AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 29, 1997
REGISTRATION NO. 333-33247
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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INTEGRATED PHYSICIAN SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 8742 23-2820597
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or Industrial Classification Identification No.)
organization) Code Number)
INTEGRATED PHYSICIAN SYSTEMS, INC.
2644 BRISTOL ROAD
WARRINGTON, PENNSYLVANIA 18976
(Address of principal place of business)
SCOTT G. POLLOCK
PRESIDENT AND CHIEF EXECUTIVE OFFICER
INTEGRATED PHYSICIAN SYSTEMS, INC.
2644 BRISTOL ROAD
WARRINGTON, PENNSYLVANIA 18976
(215) 343-1942/(215) 343-8761 (TELECOPY)
(Name, address, and telephone number of principal executive offices and agent
for service)
COPIES TO:
ROBERT STEVEN BROWN, ESQ. LAWRENCE B. FISHER, ESQ.
STEPHEN H. GRAY, ESQ. ORRICK, HERRINGTON & SUTCLIFFE LLP
BROCK FENSTERSTOCK SILVERSTEIN 666 FIFTH AVENUE
MCAULIFFE & WADE LLC NEW YORK, NEW YORK 10103
153 EAST 53RD STREET (212) 506-5000/(212) 506-5151 (TELECOPY)
NEW YORK, NEW YORK 10022
(212) 371-2000/(212) 371-5500 (TELECOPY)
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after the effective date of this Registration Statement.
IF ANY OF THE SECURITIES BEING REGISTERED ON THIS FORM ARE TO BE OFFERED ON
A DELAYED OR CONTINUOUS BASIS PURSUANT TO RULE 415 UNDER THE SECURITIES ACT OF
1933, CHECK THE FOLLOWING BOX. /X/
IF THIS FORM IS FILED TO REGISTER ADDITIONAL SECURITIES PURSUANT TO RULE
462(B) UNDER THE SECURITIES ACT, PLEASE CHECK THE FOLLOWING BOX AND LIST THE
SECURITIES ACT REGISTRATION STATEMENT NUMBER OF THE EARLIER EFFECTIVE
REGISTRATION STATEMENT FOR THE SAME OFFERING. / /
IF THIS FORM IS A POST-EFFECTIVE AMENDMENT FILED PURSUANT TO RULE 462(C)
UNDER THE SECURITIES ACT, CHECK THE FOLLOWING BOX AND LIST THE SECURITIES ACT
REGISTRATION STATEMENT NUMBER OF THE EARLIER EFFECTIVE REGISTRATION STATEMENT
FOR THE SAME OFFERING. / /
IF DELIVERY OF THE PROSPECTUS IS EXPECTED TO BE MADE PURSUANT TO RULE 434,
PLEASE CHECK THE FOLLOWING BOX. / /
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CALCULATION OF REGISTRATION FEE
See attached page.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
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CALCULATION OF REGISTRATION FEE
TITLE OF EACH CLASS OF SECURITIES PROPOSED PROPOSED MAXIMUM
TO AMOUNT TO BE MAXIMUM OFFERING AGGREGATE OFFERING AMOUNT OF
BE REGISTERED REGISTERED PRICE PER UNIT (1) PRICE (1) REGISTRATION FEE
Common Stock, par value $.01 per 2,300,000
share Shares (2) $7.50 $ 17,250,000.00 $ 5,227.27
Class A Redeemable Common Stock 2,300,000
Purchase Warrants Warrants (3)(5) $0.10 $ 230,000.00 $ 69.70
Common Stock, par value $.01 per
share, issuable upon exercise of
the Class A Redeemable Common
Stock Purchase Warrants 2,300,000 Shares $10.50 $ 24,150,000.00 $ 7,318.18
[6 1/2% to 8%] Convertible
Subordinated Debentures due
, 2004, including
Common Stock issuable upon
conversion of such Debentures $28,750,000(4)(5) 100% 28,750,000.00 $ 8,712.13
Representative's Warrants 200,000 Warrants (5) .0001 20.00 --
Common Stock, par value
$.01 per share, underlying the 200,000
Representative's Warrants Shares 9.00 1,800,000.00 $ 545.45
Class A Redeemable Common Stock
Purchase Warrants underlying the
Representative's Warrants 200,000 Warrants $.12 24,000.00 $ 7.27
Common Stock, par value $.01 per
share, issuable upon exercise of
the Class A Redeemable Common
Stock Purchase Warrants underlying
the Representative's Warrants 200,000 Shares $10.50 2,100,000.00 $ 636.36
Convertible Subordinated
Debentures underlying
Representative's Warrants,
including Common Stock to be
issued upon the conversion thereof $2,500,000 (4) 100% 2,500,000.00 $ 757.57
TOTAL -- -- $ 76,804,020.00 $ 23,273.93(6)
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Includes 300,000 shares of common stock, par value $.01 per share (the
"Common Stock"), of the Company which the Underwriters have the option to
purchase solely to cover over-allotments, if any.
(3) Includes 300,000 warrants (the "Warrants") which the Underwriters have the
option to purchase solely to cover over-allotments, if any.
(4) Includes $3,750,000 principal amount of [6 1/2% to 8%] Convertible
Subordinated Debentures due , 2004 (the "Debentures") which the
Underwriters have the option to purchase solely to cover over-allotments, if
any.
(5) Pursuant to Rule 416, there are also being registered such indeterminate
number of shares of Common Stock as may become issuable pursuant to the
anti-dilution provisions of the Debentures, the Warrants, and the
Representative's Warrants.
(6) A filing fee of $15,242.36 was previously paid. Accordingly, an additional
filing fee of $8,031.57 is included herewith.
SUBJECT TO COMPLETION, DATED OCTOBER 29, 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
PROSPECTUS
[LOGO]
INTEGRATED PHYSICIAN SYSTEMS, INC.
$25,000,000 [6 1/2% TO 8%] CONVERTIBLE SUBORDINATED DEBENTURES DUE 2004,
2,000,000 SHARES OF COMMON STOCK AND
2,000,000 CLASS A REDEEMABLE COMMON STOCK PURCHASE WARRANTS
------------------------
This Prospectus relates to the offering (the "Offering") of $25,000,000
aggregate principal amount of % Convertible Subordinated Debentures due 2004
(the "Debentures"), 2,000,000 shares of Common Stock, par value $.01 per share
(the "Common Stock"), and 2,000,000 Class A Redeemable Common Stock Purchase
Warrants (the "Warrants") of Integrated Physician Systems, Inc., a Delaware
corporation (the "Company"). The Debentures, the Common Stock, and the Warrants
are sometimes hereinafter referred to as the "Securities."
Interest on the Debentures will be payable semi-annually on and
of each year, commencing , 1998, at the rate of % per
annum [6 1/2% to 8%]. The Debentures are convertible into shares of Common Stock
at any time prior to maturity, unless previously redeemed, at a conversion price
per share of $ [120% to 130% of the initial public offering price of the
Common Stock], subject to adjustment as hereinafter provided. The Debentures are
redeemable, in whole or in part, at the option of the Company, at a redemption
price equal to 100% of the principal amount, plus accrued and unpaid interest,
at any time on or after , 2000 [36 months after issuance], provided
that the closing sale price of the Common Stock, during the 20 consecutive
trading days prior to the date of the notice of redemption, has equaled or
exceeded $ [150% of the initial public offering price of the Common Stock],
subject to adjustment in certain events. The Debentures are subordinated to all
existing and future Senior Indebtedness (as hereinafter defined) and are
effectively subordinated to all indebtedness of the Company. At June 30, 1997,
the Company had pro forma consolidated indebtedness to which the Debentures
would be effectively subordinated aggregating approximately $572,000. See
"Description of Debentures."
Each Warrant entitles the registered holder thereof to purchase, at any time
commencing on , 1997 [the date of this Prospectus] and terminating on
, 2002 [five years after the date of this Prospectus], one share of Common
Stock at a price of $ per share [140% of the initial public offering
price per share of Common Stock], subject to adjustment in certain
circumstances. Commencing , 1999 [18 months after the date of this
Prospectus], the Company may redeem the Warrants, in whole but not in part, at
$.10 per Warrant on 30-days prior written notice to the warrantholders, provided
that the average closing sale price of the Common Stock, as reported on the
American Stock Exchange ("AMEX"), equals or exceeds $ per share [210% of
the initial public offering price per share of Common Stock] for any 20 trading
days within a period of 30 consecutive trading days ending on the fifth trading
day prior to the date of the notice of redemption. See "Description of
Securities."
Prior to this Offering, there has been no public market for the Debentures,
the Common Stock, or the Warrants, and there can be no assurance that such a
market will develop upon completion of this Offering, or, if developed, that it
will be sustained. It is currently anticipated that the initial public offering
price of the Common Stock and the Warrants will be $7.50 per share and $.10 per
Warrant, respectively. For information regarding the factors considered in
determining the terms of the Debentures and the Warrants and the initial
offering price of the Common Stock and the Warrants, see "Underwriting." The
Company has applied for listing of the Debentures, the Common Stock, and the
Warrants on AMEX under the symbols "IPH.C," "IPH," and "IPH.W," respectively.
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THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 9 AND "DILUTION" FOR A DISCUSSION OF
CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE
PURCHASERS OF THE SECURITIES.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(2) COMPANY(3)
Per Debenture............................................ 100%(1) % %
Per Share................................................ $ $ $
Per Warrant.............................................. $ $ $
Total(4)................................................. $ $ $
(1) Plus accrued and unpaid interest, if any, from , 1997
(2) Does not include additional consideration to be received by Nolan Securities
Corp., SouthWall Capital Corp., and Dirks & Company, Inc., the
representatives (the "Representatives") of the several underwriters (the
"Underwriters"), in the form of a non-accountable expense allowance. In
addition, see "Underwriting" for information concerning indemnification and
contribution arrangements with the Underwriters and other compensation
payable to the Representatives.
(3) Before deducting estimated expenses of $ payable by the Company,
including the Representatives' non-accountable expense allowance.
(4) The Company has granted the Underwriters an option, exercisable within 45
days from the date of this Prospectus, to purchase up to an additional
$3,750,000 principal amount of Debentures and/or up to an additional 300,000
shares of Common Stock and/or up to an additional 300,000 Warrants upon the
same terms and conditions, solely to cover over-allotments, if any. If the
over-allotment option granted to the Underwriters is exercised in full, the
total Price to Public, Underwriting Discount, and Proceeds to Company will
be $ , $ , and $ , respectively. See "Underwriting."
The Securities offered hereby are being offered, subject to prior sale,
when, as, and if delivered to, and accepted by, the Underwriters, subject to
approval of certain legal matters by counsel and certain other conditions. The
Underwriters reserve the right to withdraw, modify, or cancel the Offering and
to reject any order in whole or in part. It is expected that delivery of
certificates representing the Securities offered hereby will be made against
payment therefor at the offices of on or about , 1997.
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NOLAN SECURITIES CORP.
SOUTHWALL CAPITAL CORP.
DIRKS & COMPANY, INC.
The date of this Prospectus is , 1997
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE DEBENTURES, THE
COMMON STOCK, AND THE WARRANTS, INCLUDING PURCHASES OF THE DEBENTURES, THE
COMMON STOCK, AND/OR THE WARRANTS TO STABILIZE THEIR RESPECTIVE MARKET PRICES,
PURCHASES OF THE DEBENTURES, COMMON STOCK, AND/OR WARRANTS TO COVER SOME OR ALL
OF A SHORT POSITION MAINTAINED BY THE UNDERWRITERS IN THE DEBENTURES, THE COMMON
STOCK, AND/OR THE WARRANTS RESPECTIVELY, AND THE IMPOSITION OF PENALTY BIDS. FOR
A DISCUSSION OF THESE ACTIVITIES, SEE "UNDERWRITING."
The Company intends to furnish to its securityholders annual reports
containing financial statements audited and reported on by its independent
certified public accountants after the end of each fiscal year and make
available such other periodic reports as the Company may deem appropriate or as
may be required by law.
2
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING
ELSEWHERE IN THIS PROSPECTUS. UPON CONSUMMATION OF THIS OFFERING, INTEGRATED
PHYSICIAN SYSTEMS, INC. (THE "COMPANY") WILL ACQUIRE CERTAIN ASSETS, AND ASSUME
CERTAIN LIABILITIES, ASSOCIATED WITH 12 MEDICAL PRACTICES (THE "INITIAL
AFFILIATED PRACTICES") AND WILL ENTER INTO MANAGEMENT SERVICES AGREEMENTS WITH
EACH SUCH MEDICAL PRACTICE. THE COMPANY WILL ALSO ACQUIRE 100% OF THE CAPITAL
STOCK OF A MEDICAL BILLING COMPANY, MEDICAL BILLING AND MANAGEMENT SYSTEMS,
INC., UPON CONSUMMATION OF THIS OFFERING (COLLECTIVELY, THE "ACQUISITIONS"). AS
USED HEREIN, "COMPANY" REFERS TO INTEGRATED PHYSICIAN SYSTEMS, INC. AND ITS
SUBSIDIARIES AND "AFFILIATED PRACTICES" REFERS TO THE INITIAL AFFILIATED
PRACTICES AND ANY PHYSICIAN PRACTICES WITH WHICH THE COMPANY MAY ENTER INTO
SIMILAR RELATIONSHIPS IN THE FUTURE. ALL REFERENCES TO "NETWORK BILLING SYSTEMS,
INC." OR "NBS" HEREIN REFERS TO MEDICAL BILLING AND MANAGEMENT SERVICES, INC.,
WHICH THE COMPANY WILL RENAME UPON CONSUMMATION OF THIS OFFERING. EXCEPT AS
OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS DOES NOT GIVE EFFECT TO
(I) THE EXERCISE OF THE REPRESENTATIVES' WARRANTS; (II) THE EXERCISE OF THE
UNDERWRITERS' OVER-ALLOTMENT OPTION; (III) THE EXERCISE OF THE WARRANTS; AND
(IV) THE ISSUANCE OF UP TO 300,000 SHARES OF COMMON STOCK UPON THE EXERCISE OF
OPTIONS WHICH MAY BE GRANTED UNDER THE COMPANY'S 1996 STOCK OPTION PLAN (THE
"PLAN"). THE INFORMATION IN THIS PROSPECTUS RELATING TO SHARES OF COMMON STOCK
AND PER SHARE AMOUNTS GIVES EFFECT TO THE ISSUANCE OF AN AGGREGATE OF 481,067
SHARES OF COMMON STOCK TO BE ISSUED IN CONNECTION WITH THE ACQUISITIONS.
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET
FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS.
THE COMPANY
Integrated Physician Systems, Inc. (the "Company") is a newly established
physician practice management organization ("PPMO") which is developing an
integrated health care delivery network in selected geographic areas through
affiliation with physician practices. Upon the closing of this Offering, the
operations of the Company will consist of (i) management of the Initial
Affiliated Practices, consisting of 12 medical practices located in New Jersey,
(ii) Professional Medical Images Ltd. ("PMI"), a wholly-owned subsidiary of the
Company which is engaged in the management of one independent practice
association ("IPA") which is currently affiliated with approximately 225
physicians in the State of New Jersey, and (iii) Network Billings Systems, Inc.
("NBS"), which is engaged in the development and management of physician fee
billing, electronic medical records, and utilization information systems for
medical practices. NBS currently manages patient and third party billing
services for 25 medical practices unaffiliated with the Company in Pennsylvania.
The Company's objective is to develop and manage an integrated health care
delivery network comprised of physician practices that provide high quality,
cost-effective care. The Company has focused, and intends, at least initially,
to continue to focus, its primary affiliation efforts on physician practices
located in New Jersey, New York, and Pennsylvania. The Company targets
physicians who are committed
to the delivery of high quality, cost-effective care and have a reputation with
their patients, peers, and payors for providing quality medical services and
that have the capacity to increase profitability through improved performance on
existing patient bases. When affiliating with a physician practice, the Company
will typically purchase the practice's non-real estate operating assets and
enter into a long-term practice management services agreement ("PMSA") with the
practice in exchange for a combination of Common Stock, cash, notes, other
securities of the Company, and/or the assumption of liabilities. Pursuant to the
PMSA, the Company will be responsible for providing the Affiliated Practice with
necessary office facilities, medical equipment, supplies, and medical staff such
as nurses, physician assistants and clerks, and will plan and manage the
activities of the Affiliated Practice in all respects other than the provision
of medical services. The Affiliated Practice will be responsible solely for the
rendering of medical services.
3
The health care delivery system in the United States has been undergoing
substantial change, largely in response to concerns over the quality and
escalating cost of health care. National expenditures for health care grew from
$250 billion in 1980 to an estimated $1 trillion in 1995. Of the total estimated
1995 expenditures, physicians received approximately $200 billion for their own
services and controlled an additional $600 billion through the referral of
patients for additional care and services provided by others. Concerns over the
accelerating cost of health care have resulted in the increasing prominence of
managed care. The Company believes that traditional physician practices are at a
competitive disadvantage in a managed care environment because they typically
have high operating costs, have little purchasing power with suppliers, and must
spread overhead over a relatively small revenue base. In addition, these
physician practices often have insufficient capital to acquire equipment to
incorporate new technologies and often lack the sophisticated systems necessary
to contract effectively with managed care entities. Physician practices are
increasingly turning to organizations such as the Company to provide the
professional management expertise and capital required to compete in the managed
care environment and otherwise to assist them with the increasingly complex
management of physician practices. The Company believes that this has resulted
in a need for management organizations committed to preserving the professional
autonomy of physician practices and whose economic incentives are aligned with
those of physicians.
The Company's operating strategy includes the following: (i) targeting for
affiliation high quality and productive physician practices which are committed
to expanding and providing cost-effective care; (ii) integrating physician
practices into Company-coordinated strategic business units ("SBUs") to provide
physician and medical support services within specific geographic regions; (iii)
contracting with state and local governments to provide medical services for
elderly and indigent populations; (iv) enhancing the ability of the Affiliated
Practices to focus on clinical practice issues by relieving them of most
administrative functions; (v) implementing and utilizing sophisticated
information systems to manage patient care and control costs; (vi) coordinating
purchases of supplies, equipment, and services in order to realize economies of
scale; (vii) developing and enhancing IPA services and contracts; (viii)
positioning the Company to maximize managed care contract opportunities; and
(ix) developing ancillary services and broadening the specialties of the
Company's health care delivery network.
The Company was incorporated under the laws of the State of Delaware on
April 25, 1995. The Company's principal offices are located at 2644 Bristol
Road, Warrington, Pennsylvania 18976, and its telephone number is (215)
343-1942.
4
THE OFFERING
SECURITIES OFFERED
Debentures................................... $25,000,000 aggregate principal amount of
[6 1/2% to 8%] Convertible Subordinated
Debentures due , 2004 (the
"Debentures")
Common Stock................................. 2,000,000 shares
Warrants..................................... 2,000,000 Warrants
DEBENTURE TERMS
Interest Payment Dates....................... Each and , commencing ,
1998
Maturity Date................................ , 2004
Conversion................................... The Debentures are convertible into shares of
Common Stock at any time prior to maturity,
unless previously redeemed, at a conversion
price of $ per share [120% to 130% of
the initial public offering price of the
Common Stock], subject to adjustment in
certain events.
Redemption at Option of Company.............. The Debentures are not redeemable prior to
, 2000. Thereafter, the Debentures
are redeemable, in whole or in part, from
time to time, at the option of the Company at
a redemption price equal to 100% of the
principal amount thereof plus accrued and
unpaid interest, provided that the Debentures
may not be redeemed prior to maturity unless
the closing sale price of the Common Stock
for 20 consecutive trading days prior to the
date of notice of such redemption has equaled
or exceeded $ , [150% of the initial
public offering price of the Common Stock],
subject to adjustment in certain events. See
"Description of Debentures-- Optional
Redemption."
Redemption at Option of Holders.............. In the event that a Repurchase Event (as
defined) occurs, subject to certain
conditions, each holder of a Debenture shall
have the right, at the holder's option, to
require the Company to purchase all or any
part of such holder's Debentures at 100% of
the principal amount thereof plus accrued and
unpaid interest through the date of
redemption.
Sinking Fund................................. If a sinking fund is established for any
indebtedness ranking junior to, or pari passu
with, the Debentures and which has a maturity
or weighted average time to maturity which is
on or prior to , 2004, the Debentures
will be entitled to an annual sinking fund
beginning in the Company's next fiscal year
calculated to retire that amount of
5
Debentures equal to the lesser of (i) the
same percentage of outstanding Debentures
prior to maturity as the percentage of the
principal amount of such other indebtedness
to be retired prior to maturity on the same
payment schedule as such other indebtedness
or (ii) such amount of Debentures necessary
to result in the Debentures having the same
weighted average time to maturity as the
other indebtedness.
Subordination................................ The Debentures are subordinated in right of
payment to all present and future Senior
Indebtedness (as defined) of the Company. The
Indenture will not restrict the incurrence of
additional Senior Indebtedness by the Company
or any indebtedness by any Subsidiary. See
"Description of Debentures."
WARRANT TERMS................................ Each Warrant entitles the registered holder
thereof to purchase, at any time commencing
on , 1997 [the date of this
Prospectus] and terminating on ,
2002 [five years after the date of this
Prospectus], one share of Common Stock at a
price of $ per share [140% of the initial
public offering price per share of Common
Stock], subject to adjustment in certain
circumstances. Commencing , 1999
[18 months after the date of this
Prospectus], the Company may redeem the
Warrants, in whole but not in part, at $.10
per Warrant on 30-days prior written notice
to the warrantholders, provided that the
average closing sale price of the Common
Stock, as reported on AMEX, equals or exceeds
$ per share [210% of the initial public
offering price per share of Common Stock] for
any 20 trading days within a period of 30
consecutive trading days ending on the fifth
trading day prior to the date of the notice
of redemption. See "Description of
Securities."
SECURITIES OUTSTANDING PRIOR TO THE OFFERING
Debentures................................... None
Common Stock................................. 2,183,067 shares (1)
Warrants..................................... None
SECURITIES OUTSTANDING IMMEDIATELY
FOLLOWING THE OFFERING
Debentures................................... $25,000,000 aggregate principal amount
Common Stock................................. 4,183,067 shares (1)
Warrants..................................... 2,000,000
6
USE OF PROCEEDS.............................. Payments due upon consummation of the
Acquisitions; funds available for future
acquisitions of additional physician
practices and/or other medical entities;
hardware, software, and installation cost of
an information system; repayment of certain
indebtedness; and general corporate and
working capital purposes.
RISK FACTORS................................. The purchase of the Securities offered hereby
is speculative and involves substantial risk.
Prospective investors should carefully review
and consider the information set forth under
"Risk Factors" and "Dilution."
PROPOSED AMEX TRADING SYMBOLS:
Debentures................................... "IPH.C"
Common Stock................................. "IPH"
Warrants..................................... "IPH.W"
- ------------------------
(1) Gives effect to the contribution, on October 21, 1997, of 1,356,000 shares
of Common Stock to the Company by certain stockholders (the
"Recapitalization"). Such shares were simultaneously retired by the
Company.
7
SUMMARY FINANCIAL INFORMATION
STATEMENT OF OPERATIONS DATA:
SIX MONTHS ENDED JUNE 30,
INCEPTION ---------------------------------------------
(APRIL 25, YEAR ENDED
1995) DECEMBER 31, 1996 1996 1997
THROUGH --------------------- --------------------- ----------------------
DECEMBER PRO PRO PRO
31, 1995 ACTUAL FORMA(1) ACTUAL FORMA(1) ACTUAL FORMA(1)
----------- --------- ---------- --------- ---------- ---------- ----------
Revenue:
Medical service revenue........ -- -- $17,130,000 -- $8,754,000 -- $7,962,000
Management fees................ -- -- -- -- -- 111,000 111,000
Medical billing and service -- 576,000
fees........................... -- 1,398,000 -- -- 1,101,000
Other revenue.................. -- -- 38,000 -- 48,000 -- 63,000
---------- ---------- ----------
Total revenue................ -- -- 18,566,000 -- 9,378,000 111,000 9,237,000
Costs and expenses:.............. --
Salaries and wages............. -- -- 13,294,000 -- 6,624,000 51,000 5,184,000
Medical supplies and -- 205,000
expenses....................... -- 426,000 -- -- 239,000
General and administrative -- 2,608,000
expenses....................... 4,000 4,174,000 2,000 78,000 3,390,000
Depreciation and 1,000 620,000
amortization................... 2,000 1,239,000 1,000 1,000 620,000
Interest expense............... -- -- 2,020,000 -- 1,010,000 135,000 1,010,000
----------- --------- ---------- --------- ---------- ---------- ----------
Total costs and expenses..... 1,000 6,000 21,153,000 3,000 11,067,000 265,000 10,443,000
Loss before income taxes......... (1,000) ( 6,000) (2,587,000 ( 3,000) (1,689,000) ( 154,000) (1,206,000)
Provision for income taxes....... -- -- -- -- -- -- --
----------- --------- ---------- --------- ---------- ---------- ----------
Net loss......................... $ (1,000) $( 6,000) $(2,587,000 $( 3,000) $(1,689,000) $( 154,000) $(1,206,000)
----------- --------- ---------- --------- ---------- ---------- ----------
----------- --------- ---------- --------- ---------- ---------- ----------
Pro forma net loss per $(0.41)
share(2)......................... $ (0.62) $ (0.29)
---------- ---------- ----------
---------- ---------- ----------
Pro forma weighted average 4,183,067
number of shares
outstanding(2)................... 4,183,067 4,183,067
---------- ---------- ----------
---------- ---------- ----------
BALANCE SHEET DATA:
DECEMBER 31, JUNE 30, 1997
-------------------- ------------------------
PRO FORMA, AS
1995 1996 ACTUAL ADJUSTED(1)(3)
--------- --------- --------- -------------
Working capital (deficiency)...................................... $ (74,000) $(149,000) $(329,000) $27,249,000
Total assets...................................................... 73,000 296,000 545,000 41,933,000
Total liabilities................................................. 74,000 179,000 431,000 25,686,000
Stockholders' equity (deficit).................................... (1,000) 117,000 114,000 16,247,000
- ------------------------
(1) The pro forma statement of operations data for the fiscal year ended
December 31, 1996 and for the six months ended June 30, 1996 and 1997 is
presented as if the Acquisitions and the PMI acquisition had occurred on
January 1, 1996. The pro forma balance sheet data for June 30, 1997 is
presented as if the Acquisitions had occurred on June 30, 1997. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation" and Notes to Unaudited Pro Forma Financial Statements.
(2) See Note HH to the Unaudited Pro Forma Statement of Operations Adjustments.
(3) Gives effect on a pro forma basis to (i) the issuance after June 30, 1997 of
an aggregate principal amount of $125,000 Series A 10% Senior Notes (the
"Senior Notes") and 16,667 shares of Common Stock as part of a bridge
financing of the Company (the "Bridge Financing"), and (ii) the
Recapitalization, and as adjusted to reflect the sale of the Debentures, the
Common Stock, and the Warrants offered hereby, assuming an initial public
offering price of 100%, $7.50 per share, and $.10 per Warrant, respectively,
and the initial application of the net proceeds therefrom. See "Use of
Proceeds" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
8
RISK FACTORS
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK. IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, THE
FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY
AND ITS BUSINESS BEFORE PURCHASING THE SECURITIES OFFERED HEREBY. PROSPECTIVE
INVESTORS SHOULD BE IN A POSITION TO RISK THE LOSS OF THEIR ENTIRE INVESTMENT.
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS,
INCLUDING THOSE SET FORTH IN THE FOLLOWING RISK FACTORS AND ELSEWHERE IN THIS
PROSPECTUS.
ABSENCE OF COMBINED OPERATING HISTORY; NO ASSURANCE OF PROFITABILITY. The
Company was incorporated in April 1995 and, to date, has conducted limited
operations and generated limited revenue. At June 30, 1997, the Company had a
working capital deficiency of approximately $329,000 and an accumulated deficit
of approximately $161,000. The likelihood of the future success of the Company
is highly speculative and must be considered in light of its limited operating
history, as well as the problems, expenses, difficulties, risks, and
complications frequently encountered in connection with similarly situated
companies in early stages of development. The Company is subject to all of the
business risks associated with a new enterprise, including constraints on its
financial and human resources, lack of established business relationships, and
uncertainties regarding affiliations and future revenues. The Company only
recently acquired PMI and has entered into agreements to acquire certain assets,
and assume certain liabilities, of the Initial Affiliated Practices and NBS upon
consummation of this Offering. In connection with the acquisition of the Initial
Affiliated Practices, the Company is entering into PMSAs to provide management
services to the Initial Affiliated Practices for initial terms of 40 years. The
Initial Affiliated Practices, NBS, and PMI operated as separate independent
entities before being acquired by the Company. There can be no assurance that
the process of integrating the management and administrative functions of the
Initial Affiliated Practices, NBS, and PMI will be successful or that the
Company will be able to manage these operations effectively or profitably and
successfully implement the Company's operating or expansion strategies. Failure
by the Company to successfully implement its operating and expansion strategies
would have a material adverse effect on the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business."
RISKS RELATED TO EXPANSION STRATEGY. The Company's expansion strategy
involves growth through affiliation with physician practices and the expansion
of such practices. The Company is subject to various risks associated with this
strategy, including the risks that the Company will be unable to identify and
recruit suitable affiliation candidates, successfully expand and manage the
Affiliated Practices, or successfully integrate the Affiliated Practices into
its existing operations. The Company's expansion is dependent on its ability to
affiliate with quality physician practices, to manage and control costs, and to
realize economies of scale. In addition, the success of the Company will depend
on its ability to integrate its management information system into each of the
Affiliated Practices. There can be no assurance that the Company will be able to
achieve and manage its planned expansion, that it will be able to successfully
implement its management information system, or that suitable physician
practices will be available for affiliation upon terms satisfactory to the
Company, or at all. There can be no assurance that the Company's expansion
strategy will be successful or that material modifications to the Company's
expansion strategy will not be required. The failure of the Affiliated Practices
to achieve anticipated performance levels could have a material adverse effect
on the Company's business, prospects, financial condition, and results of
operations. In pursuing its expansion strategy, the Company intends to expand
its presence into new geographic markets. In entering a new geographic market,
the Company will be required to comply with laws and regulations of
jurisdictions that differ materially from those applicable to the Company's
current operations, deal with different payors, as well as face competitors with
greater knowledge of such markets than the Company. There can be no assurance
that the Company will be able to effectively establish a presence in any new
market. See "Business-Strategy" and "Business-Government Regulation."
9
ADDITIONAL FINANCING REQUIREMENTS. The Company's expansion strategy will
require substantial capital resources. Capital is required not only for the
acquisition of substantially all of the assets of the Affiliated Practices and
other medical entities, but also for the integration, operation, and expansion
of the Affiliated Practices and such medical entities. In addition, the
Company's Affiliated Practices and other acquired entities may, from time to
time, require capital for renovation, expansion, and the purchase of additional
medical equipment and technology. The Company believes that the net proceeds of
this Offering, together with anticipated revenues from operations, will be
sufficient to satisfy its capital requirements for at least 12 months following
the date of this Prospectus. There can be no assurance that such resources will
be sufficient to satisfy the Company's capital requirements for said period.
After the 12-month period, the Company may require additional financing in order
to meet its current plans for expansion. Such financing may take the form of the
issuance of common or preferred equity securities or debt securities, or may
involve bank financing. There can be no assurance that the Company will be able
to obtain needed additional capital on a timely basis, on favorable terms, or at
all. Any additional financing could result in dilution of the then-existing
equity positions, and increased interest and amortization expense. If the
Company is unable to secure additional sources of financing on terms and
conditions favorable to the Company, or at all, the Company's expansion strategy
could be materially adversely affected. In any of such events, the Company may
be unable to implement its current plans for expansion or to repay its debt
obligations. See "Use of Proceeds" and "Business--Strategy."
LIMITED MANAGEMENT RESOURCES. The Company's anticipated growth is expected
to place a significant strain on its managerial, operational, and financial
resources. To manage this growth, the Company will be required to significantly
expand its operational and financial systems and expand, train, and manage its
work force. The ability of the Company to attract and retain highly skilled
personnel is critical to the operations and expansion of the Company. The
Company faces competition for such personnel from other PPMOs and more
established organizations, many of which have significantly larger operations
and greater financial, marketing, human, and other resources than the Company.
There can be no assurance that the Company will be successful in attracting and
retaining qualified personnel on a timely basis, on competitive terms, or at
all. In the event that the Company is not successful in attracting and retaining
such personnel, the Company may be materially adversely affected. Further, the
Company anticipates that it will take time to integrate additional skilled
individuals into the Company's operations and to build a cohesive and efficient
workforce.
RELIANCE ON AFFILIATED PRACTICES. The Company will receive fees for
management services provided to its Affiliated Practices under the PMSAs.
Revenue received by the Company from the Affiliated Practices under the PMSAs
generally will depend on revenue generated by the Affiliated Practices. The
revenue from the Affiliated Practices will be dependent on fees generated by the
physicians employed by the Affiliated Practices. In connection with the PMSAs,
each physician will enter into an employment agreement, each of which will have
a three to five year term, with the professional corporation in which that
physician practices. The Company will not be receiving a fixed percentage of
revenues from the Affiliated Practices. Pursuant to the PMSAs, the Company will
receive 100% of the receivables from the Affiliated Practices and, before any
other expenses are paid, will return to the Affiliated Practices only such sums
as are necessary to pay certain designated expenses such as physician salaries,
physician payroll taxes, and continuing education costs. The Company will use
remaining amounts of such receivables to fund the operations of the Affiliated
Practices and its own operations. There can be no assurance that the Affiliated
Practices will generate sufficient revenues to fund the operations of the
Affiliated Practices and the Company or that they will generate sufficient
revenues to fund physician salaries. Consequently, there can be no assurance
that the revenues from the Affiliated Practices will be sufficient to allow the
Company to be profitable. A failure of the Affiliated Practices to generate
sufficient revenues could have a material adverse effect on the Company's
business, prospects, financial condition, and results of operations. Any loss of
revenue by the Affiliated Practices, including losses resulting from a
substantial reduction in the number of physicians employed by, or associated
with, the Affiliated Practices, could have a material adverse effect on the
business, prospects, financial condition, and results of operations of the
Company.
10
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Affiliation Structure."
DEPENDENCE ON THIRD PARTY REIMBURSEMENT. The Company's ability to collect
fees in a timely manner, or at all, is affected by whether its Affiliated
Practices are reimbursed for their medical services and the amount of
reimbursement. Substantially all of the revenue of the Affiliated Practices,
which will be substantially all of the Company's revenue, will derive from
commercial health insurance, state workers' compensation programs, and other
third-party payors. All of these providers and programs are regulated at the
state or federal level. There are increasing and significant public and private
sector pressures to contain health care costs and to restrict reimbursement
rates for medical services. For example, it has been reported that the Medicare
program is expected to experience a deficiency of funds early in the next
century. Accordingly, Congress, in its fiscal year 1997 budget legislation,
called for, and considered, severe reductions in both the Medicare and Medicaid
programs. Several states have taken measures to reduce the reimbursement rates
paid to health care providers in their states. The Company believes that
additional states will implement reductions from time to time. Reductions in
Medicare and Medicaid rates often lead to reductions in the reimbursement rates
of other third-party payors as well. Thus, changes in the level of support by
federal and state governments of health care services, the methods by which
health care services may be delivered, and the prices of such services may all
have a material impact on the revenue of the Company, which in turn could have a
material adverse effect on the Company.
Third party payors may disagree with the description or coding of a bill for
medical services, or may contest a description or code under a lesser fee
schedule depending on the medical services rendered. Such disagreements on
description of professional services or bill coding, particularly where the
third party payor is a federal or state funded health care program, could result
in lesser reimbursement, which could have a material adverse effect on the
Company. Persistent disagreements or alleged "upcoding" could result in
allegations of fraud or false billing, both of which constitute felonies. Such
an allegation, if proven, could result in forfeitures of payment, civil money
penalties, civil fines, suspensions, or exclusion from participation in federal
or state funded health care programs, and could have a material adverse effect
on the Company. Investigation and prosecution for fraudulent or false billing
could have a material adverse effect on the Company, even if such allegations
were disproven.
The Company's income may be materially adversely affected if the Affiliated
Practices are unable to collect medical fees from third party payors or if there
is a delay in the submission of claims. Additionally, there may be long
collection cycles for such receivables. Many third party payors, particularly
insurance carriers covering automobile no-fault and workers' compensation claims
refuse, as a matter of business practice, to pay claims unless submitted to
arbitration. Further, third party payors may reject medical claims if, in their
judgment, the procedures performed were not medically necessary or if the
charges exceed such payor's allowable fee standards. In addition, some
receivables may not be collected because of omissions or errors in timely
completion of the required claim forms. The inability of the Affiliated
Practices to collect their receivables could materially adversely affect the
Company. See "Risk Factors-- Government Regulation," "Business-Third Party
Reimbursement," and "Business-Government Regulation."
GOVERNMENT REGULATION. Federal and state laws regulate the relationships
among providers of health care services, physicians, and other clinicians. These
laws include federal fraud and abuse provisions. Such provisions prohibit the
solicitation, receipt, payment, or offering of any direct or indirect
remuneration for the referral of patients for which reimbursement is made under
any federal or state funded health care program or for the recommending,
leasing, arranging, ordering, or providing of services covered by such programs.
States have similar laws that apply to patients covered by private and
government programs. Federal fraud and abuse laws also impose restrictions on
physicians' referrals for designated health services covered under Medicare or
Medicaid to entities with which they have financial relationships. Various
states have adopted similar laws that cover patients in private programs as well
as government programs. Recent actions of Congress, including the Health
Insurance Portability and Accountability Act of 1996 and the
11
Balanced Budget Act of 1997, have expanded the coverage of fraud and abuse
provisions, enhanced the enforcement efforts of the federal government in
pursuing fraud and abuse, and have increased the penalties related to violations
of the various fraud and abuse provisions. There can be no assurance that the
federal and state governments will not consider additional prohibitions on
physician ownership, directly or indirectly, of facilities to which they refer
patients, which could adversely affect the Company. Violations of these laws may
result in substantial civil or criminal penalties for individuals or entities,
including large civil money penalties and exclusion from participation in
federal or state health care programs. Such exclusion, if applied to the
Affiliated Practices could result in significant loss of reimbursement and could
have a material adverse effect on the Company.
Federal law also prohibits conduct that may be, or result in, price-fixing
or other anticompetitive conduct. Moreover, the Company may in the future
contract with licensed insurance companies and/or HMOs. Certain of such
contracts may require the Affiliated Practices on behalf of which the Company
contracts to assume risk in connection with providing health care service under
capitation arrangements. To the extent that the Company or the Affiliated
Practices may be in the business of insurance as a result of entering into such
arrangements, they may be subject to a variety of regulatory and licensing
requirements applicable to insurance companies or HMOs. There can be no
assurance that review of the Company's or the Affiliated Practices' businesses
by courts or regulatory authorities will not result in a determination that
could materially adversely affect the operations of the Company or such
Affiliated Practices or that the health care regulatory environment will not
change so as to restrict the Company's or such Affiliated Practices' existing
operations or their expansion.
Moreover, the laws of many states, such as New York, where the Company
intends to acquire physician practices, prohibit physicians from sharing
professional fees, or "splitting fees," with anyone other than a member of the
same profession. These laws and their interpretations vary from state to state
and are enforced by the courts and by regulatory authorities with broad
discretion. Expansion of the operations of the Company to certain jurisdictions,
including New York, may require structural and organizational modifications of
the Company's form of relationship with the Affiliated Practices, which could
have an adverse effect on the Company. Although the Company believes that the
operations of the Initial Affiliated Practices as the Company will operate them
upon their acquisition are in compliance in all material respects with existing
applicable laws, there can be no assurance that review of the Company's business
by courts or regulatory authorities will not result in a determination that
could adversely affect the operations of the Company or that the health care
regulatory environment will not change so as to restrict the Company's existing
operations or its expansion.
Every state imposes licensing requirements on individual physicians and on
certain other health care providers and facilities. Many states require
regulatory approval, including licensing to render care or certificates of need
before establishing certain types of health care services which entail the
acquisition of expensive medical equipment or facilities. While the performance
of management services on behalf of a medical practice does not currently
require any regulatory approval, there can be no assurance that such activities
will not be subject to licensure in the future. Such requirements could have a
material adverse effect on the Company and its operations. See "Business -
Government Regulation."
STATE LAWS PROHIBITING THE CORPORATE PRACTICE OF MEDICINE. Affiliated
Practices are anticipated to be business corporations wholly-owned by the
Company in the states in which the Company believes general business
corporations are permitted to own a medical practice. In other states, including
New Jersey, New York, and Pennsylvania, the Affiliated Practices will be formed
as professional corporations owned by one or more medical doctors licensed to
practice medicine under the applicable state law. Corporations such as the
Company are not permitted under certain state laws, including New Jersey, New
York, and Pennsylvania, to practice medicine or exercise control over the
medical judgments or decisions of practitioners. Laws regulating the corporate
practice of medicine and the interpretation thereof vary from state to state and
are enforced by the courts and by regulatory authorities with broad discretion.
The Company believes that it performs only non-medical administrative services,
does not represent to the public or its clients that
12
it provides medical services, and does not exercise influence or control over
the practice of medicine by the practitioners with whom it contracts. Expansion
of the operations of the Company to certain jurisdictions may require structural
and organizational modifications of the Company's form of relationship with
practitioners in order to comply with laws regulating the corporate practice of
medicine, which could have an adverse effect on the Company. Although the
Company believes its operations, as currently conducted, are in compliance in
all material respects with existing applicable laws, there can be no assurance
that the Company's structure will not be challenged as constituting the
unlicensed practice of medicine or that the enforceability of the agreements
underlying this structure will not be limited. If such a challenge were made
successfully in any state, the Company could be subject to civil and criminal
penalties under such state's law and could be required to restructure its
contractual arrangements in that state. Such results, or the inability to
successfully restructure its contractual arrangements, could have a material
adverse effect upon the Company. See "Business--Government Regulation."
HEALTH CARE REFORM. Although Congress has failed to pass comprehensive
health care reform legislation, the Company anticipates that Congress and state
legislatures will continue to review and assess alternative health care delivery
and payment systems and may in the future propose and adopt legislation
effecting fundamental changes in the health care delivery system. Also, Congress
is expected to consider major reductions in the rate of increase of Medicare and
Medicaid spending as a part of efforts to balance the budget of the United
States. The Company cannot predict the ultimate timing, scope, or effect of any
legislation concerning health care reform, including legislation affecting the
Medicare and Medicaid programs. Any proposed federal legislation, if adopted,
could result in significant changes in the availability, delivery, pricing, and
payment for health care services and products. Various states also have
undertaken, or are considering, significant health care reform initiatives.
Although it is not possible to predict whether any health care reform
legislation will be adopted or, if adopted, the exact manner and the extent to
which the Company will be affected, it is likely that the Company will be
affected in some fashion, and there can be no assurance that any health care
reform legislation, if and when adopted, will not have a material adverse effect
on the Company.
EXPOSURE TO PROFESSIONAL LIABILITY. In recent years, physicians, hospitals,
and other participants in the health care industry have become subject to an
increasing number of lawsuits alleging medical malpractice and related legal
theories. Many of these lawsuits involve large claims and substantial defense
costs. The Company does not engage in the practice of medicine or provide
medical services, nor does it control the practice of medicine by the Affiliated
Practices or the compliance with regulatory and other requirements directly
applicable to the Affiliated Physicians and Affiliated Practices; however, there
can be no assurance that the Company will not become involved in such litigation
in the future. See "Business -- Professional Liability Insurance."
The PMSAs will require the Affiliated Practices to maintain, at their
expense, professional liability insurance for themselves and each physician
employed by, or otherwise providing medical services for, the Affiliated
Practices in the minimum amount of $1,000,000 per occurrence and $3,000,000 in
the aggregate. In addition, each of the Affiliated Practices will undertake to
comply with all applicable regulations and requirements, and the Company will be
indemnified under the PMSA for claims against the Company arising in connection
with actions by the Affiliated Practices. The Company has applied for general
liability insurance for itself and requires that it be named as an additional
insured party on the professional liability insurance policies of the Affiliated
Practices pursuant to the PMSA. In addition, the Company will maintain liability
insurance on its non-physician professional employees, such as nurses and
midwives.
There can be no assurance that the Company, its employees, the Affiliated
Practices, or the physicians employed by, or associated with, the Affiliated
Practices will not be subject to claims in amounts that exceed the coverage
limits or that such coverage will be available when needed. Further, there can
be no assurance that professional liability or other insurance will continue to
be available to the Affiliated Practices in the future at adequate levels, at an
acceptable cost, or at all. A successful claim against the Company or an
Affiliated Practice in excess of the relevant insurance coverage could have a
material
13
adverse effect upon the Company. Claims against the Company or an Affiliated
Practice, regardless of the merits or eventual outcomes, may also have a
material adverse effect on the Company.
RISKS ASSOCIATED WITH MANAGED CARE CONTRACTS. While none of the Initial
Affiliated Practices are currently materially dependent upon capitated fee
arrangements, the Company believes that an increasing percentage of patients
will be coming under the control of managed care entities. The Company believes
that its success will, in part, depend upon its ability to negotiate on behalf
of the Affiliated Practices favorable managed care contracts with HMOs and other
private third-party payors. Such contracts often shift much of the financial
risk of providing care from the payor to the provider by requiring the provider
to furnish all or a portion of its services in exchange for a fixed, or
"capitated," fee per member patient per month, regardless of the level of such
patients' utilization rates and, sometimes in the case of primary care
physicians, to accept financial risk for health care services not normally
furnished by such physicians (e.g., specialty physician or hospital services).
The Company intends to negotiate capitation agreements with managed care
organizations. Some managed care agreements also offer "shared risk" provisions
under which physicians and physician practice management concerns can earn
additional compensation based on the utilization of services by members, but may
be required to bear a portion of any loss in connection with such "shared-risk"
provisions. Any such losses could, in the future, have a material adverse effect
on the Company. In order for capitation contracts, especially any with
"shared-risk" provisions, to be profitable for the Company, the Company must
effectively monitor the utilization of its services delivered to members of the
managed care organization who are patients of the Affiliated Practices and, to
the extent such Affiliated Practices are responsible for overall patient care,
monitor the utilization of specialist physicians or hospitals, negotiate
favorable rates with such other providers, and obtain, on favorable terms, stop
loss protection limiting its per enrollee exposure above specified thresholds.
There can be no assurance that the Company will be able to negotiate
satisfactory managed care contracts for the Affiliated Practices. Nor can there
be any assurance that any managed care contracts it enters into on behalf of the
Affiliated Practices will not adversely affect the Company or the Affiliated
Practices.
COMPETITION. The physician practice management industry is highly
competitive. The Company is subject to significant competition both in
affiliating with physician practices and in seeking managed care contracts on
behalf of the Affiliated Practices. Its competitors include hospitals, managed
care organizations, and other PPMOs. In comparison with the Company, many of its
competitors are larger and have substantially greater resources, provide a wider
variety of services, and have longer established relationships with purchasers
of such services. There can be no assurance that the Company will be able to
compete effectively, that additional competitors will not enter the market, or
that such competition will not make it more difficult to enter into affiliations
with physician practices on terms beneficial to the Company. The Company also
experiences competition in the recruitment and retention of qualified physicians
and other health care professionals on behalf of the Affiliated Practices. There
can be no assurance that the Company will be able to recruit or retain a
sufficient number of qualified physicians and other health care professionals to
expand its operations. See "Business-Competition."
DEPENDENCE ON KEY EMPLOYEES. The Company is dependent substantially upon
the efforts of Scott G. Pollock, Chief Executive Officer and a Director of the
Company, Peter R. Heisen, M.D., President, Chief Medical Officer, and a Director
of the Company, and Dennis B. Liotta, M.D., Executive Vice President, Chief
Operating Officer, and a Director of the Company. The loss of, or unavailability
of, any of these individuals or the inability of the Company to attract other
qualified employees could have a material adverse effect upon the Company. The
Company has entered into employment agreements with these key executives, with
minimum terms of at least three years. In addition, the Company has obtained,
and is the sole owner and beneficiary of, an insurance policy in the amount of
$1,000,000 on the life of each of Mr. Pollock and Drs. Heisen and Liotta. See
"Management."
14
NO PRIOR PUBLIC MARKET; ARBITRARY DETERMINATION OF PUBLIC OFFERING PRICES;
POSSIBLE VOLATILITY OF DEBENTURE, COMMON STOCK AND WARRANT MARKET PRICES. Prior
to this Offering, there has been no public market for any of the Securities
offered hereby, and there can be no assurance that an active public market for
any of the Securities will develop or, if developed, be sustained after this
Offering. The terms of the Debentures and the Warrants and the initial public
offering prices of the Common Stock and the Warrants were arbitrarily determined
by negotiation between the Company and the Representatives, and do not
necessarily bear any relationship to the Company's assets, book value, results
of operations, or any other generally accepted criteria of value. From time to
time after this Offering, there may be significant volatility in the market
price of the Debentures, the Common Stock, and the Warrants. Quarterly operating
results of the Company or other developments affecting the Company, such as
announcements by the Company or its competitors regarding acquisitions or
dispositions, new procedures, changes in general conditions in the economy or
the health care industry, and general market conditions could cause the market
prices of the Securities to fluctuate substantially. The equity markets have, on
occasion, experienced significant price and volume fluctuations that have
affected the market prices for many companies' securities and have often been
unrelated to the operating performance of these companies. Concern about the
potential effects of health care reform measures has contributed to the
volatility of stock prices in companies in health care and related industries
and may similarly affect the price of any or all of the Securities following
this Offering. See "Underwriting."
LACK OF EXPERIENCE OF REPRESENTATIVES. Nolan Securities Corp. has been in
business since February 1991 and has participated in two public offerings as a
co-manager and two public offerings as a member of the underwriting syndicate.
Dirks & Company, Inc. commenced operations in July 1997 and has not co-managed
or participated as an underwriter in any public offering of securities.
SouthWall Capital Corp. commenced operations as an underwriter in May 1996 and
has co-managed one public offering and participated as an underwriter in nine
public offerings to date. Accordingly, none of the Representatives have
extensive experience as a co-manager or underwriter of public offerings of
securities. In addition, each of the Representatives are relatively small firms
and no assurance can be given that any of the Representatives will be able to
participate as a market maker in any of the Securities. No assurance can be
given that any broker-dealer will make a market in any of the Securities. See
"Underwriting."
NO DIVIDENDS. The Company has not paid cash dividends on the Common Stock
since inception and does not intend to pay any dividends to its stockholders in
the foreseeable future. The Company currently intends to reinvest earnings, if
any, in the development and expansion of its business. See "Dividend Policy."
IMMEDIATE AND SUBSTANTIAL DILUTION; DISPARITY OF CONSIDERATION. The
purchasers of the shares of Common Stock offered hereby will experience
immediate and substantial dilution in the net tangible book value of the shares
of Common Stock of $6.58 per share, or approximately 87.7% per share. Additional
dilution to future net tangible book value per share may occur upon the exercise
of the Warrants, the Representatives' Warrants, and options to be issued under
the Plan. The current stockholders of the Company, including the directors and
entities and persons affiliated with them acquired their shares of Common Stock
for nominal consideration. As a result, new investors will bear substantially
all of the risks inherent in an investment in the Company. See "Dilution."
SUBSTANTIAL CONTROL BY MANAGEMENT. Upon the closing of this Offering, the
Company's officers and directors will own approximately 27.2% of the outstanding
shares of Common Stock (approximately 25.4% of the outstanding shares of Common
Stock if the Underwriters' over-allotment option is exercised in full). As a
result, such persons may have the ability to control the election all of the
directors of the Company and to control the outcome of all issues submitted to a
vote of the stockholders of the Company. Furthermore, such concentration of
ownership could limit the price that certain investors might be willing to pay
in the future for shares of Common Stock and could have the effect of making it
more difficult for a
15
third party to acquire, or of discouraging a third party from attempting to
acquire control of, the Company. See "Principal Stockholders."
SHARES ELIGIBLE FOR FUTURE SALE The sale, or availability for sale, of a
substantial number of shares of Common Stock in the public market subsequent to
this Offering pursuant to Rule 144 under the Securities Act ("Rule 144") or
otherwise could materially adversely affect the market price of the Common Stock
and could impair the Company's ability to raise additional capital through the
sale of its equity securities or debt financing. Of the 4,183,067 shares of
Common Stock to be outstanding upon completion of this Offering, the 2,000,000
shares of Common Stock offered hereby (2,300,000 shares of Common Stock if the
Underwriters' over-allotment option is exercised in full), will be immediately
freely tradeable without restriction under the Securities Act, except for any
securities purchased by affiliates of the Company, which securities will be
subject to the resale limitations of Rule 144 under the Securities Act. The
availability of Rule 144 to the holders of restricted securities of the Company
would be conditioned on, among other factors, the availability of certain public
information concerning the Company. The remaining 2,183,067 shares of Common
Stock are "restricted securities" as that term is defined in Rule 144 and may,
under certain circumstances, be sold without registration under the Securities
Act. All existing stockholders of the Company, including all of the executive
officers and directors of the Company, have agreed, however, not to sell or
otherwise dispose of any securities of the Company for a period of 18 months
from the date of this Prospectus without the Representative's prior written
consent. After such 18-month period, all 2,183,067 shares may be sold in
accordance with Rule 144. See "Shares Eligible for Future Sale."
POTENTIAL ADVERSE EFFECT OF REPRESENTATIVES' WARRANTS. At the consummation
of the Offering, the Company will sell to the Representatives and/or their
designees, for nominal consideration, warrants to purchase up to an aggregate of
$2,500,000 principal amount of Debentures, up to 200,000 shares of Common Stock,
and/or up to 200,000 Warrants (the "Representatives' Warrants"). The
Representatives' Warrants are exercisable for a period of four years commencing
one year after the effective date of this Offering, at an exercise price of 100%
of the principal amount of Debentures, $ per share of Common Stock [140% of
the initial public offering price per share of the Common Stock], and $ per
Warrant [140% of the initial public offering price of the Warrants],
respectively. The Warrants obtained upon exercise of the Representatives'
Warrants will be exercisable for a period of four years commencing at the
beginning of the second year after the effective date of this Offering, at an
exercise price of $ per share [140% of the exercise price of the Warrants].
For the term of the Representatives' Warrants, the holders thereof will have, at
nominal cost, the opportunity to profit from a rise in the market price of the
Securities without assuming the risk of ownership, with a resulting dilution in
the interest of other security holders. As long as the Representatives' Warrants
remain unexercised, the Company's ability to obtain additional capital might be
adversely affected. Moreover, the Representatives may be expected to exercise
the Representatives' Warrants at a time when the Company would, in all
likelihood, be able to obtain any needed capital through a new offering of its
securities on terms more favorable than those provided by the Representatives'
Warrants. See "Underwriting."
SPECULATIVE NATURE OF THE WARRANTS. The Warrants do not confer any rights
of Common Stock ownership on their holders, such as voting rights or the right
to receive dividends, but rather represent the right to acquire shares of Common
Stock at a fixed price for a limited period of time. Specifically, commencing
, 1997 [the date of this Prospectus], holders of the Warrants may
exercise their right to acquire shares of Common Stock and pay an exercise price
of $ per share [140% of the initial public offering price per share of
Common Stock], subject to adjustment upon the occurrence of certain dilutive
events, until , 2002 [five years after the date of this Prospectus],
after which date any unexercised Warrants will expire and have no further value.
Moreover, following the completion of this Offering, the market value of the
Warrants will be uncertain and there can be no assurance that the market value
of the Warrants will equal or exceed their initial public offering price. There
can be no assurance that the market price of the Common Stock will ever equal or
exceed the exercise price of the Warrants and, consequently, whether it will
ever be profitable for holders of the Warrants to exercise the Warrants.
16
POTENTIAL ADVERSE EFFECT OF REDEMPTION OF WARRANTS. Commencing ,
1999 [18 months after the date of this Prospectus], the Warrants are subject to
redemption by the Company at $0.10 per Warrant on 30 days prior written notice
to the warrantholders if the average closing sale price of the Common Stock as
reported on AMEX equals or exceeds $ per share [210% of the initial public
offering price of the Common Stock] of Common Stock for any 20 trading days
within a period of 30 consecutive trading days ending on the fifth trading day
prior to the date of the notice of redemption. If the Warrants are redeemed,
holders of the Warrants will lose their rights to exercise the Warrants after
the expiration of the 30-day notice of redemption period. Upon receipt of a
notice of redemption, holders would be required to: (i) exercise the Warrants
and pay the exercise price at a time when it may be disadvantageous for them to
do so; (ii) sell the Warrants at the current market price, if any, when they
might otherwise wish to hold the Warrants; or (iii) accept the redemption price,
which is likely to be substantially less than the market value of the Warrants
at the time of redemption. See "Description of Securities."
POTENTIAL ADVERSE EFFECT OF SUBSTANTIAL NUMBER OF SHARES OF COMMON STOCK
RESERVED. The Company has reserved a total of at least 2,700,000 shares of
Common Stock for issuance as follows: (i) 2,000,000 shares for issuance upon
exercise of the 2,000,000 Warrants; (ii) 200,000 shares for issuance upon
exercise of the Representatives' Warrants; (iii) 200,000 shares for issuance
upon exercise of the Warrants underlying the Representatives' Warrants; (iv)
300,000 shares for issuance upon exercise of options to be granted under the
Plan; and (v) an additional indeterminate number of shares to be issued upon
conversion, if any, of the Debentures. The existence of the Warrants, the
Representatives' Warrants, the Debentures, and any other options or warrants may
adversely affect the Company's ability to consummate future equity financing.
Further, the holders of such warrants and options may exercise them at a time
when the Company would otherwise be able to obtain additional equity capital on
terms more favorable to the Company. See "Shares Eligible for Future Sale."
LEGAL RESTRICTIONS ON SALES OF COMMON STOCK UNDERLYING THE WARRANTS. The
Warrants are not exercisable unless, at the time of the exercise, the Company
has a current prospectus covering the offer and sale of the shares of Common
Stock issuable upon exercise of the Warrants, and such shares have been
registered, qualified, or are deemed to be exempt under the securities laws of
the state of residence of the exercising holder of the Warrants. Although the
Company has agreed to use its best efforts to keep a registration statement
covering the shares of Common Stock issuable upon the exercise of the Warrants
effective for the term of the Warrants, if it fails to do so for any reason, the
Warrants may be deprived of value.
The Common Stock and Warrants are separately transferable immediately upon
issuance. Purchasers may buy Warrants in the aftermarket in, or may move to,
jurisdictions in which the shares of Common Stock underlying the Warrants are
not so registered or qualified during the period that the Warrants are
exercisable. In this event, the Company would be unable to issue shares to those
person desiring to exercise their Warrants, and holders of Warrants would have
no choice but to attempt to sell the Warrants in a jurisdiction where such sale
is permissible or allow them to expire unexercised. See "Description of
Securities."
PREFERRED STOCK; ANTI-TAKEOVER PROVISIONS. The Company's Certificate of
Incorporation, as amended, authorizes the Board of Directors to issue up to
1,000,000 shares of preferred stock, $.01 par value per share. The preferred
stock may be issued in one or more series, the terms of which may be determined
at the time of issuance by the Board of Directors, without further action by
stockholders, and may include voting rights (including the right to vote as a
series on particular matters), preferences as to dividends and liquidation,
conversion and redemption rights, and sinking fund provisions. No preferred
stock is currently outstanding, and the Company has no present plans for the
issuance of any preferred stock. However, the issuance of any such preferred
stock could materially adversely affect the rights of holders of Common Stock
and Warrants and, therefore, could reduce the value of the Common Stock and
Warrants. In
17
addition, specific rights granted to future holders of preferred stock could be
used to restrict the Company's ability to merge with, or sell its assets to, a
third party. The ability of the Board of Directors to issue preferred stock
could discourage, delay, or prevent a takeover of the Company, thereby
preserving control of the Company by the current stockholders.
In addition, the Company is subject to Section 203 of the Delaware General
Corporation Law, which, subject to certain exceptions, prohibits a Delaware
corporation from engaging in any of a broad range of business combinations with
any "interested stockholder" for a period of three years following the date that
such stockholder became an interested stockholder. See "Description of
Securities."
POSSIBLE ACQUISITIONS AND BUSINESS OPPORTUNITIES; DISCRETIONARY USE OF NET
PROCEEDS. Approximately 49.6% ($17,681,000) of the estimated net proceeds from
the sale of the Debentures at an assumed initial public offering price of 100%,
and from the sale of the Common Stock and Warrants at assumed initial public
offering prices of $7.50 per share and $.10 per Warrant, respectively, has been
allocated to acquisitions of additional physician practices and other medical
entities. The Company's management will have broad discretion as to the
application of such net proceeds. Depending on the structure of any possible
acquisition or other business opportunity, the Company's Board of Directors may
have the power and authority under the laws of the State of Delaware to approve
and consummate such transaction on behalf of the Company without a stockholder
vote. See "Use of Proceeds."
SUBSTANTIAL PORTION OF NET PROCEEDS ALLOCATED FOR GENERAL CORPORATE AND
WORKING CAPITAL PURPOSES. Approximately 21.9% ($7,824,000) of the estimated net
proceeds from the sale of the Debentures at an assumed initial public offering
price of 100% and from the sale of the Common Stock and Warrants at assumed
initial public offering prices of $7.50 per share and $.10 per Warrant,
respectively, has been allocated for general corporate and working capital
purposes. Such proceeds may be utilized in the discretion of the Board of
Directors. As a result, investors will not know in advance how such net proceeds
will be utilized by the Company. See "Use of Proceeds."
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS INCLUDED IN THIS
PROSPECTUS. This Prospectus contains certain forward-looking statements
regarding the plans and objectives of management for future operations,
including plans and objectives relating to the Affiliated Practices. The
forward-looking statements included herein are based on current expectations
that involve numerous risks and uncertainties. The Company's plans and
objectives are based on a successful execution of the Company's expansion
strategy and assumptions that the Affiliated Practices will be profitable, that
the health care industry will not change materially or adversely, and that there
will be no unanticipated material adverse change in the Company's operations or
business. Assumptions relating to the foregoing involve judgments with respect
to, among other things, future economic, competitive and market conditions, and
future business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the control of the Company. Although the
Company believes that its assumptions underlying the forward-looking statements
are reasonable, any of the assumptions could prove inaccurate and, therefore,
there can be no assurance that the forward-looking statements included in this
Prospectus will prove to be accurate. In light of the significant uncertainties
inherent in the forward-looking statements included herein, particularly in view
of the Company's early stage operations, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives and plans of the Company will be achieved.
18
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the
Securities offered hereby are estimated to be approximately $35,656,000
(approximately $41,113,150 if the Underwriters' over-allotment option is
exercised in full) after deduction of underwriting discounts, the
non-accountable expense allowance, and other estimated offering expenses payable
by the Company in the amount of approximately $725,000, assuming an initial
public offering price for the Debentures of 100%, $7.50 per share of Common
Stock, and $.10 per Warrant, respectively. The Company intends to use the net
proceeds of this Offering as follows:
APPROXIMATE APPROXIMATE
APPLICATION OF NET PROCEEDS AMOUNT PERCENTAGE
- ------------------------------------------------------------------------------------- ------------- -------------
Payments due upon consummation of the Acquisitions (1)............................... $ 7,937,000 22.3%
Funds available for acquisitions of additional physician practices and other medical
entities (2)....................................................................... 17,681,000 49.6%
Hardware, software, and installation cost of information system (3).................. 1,650,000 4.6%
Repayment of indebtedness (4)........................................................ 564,000 1.6%
General corporate and working capital purposes (5)................................... 7,824,000 21.9%
------------- -----
$ 35,656,000 100.0%
------------- -----
------------- -----
- ------------------------
(1) The Company plans to consummate the Acquisitions concurrently with the
closing of this Offering. In connection with the Acquisitions, the Company
will acquire certain assets and assume certain liabilities of the Initial
Affiliated Practices and NBS. The costs of the Acquisitions will be paid
pursuant to the respective purchase agreements through a combination of
$7,936,500 in cash, notes in the aggregate principal amount of $114,000, an
aggregate of 481,067 shares of Common Stock, and the assumption of
liabilities in the amount of $467,324. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(2) The Company plans to acquire certain assets and assume certain liabilities
of other physician practices and other medical entities on terms the Company
expects to be similar to the Acquisitions. The Company intends to finance
these transactions through a combination of cash payments and issuances of
notes, shares of Common Stock, and/or other securities of the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(3) Represents the costs of the hardware, software, and the installation cost
associated with the information system that the Company intends to install
at each Affiliated Practice.
(4) Represents (i) repayment of advances to the Company from a third party in
the amount of $129,000 due upon the consummation of this Offering and
bearing interest at a rate of 10% per annum, (ii) repayment of an aggregate
principal amount of $435,000 of the Senior Notes sold by the Company in the
Bridge Financing, and (iii) certain accrued liabilities. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and "Certain Transactions."
(5) The remaining portion of the net proceeds will be allocated to working
capital and will be used by the Company for general corporate purposes,
including amounts required to pay officers' salaries, consultant and
professional fees, office and administrative expenses, and other corporate
expenses.
The foregoing represents the Company's best estimate of its allocation of
the net proceeds from the sale of the Securities offered hereby, based upon the
Company's currently contemplated operations, the Company's business plan, and
current economic and industry conditions, and is subject to reapportionment of
proceeds among the categories listed above or to new categories in response to,
among other things, changes in its plans, regulations, industry conditions, and
future revenues and expenditures.
Based on the Company's operating plan, the Company believes that the net
proceeds of this Offering, together with anticipated revenues from operations,
will be sufficient to satisfy its capital requirements for at least 12 months
following the date of this Prospectus. There can be no assurance that such
resources will be sufficient to satisfy the Company's capital requirements for
said period. After the 12-month period, the Company may require additional
financing in order to meet its current plans for expansion. Such financing may
take the form of the issuance of common or preferred equity securities or debt
securities, or may involve bank financing. There can be no assurance that the
Company will be able to obtain needed additional capital on a timely basis, on
favorable terms, or at all. Any additional financing could result in dilution of
the then-existing equity positions, and increased interest and amortization
expense. If the Company is unable to secure additional sources of financing on
terms and conditions favorable to the Company, or at all, the Company's
expansion strategy could be materially adversely affected. In any of such
events, the Company may be unable to implement its current plans for expansion
or to repay its debt obligations. See "Capitalization," "Management's Discussion
and Analysis of Financial Condition and Results of Operations," and
"Business--Development and Operations."
Net proceeds, if any, received by the Company from the sale of the
Securities issuable upon exercise of the Underwriters' over-allotment option,
and proceeds, if any, received by the Company upon exercise of the Warrants, the
Representatives' Warrants, and any options to be issued under the Plan, will be
utilized for general corporate and working capital purposes.
Pending their utilization by the Company, the Company intends to invest the
net proceeds of this Offering in interest-bearing deposit accounts, certificates
of deposit, or similar short-term investment grade financial instruments.
19
DILUTION
At June 30, 1997, the pro forma negative net tangible book value of the
Company, after giving effect to (i) the issuance after June 30, 1997 of an
aggregate principal amount of $125,000 Senior Notes and 16,667 shares of Common
Stock as part of the Bridge Financing, (ii) the Acquisitions, and (iii) the
Recapitalization, was $(6,695,000), or approximately $(3.07) per share of Common
Stock based on 2,183,067 shares of Common Stock outstanding. The net tangible
book value per share represents the amount of the Company's total assets less
the amount of its intangible assets and liabilities, divided by the number of
shares of Common Stock outstanding. After giving effect to the receipt of net
proceeds from the sale of the Debentures, the shares of Common Stock, and the
Warrants offered hereby at assumed initial public offering prices of 100%, $7.50
per share, and $.10 per Warrant, respectively, and the initial application of
the net proceeds therefrom, the adjusted pro forma combined net tangible book
value of the Company at June 30, 1997, would have been $3,848,000, or
approximately $.92 per share of Common Stock. This would result in dilution to
the public investors of approximately $6.58 per share (or approximately 87.7%).
The following table illustrates the per share dilution:
Assumed initial public offering price per share of Common
Stock....................................................... $ 7.50
Pro forma negative net tangible book value per share of
Common Stock prior to this Offering....................... $ (3.07)
Increase attributable to new investors.................... 3.99
---------
Pro forma net tangible book value per share of Common Stock
after this Offering......................................... .92
---------
Dilution in pro forma net tangible book value per share of
Common Stock to new investors............................... $ 6.58
---------
---------
In the event the Underwriters' over-allotment option is exercised in full,
the pro forma net tangible book value as of June 30, 1997 would be $5,555,150,
or $1.24 per share of Common Stock, which would result in immediate dilution in
net tangible book value to new investors of approximately $6.26 per share.
The following table sets forth, on a pro forma basis, as of the date of this
Prospectus, the number of shares of Common Stock purchased, the percentage of
total shares of Common Stock purchased, the total consideration paid, the
percentage of total consideration paid, and the average price per share of
Common Stock paid by the investors in this Offering and the existing
stockholders of the Company:
SHARES OF COMMON
STOCK PURCHASED TOTAL CONSIDERATION AVERAGE
----------------------- -------------------------- PRICE PER
NUMBER PERCENTAGE AMOUNT PERCENTAGE SHARE
---------- ----------- ------------- ----------- -----------
Existing Stockholders............................. 1,702,000 40.7% $ 30,000 * $ 0.01
Initial Affiliated Practices and NBS.............. 481,067 11.5% 3,608,000 19.4% $ 7.50
New Investors(1).................................. 2,000,000 47.8% 15,000,000 80.6% $ 7.50
---------- ----- ------------- -----
Total........................................... 4,183,067 100.0% $ 18,638,000 100.0%
---------- ----- ------------- -----
---------- ----- ------------- -----
- ------------------------
* Represents less than 1%.
(1) Attributes no value to the Warrants.
20
CAPITALIZATION
The following table sets forth, at June 30, 1997, the capitalization of the
Company (i) on an actual basis and (ii) on a pro forma, as adjusted basis,
giving effect to (a) the issuance after June 30, 1997 of the aggregate principal
amount of $125,000 Senior Notes and 16,667 shares of Common Stock as part of the
Bridge Financing, (b) the Recapitalization, and (c) the sale of the Debentures,
shares of Common Stock, and the Warrants at the assumed initial public offering
prices of 100%, $7.50 per share, and $.10 per Warrant, respectively, and the
initial application of the net proceeds therefrom, including the consummation of
the Acquisitions. This table should be read in conjunction with the Financial
Statements and Notes thereto appearing elsewhere in this Prospectus. See "Use of
Proceeds" and the Financial Statements and the Notes thereto.
JUNE 30, 1997
-------------------------
PRO FORMA,
ACTUAL AS ADJUSTED
---------- -------------
Short-term debt........................................................................ $ 310,000 $ --
---------- -------------
---------- -------------
Long-term debt:
Debentures........................................................................... -- 25,000,000
Notes payable--current and long-term................................................. -- 572,000
---------- -------------
Total long-term debt............................................................. -- 25,572,000
---------- -------------
Stockholders' equity:
Preferred Stock--$.01 par value, authorized--
1,000,000 shares; none issued and outstanding...................................... -- --
Common Stock--$.01 par value, authorized--
50,000,000 shares; issued and outstanding
3,031,000 shares, actual and 4,183,067 shares,
pro forma as adjusted.............................................................. 30,000 42,000
Additional paid-in capital........................................................... 245,000 16,479,000
Accumulated earnings (deficit)....................................................... (161,000) (274,000)
---------- -------------
Total stockholders' equity............................................................. 114,000 16,247,000
---------- -------------
Total capitalization................................................................... $ 424,000 $ 41,819,000
---------- -------------
---------- -------------
21
DIVIDEND POLICY
The Company has not paid cash dividends on the Common Stock since inception
and does not intend to pay any dividends to its stockholders in the foreseeable
future. The Company currently intends to reinvest earnings, if any, in the
development and expansion of its business. The declaration of dividends in the
future will be at the election of the Board of Directors and will depend upon
the earnings, capital requirements, and financial position of the Company,
general economic conditions, and other pertinent factors.
22
SELECTED FINANCIAL DATA
The following table sets forth selected financial data of the Company for
each of the periods indicated. The selected financial data of the Company for
the period from April 25, 1995 (inception) to December 31, 1995 and the year
ended December 31, 1996 are derived from the Financial Statements of the Company
which have been audited by Feldman Radin & Co., P.C., independent certified
public accountants. The selected financial data for the six month periods ended
June 30, 1996 and 1997 and as of June 30, 1997 were derived from the unaudited
financial statements of the Company. The unaudited financial statements include
all adjustments, consisting of normal recurring accruals, which the Company
considers necessary for a fair presentation of the financial position and the
results of operations for these periods. All of the information set forth below
should be read in conjunction with the Financial Statements of the Company and
related notes thereto appearing elsewhere in this Prospectus.
STATEMENT OF OPERATIONS DATA:
SIX MONTHS ENDED JUNE 30,
INCEPTION ----------------------------------------------------
(APRIL 25, YEAR ENDED
1995) DECEMBER 31, 1996 1996 1997
THROUGH ------------------------ ------------------------ --------------------------
DECEMBER PRO PRO PRO
31, 1995 ACTUAL FORMA(1) ACTUAL FORMA(1) ACTUAL FORMA(1)
----------- --------- ------------- --------- ------------- ----------- -------------
Revenue:
Medical service revenue............ -- -- $ 17,130,000 -- $ 8,754,000 -- $ 7,962,000
Management fees.................... -- -- -- -- -- 111,000 111,000
Medical billing and service fees... -- -- 1,398,000 -- 576,000 -- 1,101,000
Other revenue...................... -- -- 38,000 -- 48,000 -- 63,000
------------- ------------- -------------
Total revenue.................... -- -- 18,566,000 -- 9,378,000 111,000 9,237,000
Costs and expenses:..................
Salaries and wages................. -- -- 13,294,000 -- 6,624,000 51,000 5,184,000
Medical supplies and expenses...... -- -- 426,000 -- 205,000 -- 239,000
General and administrative
expenses......................... -- 4,000 4,174,000 2,000 2,608,000 78,000 3,390,000
Depreciation and amortization...... 1,000 2,000 1,239,000 1,000 620,000 1,000 620,000
Interest expense................... -- -- 2,020,000 -- 1,010,000 135,000 1,010,000
----------- --------- ------------- --------- ------------- ----------- -------------
Total costs and expenses......... 1,000 6,000 21,153,000 3,000 11,067,000 265,000 10,443,000
Loss before income taxes............. (1,000) (6,000) (2,587,000) (3,000) (1,689,000) (154,000) (1,206,000)
Provision for income taxes........... -- -- -- -- -- -- --
----------- --------- ------------- --------- ------------- ----------- -------------
Net loss............................. $ (1,000) $ (6,000) $ (2,587,000) $ (3,000) $ (1,689,000) $ (154,000) $ (1,206,000)
----------- --------- ------------- --------- ------------- ----------- -------------
----------- --------- ------------- --------- ------------- ----------- -------------
Pro forma net loss per share(2)...... $ (0.62) $ (0.41) $ (0.29)
------------- ------------- -------------
------------- ------------- -------------
Pro forma weighted average number of
shares outstanding(2).............. 4,183,067 4,183,067 4,183,067
------------- ------------- -------------
------------- ------------- -------------
- ------------------------
(1) The pro forma statement of operations data for the fiscal year ended
December 31, 1996 and for the six months ended June 30, 1996 and 1997 is
presented as if the Acquisitions and the PMI acquisition had occurred on
January 1, 1996. The pro forma balance sheet data for June 30, 1997 is
presented as if the Acquisitions had occurred on June 30, 1997. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation" and Notes to Unaudited Pro Forma Financial Statements."
(2) See Note HH to the Unaudited Pro Forma Statement of Operations Adjustments.
23
BALANCE SHEET DATA:
DECEMBER 31, JUNE 30, 1997
-------------------- ------------------------
PRO FORMA, AS
1995 1996 ACTUAL ADJUSTED(1)(3)
--------- --------- --------- -------------
Working capital (deficiency)............................ $ (74,000) $(149,000) $(329,000) $27,249,000
Total assets............................................ 73,000 296,000 545,000 41,933,000
Total liabilities....................................... 74,000 179,000 431,000 25,686,000
Stockholders' equity (deficit).......................... (1,000) 117,000 114,000 16,247,000
- ------------------------------
(3) Gives effect on a pro forma basis to (i) the issuance after June 30, 1997 of
Senior Notes in the aggregate principal amount of $125,000 and 16,667 shares
of Common Stock as part of the Bridge Financing, and (ii) the
Recapitalization, and as adjusted to reflect the sale of the Securities
offered hereby, assuming initial public offering prices of 100% for the
Debentures, $7.50 per share, and $.10 per Warrant, respectively, and the
initial application of the net proceeds therefrom. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND
UNCERTAINTIES. SEE "RISK FACTORS--RISKS ASSOCIATED WITH FORWARD-LOOKING
STATEMENTS INCLUDED IN THIS PROSPECTUS." ACTUAL EVENTS OR RESULTS MAY DIFFER
MATERIALLY FROM THOSE DISCUSSED IN FORWARD-LOOKING STATEMENTS AS A RESULT OF
VARIOUS FACTORS, INCLUDING, BUT NOT LIMITED TO, THOSE DISCUSSED IN "RISK
FACTORS." THE FOLLOWING DISCUSSION OF THE OPERATIONS AND FINANCIAL CONDITION OF
THE COMPANY SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S AUDITED FINANCIAL
STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS.
GENERAL
The Company was incorporated under the laws of the State of Delaware on
April 25, 1995. The Company's activities to date have consisted primarily of
developing corporate infrastructure, seeking capital to fund operations, seeking
affiliations with physician practices, negotiating acquisitions of certain
assets of such physician practices, and providing consulting services to one of
the Initial Affiliated Practices pursuant to a consulting agreement.
In April 1997, pursuant to a stock purchase agreement, the Company purchased
all of the outstanding capital stock of PMI from Dr. Dennis B. Liotta, the sole
shareholder of PMI, for $2,000. As a result of such transaction, PMI became a
wholly-owned subsidiary of the Company. In addition, the Company entered into an
employment agreement pursuant to which Dr. Liotta agreed to serve as the
Executive Vice President and Chief Operating Officer of the Company.
Simultaneously with the closing of this Offering, the Company intends to
exchange cash in the amount of $7,936,500, notes in the principal amount of
$114,000, 481,067 shares of Common Stock with an approximate value of $3,608,000
(based on an assumed initial public offering price of $7.50 per share), and to
assume liabilities in the amount of $467,324, in return for substantially all of
the assets of NBS and the Initial Affiliated Practices. The Initial Affiliated
Practices are all located in the State of New Jersey and are comprised of the
following entities: Joel Fuhrman, M.D., P.C., D/B/A Amwell Health Center, Bound
Brook Pediatric Associates, P.A., Branchberg Eye Physicians, P.A., Alexander
Kudryk, M.D., Audrey Hinds-McDonald, M.D., P.A., Hunterdon Ophthalmologists,
P.A., Richard M. Weeder, M.D., Felix Salerno, M.D., Kenneth Stern, M.D., P.A.,
Flemington Medical Group, P.A., John E. Durst, M.D., Reliance Medical Group,
P.C., and its affiliate Reliance Healthcare Group, Inc. These acquisitions will
be accounted for as a "purchase" and the excess of the purchase price over the
fair market value of the tangible assets acquired will be designated as
goodwill. Goodwill be amortized over a 20-year period. Substantially all of the
goodwill on the Company's pro forma balance sheet as of June 30, 1997 is related
to the acquisition of the Initial Affiliated Practices and NBS.
Simultaneously with the acquisition of their practice assets, each of the
physicians in the Initial Affiliated Practices will become employed, pursuant to
executed employment agreements, which generally have a term of five years, by a
professional corporation controlled by the Company (the "Affiliated PC"). The
Affiliated PCs are controlled by the Company by virtue of duly executed agency
agreements between the Company and David I. Rosen, M.D., the sole stockholder of
each of the Affiliated PCs. Dr. Rosen is the Vice President for Business
Development and a director of the Company. Pursuant to the agency agreements,
the Company has control over all significant decisions of the Affiliated PCs
except for decisions relating to the practice of medicine. The Company may
direct the sole stockholder with respect to the election of officers and
directors of the Affiliated PCs and may effect a change in the identity of the
sole stockholder in the event of the death, disability, retirement, or
termination of employment of Dr. Rosen. The shares of the common stock of the
Affiliated PCs have been placed in escrow by Dr. Rosen in order to allow for
easy effectuation of any changes in the identity of the sole stockholder.
Effective with the acquisition of the Initial Affiliated Practices, each
Affiliated PC will be subject to a PMSA between the Affiliated PC and the
Company whereby the Affiliated PC agrees to assign all of its accounts
receivable from all of its billings for medical services (essentially all of the
revenue of the Affiliated PC) to the Company as compensation for the services to
be provided by the Company to the
25
Affiliated PC. The term of the PMSA generally is 40 years. The PMSA may not be
terminated by the Affiliated PC prior to its expiration date, except for default
by the Company or the bankruptcy of the Company.
Pursuant to the PMSA, the Company is responsible for providing to the
Affiliated PCs clinic and office facilities for the operation of the practice,
medical equipment and supplies required for the practice of medicine, various
management and administrative services, and working capital. Further, the
Company will employ substantially all of the practice's non-physician personnel.
The Company will provide administrative services including facilities
management, the negotiation and procurement of medical malpractice insurance
policies on behalf of the Affiliated Practices, and financial and accounting
services, including budgeting, billing, and third party reimbursement services.
In addition, the Company will provide expertise in the negotiation of managed
care contracts and the management of risk sharing arrangements.
Pursuant to the PMSA, the Company is at risk for, and is responsible for,
payment of all operating expenses of the Affiliated PC, including providing the
Affiliated PC with funds from which it can pay its physician salaries, payroll
taxes, benefits, and other related costs which the Company estimates will be
approximately 40% of the gross revenue of the Affiliated PC. Operating expenses
will consist, in large part, of the expenses incurred by the Company in
fulfilling its obligations under the PMSA. These expenses are the same as the
operating costs and expenses that would have been incurred by the Affiliated
Practice. In addition to these practice operating expenses, the Company will
also incur personnel and administrative expenses in connection with maintaining
a corporate office that provides management, administrative, and marketing
services to the Affiliated PCs. The Company's profitability will depend upon,
among other things, increasing market share, expanding health care services,
enhancing operating efficiencies, and developing favorable contractual
relationships with payors. There can be no assurance that the Affiliated
Practices will generate sufficient revenues to fund the operations of the
Affiliated Practices and the Company or that they will generate sufficient
revenues to fund physician salaries. Consequently, there can be no assurance
that the revenues from the Affiliated Practices will be sufficient to allow the
Company to be profitable. Any loss of revenue from the Affiliated Practices,
including losses from a substantial reduction in the number of physicians
employed by, or affiliated with, the Affiliated Practices or the inability of
the Affiliated Practices to collect fees from their patients and third party
payors, could have a material adverse effect on the Company.
Effective with the commencement of the PMSA, all billing and claim
submission for medical services rendered by the Affiliated PCs will be performed
by NBS, which will become a subsidiary of the Company effective with the closing
of this Offering. The Company intends to purchase and utilize new billing
software. The Company anticipates that the new billing system will cost the
Company approximately $500,000 to fully implement. The Company intends to pay
such costs from a portion of the net proceeds of this Offering. See "Use of
Proceeds." The Company believes that the new software and the personnel and
expertise of NBS will be sufficient to meet the needs of the Affiliated PCs.
Management believes that industry trends toward cost containment and lower
reimbursement rates will continue to result in a reduction in per patient
revenue. Further reductions in reimbursement rates could have an adverse effect
on the Company's operations unless the Company is otherwise able to offset such
payment reductions.
RESULTS OF OPERATIONS
The Company has conducted no significant operations to date and will not
conduct significant operations until the Acquisitions and the Offering are
completed. General and administrative expenses were incurred during the year
ended December 31, 1996 and during the six months ended June 30, 1997 in
connection with this Offering. The Company has incurred and will continue to
incur various legal, accounting, travel, personnel, and marketing costs in
connection with the Acquisitions and the Offering. See "Use of Proceeds."
26
LIQUIDITY AND CAPITAL RESOURCES
The Company commenced operations on April 25, 1995 and, as of June 30, 1997,
the Company had a working capital deficiency of approximately $329,000 and an
accumulated deficit of approximately $161,000. The Company has generated limited
revenue since its inception.
Between December 1996 and July 1997, the Company consummated the Bridge
Financing, the gross proceeds of which were $310,000. Such proceeds were used by
the Company to fund the expenses relating to this Offering and other expenses in
connection with the operation of the Company's initial activities. The Bridge
Financing resulted in the issuance of 41,333 shares of Common Stock and Senior
Notes pursuant to which the Company is obligated to pay the aggregate principal
amount of $310,000, plus interest thereon. The Senior Notes bear interest at the
rate of 10% per annum and mature on the earlier of (i) one year from the date of
issuance and (ii) the closing of the Offering. The Company intends to repay the
Senior Notes, plus interest thereon, with a portion of the net proceeds from
this Offering. See "Use of Proceeds."
Wellness Concepts Inc. ("Wellness"), the founding stockholder of the
Company, has advanced $148,000 to the Company since inception. Such amount was
used to fund a portion of the costs of this Offering. As of September 30, 1997,
the balance owed by the Company to Wellness was $129,000, which the Company
intends to repay with a portion of the net proceeds of this Offering. See "Use
of Proceeds" and "Certain Transactions."
Effective April 1, 1997, the Company entered into a one year consulting
agreement with Reliance Medical Group, P.C. ("Reliance"), one of the Initial
Affiliated Practices. Under the terms of the consulting agreement, the Company
provides physician practice management services to Reliance in return for a
fixed monthly compensation of $25,000. Upon consummation of the Offering, the
consulting agreement will be terminated and Reliance will become an Affiliated
Practice.
The Company intends to design, develop, and install in its Affiliated
Practices, a management information system. The Company has estimated that the
total resources needed to fully implement the planned management information
system, including the applications to be utilized by NBS in the billing process,
should approximate $1,650,000. The Company intends to pay such sum from the net
proceeds of the Offering. See "Use of Proceeds." The Company expects to be able
to have its intended management information system fully operational within one
year of the Offering, although there can be no assurance that such system will
be fully operational by such time. Until then, the Company believes that the
information systems currently used by the Affiliated Practices will enable the
Company to provide management services during such transition period. See
"Business--Information System."
The Company anticipates that capital expenditures during the balance of 1997
and in 1998 will relate primarily to affiliations with additional physician
practices. Future acquisitions of physician practices are expected to be
structured similarly to the acquisitions of the Initial Affiliated Practices. It
is anticipated that funding for these purposes will be derived from the net
proceeds of this Offering and cash flow from operations. The Company has
allocated from the estimated net proceeds of this Offering, the sum of
$17,681,000 for payment of future acquisition costs. See "Use of Proceeds."
Based on the Company's operating plan, the Company believes that the net
proceeds of this Offering, and anticipated revenues from operations will be
sufficient to satisfy its capital requirements for at least 12 months following
the date of this Prospectus. There can be no assurance that such resources will
be sufficient to satisfy the Company's capital requirements for said period.
After the 12-month period, the Company may require additional financing in order
to meet its current plans for expansion. Such financing may take the form of the
issuance of common or preferred equity securities or debt securities, or may
involve bank financing. There can be no assurance that the Company will be able
to obtain needed additional capital on a timely basis, on favorable terms, or at
all. Any additional financing could result in dilution of the then-existing
equity positions, increased interest and amortization expense, or decreased
income to fund future expansion. In any of such events, the Company may be
unable to implement its current plans for expansion or to repay its debt
obligations.
27
BUSINESS
GENERAL
The Company is a newly established PPMO which is developing an integrated
health care delivery network in selected geographic areas through affiliation
with physician practices. Upon the closing of this Offering, the operations of
the Company will consist of (i) management of the Initial Affiliated Practices,
consisting of 12 medical practices located in New Jersey, (ii) PMI, a
wholly-owned subsidiary of the Company which is engaged in the management of one
IPA which is currently affiliated with approximately 225 physicians in the State
of New Jersey, and (iii) NBS, which is engaged in the management of physician
fee billing, electronic medical records, and utilization information systems for
medical practices. NBS currently manages patient and third party billing
services for 25 medical practices unaffiliated with the Company in Pennsylvania.
The Company's objective is to develop and manage an integrated health care
delivery network comprised of physician practices that provide high quality,
cost-effective care. The Company has focused and intends, at least initially, to
continue to focus, its primary affiliation efforts on physician practices
located in New Jersey, New York, and Pennsylvania. The Company targets
physicians who are committed to the delivery of high quality, cost-effective
care and have a reputation with their patients, peers, and payors for providing
quality medical services and that have the capacity to increase profitability
through improved performance on existing patient bases. When affiliating with a
physician practice, the Company will typically purchase the practice's non-real
estate operating assets and enter into a long-term PMSA with the practice in
exchange for a combination of Common Stock, cash, notes, other securities of the
Company, and/or the assumption of liabilities. Pursuant to the PMSA, the Company
will be responsible for providing the Affiliated Practice with necessary office
facilities, medical equipment, supplies, and medical staff such as nurses,
physician assistants, and clerks, and will plan and manage the activities of the
Affiliated Practice in all respects. The Affiliated Practice will be solely
responsible for the rendering of medical services.
INDUSTRY BACKGROUND
The health care delivery system in the United States has been undergoing
substantial change, largely in response to concerns over the quality and
escalating cost of health care. National expenditures for health care grew from
$250 billion in 1980 to an estimated $1 trillion in 1995. Of the total estimated
1995 expenditures, physicians received approximately $200 billion for their own
services and controlled an additional $600 billion through the referral of
patients for additional care and services provided by others. Concerns over the
accelerating cost of health care have resulted in the increasing prominence of
managed care. The Company believes that traditional physician practices are at a
competitive disadvantage in a managed care environment because they typically
have high operating costs, have little purchasing power with suppliers, and must
spread overhead over a relatively small revenue base. In addition, these
physician practices often have insufficient capital to acquire equipment to
incorporate new technologies and often lack the sophisticated systems necessary
to contract effectively with managed care entities. Physician practices are
increasingly turning to organizations such as the Company to provide the
professional management expertise and capital required to compete in the managed
care environment and otherwise to assist them with the increasingly complex
management of physician practices. The Company believes that this has resulted
in a need for management organizations committed to preserving the professional
autonomy of physician practices and whose economic incentives are aligned with
those of physicians.
As a result of these changes in the marketplace, physicians are increasingly
abandoning traditional private practice in favor of affiliations with larger
organizations, such as PPMOs, which offer skilled and innovative management of
physician practices, sophisticated information systems, and capital resources.
Many payors and their intermediaries, including governmental entities and HMOs,
are increasingly looking to outside providers of physician services to develop
and maintain quality outcomes, management
28
programs, and patient care data. In addition, such payors and intermediaries
look to share the risk of providing services through capitation arrangements
which provide for fixed payments for patient care over a specified period of
time.
The Company believes that PPMOs preserve the professional autonomy of
physician groups whose economic incentives are aligned with those of physicians.
Because of the position of primary care physicians in managing the delivery of
healthcare by both providing primary care and controlling patient referrals, the
Company further believes that multi-speciality groups with a substantial primary
care orientation are likely to be best positioned to succeed in the emerging
managed care environment because the specialty groups will be able to refer
patients within the Company's integrated health care delivery network.
STRATEGY
The Company's strategy is to develop and manage an integrated health care
delivery network that provides high quality, cost-effective care. The key
elements of this strategy are as follows:
TARGETING FOR AFFILIATION HIGH QUALITY AND PRODUCTIVE PHYSICIAN
PRACTICES WHICH ARE COMMITTED TO EXPANDING AND PROVIDING COST-EFFECTIVE
CARE. The Company targets physician practices which are committed to the
delivery of high quality, cost-effective care. As a management company, the
Company believes that it has identified, and will affiliate with upon
consummation of this Offering, high quality and growth-oriented physician
practices, which will form the base group of the health care delivery
network to be managed by the Company. The Company's objectives will be
satisfied by continuing to identify and affiliate with additional physician
practices, by coordinating SBUs consisting of Affiliated Practices, by
managing the business and administration of such practices, and by
identifying and negotiating managed care contracts for such practices. Once
it identifies and affiliates with additional practices, the Company will act
solely as a management company. The Company has focused and intends, at
least initially, to continue to focus its primary affiliation efforts on
physician practices located in New Jersey, New York, and Pennsylvania.
INTEGRATING PHYSICIAN PRACTICES INTO COMPANY-COORDINATED SBUS TO PROVIDE
PHYSICIAN AND MEDICAL SUPPORT SERVICES WITHIN SPECIFIC GEOGRAPHIC
REGIONS. The Company intends to organize the Affiliated Practices and any
related medical support services into SBUs. The SBUs will be designed to
provide a comprehensive range of physician and medical support services
within specific geographic regions. The Company believes that its SBU
structure will achieve operating efficiencies and enhance its ability to
secure contracts with managed care organizations. Under the SBU model,
physicians affiliated with the Company will continue to exercise the same
level of clinical autonomy they possessed prior to affiliation with the
Company, while at the same time capitalizing on the advantages of belonging
to a larger organization. Furthermore, the Company believes that such a
model will provide it with greater management control of its health care
delivery network.
CONTRACTING WITH STATE AND LOCAL GOVERNMENTS TO PROVIDE MEDICAL SERVICES
TO ELDERLY AND INDIGENT POPULATIONS. The Company believes that the
increasing cost of health care has begun to, and will in the future, cause
urban governments to subsidize health care services to the elderly and
indigent population. One of the Initial Affiliated Practices has a contract
with the city of Atlantic City, New Jersey, to deliver health care services
to the elderly and indigent. The Company believes that it will be able to
approach and contract directly with other local governments to provide low
cost, comprehensive medical care services, through the Affiliated Practices,
to the elderly and indigent.
ENHANCING THE ABILITY OF THE PHYSICIANS TO FOCUS ON CLINICAL PRACTICE
ISSUES BY RELIEVING THEM OF MOST ADMINISTRATIVE FUNCTIONS. Physicians in
independent practice are required to devote considerable time to process
paperwork for payors, as well as supervising the administration of their
offices. The Company intends to assume most of the administrative functions
of each Affiliated Practice, thereby
29
enabling each physician to devote increased time to the provision of medical
care. Furthermore, Affiliated Physicians will participate in utilization and
quality management committees, which will be responsible for focusing on the
assessment and improvement of patient outcomes.
IMPLEMENTING AND UTILIZING AN INFORMATION SYSTEM TO MANAGE PATIENT CARE
AND TO CONTROL COSTS. The Company believes that information technology is
critical to the advancement of a quality health care delivery system. The
Company intends to develop and implement an information system that provides
for the ongoing collection and review of clinical and administrative data in
order to control overhead expenses, maximize reimbursement, and provide
effective utilization management. Furthermore, the Company believes that an
information system will enable the Affiliated Practices to collect and
retrieve clinical data more efficiently. The Company expects to be able to
have its intended management information system fully operational within one
year of the Offering, although there can be no assurance that such system
will be fully operational by such time. Until then, the Company believes
that the information systems currently used by the Affiliated Practices will
enable the Company to provide management services during such transition
period.
COORDINATING PURCHASES OF SUPPLIES, EQUIPMENT, AND SERVICES IN ORDER TO
REALIZE ECONOMIES OF SCALE. The Company believes that economies of scale
inherent in a health care delivery network with centralized billing,
collections, payroll, and accounting services will allow the Company to
reduce operating costs and enable the Company to negotiate quantity
purchasing contracts for supplies, equipment, and services on behalf of the
Affiliated Practices. In addition, the Company believes that a health care
delivery network configuration provides the Company the leverage to
negotiate rates and contract terms with HMOs and other payors more favorable
than the rates and terms that physician groups have historically been able
to obtain independently. Similarly, the Company believes that as a larger
entity it will have more bargaining power and will be able to negotiate more
favorable rates for purchased out-of-network physician services.
DEVELOPING AND ENHANCING IPA SERVICES AND CONTRACTS. The Company
believes that the health care industry will continue to be driven by local
market factors and that organized providers of health care, including IPAs,
will continue to play a significant role in delivering cost-effective,
quality medical care. Physicians affiliated with IPAs often seek additional
practice management services, including billing, staffing, and financial
management services, which the Company believes it can provide on
competitive terms. The Company anticipates that IPA management will be an
additional service that will allow it to enter new markets without initially
having to affiliate with physician practices.
POSITIONING THE COMPANY TO MAXIMIZE MANAGED CARE CONTRACT
OPPORTUNITIES. The complexities of the managed care environment create a
significant administrative burden for physicians. The growth of capitated
reimbursement presents the challenge of projecting costs of care based upon
patient populations, physician treatment patterns, and the specific
requirements of managed care contracts. The Company intends to develop and
utilize a management information system, which will be designed to improve
productivity, manage complex reimbursement methodologies, measure patient
satisfaction and outcomes of care, and integrate information from multiple
sources. This system will enable the Company to manage its risks associated
with managed care since the Company, not the Affiliated PCs, will bear such
risks in the future.
DEVELOPING ANCILLARY SERVICES AND BROADENING THE SPECIALTIES OF THE
COMPANY'S HEALTH CARE DELIVERY NETWORK IN ORDER TO ENHANCE REVENUES AND
PROFITABILITY. The Company may add ancillary services, such as pharmacy,
laboratory testing, radiologic imaging, and medical/surgical specialists
either by acquisition and affiliation or by direct contracting. Including
these services and specialists will enable the Company to deliver more
comprehensive services and intensify its market presence. As of the date of
this Prospectus, the Company has no understanding, commitment, or agreement
with respect to any acquisitions, affiliations, or direct contracting other
than the Acquisitions.
30
DEVELOPMENT AND OPERATIONS
The Company has developed a physician practice model based on the formation
of SBUs consisting of physicians situated in the same geographic area. By
forming SBUs, the Company believes that physicians employed by the Affiliated
Practices will continue to exercise the same level of clinical autonomy they
possessed prior to affiliation with the Company, while at the same time
capitalizing on the advantages of belonging to a larger organization, including
the ability to exercise leverage in negotiating with managed care companies.
Furthermore, such a model is designed to provide the Company with greater
management control of its physician network. The Company believes that its SBU
model is replicable and will ultimately permit it to expand its operations
nationwide.
IDENTIFYING POTENTIAL AFFILIATIONS. The Company has focused, and intends,
at least initially, to continue to focus, its primary affiliation efforts on
primary care physician practices located in New Jersey, New York, and
Pennsylvania. The Company intends to expand its efforts to other states and to
specialty medical practices following the affiliation and integration of the
Initial Affiliated Practices. The Company's development goals emphasize the
affiliation of high-profile practices, both primary and specialty care, to meet
the needs of patients and payors, adjusted according to the dynamics of
individual markets.
The Company's success will largely depend upon the quantity and quality of
physician practices that it can attract to affiliate with the Company.
Management believes that the Company will have the financial resources,
experienced personnel, and information systems that will enable it to identify a
significant number of potential affiliates that meet the Company's criteria for
affiliation.
The Company targets markets by considering, among other things, the
following factors: (i) population size and distribution; (ii) physician practice
density, specialty composition, saturation, and average group size; (iii) local
competitors in the physician management business; (iv) level of managed care
penetration; and (v) local industry and economy. The Company focuses on
physicians within such markets who are committed to the delivery of high
quality, cost-effective care and have a reputation with their patients, peers,
and payors for providing quality medical services and that have the capacity to
increase profitability through improved performance on existing patient bases.
Once the Company identifies a potential affiliate, the Company conducts a
comprehensive analysis of the practice, including a thorough financial and
operational review and evaluation of staff, facilities, equipment, and systems.
Initially, an estimate of the current value of the practice is calculated based
on the practice's gross income, net profit, and new treatment contracts written
during the prior twelve months. In addition, current staff are interviewed to
determine their suitability for, and commitment to, the practice, and the
facilities and equipment are reviewed to ensure that they will support a larger
and growing practice without significant additional cost. Finally, the
practice's current systems for starting new patients, reviewing treatment
programs, scheduling, communicating with patients and referral sources,
marketing and controlling expenses, and the cost of upgrading or replacing the
systems, are analyzed.
If the practice satisfies the Company's criteria for affiliation, an offer
is made for the practice to affiliate with the Company. The Company outlines
proposed financial terms of the affiliation, including the Company's valuation
of the practice and the amount of cash, notes, and shares of Common Stock that
the Company proposes to pay to acquire certain assets of the PC associated with
the practice. Once the basic business terms of the affiliation are agreed to,
the parties proceed to execute an asset purchase agreement and/or goodwill
purchase agreement and the related PMSA.
Prior to affiliation with the Company, the medical practices to be acquired
practice medicine through sole proprietorships or through PCs owned by one or
more medical doctors licensed to practice medicine under applicable state law.
In connection with the acquisition of the physician practices by the Company,
the Company will acquire, pursuant to asset purchase agreements and/or goodwill
purchase agreements with the sole proprietorships or PCs, the furniture,
fixtures, medical equipment and supplies, goodwill, and certain other assets of
the practices. The Company will cause to be formed an Affiliated PC, to be owned
by a stockholder and/or officer of the Company, designated by the Board of
Directors, who is also a
31
physician. The Affiliated PC will employ the affiliated physicians and will
carry on the practice previously conducted by such physicians. All of the
affiliated physicians will execute employment agreements with the Affiliated PC,
which will have terms of generally three to five years.
Effective with the acquisition of the Initial Affiliated Practices, each
Affiliated PC will be subject to a PMSA between the Affiliated PC and the
Company whereby the Affiliated PC agrees to assign all of its accounts
receivable from all of its billings for medical services (essentially all of the
revenue of the Affiliated PC) to the Company as compensation for the services to
be provided by the Company to the Affiliated PC. The term of the PMSA generally
is 40 years. The PMSA may not be terminated by the Affiliated PC prior to its
expiration date, except for default by the Company or the bankruptcy of the
Company.
Pursuant to the PMSA, the Company is responsible for providing to the
Affiliated PCs clinic and office facilities for the operation of the practice,
medical equipment and supplies required for the practice of medicine, various
management and administrative services, and working capital. Further, the
Company will employ substantially all of the practice's non-physician personnel.
The Company will provide administrative services including facilities
management, the negotiation and procurement of medical malpractice insurance on
behalf of the Affiliated Practices, and financial and accounting services,
including budgeting, billing and third party reimbursement services. In
addition, the Company will provide expertise in the negotiation of managed care
contracts and the management of risk sharing arrangements.
Pursuant to the PMSA, the Company is at risk for, and is responsible for,
payment of all operating expenses of the Affiliated PC, including providing the
Affiliated PC with funds from which it can pay its physician salaries, payroll
taxes, benefits, and other related costs which the Company estimates will be
approximately 40% of the gross revenue of the Affiliated PC. Operating expenses
will consist, in large part, of the expenses incurred by the Company in
fulfilling its obligations under the PMSA. These expenses are the same as the
operating costs and expenses that would have been incurred by the Affiliated
Practice. In addition to these practice operating expenses, the Company will
also incur personnel and administrative expenses in connection with maintaining
a corporate office that provides management, administrative, and marketing
services to the Affiliated PCs. The Company's profitability will depend upon,
among other things, increasing market share, expanding health care services,
enhancing operating efficiencies, and developing favorable contractual
relationships with payors.
OPERATIONS. To meet payor demand for price competitive quality services,
the Company intends to organize the Affiliated Practices into SBUs by utilizing
a market-based approach that incorporates a comprehensive range of physician and
medical support services within specific geographic regions. The Company will
engage in research activities and market analysis to determine the optimal
configuration of each SBU for its particular market.
The Company intends to enhance growth in the Affiliated Practices by adding
to, and expanding, managed care arrangements, assisting in the recruitment of
new physicians and adding services which historically have been performed
outside of the practices. The Company will work closely with the Affiliated
Physicians in targeting and recruiting physicians and in merging sole practices
or single specialty groups into the Affiliated Practices. The Company intends to
assist in the development of new and expanded ancillary services by providing
the needed capital resources and management services. In addition, the Company
intends to recognize and develop opportunities to provide services throughout a
market by positioning the Affiliated Practices in such a way that an entire
market is covered geographically. The Company believes this approach will
improve patient convenience and respond to coverage criteria essential to
payors.
The Company's organizational structure is designed to include physician
representation on the Company's Board of Directors. In addition, the Company and
each SBU will establish a Planning Board consisting of an SBU clinical director,
two physician representatives, and three representatives of the
32
Company. The Planning Board's responsibilities include developing long-term
strategic objectives, recommending significant capital expenditures, and
facilitating communication and information exchange between the Company and each
of the SBUs. The representation of the Affiliated Physicians on each Planning
Board ensures that the physicians within each group will retain a significant
voice in the expansion and operation of their group, while benefitting from the
Company's management experience and expertise. As the Company expands, it
intends to establish Planning Boards on a regional level.
The Company's SBUs will consist predominantly of primary care and specialty
physicians organized in a similar configuration as the Initial Affiliated
Practices. The following table sets forth the configuration, consisting of five
initial SBUs, of the Company's Initial Affiliated Practices:
NUMBER OF
LOCATION AFFILIATED PHYSICIANS SPECIALTIES
- ----------------------------------------- ----------------------- -----------------------------------------
Atlantic City, New Jersey................ 15 Primary Care / OB/GYN
Atlantic City, New Jersey................ 7 Primary Care / Pediatric Medicine
Atlantic City, New Jersey................ 5 Internal Medicine
Atlantic City, New Jersey................ 3 Primary Care
Hunterdon County, New Jersey............. 3 Primary Care
Hunterdon County, New Jersey............. 3 Opthamology
Hunterdon County, New Jersey............. 2 General Surgery
Somerset County, New Jersey.............. 1 Primary Care
Somerset County, New Jersey.............. 1 Primary Care / Pediatric Medicine
Hudson County, New Jersey................ 1 Primary Care
Monmouth County, New Jersey.............. 1 Primary Care
--
42
Primary care includes family practice, internal medicine, pediatrics, and
obstetrics/gynecology. Physicians in such practice categories are regarded as
"gatekeepers" for the remainder of the health care industry and, as such, these
physicians generally coordinate patient care from various providers in various
settings to ensure appropriate care and resource utilization. By initially
developing primary care markets, the Company believes it will be able to
subsequently build an integrated comprehensive physician network that includes
specialty care practices, outpatient services, and ancillary services.
In April 1997, the Company acquired 100% of the capital stock of PMI. PMI
has, for the past seven years, been engaged in the business of the management of
IPAs. An IPA is generally composed of a group of geographically diverse
independent physicians who form an association for the purpose of contracting as
a single entity. PMI provides a number of administrative management services to
physician organizations, including, but not limited to, credentialing services,
licensing, group purchasing, managed care contracting, benefits administration,
and practice management. As a subsidiary of the Company, PMI will continue to
offer such services and products to those physician groups which are not yet
willing to be acquired by the Company, but are interested in receiving the
benefits to be derived from an association with a physician practice management
company. By contracting with these physician organizations, the Company believes
it will be able to expand its influence in the physician marketplace and will
have the opportunity to showcase its products and services. The Company believes
that the IPA structure not only increases the purchasing power of the
constituent practices, but also provides a foundation for the development of an
integrated physician network.
Effective upon the consummation of this Offering, the Company will acquire
100% of the capital stock of NBS. NBS has, for the past eleven years, been
engaged in the business of providing comprehensive medical billing and
collection services to physicians and medical practices throughout Pennsylvania.
In so doing, NBS has developed computer systems which streamline the collection
and processing of the data required for the efficient and cost-effective billing
of fees and medical services. Additionally, officials of
33
NBS are familiar with the rules, regulations, customs, and practices related to
the often complex and complicated reimbursement procedures utilized by Medicare,
Medicaid, and managed care organizations with respect to payment for physician
services. Subsequent to the consummation of this Offering, the Company believes
it will benefit from this specialized knowledge and experience as it intends to
install the NBS billing and collection practices in each of the Affiliated
Practices. In addition, the Company believes that NBS's current customers, which
are currently unaffiliated with the Company, will provide it with a pool of
prospective acquisitions as well as an outlet for additional third party
management services offered by the Company.
MANAGEMENT AND ADMINISTRATION SERVICES. Upon affiliation with a physician
practice, the Company intends to assume most administrative functions of each
practice, including billing, collections, accounts payable, payroll, human
resources, purchasing, lease administration, property management, and
telecommunications, thereby enabling each physician to devote increased time to
the provision of medical care. Furthermore, Affiliated Physicians will
participate in utilization and quality management committees, which will be
responsible for focusing on the assessment and improvement of patient outcomes.
The Company anticipates that the Affiliated Physicians will be an integral part
of the ongoing evaluation and monitoring of medical care. As a result, the
Company anticipates that each Affiliated Practice will benefit from increased
efficiency and economies of scale.
The Company intends to provide medical management services to the Affiliated
Practices. These services will include:
UTILIZATION MANAGEMENT. Utilization management services have been designed
to be peer-to-peer. This means that the Affiliated Physicians within each SBU
will be responsible for reviewing and advising one another on how to better
manage operations and mitigate costs. Utilization management services will
encourage the Affiliated Physicians to provide cost-effective care to their
patients that emphasizes (i) disease prevention and (ii) the elimination of
unnecessary tests, procedures, hospitalizations, surgeries, and referrals to
specialty care physicians. In addition, the Company intends to design and
implement a management information system to enable the Company and the
Affiliated Practices to correct coding errors, which are typically made by
individual and small group practices, which the Company believes may result in
improved revenues. Additionally, regular chart reviews and billing audits will
allow the Company to do its own pre-loss risk management to prevent malpractice
claims.
CASE MANAGEMENT. The Company intends to utilize its management services to
advise the Affiliated Practices with respect to workers' compensation and
personal injury evaluation and treatment on an as needed basis. The Company's
management services will be comprised of both a clinical and an administrative
process by which health care services are identified, coordinated, implemented,
and evaluated on an ongoing basis for patients experiencing certain health
problems, particularly those that require longer-term treatment. In both the
workers' compensation and personal injury areas, the Company believes that the
case management approach will provide the Affiliated Practices with guidance,
prevent costly litigation, and allow for a continuum of care over an extended
treatment period. The Company believes that the success of these services with
the Affiliated Practices could lead to the future development of a similar
service to practices unaffiliated with the Company.
QUALITY ASSURANCE. The Company intends to implement programs that provide
both physicians and payors with quality assurance information on a regular
reporting basis. These programs include physician peer review, patient
satisfaction surveys, medical records auditing, and continuing
education/development for medical staff as required by accrediting
organizations, state law, and licensing requirements.
PHYSICIAN CREDENTIALING. The Company intends to maintain, and comply with,
the credentialing standards established by national accreditation bodies for
each of the Affiliated Physicians, without exception. The credentialing process
is an important part of any managed care contracting arrangement. The
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Company intends to comply with the standards of the National Committee on
Quality Assurance ("NCQA") and the Joint Commission on Accreditation of Health
Care Organizations.
ANCILLARY SERVICES. The Company intends to add ancillary services, such as
laboratory testing, pharmacy, imaging, and medical/surgical specialists to its
SBUs, on a SBU-by-SBU basis determined based on need, either by acquisition and
affiliation or by direct contracting. The Company believes that including these
services and specialists will enable the Company to deliver more comprehensive
services, which will increase its bargaining power with managed care companies
and payors and intensify its market presence. Management will rely on each SBU
to identify the need for services and medical/surgical specialities which will
augment its ability to deliver comprehensive health care.
MANAGED CARE
The Company intends to undertake the identification, evaluation, and
negotiation of managed care contracts on behalf of the Affiliated Practices.
Upon a physician practice's affiliation, the Company will begin managed care
contracting activities designed to increase the practice's revenues and market
share, including determining the value of existing third party relationships,
identifying desirable managed care contracts and network affiliations, and
identifying practice strengths and weaknesses with respect to managed care
contracting strategies, including: (i) practice-specific contracting designed to
increase access to managed care patients; (ii) development of global-priced
products which establish a single price for all the medical costs of a
designated procedure; (iii) specialty carve-outs and single specialty networks,
such as orthopedics, ophthalmology, and obstetrics/gynecology, that serve as
exclusive providers for managed care plans; and (iv) full-risk capitation by
contracting with a third party payor to provide all physician services and, in
some cases, hospital and other facility services for a fixed price. In addition,
the Company intends to "share" risk with licensed insurers, such as HMOs, under
the managed care contracts. By forming SBUs, the Company believes that it will
be well positioned to assist the Affiliated Physicians in gaining additional
market share, growing practice revenues, and efficiently managing practice
costs.
INFORMATION SYSTEM
The Company believes that information technology is essential to the
advancement of a quality health care delivery network. When a physician practice
becomes affiliated with the Company, the Company will evaluate the
administrative and clinical operation of the practice and reengineer the
practice to operate within the Company's information system. The Company intends
to implement a system that provides for the ongoing collection and review of
clinical and administrative data in order to control overhead expenses, maximize
reimbursement, and provide effective utilization management. In addition, the
Company intends to install a standardized system and set of procedures within
each Affiliated Practice. Furthermore, the Company believes that an information
system will enable the Affiliated Practices to collect and retrieve clinical
data more efficiently.
The Company believes that information collection, dissemination, analysis,
and management is a key to enabling the Company to compete in the managed care
marketplace. The Company has designed, and is in the process of purchasing the
hardware and software required to operate, a multi-layered, user-friendly,
comprehensive information system. The electronic medical record system which the
Company intends to purchase and install will enable the Affiliated Practices to
store all patient records in a central data bank allowing physicians "real time"
access to patient histories and orders. The physicians will record clinical and
billing information directly into the computer, using point and click
methodology, eliminating redundant work and inconsistencies in recording data.
This will improve the accuracy of the billing process while reducing back office
costs. In addition, the centralized collection of information in a relational
data base will enable the Company to measure, in specific geographic areas,
frequencies of illness and disease, treatment plans and protocols utilized, and
outcomes and results. The Company believes that this data will be a valuable
resource for managed care companies in their quest to control costs and improve
utilization and will provide both the Company and the managed care payor with
reliable statistics for use in managing
35
risks, evaluating contracts, and improving processes. Another application within
the information system will automate patient registration, patient/physician
scheduling, insurance eligibility, and transmission of claims. The Company
believes that such processes improve efficiency, significantly reduce human
error, and reduce administrative costs.
The Company has estimated that the total resources needed to fully implement
the planned management information system, including the applications to be
utilized by NBS in the billing process, should approximate $1,650,000. The
Company intends to pay such sum from the net proceeds of the Offering. See "Use
of Proceeds." The Company expects to be able to have its intended management
information system fully operational within one year of the Offering. Until
then, the Company believes that the information systems currently used by the
Affiliated Practices will enable the Company to provide management services
during such transition period.
AFFILIATION STRUCTURE
The Company utilizes an affiliation structure that aligns the interests of
the Company with those of its physicians. Moreover, the affiliation structure is
designed to allow each Affiliated Practice to retain professional autonomy and
control over its medical practices through continued governance of its
professional corporation or similar organization.
Prior to affiliation with the Company, the medical practices to be acquired
practice medicine through sole proprietorships or through PCs owned by one or
more medical doctors licensed to practice medicine under applicable state law.
When a medical practice has agreed to affiliate with the Company, the Company
purchases the practice's non-real estate operating assets and assumes certain of
its liabilities, and the practice enters into a long-term PMSA with the Company
in exchange for a combination of Common Stock, cash, notes, other securities of
the Company, and/or the assumption of certain liabilities. The Company has
utilized as partial consideration for the Acquisitions, and intends to continue
to utilize, Common Stock in payment of a significant portion of its
consideration for Affiliated Practices.
The PMSAs provide that the physicians are responsible for the provision of
all medical services and the Company is responsible solely for the management of
the operations of all other aspects of the Affiliated Practice. The Company will
provide the physician practice with the facilities, equipment, and supplies used
in the medical practice, employ substantially all of the non-physician personnel
utilized by the practice, except those whose services are directly related to
the provision of medical care, and assume certain of the liabilities of the
physician practice.
The Company's PMSAs are generally for a term of 40 years and generally
cannot be terminated by either party without cause, which consists primarily of
bankruptcy or material default.
Under the terms of the PMSAs, the Affiliated Practices will assign all of
their revenue to the Company in return for the services and expertise provided
to the Affiliated Practices by the Company and for the assumption by the Company
of all of the overhead costs of the practice. The Company, in turn, will return
to the Affiliated Practices such sums, estimated to be approximately 40% of
revenues, as shall be required to pay physician compensation, taxes, benefits
and personal expenses. Each Affiliated Physician will provide medical services
to the Affiliated Practices pursuant to the terms of an employment agreement,
generally three to five years in duration, by which the physician earns a base
salary and can earn additional incentive compensation based upon the
profitability of the practice with which the physician is assigned. The
employment contract provides for the repayment to the Company of all or a
portion of the physician's share of the consideration paid by the Company for
the practice's non-real estate operating assets in the event of the physician's
breach of the contract. This relationship offers the physician an opportunity to
maintain a level of compensation equal to that which the physician earned prior
to the affiliation, while giving the practice access to capital, managment
expertise, information systems, and managed care contracts. Each Affiliated
Practice also enters into an agreement not to compete with the Company, and
36
each physician within the group enters into an agreement not to compete with the
Affiliated Practice during the period of his or her employment and for a period
of time thereafter, typically two years.
COMPETITION
The physician practice management industry is highly competitive. The
Company is subject to significant competition both in affiliating with physician
practices and in seeking managed care contracts on behalf of the Affiliated
Practices. Its competitors include hospitals, managed care organizations, and
other PPMOs. In comparison with the Company, many of its competitors are larger
and have substantially greater resources, provide a wider variety of services,
and have longer established relationships with purchasers of such services. The
Company intends to compete in such market by focusing on the quality of service
of its Affiliated Practices and believes its affiliation selection process, the
skills and experience of its management and personnel, and its medical
information system will all be important competitive factors. There can be no
assurance, however, that the Company will be able to compete effectively, that
additional competitors will not enter the market, or that such competition will
not make it more difficult to enter into affiliations with physician practices
on terms beneficial to the Company.
The Company also experiences competition in the recruitment and retention of
qualified physicians and other health care professionals on behalf of the
Affiliated Practices. There can be no assurance that the Company will be able to
recruit or retain a sufficient number of qualified physicians and other health
care professionals to expand its operations.
THIRD PARTY REIMBURSEMENT
The Company's ability to collect fees in a timely manner, or at all, is
affected by whether the Affiliated Practices are reimbursed for their medical
services and the amount of reimbursement. Substantially all of the revenue of
the Affiliated Practices, on which the Company's revenue will be dependent, will
derive from commercial health insurance, state workers' compensation programs,
and other third party payors. All of these providers and programs are regulated
at the state or federal level. There are increasing and significant public and
private sector pressures to contain health care costs and to restrict
reimbursement rates for medical services. For example, it has been reported that
the Medicare program is expected to experience a deficiency of funds early in
the next century. Accordingly, Congress, in its fiscal year 1997 budget
legislation, called for, and considered, severe reductions in both the Medicare
and Medicaid programs. Several states have taken measures to reduce the
reimbursement rates paid to health care providers in their states. The Company
believes that additional states will implement reductions from time to time.
Reductions in Medicare and Medicaid rates often lead to reductions in the
reimbursement rates of other third party payors as well. Thus, changes in the
level of support by federal and state governments of health care services, the
methods by which health care services may be delivered, and the prices of such
services may all have a material impact on the revenue of the Company, which in
turn could have a material adverse effect on the Company.
Third party payors may disagree with the description or coding of a bill for
medical services, or may contest a description or code under a lesser fee
schedule depending on the medical services rendered. Such disagreements on the
description of professional services or bill coding, particularly where the
third-party payor is a federal or state funded health care program, could result
in lesser reimbursement, which could have a material adverse effect on the
Company. Persistent disagreements or alleged "upcoding" could result in
allegations of fraud or false billing, both of which constitute felonies. Such
an allegation, if proven, could result in forfeitures of payment, civil money
penalties, civil fines, suspensions, or exclusion from participation in federal
or state funded health care programs, and could have a material adverse effect
on the Company. Investigation and prosecution for fraudulent or false billing
could have a material adverse effect on the Company, even if such allegations
were disproven.
37
The Company's income may be materially adversely affected by the
uncollectibility of medical fees from third party payors or by delay in the
submission of claims. Additionally, there may be long collection cycles for such
receivables. Many third party payors, particularly insurance carriers covering
automobile no-fault and workers' compensation claims refuse, as a matter of
business practice, to pay claims unless submitted to arbitration. Further, third
party payors may reject medical claims if, in their judgment, the procedures
performed were not medically necessary or if the charges exceed such payor's
allowable fee standards. In addition, some receivables may not be collected
because of omissions or errors in timely completion of the required claim forms.
This does not mean that such claims will not ultimately be paid. The Affiliated
Practices normally would resubmit the claim with such revisions as requested
and/or forms and documentation. Outstanding claims that continue to be disputed
after one year or more could then be submitted to an arbitration process. Often,
when final arbitration decisions are about to be rendered, the third party payor
will settle. Although the Company will take all legally available steps to
collect receivables on behalf of the Affiliated Practices, there is a
significant risk that the Affiliated Practice receivables may not be collected,
which could materially adversely affect the Company.
GOVERNMENT REGULATION
As a participant in the health care industry, the Company's operations and
relationships are subject to extensive and increasing regulation by a number of
governmental entities at the federal, state, and local levels. The Company is
also subject to laws and regulations relating to business corporations in
general. The Company believes its operations and the operations of the Initial
Affiliated Practices and NBS are currently, and will continue to be, in material
compliance with all applicable laws. Nevertheless, because of the structure of
the intended relationship with the Affiliated Practices, many aspects of the
Company's business operations have not been the subject of state or federal
regulatory interpretation and there can be no assurance that a review of the
Company's or the Affiliated Practices by courts or regulatory authorities will
not result in a determination that could adversely affect the operations of the
Company or the Affiliated Practices.
A significant portion of the revenues of the Affiliated Practices will be
derived from payments made by government sponsored health care programs
principally Medicare and Medicaid. As a result, any change in reimbursement
regulations, policies, practices, interpretations, or statutes could adversely
affect the future operations of the Company. The federal Medicare program has
adopted a system of reimbursement for physician services, known as the resource
based relative value scale schedule ("RBRVS"). The Company expects that the
RBRVS fee schedule and other future changes in Medicare reimbursement will
result in a reduction in the Medicare revenue received by certain Affiliated
Practices. However, the Company does not believe such reductions will adversely
affect the Company's projected operating results.
Certain provisions of the Social Security Act, commonly referred to as the
"Anti-kickback Statute," prohibit the offer, payment, solicitation, or receipt
of any form of remuneration in return for the recommendation, arrangement,
purchase, lease, or order of items or services that are covered by Medicare or
state health programs. The Anti-kickback Statute is broad in scope and has been
broadly interpreted by courts in many jurisdictions. Read literally, the statute
places at risk many legitimate business arrangements, potentially subjecting
such arrangements to lengthy, expensive investigations and prosecutions
initiated by federal and state governmental officials. Many states have adopted
similar prohibitions against payments intended to induce referrals of Medicaid
and other third party payor patients. The Company believes that although it will
receive remuneration under the PMSAs for management services, it is not in a
position to make or influence the referral of patients or services reimbursed
under government programs to the physician groups and, therefore, believes that
it will not violate the Anti-kickback Statute. The Company will also not be a
separate provider of Medicare or state health program reimbursed services. To
the extent the Company is deemed to be either a referral source or a separate
provider under the PMSAs the financial provisions of these agreements could be
subject to scrutiny and prosecution under the Anti-kickback Statute. Violation
of the Anti-kickback Statute is a felony punishable by fines up to $25,000 per
38
violation and imprisonment for up to five years. In addition, the Department of
Health and Human Services may impose civil penalties and may exclude violators
from participation in Medicare or state health programs.
In July 1991, in part to address concerns regarding the Anti-kickback
Statute, the federal government published regulations that provide exceptions,
or "safe harbors," for transactions that will be deemed not to violate the Anti-
kickback Statute. Among the safe harbors included in the regulations were
provisions relating to the sale of practitioner practices, management and
personal service agreements, and employee relationships. Additional safe harbors
were published in September 1993 offering new protections under the
Anti-kickback Statute to eight activities, including referrals within group
practices. Proposed amendments to clarify these safe harbors were published in
July 1994 which, if adopted, would cause substantive retroactive changes to the
1991 regulations. Although the Company believes that it will not be in violation
of the Anti-kickback Statute, its operations may not fit within any of the
existing or proposed safe harbors.
Significant prohibitions against physician referrals were enacted by
Congress in the Omnibus Budget Reconciliation Act of 1993. These prohibitions,
commonly known as "Stark II," amended prior physician self-referral legislation
known as "Stark I" by dramatically enlarging the field of physician-owned or
physician interested entities to which the referral prohibitions apply.
Effective January 1, 1995, Stark II prohibits, subject to certain exemptions, a
physician or a member of his immediate family from referring Medicare or
Medicaid patients to an entity providing "designated health services" in which
the physician has an ownership or investment interest, or with which the
physician has entered into a compensation arrangement, including the physician's
own group practice. The designated health services include radiology and other
diagnostic services, radiation therapy services, physical and occupational
therapy services, durable medical equipment, parenteral and enteral nutrients,
equipment, and supplies, orthotic and prosthetic devices and supplies,
outpatient prescription drugs, home health services, and inpatient and
outpatient hospital services. The penalties for violating Stark II include a
prohibition on payment by these government programs and civil penalties of as
much as $15,000 for each violative referral and $100,000 for participation in a
"circumvention scheme." The Company believes that its activities, as structured,
will not be in violation of Stark I or Stark II. While the Company believes it
will be in compliance with the Stark legislation, future regulations could
require the Company to modify the form of its relationships with physician
groups. Moreover, the violation of Stark I or II by the Affiliated Practices
could result in significant fines and loss of reimbursement which would
adversely affect the Company.
Because the Affiliated Practices will remain separate legal entities, they
may be deemed competitors subject to a range of antitrust laws which prohibit
anti-competitive conduct, including price fixing, concerted refusals to deal and
division of market. The Company intends to comply with such state and federal
laws as may affect its development of an integrated health care delivery
network, but there is no assurance that a review of the Company's business by
courts or regulatory authorities will not result in a determination that could
adversely affect the operation of the Company and the Affiliated Practices.
There are also state and federal civil and criminal statutes imposing
substantial penalties, including civil and criminal fines and imprisonment, on
health care providers which fraudulently or wrongfully bill governmental or
other third party payors for health care services. The federal law prohibiting
false billings allows a private person to bring a civil action in the name of
the United States government for violations of the law's provisions. Recent
actions of Congress, including the Health Insurance Portability and
Accountability Act of 1996 and the Balanced Budget Act of 1997, have expanded
the coverage of fraud and abuse provisions, enhanced the enforcement efforts of
the federal government in pursuing fraud and abuse, and have increased the
penalties related to violations of the various fraud and abuse provisions. The
Company believes that it will be in material compliance with such laws, but
there is no assurance that the Company's activities will not be challenged or
scrutinized by governmental authorities. Moreover, technical Medicare and other
reimbursement rules affect the structure of physician billing arrangements. The
Company believes that it will be in material compliance with such regulations,
but regulatory authorities may differ.
39
In such event the Company may have to modify its relationship with the
Affiliated Practices. Noncompliance with such regulations may adversely affect
the operations of the Company and subject it and certain Affiliated Practices to
penalties and additional costs.
Every state imposes licensing requirements on individual physicians and on
certain other health care providers and facilities. Many states require
regulatory approval, including licensing to render care or certificates of need
before establishing certain types of health care services which entail the
acquisition of expensive medical equipment or facilities. While the performance
of management services on behalf of a medical practice does not currently
require any regulatory approval, there can be no assurance that such activities
will not be subject to licensure in the future.
The laws of many states, including New York, New Jersey, and Pennsylvania,
prohibit business corporations such as the Company from practicing medicine and
employing physicians to practice medicine. The Company will perform only
non-medical administrative service, will not represent to the public or its
clients that it offers medical services, and will not exercise influence or
control over the practice of medicine by the physicians with whom it affiliates.
Accordingly, the Company believes that it will not be in violation of any state
laws relating to the practice of medicine. The laws in most states regarding the
corporate practice of medicine have been subjected to limited judicial and
regulatory interpretation and, therefore, no assurances can be given that the
Company's activities will be found to be in compliance, if challenged. In
addition to prohibiting the practice of medicine, numerous states prohibit
entities like the Company from engaging in certain health care related
activities such as fee-splitting with physicians. The Company believes it is
likely that more states will adapt similar legislation. Accordingly, expansion
of the operations of the Company to certain jurisdictions may lead to structural
and organizational modifications in the Company's form of contractural
relationships with physician practices. Such changes, if any, could have an
adverse effect on the Company. Further, there can be no assurance that the
Company's arrangements with the Affiliated Practices will not be successfully
challenged as constituting the unauthorized practice of medicine.
Following is a brief summary of the laws of the states in which the Company
intends to initially focus its operations:
NEW YORK
New York's prohibition against the corporate practice of medicine prohibits,
with several exceptions, any corporation from engaging in the practice of
medicine. Among the recognized exceptions, physicians may practice medicine
through partnerships, professional corporations, professional service limited
liability companies, and registered limited liability partnerships. Violations
of the corporate practice of medicine in New York often involve "fee splitting"
issues as well. Under New York State law, physicians are prohibited from sharing
revenues received in connection with the furnishing of medical care, other than
with a partner, employee, associate in a professional corporation, subcontractor
or physician consultant. Unlike the practice in other states, management service
organizations in New York State may not manage a physician's practice in return
for a percentage of patient revenues as a result of New York's fee-splitting
rules. Accordingly,, management service contracts are generally based on an
alternative compensation arrangement including "cost plus" arrangements or
fair-market compensation agreed to in advance by the parties. The Company
currently has no New York practices under agreement for acquisition. If the
Company commences operations in New York, any PMSA entered into will be based on
one of the alternative compensation arrangements permissible in New York.
NEW JERSEY
The rule against the corporate practice of medicine is not expressly stated
in the Medical Practice Act. The Medical Practice Act, however, grants the State
Board of Medical Examiners rule making powers. The Board of Medical Examiners
has adopted regulations which specifically prescribe "acceptable professional
40
practice forms" for those professionals licensed by the Board. The physicians
are to be employed by "Professional Associations" which qualify as an acceptable
practice form. Unlike New York there is no "fee-splitting" prohibition and the
Company believes that its PMSA fee structure is acceptable in New Jersey.
PENNSYLVANIA
The rule is generally recognized that a licensed practitioner of a
profession may not lawfully practice his profession among the public as the
servant of an unlicensed person or a corporation; and that, if he does so, the
unlicensed person or corporation employing him is guilty of practicing that
profession without a license. Practice in a professional corporation is an
exception to this rule. The Company believes that the structure utilized in New
Jersey is acceptable in Pennsylvania.
Laws in all states regulate the business of insurance and the operation of
HMOs. Many states also regulate the establishment and operation of networks of
health care providers. Many state insurance commissioners have interpreted their
states' insurance statutes to prohibit entities from entering into risk-based
managed care contracts unless there is an entity licensed to engage in the
business of insurance, such as an HMO, in the chain of contracts. An entity not
licensed to engage in the business of insurance that contracts directly with a
self-insured employer in such a state may be deemed to be engaged in the
unlicensed business of insurance. While these laws do not generally apply to the
hiring and contracting of physicians by other health care providers, there can
be no assurance that regulatory authorities of the states in which the Company
operates would not apply these laws to require licensure of the Company's
operations as an insurer, as an HMO or as a provider network. The Company
believes that it will be in compliance with these laws in the states in which it
does business, but there can be no assurance that future interpretations of
insurance laws and health care network laws by the regulatory authorities in
these states or in the states into which the Company may expand will not require
licensure or a restructuring of some or all of the Company's operations.
In addition to current regulation, the Clinton Administration and several
members of Congress have proposed legislation for comprehensive reforms
affecting the payment for, and availability of, health care services. Aspects of
certain of these health care proposals, such as reductions in Medicare and
Medicaid payments, if adopted, could adversely affect the Company. Other aspects
of such proposals, such as universal health insurance coverage and coverage of
certain previously uncovered services, could have a positive impact on the
Company's business. It is not possible at this time to predict what, if any,
reforms will be adopted by Congress or state legislatures, or when such reforms
will be adopted and implemented.
As health care reform progresses, and the regulatory environment
accommodates reform, it is likely that changes in state and federal regulations
will necessitate modifications to the Company's agreements and/or operations.
While the Company believes that it will be able to restructure in accordance
with applicable laws and regulations, the Company cannot be certain that such
restructuring will be possible or profitable in all circumstances.
EMPLOYEES
At June 30, 1997, the Company had seven employees consisting of four
executive officers, the general counsel to the Company, and two employees of
PMI.
PROFESSIONAL LIABILITY INSURANCE
In recent years, physicians, hospitals, and other participants in the health
care industry have become subject to an increasing number of lawsuits alleging
medical malpractice and related legal theories. Many of these lawsuits involve
large claims and substantial defense costs. The Company does not engage in the
practice of medicine or provide medical services, nor does it control the
practice of medicine by the Affiliated Practices or the compliance with
regulatory and other requirements directly applicable to the
41
Affiliated Physicians and Affiliated Practices. Although the Company has not
been a party to any litigation relating to the practice of medicine, there can
be no assurance that the Company will not become involved in such litigation in
the future.
The PMSAs will require the Affiliated Practices to maintain, at their
expense, professional liability insurance for themselves and each physician
employed by or otherwise providing medical services for the Affiliated Practices
in the minimum amount of $1,000,000 per occurrence and $3,000,000 in the
aggregate. In addition, each Affiliated Practice will undertake to comply with
all applicable regulations and requirements, and the Company will be indemnified
under the PMSA for claims against the Company arising in connection with actions
by the Affiliated Practices. The Company has applied for general liability
insurance for itself and intends to require that it be named as an additional
insured party on the professional liability insurance policies of the Affiliated
Practices pursuant to the PMSA. In addition, the Company will maintain liability
insurance on its non-physician professional employees, such as nurses and
midwives.
There can be no assurance that the Company, its employees, the Affiliated
Practices, or the Affiliated Physicians will not be subject to claims in amounts
that exceed the coverage limits or that such coverage will be available when
needed. Further, there can be no assurance that professional liability or other
insurance will continue to be available to the Affiliated Practices in the
future at adequate levels, at an acceptable cost, or at all. A successful claim
against the Company or an Affiliated Practice in excess of the relevant
insurance coverage could have a material adverse effect upon the Company. Claims
against the Company or an Affiliated Practice, regardless of the merits or
eventual outcomes, may also have a material adverse effect on the Company.
PROPERTIES
The Company has assumed the lease of PMI, which covers approximately 2,400
square feet, at $29,792 per annum, at 615 Hope Road, Eatontown, New Jersey.
Prior to the consummation of this Offering, the Company has been conducting its
administration and marketing operations at the offices of Wellness Concepts,
Inc., at 2644 Bristol Road, Warrington, Pennsylvania 18976. After this Offering,
the Company intends to use both the Hope Road and Bristol Road facilities as its
principal places of business. Upon consummation of the Acquisitions, the Company
will lease approximately 17 medical practice facilities of the Affiliated
Practices in the form of either a sublease of facilities being leased by the PCs
or entering into a lease agreement with the sole practitioners who own their
facilities. The annual rent payments of such medical facilities are estimated to
aggregate approximately $725,000 . In addition, upon the consummation of the
Acquisitions, the Company will acquire, as part of the Acquisitions, a medical
practice facility currently owned by Reliance, at 3407 Atlantic Avenue, Atlantic
City, New Jersey.
LEGAL PROCEEDINGS
There are no material lawsuits pending, or to the Company's knowledge,
threatened against the Company.
42
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the members of
the Board of Directors and executive officers of the Company.
NAME AGE TITLE
- ----------------------------------- --- -----------------------------------------------------------------------
Scott G. Pollock(1)................ 36 President, Chief Executive Officer, Chief Financial Officer and a
Director
Dennis B. Liotta, M.D.............. 43 Executive Vice President, Chief Operating Officer and a Director
Peter Heisen, M.D.(1).............. 54 Vice President, Chief Medical Officer and a Director
David I. Rosen, M.D................ 59 Vice President for Business Development and a Director
Joseph F. Murray................... 41 Secretary and a Director
Walter B. Dunsmore................. 50 Corporate General Counsel and a Director
James M. Foulke.................... 41 Director
Randall K. Sprau(2)................ 50 Consultant
- ------------------------
(1) Effective upon the consummation of this Offering, Mr. Pollock will resign
his position as President of the Company. At such time the office of
President will be assumed by Dr. Heisen.
(2) Effective upon the consummation of this Offering, Mr. Sprau will become a
Vice President and the Chief Information Officer of the Company.
Each director is elected for a period of one year at the Company's annual
meeting of stockholders and serves until the next annual meeting and until his
successor is duly elected and qualified. Officers of the Company are elected by,
and serve at the discretion of, the Board of Directors.
Set forth below is a brief summary of the background of each director,
executive officer, and key employee of the Company.
SCOTT G. POLLOCK is a co-founder of the Company, has served as the President
and Chief Executive Officer of the Company since August 1, 1996 and has served
as a Director and Chief Financial Officer of the Company since April 1995. Since
January 1, 1994, Mr. Pollock has served as Chief Financial Officer of Wellness
Concepts, Inc. ("Wellness"), an owner and manager of long-term care facilities
and other health care related ventures. Effective upon the consummation of this
Offering, Mr. Pollock will resign from his position with Wellness. From 1986
through December, 1993, Mr. Pollock was a Director and Senior Manager at
Zelenofske, Axelrod & Co., Ltd., a regional health care consulting and certified
public accounting firm. Mr. Pollock received a Bachelor of Science degree in
accounting from Indiana University of Pennsylvania and is a member of the
American Institute of Certified Public Accountants.
DENNIS B. LIOTTA, M.D., is a co-founder of the Company and has served as the
Executive Vice President, Chief Operating Officer and a Director of the Company
since April 1995. Since 1990, Dr. Liotta has served as President of PMI, a
health care marketing and management firm. In 1986, Dr. Liotta founded, and from
1986 through 1990, served as President of ProHEALTH, a care organization in New
Jersey that specifically addressed work-related injuries and illnesses. From
1985 through 1990, Dr. Liotta maintained a private internal medicine practice.
Dr. Liotta received his medical training at Northeastern University, completed
his residency in internal medicine at Monmouth Medical Center in New Jersey, and
received an MBA from Rutgers University.
43
PETER R. HEISEN, M.D. will, upon the consummation of this Offering, become
President and Chief Medical Officer of the Company. Since 1993, Dr. Heisen has
been a principal with William M. Mercer, Inc., a national health care consulting
firm, and has worked on a number of projects helping clients design, operate,
and build health care delivery systems. From May 1991 through September 1992,
Dr. Heisen was Medical Director of PruCare of New Jersey ("PruCare"), a
state-wide managed care insurance plan serving more than 250,000 subscribers
through affiliations with 3,000 physicians and 42 hospitals. From 1986 through
1991, Dr. Heisen served as the Associate Medical Director at PruCare. From 1971
through 1991, Dr. Heisen engaged in the private practice of medicine,
specializing in internal medicine and infectious disease. Dr. Heisen received
his medical degree from the University of Pennsylvania and has an undergraduate
degree in mathematics from Swarthmore College. Dr. Heisen is a Diplomate of the
American Board of Internal Medicine and the National Board of Medical Examiners.
DAVID I. ROSEN, M.D. has served as Vice President for Business Development
and a Director of the Company since April 1995. Dr. Rosen is also a co-founder
of the Company. From 1978 to June 1996, Dr. Rosen was the managing partner of
Hunterdon Urological Associates, a New Jersey urological practice. Since 1989,
Dr. Rosen has also been a general partner of a licensed 68-bed long-term and
subacute care facility in Hunterdon County. Dr. Rosen is a board certified
urologist who graduated cum laude with a Bachelor of Arts degree from Brooklyn
College. He received his medical degree, with honors, from State University of
New York at Syracuse School of Medicine. Following three years in the U.S. Navy
(Lt. M.C.), he completed his post graduate medical education in urology at
Stanford University.
JOSEPH F. MURRAY has served as Secretary, and a Director of the Company
since April 1995. Since 1986, Mr. Murray has served, and currently serves, as
Vice President and General Counsel of Wellness. Following the consummation of
this Offering, Mr. Murray will maintain a part-time position with Wellness. From
1991 to 1994 he was also Vice President, General Counsel and a Board Member of
GraceCare Health Systems, Inc., a long-term care management company. From 1980
until 1986, Mr. Murray was engaged in the private practice of law primarily
representing health care clients. Mr. Murray received a Bachelor of Arts degree
in Political Science and an L.L.M. in Taxation from Villanova University, and a
Juris Doctor from Widener University School of Law. He is a member of the
National Health Lawyers Association.
JAMES M. FOULKE is a co-founder of the Company and has served as a Director
of the Company since October 1997. Mr. Foulke is the Chairman of the Board of
Directors, President, and Chief Executive Officer, of Wellness. He has been the
Chief Executive Officer, and a Director of Wellness and its predecessor and
affiliated companies since 1979. From 1991 to 1994 he was President, Chief
Executive Officer, and Chairman of the Board of Directors of GraceCare Health
Systems, Inc. He has served two terms on the board of directors of the
Pennsylvania Healthcare Association (1988-1991 and 1992-1993).
WALTER B. DUNSMORE, ESQ. is an attorney who has been associated with the
Company since April 1996. From April 1991 to September 1995, Mr. Dunsmore was
General Counsel and Chief Financial Officer of Nutrition Management Services
Company, a national health care food service provider. From 1976 through 1991,
Mr. Dunsmore was engaged in the private practice of law with an emphasis on
business and health care clients. Mr. Dunsmore received his Bachelor of Business
Administration from Temple University and his Juris Doctor degree from Seton
Hall University.
RANDALL K. SPRAU currently serves as a consultant to the Company and will,
effective upon the consummation of this Offering, become a Senior Vice President
and the Chief Information Officer of the Company. Prior to becoming associated
with the Company, Mr. Sprau had been employed, since 1969, by Shared Medical
Systems, Inc. ("SMS"). SMS is a provider of information systems and computer
products to the health care industry. Mr. Sprau has held a variety of positions
with SMS, most recently as Vice President of Information Systems. In addition,
from 1981 through 1994, Mr. Sprau managed the development, marketing, and
installation of SMS' premier clinical information system for physicians. Mr.
Sprau received a degree in mathematics from Mankato State University.
44
EXECUTIVE COMPENSATION
The following table sets forth compensation awarded to, earned by, or paid
to Scott G. Pollock, the Company's President and Chief Executive Officer, for
the year ended December 31, 1996. No executive officer of the Company received
compensation in excess of $100,000 during the Company's last fiscal year.
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY
- ------------------------------------------------------------------------- ------------- ---------
Scott G. Pollock; President, Chief Executive Officer,
Chief Financial Officer and a Director................................. 1996 $ 0(1)
- ------------------------------
(1) During 1996 and until December 1, 1997, Mr. Pollock has not and will not
receive a salary, but has been and will be reimbursed for all out-of-pocket
expenses. At December 1, 1997, Mr. Pollock's employment agreement commences,
pursuant to which he is entitled to an annual base salary of $200,000. See
"Management--Employment Agreements."
DIRECTOR COMPENSATION
Members of the Board of Directors will receive compensation at the rate of
$200 per meeting attended. All Directors will be reimbursed for out-of-pocket
expenses incurred in attending meetings of the Board of Directors or committees
thereof and for other expenses incurred in their capacity as Directors.
COMMITTEES OF THE BOARD OF DIRECTORS
On May 1, 1997, the Board of Directors formalized the creation of a
Compensation Committee, which is comprised of Messrs. Pollock, Murray, and
Dunsmore. The Compensation Committee has (i) full power and authority to
interpret the provisions of, and supervise the administration of, the Plan and
(ii) the authority to review all compensation matters relating to the Company.
On May 1, 1997, the Board formalized the creation of an Audit Committee,
which is comprised of Messrs. Heisen, Murray, and Dunsmore. The Audit Committee
is responsible for reviewing the plans and results of the audit engagement with
the independent auditors; reviewing the adequacy, scope, and results of the
internal accounting controls and procedures; reviewing the degree of
independence of the auditors; reviewing the auditors' fees; and recommending the
engagement of auditors to the full Board of Directors.
DIRECTORS' LIMITATION OF LIABILITY
The Company's Certificate of Incorporation and By-Laws include provisions to
(a) eliminate the personal liability of directors for monetary damages resulting
from breaches of their fiduciary duty (except for liability for breaches of the
duty of loyalty, acts, or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, violations under Section
174 of the Delaware General Corporation Law, or for any transaction from which
the director derived an improper personal benefit) and (b) indemnify the
directors and officers to the fullest extent permitted by the Delaware General
Corporation Law, including circumstances under which indemnification is
otherwise discretionary. The Company believes that these provisions are
necessary to attract and retain qualified persons as directors and officers.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Messr. Pollock, and
Drs. Heisen and Liotta to serve in their respective positions with the Company.
Each of the agreements has a term of three years, commencing on December 1, 1997
and terminating on July 31, 2000. Each of the agreements contains a covenant not
to compete with the Company for a period of two years following termination of
45
employment with the Company, although there can be no assurance that such
covenants will be enforceable. Such employees are entitled to an annual salary
of $200,000, $200,000, and $150,000, respectively, and Company-paid health,
life, and disability benefits, as well as a monthly automobile allowance of
$600. Each of the employment agreements additionally provides that the employee
may receive bonus compensation, to be determined by the Board of Directors of
the Company, based upon the achievement of certain financial and operational
goals. Each of the agreements provides that in the event that the agreement is
terminated for any reason other than a change in control of the Company the
employee shall be entitled to receive all accrued compensation and a severance
payment equal to two months salary. In the event that such employment is
terminated as a result of a change in control of the Company, each of the above-
named employees shall be entitled to receive all accrued compensation and a
payment equal to two times such employee's (i) base salary and (ii) the maximum
potential bonus under the agreement.
The Company has entered into a memorandum of understanding to enter an
employment agreement with Randall K. Sprau upon consummation of this Offering to
serve as the Senior Vice President and Chief Information Officer of the Company.
The agreement will have a term of three years. Pursuant to the terms of such
employment agreement, Mr. Sprau will initially receive an annual salary of
$175,000 and Company-paid health, life, and disability benefits. Mr. Sprau
additionally may receive bonus compensation of between 10% and 30% of his annual
salary, based upon the achievement of certain financial and operational goals.
Concurrently with the execution of the emplyment agreement, Mr. Sprau agreed to
enter into an agreement not to compete with the Company. Until such employment
agreement is executed, Mr. Sprau has agreed to provide consulting services to
the Company in consideration of the reimbursement of all of his expenses in
connection with his engagement as a consultant.
STOCK OPTION PLAN
On April 24, 1996, the Board of Directors and the stockholders of the
Company adopted the Plan. The Plan provides for the grant of options to purchase
up to 300,000 shares of Common Stock to employees, officers, directors, and
consultants of the Company. Options may be either "incentive stock options"
within the meaning of Section 422 of the United States Internal Revenue Code of
1986, as amended (the "Code"), or non-qualified options. Incentive stock options
may be granted only to employees of the Company, while non-qualified options may
be issued to non-employee directors, consultants, and others, as well as to
employees of the Company.
The Plan will be administered by "disinterested members" of the Board of
Directors (as defined by Rule 16b-3 of the Exchange Act) or the Compensation
Committee thereof, who will determine, among other things, the individuals who
shall receive options, the time period during which the options may be partially
or fully exercised, the number of shares of Common Stock issuable upon the
exercise of each option, and the option exercise price.
The exercise price per share of Common Stock subject to an incentive option
may not be less than the fair market value per share of Common Stock on the date
the option is granted. The per share exercise price of the Common Stock subject
to a non-qualified option may be established by the Board of Directors.
The aggregate fair market value (determined as of the date the option is
granted) of Common Stock for which any person may be granted incentive stock
options which first become exercisable in any calendar year may not exceed
$100,000. No person who owns, directly or indirectly, at the time of the
granting of an incentive stock option to such person, 10% or more of the total
combined voting power of all classes of stock of the Company (a "10%
Stockholder") shall be eligible to receive any incentive stock options under the
Plan unless the exercise price is at least 110% of the fair market value of the
shares of Common Stock subject to the option, determined on the date of grant.
Non-qualified options are not subject to such limitation.
No stock option may be transferred by an optionee other than by will or the
laws of descent and distribution, and, during the lifetime of an optionee, the
option will be exercisable only by the optionee. In
46
the event of termination of employment other than by death or disability, the
optionee will have no more than three months after such termination during which
the optionee shall be entitled to exercise the option, unless otherwise
determined by the Board of Directors. Upon termination of employment of an
optionee by reason of death or permanent and total disability, such optionee's
options will remain exercisable for one year thereafter to the extent such
options were exercisable on the date of such termination. No similar limitation
applies to non-qualified options.
Options under the Plan must be issued within ten years from the effective
date of the Plan. The effective date of the Plan is April 24, 1996. Incentive
stock options granted under the Plan cannot be exercised more than ten years
from the date of grant. Incentive stock options issued to a 10% Stockholder are
limited to five year terms. Options granted under the Plan generally provide for
the payment of the exercise price in cash and may provide for the payment of the
exercise price by delivery to the Company of shares of Common Stock already
owned by the optionee having a fair market value equal to the exercise price of
the options being exercised, or by a combination of such methods. Therefore, if
so provided in an optionee's options, such optionee may be able to tender shares
of Common Stock to purchase additional shares of Common Stock and may
theoretically exercise all of his stock options with no additional investment
other than the purchase of his original shares.
Any unexercised options that expire or that terminate upon an employee's
cessation of employment with the Company become available again for issuance
under the Plan.
To date, no options have been granted under the Plan.
47
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of the date of this Prospectus, the
ownership of the Common Stock by (i) each person who is known by the Company to
own of record or beneficially more than 5% of the outstanding Common Stock, (ii)
each of the Company's directors and executive officers, and (iii) all directors
and executive officers of the Company as a group. Except as otherwise indicated,
the stockholders listed in the table have sole voting and investment powers with
respect to the shares indicated.
NUMBER OF PERCENTAGE OF CLASS
SHARES ------------------------
BENEFICIALLY BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER(2) OWNED(1) OFFERING OFFERING
- --------------------------------------------------------------------------------- ----------- ----------- -----------
Scott G. Pollock................................................................. 225,000 10.3% 5.3%
Dennis B. Liotta, M.D............................................................ 180,000 8.2% 4.3%
Peter R. Heisen, M.D............................................................. 60,000 2.7% 1.4%
David I. Rosen, M.D.............................................................. 213,750 9.8% 5.1%
Joseph F. Murray................................................................. 20,000 0.9% 0.5%
Walter B. Dunsmore, Esq.......................................................... 20,000 0.9% 0.5%
James M. and Ellen Foulke........................................................ 420,250 19.2% 10.0%
All directors and executive officers of the
Company as a group (7 persons)................................................. 1,139,000 52.1% 27.2%
- ------------------------
(1) As used herein, the term beneficial ownership with respect to a security is
defined by Rule 13d-3 under the Securities Exchange Act of 1934, as amended,
as consisting of sole or shared voting power (including the power to vote or
direct the vote) and/or sole or shared investment power (including the power
to dispose or direct the disposition) with respect to the security through
any contract, arrangement, understanding, relationship or otherwise,
including a right to acquire such power(s) during the next 60 days. Unless
otherwise noted, beneficial ownership consists of sole ownership, voting,
and investment power with respect to all shares shown as beneficially owned
by them.
(2) The address of each of the referenced individuals is c/o Integrated
Physician Systems, Inc., 2644 Bristol Road, Warrington, Pennsylvania 18976.
48
CERTAIN TRANSACTIONS
Since the Company's inception, Wellness, the founding stockholder of the
Company, has advanced to the Company an aggregate of $245,468 to assist in
funding the fees and expenses accrued in connection with this Offering. Such
advance bears no interest and is required to be repaid upon the closing of this
Offering. As of the date of this Prospectus, the balance owed by the Company on
such advance is $199,078, all of which will be paid with a portion of the net
proceeds from this Offering. James M. Foulke, Scott G. Pollock, and Joseph F.
Murray are currently the President, the Chief Financial Officer, and the Vice
President and General Counsel, respectively, of Wellness. See "Use of Proceeds"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Affiliated PCs, which, upon the consummation of this Offering, will
employ the affiliated physicians and enter into the PMSAs with the Company, will
be 100% owned by David I. Rosen, M.D., the Vice President for Business
Development of the Company. The Company has entered into an agency agreement and
other agreements with Dr. Rosen which provide that the Company has control over
all significant decisions of the Affiliated PCs, except decisions relating to
the practice of medicine, and that the Company may direct Dr. Rosen with respect
to the election of officers and directors of the Affiliated PCs, and may effect
a change in the identity of the sole stockholder of the Affiliated PC in the
event of death, disability, retirement, or termination of employment of Dr.
Rosen. Dr. Rosen will receive no payment, whether in the form of dividends or
otherwise, by virtue of his being stockholder of the Affiliated PCs. See
"Business--Development and Operations."
In April 1997, pursuant to a stock purchase agreement, the Company purchased
all of the outstanding capital stock of PMI from Dr. Dennis B. Liotta, the sole
shareholder of PMI, for $2,000. As a result of such transaction, PMI became a
wholly-owned subsidiary of the Company. In addition, the Company entered into an
employment agreement pursuant to which Dr. Liotta agreed to serve as the
Executive Vice President and Chief Operating Officer of the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
On October 21, 1997 certain stockholders of the Company, including a former
Director, contributed 1,356,000 shares of Common Stock owned by such
stockholders, including 422,000 shares owned by the former Director, to the
Company. The shares were simultaneously retired by the Company.
All future transactions between the Company and its officers, directors, and
5% stockholders will be on terms no less favorable to the Company than can be
obtained from unaffiliated third parties and will be approved by a majority of
the independent and disinterested directors of the Company.
49
DESCRIPTION OF DEBENTURES
GENERALLY
The Debentures will be issued under an Indenture, to be dated as of
, 1997, (the "Indenture"), between the Company, as issuer, and IBJ
Schroder Bank & Trust Company, as trustee (the "Trustee"), a copy of which has
been filed as an exhibit to the Registration Statement. The descriptions of the
Debentures and the Indenture in this Prospectus are summaries, do not purport to
be complete, and are subject to, and are qualified in their entirety by
reference to, all provisions of the Indenture. Wherever terms defined in the
Indenture are used in this Prospectus, such defined terms are incorporated
herein by reference. Article and Section references appearing below refer to the
corresponding Articles and Sections of the Indenture.
The Debentures will be unsecured subordinated obligations of the Company,
will be limited to an aggregate principal amount of $28,750,000 (including
$3,750,000 subject to the Underwriters' over-allotment option and excluding
$2,500,000, subject to the Representative's Warrants) and will mature on
, 2004. The Debentures will bear interest at the rate per annum
stated in their title from the date of the issuance thereof or from the most
recent Interest Payment Date to which interest has been paid or provided for,
payable semi-annually on 15 and 15 of each year, commencing
15, 1998, to each holder in whose name a Debenture (or any predecessor
Debenture) is registered at the close of business on the Regular Record Date for
such interest payment, which shall be 1 or 1 (whether or
not a Business Day), as the case may be, next preceding such Interest Payment
Date (unless, with certain exceptions, such Debentures are converted or redeemed
prior to such Interest Payment Date). Interest on the Debentures will be paid on
the basis of a 360-day year consisting of twelve 30-day months (Section 311).
Principal of, and interest on, the Debentures will be payable at the office or
agency of the Company maintained for that purpose in the Borough of Manhattan,
City of New York, and such other office or agency of the Company as may be
maintained for such purpose (initially the corporate trust office of the Trustee
in New York, New York). Debentures may be surrendered for transfer, exchange,
repurchase, redemption, or conversion at that agency or office. Payment of
interest may, at the option of the Company, be made by check mailed to the
address of the holder entitled thereto as it appears in the Debenture Register
(See Sections 301, 305, 1002 and 1202). The Debentures will be issued only in
fully registered form, without coupons, in denominations of $1,000 and any
integral multiple thereof (Section 302). No service charge will be made for any
transfer or exchange of Debentures, but the Company may require payment of a sum
sufficient to cover any tax or other governmental charge payable in connection
therewith (Section 305). The Company is not required to transfer or exchange any
Debenture (i) during a period beginning at the opening of business 15 days
before the date of the mailing of a notice of redemption and ending at the close
of business on the date of such mailing or (ii) selected for redemption, in
whole or in part, except the unredeemed portion of Debentures being redeemed in
part. All moneys paid by the Company to the Trustee or any Paying Agent for the
payment of, principal of, and premium, if any, and interest on any Debenture
which remain unclaimed for two years after such principal, premium, or interest
became due and payable may be repaid to the Company. Thereafter, the holder of
such Debenture may, as an unsecured general creditor, look only to the Company
for payment thereof.
The Indenture does not contain any provisions that would provide protection
to holders of the Debentures against a sudden and dramatic decline in credit
quality of the Company resulting from any takeover, recapitalization, or similar
restructuring, except as described under "--Certain Rights to Require Repurchase
of Debentures."
The Indenture contains no financial covenants or covenants restricting the
incurrence of indebtedness by the Company or any Subsidiary (as defined
therein). Although certain agreements under which Senior Indebtedness (as
defined therein) in the future may be outstanding may contain limitations on the
incurrence of indebtedness by the Company or its Subsidiaries, such agreements
may be amended or modified as provided therein, may provide only incidental
protection to holders of Debentures in the event
50
of a Repurchase Event (as described below), and are not intended for the benefit
of the holders of the Debentures. In addition, future agreements under which
future Senior Indebtedness may be outstanding may contain provisions which may
require repayment of such Senior Indebtedness prior to repayment of the
Debentures upon, among other things, a Repurchase Event.
CONVERSION RIGHTS
The Debentures (or any portion thereof that is an integral multiple of
$1,000) will be convertible into Common Stock at the option of the holders
thereof at any time and from time to time prior to, and including, the maturity
date unless a Debenture or a portion thereof shall have been called for
redemption, through optional redemption, a sinking fund or otherwise, in which
case it will be convertible if duly surrendered on or before the close of
business on the fifth day preceding the Redemption Date at the conversion price
stated on the cover hereof (subject to adjustment as described below). The
conversion price shall be subject to adjustment upon certain events, including
in the event that:
(a) The Company shall declare a dividend or make a distribution on its
outstanding Common Stock payable in Common Stock or shall declare or make a
dividend or other distribution on any other class of capital stock of the
Company or any subsidiary not wholly owned by the Company which dividend or
distribution includes Common Stock.
(b) The Company shall subdivide the outstanding Common Stock into a
greater number of shares, or combine the outstanding Common Stock into a
smaller number of shares.
(c) The Company shall fix a record date for the issuance of rights or
warrants to all holders of its Common Stock entitling them (for a period
expiring within 45 days after the record date therefor) to subscribe for or
purchase Common Stock (or securities convertible into Common Stock) at a
price per share (or having an initial conversion price per share) less than
the Current Market Price (as defined in Section 1204(h) of the Indenture) of
Common Stock on such record date.
(d) The Company shall fix a record date for making a distribution to
holders of its Common Stock or holders (other than the Company or its
wholly-owned subsidiaries) of capital stock of any Subsidiary (as defined in
the Indenture) (i) of evidences of indebtedness of the Company or any
Subsidiary, (ii) of assets (including shares of any class of capital stock,
cash or other securities, but excluding any rights or warrants referred to
in subsection (c), above, or securities referred to in subsection (e),
below, excluding any dividend or distribution referred to in subsection (a),
above, and excluding any dividend or distribution paid exclusively in cash
out of retained or current earnings) or (iii) of rights or warrants
entitling the holders thereof to receive upon payment of the consideration
set forth therein shares of capital stock of the Company (excluding those
referred to in subsection (c) above).
(e) The Company shall issue or distribute Common Stock, (excluding
shares issued (i) in any of the transactions described in subsection (a)
above, (ii) upon conversion or exchange of securities convertible into or
exchangeable for Common Stock described in subsection (f) below, (iii) to
employees or consultants under the Plan, as now in effect or hereafter
amended, if such shares would otherwise be included in this section (e),
(iv) to the Company's employees or consultants under bona fide benefit
plans, employment agreements, or consulting agreements adopted by the
Company's Board of Directors and approved by its stockholders or granted at
an exercise price of at least 100% of the fair market value of the shares on
the date of grant whether or not approved by stockholders, if such shares
would otherwise be included in this Section (e) (but only to the extent that
the aggregate number of shares excluded by this subdivision (iv) and issued
after the date of the Indenture shall not exceed 10% of the Common Stock
outstanding at the time of any such issuance), (v) upon exercise of rights
or warrants issued to the holders of Common Stock, (vi) to acquire, or in
connection with the acquisition of, all or any portion of a business as a
going concern, whether such acquisition shall be effected by purchase of
assets, exchange of securities, merger, consolidation or otherwise, (vii) in
51
connection with the entry into a medical practice or other professional
practice management agreement by the Company for a term of at least five
years, (viii) upon exercise of rights or warrants issued in a bona fide
public offering pursuant to a firm commitment underwriting, but only if no
adjustment is required pursuant to these conversion price adjustments
(without regard to Section 1204(j) of the Indenture) with respect to the
transaction giving rise to such rights or (ix) pursuant to an offering
effected at a discount of less than 5% from the Current Market Price per
share determined as provided in Section 1204(h) of the Indenture) for a
consideration per share less than the Current Market Price per share on the
date the Company fixes the offering price of such additional shares.
(f) The Company shall issue any securities convertible into, or
exchangeable for, its Common Stock (excluding securities issued in
transactions described in sections (c) and (d) above, or the Securities (as
defined in the Indenture)) for a consideration per share of Common Stock
initially deliverable upon conversion or exchange of such securities less
than the Current Market Price per share in effect immediately prior to the
issuance of such securities.
Upon the termination of the right to convert or exchange such securities,
the conversion price shall forthwith be readjusted to such conversion price as
would have obtained had the adjustments made upon the issuance of such
convertible or exchangeable securities been made upon the basis of the delivery
of only the number of shares of Common Stock actually delivered upon conversion
or exchange of such securities and upon the basis of the consideration actually
received by the Company for such securities. No adjustment in the conversion
price need be made unless such adjustment would require an increase or decrease
of at least 1% in such price; provided, however, that any such adjustment which
is not required to be made shall be carried forward and taken into account in
any subsequent adjustment. All calculations shall be made to the nearest cent or
to the nearest one-hundredth of a share, as the case may be. Fractional shares
will not be issued upon conversion, but in lieu thereof, the Company will pay
cash equal to the market value of such fractional share computed with reference
to the Closing Price of the Common Stock on the last business day prior to
conversion (Section 1203). Debentures surrendered for conversion during the
period from the close of business on any Regular Record Date to the opening of
business on the next succeeding Interest Payment Date (except Debentures whose
maturity is prior to such Interest Payment Date and Debentures called for
redemption on a Redemption Date within such period) must be accompanied by
payment of an amount equal to the interest thereon to be paid on such Interest
Payment Date (provided, however, that if the Company shall default in payment of
such interest, such payment shall be returned to the payor thereof.) Except for
Debentures surrendered for conversion which must be accompanied by payment as
described above, no interest on converted Debentures will be payable by the
Company on any Interest Payment Date subsequent to the date of conversion
(Sections 307 and 1202).
Except as stated above, the conversion price will not be adjusted for the
issuance of Common Stock or any securities convertible into, or exchangeable
for, Common Stock or for payment of dividends on the Common Stock or any
preferred shares of the Company.
The Company has covenanted under the Indenture to reserve and keep available
at all times out of its authorized but unissued shares of Common Stock, for the
purpose of effecting conversions of Debentures, the full number of shares of
Common Stock deliverable upon the conversion of all outstanding Debentures.
CERTAIN RIGHTS TO REQUIRE REPURCHASE OF THE DEBENTURES
In the event of any Fundamental Change (as described below) affecting the
Company which constitutes a Repurchase Event occurring after the date of
issuance of the Debentures and on or prior to maturity, each holder of
Debentures will have the right, at the holder's option, to require the Company
to repurchase all or any part of the holder's Debentures on the date (the
"Repurchase Date") that is 30 days after the date the Company gives notice of
the Repurchase Event as described below at a price (the "Repurchase Price")
equal to 100% of the principal amount thereof, together with accrued and unpaid
52
interest to the Repurchase Date. On or prior to the Repurchase Date, the Company
shall deposit with the Trustee or a Paying Agent an amount of money sufficient
to pay the Repurchase Price of the Debentures which are to be repurchased on or
promptly following the Repurchase Date (Section 1403). In the event the Company
becomes obligated to repurchase some or all of the Debentures, the Company
expects that it would seek to finance the Repurchase Price with its available
cash and short-term investments, through available bank credit facilities (if
any), or through a public or private issuance of debt or equity securities.
Failure by the Company to repurchase the Debentures when required as
described in the second preceding paragraph will result in an Event of Default
under the Indenture whether or not such repurchase is permitted by the
subordination provisions of the Indenture (Section 501). On or before the 15th
day after the occurrence of a Repurchase Event, the Company shall mail (or at
its option cause the Trustee to mail) to all holders of record of Debentures
notice of the occurrence of such Repurchase Event, setting forth, among other
things, the date by which the repurchase right must be exercised, the Repurchase
Price and the procedures which the holder must follow to exercise this right. No
failure of the Company to give such notice shall limit any holder's right to
exercise a repurchase right (Section 1402). Failure to give notice of the
Repurchase Event in accordance with the terms of the Indenture will result in an
Event of Default. To exercise the repurchase right, the holder of a Debenture
must deliver, on or before the fifth day prior to the Repurchase Date, written
notice to the Company (or an agent designated by the Company for such purpose)
of the holder's exercise of such right, together with the certificates
evidencing the Debentures with respect to which the right is being exercised,
duly endorsed for transfer (Section 1402). Such notice of exercise may be
withdrawn by the holder by a written notice of withdrawal delivered to the
Trustee at any time prior to the close of business on the fifth day prior to the
Repurchase Date and thereafter only with the consent of the Company (Section
1402).
The term "Fundamental Change" means when (i) any "person" or "group" (as
such terms are used in Sections 13(d) and 14(d) of the Exchange Act) is or
becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act) of shares representing more than 50% of the combined voting power
of the then outstanding securities entitled to vote generally in elections of
directors of the Company ("Voting Stock"); (ii) the stockholders of the Company
approve any plan or proposal for the liquidation, dissolution, or winding up of
the Company; or (iii) the Company (A) consolidates with, or merges into, any
other corporation or any other corporation merges into the Company, and in the
case of any such transaction, the outstanding Common Stock of the Company is
changed or exchanged into or for other assets or securities as a result, unless
the stockholders of the Company immediately before such transaction own,
directly or indirectly immediately following such transaction, at least 51% of
the combined voting power of the outstanding voting securities of the
corporation resulting from such transaction in substantially the same proportion
as their ownership of the Voting Stock immediately before such transaction or
(B) conveys, transfers, or leases all or substantially all of its assets to any
person.
The phrase "all or substantially all" of the assets of the Company, as
included in the definition of Fundamental Change, is likely to be interpreted by
reference to applicable state law at the relevant time, and will be dependent on
the facts and circumstances existing at such time. As a result, there may be a
degree of uncertainty in ascertaining whether a sale or transfer of "all or
substantially all" of the assets of the Company has occurred.
A Repurchase Event is a right to require the Company to repurchase the
Debentures and a Repurchase Event shall have occurred if a Fundamental Change
shall have occurred unless (i) the Current Market Price of the Common Stock is
at least equal to the conversion price of the Debentures in effect immediately
preceding the time of such Fundamental Change or (ii) the consideration in the
transaction or event giving rise to such Fundamental Change to the holders of
Common Stock consists of cash, securities that are, or immediately upon issuance
will be, listed on a national securities exchange or quoted in the Nasdaq
National Market (or in the case of securities which are common stock in any
Nasdaq system or any similar system of automated dissemination of quotations of
securities prices), or a combination of cash and such securities, and the
aggregate fair market value of such consideration (which, in the case of such
53
securities, shall be equal to the average of the daily Closing Prices of such
securities during the 10 consecutive trading days commencing with the sixth
trading day following consummation of such transaction or event) is at least
105% of the conversion price of the Debentures in effect on the date immediately
preceding the closing date of such transaction or event. The right to require
the Company to repurchase the Debentures as a result of the occurrence of a
Repurchase Event could create an Event of Default under Senior Indebtedness, as
a result of which any repurchase could, absent a waiver, be prevented by the
subordination provisions of the Debentures. Failure by the Company to repurchase
the Debentures when required will result in an Event of Default with respect to
the Debentures whether or not such repurchase is permitted by the subordination
provisions. The Company's ability to pay cash to the holders of the Debentures
upon a repurchase may be limited by certain financial covenants contained in any
future Senior Indebtedness. In the event a Repurchase Event occurs and the
holders exercise their rights to require the Company to repurchase Debentures,
the Company intends to comply with applicable tender offer rules under the
Exchange Act, including Rules 13e-4 and 14e-1, as then in effect, with respect
to any such purchase. This right to require repurchase would not necessarily
afford holders of the Debentures protection in the event of highly leveraged or
other transactions involving the Company that may impair the rights of holders
of Debentures.
The effect of these provisions granting the holders the right to require the
Company to repurchase the Debentures upon the occurrence of a Repurchase Event
may make it more difficult for any person or group to acquire control of the
Company or to effect a business combination with the Company and may discourage
open market purchases of the Common Stock or a non-negotiated tender or exchange
offer for the Common Stock. Accordingly, such provisions may limit a
stockholder's ability to realize a premium over the market price of the Common
Stock in connection with any such transaction.
The foregoing provisions would not necessarily afford holders of the
Debentures protection in the event of a highly leveraged transaction, a change
in control of the Company or other transactions involving the Company that may
adversely affect holders. The Company could, in the future, enter into certain
transactions, including certain recapitalizations of the Company that would not
constitute a Fundamental Change, but that would increase the amount of Senior
Indebtedness (or other indebtedness) outstanding at such time. There are no
restrictions in the Indenture or the Debentures on the creation of additional
Senior Indebtedness (or any other indebtedness of the Company or any of its
subsidiaries) and the incurrence of significant amounts of additional
indebtedness could have an adverse impact on the Company's ability to service
its debt, including the Debentures. The Debentures are subordinate in right to
payment to all existing and future Senior Indebtedness as described under
"--Subordination" below.
SUBORDINATION
The payment of the principal of, and interest on, the Debentures will, to
the extent set forth in the Indenture, be subordinated in right of payment to
the prior payment in full of all Senior Indebtedness whether currently
outstanding or hereafter incurred. Upon any payment or distribution of assets to
creditors upon any liquidation, dissolution, winding up, reorganization,
assignment for the benefit of creditors, or marshaling of assets, whether
voluntary, involuntary or in receivership, bankruptcy, insolvency, or similar
proceedings, the holders of all Senior Indebtedness will be first entitled to
receive payment in full of cash amounts due or to become due thereon before any
payment is made on account of the principal of, and premium, if any, or interest
on, the indebtedness evidenced by the Debentures or on account of any other
monetary claims, including such monetary claims as may result from rights of
repurchase or rescission, under or in respect of the Debentures, before any
payment is made to acquire any of the Debentures for cash, property, or
securities or before any distribution is made with respect to the Debentures of
any cash, property, or securities. Moreover, in the event of any acceleration of
the Debentures because of an Event of Default, the holders of any Senior
Indebtedness then outstanding would be entitled to payment in full of all
obligations in respect of such Senior Indebtedness before the holders of the
Debentures are entitled to receive any payment or distribution in respect
thereof. No
54
payments on account of principal of, sinking fund requirements, if any, or
premium, if any, or interest on the Debentures shall be made, and no Debentures
shall be redeemed or repurchased, if at the time thereof: (i) there is a default
in the payment of all or any portion of the obligations under any Senior
Indebtedness; or (ii) there shall exist a default in any covenant with respect
to the Senior Indebtedness (other than as specified in clause (i) of this
sentence), and, in such event, such default shall not have been cured or waived
or shall not have ceased to exist, the Trustee and the Company shall have
received written notice from any holder of such Senior Indebtedness stating that
no payment shall be made with respect to the Debentures, and such default would
permit the maturity of such Senior Indebtedness to be accelerated provided that
no such default will prevent any payment on, or in respect of, the Debentures
for more than 120 days unless the maturity of such Senior Indebtedness has been
accelerated (Section 1303).
The holders of the Debentures will be subrogated to the rights of the
holders of the Senior Indebtedness to the extent of payments made on Senior
Indebtedness upon any distribution of assets in any such proceedings out of the
distributive share of the Debentures (Section 1302).
By reason of such subordination, in the event of insolvency, creditors of
the Company, who are not holders of Senior Indebtedness or of the Debentures,
may recover less, ratably, than holders of Senior Indebtedness but may recover
more, ratably, than the holders of the Debentures.
"Senior Indebtedness" is defined in the Indenture as the principal of,
premium, if any, interest on (including any interest accruing after the filing
of a petition by or against the Company under any bankruptcy law, whether or not
allowed as a claim after such filing in any proceeding under such bankruptcy
law), and any other payment due pursuant to, any of the following, whether
outstanding on the date of the Indenture or thereafter incurred or created: (a)
all indebtedness of the Company for money borrowed or evidenced by notes,
debentures, bonds, or other securities (including, but not limited to, those
which are convertible or exchangeable for securities of the Company) and all
other obligations of the Company constituting the deferred purchase price of
property or assets; (b) all indebtedness of the Company due and owing with
respect to letters of credit (including, but not limited to, reimbursement
obligations with respect thereto); (c) all indebtedness or other obligations of
the Company due and owing with respect to interest rate and currency swap
agreements, cap, floor and collar agreements, currency spot and forward
contracts, and other similar agreements and arrangements; (d) all indebtedness
consisting of commitment or standby fees due and payable to lending institutions
with respect to credit facilities or letters of credit available to the Company;
(e) all obligations of the Company under leases required or permitted to be
capitalized under generally accepted accounting principles or under any lease or
related document (including a purchase agreement) that provides that the Company
is contractually obligated to purchase or cause a third party to purchase and
thereby guarantee a minimum residual value of the lease property to the lessor
and the obligations of the Company under such lease or related document to
purchase or to cause a third party to purchase such leased property; (f) all
indebtedness or obligations of others of the kinds described in any of the
preceding clauses (a), (b), (c), (d) or (e) assumed by, or guaranteed in any
manner by, the Company or in effect guaranteed (directly or indirectly) by the
Company through an agreement to purchase, contingent or otherwise, and all
obligations of the Company under any such guarantee or other arrangements; and
(g) all renewals, extensions, refundings, deferrals, amendments, or
modifications of indebtedness or obligations of the kinds described in any of
the preceding clauses (a), (b), (c), (d), (e) or (f); unless in the case of any
particular indebtedness, obligation, renewal, extension, refunding, amendment,
modification, or supplement, the instrument or other document creating or
evidencing the same or the assumption or guarantee of the same expressly
provides that such indebtedness, obligation, renewal, extension, refunding,
amendment, modification, or supplement is subordinate to, or is not superior to,
or is pari passau with, the Debentures; provided that Senior Indebtedness shall
not include (i) any indebtedness of any kind of the Company to any subsidiary of
the Company, a majority of the voting stock of which is owned, directly or
indirectly, by the Company, (ii) indebtedness for trade payables or constituting
the deferred purchase price of assets or services incurred in the ordinary
course of business; or (iii) the Debentures.
55
Notwithstanding the foregoing, in the event that the Trustee or any holder
of Debentures receives any payment or distribution of assets of the Company of
any kind in contravention of any of the terms of the Indenture, whether in cash,
property, or securities, including, without limitation, by way of set-off or
otherwise, in respect of the Debentures before all Senior Indebtedness is paid
in full, then such payment or distribution will be held by the recipient in
trust for the benefit of the holders of Senior Indebtedness of the Company, and
will be immediately paid over, or delivered to, the holders of Senior
Indebtedness of the Company or their respective representative or
representatives, or to the trustee or trustees under any indenture pursuant to
which any instruments evidencing any Senior Indebtedness may have been issued,
as their respective interests may appear, as calculated by the Company, for
application to the payment of all Senior Indebtedness remaining unpaid to the
extent necessary to make payment in full of all Senior Indebtedness of the
Company remaining unpaid, after giving effect to any concurrent payment or
distribution, or provision therefor, to or for the holders of the Senior
Indebtedness of the Company.
No provision contained in the Indenture or the Debentures will affect the
obligation of the Company, which is absolute and unconditional, to pay, when
due, principal of, premium, if any, and interest on, the Debentures. The
subordination provisions of the Indenture and the Debentures will not prevent
the occurrence of any default or Event of Default or limit the rights of any
holder of Debentures to pursue any other rights or remedies with respect to the
Debentures.
The Debentures are obligations exclusively of the Company. Certain
operations of the Company will be conducted through its subsidiaries,
principally PMI and, upon completion of this Offering, NBS (the "Subsidiaries").
The Subsidiaries are separate distinct entities that have no obligation,
contingent or otherwise, to pay any amounts due pursuant to the Debentures. In
addition, the payment of dividends, interest, and the repayment of certain loans
and advances to the Company by the Subsidiaries may be subject to certain
statutory or contractual restrictions and are contingent upon the earnings of
such Subsidiaries. The Debentures will be effectively subordinated to all
indebtedness and other liabilities and commitments (including trade payables and
lease obligations) of the Subsidiaries. In addition, the right of the Company
and, therefore, the right of creditors of the Company (including holders of
Debentures) to receive assets of any such Subsidiary upon the liquidation or
reorganization of any such Subsidiary or otherwise will be effectively
subordinated to the claims of the Subsidiary's creditors, except to the extent
that the Company is itself recognized as a creditor of such Subsidiary, in which
case the claims of the Company would still be subordinate to any secured claim
on the assets of such Subsidiary and any indebtedness of such Subsidiary senior
to that held by the Company.
At June 30, 1997, Senior Indebtedness and indebtedness of the Subsidiaries
and the Initial Affiliated Practices aggregated approximately $572,000 on a pro
forma basis, giving effect to the Acquisitions. The Company expects that it and
its Subsidiaries will from time to time incur additional indebtedness, including
Senior Indebtedness. The Indenture does not prohibit or limit the incurrence,
assumption, or guarantee by the Company or its Subsidiaries of additional
indebtedness, including Senior Indebtedness.
EVENTS OF DEFAULT
Events of Default under the Indenture are: (i) failure to pay principal of
any Debenture when due, whether at maturity, upon redemption or acceleration, or
otherwise, whether or not such payment is prohibited by the subordination
provisions of the Indenture; (ii) failure to pay any interest on any Debenture
when due or within 30 days thereafter, whether or not such payment is prohibited
by the subordination provisions of the Indenture; (iii) failure to deposit when
due or within 30 days thereafter any sinking fund payment for the Debentures,
whether or not such deposits are prohibited by the subordination provisions of
the Indenture; (iv) failure to pay any Repurchase Price when due or within 10
days thereafter on any Debenture, whether or not such payments are prohibited by
the subordination provisions of the Indenture; (v) failure to perform any other
covenant of the Company in the Indenture, which default continues for 60 days
after written notice to the Company by the Trustee or to the Company and the
Trustee by the holders of not less than 25% in aggregate principal amount of the
outstanding Debentures;
56
(vi) default on any indebtedness of the Company or the Subsidiaries in excess of
$1,000,000 for borrowed money or on any Senior Indebtedness resulting in such
indebtedness being declared due and payable after the expiration of any
applicable grace period or becoming due and payable and the holders thereof
taking any action to collect such indebtedness; and (vii) certain events in
bankruptcy, insolvency, or reorganization of the Company or significant
Subsidiaries (Section 501). Subject to the provisions of the Indenture relating
to the duties of the Trustee in case an Event of Default shall occur and be
continuing, the Trustee will be under no obligation to exercise any of its
rights or powers under the Indenture at the request or direction of any of the
holders, unless such holders shall have offered to the Trustee reasonable
indemnity (Section 514). Subject to such provisions for the indemnification of
the Trustee, the holders of a majority in principal amount of the outstanding
Debentures will have the right to determine the time, method, and place of
conducting any proceeding for any remedy available to the Trustee or exercising
any trust or power conferred on the Trustee (Section 512). If an Event of
Default (other than those relating to certain events of bankruptcy, insolvency,
and reorganization) shall occur and be continuing, either the Trustee or the
holders of at least 25% in aggregate principal amount of the outstanding
Debentures may by written notice to the Company and, if applicable, to the
Trustee, accelerate the maturity of all Debentures; provided, however, that
after such acceleration, but before a judgment or decree based on acceleration,
the holders of a majority in aggregate principal amount of outstanding
Debentures may, under certain circumstances, rescind and annul such acceleration
if all Events of Default, other than the non-payment of accelerated principal,
have been cured or waived as provided in the Indenture (Section 502). If an
Event of Default occurs by reason of certain events in bankruptcy, insolvency,
and reorganization, all principal and accrued and unpaid interest due under the
Debentures then outstanding shall automatically become immediately due and
payable. No holder of any Debenture will have any right to institute any
proceeding with respect to the Indenture or for any remedy thereunder, unless
such holder shall have previously given to the Trustee written notice of a
continuing Event of Default, the holders of at least 25% in aggregate principal
amount of the outstanding Debentures shall have made written request and offered
reasonable indemnity to the Trustee to institute such proceeding as trustee, the
Trustee shall not have received from the holders of a majority in principal
amount of the outstanding Debentures a direction inconsistent with such request
and the Trustee shall have failed to institute such proceeding within 60 days
after such notice (Section 507). However, such limitations do not apply to a
suit instituted by a holder of a Debenture for the enforcement of payment of the
principal or Repurchase Price of, sinking fund payment for, if any, or interest
on such Debenture on or after the respective due dates expressed in such
Debenture or of the right to convert such Debenture in accordance with the
Indenture (Section 508).
The Indenture provides that the Trustee shall, within 90 days after a
Responsible Officer of the Trustee has actual knowledge of the occurrence of a
default (not including any grace period allowed), mail to the holders of the
Debentures, as their names and addresses appear on the Debenture Register,
notice of all uncured defaults known to it; provided, however, that except in
the case of default in the payment of principal or Repurchase Price of, sinking
fund payment for, if any, or interest on any of the Debentures, the Trustee
shall be protected in withholding such notice if it in good faith determines
that the withholding of such notice is in the interests of the holders of the
Debentures (Section 602).
The Company will be required to furnish to the Trustee annually a
certificate with respect to its compliance with the terms, provisions, and
conditions of the Indenture and as to any default with respect thereto (Section
1004).
OPTIONAL REDEMPTION
The Debentures are not redeemable prior to , 2000. Thereafter,
the Debentures will be redeemable until maturity, at the Company's option, in
whole or from time to time in part, upon not less than 45 nor more than 60 days'
notice mailed to each holder of the Debentures at such holder's address
appearing in the Debenture Register at a redemption price equal to 100% of the
principal amount thereof plus accrued but unpaid interest thereon to the date
fixed for redemption (subject to the right of holders of
57
record on a relevant record date to receive interest due on an Interest Payment
Date that is on or prior to the date fixed for redemption), except that the
Debentures may not be redeemed prior to maturity unless, for the 20 consecutive
trading days immediately preceding the date of the notice of redemption, the
Closing Price has equaled or exceeded $ [150% of the Closing Price of
the Common Stock on the effective date of this offering], subject to adjustment
in the case of the same events which result in an adjustment of the conversion
price. For purposes of optional redemption, the "Closing Price" on any trading
day shall mean the last reported sales price of the Common Stock, or, in case no
such reported sale takes place on such day, the closing bid price of the Common
Stock, on the principal national securities exchange on which the Common Stock
is listed or admitted to trading or, if not listed or admitted to trading on any
national securities exchange, on the Nasdaq National Market or Nasdaq, as the
case may be, or, if the Common Stock is not listed or admitted to trading on any
national securities exchange or quoted on the Nasdaq National Market or Nasdaq,
the closing bid price in the over-the-counter market as furnished by any New
York Stock Exchange member firm that is selected from time to time by the
Company for that purpose and is reasonably acceptable to the Trustee. If less
than all of the Debentures are to be redeemed, the Trustee, in its discretion,
will select those to be redeemed as a whole or in part by such method as the
Trustee shall deem fair and appropriate (as long as such method is not
prohibited by the rules of any United States national securities exchange or an
established automated over-the-counter trading market in the United States on
which the Debentures are listed). Notice of redemption will be given to holders
of the Debentures to be redeemed by first class mail at their last address
appearing on the Debenture Register. If any Debenture is to be redeemed in part
only, a new Debenture or Debentures in principal amount equal to the unredeemed
principal portion thereof will be issued. If a portion of a holder's Debenture
is selected for partial redemption, and such holder converts a portion of such
Debenture, such converted portion shall be deemed to have been redeemed as the
portion selected for redemption.
SINKING FUND
If the Company provides for one or more sinking funds for securities
representing indebtedness for money borrowed ranking equal or junior to the
Debentures, and such indebtedness has a maturity or weighted average time to
maturity which is on or prior to , 2004, the Company will provide a
sinking fund for the Debentures calculated to retire that amount of Debentures
equal to the lesser of (i) the same percentage of outstanding Debentures prior
to maturity as the percentage of the principal amount of such other indebtedness
to be retired prior to maturity on the same payment schedule as such other
indebtedness or (ii) such amount of Debentures necessary to result in the
Debentures having the same weighted average time to maturity as other
indebtedness. Except as set forth herein with respect to the credit against
mandatory sinking fund payments, the redemption price and other terms of the
sinking fund applicable to the Debentures shall be the same as those applicable
to the relevant indebtedness, except that the redemption price of the Debentures
in connection with the sinking fund shall be 100% of the principal amount
thereof plus accrued and unpaid interest to the date fixed for redemption. The
Company may, at its option, receive credit against mandatory sinking fund
payments for the principal amount of (i) Debentures acquired by the Company and
surrendered for cancellation, (ii) Debentures previously converted into Common
Stock, and (iii) Debentures redeemed or called for redemption otherwise than
through the operation of the sinking fund.
LIMITATIONS ON DIVIDENDS AND REDEMPTIONS
The Indenture provides that the Company will not (i) declare or pay any
dividend or make any other distribution on any Junior Securities (as described
below), except dividends or distributions payable in Junior Securities, or (ii)
purchase, redeem or otherwise acquire or retire for value any Junior Securities,
except Junior Securities acquired upon conversion thereof into other Junior
Securities, or (iii) permit a Subsidiary to purchase, redeem or otherwise
acquire or retire for value any Junior Securities, if, upon giving effect to
such dividend, distribution, purchase, redemption, retirement or other
acquisition, a default
58
in the payment of any principal or Repurchase Price of, sinking fund payment
for, if any, premium, if any, or interest on any Debenture shall have occurred
and be continuing.
The term "Junior Securities" means (i) the Common Stock, (ii) shares of any
other class or classes of capital stock of the Company, (iii) any other non-debt
securities of the Company (whether or not such other securities are convertible
into Junior Securities), and (iv) debt securities of the Company (other than
Senior Indebtedness and the Debentures) as to which, in the instrument creating
or evidencing Senior Indebtedness and the same or pursuant to which the same is
outstanding, it is expressly provided that such debt securities are not Senior
Indebtedness with respect to, or do not rank PARI PASSU with, the Debentures.
CONSOLIDATION, MERGER, AND SALE OF ASSETS
The Company, without the consent of the holders of any of the Debentures,
may consolidate with or merge into any other Person or convey, transfer, sell,
or lease its assets substantially as an entirety to any Person, provided that:
(i) either (a) the Company is the continuing corporation or (b) the corporation
or other entity formed by such consolidation or into which the Company is merged
or the Person to which such assets are conveyed, transferred, sold or leased is
organized under the laws of the United States or any state thereof or the
District of Columbia and expressly assumes all obligations of the Company under
the Debentures and the Indenture; (ii) immediately after and giving effect to
such merger, consolidation, conveyance, transfer, sale, or lease no Event of
Default, and no event which, after notice or lapse of time, would become an
Event of Default, under the Indenture shall have occurred and be continuing;
(iii) upon consummation of such consolidation, merger, conveyance, transfer,
sale, or lease, the Debentures and the Indenture will be valid and enforceable
obligations of the Company or such successor Person, corporation, or other
entity and (iv) the Company has delivered to the Trustee an Officer's
Certificate and an Opinion of Counsel, each stating that such consolidation,
merger, conveyance, transfer, sale, or lease complies with the provisions of the
Indenture (Sections 801 and 802).
MODIFICATION AND WAIVER
Modifications and amendments of the Indenture may be made by the Company and
the Trustee with the consent of the holders of not less than a majority in
aggregate principal amount of the outstanding Debentures; provided, however,
that no such modification or amendment may, without the consent of the holder of
each outstanding Debenture affected thereby, (i) change the Stated Maturity of
the principal of, or any installment of interest on, any Debenture, (ii) reduce
the principal amount of any Debenture or reduce the rate or extend the time of
payment of interest thereon, (iii) change the place or currency of payment of
principal of, or Repurchase Price or interest on, any Debenture, (iv) impair the
right to institute suit for the enforcement of any payment on or with respect to
any Debenture, (v) adversely affect the right to convert Debentures, (vi) reduce
the percentage of the aggregate principal amount of outstanding Debentures, the
consent of the holders of which is necessary to modify or amend the Indenture,
(vii) reduce the percentage of the aggregate principal amount of outstanding
Debentures, the consent of the holders of which is necessary for waiver of
compliance with certain provisions of the Indenture or for waiver of certain
defaults, (viii) modify the provisions of the Indenture with respect to the
subordination of the Debentures in a manner adverse to the holders of the
Debentures, or (ix) modify the provisions of the Indenture with respect to the
right to require the Company to repurchase Debentures in a manner adverse to the
holders of the Debentures (Section 902). The holders of not less than a majority
in principal amount of the Outstanding Debentures may on behalf of the holders
of all Debentures waive any past defaults, except (i) a default in payment of
the principal of, or premium, if any, or interest on, any Debenture when due,
(ii) a failure by the Company to convert any Debentures into Common Stock or
(iii) a default in respect of certain provisions of the Indenture which cannot
be modified or amended without the consent of the holder of each outstanding
Debenture affected thereby.
59
SATISFACTION AND DISCHARGE
The Indenture provides that the Company may discharge its obligations under
the Indenture while Debentures remaining outstanding if (i) all outstanding
Debentures will become due and payable at their scheduled maturity within one
year or (ii) all outstanding Debentures are scheduled for redemption within one
year, and in either case the Company has deposited with the Trustee an amount
sufficient to pay and discharge all outstanding Debentures on the date of their
scheduled maturity or scheduled redemption (Section 401).
GOVERNING LAW
The Indenture and the Debentures will be governed and construed in
accordance with the laws of the State of New York without giving effect to such
state's conflicts of laws principles.
INFORMATION CONCERNING THE TRUSTEE
The Company and its Subsidiaries may maintain deposit accounts and conduct
other banking transactions with the Trustee or its affiliates in the ordinary
course of business, and the Trustee and its affiliates may from time to time in
the future provide the Company and its Subsidiaries with banking and financial
services in the ordinary course of their businesses.
60
DESCRIPTION OF SECURITIES
GENERAL
The Company is authorized by its Certificate of Incorporation to issue an
aggregate of 50,000,000 shares of Common Stock, par value $.01 per share, and
1,000,000 shares of preferred stock, par value $.01 per share. As of October 22,
1997, 1,702,000 shares of Common Stock were outstanding and held of record by 46
stockholders, and no shares of preferred stock were outstanding. Following the
completion of this Offering, an aggregate of 4,183,067 shares of Common Stock
outstanding (4,483,067 shares if the Underwriters' over-allotment option is
exercised in full) and no shares of preferred stock will be outstanding.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held of
record on each matter submitted to a vote of stockholders. There is no
cumulative voting for the election of directors. Subject to the prior rights of
any series of preferred stock which may from time to time be outstanding, if
any, holders of Common Stock are entitled to receive ratably, dividends when,
as, and if declared by the Board of Directors out of funds legally available
therefor and, upon the liquidation, dissolution, or winding up of the Company,
are entitled to share ratably in all assets remaining after payment of
liabilities and payment of accrued dividends and liquidation preferences on the
preferred stock, if any. Holders of Common Stock have no preemptive rights and
have no rights to convert their Common Stock into any other securities. The
outstanding Common Stock is validly authorized and issued, fully-paid, and
nonassessable. In the event the Company were to elect to sell additional shares
of Common Stock following this Offering, investors in this Offering would have
no prior right to purchase such additional shares. As a result, their percentage
equity interest in the Company would be diluted. The shares of Common Stock
offered hereby will be, when issued and paid for, fully paid and not liable for
further call or assessment. Holders of the Common Stock do not have cumulative
voting rights, which means that the holders of more than one half of the
outstanding shares of Common Stock (subject to the rights of the holders of the
preferred stock) can elect all of the Company's directors, if they choose to do
so. In such event, the holders of the remaining shares of Common Stock would not
be able to elect any directors. The Board of Directors is empowered to fill any
vacancies thereon. Except as otherwise required by Delaware law, and subject to
the rights of the holders of preferred stock, all stockholder action is taken by
the vote of a majority of the outstanding shares of Common Stock voting as a
single class present at a meeting of stockholders at which a quorum (consisting
of a majority of the outstanding shares of Common Stock) is present in person or
proxy, or by written consent in lieu of such meeting.
PREFERRED STOCK
Preferred stock may be issued in one or more series and having such rights,
privileges, and limitations, including voting rights, conversion privileges,
and/or redemption rights, as may, from time to time, be determined by the Board
of Directors of the Company. Preferred stock may be issued in the future in
connection with acquisitions, financings, or such other matters as the Board of
Directors deems appropriate. In the event that any such shares of preferred
stock are to be issued, a Certificate of Designation, setting forth the series
of such preferred stock and the rights, privileges, and limitations with respect
thereto, shall be filed with the Secretary of State of the State of Delaware.
The effect of such preferred stock is that the Company's Board of Directors
alone, subject to, federal securities laws and Delaware law, may be able to
authorize the issuance of preferred stock which could have the effect of
delaying, deferring, or preventing a change in control of the Company without
further action by the stockholders, and may adversely affect the voting and
other rights of the holders of the Common Stock. The issuance of preferred stock
with voting and conversion rights may also adversely affect the voting power of
the holders of Common Stock, including the loss of voting control to others.
61
WARRANTS
The following is a brief summary of certain provisions of the Warrants, but
such summary does not purport to be complete and is qualified in all respects by
reference to the actual text of the Warrant Agreement between the Company and
Continental Stock Transfer & Trust Company (the "Warrant Agent"), a copy of
which has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part. See "Additional Information."
EXERCISE PRICE AND TERMS. Each Warrant entitles the registered holder
thereof to purchase, at any time commencing , 1997 [the date of this
Prospectus] until , 2002 [five years after the date of this Prospectus],
one share of Common Stock at a price of $ per share [140% of the initial
public offering price per share of Common Stock], subject to adjustment in
accordance with the anti-dilution and other provisions referred to below. The
holder of any Warrant may exercise such Warrant by surrendering the certificate
representing the Warrant to the Warrant Agent, with the subscription form
thereon properly completed and executed, together with payment of the exercise
price. No fractional shares will be issued upon the exercise of the Warrants.
The exercise price of the Warrants bears no relationship to any objective
criteria of value and should in no event be regarded as an indication of any
future market price of the Securities offered hereby.
ADJUSTMENTS. The exercise price and the number of shares of Common Stock
purchasable upon the exercise of the Warrants are subject to adjustment upon the
occurrence of certain events, including stock dividends, stock splits,
combinations, reclassifications of the Common Stock or, for a period of two
years after the date of this Prospectus, except under certain circumstances, the
sale by the Company of its Common Stock or other securities convertible into
Common Stock at a price below the exercise price of the Warrants. Additionally,
an adjustment would be made in the case of a reclassification or exchange of
Common Stock, consolidation, or merger of the Company with or into another
corporation (other than a consolidation or merger in which the Company is the
surviving corporation) or sale of all or substantially all of the assets of the
Company, in order to enable warrantholders to acquire the kind and number of
shares of stock or other securities or property receivable in such event by a
holder of the number of shares of Common Stock that might otherwise have been
purchased upon the exercise of the Warrant.
REDEMPTION PROVISIONS. Commencing , 1999 [18 months after the date of
this Prospectus], the Warrants are subject to redemption by the Company, in
whole but not in part, at $.10 per Warrant on 30 days prior written notice to
the warrantholders, if the average closing sale price of the Common Stock as
reported on AMEX equals or exceeds $ per share [210% of the initial
public offering price per share of Common Stock] for any 20 trading days within
a period of 30 consecutive trading days ending on the fifth trading day prior to
the date of the notice of redemption. In the event the Company exercises the
right to redeem the Warrants, such Warrants will be exercisable until the close
of business on the business day immediately preceding the date for redemption
fixed in such notice. If any Warrant called for redemption is not exercised by
such time, it will cease to be exercisable and the holder will be entitled only
to the redemption price.
TRANSFER, EXCHANGE AND EXERCISE. The Warrants are in registered form and
may be presented to the Warrant Agent for transfer, exchange, or exercise at any
time on or prior to their expiration date five years from the date of this
Prospectus, at which time the Warrants will become wholly void and of no value.
If a market for the Warrants develops, the holder may sell the Warrants in lieu
of exercising them. There can be no assurance, however, that a market for the
Warrants will develop or continue.
WARRANTHOLDER NOT A STOCKHOLDER. The Warrants do not confer upon holders
thereof any voting, dividend, or other rights as stockholders of the Company.
MODIFICATION OF WARRANTS. The Company and the Warrant Agent may make such
modifications to the Warrants as they deem necessary and desirable that do not
adversely affect the interests of the warrantholders. The Company may, in its
sole discretion, lower the exercise price of the Warrants for a period of not
less than 30 days on not less than thirty 30 days' prior written notice to the
warrantholders and the
62
Representative. Modification of the number of securities purchasable upon the
exercise of any Warrant, the exercise price (other than as provided in the
preceding sentence), and the expiration date with respect to any Warrant
requires the consent of two-thirds of the warrantholders.
The Warrants are not exercisable unless, at the time of the exercise, the
Company has a current prospectus covering the shares of Common Stock issuable
upon exercise of the Warrants, and such shares have been registered, qualified,
or deemed to be exempt under the securities or "blue sky" laws of the state of
residence of the exercising holder of the Warrants. Although the Company has
undertaken to use its best efforts to have all of the shares of Common Stock
issuable upon exercise of the Warrants registered or qualified on or before the
exercise date and to maintain a current prospectus relating thereto until the
expiration of the Warrants, there can be no assurance that it will be able to do
so.
Although the Securities will not be knowingly be sold to purchasers in
jurisdictions in which the Securities are not registered or otherwise qualified
for sale, investors in such jurisdictions may purchase Warrants in the secondary
market or investors may move to jurisdictions in which the shares underlying the
Warrants are not so registered or qualified during the period that the Warrants
are exercisable. In such event, the Company would be unable to issue shares to
those persons desiring to exercise their Warrants, and holders of Warrants would
have no choice but to attempt to sell the Warrants in a jurisdiction where such
sale is permissible or allow them to expire unexercised.
REGISTRATION RIGHTS
The holders of the 58,000 shares of Common Stock issued in connection with
the Bridge Financing are entitled to certain rights with respect to the
registration of such shares under the Securities Act. In the event that the
Company proposes to register any of its securities in a secondary public
offering under the Securities Act, except in connection with this Offering or
pursuant to a registration statement on Forms S-4 or S-8, or similar or
successor forms, such holders are entitled to include such shares of Common
Stock in such registration, subject to the right of the underwriters of any such
offering to limit the number of shares included in such registration. The
Company is required to use its best efforts to effect the registration described
above and is generally required to bear the expenses of all such registrations.
TRANSFER AND WARRANT AGENT
The Company has appointed Continental Stock Transfer & Trust Company, 2
Broadway, New York, New York 10004, as transfer agent for the Common Stock and
as Warrant Agent for the Warrants.
63
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following summary sets forth the principal federal income tax
consequences of holding and disposing of Debentures. This summary is based upon
laws, regulations, rulings and judicial decisions now in effect, all of which
are subject to change, possibly on a retroactive basis. This summary is
presented for informational purposes only and relates only to Debentures or
Common Stock received in exchange therefor that are held as "capital assets"
(generally, property held for investment within the meaning of Section 1221 of
the Internal Revenue Code of 1986, as amended (the "Code"). The summary
discusses certain federal income tax consequences to holders of Debentures
("holders") that are citizens or residents of the United States. It does not
discuss state, local or foreign tax consequences, nor does it discuss tax
consequences to categories of holders that may be subject to special rules, such
as tax exempt organizations, insurance companies, financial institutions and
dealers in stocks and securities. Tax consequences may vary depending on the
particular status of an investor.
This summary does not purport to deal with all aspects of federal income
taxation that may be relevant to an investor's decision to purchase the
Debentures. Each investor should consult his or her own tax advisor as to the
particular tax consequences to such person of purchasing, holding and disposing
of the Debentures, including the applicability and effect of any state, local or
foreign tax laws and any recent proposed changes in applicable income tax laws.
STATED INTEREST
A holder using the accrual method of accounting for tax purposes generally
will be required to include interest in income as such interest accrues, while a
cash basis holder generally will be required to include interest in income when
cash payments are received (or made available for receipt) by such holder.
CONVERSION OF DEBENTURES
Except as otherwise indicated below, no gain or loss will be recognized for
federal income tax purposes upon the conversion of the Debentures into Common
Stock. Cash paid in lieu of fractional Common Stock will be taxed as if the
fractional Common Stock was issued and then redeemed for cash, resulting in
either sale or exchange treatment or dividend treatment. The tax basis of the
Common Stock received upon conversion will be equal to the tax basis of the
Debentures converted reduced by the portion of such basis, if any, allocable to
any fractional share interest exchanged for cash. The holding period of the
Common Stock received upon conversion will include the holding period of the
Debentures converted.
If at any time the Company makes a distribution of property to its
shareholders that would be taxable to such shareholders as a dividend for
federal income tax purposes (e.g. distributions of cash, evidences of
indebtedness or assets of the Company, but generally not stock dividends or
rights to subscribe for Common Stock) and, pursuant to the anti-dilution
provisions of the Indenture, the conversion price of the Debentures is reduced,
such reduction will be deemed to be the payment of a stock distribution to
holders which may be taxable as a dividend. If the Company voluntarily reduces
the conversion price for a period of time, holders may, in certain
circumstances, have to include in gross income an amount equal to the value of
the reduction in the conversion price. Holders could, therefore, have taxable
income as a result of an event pursuant to which they received no cash or
property that could be used to pay the related income tax.
POSSIBLE ORIGINAL ISSUE DISCOUNT
Because the Debentures have an initial interest accrual period that is
longer than each subsequent interest accrual period, it is possible that upon
retirement of the Debentures, the holders thereof would be required to recognize
income equal to the "de minimis OID" amount, within the meaning of Section
64
1.1273-1 (d)(6) of the regulations under the Code. Assuming a holder holds the
Debenture as a capital asset, any such income required to be recognized
thereunder will be characterized as capital gain.
DISPOSITION OF DEBENTURES OR SHARES OF COMMON STOCK
In general, the holder of a Debenture or the Common Stock into which it is
converted will recognize gain or loss upon the sale, redemption, retirement or
other disposition of the Debenture or Common Stock in an amount equal to the
difference between the amount of cash and the fair market value of property
received (except to the extent attributable to the payment of accrued interest)
and the holder's adjusted tax basis in the Debenture or Common Stock. The
holder's tax basis in a Debenture generally will be such holder's cost,
increased by the amount of accrued market discount a holder elects to include in
income with respect to the Debenture (discussed below), and reduced by (i) any
principal payments received by such holder and (ii) the amount of any
amortizable bond premium the holder elects to amortize with respect to the
Debenture. If a holder holds a Debenture as a capital asset, such gain or loss
will be a capital gain or loss except to the extent of any accrued market
discount (see "Market Discount on Resale") if the Debenture has been held for
the then requisite holding period at the time of the sale, exchange, redemption
or retirement.
MARKET DISCOUNT ON RESALE
The tax consequences of the sale of a Debenture by a holder may be affected
by the market discount provisions of the Code. Market discount is defined as the
excess of a debt instrument's stated redemption price (or its revised issue
price in the case of a debt instrument issued with original issue discount) at
maturity over the holder's tax basis in such debt instrument immediately after
its acquisition. If the market discount is less than 25% of the stated
redemption price (or the revised issue price, as the case may be) at maturity
multiplied by the number of complete years to maturity (after the holder
acquired the debt instrument), then the market discount will be considered to be
zero.
If a holder purchases a Debenture at a market discount and thereafter
recognizes gain on its disposition (or the disposition of the Common Stock into
which such Debenture is converted) such gain is treated as ordinary interest
income to the extent it does not exceed the accrued market discount on such
Debenture. In addition, recognition of gain to the extent of accrued market
discount may be required in the case of some dispositions which would otherwise
be nonrecognition transactions. Unless a holder elects to use a constant rate
method, accrued market discount equals a Debenture market discount multiplied by
a fraction, the numerator of which equals the number of days the holder holds
such Debenture and the denominator of which equals the total number of days
following the date the holder acquires such Debenture up to and including the
date of its maturity. If a holder of a Debenture acquired at a market discount
receives a partial principal payment prior to maturity, that payment is treated
as ordinary income to the extent of the accrued market discount on the Debenture
at the time payment is received. However, when the holder disposes of the
Debenture, the accrued market discount is reduced by the amount of the partial
principal payment previously included in income.
A holder that acquires a Debenture at a market discount may be required to
defer a portion of any interest expense that may otherwise be deductible on any
indebtedness incurred to purchase such Debenture until the holder disposes of
such Debenture in a taxable transaction. A holder of Debentures acquired at a
market discount may elect to include the market discount in income as the
discount accrues, either on a ratable basis, or, if elected, on a constant
interest rate basis. Once made, the current inclusion election applies to all
market discount obligations acquired on or after the first day of the first
taxable year to which the election applies and may not be revoked without the
consent of the Internal Revenue Service (the "IRS"). If a holder of a Debenture
elects to include the market discount in income as it accrues, the foregoing
rules with respect to the recognition of ordinary income on sales and certain
other dispositions and with respect to the deferral of interest deductions on
related indebtedness, would not apply.
65
BOND PREMIUM
If, as a result of a purchase at a premium, a holder's adjusted tax basis in
a Debenture exceeds the Debenture's stated redemption price at maturity, such
excess may constitute amortizable bond premium. If the Debenture is a capital
asset in the hands of the holder, Section 171 of the Code allows the holder to
elect to amortize any such bond premium under the constant interest rate method
as an offset against interest income earned on the Debenture. The amount of
amortizable bond premium equals the excess of the holder's basis (for
determining loss on sale or exchange) in the Debenture over the amount payable
at maturity or, if it results in a smaller amortizable bond premium, an earlier
call date. If a holder is required to amortize bond premium by reference to such
a call date and the Debenture is not in fact called on such date, the remaining
unamortized premium must be amortized to a succeeding call date or to maturity.
A holder's tax basis in a Debenture must be reduced by the amount of
amortized bond premium. An election to amortize bond premium applies to all
bonds (other than tax-exempt bonds) held by the holder at the beginning of the
first taxable year to which the election applies or thereafter acquired by the
holder and is irrevocable without the consent of the IRS.
BACKUP WITHHOLDING
Under the "backup withholding" provisions of federal income tax law, the
Company, its agent, a broker or any paying agent, as the case may be, will be
required to withhold a tax equal to 31% of any payment of (i) principal,
premium, if any, and interest on the Debentures, (ii) proceeds from the sale or
redemption of the Debentures, (iii) dividends on the Common Stock and (iv)
proceeds from the sale or redemption of the Common Stock, unless the holder (a)
is exempt from backup withholding and, when required, demonstrates this fact to
the payor or (b) provides a taxpayer identification number to the payor,
certifies as to no loss of exemption from backup withholding and otherwise
complies with applicable requirements of the backup withholding rules. Certain
holders (including corporations, tax-exempt organizations, individual retirement
accounts and, to a limited extent, nonresident aliens) are not subject to the
backup withholding importing requirements. A nonresident alien must submit a
statement, signed under penalties of perjury, attesting to that individual's
exemption from backup withholding. A holder of Debentures or Common Stock that
is otherwise required to but does not provide the Company with a correct
taxpayer identification number may be subject to penalties imposed by the Code.
Any amounts paid as backup withholding with respect to the Debentures or Common
Stock will be credited to the income tax liability of the person receiving the
payment from which such amount was withheld. Holders of Debentures and Common
Stock should consult their tax advisors as to their qualification for exemption
from backup withholding and the procedure for obtaining such an exemption.
66
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of this Offering, and giving effect to the Acquisitions,
the Company will have 4,183,067 shares of Common Stock outstanding (4,483,067
shares of Common Stock outstanding if the Underwriters' over-allotment option is
exercised in full). Of these shares, the 2,000,000 shares of Common Stock
offered hereby (2,300,000 shares if the Underwriters' over-allotment option is
exercised in full), will be freely tradeable without restriction under the
Securities Act unless purchased by affiliates as that term is defined in Rule
144 under the Securities Act.
The remaining 2,183,067 shares of Common Stock are "restricted securities"
within the meaning of Rule 144 of the Securities Act and, if held for at least
one year, would be eligible for sale in the public market in reliance upon, and
in accordance with, the provisions of Rule 144 following the expiration of such
one-year period. In general, under Rule 144 as currently in effect, a person or
persons whose shares are aggregated, including a person who may be deemed to be
an "affiliate" of the Company as that term is defined under the Securities Act,
would be entitled to sell within any three-month period a number of shares
beneficially owned for at least one year that does not exceed the greater of (i)
1% of the then outstanding shares of Common Stock, or (ii) the average weekly
trading volume in the Common Stock during the four calendar weeks preceding such
sale. Sales under Rule 144 are also subject to certain requirements as to the
manner of sale, notice, and the availability of current public information about
the Company. However, a person who is not deemed to have been an affiliate of
the Company during the 90 days preceding a sale by such person and who has
beneficially owned such shares of Common Stock for at least two years may sell
such shares without regard to the volume, manner of sale, or notice requirements
of Rule 144. All officers and directors of the Company, current stockholders,
and option holders under the Plan have agreed not, directly or indirectly, to
offer, agree to offer to sell, transfer, pledge, assign, encumber, grant an
option for the purchase or sale of, hypothecate, or otherwise dispose of any
securities of the Company for a period of 18 months from the date of this
Prospectus without the Representative's prior written consent. After such
18-month period, all 2,183,067 shares may be sold in accordance with Rule 144.
Prior to this offering, there has been no public market for the Company's
securities. Following this offering, the Company cannot predict the effect, if
any, that sales of shares of Common Stock and Warrants pursuant to Rule 144 or
otherwise, or the availability of such shares for sale, will have on the market
price prevailing from time to time. Nevertheless, sales by the current
stockholders of a substantial number of shares of Common Stock and Warrants in
the public market could materially adversely affect prevailing market prices for
the Common Stock and Warrants. In addition, the availability for sale of a
substantial number of shares of Common Stock Warrants acquired through the
exercise of the Representative's Warrants or the outstanding options under the
Plan could materially adversely affect prevailing market prices for such
securities.
67
UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom Nolan Securities
Corp., SouthWall Capital Corp., and Dirks & Company, Inc. are acting as
representatives (in such capacity, the "Representatives"), have severally
agreed, subject to the terms and conditions of the Underwriting Agreement (the
"Underwriting Agreement") to purchase from the Company, and the Company has
agreed to sell to the Underwriters on a firm commitment basis, the respective
amount of Debentures, and number of shares of Common Stock, and the number of
Warrants set forth opposite their names:
AMOUNT OF NUMBER OF NUMBER OF
UNDERWRITERS DEBENTURES SHARES WARRANTS
- ----------------------------------------------------- ------------- ---------- ----------
Nolan Securities Corp................................
SouthWall Capital Corp...............................
Dirks & Company, Inc.................................
------------- ---------- ----------
Total.......................................... $ 25,000,000 2,000,000 2,000,000
------------- ---------- ----------
------------- ---------- ----------
The Underwriters are committed to purchase all the Securities offered
hereby, if any of such Securities are purchased. The Underwriting Agreement
provides that the obligations of the several Underwriters are subject to
conditions precedent specified therein.
The Company has been advised by the Representatives that the Underwriters
propose initially to offer the Securities to the public at the initial public
offering prices set forth on the cover page of this Prospectus and to such
dealers at such prices less concessions not in excess of % of the principal
amount of Debentures, $ per share of Common Stock, and $ per
Warrant. Such dealers may reallow a concession not in excess of % of the
Debentures, $ per share of Common Stock, and $ per Warrant to
certain other dealers. After the commencement of the Offering, the public
offering prices, concession, and reallowance may be changed by the
Representatives.
The Representatives have informed the Company that they do not expect sales
to discretionary accounts by the Underwriters to exceed five percent of the
Securities offered hereby.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments that the Underwriters may be required to make. The Company has also
agreed to pay to the Representatives a non-accountable expense allowance equal
to 2% of the gross proceeds derived from the sale of the Securities
underwritten, of which $25,000 has been paid to date.
The Company has granted to the Underwriters an over-allotment option,
exercisable during the 45 day period from the date of this Prospectus, to
purchase up to an aggregate of $3,750,000 principal amount of Debentures, an
additional 300,000 shares of Common Stock, and/or 300,000 Warrants at the
initial offering price per Debenture, share of Common Stock, and Warrant,
respectively, offered hereby, less underwriting discounts and the
non-accountable expense allowance. Such option may be exercised only for the
purpose of covering over-allotments, if any, incurred in the sale of the
Securities offered hereby. To the extent such option is exercised in whole or in
part, each Underwriter will have a firm commitment, subject to certain
conditions, to purchase the amount of additional Securities proportionate to its
initial commitment.
The Company has agreed, at the request of the Representatives, that for five
years after the date of this Prospectus, it will use its best efforts to cause
one individual designated by the Representatives to be elected to the Company's
Board of Directors.
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In connection with this Offering, the Company has agreed to sell to the
Representatives, for nominal consideration, warrants to purchase from the
Company up to an aggregate of $2,500,000 principal amount of Debentures, up to
200,000 shares of Common Stock, and/or up to 200,000 Warrants (the
"Representatives' Warrants"). The Representatives' Warrants are initially
exercisable at a price of 100% of the principal amount of Debentures, $
per share of Common Stock [140% of the initial public offering price per share
of Common Stock], and $ per Warrant [140% of the initial public offering
price per Warrant] for a period of four years, commencing at the beginning of
the second year after their issuance and sale and are restricted from sale,
transfer, assignment, or hypothecation for a period of 12 months from the date
hereof, except to officers of the Representatives. The Warrants obtained upon
exercise of the Representatives' Warrants will be exercisable for a period of
four years commencing at the beginning of the second year after the effective
date of this Offering, at an exercise price of $____ per share [140% of the
exercise price of the Warrants]. The Representatives' Warrants provide for
adjustment in the number of shares of Common Stock and Warrants issuable upon
the exercise thereof and in the exercise price of the Representatives' Warrants
as a result of certain events, including subdivisions and combinations of the
Common Stock. The Representatives' Warrants grant to the holders thereof certain
rights of registration for the securities issuable upon exercise thereof.
All officers and directors of the Company, all holders of the issued and
outstanding Common Stock, and all holders of options, warrants, or other
securities convertible exercisable, or exchangeable for the issued or
outstanding Common Stock have agreed not to, directly or indirectly, issue,
offer, agree or offer to sell, sell, transfer, assign, encumber, grant an option
for the purchase or sale of, pledge, hypothecate, or otherwise dispose of any
beneficial interest in such securities for a period of 18 months following the
effective date of the Registration Statement without the prior written consent
of the Company and the Representatives (the "Lock-up Agreements"). An
appropriate legend shall be marked on the face of the certificates representing
all such certificates.
In connection with this Offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain, or otherwise affect the market prices of the Securities.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M, pursuant to which such persons may bid for
purchase of the Securities for the purpose of stabilizing their respective
market prices. The Underwriters also may create a short position for the account
of the Underwriters by selling more Securities in connection with the Offering
than they are committed to purchase from the Company, and in such case, may
purchase Securities in the open market following completion of the Offering, to
cover all or a portion of such short position. The Underwriters may also cover
all or a portion of such short position, up to an aggregate of $3,750,000
principal amount of Debentures, 300,000 shares of Common Stock, and/or 300,000
Warrants, by exercising the Underwriters' over-allotment option referred to
above. In addition, the Representatives may impose "penalty bids" under
contractual arrangements with the Underwriters whereby it may reclaim from an
Underwriter (or dealer participating in the Offering) for the account of other
Underwriters, the selling concession with respect to the Securities which are
distributed in the Offering but subsequently purchased for the account of the
Underwriters in the open market. None of the transactions described in this
paragraph is required , and, if they are undertaken, they may be discontinued at
any time.
Nolan Securities Corp. has been in business since February 1991 and has
participated in two public offerings as a co-manager and two public offerings as
a member of the underwriting syndicate. Dirks & Company, Inc. commenced
operations in July 1997 and has not co-managed or participated as an underwriter
in any public offering of securities. SouthWall Capital Corp. commenced
operations as an underwriter in May 1996 and has co-managed one public offering
and participated as an underwriter in nine public offerings to date.
Accordingly, none of the Representatives have extensive experience as a co-
manager or underwriter of public offerings of securities. In addition, each of
the Representatives are relatively small firms and no assurance can be given
that any of the Representatives will be able to
69
participate as a market maker in any of the Securities. No assuance can be given
that any broker-dealer will make a market in any of the Securities.
Prior to this Offering, there has been no public market for any of the
Securities. Consequently, the initial public offering prices of the Securities
has been determined by negotiation between the Company and the Representatives
and does not necessarily bear any relationship to the Company's asset value, net
worth, or other established criteria of value. The factors considered in these
negotiations, in addition to prevailing market conditions, included the history
of, and prospects for, the industry in which the Company competes, an assessment
of the Company's management, the prospects for the Company, its capital
structure, the market for initial public offerings, and certain other factors as
were deemed relevant.
The foregoing is a summary of the principal terms of the agreements
described above and does not purport to be complete. Reference is made to a copy
of each such agreement, which are filed as exhibits to the Registration
Statement. See "Additional Information."
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Brock
Fensterstock Silverstein McAuliffe & Wade LLC, New York, New York. Orrick,
Herrington & Sutcliffe, LLP, New York, New York, has acted as counsel to the
Underwriters in connection with this Offering.
EXPERTS
The financial statements of the Company, the Initial Affiliated Practices,
and PMI as at December 31, 1996, and for the period then ended have been audited
by Feldman Radin & Co., P.C., independent certified public accountants, as
indicated in their reports with respect thereto, and are included herein in
reliance upon such reports upon the authority of said firm as experts in
accounting and auditing. Certain health care-related legal matters will be
passed upon for the Company by Kalogredis, Tsoules and Sweeney Ltd., Wayne,
Pennsylvania.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), 450 Fifth Street, N.W., Washington D.C. 20549, a registration
statement on Form S-1 (the "Registration Statement"), including amendments
thereto, under the Securities Act with respect to the securities offered hereby.
This Prospectus does not contain all the information set forth in the
Registration Statement and the exhibits and schedules filed therewith, as
permitted by the rules and regulations of the Commission. For further
information with respect to the Company and the Offering, reference is hereby
made to the Registration Statement and to the exhibits and schedules filed
therewith. Statements contained in this Prospectus as to the contents of any
contract or other document which has been filed as an exhibit to the
Registration Statement are qualified in their entirety by reference to such
exhibits for a complete statement of their terms and conditions. The
Registration Statement and the exhibits and schedules thereto may be inspected
without charge at the offices of the Commission and copies of all or any part
thereof may be obtained from the Commission's principal office at 450 Fifth
Street, N.W., Washington D.C. 20549 or at certain of the regional offices of the
Commission located at Seven World Trade Center, 13th Floor, New York, New York
10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, upon
payment of the fees prescribed by the Commission. Electronic registration
statements filed through the Electronic Data Gathering, Analysis, and Retrieval
system are publicly available through the Commission's Web site
(http://www.sec.gov). Following the consummation of this Offering and the
listing of the Debentures and the Common Stock on the AMEX, reports and other
information concerning the Company may be inspected at the offices of the AMEX,
86 Trinity Place, New York, New York 10006.
70
INDEX TO FINANCIAL STATEMENTS
PAGE
---------
Unaudited Pro Forma Financial Statements of
INTEGRATED PHYSICIAN SYSTEMS, INC.
Basis of Presentation.................................................................................. F-4
Unaudited Pro Forma Balance Sheet...................................................................... F-6
Unaudited Pro Forma Statement of Operations............................................................ F-7
Notes to Unaudited Pro Forma Financial Statements...................................................... F-10
INTEGRATED PHYSICIAN SYSTEMS, INC.
Report of Independent Public Accountants............................................................... F-12
Balance Sheets......................................................................................... F-13
Statements of Operations............................................................................... F-14
Statements of Changes in Stockholders' Equity (Deficit)................................................ F-15
Statements of Cash Flows............................................................................... F-16
Notes to Financial Statements.......................................................................... F-17
RELIANCE HEALTHCARE GROUP
Report of Independent Public Accountants............................................................... F-20
Combined Balance Sheets................................................................................ F-21
Combined Statements of Operations...................................................................... F-22
Combined Statements of Changes in Stockholders' Equity (Deficit)....................................... F-23
Combined Statements of Cash Flows...................................................................... F-24
Notes to Financial Statements.......................................................................... F-25
MEDICAL BILLING AND MANAGEMENT SERVICES, INC. AND SUBSIDIARY
Report of Independent Public Accountants............................................................... F-31
Balance Sheets......................................................................................... F-32
Statements of Operations............................................................................... F-33
Statements of Changes in Stockholder's Equity (Deficit)................................................ F-34
Statements of Cash Flows............................................................................... F-35
Notes to Financial Statements.......................................................................... F-36
BRANCHBURG EYE PHYSICIANS, P.A.
Report of Independent Public Accountants............................................................... F-40
Balance Sheets......................................................................................... F-41
Statements of Operations............................................................................... F-42
Statements of Changes in Stockholder's Equity (Deficit)................................................ F-43
Statements of Cash Flows............................................................................... F-44
Notes to Financial Statements.......................................................................... F-45
FELIX SALERNO, M.D. AND RICHARD WEEDER, M.D.
Report of Independent Public Accountants............................................................... F-49
Balance Sheets......................................................................................... F-50
Statements of Operations............................................................................... F-51
Combined Statements of Proprietors' Capital............................................................ F-52
Statements of Cash Flows............................................................................... F-53
Notes to Financial Statements.......................................................................... F-54
F-1
PAGE
---------
FLEMINGTON MEDICAL GROUP, P.A.
Report of Independent Public Accountants............................................................... F-56
Balance Sheets......................................................................................... F-57
Statements of Operations............................................................................... F-58
Statements of Changes in Stockholder's Equity.......................................................... F-59
Statements of Cash Flows............................................................................... F-60
Notes to Financial Statements.......................................................................... F-61
HUNTERDON OPTHALMOLOGISTS, P.A.
Report of Independent Public Accountants............................................................... F-64
Balance Sheets......................................................................................... F-65
Statements of Operations............................................................................... F-66
Statements of Changes in Stockholders' Equity.......................................................... F-67
Statements of Cash Flows............................................................................... F-68
Notes to Financial Statements.......................................................................... F-69
JOEL FUHRMAN M.D., P.C. D/B/A AMWELL HEALTH CENTER
Report of Independent Public Accountants............................................................... F-72
Balance Sheets......................................................................................... F-73
Statements of Operations............................................................................... F-74
Statements of Changes in Stockholder's Equity.......................................................... F-75
Statements of Cash Flows............................................................................... F-76
Notes to Financial Statements.......................................................................... F-77
KENNETH G. STERN, M.D., P.A.
Report of Independent Public Accountants............................................................... F-80
Balance Sheets......................................................................................... F-81
Statements of Operations............................................................................... F-82
Statements of Changes in Stockholder's Equity.......................................................... F-83
Statements of Cash Flows............................................................................... F-84
Notes to Financial Statements.......................................................................... F-85
ALEXANDER KUDRYK, M.D.
Report of Independent Public Accountants............................................................... F-88
Balance Sheets......................................................................................... F-89
Statements of Operations............................................................................... F-90
Statements of Proprietor's Capital..................................................................... F-91
Statements of Cash Flows............................................................................... F-92
Notes to Financial Statements.......................................................................... F-93
BOUND BROOK PEDIATRIC ASSOCIATION, P.A.
Report of Independent Public Accountants............................................................... F-96
Balance Sheets......................................................................................... F-97
Statements of Operations............................................................................... F-98
Statements of Changes in Stockholder's Equity.......................................................... F-99
Statements of Cash Flows............................................................................... F-100
Notes to Financial Statements.......................................................................... F-101
F-2
PAGE
---------
AUDREY HINDS-MCDONALD, M.D.
Report of Independent Public Accountants............................................................... F-104
Balance Sheets......................................................................................... F-105
Statements of Operations............................................................................... F-106
Statements of Proprietor's Capital..................................................................... F-107
Statements of Cash Flows............................................................................... F-108
Notes to Financial Statements.......................................................................... F-109
JOHN E. DURST, M.D.
Report of Independent Public Accountants............................................................... F-112
Balance Sheets......................................................................................... F-113
Statements of Operations............................................................................... F-114
Statements of Proprietor's Capital..................................................................... F-115
Statements of Cash Flows............................................................................... F-116
Notes to Financial Statements.......................................................................... F-117
PROFESSIONAL MEDICAL IMAGES, LTD.
Report of Independent Public Accountants............................................................... F-119
Balance Sheets......................................................................................... F-120
Statements of Operations............................................................................... F-121
Statements of Changes in Stockholders' Equity (Deficit)................................................ F-122
Statements of Cash Flows............................................................................... F-123
Notes to Financial Statements.......................................................................... F-124
F-3
INTEGRATED PHYSICIAN SYSTEMS, INC.
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The following pro forma financial statements include the unaudited consolidated
balance sheet of Integrated Physician Systems, Inc. ("IPS" or the "Company"), as
of June 30, 1997, the audited statements of operations for the year ended
December 31, 1996, and the unaudited statements of operations for the six months
ended June 30, 1996 and 1997.
The following unaudited pro forma financial statements (i) give effect to
the acquisitions of the individual Initial Affiliated Practices, pursuant to
which the Company will acquire certain assets and assume certain liabilities in
exchange for 481,067 shares of the Company's Common Stock, cash and notes
payable (ii) reflect the effects of the provisions of the Practice Management
Service Agreements between the Company and each of the Initial Affiliated
Practices (except for the medical billing company) and (iii) give effect to the
consummation of the IPO. For purposes of developing the unaudited pro forma
balance sheet the value of the Company's Common Stock is based upon the assumed
initial public offering price of $7.50 per share. The estimated aggregate
amounts to be allocated to the assets acquired and liabilities assumed consist
of:
Common stock................................................... $3,608,000
Cash........................................................... 7,937,000
Notes payable.................................................. 114,000
----------
$11,659,000
----------
----------
The allocation is based upon preliminary estimates in accordance with
generally accepted accounting principles. The actual allocation will be based on
the estimated fair market value of the tangible and intangible assets and
liabilities of such Initial Affiliated Practices as of the date of the
Acquisition. For purposes of the pro forma financial statements, such allocation
has been estimated as follows:
Current assets................................................. $ 146,000
Intangible assets.............................................. 9,980,000
Property, equipment and improvements........................... 2,000,000
Liabilities assumed............................................ (467,000)
----------
$11,659,000
----------
----------
The unaudited pro forma financial statements have been prepared by the
Company based upon the historical financial statements of Integrated Physician
Systems, Inc. and the individual Initial Affiliated Practices included in this
Prospectus and certain preliminary estimates and assumptions deemed appropriate
by management of the Company. The pro forma balance sheet as of June 30, 1997
gives effect to the Acquisitions and the consummation of the IPO as if such
transactions had occurred on June 30, 1997 and reflects certain transactions
occurring subsequent to June 30, 1997. The pro forma statements of operations
for the year ended December 31, 1996 and six months ended June 30, 1996 and 1997
assumes the Acquisitions and the IPO were completed on January 1, 1996. These
pro forma financial statements may not be indicative of actual results as if the
transactions had occurred on the dates indicated or which may be realized in the
future. Neither expected benefits nor cost efficiencies anticipated by the
Company following consummation of the Acquisitions have been reflected in such
pro forma financial statements: however, cost reductions as contractually agreed
per the Practice Management Service Agreements have been reflected in the pro
forma financial statements. The pro forma general and administrative expenses do
not include the anticipated incremental costs of managing such additional
Affiliated Practices as the
F-4
INTEGRATED PHYSICIAN SYSTEMS, INC.
UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
BASIS OF PRESENTATION
related management fees are not included in the pro forma revenues. Such costs
may also be substantial and may vary according to the operations of each new
Initial Affiliated Practice.
The pro forma financial statements should be read in conjunction with the
historical financial statements of Integrated Physicians Systems, Inc. and the
individual Initial Affiliated Practices, including the related notes thereto,
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" that appear elsewhere in this Prospectus.
F-5
INTEGRATED PHYSICIAN SYSTEMS, INC.
UNAUDITED PRO FORMA BALANCE SHEET
JUNE 30, 1997
-----------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA
----------- ------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................................... $ 35,000 $ 12,850,000(B) $ 27,378,000
22,625,000(B)
181,000(B)
63,000(C)
(7,937,000 (C)
(435,000 (D)
125,000(C)
(129,000 (A)
Accounts receivable, net.......................................... 67,000 83,000(C) 150,000
----------- ------------- -------------
Total current assets.......................................... 102,000 27,426,000 27,528,000
----------- ------------- -------------
PROPERTY AND EQUIPMENT, net......................................... 6,000 2,000,000 2,006,000
----------- ------------- -------------
OTHER NONCURRENT ASSETS
Organization costs, net........................................... 6,000 -- 6,000
Discount on notes................................................. 113,000 (113,000 (E) --
Deferred registration costs....................................... 393,000 570,000(B) --
(963,000 (B)
Goodwill.......................................................... 38,000 9,130,000(C) 9,168,000
Deferred financing costs.......................................... -- 2,375,000(B) 2,375,000
Other intangibles................................................. -- 850,000(C) 850,000
----------- ------------- -------------
550,000 11,849,000 12,399,000
----------- ------------- -------------
$ 658,000 $ 41,275,000 $ 41,933,000
----------- ------------- -------------
----------- ------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities.......................... $ 105,000 $ 9,000(C) $ 114,000
Due to related party.............................................. 129,000 (129,000 (A) --
Notes payables and current portion of long-term debt.............. -- 128,000(C) 128,000
Current portion of obligations under capital lease................ -- 37,000(C) 37,000
Senior notes...................................................... 310,000 125,000(D) --
(435,000 (D)
----------- ------------- -------------
Total current liabilities....................................... 544,000 (265,000) 279,000
----------- ------------- -------------
LONG-TERM DEBT:
Notes payable, net of current portion............................. -- 273,000(C) 387,000
114,000(C)
Obligations under capital lease, net of current portion........... -- 20,000(C) 20,000
% Convertible subordinated debentures............................ -- 25,000,000(B) 25,000,000
----------- ------------- -------------
Total long-term debt.......................................... -- 25,407,000 25,407,000
----------- ------------- -------------
Total liabilities........................................... 544,000 25,142,000 25,686,000
----------- ------------- -------------
STOCKHOLDERS' EQUITY
Common stock...................................................... 30,000 20,000(B) 42,000
5,000(C)
(13,000 (F)
Additional paid-in capital........................................ 245,000 12,618,000(B) 16,479,000
3,603,000(C)
13,000(F)
Accumulated deficit............................................... (161,000) (113,000 (E) (274,000)
----------- ------------- -------------
Total stockholders' equity.................................... 114,000 16,133,000 16,247,000
----------- ------------- -------------
$ 658,000 $ 41,275,000 $ 41,933,000
----------- ------------- -------------
----------- ------------- -------------
See notes to pro forma financial statements.
F-6
INTEGRATED PHYSICIAN SYSTEMS, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997
------------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ------------ -----------
REVENUE:
Medical service revenue.......................................................... $ -- $ 7,962,000(AA) $ 7,962,000
Management fees.................................................................. 111,000 -- 111,000
Medical billing and service fees................................................. -- 1,101,000(AA) 1,101,000
Other revenue.................................................................... -- 63,000(AA) 63,000
---------- ------------ -----------
Total revenue................................................................ 111,000 9,126,000 9,237,000
---------- ------------ -----------
COSTS AND EXPENSES:
Salaries and wages............................................................... 51,000 5,133,000(BB) 5,184,000
Medical supplies and expenses.................................................... -- 239,000(CC) 239,000
General and administrative expenses.............................................. 78,000 3,312,000(DD) 3,390,000
Depreciation and amortization.................................................... 1,000 619,000(EE) 620,000
Interest expense................................................................. 135,000 875,000(FF) 1,010,000
---------- ------------ -----------
Total costs and expenses....................................................... 265,000 10,178,000 10,443,000
---------- ------------ -----------
LOSS BEFORE INCOME TAXES........................................................... (154,000) (1,052,000) (1,206,000)
PROVISION FOR INCOME TAXES......................................................... -- -- (GG) --
---------- ------------ -----------
NET LOSS........................................................................... $ (154,000) $ (1,052,000) $(1,206,000)
---------- ------------ -----------
---------- ------------ -----------
LOSS PER SHARE..................................................................... (HH) $ (0.29)
-----------
-----------
See notes to pro forma financial statements.
F-7
INTEGRATED PHYSICIAN SYSTEMS, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
-----------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA
-------- ------------ ------------
REVENUE:
Medical service revenue................................................ $ -- $ 17,130,000(AA) $ 17,130,000
Medical billing and service fees....................................... -- 1,398,000(AA) 1,398,000
Other revenue.......................................................... -- 38,000(AA) 38,000
-------- ------------ ------------
Total revenue...................................................... -- 18,566,000 18,566,000
-------- ------------ ------------
COSTS AND EXPENSES:
Salaries and wages..................................................... -- 13,294,000(BB) 13,294,000
Medical supplies and expenses.......................................... -- 426,000(CC) 426,000
General and administrative expenses.................................... 4,000 4,170,000(DD) 4,174,000
Depreciation and amortization.......................................... 2,000 1,237,000(EE) 1,239,000
Interest expense....................................................... -- 2,020,000(FF) 2,020,000
-------- ------------ ------------
Total costs and expenses............................................. 6,000 21,147,000 21,153,000
-------- ------------ ------------
LOSS BEFORE INCOME TAXES................................................. (6,000) (2,581,000) (2,587,000)
PROVISION FOR INCOME TAXES............................................... -- -- (GG) --
-------- ------------ ------------
NET LOSS................................................................. $ (6,000) $ (2,581,000) $ (2,587,000)
-------- ------------ ------------
-------- ------------ ------------
LOSS PER SHARE........................................................... (HH) $ (0.62)
------------
------------
See notes to pro forma financial statements.
F-8
INTEGRATED PHYSICIAN SYSTEMS INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996
-------------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ------------ ------------
REVENUE:
Medical service revenue.......................................................... $ -- $ 8,754,000(AA) $ 8,754,000
Medical billing and service fees................................................. -- 576,000(AA) 576,000
Other revenue.................................................................... -- 48,000(AA) 48,000
---------- ------------ ------------
Total revenue.................................................................. -- 9,378,000 9,378,000
---------- ------------ ------------
COSTS AND EXPENSES:
Salaries and wages............................................................... -- 6,624,000(BB) 6,624,000
Medical supplies and expenses.................................................... -- 205,000(CC) 205,000
General and administrative expenses.............................................. 2,000 2,606,000(DD) 2,608,000
Depreciation and amortization.................................................... 1,000 619,000(EE) 620,000
Interest expense................................................................. -- 1,010,000(FF) 1,010,000
---------- ------------ ------------
Total costs and expenses....................................................... 3,000 11,064,000 11,067,000
---------- ------------ ------------
LOSS BEFORE INCOME TAXES........................................................... (3,000) (1,686,000) (1,689,000)
PROVISION FOR INCOME TAXES......................................................... -- -- (GG) --
---------- ------------ ------------
---------- ------------ ------------
NET LOSS........................................................................... $ (3,000) $ (1,686,000) $ (1,689,000)
---------- ------------ ------------
---------- ------------
LOSS PER SHARE..................................................................... (HH) $ (0.41)
------------
------------
See notes to pro forma financial statements.
F-9
INTEGRATED PHYSICIANS SYSTEMS, INC.
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
UNAUDITED PRO FORMA BALANCE SHEET ADJUSTMENTS
(A) Reflects the repayment of monies borrowed for the purposes of funding the
initial operations of the Company from Wellness Concepts, Inc., a related
party, in the amount of $129,000 from the net proceeds of the IPO.
(B) Reflects the issuance of 2,000,000 shares of common stock by the Company
at an assumed initial public offering price of $7.50 per share, and the
issuance of 2,000,000 warrants to purchase a share of common stock, at
an assumed initial public offering price of $0.10 per warrant and the
issuance of the aggregate principal amount of $25,000,000 of the %
convertible subordinated debentures, less underwriters' discount,
offering expenses, and non-accountable expense allowance and other
expenses of the IPO.
(C) Reflects the purchase of the Initial Affiliated Practices which includes
(a) the issuance of 481,067 shares of common stock of the Company at a
price of $7.50 per share (b) the issuance of a $114,000 note by the
Company and (c) the assumption of certain liabilities of the Initial
Affiliated Practices.
Cash............................................................. $ 63,000
Accounts receivable.............................................. 83,000
Property and equipment........................................... 2,000,000
Other intangibles................................................ 850,000
Goodwill......................................................... 9,130,000
Accounts payable................................................. (9,000)
Issued long-term notes payable................................... (114,000)
Short term notes payable and current portion of long-term debt... (128,000)
Current portion of obligations under capital lease............... (37,000)
Long-term debt, net of current portion........................... (273,000)
Long-term obligations under capital lease, net of current
portion........................................................ (20,000)
Common stock issued.............................................. (5,000)
Additional paid-in-capital....................................... (3,603,000)
---------
Net cash payment made to Initial Affiliated Practices............ $7,937,000
---------
---------
(D) Reflects the issuance after June 30, 1997 of an aggregate principal
amount of $125,000 Senior Notes as part of the Bridge Financing and the
repayment of the Senior Notes in the aggregate principal amount of
$435,000 from the net proceeds of the IPO.
(E) Represents the write off of the remaining unamortized portion of the
discount on the Senior notes.
(F) Represents the contribution on October 21, 1997 to the Company by
certain stockholders of 1,356,000 shares of Common Stock.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS ADJUSTMENTS
(AA) To record the accounts receivables of the Initial Affiliates Practices
assigned to the Company pursuant to the terms of the practice management
service agreements.
F-10
INTEGRATED PHYSICIANS SYSTEMS, INC.
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
(BB) To record the physician and management/owner compensation to agree with
the contracted physician salaries, management salaries and incentive
compensation as contained in each of the physician and management
contracts with the Company and the Affiliated PCs. These adjustments
include compensation to three officers of the Company pursuant to their
employment agreements in the amount of $275,000 for the six month periods
ending June 30, 1996 and June 30, 1997, and $550,000 for the year ended
December 31, 1996.
(CC) To record the medical supplies expenses paid by the Company pursuant to
the terms of the practice management service agreements.
(DD) To record the general and administrative expenses paid by the Company
pursuant to the terms of the practice management service agreements.
(EE) To record the depreciation and amortization expenses associated with the
assets acquired from the Initial Affiliated Practices. Goodwill is being
amortized over 20 years. Other intangibles are being amortized over
periods ranging from 3 to 7 years. Deferred financing costs associated
with the convertible subordinated debentures are being amortized over 7
years.
(FF) Represents recording of interest expense on the convertible subordinated
debentures to be offered in the IPO. No estimated interest income on idle
funds associated with the proceeds from the issuance of the convertible
subordinated debentures has been assumed.
(GG) The Company has generated pro forma pre-tax losses for financial
reporting purposes. Recognition of deferred tax assets will require the
generation of future taxable income. Because there can be no assurance
that the Company will generate any earnings in future years, a valuation
allowance has been established equal to the deferred tax assets created
by the pro forma losses.
(HH) The number of shares used in the pro forma loss per share calculations
are determined as follows:
NUMBER OF
SHARES
----------
Outstanding shares after the Initial Public Offering............................. 3,644,000
Shares issued in connection with Bridge Financing................................ 58,000
Shares issued to acquire the Initial Affiliated Practices........................ 481,067
----------
Shares used to compute primary loss per share.................................... 4,183,067
Share issued in connection with conversion of subordinated convertible
debentures..................................................................... 2,381,000
----------
Shares used to compute fully diluted earnings per share(1)....................... 6,564,067
----------
----------
- ------------------------
(1) Fully diluted loss per share has not been computed as it would be
anti-dilutive.
F-11
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Integrated Physician Systems, Inc.
We have audited the accompanying balance sheets of Integrated Physician
Systems, Inc., a Delaware corporation, as of December 31, 1995 and 1996, and the
related statements of operations, changes in stockholders' equity, and cash
flows for the period from inception, April 25, 1995, through December 31, 1995,
and for the year ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Integrated Physician
Systems, Inc., as of December 31, 1995 and 1996, and the results of its
operations and its cash flows for the period from inception, April 25, 1995
through December 31, 1995, and for the year ended December 31, 1996, in
conformity with generally accepted accounting principles.
Feldman Radin & Co., P. C.
Certified Public Accountants
New York, New York
May 9, 1997 and October 23, 1997
as to Notes 7A and 7E
F-12
INTEGRATED PHYSICIAN SYSTEMS, INC.
BALANCE SHEETS
DECEMBER 31,
---------------------- JUNE 30,
1995 1996 1997
---------- ---------- -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash...................................................................... $ -- $ 30,000 $ 35,000
Accounts receivable....................................................... -- -- 67,000
---------- ---------- -----------
Total current assets.................................................. -- 30,000 102,000
---------- ---------- -----------
PROPERTY AND EQUIPMENT, net of
accumulated depreciation of $25,000....................................... -- -- 6,000
OTHER ASSETS:
Deferred registration costs............................................... 64,000 259,000 393,000
Goodwill.................................................................. -- -- 38,000
Organization costs, net of accumulated amortization
of $1,000, $3,000 and $4,000 respectively................................. 9,000 7,000 6,000
---------- ---------- -----------
Total other assets.................................................... 73,000 266,000 437,000
---------- ---------- -----------
$ 73,000 $ 296,000 $ 545,000
---------- ---------- -----------
---------- ---------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable and accrued liabilities.................................. $ -- $ 30,000 $ 105,000
Due to related party...................................................... 74,000 118,000 129,000
Senior notes, net of discount of $0, $94,000 and $113,000, respectively... -- 31,000 197,000
---------- ---------- -----------
Total current liabilities............................................. 74,000 179,000 431,000
---------- ---------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred Stock, $.01 par value, authorized 1,000,000,
shares; none issued and outstanding..................................... -- -- --
Common Stock, $.01 par value, authorized 50,000,000 shares,
issued and outstanding 1,000, 3,012,500,
and 3,031,000, respectively............................................. -- 30,000 30,000
Additional paid-in capital................................................ -- 94,000 245,000
Accumulated deficit....................................................... (1,000) (7,000) (161,000)
---------- ---------- -----------
Total stockholders' equity (deficit).................................. (1,000) 117,000 114,000
---------- ---------- -----------
$ 73,000 $ 296,000 $ 545,000
---------- ---------- -----------
---------- ---------- -----------
See notes to financial statements
F-13
INTEGRATED PHYSICIAN SYSTEMS, INC.
STATEMENTS OF OPERATIONS
FOR THE PERIOD
FROM APRIL 25,
1995
(INCEPTION) SIX MONTHS
THROUGH YEAR ENDED ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, ----------------------
1995 1996 1996 1997
--------------- ------------ --------- -----------
(UNAUDITED)
REVENUES
Management fees......................................... $ -- $ -- $ -- $ 111,000
------- ------------ --------- -----------
COSTS AND EXPENSES:
Salaries and wages...................................... 51,000
General and administrative expenses..................... -- 4,000 2,000 78,000
Interest expense........................................ -- -- -- 135,000
Amortization of organization costs...................... 1,000 2,000 1,000 1,000
------- ------------ --------- -----------
Total costs and expenses............................ 1,000 6,000 3,000 265,000
------- ------------ --------- -----------
LOSS BEFORE PROVISION FOR INCOME TAXES.................... (1,000) (6,000) (3,000) (154,000)
PROVISION FOR INCOME TAXES................................ -- -- -- --
------- ------------ --------- -----------
NET LOSS.................................................. $ (1,000) $ (6,000) $ (3,000) $ (154,000)
------- ------------ --------- -----------
------- ------------ --------- -----------
NET LOSS PER SHARE........................................ $ (1.00) $ (0.00) $ (0.00) $ (0.05)
------- ------------ --------- -----------
------- ------------ --------- -----------
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING............. 1,000 2,251,292 1,000,667 3,027,000
------- ------------ --------- -----------
------- ------------ --------- -----------
See notes to financial statements
F-14
INTEGRATED PHYSICIAN SYSTEMS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
TOTAL
COMMON STOCK ADDITIONAL STOCKHOLDERS'
--------------------- PAID-IN ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL DEFICIT (DEFICIT)
---------- --------- ---------- ------------ --------------
BALANCE, April 25, 1995........................ -- $ -- $ -- $ -- $ --
Issuance of common stock..................... 1,000 -- -- -- --
Net loss..................................... -- -- -- (1,000) (1,000)
---------- --------- ---------- ------------ --------------
BALANCE, December 31, 1995..................... 1,000 -- -- (1,000) (1,000)
Issuance of common stock..................... 3,011,500 30,000 -- -- 30,000
Net loss..................................... -- -- (6,000) (6,000)
Additional paid-in capital................... -- -- 94,000 -- 94,000
---------- --------- ---------- ------------ --------------
BALANCE, December 31, 1996..................... 3,012,500 30,000 94,000 (7,000) 117,000
Issuance of common stock (unaudited)......... 18,500 -- -- -- --
Net loss (unaudited)......................... -- -- -- (154,000) (154,000)
Additional paid-in capital................... -- -- 151,000 -- 151,000
---------- --------- ---------- ------------ --------------
BALANCE, June 30, 1997 (unaudited)............. 3,031,000 $ 30,000 $ 245,000 $ (161,000) $ 114,000
---------- --------- ---------- ------------ --------------
---------- --------- ---------- ------------ --------------
See notes to financial statements
F-15
INTEGRATED PHYSICIAN SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
FOR THE PERIOD
FROM APRIL 25,
1995
(INCEPTION) SIX MONTHS
THROUGH YEAR ENDED ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, ----------------------
1995 1996 1996 1997
--------------- ------------ --------- -----------
(UNAUDITED)
CASH FLOWS USED IN OPERATING ACTIVITIES:
Cash received for revenues................................... 111,000
Cash paid for general and administrative expenses............ $ -- $ (4,000) $ (2,000) $ (122,000)
--------------- ------------ --------- -----------
Net cash used in operating activities.................... -- (4,000) (2,000) (11,000)
--------------- ------------ --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in deferred registration costs...................... (74,000) (195,000) -- (134,000)
Increase in accounts receivable.............................. -- -- -- (67,000)
--------------- ------------ --------- -----------
Net cash used in investing activities.................... (74,000) (195,000) -- (201,000)
--------------- ------------ --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in accounts payable and accrued expenses............ -- 30,000 -- 21,000
Proceeds from senior notes................................... -- 125,000 -- 185,000
Advances from related party.................................. 74,000 74,000 2,000 11,000
Advances to related party.................................... -- (30,000) -- --
Issuance of common stock..................................... -- 30,000 -- --
--------------- ------------ --------- -----------
Net cash provided by financing activities................ 74,000 229,000 2,000 217,000
--------------- ------------ --------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS...................... -- 30,000 -- 5,000
CASH AND CASH EQUIVALENTS, beginning of period................. -- -- -- 30,000
--------------- ------------ --------- -----------
CASH AND CASH EQUIVALENTS, end of period....................... $ -- $ 30,000 $ -- $ 35,000
--------------- ------------ --------- -----------
--------------- ------------ --------- -----------
RECONCILIATION OF NET LOSS TO NET CASH USED IN OPERATING
ACTIVITIES:
Net loss................................................... $ (1,000) $ (6,000) $ (3,000) $ (154,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization of organization cost........................ 1,000 2,000 1,000 1,000
Amortization of discount................................. -- -- -- 132,000
--------------- ------------ --------- -----------
1,000 2,000 1,000 133,000
--------------- ------------ --------- -----------
Net cash used in operating activities.................... $ -- $ (4,000) $ (2,000) $ (21,000)
--------------- ------------ --------- -----------
--------------- ------------ --------- -----------
SUPPLEMENTAL INFORMATION ON NON CASH FINANCING ACTIVITIES:
Stock issued in connection with senior notes................. $ -- $ 94,000 $ -- $ 151,000
--------------- ------------ --------- -----------
--------------- ------------ --------- -----------
See notes to financial statements
F-16
INTEGRATED PHYSICIAN SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
Integrated Physician Systems, Inc. ("IPS" or the "Company"), was established
as a Delaware corporation on April 25, 1995, for the purpose of creating a
physician practice management company which will (i) own the assets of and
manage physician groups, (ii) own or manage Independent Practice Associations,
(iii) provide management services to independent physicians including
hospital-based physicians and (iv) own or manage medically related ancillary
services. The Company's operations to date have consisted primarily of seeking
affiliations with physicians, negotiating acquisitions of the assets of such
physician practices and negotiating agreements to provide management services to
such practices. The Company plans to make an initial public offering of its
common stock, warrants and convertible subordinated debentures (the "IPO") and
simultaneously exchange cash, notes and shares of its common stock for selected
assets and liabilities associated with 12 physician practices and a medical
billing company (referred to collectively as the "Initial Affiliated
Practices").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. ORGANIZATION COSTS
Organization costs incurred in the formation of the Company are amortized on
a straight-line basis over a five-year period.
B. DEFERRED REGISTRATION COSTS
Substantially all costs incurred to date have been in conjunction with the
anticipated initial public offering of the Company's common stock, warrants and
convertible subordinated debentures. All costs incurred in connection with such
efforts have been capitalized and will be charged against the proceeds of the
IPO upon its successful completion.
C. INCOME TAXES
As reflected in the accompanying statements of operations, the Company
incurred losses from operations during the period from inception, April 25,
1995, through December 31, 1995, the year ended December 31, 1996, and the six
months ended June 30, 1997. Due to the limited operations of the Company since
its inception and pending the IPO of its common stock, warrants and convertible
subordinated debentures, a valuation allowance has been recorded to fully
reserve for the deferred tax benefits generated by net operating losses. There
is no significant difference in the tax and book basis of the Company's assets
or liabilities that would give rise to deferred tax balances.
D. 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 as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
E. LONG-LIVED ASSETS
Under the requirements of SFAS No. 121 "Accounting for Long-Lived Assets and
for Long-Lived Assets to be Disposed of," the Company is obligated to recognize
an impairment loss on its long-lived
F-17
INTEGRATED PHYSICIAN SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
assets whenever the sum of the expected future cash flows resulting from their
use is less than their carrying amount. As of December 31, 1996, no impairment
exists with respect to the Company's long-lived assets.
F. PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are amortized over the respective lease terms or the
service lives of the improvements, whichever is shorter.
3. RELATED PARTY
The founding stockholder of the Company, Wellness Concepts, Inc., has
advanced funds on behalf of the Company in connection with the IPO. Such
payments have been reflected as amounts due to a related party in the
accompanying balance sheets and will be repaid at the closing of the IPO. The
Company has no resources to repay such amounts should the IPO not be
successfully completed.
4. SENIOR NOTES
As of June 30, 1997, the Company is obligated to pay an aggregate amount of
$310,000 pursuant to the terms of the series A 10% Senior Notes (the "Senior
Notes") in varying amounts issued by the Company in connection with its Bridge
Financing in contemplation of its IPO. The Senior Notes bear interest at the
rate of 10% per annum until the Senior Notes maturity which is the earlier of 12
months from the date of issuance or the closing of the IPO. Interest on the
Senior Notes is payable in arrears on the maturity date. In connection with the
issuance of the Senior Notes, the Company issued, as additional consideration,
41,333 shares of common stock, par value $.01 per share. Such 41,333 shares have
been recorded at 79% of the expected IPO price and the cost of same is reflected
as a discount against the Senior Notes. The amount assigned to the discount in
connection with the Senior Notes has been netted against the outstanding balance
at June 30, 1997 and is being amortized to interest expense over the life of the
notes.
5. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards (SFAS) No. 107 "Disclosures
About Fair Value of Financial Instruments" requires disclosure about the fair
value of all financial instruments. Carrying amounts of all financial
instruments approximate fair value as of December 31, 1996 and June 30, 1997.
6. INTERIM FINANCIAL STATEMENTS
The balance sheet at June 30, 1997, and the statements of operations and
cash flows for the six months ended June 30, 1997 are unaudited, but, in the
opinion of management, include all adjustments (consisting of normal recurring
adjustments) necessary for a fair presentation of results for the interim
period. The results of operations for the six months ended June 30, 1997 are not
necessarily indicative of results to be expected for the entire year.
F-18
INTEGRATED PHYSICIAN SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. SUBSEQUENT EVENTS
A. ISSUANCE OF ADDITIONAL SENIOR NOTES
During July 1997, the Company issued an additional aggregate principal
amount of $125,000 of Senior Notes in connection with its Bridge Financing in
contemplation of its IPO. The Senior Notes are more fully described in Note 4 to
the financial statements. In connection with the issuance of the additional
Senior Notes, the Company issued, as additional consideration, 16,667 shares of
common stock, par value $.01 per share.
B. ACQUISITION OF PROFESSIONAL MEDICAL IMAGES, INC. (PMI)
On April 1, 1997, the Company acquired 100% of the outstanding common stock
of PMI. PMI is a New Jersey corporation engaged in the business of managing and
developing IPAs and providing a full range of consulting services to physicians,
hospitals and managed care organizations. Goodwill of $38,000 resulting from the
acquisition is being amortized over 20 years.
C. CONSULTING AGREEMENT
Effective April 1, 1997, the Company entered into a Consulting Agreement
with several physician practices and a management service organization
collectively known as the Reliance Medical Group ("Reliance"). Under the terms
of a one year consulting agreement, the Company provides physician practice
management services to Reliance in return for fixed monthly compensation in the
amount of $25,000. It is anticipated that the Reliance medical practices and
management service organization will be acquired as part of the Initial
Affiliated Practices as described in Note 1.
D. COMMITMENTS AND CONTINGENCIES
The Company intends to consummate an initial public offering of its common
stock, warrants and convertible subordinated debentures and contemporaneously
exchange approximately $7,937,000 in cash, $114,000 in notes and 481,067 shares
of its common stock for selected assets of, and certain liabilities associated
with the Initial Affiliated Practices. The Company has entered into purchase and
sale and other related acquisition agreements with the Initial Affiliated
Practices the closing of which will occur upon consummation of the IPO.
E. RECAPITALIZATION
On October 21, 1997 certain stockholders of the Company contributed
1,356,000 shares of common stock owned by such stockholders to the Company. The
shares were simultaneously retired by the Company.
8. STOCK OPTION PLAN
In 1996, the Company adopted the 1996 Stock Option Plan ( the "Plan"). The
purpose of the Plan is to provide directors, officers, key employees and certain
advisors with additional incentives by increasing their proprietary interest in
the Company. The Company has authorized 300,000 shares of Common Stock to be
issued pursuant to the Plan. As of December 31, 1995, 1996, and June 30, 1997
there were no options outstanding under the Plan.
F-19
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Reliance Healthcare Group
We have audited the accompanying combined balance sheets of the Reliance
Healthcare Group as of December 31, 1995 and 1996, and the related combined
statements of operations, changes in stockholders' deficit and cash flows for
each of three years in the period ended December 31, 1996. These combined
financial statements are the responsibility of Reliance Healthcare Group's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Reliance Healthcare
Group as of December 31, 1995 and 1996, and the results of its operations,
changes in stockholders' deficit and cash flows for each of the three years in
the period ended December 31, 1996 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 discussed in Note 6 to the
financial statements, the Company is currently in default under two of its debt
agreements and its current liabilities exceed its current assets by $4,996,000
as of December 31, 1996. These matters raise substantial doubt about the
Company's ability to continue as a going concern. The accompanying financial
statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts or the amounts and classification of
liabilities that might be necessary should the Company be unable to continue as
a going concern.
Feldman Radin & Co., P. C.
Certified Public Accountants
New York, New York
May 9, 1997
F-20
RELIANCE HEALTHCARE GROUP
COMBINED BALANCE SHEETS
DECEMBER 31,
-------------------------- JUNE 30,
1995 1996 1997
------------ ------------ ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................... $ -- $ -- $ 181,828
Accounts receivable, less allowance for contractual adjustments of
$5,661,976 in 1995, $5,720,689 in 1996 and $5,730,529 in 1997 and
an allowance for doubtful accounts of $250,000 in 1995, $280,000
in 1996 and $310,000 in 1997...................................... 961,899 1,558,202 1,669,445
Prepaid expenses and other current assets........................... 259,917 503,416 637,333
------------ ------------ ------------
Total current assets............................................ 1,221,816 2,061,618 2,488,606
------------ ------------ ------------
PROPERTY AND EQUIPMENT, net............................................. 837,190 718,976 650,813
------------ ------------ ------------
OTHER NONCURRENT ASSETS, net............................................ 62,344 36,094 76,623
------------ ------------ ------------
$ 2,121,350 $ 2,816,688 $ 3,216,042
------------ ------------ ------------
------------ ------------ ------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Bank overdrafts..................................................... $ 168,651 $ -- $ --
Short-term notes payable............................................ 1,611,530 1,931,196 2,397,633
Current portion of long-term debt................................... 217,175 130,364 --
Current portion of obligations under capital lease.................. 53,390 39,099 34,500
Accounts payable and accrued expenses............................... 1,049,736 1,440,390 1,227,913
Accrued payroll..................................................... 617,806 315,781 373,826
Accrued payroll taxes............................................... 1,362,682 2,875,479 3,280,075
------------ ------------ ------------
Total current liabilities....................................... 5,080,970 6,732,309 7,313,947
------------ ------------ ------------
LONG-TERM DEBT, net of current portion.................................. 384,698 273,137 255,817
------------ ------------ ------------
LONG-TERM OBLIGATIONS UNDER CAPITAL LEASE,
net of current portion............................................ 49,919 26,724 31,124
------------ ------------ ------------
Total liabilities............................................... 5,515,587 7,032,170 7,600,888
------------ ------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT
Common Stock........................................................ 3,700 3,700 3,700
Additional paid in capital.......................................... 19,900 19,900 19,900
Accumulated deficit................................................. (3,417,837) (4,239,082) (4,408,446)
------------ ------------ ------------
TOTAL STOCKHOLDERS' DEFICIT............................................. (3,394,237) (4,215,482) (4,384,846)
------------ ------------ ------------
$ 2,121,350 $ 2,816,688 $ 3,216,042
------------ ------------ ------------
------------ ------------ ------------
See notes to financial statements.
F-21
RELIANCE HEALTHCARE GROUP
COMBINED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------------- --------------------------
1994 1995 1996 1996 1997
------------- ------------- ------------- ------------ ------------
(UNAUDITED)
REVENUE:
Medical services revenue............. $ 11,253,425 $ 11,118,296 $ 11,074,770 $ 5,774,775 $ 5,143,518
Other revenue........................ 123,260 38,671 -- -- 18,617
------------- ------------- ------------- ------------ ------------
Total revenue.................... 11,376,685 11,156,967 11,074,770 5,774,775 5,162,135
------------- ------------- ------------- ------------ ------------
COSTS AND EXPENSES:
Salaries and wages................... 9,399,315 9,149,904 9,023,455 4,568,103 3,083,171
Medical supplies and expenses........ 63,225 109,179 39,929 41,782 88,267
General and administrative
expenses........................... 3,230,726 1,762,334 1,054,537 1,204,533 793,082
Bad debt expense..................... 20,000 30,000 30,000 15,000 30,000
Payroll tax interest and penalties... 194,000 199,205 490,131 225,000 167,787
Management fees...................... -- -- 910,000 -- 952,698
Depreciation and amortization........ 140,991 205,810 179,499 93,072 107,982
Interest expense..................... 217,778 223,319 168,464 90,379 108,512
------------- ------------- ------------- ------------ ------------
Total costs and expenses......... 13,266,035 11,679,751 11,896,015 6,237,869 5,331,499
------------- ------------- ------------- ------------ ------------
Net loss......................... $ (1,889,350) $ (522,784) $ (821,245) $ (463,094) $ (169,364)
------------- ------------- ------------- ------------ ------------
------------- ------------- ------------- ------------ ------------
See notes to financial statements.
F-22
RELIANCE HEALTHCARE GROUP
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
COMMON STOCK ADDITIONAL ACCUMULATED
---------------------- PAID-IN STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT TOTAL
----------- --------- -------------- ------------- -----------
Balance, December 31, 1993........................ 3,700 $ 3,700 $ 19,900 $ (1,005,703) $ (982,103)
Net loss.......................................... (1,889,350) (1,889,350)
----- --------- ------- ------------- -----------
Balance, December 31, 1994........................ 3,700 3,700 19,900 (2,895,053) (2,871,453)
Net loss.......................................... (522,784) (522,784)
----- --------- ------- ------------- -----------
Balance, December 31, 1995........................ 3,700 3,700 19,900 (3,417,837) (3,394,237)
Net loss.......................................... (821,245) (821,245)
----- --------- ------- ------------- -----------
Balance, December 31, 1996........................ 3,700 3,700 19,900 (4,239,082) (4,215,482)
Net loss.......................................... (169,364) (169,364)
----- --------- ------- ------------- -----------
Balance, June 30, 1997(unaudited)................. 3,700 3,700 19,900 (4,408,446) (4,384,846)
----- --------- ------- ------------- -----------
----- --------- ------- ------------- -----------
See notes to financial statements.
F-23
RELIANCE HEALTHCARE GROUP
COMBINED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------------- --------------------
1994 1995 1996 1996 1997
---------- --------- --------- --------- ---------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................ $(1,889,350) $(522,784) $(821,245) $(463,094) $(169,364)
---------- --------- --------- --------- ---------
Adjustments to reconcile net loss
to net cash provided by (used) in operating activities
-
Depreciation and amortization................. 140,991 205,810 179,499 93,072 107,982
Changes in assets and liabilities -
(Increase) decrease in -
Accounts receivable, net........................ 66,755 (43,567) (596,303) (402,887) (111,243)
Prepaid expenses and other current assets....... 147,640 (228,762) (243,499) 95,029 (133,917)
Increase (decrease) in -
Accounts payable and accrued expenses........... 634,693 415,043 390,654 (108,192) (212,477)
Accrued payroll and payroll taxes............... 11,543 137,193 1,210,772 296,755 462,641
---------- --------- --------- --------- ---------
1,001,622 485,717 941,123 (26,223) 112,986
---------- --------- --------- --------- ---------
Net cash provided by (used) in operating activities... (887,728) (37,067) 119,878 (489,317) (56,378)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment...................... (501,474) (83,567) (61,285) (56,615) (39,819)
(Increase) decrease in of other noncurrent assets....... (74,029) 148,950 26,250 (17,725) (40,529)
---------- --------- --------- --------- ---------
Net cash used in investing activities........... (575,503) 65,383 (35,035) (74,340) (80,348)
---------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayments of) bank overdraft............ 634,721 (466,070) (168,651) 310,894 --
Proceeds from (repayments of) short-term notes
payable............................................... 314,286 339,143 319,666 410,528 466,437
Proceeds from (repayments of) long-term debts........... 491,170 110,703 (198,372) (601,873) (147,684)
Proceeds from (repayments of) obligations under capital
leases................................................ 20,956 (12,092) (37,486) 44,108 (199)
---------- --------- --------- --------- ---------
Net cash provided by (used in) financing activities... 1,461,133 (28,316) (84,843) 163,657 318,554
---------- --------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH............................. (2,098) -- -- (400,000) 181,828
CASH, beginning of period................................... 2,098 -- -- -- --
---------- --------- --------- --------- ---------
CASH, end of period......................................... $ -- $ -- $ -- $(400,000) $ 181,828
---------- --------- --------- --------- ---------
---------- --------- --------- --------- ---------
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid......................................... $ 217,778 $ 223,319 $ 168,464 $ 76,000 $ 52,000
---------- --------- --------- --------- ---------
---------- --------- --------- --------- ---------
See notes to financial statements.
F-24
RELIANCE HEALTHCARE GROUP
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS ORGANIZATION AND BASIS OF PRESENTATION
Reliance Healthcare Group (the "Company") is comprised of four entities
under common control, Reliance Healthcare Group, Inc., Reliance Medical Group,
P.C., West Jersey Medical Group, P.C., and Island Medical Group, P.C..
The combined financial statements of the Company have been presented as
supplemental information concerning the entities that Integrated Physician
Systems, Inc. ("IPS") intends to acquire following its planned IPO. Their
historical financial positions, results of operations, and cash flows have been
combined in the accompanying financial statements and do not reflect any
adjustments relating to the proposed transaction nor adjustments to reflect
changes that may have occurred if the actual operations of the Company,
previously operated as separate entities, had been combined. Within the Company
all significant intercompany accounts and transactions have been eliminated.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. METHOD OF ACCOUNTING
The combined financial statements of the Company are presented on the
accrual basis of accounting. Accordingly, revenues are recorded when earned,
rather than when received and expenses are recorded when incurred, rather than
when paid.
B. CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all cash accounts which are not subject to
withdrawal restrictions or penalties, and all highly liquid instruments, with
original maturities of three months or less.
C. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standard ("SFAS") No. 107 "Disclosures
About Fair Value of Financial Instruments" requires disclosure about the fair
value of all financial instruments. Carrying amounts of all financial
instruments approximate fair value as of December 31, 1996.
D. PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are amortized over the respective lease terms or the
service lives of the improvements, whichever is shorter.
E. LONG LIVED ASSETS
Under the requirements of SFAS No. 121 "Accounting for Long-Lived Assets and
for Long-Lived Assets to be Disposed of", the Company is obligated to recognize
an impairment loss on its long lived assets whenever the sum of the expected
future cash flows resulting from their use is less than their carrying amount.
As of December 31, 1996, no impairment exists with respect to the Company's
long-lived assets.
F. REVENUE
Medical service revenues are accounted for in the period the services are
provided. Revenues are reported at the estimated net realizable amounts from
patients, third-party payors and others for services
F-25
RELIANCE HEALTHCARE GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
rendered. Provisions for estimated third-party payor adjustments are recorded in
the period the related services are provided as a reduction of revenue. Any
adjustment to those amounts are recorded in the period in which the revised
amount is determined. A portion of the Company's medical services revenue is
derived from Medicare, Medicaid and other governmental programs. Medicare,
Medicaid, and other governmental programs reimburse physicians based on fee
schedules which are determined by the specific governmental agency.
Additionally, the Company participates in agreements with managed care
organizations to provide services at negotiated fee-for-service or capitated
payment rates.
G. CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk consist principally of trade accounts receivable.
The Company establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific payors, historical trends and other
information.
H. 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 as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
I. INCOME TAXES
All of the Company's entities have elected to be taxed under the provisions
of Subchapter S of the Internal Revenue Code. Under those provisions, the
Company does not pay Federal or State corporate income taxes on its taxable
income. Instead, the individual stockholders' are liable for Federal and State
income taxes on the Company's taxable income.
3. OTHER NONCURRENT ASSETS
Other noncurrent assets consist of the following:
DECEMBER 31,
--------------------
1995 1996
--------- ---------
Customer lists.......................................................... $ 70,000 $ 70,000
Less: Accumulated amortization.......................................... (7,656) (33,906)
--------- ---------
Total............................................................... $ 62,344 $ 36,094
--------- ---------
--------- ---------
4. COMMITMENTS AND CONTINGENCIES
The Company is insured with respect to medical malpractice risks. In the
normal course of business the Company has been named in lawsuits. In the opinion
of the Company's management , the ultimate liability, if any, of the Company
with respect to any such lawsuit will not exceed the insurance coverages carried
by the Company and will not materially impact the operating results or results
of its financial condition.
F-26
RELIANCE HEALTHCARE GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company has entered into a binding agreement with Integrated Physician
Systems, Inc. (IPS), the terms of which provide that IPS will acquire
substantially all of the assets, goodwill, and intangibles of the Company. The
acquisition by IPS will coincide with the consummation of its IPO.
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
ESTIMATED DECEMBER 31,
USEFUL LIVES --------------------------
(YEARS) 1995 1996
--------------- ------------ ------------
Land and building................................... 30 $ 375,000 $ 375,000
Leasehold improvements.............................. 5-10 414,711 416,578
Medical and computer equipment...................... 5-7 683,158 686,205
Automobiles......................................... 3-5 64,464 94,583
------------ ------------
Total............................................. 1,537,333 1,572,366
Less: Accumulated depreciation...................... (700,143) (853,390)
------------ ------------
Net............................................... $ 837,190 $ 718,976
------------ ------------
------------ ------------
6. SHORT-TERM AND LONG-TERM OBLIGATIONS AND COMMITMENTS
A. SHORT-TERM NOTES PAYABLE
Short-term notes payable consists of the following:
DECEMBER 31,
--------------------------
1995 1996
------------ ------------
Notes payable to a bank bearing interests at 5%
to prime +3% collateralized by various assets
of the Company.................................................. $ 1,611,530 $ 1,481,196
Secured, non-interest bearing demand note, payable to an
individual secured by accounts receivable....................... -- 450,000
------------ ------------
$ 1,611,530 $ 1,931,196
------------ ------------
------------ ------------
F-27
RELIANCE HEALTHCARE GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. SHORT-TERM AND LONG-TERM OBLIGATIONS AND COMMITMENTS (CONTINUED)
B. LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31,
------------------------
1995 1996
----------- -----------
Mortgage notes payable to the New Jersey Economic Development
Authority, and the South Jersey
Transit Authority, bearing interest at rates
ranging from 3% to 6%............................................. $ 270,141 $ 226,495
Term loan payable to a bank, due July 1999, bearing interest at
8.75%, secured by automobile...................................... 22,232 15,880
Notes payable to a physician relating to the acquisition of practice
assets and accounts receivable, bearing interest ranging from 0%
to 10%............................................................ 105,662 51,915
Unsecured, note payable to a hospital, bearing interest at 7%....... 131,250 93,750
Loan payable to a credit company, due March 2000, bearing interest
at 11%, secured by automobile..................................... 16,727 13,461
Other debt.......................................................... 55,861 2,000
----------- -----------
Total long-term debt.......................................... 601,873 403,501
Less: current portion............................................... (217,175) (130,364)
----------- -----------
Long-term debt, excluding current portion..................... $ 384,698 $ 273,137
----------- -----------
----------- -----------
As of December 31, 1996, the Company has not complied with the payment
provisions of its mortgage note and its long-term bank debt. Because of
arrearage in payments with respect to the long-term bank debt, only long term
bank debt has been reclassified as short term obligations.
As of December 31, 1996, the aggregate amounts of annual principal
maturities of long-term debt (excluding capital lease obligations) are as
follows:
1997.............................................................. $ 130,683
1998.............................................................. 243,613
1999.............................................................. 27,990
2000.............................................................. 1,215
---------
Total........................................................... $ 403,501
---------
---------
F-28
RELIANCE HEALTHCARE GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. SHORT-TERM AND LONG-TERM OBLIGATIONS AND COMMITMENTS (CONTINUED)
C. LEASES
The Company leases certain equipment under capital lease agreements, which
expire at various dates. As of December 31, 1996, minimum annual lease
commitments under capital leases with terms in excess of one year are as
follows:
CAPITAL
LEASES
----------
1997.............................................................................. $ 46,000
1998.............................................................................. 23,000
1999.............................................................................. 7,000
2000.............................................................................. --
2001.............................................................................. --
----------
Total future minimum lease payments............................................. 76,000
Less: Amounts representing interest............................................... (10,000)
----------
Present value of minimum capital lease payments................................. 66,000
Less: Current portion of obligations under capital lease.......................... (39,000)
----------
Long-term obligations under capital lease, net of current portion................. $ 27,000
----------
----------
7. ACCRUED PAYROLL TAXES
As of December 31, 1995 and 1996, accrued payroll taxes are approximately
$1,362,682 and $2,875,479 representing accrued current and delinquent Federal
and State of New Jersey payroll taxes including withholding taxes interest amd
penalties.
8. COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL
The common stock components of each company as of December 31, 1996 is as
follows:
DECEMBER 31, 1996
------------------------
ADDITIONAL
COMMON PAID-IN
STOCK CAPITAL
----------- -----------
Reliance Healthcare Group, Inc.,
$1.00 par, 1,000 shares authorized,
100 shares issued and outstanding..................................... $ 100 $ 19,900
Reliance Medical Group, P.C., $1.00 par,
1,000 shares authorized, 100 shares
issued and outstanding................................................ 100 --
West Jersey Medical Group, P.C., No par,
2,500 shares authorized, 1,000 shares
issued and outstanding................................................ 1,000 --
Island Medical Group, P.C., No par,
2,500 shares issued and outstanding................................... 2,500 --
----------- -----------
Total................................................................. $ 3,700 $ 19,900
----------- -----------
----------- -----------
F-29
RELIANCE HEALTHCARE GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. MANAGEMENT AGREEMENT
Reliance Healthcare Group, on October 1, 1996, entered into a management
agreement with US Alliance Medical, Inc. (USMA), a publicly traded NASDAQ
company. According to the agreement, USMA managed the administration and site
operations of Reliance Healthcare Group in return for a fee based upon a
percentage of collections. Management fees charged to operations for the period
October 1, 1996 through December 31, 1996 was $910,000. Effective March 31,
1997, the Company terminated its agreement with USMA.
10. SUBSEQUENT EVENT
Effective April 1, 1997, the Company entered into a Consulting Agreement
with Integrated Physician Systems, Inc. ("IPS"). Under the terms of the one-year
consulting agreement, the Company will receive physician practive management
services for a fixed monthly payment in the amount of $25,000.
F-30
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholder of
Medical Billing and Management Services, Inc. and Subsidiary
We have audited the accompanying balance sheets of Medical Billing and
Management Services, Inc. and Subsidiary as of December 31, 1995 and 1996, and
the related statements of operations, changes in stockholder's deficit and cash
flows for each of the three years in the period ended December 31, 1996. These
combined financial statements are the responsibility of Medical Billing and
Management Services, Inc.'s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Medical Billing and
Management Services, Inc. and Subsidiary as of December 31, 1995 and 1996, and
the results of its operations, changes in stockholder's deficit and cash flows
for each of the three years in the period ended December 31, 1996 in conformity
with generally accepted accounting principles.
Feldman Radin & Co., P. C.
Certified Public Accountants
New York, New York
May 9, 1997
F-31
MEDICAL BILLING AND MANAGEMENT SERVICES, INC.
AND SUBSIDIARY
BALANCE SHEETS
DECEMBER 31,
---------------------- JUNE 30,
1995 1996 1997
---------- ---------- -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash...................................................................... $ 29,999 $ 59,814 $ 39,440
Accounts receivable, less allowance for bad debts of of $0 in 1995, $6,497
in 1996 and $6,497 in 1997.............................................. 42,091 82,704 219,791
---------- ---------- -----------
Total current assets.................................................. 72,090 142,518 259,231
---------- ---------- -----------
PROPERTY AND EQUIPMENT, net................................................. 57,054 61,477 73,542
---------- ---------- -----------
OTHER NONCURRENT ASSETS, net................................................ 52,500 42,500 40,166
---------- ---------- -----------
$ 181,644 $ 246,495 $ 372,939
---------- ---------- -----------
---------- ---------- -----------
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
CURRENT LIABILITIES:
Short-term notes--stockholder............................................. $ 98,390 $ -- $ --
Current portion of long-term note--stockholder............................ 100,292 11,854 6,066
Accounts payable and accrued expenses..................................... 48,363 18,759 13,507
---------- ---------- -----------
Total current liabilities............................................. 247,045 30,613 19,573
LONG-TERM NOTE--STOCKHOLDER, net of current portion......................... -- 254,878 238,585
---------- ---------- -----------
Total liabilities..................................................... 247,045 285,491 258,158
---------- ---------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY (DEFICIT):
Common Stock, no par value; 1,000 shares authorized and 100 shares issued
and outstanding, respectively........................................... 1,000 1,000 1,000
Additional paid-in capital................................................ 9,000 9,000 9,000
Retained earnings (deficit)............................................... (75,401) (48,996) 104,781
---------- ---------- -----------
TOTAL STOCKHOLDER'S EQUITY (DEFICIT)........................................ (65,401) (38,996) 114,781
---------- ---------- -----------
$ 181,644 $ 246,495 $ 372,939
---------- ---------- -----------
---------- ---------- -----------
See notes to financial statements.
F-32
MEDICAL BILLING AND MANAGEMENT SERVICES, INC.
AND SUBSIDIARY
STATEMENTS OF OPERATIONS
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------------------- ------------------------
1994 1995 1996 1996 1997
---------- ------------ ------------ ---------- ------------
(UNAUDITED)
REVENUE:
Medical billing and service fees............ $ 990,937 $ 1,241,294 $ 1,398,593 $ 675,741 $ 1,100,855
---------- ------------ ------------ ---------- ------------
COSTS AND EXPENSES:
Salaries and wages.......................... 571,183 603,344 653,897 331,531 482,812
General and administrative expenses......... 462,297 563,022 662,981 269,171 445,416
Bad debt expense............................ -- -- 6,497 3,249 --
Depreciation and amortization............... 17,466 43,063 39,960 18,850 18,850
Interest expense............................ 6,024 10,716 8,853 4,426 --
---------- ------------ ------------ ---------- ------------
Total costs and expenses................ 1,056,970 1,220,145 1,372,188 627,227 947,078
---------- ------------ ------------ ---------- ------------
Net (loss) income....................... $ (66,033) $ 21,149 $ 26,405 $ 48,514 $ 153,777
---------- ------------ ------------ ---------- ------------
---------- ------------ ------------ ---------- ------------
See notes to financial statements.
F-33
MEDICAL BILLING AND MANAGEMENT SERVICES, INC.
AND SUBSIDIARY
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (DEFICIT)
COMMON STOCK
---------------------- ADDITIONAL RETAINED
SHARES AMOUNT PAID-IN CAPITAL EARNINGS(DEFICIT) TOTAL
----------- --------- --------------- ---------------- ----------
Balance, December 31, 1993.............................. 100 $ 1,000 $ 9,000 $ (30,517) $ (20,517)
Net loss.............................................. -- -- -- (66,033) (66,033)
Balance, December 31, 1994.............................. 100 1,000 9,000 (96,550) (86,550)
Net income............................................ -- -- -- 21,149 21,149
--- --------- ------ -------- ----------
Balance, December 31, 1995.............................. 100 1,000 9,000 (75,401) (65,401)
Net income............................................ -- -- -- 26,405 26,405
--- --------- ------ -------- ----------
Balance, December 31, 1996.............................. 100 1,000 9,000 (48,996) (38,996)
Net income............................................ -- -- -- 153,777 153,777
--- --------- ------ -------- ----------
Balance, June 30, 1997 (unaudited)...................... 100 $ 1,000 $ 9,000 $ 104,781 $ 114,781
--- --------- ------ -------- ----------
--- --------- ------ -------- ----------
See notes to financial statements.
F-34
MEDICAL BILLING AND MANAGEMENT SERVICES, INC.
AND SUBSIDIARY
STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------------- ----------------------
1994 1995 1996 1996 1997
---------- ---------- --------- --------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................... $ (66,033) $ 21,149 $ 26,405 $ 48,514 $ 153,777
---------- ---------- --------- --------- -----------
Adjustments to reconcile net income (loss) to net
cash provided by operating activities -
Depreciation and amortization...................... 17,466 43,063 39,960 18,850 18,850
Changes in assets and liabilities -
(Increase) decrease in -
Accounts receivable, net....................... (14,949) (27,142) (40,613) (37,349) (137,087)
Prepaid expenses and other current assets...... (300) 300 -- -- --
Increase (decrease) in -
Accounts payable and accrued expenses.......... 53,793 (6,985) (29,604) (29,604) (5,252)
---------- ---------- --------- --------- -----------
56,010 9,236 (30,257) (48,103) (123,489)
---------- ---------- --------- --------- -----------
Net cash provided by (used in) operating
activities......................................... (10,023) 30,385 (3,852) (4,589) 30,288
---------- ---------- --------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment................... (51,621) (31,333) (34,383) (13,183) (28,581)
(Increase) decrease in other noncurrent assets....... (62,500) -- -- -- --
---------- ---------- --------- --------- -----------
Net cash used in investing activities............ (114,121) (31,333) (34,383) (13,183) (28,581)
---------- ---------- --------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayments of) short-term
note-stockholder................................... 100,000 (1,610) (98,390) (98,390) --
Proceeds from (repayments of) long-term
note-stockholder................................... 66,827 (10,126) 166,440 140,977 (22,081)
---------- ---------- --------- --------- -----------
Net cash provided by (used in) financing
activities....................................... 166,827 (11,736) 68,050 42,587 (22,081)
---------- ---------- --------- --------- -----------
NET INCREASE (DECREASE) IN CASH........................ 42,683 (12,684) 29,815 29,815 (20,374)
CASH, beginning of period.............................. -- 42,683 29,999 29,999 59,814
---------- ---------- --------- --------- -----------
CASH, end of period.................................... $ 42,683 $ 29,999 $ 59,814 $ 59,814 $ 39,440
---------- ---------- --------- --------- -----------
---------- ---------- --------- --------- -----------
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid........................................ $ 6,396 $ 11,169 $ 8,516 $ 4,426 $ --
---------- ---------- --------- --------- -----------
---------- ---------- --------- --------- -----------
See notes to financial statements.
F-35
MEDICAL BILLING AND MANAGEMENT SERVICE, INC.
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS ORGANIZATION AND BASIS OF PRESENTATION
Medical Billing and Management Services, Inc. (the "Company") was
incorporated under the laws of the Commonwealth of Pennsylvania. The Company was
organized to provide billing and collection services to its clients as well as
maintaining applicable billing records on patient accounts.
The Company's wholly owned subsidiary Radiology Billing and Management
Services, Inc. ("RBMS") provides similar services to clients specializing in the
practice of radiology.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. METHOD OF ACCOUNTING
The financial statements of Medical Billing and Management Services, Inc.
and Subsidiary are presented on the accrual basis of accounting. Accordingly,
revenues are recorded when earned, rather than when received, and expenses are
recorded when incurred, rather than when paid.
B. REVENUES
Revenues are accounted for in the period the services are provided and are
derived from billings to clients. Fees are earned based on a percentage of gross
billings to the individual clients. Fee percentages range from 6% to 12% of
gross billings.
C. CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk consist principally of trade account receivables.
The Company establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific clients, historical trends and other
information.
D. PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are amortized over the respective lease terms or the
service lives of the improvements, whichever is shorter.
E. 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 as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F. INCOME TAXES
The Company, with the consent of its stockholder, has elected under the
Internal Revenue Code to be an S corporation for federal and state tax purposes.
In lieu of corporate income taxes, the stockholders of an S corporation are
taxed on their proportionate share of the Company's taxable income. Therefore,
no provision or liability for federal or state income taxes has been included in
these financial statements.
F-36
MEDICAL BILLING AND MANAGEMENT SERVICE, INC.
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
G. CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all cash accounts which are not subject to
withdrawal restrictions or penalties, and all highly liquid instruments, with
original maturities of three months or less.
H. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards ("SFAS") No. 107 "Disclosures
About Fair Value of Financial Instruments" requires disclosure about the fair
value of all financial instruments. Carrying amounts of all financial
instruments approximate fair value as of December 31, 1996.
I. LONG LIVED ASSETS
Under the requirements of SFAS No. 121 "Accounting for Long-Lived Assets and
for Long-Lived-Assets to be Disposed of", the Company is obligated to recognize
an impairment loss on its long lived assets whenever the sum of the expected
future cash flows resulting from their use is less than their carrying amount.
As of December 31, 1996, no impairment exists with respect to the Company's
long-lived assets.
3. OTHER NONCURRENT ASSETS
Other noncurrent assets consist of the following:
DECEMBER 31,
----------------------
1995 1996
---------- ----------
Excess of cost over fair value of assets acquired..................... $ 3,141 $ --
Customer lists........................................................ 70,000 70,000
---------- ----------
73,141 70,000
Less: Accumulated amortization........................................ (20,641) (27,500)
---------- ----------
$ 52,500 $ 42,500
---------- ----------
---------- ----------
4. COMMITMENTS AND CONTINGENCIES
The Company has entered into binding agreements with Integrated Physicians
Systems, Inc. ("IPS"), the terms of which provide that IPS will acquire
substantially all of the assets, goodwill, and intangibles of the Company. The
acquisition by IPS will coincide with the consummation of its IPO.
F-37
MEDICAL BILLING AND MANAGEMENT SERVICE, INC.
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
ESTIMATED DECEMBER 31,
USEFUL LIVES ----------------------
(YEARS) 1995 1996
--------------- ---------- ----------
Leasehold improvements.................................. 5-10 $ 4,434 $ 14,337
Office and computer equipment........................... 5-7 94,023 101,703
Furniture and fixtures.................................. 7-10 34,652 27,797
---------- ----------
Total................................................... 133,109 143,837
Less: Accumulated depreciation.......................... (76,055) (82,360)
---------- ----------
Net..................................................... $ 57,054 $ 61,477
---------- ----------
---------- ----------
6. SHORT-TERM AND LONG-TERM OBLIGATIONS AND COMMITMENTS
A. SHORT-TERM NOTES PAYABLE--STOCKHOLDER
Short-term notes payable to stockholder consists of the following:
DECEMBER 31,
--------------------
1995 1996
--------- ---------
Unsecured demand notes payable to stockholder bearing interest at 9%....... $ 98,390 $ --
--------- ---------
--------- ---------
B. LONG-TERM NOTE--STOCKHOLDER
Long-term note payable to stockholder consists of the following:
DECEMBER 31,
-----------------------
1995 1996
----------- ----------
Unsecured note payable to stockholder, due through 2009, bearing
interest at 9.5%, payable in monthly installments with fixed
principal payments................................................. $ 100,292 $ 266,732
Less: current portion................................................ (100,292) (11,854)
----------- ----------
Long-term note, excluding current portion...................... $ -- $ 254,878
----------- ----------
----------- ----------
F-38
MEDICAL BILLING AND MANAGEMENT SERVICE, INC.
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. SHORT-TERM AND LONG-TERM OBLIGATIONS AND COMMITMENTS (CONTINUED)
As of December 31, 1996, the aggregate amounts of annual principal
maturities of long-term debt is as follows:
1997.............................................................. $ 12,000
1998.............................................................. 13,000
1999.............................................................. 14,000
2000.............................................................. 16,000
2001.............................................................. 17,000
Thereafter 182,878
---------
Total $ 254,878
---------
---------
Interest of $8,000 was paid to the shareholder during year ending December
31, 1996.
C. LEASE OBLIGATIONS
The Company leases office space under noncancellable operating lease
agreements which expire at various dates. At December 31, 1996, minimum annual
rental commitments under noncancelable operating leases with terms in excess of
one year are as follows:
OPERATING
LEASES
----------
1997.............................................................................. $ 137,432
1998.............................................................................. 141,720
1999.............................................................................. 143,046
2000.............................................................................. 127,932
----------
Total future minimum lease payments............................................. $ 550,130
----------
----------
Rent expense related to operating leases amounted to $71,000, $90,000,
$74,000 for the years ended December 31, 1994, 1995, and 1996, respectively.
7. EMPLOYEE BENEFIT PLANS
The Company has a qualified defined contribution pension plan (the "Plan").
The Company pays all general and administrative expenses of the Plan. The
Company made contributions related to the Plan totaling $80,000, $44,000 and $0
in 1994, 1995 and 1996, respectively.
The Company does not typically provide employees any post retirement
benefits other than the Plan described above and, accordingly, the impact of
SFAS No. 106 "Employer's Accounting for Postretirement Benefits Other than
Pensions" had no material effect on the Company.
F-39
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholder of
Branchburg Eye Physicians, P.A.
We have audited the accompanying balance sheets of Branchburg Eye
Physicians, P.A. as of December 31, 1995 and 1996, and the related statements of
operations, stockholder's equity (deficit) and cash flows for each of the three
years in the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Branchburg Eye Physicians,
P.A. as of December 31, 1995 and 1996, and the results of its operations,
stockholder's equity (deficit) and cash flows for each of the three years in the
period ended December 31, 1996 in conformity with generally accepted accounting
principles.
Feldman Radin & Co., P. C.
Certified Public Accountants
New York, New York
May 9, 1997
F-40
BRANCHBERG EYE PHYSICIANS, P.A.
BALANCE SHEETS
DECEMBER 31,
---------------------- JUNE 30,
1995 1996 1997
---------- ---------- -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash...................................................................... $ -- $ 24,368 $ 23,595
Accounts receivable, less allowance for bad debts of $52,416 in 1995,
$63,561 in 1996 and $63,561 in 1997..................................... 50,361 56,365 108,378
---------- ---------- -----------
Total current assets.................................................. 50,361 80,733 131,973
---------- ---------- -----------
PROPERTY AND EQUIPMENT, net................................................. 143,886 136,949 136,949
---------- ---------- -----------
$ 194,247 $ 217,682 $ 268,922
---------- ---------- -----------
---------- ---------- -----------
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
CURRENT LIABILITIES:
Short-term notes payable--stockholder..................................... $ 27,239 $ 171,320 $ 66,922
Accounts payable and accrued expenses..................................... 14,486 85,267 91,739
---------- ---------- -----------
Total current liabilities............................................. 41,725 256,587 158,661
---------- ---------- -----------
LONG-TERM DEBT, net of current portion...................................... -- -- 144,875
---------- ---------- -----------
Total liabilities..................................................... 41,725 256,587 303,536
STOCKHOLDER'S EQUITY (DEFICIT):
Common stock, no par value; 1,000 shares authorized, 1,000 shares issued
and outstanding, respectively........................................... 1,000 1,000 1,000
Additional paid in capital................................................ 64,000 64,000 64,000
Retained earnings (deficit)............................................... 87,522 (103,905) (99,614)
---------- ---------- -----------
TOTAL STOCKHOLDER'S EQUITY (DEFICIT)........................................ 152,522 (38,905) (34,614)
---------- ---------- -----------
$ 194,247 $ 217,682 $ 268,922
---------- ---------- -----------
---------- ---------- -----------
See notes to financial statements.
F-41
BRANCHBERG EYE PHYSICIANS, P.A.
STATEMENTS OF OPERATIONS
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------------------- ----------------------
1994 1995 1996 1996 1997
------------ ---------- ------------ ---------- ----------
(UNAUDITED)
REVENUE:
Medical services revenue.............................. $ 1,035,987 1,091,733 $ 1,093,179 $ 513,795 $ 551,215
Other revenue......................................... 226 233 2,604 82 --
------------ ---------- ------------ ---------- ----------
Total revenue..................................... 1,036,213 1,091,966 1,095,783 513,877 551,215
------------ ---------- ------------ ---------- ----------
COSTS AND EXPENSES:
Salaries and wages.................................... 672,980 572,002 815,298 168,845 183,127
Medical supplies and expenses......................... 80,574 77,735 89,199 39,053 41,659
General and administrative expenses................... 343,139 383,162 325,771 281,242 319,288
Bad debt expense...................................... 10,000 -- 11,145 5,573 --
Depreciation and amortization......................... 3,404 44,674 41,477 500 2,850
Interest expense...................................... -- 2,909 4,320 -- --
------------ ---------- ------------ ---------- ----------
Total costs and expenses.......................... 1,110,097 1,080,482 1,287,210 495,213 546,924
------------ ---------- ------------ ---------- ----------
Net income (loss)................................. $ (73,884) 11,484 $ (191,427) $ 18,664 $ 4,291
------------ ---------- ------------ ---------- ----------
------------ ---------- ------------ ---------- ----------
See notes to financial statements.
F-42
BRANCHBURG EYE PHYSICIANS, P.A.
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (DEFICIT)
COMMON STOCK ADDITIONAL RETAINED
---------------------- PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (DEFECIT) TOTAL
----------- --------- -------------- ----------------- -----------
Balance, December 31, 1993..................... 1,000 $ 1,000 $ 64,000 $ 149,922 $ 214,922
Net loss..................................... -- -- -- (73,884) (73,884)
----- --------- ------- ----------------- -----------
Balance, December 31, 1994..................... 1,000 1,000 64,000 76,038 141,038
Net income................................... -- -- -- 11,484 11,484
----- --------- ------- ----------------- -----------
Balance, December 31, 1995..................... 1,000 1,000 64,000 87,522 152,522
Net loss..................................... -- -- -- (191,427) (191,427)
----- --------- ------- ----------------- -----------
Balance, December 31, 1996..................... 1,000 1,000 64,000 (103,905) (38,905)
Net income................................... -- -- -- 4,291 4,291
----- --------- ------- ----------------- -----------
Balance, June 30, 1997(unaudited).............. 1,000 $ 1,000 $ 64,000 $ (99,614) $ (34,614)
----- --------- ------- ----------------- -----------
----- --------- ------- ----------------- -----------
See notes to financial statements
F-43
BRANCHBERG EYE PHYSICIANS, P.A.
STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------ ----------------------
1994 1995 1996 1996 1997
---------- ----------- ----------- --------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).......................................... $ (73,884) $ 11,484 $ (191,427) $ 18,664 $ 4,291
---------- ----------- ----------- --------- -----------
Adjustments to reconcile net income (loss) to net cash used
in operating activities -
Depreciation and amortization.......................... 3,404 44,674 41,477 500 2,850
Changes in assets and liabilities -
(Increase) decrease in -Accounts receivable, net..... 157,475 15 (6,004) (77,551) (52,013)
Increase (decrease) in -Accounts payable and accrued
expenses........................................... (48,704) 2,428 70,781 4,514 6,472
---------- ----------- ----------- --------- -----------
112,175 47,117 106,254 (72,537) (42,691)
---------- ----------- ----------- --------- -----------
Net cash used in operating activities.................. 38,291 58,601 (85,173) (53,873) (38,400)
---------- ----------- ----------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment....................... (15,309) (39,425) (34,540) (500) (2,850)
---------- ----------- ----------- --------- -----------
Net cash provided by (used in) investing activities.... (15,309) (39,425) (34,540) (500) (2,850)
---------- ----------- ----------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayment of) short-term notes payable.... (12,585) (15,068) 144,081 30,937 (104,398)
Proceeds from (repayment of) long-term debt.............. (8,819) (5,781) -- 27,707 144,875
---------- ----------- ----------- --------- -----------
Net cash provided by (used in) financing activities.... (21,404) (20,849) 144,081 58,644 40,477
---------- ----------- ----------- --------- -----------
NET INCREASE (DECREASE) IN CASH............................ 1,578 (1,673) 24,368 4,271 (773)
CASH-, beginning of period................................. 95 1,673 -- -- 24,368
---------- ----------- ----------- --------- -----------
CASH-, end of period....................................... 1,673 $ -- $ 24,368 $ 4,271 $ 23,595
---------- ----------- ----------- --------- -----------
---------- ----------- ----------- --------- -----------
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid.............................................. $ 3,404 $ 2,909 $ 4,320 $ 500 $ 2,850
---------- ----------- ----------- --------- -----------
---------- ----------- ----------- --------- -----------
See notes to financial statements.
F-44
BRANCHBURG EYE PHYSICIANS, P.A.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS ORGANIZATION AND BASIS OF PRESENTATION
Branchburg Eye Physicians, P.A. (the "Company") is a New Jersey professional
corporation providing medical services in the state of New Jersey. The Company
was incorporated on July 18, 1990.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. METHOD OF ACCOUNTING
The financial statements of the Company are presented on the accrual basis
of accounting. Accordingly, revenues are recorded when earned, rather than when
received and expenses are recorded when incurred, rather than when paid.
B. REVENUES
Medical service revenues are accounted for in the period the services are
provided. The revenues are reported at the estimated realizable amounts from
patients, third-party payors and others. Provisions for estimated third-party
payor adjustments are recorded in the period the related services are provided
as a reduction of revenue. Any adjustments to those amounts are recorded in the
period in which the revised amount is determined. A portion of the Company's
medical service revenue is derived from Medicare, Medicaid and other
governmental programs. Medicare, Medicaid, and other governmental programs
reimburse physicians based on fee schedules which are determined by the specific
governmental agency. Additionally, the Company participates in agreements with
managed care organizations to provide services at negotiated fee-for-service or
capitated payment rates.
C. CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk consist principally of trade accounts receivable.
The Company establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific payors, historical trends and other
information.
D. PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are amortized over the respective lease terms or the
service lives of the improvements, whichever is shorter.
E. 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 as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F. INCOME TAXES
The Company has historically not incurred significant tax liabilities for
federal or state income taxes. Compensation to physician owners has
traditionally reduced taxable income to nominal levels. Provisions
F-45
BRANCHBURG EYE PHYSICIANS, P.A.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
for income taxes and deferred tax assets and liabilities are not material and
have not been reflected in the financial statements.
G. CASH AND CASH EQUIVALENTS
The Company includes as cash and cash equivalents all cash accounts which
are not subject to withdrawal restrictions or penalties, and all highly liquid
instruments, with original maturities of three months or less.
H. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards ("SFAS") No. 107 "Disclosures
About Fair Value of Financial Instruments" requires disclosure about the fair
value of all financial instruments. Carrying amounts of all financial
instruments approximate fair value as of December 31, 1996.
I. ACCOUNTING FOR LONG-LIVED ASSETS
Under the requirements of SFAS No. 121 "Accounting for Long-Lived Assets and
for Long-Lived Assets to be disposed of", the Company is obligated to recognize
an impairment loss on their long-lived assets whenever the sum of the expected
future cash flows from their use is less than their carrying amount. Based on
the Company's review as of December 31, 1996, no impairment of long-lived assets
was evident.
3. COMMITMENTS AND CONTINGENCIES
The Company is insured with respect to medical malpractice risks. In the
normal course of business the Company has been named in lawsuits. In the opinion
of the management of the Company the ultimate liability, if any, of the Company
with respect to any such lawsuit will not exceed the insurance coverages carried
by the Company and will not materially impact the operating results or results
of financial condition of the Company.
The Company has entered into a binding agreement with Integrated Physicians
Systems, Inc. ("IPS"), the terms of which provide that IPS will acquire
substantially all of the assets, goodwill, and intangibles of the Company. The
acquisition by IPS will coincide with the consummation of its IPO.
F-46
BRANCHBURG EYE PHYSICIANS, P.A.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
ESTIMATED DECEMBER 31,
USEFUL LIVES ----------------------
(YEARS) 1995 1996
--------------- ---------- ----------
Leasehold improvements.................................. 5-7 $ 11,705 $ 19,556
Medical and computer equipment.......................... 5-7 240,685 217,848
Furniture and fixtures.................................. 5-7 62,908 82,467
Automobiles............................................. 5 34,357 34,357
---------- ----------
Total................................................. 349,655 354,228
Less: Accumulated depreciation.......................... 205,769 217,279
---------- ----------
Net................................................... $ 143,886 $ 136,949
---------- ----------
---------- ----------
5. SHORT-TERM OBLIGATIONS AND COMMITMENTS
A. SHORT-TERM NOTES PAYABLE - STOCKHOLDER
Short-term notes payable- stockholder, consist of the following:
DECEMBER 31,
---------------------
1995 1996
--------- ----------
Secured and unsecured demand notes payable to the stockholders, bearing
interest at 9%....................................................... $ 27,239 $ 171,230
--------- ----------
--------- ----------
B. LEASE OBLIGATIONS
The Company leases office space under noncancelable operating lease
agreements, which expire at various dates. At December 31, 1996 minimum annual
rental commitments under noncancelable operating leases with terms in excess of
one year are as follows:
OPERATING
LEASES
----------
1997.............................................................................. $ 83,000
1998.............................................................................. 83,000
1999.............................................................................. 83,000
----------
Total future minimum lease payments............................................. $ 249,000
----------
----------
Rent expense relating to operating leases amounted to $88,312, $88,898 and
$81,023 for the years ended December 31, 1994, 1995 and 1996, respectively.
6. EMPLOYEE BENEFIT PLANS
The Company has an unqualified defined contribution pension plan. The
Company pays all general and administrative expenses of this plan. The Company
accrued contributions related to this plan totaling $54,378 in 1996.
F-47
BRANCHBURG EYE PHYSICIANS, P.A.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. EMPLOYEE BENEFIT PLANS (CONTINUED)
The Company does not typically provide employees any post retirement
benefits other than retirement benefits other than the plan described above,
accordingly, the impact of SFAS No. 106 "Employer's Accounting for
Postretirement Benefits Other than Pensions" had no material effect on the
Company.
7. RELATED PARTY TRANSACTIONS
A stockholder made a loan to the Company. Obligations payable to the
stockholder were $30,000 and $171,000 as of December 31, 1995 and 1996,
respectively. Interest paid associated with these obligations was $3,000 for the
year ended December 31, 1995.
F-48
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Felix Salerno, M.D. and Richard Weeder, M.D.
We have audited the accompanying combined balance sheets of Felix Salerno,
M.D. and Richard Weeder, M.D. as of December 31, 1995 and 1996, and the related
combined statements of operations, proprietors' capital and statement of changes
in cash flows for each of the three years in the period ended December 31, 1996.
These combined financial statements are the responsibility of Felix Salerno,
M.D. and Richard Weeder, M.D.'s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Felix Salerno, M.D.
and Richard Weeder, M.D. as of December 31, 1995 and 1996, and the results of
its operations, proprietors' capital and statement of changes in cash flows for
each of the three years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.
Feldman Radin & Co., P. C.
Certified Public Accountants
New York, New York
May 9, 1997
F-49
FELIX SALERNO, M.D. AND RICHARD WEEDER, M.D.
BALANCE SHEETS
DECEMBER 31,
---------------------- JUNE 30,
1995 1996 1997
---------- ---------- -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash...................................................................... $ -- $ -- $ 49,488
Accounts receivable, less allowance for bad debts of $155,774 in 1995,
$168,553 in 1996 and $168,553 in 1997................................... 126,013 155,357 129,675
---------- ---------- -----------
Total current assets.................................................. 126,013 155,357 179,163
---------- ---------- -----------
$ 126,013 $ 155,357 $ 179,163
---------- ---------- -----------
---------- ---------- -----------
LIABILITIES AND PROPRIETORS' CAPITAL
CURRENT LIABILITIES:
Accounts payable and accrued expenses..................................... $ 21,226 $ 10,454 $ 23,803
Accrued payroll and payroll taxes......................................... 30,255 37,718 --
---------- ---------- -----------
Total current liabilities............................................. 51,481 48,172 23,803
---------- ---------- -----------
COMMITMENTS AND CONTINGENCIES
PROPRIETORS' CAPITAL........................................................ 74,532 107,185 155,360
---------- ---------- -----------
$ 126,013 $ 155,357 $ 179,163
---------- ---------- -----------
---------- ---------- -----------
See notes to financial statements.
F-50
FELIX SALERNO, M.D. AND RICHARD WEEDER, M.D.
STATEMENTS OF OPERATIONS
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------------------- ----------------------
1994 1995 1996 1996 1997
------------ ------------ ---------- ---------- ----------
(UNAUDITED)
REVENUE:
Medical services revenue.............................. $ 1,049,500 $ 1,016,588 $ 853,472 $ 416,153 $ 384,305
Other revenue......................................... 10,154 13,499 20,467 5,364 7,273
------------ ------------ ---------- ---------- ----------
Total revenue....................................... 1,059,654 1,030,087 873,939 421,517 391,578
------------ ------------ ---------- ---------- ----------
COSTS AND EXPENSES:
Salaries and wages.................................... 846,880 650,202 568,817 239,668 188,076
Medical supplies and expenses......................... 7,619 5,068 4,633 2,720 2,128
General and administrative expenses................... 196,155 277,618 251,525 156,874 146,077
Bad debt expense...................................... 131,774 25,000 12,779 6,390 7,122
Interest expense...................................... 94 1,112 3,532 -- --
------------ ------------ ---------- ---------- ----------
Total costs and expenses............................ 1,181,522 959,000 841,286 405,652 343,403
------------ ------------ ---------- ---------- ----------
Net (loss) income................................... $ (121,868) $ 71,087 $ 32,653 $ 15,865 $ 48,175
------------ ------------ ---------- ---------- ----------
------------ ------------ ---------- ---------- ----------
See notes to financial statements.
F-51
FELIX SALERNO, M.D. AND RICHARD WEEDER, M.D.
COMBINED STATEMENTS OF PROPRIETORS' CAPITAL
BALANCE, December 31, 1993....................................................... $ 125,313
Net loss......................................................................... (121,868)
---------
BALANCE, December 31, 1994....................................................... 3,445
Net income....................................................................... 71,087
---------
BALANCE, December 31, 1995....................................................... 74,532
Net income....................................................................... 32,653
---------
BALANCE, December 31, 1996....................................................... 107,185
Net income....................................................................... 48,175
---------
BALANCE, June 30, 1997 (unaudited)............................................... $ 155,360
---------
---------
See notes to financial statements.
F-52
FELIX SALERNO, M.D. AND RICHARD WEEDER, M.D.
STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------------- ----------------------
1994 1995 1996 1996 1997
----------- ---------- ---------- ---------- ----------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income........................................ $ (121,868) $ 71,087 $ 32,653 $ 15,865 $ 48,175
----------- ---------- ---------- ---------- ----------
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities -
Changes in assets and liabilities -
(Increase) decrease in -
Accounts receivable, net........................... 79,371 (62,357) (29,344) 59,481 25,682
Increase (decrease) in -
Accounts payable and accrued expenses.............. (96,801) 17,474 (10,772) (11,226) 13,349
Accrued payroll and payroll taxes.................. 56,459 (26,204) 7,463 (30,255) (37,718)
----------- ---------- ---------- ---------- ----------
39,029 (71,087) (32,653) 18,000 1,313
----------- ---------- ---------- ---------- ----------
Net cash provided by (used in) operating activities.... (82,839) -- -- 33,865 49,488
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of property and equipment............ 9,740 -- -- -- --
Decrease in other noncurrent assets...................... 8,408 -- -- -- --
----------- ---------- ---------- ---------- ----------
Net cash provided by investing activities............ 18,148 -- -- -- --
----------- ---------- ---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH............................ (64,691) -- -- 33,865 49,488
CASH, beginning of period.................................. 64,691 -- -- -- --
----------- ---------- ---------- ---------- ----------
CASH, end of period........................................ $ -- $ -- $ -- $ 33,865 $ 49,488
----------- ---------- ---------- ---------- ----------
----------- ---------- ---------- ---------- ----------
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid............................................ $ 94 $ 1,112 $ 3,532 $ 106 $ 159
----------- ---------- ---------- ---------- ----------
----------- ---------- ---------- ---------- ----------
See notes to financial statements.
F-53
FELIX SALERNO, M.D. AND RICHARD WEEDER, M.D,
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS ORGANIZATION AND BASIS OF PRESENTATION
Felix Salerno, M.D. and Richard Weeder, M.D. (the "Proprietors") are medical
practitioners organized to do business as sole proprietors in the state of New
Jersey.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. METHOD OF ACCOUNTING
The combined financial statements of the Proprietors are presented on the
accrual basis of accounting. Accordingly, revenues are recorded when earned,
rather than when received and expenses are recorded when incurred, rather than
when paid.
B. REVENUES
Medical service revenues are accounted for in the period the services are
provided. The revenues are reported at the estimated realizable amounts from
patients, third-party payors and others. Provisions for estimated third-party
payor adjustments are recorded in the period the related services are provided
as a reduction of revenue. Any adjustment to those amounts are recorded in the
period in which the revised amount is determined. A portion of the Proprietors'
medical services revenue is derived from Medicare, Medicaid and other
governmental programs. Medicare, Medicaid, and other governmental programs
reimburse physicians based on fee schedules which are determined by the specific
governmental agency. Additionally, the Proprietors participate in agreements
with managed care organizations to provide services at negotiated
fee-for-service or capitated payments rates.
C. CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Proprietors to
concentrations of credit risk consist principally of trade account receivables.
The Proprietors establish an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific payors, historical trends and other
information.
D. 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 as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
E. INCOME TAXES
Income from the proprietorships are combined with the income and expenses of
the Proprietors from other sources and reported in the Proprietors' individual
federal and state tax returns. The proprietorships are not tax paying entities
for purposes of federal and state income taxes, and thus no income taxes have
been recorded in the statements.
F. CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all cash accounts which are not subject to
withdrawal restrictions or penalties, and all highly liquid instruments, with
original maturities of three months or less.
F-54
FELIX SALERNO, M.D. AND RICHARD WEEDER, M.D,
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
G. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards ("SFAS") No. 107 "Disclosures
About Fair Value of Financial Instruments" requires disclosure about the fair
value of all financial instruments. Carrying amounts of all financial
instruments approximate fair value as of December 31, 1996.
H. LONG-LIVED ASSETS
Under the requirements of SFAS No. 121 "Accounting for Long-Lived Assets and
for Long-Lived-Assets to be Disposed of", the Proprietors are obligated to
recognize an impairment loss on their long lived assets whenever the sum of the
expected future cash flows resulting from their use is less than their carrying
amount. As of December 31, 1996, no impairment exists with respect to the
shareholders' long-lived assets.
3. COMMITMENTS AND CONTINGENCIES
The Proprietors are insured with respect to medical malpractice risks. In
the normal course of business the Proprietors have been named in lawsuits. In
the opinion of the Proprietors the ultimate liability, if any, of the
Proprietors with respect to any such lawsuit will not exceed the insurance
coverages carried by the Proprietors and will not materially impact the
operating results or results of financial condition of the Proprietors.
The Proprietors have entered into binding agreements with Integrated
Physician Systems, Inc. ("IPS"), the terms of which provide that IPS will
acquire substantially all of the assets, goodwill, and intangibles of the
Proprietors. The acquisition by IPS will coincide with the consummation of its
IPO.
4. LEASE OBLIGATIONS
The Proprietors lease office space under noncancellable operating lease
agreements. At December 31, 1996, minimum annual rental commitments under
noncancelable operating leases with terms in excess of one year are as follows:
OPERATING
LEASES
-----------
1997............................................................................... $ 22,200
1998............................................................................... 22,200
1999............................................................................... 22,200
-----------
Total future minimum lease payments.............................................. $ 66,600
-----------
-----------
Rent expense related to operating leases amounted to $22,200 for each of the
years ended December 31, 1994, 1995 and 1996, respectively.
5. EMPLOYEE BENEFIT PLANS
The Proprietors have qualified defined contribution pension plans (the
"Plan"). The Proprietors pay all general and administrative expenses of the
Plans. The Proprietors made contributions related to the Plan totaling $51,000,
$60,000 and $60,000 in 1994, 1995 and 1996, respectively.
The Proprietors do not typically provide employees any post retirement
benefits other than the Plan described above and, accordingly, the impact of
SFAS No. 106 "Employer's Accounting for Postretirement Benefits other than
Pensions" had no material effect on the Proprietors.
F-55
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Shareholder of
Flemington Medical Group, PA.
We have audited the accompanying balance sheets of Flemington Medical Group,
PA. as of December 31, 1995 and 1996, and the related statements of operations,
changes in shareholder's equity and cash flows for each of the three years in
the period ended December 31, 1996. These combined financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Flemington Medical Group,
PA., as of December 31, 1995 and 1996, and the results of its operations,
changes in shareholder's equity and cash flows for each of the three years in
the period ended December 31, 1996 in conformity with generally accepted
accounting principles.
Feldman Radin & Co., P. C.
Certified Public Accountants
New York, New York
May 9, 1997
F-56
FLEMINGTON MEDICAL GROUP, P.A.
BALANCE SHEETS
DECEMBER 31,
---------------------- JUNE 30,
1995 1996 1997
---------- ---------- -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash...................................................................... $ 779 $ 6,800 $ 37,040
Accounts receivable, less allowance for bad debts of $4,500 in 1995,
$4,051 in 1996 and $4,051 in 1997....................................... 70,491 69,535 70,336
---------- ---------- -----------
Total current assets.................................................. 71,270 76,335 107,376
---------- ---------- -----------
PROPERTY AND EQUIPMENT, net................................................. 54,633 50,986 50,563
---------- ---------- -----------
$ 125,903 $ 127,321 $ 157,939
---------- ---------- -----------
---------- ---------- -----------
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Short-term notes payable.................................................. $ 9,611 $ 3,410 $ --
Accounts payable and accrued expenses..................................... 24,943 35,567 940
---------- ---------- -----------
Total current liabilities............................................. 34,554 38,977 940
---------- ---------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common stock, no par value; 1,000 shares authorized, 100 shares issued and
outstanding, respectively............................................... 1,000 1,000 1,000
Additional paid-in capital................................................ 16,402 16,402 16,402
Retained earnings......................................................... 73,947 70,942 139,597
---------- ---------- -----------
Total stockholder's equity............................................ 91,349 88,344 156,999
---------- ---------- -----------
$ 125,903 $ 127,321 $ 157,939
---------- ---------- -----------
---------- ---------- -----------
See notes to financial statements.
F-57
FLEMINGTON MEDICAL GROUP, P.A.
STATEMENTS OF OPERATIONS
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------- ----------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
REVENUE:
Medical services revenue........................... $ 759,200 $ 748,211 $ 697,837 $ 375,530 $ 361,513
---------- ---------- ---------- ---------- ----------
Total revenue.................................. 759,200 748,211 697,837 375,530 361,513
---------- ---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Salaries and wages................................. 422,094 416,553 410,658 243,246 195,743
Medical supplies and expenses...................... 50,369 51,680 40,660 20,293 13,040
General and administrative expenses................ 269,107 253,320 241,267 78,654 78,983
Bad debt expense................................... 4,500 -- -- -- 750
Depreciation and amortization...................... 11,517 22,654 6,851 3,500 3,878
Interest expense................................... 2,800 2,453 1,406 891 464
---------- ---------- ---------- ---------- ----------
Total costs and expenses....................... 760,387 746,660 700,842 346,584 292,858
---------- ---------- ---------- ---------- ----------
Net income (loss).............................. $ (1,187) $ 1,551 $ (3,005) $ 28,946 $ 68,655
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
See notes to financial statements.
F-58
FLEMINGTON MEDICAL GROUP, P.A.
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
COMMON STOCK ADDITIONAL
---------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
----------- --------- -------------- ---------- ----------
Balance, December 31, 1993............................ 1,000 $ 1,000 $ 16,402 $ 73,583 $ 90,985
Net loss............................................ -- -- -- (1,187) (1,187)
----- --------- ------- ---------- ----------
Balance, December 31, 1994............................ 1,000 1,000 16,402 72,396 89,798
Net income.......................................... -- -- -- 1,551 1,551
----- --------- ------- ---------- ----------
Balance, December 31, 1995............................ 1,000 1,000 16,402 73,947 91,349
Net loss............................................ -- -- -- (3,005) (3,005)
----- --------- ------- ---------- ----------
Balance, December 31, 1996............................ 1,000 1,000 16,402 70,942 88,344
Net income.......................................... -- -- -- 68,655 68,655
----- --------- ------- ---------- ----------
Balance, June 30, 1997 (unaudited).................... 1,000 $ 1,000 $ 16,402 $ 139,597 $ 156,999
----- --------- ------- ---------- ----------
----- --------- ------- ---------- ----------
See notes to financial statements
F-59
FLEMINGTON MEDICAL GROUP, P.A.
STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------------- ----------------------
1994 1995 1996 1996 1997
---------- ---------- --------- ---------- ----------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................................ $ (1,187) $ 1,551 $ (3,005) $ 28,946 $ 68,655
---------- ---------- --------- ---------- ----------
Adjustments to reconcile net income (loss) to net cash
provided by operating activities -
Depreciation and amortization.............................. 11,517 22,654 6,851 3,500 3,878
Changes in assets and liabilities -
(Increase) decrease in -
Accounts receivable, net............................... (4,829) (4,175) 956 18,281 (801)
Prepaid expenses and other current assets.............. 807 -- -- -- --
Increase (decrease) in -
Accounts payable and accrued expenses.................. 19,363 2,061 10,624 (22,081) (34,627)
---------- ---------- --------- ---------- ----------
26,858 20,540 18,431 (300) (31,550)
---------- ---------- --------- ---------- ----------
Net cash provided by operating activities................ 25,671 22,091 15,426 28,646 37,105
---------- ---------- --------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................... (9,379) (15,784) (3,204) -- (3,455)
Proceeds from sales of property and equpment................. -- -- -- 8,800 --
---------- ---------- --------- ---------- ----------
Net cash provided by (used in) investing activities...... (9,379) (15,784) (3,204) 8,800 (3,455)
---------- ---------- --------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayments of) short-term notes payable....... (16,854) (5,528) (6,201) (9,611) (3,410)
---------- ---------- --------- ---------- ----------
Net cash used in financing activities.................... (16,854) (5,528) (6,201) (9,611) (3,410)
---------- ---------- --------- ---------- ----------
NET INCREASE (DECREASE) IN CASH................................ (562) 779 6,021 27,835 30,240
CASH, beginning of period...................................... 562 -- 779 779 6,800
---------- ---------- --------- ---------- ----------
CASH, end of period............................................ $ -- $ 779 $ 6,800 $ 28,614 $ 37,040
---------- ---------- --------- ---------- ----------
---------- ---------- --------- ---------- ----------
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid............................................ $ 2,800 $ 2,453 $ 1,406 $ 891 $ 464
---------- ---------- --------- ---------- ----------
---------- ---------- --------- ---------- ----------
See notes to financial statements.
F-60
FLEMINGTON MEDICAL GROUP, P.A.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS ORGANIZATION AND BASIS OF PRESENTATION
Flemington Medical Group, PA. (the "Company") is a New Jersy professional
corporation providing medical services in the state of New Jersey. The Company
was incorporated on July 19, 1989.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. METHOD OF ACCOUNTING
The combined financial statements of the Company are presented on the
accrual basis of accounting. Accordingly, revenues are recorded when earned,
rather than when received and expenses are recorded when incurred, rather than
when paid.
B. REVENUES
Medical service revenues are accounted for in the period the services are
provided. The revenues are reported at the estimated realizable amounts from
patients, third-party payors and others. Provisions for estimated third-party
payor adjustments are recorded in the period the related services are provided.
Any adjustment to those amounts are recorded in the period in which the revised
amount is determined. A portion of the Company's medical services revenue is
derived from Medicare, Medicaid and other governmental programs. Medicare,
Medicaid, and other governmental programs reimburse physicians based on fee
schedules which are determined by the specific governmental agency.
Additionally, the Company participates in agreements with managed care
organizations to provide services at negotiated fee-for-service or capitated
payments rates.
C. CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to concentration
of credit risk consists principally of trade accounts receivable. The Company
establishes an allowance for doubtful accounts based upon factors surrounding
the credit risk of specific payors, historical trends and other information.
D. 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 as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
E. INCOME TAXES
The Company, with the consent of its shareholder, has elected under the
Internal Revenue Code to be taxed as an S corporation. In lieu of corporate
income taxes, the shareholders of an S corporation are taxed on their
proportionate share of the Company's taxable income. Therefore, no provision or
liability for federal income taxes has been included in these financial
statements.
F-61
FLEMINGTON MEDICAL GROUP, P.A.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
F. CASH AND CASH EQUIVALENTS
The Company includes as cash and cash equivalents all cash accounts which
are not subject to withdrawal restrictions or penalties, and all highly liquid
instruments, with original maturities of three months or less.
G. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards ("SFAS") No. 107 "Disclosures
About Fair Value of Financial Instruments" requires disclosure about the fair
value of all financial instruments. Carrying amounts of all financial
instruments approximate fair value as of December 31, 1996.
H. PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are amortized over the respective lease terms or the
service lives of the improvements, whichever is shorter.
I. LONG-LIVED ASSETS
Under the requirements of SFAS No. 121 "Accounting for Long-Lived Assets and
for Long-Lived Assets to be Disposed of", the Company is obligated to recognize
an impairment loss on its long-lived assets whenever the sum of the expected
future cash flows resulting from their use is less than their carrying amount.
As of December 31, 1996, no impairment exists with respect to the Company's
long-lived assets.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
ESTIMATED DECEMBER 31,
USEFUL LIVES ------------------------
(YEARS) 1995 1996
------------- ----------- -----------
Leasehold improvements................................ 5-10 $ 60,513 $ 62,103
Medical and computer equipment........................ 5-7 33,486 33,486
Furniture and fixtures................................ 7-10 63,779 65,393
----------- -----------
Total............................................... 157,779 160,983
Less: Accumulated depreciation........................ (103,145) (109,996)
----------- -----------
Net................................................. $ 54,633 $ 50,986
----------- -----------
----------- -----------
4. COMMITMENTS AND CONTINGENCIES
The Company has entered into binding agreements with Integrated Physicians
Systems, Inc. (IPS), the terms of which provide that IPS will acquire
substantially all of the assets, goodwill, and intangibles of the Company. The
acquisition by IPS will coincide with the consummation of its IPO.
F-62
FLEMINGTON MEDICAL GROUP, P.A.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. SHORT-TERM OBLIGATIONS AND COMMITMENTS
A. SHORT-TERM DEBT
DECEMBER 31,
--------------------
1995 1996
--------- ---------
Short-term debt consist of a line of credit with a bank. The line of credit
bears interest at prime + 3%............................................. $ 9,611 $ 3,410
--------- ---------
--------- ---------
B. LEASE OBLIGATIONS
The Company leases office space under noncancellable lease agreements. At
December 31, 1996, minimum annual rental commitments under noncancellable
operating leases with terms in excess of one year are as follows:
OPERATING
LEASES
----------
1997.............................................................................. $ 55,000
1998.............................................................................. 55,000
1999.............................................................................. 35,000
----------
Total future minimum lease payments........................................... $ 145,000
----------
----------
Rent expense amounted to $53,685, $55,786 and $56,883 for the years ended
December 31, 1994, 1995 and 1996, respectively.
6. EMPLOYEE BENEFIT PLANS
The Company maintains a qualified defined contribution profit sharing plan
(the "Plan") and pays all general and administrative expenses of the Plan. The
contributions related to the Plan totaled $40,000, $22,500 and $35,417 in 1994,
1995 and 1996, respectively.
The Company does not typically provide employees any post retirement
benefits other than the Plan described above and, accordingly, the impact of
SFAS No. 106 "Employer's Accounting for Postretirement Benefits other than
Pensions" had no material effect on the Company.
F-63
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Hunterdon Ophthalmologists, P.A.
We have audited the accompanying balance sheets of Hunterdon
Ophthalmologists, P.A. as of December 31, 1995 and 1996, and the related
statements of operations, changes in stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of Hunterdon Ophthalmologists' management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Hunterdon Ophthalmologists,
P.A. as of December 31, 1995 and 1996, and the results of its operations,
changes in stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1996 in conformity with generally accepted
accounting principles.
Feldman Radin & Co., P. C.
Certified Public Accountants
New York, New York
May 9, 1997
F-64
HUNTERDON OPHTHALMOLOGISTS, P.A.
BALANCE SHEETS
DECEMBER 31,
-------------------- JUNE 30,
1995 1996 1997
--------- --------- -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash......................................................................... $ 23,399 $ 20,076 $ 20,750
Accounts receivable, less allowance for bad debts of $12,000 in 1995, $17,088
in 1996 and $18,366 in 1997................................................ 48,000 68,352 71,417
Prepaid expenses and other current assets.................................... 3,927 3,927 4,077
--------- --------- -----------
Total current assets..................................................... 75,326 92,355 96,244
--------- --------- -----------
PROPERTY AND EQUIPMENT, net.................................................... 5,598 4,354 3,732
--------- --------- -----------
$ 80,924 $ 96,709 $ 99,976
--------- --------- -----------
--------- --------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses........................................ $ 14,783 $ 11,784 $ 10,350
--------- --------- -----------
Total current liabilities................................................ 14,783 11,784 10,350
--------- --------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, no par value; 1,000 shares authorized and 1,000 shares issued
and outstanding, respectively.............................................. 1,000 1,000 1,000
Retained earnings............................................................ 65,141 83,925 88,626
--------- --------- -----------
TOTAL STOCKHOLDERS' EQUITY..................................................... 66,141 84,925 89,626
--------- --------- -----------
$ 80,924 $ 96,709 $ 99,976
--------- --------- -----------
--------- --------- -----------
See notes to financial statements.
F-65
HUNTERDON OPHTHALMOLOGISTS, P.A.
STATEMENTS OF OPERATIONS
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------- ----------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
REVENUE:
Medical services revenue........................... $ 744,038 $ 804,638 $ 684,391 $ 342,196 $ 308,358
Other revenue...................................... 133 104 31 16 49
---------- ---------- ---------- ---------- ----------
Total revenue.................................. 744,171 804,742 684,422 342,212 308,407
---------- ---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Salaries and wages................................. 329,778 350,456 325,117 162,558 128,956
Medical supplies and expenses...................... 131,153 134,953 91,347 45,674 38,121
General and administrative expenses................ 284,719 299,560 242,842 110,174 133,402
Bad debt expense................................... 8,295 3,705 5,088 2,544 2,605
Depreciation and amortization...................... 1,244 1,244 1,244 622 622
Interest expense................................... 417 100 -- -- --
---------- ---------- ---------- ---------- ----------
Total costs and expenses....................... 755,606 790,018 665,638 321,572 303,706
---------- ---------- ---------- ---------- ----------
Net (loss) income.............................. $ (11,435) $ 14,724 $ 18,784 $ 20,640 $ 4,701
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
See notes to financial statements.
F-66
HUNTERDON OPHTHALMOLOGISTS, P.A.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
COMMON STOCK
-------------------- ADDITIONAL RETAINED
SHARES AMOUNT PAID-IN CAPITAL EARNINGS TOTAL
--------- --------- --------------- ---------- ----------
Balance, December 31, 1993............................ -- $ 1,000 $ -- $ 61,852 $ 62,852
Net loss............................................ -- -- -- (11,435) (11,435)
--------- --------- ------ ---------- ----------
Balance, December 31, 1994............................ -- 1,000 -- 50,417 51,417
Net income.......................................... -- -- -- 14,724 14,724
--------- --------- ------ ---------- ----------
Balance, December 31, 1995............................ -- 1,000 -- 65,141 66,141
Net income.......................................... -- -- -- 18,784 18,784
--------- --------- ------ ---------- ----------
Balance, December 31, 1996............................ -- 1,000 -- 83,925 84,925
Net income.......................................... -- -- -- 4,701 4,701
--------- --------- ------ ---------- ----------
Balance, June 30, 1997 (unaudited).................... -- $ 1,000 $ -- $ 88,626 $ 89,626
--------- --------- ------ ---------- ----------
--------- --------- ------ ---------- ----------
See notes to financial statements.
F-67
HUNTERDON OPHTHALMOLOGISTS, P.A.
STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------- ---------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income.................................... $ (11,435) $ 14,724 $ 18,784 $ 20,640 $ 4,701
---------- ---------- ---------- ---------- ---------
Adjustments to reconcile net (loss) income to net
cash provided by (used in) operating activities:
Depreciation and amortization...................... 1,244 1,244 1,244 622 622
Changes in assets and liabilities -
(Increase) decrease in -
Accounts receivable, net....................... 789 (14,822) (20,352) (20,921) (3,065)
Prepaid expenses and other current assets...... (3,927) -- -- 70 (150)
Increase (decrease) in -
Accounts payable and accrued expenses.......... 2,184 (913) (2,999) (3,953) (1,434)
---------- ---------- ---------- ---------- ---------
290 (14,491) (22,107) (24,182) (4,027)
---------- ---------- ---------- ---------- ---------
Net cash provided by (used in) operating
activities......................................... (11,145) 233 (3,323) (3,542) 674
---------- ---------- ---------- ---------- ---------
NET INCREASE (DECREASE) IN CASH........................ (11,145) 233 (3,323) (3,542) 674
CASH, beginning of period.............................. 34,311 23,166 23,399 23,399 20,076
CASH, end of period.................................... $ 23,166 $ 23,399 $ 20,076 $ 19,857 $ 20,750
---------- ---------- ---------- ---------- ---------
---------- ---------- ---------- ---------- ---------
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid........................................ $ 417 $ 100 $ -- $ -- $ --
---------- ---------- ---------- ---------- ---------
---------- ---------- ---------- ---------- ---------
See notes to financial statements.
F-68
HUNTERDON OPHTHALMOLOGISTS, P.A.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS ORGANIZATION AND BASIS OF PRESENTATION
Hunterdon Ophthalmologists, P.A. (the "Company") is a New Jersey
professional corporation which provides ophthalmological services. The Company
was incorporated on February 21, 1985.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. METHOD OF ACCOUNTING
The financial statements of the Company are presented on the accrual basis
of accounting. Accordingly, revenues are recorded when earned, rather than when
received and expenses are recorded when incurred, rather than when paid.
B. REVENUES
Medical service revenues are accounted for in the period the services are
provided. The revenues are reported at the estimated realizable amounts from
patients, third-party payors and others. Provisions for estimated third-party
payor adjustments are recorded in the period the related services are provided
as a reduction of revenue. Any adjustment to those amounts are recorded in the
period in which the revised amount is determined. A portion of the Company's
medical services revenue is derived from Medicare, Medicaid and other
governmental programs. Medicare, Medicaid, and other governmental programs
reimburse physicians based on fee schedules which are determined by the specific
governmental agency. Additionally, the Company participates in agreements with
managed care organizations to provide services at negotiated fee-for-service or
capitated payments rates.
C. CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk consist principally of trade account receivables.
The Company establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific payors, historical trends and other
information.
D. PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are amortized over the respective lease terms or the
service lives of the improvements, whichever is shorter.
E. 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 as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F. INCOME TAXES
The Company has historically not incurred significant tax liabilities for
federal or state income taxes. Compensation to physician owners has
traditionally reduced taxable income to nominal levels. Provisions
F-69
HUNTERDON OPHTHALMOLOGISTS, P.A.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
for income taxes and deferred tax assets and liabilities are not material and
have not been reflected in the financial statements.
G. CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all cash accounts which are not subject to
withdrawal restrictions or penalties, and all highly liquid instruments, with
original maturities of three months or less.
H. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting standards ("SFAS") No. 107 "Disclosures
About Fair Value of Financial Instruments" requires disclosure about the fair
value of all financial instruments. Carrying amounts of all financial
instruments approximate fair value as of December 31, 1996.
I. LONG-LIVED ASSETS
Under the requirements of SFAS No. 121 "Accounting for Long-Lived Assets and
for Long-Lived-Assets to be Disposed of", the Company is obligated to recognize
an impairment loss on their long lived assets whenever the sum of the expected
future cash flows resulting from their use is less than their carrying amount.
As of December 31, 1996, no impairment exists with respect to the Company's
long-lived assets.
3. COMMITMENTS AND CONTINGENCIES
The Company is insured with respect to medical malpractice risks. In the
normal course of business the Company has been named in lawsuits. In the opinion
of the management of the Company the ultimate liability, if any, of the Company
with respect to any such lawsuit will not exceed the insurance coverages carried
by the Company and will not materially impact the operating results or results
of financial condition of the Company.
The Company has entered into binding agreements with Integrated Physicians
Systems, Inc. ("IPS"), the terms of which provide that IPS will acquire
substantially all of the assets, goodwill, and intangibles of the Company. The
acquisition by IPS will coincide with the consummation of its IPO.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
ESTIMATED DECEMBER 31,
USEFUL LIFE ----------------------
(YEARS) 1995 1996
--------------- ---------- ----------
Equipment................................................. 5-7 26,208 26,208
Less: Accumulated depreciation............................ (20,610) (21,854)
---------- ----------
Net..................................................... $ 5,598 $ 4,354
---------- ----------
---------- ----------
F-70
HUNTERDON OPHTHALMOLOGISTS, P.A.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. LEASE OBLIGATIONS
The Company leases office space under noncancelable operating lease
agreements, which expire at various dates. At December 31, 1996, minimum annual
rental commitments under noncancelable operating leases with terms in excess of
one year are as follows:
OPERATING
LEASES
----------
1997.............................................................................. $ 79,000
1998.............................................................................. 86,000
1999.............................................................................. 86,000
----------
Total future minimum lease payments............................................. $ 251,000
----------
----------
Rent expense related to operating leases amounted to $88,000, $88,000 and
$79,000 for the years ended December 31, 1994, 1995 and 1996, respectively.
6. EMPLOYEE BENEFIT PLANS
The Company has a qualified defined contribution profit sharing plan (the
"Plan"). The Company pays all general and administrative expenses of the Plan.
The Company made contributions related to the Plan totaling $10,000, $13,650 and
$7,500 in 1994, 1995 and 1996, respectively.
The Company does not typically provide employees any post retirement
benefits other than the Plan described above and, accordingly, the impact of
SFAS No. 106 "Employer's Accounting for Postretirement Benefits other than
Pensions" had no material effect on the Company.
F-71
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholder of
Joel Fuhrman M.D., P.C.
D/B/A Amwell Health Center
We have audited the accompanying balance sheets of the Amwell Health Center
as of December 31, 1995 and 1996, and the related statements of operations,
changes in stockholder's equity and cash flows for each of three years in the
period ended December 31, 1996. These financial statements are the
responsibility of Amwell Health Center's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Amwell Health Center as of
December 31, 1995 and 1996, and the results of its operations, changes in
stockholder's equity and cash flows for each of the three years in the period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
Feldman Radin & Co., P. C.
Certified Public Accountants
New York, New York
May 9, 1997
F-72
AMWELL HEALTH CENTER
BALANCE SHEETS
DECEMBER 31,
----------------------
JUNE 30,
1995 1996 1997
---------- ---------- -----------
(UNAUDITED)
ASSETS
- -----------------------------------------------------------------------------------------------------------------
CURRENT ASSETS:
Cash...................................................................... $ 52,405 $ 87,336 $ 71,376
Accounts receivable, less allowance for bad debts
of $11,139 in 1995, $6,723 in 1996...................................... 16,709 15,688 7,415
Prepaid expenses and other current assets................................. -- 19,644 40,731
---------- ---------- -----------
Total current assets................................................ 69,114 122,668 119,522
---------- ---------- -----------
PROPERTY AND EQUIPMENT, net................................................. 186,031 179,241 186,031
---------- ---------- -----------
OTHER NONCURRENT ASSETS, net................................................ 44,457 44,457 46,139
---------- ---------- -----------
$ 299,602 $ 346,366 $ 351,692
---------- ---------- -----------
---------- ---------- -----------
LIABILITIES AND STOCKHOLDER'S EQUITY
- -----------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES:
Current portion of long-term debt......................................... $ 197,315 $ 23,714 $ 169,737
Accounts payable and accrued expenses..................................... 17,346 -- 10,819
---------- ---------- -----------
Total current liabilities........................................... 214,661 23,714 180,556
---------- ---------- -----------
LONG-TERM DEBT, net of current portion...................................... -- 157,800 --
---------- ---------- -----------
Total liabilities................................................... 214,661 181,514 180,556
---------- ---------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common Stock, $1.00 par value; 100 shares authorized,
100 shares issued and outstanding respectively 100 100 100
Retained earnings......................................................... 84,841 164,752 171,036
---------- ---------- -----------
Total stockholder's equity.......................................... 84,941 164,852 171,136
---------- ---------- -----------
$ 299,602 $ 346,366 $ 351,692
---------- ---------- -----------
---------- ---------- -----------
See notes to financial statements.
F-73
AMWELL HEALTH CENTER
STATEMENTS OF OPERATIONS
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------- ----------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
REVENUE:
Medical services revenue.................................. $ 670,842 $ 752,129 $ 651,987 $ 328,525 $ 337,125
Other revenue............................................. 10,085 11,219 377 -- 30
---------- ---------- ---------- ---------- ----------
Total revenue......................................... 680,927 763,348 652,364 328,525 337,155
---------- ---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Salaries and wages........................................ 308,345 419,219 332,142 188,747 193,542
Medical supplies and expenses............................. 49,687 131,101 72,581 15,518 15,021
General and administrative expenses....................... 244,468 189,946 146,341 104,692 104,815
Bad debt expense.......................................... 6,336 4,803 -- -- --
Depreciation and amortization............................. 10,393 7,844 7,843 3,462 8,465
Interest expense.......................................... 7,625 4,994 13,546 10,314 9,028
---------- ---------- ---------- ---------- ----------
Total costs and expenses.............................. 626,854 757,907 572,453 322,733 330,871
---------- ---------- ---------- ---------- ----------
Net income............................................ $ 54,073 $ 5,441 $ 79,911 $ 5,792 $ 6,284
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
See notes to financial statements.
F-74
AMWELL HEALTH CENTER
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
COMMON STOCK
------------------------ RETAINED
SHARES AMOUNT EARNINGS TOTAL
----------- ----------- ---------- ----------
Balance, December 31, 1993............................................. 100 $ 100 $ 25,327 $ 25,427
Net income........................................................... -- -- 54,073 54,073
--- ----- ---------- ----------
Balance, December 31, 1994............................................. 100 100 79,400 79,500
Net income........................................................... -- -- 5,441 5,441
--- ----- ---------- ----------
Balance, December 31, 1995............................................. 100 100 84,841 84,941
Net income........................................................... -- -- 79,911 79,911
--- ----- ---------- ----------
Balance, December 31, 1996............................................. 100 100 164,752 164,852
Net income (unaudited)............................................... -- -- 6,284 6,284
--- ----- ---------- ----------
Balance, June 30, 1997 (unaudited)..................................... 100 $ 100 $ 171,036 $ 171,136
--- ----- ---------- ----------
--- ----- ---------- ----------
See notes to financial statements.
F-75
AMWELL HEALTH CENTER
STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------------- ----------------------
1994 1995 1996 1996 1997
---------- ----------- ---------- ---------- ----------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................... $ 54,073 $ 5,441 $ 79,911 $ 5,792 $ 6,284
---------- ----------- ---------- ---------- ----------
Adjustments to reconcile net income to net cash
provided by operating activities -
Depreciation and amortization.................. 10,393 7,844 7,843 3,462 8,465
Changes in assets and liabilities -
(Increase) decrease in -
Accounts receivable, net................... (2,111) (1,924) 1,021 16,709 8,273
Prepaid expenses and other current
assets................................... -- 35,800 (19,644) -- (21,087)
Increase (decrease) in -
Accounts payable and accrued expenses...... (19,223) 13,522 (17,346) 10,922 10,819
---------- ----------- ---------- ---------- ----------
(10,941) 55,242 (28,126) 31,093 6,470
---------- ----------- ---------- ---------- ----------
Net cash provided by operating activities.......... 43,132 60,683 51,785 36,885 12,754
---------- ----------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment................. (13,319) (190,949) (1,053) (13,824) (15,255)
Increase in other noncurrent assets................ (20,000) (24,457) -- (7,186) (1,682)
---------- ----------- ---------- ---------- ----------
Net cash (used in) provided by investing
activities................................... (33,319) (215,406) (1,053) (21,010) (16,937)
---------- ----------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayment of) long-term debt........ -- 197,315 (15,801) (5,253) (11,777)
---------- ----------- ---------- ---------- ----------
Net cash provided by (used in) financing
activities................................... -- 197,315 (15,801) (5,253) (11,777)
---------- ----------- ---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH...................... 9,813 42,592 34,931 10,622 (15,960)
CASH, beginning of period............................ -- 9,813 52,405 52,405 87,336
---------- ----------- ---------- ---------- ----------
CASH, end of period.................................. $ 9,813 $ 52,405 $ 87,336 $ 63,027 $ 71,376
---------- ----------- ---------- ---------- ----------
---------- ----------- ---------- ---------- ----------
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid...................................... $ 7,625 $ 4,994 $ 13,546 $ 6,773 $ 9,028
---------- ----------- ---------- ---------- ----------
---------- ----------- ---------- ---------- ----------
See notes to financial statements.
F-76
AMWELL HEALTH CENTER
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS ORGANIZATION AND BASIS OF PRESENTATION
Amwell Health Center (the "Company") is a New Jersey professional
corporation providing general medical services in the state of New Jersey and
was incorporated on January 24, 1994.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. METHOD OF ACCOUNTING
The financial statements of the Company are presented on the accrual basis
of accounting. Accordingly, revenues are recorded when earned, rather than when
received and expenses are recorded when incurred, rather than when paid.
B. REVENUES
Medical service revenues are accounted for in the period the services are
provided. The revenues are reported at the estimated realizable amounts from
patients, third-party payors and others. Provisions for estimated third-party
payor adjustments are recorded in the period the related services are provided
as a reduction of revenue. Any adjustment to those amounts are recorded in the
period in which the revised amount is determined. A portion of the Company's
medical services revenue is derived from Medicare, Medicaid and other
governmental programs. Medicare, Medicaid, and other governmental programs
reimburse physicians based on fee schedules which are determined by the specific
governmental agency. Additionally, the Company participates in agreements with
managed care organizations to provide services at negotiated fee-for-service or
capitated payments rates.
C. CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk consist principally of trade account receivables.
The Company establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific payors, historical trends and other
information.
D. PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are amortized over the respective lease terms or the
service lives of the improvements, whichever is shorter.
E. 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 as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F. INCOME TAXES
The Company has historically not incurred significant tax liabilities for
federal or state income taxes. Compensation to physician owners has
traditionally reduced taxable income to nominal levels. Provisions for income
taxes and deferred tax assets and liabilities are not material and have not been
reflected in the financial statements.
F-77
AMWELL HEALTH CENTER
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
G. CASH AND CASH EQUIVALENTS
The Company includes as cash and cash equivalents all cash accounts which
are not subject to withdrawal restrictions or penalties, and all highly liquid
instruments, with original maturities of three months or less.
H. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statements of Financial Accounting Standards ("SFAS") No. 107 "Disclosures
About Fair Value of Financial Instruments" requires disclosure about the fair
value of all financial instruments. Carrying amounts of all financial
instruments approximate fair value as of December 31, 1996.
I. LONG-LIVED ASSETS
Under the requirements of SFAS No. 121 "Accounting for Long-Lived Assets and
for Long-Lived Assets to be Disposed of", the Company is obligated to recognize
an impairment loss on its long-lived assets whenever the sum of the expected
future cash flows resulting from their use is less than their carrying amount.
As of December 31, 1996, no impairment exists with respect to the Company's
long-lived assets.
3. COMMITMENTS AND CONTINGENCIES
The Company is insured with respect to medical malpractice risks. In the
normal course of business the Company has been named in lawsuits. In the opinion
of the management of the Company the ultimate liability, if any, of the Company
with respect to any such lawsuit will not exceed the insurance coverages carried
by the Company and will not materially impact the operating results or results
of financial condition of the Company.
The Company has entered into a binding agreement with Integrated Physician
Systems, Inc. (IPS), the terms of which provide that IPS will acquire
substantially all of the assets, goodwill, and intangibles of the Company. The
acquisition by IPS will coincide with the consummation of its IPO.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
ESTIMATED DECEMBER 31,
USEFUL LIVES ----------------------
(YEARS) 1995 1996
------------- ---------- ----------
Leasehold improvements.................................. 5-10 $ 41,109 $ 41,109
Medical and computer equipment.......................... 5-7 125,723 126,777
Furniture and fixtures.................................. 7-10 25,310 25,310
Automobiles............................................. 3-5 46,666 46,666
------ ---------- ----------
Total................................................. 238,808 239,862
Less: Accumulated depreciation.......................... (52,777) (60,621)
---------- ----------
Net................................................... $ 186,031 $ 179,241
---------- ----------
---------- ----------
F-78
AMWELL HEALTH CENTER
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31,
-----------------------
1995 1996
----------- ----------
Term loans payable to banks, due through 2001, bearing interest at
9.25%, payable monthly............................................. $ -- $ 170,372
Unsecured non-interest bearing line of credit with a hospital........ 177,690 --
Other debt........................................................... 19,625 11,142
----------- ----------
Total long-term debt............................................... 197,315 181,514
Less: current portion................................................ (197,315) (23,714)
----------- ----------
Long-term debt, excluding current portion.......................... $ -- $ 157,800
----------- ----------
----------- ----------
As of December 31, 1996, the aggregate amounts of annual principal
maturities of long-term debt (excluding capital lease obligations) are as
follows:
1997.............................................................. $ 23,714
1998.............................................................. 13,786
1999.............................................................. 15,118
2000.............................................................. 16,576
2001.............................................................. 112,320
---------
Total............................................................. $ 181,514
---------
---------
6. EMPLOYEE BENEFIT PLANS
The Company has a qualified defined contribution profit sharing plan (the
"Plan") and pays all general and administrative expenses of the Plan. The
Company made contributions related to the Plan totaling $0, $40,146 and $0 in
1994, 1995 and 1996, respectively.
The Company does not typically provide employees any post retirement
benefits other than the Plan described above and, accordingly, the impact of
SFAS No. 106 "Employer's Accounting for Postretirement Benefits other than
Pensions" had no material effect on the Company.
F-79
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholder of
Kenneth G. Stern, M.D., PA
We have audited the accompanying balance sheets of Kenneth G. Stern, M.D.,
PA as of December 31, 1995 and 1996, and the related statements of operations,
changes in stockholder's equity and cash flows for each of the three years in
the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Kenneth G. Stern,
M.D.., PA as of December 31, 1995 and 1996, and the results of its operations,
changes in stockholder's equity and cash flows for each of the three years in
the period ended December 31, 1996 in conformity with generally accepted
accounting principles.
Feldman Radin & Co., P. C.
Certified Public Accountants
New York, New York
May 9, 1997
F-80
KENNETH G. STERN, M.D., PA
BALANCE SHEETS
DECEMBER 31,
-------------------- JUNE 30,
1995 1996 1997
--------- --------- -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash......................................................................... $ -- $ -- $ 46,926
Accounts receivable, less allowance for bad debts of $8,119 in 1995, $8,436
in 1996 and $8,450 in 1997................................................. 46,009 47,802 45,345
Prepaid expenses and other current assets.................................... 2,401 7,600 --
--------- --------- -----------
Total current assets..................................................... 48,410 55,402 92,271
PROPERTY AND EQUIPMENT, net.................................................... 47,498 39,568 34,736
--------- --------- -----------
$ 95,908 $ 94,970 $ 127,007
--------- --------- -----------
--------- --------- -----------
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses........................................ $ 28,823 $ 47,953 $ 42,702
--------- --------- -----------
Total current liabilities................................................ 28,823 47,953 42,702
--------- --------- -----------
STOCKHOLDER'S EQUITY:
Common stock, no par value; 100 shares authorized, 100 shares
issued and outstanding, respectively....................................... 5,000 5,000 5,000
Additional paid in capital................................................... -- 13,173 13,173
Retained earnings............................................................ 62,085 28,844 66,132
--------- --------- -----------
TOTAL STOCKHOLDER'S EQUITY..................................................... 67,085 47,017 84,305
--------- --------- -----------
$ 95,908 $ 94,970 $ 127,007
--------- --------- -----------
--------- --------- -----------
See notes to financial statements.
F-81
KENNETH G. STERN, M.D., PA
STATEMENTS OF OPERATIONS
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------- ----------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
REVENUE:
Medical services revenue........................... $ 524,148 $ 606,186 $ 608,627 $ 273,986 $ 258,490
Other revenue...................................... 10,561 13,487 11,869 5,650 6,048
---------- ---------- ---------- ---------- ----------
Total revenue.................................. 534,709 619,673 620,496 279,636 264,538
---------- ---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Salaries and wages................................. 274,678 361,061 474,190 119,295 125,855
Medical supplies and expenses...................... 44,552 39,343 24,299 11,337 11,462
General and administrative expenses................ 110,070 134,236 142,844 94,584 81,921
Bad debt expense................................... 7,769 350 317 -- 250
Depreciation and amortization...................... 20,945 12,413 12,087 3,408 2,362
---------- ---------- ---------- ---------- ----------
Total costs and expenses....................... 458,014 547,403 653,737 228,624 221,849
---------- ---------- ---------- ---------- ----------
Net income (loss).............................. $ 76,695 $ 72,270 $ (33,241) $ 51,012 $ 42,689
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
See notes to financial statements.
F-82
KENNETH G. STERN, M.D., PA
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
COMMON STOCK ADDITIONAL
-------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
--------- --------- -------------- ----------- -----------
Balance, December 31, 1993......................... -- $ 5,000 $ -- $ 239,948 $ 244,948
Net income....................................... -- -- -- 76,695 76,695
Dividends........................................ -- -- -- (236,380) (236,380)
--------- --------- ------- ----------- -----------
Balance, December 31, 1994......................... -- 5,000 -- 80,263 85,263
Net income....................................... -- -- -- 72,270 72,270
Dividends........................................ -- -- -- (90,448) (90,448)
--------- --------- ------- ----------- -----------
Balance, December 31, 1995......................... -- 5,000 -- 62,085 67,085
Net income....................................... -- -- -- (33,241) (33,241)
Capital contributions............................ -- -- 13,173 -- 13,173
--------- --------- ------- ----------- -----------
Balance, December 31, 1996......................... -- 5,000 13,173 28,844 47,017
Net income....................................... -- -- -- 42,689 42,689
Dividends........................................ -- -- -- (5,401) (5,401)
--------- --------- ------- ----------- -----------
Balance, June 30, 1997(unaudited).................. -- $ 5,000 $ 13,173 $ 66,132 $ 84,305
--------- --------- ------- ----------- -----------
--------- --------- ------- ----------- -----------
See notes to financial statements.
F-83
KENNETH G. STERN, M.D., PA
STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------- --------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- --------- ---------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 76,695 $ 72,270 $ (33,241) $ 51,012 $ 42,689
---------- ---------- ---------- --------- ---------
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization......................... 20,945 12,413 12,087 3,408 2,362
Changes in assets and liabilities -
(Increase) decrease in -
Accounts receivable, net.......................... (5,843) (1,985) (1,793) (2,306) 2,457
Prepaid expenses and other current assets......... 3,093 (2,401) (5,199) 2,401 7,600
Increase (decrease) in -
Accounts payable and accrued expenses............. (39,804) 22,791 19,130 (4,668) (5,251)
---------- ---------- ---------- --------- ---------
(21,609) 30,818 24,225 (1,165) 7,168
---------- ---------- ---------- --------- ---------
Net cash provided by (used in) operating activities....... 55,086 103,088 (9,016) 49,847 49,857
---------- ---------- ---------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................ (37,542) (18,279) (4,157) -- 2,470
---------- ---------- ---------- --------- ---------
Net cash provided by (used in) investing activities... (37,542) (18,279) (4,157) -- 2,470
---------- ---------- ---------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid............................................ (236,380) (90,448) -- (38,387) (5,401)
Increase in additional paid in capital.................... -- -- 13,173 -- --
---------- ---------- ---------- --------- ---------
Net cash provided by (used in) financing activities... (236,380) (90,448) 13,173 (38,387) (5,401)
---------- ---------- ---------- --------- ---------
NET INCREASE (DECREASE) IN CASH............................. (218,836) (5,639) -- 11,460 46,926
CASH, beginning of period................................... 224,475 5,639 -- -- --
---------- ---------- ---------- --------- ---------
CASH, end of period......................................... 5,639 $ -- $ -- $ 11,460 $ 46,926
---------- ---------- ---------- --------- ---------
---------- ---------- ---------- --------- ---------
See notes to financial statements.
F-84
KENNETH G. STERN, M.D., PA
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS ORGANIZATION AND BASIS OF PRESENTATION
Kenneth G. Stern, M.D., PA (the "Company") is a New Jersey professional
corporation which provides medical services in the state of New Jersey. The
Company was incorporated on March 22, 1974.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. METHOD OF ACCOUNTING
The financial statements of the Company are presented on the accrual basis
of accounting. Accordingly, revenues are recorded when earned, rather than when
received and expenses are recorded when incurred, rather than when paid.
B. REVENUES
Medical service revenues are accounted for in the period the services are
provided. The revenues are reported at the estimated realizable amounts from
patients, third-party payors and others. Provisions for estimated third-party
payor adjustments are recorded in the period the related services are provided
as a reduction of revenue. Any adjustment to those amounts are recorded in the
period in which the revised amount is determined. A portion of the Company's
medical services revenue is derived from Medicare, Medicaid and other
governmental programs. Medicare, Medicaid, and other governmental programs
reimburse physicians based on fee schedules which are determined by the specific
governmental agency. Additionally, the Company participates in agreements with
managed care organizations to provide services at negotiated fee-for-service or
capitated payments rates.
C. CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk consist principally of trade accounts receivable.
The Company establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific payors, historical trends and other
information.
D. PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are amortized over the respective lease terms or the
service lives of the improvements, whichever is shorter.
E. 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 as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
E. INCOME TAXES
The Company has historically not incurred significant tax liabilities for
federal or state income taxes. Compensation to physician owners has
traditionally reduced taxable income to nominal levels. Provisions
F-85
KENNETH G. STERN, M.D., PA
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
for income taxes and deferred tax assets and liabilities are not material and
have not been reflected in the financial statements.
F. CASH AND CASH EQUIVALENTS
The Company includes as cash and cash equivalents all cash accounts which
are not subject to withdrawal restrictions or penalties, and all highly liquid
instruments, with original maturities of three months or less.
G. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards ("SFAS") No. 107 "Disclosures
About Fair Value of Financial Instruments" requires disclosure about the fair
value of all financial instruments. Carrying amounts of all financial
instruments approximate fair value as of December 31, 1996.
H. ACCOUNTING FOR LONG-LIVED ASSETS
Under the requirements of SFAS No. 121 "Accounting for Long-Lived Assets and
for Long-Lived Assets to be disposed of", the Company is obligated to recognize
an impairment loss on long-lived assets whenever the sum of the expected future
cash flows from their use is less than their carrying amount. Based on the
Company's review as of December 31, 1996, no impairment of long-lived assets was
evident.
3. COMMITMENTS AND CONTINGENCIES
The Company is insured with respect to medical malpractice risks. In the
normal course of business the Company has been named in lawsuits. In the opinion
of management the ultimate liability, if any, of the with respect to any such
lawsuit will not exceed insurance coverage and will not materially impact the
operating results or results of financial condition of the Company.
The Company. has entered into a binding agreement with Integrated Physicians
Systems, Inc. (IPS), the terms of which provide that IPS will acquire
substantially all of the assets, goodwill, and intangibles of the Company. The
acquisition by IPS will coincide with the consummation of its IPO.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
ESTIMATED DECEMBER 31,
USEFUL LIVES ----------------------
(YEARS) 1995 1996
--------------- ---------- ----------
Leasehold improvements.................................. 5-39 $ 25,892 $ 28,892
Medical and computer equipment.......................... 5-7 43,288 44,445
Furniture and fixtures.................................. 5-7 9,830 9,830
Automobiles............................................. 5 34,523 34,523
---------- ----------
Total................................................. 113,533 117,690
Less: Accumulated depreciation.......................... (66,035) (78,122)
---------- ----------
Net................................................... $ 47,498 $ 39,568
---------- ----------
---------- ----------
F-86
KENNETH G. STERN, M.D., PA
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. LEASE OBLIGATIONS
The Company leases office space under noncancelable lease agreements, which
expire at various dates. At December 31, 1996 minimum annual rental commitments
under noncancelable leases with terms in excess of one year are as follows:
OPERATING
LEASES
-----------
1997............................................................................... $ 19,250
1998............................................................................... 16,215
1999............................................................................... 16,215
-----------
Total future minimum lease payments................................................ $ 51,680
-----------
-----------
Rent expense relating to operating leases amounted to $13,200, $16,200 and
$19,250 for the years ended December 31, 1994, 1995 and 1996, respectively.
6. EMPLOYEE BENEFIT PLANS
The Company has a qualified defined contribution pension plan (the "Plan").
The Company pays all general and administrative expenses of the Plan and made
contributions related to the Plan totaling $44,221, $38,334 and $42,169 in 1994,
1995 and 1996, respectively.
The Company does not typically provide employees any post retirement
benefits other than the Plan described above and, accordingly, the impact of
SFAS No. 106 " Employer's Accounting for Postretirement Benefits other than
Pensions" had no material effect.
F-87
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Alexander Kudryk, M.D.
We have audited the accompanying balance sheets of Alexander Kudryk, M.D. as
of December 31, 1995 and 1996, and the related statements of operations,
proprietor's capital and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Alexander Kudryk, M.D. as of
December 31, 1995 and 1996, and the results of its operations, proprietor's
capital and cash flows for each of the three years in the period ended December
31, 1996 in conformity with generally accepted accounting principles.
Feldman Radin & Co., P. C.
Certified Public Accountants
New York, New York
May 9, 1997
F-88
ALEXANDER KUDRYK, M.D.
BALANCE SHEETS
DECEMBER 31,
-------------------- JUNE 30,
1995 1996 1997
--------- --------- -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash......................................................................... $ -- $ -- $ 12,440
Accounts receivable, less allowance for bad debts of $19,409 in 1995, $16,359
in 1996 and $16,359, in 1997............................................... 56,295 48,333 5,000
Prepaid expenses and other current assets.................................... 5,000 5,000 5,000
--------- --------- -----------
Total current assets..................................................... 61,295 53,333 22,440
--------- --------- -----------
PROPERTY AND EQUIPMENT, net.................................................... 8,766 6,215 10,895
--------- --------- -----------
$ 70,061 $ 59,548 $ 33,335
--------- --------- -----------
--------- --------- -----------
LIABILITIES AND PROPRIETOR'S CAPITAL
CURRENT LIABILITIES:
Accounts payable............................................................. $ 1,163 $ 2,117 $ --
Current portion of capital lease............................................. -- 1,352 1,352
Current portion of long-term debt............................................ 29,783 -- 2,400
--------- --------- -----------
Total current liabilities................................................ 30,946 3,469 3,752
LONG-TERM DEBT, net of current portion......................................... 6,582 5,231 9,600
--------- --------- -----------
LONG-TERM OBLIGATION UNDER CAPITAL LEASE,
net of current portion....................................................... -- -- 4,499
--------- --------- -----------
Total liabilities........................................................ 37,528 8,700 17,851
COMMITMENTS AND CONTINGENCIES
PROPRIETOR'S CAPITAL........................................................... 32,533 50,848 15,484
--------- --------- -----------
$ 70,061 $ 59,548 $ 33,335
--------- --------- -----------
--------- --------- -----------
See notes to financial statements.
F-89
ALEXANDER KUDRYK, M.D.
STATEMENTS OF OPERATIONS
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------- ----------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
REVENUE:
Medical services revenue........................... $ 353,031 $ 484,095 $ 485,271 $ 222,993 $ 229,598
Other revenue...................................... 121 138 125 36,000 30,000
---------- ---------- ---------- ---------- ----------
Total revenue.................................. 353,152 484,233 485,396 258,993 259,598
---------- ---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Salaries and wages................................. 78,583 83,758 91,364 46,465 64,810
Medical supplies and expenses...................... 30,464 26,415 21,258 11,880 12,147
General and administrative expenses................ 135,274 201,570 172,639 72,356 68,468
Bad debt expense................................... 15,297 4,112 -- -- 2,235
Payroll tax interest and penalties................. -- -- -- 3,837 4,482
Depreciation and amortization...................... 11,240 15,891 2,551 277 1,212
Interest expense................................... 9,421 6,658 1,749 1,315 380
---------- ---------- ---------- ---------- ----------
Total costs and expenses....................... 280,279 338,404 289,561 136,130 149,252
---------- ---------- ---------- ---------- ----------
Net income..................................... $ 72,873 $ 145,829 $ 195,835 $ 122,863 $ 110,346
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
See notes to financial statements.
F-90
ALEXANDER KUDRYK, M.D.
STATEMENTS OF PROPRIETOR'S CAPITAL
BALANCE, December 31, 1993....................................................... $ (32,566)
Net income....................................................................... 72,873
Drawings......................................................................... (56,456)
---------
BALANCE, December 31, 1994....................................................... (16,149)
Net income....................................................................... 145,829
Drawings......................................................................... (97,147)
---------
BALANCE, December 31, 1995....................................................... 32,533
Net income....................................................................... 195,835
Drawings......................................................................... (177,520)
---------
BALANCE, December 31, 1996....................................................... 50,848
Net income....................................................................... 110,346
Drawings (Unaudited)............................................................. (145,710)
---------
BALANCE, June 30, 1997 (unaudited)............................................... $ 15,484
---------
---------
See notes to financial statements.
F-91
ALEXANDER KUDRYK, M.D.
STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------------- ------------------------
1994 1995 1996 1996 1997
---------- ---------- ----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................... $ 72,873 $ 145,829 $ 195,835 $ 122,863 $ 110,346
---------- ---------- ----------- ----------- -----------
Adjustments to reconcile net income to net cash
provided by operating activities -
Depreciation and amortization............... 11,240 15,891 2,551 277 1,212
Changes in assets and liabilities -
(Increase) decrease in -
Accounts receivable, net................ 817 (5,406) 7,962 51,295 43,333
Accounts payable........................ -- 1,163 954 6,827 (2,117)
---------- ---------- ----------- ----------- -----------
12,057 11,648 11,467 58,399 42,428
---------- ---------- ----------- ----------- -----------
Net cash provided by operating activities....... 84,930 157,477 207,302 181,262 152,774
---------- ---------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.............. -- (17,976) -- -- (5,892)
---------- ---------- ----------- ----------- -----------
Net cash provided by (used in) investing
activities................................ -- (17,976) -- -- (5,892)
---------- ---------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayment of) short-term notes
payable....................................... 5,971 (5,971) 1,352 1,352 --
Drawings by owner............................... (56,456) (97,147) (177,520) (146,690) (145,710)
Proceeds from (repayment of) obligations under
capital leases................................ -- -- -- 5,926 4,499
Proceeds from (repayment of) debt............... (35,061) (38,287) (31,134) (36,365) 6,769
---------- ---------- ----------- ----------- -----------
Net cash used in financing activities....... (85,546) (141,405) (207,302) (175,777) (134,442)
---------- ---------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH................... (616) (1,904) -- 5,485 12,440
CASH, beginning of period......................... 2,520 1,904 -- -- --
---------- ---------- ----------- ----------- -----------
CASH, end of period............................... $ 1,904 $ -- $ -- $ 5,485 $ 12,440
---------- ---------- ----------- ----------- -----------
---------- ---------- ----------- ----------- -----------
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid............................... $ 9,421 $ 6,658 $ 1,749 $ 1,315 $ 380
---------- ---------- ----------- ----------- -----------
---------- ---------- ----------- ----------- -----------
See notes to financial statements.
F-92
ALEXANDER KUDRYK, M.D.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS ORGANIZATION AND BASIS OF PRESENTATION
Alexander Kudryk, M.D. (the "Proprietorship" or "Practice") was organized as
a sole propietorship, and provides medical services in the state of New Jersey.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. METHOD OF ACCOUNTING
The financial statements of Alexander Kudryk, M.D., are presented on the
accrual basis of accounting. Accordingly, revenues are recorded when earned,
rather than when received and expenses are recorded when incurred, rather than
when paid.
B. REVENUES
Medical service revenues are accounted for in the period the services are
provided. Revenues are reported at the estimated realizable amounts from
patients, third-party payors and others. Provisions for estimated third-party
payor adjustments are recorded in the period the related services are provided
as a reduction of revenue. Any adjustment to those amounts are recorded in the
period in which the revised amount is determined. A portion of the
Proprietorship's medical service revenue is derived from Medicare, Medicaid and
other governmental programs. Medicare, Medicaid, and other governmental programs
reimburse physicians based on fee schedules which are determined by the specific
governmental agency. Additionally, the Proprietorship participates in agreements
with managed care organizations to provide services at negotiated
fee-for-service or capitated payment rates.
C. CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Proprietorship to
concentrations of credit risk consist principally of trade accounts receivable.
The Proprietorship establishes an allowance for doubtful accounts based upon
factors surrounding the credit risk of specific payors, historical trends and
other information.
D. PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are amortized over the respective lease terms or the
service lives of the improvements, whichever is shorter.
E. 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 as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F. INCOME TAXES
Income from the Practice is combined with the income and expenses of the
proprietor from other sources and reported in the proprietor's individual
federal and state tax returns. The Proprietorship is not
F-93
ALEXANDER KUDRYK, M.D.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
a tax paying entity for purposes of federal and state income taxes, and thus no
taxes have been recorded in the statements.
G. CASH AND CASH EQUIVALENTS
The Practice includes as cash and cash equivalents all cash accounts which
are not subject to withdrawal restrictions or penalties, and all highly liquid
instruments, with original maturities of three months or less.
H. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards ("SFAS") No. 107 "Disclosures
About Fair Value of Financial Instruments" requires disclosure about the fair
value of all financial instruments. Carrying amounts of all financial
instruments approximate fair value as of December 31, 1996.
I. LONG-LIVED ASSETS
Under the requirements of SFAS No. 121 "Accounting for Long-Lived Assets and
for Long-Lived Assets to be Disposed of" the Practice is obligated to recognize
an impairment loss on their long lived assets whenever the sum of the expected
future cash flows resulting from their use is less than their carrying amount.
Based on the Practice's review as of December 31, 1996, no impairment of
long-lived assets was evident.
3. COMMITMENTS AND CONTINGENCIES
The Practice, is insured with respect to medical malpractice risks. In the
normal course of business the Practice has been named in lawsuits. In the
opinion of management the ultimate liability, if any, with respect to any such
lawsuit will not exceed the insurance coverages carried, and will not materially
impact the operating results or results of financial condition of the Practice.
The Practice, has entered into binding agreements with Integrated Physicians
Systems, Inc. (IPS), the terms of which provide that IPS will acquire
substantially all of the assets, goodwill, and intangibles of the Practice. The
acquisition by IPS will coincide with the consummation of its IPO.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
ESTIMATED DECEMBER 31,
USEFUL LIVES ------------------------
(YEARS) 1995 1996
--------------- ----------- -----------
Medical and office equipment.......................... 5-7 $ 107,181 $ 107,181
Equipment under capital leases........................ 5-7 5,477 5,477
Furniture and fixtures................................ 7-10 9,125 9,125
----------- -----------
Total............................................... 121,783 121,783
Less: Accumulated depreciation........................ (113,017) (115,568)
----------- -----------
Net................................................. $ 8,766 $ 6,215
----------- -----------
----------- -----------
F-94
ALEXANDER KUDRYK, M.D.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. LONG-TERM OBLIGATIONS AND COMMITMENTS
A. LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31,
---------------------
1995 1996
---------- ---------
Interest bearing term loan secured by accounts receivable payable to
bank, and due in 1996................................................. $ 29,783 $ --
Term loan payable to bank, due through 2000, bearing interest at 11.9%,
payable monthly....................................................... 6,582 6,582
---------- ---------
Total long term debt.............................................. 36,365 6,582
Less: current portion................................................... (29,783) (1,352)
---------- ---------
Long-term debt, excluding current portion......................... $ 6,582 $ 5,230
---------- ---------
---------- ---------
As of December 31, 1996, the aggregate amounts of annual principal
maturities of long-term debts (excluding capital lease obligations) are as
follows:
1997................................................................ $ 1,352
1998................................................................ 1,522
1999................................................................ 1,713
2000................................................................ 1,995
---------
Total............................................................. $ 6,582
---------
---------
B. LEASE OBLIGATIONS
The Practice leases office space under a noncancelable lease agreement. At
December 31, 1996, minimum annual rental commitments under noncancelable
operating leases with terms in excess of one year are as follows:
OPERATING
LEASES
-----------
1997............................................................................... $ 25,400
1998............................................................................... 25,400
1999............................................................................... 25,400
-----------
Total future minimum lease payments.............................................. $ 76,200
-----------
-----------
Rent expense related to operating leases amounted to $26,085, $27,829 and
$22,272 for the years ended December 31, 1994, 1995, 1996, respectively.
F-95
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Board of Directors and the Stockholder of
Bound Brook Pediatric Association, PA.
We have audited the accompanying balance sheets of Bound Brook Pediatric
Association, PA., as of December 31, 1995 and 1996, and the related statements
of operations, changes in shareholder's equity and cash flows for each of the
three years in the period ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Bound Brook Pediatric
Association, PA., as of December 31, 1995 and 1996, and the results of its
operations, changes in shareholder's equity and cash flows for each of the three
years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
Feldman Radin & Co., P. C.
Certified Public Accountants
New York, New York
May 9, 1997
F-96
BOUND BROOK PEDIATRIC ASSOCIATION, P.A.
BALANCE SHEETS
DECEMBER 31,
---------------------- JUNE 30,
1995 1996 1997
---------- ---------- -----------
(UNAUDITED)
ASSETS
- -----------------------------------------------------------------------------------------------------------------
CURRENT ASSETS:
Cash and cash equivalents................................................. $ 55,810 $ 51,216 $ 39,491
Accounts receivable, less allowance for bad debts of $5,200 in 1995,
$4,800 in 1996, and $0 in 1997.......................................... 20,800 19,200 11,341
Prepaid expenses and other current assets................................. 2,850 2,850 2,850
---------- ---------- -----------
Total current assets.................................................. 79,460 73,266 53,682
---------- ---------- -----------
PROPERTY AND EQUIPMENT, net................................................. 32,841 31,004 41,740
---------- ---------- -----------
$ 112,301 $ 104,270 $ 95,422
---------- ---------- -----------
---------- ---------- -----------
LIABILITIES AND STOCKHOLDER'S EQUITY
- -----------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses..................................... $ 28,571 $ 34,704 $ 38,646
---------- ---------- -----------
STOCKHOLDER'S EQUITY:
Common stock, no par value; 100 shares authorized, 100 shares issued and
outstanding, respectively............................................... 10,000 10,000 10,000
Retained earnings......................................................... 73,730 59,566 46,776
---------- ---------- -----------
STOCKHOLDER'S EQUITY........................................................ 83,730 69,566 56,776
---------- ---------- -----------
$ 112,301 $ 104,270 $ 95,422
---------- ---------- -----------
---------- ---------- -----------
See notes to financial statements.
F-97
BOUND BROOK PEDIATRIC ASSOCIATION, P.A.
STATEMENTS OF OPERATIONS
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------- ----------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
REVENUE:
Medical services revenue........................... $ 329,994 $ 305,384 $ 311,742 $ 159,924 $ 156,020
Other revenue...................................... 1,752 1,925 1,340 666 515
---------- ---------- ---------- ---------- ----------
Total revenue.................................. 331,746 307,309 313,082 160,590 156,535
---------- ---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Salaries and wages................................. 207,202 213,251 217,530 140,160 123,698
Medical supplies and expenses...................... 29,384 28,597 24,421 7,908 8,017
General and administrative expenses................ 82,278 87,160 83,458 35,664 37,050
Bad debt expense................................... 5,700 -- -- -- --
Depreciation and amortization...................... 532 1,321 1,837 1,100 560
---------- ---------- ---------- ---------- ----------
Total costs and expenses....................... 325,096 330,329 327,246 184,832 169,325
---------- ---------- ---------- ---------- ----------
Net income (loss).............................. $ 6,650 $ (23,020) $ (14,164) $ (24,242) $ (12,790)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
See notes to financial statements.
F-98
BOUND BROOK PEDIATRIC ASSOCIATION, P.A.
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
COMMON STOCK
-------------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
--------- --------- ---------- ----------
Balance, December 31, 1993........................................... -- $ 10,000 $ 90,100 $ 100,100
Net income......................................................... -- -- 6,650 6,650
--------- --------- ---------- ----------
Balance, December 31, 1994........................................... -- 10,000 96,750 106,750
Net loss........................................................... -- -- (23,020) (23,020)
--------- --------- ---------- ----------
Balance, December 31, 1995........................................... -- 10,000 73,730 83,730
Net loss........................................................... -- -- (14,164) (14,164)
--------- --------- ---------- ----------
Balance, December 31, 1996........................................... -- 10,000 59,566 69,566
Net loss........................................................... -- -- (12,790) (12,790)
--------- --------- ---------- ----------
Balance, June 30, 1997(unaudited).................................... -- $ 10,000 $ 46,776 $ 56,776
--------- --------- ---------- ----------
--------- --------- ---------- ----------
See notes to financial statements.
F-99
BOUND BROOK PEDIATRIC ASSOCIATION, P.A.
STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------- ----------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $ 6,650 $ (23,020) $ (14,164) $ (24,242) $ (12,790)
---------- ---------- ---------- ---------- ----------
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization........................... 532 1,321 1,837 1,100 560
Changes in assets and liabilities -
(Increase) decrease in -
Accounts receivable, net............................ 1,984 2,000 1,600 20,800 19,200
Prepaid expenses and other current assets........... 1,259 -- -- 500 --
Increase (decrease) in -
Accounts payable and accrued expenses............... 2,180 (940) 6,133 959 3,942
---------- ---------- ---------- ---------- ----------
5,955 2,381 9,570 23,359 23,702
---------- ---------- ---------- ---------- ----------
Net cash provided by (used in) operating activities....... 12,605 (20,639) (4,594) (883) 10,912
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.......................... -- (6,396) -- (1,100) (11,296)
---------- ---------- ---------- ---------- ----------
Net cash used in investing activities..................... -- (6,396) -- (1,100) (11,296)
---------- ---------- ---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.......... 12,605 (27,035) (4,594) (1,983) (384)
CASH AND CASH EQUIVALENTS, beginning of period................ 70,240 82,845 55,810 55,810 51,216
---------- ---------- ---------- ---------- ----------
CASH AND CASH EQUIVALENTS, end of period...................... $ 82,845 $ 55,810 $ 51,216 $ 53,827 $ 50,832
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
See notes to financial statements.
F-100
BOUND BROOK PEDIATRIC ASSOCIATION, P.A.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS ORGANIZATION AND BASIS OF PRESENTATION
Bound Brook Pediatric Association, P.A. (The "Company") is a New Jersey
professional corporation providing medical services in New Jersey. The Company
was incorporated on September 1, 1970.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. METHOD OF ACCOUNTING
The combined financial statements of the Company are presented on the
accrual basis of accounting. Accordingly, revenues are recorded when earned,
rather than when received and expenses are recorded when incurred, rather than
when paid.
B. CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all cash accounts which are not subject to
withdrawal restrictions or penalties, and all highly liquid instruments, with
original maturities of three months or less.
C. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards ("SFAS") No. 107 "Disclosures
About Fair Value of Financial Instruments" requires disclosure about the fair
value of all financial instruments. Carrying amounts of all financial
instruments approximate fair value as of December 31, 1996.
D. PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are amortized over the respective lease terms or the
service lives of the improvements, whichever is shorter.
E. LONG-LIVED ASSETS
Under the requirements of SFAS No. 121 "Accounting for Long-Lived Assets and
for Long-Lived Assets to be Disposed of", the Company is obligated to recognize
an impairment loss on their long lived assets whenever the sum of the expected
future cash flows resulting from their use is less than their carrying amount.
As of December 31, 1996, no impairment exists with respect to any of the
Company's long-lived assets.
F. REVENUE RECOGNITION
Medical service revenues are accounted for in the period the services are
provided. The revenues are reported at the estimated realizable amounts from
patients, third-party payors and others. Provisions for estimated third-party
payor adjustments are recorded in the period the related services are provided
as a reduction of revenue. Any adjustment to those amounts are recorded in the
period in which the revised amount is determined. A portion of the Company's
medical services revenue is derived from Medicare, Medicaid and other
governmental programs. Medicare,
Medicaid, and other governmental programs reimburse physicians based on fee
schedules which are determined by the specific governmental agency.
Additionally, the Company participates in agreements with managed care
organizations to provide services at negotiated fee-for-service or capitated
payments rates.
F-101
BOUND BROOK PEDIATRIC ASSOCIATION, P.A.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
G. CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk consist principally of trade accounts receivable.
The Company establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific payors, historical trends and other
information.
H. 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 as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
I. INCOME TAXES
The Company has historically not incurred significant tax liabilities for
federal or state income taxes. Compensation to physician owners has
traditionally reduced taxable income to nominal levels. Provision for income
taxes and deferred tax assets and liabilities are not material and have not been
reflected in the financial statements.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
ESTIMATED DECEMBER 31,
USEFUL LIVES ----------------------
(YEARS) 1995 1996
--------------- ---------- ----------
Leasehold improvements................................... 5-10 $ 27,583 $ 27,583
Medical and computer equipment........................... 5-7 3,007 3,007
Furniture and fixtures................................... 7-10 27,107 27,107
Automobiles.............................................. 3-5 39,252 39,252
---------- ----------
Total.................................................. 96,949 96,949
Less: Accumulated depreciation........................... (64,107) (65,945)
---------- ----------
Net.................................................... $ 32,841 $ 31,004
---------- ----------
---------- ----------
4. COMMITMENTS AND CONTINGENCIES
The Company is insured with respect to medical malpractice risks. In the
normal course of business the Company has been named in lawsuits. In the opinion
of the management of the Company the ultimate liability, if any, of the Company
with respect to any such lawsuit will not exceed the insurance coverages carried
by the Company and will not materially impact the operating results or results
of financial condition of the Company.
The Company has entered into a binding agreement with Integrated Physician
Systems (IPS), the terms of which provide that IPS will acquire substantially
all of the assets, goodwill, and intangibles of the Company. The acquisition by
IPS will coincide with the consummation of its IPO.
F-102
BOUND BROOK PEDIATRIC ASSOCIATION, P.A.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. EMPLOYEE BENEFIT PLANS
The Company maintains a non-contributory money purchase pension plan
(the"Plan") and pays all general and administrative expenses of the Plan. The
Company made contributions related to the Plan totaling $36,546, $33,918 and
$33,758 in 1994, 1995 and 1996, respectively.
The Company does not typically provide employees any post retirement
benefits other than the Plan described above and, accordingly, the impact of
SFAS No. 106 "Employer's Accounting for Postretirement Benefits other than
Pensions" had no material effect on the Company.
6. RELATED PARTY TRANSACTION
Rent expense of $2,000 monthly is paid to the sole stockholder by the
corporation for the use of the office. The annual rent paid to him for each of
the years ended December 31, 1994, 1995 and 1996 was $24,000.
F-103
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Audrey Hinds-McDonald, M.D.
We have audited the accompanying balance sheets of Audrey Hinds-McDonald,
M.D. as of December 31, 1995 and 1996, and the related statements of operations,
proprietor's capital and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Audrey Hinds-McDonald, M.D.
as of December 31, 1995 and 1996, and the results of its operations,
proprietor's capital and cash flows for each of the three years in the period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
Feldman Radin & Co., P. C.
Certified Public Accountants
New York, New York
May 9, 1997
F-104
AUDRY HINDS--MCDONALD, M.D.
(A SOLE PROPRIETERSHIP)
BALANCE SHEETS
DECEMBER 31,
-------------------- JUNE 30,
1995 1996 1997
--------- --------- -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................................... $ 5,000 $ 3,500 $ 3,250
Accounts receivable, less allowance for bad debts of $10,750 in 1995, $13,200
in 1996 and $13,200 in 1997................................................ 14,250 17,550 18,345
--------- --------- -----------
Total current assets..................................................... 19,250 21,050 21,595
--------- --------- -----------
$ 19,250 $ 21,050 $ 21,595
--------- --------- -----------
--------- --------- -----------
LIABILITIES AND PROPRIETOR'S CAPITAL
CURRENT LIABILITIES:
Short-term notes payable..................................................... $ 5,000 $ 5,540 $ 6,350
COMMITMENTS AND CONTINGENCIES
PROPRIETOR'S CAPITAL........................................................... 14,250 15,510 15,245
--------- --------- -----------
$ 19,250 $ 21,050 $ 21,595
--------- --------- -----------
--------- --------- -----------
See notes to financial statements.
F-105
AUDRY HINDS--MCDONALD, M.D.
(A SOLE PROPRIETERSHIP)
STATEMENTS OF OPERATIONS
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------- ----------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
REVENUE:
Medical services revenue........................... $ 191,666 $ 182,668 $ 273,573 $ 132,300 $ 127,000
---------- ---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Salaries and wages................................. 24,200 25,399 47,081 24,052 27,000
Medical supplies and expenses...................... 10,954 10,954 9,968 5,105 6,302
General and administrative expenses................ 74,443 82,430 91,911 46,523 48,489
Bad debt expense................................... 8,600 2,150 2,450 1,225 1,345
---------- ---------- ---------- ---------- ----------
Total costs and expenses....................... 118,197 120,933 151,410 76,905 83,136
---------- ---------- ---------- ---------- ----------
Net income..................................... $ 73,469 $ 61,735 $ 122,163 $ 55,395 $ 43,864
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
See notes to financial statements.
F-106
AUDREY HINDS--MCDONALD, M.D.
STATEMENTS OF PROPRIETOR'S CAPITAL
BALANCE, December 31, 1993........................................................ $ --
Net income........................................................................ 73,469
Drawings.......................................................................... (62,069)
---------
BALANCE, December 31, 1994........................................................ 11,400
Net income........................................................................ 61,735
Drawings.......................................................................... (58,885)
---------
BALANCE, December 31, 1995........................................................ 14,250
Net income........................................................................ 122,163
Drawings.......................................................................... (120,903)
---------
BALANCE, December 31, 1996........................................................ 15,510
Net income........................................................................ 43,864
Drawings.......................................................................... (44,129)
---------
BALANCE, June 30, 1997 (unaudited)................................................ $ 15,245
---------
---------
See notes to financial statements.
F-107
AUDRY HINDS--MCDONALD
(A SOLE PROPRIETERSHIP)
STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------------- ----------------------
1994 1995 1996 1996 1997
---------- ---------- ----------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................... $ 73,469 $ 61,735 $ 122,163 $ 55,395 $ 43,864
---------- ---------- ----------- ---------- ----------
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization........................ -- -- -- -- --
Changes in assets and liabilities -
(Increase) decrease in -
Accounts receivable, net......................... (11,400) (2,850) (3,300) (5,090) (795)
---------- ---------- ----------- ---------- ----------
(11,400) (2,850) (3,300) (5,090) (795)
---------- ---------- ----------- ---------- ----------
Net cash provided by operating activities................ 62,069 58,885 118,863 50,305 43,069
Net cash provided by (used in) operating activities...... -- -- (2,040) (4,450) (1,060)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proprietor's Drawings.................................... (62,008) (59,885) (120,903) (54,755) (44,129)
Proceeds from (repayments of) short-term notes payable... 5,000 -- 540 950 810
---------- ---------- ----------- ---------- ----------
Net cash provided by (used in) financing
activities......................................... (57,068) (58,885) (120,363) (53,805) (43,319)
---------- ---------- ----------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....... 5,000 -- (1,500) (3,500) (250)
CASH, beginning of period.................................. -- 5,000 5,000 5,000 3,500
---------- ---------- ----------- ---------- ----------
CASH, end of period........................................ $ 5,000 $ 5,000 $ 3,500 $ 1,500 $ 3,250
---------- ---------- ----------- ---------- ----------
---------- ---------- ----------- ---------- ----------
See notes to financial statements.
F-108
AUDREY HINDS-MCDONALD, M.D.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS ORGANIZATION AND BASIS OF PRESENTATION
Audrey Hinds-McDonald, M.D., (the "Proprietorship" or "Practice") is
organized as a sole proprietorship operating in the state of New Jersey.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. METHOD OF ACCOUNTING
The financial statements of the Practice are presented on the accrual basis
of accounting. Accordingly, revenues are recorded when earned, rather than when
received and expenses are recorded when incurred, rather than when paid.
B. REVENUES
Medical service revenues are accounted for in the period the services are
provided. Revenues are reported at the estimated realizable amounts from
patients, third-party payors and others. Provisions for estimated third-party
payor adjustments are recorded in the period the related services are provided
as a reduction of revenue. Any adjustment to those amounts are recorded in the
period in which the revised amount is determined. A portion of the Company's
medical service revenue is derived from Medicare, Medicaid and other
governmental programs. Medicare, Medicaid, and other governmental programs
reimburse physicians based on fees schedules which are determined by the
specific governmental agency. Additionally, the Company participates in
agreements with managed care organizations to provide services at negotiated
fee-for-service or capitated payment rates.
C. CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Proprietorship to
concentrations of credit risk consist principally of trade accounts receivable.
The Proprietorship establishes an allowance for doubtful accounts based upon
factors surrounding the credit risk of specific payors, historical trends and
other information.
D. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the owner 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 as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
E. CASH AND CASH EQUIVALENTS
The Practice includes as cash and cash equivalents all cash accounts which
are not subject to withdrawal restrictions or penalties, and all highly liquid
instruments, with original maturities of three months or less.
F. LONG-LIVED ASSETS
Under the requirements of Statement of Financial Accounting Standard
("SFAS") No. 121 "Accounting for Long-Lived Assets and for Long-Lived Assets to
be Disposed of", the Practice is obligated to
F-109
AUDREY HINDS-MCDONALD, M.D.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
recognize an impairment loss on their long lived assets whenever the sum of the
expected future cash flows resulting from their use is less than their carrying
amount. As of December 31, 1996, no impairment exists with respect to any of the
Practice's long-lived assets.
G. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107 "Disclosures About Fair Value of Financial Instruments"
requires disclosure about the fair value of all financial instruments. Carrying
amounts of all financial instruments approximate fair value as of December 31,
1996.
H. INCOME TAXES
Income from the Practice is combined with the income and expenses of the
proprietor from other sources and reported in the proprietor's individual
federal and state tax returns. The proprietorship is not a tax paying entity for
purposes of federal and state income taxes, and thus no income taxes have been
recorded in the statements.
3. COMMITMENTS AND CONTINGENCIES
Dr. Audrey Hinds-McDonald has entered into binding agreements with
Integrated Physicians Systems, Inc. (IPS), the terms of which provide that IPS
will acquire substantially all of the assets, goodwill, and intangibles of the
Practice. The acquisition by IPS will coincide with the consummation of its IPO.
4. SHORT-TERM AND LONG-TERM OBLIGATIONS
A. SHORT-TERM NOTES PAYABLE
Short-term notes payable consists of the following:
DECEMBER 31,
--------------------
1995 1996
--------- ---------
Unsecured line of credit with a bank bearing interest at prime +1%......... $ 5,000 $ 5,540
--------- ---------
--------- ---------
F-110
AUDREY HINDS-MCDONALD, M.D.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. SHORT-TERM AND LONG-TERM OBLIGATIONS (CONTINUED)
B. LEASE OBLIGATIONS
Dr. Audrey Hinds-McDonald leases office space under noncancellable lease
agreements. At December 31, 1996, minimum annual rental commitments under
noncancellable operating leases with terms in excess of one year are as follows:
OPERATING
LEASES
----------
1997.............................................................................. $ 20,046
1998.............................................................................. 20,046
1999.............................................................................. 20,046
2000.............................................................................. 20,046
2001.............................................................................. 20,046
----------
Total future minimum lease payments............................................. $ 100,230
----------
----------
Rent expense related to operating leases amounted to $28,938 $27,238 and
$24,108 for the years ended December 31, 1994, 1995 and 1996, respectively.
5. EMPLOYEE BENEFIT PLANS
The Practice maintains a defined contribution Keough profit sharing plan
covering all employees that meet age and length of service requirements.
Contributions on behalf of employees was $7,000, $7,000 and $8,208 for the years
ended December 31, 1994, 1995 and 1996. Contributions on behalf of the
proprietor, Audrey Hinds-McDonald have not been charged to operations for years
ended December 31, 1994, 1995 and 1996.
The Practice does not typically provide employees any post retirement
benefits other than the plan described above and, accordingly, the impact of
SFAS No. 106 "Employer's Accounting for Postretirement Benefits Other than
Pensions" had no material effect on the Practice.
F-111
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
John E. Durst, M.D.
We have audited the accompanying balance sheets of John E. Durst, M.D. as of
December 31, 1995 and 1996, and the related statements of operations,
proprietor's capital and cash flows for each of the three years in the period
ended December 31, 1996. These combined financial statements are the
responsibility of Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of John E Durst, M.D. as of
December 31, 1995 and 1996, and the results of its operations, proprietor's
capital and cash flows for each of the three years in the period ended December
31, 1996 in conformity with generally accepted accounting principles.
Feldman Radin & Co., P. C.
Certified Public Accountants
New York, New York
May 9, 1997
F-112
JOHN E. DURST, M.D.
BALANCE SHEETS
DECEMBER 31,
-------------------- JUNE 30,
1995 1996 1997
--------- --------- -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash......................................................................... $ 15,782 $ 684 $ 52,356
Accounts receivable, less allowance for bad debts of $2,725 in 1995, $1,708
in 1996 and $0 in 1997..................................................... 17,775 11,880 12,500
--------- --------- -----------
Total current assets..................................................... 33,557 12,564 64,856
--------- --------- -----------
PROPERTY AND EQUIPMENT, net.................................................... 8,180 5,889 7,213
--------- --------- -----------
$ 41,737 $ 18,453 $ 72,069
--------- --------- -----------
--------- --------- -----------
LIABILITIES AND PROPRIETOR'S CAPITAL
COMMITMENTS AND CONTINGENCIES
PROPRIETOR'S CAPITAL........................................................... $ 41,737 $ 18,453 $ 72,069
--------- --------- -----------
$ 41,737 $ 18,453 $ 72,069
--------- --------- -----------
--------- --------- -----------
See notes to financial statements.
F-113
JOHN E. DURST, M.D.
STATEMENTS OF OPERATIONS
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------- ----------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
REVENUE:
Medical services revenue........................... $ 266,245 $ 277,484 $ 208,078 $ 106,986 $ 104,712
---------- ---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Salaries and wages................................. 58,002 56,928 47,067 23,534 23,958
Medical supplies and expenses...................... 5,815 6,222 7,250 3,626 3,138
General and administrative expenses................ 97,441 108,779 92,744 23,543 43,534
Bad debt expense................................... 2,217 508 -- -- --
Depreciation and amortization...................... 7,410 3,554 2,040 1,020 924
Interest expense................................... 1,941 1,716 1,403 702 542
---------- ---------- ---------- ---------- ----------
Total costs and expenses....................... 172,826 177,707 150,504 52,425 72,096
---------- ---------- ---------- ---------- ----------
Net income..................................... $ 93,419 $ 99,777 $ 57,574 $ 54,561 $ 32,616
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
See notes to financial statements.
F-114
JOHN E. DURST, M.D.
STATEMENTS OF PROPRIETOR'S CAPITAL
BALANCE, December 31, 1993....................................................... $ 46,678
Net income..................................................................... 93,419
Drawings....................................................................... (109,362)
---------
BALANCE, December 31, 1994....................................................... 30,735
Net income..................................................................... 99,777
Drawings....................................................................... (88,775)
---------
BALANCE, December 31, 1995....................................................... 41,737
Net income..................................................................... 57,574
Drawings....................................................................... (80,858)
---------
BALANCE, December 31, 1996....................................................... 18,453
Net income (unaudited)......................................................... 32,616
Capital contributions.......................................................... 21,000
---------
BALANCE, June 30, 1997 (unaudited)............................................... $ 72,069
---------
---------
See notes to financial statements.
F-115
JOHN E. DURST, M.D.
STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------------- ---------------------
1994 1995 1996 1996 1997
----------- ---------- ---------- ---------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................... $ 93,419 $ 99,777 $ 57,574 $ 54,561 $ 32,616
----------- ---------- ---------- ---------- ---------
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................ 7,410 3,554 2,040 1,020 924
Changes in assets and liabilities -
(Increase) decrease in -
Accounts receivable, net......................... 906 (2,948) 5,895 7,055 (620)
Increase (decrease) in -
Accounts payable and accrued expenses............ 32,748 (1,803) -- -- --
----------- ---------- ---------- ---------- ---------
41,064 (1,197) 7,935 8,075 304
----------- ---------- ---------- ---------- ---------
Net cash provided by operating activities................ 134,483 98,580 65,509 62,636 32,920
----------- ---------- ---------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment....................... (23,277) 4,133 251 (977) (2,248)
----------- ---------- ---------- ---------- ---------
Net cash (used in) provided by investing
activities......................................... (23,277) 4,133 251 (977) (2,248)
----------- ---------- ---------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions.................................... -- -- -- -- 21,000
Drawings................................................. (109,362) (88,775) (80,858) (30,767) --
----------- ---------- ---------- ---------- ---------
Net cash (used in) provided by financing
activities......................................... (109,362) (88,775) (80,858) (30,767) 21,000
----------- ---------- ---------- ---------- ---------
NET INCREASE (DECREASE) IN CASH............................ 1,844 13,938 (15,098) 30,892 51,672
CASH, beginning of period.................................. -- 1,844 15,782 15,782 684
----------- ---------- ---------- ---------- ---------
CASH, end of period........................................ 1,844 $ 15,782 $ 684 $ 46,674 $ 52,356
----------- ---------- ---------- ---------- ---------
----------- ---------- ---------- ---------- ---------
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid.............................................. $ 1,941 $ 1,716 $ 1,403 $ 351 $ 271
----------- ---------- ---------- ---------- ---------
----------- ---------- ---------- ---------- ---------
See notes to financial statements.
F-116
JOHN E. DURST, M.D.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS ORGANIZATION AND BASIS OF PRESENTATION
John E. Durst M.D. is a physician with a medical practice (the "Proprietors
or "Practice") operating in the state of New Jersey. The Practice is organized
as a sole proprietorship.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. METHOD OF ACCOUNTING
The financial statements of the Practice. are presented on the accrual basis
of accounting. Accordingly, revenues are recorded when earned, rather than when
received and expenses are recorded when incurred, rather than when paid.
B. REVENUES
Medical service revenues are accounted for in the period the services are
provided. The revenues are reported at the estimated realizable amounts from
patients, third-party payors and others. Provisions for estimated third-party
payor adjustments are recorded in the period the related services are provided
as a reduction of revenue. Any adjustment to those amounts are recorded in the
period in which the revised amount is determined. A portion of the Company's
medical services revenue is derived from Medicare, Medicaid and other
governmental programs. Medicare, Medicaid, and other governmental programs
reimburse physicians based on fee schedules which are determined by the specific
governmental agency. Additionally, the Company participates in agreements with
managed care organizations to provide services at negotiated fee-for-service or
capitated payments rates.
C. CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Practice to
concentrations of credit risk consist principally of trade accounts receivable.
The Practice establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific payors, historical trends and other
information.
D. PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are amortized over the respective lease terms or the
service lives of the improvements, whichever is shorter.
E. 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 as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F. INCOME TAXES
Income from the Practice is combined with the income and expenses of the
proprietor from other sources and reported in the proprietor's individual
federal and state tax returns. The proprietorship is not a tax paying entity for
purposes of federal and state income taxes, and thus no income taxes have been
F-117
JOHN E. DURST, M.D.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
recorded in the statements. The proprietor customarily makes estimated tax
payments toward his income tax liability from the Practice's bank account.
G. CASH AND CASH EQUIVALENTS
The Practice includes as cash and cash equivalents all cash accounts which
are not subject to withdrawal restrictions or penalties, and all highly liquid
instruments, with original maturities of three months or less.
H. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards ("SFAS") No. 107 "Disclosures
About Fair Value of Financial Instruments" requires disclosure about the fair
value of all financial instruments. Carrying amounts of all financial
instruments approximate fair value as of December 31, 1996.
I. ACCOUNTING FOR LONG-LIVED ASSETS
Under the requirements of SFAS No. 121 "Accounting for Long-Lived Assets and
for Long-Lived Assets to be disposed of", the Practice is obligated to recognize
an impairment loss on their long-lived assets whenever the sum of the expected
future cash flows from their use is less than their carrying amount. Based on
the Company's review as of December 31, 1996, no impairment of long-lived assets
was evident.
3. COMMITMENTS AND CONTINGENCIES
The Practice is insured with respect to medical malpractice risks. In the
normal course of business the Practice has been named in lawsuits. In the
opinion of the management of the Practice the ultimate liability, if any, of The
Practice with respect to any such lawsuit will not exceed the insurance
coverages carried by the Practice and will not materially impact the operating
results or results of financial condition of the Practice.
The Proprietor has entered into a binding agreement with Integrated
Physicians Systems (IPS), the terms of which provide that IPS will acquire
substantially all of the assets, goodwill, and intangibles of the Practice. The
acquisition by IPS will coincide with the consummation of its IPO.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
ESTIMATED DECEMBER 31,
USEFUL LIVES ----------------------
(YEARS) 1995 1996
------------- ---------- ----------
Leasehold improvements................................... 5-39 $ 9,159 $ 9,159
Medical and computer equipment........................... 5-7 11,420 11,420
Automobiles.............................................. 5 17,680 17,680
---------- ----------
Total.................................................. 38,259 38,259
Less: Accumulated depreciation........................... (30,079) (32,370)
---------- ----------
Net.................................................... $ 8,180 $ 5,889
---------- ----------
---------- ----------
F-118
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholder of
Professional Medical Images, Ltd.
We have audited the accompanying balance sheets of Professional Medical
Images, Ltd. as of February 29, 1996 and February 28, 1997, and the related
statements of operations, changes in stockholder's deficit and cash flows for
each of the three years in the period ended February 28, 1997. These financial
statements are the responsibility of Professional Medical Images' management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Professional Medical Images,
Ltd. as of February 29, 1996 and February 28, 1997, and the results of its
operations, stockholder's deficit and cash flows for each of the three years in
the period ended February 28, 1997 in conformity with generally accepted
accounting principles.
Feldman Radin & Co., P. C.
Certified Public Accountants
New York, New York
May 9, 1997
F-119
PROFESSIONAL MEDICAL IMAGES, LTD.
BALANCE SHEETS
FEBRUARY 29, FEBRUARY 28,
1996 1997
------------ ------------
ASSETS
CURRENT ASSETS:
Cash................................................................................ $ 12,192 $ 2,873
Prepaid expenses and other current assets........................................... 18,482 450
------------ ------------
Total current assets............................................................ 30,674 3,323
PROPERTY AND EQUIPMENT, net........................................................... 9,678 6,190
------------ ------------
$ 40,352 $ 9,513
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDER'S DEFICIT
CURRENT LIABILITIES:
Bank Credit Line.................................................................... $ 23,500 $ 23,622
Accounts payable and accrued expenses............................................... 22,709 22,772
------------ ------------
Total current liabilities....................................................... 46,209 46,394
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S DEFICIT:
Common Stock, no par value; 200 shares authorized
and 200 shares issued and outstanding, respectively............................... 200 200
Accumulated deficit................................................................. (6,057) (37,081)
------------ ------------
TOTAL STOCKHOLDER'S DEFICIT........................................................... (5,857) (36,881)
------------ ------------
$ 40,352 $ 9,513
------------ ------------
------------ ------------
See notes to financial statements.
F-120
PROFESSIONAL MEDICAL IMAGES, LTD.
STATEMENTS OF OPERATIONS
YEARS ENDED
----------------------------------------
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1995 1996 1997
------------ ------------ ------------
REVENUE:
Management fees....................................................... $ 236,165 $ 197,020 $ 186,684
Other revenue......................................................... -- 2,420 1,013
------------ ------------ ------------
Total revenue..................................................... 236,165 199,440 187,697
------------ ------------ ------------
COSTS AND EXPENSES:
Salaries and wages.................................................... 97,520 131,515 132,878
General and administrative expenses................................... 142,126 72,472 81,322
Depreciation and amortization......................................... 5,976 4,865 3,488
Interest expense...................................................... -- 1,288 1,033
------------ ------------ ------------
Total costs and expenses.......................................... 245,622 210,140 218,721
------------ ------------ ------------
Net loss.......................................................... $ (9,457) $ (10,700) $ (31,024)
------------ ------------ ------------
------------ ------------ ------------
See notes to financial statements.
F-121
PROFESSIONAL MEDICAL IMAGES, LTD.
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (DEFICIT)
COMMON STOCK RETAINED
------------------------ EARNINGS
SHARES AMOUNT (DEFICIT) TOTAL
----------- ----------- ---------------- ----------
Balance, February 28, 1994....................................... -- $ 200 $ 14,100 $ 14,300
Net loss....................................................... -- -- (9,457) (9,457)
--- ----- -------- ----------
Balance, February 28, 1995....................................... -- 200 4,643 4,843
Net loss....................................................... -- -- (10,700) (10,700)
--- ----- -------- ----------
Balance, February 29, 1996....................................... -- 200 (6,057) (5,857)
Net loss....................................................... -- -- (31,024) (31,024)
--- ----- -------- ----------
Balance, February 28, 1997....................................... -- 200 (37,081) (36,881)
--- ----- -------- ----------
--- ----- -------- ----------
See notes to financial statements.
F-122
PROFESSIONAL MEDICAL IMAGES, LTD.
STATEMENTS OF CASH FLOWS
YEARS ENDED
----------------------------------------
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1995 1996 1997
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.............................................................. $ (9,457) $ (10,700) $ (31,024)
------------ ------------ ------------
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities -
Depreciation and amortization..................................... 5,976 4,865 3,488
Changes in assets and liabilities -
(Increase) decrease in -
Prepaid expenses and other current assets..................... 5,049 (16,978) 18,032
Increase (decrease) in -
Accounts payable and accrued expenses......................... 3,313 14,801 63
------------ ------------ ------------
14,338 2,688 21,583
------------ ------------ ------------
Net cash provided by (used in) operating activities............... 4,881 (8,012) (9,441)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.................................... -- (600) --
------------ ------------ ------------
Net cash used in investing activities............................... -- (600) --
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayment of) bank credit line......................... 3,179 9,879 122
------------ ------------ ------------
Net cash provided by (used in) financing activities............... 3,179 9,879 122
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH......................................... 8,060 1,267 (9,319)
CASH, beginning of period............................................... 2,865 10,925 12,192
------------ ------------ ------------
CASH, end of period..................................................... $ 10,925 $ 12,192 $ 2,873
------------ ------------ ------------
------------ ------------ ------------
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid......................................................... $ -- $ 1,288 $ 1,033
------------ ------------ ------------
------------ ------------ ------------
See notes to financial statements.
F-123
PROFESSIONAL MEDICAL IMAGES, LTD.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS ORGANIZATION AND BASIS OF PRESENTATION
Professional Medical Images, Ltd. (the "Company") is a New Jersey
professional corporation which is engaged in the development and management of
independent practice associations ("IPA's") and is currently providing IPA
management to 225 physicians in the State of New Jersey. The Company was
incorporated on March 26, 1990.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. METHOD OF ACCOUNTING
The financial statements of the Company are presented on the accrual basis
of accounting. Accordingly, revenues are recorded when earned, rather than when
received and expenses are recorded when incurred, rather than when paid.
B. REVENUES
Management fee revenues are accounted for in the period the services are
provided. The revenues are reported at the estimated net realizable amounts from
clients for services rendered. Fees are predoninantly determined under
negotiated fixed fee arrangements.
C. CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk consist principally of trade account receivables.
The Company establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific payors, historical trends and other
information.
D. PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are amortized over the respective lease terms or the
service lives of the improvements, whichever is shorter.
E. 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 as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F. INCOME TAXES
The Company has historically not incurred significant tax liabilities for
federal or state income taxes. Because of this, provisions for income taxes and
deferred tax assets and liabilities are not material and have not been reflected
in the financial statements.
F-124
PROFESSIONAL MEDICAL IMAGES, LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
G. CASH AND CASH EQUIVALENTS
The Company includes as cash and cash equivalents all cash accounts which
are not subject to withdrawal restrictions or penalties, and all highly liquid
instruments, with original maturities of three months or less.
H. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards ("SFAS") No. 107 "Disclosures
About Fair Value of Financial Instruments" requires disclosure about the fair
value of all financial instruments. Carrying amounts of all financial
instruments approximate fair value as of February 28, 1997.
I. ACCOUNTING FOR LONG-LIVED ASSETS
Under the requirements of SFAS No. 121 "Accounting for Long-Lived Assets and
for Long-Lived-Assets to be Disposed of", the Company is obligated to recognize
an impairment loss on their long lived assets whenever the sum of the expected
future cash flows resulting from their use is less than their carrying amount.
As of February 28, 1997, no impairment exists with respect to any of the
Company's long-lived assets.
3. SUBSEQUENT EVENT
On April 1, 1997 the Company was acquired by Integrated Physicians Services,
Inc. ("IPS") in a transaction accounted for as a purchase. The purchase price
paid by IPS included $2,000 and the assumption of net liabilities of the Company
in the amount of $37,000.
5. SHORT TERM OBLIGATIONS
FEBRUARY 29, FEBRUARY 28,
1996 1997
------------ ------------
The Company maintains a credit line with a bank at 5% per annum
secured by stockholder.......................................... $ 23,500 $ 23,622
------------ ------------
------------ ------------
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
ESTIMATED
USEFUL LIFES FEBRUARY 29, FEBRUARY 28,
(YEARS) 1996 1997
------------- ------------ ------------
Medical and computer equipment....................... 5-7 $ 19,690 $ 19,690
Furniture and fixtures............................... 7-10 10,791 10,791
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Total.............................................. 30,481 30,481
Less: Accumulated depreciation....................... (20,803) (24,291)
------------ ------------
Net................................................ $ 9,678 $ 6,190
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F-125
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NO UNDERWRITER, DEALER, SALESMAN, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION, OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY OF THE
SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANYONE TO WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATES AS OF WHICH SUCH INFORMATION IS FURNISHED.
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TABLE OF CONTENTS
PAGE
-----
Prospectus Summary............................... 3
Risk Factors..................................... 9
Use of Proceeds.................................. 19
Dilution......................................... 20
Capitalization................................... 21
Dividend Policy.................................. 22
Selected Financial Data.......................... 23
Management's Discussion and Analysis of
Financial Condition and Results of
Operations..................................... 25
Business......................................... 28
Management....................................... 43
Principal Stockholders........................... 48
Certain Transactions............................. 49
Description of Debentures........................ 50
Description of Securities........................ 61
Certain United States Federal
Income Tax Considerations...................... 64
Shares Eligible for Future Sale.................. 67
Underwriting..................................... 68
Legal Matters.................................... 70
Experts.......................................... 70
Additional Information........................... 70
Financial Statements............................. F-1
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UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
[LOGO]
INTEGRATED
PHYSICIAN SYSTEMS,
INC.
$25,000,000 [6 1/2% TO 8%]
CONVERTIBLE SUBORDINATED
DEBENTURES DUE 2004
2,000,000 SHARES OF COMMON STOCK
2,000,000 CLASS A REDEEMABLE
COMMON STOCK PURCHASE WARRANTS
---------------------
PROSPECTUS
---------------------
NOLAN SECURITIES CORP.
SOUTHWALL CAPITAL CORP.
DIRKS & COMPANY, INC.
, 1997
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is an itemization of all expenses (subject to future
contingencies) incurred or expected to be incurred by the Company in connection
with the issuance and distribution of the securities being offered hereby (items
marked with an asterisk (*) represent estimated expenses);
SEC Registration Fee........................................... $23,273.93
NASD Filing Fees............................................... 8,657.00
AMEX Filing Fees............................................... 25,000.00
Legal Fees and Expenses........................................ 175,000.00*
Blue Sky Fees (including counsel fees)......................... 35,000.00*
Accounting Fees and Expenses................................... 350,000.00*
Transfer Agent and Registrar Fees.............................. 5,000.00*
Printing and Engraving Expenses................................ 80,000.00*
Miscellaneous.................................................. 23,069.07*
----------
Total.................................................... $725,000.00
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ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Delaware General Corporation Law, Section 102(b)(7), enables a corporation
in its original certificate of incorporation, or an amendment thereto validly
approved by stockholders, to eliminate or limit personal liability of members of
its Board of Directors for violations of a director's fiduciary duty of care.
However, the elimination or limitation shall not apply where there has been a
breach of the duty of loyalty, failure to act in good faith, intentional
misconduct or a knowing violation of a law, the payment of a dividend or
approval of a stock repurchase which is deemed illegal or an improper personal
benefit is obtained. The Company's Certificate of Incorporation includes the
following language:
"The personal liability of the Directors of the Corporation is hereby
eliminated to the fullest extent permitted by paragraph (7) of Subsection
(b) of Section 102 of the General Corporation Law of the State of Delaware
as the same may be amended and supplemented."
Delaware General Corporation Law, Section 145, permits a corporation
organized under Delaware law to indemnify directors and officers with respect to
any matter in which the director or officer acted in good faith and in a manner
he reasonably believed to be not opposed to the best interests of the Company,
and, with respect to any criminal action, had reasonable cause to believe his
conduct was lawful. Article VII, Section 7 of the By-laws of the Company
provides as follows:
"The corporation shall indemnify its officers, directors, employees, and
agents to the extent permitted by the General Corporation Law of Delaware."
Article 11 of the Certificate of Incorporation of the Company, as amended,
permits indemnification of, and advancement of expenses to, among others,
officers and directors of the Corporation. Such Article provides as follows:
"(a) Each person who was or is made a party or is threatened to be made
a party to or is otherwise involved in any action, suit, or proceeding,
whether civil, criminal, administrative, or investigative (hereinafter a
"proceeding"), by reason of the fact that he or she is or was a director,
officer, employee, or agent of the Corporation or any of its direct or
indirect subsidiaries or is or was serving at the request of the Corporation
as a director, officer, employee, or agent of any other corporation or of a
partnership, joint venture, trust, or other enterprise, including service
with respect
II-1
to an employee benefit plan (hereinafter an "indemnitee"), whether the basis
of such proceeding is alleged action in an official capacity as a director,
officer, employee, or agent or in any other capacity while serving as a
director, officer, employee, or agent, shall be indemnified and held
harmless by the Corporation to the fullest extent authorized by the Delaware
General Corporation Law, as the same exists or may hereafter be amended
(but, in the case of any such amendment, only to the extent that such
amendment permits the Corporation to provide broader indemnification rights
than permitted prior thereto), against all expense, liability, and loss
(including attorneys' fees, judgments, fines, ERISA excise taxes or
penalties, and amounts paid in settlement) reasonably incurred or suffered
by such indemnitee in connection therewith, and such indemnification shall
continue as to an indemnitee who has ceased to be a director, officer,
employee, or agent and shall inure to the benefit of the indemnitee's heirs,
executors, and administrators; provided, however, that, except as provided
in paragraph (c) of this Article 11 with respect to proceedings to enforce
rights to indemnification, the Corporation shall indemnify any such
indemnitee in connection with a proceeding (or part thereof) initiated by
such indemnitee only if such proceeding (or part thereof) was authorized by
the Board of Directors of the Corporation.
"(b) The right to indemnification conferred in paragraph (a) of this
Article 11 shall include the right to be paid by the Corporation the
expenses incurred in defending any proceeding for which such right to
indemnification is applicable in advance of its final disposition
(hereinafter an "advancement of expenses"); provided, however, that, if the
Delaware General Corporation Law requires, an advancement of expenses
incurred by an indemnitee in his or her capacity as a director or officer
(and not in any other capacity in which service was or is rendered by such
indemnitee, including, without limitation, service to an employee benefit
plan) shall be made only upon delivery to the Corporation of an undertaking
(hereinafter an "undertaking"), by or on behalf of such indemnitee, to repay
all amounts so advanced if it shall ultimately be determined by final
judicial decision from which there is no further right to appeal
(hereinafter a "final adjudication") that such indemnitee is not entitled to
be indemnified for such expenses under this Article 11 or otherwise.
"(c) The rights to indemnification and to the advancement of expenses
conferred in paragraphs (a) and (b) of this Article 11 shall be contract
rights. If a claim under paragraph (a) or (b) of this Article 11 is not paid
in full by the Corporation within sixty days after a written claim has been
received by the Corporation, except in the case of a claim for an
advancement of expenses, in which case the applicable period shall be twenty
days, the indemnitee may at any time thereafter bring suit against the
Corporation to recover the unpaid amount of the claim. If successful in
whole or in part in any such suit, or in a suit brought by the Corporation
to recover an advancement of expenses pursuant to the terms of an
undertaking, the indemnitee shall be entitled to be paid also the expense of
prosecuting or defending such suit. In (i) any suit brought by the
indemnitee to enforce a right to indemnification hereunder (but not in a
suit brought by an indemnitee to enforce a right to an advancement of
expenses) it shall be a defense that, and (ii) any suit by the Corporation
to recover an advancement of expenses pursuant to the terms of an
undertaking, the Corporation shall be entitled to recover such expenses upon
a final adjudication that, the indemnitee has not met any applicable
standard for indemnification set forth in the Delaware General Corporation
Law. Neither the failure of the Corporation (including its Board of
Directors, independent legal counsel, or its stockholders) to have made a
determination prior to the commencement of such suit that indemnification of
the indemnitee is proper in the circumstances because the indemnitee has met
the applicable standard of conduct set forth in the Delaware General
Corporation Law, nor an actual determination by the Corporation (including
its Board of Directors, independent legal counsel, or its stockholders) that
the indemnitee has not met such applicable standard of conduct, shall create
a presumption that the indemnitee has not met the applicable standard of
conduct or, in the case of such a suit brought by the indemnitee, be a
defense to such suit. In any suit brought by the indemnitee to enforce a
right to indemnification or to an advancement of expenses hereunder, or by
the Corporation to recover an advancement of expenses pursuant to the terms
of an undertaking, the burden of proving that the
II-2
indemnitee is not entitled to be indemnified, or to such advancement of
expenses, under this Article 11 or otherwise, shall be on the Corporation.
"(d) The rights to indemnification and to the advancement of expenses
conferred in this Article 11 shall not be exclusive of any other right which
any person may have or hereafter acquire under any statute, this certificate
of incorporation, by-law, agreement, vote of stockholders or disinterested
directors, or otherwise.
"(e) The Corporation may maintain insurance, at its expense, to protect
itself and any director, officer, employee, or agent of the Corporation or
another corporation, partnership, joint venture, trust, or other enterprise
against any expense, liability, or loss, whether or not the Corporation
would have the power to indemnify such person against such expense,
liability, or loss under the Delaware General Corporation Law.
"(f) The Corporation's obligation, if any, to indemnify any person who
was or is serving as a director, officer, employee, or agent of any direct
or indirect subsidiary of the Corporation or, at the request of the
Corporation, of any other corporation or of a partnership, joint venture,
trust, or other enterprise shall be reduced by any amount such person may
collect as indemnification from such other corporation, partnership, joint
venture, trust, or other enterprise.
"(g) Any repeal or modification of the foregoing provisions of this
Article 11 shall not adversely affect any right or protection hereunder of
any person in respect of any act or omission occurring prior to the time of
such repeal or modification."
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Set forth below in chronological order is information regarding the numbers
of shares of Common Stock sold by the Company and the principal amount of debt
instruments issued by the Company since April 25, 1995, the consideration
received by the Company for such shares, options and debt instruments and
information relating to the section of the Securities Act of 1933, as amended
(the "Securities Act"), or rule of the Securities and Exchange Commission under
which exemption from registration was claimed. None of these securities was
registered under the Securities Act. Except as otherwise indicated, no sales of
securities involved the use of an underwriter and no commissions were paid in
connection with the sale of any securities.
On April 27, 1995, the Company issued 1,000 shares of Common Stock to
Wellness Concepts, Inc. ("Wellness"), the founding stockholder of the Company at
a price of $.01 per share.
On April 24, 1996, the Company completed a 3,000-for-one stock split and
Wellness surrendered all of its Common Stock to the Company. On April 25, 1996,
the Company issued to certain stockholders, including certain directors and
officers of the Company, a total of 3,000,000 shares of Common Stock at a price
of $.01 per share.
Between December 1996 and July 1997, the Company consummated the private
placement of 8.7 Units, each Unit consisting of $50,000 principal amount of
Series A 10% Senior Notes and 6,667 shares of Common Stock. Pursuant thereto,
the Company issued an aggregate principal amount of $435,000 of Senior Notes and
58,000 shares of Common Stock. The Units were offered to, and purchased by,
accredited investors pursuant to section 4(2) of the Securities Act and the
rules promulgated thereunder.
Each purchaser of the securities described above has represented that
he/she/it understands that the securities acquired may not be sold or otherwise
transferred absent registration under the Securities Act or the availability of
an exemption from the registration requirements of the Securities Act, and each
certificate evidencing the securities owned by each purchaser bears or will bear
upon issuance a legend to that effect.
II-3
ITEM 16. EXHIBITS
(a) The following exhibits are filed herewith:
EXHIBIT NO.
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1.1 Form of Underwriting Agreement
3.1 Certificate of Incorporation, as amended
3.2 Bylaws, as amended+
4.1 Form of Representatives' Warrant Agreement
4.2 Specimen Common Stock Certificate*
4.3 Form of Indenture+
4.4 Form of Warrant Agreement by and between the Company and Continental Stock
Transfer & Trust Company, including form of Warrant
5.1 Opinion of Brock Fensterstock Silverstein McAuliffe & Wade LLC*
10.1 Employment Agreements with Scott Pollock, Dennis B. Liotta, M.D., and Peter R.
Heisen, M.D., as amended
10.2 1996 Stock Option Plan+
10.3 Form of Asset Purchase Agreement with Affiliated Practices+
10.4 Form of Employment Agreement with affiliated physicians+
10.5 Form of Practice Management Services Agreement
10.6 Form of Goodwill Purchase Agreements*
23.1 Consent of Feldman Radin & Co., P.C.
23.2 Consent of Brock Fensterstock Silverstein McAuliffe & Wade LLC (contained in the
Opinion filed as Exhibit 5.1).*
23.3 Consent of Kalogredis Tsoules and Sweeney Ltd.
24.1 Power of Attorney+
25.1 Form T-1 Statement of Eligibility under the Trust Indenture Act of 1939
27.1 Financial Data Schedule
(b) Financial statement schedules:
Report of Independent Certified Public Accountants
Schedule II - Valuation and Qualifying Accounts
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* To be filed by amendment.
+ Previously filed.
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
(1) to file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the registration statement;
(iii) To include any additional or changed material information on
the plan of distribution;
(2) that, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be treated as a new
registration statement relating to the securities offered
II-4
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(3) to remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer, or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(c) The Registrant hereby undertakes that it will:
(1) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act as part of this registration statement as of
the time the Commission declared it effective.
(2) For the purpose of determining any liability under the Securities
Act, treat each post-effective amendment that contains a form of prospectus
as a new registration statement relating to the securities offered therein,
and the offering of such securities at that time as the initial bona fide
offering thereof.
(d) The Registrant hereby undertakes that it will provide to the underwriter
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
II-5
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Boards of Directors and Stockholders and proprietors of:
INTEGRATED PHYSICIAN SYSTEMS, INC.
RELIANCE HEALTHCARE GROUP
MEDICAL BILLING AND MANAGEMENT SERVICES, INC. AND SUBSIDIARY
BRANCHBURG EYE PHYSICIANS, P.A.
FELIX SALERNO, M.D. AND RICHARD WEEDER, M.D.
FLEMINGTON MEDICAL GROUP, P.A.
HUNTERDON OPTHAMOLOGY, P.A.
AMWELL HEALTH CENTER
KENNETH G. STERN, M.D., PA
ALEXANDER KUDRYK, M.D.
BOUND BROOK PEDIATRIC ASSOCIATION
AUDREY HINDS-MCDONALD
JOHN E. DURST, M.D.
PROFESSIONAL MEDICAL IMAGES
We have audited in accordance with generally accepted auditing standards the
financial statements of the above companies included in this Registration
Statement and have issued our reports thereon, all dated May 9, 1997. Our audits
were made for the purpose of forming opinions on the basic financial statements
taken as a whole. The schedules listed in the Exhibit index are the
responsibility of the Companies' management and are presented for purposes of
complying with the Securities and Exchange Commission's rules and are not part
of the basic financial statements. Our responsibility is to express an opinion
based on our audit. These Schedules have been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly state, in all material respects, the financial data required to
be set forth therein in relation to the basic financial statements taken as
whole.
/s/ Feldman Radin & Co., P.C.
Certified Public Accountants
New York, NY
May 9, 1997
II-6
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT
JANUARY 1, AMOUNTS CHARGED BALANCE AT
1996 TO EXPENSES DEDUCTIONS DECEMBER 31, 1996
-------------- ---------------- ----------- -----------------
INTEGRATED PHYSICIAN SYSTEMS, INC.
Accumulated depreciation and amortization.... $ 1,000 $ 2,000 $ -- $ 3,000
RELIANCE HEALTHCARE GROUP
Allowance for doubtful accounts.............. 250,000 30,000 -- 280,000
Allowance for contractual adjustments........ 5,661,976 58,713 -- 5,720,689
Accumulated depreciation and amortization.... 707,797 179,499 -- 887,296
MEDICAL BILLING AND MANAGEMENT SERVICES, INC.
AND SUBSIDIARY
Allowance for doubtful accounts.............. -- 6,497 -- 6,497
Accumulated depreciation and amortization.... 96,696 39,960 26,796 109,860
BRANCHBURG EYE PHYSICIANS, P.A.
Allowance for doubtful accounts.............. 52,416 11,145 -- 63,561
Accumulated depreciation and amortization.... 205,769 41,477 29,967 217,279
FELIX SALERNO, M.D. AND RICHARD WEEDER, M.D.
Allowance for doubtful accounts.............. 155,774 12,779 -- 168,553
FLEMINGTON MEDICAL GROUP, P.A.
Allowance for doubtful accounts.............. 4,500 -- 449 4,051
Accumulated depreciation and amortization.... 103,145 6,851 -- 109,996
HUNTERDON OPTHALMOLOGISTS, P.A.
Allowance for doubtful accounts.............. 12,000 5,088 -- 17,088
Accumulated depreciation and amortization.... 20,610 1,244 -- 21,854
JOEL FUHRMAN M.D., P.C. D/B/A
AMWELL HEALTH CENTER
Allowance for doubtful accounts.............. 11,139 -- 4,416 6,723
Accumulated depreciation and amortization.... 52,777 7,843 -- 60,620
KENNETH G. STERN, M.D., P.A.
Allowance for doubtful accounts.............. 8,119 317 -- 8,436
Accumulated depreciation and amortization.... 66,035 12,087 -- 78,122
ALEXANDER KUDRYK, M.D.
Allowance for doubtful accounts.............. 19,409 -- 3,050 16,359
Accumulated depreciation and amortization.... 113,017 2,551 -- 115,568
BOUND BROOK PEDIATRIC ASSOCIATION, P.A.
Allowance for doubtful accounts.............. 5,200 -- 400 4,800
Accumulated depreciation and amortization.... 64,108 1,837 -- 65,945
AUDREY HINDS-MCDONALD, M.D.
Allowance for doubtful accounts.............. 10,750 2,450 -- 13,200
JOHN E. DURST, M.D.
Allowance for doubtful accounts.............. 2,725 -- 1,017 1,708
Accumulated depreciation and amortization.... 30,079 2,291 -- 32,370
PROFESSIONAL MEDICAL IMAGES, LTD.
Accumulated depreciation and amortization.... 20,803 3,488 -- 24,291
II-7
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT
JANUARY 1, AMOUNTS CHARGED BALANCE AT
1995 TO EXPENSES DEDUCTIONS DECEMBER 31, 1995
-------------- ---------------- ------------- -----------------
INTEGRATED PHYSICIAN SYSTEMS, INC.
Accumulated depreciation and amortization.... $ -- $ 1,000 $ -- $ 1,000
RELIANCE HEALTHCARE GROUP
Allowance for doubtful accounts.............. 220,000 30,000 -- 250,000
Allowance for contractual adjustments........ 4,492,024 1,169,952 -- 5,661,976
Accumulated depreciation and amortization.... 501,987 205,810 -- 707,797
MEDICAL BILLING AND MANAGEMENT
SERVICES, INC. AND SUBSIDIARY
Allowance for doubtful accounts.............. -- -- -- --
Accumulated depreciation and amortization.... 53,633 43,063 -- 96,696
BRANCHBURG EYE PHYSICIANS, P.A.
Allowance for doubtful accounts.............. 61,571 9,155 52,416
Accumulated depreciation and amortization.... 161,095 44,674 -- 205,769
FELIX SALERNO, M.D. AND
RICHARD WEEDER, M.D.
Allowance for doubtful accounts.............. 130,774 25,000 -- 155,774
FLEMINGTON MEDICAL GROUP, P.A.
Allowance for doubtful accounts.............. 4,500 -- -- 4,500
Accumulated depreciation and amortization.... 80,491 22,654 -- 103,145
HUNTERDON OPTHALMOLOGISTS, P.A.
Allowance for doubtful accounts.............. 8,295 3,705 -- 12,000
Accumulated depreciation and amortization.... 19,366 1,244 -- 20,610
JOEL FUHRMAN M.D., P.C. D/B/A
AMWELL HEALTH CENTER
Allowance for doubtful accounts.............. 6,336 4,803 -- 11,139
Accumulated depreciation and amortization.... 44,933 7,844 -- 52,777
KENNETH G. STERN, M.D., P.A.
Allowance for doubtful accounts.............. 7,769 350 -- 8,119
Accumulated depreciation and amortization.... 53,622 12,413 -- 66,035
ALEXANDER KUDRYK, M.D.
Allowance for doubtful accounts.............. 15,297 4,112 -- 19,409
Accumulated depreciation and amortization.... 97,126 15,891 -- 113,017
BOUND BROOK PEDIATRIC ASSOCIATION, P.A.
Allowance for doubtful accounts.............. 5,700 -- 500 5,200
Accumulated depreciation and amortization.... 62,787 1,321 -- 64,108
AUDREY HINDS-MCDONALD, M.D.
Allowance for doubtful accounts.............. 8,600 2,150 -- 10,750
JOHN E. DURST, M.D.
Allowance for doubtful accounts.............. 2,217 508 -- 2,725
Accumulated depreciation and amortization.... 26,525 3,554 -- 30,079
PROFESSIONAL MEDICAL IMAGES, LTD.
Accumulated depreciation and amortization.... 15,938 4,865 -- 20,803
II-8
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT
JANUARY 1, AMOUNTS CHARGED BALANCE AT
1994 TO EXPENSES DEDUCTIONS DECEMBER 31, 1994
-------------- ---------------- ----------- -----------------
RELIANCE HEALTHCARE GROUP
Allowance for doubtful accounts.............. $ 200,000 $ 20,000 $ -- $ 220,000
Allowance for contractual adjustments........ 3,355,322 1,136,702 -- 4,492,024
Accumulated depreciation and amortization.... 360,996 140,991 -- 501,987
MEDICAL BILLING AND MANAGEMENT SERVICES, INC.
AND SUBSIDIARY
Allowance for doubtful accounts.............. -- -- -- --
Accumulated depreciation and amortization.... 36,167 17,466 -- 53,633
BRANCHBURG EYE PHYSICIANS, P.A.
Allowance for doubtful accounts.............. -- 61,571 -- 61,571
Accumulated depreciation and amortization.... 157,691 3,404 -- 161,095
FELIX SALERNO, M.D. AND RICHARD WEEDER, M.D.
Allowance for doubtful accounts.............. -- 130,774 -- 130,774
FLEMINGTON MEDICAL GROUP, P.A.
Allowance for doubtful accounts.............. -- 4,500 -- 4,500
Accumulated depreciation and amortization.... 68,974 11,517 -- 80,491
HUNTERDON OPTHAMOLOGY, P.A.
Allowance for doubtful accounts.............. -- 8,295 -- 8,295
Accumulated depreciation and amortization.... 18,122 1,244 -- 19,366
AMWELL HEALTH CENTER
Allowance for doubtful accounts.............. -- 6,336 -- 6,336
Accumulated depreciation and amortization.... 34,540 10,393 -- 44,933
KENNETH G. STERN, M.D., P.A.
Allowance for doubtful accounts.............. -- 7,769 -- 7,769
Accumulated depreciation and amortization.... 32,677 20,945 -- 53,622
ALEXANDER KUDRYK, M.D.
Allowance for doubtful accounts.............. -- 15,297 -- 15,297
Accumulated depreciation and amortization.... 85,886 11,240 -- 97,126
BOUND BROOK PEDIATRIC ASSOCIATION
Allowance for doubtful accounts.............. -- 5,700 -- 5,700
Accumulated depreciation and amortization.... 62,255 532 -- 62,787
AUDREY HINDS-MCDONALD
Allowance for doubtful accounts.............. -- 8,600 -- 8,600
JOHN E. DURST, M.D.
Allowance for doubtful accounts.............. -- 2,217 -- 2,217
Accumulated depreciation and amortization.... 19,115 7,410 -- 26,525
PROFESSIONAL MEDICAL IMAGES
Accumulated depreciation and amortization.... 9,962 5,976 -- 15,938
II-9
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant has duly caused this Amendment No. 1 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in The
City of New York on October 24, 1997.
INTEGRATED PHYSICIAN SYSTEMS, INC.
By: /s/ SCOTT G. POLLOCK
-----------------------------------------
Scott G. Pollock
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
/s/ SCOTT G. POLLOCK President, Chief Executive
- ------------------------------ Officer, Chief Financial October 24, 1997
Scott G. Pollock Officer and a Director
* Executive Vice President,
- ------------------------------ Chief Operating Officer October 24, 1997
Dennis B. Liotta, M.D. and a Director
* Vice President, Chief
- ------------------------------ Medical Officer and a October 24, 1997
Peter Heisen, M.D. Director
* Vice President for
- ------------------------------ Business Development and October 24, 1997
David I. Rosen, M.D. a Director
*
- ------------------------------ Secretary and a Director October 24, 1997
Joseph F. Murray
*
- ------------------------------ Corporate General Counsel October 24, 1997
Walter B. Dunsmore and a Director
/s/ JAMES M. FOULKE
- ------------------------------ Director October 24, 1997
James M. Foulke
*By: /s/ SCOTT G. POLLOCK
-------------------------
Scott G. Pollock
ATTORNEY-IN-FACT
II-10
INDEX TO EXHIBITS
EXHIBIT NO. PAGE
- --------------- ---------
1.1 Form of Underwriting Agreement
3.1 Certificate of Incorporation, as amended
3.2 Bylaws, as amended+
4.1 Form of Representatives' Warrant Agreement
4.2 Specimen Common Stock Certificate*
4.3 Form of Indenture+
4.4 Form of Warrant Agreement by and between the Company and Continental Stock Transfer &
Trust Company, including form of Warrant
5.1 Opinion of Brock Fensterstock Silverstein McAuliffe & Wade LLC *
10.1 Employment Agreements with Scott Pollock, Dennis B. Liotta, M.D., and Peter R. Heisen,
M.D., as amended
10.2 1996 Stock Option Plan+
10.3 Form of Asset Purchase Agreement with Affiliated Practices+
10.4 Form of Employment Agreement with affiliated physicians+
10.5 Form of Practice Management Services Agreement
10.6 Form of Goodwill Purchase Agreements*
23.1 Consent of Feldman Radin & Co., P.C.
23.2 Consent of Brock Fensterstock Silverstein McAuliffe & Wade LLC (contained in the Opinion
filed as Exhibit 5.1).*
23.3 Consent of Kalogredis Tsoules and Sweeney Ltd.
24.1 Power of Attorney+
25.1 Form T-1 Statement of Eligibility under the Trust Indenture Act of 1939
27.1 Financial Data Schedule
- ------------------------
* To be filed by amendment.
+ Previously filed.