<PAGE>
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the Fiscal Year ended: June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from:
Commission File No. 0-26288
CONTOUR MEDICAL, INC.
(Exact Name of Registrant as Specified in its Charter)
NEVADA 77-0163521
(State or Other Jurisdiction of (I.R.S. Employer Identi-
Incorporation or Organization) fication Number)
3340 Scherer Drive
St. Petersburg, Florida 33716
(Address of Principal Executive Offices, Including Zip Code)
Registrant's telephone number, including area code: (813) 572-0089
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.001 Par Value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
As of September 9, 1996, 5,946,793 shares of common stock were outstanding.
The aggregate market value of the common stock of the Registrant held by
nonaffiliates on that date was approximately $13,260,000.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]<PAGE>
PART I
ITEM 1. BUSINESS.
THE COMPANY
Contour Medical, Inc. and its Michigan and Florida subsidiaries (the
"Company") manufactures a full line of orthopedic care and rehabilitation
products in addition to a full line of disposable surgical products. The
orthopedic and rehabilitative products include pads and positioning aids
for X-rays, CAT scans, mammograms and MRI's; braces for reconstructive
rehabilitation after surgery; and finger spreaders, leg spreaders and leg
positioning devices to prevent atrophy and speed recovery from surgery.
Sterile and non-sterile products such as sponges, swabs, instrument
holders, equipment covers and drapes make up the Company's disposable
product line.
In addition to the standard product lines offered, the Company offers
customers the benefit of specialty manufacturing. The Company's staff
assists in total product development from concept to completed product
manufacturing and distribution.
In 1994, the Company began manufacturing and marketing its "REDI
NURSE SYSTEM[TM]" product line, which provides custom packaged procedural
trays for use in clinics and nursing homes as well as by home health care
nurses. The Company also designs and fabricates disposable medical
products for sports medicine applications.
Beginning in 1995, the Company commenced distribution of medical
supply products to nursing home and retirement facilities owned, leased or
managed by Retirement Care Associates, Inc., the Company's majority
shareholder. The Company has now expanded this activity to other nursing
home operators and other health care providers.
In March 1996, the Company acquired AmeriDyne Corporation
("AmeriDyne"), a bulk medical supply company based in Jackson, Tennessee.
AmeriDyne distributes supplies to hospitals, clinics, physicians,
pharmacies, nursing homes and other health care providers in Tennessee,
Arkansas, Mississippi, Alabama, Illinois, Texas, Kentucky, Missouri and
Virginia.
On August 6, 1996, the Company acquired all of the outstanding stock
of Atlantic Medical Supply Company, Inc. ("Atlantic Medical"), a
distributor of disposable medical supplies and a provider of third-party
billing services to the nursing home and home health care markets. The
acquisition was made effective retroactively to July 1, 1996.
The Company's principal executive offices are located at 3340 Scherer
Drive, St. Petersburg, Florida 33716, and its telephone number is (813)
572-0089.
BACKGROUND
The Company was organized in the State of Nevada under the name
Master Acquisitions, Inc. in April 1987. Its name was changed to Best
Acquisitions, Inc. in March 1988, and in 1989, the Company conducted an
initial public offering as a "blank check" company seeking business
opportunities. In 1991, the Company's name was again changed to Associated
Healthcare Industries, Inc. ("AHII"). The Company was a development stage
company operating in the health care industry prior to the acquisition of
all of the issued and outstanding stock of the Michigan and Florida
Subsidiaries in May 1993, as discussed below. In connection with the
acquisition of the stock of the Michigan and Florida Subsidiaries, the
Company's name was changed to Contour Medical, Inc. on June 30, 1993.
On May 14, 1993, effective as of January 1, 1993, the Company
acquired all of the issued and outstanding stock of the Michigan and
Florida Subsidiaries in exchange for the issuance of (I) 1,000,000 shares
of the Company's Class D Redeemable Preferred Stock and 666,666 Class D
Warrants (valued by the parties at $6,000,000); and (ii) 666,669 shares of
the Company's Class C Convertible Preferred Stock (valued by the parties at
$2,000,000). In April 1994, all Class D Redeemable Preferred Stock and
Class D Warrants were exchanged for shares of Class One Convertible
Preferred Stock and Common Stock.
The Michigan Subsidiary operates from a 30,000 square foot
company-owned facility located on twelve acres in Grand Blanc, Michigan,
approximately 50 miles north of Detroit and about 15 minutes from Flint.
The Michigan Subsidiary was established in 1974 to develop and manufacture
products for the imaging industry. These product lines today include a
full line of pads and positioning aids for X-rays, MRI, CAT and mammography
usages. The business has further diversified its orthopedic products used
in therapy procedures for patient's recovery from surgery, and prolonged
immobilization resulting from disease or nerve damage. The Michigan
Subsidiary's products are primarily reusable products which typically can
be used for one to two years.
In 1984, the Michigan Subsidiary's management decided to diversify
its operations into the disposable products market, and established a
sister company in St. Petersburg, Florida, the Florida Subsidiary. The
Florida Subsidiary began manufacturing disposable, sterile and non-sterile
single-use products for hospital, surgical and emergency room environments
in 1984. These products include bags, covers and drapes for protection of
equipment and patients in these special procedure areas. Additional
products have been developed for the kit-packers "kit" market. Products
for this market include foam products such as sponges, prep swabs and
instrument holders which are included in the kits sold by other
manufacturers.
In 1994, the Florida Subsidiary's operation was expanded to include
the new REDI NURSE SYSTEM[TM] production. In this connection, the
warehouse facility in St. Petersburg was expanded to include an additional
12,500 square feet of warehouse space to accommodate increased product
orders for the established products and new product lines.
On September 30, 1994, Retirement Care Associates, Inc. ("Retirement
Care") acquired 889,003 shares of the Company's outstanding Common Stock
and all 2,000,000 shares of the Company's Class One Convertible Preferred
Stock from three persons who were Officers and Directors of the Company.
Subsequently, Retirement Care converted the Class One Convertible Preferred
Stock into 2,100,000 shares of Common Stock. The Common Stock acquired by
Retirement Care in these transactions represented approximately 63% of the
Company's Common Stock outstanding after the completion of these
transactions. Retirement Care's beneficial ownership is currently 61.5%.
Retirement Care acquired the stock from William D. Gabriele, Rudolph
J. Dallessandro and Howard E. Hagon in exchange for shares of Retirement
Care's common and preferred stock. In connection with the exchange of
shares, Messrs. Gabriele, Dallessandro and Hagon each resigned as Officers
and Directors of the Company, and each resigned as employees within 90 days
of the closing. Following these resignations, three new Directors of the
Company selected by Retirement Care were elected. These three persons also
serve as directors of Retirement Care.
Retirement Care is a publicly-held company (listed on the New York
Stock Exchange) which is engaged in the management and operation of
retirement care and long-term nursing home facilities in the Southeastern
United States. Although Retirement Care now has three representatives on
the Board of Directors, it does not intend to take an active role in the
day-to-day management of the Company.
Beginning in 1995, the Company commenced distribution of medical
supply products to nursing home and retirement facilities owned, leased or
managed by Retirement Care. The Company has now expanded this activity to
other nursing home operators and other health care providers.
On March 1, 1996, the Company acquired AmeriDyne Corporation
("AmeriDyne") through a merger with a newly formed, wholly-owned subsidiary
of the Company. The Company issued 369,619 shares of its Common Stock and
paid $250,000 to Scott F. Lochridge, the sole shareholder of AmeriDyne, for
his shares of AmeriDyne in the merger. AmeriDyne is a bulk medical supply
company based in Jackson, Tennessee which has annual sales of approximately
$10 million. Scott F. Lochridge will continue to serve as the President of
AmeriDyne which will operate as a wholly-owned subsidiary of the Company.
The shares issued to Mr. Lochridge in the merger represent approximately
7.1% of the shares of the Company's Common Stock outstanding after the
transaction.
On August 6, 1996, the Company acquired all of the outstanding stock
of Atlantic Medical Supply Company, Inc. ("Atlantic Medical"), a
distributor of disposable medical supplies and a provider of third-party
billing services to the nursing home and home health care markets. The
acquisition was made effective retroactively to July 1, 1996. The Company
paid $1,400,000 in cash and promissory notes totaling $10,500,000 for the
stock of Atlantic Medical. The promissory notes bear interest at 7% per
annum and are due in full on January 10, 1997. In the event of a default
in the payment of the promissory notes, they are convertible into shares of
common stock of Retirement Care. The cash for this transaction came from a
$5 million debenture placement that was completed on July 12, 1996. These
debentures bear interest at 9% per annum and are to be repaid in monthly
installments beginning on July 1, 1999, with full payment due by July 1,
2003. The debentures are convertible into shares of the Company's Common
Stock. The two debentures, each in the amount of $2.5 million, were
purchased by Renaissance U.S. Growth and Income Trust, P.C., a fund listed
on the London Stock Exchange, and by Renaissance Capital Growth & Income
Fund III, Inc., a closed-end, publicly traded fund that invests in emerging
growth companies. Both of these investment funds are managed by
Renaissance Capital Group, Inc., of Dallas, Texas.
In July 1993 the Company effected a 1 for 13 reverse stock split and
in March 1996 the Company effected a 1.05 for 1 forward stock split. All
financial information and share data in this report gives retroactive
effect to these stock splits.
EXISTING PRODUCTS
The Company provides a full line of orthopedic care and
rehabilitation products for patients. These products range from braces
designed for reconstructive rehabilitation of patients after surgery to
finger spreaders, leg spreaders and leg positioning devices (designed to
prevent muscle atrophy and speed recovery after surgery) and a full line of
proprietary orthopedic devices used in rehabilitative therapy procedures.
Some of these products are utilized for long-term care of wheelchair or
bed-bound patients in the hospital and the home. During the year ended
June 30, 1996, positioning aids and orthopedic products accounted for
approximately 18% of the Company's sales.
The Company manufactures disposable surgical procedure products for
outpatient surgery, X-ray, radiology and other imaging technology within
the hospital, emergency room, integrated patient care facilities and clinic
market. These products, such as pads, bags, equipment covers and drapes
are used to protect equipment, patient and attending personnel in the
surgery or emergency room environment. These products are designed to meet
the requirements of infection control for medical, industrial, and
institutional applications. In general, these rules require emergency
rooms, clinics and similar areas to cover all equipment to protect the
patient from infection from prior patients. The Company also produces over
300 configurations of disposable foam products, such as sponges, swabs,
prep-swabs, vaginal swabs, instrument rests and holders, pocket liners, and
positioning and comfort aids which are used during surgery, emergency
treatment, X-ray and radiology procedures. Most products are available for
either sterile or non-sterile applications. Specialty items such as face
shields, esmark bandages, safety pins, and rubber bands are provided with
or as part of the Company's products to fill specific needs within the use
environment. Revenues from these disposable surgical and special procedure
products comprised approximately 15% of the Company's sales revenue during
the year ended June 30, 1996.
In addition to the standard product lines offered, the Company offers
specialty manufacturing for customers with special product needs. The
Company's staff assists in the product development, from concept to
completed product manufacturing and distribution.
During March-April 1994, the Company introduced a new product line
named the REDI NURSE SYSTEM[TM] following the grant of four new 510(K)
applications by the U.S. Food and Drug Administration. This product line
consists of custom packaged procedural trays which can be used for
specified applications. The applications for which products are available
include wound care, catheter irrigation, catheter insertion, IV therapy and
precautionary procedures.
The Company presently does not sterilize its products. Products
requiring sterilization are shipped via truck to the Atlanta, Georgia area,
where the products are sterilized, and then sent back to the Company's
plant in St. Petersburg. The sterilization process adds approximately a
week to the Company's delivery schedule. Once a year, the Company must
provide validation of its product sterility to the FDA. The inspection is
done on a product load designated by the Company by an inspection company
engaged by the Company. The sterilization validation process generally
takes several weeks and results in delayed shipment of the sterilized
products to customers. In order to eliminate the delays caused by shipping
products out for sterilization, the Company has ordered sterilization
equipment which is expected to be installed in the Company's Florida
facility in October 1996. At June 30, 1996, approximately $416,000 had
been paid toward the purchase of this equipment.
Suppliers for the materials used by the Company in manufacturing its
products, i.e. foam and plastic, are plentiful. The Company purchases
supplies only from companies with proven consistent quality. The Company
does not use any recycled materials as it has found the quality of such
materials is not consistent.
The Company's bulk medical supply distribution operations involves
the purchase of large quantities of medical supplies from manufacturers and
distributing such supplies to nursing homes, home health agencies,
hospitals, clinics and other health care providers. Revenues from the sale
of bulk medical supplies accounted for approximately 67% of the Company's
sales revenue during the year ended June 30, 1996.
MANUFACTURING
The Company presently meets product demand by operating its
manufacturing and assembly facilities with a single shift, which represents
about 40% of the Company's operating capacity. The manufacturing processes
used by the Company include plastic molding, contour fabrication of foams
and plastics, metal fabrication, specialized foam product coating, and heat
sealing and sewing.
The Company owns and operates a 30,000 square foot facility on
approximately 12 acres in Michigan, in which it manufactures imaging and
orthocare products. The Company also leases approximately 33,000 square
feet in Florida, in which it manufactures its disposable surgical and
special procedure products, and produces its new REDI NURSE SYSTEM[TM]
product line, as well as an additional 32,000 square feet for its bulk
medical supply distribution activities.
SALES, MARKETING AND MARKETS
Historically, the Company has focused on the disposable and limited
life medical product markets for both sterile and non-sterile applications.
The Company markets to three distinct markets: (i) the end user; (ii) the
dealer, and (iii) the value added reseller ("VAR").
The following is a historical perspective of the sales mix for the
year ended June 30, 1996, the six months ended June 30, 1995, and for the
preceding three calendar years in each of these markets, which are further
discussed below, for the Michigan Subsidiary and for the Florida and
AmeriDyne Subsidiaries:
MICHIGAN
1996 1995 1994 1993 1992
VAR Sales 96% 49% 62% 69% 54%
Dealer Sales 3% 42% 27% 13% 27%
End User (Hospital)
Sales 1% 9% 11% 18% 19%
FLORIDA AND AMERIDYNE
1996 1995 1994 1993 1992
VAR Sales 19% 53% 57% 59% 78%
Dealer Sales 2% 4% 12% 27% 14%
End User (Hospital)
Sales 3% 4% 31% 14% 8%
Bulk Supply Sales 76% 39% -- -- --
During the year ended June 30, 1996, and the six months ended June
30, 1995, the Company sold approximately $5,456,000 and $1,426,000,
respectively, in products (primarily bulk medical supplies) to facilities
owned, leased or managed by Retirement Care Associates, Inc., the Company's
majority shareholder. Such sales represented 37% of total sales for the
year ended June 30, 1996, and 40% of total sales for the six months ended
June 30, 1995. However, no individual customer represented more than 10%
of total sales during the periods.
During the years ended December 31, 1993 and 1994, only one customer
each year accounted for more than 10% of the Company's combined revenues.
Sales to Baxter Medical accounted for approximately 13.8% and 23% in 1993
and 1994, respectively.
END USERS. The end user market is common to all three of these
markets, and is made up of three primary care sectors: hospitals, clinics
and orthopedic care facilities.
HOSPITALS. The Company currently focuses on the surgical
procedure and emergency room products within the hospital markets. These
products, such as bags, equipment covers and drapes, are used to protect
equipment, patient and attending personnel in the surgery or emergency room
environment. The Company custom manufactures these products to suit the
customer's needs. Additionally, the Company produces several disposable
foam items, such as a variety of sponges, swabs, instrument holders, and
positioning aids, which are used during surgery, emergency treatment, X-ray
and radiology procedures. Specialty items, such as face shields, esmark
bandages, safety pins and rubber bands, are provided to fill specific needs
within the hospital environments.
The hospital market is a stable market for the Company's
disposable product lines designed for use within the traditional roles of
health service by the hospital community. The hospital market for
disposable products is represented by over 6,000 hospital units. The
Company currently deals with approximately 300 of these hospital units.
With the spread of Hepatitis B and HIV related diseases, the emphasis on
single patient use products and special coatings on multi-use products
places the Company in the forefront of the industry within this market
niche. Management believes that substantial future growth is available
within this market by vertical penetration of additional departments within
the hospital.
CLINICS. At present, the Company is focused on outpatient
surgery centers, large integrated care facilities, X-ray, radiology and
other imaging technology centers within the clinic market. These
facilities have similar product needs as their comparable departments
within the hospital markets. According to the American Hospital
Association, hospital outpatient surgeries outnumbered inpatient surgeries
for the first time in 1990. Hospital inpatient admissions declined by 10%,
while outpatient visits grew nearly 44%. Management believes outpatient
servicing through clinics shows definite trends for continued aggressive
growth through the year 2000 and beyond.
ORTHOPEDIC CARE FACILITIES. The orthopedic care facility
represents a combination of product markets due to its function as a
surgery center as well as rehabilitative care center. The Company provides
a full line of orthopedic care and rehabilitation products for patients,
from braces designed for reconstructive rehabilitation of patients after
surgery to a leg spreader device, which would be utilized by a long-term
care patient who is wheelchair or bed-bound. These products are utilized
in the home and in long-term care facilities.
DEALERS. The dealer market covers the full spectrum of the Company's
product lines. The Company sells its products at a discount to volume
dealers which sell the Company's products.
VAR MARKET. The VAR market consists of original equipment
manufacturers (OEM's) and dealers. Many of the foam products produced by
the Company are sold to OEM's for use in packaging their kits for special
surgical procedures. Additional OEM products include pads and positioning
aids for imaging units such as MRI's, CAT scans, and X-rays. The Company's
diversified manufacturing capability allows the Company to offer OEM's
custom product design.
Prior to 1993, the Company relied on four marketing methods: sales
made by Company management, trade shows, direct order catalogs and
referrals from customers. Sales were made directly to OEM's and kit
packers by the Company's management, and sales to hospitals were solicited
by direct mail catalogues. Accordingly, sales were limited due to time
constraints on management imposed by their other duties. The Company
currently employs two sales directors, who are responsible for soliciting
new business, maintaining contact with the Company's present customer base
and directing the efforts of an independent sales representation
organization employed by the Company effective July 19, 1994, to market the
Company's REDI NURSE SYSTEM[TM] product line to the home healthcare and
nursing home industry in the southeast. This sales organization has 11
direct sales representatives who service approximately 4,500 dealers
throughout the southeastern U.S. The Company's agreement with the sales
organization is for a two year period, and is automatically renewable
unless canceled by either party. The Company is required to pay the
organization a commission of 10% of sales.
The independent manufacturer's representative program is intended to
provide representation of the Company's products by an established network
of sales representatives across the country. The Company hopes to reach
new customers in the home health care and nursing home markets, as well as
the private clinic markets. In addition, the Company hopes to access new
departments within the hospital structure which as yet have not been a part
of the Company's markets. Because these institutions have historically
purchased products from the Company, the Company is optimistic this new
representative program will develop additional uses for existing products
as well as providing outlets for new products. New products, such as the
REDI NURSE SYSTEM[TM], combine service benefits as well as product benefits
which have a wide range of applications in nursing homes and for home
healthcare providers.
The Company is also selling products to its majority shareholder,
Retirement Care Associates, Inc., and a warehouse has been stocked to
accommodate the medical supply needs of the nursing homes and retirement
facilities which it operates or manages. In addition, the Company is now
also selling bulk medical supplies to other nursing homes and health care
providers.
MARKET EXPANSION
Nursing homes, adult congregate living facilities and home health
care markets are currently expanding markets with expected high growth in
the next ten years. The Federal home care budget was $12.5 billion for
1992. The November 18, 1992, issue of "Home Health Line," the home care
industry's national independent newsletter, reports conservative estimates
for growth at an annual rate of 15-20% or more. The continuing emphasis on
cost containment and the continuing AIDS epidemic are two reasons for this
projected growth. Additional factors and trends reported as fostering this
growth include: the boom in medical technology; care rendered in the
patient's home is far less expensive than that delivered in hospitals; the
increasing age of our population; patients prefer home care, resulting in
faster recovery from illness and injury; and home care offers emotional
advantages to people who benefit from the support of family members and the
comfort of a familiar environment.
The Company is introducing new products and product lines, such as
its REDI NURSE SYSTEM[TM], which combine service benefits as well as
product benefits and have a wide range of applications in the nursing home
and home health care markets. Special procedure trays, positioning aids,
foam products, are all used within these environments. Special order
products, such as procedure trays for use within the home and the nursing
home markets, offer ease-of-help, which enable a non-skilled home helper to
assist with the health care process after simple instruction. With the
changing demographics of the population base moving toward an over
sixty-five majority, the Company expects the market for products which can
be used by non-skilled home helpers to increase.
Private radiology centers and walk-in clinics are also markets which
are expected to offer avenues of growth. The Company intends to continue
to diversify its markets through the development of both products and
marketing strategies to provide access to new markets within its
manufacturing focus.
AMERIDYNE CORPORATION
In March 1996, the Company acquired AmeriDyne Corporation
("AmeriDyne") through a merger of that company with a newly-formed wholly-
owned subsidiary of the Company. AmeriDyne is a bulk medical supply
company based in Jackson, Tennessee, which distributes supplies to
hospitals, clinics, physicians, pharmacies, nursing homes and other health
care providers in Tennessee, Arkansas, Mississippi, Alabama, Illinois,
Texas, Kentucky, Missouri and Virginia.
AmeriDyne's product line includes approximately 3,500 items
maintained in stock and over 150,000 additional items available from over
200 manufacturers. AmeriDyne's sales efforts have emphasized supplies for
home health care such as gloves, urological products, wound care products,
sponges, etc. However, AmeriDyne's wide range of products also includes
medical furniture and equipment such as examination tables, cabinets and
carts; diagnostic equipment such as vision and hearing testing equipment,
stethoscopes and blood pressure testing equipment; laboratory testing
equipment such as microscopes, incubators, blood chemistry analysis and
centrifuges; surgical products such as scissors, forceps, scalpels and
lasers; and physical therapy and convalescent care equipment such as
crutches, walkers, wheelchairs and bathroom safety aids.
AmeriDyne has had only one customer which has represented over 10% of
its sales during the last three years. Sales to Jackson - Madison County
General Hospital represented 16%, 17% and 28% of AmeriDyne's sales during
the ten months ended February 29, 1996 and its fiscal years ended April 30,
1995 and 1994, respectively.
AmeriDyne is not dependent on any of the suppliers of the products it
distributes.
Marketing of AmeriDyne's products is handled through a fully
dedicated, full time sales staff selling in Tennessee, Arkansas and
Mississippi and the distribution of catalogs.
ATLANTIC MEDICAL SUPPLY COMPANY, INC.
On August 6, 1996, the Company acquired all of the outstanding stock
of Atlantic Medical Supply Company, Inc. ("Atlantic Medical"), a
distributor of disposable medical supplies and a provider of third-party
billing services to the nursing home and home health care markets. The
acquisition was made effective retroactively to July 1, 1996.
Atlantic Medical is based in Grovetown, Georgia (a suburb of
Augusta), and also has facilities in St. Petersburg, Florida, Miami,
Florida, and Fayetteville, North Carolina, and employs approximately 95
persons.
Atlantic Medical's product line includes approximately 4,100 items
maintained in stock and over 150,000 additional items available from over
200 manufacturers. Atlantic Medical's sales focus has been on supplies for
long-term care providers, including skilled nursing and assisted living
facilities. These supplies include such items as latex and vinyl
examination gloves, nutritional and personal care products, urological
products, wound care products, adult diapers, etc. Atlantic Medical also
offers its customers a wide array of durable medical equipment, including
wheelchairs, walkers, medical monitoring devices, including stethoscopes
and blood pressure testing equipment, surgical products, etc. Sales of
medical supplies to long-term care facilities accounted for 81% of Atlantic
Medical's revenues during the six months ended June 30, 1996.
Atlantic Medical also operates a subsidiary that provides Medicare
Part B billing services for clients, both under its own Medicare provider
number and, optionally, under its customer's provider number. Services for
the latter are done so on a fee-for-service basis. As a part of these
billing services, Atlantic Medical provides Medicare reimbursable wound
care products, enteral (tube-feeding/nutritional) products, ostomy,
colostomy and urological products, etc. for qualified patients in its
customers skilled nursing facilities. Sales of Medicare Part B billing
services and related products accounted for 19% of Atlantic Medical's
revenues during the six months ended June 30, 1996.
Atlantic Medical has not had any one customer who has represented
over 10% of its sales during the last three years.
Atlantic Medical is not singularly dependent on any of the suppliers
of the products it distributes.
Marketing of Atlantic Medical's products is handled through a fully
dedicated, full-time sales staff selling in North Carolina, Georgia, South
Carolina, Alabama and Florida, as well as through the direct mail
distribution of its product catalogs. Marketing of Atlantic Medical's
third party billing services is handled through a fully dedicated, full-time
staff of registered and licensed nurse/clinicians who assist in the
evaluation of patient care in consultation with the Company's customers.
COMPETITION
The Company is a small manufacturing concern engaged in a specialized
niche of the health care supply business. It therefore competes with all
of the health care product suppliers, most of which are better capitalized
and have significantly greater resources and industry name recognition than
does the Company.
Management is not aware of any companies which offer the product
variety, quality and delivery schedule offered by the Company. The
Company's competitors in the disposable markets are primarily companies or
individuals who establish small bag manufacturing facilities, but are not
able to offer the variety of bag sizes, configurations, and consistent
quality, as the Company. Larger manufacturers such as Microtech and Xomed,
are not direct competitors in these products because they are not focused
on specialty disposable products, but rather manufacture primarily for
their own use. These specialized products are offered to customers in
limited variety according to their internal usages because of the high
fixed overhead of the larger manufacturer relative to the volume of
available sales. Therefore, specialty bags make up a very small percentage
of their business. The Company believes its competitive edge to be its
ability to deliver small or large numbers of its products, in 300 different
sizes, and on a same day delivery schedule (except for specialty orders).
The imaging and orthocare markets are limited by total volume
requirements for product. These products represent a significant volume of
sales with high profit margins because of the Company's low fixed overheads
and tightly controlled variable costs. These products are highly
specialized and the Company offers a proprietary line within these products
which is not available from the Company's competition. Five companies
located across the U.S., which are of a similar size in volume to the
Company, represent the primary competition within these markets; however,
these companies do not presently offer the product diversity, quality or
proprietary design offered by the Company.
AmeriDyne competes with a number of large medical products
distributors. In the home healthcare market, its primary competitors
include Gulf South, National Medical and Southland. In this market,
AmeriDyne competes by offering customized ordering programs and other
specialized services not offered by larger competitors. AmeriDyne competes
with Gulf South, Metro Medical and Redline in the nursing home market,
emphasizing AmeriDyne's high level of service in this market. AmeriDyne
now also offers Medicare reimbursed Enteral and Wound Management products
to stay competitive in the nursing home market.
Atlantic Medical competes with a number of large medical products
distributors in the Southeastern United States. In the distribution of
medical supplies to long-term care providers, its primary competitors
include Gulf South Medical Supply, Redline Medical, General Medical and
Durr Medical. In addition, there are a number of smaller, regional
competitors. Atlantic Medical competes by offering an extremely high level
of customer service, as well as customized ordering and inventory control
programs and other more specialized services, some of which are not offered
by its competitors.
In the provisions of third party billing services, Atlantic Medical
competes with several small regional service providers, including Spectrum
Health Services, Appalachian and Grove Medical. Atlantic Medical competes
effectively in this category by offering superior customer service and a
variety of programs from which its customers can choose, including fee-for-
service billing under the customer's own Medicare provider number.
PATENTS AND TRADEMARKS
The Company has been assigned the rights to two patents on products
it markets. The patents expire within the next two years, and are not
considered significant to the Company's overall sales or product lines.
Letters Patent No. 4370976, dated February 1, 1983, covers a dynamic foam
orthosis, a splinting device which is used to straighten and support joints
following surgery or trauma. The rights to this Patent were assigned to
the Company in 1976 by its inventors, William T. Gabriele and his son,
Joseph M. Gabriele.
The Company also holds the rights to Letters Patent No. 4030719,
dated June 21, 1977, covering a child immobilizing device for X-rays, also
invented by William T. Gabriele and Joseph M. Gabriele. This device
immobilizes infants and young children during a radiographic examination.
All of the materials used in the device are radiolucent, thus showing no
trace of shadows or foreign artifacts on radiographic film.
The Company has a registered trademark under the Trademark Act of
1946, as amended, Reg. No. 1,680,218, registered on March 24, 1992, for the
Hugger[TM], the child immobilizing device.
In December 1994, the Company received trademark registration for the
REDI NURSE SYSTEM[TM] mark. The Company believes the trademark will
contribute to product identification with the Company.
EMPLOYEES
As of September 13, 1996, the Company had approximately 121 employees,
including 66 full-time, including management, and 55 hourly, part-time
employees, AmeriDyne had approximately 33 full-time employees, and Atlantic
Medical had approximately 95 full-time employees. None of the Company's,
AmeriDyne's or Atlantic Medical's employees are represented by unions.
Management considers its employee labor relations to be good.
ITEM 2. PROPERTIES.
The Company owns a 30,000 square foot facility located on twelve
acres in Grand Blanc, Michigan, sixty miles north of Detroit, from which
its Michigan Subsidiary operates. This building is subject to mortgages
payable to a banking institution of approximately $456,000 as of June 30,
1996.
The Company's corporate offices are maintained in the offices of its
Florida Subsidiary in St. Petersburg, Florida. The Company leases
approximately 65,000 square feet under a lease from an unaffiliated lessor,
for which it currently pays $24,521 per month. Beginning on July 1, 1997,
the rent will be increased based on changes in the Consumer Price Index on
an annual basis. The lease expires on June 30, 2000. The Company believes
these facilities are adequate for the Company's present and planned
operations.
AmeriDyne's offices and warehouse facilities are located in Jackson,
Tennessee. AmeriDyne leases approximately 33,000 square feet of space at
this location, including approximately 4,500 square feet of office space,
for which it pays a base rent of $8,750 per month. The lease expires on
March 31, 1999, but AmeriDyne has an option to extend this lease an
additional two years at a rental rate adjusted for changes in the Consumer
Price Index.
Atlantic Medical's primary office location is in August, Georgia,
where it also maintains three leased warehouse facilities. At its primary
location, Atlantic Medical leases approximately 18,000 square feet of
space, including approximately 3,000 square feet of office space, for which
it pays a base rent of $8,400 per month. This lease expires on August 31,
1997. Atlantic Medical leases an additional 8,000 square feet in another
Augusta location, of which approximatley 1,000 square feet is office space,
for which it pays a base rent of approximately $2,000 per month. Atlantic
Medical also leases a third 8,000 square foot warehouse in Augusta, of
which approximately 1,500 square feet is office space, for which it pays a
base rent of approximately $2,000 per month. Both of these additional
Augusta warehouses are leased on a quarter-to-quarter basis.
Atlantic Medical maintains branch warehouse and office facilities in
Fayetteville, North Carolina. At this location, it leases approximately
38,500 square feet of space, including approximately 4,000 square feet of
office space, for which it pays a base rent of approximately $6,400 per
month. This lease expires on March 31, 1997, but Atlantic Medical has two
one-year renewal options at which time the base rent can be increased by up
to 3%.
Atlantic Medical maintains branch warehouse and office facilities in
St. Petersburg, Florida. At this location, it leases approximately 41,000
square feet of space, including approximately 2,000 square feet of office
space, for which it pays a base rent of approximately $13,000 per month.
This lease expires on May 31, 1997.
Atlantic Medical maintains branch warehouse and office facilities in
Miami, Florida. At this location, it leases approximately 18,000 square
feet of space, including approximately 3,000 square feet of office space,
for which it pays a base rent of approximatley $5,100 per month. This
lease expires on March 31, 1997.
ITEM 3. LEGAL PROCEEDINGS.
There are no pending legal proceedings, and the Company is not aware
of any threatened legal proceedings to which the Company is a party.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
(a) MARKET INFORMATION. The Company's Common Stock is traded in the
over-the-counter market, and since September 21, 1995, has been traded on
the Nasdaq Small-Cap Market under the symbol "CTMI."
The following table sets forth the closing high and low bid prices of
the Company's Common Stock as reported on the OTC Bulletin Board for the
periods indicated. These prices are believed to be representative inter-
dealer quotations, without retail markup, markdown or commissions, and may
not represent prices at which actual transactions occurred.
<TABLE>
<CAPTION>
Bid<FN1>
Quarter Ended High Low
<S> <C> <C>
March 31, 1993 . . . . . . . . . . . . . $2.97 $0.87
June 30, 1993. . . . . . . . . . . . . . $2.60 $0.99
September 30, 1993 . . . . . . . . . . . $2.86 $0.25
December 31, 1993. . . . . . . . . . . . $2.14 $0.48
March 31, 1994 . . . . . . . . . . . . . $2.14 $0.95
June 30, 1994. . . . . . . . . . . . . . $1.90 $0.48
September 30, 1994 . . . . . . . . . . . $1.90 $1.67
December 31, 1994. . . . . . . . . . . . $4.76 $1.90
March 31, 1995 . . . . . . . . . . . . . $4.88 $3.38
June 30, 1995. . . . . . . . . . . . . . $5.24 $3.57
September 30, 1995 . . . . . . . . . . . $7.62 $4.17
December 31, 1995. . . . . . . . . . . . $5.95 $3.81
March 31, 1996 . . . . . . . . . . . . . $6.07 $4.05
June 30, 1996. . . . . . . . . . . . . . $6.00 $4.63
___________________
<FN>
<FN1>
As restated to give retroactive affect to a 1 for 13 reverse stock split
which
occurred in July 1993, and a 1.05 for 1 forward stock split which occurred
in March 1996.
</FN>
</TABLE>
(b) APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK. The number of
record holders of the Company's $.001 par value common stock at September
9, 1996, was 188. Based on security position listings, the Company believe
that it has in excess of 700 shareholders which hold stock in street name
at broker dealers.
(c) DIVIDENDS. No cash dividends have been declared or paid by the
Company since inception and none is contemplated at any time in the
foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth certain selected financial data with
respect to the Company, and is qualified by reference to the financial
statements and notes thereto filed herewith:
<TABLE>
<CAPTION>
BALANCE SHEET DATA:
AT JUNE 30, AT DECEMBER 31,
----------------------------------
- ----------------------------------
1996 1995 1994 1993 1992
1991
---------- ---------- ---------- ---------- ----------
- ----------
<S> <C> <C> <C> <C> <C>
<C>
Current Assets $ 8,160,509 $4,351,326 $1,129,398 $1,224,496 $1,054,020
$1,078,858
Total Assets 11,258,268 5,176,426 1,484,568 1,878,465 1,375,726
1,427,362
Current
Liabilities 4,228,561 1,377,578 410,162 829,200 601,727
653,178
Working Capital 3,931,948 2,973,748 719,236 395,296 452,293
425,680
Long-Term Debt 1,352,937 907,711 554,323 -0- 480,000
559,311
Shareholders'
Equity 5,676,770 2,891,137 520,083 648,765 293,999
214,973
</TABLE>
STATEMENT OF INCOME DATA:
For The For the Six Months
Year Ended Ended June 30,
June 30, 1996 1995 1994
------------- ---------- ----------
Sales $14,542,421 $3,568,459 $1,929,200
Net Income (Loss) 527,034 111,373 (478,798)
Net Income (Loss)per Common Share $ .09 $ .02 $ (.20)
Weighted Average Shares and
Share Equivalents Outstanding 4,804,292 4,786,126 2,341,996
Cash Dividends Per Share -0- -0- -0-
STATEMENT OF INCOME DATA:
FOR THE YEAR ENDED DECEMBER 31,
1994 1993 1992 1991
---------- ---------- ---------- ----------
Sales $3,945,745 $3,618,359 $3,440,701 $3,516,135
Net Income (Loss) (529,182) (73,536) 79,126 20,383
Net Income (Loss)
Per Common Share $ (0.20) $ (0.05) $ 0.07 $ 0.03
Weighted Average
Shares and Share
Equivalents
Outstanding 2,688,927 1,434,466 1,180,407 689,123
Cash Dividends
Per Share -0- -0- -0- -0-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of
sales for the periods indicated:
SIX
MONTHS
YEAR ENDED ENDED YEAR ENDED DECEMBER 31,
JUNE 30, JUNE 30,
- ----------------------------------
1996 1995 1994 1994 1993 1992
---------- -------- ------ ------ ------
- ------
Sales 100.0% 100.0% 100.0% 100.0% 100.0%
100.0%
Cost of Sales 72.1% 71.3% 73.8% 64.5% 57.0%
51.0%
Gross Profit 27.9% 28.7% 26.2% 35.5% 43.0%
49.0%
Operating Expenses 23.1% 23.6% 34.1% 40.1% 44.9%
43.6%
Net Income (Loss)
Before Income
Taxes (Benefit) 5.8% 4.6% (24.8%) (13.4%) (3.5%)
3.0%
Income Taxes
(Benefit) 2.1% 1.5% -- -- (1.4%)
0.7%
Net Income (Loss) 3.6% 3.1% (24.8%) (13.4%) (2.0%)
2.3%
YEAR ENDED JUNE 30, 1996 COMPARED TO THE TWELVE MONTHS ENDED JUNE 30, 1995
As a result of the factors discussed below, the Company had net income
of $527,034 for the year ended June 30, 1996, as compared to a net loss of
$9,997 for the twelve months ended June 30, 1995.
Sales for the year ended June 30, 1996 increased to $14,542,421 as
compared to $5,585,004 for the twelve months ended June 30, 1995, due to
growth in sales volume of the existing product lines and the addition of the
Company's new product line, bulk medical supplies. Approximately $4,030,000
of the sales increase is attributable to sales of bulk medical supplies and
prepacked kits to nursing homes managed or operated by the Company's majority
shareholder; the AmeriDyne acquisition on March 1, 1996, resulted in
additional sales of bulk medical supplies of approximately $3,617,000.
Gross profit for the year ended June 30, 1996, was $4,051,318 or 27.8%
of sales as compared to $1,739,553 or 31.1% of sales for the twelve months
ended June 30, 1995. The gross profit percentage decreased in 1996 as
compared to the comparable period in 1995 because the sales mix for 1996 was
substantially higher in bulk medical supplies, which have a lower gross profit
than the manufactured products. The AmeriDyne acquisition contributed
approximately $980,000 of gross profit for the period ended June 30, 1996.
Operating expenses for the year ended June 30, 1996, increased to
$3,185,620 as compared to $1,632,015 for the same period in 1995. Total
operating expenses increased approximately $1,725,000 as a result of the
increased volumes, but as a percentage of sales they decreased to
approximately 23% of sales in 1996 versus 29% of sales in the same period in
1995. The AmeriDyne acquisition increased operating expenses by $635,000 for
the year ended June 30, 1996.
Net income before taxes for the year ended June 30, 1996, was $839,200
as compared to $44,721 for the twelve months ended June 30, 1995. The
AmeriDyne acquisition contributed approximately $295,000 to net income before
taxes for the year ended June 30, 1996.
SIX MONTHS ENDED JUNE 30, 1995, COMPARED TO SIX MONTHS ENDED JUNE 30, 1994
As a result of the factors discussed below, the Company had net income
of $111,373 for the six months ended June 30, 1995, as compared to a net loss
of $478,798 for the six months ended June 30, 1994.
Sales for the six months ended June 30, 1995, increased to $3,568,459 as
compared to $1,929,200 during the same period in 1994, due to growth in sales
volume of the existing product lines and the addition of bulk medical supply
sales. Approximately $1,426,000 of the sales increase was attributable to
sales of bulk medical supplies and pre-packaged kits to nursing homes managed
or operated by the Company's parent. These sales, which started during April
1995 represent a new market for the Company. Approximately $175,000 of these
nursing home sales represents sales of the Company's prepackaged kits and the
remainder of the nursing home sales represents sales of bulk medical supplies.
The remaining $213,000 of the overall sales increase was due to an increased
demand for the Company's existing product line.
Gross profit for the six months ended June 30, 1995, was $1,024,083 or
28.7% of sales as compared to $505,500 or 26.2% of sales for the six months
ended June 30, 1994. The gross profit percentage remained relatively constant
in 1995 as compared to the comparable period in 1994 because the product mix
in both periods included about the same percentage of REDI NURSE kits which
have a lower gross profit than the manufactured products. The 1995 period
included approximately $1,251,000 in sales of bulk medical supplies which also
have a lower gross profit, and the 1994 period margin was reduced due to the
costs of developing and shipping numerous prototype kits for customer
evaluation and introduction prior to FDA approvals. In prior years, the
Company had higher gross profit margins because most of the Company's sales
were of products manufactured by the Company.
Operating expenses for the six months ended June 30, 1995, increased to
$841,275 as compared to $657,199 for the same period in 1994. Total operating
expenses increased approximately $184,000 as a result of the increased
staffing necessary to service the increased volumes, but as a percentage of
sales they decreased to approximately 24% of sales in 1995 versus 34% of sales
in the same period in 1994.
Net income before taxes for the six months ended June 30, 1995, was
$166,091 as compared to a net loss before income taxes for the six months
ended June 30, 1994, of $478,798, after deducting offering costs of $305,731.
1994 COMPARED TO 1993
As a result of the factors discussed below, the Company had a net loss
of $529,182 in 1994 as compared to a net loss of $73,536 in 1993.
Sales for 1994 increased by 9% to $3,945,745 as compared to $3,618,359
in 1993 due to growth in sales of existing product lines and increasing sales
in the new REDI NURSE product lines which were introduced during March - April
1994.
Gross profit for 1994 was $1,399,820 or 35.5% of sales, as compared to
$1,557,109 or 43.0% of sales, in fiscal year 1993. The lower gross profit in
1994 resulted from a change in the sales mix of products and the fact that
profit margins on the REDI NURSE lines (introduced during March-April 1994)
are lower since those products are assembled as opposed to being manufactured.
Operating expenses in 1994 were $1,580,385 as compared to $1,623,465 in
1993. The operating expenses decreased primarily due to a reduction of
litigation related fees and expenses of approximately $55,000.
The net loss before income taxes in 1994 was $529,182 after deducting
offering costs totaling $305,731, as compared to a net loss before income
taxes in 1993 of $125,325.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1996, the Company had $3,931,948 of working capital as
compared to working capital of $2,973,748 at June 30, 1995. The increase in
working capital was primarily due to the AmeriDyne acquisition which was
completed during March, 1996.
Operating activities for the year ended June 30, 1996 utilized cash of
$124,047 as compared to operating activities during the six months ended June
30, 1995, which utilized cash of $1,030,398.
Inventories increased by approximately $1,579,000 from June 30, 1995 as
a result of increased inventory levels needed to serve the growing nursing
home market, and approximately $1,240,000 of the increase resulted from the
AmeriDyne acquisition. Accounts receivable and accounts payable have
increased due to the increased level of sales and inventories.
Cash flows from investing activities used cash of $521,456 for the year
ended June 30, 1996 as a result of the repayment of $550,004 from the
Company's parent which was offset by the use of $749,163 for the acquisition
of additional equipment and $322,297 for the AmeriDyne acquisition.
Cash flow of $695,487 was provided from financing activities in fiscal
1996 versus $2,163,773 in 1995. For the year ended June 30, 1996, $608,956
was provided from net bank borrowings, $50,000 was provided by the exercise of
stock options and $36,531 was provided by payment of a short-swing liability
by a shareholder.
Operating activities for the six month period ended June 30, 1995,
utilized cash of $1,030,398 as compared to $120,699 for the same period in
1994. The increased utilization of cash resulted primarily from higher
receivable and inventory levels, net of increased accounts payable, necessary
to support the increase in sales. Operating activities for the years ended
December 31, 1994, and 1993 utilized cash of $28,133 and $209,284,
respectively.
Investing activities for the six months ended June 30, 1995, utilized
$1,701,945 of cash, of which $533,054 was for the acquisition of equipment and
$1,168,901 was advanced to the Company's majority shareholder as compared to
$6,597 of cash used during the six months ended June 30, 1994, which was
expended for equipment. The cash flows for the years ended December 31, 1994
and 1993, were used substantially for the acquisition of additional equipment
as needed.
Cash flow of $2,689,372 was provided from financing activities for the
six months ended June 30, 1995, as compared to cash utilized during the six
months ended June 30, 1994, of $17,468. During the six months ended June 30,
1995, cash of $2,216,447 was provided from the issuance of preferred stock and
exercise of stock options, and $482,622 was provided from equipment financing
at favorable long-term rates, utilization of credit line funds of $189,671,
all of which was reduced by repayments on bank loans and advances to the
Company's majority shareholder totaling of $199,328. For the year ended
December 31, 1994, cash flow of $62,833 was provided from financing
activities, whereas in 1993 cash flow of $448,944 was provided due to the sale
of preferred stock of $430,500.
At June 30, 1996, the Company has a mortgage payable with Michigan
National Bank with an outstanding balance of $456,233, bearing interest at
8.58% with monthly payments of $6,793, including interest, collateralized by
real estate; and a second mortgage with a balance of $64,284 with monthly
principal payments of $1,190 and interest at prime plus .75% (9.0% at June 30,
1996); and a loan secured by equipment with a balance of $496,171, bearing
interest at prime plus .75% with monthly payments of $11,380 including
interest. The Company secured an equipment loan with Fidelity Bank with an
outstanding balance of $217,559 as of June 30, 1996, interest at prime plus 1%
(9.25% at June 30, 1996), principal of $5,000 plus interest, collateralized by
equipment. At June 30, 1996, the Company had a note payable with Republic
Bank with a balance of $60,436, interest at 8.75%, with principal and interest
of $1,282 due monthly, collateralized by accounts receivable, inventory and
equipment of the Florida subsidiary.
As of June 30, 1996, the Company maintained a total of $1,575,000 in
lines of credit with its banks for short-term working capital needs, and
$1,456,535 had been borrowed against these lines. On August 5, 1996, the
Company's line of credit with Republic Bank was increased from $500,000 to
$1,750,00. On September 20, 1996, the Company replaced all of its existing
lines of credit with a $7,000,000 revolving line of credit with Barnett Bank,
secured by inventory and accounts receivable and bearing interest at the
30-day
LIBOR rate plus 2%. Management believes that the Company's working
capital, together with anticipated net income from operations and unused lines
of credit, will be adequate to meet the Company's needs for liquidity for at
least the next twelve months. If additional short-term capital is needed,
management believes that Retirement Care, the Company's majority shareholder,
would pay down the amount it owes to the Company.
The Company completed a $5 million debenture placement on July 12, 1996.
These debentures bear interest at 9% per annum and are to be repaid in monthly
installments beginning on July 1, 1999, with full payment due by July 1, 2003.
The debentures are convertible into shares of the Company's Common Stock. The
two debentures, each in the amount of $2.5 million, were purchased by
Renaissance U.S. Growth and Income Trust, PLC, a fund listed on the London
Stock Exchange, and by Renaissance Capital Growth & Income Fund III, Inc., a
closed-end, publicly traded fund that invests in emerging growth companies.
Both of these investment funds are managed by Renaissance Capital Group, Inc.,
of Dallas, Texas.
On August 6, 1996, the Company acquired all of the oustanding stock of
Atlantic Medical Supply Company, Inc. ("Atlantic Medical"), a distributor of
disposable medical supplies and a provider of third-party billing services to
the nursing home and home health care markets. The acquisition was made
effective retroactively to July 1, 1996. The Company paid $1,400,000 in cash
and promissory notes totaling $10,500,000 for the stock of Atlantic Medical.
The promissory notes bear interest at 7% per annum and are due in full on
January 10, 1997. In the event of a default in the payment of the promissory
notes, they are convertible into shares of common stock of Retirement Care
Associates, Inc., the Company's majority shareholder. The cash for this
transaction came from the $5 million debenture placement that was completed on
July 12, 1996. The Company intends to pay the promissory notes from the
proceeds of an offering of the Company's securities to be conducted by the
Company.
The Company presently does not anticipate any commitments for material
capital expenditures.
SEASONALITY AND INFLATION
The Company's business is relatively consistent and stable on a monthly
basis, and has not indicated any seasonality over the past three years.
In addition, the Company does not believe that inflation has had a
material effect on its results from operations during the past three years.
There can be no assurance, however, that the Company's business will not be
affected by inflation in the future.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Independent Auditors' Reports appear at pages F-1 through F-3, and
the Financial Statements and Notes to Financial Statements appear at pages F-4
through F-33 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
No response required.<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The Directors and Executive Officers of the Company are as follows:
NAME AGE POSITIONS AND OFFICES HELD
Donald F. Fox 47 President, Treasurer and Chief
Financial Officer
Gerald J. Flanagan 55 President of Michigan and Florida
Subsidiaries
Scott F. Lochridge 43 Vice-President- Purchasing
R. Scott Williams 35 Vice President - Strategic Development
Chris Brogdon 47 Chairman of the Board and Director
Edward E. Lane 59 Director
Darrell C. Tucker 37 Director
Philip M. Rees 32 Secretary
There is no family relationship between any Director or Executive
Officer of the Company.
The Company presently has no Nominating Committee, Compensation
Committee or Audit Committee.
Set forth below are the names of all Directors and Executive Officers of
the Company, all positions and offices with the Company held by each such
person, the period during which he has served as such, and the principal
occupations and employment of such persons during at least the last five
years:
Donald F. Fox - President, Treasurer and Chief Financial Officer. Mr.
Fox has been employed by the Company as its President, Treasurer and Chief
Financial Officer since April 1996, and served as a consultant to the Company
from December 1995 to April 1996. From August 1995 to December 1995, he was a
consultant to the City of Roswell, Georgia. From May 1987 to August 1995 he
was Chief Financial Officer of Argenbright Holdings Limited (US) and The ADI
Group Limited (UK). In this capacity, Mr. Fox managed the growth of these
security and transportation businesses from approximately $11 million in
annual sales to approximately $160 million in annual sales during this time
period. From March 1986 to May 1987, he was Chief Executive Officer of
Juiceco Distributors, Inc., a food service distribution company in Atlanta,
Georgia. From November 1982 to March 1986, Mr. Fox was Vice President -
Finance of RTM, Inc. which was engaged in restaurant operations. Mr. Fox
received a Bachelor's Degree in Business Administration from Georgia State
University in 1972 and an MBA Degree from Wharton Graduate School, University
of Pennsylvania in 1974.
Gerald J. Flanagan - President of Michigan and Florida Subsidiaries.
Mr. Flanagan has been employed by the Company since July 1993, and from July
1993 to April 1996 was President, Treasurer, Chief Financial Officer and a
Director of the Company. From 1984 until July 1993, he served as the
independent certified public accountant for the Company's Florida Subsidiary.
Mr. Flanagan has been a certified public accountant for more than 23 years,
specializing in international financial transactions and tax. Mr. Flanagan
earned a Bachelor of Science in Business Administration degree from St. Mary's
College, Winona, Minnesota, in 1963. He has been a certified financial
planner in Florida since 1989. From 1969 to 1978, Mr. Flanagan was a
treasurer successively for Velsicol Chemical Corp., a subsidiary of Northwest
Industries, Chicago, Illinois, and Milton Roy Company, St. Petersburg,
Florida, companies listed on the New York Stock Exchange and the American
Stock Exchange, respectively. Mr. Flanagan was responsible for cash
management, which included establishing international credit lines, cash
transfer arrangements, management of world wide banking relationships,
including foreign subsidiaries, accounts receivable management, corporate tax
policy and investment coordination. From 1979 through 1992, Mr. Flanagan
maintained his own public accounting firm specializing in tax, financial
planning and management advisory services in St. Petersburg, Florida.
R. Scott Williams - Vice President - Strategic Development. Mr.
Williams has been employed by the Company since March 1993. From 1988 to
1991, he was an Account Representative for Motorola Communications, Inc., a
communication systems manufacturing company. In 1991, he was employed with
Med-Equip, Inc., a medical distribution company. From 1991 to 1992, he was
Vice President of Sales for Zygiene Medical Technology, Inc., a medical
manufacturing company.
Scott F. Lochridge - Vice President - Purchasing. Since 1991, Mr.
Lochridge has been President of AmeriDyne Corporation, which has been a
wholly-owned subsidiary of the Company since March 1, 1996, and has been Vice
President-Purchasing for the Company since September 1996. He received a
Bachelor's Degree in Business from Texas Christian University in 1975.
Chris Brogdon - Chairman of the Board and Director. Mr. Brogdon has
been a Director of the Company since September 30, 1994. He has served as
President and a Director of Retirement Care Associates, Inc. ("Retirement
Care"), a New York Stock Exchange company, since October, 1991. He also
served as Treasurer of Retirement Care from October, 1991, to November, 1993.
He served as Secretary of Capitol Care Management Company, Inc. ("Capitol
Care"), a wholly-owned subsidiary of Retirement Care, since July, 1990. Mr.
Brogdon has been involved in financing and operating nursing homes and
retirement communities since 1982. From 1969 until 1982, Mr. Brogdon was
employed in the securities business as a retail salesman. Mr. Brogdon
attended Georgia State University in Atlanta, Georgia. Since March, 1987, Mr.
Brogdon has been Secretary/Treasurer of Winter Haven Homes, Inc. ("WHH") and
since August, 1990, he has been Secretary/Treasurer of National Assistance
Bureau, Inc. ("NAB"). Both WHH and NAB are engaged in the business of owning
and operating nursing homes and retirement communities. These two companies
either own or operate pursuant to long-term leases with options to purchase,
or are the sole or managing general partner of limited partnerships that own
or lease a total of ten nursing home properties. Mr. Brogdon is also a
Director of Perennial Development Corporation, a publicly-held company which
provides physical, speech and occupational therapists to nursing homes and
other long-term care providers.
Edward E. Lane - Director. Mr. Lane has been a Director of the Company
since September 30, 1994. He has served as Secretary and a Director of
Retirement Care since October, 1991. Mr. Lane graduated from the University
of Iowa in 1959. From 1961 until 1968, he was self-employed as Gene Lane &
Associates where he was engaged in industrial financing with municipal tax
exempt bonds. From 1968 until 1971, he was employed by the investment banking
firm of Johnson, Lane, Space, Smith & Co. in Atlanta, Georgia. From 1972
until 1984, he was self-employed as Gene Lane & Associates where he was
involved with private investment banking principally in the areas of municipal
and industrial finance. In 1984, he was involved in the creation of the full
service investment banking firm of Lane, McNally & Jackson where he was a
principal until the firm was sold and merged into Bay City Securities, Inc. in
1987. In 1988, Mr. Lane co-founded Winter Haven Homes, Inc. to acquire
defaulted retirement centers and nursing homes. Mr. Lane also serves as
President and a Director of Gordon Jensen Health Care Association, Inc., a
nonprofit corporation that owns nine nursing homes and three personal care
facilities and National Assistance Bureau, Inc., a nonprofit corporation that
owns four health care facilities.
Darrell C. Tucker - Director. Mr. Tucker has been a Director of the
Company since September 30, 1994. He has been a Director of Retirement Care
since November, 1991, and Treasurer since November, 1993. Mr. Tucker also
serves as President of Capitol Care. He also served as President of Capitol
Care from October, 1990, until it was merged into the Company in November,
1992. From September, 1988, to July, 1990, he was a risk manager for Pruitt
Corporation where he was involved in insurance management for 30 long-term
health care facilities. From April, 1987 to August, 1988, he was Chief
Financial Officer for Allgood Health Care, Inc. which managed 12 nursing home
facilities. Mr. Tucker received a Bachelors Degree in Accounting from the
University of Georgia in 1980.
Philip M. Rees - Secretary. Mr. Rees has been Secretary of the Company
since October 18, 1994. He has been general counsel for Retirement Care since
July 1994. From May 1989 to July 1994, Mr. Rees was an attorney with the law
firm of Vincent, Chorey, Taylor & Feil in Atlanta, Georgia. He received a
Bachelors Degree in Economics in 1985 and a Juris Doctorate Degree in 1989
from the University of North Carolina.
SECTION 16(A) BENEFICIAL REPORTING COMPLIANCE
Based solely on a review of Forms 3 and 4 and amendments thereto
furnished to the Company during its most recent fiscal year, and Forms 5 and
amendments thereto furnished to the Company with respect to its most recent
fiscal year and certain written representations, the following persons who
were either a director, officer or beneficial owner of more than 10% of the
Company's Common Stock, failed to file on a timely basis reports required by
Section 16(a) of the Exchange Act during the most recent fiscal year: Chris
Brogdon failed to timely report three transactions on a timely basis; Edward
E. Lane failed to timely report one transaction; and Gerald J. Flanagan filed
one Form 4 late, which reported two transactions.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth information regarding the executive
compensation for the Company's Chief Executive Officer and each other
executive officer who received compensation in excess of $100,000 for the year
ended June 30, 1996, the six months ended June 30, 1995, and the years ended
December 31, 1994 and 1993:
<TABLE>
SUMMARY COMPENSATION TABLES
<CAPTION>
ANNUAL COMPENSATION
OTHER
ANNUAL
NAME AND PRINCIPAL COMPEN-
POSITION YEAR SALARY BONUS SATION
<S> <C> <C> <C> <C>
Donald F. Fox, 1996 $ 30,000 -0- -0-
President
Gerald J. Flanagan, 1996 $100,000 -0- -0-
President<FN1> 1995 $ 50,000 -0- -0-
1994 $ 69,250 -0- -0-
1993 $ 75,000 -0- -0-
William J. Gabriele, 1994 $114,500 -0- -0-
Chief Executive 1993 $150,000 $ 70,000 -0-
Officer<FN2>
Rudolf J. Dallessandro, 1994 $ 62,200 -0- -0-
Executive Vice Presi- 1993 $100,000 -0- -0-
dent (Sales & Market-
ing)<FN2>
Howard H. Hagon, 1994 $ 82,200 -0- -0-
Executive Vice Presi- 1993 $100,000 -0- -0-
dent (Operations)<FN2>
<FN>
<FN1>
Mr. Flanagan relinquished his title as President of the Company in April 1996.
<FN2>
These persons resigned as Officers and Directors of the Company on September
30, 1994.
</FN>
</TABLE>
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
AWARDS PAYOUTS
SECURITIES
UNDERLYING ALL
RESTRICTED OPTIONS/ OTHER
NAME AND PRINCIPAL STOCK SARS LTIP COMPEN-
POSITION YEAR AWARD(S) (NUMBER) PAYOUTS SATION
<S> <C> <C> <C> <C> <C>
Donald F. Fox, 1996 -- 75,000 -- -0-
President
Gerald J. Flanagan, 1996 -- -- -- -0-
President<FN1> 1995 -- -- -- -0-
1994 -- -- -- -0-
1993 -- 262,500 -- -0-
William J. Gabriele, 1994 -- -- -- -0-
Chief Executive 1993 -- -- -- -0-
Officer<FN2>
Rudolf J. Dallessandro, 1994 -- -- -- -0-
Executive Vice Presi- 1993 -- -- -- -0-
dent (Sales & Market-
ing)<FN2>
Howard H. Hagon, 1994 -- -- -- -0-
Executive Vice Presi- 1993 -- -- -- -0-
dent (Operations)<FN2>
<FN>
<FN1>
Mr. Flanagan relinquished his title as President of the Company in April 1996.
<FN2>
These persons resigned as Officers and Directors of the Company on September
30, 1994.
</FN>
</TABLE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
SECURITIES UNDER- VALUE OF UNEXER-
SHARES LYING UNEXER- CISED-IN-THE
ACQUIRED CISED OPTIONS MONEY\OPTIONS/
ON SARS AT FY-END SARS AT FY-END
EXERCISE VALUE EXERCISABLE/ EXERCISABLE/
NAME (NUMBER) REALIZED UNEXERCISABLE UNEXERCISABLE
Donald F. Fox -0- -0- 0/75,000 $0/$0
Gerald J. Flanagan 26,250 $115,625 236,250/0 $790,256/$0
EMPLOYMENT AGREEMENTS
On January 1, 1993, the Florida Subsidiary and the Michigan Subsidiary
executed employment agreements (the "Agreements") with Messrs. Gabriele,
Dallessandro and Hagon. Each Agreement provided that the employee was to
devote his full time and energy to the Company. The Agreements provided for a
base salary for Messrs. Gabriele, Dallessandro and Hagon of $150,000, $100,000
and $100,000, respectively, and incentive quarterly bonuses equal to 15.18%,
5.36% and 4.46%, respectively, of combined net income of the Michigan and
Florida Subsidiaries (defined as net operating income before taxes),
calculated without giving effect to net operating loss carryforwards or
carrybacks. The Agreements further provided for the same medical and life
insurance coverage as the Company provides for its other senior executive
officers. Each of the Agreements required payment of the employee's full
salary through the Scheduled Termination Date, irrespective of whether the
employee's employment terminates, the employee renders the services specified
or whether such services are deemed satisfactory by the Company. However,
each of these persons agreed to cancel their Agreements, and effective
December 29, 1994, no further compensation will be paid to these persons.
In November 1993, effective as of July 1, 1993, the Florida Subsidiary
and the Company executed a five year employment agreement with Gerald J.
Flanagan. The agreement shall be automatically extended for additional one
year periods unless terminated by either party on 60 days' notice. The
agreement provides for a base salary of $75,000 per year plus incentive
bonuses, and the same medical and life insurance benefits as are provided to
the Company's senior executive officers. The agreement contains trade
secrets, confidentiality and non-competition covenants. Effective October 1,
1994, Mr. Flanagan's salary was increased to $100,000 per year.
R. Scott Williams, the Company's Vice President of Marketing, has an
employment agreement with the Company pursuant to which he presently receives
an annual salary of $75,000. The initial term of this agreement was through
February 21, 1995, but is automatically extendable for additional one year
periods unless either party gives 60 days' notice of an intent to terminate
prior to the end of a term.
Scott F. Lochridge, President of the Company's AmeriDyne subsidiary, has
a two-year employment agreement with AmeriDyne which became effective on March
1, 1996. Under this agreement, Mr. Lochridge will receive a base salary of
$150,000 during the first year and $165,000 during the second year. He will
also be entitled to performance-based bonuses under a plan to be agreed upon
which would allow him to earn up to 30% of his annual salary as additional
compensation. Mr. Lochridge is also entitled to a $500,000 term life
insurance policy, the beneficiary of which is to be named by him, and a $500
per month automobile allowance.
Donald F. Fox, who became President of the Company in April 1996,
presently has no employment agreement with the Company. From April to July
1996 he received a salary of $120,000 per year. Effective July 15, 1996, his
salary was increased to $160,000 per year.
NON-QUALIFIED EMPLOYEE STOCK BONUS PLAN
On April 20, 1993, the Company's Board of Directors and a majority of
the owners of its Common Stock approved the adoption by the Company of a
Non-Qualified Employee Stock Bonus Plan (the "Plan") to reward individual
performance, provide incentives for employee performance, and to attract and
retain employees. The Company set aside 1,050,000 shares of its Common Stock
under the Plan, which is administered by the Board of Directors. Shares may
be awarded to employees of the Company, including its Subsidiaries, at a
purchase price of not less than $.01 per share. Options awarded under the
Plan will vest over a three year period and are exercisable for a period of
five years from date of grant. The only options which have been granted under
the Plan are an option to purchase 262,500 shares granted to Gerald J.
Flanagan in July 1993, exercisable at $1.905 per share; an option to purchase
105,000 shares granted to R. Scott Williams in October 1994, exercisable at
$2.143 per share; and options to purchase an aggregate of 52,500 shares
granted to two employees in May 1995, exercisable at $3.714 per share; and
options to purchase an aggregate of 47,250 shares granted to six employees in
December, 1995, exercisable at $4.11 per share.
1996 STOCK OPTION PLAN
On February 1, 1996, the Company's Board of Directors adopted the
Company's 1996 Stock Option Plan (the "1996 Plan"). The plan must be approved
by the Company's shareholders within 12 months of February 1, 1996. The 1996
Plan allows the Board to grant stock options from time to time to employees,
officers and directors of the Company and consultants to the Company. The
Board has the power to determine at the time the option is granted whether the
option will be an Incentive Stock Option (an option which qualifies under
Section 422 of the Internal Revenue Code of 1986) or an option which is not an
Incentive Stock Option. However, Incentive Stock Options will only be granted
to persons who are key employees of the Company. Vesting provisions are
determined by the Board at the time options are granted. The total number of
shares of Common Stock subject to options under the 1996 Plan may not exceed
315,000, subject to adjustment in the event of certain recapitalizations,
reorganizations and similar transactions. The option price must be satisfied
by the payment of cash.
The Board of Directors may amend the 1996 Plan at any time, provided
that the Board may not amend the 1996 Plan to materially increase the number
of shares available under the 1996 Plan, materially increase the benefits
accruing to Participants under the 1996 Plan, or materially change the
eligible class of employees without shareholder approval.
On February 1, 1996, the Board of Directors granted non-qualified stock
options to purchase an aggregate of 89,250 shares of Common Stock subject to
shareholder approval of the 1996 Plan. All of the options are exercisable at
$4.643 per share and, once the 1996 Plan is approved by the Company's
shareholders, will be fully vested. The options will expire five years after
the date of grant.
Included in options granted on February 1, 1996, are non-qualified stock
options granted to Chris Brogdon, Edward E. Lane and Darrell C. Tucker,
Directors of the Company, to purchase 26,250 shares each, and non-qualified
stock options granted to Phillip M. Rees, Secretary of the Company, to
purchase 10,500 shares.
On April 15, 1996, the Board of Directors granted a non-qualified stock
option to Donald F. Fox, the Company's President, to purchase 75,000 shares of
the Company's Common Stock at $5.375 per share. Once the 1996 Plan is
approved, the option will be fully vested, and will expire five years after
the date of grant.
On July 1, 1996, the Board of Directors granted a non-qualified stock
option to an employee of a subsidiary to purchase 25,000 shares of Common
Stock at $5.75 per share. Once the 1996 Plan is approved, the option will be
fully vested, and will expire five years after the date of grant.
On August 6, 1996, the Board of Directors granted a non-qualified stock
option to an employee to purchase 25,000 shares of Common Stock at $5.75 per
share. Once the 1996 Plan is approved, the options will be fully vested, and
will expire five years after the date of grant.
On September 3, 1996, the Board of Directors granted non-qualified stock
options to two employees each to purchase 25,000 shares of Common Stock at
$5.50 per share. Once the 1996 Plan is approved, the options will be fully
vested, and will expire five years after the date of grant.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth information as of September 1, 1996, as
to the shares of the Common Stock beneficially owned by each person who is the
beneficial owner of more than five percent (5%) of the Company's shares, each
of the Company's Directors and by all of the Company's Directors and Executive
Officers as a group. Each person has sole voting and investment power with
respect to the shares shown except as noted.
<TABLE>
<CAPTION>
AMOUNT OF BENE- PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER FICIAL OWNERSHIP OF CLASS
<S> <C> <C>
Retirement Care Associates, Inc.<FN1> 3,290,878 <FN2> 54.1%
6000 Lake Forrest Drive, Suite 200
Atlanta, GA 30328
Donald F. Fox 10,000 <FN3> 0.2%
3340 Scherer Drive
St. Petersburg, FL 33716
Gerald J. Flanagan 268,155 <FN4> 4.3%
3340 Scherer Drive
St. Petersburg, FL 33716
R. Scott Williams 113,077 <FN5> 1.9%
3340 Scherer Drive
St. Petersburg, FL 33716
Chris Brogdon 60,300 <FN6> 1.0%
6000 Lake Forrest Drive, Suite 200
Atlanta, GA 30328
Edward E. Lane 14,450 <FN7> 0.2%
6000 Lake Forrest Drive, Suite 200
Atlanta, GA 30328
Darrell C. Tucker 5,250 <FN8> 0.1%
6000 Lake Forrest Drive, Suite 200
Atlanta, GA 30328
Scott F. Lochridge 367,119 6.2%
231 Bobick Drive
Jackson, TN 39301
All Directors and Executive Officers 838,351 13.3%
as a Group (7 Persons)
__________________
<FN>
<FN1>
Retirement Care Associates, Inc. ("Retirement Care") is a publicly-held
corporation of which Chris Brogdon is President, Director and a principal
shareholder; Edward E. Lane is Secretary, Director and a principal
shareholder; Darrell C. Tucker is a Director and a President of a subsidiary;
and Julian S. Daley and Harlan Mathews are Directors.
In addition, Connie Brogdon, the wife of Chris Brogdon, is a principal
shareholder of Retirement Care. The following sets forth the percentage
ownership beneficially held by such persons in Retirement Care:
Chris Brogdon 20.7%
Edward E. Lane 19.5%
Darrell C. Tucker 4.1%
Julian S. Daley 0.3%
Harlan Mathews 0.1%
Connie Brogdon 20.7%
<FN2>
Includes 3,157,003 shares held by Retirement Care Associates, Inc., 44,625
shares underlying Class C Warrants held by Retirement Care Associates, Inc.
and 89,250 shares of Common Stock into which shares of Series A Convertible
Preferred Stock held by Retirement Care Associates, Inc. may be converted.
<FN3>
Does not include shares underlying stock options held by Mr. Fox under the
1996 Stock Option Plan because the options are contingent on shareholder
approval of such plan.
<FN4>
Represents 31,905 shares of Common Stock held by Mr. Flanagan and 236,250
shares issuable upon the exercise of currently exercisable stock options held
by Mr. Flanagan.
<FN5>
Includes 8,077 shares of Common Stock held directly by Mr. Williams and
105,000 shares issuable upon the exercise of currently exercisable stock
options held by him.
<FN6>
Includes 45,300 shares held directly by Mr. Brogdon; 10,000 shares held by Mr.
Brogdon's wife; and 5,000 shares which represents one-half of the shares owned
by Winter Haven Homes, Inc. of which Mr. Brogdon's wife is a 50% owner. Does
not include shares held by Retirement Care Associates, Inc. of which Mr.
Brogdon is an officer, director and a principal shareholder. Also does not
include shares underlying stock options granted to Mr. Brogdon under the
Company's 1996 Stock Option Plan because the options are contingent on
shareholder approval of such plan.
<FN7>
Includes 9,450 shares held directly by Mr. Lane and 5,000 shares which
represents one-half of the shares owned by Winter Haven Homes, Inc. of which
Mr. Lane is 50% owner. Does not include shares held by Retirement Care
Associates, Inc. of which Mr. Lane is an officer, director and a principal
shareholder. Also does not include shares underlying stock options granted to
Mr. Lane under the Company's 1996 Stock Option Plan because the options are
contingent on shareholder approval of such plan.
<FN8>
Represents 5,250 shares held directly by Mr. Tucker. Does not include shares
held by Retirement Care Associates, Inc. of which Mr. Tucker is an officer and
diretor. Also does not include shares underlying stock options granted to Mr.
Tucker under the Company's 1996 Stock Option Plan because the options are
contingent on shareholder approval of such plan.
</FN>
</TABLE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
During 1994, Retirement Care Associates, Inc., the Company's majority
shareholder, advanced the Company $165,000. This was repaid without interest
during February 1995.
In February 1995, Retirement Care Associates, Inc. ("Retirement Care"),
the Company's majority shareholder, purchased 85,000 shares of Series A
Preferred Stock and 42,500 Class C Redeemable Common Stock Purchase Warrants
for a total of $340,000 in cash as part of a private offering conducted by the
Company. Also in February 1995, the Company advanced $1,168,901 out of the
proceeds of the private offering to Retirement Care. The advance to
Retirement Care is due on demand and is interest free. This transaction was
approved by the only disinterested member of the Board of Directors based on
an understanding among the Board members that Retirement Care will repay the
advance as the Board determines the Company needs the money. In addition, if
the Company needs to borrow money from Retirement Care, as it did in 1994,
Retirement Care will loan the money on an interest free basis. It is the
Company's policy that all transactions with affiliates, including major
shareholders and members of management, must be approved by a majority of the
disinterested directors. On July 11, 1996, Retirement Care repaid $613,563 to
the Company, representing the entire outstanding balance owed to the Company
from the proceeds of the private offering advanced to Retirement Care in
February, 1995. On August 22, the Company advanced $750,000 to Retirement
Care out of the proceeds of the sale of Convertible Debentures in July, 1996,
pursuant to an agreement between the Company and Retirement Care dated August
22, 1996. This agreement stipulates that funds advanced to Retirement Care by
the Company, or by Retirement Care to the Company, must be repaid within 45
days of the date of the advance and will bear interest at the prime interest
rate published in the Wall Street Journal.
During the year ended June 30, 1996, nursing home and retirement
facilities owned, leased or managed by Retirement Care purchased a total of
approximately $5,456,000 in bulk medical supplies from the Company. The sales
made to these facilities are at the same prices the Company would receive from
non-affiliated persons. As of June 30, 1996, such facilities owed the Company
$1,918,000 in accounts receivable in connection with such sales.
Retirement Care has guaranteed a $500,000 line of credit of the Company
from a commercial bank. As of June 30, 1996, $433,535 had been drawn on this
line of credit. In September 1996, this line of credit was paid in full and
replaced.
In August 1996, the Company issued promissory notes totaling $10,500,000
in connection with the acquisition of Atlantic Medical Supply, Inc.
Retirement Care has agreed that in the event of a default in the payment of
such promissory notes, they may be converted into shares of Retirement Care's
common stock, and that Retirement Care will register such stock for resale
under the Securities Act of 1933.
Retirement Care has also guaranteed loans and lines of credit of the
Company's AmeriDyne subsidiary totaling approximately $1,255,000. As of
June 30, 1996, approximately $1,040,000 was outstanding under these
obligations. In September 1996 this line of credit was paid in full.
Scott F. Lochridge, the President of AmeriDyne, holds a promissory note
from AmeriDyne dated March 1, 1996, in the principal amount of $176,419. The
note bears interest at 10% per annum and is payable in 36 equal monthly
installments of $5,693 commencing April 1, 1996. As of June 30, 1996,
$163,646 in principal was outstanding under this promissory note.
On September 12, 1996, the Company loaned $55,332 to Donald F. Fox, the
Company's President. The loan is due on demand and bears interest at 7% per
annum.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. FINANCIAL STATEMENTS. The following financial statements are
filed as part of this report:
PAGE(S)
Reports of Independent Certified Public Accountants............. F-1 to F-3
Consolidated Balance Sheets as of June 30, 1996, and
June 30, 1995....................................................... F-4
Consolidated Statements of Income for the year ended
June 30, 1996, the six months ended June 30, 1996,
and for the years ended December 31, 1994 and 1993.................. F-5
Consolidated Statements of Shareholders' Equity for
the year ended June 30, 1996, the six months ended
June 30, 1996, and for the years ended December 31,
1994 and 1993................................................... F-6 to F-17
Consolidated Statements of Cash Flows for the
year ended June 30, 1996 and the six months ended
June 30, 1996, and for the years ended December 31,
1994 and 1993................................................... F-18 to F-19
Notes to Financial Statements................................... F-20 to F-33
(a) 2. FINANCIAL STATEMENT SCHEDULES. All schedules have been
omitted, as the required information is inapplicable or the information is
presented in the financial statements or the notes thereto.
(a) 3. EXHIBITS:
EXHIBIT
NUMBER DESCRIPTION LOCATION
3.1 Restated Articles of Incorpora- Incorporated by reference to
tion of Associated Health Care Exhibit 3.1 to the Company's
Industries, Inc. Form S-1 Registration State-
ment (File No. 33-66024)
3.2 Amendment to the Restated Incorporated by reference to
Articles of Incorporation Exhibit 3.2 to the Company's
Form S-1 Registration State-
ment (File No. 33-66024)
3.3 Bylaws of the Registrant Incorporated by reference to
Exhibit 3.3 to the Company's
Form S-1 Registration State-
ment (File No. 33-66024)
3.4 Second Amendment to the Restated Incorporated by reference to
Articles of Incorporation of Exhibit 3.4 to the Company's
Contour Medical, Inc., dated Form S-1 Registration State-
July 26, 1993 ment (File No. 33-66024)
3.5 Third Amendment to the Restated Incorporated by reference to
Articles of Incorporation of Exhibit 3.5 to the Company's
Contour Medical, Inc., dated Form S-1 Registration State-
August 27, 1993 ment (File No. 33-66024)
3.6 Fourth Amendment to the Restated Incorporated by reference to
Articles of Incorporation of Exhibit 3.6 to the Company's
Contour Medical, Inc., dated Form S-1 Registration State-
November 10, 1993 ment (File No. 33-66024)
3.7 Amended Bylaws Incorporated by reference to
Exhibit 3.7 to the Company's
Form S-1 Registration State-
ment (File No. 33-66024)
3.8 Sixth Amendment to Articles of Incorporated by reference to
Incorporation, dated November 9, Exhibit 3.8 to the Company's
1993 (there is no "Fifth" Amend- Form S-1 Registration State-
ment) ment (File No. 33-66024)
3.9 Amendment Number Five to Incorporated by reference to
Articles of Incorporation, Exhibit 3.9 to the Company's
dated April 25, 1994 Form S-1 Registration State-
ment (File No. 33-66024)
3.10 Amendment Number Six to Incorporated by reference to
Articles of Incorporation, Exhibit 3.10 to the Company's
dated May 13, 1994 Form S-1 Registration State-
ment (File No. 33-66024)
10.1 Lease Agreement, effective Incorporated by reference to
August 1, 1994, between Contour Exhibit 10.1 to the Company's
Fabricators of Florida, Inc., Transition Report on Form10-K
and William A. and Gerald for the period ended June30,
Gehrand relating to the Regis- 1995
trant's office and manufacturing
space in St. Petersburg, Florida
10.2 Lease Agreement, dated March 1, Incorporated by reference to
1993, between the Registrant Exhibit 10.2 to the Company's
and William A. and Gerald Form S-1 Registration State-
Gehrand, relating to the Regis- ment (File No. 33-66024)
trant's office and manufacturing
space in St. Petersburg, Florida
10.3 Employment Agreement, dated Incorporated by reference
January 1, 1993, between the Exhibit 10.3 to the Company's
Registrant and William J. Form S-1 Registration State-
Gabriele ment (File No. 33-66024)
10.4 Employment Agreement, dated Incorporated by reference to
January 1, 1993, between the Exhibit 10.4 to the Company's
Registrant and Rudolph J. Form S-1 Registration State-
Dallessandro ment (File No. 33-66024)
10.5 Employment Agreement, dated Incorporated by reference to
January 1, 1993, between the Exhibit 10.5 to the Company's
Registrant and Howard E. Hagon Form S-1 Registration State-
ment (File No. 33-66024)
10.6 Non-Qualified Employee Stock Incorporated by reference to
Bonus Plan Exhibit 10.6 to the Company's
Form S-1 Registration State-
ment (File No. 33-66024)
10.7 Employment Agreement by and Incorporated by reference to
between Contour Medical Fabrica- Exhibit 10.8 to the Company's
tors of Florida, Inc., Associa- Form S-1 Registration State-
ted Healthcare Industries, Inc. ment (File No. 33-66024)
and Gerald J. Flanagan, dated
July 1, 1993
10.8 Lease Agreement with William A. Incorporated by reference to
and Gerald Gehrand dated Exhibit 10.8 to the Company's
February 1, 1995, relating to Transition Report on Form
Registrant's warehouse space in 10-K for the period ended
St. Petersburg, Florida June 30, 1995
10.9 1996 Stock Option Plan Incorporated by reference to
Exhibit 10.9 to the Company's
Form S-1 Registration State-
ment (File No. 33-64977)
10.10 Agreement and Plan of Merger by Incorporated by reference to
and among Contour Medical, Inc. Exhibit 10 to the Company's
Contour Merger Sub, Inc., Scott Current Report on Form 8-K
F. Lochridge and AmeriDyne Dated March 1, 1996
Corporation
10.11 Employment Agreement with Incorporated by reference to
Scott F. Lochridge Exhibit 10.11 to the Company's
Form S-1 Registration State-
ment (File No. 33-64977)
10.12 Promissory Note from AmeriDyne Incorporated by reference to
Corporation from Scott F. Exhibit 10.13 to the Company's
Lochridge Form S-1 Registration State-
ment (File No. 33-64977)
10.13 Share Purchase Agreement for Incorporated by reference to
the acquisition of Atlantic Exhibit 10.1 to the Company's
Medical Supply Company, Inc. Report on Form 8-K dated
August 6, 1996
10.14 Convertible Debenture Loan Filed herewith electronically
Agreement with Renaissance
Capital Growth & Income Fund
III, Inc., and Renaissance
US Growth and Income Trust
PLC
10.25 Letter Agreement dated August Filed herewith electronically
22, 1996 with Retirement Care
Associates, Inc.
21 Subsidiaries of the Registrant Filed herewith electronically
23.1 Consent of Coopers & Lybrand, Filed herewith electronically
L.L.P.
23.2 Consent of BDO Seidman, LLP Filed herewith electronically
23.3 Consent of Pender Newkirk &
Company Filed herewith electronically
27 Financial Data Schedule Filed herewith electronically
All financial statement schedules have been omitted, as the required
information is inapplicable or the information is presented in the financial
statements or the notes thereto.
(b) The Company did not file any reports on Form 8-K during the
quarter ended June 30, 1996.
<PAGE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Contour Medical, Inc.
St. Petersburg, Florida
We have audited the accompanying consolidated balance sheet of Contour
Medical, Inc. (a subsidiary of Retirement Care Associates, Inc.) and
Subsidiaries (the Company) as of June 30, 1996, and the related consolidated
statement of operations, stockholders' equity, and cash flows for the year
then ended. These financial statements are the responsibility of the Company'
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Contour Medical,
Inc. and Subsidiaries as of June 30, 1996, and the consolidated results of its
operations and its cash flows for the year then ended, in conformity with
generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Tampa, Florida
September 13, 1996, except for the second paragraph in Note 13,
for which the date is September 20, 1996
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Contour Medical, Inc.
St. Petersburg, Florida
We have audited the accompanying consolidated balance sheets of Contour
Medical, Inc. (a subsidiary of Retirement Care Associates, Inc.) and
Subsidiaries as of June 30, 1995 and December 31, 1994 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the six months and year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Contour
Medical, Inc. and Subsidiaries as of June 30, 1995 and December 31, 1994 and
the results of their operations and their cash flows for the six months and
year then ended in conformity with generally accepted accounting principles.
/s/ BDO Seidman, LLP
BDO SEIDMAN, LLP
Orlando, Florida
August 18, 1995, except for the stock split
discussed in Note 10 which is as of March 15, 1996
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Contour Medical, Inc.
St. Petersburg, Florida
We have audited the accompanying consolidated statements of operations,
changes in stockholders' equity and cash flows of Contour Medical, Inc. and
Subsidiaries for the year ended December 31, 1993. These consolidated
financial statements are the responsibility of the management of Contour
Medical, Inc. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audit to
obtain reasonable assurance about whether the statements of operations,
changes in stockholders' equity, and cash flows are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of Contour Medical, Inc. and Subsidiaries for the year ended December
31, 1993 in conformity with generlaly accepted accounting principles.
/s/ Pender Newkirk & Company
Certified Public Accountants
Tampa, Florida
January 21, 1994
100 South Ashley Drive, Suite 1650, Tampa, Florida 33602
813/229-2321
813/229-2359 FAX
PENDER NEWKIRK & COMPANY - CERTIFIED PUBLIC ACCOUNTANTS
Member of Private Companies Practice Section
and SEC Practice Section of American Institute
of Certified Public Accountants
F-3
<PAGE>
CONTOUR MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1996 and 1995
1996 1995
----------- ----------
ASSETS
Cash $ 146,219 $ 96,235
Accounts receivable:
Related parties 1,918,000 943,094
Trade, net of allowance for bad debts
of approximately $410,000 in 1996 2,527,676 760,703
Inventories 2,876,792 1,297,394
Refundable income taxes 21,406 10,680
Prepaid expenses and other 51,519 74,319
Due from parent 618,897 1,168,901
------------ -----------
8,160,509 4,351,326
------------ -----------
Property and equipment, less
accumulated depreciation 1,223,195 592,243
------------ -----------
Other assets:
Deposit on equipment 416,184 228,282
Other 172,215 4,575
Goodwill, net of accumulated amorti-
ation of approximately $11,000 in 1996 1,286,165 0
------------ -----------
1,874,564 232,857
------------ -----------
$ 11,258,268 $ 5,176,426
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 1,825,193 $ 414,077
Accounts payable 1,954,824 882,524
Accrued expenses 366,716 80,977
------------ -----------
4,146,733 1,377,578
Long-term debt, less current maturities 1,352,937 907,711
------------ -----------
Total liabilities 5,499,670 2,285,289
------------ -----------
Stockholders' equity:
Preferred stock - Series A convertible;
$.001 par value, shares authorized -
1,265,000; issued and outstanding -
600,000 at aggregate liquidation
preference 2,528,000 2,400,000
Common stock; $.001 par value, shares
authorized - 76,000,000; issued and
outstanding 5,214,223 and 4,573,600,
respectively, (net of $765 discount) 4,449 3,808
Additional paid-in capital 2,911,696 781,738
Retained earnings (deficit) 232,625 (294,409)
------------ -----------
Total stockholders' equity 5,676,770 2,891,137
------------ -----------
$ 11,258,268 $ 5,176,426
The accompanying notes are an integral part of these financial statements.
F-4<PAGE>
<PAGE>
CONTOUR MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31,
JUNE 30, JUNE 30,
- ------------------------
1996 1995 1994
1993
----------- ---------- ----------
- -----------
<S> <C> <C> <C> <C>
Sales $14,542,421 $3,568,459 $3,945,745
$3,618,359
Cost of sales 10,491,103 2,544,376 2,545,925
2,061,250
----------- ---------- ----------
- ----------
Gross profit 4,051,318 1,024,083 1,399,820
1,557,109
Selling, general and adminis-
trative expenses 3,185,620 841,275 1,550,385
1,538,465
Litigation settlements 0 0 30,000
85,000
----------- ---------- ----------
- ----------
Income (loss) from operations 865,698 182,808 (180,565)
(66,356)
----------- ---------- ----------
- ----------
Other income (expenses):
Offering costs 0 0 (305,731)
0
Interest (170,951) (39,098) (53,627)
(63,758)
Other 144,453 22,381 10,741
4,789
----------- ---------- ----------
- ----------
(26,498) (16,717) (348,617)
(58,969)
----------- ---------- ----------
- ----------
Income (loss) before taxes
on income (benefit) 839,200 166,091 (529,182)
(125,325)
Taxes on income (benefit) 312,166 54,718 0
(51,789)
----------- ---------- ----------
- ----------
Net income (loss) $ 527,034 $ 111,373 $ (529,182) $
(73,536)
=========== ========== ==========
==========
Earnings (loss) per common share $ 0.09 $ 0.02 $ (0.20) $
(0.05)
=========== ========== ==========
==========
Weighted average common shares and
share equivalents outstanding 4,804,292 4,786,126 2,688,927
1,434,466
=========== ========== ==========
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
CONTOUR MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SUBSCRIBED
COMMON STOCK COMMON STOCK
ADDITIONAL
---------------------- ---------------------
PAID-IN
SHARES AMOUNT SHARES AMOUNT
CAPITAL
----------- -------- --------- ---------
- ----------
<S> <C> <C> <C> <C>
<C>
Balance, January 1,
1993 6,900 $ 6,900 0 $ 0 $
0
Acquisition of CMI 16,315,034 16,315 150,000 75
517,939
Recapitalization (6,900) (23,215) 0 (75)
(517,939)
Issuance of stock 180,045 33 (150,000) 0
4,967
Contribution of stock 0 0 0 0
0
1-for-13 reverse stock
split (15,226,227) (30) 0 0
30
Conversion of Class A
preferred stock 365,704 366 0 0
27,226
Conversion of Class C
preferred stock 846,669 847 0 0
404,356
Issuance of Class E
preferred stock in
exchange for common
stock (172,986) (87) 0 0
(295,656)
Net loss 0 0 0 0
0
----------- --------- -------- ---------
- ---------
Balance, December 31,
1993 2,308,239 1,129 0 0
140,923
Conversion of Class A
preferred stock 219,182 220 0 0
39,557
Conversion of Class B
preferred stock 33,333 33 0 0
(33)
Converson of Class D
preferred stock and
warrants 238,450 238 0 0
75,212
Conversion of Class E
preferred stock 172,986 173 0 0
295,569
Conversion of Class One
preferred stock 2,000,000 2,000 0 0
370,844
Net loss 0 0 0 0
0
----------- --------- -------- ---------
- ---------
Balance, December 31,
1994 4,972,190 3,793 0 0
922,072
Issuance of Series A
preferred stock 0 0 0 0
(214,997)
Exercise of common
stock options 15,385 15 0 0
19,985
Correction of Class A
preferred stock conver-
sion 255 0 0 0
0
Redemption of Class A
warrants 0 0 0 0
(40)
Tax benefit from utiliza-
tion of net operating
loss carryforward 0 0 0 0
54,718
F-6
<PAGE>
Retirement of treasury
stock (414,230) 0 0 0
0
Net income 0 0 0 0
0
----------- --------- -------- ---------
- ---------
Balance, June 30, 1995 4,573,600 3,808 0 0
781,738
Issuance of stock 352,018 353 0 0
2,045,753
Exercise of common stock
options 25,000 25 0 0
49,975
1.05-for-1 forward stock
split 247,601 247 0 0
(247)
Correction of preferred
stock 16,004 16 0 0
(16)
Short-swing liability from
a shareholder 0 0 0 0
36,531
Preferred dividends in
arrears 0 0 0 0
(128,000)
Tax benefit from utilization
of net operating loss
carryforward 0 0 0 0
125,962
Net income 0 0 0 0
0
----------- --------- -------- ---------
- ---------
Balance, June 30, 1996 5,214,223 $ 4,449 0 $ 0
$2,911,696
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7<PAGE>
<PAGE>
CONTOUR MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, CONTINUED
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED
STOCK
RETAINED TREASURY STOCK SERIES
A
EARNINGS ---------------------
- -------------------
(DEFICIT) SHARES AMOUNT SHARES
AMOUNT
----------- ----------- ------- -------
- ----------
<S> <C> <C> <C> <C> <C>
Balance, January 1,
1993 $ 287,099 0 $ 0 0 $
0
Acquisition of CMI (1,039,673) 0 0 0
0
Recapitalization 1,039,673 0 0 0
0
Issuance of stock 0 0 0 0
0
Contribution of stock 0 5,385,000 0 0
0
1-for-13 reverse stock
split 0 (4,970,770) 0 0
0
Conversion of Class A
preferred stock (27,592) 0 0 0
0
Conversion of Class C
preferred stock 0 0 0 0
0
Issuance of Class E
preferred stock in
exchange for common
stock 0 0 0 0
0
Net loss (73,536) 0 0 0
0
----------- ----------- ------- -------
- ----------
Balance, December 31,
1993 185,971 414,230 0 0
0
Conversion of Class A
preferred stock (14,777) 0 0 0
0
Conversion of Class B
preferred stock 0 0 0 0
0
Converson of Class D
preferred stock
and warrants (47,794) 0 0 0
0
Conversion of Class E
preferred stock 0 0 0 0
0
Conversion of Class One
preferred stock 0 0 0 0
0
Net loss (529,182) 0 0 0
0
----------- ----------- ------- -------
- ----------
Balance, December 31,
1994 (405,782) 414,230 0 0
0
Issuance of Series A
preferred stock 0 0 0 600,000
2,400,000
Exercise of common
stock options 0 0 0 0
0
Correction of Class A
preferred stock
conversion 0 0 0 0
0
Redemption of Class A
warrants 0 0 0 0
0
F-8
<PAGE>
Tax benefit from utili-
zation of net operating
loss carryforward 0 0 0 0
0
Retirement of treasury
stock 0 (414,230) 0 0
0
Net income 11,373 0 0 0
0
----------- ----------- ------- -------
- ----------
Balance, June 30, 1995 (294,409) 0 0 600,000
2,400,000
Issuance of stock 0 0 0 0
0
Exercise of common stock
options 0 0 0 0
0
1.05-for-1 forward stock
split 0 0 0 0
0
Correction of preferred
stock 0 0 0 0
0
Short-swing liability
from a shareholder 0 0 0 0
0
Preferred dividends in
arrears 0 0 0 0
128,000
Tax benefit from utili-
zation of net operating
loss carryforward 0 0 0 0
0
Net income 527,034 0 0 0
0
----------- ----------- ------- -------
- ----------
Balance, June 30, 1996 $ 232,625 0 $ 0 600,000
$2,528,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-9<PAGE>
<PAGE>
CONTOUR MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, CONTINUED
<TABLE>
<CAPTION>
REDEEMABLE CUMULATIVE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK
CLASS D CLASS ONE
-----------------------
- -----------------------
SHARES AMOUNT SHARES
AMOUNT
--------- ---------- ---------
- ---------
<S> <C> <C> <C> <C>
Balance, January 1, 1993 0 $ 0 0 $
0
Acquisition of CMI 1,000,000 0 0
0
Recapitalization 0 0 0
0
Issuance of stock 74,176 400,500 0
0
Contribution of stock 0 0 0
0
1-for-13 reverse stock
split 0 0 0
0
Conversion of Class A
preferred stock 0 0 0
0
Issuance of Class E
preferred stock in
exchange for common stock 0 0 0
0
Net loss 0 0 0
0
--------- ---------- ---------
- ---------
Balance, December 31, 1993 1,074,176 400,500 0
0
Conversion of Class A
preferred stock 0 0 0
0
Conversion of Class B
preferred stock 0 0 0
0
Converson of Class D
preferred stock and
warrants (1,074,176) (400,500) 2,000,000
372,844
Conversion of Class E
preferred stock 0 0 0
0
Conversion of Class One
preferred stock 0 0 (2,000,000)
(372,844)
Net loss 0 0 0
0
--------- ---------- ---------
- ---------
Balance, December 31, 1994 0 0 0
0
Issuance of Series A
preferred stock 0 0 0
0
Exercise of common stock
options 0 0 0
0
Correction of Class A
preferred stock conversion 0 0 0
0
Redemption of Class A
warrants 0 0 0
0
Tax benefit from utilization
of net operating loss
carryforward 0 0 0
0
Retirement of treasury stock 0 0 0
0
Net income 0 0 0
0
--------- ---------- ---------
- ---------
F-10
Balance, June 30, 1995 0 0 0
0
Issuance of stock 0 0 0
0
Exercise of common stock
options 0 0 0
0
1.05-for-1 forward stock
split 0 0 0
0
Correction of preferred
stock 0 0 0
0
Short-swing liability from
a shareholder 0 0 0
0
Preferred dividends in
arrears 0 0 0
0
Tax benefit from utilization
of net operating loss
carryforward 0 0 0
0
Net income 0 0 0
0
--------- ---------- ---------
- ---------
Balance, June 30, 1996 0 $ 0 0 $
0
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-11<PAGE>
<PAGE>
CONTOUR MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, CONTINUED
<TABLE>
<CAPTION>
CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK
CLASS A CLASS B
------------------------
- -----------------------
SHARES AMOUNT SHARES
AMOUNT
--------- ---------- ---------
- ---------
<S> <C> <C> <C> <C>
Balance, January 1, 1993 0 $ 0 0 $
0
Acquisition of CMI 36,325 33,919 2
100,000
Recapitalization 0 (33,919) 0
(100,000)
Issuance of stock 334,319 25,000 0
0
Contribution of stock 0 0 0
0
1-for-13 reverse stock
split 0 0 0
0
Conversion of Class A
preferred stock (271,119) 0 0
0
Issuance of Class E
preferred stock in
exchange for common stock 0 0 0
0
Net loss 0 0 0
0
--------- -------- ---------
- ---------
Balance, December 31, 1993 99,525 25,000 2
0
Conversion of Class A
preferred stock (99,525) (25,000) 0
0
Conversion of Class B
preferred stock 0 0 (2)
0
Converson of Class D
preferred stock and
warrants 0 0 0
0
Conversion of Class E
preferred stock 0 0 0
0
Conversion of Class
One preferred stock 0 0 0
0
Net loss 0 0 0
0
--------- -------- ---------
- ---------
Balance, December 31, 1994 0 0 0
0
Issuance of Series A
preferred stock 0 0 0
0
Exercise of common stock
options 0 0 0
0
Correction of Class A
preferred stock conversion 0 0 0
0
Redemption of Class A
warrants 0 0 0
0
Tax benefit from utiliza-
tion of net operating
loss carryforward 0 0 0
0
Retirement of treasury stock 0 0 0
0
Net income 0 0 0
0
--------- -------- ---------
- ---------
F-12
<PAGE>
Balance, June 30, 1995 0 0 0
0
Issuance of stock 0 0 0
0
Exercise of common stock
options 0 0 0
0
1.05-for-1 forward stock
split 0 0 0
0
Correction of preferred
stock 0 0 0
0
Short-swing liability from
a shareholder 0 0 0
0
Tax benefit from utiliza-
tion of net operating
loss carryforward 0 0 0
0
Net income 0 0 0
0
--------- -------- ---------
- ---------
Balance, June 30, 1996 0 $ 0 0 $
0
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-13
<PAGE>
CONTOUR MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, CONTINUED
<TABLE>
<CAPTION>
CONVERTIBLE CUMULATIVE CLASS C
PREFERRED STOCK PREFERRED STOCK
CLASS C SERIES E
------------------------
- -----------------------
SHARES AMOUNT SHARES
AMOUNT
--------- ---------- ---------
- ---------
<S> <C> <C> <C> <C>
Balance, January 1, 1993 0 $ 0 0 $
0
Acquisition of CMI 666,669 0 325,000
0
Recapitalization 0 (74,797) 0
0
Issuance of stock 0 0 0
0
Issuance of stock in
satisfaction of loans 180,000 480,000 0
0
Conversion of Class A
preferred stock 0 0 0
0
Conversion of Class C
preferred stock (846,669) (405,203) 0
0
Issuance of Class E
preferred stock in
exchange for common stock 0 0 0
0
Acquisition and retirement
of stock 0 0 (325,000)
0
Net loss 0 0 0
0
--------- ---------- ---------
- ---------
Balance, December 31, 1993 0 0 0
0
Conversion of Class A
preferred stock 0 0 0
0
Conversion of Class B
preferred stock 0 0 0
0
Converson of Class D
preferred stock and warrants 0 0 0
0
Conversion of Class E
preferred stock 0 0 0
0
Conversion of Class One
preferred stock 0 0 0
0
Net loss 0 0 0
0
--------- ---------- ---------
- ---------
Balance, December 31, 1994 0 0 0
0
Issuance of Series A
preferred stock 0 0 0
0
Exercise of common stock
options 0 0 0
0
Correction of Class A
preferred stock conversion 0 0 0
0
Redemption of Class A
warrants 0 0 0
0
Tax benefit from utilization
of net operating loss
carryforward 0 0 0
0
Retirement of treasury stock 0 0 0
0
Net income 0 0 0
0
--------- ---------- ---------
- ---------
F-14
<PAGE>
Balance, June 30, 1995 0 0 0
0
Issuance of stock 0 0 0
0
Exercise of common stock
options 0 0 0
0
1.05-for-1 forward stock
split 0 0 0
0
Correction of preferred
stock 0 0 0
0
Short-swing liability from
a shareholder 0 0 0
0
Preferred dividends in
arrears 0 0 0
0
Tax benefit from utiliza-
tion of net operating loss
carryforward 0 0 0
0
Net income 0 0 0
0
--------- ---------- ---------
- ---------
Balance, June 30, 1996 0 $ 0 0 $
0
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-15<PAGE>
<PAGE>
CONTOUR MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, CONTINUED
<TABLE>
<CAPTION>
SUBSCRIBED CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK
CLASS A CLASS E
------------------------
- -----------------------
SHARES AMOUNT SHARES
AMOUNT
--------- ---------- ---------
- ---------
<S> <C> <C> <C> <C>
Balance, January 1, 1993 0 $ 0 0 $
0
Acquisition of CMI 309,319 289,728 0
0
Recapitalization 0 (289,728) 0
0
Issuance of stock (309,319) 0 0
0
Issuance of stock in
satisfaction of loans 0 0 0
0
Conversion of Class A
preferred stock 0 0 0
0
Conversion of Class C
preferred stock 0 0 0
0
Issuance of Class E
preferred stock in
exchange for common stock 0 0 172,986
295,742
Acquisition and retirement
of stock 0 0 0
0
Net loss 0 0 0
0
--------- ---------- ---------
- ---------
Balance, December 31, 1993 0 0 172,986
295,742
Conversion of Class A
preferred stock 0 0 0
0
Conversion of Class B
preferred stock 0 0 0
0
Converson of Class D
preferred stock and warrants 0 0 0
0
Conversion of Class E
preferred stock 0 0 (172,986)
(295,742)
Conversion of Class One
preferred stock 0 0 0
0
Net loss 0 0 0
0
--------- ---------- ---------
- ---------
Balance, December 31, 1994 0 0 0
0
Issuance of Series A
preferred stock 0 0 0
0
Exercise of common stock
options 0 0 0
0
Correction of Class A
preferred stock conversion 0 0 0
0
Redemption of Class A
warrants 0 0 0
0
Tax benefit from utilization
of net operating loss
carryforward 0 0 0
0
Retirement of treasury stock 0 0 0
0
Net income 0 0 0
0
--------- ---------- ---------
- ---------
F-16
<PAGE>
Balance, June 30, 1995 0 0 0
0
Issuance of stock 0 0 0
0
Exercise of common stock
options 0 0 0
0
1.05-for-1 forward stock
split 0 0 0
0
Correction of preferred
stock 0 0 0
0
Short-swing liability from
a shareholder 0 0 0
0
Tax benefit from utilization
of net operating loss
carryforward 0 0 0
0
Net income 0 0 0
0
--------- ---------- ---------
- ---------
Balance, June 30, 1996 0 $ 0 0 $
0
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-17<PAGE>
<PAGE>
CONTOUR MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31,
JUNE 30, JUNE 30,
- -----------------------
1996 1995 1994
1993
------------ ------------ ----------
- ----------
<S> <C> <C> <C>
<C>
Cash flows from operating
activities:
Net income (loss) $ 527,034 $ 111,373 $(529,182)
$ (73,536)
Adjustments to reconcile
net income (loss) to net cash
used in operating activities:
Depreciation and amortization 255,757 51,670 98,684
53,397
Offering costs 0 0 305,731
0
Tax benefit from utilization
of net operating loss
carryforward 207,990 54,718 0
0
Cash provided by (used in):
Accounts receivable (1,364,353) (1,123,856) (34,558)
(12,505)
Inventories (318,832) (908,317) 33,978
50,654
Refundable income taxes (10,726) (2,500) 90,941
(99,121)
Prepaid expenses and other 32,059 (61,325) (6,189)
(6,805)
Accounts payable 402,534 767,004 23,263
(74,444)
Accrued expenses 144,490 80,835 (10,801)
(46,924)
------------- ------------- ----------
- ----------
Net cash used in operating
activities (124,047) (1,030,398) (28,133)
(209,284)
------------- ------------- ----------
- ----------
Cash flows from investing
activities:
Purchases of property and
equipment (749,163) (304,762) (46,181)
(123,917)
Cash acquired from acquisition 0 0 0
778
Decrease (increase) in due
from parent 550,004 (1,168,901) 0
0
Deposit on equipment 0 (228,282) 0
0
Decrease (increase) in
other assets 0 0 555
(1,055)
Acquisition of AmeriDyne,
net of cash acquired (322,297) 0 0
0
------------- ------------- ----------
- ----------
Net cash used in investing
activities (521,456) (1,701,945) (45,626)
(24,194)
------------- ------------- ----------
- ----------
Cash flows from financing
activities:
Deferred offering costs 0 0 (59,990)
(138,136)
Proceeds from issuance of notes
payable to bank 1,295,635 0 0
80,000
Proceeds (repayments) on notes
payable to bank (686,679) 189,671 (42,177)
100,000
Increase (decrease) in due to
parent 0 (165,000) 165,000
0
F-18
<PAGE>
Proceeds from issuance of
long-term debt 0 482,622 0
0
Payments of long-term debt 0 (34,328) 0
0
Payments on loans to
stockholder 0 0 0
(23,420)
Proceeds from issuance of
stock 0 0 0
430,500
Proceeds from issuance of
preferred stock, net of
offering costs 0 2,196,447 0
0
Exercise of stock options 50,000 20,000 0
0
Redemption of Class A
warrants 0 (40) 0
0
Payment of short-swing
liability by a shareholder 36,531 0 0
0
------------- ------------- ----------
- ----------
Net cash provided by
financing activities 695,487 2,689,372 62,833
448,944
------------- ------------- ----------
- ----------
Net increase (decrease)
in cash 49,984 (42,971) (10,926)
115,466
Cash, beginning of period 96,235 139,206 150,132
34,666
------------- ------------- ----------
- ----------
Cash, end of period $ 146,219 $ 96,235 $ 139,206
$ 150,132
</TABLE>
The accompanying notes are an integral part of these financial statement.
F-19
<PAGE>
CONTOUR MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation - The consolidated financial statements include
the
accounts of Contour Medical, Inc. (CMI) and its wholly owned subsidiaries,
Contour Fabricators, Inc. (CFI), Contour Fabricators of Florida, Inc. (CFFI),
and AmeriDyne Corporation (AmeriDyne), collectively referred to as "the
Company." All material intercompany accounts and transactions have been
eliminated in the consolidation. CMI is a majority owned subsidiary of
Retirement Care Associates, Inc. (Parent Company).
Inventories - Inventories are valued at the lower of cost (first-in,
first-out)
or market. AmeriDyne inventories are valued at the lower of average cost or
market.
Property and Equipment - Property and equipment are stated at cost.
Depreciation is computed over the estimated useful lives of the assets by
accelerated methods for financial reporting and income tax purposes.
Goodwill - The Company has classified as goodwill the cost in excess of fair
value of the net assets (including tax attributes) of AmeriDyne acquired in a
purchase transaction. Goodwill is being amortized on the straight-line method
over 40 years. Amortization charged to continuing operations amounted to
$11,261 for the year ended June 30, 1996. The Company periodically reviews
goodwill to assess recoverability, and any impairment would be recognized in
operating results if a permanent diminution in value were to occur.
Offering Costs - Fees, costs and expenses related to offerings of securities
are
deferred and charged against the proceeds therefrom or, if the offering is
unsuccessful, charged to operations. Costs of $257,185 related to a proposed
public offering were deferred at December 31, 1993 and charged to operations
in
the second quarter of 1994, when the offering was abandoned. Deferred costs
at
December 31, 1994, related to the private placement discussed in Note 9, were
charged against the proceeds therefrom in 1995.
Change in Method of Accounting for Income Taxes - Effective January 1, 1993,
the
Company adopted Statement of Financial Accounting Standards No. 109,
"Accounting
for Income Taxes" (FAS 109), which requires recognition of estimated income
taxes payable or refundable on income tax returns for the current year and
for the estimated future tax effect attributable to temporary differences and
carryforwards. Measurement of deferred income tax is based on enacted tax
laws
including tax rates, with the measurement of deferred income tax assets being
reduced by available tax benefits not expected to be realized.
Revenue Recognition - Sales are recognized upon shipment of products to
customers.
Earnings (Loss) Per Share - Earnings (loss) per common share are based on the
weighted average number of common shares outstanding and dilutive common stock
equivalent shares outstanding during each period, after giving effect to the
one-for-thirteen reverse stock split which occurred in 1993, and the
1.05-for-1
forward stock split which occurred in 1996. Common stock equivalents for
1996,
1995, 1994 and 1993 have not been included, since the effect would be
antidilutive. Cumulative dividends in arrears of $96,000 and $32,000 related
to
the Company's Class A preferred stock (see Note 9) have been deducted from
1996
and 1995 net income for the calculation of earnings per common share,
respectively.
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES, Continued:
Change in Year-End - The Company changed its fiscal year-end from December 31
to
June 30 during 1995. Accordingly, the June 30, 1995 statements of operations,
stockholders' equity and cash flows are for the six months then ended.
Use of Estimates - The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires management
to
make estimates and assumptions that affect the reported amounts of
consolidated
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements. Estimates also affect the
reported amounts of consolidated revenues and expenses during the reporting
period. Actual results could differ from those estimates.
New Pronouncements - The Financial Accounting Standards Board has released
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for
the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
SFAS No.121 requires that long-lived assets and certain identifiable
intangibles
to be held and used by an entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. This standard would be effective for the company's fiscal
year
ended June 30, 1997.
The Financial Accounting Standards Board also released SFAS No. 123,
"Accounting
for Stock Based Compensation." SFAS No. 123 encourages, but does not require,
companies to recognize compensation expense based on the fair value of grants
of
stock, stock options, and other equity investments to employees. Although
expense recognition for employee stock-based compensation is not mandatory,
SFAS
No. 123 requires that companies not adopting must disclose pro forma net
income
and earnings per share. The Company will continue to apply the prior
accounting
rules and make pro forma disclosures. This standard would be effective for
the
Company's fiscal year ending June 30, 1997.
2. ORGANIZATION AND BUSINESS ACQUISITION:
Contour Fabricators, Inc., incorporated in March 1974 and located in Grand
Blanc, Michigan, manufactures orthopedic devices used in rehabilitative
therapy
procedures and positioning aids for imaging procedures. Contour Fabricators
of
Florida, Inc., incorporated in December 1984 and located in St. Petersburg,
Florida, manufactures disposable medical products, which consist primarily of
plastic and foam items for use in surgical and other special medical
procedures.
Contour Medical, Inc. (formerly Associated Healthcare Industries, Inc.) was
incorporated in Nevada in April 1987 as a "blank check" company and in 1989
conducted an initial public offering. In May 1993, effective as of January 1,
1993, the stockholders of CFI and CFFI received, in exchange for all their
shares, the following from CMI: 1,000,000 shares of Class D redeemable
preferred stock, 666,669 shares of Class C convertible preferred stock and
666,666 Class D warrants. Through December 31, 1992, CMI was a development
stage company in the health care industry. As a result of this acquisition,
the stockholders of CFI and CFFI had effectively acquired CMI and control
thereof. Accordingly, this acquisition was accounted for as a reverse
acquisition and the financial statements have been prepared as if the
entities had operated as a single entity effective as of January 1, 1993.
The operating results of CMI are included in the accompanying consolidated
financial statements since January 1, 1993.
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. ORGANIZATION AND BUSINESS ACQUISITION, Continued:
Beginning in 1995, CMI established a medical supply distribution business to
service Parent Company health care facilities. CMI also distributes medical
supplies to other nursing home operators and health care providers.
3. RELATED PARTY TRANSACTIONS:
During 1995, CMI began distributing medical supplies to health care facilities
owned, leased or managed by the Parent Company. Sales to these facilities
approximated $5,456,000 for the year ended June 30, 1996, and $1,426,000 for
the
six-month period ended June 30, 1995. Trade accounts receivable of
approximately $1,918,000 and $943,000 related to these health care facility
sales are outstanding as of June 30, 1996 and 1995, respectively.
Additionally, the Company had an outstanding loan receivable due from its
Parent Company of approximately $619,000 and $1,169,000 as of June 30, 1996
and 1995, respectively, which is due on demand with no stated interest rate.
4. INVENTORIES:
Inventories at June 30, 1996 and 1995 consisted of the following:
1996 1995
Raw materials $ 330,699 $ 259,952
Work in process 96,647 58,704
Finished goods 2,449,446 978,738
$ 2,876,792 $ 1,297,394
All inventories are pledged as collateral (see Note 6).
5. PROPERTY AND EQUIPMENT:
Property and equipment at June 30, 1996 and 1995 consisted of the following:
Useful Lives 1996 1995
Land $ 50,000 $ 50,000
Building 5-45 yrs. 596,247 596,247
Machinery and equipment 3-7 yrs. 1,798,520 1,034,568
Furniture and fixtures 5-7 yrs. 146,536 124,651
Leasehold improvements 5 yrs. 251,352 13,923
Vehicles 3-5 yrs. 72,245 9,109
2,914,900 1,828,498
Less accumulated depreciation 1,691,705 1,236,255
$ 1,223,195 $ 592,243
All property and equipment are pledged as collateral (see Note 6).
6. NOTES PAYABLE:
Notes payable at June 30, 1996 and 1995 consisted of the following:
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
6. NOTES PAYABLE, Continued:
1996 1995
Note payable to bank, interest at prime
plus 1% (9.25% at June 30, 1996), principal
of $5,000 plus interest due monthly
through June 2000, collateralized by
equipment $ 217,559 $ 300,000
Note payable to bank, interest at prime plus
.75% (9.00% at June 30, 1996) principal of
$7,605 plus interest due monthly through
May 2000, collateralized by accounts
receivable, inventory, equipment and real
property 496,171 182,622
Mortgage payable to bank, bearing interest
at 8.58%, principal and interest of $6,793
due monthly through December 2003,
collateralized by accounts receivable,
inventory, equipment and real property 456,233 491,662
Mortgage payable to bank, interest at
prime plus .75% (9.00% at June 30,
1996), principal of $1,190 plus interest
due monthly through December 2000,
collateralized by accounts receivable,
inventory, equipment and real property 64,284 78,571
Borrowings under $100,000 line of credit,
interest at prime plus .75% (9.00% at
June 30, 1996), payable monthly,
collateralized by accounts receivable,
inventory, equipment, and real property 65,000 0
Note payable to bank, interest at prime plus
1% (10% at June 30, 1995), principal and
interest of $1,667 due monthly through
August 1996, collateralized by accounts
receivable, inventory and equipment 0 23,333
Note payable to bank, interest at 8.75%,
principal and interest at $1,282 due
monthly through April 2001, collateralized
by equipment 60,436 0
Borrowings under $250,000 line of credit,
interest at prime plus 1% (10% at June 30,
1995) payable monthly, collateralized by
accounts receivable and inventory 0 245,600
Borrowings under $500,000 line of credit,
interest at prime plus .25% (8.5% at June 30,
1996) payable monthly, collateralized by
accounts receivable, inventory and equipment,
and guarantees by Retirement Care Associates, Inc. 433,535 0
F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
6. NOTES PAYABLE, Continued:
Note payable to leasing institution, interest
at 14.6%, monthly installments of $309 plus
sales tax. Matures June 1997, collateralized
by computer equipment 2,924 0
Note payable to equipment company, interest at
11%, monthly installments of $533 including
interest. Matures December 1997,
collateralized by equipment 8,805 0
Note payable to stockholder, interest at 10%,
principal and interest of $5,693, due monthly
through March 1999. $ 163,646 $ 0
Note payable to bank, interest at 9%,
principal and interest of $3,600 due monthly
through May 1997, collateralized by accounts
receivable, inventory, furniture, fixtures,
equipment, machinery, bank accounts, and
guarantees of Retirement Care Associates, Inc. 38,924 0
Note payable to bank, interest at 9%,
principal and interest of $5,266 due monthly
through October 1997, collateralized by accounts
receivable, inventory, furniture, fixtures,
equipment, machinery, bank accounts, and
guarantees of Retirement Care Associates, Inc. 212,613 0
Borrowings under $975,000 line of credit,
interest at prime plus 1.25% (9.5% at June 30,
1996). Principal is due on demand but no later
than May 15, 1997. Collateralized by accounts
receivable, inventory, furniture, fixtures,
equipment, machinery, bank accounts, and
guarantees of Retirement Care Associates, Inc. 958,000 0
3,178,130 1,321,788
Less current maturities (1,825,193) (414,077)
$ 1,352,937 $ 907,711
Certain of the above agreements contain financial and operating covenants,
including requirements that the Company maintain certain net worth levels, and
current and debt-to-net worth ratios. The Company was in compliance with all
debt covenants as of June 30, 1996.
The aggregate maturities of long-term debt are as follows as of June 30, 1996:
1997 $ 1,825,193
1998 468,665
1999 303,777
2000 491,884
2001 83,674
F-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
6. NOTES PAYABLE, Continued:
SFAS No. 107, "Disclosure About Fair Value of Financial Instruments," requires
that the Company disclose estimated fair values for its financial instruments.
Fair value is defined as the price at which a financial instrument could be
liquidated in an orderly manner over a reasonable time period under present
market conditions. The rates of the Company's fixed obligations approximate
those rates of the adjustable loans. Therefore, the fair value of these loans
has been estimated to be approximately equal to their carrying value.
7. COMMITMENTS AND CONTINGENCIES:
The Company is obligated under various noncancelable leases for equipment and
office space. Future minimum lease commitments under operating leases were as
follows as of June 30, 1996.
1997 $ 389,974
1998 412,224
1999 385,974
2000 307,224
2001 305,062
Total rental expense was approximately $349,600, $145,500, $203,000, and
$189,500 for the year ending June 30, 1996, the six-month period ended June
30, 1995, and the years ended December 31, 1994 and 1993, respectively.
Employment Agreement - The Company has entered into an employment agreement
with
a key executive for a five-year period ending in June 1998. The agreement
provides for annual base compensation of $100,000.
Litigation - During 1994, the Company was a defendant in an employment injury
lawsuit filed by one of its employees. The Company settled this dispute for
approximately $30,000.
The Company was a defendant in a lawsuit filed by one of its former employees
for wrongful discharge of employment. During the year ended December 31,
1993, the Company settled this dispute for $85,000.
8. INCOME TAXES:
Income taxes are provided based on the liability method of accounting pursuant
to Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes."
The components of the provisions for income taxes for the year ended June 30,
1996 are as follows:
F-25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
8. INCOME TAXES, Continued:
Current:
Federal $ 161,951
State 28,101
Total current 190,052
Deferred:
Federal 104,266
State 17,848
Total deferred 122,114
Total tax provision $ 312,166
Deferred tax assets for the year ended June 30, 1996 are as follows:
Deferred tax assets:
Allowance for bad debts $ 164,048
Net operating losses 355,108
Total gross deferred tax assets 519,158
Less valuation allowance (355,108)
Net deferred tax assets $ 164,048
As of June 30, 1996, the Company had net operating loss carryforwards for tax
purposes, expiring during the years 2007 and 2009, of approximately $944,000,
which includes approximately $516,000 attributable to Contour Medical, inc.
(CMI) for the period prior to January 1, 1993. Due to certain change of
ownership requirements of Section 382 of the Internal Revenue Code,
utilization of the Company's operating losses is expected to be limited to
approximately $414,000 per year. The deferred tax asset related to the tax
benefit of these losses has been offset by a valuation allowance due to
uncertainty of realization. The valuation allowance decreased approximately
$112,000 during 1996.
The income tax benefit arising from any utilization of the net operating
losses
attributable to CMI will be credited to additional paid-in capital when
recognized. During 1996, the income tax benefit of utilization of net
operating
losses attributable to CMI of approximately $126,000 were credited to paid-in
capital.
The following summary reconciles differences from taxes at the federal
statutory
rate with the effective rate:
F-26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
8. INCOME TAXES, Continued:
Six
Year Months
Ended Ended
June 30, June 30, Year Ended December 31,
1996 1996 1994 1993
Taxes on Income (benefit)
at statutory rate 34.00% 34.00% (34.00)% (34.00)%
State income taxes, net of
federal tax benefit 3.60% 3.10% 0 1.00%
Carryforward of net
operating loss 0 (9.90)% 0 0
Carryback of net
operating loss 0 0 0 (8.30)%
Losses not available for
carryback 0 0 34.00% 0
Other (0.04)% 5.00% 0 0
37.56% 32.20% 0.00% (41.30)%
9. CAPITAL STOCK:
Stock Bonus Plan - In March 1993, the Company adopted a non-qualified employee
stock bonus plan. The Plan provides for the granting of up to 1,000,000
options
for the purchase of the Company's common stock to eligible employees at
purchase
prices of at least $.01 per share. Options awarded under the Plan vest over a
three-year period from the date of grant and are exercisable over a five-year
period from the date of grant.
Changes in options outstanding are summarized as follows:
Option Price
Shares per Share
Balance, January 1, 1993 15,386 $1.30
Granted 250,000 $2.00
Balance, December 31, 1993 265,386 $1.30-$2.00
Granted 100,000 $2.25
Balance, December 31, 1994 365,386 $1.30-$2.25
Granted 50,000 $3.90
Exercised (15,385) $1.30
Canceled (1) $1.30
Balance, June 30, 1995 400,000 $2.00-$3.90
Granted 45,000 $4.11
Exercised (25,000) $2.00
Stock split 23,500
Balance, June 30, 1996 443,500 $1.88-$4.11
All of the above options were granted with an exercise price above fair market
value at the date of grant. In addition, 351,249 options were exercisable at
June 30, 1996. In addition, 959,615 common shares are reserved for future
issuance under this plan.
F-27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
9. CAPITAL STOCK, Continued:
Stock Option Plan - In February 1996, the Company adopted the 1996 Stock
Option
Plan (the "1996 Plan"). The 1996 Plan must be approved by the Company's
shareholders within 12 months of February 1, 1996. The 1996 Plan allows the
Board of Directors to grant stock options from time to time to employees,
officers and directors of the Company and consultants to the Company. The
Board
of Directors has the right to determine, at the time of option, whether the
option will be an Incentive Stock Option or an option which is not an
Incentive
Stock Option. Vesting provisions are determined by the Board of Directors at
the time the options are granted. The 1996 Plan provides for the granting of
up to 315,000 options for the purchase of the Company's common stock.
Changes in options outstanding are summarized as follows:
Option Price
Shares per Share
Balance, June 30, 1995 - -
Granted 160,000 $4.643-$5.75
Stock split 4,250
Balance, June 30, 1996 164,250 $4.643-$5.75
All of the above options were granted with an exercise price above fair market
value at the time of grant. In addition, none of the options were exercisable
at June 30, 1996 and 315,000 common shares are reserved for future issuance
under this plan.
Stock Split - In March 1993, the Board of Directors authorized a 1-for-13
reverse stock split of its common stock effective June 30, 1993. All common
shares and per share amounts have been retroactively adjusted to give effect
to the reverse stock split. In February 1996, the Board of Directors
authorized a 1.05-for-1 forward stock split of its common stock effective
March 1996. All common shares and per share amounts have been retroactively
adjusted to give effect to the forward stock split.
Stock Warrants - At June 30, 1996, the Company had 969,225 stock warrants
outstanding. Information relating to these warrants is summarized as follows:
Number of
Common Exercise
Expiration Number of Shares Per Price Per
Type Date Warrants Warrant Warrant
Class B July 1996 119,225 1.05 $4.50
Class C Feb. 1999 300,000 1.05 $4.50
Consultant Oct. 1997 300,000 1.05 $1.50
Consultant Oct. 1999 200,000 1.05 $3.00
Consultant Oct. 1997 50,000 1.05 $3.00
The Class B warrants are redeemable by the Company under certain
circumstances.
Of the total outstanding warrants, 969,225 were exercisable at June 30, 1996.
In addition, 1,017,686 common shares are reserved for future issuance related
to
these warrants.
F-28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
9. CAPITAL STOCK, Continued:
Change of Control - On September 30, 1994, Retirement Care Associates, Inc.
(Retirement Care) acquired 889,002 shares of the Company's outstanding common
stock and 2,000,000 shares of the Company's Class One Convertible Preferred
Stock from three persons who were officers and directors of the Company.
Subsequently, Retirement Care converted the Class One Convertible Preferred
Stock into 2,100,000 shares of common stock.
Class One Convertible Preferred Stock - During 1994, the holders of 1,000,000
shares of Class D Redeemable Cumulative Preferred Stock exchanged their shares
for 2,000,000 shares of newly created no par Class One Convertible Preferred
stock. The Class One Preferred Stock had a liquidation preference of $3.00
per
share. Each Class One Preferred Share was convertible into 1.05 shares of the
Company's common stock. All 2,000,000 shares of Class One Preferred Stock
were
converted into 2,100,000 shares of common stock in November 1994.
Class A Convertible Preferred Stock - During 1994, 99,525 shares of Class A
Convertible Preferred stock were converted into 230,141 shares of common
stock.
The conversion included a stock dividend of $14,777 for dividends in arrears
through the date of conversion.
Class B Convertible Preferred Stock - During 1994, two shares of Class B
Convertible Preferred Stock were converted into 35,000 shares of common stock.
Class D Redeemable Cumulative Preferred Stock - In April 1994, 74,176 shares
of
Class D Redeemable Cumulative Preferred Stock and 148,345 Class D Warrants
were
converted into 250,354 shares of common stock and 119,225 Class B warrants.
In
addition, 1,000,000 shares of Class D Redeemable Cumulative Preferred stock
and
846,667 Class D warrants were converted into 2,000,000 shares of a new Class
One
Convertible Preferred Stock. In November 1994, the Class One shares were
converted into 2,100,000 shares of common stock. These conversions included a
stock dividend of $47,794 for dividends in arrears through the date of
conversion.
Class E Convertible Preferred Stock - In April 1994, 172,986 shares of Class E
Convertible Preferred Stock were converted into 181,635 shares of common
stock.
Series A Convertible Preferred Stock and Class C Warrants - During 1995, the
Company completed a private placement of its securities consisting of 60 units
sold at a price of $40,000 per unit. Each unit sold in the private placement
consisted of 10,000 shares of the Company's Series A Convertible Preferred
Stock
and 5,000 Class C Redeemable Common Stock Purchase Warrants. Each share of
Series A Preferred Stock has a $4 liquidation preference and is convertible
into
1.05 shares of the Company's common stock beginning in May 1996.
Additionally,
the holders of the Series A Preferred Stock are entitled to receive annual
cash
dividends (payable semiannually) of 4% of the liquidation preference of the
stock, or $.16 per share, on a cumulative basis from the date of issuance. At
June 30, 1996, cumulative dividends in arrears related to the Series A
Preferred
Stock amounted to $128,000 ($.21 per share). The Series A Preferred Stock may
be redeemed by the Company at $4 per share plus dividends in arrears beginning
in May 1999. In addition, 1,328,250 common shares are reserved for future
issuance upon conversion of the total authorized Series A preferred stock.
F-29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
9. CAPITAL STOCK, Continued:
Preferred Stock Cancellation - Subsequent to the conversion of the preferred
stock classes, the Company canceled the Class A, Class B, Class C, Class E and
Class One Convertible Preferred Stock and the Class D Redeemable Convertible
Preferred Stock.
Issuance of Stock in Satisfaction of Loans - During the year ended December
31,
1993, the Company issued 180,000 shares of Class C Convertible Cumulative
Preferred Stock in satisfaction of $480,000 of loans payable to stockholders.
All of the Class C Preferred Stock of 846,669 shares were converted into
889,002
shares of common stock in 1993.
Shares Reserved - At June 30, 1996, the Company has reserved common stock for
future issuance under all of the above arrangements amounting to 3,620,551.
10. MAJOR CUSTOMERS:
Sales to significant customers were as follows:
Year ending December 31, Number of Customers Sales Volume
1994 1 $ 531,000
1993 2 692,000
As a result of the increased sales volume due to sales to related parties of
approximately $5,456,000 and $1,426,000 (see Note 3), there were no sales to
significant other customers during the year ended June 30, 1996 and the six-
month period ended June 30, 1995, respectively.
F-30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
11. SUPPLEMENTAL CASH FLOW INFORMATION:
Six
Year Months
Ended Ended
June 30, June 30, Year Ended December 31,
1996 1996 1994 1993
Cash paid for interest $ 170,951 $39,065 $ 53,627 $ 65,251
Cash paid for income taxes $ 930 $ 2,500 $ 5,000 $ 40,054
Noncash financing and
investing activities:
Issuance of 369,618
shares of common stock
for purchase of Ameri-
Dyne Corporation (see
Note 12) $2,100,000 $ 0 $ 0 $ 0
Conversion of 1,074,176
shares of Class D pre-
ferred stock and
995,012 Class D
Warrants into 250,372
shares of common stock
and 2,000,000 shares of
Class One preferred
stock (see Note 9) 0 0 400,500 0
Issuance of 180,000
shares of Class C pre-
ferred stock as payment
of stockholder loans
(see Note 9) 0 0 0 480,000
Deferred offering costs
charged to additional
paid-in capital as an
offset to private
placement offering
proceeds (see Note 9) 0 11,444 0 0
$2,100,000 $11,444 $400,500 $480,000
As discussed in Note 2, the stockholders of CFI and CFFI exchanged all of
their
shares of stock for shares of stock of CMI. As a result of this transaction,
the following assets and liabilities of CMI were acquired effective January 1,
1993 which were recorded at predecessor basis:
Cash $ 778
Other assets 54,897
Accounts payable and accrued expenses (137,372)
Capital deficit assumed $ (81,697)
F-31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
12. AMERIDYNE ACQUISITION:
Effective March 1, 1996, the Company acquired all of the outstanding common
stock of AmeriDyne Corporation (AmeriDyne) for approximately $2.475 million
in cash and stock. AmeriDyne distributes medical supplies to hospitals,
clinics, physicians, pharmacies, nursing homes and other health care
providers.
The purchase price exceeded the fair value of the net assets acquired by
approximately $1.3 million. The acquisition was accounted for as a purchase.
The resulting goodwill is being amortized on the straight-line basis over 40
years. The consolidated statement of income includes the results of
operations
of AmeriDyne for the period from March 1, 1996 through June 30, 1996.
The following unaudited pro forma consolidated results of operations presents
information as if the acquisition had occurred at the beginning of the fiscal
year. The pro forma information is provided for information purposes only.
It
is based on historical information and does not necessarily reflect the actual
results that would have occurred nor is it necessarily indicative of future
results of operations of the combined enterprise.
Unaudited Year Ended
June 30, 1996
Sales $ 21,406,882
Net income $ 348,880
Per share $ 0.05
13. SUBSEQUENT EVENTS:
On July 12, 1996, the Company completed a $5 million debenture placement.
These
debentures bear interest at 9% per annum and are to be repaid in monthly
installments beginning on July 1, 1999, with full payment due by July 1, 2003.
The debentures are convertible into shares of the Company's common stock.
On September 20, 1996, the Company replaced all of its existing lines of
credit
with a $7 million revolving line of credit, secured by inventory and accounts
receivable, and bearing interest at the 30-day LIBOR rate plus 2%.
On August 6, 1996, the Company acquired all of the outstanding stock of
Atlantic
Medical Supply Company, Inc. (Atlantic Medical), a distributor of disposable
medical supplies and a provider of third-party billing services to the nursing
home and home health care markets. The acquisition was made retroactively to
July 1, 1996. The Company paid $1.4 million in cash and $10.5 million in
promissory notes for all of the outstanding stock of Atlantic Medical. The
promissory notes bear interest at 7% per annum and are due in full on January
10, 1997. In the event of a default in the payment of the promissory notes,
they are convertible into shares of common stock of the Parent Company.
The following unaudited pro forma consolidated results of operations presents
information as if the acquisition had occurred at the beginning of the fiscal
year. The pro forma information is provided for information purposes only.
It
is based on historical information and does not necessarily reflect the
results
that would have occurred nor is it necessarily indicative of future results of
operations of the combined enterprise.
F-32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
13. SUBSEQUENT EVENTS, Continued:
Unaudited
Year Ended
June 30, 1996
Sales $ 34,333,727
Net Income $ 585,784
Per share $ 0.10
F-33
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on
its behalf by the undersigned thereunto duly authorized.
CONTOUR MEDICAL, INC.
Dated: September 27, 1996 By /s/ Donald F. Fox
Donald F. Fox, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the Registrant
and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Donald F. Fox President, Treasurer September 27, 1996
Donald F. Fox (Principal Financial
and Accounting Officer)
and Chief Financial
Officer
/s/ Chris Brogdon Director September 27, 1996
Chris Brogdon
/s/ Edward E. Lane Director September 27, 1996
Edward E. Lane
/s/ Darrell C. Tucker Director September 27, 1996
Darrell C. Tucker
CONVERTIBLE DEBENTURE LOAN AGREEMENT WITH RENAISSANCE CAPITAL GROWTH
& INCOME FUND III, INC., AND RENAISSANCE US GROWTH AND INCOME TRUST PLC
CONVERTIBLE DEBENTURE LOAN AGREEMENT
BY AND BETWEEN
CONTOUR MEDICAL, INC.
AND ITS WHOLLY-OWNED SUBSIDIARIES:
Contour Fabricators, Inc.
Contour Fabricators of Florida, Inc.
AmeriDyne Corporation
All as Co-Borrowers
AND
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
RENAISSANCE US GROWTH & INCOME TRUST PLC
As LENDER
This Convertible Debenture Loan Agreement (the "Loan Agreement") is
entered into as of July 12, 1996, by and between Contour Medical, Inc. (a
Nevada corporation) and its Subsidiaries Contour Fabricators, Inc. (a
Michigan corporation), Contour Fabricators of Florida, Inc. (a Florida
corporation), and AmeriDyne Corporation (a Tennessee corporation), all as
co-Borrowers (collectively hereinafter referred to as "Borrower") and
Renaissance Capital Growth & Income Fund III, Inc. (a Texas corporation)
and Renaissance US Growth & Income Trust PLC (a public limited company
registered in England and Wales) (individually referred to as Renaissance
III and Renaissance PLC, respectively, together with any assignees or
successors in interest collectively referred to as "Lender").
WITNESSETH:
WHEREAS, Borrower seeks to obtain up to Five Million Dollars
($5,000,000) in convertible debenture financing for working capital
purposes, acquisitions, and the repayment of debt; and
WHEREAS, Borrower has requested that Lender provide such funding by
furnishing a loan as herein provided and Lender is willing to furnish such
to Borrower upon the terms and subject to the conditions and for the
considerations hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual promises herein
contained and for other valuable consideration, receipt and sufficiency of
which is acknowledged, the parties hereto agree as follows:
ARTICLE I - DEFINITION OF TERMS
Section 1.01. Definitions.
(a) For the purposes of this Loan Agreement, unless the context
otherwise requires, the following terms shall have the respective meanings
assigned to them in this Article I or in the section or recital referred to
below:
"Affiliate" with respect to any Person shall mean (i) any person
directly or indirectly owning, controlling or holding power to vote 10% or
more of the outstanding voting securities of any Person; (ii) any person,
10% or more of whose outstanding voting securities are directly or
indirectly owned, controlled or held with power to vote by any Person;
(iii) any person directly or indirectly controlling, controlled by or under
common control with any Person; (iv) any officer, director or partner of
any Person; and (v) if a Person is an officer, director or partner, any
company for which any Person acts in such capacity. For purposes of this
Agreement, any partnership of which any Person is a general partner, or any
joint venture in which any Person is a joint venturer, is an Affiliate of
each Person.
"Capital Expenditure" shall mean an expenditure for assets that will
be used in years subsequent to the year in which the purchase is made and
which asset is properly classifiable in financial statements as equipment,
real property or improvements, or similar type of capitalized asset.
"Capital Lease" shall mean any lease of property, real or personal,
which is in substance a financing lease and which would be capitalized on a
balance sheet of the lessee, including without limitation, any lease under
which (i) such lessee will have an obligation to purchase the property for
a fixed sum, (ii) an option to purchase the property at an amount less than
a reasonable estimate of the fair market value of such property as of the
date such lease is executed, or (iii) the term of the lease approximates or
exceeds the expect useful life of the property leased thereunder.
"Consolidated Subsidiaries" shall mean those corporations of which
50% or more of the voting stock is owned by Borrower and their financial
statements are consolidated with those of the Borrower.
"Conversion " or "Conversion Rights" shall mean exchange of, or the
rights to exchange, the Principal Amount of the loan, or any part thereof,
for Borrower's fully paid and non-assessable common stock on the terms and
conditions as provided in the Debenture.
"Common Stock" shall mean the Contour Medical, Inc. common stock,
$0.001 par value.
"Debentures" shall mean the Debentures executed by Borrower and
delivered pursuant to the terms of this Loan Agreement, together with any
renewals, extensions or modifications thereof.
"Debtor Laws" shall mean all applicable liquidation, conservatorship,
bankruptcy, moratorium, arrangement, receivership, insolvency,
reorganization or similar laws from time to time in effect affecting the
rights of creditors generally.
"Default" shall mean any of the events specified in Article VIII.
"Dividends", in respect of any corporation, shall mean (i) cash
distributions or any other distributions on, or in respect of, any class of
capital stock of such corporation, except for distributions made solely in
shares of stock of the same class, and (ii) any and all funds, cash and
other payments made in respect of the redemption, repurchase or acquisition
of such stock, unless such stock shall be redeemed or acquired through the
exchange of such stock with stock of the same class.
"ERISA" shall mean the Employee Retirement Income Security Act, as
amended, together with all regulations issued pursuant thereto.
"GAAP" shall mean generally accepted accounting principles applied on
a consistent basis, set forth in the Opinions of the Accounting Principles
Board of the American Institute of Certified Public Accountants, or their
successors, which are applicable in the circumstances as of the date in
question. The requisite that such principles be applied on a consistent
basis shall mean that the accounting principles observed in a current
period are comparable in all material respects to those applied in a
preceding period.
"Governmental Authority" shall mean any government (or any political
subdivision or jurisdiction thereof), court, bureau, agency or other
governmental authority having jurisdiction over Borrower or a Subsidiary or
any of its or their business, operations or properties.
"Guaranty" of any Person shall mean any contract, agreement or
understanding of such Person pursuant to which such Person in effect
guarantees the payment of any Indebtedness of any other Person (the
"Primary Obligor") in any manner, whether directly or indirectly, including
without limitation agreements: (i) to purchase such Indebtedness or any
property constituting security therefor; (ii) to advance or supply funds
primarily for the purpose of assuring the holder of such Indebtedness of
the ability of the Primary Obligor to make payment; or (iii) otherwise to
assure the holder of the Indebtedness of the Primary Obligor against loss
in respect thereof, except that "Guaranty" shall not include the
endorsement by Borrower or a Subsidiary in the ordinary course of business
of negotiable instruments or documents for deposit or collection.
"Holder" shall mean the owner of Registrable Securities.
"Indebtedness" shall mean, with respect to any Person, the following
indebtedness, obligations and liabilities of such Person: (I) all
"liabilities" that would be reflected on a balance sheet of such Person;
(ii) all obligations of such Person in respect of any Guaranty; (iii) all
obligations of such Person in respect of any Capital Lease, (iv) all
obligations, indebtedness and liabilities secured by any lien or any
security interest on any property or assets of such Person; and (v) any
preferred stock of such Person which is subject to a mandatory redemption
requirement, valued at the greater of its involuntary redemption price or
liquidation preference plus accrued and unpaid dividends.
"Investment" in any Person shall mean any investment, whether by
means of share purchase, loan, advance, extension of credit, capital
contribution or otherwise, in or to such Person, the Guaranty of any
Indebtedness of such Person, or the subordination of any claim against such
Person to other Indebtedness of such Person; provided however, that
"Investment" shall not include (i) any demand deposits in a duly chartered
state or national bank or other cash equivalent investments (ii) any loans
permitted by Section 6.12, or (iii) any acquisitions of equity in any other
Person.
"IRS Code" shall mean the Intemal Revenue Code of 1986, as amended,
together with all regulations issued thereunder.
` "Lien" shall mean any lien, mortgage, security interest, tax lien,
pledge, encumbrance, conditional sale or title retention arrangement, or
any other interest in property designed to secure the repayment of
Indebtedness, whether arising by Agreement or under any statute or law, or
otherwise.
"Loan" shall mean the money lent to Borrower pursuant to this Loan
Agreement, along with any accrued interest thereon.
"Loan Closing" or "Loan Closing Date" shall mean the initial
disbursement of Loan funds which shall occur on a date 30 days from the
date hereof or such earlier date on which Borrower requests, and Lender
approves, as the date at which the initial advance of the Loan funds shall
be consummated, provided that such date may be mutually extended beyond 30
days, but only by written agreement of the parties hereto.
"Loan Documents" shall mean this Loan Agreement, the Debentures
(including any renewals, extensions and refinancings thereof), and any
other agreements or documents (and with respect to this Loan Agreement, and
such other agreements and documents, any amendments or supplements thereto
or modifications thereof) executed or delivered pursuant to the terms of
this Loan Agreement.
"Material Adverse Effect" or "Material Adverse Change" shall mean any
change, factor or event that shall (i) have a material adverse effect upon
the validity, performance or enforceability of any Loan Documents, (ii)
have a material adverse effect upon the financial condition or business
operations of Borrower or any Subsidiaries, (iii) have a material adverse
effect upon the ability of the Borrower to fulfill its obligations under
the Loan Documents, or (iv) any event that causes an Event of Default or
which, with notice or lapse of time or both, could become an Event of
Default.
"Obligation" shall mean: (i) all present and future indebtedness,
obligations and liabilities of Borrower to Lender arising pursuant to this
Loan Agreement, regardless of whether such indebtedness, obligations and
liabilities are direct, indirect, fixed, contingent, joint, several, or
joint and several; (ii) all present and future indebtedness, obligations
and liabilities of Borrower to Lender arising pursuant to or represented by
the Debentures and all interest accruing thereon, and reasonable attorneys'
fees incurred in the enforcement or collection thereof; (iii) all present
and future indebtedness, obligations and liabilities of Borrower and any
Subsidiary evidenced by or arising pursuant to any of the Loan Documents;
(iv) all costs incurred by Lender, including but not limited to reasonable
attorneys' fees and legal expenses related to this transaction; and (v) all
renewals, extensions and modifications of the indebtedness referred to in
the foregoing clauses, or any part thereof.
"Permit Liens" shall mean: (i) Liens (if any) granted to Lender to
secure the Obligation; (ii) pledges or deposits made to secure payment of
worker's compensation insurance (or to participate in any fund in
connection with worker's compensation insurances, unemployment insurance,
pensions or social security programs); (iii) Liens imposed by mandatory
provisions of law such as for landlords, materialmen's, mechanics',
warehousemen's and other like Liens arising in the ordinary course of
business, securing Indebtedness whose payment is not yet due; (iv) Liens
for taxes, assessments and governmental charges or levies imposed upon a
Person or upon such Person's income or profits or property, if the same are
not yet due and payable or if the same are being contested in good faith
and as to which adequate cash reserves have been provided or if an
extension is obtained with respect thereto, (v) Liens arising from good
faith deposits in connection with tenders, leases, real estate bids or
contracts (other than contracts involving the borrowing of money), pledges
or deposits to secure public or statutory obligations and deposits to
secure (or in lieu of) surety, stay, appeal or customs bonds and deposits
to secure the payment of taxes, assessments, customs duties or other
similar charges; (vi) encumbrances consisting of zoning restrictions,
easements, or other restrictions on the use of real property, provided that
such items do not materially impair the use of such property for the
purposes intended, and none of which is violated by existing or proposed
structures or land use; (vii) mortgages, financing statements, equipment
leases or other encumbrances incurred in connection with the acquisition of
property or equipment or the replacement of existing property or equipment,
provided that such liens shall be limited to the property or equipment then
being acquired; and (viii) Liens arising from standard bank revolving
working capital financing secured by inventory, receivables, or general
assets of the Borrower.
"Person" shall include an individual, a corporation, a joint venture,
a general or limited partnership, a trust, an unincorporated organization
or a government or any agency or political subdivision thereof.
"Plan" shall mean an employee benefit plan or other plan maintained
by Borrower for employees of Borrower and/or any Subsidiaries and covered
by Title IV of ERISA, or subject to the minimum funding standards under
Section 412 of the Internal Revenue Code of 1986, as amended.
"Principal Amount" shall mean, as of any time, the then aggregate
outstanding face amount of the Debentures after any conversions or
redemptions and after giving effect to any installment payments received by
Lender.
"Registrable Securities" shall mean (i) the Common Stock issued upon
Conversion of the Debentures, or (ii) any Common Stock issued upon
Conversion of the Debentures or exercise of any warrant, right or other
security which is issued with respect to the Common Stock referred to in
clause (I) and (ii) above by way of stock dividend; any other distribution
with respect to or in exchange for, or in replacement of Common Stock;
stock split; or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization; excluding
in all cases, however, any Registrable Security that is not a Restricted
Security and any Registrable Securities sold or transferred by a person in
a transaction in which the rights under this Loan Agreement are not
assigned.
"Registrable Securities Then Outstanding" shall mean an amount equal
to the number of Registrable Securities outstanding which have been issued
pursuant to the Conversion of the Debentures.
"Rentals" of any Person shall mean, as of any date, the aggregate
amount of the obligations and liabilities (including future obligations and
liabilities not yet due and payable) of such Person to make payments under
all leases, subleases and similar arrangements for the use of real,
personal or mixed property, other than leases which are Capital Leases.
"Restricted Security" shall mean a security that has not been (i)
registered under the 1933 Act or (ii) distributed to the public pursuant to
Rule 144 (or any similar provisions that are in force) under the 1933 Act.
"SEC" shall mean the Securities and Exchange Commission.
"1933 Act" shall refer to the Securities Act of 1933, as amended.
"1934 Act" shall refer to the Securities Exchange Act of 1934, as
amended.
"Solvent" shall mean, with respect to any Person on a particular
date, that on such date: (i) the fair value of the property of such Person
is greater than the total amount of liabilities, including, without
limitation, contingent liabilities, of such Person; (ii) The present fair
salable value, in the ordinary course of business, of the assets of such
Person is not less than the amount that will be required to pay the
probable liability of such Person on its debts as they become absolute and
matured; (iii) such Person is able to realize upon its assets and pay its
debts and other liabilities, contingent obligations and other commitments
as they mature in the normal course of business; (iv) such Person does not
intend to, and does not believe that it will, incur debts or liabilities
beyond such Person's ability to pay as such debts and liabilities mature,
and (v) such Person is not engaged in business or a transaction, and is not
about to engage in business or a transaction, for which such Person's
property would constitute unreasonably small capital after giving due
consideration to the prevailing practice in the industry in which such
Person is engaged. In computing the amount of contingent liabilities at any
time, it is intended that such liabilities will be computed at the amount
which, in light of all the facts and circumstances existing at such time,
represents the amount that can reasonably be expected to become an actual
or matured liability.
"Subordinated Debt" shall mean any indebtedness of the Borrower or
any Subsidiaries, now existing or hereafter incurred, which indebtedness
is, by its terms, junior in right of repayment to the payment of the
Debentures.
"Subsidiary" shall mean any corporation whether now existing or
hereafter acquired of which fifty percent (50%) or more of the Voting
Shares are owned, directly or indirectly, by Borrower.
"Voting Shares" of any corporation shall mean shares of any class or
classes (however designated) having ordinary voting power for the election
of at least a majority of the members of the Board of Directors (or other
governing bodies) of such corporation, other than shares having such power
only by reason of the happening of a contingency.
Section 1.02. Other Definition Provisions.
(a) All terms defined in this Loan Agreement shall have the above-defined
meanings when used in the Debentures or any other Loan Documents,
certificate, report or other document made or delivered pursuant to this
Loan Agreement, unless the context therein shall otherwise require.
(b) Defined terms used herein in the singular shall import the plural
and vice versa.
(c) The words "hereof," "herein," "hereunder" and similar terms when
used in this Loan Agreement shall refer to this Loan Agreement as a whole
and not to any particular provision of this Loan Agreement.
(d) References to financial statements and reports shall be deemed to
be a reference to such statements and reports prepared in accordance with
GAAP recognized as such by the American Institute of Certified Public
Accountants acting through its Accounting Principles Board or by the
Financial Accounting Standards Board which principles are consistently
applied, on the basis used by Borrower in prior years, for all periods
after the date hereof so as to properly reflect the financial condition,
and the results of operations and statement of cash flows, of Borrower and
its Consolidated Subsidiaries, if any.
(e) Accounting terms not specifically defined above, or not defined
in the Loan Agreement, shall be construed in accordance with GAAP as
recognized as of this date by the American Institute of Certified Public
Accountants.
ARTICLE II - LOAN PROVISIONS
Section 2.01. Loan Closing.
(a) Subject to the terms and conditions of this Loan Agreement, and
the compliance with such terms and conditions by all parties, Lender agrees
to lend to Borrower, and Borrower agrees to borrow from Lender, the
aggregate sum of up to Five Million Dollars ($5,000,000) which shall be
disbursed at the Loan Closing.
(b) Such disbursement is to be at such time and subject to the
conditions as provided hereunder and such borrowing shall be evidenced by
Borrower's duly executed Debenture (in one or more counterparts in the
aggregate sum of the Principal Amount advanced substantially in the form of
Exhibit 2.01(b) attached hereto and made a part hereof, with appropriate
insertion of names, dates and amounts. In the event of any differences in
terms between the Loan Agreement and the Debenture, the Debenture will be
controlling; provided, however, that the holder of the Debenture shall be
entitled to all the rights and benefits of the Lender provided in this
Agreement.
(c) Unless otherwise mutually agreed, the Loan Closing shall be at
the offices of Renaissance Capital Group, Inc. in Dallas, Texas.
(d) If, within 30 days of the date of this Agreement (i) Borrower has
failed to comply with the conditions precedent to the Loan Closing as
specified in Article III hereof (unless compliance with such conditions in
whole or in part has been waived or modified by Lender in its sole
discretion) or (ii) the Loan
Closing has not occurred (unless the date of such Loan Closing has been
mutually extended) then, in either such case, the obligations of Lender
under this Loan Agreement shall terminate, provided however that Borrower
shall be obligated for payment of the commitment fees and Lender expenses
as provided in Section 2.07 due and payable as of such date of termination.
Section 2.02. Use of Proceeds.
(a) Borrower intends to use the money advanced hereunder
substantially for the following purposes:
Repayment of Debt $1,300,000
General Working Capital Purposes 3,069,000
Capital Expenditures 306,000
Fees 325,000
Total = $5,000,000
(b) Contour Medical, Inc., Contour Fabricators, Inc., Contour
Fabricators of Florida, Inc., and AmeriDyne Corporation all hereby
acknowledge that the proceeds from the Loan shall be used by each company
individually for the growth of their respective businesses by providing
working capital and capital for acquisitions and the repayment of debt.
Section 2.03. Interest Rate and Interest Payments.
(a) Interest on the Principal Amount outstanding from time to time
shall accrue at the rate of 9.00% per annum, with the first installment
payable on August 1, 1996 and subsequent payments at the first day of each
month thereafter. Overdue principal and interest on the Debentures shall
bear interest, to the extent permitted by applicable law, at a rate of
9.00% per annum. Interest on the Principal Amount of each Debenture shall
be calculated, from time to time, on the basis of the actual days elapsed
in a year consisting of 365 days.
Section 2.04. Maturity.
(a) If not sooner redeemed or convert, the Debentures shall mature on
June 30, 2003, at which time all the remaining unpaid principal, interest
and any other charges then due under the Loan Agreement shall be due and
payable in full.
Section 2.05. Mandatory Principal Redemption Installments.
(a) Mandatory principal redemption installments on each Debenture
shall be as provided for in the Debentures.
Section 2.06. Optional Redemotion.
(a) Optional principal redemption on each Debenture shall be as
provided for in the Debentures.
Section 2.07 Closing Fees and Loan Closing Costs.
(a) Borrower agrees to pay to Lender, or Lender's designee, a Loan
Commitment fee of 1% of the loan amount available under this Loan Agreement
such to be due and payable at Loan Closing or upon termination of this Loan
Agreement.
(b) Borrower agrees to pay to Lender, or Lender's designee, a Loan
Closing Fee of 1% of the amount of Loan funds disbursed at each Loan
Closing, such to be due and payable at Loan Closing.
(c) In addition, at the Loan Closing Borrower agrees to pay Lender's
reasonable costs and expenses (including, without limitation, the
reasonable fees and expenses of Lender's legal counsel) in connection with
the negotiation, preparation, execution and delivery of this Loan
Agreement, the Debentures, the other Loan Documents and the Loan Closing or
Subsequent Loan Closing, provided that such costs and expenses shall not,
in the aggregate, exceed 0.5% of the loan amount available under this Loan
Agreement.
(d) Lender acknowledges the receipt of the payment by the Borrower of
$25,000 to cover Due Diligence expenses.
(e) Lender agrees to a similar fee arrangement on any additional
funds provided under this Loan Agreement or similar Agreement between
Lender and Borrower.
Section 2.08. Placement Fee.
The Borrower shall be responsible for payment of any placement fees
and commissions, brokerage fees or finder's fees in connection with the
Loan. All such placement fee obligations are as listed in Schedule 2.08
attached hereto. The Lender has incurred no placement fee on this
transaction.
Section 2.09. Taxes.
(a) Payments by Borrower hereunder shall be made without deduction
for any present or future taxes, duties, charges or withholdings,
(excluding, in the case of the Lender, any foreign taxes, any federal,
state or local income taxes and any franchise taxes or taxes imposed upon
it by the jurisdiction, or any political subdivision thereof, under which
the Lender is organized or is qualified to do business) and all liabilities
with respect thereto (herein "Taxes") shall be paid by Borrower. If
Borrower shall be required by law to deduct any Taxes for which Borrower is
responsible under the preceding sentence from any sum payable hereunder to
any Lender: (i) the sum payable shall be increased so that after making all
required deductions, such Lender receives an amount equal to the sum it
would have received had no such deductions been made; (ii) Borrower shall
make such deductions; and (iii) Borrower shall pay the full amount deducted
to the relevant taxing authority or other authority in accordance with
applicable law.
(b) Except as otherwise set forth in this Loan Agreement or the other
Loan Documents, Borrower shall pay any present or future stamp or
documentary taxes or any other excise or property taxes, charges or similar
levies which arise from any payment made hereunder or under the Loan
Documents or from the execution, delivery or registration of, or otherwise
with respect to, this Loan Agreement or the other Loan Documents
(hereinafter referred to as "Other Taxes").
(c) Borrower shall indemnify Lender for the full amount of Taxes and
Other Taxes reasonably paid by Lender on any liability (including any
penalties or interest assessed because of Borrower's defaults) arising
therefrom or with respect thereto, whether or not such Taxes or Other Taxes
were correctly or legally asserted. This Indemnification shall be made
within thirty (30) days from the date Lender made written demand therefor.
Lender shall subrogate any and all rights and claims relating to such Taxes
and Other Taxes to Borrower upon payment of said indemnification.
(d) Without prejudice to the survival of any other Agreement of
Borrower hereunder, the Agreements and obligations of Borrower in this
Section 2.09 shall survive the payment in full of the Obligation.
Section 2.10 Stock Conversion Rights and Registration Rights Agreement.
(a) Each Debenture shall be exchangeable for shares of Borrower's
common stock on such terms and in such amounts as shall be stated in the
Debenture. The holders of the stock issued upon exercise of the right of
conversion as provided in said Debenture shall be entitled to all the
rights of the Lender as stated in this Loan Agreement or the other Loan
Documents to the extent such rights are specifically stated to survive the
surrender of the Debenture for conversion as herein provided.
(b) The holder of shares of common stock of Borrower issued upon
conversion shall be entitled to the rights as provided in Article IX of
this Loan Agreement.
ARTICLE III - CONDITIONS PRECEDENT
Section 3.01. Document Requirements.
(a) The obligation of Lender to advance funds at the Loan Closing
Date hereof is subject to the condition precedent that, on or before the
date of such advance, Lender shall have received the following in form and
substance satisfactory to Lender:
(i) One or more duly executed Debentures aggregating the
Principal Amount of Loan funds then advanced, each in amounts as requested
by Lender, which shall be styled "River Oaks Trust Company, FBO,
Renaissance Capital Growth and Income Fund III, Inc.," and "Renaissance
U.S. Grown and Income Trust, PLC.", and in the form of Exhibit 2.01(a)(1)
with appropriate insertions of date, amount and conversion features.
(ii) An opinion of legal counsel for Borrower dated as of the
Loan Closing Date, satisfactory in form and substance to Lender, as to due
execution by the Borrower of the Loan Agreement, the Debenture and other
Loan Documents and the legal enforceability thereof.
(iii) A true and correct certificate signed by a duly
authorized officer of the Borrower and dated as of the Loan Closing Date
stating that, to the best knowledge and belief of such officer, after
reasonable and due investigation and review of matters pertinent to the
subject matter of such certificate: (A) all of the representations and
warranties contained in Article IV hereof and the other Loan Documents are
true and correct as of the Loan Closing Date and (B) no event has occurred
and is continuing, or would result from the Loan, which constitutes a
Default or an Event of Default.
(iv) Copies of resolutions, as adopted by the Borrower's Board
of Directors, approving the execution, delivery and performance of this
Loan Agreement, the Debentures, and the other Loan Documents, including the
transactions contemplated herein and accompanied by a certificate of the
Secretary or Assistant Secretary of Borrower stating that such resolutions
have been duly adopted, are true and correct, have not been altered or
repealed and are in full force and effect.
(v) A signed certificate of the Secretary or Assistant
Secretary of the Borrower which shall certify the names of the officers of
Borrower authorized to sign each of the Loan Documents to be executed by
such officer, together with the true signatures of each of such officers.
It is herewith stipulated and agreed that Lender may hereafter rely
conclusively on the validity of this certificate as a representation of the
officers of Borrower duly authorized to act with respect to the Loan
Documents until such time as Lender shall receive a further certificate of
the Secretary or Assistant Secretary of Borrower canceling or amending the
prior certificate and submitting the signatures of the officers thereupon
authorized in such further certificate.
(vi) Certificates of good standing (or other similar
instrument) for the Borrower issued by the Secretary of State of the state
of incorporation of Borrower, and certificates of qualification and good
standing for Borrower issued by the Secretary of State of each of the
states wherein such Borrower has operating facilities of such nature so as
to be required to be qualified to do business as a foreign corporation,
dated within ten (10) days of Loan Closing.
(vii) A copy of the Articles of Incorporation of the Borrower
and all amendments thereto, certified by the Secretary of State of the
state of incorporation and dated within ten (1O) days of the date of Loan
Closing and a copy of the bylaws of Borrower and all amendments thereto,
certified by the Secretary or Assistant Secretary of Borrower, as being
true, correct and complete as of the date of such certification.
(viii) Copies of the following financial statements for
Borrower: (A) An audited balance sheet and income statement for Borrower as
of June 30, 1995 and (B) unaudited balance sheet and income statement for
Borrower as of March 31, 1996.
(ix) Such other information and documents as may reasonably be
required by Lender and Lender's counsel to substantiate Borrower's
compliance why the requirements of this Loan Agreement.
Section 3.02. Repayment of Inter-company Debt.
The obligation of Lender to advance funds at the Loan Closing Date
hereof is subject to the condition precedent that Retirement Care
Associates, Inc., the Borrower's parent corporation, repays any inter-company
balances.
Section 3.03. Inter-company Debts
The obligation of Lender to advance funds at the Loan Closing Date
hereof is subject to the condition precedent that Retirement Care
Associates, Inc., the Borrower's parent corporation, repays all inter-company
balances owed to Borrower, other than trade payables.
ARTICLE IV - REPRESENTATIONS AND WARRANTIES
To induce Lender to make the Loan hereunder, Borrower represents and
warrants to Lender that:
Section 4.01. Organization and Good Standing.
(a) Borrower is duly organized and existing in good standing under
the laws of the state of its incorporation, is duly qualified as a foreign
corporation and in good standing in all states in which failure to qualify
would have a Material Adverse Effect, and has the corporate power and
authority to own its properties and assets and to transact the business in
which it is engaged and is or will be qualified in those states wherein it
proposes to transact material business operations in the future.
Section 4.02. Authorization and Power.
(a) Borrower has the corporate power and requisite authority to
execute, deliver and perform the Loan Documents to be executed by Borrower.
The Borrower is duly authorized to, and has taken all corporate action
necessary to authorize, execute, deliver and perform the Loan Documents
executed by Borrower. The Borrower is and will continue to be duly
authorized to perform the Loan Documents executed by Borrower.
Section 4.03. No Conflicts or Consents.
(a) Except as disclosed to Lender pursuant to Exhibit 4.03 - Schedule
of Conflicts or Consents, neither the execution and delivery of the Loan
Documents, nor the consummation of any of the transactions therein
contemplated, nor compliance with the terms and provisions thereof, will
contravene or materially conflict with any judgment, license, order or
permit applicable to Borrower, or any indenture, loan agreement, mortgage,
deed of trust, or other agreement or instrument to which Borrower is a
party or by which Borrower is or becomes bound, or to which Borrower is or
becomes subject, or violate any provision of the charter or bylaws of
Borrower. No consent, approval, authorization or order of any court or
governmental authority or third party is required in connection with the
execution and delivery by Borrower of the Loan Documents or to consummate
the transactions contemplated hereby or thereby except those that have been
obtained.
Section 4.04. Enforceable Obligations.
(a) The Loan Documents have been duly executed and delivered by the
Borrower and are the legal and binding obligations of the Borrower,
enforceable in accordance with their respective terms, except as limited by
any applicable bankruptcy, insolvency or similar laws now or hereafter in
effect affecting creditors rights and debtor's obligations.
Section 4.05. No Liens.
(a) Except for Permitted Liens, all of the properties and assets
owned by the Borrower are free and clear of all Liens and other adverse
claims of any nature, and Borrower has good and marketable title to such
properties and assets. A true and complete list of all liens for borrowed
money is disclosed to Lender pursuant to Exhibit 4.05.
Section 4.06. Financial Condition.
(a) Borrower has delivered to Lender copies of the balance sheet of
Borrower as of June 30, 1995, and the related statements of income,
stockholders' equity and statement of cash flow for the year ended, audited
by its independent Certified Public Accountant. Borrower has also delivered
to Lender copies of the balance sheet of Borrower as of March 31, 1996, and
the related statements of income, stockholders' equity and statement of
cash flow for the period ended such date, which financial statements have
not been certified by its independent Certified Public Accountant. Such
financial statements are true and correct in all material respects, fairly
represent the financial condition of Borrower as of such dates and have
been prepared in accordance with GAAP (except unaudited financial
statements omit certain footnotes); and as of the date hereof, there are no
obligations, liabilities or Indebtedness (including contingent and indirect
liabilities and obligations) of Borrower which are (separately or in the
aggregate) material and are not reflected in such financial statements or
otherwise disclosed herein. Since the date of the above referenced year end
financial statements and quarterly financial statements, there have not
been, except as disclosed in Exhibit 4.06: (i) any Material Adverse Change
in the financial condition, results of operations, business, prospects,
assets or liabilities (contingent or otherwise, whether due or to become
due, known or unknown), of the Borrower; (ii) any dividend declared or paid
or distribution made on the capital stock of the Borrower or any capital
stock thereof redeemed or repurchased; (iii) any incurrence of long-term
debt by the Borrower; (iv) any salary, bonus or compensation increases to
any officers, key employees or agents of the Borrower or; (v) any other
transaction entered into by the Borrower except in the ordinary course of
business and consistent with past practice.
Section 4.07. Full Disclosure.
(a) To the best of Borrower's knowledge and belief after current
investigation, there is no material fact that Borrower has not disclosed to
Lender which could reasonably be expected to have a Material Adverse Effect
on the properties' business, prospects or condition (financial or
otherwise) of Borrower. Neither the financial statements referenced in
Section 4.06 hereof, nor any business plan, offering memorandum or
prospectus, certificate or statement delivered herewith or heretofore by
Borrower to Lender in connection with the negotiations of this Loan
Agreement, contained any untrue statement of a material fact or omitted to
state any material fact necessary to keep the statements contained herein
or therein from being misleading.
Section 4.08. No Default.
(a) No event has occurred and is continuing which constitutes a
Default or an Event of Default under this Loan Agreement.
Section 4.09. Material Agreements.
(a) The Borrower is not in default in any material respect under any
contract, lease, loan agreement, indenture, mortgage, security agreement or
other material agreement or obligation to which it is a party or by which
any of its properties is bound.
Section 4.10. No Litigation.
(a) Except as disclosed to Lender pursuant to Exhibit 4.10 - Schedule
of Litigation attached hereto, there are no actions, suits, investigations,
arbitrations or administrative proceedings pending, or to the knowledge of
Borrower threatened, against Borrower, and there has been no change in the
status of any of the actions, suits, investigations, litigation or
proceedings disclosed to Lender which could have a materially adverse
effect on Borrower or on any transactions contemplated by any Loan
Document.
Section 4.11. Burdensome Contracts.
(a) To the best knowledge of the Borrower, it is not a party to, or
bound by, any contract or agreement, the faithful performance of which is
so onerous so as to create or to likely create a Material Adverse Effect on
the business, operations or financial condition of the Borrower.
Section 4.12. Taxes.
(a) All tax returns required to be filed by Borrower in any
jurisdiction have been filed and all taxes (including mortgage recording
taxes), assessments, fees and other governmental charges upon Borrower or
upon any of its properties, income or franchises have been paid. To the
best knowledge of Borrower, there is no proposed tax assessment against
Borrower and there is no basis for such assessment.
Section 4.13 Principal Office, Etc.
(a) The principal office and principal place of business of the
Borrower and each of its Subsidiaries is as follows:
Contour Medical, Inc.
3340 Scherer Drive
St. Petersburg, Florida 33716
Contour Fabricators, Inc. and
4100 E. Baldwin Road
Grand Blanc, Michigan 48439
Contour Fabricators of Florida, Inc.
3340 Scherer Drive
St. Petersburg, Florida 33716
AmeriDyne Corporation
231 Bobrick Drive
Jackson, Tennessee 38301
Section 4.14. Use of Proceeds.
(a) The Borrower hereby acknowledges that it intends to use proceeds
from the Loan as disclosed in Section 2.02 hereof.
Section 4.15. Employee Benefit and Incentive Plans; ERISA.
(a) Borrower is not obligated under any Plans.
(b) Borrower is not a party to any collective bargaining agreement
and is not aware of any activities of any labor union that is currently
seeking to represent or organize its employees. Borrower has not
experienced any labor problems, including work stoppages, disputes or
slowdowns with respect to its employees.
Section 4.16. Compliance with Law.
(a) To the best knowledge of Borrower, Borrower is in compliance with
all laws, rules, regulations, orders and decrees which are applicable to
Borrower or its properties by reason of any Governmental Authority which
are material to the conduct of the business of Borrower or any of its
properties.
Section 4.17. Compliance with Environmental Requirements.
(a) To the best knowledge of Borrower, all properties of Borrower are
in compliance with all federal, state or local environmental protection
laws, statutes and regulations which are material to the conduct of the
business of Borrower, or its properties, and the Borrower is currently in
compliance with all material reporting requirements, rules, and regulations
which are applicable to Borrower or its properties by reason of such
governmental environmental protective agencies.
Section 4.18. Schedule of Capital Stock and SEC Requirements.
(a) Set forth on Exhibit 4.18 - Schedule of Capital Stock is a true
and correct schedule of all classes of authorized, issued, and outstanding
Capital Stock of the Borrower, all stock options, warrants, conversion
rights, subscription rights and other rights or agreements to acquire
securities of Borrower and any shares held in treasury or reserved for
issue upon exercise of such stock options, warrants or conversion rights,
subscription rights and other rights or agreements to acquire securities
including date of termination of such right and the consideration therefor.
(b) Except as provided in Exhibit 4.18 - Schedule of Capital Stock,
to the best of the Borrower's knowledge, all securities of Borrower have
been issued in compliance with the requirements of the 1933 Act, and the
rules and regulations promulgated thereunder, or pursuant to an exemption
therefrom.
(c) The shares of common stock of the Borrower when issued to Lender
upon conversion of the Debentures will be duly and validly issued, fully
paid and nonassessable and in compliance with all applicable securities
laws. Such issuance will not give rise to preemptive rights or similar
rights by any other security holder of Borrower. Borrower shall at all
times reserve and keep available sufficient authorized and unissued shares
of common stock to effectuate the conversion of the Debentures.
Section 4.19. Insider.
(a) Neither the Borrower, nor any Person having "control" (as that
term is defined in the Investment Company Act of 1940, as amended, or in
regulations promulgated pursuant thereto (herein the "1940 Act")) of the
Borrower is, an "executive officer," "director," or "principal shareholder"
(as those terms are defined in the 1940 Act) of Lender.
(b) Except as set forth in the Borrower's Form 1O-K dated for the
period ending June 30, 1995, there are no transactions between the Borrower
and any affiliates of Borrower.
(c) All agreements between the Borrower and any of its officers,
directors, and principal shareholders, including employment Agreements, are
listed on Exhibit 4.19 - Schedule of Affiliate Transactions.
Section 4.20. Subsidiaries.
(a) As of the date hereof, the Borrower has the following
Subsidiaries: Contour Fabricators, Inc., Contour Fabricators of Florida,
Inc. and AmeriDyne Corporation.
(b) Except as disclosed in the Financial Statements and except for
Subsidiaries, the Borrower does not own any equity or debt interest or any
form of proprietary interest in any entity, or any right or option to
acquire any such interest in any such entity.
Section 4.21. Casualties.
(a) Neither the business nor the properties of Borrower is currently
affected by any environmental hazard, fire, explosion, accident, strike,
lockout or other labor dispute, drought, storm, hail, earthquake, embargo,
act of God or other casualty (whether or not covered by insurance), which
could have a Material Adverse Effect.
Section 4.22 Investment Company Act.
(a) Borrower is not an "investment company" as defined in Section 3
of the 1940 Act nor a company that would be an investment company except
for the exclusions from the definition of an investment company in Section
3(c) of the 1940 Act, and Borrower is not controlled by such a company.
Section 4.23. Sufficiency of Capital.
(a) Borrower is, and after consummation of this Loan Agreement and
giving effect to all Indebtedness incurred and transactions contemplated in
connection herewith will be, Solvent.
Section 4.24. Corporate Names.
(a) The Borrower has not, during the preceding five (5) years, been
known as or used any other corporate, fictitious or tradenames except as
disclosed on Exhibit 4.24 - Schedule of Corporate Names, Mergers and
Consolidations. Except as disclosed on Exhibit 4.24, the Borrower has not,
during the preceding five (5) years, been the surviving corporation of a
merger or consolidation or acquired all or substantially all of the assets
of any Person.
Section 4.25 Margin Regulation.
(a) As of the Loan Closing Date, the Borrower does not have class of
securities with respect to which a member of a national securities
exchange, broker, or dealer may extend or maintain credit to or for a
customer pursuant to rules or regulation adopted by the Board of Governors
of the Federal Reserve System under Section 7 of the 1934 Act.
Section 4.26 Insurance.
(a) All of the insurable properties of the Borrower are insured for
its benefit under valid and enforceable policies, issued by insurers of
recognized responsibility in amounts and against such risks and losses as
is customary in such industry. Such policies are listed in Exhibit 4.26 -
Schedule of Insurance.
Section 4.27 Patents, Trademarks and Copyrights.
(a) To the best of borrower's knowledge and belief after current
investigation, Borrower owns all patents, trademarks and copyrights, if
any, necessary to conduct its business or possesses licenses or other
rights, if any, therefor. All such intangible property rights are listed in
Exhibit 4.27 - Schedule of Patents, Trademarks and Copyrights. Borrower has
the right to use such proprietary rights without infusing or violating the
rights of any third parties. No claim has been asserted by any person to
the ownership of or right to use any such proprietary right or challenging
or questioning the validity or effectiveness of any such license or
agreement. Each of the proprietary rights is valid and subsisting, and has
not been canceled, abandoned or otherwise terminated.
Section 4.28. Survival of Representations and Warranties.
(a) All representations and warranties by Borrower herein shall
survive the Loan Closing and any subsequent Loan Closings and the delivery
of the Debentures, and any investigation at any time made by or on behalf
of Lender shall not diminish Lender's right to rely on Borrower's
representations and warranties as herein set forth.
ARTICLE V - AFFIRMATIVE COVENANTS
So long as any part of the Debentures remains unpaid or has not been
redeemed or conveyed hereunder, and until such payment, redemption or
conversion in full, unless the Lender shall otherwise consent in writing,
which consent shall not be unreasonably withheld, Borrower agrees that:
(a) The Borrower shall accurately and fairly maintain its books of
account in accordance with GAAP, employ a firm of independent certified
public accountants, which firm is one of the six largest national
accounting firms or which is approved by the Lender, to make annual audits
of its accounts in accordance with generally accepted auditing standards;
permit the Lender and its representatives to have access to and to examine
its properties, books and records (and to copy and make extracts therefrom)
at such reasonable times and intervals as the Lender may request; and to
discuss its affairs, finances and accounts with its officers and auditors,
all to such reasonable extent and at such reasonable times and intervals as
the Lender may request.
(b) The Borrower shall provide the following reports and information
to the Lender and/or the Lender's designee:
(i) As soon as available, and in any event within forty-five
(45) days after the close of each quarter, the Company's report on Form 10-Q
with exhibits for said period. In addition, the Lender may at its sole
discretion request internal monthly reports for specific periods.
(ii) As soon as available, and in any event within ninety (90)
days after the close of each year, the Company's report on Form 1O-K with
exhibits for said period.
(iii) Each quarter, concurrent with the periodic report
required above, a certificate executed by the Chief Financial Officer or
Chief Executive Officer of the Borrower, (A) stating that a review of the
activities of the Borrower during such fiscal period has been made under
his supervision and that the Borrower has observed, performed and fulfilled
each and every obligation and covenant contained herein and is not in
default under any of the same or, if any such default shall have occurred,
specifying the nature and status thereof, and (B) setting forth a
computation in reasonable detail as of the end of the period covered by
such statements, of compliance with the Agreed Minimum Financial Standards
in Exhibit 7.01 as provided therein.
(iv) So long as any Debenture remains outstanding, promptly
(but in any event within five (5) business days) upon learning of the
occurrence of a Default or an Event of Default deliver a certificate signed
by the Chief Executive Officer or Chief Financial Officer of the Borrower
describing such Default, Event of Default and stating what steps are being
taken to remedy or cure the same.
(v) Promptly (but in any event within five (5) business days)
upon the receipt thereof by the Borrower or the Board of Directors of the
Borrower, copies of all reports, all management letters and other detailed
information to the Borrower or the Board by independent accountants in
connection with each annual or interim audit or review of the accounts or
affairs of the Borrower made by such accountants.
(vi) With reasonable promptness, such other information
relating to the finances, properties, business and affairs of the Borrower
and each Subsidiary, as Lender may reasonably request from time to time.
(vii) Promptly upon its becoming available, one copy of each
financial statement, report, press release, notice or proxy statement sent
by Borrower to stockholders generally and of each regular or periodic
report, registration statement or prospectus filed by Borrower with any
securities exchange or the SEC or any successor agency, and of any order
issued by any Governmental Authority in any proceeding to which the
Borrower is a party.
Section 5.02. Preparation of a Budget.
(a) At least thirty (30) days prior to the beginning of Borrower's
fiscal year, Borrower agrees to prepare and submit to the Board, and
furnish to the Lender a copy of an annual plan for such year which shall
include, without limitation, plans for expansion, if any, plans for
incurrences of Indebtedness and projections regarding other sources of
funds, quarterly projected capital and operating expense budgets, cash flow
statements, profit and loss statistics and balance sheet projections,
itemized in such detail as the Board and/or the Lender may request.
Section 5.03. Operation Review.
(a) Borrower agrees that it will review its operations with Lender.
Such operations reviews will be in such depth and detail as Lender shall
reasonably request. Operations reviews, which usually will require a day or
less to complete, will be held as reasonably necessary, generally once a
fiscal quarter.
Section 5.04. Payment of Taxes and Other Indebtedness.
(a) Borrower shall, and shall cause its Subsidiaries, if any, to, pay
and discharge (i) all taxes, assessments and governmental charges or levies
imposed upon it or upon its Income or profits, or upon any property
belonging to it, before delinquent, (ii) all lawful claims (including
claims for labor, materials and supplies), which, if unpaid, might give
rise to a Lien upon any of its property, and (iii) all of its other
Indebtedness, except as prohibited hereunder; provided, however, that
Borrower and its Subsidiaries, if any, shall not be required to pay any
such tax, assessment, charge or levy if and so long as the amount,
applicability or validity thereof shall currently be contested in good
faith by appropriate proceedings and appropriate accruals and reserves
therefor have been established in accordance with GAAP.
Section 5.05. Maintenance of Existence and Rights: Conduct of Business.
(a) Borrower shall, and shall cause its Subsidiaries, if any, to,
preserve and maintain its corporate existence and all of its rights,
privileges and franchises necessary or desirable in the normal conduct of
its business, and conduct its business in an orderly and efficient manner
consistent with good business practices and in accordance with all valid
regulations and orders of any Governmental Authority. Borrower shall keep
its principal place of business within the United States.
Section 5.06. SEC Filing and Maintenance of SEC Reporting Requirements.
(a) So long as Borrower has a class of securities registered pursuant
to Section 12 of the 1934 Act, Borrower shall duly file, when due, all
reports and statements required of a company whose securities are
registered for public trading under and pursuant to the 1934 Act, as
amended, and any rules and regulations issued thereunder, and to preserve
and maintain its registration thereunder and all of the rights of its
security holders normally associated with a publicly traded stock company.
Section 5.07. Notice of Default.
(a) Borrower shall furnish to Lender, immediately upon becoming aware
of the existence of any condition or event which constitutes a Default or
would with the passage of time become a Default or an Event of Default,
written notice specifying the nature and period of existence thereof and
the action which Borrower is taking or proposes to take with respect
thereto.
Section 5.08. Other Notices.
(a) Borrower shall promptly notify Lender of (i) any Material Adverse
Change in its financial condition or its business, (ii) any default under
any material agreement, contract or other instrument to which it is a party
or by which any of its properties are bound, or any acceleration of the
maturity of any Indebtedness owing by Borrower or its Subsidiaries, if any,
(iii) any material adverse claim against or affecting Borrower or its
Subsidianes, if any, or any of its properties, and (iv) the commencement
of, and any material determination in, any litigation with any third party
or any proceeding before any Governmental Authority, the negative result of
which has a Material Adverse Effect on Borrower and its Subsidiaries, taken
as a whole.
Section 5.09. Compliance with Loan Documents.
(a) Borrower shall, and shall cause each of its Subsidiaries, if any,
to promptly comply with any and all covenants and provisions of the Loan
Documents.
Section 5.10. Compliance with Material Aereements.
(a) Borrower shall, and shall cause each of its Subsidianes, if any
to comply in all material respects with all material Agreements,
indentures, mortgages or documents binding on it or affecting its
properties or business.
Section 5.11. Operations and Properties.
(a) Borrower shall, and shall cause each of its Subsidianes, if any,
to, act prudently and in accordance with customary industry standards in
managing or operating its assets, properties, business and investments.
Borrower shall, and shall cause each of its Subsidiaries, if any, to, keep
in good working order and condition, ordinary wear and tear excepted, all
of its assets and properties which are necessary to the conduct of its
business.
Section 5.12. Books and Records: Access.
(a) Borrower shall, and shall cause each of its Subsidiaries, if any,
to, maintain complete and accurate books and records of its transactions in
accordance with good accounting practices. Borrower shall give each duly
authorized representative of Lender access during all normal business hours
to, and shall permit such representative to examine, copy or make excerpts
from, any and all books, records and documents in the possession of
Borrower and its Subsidiaries and relating to its affairs, and to inspect
any of the properties of Borrower and its Subsidiaries, if any. Borrower
shall make a copy of this Loan Agreement, along with any waivers, consents,
modifications or amendments, available for review at its principal office
by Lender or Lender's representatives.
Section 5.13. Compliance with Law.
(a) Borrower shall, and shall cause each of its Subsidiaries, if any,
to, comply with all applicable laws, rules, regulations, and all orders of
any Governmental Authority applicable to it or any of its property,
business operations or transactions, a breach of which could reasonably be
expected to have a Material Adverse Effect.
Section 5.14. Insurance.
(a) Borrower shall, and shall cause each of its Subsidiaries, if any,
to, maintain such worker's compensation insurances liability insurance and
insurance on its properties, assets and business, now owns or hereafter
acquired, against such casualties, risks and contingencies, and in such
types and amounts, as are consistent with customary practices and standards
of companies engaged in similar businesses.
Section 5.15. Authorizations and Approvals.
(a) Borrower shall, and shall cause each of its Subsidiaries, if any,
to, promptly obtain, from time to time at its own expense, all such
governmental licenses, authorizations, consents, permits and approvals as
may be required to enable it to comply with its obligations hereunder and
under the other Loan Documents.
Section 5.16. ERISA Compliance.
(a) Borrower shall (i) at all times, make prompt payment of all
contributions required under all Plans, if any, and required to meet the
minimum funding standards set form in ERISA with respect to its Plans
subject to ERISA, if any, (ii) notify Lender immediately of any fact in
connection with any of its Plans, which might constitute grounds for
termination thereof or for the appointment by the appropriate United States
District Court of a trustee to administer such Plan, together with a
statement, if requested by Lender as to the reason therefor and the action,
if any, proposed to be taken with respect thereto, and (iii) furnish to
Lender upon its request such additional information concerning any of its
Plans as may be reasonably requested.
Section 5.17. Further Assurances
(a) Borrower shall, and shall cause each of its Subsidiaries, if any,
to, make, execute or endorse, and acknowledge and deliver or file or cause
the same to be done, all such notices, certifications and additional
Agreements, undertakings, transfers, assignments, or other assurances, and
take any and all such other action, as Lender may, from time to time, deem
reasonably necessary or proper in connection with any of the Loan
Documents, or the obligations of Borrower or its Subsidiaries, if any,
thereunder, which Lender may request from time to time.
Section 5.18. Indemnity by Borrower.
(a) Borrower shall indemnify, save, and hold harmless, Lender and its
directors, officers, agents, attorneys, and employees (collectively, the
"Indemnitees") from and against: (i) any and all claims, demands, actions
or causes of action that are asserted against any Indemnitee if the claim,
demand, action or cause of action directly or indirectly related to the
Loan Agreement and the other Loan Documents issued pursuant thereto, the
use of proceeds of the Loans, or the relationship of Borrower and Lender
under this Loan Agreement or any transaction contemplated pursuant to this
Loan Agreement, (ii) any administrative or investigative proceeding by any
Governmental Authority directly or indirectly related to a claim, demand,
action or cause of action described in clause (i) above, and (iii) any and
all liabilities, losses, costs, or expenses (including reasonable
attorneys' fees and disbursements) that any indemnitee suffers or incurs as
a result of any of the foregoing; provided, however, that Borrower shall
have no obligation under this Section 5.18 to Lender with respect to any of
the foregoing arising out of the negligence or willful misconduct of Lender
or its assignees or the breach by the Lender or its assignees of this Loan
Agreement or any other Loan Document or other document executed in
connection with any of the aforesaid, the breach by Lender or its assignees
of any Agreement or commitment with other parties, the violation or alleged
violation of any law, rule or regulation by Lender or its assignees, or
from the transfer or disposition by Lender of any Debenture or the Common
Stock issued upon conversion. If any claim, demand, action or cause of
action is asserted against any indemnitee, such indemnitee shall promptly
notify Borrower, but the failure to so promptly notify Borrower shall not
affect Borrower's obligations under this Section unless such failure
materially prejudices Borrower's right to participate in the contest of
such claim, demand, action or cause of action, as hereinafter provided. In
the event that such indemnitee's failure to properly notify the Borrower
materially prejudices Borrower's right to participate in the contest of
such claim, demand, action, or cause of action, then said indemnitees shall
have no right to receive, and Borrower shall have no obligation to pay, any
Indemnification amounts hereunder. Borrower may elect to defend any such
claim, demand, action or cause of action (at its own expense) asserted
against said indemnitee and, if requested by Borrower in writing and so
long as no Default or Event of Default shall have occurred and be
continuing, such indemnitee (at Borrower's expense) shall in good faith
contest the validity, applicability and amount of such claim, demand,
action or cause of action and shall permit Borrower to participate in such
contest. Any indemnitee that proposes to settle or compromise any claim or
proceeding for which Borrower may be liable for payment to or on behalf of
an indemnitee hereunder shall give Borrower written notice of the terms of
such proposed settlement or compromise reasonably in advance of settling or
compromising such claim or proceeding and shall obtain Borrower's written
concurrence thereto. In the event that said indemnitee plan's to obtain
Borrower's prior written consent to any such settlement or compromise, said
indemnitee shall have no right to receive and Borrower shall have no
obligation to pay any indemnification amounts hereunder. Each indemnitee
may employ counsel in enforcing its rights hereunder and in defending
against any claim, demand, action, or cause of action covered by this
Section 5.18; provided, however, that each indemnitee shall endeavor, but
shall not be obligated, in connection with any matter covered by this
Section which also involves other indemnitee, to use reasonable efforts to
avoid unnecessary duplication of effort by counsel for all indemnitee,
including by allowing Borrower to select one lawyer for all parties, such
selection to be subject to the approval of such parties, which approval
shall not be unreasonably withheld. Any obligation or liability of Borrower
to any indemnitee under this Section 5.18 shall survive the expiration or
termination of this Loan Agreement and the repayment of the Debentures.
5.19 Payment of Management Fee/Monitoring Fee
Borrower shall pay each of Renaissance III and Renaissance PLC a
financial advisory fee of $500 per month.
ARTICLE VI - NEGATIVE COVENANTS
So long as any part of the Debentures have not been redeemed or
converted hereunder, and until such redemption or conversion in full,
unless the Lender shall otherwise consent in writing, which consent shall
not be unreasonably withheld, Borrower agrees that, unless permitted
otherwise:
Section 6.01. Limitation on Indebtedness.
(a) Borrower and its Subsidianes shall not incur, create, contract,
waive, assume, have outstanding, guarantee or otherwise be or become,
directly or indirectly, liable in respect of any Indebtedness, except:
(i) Indebtedness arising out of this Loan Agreement or
otherwise contemplated herein;
(ii) Indebtedness secured by the Permitted Liens;
(iii) Current liabilities for accounts payable or obligations
accrued (other than for borrowed fiends or purchase money obligations) and
incurred in the ordinary course of business, and for taxes and assessments;
or
(iv) Indebtedness as listed on Exhibit 4.05
Section 6.02. Negative Pledge.
(a) Borrower shall not, and shall not permit its Subsidiaries, if
any, to, create, incur, permit or suffer to exist any Lien upon any of its
property or assets other than Permitted Liens, or payments upon any
Subordinated Debt other than regularly scheduled installments of principal
and interest and shall not directly or indirectly make any payment of any
Subordinated Debt which would violate the terms of the Loan Agreement or of
such Subordinated Debt or any subordination agreement applicable to such
Subordinated Debt.
Section 6.03. Limitation on Investments.
(a) Borrower shall not, and shall not permit its Subsidiaries, if
any, to make or have outstanding any Investments in any Person, except for
Borrower's (and any Subsidiary's) ownership of stock of Subsidiaries, loans
and other transactions between the Borrower and any Subsidiaries, short
term bank deposits or money market investments, and such other "cash
equivalent" investments as Lender may from time to time approve.
Section 6.04. Alteration of Material Agreements.
(a) Borrower shall not, and shall not permit its Subsidiaries, if
any, to, consent to or permit any alteration, amendment, modification,
release, waiver or termination of any material agreement to which it is a
party other than in the ordinary course of business.
Section 6.05. Certain Transactions.
(a) Except as permitted by Section 6.12, Borrower shall not, and
shall not permit its Subsidiaries, if any, to, enter into any transaction
with, or pay any management fees to, any Affiliate; provided, however, that
Borrower and any Subsidiary may enter into transactions with Affiliates
upon terms not less favorable to Borrower and any Subsidiary than would be
obtainable at the time in comparable transactions of Borrower and any
Subsidiaries in arms-length dealings with Persons other than Affiliates.
Section 6.06. Limitations on Acquisition of Non-Related Business.
Borrower shall not, and shall not permit its Subsidiaries, if any,
to, engage in any line of business or acquire any new product lines or
business or acquire any companies unless such new product line or business
of the company acquired is primarily involved in the health-care supply,
manufacturing or services industry.
Section 6.07. Limitation on Sale of Properties.
(a) Borrower shall not, and shall not permit its Subsidiaries, if
any, to: (i) sell, assign, convey, exchange, lease or otherwise dispose of
any of its properties, rights, assets or business, whether now owned or
hereafter acquired, except in the ordinary course of its business and for a
fair consideration, or (ii) sell, assign or discount any accounts
receivable except in the ordinary course of business or to secure bank or
commercial working capital loans in the ordinary course of business.
Section 6.08. Fiscal Year and Accounting Method.
(a) Borrower shall not, and shall not permit its Subsidiaries, if
any, to, change its method of accounting except as permitted by GAAP.
Section 6.09. Liquidation and Dispositions of Substantial Assets.
(a) Borrower shall not permit Subsidiaries to dissolve or liquidate,
(ii) sell, transfer, lease or otherwise dispose of all or any substantial
part of its property or assets or business, or (iii) enter into any other
transaction that has a similar effect.
Section 6.10. No Amendments to Articles of Incorporation or Bylaws.
(a) Borrower shall not, and shall not permit its Subsidiaries, if
any, to materially amend its Articles of Incorporation or bylaws except as
is necessary to fulfill the conditions of this Loan Agreement.
Section 6.11. Limitation on Increased Executive Compensation and Bonus,
Profit Sharing or other Incentive Payments.
(a) Borrower will not increase the salary, bonus, or other
compensation programs (whether in cash, securities, or other property, and
whether payment is deferred or current) of its top five executive officers
unless such compensation increase is approved by a majority of the Board or
a Compensation Committee of the Board of Directors, a majority of whom
shall be non-employee Directors.
(b) Borrower shall not pay any Bonus, Profit Sharing or Other
Incentive Payments until such plans are formally adopted by the majority of
the Board or a Compensation Committee of the Board of Directors, a majority
of which shall be non-employee Directors.
Section 6.12. Limitation on Lending to Parent.
Borrower shall not lend more than $1,000,000 to Retirement Care
Associates, Inc., or any affiliate of Retirement Care Associates, Inc. If
money is loaned, it shall be for a period of less than forty-five (45) days
and have written documentation containing standard commercial terms and
conditions.
Section 6.13. Restricted Payments.
So long as any Debentures are outstanding, Borrower shall not declare
or pay any dividend (other than stock dividends) (i) on any Common Stock,
or purchase, redeem, decrease, or otherwise acquire any shares of Common
Stock, or (ii) on any Preferred Stock issued after the date hereof of which
Retirement Care Associates, Inc., or its affiliates owns in excess of 30%,
if such dividend or purchase in the aggregate exceeds 1.25 times the
cumulative earnings of the Borrower for the previous twelve months.
ARTICLE VII - COVENANTS OF MAINTENANCE OF FINANCIAL STANDARDS
Section 7.01. Financial Ratios.
(a) So long as any part of the Debentures has not been redeemed or
converted hereunder, and until such redemption or conversion in full, or
unless the Lender (or if any portion of the Debentures has been assigned,
the holders of a majority in amount of the outstanding Principal Amount)
shall otherwise consent in writing, the Borrower will at all times maintain
the agreed minimum financial ratios or standards as provided and set forth
in Exhibit 7.01 - Agreed Minimum Financial Standards as attached hereto and
made a part hereof. Borrower shall deliver to Lender a compliance
certificate covering these ratios as required in Section 5.01(b)(iii).
ARTICLE VIII - EVENTS OF DEFAULT
Section 8.01. Events of Default.
(a) An "Event of Default" shall exist if any one or more of the
following events (herein collectively called `Events of Default') shall
occur and be continuing:
(i) Borrower shall fail to pay (or shall state in an intention
not to pay or its inability to pay), not later than ten (10) days after the
due date, any installment of interest on or principal of, any Debenture or
any fee, expense or other payment required hereunder;
(ii) Any representation or warranty made under this Loan
Agreement, or any of the other Loan Documents, or in any certificate or
statement furnished or made to Lender pursuant hereto or in connection
herewith or with the Loans hereunder, shall prove to be untrue or
inaccurate in any material respect as of the date on which such
representation or warranty was made;
(iii) Default shall occur in the performance of any of the
covenants or agreements of Borrower or of its Subsidiaries, if any,
contained herein, or in any of the other Loan Documents, which is not
remedied within thirty (30) days after written notice thereof to Borrower
from Lender;
(iv) Default shall occur in the payment of any material
indebtedness (other than the Obligation) of the Borrower or its
Subsidiaries, if any, or default shall occur in respect of any note, loan
agreement or credit agreement relating to any such indebtedness and such
default shall continue for more than the period of grace, if any, specified
therein and any such indebtedness shall become due before its stated
maturity by acceleration of the maturity thereof or shall become due by its
terms and shall not be promptly paid or extended.
(v) Any of the Loan Documents shall cease to be legal, valid
and binding agreements enforceable against the Borrower in accordance with
the respective terms thereof or shall in any way terminated or become or be
declared ineffective or inoperative or shall in any way whatsoever cease to
give or provide the respective rights, titles, interests, remedies, powers
or privileges intended to be created thereby;
(vi) Borrower or its Subsidianes, if any, shall (A) apply for
or consent to the appointment of a receiver, trustee, custodian, intervener
or liquidator of itself, or of all or substantially all of such Person's
assets, (B) file a voluntary petition in bankruptcy, admit in writing that
such Person is unable to pay such Person's debts as they become due or
generally not pay such Person's debts as they become due, (C) make a
general assignment for the benefit of creditors, (D) file a petition or
answer seeking reorganization or an arrangement with creditors or to take
advantage of any bankruptcy or insolvency laws, (E) file an answer
admitting the material allegations of, or consent to, or default in
answering, a petition filed against such Person in any bankruptcy,
reorganization or insolvency proceeding, or (F) take corporate action for
the purpose of effecting any of the foregoing;
(vii) An involuntary petition or complaint shall be filed
against Borrower or any of its Subsidiaries, if any, seeking bankruptcy or
reorganization of such Person or the appointment of a receiver, custodian,
trustee, intervenor or liquidator of such Person, or all or substantially
all of such Person's assets, and such petition or complaint shall not have
been dismissed within sixty (60) days of the filing thereof or an order,
Order for relief, judgment or decree shall be entered by any court of
competent jurisdiction or other competent authority approving a petition or
complaint seeking reorganization of Borrower or its subsidiary, if any, or
appointing a receiver, custodian, trustee, intervenor or liquidator of such
Person, or of ah or substantially all of such Person's assets;
(viii) Any final judgments, for the payment of money in excess
of the sum of $250,000 in the aggregate shall be rendered against Borrower
or any subsidiary and such judgment or judgments shall not be satisfied or
discharged at least ten (10) days prior to the date on which any of its
assets could be lawfully sold to satisfy such judgment;
(ix) The Borrower shall fail to issue and deliver shares of
Common Stock as provided herein upon conversion of the Debenture; or
(x) The Borrower shall fail to submit Lender's nominee, if any,
for election to the Board of Directors of the Borrower or shall remove
Lender's nominee from the Board of Directors of Borrower other than for
cause.
Section 8.02. Remedies Unon Event of Default.
(a) If an Event of Default shall have occurred and be continuing for
a period of thirty (30) days, then Lender may exercise any one or more of
the following rights and remedies, and any other remedies provided in any
of the Loan Documents, as Lender in its sole discretion may deem necessary
or appropriate:
(i) declare the unpaid Principal Amount (after application of
any payments or installments received by Lender) of, and all interest then
accrued but unpaid on, the Debentures and any other liabilities hereunder
to be forthwith due and payable, whereupon the same shall forthwith become
due and payable without presentment, demand, protest, notice of default,
notice of acceleration or of intention to accelerate or other notice of any
kind, all of which Borrower hereby expressly waives, anything contained
herein or in the Debentures to the contrary notwithstanding;
(ii) reduce any claim to judgment; and
(iii) without notice of default or demand, pursue and enforce
any of Lender's rights and remedies under the Loan Documents, or otherwise
provided under or pursuant to any applicable law or Agreement, all of which
rights may be specifically enforced.
Section 8.03. Performance by Lender.
(a) Should Borrower fail to perform any covenant, duty or agreement
contained herein or in any of the other Loan Documents, Lender may perform
or attempt to perform such covenant, duty or agreement on behalf of
Borrower. In such event, Borrower shall, at the request of Lender, promptly
pay any amount reasonably expended by Lender in such performance or
attempted performance to Lender at its principal office in Dallas, Texas,
together with interest thereon, at the interest rate specified in the
Debenture, from the date of such expenditure until paid. Notwithstanding
the foregoing, it is expressly understood that Lender assumes no liability
or responsibility for the performance of any duties of Borrower hereunder
or under any of the other Loan Documents.
Section 8.04. Payment of Expenses Incurred by Lender.
(a) Upon the occurrence of a Default or an Event of Default, which
occurrence is not cured within the notice provisions, if any, provided
herein, Borrower agrees to pay and shall pay all costs and expenses
(including Lender's attorney's fees and expenses) reasonably incurred by
Lender in connection with the preservation and enforcement of Lender's
rights under the Loan Agreement, the Debentures, or any other Loan
Document.
ARTICLE IX - REGISTRATION RIGHTS
Section 9.01. Demand For Registration.
(a) Subject to the Holder's right to convert the Debenture under the
Loan Agreement, the Borrower hereby agrees to register, subject to the
terms and conditions set forth herein, all or any portion of the
Registrable Securities at any time it shall receive a written request from
the Holders of at least fifty percent (50%) of the Registrable Securities
Then Outstanding (or a lesser percent if the anticipated aggregate offering
price, net of underwriting discounts and commissions, would exceed
$1,000,000) that the Borrower file a registration statement under the 1933
Act covering the registration of at least a majority of the Registrable
Securities Then Outstanding. The Borrower shall, within 20 days of its
receipt thereof, give written notice of such request to all Holders of
record of Registrable Securities. The Holders of said Registrable
Securities shall then have 15 days from the date of mailing of such notice
by the Borrower to request that all or a portion of their respective
Registrable Securities be included In said registration. The Borrower
hereby agrees, subject to the limitations hereof, to use its best lawful
efforts to effect as soon as reasonably possible, and in any event (if
legally possible, and as allowed by the SEC, and if no factor outside the
Borrower's reasonable control prevents it) within 150 days of the receipt
of the initial written registration request, to effect the registration
under the 1933 Act of all Registrable Securities which the Holders thereof
(the "Initiating Holders") have requested.
(b) If the Initiating Holders intend to distribute the Registrable
Securities covered by their request by means of an underwriting, they shall
so advise the Borrower as a part of their request made pursuant to this
Loan Agreement, and the Borrower shall include such information in the
written notice to the other Holders of Registrable Securities referred to
in Section 9.01(a). In such event, the right of any Holder to include
his/her Registrable Securities in such registration shall be conditioned
upon such Holder's participation in such underwriting and the inclusion of
such Holder's Registrable Securities in the underwriting (unless otherwise
mutually agreed by the Borrower, the underwriter, a majority in interest of
the Initiating Holders and such Holder) is limited to the extent provided
herein. All Holders proposing to distribute their securities through such
underwriting shall (together with the Borrower as provided in Section
9.03(e)) enter into an underwriting Agreement in customary form with the
underwriter or underwriters selected for such underwriting by mutual
agreement of the Borrower and a majority in interest of the Initiating
Holders, which Agreement shall not be unreasonably withheld.
Notwithstanding any other provision of this Section 9.01, if the
underwriter advises the Initiating Holders and the Borrower in writing that
marketing factors require a limitation of the number of shares to be
underwritten, then the Initiating Holders shall so advise all Holders of
Registrable Securities which would otherwise be underwritten pursuant
hereto, and the number of shares of Registrable Securities that may be
included in the underwriting shall be allocated on a pro rata basis among
all Holders that have requested to participate in such registration.
(c) Borrower shall utilize Rule 144 if said exemption, in the
Borrower's sole determination, meets its distribution requirements.
(d) Notwithstanding the foregoing, if the Borrower shall furnish to
the Initiating Holders a certificate signed by the President of the
Borrower stating that in the good faith judgment of the Board of Directors
of the Borrower, it would be materially detrimental to the Borrower and its
shareholders for such registration statement to be filed at that time, and
it is therefore essential to defer the filing of such registration
statement, the Borrower shall have the right to defer the commencement of
such a filing for a period of not more than 180 days after receipt of the
request of the Initiating Holders; provided, however, that at least 12
months must elapse between any two such deferrals.
Section 9.02. "Piggy-Back" Registration.
If, but without any obligation to do so, the Borrower proposes to
register any of its capital stock under the 1933 Act in connection with the
public offering of such securities for its own account or for the account
of its security holders, other than Holders of Registrable Securities
pursuant hereto (a "Piggy-Back Registration Statement"), (except for (i) a
registration relating solely to the sale of securities to participants in
the Borrower's stock plans or employee benefit plans or (ii) a registration
relating solely to an SEC Rule 145 transaction or any rule adopted by the
SEC in substitution thereof or in amendment thereto), then:
(a) The Borrower shall give written notice of such determination to
each Holder of Registrable Securities, and each such Holder shall have the
right to request, by written notice given to the Borrower within 15 days of
the date that such written notice was mailed by the Borrower to such
Holder, that a specific number of Registrable Securities held by such
Holder be included in the Piggy-Back Registration Statement (and related
underwritten offering, if any);
(b) If the Piggy-Back Registration Statement relates to an
underwritten offering, the notice given to each Holder shall specify the
name or names of the managing underwriter or underwriters for such
offering. In addition such notice shall also specify the number of
securities to be registered for the account of the Borrower and for the
account of its shareholders (other than the Holders of Registrable
Securities), if any;
(c) If the Piggy-Back Registration Statement relates to an
underwritten offering, each Holder of Registrable Securities to be included
therein must agree
(I) to sell such Holder's Registrable Securities on the same basis as
provided in the underwriting arrangement approved by the Borrower, and (ii)
to timely complete and execute all questionnaires, powers of attorney,
indemnities, hold-back agreements, underwriting agreements and other
documents required under the terms of such underwriting arrangements or by
the SEC or by any state securities regulatory body;
(d) If the managing underwriter or underwriters for the underwritten
offering under the Piggy-Back Registration Statement determines that
inclusion of all or any portion of the Registrable Securities in such
offering would adversely affect the ability of the underwriters for such
offering to sell all of the securities requested to be included for sale in
such offering at the best price obtainable therefor, the aggregate number
of Registrable Securities that may be sold by the Holders shall be
increased to such number of Registrable Securities, if any, that the
managing underwriter or underwriters determine may be included therein
without such adverse effect as provided below. If the number of securities
proposed to be sold in such underwritten offering exceeds the number of
securities that may be sold in such offering, there shall be included in
the offering, first, up to the maximum number of securities to be sold by
the Borrower for its own account and for the account of other stockholders
(other than Holders of Registrable Secunties), as they may agree among
themselves, and second, as to the balance, if any, Registrable Securities
requested to be included therein by the Holders thereof (pro rata as
between such Holders based upon the number of Registrable Securities
initially proposed to be registered by each), or in such other proportions
as the managing underwriter or underwriters for the offering may require;
provided, however, that in the event that the number of securities proposed
to be sold in such underwritten offering exceeds the number of securities
that may be sold in such offering pursuant to the terms and conditions set
form above and the Piggy-Back Registration Statement is a result of public
offering by the Borrower of its securities for its own account, there shall
be included In the offering, first, up to the maximum number of securities
to be sold by the Borrower for its own account and second, as to the
balance, if any, securities to be sold for the account of the Borrower's
stockholders (both the Holders of Registrable Securities request and such
other stockholders of the Borrower requested to be included therein) on a
pro rata basis;
(e) Holders of Registrable Securities shall have the right to
withdraw their Registrable Securities from a Piggy-Back Registration
Statement, but if the same relates to an underwritten offering, they may
only do so during the time period and on the terms agreed upon among the
underwriters for such underwritten offering and the Holders of Registrable
Securities.
Section 9.03. Obligations of the Borrower.
Whenever required to effect the registration of any Registrable
Securities pursuant to this Loan Agreement, the Borrower shall, as
expeditiously as reasonably possible:
(a) Prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use its best lawful efforts to
cause such registration statement to become effective, and keep such
registration statement effective until the sooner of all such Registrable
Securities have been distributed, or until 120 days have elapsed since such
registration statement became effective (subject to extension of this
period as provided below);
(b) Prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of
the 1933 Act with respect to the disposition of all securities covered by
such registration statement, or 120 days have elapsed since such
registration statement became effective (subject to the extension of this
period as provided below);
(c) Furnish to the Holders such numbers of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of
the 1933 Act, and such other documents as they may reasonably request in
order to facilitate the disposition of Registrable Securities owned by
them.
(d) Use its best lawful efforts to register and qualify the
securities covered by such registration statement under such other
securities or Blue Sky laws of such jurisdictions as shall be reasonably
requested by the Holders, provided that the Borrower shall not be required
in connection therewith or as a condition thereto to qualify as a broker-
dealer in any states or jurisdictions or to do business or to file a
general consent to service of process in any such states or jurisdictions;
(e) In the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement with the managing
underwriter of such offering, in usual and customary form reasonably
satisfactory to the Borrower and the Holders of a majority of the
Registrable Securities to be included in such offering. Each Holder
participating in such underwriting shall also enter into and perform its
obligations under such an agreement;
(f) Notify each Holder of Registrable Securities covered by such
registration statement, at any time when a prospectus relating thereto and
covered by such registration statement is required to be delivered under
the 1933 Act, of the happening of any event as a result of which the
prospectus included in such registration statement, as then in effect,
includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing; and
(g) In the event of the notification provided for in Section 9.03(f)
above, the Borrower shall use its best efforts to prepare and file with the
SEC (and to provide copies thereof to the Holders) as soon as reasonably
possible an amended prospectus complying with the 1933 Act, and the period
during which the prospectus referred to in the notice provided for in
Section 9.03(f) above cannot be used and the time period prior to the use
of the amended prospectus referred to in this Section 9.03(g) shall not be
counted in the 120 day period of this Section 9.03.
Section 9.04. Furnish Information.
(a) It shall be a condition precedent to the obligations of the
Borrower to take any action pursuant to this Article IX that the selling
Holders shall furnish to the Borrower any and all information reasonably
requested by the Borrower, its officers, directors, employees, counsel,
agents or representatives, the underwriter or underwriters, if any, and the
SEC or any other Governmental Authority, including but not limited to: (I)
such information regarding themselves, the Registrable Securities held by
them, and the intended method of disposition of such securities, as shall
be required to effect the registration of their Registrable Securities, and
(ii) the identity of and compensation to be paid to any proposed
underwriter or broker-dealer to be employed in connection therewith.
Section 9.05. Expenses of Demand Registration.
Except as set forth below, all expenses, other than underwriting
discounts and commissions incurred in connection with not more than two
demand registrations pursuant to Section 9.01 above, including, without
limitation, all registration, filing and qualification fees, printers' and
accounting fees, fees and disbursements of counsel for the Borrower, and
the reasonable fees and disbursements of one counsel for the selling
Holders, shall be borne by the Borrower; provided, however, that the
Borrower shall not be required to pay for any expenses of any registration
proceeding which was commenced prior to July 12, 1998, pursuant to Section
9.01, or if the registration request is subsequently withdrawn at the
written request of the Holders of the majority of the Registrable
Securities subject to such registration.
Section 9.06. Expenses of Piggy-Back Registration.
Each Holder shall bear and pay all commissions and discounts
attributable to the inclusion of such Holder's Registrable Securities in
any registration, filing or qualification of Registrable Securities
pursuant to Section 9.02 and the reasonable fees and disbursements of the
counsel for the selling Holders.
Section 9.07. Indemnification Regarding Registration Rights.
If any Registrable Securities are included in a registration
statement under this Article IX:
(a) To the extent permitted by law, the Borrower will indemnify and
hold harmless each Holder, the officers and directors of each Holder, any
underwriter (as defined in the 1933 Act) for such Holder and each person,
if any, who controls such Holder or underwriter within the meaning of the
1933 Act or the 1934 Act, against any losses, claims, damages, liabilities
(joint or several) or any legal or other costs and expenses reasonably
incurred by them in connection with investigating or defending any such
loss, claim, damage, liability or action to which they may become subject
under the 1933 Act, the 1934 Act or other federal or state law, insofar as
such losses, claims, damages, costs, expenses or liabilities (or actions in
respect thereof) arise out of or are based upon any of the following
statements, omissions or violations (collectively a "Violation"): (I) any
untrue statement or alleged untrue statement of a material fact with
respect to the Borrower or its securities contained in such registration
statement, including any preliminary prospectus or final prospectus
contained therein or any amendments or supplements therein; (ii) the
omission or alleged omission to state therein a material fact with respect
to the Borrower or its securities required to be stated therein or
necessary to make the statements therein not misleading; or (iii) any
violation or alleged violation by the Borrower of the 1933 Act, the 1934
Act, any federal or state securities law or any rule or regulation
promulgated under the 1933 Act, the 1934 Act or any state securities law.
Notwithstanding the foregoing, the indemnity agreement contained in this
Section 9.07(a) shall not apply and the Borrower shall not be liable (I) in
any such case for any such loss, claim, damage, costs, expenses, liability
or action to the extent that it arises out of or is based upon a violation
which occurs in reliance upon and in conformity with written information
furnished expressly for use in connection with such registration by any
such Holder, underwriter or controlling person, or (ii) for amounts paid in
settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the prior written consent of the Borrower,
which consent shall not be unreasonably withheld.
(b) To the extent permitted by law, each Holder who participates in a
registration pursuant to the terms and conditions of this Loan Agreement
shall indemnify and hold harmless the Borrower, each of its directors and
officers who have signed the registration statement, each Person, if any,
who controls the Borrower within the meaning of the 1933 Act or the 1934
Act, each of the Borrower's employees, agents, counsel and representatives,
any underwriter and any other Holder selling securities in such
registration statement, or any of its directors or officers, or any person
who controls such Holder, against any losses, claims, damages, costs,
expenses, liabilities (joint or several) to which the Borrower or any such
director, officer, controlling person employee, agent, representative,
underwriter, or other such Holder, or director, officer or controlling
person thereof, may become subject, under the 1933 Act, the 1934 Act or
other federal or state law, only insofar as such losses, claims, damages,
costs, expenses or liabilities or actions in respect thereto arise out of
or are based upon any Violation, in each case to the extent and only to the
extent that such Violation occurs in reliance upon and in conformity with
written information furnished by such Holder expressly for use in
connection with such. Each such Holder will indemnify any legal or other
expenses reasonably incurred by the Borrower or any such director, officer,
employee, agent representative, controlling person, underwriter or other
Holder, or officer, director or of any controlling person thereof, in
connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the indemnity Agreement
contained in this Section 9.07(b) shall not apply to amounts paid in
settlement of any such loss, claim, damage, costs, expenses, liability or
action if such settlement is effected without the prior written consent of
the Holder, which consent shall not be unreasonably withheld.
(c) Promptly after receipt by an indemnified party under this Section
9.07 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect
thereof is to be made against any indemnifying party under this Section
9.07, deliver to the indemnifying party a written notice of the
commencement thereof and the indemnifying party shall have the right to
participate in, and, to the extent the indemnifying party so desires,
jointly with any other indemnifying party similarly noticed, to assure the
defense thereof with counsel mutually satisfactory to the parties;
provided, however, that an indemnified party shall have the right to retain
its own counsel, with the reasonable fees and expenses of such counsel to
be paid by the indemnifying party, if representation of such indemnified
party by the counsel retained by the indemnifying party would be
inappropriate due to actual or potential conflict of interests between such
indemnified party and any other party represented by such counsel in such
proceeding. The failure to deliver written notice to the indemnifying party
within a reasonable time of the commencement of any such action shall not
relieve the indemnifying party of its obligations under this Section 9.07,
except to the extent that the failure results in a failure of actual notice
to the indemnifying patty and such indemnifying party is materially
prejudiced in its ability to defend such action solely as a result of the
failure to give such notice.
(d) If the indemnification provided for in this Section 9.07 is
unavailable to an indemnified party under this Section in respect of any
losses, claims, damages, costs, expenses, liabilities or actions referred
to herein, then each indemnifying party, in lieu of indemnifying such
indemnified party, shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages, costs,
expenses, liabilities or actions in such proportion as is appropriate to
reflect the relative fault of the Borrower, on the one hand and of the
Holder, on the other, in connection with the Violation that resulted in
such losses, claims, damages, costs, expenses, liabilities or actions. The
relative fault of the Borrower, on the one hand, and of the Holder, on the
other, shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of the material fact or the omission to
state a material fact relates to information supplied by the Borrower or by
the Holder, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or
omission.
(e) The Borrower, on the one hand, and the Holders, on the other
hand, agree that it would not be just and equitable if contribution
pursuant to this Section 9.07 were determined by a pro rata allocation or
by any other method of allocation which does not take account of the
equitable considerations referred to in the immediately preceding
paragraph. The amount paid or payable by an indemnified party as a result
of losses, chains, damages, costs, expenses, liabilities and actions
referred to in the immediately preceding paragraph shall be deemed to
include, subject to the limitations set forth above, any reasonable legal
or other expenses incurred by such indemnified party in connection with
defending any such action or claim. Notwithstanding the provisions of this
Section 9.07, neither the Borrower nor the Holders shall be required to
contribute any amount in excess of the amount by which the total price at
which the securities were offered to the public exceeds the amount of any
damages which the Borrower or each such Holder has otherwise been required
to pay by reason of such Violation. No person guilty of fraudulent
misrepresentations (within the meaning of Section 11(f) of the 1933 Act)
shall be entitled to contribution from any person who is not guilty of such
fraudulent misrepresentation.
Section 9.08. Reports Under the 1934 Act.
So long as the Borrower has a class of securities registered pursuant
to Section 12 of the 1934 Act, with a view to making available to the
Holders the benefits of Rule 144 promulgated under the 1933 Act ("Rule
144") and any other rule or regulation of the SEC that may at any time
permit a Holder to sell securities of the Borrower to the public without
registration or pursuant to a registration on Form S-3, if applicable, the
Borrower agrees to use its best lawful efforts to:
(a) Make and keep public information available, as those terms are
understood and defined in SEC Rule 144, at all times;
(b) File with the SEC in a timely manner all reports and other
documents required of the Borrower under the 1933 Act and the 1934 Act;
(c) Use its best efforts to include all Common Stock covered by such
registration statement on NASDAQ if the Common Stock is then quoted on
NASDAQ; or list any Common Stock covered by such registration statement on
such securities exchange on which any of the Common Stock is then listed;
or, if the Common Stock is not then quoted on NASDAQ or listed on any
national securities exchange, use its best efforts to have such Common
Stock covered by such registration statement quoted on NASDAQ or, at the
option of the Borrower, listed on a national securities exchange; and
(d) Furnish to any Holder, so long as the Holder owns any Registrable
Securities, forthwith upon request a copy of the most recent annual or
quarterly report of the Borrower and such other SEC reports and documents
so filed by the Borrower, and (ii) such other information (but not any
opinion of counsel) as may be reasonably requested by any Holder seeking to
avail himself of any rule or regulation of the SEC which permits the
selling of any such securities without registration or pursuant to such
form.
Section 9.09. Assignment of Registration Rights.
(a) Subject to the terms and conditions of the Loan Agreement and the
Debentures, the right to cause the Borrower to register Registrable
Securities pursuant to this Loan Agreement may be assigned by Holder to any
transferee or assignee of such securities; provided that said transferee or
assignee is a transferee or assignee of at least ten percent (10%) of the
Registrable Securities and provided that the Borrower is, within a
reasonable time after such transfer, furnished with written notice of the
name and address of such transferee or assignee and the securities with
respect to which such registration rights are being assigned; and provided,
further, that such assignment shall be effective only if immediately
following such transfer the further disposition of such securities by the
transferee or assignee is restricted under the 1933 Act; it being the
intention that so long as Holder holds any Registrable Securities
hereunder, either Holder or its transferee or assignee of at least ten
percent may exercise the demand right to registration and piggy-back
registration rights hereunder. Other than as set forth above, the parties
hereto hereby agree that the registration rights hereunder shall not be
transferable or assigned and any contemplated transfer or assignment in
contravention of this Loan Agreement shall be deemed null and void and of
no effect whatsoever.
Section 9.10. Other Matters.
(a) Each Holder of Registrable Securities hereby agrees by
acquisition of such Registrable Securities that, with respect to each
offering of the Registrable Securities, whether each Holder is offering
such Registrable Securities in an underwritten or non-underwritten
offering, such Holder will comply with Rules 10b-2, 10b-6 and 10b-7 of the
1934 Act and such other or additional anti-manipulation rules then in
effect until such offering has been completed, and in respect of any non-
underwritten offering, in writing will inform the Borrower, any other
Holders who are selling shareholders, and any national securities exchange
upon which the securities of the Borrower are listed, that the Registrable
Securities have been sold and will, upon the Borrower's request, furnish
the distribution list of the Registrable Securities. In addition, upon the
request of the Borrower, each Holder will supply the Borrower with such
documents and information as the Borrower may reasonably request with
respect to the subject matter set forth and described in this Section 9.10.
(b) Each Holder of Registrable Securities hereby agrees by
acquisition of such Registrable Securities that, upon receipt of any notice
from the Borrower of the happening of any event which makes any statement
made in the registration statement, the prospectus or any document
incorporated therein by reference, untrue in any material respect or which
requires the making of any changes in the registration statement, the
prospectus or any document incorporated therein by reference, in order to
make the statements therein not misleading in any material respect, such
Holder shall forthwith discontinue disposition of Registrable Securities
under the prospectus related to the applicable registration statement until
such Holder's receipt of the copies of the supplemented or amended
prospectus, or until it is advised in writing by the Borrower that the use
of the prospectus may be resumed, and has received copies of any additional
or supplemental filings which are incorporated by reference in the
prospectus.
(c) The Borrower hereby agrees not to effect any public sale or other
distribution of its equity securities, or any securities convertible into
or exchangeable or exercisable for such equity securities, during the
period commencing on the 7th day prior to, and ending on the 120th day
(subject to extension as provided in Section 9.03 hereof) following the
effective date of any underwritten demand registration, other than pursuant
to Form S-8.
Section 9.11 Termination of Rights.
(a) The Holders' right to demand registration and to participate in a
Piggy-Back Registration, as granted to Holders under this Article IX, shall
terminate on June 30, 2006, or after the Holder has exercised two demand
registration rights at the expense of the Borrower as provided in Article
IX of this Loan Agreement, whichever is first to occur.
ARTICLE X - DIRECTORS AND BOARD MEETING ATTENDANCE
Section 10.01. Board Representation or Attendance by Lender Designee.
(a) Borrower herewith agrees that Lender shall have the right from
time to time, at Lender's option and so long as there is $100,000 face
value of Debentures that have not been fully converted or redeemed, to
designate a nominee to the Board of Directors of the Borrower, which
designee is subject to the written approval of Borrower which approval
shall not be unreasonably withheld. Borrower will, at all times, use its
reasonable best efforts to secure the election of such designee as a
Director of the Borrower, provided that such designee may, at his or her
option, elect to serve only as an "Advisory Director" with all the rights
of the Directors in regards to notice and attendance at meetings of the
Board of Directors, or committees thereof, but without voting rights. All
reasonable costs and expenses incurred by such Designee as a Director or
Advisory Director, or by Lender on behalf of such Designee, shall be
reimbursed by Borrower, consistent with payment policies accorded to other
independent directors.
(b) Further, though Lender may waive, from time to time, its right to
require a Board Designee, in such event it shall be entitled, at its own
expense, to have a representative of the Lender attend meetings of the
Board of Directors of the Borrower or of its Subsidiaries and such
representative may serve as an observer but without voice in matters under
discussion except as requested.
(c) Any such Designee or representative of the Lender shall, if
requested to do so, absent himself or herself from the meeting in the event
of, and so long as, the Directors are considering and acting on matters
pertaining to any rights or obligations of the Borrower or the Lender under
the Loan Agreement, the Debenture, or the other Loan Documents. Borrower
may provide Lender's designated representative with the same notice of
Board meetings and information as the Borrower shall provide to its duly
elected Directors.
Section 10.02. Borrower's Right to Request Lender to Provide an Advisor and
a Director Nominee.
(a) Lender herewith agrees that, so long as no Default or Event of
Default exists under the Loan Agreement and so long as the Debentures have
not been fully converted or redeemed, Lender will, at the written request
of Borrower, use its reasonable best efforts to provide, from time to time,
a person or persons, reasonably believed knowledgeable in investor
relations, such person or persons to be available to consult with, and
serve as advisor to, the Borrower about its communications with its
shareholders and with the general investment public. Further, if requested
by Borrower, at least one such person will be available to serve as a
nominee to the Board of Directors of the Borrower provided that such
nominee may, at his or her option, elect to serve only as an "Advisory
Director" with all the rights of the Directors in regards to notice and
attendance at meetings of the Board of Directors, or committees thereof,
but without voting rights. All reasonable costs and expenses incurred by
such person or persons, or by Lender on behalf of such persons, shall be
reimbursed by Borrower, consistent with payment policies accorded to other
independent directors.
Section 10.03. Limitation of Authority of Persons Designated as a Director
Nominee.
(a) It is provided and agreed that the actions and advice of any
person while serving pursuant to Section 10.01 or 10.02 as an advisor to
the Borrower or as a member of Borrower's Board of Directors, or while
serving solely as a representative of Lender in attendance at meetings of
the Board of Directors, shall be construed to be the actions and advice of
that person alone and not be construed as actions of the Lender as to any
notice of requirements or rights of Lender under this Loan Agreement, the
Debenture or the other Loan Documents; nor as actions of the Lender to
approve modifications, consents, amendments or waivers thereof; and all
such actions or notices shall be deemed actions or notices of the Lender
only when duly provided in writing and given in accordance with the
provisions of this Loan Agreement.
Section 10.04. Nonliability of Lender.
(a) The provisions of Section 10.01 and 10.02 notwithstanding, the
relationship between Borrower and Lender is, and shall at all times remain,
solely that of borrower and lender, and except for the Agreement to use its
best efforts to provide a knowledgeable advisor (whose actions and advice
shall be deemed to be solely advised by such person in an individual
capacity and not advice by Lender), Lender neither undertakes nor assumes
any responsibility or duty to the Borrower to review, inspect, supervise,
pass judgment upon, or inform Borrower of any matter in connection with any
phase of Borrower's business, operations, or condition, financial or
otherwise. Borrower shall rely entirely upon its own judgment with respect
to such matters, and any review, inspection, supervision, exercise of
judgment, or information supplied to Borrower by Lender, or any
representative or agent of Lender, in connection with any such matter is
for the protection of Lender, and neither Borrower nor any third party is
entitled to rely thereon.
ARTICLE XI AGENCY AND INTER LENDER PROVISIONS
Section 11.01. Lenders' Representations and Warranties to Other Lenders
Each Lender represents and warrant to the other Lender and the Agent:
(a) It is legal for it to make its portion of the Loan, and the
making of such portion of the Loan complies with laws applicable to it;
(b) It has made, without reliance upon any other Lender, its own
independent review (including any desired investigations and inspections)
of, and it accepts and approves, the loan, the Loan Agreement and the
associated documents and all other matters and information which it deems
pertinent. It acknowledges that the Loan Documents are a complete statement
of all understandings and respective rights and obligations between and
among Lenders and Borrowers regarding the Loan.
(c) No Lender has made any express or implied representation or
warranty to any other Lender with respect to this transaction.
(d) It will, independently and without reliance upon any other
Lender, and based upon such documents and information as it shall deem
appropriate at the time, continue to make its own credit analysis,
appraisals and decisions in taking or not taking action under this
Agreement, and will make such investigation as it deems necessary to inform
itself as to the Loan, the Loan Document, the Borrower and any collateral;
provided, however, nothing contained in this Section shall limit Agent's
obligation to provide the other Lenders with the information and documents
Agent is expressly required to deliver under this Agreement.
(e) The relationship of Lender is, and shall at all times remain,
solely that of a lender of its respective Loan portion. Lenders are not
partners or joint venturer in connection with the Loan.
Section 11.02. Waiver of Loan Provisions or Interest or Principal Payments
(a) So long as Renaissance III and Renaissance PLC each have not sold
or assigned any of the debentures issued to such Lender pursuant to this
Loan Agreement, consent of both Renaissance III and Renaissance PLC will be
required for the waiver of principal or interest payment and any
alterations thereto.
(b) If either Renaissance III and Renaissance PLC disposes of any
part of their Debentures, a waiver of an interest or principal payment and
any alterations thereto will require the consent of the holders of a
majority by dollar amount of the then outstanding Debentures issued
pursuant to this Loan Agreement.
Section 11.03. Agency
(a) Renaissance III and Renaissance PLC hereby designates and
appoints Renaissance Capital Group, Inc. ("Renaissance Group") as its Agent
under this Agreement and authorizes the Agent to take such action on its
behalf under the provisions of this Agreement and the other Loan Documents
and to exercise such powers as are set forth herein or therein, together
with such other powers as are reasonable incidental thereto. In performing
its functions and duties under this Agreement, the Agent shall act solely
as agent of the Lenders and does not assume and shall not be deemed to have
assumed any obligation toward or relationship of agency or trust with or
for any of the Borrowers. The Agent may perform any of its duties under
this Agreement, or under the other Loan Documents, by or through its agents
or employees.
(b) The Agent shall have no duties or responsibilities except those
expressly set forth in this Agreement or in the other Loan Documents.
Except as expressly provided herein, the duties of the Agent shall be
mechanical and administrative in nature. The Agent shall have and may use
its sole discretion with respect to exercising or refraining from taking
any actions which the Agent is expressly entitled to take or assert under
this Agreement and the other Loan Documents. The Agent shall not have by
reason of this Agreement a fiduciary relationship in respect of any Lender.
Nothing in this Agreement or any of the other Loan Documents, express or
implied, is intended to or shall be construed to impose upon the Agent any
obligations in respect of this Agreement or any of the other Loan Documents
except as expressly set forth herein or therein. If the Agent seeks the
consent or approval of the Majority in Interest to the taking or refraining
from taking any action hereunder, the Agent shall send notice thereof to
each Lender. The Agent shall promptly notify each Lender any time that the
Majority in Interest have instructed the Agent to act or refrain from
acting pursuant hereto. The Agent may employ agents, co-agents and
attorneys-in-fact and shall not be responsible to the Lenders or the
Borrower, except as to money or securities received by it or its authorized
agents, for the negligence or misconduct of any such agents or attorneys
fact selected by it with reasonable care.
(c) Neither the Agent nor any of its officers, directors, employees
or agents shall be liable to any Lender for any action taken or omitted by
it or any of them under this Agreement or under any of the other Loan
Documents, or in connection herewith or therewith, except that no Person
shall be relieved of any liability imposed by law, intentional tort or
gross negligence. The Agent shall not be responsible to any Lender for any
recitals, segments, representations or warranties contained in this
Agreement or for the execution, effectiveness, genuiness, validity,
enforceability, collectibility, or sufficiency of this Agreement or any of
the other Loan Documents or any of the transactions contemplated thereby,
or for the financial condition of any of the Borrowers. The Agent shall not
be required to make any inquiry concerning either the performance or
observance of any of the terms, provisions or conditions of this Agreement
or any of the other Loan Documents or the financial condition of any of the
Borrowers, or the existence or possible existence of any Default or Event
of Default. Agent shall give Lender notice of any Default or Event of
Default of which Agent has actual notice. The Agent may at any time request
instructions from the Lenders with respect to any actions or approvals
which by the terms of this Agreement or of any of the other Loan Documents
the Agent is permitted or required to take or to grant, and if such
instructions are promptly requested, the Agent shall be absolutely entitled
to refrain from taking any action or to withhold any approval and shall not
be under any liability whatsoever to any Person for remaining from any
action or withholding any approval under any of the Loan Documents until it
shall have received such instructions from the Majority in Interest.
Without limiting the foregoing, no Lender shall have any right of action
whatsoever against the Agent as a result of the Agent acting or retraining
from acting under this Agreement or any of the other Loan Documents in
accordance with the instructions of the Majority in Interest.
(d) The Agent shall be entitled to rely upon any written notices,
statements, certificates, orders or other documents or any telephone
message believed by it in good faith to be genuine and correct and to have
been signed, sent or made by the proper Person, and with respect to all
matters pertaining to this Agreement or any of the other Loan Documents and
its duties hereunder or thereunder, upon advice of counsel selected by it.
(e) To the extent the Agent is not reimbursed and indemnified by the
Borrowers, the Lenders will reimburse and indemnify the Agent for and
against any and all liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, expenses, advances or disbursements of
any kind or nature whatsoever which may be imposed on, incurred by or
asserted against the Agent in any way relating to or arising out of this
Agreement or any of the other Loan Documents or any action taken or omitted
by the Agent under this Agreement or any of the other Loan Documents, in
proportion to each Lender's pro rata share. The obligations of the Lenders
under this indemnification provision shall survive the payment of the Loans
and the termination of this Agreement.
(f)(I) The Agent is hereby authorized by each of the Borrowers and
the Lenders, from time to time, before or after the occurrence of an Event
of Default, to make such disbursements and ativances ("Agent Advances")
pursuant to this Agreement and the other Loan Documents which the Agent, in
its sole discretion, deems necessary or desirable to preserve or protect
the collateral, or any portion thereof, in order to enhance the likelihood
of, or maximize the amount of, repayment by the Borrowers, or any guarantor
or other Person, of the Loans and other Obligations or to pay any other
amount chargeable to any of the Borrowers pursuant to the terms of this
Agreement, including, without limitation, costs, fees and expenses. The
Agent Advances shall be repayable on demand and be secured by the
collateral.
(ii) The Loan will initially be unsecured; however, the Lenders
hereby irrevocably authorize the Agent, at its option and in its
discretion, to release any Lien granted to or held by the Agent for the
benefit of the secured creditors, upon any collateral (i) upon termination
or of the commitments and payments and satisfaction of all Loans, (whether
or not due) and all other Obligations which have matured and which the
Agent has been notified in writing are then due and payable, (ii)
constituting property being sold or disposed of if the applicable Borrower
certifies to the Agent that the sale or disposition is made in compliance
with this Agreement (and the Agent shall rely conclusively on any such
certificate, without further inquiry);
(iii) constituting property in which none of the Borrowers
owned any interest at the time the Lien was granted or at any time
thereafter; (iv) constituting property leased to any of the Borrowers under
a lease which has expired or been terminated in a transaction permitted
under this Agreement or which will expire imminently and which has not
been, and is not intended by such Borrower to be, renewed or extended; or
(v) if approved, authorized or ratified in writing by the Majority in
Interest. Upon request by the Agent or each of the Borrowers at any time,
the Lenders will confirm in writing the Agent's authority to release any
Lien granted or held by the Agent, for the benefit of the secured
creditors, upon particular types or items of collateral pursuant to this
section.
(iii) So long as no Event of Default has occurred and is then
continuing, upon receipt by the Agent of confirmation from the Majority In
Interest of its authority to release any Lien granted to or held by the
Agent, for the benefit of the secured creditors, upon particular types or
items of collateral, and upon at least five (5) business days prior written
request by each of the Borrowers, the Agent shall (and is hereby
irrevocable authorized by the Lenders to) execute such documents as may be
necessary to evidence the release of the Liens granted to the Agent, for
the benefit of the secured creditors, herein or pursuant hereto upon such
collateral; provident, however, that (i) the Agent shall not be required to
execute any such document on terms which, in the Agent's opinion, would
expose the Agent to liability or create any obligation or entail any
consequence other than the release shall not in any manner discharge,
affect or impair the Obligations or any Liens other than those expressly
being released, upon (or obligations of any of the Borrowers in respect of)
all interests retained by any Borrower, including (without limitation) the
proceeds of any sale, all of which shall continue to constitute part of the
collateral.
(iv) The Agent shall have no obligation whatsoever to any Lender to
assure the collateral exists or is owned by any Borrower or is cared for,
protected or insured or has been encumbered or that the Liens granted to
the Agent, for the benefit of the secured creditors, herein or pursuant
hereto have been properly or sufficiently or lawfullyy created, perfect,
protected or enforced or are entitled to any particular priority, or to
exercise at all or any particular manner or under any duty or care,
disclosure or fidelity, or to continue exercising, any of the rights,
authorities and powers granted or available to the pursuant to this section
or pursuant to any of the Loan Documents, it being understood and agreed
that in respect of the collateral, or any act, omission or event related
thereto, the Agent may act in any manner it may deem appropriate, in its
sole discretion, given the Agent's own interest in the collateral in its
capacity as one of the Lenders and that the Agent shall have no duty or
liability whatsoever to any Lender as to any of the foregoing.
ARTICLE XII - MISCELLANEOUS
Section 12.01. Strict Compliance.
(a) Any waiver by Lender of any breach or any term or condition of
this Loan Agreement or the other Loan Documents shall not be deemed a
waiver of any other breach, nor shall any failure to enforce any provision
of this Loan Agreement or the other Loan Documents operate as a waiver of
such provision or of any other provision, nor constitute nor be deemed a
waiver or release of the Borrower for anything arising out of, connect with
or based upon this Loan Agreement or the other Loan Documents.
Section 12.02. Waivers and Modifications.
(a) Any modifications, consents, amendments or waivers (herein
"Waivers") of any provision of this Loan Agreement, the Debentures or any
other Loan Documents, and any consent to departure therefrom, shall be
effective only if the same shall be in writing by Lender and then shall be
effective only in the specific instance and for the purpose for which
given. No notice or demand given in any case shall constitute a waiver of
the right to take other action in the same, similar or other instances
without such notice or demand. No failure to exercise, and no delay in
exercising, on the part of Lender, any right hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise thereof preclude
any other or further exercise thereof or the exercise of any other right.
The rights of Lender hereunder and under the other Loan Documents shall be
in addition to all other rights provided by law.
Section 12.03. Notices.
(a) Any notices or other communications required or permitted to be
given by this Loan Agreement or any other documents and instruments
referred to herein must be (i) given in writing and personally delivered,
mailed by prepaid certified, registered mail or sent by overnight service
such as Federal Express, or (ii) made by telex or facsimile transmission
delivered or transmitted to the party to whom such notice or communication
is direct, with confirmation thereupon given in writing and personally
delivered or mailed by prepaid certified or registered mail.
(b) Any notice to be mailed, sent or personally delivered shall be
mailed or delivered to the principal offices of the party to whom such
notice is addressed, as that address is specified herein on the signature
page hereof. Any such notice or other communication shall be deemed to
have been given (whether actually received or not) on the day it is mailed,
postage prepaid, or sent by overnight service or personally delivered or,
if transmitted by telex or facsimile transmission, on the day that such
notice is transmitted; provided, however, that any notice by telex or
facsimile transmission, received by any Borrower or Lender after 4:00 p.m.,
Standard Time at the recipient's address, on any day, shall be deemed to
have been given on the next succeeding day. Any party may change its
address for purposes of this Loan Agreement by mailing notice of such
change to the other parties pursuant to this Section 12.03.
Section 12.04. Choice of Forum; Consent to Service of Process and
Jurisdiction.
(a) Any suit, action or proceeding against the Borrower with respect
to this Loan Agreement, the Debentures or any judgment entered by any court
in respect thereof, may be brought in the courts of the State of Texas,
County of Dallas, or in the United States courts located in the State of
Texas as in its sole discretion may elect, and Borrower hereby submits to
the nonexclusive jurisdiction of such courts for the purpose of any such
suit, action or proceeding. Borrower hereby agrees that service of all
suits, process and summonses in any such suit, action or proceeding brought
in the State of Texas may be brought upon, and Borrower hereby irrevocably
appoints, the CT Corporation, Dallas, Texas, as its true and lawful
attorneys in fact in the name, place and stead of Borrower to accept such
service of any and all such writs, process and summonses. Borrower hereby
irrevocably waives any objections which it may now or hereafter have to the
laying of venue of any suit, action or proceeding arising out of or
relating to this Loan Agreement or any Debenture brought in the courts
located in the State of Texas, County of Dallas, and hereby further
irrevocably waives any claim that any such suit, action or proceeding
brought in any such court has been brought in any inconvenient forum.
Section 12.05. Arbitration
(a) Upon the demand of the Lender or Borrower (collectively the
"parties"), made before the institution of any judicial proceeding or not
more than 60 days after service of a complaint, third party complaint,
crossclaim or counterclaim or any answer thereto or any amendment to any of
the above, any Dispute (as defined below) shall be resolved by binding
arbitration in accordance with the terms of this arbitration clause. A
"Dispute" shall include any action, dispute, claim, or controversy of any
kind, whether founded in contract, tort, statutory or common law, equity,
or otherwise, now existing or hereafter occurring between the parties
arising out of, pertaining to or in connection with this Agreement, any
document evidencing, creating, governing, or securing any indebtedness
guaranteed pursuant to the terms hereof, or any related Agreements,
documents, or instruments (the "Documents"). The parties understand that by
this Agreement they have decided that the Disputes may be submitted to
arbitration rather that being decided through litigation in court before a
judge or jury and that once decided by an arbitrator the claims involved
cannot later be brought, filed, or pursued in court. If Borrower shall fail
to pay (or shall state in writing an intention not to pay or its inability
to pay), not later than ten (10) days after the due date, any installment
of interest on or principal of, any Debenture or any fee, expense or other
payment required hereunder, Lender may, at its sole option, enforce its
rights outside the arbitration provision found in this Section 12.05 or any
Debenture.
(b) Arbitrations conducted pursuant to this Agreement, including
selection of arbitrators, shall be administered by the American Arbitration
Association ("Administrator") pursuant to the Commercial Arbitration rules
of the Administrator. Arbitrations conducted pursuant to the terms hereof
shall be governed by the provisions of the Federal Arbitration Act (Title 9
of the United States Code), and to the extent the foregoing are
inapplicable, unenforceable or invalid, the laws of the State of Texas.
Judgment upon any award rendered hereunder may be entered in any court
having jurisdiction; provided, however, that nothing contained herein shall
be deemed to be a waiver by any party that is a bank of the protections
afforded to it under 12 U.S.C. 91 or similar governing state law. Any party
who fails to submit to binding arbitration following a lawful demand by the
opposing patty shall bear all costs and expenses, including reasonable
attorney's fees, incurred by the opposing party in compelling arbitration
of any Dispute.
(c) No provision of, nor the exercise of any rights under, this
arbitration clause shall limit the right of any party to (i) foreclose
against any real or personal property collateral or other security, (ii)
exercise self-help remedies (including repossession and setoff rights) or
(iii) obtain provisional or ancillary remedies such as injunctive relief,
sequestration, attachment, replevin, garnishment, or the appointment of a
receiver from a court having jurisdiction. Such rights can be exercised at
any time except to the extent such action is contrary to a final award or
decision in any arbitration proceeding. The institution and maintenance of
an action as described above shall not constitute a waiver of the right of
any party, including the plaintiff, to submit the Dispute to arbitration,
nor render inapplicable the compulsory arbitration provisions hereof. Any
claim or Dispute related to exercise of any self-help, auxiliary or other
exercise of rights under this section shall be a Dispute hereunder.
(d) Arbitrator(s) shall resolve all Disputes in accordance with the
applicable substantive law of the State of Texas. Arbitrator(s) may make an
award of attorneys' fees and expenses if permitted by law or the Agreement
of the parties. All statutes of limitation applicable to any Dispute shall
apply to any proceeding in accordance with this arbitration clause. Any
arbitrator selected to act as the only arbitrator in a Dispute shall be
required to be a practicing attorney with not less than 5 years practice in
comthercial law in the State of Texas. With respect to a Dispute in which
the claims or amounts in controversy do not exceed five hundred thousand
dollars ($500,000), a single arbitrator shall be chosen and shall resolve
the Dispute. In such case the arbitrator shall have authority to render an
award up to but not to exceed five hundred thousand dollars ($500,000)
including all damages of any kind whatsoever, costs, fees and expenses.
Submission to a single arbitrator shall be a waiver of all parties' claims
to recover more than five hundred thousand dollars ($500,000~. A Dispute
involving claims or amounts in controversy exceeding five hundred thousand
dollars ($500,000) shall be decided by a majority vote of a panel of three
arbitrators ("Arbitration Panel"), one of whom must possess the
qualifications to sit as a single arbitrator in a Dispute decided by one
arbitrator. If the arbitration is consolidated with one conducted pursuant
to the terms of an Agreement between the Lender and the Borrower related to
the indebtedness guaranteed, then the Arbitration Panel shall be one which
theets the crated set forth between the Lender and Borrower. Arbitrator(s)
may, in the exercise of their discretion, at the written request of a
party, (i) consolidate in a single proceeding any multiple party claims
That are substantially identical and all claims arising out of a single
loan or series of loans including claims by or against borrower(s),
guarantors, sureties and/or owners of collateral if different from the
Borrower, and (ii) administer multiple arbitration claims as class actions
in accordance with Rule 23 of the Federal Rules of Civil Procedure. The
arbitrators shall be empowered to resolve any dispute regarding the terms
of this Agreement or the arbitrability of any Dispute or any claim that all
or any part (including this provision) is void or voidable but shall have
no power to change or alter the terms of this Agreement. The award of the
arbitrator(s) shall be in writing and shall specify the factual and legal
basis for the award.
(e) To the maximum extent practicable, the Administrator, the
arbitrator(s) and the parties shall take any action necessary to require
that an arbitration proceeding hereunder be concluded within 180 days of
the filing of the Dispute with the Administrator. The arbitrator(s) shall
be empowered to impose sanctions for any party's failure to proceed within
the times established herein. Arbitration proceedings hereunder shall be
conducted in Texas at a location determined by the Administrator. In any
such proceeding a party shall state as a counterclaim any claim which
arises out of the transaction or occurrence or is in any way relay to the
Documents which does not require the presence of a third party which could
not be joined as a party In We proceeding, The provisions of this
arbitration clause shall survive any termination, amendment, or expiration
of the Documents and repayment in full of sums owed to Lender by Borrower
unless the parties otherwise expressly agreed in writing. Each party agrees
to keep all Disputes and arbitration proceedings strictly confidential,
except for disclosures of information required in the ordinary course of
business of the parties or as required by applicable law or regulation.
Section 12.06. Invalid Provisions.
(a) If any provision of any Loan Document is held to be illegal,
invalid or unenforceable under present or future laws dunng the term of
this Loan Agreement, such provision shall be fully severable; such Loan
Document shall be construed and enforced as if such illegal, invalid or
unenforceable provision had never comprised a part of such Loan Document;
and the remaking provisions of such Loan Document shall remain in full
force and effect and shall not be affected by the illegal, invalid or
unenforceable provision or by its severance from such Loan Document.
Furthermore, in lieu of each such illegal, mvalid or unenforceable
provision shall be added as part of such Loan Document a provision mutually
agreeable to Borrower and Lender as similar in terms to such illegal,
invalid or unenforceable provision as may be possible and be legal, valid
and enforceable. In the event Borrower and Lender are unable to agree upon
a provision to be added to the Loan Document within a period of ten (10)
business days after a provision of the Loan Document is held to be illegal,
invalid or unenforceable, then a provision acceptable to independent
arbitrators, such to be selected in accordance wit the provisions of the
American Arbitration Association, as similar in terms to the illegal,
invalid or unenforceable provision as is possible and be legal, valid and
enforceable shall be added automatically to such Loan Document. In either
case, the effective date of the added provision shall be the date upon
which the prior provision was held to be illegal, invalid or unenforceable.
Section 12.07. Maximum Interest Rate.
(a) Regardless of any provision contained in any of the Loan
Documents, Lender shall never be entitled to receive, collect or apply as
interest on the Debentures any amount in excess of interest calculated at
the Maximum Rate, and, in the event that any Lender ever receives, collects
or applies as interest any such excess, the amount which would be excessive
interest shall be deemed to be a partial prepayment of principal and
treated hereunder as such; and, if the principal amount of the Obligation
is paid in full, any remaining excess shall forthwith be paid to Borrower.
In determining whether or not the interest paid or payable under any
specific contingency exceeds interest calculated at the Maximum Rate,
Borrower and Lender shall, to the maximum extent permitted under applicable
law, (i) characterize any non-principal payment as an expense, fee or
premium rather than as interest; (ii) exclude voluntary prepayments and the
effects thereof, and (iii) amortize, pro rate, allocate and spread, in
equal parts, the total amount of interest throughout the entire
contemplated term of the Debentures; provided that, if the Debentures are
paid and performed in full prior to the end of the full contemplated term
thereof, and if the interest received for the actual period of existence
thereof exceeds interest calculated at the Maximum Rate, Lender shall
refund to Borrower the amount of such excess or credit the amount of such
excess against the principal amount of the Debentures and, in such event,
Lender shall not be subject to any penalties provided by any laws for
contracting for, charging, taking, reserving or receiving interest in
excess of interest calculated at the Maximum Rate.
(b) "Maximum Rate" shall mean, on any day, the highest nonusurious
rate of interest (if any) permitted by applicable law on such day that at
any time, or from time to time, may be contracted for, taken, reserved,
charged or received on the Indebtedness evidenced by the Debentures under
the laws which are presently in effect of the United States of America and
the State of Texas or by the laws of any other jurisdiction which are or
may be applicable to Be holders of the Debentures and such hndebtedness or,
to the extent permitted by law, under such applicable laws of the United
States of America and the State of Texas or by the laws of any other
junsdiction which are or may be applicable to the holder of the Debentures
and which may hereafter be in effect and which allow a higher maximum
nonusurious interest rate than applicable laws now allow.
Section 12.08. Participations and Assignments of the Debentures.
(a) The Lender shall have the right to enter into a participation
agreement with any other Lender with respect to the Debentures, or to sell
all or any part of the Debentures, but any participation or sale shall not
affect the rights and duties of such Lender hereunder vis-a-vis Borrower.
In the event that all or any portion of this Loan shall be, at any time,
assigned, transferred or conveyed to other parties, any action, consent or
waiver (except for compromise or extension of maturity), to be given or
taken by Lender hereunder therein "Action"), shall be such action as taken
by the holders of a majority in amount of the Principal Amount of the
Debentures then outstanding, as such holders are recorded on the books of
the Borrower and represented by Lender's Agent as described in subsection
(b) below.
(b) Assignment or sale shall be effective, on the books of the
Borrower, only upon (i) endorsement of the Debenture, or part thereof, to
the proposed new holder, along with a current notation of the amount of
payments or installments received and net Principal Amount yet unfunded or
unpaid, and presentment of such Debenture to the Borrower for issue of a
replacement Debenture, or Debentures, in the name of the new holder; (ii) a
designation by the holders of a single Lender's Agent for Notice, such
agent to be the sole party to whom Borrower shah be required to provide
notice when notice to Lender is required hereunder and who shall be the
sole party authorized to represent Lender in regard to modification or
waivers under the Debenture, the Loan Agreement, or other Loan Documents;
and (iii) delivery of an opinion of counsel, reasonably satisfactory to
Borrower, that transfer shall not require registration or qualification
under applicable state or federal securities laws.
(c) So long as the Borrower is not in default hereunder, the Lender
shall not sell or assign an interest in the Debentures or rights under the
Loan Agreement to any Person that the Borrower reasonably identifies to
Lender as being engaged as a competitor.
Section 12.09 Confidentiality..
(a) All financial reports or information which are furnished to
Lender, or its director designee or other representatives, pursuant to this
Loan Agreement or pursuant to the Debentures or other Loan Documents shall
be treated as confidential unless and to the extent that such information
has been otherwise disclosed by the Borrower, but nothing herein contained
shall limit or impair Lender's right to disclose such reports to any
appropriate Governmental Authority, or to use such information to the
extent pertinent to an evaluation of the Obligation, or to enforce
compliance with the terms and conditions of this Loan Agreement, or to take
any lawful action which Lender deems necessary to protect its interests
under this Loan Agreement.
(b) Lender, its director designees, and agents shall use their
reasonable best efforts to protect and preserve the confidentiality of such
information except for such disclosure as shall be required for compliance
by Lender or its director designees with SEC reporting requirements or
otherwise as a matter of law. The provisions of Section 5.01(a)(1) and (6)
notwithstanding, Borrower may refuse to provide information as required
pursuant thereto to an assignee or successor in interest to the Lender
unless and until such assignee or successor shall have executed an
Agreement to maintain the confidentiality of the information as provided
herein.
Section 12.10. Binding Effect.
(a) The Loan Documents shall be binding upon and inure to the benefit
of Borrower and Lender and their respective successors, assigns and legal
representatives; provided, however, that Borrower may not, without the
prior written consent of Lender, assign any rights, powers, duties or
obligations thereunder.
Section 12.11. No Third Party Beneficiary.
(a) The parties do not intend the benefits of this Loan Agreement to
inure to any third party, nor shall is Loan Agreement be construed to make
or render Lender liable to any materialman, supplier, contractor,
subcontractor, purchaser or lessee of any property owned by Borrower, or
for debts or claims accruing to any such persons against Borrower.
Notwithstanding anything contained herein or in the Debentures, or any
other Loan Document, no conduct by any or all of the parties hereto, before
or after signing this Loan Agreement nor any other Loan Document, shall be
construed as creating any right, claim or cause of action against Lender,
or any of its officers, directors, agents or employees, in favor of any
materialman, supplier, contractor, subcontractor, purchaser or lessee of
any property owed by Borrower, nor to any other person or entity other than
Borrower.
Section 12.12. Entirety.
(a) This Loan Agreement and the Debentures and the other Loan
Documents issued pursuant thereto contain the entire Agreement between the
parties and supersede all prior Agreements and understandings, if any,
relating to the subject matter hereof and thereof.
Section 12.13. Headings.
(a) Section headings are for convenience of reference only and,
except as a means of identification of reference, shall in no way affect
the interpretation of this Loan Agreement.
Section 12.14. Survival.
(a) All representations and warranties made by Borrower herein shall
survive delivery of the Debentures and the making of the Loans.
Section 12.15. Multiple Counterparts.
(a) This Loan Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
Agreement, and any of the parties hereto may execute this Loan Agreement by
signing any such counterpart.
Section 12.16. GOVERNING LAW.
(a) THIS LOAN AGREEMENT HAS BEEN PREPARED, IS BEING EXECUTED AND
DELIVERED, AND IS INTENDED TO BE PERFORMED IN THE STATE OF TEXAS, AND THE
SUBSTANTIVE LAWS OF SUCH STATE AND THE APPLICABLE FEDERAL LAWS OF THE
UNITED STATES OF AMERICA SHALL GOVERN THE VALIDITY, CONSTRUCTION,
ENFORCEMENT AND INTERPRETATION OF THIS LOAN AGREEMENT AND ALL OF THE OTHER
LOAN DOCUMENTS.
Section 12.17 Reference to Borrower.
(a) The term Borrower shall mean Contour Medical, Inc., Contour
Fabricators, Inc., Contour Fabricators of Florida, Inc., and/or AmeriDyne
Corporation, where the context of the Agreement makes such other reference
appropriate. (signature page follows)
In WITNESS WHEREOF, the undersigned has caused this Loan Agreement to
be executed, sealed, and delivered, as of the day and year first above
written.
Address for Notice: CO-BORROWER
Contour Medical, Inc.
By: /s/ Donald F. Fox
Donald F. Fox, President
Attest by:
/s/ Philip M. Rees
Philip M. Rees, Secretary
Address for Notice: CO-BORROWER
Contour Fabricators, Inc.
By: /s/ Donald F. Fox
Donald F. Fox, President
Attest by:
/s/ Philip M. Rees
Philip M. Rees, Secretary
Address for Notice: CO-BORROWER
Contour Fabricators of Florida, Inc.
By: /s/ Donald F. Fox
Donald F. Fox, President
Attest by:
/s/ Philip M. Rees
Philip M. Rees, Secretary
CO-BORROWER
Address for Notice: AmeriDyne Corporation
By: /s/ Donald F. Fox
Donald F. Fox, President
Attest by:
/s/ Philip M. Rees
Philip M. Rees, Secretary
LENDER
Address for Notice: Renaissance US Growth & Income Trust
PLC
8080 Norm Central Expressway,
Suite 210/LB59
Dallas, Texas 75206 By:/s/ Russell Cleveland
(214) 891-8294 Vance M. Angola, Vice President
Fax: (214) 891-8200
Attest by:
/s/ Elroy S. Roelby
Title: Assistant Secretary
LENDER
Address for Notice:
80O North Central Expressway, Renaissance Capital Growth & Income
Fund
Suite 210/LB59 III, Inc.
Dallas, Texas 75206
(214) 891-8294 By: /s/ Russell Cleveland
Fax: (214) 891-8200 Vance M. Angola, Vice President
Attest by:
/s/ Elroy S. Roelby
Title: Secretary
[DESCRIPTION] LETTER AGREEMENT WITH RETIREMENT CARE ASSOCIATES, INC.
RETIREMENT CARE ASSOCIATES, INC.
6000 Lake Forest Drive
Suite 200
Atlanta, Georgia 30328
August 22, 1996
Mr. Donald F. Fox
Contour Medical, Inc.
3340 Scherer Drive
St. Petersburg, Florida 33716
Dear Don:
This letter agreement (the "Letter Agreement") confirms the
understandings and agreements by and between RETIREMENT CARE ASSOCIATES,
INC., a Colorado corporation (the "Company"), and CONTOUR MEDICAL, INC., a
Nevada corporation ("Contour"), in connection with the making and receiving
of Loans (as hereinafter defined) by the Company and Contour from time to
time. This Letter Agreement is, and is intended by the Company and Contour
to be, a binding agreement between the Company and Contour, and each of the
parties shall be liable to the other party hereto if it fails in the
performance or non-performance of any term or condition set forth herein.
1. The Company and Contour each agree that any sums advanced by
either party hereto to the other party hereto from and after the date
hereof (each such advance hereinafter referred to as a "Loan") shall be
governed by and enforced in accordance with the terms and conditions of
this Letter Agreement.
2. Subject to the terms and conditions set forth in this Letter
Agreement, the Company and Contour each agree that any Loan made by either
party hereto to the other party hereto shall contain the following terms:
(a) the proceeds of the Loan shall bear interest at the Prime Interest Rate
(as hereinafter defined) in effect as of the date of the advance of the
proceeds of such Loan; (b) all amounts of principal and accrued but unpaid
interest under the Loan shall be due and payable in full no later than
forty-five (45) days following the date of such Loan; and (c) such other
terms and conditions as may be mutually agreed to by the parties hereto at
the time such Loan is made. for purposes of this Letter Agreement, the
term "Prime Interest Rate" shall mean the annualized base rate of interest
from time to time charged on corporate loans by the United States' 30
largest lending institutions, as such rate is reported in the "Money Rates"
section of The Wall Street Journal (Eastern Edition).
3. The covenants contained herein shall bind, and the benefits
hereof shall inure to the benefit of, the respective successors and assigns
of the parties hereto.
4. This Letter Agreement contains the entire agreement between the
parties hereto relating to the matters provided herein, and no
representations, promises or agreements, oral or otherwise, not expressly
contained or incorporated by reference herein shall be binding on either
party hereto. The provisions of this Letter Agreement are severable and
the invalidity of one or more of the provisions hereof shall not have any
effect upon the validity or enforceability of any other provision hereof.
5. This Letter Agreement shall be governed by, construed and
enforced in accordance with the laws of the State of Georgia, without
giving effect to any principles of conflict of laws.
6. This Letter Agreement may be examined in one or more
counterparts, each of which shall be deemed an original and both of which
together shall constitute one and the same agreement.
Please confirm Contour's acceptance of and agreement to the foregoing
terms and conditions by executing and returning to the Company the enclosed
copy of this Letter Agreement.
Sincerely,
RETIREMENT CARE ASSOCIATES, INC.
By: /s/ Darrell C. Tucker
Its: Treasurer
AGREED TO AND ACCEPTED:
CONTOUR MEDICAL, INC.
By: /s/ Chris Brogdon
Its: Chairman of the Board
SUBSIDIARIES OF THE REGISTRANT
State of Other Names Under Which
Name of Subsidiary Incorporation Business is Conducted
-------------------------------- ------------- ----------------------
Contour Fabricators, Inc. Michigan None
Contour Fabricators of Florida, Inc. Florida None
AmeriDyne Corporation Tennessee None
Atlantic Medical Supply Company, Inc. Georgia None
Americare Health Services Corp. Delaware None
Americare Group Purchasing Corp. Delaware None
Facility Supply, Inc. Florida None
Gerimed, Inc. Florida None
Florida ACLF, Inc. Florida None
COOPERS & LYBRAND L.L.P.
a professional services firm
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement
of Contour Medical, Inc. on Form S-8 File No. 33-92110) of our report dated
September 16, 1996, on our audit of the consolidated financial statements
of Contour Medical, Inc. and Subsidiaries as of June 30, 1996 and for the
year then ended, which report is incorporated by reference in this Annual
Report on Form 10-K.
/s/ Coopers & Lybrand L.L.P.
Tampa, Florida
September 26, 1996
Coopers & Lybrand L.L.P. is a member of Coopers & Lybrand International,
a limited liability association incorporated in Switzerland.
CONSENT OF BDO SEIDMAN, LLP
CERTIFIED PUBLIC ACCOUNTANTS
Contour Medical, Inc.
St. Petersburg, Florida
We hereby consent to the incorporation by reference in this Registration
Statement of Contour Medical, Inc. on Form S-8 of our report dated August
18, 1995, except for the stock split discussed in Note 10 which is as of
March 15, 1996, relating to the consolidated financial statements of
Contour Medical, Inc.
and subsidiaries appearing in the Company's Annual Report on Form 10-K for
the year ended June 30, 1996.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Orlando, Florida
September 27, 1996
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Contour Medical, Inc. and Subsidiaries
We hereby consent to the incorporation of our reports appearing in the
Annual Report on Form 10-K of Contour Medical, Inc. and Subsidiaries for
the year ended June 30, 1996 in the Registration Statement on Form S-8,
File No. 33-92110, of Contour Medical, Inc. and Subsidiaries.
/s/ Pender Newkirk & Company
Certified Public Accountants
September 26, 1996
Pender Newkirk & Company
Certified Public Accountants
100 South Ashley Drive, Suite 1650
Tampa, Florida 33602
813/229-2321
813/229-2359 FAX
Member of Private Companies Practice Section and
SEC Practice Section of American Institute of
Certified Public Accountants
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
balance sheet and statements of operations found on pages F-4 and F-5 of
the Company's Form 10-K for the fiscal year ended June 30, 1996, and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 146,219
<SECURITIES> 0
<RECEIVABLES> 5,064,573
<ALLOWANCES> 0
<INVENTORY> 2,876,792
<CURRENT-ASSETS> 8,160,509
<PP&E> 1,223,195
<DEPRECIATION> 0
<TOTAL-ASSETS> 11,258,268
<CURRENT-LIABILITIES> 4,228,561
<BONDS> 0
0
2,528,000
<COMMON> 4,449
<OTHER-SE> 3,144,321
<TOTAL-LIABILITY-AND-EQUITY> 11,258,268
<SALES> 14,542,421
<TOTAL-REVENUES> 14,542,421
<CGS> 10,491,103
<TOTAL-COSTS> 10,491,103
<OTHER-EXPENSES> 3,185,620
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 170,951
<INCOME-PRETAX> 839,200
<INCOME-TAX> 312,166
<INCOME-CONTINUING> 527,034
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 527,034
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.09
</TABLE>
