<PAGE> 1
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, 1998
Commission File Number: 34-0-20400
---------------------
UNIVERSAL STANDARD HEALTHCARE, INC.
(Exact name of Registrant as specified in its charter)
MICHIGAN 38-2986640
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
29200 NORTHWESTERN HIGHWAY, SUITE 300
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 SUBOR-
DINATED DEBENTURES DUE 2006
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
----- -----
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
<PAGE> 2
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 (2,670,805 shares on March 26, 1999) was $1,169,812. 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.
Indicate the number of shares outstanding of each of the Registrant's classes of
Common Stock as of the latest practicable date: 9,164,842 shares of Common Stock
outstanding as of March 26, 1999.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's definitive
Proxy Statement pertaining to the 1999 Annual Meeting of Shareholders (the
"Proxy Statement") filed pursuant to Regulation 14A are incorporated herein by
reference into Part III.
<PAGE> 3
PART I
ITEM 1. BUSINESS
GENERAL
Universal Standard Healthcare, Inc. (the "Company"), through specialty
managed care programs (the "Managed Care Programs") offered by its subsidiaries,
provides 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 services
are provided by the Company under arrangements through contracting 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. The Company
changed its name from Universal Standard Medical Laboratories, Inc. to Universal
Standard Healthcare, Inc. in August 1997.
On August 4, 1998, the Company sold its clinical laboratory customer
list and certain tangible assets relating to its clinical laboratory business to
Laboratory Corporation of America Holdings ("LabCorp") as part of its
divestiture of its clinical laboratory operations (the "Asset Sale"). The
Company has ceased all clinical laboratory operations. Accordingly, its clinical
laboratory business, previously conducted under the name Universal Diagnostics,
is being reported as a discontinued operation.
In March 1999, the Company presented an out of court restructuring plan
to the creditors of Universal Diagnostics, the holders of its 8.25% Convertible
Subordinated Debentures, due February 1, 2006 (the "Debentures") and its
principal bank lender. The Company believes that completion of an out of court
restructuring will result in a greater benefit to the creditors of its former
clinical laboratory business and holders of the Debentures. See "Item 1.
Business-Work Out Strategy" and "Business - Risk Factors".
References herein to the Company mean the Company, the Predecessor and
their respective consolidated subsidiaries.
BUSINESS STRATEGY
The Company's business strategy is to become a national leader in the
development and delivery of innovative health care management programs. The
Company has implemented a business strategy designed to leverage its expertise
in the managed care area to expand its business
2
<PAGE> 4
and become a national competitor in the managed care industry. This strategy
includes the development of new managed care products, such as the home medical
services program and the imaging services program introduced in 1997. New
programs will be offered to existing customers, as well as a means of attracting
new customers. In addition, the Company has expanded its business geographically
through the establishment of managed care sales offices in Ohio, Delaware and
Florida and intends to establish additional offices or affiliates in 1999.
The foregoing statements regarding the Company's business strategy and
programs implemented in connection with such business strategy may be "forward
looking statements" 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
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, the competitive nature of the laboratory and
managed care industries, and other factors listed under "Item 1. Business-Risk
Factors".
WORK OUT STRATEGY
On March 19, 1999, the Company proposed an out-of-court restructuring
plan (the "Work Out Strategy") at a meeting (the "Creditors' Meeting") of the
creditors of its former laboratory operation and the holders of its outstanding
8.25% Convertible Subordinated Debentures (collectively, the "Unsecured
Creditors"). The proposed Work Out Strategy contemplates that the Unsecured
Creditors will be paid a percentage of the debts owed to them over the next few
years. Under the Work Out Strategy, the holders of the Debentures will maintain
their existing right under the terms of the Debentures to convert the Debentures
and accrued interest thereon into Common Stock at a conversion price of $4.375
per share.
At the Creditors' Meeting, the Unsecured Creditors elected a committee
of seven creditors (the "Creditors' Committee") to represent the interests of
the Unsecured Creditors. The Creditors' Committee has retained counsel to assist
it in its negotiations with the Company. While many of the Unsecured Creditors
have been cooperative with the Company to date, there can be no assurance that
the Company will be able to negotiate an acceptable Work Out Strategy with the
Creditors' Committee or that a sufficient number of such Unsecured Creditors
will accept the Work Out Strategy so that it can be successfully implemented by
the Company. A number of Unsecured Creditors have initiated legal action (or
have threatened to do so) if the amounts due to them are not paid in full.
The Company is also negotiating with its principal bank lender to
restructure its existing obligations to the bank, which includes outstanding
indebtedness of $583,000 at March 25, 1999, letters of credit totaling $3.5
million and an equipment lease in the amount of $700,000. The proposed
restructuring contemplates the repayment of the outstanding indebtedness and
cash
3
<PAGE> 5
collateralization of the other bank obligations over time through the sale of
laboratory assets, collection of accounts receivable and from operating cash
flow.
If an acceptable Work Out Strategy is not accepted by a sufficient
number of Unsecured Creditors and the Company's principal bank lender, the
Company may be compelled to seek protection under the federal Bankruptcy Code.
See "Item 1. Business-Risk Factors - Defaults Under Indebtedness; Uncertainties
Inherent in Work Out Strategy."
MANAGED CARE PROGRAMS
OVERVIEW. Since 1985, the Company has offered Managed Care Programs for
large employers, union-sponsored and government-sponsored health care benefit
plans, as well as HMOs and PPOs and other groups. Under its Managed Care
Programs, in exchange for a capitated rate, the Company's subsidiaries are
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.
The Company's managed care subsidiaries design, develop and implement
innovative health care solutions for its customers. The Company's expertise in
network management, information processing, and utilization compliance are a few
of its core competencies. The customers obtain significant health care savings,
which have been sustainable in subsequent years, while improving the quality of
the health care provided to its employees. The Company's Managed Care
subsidiaries perform risk management and administrative functions and pay the
providers, retaining a portion of the annual capitated fees.
Depending on the Managed Care Program involved, services currently
offered 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 ("Home
Medical Services") and outpatient diagnostic imaging services. The Company
arranges, through contracting agreements with other qualified providers, to
provide the required services. The Company currently has 31 Managed Care Program
contracts, eight of which began in 1998, covering approximately 1 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 and the Company has generally been able to sustain
the savings for the plan sponsor in
4
<PAGE> 6
subsequent years. The Company's Managed Care Programs are also designed so that
Covered Persons can continue to use the physicians of their choice.
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 1996, 1997 and 1998, a majority
of the Company's Managed Care Program revenues were derived from contracts with
unions and companies affiliated with the automobile industry. In 1998, revenues
derived from contracts with three automotive customers accounted for virtually
all of these automobile industry-related Managed Care Program revenues. 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 1998, managed care programs with Ford Motor Company ("Ford") accounted
for 27% of its consolidated net revenues, Chrysler Corporation ("Chrysler")
accounted for 19% of its consolidated net revenues and General Motors
Corporation ("General Motors") accounted for 28% of its consolidated net
revenues. The General Motors contract terminated on October 31, 1998. See "Item
1. Business - Risk Factors - Dependence on Key Managed Care Customers."
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).
The Company contracts on a discounted fee-for-service basis with
third-party clinical laboratories to provide all laboratory services to covered
Persons. The Company entered into a Laboratory Services Agreement with LabCorp
effective as of August 3, 1998. Under the terms of the five-year agreement,
LabCorp is the preferred provider of clinical laboratory services for the
Company's managed care customers. Generally, in those circumstances where
LabCorp does not wish to provide services or does not have sufficient
facilities, or where customers or existing contracts require other providers, or
where the Company had an existing contract with a provider at August 3, 1998,
the Company may contract with other laboratory providers. The Company pays
LabCorp on a fixed fee-for-service basis. The Laboratory Services Agreement may
be terminated by either party for material breach by the other party upon thirty
days prior written notice. See "Item
5
<PAGE> 7
1. Business - Risk Factors - Dependence on Managed Care Contractors" for a
discussion of certain allegations by LabCorp that the Company has breached the
Laboratory Services Agreement.
The Company contracts with providers other than LabCorp are generally
terminable by either party on short notice. See "Item 1. Business - Risk Factors
- - - Dependence on Managed Care Contractors" for a discussion of the impact on the
Company of a termination by LabCorp or the Company's other clinical laboratory
providers of their contracts.
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, infusion, orthotic and prosthetic
appliances and related supplies at a prepaid, capitated rate.
The Company contracts with third parties to provide services under its
HMS agreements. The contracts for durable medical equipment and supplies under
these programs are generally on a capitated basis and generally run for the term
of the program contract. 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 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 is required to indemnify Ford under the Ford HMS program for
any expenses incurred by Ford in replacing the HMS program in the event that
Ford cancels such a program due to the Company's or any of its contractors'
non-performance. The Company's obligations under the Ford HMS program are
secured by a $1.8 million letter of credit. See "Item 1 Business - Risk Factors
Dependence on Managed Care Contracts" for a discussion of certain risks
associated with the Company's Home Medical Services Programs.
The Company has four additional HMS programs currently in effect. These
programs are generally terminable by the customer upon short notice.
DIAGNOSTIC IMAGING SERVICES. The Company also has a Managed Care
Program providing outpatient diagnostic imaging services at a prepaid, capitated
rate. The Company has contracted with a third party to assist in the
establishment of a network of radiologists and radiology clinics to provide
diagnostic imaging services and assist the Company in managing this network.
Network providers are paid on a discounted fee-for-service basis and their
arrangements are generally terminable by either party on short notice.
6
<PAGE> 8
SALES AND MARKETING
As of December 31, 1998, 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.
The Company also markets its Managed Care Programs through other
managers of health care benefits. The Company has a Teaming Agreement with a
manager of healthcare benefits to sell the Company's Managed Care Programs with
programs offered by the manager of health care benefits. The teaming arrangement
allows the health care benefit manager to offer broader programs providing
greater potential savings for potential customers. Under the Teaming Agreement,
the Company's programs are offered and sold through the sales and marketing
networks of this manager, permitting the Company to reach a broader group of
potential customers.
The Company and LabCorp entered into a Co-Marketing Agreement, dated as
of August 3, 1998 (the "Co-Marketing Agreement"), for the purpose of
coordinating and complementing their marketing and sales efforts to new and
existing managed care customers and to utilize each company's expertise and
resources in such efforts. The Co-Marketing Agreement further provides that in
the event of the termination of the Co-Marketing Agreement or in certain cases,
the occurrence of other events, the Company will pay to LabCorp the Co-Marketing
Termination Fee. The Co-Marketing Termination Fee is calculated as set forth in
the Co-Marketing Agreement, but cannot exceed $4,250,000. If LabCorp terminates
the Co-Marketing Agreement, the Co-Marketing Termination Fee is not payable
until August 1, 2000. If the Co-Marketing Termination Fee does not become
payable by November 30, 2000, the Company's obligation to pay such fee expires.
The Company's obligation to LabCorp for the Co-Marketing Termination Fee is
secured by a security interest in all of the Company's assets and the assets of
its wholly-owned subsidiary Universal HealthCare of Delaware, Inc. ("Universal
Delaware"), other than the capital stock of certain regulated companies owned by
Universal Delaware. LabCorp has agreed to subordinate the Company's obligation
to LabCorp for the Co-Marketing Termination Fee and LabCorp's security interest
in certain assets of the Company to certain debt of the Company and the assets
securing such debt. In the event the Co-Marketing Termination Fee is paid, the
Company will have the right to purchase 1,416,667 shares for Common Stock owned
by LabCorp for $0.50 per share, as provided in the Stock Purchase Agreement (the
"Special Call Right').
COMPETITION
The Company competes on the basis of price, service and its experience.
The Company believes its experience, reputation and long-standing relationships
offer it a competitive advantage
7
<PAGE> 9
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. However, such similar programs generally have not had the
capability to handle in- and out-of-network claims. Nevertheless, these other
programs can cause pricing pressure on the Company's programs. See "Item 1.
Business - Risk Factors Competition."
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. See
"Item 1. Business - Risk Factors - Dependence on Senior Management."
GOVERNMENT REGULATION
The Company's operations are subject to governmental regulations at the
federal, state and local levels.
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.
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.
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.
8
<PAGE> 10
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 reporting requirements, reserve requirements and limitations
on cash distributions. As the Company expands its Managed Care Programs into
other states, it may experience similar requirements or limitations 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.
THIRD-PARTY REIMBURSEMENT REGULATION. Medicare and Medicaid
reimbursements accounted for a significant portion of the Company's net revenues
from its former clinical laboratory operations. 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.
The Company's liquidity may be affected by how promptly the Company is
reimbursed by Medicare, Medicaid and other third-party payors for its former
clinical laboratory operations. The Company from time to time has experienced a
slowdown in payments from such third-party payors.
9
<PAGE> 11
ANTI-FRAUD AND ABUSE REGULATION; MEDICARE AND MEDICAID REIMBURSEMENT.
Although the Company currently does not participate in Medicare or Medicaid for
its managed care business, it could participate in such programs in the future.
In addition, in the Company's former laboratory division did participate in
Medicare and Medicaid.
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 health care providers, including managed care companies,
from soliciting, offering, paying, receiving or accepting any remuneration as an
inducement for the referral or the arrangement of referral of patients, items or
services for which payment is made in whole or in part under the Medicare or
Medicaid and other private and government third-party payor programs.
Contravention of the Fraud and Abuse Statutes is a criminal and civil violation
and can subject the health care provider and persons acting on behalf of the
health care provider to significant fines, penalties, imprisonment and exclusion
from the Medicare and Medicaid and other 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 payor programs and prohibit offers of rebates or other
benefits to persons, items or services to the Company. 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 health care laws
applicable. 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 healthcare laws. Violation of these laws by the Company could result
in the Company being prohibited from contracting for Medicare or Medicaid
reimbursed services. Currently, the Company has no Managed Care contracts that
provide for it to receive Medicare or Medicaid reimbursements.
ENVIRONMENTAL REGULATION. While the Company operated a clinical
laboratories, it was 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
10
<PAGE> 12
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 was previously subject to these requirements when it
operated clinical laboratories and could be subject to penalties in excess of
the value of the services rendered for any prior non-compliance or false
certification of compliance.
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 health care 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.
GENERAL. The laws and regulations affecting the health care industry
change frequently. There can be no assurance that changes to such laws and
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.
11
<PAGE> 13
EMPLOYEES
As of December 31, 1998, the Company had approximately 83 employees,
approximately 81 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.
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS ANNUAL REPORT ON FORM
10-K, THE FOLLOWING FACTORS SHOULD BE CONSIDERED CAREFULLY IN
EVALUATING THE COMPANY AND ITS BUSINESS.
RECENT LOSSES. The Company has reported a net loss for each of the last
three fiscal years principally due to its discontinued laboratory operations.
The Company has ceased all of its laboratory operations and so does not expect
continuing losses in the magnitude it has previously reported.
The Company's independent certified public accountants' audit opinion
on the 1998 consolidated financial statements included an uncertainty paragraph
which stated, in part that the Company's financial results "...raise substantial
doubt about the Company's ability to continue as a going concern."
The Company's continuing operations consist of its Managed Care
Programs. Although the Company expects to eventually become profitable, it
expects to continue to report net losses in the short term and there can be no
assurance that the Company will become profitable. The foregoing statement is a
"forward looking statement" within the meaning of the Securities Act of 1933.
The ability of the Company to become profitable is subject to a number of
uncertainties, including those described in the following "Risk Factors."
DEFAULTS UNDER INDEBTEDNESS; UNCERTAINTIES INHERENT IN WORK OUT
STRATEGY. The Company has defaulted in the payment of interest on its 8.25%
Convertible Subordinated Debentures due February 1, 2006 (the "Debentures").
From time to time, the Company may be in default under its loan agreement with
its principal bank lender. In addition, the Company has defaulted in its payment
obligations to certain creditors of the Company's former clinical laboratory
division, Universal Diagnostics.
The Company has proposed the Work Out Strategy to creditors of its
former laboratory operation and the holders of its outstanding Debentures
described under "Item 1 Business - Business Strategy." The proposed Work Out
Strategy provides for these creditors to receive payments of only a portion of
the amount due to them, payable over the next few years. There can be no
assurance that the Company will be able to negotiate an acceptable Work Out
Strategy with its creditors and holders of Debentures or that a sufficient
number of such creditors and holders of Debentures will accept the Work Out
Strategy to permit it to be successfully implemented. A number of these
creditors have initiated legal action or have threatened to do so if the amounts
due to them are not paid in full. The Company is also negotiating a
restructuring of the obligations due to its principal bank lender. If the Work
Out Strategy is not accepted by the Company's creditors and holders of
Debentures and
12
<PAGE> 14
its principal lender, the Company may be forced to seek the protections offered
by the federal Bankruptcy Code.
LOSS OF NASDAQ LISTING. The Company's Common Stock is expected to be
delisted from Nasdaq and is not expected to be traded on an established trading
market. It is not expected that the Company will satisfy the requirements of any
established trading market, including Nasdaq, for the listing of its Common
Stock in the near term. Accordingly, trading of the Common Stock will be more
difficult than in the past and trading information concerning the Common Stock
will not be as readily available as in the past. It is also possible that
certain institutional investors will no longer be able or willing to hold the
Common Stock and may attempt to sell the Common Stock in the open market or
otherwise. In addition, it will be difficult for the Company to attract market
makers and analysts to trade in or report on the Common Stock. Any of the
foregoing events could have a further negative impact on the public trading
prices of the Common Stock.
FACTORS ADVERSELY AFFECTING THE COMPANY'S OPERATING CASH; RESTRICTIONS
ON CASH DISTRIBUTIONS FROM MANAGED CARE SUBSIDIARIES. There can be no assurance
that the Company will be able to generate operating cash flow or to receive cash
distributions from its Managed Care Subsidiaries (as defined below) to the
extent required to fund the Company's operating cash flow needs, including those
resulting from the winding up of the Company's discontinued operations and those
required to fund the Work Out Strategy. In the event that the Company is not
able to generate cash to the extent required to fund the Company's operations
from the sources described below, the Company will have to consider obtaining
additional financing or disposing of assets relating to its managed care
business. There can be no assurance that the Company will be able to derive
sufficient cash from such sources to support its continued operation.
The Company conducts its managed care programs ("Managed Care
Programs") through subsidiaries ("Managed Care Subsidiaries") which are required
to be licensed in certain states, including the state of Michigan, and must
comply with applicable state regulations as a condition to continued licensure.
Such regulations include requirements relating to maintaining minimum levels of
net worth, working capital and cash reserves and limitations on distributions by
the Managed Care Subsidiaries to the Company. From time to time, the 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") is subject to regulation by the Michigan Insurance Bureau ("MIB").
The Company's Michigan Managed Care Subsidiary proposes to enter into an
agreement with the 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.
13
<PAGE> 15
Other factors that could adversely affect the Company's operating cash
include uncertainties inherent in the Company's efforts to successfully complete
the Work Out Strategy; intense competition in the managed care business,
particularly from larger, better capitalized companies; dependence of the
Company on third parties to provide services under its managed care programs;
uncertainties due to the fact that the Company's programs are generally
terminable by the customer on short notice and many of the Company's service
arrangements are terminable on short notice; periodic disputes between the
Company and its primary clinical laboratory provider, LabCorp, and related
threats by LabCorp to terminate the existing Laboratory Services Agreement for
alleged breaches by the Company; the impact of the highly regulated nature of
the managed care business on the Company's continuing operations; the cost and
the ability of the Company to continue to satisfy increasing regulatory
requirements relating to the managed care business; the long sales cycle
involved in the managed care business; the dependence of the Company on a
limited number of large customers for its revenue and growth, most of whom are
involved in the automotive industry; the ability of the Company to develop new
managed care products; the level of interest that existing and potential new
customers have in managed care products offered by the Company; the ability of
the Company to identify and satisfy market needs; potential increases in
operating costs resulting from the failure of the Company's principal suppliers
to become year 2000 compliant; and economic conditions in the health care and
automotive industries in general.
COMPETITION. 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. There can be no assurance that
competition in existing or new markets will not have a material adverse effect
on the Company's business, financial condition, including working capital, and
results of operations.
DEPENDENCE ON MANAGED CARE PROGRAMS. The Company's Managed Care
Programs represent the source of all of the Company's ongoing net revenues.
Under the 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 tests, durable medical
equipment, respiratory therapy and orthotic and prosthetic appliances (devices
supporting joints or muscles or artificially replacing body parts) and
outpatient diagnostic imaging services. Therefore, the Company's revenues under
these programs are fixed and its costs depend on the extent to which its
services are used by Covered Persons. There can be no assurance that higher than
anticipated utilization rates over an extended period of time will not cause the
expenses associated with the Managed Care Programs to exceed net revenues, which
would have a material adverse effect on the Company's business, financial
condition, including working capital, and results of operations. The fixed
monthly payments established by the Company generally are guaranteed by the
Company for two years, while the contracts governing the Managed Care
14
<PAGE> 16
Programs are generally renewable on an annual basis and are terminable upon 30
or 60 days written notice by the customer. There can be no assurance that the
Company will not lose a significant Managed Care Program, which could have a
material adverse effect on the Company's business, financial condition,
including working capital, and results of operations.
DEPENDENCE ON MANAGED CARE CONTRACTORS. For the Company's laboratory
Managed Care Programs, the Company contracts on a discounted fee-for-service
basis with independent clinical laboratories. LabCorp is the Company's Preferred
Laboratory Provider pursuant to a Laboratory Services Agreement with a five year
term ending August 3, 2003. LabCorp has claimed that the Company has breached
the Laboratory Services Agreement by contracting with certain other laboratory
providers and by failing to make payments in a timely fashion in accordance with
the terms of the Agreement and has terminated the agreement effective March 30,
1999. The Company does not believe it has breached the Laboratory Services
Agreement and has so advised LabCorp. In addition, the Company believes that
LabCorp has breached the Laboratory Services Agreement. Discussions between the
Company and LabCorp regarding these matters are ongoing. LabCorp is unwilling to
perform services under this contract after April 13, 1999, requiring the
Company to locate another national clinical laboratory or a group of smaller
laboratories throughout the country to provide such services on short notice
and, potentially, at a significantly greater cost. While the Company believes
it can replace LabCorp's services without a significant increase in cost, there
can be no assurance to that effect. The foregoing statement is a "forward
looking statement" within the meaning of the Securities Act of 1933. The ability
of the Company to replace the services of its principal laboratory provider
involves a number of uncertainties, including, but not limited to the impact
that the Company's current financial difficulties will have on the willingness
of other laboratory providers, particularly the larger national or regional
providers, to do business with the Company, the possibility that such providers
will charge increased fees or require up-front payments or deposits or other
financial accommodations as a condition to doing business with the Company and
the willingness of the Company's customers to accept services from another
laboratory or group of laboratories. In addition, there are a limited number of
national and regional laboratories. If more than one of these laboratories
refused to do business with the Company, the cost of providing services could
increase significantly and the access of the Company's Covered Persons to
required services could decrease significantly. As a result, the termination by
LabCorp of its contract may have a material adverse effect on the Company's
business, financial condition, including working capital, and results of
operations.
The Company also contracts with other clinical laboratories. These
contracts are generally terminable on short notice. Because the Company does not
have long-term agreements with its other clinical laboratory providers, it may
be subject to increases in prices to provide services under these agreements,
which may adversely affect the Company's profitability.
15
<PAGE> 17
All services under the Company's home medical services ("HMS") and
diagnostic imaging Managed Care Programs are contracted to a small number of
providers. If a contractor 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. The refusal of one of these contractors to
participate in future HMS or imaging programs could have a material adverse
effect on the Company's ability to offer these programs and on the Company's
costs of providing these programs. Although certain providers under the HMS
Programs provided services, others are paid on a discounted fee for service
basis. Because the Company does not have long-term agreements with these
providers, it may be subject to increases in prices to provide services, which
may adversely affect the Company's profitability.
The Company is required to indemnify Ford Motor Company ("Ford") for
any expenses incurred by Ford in replacing the Ford HMS Program in the event
that Ford cancels such program due to the Company's or its contractor's
non-performance. The current providers under the HMS programs have not provided
similar indemnification to the Company. The Company's obligations under the Ford
HMS Program are secured by a $1.8 million letter of credit.
DEPENDENCE ON KEY MANAGED CARE CUSTOMERS. Although many of the
Company's new Managed Care Programs are with groups not affiliated with the
automobile industry, a majority of the Company's Managed Care Program revenues
have been from contracts with companies and unions affiliated with the
automobile industry. 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. The loss of either one of the Company's two principal automotive
customers could have a material adverse effect on the Company's business,
financial condition, including working capital, and results of operations. In
addition, because of the relatively low costs of the services provided by the
Company in its Managed Care Programs (relative to total health care costs), the
market for the Company's Managed Care Programs is limited to sponsors of
significant size who are willing to administer the health care services offered
by the Company separately from their other health care benefits.
DEPENDENCE UPON SENIOR MANAGEMENT. The Company's success depends upon
the continued services of certain members of its senior management. Competition
among managed care companies for qualified personnel is intense. The loss of the
services of certain members of senior management for any reason may have a
material adverse effect on the Company's business, financial condition,
including working capital, and results of operations.
POSSIBLE ADVERSE EFFECTS OF GOVERNMENT REGULATION. The Company must
comply with various federal and state laws, regulations and restrictions
governing its Managed Care Programs, business practices such as referrals from
health care providers, and reimbursement for services.
The Company's third-party payors relating to its previous clinical
laboratory business, including Medicare and Medicaid, from time to time conduct
audits and reviews of the Company's activities to determine compliance with
these laws, regulations and restrictions. In recent years,
16
<PAGE> 18
these third-party and governmental payors have significantly expanded their
efforts to detect instances of non-compliance and related enforcement
activities. The Company has from time to time experienced compliance reviews,
including reviews of its billing practices, by its 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 a final determination notice or decision letter
relating to an audit conducted by one of its largest third-party payors. Failure
to comply with these laws, regulations or restrictions could result in the
imposition of significant fines, civil and criminal penalties, third-party
liability, exclusion from Medicare and Medicaid, any of which could have a
material adverse effect on the Company's business, financial condition,
including working capital, and results of operations.
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 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 by Congress or by one
or more state legislators 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.
LITIGATION AND LIMITS OF LIABILITY INSURANCE COVERAGE. The Company may
be subject to legal actions arising out of the performance of its laboratory
testing services prior to the Asset Sale. Damages assessed in connection with,
and the cost of defending, any legal actions could be substantial. The Company
maintained professional liability insurance and customary liability insurance
coverage during periods that the Company rendered laboratory services in types
and amounts that management believes are adequate in view of the risks
associated with the Company's operations. There can be no assurance that this
coverage will be sufficient. Furthermore, there can be no assurance that the
Company will have resources sufficient to satisfy any liability or litigation
expenses that may result from any uninsured or underinsured claims.
CONTROL BY EXISTING SHAREHOLDERS. The Company's directors, executive
officers and their affiliates in the aggregate beneficially own a majority of
the outstanding shares of Common Stock. As a result, these shareholders as a
group are able, in effect, to determine the outcome of corporate actions
requiring shareholder approval, including the election of directors, and
otherwise control the business of the Company.
17
<PAGE> 19
ITEM 2. PROPERTIES
On or about April 1, 1999, the Company will move its managed care
operations to a 16,000 square foot leased facility located in Southfield,
Michigan. The Company's lease is for a five-year term and is cancelable earlier
at the option of the landlord at the end of the first or third years of the
lease upon six months prior written notice.
The Company has terminated its lease for its former 94,000 square foot
laboratory, headquarters and administrative offices located in Southfield,
Michigan effective March 30, 1999.
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.
The Company's obligation to LabCorp for the Co-Marketing Termination
Fee is secured by a security interest in all of the Company's assets and the
assets of its wholly-owned subsidiary Universal Healthcare of Delaware, Inc.
("Universal Delaware"), other than the capital stock of certain regulated
companies owned by Universal Delaware. LabCorp has agreed to subordinate the
Company's obligation to LabCorp for the Co-Marketing Termination Fee and
LabCorp's security interest in certain assets of the Company to certain debt of
the Company and the assets securing such debt. See "Item 1. Business - Sales and
Marketing."
ITEM 3. LEGAL PROCEEDINGS
The Company was 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,
Michigan on February 19, 1997, and amended March 13, 1998. In January, 1999, the
Company settled the suit with Ivonyx, with the Company paying Ivonyx $35,000.
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 alleged that the Michigan Managed
Care Subsidiary breached the Primary Provider Agreement by not paying Ivonyx
amounts it alleged were due under such agreement for services rendered by Ivonyx
and included claims for quantum meruit and unjust enrichment. The Michigan
Managed Care Subsidiary filed a counterclaim against Ivonyx claiming Ivonyx
breached the Primary Provider Agreement by failing to enter into a 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.
The Company is a defendant in a suit filed by FS Laboratory in Oakland
County Circuit Court, Michigan alleging that the Company owed FS Laboratory an
additional $500,000 in contingent payments in connection with the March 1994
acquisition by the Company of the assets of FS Laboratory. In the fall of 1998,
a judgment for $1.1 million (including accrued interest) was rendered against
the Company in favor of FS Laboratory. The Company has appealed the case to the
Michigan Court of Appeal and intends to vigorously pursue this appeal.
18
<PAGE> 20
The Company is a defendant in a suit filed by Huston Technology,
Inc.("Huston"), in Oakland County Circuit Court, Michigan on February 23, 1999.
Huston alleges that the Company failed to give Huston notice of the availability
of additional space in the Company's former headquarters building in breach of
Huston's sublease and allow Huston the opportunity to lease the space itself or
find a tenant for the space. Huston also alleges that the Company failed to pay
Huston a commission for subleasing space on the first and second floor of the
headquarters. Finally, Huston alleges that the Company failed to allow Huston to
supply it with goods and services as was contemplated by an amendment to the
Huston's sublease. Huston alleges damages in excess of $25,000. The Company
intends to vigorously defend this matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
19
<PAGE> 21
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock was traded on The Nasdaq National Market
under the symbol UHCI during 1997 and 1998. The Company expects the Common Stock
to be delisted from the Nasdaq National Market and does not expect the Common
Stock to be traded on an established trading market. 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>
1997 High Low
---- ---
<S> <C> <C>
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
<CAPTION>
1998
<S> <C> <C>
First Quarter 2 7/8 1 1/2
Second Quarter 2 1/2 1 1/2
Third Quarter 3 1/4 15/16
Fourth Quarter 1 1/2 5/8
</TABLE>
As of March 26, 1999, there were approximately 129 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 1997
or 1998, 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 and a certain Stock Purchase Agreement with LabCorp 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> 22
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS DATA
Total Net Managed Care Revenue $25,538 $18,764 $17,522 $18,406 $15,451
------- ------- ------- ------- -------
Income (loss) from continuing
operations before income tax expense (1,243) (554) 882 997 765
------- ------- ------- ------- -------
Income (loss) from continuing $ (0.23) $ (0.10) $ 0.08 $ 0.16 $ 0.12
operations per share (basic and diluted) ------- ------- ------- ------- -------
BALANCE SHEET DATA (1): (AT END OF
PERIOD)
Total assets 9,525 40,175 57,072 64,566 65,816
------- ------- ------- ------- -------
Long-term obligations 5,077 20,108 19,013 12,443 13,669
(including redeemable stock) ------- ------- ------- ------- -------
OTHER DATA:
EBITDA(2) $ (272) $ 253 $ 1,631 $ 2,375 $ 1,993
------- ------- ------- ------- -------
EBITDA, excluding special charge (2) $ (272) $ 1,543 $ 1,631 $ 2,375 $ 1,993
------- ------- ------- ------- -------
EBITDA, excluding special charge and
General Motors contract (3) $ 1,002 $ 2,069 $ 1,631 $ 2,375 $ 1,993
------- ------- ------- ------- -------
Net cash provided by operating $(4,132) 469 878 4,267 3,992
activities(4) ------- ------- ------- ------- -------
Net cash used in investing activities $ 5,137 ($1,302) ($1,604) ($1,797) ($1,644)
------- ------- -------- ------- -------
Net cash provided by (used in) financing
activities $(1,701) ($142) $1,954 ($2,761) ($2,156)
------- ------- -------- ------- -------
</TABLE>
(1) The Company has paid no dividends on Common Stock during the periods
presented.
21
<PAGE> 23
(2) EBITDA represents earnings (losses) before interest, taxes, depreciation,
amortization, other (income) expense, extraordinary item and acquisition expense
but after restructuring and special charge. EBITDA excluding special charge
represents earnings (losses) before interest, taxes, depreciation, amortization,
other (income) expense, extraordinary item, acquisition expense and special
charges of $1.3 million in 1997. The Company and managed care industry analysts
use EBITDA as a method of measuring and comparing the financial performance of
managed care companies, many of which were formed by combining with and
acquiring other managed care companies, because it eliminates the effects of
goodwill amortization and acquisition expenses on net income. EBITDA excluding
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. Neither
EBITDA nor EBITDA excluding 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.
(3) EBITDA excluding special charge and General Motors contract represents
earnings (loss) before interest, taxes, depreciation, amortization, other
(income) expense, extraordinary item, acquisition expense, special charges of
$1.3 million in 1997 and losses on the General Motors administrative services
contract. EBITDA for 1997 was reduced by $526,000 in startup costs and
programming costs associated with the General Motors administrative services
contract. EBITDA for 1998 was reduced by a $1.3 million loss on the General
Motors contract. The General Motors contract was structured as an administrative
services contract and was not profitable as structured. The Company's typical
managed care program is capitated arrangement, which provides for claim expense
controls and utilization reduction.
(4) 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, 1998. The following table sets forth, for the
periods indicated, the percentage of net revenue represented by items in the
statements of operations.
22
<PAGE> 24
<TABLE>
<CAPTION>
YEAR END DECEMBER 31
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
NET MANAGED CARE REVENUE 100% 100% 100%
------ ------ ------
OPERATING EXPENSES:
CLAIMS AND PROCESSING 86 68 70
SELLING, GENERAL AND ADMINISTRATIVE 15 24 21
SPECIAL CHARGES 0 7 0
DEPRECIATION 2 2 2
AMORTIZATION 2 2 2
------ ------ ------
TOTAL OPERATING EXPENSES (105) (103) 95
------ ------ ------
OPERATING INCOME (LOSS) (5) (3) 5
INTEREST EXPENSE 1 1 1
OTHER INCOME, NET 0 0 0
------ ------ ------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAX EXPENSE (6) (4) 4
INCOME TAX EXPENSE 0 0 2
------ ------ ------
NET INCOME (LOSS) FROM CONTINUING OPERATIONS (6) (4) 3
LOSS ON DISPOSAL OF LABORATORY DIVISION (55) (107) (47)
LOSS FROM OPERATIONS OF LABORATORY DIVISION, NET OF APPLICABLE (61) 0 0
INCOME TAX BENEFIT ------ ------ ------
NET LOSS (122)% (110)% (44)%
====== ====== ======
EBITDA* (1.1%) 1.4% 9.3%
EBITDA EXCLUDING SPECIAL CHARGE* (1.1%) 8.2% 9.3%
EBITDA EXCLUDING SPECIAL CHARGE AND GENERAL MOTORS 5.5% 11.0% 9.3%
CONTRACT**
NET CASH PROVIDED BY OPERATING ACTIVITIES*** (16.2%) 2.5% 5.0%
</TABLE>
23
<PAGE> 25
- - ----------------
* EBITDA represents earnings (losses) from continuing operations before
interest, taxes, depreciation, amortization, other (income) expense and
extraordinary item, but after restructuring and special charge. EBITDA
excluding special charge represents earnings (losses) before interest,
taxes, depreciation, amortization, other (income) from continuing
operations expense, extraordinary item 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(loss).
EBITDA excluding 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. Neither EBITDA nor EBITDA excluding 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.
** EBITDA excluding special charge and General Motors contract represents
earnings (loss) from continuing operations before interest, taxes,
depreciation, amortization, other (income) expense, extraordinary item,
acquisition expense, special charges of $1.3 million in 1997 and costs
and losses on the General Motors administrative services contract.
EBITDA for 1997 was reduced by $526,000 in startup costs and
programming costs associated with the General Motors administrative
services contract. EBITDA for 1998 was reduced by a $1.3 million loss
on the General Motors contract. The General Motors contract was
structured as an administrative services contract and was not
profitable as structured. The Company's typical managed care program is
a capitated arrangement which provides for claim controls and capitated
contracts which provides for claim expense controls and utilization
reduction.
*** 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.
24
<PAGE> 26
NET REVENUE. The Company's net revenue from continuing operations is
generated from managed care laboratory programs with major employers, union and
government benefit plans, and large purchasing organizations as a means of
controlling health care costs. 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 Program
Member's physician of choice, home medical services (including durable medical
equipment, respiration therapy, infusion, orthotic and prosthetic appliances and
related supplies), and outpatient diagnostic imaging services.
The Company's managed care revenues are not affected by seasonal
trends. Managed Care Programs with United Auto Workers ("UAW")/Ford Motor
Company, UAW/Chrysler Corporation ("Chrysler") and General Motors Corporation
("GM"), collectively, accounted for 61.6%, 73.2%, and 74% of managed care
revenue for 1996, 1997, and 1998, respectively. The increase in 1997 was due to
an expansion of Ford and Chrysler programs nationwide. The increase in 1998 was
due primarily to the GM Administrative Services Contract.
Total net revenue from continuing operations totaled $17.5 million,
$18.8 million and $25.5 million for fiscal years 1996 and 1997, and 1998,
respectively. The $1.3 million revenue increase in 1997 is primarily due to the
expansion of existing programs on a national basis and new product line
revenues. The $6.7 million revenue increase in 1998 was due to the managed care
revenue from the administrative services contract with General Motors
Corporation which went into effect January 1, 1998. As previously announced, the
administrative services contract with GM was terminated on October 31, 1998.
Because of the losses incurred in start up costs, programming costs and
operating losses on this contract, totaling $1.3 million in 1998, its
termination is expected to result in the Company returning to historical
operating levels.
CLAIMS AND PROCESSING EXPENSES. Claims and processing expenses were
$12.3 million, $12.8 million, and $22 million for fiscal years 1996, 1997 and
1998, respectively. As a percentage of net revenue, claims and processing
expenses decreased from 70% in 1996 to 68% in 1997 and increased to 86% in 1998.
These decreases in 1997 are primarily due to improved network compliance. These
increases in 1998 are primarily due to the $8.5 million in claims and processing
expenses associated with GM contract described above. The increases in 1998 were
also affected by costs associated with the introduction of the Company's
outpatient diagnostic imaging program and the conversion to a new state of the
art, year 2000 compliant, managed care computer system.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for 1996 were $3.6 million, compared to $4.4 million for
1997, an increase of $0.8 million or 22%. Selling, general and administrative
expenses for 1998 were $3.8 million, a decrease of $0.6 million or 14%. The
increase in 1997 is principally due to additional sales and marketing and
customer service representatives. The decrease for 1998 reflects cost reduction
efforts in general and administrative expenses. As a percentage of net revenue,
selling, general and administrative expenses decreased from 21% for 1996 to 24%
for 1997 to 15% for 1998. The increase in 1997 is
25
<PAGE> 27
primarily due to additional sales and marketing and customer service
representatives. These decreases in 1998 are primarily due to the Company's
increased net revenue from the GM contract.
EBITDA. EBITDA was $1.6 million, or 9.3% of net revenue for 1996.
Earnings from continuing operations before interest, taxes, depreciation and
amortization ("EBITDA") was $253,000, or 1.4% of net revenue for 1997. EBITDA
excluding special charge and the GM contract was $2.1 million, or 11% of net
revenue for 1997. EBITDA was $(272,000) or (1.1)% of net revenue for 1998.
EBITDA excluding special charge and the GM contract was $1.0 million or 5.5% of
net revenue for 1998. The Company attributes the 1997 increases in EBITDA
excluding special charge and GM contract primarily to improved network
compliance. The Company attributes the 1998 decreases principally to the lower
profit margins associated with the GM contract and the costs of establishing new
programs and contracts, particularly the GM contract. The 1998 decreases in
EBITDA excluding special charge and GM contract are primarily due to costs
associated with the introduction of the Company's outpatient diagnostic imaging
program and the conversion to a new state of the art managed care computer
system.
DEPRECIATION AND AMORTIZATION. Depreciation expenses increased in 1997
and 1998 due to new computer systems, including the Company's new managed care
claims processing system. Amortization expense, which relates primarily to the
Company's managed care customer list, remained fairly constant during 1996, 1997
and 1998.
INTEREST EXPENSE. Interest expenses were $179,000, $196,000 and
$249,000 in 1996, 1997 and 1998, respectively. The increase in interest expense
in 1997 and 1998 reflects increased borrowings.
INCOME TAXES. The effective income tax rates were (15.9)%, 0%, and 0%
for 1996, 1997, and 1998, respectively. 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 and 1998 because, under applicable
accounting rules, the 1997 and 1998 losses could not be recorded. The 1997 and
1998 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 14 to Notes to Consolidated Financial Statements - Income Taxes and Loss
Carryforwards", for an explanation of the potential future tax benefit.
DISCONTINUED OPERATIONS: LOSS FROM OPERATIONS OF LABORATORY DIVISION.
As a result of the Asset Sale and the Company's decision to divest its clinical
laboratory operations, these operations have been treated as discontinued
operations.
The Company's net revenue from discontinued operations in 1997 was
$36.9 million, a decrease of $3.2 million or 7.8% from 1996. Net revenue from
discontinued operations was down primarily due to a 13% decline in patient
visits. This decline in patient visits is principally due to
26
<PAGE> 28
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 net revenue from discontinued operations 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.
Net revenue from discontinued operations was $20.0 million in 1998,
compared to $36.9 million in 1997, a decrease of $16.9 million or 45.8%. These
declines are principally due to the discontinuation of laboratory operations on
August 4, 1998 and to a lesser extent a decline in fee-for-service patient
visits.
OPERATING EXPENSES FROM DISCONTINUED OPERATIONS. Operating expenses
from discontinued operations were $43.2 million as compared to $38.3 million in
1997, a decrease of $4.9 million, or 11.3% from 1996. This decrease was
primarily the result of fewer patient visits.
Operating expenses from discontinued operations was $32.5 million in
1998, a decrease of $5.8 million or 15.1% from 1997. These declines are
principally due to the discontinuation of the laboratory operations.
Interest expense from discontinued operations was $1.6 million, $1.7
million and $1.6 million in 1996, 1997 and 1998, respectively. The increase in
1997 is due to increased borrowings. The decrease in 1998 is due to the
repayment of debt from the proceeds to the Asset Sale, partially offset by
increased borrowings prior to the Asset Sale.
The Company does not expect revenues from discontinued operations
in future periods. Costs associated with the discontinued laboratory
operations, including additional real property and equipment lease payments have
been estimated in the Company's 1998 financial statements and reserved
accordingly. However, future periods' financial statements may reflect
adjustments to these items which have been estimated at December 31, 1998.
DISCONTINUED OPERATIONS: LOSS ON DISPOSAL OF LABORATORY DIVISION. The
loss on disposal of laboratory division was $15.6 million. This amount includes
the loss on the assets sold to LabCorp, the subsequent loss recorded on the
write-down of assets (goodwill, property and equipment), related to the
discontinued operations, lease termination costs, employee severance and other
expenses incurred during the phase-out period between August and December 1998.
As of December 31, 1998, assets of the Company's discontinued clinical
laboratory operations consisted solely of accounts receivable. See "Item 8. Note
3 and Note 7 to Notes to Consolidated Financial Statements."
SPECIAL CHARGES. The Company previously recorded special charges of
approximately $18.8 million and $5.3 million in 1997 and 1996, respectively. The
1997 special charge included an impairment to intangible assets (primarily
goodwill) of approximately $14 million, with the remaining amount of the charge
related to various re-engineering, restructuring and non-recurring items. The
1996 special charge related primarily to re-engineering, facility and
employee-related expenses.
27
<PAGE> 29
With the exception of the $1.3 million indemnification amount in 1997
described below, the 1997 and 1996 special charge amounts have been included in
the loss from operations of the laboratory division on the accompanying
statements of operations.
During 1997, the Company recorded a special charge of $1.3 million
related to indemnification made by the Company to shareholders of a previously
acquired company that involved a settlement prior years' tax matters. This
amount (which included interest) is reflected in the 1997 statement of
operations, as part of the Company's continuing operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred net losses of $31.2 million, $20.7 million,
and $7.8 million in 1998, 1997 and 1996, respectively. Additionally, the Company
has negative working capital of $25.9 million and a capital deficit of $23.6
million at December 31, 1998. The Company's laboratory services division was
responsible for losses of approximately $29.7 million, $20.0 million and $8.2
million in 1998, 1997, and 1996, respectively. After attempting to restructure
and thereby improve laboratory services operations during the past several
years, the Company decided to sell that division during 1998.
On August 4, 1998, the Company received proceeds from the Asset Sale of
$9.0 million and $4.25 million in proceeds from the sale of Common Stock and a
transition period six-month rental payment of $1.8 million. These proceeds were
used to pay $11.4 million in bank debt, as well as closing costs and accounts
payable.
The Company has recorded a liability at December 31, 1998 of
approximately $20.6 million related to laboratory-related liabilities and other
obligations the Company is attempting to restructure, including (a) the $11.6
million in outstanding Debentures, (b) costs related to commitments under lease
agreements and (c) various other obligations incurred by the clinical laboratory
division.
The Company's working capital ratio decreased to .08 to 1 at December
31, 1998 from .8 to 1 at December 31, 1997. These decreases resulted primarily
from the losses associated with the Asset Sale and a decline in the liquidation
value of assets associated with the discontinued laboratory division. The
remainder of the working capital deficit results principally from the use by the
Company of the operating cash flows from its managed care subsidiaries to fund
the losses associated with the discontinued clinical laboratory operations. The
Company is not currently using managed care operating cash flows to pay
liabilities of the discontinued laboratory operations.
Included in cash and cash equivalents at December 31, 1998 is $500,000
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.
28
<PAGE> 30
At December 31, 1998, the Company had a credit facility consisting of a
$1.1 million litigation letter of credit, $2.4 million of managed care letters
of credit, a $700,000 capital lease and a new revolving credit facility in the
amount of $983,000. In January 1999, the bank terminated the Company's right to
borrow additional amounts under the new revolving credit facility and has
required the Company to use the proceeds from the collection of its laboratory
accounts receivables and the sale of its laboratory assets to pay amounts due
under such revolving credit facility. At March 25, 1999, the outstanding balance
of such revolving credit facility was $583,000. The interest rate on the
revolving line is at 1% above the bank's prime rate. The Company is required to
deposit the proceeds from all future sales of assets in a cash collateral
account with the bank, up to the amount due to the bank under the credit
facility.
The credit facility is collateralized by substantially all of the
assets of the Company and its subsidiaries (including the stock of the Company's
Managed Care Subsidiaries), except for the assets of the Company's Managed Care
Subsidiaries.
The Company is currently negotiating with its principal bank lender to
restructure its existing credit facility. The proposed restructuring
contemplates the repayment of the outstanding indebtedness and cash
collateralization of its other bank obligations over time through the sale of
laboratory assets, collection of accounts receivable and from operating cash
flow of the Company.
The Company has defaulted on the February 1, 1999 payment of interest
on its Debentures. From time to time, the Company may be in default under its
loan agreement with its principal bank lender. In addition, the Company has
defaulted in its payment obligations to certain creditors of the Company's
former clinical laboratory division, Universal Diagnostics.
The Company has proposed the Work Out Strategy to creditors of its
former laboratory operation and the holders of its outstanding Debentures. The
proposed Work Out Strategy provides for these creditors to receive payments of
only a portion of the amount due to them, payable over the next few years from
the Company's operating cash flow. The holders of the Debentures have been
offered a similar arrangement and also have the right under the terms of the
Debentures to convert the Debentures and accrued interest into Common Stock at a
conversion price of $4.375 per share. There can be no assurance that the Company
will be able to negotiate an acceptable Work Out Strategy with its creditors and
holders of Debentures or that a sufficient number of such creditors and holders
of Debentures will accept the Work Out Strategy to permit it to be successfully
implemented. A number of these creditors have initiated legal action or have
threatened to do so if the amounts due to them are not paid in full.
29
<PAGE> 31
If the Work Out Strategy is not accepted by the Company's creditors,
holders of Debentures and the Company's principal lender, the Company may be
forced to seek the protections offered by the federal Bankruptcy Code.
The Company expects to incur capital expenditures during 1999 of
approximately $.5 million for computer systems enhancements designed to increase
operational efficiencies.
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 and make limited distributions to
the Company. The foregoing statement may be a "forward looking statement" within
the meaning of the Securities Exchange Act of 1934. The ability of the Company
to generate operating cash is subject to a number of uncertainties described
below. From time to time the Company's regulated managed care subsidiaries may
not be able to make cash distributions to the Company at levels required to fund
the Company's operating cash flow needs without violating applicable regulatory
requirements. The Company's Michigan Managed Care Subsidiary proposes to enter
into an agreement with the Michigan Insurance Bureau 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. In addition, the Company is engaged in
negotiations with LabCorp, the Company's principal clinical laboratory provider,
regarding a payment plan for the payment by the Company of LabCorp's ongoing and
past claims for laboratory services. The Company's ability to generate
sufficient cash to fund its cash flow needs is dependent upon the successful
completion of those negotiations.
The Company expects to fund its ongoing working capital needs and the
Work Out Strategy from its operating cash flow, including distributions from its
managed care subsidiaries as described above, the collection of its accounts
receivable and proceeds from the sale of its clinical laboratory equipment and
capitalized leases. The Company is also considering the issuance of debt or the
sale of additional equity as a means of generating additional cash to support
the Company's operations, satisfy its debt service requirements and fund
expansion of its managed care operations. The foregoing statements may be
"forward looking statements' within the meaning of the Securities Exchange Act
of 1934. The Company's ability to sell certain assets and to raise additional
debt or equity financing is subject to a number of uncertainties, including the
limited demand for clinical laboratory equipment, and the price interested
parties may be willing to offer for such equipment, the Company's current
financial position and recent operating results, the financial condition of
other parties in the industry and the current economic condition of the health
care industry in general.
Factors that could adversely affect the Company's operating cash
include uncertainties inherent in the Company's efforts to successfully complete
the Work Out Strategy; intense competition in the managed care business,
particularly from larger, better capitalized companies; dependence of the
Company on third parties to provide services under its managed care programs;
30
<PAGE> 32
uncertainties due to the fact that the Company's programs are generally
terminable by the customer on short notice and many of the Company's service
arrangements are terminable on short notice; periodic disputes between the
Company and its primarily clinical laboratory provider, LabCorp, and related
threats by LabCorp to terminate the existing Laboratory Services Agreement for
alleged breaches by the Company; the impact of the highly regulated nature of
the managed care business on the Company's continuing operations; the cost and
the ability of the Company to continue to satisfy increasing regulatory
requirements relating to the managed care business; the long sales cycle
involved in the managed care business; the dependence of the Company on a
limited number of large customers for its revenue and growth, most of whom are
involved in the automotive industry; the ability of the Company to develop new
managed care products; the level of interest that existing and potential new
customers have in managed care products offered by the Company; the ability of
the Company to identify and satisfy market needs; potential increases in
operating costs resulting from the failure of the Company's principal suppliers
to become year 2000 compliant; and economic conditions in the health care and
automotive industries in general. See "Item 1-Business-Risk Factors."
In the event that the Company is not able to generate cash to the
extent required to fund the Company's operations from the sources described
above, the Company will have to consider disposition of assets relating to its
managed care business.
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 a final determination notice from a compliance
review conducted by one of its largest third-party payors. The ultimate effect,
if any, of these compliance reviews cannot be determined at this time and no
liability has been accrued by the Company.
YEAR 2000 READINESS DISCLOSURE.
These materials contain certain information regarding Year 2000
readiness which constitute a "Year 2000 Readiness Disclosure" as defined in the
Year 2000 Readiness Disclosure Act.
The year 2000 issue is the result of computer programs and
microprocessors using two digits rather than four to define the applicable year
(the "Year 2000 Issue"). Such programs or microprocessors may recognize a date
using "00" as the year 1900 rather than the year 2000. This could result in
system failures or miscalculations leading to disruptions in the Company's
activities and operations. If the Company or third parties with which it has a
significant relationship fail to make necessary modifications, conversions and
contingency plans on a timely basis, the Year 2000 Issue could have a material
adverse effect on the Company's business, financial condition and results of
operations. However, the effect cannot be quantified at this time because the
Company cannot accurately estimate the magnitude, duration or ultimate impact of
noncompliance by vendors and other third parties. The Company believes that its
competitors face a similar risk. Although the risk is not presently
quantifiable, the disclosure below is intended to summarize the Company's
actions to minimize its risk from the Year 2000 Issue. Programs that will
operate in the year 2000 unaffected by the change in year from 1999 to 2000 are
referred to herein as "year 2000 compliant."
31
<PAGE> 33
The Company began addressing the Year 2000 issue in June 1997. It
identified three general categories of systems that require attention: (1)
information technology ("IT") systems, (2) non-IT systems, such as climate
control systems, telephone systems and security systems, which may contain
embedded date-sensitive microprocessors, and (3) IT and non-IT systems of third
parties.
The Company currently has three major IT systems: its managed care
computer software, its accounting software and its internal personal computer
system and related software. The managed care software, which was purchased and
installed in late 1997, is used for client billings and operates from the
Company's personal computer network. The Company has forward-date tested the
system and believes that the managed care software is year 2000 compliant. The
Company's accounting software, which was recently purchased and installed before
the end of December 1998, will operate from the Company's personal computer
network. The vendor of the software has represented to the Company that the
software is year 2000 compliant. The software will be tested to verify
compliance and, in the event of a breach of the representation, the Company
would expect to avail itself of its legal remedies. The Company's personal
computer system otherwise operates using "shrink wrapped" software (such as
Microsoft Windows NT, Microsoft Word and Excel). To the extent any of the
programs used by the personal computer system are not year 2000 compliant, the
Company believes that year 2000 compliant upgrades are or will be readily
available for purchase. The Company intends to test the hardware components of
its personal computer system for the year 2000 compliance during 1999 and
expects any disruption due to the Year 2000 Issue with respect to the hardware
or software used by its personal computer system to be minimal.
The Company's major non-IT system is its telephone system. Testing of
the telephone system is complete and replacement equipment will be purchased in
the first half of 1999 to remediate the portion of the system which was not year
2000 compliant. Testing of the upgraded equipment is expected to be completed by
June 1999. The Company intends to assess, in the second quarter of 1999, the
year 2000 compliance of its new headquarters facility and related non-IT
embedded systems and will determine at that time the need for and cost of
remediation.
The Company has relationships with, and is to varying degrees dependent
upon, various third parties that provide funds, information, goods and services
to the Company. These include the Company's bank lender, utility providers and
other vendors, such as LabCorp, with whom it subcontracts to provide services
under its managed care contracts. The Company is attempting, through informal
contacts, to assess the compliance of these third parties. These vendors have
been giving the Company updates on their progress. The year 2000 compliance of
the systems of these third parties is outside the Company's control. There can
be no assurance that any of these third parties will not experience a systems
failure due to the Year 2000 Issue.
Because the Company expects that the systems within its control will be
year 2000 compliant before the end of 1999, the Company believes that the most
reasonably likely worst case scenario is a compliance failure by one or more of
the third parties described above. Such a failure would likely have an effect on
the Company's business, financial condition and results of operations. The
magnitude of that effect, however, cannot be quantified at this time because of
variables such as the type and importance of the third party, the possible
effect on the Company's operations and the Company's ability to respond. Thus,
there can be no assurance that there will not be a material
32
<PAGE> 34
adverse effect on the Company if such third parties do not remediate their
systems in a timely manner and in a way that is compatible with the Company's
systems.
As a result, the Company will develop contingency plans that assume
some estimated level of noncompliance by, or business disruption to, these third
parties. The Company intends to have contingency plans developed by June 30,
1999 for third parties determined to be at high risk of noncompliance or
business disruption or whose noncompliance or disruption could materially affect
the Company. The contingency plans will be developed on a case-by-case basis,
and may include alternative vendors that can assure year 2000 compliance.
Judgments regarding contingency plans are subject to many uncertainties and
there can be no assurance that the Company will correctly anticipate the level,
impact or duration of noncompliance or that its contingency plans will be
sufficient to mitigate the impact of any noncompliance. Some material adverse
effect to the Company may result despite such contingency plans.
To date, the Company has expended approximately $915,000 to remediate
year 2000 problems, principally to replace its managed care and accounting
software. Replacement of the managed care claim processing system, represents
$850,000 of this expenditure. These costs have been expensed or capitalized in
the period incurred. The Company estimates total year 2000 remediation costs at
less than $1 million, with the remaining costs to be incurred over the next
three quarters. Estimates of time, cost and risks are based on currently
available information. Developments that could affect estimates include, without
limitation, the availability of trained personnel, the ability to locate and
correct all noncompliant systems, cooperation and remediation success of third
parties material to the Company, and the ability to correctly anticipate risks
and implement suitable contingency plans in the event of system failures at the
Company or third parties.
The foregoing discussion of the Year 2000 Issue contains various
"forward looking statements", within the meaning of the Securities Exchange Act
of 1934, and are subject to uncertainties which are described in the foregoing
discussion.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Position (SOP) 98-5, "Reporting on the Cost of Start-Up
Activities", was issued in April 1998 and SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities", was issued in June 1998. These statements
are effective in 1999 and 2000, respectively, and are not expected to have a
material impact on the consolidated financial statements.
33
<PAGE> 35
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
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 Sheet at December 31, 1998 and 1997
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity (Capital Deficit) for
the years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996
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.
34
<PAGE> 36
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, 1998 and 1997
and the related consolidated statements of operations, stockholders' equity
(capital deficit) and cash flows for each of the three years in the period ended
December 31, 1998. 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, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998 in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the consolidated financial
statements, the Company has incurred net losses for each of the past three
years. In addition, current liabilities exceed current assets by $25.9 million,
and total liabilities exceed total assets by $19.2 million as of December 31,
1998. These factors, and the related matters discussed in Note 2 to the
financial statements, raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Also, in our opinion, the schedule presents fairly, in all material respects,
the information set forth therein.
BDO SEIDMAN, LLP
Troy, Michigan
March 25, 1999
35
<PAGE> 37
UNIVERSAL STANDARD HEALTHCARE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
================================================================================
<TABLE>
<CAPTION>
December 31, 1998 1997
- - ------------------------------------------------------------------------------
<S> <C> <C>
ASSETS (Notes 9 and 10)
CURRENT ASSETS
Cash and cash equivalents (Note 4) $ 556 $ 1,252
Accounts receivable 824 8,488
Inventory - 894
Prepaid expenses and other 348 526
Assets of discontinued operations (Note 3) 425 -
- - ------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 2,153 11,160
PROPERTY AND EQUIPMENT, net (Note 5) 2,660 8,780
INTANGIBLE ASSETS, net (Note 1) 3,561 18,713
OTHER ASSETS (Note 6) 1,151 1,522
- - ------------------------------------------------------------------------------
$ 9,525 $ 40,175
==============================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
36
<PAGE> 38
UNIVERSAL STANDARD HEALTHCARE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
================================================================================
<TABLE>
<CAPTION>
December 31, 1998 1997
- - ------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 631 $ 6,360
Accrued claims 3,857 2,673
Accrued compensation and benefits 295 1,213
Other accruals (Note 8) 1,613 2,594
Laboratory-related and other liabilities (Note 7) 20,562 -
Current portion of long-term debt (Note 9) 1,139 1,039
- - ------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 28,097 13,879
LONG-TERM DEBT, net of current portion (Note 9) 678 20,108
- - ------------------------------------------------------------------------------
TOTAL LIABILITIES 28,775 33,987
- - ------------------------------------------------------------------------------
REDEEMABLE COMMON STOCK (Note 10) 4,399 -
- - ------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY (CAPITAL DEFICIT)
Common stock, no par; 20,000,000 shares authorized;
7,110,774 and 6,560,774 shares issued and out-
standing at December 31, 1998 and 1997, respectively 34,247 32,889
Paid-in-capital 129 -
Deficit (58,025) (26,701)
- - ------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY (CAPITAL DEFICIT) (23,649) 6,188
- - ------------------------------------------------------------------------------
$ 9,525 $ 40,175
==============================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
37
<PAGE> 39
UNIVERSAL STANDARD HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
================================================================================
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------
Year Ended December 31, 1998 1997 1996
- - ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET MANAGED CARE REVENUE (Note 11) $ 25,538 $ 18,764 $ 17,522
- - ------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Claims and processing 21,970 12,781 12,276
Selling, general and administrative 3,840 4,440 3,615
Special charges (Notes 8 and 12) -- 1,290 --
Depreciation 587 438 410
Amortization 384 369 339
- - ------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 26,781 19,318 16,640
- - ------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) (1,243) (554) 882
OTHER INCOME (EXPENSE)
Interest expense (249) (196) (179)
Other income, net 45 75 68
- - ------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAX EXPENSE (1,447) (675) 771
INCOME TAX EXPENSE (Note 14) -- -- (275)
- - ------------------------------------------------------------------------------------------------
NET INCOME (LOSS) FROM CONTINUING OPERATIONS (1,447) (675) 496
DISCONTINUED OPERATIONS (Note 3)
Loss on disposal of laboratory division (15,574) -- --
Loss from operations of laboratory division, net of
applicable income tax benefit of $1,742 in 1996 (Note 14) (14,154) (20,001) (8,247)
- - ------------------------------------------------------------------------------------------------
NET LOSS $(31,175) $(20,676) $ (7,751)
================================================================================================
EARNINGS (LOSS) PER COMMON SHARE (Basic and Diluted)
From continuing operations $ (.23) $ (.10) $ .08
From discontinued operations (4.34) (3.05) (1.28)
- - ------------------------------------------------------------------------------------------------
$ (4.57) $ (3.15) $ (1.20)
================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
38
<PAGE> 40
UNIVERSAL STANDARD HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CAPITAL DEFICIT)
(IN THOUSANDS)
================================================================================
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997 1996
- - -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCK, at beginning of year $ 32,889 $ 32,864 $ 32,242
Stock issued to investors 1,250 - -
Stock issued in exchange for services 108 - -
Stock issued for employee stock purchase plan - 25 225
Stock issued for conversion of debenture debt - - 397
- - -------------------------------------------------------------------------------------------
COMMON STOCK, at end of year $ 34,247 $ 32,889 $ 32,864
- - -------------------------------------------------------------------------------------------
PAID-IN-CAPITAL, at beginning of year $ - $ - $ -
Stock warrants granted 129 - -
- - -------------------------------------------------------------------------------------------
PAID-IN-CAPITAL, at end of year $ 129 $ - $ -
- - -------------------------------------------------------------------------------------------
RETAINED EARNINGS (DEFICIT), at beginning of year $(26,701) $ (6,025) $ 1,726
Net loss for the year (31,175) (20,676) (7,751)
Increase in redeemable common stock (149) - -
- - -------------------------------------------------------------------------------------------
RETAINED EARNINGS (DEFICIT), at end of year $(58,025) $(26,701) $ (6,025)
- - -------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY (CAPITAL DEFICIT) $(23,649) $ 6,188 $ 26,839
- - -------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
39
<PAGE> 41
UNIVERSAL STANDARD HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
================================================================================
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997 1996
- - -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(31,175) $(20,676) $ (7,751)
Adjustments to reconcile net loss to net cash
provided by (used in) continuing operations
Loss on disposal of laboratory division 15,574 -- --
Loss from discontinued operations 14,154 20,001 8,247
Special charge -- 1,290 --
Depreciation and amortization 971 807 749
Deferred income taxes and other -- -- (1,099)
(Increase) decrease in
Accounts receivable, net (548) (13) 256
Prepaid expenses and other (241) (1,259) 250
Other assets -- (20) (15)
Increase (decrease) in
Accounts payable (2,980) 2,012 (1,391)
Accrued liabilities 1,440 1,151 (1,595)
Other liabilities -- -- (534)
- - -------------------------------------------------------------------------------------------
Net cash provided by (used in) continuing operations (2,805) 3,293 (2,883)
Net cash provided by (used in) discontinued operations (1,327) (2,824) 3,761
- - -------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (4,132) 469 878
- - -------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of laboratory division 7,000 -- --
Purchase of property and equipment (1,813) (1,227) (1,596)
Other-net (50) (75) (8)
- - -------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 5,137 (1,302) (1,604)
- - -------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (payments) on revolving line-of-credit (6,216) 1,724 1,000
Proceeds from issuance of redeemable common stock 4,250 -- --
Proceeds from issuance of stock to investors 1,250 -- --
Payments on long-term debt (1,104) (1,569) (10,204)
Proceeds from issuance of long-term debt 176 -- --
Payment of financing costs (57) (322) (1,034)
Issuance of common stock for employee purchase plan -- 25 225
Proceeds from convertible debenture -- -- 12,000
Other-net -- -- (33)
- - -------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (1,701) (142) 1,954
- - -------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (696) (975) 1,228
CASH AND CASH EQUIVALENTS, beginning of year 1,252 2,227 999
- - -------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of year $ 556 $ 1,252 $ 2,227
===========================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
40
<PAGE> 42
UNIVERSAL STANDARD HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
================================================================================
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997 1996
- - --------------------------------------------------------------------------------------
<S> <C> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest $ 1,905 $ 1,806 $ 1,513
Cash paid for income taxes - - -
- - --------------------------------------------------------------------------------------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Reduction of proceeds on sale of laboratory
division in exchange for a reduction in
accounts payable and accrued claims $ 2,000 $ - $ -
Capital lease obligations 748 436 1,345
Issuance of common stock and warrants for services 237 - -
Increase in redeemable common stock 149 - -
Conversion of debentures to common stock - - 397
======================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
41
<PAGE> 43
UNIVERSAL STANDARD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
1. SUMMARY OF NATURE OF OPERATIONS
SIGNIFICANT
ACCOUNTING Universal Standard Healthcare, Inc. (the "Company"),
POLICIES through its specialty managed care programs (the
"Managed Care Programs") offered by its subsidiaries,
provides 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 services are provided by the
Company under arrangements through contracting
agreements with qualified providers.
The Company previously provided clinical laboratory
testing on a traditional fee-for-service basis through
its clinical laboratory operations division. The
laboratory services division was sold in August 1998
(see Note 3).
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 from Managed Care Programs is recognized monthly
when billed or when due under the terms of the related
contracts. The Company's accounts receivable generally
represent no more than one month's revenue yet to be
collected; no allowance for possible losses on accounts
receivable was considered necessary at December 31, 1998
or 1997.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Major
improvements and replacements are capitalized while
ordinary maintenance and repairs are expensed. 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 - 2 years; and computer
equipment - 3 - 7 years.
42
<PAGE> 44
UNIVERSAL STANDARD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
INTANGIBLE ASSETS
Intangible assets primarily consist of customer lists
related to the Company's Managed Care Programs which are
amortized using the straight-line method over a period
of 20 years. Accumulated amortization totaled
approximately $4.5 million and $4.2 million at December
31, 1998 and 1997, respectively.
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.
ACCRUED CLAIMS
The Company accrues the cost of external provider claims
expense in the period when the services are provided,
based in part on estimated claims expense incurred but
not yet reported to the Company.
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.
43
<PAGE> 45
UNIVERSAL STANDARD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
LOSS PER SHARE
Loss per share has been computed by dividing net loss by
the weighted average number of shares of common stock
outstanding, excluding redeemable shares (see Note 10).
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.
The following table presents the earnings (loss) per
share calculations:
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997 1996
--------------------------------------------------------------------------------
<S> <C> <C> <C>
NUMERATOR FOR BASIC AND DILUTED
EARNINGS (LOSS) PER SHARE
Net income (loss) from continuing operations $ (1,447) $ (675) $ 496
Increase in redeemable common stock (149) -- --
--------------------------------------------------------------------------------
ADJUSTED NET INCOME (LOSS) FROM
CONTINUING OPERATIONS (1,596) (675) 496
Loss from discontinued operations (29,728) (20,001) (8,247)
--------------------------------------------------------------------------------
ADJUSTED NET LOSS $(31,324) $(20,676) $ (7,751)
================================================================================
DENOMINATOR FOR BASIC AND DILUTED EARNINGS
(LOSS) PER SHARE - WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 6,856 6,557 6,462
================================================================================
EARNINGS (LOSS) PER SHARE (BASIC AND DILUTED)
From continuing operations $ (.23) $ (.10) $ .08
From discontinued operations (4.34) (3.05) (1.28)
--------------------------------------------------------------------------------
$ (4.57) $ (3.15) $ (1.20)
================================================================================
</TABLE>
STOCK-BASED COMPENSATION
The Company uses the intrinsic value method to account
for stock-based compensation.
44
<PAGE> 46
UNIVERSAL STANDARD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
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.
COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income", which establishes
standards for the reporting and display of comprehensive
income, its components and accumulated balances.
Comprehensive income is defined to include all changes
in equity except those resulting from investments by
owners and distributions to owners. Among other
disclosures, SFAS 130 requires that all items that are
required to be recognized under current accounting
standards as components of comprehensive income be
reported in a financial statement that is displayed with
the same prominence as other financial statements. For
the year ended December 31, 1998, comprehensive income
for the Company did not differ from net income.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Position (SOP) 98-5, "Reporting on the Cost
of Start-Up Activities", was issued in April 1998 and
SFAS 133, "Accounting for Derivative Instruments and
Hedging Activities", was issued in June 1998. These
statements are effective in 1999 and 2000, respectively,
and are not expected to have a material impact on the
consolidated financial statements.
2. FINANCIAL RESULTS The Company has incurred net losses of $31.2 million,
AND LIQUIDITY $20.7 million, and $7.8 million in 1998, 1997 and 1996,
respectively. Additionally, the Company has negative
working capital of $25.9 million, and its total
liabilities exceed total assets by $19.2 million at
December 31, 1998. The Company's laboratory services
division was responsible for losses of approximately
$29.7 million, $20.0 million and $8.2 million in 1998,
1997, and 1996, respectively. After attempting to
restructure and thereby improve laboratory services
operations during the past several years, the Company
decided to sell the assets of this division during 1998;
the sale occurred in August 1998 (see Note 3). The
accompanying balance sheet reflects a liability at
December 31, 1998 of approximately $20.6 million related
to laboratory-related liabilities and other obligations
the Company is attempting to restructure, including
45
<PAGE> 47
UNIVERSAL STANDARD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
(a) the $11.6 million subordinated debentures, (b) costs
related to commitments under lease agreements and (c)
various other obligations incurred by the laboratory
division (see Note 7).
The Company's continuation as a going concern is
dependent upon its ability to generate sufficient cash
flow to meet its obligations on a timely basis,
restructure its indebtedness, obtain additional
financing and ultimately to attain profitability. The
Company is engaged in ongoing discussions with its
debenture holders and major creditors in order to
restructure existing debt (see Note 7), and is also
continuing to seek outside financing to support and
expand its continuing operations. If these discussions
result in the infusion of capital into the Company
and/or significant reductions in the Company's existing
liabilities, management believes that its continuing
managed care operations will provide positive cash flow
in 1999 and in subsequent years. However, there can be
no assurance the Company will be able to obtain
additional financing, or will be able to negotiate an
acceptable arrangement with its creditors and the
holders of the debentures. If the Company's proposed
arrangements to restructure its obligations to the
creditors and debenture holders are not accepted, the
Company may be forced to seek protection offered by the
federal Bankruptcy Code.
Management believes that, despite the financial
difficulties and funding uncertainties that it faces,
the Company has a plan that, if successful, can
significantly improve the Company's financial condition.
The support of the Company's vendors, debenture holders,
customers, lenders, stockholders and employees will
continue to be key to the Company's future success.
3. DISCONTINUED In August 1998, the Company sold certain assets related
OPERATIONS to its clinical laboratory operations, including
customer lists, inventories and other tangible assets
related to its laboratory business, to Laboratory
Corporation of America Holdings ("LabCorp") for $9
million (the "Asset Sale") as part of its divestiture of
its clinical laboratory operations division.
Accordingly, this division is being reported as a
discontinued operation in the accompanying financial
statements.
The operating results of the Company's clinical
laboratory division have been segregated from the
continuing operations and reported separately, net of
applicable income tax benefits, in the accompanying
consolidated statements of operations. The assets as of
December 31, 1998 and cash flow of the clinical
laboratory division for the year then ended have been
segmented and reported separately in the accompanying
consolidated balance sheets and consolidated statements
of cash flows.
46
<PAGE> 48
UNIVERSAL STANDARD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
The results of operations from the Company's
discontinued clinical laboratory operations included in
the Company's consolidated statements of operations for
each of the years ended December 31, 1998, 1997 and 1996
are summarized below (in thousands):
<TABLE>
<CAPTION>
Years Ending December 31, 1998 1997 1996
------------------------------------------------------------------
<S> <C> <C> <C>
DISCONTINUED OPERATIONS
Net revenue $ 19,909 $ 36,867 $ 40,042
Operating expenses, excluding
special charges (32,508) (37,613) (43,166)
Special charges (Note 12) -- (17,552) (5,255)
Interest expense (1,555) (1,703) (1,610)
Income tax benefit -- -- 1,742
------------------------------------------------------------------
LOSS FROM DISCONTINUED
LABORATORY OPERATIONS $(14,154) $(20,001) $ (8,247)
==================================================================
</TABLE>
Interest expense was allocated to discontinued
laboratory operations based on the ratio of net assets
of the discontinued laboratory operations to
consolidated net assets plus consolidated debt
(excluding debt that could be directly allocated).
The Company's loss on the disposal of the clinical
laboratory operations was approximately $15.6 million;
this amount includes the loss on the assets sold to
LabCorp, the subsequent loss recorded on the write-down
of assets (primarily property and equipment and
intangibles) related to the discontinued operations, and
lease termination costs, employee severance and other
expenses incurred during the phase-out period between
August and December 1998. As of December 31, 1998,
assets of the Company's discontinued clinical laboratory
operations consisted solely of accounts receivable and
totalled approximately $425,000.
4. RESTRICTED CASH The Company is required to maintain a $500,000 cash
balance in accordance with state requirements for the
managed care programs. The cash balance is included in
cash equivalents on the accompanying balance sheets at
December 31, 1998 and 1997.
47
<PAGE> 49
UNIVERSAL STANDARD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. PROPERTY AND Property and equipment is as follows (in thousands):
EQUIPMENT
<TABLE>
<CAPTION>
December 31, 1998 1997
------------------------------------------------------------------
<S> <C> <C>
Computer equipment $ 3,830 $ 7,791
Furniture and fixtures 313 1,528
Transportation equipment 109 404
Machinery and equipment 102 6,774
Leasehold improvements -- 2,589
------------------------------------------------------------------
4,354 19,086
Less accumulated depreciation and amortization 1,694 10,306
------------------------------------------------------------------
PROPERTY AND EQUIPMENT, NET $ 2,660 $ 8,780
==================================================================
</TABLE>
6. OTHER ASSETS Other assets consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, 1998 1997
------------------------------------------------------------------------
<S> <C> <C>
Financing costs (primarily convertible debentures) $ 1,196 $ 1,491
Other 292 335
------------------------------------------------------------------------
1,488 1,826
Less accumulated amortization (337) (304)
------------------------------------------------------------------------
$ 1,151 $ 1,522
========================================================================
</TABLE>
The deferred financing costs are being amortized on a
straight-line basis over the term of the related
financing agreement.
48
<PAGE> 50
UNIVERSAL STANDARD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
7. LIABILITY As described in Note 2, the Company has reported a net
RESTRUCTURING loss in each of the past three fiscal years due
PLAN primarily to its discontinued laboratory operations.
There are significant liabilities reflected on the
accompanying December 31, 1998 balance sheet which the
Company hopes to restructure. In addition, there are
other liabilities related to discontinued operations
which the Company has recorded. These items are as
follows (in thousands):
<TABLE>
<S> <C>
Convertible subordinated debentures ($11,603 principal
and $398 accrued interest) $ 12,001
Accounts payable - trade 2,804
Operating lease commitments 2,169
Obligations under capital leases 1,331
----------------------------------------------------------------
LIABILITIES TO BE RESTRUCTURED 18,305
Litigation-Related Costs, Employee Severance
and Other Costs - Discontinued Operations 2,257
----------------------------------------------------------------
TOTAL $ 20,562
================================================================
</TABLE>
The Company defaulted on the semi-annual interest
payment due February 1999 for the $11,603,000
convertible debentures outstanding (see Note 9) and this
amount, together with the related accrued interest, is
therefore considered a current liability. In addition,
the Company also has defaulted in the payment of other
obligations to certain trade creditors and lessors
related to the discontinued laboratory operations.
In March 1999, the Company proposed an out-of-court
restructuring plan to the holders of its debentures and
to certain other creditors. The plan proposes that these
debenture holders and creditors receive only a specified
portion of the amounts due, with payment to occur over
several years. No adjustments to the above amounts owed
by the Company have been recorded in the accompanying
financial statements, since the ultimate outcome of the
proposed restructuring plan cannot presently be
determined.
49
<PAGE> 51
UNIVERSAL STANDARD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
8. OTHER ACCRUALS Other accruals consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, 1998 1997
-----------------------------------------------------------------
<S> <C> <C>
Payable to Internal Revenue Service (see below) $1,150 $1,290
Accrued interest -- 499
Other 463 805
-----------------------------------------------------------------
TOTAL $1,613 $2,594
=================================================================
</TABLE>
During 1998, the Company entered into an agreement with
the Internal Revenue Service (IRS) to settle a dispute
relating to the Company's 1991-1994 federal tax returns.
The IRS originally proposed adjustments totalling
approximately $3.3 million relating to various
deductions claimed by the Company in these prior years,
primarily relating to laboratory operations. The
Company's settlement with the IRS resulted in a final
liability for these prior years of approximately
$150,000; interest of approximately $250,000 has also
been accrued relating to this settlement.
During 1997, the Company recorded a special charge of
$1,290,000 related to indemnification made by the
Company to shareholders of a company that was previously
acquired, that involved a settlement of prior years' tax
matters. This amount (which included interest) is
reflected in the accompanying 1997 statement of
operations, and was included with other accrued
liabilities at December 31, 1997. The remaining
liability of $750,000 at December 31, 1998 is included
in the above balance payable to the IRS.
9. LONG-TERM DEBT Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31, 1998 1997
--------------------------------------------------------------
<S> <C> <C>
Revolving line-of-credit $ 983 $ 7,199
Obligations under capital leases and other 834 2,345
Convertible subordinated debentures -- 11,603
-------
TOTAL 1,817 21,147
Less current portion 1,139 1,039
--------------------------------------------------------------
LONG-TERM DEBT $ 678 $ 20,108
==============================================================
</TABLE>
50
<PAGE> 52
UNIVERSAL STANDARD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
As amended in January 1999, the Company has a credit
facility with a bank which includes a revolving
line-of-credit and $3.5 million in contingent
indebtedness owing under outstanding letters of credit.
Borrowing levels under the revolving line-of-credit were
based on specified formulas subject to the bank's
approval. The December 31, 1998 balance outstanding of
$983,000 was the maximum borrowing limit allowed by the
bank. 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 covenants; the Company
is currently not in compliance with these covenants.
Subsequent to year-end, the bank requested the $983,000
be paid in full, and the Company intends to do so during
1999. No further borrowings under this credit facility
are anticipated to be available in the future.
At December 31, 1997, $7,199,000 was payable to the bank
under a revolving line-of-credit agreement, which was
amended at various times during 1998.
The Company also leases equipment under capital leases
and has certain other miscellaneous indebtedness.
Obligations related to laboratory equipment comprise the
majority of the December 31, 1997 liability shown above;
these remaining obligations as of December 31, 1998 were
recorded as part of the laboratory-related liabilities
which were segregated for balance sheet purposes (see
Note 7). The above liability of $834,000 at December 31,
1998 relates only to the Company's continuing
operations. The Company's monthly payments for these
leases are approximately $22,000, including interest at
annual rates of 6-10%. Equipment held under capital
leases are included in property and equipment in the
accompanying balance sheets and total approximately
$650,000 and $3.0 million at December 31, 1998 and 1997,
respectively.
On February 20, 1996, the Company completed an offering
of $12,000,000 principal amount of 8.25% Convertible
Subordinated Debenture (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. During 1996, $397,000 of
debentures were converted to common stock; no debentures
were converted during 1998 or 1997. The Company did not
make the required semi-annual interest payment which was
due February 1999 (see Note 7).
Required annual principal payments of long-term debt at
December 31, 1998 during the next five years are as
follows (in thousands): 1999 - $1,139; 2000 - $265; 2001
- $192; 2002 - $170 and 2003 - $51.
51
<PAGE> 53
UNIVERSAL STANDARD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
10. REDEEMABLE On August 3, 1998, the Company sold 1,416,667 shares of
COMMON STOCK its common stock (the "Purchased Shares") to LabCorp for
AND LABCORP $4,250,000 in cash (the "Stock Sale Agreement"). Based
TRANSACTIONS on certain conditions contained in the Stock Sale
Agreement and the Co-Marketing Agreement discussed
below, this amount has been classified separately on the
accompanying consolidated balance sheet as redeemable
common stock.
The Company and LabCorp entered into a Co-Marketing
Agreement, dated as of August 3, 1998 (the "Co-Marketing
Agreement"), for the purpose of coordinating and
complementing their marketing and sales efforts to new
and existing managed care customers and to utilize each
company's expertise and resources in such efforts. The
Co-Marketing Agreement further provides that in the
event of its termination, or in certain cases discussed
below, the Company will pay to LabCorp a Co-Marketing
Termination Fee ("Termination Fee") $4,250,000, less
amounts (as defined) if LabCorp has sold any of the
Purchased Shares. The Company's obligation to pay the
Termination Fee shall terminate July 31, 2000 (unless it
is waived at an earlier date by LabCorp), if the
Company's average closing stock price, as reported on
the applicable stock exchange, for the last five
business days of July 2000 is greater than $3.50 ("Stock
Price Covenant"). If, after satisfying the Stock Price
Covenant, LabCorp is unable to sell the Purchased Shares
before October 31, 2000, the Termination Fee shall be
reinstated. In the event the Termination Fee is paid,
the Company has the right to purchase the Purchased
Shares owned by LabCorp for $.50 per share.
Additionally, if, after satisfying the stock price
covenant, LabCorp sells the Purchased Shares between
August 2000 and October 2000, the Company must pay
Labcorp the amount by which $3.50 per share exceeds the
net proceeds from the sales of such shares. The
Company's obligation to LabCorp for the Termination Fee
is secured by a security interest in all of the
Company's assets and the assets of its wholly-owned
subsidiary Universal Standard Healthcare of Delaware,
Inc. ("Universal Delaware"), other than the capital
stock of certain regulated companies owned by Universal
Delaware. The Company's obligation to LabCorp for the
Termination Fee and LabCorp's security interest in
certain assets of the Company is subordinated to certain
debt of the Company and the assets securing such debt.
During 1998, the redeemable common stock balance was
increased by approximately $149,000 to reflect the
systematic accretion of such balance to the July 2000
mandatory redemption amount of $3.50 share, or
approximately $5.0 million in total. The redeemable
common stock balance was approximately $4.4 million at
December 31, 1998.
52
<PAGE> 54
UNIVERSAL STANDARD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Claims expense recorded by the Company for services
provided by LabCorp (which is one of the Company's
qualified providers for clinical laboratory testing
services) totaled approximately $1.3 million for the
period from August 1998 to December 31, 1998.
11. NET MANAGED The Company has entered into fixed monthly fee
CARE REVENUE 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 46%, 73% and 62% of Net
Managed Care revenue for 1998, 1997 and 1996,
respectively.
In January 1998, the Company initiated a National
Laboratory Program with General Motors Corporation. This
program, which generated approximately $7.2 million in
revenues (28% of Net Managed Care revenues), was
terminated in October 1998.
12. SPECIAL CHARGES The Company previously recorded special charges of
approximately $18.8 million and $5.3 million in 1997 and
1996, respectively. The 1997 special charge included an
impairment to intangible assets (primarily goodwill) of
approximately $14 million, with the remaining amount of
the charge related to various re-engineering,
restructuring and non-recurring items. The 1996 special
charge related primarily to re-engineering, facility and
employee-related expenses.
With the exception of the $1,290,000 indemnification
amount in 1997 described in Note 8, the 1997 and 1996
special charge amounts have been included in the loss
from operations of the laboratory division on the
accompanying statements of operations.
13. OPERATING LEASES As part of its laboratory operations, the Company leased
its laboratory and warehouse facilities, patient service
center facilities and certain transportation and
laboratory equipment under operating lease agreements.
In addition, the Company continues to lease its main
office facilities. Rent expenses for operating leases
were as follows (in thousands): $1,432 for 1998, $1,437
for 1997, and $1,856 for 1996.
53
<PAGE> 55
UNIVERSAL STANDARD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
The Company has recorded a liability of approximately
$2.2 million at December 31, 1998 relating to existing
lease commitments for the discontinued laboratory
operations (see Note 7). The Company's operating lease
commitments for its continuing operations relate
primarily to its main office facilities; future minimum
rental payments are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ending December 31,
--------------------------------------------------------
<S> <C>
1999 $ 272
2000 369
2001 377
2002 385
2003 393
Thereafter 99
--------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
14. INCOME TAXES The income tax benefits consists of (in thousands):
AND LOSS
CARRYFORWARDS Years Ended December 31, 1998 1997 1996
-------------------------------------------------------
<S> <C> <C> <C>
Current $ - $ - $ (345)
Deferred - - (1,122)
-------------------------------------------------------
$ - $ - $(1,467)
=======================================================
</TABLE>
Deferred income tax assets and liabilities are as
follows (in thousands):
<TABLE>
<CAPTION>
December 31, 1998 1997
--------------------------------------------------------
<S> <C> <C>
DEFERRED TAX ASSETS
Net operating loss carryforward $ 14,766 $ 8,564
Accruals 1,494 507
Other, net 284 379
--------------------------------------------------------
TOTAL DEFERRED TAX ASSETS 16,544 9,450
========================================================
</TABLE>
54
<PAGE> 56
UNIVERSAL STANDARD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
<TABLE>
<CAPTION>
December 31, 1998 1997
--------------------------------------------------------
<S> <C> <C>
DEFERRED TAX LIABILITIES
Property and equipment 260 867
Intangible assets 224 746
Other, net - 304
--------------------------------------------------------
TOTAL DEFERRED TAX LIABILITIES 484 1,917
--------------------------------------------------------
Net deferred taxes 16,060 7,533
Less valuation allowance (16,060) (7,533)
--------------------------------------------------------
ADJUSTED DEFERRED TAXES $ - $ -
========================================================
</TABLE>
The Company established a 100% valuation allowance
against the net deferred tax assets in 1998 and 1997,
based on uncertainty surrounding the expected
realization of this asset.
A reconciliation of the statutory federal income tax
rate to the effective rate is as follows:
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997 1996
----------------------------------------------------------
<S> <C> <C> <C>
Statutory rate (benefit) (34.0)% (34.0)% (34.0)%
Valuation allowance adjustment 27.4 26.1 23.2
Non-deductible intangibles 5.4 5.8 1.2
Other 1.2 2.1 (6.3)
----------------------------------------------------------
EFFECTIVE RATE -0-% -0-% (15.9)%
==========================================================
</TABLE>
The Company has a net operating loss carryforward of
approximately $43 million, a portion of which is subject
to capital loss limitations. The available carryforward
period for these losses expires at various dates between
2011 and 2018.
55
<PAGE> 57
UNIVERSAL STANDARD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
15. 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% or
33-1/3% on each of the successive 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>
1998 1997 1996
-----------------------------------------------------------------------
<S> <C> <C> <C>
Net loss - as reported $ (31,175) $ (20,676) $ (7,751)
Net loss - pro forma (31,571) (21,140) (8,251)
Net loss per share - as reported (4.57) (3.15) (1.20)
Net loss per share - pro forma (4.63) (3.22) (1.28)
-----------------------------------------------------------------------
</TABLE>
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 1998, 1997 and 1996, respectively: dividend
yield of 0% for all years; expected volatility of 74%,
65% and 60%; risk-free interest rate of 5.9%, 6.0% and
5.6% and expected lives of 4.0 years, 4.0 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.
56
<PAGE> 58
UNIVERSAL STANDARD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
A summary of the status of the Company's stock options
is as follows:
<TABLE>
<CAPTION>
Weighted-Average
Shares Exercise Price
----------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at January 1, 1996 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
Granted 779,000 2.26
Expired (493,600) 3.70
----------------------------------------------------------------
OUTSTANDING AT DECEMBER 31, 1998 1,593,723 3.17
================================================================
</TABLE>
The weighted-average grant date fair value of options
during 1998, 1997 and 1996 was approximately $1.34,
$1.88 and $1.24, respectively.
Options exercisable at year-end, together with the
weighted-average exercise price, are summarized as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------- -------------- --------------
Shares Price Shares Price Shares Price
---------------------------------------------------
<S> <C> <C> <C> <C> <C>
642,623 $ 2.66 664,623 $ 5.07 456,523 $5.52
===================================================
</TABLE>
57
<PAGE> 59
UNIVERSAL STANDARD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
The following tables summarize information regarding
stock options outstanding and exercisable at December
31, 1998:
<TABLE>
<CAPTION>
Options Outstanding
-------------------------------------
Range of Weighted Average Weighted Average
Exercise Prices Number Remaining Contractual Life Exercisable Price
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 1.90 - 2.75 593,000 9 years $ 2.26
$ 2.82 - 3.36 399,691 6 years 3.22
$ 3.61 - 4.95 446,032 7 years 3.97
$ 5.47 - 5.60 120,000 7 years 5.57
$10.00 - 11.74 35,000 4 years 10.75
----------------------------------------------------------------------------
1,593,723 7 years $ 3.17
============================================================================
</TABLE>
<TABLE>
<CAPTION>
Options Exercisable
-------------------------
Range of Weighted Average
Exercise Prices Number Exercise Price
--------------------------------------------
<S> <C> <C>
$ 1.90 - 2.75 - $ -
$ 2.82 - 3.36 284,357 3.19
$ 3.61 - 4.95 240,766 4.13
$ 5.47 - 5.60 82,500 5.58
$10.00 - 11.74 85,000 10.75
--------------------------------------------
642,623 $ 2.66
============================================
</TABLE>
In addition to the above, the Company has warrants
outstanding that entitles the holders to purchase
183,117 shares of common stock at prices ranging from
$2.50 to $3.19 per share. The warrants, which may be
exercised at any time in whole or in part, expire in
2001 and 2002.
58
<PAGE> 60
UNIVERSAL STANDARD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
16. MATERIAL FOURTH During the fourth quarter of fiscal 1998, the Company
QUARTER made adjustments which are material to the fourth
ADJUSTMENTS quarter results. These adjustments primarily relate to
the resolution of various estimates previously made in
the third quarter of 1998 involving the August 1998 sale
of laboratory operations, with the resultant write-down
of assets and recording of reserves related to the
discontinued operations recorded in the fourth quarter.
These adjustments include: (a) property and equipment
($5.9 million) and intangible asset ($3.7 million)
write-downs to remove all laboratory-related items from
the Company's December 31, 1998 balance sheet, (b)
accounts receivable write-down ($3.9 million) to reduce
laboratory-related receivables to their estimated net
realizable value, (c) recording redeemable common stock
as indicated on the December 31, 1998 balance sheet
rather than as a component of stockholders' equity ($4.3
million), and (d) establishment of necessary reserves
related to leases, litigation, personnel and other
issues resulting from the discontinued laboratory
operations ($4.8 million). In addition to the
adjustments for laboratory operations, fourth quarter
adjustments related to continuing operations of
approximately $1.4 million were necessary, primarily in
order to increase claims expense based on management's
updated estimates of year-to-date activity and results.
17. COMMITMENTS The Company has employment contracts with certain of its
AND officers for remaining terms of up to two years
CONTINGENCIES providing for compensation aggregating $900,000 at
December 31, 1998.
The Company is also a defendant and plaintiff in various
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 accompanying
financial statements. The Company has recorded total
litigation-related reserves of approximately $1.7
million at December 31, 1998 (see Note 7) for several
lawsuits relating to the discontinued laboratory
operations; management believes these reserves are
adequate to cover future adverse judgments against the
Company with respect to these existing lawsuits.
59
<PAGE> 61
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:
1998 $ 11,974 $ 6,277 $ - $ (18,251) $ -0-
1997 8,157 4,183 - (366) 11,974
1996 9,239 4,141 - (5,223) 8,157
</TABLE>
- - -------------------------------------
(A) Write-offs charged to reserve
60
<PAGE> 62
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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 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" in the Company's Proxy Statement 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.
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.
61
<PAGE> 63
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 30, 1999
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 31, 1999.
/s/ Eugene E. Jennings
- - --------------------------------------- President, Chief Executive Officer
Eugene E. Jennings and Director (principal executive
officer)
/s/ Alan S. Ker
- - --------------------------------------- Vice President, Finance, Chief
Alan S. Ker Financial Officer and Treasurer
(principal financial and accounting
officer)
/s/ Eduardo Bohorquez, Ph.D.
- - --------------------------------------- Director
Eduardo Bohorquez, Ph.D.
/s/ Anthony A. Bonelli
- - --------------------------------------- Director
Anthony A. Bonelli
/s/ Robert P. DeCresce, M.D.
- - --------------------------------------- Director
Robert P. DeCresce, M.D.
/s/ Thomas R. Donahue
- - --------------------------------------- Director
Thomas R. Donahue
/s/ P. Thomas Hirsch
- - --------------------------------------- Director
P. Thomas Hirsch
- - ---------------------------------------- Director
Joseph J. Vadapalas
62
<PAGE> 64
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
2.1 Purchase Agreement between the Company and
the Laboratory Corporation of American
Holdings dated July 16, 1998, incorporated
by reference from the Company's Current
Report on Form 8-K dated July 21, 1998. The
Registrant agrees to furnish supplementally
a copy of any omitted schedule to the
Securities and Exchange Commission upon
request. (23)
3.1 Restated Articles of Incorporation of the Company, filed with the
Michigan Department of Commerce - Corporation and Securities
Bureau on October 2, 1992, as amended. (23)
3.2 Bylaws of the Company, Amended and Restated August 25, 1997.
(19)
4.1 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)
4.2 Revolving Credit and Loan Agreement dated April 30, 1997 between
the Company and its subsidiaries and NBD Bank. (17)
4.2(a) Covenant Waiver Letter dated July 29, 1997 between NBD Bank and
the Company and its subsidiaries. (18)
4.2(b) Waiver of Loan Agreement Covenants between National Bank of
Detroit and the Company dated November 5, 1997. (19)
4.2(c) First Amendment to Revolving Credit and Loan Agreement between
the Company and its subsidiaries and NBD Bank, dated September
26, 1997. (19)
4.2(d) Second Amendment to Revolving Credit and Loan Agreement
between the Company and its subsidiaries and NBD Bank, dated
November 30, 1997. (20)
4.2(e) Third Amendment to Revolving Credit and Loan Agreement between
the Company and its subsidiaries and NBD Bank, dated February 2,
1998. (20)
63
<PAGE> 65
4.2(f) Fourth Amendment to Revolving Credit and Loan Agreement
between the Company and its subsidiaries and NBD Bank, dated
March 12, 1998. (20)
4.2(g) Fifth Amendment to Revolving Credit and Loan Agreement dated
June 5, 1998 between NBD Bank and the Company and its
subsidiaries. (22)
4.2(h) Letter Agreement dated July 21, 1998 between NBD Bank and the
Company and its subsidiaries. (22)
4.2(i) Sixth Amendment to Revolving Credit and Loan
Agreement dated August 3, 1998 between NBD
Bank and the Company and its subsidiaries.
4.2(j) Letter Agreement, dated October 8, 1998, among NBD Bank, the
Company, Universal Standard Healthcare of Michigan, Inc.,
Universal Standard Healthcare of Ohio, Inc., Universal Standard
Healthcare of Delaware, Inc., A/R Credit, Inc., and T.P.A.,
Inc. (23)
4.2(k) Seventh Amendment to Revolving Credit and
Loan Agreement dated January 4, 1998 between
NBD Bank and the Company and its
subsidiaries. (1)
4.2(l) Eighth Amendment to Revolving Credit and
Loan Agreement dated January 25, 1999
between NBD Bank and the Company and its
subsidiaries. (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)
64
<PAGE> 66
10.2* Employment Agreement dated June 28, 1991, by and between the
Company and Perry C. McClung. (2)
10.2(a)* Form of Amendment to the McClung Employment Agreement. (2)
10.2(b)* Second Amendment dated as of September 1,
1994 to Employment Agreement Dated as of
June 28, 1991 between the Company and Perry
C. McClung. (6)
10.2(c)* Third Amendment dated as of September 30,
1994 to Employment Agreement Dated as of
June 28, 1991 between the Company and Perry
C. McClung. (7)
10.2(d)* Employment Agreement, dated June 28, 1996, by and between the
Company and Perry C. McClung. (13)
10.2(e)* Employment Agreement between Universal
Standard Medical Laboratories, Inc. and
Perry C. McClung dated June 28, 1997.
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. (19)
10.3* Employment Agreement, dated July 30, 1991, by and among the
Company and Alan S. Ker. (2)
10.3(a)* Form of Amendment to the Ker Employment Agreement. (2)
10.3(b)* Fifth Amendment dated as of September 30, 1994 to Employment
Agreement dated as of July 30, 1991 between the Company and Alan
Ker. (7)
10.3(c)* Employment Agreement between Universal Standard Medical
Laboratories, Inc. and Alan S. Ker dated August 4, 1997. (19)
10.4* Employment Agreement dated as of March 12, 1996 between Eugene
Jennings and the Company, with exhibits. (12)
10.5* 1992 Stock Option Plan (as amended and restated August 25, 1997).
(19)
10.5(a)* 1994 Performance Stock Option - Executive Officer. (7)
65
<PAGE> 67
10.5(b)* Incentive Stock Option - Executive Officers, as amended. (12)
10.5(c)* Incentive Stock Option Award Program. (14)
10.5(d)* First Amendment of 1994 Performance Stock Option - Executive
Officers Agreement by and between Perry C. McClung and the
Company. (13)
10.5(e) 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)
10.5(f) First Amendment to 1994 Performance Stock
Option - Executive Officers Agreement by and
between Alan S. Ker and the Company.
(13)
10.5(g) 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)
10.5(h)* Letter Agreement dated March 25, 1998, terminating 1994
Performance Stock Option - Executive Officers Agreement dated
December 6, 1994, between the Company and Alan S. Ker. (22)
10.5(i)* Incentive Stock Option - Executive Officers and Non-Qualified
Stock Option - Executive Officers, dated March 25, 1998 between
the Company and Alan S. Ker. (22)
10.5(j)* Incentive Stock Option - Executive Officers and Non-Qualified
Stock Option - Executive Officers, dated March 25, 1998 between
the Company and Imtiaz Sattaur. (22)
10.5(k)* Form of Incentive Stock Option Agreement - Executive Officer, as
amended. (21)
10.5(l)* Form of Incentive Stock Option Agreement - Management, as
amended. (21)
10.5(m)* Form of Incentive Stock Option Agreement - Directors, as amended.
(21)
10.6* Employee Stock Purchase Plan (as amended and restated August 25,
1997). (19)
66
<PAGE> 68
10.6(a)* First Amendment to Employee Stock Purchase Plan (as amended and
restated August 25, 1997). (1)
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)
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 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 Tax Deferred Savings Plan. (16)
10.10(d)* Fourth Amendment to the USML Tax Deferred Savings and Trust
Agreement. (16)
10.10(e)* Fifth Amendment to the USML Tax Deferred Savings and Trust
Agreement, effective August 4, 1997. (19)
10.11 Form of Lease Agreement by and between WRJ
Company, JWJ Company and the Company
(formerly LCM/Universal Standard, Inc.)
(2)
10.12 Lease Agreement dated as of November 18, 1994 between Jan-Jo
Development Corporation and the Company. (7)
10.12(a) First Amendment to Lease dated as of April 3, 1995, between
Jan-Jo Development Corporation and the Company. (11)
10.12(b) Second Amendment to Lease, dated October 19, 1995, between Jan-
Jo Development Corporation and the Company. (11)
67
<PAGE> 69
10.12(c) Third Amendment to Lease, dated November 14, 1995, between Jan-
Jo Development Corporation and the Company. (11)
10.12(d) Acknowledgment Agreement to Lease, dated November 16, 1996,
between Jan-Jo Development Corporation, the Company and Wispark
Corporation. (11)
10.12(e) Fourth Amendment to Lease, dated December 15, 1995, between Jan-
Jo Development Corporation and the Company. (11)
10.13 Management Advisory and Consulting Services Agreement dated as
of June 28, 1991 between WestSphere Capital Associates, L.P. and
the Company. (2)
10.14 Non-Qualified Stock Option Agreement, dated May 31, 1992, with
Alan Ker. (3)
10.15* Non-Qualified Stock Option Agreement, dated February 13, 1992,
with Robert DeCresce. (3)
10.16* Non-Qualified Stock Option Agreement, dated June 24, 1992, with
Anthony Bonelli. (3)
10.17* Non-Qualified Stock Option Agreement, dated April 13, 1993, with
Robert DeCresce, M.D. (5)
10.18* Non-Qualified Stock Option Agreement, dated April 13, 1993, with
Anthony Bonelli. (5)
10.19* Directors Stock Option Plan (as amended and restated August 25,
1997). (19)
10.20* Employment Agreement between Universal Standard Medical
Laboratories, Inc. and Alan S. Ker dated August 4, 1998. (19)
10.21* Employment Agreement between Universal Standard Medical
Laboratories, Inc. and Perry C. McClung dated June
28, 1997. (19)**
10.22 Form of Executive Non-Competition and Restrictive Covenant
Agreement. (19)
10.23* Universal Standard Medical Laboratories, Inc. Agreement for
Incentive Stock Option Award Program Incentive Stock Option
Agreement for Alan Ker dated September 27, 1996. (19)
68
<PAGE> 70
10.24* 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)
10.25* Universal Standard Medical Laboratories, Inc. Agreement for
Incentive Stock Option Award Program Incentive Stock Option
Agreement for Perry McClung dated May 14, 1997. (19)
10.26* Employment Letter Agreement with Imtiaz Sattaur dated April 11,
1997. (20)
10.27 Stock Purchase Agreement dated June 8, 1998 between The
Kaufmann Fund, Inc. and the Company. (22)
10.28 Warrant to Purchase 100,000 shares of Common Stock issued August
3, 1998 to NBD by the Company. (22)
10.29 Stock Purchase Agreement between the Company and Laboratory
Corporation of America Holdings Dated July 16, 1998.
10.30 Co-Marketing Agreement, dated as of August 3, 1998, between the
Company and Laboratory Corporation of America Holdings. (25)
10.31 Shareholders' Agreement, dated as of August 3, 1998, between the
Company Laboratory Corporation of America Holdings. (25)
10.32 Voting Agreement among the Company, Laboratory Corporation
America Holdings, Anixter International, Inc., Signal Capital
Corporation, Portfolio Investment Company Limited, Ltd and CLF,
LP. (25)
10.33 Laboratory Services Agreement, dated as of August 3, 1998,
between the Company and Laboratory Corporation of America
Holdings. Exhibit A to this Agreement was filed separately with
the Commission pursuant to Rule 24b-2 of the Securities Exchange
Act of 1934 governing requests for confidential treatment of
information. (25)
69
<PAGE> 71
10.34 Security Agreement dated as of August 3, 1998, among the company,
Universal Standard Healthcare of Delaware, Inc. and Laboratory
Corporation of America Holdings. (25)
10.35 Sublease dated as of August 3, 1998, between the Company and
Laboratory Corporation of America Holdings. (25)
10.36 Transition Services Agreement dated as of August 3, 1998, between
the Company and Laboratory Corporation of America Holdings.
Portions of Schedule A to this Agreement were filed separately
with the Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934 governing requests for confidential
treatment of information. (25)
10.37 Non-Compete Agreement, dated as of August 3, 1998, by the Company
and all of its subsidiaries and affiliated companies for the
benefit of Laboratory Corporation of America Holdings. (25)
10.38 Universal Subordination Agreement, dated as of August 3, 1998,
among the Company, Universal Standard Healthcare of Delaware,
Inc. and Laboratory Corporation of America Holdings. (25)
10.39 Sublease Agreement, dated as of August 4, 1998, between the
Company and Laboratory Corporation of America Holdings. (25)
10.40 Consent of Signal Capital Corp., dated July 30, 1998, to the
Amendment to Stockholders Agreement dated as of June 28, 1991 by
and among Universal Standard Equity, Ltd., WestSphere Capital
Associates L.P., WestSphere Capital, Inc., WestSphere Funding II,
L.P., Fleet National Bank, Signal Capital Corp., Marvin Eisner,
MML, Inc., Robert Nowikowski, Barbara Pace, John Watkins, Perry
McClung, Janney Montgomery Scott., Inc., Richard J. Berman,
Marcus & Katz and Elan Holdings Corp. (25)
70
<PAGE> 72
10.41 Consent of Portfolio Investment Company
Limited, CLF, LTD. and CLF, L.P., dated July
31, 1998, to the Amendment to Stockholders
Agreement dated as of June 28, 1991 by and
among Universal Standard Equity, Ltd.,
WestSphere Capital Associates, L.P.,
WestSphere Capital, Inc., WestSphere Funding
II, L.P., Fleet National Bank, Signal
Capital Corp., Marvin Eisner, MML, Inc.,
Robert Nowikowski, Barbara Pace, John
Watkins, Perry McClung, Janney Montgomery
Scott, Inc., Richard J. Berman, Marcus &
Katz and Elan Holdings Corp. (25)
21.1 Subsidiaries of the Company. (20)
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.
71
<PAGE> 73
(1) Filed herewith.
(2) Incorporated by reference from the Company's Registration Statement on
Form S-1, No. 33- 49092, as amended.
(3) Incorporated by reference from the Company's 1992 Annual Report on
Form 10-K.
(4) Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the Fiscal Quarter ended March 31, 1993.
(5) Incorporated by reference from the Company's 1993 Annual Report on
Form 10-K.
(6) Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the Fiscal Quarter ended September 30, 1994.
(7) Incorporated by reference from the Company's 1994 Annual Report on
Form 10-K.
(10) Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the Fiscal Quarter ended September 30, 1995.
(11) Incorporated by reference from the Company's Registration Statement on
Form S-2, No. 33- 80187, as amended.
(12) Incorporated by reference from the Company's 1995 Annual Report on
Form 10-K.
(13) Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the Fiscal Quarter ended June 30, 1996.
(14) Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the Fiscal Quarter ended September 30, 1996.
(15) Incorporated by reference from the Company's Current Report on Form 8-K
filed January 4, 1997.
(16) Incorporated by reference from the Company's 1996 Annual Report on
Form 10-K.
(17) Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the Fiscal Quarter ended March 31, 1997.
(18) Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the Fiscal Quarter ended June 30, 1997.
(19) Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the Fiscal Quarter ended September 30, 1997.
72
<PAGE> 74
(20) Incorporated by reference from the Company's 1997 Annual Report
Form 10-K.
(21) Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the Fiscal Quarter ended March 31, 1998.
(22) Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the Fiscal Quarter ended June 30, 1998.
(23) Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the Fiscal Quarter ended September 30, 1998.
(24) Incorporated by reference from the Company's Current Report on Form 8-K
dated July 21, 1998.
(25) Incorporated by reference from the Company's Current Report on Form 8-K
dated August 19, 1998.
73
<PAGE> 1
EXHIBIT 4.2(K)
SEVENTH AMENDMENT TO REVOLVING CREDIT AND LOAN AGREEMENT
THIS SEVENTH AMENDMENT TO REVOLVING CREDIT AND LOAN AGREEMENT (this
"Seventh Amendment to Loan Agreement" or this "Seventh Amendment") is entered
into on January 7, 1999 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 Seventh Amendment to Loan Agreement is based on the following
recitals ("Recitals"), which are incorporated into and made a part of this
Seventh 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, by a Third Amendment to Revolving Credit and
Loan Agreement dated February 2, 1998, by a Fourth Amendment to
Revolving Credit and Loan Agreement dated March 12, 1998, by a Fifth
Amendment to Revolving Credit and Loan Agreement dated June 5, 1998, by
a letter agreement dated July 21, 1998, by a Sixth Amendment to
Revolving Credit and Loan Agreement dated August 3, 1998, and by a
letter agreement dated October 8, 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 Seventh
Amendment have the same meanings given to those terms in the Loan
Documents.
2. Simultaneously with the execution of the Sixth Amendment
USML entered into the Labcorp Transaction.
3. In connection with the October 8, 1998 letter agreement, USML
executed a Master Demand Business Loan Note dated October 8, 1998 in
the original principal
<PAGE> 2
amount of $2,000,000 (the "Demand Note"). NBD made certain loans and
advances to USML, which are evidenced by the Demand Note.
4. Obligors have requested and, subject to the terms hereof,
Bank has agreed to amend the Loan Agreement as set forth in this
Seventh 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 following defined terms in Section 1.1 of the Loan
Agreement are amended in their entirety to read as follows:
"Adjusted Line of Credit Floating Rate" means the per annum
rate of interest equal to the sum of (a) the Prime Rate in effect from
time to time, plus, (b) one percent. The Adjusted Line of Credit
Floating Rate changes simultaneously with any change in the Prime Rate.
"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 Equipment, multiplied
by, a person's Qualified Equipment reported in a Collateral Activity
Report delivered in accordance with Section 6.4(b:
Qualified Accounts up to the Applicable Amount
Qualified Equipment up to 80%
All Qualified 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 sole
discretion. "Applicable Amount" means 40% during October, November, and
December, 1998; 30% during January and February, 1999; and 25% during
March, 1999.
"Termination Date" means the earlier to occur of (a) March 31,
1999 and (b) at NBD's option and in its sole discretion, any time
before that.
-2-
<PAGE> 3
B. Clause (ii) of the definition of Qualified Account in
section 1.1 of the Loan Agreement is amended in its entirety to read as
follows: "(ii) [Intentionally omitted.]"
C. Section 2.1 of the Loan Agreement is amended in its
entirety to read as follows:
"2.1 LINE OF CREDIT. From time to time prior to the Termination Date
and subject to the terms and conditions set forth in this Agreement,
NBD agrees, in its sole and absolute discretion, to make Loans to USML
in such amounts as USML may request, provided that the aggregate
principal amount of all borrowings made by USML under this line of
credit at any one time outstanding may not exceed the lesser of (a)
$2,000,000 minus the face amount of the Litigation Letter of Credit
(the "Line Limit") or (b) the Borrowing Base minus the face amount of
the Litigation Letter of Credit (the "Line of Credit" or the
"Credit"). The outstanding loans and advances made in connection with
and evidenced by the Demand Note, in the principal amount of
$____________ on the date of the Seventh Amendment, are rolled into
and consolidated with the Line of Credit. Advances under the Line of
Credit will only be made at the Adjusted Line of Credit Floating Rate,
and no Advances under the Line of Credit will be made at the Adjusted
LIBOR Rate.
All such Loans are evidenced by a single promissory note of USML (the
"Line of Credit Note"), payable to the order of NBD and dated as of
the date of the Seventh Amendment, in substantially the form of
Exhibit 2.1 attached to the Seventh Amendment. The Line of Credit Note
must be executed by USML and delivered to NBD prior to or
simultaneously with the initial Loan under this Line of Credit."
D. By January 15, 1999, NBD and the Obligors agree to meet to
discuss and attempt to agree on amending and setting 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 by January 15, 1999, then such event
constitutes an Event of Default under all of the Loan Documents for
which there is no cure period. The foregoing provision amends any prior
provisions in the Loan Documents dealing with this issue, and waives
any Event of Default created by the failure to agree on amended and
reset financial covenants by October 2, 1998.
E. Simultaneously with the execution of this Seventh
Amendment, Borrower must pay to NBD a $5,000 facility fee, which fee
is fully earned upon NBD's execution of this Seventh Amendment.
F. The Obligors have advised that Delaware Managed Care has
-3-
<PAGE> 4
established Universal Standard Healthcare of Florida, Inc., a Florida
corporation ("Florida Managed Care") as a 100% owned subsidiary that
will be licensed to do business in Florida. Notwithstanding anything
to the contrary contained in the Loan Documents, NBD consents to
Delaware Managed Care's creation of Florida Managed Care if (1)
Obligors' investment in the New Subsidiary does not exceed $150,000;
(2) Delaware Managed Care pledges to NBD 100% of the issued and
outstanding capital stock of the Florida Managed Care in accordance
with the Stock Pledge Agreement (the "Florida Managed Care Stock
Pledge Agreement") in the form attached as Exhibit A; and (3) the
Obligors take such other further actions and execute such other
documents as NBD may reasonably request in connection with Florida
Managed Care. Subject to Section 9.27 of the Loan Agreement (as
amended by this Seventh Amendment), Florida Managed Care assumes the
obligations of the Obligors under the Loan Documents and is an Obligor
under the Loan Documents for all purposes. In connection therewith (1)
Florida Managed Care represents and warrants that all representations
and warranties (including those in Article IV of the Loan Agreement
are true, correct and complete with respect to it; (2) the
parenthetical "(other than Michigan Managed Care and Ohio Managed
Care)" appearing in several places in the Loan Agreement is amended to
read as follows: "(other than Michigan Managed Care, Ohio Managed
Care, and Florida Managed Care)"; (3) the parenthetical in the first
sentence of Section 6.11 of the Loan Agreement is amended to read as
follows: "(including Michigan Managed Care, Ohio Managed Care, and
Florida Managed Care)"; and (4) Section 9.27 of the Loan Agreement is
amended to read as follows: "Notwithstanding any other term or
condition of this Agreement or the other Loan Documents, Michigan
Managed Care's, Ohio Managed Care's and Florida Managed Care's
liability with respect to the Loans is limited to that portion of the
Loan's arising in connection with Standby Letters of Credit issued for
their respective accounts in connection with their managed care
business."
G. Obligors have advised NBD that they intend to dissolve A/R
Credit. Based on each Obligor's representation and warranty that A/R
Credit has no assets, NBD waives any Event of Default under the Loan
Documents due to A/R Credit's dissolution.
H. The Loan Documents are amended, effective as of July 14,
1998, to provide that the maturity date of the Term Note is amended
from July 15, 1998 to August 4, 1998.
I. NBD waives through December 31, 1998 the default under the
Loan Documents due to Obligors' failure to deliver to NBD the Managed
Care Reports.
-4-
<PAGE> 5
J. From and after the date of this Seventh 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 Seventh
Amendment; (ii) to "obligations" and "Obligations" are to be treated as
referring to all indebtedness and obligations referred to in this
Seventh Amendment (including the Obligations evidenced by the Line of
Credit Note; (iii) to "Loan Documents" includes, without limitation,
the Warrant Documents, the Line of Credit Note and the Florida Managed
Care Stock Pledge Agreement; (iv) to "Obligors" includes Florida
Managed Care; (v) to "Collateral" includes, without limitation, the
collateral granted to NBD under the Florida Managed Care Stock Pledge
Agreement.
K. Prior to or simultaneously with execution and delivery of
this Seventh 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 Seventh Amendment. Obligors must pay all costs and
expenses (including attorneys' fees) incurred by Bank in connection
with this Seventh Amendment.
L. 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
Seventh Amendment 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.
M. Obligors represent and warrant to NBD that:
(1) (a) The execution, delivery and performance of
this Seventh Amendment by the Obligors and all agreements and
documents delivered by Obligors in connection with this Seventh
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.
-5-
<PAGE> 6
(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
Seventh Amendment and all agreements and documents delivered in
connection with this Seventh Amendment.
(c) This Seventh Amendment and all agreements and
documents delivered by Obligors in connection with this Seventh
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 Seventh Amendment, except as set forth on Exhibit C, all
of the representations and warranties contained in the Loan
Documents (other than in Section 4.16 of the Loan Agreement) 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 Seventh Amendment no
Default or Event of Default has occurred and is continuing or will
exist on the date of this Seventh Amendment under the Loan
Agreement or any of the other Loan Documents.
N. The terms and provisions of this Seventh Amendment amend,
add to and constitute a part of the Loan Agreement. Except as expressly
modified and amended by the terms of this Seventh 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.
O. If there is an express conflict between the terms of this
Seventh Amendment to Loan Agreement and the terms of the Loan Agreement
or the other Loan Documents, the terms of this Seventh Amendment govern
and control.
P. This Seventh Amendment may be executed in any number of
counterparts
-6-
<PAGE> 7
with the same effect as if all signatories had signed the same
document. All counterparts must be construed together to constitute one
instrument.
Q. 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.
R. There are no promises or inducements which have been made
to any signatory hereto to cause such signatory to enter into this
Seventh Amendment other than those which are set forth in this Seventh
Amendment.
S. 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.
T. 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
-7-
<PAGE> 8
INSTRUMENT SIGNED BY THE PARTY TO WHICH SUCH RELINQUISHMENT WILL BE
CHARGED.
NBD BANK
By: Robert B. Greene
---------------------------------------------
Robert B. Greene
First Vice President
UNIVERSAL STANDARD
HEALTHCARE, INC.
By: Alan S. Ker
---------------------------------------------
Alan S. Ker
Vice President Finance and Treasurer
UNIVERSAL STANDARD HEALTHCARE
OF MICHIGAN, INC.
By: Alan S. Ker
---------------------------------------------
Alan S. Ker, Treasurer
UNIVERSAL STANDARD HEALTHCARE
OF OHIO, INC.
By: Alan S. Ker
---------------------------------------------
Alan S. Ker, Treasurer
UNIVERSAL STANDARD HEALTHCARE
OF DELAWARE, INC.
By: Alan S. Ker
---------------------------------------------
Alan S. Ker, Treasurer
A/R CREDIT, INC.
By: Alan S. Ker
---------------------------------------------
Alan S. Ker, Treasurer
UNIVERSAL STANDARD HEALTHCARE
OF FLORIDA, INC.
By: Alan S. Ker
---------------------------------------------
Alan S. Ker, Treasurer
Exhibit 2.1 Line of Credit Note
A Stock Pledge Agreement
-8-
<PAGE> 9
EXHIBIT 2.1
LINE OF CREDIT NOTE
$2,000,000 January 7, 1999
Detroit, Michigan
FOR VALUE RECEIVED, the undersigned, Universal Standard Healthcare, Inc.,
formerly known as Universal Standard Medical Laboratories, Inc., a Michigan
corporation ("Borrower"), promises to pay to the order of NBD Bank ("Bank"),
under the Revolving Credit and Loan Agreement, dated April 30, 1997, as amended
(as amended, and as may be further amended or restated from time to time, the
"Credit Agreement"), by and between Borrower, Bank, and others, at the main
office of the Bank in Detroit, Michigan in accordance with the Credit Agreement,
in lawful money of the United States of America and in immediately available
funds, the principal sum of $2,000,000, or such lesser amount as is recorded on
the books and records of Bank, on the earlier to occur of the Termination Date
(as defined in the Credit Agreement) or demand for payment by Bank, together
with interest on the outstanding balance thereof as provided in the Credit
Agreement.
The Bank is hereby authorized by Borrower to record on the schedule attached
to this Note, or on its books and records, the date, amount and type of each
Advance, the applicable interest rate (including any changes therein), the
amount of each payment of principal thereon and the other information provided
for on such schedule, which schedule or books and records, as the case may be,
constitute presumptive evidence of the information so recorded, provided,
however, that any failure by the Bank to record any such information shall not
relieve Borrower of its obligation to repay the outstanding principal amount of
all Advances made by the Bank, all accrued interest thereon, and any amount
payable with respect thereto in accordance with the terms of this Note and the
Credit Agreement.
This Note is in substitution and exchange for the Master Demand Business Loan
Note dated October 8, 1998 in the original principal amount of $2,000,000 (the
"Old Note") and shall not in any circumstances be deemed a novation or to have
paid, terminated, extinguished or discharged the undersigned's indebtedness
evidenced by the Old Note, all of which indebtedness shall continue under and be
evidenced and governed by this Note. The Old Note is amended and restated in its
entirety by this Note. Any reference in any other document or instrument
(including but not limited to the Loan Agreement) to the Old Note shall
constitute a reference to this Note
This Note is subject to, and evidences the Advances made by Bank under, the
Credit Agreement, to which reference is made for a statement of the
circumstances and terms under which this Note is subject to prepayment and under
which its due date may be accelerated and other terms applicable to this Note.
Capitalized terms used but not defined in this Note have the same meanings as in
the Credit Agreement.
Borrower and each endorser or guarantor hereof waive demand, presentment,
protest, diligence, notice of dishonor and any other formality in connection
with this Note. Borrower agrees to pay, in addition to the principal, interest
and other sums due and payable hereon, all costs of collecting this Note,
including reasonable attorneys' fees and expenses.
UNIVERSAL STANDARD HEALTHCARE,
INC., a Michigan Corporation
By: Alan S. Ker
------------------------------------
Alan S. Ker
Vice President Finance and Treasurer
<PAGE> 10
EXHIBIT A
STOCK PLEDGE AGREEMENT
THIS STOCK PLEDGE AGREEMENT (this "Agreement ") is made as of December ,
1998, by Universal Standard Healthcare of Delaware, Inc., formerly known as
Universal Standard Managed Care, Inc., a Delaware corporation ("Pledgor"),
Universal Standard Healthcare of Florida, Inc., a Florida corporation,
("Florida Managed Care" or "Issuer"); in favor of NBD Bank ("Lender").
RECITALS
A. Pledgor is the legal and beneficial owner of the shares of capital
stock (the "Stock") listed on Schedule "A," which constitute all of the issued
and outstanding shares of capital stock of Issuer.
B. Issuer, Pledgor, and others 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, by a Third
Amendment to Revolving Credit and Loan Agreement dated February 2, 1998, by a
Fourth Amendment to Revolving Credit and Loan Agreement dated March 12, 1998, by
a Fifth Amendment to Revolving Credit and Loan Agreement dated June 5, 1998, by
a letter agreement dated July 21, 1998, by a Sixth Amendment to Revolving Credit
and Loan Agreement dated August 3, 1998, by a letter agreement dated October 8,
1998, and by a Seventh Amendment to Revolving Credit and Loan Agreement dated on
or about the same date as this Agreement (as amended and as may be further
amended or supplemented from time to time, the "Loan Agreement"), pursuant to
which Lender has agreed, subject to the terms and conditions of the Loan
Agreement, to make loans and advances (collectively, the "Loans") to or for the
benefit of the Issuer, Pledgor, and others as provided in the Loan Agreement.
C. It is a condition precedent to the obligations of Lender to make
further Loans that Pledgor shall have entered into this Agreement.
D. Capitalized terms used but not defined in this Agreement have the
meanings given them in the Loan Agreement.
THEREFORE, for good and valuable consideration, the receipt and
adequacy of which are hereby expressly acknowledged, Pledgor and the Issuer
agree with Lender as follows:
1. Definitions: In addition to the terms defined above or elsewhere
in this Agreement, the following terms shall have the following meanings:
(a) "Collateral" has the meaning assigned in Section 2 of this
Agreement.
(b) "Issuer Obligations" means all obligations or liabilities of
Issuer to
<PAGE> 11
Pledgor, now existing or hereafter incurred, including, without limitation, all
accounts payable, contract rights, chattel paper, book debts, notes, drafts,
instruments, documents, acceptances and other forms of present or future
obligations of Issuer to Pledgor, and all collateral security and any guarantees
of any kind given by any Person with respect to any of the foregoing.
(c) "Obligations" has the same meaning as in the Loan Agreement.
(d) "Proceeds" has the meaning assigned to it under the Michigan
Uniform Commercial Code and, in any event, includes, but not is not limited to
(i) any and all proceeds of any insurance, indemnity, warranty or guaranty
payable to Pledgor from time to time with respect to any of the Collateral, (ii)
any and all payments (in any form whatsoever) made or due and payable to Pledgor
from time to time in connection with any requisition, confiscation,
condemnation, seizure or forfeiture of all or any part of the Collateral by any
governmental body, authority bureau or agency (or any person acting under color
of Governmental Authority), and (iii) any and all other amounts from time to
time paid or payable under or in connection with any of the Collateral,
including, without limitation, any and all dividends, cash, instruments and
other property from time to time received, receivable or otherwise distributed
in respect of, or in exchange for, any of the Stock.
2. Pledgor's Pledge: As security for the payment and performance of
any and all of the Obligations, Pledgor hereby delivers, pledges and grants to
Lender a continuing security interest in the following:
(a) the Stock listed on Schedule A and all other types or items
of property which is to be pledged to Lender and held as Collateral under this
Agreement;
(b) stock powers ("Powers") duly executed in blank;
(c) the Issuer Obligations; and
(d) the Proceeds of each of the foregoing. (The Stock, the
Powers, the Issuer Obligations and the Proceeds are collectively referred to as
the "Collateral").
3. Lender's Duties: Subject to Section 9-207 of the Michigan Uniform
Commercial Code ("Code"), Lender has no duty with respect to the Collateral.
Without limiting the generality of the foregoing, Lender shall be under no
obligation to take any steps necessary to preserve rights in the Collateral
against any other parties or to exercise any rights represented thereby;
provided, however, that Lender may, at its option, do so, and any and all
expenses incurred in connection therewith shall be for the sole account of
Pledgor.
4. Voting Rights; Dividends; Etc.: During the term of this Agreement:
(a) As long as no Default or Event of Default shall have occurred
and be continuing, Pledgor shall be entitled to exercise any and all voting and
other consensual rights
2
<PAGE> 12
pertaining to the Stock or any part thereof, and Lender shall execute and
deliver (or cause to be executed and delivered) to Pledgor all such proxies and
other instruments as Pledgor may reasonably request for the purpose of enabling
Pledgor to exercise those voting and other rights which it is entitled to
exercise pursuant to the foregoing; provided, however, that no vote shall be
cast or consent, waiver or ratification given or action taken which would
directly or indirectly impair the Collateral or be inconsistent with or violate
any provision of this Agreement, the Loan Agreement or any other Loan Document.
(b) If Pledgor shall become entitled to receive or shall receive
any dividends or other distributions on the Stock including any stock
certificate (including, without limitation, any certificate representing a stock
dividend or a distribution in connection with any reclassification, increase or
reduction of capital, or issued in connection with any reorganization), option
or rights, whether as an addition to, in substitution of, or in exchange for any
shares of any Stock, or otherwise, Pledgor agrees to accept the same as agent
for Lender and to hold the same in trust on behalf of and for the benefit of the
Lender and to deliver the same forthwith to the Lender in the exact form
received, with the endorsement of Pledgor when necessary and/or appropriate
undated stock powers duly executed in blank, to be held by Lender as additional
collateral security for the Obligations; provided, however, that until a Default
or an Event of Default occurs under the Loan Agreement Pledgor may use in the
ordinary course of its business cash dividends received from the Issuer.
(c) Pledgor will promptly deliver to Lender to hold as Collateral
any and all notes, drafts or other documents or instruments evidencing Issuer
Obligations, duly endorsed in blank or accompanied by an assignment to Lender,
and will also promptly deliver to Lender all Proceeds of Issuer Obligations,
also to be held as Collateral hereunder.
(d) If an Default or Event of Default shall have occurred and be
continuing, Pledgor shall not be entitled to receive or retain any dividends or
distributions paid in respect of the Stock whether paid or payable in cash or
other property, whether in redemption of, or in exchange for the Stock, whether
in connection with a partial or total liquidation or dissolution of the Stock,
or whether in connection with a reduction of capital, capital surplus or paid-in
surplus of the Stock or otherwise, and any and all such dividends or
distributions shall be forthwith delivered to Lender to hold as Collateral and
shall, if received by Pledgor, be received in trust for delivery to Lender, be
segregated from the other property or funds of Pledgor, and be forthwith
delivered to Lender as Collateral in the same form as so received (with
any necessary endorsement).
(e) If an Default or Event of Default shall have occurred and be
continuing, all rights of Pledgor to exercise the voting and other consensual
rights which it would otherwise be entitled to exercise pursuant to this Section
4 shall, at Lender's option, cease, and all such rights shall, at Lender's
option, thereupon become vested in Lender, so long as an Default or Event of
Default shall continue, and Lender shall, at its option, thereupon have the sole
right, but not the obligation, to exercise such voting and other consensual
rights.
3
<PAGE> 13
5. Pledgor Representations: Pledgor represents, wan-ants and agrees
that:
(a) There are no restrictions upon the transfer of any of the
Collateral and Pledgor has the right to pledge and grant a security interest in
or otherwise transfer such Collateral free of any Liens or rights of third
parties.
(b) Except for Permitted Liens (as defined in the Loan
Agreement), all of the Collateral is and shall remain free from all Liens,
claims, encumbrances, and purchase money or other security interests. Pledgor
shall not, without the Lender's prior written consent, sell or otherwise dispose
of any or all of the Collateral.
(c) This Agreement, and the delivery to Lender of the Stock,
creates a valid, perfected, and first priority security interest in the Stock in
favor of Lender, and all actions necessary or desirable to such perfection
have been duly taken.
(d) No authorization or other action by, and no notice to or
filing with, any Governmental Authority or regulatory body is required either:
(i) for the grant by Pledgor of the security interest granted hereby or for the
execution, delivery or performance of this Agreement by Pledgor, (ii) for the
perfection of, or exercise by, Lender of its rights and remedies hereunder
(except as may have been taken by or at the direction of Pledgor or as may be
required in connection with a disposition of the Stock by laws affecting the
offering and sale of securities generally); or (iii) for the exercise by Lender
of the voting or other rights provided for in this Agreement or the remedies in
respect of the Stock pursuant to this Agreement (except as may be required in
connection with a disposition of the Stock by laws affecting the offering and
sale of securities generally).
(e) Pledgor has made its own arrangements for keeping informed of
changes or potential changes affecting the Collateral (including, but not
limited to, rights to convert, rights to subscribe, payment of dividends,
reorganization or other exchanges, tender offers and voting rights) and Pledgor
agrees that Lender shall not have any responsibility or liability for informing
Pledgor of any such changes or potential changes or for taking any action or
omitting to take any action with respect thereto.
(f) Schedule A is an accurate and current listing of all shares
of Stock of the Issuer presently owned or controlled by Pledgor. If Pledgor at
any time owns or controls any other shares of stock of Issuer, all such stock
shall without further act or deed be subject to all of the terms and conditions
of this Agreement and Pledgor must immediately take such action to perfect
Lender's lien and security interest as Lender may request, including executing
undated blank stock powers.
(g) Except as described in the Loan Agreement, there are no
options for the purchase of Stock nor are there any rights represented thereby,
warrants or other rights to acquire stock of any of the Issuer outstanding at
this time.
4
<PAGE> 14
(h) All of the outstanding shares of Stock have been duly and
validly issued by the Issuer, and they are fully paid and nonassessable.
(i) There are no existing agreements with respect to the
Collateral between Pledgor and any other person or entity (other than the
Lender).
(j) This Agreement and the Powers have been duly authorized;
executed and delivered by Pledgor and each constitutes a legal, valid and
binding obligation of Pledgor, enforceable in accordance with its terms.
6. Stock Adjustments: During the term of this Agreement and until the
Obligations have been paid in full, no reclassification, readjustment,
recapitalization or other change shall be declared or made in the capital
structure of Issuer, without the prior written consent of Lender.
7. Warrants: During the term of this Agreement and until the
Obligations have been paid in full, no subscriptions, warrants or any other
rights or options shall be issued in connection with the Stock, without the
prior written consent of Lender.
8. Consent: Subject to Lender's obligations to use reasonable care in
the custody and preservation of Collateral in its possession, Pledgor hereby
consents that, from time to time, before or after the occurrence or existence of
any Default or Event of Default, with or without notice to or assent from
Pledgor, any other security at any time held by or available to Lender for any
of the Obligations or any other security at any time held by or available to
Lender of any other person, firm or corporation secondarily or otherwise liable
for any of the Obligations, may be exchanged, surrendered, or released and any
of the Obligations may be changed, altered, renewed, extended, continued,
surrendered, compromised, waived or released, in whole or in part, as Lender may
see fit, and Pledgor shall remain bound under this Agreement notwithstanding any
such exchange, surrender, release, alteration, renewal, extension, continuance,
compromise, waiver or inaction, or extension of further credit.
9. Remedies Upon Default:
(a) Upon the occurrence of an Event of Default, Lender shall
have, in addition to any other rights given by law or the rights against Pledgor
hereunder, in the Loan Agreement, or other Loan Documents, all of the rights and
remedies with respect to the Collateral of a secured party under the Code.
(b) In addition, with respect to the Collateral, or any part
thereof, Lender may sell or cause the same to be sold at any public or private
sale, in one or more sales or lots, at such reasonable price as Lender may deem
best, and for cash or on credit or for future delivery, without assumption of
any credit risk, and the purchaser of any or all of the Collateral so sold shall
thereafter hold the same absolutely, free from any claim, encumbrance or right
of any kind whatsoever.
5
<PAGE> 15
(c) Pledgor hereby agrees that any transfer or sale of the
Collateral conducted in conformity with reasonable commercial practices of
banks, insurance companies or other financial institutions disposing of property
similar to the Collateral shall be deemed to be commercially reasonable. Any
requirements of reasonable notice shall be met if such notice is mailed to
Pledgor, at the address set forth below, at least ten (10) days before the time
of the sale or disposition; provided that no notification need be given to
Pledgor if it has signed, after default, a statement renouncing or modifying any
right to notification and provided further that no such notification shall be
required as to any of the Collateral which is of a type customarily sold in a
recognized market. Any other requirement of notice, demand or advertisement for
sale, is, to the extent not prohibited by law, waived.
(d) Lender may, in its own name, or in the name of a designee or
nominee, buy the Stock at any public sale of the Stock, and Lender may also buy
at private sale, if the Stock or other Collateral is sold in a recognized market
or is the subject of widely distributed standard price quotations and if
purchased at a price quoted by an independent third party in such market. Lender
shall have the right to execute any document or form, in its name or in the name
of Pledgor, which may be necessary or desirable in connection with any such sale
of Collateral.
(e) In view of the fact that federal and state securities laws
may impose certain restrictions on the method by which a sale of the Stock may
be effected after an Event of Default, Pledgor agrees that upon the occurrence
of an Event of Default, Lender may from time to time attempt to sell all or any
part of the Stock by a private placement, restricting the bidders and
prospective purchasers to those who will represent and agree that they are
"accredited investors" within the meaning of Regulation D promulgated pursuant
to the Securities Act of 1933, as amended ("Securities Act"), and are purchasing
for investment only and not for distribution. In so doing, Lender may solicit
offers to buy the Stock, or any part of it, for cash, from a limited number of
investors who might be interested in purchasing the Stock. If Lender hires a
firm of regional or national reputation that is engaged in the business of
rendering investment banking and brokerage services to solicit such offers and
facilitate the sale of the Stock, then Lender's acceptance of the highest offer
obtained through the efforts of such firm shall be deemed to be a commercially
reasonable method of disposition of such Stock.
10. Lender as Pledgor's Attorney-in-Fact: Pledgor hereby irrevocably
appoints Lender as its attorney-in-fact to arrange for the transfer, at any time
after the existence or occurrence of an Event of Default, of the Stock or other
Collateral on the books of Issuer to the name of Lender or to the name of
Lender's nominee.
11. Acts Not Affecting Obligations. None of the following shall affect
the liabilities of the Pledgor under this Agreement or otherwise, and of the
Obligations or the rights of the Lender with respect to any of the Collateral:
(a) acceptance or retention by the Lender of other property or interests as
security for the Obligations, or for the liability of any person for the
Obligations; (b) the release of any or all of the Collateral or other security
for any of the Obligations; (c) any release, extension, renewal, modification or
compromise of any of the Obligations or the liability of any obligor thereon;
(d) failure by the Lender to resort to other
6
<PAGE> 16
security or any person liable for any of the Obligations before resorting to the
Collateral; (e) any increase in the amount of the Obligations for any reason
whatsoever; (f) any exercise of, or failure to exercise, any remedy or taking or
failing to take any action with respect thereto; and (g) any act that would not
release Pledgor from its liability under the Guaranty dated the same date as
this Agreement that Pledgor executed and delivered to Lender.
12. Further Assurances: Pledgor agrees that it will cooperate with the
Lender and will execute and deliver, or cause to be executed and delivered, all
such other stock powers, proxies, instruments, and documents and will take all
such other action, as Lender may reasonably request from time to time in order
to carry out the provisions and purposes hereof.
13. Waiver; Cumulative Remedies. No delay on the part of the Lender or
any holder of a Note in exercising any right, power or privilege hereunder shall
operate as a waiver thereof nor shall any single or partial exercise of any
right, power or privilege hereunder preclude other or further exercise thereof
or the exercise of any other right, power or privilege. The rights and remedies
herein specified are cumulative and not exclusive of any rights or remedies
which the Lender or the holder of a Note would otherwise have.
14. Successors and Assigns. This Agreement shall be binding upon
Pledgor and its successors and assigns. The Lender may, in its sole discretion,
assign its rights and delegate its obligations under this Agreement and further
may assign, or sell participations in, all or any part of the Loans or Notes or
any other interest herein to any other person.
15. Survival. All agreements, representations and warranties made
herein shall survive the execution of this Agreement.
16. Michigan Law. This Agreement shall be governed by and construed in
accordance with the internal laws of the State of Michigan.
17. Counterparts. This Agreement may be signed in any number of
counterparts with the same effect as if the signatures thereto and hereto were
upon the same instrument.
18. Partial Invalidity. The unenforceability for any reason of any
provision of this Agreement shall not impair or limit the operation or validity
of any other provisions of this Agreement or any other agreements now or
hereafter existing between the Lender and Pledgor or any other person.
Signed, sealed and delivered on ___________, 1998.
UNIVERSAL STANDARD HEALTHCARE
OF DELAWARE, INC., a Delaware corporation
By: Alan S. Ker
-------------------------------------------
Alan S. Ker
Vice President Finance and Treasurer
UNIVERSAL STANDARD HEALTHCARE
OF FLORIDA, INC., a Florida corporation
By: Alan S. Ker
-------------------------------------------
Alan S. Ker
Vice President Finance and Treasurer
Schedule A - List of Stock
7
<PAGE> 1
EXHIBIT 4.2(L)
EIGHTH AMENDMENT TO REVOLVING CREDIT AND LOAN AGREEMENT
THIS EIGHTH AMENDMENT TO REVOLVING CREDIT AND LOAN AGREEMENT (this
"Eighth Amendment to Loan Agreement" or this "Eighth Amendment") is entered into
as of January 25, 1999 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"); Universal Standard
Healthcare of Florida, Inc. ("Florida 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 Eighth Amendment to Loan Agreement is based on the following
recitals ("Recitals"), which are incorporated into and made a part of this
Eighth Amendment:
1. USML, Delaware Managed Care, Ohio Managed Care, Michigan
Managed Care, Florida 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, by a Third Amendment to Revolving
Credit and Loan Agreement dated February 2, 1998, by a Fourth Amendment
to Revolving Credit and Loan Agreement dated March 12, 1998, by a Fifth
Amendment to Revolving Credit and Loan Agreement dated June 5, 1998, by
a letter agreement dated July 21, 1998, by a Sixth Amendment to
Revolving Credit and Loan Agreement dated August 3, 1998, by a letter
agreement dated October 8, 1998, and by a Seventh Amendment to
Revolving Credit and Loan Agreement dated January 4, 1999 (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 Eighth
Amendment have the same meanings given to those terms in the Loan
Documents.
2. Simultaneously with the execution of the Sixth Amendment
USML entered into the Labcorp Transaction.
<PAGE> 2
3. Timothy D. Hanchett ("Mr. Hanchett") of NBD's Managed Asset
Group was recently introduced to the Obligors as the new account
officer on Obligors' account because of NBD's concerns, among others,
about Obligors' cash flow issues and the overdrafts on Obligors'
accounts. Mr. Hanchett's involvement is to evaluate the Obligors'
controls, performance, direction, and NBD's continued involvement. In
order to achieve that purpose, it is necessary that we conduct certain
investigations and review certain financial data regarding the Obligors
4. At a meeting on January 20, 1999, NBD and the Obligors met
to discuss the situation. At this meeting Obligors advised that they
would promptly hire a financial consultant reasonably acceptable to NBD
(the "Obligors' Consultant") to assist the Obligors with their cash
flow issues.
5. Obligors have requested and, subject to the terms hereof,
Bank has agreed to amend the Loan Agreement as set forth in this Eighth
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 Obligors acknowledge and agree that on January 22,
1999 there was $4,999,107.32 in principal owing by Obligors to NBD under the
Loan Documents as follows:
1. $983,000 owing under the Line of Credit Note,
2. $621,764 owing under the Lease Transactions,
3. $2,378,000 in contingent indebtedness owing
under the letters of credit issued under
Section 2.3 of the Loan Agreement, and
4. $1,016,343.32 in contingent indebtedness owing under
the Litigation Letter of Credit,
plus accrued but unpaid interest, costs and expenses (including
attorneys' fees and consultant fees) called for by the Loan Documents
(all such obligations together with all other principal and interest
due or becoming due to NBD), together with the payment of all other
sums, indebtedness and liabilities of any and every kind now or
hereafter owing and to become due from the Obligors to NBD, however
created, however incurred,
-2-
<PAGE> 3
evidenced, acquired or arising, and whether direct or indirect,
primary, secondary, fixed or contingent, matured or unmatured, joint,
several, or joint and several, and whether for principal, interest,
reimbursement obligations, indemnity obligations, obligations under
guaranty agreements, fees, costs, expenses, or otherwise, all of the
Obligors' obligations under this Eighth Amendment, together with all
other present and future obligations of the Obligors to NBD, including
the "Obligations" as defined in the Loan Agreement, are referred to
collectively as the "Obligations". The Obligors acknowledge and agree
that the Obligations and all other obligations of Obligors to NBD are
owing to NBD without setoff, recoupment, defense or counterclaim, in
law or in equity, of any nature or kind.
B. The Obligors' Consultant must prepare and deliver a
preliminary oral report to NBD by January 29, 1999. Obligors agree that
they alone are responsible for the cost of the retention and use of the
Obligors' Consultant.
C. Honigman Miller Schwartz and Cohn, may engage a consultant
("NBD's Consultant") to, among other things, assist in reviewing
certain financial data regarding the Obligors, including Obligors'
cash flow shortfalls, and the Obligors agree to cooperate fully with
NBD's Consultant and NBD. Obligors must reimburse NBD or its agents
for all reasonable costs and fees related to the retention and use of
NBD's Consultant.
D. At the close of business on January 22, 1998 the Obligors
had a $452,531.33 overdraft on their accounts at NBD. At the close of
business on January 25, 1999, $409,626 of deposits in the Deposit
Account were used to pay down the overdraft. The Obligors acknowledge
that, notwithstanding that NBD has honored overdrafts in the past,
effective on the close of business on January 25, 1999, neither NBD
nor any of its affiliates will under any circumstances honor any
checks or other items presented to NBD or such affiliates for payment
for which there are insufficient available funds in the Obligors'
accounts and NBD or such affiliates, as the case may be, will return
any such items so presented.
E. It is anticipated that negotiations will ensue over the
coming weeks among NBD and the Obligors to address the cash flow
issues and other issues under the Loan Documents, the basis for going
forward with the relationship and the various alternatives available
to the Obligors and NBD. Without any obligation to do so, we each plan
to discuss these matters in a manner consistent with each of our
respective mutual interests. NBD and the Obligors each retain the
right, in their sole discretion, to terminate these discussions at any
time, with or without cause.
F. During the course of our discussions, we may touch upon and
possibly reach a preliminary understanding on one or more issues prior
to concluding our negotiations. Notwithstanding this fact, the Obligors
and NBD agree that no party will be bound by any such agreement on such
individual issues unless and until an agreement
-3-
<PAGE> 4
is reached which is reduced to writing and signed by the Obligors and
NBD.
G. The Obligors agree that they will pay the costs and
expenses, including attorneys' fees, incurred by NBD arising from or
relating in any way to the Loan Documents, this Eighth Amendment or any
subsequent negotiations, agreements and disputes. Furthermore, all such
fees, costs and expenses referred to in this paragraph shall constitute
a part of each Obligor's obligations owing to NBD and shall be secured
by all collateral security granted to NBD by any one or more of the
Obligors.
H. If customers, buyers, investors, potential alternative
financing sources or other parties ask NBD about the current lending
relationship between NBD and the Obligors, the Obligors agree that NBD
may refer such inquiries to the Obligors.
I. As you know, the discussions and negotiations involve both
business and legal issues. We strongly encourage you to continue the
retention of, and consultation with, legal counsel with respect to such
discussions, the execution of any agreements or any other matter
relating to the business relationship among NBD and the Obligors.
J. Neither the discussions nor anything contained in this
Eighth Amendment shall be deemed to constitute a waiver of or shall
waive any defaults that may exist as of the date hereof or any other
defaults which may arise after the date hereof or any of NBD's rights
or remedies provided in its agreements with the Obligors, including,
without limitation, all such rights and remedies under the Loan
Documents (including, but not limited to any guaranties or
subordination agreements) or the rights and remedies provided by law.
All such rights and remedies are preserved and remain in full force and
effect. Without limiting the generality of the foregoing, NBD
explicitly reserves its right to enforce its rights and remedies under
the Loan Documents and applicable law in connection with any defaults
at any time without further notice. Furthermore, to the extent NBD
makes discretionary advances, such advances shall not create a right or
expectation that further or additional advances will be made or that
other financial accommodations will be forthcoming.
K. By January 29, 1999, NBD and the Obligors agree to meet to
discuss and attempt to agree on amending and setting 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 by January 29, 1999, then such event
constitutes an Event of Default under all of the Loan Documents for
which there is no cure period. The foregoing provision amends any prior
provisions in the Loan Documents dealing with this issue, and waives
any Event of Default created by the failure to agree on amended and
reset financial covenants by January 15, 1999.
L. From and after the date of this Eighth Amendment,
references in the Loan
-4-
<PAGE> 5
Documents (i) to the "Loan Agreement" are to be treated as referring to
the Loan Agreement as amended by this Eighth Amendment; and (ii) to
"obligations" and "Obligations" are to be treated as referring to all
indebtedness and obligations referred to in this Eighth Amendment.
M. Prior to or simultaneously with execution and delivery of
this Eighth 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 Eighth Amendment. Obligors must pay all costs and expenses
(including attorneys' fees) incurred by Bank in connection with this
Eighth Amendment.
N. 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
Eighth Amendment 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.
O. Obligors represent and warrant to NBD that:
(1) The execution, delivery and performance of this
Eighth Amendment by the Obligors and all agreements and
documents delivered by Obligors in connection with this Eighth
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.
(2) 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 Eighth Amendment and all agreements and documents
delivered in connection with this Eighth Amendment.
-5-
<PAGE> 6
(3) This Eighth Amendment and all agreements and
documents delivered by Obligors in connection with this Eighth
Amendment are the legal, valid and binding obligations of
Obligors enforceable against each of them in accordance with
the terms thereof.
P. The terms and provisions of this Eighth Amendment amend,
add to and constitute a part of the Loan Agreement. Except as expressly
modified and amended by the terms of this Eighth 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.
Q. If there is an express conflict between the terms of this
Eighth Amendment to Loan Agreement and the terms of the Loan Agreement
or the other Loan Documents, the terms of this Eighth Amendment govern
and control.
R. This Eighth 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.
S. 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.
T. There are no promises or inducements which have been made
to any signatory hereto to cause such signatory to enter into this
Eighth Amendment other than those which are set forth in this Eighth
Amendment.
U. 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,
-6-
<PAGE> 7
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.
V. 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/ Timothy D. Hanchett
-------------------------------------------------
Timothy D. Hanchett
First Vice President
UNIVERSAL STANDARD
HEALTHCARE, INC.
By: Alan S. Ker
-------------------------------------------------
Alan S. Ker
Vice President Finance and Treasurer
UNIVERSAL STANDARD HEALTHCARE
OF MICHIGAN, INC.
By: Alan S. Ker
-------------------------------------------------
Alan S. Ker, Treasurer
UNIVERSAL STANDARD HEALTHCARE
OF OHIO, INC.
By: Alan S. Ker
-------------------------------------------------
Alan S. Ker, Treasurer
UNIVERSAL STANDARD HEALTHCARE
OF DELAWARE, INC.
By: Alan S. Ker
-------------------------------------------------
Alan S. Ker, Treasurer
A/R CREDIT, INC.
By: Alan S. Ker
-------------------------------------------------
Alan S. Ker, Treasurer
UNIVERSAL STANDARD HEALTHCARE
OF FLORIDA, INC.
By: Alan S. Ker
-------------------------------------------------
Alan S. Ker, Treasurer
<PAGE> 1
EXHIBIT 10.6(A)
FIRST AMENDMENT
OF THE
UNIVERSAL STANDARD HEALTHCARE, INC.
EMPLOYEE STOCK PURCHASE PLAN
Pursuant to Section 13 of the Universal Standard Healthcare, Inc.
Employee Stock Purchase Plan ("Plan"), Universal Standard Healthcare, Inc., by
authority of its board of directors, hereby adopts this First Amendment of the
Plan. This First Amendment is effective July 1, 1998.
1. SECTION (B) OF THE PLAN IS CHANGED TO READ AS FOLLOWS:
(b) A participating employee may not authorize payroll deductions for
less than an entire Purchase Period. An employee may suspend payroll
deductions during a Purchase Period only at the discretion of the
Company in the event of an unforeseen hardship; provided, however, that
payroll deductions made prior to approval of the suspension by the
Company shall be used to purchase Common Stock for the employee at the
end of the Purchase Period. A participating employee shall not be
permitted to withdraw payroll deductions from the Plan in cash, except
as provided in Sections 8(e) and 10.
2. SECTION 10 OF THE PLAN IS CHANGED TO READ A FOLLOWS:
Termination of Employment, Unpaid Leave of Absence or Layoff. If a
participating employee ceases to be employed by the Company for any
reason (with or without severance pay), including but not limited to,
voluntary or forced resignation, retirement, death, layoff, or if an
employee is on an unpaid leave of absence for more than 60 days, or
during any period of severance, payroll deductions with respect to such
employee at the time of such termination, layoff, or leave of absence
shall cease and the participating employee can elect to (i) exercise
the option on the Purchase Date to the extent payroll deductions were
made prior to such termination, layoff, or leave of absence, or (ii)
receive a check following the end of the Purchase Period from the
Company for any amount that has been deducted and withheld during the
Purchase Period.
<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 March 25, 1999, 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, 1998.
BDO SEIDMAN, LLP
Troy, Michigan
March 31, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-3-1998
<CASH> 556
<SECURITIES> 0
<RECEIVABLES> 824
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,153
<PP&E> 4,354
<DEPRECIATION> 1,694
<TOTAL-ASSETS> 9,525
<CURRENT-LIABILITIES> 28,097
<BONDS> 678
4,399
0
<COMMON> 34,247
<OTHER-SE> (57,896)
<TOTAL-LIABILITY-AND-EQUITY> 9,525
<SALES> 25,538
<TOTAL-REVENUES> 25,538
<CGS> 0
<TOTAL-COSTS> 26,781
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 249
<INCOME-PRETAX> (1,447)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,447)
<DISCONTINUED> (29,728)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (31,175)
<EPS-PRIMARY> (4.57)
<EPS-DILUTED> (4.57)
</TABLE>
