Exhibit 9.10
Financial Statements
[See Attached]
KPMG
MAINSTREET HEALTHCARE CORPORATION
Consolidated Financial Statements
March 31, 1997
With Independent Auditors' Report Thereon
KPMG Peat Marwick LLP
303 Peachtree Street, N.E.
Suite 2000
Atlanta, GA 30308
INDEPENDENT AUDITORS' REPORT
The Board of Directors
MainStreet Healthcare Corporation:
We have audited the accompanying consolidated balance sheet of MainStreet
Healthcare Corporation as of March 31, 1997, and the related consolidated
statements of operations, stockholders' deficit, and cash flows for the period
February 6, 1996 (date of incorporation) to March 31, 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of MainStreet
Healthcare Corporation at March 31, 1997, and the results of its operations and
its cash flows for the period February 6, 1996 (date of incorporation) to March
31, 1997 in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that MainStreet Healthcare Corporation will continue as a going concern. As
discussed in note 1(b) to the consolidated financial statements, MainStreet
Healthcare Corporation has suffered recurring losses and has a working capital
deficiency that raises substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are also described
in note 1(b). The accompanying consolidated financial statements do not include
any adjustment that might result from the outcome of this uncertainty.
November 14, 1997, except
as to note 12(b), which is
as of February 3, 1998 /s/ KPMG Peat Marwick LLP
2
MAINSTREET HEALTHCARE CORPORATION
Consolidated Balance Sheet
March 31, 1997
Assets
Current assets:
Cash $ 1,950
Accounts receivable, less allowances for contractual adjustments
and uncollectible accounts of $1,258,571 1,110,019
Redeemable preferred stock subscriptions receivable (notes 4 and 11) 750,000
Other receivables 110,658
Prepaid and other 44,010
-----------
Total current assets 2,016,637
Property and equipment, net (notes 3 and 6) 1,422,594
Intangible assets, net (notes 3 and 5) 1,968,252
Other assets 388,393
----------
Total assets $ 5,795,876
=========
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable $ 695,411
Other accrued expenses and liabilities 615,237
Current portion of notes payable (notes 3 and 7) 357,053
Current portion of capital lease obligation (note 7) 3,401
Shareholder loan (note 8) 18,252
------
Total current liabilities 1,689,354
----------
Long-term liabilities:
Notes payable, less current portion (notes 3 and 7) 751,261
Capital lease obligation, less current portion (note 7) 14,183
-----------
Total long-term liabilities 765,444
-----------
Total liabilities 2,454,798
Redeemable preferred stock, $.01 par value; 13,250 shares authorized,
no shares issued and outstanding -
5% cumulative redeemable preferred stock, $1,000 redemption value;
6,000 shares authorized, 3,367 shares issued and outstanding, 750
shares subscribed (notes 4, 11, and 12) 4,117,000
Class A nonvoting convertible common stock, $.01 par value;
5,000,000 shares authorized, 268,000 shares issued and outstanding 696,015
Stockholders' deficit (note 4):
Class B common stock, $.01 par value; 20,000,000 shares authorized,
5,875,000 shares issued and outstanding 58,750
Additional paid-in capital 81,550
Accumulated deficit (1,612,237)
---------
Total stockholders' deficit (1,471,937)
----------
Total liabilities and stockholders' deficit $ 5,795,876
=========
See accompanying notes to consolidated financial statements.
3
MAINSTREET HEALTHCARE CORPORATION
Consolidated Statement of Operations
For the period February 6, 1996 (date of incorporation) to March 31, 1997
Net patient service revenue $ 3,665,982
---------
Operating expenses:
Cost of affiliated physician services 1,733,826
Clinic salaries, wages, and benefits 1,131,729
Clinic rent and lease expense (notes 7 and 8) 306,571
Clinic supplies 287,431
Other clinic costs 428,987
General corporate expenses (note 8) 571,499
Depreciation and amortization (notes 5 and 6) 217,029
Clinic start-up expenses 307,419
-----------
Total expenses 4,984,491
-----------
Operating loss (1,318,509)
Interest expense, net (note 7) 161,774
Loss on clinic disposals (note 12(a)) 88,990
-------------
Loss before income taxes (1,569,273)
Income taxes (note 9) -
-
Net loss $ (1,569,273)
=========
See accompanying notes to consolidated financial statements.
4
MAINSTREET HEALTHCARE CORPORATION
Consolidated Statement of Stockholders' Deficit
For the period February 6, 1996 (date of incorporation) to March 31, 1997
Class B Additional Total
Common Stock Paid-in Accumulated Stockholder's
Shares Amount Capital Deficit Deficit
------ ------ ------- ------- -------
Balance at February 6, 1996 - $ - - - -
Issuance of common stock 5,875,000 58,750 38,586 97,336
Accretion of difference
Between fair value and
garanteed value of stock
issued in connection with
acquisition (note 3) - - 42,964 (42,964) -
Net loss - - - (1,569,273) (1,569,273)
---------------- --------------------------- ------------- -----------
Balance at March 31, 1997 5,875,000 $ 58,750 81,550 (1,612,237) (1,471,937)
========= ========== ======= ============ ===========
See accompanying notes to consolidated financial statements.
5
MAINSTREET HEALTHCARE CORPORATION
Consolidated Statement of Cash Flows
For the period February 6, 1996 (date of incorporation) to March 31, 1997
Operating activities:
Net loss $(1,569,273)
Adjustments to reconcile net loss to net cash provided
(used) by operating activities:
Depreciation and amortization 217,029
Changes in operating assets and liabilities,
net of effects of acquisitions:
Accounts receivable, net (517,720)
Other receivables (110,658)
Prepaid expenses and other assets (64,010)
Accounts payable 580,688
Other accrued expenses and liabilities 615,237
------------
Net cash used by operating activities (848,707)
------------
Investing activities:
Acquisitions of businesses, net of cash acquired (note 3) (1,226,480)
Purchases of property and equipment (631,279)
------------
Net cash used by investment activities (1,857,759)
------------
Financing activities:
Net proceeds from issuance of preferred stock 2,071,607
Proceeds from shareholder loans 1,370,300
Proceeds from issuance of common stock 65,810
Net borrowings under capital lease obligations 17,584
Repayment of notes payable (423,363)
Repayment of shareholder loans (393,522)
-----------
Net cash provided by financing activities 2,708,416
-----------
Net increase in cash 1,950
Cash at beginning of period -
Cash at end of period $ 1,950
=============
Supplemental disclosure of cash flow information cash paid during the period
for:
Interest $ 55,476
Income taxes -
See accompanying notes to consolidated financial statements.
6
MAINSTREET HEALTHCARE CORPORATION
Notes to Consolidated Financial Statements
March 31, 1997
(1) Organization and Basis of Presentation
(a) Description of Business
MainStreet Healthcare Corporation ("the Company") was
incorporated on February 6, 1996. The Company was organized to
purchase general practitioner outpatient clinics in Georgia
and Tennessee. After purchasing a clinic, the Company focuses
on centralizing fixed costs and reducing the overall overhead
of each outpatient clinic in order to maximize income and cash
flow. During the period from February 6, 1996 to March 31,
1997, MainStreet acquired 12 primary care clinics.
(b) Basis of Presentation
The consolidated financial statements have been prepared on
the accrual basis of accounting and include the accounts of
the Company and the affiliated professional corporations
("Professional Corporations"). Through the clinic services
agreements between the Company and the Professional
Corporations, the Company has assumed full responsibility for
the operating expenses in return for the assignment of the
revenue of the professional corporations.
The Company has perpetual, unilateral control over the assets
and operations of the Professional Corporations, and
notwithstanding the lack of technical majority ownership of
the stock of such entities, consolidation of the various
professional corporations is necessary to present fairly the
financial position and results of operations of the Company
because of control by means other than ownership of stock.
Control by the Company is perpetual rather than temporary
because of (i) the length of the original terms of the
agreements, (ii) the successive extension periods provided by
the agreements, (iii) the continuing investment of capital by
the Company, (iv) the employment of the nonphysician
personnel, and (v) the nature of the services provided to the
Professional Corporations by the Company. All intercompany
accounts and transactions have been eliminated in the
consolidation.
The Company has experienced recurring losses since its
inception, including approximately $1,900,000 (unaudited) from
April 1, 1997 through December 31, 1997, and has a net working
capital deficiency of approximately $1,200,000 (unaudited) as
of December 31, 1997. Management has entered into a letter of
intent to sell its operating clinics at an amount that in its
opinion would generate sufficient value to satisfy all its
outstanding debt obligations in either cash or stock (see note
12(b)). The financial statements do not include any
adjustments that might result from the outcome of this
uncertainty.
(2) Summary of Significant Accounting Policies
(a) Property and Equipment
Property and equipment are recorded at cost, less accumulated
depreciation and amortization. Depreciation of property and
equipment is calculated using the straight-line method over
the estimated useful lives of the assets.
7
MAINSTREET HEALTHCARE CORPORATION
Notes to Consolidated Financial Statements
Equipment held under capital leases and leasehold improvements
are amortized on a straight-line basis over the shorter of the
lease term or estimated useful life of the assets.
(b) Intangible Assets
(1) Noncompete Agreements
In connection with certain clinic acquisitions, the
Company entered into noncompete agreements with
physicians. Such agreements are being amortized using
the straight-line method over the terms of the
agreements, generally three to five years.
(2) Excess of Cost
Goodwill, which represents the excess of purchase
price over fair value of net assets acquired, is
amortized on a straight-line method over the expected
periods to be benefited, generally fifteen years. The
Company assesses the recoverability of this
intangible asset by determining whether the
amortization of the goodwill balance over its
remaining life can be recovered through undiscounted
future operating cash flows of the acquired
operation. The amount of goodwill impairment, if any,
is measured based on projected discounted future
operating cash flows using a discount rate reflecting
the Company's average cost of funds. The assessment
of recoverability of goodwill will be impacted if
estimated future operating cash flows are not
achieved. In management's estimation, the remaining
amount of goodwill has continuing value.
(c) Net Revenue
Patient revenue is recorded at established rates reduced by
allowances for doubtful accounts and contractual adjustments.
Contractual adjustments arise due to the terms of certain
reimbursement and managed care contracts. Such adjustments
represent the difference between charges at established rates
and estimated recoverable amounts and are recognized in the
period the services are rendered. Any differences between
estimated contractual adjustments and actual final settlements
under reimbursement contracts are reported as contractual
adjustments in the year final settlements are made.
(d) Income Taxes
The Company accounts for income taxes using the asset and
liability method of Statement of Financial Accounting
Standards No. 109, ACCOUNTING FOR INCOME TAXES ("SFAS No.
109"). Under SFAS No. 109, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to
differences between financial statement carrying amounts of
existing assets and liabilities and their respective tax
bases. Deferred income tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred income tax
assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.
8
MAINSTREET HEALTHCARE CORPORATION
Notes to Consolidated Financial Statements
Prior to the merger of MainStreet Georgia with and into
MainStreet Delaware, as discussed in note 4, the Company was
taxed as an S Corporation under the Internal Revenue Code. As
a result, the Company has been taxed in a manner similar to a
partnership for the period prior to December 9, 1997, and has
not provided any federal or state income taxes as the results
of operations were passed through to, and the related income
taxes became the individual responsibility of the Company's
shareholders.
(e) Impairment of Long-Lived Assets
Financial Accounting Standards No. 121 ("SFAS No. 121"),
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF, requires the Company to
review for the impairment of long-lived assets and certain
identifiable intangibles to be held and used by the Company
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
The statement also addresses the accounting for long-lived
assets that are expected to be disposed. SFAS No. 121 is
applicable for most long-lived assets, identifiable
intangibles, and goodwill related to those assets. Management
has determined that long-lived assets are fairly stated in the
accompanying consolidated balance sheet and that no indicators
of impairment are present.
(f) Redeemable Preferred Stock Offering Costs
Costs associated with the issuance of mandatory redeemable
preferred stock have been capitalized and are being amortized
using a straight-line method over five years and are included
in other assets in the accompanying consolidated balance sheet
(see note 5).
(g) Use of Estimates
Management of the Company has made certain estimates and
assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent liabilities to
prepare these financial statements in conformity with
generally accepted accounting principles. Actual results could
differ from those estimates.
(3) Acquisitions
The Company acquired, through its wholly owned subsidiaries, certain
operating assets of 12 primary care physician clinics.
Simultaneous with each acquisition, the Company enters into long-term
clinic services agreements. Under these agreements, the Company manages
all aspects of the affiliated practice other than the provision of
medical services, which is controlled by the physician groups. For
providing services under the clinic services agreements, the physicians
receive compensation based on individually negotiated contracts.
Generally, the clinic service agreements cannot be terminated by the
physician group or the Company without cause, which includes material
default or bankruptcy of either party.
9
MAINSTREET HEALTHCARE CORPORATION
Notes to Consolidated Financial Statements
The acquisitions have been accounted for by the purchase method of
accounting and, accordingly, the purchase price has been allocated to the
net assets acquired and the liabilities assumed based upon the fair
values at the dates of acquisition. In connection with the acquisitions,
the Company issued 268,000 shares of common stock in MainStreet
Healthcare Corporation. The Company guaranteed the fair market value of
the stock to be $5 per share at various dates in the future and recorded
the stock by discounting the guarantee price using a risk-based interest
rate of 15%. The difference between the fair value and guaranteed value
of stock issued in connection with the issuance of stock of $643,395 is
being accreted over the period from the date of issuance to the various
settlement dates through periodic charges to accumulated deficit. The
Company also issued $1,531,677 in notes payable. The excess of the
purchase price over the fair values of the net assets acquired was
$1,813,179 and has been recorded as goodwill and is being amortized using
a straight-line method over 15 years. The composition of acquisition of
businesses, net of cash acquired, is set forth below:
Working capital, other than cash $ 477,577
Property and equipment 862,916
Noncompete agreements 300,500
Excess of costs over fair value of assets acquired 1,813,179
Less:
Value of stock issued (696,015)
Value of notes payable issued (1,531,677)
----------
Cash purchase price, net of cash acquired $ 1,226,480
=========
The operating results of the acquired clinics have been included in the
consolidated statement of operations from the respective dates of
acquisition.
(4) Reorganization
MainStreet Healthcare Corporation (MainStreet Georgia) was organized on
February 6, 1996 as a Georgia Corporation and was authorized 10,000,000
shares of no par common stock of which 5,375,000 shares were issued.
On December 4, 1996, MainStreet Healthcare Corporation (MainStreet
Delaware) was incorporated and was authorized 10,000,000 shares of no par
common stock. Effective December 9, 1996, the shareholders of MainStreet
Georgia exchanged their shares for equal shares in MainStreet Delaware
pursuant to a merger of MainStreet Georgia with and into MainStreet
Delaware.
On December 11, 1996, MainStreet Delaware amended and restated the
Certificate of Incorporation in order to give MainStreet Delaware the
authority to issue preferred stock and common stock as follows:
(a) 20,000 shares of Preferred Stock, par value $.01 per
share. MainStreet Delaware's Board of Directors has
the authority to fix the terms of the Preferred
Stock.
10
MAINSTREET HEALTHCARE CORPORATION
Notes to Consolidated Financial Statements
(b) 5,000,000 shares of Class A Non-Voting Convertible
Common Stock, par value $.01 per share. One share of
Class A Non-Voting is convertible upon: (i) a
Qualified Public Offering; (ii) a sale of MainStreet
Delaware; or (iii) a sale of a majority of the Class
B Common Stock, into one fully paid and
non-assessable share of Class B Common Stock.
(c) 20,000,000 shares of Class B Common Stock, par value
$.01 per share.
The Class A and Class B common stocks are identical,
except with respect to voting rights, where the Class
A shares have no voting rights. The Class A shares
are nonvoting convertible into one share of Series B
stock upon: (i) a Qualified Public Offering; (ii) a
sale of the Company; or (iii) a sale of a majority of
the shares of Class B stock.
Effective December 12, 1996, MainStreet Delaware entered into a
recapitalization agreement. The shareholders of MainStreet Georgia
exchanged a total of 5,375,000 shares of no par common stock in
MainStreet Georgia and $948,026 of debt owed by MainStreet Georgia to the
shareholders for 2,350,000 shares of no par common stock and 927 shares
of five percent cumulative mandatory redeemable preferred stock in
MainStreet Delaware. In addition, Penman Private Equity and Mezzanine
Fund, L.P., (Penman) purchased 3,525,000 shares of Class B Common Stock
for $60,000 and 2,440 shares of five percent mandatory redeemable
preferred stock in MainStreet Delaware for $2,071,607, net of offering
expenses of $368,393. The preferred stock is mandatory redeemable on
December 12, 2001.
On March 21, 1997, Penman subscribed to 750 shares of the five percent
mandatory redeemable preferred stock for $750,000. On April 8, 1997, the
Company received $750,000 for the subscribed preferred stock.
(5) Intangible Assets
Intangible assets consists of:
Excess of cost over fair value of assets acquired $ 1,813,179
Noncompete agreements 300,500
Less accumulated amortization (145,427)
---------
$ 1,968,252
==========
(6) Property and Equipment
Property and equipment consists of:
Land $ 104,600
Buildings and improvements 406,635
Furniture and fixtures 181,621
Clinic equipment 559,451
Office equipment 193,843
Leasehold improvements 48,046
------------
1,494,196
Accumulated depreciation and amortization (71,602)
-------
$ 1,422,594
============
11
MAINSTREET HEALTHCARE CORPORATION
Notes to Consolidated Financial Statements
(7) Long-Term Debt and Leases
Long-term debt and capital leases consists of:
Notes payable to physician groups with interest rates ranging from
7% to 10.5%, with payments
due at varying intervals through March 1, 2006 $ 1,108,314
Capital leases 17,584
----------------
1,125,898
Less amounts due within one year 360,454
----------------
$ 765,444
================
The following is a schedule of principal maturities of long-term debt,
including capital leases, as of March 31, 1997.
1998 $ 360,454
1999 360,717
2000 161,691
2001 37,929
2002 34,814
Thereafter 170,293
-----------------
Total $ 1,125,898
=================
CAPITAL LEASES: The Company is the lessee of equipment under a capital
lease which expires during the next ten years. The related equipment
is being amortized over ten years and the related amortization expense
is included with depreciation expense in the consolidated statement of
operations.
The following is a schedule of future minimum lease payments under the
capital leases together with the present value of the net minimum
lease payments as of March 31, 1997.
1998 $6,045
1999 6,045
2000 6,045
2001 5,892
-------
Total minimum lease payments 24,027
Less amounts representing interest (6,443)
------
Obligation under capital leases 17,584
Less current portion of capital lease obligations (3,401)
------
Long-term obligations under capital leases $14,183
=======
Capitalized equipment leases included in equipment was $18,600 at
March 31, 1997. The imputed interest rate was 16.45% at March 31,
1997.
12
MAINSTREET HEALTHCARE CORPORATION
Notes to Consolidated Financial Statements
OPERATING LEASES: Operating leases generally consist of short-term lease
agreements for professional office space where the medical practices are
located. These leases generally have five-year terms with renewal
options. Lease expense of $250,000 for 1997 consists of corporate office
space, corporate equipment and medical office space, and equipment for
the operating practices.
The following is a schedule of future minimum lease payments under
noncancelable operating leases as of March 31, 1997.
1998 $ 512,353
1999 453,355
2000 426,199
2001 411,586
2002 258,130
Thereafter 76,757
-----------
$2,138,380
==========
(8) Related Party Transactions
The Chief Executive Officer and Chief Operating Officer of the Company
made loans to finance the Company's operations in the amounts of
$1,345,000 and $25,300, respectively, of which $20,000 and $500,
respectively, of contributed capital was converted to debt under the
Reorganization discussed in note 4. Of the $1,345,000, $927,000 was
converted into preferred stock; $21,026 was converted into Class B common
stock; $378,722 was repaid during the year; and the remainder of $18,252
is outstanding at March 31, 1997. Of the $25,300, $10,500 was converted
into Class B common stock, and $14,800 was repaid during the year.
During the period ended March 31, 1997, the Company made payments of
$116,260 to related parties for rent expense in connection with the
clinic facilities. Also, the Company made principal and interest payments
of $14,220 on behalf of the Chief Executive and Operations Officers of
the Company for the corporate office location.
In the process of acquiring the physician clinic groups, the Company paid
$47,650 to a consultant who became an officer of the Company.
(9) Income Taxes
Because of operating losses, the Company has not provided any income tax
expense for the year ended March 31, 1997. The Company has operating loss
carryforwards, which may be used to reduce future taxable income, of
approximately $280,014 at March 31, 1997 which expire beginning in 2010.
The income tax recognition of temporary differences originating before
the Company became a C Corporation will reverse. Accordingly, an income
tax liability of $101,500 was recorded as of the date the Company became
a C Corporation.
13
MAINSTREET HEALTHCARE CORPORATION
Notes to Consolidated Financial Statements
Deferred income taxes determined in accordance with Statement 109 reflect
the net tax effects of (a) temporary differences between carrying amounts
of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes and (b) operating loss and tax
credit carryforwards. In assessing the realizability of deferred tax
assets, management considers whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable
income, and tax planning strategies in making this assessment. Due to the
uncertainty of future realization, the Company's deferred tax assets are
subject to a valuation allowance that results in the recognition of no
deferred tax asset at March 31, 1997.
The tax effects of significant items comprising the Company's deferred
income taxes for March 31, 1997 are as follows:
Deferred tax assets:
Accrual to cash $ 207,000
Net operating loss carryforwards 106,400
Other 49,300
------
362,700
Less valuation allowance (318,600)
--------
Net deferred tax assets 44,100
Deferred tax liabilities - depreciation (44,100)
-------
Net deferred taxes $ -
=========
The significant components of the deferred income tax expense (benefit)
for the period ended March 31, 1997 are as follows:
Deferred income tax benefit $ 420,100
Change in tax status from S Corporation
to C Corporation (101,500)
Increase in valuation allowance (318,600)
---------------
Deferred income tax expense $ -
===============
(10) Contingencies
In addition to the general liability and malpractice insurance carried by
the individual physicians, the Company is insured with respect to general
liability and medical malpractice risks on a claims-made basis. To the
extent that any claims-made coverage is not renewed or replaced with
equivalent insurance, claims based on occurrences during the term of the
coverage, but reported subsequently, would be uninsured. Management
anticipates that the claims-made coverage currently in place will be
renewed or replaced with equivalent insurance as the term of such
coverage expires.
14
MAINSTREET HEALTHCARE CORPORATION
Notes to Consolidated Financial Statements
(11) Redeemable Preferred Stock
Five percent preferred stock is cumulative, mandatory redeemable
nonvoting shares issued in connection with the reorganization
described in note 4. The five percent dividend is payable when
declared by the Company. During 1997, the Company declared a
dividend of $47,046 based on the preferred stock issuance date of
December 12, 1996. Upon sale of the Company or a Qualified Public
Offering, the Company will redeem the preferred stock at the
redemption price which is $1,000 per share plus the amount of
accrued and unpaid dividends at such date. The preferred shares are
mandatory redeemable on December 12, 2001. If the Company is unable
or does not redeem the preferred shares, the dividend rate will
increase to nine percent.
The Company granted options to acquire up to 146,875 shares of Class
B common stock to officers of the Company, which are vested and are
exercisable at $5.50 per share.
(12) Subsequent Events
(a) Subsequent to March 31, 1997, the Company closed two physician
clinics which were purchased during the period. The amount of
the loss, including write-off of goodwill, accounts receivable,
and property and equipment, was $88,990.
(b) The Company has signed a letter of intent dated February 3, 1998
for the sale of substantially all of its assets to UCI Medical
Affiliates Inc. ("UCI"). The consideration paid by UCI to the
Company for the assets, as defined in the letter of intent,
shall be $8,050,000 plus assumption of debt of $685,000.
15
MainStreet Healthcare, Inc.
Balance Sheet
ASSETS 12/31/97 12/31/96
Cash
Petty Cash 10,409 850
Cash-Checking 73,931 1,995,684
-----------------------------
Total Cash 84,340 1,996,534
Accounts Receivable
Accounts Receivable-Medical 3,219,829 2,304,372
Less: Doubtful Accounts (1,788,679) (1,129,406)
A/R Lockbox Account 4,079 -
Accounts Receivable-Other 51,701 19,738
-----------------------------
Total Accounts Receivable 1,486,930 1,194,704
Inventory
Inventory-Medical Supplies 25,250 14,500
Supplies 5,060 -
-----------------------------
Total Inventory-Medical Supplies 30,310 14,500
Prepaid
Prepaid Insurance 438 (871)
Prepaid Interest - (7,828)
Prepaid Other 29,149 4,054
Deposits - Refundable 41,789 33,154
-----------------------------
Total Prepaid 71,376 28,509
Other Current Assets
Other Receivables 17,995 9,898
------------------------------
Total Other Assets 17,995 9,898
TOTAL CURRENT ASSETS 1,690,951 3,244,145
Fixed Assets
Land 104,600 104,600
Buildings 162,900 162,900
Building Improvements 263,594 216,551
Furniture & Fixtures 181,947 181,066
Clinic Equipment 752,413 629,031
Signs 19,804 6,499
Trucks - 1,700
Office Equipment 5,117 1,313
Computers 102,925 48,291
Software 106,915 95,951
Leasehold Improvements 50,143 38,383
-----------------------------
Total Fixed Assets 1,750,358 1,486,285
Accumulated Depreciation (188,218) (53,846)
-----------------------------
NET FIXED ASSETS 1,562,140 1,432,439
Other Assets
Organizational Expense 5,229 44,363
Deferred Acquisition Costs 196,625 5,334
Deferred A/R financing fees 30,285 -
Deferred Conversion Costs 11,144 (56,914)
Deferred Recruiting Costs 6,100 -
Goodwill 1,515,883 1,580,126
Non Compete 192,916 245,833
Investments - -
Bond Discount - -
--------------------------
TOTAL OTHER ASSETS 1,958,182 1,818,742
TOTAL ASSETS 5,211,273 6,495,326
MainStreet Healthcare, Inc.
Balance Sheet
LIABILITIES 12/31/97 12/31/96
Current Liabilities
Notes Payable-Acquisitions 345,719 485,719
Contracts Payable - Current 26,333 26,333
Lease Payable - Current 69,152 -
Accrued Interest - Notes/Lease Payable 29,023 8,154
NCFE Financing Payable 613,543 -
NCFE Financing Reserves (111,487) -
Accounts Payable - Trade 1,149,097 400,839
Payroll Taxes Payable 107,195 78,317
Health Insurance 5,749 13,815
401(k) Plan - Employee 1,040 (7,715)
Accrued Wages 373,433 57,606
Accrued Interest - Redeem. Shares 194,695 5,535
Other Accrued Payables 166,207 5,564
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Total Current Liabilities 2,969,699 1,074,167
Long Term Liabilities
LT Notes Payable - Acquisitions 312,272 430,171
Contracts Payable - Long Term 277,505 302,403
Lease Payable - Long Term 91,075 -
Shareholder Loans 19,476 87,336
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Total Long Term Liabilities 700,328 819,910
Total Liabilities 3,670,027 1,894,077
EQUITY
Common Stock - -
Class A Common Stock 2,480 2,480
Class B Common Stock 58,450 58,450
Redeemable Preferred Stock 4,283,814 4,283,814
Excess Paid in Capital 715,454 715,454
Accumulated Deficit (42,965) -
Retained Earnings (1,569,272) (1,188)
YTD Net Income (1,906,715) (457,761)
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Total Equity 1,541,246 4,601,249
Total Liabilities & Equity 5,211,273 6,495,326
MainStreet Healthcare, Inc.
MAINSTREET: CONSOLIDATED
Nine Months Ended Nine Months Ended
OTHER DIRECT COSTS: 12/31/97 Pctg. 12/31/96 Pctg.
6010 Advertising 42,657 0.8% 5,852 0.3%
6011 Yellow Pages 31,413 0.6% 399 0.0%
6400 Computer Supplies 18,149 0.4% 14,305 0.7%
7055 Computer Communications 7,366 0.2% -- 0.0%
6410 Computer Maintenance 11,072 0.2% 1,402 0.1%
6520 Collection Costs 461 0.0% 226 0.0%
6550 Dues & Subscriptions 8,977 0.2% 7,950 0.4%
6590 Entertainment 8,986 0.2% 3,001 0.1%
(7000 Travel 45,840 0.9% 14,187 0.7%
7130 Uniforms 5,914 0.1% 20 0.0%
7150 Licenses 5,554 0.1% 4,760 0.2%
7180 Office Supplies 77,180 1.5% 40,851 1.9%
7190 Outside Services 258 0.0% 2,363 0.1%
7280 Postage 36,432 0.7% 8,653 0.4%
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Total Other Direct Costs 300,259 5.9% 103,969 4.8%
Total Direct Clinic Costs: 1,625,382 32.0% 584,006 27.1%
Profit (Loss) after Direct Costs (825,769) (16.3%) (92,166) 4.6%
INDIRECT CLINIC COSTS:
6030 Acctng & Audit Fees 550 0.0% 1,018 0.1%
6031 Legal Fees 22,384 0.4% 8,190 0.4%
6050 Bad Check -- 0.0% 1,306 0.1%
6070 Bank Service Charges 30,765 0.6% 7,007 0.3%
6510 Contributions (25) 0.0% 125 0.0%
6530 Courier 8,093 0.2% 3,500 0.2%
6535 Donations 1,296 0.0% 15 0.0%
(7155 Recruiting Costs 8,007 0.2% 6,792 0.3%
7290 Personnel Recuitment Fees 7,900 0.2% 1,756 0.1%
7120 Long Term Interest Expense 18,459 0.5% 27,730 1.3%
7125 Capitalized Lease Interest Exp 4,607 0.0% -- 0.0%
(7300 Miscellaneous Items 5,876 0.1% 9,229 0.4%
---------- -------
Total Indirect Clinic Costs 107,912 2.1% 66,668 3.1%
Profit (Loss) after Indirect Costs (933,681) (18.4%) (158,834) 1.5%
CORPORATE EXPENSES:
5010 Management Salaries 272,174 5.4% 25,460 1.2%
7110 Officer Life Insurance -- 0.0% -- 0.0%
5020 Office Salaries 187,934 3.7% 56,607 2.6%
5030 Marketing Salaries 28,321 0.6% 25,880 1.2%
5050 Computer Wages 37,917 0.8% 16,115 0.8%
5040 Other Wages & Benefits -- 0.0% 744 0.0%
7210 Sales Promotion -- 0.0% 180 0.0%
7260 Franchise Taxes 2,989 0.1% -- 0.0%
9055 Program (Interest) Cost - A/R
Finance 20,040 0.4% -- 0.0%
---------- -------
Total Corporate Expenses 549,735 10.8% 124,986 5.8%
MainStreet Healthcare, Inc.
MAINSTREET: CONSOLIDATED
Nine Months Ended Nine Months Ended
12/31/97 Pctg. 12/31/96 Pctg.
Net Profits (Loss) before Non Cash Iter (1,483,056) (29.2) (283,820) (4.3%)
Non Cash Items:
6560 Depreciation Expense 114,394 2.3% 53,569 2.2%
6581 Amortization - Goodwill 80,870 1.6% 51,511 1.6%
6582 Amortization - Non Compete 55,000 1.1% 29,167 0.9%
6570 Amortization - Other 2,221 0.0% 277 0.0%
9020 Imputted Interest - NP 22,635 0.5% 33,882 0.2%
9060 Accrued Interest - Redeemable Shar 148,529 2.9% 5,535 0.3%
9070 Accredited Interest - Class A Stk - 0.0% - 0.0%
9080 Restructure Goodwill - 0.0% - 0.0%
9030 Loss on Disposal of Assets - 0.0% - 0.0%
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Total Non Cash Items 423,549 8.3% 173,941 5.1%
Net Profit/(Loss) (1,906,705) (37.6%) (457,761) (9.4%)
Exhibit 9.11.1
1. None.