<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule 14a-
6(e)(2))
[X ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
MEDICAL INNOVATIONS, INC.
(Name of Registrant as Specified In Its Charter)
MEDICAL INNOVATIONS, INC.
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2).
[ ] $500 per each party to the controversy pursuant to Exchange Act Rule 14a-
6(i)(3).
[X ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
COMMON STOCK, $.0075 PAR VALUE
2) Aggregate number of securities to which transaction applies:
15,954,880
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
$1.85; CASH MERGER CONSIDERATION
4) Proposed maximum aggregate value of transaction:
$29,516,528.00
5) Total fee paid:
$5,903.31
[X ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
$5903.31
2) Form, Schedule or Registration Statement No.:
Schedule 14A
3) Filing Party:
Registrant
4) Date Filed:
May 31, 1996
<PAGE>
MEDICAL INNOVATIONS, INC.
ONE RIVERWAY, SUITE 2300
HOUSTON, TEXAS 77056
JUNE 20, 1996
To Our Stockholders:
You are cordially invited to attend a Special Meeting of Stockholders (the
"Special Meeting") of Medical Innovations, Inc. ("Medical Innovations") to be
held at 10:00 a.m., local time, on July 11, 1996 at One Riverway, 20th Floor,
Houston, Texas.
At the Special Meeting, you will be asked to consider and vote upon a
proposal to adopt the Agreement and Plan of Merger dated as of May 15, 1996 (the
"Merger Agreement") and to approve the merger of a wholly owned subsidiary of
Horizon/CMS Healthcare Corporation ("Horizon") into Medical Innovations (the
"Merger") as contemplated by the Merger Agreement. Subject to the terms and
conditions of the Merger Agreement, at the effective time of the Merger (the
"Effective Time") each share of common stock, par value $.0075 per share, of
Medical Innovations ("Common Stock") outstanding immediately prior to the
Effective Time (other than shares held in treasury by Medical Innovations or
owned by Horizon, or any subsidiary of Medical Innovations or Horizon, and
shares held by stockholders of Medical Innovations who have validly exercised
and perfected appraisal rights under Delaware law) will be converted into the
right to receive $1.85 in cash.
The Board of Directors of Medical Innovations has carefully reviewed and
considered the terms and conditions of the proposed Merger. In addition, the
Board has received the written opinion dated as of May 15, 1996 of Montgomery
Securities, Medical Innovations' financial advisor, to the effect that the
consideration to be received by the holders of Common Stock pursuant to the
Merger was fair to such holders from a financial point of view as of such date.
The full text of Montgomery Securities' written opinion is included as Appendix
B to the Proxy Statement.
FOR THE REASONS SET FORTH IN THE ATTACHED PROXY STATEMENT, THE BOARD OF
DIRECTORS OF MEDICAL INNOVATIONS BELIEVES THAT THE MERGER IS FAIR TO AND IN THE
BEST INTERESTS OF MEDICAL INNOVATIONS AND ITS STOCKHOLDERS, AND RECOMMENDS THAT
STOCKHOLDERS VOTE "FOR" ADOPTION OF THE MERGER AGREEMENT AND APPROVAL OF THE
MERGER.
Details of the proposed Merger and other material information are included
in the attached Proxy Statement. Please review the Proxy Statement carefully.
The affirmative vote of the holders of a majority of the outstanding shares
of Common Stock is required to adopt the Merger Agreement and approve the
Merger, so failure to vote will have the same effect as a vote against the
Merger Agreement and the Merger. Accordingly, we urge you to complete, sign and
date the enclosed proxy or voting instruction card and return it in the enclosed
return envelope, whether or not you plan to attend the meeting. Your vote is
important regardless of the number of shares you own.
If you have any questions prior to the Special Meeting or need further
assistance, please call the undersigned at (713) 688-6600.
Sincerely,
/s/ MARK H. FISHER
------------------------------------------------
MARK H. FISHER
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
<PAGE>
MEDICAL INNOVATIONS, INC.
ONE RIVERWAY, SUITE 2300
HOUSTON, TEXAS 77056
___________
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON JULY 11, 1996
___________
To the Stockholders of Medical Innovations, Inc.:
A Special Meeting of Stockholders (the "Special Meeting") of Medical
Innovations, Inc., a Delaware corporation ("Medical Innovations"), will be held
on Thursday, July 11, 1996 at 10:00 a.m., local time, at One Riverway, 20th
Floor, Houston, Texas, for the following purposes:
1. To consider and vote upon a proposal to (a) adopt the Agreement and
Plan of Merger, dated as of May 15, 1996 (the "Merger Agreement"), among
Horizon/CMS Healthcare Corporation ("Horizon"), Horizon MI Corporation, a wholly
owned subsidiary of Horizon ("Merger Sub"), and Medical Innovations, and
(b) approve the merger of Merger Sub with and into Medical Innovations (the
"Merger") as contemplated by the Merger Agreement. Subject to the terms and
conditions of the Merger Agreement, at the effective time of the Merger (the
"Effective Time") each share of common stock, par value $.0075 per share, of
Medical Innovations ("Common Stock") outstanding immediately prior to the
Effective Time (other than shares held in treasury by Medical Innovations or
owned by Horizon, or any subsidiary of Medical Innovations or Horizon, and
shares held by stockholders of Medical Innovations who have validly exercised
and perfected appraisal rights under Delaware law) will be converted into the
right to receive $1.85 in cash. Upon completion of the Merger, Medical
Innovations will be a wholly owned subsidiary of Horizon, all as more fully set
forth in the attached Proxy Statement and in the Merger Agreement, a copy of
which is included as Appendix A thereto; and
2. To transact such other business as may properly come before the
Special Meeting or any adjournment thereof.
The Board of Directors has fixed the close of business on May 31, 1996, as
the record date (the "Record Date") for the determination of stockholders
entitled to notice of, and to vote at, the Special Meeting or any adjournment
thereof. Only holders of record of shares of Common Stock at the close of
business on the Record Date are entitled to notice of, and to vote at, the
Special Meeting.
In connection with the Merger, holders of Common Stock who comply with
certain requirements and procedures set forth in Section 262 of the Delaware
General Corporation Law (the "DGCL") may be entitled to assert certain
dissenters' rights of appraisal. A copy of Section 262 of the DGCL is included
as Appendix C to the attached Proxy Statement.
Your vote is important. The affirmative vote of the holders of a majority
of the outstanding shares of Common Stock is required for adoption of the Merger
Agreement and approval of the Merger. Even if you plan to attend the Special
Meeting in person, we request that you sign and return the enclosed proxy or
voting instruction card and thus ensure that your shares will be represented at
the Special Meeting if you are unable to attend. If you do attend the Special
Meeting and wish to vote in person, you may withdraw your proxy and vote in
person.
<PAGE>
PLEASE DO NOT SEND ANY CERTIFICATES FOR YOUR COMMON STOCK AT THIS TIME. You
will receive instructions regarding the surrender of your stock certificate(s)
and receive payment for your shares of Common Stock after the Effective Time.
By Order of the Board of Directors
/s/ J. WILLIAM WILSON
---------------------------------------------
J. WILLIAM WILSON
SECRETARY
Houston, Texas
June 20, 1996
<PAGE>
MEDICAL INNOVATIONS, INC.
ONE RIVERWAY, SUITE 2300
HOUSTON, TEXAS 77056
___________
PROXY STATEMENT
___________
This Proxy Statement relates to the proposed merger of Horizon MI
Corporation ("Merger Sub"), a Delaware corporation and wholly owned subsidiary
of Horizon/CMS Healthcare Corporation, a Delaware corporation ("Horizon"), with
and into Medical Innovations, Inc., a Delaware corporation ("Medical
Innovations"), pursuant to the Agreement and Plan of Merger dated as of May 15,
1996 among Horizon, Merger Sub and Medical Innovations (the "Merger Agreement").
The merger contemplated by the Merger Agreement is referred to herein as the
"Merger."
Subject to the terms and conditions of the Merger Agreement, at the
effective time of the Merger (the "Effective Time"), (i) each share of common
stock, par value $.0075 per share, of Medical Innovations ("Common Stock")
outstanding immediately prior to the Effective Time (other than shares held in
treasury by Medical Innovations or owned by Horizon, or any subsidiary of
Medical Innovations or Horizon, and shares held by stockholders of Medical
Innovations who have validly exercised and perfected appraisal rights under
Delaware law) will be converted into the right to receive $1.85 in cash, (ii)
Merger Sub will be merged with and into Medical Innovations, and (iii) Medical
Innovations will become a wholly owned subsidiary of Horizon.
This Proxy Statement is being furnished to holders of Common Stock in
connection with the solicitation of proxies by the Board of Directors of Medical
Innovations (the "Board") for use at a special meeting of stockholders of
Medical Innovations (the "Special Meeting") to be held on July 11, 1996. This
Proxy Statement and the accompanying forms of proxy are first being mailed to
stockholders of Medical Innovations on or about June 20, 1996.
At the Special Meeting, holders of Common Stock will be asked to adopt the
Merger Agreement and approve the Merger. THE BOARD OF DIRECTORS OF MEDICAL
INNOVATIONS HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND THE MERGER AND
UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THE ADOPTION OF THE MERGER AGREEMENT
AND APPROVAL OF THE MERGER.
NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT IN CONNECTION
WITH THE SOLICITATION OF PROXIES MADE HEREBY, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY MEDICAL INNOVATIONS OR ANY OTHER PERSON.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF
SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED
IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
<PAGE>
TABLE OF CONTENTS
PAGE
----
SUMMARY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
The Special Meeting. . . . . . . . . . . . . . . . . . . . . . . . . 3
The Parties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Interests of Certain Persons in the Merger . . . . . . . . . . . . . 4
The Merger and the Merger Agreement. . . . . . . . . . . . . . . . . 5
The Voting Agreement . . . . . . . . . . . . . . . . . . . . . . . . 7
Certain Federal Income Tax Consequences. . . . . . . . . . . . . . . 7
Rights of Dissenting Stockholders. . . . . . . . . . . . . . . . . . 8
Market Price Data. . . . . . . . . . . . . . . . . . . . . . . . . . 8
Dividend Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . 8
MEDICAL INNOVATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . 9
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Reimbursement for Services . . . . . . . . . . . . . . . . . . . . . 11
Program Education and Patient Base Expansion . . . . . . . . . . . . 12
Suppliers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Competition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Government Regulation. . . . . . . . . . . . . . . . . . . . . . . . 13
Employees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . 15
MARKET PRICE DATA; DIVIDENDS . . . . . . . . . . . . . . . . . . . . . 15
SELECTED HISTORICAL FINANCIAL INFORMATION. . . . . . . . . . . . . . . 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . 17
Results of Operations. . . . . . . . . . . . . . . . . . . . . . . . 17
Excess Cost Over Net Assets of Acquired Companies. . . . . . . . . . 22
Liquidity and Capital Resources. . . . . . . . . . . . . . . . . . . 22
THE SPECIAL MEETING. . . . . . . . . . . . . . . . . . . . . . . . . . 24
Date, Time and Place . . . . . . . . . . . . . . . . . . . . . . . . 24
Purposes of the Special Meeting. . . . . . . . . . . . . . . . . . . 24
Record Date and Outstanding Shares . . . . . . . . . . . . . . . . . 25
Voting and Revocation of Proxies . . . . . . . . . . . . . . . . . . 25
Vote Required. . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Solicitation of Proxies. . . . . . . . . . . . . . . . . . . . . . . 25
Other Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
General Description of the Merger. . . . . . . . . . . . . . . . . . 26
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Medical Innovations' Reasons for the Merger; Recommendation of
Board of Directors. . . . . . . . . . . . . . . . . . . . . . . . . 29
Opinion of Financial Advisor to Medical Innovations. . . . . . . . . 30
Certain Income Tax Consequences. . . . . . . . . . . . . . . . . . . 33
Governmental and Regulatory Approvals. . . . . . . . . . . . . . . . 34
Accounting Treatment . . . . . . . . . . . . . . . . . . . . . . . . 34
Existing Relationships with Horizon. . . . . . . . . . . . . . . . . 34
Rights of Dissenting Stockholders. . . . . . . . . . . . . . . . . . 34
CERTAIN TERMS OF THE MERGER AGREEMENT. . . . . . . . . . . . . . . . . 37
Effective Time of the Merger . . . . . . . . . . . . . . . . . . . . 37
Manner and Basis of Converting Shares. . . . . . . . . . . . . . . . 37
Warrants and Stock Options . . . . . . . . . . . . . . . . . . . . . 38
Conditions to the Merger . . . . . . . . . . . . . . . . . . . . . . 38
Representations and Warranties . . . . . . . . . . . . . . . . . . . 39
Certain Covenants; Conduct of Business Prior to the Merger . . . . . 39
No Solicitation. . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Certain Post-Merger Matters. . . . . . . . . . . . . . . . . . . . . 40
Termination or Amendment of the Merger Agreement . . . . . . . . . . 40
Expenses and Termination Fee . . . . . . . . . . . . . . . . . . . . 41
Indemnification. . . . . . . . . . . . . . . . . . . . . . . . . . . 42
THE VOTING AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . 43
BENEFICIAL OWNERSHIP BY CERTAIN STOCKHOLDERS AND
MANGEMENT OF MEDICAL INNOVATIONS. . . . . . . . . . . . . . . . . . 43
INDEPENDENT ACCOUNTANTS. . . . . . . . . . . . . . . . . . . . . . . . 45
STOCKHOLDER PROPOSALS. . . . . . . . . . . . . . . . . . . . . . . . . 45
AVAILABLE INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . 45
INDEX TO MEDICAL INNOVATIONS HISTORICAL
CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . F-1
APPENDICES:
A - Merger Agreement
B - Opinion of Montgomery Securities
C - Delaware General Corporation Law, Section 262 - Appraisal Rights
2
<PAGE>
SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN
THIS PROXY STATEMENT. REFERENCE IS MADE TO, AND THIS SUMMARY IS QUALIFIED IN ITS
ENTIRETY BY, THE MORE DETAILED INFORMATION CONTAINED IN OR INCORPORATED BY
REFERENCE IN THIS PROXY STATEMENT AND THE APPENDICES HERETO. STOCKHOLDERS OF
MEDICAL INNOVATIONS ARE URGED TO READ CAREFULLY THIS PROXY STATEMENT AND THE
APPENDICES HERETO IN THEIR ENTIRETY. AS USED IN THIS PROXY STATEMENT, UNLESS
OTHERWISE REQUIRED BY THE CONTEXT, THE TERM "HORIZON" MEANS HORIZON/CMS
HEALTHCARE CORPORATION AND ITS CONSOLIDATED SUBSIDIARIES AND THE TERM "MEDICAL
INNOVATIONS" MEANS MEDICAL INNOVATIONS, INC. AND ITS CONSOLIDATED SUBSIDIARIES.
CAPITALIZED TERMS USED HEREIN WITHOUT DEFINITION ARE, UNLESS OTHERWISE
INDICATED, DEFINED IN THE MERGER AGREEMENT AND USED HEREIN WITH SUCH MEANINGS.
THE SPECIAL MEETING
DATE, TIME AND PLACE. The Special Meeting will be held on Thursday, July 11,
1996 at One Riverway, 20th Floor, Houston, Texas, commencing at 10:00 a.m. local
time.
PURPOSES OF THE SPECIAL MEETING. At the Special Meeting, Medical Innovations
stockholders will consider and vote upon a proposal to adopt the Merger
Agreement and approve the Merger. The Medical Innovations stockholders also will
consider and vote upon such other matters as may properly come before the
Special Meeting.
RECORD DATE; SHARES ENTITLED TO VOTE. Only holders of record of shares of
Common Stock at the close of business on May 31, 1996 (the "Record Date") are
entitled to notice of and to vote at the Special Meeting. On such date, there
were 15,954,880 shares of Common Stock outstanding, each of which is entitled to
one vote on each matter to be acted upon at the Special Meeting.
QUORUM; VOTE REQUIRED. The presence, in person or by proxy, at the Special
Meeting of the holders of a majority of the shares of Common Stock outstanding
and entitled to vote at the Special Meeting is necessary to constitute a quorum
at the meeting. The affirmative vote of the holders of a majority of the shares
of Common Stock outstanding and entitled to vote thereon at the Special Meeting
is required under the General Corporation Law of the State of Delaware (the
"DGCL") to adopt the Merger Agreement and to approve the Merger. Abstentions and
broker non-votes will have the same effect as a vote against adoption of the
Merger Agreement and approval of the Merger.
SECURITY OWNERSHIP OF MANAGEMENT. As of the Record Date, the directors and
executive officers of Medical Innovations and their affiliates owned 5,802,319
shares of Common Stock, or approximately 36.4% of the shares entitled to vote
at the Special Meeting. Certain stockholders of Medical Innovations, including
all of the directors of Medical Innovations, have entered into a Voting
Agreement with Horizon dated May 15, 1996 (the "Voting Agreement") whereby they
have agreed, among other things, to vote all shares of Common Stock owned by
them for adoption of the Merger Agreement and approval of the Merger. These
stockholders also have agreed to vote their shares against any combination
proposal or other matters that may interfere with the Merger. As of the Record
Date, 6,855,285 shares of Common Stock, or approximately 43% of the shares
entitled to vote at the Special Meeting, were subject to the Voting Agreement.
See "The Voting Agreement."
THE PARTIES
MEDICAL INNOVATIONS. Medical Innovations provides specialized and high-tech home
health care services, home medical equipment, homemaker services, and
intravenous therapies. This full complement of home health care services is
designed to address the specific needs of patients in a variety of diagnostic
groups, including patients receiving treatment for cancer, diabetes, wounds,
AIDS and high risk pregnancies. Medical Innovations has a staff of full time
nursing, homemaker, pharmacy, and therapy personnel and access to carefully
screened registries of qualified clinicians, all of whom interact with
physicians to implement a customized plan of home health care for each patient.
Substantially all products used by Medical Innovations in its home infusion
therapies are prepared in pharmacies owned by Medical Innovations. Medical
Innovations also provides comprehensive home health care management and
consulting services to hospitals, skilled nursing facilities, and other
providers under contractual arrangements. See "Medical Innovations."
The principal offices of Medical Innovations are located at One Riverway,
Suite 2300, Houston, Texas 77056, telephone number (713) 688-6600.
3
<PAGE>
HORIZON. Horizon is a leading provider of post-acute health care services,
including specialty health care services and long-term care services,
principally in the Midwest, Southwest and Northeast regions of the United
States. Horizon provides specialty health care service through 37 acute
rehabilitation hospitals in 16 states (2,065 beds), 58 specialty hospitals and
subacute care units in 17 states (1,905 beds), 186 outpatient rehabilitation
clinics in 21 states and 2,618 rehabilitation therapy contracts in 38 states.
Horizon provides long-term care services through 121 owned or leased facilities
(15,047 beds) and 143 managed facilities (15,984 beds) in a total of 19 states.
Other medical services offered by Horizon include pharmacy, laboratory,
Alzheimer's care, physician management, non-invasive medical diagnostic, home
respiratory, home infusion therapy and hospice care.
Post-acute care is the provision of a continuum of care to patients for the
twelve month period following discharge from an acute care hospital. Post-acute
care services that Horizon provides include: (a) inpatient and outpatient
rehabilitative services; (b) subacute care; (c) long-term care; (d) contract
rehabilitation therapy services; (e) pharmacy and related services; (f) clinical
laboratory services; (g) non-invasive medical diagnostic services; (h) home
respiratory supplies and services; (i) home infusion supplies and services; and
(j) hospice care. Horizon's integrated post-acute health care system is intended
to provide continuity of care for its patients and enable payors to contract
with one provider to provide for virtually all of the patient's needs during the
period following discharge from an acute care facility.
The principal offices of Horizon are located at 6001 Indian School Road,
N.E., Suite 530, Albuquerque, New Mexico 87110, telephone number (505) 881-
4961.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Board with respect to the
Merger, Medical Innovations' stockholders should be aware that, under the
provisions of the Merger Agreement, each outstanding stock option to purchase
Common Stock granted under Medical Innovations' employee stock option plans,
whether vested or unvested ("Options"), and each Common Stock Warrant (as
defined in the Merger Agreement) will be terminated in exchange for cash
equal to the difference between the exercise price per share of Common Stock
purchasable under such Options and Common Stock Warrants and $1.85,
multiplied by the number of shares of Common Stock purchasable under the
Options and Common Stock Warrants. Arthur L. Rice, a director of Medical
Innovations and President of Hospital HomeCare Corporation (HHCC"), a
wholly-owned subsidiary of Medical Innovations, holds Options to purchase
100,000 shares of Common Stock at an exercise price of $1.6875 under the 1988
Stock Option Plan, which is currently 20% vested. Mr. Rice will receive
$16,250 in exchange for these Options. J. William Wilson, Secretary and
General Counsel of Medical Innovations, holds Options to purchase 50,000
shares of Common Stock at an exercise price of $1.50 under the 1993 Employee
Stock Option Plan, none of which is currently vested. Mr. Wilson will receive
$17,500 in exchange for these Options. David C. Horn, Vice President,
Treasurer and Chief Financial Officer of Medical Innovations, is the only
holder of Options under the 1993 Executive Security Stock Option Plan. Mr.
Horn holds Options to purchase 125,000 shares of Common Stock at an exercise
price of $0.50, which Options vest upon a "change in control" of Medical
Innovations or the termination of Mr. Horn without cause. Mr. Horn will
receive $168,750 in exchange for these Options. Mark H. Fisher, Chairman of
the Board, President and Chief Executive Officer of Medical Innovations,
holds Common Stock Warrants to purchase an aggregate of 483,774 shares of
Common Stock at various exercise prices. Mr. Fisher will receive $230,866 in
exchange for these Common Stock Warrants. Harvey R. Houck, Jr., a director of
Medical Innovations, holds Common Stock Warrants to purchase an aggregate of
1,211,046 shares of Common Stock at various exercise prices. Mr. Houck will
receive $517,229 in exchange for these Common Stock Warrants. See "Certain
Terms of the Merger Agreement -- Warrants and Stock Options." In considering
the recommendation of the Board with respect to the Merger, Medical
Innovations' stockholders should also be aware that the Merger Agreement
contains certain provisions with respect to indemnification of Medical
Innovations' directors and officers. See "Certain Terms of the Merger
Agreement -- Indemnification."
4
<PAGE>
THE MERGER AND THE MERGER AGREEMENT
TERMS OF THE MERGER. At the Effective Time, Merger Sub will merge with and into
Medical Innovations, with Medical Innovations being the surviving corporation
and becoming a wholly owned subsidiary of Horizon. Subject to the terms and
conditions of the Merger Agreement, at the Effective Time, each share of Common
Stock outstanding at the Effective Time will be converted into the right to
receive $1.85 in cash.
RECOMMENDATION OF BOARD OF DIRECTORS. THE BOARD HAS UNANIMOUSLY DETERMINED
THAT THE MERGER IS FAIR TO, AND IN THE BEST INTERESTS OF, THE STOCKHOLDERS OF
MEDICAL INNOVATIONS AND RECOMMENDS THAT THE STOCKHOLDERS OF MEDICAL
INNOVATIONS ADOPT THE MERGER AGREEMENT AND APPROVE THE MERGER. The Board
reached its conclusion after searching for a "strategic partner" during much
of the second half of 1995, and after Medical Innovations had provided
management services to Horizon for over seven months, after executing an
Agreement and Plan of Merger (the "Original Merger Agreement") with Horizon,
pursuant to which each share of Common Stock would have been converted into
shares of Horizon common stock, and after considering several alternatives to
the merger contemplated by the Original Merger Agreement, including a sale of
Medical Innovations' Medicare operations to Horizon. Based upon its business
judgment regarding trends in the health care industry, Medical Innovations'
acquisition plans, Medical Innovations' need for additional capital, and
other factors, the Board believed that it was not in Medical Innovations'
best interest to (i) attempt to proceed under the Original Merger Agreement,
(ii) proceed with negotiations for the sale of Medical Innovations' Medicare
operations to Horizon, or (iii) terminate the Original Merger Agreement
without entering into an alternative transaction with Horizon and,
subsequently, attempt to raise additional capital or attempt to find another
strategic partner and that the proposed Merger represented the best
opportunity available to maximize stockholder value. See "The Merger --
Background" and "-- Medical Innovations' Reasons for the Merger;
Recommendation of Board of Directors." In considering the recommendation of
the Board with respect to the Merger, Medical Innovations stockholders should
consider the information set forth in "Summary -- Interests of Certain
Persons in the Merger."
OPINION OF FINANCIAL ADVISOR TO MEDICAL INNOVATIONS. Montgomery Securities
("Montgomery") was retained by Medical Innovations to render an opinion with
respect to the fairness, from a financial point of view, to the holders of
Common Stock of the consideration to be received by such holders in connection
with the Merger. The full text of the written opinion of Montgomery, dated as of
May 15, 1996, which sets forth the assumptions made, matters considered and
limitations on the review undertaken is attached as Appendix B to this Proxy
Statement and should be read carefully in its entirety. Montgomery's opinion is
directed only to the fairness from a financial point of view of the
consideration to be received by holders of Common Stock pursuant to the Merger,
does not address any other aspect of the Merger or related transactions and does
not constitute a recommendation to any stockholder as to how such stockholder
should vote at the Special Meeting. See "The Merger -- Opinion of Financial
Advisor to Medical Innovations."
EFFECTIVE TIME OF THE MERGER. The Merger will become effective upon the filing
of a certificate of merger with the Secretary of State of the State of Delaware.
Assuming all conditions to the Merger contained in the Merger Agreement are
satisfied or, to the extent susceptible to waiver, waived prior thereto, it is
anticipated that the Effective Time of the Merger will occur as soon as
practicable following the Special Meeting.
CERTAIN CONDITIONS TO THE CONSUMMATION OF THE MERGER. The obligations of
Horizon and Medical Innovations to consummate the Merger are subject to the
satisfaction of certain conditions including the following: (i) adoption of the
Merger Agreement and approval of the Merger by the stockholders of Medical
Innovations; (ii) the absence of any order making the Merger illegal or
otherwise prohibiting consummation of the Merger; and (iii) the absence of
certain regulatory conditions. In addition, the obligations of each of Horizon
and Medical Innovations are subject to the accuracy of the representations and
warranties of the other party and to compliance with all agreements and
covenants on the part of the other party contained in the Merger Agreement.
Either Horizon or Medical Innovations may extend the time for performance of any
of the obligations of the other party or waive compliance with those obligations
at its discretion. See "Certain Terms of the Merger Agreement -- Conditions to
the Merger."
GOVERNMENTAL APPROVALS. On May 24, 1996, Horizon and Medical Innovations each
filed with the Federal Trade Commission (the "FTC") and the Antitrust Division
of the Department of Justice (the "DOJ") a notification and report, together
with requests for early termination of the waiting period, under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), with respect to the Merger. Expiration or early termination of the
applicable waiting period under the HSR Act is a condition to the obligations of
Horizon and Medical Innovations to consummate the Merger. On June 4, 1996,
the FTC and the DOJ granted early termination of the applicable waiting
period under the HSR Act. Medical Innovations has been advised by
its counsel that the Merger will not constitute a "change of ownership" of the
Medical Innovations "providers" for purposes of the Medicare program. However,
for Medicaid purposes, one or more of the state Medicaid programs may consider
this transaction to constitute a change of ownership and may require the
providers to file the necessary state notifications in connection with
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the changes of ownership. See "The Merger -- Governmental and Regulatory
Approvals and Matters." Medical Innovations is not aware of any other
governmental or regulatory approval required for consummation of the Merger,
other than compliance with applicable securities laws.
NO SOLICITATION. The Merger Agreement provides that Medical Innovations will
not initiate, solicit or encourage (including by way of furnishing information
or assistance) any inquiries or the making of any proposal relating to any
Competing Transaction (as defined below), or enter into discussions or
negotiations with any person in furtherance of a Competing Transaction, or agree
to, or endorse, a Competing Transaction; PROVIDED, HOWEVER, that the Board may
authorize its representatives to furnish information or enter into discussions
or negotiations with respect to an unsolicited bona fide proposal in writing
relating to a Competing Transaction for which financing, to the extent required,
is then committed (except that a financing commitment is not required for
purposes of furnishing information only), if, and only to the extent that, the
Board, after consultation with and based upon the advice of outside legal
counsel, determines in good faith that such action is required for the Board to
comply with its fiduciary duties to stockholders imposed by the DGCL. Medical
Innovations is required to provide Horizon written notice prior to taking any
such actions and to notify Horizon of any inquiries or proposals received by
Medical Innovations and copies of any written inquiry or proposal. Further, the
Board may take such actions as may be necessary to comply with Rule 14e-2 under
the Securities Exchange Act of 1934, as amended (the "Exchange Act") with regard
to a Competing Transaction. A "Competing Transaction" means any merger,
consolidation, share exchange, business combination or similar transaction
involving Medical Innovations or any of its Significant Subsidiaries (as defined
in the Merger Agreement) or the acquisition in any manner, directly or
indirectly, of a material interest in any voting securities of, or a material
equity interest in a substantial portion of the assets of, Medical Innovations
or any of its Significant Subsidiaries, other than the transactions contemplated
by the Merger Agreement. See "Certain Terms of the Merger Agreement -- No
Solicitation."
TERMINATION OF THE MERGER AGREEMENT. The Merger Agreement may be terminated at
any time prior to the Effective Time (i) by mutual consent of Horizon and
Medical Innovations or (ii) by either party if (a) the Merger has not been
consummated before September 30, 1996 (provided, however, that the Merger
Agreement may be extended by either Horizon or Medical Innovations to a date no
later than December 31, 1996 under certain circumstances), (b) any court or
governmental order shall have prohibited consummation of the Merger, (c) the
required approvals of the stockholders of Medical Innovations are not received
at the Special Meeting, or (d) if Medical Innovations accepts a bona fide
written proposal made by a third party relating to a Competing Transaction on
terms that the Board determines it cannot reject in favor of the Merger, based
on applicable fiduciary duties and the advice of counsel, and for which
financing, to the extent required, is then committed (a "Superior Proposal").
BY HORIZON. Horizon may terminate the Merger Agreement (i) upon a breach of any
material representation, warranty, covenant or agreement on the part of Medical
Innovations set forth in the Merger Agreement, or if any such representation or
warranty shall have become untrue, in either case such that Horizon's conditions
to closing of the Merger would not be satisfied, subject to a limited cure
period under certain circumstances, or (ii) if the Board withdraws, modifies or
changes its recommendation of the Merger in a manner adverse to Horizon or
recommends to the stockholders of Medical Innovations any Competing Transaction,
or resolves to do so, or (iii) if a tender or exchange offer for outstanding
shares of capital stock of Medical Innovations then representing more of the
combined power to vote generally for the election of directors than is subject
to the Voting Agreement as of the date of the Merger Agreement is commenced, and
the Board does not recommend that stockholders not tender their shares into such
offer, or (iv) if any person (other than Horizon or an affiliate thereof) shall
have acquired beneficial ownership or the right to acquire beneficial ownership
of outstanding shares of capital stock of Medical Innovations then representing
more of the combined power to vote generally for the election of directors than
is subject to the Voting Agreement as of the date of the Merger Agreement.
BY MEDICAL INNOVATIONS. Medical Innovations may terminate the Merger Agreement
upon a breach of any material representation, warranty, covenant or agreement on
the part of Horizon set forth in the Merger Agreement, or if any such
representation or warranty shall have become untrue, in either case such that
Medical Innovations' conditions to effecting the Merger would not be satisfied,
subject to a limited cure period under certain circumstances.
See "Certain Terms of the Merger Agreement -- Termination or Amendment of
the Merger Agreement."
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TERMINATION FEE. If the Merger Agreement is terminated upon the occurrence of
certain of the events described above, Medical Innovations will be required to
pay to Horizon a termination fee of $1 million. See "Certain Terms of the Merger
Agreement -- Expenses and Termination Fee."
WARRANTS AND STOCK OPTIONS. Medical Innovations has the obligation under the
Merger Agreement to take all actions necessary to cause each Option, whether
vested or unvested, and each Common Stock Warrant to be exercised, expire
pursuant to its terms or be terminated immediately prior to the Effective
Time in exchange for the right to receive cash equal to the product of (i)
the number of shares of Common Stock subject to such Option or Common Stock
Warrant, and (ii) the amount by which $1.85 exceeds the exercise price per
share of such Option or Common Stock Warrant.
INDEMNIFICATION. Horizon agrees in the Merger Agreement to indemnify and hold
harmless Medical Innovations and its directors and officers from and against
liabilities to which any indemnified party may become subject under the
Securities Act of 1933, as amended (the "Securities Act"), the Exchange Act or
otherwise, insofar as such liability arises out of or is based upon any untrue
statement or alleged untrue statement of a material fact relating to such
indemnifying party and contained in the Proxy Statement or arises out of or is
based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein with
respect to such indemnifying party not misleading or necessary to make the
statements in the Proxy Statement with respect to such indemnifying party, in
light of the circumstances under which they were made, not misleading.
The Merger Agreement provides that (i) for a period of five years after the
Effective Time, Medical Innovations will not amend its charter or bylaws to
reduce or limit the rights of indemnity afforded to the present and former
directors and officers of Medical Innovations thereunder or as to the ability of
Medical Innovations to indemnify such persons, or to hinder, delay or make more
difficult the exercise of such rights of indemnity or ability to indemnify and
(ii) Medical Innovations will at all times exercise the powers granted to it by
its charter and bylaws and by applicable law to indemnify to the fullest extent
possible the present and former directors, officers, employees and agents of
Medical Innovations against claims made against them arising from their service
in such capacities. The Merger Agreement also provides for Horizon to guarantee
payment of Medical Innovations' indemnification obligations under certain
circumstances.
THE VOTING AGREEMENT
Pursuant to the Voting Agreement, certain stockholders of Medical
Innovations, including all of the directors, have agreed, among other things, to
vote all shares of Common Stock owned by them in favor of the Merger Agreement.
As of the Record Date, 6,855,285 shares of Common Stock, or approximately 43% of
the shares entitled to vote at the Special Meeting, were subject to the Voting
Agreement. See "The Voting Agreement."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The receipt of cash for shares of Common Stock pursuant to the Merger or
pursuant to the exercise of appraisal rights with respect to shares of Common
Stock will be a taxable transaction for federal income tax purposes and may also
be a taxable transaction under state, local and other tax laws. In general, a
stockholder will recognize gain or loss for federal income tax purposes to the
extent of the difference between the cash received and the holder's basis in the
shares of Common Stock exchanged for cash. For a discussion of these and other
federal income tax considerations in connection with the Merger, see "The
Merger -- Certain Federal Income Tax Consequences." HOLDERS OF COMMON STOCK ARE
URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE TAX CONSEQUENCES OF THE MERGER
PARTICULAR TO THEM, INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL AND
OTHER TAX LAWS.
RIGHTS OF DISSENTING STOCKHOLDERS
In connection with the Merger, holders of Common Stock who comply with
certain requirements and procedures set forth in Section 262 of the DGCL may be
entitled to seek an appraisal of their shares and to obtain the "fair value" of
their shares. To exercise appraisal rights, holders of Common Stock must comply
strictly with the procedural requirements of
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Section 262 of the DGCL, a description of which is set forth under "The Merger -
- - Rights of Dissenting Stockholders," and the full text of which is included as
Appendix C hereto.
MARKET PRICE DATA
The Common Stock is traded on the Nasdaq SmallCap Market under the symbol
"MIXX." On February 12, 1996, the last trading day prior to the date of the
joint announcement by Horizon and Medical Innovations that they had executed
the Original Merger Agreement, the closing per share sales price of the
Common Stock, as reported by the Nasdaq SmallCap Market, was $1.625. On May
15, 1996, the last trading day prior to the release of the joint announcement
by Horizon and Medical Innovations that they had executed the Merger
Agreement, the closing per share sales price of the Common Stock, as reported
by the Nasdaq SmallCap Market, was $1.25. On June 14, 1996, the closing per
share sales price of the Common Stock, as reported by the Nasdaq SmallCap
Market, was $1.625. See "Market Price Data; Dividends." Stockholders are
urged to obtain current market quotations for the Common Stock.
DIVIDEND POLICY
Medical Innovations has never paid cash dividends on the Common Stock.
Medical Innovations presently intends to retain earnings to finance the
expansion of its business and, therefore, does not expect to pay any cash
dividends in the foreseeable future. Any determination as to the payment of
cash dividends will depend upon Medical Innovations' earnings, general
financial condition, capital needs and other factors deemed pertinent by the
Board, as well as any limitations imposed by Medical Innovations' lenders
under its financing arrangements. Medical Innovations' current credit
facilities prohibit the payment of dividends. See "Market Price Data;
Dividends."
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MEDICAL INNOVATIONS
INTRODUCTION
Medical Innovations provides specialized and high-tech home health care
services, home medical equipment, homemaker services, and intravenous therapies.
This full complement of home health care services is designed to address the
specific needs of patients in a variety of diagnostic groups, including patients
receiving treatment for cancer, diabetes, wounds, AIDS and high risk
pregnancies. Medical Innovations has a staff of full time nursing, homemaker,
pharmacy, and therapy personnel and access to carefully screened registries of
qualified clinicians, all of whom interact with physicians to implement a
customized plan of home health care for each patient. Substantially all products
used by Medical Innovations in its home infusion therapies are prepared in
pharmacies owned by Medical Innovations. Medical Innovations also provides
comprehensive home health care management and consulting services to hospitals,
skilled nursing facilities, and other providers under contractual arrangements.
Medical Innovations believes that its home health care business is part of
a growing industry. Pressure to reduce health care costs through shorter
institutional stays, combined with the escalating price of health care, the
aging of the American population and an increasing awareness by consumers that
quality health care can be administered at home, has resulted in rapid growth of
the market for home health care. Moreover, physicians are increasingly being
asked by patients and payors to oversee health care services at home, or in
other environments which are less costly than hospitalization. Medical
Innovations offers health care services in environments familiar to the patient,
with systems that assist the physician in maintaining control of medical
treatment, at a price that Medical Innovations believes compares favorably with
alternative means of treatment.
Medical Innovations' strategy has been to expand through acquisitions,
develop additional complementary health care services, increase the number of
patients served in its existing markets, introduce new therapies, and provide
management and consulting services to other providers of home health care. As
described below, Medical Innovations completed seven acquisitions in 1993
through 1995, and formed a management services division in late 1993. The
management services division was expanded in May 1995 by the merger with HHCC
and in September 1995 by the execution of a five-year contract to start-up and
manage the homecare operations of Horizon.
Effective January 1, 1993, Medical Innovations acquired substantially all
of the operating assets, except cash and accounts receivable, of Preferred
Pharmacy, Inc. and Preferred Homecare, Inc. (collectively, "Preferred"), a
provider of home infusion therapy and skilled homecare services in the Houston,
Texas area.
Effective May 1, 1993, Medical Innovations acquired all of the issued and
outstanding shares of common stock of Physician's Visiting Nurse Service, Inc.
("PVNS"), a provider of skilled homecare and homemaker services exclusively in
the state of Texas.
Effective September 1, 1993, Medical Innovations acquired all of the
outstanding common stock of Advance Healthcare, Inc. ("Advance"), a provider of
home intravenous therapies in the Richmond, Virginia area.
Effective February 11, 1994, Medical Innovations acquired certain assets of
STAT Specialty Home Health Care, Inc. ("STAT"), a provider of skilled homecare
services in the Texas Rio Grande Valley and Houston areas.
Effective April 1, 1994, Medical Innovations acquired all of the
outstanding common stock of PRN Home Health Care of Nevada, Inc. and affiliates
("PRN Nevada"), a provider of skilled homecare and homemaker services in the
state of Nevada.
On January 31, 1995, Medical Innovations acquired certain assets of
PharmaThera, Inc.'s Pensacola, Florida branch (the "PharmaThera Branch"), a
provider of infusion therapy services in the Pensacola, Florida area.
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On May 19, 1995, Medical Innovations acquired all of the outstanding common
stock of HHCC, a provider of homecare management and consulting services in
various states, in a "stock for stock" merger accounted for as a pooling of
interests.
As of December 31, 1995, Medical Innovations provided its home health care
services in Texas, Nevada, Virginia, and Florida and its homecare management
services in Texas, Nevada and various other states.
The principal offices of Medical Innovations are located at One Riverway,
Suite 2300, Houston, Texas 77056, telephone number (713) 688-6600.
SERVICES
Medical Innovations provides services through teams of clinicians,
including homemakers, home health aides, licensed practical nurses, licensed
registered nurses, registered pharmacists, physical therapists, occupational
therapists, speech therapists, and medical social workers. In most of Medical
Innovations' operations, its clinicians form tightly knit interdisciplinary
teams, each of which provides home health care to patients in a defined
geographic area. In connection with the administration of home infusion
therapies, Medical Innovations' pharmacies prepare the necessary
pharmaceuticals, such as nutritional solutions, antineoplastic chemotherapy
agents, antibiotics and other medications.
Medical Innovations has established written policies and procedures
prescribing standards for patient care and has established an internal quality
assurance program including chart audits, pharmacy surveys, patient interviews
and customer questionnaires. Medical Innovations conducts clinical and
operational audits of each branch office on a periodic basis to assure
compliance with these standards. The clinical staff actively participates with
the corporate staff in the quality assurance program.
To assist in maintaining high standards for quality care, Medical
Innovations has established medical advisory boards comprised of prominent
physicians that provide advice on specific medical issues. Medical Innovations
also consults from time to time with medical specialists on clinical procedures
and new therapies. In addition, Medical Innovations has sought and obtained
accreditation from the Joint Commission on Accreditation of Healthcare
Organizations (JCAHO) for most of its operations. Medical Innovations' health
care specialists and home nursing staff must meet experience and training
criteria. In accordance with state and federal regulations, each member of such
staff is tested and evaluated at the time of employment, prior to providing
patient care.
NURSING SERVICES. Medical Innovations offers a full line of intermittent and
extended services for both infusion and general nursing needs of patients.
Medical Innovations maintains an extensive registry of carefully screened staff,
including registered nurses, licensed vocational nurses, and home health aides.
Skilled nursing services include the following: (i) administering injections;
(ii) changing dressings and other care for wounds, incisions and stomas;
(iii) monitoring vital signs; (iv) catheter care; (v) drawing lab samples;
(vi) administering enteral nutrition therapy; and (vii) patient education.
Infusion nursing services include attended infusion drug administrations,
catheter placements and blood transfusions.
PERSONAL ASSISTANCE. Homemakers and home health aides provide hourly or
around-the-clock assistance with bathing, hygiene tasks, bed linen changes and
general cleaning of the patient's living area and other personal care needs.
PHYSICAL THERAPY. Physical therapists provide structured therapies for the
patient's improved ambulation, use of equipment, prostheses training, therapies
for the patient's increased bed mobility, prescribed exercise programs, and
needed therapy to improve activities of daily living.
OCCUPATIONAL THERAPY. Occupational therapists provide structured therapies for
the patient's improved upper body mobility, training in home for bath activities
and equipment, and increased independence in the patient's activities of daily
living.
SPEECH THERAPY. Speech therapists provide structured therapies for the
patient's increased communication skills and improved swallowing techniques
following a trauma.
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MEDICAL SOCIAL SERVICES. Medical Innovations employees counsel patients to
alleviate stresses encountered during illnesses by providing needed information
and support, as well as coordination of community services for the patient and
family.
EQUIPMENT AND ENTERAL THERAPY. Medical Innovations provides durable medical
equipment and medical supplies that are needed to complete therapy in the home,
coordinated by nurse managers and patient service representatives. Infusion
pumps and supplies are stocked, maintained and dispensed according to industry
standards in Medical Innovations' pharmacies. Patients receive comprehensive
training and counseling on all medical supplies provided as part of their
therapies.
SPECIALIZED HOME HEALTH CARE PROGRAMS. Medical Innovations develops special
programs to address specific patient needs, managed care companies and
physicians as an effective way to reduce health care costs and ensure quality
patient care.
FACILITY STAFFING. Medical Innovations currently provides nurse staffing
services to hospitals and other institutions in Virginia and Nevada.
MANAGEMENT SERVICES. Medical Innovations provides comprehensive homecare
management and consulting services to hospitals, rural health clinics, skilled
nursing facilities, and other providers under contractual arrangements.
REIMBURSEMENT FOR SERVICES
Patients, their insurers or other third-party payors, if applicable, are
billed directly by Medical Innovations for its products and services provided.
Nursing services are generally billed at a specified rate per visit or per hour
and pharmaceuticals are priced based on "per diem" rates or on an item-by-item
basis.
Virtually all of Medical Innovations' revenue is attributable to amounts
from third-party payors. Like other medical service providers, Medical
Innovations is subject to lengthy collection periods as a result of third-party
payment procedures. Consequently, management of accounts receivable through
effective billing and reimbursement procedures is critical to Medical
Innovations' financial success.
Before a patient begins home health care services, reimbursement
specialists contact the patient's third-party payor to determine eligibility
for, and the extent of, insurance coverage. The billing and reimbursement
process requires the collection, review and approval of a significant number of
documents. Certain payors such as Medicare, Medicaid, and some managed care
plans require very specific procedures and documentation prior to providing
reimbursement. Medical Innovations' reimbursement specialists work closely with
third-party payors and are directly responsible for assessing patient coverage,
ensuring the adequacy of documentation, submitting the documentation and claims
to the third-party payors, and expediting payment. Medical Innovations accepts
assignments of insurance benefits from the patient and, in most instances, the
third-party payors reimburse Medical Innovations directly.
Reimbursement coverage is provided through private sources, such as
insurance companies, self-insured employers and patients, as well as through
Medicare, Medicaid, and other government programs. During 1995, Medical
Innovations' payor mix was approximately 51% Medicare, 6% Medicaid, 20% other
government programs, and 23% private insurance and private pay. Private health
care insurance typically reimburses a higher amount for a given therapy and
provides a broader range of benefits than Medicare and most other government
programs. In addition, reimbursement from government payors is generally based
on the cost of services provided, which is subject to examination and
retroactive adjustment after reimbursement. Medical Innovations has not had a
material amount of claims refused by insurance companies or a material amount of
reimbursement by government payors adjusted downward upon final settlement. From
time to time, Medical Innovations enters into negotiated pricing arrangements
with third parties, including Health Maintenance Organizations (HMOs) and
Preferred Provider Organizations (PPOs). Such "managed care" arrangements are
becoming more prevalent in the health care industry. Medical Innovations will
continue to enter into such pricing arrangements to the extent such arrangements
provide for adequate reimbursement for services provided.
In addition to extensive, existing health care regulation, there have been
numerous initiatives on the federal and state levels for comprehensive reforms
affecting the payment for and availability of health care services. The United
States
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Congress is currently reviewing extensive Medicare reform, which may include
drastic changes to the health care industry as providers face pressure to
contain costs associated with Medicare. In addition, Medical Innovations
anticipates that both Congress and state legislatures will continue to review
comprehensive reform legislation that may effect fundamental changes in the
nation's health care system. The scope of any health care reform, whether at the
federal or state level, is uncertain. The profitability of Medical Innovations
could be adversely affected by any new government regulation limiting the levels
of reimbursement and by the continuing efforts of governmental and private
payors to independently reduce costs by lowering reimbursement rates, increasing
medical review of bills for services, and negotiating for reduced payment rates.
Currently, Medicare reimbursement for home health care nursing services and
supplies are under a cost-based model that does not necessarily encourage
efficiency or cost effectiveness. However, in the near future, Medical
Innovations believes it is likely that some form of a prospective reimbursement
system will be in place that will provide an incentive for home health care
companies to reduce costs while maintaining quality in their services. Medical
Innovations will continue to focus on reducing its costs and developing superior
patient outcomes in anticipation of such change.
Medical Innovations is compensated on a fixed fee basis, per patient visit
fee basis, or combination thereof, under its management and consulting services
contracts with hospitals, skilled nursing facilities, and other providers.
PROGRAM EDUCATION AND PATIENT BASE EXPANSION
Expanding the base of health care services to patients is highly dependent
upon the professional reputation of the service provider and its ability to
respond to client demands at competitive prices. Since patients are obtained
primarily through referrals from physicians and case managers, Medical
Innovations emphasizes establishing and maintaining professional relationships
with referral sources in the areas where Medical Innovations does business.
Medical Innovations maintains a program education staff which contacts
physicians, third party payors and other referral sources, explaining Medical
Innovations' comprehensive home health care program. Typically, a source will
make initial referrals to Medical Innovations on a trial basis after it becomes
familiar with the scope and quality of Medical Innovations' patient care
services. To obtain referrals, Medical Innovations emphasizes high quality,
reliability of patient service, and its geographic coverage area, plus detailed
reporting and consultation with referral sources.
Medical Innovations provides information about its services to a wide range
of patient referral sources, such as physicians, medical groups, hospital
discharge planners, prepaid health plans, nursing agencies, and case managers.
An important element of Medical Innovations' expansion is to provide information
to referral sources concerning the availability of home infusion care and the
cost-saving advantages of home therapy. Medical Innovations may also assist
referral sources in establishing procedures for the identification of candidates
for whom home health care may be appropriate. Primarily due to escalating
pressures to contain health care costs, third-party payors are participating to
a greater extent in decisions regarding health care alternatives and,
consequently, are becoming more important in the referral process. Medical
Innovations endeavors to ensure that its services and products are provided in a
manner and at a price which enables patients to utilize third-party
reimbursement through insurance and non-governmental subsidies.
Medical Innovations from time to time may enter into contractual and other
arrangements with medical professionals, institutions and third-party payors,
which may include arrangements with prepaid health plans, under which Medical
Innovations agrees to provide services to members of the organization at
negotiated prices.
SUPPLIERS
Medical Innovations purchases all pharmaceuticals and other materials and
buys or rents equipment required in connection with Medical Innovations'
business from a number of suppliers. Medical Innovations has not experienced,
and does not anticipate that it will experience, difficulty in purchasing such
materials or renting such equipment. In the event that its current suppliers
cease to sell materials or rent equipment to Medical Innovations, Medical
Innovations believes that alternate sources can readily be located to adequately
meet its needs at comparable prices.
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COMPETITION
The home health care business is highly fragmented, with a large number of
small providers serving local markets and a smaller number of larger regional
and national providers. Medical Innovations believes that the number of
providers is declining due to the continuing consolidation within the health
care industry. Medical Innovations competes with a large number of companies and
programs in most areas in which it provides services and products. These
competitors include major national and regional companies, hospital-based
programs, physician groups and nursing agencies. Medical Innovations believes
that the principal competitive factors are a reputation for quality service, a
range of services, experience, and price. Provider size is also becoming an
important factor as a result of the increased emphasis on managed care.
The competitive factors most important to attracting referral sources and
patients for Medical Innovations' home nursing and its other services and
products are name recognition in the marketplace, reputation for quality of
service, geographic area covered, and price, as well as provider size.
Medical Innovations' competitors in the home infusion business include a
large number of home health care providers of various sizes that offer
intravenous therapy as their only home health care product and service. The
development of alternative means of treating infections or administering
nutrition which do not involve infusion therapy also could adversely affect
Medical Innovations' home infusion business. Medical Innovations competes in
this market based upon a number of factors, including quality of care and
service, the ability to service the geographic area, the ability to develop and
maintain relationships with referral sources, and price.
Competition for Medical Innovations' management services division is
currently relatively limited as compared to its other services and products, but
could increase as other companies with home health care expertise enter this
market. In addition, the hospitals and other providers that are customers, or
potential customers of Medical Innovations' management services, may decide to
perform such management internally.
GOVERNMENT REGULATION
STATE REGULATION. Health care services are subject to substantial regulation by
the various states in which Medical Innovations conducts its business. In
particular, Medical Innovations' facilities are subject to state laws governing
pharmacies, home health agencies, nursing services, health planning and
professional ethics. The United States Food and Drug Administration and Drug
Enforcement Agency also require each facility containing a pharmacy to be
registered to dispense controlled substances. These regulations impose
substantive standards on the level of home health care provided, as well as
licensing and record keeping requirements. Such licenses generally require
annual renewal. The state governmental bodies that presently regulate Medical
Innovations are the state departments of health, the state boards of pharmacy
and the state departments of public safety. Additionally, Medical Innovations'
nurses and pharmacists are licensed by respective state agencies. The failure of
a facility to obtain, renew or maintain any required regulatory approvals or
licenses could adversely affect continued expansion of Medical Innovations and
could prevent such facility from offering its existing services to patients.
Some of the states in which Medical Innovations operates have laws that
prohibit certain direct and indirect payments or fee-splitting arrangements
between health care providers and referral sources that are designed to induce
or encourage the referral of patients to, or the recommendation of, a particular
provider for medical products and services. In addition, some states restrict
certain business relationships between physicians and pharmacies. Possible
sanctions for violation of these restrictions include loss of licensure and
civil and criminal penalties. These statutes vary from state to state, are often
vague and have seldom been interpreted by the courts or regulatory agencies.
Medical Innovations believes that it currently has no relationship which would
be considered to be in violation of these statutes in any material respect and
intends to structure referral arrangements, if any, with health care providers
in compliance with the relevant state statutes.
FEDERAL REGULATION. Medical Innovations has Medicare-certified home health care
agencies in Texas, Virginia and Nevada. HCFA promulgates, through its selected
intermediaries and administrators, certain controls and standards applicable to
the provision of services and reimbursement of those services to Medicare
patients. The business of Medical Innovations may
13
<PAGE>
be impacted by changes in these regulations. In addition, Medical Innovations is
subject to laws and regulations which relate to business corporations in
general, including antitrust laws, occupational health and safety laws and
environmental laws which, among other things, include the disposal,
transportation, and handling of hazardous and infectious wastes. None of these
laws and regulations have had a material adverse effect on Medical Innovations'
business or competitive position or required material capital expenditures on
the part of Medical Innovations.
Medical Innovations is also subject to Section 112B(b) of the Social
Security Act (commonly known as the Federal Illegal Remuneration Law), which
prohibits certain actions and practices deemed by Congress to be fraudulent or
abusive in nature. In particular, the Federal Illegal Remuneration Law prohibits
financial arrangements between providers of health care services to government
health care program (including Medicare and Medicaid) beneficiaries, such as
Medical Innovations, and potential referral sources, such as physicians, that
are designed to induce patient referrals to the providers. The Federal Illegal
Remuneration Law contains both civil and criminal sanctions. The prohibitions
contained in this statute have been broadly construed by federal courts and
administrative agencies charged with enforcement of the statute and apply to any
type of financial transaction between providers of health care services to
Medicare and Medicaid beneficiaries and referral sources. Medical Innovations
believes that it currently has no financial relationship which would be
considered to be in violation of the Federal Illegal Remuneration Law in any
material respects.
In addition to the Federal Illegal Remuneration Law, Section 1877 of the
Social Security Act (commonly known as the Stark Law) imposes certain
restrictions upon referring physicians and providers of certain designated
health services under the Medicare and Medicaid programs. Subject to certain
exceptions, the Stark Law provides that if a physician (or a family member of a
physician) has a financial relationship with an entity, (i) the physician may
not make a referral to the entity for the furnishing of designated health
services reimbursable under the Medicare and Medicaid programs, and (ii) the
entity may not bill for designated health services furnished pursuant to a
prohibited referral. Entities and physicians committing an act in violation of
the Stark Law are subject to civil monetary penalties and exclusion from the
Medicare and Medicaid programs. The designated health services include home
health services, outpatient prescription drugs, durable medical equipment, and
other services furnished through Medical Innovations' facilities. Financial
relationships subject to the Stark Law are defined to include compensation
arrangements, as well as investment interests such as those held by investors in
Medical Innovations. Thus, physicians who invest in Medical Innovations, or have
family members who invest in Medical Innovations, will be prohibited from
referring Medicare and Medicaid patients to facilities owned by Medical
Innovations. Medical Innovations intends to monitor interests held by physicians
or family members of physicians and comply with the referral prohibitions, as
well as structure all compensation arrangements with physicians, if any, in
compliance with the requirements of the Stark Law.
Medical Innovations believes that it is in material compliance with all
applicable laws and regulations. Medical Innovations is unable to accurately
predict what additional legislation, if any, may be enacted in the future
relating to Medical Innovations' business or the health care industry, including
third-party reimbursement, or what effect any such legislation may have on
Medical Innovations.
EMPLOYEES
At March 31, 1996, Medical Innovations employed approximately 690 full-time
executive, administrative, program education, technical and patient care
employees. Medical Innovations utilizes, on a part-time, hourly or per visit
basis, nurses, nurse aides and attendants. Medical Innovations maintains
registries of over 3,000 nurses, nurse aides and attendants in Texas, Virginia,
Nevada and Florida. To date, Medical Innovations has not experienced any
shortages in the availability of qualified nursing or other professionals.
PROPERTIES
As of March 31, 1996, Medical Innovations leased approximately 8,600 square
feet of space in Houston, Texas for its corporate offices. Medical Innovations
also leased office space for all of its other operations, including four
locations in Virginia, one location in Florida, four locations in Nevada, and
approximately thirty-five locations in Texas. These other facilities range in
size from approximately 380 square feet to approximately 18,000 square feet,
with the average size being approximately 3,400 square feet. Medical Innovations
believes that such facilities are generally adequate and suitable for its
14
<PAGE>
current operating activities. Medical Innovations does not, nor does it plan to,
own any real property. Aggregate monthly rent for Medical Innovations'
facilities was approximately $135,000 as of March 31, 1996.
LEGAL PROCEEDINGS
There are no material pending legal proceedings to which Medical
Innovations or any of its subsidiaries is a party or of which any of their
property is the subject.
MARKET PRICE DATA; DIVIDENDS
The following table sets forth the quarterly high and low sales prices for the
Common Stock:
<TABLE>
<CAPTION>
COMMON STOCK
MIXX
-----------------------
HIGH LOW
---- ----
<S> <C> <C>
FISCAL YEAR ENDED DECEMBER 31, 1994
First Quarter 2-1/2 1-11/16
Second Quarter 2-3/16 1-3/4
Third Quarter 2-11/32 1-9/16
Fourth Quarter 1-11/16 1-3/8
FISCAL YEAR ENDED DECEMBER 31, 1995
First Quarter 1-5/8 1-1/4
Second Quarter 1-7/8 1-1/4
Third Quarter 2-11/16 1-21/32
Fourth Quarter 2-7/32 1-13/32
FISCAL YEAR ENDED DECEMBER 31, 1996
First Quarter 2 1-1/8
Second Quarter (through June 14, 1996) 1-11/16 1-5/32
</TABLE>
The listed quotations reflect interdealer prices, without retail mark-up, mark-
down or commissions, and may not necessarily represent actual transactions.
Medical Innovations has never paid cash dividends on the Common Stock. Medical
Innovations presently intends to retain earnings to finance the expansion of its
business and, therefore, does not expect to pay any cash dividends in the
foreseeable future. Any determination as to the payment of cash dividends will
depend upon Medical Innovations' earnings, general financial condition, capital
needs and other factors deemed pertinent by the Board, as well as any
limitations imposed by Medical Innovations' lenders under its financing
arrangements. Medical Innovations' current credit facilities prohibit the
payment of dividends.
15
<PAGE>
SELECTED HISTORICAL FINANCIAL INFORMATION
The selected historical consolidated financial information of Medical
Innovations and subsidiaries shown below, insofar as it relates to each of the
years ended December 31, 1995, 1994 and 1993, has been derived from Medical
Innovations' consolidated financial statements audited by Price Waterhouse LLP,
independent accountants. The selected historical financial information of
Medical Innovations and subsidiaries shown below, insofar as it relates to the
three months ended March 31, 1996 and 1995, has been derived from Medical
Innovations' unaudited consolidated financial statements and includes, in the
opinion of Medical Innovations' management, all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly the information for
such periods. Results for such three month periods is not necessarily indicative
of the results which may be expected for the fiscal year as a whole. The
information set forth below is qualified by reference to and should be read in
conjunction with Medical Innovations' consolidated financial statements and
related notes included elsewhere in this Proxy Statement.
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
---------------------------------------------
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31, (1)
----------------- --------------------------------------------------------
1996 1995(1)(2) 1995(2) 1994(4) 1993(8) 1992 1991
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Revenues $16,484 $15,928 $69,389 $60,378 $34,577 $9,958 $9,288
Income (loss) from operations 522 565(3) 2,860(3) 1,786(5,6) 1,632(6) (369) 259
Net income (loss) 158 261 1,110 610(7) 742 (307) 113
Net income (loss) per common
and common equivalent share 0.01 0.02 0.07 0.04 0.05 (0.03) 0.01
Consolidated Balance Sheet Data
(at period end):
Total assets $27,959 $28,197 $29,090 $27,593 $20,841 $4,373 $3,614
Working capital 4,394 247 5,223 3,812 1,991 2,209 583
Long-term debt(9) 9,687 6,781 10,590 10,040 4,266 672 20
Total stockholders' equity(10) 9,530 8,338 9,339 8,071 7,785 2,111 1,138
Book value per common share 0.60 0.59
</TABLE>
___________________________________
(1) Restated to reflect the merger with HHCC in May 1995 which was
accounted for as a pooling of interests.
(2) Includes two months of results for the three months ended March 31,
1995 and eleven months of results for the year ended December 31, 1995 from
the PharmaThera Branch which was acquired on January 31, 1995.
(3) Includes a reduction of expenses of approximately $245,000 resulting
from the abatement of nonrecurring payroll tax penalties and interest
attributable to prior years.
(4) Includes approximately eleven months of results from STAT which was
acquired effective February 11, 1994, and nine months of results from PRN
Nevada which was acquired effective April 1, 1994.
(5) Includes income of approximately $533,000 relating to PVNS
preacquisition Medicare Cost Reports.
(6) Includes payroll tax penalties and employee injury costs of $151,000
in 1993 and $134,000 in 1994 which were recovered in 1994 pursuant to the
PVNS settlement.
16
<PAGE>
(7) Includes a pre-tax gain of $128,500 from sale of a minority interest
in the Company's Pensacola, Florida operation.
(8) Includes a full year of results of Preferred which was acquired
effective January 1, 1993, eight months of results from PVNS which was
acquired effective May 1, 1993, and four months of results of Advance which
was acquired effective September 1, 1993.
(9) Exclusive of obligation to the former owners of PVNS, which is
included in accrued liabilities - see notes to accompanying consolidated
financial statements of Medical Innovations.
(10) No Common Stock dividends were declared during any of the periods
presented.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table presents selected financial information for the periods
indicated as a percentage of revenues and sets forth the percentage dollar
increase (decrease) of such items from period to period.
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUES
--------------------------------------------
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
---------------- -------------------------
1996 1995 1995 1994 1993
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
REVENUES 100.0% 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------ ------
DIRECT PATIENT CARE 58.0% 62.0% 60.1% 62.5% 61.9%
SELLING, GENERAL & ADMINISTRATIVE 36.9% 33.6% 34.0% 32.7% 31.5%
PROVISION FOR DOUBTFUL ACCOUNTS 1.9% .9% 1.7% 1.6% 1.9%
MERGER TRANSACTION COSTS -- -- .1% .3% --
------ ------ ------ ------ ------
INCOME FROM OPERATIONS 3.2% 3.5% 4.1% 2.9% 4.7%
GAIN ON SALE OF MINORITY INTEREST -- -- -- .2% --
INTEREST EXPENSE 1.4% 1.5% 1.5% 1.4% 1.2%
------ ------ ------ ------ ------
INCOME BEFORE INCOME TAXES 1.8% 2.0% 2.6% 1.7% 3.5%
INCOME TAX PROVISION .8% .4% 1.0% .7% 1.3%
------ ------ ------ ------ ------
NET INCOME 1.0% 1.6% 1.6% 1.0% 2.2%
------ ------ ------ ------ ------
------ ------ ------ ------ ------
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE CHANGE FROM PRIOR PERIOD
-----------------------------------------
THREE MONTHS YEAR ENDED
ENDED MARCH 31, DECEMBER 31,
-------------- -----------------------
1996 VS. 1995 VS. 1994 VS.
1995 1994 1993
------- -------- --------
<S> <C> <C> <C>
REVENUES 3.5% 14.9% 74.6%
DIRECT PATIENT CARE (3.2)% 10.6% 76.3%
SELLING, GENERAL & ADMINISTRATIVE 13.9% 19.5% 81.3%
PROVISION FOR DOUBTFUL ACCOUNTS 110.5% 24.3% 44.2%
MERGER TRANSACTION COSTS N/A (65.4)% N/A
------- -------- --------
INCOME FROM OPERATIONS (7.5)% 60.2% 9.4%
INTEREST EXPENSE (4.2)% 24.1% 104.3%
------- -------- --------
INCOME BEFORE INCOME TAXES (10.0)% 70.1% (13.0)%
INCOME TAX PROVISION 116.7 % 53.7% (5.3)%
------- -------- --------
NET INCOME (39.5)% 82.0% (17.8)%
------- -------- --------
------- -------- --------
</TABLE>
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
REVENUES. Revenues for 1995 were $69,389,360, an increase of $9,011,212, or
14.9%, over 1994 revenues of $60,378,148. Of this increase, approximately
$2,658,000 was due to the acquisition of PRN Nevada effective April 1, 1994. A
full year of PRN Nevada revenues were included in 1995 while 1994 included only
nine months of PRN Nevada revenues. Also, an increase of approximately $748,000
was attributable to the PharmaThera Branch acquisition on January 31, 1995, and
accordingly, 1994 did not include any PharmaThera Branch revenues. The
management division's revenues increased by $1,021,000, or 64.4%, primarily as
the result of contracts entered into in 1995 and the recognition of
approximately $212,000 in revenues resulting from the early termination of two
management contracts in 1995. The remaining increase of $4,584,000 was comprised
of (i) an increase in revenues of $4,727,000, or 11.3%, in Texas nursing and
pharmacy operations, (ii) an increase in revenues from Virginia nursing and
pharmacy operations of $1,481,000, or 21.7%, (iii) a decrease in revenues of
$1,254,000, or 66.5%, in the New Jersey operation which was closed in July 1995,
and (iv) a decrease in revenues of $334,000, or 4.0%, in the Nevada nursing
operations as this location continues to experience an increase in management
contract activity. On a company-wide basis in 1995, nursing and related revenues
increased by $4,470,000, or 11.0%, homemaker revenues increased by $1,634,000,
or 13.8%, and pharmacy revenues increased by $1,921,000, or 31.6%, compared to
1994. Medical Innovations' revenues have been affected by changes in
reimbursement policies and rates of various third party payors; however, it is
impossible to determine the exact magnitude thereof.
DIRECT PATIENT CARE. Costs of direct patient care in 1995 were $41,731,088, an
increase of $3,981,259, or 10.6%, over 1994, resulting primarily from the
corresponding increase in revenues described above. As a percentage of revenues,
such costs were 60.1% in 1995, compared to 62.5% in 1994. The decrease as a
percentage of revenues is attributable to several factors, including (i) the
increase in management services revenue, which costs are included in selling,
general and administrative expenses, (ii) elimination of unprofitable nurse
staffing services in one of the Houston, Texas branches, which had a higher than
normal direct patient care cost as a percentage of revenues, (iii) reduction in
employee injury claims in the self-insured Texas nursing and homemaker
operations, and (iv) the substantial increase in pharmacy revenues which has a
lower direct patient care cost as a percentage of revenues than nursing
services.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. In 1995, selling, general and
administrative expenses were $23,576,444, an increase of $3,845,062, or 19.5%
over such expenses of $19,731,382 in 1994. A large portion of the increase
amounting to approximately $2,800,000 is attributable to the addition of key
management and other administrative personnel in the clinical operating
divisions and increased corporate overhead (primarily personnel) to support
Medical Innovations' growth. Also, $725,000 of the increase is associated with
the PRN Nevada acquisition, effective April 1, 1994. A full year of PRN
18
<PAGE>
Nevada selling, general and administrative expenses was included in 1995, while
1994 included only nine months of such expenses. Additionally, an increase of
$506,000 is attributable to the PharmaThera Branch, which was acquired on
January 31, 1995, and accordingly, 1994 did not include any PharmaThera Branch
expenses. During 1995, selling, general and administrative expenses were reduced
by approximately $245,000, resulting from the abatement of non-recurring payroll
tax penalties attributable to prior periods. As a percentage of revenues,
selling, general and administrative expenses increased from 32.7% in 1994 to
34.0% in 1995 due primarily to the reasons set forth above.
PROVISION FOR DOUBTFUL ACCOUNTS. The provision for doubtful accounts was
$1,159,695 in 1995, an increase of $226,544, or 24.3% over the 1994 provision of
$933,151. The increase is primarily related to the corresponding revenue
increase described above, particularly the pharmacy revenue. As a percentage of
revenue, the provision for doubtful accounts in 1995 and 1994 was approximately
the same (1.7% and 1.6%, respectively).
MERGER TRANSACTION COSTS. Costs of $61,774 were expensed in 1995 in connection
with the merger of HHCC into Medical Innovations.
INCOME FROM OPERATIONS. Income from operations was $2,860,359 in 1995, an
increase of $1,074,838 or 60.2%, over 1994. The increase is principally
attributable to growth in the management services division, which increased by
$1,464,000 over 1994. Also, income from the Texas and Nevada operations
increased 13.5% ($479,000) and 18.2% ($127,000), respectively. In 1995, an
abatement of payroll tax penalties originating in a prior year reduced selling,
general and administrative expenses by $245,000, thus increasing income from
operations. These increases in 1995 were offset by increased corporate overhead
of $662,000 to support Medical Innovations' growth, a decrease in operating
income in the Virginia operations of 58.5% ($277,000), operating losses in
Florida of $163,000, which had nominal losses in 1994, and increased operating
losses of $142,000 in the New Jersey operation, which was closed in July 1995.
Emphasis has been placed on improving the operating results in Florida and
Virginia, with a focus on increasing the business volume of these operations, as
well as a reduction of certain costs and expenses not expected to impact Medical
Innovations' ability to achieve revenue increases in such markets. During 1995,
adjustments to the reserve for government program settlements resulted in a net
charge against income of approximately $62,600, as compared to a net credit to
income of $479,000 in 1994, a decrease of approximately $541,400 in income from
operations between the two years. The 1995 results of operations were also lower
by approximately $116,000 due to the difference in merger transaction costs
being recognized in 1995 and 1994.
INTEREST EXPENSE. Interest expense increased $207,443, or 24.1%, to $1,067,189
in 1995, compared to $859,746 in 1994, primarily due to increases in the prime
interest rate in 1995 over 1994. When applying the percentage increase in
average interest rates to interest expense incurred in 1994, this equates to a
$204,000 increase in expense for 1995. The remainder of the increase results
from interest on additional debt incurred in connection with Medical
Innovations' acquisitions and for working capital purposes.
PROVISION FOR INCOME TAXES. The effective tax rate for 1995 is 38.1% compared
to 42.2% in 1994. Such effective tax rate was lower in 1995, primarily due to a
permanent book and tax difference created by a nontaxable abatement of certain
payroll tax penalties and interest in 1995. See also Note 7 to the accompanying
consolidated financial statements of Medical Innovations for the year ended
December 31, 1995 for more detailed information concerning the items causing the
difference between the effective tax rate and the statutory tax rate of 34% for
these periods and the differences between the two periods.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
REVENUES. Revenues for 1994 were $60,378,148, an increase of $25,800,944, or
74.6%, compared to 1993 revenues of $34,577,204. Of this increase, approximately
$8,350,000 was due to the effect of the PVNS acquisition effective May 1, 1993.
A full year of PVNS revenues was included in 1994, while 1993 included only
eight months. Another $8,411,000 of the 1994 revenue increase was due to the
acquisition of PRN Nevada effective April 1, 1994. Additionally, the
acquisitions of Advance and STAT (effective September 1, 1993 and February 11,
1994, respectively) had an increasing effect on revenues of approximately
$1,700,000. The remaining 1994 increase in revenues of approximately $7,340,000
was due primarily to the growth in the number of patients served by Medical
Innovations' nursing operations in Texas which, combined with infusion
operations, grew approximately 26% ($6,610,000), and the growth of infusion and
nursing business
19
<PAGE>
in Virginia, which increased approximately 17% ($858,000) compared to 1993. The
growth in Texas and Virginia was somewhat offset by a decrease of 22% ($545,000)
in revenues of the New Jersey operations. On a company-wide basis, nursing
revenues increased 100% ($20,466,000) in 1994 compared to 1993. Homemaker
services revenue increased 83% ($5,385,000) in 1994 over 1993. Also, management
services revenue increased 34% ($369,000) in 1994 over 1993. These increases
were somewhat offset by a decrease in pharmacy revenues of 7% ($438,000), due
partially to a decrease in volume and lower reimbursement rates. Medical
Innovations' revenues have been affected by changes in reimbursement policies
and rates of various third party payors; however, it is impossible to determine
the exact magnitude thereof.
DIRECT PATIENT CARE. Costs of direct patient care in 1994 were $37,749,829, an
increase of $16,337,995, or 76.3%, over 1993 direct patient care costs of
$21,411,834, resulting primarily from the corresponding increase in revenues
from patient volume described above. As a percentage of revenues, such costs
were 62.5% and 61.9% of revenues in 1994 and 1993, respectively. Medical
Innovations continues to experience close involvement by payors in referring and
managing patients. Accordingly, Medical Innovations makes extensive use of
personnel who are paid on a "per patient visit" basis. This enables adjustments
of personnel costs to be made in response to changes in reimbursement and volume
without being burdened with a large full-time staff.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. In 1994, selling, general and
administrative expenses were $19,731,382, an increase of $8,845,385, or 81.3%,
over such expenses of $10,885,997 in 1993. The increase was due primarily to the
acquisitions of PVNS and PRN Nevada, expansion of operations in Virginia and
Texas, and increased corporate overhead costs to support Medical Innovations'
growth. As a percentage of revenues, such costs increased to 32.7% in 1994
compared to 31.5% in 1993. The percentage increase was attributable to the need
for Medical Innovations to expand its management resources for anticipated
continuing growth which had not yet been offset by a corresponding growth in
revenues. Corporate overhead increased by approximately $1,081,000, or 52%, in
1994 over such costs totaling approximately $2,086,000 in 1993. Also,
amortization of excess costs over net assets of acquired companies increased to
approximately $306,000 in 1994 as compared to approximately $133,000 in 1993, an
increase of $173,000, or 129%, due to the increase in excess cost over net
assets of acquired companies from various acquisitions in 1993 and 1994.
Selling, general and administrative expenses were reduced by $285,000 in 1994,
pursuant to the PVNS settlement, for the recovery of costs of which $134,000 and
$151,000 were previously charged against 1994 and 1993 income, respectively.
PROVISION FOR DOUBTFUL ACCOUNTS. Although the provision for doubtful accounts
of $933,151 in 1994 increased $286,115 over the 1993 provision of $647,036, as a
percentage of revenues such provision decreased to 1.6% in 1994, compared to
1.9% in 1993, primarily as the result of a change in Medical Innovations' payor
mix. Medical Innovations' revenues from government programs, including Medicare
and Medicaid, increased from 68% in 1993 to 79% in 1994, primarily because of
the acquisitions of PVNS and PRN Nevada, whose revenues from government programs
represent a proportionately higher percentage of total revenues. For the most
part, a contractual allowance is recognized directly against revenues from
government programs as compared to a provision for doubtful accounts for certain
other payors.
MERGER TRANSACTION COSTS. Costs of $178,265 were recognized in 1994 in
connection with the merger of HHCC into Medical Innovations.
INCOME FROM OPERATIONS. Income from operations was $1,785,521 in 1994, a 9.4%
increase over income from operations of $1,632,337 for 1993. However, as a
percentage of revenues, income from operations decreased to 2.9% in 1994 as
compared to 4.7% for 1993. This percentage decrease is primarily attributable to
lower margins resulting from the change in Medical Innovations' service and
payor mix as described above, reduced profitability of the Houston, Texas and
New Jersey operations, losses in the Florida start-up operation, and increased
corporate overhead costs to support Medical Innovations' growth. Various
operational changes continued to be implemented in the Houston, Texas and New
Jersey, as well as the Virginia operations to achieve increased profitability.
Further, in 1994, income of $479,000 was recognized in connection with changes
in estimates of the reserve for government program settlements. This amount
consisted of (i) income of $200,000 as a result of final settlement of the PVNS
June 30, 1992 of Medical Innovations Cost Report, (ii) income of $333,000
related to favorable revisions in proposed audit adjustments and reopenings of
the PVNS Medicare Cost Reports for the years ended June 30, 1990 and 1991, and
(iii) expense of $54,000 related to post-acquisition Medicare Cost Reports. See
also Note 6 to the accompanying consolidated financial statements of Medical
Innovations.
20
<PAGE>
GAIN ON SALE OF MINORITY INTEREST. In the second quarter of 1994, Medical
Innovations sold a 20% ownership interest and a 5% net profits interest in its
then existing Pensacola, Florida home healthcare business for cash, and realized
a pre-tax gain of $128,500.
INTEREST EXPENSE. Interest expense increased $438,907, or 104.3%, to $859,746
in 1994, compared to $420,839 in 1993, primarily as a result of interest on
debt incurred in connection with the PVNS and PRN Nevada acquisitions and for
working capital purposes to fund Medical Innovations' operations and growth,
including the post acquisition operations of PVNS and PRN Nevada. A portion of
the increase was also attributable to increases in the prime interest rate
charged by banks in 1994 over 1993. The weighted average of the prime interest
rate in 1994 was 7.1%, compared to 6.0% in 1993. Virtually all of Medical
Innovations' borrowings bear interest at floating interest rates based on prime.
PROVISION FOR INCOME TAXES. Medical Innovations' effective tax rate in 1994 was
approximately 42.2% compared to 38.8% in 1993. See Note 7 to the accompanying
consolidated financial statements of Medical Innovations for the year ended
December 31, 1995 for detailed information regarding the difference in the
effective tax rates between 1993 and 1994 and the items causing the differences
between the effective tax rates and the statutory rate of 34% in both years.
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31, 1995.
REVENUES. Revenues for the first quarter of 1996 were $16,484,226, an increase
of $556,235, or 3.5%, over revenues of $15,927,991 for the first quarter of
1995. This increase was primarily due to the growth in the Virginia nursing and
pharmacy operations and in the management services division. Revenue in the
Virginia operations increased by approximately $434,000, or 27.6%, while
management services revenue increased by approximately $345,000, or 104.4%.
These increases were somewhat offset by the closure of the New Jersey operations
in July 1995, which had revenues of approximately $263,000 in the first quarter
of 1995. On a company-wide basis, in the first quarter of 1996, durable medical
equipment (DME) revenues increased by approximately $345,000, or 115.3%,
homemaker revenues increased by approximately $321,000, or 9.9%, nursing and
related revenues decreased by approximately $241,000, or 2.3%, due to reduced
visit volume on a comparable basis between the periods, and pharmacy revenues
decreased by approximately $115,000, or 7.9%, compared to the first quarter of
1995.
DIRECT PATIENT CARE. Costs of direct patient care in the first quarter of 1996
were $9,556,524, a decrease of $312,233, or 3.2%, from the first quarter of
1995. The dollar decrease is due primarily to a reduction in skilled nursing
payroll of approximately $380,000, or 8.2%, in response to the decline in
nursing revenues as set forth above, as well as the reduction of nurse
supervisory personnel in the homemaker division. As a percentage of revenues,
such costs were 58.0% in the first quarter of 1996 compared to 62.0% in the
first quarter of 1995. The decrease in percentage is due to reduction in
skilled nursing payroll referred to above and, to a lesser extent, the increase
in revenues of the management services division, which carries no direct patient
care costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. In the first quarter of 1996,
selling, general and administrative expenses were $6,088,328, an increase of
$744,399, or 13.9% over the first quarter of 1995. Approximately $300,000 of the
increase was due to the addition, subsequent to the first quarter of 1995, of
information services and administrative personnel to support the development and
implementation of an improved clinical and reimbursement system. Also, an
increase of approximately $200,000 was due to increased overhead to support the
growth in revenues of the management services division. The remaining amount of
the increase was due to the reduction of approximately $245,000 in selling,
general and administrative expenses in the first quarter of 1995, resulting from
the recovery of certain nonrecurring payroll related costs attributable to prior
periods, without a corresponding reduction in such expenses for the same period
in 1996. As a percentage of revenues, selling, general and administrative
expenses increased to 36.9% in the first quarter of 1996 compared to 33.6% in
the first quarter of 1995 for the reasons set forth above.
PROVISION FOR DOUBTFUL ACCOUNTS. The provision for doubtful accounts was
$317,013 in the first quarter of 1996, an increase of $166,379, or 110.5%,
compared to the first quarter of 1995. This increase was due to additional
provisions to expense, in particular, approximately $102,000 in the Virginia
operations and, to a lesser extent, the increase in revenues described above. As
a percentage of revenues, the provision for doubtful accounts was 1.9% in the
first quarter of 1996,
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compared to .9% in the first quarter of 1995. Such percentage increase resulted
from the additional provisions to expense as set forth above.
INCOME FROM OPERATIONS. Income from operations was $522,361 in the first
quarter of 1996, a decrease of $42,310, or 7.5% over the first quarter of 1995.
As previously stated, in the first quarter of 1995, selling, general and
administrative expenses were reduced by approximately $245,000 resulting from
the recovery of certain nonrecurring payroll related costs attributable to prior
periods, without a corresponding reduction in the first quarter of 1996.
Additionally, the Virginia operations incurred operating losses of approximately
$106,000 in the first quarter of 1996, compared to income of approximately
$58,000 in the first quarter of 1995, resulting in a decrease in operating
income of approximately $164,000. Substantial emphasis has been placed on
improving the operating results in Virginia, including the reduction of certain
costs and expenses not expected to impact the Company's ability to achieve
revenue increases in this operation. Offsetting these decreases was an operating
income increase in the Texas operations of $219,000, or 25.7%; an increase in
operating income of the management services division of $100,000, or 43.4%; and
the closing of the New Jersey operations in July 1995, which incurred losses of
$87,000 in the first quarter of 1995. Operating income in the first quarter of
1996 was reduced slightly by the loss of a managed care contract in Texas which
occurred late in the first quarter of 1996. In future periods, quarterly income
from operations is projected to be reduced by approximately $75,000 as a result
of this lost contract. Medical Innovations continues to actively market its
services to other managed care companies.
PROVISION FOR INCOME TAXES. The effective tax rate for the first quarter of
1996 was 45.4%, compared to 18.9% for the first quarter of 1995. Such effective
tax rate was substantially higher in 1996 primarily due to a permanent book and
tax difference created by a nontaxable abatement of certain payroll related
costs in 1995. See also Note 8 to the accompanying condensed financial
statements for the three months ended March 31, 1996 for more detailed
information concerning the items causing the difference between the effective
tax rate and the statutory tax rate of 34% for these periods and the differences
between the two periods.
EXCESS COST OVER NET ASSETS OF ACQUIRED COMPANIES
"Excess cost over net assets of acquired companies" comprises a significant
portion of Medical Innovations' total assets. Medical Innovations reviews the
carrying value of this asset for potential impairment at each balance sheet
date. The principal factors considered by Medical Innovations in its
recoverability assessment include market share and competitive conditions,
technological and regulatory changes (including reimbursement), demand trends
and earnings trends of the acquired companies. Medical Innovations is not
currently aware of any adverse changes in these factors that would result in an
impairment of this asset in the future. However, projection of current facts and
circumstances to future periods is inherently uncertain.
Management believes that the excess cost over net assets of acquired
companies has an unlimited useful life and therefore has assigned a forty-year
amortization period for this asset. In determining that the life of this asset
is unlimited, management considered factors such as: (1) the market share,
locations, reputation and related business attributes of each acquisition as
discussed above; (2) the nature of the home healthcare industry, which is
positively impacted by aging trends and the continued transfer of patients from
high-cost, acute care settings to home healthcare; (3) the increasing acceptance
by medical professionals of home healthcare as a better alternative to
institutionalized care; and (4) the nature of the personal services provided,
which will be continuously needed in the future and are not subject to
obsolescence. Reductions to the estimated useful life of this asset could have a
material effect on Medical Innovations' results of operations. Medical
Innovations is not currently aware of any events or trends which would indicate
a reduction in the useful life should be made. See Notes 1 and 2 to the
accompanying consolidated financial statements of Medical Innovations.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth, for the periods indicated, the level of Medical
Innovations' cash and cash equivalents, working capital and its current and
debt-to-equity ratios (including the restatement to reflect the merger with HHCC
in May 1995 which was accounted for as a pooling of interests):
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LIQUIDITY AND CAPITAL RESOURCES
(DOLLAR AMOUNTS IN THOUSANDS)
-------------------------------
MARCH 31, DECEMBER 31,
1996 1995
----------- --------------
Cash and cash equivalents $ 225 $ 293
Working capital $ 4,394 $ 5,223
Current ratio 1.54 1.61
Debt-to-equity ratio 1.93 2.11
GENERAL
Medical Innovations has entered into various debt obligations with a bank
and others, including the former owners of acquired companies, resulting in
total outstanding borrowings of approximately $10,691,000 at March 31, 1996.
Such total debt amount is exclusive of a contractual obligation to the former
owners of PVNS, which is addressed in the discussion below concerning Medical
Innovations' other commitments. The terms and other information regarding such
borrowings are more fully described in the accompanying consolidated financial
statements of Medical Innovations.
Medical Innovations' stockholders' equity at March 31, 1996 was $9,529,616,
which increased $190,312 from December 31, 1995. Such increase resulted
principally from net income for the period. Medical Innovations' debt-to-equity
ratio improved from 2.11 to 1.93 between these dates, primarily due to the
increase in stockholders' equity, debt repayments, and the amount borrowed under
Medical Innovations' revolving credit facilities was less at March 31, 1996 than
at December 31, 1995.
ITEMS AFFECTING LIQUIDITY AND CAPITAL RESOURCES
Medical Innovations' total debt (including capitalized lease obligations)
will require approximately $2,190,000 for principal and interest payments
during the twelve months ending March 31, 1997, based on the assumptions that
interest rates and Medical Innovations' borrowing levels remain constant.
Medical Innovations also has commitments under employment agreements to various
officers and other employees, as well as contractual obligations of
approximately $332,000 to the former owners of PVNS over the twelve months
ending March 31, 1997. In addition, Medical Innovations is committed under
various operating leases (office facilities, automobiles, and computer and
equipment), for payments totaling approximately $2,040,000 (including month-to-
month leases that are expected to be continued or replaced) over the twelve
months ending March 31, 1997. As of March 31, 1996, Medical Innovations had no
other significant commitments and no material planned purchases of property and
equipment.
Medical Innovations has been experiencing some difficulty in collecting
certain receivables. At March 31, 1996, such receivables consisted of: (i)
approximately $800,000 of claims receivable from a Texas welfare program that
exceed the normal amount of receivables outstanding for this operation, (ii)
approximately $590,000 of claims receivable from the Nevada Medicaid
intermediary relating to untimely billing thereof, for which an informal appeal
for payment has been made to the Nevada Medicaid program (see also Note 7 to the
accompanying condensed consolidated financial statements), and (iii)
approximately $600,000 receivable under a management services contract,
collection of which is being litigated. With respect to the receivables of
$1,990,000 set forth in (i) through (iii) above, $800,000 is related to timing
and documentation delays and as such is not believed to be subject to any
material collection risk. Of this amount, Medical Innovations has collected
approximately $110,000 from April 1 through May 8, 1996 and expects to collect a
substantial portion of the remaining amount of $690,000 by the end of the third
quarter of 1996. The other $1,190,000 of receivables set forth in (ii) and (iii)
above are being appealed or litigated and thus, the timing and amount of
collection are less certain. At March 31, 1996, Medical Innovations had reserves
of approximately $550,000 attributable to the receivables set forth in (i)
through (iii) above, which it believes to be adequate for any loss that will be
incurred thereon. The receivable amounts referred to above, not yet collected as
of May 8, 1996, could be withheld longer than expected,
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could continue to be delayed in collection and could be adversely impacted by
third-party determinations. While Medical innovations believes that it is taking
appropriate actions to collect the amounts described above and to manage its
investment in accounts receivable, its anticipated growth may continue to
require cash for working capital in excess of cash generated from operations.
As previously stated, net accounts receivable decreased approximately
$1,366,000 from December 31, 1995 to March 31, 1996. Of this decrease,
approximately $900,000 consists of a reduction in PVNS and PRN Nevada Medicare
receivables, which enhanced Medical Innovations' liquidity during this three-
month period. This reduction was due to payments received from the Medicare
intermediary consisting of (i) advances in connection with a timing change for
reimbursing costs which resulted from a change in Medicare intermediaries and
(ii) reimbursement in excess of costs incurred during 1995 and the first quarter
of 1996. Such remaining amounts of approximately $2,600,000 will be repaid to
the Medicare intermediary through August 1996. These repayments are somewhat
offset by amounts totaling approximately $1,500,000 received from the Medicare
intermediary in April 1996 for reimbursable costs incurred in March 1996. The
net amount of approximately $1,100,000 due the Medicare intermediary after March
31, 1996 will result in the Company utilizing a substantial portion, if not all,
of its available borrowing capacity under its revolving credit facilities and
may require the Company to obtain additional financing.
YEAR END 1995 COMPARED TO YEAR END 1994
Cash decreased by approximately $1,323,000 from December 31, 1994 to
December 31, 1995, primarily due to the growth in Medical Innovations' accounts
receivable, and its cash needs for other purposes. Working capital increased by
approximately $1,411,000 from December 31, 1994 to December 31, 1995 and the
current ratio increased from 1.43 at December 31, 1994 to 1.61 at December 31,
1995, due to various factors including an increase in net accounts receivable
and a decrease in current debt maturities. Accounts receivable, net of reserves,
at December 31, 1995 increased by approximately $2,151,000, or 22%, from
December 31, 1994, due to Medical Innovations' growth in revenues and other
matters as set forth above. Additionally, accounts payable and accrued
liabilities increased by approximately $247,000 and accrued compensation and
benefits increased by approximately $234,000 from December 31, 1994 to
December 31, 1995. For the year ending December 31, 1995, net cash of
approximately $142,100 was provided from operating activities, while Medical
Innovations used cash of approximately $1,138,700 for financing activities
during this period. In 1995, Medical Innovations used cash of approximately
$97,600 in the acquisition of the PharmaThera Branch and approximately $229,400
to acquire property and equipment.
YEAR END 1994 COMPARED TO YEAR END 1993
Working capital increased by approximately $1,821,000 from December 31,
1993 to December 31, 1994 and the current ratio increased from 1.23 at
December 31, 1993 to 1.43 at December 31, 1994, primarily due to the extension
of certain of Medical Innovations' debt maturities into 1996, a portion of which
was classified as current at December 31, 1993. Accounts receivable, net of
reserves, at December 31, 1994 increased by approximately $2,031,000, or 26%,
from December 31, 1993, due to Medical Innovations' growth in revenues, which
resulted primarily from Medical Innovations' various acquisitions, the growth of
Medical Innovations' existing operations, and other matters as set forth above.
Additionally, accounts payable and accrued liabilities increased by
approximately $268,000 and accrued compensation and benefits increased by
approximately $685,000 from December 31, 1993 to December 31, 1994. For the year
ending December 31, 1994, net cash of approximately $2,735,000 was provided from
financing activities, while Medical Innovations used cash of approximately
$1,397,000 for operating activities during this period. In 1994, Medical
Innovations used cash of approximately $277,000 in the acquisition of STAT,
approximately $908,000 in the acquisition of PRN Nevada, and approximately
$682,000 to acquire property and equipment.
Medical Innovations received proceeds, net of offering costs, of $2,627,315
from the offering of shares of Common Stock upon the exercise of outstanding
public warrants completed in December 1993. In 1994, $1,981,000 of such proceeds
were used to repay principal on the debt incurred to acquire PVNS. The remaining
proceeds were utilized for working capital purposes. No similar offering of
Common Stock or other equity securities occurred in 1994.
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MARCH 31, 1996 COMPARED TO YEAR END 1995
Cash decreased by approximately $68,000 from December 31, 1995 to March 31,
1996. Related thereto, at March 31, 1996, Medical Innovations had $800,000 less
outstanding under its revolving credit facilities than at December 31, 1995. For
the three months ended March 31, 1996, net cash of approximately $1,353,000 was
provided by operating activities, while Medical Innovations used cash of
approximately $1,189,000 for financing activities. Also during this period,
Medical Innovations used cash of approximately $177,000 in investing activities
and approximately $55,000 to acquire property and equipment. Working capital
decreased by approximately $829,000 during the three-month period ended March
31, 1996. The current ratio also decreased to 1.54 at March 31, 1996 from 1.61
at December 31, 1995. These decreases are due to various factors, consisting
primarily of a decrease of approximately $1,366,000 in net accounts receivable
between these dates, without a corresponding decrease in current liabilities.
THE SPECIAL MEETING
DATE, TIME AND PLACE
The Special Meeting will be held on Thursday, July 11, 1996, at One
Riverway, 20th Floor, Houston, Texas, commencing at 10:00 a.m. local time.
PURPOSES OF THE SPECIAL MEETING
The purposes of the Special Meeting are to consider and vote upon (i) a
proposal to adopt the Merger Agreement and approve the Merger and (ii) such
other matters as may properly be brought before the Special Meeting.
RECORD DATE AND OUTSTANDING SHARES
Only holders of record of Common Stock at the close of business on the
Record Date are entitled to notice of, and to vote at, the Special Meeting. On
the Record Date, there were approximately 216 holders of record of the
15,954,880 shares of Common Stock then issued and outstanding. Each share of
Common Stock entitles the holder thereof to one vote on each matter submitted
for stockholder approval. See "Beneficial Ownership of Certain Stockholders and
Management of Medical Innovations" for information regarding persons known to
the management of Medical Innovations to be the beneficial owners of more than
5% of the outstanding Common Stock. A complete list of the stockholders entitled
to notice of, and to vote at, the Special Meeting will be available for
examination at the offices of Medical Innovations in Houston, Texas during
normal business hours by any Medical Innovations stockholder, for any purpose
germane to the Special Meeting, for a period of 10 days prior to the Special
Meeting.
VOTING AND REVOCATION OF PROXIES
A form of proxy for use by stockholders of Medical Innovations at the
Special Meeting accompanies this Proxy Statement. All properly executed proxies
that are received prior to or at the Special Meeting and not revoked will be
voted at the Special Meeting in accordance with the instructions contained
therein. IF A HOLDER OF COMMON STOCK EXECUTES AND RETURNS A PROXY AND DOES NOT
SPECIFY OTHERWISE, THE SHARES REPRESENTED BY SUCH PROXY WILL BE VOTED "FOR"
ADOPTION OF THE MERGER AGREEMENT AND APPROVAL OF THE MERGER IN ACCORDANCE WITH
THE RECOMMENDATION OF THE BOARD. A stockholder of Medical Innovations who has
executed and returned a proxy may revoke it at any time before it is voted at
the Special Meeting by (i) executing and returning a proxy bearing a later date,
(ii) filing written notice of such revocation with the Secretary of Medical
Innovations stating that the proxy is revoked or (iii) attending the Special
Meeting and voting in person.
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VOTE REQUIRED
The presence at the Special Meeting, in person or by proxy, of the holders
of a majority of the outstanding shares of Common Stock entitled to vote thereat
will constitute a quorum for the transaction of business. Adoption of the Merger
Agreement and approval of the Merger requires the affirmative vote of a majority
of the issued and outstanding Common Stock entitled to vote thereon. On the
Record Date, there were 15,954,880 shares of Common Stock outstanding and
entitled to vote at the Special Meeting. In determining whether the Merger
Agreement and the Merger have received the requisite number of affirmative
votes, abstentions and broker non-votes will have the same effect as a vote
against the Merger.
Certain stockholders of Medical Innovations, including all of the members
of the Board, have agreed pursuant to the Voting Agreement to vote all shares of
Common Stock owned by them in favor of the Merger Agreement and the Merger. As
of the Record Date, 6,855,285 shares of Common Stock, or approximately 43% of
the shares entitled to vote at the Special Meeting, were subject to the Voting
Agreement. The signatories to the Voting Agreement have also agreed to vote such
shares against any business combination proposal or other matter that may
interfere or be inconsistent with the Merger or the Merger Agreement (including,
without limitation, a Competing Transaction). The obligations of the signatories
to the Voting Agreement are not subject to the continued support of the Board in
recommending approval and adoption of the Merger Agreement (although the Voting
Agreement would terminate upon a termination of the Merger Agreement). See
"The Voting Agreement."
SOLICITATION OF PROXIES
In addition to solicitation by mail, the directors, officers, employees and
agents of Medical Innovations may solicit proxies from its stockholders by
personal interview, telephone, telegram or otherwise. Medical Innovations will
bear the costs of the solicitation of proxies from its stockholders.
Arrangements will also be made with brokerage firms and other custodians,
nominees and fiduciaries who hold of record voting securities of Medical
Innovations for the forwarding of solicitation materials to the beneficial
owners thereof. Medical Innovations will reimburse such brokers, custodians,
nominees and fiduciaries for the reasonable out-of-pocket expenses incurred by
them in connection therewith.
OTHER MATTERS
At the date of this Proxy Statement, the Board does not know of any
business to be presented at the Special Meeting other than as set forth in the
notices attached to this Proxy Statement. If any other matters should properly
come before the Special Meeting, it is intended that the shares represented by
proxies will be voted with respect to such matters in accordance with the
judgment of the persons voting such proxies.
THE MERGER
GENERAL DESCRIPTION OF THE MERGER
The Merger Agreement provides that, at the Effective Time, Merger Sub will
merge with and into Medical Innovations, with Medical Innovations being the
surviving corporation, and, subject to the terms and conditions of the Merger
Agreement and the provisions of the DGCL concerning dissenting stockholders'
right of appraisal, each outstanding share of Common Stock will be converted
into the right to receive $1.85 in cash. As a consequence of the Merger, Medical
Innovations will become a wholly owned subsidiary of Horizon.
BACKGROUND
Beginning in May 1995, Mark H. Fisher, Medical Innovations' President and
Chief Executive Officer, had informal conversations with senior management of
Medical Innovations and other health care companies in an effort to explore
strategic alternatives available to Medical Innovations. At such time, Medical
Innovations determined that it would be in its best interest to expand its
operations through a strategic partnership.
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At Medical Innovations' 1995 Annual Meeting of Stockholders, held on
June 14, 1995, Mr. Fisher explained to the Medical Innovations stockholders in
attendance what positive steps had been taken to that point, but that, in order
for Medical Innovations to continue to grow and maintain its competitive
position in the markets served, a "strategic partner" was required. A strategic
partner was defined as an entity in the health care industry that could bring to
Medical Innovations business opportunities, synergies of operations and, most
importantly, expanded access to capital. The Board observed that the health care
industry, in general, and the home health care segment of this industry, in
particular, was rapidly consolidating, and concluded that Medical Innovations
had to grow substantially in order to maintain and continue to improve its
competitive position. A strategic partner was required to provide the assets,
including capital, that Medical Innovations would need to finance such growth.
The Board believed that opportunities to finance acquisitions using primarily
Medical Innovations stock were limited, and due to limited access to additional
capital, Medical Innovations would have difficulty financing the non-stock
portion of the acquisition consideration and the working capital requirements
resulting from the acquisitions necessary to achieve a desired size. The
strategic partnership could have taken the form of, among other things, a
contractual relationship, an equity or other form of investment in Medical
Innovations, or the acquisition of Medical Innovations by another health care
company.
Medical Innovations' management recognized that its relatively small size
was becoming an important factor in its ability to effectively compete in the
expanding managed care environment. Managed care companies are increasingly
trying to reduce the number of providers with whom they contract. Larger
providers, with a broad range of services and large geographic coverage,
therefore, were at an advantage over Medical Innovations in obtaining managed
care business.
Management of Medical Innovations spent much of the summer of 1995 having
informal meetings with prospective strategic partners. One such prospective
partner was Horizon. In early August 1995, Horizon sent certain representatives
of its Medical Specialty Services division to gather information regarding
Medical Innovations, to determine whether to pursue a strategic relationship
with Medical Innovations. After Horizon completed its information gathering, on
August 13, 1995, Mr. Fisher met with Neal M. Elliott, President and Chief
Executive Officer of Horizon, and Albert Sousa, President of Horizon's Medical
Specialty Services division, at Horizon's offices in Dallas, Texas. At this
meeting, Horizon agreed to enter into a management agreement with Medical
Innovations, effective September 1, 1995, under which Medical Innovations would
provide management and consulting services to Horizon relating to the
establishment, acquisition and operation of home health agencies by Horizon.
In 1995, the United States Congress proposed certain changes to the
Medicare program as part of the effort to balance the federal budget. As part of
these changes, Congress proposed to replace the current Medicare home health
care cost reimbursement system with a prospective payment system ("PPS"). If the
PPS proposal had been signed by the President, it could likely have had an
adverse impact on Medical Innovations, which received approximately 51% of its
revenues from Medicare in fiscal 1995. Accordingly, because of the uncertainty
regarding Medicare legislation and related reimbursement issues, as well as
increased competition from, among others, hospitals and other providers
establishing their own home health care operations, Medical Innovations became a
less attractive acquisition candidate.
During the week of January 22, 1996, Mr. Fisher once again met with
Mr. Elliott and Mr. Sousa to discuss the status of the management agreement and
Horizon's entry into home health care. They agreed that the relationship between
Medical Innovations and Horizon was progressing favorably, and additional areas
of potential growth were discussed. At this meeting, the parties also agreed
that a combination of Medical Innovations and Horizon would be more efficient
than the contractual relationship then in place. As a result, during the week of
January 29, 1996, Horizon sent representatives to perform a more extensive due
diligence investigation of Medical Innovations.
Between February 1, 1996 and February 12, 1996 representatives of Horizon
and Medical Innovations negotiated the pricing and structure of the
transaction and terms and conditions of a proposed merger agreement and
related documents. On February 13, 1996, Medical Innovations and Horizon
executed the Original Merger Agreement pursuant to which each share of Common
Stock would have been converted into .0645 of one share of the common stock
of Horizon (the Original Exchange Ratio"); provided, however, that if the
Horizon Market Value (as defined below) was (i) less than $24.787 per share,
the Original Exchange Ratio would be equal to $1.60 divided by the Horizon
Market Value, and (ii) more than $29.48 per share, the Original Exchange
Ratio would be equal to $1.90 divided by the Horizon Market Value. The
"Horizon Market Value" was equal to the average closing price per share of
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Horizon's common stock on the New York Stock Exchange (the "NYSE") for the 20
trading days immediately preceding the date on which the merger was consummated
(the "Determination Period"). Other than the merger consideration and those
provisions that are inapplicable to a cash merger, the terms of the Original
Merger Agreement and the Merger Agreement are substantially identical.
The Original Exchange Ratio, and the potential adjustments thereto, were
arrived at based upon a number of factors, none of which individually was
determinative, including the then current prices at which each of the companies'
stock was trading in the marketplace, the liquidity of shares of Horizon's
common stock versus the liquidity of the Common Stock, the value of Medical
Innovations as an independent operation, and the premium that the Board believed
should be paid for acquisition of a controlling interest in Medical Innovations.
The exchange ratio was based upon a value of the Common Stock of $1.75 per
share. On February 12, 1996, the closing price of Common Stock on the Nasdaq
SmallCap Market was $1 5/8 per share and the closing price of Horizon's common
stock on the NYSE on such date was $26 per share.
On February 7, 1996, Medical Innovations retained Montgomery to render an
opinion to the Board with respect to the fairness, from a financial point of
view, of the consideration to be received by the stockholders of Medical
Innovations under the Original Merger Agreement.
On February 12, 1996, the Board held a special telephonic meeting to
consider in detail the proposed Original Merger Agreement. At that meeting,
legal counsel reviewed with the Board the material terms and conditions of the
Original Merger Agreement and the related documents and the fiduciary
obligations of the members of the Board in connection with the proposed
transaction. Montgomery then made a financial presentation to the Board and
rendered an oral opinion (subsequently confirmed by delivery of a written
opinion dated as of February 12, 1996) to the effect that, subject to certain
matters stated in such opinion, the consideration to be received by the holders
of Common Stock pursuant to the proposed merger was fair to such holders, as of
such date. After discussion, the Board unanimously approved the proposed merger,
the Original Merger Agreement and the related documents. The parties executed
the Original Merger Agreement and related agreements on February 13, 1996, and
public announcement of such execution was made that evening.
Subsequent to the execution of the Original Merger Agreement, Horizon
announced several adverse or potentially adverse developments. These
developments included (i) anticipated earnings for its third quarter ending
February 29, 1996 that were below analysts' consensus expectations, (ii) an
investigation by the Office of Inspector General of the Department of Health
and Human Services and the DOJ with respect to certain of Horizon's Medicare
Part B and related co-insurance billings; and (iii) litigation with Tenet
Healthcare Corporation. On February 13, 1996, the price of Horizon's common
stock, as quoted on the New York Stock Exchange, closed at $26 per share.
The closing price of Horizon's common stock on March 18, the trading day
following the last of the foregoing public announcements, was $13 3/4 per
share. Subsequent to these developments, several stockholder lawsuits were
filed against Horizon alleging violations of federal and state securities
laws by Horizon and certain of its current and former officers and directors
based to a large extent on such developments and the decrease in trading
price of Horizon's common stock.
Based on the Original Exchange Ratio, the number of shares of Common Stock
outstanding at February 13, 1996, and the closing price of Horizon's common
stock on February 13, 1996, Horizon would have been required to issue
approximately 1.03 million shares of its common stock to effect the merger
contemplated by the Original Merger Agreement. Based on the closing of
Horizon's common stock on March 18, 1996, the number of Horizon shares required
to be issued would have increased to approximately 1.86 million.
In early April 1996, representatives of Horizon approached representatives
of Medical Innovations regarding potential developments at Horizon that might
preclude the proposed merger from being treated as a "pooling of interests" for
financial accounting purposes, and suggested that the Original Merger Agreement
be amended to reflect that the merger would be accounted for as a "purchase".
In anticipation of such an amendment, Medical Innovations contacted Montgomery
to determine the effect that such an amendment would have on Montgomery's
fairness opinion of February 12, 1996. Representatives of Montgomery indicated
at that time that Montgomery had concerns regarding the unquantifiable risk to
holders of Horizon common stock resulting from the developments at Horizon
discussed above, and that Montgomery would not be prepared to reissue its
fairness opinion regarding a merger in which the stockholders of Medical
Innovations would
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receive shares of Horizon's common stock. Representatives of Montgomery
indicated, however, that Montgomery would likely be able to issue a new fairness
opinion based upon a cash merger with similar pricing.
On or about April 15, 1996, Mr. Elliott contacted Mr. Fisher to indicate
that Horizon was reluctant to proceed under the Original Merger Agreement and to
request that Medical Innovations consider alternatives to the merger under the
Original Merger Agreement. On April 25, 1996, the Board met to discuss such
alternatives. The Board discussed various alternatives to the merger under the
Original Merger Agreement, including (i) termination of the Original Merger
Agreement, (ii) the sale of Medical Innovations' Medicare operations to Horizon,
and (iii) a cash merger. After a discussion with legal counsel, the Board
unanimously agreed that it preferred to go forward with the merger under the
Original Merger Agreement, but authorized Mr. Fisher to negotiate with Horizon
regarding alternatives to that merger which would provide at least equivalent
value to the stockholders of Medical Innovations.
Between April 15, 1996 and May 10, 1996 representatives of Horizon and
Medical Innovations explored several alternative transactions, primarily the
sale of Medical Innovations' Medicare operations and a concurrent amendment
to Medical Innovations' existing management and consulting agreement with
Horizon, under which Medical Innovations would manage the transferred
operations. See "The Merger -- Existing Relationships with Horizon." On May
10, 1996, Mr. Fisher met with Mr. Elliott to discuss the status of
negotiations relating to the Medicare operations sale. At that meeting, Mr.
Fisher told Mr. Elliott that the proposed sale did not fit with Medical
Innovations long term strategic plans to grow to a size that would allow
Medical Innovations to compete more effectively. After some discussion, they
agreed that such a sale was not practical, and that a cash merger, at $1.85
per share of Common Stock, was the best alternative transaction. Mr. Fisher
and Mr. Elliott agreed to propose that alternative transaction to their
respective boards of directors.
On May 13, 1996, the Board met to discuss the cash merger alternative
agreed to by Mr. Fisher and Mr. Elliott. In that discussion, the Board
considered (among other things) that (i) unless the trading price of Horizon's
common stock increased significantly, the Original Exchange Ratio would be equal
to $1.60 divided by the Horizon Market Value, and , as a result, the market
price of the Horizon common stock to be received by stockholders of Medical
Innovations upon the effectiveness of the merger contemplated by the Original
Merger Agreement would likely be less than the cash consideration of $1.85, (ii)
the proposed cash merger was not a tax free exchange for the Medical Innovations
stockholders, and (iii) the cash merger would eliminate the risk to the Medical
Innovations stockholders that the price of the Horizon common stock would
decline during the Determination Period or after the effective date of the stock
merger. The Board determined that the cash merger was the best alternative
available to maximize value for the Medical Innovations stockholders. The Board
also considered alternatives to the cash merger, including (i) attempting to go
forward under the Original Merger Agreement, (ii) proceeding with negotiations
for the sale of the Medicare operations to Horizon, and (iii) termination of the
Original Merger Agreement without entering into an alternative transaction with
Horizon. The Board determined that going forward with the merger under the
Original Merger Agreement was impractical because of Horizon's apparent
reluctance to proceed pursuant to that agreement and Montgomery's concerns
regarding its fairness opinion. The Board also determined that the sale of the
Medicare operations would not provide value to the stockholders equal to the
stock merger, and that such a transaction did not address many of the
objectives, set forth above, that initially led to the decision for Medical
Innovations to seek a strategic partner. Finally, the Board determined that the
proposed cash merger was superior to terminating the Original Merger Agreement
and commencing a new search for another strategic partner. The Board then
approved the cash merger, subject to satisfactory documentation and a
satisfactory fairness opinion from Montgomery. Between May 13, 1996 and May 15,
1996 representatives of Horizon and Medical Innovations negotiated the remaining
terms and conditions of the Merger Agreement and related documents.
On May 15, 1996, the Board held a special telephonic meeting to consider
the Merger and the Merger Agreement. At such meeting, legal counsel reviewed
with the Board the material terms and conditions of the Merger Agreement and the
related documents and again reviewed the fiduciary obligations of the members of
the Board in connection with the proposed transaction. Montgomery then made a
financial presentation to the Board and rendered an oral opinion (subsequently
confirmed by delivery of a written opinion dated as of May 15, 1996) to the
effect that, subject to certain matters stated in such opinion, the
consideration to be received by the holders of Common Stock pursuant to the
Merger was fair to such holders, as of such date. After discussion, the Board
unanimously approved the Merger, the Merger Agreement and the related documents.
The parties executed the Merger Agreement and related agreements on May 15,
1996, and public announcement of such execution was made the next morning.
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MEDICAL INNOVATIONS' REASONS FOR THE MERGER;
RECOMMENDATION OF BOARD OF DIRECTORS
At a meeting held on May 15, 1996, the Board concluded that the Merger
was fair to and in the best interests of the stockholders of Medical
Innovations, approved the Merger Agreement and the Merger, and recommended
that the stockholders of Medical Innovations adopt the Merger Agreement and
approve the Merger. Based upon its business judgment regarding trends in the
health care industry, Medical Innovations' growth and acquisition
opportunities, Medical Innovations' need for additional capital, and other
factors, the Board believed that the proposed Merger represented the best
opportunities to maximize stockholder value. In coming to that conclusion,
the Board belived that it was not in Medical Innovations' best interest to
(i) attempt to proceed under the Original Merger Agreement, (ii) proceed with
negotiations for the sale of Medical Innovations' Medicare operations to
Horizon, or (iii) terminate the Original Merger Agreement without entering
into an alternative transaction with Horizon and, subsequently, attempt to
raise additional capital or commencing a new search for another strategic
partner. See "--Background."
In reaching its determination, the Board considered a number of factors,
including without limitation the matters discussed above and the following:
(i) the immediate benefits to Medical Innovations' stockholders inherent in
the terms of the Merger. In this regard, unless the trading price of Horizon's
common stock increased significantly, the Original Exchange Ratio would be equal
to $1.60 divided by the Horizon Market Value, and, as a result, the market
price of the Horizon common stock to be received by stockholders of Medical
Innovations upon the effectiveness of the merger contemplated by the Original
Merger Agreement would likely be less than the cash consideration of $1.85. In
addition, in light of the consolidation of the health care industry and the
Board's perception that only by growing substantially could Medical Innovations
be successful in the long term, the Board concluded that the Merger represented
the best opportunity to maximize stockholder value;
(ii) the Merger would eliminate the risks to the Medical Innovations
stockholders that the price of the Horizon common stock would decline during the
Determination Period or after the effective date of the stock merger;
(iii) the relative prospects for expansion and growth in stockholder values
as a stand-alone entity. The Board concluded that the health care industry was
consolidating rapidly and that larger, more diversified companies were likely to
be the most successful;
(iv) Medical Innovations' substantial need for additional capital in the
form of debt or equity, for working capital and acquisitions, and the relative
prospects for raising capital in current industry conditions as a stand-alone
entity. The Board determined that Medical Innovations would need substantial
amounts of additional capital in the form of debt, equity, or some combination
thereof. The Board concluded that the costs of debt capital would be too high
and would adversely affect earnings and that additional equity capital would
further dilute earnings and adversely affect the price of the Common Stock in
the marketplace;
(v) the potential cost savings in management and general and administrative
expenses. The Board concluded that Medical Innovations would have to invest
substantial amounts of money in additional assets and personnel in order to
properly manage itself as it expanded;
(vi) the realization that further consolidations in the health care
industry, including home health care companies, were likely, that Medical
Innovations would be at a competitive disadvantage as a stand-alone entity in
the current environment, and that market conditions were favorable to a
transaction in the current time frame; and
(vii) the oral opinion of Montgomery rendered to the Board on May 15, 1996
(subsequently confirmed by delivery of a written opinion dated as of such date)
to the effect that, as of such date and based upon and subject to certain
matters stated in such opinion, the consideration to be received by the holders
of Common Stock was fair to such holders, from a financial point of view, as of
such date. The Board did not specifically adopt the opinion of Montgomery, but
rather considered such opinion in the total mix of information regarding the
proposed Merger that was available to, and evaluated, by the Board.
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The Board believes that all of the factors described above supported its
conclusion that the Merger is in the best interests of Medical Innovations and
its stockholders. Because the Board believes that the Merger is in the best
interest of all stockholders and that no material conflicts of interest exist
between the Board and nonaffiliated stockholders, an independent representative
to represent the interests of any stockholder was not retained.
The Board also recognized that the possibility of a higher offer was not
precluded by the Merger Agreement.
In analyzing the proposed Merger, the Board evaluated the factors and
considerations described above and consulted with its financial and legal
advisors and with Medical Innovations management. In evaluating the Merger
versus the merger contemplated in the Original Merger Agreement, the Board
considered factors (i) and (ii) above, with more weight assigned to factor (i).
In evaluating the Merger versus other alternatives, the Board considered the
other factors, but did not view any one such factor as determinative and did not
assign particular weight to any one such factor. Based upon the information
presented to the directors, the members of the Board unanimously adopted the
Merger Agreement and recommended that the stockholders of Medical Innovations
vote "FOR" the adoption of the Merger Agreement and approval of the Merger.
OPINION OF FINANCIAL ADVISOR TO MEDICAL INNOVATIONS
Pursuant to an engagement letter dated February 7, 1996 (the "Engagement
Letter"), Medical Innovations retained Montgomery to render an opinion with
respect to the fairness, from a financial point of view, to the holders of
Common Stock of the consideration to be received by such holders in connection
with the Merger. Montgomery is a nationally recognized firm, and, as part of its
investment banking activities, is regularly engaged in the valuation of
businesses and their securities in connection with merger transactions and other
types of acquisitions, negotiated underwritings, secondary distributions of
listed and unlisted securities, private placements and valuations for corporate
and other purposes. Medical Innovations selected Montgomery to render a fairness
opinion in connection with the Merger on the basis of its experience and
expertise in transactions similar to the Merger and its reputation in the health
care and investment communities. Montgomery was not retained to, nor did it
advise Medical Innovations with respect to, alternatives to the Merger or
Medical Innovations' underlying business decision to proceed with or effect the
Merger. Further, Montgomery was not requested to, nor did it, solicit or assist
Medical Innovations in soliciting offers for Medical Innovations from other
potential acquirors.
At the May 15, 1996 meeting of the Board, Montgomery rendered its oral
opinion, subsequently confirmed in writing as of such date, that the
consideration to be received by the holders of Common Stock pursuant to the
Merger was fair to such holders, from a financial point of view, as of such
date.
THE FULL TEXT OF MONTGOMERY'S WRITTEN OPINION TO THE BOARD IS ATTACHED
HERETO AS APPENDIX B AND IS INCORPORATED BY REFERENCE AND SHOULD BE READ
CAREFULLY AND IN ITS ENTIRETY IN CONNECTION WITH THIS PROXY STATEMENT. THE
FOLLOWING SUMMARY OF MONTGOMERY'S OPINION IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE FULL TEXT OF THE OPINION. MONTGOMERY'S OPINION IS ADDRESSED TO
THE BOARD AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY MEDICAL INNOVATIONS
STOCKHOLDER AS TO HOW SUCH STOCKHOLDER SHOULD VOTE AT THE SPECIAL MEETING.
In connection with its opinion, Montgomery, among other things:
(i) reviewed certain publicly available financial and other data with respect to
Medical Innovations, including Medical Innovations' consolidated financial
statements for recent years and interim periods to March 31, 1996 and certain
other relevant financial and operating data relating to Medical Innovations made
available to Montgomery from published sources and from the internal records of
Medical Innovations; (ii) reviewed certain publicly available financial and
other data with respect to Horizon, including Horizon's consolidated financial
statements for recent years and interim periods to February 29, 1996;
(iii) reviewed the draft form of the Merger Agreement provided to Montgomery by
Medical Innovations on May 15, 1996; (iv) reviewed certain historical market
prices and trading volumes of Common Stock as reported by the Nasdaq SmallCap
Market; (v) compared Medical Innovations from a financial point of view with
certain other companies in the home health care industry, which Montgomery
deemed to be relevant; (vi) considered the financial terms, to the extent
publicly available, of selected recent business combinations in the home health
care and health services industries which Montgomery deemed to be comparable, in
whole or in part, to the Merger; (vii) reviewed and discussed with
representatives of the management of Medical Innovations certain information of
a business and financial nature regarding Medical Innovations, furnished to
Montgomery
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by Medical Innovations; and (viii) performed such other analyses and
examinations as Montgomery deemed appropriate. Montgomery was not provided with,
nor did it review, any internal financial forecasts with respect to Medical
Innovations.
In connection with its review, Montgomery relied upon the accuracy and
completeness of the foregoing information and did not assume any obligation
independently to verify such information. Montgomery assumed that there were no
materially positive changes in Medical Innovations' assets, financial condition,
results of operations, business or prospects since the date of the last
financial statements made available to Montgomery by Medical Innovations.
Montgomery also assumed that the Merger would be consummated in a manner that
complies in all respects with the Exchange Act and all other applicable federal
and state statutes, rules and regulations. In rendering its opinion, Montgomery
expressed no view with respect to, nor did it consider, the tax consequences of
the Merger to any stockholder of Medical Innovations. In addition, Montgomery
did not assume responsibility for making an independent evaluation, appraisal or
physical inspection of any assets or liabilities (contingent or otherwise) of
Medical Innovations, nor was Montgomery furnished with any such appraisals.
Finally, Montgomery's opinion was based on economic, monetary and market and
other conditions as in effect on, and the information made available to
Montgomery as of May 15, 1996. Accordingly, although subsequent developments may
effect Montgomery's opinion, Montgomery has not assumed any obligation to
update, revise or reaffirm its opinion.
Montgomery further assumed, with Medical Innovations' consent, that the
Merger would be consummated in accordance with the terms described in the Merger
Agreement, without any further amendments thereto, and without waiver by Medical
Innovations of any conditions to its obligations thereunder.
Set forth below is a brief summary of the report presented by Montgomery to
the Board on May 15, 1996 in connection with its opinion.
ANALYSIS OF SELECTED COMPARABLE PUBLICLY TRADED COMPANIES. Montgomery
compared certain financial information for Medical Innovations to the
corresponding publicly available information of certain other home health
care companies. Montgomery reviewed the financial information of four
publicly traded home health care companies which Montgomery deemed to be
reasonably similar to Medical Innovations: The Care Group, Home Health Corp.
of America, Hospital Staffing and U.S. Homecare (collectively, the "Home
Health Care Selected Companies"). Montgomery calculated multiples of such
companies of "Aggregate Value" (defined for this purpose as total market
capitalization plus total long-term debt minus cash and cash equivalents) to
latest twelve months revenues, earnings before interest, taxes, depreciation
and amortization ("EBITDA"), and earnings before interest and taxes ("EBIT"),
and compared those multiples against the multiples for Medical Innovations
implied by the Merger Consideration (as that term is defined in the Merger
Agreement). All multiples were based on closing stock prices as of May 14,
1996. Montgomery also analyzed the profitability of Medical Innovations and
the Home Health Care Selected Companies.
The ranges of multiples for the Home Health Care Selected Companies
(excluding certain multiples which Montgomery deemed not material) were as
follows: (i) the ratio of Aggregate Value to latest twelve months revenues
yielded a range of 0.6x to 1.6x, with an average of 0.7x; (ii) the ratio of
Aggregate Value to latest twelve months EBITDA yielded a range of 4.0x to 13.1x,
with an average of 7.3x; (iii) the ratio of Aggregate Value to latest twelve
months EBIT yielded a range of 9.1x to 18.9x, with an average of 12.9x. The
Merger Consideration equated to implied multiples of latest twelve months
revenues, EBITDA and EBIT for Medical Innovations of 0.6x, 10.8x, and 14.7x,
respectively.
ANALYSIS OF COMPARABLE MERGER AND ACQUISITION TRANSACTIONS. Using publicly
available information, Montgomery analyzed the purchase price and implied
transaction multiples of latest twelve months revenues and EBIT paid or proposed
to be paid in the following selected transactions in the home health care
industry since January 1, 1993 (target/acquiror): Alliance Home Health/Help at
Home Inc.; Star Multi Care Services/AMSERV Healthcare Inc.; Nurse Care
Inc./National Home Health Care Corp.; Hooper Holme's Inc./Olsten Corp.; In Home
Health/Manor Care Inc.; Home Care Affiliates/Housecall Medical Resources;
Caremark International's Medical Home Infusion Division/Coram Healthcare;
PharmaThera/Medical Innovations; PRN Nevada/Medical Innovations; Home
Nutritional Services/WR Grace & Co.; STAT/Medical Innovations; Advance/Medical
Innovations; PVNS/Medical Innovations; and Preferred/Medical Innovations
(collectively, the "Selected Transactions"). These multiples were compared with
the multiples of Medical Innovations latest twelve months revenues and EBIT
implied by the Merger Consideration.
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The range of multiples of latest twelve months revenues and EBIT of the
Selected Transactions (excluding certain multiples which Montgomery deemed not
material) were as follows: (i) latest twelve months revenues: 0.1x to 1.3x
(with a mean of 0.49x) and (ii) latest twelve months EBIT: 6.0x to 17.0x (with
a mean of 11.8x). The Merger Consideration equated to implied multiples of
latest twelve months revenues and EBIT for Medical Innovations of 0.6x and
14.7x, respectively.
The summary set forth above does not purport to be a complete description
of the presentation by Montgomery to the Board or of the analyses performed by
Montgomery. The preparation of a fairness opinion is not necessarily susceptible
to partial analysis or summary description. Montgomery believes that its
analyses and the summary set forth above must be considered as a whole and that
selecting portions of its analyses and of the factors considered, without
considering all analyses and factors, would create an incomplete view of the
process underlying the analyses set forth in the presentation to the Board. In
addition, Montgomery may have given various analyses more or less weight than
other assumptions, so that the ranges of valuations resulting from any
particular analysis described above should not be taken to be Montgomery's view
of the actual value of Medical Innovations. The fact that any specific analysis
has been referred to in the summary above is not meant to indicate that such
analysis was given greater weight than any other analysis.
In performing its analyses, Montgomery made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of Medical Innovations. The
analyses performed by Montgomery are not necessarily indicative of actual values
or actual future results, which may be more or less favorable than suggested by
such analyses. Such analyses were prepared solely as part of Montgomery's
analysis of the fairness of the Merger to the holders of Common Stock in
connection with the delivery of Montgomery's opinion. The analyses do not
purport to be appraisals or to reflect the prices which a company might actually
be sold or the prices at which any securities may trade at the present time or
at any time in the future.
As noted under the caption "Medical Innovations Reasons for the Merger;
Recommendation of the Board of Directors," Montgomery's opinion and
presentation to the Board were among many factors taken into consideration by
the Board in making its determination to approve the Merger and to submit the
Merger Agreement for the approval of the holders of Common Stock.
Pursuant to the Engagement Letter, Medical Innovations engaged Montgomery
to render an opinion to its Board with respect to the fairness, from a financial
point of view, to the holders of Common Stock of the consideration to be
received by them in connection with the Merger. Medical Innovations agreed to
pay Montgomery $200,000 for delivery of the opinion, all of which has been paid.
Medical Innovations also agreed to reimburse Montgomery for its reasonable
out-of-pocket expenses. Pursuant to a separate letter agreement, Medical
Innovations has agreed to indemnify Montgomery, its affiliates, and their
respective partners, directors, officers, agents, consultants, employees and
controlling persons against certain liabilities, including liabilities under the
federal securities laws.
In the ordinary course of business, Montgomery trades equity securities of
Medical Innovations for its own account and for the accounts of customers and,
accordingly, may at any time hold a long or short position in such securities.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general summary of certain federal income tax
consequences of the Merger to the holders of Common Stock and is based upon
current provisions of the Code, existing regulations thereunder and current
administrative rulings and court decisions, all of which are subject to change.
Medical Innovations will not seek any ruling from the Internal Revenue Service
or an opinion of counsel with respect to the Merger. No attempt has been made to
comment on all federal income tax consequences of the Merger that may be
relevant to particular holders, including holders that are subject to special
tax rules such as dealers in securities, foreign persons, mutual funds,
insurance companies, tax-exempt entities and holders who do not hold their
shares as capital assets.
For federal income tax purposes, a holder of Common Stock who exchanges
such shares for cash pursuant to the Merger or who receives cash in exchange for
such shares pursuant to the exercise of appraisal rights will be treated as
having
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sold his or her shares of Common Stock for cash in a taxable transaction. Gain
or loss will be recognized on the exchange to the extent of the difference
between the cash received and the holder's adjusted tax basis in the shares of
Common Stock so exchanged.
In general, any gain or loss recognized by a stockholder in the Merger will
be eligible for capital gain or loss treatment. Any capital gain or loss
recognized by stockholders will be long-term capital gain or loss if the Common
Stock giving rise to such recognized gain or loss have been held for more than
one year; otherwise such capital gain or loss will be short term. An
individual's long-term capital gain is subject to federal income tax at a
maximum rate of 28% while any capital loss can be offset only against other
capital gains plus $3,000 of other income in any tax year. Any unutilized
capital loss will carry over as a capital loss to succeeding years for an
unlimited time until the loss is exhausted.
For corporations, a capital gain is subject to federal income tax at a
maximum rate of 35% while any capital loss can be offset only against other
capital gains. Any unutilized capital loss can be carried back three years and
forward five years to be offset against net capital gains in such years.
Under the federal income tax backup withholding rules, unless an exemption
applies, the Exchange Agent (as defined below) must withhold 31% of all cash
payments to which a holder of Common Stock or other payee is entitled pursuant
to the Merger Agreement, unless the stockholder or other payee provides a tax
identification number (social security, in case of an individual, or employer
identification number, in the case of other stockholders) and certifies that
such number is correct. Each stockholder, and, if applicable, each other payee,
should complete and sign the Substitute Form W-9 included as part of the letter
of transmittal to be returned to the Exchange Agent in order to provide the
information and certification necessary to avoid backup withholding, unless an
applicable exemption exists and is proved in a manner satisfactory to the
Exchange Agent.
THE FEDERAL INCOME TAX CONSEQUENCES SET FORTH ABOVE ARE GENERAL INFORMATION
ONLY. EACH HOLDER OF COMMON STOCK IS URGED TO CONSULT HIS OR HER OWN TAX
ADVISOR TO DETERMINE THE PARTICULAR TAX CONSEQUENCES TO SUCH STOCKHOLDER OF THE
MERGER (INCLUDING THE APPLICABILITY AND EFFECT OF FOREIGN, STATE, LOCAL AND
OTHER TAX LAWS).
GOVERNMENTAL AND REGULATORY APPROVALS
ANTITRUST MATTERS. Transactions such as the Merger are reviewed by the DOJ and
the FTC to determine whether they comply with applicable antitrust laws. Under
the provisions of the HSR Act, the Merger may not be consummated until such time
as the specified waiting period requirements of the HSR Act have been satisfied.
Horizon and Medical Innovations filed notification reports, together with
requests for early termination of the waiting period, with the DOJ and the FTC
under the HSR Act on May 24, 1996. On June 4, 1996, the DOJ and the FTC
granted early termination of the applicable waiting period under the HSR Act.
At any time before or after the Effective Time, the DOJ, the FTC or a
private person or entity could seek under the antitrust laws, among other
things, to enjoin the Merger or to cause Horizon to divest itself, in whole or
in part, of Medical Innovations or of other businesses conducted by Horizon.
There can be no assurance that a challenge to the Merger will not be made or
that, if such a challenge is made, Horizon and Medical Innovations will prevail.
MEDICARE AND MEDICAID. Medical Innovations has been advised by its counsel
that the Merger will not constitute a "change of ownership" of the Medical
Innovations "providers" for purposes of the Medicare program. However, for
Medicaid purposes, one or more of the state Medicaid programs may consider
this transaction to constitute a change of ownership and may require the
providers to file the necessary state notifications in connection with the
changes of ownership.
Except as described above, Horizon and Medical Innovations are not aware of
any other governmental or regulatory approvals required for consummation of the
Merger, other than compliance with applicable securities laws.
ACCOUNTING TREATMENT
The Merger will be accounted for as a purchase under generally accepted
accounting principles.
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EXISTING RELATIONSHIPS WITH HORIZON
Horizon and Medical Innovations have entered into a Consulting and
Management Services Master Agreement dated September 1, 1995 under which Medical
Innovations has agreed to provide certain consulting and management services for
a period of five years for the purpose of assisting Horizon in establishing
home health agencies. Such services include taking all action reasonable and
necessary to establish home health agencies at such locations as Horizon
designates and managing all operations of home health agencies established and
operated by Horizon pursuant to that agreement. As compensation for the services
provided by Medical Innovations, Horizon has agreed to pay Medical Innovations
a base fee of $100,000 per month for the first year of the agreement and an
additional monthly fee equal to $9.00 multiplied by the total number of patient
visits during each month (less the base monthly fee paid in the first year).
RIGHTS OF DISSENTING STOCKHOLDERS
A holder of Common Stock who makes the demand described below with respect
to such shares, who continuously is the holder of record of such shares through
the Effective Time, and who otherwise complies strictly with the statutory
requirements of Section 262 of the DGCL ("Section 262") will be entitled to have
such shares of Common Stock appraised by the Delaware Court of Chancery (the
"Delaware Court") and to receive payment of the "fair value" of such shares in
lieu of the cash to be received by holders of Common Stock pursuant to the
Merger Agreement.
In order to exercise appraisal rights, holders of Common Stock must demand
and perfect their rights in strict accordance with the conditions established by
Section 262. All references in this summary of appraisal rights to a "holder" or
"holders of Common Stock" are to the holder of record of Common Stock. HOLDERS
OF COMMON STOCK WHO WISH TO SEEK APPRAISAL ARE ADVISED TO CONSULT WITH THEIR
LEGAL COUNSEL REGARDING HOW TO DEMAND AND PERFECT SUCH APPRAISAL RIGHTS.
THE FOLLOWING DISCUSSION IS NOT A COMPLETE STATEMENT OF THE LAW RELATING TO
APPRAISAL RIGHTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SECTION 262,
WHICH IS REPRINTED IN ITS ENTIRETY AS APPENDIX C TO THIS PROXY STATEMENT. THIS
DISCUSSION SHOULD BE REVIEWED CAREFULLY BY ANY HOLDER OF COMMON STOCK WHO WISHES
TO EXERCISE STATUTORY APPRAISAL RIGHTS, OR WHO WISHES TO PRESERVE THE RIGHT TO
DO SO, BECAUSE FAILURE TO TIMELY AND STRICTLY COMPLY WITH THE PROCEDURES SET
FORTH HEREIN OR THEREIN WILL RESULT IN THE LOSS OF APPRAISAL RIGHTS.
Under Section 262, where a merger is to be submitted for approval at a
meeting of stockholders, as in the case of the Special Meeting, not less than
20 days prior to such meeting, each constituent corporation must notify each of
the holders of its stock for which appraisal rights are available that such
appraisal rights are available and include in each such notice a copy of
Section 262. This Proxy Statement constitutes such notice to holders of
Common Stock.
Each holder of Common Stock electing to exercise appraisal rights must
deliver to Medical Innovations written demand for appraisal before the vote on
the adoption of the Merger Agreement and approval of the Merger. In general,
stockholders electing to exercise their appraisal rights (if available) must
satisfy all of the conditions of Section 262 and must not vote for adoption of
the Merger Agreement and approval of the Merger. It is unsettled under Delaware
law whether a stockholder (other than a record owner of shares held by multiple
beneficial owners, as discussed below) can split its holdings (whether by class
or by shares within the same class) and vote some shares in favor of the
adoption of the Merger Agreement and approval of the Merger while abstaining or
voting against adoption of the Merger Agreement and approval of the Merger with
respect to other shares in an effort to preserve appraisal rights with respect
to the shares not voted in favor of adoption of the Merger Agreement and
approval of the Merger. A stockholder who signs and returns a proxy without
expressly specifying that such shares be voted against adoption of the Merger
Agreement and approval of the Merger or that an abstention be registered with
respect to such shares in connection with the Merger will effectively have
thereby waived his or her appraisal rights because, in the absence of express
contrary instructions, such shares will be voted in favor of the Merger. See
"The Special Meeting -- Voting and Revocation of Proxies."
Only a holder of record of Common Stock is entitled to exercise appraisal
rights for the Common Stock registered in that holder's name. A demand for
appraisal must be executed by or on behalf of the holder of record fully and
correctly, as such holder's name appears on his or her stock certificates, and
must reasonably inform Medical Innovations of the identity
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of the holder of record and that such holder intends thereby to demand appraisal
of the Common Stock. A person having a beneficial interest in Common Stock held
of record in the name of another person, such as a broker, fiduciary (such as a
trustee, guardian or custodian) or other nominee, must act promptly to cause the
record holder to follow properly and in a timely manner the steps summarized
herein to perfect such person's appraisal rights. If the Common Stock is owned
of record by a person other than the beneficial owner, including a broker,
fiduciary or other nominee, such demand must be executed by or on behalf of the
record owner. If the Common Stock is owned of record by more than one person, as
in a joint tenancy or tenancy in common, such demand must be executed by or on
behalf of all joint owners. An authorized agent, including an agent for two or
more joint owners, may execute the demand for appraisal for a holder of record;
however, the agent must identify the record owner or owners and expressly
disclose the fact that, in exercising the demand, such person is acting as agent
for the record owner. A record owner, such as a broker, fiduciary or other
nominee, who holds Common Stock as a nominee for others, may exercise appraisal
rights with respect to the shares held for all or less than all beneficial
owners of shares as to which such person is the record owner. In such case, the
written demand must set forth the number of shares covered by such demand. Where
the number of shares is not expressly stated, the demand will be presumed to
cover all Common Stock outstanding in the name of such record owner.
A holder of Common Stock who elects to exercise appraisal rights should
mail or deliver his or her written demand to Medical Innovations at its
principal executive offices, attention: Corporate Secretary. The written demand
for appraisal should specify the holder's name and mailing address, the number
of shares of Common Stock owned, and that the stockholder is thereby demanding
appraisal of his or her shares.
Within ten days after the Effective Time, Medical Innovations, as the
surviving corporation, must provide notice to all holders who have complied with
Section 262 that the Merger has become effective. Within 120 days after the
Effective Time, either Medical Innovations, as the surviving corporation, or any
holder of Common Stock who has complied with the required conditions of
Section 262, may file a petition in the Delaware Court demanding a determination
of the fair value of the shares of all holders seeking appraisal. There is no
present intent on the part of Medical Innovations to file an appraisal petition,
and holders of Common Stock seeking to exercise appraisal rights should not
assume that Medical Innovations will file such a petition. Holders of Common
Stock who desire to have their shares appraised should initiate any steps
required to perfect their appraisal rights within the time periods and in the
manner prescribed in Section 262. Within 120 days after the Effective Time, any
holder of Common Stock who has theretofore complied with subsections (a) and (d)
of Section 262 will be entitled, upon written request, to receive from Medical
Innovations a statement setting forth the aggregate number of Common Stock with
respect to which demands for appraisal have been received by Medical
Innovations, and the aggregate number of holders of such shares. Such statement
must be mailed within ten days after the written request therefor has been
received by Medical Innovations or within ten days after expiration of the time
for delivery of demands for appraisal under Section 262, whichever is later. If
no petition for appraisal is filed with the Delaware Court within 120 days after
the Effective Time, the rights of holders of Common Stock to appraisal shall
cease.
If a petition for an appraisal is timely filed, at the hearing on such
petition, the Delaware Court will determine the holders of Common Stock, if any,
entitled to appraisal rights. The Delaware Court may require the holders who
have demanded an appraisal of the Common Stock and who had stock represented by
certificates to submit their certificates of stock to the Register in Chancery
for notation thereon of the pendency of the appraisal proceedings; and if any
holder of Common Stock fails to comply with such direction, the Delaware Court
may dismiss the proceedings as to such holder. After determining the holders of
Common Stock entitled to appraisal, the Delaware Court will appraise the Common
Stock owned by such holders, determining the fair value of such shares exclusive
of any element of value arising from the accomplishment of expectation of the
Merger, together with a fair rate of interest, if any, to be paid upon the
amount determined to be the fair value. In determining fair value, the Delaware
Court is to take into account all relevant factors. In WEINBERGER V. UOP INC.,
the Delaware Court discussed the factors that could be considered in determining
fair value in an appraisal proceeding, stating that "proof of value by any
techniques or methods which are generally considered acceptable in the financial
community and otherwise admissible in court" should be considered, and that
"fair price obviously requires consideration of all relevant factors involving
the value of the company." The Delaware Supreme Court stated that in making this
determination of fair value the court must consider "market value, asset value,
dividends, earnings prospects, the nature of the enterprise and any other facts
which were known or which could be ascertained as of the date of the merger
which throw light on future prospects of the merged corporation." In WEINBERGER,
the Delaware Supreme Court stated that "elements of future value, including the
nature of the enterprise, which are known or susceptible of proof as of the date
of
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the merger and not the product of speculation, may be considered." Section 262,
however, provides that fair value is to be "exclusive of any element of value
arising from the accomplishment of expectation of the merger." Delaware courts
have decided that the statutory appraisal remedy, depending on factual
circumstances, may or may not be a dissenter's exclusive remedy.
Holders of Common Stock considering demanding appraisal of their shares
should recognize that the fair value of their shares determined under Section
262 could be more than, the same as or less than the consideration they are
entitled to receive pursuant to the Merger Agreement if they do not seek
appraisal of their shares, and that investment banking opinions as to fairness
from a financial point of view are not necessarily opinions as to fair value as
determined under Section 262. The cost of the appraisal proceeding may be
determined by the Delaware Court and assessed against the parties as the
Delaware Court deems equitable in the circumstances. Upon application of a
holder of Common Stock seeking appraisal, the Delaware Court may order that all
or a portion of the expenses incurred by any holder of Common Stock in
connection with the appraisal proceeding, including, without limitation,
reasonable attorney's fees and the fees and expenses of experts, be charged PRO
RATA against the value of all Common Stock entitled to appraisal. In the absence
of such a determination or assessment, each party bears its own expenses.
Any holder of Common Stock who has duly demanded appraisal in compliance
with Section 262 will not, after the Effective Time, be entitled to vote for any
purpose any shares subject to such demand or to receive payment of dividends or
other distributions on such shares, except for dividends or distributions
payable to holders of record of Common Stock at a date prior to the Effective
Time.
Any holder of Common Stock may withdraw such holder's demand for appraisal
by delivering to Medical Innovations a written withdrawal of such demand for
appraisal and acceptance of the terms of the Merger, except (i) that any such
attempt to withdraw such demand made more than 60 days after the Effective Time
will require written approval of Medical Innovations, and (ii) that no appraisal
proceeding properly instituted in the Delaware Court shall be dismissed as to
any holder of Common Stock without the approval of the Delaware Court, and such
approval may be conditioned upon such terms as the Delaware court deems just.
CERTAIN TERMS OF THE MERGER AGREEMENT
The following description does not purport to be complete and is qualified
in its entirety by reference to the Merger Agreement, a copy of which is
attached as Appendix A to this Proxy Statement and is incorporated herein by
reference.
EFFECTIVE TIME OF THE MERGER
The Merger Agreement provides that, as promptly as practicable after the
satisfaction or waiver of the conditions to effecting the Merger, the parties
shall cause the Merger to be consummated by filing a Certificate of Merger with
the Secretary of State of the State of Delaware, in such form as required by,
and executed in accordance with, the relevant provisions of the DGCL. It is
anticipated that, if the Merger Agreement is approved and adopted at the Special
Meeting and all other conditions to the Merger have been satisfied or waived,
the Effective Time will occur on the date of the Special Meeting or as soon
thereafter as practicable.
MANNER AND BASIS OF CONVERTING SHARES
At the Effective Time, each outstanding share of Common Stock, other than
shares of Common Stock held in the treasury of Medical Innovations or owned by
Horizon or any direct or indirect wholly-owned subsidiary of either Horizon or
Medical Innovations, which shares will be canceled at the Effective Time, will
be converted into the right to receive $1.85 in cash. All shares of Common Stock
will be canceled at the Effective Time. Notwithstanding the foregoing, if
between the date of the Merger Agreement and the Effective Time the outstanding
shares of Common Stock shall have been changed into a different number of shares
or a different class, by reason of any stock dividend, subdivision,
reclassification, recapitalization, split, combination or exchange of shares,
the Merger Consideration will be correspondingly adjusted to reflect such stock
dividend, subdivision, reclassification, recapitalization, split, combination or
exchange of shares.
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At or prior to the Effective Time, Horizon will deposit with a bank or
trust company to be determined (the "Exchange Agent"), for the benefit of
holders of Common Stock immediately preceding the Effective Time, for exchange
in accordance with the Merger Agreement, through the Exchange Agent, funds that
will be sufficient to enable the Exchange Agent to make payments with respect to
all shares of Common Stock (the "Exchange Fund"). The Exchange Agent will,
pursuant to irrevocable instructions, deliver cash in exchange for surrendered
certificates representing Common Stock out of the Exchange Fund.
As soon as practicable following the Effective Time, Horizon will cause the
Exchange Agent to mail to each record holder of Common Stock at the Effective
Time, a letter of transmittal and other information advising such holder of the
consummation of the Merger and for use in exchanging Common Stock certificates
for cash. After the Effective Time, there will be no further registration of
transfers on the stock transfer books of Medical Innovations of shares of Common
Stock that were outstanding immediately prior to the Effective Time. Share
certificates should not be surrendered for exchange by stockholders of Medical
Innovations prior to the Effective Time and the receipt of a letter of
transmittal. Until so surrendered and exchanged, each certificate previously
evidencing Common Stock shall represent solely the right to receive cash on the
terms set forth in the Merger Agreement.
Any portion of the Exchange Fund that remains unclaimed by the former
holders of Common Stock for six months after the Effective Time will be
delivered to Horizon, upon demand, and any former holders of Common Stock who
have not exchanged Common Stock for cash must look only to Horizon for such
cash.
WARRANTS AND STOCK OPTIONS
Section 6.9 of the Merger Agreement provides that Medical Innovations
will take all actions necessary to cause each outstanding Option, whether
vested or unvested, and each Common Stock Warrant to be exercised or expire
according to its terms prior to the Effective Time, or terminate immediately
prior to the Effective Time in exchange for the right to receive cash equal
to the product of (i) the number of shares of Common Stock subject to such
Option or Common Stock Warrant, as the case may be, and (ii) the amount by
which $1.85 exceeds the exercise price per share of such Option or Common
Stock Warrant. Assuming that no Options are exercised prior to their
expiration before the Effective Time, holders of Options granted under
Medical Innovations 1988 Stock Option Plan, 1993 Employee Stock Option Plan,
and 1993 Executive Security Stock Option Plan will receive cash in the
aggregate amount of approximately $476,221. Arthur L. Rice, a director of
Medical Innovations and President of HHCC, holds Options to purchase 100,000
shares of Common Stock at an exercise price of $1.6875 under the 1988 Stock
Option Plan, which is currently 20% vested. Mr. Rice will receive $16,250 in
exchange for these Options. J. William Wilson, Secretary and General Counsel
of Medical Innovations, holds Options to purchase 50,000 shares of Common
Stock at an exercise price of $1.50 under the 1993 Employee Stock Option
Plan, none of which is currently vested. Mr. Wilson will receive $17,500 in
exchange for these Options. David C. Horn, Vice President, Treasurer and
Chief Financial Officer of Medical Innovations, is the only holder of Options
under the 1993 Executive Security Stock Option Plan. Mr. Horn holds Options
to purchase 125,000 shares of Common Stock at an exercise price of $0.50,
which Options vest upon a "change in control" of Medical Innovations or the
termination of Mr. Horn without cause. Mr. Horn will receive $168,750 in
exchange for these Options.
Assuming that no Common Stock Warrants are exercised prior to expiration
before the Effective Time, holders of Common Stock Warrants will receive cash in
the aggregate amount of $773,654. Mark H. Fisher, Chairman of the Board,
President and Chief Executive Officer of Medical Innovations, holds Common Stock
Warrants to purchase an aggregate of 483,774 shares of Common Stock at various
exercise prices. Mr. Fisher will receive $230,866 in exchange for these Common
Stock Warrants. Harvey R. Houck, Jr., a director of Medical Innovations, holds
Common Stock Warrants to purchase an aggregate of 1,211,046 shares of Common
Stock at various exercise prices. Mr. Houck will receive $517,229 in exchange
for these Common Stock Warrants.
CONDITIONS TO THE MERGER
The respective obligations of Horizon and Medical Innovations to consummate
the Merger are subject to the satisfaction of the following conditions, any or
all of which may be waived in writing by Medical Innovations and Horizon,
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in whole or in part, to the extent permitted by applicable law: (a) the Merger
Agreement shall have been adopted and the Merger shall have been approved by a
vote of the holders of a majority of the outstanding shares of Common Stock;
(b) no Governmental Entity (as defined in the Merger Agreement) or federal or
state court of competent jurisdiction shall have enacted, issued, promulgated,
enforced or entered any statute, rule, regulation, executive order, decree,
injunction or other order (whether temporary, preliminary or permanent) which is
in effect and which has the effect of making the Merger illegal or otherwise
prohibiting consummation of the Merger; (c) the applicable waiting period under
the HSR Act with respect to the transactions contemplated by the Merger
Agreement shall have expired or been terminated; (d) there shall not have been
any action taken, or condition, restriction or limitation imposed by any
Governmental Entity in connection with the grant of a regulatory approval
necessary to the consummation of the Merger that would, with respect to the
continuing business, operations or future prospects of Medical Innovations,
constitute a Company Material Adverse Effect (as defined in the Merger
Agreement) or an Acquiror Material Adverse Effect (as defined in the Merger
Agreement).
The obligation of Horizon to effect the Merger is also subject to the
satisfaction at or prior to the Effective Time of the following conditions, any
or all of which may be waived in writing by Horizon, in whole or in part:
(a) each of the representations and warranties of Medical Innovations contained
in the Merger Agreement shall be true and correct in all material respects as of
the Effective Time; (b) Medical Innovations shall have performed or complied in
all material respects with all agreements and covenants required by the Merger
Agreement to be performed or complied with by it on or prior to the Effective
Time; (c) Medical Innovations will have complied with Section 6.9 of the Merger
Agreement, as described under "Certain Terms of the Merger Agreement -- Warrants
and Stock Options"; and (d) the Preferred Stock Warrant (as defined in the
Merger Agreement) shall not have been exercised.
The obligation of Medical Innovations to effect the Merger is also subject
to the satisfaction at or prior to the Effective Time of the following
conditions, any or all of which may be waived in writing by Medical Innovations,
in whole or in part: (a) each of the representations and warranties of Horizon
and Merger Sub contained in the Merger Agreement shall be true and correct in
all material respects as of the Effective Time as though made as of the
Effective Time; and (b) Horizon and Merger Sub shall have performed or complied
in all material respects with all agreements and covenants required by the
Merger Agreement to be performed or complied with by them on or prior to the
Effective Time.
There can be no assurance that all of the conditions to the Merger will be
satisfied.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties of
Medical Innovations, Merger Sub and Horizon relating to, among other things, (i)
various corporate organizational and authority matters, (ii) votes required to
approve the Merger Agreement, (iii) brokers, and (iv) authorization, execution,
delivery, performance and enforceability of the Merger Agreement and related
matters, and the absence of conflicts, violations and defaults under their
respective charters and bylaws and certain other agreements and documents. The
Merger Agreement also contains various representations and warranties of Medical
Innovations, relating to, among other things, (i) its capitalization,
(ii) compliance with law, (iii) the documents and reports filed by it with the
United States Securities and Exchange Commission (the Commission") and any
applicable state securities authorities, and the accuracy of the information
contained therein, (iv) the absence of certain changes and events,
(v) litigation, (vi) employee benefit and labor matters, (vii) taxes,
(viii) certain business practices, (ix) insurance, (x) properties,
(xi) management contracts of Medical Innovations, and (xii) the fairness opinion
of Montgomery. The representations and warranties expire at the Effective Time.
CERTAIN COVENANTS; CONDUCT OF BUSINESS PRIOR TO THE MERGER
Medical Innovations has agreed that, prior to the Effective Time, unless
expressly contemplated by the Merger Agreement or otherwise consented to in
writing by Horizon, it will and will cause its subsidiaries to (a) operate its
business in the usual and ordinary course consistent with past practices;
(b) use all reasonable efforts to preserve substantially intact its business
organization, maintain its rights and franchises, retain the services of its
respective officers and key employees and maintain its relationships with its
respective customers and suppliers; (c) maintain and keep its properties and
assets in as good repair and condition as at present, ordinary wear and tear
excepted, and maintain supplies and inventories in
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quantities consistent with its customary business practice; and (d) use all
reasonable efforts to keep in full force and effect insurance and bonds
comparable in amount and scope of coverage to that currently maintained.
Medical Innovations has also agreed that, prior to the Effective Time,
unless expressly contemplated by the Merger Agreement or otherwise consented to
in writing by Horizon, it will not do, and will not permit any of its
subsidiaries to do, any of the following: (a)(i) increase the compensation
payable to or to become payable to any director or executive officer;
(ii) increase the compensation payable or pay bonuses to employees other than in
the ordinary course of business, subject to certain exceptions; (iii) grant any
severance or termination pay to, or enter into any employment or severance
agreement with, any director, officer or employee, subject to certain
exceptions; (iv) establish, adopt or enter into any employee benefit plan or
arrangement; or (v) amend, or take any other actions with respect to, any of
Medical Innovations' benefit plans, subject to certain exceptions; (b) declare
or pay any dividend on, or make any other distribution in respect of,
outstanding shares of capital stock or other equity interests, with certain
exceptions; (c)(i) except for certain matters and subject to certain exceptions,
redeem, purchase or otherwise acquire any shares of its or any of its
subsidiaries' capital stock or any securities or obligations convertible into or
exchangeable for any shares of its or its subsidiaries' capital stock, or any
options, warrants or conversion or other rights to acquire any shares of its or
its subsidiaries' capital stock or any such securities or obligations, subject
to certain exceptions; (ii) effect any reorganization or recapitalization; or
(iii) split, combine or reclassify any of its or its subsidiaries' capital stock
or issue or authorize or propose the issuance of any other securities in respect
of, in lieu of or in substitution for, shares of its or its subsidiaries'
capital stock; (d)(i) except for certain matters and as contemplated by the
Merger Agreement, issue, sell, grant, award, deliver or limit the voting rights
of any class of its or its subsidiaries' capital stock, any securities
convertible into or exercisable or exchangeable for any such shares, or any
rights, warrants or options to acquire any such shares; (ii) amend or otherwise
modify the terms of any such rights, warrants or options the effect of which
shall be to make such terms materially more favorable to the holders thereof; or
(iii) take any action to accelerate the vesting of options; (e) acquire or agree
to acquire any business or other entity, or otherwise acquire any assets of any
other person (with certain exceptions); (f) sell or otherwise dispose of any of
its assets or any assets of any of its subsidiaries, with certain exceptions;
(g) release any third party from its obligations under any existing standstill
agreement or arrangement relating to a Competing Transaction (as defined in the
Merger Agreement) or otherwise under any confidentiality or other similar
agreement relating to material information; (h) propose to adopt certain
amendments to its charter or bylaws; (i) change any of its significant
accounting policies or take certain actions with respect to taxes; (j) incur any
obligation for borrowed money or purchase money indebtedness, with certain
exceptions; (k) enter into certain material contracts; or (l) agree in writing
or otherwise to do any of the foregoing.
Horizon has agreed that, prior to the Effective Time, unless expressly
contemplated by the Merger Agreement or otherwise consented to in writing by
Medical Innovations, it will not take any action, and will nor permit its
subsidiaries to take any action, that will result in an Acquiror Material
Adverse Effect.
NO SOLICITATION
Medical Innovations has agreed not to initiate, solicit or encourage
(including by way of furnishing information or assistance), or take any other
action to facilitate, any inquiries or the making of any proposal relating
to, or that may reasonably be expected to lead to, any Competing Transaction,
or enter into discussions or negotiate with any person or entity in
furtherance of such inquiries or to obtain a Competing Transaction, or agree
to or endorse any Competing Transaction, or authorize or permit any of the
officers, directors or employees of Medical Innovations or any of its
subsidiaries or any investment banker, financial advisor, attorney,
accountant or other representative retained by Medical Innovations or any of
its subsidiaries to take any such action, and Medical Innovations is required
to promptly notify Horizon of all relevant terms of any such inquiries and
proposals received by Medical Innovations or any of its subsidiaries or by
any such officer, director, employee, investment banker, financial advisor,
attorney, accountant or other representative relating to any of such matters
and if such inquiry or proposal is in writing, Medical Innovations is
required to promptly deliver or cause to be delivered to Horizon a copy of
such inquiry or proposal; PROVIDED, HOWEVER, that the Board may (i) furnish
information to, or enter into discussions or negotiations with, any person or
entity in connection with an unsolicited bona fide proposal in writing by
such person or entity relating to a Competing Transaction if, and only to
the extent that (A) such unsolicited bona fide proposal is a bona fide
written proposal made by a third party relating to a Competing Transaction on
terms that the Board determines it cannot then reject in favor of the Merger,
based on applicable fiduciary duties and the advice of counsel and for which
financing, to the extent required, is then committed, (B) the Board, after
duly considering the written advice of
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outside legal counsel to Medical Innovations, determines in good faith that such
action is required for the Board to comply with its fiduciary duties to
stockholders imposed by the DGCL and (C) prior to furnishing such information
to, or entering into discussions or negotiations with, such person or entity,
Medical Innovations has provided written notice to Horizon to the effect that it
is furnishing information to, or entering into discussions or negotiations with,
such person or entity; or (ii) comply with Rule 14e-2 promulgated under the
Exchange Act with regard to a Competing Transaction.
CERTAIN POST-MERGER MATTERS
Once the Merger is consummated, Merger Sub will cease to exist as a
corporation, and Medical Innovations, as the surviving corporation, will succeed
to all of the assets, rights and obligations of Merger Sub.
Pursuant to the Merger Agreement, the Medical Innovations Certificate of
Incorporation and the Medical Innovations By-laws, as in effect immediately
prior to the Effective Time, will be the certificate of incorporation and bylaws
of Medical Innovations, as the surviving corporation, until amended as provided
therein and pursuant to the DGCL.
TERMINATION OR AMENDMENT OF THE MERGER AGREEMENT
The Merger Agreement may be terminated at any time prior to the Effective
Time, whether before or after adoption of the Merger Agreement and approval of
the Merger by the stockholders of Medical Innovations: (a) by mutual consent of
Horizon and Medical Innovations; (b) by Horizon, upon a breach of any material
representation, warranty, covenant or agreement on the part of Medical
Innovations set forth in the Merger Agreement, or if any representation or
warranty of Medical Innovations shall have become untrue, in either case such
that Horizon's conditions to effecting the Merger would not be satisfied,
subject to a limited cure period under certain circumstances (a "Terminating
Medical Innovations Breach"); (c) by Medical Innovations, upon a breach of any
material representation, warranty, covenant or agreement on the part of Horizon
or Merger Sub set forth in the Merger Agreement, or if any representation or
warranty of Horizon or Merger Sub shall have become untrue, in either case such
that the conditions to Medical Innovations effecting the Merger would not be
satisfied, subject to a limited cure period under certain circumstances (a
"Terminating Horizon Breach"); (d) by either Horizon or Medical Innovations, if
there shall be any Order (as defined in the Merger Agreement) which is final and
nonappealable preventing the consummation of the Merger, subject to a limited
exception; (e) by either Horizon or Medical Innovations, if the Merger shall not
have been consummated before September 30, 1996; PROVIDED, HOWEVER, that the
Merger Agreement may be extended by written notice of either Horizon or Medical
Innovations to a date not later than December 31, 1996 if the Merger shall not
have been consummated as a result of Medical Innovations, Horizon or Merger Sub
having failed by September 30, 1996 to receive all required regulatory approvals
or consents with respect to the Merger or as the result of the entering of an
Order; (f) by either Horizon or Medical Innovations, if the Merger Agreement and
the Merger shall fail to receive the requisite vote or consent for approval and
adoption by the stockholders of Medical Innovations; (g) by Horizon, if (1) the
Board withdraws, modifies or changes its recommendation of the Merger Agreement
or the Merger in a manner adverse to Horizon or shall have resolved to do any of
the foregoing; (2) a tender offer or exchange offer for outstanding shares of
capital stock of Medical Innovations then representing more of the combined
power to vote generally for the election of directors than is subject to the
Voting Agreement as of the date of the Merger Agreement is commenced, and the
Board does not recommend that stockholders not tender their shares into such
tender or exchange offer, or (3) any person (other than Horizon or an affiliate
thereof) shall have acquired beneficial ownership or the right to acquire
beneficial ownership of, or any "group" (as such term is defined under Section
13(d) of the Exchange Act and the rules and regulations promulgated thereunder)
shall have been formed that beneficially owns, or has the right to acquire
beneficial ownership of, outstanding shares of capital stock of Medical
Innovations then representing more of the combined power to vote generally for
the election of directors than is subject to the Voting Agreement as of the date
of the Merger Agreement; or (h) by Medical Innovations or Horizon, if Medical
Innovations accepts a Superior Proposal and pays the Termination Fee (as defined
below) and the expenses as required by the Merger Agreement. See "Certain Terms
of the Merger Agreement -- Expenses and Termination Fee."
Subject to limited exceptions, including the survival of Medical
Innovations' agreement to pay a fee in the amount of $1,000,000 (the
"Termination Fee") to Horizon under certain circumstances, in the event of the
termination of the Merger Agreement, the Merger Agreement will become void,
there will be no liability on the part of Horizon, Merger Sub or Medical
Innovations or any of their respective officers of directors to the other and
all rights and obligations of the parties
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thereto will cease, except that no party will be relieved from its obligations
with respect to any breach of the Merger Agreement.
The Merger Agreement may be amended by the parties thereto by action taken
by or on behalf of their respective boards of directors at any time prior to the
Effective Time; PROVIDED, HOWEVER, that, after approval of the Merger by the
stockholders of Medical Innovations, no amendment may be made that would reduce
the amount or change the type of consideration into which each share of Common
Stock is to be converted pursuant to the Merger Agreement upon consummation of
the Merger. At any time prior to the Effective Time, any party to the Merger
Agreement may (a) extend the time for the performance of any of the obligations
or other acts of the other party thereto, (b) waive any inaccuracies in the
representations and warranties of the other party contained therein or in any
document delivered pursuant thereto and (c) waive compliance by the other party
with any of the agreements or conditions contained therein.
EXPENSES AND TERMINATION FEE
All expenses incurred by Horizon or Medical Innovations will be borne by
the party incurring such expenses; PROVIDED HOWEVER, that Horizon may, at its
option, pay any expenses incurred by Medical Innovations in connection with the
Merger.
The Merger Agreement provides that Medical Innovations will pay to Horizon
the Termination Fee if the Merger Agreement is terminated (i) by either Horizon
or Medical Innovations as a result of the Merger Agreement and the Merger
failing to receive the requisite vote of the stockholders of Medical Innovations
and, prior to the presentment of the Merger and the Merger Agreement to the
holders of Common Stock, Medical Innovations shall have furnished information
to, or entered into discussions or negotiations with, any person or entity with
respect to a Competing Transaction involving Medical Innovations or any of its
subsidiaries and the Board shall have not reaffirmed its recommendation to the
stockholders of Medical Innovations with respect to the transactions
contemplated by the Merger Agreement in time of such presentment; (ii) by
Horizon, if the Board withdraws, modifies or changes its recommendation of the
Merger Agreement or the Merger in a manner adverse to Horizon (or resolves to do
so); (iii) by Horizon, if the Board shall recommend any Competing Transaction to
Medical Innovations' stockholders (or resolves to do so); (iv) by Horizon, if a
tender or exchange offer for outstanding shares of capital stock of Medical
Innovations then representing more of the combined power to vote generally for
the election of directors than subject to the Voting Agreement as of the date of
the Merger Agreement is commenced, and the Board does not recommend that
stockholders not tender their shares into such tender or exchange offer; (v) by
Horizon, as a result of any person having acquired beneficial ownership or the
right to acquire beneficial ownership of, or any "group" being formed that
beneficially owns, or has the right to acquire beneficial ownership of,
outstanding shares of capital stock of Medical Innovations then representing
more of the combined power to vote generally for the election of directors than
is subject to the Voting Agreement as of the date of the Merger Agreement;
(vi) by Horizon or Medical Innovations as a result of Medical Innovations
accepting a Superior Proposal; or (vii) (a) by Horizon or Medical Innovations as
a result of a Terminating Medical Innovations Breach, which is not cured within
the applicable cure period, or as a result of the Merger not being consummated
before September 30, 1996 (provided, however, that the Merger Agreement may be
extended by either Horizon or Medical Innovations to a date no later than
December 31, 1996 under certain circumstances) at which time a Terminating
Medical Innovations Breach existed and (b) within nine months after such
termination a Competing Transaction is consummated (with certain exceptions) or
any person shall have acquired beneficial ownership or the right to acquire
beneficial ownership of, or any "group" shall have been formed that beneficially
owns, or has the right to acquire beneficial ownership of, outstanding shares of
capital stock of Medical Innovations then representing more of the combined
power to vote generally for the election of director than is subject to the
Voting Agreement as of the date of the Merger Agreement.
INDEMNIFICATION
Medical Innovations and Horizon each agree in the Merger Agreement to
indemnify and hold harmless each other and each other's directors and officers,
from and against any loss, claim, damage, cost, liability, obligation or expense
(including reasonable attorney's fees and costs of investigation) to which any
indemnified party may become subject under the Securities Act, the Exchange Act
or otherwise, insofar as such loss, claim, damage, cost, liability, obligation
or expense or actions in respect thereof arises out of or is based upon any
untrue statement or alleged untrue statement of a material fact
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relating to such indemnifying party and contained in the Proxy Statement or
arises out of or is based upon the omission or alleged omission to state therein
a material fact required to be stated therein or necessary to make the
statements therein with respect to such indemnifying party not misleading or
necessary to make the statements therein with respect to such indemnifying
party, in light of the circumstances under which they were made, not misleading.
The Merger Agreement provides that (i) for a period of five years after the
Effective Time, Medical Innovations will not amend its charter or bylaws to
reduce or limit the rights of indemnity afforded to the present and former
directors and officers of Medical Innovations thereunder or as to the ability of
Medical Innovations to indemnify such persons, or to hinder, delay or make more
difficult the exercise of such rights of indemnity or ability to indemnify and
(ii) Medical Innovations will at all times exercise the powers granted to it by
its charter and bylaws and by applicable law to indemnify to the fullest extent
possible the present and former directors, officers, employees and agents of
Medical Innovations against claims made against them arising from their service
in such capacities.
The Merger Agreement also provides that Horizon will guarantee the payment
of Medical Innovations' indemnification obligations up to an amount determined
as of the Effective Time equal to (i) the fair market value of any Medical
Innovations assets distributed to Horizon, minus (ii) any Medical Innovations
liabilities assumed by Horizon, minus (iii) the fair market value of any Horizon
assets contributed to Medical Innovations, and plus (iv) any Horizon liabilities
assumed by Medical Innovations.
THE VOTING AGREEMENT
In connection with the execution of the Merger Agreement, Harvey R.
Houck, Jr., Harvey R. Houck, Jr. & Patricia W. Houck Foundation, Inc., Mark H.
Fisher, Arthur L. Rice, Lauretta Rice Colvin, Angela Rice McBride, Thomas Kaled,
Luis Campos, Philip Tuttle and John Schurwon (collectively, the "Stockholders")
have entered into a voting agreement with Horizon, dated as of May 15, 1996 (the
"Voting Agreement"). As of the date of the Voting Agreement, the Stockholders
held shares of Common Stock representing, in the aggregate, approximately 43% of
the voting power of Medical Innovations. The Voting Agreement was entered into
after negotiations between Horizon and Medical Innovations. Horizon requested
the Stockholders to enter into the Voting Agreement in order to ensure that the
Stockholders, in their individual capacities as stockholders, would vote their
shares in favor of the Merger and in opposition to any Competing Transaction.
Horizon's request was presented as an integral part of the overall transaction,
and the Stockholders agreed to execute the Voting Agreement to facilitate the
Merger.
As of the Record Date, the Stockholders held 6,855,285 shares of Common
Stock, representing approximately 43% of the shares entitled to vote at the
Special Meeting. Pursuant to the Voting Agreement, the Stockholders have, among
other things, agreed to vote all shares of Common Stock beneficially owned by
them in favor of the Merger and (if requested by Horizon, not (i) to attend, or
vote any Common Stock beneficially owned by them at, any annual or special
meeting of stockholders or (ii) to execute any written consent of stockholders)
against any combination proposal or other matter that may interfere or be
inconsistent with the Merger.
The Stockholders have also agreed that no Stockholder will, directly or
indirectly, sell, transfer, pledge or otherwise dispose of, or grant a proxy
with respect to, any shares of Common Stock to any person other than Horizon or
its designee, or grant an option with respect to any of the foregoing, or enter
into any other agreement or arrangement with respect to any of the foregoing.
The Voting Agreement also provides that no Stockholder will, in his or her
capacity as a stockholder, initiate, solicit or encourage (including by way of
furnishing information or assistance), or take any other action to facilitate,
any inquiries or the making of any proposal relating to, or that may reasonably
be expected to lead to, any Competing Transaction, or enter into discussions or
negotiate with any person or entity in furtherance of such inquiries or to
obtain a Competing Transaction, or agree to, or endorse, any Competing
Transaction, or authorize or permit any employee, investment banker, financial
advisor, attorney, accountant or other representative retained by any
Stockholder to take any such action.
The parties to the Voting Agreement have agreed that nothing in the Voting
Agreement will be deemed to prohibit any Stockholder from acting in accordance
with such Stockholder's fiduciary duties solely to the extent that such
43
<PAGE>
Stockholder is acting in the capacity of officer or director of Medical
Innovations. The Voting Agreement terminates upon the termination of the Merger
Agreement.
BENEFICIAL OWNERSHIP
BY CERTAIN STOCKHOLDERS AND
MANAGEMENT OF MEDICAL INNOVATIONS
The following table sets forth certain information regarding the beneficial
ownership, as of the close of business on the Record Date, of shares of Common
Stock by each person who is known to Medical Innovations to be a beneficial
owner of 5% or more of the Common Stock, each current director, certain
executive officers of Medical Innovations as of the Record Date and all current
directors and executive officers of Medical Innovations as a group. The Common
Stock is the only class of voting securities outstanding. Unless otherwise
indicated, each person or entity set forth in the table has sole investment and
voting power with respect to all shares shown as beneficially owned, subject to
community property laws, where applicable, shares of Common Stock are owned
beneficially and of record, unless otherwise specified.
<TABLE>
<CAPTION>
NAME AND ADDRESS
OF BENEFICIAL OWNER (1) NUMBER PERCENT
- ----------------------- ------ -------
SHARES BENEFICIALLY OWNED
-------------------------
<S> <C> <C>
Mark H. Fisher. . . . . . . . . . . . . 934,529(2) 5.7%
Thomas J. Kaled . . . . . . . . . . . . 963,409(3) 6.0%
David C. Horn . . . . . . . . . . . . . 70,000(4) *
J. William Wilson . . . . . . . . . . . 3,110 *
Arthur L. Rice. . . . . . . . . . . . . 2,053,609(5) 12.9%
Luis T. Campos, M.D.. . . . . . . . . . 749,795(6) 4.7%
Harvey R. Houck, Jr.. . . . . . . . . . 2,324,683(7) 13.5%
Philip A. Tuttle. . . . . . . . . . . . 468,004 2.9%
All executive officers and
directors as a group (8 persons). . . 7,567,139(8) 42.7%
Horizon/CMS Healthcare Corporation. . . 8,588,287(9) 48.6%
601 Indian School Road, Suite 500
Albuquerque, New Mexico 87110
John Schurwon . . . . . . . . . . . . . 351,430(10) 2.2%
One Riverway #2300
Houston, Texas 77056
</TABLE>
___________
* Less than 1%
(1) The address for all officers and directors is One Riverway, Suite 2300,
Houston, Texas 77056.
(2) Includes 450,755 shares owned of record by Mr. Fisher and 483,774 shares
purchasable by Mr. Fisher under Common Stock Warrants exercisable within 60 days
after the Record Date. Excludes 7,500 shares held by a member of Mr. Fisher's
family, the beneficial ownership of which Mr. Fisher disclaims.
(3) Includes 948,409 shares owned of record by Mr. Kaled and 15,000 shares
owned by his spouse.
(4) Includes 20,000 shares owned of record by Mr. Horn and 50,000 shares
purchasable by Mr. Horn under Options exercisable within 60 days after the
Record Date.
(5) Includes shares owned of record by Mr. Rice and his wife, of which 101,680
shares are held in escrow. Such escrowed shares will be transferred to Mr. and
Mrs. Rice, subject to any right of offset Medical Innovations may have against
such shares for indemnification claims relating to the acquisition of HHCC.
Includes 20,000 shares purchasable by Mr. Rice under Options exercisable within
60 days after the Record Date. Excludes 1,228,864 shares held by members of
Mr. Rice's family, the beneficial ownership of which Mr. Rice disclaims.
(6) Includes 744,795 shares owned of record by Dr. Campos and 5,000 shares
owned by his spouse.
(7) Includes 489,241 shares owned of record by Mr. Houck, 224,396 shares owned
of record by his wife, 400,000 shares owned of record by the Harvey R. Houck and
Patricia W. Houck Foundation, Inc., a foundation controlled by Mr. and
Mrs. Houck, and 1,211,046 shares purchasable by Mr. Houck under Common Stock
Warrants exercisable within 60 days after the Record Date. Excludes 508,304
shares held by members of Mr. Houck's family, the beneficial ownership of which
Mr. Houck disclaims.
(8) Includes 1,764,820 shares purchasable by executive officers and directors
under Common Stock Warrants and Options exercisable within 60 days after the
Record Date.
44
<PAGE>
(9) Includes 6,855,285 shares owned by certain stockholders of Medical
Innovations, including executive officers and directors, who executed the Voting
Agreement with Horizon described below, and 1,733,002 shares purchasable by such
stockholders under Common Stock Warrants and Options exercisable within 60 days
after the Record Date. All but 987,224 of the shares listed as beneficially
owned by Horizon are also listed as being beneficially owned by others in the
table. These shares have been included as being beneficially owned by Horizon
solely because Horizon may, under Rule 13d-3 promulgated under the Exchange Act,
be deemed to have shared voting power as to such shares for the sole purpose of
approving the proposed merger of Horizon and Medical Innovations (and various
related matters). Horizon does not have any investment power, or voting power
for any other purpose. Horizon disclaims beneficial ownership of any such
shares.
(10) Mr. Schurwon may be deemed a beneficial owner of over 5% of Common Stock,
as described below. Includes 333,248 shares owned of record by Mr. Schurwon and
18,182 shares purchasable by Mr. Schurwon under Common Stock Warrants
exercisable within 60 days after the Record Date.
Mark H. Fisher, Harvey R. Houck, Jr. and John Schurwon (the "Collateral
Guarantors") received, among other consideration, warrants to purchase an
aggregate of 100 shares of the Medical Innovations' authorized Class A preferred
stock for the purchase price of $100.00 per share (the "Preferred Warrants"), as
compensation for their financing of the PVNS acquisition in 1993. The Preferred
Warrants are currently exercisable only in the event of certain defaults by
Medical Innovations or the Collateral Guarantors under (i) Medical Innovations'
$3,625,000 term loan with its bank (the "Term Note"), (ii) the loan documents
representing a $1,575,000 revolving credit facility (the "Guaranteed Revolver"),
or (iii) the related collateral maintenance agreements, or the bank liquidates
the collateral of the Collateral Guarantors. The Preferred Warrants expire when
the outstanding balance of the Term Note, added to the Guaranteed Revolver, is
$1,175,000 or less and Medical Innovations is not in default under the Term Note
or the Guaranteed Revolver. If the Preferred Warrants are exercised and the
outstanding balance of the Term Note and the Guaranteed Revolver are $3,625,000
or more, the holders of the preferred stock have the right to elect a majority
of the members of the Board. The Collateral Guarantors have executed a Voting
Trust Agreement governing the Preferred Warrants, which provides for Mr. Houck,
as trustee, to vote all shares of preferred stock issued upon exercise of the
Preferred Warrants, until such shares are redeemed. Mr. Houck, therefore, upon
exercise of the Preferred Warrants, may obtain the right to elect additional
directors that constitute a majority of the Board. The total aggregate balance
of the Term Note and the Guaranteed Revolver as of March 31, 1996, was
$5,200,000. The Collateral Guarantors may be deemed to be a "group" under the
rules of the Commission and may each, therefore be deemed to beneficially own
all of the shares of Common Stock held by the other Collateral Guarantors. Each
of the Collateral Guarantors disclaim any beneficial ownership of the shares of
Common Stock held by the others.
INDEPENDENT ACCOUNTANTS
It is expected that representatives of Price Waterhouse LLP will be present
at the Special Meeting to respond to appropriate questions of stockholders and
to make a statement if they so desire.
STOCKHOLDER PROPOSALS
If the Merger is not consummated, any proposals of stockholders of Medical
Innovations intended to be presented at the Annual Meeting of Stockholders of
Medical Innovations to be held in 1996 must have been received by Medical
Innovations, addressed to the Secretary of Medical Innovations at One Riverway,
Suite 2300, Houston, Texas 77056, by no later than January 13, 1996, to be
considered for inclusion in the proxy statement and form of proxy relating to
that meeting.
AVAILABLE INFORMATION
Medical Innovations is subject to the informational requirements of the
Exchange Act and, in accordance therewith, files reports and other information
with the Commission. Reports, proxy statements and other information filed by
Medical Innovations can be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's Regional Offices at Seven World Trade
Center, 13th Floor, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such
material can be obtained by mail from the Public Reference Section of the
Commission at 450 West Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. After the Merger, registration of the Common Stock under the Exchange Act
will be terminated. Copies of the documents referred to herein may also be
obtained from Medical Innovations, without charge, upon request to Medical
Innovations, Mark H. Fisher, President, One Riverway, Suite 2300, Houston, Texas
77056.
45
<PAGE>
INDEX TO MEDICAL INNOVATIONS
HISTORICAL CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Consolidated Financial Statements as of December 31, 1995 and 1994
And for the Years Ended December 31, 1995, 1994 and 1993:
Report of Independent Accountants F-2
Balance Sheets F-3
Statements of Operations F-4
Statements of Stockholders' Equity F-5
Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-8
Condensed Consolidated Financial Statements as of March 31, 1996
And for the Three Months Ended March 31, 1996 and 1995:
Condensed Balance Sheets F-25
Condensed Statements of Operations F-26
Condensed Statements of Cash Flows F-27
Notes to Condensed Consolidated Financial Statements F-29
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Medical Innovations, Inc.
In our opinion, the accompanying consolidated financial statements listed in the
accompanying index on page F-1 present fairly, in all material respects, the
financial position of medical innovations, inc. And its subsidiaries at December
31, 1995 and 1994, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in note 14 to the consolidated financial statements, the Company
entered into an agreement in May 1996 to merge with Horizon/CMS Healthcare
Corporation.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Houston, Texas
March 18, 1996, except for Note 14,
Which is as of May 15, 1996
F-2
<PAGE>
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
ASSETS 1995 1994
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 292,666 $ 1,415,294
Short-term investments -- 201,000
Accounts receivable, net 11,981,393 9,830,269
Inventories 324,750 257,360
Deferred income taxes 546,227 347,047
Other 632,104 532,046
----------- -----------
Total current assets 13,777,140 12,583,016
Property and equipment, net 2,120,249 1,926,209
Excess cost over net assets of acquired
companies, net of amortization of
$761,383 and $438,896 12,008,946 12,258,000
Other, net 1,183,821 825,656
----------- -----------
Total Assets $29,090,156 $27,592,881
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and other debt $ 1,171,193 $ 1,773,798
Accounts payable and accrued liabilities 2,871,216 2,623,754
Accrued compensation and benefits 2,752,828 2,518,077
Reserve for government program settlements 917,199 1,784,256
Income taxes payable 841,887 70,773
----------- -----------
Total current liabilities 8,554,323 8,770,658
Notes payable and other debt 10,590,163 10,040,016
Other accrued liabilities 498,913 678,236
Deferred income taxes 107,453 32,804
----------- -----------
Total liabilities 19,750,852 19,521,714
----------- -----------
Stockholders' equity:
Preferred stock - par value $.01 per share; 3,000,000
shares authorized, none issued or outstanding -- --
Common stock - par value $.0075 per share; 75,000,000
shares authorized, 15,927,873 and 15,828,873 shares
Issued and outstanding 119,459 118,717
Additional paid-in capital 7,506,917 7,349,517
Retained earnings 1,712,928 602,933
----------- -----------
Total stockholders' equity 9,339,304 8,071,167
----------- -----------
Commitments and contingencies ----------- -----------
Total liabilities and stockholders' equity $29,090,156 $27,592,881
----------- -----------
----------- -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS STATEMENT.
F-3
<PAGE>
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Revenues $69,389,360 $60,378,148 $34,577,204
----------- ----------- -----------
Costs and expenses:
Direct patient care 41,731,088 37,749,829 21,411,834
Selling, general and administrative 23,576,444 19,731,382 10,885,997
Provision for doubtful accounts 1,159,695 933,151 647,036
Merger transaction costs 61,774 178,265 --
----------- ----------- -----------
Total costs and expenses 66,529,001 58,592,627 32,944,867
----------- ----------- -----------
Income from operations 2,860,359 1,785,521 1,632,337
Gain on sale of minority interest -- 128,500 --
Interest expense 1,067,189 859,746 420,839
----------- ----------- -----------
Income before income taxes 1,793,170 1,054,275 1,211,498
Provision for income taxes 683,175 444,469 469,465
----------- ----------- -----------
Net income $ 1,109,995 $ 609,806 $ 742,033
----------- ----------- -----------
----------- ----------- -----------
Net income per common and common
equivalent share $ .07 $ .04 $ .05
----------- ----------- -----------
----------- ----------- -----------
Weighted average common and common
equivalent shares outstanding 16,697,192 17,374,982 15,899,342
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS STATEMENT.
F-4
<PAGE>
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED
------------------------ PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
------ ------ ------- --------- -----
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1993
As previously reported 9,541,341 $ 71,560 $2,216,535 $ (442,923) $1,845,172
Pooling of interests with HHCC 3,262,473 24,469 547,470 (305,983) 265,956
---------- -------- ---------- ---------- ----------
Balance, January 1, 1993, as restated 12,803,814 96,029 2,764,005 (748,906) 2,111,128
Stock issued for acquisitions of:
Preferred 300,000 2,250 89,055 91,305
PVNS 1,100,000 8,250 1,575,248 1,583,498
Advance 203,934 1,530 380,845 382,375
Warrants issued for debt guarantees 200,000 200,000
Exercise of warrants from public offering 1,796,336 13,472 2,879,921 2,893,393
Offering costs (266,078) (266,078)
Stock issued for services 47,837 359 47,478 47,837
Net income 742,033 742,033
---------- -------- ---------- ---------- ----------
Balance, December 31, 1993 16,251,921 121,890 7,670,474 (6,873) 7,785,491
Stock issued for acquisition of PRN Nevada 380,952 2,857 747,143 750,000
Tax benefit of warrants exercised 38,282 38,282
Stock returned in connection with PVNS
settlement and subsequently cancelled (850,000) (6,375) (1,268,625) (1,275,000)
Merger transaction costs paid by shareholder 100,000 100,000
Exercise of stock options, including tax benefit 46,000 345 62,243 62,588
Net income 609,806 609,806
---------- -------- ---------- ---------- ----------
Balance, December 31, 1994 15,828,873 118,717 7,349,517 602,933 8,071,167
Purchase of minority interest 85,000 637 142,800 143,437
Exercise of stock options, including tax benefit 14,000 105 14,600 14,705
Net income 1,109,995 1,109,995
---------- -------- ---------- ---------- ----------
Balance, December 31, 1995 15,927,873 $119,459 $7,506,917 $1,712,928 $9,339,304
---------- -------- ---------- ---------- ----------
---------- -------- ---------- ---------- ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS STATEMENT.
F-5
<PAGE>
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $1,109,995 $ 609,806 $ 742,033
Noncash adjustments:
Depreciation and amortization 1,024,316 959,979 437,335
Deferred income taxes (124,531) 388 99,380
Provision for doubtful accounts 1,159,695 933,151 647,036
Income recognized in connection with
Pvns settlement -- (285,016) --
Professional fees incurred by shareholder -- 100,000 --
Other (8,544) 16,855 24,951
Changes in operating assets and liabilities,
Net of acquisitions:
Accounts receivable (3,310,819) (2,317,631) (3,112,067)
Income taxes 790,341 119,073 520,284
Other assets (120,403) (294,405) (264,426)
Accounts payable and accrued liabilities,
including compensation and benefits 483,943 (267,683) 788,131
Reserve for government program settlements (867,057) (934,894) --
Other liabilities 5,184 (36,760) 59,760
------------ ------------ ------------
Net cash provided (used) by operating
activities 142,120 (1,397,137) (57,583)
------------ ------------ ------------
Cash flows from investing activities:
Sale of short term investments 201,000 -- 414,216
Acquisition of PVNS -- -- (5,300,654)
Acquisition of advance -- -- (374,873)
Acquisition of stat -- (276,992) --
Acquisition of PRN Nevada -- (907,533) --
Acquisition of PVNS (56,468) -- --
Acquisition expenses (41,116) (97,021) (133,579)
Purchases of property and equipment (229,445) (681,637) (178,052)
Other -- 57,389 --
------------ ------------ ------------
Net cash used by investing activities (126,029) (1,905,794) (5,572,942)
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS STATEMENT.
F-6
<PAGE>
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from notes payable $ -- $ 9,960,297 $ 797,976
Proceeds from subordinated note and demand
loans payable to related parties 300,000 2,600,000 5,524,000
Revolving credit facilities:
Borrowings 11,670,000 15,261,764 4,307,507
Repayments (10,370,000) (12,036,764) (5,407,507)
Payments on notes payable and capital lease
obligations, including related party debt (2,474,527) (12,844,831) (390,688)
Payments on obligation to former owners of PVNS (272,592) (256,996) --
Proceeds from exercise of warrants, net -- -- 2,627,315
Proceeds from exercise of stock options 8,400 51,880 --
----------- ----------- ----------
Net cash provided (used) by financing
activities (1,138,719) 2,735,350 7,458,603
----------- ----------- ----------
Net increase (decrease) in cash and equivalents (1,122,628) (567,581) 1,828,078
Cash and equivalents at beginning of year 1,415,294 1,982,875 154,797
----------- ----------- ----------
Cash and equivalents at end of year $ 292,666 $ 1,415,294 $1,982,875
----------- ----------- ----------
----------- ----------- ----------
Cash paid during the period for:
Interest $ 1,123,760 $ 862,684 $ 338,460
Income taxes 48,769 319,376 37,079
Noncash transactions (not otherwise disclosed):
Assets acquired under capital lease obligations $ 348,113 $ 640,323 $ 104,872
Issuance of stock to acquire minority interest 143,437 -- --
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS STATEMENT.
F-7
<PAGE>
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BUSINESS
Medical innovations, Inc. And its subsidiaries (collectively referred to as the
"Company") specialize in providing intermittent and extended healthcare
services, intravenous therapies and personal care services to patients in their
home and homecare management and consulting services to hospitals, skilled
nursing facilities, and other providers under contractual arrangements. As more
fully described in Note 3, a large portion of the Company's business is
concentrated in providing services to beneficiaries of government health
programs.
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Medical
Innovations, Inc, and its majority-owned subsidiaries. All significant
intercompany accounts and transactions are eliminated in consolidation.
The consolidated financial statements for prior years have been restated to
reflect a merger, accounted for as a pooling of interests, completed in May 1995
as more fully described in Note 2. In addition, certain amounts previously
reported have been reclassified to conform with their 1995 presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses, and
disclosure of contingent assets and liabilities. Because of the inherent
subjectivity of this process, actual future results could differ from that
expected at the reporting date.
REVENUE RECOGNITION
Revenue for healthcare services (including related products) is recognized when
services are rendered at the net realizable amounts expected to be received from
payors, patients, and others. Management and consulting fee revenue is recorded
in accordance with contract terms and in the period which the services are
performed. Amounts reimbursed by certain payors of healthcare services are
subject to examination and retroactive adjustment. Anticipated adjustments are
accrued on an estimated basis and adjusted in future periods as the final
settlements are determined. Earnings are also charged with a provision for
doubtful accounts based on an ongoing review of collectibility.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
For purposes of the accompanying statements of cash flows, cash equivalents
include highly liquid investments with original maturities of three months or
less. Similar investments with original maturities beyond three months are
considered short-term investments. Investments in marketable debt securities, if
any, are reported (1) at amortized cost if the Company's intent and ability is
to hold such securities to maturity or (2) at fair value with unrealized
gains and losses reflected as a separate component of
F-8
<PAGE>
stockholders' equity if the investments are available for use in current
operations. Short-term investments at December 31, 1994 consisted of a bank
certificate of deposit carried at cost which approximated market value. There
were no short-term investments at December 31, 1995.
INVENTORIES
Inventories consist of medical supplies and pharmaceuticals and are stated at
the lower of cost (first-in, first-out basis) or market.
EXCESS COST OVER NET ASSETS OF ACQUIRED COMPANIES
The purchase price of an acquired company is allocated to the fair value of the
tangible and identifiable intangible assets (Such as contracts) and liabilities
of such company as of the effective date of the acquisition, with any excess
cost allocated to "excess cost over net assets of acquired companies" and
amortized on a straight-line basis over forty years. In the acquisition of
PVNS, advance and PRN Nevada, their respective reputations, locations, growth
potential and significant market shares, combined with (i) the Company's managed
care, administrative and related synergies and (ii) each acquired entity's
contribution to the Company's strategy of achieving geographical strength and
economies of scale, were the principal aspects of value received by the Company.
These factors are indicative of going concern value rather than separate
intangible assets and, accordingly, the Company allocated substantially all of
the excess purchase prices for these companies to this asset.
Management believes that the "excess cost over net assets of acquired companies"
has an unlimited useful life and therefore has assigned a forty-year
amortization period for this asset. In determining that the life of this asset
is unlimited, management considered factors such as: (1) the market share,
locations, reputation and related business attributes of each acquisition as
discussed above; (2) the nature of the home healthcare industry which is
positively impacted by aging trends and the continued transfer of patients from
high-cost, acute care settings to home healthcare; (3) the increasing acceptance
by medical professionals of home healthcare as a better alternative to
institutionalized care; and (4) the nature of the personal services provided
which will be continuously needed in the future and are not subject to
obsolescence.
The Company reviews the realizability of this asset whenever events or
circumstances occur which indicate the recorded cost may not be recoverable.
Principal factors considered by the Company in this review include changes in
market share and competitive conditions, technological and regulatory changes
(including reimbursement), demand trends, and earnings trends of the acquired
companies. If such a review indicates that the undiscounted future cash flows
from operations of the acquired business are less than the recorded asset, its
carrying amount will be reduced to its estimated fair value. In the absence of
an active market for the asset, fair value will be estimated using accepted
valuation techniques, including discounted cash flow analysis. While projection
of current facts and circumstances to future periods is inherently uncertain,
the Company is not aware of any adverse changes in the above referenced factors.
ACCOUNTING FOR IMPAIRMENT OF LONG-LIVED ASSETS
Effective January 1, 1995, the Company adopted statement of financial accounting
standards No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF, which covers the accounting for the
impairment of long-lived assets such as "excess cost over net assets of acquired
companies." The Company believes that its previous impairment policy was
substantially similar to the new requirements. Accordingly, the new standard
did not have a significant effect on the Company's financial position or results
of operations.
F-9
<PAGE>
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Major additions or improvements to
property and equipment are capitalized and depreciated over the estimated useful
lives of the related assets. Routine maintenance and repair costs are expensed
as incurred. Depreciation is computed on a straight-line basis over estimated
useful lives of three to five years.
OTHER ASSETS
Other assets consist primarily of debt issuance costs, which are deferred and
amortized over the terms of the related debt agreements, and the allocated cost
of acquired customer lists and contracts, which are amortized on a straight-line
basis over their estimated useful lives of five to ten years. Additionally,
costs incurred by the Company to develop its home infusion software programs for
sale to third parties were capitalized and are being amortized on a straight-
line basis over an estimated useful life of five years. Such costs were
capitalized only after technological feasibility was reached as demonstrated by
the Company's successful use in its operations. The rights to these programs
were subsequently sold as described in note 11 and no further costs were
capitalized; however, the Company retained the right for their use in its
internal operations. Other assets are shown net of accumulated amortization of
$585,344 in 1995 and $345,564 in 1994.
INCOME TAXES
Deferred income taxes are accounted for using an asset and liability approach
which requires the recognition of deferred tax liabilities and assets for the
expected future tax consequences of temporary differences between the carrying
amounts and the tax bases of assets and liabilities. This method gives
immediate effect to changes in income tax laws when enacted and the income
statement effect is derived from changes in deferred income taxes on the balance
sheet.
PER SHARE DATA
Net income per common and common equivalent share is based on the weighted
average number of common shares and equivalents outstanding during the period,
which has been restated to reflect the merger completed in 1995 as more fully
described in note 2. Common stock equivalents consisting of stock options and
warrants are included in the computation of weighted average shares when their
effect is dilutive.
SEGMENT INFORMATION
The Company operates solely within the United States in the home healthcare
industry segment.
NOTE 2 - ACQUISITIONS:
PREFERRED PHARMACY AND PREFERRED HOMECARE
Effective January 1, 1993, the Company acquired substantially all of the
operating assets, except cash and accounts receivable, of Preferred Homecare,
Inc.("Homecare") and Preferred Pharmacy, Inc. ("Pharmacy" and, collectively with
Homecare, referred to as "preferred"), for 200,000 and 100,000 restricted shares
of the Company's common stock, respectively. The acquisition was accounted for
by the purchase method. Accordingly, the results of operations of the acquired
companies are included with those of the Company for periods subsequent to the
date of the acquisition.
F-10
<PAGE>
PHYSICIAN'S VISITING NURSE SERVICE
Effective May 1, 1993, the Company purchased all of the outstanding common stock
of Physician's Visiting Nurse Service, Inc. ("PVNS"), a provider of skilled
homecare and homemaker services. Consideration for the purchase consisted of
$5,312,000 in cash, 1,100,000 restricted shares of the Company's common stock,
and a note payable to the former owners in the principal amount of $1,000,000.
The Company also entered into agreements to make future payments to the former
owners resulting in a total obligation of approximately $1,211,000, net of
amounts attributable to compensation and imputed interest at 7-1/2%. Of the
remaining obligation of $753,644 at December 31, 1995, $298,819 is included in
accrued liabilities.
This obligation is secured by a subordinated lien on accounts receivable of the
Company, is payable in approximately equal monthly installments through June
1998 and is not contingent upon any future event or action by the Company or the
former owners. The acquisition was accounted for by the purchase method.
Accordingly, the results of operations of PVNS are included with those of the
Company for periods subsequent to the effective date of the acquisition.
Substantially all of the purchase price of approximately $9,209,000 has been
allocated to excess cost over net assets of acquired companies.
Effective November 18, 1994, the Company entered into an agreement with the
former owners of PVNS to settle claims for certain acquisition contingencies.
In connection with the settlement, the Company received (i) 850,000 shares of
its common stock issued to the former owners and escrowed since the acquisition
date, which were valued at $1.50 per share, the fair market value at the
settlement date, and (ii) a reduction of $275,000 in the principal amount of the
above referenced note payable (see also note 5), in exchange for the release of
all further obligations under an indemnification received by the Company from
the former owners for acquisition contingencies. As a result, the Company
assumed and recorded total estimated liabilities, aggregating approximately
$1,265,000, pertaining to any adjustments from open pre-acquisition medicare
cost reimbursement reports ("cost reports") (see also note 6) and other matters
for which the Company received the settlement consideration as set forth above.
In 1994, the Company also recorded pre-tax income of $285,000 in connection with
the settlement, representing a recovery of costs associated with the acquisition
contingencies previously charged against income by the Company after the
acquisition date.
ADVANCE HEALTHCARE
Effective September 1, 1993, the Company acquired all of the outstanding common
stock of Advance Healthcare, Inc. ("Advance") for 203,934 restricted shares of
the Company's common stock and $382,375 in cash. The acquisition was accounted
for by the purchase method. Accordingly, the results of operations of advance
are included with those of the Company for periods subsequent to the date of the
acquisition. Substantially all of the purchase price of approximately $765,000
has been allocated to excess cost over net assets of acquired companies.
STAT SPECIALTY HOME HEALTH
Effective February 11, 1994, the Company acquired certain assets of STAT
Specialty Home Health Care, Inc. ("STAT") for cash in the amount of
approximately $285,000, of which approximately $119,000 was allocated to
purchased contracts and the remainder to property and equipment. The
acquisition was accounted for by the purchase method. Accordingly, the results
of operations of STAT are included with those of the Company for periods
subsequent to the effective date of the acquisition.
F-11
<PAGE>
PRN Nevada
Effective April 1, 1994, the Company purchased all of the outstanding common
stock of PRN Home Health Care, Inc. of Nevada and its affiliated companies
(collectively "PRN Nevada"), a provider of skilled homecare services. Total
consideration to the seller consisted of $1,825,000 in cash, 380,952 restricted
shares of the Company's common stock, a note payable to the former owner in
the principal amount of $850,000, and an additional contingent payment estimated
to be approximately $73,000, which is expected to be paid in 1996. The
acquisition was accounted for by the purchase method. Accordingly, the results
of operations of PRN Nevada are included with those of the Company for periods
subsequent to the effective date of the acquisition. Of the total purchase
price of approximately $3,726,000, the amount allocated to excess cost over net
assets of acquired companies is approximately $3,169,000.
PVNS
On January 31, 1995, the Company acquired certain assets, consisting
primarily of inventory, equipment, provider contracts and a customer base, of
Pharmathera, Inc.'s branch operation in Pensacola, Florida ("PVNS"), a
provider of infusion therapy services, for cash of approximately $56,000 and
two notes with obligations totalling approximately $474,000, after
adjustment. The acquisition was accounted for by the purchase method.
Accordingly, the results of operations of the PVNS are included
with those of the Company for periods subsequent to the acquisition date.
The price paid for provider contracts and a customer base, together with
related transaction costs, totalling $441,116 was allocated to purchased
contracts and is being amortized over ten years. See also note 13.
HOSPITAL HOMECARE
In May 1995, the Company issued 3,262,473 shares of its common stock in exchange
for all of the issued and outstanding common stock of Hospital Homecare
Corporation ("HHCC"), a provider of hospital-based home healthcare management
services. Five percent of the shares issued to HHCC have been escrowed to
indemnify the Company for certain specified pre-merger contingencies. This
transaction was accounted for as a pooling of interests. Accordingly, the
Company's consolidated financial statements have been restated to include the
assets, liabilities and results of operations of HHCC, as more fully described
below.
Prior to the combination, HHCC's fiscal year ended on March 31, which has been
subsequently changed to conform with that of the Company. HHCC's results of
operations for the fiscal year ended March 31, 1995 and 1994 are combined with
the Company for the years ended December 31, 1994 and 1993, respectively.
Accordingly, the Company's results of operations for the three months ended
March 31, 1995 did not include HHCC. Separate results of operations of the
Company and HHCC for the pre-merger annual periods included herein are as
follows:
<TABLE>
<CAPTION>
REVENUES COMPANY HHCC COMBINED
-------- ------- ---- --------
<S> <C> <C> <C>
Year ended:
December 31, 1994 $59,110,330 $1,267,818 $60,378,148
December 31, 1993 33,482,504 1,094,700 34,577,204
NET INCOME (LOSS)
-----------------
Year ended:
December 31, 1994 $ 804,026 $ (194,220) $ 609,806
December 31, 1993 845,690 (103,657) 742,033
</TABLE>
F-12
<PAGE>
Transaction costs of $240,039 (without income tax benefit) were incurred by the
Company and HHCC, of which $61,774 were expensed by the Company in 1995. The
remaining costs of $178,265 were incurred by HHCC in the fiscal year ended March
31, 1995, and therefore, were included in the restated combined net income of
the Company for the year ended December 31, 1994. Such costs are separately
presented as merger transaction costs in the consolidated statement of
operations.
PURCHASE PRICE ALLOCATIONS
Set forth below are the principal reasons that a significant portion of the
purchase prices of the PVNS, advance and PRN Nevada acquisitions was not
allocated to the following intangible assets: (1) there were no formal or
informal contracts acquired except for certain PVNS contracts which were valued
at $250,000; (2) physician relationships were considered to be inseparable from
going concern value and the relationships were not contractual and not
exclusive; (3) patients have a generally high turnover rate and, since patients
do not determine the services provided or the duration thereof, and the Company
is prohibited from marketing additional services to them, patients cannot be
used to expand the business; and (4) the assembled workforce is readily
replaceable at low cost, market rates are paid, clinical expertise is the
responsibility of the employee and no significant proprietary training is
provided.
PRO FORMA INFORMATION
The pro forma combined results of operations of the Company and its 1994 and
1995 acquisitions (STAT, PRN Nevada and PVNS), after giving effect to certain
pro forma adjustments and assuming the acquisitions had been completed
effective January 1, 1994, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1994
------------
(UNAUDITED)
<S> <C>
REVENUE $64,467,782
NET INCOME 970,489
NET INCOME PER COMMON AND
COMMON EQUIVALENT SHARE 0.06
</TABLE>
The PVNS acquisition completed on January 31, 1995 did not have a material
pro forma effect on 1995 results of operations.
The pro forma information is not necessarily indicative of results which may
occur in the future.
NOTE 3 - ACCOUNTS RECEIVABLE:
Accounts receivable at December 31, consisted of the following:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Accounts receivable $12,977,110 $10,618,965
Less allowance for doubtful accounts 995,717 788,696
----------- -----------
$11,981,393 $ 9,830,269
----------- -----------
</TABLE>
F-13
<PAGE>
A large portion of the Company's revenues is derived from services to
beneficiaries of government health programs. The percentages of the Company's
net revenues derived from Medicare and state government programs were
approximately 51% and 26% in 1995, 55% and 24% in 1994, and 42% and 26% in 1993,
respectively.
The Company does not require collateral for its receivables, but believes that
due to the diversity of third-party payors and the concentration of receivables
from government health programs (57% of receivables at December 31, 1995),
credit risk is generally not significant. The Company continually monitors the
adequacy of its allowance for doubtful accounts based on historical experience,
collection trends and other factors.
NOTE 4 - PROPERTY AND EQUIPMENT:
Property and equipment at December 31, consisted of the following:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Furniture and fixtures $1,383,716 $1,341,684
Equipment, including computers 2,062,862 1,480,624
Transportation equipment 316,839 329,767
Leasehold improvements 195,528 167,365
---------- ----------
3,958,945 3,319,440
Less accumulated depreciation
and amortization 1,838,696 1,393,231
---------- ----------
$2,120,249 $1,926,209
---------- ----------
---------- ----------
</TABLE>
Property and equipment under capital leases and the accumulated amortization
thereon totalled $1,099,351 and $268,528, respectively, at December 31, 1995,
and $816,088 and $134,253, respectively, at December 31, 1994.
Depreciation expense totalled $454,009 in 1995, $442,835 in 1994 and $184,408 in
1993.
F-14
<PAGE>
NOTE 5 - NOTES PAYABLE AND OTHER DEBT:
Notes payable and other debt at December 31, consisted of the following:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Bank revolving credit facilities $4,725,000 $3,425,000
Notes payable to bank 5,200,000 5,450,000
Term note payable to bank -- 400,000
Notes payable to former owners of PVNS 222,365 752,638
Note payable to former owner of PRN Nevada 425,000 708,333
Note payable to former owner of PharmaThera
branch 339,320 --
Notes payable to bank and others, at rates
ranging from 8% to 14%, with various
maturities through 1997, secured by
property and equipment 35,398 378,439
Capital lease obligations 814,273 699,404
----------- -----------
11,761,356 11,813,814
less current portion 1,171,193 1,773,798
----------- -----------
Noncurrent portion $10,590,163 $10,040,016
----------- -----------
----------- -----------
</TABLE>
BANK REVOLVING CREDIT FACILITIES
At December 31, 1995, the Company had revolving credit facilities totalling
$4,725,000 with a bank (the "Bank") that were to mature at various dates from
March 31, 1996 through April 30, 1996. The interest rates on the credit
facilities were prime plus 1/4% (8.75% at December 31, 1995), payable monthly.
The credit facilities were secured by a first priority lien on all accounts
receivable of the Company and were guaranteed by the President and another
director of the Company. The related loan agreements covering $2,550,000 of the
credit facilities included covenants to maintain certain net worth and a debt to
net worth ratio and prohibited certain additional indebtedness and the payment
of dividends. At December 31, 1995, the Company was in compliance with such loan
covenants.
On March 15, 1996, the Company refinanced all of its debt with the Bank,
including the above referenced revolving credit facilities, an additional
revolving credit facility of $1,000,000 entered into on January 31, 1996, and
the notes payable described below. The new revolving credit facilities total
$7,300,000, bear interest at rates ranging from prime to prime minus 1%, payable
monthly, and mature April 15, 1997. Such credit facilities totalling $5,725,000
are secured by a first priority lien on all accounts receivable of the Company
and $1,575,000 of such credit facilities are secured by collateral (marketable
securities) pledged to the Bank by the President, another director and a
shareholder of the Company ("Collateral Guarantors"), and are guaranteed in the
amount of $5,725,000 by the President and another director of the Company. The
related loan agreements do not include any covenant requirements; however, such
agreements do prohibit certain additional indebtedness and payments of
dividends.
F-15
<PAGE>
NOTES PAYABLE TO BANK
In June 1994, the Company borrowed $5,450,000 from the Bank ("Term Note") for
the purpose of repaying a demand note of $1,650,000 and substantially all of the
remaining balance on the subordinated note payable as described below. The
$1,650,000 demand note was executed in March 1994 when the Company entered into
a demand loan agreement with the Collateral Guarantors. The interest rate on
the Term Note, which was to mature June 6, 1996, was prime minus 1% (7.5% at
December 31, 1995), payable monthly. The Term Note was secured by collateral
(marketable securities) pledged to the bank by the collateral guarantors.
Previously, this collateral was held by the Bank as security for its loan to the
collateral guarantors which was used by these individuals to make loans to the
Company. During 1995, the Company repaid $250,000 on the Term Note, resulting
in an outstanding principal balance of $5,200,000 at December 31, 1995.
As described above, the Company refinanced all of its debt with the Bank on
March 15, 1996. In connection therewith, the Company borrowed $3,625,000 from
the Bank ("New Term Note"), which matures April 15, 1997. The new Term Note
bears interest at prime minus 1%, payable monthly, and is secured by collateral
(marketable securities) pledged to the bank by collateral guarantors (see also
discussion above regarding such collateral security).
NOTES PAYABLE TO FORMER OWNERS OF PVNS
Note In connection with the acquisition of PVNS in 1993, the Company issued a
$1,000,000 note payable to the former owners of PVNS ("PVNS note") which is
secured by a subordinated lien on accounts receivable of the Company and is
guaranteed by the President of the Company. In January 1994, the Company repaid
principal of $306,000 on this note, pursuant to its contractual obligation to
apply as debt reduction, a portion of the net proceeds from the Company's
offering of common stock in connection with the exercise of various outstanding
warrants ("Warrant Offering") completed in December 1993. Also, the principal
balance of the PVNS note was further reduced by $275,000 in November 1994 as a
result of the settlement with the former owners of PVNS as more fully described
in note 2. This note reduction was required to be applied to principal in
inverse order of maturity. Scheduled monthly principal payments of $20,833
commenced on August 1, 1994, together with interest at prime through June 28,
1995, on which date the interest rate increased to prime plus 1% (9.5% at
December 31, 1995). At December 31, 1995, the principal balance of the PVNS
note was $44,006.
In November 1994, the Company borrowed $458,636 of previously escrowed cash from
the former owners of PVNS for working capital purposes. Interest only was due
on this note through February 1, 1995, at which date monthly principal and
interest payments commenced in eighteen equal installments with a final payment
due on July 1, 1996. The interest rate on the note was at prime through June 30,
1995, on which date the interest rate increased to prime plus 1% (9.5% at
December 31, 1995). At December 31, 1995, the principal balance of this note
was $178,359.
NOTE PAYABLE TO FORMER OWNER OF PRN NEVADA
In connection with the Company's acquisition of PRN Nevada, the Company issued
an $850,000 note payable to the former owner of PRN Nevada. The note bears
interest at prime (8.5% at December 31, 1995), payable monthly, and is secured
by the common stock of PRN Nevada. Monthly principal payments of $23,611
commenced August 1, 1994 and are payable in such amount through July 1, 1997.
During 1995, scheduled payments on this note were offset by $125,776 due from
the former owner of PRN Nevada for indemnification of applicable adjustments to
PRN Nevada's pre-acquisition cost reports through December 31, 1993 (see also
note 6).
F-16
<PAGE>
NOTES PAYABLE TO FORMER OWNER OF PHARMATHERA BRANCH
In connection with the acquisition of the PVNS, the Company issued two notes
payable to the former owner of the PVNS. The larger note in the amount of
$500,000, subsequently reduced to $400,000, is secured by all equipment of
the Company's Florida operation, is non-interest bearing, and is payable at
various dates through maturity on May 15, 1996. The other note in the amount
of $73,956 was paid in six equal monthly principal installments of $12,326
through August 1, 1995.
SUBORDINATED NOTE PAYABLE
In connection with the acquisition of PVNS, the Company issued a $5,500,000 note
payable to the collateral guarantors (as defined above). In March 1994, the
Company repaid principal of $1,675,000 on the note, pursuant to its contractual
obligation to apply as debt reduction a portion of the net proceeds from the
Company's warrant offering completed in December 1993. On the date of such
repayment, a replacement note was issued to the collateral guarantors in the
amount of $3,802,370, which was repaid in June 1994 as described above.
In connection with making this subordinated loan, the collateral guarantors were
granted warrants to purchase 100 shares of the Company's class a preferred stock
at $100 per share. As previously described, the collateral (marketable
securities) that the collateral guarantors pledged to the bank as security for
the Term Note and new Term Note was previously held by the bank as security for
a loan to the collateral guarantors which was used by these individuals to make
loans to the Company. Thus, the collateral guarantors' risk position has not
significantly changed and accordingly, the agreement governing the preferred
stock warrants has been amended so that the warrants remain outstanding under
substantially the same terms, except that the exercisability of the warrants now
relates to the new Term Note and $1,575,000 of the new revolving credit
facilities rather than the subordinated loan. Such warrants are now exercisable
only in the event of certain defaults of the Company or the collateral
guarantors under the new Term Note, $1,575,000 of the new revolving credit
facilities, or the related collateral maintenance agreements with the bank, or
in the event the bank liquidates the collateral guarantors' collateral. The
warrants expire when the aggregate outstanding balance of the new Term Note,
$1,575,000 of the new revolving credit facilities, and the PVNS note is
$1,175,000 or less and the Company is not in default under the new Term Note and
$1,575,000 of the new revolving credit facilities. If the warrants are
exercised and the aggregate outstanding balance of the new Term Note,
$1,575,000 of the new revolving credit facilities, and the PVNS note is
$3,625,000 or more, the holders of the preferred stock have the right to elect
seven of thirteen Company directors. At December 31, 1995, the aggregate
principal outstanding on the Term Note and the PVNS note was $5,244,006. At all
other times after warrant exercise, the holders of the preferred stock have the
right to elect three of nine Company directors. If the warrants are exercised,
the Company may redeem the preferred stock, at the price of $100 per share, at
any time after the aggregate outstanding principal balances of the above
referenced debt are less than $1,175,000.
OTHER
On June 7, 1994, the Company borrowed $500,000 from its President for working
capital purposes at prime plus 2%, which was repaid on June 28, 1994. The
Company also borrowed $400,000 and $50,000 from its President on September 12,
1994 and September 15, 1994, respectively, for working capital purposes at prime
plus 2%, which were repaid on September 26, 1994. On April 10, 1995, the
Company borrowed $300,000 from its President for working capital purposes at
prime, which was repaid on May 26, 1995.
F-17
<PAGE>
FAIR VALUE OF INDEBTEDNESS
Substantially all of the Company's indebtedness bears current rates of interest
and the terms thereof are considered normal for the nature of the instruments.
Accordingly, the Company believes that the carrying value of indebtedness
approximates its fair value.
FUTURE MINIMUM MATURITIES
Future minimum maturities of the above described notes payable and other debt
outstanding at December 31, 1995, taking into consideration the Company's debt
refinancing with the bank in March 1996 as more fully described above, were as
follows:
<TABLE>
<CAPTION>
<S> <C>
1996 $1,171,193
1997 10,380,734
1998 157,317
1999 35,544
2000 and thereafter 16,568
-----------
$11,761,356
-----------
-----------
</TABLE>
NOTE 6 - RESERVE FOR GOVERNMENT PROGRAM SETTLEMENTS:
The Company's Medicare operations are subject to regulations administered by the
health care financing administration. Other government programs served by the
Company are also subject to regulations of various state agencies. Amounts
reimbursed by the Medicare and other government programs are subject to audit
and retroactive adjustment. Such adjustments which affect income are included
in revenue.
In reviewing its reserve for government program settlements for adequacy, the
Company considers, among other factors, recent Medicare intermediary audit
results, the effect of final adjustments on open cost reports, recent
interpretations of regulations and cost reporting principles, and other
available current information.
In connection with the acquisition of PRN Nevada, the Company received an
indemnification from the former owner of PRN Nevada for adjustments to PRN
Nevada's pre-acquisition cost reports open for examination. Cost reports through
December 31, 1994 have been settled. The amounts due the Company pursuant to the
indemnification for cost reports through December 31, 1993 have been received
(see also note 5). Adjustments to the 1994 pre-acquisition cost report period
will be recovered from the above referenced indemnification and any amounts not
to be recovered therefrom have been applied against the historical reserve
recorded by PRN Nevada in periods prior to the acquisition date and carried
forward by the Company in the acquisition. Also, PRN Nevada is experiencing
difficulties in obtaining reimbursement of certain receivable claims from nevada
medicaid due to untimely billing of such claims and a reserve has been
established for estimated losses that may result therefrom. Collection of such
receivables has been delayed awaiting resolution of a regulatory investigation
for which no claim has been asserted and for which the Company's internal review
indicates that it should have no material liability related thereto.
In 1994, the historical reserve of $893,000 attributable to the PVNS
preacquisition cost reports was reduced by $533,000 and taken to income. Such
historical reserve was considered necessary by PVNS and recorded in periods
prior to the acquisition due to the magnitude of the audit adjustments proposed
by the Medicare intermediary. Such reserve was recorded by the Company as a
liability assumed at the
F-18
<PAGE>
Acquisition date. The reserve reduction resulted from settlements and audit
notifications for preacquisition PVNS cost reports received from the
intermediary more than one year after the PVNS acquisition date. Of the
reserve reduction, $200,000 was recorded in the second quarter of 1994 when the
Company received final "desk review" audit results of $52,000 for the June 30,
1992 PVNS cost report and $333,000 was recorded in the third quarter of 1994
when the Company was notified of the revised field audit adjustments of
$1,640,000 (reduced from $2,200,000) for the June 30, 1990 and 1991 PVNS cost
reports, of which the total adjustments included approximately $1,200,000 of
various transportation costs. The Company's reserve adjustment in the third
quarter of 1994 was recorded as a result of the reduced audit adjustments for
these cost reports, the reopening of such cost reports for further review by the
intermediary, and certain of the larger cost adjustments therein having been
allowed in the settled June 30, 1992 cost report; thus, substantially reducing
the Company's estimated total exposure for the remaining cost reports to be
settled. In early 1994, the Company also recorded $138,000 as a reduction in
"excess cost over net assets of acquired companies" due to a favorable result in
connection with the 1988 cost report which was determined prior to the end of
the PVNS acquisition allocation period. Expense of $54,000 was also recorded in
1994 related to changes in estimates for post-acquisition cost reporting
periods.
Subsequently, as more fully described in note 2, the Company entered into a
settlement in November 1994 with the former owners of PVNS pertaining to various
acquisition contingencies including open preacquisition cost reports. In
connection with this settlement, the Company assumed the total liability for
final adjustments on the June 30, 1990, 1991 and 1993 PVNS cost reports which
were still outstanding. In recognition thereof, the Company re-evaluated its
exposure for estimated final adjustments to these open cost reports, which was
previously the responsibility of the former owners of PVNS, and determined an
additional reserve of approximately $975,000 was needed, and accordingly,
increased the reserve in this amount. As of December 31, 1995, all such cost
reports have been settled in a total amount less the reserve established.
During 1995, expense of $315,000 was recorded for increases to the reserve
pertaining to estimated adjustments for current year cost reports and for nevada
medicaid receivable claims. The reserve was reduced by payments of approximately
$957,000 as a result of final settlements of PVNS and PRN Nevada preacquisition
and post-acquisition cost reports. All preacquisition cost reports have been
settled as of December 31, 1995. The reserve was also reduced by approximately
$252,400, of which $200,000 was transferred to a receivable contractual
allowance and approximately $52,400 was credited to income in connection with
the settlements of various cost reports.
Although the process for estimating final settlements related to government
programs is inherently subjective and such estimates can change as new
developments occur, the Company believes the reserve for government program
settlements is adequate to cover estimated adjustments to open cost reports and
settlements with other government programs, and that any final determinations in
connection therewith will not have a material adverse effect on the Company's
financial position or results of operations.
F-19
<PAGE>
NOTE 7 - INCOME TAXES:
The provision (benefit) for income taxes for the years ended December 31,
consisted of the following:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Federal:
Current $771,844 $455,741 $528,460
Deferred (124,532) (42,272) 1,600
Change in deferred tax
asset valuation allowance -- (100,980)
State 35,863 31,000 40,385
-------- -------- --------
$683,175 $444,469 $469,465
-------- -------- --------
-------- -------- --------
</TABLE>
The tax effects of temporary differences related to deferred tax assets
(liabilities) at December 31, consisted of the following:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Prepaid expenses $(43,916) $(99,467)
Depreciation and amortization (105,536) (44,431)
Other (1,919) --
-------- --------
Deferred tax liabilities (151,371) (143,898)
-------- --------
Provision for doubtful accounts 287,635 220,619
Accruals not currently deductible 132,838 132,909
Compensation 158,629 92,986
Other 11,043 11,627
-------- --------
Deferred tax assets 590,145 458,141
-------- --------
Net deferred tax asset $438,774 $314,243
-------- --------
-------- --------
</TABLE>
The following table reconciles the federal statutory income tax rate and the
Company's effective income tax rate for the years ended December 31:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Federal income taxes at statutory rates 34.0% 34.0% 34.0%
Nondeductible amortization 5.9 8.1 3.5
Other permanent differences 1.3 1.6 5.3
Utilization of operating loss carryforwards -- -- (4.0)
Income tax effect of PVNS settlement -- (7.8) --
Recovery of nontaxable payroll related costs (4.6) -- --
State income taxes 2.0 2.5 3.1
Change in deferred tax asset valuation
Allowance -- -- (7.7)
Changes in prior year estimates and other (.5) 3.8 4.6
----- ----- -----
Effective income tax rate 38.1% 42.2% 38.8%
----- ----- -----
----- ----- -----
</TABLE>
F-20
<PAGE>
NOTE 8 - EMPLOYEE BENEFIT PLANS:
Through December 31, 1995, the Company provided 401(k) savings plans for most of
its employees who may contribute up to a certain percentage of their annual
gross wages into the plans, with the Company matching the employees'
contributions up to certain levels, as defined in the plans. A similar
retirement savings plan was also provided to certain employees of HHCC.
Effective January 1, 1996, a single 401(k) savings plan is provided for all of
the Company's eligible employees. Company contributions to these plans were
$176,940 in 1995, $165,406 in 1994 and $68,620 in 1993.
NOTE 9 - STOCK OPTIONS:
In May 1988, the Company adopted the 1988 stock option plan, as amended in May
1989 and December 1993 ("1988 plan"), which reserves 600,000 common shares for
issuance to officers, directors and employees of the Company. In December 1993,
the Company adopted the 1993 employee stock option plan ("1993 plan") which
reserves 1,000,000 common shares for issuance to officers and employees of the
Company.
Options under the 1988 and 1993 plans are granted at an exercise price equal to
at least 100% of the fair market value of the common stock on the date of grant
in the case of incentive stock options. Nonqualified option grants are generally
at 85% of the fair market value under the 1988 plan and as determined by the
stock option committee under the 1993 plan. All options generally vest over a
five year period from the date of grant and expire within ten years. The plans
restrict the rights to exercise based on employment status and percentage of
stock ownership in accordance with section 422 of the internal revenue code.
The following schedule summarizes the changes in options outstanding under the
1988 and 1993 plans:
<TABLE>
<CAPTION>
SHARES PRICE RANGE
------ -----------
<S> <C> <C>
Outstanding, December 31, 1992 552,500 $ .60 - 1.67
Granted 350,000 1.38 - 1.94
Cancelled (52,500) .60 - 1.67
---------
Outstanding, December 31, 1993 850,000 .60 - 1.94
Granted 405,000 1.38 - 2.13
Exercised (46,000) .60 - .67
Cancelled (97,500) .60 - 1.67
---------
Outstanding, December 31, 1994 1,111,500 .60 - 2.13
Granted 184,500 1.38 - 1.78
Exercised (14,000) .60
Cancelled (250,000) .60 - 2.06
---------
Outstanding, December 31, 1995 1,032,000 .60 - 2.13
---------
---------
</TABLE>
At December 31, 1995, options to purchase 438,100 shares were exercisable and
options to purchase 508,000 shares were available for future grant.
F-21
<PAGE>
In December 1993, the Company also adopted the 1993 executive security stock
option plan ("1993 executive plan") which reserves 500,000 common shares for
issuance to officers of the Company. The option price for all grants under the
1993 executive plan is $.50 per share. The options, which expire ten years from
plan formation, are exercisable only if the officer's employment is terminated
without cause or a majority of the issued and outstanding common shares is
acquired by a person or group not including the current President of the
Company. The Company will recognize compensation expense related to these
options if and when such events occur. A total of 325,000 nonqualified options
have been granted under the 1993 executive plan, of which 125,000 of such
options are outstanding at December 31, 1995. The remaining 200,000 options have
been cancelled. None of the options are currently exercisable.
In April 1992, the Company granted stock options (not included in the 1988 Plan
or 1993 Plans described above) to the then President of the Company and a
current officer and director of the Company and in June 1992, the Company
granted a like stock option to another director of the Company. The stock
options entitle each of these individuals to purchase 250,000 shares of the
Company's common stock at $1.50 per share. The options became exercisable on
January 1, 1996 and expire on April 29, 1996.
Compensation associated with options granted at less than quoted market value is
expensed over the vesting period and totalled $1,695 in 1995, $10,385 in 1994,
and $18,160 in 1993.
In October 1995, statement of financial accounting standards no. 123, ACCOUNTING
FOR STOCK-BASED COMPENSATION, was issued which covers the accounting for stock-
based compensation, principally stock options. The Company believes at this
time, as permitted by the standard, that it will not change its existing
accounting for stock options. Additional disclosures, including pro forma
effects on income of the difference between existing and the new accounting
methods, will be required when adopted. The Company is required to adopt the
standard no later than January 1, 1996.
NOTE 10 - STOCK WARRANTS:
In April 1992, the Company entered into an agreement with an investment banking
firm to provide investment banking services to the Company for a two and one-
half year term. In consideration of these services, the investment banking firm
was granted warrants to purchase up to 350,000 shares of common stock of the
Company at $1.50 per share, which are exercisable anytime through June 30, 1996.
The warrants include customary demand and piggyback registration rights for the
underlying shares. as of December 31, 1995, none of the warrants had been
exercised.
In May 1992, the Company entered into an agreement with a public relations firm
to provide consultation to the Company. In addition to a monthly fee, the
public relations firm was granted warrants to purchase up to 64,000 shares of
the Company's common stock at $1.56 per share, which are exercisable anytime
through May 14, 1997. The warrants include customary piggyback registration
rights for the underlying shares. As of December 31, 1995, none of the warrants
had been exercised.
In June 1993, in connection with the issuance of the subordinated note payable
to finance the acquisition of PVNS and a guarantee of the PVNS note, the
collateral guarantors were granted warrants to purchase a total of 1,000,000
shares of the Company's common stock for the price of $1.45625 per share, which
are exercisable anytime through June 29, 1998. As of December 31, 1995, none of
the warrants had been exercised. The warrants were assigned a value of
$150,000, which is being amortized over a five year period, and include
customary demand and piggyback registration rights for the underlying shares.
also, as described in note 5, the collateral guarantors were granted warrants to
purchase preferred stock of the Company.
F-22
<PAGE>
On July 21, 1993, in connection with the guarantee of the Company's Bank debt,
including the Bank debt of PVNS, the President and another director of the
Company were also granted warrants to purchase a total of 713,000 shares of the
Company's common stock at prices ranging from $1.2375 to $1.5844 per share,
which are exercisable anytime through the one-year anniversary of the date that
their guarantees are no longer required by the Bank. As of December 31, 1995,
none of the warrants had been exercised. The warrants include customary demand
and piggyback registration rights for the underlying shares.
NOTE 11 - RELATED PARTY TRANSACTIONS:
As more fully described in note 5, the Company borrowed various amounts from the
President, another director and a shareholder of the Company (also referred to
herein as the collateral guarantors). All such loans were repaid as of December
31, 1995. However, these individuals continue to guarantee and collaterize
various borrowings by the Company from unrelated third parties. In connection
with such borrowings and related security provided, these individuals were
granted warrants to purchase the Company's common stock as described in note 10
and the Company's preferred stock as described in note 5, and certain of these
individuals also received fees totalling $20,000. In addition, the Company has
borrowings from a family member of another director with total outstanding
principal balances of $19,479 at December 31, 1995.
Through April 30, 1994, the President and another director of the Company were
stockholders of a Company that sold office supplies to the Company. Total
purchases from this Company were $73,708 in 1994 and $112,878 in 1993.
Effective January 1, 1993, the Company acquired substantially all of the
operating assets of preferred, of which the President and another director of
the Company were shareholders (see note 2).
In 1993, as compensation for services rendered in connection with the Company's
acquisition of PVNS, a shareholder was awarded 100,000 shares of the Company's
unregistered common stock valued at $83,500.
A director of the Company, previously the principal shareholder of HHCC, paid
merger transaction costs of $100,000 on HHCC's behalf which were expensed in
1994 and included in the Company's stockholders' equity as additional paid-in
capital.
In March 1993, the Company sold the rights to its home infusion software
programs to a start-up Company, sequel solutions, inc. ("ssi"), owned by a group
of employees including a shareholder (until January 1995) who was also a
director of the Company until August 1994. In connection with the sale, the
Company received notes of $335,000, which were reserved to their cost basis of
$245,000. No gain was recognized at the sale date because the Company concluded
that the business risks had not transferred to ssi because it was a thinly
capitalized start-up Company and the related party aspects of the transaction.
After the sale, through December 31, 1993, the Company provided personnel,
office space and administrative services to ssi for which the Company received a
reimbursement of approximately $56,000. The Company continued to utilize the
software support services provided by ssi for which the Company paid $9,412 in
1995, $13,670 in 1994 and $6,610 in 1993. In December 1993, the Company entered
into an agreement with the above referenced individual in which the Company
exchanged the aforementioned notes and its future rights to royalties from the
ssi software sales in return for the relinquishment by such individual of all
rights to past and future bonuses stipulated in an employment agreement that
terminated May 31, 1995. As a result of this agreement, the Company recorded a
pretax charge to income of $26,000 in 1993, which is included in general and
administrative expenses.
F-23
<PAGE>
NOTE 12 - LEASE COMMITMENTS:
At of December 31, 1995, future minimum payments under noncancellable lease
obligations for office space and various property and equipment, were as
follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1996 $377,688 $2,208,047
1997 354,376 1,360,868
1998 169,781 723,832
1999 41,329 84,129
2000 and thereafter 16,951 66,885
-------- ----------
Total minimum lease payments 960,125 $4,443,761
----------
----------
less imputed interest 145,852
--------
present value of minimum lease payment 814,273
less current portion 300,891
--------
noncurrent portion $513,382
--------
--------
</TABLE>
The amounts under capital leases above are included in notes payable and other
debt in note 5.
Rental expense under noncancellable operating leases was $2,853,043 in 1995,
$2,414,910 in 1994, and $645,124 in 1993.
NOTE 13 - MINORITY INTEREST:
In June 1994, the Company sold a 20% ownership interest and a 5% net profits
interest in its then existing Pensacola, Florida homecare business for cash and
realized a pretax gain of $128,500. The acquiring Company also held a 12-1/2%
net profits interest in this business which it received for services
provided in connection with the start-up of this operation in April 1994. In
July 1995, the Company reacquired the 20% ownership interest and the 17-1/2% net
profits interest for cash of $13,000 and issued 85,000 shares of its
unregistered common stock, which was valued at $1.6875 per share, the fair
market value on the transaction date. The total purchase price of $156,437 was
allocated to purchased contracts and is being amortized over a ten year period.
NOTE 14 - SUBSEQUENT EVENT: PROPOSED MERGER OF COMPANY
In February 1996, the Company agreed to be acquired by Horizon/CMS Healthcare
Corporation ("horizon") pursuant to a merger agreement, under which the
Company's stockholders would receive shares of horizon. On May 15, 1996, the
Company and horizon executed a new merger agreement under which the Company's
stockholders will receive cash in the amount of $1.85 for each share of the
Company's common stock. Completion of the transaction is subject to, among other
conditions, compliance with, and expiration of, the applicable waiting period
under the hart-scott-rodino act and healthcare regulatory approvals; and
approval by the stockholders of the Company. Certain affiliates of the Company
holding approximately forty-three percent of the outstanding common stock of the
Company have signed a voting agreement under which they have agreed to vote
their shares in favor of the merger. The merger, if completed, is expected to
occur in the third quarter of 1996.
F-24
<PAGE>
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
ASSETS (UNAUDITED) (AUDITED)
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 224,536 $ 292,666
Accounts receivable, net 10,615,364 11,981,393
Inventories 315,427 324,750
Deferred income taxes 661,649 546,227
Other 748,228 632,104
------------ ------------
Total current assets 12,565,204 13,777,140
Property and equipment, net 2,088,729 2,120,249
Excess cost over net assets of acquired
companies, net of amortization of
$844,242 and $761,383 11,926,856 12,008,946
Other, net 1,378,177 1,183,821
------------ ------------
Total assets $ 27,958,966 $ 29,090,156
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and other debt $ 1,003,608 $ 1,171,193
Accounts payable and accrued liabilities 2,562,716 2,871,216
Accrued compensation and benefits 3,031,023 2,752,828
Reserve for government program settlements 951,198 917,199
Income taxes payable 622,870 841,887
------------ ------------
Total current liabilities 8,171,415 8,554,323
Notes payable and other debt 9,686,980 10,590,163
Other accrued liabilities 457,090 498,913
Deferred income taxes 113,865 107,453
------------ ------------
Total liabilities 18,429,350 19,750,852
------------ ------------
Stockholders' equity:
Preferred stock - par value $.01 per share;
3,000,000 shares authorized, none issued
or outstanding - -
Common stock - par value $.0075 per share;
75,000,000 shares authorized, 15,954,873
and 15,927,873 shares issued and outstanding 119,662 119,459
Additional paid-in capital 7,538,790 7,506,917
Retained earnings 1,871,164 1,712,928
------------ ------------
Total stockholders' equity 9,529,616 9,339,304
------------ ------------
Commitments and contingencies
Total liabilities and stockholders' equity $ 27,958,966 $ 29,090,156
------------ ------------
------------ ------------
</TABLE>
(SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS)
F-25
<PAGE>
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
1996 1995
------------ ------------
<S> <C> <C>
Revenues $ 16,484,226 $ 15,927,991
------------ ------------
Costs and expenses:
Direct patient care 9,556,524 9,868,757
Selling, general and administrative 6,088,328 5,343,929
Provision for doubtful accounts 317,013 150,634
------------ ------------
Total costs and expenses 15,961,865 15,363,320
------------ ------------
Income from operations 522,361 564,671
Interest expense 232,377 242,472
------------ ------------
Income before income taxes 289,984 322,199
Provision for income taxes 131,748 60,808
------------ ------------
Net income $ 158,236 $ 261,391
------------ ------------
------------ ------------
Net income per common and common
equivalent share $ 0.01 $ 0.02
------------ ------------
------------ ------------
Weighted average common and common
equivalent shares outstanding 15,945,785 15,831,584
------------ ------------
------------ ------------
</TABLE>
(SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS)
F-26
<PAGE>
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
1996 1995
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 158,236 $ 261,391
Noncash adjustments:
Depreciation and amortization 300,518 266,470
Provision for doubtful accounts 317,013 150,634
Deferred income taxes (109,010) (129,706)
Other 324 -
Changes in operating assets and liabilities,
net of acquisitions:
Accounts receivable 1,049,016 (833,591)
Income taxes (213,341) 188,545
Other assets (189,029) (215,282)
Accounts payable and accrued liabilities,
including compensation and benefits (18,870) 615,543
Reserve for government program settlements 33,999 (82,742)
Other liabilities 24,282 -
---------- ----------
Net cash provided by operating activities 1,353,138 221,262
---------- ----------
Cash flows from investing activities:
Acquisition of PharmaThera Branch - (56,468)
Acquisition and merger transaction expenses (177,030) (41,116)
Purchase of property and equipment (54,779) (135,463)
---------- ----------
Net cash used by investing activities (231,809) (233,047)
---------- ----------
</TABLE>
(SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS)
F-27
<PAGE>
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
1996 1995
------------ -----------
<S> <C> <C>
Cash flows from financing activities:
Proceeds from notes payable $ 3,625,000 $ -
Revolving credit facilities:
Borrowings 10,750,000 4,300,000
Repayments (9,975,000) (4,620,000)
Payments on notes payable and capital lease
obligations (5,538,319) (585,946)
Payments on obligation to former owners of PVNS (73,591) (66,413)
Proceeds from exercise of stock options 22,451 3,600
------------ -----------
Net cash used by financing activities (1,189,459) (968,759)
------------ -----------
Net decrease in cash and cash equivalents (68,130) (980,544)
Cash and cash equivalents at beginning of period 292,666 1,322,407
------------ -----------
Cash and cash equivalents at end of period $ 224,536 $ 341,863
------------ -----------
Cash paid during the period for:
Interest $ 283,650 $ 277,969
Income taxes 477,290 4,491
Non-cash transactions (not otherwise disclosed):
Assets acquired under capitalized lease obligations 67,551 -
</TABLE>
(SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS)
F-28
<PAGE>
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The condensed consolidated financial statements of medical innovations, inc. And
its subsidiaries (the "Company") have been prepared without audit, pursuant to
the rules and regulations of the securities and exchange commission. As
applicable under such regulations, certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. The Company
believes that the presentation and disclosures herein are adequate to make the
information not misleading, and that the financial statements reflect all
elimination entries and adjustments (consisting of only normal recurring
adjustments) which are necessary for a fair statement of the operating results
for the three months ended March 31, 1996 and 1995. Operating results for these
interim periods are not necessarily indicative of the results for full years.
It is suggested that these condensed consolidated interim financial statements
be read in conjunction with the consolidated financial statements and notes
thereto included in the Company's 1995 annual report on form 10-k.
The condensed consolidated financial statements for the prior period have been
restated to reflect the merger completed in May 1995 as more fully described in
note 3. In addition, certain reclassifications have been made to previously
reported information to conform to the current period presentation.
Net income per share is based on the weighted average number of common shares
and equivalents outstanding during the periods, which has also been restated to
reflect the merger completed in 1995, as more fully described in note 3. Common
stock equivalents consisting of stock options and warrants are included in the
computation of weighted average shares when their effect is dilutive.
NOTE 2 - USE OF ESTIMATES:
The Company's interim financial statements are prepared in accordance with the
same accounting policies as those followed at year end. Certain items in the
financial statements require management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses, and
disclosure of contingent assets and liabilities. The accuracy of such amounts is
dependent upon facts that will exist and procedures that will be accomplished by
the Company later in the year. Because of the inherent subjectivity of the
estimation process, actual future results could differ from that expected at the
reporting date.
Note 3 - ACQUISITIONS:
Set forth below is information regarding the Company's material acquisitions
completed in 1993 and 1994 and all of its 1995 acquisitions:
PHYSICIAN'S VISITING NURSE SERVICE
Effective May 1, 1993, the Company purchased all of the outstanding common stock
of Physician's Visiting Nurse Service, inc. ("PVNS"), which was accounted for by
the purchase method. Substantially all of the purchase price of approximately
$9,209,000 was allocated to excess cost over net assets of acquired companies.
In connection with the acquisition, the Company entered into agreements to make
future payments to the former owners resulting in a total obligation of
approximately $1,295,000, net of amounts attributable to compensation and
imputed interest at 7-1/2%. This obligation, which is
F-29
<PAGE>
included in accrued liabilities, is secured by accounts receivable of
Company, is payable in approximately equal monthly installments through June
1998 and is not contingent upon any future event or action by the Company or
the former owners. At March 31, 1996, the amount remaining on this obligation
was approximately $680,000, of which approximately $291,000 was classified as
current.
PRN NEVADA
Effective April 1, 1994, the Company purchased all of the outstanding common
stock of prn home health care, inc. Of Nevada and its affiliated companies
(collectively "PRN Nevada"). of the total purchase price of approximately
$3,726,000, approximately $3,169,000 was allocated to excess cost over net
assets of acquired companies.
PVNS
On January 31, 1995, the Company acquired certain assets, consisting
primarily of inventory, equipment, provider contracts and a customer base, of
PharmaThera, Inc.'s branch operation in Pensacola, Florida ("PVNS"), a
provider of infusion therapy services, for cash of approximately $56,000 and
two notes with obligations totalling approximately $474,000, after
adjustment. The acquisition was accounted for by the purchase method.
Accordingly, the results of operations of the PVNS are included with those of
the Company for periods subsequent to the acquisition date. The price paid
for provider contracts and a customer base, together with related transaction
costs, totalling $441,116 was allocated to purchased contracts and is being
amortized over ten years.
HOSPITAL HOMECARE
In May 1995, the Company issued 3,262,473 shares of its common stock in exchange
for all of the issued and outstanding common stock of Hospital Homecare
Corporation ("HHCC"), a provider of hospital-based home healthcare management
services. Five percent of the shares issued to HHCC have been escrowed to
indemnify the Company for certain specified pre-merger contingencies. This
transaction was accounted for as a pooling of interests. Accordingly, the
Company's consolidated financial statements have been restated to include the
assets, liabilities and results of operations of HHCC. Prior to the
combination, HHCC's fiscal year ended on March 31, which has been subsequently
changed to conform with that of the Company. HHCC's results of operations for
the fiscal year ended March 31, 1995 are combined with the Company for the year
ended December 31, 1994. Accordingly, the Company's results of operations for
the three months ended March 31, 1995 do not include HHCC.
PURCHASE PRICE ALLOCATIONS
Set forth below are the principal reasons that a significant portion of the
purchase prices of PVNS, PRN Nevada and certain other acquisitions was allocated
to excess costs over net assets of acquired companies, and not allocated to
other intangible assets: (1) there were no formal or informal contracts
acquired except for certain PVNS contracts which were valued at $250,000; (2)
physician relationships were considered to be inseparable from going concern
value and the relationships were not contractual and not exclusive; (3)
patients have a generally high turnover rate and, since patients do not
determine the services provided or the duration thereof, and the Company is
prohibited from marketing additional services to them, patients cannot be used
to expand the business; and (4) the assembled workforce is readily replaceable
at low cost, market rates are paid, clinical expertise is the responsibility of
the employee and no significant proprietary training is provided.
F-30
<PAGE>
PRO FORMA INFORMATION
The PVNS acquisition completed on January 31, 1995 did not have a material
pro forma effect on results of operations for the three month period ended
March 31, 1995.
NOTE 4 - ACCOUNTS RECEIVABLE:
Accounts receivable at March 31, 1996, consisted of the following:
<TABLE>
<S> <C>
Accounts receivable $11,508,091
Less allowance for doubtful accounts 892,727
-----------
$10,615,364
-----------
-----------
</TABLE>
NOTE 5 - PROPERTY AND EQUIPMENT:
Property and equipment at March 31, 1996 consisted of the following:
<TABLE>
<S> <C>
Furniture and fixtures $1,406,957
equipment, including computers 2,141,088
transportation equipment 316,839
leasehold improvements 213,627
----------
4,078,510
less accumulated depreciation and amortization 1,989,782
----------
$2,088,729
----------
----------
</TABLE>
NOTE 6 - NOTES PAYABLE AND OTHER DEBT:
Notes payable and other debt at March 31, 1996 consisted of the following:
<TABLE>
<S> <C>
Bank revolving credit facilities $ 5,500,000
Note payable to Bank 3,625,000
notes payable to former owners of PVNS 101,919
Note payable to former owner of PRN Nevada 348,022
Note payable to former owner of PVNS 291,004
Notes payable to Bank and others, at rates
ranging from 8% to 8.5%, with various maturities
through 1997 17,037
Capital lease obligations 807,606
-----------
10,690,588
Less current portion 1,003,608
-----------
Noncurrent portion $ 9,686,980
-----------
-----------
</TABLE>
F-31
<PAGE>
BANK REVOLVING CREDIT FACILITIES
On March 15, 1996, the Company refinanced all of its debt with a Bank (the
"Bank"). The new revolving credit facilities total $7,300,000, bear interest at
rates ranging from prime to prime minus 1% (8.25% to 7.25% at March 31, 1996),
payable monthly, and mature April 15, 1997. Such credit facilities totalling
$5,725,000 are secured by a first priority lien on all accounts receivable of
the Company. In addition, $1,575,000 of such credit facilities are secured by
collateral (marketable securities) pledged to the Bank by the President, another
director and a shareholder of the Company ("collateral guarantors") and the
remaining $5,725,000 of these credit facilities are guaranteed by the President
and another director of the Company. The related loan agreements do not include
any covenant requirements; however, such agreements do prohibit certain
additional indebtedness and payments of dividends.
NOTES PAYABLE TO BANK
As described above, the Company refinanced all of its debt with the Bank on
March 15, 1996. In connection therewith, the Company borrowed $3,625,000 from
the Bank ("Term Note"), which matures April 15, 1997. The new Term Note bears
interest at prime minus 1% (7.25% at March 31, 1996), payable monthly, and is
secured by collateral (marketable securities) pledged to the Bank by collateral
guarantors. Previously, this collateral was held by the Bank as security for
the Bank's loan to the collateral guarantors which was used by these individuals
to make loans to the Company (see also subordinated note payable below).
NOTES PAYABLE TO FORMER OWNERS OF PVNS
In connection with the acquisition of PVNS, the Company issued a $1,000,000 note
payable to the former owners of PVNS ("PVNS note"). After scheduled and other
principal repayments, together with a settlement reduction of principal
amounting to $275,000, the PVNS note had been repaid as of March 31, 1996.
In November 1994, the Company borrowed $458,636 from the former owners of PVNS
for working capital purposes. Interest only was due on this note through
February 1, 1995, at which date monthly principal and interest payments
commenced in eighteen equal installments with a final payment due on July 1,
1996. The interest rate on the note was at prime through June 30, 1995, on which
date the interest rate increased to prime plus 1% (9.25% at March 31, 1996). At
March 31, 1996, the principal balance of this note was $101,919.
NOTE PAYABLE TO FORMER OWNER OF PRN NEVADA
In connection with the Company's acquisition of PRN Nevada, the Company issued
an $850,000 note payable to the former owner of PRN Nevada. The note bears
interest at prime (8.25% at March 31, 1996), payable monthly, and is secured by
the common stock of PRN Nevada. Monthly principal payments of $23,611 commenced
August 1, 1994 and are payable in such amount through July 1, 1997. During 1995
and 1996, scheduled payments on this note were offset by approximately $155,500
due from the former owner of PRN Nevada for indemnification of applicable
adjustments to PRN Nevada's pre-acquisition cost reports (see also note 7).
NOTES PAYABLE TO FORMER OWNER OF PVNS
In connection with the acquisition of the PVNS, the Company issued two notes
payable to the former owner of the PVNS. The larger note in the amount of
$500,000, subsequently reduced to $400,000, is secured by all equipment of
the Company's Florida operation and is non-interest bearing. The remaining
balance due of $291,004 on this note is payable on May 15, 1996. The other
note, in the amount of $73,956, was repaid in 1995.
F-32
<PAGE>
SUBORDINATED NOTE PAYABLE
In connection with the acquisition of PVNS, the Company issued a $5,500,000 note
payable to the collateral guarantors (as defined above), which was subsequently
repaid. In connection with making this subordinated loan, the collateral
guarantors were granted warrants to purchase 100 shares of the Company's
class a preferred stock at $100 per share. As previously described, the
collateral (marketable securities) that the collateral guarantors pledged to
the Bank as security for a portion of the revolving credit facilities and the
Term Note was previously held by the Bank as security for a loan to the
collateral guarantors. Such loan was used by these individuals to make loans
to the Company. Thus, the collateral guarantors' risk position has not
significantly changed and, accordingly, the agreement governing the preferred
stock warrants has been amended so that the warrants remain outstanding under
substantially the same terms, except that the exercisability of the warrants
now relates to the Term Note and $1,575,000 of the new revolving credit
facilities rather than the subordinated loan. Such warrants are now
exercisable only in the event of certain defaults of the Company or the
collateral guarantors under the Term Note, $1,575,000 of the new revolving
credit facilities, or the related collateral maintenance agreements with the
Bank, or in the event the Bank liquidates the collateral guarantors'
collateral. The warrants expire when the aggregate outstanding balance of
the Term Note and $1,575,000 of the new revolving credit facilities is
$1,175,000 or less and the Company is not in default under the Term Note and
$1,575,000 of the new revolving credit facilities. If the warrants are
exercised and the aggregate outstanding balance of the Term Note and
$1,575,000 of the new revolving credit facilities is $3,625,000 or more, the
holders of the preferred stock have the right to elect seven of thirteen
Company directors. At March 31, 1996, the aggregate principal outstanding on
the $1,575,000 portion of the new revolving credit facilities and the Term
Note was $5,200,000. At all other times after warrant exercise, the holders
of the preferred stock have the right to elect three of nine Company
directors. If the warrants are exercised, the Company may redeem the
preferred stock, at the price of $100 per share, at any time after the
aggregate outstanding principal balances of the above referenced debt are
less than $1,175,000.
OTHER
On April 10, 1995, the Company borrowed $300,000 from its President for working
capital purposes at the prime interest rate, which was repaid on May 26, 1995.
FAIR VALUE OF INDEBTEDNESS
Substantially all of the Company's indebtedness bears current rates of interest
and the terms thereof are considered normal for the nature of the instruments.
Accordingly, the Company believes that the carrying value of indebtedness
approximates its fair value.
NOTE 7 - RESERVE FOR GOVERNMENT PROGRAM SETTLEMENTS:
The Company's Medicare operations are subject to regulations administered by the
health care financing administration. Other government programs served by the
Company are also subject to regulations of various state agencies. Amounts
reimbursed by the Medicare and other government programs are subject to audit
and retroactive adjustment. Such adjustments which affect income are included
in revenue.
In reviewing its reserve for government program settlements for adequacy, the
Company considers, among other factors, recent Medicare intermediary audit
results, the effect of final adjustments on open cost reports, recent
interpretations of regulations and cost reporting principles, and other
available current information.
F-33
<PAGE>
In connection with the acquisition of PRN Nevada, the Company received an
indemnification from the former owner of PRN Nevada for adjustments to PRN
Nevada's pre-acquisition Medicare cost reports, all of which have been settled.
The amounts due the Company pursuant to the indemnification for such pre-
acquisition cost reports have been received (see also note 6). PRN Nevada's
Medicare cost reports subsequent to December 31, 1994 remain open for
examination and reserves have been established for estimated adjustments that
may result therefrom. Also, PRN Nevada is experiencing difficulties in
obtaining reimbursement of certain receivable claims from nevada medicaid due to
untimely billing of such claims and accordingly, a reserve has been established
for estimated losses that may result therefrom. In connection therewith,
expense of $75,000 was recorded during the three months ended March 31, 1995.
Collection of such receivables has been delayed awaiting resolution of a
regulatory investigation for which no claim has been asserted and for which the
Company's internal review indicates that it should have no material liability
related thereto.
During 1995, all remaining open PVNS pre-acquisition Medicare cost reports were
settled and the Company recorded the effect of the adjustments resulting
therefrom, which included adjustments to this reserve. Such adjustments did not
have a material effect on the Company's results of operations. PVNS Medicare
cost reports subsequent to December 31, 1993 remain open for examination and
reserves have been established for estimated adjustments that may result
therefrom.
During the three month periods ended March 31, 1996 and 1995, the Company
recorded expense of $34,000 and $50,000, respectively, for estimated adjustments
that may result from current year Medicare cost reports, of which a portion
thereof increased this reserve. Also, during the first quarter of 1995, the
reserve was reduced by approximately $97,000 for an agreed upon repayment of a
prior year advance received from a Medicare intermediary.
Although the process for estimating final settlements related to government
programs is inherently subjective and such estimates can change as new
developments occur, the Company believes the reserve for government program
settlements is adequate to cover estimated adjustments to open Medicare cost
reports and settlements with other government programs, and that any final
determinations in connection therewith will not have a material adverse effect
on the Company's financial position or results of operations.
NOTE 8 - INCOME TAXES:
The following table reconciles the federal statutory income tax rate and the
Company's effective income tax rate for the three month periods ended March 31:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Federal income taxes at statutory rates 34.0% 34.0%
Nondeductible amortization 8.8% 8.6%
Other permanent differences (.4)% 1.6%
Recovery of nontaxable payroll related costs -% (25.8)%
State income taxes 3.0% .5%
------ -------
Effective income tax rate 45.4% 18.9%
------ -------
------ -------
</TABLE>
NOTE 9 - NEW ACCOUNTING STANDARD - STOCK BASED COMPENSATION:
In October 1995, statement of financial accounting standards no. 123, ACCOUNTING
FOR STOCK-BASED COMPENSATION, was issued which covers the accounting for stock-
based compensation, principally stock options. The Company adopted this
standard effective January 1, 1996. However, as permitted by the
F-34
<PAGE>
standard, the Company will not change its existing accounting for stock options.
Additional disclosures, including pro forma effect on income of the difference
between existing and the new accounting method, will be required in the
Company's year end financial statements. The Company does not expect that such
pro forma effect on income will be material.
NOTE 10 - PROPOSED MERGER OF COMPANY
In February 1996, the Company agreed to be acquired by Horizon/CMS Healthcare
corporation ("horizon") pursuant to a merger agreement, under which the
Company's stockholders would receive shares of horizon. On May 15, 1996, the
Company and horizon executed a new merger agreement under which the Company's
stockholders will receive cash in the amount of $1.85 for each share of the
Company's common stock. Completion of the transaction is subject to, among other
conditions, compliance with, and expiration of, the applicable waiting period
under the hart-scott-rodino act and healthcare regulatory approvals; and
approval by the stockholders of the Company. Certain affiliates of the Company
holding approximately forty-three percent of the outstanding common stock of the
Company have signed a voting agreement under which they have agreed to vote
their shares in favor of the merger. The merger, if completed, is expected to
occur in the third quarter of 1996.
F-35
<PAGE>
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
HORIZON/CMS HEALTHCARE CORPORATION,
HORIZON MI CORPORATION
AND
MEDICAL INNOVATIONS, INC.
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE I.
THE MERGER
SECTION 1.02. EFFECTIVE TIME.. . . . . . . . . . . . . . . . . . 2
SECTION 1.03. EFFECT OF THE MERGER . . . . . . . . . . . . . . . 2
SECTION 1.04. CERTIFICATE OF INCORPORATION; BYLAWS . . . . . . . 2
SECTION 1.05. DIRECTORS AND OFFICERS . . . . . . . . . . . . . . 2
ARTICLE II.
CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES
SECTION 2.01. MERGER CONSIDERATION; CONVERSION AND CANCELLATION OF
SECURITIES . . . . . . . . . . . . . . . . . . . . 2
SECTION 2.02. PAYMENT FOR COMPANY COMMON STOCK; SURRENDER OF
CERTIFICATES . . . . . . . . . . . . . . . . . . . 3
SECTION 2.04. STOCK TRANSFER BOOKS . . . . . . . . . . . . . . . 5
ARTICLE III.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
SECTION 3.01. ORGANIZATION AND QUALIFICATION; SUBSIDIARIES . . . 5
SECTION 3.02. CERTIFICATE OF INCORPORATION AND BYLAWS. . . . . . 6
SECTION 3.03. CAPITALIZATION . . . . . . . . . . . . . . . . . . 6
SECTION 3.04. AUTHORITY. . . . . . . . . . . . . . . . . . . . . 8
SECTION 3.05. NO CONFLICT; REQUIRED FILINGS AND CONSENTS . . . . 8
SECTION 3.06. PERMITS; COMPLIANCE. . . . . . . . . . . . . . . . 9
SECTION 3.07. REPORTS; FINANCIAL STATEMENTS. . . . . . . . . . . 11
SECTION 3.08. ABSENCE OF CERTAIN CHANGES OR EVENTS . . . . . . . 12
SECTION 3.09. ABSENCE OF LITIGATION. . . . . . . . . . . . . . . 13
SECTION 3.10. EMPLOYEE BENEFIT PLANS; LABOR MATTERS. . . . . . . 13
SECTION 3.11. TAXES. . . . . . . . . . . . . . . . . . . . . . . 15
SECTION 3.12. CERTAIN BUSINESS PRACTICES . . . . . . . . . . . . 16
SECTION 3.13. VOTE REQUIRED. . . . . . . . . . . . . . . . . . . 16
SECTION 3.14. BROKERS. . . . . . . . . . . . . . . . . . . . . . 16
SECTION 3.15. INSURANCE. . . . . . . . . . . . . . . . . . . . . 16
-i-
<PAGE>
SECTION 3.16. PROPERTIES . . . . . . . . . . . . . . . . . . . . 16
SECTION 3.17. MANAGEMENT CONTRACTS . . . . . . . . . . . . . . . 17
SECTION 3.18. OPINION OF FINANCIAL ADVISOR . . . . . . . . . . . 17
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES OF ACQUIROR
SECTION 4.01. ORGANIZATION AND QUALIFICATION; SUBSIDIARIES.. . . 17
SECTION 4.02. AUTHORITY. . . . . . . . . . . . . . . . . . . . . 18
SECTION 4.03. NO CONFLICT; REQUIRED FILINGS AND CONSENTS . . . . 18
SECTION 4.04. VOTE REQUIRED. . . . . . . . . . . . . . . . . . . 19
SECTION 4.05. BROKERS. . . . . . . . . . . . . . . . . . . . . . 19
SECTION 4.06. SUFFICIENT FUNDS . . . . . . . . . . . . . . . . . 19
ARTICLE V.
COVENANTS
SECTION 5.01. AFFIRMATIVE COVENANTS OF THE COMPANY . . . . . . . 20
SECTION 5.02. NEGATIVE COVENANTS OF THE COMPANY. . . . . . . . . 20
SECTION 5.03. NEGATIVE COVEANTS OF ACQUIROR. . . . . . . . . . . 23
SECTION 5.04. ACCESS AND INFORMATION . . . . . . . . . . . . . . 23
ARTICLE VI.
ADDITIONAL AGREEMENTS
SECTION 6.01. PRESENTATION TO COMPANY STOCKHOLDERS . . . . . . . 24
SECTION 6.02. PROXY STATEMENT. . . . . . . . . . . . . . . . . . 25
SECTION 6.03. APPROPRIATE ACTION; CONSENTS; FILINGS. . . . . . . 26
SECTION 6.04. PUBLIC ANNOUNCEMENTS . . . . . . . . . . . . . . . 27
SECTION 6.05. STATE TAKEOVER STATUTES. . . . . . . . . . . . . . 27
SECTION 6.06. MERGER SUB . . . . . . . . . . . . . . . . . . . . 28
SECTION 6.07. INDEMNIFICATION AND INSURANCE. . . . . . . . . . . 28
SECTION 6.08. OPINION OF FINANCIAL ADVISOR . . . . . . . . . . . 29
SECTION 6.09. STOCK OPTIONS. . . . . . . . . . . . . . . . . . . 29
-ii-
<PAGE>
ARTICLE VII.
CLOSING CONDITIONS
SECTION 7.01. CONDITIONS TO OBLIGATIONS OF EACH PARTY UNDER THIS
AGREEMENT. . . . . . . . . . . . . . . . . . . . . 30
SECTION 7.02. ADDITIONAL CONDITIONS TO OBLIGATIONS OF THE ACQUIROR
COMPANIES. . . . . . . . . . . . . . . . . . . . . 30
SECTION 7.03. ADDITIONAL CONDITIONS TO OBLIGATIONS OF THE
COMPANY. . . . . . . . . . . . . . . . . . . . . . 31
ARTICLE VIII.
TERMINATION, AMENDMENT AND WAIVER
SECTION 8.01. TERMINATION. . . . . . . . . . . . . . . . . . . . 31
SECTION 8.02. EFFECT OF TERMINATION. . . . . . . . . . . . . . . 33
SECTION 8.03. AMENDMENT. . . . . . . . . . . . . . . . . . . . . 33
SECTION 8.04. WAIVER . . . . . . . . . . . . . . . . . . . . . . 33
SECTION 8.05. FEES, EXPENSES AND OTHER PAYMENTS. . . . . . . . . 34
ARTICLE IX.
GENERAL PROVISIONS
SECTION 9.01. EFFECTIVENESS OF REPRESENTATIONS, WARRANTIES AND
AGREEMENTS . . . . . . . . . . . . . . . . . . . . 35
SECTION 9.02. NOTICES. . . . . . . . . . . . . . . . . . . . . . 35
SECTION 9.03. CERTAIN DEFINITIONS. . . . . . . . . . . . . . . . 36
SECTION 9.04. HEADINGS . . . . . . . . . . . . . . . . . . . . . 37
SECTION 9.05. SEVERABILITY . . . . . . . . . . . . . . . . . . . 37
SECTION 9.06. ENTIRE AGREEMENT . . . . . . . . . . . . . . . . . 38
SECTION 9.07. ASSIGNMENT . . . . . . . . . . . . . . . . . . . . 38
SECTION 9.08. PARTIES IN INTEREST. . . . . . . . . . . . . . . . 38
SECTION 9.09. FAILURE OR INDULGENCE NOT WAIVER; REMEDIES
CUMULATIVE . . . . . . . . . . . . . . . . . . . . 38
SECTION 9.10. GOVERNING LAW. . . . . . . . . . . . . . . . . . . 38
SECTION 9.11. COUNTERPARTS . . . . . . . . . . . . . . . . . . . 38
SECTION 9.12. SPECIFIC PERFORMANCE . . . . . . . . . . . . . . . 38
-iii-
<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER, dated as of May 15, 1996 (this
"Agreement"), is by and among HORIZON/CMS HEALTHCARE CORPORATION, a Delaware
corporation ("Acquiror"), HORIZON MI CORPORATION, a Delaware corporation and
wholly owned subsidiary of Acquiror ("Merger Sub"), and MEDICAL INNOVATIONS,
INC., a Delaware corporation (the "Company"). Acquiror and Merger Sub are
sometimes collectively referred to herein as the "Acquiror Companies."
WHEREAS, Merger Sub, upon the terms and subject to the conditions of this
Agreement and in accordance with the General Corporation Law of the State of
Delaware ("Delaware Law"), will merge with and into the Company (the "Merger");
WHEREAS, the Board of Directors of the Company has determined that the
Merger is consistent with and in furtherance of the long-term business strategy
of the Company and is fair to, and in the best interests of, the Company and its
stockholders and has approved and adopted this Agreement and the transactions
contemplated hereby, and recommended approval and adoption of this Agreement by
the stockholders of the Company;
WHEREAS, the Board of Directors of Acquiror has determined that the Merger
is consistent with and in furtherance of the long-term business strategy of
Acquiror and is fair to, and in the best interests of, Acquiror and its
stockholders and has approved and adopted this Agreement and the transactions
contemplated hereby; and
WHEREAS, Acquiror, Merger Sub and the Company have agreed to terminate that
certain Agreement and Plan of Merger dated February 13, 1996 by and among the
parties hereto simultaneously with the execution of this Agreement;
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth in this
Agreement, the parties hereto agree as follows:
ARTICLE I.
THE MERGER
SECTION 1.01. THE MERGER. Upon the terms and subject to the conditions
set forth in this Agreement, and in accordance with Delaware Law, at the
Effective Time (as defined in Section 1.02 of this Agreement), Merger Sub shall
be merged with and into the Company. As a result of the Merger, the separate
corporate existence of Merger Sub shall cease and the Company shall continue as
the surviving corporation of the Merger (the "Surviving Corporation"). The name
of the Surviving Corporation shall be "Medical Innovations, Inc."
<PAGE>
SECTION 1.02. EFFECTIVE TIME. As promptly as practicable after the
satisfaction or, if permissible, waiver of the conditions set forth in Article
VII of this Agreement, the parties hereto shall cause the Merger to be
consummated by filing a Certificate of Merger with the Secretary of State of the
State of Delaware, in such form as required by, and executed in accordance with
the relevant provisions of Delaware Law (the date and time of the completion of
such filing being the "Effective Time").
SECTION 1.03. EFFECT OF THE MERGER. At the Effective Time, the effect of
the Merger shall be as provided in the applicable provisions of Delaware Law.
Without limiting the generality of the foregoing, and subject thereto, at the
Effective Time, except as otherwise provided herein, all the property, rights,
privileges, powers and franchises of Merger Sub and the Company shall vest in
the Surviving Corporation, and all debts, liabilities and duties of Merger Sub
and the Company shall become the debts, liabilities and duties of the Surviving
Corporation.
SECTION 1.04. CERTIFICATE OF INCORPORATION; BYLAWS. At the Effective
Time, the Certificate of Incorporation and the Bylaws of the Company, as in
effect immediately prior to the Effective Time, shall be the Certificate of
Incorporation and the Bylaws of the Surviving Corporation.
SECTION 1.05. DIRECTORS AND OFFICERS. The directors of Merger Sub
immediately prior to the Effective Time shall be the directors of the Surviving
Corporation, each to hold office in accordance with the Certificate of
Incorporation and Bylaws of the Surviving Corporation, and the officers of
Merger Sub immediately prior to the Effective Time shall be the officers of the
Surviving Corporation, in each case until their respective successors are duly
elected or appointed and qualified.
ARTICLE II.
CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES
SECTION 2.01. MERGER CONSIDERATION; CONVERSION AND CANCELLATION OF
SECURITIES. At the Effective Time, by virtue of the Merger and without any
action on the part of the Acquiror Companies, the Company or the holders of any
of the Company's securities:
(a) Subject to the other provisions of this Article II, each share of
common stock, par value $.0075 per share, of the Company ("Company Common
Stock") issued and outstanding immediately prior to the Effective Time
(excluding any (i) Company Common Stock described in Section 2.01(c) of
this Agreement and (ii) Dissenting Shares (as hereinafter defined) in
respect of which appraisal rights are properly exercised and perfected)
shall be converted into the right to receive $1.85 per share in cash,
without interest thereon (the "Merger Consideration") which Merger
Consideration shall be payable upon surrender of the certificate
representing such share (a "Certificate") in the manner provided in Section
2.02 of this Agreement. Notwithstanding the foregoing, if between the date
of this Agreement and the Effective Time the outstanding shares of Company
Common Stock shall have been changed into a different number of shares or a
different class, by reason of any stock dividend, subdivision,
reclassification, recapitalization, split, combination or exchange
-2-
<PAGE>
of shares, the Merger Consideration shall be correspondingly adjusted to
reflect such stock dividend, subdivision, reclassification,
recapitalization, split, combination or exchange of shares.
(b) As a result of their conversion pursuant to subsection 2.01(a),
all shares of Company Common Stock shall cease to be outstanding and shall
automatically be canceled and retired, and each Certificate previously
evidencing Company Common Stock outstanding immediately prior to the
Effective Time (other than Company Common Stock described in Section
2.01(c) of this Agreement and Dissenting Shares) shall thereafter represent
the right to receive $1.85 in cash per share of Company Common Stock
previously represented thereby, without interest thereon. The holders of
Certificates previously evidencing Company Common Stock shall cease to have
any rights with respect to such Company Common Stock except the right to
receive the Merger Consideration and as otherwise provided herein or by
law. Such Certificates previously evidencing Company Common Stock shall be
exchanged for cash upon the surrender of such Certificates in accordance
with the provisions of Section 2.02 of this Agreement.
(c) Notwithstanding any provision of this Agreement to the contrary,
each share of Company Common Stock held in the treasury of the Company and
each share of Company Common Stock owned by Acquiror or any direct or
indirect wholly owned subsidiary of Acquiror or of the Company immediately
prior to the Effective Time shall be canceled and extinguished without any
conversion thereof and no payment shall be made with respect thereto.
(d) Each share of common stock, par value $.001 per share, of Merger
Sub issued and outstanding immediately prior to the Effective Time shall be
converted into one share of common stock, par value $.0075 per share, of
the Surviving Corporation.
SECTION 2.02. PAYMENT FOR COMPANY COMMON STOCK; SURRENDER OF CERTIFICATES.
(a) EXCHANGE FUND. At or prior to the Effective Time, Acquiror shall
deposit, or cause to be deposited, with a bank or trust company mutually
agreeable to the parties to this Agreement (the "Exchange Agent"), for the
benefit of the former holders of Company Common Stock, for exchange in
accordance with this Article II, through the Exchange Agent, funds that
will be sufficient to enable the Exchange Agent to make payments with
respect to all Certificates representing Company Common Stock for which the
Merger Consideration is payable in accordance with this Section 2.02. The
cash deposited with the Exchange Agent in accordance with this subsection
2.02(a) is hereinafter referred to as the "Exchange Fund." The Exchange
Agent shall, pursuant to irrevocable instructions, deliver cash, as
described above, in exchange for surrendered Certificates pursuant to the
terms of this Agreement out of the Exchange Fund. The Exchange Fund shall
not be used for any other purpose.
(b) EXCHANGE PROCEDURES. As soon as practicable after the Effective
Time, Acquiror will cause the Exchange Agent to send to each record holder
of Company Common
-3-
<PAGE>
Stock at the Effective Time (i) a letter of transmittal (which shall
specify that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon delivery of the Certificates to the
Exchange Agent and shall be in such form and contain such other provisions
as the parties hereto may agree) and (ii) instructions for use in effecting
the surrender for payment of the Certificates. Upon surrender of a
Certificate for cancellation to the Exchange Agent, together with such
letter of transmittal, duly executed, the holder of such Certificate shall
be entitled to receive in exchange therefor cash in an amount equal to the
product of the number of shares of Company Common Stock represented by the
Certificate or Certificates surrendered and the Merger Consideration, and
the Certificate so surrendered shall forthwith be canceled. In the event
of a transfer of ownership of Company Common Stock which is not registered
in the transfer records of the Company, the appropriate amount of cash may
be paid to the transferee if the Certificate evidencing the Company Common
Stock shall be surrendered to the Exchange Agent, accompanied by all
documents required to evidence and effect such transfer and by evidence
that any applicable stock transfer taxes have been paid. Until surrendered
for exchange in accordance with the provisions of Section 2.02 of this
Agreement, each Certificate theretofore representing Company Common Stock
(other than shares of Company Common Stock to be canceled pursuant to
Section 2.01(c) of this Agreement and Dissenting Shares) shall from and
after the Effective Time represent for all purposes only the right to
receive the Merger Consideration as set forth in this Agreement. If any
holder of Company Common Stock shall be unable to surrender such holder's
Certificates because such Certificates have been lost or destroyed, such
holder may deliver in lieu thereof an affidavit and indemnity bond in form
and substance and with surety reasonably satisfactory to Acquiror.
(c) TERMINATION OF EXCHANGE FUND. Any portion of the Exchange Fund
that remains unclaimed by the former holders of Company Common Stock for
six months after the Effective Time shall be delivered to Acquiror, upon
demand, and any former holders of Company Common Stock who have not
theretofore complied with this Article II shall thereafter look only to
Acquiror for the Merger Consideration, without any interest thereon.
Neither Acquiror nor the Company shall be liable to any holder of shares of
Company Common Stock for any Merger Consideration or cash delivered to a
public official pursuant to any applicable abandoned property escheat or
similar law.
(d) WITHHOLDING. Acquiror (or any affiliate thereof) shall be
entitled to deduct and withhold from the consideration otherwise payable
pursuant to this Agreement to any former holder of Company Common Stock
such amounts as Acquiror (or any affiliate thereof) is required to deduct
and withhold with respect to the making of such payment under the Code (as
hereinafter defined), or any other provision of federal, state, local or
foreign tax law. To the extent that amounts are so withheld by Acquiror,
such withheld amounts shall be treated for all purposes of this Agreement
as having been paid to the former holder of the Company Common Stock in
respect of which such deduction and withholding was made by Acquiror.
SECTION 2.03 DISSENTING SHARES. Notwithstanding anything in this
Agreement to the contrary, shares of Company Common Stock that are issued and
outstanding immediately prior to
-4-
<PAGE>
the Effective Time and that are held by stockholders who have properly exercised
appraisal rights with respect thereto under Section 262 of the Delaware Law (the
"Dissenting Shares") shall not be converted into the right to receive the Merger
Consideration as provided in 2.01(a), but the holders of Dissenting Shares shall
be entitled to receive such payment as shall be determined pursuant to Section
262 of the Delaware Law; PROVIDED, HOWEVER, that if any such holder shall have
failed to perfect or shall withdraw or lose the right to appraisal and payment
under the Delaware Law, each such holder's shares of Company Common Stock shall
thereupon be deemed to have been converted as of the Effective Time into the
right to receive the Merger Consideration, without any interest thereon, as
provided in Section 2.01(a), and such shares shall no longer be Dissenting
Shares.
SECTION 2.04. STOCK TRANSFER BOOKS. At the Effective Time, the stock
transfer books of the Company shall be closed and there shall be no further
registration of transfers of shares of Company Common Stock thereafter on the
records of the Company.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Acquiror that:
SECTION 3.01. ORGANIZATION AND QUALIFICATION; SUBSIDIARIES. The Company
is a corporation, and each of the Company's subsidiaries (as such term in
defined in Section 9.03 herein) is a corporation or partnership, duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
incorporation or organization, and each of the Company and its subsidiaries has
all requisite power and authority to own, lease and operate its properties and
to carry on its business as it is now being conducted and, except as set forth
in Section 3.01 of the Company Disclosure Schedule (as defined below), is duly
qualified and in good standing to do business in each jurisdiction in which the
nature of the business conducted by it or the ownership or leasing of its
properties makes such qualification necessary, other than where the failure to
be so duly qualified and in good standing could not reasonably be expected to
have a Company Material Adverse Effect. The term "Company Material Adverse
Effect" as used in this Agreement shall mean any change or effect that would be
materially adverse to the financial condition, results of operations, business
or prospects of the Company and its subsidiaries, taken as a whole, at the time
of such change or effect. Section 3.01 of the Disclosure Schedule delivered by
the Company to the Acquiror Companies concurrently with the execution of this
Agreement (the "Company Disclosure Schedule") sets forth, as of the date of this
Agreement, a true and complete list of all the Company's directly or indirectly
owned subsidiaries, together with (A) the jurisdiction of incorporation or
organization of each subsidiary and the percentage of each subsidiary's
outstanding capital stock or other equity interests owned by the Company or
another subsidiary of the Company and (B) an indication of whether each such
subsidiary is a "Significant Subsidiary" as defined in Section 9.03 of this
Agreement.
SECTION 3.02. CERTIFICATE OF INCORPORATION AND BYLAWS. The Company has
heretofore furnished or made available to Acquiror complete and correct copies
of the Certificate of Incorporation and the Bylaws or the equivalent
organizational documents, in each case as amended
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or restated to the date hereof, of the Company and each of its subsidiaries.
Neither the Company nor any of its subsidiaries is in violation of any of the
provisions of its Certificate of Incorporation or Bylaws (or equivalent
organizational documents).
SECTION 3.03. CAPITALIZATION.
(a) The authorized capital stock of the Company consists of
75,000,000 shares of Company Common Stock and 3,000,000 shares of preferred
stock, par value $.01 per share ("Company Preferred Stock"), of which the
Company has agreed to designate 100 shares as Class A Preferred Stock (the
"Company Class A Preferred Stock") and the balance of which are
undesignated. At the close of business on April 30, 1996, 15,954,880
shares of Company Common Stock were issued and outstanding, no shares of
Company Common Stock were held by the Company in its treasury or by the
Company's subsidiaries and 4,140,002 shares of Company Common Stock were
reserved for issuance as follows: (i) 513,000 shares were reserved for
issuance upon exercise of stock options heretofore granted or available for
grant pursuant to the Company's 1988 Stock Option Plan, (ii) 1,000,000
shares were reserved for issuance upon exercise of stock options heretofore
granted or available for grant pursuant to the Company's 1993 Stock Option
Plan, (iii) 500,000 shares were reserved for issuance upon exercise of
stock options heretofore granted or available for grant pursuant to the
Company's Executive Security Stock Option Plan (the stock option plans
referenced in clauses (i), (ii) and (iii) of this Section being herein
collectively called the "Option Plans"), (iv) 2,127,002 shares were
reserved for issuance upon the exercise of the warrants and options (the
"Common Stock Warrants") listed and described in Section 3.03(a) of the
Company Disclosure Schedule. No shares of the Company Preferred Stock are
issued or outstanding and the Company has agreed to reserve 100 shares of
Company Class A Preferred Stock for issuance upon the exercise of a warrant
(the "Preferred Stock Warrant") described in Section 3.03(a) of the Company
Disclosure Schedule. Except as described in this Section 3.03 or in
Section 3.03(a) of the Company Disclosure Schedule, no shares of capital
stock of the Company are reserved for issuance for any other purpose.
Since April 30, 1996, no shares of capital stock have been issued by the
Company or any of its subsidiaries except pursuant to agreements for which
shares were adequately reserved at such date as described in this
subsection (a). Since April 30, 1996, neither the Company nor any of its
subsidiaries has granted any options for, or other rights to purchase, any
shares of capital stock of the Company or any of its subsidiaries. Each of
the issued shares of capital stock of, or other equity interests in, each
of the Company and its subsidiaries is duly authorized, validly issued and,
in the case of shares of capital stock, fully paid and nonassessable, and
has not been issued in violation of (nor are any of the authorized shares
of capital stock of, or other equity interests in, the Company or any of
its subsidiaries subject to) any preemptive or similar rights created by
statute, the Certificate of Incorporation or Bylaws (or the equivalent
organizational documents) of the Company or any of its subsidiaries, or any
agreement to which the Company or any of its subsidiaries is a party or is
bound, and, except as set forth in Section 3.16 of the Company Disclosure
Schedule, all such issued shares or other equity interests owned by the
Company or a subsidiary of the Company are owned free and clear of all
security interests, liens, claims, pledges, agreements,
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limitations on the Company's or such subsidiaries' voting rights, charges
or other encumbrances of any nature whatsoever.
(b) No bonds, debentures, notes or other indebtedness of the Company
having the right to vote (or convertible into or exchangeable or
exercisable for securities having the right to vote) on any matters on
which stockholders may vote ("Voting Debt") is issued or outstanding. All
shares of Company Common Stock which may be issued upon exercise of stock
options granted pursuant to the Option Plans will, when issued in
accordance with the terms of such stock options and the related Option
Plans, be validly issued, fully paid and nonassessable and not subject to
preemptive rights.
(c) Except as set forth in Section 3.03(a) above or in Section
3.03(c) of the Company Disclosure Schedule, there are no options, warrants
or other rights (including registration rights), agreements, arrangements
or commitments of any character to which the Company or any of its
subsidiaries is a party relating to the issued or unissued capital stock or
other equity interests of the Company or any of its subsidiaries or
obligating the Company or any of its subsidiaries to grant, issue or sell
any shares of capital stock, Voting Debt or other equity interests of the
Company or any of its subsidiaries. Except as set forth in Section 3.03(c)
of the Company Disclosure Schedule, there are no obligations, contingent or
otherwise, of the Company or any of its subsidiaries (i) to repurchase,
redeem or otherwise acquire any shares of Company Common Stock or other
capital stock of the Company or the capital stock or other equity interests
of any subsidiary of the Company or (ii) (other than advances to wholly
owned subsidiaries in the ordinary course of business) to provide material
funds to, or to make any material investment in (in the form of a loan,
capital contribution or otherwise), or to provide any guarantee with
respect to the material obligations of, any subsidiary of the Company or
any other person. Except (i) as set forth in Section 3.03(c) of the
Company Disclosure Schedule or (ii) for subsidiaries of the Company set
forth in Section 3.01 of the Company Disclosure Schedule, neither the
Company nor any of its subsidiaries (x) directly or indirectly owns, (y)
has agreed to purchase or otherwise acquire or (z) holds any interest
convertible into or exchangeable or exercisable for, 5% or more of the
capital stock or other equity interest of any corporation, partnership,
joint venture or other business association or entity. Except as set forth
in Section 3.03(c) of the Company Disclosure Schedule or for any
agreements, arrangements or commitments between the Company and its wholly
owned subsidiaries or between such wholly owned subsidiaries, there are no
agreements, arrangements or commitments of any character (contingent or
otherwise) pursuant to which any person is or may be entitled to receive
any payment based on, or calculated in accordance with, the revenues or
earnings of the Company or any of its subsidiaries. Except for the Voting
Agreement (as such term is defined in Section 9.03 herein) and as set forth
in Section 3.03(c) of the Company Disclosure Schedule, there are no voting
trusts, proxies or other agreements or understandings to which the Company
or any of its subsidiaries is a party or by which the Company or any of its
subsidiaries is bound with respect to the voting of any shares of capital
stock or other equity interests of the Company or any of its subsidiaries.
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(d) Section 3.03(d) of the Company Disclosure Schedule sets forth a
complete and correct list as of April 30, 1996, of (i) the number of stock
options outstanding, (ii) the exercise price of each outstanding stock
option and (iii) the number of stock options exercisable and includes
complete and correct copies of the Option Plans, all forms of stock options
issued pursuant to the Option Plans or otherwise, all Common Stock Warrants
and the Preferred Stock Warrant, including all amendments thereto.
SECTION 3.04. AUTHORITY. The Company has all requisite corporate power
and authority to execute and deliver this Agreement, to perform its obligations
hereunder and to consummate the transactions contemplated hereby (subject to,
with respect to the Merger, the approval and adoption of this Agreement by the
stockholders of the Company as set forth in Section 3.13 of this Agreement).
The execution and delivery of this Agreement by the Company and the consummation
by the Company of the transactions contemplated hereby have been duly authorized
by all necessary corporate action and no other corporate proceedings on the part
of the Company are necessary to authorize this Agreement or to consummate the
transactions contemplated hereby (subject to, with respect to the Merger, the
approval and adoption of this Agreement by the stockholders of the Company as
set forth in Section 3.13 of this Agreement). This Agreement has been duly
executed and delivered by the Company and, assuming the due authorization,
execution and delivery hereof by the Acquiror Companies, constitutes the legal,
valid and binding obligation of the Company.
SECTION 3.05. NO CONFLICT; REQUIRED FILINGS AND CONSENTS.
(a) Assuming that all consents, licenses, permits, waivers,
approvals, authorizations, orders, filings and notifications contemplated
by the exceptions to Section 3.05(b) are obtained or made and except as
disclosed in Section 3.05(a) of the Company Disclosure Schedule, the
execution and delivery of this Agreement by the Company does not, and the
performance by the Company of its obligations hereunder, including
consummation of the transactions contemplated hereby, will not (i) conflict
with or violate the Certificate of Incorporation or Bylaws, or the
equivalent organizational documents, in each case as amended or restated,
of the Company or any of its subsidiaries, (ii) conflict with or violate
any federal, state, foreign or local law, statute, ordinance, rule or
regulation (collectively, "Laws") or any judgment, order or decree
applicable to the Company or any of its subsidiaries or by or to which any
of their respective properties is bound or subject or (iii) result in any
breach of or constitute a default (or an event that with notice or lapse of
time or both would become a default) under, or give to others any rights of
termination, amendment, acceleration or cancellation of, or require payment
under, or result in the creation of a lien or encumbrance on any of the
properties or assets of the Company or any of its subsidiaries pursuant to,
any material note, bond, mortgage, indenture, contract, agreement, lease,
license, permit, franchise or other instrument or obligation to which the
Company or any of its subsidiaries is a party or by or to which the Company
or any of its subsidiaries or any of their respective properties is bound
or subject. The Board of Directors of the Company has taken all actions
necessary under Delaware Law, including approving the transactions
contemplated by this Agreement, to ensure that the prohibitions on business
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combinations set forth in Section 203 of Delaware Law do not, and will not,
apply to the transactions contemplated by this Agreement or the Voting
Agreement.
(b) The execution and delivery of this Agreement by the Company does
not, and the performance by the Company of its obligations hereunder,
including consummation of the transactions contemplated hereby, will not,
require the Company to obtain any consent, license, permit, waiver,
approval, authorization or order of, or to make any filing with or
notification to, any governmental or regulatory authority, federal, state,
local or foreign (collectively, "Governmental Entities"), except (i) for
applicable requirements, if any, of the Securities Act of 1933, as amended
(the "Securities Act"), and the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), state securities or blue sky laws ("Blue Sky Laws"),
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
"HSR Act"), and the filing and recordation of appropriate merger documents
as required by Delaware Law, (ii) where the failure to obtain such
consents, licenses, permits, waivers, approvals, authorizations or orders,
or to make such filings or notifications could not reasonably be expected
to cause a Company Material Adverse Effect or to prevent the Company from
performing its obligations under this Agreement and (iii) as disclosed in
Section 3.05(b) of the Company Disclosure Schedule.
SECTION 3.06. PERMITS; COMPLIANCE.
(a) Except as disclosed in Section 3.06(a) of the Company Disclosure
Schedule, each of the Company and its subsidiaries is in possession of all
(i) material franchises, grants, authorizations, licenses, permits,
easements, variances, exemptions, consents, certificates, identification
and registration numbers, approvals and orders necessary to own, lease and
operate its home health care, home medical equipment, homemaker and
intravenous therapy business (collectively, the "Agencies") and its other
properties and to carry on its business as it is now being conducted and
(ii) agreements, licenses and certificates or determinations of need from
all federal, state and local governmental agencies and accrediting and
certifying organizations (including without limitation the Joint Commission
on Accreditation of Healthcare Organizations ("JCAHO")) having jurisdiction
over such Agency or Agencies that are required to operate the Agency or
Agencies in the manner in which it or they are currently operated and
receive reimbursement for care provided to patients covered under the
federal Medicare program and any applicable state Medicaid program,
including without limitation, Medicare and Medicaid provider numbers
(collectively, the "Company Permits"). Without limiting the generality of
the foregoing and except as disclosed in Section 3.06(a) of the Company
Disclosure Schedule, all of the Company's Agencies are certified for
participation or enrollment in the Medicare program and in the Medicaid
program of each state in which any such Agency operates, have a current and
valid provider contract with each such program and are in substantial
compliance with the conditions of participation in all such programs.
Section 3.06(a) of the Company Disclosure Schedule sets forth a list of
each of the Company Permits held by Company and the jurisdiction issuing
the same, all of which are now and as of the Effective Time shall be in
good standing and not subject to meritorious challenge. Section 3.06(a) of
the Company Disclosure Schedule also sets forth, as of the date of this
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Agreement, all actions, proceedings, investigations or surveys pending or,
to the knowledge of the Company, threatened against the Company or any of
its subsidiaries that could reasonably be expected to result in (i) the
loss or revocation of a Company Permit necessary to operate one or more
Agencies or for an Agency to receive reimbursement under the Medicare or
Medicaid programs or (ii) the suspension or cancellation of any other
Company Permit. Except as set forth in Section 3.06(a) of the Company
Disclosure Schedule, neither the Company nor any of its subsidiaries is in
conflict with, in default under or in violation of and none of them has
received, since December 31, 1994, from any Governmental Entity any written
notice with respect to any conflict with, default under or violation of,
(i) any Law applicable to the Company or any of its subsidiaries or by or
to which any of their respective properties is bound or subject, (ii) any
judgment, order of decree applicable to the Company or any of its
subsidiaries or (iii) any of the Company Permits. The home health agencies
owned by the Company or its subsidiaries have not made claims for (i)
visits not made, (ii) visits to beneficiaries not homebound, (iii) visits
to beneficiaries not requiring a qualifying service or (iv) visits not
properly authorized by a physician, except in the cases of clauses (i) and
(iv) of this subsection for claims that could not reasonably be expected to
result in a Company Material Adverse Effect.
(b) Except as set forth in Section 3.06(b) of the Company Disclosure
Schedule, the Company and its subsidiaries, as appropriate, are approved
participating providers in and under all material third party payment
programs, including without limitation Medicare and applicable state
Medicaid programs, from which they have received revenues since December
31, 1993 ("Payment Programs"). Except as set forth in Section 3.06(b) of
the Company Disclosure Schedule, no action, survey or investigation is
pending or, to the knowledge of the Company, threatened to suspend, limit,
terminate, condition, or revoke the status of the Company or any of its
subsidiaries as a provider in any such program, and neither the Company nor
any of its subsidiaries has been provided notice by any third party payor
of its intention to suspend, limit, terminate, revoke, condition or fail to
renew in whole or in part or decrease the amounts payable under any
arrangement with the Company or such subsidiary as a provider.
(c) Except as set forth in Section 3.06(c) of the Company Disclosure
Schedule or specifically disclosed in the Company SEC Reports (as
hereinafter defined), the Company and its subsidiaries have filed on a
timely basis all claims, cost reports and annual filings required to be
filed to secure payments for services rendered by them under any Payment
Program from which they receive or expect to receive revenues except where
the failure to file such claim, report or other filing would not have a
Company Material Adverse Effect. Except as set forth in Section 3.06(c) of
the Company Disclosure Schedule, the Medicare and Medicaid cost reports of
the Company and its subsidiaries do not claim and the Company and its
subsidiaries have not received reimbursement in excess of the amount
provided by law, regulations promulgated thereunder or any applicable
agreement, other than any claims and reimbursements that, individually or
in the aggregate, could not reasonably be expected to result in a Company
Material Adverse Effect. Except as set forth in Section 3.06(c) of the
Company Disclosure Schedule, there are no claims, actions or appeals
pending (and neither
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the Company nor any of its subsidiaries has any knowledge of any claims or
reports that could result in any such claims, actions or appeals) before
any commission, board or agency, including, without limitation, any
intermediary, the Provider Reimbursement Review Board or the Administrator
of the Health Care Financing Administration ("HCFA"), with respect to any
state or federal Medicare or Medicaid cost reports or claims filed by the
Company or its subsidiaries on or before the date hereof. Except as set
forth in Section 3.06(c) of the Company Disclosure Schedule, the Company or
its subsidiaries, as applicable, have paid, or caused to be paid, all
refunds, discounts, adjustments, or amounts owing that have become due to
such third party payors pursuant to such claims, reports or filings, and
neither the Company nor any of its subsidiaries has any knowledge or notice
of any disallowances or material changes required to be made to any cost
reports, claims or filings made by them for any period or of any deficiency
in any such claim, report, or filing, except for changes and deficiencies
that in the aggregate would not have a Company Material Adverse Effect.
SECTION 3.07. REPORTS; FINANCIAL STATEMENTS.
(a) Since December 31, 1993, the Company and its subsidiaries have
filed (i) all forms, reports, statements and other documents required to be
filed with (A) the Securities and Exchange Commission (the "SEC"),
including without limitation (1) all Annual Reports on Form 10-K, (2) all
Quarterly Reports on Form 10-Q, (3) all proxy statements relating to
meetings of stockholders (whether annual or special), (4) all Current
Reports on Form 8-K and (5) all other reports, schedules, registration
statements or other documents (collectively referred to as the "Company SEC
Reports"), and (B) any applicable state securities authorities and (ii) all
forms, reports, statements and other documents required to be filed with
any other Governmental Entities, including, without limitation, state
insurance and health regulatory authorities (all such forms, reports,
statements and other documents in clauses (i) and (ii) of this Section
3.07(a) being referred to herein, collectively, as the "Company Reports"),
except where the failure to file any such Company Reports required to be
filed with any other Governmental Entities could not reasonably be expected
to have a Company Material Adverse Effect. The Company Reports were
prepared in all material respects in accordance with the requirements of
applicable Law (including, with respect to the Company SEC Reports, the
Securities Act or the Exchange Act, as the case may be, and the rules and
regulations of the SEC thereunder applicable to such Company SEC Reports)
and the Company SEC Reports did not at the time they were filed contain any
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.
(b) Each of the consolidated financial statements (including, in each
case, any related notes thereto) contained in the Company SEC Reports (i)
have been prepared in accordance with the published rules and regulations
of the SEC and generally accepted accounting principles applied on a
consistent basis throughout the periods involved (except (A) to the extent
disclosed therein or required by changes in generally accepted accounting
principles, (B), with respect to Company SEC Reports filed prior to the
date of this
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Agreement, as may be indicated in the notes thereto and (C) in the case of
the unaudited financial statements, as permitted by the rules and
regulations of the SEC) and (ii) fairly present the consolidated financial
position of the Company and its subsidiaries as of the respective dates
thereof and the consolidated results of operations and cash flows for the
periods indicated (subject, in the case of unaudited consolidated financial
statements for interim periods, to adjustments, consisting only of normal,
recurring accruals, necessary to present fairly such results of operations
and cash flows), except that any pro forma financial statements contained
in such consolidated financial statements are not necessarily indicative of
the consolidated financial position of the Company and its subsidiaries as
of the respective dates thereof and the consolidated results of operations
and cash flows for the periods indicated.
(c) Set forth in Section 3.07(c) of the Company Disclosure Schedule
is a schedule of the total visits (a "visit" is defined as a patient visit
meeting the participation conditions and medical necessity requirements of
the Medicare program) of each of the home health agencies owned by the
Company and its subsidiaries for each of the calendar months in the 15
month period ending March 31, 1996.
SECTION 3.08. ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed
in the Company SEC Reports filed prior to the date of this Agreement or as
contemplated in this Agreement or as set forth in Section 3.08 of the Company
Disclosure Schedule, since December 31, 1994 the Company and its subsidiaries
have conducted their respective businesses only in the ordinary course and in a
manner consistent with past practice and there has not been: (i) any damage,
destruction or loss with respect to any assets of the Company or any of its
subsidiaries that, whether or not covered by insurance, would constitute a
Company Material Adverse Effect; (ii) any change by the Company or its
subsidiaries in their significant accounting policies; (iii) except for
dividends by a subsidiary of the Company to the Company or another wholly owned
subsidiary of the Company, any declaration, setting aside or payment of any
dividends or distributions in respect of shares of Company Common Stock or the
shares of stock of, or other equity interests in, any subsidiary of the Company
or any redemption, purchase or other acquisition of any of the Company's
securities or any of the securities of any subsidiary of the Company; (iv) any
material increase in the benefits under, or the establishment or amendment of,
any bonus, insurance, severance, deferred compensation, pension, retirement,
profit sharing, performance awards (including, without limitation, the granting
of stock appreciation rights or restricted stock awards), stock purchase or
other employee benefit plan, or any increase in the compensation payable or to
become payable to any of the directors or officers of the Company or the
employees of the Company or its subsidiaries as a group, except for (A) increase
in salaries or wages payable or to become payable in the ordinary course of
business and consistent with past practice or (B) the granting of stock options
in the ordinary course of business to employees of the Company or its
subsidiaries who are not directors or executive officers of the Company; or (v)
any other Company Material Adverse Effect.
SECTION 3.09. ABSENCE OF LITIGATION. Except as disclosed in the Company
SEC Reports filed prior to the date of this Agreement or as set forth in Section
3.09 of the Company Disclosure Schedule, there is no claim, action, suit,
litigation, proceeding, arbitration or, to the
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knowledge of the Company, investigation of any kind, at law or in equity
(including actions or proceedings seeking injunctive relief), pending or, to the
knowledge of the Company, threatened against the Company or any of its
subsidiaries or any properties or rights of the Company or any of its
subsidiaries (except for claims, actions, suits, litigation, proceedings,
arbitrations, or investigations that could not reasonably be expected to have a
Company Material Adverse Effect), and neither the Company nor any of its
subsidiaries is subject to any executory judgment, order, writ, injunction,
decree or award of any Governmental Entity, including without limitation any
cease and desist order and any consent decree, settlement agreement or other
similar written agreement with any Governmental Entity, except for matters that
could not reasonably be expected to have a Company Material Adverse Effect.
SECTION 3.10. EMPLOYEE BENEFIT PLANS; LABOR MATTERS.
(a) With respect to each employee benefit plan, program, arrangement
and contract (including, without limitation, any "employee benefit plan,"
as defined in Section 3(3) of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA")), maintained or contributed to by the Company
or any of its subsidiaries, or with respect to which the Company or any of
its subsidiaries could incur liability under Section 4069, 4212(c) or 4204
of ERISA (the "Benefit Plans"), the Company has delivered or made available
to Acquiror a true and correct copy of (i) the most recent annual report
(Form 5500) filed with the Internal Revenue Service (the "IRS") for each
Benefit Plan for which a Form 5500 is required to be filed, (ii) such
Benefit Plan, (iii) each trust agreement, if any, relating to such Benefit
Plan, (iv) the most recent summary plan description for each Benefit Plan
for which a summary plan description is required, (v) the most recent
actuarial report or valuation relating to a Benefit Plan subject to Title
IV of ERISA and (vi) the most recent determination letter, if any, issued
by the IRS with respect to any Benefit Plan qualified under Section 401 of
the Code.
(b) With respect to the Benefit Plans, no event has occurred and, to
the knowledge of the Company, there exists no condition or set of
circumstances, in connection with which the Company or any of its
subsidiaries could be subject to any liability under the terms of such
Benefit Plans, ERISA, the Code or any other applicable Law that could
reasonably be expected to have a Company Material Adverse Effect.
(c) There are no collective bargaining or other labor union contracts
to which the Company or its subsidiaries is a party applicable to persons
employed by the Company or its subsidiaries and no collective bargaining
agreement is being negotiated by the Company or any of its subsidiaries.
There is no pending or, to the knowledge of the Company, threatened labor
dispute, strike or work stoppage against the Company or any of its
subsidiaries that could materially interfere with the respective business
activities of the Company or any of its subsidiaries. To the knowledge of
the Company, none of the Company, any of its subsidiaries or any of their
respective representatives or employees has committed any unfair labor
practices in connection with the operation of the respective businesses of
the Company or its subsidiaries that could reasonably be expected to have a
Company Material Adverse Effect,
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and there is no pending or, to the knowledge of the Company, threatened
charge or complaint against the Company or any of its subsidiaries by the
National Labor Relations Board or any comparable state agency that, if not
covered by insurance, would constitute a Company Material Adverse Effect.
(d) Section 3.10(d) of the Company Disclosure Schedule contain true
and correct (i) copies of all employment agreements with officers of the
Company; (ii) listings of all officers of the Company who have executed a
non-competition agreement with the Company; (iii) copies of all severance
agreements, programs and policies of the Company with or relating to its
employees; and (iv) summary descriptions of all plans, programs, agreements
and other arrangements of the Company with or relating to its employees.
Except as set forth in Section 3.10(d) of the Company Disclosure Schedule,
neither the Company nor any of its subsidiaries will owe a severance
payment or similar obligation to any of their respective employees,
officers or directors as a result of the Merger or the transactions
contemplated by this Agreement, and none of such persons will be entitled
to an increase in severance payments or other benefits as a result of the
Merger or the transactions contemplated by this Agreement in the event of
the subsequent termination of their employment.
(e) No Benefit Plan provides retiree medical or retiree life
insurance benefits that could reasonably be expected to have a Company
Material Adverse Effect and (y) neither the Company nor any of its
subsidiaries is contractually or otherwise obligated (whether or not in
writing) to provide life insurance and medical benefits upon retirement or
termination of employment of employees that could reasonably be expected to
have a Company Material Adverse Effect .
(f) Neither the Company nor any of its subsidiaries contributes to or
has an obligation to contribute to, and has not within six years prior to
the date of this Agreement contributed to or had an obligation to
contribute to, a multiemployer plan within the meaning of Section 3(37) of
ERISA.
(g) The Company has not taken any of the following or other similar
actions since December 31, 1993: the acceleration of vesting (other than
as contemplated by this Agreement), waiving of performance criteria or the
adjustment of awards or any other actions permitted upon a change in
control of the Company (or a filing under Sections 13(d) or 14(d) of the
Exchange Act with respect to the Company) with respect to any of the
Benefit Plans or any of the plans, programs, agreements, policies or other
arrangements described in Section 3.10(d) of this Agreement.
SECTION 3.11. TAXES. Except as set forth in Section 3.11 of the Company
Disclosure Statement,
(a) (i) all material returns and reports ("Tax Returns") of or with
respect to any Tax which is required to be filed on or before the Effective
Time by or with respect to the Company or any its subsidiaries have been or
will be duly and timely filed, (ii) all items of
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income, gain, loss, deduction and credit or other items required to be
included in each such Tax Return have been or will be so included and all
information provided in each such Tax Return is true, correct and complete
in all material respects, (iii) all Taxes which have become or will become
due with respect to the period covered by each such Tax Return have been or
will be timely paid in full, (iv) all withholding Tax requirements imposed
on or with respect to Company or any of its subsidiaries have been or will
be satisfied in all material respects, and (v) no material penalty,
interest or other charge is or will become due with respect to the late
filing of any such Tax Return or late payment of any such Tax.
(b) There is no claim against Company or any of its subsidiaries for
any material amount of Taxes, and no material assessment, deficiency or
adjustment has been asserted or proposed with respect to any Tax Return of
or with respect to the Company or any of its subsidiaries other than those
disclosed (and to which are attached true and complete copies of all audit
or similar reports) in Section 3.11 of the Company Disclosure Schedule.
(c) The total amounts set up as liabilities for current and deferred
Taxes in the financial statements referred to in Section 3.07 of this
Agreement are sufficient to cover the payment of all Taxes, whether or not
assessed or disputed, which are, or are hereafter found to be, or to have
been, due by or with respect to the Company and any of its subsidiaries up
to and through the periods covered thereby.
(d) Except for statutory liens for current Taxes not yet due, no
material liens for Taxes exist upon the assets of any of the Company or any
of its subsidiaries.
(e) None of the transactions contemplated by this Agreement will
result in any Tax liability or the recognition of any item of income or
gain to the Company or any of its subsidiaries.
(f) Neither the Company nor any of its subsidiaries has made an
election under section 341(f) of the United States Internal Revenue Code
(the "Code").
(g) The Company is not an investment company as defined in Section
368(a)(2)(F)(iii) and (iv) of the Code.
(h) The Company is not under the jurisdiction of a court in a title
11 or similar case within the meaning of section 368(a)(3)(A) of the Code.
SECTION 3.12. CERTAIN BUSINESS PRACTICES. To the Company's knowledge,
except as set forth in Section 3.12 of the Company Disclosure Schedule, none of
the Company, any of its subsidiaries or any directors, officers, agents or
employees of the Company or any of its subsidiaries (in their capacities as
such) has (i) used any funds for unlawful contributions, gifts, entertainment or
other unlawful purposes relating to political activity, (ii) made any unlawful
payment to foreign or domestic government officials or employees or to foreign
or domestic political parties or campaigns or violated any provision of the
Foreign Corrupt Practices Act of 1977, as amended,
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(iii) consummated any transaction, made any payment, entered into any agreement
or arrangement or taken any other action in violation of Section 1128B(b) of the
Social Security Act, as amended, or (iv) made any other unlawful payment.
SECTION 3.13. VOTE REQUIRED. The only votes of the holders of any class
or series of Company capital stock necessary to approve the Merger and this
Agreement are the affirmative votes of the holders of a majority of the
outstanding shares of the Company Common Stock.
SECTION 3.14. BROKERS. No broker, finder or investment banker (other than
Institutions Investors Consulting Company, Inc. and Montgomery Securities) is
entitled to any brokerage, finder's or other fee or commission in connection
with the transactions contemplated by this Agreement based upon arrangements
made by or on behalf of the Company. Prior to the date of this Agreement, the
Company has made available to Acquiror a complete and correct copy of all
agreements between the Company and Institutions Investors Consulting Company,
Inc. and Montgomery Securities pursuant to which such firms will be entitled to
any payment relating to the transactions contemplated by this Agreement.
SECTION 3.15. INSURANCE. Except as set forth in Section 3.15 of the
Company Disclosure Schedule, the Company and each of its subsidiaries are
presently insured, and during each of the past five calendar years have been
insured, against such risks as companies engaged in a similar business would, in
accordance with good business practice, customarily be insured. Except as set
forth in Section 3.15 of the Company Disclosure Schedule, the policies of
general liability, malpractice liability, fire, theft and other insurance
maintained with respect to the operations, assets or businesses of the Company
and its subsidiaries provide adequate coverage against loss.
SECTION 3.16. PROPERTIES. Except as set forth in Section 3.16 of the
Company Disclosure Schedule or specifically described in the Company SEC
Reports, the Company and its subsidiaries have good and marketable title, free
and clear of all liens, the existence of which could reasonably be expected to
have a Company Material Adverse Effect, to all their material properties and
assets whether tangible or intangible, real, personal or mixed, reflected in the
Company's consolidated financial statements contained in the Company's most
recent SEC Reports on Form 10-K and Form 10-Q as being owned by the Company and
its subsidiaries as of the date thereof, other than (i) any properties or assets
that have been sold or otherwise disposed of in the ordinary course of business
since the date of such financial statements, (ii) liens disclosed in the notes
to such financial statements and (iii) liens arising in the ordinary course of
business after the date of such financial statements. All buildings, and all
fixtures, equipment and other property and assets that are material to its
business on a consolidated basis, held under leases or sub-leases by the Company
or any of its subsidiaries are held under valid instruments enforceable in
accordance with their respective terms, subject to applicable laws of
bankruptcy, insolvency or similar laws relating to creditors' rights generally
and to general principles of equity (whether applied in a proceeding in law or
equity). All of the Company's and its subsidiaries' equipment in regular use
has been reasonably maintained and is in serviceable condition, reasonable wear
and tear excepted.
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SECTION 3.17. MANAGEMENT CONTRACTS. Section 3.17 of the Company
Disclosure Schedule sets forth a list of each of the management contracts and
consulting agreements relating to home health care services to be provided by
the Company or any of its subsidiaries (the "Management Contracts"), true,
correct and complete copies of which have been provided or made available to
Acquiror. Each of the Management Contracts is in full force and effect without
default thereunder by any party thereto. Neither the Company nor any of its
subsidiaries is or may be obligated to return any fees received under the
Management Contracts to any provider thereunder. To the knowledge of the
Company, neither the Company nor any of its subsidiaries has made any claims as
a provider under the Management Contracts for (i) visits not made, (ii) visits
to beneficiaries not homebound, (iii) visits to beneficiaries not requiring a
qualifying service or (iv) visits not properly authorized by a physician, except
for any claims described in clauses (ii) and (iii) which could not reasonably be
expected to result in a Company Material Adverse Effect.
SECTION 3.18. OPINION OF FINANCIAL ADVISOR. The Company has received the
oral opinion of Montgomery Securities to the effect that, as of the date of this
Agreement, the Merger Consideration is fair, from a financial point of view, to
the holders of Company Common Stock.
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES OF ACQUIROR
The Acquiror Companies hereby, jointly and severally, represent and warrant
to the Company that:
SECTION 4.01. ORGANIZATION AND QUALIFICATION; SUBSIDIARIES. Each of the
Acquiror Companies is a corporation, and each of Acquiror's other subsidiaries
is a corporation or partnership, duly organized, validly existing and in good
standing under the laws of its jurisdiction of incorporation or organization and
each of the Acquiror Companies and each of Acquiror's other subsidiaries has all
requisite power and authority to own, lease and operate its properties and to
carry on its business as it is now being conducted and is duly qualified and in
good standing to do business in each jurisdiction in which the nature of the
business conducted by it or the ownership or leasing of its properties makes
such qualification necessary, other than where the failure of either Acquiror
Company to be so duly qualified and in good standing could not reasonably be
expected to have an Acquiror Material Adverse Effect and where the failure,
individually or in the aggregate, of any such other subsidiary to comply with
this Section 4.01 could not reasonably be expected to have an Acquiror Material
Adverse Effect. The term "Acquiror Material Adverse Effect" as used in this
Agreement shall mean any change or effect that would materially impair the
ability of Acquiror or Merger Sub to consummate the transactions contemplated
hereby.
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SECTION 4.02. AUTHORITY. Each of the Acquiror Companies has all requisite
corporate power and authority to execute and deliver this Agreement, to perform
its obligations hereunder and to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement by each of the Acquiror
Companies and the performance by each of the Acquiror Companies of its
obligations hereunder, including the consummation of the transactions
contemplated hereby, have been duly authorized by all necessary corporate action
and no other corporate proceedings on the part of either of the Acquiror
Companies are necessary to authorize this Agreement or to consummate the
transactions contemplated hereby. This Agreement has been duly executed and
delivered by each of the Acquiror Companies and, assuming the due authorization,
execution and delivery hereof by the Company, constitutes the legal, valid and
binding obligation of each of the Acquiror Companies.
SECTION 4.03. NO CONFLICT; REQUIRED FILINGS AND CONSENTS.
(a) Assuming that all consents, licenses, permits, waivers,
approvals, authorizations, orders, filings and notifications contemplated
by the exceptions to Section 4.03(b) are obtained or made and except as
otherwise disclosed in Section 4.03(a) of the Disclosure Schedule delivered
by the Acquiring Companies to the Company contemporaneously with the
execution and delivery of this Agreement (the "Acquiror Disclosure
Schedule"), the execution and delivery of this Agreement by each of the
Acquiror Companies does not, and performance by each of them of its
obligations hereunder, including the consummation of the transactions
contemplated hereby, will not (i) conflict with or violate the Certificate
of Incorporation or Bylaws, or the equivalent organizational documents, in
each case as amended or restated, of Acquiror or any of Acquiror's
subsidiaries, (ii) conflict with or violate any Laws or any judgment,
order, or decree in effect as of the date of this Agreement applicable to
Acquiror or any of Acquiror's subsidiaries or by or to which any of their
properties is bound or subject or (iii) result in any breach of or
constitute a default (or an event that with or without notice or lapse of
time or both would become a default) under, or give to others any rights of
termination, amendment, acceleration or cancellation of, or require payment
under, or result in the creation of a lien or encumbrance on any of the
properties or assets of Acquiror or any of Acquiror's subsidiaries pursuant
to, any note, bond, mortgage, indenture, contract, agreement, lease,
license, permit, franchise or other instrument or obligation to which
Acquiror or any of Acquiror's subsidiaries is a party or by or to which
Acquiror or any of Acquiror's subsidiaries or any of their respective
properties is bound or subject, except for any such conflicts, violations,
breaches, defaults, events, rights of termination, amendment, acceleration
or cancellation, payment obligations or liens or encumbrances that could
not reasonably be expected to have an Acquiror Material Adverse Effect.
(b) The execution and delivery of this Agreement by each of the
Acquiror Companies does not, and the performance of this Agreement by each
of the Acquiror Companies will not, including the consummation of the
transactions contemplated hereby, require any of the Acquiror Companies to
obtain any consent, license, permit, waiver approval, authorization or
order of, or to make any filing with or notification to, any Governmental
Entities, except (i) for applicable requirements, if any, of the Securities
Act,
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the Exchange Act, Blue Sky Laws and the HSR Act and the filing and
recordation of appropriate merger documents as required by Delaware Law and
(ii) where the failure to obtain such consents, licenses, permits, waivers,
approvals, authorizations or orders, or to make such filings or
notifications could not reasonably be expected to have an Acquiror Material
Adverse Effect and (iii) as disclosed in Section 4.03(b) of the Acquiror
Disclosure Schedule,
SECTION 4.04. VOTE REQUIRED. No vote of the holders of any class or
series of Acquiror capital stock is necessary to approve the Merger or the other
transactions contemplated by this Agreement.
SECTION 4.05. BROKERS. No broker, finder or investment banker is entitled
to any brokerage, finder's or other fee or commission in connection with the
transactions contemplated by this Agreement based upon arrangements made by or
on behalf of Acquiror.
SECTION 4.06. SUFFICIENT FUNDS. Acquiror has sufficient funds available
(either in the form of cash currently held by Acquiror or current commitments
from third parties to provide such cash to Acquiror, or a combination of both)
to consummate the Merger and the transactions contemplated hereby in accordance
with the terms of this Agreement.
ARTICLE V.
COVENANTS
SECTION 5.01. AFFIRMATIVE COVENANTS OF THE COMPANY. The Company hereby
covenants and agrees that, prior to the Effective Time, unless otherwise
expressly contemplated by this Agreement or consented to in writing by Acquiror,
the Company will and will cause its subsidiaries to:
(a) operate its business in the usual and ordinary course consistent
with past practices;
(b) use all reasonable efforts to preserve substantially intact its
business organization, maintain its rights and franchises, retain the
services of its respective officers and key employees and maintain its
relationships with its respective customers and suppliers;
(c) maintain and keep its properties and assets in as good repair and
condition as at present, ordinary wear and tear excepted, and maintain
supplies and inventories in quantities consistent with its customary
business practice; and
(d) use all reasonable efforts to keep in full force and effect
insurance and bonds comparable in amount and scope of coverage to that
currently maintained.
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SECTION 5.02. NEGATIVE COVENANTS OF THE COMPANY. Except as expressly
contemplated by this Agreement or otherwise consented to in writing by Acquiror,
from the date of this Agreement until the Effective Time, the Company will not
do, and will not permit any of its subsidiaries to do, any of the following:
(a) (i) increase the compensation payable to or to become payable to
any director or executive officer; (ii) increase the compensation payable
or pay bonuses to employees of the Company (excluding payments made
pursuant to agreements disclosed in Section 3.10(d) of the Company
Disclosure Schedule) other than in the ordinary course of business, (iii)
grant any severance or termination pay (other than pursuant to the normal
severance practices of the Company or its subsidiaries as in effect on the
date of this Agreement) to, or enter into any employment or severance
agreement with, any director, officer or employee; (iv) except as set forth
in Section 3.10(d) of the Company Disclosure Schedule, establish, adopt or
enter into any employee benefit plan or arrangement or (v) except as may be
required by applicable law, as set forth in Section 3.10(d) of the Company
Disclosure Schedule and for actions that are required to comply with the
provisions of Section 6.08 of this Agreement, amend, or take any other
actions (including, without limitation, the acceleration of vesting,
waiving of performance criteria or the adjustment of awards or any other
actions permitted upon a "change in control" (as defined in the respective
plans) of the Company or a filing under Section 13(d) or 14(d) of the
Exchange Act with respect to the Company) with respect to any of the
Benefit Plans or any of the plans, programs, agreements, policies or other
arrangements described in Section 3.10(d) of this Agreement;
(b) declare or pay any dividend on, or make any other distribution in
respect of, outstanding shares of capital stock or other equity interests,
except dividends by a wholly owned subsidiary of the Company to the Company
or another wholly owned subsidiary of the Company;
(c) (i) except as described in Section 3.03(c) of the Company
Disclosure Schedule, redeem, purchase or otherwise acquire any shares of
its or any of its subsidiaries' capital stock or any securities or
obligations convertible into or exchangeable for any shares of its or its
subsidiaries' capital stock (other than any such acquisition directly from
any wholly owned subsidiary of the Company in exchange for capital
contributions or loans to such subsidiary), or any options, warrants or
conversion or other rights to acquire any shares of its or its
subsidiaries' capital stock or any such securities or obligations (except
in connection with the exercise of outstanding stock options in accordance
with their terms); (ii) effect any reorganization or recapitalization of
the Company or any of its subsidiaries; or (iii) split, combine or
reclassify any of its or its subsidiaries' capital stock or issue or
authorize or propose the issuance of any other securities in respect of, in
lieu of or in substitution for, shares of its or its subsidiaries' capital
stock;
(d) (i) except as set forth in Section 3.03(a) herein or as
described in Section 3.03(c) of the Company Disclosure Schedule, issue
(whether upon original issue or out of treasury), sell, grant, award,
deliver or limit the voting rights of any shares of any class
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of its or its subsidiaries' capital stock, any securities convertible into
or exercisable or exchangeable for any such shares, or any rights, warrants
or options to acquire, any such shares (except for the issuance of shares
upon the exercise of outstanding stock options in accordance with their
terms); (ii) amend or otherwise modify the terms of any such rights,
warrants or options the effect of which shall be to make such terms
materially more favorable to the holders thereof; or (iii) take any action
to accelerate the vesting of any of the stock options;
(e) acquire or agree to acquire, by merging or consolidating with, by
purchasing an equity interest in or a portion of the assets of, or by any
other manner, any business or any corporation, partnership, association or
other business organization or division thereof, or otherwise acquire or
agree to acquire any assets of any other person (other than the purchase of
assets from suppliers or vendors in the ordinary course of business and
consistent with past practice);
(f) sell, lease, exchange, mortgage, pledge, transfer or otherwise
dispose of, or agree to sell, lease, exchange, mortgage, pledge, transfer
or otherwise dispose of, any of its assets or any assets of any of its
subsidiaries, except for pledges or dispositions of assets in the ordinary
course of business and consistent with past practice;
(g) initiate, solicit or encourage (including by way of furnishing
information or assistance), or take any other action to facilitate, any
inquiries or the making of any proposal relating to, or that may reasonably
be expected to lead to, any Competing Transaction, or enter into
discussions or negotiate with any person or entity in furtherance of such
inquiries or to obtain a Competing Transaction, or agree to, or endorse,
any Competing Transaction, or authorize or permit any of the officers,
directors, employees or agents of the Company or any of its subsidiaries or
any investment banker, financial advisor, attorney, accountant or other
representative retained by the Company or any of the Company's subsidiaries
to take any such action, and the Company shall promptly notify Acquiror of
all relevant terms of any such inquiries or proposals received by the
Company or any of its subsidiaries or by any such officer, director,
employee, agent, investment banker, financial advisor, attorney, accountant
or other representative relating to any of such matters and if such inquiry
or proposal is in writing, the Company shall promptly deliver or cause to
be delivered to Acquiror a copy of such inquiry or proposal; PROVIDED,
HOWEVER, that nothing contained in this subsection (g) shall prohibit the
Board of Directors of the Company from (i) authorizing its representatives
to furnish information to, or to enter into discussions or negotiations
with, any persons or entity in connection with an unsolicited bona fide
proposal in writing by such person or entity relating to a Competing
Transaction if, and only to the extent that (A) such unsolicited bona fide
proposal is a bona fide written proposal made by a third party relating to
a Competing Transaction on terms that the Board of Directors of the Company
determines it cannot then reject in favor of the Merger, based on
applicable fiduciary duties and the advice of counsel and (except with
respect to furnishing information) for which financing, to the extent
required, is then committed, (B) the Board of Directors of the Company,
after duly considering the written advice of outside legal counsel to the
Company, determines in good
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faith that such action is required for the Board of Directors of the
Company to comply with its fiduciary duties to stockholders imposed by
Delaware Law and (C), prior to such authorization by the Board of Directors
with respect to the furnishing of information to, or the entering into
discussions or negotiations with, such person or entity, the Company has
provided written notice to Acquiror to the effect that it is furnishing
information to, or entering into discussions or negotiations with, such
person or entity; or (ii) complying with Rule 14e-2 promulgated under the
Exchange Act with regard to a Competing Transaction. For purposes of this
Agreement, "Competing Transaction" shall mean any merger, consolidation,
share exchange, business combination or similar transaction involving the
Company or any of its Significant Subsidiaries or the acquisition in any
manner, directly or indirectly, of a material interest in any voting
securities of, or a material equity interest in a substantial portion of
the assets of, the Company or any of its Significant Subsidiaries, other
than the transactions contemplated by this Agreement;
(h) release any third party from its obligations under any existing
standstill agreement or arrangement relating to a Competing Transaction or
otherwise under any confidentiality or other similar agreement relating to
information material to the Company or any of its subsidiaries;
(i) propose to adopt any amendments to its Certificate of
Incorporation or its Bylaws that would have an adverse effect on the
consummation of the transactions contemplated by this Agreement;
(j) (i) change any of its significant accounting policies or (ii)
make or rescind any express or deemed election relating to taxes, settle or
compromise any material claim, action, suit, litigation, proceeding,
arbitration, investigation, audit or controversy relating to Taxes, or
change any of its methods of reporting income or deductions for federal
income tax purposes from those employed in the preparation of the federal
income tax returns for the taxable year ending December 31, 1994, except,
in the case of clause (i) or clause (ii), as may be required by Law or
generally accepted accounting principles;
(k) incur any obligation for borrowed money or purchase money
indebtedness, whether or not evidenced by a note, bond, debenture or
similar instrument or under any financing lease, whether pursuant to a
sale-and-leaseback transaction or otherwise, except in the ordinary course
of business consistent with past practice, or pursuant to the terms in
effect on the date of this Agreement of any revolving credit agreements
disclosed in the Company SEC Reports or in Section 5.02(k) of the Company
Disclosure Schedule (or extensions or renewals of such agreements on terms
substantially similar to such agreements, including an aggregate increase
in the actual or potential borrowings under such agreements, or a new
agreement on terms substantially similar to such agreements, not to exceed
$1 million);
(l) enter into any material arrangement, agreement or contract with
any third party (other than customers in the ordinary course of business)
that provides for an exclusive arrangement with that third party or is
substantially more restrictive on the Company or
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substantially less advantageous to the Company than arrangements,
agreements or contracts existing on the date hereof; or
(m) agree in writing or otherwise to do any of the foregoing.
SECTION 5.03. NEGATIVE COVENANTS OF ACQUIROR. Except as expressly
contemplated by this Agreement or otherwise consented to in writing by the
Company, from the date of this Agreement until the Effective Time, Acquiror will
not take any action, and will not permit any of its subsidiaries to take any
action, that will materially impair the ability of Acquiror or Merger Sub to
consummate the Merger and the other transactions contemplated hereby.
SECTION 5.04. ACCESS AND INFORMATION.
(a) The Company shall, and shall cause its subsidiaries to, (i)
afford to Acquiror and its officers, directors, employees, accountants,
consultants, legal counsel, agents and other representatives (collectively,
the "Acquiror Representatives") access during ordinary business hours and
at other reasonable times, upon reasonable prior notice, to the officers,
employees, accountants, agents, properties, offices and other facilities of
the Company and its subsidiaries and to the books and records thereof and
(ii) furnish promptly to Acquiror and the Acquiror Representatives such
information concerning the business, properties, contracts, records and
personnel of the Company and its subsidiaries (including, without
limitation, financial, operating and other data and information) as may be
reasonably requested, from time to time, by Acquiror.
(b) Notwithstanding the foregoing provisions of this Section 5.04,
the Company shall not be required to grant access or furnish information to
the Acquiror or the Acquiror Representatives to the extent that such access
or the furnishing of such information is prohibited by law or contract. No
investigation by the parties hereto made heretofore or hereafter shall
affect the representations and warranties of the parties that are contained
herein and each such representation and warranty shall survive such
investigation.
(c) Each party to this Agreement (the Acquiror Companies being
considered one party for purposes of this Section 5.05(c)) shall hold in
confidence all nonpublic information received from the other party to this
Agreement until such time as such information is otherwise publicly
available and, if this Agreement is terminated, each party will deliver to
the other party all documents, work papers and other materials (including
copies) obtained by such party or on its behalf from the other party as a
result of this Agreement or in connection herewith, whether so obtained
before or after the execution hereof.
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ARTICLE VI.
ADDITIONAL AGREEMENTS
SECTION 6.01. PRESENTATION TO COMPANY STOCKHOLDERS. The Company shall,
promptly after the date of this Agreement, take all actions necessary in
accordance with Delaware Law and its Certificate of Incorporation and Bylaws to
present the Merger and this Agreement to the holders of Company Common Stock for
their consideration and approval either pursuant to the consent of the requisite
percentage of holders of Company Common Stock or by the vote thereof at a
meeting of the Company's stockholders duly called and convened to act on the
Merger and this Agreement (the "Company Stockholders' Meeting"), and the Company
shall consult with Acquiror in connection therewith. Unless its Board of
Directors in the good faith exercise of its fiduciary duties, after consultation
with legal counsel and its financial advisors, determines not to recommend, or
to withdraw its recommendation, that such matters be approved by the Company's
stockholders, the Company shall, if a Company Stockholders' Meeting is required
to be convened, use all reasonable efforts to solicit from stockholders of the
Company proxies in favor of the approval and adoption of this Agreement and to
secure the vote or consent of stockholders required by Delaware Law and its
Certificate of Incorporation and Bylaws to approve and adopt the Merger and this
Agreement.
SECTION 6.02. PROXY STATEMENT.
(a) As promptly as reasonably practicable after the execution of this
Agreement, the Company shall prepare and file with the SEC preliminary
proxy materials with respect to the actions to be taken at the Company
Stockholders Meeting, which shall be in form and substance reasonably
satisfactory to Acquiror. As promptly as reasonably practicable after
comments are received from the SEC with respect to such preliminary proxy
materials, the Company shall use its best reasonable efforts to respond to
the comments of the SEC, which comments shall be in form and substance
reasonably satisfactory to Acquiror. Acquiror shall provide the Company
with such information as may be required to be included in the proxy
statement or as may be reasonably required to respond to any comment of the
SEC. After all the comments received from the SEC have been cleared by the
SEC staff and all information required to be contained in the proxy
statement, to the reasonable satisfaction of Acquiror, has been included
therein by the Company, the Company shall file with the SEC the Proxy
Statement and the Company shall use its best reasonable efforts to have the
Proxy Statement cleared by the SEC as soon thereafter as practicable. The
Company shall cause the Proxy Statement to be mailed to its stockholders of
record as promptly as reasonably practicable after clearance by the SEC.
Unless the Company is advised in writing by outside counsel that such a
recommendation is no longer consistent with the discharge of applicable
fiduciary duties of the directors of the Company, the Proxy Statement shall
include the recommendation of the Board of Directors of the Company in
favor of the Merger.
(b) None of the information supplied or to be supplied by the Company
for inclusion or incorporation by reference in the Proxy Statement will, at
the mailing date of the Proxy Statement and at the time of the Company
Stockholders' Meeting, contain any untrue
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statement of a material fact or omit to state any material fact required to
be stated therein or necessary to make the statements made therein, in
light of the circumstances in which they were made, not misleading. If at
any time prior to the Company Stockholders' Meeting any event or
circumstance relating to the Company or any of its affiliates, or its or
their respective officers or directors, should be discovered by the Company
that should be set forth in a supplement to the Proxy Statement, the
Company shall promptly inform Acquiror. All documents that the Company is
responsible for filing with any Governmental Entity in connection with the
transactions contemplated hereby, including without limitation the Proxy
Statement to the extent that the information contained therein relates to
the Company and its subsidiaries or the transactions contemplated hereby,
will comply as to form in all material respects with the provisions of
applicable law, including applicable provisions of the Securities Act, the
Exchange Act and the rules and regulations thereunder, and each such
document required to be filed with any Governmental Entity other than the
SEC will comply with the provisions of applicable law as to the information
required to be contained therein.
(c) None of the information supplied or to be supplied by Acquiror
for inclusion or incorporation by reference in the Proxy Statement will, at
the mailing date of the Proxy Statement and at the time of the Company
Stockholders' Meeting, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary
to make the statements contained therein, in light of the circumstances in
which they were made, not misleading. If at any time prior to the Company
Stockholders' Meeting any event or circumstance relating to Acquiror or any
of its affiliates, or its or their respective officers or directors, should
be discovered by Acquiror that should be set forth in a supplement to the
Proxy Statement, Acquiror shall promptly inform the Company. All documents
that Acquiror is responsible for filing with any Governmental Entity in
connection with the transactions contemplated hereby, to the extent that
the information contained therein relates to Acquiror and its subsidiaries
or the transactions contemplated hereby, will comply as to form in all
material respects with the provisions of applicable law, including
applicable provisions of the Securities Act, the Exchange Act and the rules
and regulations thereunder, and each such document required to be filed
with any Governmental Entity other than the SEC will comply with the
provisions of applicable law as to the information required to be contained
therein.
SECTION 6.03. APPROPRIATE ACTION; CONSENTS; FILINGS.
(a) The Company and Acquiror shall each use, and shall cause each of
their respective subsidiaries to use, all reasonable efforts promptly (i)
to take, or cause to be taken, all appropriate action, and do, or cause to
be done, all things necessary, proper or advisable under applicable Law or
otherwise to consummate and make effective the transactions contemplated by
this Agreement, (ii) to obtain from any Governmental Entity any consents,
licenses, permits, waivers, approvals, authorizations or orders required to
be obtained by the Company or Acquiror, respectively, or any of their
respective subsidiaries in connection with the authorization, execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated hereby, including, without limitation, the
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Merger, (iii) to make all necessary filings, and thereafter make any other
required submissions, with respect to this Agreement and the Merger
required under (A) the Securities Act and the Exchange Act and the rules
and regulations thereunder, and any other applicable federal or state
securities laws, (B) the HSR Act and (C) any other applicable Law; provided
that Acquiror and the Company shall cooperate with each other in connection
with the making of all such filings, including providing copies of all such
documents to the nonfiling party and its advisors prior to filing and, if
requested, shall accept all reasonable additions, deletions or changes
suggested in connection therewith. The Company and Acquiror shall furnish
all information required for any application or other filing to be made
pursuant to the rules and regulations of any applicable Law in connection
with the transactions contemplated by this Agreement.
(b) Acquiror and the Company agree, and shall cause each of their
respective subsidiaries, to cooperate and to use all reasonable efforts to
contest and resist any action, including legislative, administrative or
judicial action, and to have vacated, lifted, reversed or overturned any
decree, judgment, injunction or other order (whether temporary, preliminary
or permanent) (an "Order") that is in effect and that restricts, prevents
or prohibits the consummation of the Merger or any other transactions
contemplated by this Agreement, including, without limitation, by
vigorously pursuing all available avenues of administrative and judicial
appeal and all available legislative action. Acquiror and the Company also
agree to take any and all reasonable actions, including, without
limitation, the disposition of assets or the withdrawal from doing business
in particular jurisdictions, required by regulatory authorities as a
condition to the granting of any approvals required in order to permit the
consummation of the Merger or as may be required to avoid, lift, vacate or
reverse any legislative or judicial action that would otherwise cause any
condition to Closing not to be satisfied; PROVIDED, HOWEVER, that in no
event shall either party take, or be required to take, any action that
could reasonably be expected to have a Company Material Adverse Effect or
an Acquiror Material Adverse Effect.
(c) The Company and Acquiror shall each promptly give (or shall cause
their respective subsidiaries to give) any notices regarding the Merger,
this Agreement or the transactions contemplated hereby to third parties
required by Law or by any contract, license, lease or other agreement to
which it is a party or by which it is bound, and use, and cause its
subsidiaries to use, all reasonable efforts to obtain any third party
consents (A) necessary, proper or advisable to consummate the transactions
contemplated by this Agreement, (B) otherwise required under any contracts,
licenses, leases or other agreements in connection with the consummation of
the transactions contemplated by this Agreement or (C) required to prevent
a Company Material Adverse Effect or an Acquiror Material Adverse Effect,
respectively, from occurring after the Effective Time.
(d) If any party shall fail to obtain any third party consent
described in subsection (c)(i) above, such party shall use all reasonable
efforts, and shall take any such actions reasonably requested by the other
parties, to limit the adverse effect upon the Company and Acquiror, their
respective subsidiaries, and their respective businesses resulting, or
which
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could reasonably be expected to result after the Effective Time, from the
failure to obtain such consent.
SECTION 6.04. PUBLIC ANNOUNCEMENTS. The initial press release relating to
this Agreement shall be a joint press release and thereafter, to the extent
practicable, Acquiror and the Company shall consult with each other before
issuing any press release or otherwise making any public statements with respect
to this Agreement or the Merger and shall not issue any such press release or
make any such public statement prior to such consultation.
SECTION 6.05. STATE TAKEOVER STATUTES. The Company will take all steps
necessary to exempt the transactions contemplated by this Agreement and the
Voting Agreement from, and if necessary challenge the validity of, any
applicable state takeover law, including, without limitation, Section 203 of
Delaware Law. The Company shall take all actions necessary under Delaware Law,
including approving the transactions contemplated by this Agreement and the
Voting Agreement, to ensure that the prohibitions on business combinations set
forth in Section 203 of Delaware Law do not, or will not, apply to the
transactions contemplated by this Agreement and the Voting Agreement.
SECTION 6.06. MERGER SUB. Prior to the Effective Time, Merger Sub shall
not conduct any business or make any investments other than as specifically
contemplated by this Agreement and will not have any assets (other than a DE
MINIMIS amount of cash paid to Merger Sub for the issuance of its stock to
Acquiror) or liabilities.
SECTION 6.07. INDEMNIFICATION AND INSURANCE.
(a) Acquiror hereby indemnifies and holds harmless the Company and
its directors and officers from and against any loss, claim, damage, cost,
liability, obligation or expense (including reasonable attorney's fees and
costs of investigation) to which any indemnified party may become subject
under the Securities Act, the Exchange Act or otherwise, insofar as such
loss, claim, damage, cost, liability, obligation or expense or actions in
respect thereof arises out or is based upon any untrue statement or alleged
untrue statement of a material fact relating to such indemnifying party and
contained in the Proxy Statement or arises out of or is based upon the
omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein with respect
to such indemnifying party not misleading or necessary to make the
statements therein with respect to such indemnifying party, in light of the
circumstances under which they were made, not misleading.
(b) The Company and Acquiror agree that:
(i) Subject to consummation of the Merger and until five years
from the Effective Time, the Certificate of Incorporation and Bylaws
of the Company as in effect at the Effective Time shall not be
amended to reduce or limit the rights of indemnity afforded to the
present and former directors and officers of the Company thereunder or
as to the ability of the Company to indemnify such persons, or to
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hinder, delay or make more difficult the exercise of such rights of
indemnity or the ability to indemnify;
(ii) the Company, as the surviving corporation of the Merger,
will at all times exercise the powers granted to it by its Certificate
of Incorporation, its Bylaws and by applicable law to indemnify to the
fullest extent possible the present or former directors, officers,
employees and agents of the Company against claims made against them
arising from their service in such capacities;
(iii) should any claim or claims be made against any present or
former director, officer, employee or agent of the Company arising
from his services as such, within five years of the Effective Time,
the provisions of this Section 6.07(b) respecting the Certificate of
Incorporation and Bylaws of the Company shall continue in effect until
the final disposition of all such claims;
(iv) notwithstanding anything to the contrary in this Section
6.07, the Company shall not be liable for any settlement effected
without its written consent, which shall not be unreasonably withheld;
and
(v) the provisions of this Section 6.07(b) are intended to be
for the benefit of, and shall be enforceable by, each party entitled
to indemnification hereunder, his heirs and his representatives.
(c) Acquiror hereby agrees after the Effective Time to guarantee the
payment of the Company's indemnification obligations pursuant to Section
6.07(b)(ii) up to an amount determined as of the Effective Time equal to
(i) the fair market value of any assets of the Company or any of its
subsidiaries distributed to Acquiror or any of its subsidiaries (other than
the Company and its subsidiaries), minus (ii) any liabilities of the
Company or any of its subsidiaries assumed by Acquiror or any of its
subsidiaries (other than the Company and its subsidiaries), minus (iii) the
fair market value of any assets of Acquiror or any of its subsidiaries
(other than the Company and its subsidiaries) contributed to the Company or
any of its subsidiaries and (iv) plus any liabilities of Acquiror or any of
its subsidiaries (other than the Company and its subsidiaries) assumed by
the Company or any of its subsidiaries.
SECTION 6.08. OPINION OF FINANCIAL ADVISOR. The Company agrees to use all
reasonable efforts to obtain a written opinion of Montgomery Securities to the
effect that as of the date of the Company's Board of Directors meeting approving
the Merger, the Merger Consideration to be received by the holders of the
Company Common Stock pursuant to the Merger is fair to such stockholders from a
financial point of view, to obtain the consent of such firm to include such
opinion and the name of such firm in the Proxy Statement, to obtain a
reasonable description of such opinion from such firm for inclusion in the Proxy
Statement and to provide a copy of such opinion to Acquiror.
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SECTION 6.09. STOCK OPTIONS. The Company agrees to take all actions
necessary to cause each of the options, whether vested or unvested, to purchase
Company Common Stock granted under the Option Plans prior to the Effective Time
and outstanding on the date hereof (the "Options") and each of the Common Stock
Warrants outstanding on the date hereof to (a) be exercised prior to the
Effective Time, (b) expire, lapse or otherwise terminate by its terms or (c) be
terminated immediately prior to the Effective Time solely in exchange for the
right to receive, promptly upon the surrender of an Option or Common Stock
Warrant, as the case may be, an amount in cash equal to the product of (i) the
number of shares of Company Common Stock subject to such Option or Common Stock
Warrant, as the case may be, and (ii) the amount by which the Merger
Consideration exceeds the exercise price per share of Company Common Stock
subject to such Option or Common Stock Warrant, as the case may be.
ARTICLE VII.
CLOSING CONDITIONS
SECTION 7.01. CONDITIONS TO OBLIGATIONS OF EACH PARTY UNDER THIS
AGREEMENT. The respective obligations of each party to effect the Merger and
the other transactions contemplated hereby shall be subject to the satisfaction
at or prior to the Effective Time of the following conditions (any or all of
which may be waived by the parties hereto in writing, in whole or in part, to
the extent permitted by applicable Law):
(a) STOCKHOLDER APPROVAL. The Merger and this Agreement shall have
been approved and adopted by the requisite vote of the stockholders of the
Company.
(b) NO ORDER. No Governmental Entity or federal or state court of
competent jurisdiction shall have enacted, issued, promulgated, enforced or
entered any statute, rule, regulation, executive order, decree, judgment,
injunction or other order (whether temporary, preliminary or permanent)
which is in effect and which has the effect of making the Merger illegal or
otherwise prohibiting consummation of the Merger.
(c) HSR ACT. The applicable waiting period under the HSR Act with
respect to the transactions contemplated by this Agreement shall have
expired or been terminated.
(d) ABSENCE OF REGULATORY CONDITIONS. There shall not have been any
action taken or condition, restriction or limitation imposed by any
Governmental Entity in connection with the grant of a regulatory approval
necessary to the consummation of the Merger and the transactions
contemplated hereby that would, with respect to the continuing business,
operations or future prospects of the Company, constitute a Company
Material Adverse Effect or an Acquiror Material Adverse Effect.
SECTION 7.02. ADDITIONAL CONDITIONS TO OBLIGATIONS OF THE ACQUIROR
COMPANIES. The obligations of the Acquiror Companies to effect the Merger and
the other transactions contemplated
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by this Agreement are also subject to the following conditions (any or all of
which may be waived by Acquiror in writing, in whole or in part):
(a) REPRESENTATIONS AND WARRANTIES. Each of the representations and
warranties of the Company contained in this Agreement shall be true and
correct in all material respects as of the Effective Time as though made on
and as of the Effective Time. The Acquiror Companies shall have received a
certificate of the President and the Chief Financial Officer of the
Company, in their capacities as such, dated as of the Effective Time, to
such effect; PROVIDED that the Chief Financial Officer of the Company shall
only certify as to the representations and warranties contained in Section
3.07.
(b) AGREEMENTS AND COVENANTS. The Company shall have performed or
complied in all material respects with all agreements and covenants
required by this Agreement to be performed or complied with by it on or
prior to the Effective Time. The Acquiror Companies shall have received a
certificate of the President of the Company, in his capacity as such, dated
the date of the Effective Time, to that effect.
(c) OPTIONS, COMMON STOCK WARRANTS AND PREFERRED STOCK WARRANTS. The
Company shall have taken all actions required by Section 6.09, and the
Preferred Stock Warrant shall not have been exercised.
SECTION 7.03. ADDITIONAL CONDITIONS TO OBLIGATIONS OF THE COMPANY. The
obligations of the Company to effect the Merger and the other transactions
contemplated hereby are also subject to the following conditions (any or all of
which may be waived by the Company in writing, in whole or in part):
(a) REPRESENTATIONS AND WARRANTIES. Each of the representations and
warranties of the Acquiror Companies contained in this Agreement shall be
true and correct in all material respects as of the Effective Time as
though made on and as of the Effective Time. The Company shall have
received a certificate of the President and the Chief Financial Officer of
each of the Acquiror Companies, in their capacities as such, dated as of
the Effective Time, to such effect.
(b) AGREEMENTS AND COVENANTS. The Acquiror Companies shall have
performed or complied in all material respects with all agreements and
covenants required by this Agreement to be performed or complied with by
them on or prior to the Effective Time. The Company shall have received a
certificate of the President and the Chief Financial Officer of each of the
Acquiror Companies, in their capacities as such, dated the date of the
Effective Time, to that effect.
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ARTICLE VIII.
TERMINATION, AMENDMENT AND WAIVER
SECTION 8.01. TERMINATION. This Agreement may be terminated at any time
prior to the Effective Time, whether before or after approval of this Agreement
and the Merger by the stockholders of the Company:
(a) by mutual consent of Acquiror and the Company;
(b) by Acquiror, upon a breach of any material representation,
warranty, covenant or agreement on the part of the Company set forth in
this Agreement, or if any representation or warranty of the Company shall
have become untrue, in either case such that the conditions set forth in
Section 7.02(a) or Section 7.02(b) of this Agreement would not be satisfied
(a "Terminating Company Breach"); PROVIDED THAT, if such Terminating
Company Breach is curable by the Company through the exercise of reasonable
efforts and for so long as the Company continues to exercise such
reasonable efforts (or, if shorter, for 30 days), Acquiror may not
terminate this Agreement under this Section 8.01(b);
(c) by the Company, upon breach of any material representation,
warranty, covenant or agreement on the part of the Acquiror Companies set
forth in this Agreement, or if any representation or warranty of the
Acquiror Companies shall have become untrue, in either case such that the
conditions set forth in Section 7.03(a) or Section 7.03(b) of this
Agreement would not be satisfied (a "Terminating Acquiror Breach");
PROVIDED THAT, if such Terminating Acquiror Breach is curable by the
Acquiror Companies through the exercise of their reasonable efforts and for
so long as the Acquiror Companies continue to exercise such reasonable
efforts (or, if shorter, for 30 days), the Company may not terminate this
Agreement under this Section 8.01(c);
(d) by either Acquiror or the Company, if there shall be any Order
which is final and nonappealable preventing the consummation of the Merger,
unless the party seeking to terminate this Agreement has not complied with
its obligations under Section 6.03(b) of this Agreement;
(e) by either Acquiror or the Company, if the Merger shall not have
been consummated before September 30, 1996 PROVIDED, HOWEVER, that this
Agreement may be extended by written notice of either Acquiror or the
Company to a date not later than December 31, 1996, if the Merger shall not
have been consummated as a result of the Company or the Acquiror Companies
having failed by September 30, 1996 to receive all required regulatory
approvals or consents with respect to the Merger or as a result of the
entering of an Order;
(f) by either Acquiror or the Company, if the Merger and this
Agreement, when presented to the holders of Company Common Stock for their
consideration, whether by vote
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or by consent, shall fail to receive the requisite vote or consent for
approval and adoption by the stockholders of the Company;
(g) by Acquiror, if (i) the Board of Directors of the Company
withdraws, modifies or changes its recommendation of this Agreement or the
Merger in a manner adverse to the Acquiror Companies or shall have resolved
to do any of the foregoing or the Board of Directors of the Company shall
have recommended to the stockholders of the Company any Competing
Transaction or resolved to do so; (ii) a tender offer or exchange offer for
outstanding shares of capital stock of the Company then representing more
of the combined power to vote generally for the election of directors than
is subject to the Voting Agreement as of the date of this Agreement is
commenced, and the Board of Directors of the Company does not recommend
that stockholders not tender their shares into such tender or exchange
offer or; (iii) any person shall have acquired beneficial ownership or the
right to acquire beneficial ownership of, or any "group" (as such term is
defined under Section 13(d) of the Exchange Act and the rules and
regulations promulgated hereunder), shall have been formed which
beneficially owns, or has the right to acquire beneficial ownership of,
outstanding shares of capital stock of the Company then representing more
of the combined power to vote generally for the election of directors than
is subject to the Voting Agreement as of the date of this Agreement; or
(h) by the Company or Acquiror, if the Company accepts a Superior
Proposal and makes payment as required pursuant to Section 8.05(c)(i) of
this Agreement and of the Expenses for which the Company is responsible
under Section 8.05(a) of this Agreement. For purposes of this Agreement,
"Superior Proposal" means a bona fide written proposal made by a third
party relating to a Competing Transaction on terms that the Board of
Directors of the Company determines it cannot reject in favor of the
Merger, based on applicable fiduciary duties and the advice of counsel and
for which financing, to the extent required, is then committed.
The right of any party hereto to terminate this Agreement pursuant to this
Section 8.01 shall remain operative and in full force and effect regardless of
any investigation made by or on behalf of any party hereto, any person
controlling any such party or any of their respective officers, directors,
employees, accountants, consultants, legal counsel, agents or other
representatives whether prior to or after the execution of this Agreement.
SECTION 8.02. EFFECT OF TERMINATION. Except as provided in Section
5.04(c), Section 8.05 and Section 9.01 of this Agreement, in the event of the
termination of this Agreement pursuant to Section 8.01, this Agreement shall
forthwith become void, there shall be no liability on the part of the Acquiror
Companies or the Company or any of their respective officers or directors to the
other and all rights and obligations of any party hereto shall cease, except
that nothing herein shall relieve any party from its obligations with respect to
any breach of this Agreement.
SECTION 8.03. AMENDMENT. This Agreement may be amended by the parties
hereto by action taken by or on behalf of their respective Boards of Directors
at any time prior to the
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Effective Time; PROVIDED, HOWEVER, that, after approval of the Merger by the
stockholders of the Company, no amendment may be made that would reduce the
amount or change the type of consideration into which each share of Company
Common Stock shall be converted pursuant to this Agreement upon consummation of
the Merger. This Agreement may not be amended except by an instrument in
writing signed by the parties hereto.
SECTION 8.04. WAIVER. At any time prior to the Effective Time, any party
hereto may (a) extend the time for the performance of any of the obligations or
other acts of the other party hereto, (b) waive any inaccuracies in the
representations and warranties of the other party contained herein or in any
document delivered pursuant hereto and (c) waive compliance by the other party
with any of the agreements or conditions contained herein. Any such extension
or waiver shall be valid only if set forth in an instrument in writing signed by
the party or parties to be bound thereby. For purposes of this Section 8.04,
the Acquiror Companies as a group shall be deemed to be one party.
SECTION 8.05. FEES, EXPENSES AND OTHER PAYMENTS.
(a) All Expenses (as defined in paragraph (b) of this Section 8.05)
incurred by the parties hereto shall be borne solely and entirely by the
party which has incurred such Expenses; PROVIDED, HOWEVER, that Acquiror
may, at its option, pay any Expenses of the Company.
(b) "Expenses" as used in this Agreement shall include all reasonable
out-of-pocket expenses (including, without limitation, all reasonable fees
and expenses of counsel, accountants, investment bankers, experts and
consultants to a party hereto and its affiliates) incurred by a party or on
its behalf in connection with or related to the authorization, preparation,
negotiation, execution and performance of this Agreement, the preparation,
printing, filing and mailing of the Proxy Statement, the solicitation of
stockholder approvals and all other matters related to the consummation of
the transactions contemplated hereby.
(c) The Company agrees that, if (i) this Agreement is terminated
pursuant to Section 8.01(f) and, prior to the presentment of the Merger and
this Agreement to the holders of Company Common Stock pursuant to Section
6.01 herein, the Company shall have furnished information to, or entered
into discussions or negotiations with, any person or entity with respect to
a Competing Transaction involving the Company or any of its subsidiaries
and the Board of Directors of the Company shall not have reaffirmed its
recommendation to the stockholders of the Company with respect to the
transactions contemplated by this Agreement by the time of such
presentment; (ii) Acquiror terminates this Agreement pursuant to Section
8.01(g); (iii) the Company or Acquiror terminates this Agreement pursuant
to Section 8.01(h) or (iv)(A) Acquiror or the Company terminates this
Agreement pursuant to Section 8.01(b) or 8.01(e) at a time that a
Terminating Company Breach exists (except solely for purposes of this
subsection 8.05(c) a breach of a representation shall not be deemed to be a
Terminating Company Breach if the representation was true and correct as of
the date hereof), and (B) within nine months after such termination (1) a
Competing Transaction (other than sale by the Company of newly issued
securities (x) to the public in general or (y)
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in one or more private placements, so long as the securities sold in such
private placements do not represent more of the combined power to vote
generally for the election of directors (including, for this purpose, such
additional power, if any, of the maximum number of securities that the
holders of the securities sold in such private placements may acquire upon
conversion or exercise of such securities or otherwise) than is subject to
the Voting Agreement as of the date of this Agreement or (2) any person
shall have acquired beneficial ownership or the right to acquire beneficial
ownership of, or any "group" (as such term is defined under Section 13(d)
of the Exchange Act and the rules and regulations promulgated thereunder),
shall have been formed which beneficially owns, or has the right to acquire
beneficial ownership of, outstanding shares of capital stock of the Company
then representing more of the combined power to vote generally for the
election of directors than is subject to the Voting Agreement as of the
date of this Agreement, then in any such case the Company shall pay to
Acquiror $1,000,000.
ARTICLE IX.
GENERAL PROVISIONS
SECTION 9.01. EFFECTIVENESS OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS.
(a) Except as set forth in Section 9.01(b) of this Agreement, the
representations, warranties, covenants and agreements of each party hereto
shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any other party hereto, any person
controlling any such party or any of their officers, directors,
representatives or agents whether prior to or after the execution of this
Agreement.
(b) The representations, warranties, covenants and agreements in this
Agreement shall terminate at the Effective Time or upon the termination of
this Agreement pursuant to Article VIII, except that the agreements set
forth in Articles I and II and Sections 6.07 shall survive the Effective
Time and those set forth in Sections 5.04(c), 8.02 and 8.05 and Article IX
hereof shall survive termination.
SECTION 9.02. NOTICES. All notices and other communications given or made
pursuant hereto shall be in writing and shall be deemed to have been duly given
upon receipt, if delivered personally, mailed by registered or certified mail
(postage prepaid, return receipt requested) to the parties at the following
addresses (or at such other address for a party as shall be specified by like
changes of address) or sent by electronic transmission to the telecopier number
specified below:
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(a) If to any of the Acquiror Companies, to:
HORIZON/CMS HEALTHCARE CORPORATION
6001 Indian School Road
Suite 500
Albuquerque, New Mexico 87110
Attention: General Counsel
Telecopier No.: (505) 881- 4961
with a copy to:
Vinson & Elkins L.L.P.
2300 First City Tower
1001 Fannin
Houston, Texas 77002-6760
Attention: James H. Wilson
Telecopier No.: (713) 615-5926
(b) If to the Company, to:
MEDICAL INNOVATIONS, INC.
One Riverway
Suite 2300
Houston, Texas 77056
Attention: General Counsel
Telecopier No.: (713) 688-6600
with a copy to:
Boyer, Ewing & Harris Incorporated
The Coastal Tower
Nine Greenway Plaza
Suite 3100
Houston, TX 77046
Attention: John R. Boyer, Jr.
Telecopier No.: (713) 871-2024
SECTION 9.03. CERTAIN DEFINITIONS. For the purposes of this Agreement,
the term:
(a) "affiliate" means a person that directly or indirectly, through
one or more intermediaries, controls, is controlled by, or is under common
control with, the first mentioned person;
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(b) "business day" means any day other than a day on which banks in
the State of New York are authorized or obligated to be closed;
(c) "control" (including the terms "controlled," "controlled by" and
"under common control with") means the possession, directly or indirectly
or as trustee or executor, of the power to direct or cause the direction of
the management or policies of a person, whether through the ownership of
stock or as trustee or executor, by contract or credit arrangement or
otherwise;
(d) "knowledge" or "known" shall mean, with respect to any matter in
question, if an executive officer of the Company or Acquiror, as the case
may be, has actual knowledge of such matter;
(e) "person" means an individual, corporation, partnership,
association, trust, unincorporated organization, other entity or group (as
defined in Section 13(d) of the Exchange Act);
(f) "Significant Subsidiary" means any subsidiary of the Company or
Acquiror, as the case may be, that would constitute a Significant
Subsidiary of such party within the meaning of Rule 1-02 of Regulation S-X
of the SEC;
(g) "subsidiary" or "subsidiaries" of the Company, Acquiror, the
Surviving Corporation or any other person, means any corporation,
partnership, joint venture or other legal entity of which the Company,
Acquiror, the Surviving Corporation or an such other person, as the case
may be (either alone or through or together with any other subsidiary),
owns, directly or indirectly, 50% or more of the stock or other equity
interests the holders of which are generally entitled to vote for the
election of the board of directors or other governing body of such
corporation or other legal entity; and
(h) "Tax" or "Taxes" shall mean any and all taxes, charges, fees,
levies, assessments, duties or other amounts payable to any federal, state,
local or foreign taxing authority or agency, including, without limitation,
(i) income, franchise, profits, gross receipts, minimum, alternative
minimum, estimated, ad valorem, value added, sales, use, service, real or
personal property, capital stock, license, payroll, withholding,
disability, employment, social security, workers compensation, unemployment
compensation, utility, severance, excise, stamp, windfall profits, transfer
and gains taxes, (ii) customs, duties, imposts, charges, levies or other
similar assessments of any kind, and (iii) interest, penalties and
additions to tax imposed with respect thereto.
(i) "Trading Day" shall mean each business day on which the NYSE is
open for trading.
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(j) "Voting Agreement" shall mean the Voting Agreement dated as of
even date herewith by and between Acquiror and the stockholders of the
Company named therein.
SECTION 9.04. HEADINGS. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
SECTION 9.05. SEVERABILITY. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of law
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
materially adverse to any party. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the parties hereto
shall negotiate in good faith to modify this Agreement so as to effect the
original intent of the parties as closely as possible in an acceptable manner to
the end that transactions contemplated hereby are fulfilled to the extent
possible.
SECTION 9.06. ENTIRE AGREEMENT. This Agreement (together with the
Exhibits, the Company Disclosure Schedule and the Acquiror Disclosure Schedule),
constitute the entire agreement of the parties, and supersede all prior
agreements and undertakings, both written and oral, among the parties, with
respect to the subject matter of this Agreement.
SECTION 9.07. ASSIGNMENT. This Agreement shall not be assigned by
operation of law or otherwise.
SECTION 9.08. PARTIES IN INTEREST. This Agreement shall be binding upon
and inure solely to the benefit of each party hereto and the beneficiaries of
the provisions of Section 6.11 herein, and nothing in this Agreement, express or
implied, is intended to or shall confer upon any other person any right, benefit
or remedy of any nature whatsoever under or by reason of this Agreement.
SECTION 9.09. FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE. No
failure or delay on the part of any party hereto in the exercise of any right
hereunder shall impair such right or be construed to be a waiver of, or
acquiescence in, any breach of any representation, warranty or agreement herein,
nor shall any single or partial exercise of any such right preclude other or
further exercise thereof or of any other right. All rights and remedies
existing under this Agreement are cumulative to, and not exclusive to, and not
exclusive of, any rights or remedies otherwise available.
SECTION 9.10. GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Delaware, regardless of
the laws that might otherwise govern under applicable principles of conflicts of
law.
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<PAGE>
SECTION 9.11. COUNTERPARTS. This Agreement may be executed in multiple
counterparts, and by the different parties hereto in separate counterparts, each
of which when executed shall be deemed to be an original but all of which taken
together shall constitute one and the same agreement.
SECTION 9.12. SPECIFIC PERFORMANCE. The parties hereby acknowledge and
agree that the failure of any party to this Agreement to perform its agreement
and covenants hereunder, including its failure to take all actions as are
necessary on its part to the consummation of the Merger, will cause irreparable
injury to the other parties to this Agreement for which damages, even if
available, will not be an adequate remedy. Accordingly, each of the parties
hereto hereby consents to the issuance of injunctive relief by any court of
competent jurisdiction to compel performance of any party's obligations and to
the granting by any such court of the remedy of specific performance of such
party's obligations hereunder.
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<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed as of the date first written above by their respective officers
thereunto duly authorized.
HORIZON/CMS HEALTHCARE CORPORATION
By: /s/ Scot Sauder
----------------------------------------------
Scot Sauder
Vice President of Legal Affairs
HORIZON MI CORPORATION
By: /s/ Scot Sauder
----------------------------------------------
Scot Sauder
Vice President of Legal Affairs
MEDICAL INNOVATIONS, INC.
By: /s/ Mark H. Fisher
----------------------------------------------
Mark H. Fisher
Chairman of the Board and
Chief Executive Officer
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<PAGE>
APPENDIX B
[LETTERHEAD]
[LOGO]
MONTGOMERY
May 15, 1996
Members of the Board of Directors
Medical Innovations, Inc.
1 Riverway, Suite 2300
Houston, TX 77056
Gentlemen:
We understand that Medical Innovations, Inc., a Delaware corporation (the
"Company"), Horizon/CMS Healthcare Corporation, a Delaware corporation
("Acquiror") and Horizon MI Corporation, a Delaware corporation and wholly-owned
subsidiary of Acquiror ("Merger Sub"), propose to enter into an Agreement and
Plan of Merger dated May 15, 1996 (the "Merger Agreement"), pursuant to which
Merger Sub will be merged with and into the Company, which will be the surviving
entity (the "Merger"). Pursuant to the Merger, as more fully described in the
draft form of the Merger Agreement provided to us by the Company, we understand
that each outstanding share of the common stock, $.0075 par value per share, of
the Company ("Company Common Stock"), except dissenting shares and shares held
by the parties or their subsidiaries, will be converted into the right to
receive $1.85 cash (the "Consideration").
You have asked for our opinion as investment bankers as to whether the
Consideration to be received by holders of Company Common Stock pursuant to the
Merger is fair to such holders from a financial point of view, as of the date
hereof. As you are aware, we were not retained to nor did we advise the Company
with respect to alternatives to the Merger or the Company's underlying business
decision to proceed with or effect the Merger. Further, we were not requested
to nor did we solicit or assist the Company in soliciting offers for the Company
from other potential acquirors.
In connection with our opinion, we have, among other things: (i) reviewed
certain publicly available financial and other data with respect to the Company,
including the Company's consolidated financial statements for recent years and
interim periods to March 31, 1996 and certain other relevant financial and
operating data relating to the Company made available to us from published
sources and from the internal records of the Company; (ii) reviewed certain
publicly available financial data with respect to Acquiror, including the
consolidated financial statements for recent years and interim
<PAGE>
Medical Innovations, Inc.
May 15, 1996
Page 2
periods to February 29, 1996; (iii) reviewed the draft form of the Merger
Agreement provided to us by the Company on May 15, 1996; (iv) reviewed certain
historical market prices and trading volumes of Company Common Stock as
reported by the Nasdaq SmallCap Market; (v) compared the Company from a
financial point of view with certain other companies in the home health care
industry which we deemed to be relevant; (vi) considered the financial terms,
to the extent publicly available, of selected recent business combinations of
companies in the home health care and health care services industries which we
deemed to be comparable, in whole or in part, to the Merger; (vii) reviewed
and discussed with representatives of the management of the Company certain
information of a business and financial nature regarding the Company,
furnished to us by them; and (viii) performed such other analyses and
examinations as we have deemed appropriate. We were not provided with nor did
we review any internal financial forecasts with respect to the Company.
In connection with our review, we have relied on the accuracy and
completeness of the foregoing information and have not assumed any obligation
independently to verify the foregoing information. We have assumed that there
have been no materially positive changes in the Company's assets, financial
condition, results of operations, business or prospects since the date of the
last financial statements made available to us by the Company. We have also
assumed that the Merger will be consummated in a manner that complies in all
respects with the applicable provisions of the Securities Exchange Act of 1934
and all other applicable federal and state statutes, rules and regulations. In
addition, we have not assumed responsibility for making an independent
evaluation, appraisal or physical inspection of any of the assets or liabilities
(contingent or otherwise) of the Company, nor have we been furnished with any
such appraisals. Finally, our opinion is based on economic, monetary and market
and other conditions as in effect on, and the information made available to us
as of, the date hereof. Accordingly, although subsequent developments may
affect this opinion, we have not assumed any obligation to update, revise or
reaffirm this opinion.
We have further assumed with your consent that the Merger will be
consummated in accordance with the terms described in the Merger Agreement,
without any further amendments thereto, and without waiver by the Company of any
of the conditions to its obligations thereunder.
In the ordinary course of our business, we actively trade the equity
securities of the Company and Acquiror for our own account and for the accounts
of customers and, accordingly, may at any time hold a long or short position in
such securities.
Based upon the foregoing and in reliance thereon, it is our opinion as
investment bankers that the Consideration to be received by the holders of
Company Common Stock pursuant to the Merger is fair to such holders from a
financial point of view, as of the date hereof.
<PAGE>
Medical Innovations, Inc.
May 15, 1996
Page 3
This opinion is furnished pursuant to our engagement letter, dated February
7, 1996. This opinion is addressed to the Board of Directors of the Company and
is not intended to be and shall not be deemed to be a recommendation to any
stockholder as to how such stockholder should vote with respect to the Merger.
This opinion may not be used or referred to by the Company, or quoted or
disclosed to any person in any manner, without our prior written consent.
Very truly yours,
/s/ Montgomery Securities
MONTGOMERY SECURITIES
<PAGE>
APPENDIX C
DELAWARE GENERAL CORPORATION LAW
SECTION 262 -- APPRAISAL RIGHTS
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to Section 228
of this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of his shares of stock under the circumstances described in
subsections (b) and (c) of this section. As used in this section, the word
"stockholder" means a holder of record of stock in a stock corporation and also
a member of record of a nonstock corporation; the words "stock" and "share" mean
and include what is ordinarily meant by those words and also membership or
membership interest of a member of a nonstock corporation; and the words
"depository receipt" mean a receipt or other instrument issued by a depository
representing an interest in one or more shares, or fractions thereof, solely of
stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Sections 251 (other than a merger effected pursuant to
subsection (g) of Section 251), 252, 254, 257, 258, 263 or 264 of this title:
(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock, which stock, or
depository receipts in respect thereof, at the record date fixed to determine
the stockholders entitled to receive notice of and to vote at the meeting of
stockholders to act upon the agreement of merger or consolidation, were either
(i) listed on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or (ii) held of record by more than 2,000 holders;
and further provided that no appraisal rights shall be available for any shares
of stock of the constituent corporation surviving a merger if the merger did not
require for its approval the vote of the holders of the surviving corporation as
provided in subsection (f) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series of a
constituent corporation if the holders thereof are required by the terms of an
agreement of merger or consolidation pursuant to Sections 251, 252, 254, 257,
258, 263 and 264 of this title to accept for such stock anything except:
a. Shares of stock of the corporation surviving or resulting from such
merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts in
respect thereof, which shares of stock or depository receipts at the effective
date of the merger or consolidation will be either listed on a national
securities exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities Dealers,
Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a. and b. of this paragraph; or
d. Any combination of the shares of stock, depository receipts and cash
in lieu of fractional shares or fractional depository receipts described in the
foregoing subparagraphs a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Section 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall be
available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsection (d)
and (e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
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(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting, shall
notify each of its stockholders who was such on the record date for such meeting
with respect to shares for which appraisal rights are available pursuant to
subsections (b) or (c) hereof that appraisal rights are available for any or all
of the shares of the constituent corporations, and shall include in such notice
a copy of this section. Each stockholder electing to demand the appraisal of his
shares shall deliver to the corporation, before the taking of the vote on the
merger or consolidation, a written demand for appraisal of his shares. Such
demand will be sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends thereby to demand
the appraisal of his shares. A proxy or vote against the merger or consolidation
shall not constitute such a demand. A stockholder electing to take such action
must do so by a separate written demand as herein provided. Within 10 days after
the effective date of such merger or consolidation, the surviving or resulting
corporation shall notify each stockholder of each constituent corporation who
has complied with this subsection and has not voted in favor of or consented to
the merger or consolidation of the date that the merger or consolidation has
become effective; or
(2) If the merger or consolidation was approved pursuant to Section 228 or
253 of this title, the surviving or resulting corporation, either before the
effective date of the merger or consolidation or within 10 days thereafter,
shall notify each of the stockholders entitled to appraisal rights of the
effective date of the merger or consolidation and that appraisal rights are
available for any or all of the shares of the constituent corporation, and shall
include in such notice a copy of this section. The notice shall be sent by
certified or registered mail, return receipt requested, addressed to the
stockholder at his address as it appears on the records of the corporation. Any
stockholder entitled to appraisal rights may, within 20 days after the date of
mailing of the notice, demand in writing from the surviving or resulting
corporation the appraisal of his shares. Such demand will be sufficient if it
reasonably informs the corporation of the identity of the stockholder and that
the stockholder intends thereby to demand the appraisal of his shares.
(e) Within 120 days after the date of the merger or consolidation, the
surviving or resulting corporation or any stockholder who has complied with
subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value of the stock of all such stockholders. Notwithstanding the
foregoing, at any time within 60 days after the effective date of the merger or
consolidation, any stockholder shall have the right to withdraw his demand for
appraisal and to accept the terms offered upon the merger or consolidation.
Within 120 days after the effective date of the merger or consolidation, any
stockholder who has complied with the requirements of subsections (a) and
(d) hereof, upon written request, shall be entitled to receive from the
corporation surviving the merger or resulting from the consolidation a statement
setting forth the aggregate number of shares not voted in favor of the merger or
consolidation and with respect to which demands for appraisal have been received
and the aggregate number of holders of such shares. Such written statement shall
be mailed to the stockholder within 10 days after his written request for such a
statement is received by the surviving or resulting corporation or within
10 days after expiration of the period for delivery of demands for appraisal
under subsection (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper or general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or
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resulting corporation pursuant to subsection (f) of this section and who has
submitted his certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that he is not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who had demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at date which
is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation. (Last amended by
Ch. 299, L. "96, eff. 2-1-96.)
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MEDICAL INNOVATIONS, INC.
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS JULY 11, 1996
The undersigned hereby appoints David C. Horn and Roger S. Huntington, or any
one or more of them, with full power of substitution, the attorneys and proxies
of the undersigned to vote the shares of common stock of Medical Innovations,
Inc., a Delaware corporation (the "Company"), held of record by the undersigned
at the close of business on May 31, 1996, at the special meeting of stockholders
of the Company to be held at One Riverway, 20th Floor, Houston, Texas 77056, on
Thursday, July 11, 1996 at 10:00 a.m. Houston time, and at any adjournment
thereof, as follows:
(1) Adoption of Agreement and Plan of Merger and approval of Merger.
/ / FOR / / AGAINST / / ABSTAIN
(2) As such proxies may in their discretion determine upon such other matters as
may properly come before the meeting.
PLEASE NOTE
THIS PROXY IS TO BE VOTED AS DIRECTED. IN THE ABSENCE OF SPECIFIC DIRECTION, IT
IS INTENDED TO VOTE THE SHARES REPRESENTED BY THIS PROXY FOR EACH OF THE
PROPOSALS.
You are urged to sign and return your proxy without delay in the return envelope
provided for that purpose, which requires no postage if mailed in the United
States or Canada.
When signing this proxy, please date it and take care to have the signature
conform to the stockholder's name as it appears on this side of the proxy. If
shares are registered in the names of two or more persons, each person should
sign. Executors, administrators, trustees and guardians should so indicate their
full title or capacity when signing.
<PAGE>
PLEASE SEND IN YOUR PROXY
In order that there may be proper representation at the Special Meeting, each
stockholder, whether he or she owns one or more shares, is requested to sign
this proxy and return it promptly in the enclosed envelope.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR EACH OF THE
PROPOSALS.
THIS PROXY SHALL BE VOTED IN ACCORDANCE WITH THE INSTRUCTIONS GIVEN, AND IN THE
ABSENCE OF SUCH INSTRUCTIONS, THE PROXIES SHALL VOTE FOR THE ELECTION OF THE
NOMINEES NAMED ABOVE, ALL OF THE PROPOSALS SET FORTH ABOVE AND SUCH OTHER
MATTERS AS MAY PROPERLY COME BEFORE THE MEETING.
Dated _____________________ , 1996
By: ______________________________
__________________________________
(Print Name)
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
