<PAGE>
Pursuant to Rule 424(b)(4)
Registration Nos. 333-4262
333-5319
PROSPECTUS
$35,000,000
COMPLETE MANAGEMENT, INC.
8% CONVERTIBLE SUBORDINATED DEBENTURES DUE AUGUST 15, 2003
INTEREST PAYABLE AUGUST 15 AND FEBRUARY 15
The debentures (the "Debentures") are convertible into common shares, par
value $.001 per share (the "Common Shares"), of Complete Management, Inc.
("CMI") at any time prior to maturity, unless previously redeemed, at a
conversion price of $14 per share, subject to adjustment in certain events. On
June 5, 1996 the closing sale price for the Common Shares on the American
Stock Exchange ("AMEX") was $12.75 per share. See "Price Range for Common
Shares." The Common Shares and subject to notice of issuance the Debentures
are listed on the AMEX under the symbols "CMI" and "CMI.A." respectively.
The Debentures are redeemable, in whole or in part on 45 days' prior
written notice, at the option of CMI at a redemption price equal to 100% of
the principal amount, plus accrued interest, at any time on or after June 5,
1999, provided that the Closing Price (as defined) of the Common Shares,
during the 20 consecutive trading days prior to the date of notice of such
redemption, has equaled or exceeded $19.125, subject to adjustment in certain
events. The Debentures are subordinated to all existing and future Senior
Indebtedness (as defined) and are effectively subordinated to all indebtedness
of CMI's subsidiaries. At March 31, 1996, CMI had indebtedness to which the
Debentures would be effectively subordinated aggregating $4,195,000. See
"Description of Debentures."
See "Investment Considerations" on page 8 hereof for a discussion of
certain factors that should be considered by prospective purchasers of the
Debentures.
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.
<PAGE>
===============================================================================
Price to Underwriting Proceeds to
Public(1) Discount(2) Company(2) (3)
- -------------------------------------------------------------------------------
Per Debenture ......... 100% 8.0% 92.00%
- -------------------------------------------------------------------------------
Total (4) ............ $35,000,000 $2,800,000 $32,200,000
===============================================================================
(1) Plus accrued interest, if any, from June 11, 1996.
(2) Does not include additional compensation to National Securities
Corporation, the representative of the several underwriters (the
"Representative"), in the form of a non-accountable expense allowance
equal to 2% of the gross proceeds of this offering of Debentures (this
"Offering"). CMI has also agreed to issue to the Representative warrants
(the "Representative's Warrants") to purchase up to 250,000 Common Shares.
For indemnification arrangements with the Underwriters and additional
compensation payable to the Representative, see "Underwriting."
(3) Before deduction of expenses payable by CMI estimated at $1,200,000
(including the nonaccountable expense allowance).
(4) CMI has granted to the Underwriters an option, exercisable within 45 days
of the date hereof, to purchase up to an additional $5,250,000 principal
amount of Debentures solely for the purpose of covering over-allotments,
if any. If such option is exercised in full, the total Price to Public,
Underwriting Discount and Proceeds to Company will be $40,250,000,
$3,220,000 and $37,030,000, respectively. See "Underwriting."
The Debentures are offered, subject to prior sale, when, as and if
delivered to and accepted by the Underwriters, subject to approval of certain
legal matters by their counsel and subject to certain other conditions. The
Underwriters reserve the right to withdraw, cancel or modify this Offering
and to reject any order in whole or in part. It is expected that delivery of
certificates representing the Debentures will be made against payment
therefor at the office of National Securities Corporation, 1001 Fourth
Avenue, Seattle, Washington 98154 on or about June 11, 1996.
NATIONAL SECURITIES CORPORATION
The date of this Prospectus is June 5, 1996
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the financial statements and related notes appearing
elsewhere in this Prospectus.
On January 3, 1996 CMI acquired the assets and business of Medical
Management, Inc. ("MMI") through the merger (the "Merger") of MMI into a
wholly owned subsidiary of CMI, which changed its name to Medical Management,
Inc. upon consummation of the Merger. MMI is principally engaged in providing
and administratively managing diagnostic imaging equipment in physicians'
offices and hospitals. Unless otherwise indicated, all references to the
Company herein include CMI and MMI and "MMI" refers to Medical Management,
Inc., both before and after the Merger.
THE COMPANY
Complete Management, Inc. is a physician practice management company. It
provides physician and hospital management and support services to medical
practice groups and hospitals in the greater New York metropolitan area,
primarily to medical practice groups focused on the treatment and evaluation
of patients with injury-related conditions. The services offered by the
Company include substantially all aspects of business, financial and
marketing support required by a medical practice but do not include providing
any type of medical diagnostic or treatment services. The Company offers
sophisticated business and management systems and a high level of
professional competence to doctors and hospitals that, increasingly, are
faced with complex, time-consuming and expensive reporting, record-keeping,
purchasing, collections and other non-medical requirements of a successful
practice. Historically, all of CMI's revenue and most of MMI's revenue have
come from a single medical practice group, Greater Metropolitan Medical
Services ("GMMS") (formerly doing business as "Greater Metropolitan Neurology
Services"), and the Company's future growth prospects are substantially
linked to the prospects of the continued growth of this client as well as to
acquisitions the Company might identify and make in the future.
Services provided by the Company include the provision of office space and
equipment, non-medical personnel, administrative services, billing,
receivables collection, regulatory compliance, and non-medical services
related to its clients' diagnostic imaging services. The Company also offers
consultation regarding marketing strategies and provides financing for the
expansion of its clients' medical practices. By focusing solely on the
business support of medical practices, the Company is able to offer a variety
of operating efficiencies that would be difficult to establish and maintain
by the typical, unassisted medical practice.
The Company's current medical practice clients focus on the treatment of
patients with injury-related conditions in which the reporting,
record-keeping and other requirements imposed by governmental regulations,
payor policies or litigation or other dispute resolution processes are highly
complex, change rapidly and unpredictably and require a high level of
specialized non-medical knowledge. The Company offers both management and
staff with high levels of training and experience in these activities. In
order to maximize the benefits of its expertise, the Company has focused its
marketing efforts on medical practices, such as GMMS, that have the ability
to provide medical services for work-related, automotive and other injury
cases in which the degree of regulation is particularly high. Initially,
these practices related primarily to automobile no-fault injury claims;
however, GMMS, supported by the Company, is aggressively expanding into the
treatment and evaluation of workplace injuries covered under workers'
compensation statutes. The Company believes that the opportunity to use a
medical management service company to service the administrative burdens
dictated by the regulatory environment will encourage neurological,
orthopedic and other medical practices to expand and focus on the area of
injury-related services and expects that such expansion should produce a
corresponding demand for the Company's services. The Company also believes
that similar business opportunities may exist in a variety of other medical
practice areas, such as managed healthcare. Managed healthcare, which has
evolved more slowly in New York State than in many other states, is expected
to become more widely established in New York State in the future.
3
<PAGE>
The Company's management has experience in hospital administration and
attempts to recruit and train staff to operate at a high level of efficiency
in the management of medical practices. To that end, the Company emphasizes a
high level of standardization of procedures and seeks to automate significant
aspects of record-keeping, reporting, collections and other critical business
activities of its clients' practices. Under the Company's management, GMMS
has established a multi-location practice that benefits from such management
efficiencies as centralized purchasing and collection functions and a
standard office format that supports the flexible use of both medical and
non-medical personnel and equipment in its various offices as required. The
Company also uses standardized and automated systems to produce and
administer the various financial and other records used to support its
clients' claims for payment.
Clients of the Company are expected to support claims for reimbursement
for their services and provide data relevant to their patients' related
claims, such as those for lost wages. While medical diagnosis, treatment,
reporting and provision of expert testimony are matters requiring medical
expertise, the related administrative processes require expertise and systems
for which medical personnel and the typical medical office staff are not well
suited. By providing an effective system to process claims for reimbursement,
the Company assists its clients in the collection of their professional fees.
The preponderance of GMMS' medical practice has historically been referred by
attorneys representing clients with automobile no-fault injury or workers'
compensation claims. By administering an effective claims process, the
Company believes that it supports its clients in their collection of fees. By
providing high quality medical services, the Company's clients have developed
a reputation as "definers" of injury, rather than advocates for a particular
medical evaluation. This reputation has led plaintiffs' attorneys to
recommend GMMS and increasingly has caused insurance companies to retain GMMS
to perform independent medical evaluations ("IME's").
The Company's objective is to become the dominant provider of medical
management services in the greater New York metropolitan area and elsewhere
in New York State by implementing an aggressive growth strategy. The key
elements of the Company's strategy to achieve this objective are:
o marketing its services to medical practices and hospitals with
substantial involvement in the medical specialties in which the
Company's services can increase efficiency and add value;
o assisting its clients to expand their practices by advising with
respect to management, marketing, financing and other techniques to
increase patient referrals and broaden the range of diagnostic and
treatment services offered and, where appropriate, to open new offices
and acquire other medical practices;
o establishing a network of client physicians suitable for providing
services under managed care contracts;
o establishing client relationships with medical practices and hospitals
that have achieved a high level of credibility among third-party
payors, referring attorneys and others with respect to the quality and
integrity of the medical treatments and evaluations performed; and
o establishing a position of industry leadership by providing effective
management systems for medical practices requiring complex management
services.
CMI was incorporated in New York on December 30, 1992 and commenced
operations on April 1, 1993. On January 3, 1996, CMI completed its initial
public offering (the "IPO") of 2,000,000 Common Shares at a price of $9.00
per share and received net proceeds of $13,912,000. Also on January 3, 1996,
CMI acquired the assets and business of MMI through its merger into CMI
Acquisition Corporation which, upon consummation of the Merger, changed its
name to Medical Management, Inc. MMI is principally engaged in providing
diagnostic imaging equipment and billing and management services related
thereto, thus broadening the range of testing services the Company's clients
are able to provide. Currently, MMI operates six diagnostic imaging units for
two clients. MMI has also entered into two additional agreements
4
<PAGE>
for diagnostic imaging units at two metropolitan area hospitals. GMMS is the
primary client of MMI and the sole client of CMI. The acquired Medical
Management, Inc. was incorporated on December 24, 1991. The Company's
principal executive offices are located at 254 West 31st Street, New York,
New York 10001 and its telephone number is (212) 868-1188.
THE OFFERING
Securities Offered............. $35,000,000 aggregate principal amount of 8%
Convertible Subordinated Debentures Due 2003.
Interest Payment Dates ........ August 15 and February 15, commencing August
15, 1996
Maturity Date.................. August 15, 2003
Conversion..................... The Debentures are convertible into Common
Shares, par value $.001 per share, of the
Company, at any time prior to maturity,
unless previously redeemed, at a conversion
price of $14.00 per share, subject to
adjustment in certain events.
Redemption at Option of the
Company ..................... The Debentures are not redeemable prior to
June 5, 1999. 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
interest, provided that the Debentures may
not be redeemed prior to maturity unless,
during the 20 consecutive trading days prior
to the date of notice of such redemption,
the closing price as defined has equaled or
exceeded $19.125, 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
interest.
Sinking Fund .................. If a sinking fund is established for any
indebtedness that is junior or pari passu
with the Debentures and which has a maturity
or weighted average time to maturity which is
on or prior to August 15, 2003, the
Debentures will be entitled to an annual
sinking fund beginning in the Company's next
fiscal year 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 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 of the Company. See "Description
of Debentures."
5
<PAGE>
Use of Proceeds ............... To provide added funds for the Company's
acquisition program and for working capital
and general corporate purposes. See "Use of
Proceeds."
Trading Symbols ............... The Debentures subject to notice of issuance,
and the Common Shares are listed on the AMEX
under the symbols "CMI.A." and "CMI"
respectively.
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF INCOME DATA:
COMPLETE MANAGEMENT, INC.
<TABLE>
<CAPTION>
For the
For the period three Months
from inception For the ended
(April 1, 1993) years ended December 31, March 31,
to December 31, ------------------------ -------------------
1993 1994 1995 1995 1996
--------------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenue ................................. $5,283 $10,654 $12,294 $3,000 $5,200
Interest discount (1) ................... (865) (1,744) (2,016) (487) (515)
--------------- ---------- ---------- -------- --------
Net revenue ............................. 4,418 8,910 10,278 2,513 4,685
Operating expenses ...................... 2,790 4,520 5,745 1,257 3,048
--------------- ---------- ---------- -------- --------
Operating income ........................ 1,628 4,390 4,533 1,256 1,637
Interest discount included in income (2) . 207 922 1,585 302 587
Net income .............................. $1,006 $ 2,845 $ 3,227 826 $1,110
--------------- ---------- ---------- -------- --------
Net income per share (3) ................ $ 0.34 $ 0.95 $ 1.08 $ 0.28 $ 0.15
=============== ========== ========== ======== ========
Weighted average number of shares outstanding 2,981 2,981 2,981 2,981 7,438
=============== ========== ========== ======== ========
Ratio of earnings to fixed charges (4) .. N/A N/A 133.35 N/A 8.11
--------------- ---------- ---------- -------- --------
</TABLE>
MEDICAL MANAGEMENT, INC.
<TABLE>
<CAPTION>
For the
Years Ended December 31,
----------------------------
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Revenue ................................................. $3,279 $6,049 $7,287
Interest discount (1) ................................... -- -- (702)
------- ------- -------
Net revenue ............................................. 3,279 6,049 6,585
Operating expenses ...................................... 2,039 3,574 5,174
------- ------- -------
Operating income ........................................ 1,240 2,475 1,411
Interest discount included in income (2) ................ -- -- 651
Cumulative effect of change in accounting principle net of
income tax benefit of $196,000 ......................... (222)
Net income .............................................. $ 346 $1,302 $ 781
======= ======= =======
Cumulative effect per share of change in accounting
principle net of income taxes .......................... $(0.07)
=======
Net income per share .................................... $ 0.43 $ 0.26
======= =======
Pro forma net income (5) ................................ $ 575
=======
Pro forma net income per share .......................... $ 0.26
=======
Pro forma amounts assuming the discounting of certain accounts
receivable is applied retroactively:
Pro forma net income .................................... $ 554 $1,211 $1,003
======= ======= =======
Pro forma net income per share .......................... $ 0.25 $ 0.40 $ 0.33
======= ======= =======
Weighted average number of shares outstanding ........... 2,185 3,008 3,035
======= ======= =======
</TABLE>
6
<PAGE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
Complete Management, Inc.
As at March 31, 1996
-------------------------
As
Adjusted
Actual (6)
-------- -----------
<S> <C> <C>
Cash and cash equivalents ...................... $ 2,540 $29,040
Marketable securities .......................... 9,599 9,599
Accounts receivable, net (7) ................... 25,851 25,851
Purchase price in excess of net assets acquired . 8,567 8,567
Total assets ................................... 54,354 89,354
Current liabilities ............................ 7,240 7,240
Long-term obligations, less current portion .... 3,591 38,591
Shareholders' equity ........................... 37,621 37,621
Working capital ................................ 16,775 47,775
</TABLE>
- ------
(1) Represents an interest discount taken to reflect the presumed collection
of revenues over a period in excess of one year. See "Notes to
Consolidated Financial Statements of CMI and MMI."
(2) Represents interest income included in income as a result of the
amortization of the interest discount on revenues over a three year
period, and a two year period for CMI and MMI, respectively. See "Notes
to Consolidated Financial Statements of CMI and MMI."
(3) Assuming the conversion as of January 1, 1996 of $35,000,000 aggregate
principal amount of Debentures at the estimated conversion price of
$14.00 per share into 2,500,000 Common Shares, fully diluted earnings per
share would be $0.11. The Representative's Warrants will be exercisable
at a price per share of $21.04. As the Representative's
Warrants would be anti-dilutive, they are excluded from the calculation
of additional shares to be offered in this Offering.
(4) As there was no interest expense incurred in 1993, 1994 and the first
quarter of 1995, the ratio of earnings to fixed charges is not
applicable.
(5) Pro forma net income for MMI reflects (i) an adjustment to include
compensation expense for the President and Chief Executive Officer and
the Vice President and Chief Operating Officer under employment contracts
which became effective after MMI's initial public offering, even though
such officers did not receive and are not owed any compensation for the
period from inception to October 26, 1993 and (ii) a provision for income
taxes based upon pro forma income since MMI had been an S Corporation
through such date.
(6) The As Adjusted Balance Sheet Data gives effect to this Offering as if it
had occurred on March 31, 1996.
(7) Includes both the current and long-term portions of the accounts
receivable.
7
<PAGE>
INVESTMENT CONSIDERATIONS
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER, TOGETHER WITH THE OTHER
MATTERS AND FINANCIAL INFORMATION DISCUSSED ELSEWHERE HEREIN, THE FOLLOWING
MATTERS RELATING TO THE BUSINESS OF THE COMPANY AND THE SECURITIES OFFERED
HEREBY.
Ratios of Debt to Net Tangible Book Value and Earnings to Fixed Charges. At
March 31, 1996, CMI had a net tangible book value of approximately $29,000,000
and its ratio of total debt to net tangible book value was .14 to 1. Giving
pro-forma effect to the issuance of the Debentures at March 31, 1996, the
Company's consolidated assets would have been approximately $88,400,000, its
long term debt would have been $38,600,000 and its ratio of total debt to net
tangible book value be 1.57 to 1. Further, the Company's net tangible book
value would be reduced by the creation of approximately $4,000,000 of
intangible assets (capitalized debt issuance costs) as a result of the
issuance of the Debentures, which, for computation and amortization of
interest expense on the Debentures will be treated as a reduction in the
carrying amount of the debt in order to generate a constant rate of interest
over the life of the Debentures. If the Company experiences unanticipated
costs, write-offs of investments or other assets or operating or other losses,
the Company's leverage could increase. This leverage (i) could adversely
affect the ability of the Company to obtain additional financing in the future
for working capital, capital expenditures or other purposes, should it need to
do so, (ii) will require a substantial portion of the Company's cash flow from
operations to be dedicated to debt service, (iii) may place the Company at a
competitive disadvantage, if the Company is more highly leveraged than its
competitors, and (iv) may make the Company more vulnerable to a downturn in
its business.
Assuming that the Debentures had been outstanding during 1995, the ratio
of pro forma consolidated 1995 income, before income taxes, to fixed charges
(at an interest rate of 8.0% on the Debentures) would have been 3.3 to 1.
Dependence on Principal Client. All of CMI's net revenues in 1994 and 1995
and approximately 93% of the Company's pro forma combined net revenue in 1995
were earned under management contracts with GMMS and a substantial part of
the growth in the Company's business is a direct result of comparable growth
of GMMS' medical practice. The Company expects that its relationship with
GMMS will be a dominant factor in its business for the foreseeable future.
The continued vitality of GMMS' medical practice is subject to numerous
risks, including its continued ability to retain its key medical personnel,
malpractice claims and regulatory compliance. There is no assurance that GMMS
will continue to operate successfully. Moreover, although the Practice
Management Services Agreement (the "PMSA") and the Management Services
Agreement for Magnetic Resonance Imaging Practice (the "MSA") between the
Company and GMMS, which cover all management services provided to GMMS,
expire June 2025 and July 2001 (with a provision for the automatic extension
of the MSA in five (5) year intervals at the option of MMI), respectively,
there is no assurance that the Company and GMMS will continue to maintain a
productive working relationship. The founder of GMMS, Lawrence Shields, M.D.,
and his son Dennis Shields are principal shareholders of the Company. See
"Business -- Principal Client."
Dependence on Third-Party Payor Reimbursements; Possible Decreases in
Reimbursement Rates. For the year ended December 31, 1995, approximately 46%
and 20% of the revenues of GMMS came from no-fault auto insurance carriers
and workers' compensation insurers, respectively. Payments from these sources
generally have long collection cycles. The Company's engagement by its
clients is based, in part, on such clients' belief in the Company's
receivables collection skills and its ability to collect such payments for
them as expeditiously as feasible. If the laws and regulations establishing
these third-party payors are amended, rescinded or overturned with the effect
of eliminating this system of payment reimbursement for injured parties, the
ability of the Company to market its management services could be adversely
affected. To the extent that the medical practices which contract to receive
the Company's services are dependent on third-party payors, changes in the
policy implemented by such payors that result in reduced reimbursement rates
could impair clients' ability to pay management fees to the Company. See
"Business -- Third-Party Reimbursement."
Risk of Lower Margins. The preponderance of services offered by the
Company are provided in accordance with a fee schedule that is based on the
Company's estimate of the cost of providing the service but that
8
<PAGE>
is not readily subject to modification if the estimates vary from actual
results. Accordingly, higher than expected personnel, space, equipment,
capital or other costs would have a substantial and adverse impact on the
Company's operating margins and net income. There is no assurance that the
Company will be able to control its costs in accordance with the assumptions
made in contracting with its clients. Both the professional fees earned by
hospitals and medical practices and the cost of providing non-medical
services to them vary substantially with the nature of the medical activities
undertaken, the effectiveness of the medical services provided, the location
of the hospital or medical practice and numerous other factors. Further there
is no assurance that other relationships into which the Company may enter (or
assist GMMS in entering) will provide margins comparable to those earned on
the existing services provided to GMMS. See "Business-Medical Practice
Management Services."
Inability to Collect or Delay in Collecting Management Fees. Collection by
the Company of its management fees may be adversely affected by the
uncollectibility of its clients' medical fees from third-party payors
(including workers' compensation insurers, no-fault insurance carriers,
no-fault payment pool, Medicare and commercial insurers) or by the long
collection cycles for those receivables, even though clients of the Company
are liable to the Company for payment of its fees regardless of whether they
receive payment for their medical services. The Company has historically
deferred collecting amounts owed to it when its clients have experienced
delays in collecting from third-party payors. The application forms required
by third-party payors for payment of medical claims are long, detailed and
complex and payments may be delayed or refused unless such forms are properly
completed. Many third-party payors, particularly insurance carriers covering
automobile no-fault and workers' compensation claims refuse, as matter of
business practice, to pay claims unless submitted to arbitration. It is the
Company's experience that the insurance carriers from which it seeks
reimbursement delay payment of claims until just prior to the arbitration
hearing. The Company's management has determined based on actual results,
industry factors, and GMMS' historical collection experience prior to its
association with the Company, that this entire collection process generally
spans a period averaging approximately three years and two years for those
GMMS receivables due to CMI and MMI, respectively. As a result, the Company
requires more capital to finance its receivables than do businesses with
shorter receivables collection cycles. 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. Although the Company is generally prepared to take all legally
available steps, including legally prescribed arbitration, to collect the
receivables generated by its clients, whether owned by the Company or by the
client, some of those receivables may not be collected due to the
determination by third-party payors that certain procedures performed by the
Company's clients were not medically necessary or were performed at excessive
fees or because of omissions or errors in timely completion of the required
claim forms. The inability of the Company's clients to collect their
receivables could adversely affect the clients' ability to pay in full all
amounts owed by them to the Company. See "Business -- Third Party
Reimbursement."
Government Regulation. The health care industry is highly regulated by
numerous laws and regulations, at the federal, state and local levels.
Regulatory authorities have broad discretion to interpret and enforce these
laws and promulgate corresponding regulations. Violations of these laws and
regulations (as determined by agencies or judicial authorities) may result in
substantial criminal and/or civil penalties. The Company believes that its
operations under agreements pursuant to which it is currently providing
services are in material compliance with these laws and regulations.
Nevertheless, because of the uniqueness of the structure of the Company's
relationships with its medical practice and hospital clients (including GMMS,
the Company's principal medical practice client, whose 95% shareholder, Dr.
Lawrence Shields, is a founder and principal shareholder of the Company),
many aspects of the Company's business and business opportunities have not
been the subject of federal or state regulatory review or interpretation, and
the Company has not obtained, nor applied for, any opinion of any regulatory
or judicial authority that its business operations are in compliance with
applicable laws and regulations. However, there is no assurance that a court
or regulatory authority will not determine that the Company's operations
(including arrangements with new or existing clients, such as the purchase
and lease-back of assets, providing financing to new or existing clients, the
purchase of client accounts receivable and, if appropriate, providing an
equity interest in the Company to a client) violate applicable laws or
regulations. If the Company's interpretation of the relevant laws and
regulations is inaccurate, the Company's business and its prospects could be
materially and adversely affected. For example, if the Company were
determined to be a diagnostic and treatment center or engaged in the
corporate practice of medicine, it could be found guilty of criminal offenses
and be subject to substantial civil penalties, including fines, and an
injunction preventing con
9
<PAGE>
tinuation of its business. The following are among the laws and regulations
that affect the Company's operations and development activities: Corporate
Practice of Medicine; Fee Splitting; Anti-Referral Laws; Anti-Kickback Laws;
Certificates of Need; Regulation of Diagnostic Imaging; No-Fault Insurance
and Workers' Compensation.
In addition to current laws and regulations, the federal government and
New York State are considering numerous new laws and regulations that, if
enacted, could result in comprehensive changes affecting the health industry
and the payment for, and availability of, health care services.
Many aspects of the laws and regulations that cover the Company's
operations and relationships have not been definitively interpreted by
regulatory authorities. Regulatory authorities have broad discretion
concerning how these laws and regulations are interpreted and how they are
enforced. The Company may, therefore, be subject to lengthy and expensive
investigations of its business operations or to prosecutions which may have
uncertain merit, by a variety of state and federal governmental authorities.
If the Company or any of its physician or hospital clients were found by an
agency or judicial authority to be in violation of these laws and
regulations, the Company could be subject to criminal and/or civil penalties,
including substantial fines and injunction. Such developments could limit the
Company's ability to provide or could restrict or make unprofitable some of
the services the Company provides to its clients, generally, in connection
with governmental health care programs such as Medicare and Medicaid. Many
aspects of the Company's business and business opportunities have not been
the subject of state or federal regulatory review or interpretation, and the
Company has not obtained, nor applied for, any opinion of any regulatory or
judicial authority that its business operations are in compliance with
applicable laws and regulations. Therefore, there is no assurance that
scrutiny of the Company's business or its relationship with its medical
practice or hospital clients by court or regulatory authorities will not
result in determinations adverse to the Company. If the Company's
interpretation of the relevant laws is inaccurate, or if laws and regulations
change or are adopted so as to restrict the operations of the Company or its
clients' operations or expansion plans, the Company's business and its
prospects could be materially and adversely affected. See "Business --
Government Regulation."
Dependence Upon Key Personnel. The Company will be primarily dependent
upon the expertise and abilities of its management, including Steven
Rabinovici and David Jacaruso. The loss of the services of either Mr.
Rabinovici or Mr. Jacaruso or other key members of management could have a
material adverse effect on the business of the Company. The Company is also
indirectly dependent on Dr. Lawrence W. Shields and other senior physicians
at GMMS, whose loss could adversely affect GMMS' practice and the financial
condition and results of operations of the Company. See "Management" and
"Certain Transactions."
Competition. The medical practice management field is highly competitive.
A number of large hospitals in New York State and elsewhere have acquired
medical practices and this trend is expected to continue. The Company expects
that more competition will develop, in part as a result of its having
demonstrated that management companies can operate in the highly regulated
New York environment. Potential competitors include large hospitals and a
number of public corporations operating through a regional or national
network of offices that have greater financial and other resources than the
Company. See "Business -- Competition."
Technological Obsolescence. Both the software and hardware used by the
Company in connection with the services it provides have been subject to
rapid technological change. Although the Company believes that this
technology can be upgraded as necessary, the development of new technologies
or refinements of existing technology could make the Company's existing
equipment obsolete. Although the Company is not currently aware of any
pending technological developments that would be likely to have a material
adverse effect on its business, there is no assurance that such developments
will not occur.
Inability to Collect Loans to Clients. The Company's expansion strategy,
particularly as it relates to the acquisition of certain assets of medical
practices and the financing of medical practice acquisitions by its clients,
requires that the Company have access to capital at reasonable rates. The
Company has provided financing to GMMS and expects to provide financing to
future clients, either in the form of loans or the purchase of receivables,
to enable them to open new offices, add medical specialties, focus on the
evaluation, diagnosis and treatment of patients' automobile no-fault and
workers' compensation claims, acquire diagnostic imaging and other equipment
and renovate their offices. If the Company makes loans to its clients for the
acquisition of medical practices or otherwise, it will take a security
interest in receivables owned by such clients and not assigned to
10
<PAGE>
the Company to secure repayment. Inasmuch as clients' receivables may also
secure payment to the Company of any unpaid management fees from such
clients, there is a risk that its clients will be unable to repay such loans
on a timely basis, if at all, and, in any such event, that the Company's
security interest in its clients' receivables will be inadequate to repay
both the loan obligations and other amounts due to the Company. See "Business
- -- Growth Strategy."
Inability to Effect Expansion Strategy. The Company's expansion strategy
includes increasing the number of medical practices to which it provides
management services in its current market, the greater New York metropolitan
area and other locations in New York State, as well as the nearby states of
New Jersey and Connecticut, and securing contracts on behalf of its clients
with managed care organizations. A primary means of accomplishing this growth
involves the identification of high volume medical practices which might be
acquired by GMMS or might directly contract with the Company to receive its
management services, possibly incidental to the Company's purchase of certain
fixed assets and/or accounts receivable of such medical practice. There is no
assurance, however, that suitable medical practices will be identified which
are either willing to become acquisition candidates or to contract for the
management services offered by the Company, that any such prospective new
clients will choose to use the Company's services or that existing clients
will renew their management agreements with the Company. Moreover, there is
no assurance that the Company can expand its business into other parts of New
York State or into other states. In order to operate effectively in such new
locations, the Company must achieve acceptance in the local market and, in
the case of other states, the Company must adapt its procedures to each such
state's no-fault, workers' compensation and other regulatory requirements and
systems. See "Business -- Growth Strategies."
Liability to Clients' Patients and Others; Insurance. If misdiagnoses are
made by the Company's clients using equipment furnished by the Company or if
clients' patients or operating personnel suffer injury as a result of the use
of such equipment or if persons are injured on premises leased by the Company
to its clients, there is a risk that claims may be filed by such client or
patient, as the case may be, against the Company. While the Company seeks to
protect itself from liability claims both by requiring that clients with
which it contracts carry a substantial amount of medical malpractice and
other liability insurance and by carrying its own general liability
insurance, there is no assurance that such insurance would be adequate to
fund such claims or that the insurance companies would not find a basis to
deny coverage.
Control by Certain Shareholders. Steven Rabinovici, David Jacaruso, Marie
Graziosi, Dennis Shields and Dr. Lawrence Shields, the founders of the
Company, are parties to a shareholders' agreement (the "Shareholders'
Agreement") pursuant to which they have agreed until June 1, 2005 to vote all
of their shares of CMI in favor of the election to the Board of Directors of
the Company of the nominees approved by the Board and to vote on all other
matters in accordance with the recommendations of the Board. Mr. Rabinovici
is Chairman of the Board and Chief Executive Officer of the Company and Mr.
Jacaruso is President of the Company. Dr. Shields is the Company's largest
shareholder and the father of Dennis Shields, who is Executive Vice President
and Director of the Company. Marie Graziosi is the wife of David Jacaruso.
Messrs. Rabinovici, Jacaruso, Dennis Shields, Ms. Graziosi and Dr. Lawrence
Shields beneficially own an aggregate of approximately 3,094,581 shares or
41.60% of the Company's outstanding Common Shares and, accordingly, as long
as they vote as required by the Shareholders' Agreement, may be in a position
to elect all of the persons nominated by the Board of Directors. Furthermore,
such control could preclude any unsolicited acquisition of the Company which
may adversely affect the market price of the Common Shares. See "Principal
Shareholders."
Broad Discretion in Application of Proceeds. Of the estimated net proceeds
from this Offering, approximately $29,000,000 (93.5%) has been allocated to
the Company's acquisition program and $2,000,000 (6.5%) to working capital
and other general corporate purposes. None of the funds allocated to the
foregoing purposes is subject to binding agreements requiring such use and no
specific acquisition now being negotiated is likely to occur. Accordingly,
the Company will have broad discretion in the application of such proceeds.
See "Use of Proceeds."
Limitation of Director Liability. The Company's Certificate of
Incorporation provides that a director of the Company will not be personally
liable to the Company or its stockholders for monetary damages for breach of
the fiduciary duty of care as a director, including breaches which constitute
gross negligence, subject to certain
11
<PAGE>
limitations imposed by the New York Business Corporation Law. Thus, under
certain circumstances, neither the Company nor the stockholders will be able
to recover damages even if directors take actions which harm the Company. See
"Management -- Limitation of Director Liability; Indemnification."
No Prior Public Market Risks. Prior to this Offering, there has been no
market for the Debentures offered hereby by the Company and there is no
assurance that an active trading market will develop or be sustained
following this Offering. The public offering price of the Debentures will be
determined in negotiations between the Company and the Representative and may
be greater or less than the price established by market trading following
this Offering.
Potential Adverse Impact on Market Price of Securities; Shares Eligible
for Future Sale. Sales of substantial amounts of the Company's securities in
the public market after this Offering or the perception that such sales may
occur could materially adversely affect the market price of the Common Shares
and the Debentures. An aggregate of 2,572,279 Common Shares, now subject to
contractual lock-up agreements entered into in connection with the Company's
IPO, will become eligible for sale upon expiration of such contractual
lock-ups on December 27, 1996 and all of the 2,500,000 Common Shares into which
the Debentures are convertible will be saleable publicly immediately upon
conversion of the Debentures. See "Shares Eligible for Future Sale." In
addition, 222,222 Common Shares underlying $2,000,000 face amount of 8%
Convertible Subordinates Notes due March 20, 2001 (the "Notes") which the
Company issued on March 20, 1996 and up to an additional 333,333 Common
Shares underlying an additional $3,000,000 face amount of Notes which the
purchasers thereof have an option to acquire until July 18, 1996, will become
eligible for sale under Rule 144 two years after the insurance thereof. Sales
in the public market of substantial numbers of Common Shares may affect the
price of the Common Shares and could impair the Company's ability to raise
additional capital through equity offerings. Securities of many companies, in
particular, newer and smaller companies, have experienced substantial
fluctuations and volatility that, in some cases, were unrelated or
disproportionate to the performance of the companies themselves. Any such
fluctuations, or general economic or market trends, could adversely affect
the price of the Common Shares.
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the
Debentures offered hereby are estimated to be approximately $31,000,000,
after deducting estimated underwriting discounts and commissions and offering
expenses payable by the Company. Of these net proceeds, approximately
$29,000,000 will be added to funds available for the Company's acquisition
program, and the balance will be used for working capital and general
corporate purposes. The acquisition program may include acquisition of
minority equity positions in subsidiary or joint venture entities with which
the Company will have management service or other business relationships.
Pending any such uses, the net proceeds of this Offering will be invested in
interest-bearing deposit accounts, certificates of deposit or similar
short-term investment grade financial instruments.
The foregoing represents the Company's best estimate of the allocation of
the net proceeds to be received by it from this Offering based upon its
currently contemplated operations, its business plan, current legislation and
regulations and current economic and industry conditions; such allocation is
subject to reapportionment among the categories described above or to new
categories in response to, among other things, changes in the Company's plans
and its future revenues and expenditures, as well as changes in existing
regulations, general industry conditions and technology.
The Company believes that the net proceeds of this Offering and cash flow
from operations will be sufficient to meet its expected cash needs and
finance its plans for expansion for the indefinite future, and in any case
for not less than 12 months from the date of this Prospectus. This belief is
based upon certain assumptions regarding the Company's business and cash
flow, as well as prevailing regulatory and economic conditions. The Company's
capital requirements may vary significantly, depending on how rapidly
management seeks to expand the business and the expansion strategies elected.
Accordingly, the Company may, in the future, require additional financing to
continue to expand its business. There is no assurance that the Company will
be successful in obtaining additional financing, if required, on favorable
terms, or at all. If the Company were unable to obtain additional financing,
its ability to meet its current plans for expansion could be materially and
adversely affected. See "Capitalization," "Management's Discussion and
Analysis of Financial Conditions and Results of Operations" and "Business
Growth Strategy."
12
<PAGE>
RECENT FINANCING
On March 20, 1996, the Company borrowed an aggregate of $2,000,000 due
March 20, 2001 from seven accredited investors (the "Purchasers"): $500,000
from The William Harris & Co. Employee's Profit Sharing Trust, $500,000 from
the WHI Growth Fund, LP, $250,000 from the Harris Foundation #2, $250,000
from HFF Partners, $250,000 from the Irving B. Harris Foundation, $200,000
from Astro Communications, Inc. and $50,000 from Fred Holubow, evidenced by
the Notes. The Notes bear interest at the rate of 8% per annum, payable on
June 1, 1996 and on the first day of September, December, March and June of
each year thereafter until the Notes are paid in full. Holders of the Notes
may convert all or any portion of the principle amount of the Notes into
Common Shares of the Company at an initial conversion price of $9.00 per
share, subject to adjustment for stock splits, dividends, recapitalization
and certain other capital changes. No fractional shares will be issued upon
conversion, but in lieu thereof, an amount will be paid in cash based upon
the market price of the Common Shares on the last trading day prior to the
date of conversion. Under certain circumstances, such as a change in control,
holders of the Notes may require the Company to redeem the Notes at 125% of
their principal amount plus all accrued and unpaid interest thereon. The
Notes are subordinate in right of payment to certain future indebtedness
which may be incurred by the Company. The Purchasers or parties related to or
affiliated with any of the Purchasers have an option until July 18, 1996 to
acquire an additional $3,000,000 of Notes from the Company under the same
terms and conditions. If such option is exercised in full, the Notes would be
converted into approximately 555,555 Common Shares of the Company.
13
<PAGE>
PRICE RANGE FOR COMMON SHARES
The Common Shares traded on the Nasdaq National Market under the symbol
"CMGT" from December 27, 1995 until the close of trading on May 3, 1996 and
commenced trading on the AMEX under the symbol "CMI" on May 6, 1996. The
following table indicates the closing sale prices of the Common Shares on the
Nasdaq National Market and the AMEX for the periods indicated beginning with
the commencement of trading on December 28, 1995 following the Company's IPO.
Closing Sale Price
----------------------------
High Low
-------- -------
1995
Fourth Quarter (from December 28) ... 8 7/8 8 3/4
1996
First Quarter ....................... 9 1/4 8
Second Quarter (through June 5) ..... 12 7/8 7 7/8
On June 5, 1996 the closing price of the Common Shares was $12.75.
CAPITALIZATION
The following table sets forth as of March 31, 1996 (i) the actual
capitalization of CMI and (ii) on an as adjusted basis the estimated net
proceeds from this Offering. The table should be read in conjunction with the
Consolidated Financial Statements and Notes thereto appearing elsewhere in
this Prospectus.
AS AT MARCH 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
As adjusted
Actual (2)
--------- --------------
<S> <C> <C>
Current portion of long-term obligations ............................ $ 604 $ 604
Long-term obligations (3) ........................................... 3,591 38,591
Shareholders' equity
Preferred Shares, $.001 par value, 2,000,000 shares authorized; none
issued ......................................................... -- --
Common Share, $.001 par value, 20,000,000 shares authorized;
7,438,298 issued and outstanding (1) ........................... 7 7
Additional paid-in capital ........................................ 29,426 29,426
Retained earnings ................................................. 8,188 8,188
Total shareholders' equity ...................................... 37,621 37,621
--------- -----------
Total capitalization .............................................. $ 41,816 $76,816
========= ===========
Net tangible book value ............................................. $ 28,958 $24,958
========= ===========
Ratio of total debt to tangible net worth ........................... .14x 1.57x
========= ===========
</TABLE>
- ------
(1) Excludes (i) 750,000 Common Shares issuable upon the exercise of options
granted under the 1995 Stock Option Plan at an exercise price equal to
$8.375 per share, 50,000 of which are subject to shareholder approval,
(ii) 175,000 Comon Shares issuable upon the exercise of options granted to
four consultants at an exercise price of $8.375 per share and (iii)
200,000 Common Shares reserved for issuance upon exercise of warrants
granted to the representatives of the underwriters participating in the
IPO (the "IPO Representatives' Warrants").
(2) Reflects the issuance of $35,000,000 aggregate principal amount of the
Debentures less estimated offering expenses of $4,000,000.
(3) Long-term obligations consist of:
Long-term debt ......................................... 2,339,000
Obligations under capital leases ....................... 1,252,000
---------
3,591,000
14
<PAGE>
DIVIDEND POLICY
Holders of Common Shares are entitled to such dividends as may be declared
by the Board of Directors and paid out of funds legally available therefor.
The Company has never paid any dividends on the Common Shares. The Company
intends to retain earnings to finance the development and expansion of its
business and does not anticipate paying cash dividends in the foreseeable
future. Future determinations regarding the payment of dividends is subject
to the discretion of the Board of Directors and will depend upon a number of
factors, including future earnings, capital requirements, financial
condition, and the existence or absence of any contractual limitations on the
payment of dividends.
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The Unaudited Pro Forma Consolidated Statement of Income for CMI and MMI
for the year ended December 31, 1995, which are set forth below, give effect
to the Merger and the IPO based upon assumptions set forth below, and in the
notes to such statements. The Merger has been accounted for as a "purchase."
However, because CMI and MMI have a common control group (the "Management
Control Group"), that portion of the assets of MMI attributable to the
Management Control Group, approximately 39.0% of total assets, was acquired
at a carryover historical basis. The excess of purchase price over the value
of the remaining net assets acquired as if the Merger occurred on December
31, 1995, was estimated at approximately $8,248,000 while the actual gross
amount recorded at March 31, 1996 was $8,675,000, and will be amortized over
a period not to exceed 20 years. The consolidated unaudited pro forma
financial information assumes that the Merger and IPO were completed January
1, 1995 for the Unaudited Pro Forma Consolidated Statement of Income for the
year ended December 31, 1995. The unaudited pro forma financial information
has been included pursuant to the requirements set forth in applicable rules
of the Securities and Exchange Commission (the "SEC") and is provided for
comparative purposes only. The unaudited pro forma financial information
presented is based upon the respective historical consolidated financial
statements of CMI and MMI and should be read in conjunction with such
financial statements and related notes thereto, all of which are included
elsewhere in this Registration Statement. The Company believes that the
accompanying consolidated unaudited pro forma financial information contains
all the material adjustments necessary to fairly present the pro forma
consolidated results of operations of CMI and MMI as of December 31, 1995.
The unaudited pro forma financial information presented should not be
construed as representative of the Company's results of operations for any
future date or period.
The pro forma adjustments are based on available information and upon
certain assumptions that the Company believes are reasonable under the
circumstances; however, the actual recording of the Merger was based on
ultimate appraisals, evaluations and estimates of fair values. If these
appraisals and evaluations identified assets with lives shorter than twenty
years, such assets will be amortized over their expected useful lives.
Management has determined a 20-year amortization period to be appropriate
based on the continuing relationship between MMI and GMMS which is expected
to continue beyond 20 years. Periodically, but no less than quarterly, the
Company will evaluate the relative fair market value of the intangible assets
identified (including goodwill, if any) in the acquisition of MMI by
estimating the future earning streams of the related business lines and
comparing the present value of the result of that estimation to the stated
value of the related assets. Impairments, if any, will be charged to
operations when identified.
15
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
CMI MMI Sub-total Adjustments (1) Pro forma
---------- --------- ----------- --------------- -----------
<S> <C> <C> <C> <C> <C>
Revenue ............................. $12,294 $7,287 $19,581 $ -- $19,581
Interest discount ................... (2,016) (702) (2,718) -- (2,718)
---------- --------- ----------- --------------- -----------
Net revenue ......................... 10,278 6,585 16,863 0 16,863
Cost of revenue ..................... 2,771 2,792 5,563 5,563
General and administrative expenses . 2,974 2,382 5,356 434 (2) 6,150
360 (3)
---------- --------- ----------- --------------- -----------
Operating income .................... 4,533 1,411 5,944 (794) 5,150
Interest discount included in income . 1,585 651 2,236 -- 2,236
Other expense, net .................. (30) (170) (200) -- (200)
---------- --------- ----------- --------------- -----------
Income before provision for income taxes
and cumulative effect of change in
accounting principle ............... 6,088 1,892 7,980 (794) 7,186
Provision (benefit) for income taxes . 2,861 889 3,750 (169) (4) 3,581
---------- --------- ----------- --------------- -----------
Income before cumulative effect of change
in accounting principle ............ 3,227 1,003 4,230 (625) 3,605
Cumulative effect of change in accounting
principle net of income taxes ...... -- (222) (222) 222 (5) --
---------- --------- ----------- --------------- -----------
Net income .......................... $ 3,227 $ 781 $ 4,008 $ (403) $ 3,605
========== ========= =========== =============== ===========
Income per share before cumulative effect $ 1.08 $ 0.33
Cumulative effect of change in accounting
principle net of income taxes per share -- (0.07)
---------- ---------
Net income per share(6) ............. $ 1.08 $ 0.26 $ 0.48
========== ========= ===========
Weighted average number of shares
outstanding ........................ 2,981 3,035 7,438
========== ========= ===========
</TABLE>
- ------
(1) Reflects the Merger and the consummation of the IPO as if they had
occurred on January 1, 1995.
(2) Reflects the amortization of purchase price in excess of net assets
acquired recorded at approximately $8,675,000 assuming a useful life of
20 years.
(3) Reflects increased costs of employment contracts.
(4) Assumes an effective tax rate after adjustments of 47%.
(5) The cumulative effect of change in accounting principle is removed as it
is a nonrecurring charge.
(6) Assuming the conversion as of January 1, 1995 of $35,000,000 aggregate
principal amount of Debentures at the conversion price of
$14.00 per share into 2,500,000 Common Shares, fully diluted earnings per
share would be $0.36. The Representative's Warrants will be exercisable
at a price per share of $21.04. As the Representative's
Warrants would be anti-dilutive, they are excluded from the calculation
of additional shares to be offered in the Offering.
16
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data of CMI presented below as of December 31,
1993, 1994, 1995 and March 31, 1995 and 1996 have been derived from the
Consolidated Financial Statements of CMI, which Consolidated Financial
Statements have been audited by Arthur Andersen LLP, independent public
accountants, and are included elsewhere in this Registration Statement.
The selected financial data of MMI presented below as of December 31, 1993
and 1994 and for the years then ended have been derived from the Financial
Statements of MMI which have been audited by Ernst & Young L.L.P.,
independent auditors. The selected financial data for the year ended December
31, 1995 has been derived from the Consolidated Financial Statements of MMI,
which Consolidated Financial Statements have been audited by Arthur Andersen
LLP. The data set forth below should be read in conjunction with the
Company's Financial Statements, related notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus.
17
<PAGE>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SELECTED INCOME DATA:
COMPLETE MANAGEMENT, INC.
<TABLE>
<CAPTION>
For the period
from inception For the three
(April 1, 1993) months
to For the years ended ended
December 31, December 31, March 31,
--------------------
1993 1994 1995 1995 1996
---------------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenue ...................................... $5,283 $10,654 $12,294 $3,000 $5,200
Interest discount (1) ........................ (865) (1,744) (2,016) (487) (515)
---------------- ---------- ---------- -------- --------
Net revenue .................................. 4,418 8,910 10,278 2,513 4,685
Cost of revenue .............................. 1,103 1,949 2,771 567 1,725
General and administrative expenses .......... 1,687 2,571 2,974 690 1,323
---------------- ---------- ---------- -------- --------
Operating income ............................. 1,628 4,390 4,533 1,256 1,637
Interest discount included in income (2) ..... 207 922 1,585 302 587
Other income (expense), net .................. 62 55 (30) -- (33)
---------------- ---------- ---------- -------- --------
Income before provision for taxes ............ 1,897 5,367 6,088 1,558 2,191
Provision for income taxes ................... 891 2,522 2,861 732 1,081
---------------- ---------- ---------- -------- --------
Net income ................................... $1,006 $ 2,845 $ 3,227 $ 826 $1,110
================ ========== ========== ======== ========
Net income per share ......................... $ 0.34 $ 0.95 $ 1.08 $ 0.28 $ 0.15
================ ========== ========== ======== ========
Weighted average number of shares outstanding . 2,981 2,981 2,981 2,981 7,438
================ ========== ========== ======== ========
Ratio of earnings to fixed charges (3) ....... N/A N/A 133.35 N/A 8.11
================ ========== ========== ======== ========
</TABLE>
MEDICAL MANAGEMENT, INC.
<TABLE>
<CAPTION>
For the years ended December 31,
----------------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Revenue ........................................................ $3,279 $6,049 $7,287
Interest discount (1) .......................................... -- -- (702)
--------- --------- ---------
Net revenue .................................................... 3,279 6,049 6,585
Cost of revenue ................................................ 761 1,221 2,792
General and administrative expenses (6) ........................ 1,278 2,353 2,382
--------- --------- ---------
Operating income ............................................... 1,240 2,475 1,411
Interest discount included in income (2) ....................... -- -- 651
Other income (expense), net .................................... 31 (2) (170)
--------- --------- ---------
Income before provision for taxes and cumulative effect ........ 1,271 2,473 1,892
Provision for income taxes ..................................... 925 1,171 889
--------- --------- ---------
Income before cumulative effect ................................ 346 1,302 1,003
Cumulative effect of change in accounting principle net of income
taxes (4) ..................................................... -- -- (222)
--------- --------- ---------
Net income ..................................................... $ 346 $1,302 $ 781
========= ========= =========
Income per share before cumulative effect of change in accounting
principle net of income taxes ................................. -- -- $ 0.33
Cumulative effect per share .................................... -- -- (0.07)
---------
Net income per share ........................................... -- $ 0.43 $ 0.26
========= =========
Pro forma net income (5) ....................................... $ 575 -- --
=========
Pro forma net income per share ................................. $ 0.26 -- --
=========
Pro forma amounts assuming the discounting of certain accounts receivable
is applied retroactively:
Pro forma net income ........................................... $ 554 $1,211 $1,003
========= ========= =========
Pro forma net income per share ................................. $ 0.25 $ 0.40 $ 0.33
========= ========= =========
Weighted average number of shares outstanding .................. 2,185 3,008 3,035
========= ========= =========
</TABLE>
18
<PAGE>
- ------
(1) Reflects an interest discount taken for the presumed collection cycle of
certain revenues at a 12% interest rate over a three and two year period
for CMI and MMI, respectively, which is management's best estimate of its
incremental borrowing rate.
(2) Represents interest income earned as a result of the amortization over
the applicable period of the interest discount in (1) above.
(3) As there was no interest expense incurred in 1993, 1994 and the first
quarter of 1995, the ratio of earnings to fixed charges is not
applicable.
(4) Reflects a change in accounting principle and the cumulative effect on
income net of income taxes arising from MMI's no longer providing for a
provision for bad debts due to its adoption of the discounting of certain
of its accounts receivables, amortizing the discount and including the
amount in income over a two year period.
(5) Pro forma net income for MMI reflects (i) an adjustment to include
compensation expense for the President and Chief Executive Officer and
the Vice President and Chief Operating Officer under employment contracts
which became effective after MMI's initial public offering, even though
such officers did not receive and are not owed any compensation for the
period from inception to October 26, 1993 and (ii) a provision for income
taxes based upon pro forma income since MMI had been an S Corporation up
to the date of its initial public offering.
(6) Includes provision for uncollectible accounts receivable of $107,000 and
$502,000 for 1993 and 1994, respectively. No such provision was made or
necessary in 1995.
(IN THOUSANDS)
SELECTED BALANCE SHEET DATA:
<TABLE>
<CAPTION>
Medical Management,
Inc. Complete Management, Inc.
------------------- -------------------------------------
As at December 31, As at December 31, March 31, 1996
------------------- ---------------
1994 1995 1994 1995 Actual
------- -------- ------- -------- ---------------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents ......... $ 93 $ 104 $ -- $ -- $ 2,540
Marketable securities ............. 905 122 -- -- 9,599
Accounts receivable, net (1) ...... 5,232 7,419 7,679 14,884 25,851
Purchase price in excess of net assets
acquired ......................... -- -- -- -- 8,567
Total assets ...................... 9,717 13,519 8,009 17,860 54,354
Current liabilities ............... 1,947 3,375 2,461 5,744 7,240
Long-term obligations, less current
portion .......................... 374 1,520 -- 228 3,591
Shareholders' equity .............. 6,355 7,293 3,854 7,330 37,621
Working capital ................... 2,137 1,213 1,615 (63) 16,775
</TABLE>
- ------
(1) Includes both the current and long-term portions of the accounts
receivable.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
COMPLETE MANAGEMENT, INC.
The following discussion of the results of the operations and financial
condition of CMI should be read in conjunction with CMI's Audited and
Unaudited Consolidated Financial Statements and Notes thereto included
elsewhere in this Prospectus.
OVERVIEW
On April 1, 1993 CMI commenced operations and servicing GMMS, its initial
client, a multi-site neurological medical practice in the New York
metropolitan area. For the period from commencement to December 31, 1993, and
the years ended December 31, 1994 and 1995, all fee revenue was derived from
the management of GMMS.
CMI's revenues are derived primarily from agreed upon fees for management
services. CMI's charges are intended to reflect the varying costs associated
with its provision of services to clients including rental costs,
compensation of personnel supplied by CMI, costs of third-party payor
documentation, costs of billing and collections, and the provision by CMI of
financing to enable its clients to acquire high cost diagnostic imaging
equipment, as well as to acquire other medical practices.
GMMS pays the management fees it owes CMI by assigning ownership, on a
recourse basis, of its receivables with a net collectible value equal to the
then current management fee owed to CMI.
GMMS is a multi-specialty medical practice group which evaluates,
diagnoses and treats patients in the New York metropolitan area. Currently,
GMMS' primary medical focus is the treatment of patients with injury- related
conditions who carry insurance with various insurance carriers under the
workers' compensation and no-fault guidelines. GMMS currently includes
sixteen (16) physicians, (including seven neurologists, one chiropractor, one
physiatrist, two orthopedists, one general surgeon, one family practitioner,
two psychologists and one radiologist) who operate in offices throughout the
New York metropolitan area.
The following unaudited tabulation sets forth the operating results of
GMMS for the years ended December 31, 1993, 1994, 1995 and for the quarters
ended March 31, 1995 and 1996. GMMS is an entity separate from CMI and the
amounts reflected below are not included in the results of operations of CMI,
except for the portion of the management fee due to CMI, which is exclusive
of fees due to MMI for diagnostic imaging services.
Year Ended
December 31,
1993
-----------------------------------------
Unaudited: General
Services Imaging GMMS
------------ ------------ ------------
Services rendered
Contractual $ 9,414,011 $3,855,618 $13,269,629
allowances ....
Net medical servic (1,849,637) (107,000) (1,956,637)
fee ...........
Less expenses: 7,564,374 3,748,618 11,312,992
Medical
personnel
payroll ....
Other ......... 1,205,684 429,793 1,635,477
319,622 40,196 359,818
------------ ------------ ------------
Total expense 1,525,306 469,989 1,995,295
------------ ------------ ------------
Owner physician
payroll and
entity income 756,454 -- 756,454
Management fee $ 5,282,614 $3,278,629 $ 8,561,243
============ ============ ============
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1994 1995
----------------------------------------- -----------------------------------------
General General
Medical Diagnostic Total Medical Diagnostic Total
Unaudited: Services Imaging GMMS Services Imaging GMMS
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Services rendered $15,873,681 $6,362,166 $22,235,847 $17,324,953 $6,685,483 $24,010,436
Contractual
allowances .... (2,243,719) (502,000) (2,745,719) (2,037,223) (302,297) (2,339,520)
Net medical servic
fee ........... 13,629,962 5,860,166 19,490,128 15,287,730 6,383,186 21,670,916
Less expenses:
Medical
personnel
payroll .... 1,418,973 665,695 2,084,668 1,969,157 371,148 2,340,305
Other ......... 474,998 1,177 476,175 502,367 22,186 524,553
------------ ------------ ------------ ------------ ------------ ------------
Total expense 1,893,971 666,872 2,560,843 2,471,524 393,334 2,864,858
------------ ------------ ------------ ------------ ------------ ------------
Owner physician
payroll and
entity income 1,081,693 -- 1,081,693 522,376 -- 522,376
Management fee $10,654,298 $5,193,294 $15,847,592 $12,293,830 $5,989,852 $18,283,682
============ ============ ============ ============ ============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Three months ended Three months ended
March 31, 1995 March 31, 1996
------------------------------------------- -------------------------------------------
General General
Medical Diagnostic Total Medical Diagnostic Total
Services Imaging GMMS Services Imaging GMMS
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Unaudited:
Services rendered ......... $4,529,253 $1,577,028 $6,106,281 $5,044,019 $2,052,998 $7,097,017
Contractual allowances .... (382,723) (68,981) (451,704) (448,856) (176,753) (625,609)
------------ ------------ ------------ ------------ ------------ ------------
Net medical service fees .. 4,146,530 1,508,047 5,654,577 4,595,163 1,876,245 6,471,408
------------ ------------ ------------ ------------ ------------ ------------
Less expenses:
Medical personnel payroll . 369,460 105,711 475,171 688,930 82,802 771,732
Other ................... 101,605 3,774 105,379 342,652 26,498 369,150
------------ ------------ ------------ ------------ ------------ ------------
Total expenses ....... 471,065 109,485 580,550 1,031,582 109,300 1,140,882
------------ ------------ ------------ ------------ ------------ ------------
Owner physician payroll and
entity income ........ 675,465 -- 675,465 252,518 -- 252,518
------------ ------------ ------------ ------------ ------------
Management fee ............ $3,000,000 $1,398,562 $4,398,562 $3,311,063 $1,766,945 $5,078,008
============ ============ ============ ============ ============ ============
</TABLE>
GENERAL
GMMS' operations are limited to the following activities:
1) Rendering services to patients;
2) Compensating both owner physicians and other medical personnel; and
3) Paying miscellaneous expenses incidental to the rendering of the
medical service.
As more fully discussed below, as well as elsewhere in this Prospectus,
the Company provides the following services to GMMS:
1) Patient scheduling, record transcription, non-clinical intake
examination, and insurance verification;
2) Billing in GMMS' name and collection for all medical services rendered
to patients by GMMS; and
3) Any other business activity necessary to ensure the proper business
operations of GMMS' practice.
ECONOMICS
Because the activities of GMMS are limited to rendering medical services,
its principal asset is the accounts receivable due from third-party payors
and/or its patients (minimal services are paid for by the patient at the time
service is rendered). Substantially all of GMMS' non-clinical activities, as
defined in the PMSA, are performed by the Company. GMMS' principal
liabilities are the fee due under the PMSA and the amounts due owner
physicians and other medical personnel for services rendered. This is
reflected in the above tabulation in that revenues generated by GMMS in the
amounts of $13,269,629, $22,235,847, and $24,010,436 for the years ended
December 31, 1993, 1994 and 1995, respectively, have been allocated to the
owner physician, medical personnel, other medical related expenses and the
management fee.
Because the management fee is paid through recourse assignment of GMMS'
accounts receivable and the doctors' compensation is paid currently, GMMS'
cash flow is used principally for the payment of remaining GMMS expenses and
doctor's compensation.
FINANCIAL STATEMENTS OF GMMS
Audited financial statements for GMMS have not been presented because
management believes they would not provide any additional information that
would be meaningful to the evaluation of the Company's financial position,
results of operations and cash flow given that GMMS' balance sheet, prepared
on an accrual basis, would include a limited amount of accounts receivable
and immaterial liabilities for miscellaneous costs not paid, due to timing of
cash flow. Further, GMMS' statement of operations would reflect three
components: (1)
21
<PAGE>
revenues, (2) compensation to owner physicians and medical personnel and (3)
management fees, which are presented in substantially this form in the table
above as well as elsewhere in this Prospectus. Finally, GMMS is merely a
vehicle for physicians to achieve cash compensation from the practice of
their medical profession.
To ensure that all GMMS' billings result in bona fide accounts receivable,
the Company interviews all patients and reviews their insurance documentation
before any medical services are rendered by GMMS. If, as a result of this
review, the Company determines any billing to be doubtful, such bills, for
the purposes of paying the Company's management fee or as amounts available
under the recourse rights, are not included in GMMS' accounts receivable,
which are assigned to the Company.
The process of determining the timing and the probability of collecting
third-party accounts receivable is an integral part of the activities of the
Company. Such information is used by the Company to determine which
receivables are to be assigned to it to pay its management fees and which
receivables are to be retained by GMMS to compensate the owner physicians and
medical personnel. The Company believes that because of this process, the
amount of accounts receivable that would revert back to GMMS as a result of
the recourse right is not material. To date, the Company has not had to
exercise this right with respect to any accounts receivable assigned to it.
RESULTS OF OPERATIONS FOR THE QUARTERS ENDED MARCH 31, 1995 AND 1996
The Company's actual results for the quarter ended March 31, 1996 reflect
substantial changes in revenue, cost of revenue, general and administrative
expenses, interest expense and net income as compared to the quarter ended
March 31, 1995 primarily as a result of the acquisition of MMI on January 3,
1996. The acquisition of MMI contributed $1,868,000, $558,000, $412,000 and
$56,000 to the increases in 1996 of revenue, cost of revenue, general and
administrative expenses and interest expense, respectively. MMI contributed
approximately $453,000 in net income to the merged Company. This increase was
offset by an increase in goodwill amortization and officer compensation
expense in 1996, which aggregated approximately $184,000 net of income tax
expense.
As a result of the acquisition of MMI, the Company's combined results of
operations for the three months ended March 31, 1995 are discussed on a pro
forma consolidated basis as if MMI had been consolidated with CMI for the
entire period. The results of operations for the three months ended March 31,
1996 reflect the actual consolidation of MMI into CMI for the entire reporting
period.
REVENUE
Revenue in 1995 was $4,738,000 as compared to $5,200,000 in 1996, an
increase of $462,000 (9.7%). The most significant increase ($332,000)
resulted from management services rendered by the Company to GMMS due to an
increase in the number patients treated and evaluated by GMMS. Additionally,
three new GMMS offices (Garden City, Staten Island and Newburgh, New York)
opened during the fourth quarter of 1995 became fully integrated in 1996. The
remaining increase ($130,000) resulted from a 31% increase in the volume of
diagnostic imaging scans in 1996 provided by GMMS, which were offset by the
termination of an agreement with an existing metropolitan area hospital
client during January 1996.
COST OF REVENUES
Cost of revenue was $1,107,000 in 1995 as compared to $1,725,000 in 1996,
an increase of $618,000 (55.8%). A significant portion of this increase
($298,000) was due to the hiring of additional practice management and other
support personnel such as appointment schedulers and intake examiners in
order to properly administer GMMS' expanding medical practices. Patient
transportation cost increased by $50,000 as a result of the increase in the
number of patient services and diagnostic imaging scans provided by GMMS in
1996. Depreciation and amortization increased by $74,000 primarily as a
result of an increase in medical equipment purchases of $1,858,000.
Consulting fees and rent expense increased by $71,000 and $105,000
respectively, as a result of the reclassification in 1996 of these expenses
from general and administrative expenses to cost of revenues in order to be
consistent with the Company's new practice management services agreement.
22
<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses (including fees paid to related
parties) decreased in 1996 by $238,000 from $1,561,000 in 1995 to $1,323,000
in 1996. The decrease was primarily due to the reclassification of the
consulting fees and rent expense, as discussed under "Cost of Revenues"
above, to cost of revenues ($71,000 and $105,000 for consulting fees and rent
expense, respectively) in order to be consistent with the Company's new
practice management services agreement.
INTEREST EXPENSE
Interest expense increased in 1996 as compared to 1995 by approximately
$265,000. The principal increase is attributable to the write-off of
($237,500) of original issue discount related to the repayment of the Secured
Notes. The balance of the increase ($33,000) was the interest incurred
related to the mobile diagnostic testing machine utilized at a metropolitan
area medical center.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
Revenue in 1994 was $10,654,000 as compared to $12,294,000 in 1995, an
increase of 15.4%. The increase in revenue resulted from an increase in
services provided to GMMS due to the increase in the number of patients
evaluated and treated by GMMS. The number of procedures GMMS performed
increased from 128,500 in 1994 to 157,000 in 1995.
Cost of Revenue increased $822,000 or 42.2%, from $1,949,000 to $2,771,000
in 1995. A significant portion of this increase ($694,000) was due to the
hiring of an additional 23 practice management and other support personnel
such as appointment schedulers, record transcribers and intake examiners in
order to properly administer GMMS' expanding medical practice and to prepare
a base for future clients and projected acquisitions. Transcription costs
increased by $129,000 due to the greater number of patients evaluated and
treated.
General and Administrative Expenses (including fees paid to related
parties) increased by $403,000, or 15.7%, from $2,571,000 in 1994 to
$2,974,000 in 1995. The increase is primarily attributable to an increase in
space rental costs ($126,000) associated with the opening of three additional
GMMS offices, related incremental depreciation and amortization ($38,000),
upgrading of the billing system ($68,000) and increased marketing efforts
($57,000). Additionally, the Company incurred one time costs ($32,500)
associated with its fourth quarter financing and incremental insurance costs
($23,000) in conjunction with its IPO.
Depreciation and Amortization Expense increased by $47,000 from $55,000 in
1994 to $102,000 in 1995. This increase was directly related to the purchase
of property and equipment, primarily leasehold and replacement expenditures,
totaling $193,000 in 1994 and $178,000 in 1995.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1993 AND 1994
CMI began servicing GMMS on April 1, 1993 and therefore only nine months
of operations are included in the 1993 financial results.
Revenue in 1993 was $5,283,000 as compared to $10,654,000 in 1994, an
increase of 101.7%. The primary reason for the increase of $ 5,371,000 is the
incremental three months included in 1994. In addition, during the year ended
December 31, 1994, GMMS increased the number and size of its practice offices
from five in 1993 to six in 1994 and the number of procedures performed
increased from 88,450 in 1993 to 128,500 in 1994. GMMS, originally a
neurological practice, added additional medical specialties and
rehabilitative services and therefore increased its physician and medical
support staff from 12 in 1993 to 23 in 1994 to accommodate its growth. As a
result of GMMS' growth, CMI has provided additional rental space (an
incremental 1,200 square feet associated with the new GMMS office),
additional personnel (from 48 employees in 1993 to 60), and increased billing
and collection services causing CMI's fees from GMMS to correspondingly
increase.
Cost of Revenue increased by $846,000 or 76.7%, from $1,103,000 in 1993 to
$1,949,000 in 1994. Cost of revenue includes personnel who directly support
the medical practice in rendering patient care and who directly support its
billing and collection process. The support services include patient
scheduling and assisting patients in producing background and medical
coverage information necessary for GMMS' physicians to properly diag-
23
<PAGE>
nose, test and bill for services they render. CMI charges GMMS fees for the
services provided by its personnel under the terms of the PMSA. A significant
portion of the difference, $367,000, was attributable to the incremental
three months included in 1994. A substantial part of the remaining increase
was due to hiring management and support personnel such as patient schedulers
and medical record maintainers to properly service GMMS' expanding medical
practice and to prepare a base for future clients and anticipated
acquisitions. As a result, personnel and related payroll costs increased by
$288,000. Other increases in cost of revenues were due to a greater volume of
patients seen by the medical practice, higher equipment costs including
leasing and maintenance ($33,000), transcription fees ($80,000), medical and
related supplies ($47,000) and employee health insurance costs ($31,000).
General and Administrative Expenses (including fees paid to related
parties) increased by $884,000 or 52.4%, in 1994 from $2,571,000 as compared
to $1,687,000 in 1993. General and administrative costs represent overhead
and administrative expenses excluding costs directly related to operations
and generation of revenue, such as space costs, office supplies and general
and administrative costs of CMI including corporate management and
professional fees. The primary difference ($562,000) was attributable to the
incremental three months included in 1994. The increase is primarily
attributable to the rapid expansion of GMMS' medical practice and the
resultant expenditures required to keep pace with such expansion. In
addition, CMI's philosophy has been to significantly upgrade and increase its
infrastructure (at a cost in 1994 of $203,000) to ensure its ability to
adequately service additional clients and anticipated acquisitions while
continuing to provide a comprehensive range of management services to GMMS.
CMI has also hired additional experienced marketing personnel and has
established more aggressive marketing programs (at a cost in 1994 of
$77,000). Additionally, insurance costs increased by ($42,000). CMI increased
expenditures during 1993, 1994 and in the beginning of 1995 in order to
prepare itself to service additional clients in 1996 and beyond.
Depreciation and Amortization Expenses increased by $38,000 in 1994 from
$17,000 in 1993 to $55,000 in 1994. This increase is directly related to the
purchase of capital assets by CMI totaling $183,000 in 1993 and $193,000 in
1994.
QUARTERLY RESULTS OF OPERATIONS
The following table presents unaudited quarterly operating results for the
years ended December 31, 1994, 1995 and March 31, 1996. In the opinion of
management, all necessary adjustments (consisting only of normal recurring
adjustments) have been included below to present fairly the quarterly results
when read in conjunction with the audited consolidated financial statements
and notes thereto, included elsewhere in this Prospectus.
QUARTERLY STATEMENTS OF INCOME SUMMARY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND THE QUARTER ENDED MARCH 31,
1996
(UNAUDITED)
AS PERCENTAGE OF REVENUES:
<TABLE>
<CAPTION>
1996
Quarter
1994 Quarters ended 1995 Quarters ended ended
----------------------------------------- ----------------------------------------- ----------
Mar 31 Jun 30 Sep 30 Dec 31 Mar 31 Jun 30 Sep 30 Dec 31 Mar 31
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue ................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Interest discount ......... -18.7% -16.4% -15.5% -15.5% -16.2% -14.7% -18.6% -16.5% 9.9%
-------- -------- -------- -------- -------- -------- -------- -------- ----------
Net revenue ............... 81.3% 83.6% 84.5% 84.5% 83.8% 85.3% 81.4% 83.5% 90.1%
Cost of revenue ........... 18.2% 18.0% 17.5% 19.5% 18.9% 16.3% 22.7% 32.4% 33.2%
-------- -------- -------- -------- -------- -------- -------- -------- ----------
Gross profit .............. 63.1% 65.6% 67.0% 65.0% 64.9% 69.0% 58.7% 51.1% 56.9%
Gen. & administrative expenses 25.2% 28.3% 22.4% 21.0% 23.0% 19.9% 30.1% 24.9% 25.4%
-------- -------- -------- -------- -------- -------- -------- -------- ----------
Operating income .......... 37.9% 37.3% 44.6% 44.0% 41.9% 49.1% 28.6% 26.2% 31.5%
Interest discount included in
income ................... 5.7% 5.9% 8.7% 13.9% 10.0% 9.7% 19.3% 13.6% 11.3%
Other income (expense), net . -- % 2.0% -- % -- % -- % -- % 0.5% -1.3% -0.7%
-------- -------- -------- -------- -------- -------- -------- -------- ----------
Pre-tax income ............ 43.6% 45.2% 53.3% 57.9% 51.9% 58.8% 48.4% 38.5% 42.1%
Income taxes .............. 20.5% 21.2% 24.9% 27.3% 24.4% 27.5% 23.0% 18.1% 20.8%
-------- -------- -------- -------- -------- -------- -------- -------- ----------
Net income ................ 23.1% 24.0% 28.4% 30.6% 27.5% 31.3% 25.4% 20.4% 21.3%
======== ======== ======== ======== ======== ======== ======== ======== ==========
</TABLE>
24
<PAGE>
The management fees under the PMSA would tend to generate higher
management fees than fixed annual amounts payable under prior arrangements
with GMMS because the PMSA seeks to recoup incremental costs (on a cost-plus
or unit of activity basis) incurred by CMI as a result of the commensurate
needs for additional services GMMS provides as its medical practice grows.
Accordingly, operating income as a percentage of revenues would tend to
remain constant or abate and receivables would increase accordingly.
Cost of revenue as a percentage of revenue has shown a pattern of increase
during the reported quarters. The most recent two quarters reflect the
incremental personnel costs associated with the opening of three new GMMS
offices.
Conversely, general and administrative expenses have decreased as a
percentage of revenue in most quarters as a result of the increase in revenue
since the commencement of operations. During the quarters ended June 30, 1994
and September 30, 1995 these expenses were somewhat higher than normal as a
result of anticipated increases in the level of operations.
LIQUIDITY AND CAPITAL RESOURCES
On January 3, 1996, the Company completed an initial public offering of
2,000,000 common shares at $9.00 per share and received proceeds net of
underwriter's commission and expenses of $16,380,000. Costs incurred with
respect to the registration of the common shares in addition to the
underwriter's commission and expenses were $2,468,000, of which the Company
paid $1,166,992 in the three months ended March 31, 1996. In addition, the
Company sold to the underwriter, or its designee, at a price of $.001 per
Representative's Warrant, 200,000 Warrants entitling the holders thereof to
purchase 200,000 common shares of the Company at a purchase price of $10.80
per share for a period of four years commencing one year from the date of the
IPO.
Also, on January 3, 1996, the Company completed the merger of Medical
Management, Inc. into a wholly- owned subsidiary of CMI. The terms of the
Merger provided that MMI shareholders receive .778 CMI common shares for each
MMI common share which they held based upon the IPO price of $9.00 per share.
The holders of outstanding options to purchase MMI common shares received
93,281 CMI common shares based upon the difference between their aggregate
option exercise prices and the value thereof at $7.00 per share divided by
the IPO price. In January 1996, the Company issued 2,211,953 common shares to
effect the merger including shares to be issued in satisfaction of
outstanding options and warrants to purchase MMI shares. The excess of cost
over net assets acquired (goodwill) of $8,675,000 as a result of the
acquisition of MMI will be amortized on a straight-line basis over a period
not to exceed twenty years.
The Company's principal cash requirements to date have been to fund
working capital, primarily to support higher levels of receivables generated
by increased management fees as well as capital expenditures. The Company has
financed these requirements primarily through cash flow from operations, the
proceeds from the Notes and from the IPO it completed on January 3, 1996.
During the first three months of 1996, the principal uses of cash have
been to support operating activities and to repay short-term debt. Net cash
used for operating activities in 1995 was $3,955,000. In January 1996, the
Company loaned GMMS for working capital needs approximately $1,590,000 due on
demand at interest of 9% per annum. The Company does not anticipate making
any additional loans to GMMS. At March 31, 1996 the Company had working
capital of $16,775,000.
The Company repaid $1,000,000 in short-term debt to three lenders with
proceeds from the IPO as called for in the lender's agreements. There was no
pre-payment penalty or additional costs associated with the prepayment.
The Company currently has certain commitments for capital expenditures of
approximately $1,140,000 for new diagnostic testing units to be constructed
and installed in two major metropolitan area hospitals. The current
availability of funds is adequate to facilitate such costs of the projects in
addition to the initial startup costs. Historically, whenever the Company
begins servicing a new client for diagnostic testing, the Company requires
funding to acquire, setup, develop and manage the operating facilities of the
client during the period from the initial startup until sufficient cash flow
levels from reimbursements from third-party payors is achieved. During these
periods the Company's clients cash flow is negatively affected by the slow
payment of medical claims from
25
<PAGE>
third-party payors. As a result of the slow payment pattern the Company's
clients delay payment of management fees thus causing the Company to require
more capital to finance its management fee receivables than would be required
with traditionally faster receivable payment cycles for its clients.
The Company expects cash, cash equivalents, short-term investments, cash
generated from operations and short-term borrowings to be sufficient to meet
its working capital requirements for the next 12 months. However, if the
Company's cash requirements for capital expenditures for new clients,
acquisitions and working capital, exceed expected levels, the Company may be
required to obtain additional funds in the credit or capital markets.
For the years ended December 31, 1993, 1994 and 1995, net cash provided by
operating activities was $117,000, $111,000 and $1,088,000, respectively.
Although CMI provided cash through its operating activities, a significant
amount of cash was used to support higher levels of accounts receivable. The
amount of cash used was $2,623,000, $6,536,000 and $7,636,000 for 1993, 1994
and 1995, respectively.
The ability of GMMS to pay the management fees which it owes to CMI is
dependent upon GMMS' ability to collect its accounts receivable from
insurance carriers, primarily no-fault and workers' compensation carriers,
though GMMS is obligated to pay such fees regardless of its collections.
Receipts from these sources generally have long collection cycles. These
claims can be subjected to dispute and are often referred to arbitration.
Many third-party payors, particularly insurance carriers covering automobile
no-fault and workers' compensation claims refuse, as matter of business
practice, to pay claims unless submitted to arbitration. It is the Company's
experience that the insurance carriers from which it seeks reimbursement
delay payment of claims until just prior to the arbitration hearing.
Management has determined, based on actual results, industry factors, and
GMMS' historical collection experience prior to its association with the
Company, that this entire collection process generally spans a period
averaging approximately three years. The Company believes that its experience
to date is a good indication of the timing of the collection process in the
future. Therefore, CMI requires more capital to finance its receivables than
businesses with a shorter receivable collection cycle. In the event that the
laws and regulations establishing these third-party payors are amended,
rescinded or overturned with the effect of eliminating this system of payment
reimbursement for injured parties, the ability of CMI to market its
management services could be affected. CMI takes ownership on a recourse
basis of GMMS' receivables with a net collectible value equal to the then
current management fee owed to CMI. The collection cycle for these
receivables are generally in excess of one year and as a result of such
delayed payment the financial statements include an imputed interest discount
against gross revenues. This discount is recaptured as the accounts
receivable are collected and is accounted for as reversal of interest
discount in the financial statements.
Cash was provided due to an increase in accounts payable of $195,000,
$403,000 and $1,946,000 for 1993, 1994 and 1995, respectively. The increases
were caused by the deferred registration costs incurred as a result of the
IPO and by the increase in services rendered and costs incurred by the
Company as the result of the rapid expansion of GMMS' practice. The Company's
estimate of its cash needs includes, in part, an estimate of the timing of
its collections of accounts receivable.
For the period from inception (April 1, 1993) to December 31, 1993, and
for the years ended December 31, 1994 and 1995, the Company made capital
expenditures totaling $183,000, $193,000 and $178,000, respectively. These
expenditures were for office furniture, computer hardware/software, telephone
and medical equipment.
Deferred registration costs incurred for 1995 were $1,985,000. These costs
represent primarily professional fees incurred in conjunction with the IPO.
These fees were charged to paid-in capital upon the consummation of the IPO
in 1996.
In September and October 1995, CMI borrowed an aggregate of $1,000,000
secured by all its assets from three lenders (the "Secured Lenders"):
InterEquity Capital Partners ("IECP"), Astro Communications, Inc. and William
Harris & Company Employee Profit Sharing Trust, which loaned $400,000,
$300,000 and $300,000, respectively. The loans were evidenced by secured
notes (the "Secured Notes") which were paid in full in January 1996 from the
proceeds of the IPO. The Company paid IECP a processing fee of $12,500 and
reimbursed it for costs of approximately $20,000, which were charged to
operations in the period paid. The Company issued
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to the Secured Lenders 27,778 Common Shares having an aggregate value of
$250,000 when valued at the IPO price of $9.00 per share. This original issue
discount of $250,000 was charged to operations over the term of the loan;
$12,500 in 1995 and the balance when the loans were paid in full. The
unamortized portion of the discount of $237,500 at December 31, 1995 is
included in prepaid and other current assets on the accompanying balance
sheet.
In March 1996, the Company sold $2,000,000 of Convertible Subordinated
Notes (the "Notes") to accredited investors. The Notes bear interest at 8%,
payable quarterly. The entire principal is due five years from the date of
issuance. Holders of the Notes may convert all or any portion of the Notes
into Common Shares of the Company at $9.00 per share, subject to adjustment
for stock splits, dividends, recapitalization, etc. Under certain
circumstances, such as a change in control, holders of the Notes may require
the Company to redeem the Notes at 125% of the original principal amount. The
Notes are subordinate in right of payment to certain future indebtedness
which may be incurred by the Company. The purchasers and/or affiliates have
an option for 120 days from March 20, 1996 to acquire an additional
$3,000,000 of Notes from the Company under the same terms and conditions.
In July 1995, CMI and GMMS entered into a revised agreement for its
services. The revenues are primarily generated on a cost plus basis (e.g.,
personnel, space and supplies) and for activity based efforts at pre-
determined rates (e.g., collection, consulting). The agreement is for a term
of 30 years commencing April 1, 1995 and shall be automatically renewed for
six five-year periods thereafter unless notice is given six months prior to
the expiration of the initial term. These fees for services are believed by
management to be usual and customary in the industry and at levels consistent
with those that would have been determined through "arms-length" negotiation.
In management's opinion, the revenue generated during the first quarter of
1995 approximates the revenue that would have been recorded if the revised
agreement had been in effect during that quarter.
MEDICAL MANAGEMENT, INC.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1994 AND 1995
MMI's revenue for the year ended December 31, 1995 was $7,287,000 as
compared to $6,049,000 in 1994, an increase of 20.5%.
Revenue increased for the year ended December 31, 1995, as compared to
1994, primarily because of the increase in the volume of diagnostic imaging
and other diagnostic testing scans provided by MMI's clients. Scans for the
year ended December 31, 1995 numbered 9,532 as compared to 6,341 for 1994.
Discounting of certain accounts receivable was implemented in 1995.
Discounting was not implemented in prior years as the Company's period of
operations was insufficient to adequately determine the appropriate
collection period. In 1995, discounting of certain accounts receivable was
adopted based upon the results of the Company's periodic reviews of its
accounts receivable from GMMS and its updated analysis of the related
collection period which indicated that these receivables have a collection
cycle of approximately two years. The applicable accounts receivable were
discounted utilizing an interest rate of 12% per annum, which was
management's best estimate of its incremental borrowing rate from April 1992
(commencement of operations) through December 31, 1995. The impact of this
change in accounting policy considers accounts receivable generated in prior
years. The effect of the change in 1995 was to decrease income before income
taxes by approximately $51,000. The adjustment of approximately $222,000
(after an income tax benefit of $196,000) is shown as the cumulative effect
of change in accounting principle in the accompanying statements of income.
The most significant factor resulting in the increase in the volume of
diagnostic imaging and other scans by GMMS was the relocation of its
operations to a newly constructed operating medical office in February 1994.
In February 1994, MMI discontinued providing GMMS with an off-site mobile
diagnostic imaging unit and began providing a new fixed-site unit which it
had purchased and located at the newly constructed medical office. The
efficiencies of having all the operations of this unit at one site coupled
with the faster scanning of its patients by GMMS using the new medical
equipment resulted in an increased volume of scans during the year ended
December 31, 1995. In 1994, since the transfer of the operations to the new
office did not occur until the midpoint of the first quarter, the advantages
of using the new medical equipment for GMMS were not realized
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until the beginning of the second quarter. In 1995, MMI was servicing a
hospital located in the New York metropolitan area and an ultrasound unit for
GMMS resulting in revenue of $1,076,000. MMI managed these units only during
the fourth quarter of 1994. The comparable revenue for 1994 was $155,000.
In the second quarter of 1995, MMI began servicing a new client, a
neurology practice located in the New York metropolitan area. For the year
ended December 31, 1995, fee revenue from this client was $269,000. In
September 1995, MMI began renting a mobile diagnostic imaging unit on a per
scan basis for GMMS to provide diagnostic services to its Newburgh, New York
practice office which contributed $44,000 in revenues in 1995. The increase
in revenues was partially offset by the termination of an agreement with an
existing client in the second quarter of 1995. The agreement was terminated
by mutual consent upon the determination that the client's existing patient
volume did not warrant the agreement's continuation.
Cost of Revenue was $2,792,000 for the year ended December 31, 1995 as
compared to $1,221,000 for 1994, an increase of 128.7%. Cost of revenue
includes non-technical personnel who directly support the medical practice in
rendering diagnostic testing to patients. The support services include
patient scheduling, assisting patients in the provision of certain
information necessary for the proper diagnosis of their ailment(s) by the
physicians and gathering insurance and other information for billing
purposes. The most significant increases were payroll related costs
($278,000), equipment costs ($97,000), medical supplies ($181,000) and
depreciation and amortization ($489,000). During the first quarter of 1994,
MMI only serviced GMMS. In the second quarter of 1994, MMI began servicing a
CAT-scan unit for GMMS and began servicing two additional clients (one client
for only one month.) During the fourth quarter of 1994, MMI began servicing a
hospital located in the New York metropolitan area.
During 1995, in addition to continuing to service the same clients as it
did in 1994, MMI serviced two additional clients as well as an ultrasound
unit for GMMS. In the third quarter of 1995, MMI began renting a mobile
diagnostic imaging unit on a per scan basis for GMMS to provide diagnostic
services to its Newburgh, New York practice office. Except for one client
which terminated its contract after April 1995 and one client which began
operations in April 1995, each unit was in operation for the entire 1995
year. Expenditures required by MMI to service the additional clients in 1995
as compared to 1994 as well as expenditures made to build an infrastructure
in anticipation of higher future revenues and new clients has resulted in a
higher level of cost of revenues in 1995 as compared to 1994. However, MMI
expects that the additional expenditures currently made in operational
management personnel, support staff and services provided as part of the
enhancement of MMI's infrastructure will result in economies of scale when
future revenue streams are integrated with current operations.
General and Administrative Expenses were $2,382,000 for the year ended
December 31, 1995, as compared to $2,353,000 in 1994. The 1994 figure
includes a provision for uncollectible accounts receivable of $502,000. 1994
general and administrative expenses not including such provision were
$1,852,000 and 1995 general and administrative expenses represent an increase
of $530,000, or 28.6% over $1,852,000. General and administrative expenses
primarily reflect management compensation, professional fees and office and
related administrative costs. The increase in general and administrative
expenses is primarily a result of MMI's positioning itself to adequately
service additional diagnostic imaging units as MMI's operations expand. In
order to achieve this goal, during the middle-to-latter part of 1994, MMI
increased the quality and quantity of its staff by hiring additional middle
management personnel. In addition to increasing its management staff in order
to adequately service its new clients, MMI significantly expanded its support
staff of administrative, marketing, accounting, billing, verification and
collection personnel. The increases in management and support staff accounted
for approximately 75% of the increase in general and administrative expenses
for 1995, as compared to 1994. As indicated in the previous paragraph, the
expansion of MMI's client operations for the year ended December 31, 1995 as
compared to 1994 also contributed to the increased general and administrative
expenses. The more significant expense increases in 1995 were payroll related
costs ($396,000) and depreciation and amortization ($105,000). These expenses
were phased in during the middle-to-latter part of 1994 as new clients were
added and existing clients expanded their operations. The full impact of
these expenses is reflected in 1995; 1994 does not have a comparable level of
equivalent expenses.
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RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1993 AND 1994
Revenue for the year ended December 31, 1994 was $6,049,000 compared to
$3,279,000 for 1993, an increase of 84.5%. Correspondingly, 1994 net income
increased approximately 126% to $1,302,000, or $.43 per share, from pro forma
net income of $575,000, or $.26 per share, in 1993.
The significant increases in revenue, net income and earnings per share
for 1994 as compared to 1993 are a result of several prominent factors. The
most significant is the increase in volume of diagnostic imaging scans by
GMMS which was a result of the relocation of its operations to new offices in
January 1994. In February 1994, MMI discontinued providing GMMS with an
off-site mobile diagnostic imaging unit, which MMI had been leasing from a
third party, and began providing GMMS with a new fixed-site unit which MMI
purchased and located at the new GMMS office. The efficiencies of having all
the operations at one site coupled with the faster scanning of patients by
GMMS using the new medical equipment resulted in an increased volume of scans
by GMMS (5,808 diagnostic imaging scans in 1994 versus 4,013 diagnostic
imaging scans in 1993) and resulted in the realization by MMI of additional
fee revenue of approximately $1,764,000 for 1994 compared to 1993.
An equally important factor in the enhanced results of operations in 1994
as compared to 1993 was the servicing by MMI in the second quarter of 1994 of
two additional clients: a medical P.C. specializing in physiatry
(rehabilitative medicine) and a multi-specialty medical practice, both
located in the New York metropolitan area. In addition, in the second quarter
of 1994, MMI began servicing a CAT-scan unit for GMMS and in the fourth
quarter of 1994 MMI began servicing a hospital located in the New York
metropolitan area as well as servicing an ultrasound unit for GMMS. Although
these clients' units were in operation for only a portion of 1994, they added
revenue of approximately $1,006,000. In November 1994, an agreement with a
multi-specialty medical practice was discontinued by mutual consent, as MMI
determined, based upon volume during the initial six- month trial period,
that future volume would not be sufficient to support the unit. The increase
in revenues in 1994 as compared to 1993 was somewhat diminished by the harsh
winter weather experienced in the New York metropolitan area, specifically
during the first quarter of 1994. The severe weather forced MMI's clients to
curtail business hours as well as close operations for several days during
this period. It also resulted in a higher than normal "no show" rate for
patients of MMI's clients.
Cost of Revenue was $1,221,000 for 1994 as compared to $761,000 for 1993,
an increase of 60.4%. Cost of revenues include non-technical personnel who
directly support the medical practice in rendering diagnostic testing to
patients. The support services include patient scheduling, assisting patients
in their provision of certain information necessary for the proper diagnosis
of their ailment(s) by the physicians and gathering insurance and other
information for billing purposes. The most significant increases were payroll
related costs ($129,000), medical supplies ($96,000) and depreciation and
amortization ($329,000) related to the commencement of the operations of
MMI's second, third and fourth clients and the expansion of GMMS to include a
CAT-scan and ultrasound unit. These additional costs were incurred primarily
during the latter half of 1994.
General and Administrative Expenses were $2,353,000 for 1994 and
$1,278,000 for 1993. These figures include provisions for uncollectible
accounts receivable of $502,000 and $107,000 for 1994 and 1993, respectively.
General and administrative expenses not including such provision were
$1,852,000 and $1,170,000 for 1994 and 1993, respectively. General and
administrative expenses primarily reflect management compensation,
professional fees and office and related administrative costs. These
increases resulted primarily from the additional costs incurred after the
initial start-up of GMMS in mid-1992. As the number of diagnostic imaging
scans and the hours of operations increased in 1992 and 1993, it was
necessary to increase staffing, both managerial and clerical, as well as
incur other expenses associated with an expanding and growing business. Costs
of office staffing, rental of office space, depreciation of additional office
computers, etc., increased with the view toward the eventual expansion of the
operations to accommodate additional diagnostic imaging units. The increase
in general and administrative expenses was incurred incrementally during the
period from inception (December 24, 1991) to December 31, 1993; however,
these expenses were incurred primarily during the middle-to-latter part of
1993. An increase in general and administrative expenses also resulted from
the servicing in 1994 of an ultrasound and a CAT-scan unit for GMMS and
servicing three additional clients. The expenses attributed to servicing
these new units for GMMS and for the three additional clients were phased in
during 1994. The most significant increases were payroll ($384,000) and
office and administrative costs ($36,000). In addition, following its initial
public offering in October 1993, MMI incurred certain increased expenses
inherent in being a public corporation, including professional fees
($189,000) and fees for investor relations ($50,000).
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Interest and Dividend Income increased in 1994 as compared to 1993 by
$90,000, primarily as a result of the receipt of proceeds from MMI's initial
public offering, effective October 26, 1993. MMI invested a substantial
portion of these funds, approximately $2,000,000, in marketable securities
and money market funds.
Interest Expense increased in 1994 as compared to 1993 by approximately
$93,000; $134,000 in 1994 as compared to $41,000 in 1993. A significant
portion of the increase in interest expense was due to interest costs related
to the construction of the corporate office and operating facility being
capitalized as part of the construction costs in 1993. Effective February
1994, when these facilities were completed, related interest costs were
expensed. This resulted in increased interest expense of $96,000 in 1994 as
compared to zero in 1993. In addition, during 1994, MMI financed the purchase
of medical, computer and office equipment resulting in interest expense of
$37,000 in 1994 as compared to related interest expense of zero in 1993. In
July 1993, MMI obtained a bridge loan of $50,000 at an interest rate of 10%
per annum. As an inducement to the lender, certain principal stockholders of
MMI sold an aggregate of 10,000 shares to the lender at a nominal cost. In
1993, MMI recorded a deferred financing interest charge of $40,000
representing the estimated fair value attributed to the shares by MMI. In
1994, MMI did not have a comparable interest cost.
LIQUIDITY AND CAPITAL RESOURCES
To date, MMI's principal cash requirements have been to fund working
capital and capital expenditures in order to support the growth of revenues.
MMI has financed these requirements primarily through cash flow from
operations and from the proceeds received from an initial public offering
completed on October 26, 1993.
During 1995, the principal uses of cash were to support operating
activities, fund the costs associated with the Merger and to fund the
start-up costs of adding new clients. Net cash used in operating activities
in 1994 was $446,000 as compared to cash provided by operations of $700,000
in 1993. Operating activities for the year ended December 31, 1995 provided
cash of $797,000. At December 31, 1994 MMI had working capital of $2,137,000.
At December 31, 1995, MMI's working capital was $1,213,000.
During the years ended December 31, 1994 and 1995, marketable securities
decreased $737,000 and $783,000, respectively. During the same periods, gross
property and equipment increased $1,381,000 and $283,000, respectively. These
changes are a result of MMI's increased net use of cash for support of
operating activities which has resulted primarily from the servicing of three
additional new clients in 1994 as well as the expansion of services to MMI's
initial client to include CAT-scan and ultrasound units. Whenever MMI begins
servicing a new client, MMI requires funding to acquire, set-up, develop and
manage the operating facilities of the client during the period from initial
start-up until sufficient cash flow levels from reimbursements from third
party payors is achieved. During these periods, the cash flow of MMI's
clients is negatively affected by the slow payment of medical claims from
third-party payors. As a result of this slow payment pattern, MMI's clients
delay payment of management fees to MMI causing MMI to require more capital
to finance its management fee receivables than would be required with
traditionally faster receivable payment cycles. As a result of the slow
payment pattern and the additional expenses incurred as a result of servicing
additional clients, accounts payable and other accrued expenses increased in
1994 and in 1995 by $71,000 and $899,000, respectively. During the same
periods accounts receivable increased $3,433,000 and $2,356,000. Net cash of
$583,000 was generated through investing activities in 1995 as compared to
cash used in investing activities in 1994 and 1993 of $917,000 and
$2,847,000, respectively. The more significant items which resulted in a net
use of cash in investing activities for the three year period ended December
31, 1995 were approximately $2,808,000 used for capital expenditures as well
as $2,157,000 used to purchase marketable securities. Substantially all of
MMI's capital expenditures were for the purchase of medical and related
equipment to service the Company's clients and the completion of the
corporate headquarters and operating facility of GMMS.
Whenever MMI begins servicing a new client, the Company incurs various
pre-operating costs which MMI capitalizes and amortizes over the life of the
related management services agreement which defines the future period during
which income will be realized. During 1994, MMI incurred $159,000 of
pre-operating costs which it deferred to future periods; none were incurred
in 1995. MMI amortized $21,000 and $34,000 of these costs during 1994 and
1995, respectively. $121,000 of net pre-operating costs were written off
during 1995.
In June 1992, MMI entered into a loan and security agreement with Pantepec
International, Inc. ("Pantepec") to borrow up to $700,000 to finance the
purchase of a fixed-rate diagnostic imaging unit for
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GMMS, payable over three years and terminating on June 30, 1995. Over the
loan period principal payments ranged from $16,000 to $26,000, and interest
payments ranged from $3,800 to $12,000. Any and all unpaid principal and
interest was paid in full on June 30, 1995. The diagnostic system was
capitalized and is included in property and equipment in the financial
statements of the Company.
In addition to interest, Pantepec is entitled to lender participation
payments of $10 per scan. Lender participation payments were $70,000 for the
loan years ended June 30, 1993 and 1994 and $62,000 for the loan year ended
June 30, 1995.
Lender participation payments are recorded as interest expense in the
financial statements. In addition, during 1994, the Company entered into a
loan and security agreement to borrow $440,000 to purchase a mobile
diagnostic imaging unit. This borrowing bears an effective annual interest
rate of 13.2% and is payable in equal monthly installments of $11,559
(including interest) through April 1998. During 1995, MMI entered into
capital leases aggregating $1,951,000 for the rental of computer, medical and
office equipment ranging in terms from 36 to 60 months with interest rates
ranging from 10% to 13%. As a result of the increases in capital leases
during 1995, total interest expense increased by $200,000 as compared to
1994.
MMI expects cash and cash equivalents, short-term investments and cash
generated from operations to be sufficient to meet its working capital
requirements over the near term and at least through the next year. However,
if MMI feels that its requirements for capital expenditures for new clients
and working capital exceed current anticipated levels, MMI may be required to
obtain additional funds in the credit or capital markets.
Although MMI currently does not have material commitments pending for
capital expenditures, MMI may make additional capital expenditures in
connection with future new clients.
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BUSINESS
Complete Management, Inc. is a physician practice management company. It
provides physician and hospital management and support services to medical
practice groups and hospitals in the greater New York metropolitan area,
primarily to medical practice groups focused on the treatment and evaluation
of patients with injury-related conditions. The services offered by the
Company include substantially all aspects of business, financial and
marketing support required by a medical practice but do not include providing
any type of medical diagnostic or treatment services. The Company offers
sophisticated business and management systems and a high level of
professional competence to doctors and hospitals that, increasingly, are
faced with complex, time- consuming and expensive reporting, record-keeping,
purchasing, collections and other non-medical requirements of a successful
practice. Historically, all of CMI's revenue and most of MMI's revenue have
come from a single medical practice group, GMMS, and the Company's future
growth prospects are substantially linked to the prospects of the continued
growth of this client as well as to acquisitions the Company might identify
and make in the future.
Services provided by the Company include the provision of office space and
equipment, non-medical personnel, administrative services, billing,
receivables collection, regulatory compliance, and non-medical services
related to its clients' diagnostic imaging services. The Company also offers
consultation regarding marketing strategies and provides financing for the
expansion of its clients' medical practices. By focusing solely on the
business support of medical practices, the Company is able to offer a variety
of operating efficiencies that would be difficult to establish and maintain
by the typical, unassisted medical practice.
The Company's current medical practice clients focus on the treatment of
patients with injury-related conditions in which the reporting,
record-keeping and other requirements imposed by governmental regulations,
payor policies or litigation or other dispute resolution processes are highly
complex, change rapidly and unpredictably and require a high level of
specialized non-medical knowledge. The Company offers both management and
staff with high levels of training and experience in these activities. In
order to maximize the benefits of its expertise, the Company has focused its
marketing efforts on medical practices, such as GMMS, that have the ability
to provide medical services for work-related, automotive and other injury
cases in which the degree of regulation is particularly high. Initially,
these practices related primarily to automobile no-fault injury claims;
however, GMMS, supported by the Company, is aggressively expanding into the
treatment and evaluation of workplace injuries covered under workers'
compensation statutes. The Company believes that the opportunity to use a
medical management service company to service the administrative burdens
dictated by the regulatory environment will encourage neurological,
orthopedic and other medical practices to expand and focus on the area of
injury-related services and expects that such expansion should produce a
corresponding demand for the Company's services. The Company also believes
that similar business opportunities may exist in a variety of other medical
practice areas, such as managed healthcare. Managed healthcare, which has
evolved more slowly in New York State than in many other states, is expected
to become more widely established in New York State in the future.
The Company's management has experience in hospital administration and
attempts to recruit and train staff to operate at a high level of efficiency
in the management of medical practices. To that end, the Company emphasizes a
high level of standardization of procedures and seeks to automate significant
aspects of record- keeping, reporting, collections and other critical
business activities of its clients' practices. Under the Company's
management, GMMS has established a multi-location practice that benefits from
management efficiencies such as centralized purchasing and collection
functions and a standard office format that supports the flexible use of both
medical and non-medical personnel and equipment in its various offices as
required. The Company also uses standardized and automated systems to produce
and administer the various financial and other records to support its
clients' claims for payment.
Clients of the Company are expected to support a claim for reimbursement
for their services and provide data relevant to their patients' related
claims, such as for lost wages. While medical diagnosis, treatment, reporting
and provision of expert testimony are matters requiring medical expertise,
the related administrative processes require expertise and systems for which
medical personnel and the typical medical office staff are not well suited.
By providing an effective system to process claims for reimbursement, the
Company assists its clients in the collection of their professional fees. The
preponderance of GMMS' medical practice has historically been referred by
attorneys representing clients with automobile no-fault injury or workers'
compensation claims. By
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administering an effective claims process, the Company believes that it
supports its clients in their collection of fees. By providing high quality
medical services, the Company's clients have developed a reputation as
"definers" of injury, rather than advocates for a particular medical
evaluation. This reputation has led plaintiffs' attorneys to recommend GMMS
and increasingly has caused insurance companies to retain GMMS to perform
IME's.
On January 3, 1996, CMI completed its IPO of 2,000,000 Common Shares at a
price of $9.00 per share and received net proceeds of $13,912,000. Also on
January 3, 1996, CMI acquired the assets and business of MMI, through its
Merger into CMI Acquisition Corporation which, upon consummation of the
Merger, changed its name to Medical Management, Inc. MMI is principally
engaged in providing diagnostic imaging equipment and billing and management
services related thereto. Currently, MMI operates six diagnostic imaging
units for two clients. MMI has also entered into two additional agreements
for diagnostic imaging units at two metropolitan area hospitals. GMMS is the
primary client of MMI and the sole client of CMI. CMI believes that the
Merger with MMI will help it accomplish its overall growth strategy.
BACKGROUND
Injury-related medicine is the process of evaluating and diagnosing the
nature and extent of a patient's injury, treating the injury and, where
appropriate, providing rehabilitation therapy to restore a maximum level of
physical capability to individuals whose capacity to perform basic and
meaningful life functions has been impaired.
Annual medical expenses in the United States related to accidents exceeded
$75 billion in 1992, with the largest categories as follows: work-related --
$22 billion; motor vehicle -- $20.7 billion; and home -- $21.6 billion.1 The
medical costs for claims covered by workers' compensation have been growing
at a faster rate than the cost for all medical claims.2 Neurologists and
orthopedic surgeons, the medical specialists most often involved in the
evaluation and treatment of injury-related healthcare problems, have grown in
number from 7,776 and 17,166 doctors in 1986 to 11,294 doctors and 22,740
doctors, respectively in 1995.3
Historically, the medical evaluation, diagnosis and treatment of
injury-related cases covered by no-fault and workers' compensation has been a
highly fragmented and an inefficiently practiced area of medicine. This has
been due, in part, to the burdensome regulatory requirements, lengthy
reimbursement cycles and, until recently, the below-average reimbursement
rates associated with such services. Since the majority of reimbursement
claims for these medical services are from no-fault insurance policies and
state workers' compensation boards, physicians have had to cope with the
bureaucratic procedures associated with the processing of such claims. In
addition, the high costs of healthcare in general has created pressure on
medical providers from third-party payors and others to lower their rates.
Traditional medical practices, including injury-related practices, face high
operating costs, little or no ability to secure volume discounts on supplies
or effectively negotiate contracts, insufficient capital to purchase new
medical technologies and inexperience regarding the complexity of laws and
regulations affecting their practice. They also generally lack sophisticated
administrative and financial systems needed to process such claims. The
Company believes these regulatory, administrative and other factors have
increased the need for professional management to assist medical practices in
lowering costs and increasing efficiencies and also to market their services
more effectively to managed care plans. The Company also believes physicians
often require additional financial resources to invest in equipment and
facilities or to acquire other physician practices to build market share.
The Company believes the practice of injury-related medicine is
experiencing significant growth primarily as a result of governmentally
mandated and regulated payment programs that require either third-party
insurers
- --------
1. Accident Facts 1993 edition, utilizing data from the National Safety
Council. Workers' compensation medical claims, including medical benefits
paid by private insurance carriers and self insurers, grew from $1.4
billion in 1970 to $17.8 billion in 1991.
2. "Workers Compensation Medical Price Index: 1987-1994" by N. Mike
Helvacian, Ph.D. and Christopher K. Fred, published by National Council on
Compensation Insurance, Inc.
3. American Medical Association, unpublished data.
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(in the case of no-fault automobile claims) or employers (in the case of
work-related injuries) to bear the costs of medical services, lost wages and
other expenses. However, the programs have given rise to an abundance of
complex and overlapping regulations, caused the medical treatment and payment
therefore to become adversarial in nature and created a paperwork jungle of
complicated forms. The untimely or improper preparation of these forms has
substantially contributed to long collection cycles for medical practices.
GROWTH STRATEGY
The Company's objective is to become the dominant provider of medical
management services in the greater New York metropolitan area and elsewhere
in New York State by implementing an aggressive growth strategy. The key
elements of the Company's strategy to achieve this objective are:
o Increase Number of Clients Serving Injury-Related Medical
Practices. The Company is seeking to secure contracts with additional
medical practices that focus or have the potential to grow by focusing
on injury-related medicine as well as with hospitals. As a part of this
process, the Company will typically purchase fixed assets, leasehold
interests and/or accounts receivable from the medical practice and will
enter into a service contract to provide medical management services.
The Company believes that there are numerous existing medical practices
whose performance could benefit from an increased focus on
injury-related medicine combined with efficient administrative support
services such as those provided by the Company.
o Support the Growth of Existing Client Medical Practices. The Company
will advise its existing clients with respect to methods to expand
their medical practices by adding patient referral sources, providing a
broader range of diagnostic and treatment and evaluation services, and
opening additional medical offices. The Company will advise with
respect to the acquisition by its clients of other medical practices.
It will identify acquisition candidates, assist in structuring and
negotiating the acquisition and, in some cases, provide or arrange for
financing for the acquisition. The Company has had considerable success
in supporting the growth of GMMS and believes that the continuation of
that growth, together with similar growth strategies for other clients,
offers an attractive method to achieve Company growth and management
efficiencies.
o Create a Network of Physicians to Develop Managed Care Practice. The
advent of managed care arrangements as a significant format for general
medical insurance programs has imposed on physicians marketing,
regulatory, record-keeping, billing, collection and other
administrative burdens similar to those encountered by injury-related
practices. The Company believes that it can assist clients and
potential clients by establishing a network of physicians to compete
for managed care, injury-related and other medical care contracts by
offering a broad range of medical services and a high level of
administrative support.
o Assist Clients in Maintaining High Credibility with Third-Party Payors
and other Referral Sources. The Company believes that its clients'
success is dependent to a great extent on the perceived accuracy and
integrity both of the medical diagnoses and evaluations performed by
the Company's clients and the records supporting such diagnoses and
evaluations. The Company seeks to associate itself with medical
practices comprised of highly qualified physicians (such as those with
board certifications) having a reputation for an unbiased approach to
medical evaluations and diagnoses. As a result of these factors, GMMS
has, to an increasing extent, been retained to provide IME's on behalf
of third-party payors that have come to respect the quality of GMMS'
work as a definer of injuries. The Company believes that the
credibility of these processes is a critical factor in increasing
patient referrals.
o Establish Industry Leadership in Medical Management Systems. The
Company seeks to develop and maintain state-of-the-art record keeping,
billing and collections software and to hire and retain a staff of
highly trained administrative support personnel. The Company believes
that a highly automated and standardized support system supports a
higher level of efficiency for its clients' medical personnel and also
leads to faster and more complete collections of fees.
The Company's growth strategy is intended to enable its medical practice
clients to offer patients cost- effective medical care within an integrated
practice offering a broad range of evaluation, testing, diagnostic, treatment
and therapeutic services. The Company believes that such a strategy could, in
turn, enhance its clients'
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revenue opportunities in a competitive environment generally affected by
shrinking profit margins. The Company believes that its greatest growth
potential will be in the high volume injury-related medical market. The
Company believes it has competitive advantages in this market because of its
skills in managing these practices and its experience in operating in the New
York regulatory environment. In the longer term, as the network of offices to
which it provides its management services grows, the Company believes that it
will be in an excellent position to attract managed care contracts for its
clients from employers and insurance carriers. The Company's ability to grow
is, however, dependent upon its ability to identify suitable candidates for
its services, as to which there is no assurance.
The Company regularly explores new opportunities and negotiates
arrangements with medical practices for the provision of general medical
management services or limited medical management services related to
diagnostic imaging. However, at present, the Company has no commitments or
agreements with respect to any new service contracts with medical practices
nor has the state of negotiations with any medical practice reached a level
where the Company believes that it is reasonably likely that a new commitment
or agreement will be reached.
MEDICAL PRACTICE AND HOSPITAL MANAGEMENT SERVICES
The Company provides a broad range of medical practice and hospital
management services, particularly those necessary for the efficient and
profitable operation of high volume injury-related medical practices. These
services encompass substantially all the non-medical aspects of its clients'
operations and are designed to increase client revenue levels through a
combination of strategies, which include revenue enhancing marketing methods,
integration of multi-specialty practices to reduce the need for patient
referrals, maximized use of diagnostic and treatment equipment and offices
and improved receivable collection efforts. The principal areas of the
Company's services include:
Offices; Equipment. The Company develops, administers and leases office
space and equipment to its medical practice clients. The Company also
oversees, manages and finances construction, decorating and other
improvements to leaseholds or other real estate and assists its clients in
site selection. Where appropriate, the Company advises its clients on their
need to improve, update, expand or adapt to new technology.
Personnel. The Company staffs all the non-medical positions of its clients
with its own employees, thereby eliminating the client's need to interview
and train non-medical employees, as well as the related demands of processing
the tax, insurance and other regulatory documentation associated with an
employment relationship.
Administrative. The Company assists in the scheduling of patient
appointments, the purchasing of medical supplies and equipment and the
handling of reporting, accounting, processing and filing systems, including
reviewing the completeness of the physician portions of the increasingly
complex forms to ensure and expedite full and timely regulatory compliance
and appropriate cost reimbursement under no-fault insurance and workers'
compensation guidelines. Among other things, the Company provides its clients
with timely management reports which include activity data, collection status
and other management information necessary to the operation of their
respective medical practices.
Receivable Collections. The Company has experience in the collection of
revenues from third-party payors governed by no-fault and workers'
compensation statutes, a process which is generally burdensome and
adversarial. The Company aggressively pursues all appropriate legally
available avenues for the collection of such medical receivables by, among
other things, effectively using various legally prescribed arbitration
dispute methodologies. The Company has also worked with third-party payors to
establish cooperative approaches to the collection process designed to reduce
costs to both the Company and to such payors.
Regulatory Compliance. The Company develops a compliance program
applicable to each client's medical practice area designed to ensure that
such client is notified of regulatory changes and operates in compliance with
applicable laws and regulations.
Cost Saving Programs. Based on available volume discounts, the Company
seeks to obtain favorable pricing for medical supplies, equipment,
pharmaceuticals and other inventory for its clients.
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Operational Efficiency. Through its training of employees, management of
the operations of expensive technological equipment and centralization and
standardization of various administrative procedures, the Company is able to
improve the productivity of both the professional and non-professional staff
and client equipment and facilities.
Diagnostic Imaging Services. With the merger with MMI, the Company offers
practice broadening opportunities, such as in-office diagnostic imaging
equipment, by providing a "turnkey" service to appropriate medical and
hospital clients allowing them to broaden their practices or services to
include diagnostic imaging services for their patients. In connection with
this service, the Company processes all applications required for filing with
regulatory authorities, finances the acquisition of capital intensive
equipment, oversees its installation and then manages its operations to
assure efficient use.
Marketing Strategies. The Company, in conjunction with its clients,
develops plans to enable such clients to increase the size and revenues of
their medical practices. Strategies developed by the Company for
implementation by its clients include: (a) increasing the range of
evaluation, diagnostic and treatment services offered by its clients; (b)
integrating other specialties into its clients' medical practices; (c)
expanding patient referral sources by helping its clients to establish
relationships with both attorneys for injury claimants and insurance
companies; (d) assisting its clients in the acquisition of other medical
practices; and (e) assisting clients in developing multi-office practices
which can be managed by application of the Company's fully-integrated network
computer system that provides necessary practice information to its clients
and coordinates the activities of multi-site, multi-specialty medical
practices. While the Company advises its clients with respect to these
marketing issues it does not engage in sales or marketing activities on
behalf of its clients.
Financing Opportunities. The Company, either directly through loans to its
clients or through assistance in presenting to sources of financing, intends
to provide its medical clients with greater access to the capital necessary
to develop, equip and expand their medical practices and to acquire other
medical practices.
Capital Support. In connection with the implementation of its growth
strategy below, the Company believes that it may increase its loans to GMMS
and other clients to enable them to further expand by acquiring medical
practices, opening additional offices and adding medical specialties and
sophisticated diagnostic equipment to their existing practices. The Company
may also make loans to, or purchase receivables from, new medical practice
clients to enable them to carry the long-term receivables generated by
injury-related practices. The Company intends to limit its loans in
connection with its clients' medical practice acquisitions to not more than
50% of the purchase price and to take a security interest in the receivables
and other assets being transferred. Inasmuch as such receivables are also
securing payment to the Company of its management fees from such clients,
there is a risk that its clients will be unable to repay such loans on a
timely basis, if at all, and that the Company's security in their receivables
may be inadequate to repay such indebtedness.
The Company provides its services pursuant to negotiated contracts with
its clients. While the Company believes it can provide the greatest value to
its clients by furnishing the full range of services appropriate to that
client, the Company is also willing to enter into contracts providing for a
more limited spectrum of selected services.
PRINCIPAL CLIENT
The Company's initial and principal client, GMMS, is a multi-specialty
medical practice that focuses on the diagnosis and treatment of injured
patients. Originally a one-office neurological practice, GMMS has now grown
to include sixteen physicians (including seven neurologists, one
chiropractor, one physiatrist, two orthopedists, one general surgeon, one
family practitioner, two psychologists, and one radiologist) operating a
total of nine offices in the greater New York metropolitan area (Brooklyn,
Manhattan, the Bronx, Queens, Staten Island, Long Beach, Long Island, and one
office located in Newburgh, New York). In 1995, GMMS saw patients at an
annual rate of more than 10,000 new patients per year for treatment, 6,000
new patient IME's (on behalf of insurance carriers and employers), 45,000
follow-up visits, 60,000 physical therapy visits, and performs more than
40,000 medical tests and 6,000 diagnostic imaging scans.
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The following table sets forth certain statistical data with respect to
GMMS:
<TABLE>
<CAPTION>
Quarter
Ended
Years Ended December 31, March 31,
--------------------------------- -----------
1993 1994 1995 1996
-------- --------- --------- -----------
<S> <C> <C> <C> <C>
Procedures performed ........ 88,450 128,500 157,000 48,700
New patients for treatment .. 5,950 10,850 11,160 3,920
New patients for evaluation . * * 9,800 5,200
Patient by payor category --
No-fault .................. 59% 49% 46% 46%
Worker's compensation ..... 14% 17% 20% 20%
All other ................. 27% 34% 34% 34%
At period end --
Doctors ................... 7 10 16 16
Technicians and other staff . 7 15 20 28
Offices ................... 5 6 9 9
</TABLE>
- ------
* Not treated as a separate category for record keeping purposes.
All of CMI's revenues in 1994 and 1995 and approximately 93% of the
Company's pro forma combined net revenue in 1995 were generated under a
management contract with GMMS and a substantial part of the growth in the
Company's business is a direct result of comparable growth of GMMS' medical
practice. The Company expects that its relationship with GMMS will be a
dominant factor in its business for the foreseeable future. The continued
vitality of GMMS' medical practice is subject to numerous risks, including
its continued ability to retain its key medical personnel, malpractice claims
and regulatory compliance. There is no assurance that GMMS will continue to
operate successfully. Moreover, although the terms of the PMSA and the MSA
between the Company and GMMS, which cover all management services provided to
GMMS, expire June 2025 and July 2001 (with a provision for the automatic
extension of the MSA in five (5) year intervals at the option of MMI),
respectively, there is no assurance that the Company and GMMS will continue
to maintain a productive working relationship. The founder of GMMS and his
son are principal shareholders of the Company.
GMMS has advised the Company that it intends to continue its strategy of:
(a) integrating, through both internal growth and the acquisition of the
other medical practices, as many of the services rendered to patients (e.g.,
diagnostic tests and other non-neurological specialties such as orthopedics
and physical therapy) as possible; and (b) broadening its patient referral
base by continuing to provide diagnosis and treatment of patients referred by
attorneys handling their injury-related legal claims, as well as IME's of
injury claims required by insurance companies and employers. It is the intent
of the Company to obtain management agreements with other medical practices
throughout key markets in New York State and neighboring states as well as to
assist GMMS in providing services at additional locations throughout the
State. The Company believes that if it can provide services to a sufficient
number and variety of medical practices, it can form a network of these
physicians. The Company would attempt to assist network members in obtaining
new sources of patients by negotiating with managed care payors for a fixed
reimbursement schedule that would be advantageous to the network and managed
care payors. The Company may also be able to assist network members in
achieving efficiencies from centralized billing, purchasing and marketing
activities.
Under the PMSA, the Company furnishes GMMS with a comprehensive range of
management and related financial services encompassing all non-medical
aspects of the GMMS' medical practice, including: (a) renting "built-out"
medical offices, including furnishings; (b) leasing equipment, including
diagnostic equipment; (c) purchasing supplies; (d) providing non-medical
personnel; (e) providing managerial, administrative, marketing and fiscal
management services; (f) providing various consulting services in connection
with the acquisition by GMMS of medical practices; (g) billing and collection
services; and (h) inclusion of GMMS in a network of medical practices which
the Company may ultimately form. The Company's fees are related to services
provided and include specified flat fees, hourly charges, network fees and,
in the case of billing and collections, varying percentages of amounts
collected depending upon length of collection period. All such fees are
subject to periodic upward readjustment starting in the third year, based on
specified formulae or methods for calculating the revised amounts. The
Company has also agreed to consider making working capital advances in
unspecified amounts. Each month the Company takes ownership on a full
recourse basis of GMMS' receivables with a net
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collectible value equal to the amount of the management fee then currently
owed by GMMS, an estimated average of 72% of GMMS' aggregate monthly
receivables, and also takes a security interest in the balance of GMMS'
receivables as security for the payment of any uncollected fees. All of these
receivables may, however, be insufficient to secure all amounts due to the
Company by GMMS. The PMSA also gives the Company a right of first refusal to
purchase the medical practice of GMMS at its then fair market value in the
event that New York State permits the public corporate practice of medicine
without the need to apply for a CON. The transfer of ownership of a majority
of GMMS shares to anyone other than Dr. Lawrence Shields or Dr. Irving
Friedman (95% and 5% owners, respectively, of GMMS) constitutes an assignment
under such agreement and may not be made without the consent of the Company.
The term of the PMSA is thirty (30) years, expiring on June 2025 unless
earlier terminated in accordance with its terms for reasons such as material
breach. The initial term and any subsequent renewal term can be extended in
five (5) year increments.
MARKETING
The Company's marketing goal is to increase the size, number and locations
of medical practices to which it provides its services both in its current
market (the New York metropolitan area), selected new geographic markets
within New York State, and possibly in New Jersey, Connecticut and other
contiguous states. The Company's goal is also to broaden the types of medical
practices which it services, to develop a client base of managed care
organizations and to implement growth strategies for its existing and new
clients. Some of the marketing strategies which the Company expects to apply
to promote growth of its client's patient and revenue bases involve assisting
its clients in the development of multi-specialty medical practices to
eliminate the need for patient referrals, the opening of additional offices
and the implementing of an aggressive program of acquiring other medical
practices. A major focus of the Company's near term marketing efforts will be
the identification of high volume medical practices in the New York
metropolitan area and elsewhere in New York State, particularly those that
specialize in orthopedics and neurology, which could either be acquired by
GMMS or make effective use of the Company's management services. The Company
may make working capital advances and/or acquisition loans to its present and
future clients to enable them to implement such growth strategies.
The Company's marketing efforts to establish relationships with new
medical practice clients, both for its full range of management services and
for management services related to diagnostic imaging, are conducted by
employees under the direction of the Executive Vice President of Practice
Development and Managed Care. Marketing activities consist of locating
medical practices which meet the size, quality and operating parameters set
by the Company. Generally, the Company seeks high-volume practices that
handle a significant number of patients with injury-related conditions, or
practices believed to be suitable for expansion into such area. The Company's
marketing staff also helps existing clients analyze opportunities for
expanding the services they offer and expanding into new geographic areas
either through opening new offices or acquiring existing medical practices.
Strategies are also developed for increasing the patient volume of existing
clients, including identifying attorneys handling workers' compensation and
no-fault insurance claims and meeting with such attorneys to make them aware
of the medical capabilities of the Company's clients. Additionally, one
senior executive of the Company focuses on advising insurance carriers and
large employers, such as the Metropolitan Transit Authority, on GMMS'
abilities as a definer of injuries and skills as preparers of IME reports.
The marketing staff also oversees and facilitates the exchange of information
with attorneys and insurance companies that are sources of new patients for
the Company's clients.
The Company believes it can increase its market share in the medical
management services industry by providing its clients with significant
competitive advantages and by relieving them of the complex, burdensome and
time-consuming non-medical aspects of their businesses. The Company believes
that relieving medical personnel of these obligations may enhance the
productivity, efficiency and profitability of such personnel and the growth
potential of the clients and thus also enhance the ability of such clients to
serve the needs of their patients. The Company also believes that a fully
integrated medical office for the diagnosis and treatment of injuries, as
well as the medical evaluation of injury claims for insurance carriers,
provides significant advantages to patients and third-party payors. By
providing a full array of medical and testing services in one facility, a
medical practice will serve the patient more effectively and efficiently and
also alleviate the injured patient's burden of traveling from one location to
another. The centralization of comprehensive medical services also
facilitates administrative and regulatory reporting to third-party payors.
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THIRD-PARTY REIMBURSEMENT
In order to comply with applicable federal and state laws, the Company's
management fees (including lease payments for office space and equipment) are
generally payable to the Company by its clients without regard to (i) the
fees which the client charges its patients for its medical services or (ii)
whether the client actually receives payment for its services. The Company's
ability to collect its management fees in a timely manner, or at all, is
affected by such factors as whether its client is reimbursed for its medical
services, the timing of such reimbursement and the amount of reimbursement.
The Company's own cash flow is adversely affected by its clients' long
collection cycle from various third-party payors, which typically range from
nine months to 40 months for workers' compensation insurers, six months to 32
months for no-fault insurance carriers of the no-fault payment pool, two
months to six months for Medicare and other commercial insurers and three
months to 24 months for medical malpractice injuries. The historical,
aggregate collection cycles of the Company's clients were based on the
Company's approximate three years of experience and GMMS' historical
collection experience. As a result of this slow payment pattern, the Company
requires more capital to finance its receivables than other businesses with
shorter receivable payment cycles. Further, third-party payors may reject the
clients' medical claims if, in their judgment, the procedures performed were
not medically necessary or if the charges exceeded such payors' allowable fee
standards. It is common practice for third-party workers' compensation and
no-fault payors to initially deny/reject the first submission of a medical
claim. This does not mean that the claim will not be ultimately paid. The
Company normally will re-submit the claim with such revised information as
requested and/or forms and documentation. Outstanding claims that continue to
be disputed after one year or more are then submitted to an arbitration
process. Normally, when final arbitration decisions are about to be rendered,
the third-party payor will settle. Under current law, the Company is entitled
to collect the settlement amount, filing fees and interest on the agreed-upon
payment. Finally, the reimbursement forms required by third-party payors for
payment of medical claims are long, detailed and complex and payments may be
delayed or refused unless these forms are properly completed in a timely
manner. Although the Company takes all legally available steps, including
legally prescribed arbitration, to collect the receivables generated by its
clients, there is a significant risk that some client receivables may not be
collected due to the determination by third-party payors that certain
procedures performed by the clients were not medically necessary or were
performed at excessive fees or because of omission or errors in timely
completion of the required claim. The inability of its clients to collect
their receivables could adversely affect their ability to pay in full all
amounts owed by them to the Company.
The healthcare industry is undergoing significant change as third-party
payors increase their efforts to control the cost, use and delivery of
healthcare services. Several states have taken measures to reduce the
reimbursement rates paid to healthcare providers in their states. The Company
believes that additional reductions will be implemented from time to time.
Reductions in Medicare rates often lead to reductions in the reimbursement
rates of other third-party payors as well and the Company believes that such
further reductions are probable. Further changes in Medicare reimbursement
rates whether pursuant to legislation presently under active consideration or
otherwise, or other changes in reimbursements by third-party payors to
clients of the Company, could have a material adverse affect on the Company's
operations and profitability.
RECENT DEVELOPMENTS
On April 10, 1996, in a transaction which the Company arranged, GMMS and
the Company entered into a letter of intent pursuant to which GMMS or its
designee, will acquire the practice of two Board Certified neurologists with
offices in the boroughs of the Bronx and Queens in New York City. After the
contemplated transaction, it is expected that the Company will assume the
administrative management of the acquired offices. The new offices are
expected to generate additional annual management fees of approximately
$700,000 to $1,000,000. The letter of intent is subject to various
conditions, including the execution of definitive agreements.
On April 10, 1996, MMI entered into an agreement with Brookdale Hospital,
a 1,000-bed teaching hospital in New York City, to provide diagnostic imaging
equipment and management services beginning in July 1996. It is expected that
annual revenues in excess of $2 million will be generated under these
arrangements, which expire in December 1997. Brookdale is planning to
construct and operate a multi modality imaging
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facility after the expiration of the agreement term which may not require
management services from the Company. MMI has also agreed to provide
diagnostic imaging equipment and administrative services to Bronx- Lebanon
Hospital Center, a 900 bed New York City hospital, commencing June 1996. It
is expected that annual revenues of approximately $1.5 million will be
generated.
On April 25, 1996, the Company entered into a letter of intent to finance
the acquisition by a professional corporation of the assets of a five
physician multi- specialty community based medical practice in Brooklyn, New
York. Under the contemplated transaction, the Company expects to provide
management and administrative services to the acquiring professional
corporation. The letter of intent is subject to various terms and conditions
including execution of definitive agreements, and provides for an approximate
purchase price of $500,000 payable 50% in Common Shares of the Company and 50%
in cash.
On May 7, 1996, the Company entered into a letter of intent to acquire, by
means of a merger or consolidation through a wholly owned subsidiary a
medical billing and collections company located in the New York metropolitan
area. It is the parties' intent that the transaction will qualify for
treatment as a tax-free reorganization under the Internal Revenue Code of
1986, as amended. The acquiree now serves a client base of more than 700
physicians and 20 hospitals and in 1995 generated sales of more than $3
million. The transaction is subject to significant conditions, including a
due diligence investigation by the Company confirming the absence of certain
changes, the level of 1995 income and the acquiree's prospects, as well as
the execution of a definitive agreement. The letter of intent provides for a
purchase price at closing of approximately $2,000,000, payable 40% in Common
Shares of the Company and 60% in cash.
GOVERNMENT REGULATION
The Company's business of providing management and administrative services
to medical practices and its proposed growth strategy of financing its
clients' acquisitions of medical practices and its purchase of certain
medical practice assets incidental to the obtaining of new practice
management service agreements is subject to extensive and increasing
regulation of numerous laws, rules, approvals and licensing requirements by
federal, state and local governmental agencies. The Company is also subject
to laws and regulations relating to business corporations in general.
The laws and regulations that cover the Company's operations and
relationships have not been definitively interpreted by regulatory
authorities. Regulatory authorities have broad discretion concerning how
these laws and regulations are interpreted and how they are enforced. The
Company may, therefore, be subject to lengthy and expensive investigations of
its business operations, or prosecutions by various state or federal
governmental authorities. If the Company or any of its medical practice or
hospital clients were found by an agency or judicial authority to be in
violation of these laws and regulations, the Company could be subject to
criminal and/or civil penalties, including substantial fines and injunctions,
which could limit or terminate the Company's ability to provide its services
to medical practices and hospital clients.
The Company believes that its operations are in material compliance with
applicable laws and regulations. Nevertheless, because of the uniqueness of
the structure of the Company's relationships with its medical practice and
hospital clients (including GMMS, the Company's principal medical practice
client, whose 95% shareholder, Dr. Lawrence Shields, is a founder and
principal shareholder of the Company), many aspects of the Company's business
and business opportunities have not been the subject of federal or state
regulatory review or interpretation, and the Company has not obtained nor
applied for any opinion of any regulatory or judicial authority that its
business operations are in compliance with applicable laws and regulations.
Therefore, there is no assurance that scrutiny of the Company's business or
its relationships with its medical practice or hospital clients by court or
regulatory authorities will not result in determinations adverse to the
Company. If the Company's interpretation of the relevant laws are inaccurate,
or if laws and regulations change or are adopted so as to restrict the
Company's or its clients' operations or expansion plans, the Company's
business and its prospects could be materially and adversely affected.
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The following are among the laws and regulations that affect the Company's
operations and development activities:
Corporate Practice of Medicine: The laws of New York State and various
other states prohibit public corporations such as the Company from practicing
medicine and employing physicians to practice medicine. New York also
prohibits any business corporation from operating a diagnostic and treatment
center unless licensed by the State and such a license is not currently
available to a public company in New York. The Company leases space and
equipment to medical practices and hospital clients and provides these
clients with a range of non- medical administrative and managerial services.
The Company also plans to provide financing for its clients' acquisitions of
physician practices. The Company does not, however, employ or supervise
physicians or other health professionals, does not represent to the public or
to the patients of its clients that it offers medical services, and does not
exercise influence or control over the practice of medicine by its clients.
The Company does not initiate direct contact with its clients' patients
except as an agent of its clients and at the specific request of its clients.
The Company does not direct outpatient referrals or assign patients to
particular physicians. The Company is not responsible for patient care
services, medical charts or patient records and does not provide any
ancillary medical services to patients or determine when patients will be
admitted to or discharged from care. The Company does not establish standards
of medical practice or policies for its clients, nor ensure adherence to such
standards or policies. Moreover, the Company does not determine what charges
are to be made to its clients' patients or to the third-party payors, nor are
patient care bills payable to the Company, but only to the Company's clients.
The Company does not determine how its clients' income will be distributed or
the scope of patient care services that its clients will provide.
Accordingly, the Company believes that it is not a diagnostic and treatment
center as such is defined by New York State and is not in violation of New
York State laws prohibiting the corporate practice of medicine. If the
Company were determined to be a diagnostic and treatment center or engaged in
the corporate practice of medicine, it could be found guilty of criminal
offenses and be subject to substantial civil penalties, including fines and
injunction preventing continuation of its business.
Fee Splitting: New York and various other states prohibit a physician from
sharing or "splitting" fees with persons not authorized to practice medicine.
This prohibition precludes the Company from receiving fees based upon a
percentage of its clients' gross income or net revenue. Accordingly, the fee
structure set forth in the Company's practice management service agreements
with its clients, including the Company's agreement for the use and
management of diagnostic imaging equipment based on a fixed fee per use
charge, provides for fixed remuneration based upon the estimated fair market
value of the services and equipment provided to such clients by the Company.
Although generally the Company's charges to its clients are payable to the
Company without regard to the amount of the fees charged by its clients to
their patients or whether such clients actually receive payment of their
fees, there is a risk that the inability of its clients to collect their
receivables will result in their being unable to make payments to the Company
on a timely basis, if at all. The Company believes that its charges to its
clients are not based upon their professional fees or level of income and,
accordingly, do not violate fee splitting prohibitions. If this belief is
incorrect and the Company is determined to be engaged in fee splitting
arrangements with its physician clients, such clients would be subject to
charges of professional misconduct and penalties ranging from censure and
reprimand to revocation of medical license. In addition, the Company could be
deprived of access to the courts to collect fees due from the physician
clients, thereby materially and adversely affecting the Company's revenues
and prospects.
Anti-Referral Laws: Under New York Law (and similar laws in a number of
other states) and the federal Stark Law (42 U.S.C. 1395nn) (which is
presently only applicable to Medicare and Medicaid patients), certain health
practitioners (including physicians, dentists, chiropractors and podiatrists)
are prohibited from referring their patients for the provision of designated
health services (including clinical lab and diagnostic imaging services) to
any entity with which they or their immediate family members have a financial
relationship. The penalties for violating the Stark Law include, among
others, denial of payment for the services performed, civil fines of up to
$15,000 for each service provided pursuant to a prohibited referral, a fine
of up to $100,000 for participation in a circumvention scheme and possible
exclusion from Medicare and Medicaid programs. Additional penalties of up to
$2,000 for each improperly billed service may also be imposed under the
Federal Civil Monetary Penalties Law. The Company believes that its
agreements with its health practitioner clients do not involve prohibited
referrals or the provision of designated health services by the Company as
the Company is neither a healthcare practitioner in a position to refer
patients nor an entity that provides prohibited designated health ser
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vices. Rather, the Company only furnishes management, administrative and
financial services to its healthcare practitioner clients who may perform
such designated health services. In the event that any of the Company's
healthcare clients make referrals that may be affected by the Stark Law (and
similar New York and other state anti-referral laws or regulations), they may
qualify for certain statutory exceptions to the general prohibition against
self-referrals which include, among others, direct physician services,
in-office ancillary services rendered within a group practice, space and
equipment rental, and services rendered to enrollees of certain prepaid
health plans. There can, however, be no assurance that future interpretations
or changes to the Stark Law (including its extension to all third-party
payors) or the regulations promulgated thereunder (and similar New York and
other state anti-referral laws or regulations) will not prohibit or otherwise
affect the Company's arrangements with its clients in ways that could
materially and adversely affect the Company's business.
Anti-Kickback Law: The Social Security Act imposes criminal penalties for
paying or receiving remuneration (which is deemed a kickback, bribe or
rebate) in connection with Medicare or Medicaid programs. Violation of this
law is a felony, punishable by fines of up to $25,000 per violation and
imprisonment for up to five (5) years. This law and related regulations have
been broadly interpreted to prohibit the payment, solicitation, offering or
receipt of any form of remuneration in return for the referral of Medicare or
Medicaid patients or any item or service that is covered by Medicare or
Medicaid reimbursement. Because the breadth of these prohibitions, when read
literally, may place many legitimate business relationships into question,
the U.S. Department of Health and Human Services ("HHS") promulgated "Safe
Harbor" regulations in 1991 specifying certain relationships and activities
that do not violate the law and regulations. The Company does not believe
that all of its business practices satisfy the conditions of the "Safe
Harbor" regulations; however, failure of an activity to fall within a "Safe
Harbor" provision does not mean that such activity constitutes a violation of
the law. The Company believes that its medical practice and hospital client
agreements under which it is currently providing management services do not
put it in a position to make or induce the referral of patients or services
reimbursed under government programs and, therefore, believes that the
likelihood of these agreements being determined to be in violation of the
federal anti-kickback law is remote. If, however, the Company's management
arrangements were found to violate this federal law, the Company and its
medical clients could be subject to substantial civil monetary fines and/or
criminal sanctions, including a minimum mandatory five year exclusion from
participation in the Medicare and Medicaid programs which would adversely
affect the Company's future results, operations and profitability.
Certificate of Need: In the case of the Company's magnetic resonance
imaging units, New York and several other states have laws and regulations
that require hospitals to obtain a CON approval to establish an imaging
center or to acquire magnetic resonance imaging or other major medical
equipment. Under CON laws, a hospital is required to substantiate the need
and financial feasibility for the establishment of new facilities,
commencement of new services or the acquisition of major medical equipment in
excess of statutory thresholds. The Company's ability to manage imaging
equipment for hospitals could be adversely affected by the existence of state
CON laws. Generally, a CON is not required for the acquisition or lease of a
magnetic resonance imaging unit by a physician engaged in the private
practice of medicine. Thus, GMMS and other medical practices which have
contracted with the Company have not been required to obtain a CON with
respect to any magnetic resonance imaging units leased from the Company. For
a number of years (but not in the most recent legislative session) New York
has considered and rejected legislation that would extend the CON requirement
to physicians engaged in private practice. The adoption of such legislation
would make it more difficult for physicians to obtain certain diagnostic
imaging equipment and could adversely affect the Company's expansion plans.
Regulation of Diagnostic Imaging Facilities: The operation by the
Company's clients of diagnostic imaging equipment administratively managed by
the Company is subject to federal and state regulations relating to
licensing, standards of testing, accreditation of certain personnel, and
compliance with governmental reimbursement programs. The Company believes
that its clients are in compliance with these federal and state requirements.
No-Fault Insurance: GMMS generates significant revenue from patients
covered by no-fault insurance carriers and the no-fault insurance payment
pool. In the event that changes in the no-fault insurance law create greater
or lesser demand for physician services or impose additional or different
administrative requirements, the Company could be required to modify its
business practices and its administrative services in ways that could be more
costly or more burdensome to the Company or in ways that limit or otherwise
decrease the revenues which the Company receives from its present and
potential future clients for its services.
42
<PAGE>
Workers' Compensation: GMMS generates significant revenue from patients
covered by the New York Workers' Compensation Program. In the event that
changes in the Workers' Compensation Law create greater or lesser demand for
physician services, cause decreased compensation for physician services,
prolong the physician reimbursement process or impose additional or different
administrative requirements, the Company could be required to modify its
business practices and its administrative services in ways that could be more
costly or more burdensome to the Company or in ways that limit or otherwise
decrease the revenues which the Company receives from its present and
potential future clients for its services. See "Business -- Government
Regulation -- Proposed Health Care Reform Legislation."
Factors Affecting the Ability of Clients to Make Payments to the
Company: In order to comply with applicable federal and state laws, the
Company's management fees (including lease payments for office space and
equipment) are payable to the Company by its clients generally without regard
to (i) the fees which the client charges its patients for its medical
services or (ii) whether the client actually receives payment for such
services. The Company's ability to collect the management fees it earns from
its clients in a timely manner, or at all, is affected by such factors as
whether its client is reimbursed for its medical services, the timing of such
reimbursement and the amount of reimbursement. In this regard, a substantial
portion of the revenues of the Company's clients are derived from payments by
government sponsored or regulated programs (i.e., no-fault insurance and
workers' compensation), private insurers and managed care companies. All of
these third-party payors are engaged in cost reduction programs that may
adversely affect the ability of the Company's clients to meet their
contractual obligations to the Company which, in turn, could cause the
Company to experience significant losses.
Anti-Trust: It is possible as the Company provides network, management and
administrative services to several clients in a particular location, these
medical practices 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 markets. The Company intends to
comply with such federal and state laws, but there is no assurance that a
review of the Company's business by courts or regulatory authorities would
not result in a determination that could adversely affect the operation of
the Company and its clients.
Anti-Fraud: There are also federal and state civil and criminal statutes
imposing substantial penalties, including substantial civil and criminal
fines and imprisonment, on healthcare providers and those who provide
services to such providers (including management businesses such as the
Company) which fraudulently or wrongfully bill governmental or other
third-party payors for healthcare services. The federal law prohibiting false
Medicare/Medicaid billings allows a private person to bring a civil action in
the name of the United States government for violations of its provisions.
The Company believes that it and its clients are in material compliance with
such laws, but there is no assurance that the Company's (and its clients')
activities will not be challenged or scrutinized by governmental authorities.
Proposed Health Care Reform Legislation: In addition to current laws and
regulations, the federal government and New York State are considering new
laws and regulations that, if enacted, would result in comprehensive changes
affecting the healthcare industry and the payment for, and availability of,
healthcare services. Specifically, New York State has adopted a pilot managed
care workers' compensation program that seeks to more closely regulate
expenditures for workers' compensation cases. Various bills to expand this
managed care pilot program have been proposed recently in the New York State
Legislature. It is not possible at this time to predict if or to what extent
this New York project will be expanded or to assess its full impact on the
Company. Likewise, it is not certain which, if any, reforms will be adopted
by Congress or state legislatures, or when such reforms will be adopted or
implemented. New federal and state healthcare legislation and changes in the
current regulatory environment may require the Company's business strategies,
operations and agreements to be modified and there can be no assurance that
such restructuring will be possible without adversely affecting the Company's
profitability.
LIABILITY INSURANCE
The Company carries insurance providing coverage for general liability,
comprehensive property damage and workers' compensation. While the Company
believes its insurance policies are adequate in amount and coverage for
protection of its assets and operations as currently conducted, there is no
assurance that the coverage limits of such policies will be adequate. A
successful claim against the Company in excess of its insurance cov
43
<PAGE>
erage could have a material adverse effect on the Company and its financial
condition. Claims against the Company, regardless of their merit or outcome,
could also have an adverse effect on the Company's reputation and business.
In addition, there is no assurance that the Company's coverage will, in fact,
be or continue to be available in sufficient amounts and on reasonable terms,
or at all.
COMPETITION
The medical practice management field is highly competitive, although the
Company is not aware of any significant competition in New York State which
focuses on medical practices significantly involved in the evaluation,
diagnosis and treatment of injury-related cases. A number of large hospitals
in New York State and elsewhere have acquired medical practices and this
trend is expected to continue. The Company expects that more competition will
develop, in part as a result of its demonstration that management companies
can operate in the highly regulated New York environment. Potential
competitors include large hospitals and a number of public corporations
operating through a regional or national network of offices that have greater
financial and other resources than the Company. The Company's experience in
providing medical practice management services in the highly regulated New
York State environment is believed to be an important competitive factor. The
Company provides a full range of management and administrative services in a
manner which it believes does not violate the state's laws prohibiting the
corporate practice of medicine and also provides an expertise in
administering receivable processing and collections.
EMPLOYEES
The Company employs ninety-three persons on a full time basis, including
eleven executive officers, thirty four non-medical support persons "on-site"
at clients' offices; four marketing support persons; seven accounting staff
members; twenty-two billing, collection and verification employees and
fifteen record transaction and clerical employees. The Company believes that
employees suitable for its needs are available in its current and expected
areas of activity. None of the Company's employees are represented by a labor
union and the Company is not aware of any activities seeking such
organization. The Company considers its relationships with its employees to
be good.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
------------------ ----- ---------------------------------------------------
<S> <C> <C>
Steven Rabinovici 43 Chairman of the Board and Chief Executive Officer
David Jacaruso 51 Vice Chairman of the Board and President
Senior Executive Vice President and Chief
Arthur L. Goldberg 57 Operating Officer
Dennis Shields 28 Executive Vice President and Director
Vice President, Chief Financial Officer, Treasurer,
Joseph M. Scotti 52 Secretary and Director
Executive Vice President of Practice Development
Dennis W. Simmons 45 and Managed Care
Senior Executive Vice President, Director of
Robert Keating 54 Operations -- Medical Legal Services
Jack Schwartzberg 60 Vice President and Director
Richard DeMaio 38 Vice President and Director
Claire Cardone 49 Vice President
Kenneth Theobalds 36 Vice President -- Workers' Compensation
Steven Cohn 46 Director
</TABLE>
44
<PAGE>
All directors hold office until the next annual meeting of shareholders
and until their successors are duly elected and qualified. Directors, other
than officers or employees of the Company or holders of 10% or more of its
shares, receive an option upon taking office to purchase 20,000 Common Shares
exercisable at the fair market value on the date of grant. Officers are
elected to serve, subject to the discretion of the Board of Directors, until
their successors are appointed.
Steven Rabinovici has been Chairman of the Board and Chief Executive
Officer of the Company since December 28, 1995. From December 31, 1992
through December 27, 1995 he was the President, Chief Executive Officer and a
director of MMI. He is a founder of the Company and also provided certain
consulting services to the Company during 1994 and 1995. From July 1990
through December 31, 1992, he was an independent healthcare and business
consultant. On July 21, 1992, MEBE Enterprises, Inc., the owner and operator
of a single Roy Rogers fast food restaurant, filed for protection under
Chapter 11 of the Bankruptcy Code. Messrs. Rabinovici and Jacaruso were
founders and principals of MEBE Enterprises, Inc. Earlier in his career, Mr.
Rabinovici had more than 10 years experience in hospital administration,
including approximately two years as associate administrator of Brookdale
Hospital Medical Center, a 1,000 bed teaching hospital, and two years as the
administrator of the Division of Psychiatry, Cornell University New York
Hospital.
David Jacaruso has been Vice Chairman of the Board of the Company since
December 28, 1995, as well as President, a founder and a director of the
Company since April 1993. From April 1993 through December 27, 1995 he was
Chairman of the Board of the Company. From July 1990 to April 1993 he was an
independent healthcare and business consultant. On July 21, 1992, MEBE
Enterprises, Inc., the owner and operator of a single Roy Rogers fast food
restaurant, filed for protection under Chapter 11 of the Bankruptcy Code.
Messrs. Rabinovici and Jacaruso were founders and principals of MEBE
Enterprises, Inc. Earlier in his career, Mr. Jacaruso was associated with
Brookdale Hospital for ten years and with Mt. Sinai Medical Center, holding
various administrative positions including Senior Associate Administrator for
Operations.
Arthur L. Goldberg has been Senior Executive Vice President and Chief
Operating Officer of the Company since April 2, 1996. From August 1993
through March 1996 he was an independent management consultant. Prior thereto
he was the Chief Financial Officer of Elek-Tek, Inc., a reseller of computer
and related equipment since December 1990.
Dennis Shields has been Executive Vice President and Director of the
Company since December 28, 1995. Prior thereto he was Vice President, Chief
Operating Officer and a Director of MMI since 1992. He is a founder of CMI.
His father, Dr. Lawrence Shields, a founder of MMI and CMI, is the 95% owner
of GMMS, the largest client of the Company.
Joseph M. Scotti has been Vice President, Chief Financial Officer,
Treasurer, Secretary and Director of the Company since December 28, 1995.
Prior thereto he held similar positions with MMI since January 1993. From
February 1992 to January 1993, Mr. Scotti was a consultant to Burke & Burke,
a food store chain and from November 1986 to February 1992 he was controller
of Rols Capital Co., a mortgage lender.
Dennis Simmons has been Executive Vice President of Practice Development
and Managed Care of the Company since April 2, 1996. Mr. Simmons has over
twenty years of healthcare experience. From November 1992 to March 1996 he
was the Senior Vice President for Coastal Physician Group, Inc. Prior thereto
he worked for Medical Care Development, Inc. as a consultant to the Saudi
Arabian government and United Healthcare Corp. in Central Texas since October
1986. Mr. Simmons also developed the Emergency Medical Services Program and
STAR Flight medical helicopter service in Austin, Texas.
Robert Keating has been Senior Executive Vice President, Director of
Operations -- Medical Legal Services of the Company since April 8, 1996. From
January 1995 to April 7, 1996, Mr. Keating was the Administrative Judge,
Second Judicial District, Supreme Court, State of New York responsible for
the day to day management of the Supreme Court district that encompasses
Brooklyn and Staten Island, New York and has general jurisdiction over both
civil litigation and criminal matters. Prior thereto he was the
Administrative Judge, Criminal Court of the City of New York since April
1985.
Jack Schwartzberg has been a Vice President and head of CMI's Workers'
Compensation Division since June 1993. For more than five years prior
thereto, Mr. Schwartzberg was engaged in the magazine publishing business as
a principal and president of Madison Avenue Magazine Publishing Co. and
Runway New York Publishing Company. Mr. Schwartzberg is the father-in-law of
Dennis Shields.
45
<PAGE>
Richard DeMaio has been Vice President of Operations and Director of the
Company since March 1994. From March 1989 through February 1994, he was
assistant administrator at the Long Island Jewish Medical Center with
administrative responsibilities for various clinical and support services.
Mr. DeMaio is a member of the American College of Healthcare Executives and
has also served on the Executive Committee of the Metropolitan Health
Administrators Association.
Claire A. Cardone has been Vice President of Operations for diagnostic
imaging of the Company since December 28, 1995. Prior thereto she was the
Vice President of Operations of MMI since 1993. From 1985 until 1993, Ms.
Cardone was Senior Associate Administrator at St. John's Episcopal Hospital,
a 300 bed community teaching hospital in Queens, New York.
Kenneth Theobalds has been Vice President of Workers' Compensation of CMI
since July 1995. Prior thereto Mr. Theobalds was Executive Director of The
State Insurance Fund of New York State since September 1992. From 1989 to
September 1992 he served as an Assistant Secretary for Human Resources to New
York State Governor Mario M. Cuomo.
Steven Cohn has been a member of the law firm of Goldberg and Cohn, which
has its offices in Brooklyn, New York, and a State Committeeman for the 50th
Assembly District for more than five years.
Steven Rabinovici, David Jacaruso, Marie Graziosi, Dennis Shields and Dr.
Lawrence Shields, founders of the Company, are parties to a shareholders'
agreement (the "Shareholders' Agreement") pursuant to which they have agreed
to vote (and subsequently voted) all of their shares of the Company, for a
period of 10 years, in favor of election to the Board of Directors of the
Company and for such other or additional nominees as may be designated from
time to time and approved by the Board and to vote on all other matters in
accordance with the recommendations of the Board. Mr. Rabinovici is the
Chairman of the Board and Chief Executive Officer of the Company, Mr.
Jacaruso is the Vice Chairman of the Board and President of the Company and
Dennis Shields, the son of Dr. Shields, is the Executive Vice President and a
Director of the Company. Marie Graziosi is the wife of David Jacaruso. Dr.
Shields is a founder of CMI and MMI, the Company's largest shareholder and
the founder and a 95% shareholder of GMMS, a client which accounted for
approximately 93% of the Company's pro forma combined revenues in 1995. In
addition, Messrs. Rabinovici, Jacaruso, Dennis Shields, Marie Graziosi and
Dr. Lawrence Shields beneficially own approximately 41.60% of the Company's
outstanding Common Shares and, accordingly, as long as they vote as required
by the Shareholders' Agreement, may be in a position to elect all of the
persons nominated by the Board of Directors.
The Company's Board of Directors has established Compensation and Audit
Committees, whose sole present member is Steven Cohn. The Company intends to
appoint two new independent directors, not yet identified, to the Board and
these committees after the consummation of this Offering. The Compensation
Committee reviews and recommends to the Board of Directors the compensation
and benefits of all officers of the Company, reviews general policy matters
relating to compensation and benefits of employees of the Company and
administers the issuance of stock options to the Company's officers,
employees, directors and consultants. The Audit Committee meets with
management and the Company's independent auditors to determine the adequacy
of internal controls and other financial reporting matters. It is the
intention of the Company to appoint only independent directors to the Audit
and Compensation Committees.
46
<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth certain summary information concerning the
aggregate total annual salary and bonus paid or accrued by the Company for
services rendered in 1995 to its chief executive officer and to the other
executive officers named below who received annual conpensation in excess of
$100,000. None of the below named executive officers were granted options by
the Company in 1995.
<TABLE>
<CAPTION>
Annual compensation
-------------------------------------------------------------------------------
All other
Salary Bonus compensation
Name and principal position Year ($) ($) ($)
- --------------------------- ------ ------------ ------- --------------
<S> <C> <C> <C> <C>
Steve Rabinovici
Chairman & CEO .......... 1995 109,842(1) -- 21,124
David Jacaruso
Vice Chairman, President . 1995 165,063(2) -- 6,334
Dennis Shields
Executive Vice President . 1995 136,920(3) -- 19,870
Joseph M. Scotti
Vice President & CFO .... 1995 117,225 -- 10,004
Jack Schwartzberg
Vice President .......... 1995 149,573 -- 15,289
</TABLE>
- ------
(1) Consists of fees of $30,650 from CMI for consultation and advice to
senior management and salary from MMI of $79,192.
(2) Includes consulting fees of $63,075 paid by CMI to Marie Graziosi, Mr.
Jacaruso's wife.
(3) Consists of fees of $57,728 from CMI for consultation and advice to
senior management and salary from MMI of $79,192.
EMPLOYMENT CONTRACTS
In October 1995, the Company entered into an agreement with Steven
Rabinovici which became effective on January 3, 1996, providing for his
employment as Chairman of the Board and Chief Executive Officer for an
initial term expiring on December 31, 1999. On December 31 of each year, the
term is automatically extended for an additional year unless on or before
such date either party elects to terminate the agreement at the expiration of
the term. The Agreement provides for an annual base salary of $250,000 and
for participation in all executive benefit plans. The agreement also
provides, among other things, that, if Mr. Rabinovici's employment is
terminated without cause (as defined in the agreement), the Company will pay
to him an amount equal to the salary which would have been payable to him
over the unexpired term of his employment agreement.
In October 1995, the Company entered into an agreement with David Jacaruso
which became effective on January 3, 1996, providing for his employment as
Vice Chairman of the Board and President, for an initial term expiring on
December 31, 1999. On December 31 of each year, the term is automatically
extended for an additional year unless on or before such date either party
elects to terminate the agreement at the expiration of the term. The
Agreement provides for an annual base salary of $250,000 and for
participation in all executive benefit plans. The agreement also provides,
among other things, that, if Mr. Jacaruso's employment is terminated without
cause (as defined in the agreement), the Company will pay to him an amount
equal to the salary which would have been payable to him over the unexpired
term of his employment agreement.
In October 1995, the Company entered into an agreement with Dennis Shields
which became effective on January 3, 1996, providing for his employment as
Executive Vice President, for an initial term expiring on December 31, 1999.
On December 31 of each year, the term is automatically extended for an
additional year unless on or before such date either party elects to
terminate the agreement at the expiration of the term. The Agreement provides
for an annual base salary of $250,000 and for participation in all executive
benefit plans. The agreement also provides, among other things, that, if Mr.
Shields' employment is terminated without cause (as defined in the
agreement), the Company will pay to Mr. Shields an amount equal to the salary
which would have been payable to him over the unexpired term of his
employment agreement. Prior to the closing of the IPO, Mr. Shields was Vice
President, Chief Operating Officer and a director of MMI.
47
<PAGE>
In January 1996, the Company entered into an agreement with Joseph M.
Scotti, providing for his employment as Vice President and Chief Financial
Officer for an initial term expiring on December 31, 1999. The Agreement
provides for an annual base salary of $175,000 and for participation in all
executive benefit plans. The agreement also provides, among other things,
that, if Mr. Scotti's employment is terminated without cause (as defined in
the agreement), the Company will pay to him an amount equal to the salary
which would have been payable to him over the unexpired term of his
employment agreement. Prior to the closing of the IPO, Mr. Scotti was Vice
President and Chief Financial Officer and a director of MMI. In December
1995, an option to purchase 50,001 shares exercisable at $9.00 per share
during a ten year period was granted to Mr. Scotti. The options are
exercisable for one-third of the shares covered thereby as of the date of the
grant and for an additional one-third of the shares covered thereby the two
years thereafter.
In March 1996, the Company entered into an agreement with Arthur L.
Goldberg providing for his employment as Senior Executive Vice President and
Chief Operating Officer which expires on March 10, 1999. The Agreement
provides for an annual base salary of $175,000 and for participation in all
executive benefit plans. The agreement also provides, among other things,
that, if Mr. Goldberg's employment is terminated without cause at anytime
prior to September 10, 1996, the Company shall pay to him the sum of $30,000
and shall grant him non-qualified stock options to purchase 20,000 shares of
Common Stock equal to the greater of the average trading price of a share of
Common Stock for the twenty day period ending on the date of such termination
or $9.00 per share. In addition, in April 1996 Mr. Goldberg was granted an
option for 100,000 shares exercisable for a ten year period. The option will
be exercisable for 50,000 shares beginning April 1997 and 50,000 shares in
April 1998.
In March 1996, the Company entered into an agreement with Dennis W.
Simmons providing for his employment as Executive Vice President of Practice
Development and Managed Care which expires on March 10, 1999. The Agreement
provides for an annual base salary of $175,000 and for participation in all
executive benefit plans and for the grant of an option for 100,000 shares
exercisable for a ten year period. The option will be exercisable for 50,000
shares beginning April 1997 and 50,000 shares in April 1998.
In March 1996, the Company entered into an agreement with Robert Keating
commencing on April 8, 1996, providing for his employment as Senior Executive
Vice President, Director of Operations -- Medical Legal Services. The
agreement expires on December 31, 1999, but may be automatically extended for
two years on mutually agreeable terms. The agreement provides for an annual
base salary of $185,000 with escalations to a base salary of $199,800 and
$215,784 on March 7, 1997 and March 7, 1998, respectively. The agreement also
provides for participation in all executive benefit plans and for the grant
of an option for 150,000 shares exercisable for a three year period. Up to
50,000 options vest at the end of each year of employment: 47,500 options in
each of the next three years will vest based upon a performance formula (as
defined in the agreement) and 2,500 options in each of the next three years
will vest without regard to the formula.
STOCK OPTIONS
In May 1995, in order to attract and retain persons necessary for the
success of the Company, the Company adopted its 1995 Stock Option Plan (the
"Option Plan") covering up to 700,000 of its Common Shares, pursuant to which
officers, directors and key employees of the Company and consultants to the
Company are eligible to receive incentive and/or non-incentive stock options.
The Option Plan, which expires in May 2005, will be administered by the Board
of Directors or a committee designated by the Board of Directors. The
selection of participants, allotment of shares, determination of price and
other conditions relating to the purchase of options will be determined by
the Board of Directors, or a committee thereof, in its sole discretion.
Incentive stock options granted under the Option Plan are exercisable for a
period of up to 10 years from the date of grant at an exercise price which is
not less than the fair market value of the Common Stock on the date of the
grant, except that the term of an incentive stock option granted under the
Option Plan to a shareholder owning more than 10% of the outstanding Common
Stock may not exceed five years and its exercise price may not be less than
110% of the fair market value of the Common Stock on the date of the grant.
As of May 24, 1996, options for an aggregate of 750,000 shares, exercisable
at a price of $8.375 per share during five to ten-year periods had been
granted to 8 officers, 2 outside directors and 11 other employees of the
Company, and were outstanding under the Option Plan, 50,000 of which were
subject to shareholder approval. Options are generally exercisable
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<PAGE>
for one-third of the shares covered thereby as of the date of the grant and
for an additional one-third of the shares covered thereby each year
thereafter, except that options granted to outside directors are exercisable
for 50% of the shares covered immediately upon grant and for the remainder of
the shares following one year's service and certain options have different
vesting schedules pursuant to employment agreements or other arrangements. In
addition, options for an aggregate of 175,000 shares exercisable at a price
of $8.375 per share had been granted to 4 consultants to the Company.
CERTAIN TRANSACTIONS
All of CMI's net revenue in 1994 and 1995 and approximately 93% of the
Company's pro forma combined net revenue in 1995 were earned under management
contracts with GMMS. On July 1, 1995, the Company and GMMS entered into the
PMSA effective April 1, 1995 which provides for the furnishing by the Company
of comprehensive management services, related financial services and the
inclusion of GMMS in a medical practices network expected to be formed by the
Company. The 95% shareholder of GMMS, Dr. Lawrence Shields, is a founder of
the Company. The agreement is for a term of thirty years, expiring in June
2025, and can be extended in five (5) year intervals. The various practice
management fees set forth in the agreement are subject to upward adjustment
every two (2) years depending on cost of living and other factors.
During 1994 and 1995, the Company retained MADAJ Dezines, Ltd. to provide
design services and to acquire furniture and furnishings. Aggregate payments
of $22,300 and $45,000 were made by the Company in 1994 and 1995,
respectively. MADAJ Dezines, Ltd. is controlled by Marie Graziosi, a founder
and principal shareholder of the Company and the wife of David Jacaruso, Vice
Chairman of the Board and President of the Company. The Company believes that
the services provided by MADAJ Dezines, Ltd. were provided on terms no less
favorable to the Company than those would have obtained from unaffiliated
parties.
Immediately following the closing of the IPO on January 3, 1996, CMI
acquired the assets and business of MMI through its merger into a wholly
owned subsidiary. In the Merger, the MMI shareholders received .778 Common
Shares for each MMI common share which they held. The holders of outstanding
options to purchase MMI common shares received a number of CMI Common Shares
equal to the difference between their aggregate option exercise prices and
the value thereof at $7.00 per share. An aggregate of 2,364,444 and 93,281
CMI Common Shares were issued in the Merger to MMI shareholders and option
holders, respectively.
The Company is the beneficiary of key-man life insurance policies
aggregating $10,000,000 covering the life of Dr. Lawrence Shields, the 95%
shareholder of GMMS, the Company's principal client.
As of December 8, 1995 an Omnibus Settlement Agreement (the "Settlement
Agreement") was entered into among CMI, MMI, Steven Rabinovici, David
Jacaruso, Dennis Shields, Dr. Lawrence Shields and Gail Shields ("Ms.
Shields"), the former wife of Dr. Lawrence Shields. Under the terms of the
Settlement Agreement, as revised on December 21, 1995, CMI arranged for the
sale of 117,187 MMI common shares owned by Ms. Shields at a net price to Ms.
Shields of $5.50 per share and obtained Ms. Shields' release as the maker of
a promissory note for a bank loan whose proceeds were used by GMMS (which had
previously been satisfied by GMMS) and as lessee of certain premises occupied
by GMMS, which lease has been assigned to CMI. There was no material impact
on the financial statements of CMI or MMI as a result of the foregoing
settlement.
49
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information as of May 19, 1996 with
respect to the beneficial ownership of the Company's Common Shares by each
shareholder known by the Company to be the beneficial owner of more than 5%
of its outstanding shares, by each director of the Company, by the executive
officers named in the table below and by the directors and executive officers
as a group.
<TABLE>
<CAPTION>
Common Shares Beneficially Owned
Number of Shares Percentage of Class
---------------- -------------------
Name and Address (1) Actual Actual
------------------------------------------------------- ---------------- -------------------
<S> <C> <C>
Steven Rabinovici (2) ................................. 476,813 6.41%
David Jacaruso (3) .................................... 424,640 5.71%
Dennis Shields (4) .................................... 567,837 7.63%
Joseph M. Scotti (7) .................................. 59,190 0.80%
Steven Cohn (7) ....................................... 14,921 0.20%
Jack Schwartzberg (7) ................................. 100,565 1.35%
Richard DeMaio (7) .................................... 19,843 0.27%
Lawrence Shields, M.D. (5) ............................ 1,625,291 21.85%
All officers and directors as a group (11 persons) (6) . 1,630,475 21.92%
</TABLE>
- ------
(1) The addresses of the persons named in this table are as follows: Steven
Rabinovici, David Jacaruso, Dennis Shields, Joseph M. Scotti, Jack
Schwartzberg and Richard DeMaio, c/o Complete Management, Inc., 254 West
31st Street, New York, New York 10001-2813; Steve Cohn c/o Goldberg and
Cohn, 16 Court Street, Suite 2304, Brooklyn, New York 11241 and Lawrence
Shields, M.D., 26 Court Street, Brooklyn, New York 11242.
(2) Mr. Rabinovici's shares are held as custodian for benefit of his minor
son, Jeffrey.
(3) Mr. Jacaruso's shares include shares held by his wife, Marie Graziosi and
shares held as custodian for his minor children, Cara Elizabeth and David
Francis.
(4) Dennis Shields is the son of Dr. Lawrence Shields.
(5) Dr. Lawrence Shields is the father of Dennis Shields.
(6) The officers' and directors' shares include shares subject to stock
options granted under the Option Plan to executive officers.
(7) The shares of Mr. Scotti, Mr. Cohn, Mr. Schwartzberg and Mr. DeMaio
include shares issuable upon the exercise of options granted under the
Company's stock option plan. Such options are exercisable within 60 days
of the date hereof as follows: Joseph M. Scotti, 16,667; Steven Cohn,
10,000; Jack Schwartzberg, 16,667 and Richard DeMaio, 10,000.
All of the Common Shares set forth in the above table are subject to
agreements prohibiting the sale, assignment or transfer until December 27,
1996 without the prior written consent of the IPO Representatives.
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DESCRIPTION OF DEBENTURES
The Debentures will be issued under an Indenture, to be dated as of
June 11, 1996, (the "Indenture"), between CMI, as issuer, and Chemical Bank,
as trustee (the "Trustee"), a copy of which is 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 Indenture.
The Debentures will be unsecured subordinated obligations of the Company,
will be limited to an aggregate principal amount of $35,000,000 (including
$5,250,000 subject to the Underwriters' over-allotment option) and will mature
on August 15, 2003. The Debentures will bear interest at the rate per annum
stated in their title from June 11, 1996 or from the most recent Interest
Payment Date to which interest has been paid or provided for, payable
semi-annually on August 15 and February 15 of each year, commencing August 15,
1996, 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 February 1 or August 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
(Sections 202 and 302). 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
"Description of Debentures -- 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. Although certain
of the agreements under which the Senior Indebtedness is outstanding contain,
and agreements in the future 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 of a Repurchase Event (as
described below), and are not intended for the benefit of the holders of the
Debentures. In addition, agreements under which Senior Indebtedness is
outstanding contain, and 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.
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<PAGE>
CONVERSION RIGHTS
The Debentures (or any portion thereof that is an integral multiple of
$1,000) will be convertible into Common Shares 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 the following:
(a) The Company shall (i) declare a dividend or make a distribution
payable in Common Shares or any class of capital stock of the Company or any
Subsidiary which is not wholly owned by the Company.
(b) The Company shall subdivide the outstanding Common Shares into a
greater number of shares, or combine the outstanding Common Shares into a
smaller number of shares.
(c) The Company shall fix a record date for the issuance rights or warrants
to all holders of its Common Shares entitling them (for a period expiring
within 45 days after the record date therefor) to subscribe for or purchase
Common Shares (or securities convertible into Common Shares) at a price per
share (or having an initial conversion price per share) less than the Current
Market Price of a Common Share of the Company on such record date.
(d) The Company shall make a distribution to holders of its Common Shares
or holders (other than the Company or its wholly-owned subsidiaries) of
capital stock of any Subsidiary (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 dividends or
distributions piad 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 (but excluding those dividends, distributions, options, rights and
warrants for which adjustment is made as described above or below.
(e) The Company shall issue or distribute Common Shares, (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 Shares, (iii) to employees or consultants under the Company's 1995
Stock Option Plan as now in effect or hereafter amended, if such shares would
otherwise be included in this Section (d), (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
stock holders 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 (d)
(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 Company's Common Shares outstanding at the time of any such
issuance), (v) upon exercise or rights or warrants issued to the holders of
Common Shares of the Company, (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 connection with the
entry into a medical practice or other professional practice management
agreement by the Company for a term of at least 5 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(g) 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, other than up to an additional
$3,000,000 face amount of 8% Convertible Subordinated Notes due March 20,
2001, convertible into or exchangeable for its Common Shares (excluding
securities issued in transactions described in sections (c) and (d) above, or
the Securities (as defined in the Indenture entered into by the Company)) for
a consideration per Common Share of the Company 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.
52
<PAGE>
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 Common Shares 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 Shares 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 Shares or any securities convertible into or exchangeable
for Common Shares or for payment of dividends on the Common Shares 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 Common Shares, for
the purpose of effecting conversions of Debentures, the full number of Common
Shares deliverable upon the conversion of all outstanding Debentures.
CERTAIN RIGHTS TO REQUIRE PURCHASE OF 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 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 5th day prior
53
<PAGE>
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 5th day prior to the Repurchase Date and thereafter only with
the consent of the Company (Section 1402).
The term "Fundamental Change" means the occurrence of any transaction or
event in connection with which all or substantially all of the Common Shares
shall be exchanged for, converted into, acquired for or constitute the right
to receive consideration (whether by means of an exchange offer, liquidation,
tender offer, consolidation, merger, combination, reclassification,
recapitalization or otherwise) which is not all or substantially all common
stock which is (or, upon consummation of or immediately following such
transaction or event, will be) listed on a national securities exchange or
approved for quotation in any NASDAQ system or any similar system of
automated dissemination of quotations of securities prices. For purposes of
the definition of a "Fundamental Change," (i) "substantially all of the
Common Shares" shall mean at least 85% of the Common Shares outstanding
immediately prior to the transaction or event giving rise to a Fundamental
Change and (ii) consideration shall be "substantially all common stock" if at
least 80% of the fair value (as determined in good faith by the Board of
Directors) of the total consideration is attributable to common stock. A
Fundamental Change would not include an acquisition of a majority of the
outstanding Common Shares by any person or group so long as it does not
result in termination of such listing or approval for quotation.
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 Shares
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 Shares 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 Shares 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 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 the 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 Shares or a non-negotiated
tender or exchange offer for the Common Shares. Accordingly, such provisions
may limit a stockholder's ability to realize a premium over the market price
of the Common Shares in connection with any such transaction.
54
<PAGE>
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. 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. No 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: (a) the principal of
and unpaid interest (whether accruing before or after filing of any petition
in bankruptcy or any similar proceedings by or against the Company and
whether or not allowed as a claim in bankruptcy or any similar proceeding) on
the following, whether heretofore or hereafter created, incurred, assumed or
guaranteed: (i) all indebtedness for borrowed money, created, incurred,
assumed or guaranteed by the Company (other than indebtedness evidenced by
the Debentures and indebtedness which by the terms of the instrument creating
or evidencing the same is specifically stated to be not superior in right of
payment to the Debentures); (ii) bankers' acceptances and reimbursement
obligations under letters of credit; (iii) obligations of the Company under
interest rate and currency swaps, caps, floors, collars or similar agreements
or arrangements intended to protect the Company against fluctuations in
interest or currency rates; (iv) any other indebtedness evidenced by a note
or written instrument; and (v) obligations of the Company under any agreement
to lease, or lease of, any real or personal property, which obligations are
required to be capitalized on the books of the Company in accordance with
generally accepted accounting principles then in effect (other than leases
which by their terms are specifically stated to be not superior in right of
payment to the Debentures), or guarantees by the Company of similar
obligations of others; and (b) all deferrals, modifications, renewals or
extensions of such indebtedness, and any debentures, notes or other evidence
of indebtedness issued in exchange for such indebtedness or to refund the
same (Section 101).
The Debentures are obligations exclusively of the Company. Certain
operations of the Company are currently conducted through its subsidiaries,
principally MMI (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,
55
<PAGE>
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 March 31, 1996, Senior Indebtedness and indebtedness of the
Subsidiaries aggregated approximately $4,195,000. 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; (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
56
<PAGE>
instituted by a holder of a Debenture for the enforcement or 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 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 June 5, 1999. The Debentures
will be redeemable, 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, on any date on or after June 5, 1999, and prior to maturity, at a
redemption price equal to 100% of the principal amount thereof plus accrued
but unpaid interest to the date fixed for redemption (subject to the right of
holders of 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 $19.125, 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 Shares, or, in
case no such reported sale takes place on such day, the closing bid price of
the Common Shares, on the principal national securities exchange on which the
Common Shares are 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 Shares are 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. 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.
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 August 15, 2003, 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
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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 Shares 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 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 Shares, (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 a 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, or (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).
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The holders of a majority in aggregate principal amount of the Outstanding
Debentures may, on behalf of all holders of Debentures, waive any past
default under the Indenture or Event of Default except a default in the
payment of principal or interest on any of the Debentures or in respect of a
provision which under the Indenture cannot be modified without the consent of
the holder of each outstanding Debenture (Section 902).
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.
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
The following summary sets forth the principal U.S. federal income tax
consequences of holding and disposing of the Debentures, converting the
Debentures into Common Shares, and holding and disposing of Common Shares
acquired as a result of the conversion of the 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 the
Debentures or Common Shares into which such Debentures are converted 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 U.S. federal income tax consequences
to holders of the Debentures or Common Shares into which such Debentures are
converted ("Holders") that are (i) individuals who are citizens or residents
of the United States, (ii) corporations or other entities organized under the
laws of the United States or a political subdivision thereof, or (iii)
estates or trusts, the income of which is includible in gross income for U.S.
federal income tax purposes regardless of source. 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 a Holder.
This summary does not purport to deal with all aspects of U.S. federal
income taxation that may be relevant to the decision to purchase the
Debentures or to convert the Debentures into Common Shares. Each prospective
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 converting the Debentures into Common Shares, and holding and
disposing of Common Shares acquired as a result of the conversion of the
Debentures, including the applicability and effect of any state, local or
foreign tax laws and any recent proposed changes in applicable 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 with
respect to the Debentures, while a cash basis Holder generally will be
required to include interest in income when interest payments are received by
such Holder with respect to the Debentures, or when the Company makes such
interest payments available for receipt.
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CONVERSION OF THE DEBENTURES
Except as otherwise indicated below, no gain or loss will be recognized
for U.S. federal income tax purposes upon the conversion of the Debentures
into Common Shares. Cash paid in lieu of fractional Common Shares will be
taxed as if the fractional Common Shares were issued and then redeemed for
cash, generally resulting in capital gains or loss from sale or exchange of
such fractional Common Shares. The tax basis of the Common Shares received
upon conversion will be equal to the tax basis of the Debentures converted
reduced by the portion of such tax basis, if any, allocable to any fractional
share interest exchanged for cash. The holding period of the Common Shares
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
U.S. 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 Shares) 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 equal to the fair market value of additional Common
Shares that may be acquired at such conversion price, which will be taxable
as a dividend to the extent of the current or accumulated earnings and
profits of the Company. To the extent that such deemed stock distribution
exceeds the Company's current or accumulated earnings and profits, it will be
treated as a tax-free return of capital to the extent of the Holder's tax
basis in the applicable Debentures, and then as capital gain. Similarly, if
the Company voluntarily reduces the conversion price for a period of time,
Holders may, in certain circumstances, have a deemed taxable stock
distribution in an amount equal to the fair market value of the additional
Common Shares that may be acquired at the reduced 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.
DISPOSITION OF THE DEBENTURES OR COMMON SHARES
In general, the Holder of the Debentures or, Common Shares into which such
Debentures are converted will recognize gain or loss upon the sale,
redemption, retirement or other disposition of the Debentures or Common
Shares 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 Debentures or Common Shares, as the case may be. The Holder's tax basis
in the Debentures generally will be such Holder's cost, increased by (i) the
amount of accrued market discount a Holder elects to include in income with
respect to the Debentures (discussed below) and (ii) the amount of any deemed
taxable stock distribution arising from a conversion price adjustment, under
the rules described above (see "Conversion of Debentures") and, (iii) the
amount of any accrued interest included in income under the Holder's method
of accounting (see "Stated Interest"), reduced by (i) any principal payments
or payments of stated interest received by such Holder, (ii) the amount of
any amortizable bond premium the Holder elects to amortize with respect to
the Debentures and (iii) the amount of any deemed taxable stock distribution
arising from conversion price adjustment not treated as a dividend or
resulting in capital gain under the rules described above (see "Conversion of
the Debentures"). As discussed above, a Holder's tax basis in the Common
Shares received on conversion will be equal to such Holder's tax basis in the
Debentures converted, reduced by the portion of such tax basis, if any,
allocable to any fractional share interest exchanged for cash. If a Holder
holds the Debentures or Common Shares as a capital asset, gain or loss
arising from sale, exchange, redemption or retirement of such Debenture or
Common Shares will be capital gain or loss except, in the case of Debentures,
to the extent of any accrued market discount (see "Market Discount on
Resale"). and such gain or loss will be long-term capital gain or loss if the
holding period of either Debentures or Common Shares (including the holding
period of Debentures converted into such Common Shares), as the case may be,
is more than one year at such time.
MARKET DISCOUNT ON RESALE
The tax consequences of the sale of the Debentures 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 at
maturity over the Holder's tax basis in such debt instrument immediately
after its acquisition. If the market discount is less than 1/4 th of 1
percent of the stated redemption price 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.
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If a Holder purchases the Debentures at a market discount and thereafter
recognizes gain on their disposition (or the disposition of the Common Shares
into which such Debentures are converted) such gain is treated as ordinary
interest income to the extent it does not exceed the accrued market discount
on such Debentures. 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's 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 the
Debentures 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 Debentures at the time payment is
received. However, when the Holder disposes of the Debentures, the accrued
market discount is reduced by the amount of the partial principal payment
previously included in income. A Holder that acquires the Debentures 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
Debentures until the Holder disposes of such Debentures in a taxable
transaction.
A Holder that acquired the Debentures 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 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.
BOND PREMIUM
If, as a result of a purchase at a premium, a Holder's adjusted tax basis
in Debentures exceeds the Debentures' stated redemption price at maturity,
such excess may constitute amortizable bond premium. If the Debentures are 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 Debentures.
The amount of amortizable bond premium equals the excess of the Holder's
basis (for determining loss on sale or exchange) in the Debentures 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 Debentures are 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 the Debentures 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 Shares into
which the Debentures are converted and (iv) proceeds from the sale or
redemption of such Common Shares, 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 and individual retirement
accounts are not subject to the backup withholding reporting requirements.
Nonresident aliens and foreign entities must submit a statement, signed under
penalties of perjury, attesting to that individual's exemption from backup
withholding. However, distributions taxable as dividends paid (or deemed
paid) to Holders who are nonresident aliens or foreign entities will also be
subject to 30% U.S. withholding tax unless
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a reduced rate of withholding is provided under an applicable treaty. In
addition, interest paid to a Holder who is a nonresident alien or foreign
entity generally should qualify as "portfolio interest" (assuming the Holder
will not own, directly or indirectly, 10% or more of the Common Shares of the
Company upon conversion of Debentures) and thus should be exempt from this
30% U.S. withholding tax if the Holder properly certifies as to his foreign
status. A Holder of the Debentures or Common Shares 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
Shares will be creditable against the income tax liability of the person
receiving the payment from which such amount was withheld. Holders of the
Debentures and Common Shares should consult their tax advisors as to their
qualification for exemption from backup withholding and the procedure for
obtaining such an exemption.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of 20,000,000 Common
Shares, par value $.001 per share, of which 7,438,298 shares are outstanding
on the date of this Prospectus, and 2,000,000 Preferred Shares, par value
$.001 per share, issuable in series, none of which are outstanding.
COMMON SHARES
Holders of the Common Shares are entitled to one vote for each share held
of record by them. The Common Shares have no redemption, preemptive, or
sinking fund rights. Holders of the Common Shares are entitled to dividends
as and when declared by the Board of Directors from funds legally available
therefor and, upon liquidation, dissolution or winding up of the Company, to
participate ratably in all assets remaining after payment of all liabilities.
The Common Shares are not redeemable and do not have any conversion rights or
preemptive rights. All Common Shares issued and outstanding are, and those
offered hereby when issued will be, legally issued, fully-paid and
non-assessable. See "Dividend Policy."
Steven Rabinovici, David Jacaruso, Marie Graziosi, Dennis Shields and Dr.
Lawrence Shields, the founders of the Company, have entered into a
Shareholders' Agreement pursuant to which they have agreed to vote all of
their shares, for a period of 10 years, in favor of the election to the Board
of Directors of the Company of the nominees approved by the Board and to vote
on all other matters in accordance with the recommendations of the Board. Mr.
Rabinovici is Chairman of the Board and Chief Executive Officer of the
Company, and Mr. Jacaruso is Vice Chairman of the Board and President of the
Company. Dr. Shields is the Company's largest shareholder and the father of
Dennis Shields who is Executive Vice President and a Director of the Company.
Marie Graziosi is the wife of David Jacaruso. Messrs. Rabinovici, Jacaruso
and Shields, Ms. Graziosi and Dr. Lawrence Shields beneficially own
approximately 41.60% of the Company's outstanding Common Shares and,
accordingly, as long as they vote as required by the Shareholders' Agreement,
will be in a position to elect all of the persons nominated by the Board of
Directors. Further, such control by the founding shareholders could preclude
any unsolicited acquisition of the Company and consequently affect the market
price of the Common Shares.
PREFERRED SHARES
The Company's Certificate of Incorporation provides that the Board of
Directors of the Company has the authority, without further action by the
holders of the outstanding Common Shares, to issue up to 2,000,000 Preferred
Shares from time to time in one or more classes or series, to fix the number
of shares constituting any class or series and the stated value thereof, if
different from the par value, and to fix the terms of any such series or
class, including dividend rights, dividend rates, conversion or exchange
rights, voting rights, rights and terms of redemption (including sinking fund
provisions), the redemption price and the liquidation preference of such
class or series. The Company does not have any Preferred Shares outstanding
and has no present intention to issue any Preferred Shares. The designations,
rights and preferences of any Preferred Shares would be set forth in a
Certificate of Designation which would be filed with the Secretary of State
of New York.
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IPO REPRESENTATIVES' WARRANTS
In connection with the Company's IPO, it sold to the IPO Representatives,
at a price of $.001 per Warrant, 200,000 IPO Representatives' Warrants,
entitling the holders thereof to purchase up to 200,000 Common Shares at a
purchase price of $10.80 per share for a period of four (4) years commencing
one year from the effective date of the IPO, December 28, 1995.
REPORTS
The Company intends to furnish to its shareholders annual reports
containing audited financial statements and quarterly reports for the first
three quarters of each fiscal year containing unaudited interim financial
information. In addition, the Company is required to file periodic reports on
Forms 8-K, 10-Q and 10-K with U.S. Securities and Exchange Commission and
make such reports available to its shareholders.
LIMITATION OF DIRECTORS' LIABILITY; INDEMNIFICATION
The Company's Certificate of Incorporation limits the liability to the
Company of individual directors for certain breaches of their fiduciary duty
to the Company. The effect of this provision is to eliminate the liability of
directors for monetary damages arising out of their failure, through
negligent or grossly negligent conduct, to satisfy their duty of care, which
requires them to exercise informed business judgment. The liability of
directors under the federal securities laws is not affected. A director may
be liable for monetary damages only if a claimant can show a breach of the
individual director's duty of loyalty to the Company, a failure to act in
good faith, intentional misconduct, a knowing violation of the law, an
improper personal benefit or an illegal dividend or stock purchase.
The Company's Certificate of Incorporation also provides that each
director or officer of the Company serving as a director or officer shall be
indemnified and held harmless by the Company to the fullest extent authorized
by the Business Corporation Law, against all expense, liability and loss
(including attorneys fees, judgments, fines, Employee Retirement Income
Security Act, excise taxes or penalties and amounts paid or to be paid in
settlement) reasonably incurred or suffered by such person in connection
therewith.
LISTINGS ON AMERICAN STOCK EXCHANGE
CMI Common Shares and the Debentures, subject to notice of issuance are
listed on the American Stock Exchange (the "AMEX") under the symbols "CMI."
and "CMI.A." respectively.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Shares is Continental
Stock Transfer and Trust Company, 2 Broadway, New York, NY 10004.
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UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement among
the Company and the Underwriters named below (the "Underwriters"), the
Company has agreed to sell to the Underwriters for whom National Securities
Corporation is acting as representative (in such capacity, the
"Representative"), and the Underwriters have severally and not jointly agreed
to purchase the principal amount of Debentures set forth below.
Underwriters Amount of Debentures
- ------------ --------------------
National Securities Corporation.......................... $ 6,000,000
Baird, Patrick & Co., Inc................................ 8,000,000
Paulson Investment Co., Inc.............................. 13,500,000
Frederick & Company, Inc................................. 3,000,000
First London Securities.................................. 2,000,000
Cohig & Associates, Inc.................................. 1,000,000
Smith Moore & Co......................................... 1,000,000
LaVolla Securities Corp.................................. 500,000
-----------
Total.............................................. $35,000,000
-----------
The Underwriting Agreement provides that the obligations of the several
Underwriters are subject to the approval of certain legal matters by their
counsel and various other conditions. The maturing of the Underwriters'
obligations are such that they are committed to purchase all of the above
Debentures if any are purchased.
The Company has been advised by the Representative that the Underwriters
propose to offer the Debentures to the public at the public offering price set
forth on the cover page of this Prospectus and to certain dealers at such
price less a concession not in excess of 4% of the principal amount of the
Debentures. The Underwriters may allow, and such dealers may allow, a
concession not in excess of 1% of the principal amount of the Debentures to
certain other dealers. After this Offering, the public offering price and
concessions and discounts may be changed by the Representative. The Company
has granted to the Underwriters an option exercisable during the 45-day period
commencing on the date of this Prospectus to purchase from the Company, at the
offering price less underwriting discount, up to an aggregate of $5,250,000
principal amount of Debentures for the sole purpose of covering
over-allotments, if any. To the extent that the Underwriters exercise the
option, each Underwriter will have a firm commitment to purchase approximately
the same percentage thereof that the principal amount of Debentures shown in
the above table bears to the total shown, and the Company will be obligated,
pursuant to the option, to sell such principal amount of Debentures to the
Underwriters.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act. The Company has
agreed to pay to the Representative a non-accountable expense allowance equal
to 2% of the gross proceeds derived from the sale of the Debentures
underwritten, $25,000 of which has been advanced.
In connection with this Offering, the Company has agreed to sell to the
Representative, for nominal consideration, warrants (the "Representative's
Warrants") to purchase up to an 250,000 Common Shares at an initial exercise
price of $21.04. The Representative's Warrants are exercisable for a period of
four years commencing one year from the date of this Prospectus. The
Representative's Warrants provide for adjustment in the exercise price of the
Representative's Warrants in the event of certain mergers, acquisitions, stock
dividends and capital changes. The Representative's Warrants grant to the
holders thereof certain rights with respect to the registration under the
Securities Act of the securities issuable upon exercise of the
Representative's Warrants.
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
copies of each such agreement which are filed as exhibits to the Registration
Statement, of which this Prospectus forms a part. See "Available
Information."
DETERMINATION OF OFFERING PRICE
Prior to this Offering, there has been no public market for the
Debentures. Consequently, the conversion price of the Debentures has been
determined by negotiations between the Company and the Underwriters. Fac-
64
<PAGE>
tors considered in determining the conversion price of the Debentures
included the Company's net worth and earnings, the amount of dilution per
Common Share issuable upon conversion of the Debentures to the public
investors, the estimated amount of proceeds believed by management of the
Company to be necessary to accomplish its proposed goals, prospects for the
industry in which the Company operates, the present state of the Company's
activities and the general condition of the securities markets at the time of
this Offering.
LEGAL MATTERS
The validity of the Debentures and the Common Shares issuable upon
conversion thereof will be passed upon for the Company by Morse, Zelnick,
Rose & Lander, LLP, 450 Park Avenue, New York, New York 10022. Members of the
firm beneficially own an aggregate of 116,194 Common Shares. Camhy Karlinsky
& Stein LLP, 1740 Broadway, Sixteenth Floor, New York, New York 10019-4315
has acted as counsel to the Underwriters in connection with this Offering.
EXPERTS
The Consolidated Financial Statements of Complete Management, Inc. and
Medical Management, Inc. included in this Prospectus and elsewhere in the
Registration Statement, to the extent and for the period indicated in their
report, have been audited by Arthur Andersen LLP, independent public
accountants, and are included herein in reliance upon the authority of said
firm as experts in giving said report. Reference is made to said report,
which includes an explanatory paragraph with respect to the change in
accounting for certain receivables as discussed in Note (3) to the MMI
financial statements.
The Financial Statements of Medical Management, Inc. as of December 31,
1994 and for the years ended December 31, 1993 and 1994 appearing in this
Prospectus and the Registration Statement of which this Prospectus forms a
part have been audited by Ernst & Young LLP, independent auditors as set
forth in their report thereon which appear elsewhere herein, and are included
herein in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended and, in accordance therewith, files reports
and other information with the SEC. Such reports and other information can be
inspected and copied at the public reference facilities maintained by the SEC
at Room 1024, 450 Fifth Street, N.W., Washington, D.C. and at the following
regional offices of the SEC: New York Regional Office, 7 World Trade Center,
Suite 1300, New York, New York 10048; and Chicago Regional Office, 500 West
Madison Street, 14th Floor, Chicago, Illinois 60661-2511. Copies of such
material can also be obtained from the public reference section of the SEC at
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
This Prospectus does not contain all of the information set forth in the
Registration Statement on Form S-l, of which this Prospectus forms a part,
and the exhibits thereto which the Company has filed with the SEC under the
Securities Act, to which reference is hereby made for further information
concerning the Company and the Debentures.
65
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
--------
<S> <C>
COMPLETE MANAGEMENT, INC.
Report of Independent Public Accountants ......................................................... F-2
Consolidated Balance Sheets as of December 31, 1994 and 1995 ..................................... F-3
Consolidated Statements of Income for the period from April 1, 1993 to December 31, 1993 and for
the years ended December 31, 1994 and 1995 .................................................... F-4
Consolidated Statements of Stockholders' Equity for the period from April 1, 1993 to
December 31, 1993 and for the years ended December 31, 1994 and 1995 .......................... F-5
Consolidated Statements of Cash Flows for the period from April 1, 1993 to December 31, 1993
and for the years ended December 31, 1994 and 1995 ............................................ F-6
Notes to Consolidated Financial Statements ....................................................... F-7
Interim Consolidated Balance Sheets as of December 31, 1995 and March 31, 1996 (Unaudited) ....... F-18
Interim Consolidated Statements of Income for the three month periods ended March 31, 1995 and 1996
(Unaudited) ................................................................................... F-19
Interim Consolidated Statements of Cash Flows for the three month periods ended March 31, 1995
and 1996 (Unaudited) ......................................................................... F-20
Notes to Interim Consolidated Financial Statements (Unaudited) ................................... F-21
MEDICAL MANAGEMENT, INC.
Report of Independent Public Accountants ......................................................... F-26
Report of Independent Auditors ................................................................... F-27
Balance Sheets as of December 31, 1994 and 1995 .................................................. F-28
Statements of Income for the years ended December 31, 1993, 1994 and 1995 ........................ F-29
Statements of Stockholders' Equity for the years ended December 31, 1993, 1994 and 1995 .......... F-30
Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995 .................... F-31
Notes to Financial Statements .................................................................... F-32
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Complete Management, Inc.:
We have audited the accompanying consolidated balance sheets of Complete
Management, Inc. (a New York corporation) and subsidiaries as of December 31,
1994 and 1995, and the related consolidated statements of income,
stockholders' equity and cash flows for the years then ended. 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 audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Complete
Management, Inc. and subsidiaries as of December 31, 1994 and 1995, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
New York, New York
March 26, 1996
F-2
<PAGE>
COMPLETE MANAGEMENT, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31,
Historical Proforma
1994 1995 1995
------------ ------------- -------------
(Unaudited)
<S> <C> <C> <C>
Current assets:
Cash ................................................. $ -- $ -- $16,160,038
Accounts receivable, net of unamortized discount of $971,064
and $1,307,034 .................................... 4,074,764 5,325,147 5,325,147
Prepaid expenses and other current assets ............ 1,664 356,097 356,097
------------ ------------- -------------
Total current assets ................................ 4,076,428 5,681,244 21,841,282
Long-term portion of accounts receivable, net of
unamortized discount of $508,537 and $603,758 ........ 3,604,571 9,559,424 9,559,424
Property and equipment, less accumulated depreciation and
amortization of $71,708 and $173,483 ................. 303,774 400,170 400,170
Deferred registration costs ............................ -- 1,985,446 --
Other assets ........................................... 24,172 233,777 233,777
------------ ------------- -------------
Total assets ....................................... $8,008,945 $17,860,061 $32,034,653
============ ============= =============
Liabilities and stockholders' equity
Current liabilities:
Notes payable ........................................ $ -- $ 1,000,000 $ 1,000,000
Accounts payable and accrued expenses ................ 742,252 2,815,718 2,595,756
Income taxes payable ................................. 39,971 39,371 39,371
Deferred income taxes -- current ..................... 1,679,052 1,799,523 1,799,523
Current portion of long-term debt .................... -- 89,369 89,369
------------ ------------- -------------
Total current liabilities ........................... 2,461,275 5,743,981 5,524,019
Deferred income taxes -- non-current ................... 1,694,148 4,435,776 4,435,776
Long-term debt ......................................... -- 228,534 228,534
Deferred rent .......................................... -- 121,595 121,595
Commitments and contingencies (Note 11)
Stockholders' equity:
Preferred stock, $.001 par value:
Authorized, 2,000,000 shares
Issued and outstanding, none ...................... -- -- --
Common stock, $.001 par value:
Authorized, 20,000,000 shares
Issued and outstanding, 2,952,795 shares at
December 31, 1994 and 2,980,573 shares
at December 31, 1995 ............................ 2,953 2,981 4,981
Paid-in capital ...................................... -- 249,972 14,642,526
Retained earnings .................................... 3,850,569 7,077,222 7,077,222
------------ ------------- -------------
Total stockholders' equity ........................ 3,853,522 7,330,175 21,724,729
------------ ------------- -------------
Total liabilities and stockholders' equity ... $8,008,945 $17,860,061 $32,034,653
============ ============= =============
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
F-3
<PAGE>
COMPLETE MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Period from
April 1, 1993 to Year ended December 31,
December 31, ------------------------------
1993 1994 1995
---------------- ------------- -------------
<S> <C> <C> <C>
Revenue:
From a related party ..................... $5,282,614 $10,654,298 $12,293,830
Interest discount ........................ (864,664) (1,743,900) (2,016,357)
---------------- ------------- -------------
Net revenue ................................ 4,417,950 8,910,398 10,277,473
---------------- ------------- -------------
Cost of revenue ............................ 1,102,900 1,948,755 2,771,256
General and administrative expenses ........ 1,482,653 2,374,695 2,863,806
Fees paid to related parties ............... 204,529 196,627 109,975
---------------- ------------- -------------
2,790,082 4,520,077 5,745,037
---------------- ------------- -------------
Operating income ........................... 1,627,868 4,390,321 4,532,436
Interest discount included in income ....... 206,981 921,977 1,585,171
Interest expense ........................... -- -- (45,502)
Other income ............................... 61,723 54,870 16,048
---------------- ------------- -------------
Income before provision for income taxes ... 1,896,572 5,367,168 6,088,153
Provision for income taxes ................. 890,729 2,522,442 2,861,500
---------------- ------------- -------------
Net income ................................. $1,005,843 $ 2,844,726 $ 3,226,653
================ ============= =============
Net income per share ....................... $ 0.34 $ 0.95 $ 1.08
================ ============= =============
Weighted average number of shares outstanding 2,980,573 2,980,573 2,980,573
================ ============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
COMPLETE MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Preferred Common Paid-in Retained
Stock Stock Capital Earnings Total
----------- -------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Issuance of 2,952,795 shares of common
stock at $.001 par value ........ $ -- $2,953 $ -- $ -- $ 2,953
Net income from April 1, 1993 to December
31, 1994 ........................ -- -- -- 1,005,843 1,005,843
----------- -------- ------------- ------------ -------------
Balance at December 31, 1993 ..... -- 2,953 -- 1,005,843 1,008,796
Net income for the year ended December
31, 1994 ........................ -- -- -- 2,844,726 2,844,726
----------- -------- ------------- ------------ -------------
Balance at December 31, 1994 ..... -- 2,953 -- 3,850,569 3,853,522
Issuance of 27,778 shares of common
stock at $.001 par value to secured
lenders ......................... -- 28 249,972 -- 250,000
Net income for the year ended December
31, 1995 ........................ -- -- -- 3,226,653 3,226,653
----------- -------- ------------- ------------ -------------
Balance at December 31,1995 ...... $ -- $2,981 $ 249,972 $7,077,222 $ 7,330,175
=========== ======== ============= ============ =============
Pro Forma Adjustments:
Historical balance at December 31, 1995 $ -- $2,981 $ 249,972 $7,077,222 $ 7,330,175
Issuance of 2,000,000 shares of common
stock at $.001 par value, net of
registration costs .............. -- 2,000 14,392,554 -- 14,394,554
----------- -------- ------------- ------------ -------------
Balance at December 31, 1995 ..... $ -- $4,981 $14,642,526 $7,077,222 $21,724,729
=========== ======== ============= ============ =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
COMPLETE MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
April 1, 1993 to
December 31, Year ended December 31,
---------------- ------------------------------
1993 1994 1995
---------------- ------------- -------------
<S> <C> <C> <C>
Operating activities
Net income ............................................ $ 1,005,843 $ 2,844,726 $ 3,226,653
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ....................... 16,914 54,794 101,775
Discount of accounts receivable, net of amortization . 657,683 821,918 431,191
Provision for deferred income taxes ................. 850,100 2,523,100 2,862,099
Amortization of prepaid insurance ................... -- -- 24,306
Amortization of original issue discount ............. -- -- 12,500
Changes in operating assets and liabilities:
Accounts receivable .............................. (2,622,777) (6,536,159) (7,636,427)
Prepaid expenses and other current assets ........ (2,739) 1,075 (266)
Accounts payable and accrued expenses ............ 194,755 402,846 1,945,655
Income taxes payable ............................. 40,629 (658) (600)
Other assets ..................................... (23,092) (1,080) (578)
Deferred rent .................................... -- -- 121,595
---------------- ------------- -------------
Net cash provided by operating activities ............. 117,316 110,562 1,087,903
---------------- ------------- -------------
Investing activities
Purchase of property and equipment .................... (182,516) (192,966) (177,768)
---------------- ------------- -------------
Net cash used in investing activities ................. (182,516) (192,966) (177,768)
---------------- ------------- -------------
Financing activities
Deferred registration costs ........................... -- -- (1,985,446)
Proceeds from issuance of notes payable ............... -- -- 1,000,000
Bank overdraft ........................................ 62,247 82,404 75,311
Issuance of common stock .............................. 2,953 -- --
---------------- ------------- -------------
Net cash provided by (used in) financing activities ... 65,200 82,404 (910,135)
---------------- ------------- -------------
Net increase (decrease) in cash ....................... -- -- --
Cash at the begining of the period .................... -- -- --
---------------- ------------- -------------
Cash at the end of the period ......................... $ -- $ -- $ --
================ ============= =============
Supplemental disclosures of cash flow information
Cash paid during the first year
Interest ............................................ $ -- $ -- 21,233
Taxes ............................................... -- -- --
Non-cash financing activities:
Issuance of common stock ............................. -- -- 250,000
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
COMPLETE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD FROM APRIL 1, 1993 TO DECEMBER 31, 1993
AND THE YEARS ENDED DECEMBER 31, 1994 AND 1995
1. DESCRIPTION OF BUSINESS
Complete Management, Inc. (the "Company"), a New York corporation, was
incorporated on December 30, 1992, and commenced operations on April 1, 1993.
The Company had no operations from the time of its incorporation through March
31, 1993. The Company provides comprehensive management services primarily to
high volume medical practices in New York State. The Company's services
include development, administration and leasing of medical offices and
equipment, staffing and supervision of non-medical personnel, accounting,
billing and collection, and development and implementation of practice growth
and marketing strategies.
In April 1993, the Company commenced servicing its initial client,
Greater Metropolitan Medical Services', a multi-site medical practice in the
New York metropolitan area (the "PC" or "GMMS"). The PC, at December 31, 1994,
was wholly owned by a physician stockholder (95% owned effective July 1995)
who is a neurologist and also founder and principal stockholder of the
Company. All of the Company's net revenues in 1993, 1994 and 1995, were earned
under a management contract with the PC and a substantial part of that growth
in the Company's business is a direct result of comparable growth of the PC.
While the Company expects to continue to market to other potential clients, it
expects that its relationship with the PC will be a dominant factor in its
business for the foreseeable future. There is no assurance however, that
future relationships will produce similar results of operations as currently
experienced by the Company under this arrangement with the PC. The continued
vitality of the PC is subject to numerous risks, including its continued
ability to retain its key medical personnel, malpractice claims and regulatory
compliance (see Note 12 for additional related party information).
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Preparation of Financial Statements
The consolidated financial statements include the accounts of the Company
and subsidiaries. All significant inter-company balances and transactions have
been eliminated in consolidation.
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 financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
Fee revenue is recognized based upon a contractual agreement for
management services rendered by the Company. The Company's agreement with the
PC stipulated a fee for services rendered to be a fixed annual amount. This
annual fee was billed ratably over the year. In July 1995, the Company
re-negotiated this contract effective April 1, 1995 and entered into a thirty
year agreement ending in June 2025. The fees are primarily calculated on a
cost-plus basis, including an allocation for Company-wide overhead, as in the
case of personnel, space, supplies, etc., and/or activity based efforts at
pre-determined rates per unit of activity such as consulting and collection.
All fees are re-negotiable at the second anniversary of this agreement and
each year thereafter. This contract may be renewed for additional six-five
year periods at the option of either party (see Note 12).
Due to the long term collection cycle associated with assigned
receivables from the PC (as described in Note 3), these receivables are
discounted using the Company's incremental borrowing rate and management's
estimate of the collection cycle.
GMMS is a multi-specialty medical practice group which provides
evaluations, diagnoses and treatment in the New York metropolitan area.
Currently, the practice's primary medical focus is to treat patients with
injury- related conditions who carry insurance with various insurance carriers
under the workers' compensation and no-fault guidelines.
F-7
<PAGE>
COMPLETE MANAGEMENT, INC.
Notes to Consolidated Financial Statements - (Continued)
For the period from April 1, 1993 to December 31, 1993
and the years ended December 31, 1994 and 1995
2. SIGNIFICANT ACCOUNTING POLICIES - (Continued)
The following "unaudited" tabulation sets forth the operating results of
the GMMS for the years ended December 31, 1993, 1994 and 1995. GMMS is an
entity separate from CMI and the amounts reflected below are not included in
the results of operations of CMI, except for the portion of the management fee
related to CMI.
Year Ended
December 31,
1993
---------------------------------------------
General
Medical Diagnostic Total
Unaudited: Services Imaging GMMS
------------- ------------ -------------
Services rendered . $ 9,414,011 $3,855,618 $13,269,629
Contractural
allowances ....... (1,849,637) (107,000) (1,956,637)
Net medical service
fee .............. 7,564,374 3,748,618 11,312,992
Less expenses:
Medical personnel
payroll ...... 1,205,684 429,793 1,635,477
Other ........... 319,622 40,196 359,818
------------- ------------ -------------
Total expenses . 1,525,306 469,989 1,995,295
------------- ------------ -------------
Owner physicians
payroll and
entity income . 756,454 -- 756,454
Management fee .. $ 5,282,614 $3,278,629 $ 8,561,243
============= ============ =============
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1994 1995
--------------------------------------------- ---------------------------------------------
General General
Medical Diagnostic Total Medical Diagnostic Total
Unaudited: Services Imaging GMMS Services Imaging GMMS
------------- ------------ ------------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Services rendered . $15,873,681 $6,362,166 $22,235,847 $17,324,953 $6,685,483 $24,010,436
Contractural
allowances ....... (2,243,719) (502,000) (2,745,719) (2,037,223) (302,297) (2,339,520)
Net medical service
fee .............. 13,629,962 5,860,166 19,490,128 15,287,730 6,383,186 21,670,916
Less expenses:
Medical personnel
payroll ...... 1,418,973 665,695 2,084,668 1,969,157 371,148 2,340,305
Other ........... 474,998 1,177 476,175 502,367 22,186 524,553
------------- ------------ ------------- ------------- ------------ -------------
Total expenses . 1,893,971 666,872 2,560,843 2,471,524 393,334 2,864,858
------------- ------------ ------------- ------------- ------------ -------------
Owner physicians
payroll and
entity income . 1,081,693 -- 1,081,693 522,376 -- 522,376
Management fee .. $10,654,298 $5,193,294 $15,847,592 $12,293,830 $5,989,852 $18,283,682
============= ============ ============= ============= ============ =============
</TABLE>
RELATIONSHIP BETWEEN THE COMPANY AND THE GMMS (UNAUDITED)
General
GMMS' operations are limited to the following activities:
1) Rendering services to patients;
2) Payment of compensation to both the owner physician and other medical
personnel; and
3) Payment of miscellaneous expenses incidental to the rendering of the
medical service.
As more fully discussed below, the Company's operations as they relate to
GMMS include the following activities:
1) Patient scheduling, record transcription, non-clinical intake
examination, and insurance verification;
2) Billing and collection for all patient medical services rendered; and
3) Any other activity necessary to ensure the proper delivery of medical
services.
Economics
Because the activities of GMMS are limited to the rendering of medical
services, its principal asset is the accounts receivable due from third-party
payors and/or its patients (minimal services are paid for by the patient at
the time service is rendered). Further, substantially all of the non-clinical
activities of GMMS, as defined by the management agreement, are performed by
the Company (whose activities are fully discussed above and elsewhere in this
annual report) and its principle liability is the amount due to the owner
physician and other medical personnel for services and the fee due under the
management agreement.
The above tabulation reflects those dynamics in that revenue generated by
GMMS in the amount of $13,269,629, $22,235,847 and $24,010,436 for the years
ended December 31, 1993, 1994 and 1995, respectively, have been allocated to
the owner physician, medical personnel, other medical expenses or management
fee.
F-8
<PAGE>
COMPLETE MANAGEMENT, INC.
Notes to Consolidated Financial Statements - (Continued)
For the period from April 1, 1993 to December 31, 1993
and the years ended December 31, 1994 and 1995
2. SIGNIFICANT ACCOUNTING POLICIES - (Continued)
Finally, because the management fee is paid through an assignment of the
accounts receivable and the doctors' compensation is paid currently, GMMS'
cash flow is principally a pass through of cash received for the delivery of
services rendered and cost of those services.
Financial Statements of GMMS
Audited financial statements have not been presented because management
believes that audited financial statements of GMMS would not provide any
additional information that would be meaningful in the evaluation of the
Company's financial position, results of operations, and cash flows, because
GMMS' balance sheets are prepared on the accrual basis and include a very
limited amount of accounts receivable, and immaterial liabilities for
miscellaneous costs not paid due to the timing of cash flows. Further, its
statements of operations would reflect three components: revenues,
compensation to owner physician and medical personnel and management fee,
which information is presented in substantially that form in the above
tabulation. Finally, GMMS as an entity is merely a conduit which distributes
all cash for compensation of the medical professionals.
Depreciation and Amortization
Medical equipment, office furniture and computer and telephone equipment
are depreciated on the straight- line basis over the estimated useful lives
of the assets (5 to 7 years). Leasehold improvements are amortized over the
shorter of the term of the lease or the life of the asset.
Long-lived Assets
The Company reviews its long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. In performing this review the Company estimates the
future cash flows expected to result from the use of the asset and its
eventual disposition.
Income Taxes
Income taxes are determined under the liability method as required by
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109"). Under SFAS 109, deferred tax assets and liabilities are
determined based upon differences between the financial reporting and the tax
basis of assets and liabilities.
Earnings Per Share
Net income per common share has been computed by dividing net income by
the weighted average number of shares of common stock and common stock
equivalents outstanding during the periods, retroactively adjusted to reflect
the stock split (see Note 4), and the issuance of shares in connection with
the Secured Notes (see Note 7). Such shares have been outstanding for all
periods presented.
3. ACCOUNTS RECEIVABLE
The Company takes ownership on a recourse basis of receivables generated
by the PC's medical practice from third-party payors with a net collectible
value equal to the then current management fee owed to the Company. These
third-party payors are billed at negotiated rates and are principally
insurance carriers. Payment from these sources generally have long collection
cycles. To the extent any receivables assigned to the Company are disputed
and/or referred to arbitration proceedings, such receivables are immediately
substituted under the recourse arrangements between the PC and the Company. In
the event that the laws and regulations establishing these third-party payors
are amended, rescinded or overturned with the effect of eliminating this
system of payment reimbursement for injured parties, the ability of the
Company to market its management services could be affected.
F-9
<PAGE>
COMPLETE MANAGEMENT, INC.
Notes to Consolidated Financial Statements - (Continued)
For the period from April 1, 1993 to December 31, 1993
and the years ended December 31, 1994 and 1995
3. ACCOUNTS RECEIVABLE - (Continued)
Collection by the Company of its accounts receivable may be impaired by
the uncollectibility of medical fees from third-party payors. The PC is liable
to the Company for payment of its fees regardless of whether payment is
received for medical services. The Company takes ownership on a recourse basis
of client receivables on amounts equal to the net collectible value of the
then current management fee. The Company has historically experienced delays
in collecting from third-party payors. 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, and then further defer payment until or near the
date of a scheduled arbitration hearing, generally not to exceed three years
after the submission of a fully documented medical claim. As a result of such
delayed payment, the Company requires more capital to finance its receivables
than businesses with a shorter receivable payment cycle. 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 payors
allowable fee standards. Finally, the application forms required by
third-party payors for payment of claims are long, detailed and complex and
payments may be delayed or refused unless such forms are properly completed.
Nevertheless, although the Company takes all legally available steps,
including legally prescribed arbitration, to collect the receivables generated
by the PC, there is a risk that some of those receivables may not be
collected, which may impede the ability of the PC to pay in full all amounts
owed by them to the Company. Accordingly, the collection cycle tends to be
long-term in nature. The Company assesses the recoverability of its accounts
receivable at a minimum, but no less than, quarterly, and may, on a calendar
quarter basis, exchange receivables, at its sole discretion, without
limitations or conditions which it deems uncollectible within a period of
time, for newly generated receivables. The PC has receivables substantially in
excess of the amounts owed the Company after giving effect to their
collectibility. The Company has not had to exercise such option with respect
to any receivables assigned to it for periods ended December 31, 1993, 1994
and 1995.
Periodically, the Company reviews all third-party payor receivables prior
to acceptance for payment of its fee in order to determine those amounts that
are potentially impaired as a result of disputes, billing differences and
length of time outstanding. Those amounts deemed to be impaired are subtracted
from the total third-party payor receivables that are available for payment to
the Company. This factor, along with the fact that the PC assigns its
receivables to the Company on a full recourse basis in payment of its fees,
indicates that recognition for bad debts are not required.
Management has determined, based on actual results and industry factors,
that these receivables have a collection cycle of approximately three years,
and accordingly, have been reflected in the accompanying financial statements
on a discounted basis (12% per annum, which is management's estimate of its
incremental borrowing rate for the period of April 1, 1993 through December
31, 1995). Management believes that its experience and that of the Company is
a good indication of the timing of the collection process. Because numerous
factors affect the timing and the manner in which these receivables are
collected (i.e., government regulations, etc.) it is the Company's policy to
periodically assess the collection of its receivables. As a result, the
Company's estimate of its incremental borrowing rate and collection period may
change.
4. STOCKHOLDERS' EQUITY
Recapitalization
In December 1995, the Company increased its authorized common stock from
1,000 shares $.001 par value to 20,000,000 shares in addition to authorizing
2,000,000 shares of preferred stock with a par value of $.001. Prior thereto,
there had been no authorized preferred stock.
On December 21, 1995 the Company declared a 4921.3243 to 1 stock split in
the form of a stock dividend. After the split, all presently outstanding
shares of the Company, other than shares issued to the Secured Lend
F-10
<PAGE>
COMPLETE MANAGEMENT, INC.
Notes to Consolidated Financial Statements - (Continued)
For the period from April 1, 1993 to December 31, 1993
and the years ended December 31, 1994 and 1995
4. STOCKHOLDERS' EQUITY - (Continued)
ers, plus shares issuable to the principal stockholders of the Company in
connection with the merger of Medical Management, Inc. ("MMI") into a
wholly-owned subsidiary of CMI (the "Merger") aggregated 4,000,000 shares (See
Note 13). All outstanding shares and per share amounts included in the
accompanying financial statements have been retroactively adjusted to reflect
the stock split.
Stock Option Plan
The Financial Accounting Standards Board has issued Statement of
Accounting Standard 123 "Accounting for Stock-based Compensation" (SFAS 123).
This statement establishes financial accounting and reporting standards for
stock-based employee compensation plans. The accounting requirements of SFAS
123 are effective for transactions entered into in fiscal years that begin
after December 15, 1995, though they may be adopted upon issuance. The
disclosure requirements of SFAS 123 are effective for financial statements for
fiscal years beginning after December 15, 1995. Management believes the
adoption of this statement would have had no material effect on the financial
statements.
In May 1995, the Company adopted the 1995 Stock Option Plan (the "Plan")
covering up to 700,000 shares of the Company's common stock, pursuant to
which, officers, directors and key employees of the Company and consultants to
the Company are eligible to receive incentive and/or non-incentive stock
options. The Plan, which expires on May 14, 2005, will be administered by the
Board of Directors of the Company or a committee designated by it. Incentive
stock options granted under the Plan are exercisable for a period of up to ten
years from the date of the grant, at an exercise price not less than the fair
market value at the date of the grant, except that the term of the incentive
options granted under the Plan to a stockholder owning more than 10% of the
outstanding common stock of the Company may not exceed five years.
The Company has reserved 700,000 shares of its stock for the future grant
or exercise of options. During 1995 the Company granted 400,000 shares under
the plan at an exercise price of $9.00 per share.
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------
1994 1995
---------- -----------
<S> <C> <C>
Medical equipment ............................ $ 82,091 $ 83,986
Leasehold improvements ....................... 62,165 169,124
Office furniture ............................. 104,220 140,120
Computer and telephone equipment ............. 127,006 157,666
Motor vehicle ................................ -- 22,757
---------- -----------
375,482 573,653
Less: accumulated depreciation and amortization (71,708) (173,483)
---------- -----------
Net property and equipment ................... $303,774 $ 400,170
========== ===========
</TABLE>
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------
1994 1995
---------- -----------
<S> <C> <C>
Accounts payable ........................... $401,771 $ 932,862
Accruals and other current liabilities ..... 107,777 1,531,684
Due to affiliate ........................... 88,053 131,210
Bank overdraft ............................. 144,651 219,962
---------- -----------
Total accounts payable and accrued expenses . $742,252 $2,815,718
========== ===========
</TABLE>
F-11
<PAGE>
COMPLETE MANAGEMENT, INC.
Notes to Consolidated Financial Statements - (Continued)
For the period from April 1, 1993 to December 31, 1993
and the years ended December 31, 1994 and 1995
7. NOTES PAYABLE
In September and October 1995, the Company borrowed an aggregate of
$1,000,000 secured by all assets from three lenders (the "Secured Lenders");
$400,000 from InterEquity Capital Partners ("IECP") and $300,000 each from
Astro Communications, Inc. and William Harris & Company Employee Profit
Sharing Trust. The loans were evidenced by secured notes (the "Secured Notes")
which were due on the earlier of the consummation of the Initial Public
Offering ("IPO") or five years following their issuance. The Secured Note to
IECP carried interest at the rate of 12% per annum for the first six months,
thereafter at 14% until maturity. The other Secured Notes carried interest at
14% from issuance. In addition, the Company paid IECP a processing fee of
$12,500 and reimbursed it for costs of approximately $20,000, which were
charged to operations in the period paid. In connection with execution of the
Secured Notes, the Company issued to the Secured Lenders 27,778 common shares
which have an aggregate value of $250,000 (this original issue discount was
charged to operations over the term of the loan; $12,000 in 1995 and the
balance when the loans were paid in full) when valued at the IPO price of
$9.00 per share (See Note 13). The unamortized portion of the discount of
$237,500 at December 31, 1995 is classified as prepaid and other current
assets on the accompanying balance sheet. Each loan was pre-payable at any
time by the Company without fees, except for a prepayment fee in the case of
the loan from IECP, declining from 5% in the first year to 1% in the fifth
year, provided that no prepayment fee was due if the loan was prepaid from the
proceeds of the IPO or upon the exercise of the call. The loan from IECP was
superior to the loans from the other Secured Lenders in right of payment and
security. The loans were paid in full in January 1996 from the proceeds of the
IPO.
8. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1994 1995
------ ----------
<S> <C> <C>
Note payable to a finance company for a three year liability
insurance policy covering the Company's directors and officers.
The Company is required to remit thirty monthly payments of
$12,379 (including principal and interest) commencing in March
1996, with annual interest at 5.45% ..................... $ -- $297,500
Note payable to a finance company for the purchase of a 1995
motor vehicle. The Company is required to remit forty-eight
monthly payments of $524 (including principal and interest)
commencing in December 1995, with annual interest at 9.75% -- 20,403
------ ----------
317,903
Less: current portion ................................... -- 89,369
------ ----------
Total long-term debt ................................... $ -- $228,534
====== ==========
At December 31, 1995, future payments for long-term debt were
approximately as follows:
Year ended December 31,
1996 ............................................... $ 89,369
1997 ............................................... 124,909
1998 ............................................... 98,133
1999 ............................................... 5,492
---------
$317,903
=========
</TABLE>
F-12
<PAGE>
COMPLETE MANAGEMENT, INC.
Notes to Consolidated Financial Statements - (Continued)
For the period from April 1, 1993 to December 31, 1993
and the years ended December 31, 1994 and 1995
9. COST OF REVENUE
Cost of revenue consists of the following:
<TABLE>
<CAPTION>
Period from
April 1, 1993 to
December 31, Year Ended December 31,
----------------------------
1993 1994 1995
---------------- ------------ ------------
<S> <C> <C> <C>
Compensation/temporary held . $ 834,528 $1,396,413 $1,954,208
Equipment ................. 114,167 191,441 147,439
Medical supplies .......... 52,510 111,038 85,123
Transcription fees ........ 60,783 157,970 286,852
Insurance ................. 40,912 91,893 297,634
---------------- ------------ ------------
Total cost of revenue .... $1,102,900 $1,948,755 $2,771,256
================ ============ ============
</TABLE>
10. INCOME TAXES
The provision for income taxes on income for the period from April 1,
1993 to December 31, 1993, and for the years ended December 31, 1994 and 1995,
differs from the amount computed by applying the federal statutory rate due to
the following:
<TABLE>
<CAPTION>
Period from
April 1, 1993 to Year Ended
December 31, December 31,
---------------- ----------------
(in percentages) 1993 1994 1995
- ---------------- ---------------- ------ ------
<S> <C> <C> <C>
Statutory federal income tax rate ........... 34.0 34.0 34.0
State and local taxes, net of federal benefit . 12.9 12.9 12.9
Other ....................................... 0.1 0.1 0.1
---------------- ------ ------
Total ...................................... 47.0 47.0 47.0
================ ====== ======
</TABLE>
Income tax expense consists of the following:
<TABLE>
<CAPTION>
Period from
April 1, 1993 to
December 31, Year Ended December 31,
---------------- --------------------------------
1993 1994 1995
---------------- ------------ ------------
<S> <C> <C> <C>
Current:
Federal ..... $ 20,500 $ (6,600) $ (69,500)
State and local 20,129 5,942 13,300
---------------- ------------ ------------
40,629 (658) (56,200)
---------------- ------------ ------------
Deferred:
Federal ..... 514,500 1,544,600 1,778,500
State and local 335,600 978,500 1,139,200
---------------- ------------ ------------
850,100 2,523,100 2,917,700
---------------- ------------ ------------
Total ..... $890,729 $2,522,442 $2,861,500
================ ============ ============
</TABLE>
F-13
<PAGE>
COMPLETE MANAGEMENT, INC.
Notes to Consolidated Financial Statements - (Continued)
For the period from April 1, 1993 to December 31, 1993
and the years ended December 31, 1994 and 1995
10. INCOME TAXES - (Continued)
Deferred income taxes are the result of temporary differences between the
carrying amounts of assets and liabilities on the accrual basis used for
financial statement reporting purposes and the cash basis used for income tax
reporting. These temporary differences primarily affect accounts receivable
at December 31, 1994 and 1995. The classification of deferred income taxes
has been determined based upon the collection cycle of accounts receivable
(as more fully described in Note 3) estimated to be approximately three
years. Accordingly, deferred income tax liabilities have been accrued at the
effective tax rate of 47.0%. The following sets forth the components of
deferred tax liabilities.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1994 1995
------------ ------------
<S> <C> <C>
Current:
Accounts receivable .......... $2,371,539 $3,117,125
Less: Discount ............... (456,400) (614,306)
Accounts payable ............. (236,087) (641,821)
Original issue discount ...... -- (5,875)
Net operating loss carry forward -- (55,600)
------------ ------------
Non-current:
Accounts receivable .......... 1,933,161 4,776,693
Less: Discount ............... (284,013) (283,766)
Deferred rent ................ -- (57,151)
------------ ------------
Total non-current ........... 1,649,148 4,435,776
------------ ------------
Total ...................... $3,328,200 $6,235,299
============ ============
</TABLE>
The Company currently utilizes the cash basis method of accounting for tax
reporting purposes. This method allows the Company to defer recognition of
income for tax purposes until the actual collection of cash. Beginning with
calendar year 1997, the Company will be required to change to the accrual
method of accounting for tax purposes. As a result of this change the Company
will be unable to defer payment of taxes on reported income earned in 1997
and beyond. The tax relating to untaxed accrual basis income at December 31,
1996 will be payable over a minimum three year period beginning in 1997.
11. COMMITMENTS AND CONTINGENCIES
The Company leases various medical and office equipment ranging in terms
from one to four years, the last to expire in June 1999. Equipment rental
amounted to approximately $104,000, $141,000 and $126,000, respectively, for
the period from April 1, 1993 to December 31, 1993 and for the years ended
December 31, 1994 and 1995.
The Company leases nine offices in the New York metropolitan area with
remaining terms ranging from two months to approximately seven years, the last
to expire in August 2002. The leases generally require the Company to pay for
increases in real estate taxes and operating costs in addition to minimum
rentals. Rent expense recorded on a straight-line basis is over the full terms
of the leases, was approximately $185,000, $356,000 and $603,000,
respectively, for the period from April 1, 1993 to December 31, 1993 and the
years ended December 31, 1994 and 1995.
F-14
<PAGE>
COMPLETE MANAGEMENT, INC.
Notes to Consolidated Financial Statements - (Continued)
For the period from April 1, 1993 to December 31, 1993
and the years ended December 31, 1994 and 1995
11. COMMITMENTS AND CONTINGENCIES - (Continued)
Future minimum lease payments under the above leases, excluding real
estate taxes and operating cost escalations, are as follows:
<TABLE>
<CAPTION>
<S> <C>
Year Ending December 31:
1996 ...................... $ 571,000
1997 ...................... 471,000
1998 ...................... 392,000
1999 ...................... 157,000
2000 ...................... 154,000
Thereafter ................ 449,000
------------
Total minimum lease payments $2,194,000
============
</TABLE>
Other income included in the statements of income represents sub-rental
income received on a monthly basis which was discontinued during 1994.
During the latter part of 1995 and early 1996 the Company entered into a
series of employment agreements with its Chief Executive Officer and certain
other Officers and key employees. The agreements have a term of approximately
3 years expiring in 1999 with an aggregate annual compensation of
approximately $1,500,000. In addition and in connection with the execution of
these agreements, the Company intends to grant approximately 325,000 options
at the then fair market value, certain of which will be subject to
shareholder approval.
As of December 8, 1995 an Omnibus Settlement Agreement (the "Settlement
Agreement") was entered into among CMI, MMI, Steven Rabinovici, David
Jacaruso, Dennis Shields, Dr. Lawrence Shields (the "Interested
Shareholders") and Gail Shields ("Ms. Shields"), the former wife of Dr.
Lawrence Shields. Under the terms of the Settlement Agreement, as revised on
December 21, 1995, CMI arranged for the sale of 117,187 MMI common shares
owned by Ms. Shields at a net price to Ms. Shields of $5.50 per share and
obtained Ms. Shields' release as the maker of a promissory note for a bank
loan whose proceeds were used by GMMS (which has previously been satisfied by
GMMS) and as lessee of certain premises occupied by GMMS, which lease has
been assigned to CMI. There was no material impact on the financial
statements of CMI or MMI as a result of the foregoing settlement.
12. RELATED PARTY TRANSACTIONS
Since the commencement of operations all of the Company's revenue has
been received from the PC, a medical practice which is 95% owned by a
neurologist who is also a founder and principal stockholder in the Company.
The loss of this customer, or the curtailment of its practice as a result of
the death or disability of its principal stockholder, could have a material
adverse effect on the Company's results of operations. The Company is the
beneficiary of key-man life insurance policies aggregating $5,000,000 insuring
the life of the principal stockholder of the PC.
For the years ended December 31, 1994 and 1995, the Company paid an
entity controlled by a principal stockholder of the Company approximately
$22,300 and $45,000, respectively, to provide design services and to acquire
furniture and furnishings for the Company.
Amounts due to an affiliate of approximately $88,000 and $131,000 at
December 31, 1994 and 1995 respectively, reflect primarily cash advances made
by the affiliate to the Company and are included in accounts payable and
accrued expenses as they are due on demand.
F-15
<PAGE>
COMPLETE MANAGEMENT, INC.
Notes to Consolidated Financial Statements - (Continued)
For the period from April 1, 1993 to December 31, 1993
and the years ended December 31, 1994 and 1995
12. RELATED PARTY TRANSACTIONS - (Continued)
During 1993, 1994 and 1995 the Company paid, to a related party, all real
estate and other costs for an office occupied by the PC. These costs were
approximately $9,000 per year.
In connection with management services provided to the PC, the Company
has informal arrangements with three stockholders and an unrelated third party
under which they act as general financial advisors on matters pertaining to
the business and operations of the Company. Consulting fees for the period
from April 1, 1993 to December 31, 1993 and for the years ended December 31,
1994 and 1995 amounted to approximately $292,000 ($205,000 to the related
parties), $313,000 ($200,000 to the related parties) and $193,000 ($110,000 to
the related parties), respectively. Such arrangements with the three
stockholders terminated as of the effective date of the Merger, at which time
they became employees of the Company.
13. SUBSEQUENT EVENTS
In January 1996, the Company completed an initial public offering of
2,000,000 common shares at $9.00 per share and received net proceeds of
$13,480,000. Estimated costs incurred with respect to the registration of the
common shares in addition to the underwriter's commission and expenses and
amount to $3,520,000. In addition, the Company sold to the underwriter, or its
designee, at a price of $.001 per Representative's Warrant, up to 200,000
Warrants entitling the holders thereof to purchase 200,000 common shares of
the Company at a purchase price of $10.80 per share for a period of four years
commencing one year from the date of the IPO.
In January 1996, the Company completed the Merger. The terms of the
Merger provided that MMI shareholders received .778 CMI Common Shares for each
MMI Common share which they held based upon an IPO price of $9.00 per share
(see above). The holders of outstanding options to purchase MMI common shares
received 93,281 CMI Common Shares based upon the difference between their
aggregate option exercise prices and the value thereof at $7.00 per share
divided by the IPO price. In January 1996, the Company issued 2,211,953 common
shares to effect the merger including shares to be issued in satisfaction of
outstanding options and warrants to purchase MMI shares. The excess of
purchase price over net assets acquired as a result of the acquisition,
estimated at $8,856,000, will be amortized over a period not to exceed twenty
years.
In March 1996, the Company sold $2,000,000 of Convertible Subordinated
Notes (the "Notes") to accredited investors. The notes bear interest at 8%,
payable quarterly. The entire principal is due five years from the date of
issuance. Holders of the Notes may convert all or any portion into common
shares of the Company at $9.00 per share, subject to adjustment for stock
splits, dividends, recapitalization, etc. Under certain circumstances, such as
a change in control, holders of the Notes may require the company to redeem
the Notes at 125% of the original principal amount. The Notes are subordinate
in right of payment to certain future indebtedness which may be incurred by
the company. The purchasers and/or affiliates have an option for 120 days to
acquire an additional $3,000,000 of Notes from the Company under the same
terms and conditions.
14. GOVERNMENT REGULATION
The health-care industry is highly regulated by numerous laws,
regulations, approvals and licensing requirements at the federal, state and
local levels. Regulatory authorities have very broad discretion to interpret
and enforce these laws and promulgate corresponding regulation. The Company
believes that its operations under agreements pursuant to which it is
currently providing services are in material compliance with these laws and
regulations. However, there can be no assurance that a court or regulatory
authority will not determine that the Company's operations (including
arrangements with new or existing clients) violate applicable laws or
regulations. If the Company's interpretation of the relevant laws and
regulations is inaccurate, the Company's business and its prospects could be
materially and adversely affected. The following are among the laws and
regulations
F-16
<PAGE>
COMPLETE MANAGEMENT, INC.
Notes to Consolidated Financial Statements - (Continued)
For the period from April 1, 1993 to December 31, 1993
and the years ended December 31, 1994 and 1995
14. GOVERNMENT REGULATION - (Continued)
that affect the Company's operations and development activities:
corporate practice of medicine; fee splitting; anti-referral laws;
anti-kickback laws; certificates of need; regulation of diagnostic imaging;
no-fault insurance; worker's compensation; and proposed healthcare reform
legislation.
15. UNAUDITED PRO FORMA INFORMATION
The pro forma balance sheet at December 31, 1995 and the pro forma
adjustments to the statement of stockholders' equity for the year then ended
have been adjusted to reflect the sale of 2,000,000 common shares at $9.00 per
share through the initial public offering discussed above (Note 13).
F-17
<PAGE>
COMPLETE MANAGEMENT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31, March 31,
-------------- -------------
1995 1996
-------------- -------------
(Audited) (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents ...................................... $ -- $ 2,539,679
Marketable securities available-for-sale ....................... -- 9,599,316
Notes receivable from a related party .......................... -- 1,985,641
Accounts receivable:
From a related party, less allowances of $-0- and $609,000,
respectively and net of unamortized discount of $1,307,034
and $1,575,454, respectively .............................. 5,325,147 8,952,211
Other ........................................................ -- 424,498
-------------- -------------
5,325,147 9,376,709
Prepaid expenses and other current assets ...................... 356,097 514,049
-------------- -------------
Total current assets ...................................... 5,681,244 24,015,394
Long-term portion of notes receivable from a related party .......... -- 134,492
Long-term portion of accounts receivable from a related party, net of
unamortized discount of $603,758 and $731,998, respectively ....... 9,559,424 16,473,716
Property and equipment, net ......................................... 400,170 4,803,345
Excess of cost over net assets acquired, less accumulated amortization
of $108,000 ....................................................... -- 8,567,088
Deferred registration costs ......................................... 1,985,446 --
Deferred costs, net of amortization of $65,000 ...................... -- 95,959
Other assets ........................................................ 233,777 264,294
-------------- -------------
Total assets .............................................. $17,860,061 $54,354,288
============== =============
Liabilities and shareholders' equity
Current liabilities:
Notes payable .................................................. $ 1,000,000 $ --
Accounts payable and accrued expenses .......................... 2,937,313 2,295,565
Income taxes payable ........................................... 39,371 126,034
Deferred income taxes -- current ............................... 1,799,523 4,214,450
Current portion of long-term debt .............................. 89,369 223,468
Current portion of obligations under capital leases ............ -- 380,569
-------------- -------------
Total current liabilities ................................. 5,865,576 7,240,086
Deferred income taxes -- non-current ................................ 4,435,776 5,902,100
Long-term debt ...................................................... 228,534 2,339,241
Obligations under capital leases .................................... -- 1,251,846
Commitments and contingencies
Shareholders' equity:
Preferred shares, $.001 par value:
Authorized 2,000,000 shares
Issued and outstanding, none ................................. -- --
Common shares, $.001 par value:
Authorized, 20,000,000 shares
Issued and outstanding, 2,980,573 and 7,438,298 shares,
respectively ............................................... 2,981 7,438
Paid-in capital ................................................ 249,972 29,426,335
Retained earnings .............................................. 7,077,222 8,187,242
-------------- -------------
Total shareholders' equity ................................... 7,330,175 37,621,015
-------------- -------------
Total liabilities and shareholders' equity ................ $17,860,061 $54,354,288
============== =============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
F-18
<PAGE>
COMPLETE MANAGEMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1995 1996
------------ ------------
<S> <C> <C>
Revenue:
From a related party ......................................... $3,000,000 $5,078,008
Other ........................................................ -- 122,325
Interest discount ............................................ (487,196) (515,176)
------------ ------------
Net revenue ....................................................... 2,512,804 4,685,157
Cost of revenue ................................................... 566,904 1,724,845
General and administrative expenses ............................... 652,557 1,312,848
Fees paid to related parties ...................................... 37,250 10,425
------------ ------------
1,256,711 3,048,118
------------ ------------
Operating income .................................................. 1,256,093 1,637,039
Other income (expense):
Interest discount included in income ......................... 302,334 587,076
Interest and dividend income ................................. -- 115,633
Interest expense ............................................. -- (307,670)
Gain on sale of marketable securities ........................ -- 158,442
------------ ------------
Net income before provision for income taxes ...................... 1,558,427 2,190,520
Provision for income taxes ........................................ 732,400 1,080,500
------------ ------------
Net income ........................................................ $ 826,027 $1,110,020
============ ============
Net income per share .............................................. $ 0.28 $ 0.15
============ ============
Weighted average number of common shares and equivalents outstanding 2,980,573 7,438,298
============ ============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
F-19
<PAGE>
COMPLETE MANAGEMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three months ended March 31,
-------------------------------
1995 1996
------------- --------------
<S> <C> <C>
Operating activities
Net income ......................................................... $ 826,027 $ 1,110,020
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization ................................. 72,915 350,490
Provision for deferred income taxes ........................... 726,000 1,077,250
Amortization of discount of accounts receivable, net .......... 184,862 (71,900)
Gain on sale of marketable securities ......................... -- (158,442)
Write-off of original issue discount .......................... -- 237,500
Changes in operating assets and liabilities:
Notes receivable from a related party .................... -- (1,589,550)
Accounts receivable ...................................... (1,828,800) (3,474,496)
Prepaid expenses and other current assets ................ -- (239,034)
Accounts payable and accrued expenses .................... 99,130 (1,161,507)
Other assets ............................................. (1,047) (36,000)
Income taxes payable ..................................... 6,400 409
------------- --------------
Net cash provided by (used in) operating activities ................ 85,487 (3,955,260)
------------- --------------
Investing activities
Purchase of property and equipment ................................. (83,144) (378,973)
Purchase of marketable securities .................................. -- (15,100,094)
Proceeds from sale of marketable securities ........................ -- 5,781,160
------------- --------------
Net cash used in investing activities .............................. (83,144) (9,697,907)
------------- --------------
Financing activities
Proceeds from issuance of common stock, net of underwriter's
commission and expenses .......................................... -- 16,380,000
Payments of registration costs of common stock ..................... -- (1,166,992)
Proceeds from long-term debt ....................................... -- 2,000,000
Bank overdraft ..................................................... (2,343) --
Cash acquired in merger ............................................ -- 103,631
Repayment of notes payable ......................................... -- (1,000,000)
Principal payments on long-term debt ............................... -- (34,911)
Repayment of capital lease obligations ............................. -- (88,882)
------------- --------------
Net cash (used in) provided by financing activities ................ (2,343) 16,192,846
------------- --------------
Net increase in cash and cash equivalents .......................... -- 2,539,679
Cash and cash equivalents, beginning of period ..................... -- --
------------- --------------
Cash and cash equivalents, end of period ........................... $ -- $ 2,539,679
============= ==============
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest ...................................................... $ -- $ 64,839
Taxes ......................................................... -- 2,842
Non-cash financing activities:
Capital stock issued for acquisition .......................... $ -- $ 15,266,463
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
F-20
<PAGE>
COMPLETE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 1996
1. BASIS OF PRESENTATION AND OPERATIONS
The accompanying consolidated financial statements are unaudited and in
the opinion of management, reflect all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation. Operating
results for the three month period ended March 31, 1996 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1996. For further information, refer to the financial statements and footnotes
thereto included in the Complete Management, Inc. ("CMI" or the "Company")
audited financial statements for the year ended December 31, 1995.
The Company's primary client, Greater Metropolitan Medical Services
("GMMS") is a multi-specialty medical practice group which provides
evaluations, diagnosis and treatment in the New York metropolitan area.
Currently, the practice's primary medical focus is to treat patients with
injury-related conditions who carry insurance with various different insurance
carriers under the Workers' Compensation and No-fault guidelines.
The following unaudited tabulation sets forth the operating results of
GMMS for the three months ended March 31, 1995 and 1996.
<TABLE>
<CAPTION>
Three months ended Three months ended
March 31, 1995 March 31, 1996
------------------------------------------- -------------------------------------------
General General
Medical Diagnostic Total Medical Diagnostic Total
Services Imaging GMMS Services Imaging GMMS
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Unaudited:
Services rendered ......... $4,529,253 $1,577,028 $6,106,281 $5,044,019 $2,052,998 $7,097,017
Contractual allowances .... (382,723) (68,981) (451,704) (448,856) (176,753) (625,609)
------------ ------------ ------------ ------------ ------------ ------------
Net medical service fees .. 4,146,530 1,508,047 5,654,577 4,595,163 1,876,245 6,471,408
------------ ------------ ------------ ------------ ------------ ------------
Less expenses:
Medical personnel payroll . 369,460 105,711 475,171 688,930 82,802 771,732
Other ................... 101,605 3,774 105,379 342,652 26,498 369,150
------------ ------------ ------------ ------------ ------------ ------------
Total expenses ....... 471,065 109,485 580,550 1,031,582 109,300 1,140,882
------------ ------------ ------------ ------------ ------------ ------------
Owner physician payroll and
entity income ........ 675,465 -- 675,465 252,518 -- 252,518
------------ ------------ ------------ ------------ ------------ ------------
Management fee ............ $3,000,000 $1,398,562 $4,398,562 $3,311,063 $1,766,945 $5,078,008
============ ============ ============ ============ ============ ============
</TABLE>
RELATIONSHIP BETWEEN THE COMPANY AND GMMS (UNAUDITED)
GENERAL
GMMS' operations are limited to the following activities:
(1) Rendering services to patients;
(2) Payment of compensation to both the owner physician and other
medical personnel; and
(3) Payment of miscellaneous expenses incidental to the rendering of
the medical services.
As more fully discussed below, the Company's operations as they relate to
GMMS include the following activities:
1) Patient scheduling, record transcription, non-clinical intake
examination, and insurance verification;
2) Billing and collection for all patient medical services rendered;
and
3) Any other activity necessary to ensure the proper delivery of
medical service.
F-21
<PAGE>
COMPLETE MANAGEMENT, INC.
Notes to Condensed Consolidated Financial Statements - (Continued)
(Unaudited)
March 31, 1996
1. BASIS OF PRESENTATION AND OPERATIONS - (Continued)
ECONOMICS
The activities of GMMS are limited to the rendering of medical services,
and accordingly, its principle asset is the accounts receivable due from the
third-party payors and/or its patients (minimal services are paid for by the
patient at the time service is rendered). Further, substantially all of the
non-clinical activities of GMMS, as defined by the management agreement, are
performed by the Company. GMMS' principal liabilities are the amount due to
the owner physician and other medical personnel for services and the fee due
to the Company under the management agreement.
The tabulation above reflects those dynamics in that revenue generated by
GMMS in the amount of $6,106,281 and $7,097,017 for the three months ended
March 31, 1995 and 1996, respectively, has been allocated to the owner
physician and medical personnel payroll and management fee due to the
Company.
Finally, due to the fact that the management fee is paid by GMMS, through
an assignment of its accounts receivable, and the doctors' compensation is
paid currently, GMMS' cash flows are principally a pass through of cash
received for the delivery of services rendered and cost of those services.
Notes receivable from a related party included in the accompanying
unaudited balance sheet, represents working capital advances made to GMMS
which are due on demand.
EXCESS OF COST OVER NET ASSETS ACQUIRED
For purposes of amortizing the excess of cost over net assets acquired
(goodwill) arising from the acquisition and merger of Medical Management,
Inc. ("MMI") (as described in Note 2) the Company's policy is to record
goodwill resulting from the merger based on appraisals, evaluations and
estimates of the fair value of the assets acquired. Until such time that
these evaluations are completed, the Company is amortizing goodwill on the
straight-line method over a 20-year period. The value of goodwill and the
period of amortization of goodwill may be adjusted in future periods when the
fair value and useful lives of the assets acquired are determined.
ACCOUNTING FOR IMPAIRMENTS IN LONG-LIVED ASSETS
The Financial Accounting Standards Board has issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
Being Disposed Of", which the Company adopted on January 1, 1996. This
statement requires that long-lived assets and identifiable intangibles be
reviewed for impairment whenever events or changes in circumstances indicate
the carrying amounts of the assets may not be recoverable. In evaluating
recoverability, the Company estimates the future cash flows expected to
result from the assets and its eventual disposition. If the sum of future
undiscounted cash flows is less than the carrying amount of the asset, an
impairment loss is recognized. No such loss was recognized in the March 31,
1996 financial statements.
STOCK OPTION PLAN
The Financial Accounting Standards Board has issued Statement of
Accounting Standard No. 123 "Accounting for Stock-based Compensation" ("SFAS
123"). This statement establishes financial accounting and reporting
standards for stock-based employee compensation plans. The requirements of
SFAS 123 are effective for transactions entered into in fiscal years that
begin after December 15, 1995, though they may be adopted upon issuance. The
disclosure requirements of SFAS 123 are effective for financial statements
for fiscal years beginning after December 15, 1995. The adoption of this
statement had no material effect on the March 31, 1996 financial statements.
F-22
<PAGE>
COMPLETE MANAGEMENT, INC.
Notes to Condensed Consolidated Financial Statements - (Continued)
(Unaudited)
March 31, 1996
2. INITIAL PUBLIC OFFERING AND ACQUISITION OF MEDICAL MANAGEMENT, INC.
On January 3, 1996, the Company completed an Initial Public Offering (the
"IPO") of 2,000,000 common shares at $9.00 per share and received proceeds net
of underwriter's commission and expenses of $16,380,000. Costs incurred with
respect to the registration of the common shares in addition to the
underwriter's commission and expenses amounted to $2,468,000. In addition, the
Company sold to the underwriter, or its designee, at a price of $.001 per
Representative's Warrant, up to 200,000 Warrants entitling the holders thereof
to purchase 200,000 common shares of the Company at a purchase price of $10.80
per share for a period of four years commencing one year from the date of the
IPO.
Simultaneously, upon the completion of the IPO, the Company acquired
Medical Management, Inc., through a merger, as a wholly-owned subsidiary of
CMI. MMI is principally engaged in providing diagnostic imaging equipment and
billing and management services thereto. Currently, MMI operates six
diagnostic imaging units for two clients. MMI has also entered into two
additional agreements for diagnostic imaging units at two metropolitan area
hospitals. GMMS is the primary client of MMI and the sole client of CMI. The
terms of the merger provided that MMI shareholders receive .778 CMI common
shares for each common share which they held based upon the IPO price of $9.00
per share. The holders of outstanding options to purchase MMI common shares
received 93,281 CMI common shares based upon the difference between their
aggregate option exercise prices and the value thereof at $7.00 per share
divided by the IPO price. In January 1996, CMI issued 2,211,953 common shares
to effect the merger including shares to be issued in satisfaction of
outstanding options and warrants to purchase the MMI shares. Upon the closing
of CMI's initial public offering on January 3, 1996, the President and Chief
Executive Officer and Vice President and Chief Operating Officer of MMI became
offi- cers of CMI.
The following table summarizes selected unaudited pro forma financial
data for the three months ended March 31, 1995. The amounts shown have been
prepared to illustrate the effect of the consummation of the acquisition as if
the transaction had taken place on January 1, 1995.
<TABLE>
<CAPTION>
Three months ended
March 31, 1995 Pro forma Pro forma
----------------------------
CMI MMI Total Adjustments Total
------------ ------------ ------------ -------------- ------------
<S> <C> <C> <C> <C> <C>
Revenue ................................ $3,000,000 $1,738,018 $4,738,018 $ -- $4,738,018
Interest discount ...................... (487,000) -- (487,000) (171,000) (1) (658,000)
------------ ------------ ------------ -------------- ------------
Net revenue ............................ $2,513,000 $1,738,018 $4,251,018 $ (171,000) $4,080,018
============ ============ ============ ============== ============
Income before provision for income taxes . $1,558,427 $ 561,346 $2,119,773 $ (272,444) (2) $1,847,329
Provision for income taxes ............. 732,000 267,000 999,000 (79,800) (3) 919,200
------------ ------------ ------------ -------------- ------------
Net income ............................. $ 826,427 $ 294,346 $1,120,773 $ (192,644) $ 928,129
============ ============ ============ ============== ============
Net income per share ................... $ 0.12
Weighted average number of common shares and
equivalents outstanding ............... 7,438,298
============
Pro forma adjustments:
(1) Reflects an interest discount taken for the presumed collection cycle of MMI revenues over a two-year
period at an interest rate of 12% which is management's estimate of its incremental borrowing rate .. $ (171,000)
============
(2) Adjustments consist of the following:
(a) Reflects an interest discount taken for the presumed collection cycle of MMI revenues over a two
year period at an interest rate of 12%, which is management's estimate of its incremental
borrowing rate .................................................................................... $ (171,000)
(b) Reflects increased costs of employment agreements ................................................ (144,000)
(c) Reflects the amortization on the straight-line method over a 20-year period of the excess of cost
over net assets acquired recorded at approximately $8,676,000 ..................................... (108,444)
(d) Represents interest income earned as a result of the amortization over a two-year period of the
interest discount in (1) above .................................................................... 151,000
------------
Total adjustments .................................................................................... $ (272,444)
============
(3) Assumes an effective tax rate after adjustments of 47% ............................................. $ (79,800)
============
</TABLE>
F-23
<PAGE>
COMPLETE MANAGEMENT, INC.
Notes to Condensed Consolidated Financial Statements - (Continued)
(Unaudited)
March 31, 1996
3. ACCOUNTS RECEIVABLE
The Company's accounts receivables are generated from its clients (the
"Clients") under management contracts whereby the Company is entitled to
management fees for practice management services it performed or an
agreed-upon fee for each medical procedure performed.
As collateral for its fee revenue receivable from its primary client,
GMMS, the Company has a security interest in GMMS' trade receivables.
In 1996, as part of the Company's periodic review for potential
impairment of all third-party payor receivables prior to the acceptance for
payment of its fee, the Company determined that based upon its Clients'
historical collection experience and the results of the review, its Clients
had receivables substantially in excess of the amounts owed to the Company
after giving effect to their collectability. Accordingly, this factor along
with the fact that GMMS assigns it receivables to the Company on a full
recourse basis in payment of its fees indicates that recognition of bad debts
is not required.
Management has determined, based on actual results and industry factors,
that CMI's and MMI's receivables have collection cycles of approximately three
years and two years, respectively, and accordingly, have been reflected in the
accompanying financial statements on a discounted basis (8% per annum in 1996
and 12% per annum in 1995). Management believes that its experience and that
of the Company is a good indication of the timing of the collection process.
Because numerous factors affect the timing and the manner in which their
receivables are collected (i.e., government regulations, etc.), it is the
Company's policy to periodically assess the collection of its receivables. As
a result, the Company's estimate of its incremental borrowing rate and
collection period may change.
4. NOTES PAYABLE
In September and October 1995, the Company borrowed an aggregate of
$1,000,000 secured by all assets from three lenders (the "Secured Lenders").
The loans were evidenced by secured notes (the "Secured Notes") which were due
on the earlier of the consummation of the IPO or five years following their
issuance. The Secured Notes carried interest rates of 12% to 14% per annum. In
addition, the Company paid a processing fee of $12,500 and reimbursed them for
costs of approximately $20,000, which were charged to operations in the period
paid. In connection with execution of the Secured Notes, the Company issued to
the Secured Lenders 27,778 common shares which have an aggregate value of
$250,000 (this original issue discount was charged to operations over the term
of the loan; $12,500 in 1995 and $237,500 in January 1996) when valued at the
IPO price of $9.00 per share. The unamortized portion of the discount of
$237,500 at December 31, 1995 was classified as prepaid and other current
assets on the accompanying balance sheet. The Secured Notes were paid in full
in January 1996 from the proceeds of the IPO.
In March 1996, the Company sold $2,000,000 of Convertible Subordinated
Notes (the "Notes") to accredited investors. The notes bear interest at 8%,
payable quarterly. The entire principal is due five years from the date of
issuance. Holders of the Notes may convert all or any portion into common
shares of the Company at $9.00 per share, subject to adjustment for stock
splits, dividends, recapitalization, etc. Under certain circumstances, such as
a change in control, holders of the Notes may require the Company to redeem
the Notes at 125% of the original principal amount. The Notes are subordinate
in right of payment to certain future indebtedness which may be incurred by
the Company. The purchasers and/or affiliates have an option for 120 days to
acquire an additional $3,000,000 of Notes from the Company under the same
terms and conditions.
F-24
<PAGE>
COMPLETE MANAGEMENT, INC.
Notes to Condensed Consolidated Financial Statements - (Continued)
(Unaudited)
March 31, 1996
5. SUBSEQUENT EVENTS
On April 2, 1996, options for an aggregate of 835,000 shares, exercisable
at $8.375 price during a ten-year period were granted to 8 officers and 12
other employees and consultants of the Company. These options will be
exercisable for one-third of the shares covered thereby as of the date of the
grant and for an additional one- third of the shares covered thereby each year
thereafter. In addition, options for 20,000 shares were granted to each of the
Company's two outside directors. Options granted to outside directors are
exercisable for 50% of the shares covered immediately upon grant and for the
remainder of the shares following one year's service.
On April 24, 1996, the common shares of the Company were approved for
listing on the American Stock Exchange under the symbol "CMI" and began
trading on May 6, 1996.
On May 1, 1996, the Company filed a registration statement with the
Securities and Exchange Commission for $30,000,000 Convertible Subordinated
Debentures (the "Debentures") due 2003 at an interest rate ranging from 7 to 8
1/2 %, payable semi-annually on August 15 and February 15. The debentures are
convertible into common shares, par value $.001 per share, of the Company at
any time prior to maturity, unless previously redeemed, at a conversion price
of 120% to 130% of the closing price of the common shares on the American
Stock Exchange on the effective date of the offering, subject to adjustment in
certain events.
6. NET INCOME PER SHARE
Net income per common share has been computed by dividing net income by
the weighted average number of common shares outstanding during the periods.
F-25
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Medical Management, Inc.:
We have audited the accompanying balance sheet of Medical Management, Inc. (a
New York Corporation) as of December 31, 1995, and the related statements of
income, stockholders' equity and cash flows for the year then ended. 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 audit. The financial statements of Medical Management, Inc. as of
December 31, 1993 and 1994, were audited by other auditors whose report dated
March 21, 1995, except for paragraph 3 of Note 4 and paragraph 2 of Note 13
as to which the date is April 17, 1995, expressed an unqualified opinion on
those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Medical Management, Inc. as
of December 31, 1995 and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting
principles.
As explained in Note 3 to the financial statements, effective January 1,
1995, the Company changed its method of accounting for certain accounts
receivable.
ARTHUR ANDERSEN LLP
New York, New York
April 26, 1996
F-26
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Medical Management, Inc.
We have audited the accompanying balance sheet of Medical Management, Inc.
(formerly MRI Management Associates, Inc.) (the "Company") as of December 31,
1994 and the related statements of income, stockholders' equity and cash
flows for the years ended December 31, 1993 and 1994. 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 audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe 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 Management, Inc.
(formerly MRI Management Associates, Inc.) at December 31, 1994, and the
results of its operations and its cash flows for the years ended December 31,
1993 and 1994, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
New York, New York
March 21, 1995, except for paragraph 3
of Note 4 and paragraph 2 of Note 13,
as to which the date is April 17, 1995
F-27
<PAGE>
MEDICAL MANAGEMENT, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31,
-----------------------------
1994 1995
------------ -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents ....................................... $ 92,813 $ 103,631
Marketable securities available-for-sale ........................ 905,157 121,940
Notes receivable from a related party ........................... -- 166,745
Accounts receivable:
From a related party, less allowances of $434,000 and $609,000,
respectively, and net of unamortized discount of $407,300
at 1995 .................................................... 2,461,667 3,478,204
Other, less allowances of $57,000 and $-0-, respectively ..... 363,542 429,875
------------ -------------
2,825,209 3,908,079
Prepaid expenses and other current assets, less allowances of
$9,000 and $8,000, respectively .............................. 240,660 156,418
Amounts due from related parties ................................ 20,386 131,210
------------ -------------
Total current assets ............................................ 4,084,225 4,588,023
Long-term portion of notes receivable from a related party ........ -- 167,841
Long-term portion of accounts receivable:
From a related party, less allowances of $370,000 and $-0-,
respectively, and net of unamortized discount of $-0- and
$61,300, respectively ......................................... 2,097,000 3,511,337
Other, less allowances of $48,000 and $-0- respectively ......... 310,000 --
------------ -------------
2,407,000 3,511,337
Amounts due from related parties .................................. 195,997 195,997
Property and equipment, net ....................................... 2,793,752 4,256,732
Deferred registration costs ....................................... -- 699,240
Deferred costs, net of amortization of $21,040 and $55,000,
respectively .................................................... 195,463 40,020
Deposits .......................................................... 40,900 60,013
------------ -------------
Total assets .................................................... $9,717,337 $13,519,203
============ =============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses (including consulting fees
payable to related party of approximately $36,000 and $-0-,
respectively) ................................................. $ 435,934 $ 1,334,958
Income taxes payable ............................................ 81,430 86,255
Deferred income taxes -- current ................................ 1,084,000 1,473,000
Current portion of long-term debt ............................... 326,289 110,084
Current portion of obligations under capital leases ............. 19,105 370,439
------------ -------------
Total current liabilities ....................................... 1,946,758 3,374,736
Deferred income taxes -- non-current .............................. 1,041,000 1,331,000
Long-term debt .................................................... 279,716 169,633
Obligations under capital leases .................................. 94,457 1,350,857
Commitments and contingencies
Stockholders' equity:
Common stock, $.001 par value:
Authorized, 20,000,000 shares
Issued and outstanding, 3,010,000 shares at 1994 and 3,040,000
shares at 1995 ............................................. 3,010 3,040
Additional paid-in capital ...................................... 4,996,826 5,064,296
Retained earnings ............................................... 1,431,546 2,212,635
Unrealized gain (loss) on marketable securities available-for-sale (75,976) 13,006
------------ -------------
Total stockholders' equity ...................................... 6,355,406 7,292,977
------------ -------------
Total liabilities and stockholders' equity ................... $9,717,337 $13,519,203
============ =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-28
<PAGE>
MEDICAL MANAGEMENT, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------
1993 1994 1995
------------ ------------ ------------
<S> <C> <C> <C>
Revenue:
From a related party ............................ $3,278,629 $5,193,294 $5,989,852
Other ........................................... -- 856,018 1,297,089
Interest discount ............................... -- -- (701,874)
------------ ------------ ------------
3,278,629 6,049,312 6,585,067
Cost of revenue ................................... 760,750 1,220,516 2,791,839
General and administrative expenses ............... 1,170,642 1,852,070 2,382,494
Provision for uncollectible accounts receivable:
From a related party ............................ 107,000 397,000 --
Other ........................................... -- 105,000 --
------------ ------------ ------------
2,038,392 3,574,586 5,174,333
------------ ------------ ------------
Operating income .................................. 1,240,237 2,474,726 1,410,734
Other income (expense):
Interest discount included in income ............ -- -- 650,992
Interest and dividend income .................... 43,033 133,230 119,442
Other income .................................... 29,108 24,879 29,684
Interest expense ................................ (41,291) (133,789) (333,898)
(Loss) gain on sale of marketable securities .... -- (26,512) 14,812
------------ ------------ ------------
Income before provision for income taxes and
cumulative effect of change in accounting
principle ....................................... 1,271,087 2,472,534 1,891,766
Provision for income taxes ........................ 925,000 1,171,000 889,000
------------ ------------ ------------
Income before cumulative effect of change in
accounting principle ............................ 346,087 1,301,534 1,002,766
Cumulative effect of change in accounting principle
net of income tax benefit of $196,000 .......... -- -- 221,677
------------ ------------ ------------
Net income ........................................ $ 346,087 $1,301,534 $ 781,089
============ ============ ============
Income before cumulative effect of change in
accounting principle per share .................. $ 0.33
Cumulative effect of change in accounting principle
net of tax benefit per share .................... (0.07)
------------
Net income per share .............................. $ 0.43 $ 0.26
============ ============
Historical income before provision for income taxes . $1,271,087
Unaudited pro forma information:
Pro forma adjustment for officers compensation .. 126,000
------------
Pro forma income before income taxes ............ 1,145,087
Pro forma provision for income taxes ............ 570,000
------------
Pro forma net income .............................. $ 575,087
============
Pro forma net income per share .................... $ 0.26
============
Pro forma amounts assuming the discounting of certain
accounts receivable is applied retroactively: ...
Pro forma net income .............................. $ 553,902 $1,211,459 $1,002,766
============ ============ ============
Pro forma net income per share .................... $ 0.25 $ 0.40 $ 0.33
============ ============ ============
Weighted average number of common shares and
equivalents outstanding ......................... 2,185,062 3,008,329 3,035,000
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-29
<PAGE>
MEDICAL MANAGEMENT, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unrealized
gain (loss) on
marketable
Additional securities
Common paid-in available- Retained
stock capital for-sale earnings Total
-------- ------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1992 ............ $2,000 $ -- $ -- $ 1,214,617 $ 1,216,617
Net income for the year ended December 31,
1993 ................................... -- -- -- 346,087 346,087
Distributions to stockholders during the
year ended December 31, 1993 ........... -- -- -- (317,420) (317,420)
Deferred financing charge representing the
estimated fair value ascribed to shares
contributed by stockholders ............ -- 40,000 -- -- 40,000
Proceeds from issuance of 1,000,000 shares
of common stock of $.001 par value in an
initial public offering ................ 1,000 4,999,000 -- -- 5,000,000
Shares issuance expenses ................ -- (1,180,436) -- -- (1,180,436)
Undistributed retained earnings as of
effective date of initial public offering -- 1,113,272 -- (1,113,272) --
Unrealized loss on marketable securities . -- -- (213) -- (213)
-------- ------------- -------------- ------------- -------------
Balance at December 31, 1993 ............ 3,000 4,971,836 (213) 130,012 5,104,635
Net income for the year ended December 31,
1994 ................................... -- -- -- 1,301,534 1,301,534
Unrealized loss on marketable securities . -- -- (75,763) -- (75,763)
Issuance of 10,000 shares of common stock
of $.001 par value ..................... 10 24,990 -- -- 25,000
-------- ------------- -------------- ------------- -------------
Balance at December 31, 1994 ............ 3,010 4,996,826 (75,976) 1,431,546 6,355,406
Net income for the year ended December 31,
1995 ................................... -- -- -- 781,089 781,089
Unrealized gain on marketable securities . -- -- 88,982 -- 88,982
Issuance of 30,000 shares of common stock
of $.001 par value ..................... 30 67,470 -- -- 67,500
-------- ------------- -------------- ------------- -------------
Balance at December 31, 1995 ............ $3,040 $ 5,064,296 $ 13,006 $ 2,212,635 $ 7,292,977
======== ============= ============== ============= =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-30
<PAGE>
MEDICAL MANAGEMENT, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------------
1993 1994 1995
------------- ------------- -------------
<S> <C> <C> <C>
Operating activities
Net income ................................................. $ 346,087 $ 1,301,534 $ 781,089
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization ............................ 9,242 327,462 928,385
Provision for deferred income taxes ...................... 821,000 1,152,000 875,000
Discount of accounts receivable, net of amortization ..... -- -- 50,882
Provision for (recovery of) uncollectible accounts
receivable ............................................. 107,000 502,000 (300,000)
Non cash expense related to issuance of common stock ..... -- 25,000 67,500
Non cash financing charge ................................ 40,000 -- --
Loss (gain) on sale of marketable securities ............. -- 26,512 (14,812)
Cumulative effect on prior year (to December 31, 1994)
of implementing discounting of accounts receivable .... -- -- 221,677
Changes in operating assets and liabilities:
Notes receivable from a related party ................. -- -- (334,586)
Accounts receivable ................................... (726,310) (3,432,969) (2,355,766)
Prepaid expenses and other current assets ............. (44,097) (187,389) 84,242
Amounts due from related parties ...................... (3,694) (212,689) (110,824)
Accounts payable and accrued expenses ................. 54,588 71,255 899,024
Income taxes payable .................................. 96,381 (18,951) 4,825
------------- ------------- -------------
Net cash provided by (used in) operating activities ........ 700,197 (446,235) 796,636
------------- ------------- -------------
Investing activities
Purchase of property and equipment ......................... (1,143,605) (1,380,940) (283,009)
Purchase of marketable securities .......................... (1,642,799) (393,661) (120,902)
Proceeds from maturing of marketable securities ............ -- 100,000 --
Proceeds from sale of marketable securities ................ -- 928,815 1,007,913
Deferred costs ............................................. (57,203) (159,300) (1,791)
Deposits ................................................... (3,700) (11,600) (19,113)
------------- ------------- -------------
Net cash (used in) provided by investing activities ........ (2,847,307) (916,686) 583,098
------------- ------------- -------------
Financing activities
Proceeds from issuance of common stock ..................... 5,000,000 -- --
Share issuance expenses .................................... (1,164,815) -- --
Distributions to stockholders .............................. (317,420) -- --
Deferred registration costs ................................ -- -- (699,240)
Proceeds from long-term debt and other borrowings .......... 230,000 836,129 --
Principal payments on long-term debt and other borrowings .. (646,714) (460,916) (326,289)
Repayment of capital lease obligations ..................... -- -- (343,387)
------------- ------------- -------------
Net cash provided by (used in) financing activities ........ 3,101,051 375,213 (1,368,916)
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents ....... 953,941 (987,708) 10,818
Cash and cash equivalents, beginning of period ............. 126,580 1,080,521 92,813
------------- ------------- -------------
Cash and cash equivalents, end of period ................... $ 1,080,521 $ 92,813 $ 103,631
============= ============= =============
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest ................................................. $ 456 $ 100,166 $ 333,898
Taxes .................................................... 7,350 39,325 9,175
Non-cash investing activities:
Capital lease obligations ............................... -- -- $ 1,951,122
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-31
<PAGE>
MEDICAL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1993, 1994 AND 1995
1. DESCRIPTION OF BUSINESS
Medical Management, Inc. (the "Company"), a New York corporation, was
incorporated as MRI Management Associates, Inc. on December 24, 1991.
Effective January 3, 1995, the Company's name was changed to Medical
Management, Inc. The Company provides magnetic resonance imaging ("MRI") and
other medical equipment and comprehensive services for the financing,
installation and administrative management of MRI and other facilities on
behalf of physicians.
In April 1992, the Company commenced operations and began servicing its
initial client, Greater Metropolitan Medical Services ("GMMS"), a multi-site
neurological medical practice located in the New York metropolitan area.
Currently, the Company operates six diagnostic imaging units for three
clients. GMMS is the primary client of the Company. Separate MRI units and
other medical equipment are used exclusively for the treatment of patients of
each client. All fee revenue for the period from inception to December 31,
1993, and approximately 86% and 82% of fee revenue for the years ended
December 31, 1994 and 1995, respectively, is from GMMS. The Company's
agreement with GMMS is for a period of twenty-nine years ending in June 2025.
In addition, the Company also has an agreement with a neurology practice
located in the New York metropolitan area. The Company's agreement with the
client is for a period of seven years ending in March 2002.
At December 31, 1995, Dr. Lawrence Shields, the 95% physician stockholder
of GMMS was also a major stockholder of the Company. The loss of GMMS as a
customer or curtailment of its practice as a result of the death or disability
of Dr. Shields could have a material adverse effect on the Company's results
of operations. The Company is the beneficiary of key-man life insurance
policies aggregating $5,000,000 covering the life of Dr. Shields.
On January 3, 1996, Complete Management, Inc. ("CMI") completed an
initial public offering ("IPO") of 2,000,000 of its common shares at $9.00 per
share and a simultaneous acquisition and merger of the Company as a wholly
owned subsidiary of CMI (see Note 18). CMI provides comprehensive management
services primarily to high volume medical practices in New York State. CMI's
services include development, administration and leasing of medical offices
and equipment, staffing and supervision of non-medical personnel, accounting,
billing and collection, and development and implementation of practice growth
and marketing strategies.
2. SIGNIFICANT ACCOUNTING POLICIES
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 financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
Fee revenue is recognized when the medical procedure is performed.
DEPRECIATION AND AMORTIZATION
Medical equipment, office furniture and computer and telephone equipment
are depreciated on the straight- line basis over the shorter of the estimated
useful lives of the assets (5 to 7 years) or the term of the capital lease.
Leasehold improvements are amortized over the shorter of the term of the
lease or life of the assets.
Cash and Cash Equivalents
The Company considers all highly liquid financial instruments with a
maturity of three months or less when purchased to be cash equivalents.
F-32
<PAGE>
MEDICAL MANAGEMENT, INC.
Notes to Financial Statements - (Continued)
December 31, 1993, 1994 and 1995
2. SIGNIFICANT ACCOUNTING POLICIES - (Continued)
ACCOUNTING FOR IMPAIRMENTS IN LONG-LIVED ASSETS
The Financial Accounting Standards Board ("FASB") has issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
Being Disposed Of," which the Company has adopted on January 1, 1995. This
statement requires that long-lived assets and identifiable intangibles be
reviewed for impairment whenever events or changes in circumstances indicate
the carrying amounts of the assets may not be recoverable. In evaluating
recoverability, the Company estimates the future cash flows expected to
result from the asset and its eventual disposition. If the sum of future
undiscounted cash flows is less than the carrying amount of the asset, an
impairment loss is recognized. No such loss was recognized in the December
31, 1995 financial statements.
MARKETABLE SECURITIES
The Company accounts for marketable securities in accordance with the
provisions of Statement of Financial Accounting Standards No. 115,
"Accounting For Certain Investments in Debt and Equity Securities".
Management determines the appropriate classification of debt securities at
the time of purchase and reevaluates such designation as of each balance
sheet date. Debt securities are classified as held-to-maturity when the
Company has the positive intent and ability to hold the securities to
maturity.
Debt securities not classified as held-to-maturity are classified as
available-for-sale. Available-for-sale securities are stated at fair value,
with the unrealized gains and losses, net of tax effect, reported as a
separate component of stockholders' equity.
The amortized cost of debt securities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity, or in the case of mortgage-backed securities, over the
estimated life of the security. Such amortization is included in interest
income from investments. Realized gains and losses, and declines in value
judged to be other-than-temporary are included in net securities gains
(losses). The cost of securities sold is based on the specific identification
method
INCOME TAXES
Income taxes are determined under the liability method as required by
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109"). Under SFAS 109, deferred tax assets and liabilities are
determined based upon differences between the financial reporting and tax
basis of assets and liabilities.
EARNINGS PER SHARE
Net income per common share has been computed by dividing net income by
the weighted average number of shares of common stock outstanding during the
period. All options issued were anti-dilutive and, accordingly, were excluded
from the calculation for weighted average shares.
RECLASSIFICATIONS
Certain amounts in the 1994 financial statements have been reclassified to
conform with the 1995 presentation.
3. CHANGE IN ACCOUNTING PRINCIPLE -- DISCOUNTING OF ACCOUNTS RECEIVABLE
Effective January 1, 1995, the Company adopted the policy of discounting
certain of its accounts receivable balances which have historically been
collected in a period in excess of one year. Discounting was not implemented
in prior years as the Company's period of operations was insufficient to
adequately determine the appropriate collection period. In 1995, discounting
of certain accounts receivable was adopted based upon the results of the
Company's periodic reviews of its accounts receivable from GMMS and its
analysis of the related collec
F-33
<PAGE>
MEDICAL MANAGEMENT, INC.
Notes to Financial Statements - (Continued)
December 31, 1993, 1994 and 1995
3. CHANGE IN ACCOUNTING PRINCIPLE -- DISCOUNTING OF ACCOUNTS RECEIVABLE
- (Continued)
tion period which indicated that these receivables have a collection
cycle of approximately two years. The applicable accounts receivable have been
discounted utilizing an interest rate of 12% per annum, management's best
estimate of its incremental borrowing rate from April 1992 (commencement of
operations) through December 31, 1995. The impact of this change in accounting
policy considers accounts receivable generated in prior years. The effect of
the change in 1995 was to decrease income before income taxes by approximately
$51,000. The adjustment of $221,677 (after an income tax benefit of $196,000)
is shown as a cumulative effect of change in accounting principle in the
accompanying statements of income.
4. ACCOUNTS RECEIVABLE
The Company is entitled to an agreed-upon fee for each medical procedure
performed. As collateral for its fee revenue receivable from its primary
client, GMMS, the Company has a security interest in GMMS' trade receivables.
The Company's clients (the "Clients") bill at rates negotiated with third
party payors, principally commercial insurance carriers. Reimbursements may
result in amounts received being less than established charges. 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, and then further
defer payment until or near the date of a scheduled arbitration hearing,
generally not to exceed three years after the submission of a fully documented
medical claim. As a result of such delayed payment, the Company requires more
capital to finance its receivables than businesses with a shorter receivable
payment cycle. 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 payors allowable fee standards. Finally, the
application forms required by third-party payors for payment of claims are
long, detailed and complex and payments may be delayed or refused unless such
forms are properly completed. Nevertheless, although the Company takes all
legally available steps, including legally prescribed arbitration to collect
the receivables generated by its clients, there is a risk that some of those
receivables may not be collected which may impede the ability of the Clients
to pay in full all amounts owed by them to the Company. Accordingly, the
collection cycle tends to be long-term in nature. Although Clients are
ultimately liable for payment of its fees to the Company, the Company has
deferred the collection of its receivable from its Clients and allowed the
Clients to pay the Company its fees as collections of the Clients receivable
are made from third-party payors or, if rejected by third-party payors, until
the Clients receivable is collected on a lien in litigation. If the Company
determines that receivables cannot be collected from third party payors,
including liens placed in litigation, it intends to use all appropriate means
including litigation to enforce collection of its fees from the Client. In
July 1995, the Company re-negotiated its agreement with GMMS and entered into
a new agreement which expires in June 2025. Under terms of the new agreement,
the Company takes ownership on a recourse basis of receivables generated by
GMMS' medical practice from third-party payors with a net collectible value
equal to the then current management fee owed to the Company. To the extent
any receivables assigned to the Company are disputed and/or referred to
arbitration proceedings, such receivables are immediately substituted under
the recourse arrangements between GMMS and the Company. In the event that the
laws and regulations establishing these third-party payors are amended,
rescinded or overturned with the effect of eliminating this system of payment
reimbursement for injured parties, the ability of the Company to collect its
fees could be affected. Under the re-negotiated agreement, the Company has not
had to exercise such option with respect to any receivables assigned to it for
the six months ended December 31, 1995.
On April 17, 1995, under the terms of the former GMMS agreement, the
Company agreed to receive a promissory note, effective March 31, 1995 from
GMMS, for $401,384 of GMMS accounts receivable which the Company determined
could be collected and used to pay the Company's fees from GMMS. This note is
payable by GMMS in equal quarterly installments of $33,349, commencing on June
30, 1995 and ending March 31, 1998, but may be prepaid. Interest on this note
is payable monthly at 7.5% per annum commencing in April 1995. The balance of
the note outstanding on December 31, 1995 was $334,586.
F-34
<PAGE>
MEDICAL MANAGEMENT, INC.
Notes to Financial Statements - (Continued)
December 31, 1993, 1994 and 1995
4. ACCOUNTS RECEIVABLE - (Continued)
During 1993 and 1994, because of the various factors that influenced the
collection of Clients' accounts receivable due from third-party payors and
liens in litigation, the Company reviewed at a minimum, but no less than
quarterly, the status of Clients' accounts receivable due from third-party
payors which collateralized its receivable from its Clients. As a result, the
Company established an allowance for possible uncollectible accounts
receivable ($407,000 at December 31, 1993 and $909,000 at December 31, 1994).
This periodic review included but was not limited to the review of patient's
files, discussions with third-party payors on individual patient billings and
analysis of past experience. It was also the Company's policy to estimate the
portion of accounts receivable from Clients that will not be collected within
a twelve month period. Such receivables are presented as a long-term asset in
the accompanying balance sheets.
In 1995, as part of the Company's periodic review for potential
impairment of all third-party payor receivables prior to the acceptance for
payment of its fee, the Company determined that based upon its clients'
historical collection experience and the results of the review, its clients
had receivables substantially in excess of the amounts owed to the Company
after giving effect to their collectability. Accordingly, the Company
determined that a portion of its estimated allowance for bad debts was no
longer required. This factor along with the fact that its Client assigns it
receivables to the Company on a full recourse basis in payment of its fees
would preclude further recognition of bad debts.
The Company has determined that $300,000 of the December 31, 1994
accounts receivable allowance related to accounts receivable balances
collected in 1995. Such amounts were credited to general and administrative
expenses on the accompanying December 31, 1995 statement of income.
As more fully described in Note 3, the Company changed its accounting
policy to implement discounting of accounts receivable from a related party.
GMMS Management believes that its experience and that of the Company is a good
indication of the timing of the collection process. Because numerous factors
affect the timing and the manner in which these receivables are collected
(i.e., government regulations, etc.) it is the Company's policy to
periodically assess the collection of its receivables. As a result, the
Company's estimate of its collection period and incremental borrowing rate may
change.
5. MARKETABLE SECURITIES AVAILABLE-FOR-SALE
Marketable securities available-for-sale at December 31, 1994 and 1995
are as follows:
<TABLE>
<CAPTION>
December 31, 1994: Gross unrealized Estimated
----------------------
Cost Gains Losses fair value
---------- --------- --------- ------------
<S> <C> <C> <C> <C>
Equity securities .............................. $277,335 $ 3,279 $ -- $280,614
Equity funds ................................... 45,601 -- 1,885 43,716
U.S. Treasury securities and obligations of U.S.
government agencies ........................... 354,702 -- 43,187 311,515
U.S. corporate securities ...................... 303,495 -- 34,183 269,312
---------- --------- --------- ------------
$981,133 $ 3,279 $79,255 $905,157
========== ========= ========= ============
December 31, 1995:
Equity securities .............................. $108,934 $13,006 $ -- $121,940
========== ========= ========= ============
</TABLE>
During the year ended December 31, 1995, the proceeds from the sale of
available-for-sale-securities was $1,007,913. Gross realized gains totaled
$62,937 and gross realized losses totaled $48,125.
F-35
<PAGE>
MEDICAL MANAGEMENT, INC.
Notes to Financial Statements - (Continued)
December 31, 1993, 1994 and 1995
6. STOCKHOLDERS' EQUITY
RECAPITALIZATION
In August 1993, the Company increased its authorized common stock from 200
shares at no par value to 20,000,000 shares as $.001 par value. In addition,
the Company declared a 9,999 for 1 stock split in the form of a stock
dividend on the then issued and outstanding common shares. All outstanding
share amounts included in the accompanying financial statements have been
retroactively adjusted to reflect the 9,999 for 1 stock split.
STOCK OPTION PLAN
The Financial Accounting Standards Board has issued Statement of
Accounting Standard 123 "Accounting for Stock-based Compensation" (SFAS 123).
This statement establishes financial accounting and reporting standards for
stock-based employee compensation plans. The accounting requirements of SFAS
123 are effective for transactions entered into in fiscal years that begin
after December 15, 1995, though they may be adopted upon issuance. The
disclosure requirements of SFAS 123 are effective for financial statements
for fiscal years beginning after December 15, 1995. Management believes the
effect of adopting this statement would have had no material effect on the
financial statements.
In August 1993, the Company adopted the 1993 stock option plan (the
"Plan") covering 150,000 shares of the Company's common stock, pursuant to
which, officers, directors and key employees of the Company and consultants
to the Company are eligible to receive qualified and/or nonqualified stock
options. The Plan, which expires on August 2, 2003, will be administered by
the Board of Directors of the Company or a committee designated by them.
Qualified stock options granted under the plan are exercisable for a period
of ten years from the date of the grant, except that the term of qualified
stock options granted under the Plan to a shareholder owning more than 10%
the outstanding common stock of the Company may not exceed five years. In
August 1993, an option for 45,000 shares was granted to the Company's Chief
Financial Officer. One-third of the shares covered by the option were
exercisable at an exercise price of $4 per share when granted, and an
additional one- third of the shares, at an exercise price of $5 per share,
became exercisable each year thereafter. However, all shares under the option
must be exercised during the ten-year period from the date of the grant. In
addition, options for 15,000 shares exercisable at $4.875 per share were
granted to each of the Company's two outside directors upon their taking
office immediately following the consummation of the offering.
In June 1994, the Company agreed to issue options to purchase 50,000
shares of common stock to a consultant as an inducement for the consultant to
enter a contract to render investor relations services. Options to purchase
30,000 shares of common stock vested immediately and the remaining options
vested in June 1995. The options are exercisable at $4.31 per share (quoted
market value on date of grant).
The Company has reserved 250,000 shares of its common stock for the future
grant or exercise of options and an additional 100,000 shares for the future
exercise of warrants.
COMMON STOCK AND WARRANTS
The Company completed an initial public offering of 1,000,000 common
shares at $5.00 per share on October 26, 1993, and received net proceeds of
$4,400,000. Costs incurred with respect to the registration of the common
shares, inclusive of underwriter commissions, amounted to $1,180,436. In
addition, the Company sold to the underwriter, or its designee, at a price of
$.001 per Underwriter Warrant, up to 100,000 Underwriter's Warrants entitling
the holder's thereof to purchase 100,000 common shares of the Company at a
purchase price of $6.00 per share for a period of four years commencing one
year from the date of the initial public offering.
On March 3, 1994, the Company issued 10,000 shares of common stock to a
consultant for services rendered and to be rendered. Such shares are subject
to certain restrictions under which the consultant is to remain
F-36
<PAGE>
MEDICAL MANAGEMENT, INC.
Notes to Financial Statements - (Continued)
December 31, 1993, 1994 and 1995
6. STOCKHOLDERS' EQUITY - (Continued)
available for substantial services during a two-year period. The shares are
subject to forfeiture unless this condition was satisfied. Accordingly, the
shares were valued at a 50% discount from market on the date of the award and
is being amortized over the "risk of forfeiture" period. The Company recorded
a charge of $25,000 for financial reporting purposes.
During the second quarter of 1995, the Company issued 30,000 shares of
common stock to a consultant for services rendered and to be rendered. Such
shares are subject to certain restrictions under which the consultant is to
remain available for substantial services during a two-year period. The
shares are subject to forfeiture unless this condition is satisfied.
Accordingly, the shares were valued at a 50% discount from market on the date
of the award and is being amortized over the "risk of forfeiture" period. The
Company recorded a charge of $28,125 for financial reporting purposes.
7. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------------------
1994 1995
------------ ------------
<S> <C> <C>
Cost:
Medical equipment ........................ $1,723,797 $1,749,143
Leasehold improvements ................... 1,070,840 1,098,964
Office furniture and equipment ........... 101,385 221,783
Computer and telephone equipment ......... 102,331 184,410
Property and equipment under capital leases 119,129 2,097,313
------------ ------------
3,117,482 5,351,613
Less: accumulated depreciation and
amortization ........................... 323,730 1,094,881
------------ ------------
Net property and equipment ............... $2,793,752 $4,256,732
============ ============
</TABLE>
The construction of the corporate headquarters and operating facility was
completed in February 1994. Construction costs consisted of site preparation
and installation of the medical equipment of the Company's initial fixed site
MRI unit, completion of the medical practice office of the Company's initial
client and the completion of the offices to house the corporate headquarters
of the Company. Final construction costs of $2,308,000 were allocated
$1,237,000 to medical equipment and $1,071,000 to leasehold improvements. For
the years ended December 31, 1993, 1994 and 1995, the Company incurred
interest expense of $160,900, $142,000 and $18,700 respectively, of which,
$159,609 for 1993 and $8,000 for 1994, (relating to interest paid to Pantepec
and Swenvest), were capitalized as medical equipment and leasehold cost in
1993 and 1994, respectively. Interest incurred in 1995 was expensed as period
costs in 1995. In addition, lender participation fees (see Note 8) of $70,000
and $12,000 for the years ended December 31, 1993 and 1994, respectively,
were capitalized. Lender participation fees of $29,900 were expensed as
period costs in 1995.
In 1994 and 1995 the Company entered into capital leases for computer,
office and medical equipment ranging in terms from 36 months to 60 months.
The aggregate accumulated amortization of the computer, office and medical
equipment as of December 31, 1994 and 1995 were $1,700 and $345,000,
respectively.
F-37
<PAGE>
MEDICAL MANAGEMENT, INC.
Notes to Financial Statements- (Continued)
December 31, 1993, 1994 and 1995
8. LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES
Long-term debt and obligations under capital leases consist of the
following:
December 31,
--------------------------------
1994 1995
---------- ------------
Loan payable Pantepec (A) .......... $229,003 $ --
Other loan payable (B) ............. 377,003 279,717
Obligations under capital leases (C) . 113,561 1,721,296
---------- ------------
719,567 2,001,013
Less current portion ............... 345,394 480,523
---------- ------------
$374,173 $1,520,490
========== ============
At December 31, 1995, future, principal payments for long-term debt and
obligations under capital leases were as follows:
Year ended December 31,
-----------------------
1996 .................. $ 480,523
1997 .................. 536,912
1998 .................. 499,980
1999 .................. 454,336
2000 .................. 29,262
------------
$2,001,013
============
(A) The Company entered a loan and security agreement effective June 30,
1992, with Pantepec International, Inc. ("Pantepec") (an unrelated third
party) to borrow up to $700,000 to finance the purchase and installation
of the medical equipment. Borrowings as of December 31, 1993 and December
31, 1994, amounted to $344,354 and $229,003, respectively. The Company,
Pantepec and Swenvest Corporation ("Swenvest") (an unrelated third
party), from whom Pantepec had borrowed $273,000 to fund the loan to the
Company, entered into an agreement dated May 1, 1993, to refinance this
loan and the original loan agreement was terminated. Under the refinance
agreement, the Company had the option to borrow up to $700,000 up to 45
days from acceptance of the Medical Equipment from the manufacturer.
Interest on the borrowing accrues as follows:
Loan year ending June 30, 1993
(including period prior to refinancing) .. -14% per annum
Loan year ending June 30, 1994 ............. -10% per annum
Loan year ending June 30, 1995 ............. -10% per annum
In addition to interest, the lenders are entitled to lender participation
payments of $10 per Scan. Lender participation payments may not be less
than $70,000 for the years ending June 30, 1993 and 1994 and $30,000 for
the loan year ending June 30, 1995. For the years ended December 31, 1993
and 1994 lender participation payments of $70,000 and $12,000,
respectively, were capitalized. Subsequent to the completion of the
installation of the medical equipment in February 1994, lender
participation payments have been expensed as period costs. Interest which
accrued for the loan year ending June 30, 1993 was paid monthly. The
repayment terms were renegotiated after the initial public offering and,
effective July 31, 1993, principal and interest payments were payable in
monthly installments of $15,729 and $3,787, respectively. In February
1994 the Company borrowed $277,000, the balance of the original
commitment and the monthly principal and interest installment was
increased to $26,380 and $11,787, respectively, per month. In July 1995,
all unpaid principal and interest was paid in full.
F-38
<PAGE>
MEDICAL MANAGEMENT, INC.
Notes to Financial Statements - (Continued)
December 31, 1993, 1994 and 1995
8. LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES - (Continued)
(B) In April 1994, the Company entered into a loan and security agreement to
borrow $440,000 to finance a mobile MRI unit to be used for its second
client. This borrowing bears interest at 13.2% and is repayable in equal
monthly installments of $11,559 (including interest) through April 1998.
(C) At December 31, 1995, future minimum lease payments payable in monthly
installments, including interest ranging from 10% to 12% per annum, were
as follows:
Year ended December 31,
----------------------------
1996 ....................... $ 673,479
1997 ....................... 673,479
1998 ....................... 577,752
1999 ....................... 481,136
2000 ....................... 30,012
------------
2,435,858
Less amount representing
interest ................. 434,845
------------
$2,001,013
============
Substantially all assets of the Company have been pledged as collateral
for the above borrowings.
9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
December 31,
----------------------------
1994 1995
---------- ------------
Consulting fees payable ................... $178,272 $ 222,114
Professional fees ......................... 41,000 --
Lender participation fees ................. 29,970 --
Deferred registration costs ............... -- 298,285
Other accounts payable and accrued expenses . 186,692 814,559
---------- ------------
$435,934 $1,334,958
========== ============
10. INCOME TAXES
In December 1992, the Company, upon its incorporation had elected to be
treated as an S Corporation under Subchapter S of the Internal Revenue Code
for federal income tax purposes. In addition, the Company had elected to be
treated for New York State income tax purposes as an S Corporation.
Consequently, the Company was not subject to federal income taxes because the
stockholders include the Company's income in their own personal income tax
returns. For New York State purposes, S Corporations were subject to an income
tax of approximately 2.475%.
The Company was liable for New York City income taxes because New York
City does not allow Subchapter S Status. The New York City income tax rate is
approximately 9%.
Effective October 26, 1993, as a result of the initial public offering,
the Company is no longer treated as an S Corporation. Upon the change in
status of the Company, in the fourth quarter of 1993, the Company had an
additional income tax expense of approximately $680,000 due to federal and
state income taxes being payable on the temporary differences which are
principally due to the cash basis of reporting for income taxes.
F-39
<PAGE>
MEDICAL MANAGEMENT, INC.
Notes to Financial Statements - (Continued)
December 31, 1993, 1994 and 1995
10. INCOME TAXES - (Continued)
The provision for income taxes on historical net income for the years
ended December 31, 1993, 1994 and 1995 differs from the amount computed by
applying the federal statutory rate due to the following:
<TABLE>
<CAPTION>
(In Percentages)
1993 1994 1995
------ ------ ------
<S> <C> <C> <C>
Statutory federal income tax rate .................. 34.0 34.0 34.0
State and local taxes, net of federal benefit ...... 13.1 13.2 12.9
Federal income taxes paid or payable related to prior
year S Corporation income ......................... 24.2 -- --
Other .............................................. 1.5 0.2 0.1
------ ------ ------
72.8 47.4 47.0
====== ====== ======
</TABLE>
Income tax expense consists of the following:
<TABLE>
<CAPTION>
1993 1994 1995
---------- ------------ ----------
<S> <C> <C> <C>
Current:
Federal ... $ -- $ -- $ --
State ..... 10,000 9,000 8,000
Local ..... 94,000 10,000 6,000
---------- ------------ ----------
104,000 19,000 14,000
---------- ------------ ----------
Deferred:
Federal ... 588,000 657,000 539,948
State ..... 170,000 273,000 159,794
Local ..... 63,000 222,000 175,258
---------- ------------ ----------
821,000 1,152,000 875,000
---------- ------------ ----------
$925,000 $1,171,000 $889,000
========== ============ ==========
</TABLE>
F-40
<PAGE>
MEDICAL MANAGEMENT, INC.
Notes to Financial Statements - (Continued)
December 31, 1993, 1994 and 1995
10. INCOME TAXES - (Continued)
Deferred income taxes are the result of temporary differences between the
carrying amounts of assets and liabilities on the accrual basis used for
financial statement reporting purposes and the cash basis used for income tax
reporting. Accordingly, deferred income tax liabilities have been accrued at
the effective tax rate of 47.4% in 1994 and 47.0% in 1995. The classification
of deferred tax liabilities related to accounts receivable has been
determined based upon the collection cycle of certain accounts receivable,
which is estimated to be approximately two years. The following sets forth
the components of deferred tax liabilities:
<TABLE>
<CAPTION>
December 31,
--------------------------------
1994 1995
------------ ------------
<S> <C> <C>
Current:
Accounts receivable ............ $1,207,849 $1,870,983
Prepaid expenses ............... 66,039 40,000
Accounts payable and accrued
expenses ..................... (189,888) (437,983)
------------ ------------
Total current ................ $1,084,000 $1,473,000
============ ============
Non-current:
Accounts receivable ............ 1,074,017 1,486,520
Depreciation ................... 131,461 87,000
Net operating loss carryforwards . (164,478) (242,520)
------------ ------------
Total non-current ............ 1,041,000 1,331,000
------------ ------------
Total ....................... $2,125,000 $2,804,000
============ ============
</TABLE>
The Company currently utilizes the cash basis method of accounting for tax
reporting purposes. This method allows the Company to defer recognition of
income for tax purposes until actual collection of cash. Beginning with
calendar year 1997, the Company will be required to change to the accrual
method of accounting for tax purposes. As a result of this change the Company
will be unable to defer payment of taxes on reporting income earned in 1997
and beyond. The tax relating to untaxed accrual basis income at December 31,
1996 will be payable over a minimum three year period beginning in 1997. The
Company has cumulative net operating loss carryforwards of $516,000 as of
December 31, 1995 which begin to expire in 2009.
11. OPERATING LEASE OBLIGATIONS
Prior to the completion of the construction of the medical equipment in
February 1994, the Company leased a magnetic resonance imaging scanner under a
month-to-month lease. In addition, the Company paid approximately $42,000 and
$7,000, respectively, as parking fees for the mobile trailer in which the MRI
equipment was located. For the years ended December 31, 1993, 1994 and 1995
equipment rental amounted to $460,000, $70,000 and $125,000, respectively.
In August, 1992, the Company entered into an operating lease for office
space with rent commencing on March 1, 1993. The lease, which expires in 2003,
provides for the Company to pay for increases in real estate taxes and
operating costs in addition to minimum rentals.
With respect to the servicing of one of its clients, the Company entered
into an operating lease for an area of a parking lot to locate and station the
MRI trailer and office space to service the client's patients. The leases
expire in March 1997.
F-41
<PAGE>
MEDICAL MANAGEMENT, INC.
Notes to Financial Statements - (Continued)
December 31, 1993, 1994 and 1995
11. OPERATING LEASE OBLIGATIONS - (Continued)
Future minimum lease payments under the above leases, excluding real
estate and operating cost escalations, are as follows:
Year ended December 31,
---------------------------------
1996 ............................ $113,000
1997 ............................ 96,000
1998 ............................ 89,000
1999 ............................ 89,000
2000 ............................ 98,000
Thereafter minimum lease payments . 216,000
----------
$701,000
==========
12. COMMITMENTS AND CONTINGENCIES
In connection with services provided to GMMS, the Company has a
consulting agreement with an unrelated third party. Under the terms of the
agreement which expires in March 2025, the consultant acts as general
financial advisor and consultant on matters pertaining to the business and
operations of the Company. As compensation for these services, the unrelated
third party is paid a consulting fee of 5% of revenue, of which 1% has been
assigned by such unrelated third party to a less than 5% shareholder in the
Company. These fees are payable only on revenues collected. Consulting fees
for the years ended December 31, 1993, 1994 and 1995 amounted to approximately
$167,000 (approximately $33,000 to the less than 5% stockholder) $214,000
(approximately $43,000 to the less than 5% stockholder), and $264,000
(approximately $53,000 to the less than 5% stockholder), respectively. The
consulting agreement can be renewed at the option of the consultant for an
additional five years.
In 1993, the Company entered into a joint marketing agreement with the
New York District of Siemens Medical Systems, a lending manufacture and
supplier of medical imaging equipment, to cooperatively develop the market for
MRI systems in out-patient offices. Under the terms of the agreement, Siemens
will give the Company the "right of first refusal" in situations where they
are asked to recommend an "outside" provider of MRI services. In exchange, the
Company will select Siemens Medical Systems, whenever possible, as the "vendor
of choice" for MRI placements over the next two years. The Company has made a
refundable advance payment in medical practice offices at prices and terms to
be agreed upon. If the Company and Siemens do not agree on the purchase price
or on the terms and conditions, the Company may cancel its order and obtain a
refund of the $20,000 recorded as an other current asset.
As of December 8, 1995 an Omnibus Settlement Agreement (the "Settlement
Agreement") was entered into among CMI, the Company, Steven Rabinovici, David
Jacaruso, Dennis Shields, Dr. Lawrence Shields, (the "Interested
Shareholders") and Gail Shields ("Ms. Shields"), the former wife of Dr.
Lawrence Shields. Under the terms of the Settlement Agreement, as revised on
December 21, 1995, CMI arranged for the sale of 117,187 common shares of the
Company owned by Ms. Shields at a net price to Ms. Shields of $5.50 per share
and obtained Ms. Shields' release as the maker of a promissory note for a bank
loan whose proceeds were used by GMMS (which has previously been satisfied by
GMMS) and as lessee of certain premises occupied by GMMS, which lease has been
assigned to CMI. There was no material impact on the financial statements of
CMI or the Company as a result of the foregoing settlement.
F-42
<PAGE>
MEDICAL MANAGEMENT, INC.
Notes to Financial Statements - (Continued)
December 31, 1993, 1994 and 1995
13. OTHER RELATED PARTY TRANSACTIONS
For the years ended December 31, 1993, 1994 and 1995, the Company paid to
an entity controlled by a principal stockholder of the Company or to the
stockholder approximately $75,000, $102,000 and $132,000, respectively, to
provide design services and as reimbursement for acquiring furniture and
furnishings for the Company. Included in these amounts were design fees of
approximately $16,000, $7,000 and $32,000, respectively. In addition, for the
years ended December 31, 1993, 1994 and 1995, the Company paid approximately
$6,000, $16,000 and $30,000, to another stockholder as compensation for
services rendered to the Company.
Amounts due from related parties at December 31, 1994 and 1995, include
$196,000 due from GMMS for expenses paid on its behalf and is payable pursuant
to a note on March 31, 1997 with interest payable quarterly at 7.5% per annum.
In addition, included in due from related parties at December 31, 1995, is a
$131,000 working capital loan to CMI due on demand.
14. GOVERNMENT REGULATION
The health care industry is highly regulated. The ownership, operation
and acquisition of medical equipment is subject to regulations and approvals
that vary from state to state, including licensing regulations, Medicare
regulations and regulations in certain jurisdictions requiring certificates of
need for certain types of "health care facilities" and "major medical
equipment".
15. PRO FORMA INFORMATION (UNAUDITED)
PRO FORMA ADJUSTMENTS
The Company completed an initial public offering of 1,000,000 common
shares at $5.00 per share in October 1993. Effective October 26, 1993, the
date of the initial public offering, the Company no longer was treated as an
S Corporation and, accordingly, is subject to federal and New York State
income taxes. In August 1993, the Company entered into separate employment
contracts with its President and Chief Executive Officer and Vice President
and Chief Operating Officer. These contracts expire on August 31, 1996 and
provided for annual base salaries of $75,000 to each officer commencing from
the date of consummation of the initial public offering. The pro forma
adjustments reflect (i) an adjustment to include officers' compensation
payable under current employment contracts and (ii) a provision for income
taxes based upon pro forma income as if the Company had not been an S
Corporation.
16. NET INCOME PER SHARE
Net income per common share has been computed by dividing pro forma net
income by the weighted average number of shares of common stock outstanding
during the periods. The weighted average number of common shares outstanding
has been computed in accordance with Staff Accounting Bulletin 83 ("SAB 83")
of the Securities and Exchange Commission. SAB 83 requires that common shares
and warrants, issued within a one- year period prior to the initial filing of
a registration statement relating to an initial public offering at amounts
below the public offering price, be considered outstanding for all periods
presented in the Company's Registration Statement. In August 1993, the Company
issued options to purchase 15,000 shares of common stock at $4.00 per share to
its Chief Financial Officer (see Note 6). Such options have been considered
outstanding through June 1993 for purpose of calculating net income per share.
Such shares have been reduced, using the treasury stock method, by the number
of shares which the Company would be able to purchase with the proceeds which
would be received from the exercise of such options. All other options issued
were anti-dilutive and, accordingly, were excluded from the calculation for
weighted average shares.
17. RETAINED EARNINGS
Effective October 26, 1993, the Company was no longer an S Corporation.
Accordingly, in accordance with the provisions of Staff Accounting Bulletin 59
of the Securities and Exchange Commission, undistributed earn
F-43
<PAGE>
MEDICAL MANAGEMENT, INC.
Notes to Financial Statements - (Continued)
December 31, 1993, 1994 and 1995
17. RETAINED EARNINGS - (Continued)
ings as of the date of change in status from an S Corporation (October 26, 1993)
amounting to $1,113,272 is considered to be a constructive distribution to the
owners followed by a contribution to the capital of the Company and has been
transferred to additional paid-in capital.
18. SUBSEQUENT EVENT (UNAUDITED)
On January 3, 1996, CMI completed an Initial Public Offering ("IPO") of
2,000,000 of its common shares at $9.00 per share and the simultaneous
acquisition and merger of the Company as a wholly owned subsidiary of CMI. The
terms of the merger provided that the Company's shareholders receive .778 CMI
common shares for each common share which they held based upon the IPO price
of $9.00 per share. The holders of outstanding options to purchase the
Company's common shares received 93,281 of CMI common shares based upon the
difference between their aggregate option exercise prices and the value
thereof at $7.00 per share divided by the IPO price. In January 1996, the
Company issued 2,211,953 common shares to effect the merger including shares
to be issued in satisfaction of outstanding options and warrants to purchase
the Company's shares. Upon the closing of CMI's initial public offering on
January 3, 1996, the President and Chief Executive Officer and Vice President
and Chief Operating Officer of the Company became officers of CMI.
F-44
<PAGE>
=============================================================================
No dealer, salesman or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus and, if given or made, such information or representations must
not be relied upon as having been authorized by the Company or any
Underwriter. 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 date subsequent to
the date here. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any securities offered hereby to 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.
------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
--------
<S> <C>
Prospectus Summary ............................. 3
Investment Considerations ...................... 8
Use of Proceeds ................................ 12
Recent Financing ............................... 13
Price Range for Common Shares .................. 14
Capitalization ................................. 14
Dividend Policy ................................ 15
Pro Forma Consolidated Financial Information ... 15
Selected Financial Data ........................ 17
Management's Discussion and Analysis of Financial
Conditions and Results of Operations .......... 20
Business ....................................... 32
Management ..................................... 44
Principal Shareholders ......................... 50
Description of Debentures ...................... 51
Certain U.S. Federal Income Tax Consequences ... 59
Description of Capital Stock ................... 62
Underwriting ................................... 64
Legal Matters .................................. 65
Experts ........................................ 65
Available Information .......................... 65
Index to Financial Statements .................. F-1
</TABLE>
------
Until June 30, 1996 (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 delivery requirement 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.
=============================================================================
<PAGE>
=============================================================================
COMPLETE
MANAGEMENT, INC.
$35,000,000
8% CONVERTIBLE
SUBORDINATED DEBENTURES
DUE 2003
------
PROSPECTUS
------
NATIONAL SECURITIES
CORPORATION
June 5, 1996
=============================================================================
