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SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the year ended December 31, 1997
Commission File Number: 34-0-20400
UNIVERSAL STANDARD HEALTHCARE, INC.
(Exact name of Registrant as specified in its charter)
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MICHIGAN 38-2986640
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
26500 NORTHWESTERN HIGHWAY, SOUTHFIELD, MICHIGAN 48076
(Address of principal executive offices) (Zip Code)
Registrant's telephone no. including area code: (248) 386-5374
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK
8.25% CONVERTIBLE SUBORDINATED
DEBENTURES DUE 2006
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock of the Registrant held by
non-affiliates (2,579,486 shares on March 4, 1998) was $5,481,408. For purposes
of this computation only, all directors, executive officers and owners of more
than 5% of the Registrant's voting stock are assumed to be affiliates.
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Indicate the number of shares outstanding of each of the Registrant's classes of
Common Stock as of the latest practicable date: 6,569,513 shares of Common Stock
outstanding as of March 4, 1998.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's definitive
Proxy Statement pertaining to the 1998 Annual Meeting of Shareholders (the
"Proxy Statement") filed pursuant to Regulation 14A are incorporated herein by
reference into Part III.
PART I
ITEM 1. BUSINESS
GENERAL
Universal Standard Healthcare, Inc. (the "Company") provides clinical
laboratory testing services on a traditional fee-for-service basis and, through
its specialty managed care programs (the "Managed Care Programs"), offers
clinical laboratory testing services, home medical services, and diagnostic
imaging to employer, employer group -, union - and government-sponsored health
care benefit plans and other groups for a fixed payment per participating
employee or retiree ("capitated rate"). All home medical services, diagnostic
imaging and virtually all of the clinical laboratory services provided outside
of Michigan, are provided by the Company under arrangements through
subcontracting agreements with qualified providers.
BACKGROUND
The Company was incorporated in Michigan in 1990 to acquire the
business of the Company's predecessor, MML, Inc. (the "Predecessor"), and the
stock of T.P.A., Inc. In the first half of 1992, the Company acquired clinical
laboratory businesses based in Mid- and Northern Lower Michigan, significantly
expanding its customer and service base. The Company later completed its initial
public offering of Common Stock in October 1992 and became listed and qualified
for trading on The Nasdaq National Market. The Company changed its name from
Universal Standard Medical Laboratories, Inc. to Universal Standard Healthcare,
Inc., and its Nasdaq symbol from USML to UHCI in August 1997.
References herein to the Company mean the Company, the Predecessor and
their respective consolidated subsidiaries.
FEDERAL LAW PROHIBITS A PHYSICIAN FROM REFERRING MEDICARE - OR MEDICAID
PATIENTS TO THE COMPANY FOR CERTAIN DESIGNATED HEALTH SERVICES IF THE PHYSICIAN
OR ANY OF THE PHYSICIAN'S IMMEDIATE FAMILY MEMBERS HAVE A FINANCIAL RELATIONSHIP
WITH THE COMPANY, INCLUDING OWNERSHIP OF ITS COMMON STOCK OR DEBENTURES.
ACCORDINGLY, AN INVESTMENT IN THE COMPANY'S COMMON STOCK OR DEBENTURES BY A
PHYSICIAN OR ANY OF THE PHYSICIAN'S IMMEDIATE FAMILY MEMBERS IS PROHIBITED IF
THE PHYSICIAN IS REFERRING MEDICARE - OR MEDICAID - COVERED BUSINESS TO THE
COMPANY.
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FEDERAL LAW REQUIRES THAT THE COMPANY REPORT THE FOLLOWING INFORMATION
TO THE HEALTH CARE FINANCING ADMINISTRATION FOR ANY PHYSICIAN WHO HAS OR WHOSE
IMMEDIATE FAMILY MEMBER HAS A FINANCIAL RELATIONSHIP WITH THE COMPANY: THE
PHYSICIAN'S NAME, PHYSICIAN'S PROVIDER ID NUMBER, THE EXTENT OF THE FINANCIAL
RELATIONSHIP AND THE SERVICES PROVIDED. MICHIGAN LAW ALSO PROHIBITS A PHYSICIAN
WITH AN OWNERSHIP INTEREST IN THE COMPANY FROM REFERRING BUSINESS TO THE
COMPANY.
BUSINESS STRATEGY
The Company's business strategy is to become a national leader in the
development and delivery of innovative health care management programs. In
connection with the implementation of this business strategy, beginning in 1996,
the Company initiated a series of revenue enhancement, reengineering and cost
reduction programs designed to increase revenues, reduce expenses and improve
overall profitability in both its laboratory fee-for-service and managed care
businesses.
In its laboratory business, the Company has implemented reengineering
and cost reduction programs designed to reduce costs while increasing service
levels. The Company's reengineering programs involve the use of process
engineering and Total Quality Management ("TQM") processes to improve
productivity and reduce laboratory operating costs. In addition, these programs
are designed to improve quality and service levels and contribute to the
Company's customer retention efforts. These reengineering programs have
facilitated the Company's cost reduction programs which include reductions in
laboratory personnel and facility costs. Revenue enhancement programs have also
been implemented by the Company in its laboratory business, including an
expanded sales force, the use of telemarketing efforts to assist and supplement
sales efforts and a renewed focus on the retention of the Company's most
profitable accounts. The Company also seeks to improve profitability in its
laboratory operations by automating its information exchange with its customers,
improving its cash collections and reducing its accounts receivable and the
costs associated with maintaining cash management.
In its managed care business, the Company has implemented a business
strategy designed to leverage its expertise in the managed care area to expand
its business and become a national competitor in the managed care industry. This
strategy includes the development of new managed care products to complement its
laboratory programs, such as the home medical services program introduced in
1995 and the imaging services program introduced in 1997. These new programs
will be offered to existing customers and as a means of attracting new
customers. In addition, the Company has begun to expand its business
geographically through the establishment of managed care sales offices in Ohio,
Delaware, Illinois and Florida and intends to establish additional offices in
1998.
The foregoing statements regarding the Company's business strategy and
programs implemented in connection with such business strategy may be "forward
looking statements"
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within the meaning of the Securities Exchange Act of 1934. The ability of the
Company to successfully execute the strategies set forth above involves a number
of uncertainties, including, but not limited to, the degree to which the
Company's revenue enhancement initiatives will generate new revenues, whether
any such new revenues will be at levels required to offset decreases in
revenues, particularly if third party reimbursement levels continue to decrease
or the Company continues to experience declines in patient visits or
fee-for-service revenue per patient visit, the impact of reengineering/cost
reduction efforts on revenues, potential offsetting increases in operating
expenses, variations in cost savings from, and timing of, the Company's
reengineering/cost reduction efforts from those anticipated, the impact on
revenues and expenses of governmental and third-party payor requirements and
reimbursement levels, the ability of the Company to develop new managed care
products, the level of interest that existing and potential new customers may
have in managed care products offered by the Company, the ability of the Company
to identify and satisfy market needs, the impact on the Company of recent and
continuing changes in the health care industry, and the competitive nature of
the laboratory and managed care industries.
FEE-FOR-SERVICE BUSINESS
OVERVIEW. Clinical laboratories, such as the Company in its
fee-for-service business, traditionally are reimbursed for laboratory testing
services performed based upon the specific test or tests requested, commonly
referred to as "fee-for-service". During 1997, the Company performed testing
services for over 8,500 accounts, including office-based physicians, hospitals,
long-term care facilities (including both nursing homes and adult foster care
homes), preferred provider organizations ("PPOs") and health maintenance
organizations ("HMOs"). Fee-for-service business accounted for 72.4%, 69.6% and
66.3% of the Company's net revenues during 1995, 1996, and 1997 respectively.
LABORATORY OPERATIONS AND TESTING SERVICES. The Company currently
operates one full-service laboratory located in Southfield, Michigan, and
operates or manages five limited-service laboratories in Michigan. The
Southfield laboratory also houses the Company's headquarters and administrative
offices.
The full-service laboratory provides a complete range of routine and
esoteric testing services. The limited-service laboratories provide a limited
number of routine testing services. Esoteric tests are generally those tests
which are not commonly requested or which require specialized equipment or
training to perform, such as HIV, DNA ploidy, allergy, prostate specific antigen
("PSA") and cancer or tumor tests. Routine tests are generally those tests which
are commonly requested or do not require special training or equipment, such as
automated chemistries, glucose, cholesterol and complete blood count ("CBC")
tests.
The Company's limited-service laboratories refer virtually all esoteric
and routine tests which are not performed by such laboratories to the Company's
full-service laboratory. While some clinical laboratories refer less common
tests to other reference laboratories, in 1997 the Company's laboratories
performed in-house over 99% of the tests for which the Company received
requests.
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There are two major categories of clinical testing that the Company
regularly performs: clinical tests and anatomical tests. Clinical tests are
performed for diagnostic purposes on body fluids such as blood or urine.
Anatomical tests involve the visual or microscopic examination of tissue
specimens to detect abnormalities in cell composition and structure to diagnose
diseases such as cancer. In 1997, the Company performed clinical and anatomical
tests for approximately 1.5 million patients.
While specimens are delivered to the Company's laboratories throughout
the day, most specimens are delivered to the Company's laboratories beginning in
the early evening. Each specimen is accompanied by a request form that is
checked for accuracy and completeness. The specimen and related form are given a
unique number to ensure that the results are attributed to the appropriate
patient (an "accession" number). The test request information is entered into
the Company's computer system, where a file for testing and billing information
is established for each patient. This file is maintained for repeat patients in
the Company's "PatientLinktm" data system. Once the information is entered, the
tests are performed by one of the Company's medical technologists or laboratory
professionals. Test results are entered into the computer system either by
direct computer interfaces or manually, depending upon the test and the type of
equipment used to conduct the test. Much of the Company's testing equipment,
including the autochemistry and hematology equipment, is interfaced with and
reports results electronically to the Company's computer system, increasing
operational efficiency and reducing the possibility of errors from manual data
entry. In addition, the Company maintains certain duplicate testing equipment as
a back-up to enable timely processing of laboratory tests.
CUSTOMER SERVICES. The Company's full-service and limited-service
laboratories operate 24 hours a day, seven days a week. The Company maintains
its own courier fleet to retrieve specimens and transport them to its
laboratories. The courier system is flexible, enabling the pick-up of specimens
from a physician on an emergency basis or several times per day if required.
Moreover, the Company maintains its own extensive network of patient service
centers throughout the State of Michigan and has established relationships with
numerous affiliate centers in Michigan and other states in which the Company
provides services. A patient service center is typically a small, leased
facility located in a medical office building established to provide specimen
collection services for patients.
The Company provides many of its customers with an electronic reporting
system consisting of a printer and modem connected to the Company's computer
system. Customers equipped with this system can have test results transmitted
directly to their office as soon as the tests are performed. The Company
believes that during 1997 a majority of its test results were reported using
this system. Testing results for low volume customers are sometimes delivered by
the Company's couriers beginning in the morning after the tests are performed.
The Company also offers certain of its customers an interactive computer system
through which physicians may receive laboratory test results and retrieve other
information relating to tests performed by the Company through its PC computer
system.
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The Company also provides rapid processing and reporting for tests that
are required on an emergency basis ("Stat tests"). The Company's full-service
and certain of its limited-service laboratories are capable of performing Stat
tests for up to 80 procedures. Upon receipt of a request for a Stat test, a
courier is dispatched to retrieve and transport to the laboratory the specimen
to be tested. Within certain service areas, the Company uses its best efforts to
assure that Stat tests are performed and the results communicated to the
requesting physician within two hours after the Company is contacted to pick-up
the specimen for testing.
The Company maintains a customer response unit to provide prompt
responses to questions or concerns from physicians and other customers, verbal
test results, assistance in interpreting tests, technical information regarding
specific tests and billing information. The Company also employs 46 full-time
sales and customer service representatives. Under the Company's customer
satisfaction program, the Company will repeat any test, including Stat tests, at
a physician's request for any reason at no charge and, upon request, send a
specimen to a customer-designated reference laboratory for a second opinion.
YEAR 2000 COMPLIANCE. See Item 7 -"Management's Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources" for a discussion of issues relating to the Year 2000 computer
software problem.
QUALITY ASSURANCE. The Company believes it has developed high standards
for the provision of accurate, prompt and reliable testing services. The
Company's quality assurance programs are intended to determine if specimens are
collected and transported properly, tests are performed accurately, and client,
patient and test information is reported, billed and filed correctly. The
quality assurance programs include testing quality control specimens of known
concentration or reactivity to check for accuracy and precision, routine checks
and preventive maintenance of laboratory testing equipment, and personnel
standards which ensure that only qualified personnel perform testing. The
Company routinely reviews the effectiveness of its quality assurance programs.
The Company's full-service laboratory and two of its other laboratories
have been accredited by the College of American Pathologists ("CAP") for
purposes of compliance with the Clinical Laboratory Improvement Amendments of
1988, as amended. All of the Company's laboratories have received all required
certifications by the federal and state governments. See Item 1 - "Business --
Government Regulation".
REIMBURSEMENT; IMPACT OF INDUSTRY TRENDS. The amount of the fee charged
for any test depends on a number of factors, including the complexity of the
testing procedure, the type of equipment required and the specific costs
associated with the test.
The Company's fee-for-service charges are reimbursed by a number of
payors. In 1997, the Company's net revenues from fee-for-service business were
derived approximately 31% from governmental payors, approximately 31% from
various private insurance companies and other similar programs, approximately
23% from private payors and approximately 15% from hospitals and physicians.
Under various governmental regulations and insurance provider agreements to
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which the Company is a party, the Company is required to accept as payment in
full the reimbursement paid by governmental and certain insurance payors for
services provided to patients covered under such programs. Beginning August 1,
1993, third-party payors have been instituting changes in reimbursement policies
which have negatively affected the Company's fee-for-service revenue and overall
profitability. Further significant changes in reimbursement policies are under
consideration by a number of third-party payors such as Medicare, Medicaid and
insurance companies. Such changes, if instituted, could further negatively
affect the Company's fee-for-service revenue and overall profitability by
reducing amounts received for the Company's services, increasing testing costs
and increasing collection costs and bad debt expenses. For a more detailed
discussion of the regulation of reimbursements from governmental payors, see
"Business -- Government Regulation -- Third Party Reimbursement Regulation". For
a discussion of the impact of changes in reimbursement policies on the Company's
results of operations, see Item 7 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
The Company's fee-for-service revenues have also been negatively
affected by changes in payor and test mixes being experienced by the Company and
the clinical laboratory industry in general. These changes result from a variety
of factors, including the shift from traditional fee-for-service to discounted
or managed care arrangements and the level and nature of tests ordered. For a
discussion of the impact of changes in test and payor mixes on the Company's
results of operations, see Item 7 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
Increasing numbers of patients, including Medicaid and Medicare
recipients, are participating in managed health care delivery systems such as
HMOs and PPOs, employer group, union and government sponsored programs and
various managed health care organizations. These organizations often contract
with one or a limited number of laboratories to provide all laboratory services
for their members, at significantly discounted or capitated rates. While this
change creates new opportunities for the Company's Managed Care Programs, its
fee-for-service revenues are being negatively affected. In addition, such change
is causing the Company to become increasingly dependent on contracts with a few
large managed care organizations.
MANAGED CARE PROGRAMS
OVERVIEW. Since 1985, the Company has also offered Managed Care
Programs for employer-, employer group-, union- and government-sponsored health
care benefit plans and other groups. Under its Managed Care Programs, in
exchange for a capitated rate, the Company is required to provide, or to
coordinate the provision of, substantially all of the services specified in the
Managed Care Program contract to all Covered Persons. Depending on the Managed
Care Program involved, those services currently include any one or more of the
following ordered by physicians for Covered Persons: non-hospital clinical
laboratory testing, durable medical equipment, respiratory therapy and orthotic
and prosthetic appliances and diagnostic imaging services. The Company provides
some of the required clinical laboratory testing services directly in Michigan
and arranges through subcontracting agreements with other qualified providers to
provide the remaining services. The Company currently has 36 Managed Care
Program contracts,
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two of which began in 1997, covering over 1.8 million Covered Persons located in
all 50 states. A "Covered Person" is a person who is entitled to benefits under
a specific Managed Care Program Contract. Individuals participating in more than
one Managed Care Program are treated as a separate Covered Person under each
program. The Company's Managed Care Programs are designed to permit customers to
reduce costs while maintaining the quality and availability of the specialty
health care services offered by the Company. The Company's Managed Care Programs
are also designed to lessen physicians' incentive to order unnecessary health
care services. The Managed Care Programs implemented to date have resulted in
first-year plan costs which were at least 20% lower than the plan sponsor's
projected costs for that year. The Company's Managed Care Programs are also
designed so that Covered Persons can continue to use the physicians of their
choice.
During 1995, 1996 and 1997 revenues from the Company's Managed Care
Programs accounted for 27.6%, 30.4% and 33.7% respectively, of the Company's net
revenues.
CUSTOMERS. The principal customers for which the Company has
established Managed Care Programs are large employers, union-sponsored and
government-sponsored health care benefit plans, as well as HMOs and PPOs.
Although many of the Company's new Managed Care Programs are with groups not
affiliated with the automobile industry, during 1995, 1996 and 1997, a majority
of the Company's Managed Care Program revenues were derived from contracts with
unions and companies affiliated with the automobile industry, with revenues
derived from contracts with two of these customers collectively accounting for
virtually all of these automobile industry-related Managed Care Program
revenues. On January 1, 1998, the Company began a national laboratory services
program with General Motors Corporation in conjunction with Blue Cross Blue
Shield. A decrease in the number of employees and retirees under these programs,
downsizing in the automobile industry or an adverse change in the Company's
relationships with the employers and unions with whom it has Managed Care
Programs could have a material adverse effect on the Company's business,
financial condition, including working capital, and results of operations.
During 1997, the Company had one customer, Ford Motor Company ("Ford"), which
accounted for 14% of its consolidated net revenues.
SERVICES PROVIDED. The Company offers three services under its Managed
Care Programs: laboratory services, home medical services and diagnostic imaging
services. However, most of the Company's managed care revenues are generated
from its laboratory services programs.
LABORATORY SERVICES. The Company's laboratory services Managed Care
Program covers generally all non-hospital clinical laboratory services ordered
by physicians for Covered Persons on a "carve-out" basis, i.e., independent from
the other health care benefits and programs provided by the employer or group
for the Covered Persons. Under this program, the Company is paid a fixed monthly
payment by the customer. The fixed monthly payments established by the Company
are generally guaranteed by the Company for two years, while the contracts
governing the Managed Care Programs are generally renewable on an annual basis
and terminable by the customer upon 30 or 60 days prior written notice
(depending on the program). For Managed Care Programs covering Covered Persons
located in Michigan, the Company's laboratories are designated as the key
provider of substantially all covered laboratory services for such Covered
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Persons. For Managed Care Programs covering Covered Persons located elsewhere,
the Company subcontracts on a discounted fee-for-service basis with other
clinical laboratories, principally Laboratory Corporation of America ("LCA")
and, to a lesser extent, SmithKline Beecham Clinical Laboratories, Inc.
("SmithKline"), to provide all laboratory services to Covered Persons located in
those markets. The Company's subcontracts with LCA are generally terminable by
either party on short notice. In the event that LCA terminates these
subcontracts or is unable or unwilling to perform its services under these
subcontracts, the Company would be required to locate another national clinical
laboratory or a group of smaller laboratories throughout the United States to
provide such services on short notice and, potentially, at a significantly
greater cost. While the Company believes it could replace LCA's services without
a significant increase in cost, there can be no assurance to that effect.
HOME MEDICAL SERVICES. The Company's home medical services ("HMS")
program provides all durable medical equipment (such as hospital beds,
wheelchairs and canes), respirator therapy, and orthotic and prosthetic
appliances at a prepaid, capitated rate.
The Company's Managed Care Subsidiary in Michigan (the "Michigan
Managed Care Subsidiary") is the nationwide administrator and utilization
control coordinator of Ford Motor Company's and the United Auto Workers' HMS
program for employees enrolled in the traditional health plan (the "Ford HMS
Program"). The multi-year contract became effective June 1, 1995 and covers
approximately 225,000 Ford hourly workers, non-Medicare retirees and their
dependents in 50 states. The fixed monthly fee established by the Company for
the Ford HMS Program is guaranteed by the Company through March 1, 2000, while
the program is terminable by Ford upon 30 days prior written notice. This HMS
program resulted in first-year annual employer expenditures for these services
which were at least 30% less than the plan sponsor's projected costs for that
year. The Company has three additional HMS programs currently in effect.
These programs are generally terminable by the customer upon short notice.
The Company subcontracts with third parties to provide services under
its HMS agreements. The subcontract for durable medical equipment under the
Ford HMS Program is on a capitated basis and generally runs for the term of the
Ford HMS Program contract and cannot be terminated earlier by the subcontractor
without penalty. Currently, other providers under these programs provide
services on a discounted fee-for-service basis and their arrangements are
generally terminable by either party on short notice. The Managed Care
Subsidiaries perform risk management and administrative functions and, under
the current agreements, pay the fee-for-service providers, retaining a portion
of the annual capitated fees.
While one of the subcontractors under the Ford HMS Program receives a
capitated rate under the program, if this subcontractor did not or was not able
to provide services, the Company would be obligated to locate other providers to
do so, potentially at a significantly greater cost. In addition, the Company is
required to indemnify Ford for any expenses incurred by Ford in replacing the
HMS program in the event that Ford cancels such program due to the Company's or
any of its subcontractors' non-performance. While the subcontractor for durable
medical equipment under the Ford HMS Program has indemnified the Company for
liability arising from its non-performance, there can be no assurance that this
subcontractor will be able to satisfy such
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indemnification liability or that the Company will not have liability to Ford in
a situation where the subcontractor's indemnification is not applicable. In
addition, the other current providers under the HMS programs have not provided
similar indemnification to the Company and the amount payable to such providers
has not been capped. The Company's obligations under the Ford HMS program are
secured by a $1.8 million letter of credit. See "Item 3 Legal Proceedings" for a
discussion of pending litigation between a former subcontractor under the
Ford HMS Program and the Michigan Managed Care Subsidiary.
DIAGNOSTIC IMAGING SERVICES. The Company also has a Managed Care
Program for diagnostic imaging services. The Company has contracted with a
third party to establish a network of radiologists and radiology clinics to
provide diagnostic imaging services and assist the Company in managing this
network. Network providers will be paid on a discounted fee-for-service basis
and their arrangements will generally be terminable by either party on short
notice. The Company's managed care subsidiaries perform risk management and
administrative functions and pay the fee-for-service providers, retaining a
portion of the annual capitated fees.
SALES AND MARKETING
The Company has established fee-for-service sales territories covering
the States of Michigan, Indiana and Ohio. As of December 31, 1997, the Company
employed 20 direct sales representatives who market its services principally to
physician offices, clinics, PPOs, HMOs and institutions such as hospitals,
nursing homes and drug recovery centers. In addition, the sales representatives
call upon physicians who are first exposed to the Company's testing services as
a result of its Managed Care Programs. As of December 31, 1997, the Company also
employed 25 additional customer service representatives who work together with
the sales representatives under a team approach to provide support services to
the Company's customers.
The Company is focusing its fee-for-service sales efforts on margin
enhancement. The Company's strategy is to increase the volume of its
fee-for-service clinical laboratory testing services to realize economies of
scale available from increased use of its automated testing capacity and to
increase revenues. Selective analysis of new accounts will also be performed to
keep revenue levels in line with the cost of services provided. The Company
plans to concentrate its sales activities in selected geographic regions where a
minimum of infrastructure expansion is required to provide services.
With respect to its Managed Care Programs, as of December 31, 1997, the
Company employed 11 sales and service representatives to market the Managed Care
Programs primarily to large employer-, employer group-, union and
government-sponsored health care benefit plans, HMOs, PPOs, health care
alliances and other groups. The establishment of a Managed Care Program for a
large employer or other group often requires the involvement of multiple
departments within the employer or group, as well as participation of that
company's unions. As a result, Managed Care Programs may take six months to a
year or more to negotiate and implement.
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The Company also markets its Managed Care Programs through other
managers of health care benefits. The Company has a Teaming Agreement to sell
its Managed Care Programs with programs offered by a manager of health care
benefits to offer overall programs with greater potential savings for potential
customers and also uses the sales and marketing networks of this manager to
reach a broader group of potential customers.
The Company believes there are synergies between its Managed Care
business and its fee-for-service business. For example, the growth in the number
of Covered Persons covered by the Company's Managed Care Programs has increased
the exposure of the Company's services and capabilities to physicians serving
Covered Persons, which the Company believes has resulted in additional
fee-for-service business through referrals of non-Covered Persons to the Company
by these physicians. In addition, the Company believes that its strong
reputation for providing fee-for-service laboratory testing, its extensive
network of patient service centers and the wide range of physician offices and
institutions regularly served through its fee-for-service business have a
positive effect on the Company's ability to market its Managed Care Programs.
COMPETITION
The clinical laboratory testing industry is characterized by intense
competition. The Company faces competition from numerous national and local
independent clinical laboratories, hospital-based laboratories, insurance
companies, HMOs, PPOs, third party administrators and managed health care
organizations. The Company also faces increasing competition from hospitals,
particularly those which control HMOs, PPOs or other managed health care
organizations.
With respect to the Company's fee-for-service business, the Company
competes primarily on the basis of the quality of its testing, reporting and
information services, its reputation in the medical community, the introduction
of new testing procedures and its ability to perform virtually all clinical
laboratory tests in-house. Under federal and Michigan law, physicians are
prohibited from marking-up the cost of third-party laboratory tests.
Accordingly, the Company competes for fee-for-service business primarily on the
basis of quality and service, with a particular emphasis on rapid reporting of
test results and responsiveness to customer requests, as well as its ability to
perform virtually all clinical laboratory tests in-house. Some of the
laboratories which compete with the Company have a national presence and have
substantially greater financial resources than the Company. The Company must
also maintain competitive pricing for both its fee-for-service and Managed Care
operations.
With respect to its Managed Care Programs, the Company competes on the
basis of price, service and its experience in providing this type of health care
program. The Company believes its experience, reputation and long-standing
relationships offer it a competitive advantage with respect to maintaining its
existing Managed Care Programs and establishing new Managed Care Programs. The
Company is experiencing increased competition with regard to its Managed Care
Programs from insurance companies, HMOs, PPOs, third-party administrators and
other managed health care companies which offer similar programs. In particular,
the Company is facing aggressive pricing of these programs by its principal
competitors.
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In addition to competition for customers, the Company faces increasing
competition for obtaining the services of qualified personnel. These personnel
are difficult to recruit and retain, and there can be no assurance that the
Company will be successful in attracting and retaining these employees.
SEASONALITY
The volume of tests performed by the Company tends to decrease during
the summer months, year-end holiday periods and periods of inclement weather.
Although these seasonal effects are partially offset by the Company's Managed
Care Programs, which provide monthly revenues based upon capitated rates rather
than based upon testing volume, these seasonal decreases in testing volume tend
to reduce net revenue and net income for the third and fourth quarters each
year. As a result, comparisons of the results of successive quarters may not
accurately reflect trends or results for the full year. See Item 7 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
GOVERNMENT REGULATION
The Company's operations are subject to governmental regulations at the
federal, state and local levels.
CERTIFICATION REGULATION. The Company's laboratories are certified
under the federal Medicare and Medicaid programs and have been issued the
registration certificates required by the federal Clinical Laboratory
Improvements Amendments of 1988, as amended ("CLIA"). CLIA has established
periodic reporting requirements, performance and operational standards and
procedures, and periodic inspection and testing programs. Any failure of the
Company's laboratories to meet the requirements of CLIA and the regulations
promulgated thereunder could result in significant fines, civil and criminal
penalties, third-party liability, and loss of the Company's licenses,
certifications or other approvals required to continue operations, which could
have a material adverse effect on the Company's business, financial condition,
including working capital, and results of operations. State laws and regulations
applicable to the Company's laboratories may have requirements exceeding federal
requirements.
ANTI-FRAUD AND ABUSE REGULATION; MEDICARE AND MEDICAID AUDITS AND
REVIEWS. The Medicare and Medicaid Patient and Program Protection Act of 1987,
as amended, and various other federal and state statutes (the "Fraud and Abuse
Statutes") prohibit laboratories from soliciting, offering, paying, receiving or
accepting any remuneration as an inducement for the referral or the arrangement
of referral of laboratory work for which payment is made in whole or in part
under the Medicare or Medicaid and other government third-party payor programs.
Contravention of the federal Fraud and Abuse Statutes is a criminal and civil
violation and can subject the laboratory and persons acting on behalf of the
laboratory to significant fines, penalties, imprisonment and exclusion from the
Medicare and Medicaid and other government third-party payor programs. The Fraud
and Abuse Statutes also prohibit bribes and kickbacks in connection with the
furnishing of goods or services under Medicare or Medicaid or other third-party
payors
12
<PAGE> 13
and prohibit offers of rebates or other benefits to persons referring test
specimens to a laboratory. The Company is also subject to other federal and
state statutes that impose civil and criminal penalties for claims upon federal
or state authorities for payment or reimbursement for services, or any related
statements made to induce payment, if such claims or statements are found to be
false, misleading or otherwise fraudulent.
The Company may be excluded from participation in Medicare and Medicaid
for a variety of reasons. These reasons include, among others, revocation or
suspension of any of its health care licenses, suspension under a state health
care program or any federal government program (whether or not related to health
care), submission of false or fraudulent claims or related statements to
authorities engaging in kickbacks or other prohibited activities, failure to
provide necessary information to regulatory authorities or to comply with
administrative orders, or violation of federal or state laws applicable to
clinical laboratory services. Exclusion also can occur if the Company, or any of
its officers, directors, agents, managing employees or any person with a five
percent or greater share of ownership or control is convicted of certain
criminal offenses related to Medicare, Medicaid or controlled substances.
Combined Medicare and Medicaid reimbursements accounted for 24.8%, 21.9% and
20.7% of the Company's net revenues during 1995, 1996 and 1997, respectively.
Medicare and Medicaid reimbursements are approximately 30% of fee-for-service
revenue. Exclusion from Medicare or Medicaid would have a material adverse
effect on the Company's business, financial condition, including working
capital, and results of operations.
Failure to comply with these laws, regulations and restrictions could
result in the imposition of significant fines, civil and criminal penalties,
third-party liability, exclusion from Medicare and Medicaid, and loss of
licenses and approvals necessary for the Company to conduct its business
operations.
REGULATION OF RELATIONSHIPS WITH PHYSICIANS. Sections 1877 and 1903 of
the Social Security Act, as amended (the "Stark Law"), prohibits (i) a physician
from making a referral to the Company for any designated health service,
including laboratory services, durable medical equipment and supplies and
certain diagnostic imaging services, for which Medicare or Medicaid
reimbursement may be received if the physician or any member of the physician's
immediate family (including the physician's spouse, parents, grandparents,
children, grandchildren, siblings, spouse's parents, and the spouse of the
physician's children, siblings, grandparents and grandchildren) has a financial
relationship (i.e., ownership or investment interest or compensation
arrangement, subject to certain exceptions) with the Company and (ii) the
Company from billing Medicare or Medicaid for any designated health service
based on such a referral. An ownership or investment interest may be in the form
of equity or debt and owners of Debentures or Common Stock would be considered
to have a "financial relationship" (as defined in the Stark Law) with the
Company. Accordingly, subject to certain exceptions, a physician is prohibited
from making a referral to the Company for a designated health service if the
physician or any of the physician's immediate family members have an investment
in the Company's Common Stock or its 8.25% Convertible Subordinated Debentures
due 2006, (the "Debentures") or have a compensation arrangement with the Company
and the Company is prohibited from billing Medicare or Medicaid for such
business.
13
<PAGE> 14
In addition, the Stark Law requires the Company to report to the Health
Care Financing Administration of the United States Department of Health and
Human Services ("HCFA") the identity of all persons who have a financial
relationship with the Company and who are physicians or immediate family members
of physicians. The Stark Law imposes civil penalties for improper claims for
payment, for the creation of arrangements to circumvent the law and for failure
to comply with the reporting requirements. Failure to comply with the Stark Law
may also result in the Company's exclusion from the Medicare and Medicaid
programs. The Stark Law sets forth a number of exceptions to the statute. HCFA
promulgated regulations under the Stark Law relating to clinical laboratory
services which became effective September 12, 1995. On January 9, 1998, HCFA
published proposed rules relating to all designated health services, including
clinical laboratory services. These regulations significantly broaden the scope
of the Stark Law. It is difficult to determine whether the Company will be
materially affected by the proposed regulations because the regulations are
complex and far-reaching. The Company is evaluating its planned and existing
business practices in light of these changes.
THIRD-PARTY REIMBURSEMENT REGULATION. For most of the tests performed
for Medicare or Medicaid recipients, laboratories are required to bill Medicare
or Medicaid directly and, for all tests except anatomical testing which has
co-insurance and deductible provisions, laboratories are required to accept
Medicare or Medicaid approved amounts as payment in full. In addition, state
Medicaid programs are prohibited from paying more than the Medicare fee schedule
amount for testing for Medicaid recipients. The Omnibus Budget Reconciliation
Acts of 1989 and 1990 provide that clinical laboratories which do not perform
on-site at least 70% of the testing procedures billed to Medicare may not bill
Medicare for tests not performed on-site and that 70% of the tests for which the
laboratory receives requests must be performed on-site. The Company has
historically exceeded these levels and, during 1997, over 99% of the tests it
was requested to perform were performed in-house.
Medicare and Medicaid reimbursements account for a significant portion
of the Company's net revenues. The Company is subject to audits and retroactive
audit adjustments for Medicare and Medicaid payments. The Company has from time
to time experienced these audits by third-party payors and, from time to time,
has been required to return monies paid to it by such payors. The Company has
not yet received final determination notices or decision letters relating to an
audit conducted by one of its largest third-party payors. Government
reimbursements to the clinical laboratory industry have been the subject of
heightened legislative and regulatory scrutiny in recent years. Medicare and
Medicaid reimbursement programs contain various restrictions on prices that can
be charged by laboratories. Medicare reimbursement for services provided by
clinical laboratories was reduced several times in recent years from previously
authorized levels. Further changes in Medicare reimbursement policies are under
consideration and such changes, if instituted, could negatively affect the
Company's fee-for-service revenue and overall profitability.
The Company's liquidity may be affected by how promptly the Company is
reimbursed by Medicare, Medicaid and other third-party payors. The Company from
time to time has experienced a slowdown in payments from such third-party
payors.
14
<PAGE> 15
In the Balanced Budget Act of 1997, (the "Budget Act"), Congress
reduced future federal spending by Medicare by an estimated $115 billion over
the next five years. Specifically, the Budget Act reduced updates in payments
for clinical laboratory services and mandated the adoption of national policies
for clinical laboratories by January 1, 1999. Future efforts by Congress to
reduce Medicare and Medicaid spending or expand coverage are likely.
For a discussion of the impact of changes in reimbursement policies on
the Company's results of operations, see Item 7 - "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
ENVIRONMENTAL REGULATION. The Company has registered with and holds
licenses and certificates issued by federal and state authorities concerning
controlled substances and radioactive materials that are purchased, handled and
disposed of in connection with certain tests conducted at the Company's
facilities. The Company is also subject to certain laws relating to protection
of the environment and public safety and health, including federal and state
laws governing the containment, storage, decontamination and disposal of certain
defined medical wastes and hazardous wastes.
SAFETY AND HEALTH REGULATION. Pursuant to the Federal Occupational
Safety and Health Act and the Michigan Occupational Safety and Health Act,
laboratories have a general duty to provide a workplace for employees that is
safe from hazard. The United States Occupational Safety and Health
Administration ("OSHA") has issued rules relevant to certain hazards that are
found in the laboratory. In addition, OSHA has promulgated regulations
specifically applicable to occupational exposures to blood borne pathogens in
the workplace. These regulations currently require evaluation of potential
workplace exposures, employee training and development of an exposure control
plan, and include engineering and workplace controls, workplace practices, and
the offering of certain vaccinations to applicable employees. The Company also
has and intends to bid on contracts for laboratory testing services with
agencies of local, state and federal governments. Such contracts may require
compliance with certain government-mandated restrictions concerning the conduct
of the Company's business and may subject the Company to penalties in excess of
the value of the services for any non-compliance or false certification of
compliance.
MANAGED CARE REGULATION. The Company's Managed Care Programs require
that the Company and the Managed Care Subsidiaries be licensed under various
laws in certain states in which they operate.
Most of the Company's Managed Care Program revenues during 1997 were
derived from the Michigan Managed Care Subsidiary. The Michigan Managed Care
Subsidiary is licensed as an Alternative Health Care Financing and Delivery
System ("AFDS") by the Insurance Bureau of the Michigan Department of Consumer
and Industry Services (the "Michigan Insurance Bureau") and the Michigan
Department of Community Health pursuant to the Michigan Health Maintenance
Organization Act (the "HMO Act"). The AFDS license and the HMO Act specify terms
and conditions with which the Michigan Managed Care Subsidiary must comply in
order to retain its AFDS license, including certain financial requirements.
15
<PAGE> 16
The HMO Act requires that the Michigan Managed Care Subsidiary
maintain: (i) a net worth of $500,000; (ii) a deposit of $500,000 (consisting of
cash or securities, as defined in the HMO Act and the Michigan Insurance Code)
with the state treasurer or with a federally or state chartered financial
institution held solely for the benefit of Covered Persons in the event of
insolvency of the Michigan Managed Care Subsidiary; (iii) working capital of
$250,000 or such greater amount as the State of Michigan Insurance Bureau may,
in the future, deem to be adequate for the Michigan Managed Care Subsidiary, and
(iv) a minimum deposit of 5% of the Michigan Managed Care Subsidiary's annual
subscription income (consisting of cash or securities) with the state treasurer
or with a federally or state chartered financial institution held solely for the
benefit of Covered Persons in the event of insolvency of the Michigan Managed
Care Subsidiary. The minimum deposit described in (iv) is subject to a maximum
of $500,000, if the Michigan Managed Care Subsidiary has a positive net worth,
or $1,000,000, if the Michigan Managed Care Subsidiary has a negative net worth.
The Michigan Insurance Bureau has responsibility under the HMO Act for
ensuring that the Michigan Managed Care Subsidiary is financially and
actuarially sound and has adequate working capital and statutory deposits and
reserves. The HMO Act grants to the Michigan Insurance Bureau discretion to
establish additional financial reserve requirements and to impose restrictions
on the distribution of funds from the Michigan Managed Care Subsidiary. The
Michigan Insurance Bureau requires the Michigan Managed Care Subsidiary to file
quarterly and annual reports detailing all transactions, including cash
disbursements, with its affiliates.
The Michigan Managed Care Subsidiary is permitted to make cash
distributions to the Company out of such subsidiary's earned surplus, to the
extent such distributions do not cause the subsidiary to fail to satisfy the
minimum net worth, working capital and other reserve requirements of the
Michigan Insurance Bureau or the Michigan Insurance Bureau has not otherwise
limited such distributions. The Michigan Insurance Bureau has restricted the
amount of distributions that the Michigan Managed Care Subsidiary may make to
the Company. See Item 7 - "Management's Discussion and Analysis-Liquidity and
Capital Resources."
The other states in which the Company's other Managed Care subsidiaries
have Managed Care Programs regulate such subsidiaries to varying degrees and, in
some instances, require licenses. Loss of these licenses could result in the
Company being prohibited from continuing to offer its Managed Care Programs in
one or more states. The Company's Managed Care subsidiary in Ohio is also
subject to certain limitations on cash distributions. As the Company expands its
Managed Care Programs into other states, it may experience similar limitations
on cash distributions in certain of those states as well.
If the Company were not able to derive adequate levels of cash from its
Managed Care Subsidiaries, it is possible that the Company would not have
sufficient cash available to fund its working capital needs and debt service
requirements.
GENERAL. The laws and regulations affecting the health care industry
and third party reimbursement change frequently. There can be no assurance that
changes to such laws and
16
<PAGE> 17
regulations will not have a material adverse effect on the Company's business,
financial condition, including working capital, and results of operations. In
addition, legislation may be introduced in Congress or by one or more state
legislatures to reform certain facets of the health care delivery system. The
Company cannot predict whether any of these possible proposals will become law
or the effect such legislation would have on the Company. In addition, even
consideration of reform proposals can have an adverse effect on the Company's
Managed Care Programs because the Company believes health care plan sponsors are
less willing to consider changes in their plans when they think the government
will mandate the types of benefits that must be provided or the method of
delivery of benefits. The Company cannot predict which, if any, health care
reform proposals will be adopted or, if adopted, their effect on the Company's
business.
The Company's failure to comply with any of the above-described laws,
regulations, restrictions or licenses could subject the Company to fines and
penalties, exclusion from Medicare and Medicaid, loss of licenses and approvals
and compliance orders or other remedies which could have a material adverse
effect on the Company's business, financial condition, including working
capital, and results of operations.
COMPLIANCE PROGRAM
Because of evolving interpretations of regulations and the national
debate over health care, compliance with all Medicare, Medicaid and other
government-established rules and regulations has become a significant concern
throughout the clinical laboratory industry. The Company has begun to implement
a compliance program. The objective of the program is to develop aggressive and
reliable compliance safeguards. Emphasis is placed on developing training
programs for personnel intended to assure the strict implementation and
observance of all applicable rules and regulations. Further, in-depth reviews of
procedures, personnel and facilities are conducted to assure regulatory
compliance throughout the Company. The Company's current compliance plan
appoints a compliance officer, provides for the establishment of a Compliance
Committee of the Board of Directors and requires periodic reporting of
compliance operations by management to the compliance officer who will report
directly to the Board of Directors. Such sharpened focus on regulatory standards
and procedures will continue to be a priority for the Company in the future.
EMPLOYEES
As of December 31, 1997, the Company had approximately 574 employees,
approximately 531 of whom were full-time employees. In February , 1997 the
Company entered into an agreement with a professional employer organization
("PEO"), the result of which is that substantially all of the Company's
personnel are now leased from the PEO. None of the Company's personnel are
represented by a labor union or are subject to a collective bargaining agreement
and the Company has never experienced a work stoppage as a result of its
personnel relations.
17
<PAGE> 18
ITEM 2. PROPERTIES
The Company's full service laboratory, headquarters and administrative
offices are located in Southfield, Michigan. The Company occupies approximately
65,000 square feet at this site under a lease which expires in November 2009
with a cancellation date of November 2004. The Company has sublet approximately
35,000 square feet of this space on terms extending from five years to nine
years. The Company also operates a limited-service laboratory in Saginaw,
Michigan, which occupies approximately 4,000 square feet under a newly
negotiated lease whose term expires on December 31, 1998. The Company also
operates three "stat" laboratories and 52 patient service centers, which
typically occupy 500 to 2,000 square feet under leases with terms ranging from
one to five years, except for the Lansing, Michigan "stat" laboratory which
occupies approximately 11,500 of the 31,000 square feet leased by the Company
under a lease terminating in June 2002. The Company's Lansing, Michigan facility
has an additional 20,000 square feet of unused space, 15,000 square feet of
which have been sublet and 5,000 square feet of which the Company is currently
attempting to sublet.
Borrowings under the Company's credit facility with its principal
lender are collateralized by substantially all of the Company's assets, except
for assets of the Company's Managed Care subsidiaries.
ITEM 3. LEGAL PROCEEDINGS
In connection with the acquisition of the business of the Predecessor
in 1991, the Company agreed to indemnify the Predecessor and its shareholders
(including certain officers, directors and shareholders of the Company) under
certain circumstances for federal and state income tax liabilities arising from
such acquisition, as well as federal and state income tax liabilities arising
from such indemnification, including tax deficiencies that would arise if the
acquisition was not treated as a tax-free transaction. The Predecessor and its
shareholders have received notices of deficiency, dated July 13, 1995, from the
Internal Revenue Service. The IRS deficiency assessments relating to the
acquisition total approximately $4.9 million, excluding interest and penalties.
In January 1998, the Company settled the IRS assessment for $700,000, plus
interest and legal costs of an additional $650,000, payable on a monthly
installment basis.
The Company is currently a defendant in a suit filed by Ivonyx , Inc.
against Universal Standard Healthcare of Michigan, Inc., a subsidiary of the
Company (the "Michigan Managed Care Subsidiary"), in Oakland County Circuit
Court on February 19, 1997, and amended March 13, 1998. Ivonyx was a
subcontractor under the Company's HMS Program with Ford Motor Company, providing
respiratory therapy, home infusion services and orthotic and prosthetic
appliances ("O & P") pursuant to a Primary Provider Agreement with the Michigan
Managed Care Subsidiary. The suit alleges that the Michigan Managed Care
Subsidiary breached the Primary Provider Agreement by not paying Ivonyx amounts
it alleges were due under such agreement for services rendered by Ivonyx and
includes claims for quantum meruit and unjust enrichment. The Michigan Managed
Care Subsidiary has filed a counterclaim against Ivonyx claiming Ivonyx has
breached the Primary Provider Agreement by failing to enter into a
18
<PAGE> 19
subcontract with an O & P provider and failing to pay amounts owing to the
Michigan Managed Care Subsidiary. The Primary Provider Agreement with Ivonyx
terminated in February 1998 and Ivonyx is providing services only on a
transition basis. The Company intends to vigorously pursue its claims and defend
its position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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<PAGE> 20
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on The Nasdaq National Market
under the symbol UHCI. The following table sets forth for the periods indicated
the high and low sales prices for the Common Stock as reported on The Nasdaq
National Market.
<TABLE>
<CAPTION>
1996
- - - - ----
<S> <C> <C>
First Quarter 4 1/4 2 3/4
Second Quarter 6 1/8 3 1/8
Third Quarter 5 3/8 3 3/8
Fourth Quarter 4 1/4 2
1997
- - - - -----
First Quarter 4 3/8 2 7/8
Second Quarter 4 1/8 2 3/4
Third Quarter 4 2 3/4
Fourth Quarter 3 3/4 2
</TABLE>
As of March 4, 1998, there were approximately 131 record holders of
the Common Stock based upon the records of the Company's transfer agent.
The Company did not pay any cash dividends on the Common Stock in 1996
or 1997, and it does not intend to pay any cash dividends on the Common Stock in
the foreseeable future. In addition, certain covenants in the Company's credit
facility restrict the Company's ability to pay cash dividends. See Item 7-
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." The Company currently
anticipates that it will retain all of its earnings for use in the operation and
expansion of its business.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial information set forth below is derived from the
Company's audited consolidated financial statements and should be read in
conjunction with Item 7 - "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and with the consolidated financial
statements and notes thereto included elsewhere herein.
20
<PAGE> 21
<TABLE>
<CAPTION>
Year Ended December 31,
- - - - ----------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS DATA:
Fee-for-service revenue 36,867 40,042 $ 48,367 $ 54,264 $ 53,679
Managed care revenue 18,764 17,522 18,406 15,451 12,102
-------------------------------------------------------------------
Total net revenue(1) 55,631 57,564 66,773 69,715 65,781
Laboratory expenses(1)(2) 40,338 43,401 47,331 46,699 41,631
Special charge(3) 18,842 5,255 -- 287 --
Selling, general and admini-
strative expenses 11,316 11,961 14,960 16,061 15,129
Restructuring charge(4) -- -- -- 4,142 --
Depreciation and amortization 3,998 4,517 4,239 3,995 3,498
-------------------------------------------------------------------
Operating income (loss) (18,863) (7,570) 243 (1,469) 5,523
Interest expense 1,899 1,790 1,591 1,396 1,202
Other (income) expense,
net(5) (86) (142) (90) (145) (1,242)
-------------------------------------------------------------------
Income (loss) before income
taxes and extraordinary
item (20,676) (9,218) (1,258) (2,720) 5,563
Income taxes (benefit)(6) -- (1,467) (277) (766) 1,245
-------------------------------------------------------------------
Income (loss) before extra-
ordinary item(6) (20,676) (7,751) (981) (1,954) 4,318
Extraordinary item, net (7) -- -- -- 167 --
-------------------------------------------------------------------
Net income (loss)(6) (20,676) ($ 7,751) ($ 981) ($ 2,121) $ 4,318
===================================================================
Income (loss) per share
before extraordinary item(6) (3.15) ($ 1.20) ($ 0.15) ($ 0.30) $ 0.66
Net income (loss) per share(6) (3.15) ($ 1.20) ($ 0.15) ($ 0.33) $ 0.66
Average shares outstanding
and common equivalent shares 6,557 6,462 6,392 6,417 6,518
BALANCE SHEET DATA: (AT END
OF PERIOD)
Working capital ($ 2,719) $ 1,127 $ 3,130 $ 3,857 $ 1,900
Total assets 40,175 57,072 64,566 65,816 69,086
Long term debt (net of current
portion) 20,108 19,013 12,443 13,669 14,133
Stockholders' equity (8) 6,188 26,839 33,968 34,171 36,392
OTHER DATA:
EBITDA (9) ($14,865) ($ 3,053) $ 4,482 $ 2,526 $ 9,021
EBITDA before restructuring and
special charge (9) $ 3,977 2,202 4,482 6,995 9,021
Net cash provided by
operating activities (10) 469 878 4,267 3,992 4,669
Net cash used in investing activities (1,302) (1,604) (1,797) (1,644) (8,749)
Net cash provided by (used in)
financing activities (142) 1,954 (2,761) (2,156) 3,517
</TABLE>
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<PAGE> 22
(1) Effective July 1, 1993 the provision for doubtful accounts is included in
operating expenses. Prior to July 1, 1993, the provision for doubtful accounts
was included in revenue.
(2) Includes charges in 1993 of $1.5 million following the conversion to a new
Company-wide computer system.
(3) The 1994 special charge reflects expenses incurred in connection with a
review of strategic alternatives undertaken by the Company in 1994. The 1996
special charges, totaling $5.3 million, reflect expenses incurred in
connection with actions designed to reduce costs, improve operating
effectiveness and increase overall profitability. The 1997 special charge,
totaling $18.8 million, reflects an impairment to goodwill charge of
approximately $14 million, a $3.4 million charge to complete the Company's
re-engineering process initiatives that commenced during 1996, including
personnel and facility reductions, related consulting, legal expenses and other
charges relating to the Company's re-engineering process, additional reserves
and the settlement of an IRS tax assessment for $1.4 million, including
interest and legal costs, in connection with the MML acquisition. See Item 7 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Results of Operations - Special Charge" and Item 8 - Note 2 to the
Notes to Consolidated Financial Statements, "Special Charges - 1997".
(4) Reflects charges in connection with the Company's restructuring program.
(5) Includes $1.1 million of life insurance proceeds, net of related costs and
expenses, in 1993.
(6) Does not include $5.4 million of net tax benefits relating to the 1997 loss
or $2.1 million of tax benefits relating to the 1996 loss which, under
applicable accounting rules, could not be recognized in 1997 and 1996,
respectively. These losses are treated as net operating loss carry forwards for
accounting purposes and may be used to offset future profits of the
Company. See Item 8 - Note 10 to Notes to Consolidated Financial Statements,
"Income Taxes and Loss Carryforwards" and Item 7 - "Management's Discussion
and Analysis of Financial Condition and Results of Operations-Results of
Operations-Income Taxes." The amounts of the Company's "basic" and "diluted"
earnings (loss) per share are the same.
(7) Reflects write-off of financing costs in connection with refinancing of
debt in 1994, net of income tax benefits.
(8) The Company has paid no dividends on Common Stock during the periods
presented.
(9) EBITDA represents earnings (losses) before interest, taxes, depreciation,
amortization, other (income) expense, extraordinary item and acquisition
expense but after restructuring and special charge. EBITDA before
restructuring and special charge represent earnings (losses) before interest,
taxes, depreciation, amortization, other (income) expense, extraordinary item,
acquisition expense and restructuring and special charge. The Company and
laboratory industry analysts use EBITDA as a method of measuring and comparing
the financial performance of clinical laboratory companies, many of which were
formed by combining with and acquiring other clinical laboratory companies,
because it eliminates the effects of goodwill amortization and acquisition
expenses on net income. EBITDA before restructuring and special charge is
included in the table to permit a year to year comparison of EBITDA data
exclusive of those charges not
22
<PAGE> 23
expected to be recurring. See Item 7 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Results of Operations-Income
Taxes." Neither EBITDA nor EBITDA before restructuring and special charge
should be considered as an alternative to net income as an indicator of the
Company's operating performance or to cash flows as a measure of the Company's
liquidity.
(10) Net cash provided by operating activities is determined in accordance with
generally accepted accounting principles and is included in the Company's
Consolidated Statements of Cash Flows. The amount for each period is
determined by adjusting net income for the period for non-cash expense items,
including restructuring and special charge, depreciation and amortization,
extraordinary item and deferred income taxes, and for increases and decreases
in asset and liability items other than those relating to financing and
investing activities.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following discussion and analysis of financial results covers the three
years ended December 31, 1997. The following table sets forth, for the periods
indicated, the percentage of net revenue represented by items in the statements
of operations.
<TABLE>
<CAPTION>
- - - - --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
- - - - --------------------------------------------------------------------------------
1997 1996 1995
- - - - --------------------------------------------------------------------------------
<S> <C> <C> <C>
Fee-for-service 66.3% 69.6% 72.4%
Managed care 33.7% 30.4% 27.6%
-------------------------------------------
Total net revenue 100.0 100.0 100.0
Laboratory expenses 72.5 75.4 70.9
Special charge 33.9 9.1 --
Selling, general and
administrative expenses 20.3 20.8 22.4
Depreciation and amortization 7.2 7.9 6.3
-------------------------------------------
Operating income (loss) (33.9) (13.2) 0.4
Interest expense 3.4 3.1 2.4
Other (income) expense, net (0.2) (0.3) (0.1)
-------------------------------------------
Income (loss) before income
taxes and extraordinary item (37.2) (16.0) (1.9)
Income taxes (benefit) -- (2.5) (0.4)
-------------------------------------------
Income (loss) before
extraordinary item (37.2) (13.5) (1.5)
Extraordinary item, net -- -- --
-------------------------------------------
Net income (loss) (37.2)% (13.5)% (1.5)%
===========================================
EBITDA* (26.7)% (5.3)% 6.7%
</TABLE>
23
<PAGE> 24
<TABLE>
<S> <C> <C> <C>
EBITDA before restructuring
and special charge* 7.1% 3.8% 6.7%
Net cash provided by operating
activities** 0.8% 1.5% 6.4%
</TABLE>
* EBITDA represents earnings (losses) before interest, taxes,
depreciation, amortization, other (income) expense and extraordinary
item, but after restructuring and special charge. EBITDA before
restructuring and special charge represents earnings (losses) before
interest, taxes, depreciation, amortization, other (income) expense,
extraordinary item and restructuring and special charge. The Company
and laboratory industry analysts use EBITDA as a method of measuring
and comparing the financial performance of clinical laboratory
companies, many of which were formed by combining with and acquiring
other clinical laboratory companies, because it eliminates the effects
of goodwill amortization and acquisition expenses on net income.
EBITDA before restructuring and special charge is included in the
table to permit a year to year comparison of EBITDA data exclusive of
those charges not expected to be recurring. See Item 7 - "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Results of Operations-Income Taxes." Neither EBITDA nor
EBITDA before restructuring and special charge should be considered as
an alternative to net income as an indicator of the Company's
operating performance or to cash flows as a measure of the Company's
liquidity.
** Net cash provided by operating activities is determined in accordance
with generally accepted accounting principles and is included in the
Company's Consolidated Statements of Cash Flows. The amount for each
period is determined by adjusting net income for the period for
non-cash expense items, including restructuring and special charge,
depreciation and amortization, extraordinary item and deferred income
taxes, and for increases and decreases in asset and liability items
other than those relating to financing and investing activities.
NET REVENUE. The Company's net revenue is generated from managed care
programs with major employers, union and government benefit plans, and from
traditional laboratory fee-for-service business. In the Managed Care Programs,
for a fixed monthly payment, the Company is the designated provider of
substantially all non-hospital clinical laboratory testing which may be ordered
by a Covered Person's physician of choice and, in some cases, equipment and
appliances, and diagnostic imaging services. In the fee-for-service business,
the Company charges a fee based upon the type of test requested by the patient's
physician.
Total net revenue in 1996 was $57.6 million, a decrease of $9.2 million
from 1995. This decrease principally resulted from an $8.3 million decrease in
fee-for-service revenues, caused by a 13% decline in patient visits. Total net
revenue in 1997 was $55.6 million, a decrease of $2.0 million from 1996. An
increase of $1.3 million in managed care revenue in 1997 was more than offset by
a $3.2 million decrease in fee-for-service revenue in 1997.
24
<PAGE> 25
Managed care revenue totaled $18.4 million, $17.5 million, and $18.8
million for fiscal years 1995, 1996 and 1997, respectively. The decrease in
revenue for 1996 was primarily due to a program that expired during August 1996
and was renewed two months later at a reduced level, and to a lesser extent,
decreases in participation levels, fee reductions in a program and program
terminations. The $1.3 million increase in 1997 is primarily due to the
expansion of existing programs on a national basis and new product line
revenues. Managed Care Programs with United Auto Workers ("UAW")/Ford Motor
Company and UAW/Chrysler Corporation ("Chrysler") collectively accounted for
57.0%, 61.6% and 73.2% of managed care revenue for 1995, 1996 and 1997,
respectively. The increase in 1996 is principally due to the impact of a full
year of revenues from the UAW/Ford home medical services program implemented
June 1, 1995. The increase in 1997 was due to an expansion of programs
nationwide. As a percentage of total net revenue, managed care revenue has
increased from 27.6% in 1995 to 30.4% in 1996 to 33.7% in 1997, due primarily in
1996 to decreases in the Company's fee-for-service revenue, and in 1997 to
expansion of existing managed care programs on a national basis and, to a lesser
extent, the decrease in fee-for-service revenue.
Fee-for-service revenue was $40.0 million in 1996, a decrease of $8.3
million, or 17.2%, from 1995. The decrease was primarily the result of a 12.2%
decline in fee-for-service patient visits as compared to 1995. The decline in
fee-for-service patient visits was primarily due to the previously announced
shift of laboratory testing to exclusive service health maintenance
organizations, the reduction in testing facilities and lost accounts. Declines
in fee-for-service revenue per accession, principally due to changes in payor
and test mix, also contributed to the decline in fee-for-service revenue for
1996.
The Company's fee-for-service net revenue in 1997 was $36.9 million, a
decrease of $3.2 million or 7.8% from 1996. Fee-for-service revenue was down
primarily due to a 13% decline in patient visits. This decline in patient visits
is principally due to the impact on the Company of previously announced
reductions in unprofitable accounts, the industry wide reductions in patient
testing orders and attrition. The decline in fee-for-service revenue is due to
the patient visit volume decrease offset by increases in revenue per patient
visit resulting from changes in payor and test mixes and reduction of
unprofitable accounts.
LABORATORY EXPENSES. Laboratory expenses were $43.4 million in 1996, a
decrease of $3.9 million, or 8.2% from 1995. This decrease was primarily the
result of fewer patient visits and, to a lesser extent, the Company's
reengineering and cost reduction programs initiated during 1996. Laboratory
expenses were $40.3 million in 1997, a decrease of $3.1 million, or 7.1% from
1996. This decrease was primarily the result of fewer patient visits, which was
partially offset by the effect of higher claims associated with the managed
care revenue increase.
SPECIAL CHARGES. During 1996 the Company incurred $5.3 million in
special charges designed to reduce costs, improve operating efficiencies and
increase the overall profitability of the Company. The special charges include
$0.7 million in consolidation of locations, $1.4 million in employee related
expenses and $2.2 million in reengineering, consulting, legal and other
25
<PAGE> 26
expenses, as well as a $1.0 million write-off of certain tangible assets. The
Company began its reengineering process with a $2.4 million special charge in
the second quarter of 1996 and took an additional special charge in the fourth
quarter of 1996 by recording an additional $2.9 million special charge. At
December 31, 1997 a special charge was taken for $18.8 million which reflects
an impairment to goodwill charge of approximately $14 million, a $3.4 million
charge to complete the Company's re-engineering process initiatives that
commenced during 1996, including personnel and facility reductions, related
consulting, legal expenses and other charges relating to the Company's
re-engineering process, additional reserves, and the settlement of the
outstanding IRS tax assessment for $1.4 million, including interest and legal
costs, in connection with the MML acquisition. At December 31, 1997, a special
charge reserve of $1.5 million is included in other accrued liabilities. See
Item 8 - Note 2 to Notes to Consolidated Financial Statements, "Special
Charges". As a result of the goodwill reduction described above, the Company's
intangible assets total approximately $18.7 million at December 31, 1997. The
analysis of potential impairment is based on management's estimate of future
cash flows and management programs to enhance revenues and reduce costs
described under Item 1 - "Business - Business Strategy." No estimate can be
made of a range of amounts of loss that are reasonably possible should
management's plans not be successful.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $12.0 million in 1996, a decrease of $3.0 million,
or 20%, from 1995. The decrease was principally due to the reengineering and
cost reduction programs which were implemented in 1996. Selling, general and
administrative expenses were $11.3 million in 1997, a decrease of $0.7 million,
or 6%, from 1996. The decrease resulted primarily from the Company's
reengineering and cost reduction efforts and was partially offset by increased
sales and marketing expenditures. As a result of these factors, selling, general
and administrative expenses decreased as a percentage of net revenue from 22.4%
in 1995, to 20.8% in 1996, to 20.3% in 1997.
EBITDA. Earnings before interest, taxes, depreciation, amortization,
other (income) expense and extraordinary item ("EBITDA") was ($3.1 million) in
1996 compared to $4.5 million for 1995. Without the special charges, EBITDA
would have been $2.2 million, or 3.8% of net revenue, for 1996. The decrease in
1996 EBITDA is principally attributable to declines in revenues, which are only
partially offset by decreases in operating expenses. EBITDA for 1997 was ($14.9
million). Without the special charge, EBITDA would have been $4.0 million, or
7.1% of net revenue for 1997. The increase in 1997 EBITDA is principally due to
managed care revenue increases, reduction of costs from the reengineering
projects, reduction in unprofitable accounts and improvements in test and payor
mix.
DEPRECIATION AND AMORTIZATION. The increase in depreciation and
amortization expense in 1996 relates primarily to depreciation on property and
equipment additions. Amortization expense during 1997 was reduced by
approximately $0.6 million due to the write-off of covenants not to compete in
the fourth quarter of 1996. In 1997 the Company took a special charge which
included a $14 million goodwill write down which is expected to reduce
amortization expense in 1998 by approximately $0.7 million.
26
<PAGE> 27
INTEREST EXPENSE. Interest expenses were $1.6 million, $1.8 million,
and $1.9 million in 1995, 1996 and 1997, respectively. The increase in interest
expense in 1996 was principally due to the issuance of $12 million principal
amount of 8.25% Convertible Subordinated Debentures due 2006 (the "Debentures")
in February 1996, partially offset by reduced levels of bank debt during 1996.
The increase in 1997 reflects increased borrowings.
INCOME TAXES. The effective income tax rates were 22.0%, 15.9% and 0%
for 1995, 1996 and 1997, respectively. The effective tax rate is less than the
statutory rate in 1995 due to non-deductible goodwill amortization. The
effective tax rate is less than the statutory rate in 1996 because, under
applicable accounting rules, $2.1 million of tax benefits relating to the 1996
loss could not be recorded in 1996. These losses are treated as net operating
loss carry forwards for accounting purposes and may be used to offset future
profits of the Company. In 1996, the Company established a valuation allowance
against the net deferred tax assets which reduced deferred tax assets on the
Company's consolidated balance sheet to zero. The effective tax rate is 0% in
1997 because, under applicable accounting rules, $5.4 million of net tax
benefits relating to the 1997 loss could not be recorded in 1997. The 1997
losses are treated as net operating loss carryforwards for accounting
purposes and may be used to offset future profits of the Company. See Item 8 -
Note 10 to Notes to Consolidated Financial Statements, "Income Taxes and Loss
Carryforwards", for an explanation of the potential future tax benefit.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital ratio was 1.1 to 1 at December 31, 1996,
compared to .8 to 1 at December 31, 1997. In 1997 the decrease in working
capital is principally due to an increase in accounts payable and reduced
prepaid expenses and accrued claims. Included in cash and cash equivalents at
December 31, 1997 is $1.7 million in cash deposits of one of the Company's
wholly owned managed care subsidiaries, which is generally permitted to make
distributions to the Company only out of the subsidiary's earned surplus and to
the extent certain other regulatory requirements are satisfied.
Net cash flow from operating activities was $0.9 million and $0.5
million in 1996 and 1997, respectively. The reduction in net cash flow from
operating activities in 1997 was principally due to the $20.7 million net loss
for 1997 (including the $18.8 million special charge) and the increase in
accounts receivable, partially offset by increases in accounts payable and
accrued liabilities. The average number of days outstanding in accounts
receivable increased from 66 days at December 31, 1996 to 74 days at December
31, 1997. This increase is principally due to a delay in collection of Medicare
accounts receivable as a result of a new requirement for a separate
identification number for each pathologist performing anatomical pathology
testing, which numbers have been obtained, and unbilled tests due to missing
patient information caused principally by required medical necessity
documentation. The Company is continuing its efforts to reduce days
outstanding, principally by collecting its Medicare accounts receivable and by
working its aged and unbilled accounts receivable.
27
<PAGE> 28
The ratio of debt to capital increased from 43.4% at December 31, 1996
to 76.0% at December 31, 1997, primarily as a result of the 1997 net loss of
$20.7 million, which reduced equity accordingly.
As of December 31, 1997, the Company had a credit facility with a bank,
which included a revolving line of credit of $9.5 million, expiring on September
30, 1998, and a $3 million acquisition line and $2.5 million of letter of credit
facility expiring on September 30, 1998. All available borrowings under the
revolving line of credit were outstanding at December 31, 1997. The credit
facility requires the maintenance of certain financial ratios. The Company was
not in compliance with these ratios at the end of each quarter of 1997 and the
bank either waived compliance with such covenants or revised such covenants
following the end of each quarter. In February 1998, the Company and the bank
amended the credit facility to permit additional borrowing to fund an
approximately $1 million appeal bond in connection with a $500,000 judgment,
plus interest, in a suit pending against the Company. The judgment against the
Company also necessitated amendment of the financial covenants to remedy the
Company's non-compliance.
In March 1998, the Company and the bank further amended the credit
facility to provide for a $3 million term loan payable on July 15, 1998. The
financial ratios were also modified to cover the $18.8 million special charge
taken in the fourth quarter of 1997 and to reflect the addition of the $3
million term loan. The borrowing formula remains the same but the financial
ratios were amended as follows: current ratio of at least .65 to 1, consolidated
funded debt ratio of no more than 1.15 to 1, consolidated debt service coverage
ratio of at least .70 to 1 at December 31, 1997 through June 29, 1988 and .78 to
1 at June 30, 1998 and thereafter and the consolidated leverage ratio not
greater than 6 to 1 for December 31, 1997 through June 29, 1998 and 5.5 to 1 on
June 30, 1998 and thereafter. The amendment also provides that within 30 days
after the earlier of July 15, 1998 or the Company's receipt of the proceeds from
a sale of securities or assets in excess of $5 million, the financial covenants
will be revised to levels mutually agreeable to the Company and the bank. The
Company's $3 million discretionary acquisition line was canceled.
Pursuant to this amendment, all future line of credit borrowings are at
the discretion of the bank lender and are subject to a borrowing base formula
which is based upon accounts receivable, inventory and equipment balances.
Borrowings under the Company's credit facility are collateralized by
substantially all of the Company's assets, except for assets of the Company's
Managed Care subsidiaries.
Capital expenditures, including capital leases, were $3.3 million in
1995, $3.0 million in 1996, and $1.6 million in 1997, and consisted principally
of new laboratory and data processing equipment and also included leasehold
improvements. The Company expects to incur approximately $2.0 million of capital
expenditures during 1998.
The Company expects to fund its working capital needs, capital
expenditures required for the operation of its business and debt service
requirements from its operating cash flow, including
28
<PAGE> 29
cash flow from its subsidiary conducting managed care operations in Michigan,
capitalized leases, the sale of certain assets and/or the proceeds from
additional equity financings.
From time to time the Company's managed care subsidiaries may not be
able to make cash distributions to the Company at levels required to fully fund
the Company's operating cash flow needs without violating applicable regulatory
requirements. The Company's managed care subsidiary operating in the State of
Michigan (the "Michigan Managed Care Subsidiary") proposes to enter into an
agreement with the Michigan Insurance Bureau ("MIB") agreeing not to engage in
certain transactions which result in the transfer of cash to affiliates without
30 days prior notice to the MIB and provided that the MIB does not disapprove
such transactions within such 30 day period. As a result, future cash transfers
from the Michigan Managed Care Subsidiary to the Company are likely to be
limited to payments for services rendered and dividends payable from the
Michigan Managed Care Subsidiary's earned surplus, which is more limited than
cash transfers made in the past. Accordingly, the cash needs of the Company's
laboratory operations will have to be funded from their own operations and the
operation of the Company's unregulated managed care subsidiaries. As a result of
the Company's revenue enhancement initiatives and the reengineering and cost
reduction efforts implemented to date and in the future by the Company, the
Company believes its laboratory operations will generate increased levels of
operating cash flow. The Company expects its managed care subsidiaries,
including the Michigan Managed Care Subsidiary, to generate sufficient operating
cash to fund their current operations and planned expansion. The foregoing
statements may be "forward looking statements" within the meaning of the
Securities Exchange Act of 1934. The Company's ability to generate additional
operating cash flow involves a number of uncertainties. For example, the
Company's revenue enhancement initiatives may not be at the level required to
offset decreases in revenues, particularly if third party reimbursement levels
continue to decrease or the Company continues to experience declines in patient
visits or fee-for-service revenue per patient visit as described above under
"Results of Operations - Net Revenue". In addition, the Company's operating cash
flow could be negatively affected by a number of other factors, including the
impact of reengineering/cost reduction efforts on revenues, potential offsetting
increases in operating expenses, variations in cost savings from, and timing of,
the Company's reengineering/cost reduction efforts from those anticipated, the
impact on revenues and expenses of governmental and third-party payor
requirements and reimbursement levels, the impact on the Company of recent and
continuing changes in the health care industry, and the competitive nature of
the laboratory industry.
The Company is also considering the sale of certain assets and to
raise additional equity financing as a means of generating additional cash
to support the Company's operations and satisfy its debt service
requirements, in particular, payments due under the term loan due July
15, 1998. The foregoing statement may be a "forward looking statement" within
the meaning of the Securities Exchange Act of 1934. The Company's ability to
sell certain assets and to raise additional equity financing is subject to
a number of uncertainties, including the impact that reimbursement and
regulatory requirements associated with the health care industry will have on
the parties potentially interested in purchasing assets or stock of the Company
and the prices they may be willing to offer, the Company's current financial
position and recent operating results, the
29
<PAGE> 30
financial condition of other parties in the industry and the current economic
condition of the healthcare industry in
general.
In the event that the Company's laboratory operations and unregulated
managed care subsidiaries do not generate cash levels to the extent required to
fund their operations and the Company is unable to obtain additional financing
to meet its operating cash needs from possible asset sales or equity financings,
the Company will have to consider disposition of other assets or curtailment of
operations.
The Company recognizes revenue from its customers at the estimated net
realizable amount. Agreements with third-party payors, such as Medicare,
Medicaid, hospitals, HMOs, PPOs and nursing homes provide for payments at
amounts different from established rates. Accounts receivable are recorded net
of an allowance for contractual adjustments and doubtful amounts. See Item 8-
Note 3 to Notes to the Consolidated Financial Statements, "Net Laboratory
Service Revenue."
The Company has from time to time experienced audits, including reviews
of its billing practices, by its third-party payors. The Company has not yet
received final determination notices or decision letters relating to audits
conducted by one of its largest third-party payors. The ultimate effect, if any,
of these audits can not be determined at this time and no liability has been
accrued by the Company.
The Company had received a thirty-day demand letter from the IRS
proposing adjustments to the Company's federal income taxes for the years
1991-1994 totaling $3.3 million. The proposed adjustments principally relate to
the timing of certain bad debt deductions and claim expense accruals and the
deductibility of certain sign on bonus and non-compete payments made in
connection with the MML acquisition. The Company has filed a written
protest with the IRS appeals office regarding this matter. There can be no
assurance that the Company will resolve this dispute with the IRS in a manner
favorable to the Company. The failure to resolve the dispute with the IRS in a
manner favorable to the Company would result in a current period charge to
earnings and would have a material adverse effect on the business, financial
condition, including working capital, and results of operations of the Company.
While management believes its liability relating to these matters, if any, will
not be material to the Company, the ultimate effect, if any, cannot be
determined at this time. The foregoing statement may be a "forward looking
statement" within the meaning of the Securities Exchange Act of 1934. The
outcome of the disputes with the IRS involves a number of uncertainties,
including those inherent in interpreting and applying the Internal Revenue Code
and other federal income tax authority and precedent to actual transactions,
those relating to the valuation of various assets at the time of the acquisition
and those inherent in pursuing any legal action of the type instituted by the
Company. The Company has not accrued a liability relating to the deficiency
assessments or proposed tax adjustments.
YEAR 2000 COMPLIANCE. While the managed care computer system is year
2000 compliant, the laboratory computer system requires software modifications
to change all two-digit year references to four digits. Modifications will be
made by internal systems personnel and are
30
<PAGE> 31
expected to be completed by the end of 1999. The Company has not yet completed
a detailed analysis of the level of modifications required to bring its
laboratory computer system into year 2000 compliance or the related costs of
doing so. The Company does not believe that the cost of bringing its
laboratory system into year 2000 compliance will have a material adverse effect
on the Company's business, financial condition and results of operations. The
foregoing statements regarding the timing and cost of the Company's year 2000
compliance efforts are "forward looking statements" within the meaning of the
Securities Exchange Act of 1934.
The timing of and costs required to bring the Company's laboratory
system into year 2000 compliance are subject to a number of uncertainties,
including that the Company has not yet completed a detailed analysis of the
level of modifications required to bring the system into compliance or the
related costs of doing so. In addition, the Company's fee-for-service charges
are reimbursed by a number of third party payors, including Medicare and
Medicaid, typically through electronic submissions. In the event that the
computer systems used by any such payors do not become year 2000 compliant in a
timely fashion, the Company could experience delays in the receipt of
reimbursement, even if the Company's systems are compliant. Any such
reimbursement delays would have a material adverse effect on the Company's
business, financial condition and results of operations. The Company plans to
investigate the year 2000 compliance efforts of its principal third party
payors and, if necessary, develop a plan to reduce the impact on the Company of
any non-compliance by such third party payors.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income", and SFAS No. 131 "Disclosures about
Segments of an Enterprise and Related Information." These statements are
effective for financial periods beginning after December 15, 1997 and require
comparative information for earlier years to be restated. Management has not
determined the impact, if any, these statements may have on future financial
statement disclosures.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK.
Not applicable.
<PAGE> 32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
UNIVERSAL STANDARD HEALTHCARE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
================================================================================
REPORT OF INDEPENDENT ACCOUNTANTS
FINANCIAL STATEMENTS
Consolidated Balance Sheets at December 31, 1997 and 1996
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
All other schedules are omitted because they are not applicable or are not
required, or the information is included in the respective statements or notes
thereto.
32
<PAGE> 33
[BDO LETTERHEAD]
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Universal Standard Healthcare, Inc.
We have audited the accompanying consolidated balance sheets of Universal
Standard Healthcare, Inc. and its subsidiaries as of December 31, 1997 and 1996
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1997. We
have also audited the schedule listed in the accompanying index. These financial
statements and the schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
the schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the schedule are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
the schedule. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements and the schedule. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Universal Standard
Healthcare, Inc. and its subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997 in conformity with generally accepted
accounting principles.
Also, in our opinion, the schedule presents fairly, in all material respects,
the information set forth therein.
BDO SEIDMAN, LLP
Troy, Michigan
February 20, 1998, except for Note 7,
which is as of March 12, 1998
33
<PAGE> 34
UNIVERSAL STANDARD HEALTHCARE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
================================================================================
<TABLE>
<CAPTION>
December 31, 1997 1996
- - - - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,252 $ 2,227
Accounts receivable, net 8,488 7,296
Inventory 894 1,053
Prepaid expenses and other 526 1,762
- - - - -------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 11,160 12,338
PROPERTY AND EQUIPMENT, net 8,780 9,695
INTANGIBLE ASSETS, net 18,713 33,547
OTHER ASSETS 1,522 1,492
- - - - -------------------------------------------------------------------------------------------------------------------
$ 40,175 $ 57,072
===================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 1,039 $ 1,534
Accounts payable 6,360 4,348
Accrued claims 2,673 1,269
Accrued compensation and benefits 1,213 1,150
Other accrued liabilities 2,594 2,910
- - - - -------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 13,879 11,211
LONG-TERM DEBT, net of current portion 20,108 19,022
- - - - -------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 33,987 30,233
- - - - -------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock, no par; 20,000,000 shares authorized;
6,560,774 and 6,552,768 shares issued and out-
standing at December 31, 1997 and 1996, respectively 32,889 32,864
Deficit (26,701) (6,025)
- - - - -------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 6,188 26,839
- - - - -------------------------------------------------------------------------------------------------------------------
$ 40,175 $ 57,072
===================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
34
<PAGE> 35
UNIVERSAL STANDARD HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
================================================================================
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996 1995
- - - - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET LABORATORY SERVICE REVENUE
Fee-for-service $ 36,867 $ 40,042 $ 48,367
Managed care 18,764 17,522 18,406
- - - - -------------------------------------------------------------------------------------------------------------------
TOTAL NET REVENUE 55,631 57,564 66,773
- - - - -------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Laboratory and claims expense 40,338 43,401 47,331
Special charges 18,842 5,255 -
Selling, general and administrative 11,316 11,961 14,960
Depreciation and amortization 3,998 4,517 4,239
- - - - -------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 74,494 65,134 66,530
- - - - -------------------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) (18,863) (7,570) 243
OTHER INCOME (EXPENSE)
Interest expense (1,899) (1,790) (1,591)
Other income, net 86 142 90
- - - - -------------------------------------------------------------------------------------------------------------------
LOSS BEFORE INCOME TAX BENEFIT (20,676) (9,218) (1,258)
INCOME TAX BENEFIT - 1,467 277
- - - - -------------------------------------------------------------------------------------------------------------------
NET LOSS $ (20,676) $ (7,751) $ (981)
- - - - -------------------------------------------------------------------------------------------------------------------
LOSS PER SHARE (Basic and Diluted) $ (3.15) $ (1.20) $ (0.15)
- - - - -------------------------------------------------------------------------------------------------------------------
AVERAGE SHARES OUTSTANDING 6,557 6,462 6,392
===================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
35
<PAGE> 36
UNIVERSAL STANDARD HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
================================================================================
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996 1995
- - - - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCK, at beginning of year $ 32,864 $ 32,242 $ 31,464
Stock issued for employee stock purchase plan 25 225 -
Stock issued for conversion of debenture debt - 397 -
Stock issued in exchange for note payable - - 478
Stock issued for acquisition of customer list - - 300
- - - - -------------------------------------------------------------------------------------------------------------------
COMMON STOCK, at end of year $ 32,889 $ 32,864 $ 32,242
===================================================================================================================
RETAINED EARNINGS (DEFICIT), at beginning of year $ (6,025) $ 1,726 $ 2,707
Net loss for the year (20,676) (7,751) (981)
- - - - -------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS (DEFICIT), at end of year $ (26,701) $ (6,025) $ 1,726
===================================================================================================================
TOTAL STOCKHOLDERS' EQUITY $ 6,188 $ 26,839 $ 33,968
===================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
36
<PAGE> 37
UNIVERSAL STANDARD HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
================================================================================
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996 1995
- - - - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (20,676) $ (7,751) $ (981)
Adjustments to reconcile net loss to net cash
provided by operating activities
Special charge 13,801 4,151 -
Depreciation and amortization 3,998 4,517 4,239
Deferred income taxes - (1,122) 617
Other - 23 118
(Increase) decrease in
Accounts receivable, net (1,192) 4,129 2,001
Inventory 159 18 150
Prepaid expenses and other 1,236 448 (270)
Other assets (20) (15) 361
Increase (decrease) in
Accounts payable 2,012 (1,391) 104
Accrued liabilities 1,151 (1,595) (1,841)
Other liabilities - (534) (231)
- - - - -------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 469 878 4,267
- - - - -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (1,227) (1,596) (1,684)
Other-net (75) (8) (113)
- - - - -------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (1,302) (1,604) (1,797)
- - - - -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings from revolving line-of-credit 1,724 1,000 1,100
Payments on long-term debt (1,569) (10,204) (3,670)
Payment of financing costs (322) (1,034) (253)
Issuance of common stock for employee purchase plan 25 225 -
Proceeds from convertible debenture - 12,000 -
Other-net - (33) 62
- - - - -------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (142) 1,954 (2,761)
- - - - -------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (975) 1,228 (291)
CASH AND CASH EQUIVALENTS, beginning of year 2,227 999 1,290
- - - - -------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of year $ 1,252 $ 2,227 $ 999
===================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
37
<PAGE> 38
UNIVERSAL STANDARD HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
================================================================================
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996 1995
- - - - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest $ 1,806 $ 1,513 $ 1,472
Cash paid for income taxes - - -
===================================================================================================================
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Capital lease obligations $ 436 $ 1,345 $ 1,545
Conversion of debenture to common stock - 397 -
Conversion of note payable to common stock - - 478
Stock issued for acquisition of customer list - - 300
===================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
38
<PAGE> 39
UNIVERSAL STANDARD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Universal Standard Healthcare, Inc. (the "Company") provides clinical laboratory
testing services on a traditional fee-for-service basis and, through its
specialty managed care programs (the "Managed Care Programs"), offers clinical
laboratory testing services, home medical services and diagnostic imaging
services to employer, employer group, union and government-sponsored health care
benefit plans and other groups for a fixed payment per participating employee or
retiree ("capitated rate"). All home medical services and diagnostic imaging
services, and virtually all of the clinical laboratory services provided outside
of Michigan, are provided by the Company under arrangements through
subcontracting agreements with qualified providers.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany accounts and
transactions are eliminated.
REVENUE RECOGNITION
Revenue for fee-for-service laboratory testing services is recognized on the
accrual basis at the time test results are reported, which approximates when
services are provided. Revenue from Managed Care Programs, generated primarily
by laboratory programs, is recognized monthly when billed or when due under the
terms of the related contracts.
INVENTORY
Inventory, consisting of laboratory supplies, is stated at the lower of cost or
market, determined principally by the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Major improvements and replacements
are capitalized while ordinary maintenance and repairs are expensed. Upon
retirement or disposal, the asset's cost and related accumulated depreciation
are eliminated from the respective accounts and the resulting gain or loss is
included in the statement of operations.
39
<PAGE> 40
UNIVERSAL STANDARD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Property and equipment are depreciated over their estimated useful lives, using
the straight-line method. Estimated useful lives are as follows: furniture and
fixtures - 7 years; machinery and equipment - 5 - 7 years; transportation
equipment - 3 years; and computer equipment - 3 - 7 years.
Leasehold improvements are amortized over the shorter of the lease term or the
estimated useful life, using the straight-line method.
Depreciation expense was $2.6 million, $2.3 million and $2.2 million for the
years ended December 31, 1997, 1996 and 1995, respectively.
INTANGIBLE ASSETS
Intangible assets primarily consist of customer lists and goodwill. Customer
lists are amortized using the straight-line method over a period of 20 years.
Goodwill is amortized using the straight-line method principally over a period
of 40 years.
VALUATION OF LONG-LIVED ASSETS
Long-lived assets (such as intangibles and property and equipment) are evaluated
for impairment when events or changes in circumstances indicate that the
carrying amount of the assets may not be recoverable through the estimated
undiscounted future cash flows from the use of these assets. The factors
considered by management in performing this assessment include current operating
results, business prospects, market trends, competitive activities and other
economic factors. When any such impairment exists, the related assets are
written down to fair value.
During the fourth quarter of 1997, the Company determined that an adjustment to
intangible assets (primarily goodwill) in the amount of approximately $14
million was necessary in order to write down the carrying amounts of the
laboratory fee-for-service business to its estimated fair value.
40
<PAGE> 41
UNIVERSAL STANDARD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
INCOME TAXES
Income taxes are calculated using the liability method specified by Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes".
FAIR VALUE OF FINANCIAL INSTRUMENTS
Due to the short-term nature of the Company's financial instruments, other than
debt, fair values are not materially different from their carrying values. Based
on the borrowing rates currently available to the Company, the carrying value of
debt approximates fair value.
CASH FLOWS
For purposes of the consolidated statements of cash flows, the Company considers
all highly liquid investments purchased with a maturity of three months or less
to be cash equivalents.
LOSS PER SHARE
Loss per share has been computed by dividing net loss by the weighted average
number of shares of common stock outstanding. The per share amounts reflected in
the consolidated statements of operations are presented in accordance with
Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings per Share";
the amounts of the Company's "basic" and "diluted" earnings per share (as
defined in SFAS No. 128) are the same.
STOCK-BASED COMPENSATION
The Company uses the intrinsic value method to account for stock-based
compensation.
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 and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
41
<PAGE> 42
UNIVERSAL STANDARD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income", and SFAS No. 131 "Disclosures about Segments
of an Enterprise and Related Information." These statements are effective for
financial periods beginning after December 15, 1997 and require comparative
information for earlier years to be restated. Management has not determined the
impact, if any, these statements may have on future financial statement
disclosures.
RECLASSIFICATIONS
Certain reclassifications of 1996 information have been made to conform to the
1997 presentation.
2. SPECIAL CHARGES
During 1997, the Company recognized special charges of $18.8 million to reflect
(a) an impairment to intangible assets (primarily goodwill) of approximately $14
million, (b) a $3.4 million charge to complete the Company's re-engineering
process initiatives that commenced during 1996, including personnel and facility
reductions, related consulting and legal expenses and other charges related to
the Company's re- engineering process, and (c) a $1.4 million charge related to
indemnification made by the Company to shareholders of a company which was
previously acquired, that involved settlement of prior years' tax matters. At
December 31, 1997, a special charge reserve of approximately $1.5 million is
included with other accrued liabilities.
During 1996, the Company recognized special charges of $5.3 million to reflect
expenses incurred in connection with actions designed to reduce costs, improve
operating efficiencies and increase the overall profitability of the Company.
The special charge includes $0.7 million in consolidation of locations, $1.4
million in employee-related expenses and $2.2 million in re-engineering,
consulting, legal and other expenses, as well as a $1.0 million write-off of
certain intangible assets. The Company began its re-engineering process with a
$2.4 million special charge in the second quarter of 1996 and an additional
special charge in the fourth quarter of 1996 by recording an additional $2.9
million special charge. Approximately $0.3 million in consolidation of
locations, $0.5 million in employee-related expenses, $1.7 million in
re-engineering and other, and $1.0 million in intangible assets have been paid
or charged against the special charge reserve at December 31, 1996. At December
31, 1996 a special charge reserve of $1.8 million is included in other accrued
liabilities; this amount was paid during 1997.
42
<PAGE> 43
UNIVERSAL STANDARD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
3. NET LABORATORY SERVICE REVENUE
FEE-FOR-SERVICE
Fee-for-service revenue represents the estimated net realizable amounts from
patients, third-party payors and others for laboratory services rendered. The
Company has agreements with third-party payors, hospitals, health maintenance
organizations and preferred provider organizations that provide for payments to
the Company at amounts different from its established rates. Revenue is recorded
net of contractual adjustments. Three of the third party payors accounted for
approximately 31%, 32% and 35% of the Company's consolidated net revenues during
1997, 1996 and 1995, respectively. Accounts receivable are recorded net of an
allowance for contractual adjustments and other reserves of $12.0 million and
$8.2 million at December 31, 1997 and 1996, respectively. These allowances are
subject to management estimates and actual amounts could differ from these
estimates.
MANAGED CARE
The Company has entered into fixed monthly fee agreements with automotive
companies, union and government benefit plans, and other entities to provide
laboratory services and home medical services. Managed Care expenses are
recognized in the period in which the service is rendered. Ford Motor Company
and Chrysler Corporation accounted for 73%, 62% and 57% of Managed Care revenue
for 1997, 1996 and 1995, respectively. These two customers accounted for 14% and
10% of consolidated net revenues in 1997, respectively. Ford Motor Company
accounted for 12% of consolidated net revenues in 1996; neither of these two
customers individually contributed more than 10% of consolidated net revenue in
1995.
4. RESTRICTED CASH
The Company is required to maintain a $0.5 million cash balance in accordance
with state requirements for the managed care programs. The restricted cash is
included in cash equivalents on the accompanying balance sheets at December 31,
1997 and 1996.
43
<PAGE> 44
UNIVERSAL STANDARD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
5. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
Property and equipment is as follows (in thousands):
December 31, 1997 1996
- - - - --------------------------------------------------------------------------------
<S> <C> <C>
Computer equipment $ 7,791 $ 6,898
Machinery and equipment 6,774 6,388
Leasehold improvements 2,589 2,354
Furniture and fixtures 1,528 1,519
Transportation equipment 404 257
- - - - --------------------------------------------------------------------------------
19,086 17,416
Less accumulated depreciation and amortization 10,306 7,721
- - - - --------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, NET $ 8,780 $ 9,695
================================================================================
</TABLE>
6. INTANGIBLE ASSETS
Intangible assets consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, 1997 1996
- - - - --------------------------------------------------------------------------------
<S> <C> <C>
Customer lists $ 22,397 $ 22,605
Goodwill 3,011 16,120
Other 346 271
- - - - --------------------------------------------------------------------------------
25,754 38,996
Less accumulated amortization 7,041 5,449
- - - - --------------------------------------------------------------------------------
INTANGIBLE ASSETS, NET $ 18,713 $ 33,547
================================================================================
</TABLE>
The accumulated amortization balance at December 31, 1997 of $7,041 relates to
the following intangible assets: customer lists - $4,121; goodwill - $2,650; and
other - $270.
44
<PAGE> 45
UNIVERSAL STANDARD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
7. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31, 1997 1996
- - - - ---------------------------------------------------------------------------------
<S> <C> <C>
Convertible subordinated debentures 8.25%,
interest payable semi-annually $ 11,603 $ 11,603
Revolving line of credit 7,199 5,475
Obligations under capital leases (see Note 8) 2,300 3,074
Other 45 404
- - - - ---------------------------------------------------------------------------------
TOTAL 21,147 20,556
Less current portion 1,039 1,534
- - - - ---------------------------------------------------------------------------------
LONG-TERM DEBT $ 20,108 $ 19,022
=================================================================================
</TABLE>
On February 20, 1996, the Company completed an offering of $12,000,000 principal
amount of 8.25% Convertible Subordinated Debentures (the "Debentures") due
February 1, 2006. Interest is payable semi-annually on each February 1 and
August 1, commencing August 1, 1996. The Debentures are convertible, at any time
prior to maturity, unless previously redeemed or repurchased, into shares of
common stock of the Company at a conversion price of $4.375 per share, subject
to adjustment in certain events. The net proceeds received by the Company from
the sale of the debentures was approximately $11 million after deducting
offering fees and expenses. The Company used $2.5 million of the net proceeds to
repay a $2.5 million note payable to a wholly-owned subsidiary, pursuant to a
repayment plan with the State of Michigan Insurance Bureau. The Company used the
remainder of the net proceeds as follows: $2.0 million was used to reduce the
amount outstanding under the term loan, $0.5 million was used to repay the
amounts outstanding under the supplement line of credit and the remainder was
used to reduce the amount outstanding on the revolving line of credit and for
general working capital purposes. During 1996, $397,000 of debentures were
converted to common stock; no debentures were converted during 1997.
45
<PAGE> 46
UNIVERSAL STANDARD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
As amended on March 12, 1998, the Company has a credit facility with a bank
which includes a $9.5 million revolving line-of-credit, a $3 million term loan
and a $2.5 million letter of credit. Borrowing levels under the revolving
line-of-credit are based on accounts receivable, inventory and property and
equipment balances, and are subject to the bank's approval. Borrowings under the
Company's credit facility are collateralized by substantially all of the
Company's assets. The credit facility also requires the maintenance of certain
financial ratios. These ratios were reset by the bank as part of the March 12,
1998 loan agreement amendment; the Company was in compliance with these ratios
(after the amendment) at December 31, 1997.
At December 31, 1997, $7,198,944 was outstanding under the revolving
line-of-credit. Borrowings under the line-of-credit bear interest at a formula
based on prime and LIBOR rates (at December 31, 1997, the weighted average
interest rate on outstanding borrowings was approximately 9.7%) and are due
September 1999. No borrowings were outstanding under the $3 million term loan as
of December 31, 1997; borrowings under the term loan will be due on or before
July 15, 1998. At December 31, 1997, letters of credit totalling $2,378,000 were
outstanding.
Required annual principal payments of long-term debt at December 31, 1997 during
the next five years are as follows (in thousands): 1998 - $1,039; 1999 - $7,982;
2000 - $420; 2001 - $102; and 2002 - $1.
8. LEASES
The Company leases its main facility, other laboratory and warehouse facilities,
patient service center facilities and certain transportation and laboratory
equipment under operating lease agreements. The leases expire on various dates
through 2010. Rent expenses for operating leases were as follows (in thousands):
$1,437 for 1997, $1,856 for 1996, and $1,766 for 1995.
46
<PAGE> 47
UNIVERSAL STANDARD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
The Company also leases laboratory equipment under capital leases. Most of the
capital leases for the laboratory equipment contain one of the following
options: (a) the Company can, after the initial lease term, purchase the
equipment at amounts ranging from $1 to the then fair market value of the
property or (b) the Company can, at the end of the initial lease term, renew the
lease for a period ranging from one month to one year. Equipment held under
capital leases and included in machinery and equipment and computer equipment in
the balance sheet totaled approximately $3.0 million and $3.9 million at
December 31, 1997 and 1996, respectively, net of accumulated depreciation.
Following is a schedule of future minimum rental payments under capital leases
and noncancelable operating leases with initial or remaining lease terms in
excess of one year from December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
Capitalized Operating
Year Ending December 31, Leases Leases
- - - - -------------------------------------------------------------------------------------
<S> <C> <C>
1998 $ 1,119 $ 1,818
1999 856 1,343
2000 439 1,291
2001 107 1,256
2002 1 1,006
Thereafter - 5,647
- - - - -------------------------------------------------------------------------------------
TOTAL MINIMUM LEASE PAYMENTS 2,522 $ 12,361
========
Less amount representing interest 222
- - - - -------------------------------------------------------------------------------------
PRESENT VALUE OF NET MINIMUM LEASE PAYMENTS $ 2,300
=====================================================================================
</TABLE>
9. RENTAL INCOME
The Company has subleased certain space in its facilities. Minimum sublease
rental income scheduled to be received in future years is approximately $1.7
million.
47
<PAGE> 48
UNIVERSAL STANDARD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
10. INCOME TAXES AND LOSS CARRYFORWARDS
The income tax benefits consists of (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31, 1997 1996 1995
- - - - -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current $ - $ (345) $ (894)
Deferred - (1,122) 617
- - - - -------------------------------------------------------------------------------------
$ - $ (1,467) $ (277)
=====================================================================================
</TABLE>
Deferred income tax assets and liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
December 31, 1997 1996
- - - - -------------------------------------------------------------------------------------
<S> <C> <C>
DEFERRED TAX ASSETS
Net operating loss carryforward $ 8,564 $ 2,811
Special charge accrual 507 609
Accounts receivable allowance 254 826
Other, net 125 295
- - - - -------------------------------------------------------------------------------------
TOTAL DEFERRED TAX ASSETS 9,450 4,541
- - - - -------------------------------------------------------------------------------------
DEFERRED TAX LIABILITIES
Property and equipment 867 935
Intangible assets 746 1,114
Other, net 304 358
- - - - -------------------------------------------------------------------------------------
TOTAL DEFERRED TAX LIABILITIES 1,917 2,407
- - - - -------------------------------------------------------------------------------------
Net deferred taxes 7,533 2,134
Less valuation allowance (7,533) (2,134)
- - - - -------------------------------------------------------------------------------------
ADJUSTED DEFERRED TAXES $ - $ -
=====================================================================================
</TABLE>
The Company established a 100% valuation allowance against the net deferred tax
assets in 1997 and 1996, based on uncertainty surrounding the expected
realization of this asset.
48
<PAGE> 49
UNIVERSAL STANDARD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
A reconciliation of the statutory federal income tax rate to the effective rate
is as follows:
<TABLE>
<CAPTION>
Years Ended December 31, 1997 1996 1995
- - - - -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory rate (benefit) (34.0)% (34.0)% (34.0)%
Valuation allowance adjustment 26.1 23.2 -
Non-deductible intangibles 5.8 1.2 8.3
Other 2.1 (6.3) 3.7
- - - - -------------------------------------------------------------------------------------
EFFECTIVE RATE - (15.9)% (22.0)%
=====================================================================================
</TABLE>
The Company has a net operating loss carryforward of approximately $25 million
which expires in 2011 and 2012.
11. STOCK OPTIONS
A total of 2,100,000 shares of common stock are reserved for issuance under the
1992 Stock Option Plan and Directors Stock Option Plan (the "Plans"). The
exercise price of the options granted under the Plans must equal at least the
fair market value of the Company's common stock on the date of the grant. The
options granted under the Plans generally vest annually at 25% on each of the
first four anniversaries of the grant date, and expire ten years after the
grant date.
The Company has adopted the disclosure-only provisions of SFAS No. 123
"Accounting for Stock-Based Compensation". Accordingly, no compensation cost
has been recognized for the Plans. If the Company had elected to recognize
compensation cost based on the fair value of the options granted at grant date
as prescribed by SFAS No. 123, net loss and loss per share amounts would have
been the pro forma amounts indicated below in thousands (except per share
amounts):
<TABLE>
<CAPTION>
1997 1996 1995
- - - - -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net loss - as reported $ (20,676) $ (7,751) $ (981)
Net loss - pro forma (21,140) (8,251) (1,116)
Net loss per share - as reported (3.15) (1.20) (0.15)
Net loss per share - pro forma (3.22) (1.28) (0.17)
=====================================================================================
</TABLE>
49
<PAGE> 50
UNIVERSAL STANDARD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for 1997, 1996 and 1995, respectively: dividend yield of 0% for
all years; expected volatility of 65%, 60% and 54%; risk-free interest rate of
6.0%, 5.6% and 5.4% and expected lives of 4.0 years, 2.5 years and 2.5 years.
The effects of applying SFAS No. 123 in the above pro forma disclosure are not
necessarily indicative of future amounts. SFAS No. 123 does not apply to options
granted prior to 1995, and the Company anticipates that options will be granted
in future years.
A summary of the status of the Company's stock options is as follows:
<TABLE>
<CAPTION>
Weighted-Average
Shares Exercise Price
- - - - -------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at January 1, 1995 689,449 $ 6.94
Granted 200,000 5.20
Expired (30,500) (7.05)
Exercised (30,426) (3.62)
- - - - -------------------------------------------------------------------------------------
Outstanding at December 31, 1995 828,523 6.64
Granted 735,200 3.77
Expired (128,000) (11.93)
- - - - -------------------------------------------------------------------------------------
Outstanding at December 31, 1996 1,435,723 4.70
Granted 283,600 3.47
Expired (411,000) 3.87
- - - - -------------------------------------------------------------------------------------
OUTSTANDING AT DECEMBER 31, 1997 1,308,323 3.99
=====================================================================================
</TABLE>
The weighted-average grant date fair value of options during 1997, 1996 and 1995
was approximately $1.88, $1.24 and $1.43, respectively.
50
<PAGE> 51
UNIVERSAL STANDARD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Options exercisable at year-end, together with the weighted-average exercise
price, are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- - - - ------------------- --------------------- --------------------
Shares Price Shares Price Shares Price
- - - - ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
664,623 $ 5.07 456,523 $ 5.52 343,147 $ 5.12
============================================================================
</TABLE>
The following tables summarize information regarding stock options outstanding
and exercisable at December 31, 1997:
<TABLE>
Options Outstanding
------------------------------------
Range of Weighted Average Weighted Average
Exercise Prices Number Remaining Contractual Life Exercisable Price
- - - - -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 2.82 - 3.36 435,691 7 years $ 3.20
$ 3.61 - 4.95 592,632 8 years 3.96
$ 5.47 - 6.20 170,000 7 years 5.71
$10.00 - 12.28 110,000 6 years 10.95
- - - - -----------------------------------------------------------------------------------------
1,308,323 7 years $ 3.99
=========================================================================================
</TABLE>
<TABLE>
<CAPTION>
Options Exercisable
---------------------------------------
Range of Weighted Average
Exercise Prices Number Exercise Price
- - - - -------------------------------------------------------------------------------------
<S> <C> <C>
$ 2.82 - 3.36 236,065 $ 3.13
$ 3.61 - 4.95 234,308 4.29
$ 5.47 - 6.20 85,000 5.76
$10.00 - 12.28 109,250 10.88
- - - - -------------------------------------------------------------------------------------
664,623 $ 5.07
=====================================================================================
</TABLE>
In addition to the above, the Company has a warrant outstanding held by a
shareholder that entitles the holder to purchase 83,117 shares of common stock
at $3.19 per share. The warrant, which may be exercised at any time in whole or
in part, expires in the year 2002.
51
<PAGE> 52
UNIVERSAL STANDARD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
12. COMMITMENTS AND CONTINGENCIES
The Company has employment contracts with certain of its officers and
stockholders for remaining terms of up to three years providing for
compensation, excluding performance bonuses, aggregating $1.3 million at
December 31, 1997.
The Company has from time to time experienced compliance reviews, including
reviews of its billing practices, by its third-party payors. The Company has not
yet received final determination notices or decision letters relating to
compliance reviews conducted by one of its largest third-party payors. The
ultimate effect, if any, of these compliance reviews can not be determined at
this time and no liability has been accrued by the Company.
During 1996, the Company received notification from the Internal Revenue Service
(IRS) proposing adjustments to the Company's federal income taxes totalling
approximately $3.3 million for the years 1991 - 1994. The proposed adjustments
related to the timing of certain bad debt deductions, claim expense accruals and
the deductibility of certain "sign-on" bonuses and non-compete payments made in
connection with an acquisition. The Company has filed a written protest with the
IRS appeals office regarding this matter.
There can be no assurance that the Company will resolve this dispute with the
IRS in a manner favorable to the Company. The failure to resolve this dispute
with the IRS in a manner favorable to the Company would result in a current
period charge to earnings and would have a material adverse effect on the
business, financial condition, including working capital, and results of
operations of the Company. While management believes its liability relating to
these matters, if any, will not be material to the Company, the ultimate effect,
if any, cannot be determined at this time. The foregoing statement may be a
"forward looking statement" within the meaning of the Securities Exchange Act of
1934. The outcome of this dispute with the IRS involves a number of
uncertainties, including those inherent in interpreting and applying Internal
Revenue Code and other federal income tax authority and precedent to actual
transactions, those relating to the valuation of various assets at the time of
the acquisition and those inherent in pursuing any legal action of the type
instituted by the Company. The Company has not accrued a liability relating to
the deficiency assessments or proposed tax adjustments.
52
<PAGE> 53
UNIVERSAL STANDARD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
During 1997, a complaint was filed against a subsidiary of the Company
involving a dispute related to services provided under a Primary Provider
Agreement. The Company's subsidiary has filed a counterclaim asserting the
other entity breached the Primary Provider Agreement. Damages have yet to be
quantified by either party relating to this matter. The accompanying 1997
financial statements include a receivable of approximately $500,000 relating to
past services rendered by the Company's subsidiary for which they expect
payment from the other party. Management of the Company intends to vigorously
defend its position and believes the receivable recorded from the entity will
be paid.
During 1997, the Company had a civil judgment rendered against it in an amount
of approximately $500,000, plus interest. The litigation was based upon a
dispute relating to the calculation and payment of the purchase price for a 1992
acquisition by the Company of a laboratory. The Company has filed an appeal and
anticipates a favorable outcome; as a result, no liability has been accrued in
the accompanying financial statements.
The Company is also a defendant and plaintiff in various other lawsuits. While
it is not feasible to predict or determine the outcome of any of these cases, it
is the Company's opinion that the outcome of this litigation will have no
material adverse effect on the Company's financial position.
53
<PAGE> 54
UNIVERSAL STANDARD HEALTHCARE, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
================================================================================
<TABLE>
<CAPTION>
Column A Column B Column C - Additions Column D Column E
- - - - -------------------------------------------------------------------------------------------------------------------
Balance Charges to Charges to Additions Balance
at Beginning Costs and Other Accounts (Deductions) at End
Description of Period Expenses Describe Describe (A) of Period
- - - - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for contractual
adjustments and doubtful
accounts:
Year Ended December 31:
1997 $ 8,157 $ 4,183 $ - $ (366) $ 11,974
1996 9,239 4,141 - (5,223) 8,157
1995 9,517 4,489 - (4,767) 9,239
</TABLE>
- - - - -------------------------------------
(A) Write-offs charged to reserve
54
<PAGE> 55
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
On December 31, 1996, the Audit Committee of the Company's Board of Directors of
determined not to retain the firm of Coopers & Lybrand LLP to audit the
Company's financial statements for the year ended December 31, 1996. Coopers &
Lybrand LLP had been the Company's principal accountants for the purpose of
auditing its financial statements since the organization of the Company. On
December 31, 1996, the Company engaged the accounting firm of BDO Seidman, LLP
as its principal accountants to audit the Company's financial statements for the
fiscal year ending December 31, 1996. The information required by Item 304 of
Regulation S-K was previously reported in a Current Report on Form 8-K dated
January 4, 1997. There were no disagreements with the accountants reported in
such Form 8-K.
55
<PAGE> 56
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information is contained under the captions "Nominees For Election
As Directors" and "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Company's Proxy Statement in the Company's Proxy
Statement and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information is contained under the caption "Executive Compensation"
(excluding the Compensation Committee Report and the stock
performance graph) in the Company's Proxy Statement and is
incorporated herein by reference.
ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
Information is contained under the caption "Information on
Securities" and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information is contained under the caption "Committee Interlocks and
Certain Transactions" in the Company's Proxy Statement and is
incorporated herein by reference.
56
<PAGE> 57
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) A list of the financial statements required to be filed as
part of this Form 10-K is included under the heading "Item 8.
Financial Statements and Supplementary Data" in this Form 10-K
and incorporated herein by reference.
(2) The financial statement schedule required to be filed as part
of this Form 10-K is included under the heading "Item 8.
Financial Statements and Supplementary Data" in this Form 10-K
and incorporated herein by reference. Such schedule is filed
with this Form 10-K.
(3) A list of the exhibits required to be filed as part of this
Form 10-K is included under the heading "Exhibit Index" in
this Form 10-K and incorporated herein by reference. The list
identifies each management contract and compensatory plan or
arrangement required to be filed as an exhibit hereto.
(b) None.
(c) See "Exhibit Index" in this Form 10-K for a description of the
exhibits filed with this Form 10-K.
57
<PAGE> 58
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereto duly authorized.
UNIVERSAL STANDARD HEALTHCARE, INC.
By: /s/ Eugene E. Jennings
-------------------------------------
Eugene E. Jennings
President and Chief Executive Officer
Dated March 25, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated as of March 25, 1998.
/s/ Eugene E. Jennings President, Chief Executive Officer and
- - - - ----------------------------------- Director (principal executive officer)
Eugene E. Jennings
/s/ Alan S. Ker Vice President, Finance, Chief Financial
- - - - ----------------------------------- Officer and Treasurer (principal
Alan S. Ker financial and accounting officer)
/s/ Eduardo Bohorquez, Ph.D. Director
- - - - -----------------------------------
Eduardo Bohorquez, Ph.D.
/s/ Anthony A. Bonelli Director
- - - - -----------------------------------
Anthony A. Bonelli
Director
- - - - -----------------------------------
Robert P. DeCresce, M.D.
/s/ Thomas R. Donahue Director
- - - - -----------------------------------
Thomas R. Donahue
/s/ Thomas W. Gorman Director
- - - - -----------------------------------
Thomas W. Gorman
/s/ P. Thomas Hirsch Director
- - - - -----------------------------------
P. Thomas Hirsch
/s/ Joseph J. Vadapalas Director
- - - - -----------------------------------
Joseph J. Vadapalas
58
<PAGE> 59
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- - - - ----------- -----------
3.1(b) Certificate of Amendment to the Articles of Incorporation
of the Company effective August 25, 1997 and Restated
Articles of Incorporation of the Company. (19)
3.2(b) Bylaws of the Company, Amended and Restated August 25, 1997. (19)
4.6 Indenture, dated February 20, 1996, relating to 8.25%
Convertible Subordinated Debentures due February 1, 2006,
including form of Convertible Subordinated Debenture, table of
contents and cross reference sheet. (12)
4.7 Revolving Credit and Loan Agreement dated April 30, 1997 between
the Company and its subsidiaries and NBD Bank. (17)
4.7(a) Covenant Waiver Letter dated July 29, 1997 between NBD Bank and
the Company and its subsidiaries. (18)
4.7(b) Waiver of Loan Agreement Covenants between National Bank of
Detroit and the Company dated November 5, 1997. (19)
4.7(c) First Amendment to Revolving Credit and Loan Agreement between
the Company and its subsidiaries and NBD Bank, dated September
26, 1997. (19)
4.7(d) Second Amendment to Revolving Credit and Loan Agreement between
the Company and its subsidiaries and NBD Bank, dated November 30,
1997. (1)
4.7(e) Third Amendment to Revolving Credit and Loan Agreement between
the Company and its subsidiaries and NBD Bank, dated February 2,
1998. (1)
4.7(f) Fourth Amendment to Revolving Credit and Loan Agreement between
the Company and its subsidiaries and NBD Bank, dated March 12,
1998. (1)
Other instruments, notes or extracts from agreements
defining the rights of holders of long-term debt of the
Company or its subsidiaries have not been filed because (i)
in each case the total amount of long-term debt permitted
thereunder does not exceed 10% of the Company's consolidated
assets, and (ii) the Company hereby agrees that it will
furnish such instruments, notes and extracts to the
Securities and Exchange Commission upon its request.
10.1 Agreement and Plan of Merger and Recapitalization dated as of
August 31, 1992. (2)
59
<PAGE> 60
10.5(f)* Employment Agreement dated as of September 11, 1995 between
Lou Gorga and the Company. (10)
10.5(h)* Employment Agreement dated as of March 12, 1996 between
Eugene Jennings and the Company, with exhibits. (12)
10.6(a)(1)* 1992 Stock Option Plan (as amended and restated August 25, 1997).
(19)
10.6(b)* 1994 Performance Stock Option - Executive Officer. (7)
10.6(d)* Incentive Stock Option - Executive Officers, as amended. (12)
10.6(e)(1)* Incentive Stock Option Award Program. (14)
10.6(f)* Employee Stock Purchase Plan (as amended and restated
August 25, 1997). (19)
10.6(h)* First Amendment of 1994 Performance Stock Option - Executive
Officers Agreement by and between Perry C. McClung and the
Company. (13)
10.6(i)* Stock Option Agreements by and between Perry C. McClung and
the Company, dated November 5, 1992, August 2, 1993,
December 6, 1994 and December 5, 1995 and related amendments
thereto. (13)
10.6(j)* First Amendment to 1994 Performance Stock Option - Executive
Officers Agreement by and between Alan S. Ker and the Company.
(13)
10.6(k)* Stock Option Agreements by and between Alan S. Ker and the
Company, dated November 5, 1992, August 2, 1993, December 6,
1994 and December 5, 1995 and related amendments thereto.
(13)
10.6(l)* First Amendment to Incentive Stock Option - Executive Officers
Agreement, dated September 11, 1995, by and between Lou Gorga and
the Company. (13)
10.6(m)* Stock Option Agreement, dated December 5, 1995, by and between
Lou Gorga and the Company and related amendments thereto. (13)
10.7 Stockholders Agreement dated June 28, 1991, by and among
Elan Holdings Corp. and certain shareholders. (2)
10.8 Registration Rights Agreement among Elan Holdings Corp.
and certain shareholders. (2)
10.9 Stock Purchase Warrant dated June 18, 1992 granted to
WestSphere Funding, Ltd. (2)
60
<PAGE> 61
10.10* USML, Inc. Tax Deferred Savings Plan and Trust Agreement
of the Company. (2)
10.10(a)* Amendment No. 1 to the Equitable Life Assurance Society of the
United States Defined Contribution Plan and Trust Basic Plan
Document No. 03. (16)
10.10(b)* Second Amendment to the USML Tax Deferred Savings And Trust Plan.
(16)
10.10(c)* Third Amendment to the USML, Inc. Tax Deferred Savings Plan. (16)
10.10(d)* Fourth Amendment to the USML, Inc. Tax Deferred Savings Plan and
Trust Agreement. (16)
10.10(e)* Fifth Amendment to the USML, Inc. Tax Deferred Savings Plan and
Trust Agreement, effective August 4, 1997. (19)
10.11(b) Form of Lease Agreements by and between WRJ Company,
JWJ Company and the Company (formerly LCM/Universal
Standard, Inc.) (2)
10.11(d) Lease Agreement dated as of November 18, 1994 between
Jan-Jo Development Corporation and the Company. (7)
10.11(d)(1) First Amendment to Lease, dated as of April 3, 1995, between
Jan-Jo Development Corporation and the Company. (11)
10.11(d)(2) Second Amendment to Lease, dated October 19, 1995, between
Jan-Jo Development Corporation and the Company. (11)
10.11(d)(3) Third Amendment to Lease, dated November 14, 1995, between
Jan-Jo Development Corporation and the Company. (11)
10.11(d)(4) Acknowledgment Agreement to Lease, dated November 16,
1996, between Jan-Jo Development Corporation, the Company
and Wispark Corporation. (11)
10.11(d)(5) Fourth Amendment to Lease, dated December 15, 1995, between
Jan-Jo Development Corporation and the Company. (11)
10.14 Management Advisory and Consulting Services Agreement
dated as of June 28, 1991 between WestSphere Capital
Associates, L.P. and the Company. (2)
10.20* Non-Qualified Stock Option Agreement, dated May 31, 1992,
with Alan Ker. (3)
10.22* Non-Qualified Stock Option Agreement, dated February 13, 1992,
with Robert DeCresce. (3)
61
<PAGE> 62
10.23* Non-Qualified Stock Option Agreement, dated June 24, 1992,
with Anthony Bonelli. (3)
10.24* Non-Qualified Stock Option Agreement, dated April 13, 1993,
with Robert DeCresce, M.D. (5)
10.25* Non-Qualified Stock Option Agreement, dated April 13, 1993,
with Anthony Bonelli. (5)
10.26(b)* Directors Stock Option Plan (as amended and restated August 25,
1997). (19)
10.27* Executive and Key Manager Compensation Plan. (14)
10.28* Employment Agreement between Universal Standard Medical
Laboratories, Inc. and Alan S. Ker dated August 4, 1998. (19)
10.29* Employment Agreement between Universal Standard Medical
Laboratories, Inc. and Perry C. McClung dated June 28, 1997.
(19)**
10.30 Form of Executive Non-Competition and Restrictive Covenant
Agreement. (19)
10.31* Universal Standard Medical Laboratories, Inc. Agreement for
Incentive Stock Option Award Program Incentive Stock Option
Agreement for Alan Ker dated September 27, 1996. (19)
10.32* Executive Form of Universal Standard Medical Laboratories, Inc.
Agreement for Incentive Stock Option Award Program Incentive/
NonQualified Stock Option Agreement for Alan Ker dated September
27, 1996. (19)
10.33* Universal Standard Medical Laboratories, Inc. Agreement for
Incentive Stock Option Award Program Incentive Stock Option
Agreement for Perry McClung dated May 14, 1997. (19)
10.35* Employment Letter Agreement with Imtiaz Sattaur dated April 11,
1997. (1)
21.1 Subsidiaries of the Company. (1)
23.1 Consent of BDO Seidman, L.L.P. (1)
27 Financial Data Schedule (EDGAR version only) (1)
* Management contract or compensatory plan or arrangement.
**Portions of Attachment A to this Agreement were filed separately with the
Commission pursuant to Rule 24b2 of the Securities Exchange Act of 1934
governing requests for confidential treatment of information.
62
<PAGE> 1
EXHIBIT 4.7(d)
SECOND AMENDMENT TO REVOLVING CREDIT AND LOAN AGREEMENT
THIS SECOND AMENDMENT TO REVOLVING CREDIT AND LOAN AGREEMENT (this
"Second Amendment to Loan Agreement" or this "Second Amendment") is entered into
on November 30, 1997 between NBD Bank ("NBD" or "Bank"), as lender, with offices
at 611 Woodward Avenue, Detroit, Michigan 48226; Universal Standard Healthcare,
Inc., formerly known as Universal Standard Medical Laboratories, Inc., a
Michigan corporation ("USML"); Universal Standard Healthcare of Michigan, Inc.,
formerly known as Universal Standard Managed Care of Michigan, Inc., a Michigan
corporation ("Michigan Managed Care"); Universal Standard Healthcare of Ohio,
Inc., formerly known as Universal Standard Managed Care of Ohio, Inc., an Ohio
corporation ("Ohio Managed Care"); Universal Standard Healthcare of Delaware,
Inc., formerly known as Universal Standard Managed Care, Inc., a Delaware
corporation ("Delaware Managed Care"); T.P.A., Inc., a Michigan corporation
("Processing"); and A/R Credit, Inc., a Michigan corporation ("AR Credit"), all
of whose addresses are 26500 Northwestern Highway, Southfield, Michigan 48076.
RECITALS
This Second Amendment to Loan Agreement is based on the following recitals
("Recitals"), which are incorporated into and made a part of this Second
Amendment:
1. USML, Delaware Managed Care, Ohio Managed Care, Michigan
Managed Care, Processing, AR Credit (each, an "Obligor" and
collectively, the "Obligors"), and NBD are parties to a Revolving
Credit and Loan Agreement dated April 30, 1997, as amended by a First
Amendment to Revolving Credit and Loan Agreement dated September 26,
1997 (as amended, and as may be further amended or restated from time
to time, the "Loan Agreement"). In addition to the Loan Agreement, Bank
and Obligors are parties to various other loan and security documents
and guaranties more particularly described in or executed in connection
with the Loan Agreement (which are defined as the "Loan Documents" in
the Loan Agreement). Capitalized terms used but not defined in this
Second Amendment have the same meanings given to those terms in the
Loan Documents.
2. Obligors have requested that NBD enter into an approximate
$541,000 lease transaction with Delaware Managed Care and that NBD
purchase a lease contract entered into between USML and National
Computer Resources, Inc. ("National Computer") in the approximate
amount of $41,000 (collectively, the "Lease Transactions").
3. Obligors have requested and, subject to the terms hereof,
Bank has agreed to amend the Loan Agreement as set forth in this Second
Amendment.
<PAGE> 2
AGREEMENT
Based on the foregoing Recitals (which are incorporated herein as
representations, warranties, acknowledgments and agreements of the parties, as
the case may be) and for other good and valuable consideration, the receipt and
adequacy of which is mutually acknowledged by the parties hereto, Obligors and
Bank agree as follows:
A. To evidence the Lease Transactions, Delaware Managed Care
must execute and deliver to NBD the lease documents attached to this
Second Amendment as Exhibit A and such related agreements as NBD may
require and USML must execute and deliver to NBD the lease documents
attached to this Second Amendment as Exhibit B and such related
agreements as NBD may require (collectively, each, a "Lease Document"
and together, the "Lease Documents").
B. The last sentence of the definition of "Advance" in Section
1.1 of the Loan Agreement is amended to read as follows: "Loans and
advances made under Section 2.3 and the Lease Transactions are not
Advances."
C. The definition of "Loan Documents" in Section 1.1 of the
Loan Agreement is amended in its entirety to read as follows:
"Loan Documents" means this Agreement, the Notes, the Lease
Documents, the documents and agreements delivered to the Bank
in accordance with the Articles II and III of this Agreement,
and all other agreements and documents or instruments now or
hereafter executed by or on behalf of any one or more of the
Obligors and delivered to Bank."
D. The definition of "Obligations" in Section 1.1 of the Loan
Agreement is amended to provide that in addition to the obligations
described therein, the term "Obligations" also includes all present and
future obligations arising under or in connection with the Lease
Transactions and the Lease Documents.
E. Any Event of Default under the Loan Documents is also a
default under each of the Lease Documents.
F. Prior to or simultaneously with execution and delivery of
this Second Amendment, Obligors must cause to be executed and delivered
to Bank such financing statements, resolutions and other agreements
that Bank may require to effectuate the transactions contemplated by
this Second Amendment. Obligors must pay all costs and expenses
(including attorneys' fees) incurred by Bank in connection with this
Second Amendment.
-2-
<PAGE> 3
G. Obligors expressly acknowledge and agree that all
collateral security and security interests, liens, pledges, guaranties,
and mortgages heretofore or hereafter granted Bank including, without
limitation, such collateral, security interests, liens, pledges, and
mortgages granted under the Loan Documents, extend to and cover all of
each Obligor's Obligations to Bank, now existing or hereafter arising
including, without limitation, those arising in connection with this
Second Amendment (including the Lease Transactions and the Lease
Documents) and under all guaranty agreements now or in the future given
by one or more of the Obligors in Bank's favor, upon the terms set
forth in such agreements, all of which security interests, liens,
pledges, and mortgages are ratified, reaffirmed, confirmed and
approved.
H. From and after the date of this Second Amendment,
references in the Loan Documents to the Loan Agreement are to be
treated as referring to the Loan Agreement as amended by this Second
Amendment.
I. Obligors represent and warrant to the NBD that:
(1) (a) The execution, delivery and performance
of this Second Amendment by the Obligors and all agreements
and documents delivered by Obligors in connection with this
Second Amendment have been duly authorized by all necessary
corporate or other organizational action and does not and
will not require any consent or approval of its
stockholders or members, violate any provision of any law,
rule, regulation, order, writ, judgment, injunction, decree,
determination or award presently in effect having
applicability to it or of its articles of incorporation,
articles of organization, or bylaws, or result in a breach of
or constitute a default under any indenture or loan or credit
agreement or any other agreement, lease or instrument to
which any Obligor is a party or by which it or its properties
may be bound or affected.
(b) No authorization, consent, approval,
license, exemption of or filing a registration with any court
or governmental department, commission, board, bureau, agency
or instrumentality, domestic or foreign, is or will be
necessary to the valid execution, delivery or performance by
Obligors of this Second Amendment and all agreements and
documents delivered in connection with this Second Amendment.
(c) This Second Amendment and all agreements
and documents delivered by Obligors in connection with this
Second Amendment are the legal, valid and binding obligations
of Obligors enforceable against each of them in accordance
with the terms thereof.
(2) After giving effect to the amendments contained
in this Second Amendment, all of the representations and
warranties contained in the Loan
-3-
<PAGE> 4
Documents are true and correct on and as of the date hereof
with the same force and effect as if made on and as of the
date hereof.
(3) Obligors's financial statements furnished to the
NBD, fairly present Obligors's financial condition as at such
dates and the results of Obligors's operations for the periods
indicated, all in accordance with generally accepted
accounting principles applied on a consistent basis, and since
the date of the last such financial statement there has been
no material adverse change in such financial condition.
(4) No Default or Event of Default has occurred and
is continuing or will exist on the date of this Second
Amendment under the Loan Agreement or any of the other Loan
Documents.
J. The terms and provisions of this Second Amendment amend,
add to and constitute a part of the Loan Agreement. Except as expressly
modified and amended by the terms of this Second Amendment, all of the
other terms and conditions of the Loan Agreement and the other Loan
Documents (including all guaranties, which, without limitation, extend
to and cover the Obligations arising in connection with the Lease
Transactions and the Lease Documents) remain in full force and effect
and are hereby ratified, reaffirmed, confirmed, and approved.
K. If there is an express conflict between the terms of this
Second Amendment to Loan Agreement and the terms of the Loan Agreement
or the other Loan Documents, the terms of this Second Amendment govern
and control.
L. This Second Amendment may be executed in any number of
counterparts with the same effect as if all signatories had signed the
same document. All counterparts must be construed together to
constitute one instrument.
M. WAIVER OF JURY TRIAL AND ACKNOWLEDGMENT. THE PARTIES HERETO
ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY JURY IS A CONSTITUTIONAL RIGHT,
BUT THAT THIS RIGHT MAY BE WAIVED. NBD AND OBLIGORS EACH HEREBY
KNOWINGLY, VOLUNTARILY AND WITHOUT COERCION, WAIVE ALL RIGHTS TO A
TRIAL BY JURY OF ALL DISPUTES ARISING OUT OF OR IN RELATION TO THIS
AGREEMENT, THE LOAN DOCUMENTS OR ANY OTHER AGREEMENTS BETWEEN ANY OF
THE PARTIES. NO PARTY SHALL BE DEEMED TO HAVE RELINQUISHED THE BENEFIT
OF THIS WAIVER OF
-4-
<PAGE> 5
JURY TRIAL UNLESS SUCH RELINQUISHMENT IS IN A WRITTEN INSTRUMENT SIGNED
BY THE PARTY TO WHICH SUCH RELINQUISHMENT WILL BE CHARGED.
NBD BANK
By:/s/ Robert B. Green
-----------------------------
Robert B. Greene
First Vice President
UNIVERSAL STANDARD
HEALTHCARE, INC.
By: /s/ Alan S. Ker
-----------------------------
Alan S. Ker
Vice President Finance and Treasurer
UNIVERSAL STANDARD HEALTHCARE
OF MICHIGAN, INC.
By: /s/ Alan S. Ker
-----------------------------
Alan S. Ker, Treasurer
UNIVERSAL STANDARD HEALTHCARE
OF OHIO, INC.
By: /s/ Alan S. Ker
-----------------------------
Alan S. Ker, Treasurer
UNIVERSAL STANDARD HEALTHCARE
OF DELAWARE, INC.
By: /s/ Alan S. Ker
-----------------------------
Alan S. Ker, Treasurer
[Signatures continued on following page]
-5-
<PAGE> 6
[Signature continued from preceding page]
A/R CREDIT, INC.
By: /s/ Alan S. Ker
-----------------------------
Alan S. Ker, Treasurer
T.P.A., INC.
By: /s/ Alan S. Ker
-----------------------------
Alan S. Ker, Treasurer
Exhibit A - Lease Documents
B - National Computer Lease Documents
-6-
<PAGE> 1
EXHIBIT 4.7(e)
THIRD AMENDMENT TO REVOLVING CREDIT AND LOAN AGREEMENT
THIS THIRD AMENDMENT TO REVOLVING CREDIT AND LOAN AGREEMENT (this
"Third Amendment to Loan Agreement" or this "Third Amendment") is entered into
on February 2nd, 1998 between NBD Bank ("NBD" or "Bank"), as lender, with
offices at 611 Woodward Avenue, Detroit, Michigan 48226; Universal Standard
Healthcare, Inc., formerly known as Universal Standard Medical Laboratories,
Inc., a Michigan corporation ("USML"); Universal Standard Healthcare of
Michigan, Inc., formerly known as Universal Standard Managed Care of Michigan,
Inc., a Michigan corporation ("Michigan Managed Care"); Universal Standard
Healthcare of Ohio, Inc., formerly known as Universal Standard Managed Care of
Ohio, Inc., an Ohio corporation ("Ohio Managed Care"); Universal Standard
Healthcare of Delaware, Inc., formerly known as Universal Standard Managed Care,
Inc., a Delaware corporation ("Delaware Managed Care"); T.P.A., Inc., a Michigan
corporation ("Processing"); and A/R Credit, Inc., a Michigan corporation ("AR
Credit"), all of whose addresses are 26500 Northwestern Highway, Southfield,
Michigan 48076.
RECITALS
This Third Amendment to Loan Agreement is based on the following recitals
("Recitals"), which are incorporated into and made a part of this Third
Amendment:
1. USML, Delaware Managed Care, Ohio Managed Care, Michigan
Managed Care, Processing, AR Credit (each, an "Obligor" and
collectively, the "Obligors"), and NBD are parties to a Revolving
Credit and Loan Agreement dated April 30, 1997, as amended by a First
Amendment to Revolving Credit and Loan Agreement dated September 26,
1997, and by a Second Amendment to Revolving Credit and Loan Agreement
dated November 30, 1997 (as amended, and as may be further amended or
restated from time to time, the "Loan Agreement"). In addition to the
Loan Agreement, Bank and Obligors are parties to various other loan and
security documents and guaranties more particularly described in or
executed in connection with the Loan Agreement (which are defined as
the "Loan Documents" in the Loan Agreement). Capitalized terms used but
not defined in this Third Amendment have the same meanings given to
those terms in the Loan Documents.
2. Recently, a $813,074.66 judgment was entered against USML
in the so-called "Fawzi and Mary Shaya vs. Universal Standard Medical
Laboratories, Inc." litigation (the "Shaya Judgment"). The Obligors
have advised NBD that they believe that USML will prevail in an appeal
of the Shaya Judgment. In order to obtain a bond to appeal the Shaya
Judgment, the Obligors have requested that NBD issue a standby letter
credit.
3. Obligors have requested and, subject to the terms hereof,
Bank has agreed to amend the Loan Agreement as set forth in this Third
Amendment.
<PAGE> 2
AGREEMENT
Based on the foregoing Recitals (which are incorporated herein as
representations, warranties, acknowledgments and agreements of the parties, as
the case may be) and for other good and valuable consideration, the receipt and
adequacy of which is mutually acknowledged by the parties hereto, Obligors and
Bank agree as follows:
A. The definition of "Borrowing Base" in Section 1.1 of the
Loan Agreement is amended in its entirety to read as follows:
"Borrowing Base" means as of the date of determination, the
sum of (1) the following applicable percentage of Qualified
Accounts, multiplied by, a person's Qualified Accounts
reported in a Collateral Activity Report delivered in
accordance with Section 6.4(b), plus, (2) the following
applicable percentage of Qualified Inventory, multiplied by, a
person's Qualified Inventory reported on a Collateral Activity
Report delivered in accordance with Section 6.4(b), plus, (3)
the following applicable percentage of Qualified Equipment,
multiplied by, a person's Qualified Equipment reported in a
Collateral Activity Report delivered in accordance with
Section 6.4(b), plus, (4) the following applicable percentage
of Qualified Edit Accounts, multiplied by, a person's
Qualified Edit Accounts reported on a Collateral Activity
Report delivered in accordance with Section 6.4(b), plus, (5)
the Applicable Amount, minus, (6) 100% of the face amount of
the Litigation Letter of Credit and 100% of all unreimbursed
draws in connection with the Litigation Letter of Credit:
Qualified Accounts up to 80%
Qualified Inventory up to 50%
Qualified Equipment up to 80%
Qualified Edit Accounts up to 80%
Notwithstanding anything to the contrary contained in this Agreement
(a) Advances under the Line of Credit Loan against Qualified Inventory may not
exceed $500,000 at any time and (b) Advances under the Line of Credit Loan
against Qualified Edit Accounts may not exceed $1,000,000 at any time. All
Qualified Accounts and Qualified Edit Accounts reported in the Borrowing Base
must be net of reserves for contractual reimbursement levels and bad debt
expense, and these reserves must be satisfactory to NBD in its Reasonable Credit
Judgment. "Applicable Amount" means $0 unless the Litigation Letter of Credit
has been issued, in which case it means the amount determined from the following
table:
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<PAGE> 3
Applicable
Time Period Amount
----------- ------
Date on which Litigation Letter of Credit
is issued to April 29, 1998 $600,000
April 30, 1998 to May 30, 1998 $350,000
May 31, 1998 and thereafter $ -0-
B. The definition of "Loan Documents" in Section 1.1 of the
Loan Agreement is amended in its entirety to read as follows:
"Loan Documents" means this Agreement, the Notes, the Lease
Documents, the Litigation Letter of Credit Documents, the
documents and agreements delivered to the Bank in accordance
with the Articles II and III of this Agreement, and all other
agreements and documents or instruments now or hereafter
executed by or on behalf of any one or more of the Obligors
and delivered to Bank."
C. Section 2.1 of the Loan Agreement is amended to add the
following: "NBD, in its sole discretion, agrees to issue a standby
letter of credit for a Borrower's account subject to all of the terms
and conditions of this Agreement and on the following terms and
conditions:
(a) NBD agrees, in its sole discretion, to issue for USML's
account a standby letter of credit for the sole purpose of bonding the
Shaya Judgment in the face amount of $1,016,343.32 (together with all
replacements thereof and amendments thereto, the "Litigation Letter of
Credit").
(b) The Litigation Letter of Credit must have an expiry date
of not later than one year from the date of issuance, but may contain a
usual and customary provision providing for automatic one year
extensions unless NBD gives 60 days prior written notice that it will
not extend the expiry date.
(c) USML must execute NBD's standard documentation relating to
the issuance of standby letters of credit (for convenience, such
documentation, together with all other documentation related to the
Litigation Letters of Credit, as may be amended or restated from time
to time, is referred to collectively as the "Litigation Letter of
Credit Documents" and individually as a "Litigation Letter of Credit
Document").
-3-
<PAGE> 4
(d) USML must (i) pay to NBD on any date on which NBD pays a
draft presented under a Litigation Letter of Credit, a sum equal to the
amount so paid plus a disbursement fee of $200 plus any and all
expenses that NBD may pay or incur relative to the Litigation Letter of
Credit, and (ii) immediately pay to NBD any and all expenses incurred
by NBD in enforcing or protecting any rights under this Agreement or
any of the Litigation Letter of Credit Documents or the other Loan
Documents. If USML fails to make any payment due NBD under this
Agreement or the Litigation Letter of Credit Documents, NBD may charge
any Borrower's account for such amount.
(e) All of USML's present and future Obligations to NBD under
the Litigation Letter of Credit Documents are secured by all collateral
security (including the Collateral) heretofore, simultaneously
herewith, or hereafter granted to NBD by each Obligor or any other
party for the purpose of securing any of any Obligor's present or
future Obligations to NBD.
(f) The Litigation Letter of Credit will accrue a commission
at the per annum rate of 1.50 percent per annum of the face amount of
the Litigation Letter of Credit, payable annually and in advance at the
time of issuance or extension, in addition, USML must also pay all
other usual and customary fees charged by NBD in connection with
issuance of standby letters of credit.
(g) For purposes of calculating the Line Limit and Borrower
Base, the full face amount of the Litigation Letter of Credit is
treated as an outstanding principal advance under the Line of Credit."
D. Subsections 6.1A through D are amended in their
entirety to read as follows:
"A. Consolidated Current Ratio. Maintain at all times
a Consolidated Current Ratio of not less than (i) 1.20 to
1 from December 31, 1997 through June 29, 1998, and (ii)
1.25 to 1 on and after June 30, 1998.
B. Consolidated Funded Debt Ratio. Maintain at all times a
Consolidated Funded Debt Ratio of not greater than (i) .75 to
1 from December 31, 1997 through September 29, 1998, (ii) .70
to 1 for the period from September 30, 1998 through December
30, 1998, and (iii) .65 to 1 on and after December 31, 1998.
C. Consolidated Debt Service Coverage Ratio. Maintain a
Consolidated Debt Service Coverage Ratio of not less than (i)
1.10 to 1 for periods ending between December 31, 1997 and
June 29, 1998, and (ii) 1.25 to 1 for the period ended June
30, 1998 and periods thereafter. This financial covenant will
be measured as of
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<PAGE> 5
the last day of each fiscal quarter of the Obligors on a
trailing four quarter basis.
D. Consolidated Leverage Ratio. Maintain at all times a
Consolidated Leverage Ratio of not greater than (i) 6.75 to 1
for the period from December 31, 1997 through March 30, 1998;
(ii) 5.25 to 1 for the period from March 31, 1998 through June
29, 1998; (iii) 4 to 1 for the period from June 30, 1998
through December 30, 1998; and (iv) 3 to 1 on and after
December 31, 1998."
E. Simultaneously with the execution of this Third Amendment,
USML must pay NBD a $5,000 amendment fee, which is in addition to all
other fees and interest due NBD. This amendment fee is fully earned by
NBD upon execution of the Third Amendment.
F. The definition of "Obligations" in Section 1.1 of the Loan
Agreement is amended to provide that in addition to the obligations
described therein, the term "Obligations" also includes all present and
future obligations arising under or in connection with the Litigation
Letter of Credit Documents. References in the Loan Documents to the
"Lease Transactions" are to be treated as referring to an approximate
$705,000 series of lease transactions.
G. Any Event of Default under the Loan Documents is also a
default under each of the Litigation Letter of Credit Documents.
H. Prior to or simultaneously with execution and delivery of
this Third Amendment, Obligors must cause to be executed and delivered
to Bank such financing statements, resolutions and other agreements
that Bank may require to effectuate the transactions contemplated by
this Third Amendment. Obligors must pay all costs and expenses
(including attorneys' fees) incurred by Bank in connection with this
Third Amendment.
I. Obligors expressly acknowledge and agree that all
collateral security and security interests, liens, pledges, guaranties,
and mortgages heretofore or hereafter granted Bank including, without
limitation, such collateral, security interests, liens, pledges, and
mortgages granted under the Loan Documents, extend to and cover all of
each Obligor's Obligations to Bank, now existing or hereafter arising
including, without limitation, those arising in connection with this
Third Amendment (including the Lease Transactions and the Lease
Documents) and under all guaranty agreements now or in the future given
by one or more of the Obligors in Bank's favor, upon the terms set
forth in such agreements, all of which security interests, liens,
pledges, and mortgages are ratified, reaffirmed, confirmed and
approved.
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<PAGE> 6
J. From and after the date of this Third Amendment, references
in the Loan Documents to the Loan Agreement are to be treated as
referring to the Loan Agreement as amended by this Third Amendment.
K. Obligors represent and warrant to the NBD that:
(1) (a) The execution, delivery and performance of
this Third Amendment by the Obligors and all agreements and
documents delivered by Obligors in connection with this Third
Amendment have been duly authorized by all necessary corporate
or other organizational action and does not and will not
require any consent or approval of its stockholders or
members, violate any provision of any law, rule, regulation,
order, writ, judgment, injunction, decree, determination or
award presently in effect having applicability to it or of its
articles of incorporation, articles of organization, or
bylaws, or result in a breach of or constitute a default under
any indenture or loan or credit agreement or any other
agreement, lease or instrument to which any Obligor is a party
or by which it or its properties may be bound or affected.
(b) No authorization, consent, approval,
license, exemption of or filing a registration with any court
or governmental department, commission, board, bureau, agency
or instrumentality, domestic or foreign, is or will be
necessary to the valid execution, delivery or performance by
Obligors of this Third Amendment and all agreements and
documents delivered in connection with this Third Amendment.
(c) This Third Amendment and all agreements
and documents delivered by Obligors in connection with this
Third Amendment are the legal, valid and binding obligations
of Obligors enforceable against each of them in accordance
with the terms thereof.
(2) After giving effect to the amendments contained
in this Third Amendment, all of the representations and
warranties contained in the Loan Documents are true and
correct on and as of the date hereof with the same force and
effect as if made on and as of the date hereof.
(3) Obligors's financial statements furnished to the
NBD, fairly present Obligors's financial condition as at such
dates and the results of Obligors's operations for the periods
indicated, all in accordance with generally accepted
accounting principles applied on a consistent basis, and since
the date of the last such financial statement there has been
no material adverse change in such financial condition.
-6-
<PAGE> 7
(4) No Default or Event of Default has occurred and
is continuing or will exist on the date of this Third
Amendment under the Loan Agreement or any of the other Loan
Documents.
L. The terms and provisions of this Third Amendment amend, add
to and constitute a part of the Loan Agreement. Except as expressly
modified and amended by the terms of this Third Amendment, all of the
other terms and conditions of the Loan Agreement and the other Loan
Documents (including all guaranties, which, without limitation, extend
to and cover the Obligations arising in connection with the Lease
Transactions and the Lease Documents) remain in full force and effect
and are hereby ratified, reaffirmed, confirmed, and approved.
M. If there is an express conflict between the terms of this
Third Amendment to Loan Agreement and the terms of the Loan Agreement
or the other Loan Documents, the terms of this Third Amendment govern
and control.
N. This Third Amendment may be executed in any number of
counterparts with the same effect as if all signatories had signed the
same document. All counterparts must be construed together to
constitute one instrument.
O. WAIVER OF JURY TRIAL AND ACKNOWLEDGMENT. THE PARTIES HERETO
ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY JURY IS A CONSTITUTIONAL RIGHT,
BUT THAT THIS RIGHT MAY BE WAIVED. NBD AND OBLIGORS EACH HEREBY
KNOWINGLY, VOLUNTARILY AND WITHOUT COERCION, WAIVE ALL RIGHTS TO A
TRIAL BY JURY OF ALL DISPUTES ARISING OUT OF OR IN RELATION TO THIS
AGREEMENT, THE LOAN DOCUMENTS OR ANY OTHER AGREEMENTS BETWEEN ANY OF
THE PARTIES. NO PARTY SHALL BE DEEMED TO HAVE RELINQUISHED THE BENEFIT
OF THIS WAIVER OF JURY TRIAL UNLESS SUCH RELINQUISHMENT IS IN A WRITTEN
INSTRUMENT SIGNED BY THE PARTY TO WHICH SUCH RELINQUISHMENT WILL BE
CHARGED.
NBD BANK
By: /s/ Robert B. Greene
-------------------------------
Robert B. Greene
First Vice President
[Signatures continued on following page]
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<PAGE> 8
[Signature continued from preceding page]
UNIVERSAL STANDARD
HEALTHCARE, INC.
By: /s/ Alan S. Ker
---------------------------------
Alan S. Ker
Vice President Finance and Treasurer
UNIVERSAL STANDARD HEALTHCARE
OF MICHIGAN, INC.
By: /s/ Alan S. Ker
---------------------------------
Alan S. Ker, Treasurer
UNIVERSAL STANDARD HEALTHCARE
OF OHIO, INC.
By: /s/ Alan S. Ker
---------------------------------
Alan S. Ker, Treasurer
UNIVERSAL STANDARD HEALTHCARE
OF DELAWARE, INC.
By: /s/ Alan S. Ker
---------------------------------
Alan S. Ker, Treasurer
A/R CREDIT, INC.
By: /s/ Alan S. Ker
---------------------------------
Alan S. Ker, Treasurer
[Signatures continued on following page]
-8-
<PAGE> 9
[Signature continued from preceding page]
T.P.A., INC.
By: /s/ Alan S. Ker
---------------------------------
Alan S. Ker, Treasurer
-9-
<PAGE> 1
EXHIBIT 4.7(f)
FOURTH AMENDMENT TO REVOLVING CREDIT AND LOAN AGREEMENT
THIS FOURTH AMENDMENT TO REVOLVING CREDIT AND LOAN AGREEMENT (this
"Fourth Amendment to Loan Agreement" or this "Fourth Amendment") is entered into
on March 12, 1998 between NBD Bank ("NBD" or "Bank"), as lender, with offices at
611 Woodward Avenue, Detroit, Michigan 48226; Universal Standard Healthcare,
Inc., formerly known as Universal Standard Medical Laboratories, Inc., a
Michigan corporation ("USML"); Universal Standard Healthcare of Michigan, Inc.,
formerly known as Universal Standard Managed Care of Michigan, Inc., a Michigan
corporation ("Michigan Managed Care"); Universal Standard Healthcare of Ohio,
Inc., formerly known as Universal Standard Managed Care of Ohio, Inc., an Ohio
corporation ("Ohio Managed Care"); Universal Standard Healthcare of Delaware,
Inc., formerly known as Universal Standard Managed Care, Inc., a Delaware
corporation ("Delaware Managed Care"); T.P.A., Inc., a Michigan corporation
("Processing"); and A/R Credit, Inc., a Michigan corporation ("AR Credit"), all
of whose addresses are 26500 Northwestern Highway, Southfield, Michigan 48076.
RECITALS
This Fourth Amendment to Loan Agreement is based on the following recitals
("Recitals"), which are incorporated into and made a part of this Fourth
Amendment:
1. USML, Delaware Managed Care, Ohio Managed Care, Michigan
Managed Care, Processing, AR Credit (each, an "Obligor" and
collectively, the "Obligors"), and NBD are parties to a Revolving
Credit and Loan Agreement dated April 30, 1997, as amended by a First
Amendment to Revolving Credit and Loan Agreement dated September 26,
1997, by a Second Amendment to Revolving Credit and Loan Agreement
dated November 30, 1997, and by a Third Amendment to Revolving Credit
and Loan Agreement dated February 2, 1998 (as amended, and as may be
further amended or restated from time to time, the "Loan Agreement").
In addition to the Loan Agreement, Bank and Obligors are parties to
various other loan and security documents and guaranties more
particularly described in or executed in connection with the Loan
Agreement (which are defined as the "Loan Documents" in the Loan
Agreement). Capitalized terms used but not defined in this Fourth
Amendment have the same meanings given to those terms in the Loan
Documents.
2. Obligors have advised that they face an approximate
$3,000,000 cash flow shortfall. The Obligors' long term strategy to
alleviate their cash flow shortfall is to sell USML securities or
assets for net proceeds of at least $5,000,000 (the "Capital
Transaction"). In the short term, the Obligors have requested that NBD
make a $3,000,000 term loan to USML to be used to cure the
out-of-formula condition under the Line of Credit and pay down all
managed care claims to within 30 days of invoice date while USML uses
its best faith efforts to complete the Capital Transaction. In
addition, Obligors have again asked NBD to reset various financial
covenants due to yet further defaults under these covenants.
<PAGE> 2
3. Obligors have requested and, subject to the terms hereof,
Bank has agreed to amend the Loan Agreement as set forth in this Fourth
Amendment.
AGREEMENT
Based on the foregoing Recitals (which are incorporated herein as
representations, warranties, acknowledgments and agreements of the parties, as
the case may be) and for other good and valuable consideration, the receipt and
adequacy of which is mutually acknowledged by the parties hereto, Obligors and
Bank agree as follows:
A. The definition of "Borrowing Base" in Section 1.1 of the
Loan Agreement is amended in its entirety to read as follows:
"Borrowing Base" means as of the date of determination, the
sum of (1) the following applicable percentage of Qualified
Accounts, multiplied by, a person's Qualified Accounts
reported in a Collateral Activity Report delivered in
accordance with Section 6.4(b), plus, (2) the following
applicable percentage of Qualified Inventory, multiplied by, a
person's Qualified Inventory reported on a Collateral Activity
Report delivered in accordance with Section 6.4(b), plus, (3)
the following applicable percentage of Qualified Equipment,
multiplied by, a person's Qualified Equipment reported in a
Collateral Activity Report delivered in accordance with
Section 6.4(b), plus, (4) the following applicable percentage
of Qualified Edit Accounts, multiplied by, a person's
Qualified Edit Accounts reported on a Collateral Activity
Report delivered in accordance with Section 6.4(b), minus, (5)
100% of the face amount of the Litigation Letter of Credit and
100% of all unreimbursed draws in connection with the
Litigation Letter of Credit:
Qualified Accounts up to 80%
Qualified Inventory up to 50%
Qualified Equipment up to 80%
Qualified Edit Accounts up to 80%
Notwithstanding anything to the contrary contained in this Agreement
(a) Advances under the Line of Credit Loan against Qualified Inventory may not
exceed $500,000 at any time and (b) Advances under the Line of Credit Loan
against Qualified Edit Accounts may not exceed $1,000,000 at any time. All
Qualified Accounts and Qualified Edit Accounts reported in the
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<PAGE> 3
Borrowing Base must be net of reserves for contractual reimbursement levels and
bad debt expense, and these reserves must be satisfactory to NBD in its
Reasonable Credit Judgment."
B. The definition of "EBITDA" in Section 1.1 of the Loan
Agreement is amended in to provide that in addition to these special
charges set forth therein not counted in calculating EBITDA, the
$18,842,000 special charge taken by Obligors on December 31, 1997 is
also not taken into account in calculating EBITDA.
C. The definition of "Loan Documents" in Section 1.1 of the
Loan Agreement is amended in its entirety to read as follows:
"Loan Documents" means this Agreement, the Notes, the Lease
Documents, the Litigation Letter of Credit Documents, the Term
Note, the CLF Stock Pledge Agreement, the documents and
agreements delivered to the Bank in accordance with the
Articles II and III of this Agreement, and all other
agreements and documents or instruments now or hereafter
executed by or on behalf of any one or more of the Obligors
and delivered to Bank."
D. The Acquisition Facility is terminated and no further Loans
will be made under the Acquisition Facility.
E. Section 2.4 of the Loan Agreement is amended in its
entirety to read as follows:
"2.4 Term Loan. Simultaneously with the execution of the
Fourth Amendment, $____________ in principal outstanding under
the Line of Credit on the date of the Fourth Amendment
together with $___________ in new advances are made available
to USML (the "Term Loan"). The Term Loan is evidenced by the
Term Note dated on or about the same date as the Fourth
Amendment and attached to the Fourth Amendment as Exhibit A.
The Term Loan bears interest and is repayable as set forth in
the Term Note. The Term Loan must be prepaid from the first
dollars of any proceeds received from any Capital Transaction.
The fact that the Term Loan must be prepaid from the proceeds
of any Capital Transaction does not in any way waive or modify
any term or condition of the Loan Documents with respect to
Events of Default or consents that may be required by NBD with
respect any Capital Transaction."
F. In addition to the Defaults and Events of Default set forth
in the Loan Documents, it is an Event of Default under the Loan
Documents (for which there is no cure period) if on or before March 24,
1998, CLF L.P., a Cayman Islands limited partnership and CLF Limited, a
Cayman Islands corporation have not granted to NBD a
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<PAGE> 4
first-priority, properly perfected, lien and security interest in
219,175 shares of the common, publicly traded, voting, stock of USML
(collectively, the "CLF Pledged Shares") as additional collateral
security for the Obligations in accordance with the terms of a stock
pledge agreement satisfactory to NBD in its sole discretion (the "CLF
Stock Pledge Agreement"). Physical possession of the original share
certificates representing the CLF Pledged Shares, together with
appropriate Assignment Separate from Certificate executed in blank with
respect to the CLF Pledged Shares, must be delivered to NBD by no later
than March 24, 1998, or this will be an Event of Default under the Loan
Documents for which there is no cure period. If no Event of Default
occurs on or after the date of the Fourth Amendment, then NBD agrees
that the CLF Pledged Shares will be released when the Term Loan has
been repaid in full.
G. NBD's commitment to make Loans under the Line of Credit is
terminated. Any further loans made under the Line of Credit will be
made by NBD in NBD's sole and absolute discretion. Without limiting the
generality of the foregoing, the fact that NBD makes one or more
advances under the Line of Credit does not obligate NBD to make any
further advances under the Line of Credit.
H. The Commitment Fee is modified to provide that it is now an
unused line fee that is calculated in the same manner and payable in
the same manner as the Commitment Fee.
I. In addition to other reporting requirements contained in
the Loan Documents, within 7 days after March 31, 1998, and 7 days
after April 30, 1998, Obligors must provide to NBD a report, as of the
preceding month-end, satisfactory in form and substance to NBD showing,
with respect to all managed care contracts, on a contract by contract
basis, a listing of all premiums earned by Obligors but not yet paid to
Obligors and an aging of outstanding claims under the Managed Care
contracts not yet paid by Obligors (the "Managed Care Reports"). After
April 30, 1998, Obligors must provide the Managed Care Reports to NBD
on Tuesday of each week, as of Friday of the preceding week.
J. Effective as of December 31, 1997, subsections 6.1A
through D are amended in their entirety to read as follows:
"A. Consolidated Current Ratio. Maintain at all
times a Consolidated Current Ratio of not less than .65 to 1.
B. Consolidated Funded Debt Ratio. Maintain at all
times a Consolidate Funded Debt Ratio of not greater than
1.15 to 1.
C. Consolidated Debt Service Coverage Ratio. Maintain a
Consolidated Debt Service Coverage Ratio of not less
than (i) .70 to 1 for periods ending between December 31,
1997 and June 29,
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<PAGE> 5
1998 and (ii) .78 to 1 for the period ended June 30, 1998 and
periods thereafter. This financial covenant will be measured
as of the last day of each fiscal quarter of the Obligors on a
trailing four quarter basis.
D. Consolidated Leverage Ratio. Maintain at all times a
Consolidated Leverage Ratio of not greater than (i) 6 to 1 for
the period from December 31, 1997 through June 29, 1998 and
(ii) 5.50 to 1 on and after June 30, 1998."
K. Within 30 days after the earlier of (1) any Obligor's
receipt of any proceeds of any Capital Transaction or (2) July 15,
1998, NBD and the Obligors agree to meet to discuss and attempt to
agree on amending and resetting the financial covenants through the
latest maturity date of any of the Loans. If for any reason NBD and the
Obligors are unable to agree on the amended and reset financial
covenants within the 30 day period referred to in the immediately
preceding sentence, then such event constitutes an Event of Default
under all of the Loan Documents for which there is no cure period.
L. Simultaneously with the execution of this Fourth Amendment,
USML must pay NBD a $100,000 fee in exchange for NBD's agreement to
reset the financial covenants in Sections 6.1A-D of the Loan Agreement
(thereby waiving the existing defaults under these covenants) in the
manner and to the extent provided in this Fourth Amendment (the "Waiver
Fee"). The Waiver Fee is in addition to all other fees and interest due
NBD. The Waiver Fee is fully earned by NBD upon execution of the Fourth
Amendment. In addition to the Waiver Fee, USML must pay NBD a $25,000
facility fee (the "Additional Facility Fee") on July 15, 1998 if the
Term Loan is not paid in full on or before June 30, 1998 or if an Event
of Default occurs between the date of the Fourth Amendment and June 30,
1998. The Additional Facility Fee is in addition to all other fees and
interest due NBD. Payment of the Additional Facility Fee does not waive
any Event of Default or Default that may exist at any time. The fact
that NBD has waived certain financial covenant violations (or reset the
financial covenants) in this Fourth Amendment and in previous
agreements does not in any way create any obligation on NBD's part, or
right or expectation of any of the Obligors, that NBD will waive, amend
or modify any future covenants or covenant defaults.
M. Simultaneously with the execution of this Fourth Amendment,
all of each Obligor's payments due NBD must be paid in full. Each
Obligor must timely make all payments due NBD on and after the date of
the Fourth Amendment.
N. Prior to the date of the Fourth Amendment and while the
Obligors and NBD were discussing the Term Loan, NBD allowed the loans
under the Line of Credit to exceed the Borrowing Base and honored
certain overdrafts. On and after the date of the Fourth Amendment, no
further overdrafts or Loans in excess of the Borrowing Base will be
allowed.
-5-
<PAGE> 6
O. From and after the date of this Fourth Amendment,
references in the Loan Documents (i) to the "Loan Agreement" are to be
treated as referring to the Loan Agreement as amended by this Fourth
Amendment; (ii) to "obligations" and "Obligations" are to be treated as
referring to all indebtedness and obligations referred to in this
Fourth Amendment (including the obligations under the Term Loan and
Term Note); (iii) to "Loan" and "Loans" includes the Term Loan; (iv) to
"Note" or "Notes" includes the Term Note and any amendments or
restatements thereof; and (v) to "Collateral" includes all collateral
security granted to NBD in connection with this Fourth Amendment,
including the CLF Pledged Shares.
P. Prior to or simultaneously with execution and delivery of
this Fourth Amendment, Obligors must cause to be executed and delivered
to Bank such financing statements, resolutions and other agreements
that Bank may require to effectuate the transactions contemplated by
this Fourth Amendment. Obligors must pay all costs and expenses
(including attorneys' fees) incurred by Bank in connection with this
Fourth Amendment.
Q. Obligors expressly acknowledge and agree that all
collateral security and security interests, liens, pledges, guaranties,
and mortgages heretofore or hereafter granted Bank including, without
limitation, such collateral, security interests, liens, pledges, and
mortgages granted under the Loan Documents, extend to and cover all of
each Obligor's Obligations to Bank, now existing or hereafter arising
including, without limitation, those arising in connection with this
Fourth Amendment (including the Term Loan) and under all guaranty
agreements now or in the future given by one or more of the Obligors in
Bank's favor, upon the terms set forth in such agreements, all of which
security interests, liens, pledges, and mortgages are ratified,
reaffirmed, confirmed and approved.
R. Obligors represent and warrant to the NBD that:
(1) (a) The execution, delivery and performance of
this Fourth Amendment by the Obligors and all agreements and
documents delivered by Obligors in connection with this Fourth
Amendment have been duly authorized by all necessary corporate
or other organizational action and does not and will not
require any consent or approval of its stockholders or
members, violate any provision of any law, rule, regulation,
order, writ, judgment, injunction, decree, determination or
award presently in effect having applicability to it or of its
articles of incorporation, articles of organization, or
bylaws, or result in a breach of or constitute a default under
any indenture or loan or credit agreement or any other
agreement, lease or instrument to which any Obligor is a party
or by which it or its properties may be bound or affected.
(b) No authorization, consent, approval, license,
exemption of or filing a registration with any court or
governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, is or will be
-6-
<PAGE> 7
necessary to the valid execution, delivery or performance
by Obligors of this Fourth Amendment and all agreements
and documents delivered in connection with this Fourth
Amendment.
(c) This Fourth Amendment and all agreements
and documents delivered by Obligors in connection with this
Fourth Amendment are the legal, valid and binding obligations
of Obligors enforceable against each of them in accordance
with the terms thereof.
(2) After giving effect to the amendments contained
in this Fourth Amendment, all of the representations and
warranties contained in the Loan Documents are true and
correct on and as of the date hereof with the same force and
effect as if made on and as of the date hereof.
(3) Obligors's financial statements furnished to NBD,
fairly present Obligors's financial condition as at such dates
and the results of Obligors's operations for the periods
indicated, all in accordance with generally accepted
accounting principles applied on a consistent basis, and since
the date of the last such financial statement there has been
no material adverse change in such financial condition.
(4) After giving effect to this Fourth Amendment no
Default or Event of Default has occurred and is continuing or
will exist on the date of this Fourth Amendment under the Loan
Agreement or any of the other Loan Documents.
S. The terms and provisions of this Fourth Amendment amend,
add to and constitute a part of the Loan Agreement. Except as expressly
modified and amended by the terms of this Fourth Amendment, all of the
other terms and conditions of the Loan Agreement and the other Loan
Documents (including all guaranties, which, without limitation, extend
to and cover the Obligations arising in connection with the Lease
Transactions and the Lease Documents) remain in full force and effect
and are hereby ratified, reaffirmed, confirmed, and approved.
T. If there is an express conflict between the terms of this
Fourth Amendment to Loan Agreement and the terms of the Loan Agreement
or the other Loan Documents, the terms of this Fourth Amendment govern
and control.
U. This Fourth Amendment may be executed in any number of
counterparts with the same effect as if all signatories had signed the
same document. All counterparts must be construed together to
constitute one instrument.
V. If customers, buyers, investors, potential alternative
financing sources or other parties make inquiry of NBD as to the
current lending relationship among NBD and
-7-
<PAGE> 8
any one or more of the Obligors, the Obligors agree that NBD may refer
such inquiries to the Obligors.
W. THIS WRITTEN AGREEMENT REPRESENTS THE FINAL AGREEMENT
BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
X. There are no promises or inducements which have been made
to any signatory hereto to cause such signatory to enter into this
Fourth Amendment other than those which are set forth in this Fourth
Amendment.
Y. RELEASE. AS OF THE DATE HEREOF EACH OBLIGOR REPRESENTS AND
WARRANTS THAT IT IS UNAWARE OF, AND POSSESSES, NO CLAIMS OR CAUSES OF
ACTION AGAINST NBD. NOTWITHSTANDING THIS REPRESENTATION AND AS FURTHER
CONSIDERATION FOR THE AGREEMENTS AND UNDERSTANDINGS HEREIN, EACH
OBLIGOR INDIVIDUALLY, JOINTLY, SEVERALLY, AND JOINTLY AND SEVERALLY,
EACH OF THEIR EMPLOYEES, AGENTS, EXECUTORS (TO THE EXTENT PERMITTED BY
APPLICABLE LAW WITH RESPECT TO EMPLOYEES, AGENTS, AND EXECUTORS),
SUCCESSORS AND ASSIGNS HEREBY RELEASE NBD, ITS OFFICERS, DIRECTORS,
EMPLOYEES, AGENTS, ATTORNEYS, AFFILIATES, SUBSIDIARIES, SUCCESSORS AND
ASSIGNS FROM ANY LIABILITY, CLAIM, RIGHT OR CAUSE OF ACTION WHICH NOW
EXISTS, OR HEREAFTER ARISES, WHETHER KNOWN OR UNKNOWN, ARISING FROM OR
IN ANY WAY RELATED TO FACTS IN EXISTENCE AS OF THE DATE HEREOF. BY WAY
OF EXAMPLE AND NOT LIMITATION, THE FORGOING INCLUDES ANY CLAIMS IN ANY
WAY RELATED TO ACTIONS TAKEN OR OMITTED TO BE TAKEN BY NBD UNDER THE
LOAN DOCUMENTS, AND THE BUSINESS RELATIONSHIP WITH NBD.
Z. WAIVER OF JURY TRIAL AND ACKNOWLEDGMENT. THE PARTIES HERETO
ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY JURY IS A CONSTITUTIONAL RIGHT,
BUT THAT THIS RIGHT MAY BE WAIVED. NBD AND OBLIGORS EACH HEREBY
KNOWINGLY, VOLUNTARILY AND WITHOUT COERCION, WAIVE ALL RIGHTS TO A
TRIAL BY JURY OF ALL DISPUTES ARISING OUT OF OR IN RELATION TO THIS
AGREEMENT, THE LOAN DOCUMENTS OR ANY OTHER AGREEMENTS BETWEEN ANY OF
THE PARTIES. NO PARTY SHALL BE DEEMED TO HAVE RELINQUISHED THE BENEFIT
OF THIS WAIVER OF
-8-
<PAGE> 9
JURY TRIAL UNLESS SUCH RELINQUISHMENT IS IN A WRITTEN INSTRUMENT SIGNED
BY THE PARTY TO WHICH SUCH RELINQUISHMENT WILL BE CHARGED.
NBD BANK
By: /s/ Robert B. Greene
----------------------------------------
Robert B. Greene
First Vice President
UNIVERSAL STANDARD
HEALTHCARE, INC.
By: /s/ Alan S. Ker
----------------------------------------
Alan S. Ker
Vice President Finance and Treasurer
UNIVERSAL STANDARD HEALTHCARE
OF MICHIGAN, INC.
By: /s/ Alan S. Ker
----------------------------------------
Alan S. Ker, Treasurer
UNIVERSAL STANDARD HEALTHCARE
OF OHIO, INC.
By: /s/ Alan S. Ker
----------------------------------------
Alan S. Ker, Treasurer
[Signatures continued on following page]
-9-
<PAGE> 10
[Signature continued from preceding page]
UNIVERSAL STANDARD HEALTHCARE
OF DELAWARE, INC.
By: /s/ Alan S. Ker
----------------------------------------
Alan S. Ker, Treasurer
A/R CREDIT, INC.
By: /s/ Alan S. Ker
----------------------------------------
Alan S. Ker, Treasurer
T.P.A., INC.
By: /s/ Alan S. Ker
----------------------------------------
Alan S. Ker, Treasurer
Exhibit A - Term Note
-10-
<PAGE> 1
EXHIBIT 10.35
April 11, 1997
Imtiaz Sattaur
Dear Imtiaz:
We are pleased to offer you employment with Universal Standard Medical
Laboratories, Inc. (USML) in the position of Vice President, Chief Information
Officer. Following are additional terms of this offer:
Base Salary $120,000 per annum paid bi-weekly at the rate of
$4,615.38 per pay period.
Performance Bonus You will be eligible to earn up to an
additional 52.5% of your base salary in annual bonus
upon the achievement of goals set forth in the Board
approved Management Bonus Plan.
Medical Benefits The company will make available to you its
standard medical benefits program. Coverage will be
effective on your date of employment.
401(k) Plan You will be eligible to participate in the company's
401(k) plan subject to established terms and waiting
periods.
Vacation You will be eligible for 2 weeks of vacation per
calendar year. Your vacation will be granted in
accordance with our standard vacation policy.
Stock Options You will be granted an option to purchase 20,000 shares of
USML common stock pursuant to the terms and conditions of
the USML 1992 Stock Option Plan (subject to Board approval).
The option price will be set at the average closing price
for the date of issuance combined with the preceding 20
days. You will also be eligible to earn an additional 10,000
options in 1997 as a participant in the Incentive Stock
Option Award Program.
Business Expenses The Company will reimburse you for any reasonable expenses
incurred while conducting business on our behalf.
Life Insurance The Company will provide term life insurance in the face
value of $500,000 effective 90 days from your date of hire,
assuming your medical insurability.
<PAGE> 2
Severance If you are terminated by USML without Cause you shall
be paid your Base Salary for a period of six (6)
months following the date of termination.
Relocation The Company will provide a relocation package. The
terms of this package will be determined based upon
your specific needs and concerns but will include, at
a minimum, the following:
- Closing costs for the sale of the house in Florida.
- Purchase cost for the house in Michigan.
- Moving costs for household goods, vehicle and family from
Florida to Michigan.
- Reasonable allocation for temporary living
expenses in Michigan.
- Reasonable commute expenses between Florida and Michigan.
Other Benefits You will also be eligible to participate in our standard
benefit package under the normal terms and conditions as set
forth in our employee handbook and appropriate Summary Plan
Descriptions.
USML is an at-will employer meaning that either you or USML can terminate the
employment relationship at any time, with or without notice and/or with or
without cause.
If you agree to the terms of this letter, please sign and date one copy of this
letter and return it to USML.
Sincerely,
/s/ Eugene Jennings
Eugene (Chip) Jennings
CEO
I agree to the terms in this letter and accept your employment offer and will
commence employment with USML on May 5, 1997.
/s/ Imtiaz Sattaur April 14, 1997
- - - - ---------------------------------- ---------------------
Imtiaz Sattaur Date
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
The following is a list of direct or indirect wholly owned subsidiaries as of
the date of this filing of Universal Standard Healthcare, Inc., other than
subsidiaries which, considered in the aggregate as a single subsidiary, would
not constitute a significant subsidiary as defined by Securities and Exchange
Commission Regulation S-X.
<TABLE>
<CAPTION>
Name of Subsidiary State of Incorporation
- - - - -------------------------------------------------------------------------------
<S> <C>
A/R Credit, Inc. Michigan
Universal Standard Healthcare of Ohio, Inc. Ohio
Universal Standard Healthcare of Michigan, Inc. Michigan
dba Universal Standard Managed Care of
Michigan, Inc.
Universal Standard Healthcare of Delaware, Inc. Delaware
T.P.A., Inc. Michigan
</TABLE>
1
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Universal Standard Healthcare, Inc.
26500 Northwestern Highway, Suite 400
Southfield, Michigan 48076
We hereby consent to the incorporation by reference in Universal Standard
Healthcare Inc.'s Registration Statements on Form S-8 and on Form S-3 of our
report dated February 20, 1998, except for Note 7 which is as of March 12,
1998, relating to the consolidated financial statements and schedule of
Universal Standard Healthcare, Inc. appearing in the Company's Annual Report on
Form 10-K for the year ended December 31, 1997.
BDO SEIDMAN, LLP
Troy, Michigan
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,252
<SECURITIES> 0
<RECEIVABLES> 20,462
<ALLOWANCES> 11,974
<INVENTORY> 894
<CURRENT-ASSETS> 11,160
<PP&E> 19,086
<DEPRECIATION> 10,306
<TOTAL-ASSETS> 40,175
<CURRENT-LIABILITIES> 13,879
<BONDS> 20,108
0
0
<COMMON> 32,889
<OTHER-SE> (26,701)
<TOTAL-LIABILITY-AND-EQUITY> 40,175
<SALES> 0
<TOTAL-REVENUES> 55,631
<CGS> 0
<TOTAL-COSTS> 40,338
<OTHER-EXPENSES> 34,156
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,899
<INCOME-PRETAX> (20,676)
<INCOME-TAX> 0
<INCOME-CONTINUING> (20,676)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (20,676)
<EPS-PRIMARY> (3.15)
<EPS-DILUTED> (3.15)
</TABLE>
