<PAGE>
Filed Pursuant to Rule 424B3
Registration No. 333-35003
Information contained in this prospectus supplement is subject to completion. A
registration statement relating to these securities has been declared effective
by the Securities and Exchange Commission. A final prospectus supplement and
prospectus will be delivered to purchasers of these securities. This prospectus
supplement and the accompanying prospectus shall not constitute an offer to
sell or the solicitation of an offer to buy, nor shall there be any sale of
these securities in any State in which such offer, solicitation or sale would
be unlawful prior to registration or qualification under the securities laws of
any such State.
SUBJECT TO COMPLETION -- DATED NOVEMBER 28, 1997
PROSPECTUS SUPPLEMENT
(To Prospectus dated November 28, 1997)
- --------------------------------------------------------------------------------
3,500,000 Common Shares
[GRAPHIC OMITTED]
COMPLETE MANAGEMENT, INC.
- --------------------------------------------------------------------------------
All of the 3,500,000 common shares, par value $.001 per share (the "Common
Shares"), offered hereby are being sold by Complete Management, Inc. (the
"Company").
The Company's Common Shares are listed on the New York Stock Exchange (the
"NYSE") under the symbol "CMI". On November 25, 1997, the last reported sales
price of the Common Shares on the NYSE was $17 1/4 per share. See "Price Range
of Common Shares".
See "Risk Factors" on pages 3 to 10 of the accompanying Prospectus for a
discussion of certain material factors that should be considered in connection
with an investment in the Common Shares offered hereby.
- --------------------------------------------------------------------------------
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 SUPPLEMENT OR ACCOMPANYING PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
================================================================================
Underwriting
Price to Discounts and Proceeds to
Public Commissions (1) Company (2)
- --------------------------------------------------------------------------------
Per Share ...... $ $ $
- --------------------------------------------------------------------------------
Total (3) ...... $ $ $
================================================================================
(1) The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of
1933, as amended. See "Underwriting".
(2) Before deducting expenses payable by the Company estimated to be $500,000.
(3) The Company has granted the several Underwriters a 30-day over-allotment
option to purchase up to 525,000 additional Common Shares on the same
terms and conditions as set forth above. If all such additional shares are
purchased by the Underwriters, the total Price to Public will be $______,
the total Underwriting Discounts and Commissions will be $________ and the
total Proceeds to Company will be $_______. See "Underwriting".
- --------------------------------------------------------------------------------
The Common Shares are offered by the several Underwriters subject to delivery
by the Company and acceptance by the Underwriters, to prior sale and to
withdrawal, cancellation or modification of the offer without notice. Delivery
of the Common Shares to the Underwriters is expected to be made at the office
of Prudential Securities Incorporated, One New York Plaza, New York, New York,
on or about December __, 1997.
Prudential Securities Incorporated
Tucker Anthony
Incorporated
L.H. Friend, Weinress,
Frankson & Presson, Inc.
December __, 1997
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF THE COMMON
SHARES, INCLUDING PURCHASES OF THE COMMON SHARES TO STABILIZE THE MARKET PRICE
THEREOF, PURCHASES OF THE COMMON SHARES TO COVER SOME OR ALL OF A SHORT
POSITION IN THE COMMON SHARES MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION
OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING".
S-2
<PAGE>
PROSPECTUS SUPPLEMENT SUMMARY
The following summary is qualified in its entirety by the information appearing
elsewhere in this Prospectus Supplement and the accompanying Prospectus and in
the documents and financial statements incorporated therein by reference.
Unless otherwise indicated, the information in this Prospectus Supplement
assumes that the Underwriters' over-allotment option will not be exercised.
The Company
The Company provides physician practice management services to medical
practices and hospitals located in the New York metropolitan area, particularly
New York City, Long Island, the Hudson Valley region and portions of New Jersey
and Connecticut. The Company's services range from managing all non-medical
aspects of its full service clients' businesses to providing limited
non-medical services to its partial service clients, such as billing and
collection, transcription and temporary staffing. Additionally, the Company
owns and provides administrative support for magnetic resonance imaging ("MRI")
and other diagnostic imaging equipment at seven hospitals. The Company also
owns Consumer Health Network, a preferred provider organization ("PPO")
operating in New Jersey and, to a more limited extent, New York and
Connecticut. Consumer Health Network is the largest PPO in New Jersey.
At October 15, 1997, the Company's full service clients employed 176
physicians and other health care providers, its partial service clients
employed approximately 1,100 physicians and other health care providers and
Consumer Health Network had under contract approximately 11,700 physicians and
other health care providers and 117 hospitals. As a result, the Company
estimates that it provides services to more than 10% of the physicians in the
New York metropolitan area. The Company does not, however, provide any type of
medical, diagnostic or treatment services; rather, these services are provided
by the Company's clients.
The Company commenced operations in April 1993 when it entered into a
management agreement with Greater Metropolitan Medical Services, P.C. ("GMMS"),
a multi-specialty medical practice that specializes in the evaluation,
diagnosis and treatment of injured patients. See "Business -- GMMS". In
December 1995, simultaneous with its initial public offering, the Company
merged with Medical Management, Inc. ("MMI"), a company that then had a common
control group with the Company and owned and provided administrative support
for MRI and other diagnostic imaging equipment to GMMS and others.
In July 1996, the Company began an expansion program primarily focused on
acquiring other physician practice management companies, entering into
management agreements with new physician practices and assisting existing
clients in acquiring other physician practices. The Company's acquisition
strategy is to expand its client base of primary care practices and the
specialty care practices to which they most often refer patients. Since July
1996, it has acquired four physician practice management companies serving ten
medical practices employing 69 physicians and other health care providers in
New York City and Westchester, Orange, Putnam, Dutchess, Suffolk and Nassau
counties of New York State and assisted and provided financing to existing
clients in connection with their acquisitions of 18 practices employing 49
physicians and other health care providers in New York City, northern New
Jersey, the Hudson Valley region and central New Jersey. Additionally, the
Company has assisted its clients in expanding their practices by hiring 45
additional physicians and other health care providers. In order to expand its
services offered, the Company has also acquired three medical billing and
collection companies and Consumer Health Network.
The Company believes that several attributes of the New York metropolitan
area present an attractive growth opportunity for the Company. This market is
one of the largest domestic healthcare markets and is highly fragmented with a
substantial majority of the approximately 73,000 physicians in this market
currently practicing alone or with one other physician. The Company believes
that the primary force driving physicians to affiliate with large group
practices similar to those managed by the Company or with physician practice
management companies is the level of managed care penetration, because as
managed care
S-3
<PAGE>
penetration increases, managed care organizations gain additional leverage to
reduce physician reimbursement and seek capitation and other risk sharing
arrangements. Although managed care penetration in New York has lagged behind
the rest of the country, it has rapidly increased from 18.2% of the insured
population in 1993 to 27.9% in 1996. In addition, the expiration of New York's
Prospective Hospital Reimbursement Methodology regulations on January 1, 1997
now enables providers and third party payors to negotiate fees directly with
hospitals. Prior to this change, only health maintenance organizations could
negotiate discounts from mandated hospital reimbursement rates.
The key elements of the Company's strategy are to: (i) focus on the New
York metropolitan area market; (ii) increase the number of physicians employed
by its full service clients through acquisitions and internal expansion; (iii)
assist full service clients in developing multi-specialty practices offering a
full range of ancillary tests and services; (iv) implement enterprise-wide
advanced information systems; and (v) continue the expansion of Consumer Health
Network throughout the New York metropolitan area. See "Business -- Growth
Strategy".
The Company believes that it can continue to attract full service clients
by showing potential physician clients that, by entering into management
agreements with the Company, they will have the opportunity to increase the
profitability of their medical practices. This objective is achieved
principally by expanding their capability to offer ancillary tests and services
within their medical practices and by adding new specialists to their practices
in order to capture a greater percentage of revenues generated from their
existing patient bases. Additionally, the Company believes that, by providing
the business, financial and marketing support required by medical practices,
the Company reduces the burden on physicians of managing the business aspects
of their practices, and thereby allows the physicians to focus greater
attention on the care and treatment of patients. The Company also believes that
its services should enable its clients to operate more profitably under
discounted fee for service and capitated fee arrangements.
The Company earns its fees from full service clients by managing the
non-medical aspects of their medical practices, generally under 30-year
management agreements. The Company's fees are based on its direct costs plus
either a fixed fee or a percentage of such costs. The Company also receives
hourly consulting charges, per use fees when MRI and other diagnostic imaging
equipment is provided and, in the case of GMMS, reimbursement of a portion of
the Company's corporate overhead expenses. Fixed and percentage fees are
subject to periodic upward readjustment after one or two years based on
specified formulae or procedures. The Company earns its fees from partial
service clients primarily by providing billing and collection services for a
fee based on a percentage of collections. Consumer Health Network earns fees
from self-insured employer groups, union groups, insurance companies and other
third party payors based on a percentage of the savings generated through use
of its network. The Company's fees for owning and providing administrative
support for MRI and other diagnostic imaging equipment are earned on the basis
of a charge for each use of the equipment.
On a pro forma basis to reflect the June 1997 acquisition of Consumer
Health Network as if such acquisition had occurred on January 1, 1997, for the
nine months ended September 30, 1997, 65.5% of the Company's revenues were
generated by services, including diagnostic imaging services, provided to its
full service clients; 17.6% were generated by services provided to its partial
service clients; and 10.1% were generated by Consumer Health Network. The
remainder of the Company's revenues was generated primarily by owning and
providing administrative support for MRI and other diagnostic imaging equipment
to hospitals.
The executive offices of the Company are located at 254 West 31st Street,
New York, New York 10001 (Tel. 212-273-0600).
S-4
<PAGE>
The Offering
<TABLE>
<S> <C>
Common Shares Offered Hereby .............................. 3,500,000 Common Shares
Common Shares to be Outstanding after the Offering (1) ...... 14,967,872 Common Shares
Use of Proceeds ............................................. To finance the Company's acquisition
program, including funding acquisitions
of medical practices by its clients; to
repay a revolving credit bank loan and
8% Notes issued in October 1997; and
for working capital and general corporate
purposes, including investment in infor-
mation systems. See "Use of Proceeds".
NYSE Symbol ................................................ CMI
</TABLE>
- ------------
(1) Represents the number of Common Shares outstanding as of November 21, 1997,
as adjusted for the 3,500,000 Common Shares offered hereby. Excludes an
aggregate of 7,982,712 Common Shares as of that date as follows: (i) up to
1,435,292 Common Shares issuable upon exercise of options granted under
the Company's 1995 Stock Option Plan, as amended, at a weighted exercise
price of $11.56 per share; (ii) 445,000 Common Shares issuable upon
exercise of options granted to consultants at a weighted exercise price of
$11.82 per share; (iii) 75,800 Common Shares reserved for issuance upon
the exercise of warrants at a weighted exercise price of $12.83 per share;
(iv) 193,000 Common Shares reserved for issuance upon exercise of warrants
granted at an exercise price of $10.80 per share to representatives of the
underwriters which participated in the Company's initial public offering
in December 1995; (v) 249,940 Common Shares reserved for issuance upon
exercise of warrants granted at an exercise price of $21.04 per share to
the representative of the underwriters which participated in the Company's
public offering in June 1996; (vi) 356,250 Common Shares reserved for
issuance upon the exercise of warrants granted at an exercise price of
$25.31 per share to the representative of the underwriters which
participated in the Company's public offering in December 1996; (vii)
555,555 Common Shares reserved for issuance upon conversion of the 8%
Convertible Subordinated Notes due March 20, 2001 at a conversion price of
$9.00; (viii) 2,875,000 Common Shares reserved for issuance upon
conversion of the 8% Convertible Subordinated Debentures due August 15,
2003 at a conversion price of $14.00; and (ix) 1,796,875 Common Shares
reserved for issuance upon conversion of the 8% Convertible Subordinated
Debentures due December 15, 2003 at a conversion price of $16.00.
Risk Factors
Investors should consider the material risk factors involved in connection
with an investment in the Common Shares and the impact on investors of various
events that could adversely affect the Company's business. See "Risk Factors"
in the accompanying Prospectus.
S-5
<PAGE>
Summary Financial Information Statement
Income Statement Data:
<TABLE>
<CAPTION>
For the period
from April 1, 1993 Nine Months Ended
(inception) Years Ended December 31, September 30,
to December 31, ---------------------------------- -----------------------
1993 1994 1995 1996 1996 1997
------------------- ---------- ---------- ---------- ---------- -----------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Revenues ................................. $5,283 $10,654 $12,294 $ 33,158 $20,030 $ 53,358
Interest discount (1) ..................... (865) (1,744) (2,016) (2,166) (1,748) (2,196)
------ -------- -------- -------- -------- --------
Net revenues .............................. 4,418 8,910 10,278 30,992 18,282 51,162
Cost of revenues ........................ 1,103 1,949 2,771 12,308 6,598 26,893
General & administrative expenses ......... 1,687 2,571 2,974 9,143 4,869 14,162
------ -------- -------- -------- -------- --------
Income from operations .................. 1,628 4,390 4,533 9,541 6,815 10,107
Interest discount included in income (2) 207 922 1,585 2,452 1,855 1,671
Interest expense ........................... -- -- (46) (2,740) (1,829) (4,876)
Interest, dividends and other income ...... 62 55 16 1,040 687 2,820
Gain on partial equity disposition ......... -- -- -- -- -- 850
------ -------- -------- -------- -------- --------
Income before provision for taxes ......... 1,897 5,367 6,088 10,293 7,528 10,572
Provision for income taxes ............... 891 2,522 2,862 4,879 3,613 4,030
------ -------- -------- -------- -------- --------
Net income .............................. $1,006 $ 2,845 $ 3,226 $ 5,414 3,915 6,542
====== ======== ======== ======== ======== ========
Primary net income per share ............ $ 0.34 $ 0.95 $ 1.08 $ 0.68 $ 0.50 $ 0.61
Weighted average number of shares
outstanding .............................. 2,981 2,981 2,981 8,008 7,840 10,647
Fully diluted net income per share ...... N/A N/A N/A $ 0.66 $ 0.42 $ 0.57
Fully diluted weighted average number of
shares outstanding ..................... N/A N/A N/A 10,087 9,264 16,218
Business Data:
Number of physicians and other providers
employed at end of period by:
Full service clients
Physicians ........................... 3 8 16 93 44 157
Other health care providers ............ -- -- -- 7 5 19
Total ................................. 3 8 16 100 49 176
Partial service clients ............... -- -- -- 800 -- 1,100
Balance Sheet Data:
</TABLE>
<TABLE>
<CAPTION>
As at December 31, As at September 30, 1997
-------------------------------------------- ----------------------------
1993 1994 1995 1996 Actual As Adjusted(3)
-------- -------- --------- ---------- ---------- ---------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents ......... $ -- $ -- $ -- $ 40,138 $ 6,245 $ 47,363
Marketable securities (4) ......... -- -- -- 32,467 10,830 10,830
Accounts receivable, net (5) ......... 1,965 7,679 14,885 52,509 91,022 91,022
Intangible assets, net (6) ......... -- -- -- 21,610 57,873 57,873
Debt issuance cost .................. -- -- -- 7,219 6,651 6,471
Total assets ........................ 2,157 8,009 17,861 166,349 199,816 240,754
Current liabilities ............... 816 2,461 5,744 10,432 21,579 11,579
Long-term obligations, less current
portion ........................... -- -- 229 1,972 1,377 1,377
Convertible subordinated debt ...... -- -- -- 74,000 74,000 74,000
Shareholders' equity ............... 1,009 3,854 7,330 70,504 89,301 145,239
</TABLE>
<PAGE>
- ------------
(1) Represents interest discount taken to reflect the presumed collection of
revenues over a period in excess of one year. See Note 2 to the
Consolidated Financial Statements of the Company included in its Annual
Report on Form 10-K for the year ended December 31, 1996 (the "1996 Form
10-K").
(2) Represents recapture of interest discount taken to reflect the presumed
collection of revenues over a period in excess of one year. See Note 2 to
the Consolidated Financial Statements of the Company included in the 1996
Form 10-K.
(3) See "Capitalization".
(4) Represents all marketable securities including those available-for-sale and
held to maturity.
(5) Represents both the current and long-term portions of the accounts
receivable.
(6) Includes funds provided to existing full service clients to enable them to
acquire other medical practices. At September 30, 1997, $7,056,000
previously classified as other assets and $4,577,000 previously classified
as accounts receivable have been reclassified to this category.
S-6
<PAGE>
PRICE RANGE OF COMMON SHARES
The Common Shares traded on The Nasdaq Stock Market's National Market
under the symbol "CMGT" from December 28, 1995 until the close of trading on
May 3, 1996 and on the American Stock Exchange under the symbol "CMI" from May
6, 1996 until the close of trading on September 5, 1997. On September 8, 1997,
the Common Shares commenced trading on the NYSE under the symbol "CMI." The
following table sets forth the high and low closing sales price for the Common
Shares for the periods indicated.
High Low
----------- ---------
1995
Fourth Quarter (from December 28) ......... $ 87/8 $ 83/4
1996
First Quarter ........................... 9 1/4 8
Second Quarter ........................... 13 3/8 7 1/2
Third Quarter ........................... 16 3/4 12 1/8
Fourth Quarter ........................... 15 3/4 11 3/4
1997
First Quarter ........................... 13 1/4 11 1/4
Second Quarter ........................... 14 3/8 10 1/2
Third Quarter ........................... 19 1/16 13
Fourth Quarter (through November 25) ...... 20 1/16 15 1/4
On November 25, 1997, the last reported sales price for the Common Shares
on the NYSE was $17 1/4.
DIVIDEND POLICY
The Company has not paid any dividends since its inception. The Company
currently intends to retain all future earnings for the development and
expansion of its business and, accordingly, the Company does not anticipate
paying any cash dividends on the Common Shares in the foreseeable future. Any
future determination to pay cash dividends will be at the discretion of the
Company's 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.
S-7
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,500,000 Common
Shares offered hereby, based upon an assumed public offering price of $17 1/4,
the last reported sales price for the Common Shares on the NYSE on November 25,
1997 (after deducting underwriting discounts and commissions and estimated
offering expenses), are estimated to be $56,117,500 ($64,630,375 if the
Underwriters' over-allotment option is exercised in full).
The Company expects that most of the net proceeds will be allocated to its
acquisition program, including funding the acquisition of additional medical
practices by its full service clients. The Company will use $10,000,000 of the
estimated net proceeds to repay in full its revolving bank line of credit (the
"Revolving Credit Loan") and $5,000,000 to repay in January 1998 the 8% Notes
referred to below. Any balance will be used for working capital and general
corporate purposes, including investments in information systems.
A significant element of the Company's strategy is to expand the client
base of medical practices to which it provides a full range of practice
management services. To date, this expansion has been accomplished largely by
acquiring other physician practice management companies and assisting,
including providing funding to, existing clients in acquiring other medical
practices. Although the Company and its clients are presently evaluating, as
they do on a regular basis, physician practice management companies, medical
practices, ancillary service providers and other healthcare-related businesses
for possible acquisition, they are not engaged in active negotiation for any
material acquisition.
The Revolving Credit Loan was incurred in the second half of 1996,
currently bears interest at 8.5% per annum and is due in January 1998. The 8%
Notes were issued in a private placement in October 1997, bear interest at 8.0%
per annum and are due on April 30, 1998. As additional consideration, holders
of the 8% Notes received an aggregate of 15,000 Common Shares. If the 8% Notes
are not repaid on or prior to April 30, 1998, they will immediately become
convertible into Common Shares at a conversion price of $9.00 per share and the
maturity date will be extended to March 20, 2001. The proceeds of the Revolving
Credit Loan and 8% Notes provided funds for working capital and acquisitions.
Pending such uses described above, the net proceeds will be invested in
short-term, interest bearing investment-grade securities, certificates of
deposit or direct or guaranteed obligations of the United States
government.
S-8
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) at
September 30, 1997 and (ii) as adjusted to reflect the issuance and sale of the
Common Shares offered hereby, at an assumed public offering price of $17 1/4
per Common Share, and the application of the estimated net proceeds therefrom
as described under "Use of Proceeds". This table should be read in conjunction
with the Company's consolidated financial statements and related notes thereto
incorporated by reference into the accompanying Prospectus.
<TABLE>
<CAPTION>
As of September 30, 1997
----------------------------
Actual As Adjusted
---------- ---------------
(in thousands)
<S> <C> <C>
Short-term debt (including current portion of long-term debt) ......... $ 11,071 $ 1,071
========= ===========
Long-term debt:
8% Convertible Subordinated Notes due 2001 ........................... $ 5,000 $ 5,000
8% Convertible Subordinated Debentures due August 15, 2003 ............ 40,250 40,250
8% Convertible Subordinated Debentures due December 15, 2003 ......... 28,750 28,750
Various notes payable ................................................ 1,377 1,377
--------- -----------
Total long-term debt ............................................. 75,377 75,377
--------- -----------
Shareholders' equity:
Preferred Shares, $.001 par value; 2,000,000 shares authorized; no shares
issued ............................................................... -- --
Common Shares, $.001 par value; 20,000,000 shares authorized (1);
10,826,972 shares issued and outstanding, 14,326,972 shares to be
issued and outstanding as adjusted (2) .............................. 11 14
Additional capital ................................................... 70,337 126,452
Retained earnings ...................................................... 18,953 18,773(3)
--------- -----------
Total shareholders' equity ....................................... 89,301 145,239
--------- -----------
Total capitalization .......................................... $164,678 $ 220,616
========= ===========
</TABLE>
- ------------
(1) On October 14, 1997, a Certificate of Amendment to the Certificate of
Incorporation was filed with the Secretary of State of the State of New
York, increasing the authorized Common Shares to 40,000,000.
(2) Excludes an aggregate of 8,623,612 Common Shares as of November 21, 1997 as
follows: (i) up to 1,435,292 Common Shares issuable upon exercise of
options granted under the Company's 1995 Stock Option Plan, as amended, at
a weighted exercise price of $11.56 per share; (ii) 445,000 Common Shares
issuable upon exercise of options granted to consultants at a weighted
exercise price of $11.82 per share; (iii) 75,800 Common Shares reserved
for issuance upon the exercise of warrants at a weighted exercise price of
$12.83 per share; (iv) 193,000 Common Shares reserved for issuance upon
exercise of warrants granted at an exercise price of $10.80 per share to
representatives of the underwriters which participated in the Company's
initial public offering in December 1995; (v) 249,940 Common Shares
reserved for issuance upon exercise of warrants granted at an exercise
price of $21.04 per share to the representative of the underwriters which
participated in the Company's public offering in June 1996; (vi) 356,250
Common Shares reserved for issuance upon the exercise of warrants granted
at an exercise price of $25.31 per share to the representative of the
underwriters which participated in the Company's public offering in
December 1996; (vii) 555,555 Common Shares reserved for issuance upon
conversion of the 8% Convertible Subordinated Notes due March 20, 2001 at
a conversion price of $9.00; (viii) 2,875,000 Common Shares reserved for
issuance upon conversion of the 8% Convertible Subordinated Debentures due
August 15, 2003 at a conversion price of $14.00; (ix) 1,796,875 Common
Shares reserved for issuance upon conversion of the 8% Convertible
Subordinated Debentures due December 15, 2003 at a conversion price of
$16.00; (x) 15,000 Common Shares issued in connection with the sale of
$5,000,000 of the Company's 8% Notes in October 1997; and (xi) 625,900
Common Shares issued in connection with the Company's acquisition program,
bonus share program or the exercise of options and warrants between
October 1, 1997 and November 21, 1997.
(3) Reflects a non-cash charge aggregating $180,000 after tax for the write off
during the fourth quarter of 1997 and the first quarter of 1998 of the
debt issuance costs associated with 8% Notes issued in October 1997.
S-9
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data of the Company presented below for the years
ended December 31, 1993, 1994, 1995 and 1996 have been derived from the
consolidated financial statements of the Company, which have been audited by
Arthur Andersen LLP, independent public accountants, and are incorporated by
reference in the accompanying Prospectus. The selected financial data for the
three- and nine-month periods ended September 30, 1996 and 1997 are unaudited.
Selected Income Data:
<TABLE>
<CAPTION>
For the period
from April 1, 1993 Years Ended
(inception) December 31,
to December 31, ------------------------------------
1993 1994 1995 1996
------------------- ----------- ----------- ----------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Revenues ....................................... $5,283 $ 10,654 $ 12,294 $ 33,158
Interest discount (1) ........................ (865) (1,744) (2,016) (2,166)
------ --------- --------- --------
Net revenues ................................. 4,418 8,910 10,278 30,992
Cost of revenues .............................. 1,103 1,949 2,771 12,308
General & administrative expenses ............ 1,687 2,571 2,974 9,143
------ --------- --------- --------
Income from operations ........................ 1,628 4,390 4,533 9,541
Interest discount included in income (2) ...... 207 922 1,585 2,452
Interest expense .............................. -- -- (46) (2,740)
Interest, dividends and other income ......... 62 55 16 1,040
Gain on partial equity disposition ............ -- -- -- --
------ --------- --------- --------
Income before provision for taxes ............ 1,897 5,367 6,088 10,293
Provision for income taxes .................. 891 2,522 2,862 4,879
------ --------- --------- --------
Net income .................................... $1,006 $ 2,845 $ 3,226 $ 5,414
====== ========= ========= ========
Primary net income per share .................. $ 0.34 $ 0.95 $ 1.08 $ 0.68
Weighted average number of shares
outstanding ................................. 2,981 2,981 2,981 8,008
Fully diluted net income per share ............ N/A N/A N/A $ 0.66
Weighted average number of shares out-
standing N/A N/A N/A 10,087
<CAPTION>
Nine Months Ended
September 30,
------------------------
1996 1997
----------- -----------
<S> <C> <C>
Revenues ....................................... $ 20,030 $ 53,358
Interest discount (1) ........................ (1,748) (2,196)
--------- ---------
Net revenues ................................. 18,282 51,162
Cost of revenues .............................. 6,598 26,893
General & administrative expenses ............ 4,869 14,162
--------- ---------
Income from operations ........................ 6,815 10,107
Interest discount included in income (2) ...... 1,855 1,671
Interest expense .............................. (1,829) (4,876)
Interest, dividends and other income ......... 687 2,820
Gain on partial equity disposition ............ -- 850
--------- ---------
Income before provision for taxes ............ 7,528 10,572
Provision for income taxes .................. 3,613 4,030
--------- ---------
Net income .................................... $ 3,915 $ 6,542
========= =========
Primary net income per share .................. $ 0.50 $ 0.61
Weighted average number of shares
outstanding ................................. 7,840 10,647
Fully diluted net income per share ............ $ 0.42 $ 0.57
Weighted average number of shares out-
standing 9,264 16,218
</TABLE>
<PAGE>
Balance Sheet Data:
<TABLE>
<CAPTION>
As at December 31, As at
-------------------------------------------- September 30,
1993 1994 1995 1996 1997
-------- -------- --------- ---------- ---------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents ......... $ -- $ -- $ -- $ 40,138 $ 6,245
Marketable securities (3) ......... -- -- -- 32,467 10,830
Accounts receivable, net (4) ......... 1,965 7,679 14,885 52,509 91,022
Intangible assets, net (5) ......... -- -- -- 21,610 57,873
Debt issuance cost .................. -- -- -- 7,219 6,651
Total assets ........................ 2,157 8,009 17,861 166,349 199,816
Current liabilities ............... 816 2,461 5,744 10,432 21,579
Long-term obligations, less current
portion ........................... -- -- 229 1,972 1,377
Convertible subordinated debt ...... -- -- -- 74,000 74,000
Shareholders' equity ............... 1,009 3,854 7,330 70,504 89,301
</TABLE>
- ------------
(1) Represents interest discount taken to reflect the presumed collection of
revenues over a period in excess of one year. See Note 2 to the
Consolidated Financial Statements of the Company included in the 1996 Form
10-K.
(2) Represents recapture of interest discount taken to reflect the presumed
collection of revenues over a period in excess of one year. See Note 2 to
the Consolidated Financial Statements of the Company included in the 1996
Form 10-K.
(3) Represents all marketable securities including those available-for-sale and
held to maturity.
(4) Represents both the current and long-term portions of the accounts
receivable.
(5) Includes funds provided to existing full service clients to enable them to
acquire other medical practices. At September 30, 1997, $7,056,000
previously classified as other assets and $4,577,000 previously classified
as accounts receivable have been reclassified to this category.
S-10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion of the results of the operations and financial
condition of the Company should be read in conjunction with the Company's
unaudited condensed consolidated financial statements and notes thereto for the
nine months ended September 30, 1997, which are incorporated by reference in
the accompanying Prospectus.
Overview
The Company provides physician practice management services to medical
practices and hospitals. These services range from managing all non-medical
aspects of its full service clients' businesses to providing limited,
non-medical services to its partial service clients, such as billing and
collection, transcription and temporary staffing. Additionally, the Company
owns and provides administrative support for MRI and other diagnostic imaging
equipment. The Company also owns Consumer Health Network, a preferred provider
organization.
Full Service Clients
The Company earns fees from its full service clients by managing the
non-medical aspects of their medical practices, generally under 30 year
management agreements. The Company's fees are based on its direct costs plus
either a fixed fee or a percentage of such costs. The Company also receives
hourly consulting charges, per use fees when MRI and other diagnostic imaging
equipment is provided and, in the case of GMMS, reimbursement of a portion of
the Company's corporate overhead expenses.
To the extent permitted by applicable law, management fees due to the
Company from its full service clients are collaterized through the assignment,
on a full-recourse basis, of such clients' patient service accounts
receivables. The clients' ability to pay these fees is dependent on the
Company's ability to collect, on behalf of its full service clients, these
receivables.
The following unaudited table sets forth the operating results of the
Company's full service clients for the three and nine month periods ended
September 30, 1996 and 1997. Since the Company does not have an ownership
interest in its full service clients, the amounts set forth below are not
included in the Company's financial results, except for the management fees
earned by the Company.
<TABLE>
<CAPTION>
Nine Months Three Months
Ended September 30, Ended September 30,
------------------------- --------------------------
1996 1997 1996 1997
---------- ------------ ------------ -----------
(in thousands)
<S> <C> <C> <C> <C>
Gross physician billings ............ $22,500 $ 78,834 $8,642 $ 33,829
Contractual allowances ............... (1,455) (14,982) (492) (6,757)
-------- --------- ------- --------
Net physician billings ............... 21,045 63,852 8,150 27,072
Management fees ........................ 18,020 37,084 7,101 12,219
Medical personnel payroll ............ 2,694 15,068 958 6,673
Other expenses ........................ 593 11,161 100 7,242
-------- --------- ------- --------
Total expenses ........................ 21,307 63,313 8,159 26,134
-------- --------- ------- --------
Net income ........................... $ (262) $ 539 $ (9) $ 938
======== ========= ======= ========
Full service clients -- management fees:
GMMS ................................. $18,020 $ 17,019 $7,101 $ 4,523
Other clients ........................ -- 20,065 -- 7,696
-------- --------- ------- --------
Total management fees ............... $18,020 $ 37,084 $7,101 $ 12,219
======== ========= ======= ========
</TABLE>
All of the Company's revenues in 1994 and 1995 and 65%, 45%, 32% and 22%
of its revenues in 1996 and the three month periods ended March 31, June 30 and
September 30, 1997, respectively, were generated under management agreements
with GMMS.
Partial Service Clients
The Company earns its fees from partial service clients primarily by
providing billing and collection services for a fee based on a percentage of
collections.
S-11
<PAGE>
Preferred Provider Organization
Consumer Health Network earns its fees from self-insured employer groups,
union groups, insurance companies and other third party payors based on a
percentage of the savings generated through the use of its network.
Management of Diagnostic Imaging Services
The Company's fees for owning and providing administrative support for MRI
and other diagnostic imaging equipment are earned on the basis of a charge for
each use of the equipment.
Results of Operations
The following tables set forth, in dollars and as a percentage of
revenues, respectively, certain items in the Company's statements of operations
for the three and nine month periods ended September 30, 1996 and 1997:
<TABLE>
<CAPTION>
Nine Months Three Months
Ended September 30, Ended September 30,
----------------------- -------------------------
1996 1997 1996 1997
---------- ---------- ----------- -----------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Revenues ............................................. $20,030 $53,358 $ 8,767 $ 20,215
Interest discount (1) .............................. (1,748) (2,196) (692) (647)
-------- -------- -------- --------
Net revenues ....................................... 18,282 51,162 8,075 19,568
Cost of revenues .................................... 6,598 26,893 2,873 11,691
General & administrative expenses .................. 4,869 14,162 2,138 3,818
-------- -------- -------- --------
Income from operations .............................. 6,815 10,107 3,064 4,059
Interest discount included in income (2) ............ 1,855 1,671 619 542
Interest expense .................................... (1,829) (4,876) (1,234) (1,683)
Interest, dividend and other income .................. 687 2,820 449 584
Gain on partial equity disposition .................. -- 850 -- 850
-------- -------- -------- --------
Income before provision for taxes .................. 7,528 10,572 2,898 4,352
Provision for income taxes ........................ 3,613 4,030 1,422 1,614
-------- -------- -------- --------
Net income .......................................... $ 3,915 $ 6,542 $ 1,476 $ 2,738
======== ======== ======== ========
Primary net income per share ........................ $ 0.50 $ 0.61 $ 0.18 $ 0.24
Weighted average number of shares outstanding ...... 7,840 10,647 8,085 11,304
Fully diluted net income per share .................. $ 0.42 $ 0.57 $ 0.13 $ 0.22
Weighted average number of shares outstanding ...... 9,264 16,218 11,483 16,755
</TABLE>
<TABLE>
<CAPTION>
Nine Months Three Months
Ended September 30, Ended September 30,
--------------------- ---------------------
<S> <C> <C> <C> <C>
1996 1997 1996 1997
----- ----- ------ -----
Revenues ....................................... 100% 100% 100% 100%
Interest discount (1) ........................ (8.7) (4.1) (7.9) (3.2)
----- ----- ------ -----
Net revenues .................................... 91.3 95.9 92.1 96.8
Cost of revenues .............................. 33.0 50.4 32.8 57.8
General & administrative expenses ............ 24.3 26.5 24.4 18.9
----- ----- ------ -----
Income from operations ........................... 34.0 19.0 34.9 20.1
Interest discount included in income (2) ...... 9.3 3.1 7.1 2.7
Interest expense .............................. (9.1) (9.1) (14.1) (8.3)
Interest, dividend and other income ............ 3.4 5.3 5.1 2.9
Gain on partial equity disposition ............ -- 1.6 -- 4.2
----- ----- ------ -----
Income before provision for taxes ............ 37.6 19.9 33.0 21.6
Provision for income taxes ..................... 18.0 7.6 16.2 8.0
----- ----- ------ -----
Net income .................................... 19.6% 12.3% 16.8% 13.6%
===== ===== ====== =====
</TABLE>
- ------------
(1) Represents interest discount taken to reflect the presumed collection of
revenues over a period in excess of one year. See Note 2 to the
Consolidated Financial Statements of the Company included in the 1996 Form
10-K.
(2) Represents recapture of interest discount taken to reflect the presumed
collection of revenues over a period in excess of one year. See Note 2 to
the Consolidated Financial Statements of the Company included in the 1996
Form 10-K.
Comparisons of the Nine Months Ended September 30, 1997 and 1996
Revenues for the first nine months of 1997 were $53,358,000 as compared to
$20,030,000 for the same period in 1996, an increase of $33,328,000. The
primary reasons for the increase were the acquisition of a physician practice
management company and the expansion of medical practices under management,
which added
S-12
<PAGE>
$22,844,000 of additional revenues, the acquisitions of two medical billing
companies, which added $5,185,000 in revenues, and the acquisition of Consumer
Health Network in June 1997, which added $2,457,000. Finally, the provision of
MRI and other diagnostic imaging equipment and other services to third parties
added $2,842,000 of additional revenues for the period.
Cost of revenues for the first nine months of 1997 increased to
$26,893,000 from $6,598,000 for the same period in 1996, an increase of
$20,295,000. Cost of revenues includes the non-medical costs of physician
practices and other costs directly related to the recognition of the Company's
revenues, including the costs incurred by the Company to collect patient
service receivables. The increase in cost of revenues was primarily
attributable to the acquisition of a physician practice management company and
the expansion of medical practices under management, which added $15,111,000 of
such costs, the acquisitions of two medical billing companies, which added
$2,665,000 of additional costs, and the acquisition of Consumer Health Network,
which added $816,000 of additional costs. Additionally, cost of revenues also
increased $1,703,000 over the same period last year due to the reclassification
of certain general and administrative expenses to cost of revenues and
increased expenses relating to the provision of MRI and other diagnostic
imaging equipment and other services to third parties.
As a percentage of revenues, cost of revenues for the nine-month period
increased to 50.4% from 33.0% for the prior year. This decrease in profit
margin resulted primarily from a decline in the percentage of the Company's
revenues generated by GMMS, a practice with historically high profit margins,
and, to a lesser extent, the reclassification of certain general and
administrative expenses noted above.
General and administrative expenses increased to $14,162,000 for the first
nine months of 1997 as compared to $4,869,000 for the same period in 1996, an
increase of $9,293,000. General and administrative expenses represent overhead
and administrative expenses excluding costs directly related to operations and
the recognition of revenues. The increase was primarily due to the various
acquisitions and medical practice expansions noted above, which added
$4,151,000 of such costs over the same period in the prior year. The Company
also added an additional $5,142,000 of costs over the same period in the prior
year by incurring increased personnel and professional costs of $1,426,000,
depreciation and amortization expenses of $1,537,000 and rental and other
general office costs of $2,179,000.
Interest expense increased to $4,876,000 for the first nine months of 1997
from $1,829,000 for the same period in 1996 principally due to interest on (a)
$2,000,000 principal amount of 8% Convertible Subordinated Notes issued on
March 20, 1996, (b) $40,250,000 principal amount of 8% Convertible Subordinated
Debentures issued on June 5, 1996, (c) $3,000,000 principal amount of 8%
Convertible Subordinated Notes issued on July 5, 1996, (d) $28,750,000
principal amount of 8% Convertible Subordinated Debentures issued on December
5, 1996 and (e) $10,000,000 principal amount of borrowings incurred under a
line of credit, $5,000,000 in February 1997 and $5,000,000 in May 1997.
Interest, dividend and other income for the first nine months of 1997
increased to $2,820,000 from $687,000 for the same period in the prior year.
The primary reasons were the increased earnings on higher cash balances and
marketable securities which resulted from various debt and equity issuances, as
well as increased gains on the sale of marketable securities.
Gain on partial equity disposition represents a gain of $850,000 on the
sale of a 40% equity interest in CMI Capital Corporation, a then wholly owned
subsidiary of the Company that purchases patient service receivables from
unrelated medical practices, for $5,000,000.
Comparisons of the Three Months Ended September 30, 1997 and 1996
Revenues in the current quarter were $20,215,000 as compared to $8,767,000
for the same period in 1996, an increase of $11,448,000. The primary reasons
for the increase were the acquisition of a physician practice management
company and the expansion of medical practices under management, which added
$6,531,000 of additional revenues, the acquisitions of two medical billing
companies, which added $1,998,000 in revenues and the acquisition of Consumer
Health Network in June 1997, which added $1,904,000 in revenues. Finally, the
provision of MRI and other diagnostic imaging equipment and other services to
third parties added $1,015,000 of additional revenues for the period. The
Company's revenues generated from GMMS for the third quarter, however,
decreased primarily due to the Company's analysis of the value of GMMS's
patient service receivables, which collateralize the Company's management fees.
S-13
<PAGE>
Cost of revenues for the third quarter increased to $11,691,000 from
$2,873,000 in 1996, an increase of $8,818,000. The increase in cost of revenue
was primarily attributable to the acquisition of a physician practice
management company and the expansion of medical practices under management,
which added $6,589,000 of such costs, the acquisitions of two medical billing
companies, which added $651,000 of additional costs, and the acquisition of
Consumer Health Network, which added $730,000 of such costs. Additionally, cost
of revenues also increased $848,000 over the same period last year due to
increased expenses relating to the provision of MRI and other diagnostic
imaging equipment and other services to third parties.
As a percentage of revenues, cost of revenues for the third quarter of
1997 increased to 57.8% from 32.8% for the same period in the prior year. This
decrease in profit margin resulted primarily from a decline in the management
fees charged to GMMS during the period notwithstanding an increase in the cost
of revenues attributable to GMMS, as well as the lower profit margins generated
by the Company's services provided to certain new and rapidly expanding full
service clients.
General and administrative expenses for the third quarter increased to
$3,818,000 in 1997 from $2,138,000 for the same period in 1996, an increase of
$1,680,000 or 78.6%. The increase was primarily due to the various acquisitions
and medical practice expansions noted above, which added $985,000 of such costs
over the same period in the prior year. The Company also added an additional
$695,000 of costs over the same period in the prior year by incurring increased
personnel and professional costs, depreciation and amortization expenses and
rental and other general office costs.
Interest expense increased to $1,683,000 from $1,234,000 in 1996
principally due to interest on $28,750,000 principal amount of 8% Convertible
Subordinated Debentures issued on December 5, 1996 and $10,000,000 of
borrowings incurred under a line of credit, $5,000,000 in February 1997 and
$5,000,000 in May 1997.
Interest, dividend and other income for the third quarter increased to
$584,000 from $449,000 for the same period in the prior year, increasing at a
substantially lower rate than for the first nine months of the year. The
primary reason for this lower rate was the decline in cash balances and
marketable securities.
Gain on partial equity disposition represents a gain of $850,000 on the
sale of a 40% equity interest in CMI Capital Corporation for $5,000,000.
Results of Operations for the Years Ended December 31, 1996 and 1995
Revenues in 1996 were $33,158,000 as compared to $12,294,000 in 1995, an
increase of $20,864,000. The primary reasons for the increase were (i) the
acquisition of MMI in January 1996, (ii) the acquisition of two medical billing
companies in July 1996 and (iii) the acquisition of a physician practice
management company in October 1996. In addition, fees for management services
rendered by the Company to GMMS increased by $2,097,000 as a result of an
increase in the number of patients evaluated and treated by GMMS, the
acquisition by GMMS of two medical practices in the third quarter of 1996 and
the opening by GMMS of three offices in the fourth quarter of 1995.
Cost of revenues increased to $12,308,000 from $2,771,000 in 1995, an
increase of $9,537,000. The major component of the increase, $5,758,000, was as
a result of the acquisition of (i) MMI in January 1996, (ii) the medical
billing companies in July 1996 and (iii) the physician practice management
companies in October 1996. Additionally, the Company continued to hire
management and support personnel, such as, patient schedulers and medical
record maintainers in order to properly service the expanding medical
practices. As a percentage of revenues, cost of revenues increased from 22.5%
in 1995 to 37.1% in 1996.
General and administrative expenses increased by $6,169,000 from
$2,974,000 in 1995 to $9,143,000 in 1996. The major component of the increase,
$3,084,000, was as a result of the acquisition of (1) MMI in January 1996, (2)
the medical billing companies in July 1996 and (3) the physician practice
management companies in October 1996. These expenses also increased as a result
of hiring management personnel to prepare for the Company's anticipated growth
and the amortization of goodwill related to the acquisitions completed in 1996.
Interest expense increased from $46,000 in 1995 to $2,740,000 in 1996 due
mainly to interest on the (1) $2,000,000 principal amount of 8% Convertible
Subordinated Notes issued on March 20, 1996, (2) $40,250,000
S-14
<PAGE>
principal amount of 8% Convertible Subordinated Debentures issued on June 5,
1996, (3) $3,000,000 principal amount of 8% Convertible Subordinated Notes
issued on July 5, 1996 and (4) $28,750,000 principal amount of 8% Convertible
Subordinated Debentures issued on December 5, 1996.
Results of Operations for the Years Ended December 31, 1995 and 1994
Revenues in 1995 were $12,294,000 as compared to $10,654,000 in 1994, an
increase of 15%. All revenues in both periods were generated by GMMS. The
procedures performed by GMMS increased from 128,500 in 1994 to 157,000 in 1995.
Cost of revenues increased $822,000, from $1,949,000 in 1994 to $2,771,000
in 1995. A significant portion of this increase ($694,000) was due to hiring 23
additional practice management and other support personnel, such as appointment
schedulers, record transcribers and intake examiners, in order to properly
administer GMMS's expanding medical practice and to prepare for additional
clients. Transcription costs increased $129,000 due to the greater number of
patients evaluated and treated by the Company's full service clients.
General and administrative expenses increased by $403,000 or 16% from
$2,571,000 in 1994 to $2,974,000 in 1995. The increase was primarily
attributable to additional expense due to the opening of three additional GMMS
offices and annual escalations in the rent of the existing six offices, related
incremental depreciation and amortization, upgrading of the billing system and
increased marketing efforts. Additionally, the Company incurred one time costs
associated with its fourth quarter financing and incremental insurance costs in
connection with its initial public offering in December 1995.
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 replacement expenditures, by the
Company totaling $193,000 in 1994 and $178,000 in 1995.
Liquidity and Capital Resources
To date, the Company has primarily used its cash to support operating
activities, including higher levels of receivables generated by increased
management fees, to fund acquisitions and for capital expenditures. The
Company's primary sources of cash have been the proceeds of its initial public
offering, its sales of an aggregate of $5,000,000 principal amount of 8%
Convertible Subordinated Notes, $40,250,000 principal amount of 8% Convertible
Subordinated Debentures due August 15, 2003, $28,750,000 principal amount of 8%
Convertible Subordinated Debentures due December 15, 2003 and Common Shares
and, borrowings under the Company's line of credit. At September 30, 1997, the
Company had working capital of $64,234,000. In October 1997, the Company
received $5,000,000 from the sale of 8% Notes.
The Company's full service clients are liable to the Company for
management fees regardless of whether the client receives payment for the
medical services rendered. However, the Company has historically deferred
collecting amounts owed to it when full service clients have experienced delays
in collecting payments for medical services. A substantial majority of the
accounts receivable generated by the Company's full service clients,
particularly GMMS, remain outstanding for extended periods. The average days
outstanding for the Company's full service clients' receivables at September
30, 1997 was 350 days. For this reason, at the beginning of 1997, the Company
embarked on a program to accelerate collections of receivables owed to its full
service clients. This program includes increased manpower and other resources
devoted to collection efforts, consolidation of most billing and collection
efforts at a centralized facility, and the earlier use of legal counsel for
collection of workers' compensation and no-fault automobile receivables.
Net cash used for operating activities in the first nine months of 1997
was $26,026,000, principally due to an increase in accounts receivable of
$32,748,000. Accounts receivable increased primarily due to acquisitions and
expansion of medical practices under management. During the first three
quarters of 1997, the Company used $40,018,000 of cash and issued $8,485,000 of
its Common Shares to complete acquisitions. During that period, the Company
also made capital expenditures of $10,873,000 (compared to $1,540,000 in the
first nine months of 1996), primarily for the acquisition of MRI and other
diagnostic imaging equipment and the refurbishment and expansion of the offices
provided to its full service clients.
S-15
<PAGE>
During the first nine months of 1997, the Company funded its operating
cash flow deficit, acquisitions and capital expenditures primarily through (i)
a reduction in the Company's cash and cash equivalents, (ii) a net reduction in
marketable securities and (iii) $10,000,000 of borrowings incurred under a line
of credit.
At September 30, 1997, $54,166,000, or 59.5%, of the Company's accounts
receivable were due from GMMS. These receivables are collateralized by patient
service receivables due to GMMS with a face amount of $72,932,000 at such date.
GMMS's ability to pay the Company is dependent upon the Company's ability to
collect the patient service receivables on behalf of GMMS. On a quarterly
basis, the Company reviews, based on estimated rates of collection for each
class of patient service and estimated allowances for uncollectible balances,
the adequacy of GMMS's collateral. From January 1, 1992 through September 30,
1997, GMMS billed its patients and third-party payors an aggregate of
$121,050,000, of which $45,821,000, or 37.9%, had been collected by September
30, 1997. In order for GMMS's patient receivables outstanding at September 30,
1997 to cover the Company's management fees owed by GMMS at that date, 74.3% of
such patient receivables must be collected, representing an overall collection
rate of 82.6% on GMMS's billings through September 30, 1997.
More specifically, at September 30, 1997, approximately $24,735,000, or
33.9%, of GMMS's total patient service receivables were generated through the
performance of medical services for which GMMS will be paid only upon the
successful resolution of negligence claims by the patients against third
parties, either through a judicial determination or settlement. From January 1,
1992 to September 30, 1997, GMMS billed approximately $30,024,000 of such
receivables, of which $4,428,000, or 14.7%, had been collected by September 30,
1997. In measuring the adequacy of such receivables as collateral for the
Company's management fees to GMMS, the Company has estimated that it will
collect, on behalf of GMMS, approximately 55% of these outstanding receivable
balances. The Company estimates, based upon industry factors and GMMS's
historical collection experience prior to its association with the Company,
that the entire collection process for these contingent claims generally ranges
from one to seven years. Since 1994, however, the percentage of cases resolved
within two years of providing service has declined, which may result in an even
longer collection cycle or a lower rate of collection. The Company believes
that this decline is the result of payors more consistently deferring
settlement of these matters until just prior to trial.
In evaluating the adequacy of its collateral from GMMS, the Company
considers historical collection patterns important. The Company, however, also
believes that the ultimate collection of receivables is dependent on its
ability to improve its billing and collection process and its relations with
third party payors. The Company believes that it can achieve the higher
collection rate necessary to assure that the Company's management fees from
GMMS are paid in full for several reasons: (i) the collection cycle for an
important portion of these receivables, particularly for the contingent
receivables described above, can be as long as seven years and thus payments
will continue to be received in future periods, (ii) since the beginning of
1997, as discussed above, the Company has committed substantial resources to
consolidate and increase its collection efforts and (iii) a recent New York
Court of Appeals decision may expedite the collection of patient receivables
from third-party payors under automobile no-fault insurance policies and
perhaps improve the rate of collection. Accordingly, the Company's estimate of
future collections reflects not only historical results, but also the impact of
the improved collection processes and the increased resources being applied to
this effort. There can be no assurance, however, that the Company will be able
to achieve the collection rate necessary to assure that the Company's
management fees from GMMS are paid in full. The inability of the Company to
collect a significant portion of its management fees owed by GMMS could have a
material adverse effect on the Company.
In October 1997, the Company purchased a physician practice management
company for $4,250,000 of which $500,000 was paid in cash at closing and
$500,000 will be paid, subject to cetain conditions, in January 1998. The
balance of the purchase price was paid in Common Shares.
In November 1997, the maturity of the Company's $10,000,000 line of credit
was extended from November 12, 1997 to January 12, 1998. If not repaid on or
before the maturity date, the Company would seek to renegotiate the line of
credit.
The Company expects its cash, cash equivalents and marketable securities
and the net proceeds from the issuance of the Common Shares offered hereby to
be sufficient to meet its current working capital requirements through at least
the end of 1998.
S-16
<PAGE>
BUSINESS
The Company provides physician practice management services to medical
practices and hospitals located in the New York metropolitan area, particularly
New York City, Long Island, the Hudson Valley region and portions of New Jersey
and Connecticut. The Company's services range from managing all non-medical
aspects of its clients' businesses to providing limited non-medical services,
such as billing and collection, transcription and temporary staffing.
Additionally, the Company owns and provides administrative support for MRI and
other diagnostic imaging equipment at seven hospitals. The Company also owns
Consumer Health Network, a PPO operating in New Jersey and, to a more limited
extent, New York and Connecticut. Consumer Health Network is the largest PPO in
New Jersey.
At October 15, 1997, the Company's full service clients employed 176
physicians and other health care providers, its partial service clients
employed approximately 1,100 physicians and other health care providers and
Consumer Health Network had under contract approximately 11,700 physicians and
other health care providers and 117 hospitals. As a result, the Company
estimates that it provides services to more than 10% of the physicians in the
New York metropolitan area. The Company does not, however, provide any type of
medical, diagnostic or treatment services; rather, these services are provided
by the Company's clients.
Physician Practice Management Industry
The Health Care Financing Administration estimates that healthcare
spending in the United States was approximately $1 trillion in 1995, with
physician fees approximating 20% of these expenditures. As concerns over the
level of these expenditures have increased, the traditional fee for service
reimbursement model, which is generally believed to contribute to cost
increases at rates greater than inflation, is being replaced by alternative
reimbursement models, including capitated and other fixed fee arrangements.
These alternative models, which were developed by managed care organizations,
focus on providing quality healthcare in a cost effective manner.
As a result of these alternative models, reimbursement rates and therefore
overall physician compensation has been declining in recent years. Smaller
practices have limited ability to negotiate with payors and do not have the
information systems necessary to enter into and manage capitated fee and other
risk-sharing contracts with payors. In addition, smaller practices tend to have
limited administrative capacity, restricted ability to coordinate care across a
variety of specialties to implement disease management programs efficiently,
limited capital to invest in new clinical equipment and technologies and
limited negotiating leverage with vendors of medical supplies. In response to
the foregoing factors and in order to combat declining income, individual
physicians and small group practices are increasingly affiliating with large
group practices and physician practice management companies.
The Company believes that significant opportunities exist in the
consolidating healthcare industry to assist physicians in managing the
administrative aspects of group practices and networks and in bidding for
service contracts with managed care providers. The Company believes its
integrated physician practice and network management services will enable
physicians to more effectively control both the quality and cost of healthcare.
New York Market
The Company believes that several attributes of the New York metropolitan
area present an attractive growth opportunity for the Company. This market is
one of the largest domestic healthcare markets and is highly fragmented with a
substantial majority of the approximately 73,000 physicians in this market
currently practicing alone or with one other physician. The Company believes
that the primary force driving physicians to affiliate with large group
practices similar to those managed by the Company or with physician practice
management companies is the level of managed care penetration, because as
managed care penetration increases, managed care organizations gain additional
leverage to reduce physician reimbursement and seek capitation and other risk
sharing arrangements. Although managed care penetration in New York has lagged
behind the rest of the country, it has rapidly increased from 18.2% of the
insured population in 1993 to 27.9% in 1996. In addition, the expiration of New
York's Prospective Hospital Reimbursement Methodology regulations on January 1,
1997 now enables providers and third party payors to negotiate fees directly
with hospitals. Prior to this change, only health maintenance organizations
could negotiate discounts from mandated hospital reimbursement rates.
S-17
<PAGE>
Growth Strategy
The Company's goal is to expand its position as a leader in the management
of physician practices in the New York metropolitan area by implementing an
aggressive growth strategy. 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 services. The Company
believes that such a strategy should, in turn, enhance its clients' revenue
opportunities and increase the profitability of their practices. The key
elements of the Company's strategy are:
o Focus on the New York Market. The Company is focused on providing services to
physicians and other health care providers in the New York metropolitan
area. This market is one of the largest domestic healthcare markets and is
highly fragmented with a substantial majority of the physicians in this
market practicing alone or with one other physician. Because of the size and
fragmentation of the market, the Company believes that the New York market
represents an attractive opportunity for the development of physician
practice management companies.
o Increase Number of Physicians Employed by Full Service Clients through
Acquisitions and Internal Expansion. The Company seeks to increase the
number of physicians to which it provides full management services by
acquiring physician practice management companies and assisting its clients
in expanding their medical practices. The Company works with its full
service clients to formulate strategies to achieve growth through either
acquisitions, internal expansion or a combination thereof and then provides
the client with the capital and expertise necessary to execute these
strategies. The Company also has developed standard procedures for
identifying and valuing targets. Since July 1996, the Company has completed
or assisted its clients in completing 25 transactions.
o Assist Full Service Clients in Developing Multi-Specialty Practices Offering
a Full Range of Ancillary Tests and Services. Managed care payors have
changed referral patterns by making primary care physicians "gate-keepers"
who control patient referrals to both specialty care physicians and
ancillary tests and services, such as diagnostic imaging, laboratory testing
and physical therapy. Additionally, federal and state laws sharply limit the
ability of physicians to receive remuneration from persons or entities to
whom they refer patients. As a result, the Company's strategy is to assist
its full service clients in developing practices that (i) employ both
primary care physicians and the specialty care physicians to whom they most
often refer patients and (ii) offer in-office capabilities to provide
ancillary tests and services. The Company believes that by expanding the
revenue base of a full service client to capture a greater portion of the
fees related to a patient's treatment, the client can increase its
profitability.
o Implement Enterprise-Wide Advanced Information Systems. The Company is
currently investing in updated management information systems to provide
standard reporting functions and allow for collection and analysis of
patient specific data, the development of clinical protocols and tracking of
clinical outcomes. The Company believes that an integrated, enterprise-wide
automated and standardized information system will support a higher level of
efficiency for its clients' medical personnel and also lead to faster and
more complete collections of fees. The Company has begun implementing an
electronic physician practice management system and is in the process of
selecting an electronic medical record system designed to automate patient
charts and other care-giving activities. See "Business -- Information
Systems".
o Continue the Expansion of Consumer Health Network throughout the New York
Metropolitan Area. The Company is seeking to expand Consumer Health Network,
the largest PPO in New Jersey, into New York and Connecticut. These efforts
are designed to offer managed care payors a broad range of medical services
across the metropolitan area. Additionally, the Company believes that
Consumer Health Network is well positioned to offer payors various
reimbursement arrangements, including discounted fee-for-service and full
and partial capitation.
Acquisition Program
The Company seeks to acquire or assist its clients in acquiring businesses
or medical practices that offer quality healthcare services, an opportunity for
internal growth through capturing additional revenues and an ability to
coordinate patient care with the medical practices of existing clients. Since
January 1, 1996, the Company has completed, or assisted its clients in
completing, 25 acquisitions, including physician practice
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management companies ("PPMs"), medical practices and other physician focused
businesses. An overview of the Company's and its clients' acquisitions is
provided below.
Business Services
<TABLE>
<CAPTION>
Date Company Description
- ------- ------- -----------
<S> <C> <C>
1/96 Medical Management, Inc. Owner and provider of administrative support for
diagnostic imaging equipment
7/96 Penta Automation Resources, Inc. Billing and collection services for physicians
7/96 Intertech Corporation Billing and collection services for hospitals
6/97 Consumer Health Network, Inc. Operator of preferred provider organizations
9/97 Tri-County Mobile MRI LP Owner and provider of administrative support for
diagnostic imaging equipment
</TABLE>
Physician Practice Management Companies and Physician Practices
<TABLE>
<CAPTION>
Date Description Physicians* Focus
- ------- ----------- ------------ -----
<S> <C> <C> <C>
8/96 PPM 5 Industrial medicine
8/96 Specialty care 2 Neurology
8/96 Primary care 10 Internal medicine
10/96 PPM 30 Radiology
11/96 PPM 9 Internal medicine
12/96 Primary care 2 Internal medicine
12/96 Primary care 1 Internal medicine
12/96 Primary care 1 Internal medicine
1/97 Primary/Specialty care 7 Urgent care/Radiology/Dermatology
1/97 Primary care 9 OB/Gyn/Pediatrics
2/97 Primary care 2 Internal medicine
2/97 Specialty care 1 Neurology
3/97 Primary care 3 Pediatrics
3/97 Specialty care 2 Physiatry
4/97 Primary care 2 OB/Gyn
5/97 Primary care 1 Family practice
6/97 Primary care 2 OB/Gyn
6/97 Primary care 8 OB/Gyn
7/97 Specialty care 2 Pain management
9/97 PPM 14 Internal medicine/Urgent care
</TABLE>
- ------------
* As of the date of acquisition.
Full Service Practice Management Services
The Company provides a broad range of practice management services to its
full service clients for the efficient and profitable operation of medical
practices. These services encompass substantially all the non-medical aspects
of its clients' operations and are designed to allow physicians to focus
greater attention on the care and treatment of their patients. The principal
areas of the Company's services include:
Billing and Collections. The Company prepares bills and submits them to
third-party payors on behalf of its clients. Regular follow-ups are then sent,
as necessary, to assist in the collection process. At the beginning of 1997,
the Company embarked on a program to accelerate the collection of patient
service receivables owed to its full service clients. This program includes
increased manpower and other resources devoted to collection efforts,
consolidation of the Company's billing and collection efforts at a centralized
facility, and the earlier use of legal counsel for collection of workers'
compensation and no-fault automobile receivables.
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<PAGE>
Personnel. The Company employs and trains all the non-medical personnel
serving its full service clients' practices. This service eliminates the
client's need to hire, train and supervise non-medical employees, as well as
process the tax, insurance and other documentation associated with an
employment relationship.
Administrative Services. 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. Additionally, the
Company provides its full service clients with timely management reports, which
include activity data, collection status and other management information
useful for the operation of their medical practices.
Consulting Services. The Company develops, in conjunction with its full
service clients, plans to enable such clients to increase the revenues and
profitability of their medical practices. Strategies implemented by clients
include: (i) increasing the evaluation, diagnostic and treatment services
offered; (ii) integrating other specialties into their medical practices; (iii)
establishing additional offices; and (iv) acquiring other medical practices to
implement one or more of the foregoing.
Access to Capital. The Company provides capital to its full service
clients to permit them to acquire other medical practices and to develop, equip
and expand their existing medical practices.
Diagnostic Imaging Services. The Company, where appropriate, assists its
full service clients in establishing MRI and other diagnostic imaging
capabilities within their medical practices. The Company processes all
applications required for filing with regulatory authorities, finances the
acquisition of equipment, oversees its installation and then manages its
operation.
Offices; Equipment. The Company leases office space and equipment for its
full service clients. The Company oversees, manages and finances construction,
decorating and other improvements to its clients' offices and assists its
clients in site selection. The Company also advises its clients on improving,
updating, expanding or adapting to new technology.
Regulatory Compliance. The Company advises its full service clients on
regulatory compliance in those areas applicable to each client's medical
practice area. The advice is 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 full service clients.
Marketing Strategies. The Company consults with its full service clients
on the development of marketing strategies including running advertisements in
newspapers and periodicals, suggesting which managed care plans (typically PPOs
and HMOs) the physicians should join and performing community educational
activities. While the Company advises its clients with respect to these
marketing issues, it does not directly engage in sales or marketing activities
on behalf of its clients.
Partial Service Clients
The Company provides its partial service clients with billing and
collection services and, in some cases, transcription and temporary staffing
services. As is customary in the billing industry, the Company earns fees for
its billing and collection services based on varying percentages of collections
according to the type and age of the receivables. The Company obtained its
first partial service clients with its acquisition of two billing and
collection service companies in July 1996. The Company believes that partial
service clients may provide the Company with an entree into physician practices
that could later become full service clients. At October 15, 1997, the Company
provided these services to medical practices employing approximately 1,100
physicians and other health care providers and to 32 hospitals, primarily their
emergency room departments.
Preferred Provider Organization
In June 1997, the Company acquired Consumer Health Network, a PPO
operating in New Jersey and, to a more limited extent, New York and
Connecticut. Consumer Health Network is the largest PPO in New
S-20
<PAGE>
Jersey. The Company believes that Consumer Health Network may provide it with
an introduction to physician practices that could become full service clients.
At October 15, 1997, Consumer Health Network had under contract approximately
11,700 physicians and other healthcare providers and 117 hospitals.
PPOs are designed to enable their network physicians and other health care
providers to expand their patient base by negotiating contracts with
self-insured employer groups, union groups, insurance companies and other
third-party payors under which those payors will make available the network
physicians and other healthcare providers to their enrollees. Consumer Health
Network earns fees from third-party payors based on a percentage of the savings
generated through use of the network. In order to generate these savings,
Consumer Health Network has agreements with healthcare providers to provide
services to enrollees on a discounted fee for service basis. See "Business --
Government Regulation -- Corporate Practice of Medicine" and "-- Insurance
Regulation".
Management of Diagnostic Imaging Services
In addition to owning and providing administrative support for MRI and
other diagnostic imaging equipment used by certain full service clients, the
Company owns and manages MRI units in two New York City hospitals and provides
a mobile MRI unit to five hospitals in Westchester and Putnam counties. The
Company's MRI units are either owned or leased under capital leases. The
Company earns fees for providing these services on the basis of a charge for
each use of the equipment.
GMMS
The Company's initial client, GMMS, is a multi-specialty medical practice
that specializes in the evaluation, diagnosis and treatment of injured
patients. All of the Company's net revenues in 1994 and 1995 and 65%, 45%, 32%
and 22% of its net revenues in 1996 and the three month periods ended March 31,
June 30 and September 30, 1997, respectively, were generated under management
agreements with GMMS. See "Risk Factors -- Dependence on Principal Client" in
the accompanying Prospectus. Originally a one-office neurological practice with
three physicians, GMMS has grown to 23 healthcare providers. Additionally, GMMS
now offers a full range of ancillary tests and services, including diagnostic
imaging and physical therapy. The Company believes that GMMS is one of the
leading providers of injury related medicine in the New York metropolitan area.
As a result of GMMS's focus on injury related medicine, the charges
incurred by a majority of its patients are not covered by commercial health
insurance. Instead, these patients are generally covered by two New York State
mandated programs: workers' compensation and automobile no-fault insurance.
Additionally, GMMS performs medical services for which it will be paid only
upon the successful resolution of negligence claims, either through judicial
determination or settlement. For the nine months ended September 30, 1997, 58%
of GMMS's revenues resulted from patients covered under workers' compensation
or automobile no-fault programs and 23% from contingent claims. As a result of
its payor mix, GMMS experiences long collection cycles for its receivables. See
"Risk Factors -- Dependence on Principal Client" and "-- Inability to Collect
or Delay in Collecting Management Fees" in the accompanying Prospectus.
Under two management services agreements with GMMS (collectively, the
"GMMS Agreements"), the Company furnishes GMMS with a comprehensive range of
management services encompassing all non-medical aspects of its medical
practice. The Company's fees are related to the services provided and include
fees based on the Company's direct costs plus a percentage of these costs, per
use fees for MRI equipment and administrative support services, hourly
consulting charges and reimbursement of certain overhead expenses. All such
fees are subject to periodic upward readjustment, based on specified formulae
or procedures. To the extent permitted by applicable laws, management fees due
from GMMS are collateralized through the assignment, on a full recourse basis,
of GMMS's accounts receivable balances. The GMMS Agreements give the Company a
right to purchase the medical practice of GMMS at its then fair market value in
the event that New York State permits the practice of medicine by a public
corporation without the need to apply for a certificate of need ("CON"). The
GMMS Agreements expire in July 2001 and June 2025, respectively, but the first
expiring agreement can be extended at the Company's option in five year
increments.
S-21
<PAGE>
GMMS is 95% owned by Lawrence Shields, a neurologist who is also a
co-founder and principal shareholder of the Company. The transfer of ownership
of a majority of GMMS shares to anyone other than Dr. Shields or Dr. Irving
Friedman (a 5% owner of GMMS) constitutes an assignment under the GMMS
Agreements and may not be made without the consent of the Company.
Information Systems
The Company is developing, in conjunction with software vendors, an
integrated enterprise-wide management information system, which it believes
will provide significant value to its client base and allow the Company to more
efficiently provide its services. The Company expects that its investment in
management information systems will range from approximately $10 to $15 million
over the next three years, although the actual amount of the investment will
depend upon technological changes, the pace at which the Company adds new
clients through its acquisition program and new offices or additional doctors
through expansion of its clients.
Physician Practice Management System. The Company, in conjunction with
Medic Corporation, is implementing a physician practice management system ("PPM
System") designed to capture patient, insurance and demographic information at
the "point of service". Additionally, the Company believes that the PPM System
will reduce the administrative burden on physicians, thereby allowing them more
time for patient care. The PPM System will be designed to generate real time
bills to third-party payors. Additionally, the Company believes that the PPM
System will permit it to better assess the operations of the various business
units it owns or manages, facilitate the development of a "best practice"
operational model, and provide useful feedback to providers and business unit
managers. The Company expects to have all of its full service clients' practice
sites on the PPM System by the end of 1998. The Company expects to begin a
pilot program, in which certain key clients would assist the Company, during
the first quarter of 1998.
Electronic Medical Record System. The Company is in the process of
selecting an electronic medical record system ("EMR System") to be used by
physicians as a clinical management tool. The EMR System will be designed to
allow the entry of clinical data on a real time basis at the point of service
and provide real time access to a patient's medical history and insurance
information, including plan restrictions. The EMR System will also suggest
treatment protocols and automatically generate the codes used by insurance
carriers and health plans associated with patient diagnosis and procedures. The
EMR System is expected to be integrated with the PPM System so that, for
example, these codes will then be used by the PPM System to generate bills to
third party payors. The Company expects to select an EMR System and begin a
pilot program, in which certain key clients would assist the Company, during
the first half of 1998.
Wide Area Network. The Company is expanding its information system and
telecommunications capabilities to support the design and implementation of a
wide area network ("WAN") to link the Company and its full service and partial
service clients and to link physicians at remote locations with their medical
practices. The WAN will allow the Company's full service and partial service
clients and employees real time and remote access to the Company's EMR System
and PPM System. For example, the WAN would allow physicians to obtain patient
clinical information outside of their offices, while on hospital rounds or "on
call". The Company expects that the major elements of the WAN will be completed
during the first half of 1998.
Management Agreements
The Company and its full service clients are party to long-term management
agreements, generally with terms of 30 years. Under these agreements, the
Company furnishes its clients with a comprehensive range of management
services, including the provision of office space and equipment, non-medical
personnel, administrative services, billing, receivables collections and
regulatory compliance, which encompass substantially all the non-medical
aspects of its full service clients' medical practices. The Company also offers
consultation services regarding marketing strategies and provides financing for
the expansion of its clients' medical practices. The specific terms and
conditions of any particular management agreement vary depending on the
negotiations between the Company and its client and the laws of the
jurisdiction where the client's medical practice is located.
The Company receives fees for providing these services under its
management agreements based on its direct costs plus either a fixed fee or a
percentage of these costs. The Company also receives hourly consulting
S-22
<PAGE>
charges, per use fees when MRI and other diagnostic imaging equipment is
provided and, in the case of GMMS, reimbursement of a portion of the Company's
corporate overhead expenses. Fixed and percentage fees are subject to periodic
upward readjustment after one or two years based on specified formulae or
procedures. In addition, if a full service client expands its business, the
Company is entitled to increase its fees by its additional costs plus a
percentage of such costs.
Because New Jersey does not prohibit practice management fees based on a
percentage of revenues, the fees paid by one of the Company's full service
clients is equal to 80% of the practice's revenue.
To the extent permitted by applicable laws, management fees due from the
Company's full service clients are collateralized through the assignment, on a
full recourse basis, of such clients' accounts receivable balances.
The Company's management agreements also give the Company the right to
purchase the medical practice of each of its clients, generally for a nominal
amount, in the event that the jurisdiction where such practice is located
permits the practice of medicine by a public corporation without the need to
apply for a CON or it otherwise becomes lawful for the Company to acquire and
operate such practice.
Third-Party Reimbursement
The Company's management fees (including lease payments for office space
and equipment) are payable to the Company by its clients, as required by
applicable legal requirements, 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. Further, patient
receivables are also subject to rejection by a third-party payor if, in its
judgment, the procedures performed were not medically necessary, if the charges
exceed such payor's allowable fee standards or if the claim forms are completed
improperly. The Company's clients are liable to the Company for management fees
regardless of whether the client collects payment for medical services
rendered. However, the Company has historically deferred collecting amounts
owed to it when clients have experienced delays in collecting payments for
medical services. Thus, collection by the Company of its management fees may be
adversely affected by the inability to collect its clients' medical fees from
third-party payors. See "Risk Factors -- Inability or Delay in Collecting
Management Fees" in the accompanying Prospectus.
The healthcare industry is undergoing significant change as third-party
payors, including governmental payors, increase their efforts to control the
cost, use and delivery of healthcare services. Thus, most states, including New
York, New Jersey and Connecticut, have taken measures to control or reduce
healthcare costs by freezing or reducing the reimbursement rates paid to
healthcare providers in their states and the Company believes that further such
initiatives are probable. 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, coverage guidelines 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.
Government Regulation
The healthcare 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 and disqualification from participation in
Medicare, Medicaid and other payor programs. The Company is also subject to
laws and regulations relating to business corporations in general. The Company
believes that its current operations are in material compliance with these laws
and regulations. The structure of the Company's relationships with its medical
practice and hospital clients is also similar in material respects to that of
many firms in the physician practice management industry. Nevertheless, the
laws and regulations in this area are extremely complex and subject to changing
interpretation.
The following are among the laws and regulations that affect the Company's
operations and development activities:
S-23
<PAGE>
Corporate Practice of Medicine; Operation of a Diagnostic Treatment
Center: The laws of New York, New Jersey, Connecticut and various other states
prohibit business corporations such as the Company from practicing medicine and
employing or engaging physicians to practice medicine. Under New York
regulation as well, the exercise by a practice management company of excessive
control over the activities of a medical practice could be deemed to be the
operation of an unlicensed diagnostic and treatment center. The operation of
such a center, however, requires a CON and license, which are not currently
available to a public company such as the Company. The Company leases space and
equipment to medical practices and hospital clients and provides these clients
with a wide-range of non-medical administrative and managerial services. The
Company also provides financing for its clients' acquisitions of physician
practices. The Company does not, however, employ or supervise physicians or
other licensed healthcare professionals, does not represent to the public or to
the patients of its clients that it offers or arranges for 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 and at the specific request of its clients, and
then does so only for the purpose of rendering non-medical services such as
insurance verification, appointment scheduling and collection. The Company does
not direct patient 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
in violation of New York and other state laws prohibiting the corporate
practice of medicine or the unlicensed operation of a diagnostic and treatment
center. If the Company were determined to be engaged in the corporate practice
of medicine or the unlicensed operation of a diagnostic and treatment center,
the Company's contractual relationships with its clients could be jeopardized
and it could be found guilty of criminal offenses and be subject to substantial
civil penalties, including fines and an injunction preventing continuation of
its business.
As a PPO, Consumer Health Network does not provide medical services or
employ or engage physicians to practice medicine. However, the New York State
Department of Health has taken the position that arranging for health care
services constitutes the practice of medicine for purposes of the corporate
practice proscriptions and, therefore, only individuals and entities licensed
or otherwise legally authorized to provide health care services, such as
physicians, professional service corporations, hospitals, HMOs or IPAs, may
arrange for the provision of such services. The arrangements in which Consumer
Health Network is engaged in New York are consistent with those of other PPOs
operating in New York and the Company does not believe that such activities
violate the New York laws prohibiting the corporate practice of medicine. If it
were determined that such arrangements violated such New York laws, however,
Consumer Health Network could be compelled to restructure its contractual
relationships with providers and third party payors in New York, such
contractual relationships could be jeopardized and it could be found guilty of
criminal offenses and be subject to substantial civil penalties, including
fines and an injunction preventing continuation of such relationships in their
present form.
Fee Splitting: New York and various other states prohibit a physician from
sharing or "splitting" fees with persons or entities not authorized to practice
medicine. In New York, but not in New Jersey or Connecticut, 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 New York
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
remuneration based, directly or indirectly, upon the costs and/or estimated
fair market value of the services and equipment provided to such clients by the
Company. Management fees based on a fixed fee per use charge are subject to
scrutiny as to whether the fee represents indirect fee splitting, but are not
improper per se. Consistent with standard practices in the billing and
collection services industry, the Company's billing services subsidiary does
maintain percentage fee arrangements with certain billing and collection
services clients. Although counsel for the New York State Department of Health
recently opined that a percentage fee arrangement for billing services would
violate the prohibition against professional fee splitting, that opinion is
inconsistent with prior Department of Health opinions on the subject and long
standing industry practice, and the matter is presently being re-examined by an
inter-agency
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<PAGE>
task force convened by the Department of Health. The Company believes,
therefore, that such percentage fee arrangements with billing and collection
services clients continue to be proper. The Company further believes that its
charges to its New York full service clients are not based upon their
professional fees or level of income and, accordingly, do not violate fee
splitting prohibitions. If such beliefs are incorrect and the Company is
determined to be engaged in fee splitting arrangements with its physician
clients, such clients could 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 unable to judicially enforce its fee
arrangements with its physician clients, thereby materially adversely affecting
the Company.
Self-Referral Laws: Under the federal Self-Referral Law (the "Stark Law")
(which is presently only applicable to Medicare and Medicaid patients), certain
health practitioners (including physicians, dentist, chiropractors and
podiatrists) are prohibited from referring their patients for the provision of
designated health services (including clinical lab, diagnostic imaging,
physical therapy and other services) to any entity with which they or their
immediate family members have a financial relationship, unless the referral
fits within one of the specific exceptions in the statutes or regulations. The
penalties for violating the Stark Law include, among others, denial of payment
for the designated health 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. Statutory exceptions under the Stark Law 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. New York, New Jersey and certain
other states have similar self-referral laws, applicable to all third party
payors. Each of these state laws varies from the others and from the Stark Law,
although certain of the Stark Law exceptions are also available under the New
York, New Jersey and other state self-referral laws.
The U.S. Department of Health and Human Services ("HHS") also has
initiated a process to issue advisory opinions as to whether a particular
arrangement violates the Stark Law. While the Company has not sought an
advisory opinion regarding compliance with the Stark Law or similar state laws,
the Company believes that its financial relationships with its health
practitioner clients and physicians affiliated with such clients do not fall
within the Stark Law or state self-referral laws, do not involve the provision
of designated health services by the Company or fit within one of the
exceptions in such laws, as the Company is neither a healthcare practitioner in
a position to refer patients nor an entity that provides prohibited designated
health services. Rather, the Company furnishes management, administrative and
financial services to its healthcare practitioner clients who may perform such
designated health services. Similarly, although the Company offers stock in the
Company to certain physicians associated with the Company's clients, which
physicians or clients may be in a position to refer patients for designated
health services to other entities which receive management and related services
from the Company, the Company believes that such investment interests offered
to such physicians either do not fall under the Stark or state self-referral
laws or fit within one of the exceptions to the laws. Nevertheless, the
interpretation of both the Stark and various state self-referral laws is
subject to broad discretion by state and federal regulators and an adverse
determination by such regulators could affect the Company's continued ability
to offer investment interests to physicians or the ability of such physician
investors and/or the medical practices with which such physicians are
associated to refer patients to entities that receive management and related
services from the Company.
In general, moreover, there can be no assurance that future
interpretations or changes to the Stark Law (including its extension to all
third-party payors) or present or future regulations promulgated thereunder (or
to similar New York, New Jersey and other state anti-referral laws or
regulations), will not prohibit or otherwise affect the Company's arrangements
with its clients and physician shareholders in ways that could materially
adversely affect the Company's business.
Anti-Kickback Laws: The Social Security Act imposes civil and criminal
penalties for paying or receiving remuneration (which is deemed a kickback,
bribe or rebate) in connection with any federal healthcare program, including
Medicare or Medicaid. Violation of this law is a felony, punishable by fines of
up to $50,000 per violation and imprisonment for up to five years. This law and
related regulations have been broadly interpreted to prohibit the payment,
solicitation, offering or receipt of any form of reimbursement in return for
the referral of
S-25
<PAGE>
program patients or any item or service that is covered by any federal
healthcare program reimbursement. Similar state law prohibitions, not limited
to particular payor programs, exist under the laws of New York, New Jersey,
Connecticut and other states. Because the breadth of these prohibitions, when
read literally, may place many legitimate business relationships into question,
the HHS has promulgated various "Safe Harbor" regulations specifying certain
relationships and activities that should not violate the federal law and
regulations. HHS has also initiated a procedure for issuing advisory opinions
with respect to whether a particular arrangement does not violate the
anti-kickback statute. The Company does not believe that all of its business
practices satisfy each criteria of an applicable "Safe Harbor" provision, nor
has it sought an advisory opinion with respect to such practices. Moreover,
certain arrangements involving payment of management fees that vary based upon
the volume of services provided may be subject to increased scrutiny with
respect to remuneration for referral. However, failure of an activity to fully
satisfy a "Safe Harbor" provision, or the fact that an arrangement may be
subject to scrutiny, does not mean that such activity constitutes a violation
of the law; rather the arrangement should be analyzed on the basis of its
specific facts and circumstances. 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 by its clients and that, in any event, the compensation
payable to the Company by its clients is unrelated to referrals and is based
upon the fair market value of the services and equipment provided to such
clients by the Company. Accordingly, the Company believes that these agreements
do not violate the federal anti-kickback law or similar state laws. If,
however, the Company's management arrangements were found to violate these
federal or state laws, 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 any federal healthcare
programs, which would materially adversely affect the Company.
Certificate of Need: In the case of the Company's MRI units, New York, New
Jersey and several other states have laws and regulations that require
hospitals to obtain a CON to establish an imaging center or to purchase MRI 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 purchase 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. Under current New York law, a CON is not required for the
acquisition or lease of a MRI 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 obtained a CON with respect to any MRI
units leased from the Company. However, the adoption of legislation extending
CON requirements to private medical practices would make it more difficult for
physicians to lease 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; however, failure of
the Company's clients to comply with the federal and state requirements
applicable to the clients' medical practices could adversely affect the
Company's continued ability to provide management and related services to its
clients.
No-Fault Insurance; Workers' Compensation: The Company's initial client,
GMMS, generates significant revenue from patients covered by no-fault insurance
carriers, the related no-fault insurance payment pool and the New York workers'
compensation program. In the event that changes in these programs create
greater or lesser demand for physician services, decrease the amount of
physician compensation under these programs 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 that the Company receives from its present and potential
future clients for its services. See "Business -- Government Regulation -- New
Laws and Regulations".
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
S-26
<PAGE>
equipment) are 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 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, workers' compensation and
Medicare), 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 that as the Company provides network,
management and administrative services to several clients in a particular
market, these medical practices may be deemed competitors subject to a range of
antitrust laws that 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.
Insurance Regulation: Depending on the scope of the Company's activities
in relation to managed care contracting and administration, the Company and its
medical clients may be subject to a variety of state laws and regulations
affecting HMOs, PPOs and other managed care arrangements, including those
involving assumption of insurance risk, independent practice associations
("IPAs"), third party administrators and utilization review activities. The
Company intends to comply with such state laws and regulations, 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/False Claims: 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. In addition, the federal law
prohibiting submission of false or fraudulent claims to a federal health care
program allows a private person to bring a civil action in the name of the
United States government and obtain a portion of the false claims recovery if
the action is successful. 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 or private parties asserting a false claim action
in the name of the United States government.
New Laws and Regulations: In addition to current laws and regulations,
federal and state governments regularly consider new laws and regulations that,
if enacted, could materially affect the healthcare industry and the payment
for, and availability of, the type of healthcare services furnished by the
Company's clients. Specifically, New York State has adopted a pilot managed
care workers' compensation program that seeks to more closely regulate
expenditures for workers' compensation cases. It is not possible at this time
to predict if this New York project will be expanded or to assess its full
impact on the Company. Nevertheless, 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.
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 neither obtained nor applied for an opinion of any regulatory
or judicial authority that its business operations are in compliance with
applicable laws and regulations. Thus, there is no assurance that the Company's
operations are or have been in compliance at all times with all such laws and
regulations. Nor is there assurance that a court or regulatory authority will
not determine that the Company's past, current or future operations (including
the provision of practice management and billing services, the purchase and
lease-back of client assets, the ownership or operation of ambulatory surgery
facilities, the provision of financing to new or existing clients, the purchase
and/or financing of medical accounts receivable, the operation of a PPO, the
arrangement of management care contracts, and, if appropriate, the granting of
an equity interest in the Company to a client) violate applicable laws or
regulations.
S-27
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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 operating
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
continuation 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; self-referral laws; anti-kickback and
antitrust laws; certificates of need; insurance; regulation of diagnostic
imaging and ambulatory surgery facilities; Medicare; Medicaid; no-fault
insurance; and workers' compensation. In addition, the federal and state
governments continue to examine numerous new laws and regulations that, if
enacted or adopted, could result in changes to the health industry and the
payment for, and availability of, healthcare 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 that 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, injunctive
relief and disqualification from participation in Medicare, Medicaid and other
third-party payor programs. 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.
Competition
The physician practice management business 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. In addition to large
hospitals, potential competitors include 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 believes that its
experience in providing physician practice management services in the
fragmented and highly regulated New York environment is an important
competitive factor.
Employees
At August 31, 1997, the Company employed 606 persons on a full time basis,
comprised of 92 executive and managerial employees; 221 non-medical support
persons "on-site" at clients' offices; 12 marketing support persons; five
information systems support persons; four human resources support persons; 19
accounting staff members; 175 billing, collection and verification employees
and 78 recording and clerical employees. In addition, at August 31, 1997, the
Company had 319 part-time employees. The Company believes that additional or
replacement 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.
Properties
The Company's principal executive offices are located in approximately
17,000 square feet on four floors of 254 West 31st Street, New York, New York
10001. The floors are leased, pursuant to separate leases, for terms expiring
between March 2006 and April 2008, at an aggregate current annual base rent of
approximately $286,000.
In addition, the Company leases on behalf of its clients 38 medical office
facilities in the New York metropolitan area. The leases expire on various
dates through February 2007 and currently provide for aggregate annual rentals
of $2,106,000. Certain of the leases provide for fixed annual increases in
their annual base rent during their terms. The Company anticipates that as its
full service clients expand their practices and add new services, additional
facilities will be required.
S-28
<PAGE>
UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom Prudential
Securities Incorporated, Tucker Anthony Incorporated and L.H. Friend, Weinress,
Frankson & Presson, Inc. are acting as representatives (the "Representatives"),
have severally agreed, subject to the terms and conditions contained in the
underwriting agreement (the "Underwriting Agreement"), to purchase from the
Company the number of Common Shares set forth below opposite their respective
names:
<TABLE>
<CAPTION>
Number of
Underwriter Common Shares
----------- --------------
<S> <C>
Prudential Securities Incorporated ..................
Tucker Anthony Incorporated ...........................
L.H. Friend, Weinress, Frankson & Presson, Inc. ......
Total ............................................. 3,500,000
=========
</TABLE>
The Company is obligated to sell, and the Underwriters are obligated to
purchase, all of the Common Shares offered hereby, if any are purchased.
The Underwriters, through their Representatives, have advised the Company
that they propose to offer the Common Shares initially at the public offering
price set forth on the cover page of this Prospectus Supplement; that the
Underwriters may allow to selected dealers a concession of $_________ per
share; and that such dealers may reallow a concession of $_______ per share to
certain other dealers. After the public offering, the offering price and the
concession may be changed by the Representatives.
The Company has granted the Underwriters an option, exercisable for 30
days from the date of this Prospectus Supplement, to purchase up to 525,000
additional Common Shares at the public offering price, less underwriting
discounts and commissions, as set forth on the cover page of this Prospectus
Supplement. The Underwriters may exercise such option solely for the purpose of
covering over-allotments incurred in the sale of the Common Shares offered
hereby. To the extent such option is exercised, each Underwriter will become
obligated, subject to certain conditions, to purchase approximately the same
percentage of such additional Common Shares as the number set forth next to
such Underwriter's name in the preceding table bears to 3,500,000.
The Company, its directors and officers and certain of its significant
shareholders have agreed, subject to certain exceptions, not to offer, sell,
offer to sell, contract to sell, pledge, grant any option to purchase or
otherwise, sell or dispose (or announce any offer, sale, offer of sale,
contract of sale, pledge, grant of any option to purchase or other sale or
disposition) of any Common Shares or other capital stock of the Company or any
other securities convertible into, or exchangeable or exercisable for, any
Common Shares or other capital stock of the Company for a period of 120 days
after the date of this Prospectus Supplement without the prior written consent
of Prudential Securities Incorporated, on behalf of the Underwriters, except
that the Company may issue (or announce the issuance of) Common Shares and
other securities in connection with acquisitions, so long as such Common Shares
and securities are issued in private placements without registration under the
Securities Act of 1933, as amended. Prudential Securities Incorporated may, at
any time and without notice, release all or any portion of the shares subject
to such lock-up agreements.
In connection with this offering, Prudential Securities Incorporated and
Tucker Anthony Incorporated will receive financial advisory fees aggregating
$135,000 from the Company.
S-29
<PAGE>
The Company has agreed to indemnify the several Underwriters and
contribute to any losses arising out of certain liabilities, including
liabilities under the Securities Act.
In connection with the offering, certain Underwriters (and selling group
members if any) and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Shares.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M, pursuant to which such persons may bid for or
purchase Common Shares for the purpose of stabilizing the market price thereof.
The Underwriters also may create a short position for the account of the
Underwriters by selling more Common Shares in connection with the offering than
they are committed to purchase from the Company, and in such case may purchase
Common Shares in the open market following completion of the offering to cover
all or a portion of such short position. The Underwriters may also cover all or
a portion of such short position, up to 525,000 Common Shares, by exercising
the Underwriters' over-allotment option referred to above. In addition,
Prudential Securities Incorporated, on behalf of the Underwriters, may impose
"penalty bids" under contractual arrangements with the Underwriters whereby it
may reclaim from an Underwriter (or any selling group member participating in
the offering) for the account of the other Underwriters, the selling concession
with respect to Common Shares that is distributed in the offering but
subsequently purchased for the account of the Underwriters in the open market.
Any of the transactions described in this paragraph may result in the
maintenance of the price of the Common Shares at a level above that which might
otherwise prevail in the open market. None of the transactions described in
this paragraph are required and, if they are undertaken, then they may be
discontinued at any time.
LEGAL MATTERS
The validity of the Common Shares offered hereby will be passed upon for
the Company by Morse, Zelnick, Rose & Lander, LLP, New York, New York and for
the Underwriters by Shearman & Sterling, New York, New York. Members of the
firm Morse, Zelnick, Rose & Lander, LLP beneficially own an aggregate of 83,094
Common Shares of the Company.
EXPERTS
The audited financial statements incorporated by reference in this
Prospectus Supplement and the accompanying Prospectus have been audited by
Arthur Andersen LLP and J.H. Cohn LLP, independent public accountants, as
indicated in their reports with respect thereto, which are incorporated by
reference herein, and are included herein in reliance upon the authority of
said firms as experts in accounting and auditing in giving said reports.
S-30
<PAGE>
PROSPECTUS
$200,000,000
COMPLETE MANAGEMENT, INC.
Securities
---------------------
Complete Management, Inc. (the "Company") intends to issue from time to
time in one or more series up to $200,000,000 aggregate offering price of its
(i) unsecured debt securities ("Debt Securities"), which may be either senior
debt securities ("Senior Debt Securities") or subordinated debt securities
("Subordinated Debt Securities"), (ii) preferred shares, par value $.001 per
share ("Preferred Shares"), which may be issued in whole or in a fraction of a
Preferred Share in the form of depositary shares evidenced by depositary
receipts ("Depositary Shares") and (iii) common shares, par value $.001 per
share ("Common Shares") (the Debt Securities, Preferred Shares, Depositary
Shares and Common Shares are referred to collectively as the "Securities"). The
Securities offered hereby (the "Offered Securities") may be offered separately
or together, in separate series, in amounts, at prices and on terms to be
determined at the time of sale and to be set forth in a supplement to this
Prospectus (a "Prospectus Supplement").
The specific terms of the Offered Securities in respect of which this
Prospectus is being delivered, such as, where applicable, (i) in the case of
Debt Securities, the specific designation (including whether senior or
subordinated), aggregate principal amount, denomination, maturity, premium, if
any, priority, interest rate (which may be variable or fixed), time of payment
of any premium and any interest, terms for optional redemption or repayment or
for sinking fund payments, and terms for conversion into or exchange for other
Offered Securities; (ii) in the case of Preferred Shares, the specific title
and stated value, number of shares or fractional interests therein, the
dividend, liquidation, redemption, conversion, voting and other rights, and
whether interests in the Preferred Shares will be represented by Depositary
Shares; and (iii) in the case of all Offered Securities, any initial offering
price, will be set forth in a Prospectus Supplement. The Prospectus Supplement
will also contain information, where applicable, about material United States
federal income tax considerations relating to, and any listing on a securities
exchange of, the Offered Securities offered thereby.
See "Risk Factors" on pages 3 to 10 for a discussion of certain material
factors that should be considered in connection with an investment in the
Offered Securities.
The Offered Securities may be offered directly through underwriters or
dealers or through such firms or other firms acting alone or through dealers.
The Offered Securities may also be sold directly by the Company or through
agents to investors. The names of any agents, dealers or managing underwriters,
and of any underwriters involved in the sale of the Offered Securities in
respect of which this Prospectus is being delivered, the applicable agents'
commission, dealers' purchase price or underwriters' discounts and commissions
and the net proceeds to the Company from such sale will be set forth in the
applicable Prospectus Supplement. See "Plan of Distribution".
---------------------
This Prospectus may not be used to consummate the sale of the Securities
unless accompanied by a Prospectus Supplement.
---------------------
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.
The date of this Prospectus is November 28, 1997.
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company can be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549; and at its
regional offices at 7 World Trade Center, 13th Floor, New York, New York 10048
and at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511.
Copies of such material may be obtained from the Public Reference Section of
the Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C.
20549, at prescribed rates. The Commission maintains a site on the world-wide
web at http://www.sec.gov that contains reports, proxy and information
statements regarding the Company. Such reports, proxy and information
statements and other information can also be inspected at the office of the New
York Stock Exchange, 20 Broad Street, New York, New York 10005 on which
exchange the Company's Common Shares are traded.
The Company has filed with the Commission a Registration Statement on Form
S-3 (including all amendments and supplements thereto, the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities
Act"), with respect to the Securities offered hereby. This Prospectus and any
accompanying Prospectus Supplement do not contain all of the information set
forth in the Registration Statement and the exhibits and schedules filed as a
part thereof, as permitted by the rules and regulations of the Commission. For
further information with respect to the Company and the Securities, reference
is hereby made to such Registration Statement, including the exhibits and
schedules filed as a part thereof. Statements contained in this Prospectus and
any Prospectus Supplement as to the contents of any contract or other document
referred to herein are not necessarily complete and where such contract or
other document is an exhibit to the Registration Statement, each such statement
is qualified in all respects by the provisions of such exhibit, to which
reference is hereby made for a full statement of the provisions thereof. The
Registration Statement, including the exhibits and schedules filed as a part
thereof, may be inspected without charge at the public reference facilities
maintained by the Commission as set forth in the preceding paragraph.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission (File No. 0-27260) are
incorporated in this Prospectus by reference:
(1) The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996, filed pursuant to the Exchange Act (the "1996 Form
10-K");
(2) The Company's Quarterly Reports on Form 10-Q for the fiscal quarters
ended March 31, 1997, June 30, 1997, as amended, and September 30, 1997,
filed pursuant to the Exchange Act;
(3) The Company's Current Report on Form 8-K, as amended, dated June 17,
1997, filed pursuant to the Exchange Act; and
(4) The Company's Proxy Statement for its 1997 Annual Meeting of
Shareholders, dated June 16, 1997, filed pursuant to the Exchange Act.
Each document filed subsequent to the date of this Prospectus pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act prior to the termination
of any offering of the Securities made by this Prospectus shall be deemed to be
incorporated in this Prospectus by reference and to be a part hereof from the
date of the filing of such documents. Any statement contained in a document
incorporated or deemed to be incorporated herein by reference shall be deemed
to be modified or superseded for purposes of this Prospectus to the extent that
a statement contained herein or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement.
The Company will provide without charge to each person to whom a copy of
this Prospectus is delivered, upon the written or oral request of any such
person, a copy of any document incorporated by reference in this
2
<PAGE>
Prospectus (other than exhibits unless such exhibits are specifically
incorporated by reference in such documents). Requests should be directed to
Complete Management, Inc., 254 West 31st Street, New York, New York 10001-2813,
(212) 273-0600, Attention: Corporate Secretary.
THE COMPANY
The Company provides physician practice management services to medical
practices and hospitals located in the New York metropolitan area, particularly
New York City, Long Island, the Hudson Valley region and portions of New Jersey
and Connecticut. The Company's services range from managing all non-medical
aspects of its clients' businesses to providing limited non-medical services,
such as billing and collection, transcription and temporary staffing.
Additionally, the Company owns and provides administrative support for magnetic
resonance and other diagnostic imaging equipment at eight hospitals and certain
medical practices. The Company also owns Consumer Health Network, a preferred
provider organization ("PPO") operating in New Jersey and, to a more limited
extent, New York and Connecticut. Consumer Health Network is the largest PPO in
New Jersey.
At October 15, 1997, the Company's full service clients employed 176
physicians and other health care providers, its partial service clients
employed approximately 1,100 physicians and other health care providers and
Consumer Health Network had under contract approximately 11,700 physicians and
other health care providers and 117 hospitals. As a result, the Company
estimates that it provides services to more than 10% of the physicians in the
New York metropolitan area. The Company does not, however, provide any type of
medical, diagnostic or treatment services; rather, these services are provided
by the Company's clients.
Unless the context otherwise requires, the term "Company" means Complete
Management, Inc. and its subsidiaries. The Company was incorporated in New York
in 1992 and its executive offices are located at 254 West 31st Street, New
York, New York 10001. The Company's telephone number is (212) 273-0600.
RISK FACTORS
An investment in the Offered Securities involves various material risks.
Prospective investors should carefully consider the following factors, in
addition to the other information set forth in this Prospectus, in connection
with an investment in the Offered Securities.
When used in this Prospectus, the words "may," "will," "expect,"
"anticipate," "continue," "estimate," "project," "intend" and similar
expressions are intended to identify forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act regarding events, conditions and financial trends that may affect the
Company's future plans of operations, business strategy, results of operations
and financial position. The Company wishes to ensure that such statements are
accompanied by meaningful cautionary statements pursuant to the safe harbor
established in the Private Securities Litigation Reform Act of 1995.
Prospective investors are cautioned that any forward-looking statements are not
guarantees of future performance and are subject to risks and uncertainties and
that actual results may differ materially from those included within the
forward-looking statements as a result of various factors. Factors that could
cause or contribute to such differences include, but are not limited to, those
identified in this section and elsewhere in this Prospectus.
In particular, in connection with certain past acquisitions and the entry
into long-term physician practice management agreements the Company has
disclosed expected additions to its revenues from such transactions. Such
revenue forecasts are forward-looking information and as such are inherently
subject to risk and uncertainty. Important factors, including the risk factors
set forth herein, could cause the Company's actual results from these
transactions to differ materially and adversely from the projections, or the
additional revenues from these transactions could be offset by a diminution of
other revenues. Accordingly, there can be no assurance that the Company will
achieve the projected revenues, or, if attained, what effect such revenues will
have on the Company's net earnings or earnings per share.
Substantial Indebtedness; Capital Needs. The Company is, and subsequent to
any offering of Debt Securities will continue to be, highly leveraged. At
September 30, 1997, the Company and its consolidated subsidiaries had total
debt (including a minority interest) of $90,577,000 of which $79,506,000 was
long-term debt and $11,071,000 was short-term debt. The Company is party to a
$10,000,000 line of credit arrangement with
3
<PAGE>
a bank, all of which was drawn at September 30, 1997. The Company also
satisfies its ongoing working capital and other cash needs from its cash, cash
equivalents and marketable securities, which totaled $72,605,000 at December
31, 1996 and $17,075,000 at September 30, 1997. The ability of the Company to
repay its indebtedness (including any Debt Securities that may be issued
hereunder) will depend upon its future operating performance, which is subject
to the success of the Company's business strategy, prevailing economic
conditions and financial, business and other factors, many of which are beyond
the Company's control. The degree to which the Company is leveraged also may
impair its ability to obtain additional financing on acceptable terms, if at
all. If the Company experiences unanticipated costs, write-offs of investments,
receivables or other assets or operating or other losses, the Company's
leverage could increase. Such increased leverage (i) could adversely affect the
ability of the Company to obtain additional financing in the future for working
capital, acquisitions, capital expenditures or other purposes should it need to
do so, (ii) will require that a substantial portion of the Company's cash flow
from operations be dedicated to debt service, (iii) could place the Company at
a competitive disadvantage, if it is more highly leveraged than its
competitors, and (iv) could make the Company more vulnerable to a downturn in
its business.
The Company's primary sources of liquidity through at least December 31,
1998 are expected to be its cash, cash equivalents and marketable securities,
the net proceeds from sales of Securities and further issuances of debt or
equity. These sources of liquidity are expected to be sufficient to fund the
Company's liquidity requirements for at least the next 12 months if the
Company's future operations are consistent with management's current growth
expectations. The type, timing and terms of financing selected by the Company
will be dependent upon the Company's cash needs, the availability of other
financing sources and the prevailing conditions in the financial markets. There
can be no assurance that any such sources will be available to the Company at
any given time or as to the favorableness of the terms on which such sources
may be available.
Dependence on Principal Client. All of the Company's revenues in 1994 and
1995 and 65%, 45%, 32% and 22% of its revenues in 1996 and the three-month
periods ended March 31, June 30, and September 30, 1997, respectively, were
generated under management contracts with Greater Metropolitan Medical
Services, P.C. ("GMMS"), a multi-specialty medical practice that specializes in
the evaluation, diagnosis and treatment of injured patients. GMMS is 95% owned
by a neurologist who is also a co-founder and principal shareholder of the
Company. A substantial part of the growth in the Company's business is a direct
result of the growth of GMMS's medical practice. The continued vitality of the
GMMS medical practice is subject to numerous risks, including the loss of its
principal shareholder or key medical personnel, malpractice claims and
liability for failure to comply with applicable regulations. The loss of this
client or the curtailment of its practice, including as a result of the death
or disability of its principal shareholder, could have a material adverse
effect on the Company.
GMMS's failure to operate successfully could jeopardize its ability to pay
management fees to the Company. Moreover, although the two management services
agreements between the Company and GMMS, which cover all management services
provided by the Company, expire in June 2025 and July 2001, respectively (with
a provision for the automatic extension of the latter agreement in five-year
intervals at the option of the Company), there is no assurance that the Company
and GMMS will continue to maintain a productive working relationship.
At September 30, 1997, $54,166,000, or 59.5%, of the Company's accounts
receivable were due from GMMS. These receivables are collateralized by patient
service receivables due to GMMS with a face amount of $72,932,000 at such date.
GMMS's ability to pay the Company is dependent upon the Company's ability to
collect the patient service receivables on behalf of GMMS. On a quarterly
basis, the Company reviews, based on estimated rates of collection for each
class of patient service and estimated allowances for uncollectible balances,
the adequacy of GMMS's collateral. From January 1, 1992 through September 30,
1997, GMMS billed its patients and third-party payors an aggregate of
$121,050,000, of which $45,821,000, or 37.9%, had been collected by September
30, 1997. In order for GMMS's patient receivables outstanding at September 30,
1997 to cover the Company's management fees owed by GMMS at that date, 74.3% of
such outstanding patient receivables must be collected, representing an overall
collection rate of 82.6% on GMMS's billings through September 30, 1997.
More specifically, at September 30, 1997, $24,735,000, or 33.9%, of GMMS's
total patient service receivables were generated through the performance of
medical services for which GMMS will be paid only upon the
4
<PAGE>
successful resolution of negligence claims by the patients against third
parties, either through a judicial determination or settlement. From January 1,
1992 to September 30, 1997, GMMS billed approximately $30,024,000 of such
receivables, of which $4,428,000, or 14.7%, had been collected by September 30,
1997. In measuring the adequacy of such receivables as collateral for the
Company's management fees owed by GMMS, the Company has estimated that it will
collect, on behalf of GMMS, approximately 55% of these outstanding receivable
balances. The Company estimates, based upon industry factors and GMMS's
historical collection experience prior to its association with the Company,
that the entire collection process for these contingent claims generally ranges
from one to seven years. Since 1994, however, the percentage of cases resolved
within two years of providing service has declined, which may result in an even
longer collection cycle or a lower rate of collection. The Company believes
that this decline is the result of payors more consistently deferring
settlement of these matters until just prior to trial.
In evaluating the adequacy of its collateral from GMMS, the Company
considers historical collection patterns important. The Company, however, also
believes that the ultimate collection of receivables is dependent on its
ability to improve its billing and collection process and its relations with
third-party payors. The Company believes that it can achieve the higher
collection rate necessary to assure that the Company's management fees to GMMS
are paid in full; however, there can be no assurance that the Company will
achieve this rate. See the Company's Form 10-Q for the fiscal quarter ended
September 30, 1997. The inability of the Company to collect a significant
portion of its management fees owed by GMMS could have a material adverse
effect on the Company.
Inability to Collect or Delay in Collecting Management Fees. The Company's
physician practice clients are liable to the Company for management fees
regardless of whether the client collects payment for medical services
rendered. However, the Company has historically deferred collecting amounts
owed to it when clients have experienced delays in collecting payments for
medical services. A substantial majority of the accounts receivable generated
by the Company's full service clients, particularly GMMS, remain outstanding
for extended periods. The average days outstanding for the Company's full
service clients' receivables at September 30, 1997 was 350 days. As a result of
this long collection cycle, the Company requires more capital to finance its
receivables than do most other businesses. The inability of the Company's
clients to collect their receivables could adversely affect their ability to
pay the Company's management fees, which in turn, could have a material adverse
effect on the Company.
The requirements of many third-party payors regarding claims submission
are detailed and complex. Payments may be delayed or refused if the payors'
requirements are not complied with in full. Patient receivables are also
subject to rejection by a third-party payor if, in its judgment, the procedures
performed were not medically necessary, if the charges exceed such payor's
allowable fee standards or if the claim forms are completed improperly.
Many third-party payors, particularly insurance carriers covering
automobile no-fault and workers' compensation claims, have traditionally
refused, as a matter of business practice, to pay most claims unless submitted
to arbitration. It is the Company's experience that these insurance carriers
generally delay payment of these claims until just prior to the arbitration
hearing. The Company is generally prepared to take all legally available steps,
including arbitration, to collect the receivables generated by its clients,
whether owned by the Company or by the client.
Government Regulation. The healthcare 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 and disqualification from
participation in Medicare, Medicaid and other payor programs. Federal and state
governments also regularly consider new laws and regulations that, if enacted,
could have a material adverse effect on the Company. The Company believes that
its current operations are in material compliance with these laws and
regulations. The structures of the Company's relationships with its medical
practice and hospital clients and its PPO arrangements are also similar in
material respects to that of many firms in the physician practice management
and PPO industries. Nevertheless, the laws and regulations in this area are
extremely complex and subject to changing interpretation. For example, although
the New York State Department of Health recently opined that the prohibition
against professional fee splitting would be violated if a billing service
company entered into a percentage fee
5
<PAGE>
arrangement with its clients, as the Company's billing services subsidiary does
with certain of its clients, the opinion is inconsistent with prior Department
of Health opinions and common industry practice, and the matter is presently
being re-examined by an inter-agency task force convened by the Department of
Health. 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 neither obtained nor applied for an opinion of any
regulatory or judicial authority that its business operations are in compliance
with applicable laws and regulations. Thus, there is no assurance that the
Company's operations are or have been in compliance at all times with all such
laws and regulations. In addition, there is no assurance that a court or
regulatory authority will not determine that the Company's past, current or
future operations (including the provision of practice management and billing
services, the purchase and lease-back of client assets, the ownership or
operation of ambulatory surgery facilities, the provision of financing to new
or existing clients, the purchase and/or financing of medical accounts
receivable, the operation of a preferred provider organization, the arrangement
of management care contracts, and, if appropriate, the granting of 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 operating
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
continuation 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; self-referral laws; anti-kickback and
antitrust laws; certificates of need; insurance; regulation of diagnostic
imaging and ambulatory surgery facilities; Medicare; Medicaid; no-fault
insurance and workers' compensation. In addition, the federal and state
governments are considering numerous new laws and regulations that, if enacted
or adopted, could result in comprehensive changes to the healthcare industry
and the payment for, and availability of, healthcare 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 that 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, injunctive
relief and disqualification from participation in Medicare, Medicaid and other
payor programs. Such developments could have a materially adverse effect on the
Company.
Management of Growth and Expansion; Integration of Acquisitions. The
Company is undergoing substantial growth. This growth places significant
demands on the Company's management and its technical, financial and other
resources. To manage its growth effectively, the Company must maintain a high
level of operational quality and efficiency, continue to enhance its
operational, financial and management systems and expand, train and manage its
management and staff. The Company has only limited experience in simultaneously
providing physician practice management services to several practices. To
execute its growth strategy, the Company plans to significantly increase the
number of physician practices under management. There can be no assurance that
the Company will be able to manage growth effectively or attract suitable
management and other personnel and maintain its operational systems, and any
failure to do so could have a material adverse effect on the Company's
business, financial condition and results of operations and the price of its
securities. Furthermore, full integration of a physician practice generally
requires three to four months, and there can be no assurance that there will
not be substantial unanticipated costs or problems associated with the
integration effort or matters existing at the time of acquisition. During the
first three months after an acquisition, the Company's expenses related to the
acquired physician practice may exceed the revenues it realizes from such
practice and, accordingly, any such acquisitions may have a negative effect on
the Company's operating results. As the Company pursues its expansion strategy,
there can be no assurance that the Company will be able to continue to
successfully integrate acquired physician practices and any failure or
inability to do so may have a material adverse effect on the Company's results
of operations or financial condition and the Company's ability to continue its
expansion.
6
<PAGE>
Ability to Expand Business. The Company's expansion strategy includes
increasing the number and type of medical practices to which it provides
management services in its current market, other areas in New York State and
selected other markets including New Jersey, and securing contracts on behalf
of its clients with managed care organizations. The Company intends to identify
primary care and specialty medical practices to be acquired by existing clients
or to become clients of the Company, possibly in conjunction with the Company's
purchase of certain fixed assets and/or accounts receivable of such medical
practices. There is no assurance, however, that suitable medical practices will
be identified that are either willing to be acquired or to contract for the
management services offered by the Company. In addition, the Company may
compete for acquisition opportunities with companies that have greater
resources than the Company. Moreover, there is no assurance that the Company
can expand its business outside the New York metropolitan area or into other
states. In order to operate effectively in new locations, the Company must
achieve acceptance in the local market and, in order to operate in other
states, the Company must adapt its procedures to each such state's regulatory
requirements and systems.
Dependence on Third-Party Payor Reimbursements. The Company's engagement
by its full service clients and certain other physician practice clients is
based, in part, on such clients' need for the Company's receivables collection
skills and its ability to collect payments from third-party payors, primarily
automobile no-fault carriers and workers compensation insurers as expeditiously
as feasible. See "Inability to Collect or Delay in Collecting Management Fees"
above. If the laws and regulations covering 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.
Risk of Lower Margins. Certain services offered by the Company are
provided in accordance with fee schedules based on the Company's estimate of
the cost of providing these services. Such fee schedules are not readily
subject to modification. Accordingly, an unanticipated increase in costs, such
as those for personnel, space, equipment or capital, would have a substantial
and adverse impact on the Company's operating margins and net income. There is
no assurance that the Company's actual costs will not exceed its estimated
costs. 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 the Company's
future business relationships will provide margins comparable to those
currently earned under existing agreements.
Cost Containment and Reduction in Reimbursement Rates. Government and
private third-party payors are seeking to contain healthcare costs by imposing
lower reimbursement and higher utilization rates and negotiating reduced
payment arrangements with service providers. One method for achieving this
objective has been the use of a resource-based relative value scale ("RBRVS")
payment methodology for physician services, initially implemented by the
federal government through the Medicare program. The RBRVS fee schedule pays
similarly situated physicians the same amount for the same services, with
certain geographical and other adjustments. The RBRVS is adjusted each year,
and is subject to increases or decreases at the discretion of Congress. The
RBRVS payment system has resulted in reduced payment rates for certain of the
procedures historically provided by the physician groups managed by the
Company. Management estimates that 30% of the 1996 revenues of physician groups
to which the Company now provides broad based management services are derived
from government sponsored healthcare programs (principally, Medicare, Medicaid
and state reimbursed programs) paid on the basis of RBRVS. Payment systems
based on RBRVS have also been adopted by certain private third-party payors and
may become a predominant fee for service payment methodology, which could
reduce payments by those third-party payors. Rates paid by many private
third-party payors, including those that provide Medicare supplemental
insurance, are based on the physician and hospital's usual and customary
charges, which are generally higher than Medicare payment rates. A decrease in
the number of privately insured patients seen by the practices managed by the
Company could cause the revenues of such practices to decrease and in turn
adversely affect the Company's results of operations. Thus, there can be no
assurance that the Company's revenues from its relationship with such
affiliated physicians will be sufficient to achieve or maintain profitability.
The Company believes that cost containment trends will continue to result in a
reduction from historical levels in per-patient revenue for medical practices.
Further reductions in payments to physicians or other
7
<PAGE>
changes in reimbursement for healthcare services could have an adverse effect
on the Company's operations. There can be no assurance that the effect of any
or all of these changes in third-party reimbursement could be offset by the
Company through cost reductions, increased volume, introduction of new services
and systems or otherwise.
Risks Associated with Capitated Fee and Other Managed Care
Arrangements. The New York healthcare industry is continuing to experience
significant growth in the number of patients covered by health maintenance,
preferred provider and other managed care organizations ("MCOs"), including
patients covered by Medicare and Medicaid, automobile no-fault and workers'
compensation insurance. Access to the populations covered by these managed care
arrangements requires that the practices managed by the Company (or the Company
on their behalf) contract with, and arrange for their physicians to be admitted
as participating providers of, such MCOs. MCO arrangements often contain
mechanisms intended to control or reduce utilization of services and may also
provide for provider reimbursement on a discounted fee-for-service or,
increasingly, on a risk-sharing or capitated basis. Under these arrangements,
the healthcare provider often receives a predetermined amount per patient per
month in exchange for providing specified services to patients covered by the
arrangement. Such arrangements pass the economic risk of providing care from
the payor to the provider. While the growth of capitation arrangements could
result in greater predictability of revenues for those clients of the Company
that enter into such arrangements, it may create new risks and uncertainties
for the profitability of these clients and their ability to pay the Company's
management fees. Additionally, the Company may be required to negotiate reduced
fee or risk sharing arrangements for its clients to maintain their competitive
position in the marketplace. There can be no assurance that the physicians who
work for the Company's clients will be included in MCOs or that the Company
will be able to negotiate satisfactory MCO arrangements for its clients or be
able to provide the service of negotiating such arrangements at commercially
reasonable rates. To the extent that medical practice clients have reduced
profitability as a result of MCO arrangements, there can be no assurance that
the Company will be able to derive sufficient revenues from its relationships
with such clients to maintain profitability or sustain its current level of
operations.
Competition. The medical practice management field is highly competitive.
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. A number of large
hospitals in New York State and elsewhere have acquired medical practices and
this trend is expected to continue. Further, certain national physician
practice management companies have recently begun to enter the New York
healthcare market on a limited basis. 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.
Upgrade of Information Systems; Technological Obsolescence. The operations
of the Company and its full service clients are heavily dependent on the
Company's information systems. The Company is seeking to develop, in
collaboration with its clients and with the assistance of outside consultants,
new management information systems, including physician practice management
software, a new electronic medical record system and a wide area network to
link physicians in remote locations with their medical practices.
Implementation of the new information systems will require a transition period
during which various Company and client functions must be converted to the new
systems. This conversion process may entail errors, defects or prolonged
downtime, especially at the outset, and such errors, defects or downtime could
have a material adverse effect on the Company either directly or indirectly as
a result of damage or harm to its clients' medical practices. While management
believes that conversion to the new systems will be completed within three
years, there is no assurance that the transition will be completed in a timely
manner.
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 its 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.
Dependence Upon Key Personnel. The Company is dependent upon the expertise
and abilities of its management, including its Chairman and Chief Executive
Officer, Steven Rabinovici. The loss of the services of
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<PAGE>
Mr. Rabinovici 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 at GMMS, whose loss could adversely affect GMMS's
practice and the financial condition and results of operations of the Company.
The Company is the beneficiary of key man insurance policies on the lives of
Steven M. Rabinovici and Dr. Lawrence W. Shields in the amounts of $2,000,000
and $10,000,000, respectively.
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 using
such equipment or if persons are injured on premises leased by the Company to
its clients, liability claims could be filed by such client or patient, as the
case may be, against the Company. Further, any substantial liability incurred
by a client not covered by insurance could impair that client's ability to pay
management fees to the Company. While the Company seeks to protect itself from
liability claims both by requiring that its clients carry substantial 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.
Effective Subordination. The Debt Securities will be obligations solely of
the Company, although certain operations of the Company are currently conducted
by subsidiaries. The subsidiaries are separate and distinct legal entities and,
unless otherwise provided in any Prospectus Supplement, will have no
obligations, contingent or otherwise, to pay any amounts due pursuant to the
Debt Securities or to make any funds available to the Company to enable it to
make payments on the Debt Securities or meet working capital needs or other
liabilities of the Company. The Debt Securities will be effectively
subordinated to all existing and future indebtedness and other liabilities and
commitments of the Company's subsidiaries, including trade payables. Any right
of the Company to receive assets of any subsidiary upon the liquidation or
reorganization of such subsidiary (and the consequent rights of the holders of
the Debt Securities to participate in those assets) will be effectively
subordinated to the claims of such subsidiary's creditors, except to the extent
that the Company is itself recognized as a creditor, in which case the claims
of the Company would still be subordinated to any lien on the assets of such
subsidiary and any indebtedness of such subsidiary senior to that held by the
Company.
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 shareholders for monetary damages for breach of
the fiduciary duty of care as a director, including breaches that constitute
gross negligence, subject to certain limitations imposed by the New York
Business Corporation Law. Thus, under certain circumstances, neither the
Company nor the shareholders will be able to recover damages even if directors
take actions that harm the Company.
Potential Adverse Impact on Market Price of Securities; Shares Eligible
for Future Sale; Possible Volatility of Common Share Price. Sales of
substantial numbers of Common Shares in the public market or the perception
that such sales may occur could materially adversely affect the market price of
the Common Shares. On September 30, 1997, 555,555 shares issuable on the
conversion of the Company's outstanding convertible subordinated notes and
27,277 shares issued in connection with a bridge loan entered into by the
Company prior to its initial public offering were covered by an effective
Registration Statement on Form S-3 and may be publicly sold in the discretion
of their beneficial owners. In addition, on September 30, 1997, an aggregate of
8,191,414 Common Shares were issuable upon exercise of outstanding options and
warrants and upon conversion of outstanding convertible debentures of the
Company. Any Common Shares offered hereby will be immediately tradable in the
public market without restriction following the issuance of such Common Shares,
unless held by affiliates. Sales in the public market of substantial numbers of
Common Shares can be expected to 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 have been unrelated or disproportionate to the performance of the
companies themselves. Operating results of the Company, changes in general
conditions in the economy or the healthcare industry or other developments
affecting the Company or its competitors could cause the market price of the
Common Shares to fluctuate substantially.
No Prior Public Trading Market for the Debt Securities and Preferred
Shares. Prior to the offering of any series of Debt Securities or Preferred
Shares hereunder, there will have been no public market for such
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<PAGE>
securities and there can be no assurance as to the liquidity of the trading
market for such securities or that an active public market will develop or, if
developed, will continue. If an active public market does not develop or is not
maintained, the market price and liquidity of Debt Securities or Preferred
Shares, as the case may be, may be adversely affected.
RATIO OF EARNINGS TO FIXED CHARGES
The following are the ratios of consolidated earnings to fixed charges for
the Company for each of the fiscal years ended December 31, 1993 (the Company's
first year of operations) through 1996 and for the nine months ended September
30, 1996 and 1997:
<TABLE>
<CAPTION>
Fiscal Year Ended Nine Months Ended
December 31 September 30
------------------------------------------ -----------------------
1993 1994 1995 1996 1996 1997
<S> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed
Charges N/A* N/A* 133.35 to 1 4.26 to 1 4.31 to 1 2.58 to 1
</TABLE>
- ------------
* There were no fixed charges during this year.
For purposes of computing this ratio, earnings are defined as income
before income taxes plus fixed charges. Fixed charges are interest expense
(including the amortization of deferred debt issuance costs) and the portion of
rental expense that is representative of the interest factor (deemed to be
one-third of minimum operating lease rentals).
USE OF PROCEEDS
Except as may otherwise be set forth in the applicable Prospectus
Supplement, the Company intends to use the net proceeds from the sale of
Securities offered hereby for working capital and general corporate purposes,
which may include financing of the Company's expansion program or repayment of
any outstanding indebtedness of the Company. Pending any of the foregoing
applications, the net proceeds may be invested temporarily in short-term,
investment grade interest bearing securities.
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MANAGEMENT
Executive Officers and Directors
The executive officers and directors of the Company and their respective
ages as of September 30, 1997 are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Steven M. Rabinovici ............ 45 Chairman of the Board and Chief Executive Officer
Arthur L. Goldberg ............ 58 Senior Executive Vice President, Chief Operating Officer,
Chief Financial Officer and Director
Dennis W. Simmons ............... 47 Senior Executive Vice President
Kenneth S. Schwartz, M.D. ...... 52 Executive Vice President - Medical Affairs and Business
Development
Joseph M. Scotti ............... 54 Executive Vice President - Acquisition Analysis, Treasurer,
Secretary
Robert Keating .................. 56 Senior Executive Vice President, Director of Operations -
Medical Legal Services
John T. Dooley .................. 54 Vice President and Chief Information Officer
Richard DeMaio .................. 40 Senior Vice President - Operations
Claire Cardone .................. 51 Senior Vice President - Operations
Alan Goldstein .................. 50 Vice President - Finance and Chief Accounting Officer
Steven Cohn ..................... 48 Director
Steven A. Hirsh ............... 57 Director
Joseph S. Tocci ............... 57 Director
</TABLE>
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. Mr. Hirsh has waived
this grant. Officers are elected to serve, subject to the discretion of the
Board of Directors, until their successors are appointed.
Steven M. Rabinovici has been Chairman of the Board, Chief Executive
Officer and a director 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 it during 1994 and 1995. From July 1990 through
December 31, 1992, he was an independent healthcare and business consultant.
Prior thereto, from December 1979 until July 1990, Mr. Rabinovici served as
President of Animed, Inc. (originally known as Cardiopet, Inc.), an animal care
business, which was liquidated pursuant to proceedings commenced under the
Federal Bankruptcy Code in 1989. On July 21, 1992, MEBE Enterprises, Inc.
("MEBE"), the owner and operator of a single Roy Rogers fast food restaurant,
filed for protection under Chapter 11 of the Bankruptcy Code. Mr. Rabinovici
was a founder and principal of MEBE. Earlier in his career, Mr. Rabinovici had
more than ten 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. Mr. Rabinovici has over 15 years of experience in the health care
industry.
Arthur L. Goldberg has been Senior Executive Vice President and Chief
Operating Officer of the Company since April 2, 1996 and Chief Financial
Officer and a director of the Company since July 1997. From August 1993 through
March 1996 he was an independent management consultant. From December 1990
through August 1993, he was the Chief Financial Officer of Elek-Tek, Inc., a
reseller of computer and related equipment. Mr. Goldberg has over 25 years of
experience in a variety of senior financial and operational management
positions.
Dennis W. Simmons has been Senior Executive Vice President of the Company
since September 23, 1997. From April 2, 1996 to September 22, 1997, he was the
Executive Vice President of Practice Development and Managed Care. From
November 1992 to March 1996, he was the Senior Vice President for Coastal
Physician Group, Inc. Prior to November 1992, he worked for Medical Care
Development, Inc. as a consultant to the Saudi Arabian government and United
Healthcare Corp. in Central Texas beginning in October 1985. Mr. Simmons has
over 20 years of healthcare experience.
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Kenneth S. Schwartz, M.D. has been Executive Vice President-Medical
Affairs of the Company since September 23, 1997. From July 1997 to September
22, 1997, he was the Vice President - Medical Affairs of the Company. Dr.
Schwartz has been the Director of Radiology, St. Francis Hospital,
Poughkeepsie, N.Y and the Director at Hudson Imaging Associates, P.C.,
Jefferson Valley, N.Y. since January 1996 and November 1995, respectively. From
March 1995 through November 1996, Dr. Schwartz was the Systems Director,
Radiology and Imaging Services, St. Francis Hospital and Medical Center-Saint
Francis and Mount Sinai Campuses, Hartford, CT. From 1991 through 1995, he was
the Medical Director, Putnam Hospital Center, Carmel, N.Y. and from 1981
through 1995 the Director of Northern Metropolitan Radiology Associates, P.C.,
which became managed by the Company in August 1996. Dr. Schwartz has been a
member of the Board of Directors of BLC Financial Services, Inc. since June
1997. Dr. Schwartz has been a physician for over 20 years.
Joseph M. Scotti has been Executive Vice President -- Acquisition Analysis
since January 1997 and Treasurer and Secretary of the Company since December
1995. From December 28, 1995 until January 1997, Mr. Scotti was also Vice
President and Chief Financial Officer of CMI. From January 1993 through
December 27, 1995, he held similar positions with MMI. From February 1992 to
January 1993, Mr. Scotti was a consultant to Burke & Burke, a food store chain.
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. Prior thereto he was the
Administrative Judge, Criminal Court of the City of New York since April 1985.
Concurrently, from 1992 to present, he has supervised and developed the Midtown
Community Court.
John T. Dooley has been a Vice President and Chief Information Officer of
the Company since September 1996. From May 1996 to September 1996, Mr. Dooley
was the Chief Information Officer for three corporations owned by Long Island
Jewish Medical Center: CHP: The Medical Group, Managed Health Inc. and LIJ-MS.
From January 1995 to May 1996, Mr. Dooley served as the Chief Information
Officer of New Hanover Regional Medical Center. From March 1994 to December
1995, Mr. Dooley was a Senior Manager of Implementation Specialists for
Healthcare, a management consulting firm specializing in healthcare systems.
Prior thereto, from December 1992 to February 1995, Mr. Dooley served as the
Chief Information Officer of North Shore University Hospitals, a series of
tertiary care teaching and community hospitals comprising 1,250 beds. From May
1988 to December 1992, Mr. Dooley served as the Assistant Vice President,
Information Services of St. Vincent's Hospital and Medical Center, an 813 bed
tertiary care teaching hospital located in New York City. Mr. Dooley has over
25 years of experience in health care information systems.
Richard DeMaio has been Senior Vice President of Operations of the Company
since September 23, 1997. From March 1994 to September 22, 1997, he was the
Vice President of Operations of the Company. 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 Senior Vice President of Operations for
diagnostic imaging of the Company since September 23, 1997. From December 28,
1995 to September 22, 1997, she was the Vice President of Operations for
diagnostic imaging of the Company. From 1993 to December 27, 1995, she was the
Vice President of Operations of MMI. From 1985 to 1993, Ms. Cardone was Senior
Associate Administrator at St. John's Episcopal Hospital, a 300 bed community
teaching hospital in Queens, New York.
Alan Goldstein has been Vice President - Finance and Chief Accounting
Officer since September 23, 1997. From January 1, 1997 through May 30, 1997, he
was an independent financial consultant to Kollsman, Inc. From June 1, 1994
through December 31, 1996, he was Vice President and Chief Financial Officer of
RF International, Inc., an international transportation services company. Prior
thereto he was an independent financial consultant from June 1993 and the Vice
President of Finance and Administration of Janus Systems, Inc. (a division of
Sequa Corporation), a systems integrator and software developer from September
1990. He is a Certified Public Accountant with over 12 years of public
accounting experience.
Steven Cohn has been a director of the Company since January 3, 1996 and a
member of its Audit and Compensation Committees since April 2, 1996. Mr. Cohn
is a member of the law firm of Goldberg & Cohn.
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Steven A. Hirsh has been a director of the Company and a member of its
Audit and Compensation Committees since September 30, 1996. Mr. Hirsh has been
a portfolio manager for William Harris & Co., a financial services company, for
more than five years. Since 1994, he has also been Chairman, Chief Executive
Officer and President of Astro Communications, Inc., a manufacturer of strobe
lights.
Joseph S. Tocci has been a director of the Company and a member of its
Audit and Compensation Committees since May 12, 1997. He is a founder and has
been a managing partner of Tocci, Goldstein & Co. (formerly Tocci and Marcano),
certified public accountants, for over the past five years. From October 1993
through December 1995, Mr. Tocci was a director of MMI, which was acquired by
the Company in a merger in January 1996.
Committees of the Board of Directors
The Company's Board of Directors has established Compensation and Audit
Committees, whose members are Messrs. Cohn, Hirsh and Tocci. 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 and discretionary cash bonuses to the
Company's officers, employees, directors and consultants. The Audit Committee
meets with management and the Company's independent public accountants 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.
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DESCRIPTION OF DEBT SECURITIES
The Debt Securities may be issued from time to time in one or more series.
The particular terms of each series of Debt Securities offered by any
Prospectus Supplement will be described therein. The Senior Debt Securities
will be issued under the Senior Indenture (the "Senior Indenture"), between the
Company and The Chase Manhattan Bank, trustee (the "Senior Trustee") prior to
the issuance of the Senior Debt Securities. The Subordinated Debt Securities
are to be issued under the Subordinated Indenture (the "Subordinated
Indenture"), between the Company and The Chase Manhattan Bank, trustee (the
"Subordinated Trustee"). The Senior Indenture and the Subordinated Indenture
are sometimes referred to individually as an "Indenture" and collectively as
the "Indentures". The Senior Trustee and the Subordinated Trustee are sometimes
referred to individually as a "Trustee" and collectively as the "Trustees". The
forms of Senior Indenture and Subordinated Indenture are filed as exhibits to
the Registration Statement. Each Indenture is subject to and is governed by the
Trust Indenture Act of 1939, as amended.
The statements herein relating to the Debt Securities and the Indentures
are summaries and are subject to the detailed provisions of the Indentures. The
following summaries of certain provisions of the Indentures do not purport to
be complete and are subject to, and qualified in their entirety by reference
to, the Indentures, and, with respect to any particular Debt Securities, to the
description thereof in the applicable Prospectus Supplement. The definitions of
certain capitalized terms used in the following summary are set forth below
under "Certain Definitions".
General
Neither Indenture limits the aggregate amount of Debt Securities that may
be issued thereunder, and Debt Securities may be issued thereunder from time to
time in separate series up to the aggregate amount from time to time authorized
by the Company for each series. The Senior Debt Securities when issued will be
direct, unsecured obligations of the Company and will rank equally with all
other unsecured and unsubordinated indebtedness of the Company. The Senior Debt
Securities will be effectively subordinated to any secured indebtedness of the
Company and to any indebtedness or other obligations, including trade payables,
of the Company's subsidiaries to the extent of the assets of such subsidiaries.
The Subordinated Debt Securities will be unsecured obligations of the Company
and will be subordinated in right of payment to all Senior Indebtedness.
The applicable Prospectus Supplement will describe the following terms of
the series of Debt Securities in respect of which this Prospectus is being
delivered:
(1) The title of such Debt Securities and whether such Debt Securities
will be Senior Debt Securities or Subordinated Debt Securities.
(2) The aggregate principal amount of such Debt Securities.
(3) The date or dates on which such Debt Securities will mature.
(4) The rate or rates of interest, if any, or the method of calculation
thereof, that such Debt Securities will bear, the date or dates from which
any such interest will accrue, the interest payment dates on which any such
interest on such Debt Securities will be payable and the regular record
date for any interest payable on any interest payment date.
(5) The place or places where the principal of and any premium and
interest on such Debt Securities will be payable.
(6) The period or periods within which, the events upon the occurrence
of which, and the price or prices at which, such Debt Securities may,
pursuant to any optional or mandatory provisions, be redeemed or purchased,
in whole or in part, by the Company and any terms and conditions relevant
thereto.
(7) The obligations of the Company, if any, to redeem or repurchase such
Debt Securities at the option of the holders thereof.
(8) The denominations in which any such Debt Securities will be
issuable, if other than denominations of $1,000 and any integral multiple
thereof.
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(9) Whether such Debt Securities will be convertible into or
exchangeable for Common Shares or other Securities and, if so, the terms
and conditions upon which such Debt Securities will be convertible or
exchangeable.
(10) Any index or formula used to determine the amount of payments of
principal of and any premium and interest on such Debt Securities.
(11) The provision for any sinking fund or analogous payments.
(12) If other than the principal amount thereof, the portion of the
principal amount of such Debt Securities that will be payable upon
acceleration of the maturity thereof.
(13) If the principal amount of any Debt Securities that will be payable
at the maturity thereof will not be determinable as of any date prior to
such maturity, the amount that will be deemed to be the outstanding
principal amount of such Debt Securities.
(14) Any provisions in modification of, in addition to or in lieu of any
of the provisions concerning defeasance and covenant defeasance contained
in the applicable Indenture that will be applicable to such Debt
Securities.
(15) Any provisions granting special rights to the holders of Debt
Securities upon the occurrence of such events as may be specified.
(16) Whether any of such Debt Securities are to be issuable in permanent
global form ("Global Security") and if so, the terms and conditions, if
any, upon which interests in such Debt Securities in global form may be
exchanged, in whole or in part, for the individual Debt Securities
represented thereby.
(17) The applicability of, and modifications to, any provisions
described under "Events of Default" and any additional Event of Default
applicable thereto.
(18) Any covenants applicable to such Debt Securities in addition to, or
in lieu of, the covenants described under "--Certain Covenants of the
Company".
(19) Whether such Debt Securities are secured.
(20) If other than the applicable Trustee, any fiscal or authenticating
or paying agent, issuing and paying agent, transfer agent or registrar or
any other person or entity to act in connection with such Debt Securities
for or on behalf of the holders thereof or the Company or an affiliate.
(21) The person to whom any interest on any Debt Security of the series
shall be payable if other than the person in whose name the Debt Security
is registered on the regular record date.
(22) Any other specific terms, conditions or provisions of such Debt
Securities.
The Debt Securities referred to on the cover page of this Prospectus, and
any additional debt securities issued under an Indenture, are herein
collectively referred to, while a single Trustee is acting with respect to all
debt securities issued under such Indenture, as the "Indenture Securities".
Each Indenture provides that there may be more than one Trustee thereunder,
each with respect to one or more series of Indenture Securities. At a time when
two or more Trustees are acting under either Indenture, each with respect to
only certain series, the term "Indenture Securities" as used herein shall mean
the one or more series with respect to which each respective Trustee is acting.
In the event that there is more than one Trustee under either Indenture, the
powers and trust obligations of each Trustee as described herein will extend
only to the one or more series of Indenture Securities for which it is the
Trustee. If two or more Trustees are acting under either Indenture, then the
Indenture Securities for which each Trustee is acting would in effect be
treated as if issued under separate indentures.
Debt Securities may be issued at a discount from their principal amount.
United States federal income tax considerations and other special
considerations applicable to any such original issue discount Debt Securities
will be described in the applicable Prospectus Supplement.
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Certain Definitions
"Capital Stock" of any person means any and all shares, interests,
partnership interests, participations, rights in or other equivalents (however
designated) of such person's equity interest (however designated).
"Capitalized Lease Obligation" means, with respect to any person, an
obligation incurred or assumed under or in connection with any capital lease of
real or personal property that, an obligation incurred or assumed under or in
connection with any capital lease of real or personal property that, in
accordance with GAAP, has been recorded as a capitalized lease.
"Closing Date" means, with respect to any Debt Securities, the date on
which such Debt Securities are originally issued under the applicable
Indenture.
"Consolidated Net Worth" means, at any date of determination,
shareholders' equity of the Company and its Restricted Subsidiaries as set
forth on the most recently available quarterly or annual consolidated balance
sheet of the Company and its Restricted Subsidiaries, less any amounts
attributable to Disqualified Stock or any equity security convertible into or
exchangeable for Debt, the cost of treasury stock and the principal amount of
any promissory notes receivable from the sale of the Capital Stock of the
Company or any of its Restricted Subsidiaries, each item to be determined in
conformity with GAAP (excluding the effects of foreign currency adjustments
under Financial Accounting Standards Board Statement of Financial Accounting
Standards No. 52).
"Debt" means (without duplication), with respect to any person, whether
recourse is to all or a portion of the assets of such person and whether or not
contingent (a) every obligation of such person for money borrowed, (b) every
obligation of such person evidenced by bonds, debentures, notes or other
similar instruments, (c) every reimbursement obligation of such person with
respect to letters of credit, bankers' acceptances or similar facilities issued
for the account of such person, (d) every obligation of such person issued or
assumed as the deferred purchase price of property or services, (e) Capitalized
Lease Obligations, (f) all Disqualified Stock of such person valued at its
maximum fixed repurchase price, plus accrued and unpaid dividends, (g) all
obligations of such person under or in respect of Hedging Agreements, and (h)
ever obligation of the type referred to in clauses (a) through (g) if another
person and all dividends of another person the payment of which, in either
case, such person has guaranteed. For purposes of this definition, the "maximum
fixed repurchase price" of any Disqualified Stock that does not have a fixed
repurchase price will be calculated in accordance with the terms of such
Disqualified Stock as if such Disqualified Stock were repurchased on any date
on which Debt is required to be determined pursuant to the applicable
Indenture, and if such price is based upon, or measured by, the fair market
value of such Disqualified Stock, such fair market value will be determined in
good faith by the board of directors of the issuer of such Disqualified Stock.
Notwithstanding the foregoing, trade accounts payable and accrued liabilities
arising in the ordinary course of business and any liability for federal, state
or local taxes or other taxes owed by such person will not be considered Debt
for purposes of this definition.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Disqualified Stock" means any class or series of Capital Stock that,
either by its terms, by the terms of any security into which it is convertible
or exchangeable or by contract or otherwise (i) is or upon the happening of any
event or passage of time would be, required to be redeemed prior to the final
Stated Maturity of the Notes, (ii) is redeemable at the option of the holder
thereof at any time prior to such final Stated Maturity or (iii) at the option
of the holder thereof, is convertible into or exchangeable for debt securities
at any time prior to such final Stated Maturity.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Generally Accepted Accounting Principles" or "GAAP" means generally
accepted accounting principles in the United States, consistently applied, that
are in effect from time to time.
"Lien" means any mortgage, charge, pledge, lien (statutory or otherwise),
privilege, security interest, hypothecation, assignment for security, claim, or
preference or priority or other encumbrance upon or with respect to any
property of any kind, real or personal, movable or immovable, now owned or
hereafter acquired. A person will be deemed to own subject to a Lien any
property that such person has acquired or holds subject to the interest of a
vendor or lessor under any conditional sale agreement, capital lease or other
title retention agreement.
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"Restricted Subsidiary" means any Subsidiary other than an Unrestricted
Subsidiary.
"Significant Subsidiary" means any Restricted Subsidiary of the Company
that together with its Subsidiaries, (a) for the most recent fiscal year of the
Company, accounted for more than 10% of the consolidated net sales of the
Company and its Restricted Subsidiaries or (b) as to the end of such fiscal
year, was the owner of more than 10% of the consolidated assets of the Company
and its Restricted Subsidiaries, in the case of either (a) or (b), as set forth
on the most recently available consolidated financial statements of the Company
for such fiscal year or (c) was organized or acquired since the end of such
fiscal year and would have been a Significant Subsidiary if it had been owned
during such fiscal year.
"Stated Maturity" means, when used with respect to any Debt Security or
any installment of interest thereon, the date specified in such Debt Security
as the fixed date on which the principal of such Debt Security or installment
of interest is due and payable and, when used with respect to any other Debt,
means the date specified in the instrument governing such Debt as the fixed
date on which the principal of such Debt or any installment of interest thereon
is due and payable.
"Subsidiary" means any person a majority of the equity ownership or Voting
Stock of which is at the time owned, directly or indirectly, by the Company
and/or one or more other Subsidiaries of the Company.
"Unrestricted Subsidiary" means (a) any Subsidiary that is designated by
the Board of Directors as an Unrestricted Subsidiary in accordance with the
"Unrestricted Subsidiaries" covenant and (b) any Subsidiary of an Unrestricted
Subsidiary.
Certain Covenants of the Company
Unless otherwise specified in the applicable Prospectus Supplement, the
following covenants contained in the Indentures shall be applicable with
respect to each series of Debt Securities:
Limitation on Investment Company Status. The Company shall not take any
action, or otherwise permit to exist any circumstance, that would require the
Company or any of its subsidiaries to register as an "investment company" under
the Investment Company Act of 1940, as amended.
Reports. The Company will be required to file on a timely basis with the
Commission, to the extent such filings are accepted by the Commission and
whether or not the Company has a class of securities registered under the
Exchange Act, the annual reports, quarterly reports and other documents that
the Company would be required to file if it were subject to Section 13 or 15(d)
of the Exchange Act. The Company will also be required (a) to file with the
applicable Trustee, and provide to each holder of Debt Securities, without cost
to such holder, copies of such reports and documents within 15 days after the
date on which the Company files such reports and documents with the Commission
or the date on which the Company would be required to file such reports and
documents if the Company were so require and (b) if filing such reports and
documents with the Commission is not accepted by the Commission or is
prohibited under the Exchange Act, to supply at the Company's cost copies of
such reports and documents to any prospective holder of Debt Securities
promptly upon written request.
Subordination of Subordinated Debt Securities
The payment of the principal of (and premium, if any, on) and interest, if
any, on the Subordinated Debt Securities will be expressly subordinated, to the
extent and in the manner set forth in the Subordinated Indenture, in right of
payment to the prior payment in full of all present and future Senior
Indebtedness of the Company. If so indicated in the applicable Prospectus
Supplement, the provisions regarding subordination of the Subordinated Debt
Securities set forth in the Subordinated Indenture (or the definition of any
term used therein) may differ from the provisions set forth below.
Upon any payment or distribution of assets of the Company to creditors
upon any liquidation, dissolution, winding-up, reorganization, assignment for
the benefit of creditors, marshaling of assets or any bankruptcy, insolvency or
similar proceedings of the Company (except in connection with the consolidation
or merger of the Company or its liquidation or dissolution following the
conveyance, transfer or lease of its properties and assets substantially as an
entirety, upon the terms and conditions described under "Consolidation, Merger
and Sale of
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Assets"), the holders of Senior Debt will first be entitled to receive payment
in full, in cash or cash equivalents, of all amounts due or to become due on or
in respect of such Senior Debt before the holders of Subordinated Debt
Securities are entitled to receive any payment of principal of (or premium, if
any) or interest on the Subordinated Debt Securities or on account of the
purchase or redemption or other acquisition of Subordinated Debt Securities by
the Company or any Subsidiary of the Company. In the event that,
notwithstanding the foregoing, the Subordinated Trustee or the holder of any
Subordinated Debt Securities receives any payment or distribution of assets of
the Company of any kind or character (excluding equity or subordinated
securities of the Company provided for in a plan of reorganization or
readjustment that, in the case of subordinated securities, are subordinated in
right of payment to all Senior Debt to at least the same extent as the
Subordinated Debt Securities are so subordinated), before all the Senior Debt
is paid in full, then such payment or distribution will be held in trust for
the holders of Senior Debt and will be required to be paid over or delivered
forthwith to the trustee in bankruptcy or other person making payment or
distribution of assets of the Company for application to the payment of all
Senior Debt remaining unpaid to the extent necessary to pay the Senior Debt in
full.
The Company may not make any payments on account of the Subordinated Debt
Securities or on account of the purchase or redemption or other acquisition of
Subordinated Debt Securities if a default in the payment when due of principal
of (or premium, if any) or interest on Specified Senior Debt has occurred and
is continuing, or a default (a "Senior Payment Default"). In addition, if any
default (other than a Senior Payment Default) with respect to any Specified
Senior Debt permitting the holders thereof (or a trustee or agent on behalf
thereof) to accelerate the maturity thereof (a "Senior Nonmonetary Default")
has occurred and is continuing and the Company and the Subordinated Trustee
have received written notice thereof from an authorized person on behalf of any
holder of Specified Senior Debt, then the Company may not make any payments on
account of the Subordinated Securities for a period (a "blockage period")
commencing on the date the Company and the Subordinated Trustee receive such
written notice (a "Blockage Notice") and ending on the earliest of (x) 179 days
after such date (the "Initial Period"), (y) the date, if any, on which the
Specified Senior Debt to which such default relates is discharged or such
default is waived or otherwise cured and (z) the date, if any, on which such
blockage period has been terminated by written notice to the Company or the
Subordinated Trustee from the person who gave the Blockage Notice. Any number
of additional payment blockage periods shall extend beyond the Initial Period.
After the expiration of the Initial Period, no payment blockage period may be
commenced until at least 181 consecutive days shall have elapsed from the last
day of the Initial Period. No Senior Nonmonetary Default that existed or was
continuing on the date of the commencement of any blockage period with respect
to the Specified Senior Debt initiating such blockage period will be, or can
be, made the basis for the commencement of a subsequent blockage period, unless
such default has been cured or waived for a period of not less than 90
consecutive days. In the event that, notwithstanding the foregoing, the Company
makes any payment to the Subordinated Trustee or the holder of any Subordinated
Debt Securities prohibited by these blockage provisions, then such payment will
be held in trust for the holders of Senior Debt and will be required to be paid
over and delivered forthwith to the holders of the Senior Debt remaining
unpaid, to the extend necessary to pay in full all the Senior Debt.
By reason of such subordination, in the event of insolvency, creditors of
the Company who are not holders of Senior Debt or the Subordinated Debt
Securities may recover less, ratably, than holders of Senior Debt and may
recover more, ratably, than the holders of the Subordinated Debt Securities.
The subordination provisions described above will cease to be applicable
to the Notes upon any defeasance or covenant defeasance of the Notes as
described under "Defeasance or Covenant Defeasance of Indentures".
The terms "Senior Debt" and "Specified Senior Debt" will be defined in the
applicable Prospectus Supplement for an offering of Subordinated Debt
Securities.
If this Prospectus is being delivered in connection with the offering of a
series of Subordinated Debt Securities, the applicable Prospectus Supplement or
the information incorporated by reference therein will set forth the
approximate amount of Senior Debt outstanding as of a recent date.
Events of Default
Unless otherwise specified in the applicable Prospectus Supplement, the
following will constitute "Events of Default" under each Indenture with respect
to Debt Securities of any series (unless they are inapplicable to such series
of Debt Securities or they are specifically deleted in the supplemental
indenture or the Board Resolution under which such series of Debt Securities is
issued or has been modified):
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(a) default in the payment of any interest on any Debt Security of such
series when it becomes due and payable, and continuance of such default for
a period of 30 days;
(b) default in the payment of the principal of (or premium, if any, on)
any Debt Security of such series when due;
(c) failure to perform or comply with the applicable Indenture
provisions described under "Consolidation, Merger and Sale of Assets";
(d) default in the performance, or breach, of any covenant or agreement
of the Company contained in the applicable Indenture (other than a default
in the performance, or breach, of a covenant or agreement that is
specifically dealt with elsewhere therein), and continuance of such default
or breach for a period of 60 days after written notice has been given to
the Company by the applicable Trustee or to the Company by such Trustee or
to the Company and such Trustee by the holders of at least 25% in aggregate
principal amount of the Debt Securities of such series then outstanding as
provided in such Indenture;
(e) (i) an event of default has occurred under any mortgage, bond,
indenture, loan agreement or other document evidencing an issue of Debt of
the Company or any Significant Subsidiary, which issue has an aggregate
outstanding principal amount of not less than $2,000,000, and such default
has resulted in such Debt becoming, whether by declaration or otherwise,
due and payable prior to the date on which it would otherwise become due
and payable or (ii) a default in any payment when due at final maturity of
any such Debt;
(f) failure by the Company or any of its Subsidiaries to pay one or more
final judgments the uninsured portion of which exceeds in the aggregate
$2,000,000, which judgment or judgments are not paid, discharged or stayed
for a period of 60 days;
(g) the occurrence of certain events of bankruptcy, insolvency or
reorganization with respect to the Company or any Significant Subsidiary;
or
(h) any other Event of Default specified for such series.
If an Event of Default (other than as specified in clause (g) above)
occurs and is continuing under the Indenture applicable to any series of Debt
Securities, the applicable Trustee or the holders of not less than 25% in
aggregate principal amount of the Debt Securities of such series then
outstanding may declare the principal of all of the outstanding Debt Securities
of such series immediately due and payable and, upon any such declaration, such
principal will become due and payable immediately.
If an Event of Default specified in clause (g) above occurs and is
continuing, then the principal of all of the outstanding Debt Securities of any
series will ipso facto become and be immediately due and payable without any
declaration or other act on the part of the applicable Trustee or any holder of
Debt Securities of such series.
At any time after a declaration of acceleration under either Indenture,
but before a judgment or decree for payment of the money due has been obtained
by the applicable Trustee, the holders of a majority in aggregate principal
amount of the outstanding Debt Securities of any series, by written notice to
the Company and such Trustee, may rescind such declaration and its consequences
if (i) the Company has paid or deposited with such Trustee a sum sufficient to
pay (A) all overdue interest on all Debt Securities of such series, (B) all
unpaid principal of (and premium, if any, on) any outstanding Debt Securities
of such series that has become due otherwise than by such declaration of
acceleration and interest thereon at the rate borne by the Debt Securities of
such series, (C) to the extent that payment of such interest is lawful,
interest upon overdue interest and overdue principal at the rate borne by the
Debt Securities of such series, and (D) all sums paid or advanced by such
Trustee under such Indenture and the reasonable compensation, expenses,
disbursements and advances of such Trustee, its agents and counsel; and (ii)
all Events of Default, other than the non-payment of amounts of principal of
(or premium, if any, on) or interest on the Debt Securities of such series that
have become due and solely by such declaration of acceleration have been cured
or waived. No such rescission will affect any subsequent default or impair any
right consequent thereto.
The holders of not less than a majority in aggregate principal amount of
the outstanding Debt Securities of any series may, on behalf of the holders of
all of the Debt Securities of such series, waive any past defaults under
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the applicable Indenture, except a default in the payment of the principal of
(and premium, if any on) or interest on any Debt Securities of such series, or
in respect of a covenant or provision that under such Indenture cannot be
modified or amended without the consent of the holder of each such Debt
Security outstanding.
If a Default or an Event of Default occurs with respect to a series of
Debt Securities and is continuing and is known to either Trustee, the
applicable Trustee will mail to each holder of the Debt Securities of such
series notice of the Default or Event of Default within 90 days after the
occurrence thereof. Except in the case of a Default or an Event of Default in
payment of principal of (and premium, if any, on) or interest on any Debt
Securities of any series, such Trustee may withhold the notice to the holders
of the Debt Securities of such series if a committee of its trust officers in
good faith determines that withholding such notice is in the interests of the
holders of the Debt Securities of such series.
The Company is required to furnish to the Trustees annual statements as to
the performance by the Company of their respective obligations under the
applicable Indenture and as to any default in such performance. The Company is
also required to notify the applicable Trustee within five days of any Default.
Satisfaction and Discharge of the Indentures and the Debt Securities
Upon the request of the Company, an Indenture will cease to be of further
effect (except as to surviving rights of registration of transfer of the Debt
Securities of any series outstanding under such Indenture, as expressly
provided for in such Indenture) and the applicable Trustee, at the expense of
the Company, will execute proper instruments acknowledging satisfaction and
discharge of such Indenture when (a) either (i) all the Debt Securities of any
series theretofore authenticated and delivered (other than destroyed, lost or
stolen Debt Securities of any series that have been replaced or paid and Debt
Securities of any series that have been subject to defeasance under "Defeasance
or Covenant Defeasance of Indentures") have been delivered to such Trustee for
cancellation or (ii) all Debt Securities of any series not theretofore
delivered to such Trustee for cancellation (A) have become due and payable, (B)
will become due and payable at maturity within one year or (C) at to be called
for redemption within one year under arrangements satisfactory to such Trustee
for the giving of notice of redemption by such Trustee in the name, and at the
expense, of the Company, and the Company has irrevocably deposited or caused to
be deposited with such Trustee funds in trust for the purpose and in an amount
sufficient to pay and discharge the entire Debt on such Debt Securities of any
series not theretofore delivered to such Trustee for cancellation, for
principal (and premium, if any, on) and interest on the Debt Securities of any
series to the date of such deposit (in the case of Debt Securities of any
series that have become due and payable) or to the Stated Maturity or
Redemption Date (as defined in the Indentures), as the case may be; (b) the
Company has paid or caused to be paid all sums payable under such Indenture by
the Company; and (c) the Company has delivered to such Trustee an officers'
certificate and an opinion of counsel, each stating that all conditions
precedent provided in such Indenture relating to the satisfaction and discharge
of such Indenture have been complied with.
Modification and Waiver
Modifications and amendments of an Indenture may be made by the Company
and the Trustee with the consent of the holders of a majority in aggregate
outstanding principal amount of the Debt Securities of any series to be offered
under the Indenture; provided, however, that no such modification or amendment
may, without the consent of the holder of each outstanding Debt Security of
such series affected thereby,
(a) change the Stated Maturity of the principal of, or any installment
of interest on, any Debt Securities of such series, or reduce the principal
amount thereof or the rate of interest thereon or any premium payable upon
the redemption thereof, or change any place of payment where any Debt
Securities of such series or any premium or the interest thereon is payable
or impair the right to institute suit for the enforcement of any such
payment after the Stated Maturity thereof (or, in the case of redemption,
on or after the Redemption Date);
(b) reduce the percentage in principal amount of outstanding Debt
Securities of such series, the consent of whose holders is required for any
waiver of compliance with certain provisions of, or certain defaults and
their consequences provided for under, such Indenture; or
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(c) in the case of the Subordinated Indenture, modify any provisions
relating to subordination of the Debt Securities of such series in a manner
materially adverse to the holders thereof.
The holders of a majority in aggregate principal amount of the Debt
Securities of any series outstanding may waive compliance with certain
restrictive covenants and provisions of the Indenture with respect to such
series.
Modification and amendment of an Indenture may be made by the Company and
the applicable Trustee thereunder, without the consent of any holder, for any
of the following purposes: (a) to evidence the succession of another person to
the Company as obligor under such Indenture; (b) to add to the covenants of the
Company for the benefit of the holders of all or any series of Indenture
Securities issued under such Indenture and any related coupons or to surrender
any right or power conferred upon the Company by such Indenture; (c) to add
Events of Default for the benefit of the holders of all or any series of
Indenture Securities; (d) to add to or change any provisions of such Indenture
to facilitate the issuance of, or to liberalize the terms of, Bearer
Securities, or to permit or facilitate the issuance of Indenture Securities in
uncertificated form, provided that any such actions do not adversely affect the
holders of such Indenture Securities or any related coupons; (e) to change or
eliminate any provisions of such Indenture, provided that any such change or
elimination will become effective only when there are no such Indenture
Securities outstanding of any series created prior thereto which are entitled
to the benefit of such provisions; (f) in the case of the Senior Debt
Securities to secure the Indenture Securities under the Senior Indenture
pursuant to the Senior Indenture, or otherwise; (g) to establish the form or
terms of such Indenture Securities of any series and any related coupons; (h)
to provide for the acceptance of appointment by a successor Trustee or
facilitate the administration of the trusts under such Indenture by more than
one Trustee; (i) to cure any ambiguity, defect or inconsistency in such
Indenture, provided such action does not adversely affect the interests of
holders of Indenture Securities of a series issued thereunder or any related
coupons in any material respect; or (j) to supplement any of the provisions of
such Indenture to the extent necessary to permit or facilitate defeasance and
discharge of any series of Indenture Securities thereunder, provided that such
action shall not adversely affect the interests of the holders of any such
Indenture Securities and any related coupons in any material respect.
Consolidation, Merger and Sale of Assets
Unless otherwise provided in the Prospectus Supplement, each Indenture
provides that the Company may not consolidate with or merge with or into any
other person or, directly or indirectly, convey, sell, assign, transfer, lease
or otherwise dispose of its properties and assets substantially as an entirety
to any other person (in one transaction or a series of related transactions),
unless:
(a) either (i) the Company is the surviving corporation or (ii) the
person (if other than the Company) formed by such consolidation or into
which the Company is merged or the person that acquires by sale,
assignment, transfer, lease or other disposition of its properties and
assets of the Company substantially as an entirety (the "Surviving Entity")
(A) is a corporation, partnership or trust organized and validly existing
under the laws of the United States, any state thereof or the District of
Columbia and (B) expressly assumes, by a supplemental indenture in form
satisfactory to the applicable Trustee, all of the Company's obligations
under such Indenture and any Debt Securities issued thereunder;
(b) immediately after giving effect to such transaction and treating any
obligation of the Company or a Restricted Subsidiary in connection with or
as a result of such transaction as having been incurred as of the time of
such transaction, no Default or Event of Default has occurred and is
continuing;
(c) immediately after giving effect to such transaction on a pro forma
basis, the Consolidated Net Worth of the Company (or of the Surviving
Entity if the Company is not the continuing obligor under such Indenture)
is equal to or greater than the Consolidated Net Worth of the Company
immediately prior to such transaction;
(d) immediately after giving effect to such transaction on a pro forma
basis (on the assumption that the transaction occurred at the beginning of
the most recently ended four full fiscal quarter period for which internal
financial statements are available, the Company (or the Surviving Entity if
the Company is not the continuing obligor under such Indenture) could incur
at least $1.00 of additional Debt (other than Permitted Debt (as defined in
such Indenture)) pursuant to the first paragraph of any "Limitation on
Debt" covenant applicable to any series of Debt Securities;
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(e) if any of the property or assets of the Company or any of its
Restricted Subsidiaries would thereupon become subject to any Lien, the
provisions of any "Limitation on Liens" covenant applicable to any series
of Debt Securities are complied with; and
(f) the Company delivers, or causes to be delivered, to such Trustee, in
form and substance reasonably satisfactory to such Trustee, an officers'
certificate and an opinion of counsel, each stating that such transaction
complies with the requirements of such Indenture.
In the event of any transaction described in and complying with the
conditions listed in the first paragraph of this covenant and in which the
Company is not the continuing obligor under such Indenture, the Surviving
Entity will succeed to, and be substituted for, and may exercise every right
and power of, the Company under such Indenture, and thereafter the Company will
be discharged from all its obligations and covenants under such Indenture and
the Debt Securities.
Defeasance or Covenant Defeasance of Indentures
Unless the Prospectus Supplement relating to the Offered Debt Securities
otherwise provides, the Company may, at its option and at any time, terminate
the obligations of the Company with respect to the outstanding Debt Securities
of any series ("defeasance"). Such defeasance means that the Company will be
deemed to have paid and discharged the entire Debt represented by the
outstanding Debt Securities of such series, except for (a) the rights of
holders of outstanding Debt Securities of such series to receive payments in
respect of the principal of (and premium, if any, on) and interest on such Debt
Securities when such payments are due, (b) the Company's obligations to issue
temporary Debt Securities of such series, register the transfer or exchange of
any Debt Securities of such series, replace mutilated, destroyed, lost or
stolen Debt Securities of such series, maintain an office or agency for
payments in respect of the Debt Securities of any series and segregate and hold
such payments in trust, (c) the rights, powers, trusts, duties and immunities
of the applicable Trustee and (d) the defeasance provisions of the applicable
Indenture. In addition, the Company may, at its option and at any time, elect
to terminate the obligations of the Company with respect to certain covenants
set forth in such Indenture, and any failure to comply with such obligations
would not constitute a Default or an Event of Default with respect to the Debt
Securities of such series ("covenant defeasance").
In order to exercise either defeasance or covenant defeasance, (a) the
Company must irrevocably deposit or cause to be deposited with the applicable
Trustee, as funds in trust, specifically pledged as security for, and dedicated
solely to, the benefit of the holders of the Debt Securities of a series, money
in an amount, of U.S. Government Obligations (as defined in the Indentures)
that through the scheduled payment of principal and interest thereon will
provide money in an amount, or a combination thereof, sufficient, in the
opinion of a nationally recognized firm of independent public accountants, to
pay and discharge the principal of (and premium, if any, on) and interest on
the outstanding Debt Securities of such series at maturity (or upon redemption,
if applicable) of such principal or installment of interest; (b) no Default or
Event of Default has occurred and is continuing on the date of such deposit or,
insofar as an event of bankruptcy under clause (g) of "Events of Default" above
is concerned, at any time during the period ending on the 91st day after the
date of such deposit; (c) such defeasance or covenant defeasance may not result
in a breach or violation of, or constitute a default under, the Indenture or
any material agreement or instrument to which the Company is a party or by
which it is bound; (d) in the case of defeasance, the Company must deliver to
such Trustee an opinion of counsel stating that the Company has received from,
or there has been published by, the U.S. Internal Revenue Service a ruling, or
there has been a change in applicable federal income tax law, to the effect,
and based thereon such opinion must confirm that, the holders of the
outstanding Debt Securities of such series will not recognize income, gain or
loss for federal income tax purposes as a result of such defeasance and will be
subject to federal income tax on the same amounts, in the same manner and at
the same times as would have been the case if such defeasance had not occurred;
(e) in the case of covenant defeasance, the Company must have delivered to such
Trustee an opinion of counsel to the effect that the Holders of the outstanding
Debt Securities of such series will not recognize income, gain or loss for
federal income tax purposes as a result of such covenant defeasance and will be
subject to federal income tax on the same amounts, in the same manner and at
the same times as would have been the case if such covenant defeasance had not
occurred; and (f) the Company must have delivered to such Trustee an officers'
certificate and an opinion of counsel, each stating that all conditions
precedent provided for relating to either the defeasance or the covenant
defeasance, as the case may be, have been complied with.
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Governing Law
The Indentures and the Debt Securities will be governed by, and construed
in accordance with, the laws of the State of New York.
Form, Registration, Transfer and Payment
Unless otherwise indicated in the applicable Prospectus Supplement, the
Debt Securities will be issued only in fully registered form in denominations
of $1,000 or integral multiples thereof. Unless otherwise indicated in the
applicable Prospectus Supplement, payment of principal, premium, if any, and
interest on the Debt Securities will be payable, and the transfer of Debt
Securities will be registerable, at the office or agency of the Company
maintained for such purposes and at any other office or agency maintained for
such purpose. No service charge will be made for any registration of transfer
of the Debt Securities, but the Company may require payment of a sum sufficient
to cover any tax or other governmental charge imposed in connection therewith.
All monies paid by the Company to a Paying Agent (as defined in the
Indentures) for the payment of principal of and any premium or interest on any
Debt Security which remain unclaimed for two years after such principal,
premium or interest has become due and payable may be repaid to the Company and
thereafter the Holder (as defined in the Indentures) of such Debt Security may
look only to the Company for payment thereof.
Book-Entry Debt Securities
The Debt Securities of a series may be issued in whole or in part in the
form of one or more Global Securities that will be deposited with, or on behalf
of, a Depositary ("Depositary") or its nominee identified in the applicable
Prospectus Supplement. In such a case, one or more Global Securities will be
issued in a denomination or aggregate denomination equal to the portion of the
aggregate principal amount of outstanding Debt Securities of the series to be
represented by such Global Security or Global Securities. Unless and until it
is exchanged in whole or in part for Debt Securities in registered form, a
Global Security may not be registered for transfer or exchange except as a
whole by the Depositary for such Global Security to a nominee of such
Depositary or by a nominee of such Depositary to such Depositary or another
nominee of such Depositary or by such Depositary or any nominee to a successor
Depositary or a nominee of such successor Depositary and except in the
circumstances described in the applicable Prospectus Supplement.
The specific terms of the depositary arrangement with respect to any
portion of a series of Debt Securities to be represented by a Global Security
will be described in the applicable Prospectus Supplement. The Company expects
that the following provisions will apply to depositary arrangements.
Unless otherwise specified in the applicable Prospectus Supplement, Debt
Securities which are to be represented by a Global Security to be deposited
with or on behalf of a Depositary will be represented by a Global Security
registered in the name of such Depositary or its nominee. Upon the issuance of
such Global Security, and the deposit of such Global Security with or on behalf
of the Depositary for such Global Security, the Depositary will credit, on its
book-entry registration and transfer system, the respective principal amounts
of the Debt Securities represented by such Global Security to the accounts of
institutions that have accounts with such Depositary or its nominee
("participants"). The accounts to be credited will be designated by the
underwriters of, or agents for, such Debt Securities or by the Company, if such
Debt Securities are offered and sold directly by the Company. Ownership of
beneficial interests in such Global Security will be limited to participants or
persons that may hold interests through participants. Ownership of beneficial
interests by participants in such Global Security will be shown on, and the
transfer of that ownership interest will be effected only through, records
maintained by the Depositary or its nominee for such Global Security. Ownership
of beneficial interests in such Global Security by persons that hold through
participants will be shown on, and the transfer of such ownership interests
will be effected only through, records maintained by such participant. The laws
of some jurisdictions require that certain purchasers of securities take
physical delivery of such securities in certificated form. The foregoing
limitations and such laws may impair the ability to transfer beneficial
interests in such Global Securities.
Debt Securities will be issued in fully registered, certificated form
("Definitive Securities") to holders or their nominees, rather than to the
Depositary or its nominee, only if (a) the Depositary advises the applicable
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Trustee in writing that the Depositary is no longer willing or able to
discharge properly its responsibilities as depositary with respect to such Debt
Securities and it is unable to locate a qualified successor, (b) the Company,
at its option, elects to terminate the book-entry system or (c) after the
occurrence of an Event of Default with respect to such Debt Securities, a
Holder of Debt Securities advises the applicable Trustee in writing that it
wishes to receive a Definitive Security.
Upon the occurrence of any event described in the immediately preceding
paragraph, the applicable Trustee will be required to notify all applicable
holders through the Depositary and its participants of the availability of
Definitive Securities. Upon surrender by the Depositary of the definitive
certificates representing the corresponding Debt Securities and receipt of
instructions for re-registration, such Trustee will reissue such Debt
Securities as Definitive Securities to such holders.
So long as the Depositary for a Global Security, or its nominee, is the
registered owner of such Global Security, such Depositary or nominee will be
considered the sole owner or holder of the Securities represented by such
Global Security for all purposes under the applicable Indenture. Unless
otherwise specified in the applicable Prospectus Supplement, owners of
beneficial interests in such Global Security will not be entitled to have Debt
Securities of the series represented by such Global Security registered in
their names, will not receive or be entitled to receive physical delivery of
Debt Securities of such series in certificated form and will not be considered
the holders thereof for any purposes under the applicable Indenture.
Accordingly, each person owning a beneficial interest in such Global Security
must rely on the procedures of the Depositary and, if such person is not a
participant, on the procedures of the participant through which such person
owns its interest, to exercise any rights of a holder under such Indenture. The
Company understands that under existing industry practices, if the Company
requests any action of holders or an owner of a beneficial interest in such
Global Security desires to give any notice or take any action a holder is
entitled to give or take under the applicable Indenture, the Depositary would
authorize the participants to give such notice or take such action, and
participants would authorize beneficial owners owning through such participants
to give such notice or take such action or would otherwise act upon the
instructions of beneficial owners owning through them.
Principal of and any premium and interest on a Global Security will be
payable in the manner described in the applicable Prospectus Supplement.
Regarding the Trustees
The Indentures contains certain limitations on the right of the Trustees,
should any Trustee become a creditor of the Company, to obtain payment of
claims in certain cases, or to realize for its own account on certain property
received in respect of any such claim as security or otherwise. The Trustees
will be permitted to engage in certain other transactions; however, if any
Trustee acquires any conflicting interest and there is a default under the Debt
Securities, it must eliminate such conflict or resign.
Either Trustee may resign or be removed with respect to one or more series
of Indenture Securities and a successor Trustee may be appointed to act with
respect to such series. In the event that two or more persons are acting as
Trustee with respect to different series of Indenture Securities, each such
Trustee shall be a Trustee of a trust under the applicable Indenture separate
and apart from the trust administered by any other such Trustee, and any action
described herein to be taken by the "Trustee" may then be taken by each such
Trustee with respect to, and only with respect to, the one or more series of
Indenture Securities for which it is Trustee.
DESCRIPTION OF OUTSTANDING CAPITAL STOCK
The authorized capital stock of the Company consists of 40,000,000 Common
Shares, par value $.001 per share, and 2,000,000 Preferred Shares, par value
$.001 per share. On September 30, 1997, there were outstanding (a) 10,826,972
Common Shares, (b) stock options to purchase an aggregate of 1,880,292 Common
Shares (of which options to purchase an aggregate of 798,145 Common Shares were
currently exercisable), (c) convertible subordinated debentures entitling the
holders thereof to purchase an aggregate of 4,671,875 Common Shares, (d)
convertible subordinated notes entitling the holders thereof to purchase an
aggregate of 555,555 Common Shares and (e) warrants to purchase an aggregate of
841,102 Common Shares. No Preferred Shares had been issued as of such date.
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DESCRIPTION OF COMMON SHARES
Under the Certificate of Incorporation, the Company is currently
authorized to issue up to 40,000,000 of its Common Shares. The Prospectus
Supplement relating to an offering of Common Shares will describe terms
relevant thereto, including the number of shares offered, any initial offering
price, and market price and dividend information.
The following description of the Common Shares of the Company is a summary
of certain provisions of the Company's Certificate of Incorporation and
By-laws.
Subject to the rights of the holders of any outstanding Preferred Shares,
holders of Common Shares are entitled to receive dividends when, as and if
declared by the Board of Directors out of funds legally available therefor. See
also "Description of Preferred Shares - Dividend Rights".
Holders of the Common Shares are entitled to one vote for each share held
of record by them on all matters voted upon by the shareholders of the Company,
including the election of directors. The Common Shares do not have cumulative
voting rights. Election of directors is decided by the holders of a plurality
of the shares entitled to vote and present in person or by proxy at a meeting
for the election of directors. See "Description of Preferred Shares - Voting
Rights" for a discussion of the voting rights of any Preferred Shares that
might be issued in the future.
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, after the payment or provision for payment of the
debts and other liabilities of the Company and the preferential amounts to
which holders of the Company's Preferred Shares are entitled (if any Preferred
Shares are then outstanding), the holders of Common Shares are entitled to
share ratably in the remaining assets of the Company.
The outstanding Common Shares are, and any Common Shares offered hereby
upon issuance and payment therefor will be, fully paid and non-assessable. The
Common Shares have no preemptive or conversion rights and there are no
redemption or sinking fund provisions applicable thereto.
The Common Shares of the Company are listed on The New York Stock Exchange
under the symbol "CMI". The transfer agent and registrar is Continental Stock
Transfer & Trust Company.
Steven Rabinovici, David Jacaruso, Marie Graziosi, Dennis Shields and Dr.
Lawrence Shields, founders of the Company, are parties to a June 1995
Shareholders' Agreement pursuant to which they have agreed to vote (and
subsequently voted) all of their shares of the Company, for a period of ten
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 former Vice
Chairman of the Board and former President of the Company and Dennis Shields,
the son of Dr. Shields, is a former Executive Vice President and a former
director of the Company. Marie Graziosi is the wife of David Jacaruso. Dr.
Shields is a founder of CMI, the Company's second largest shareholder and the
founder and a 95% shareholder of GMMS. At September 30, 1997, Messrs.
Rabinovici, Jacaruso, Shields, Ms. Graziosi and Dr. Lawrence Shields
beneficially owned an aggregate of approximately 2,265,081 shares or 20.9% of
the Company's outstanding Common Shares.
DESCRIPTION OF PREFERRED SHARES
General
The following summary does not purport to be complete and is subject in
all respects to applicable New York law and the Company's Certificate of
Incorporation.
The Company is authorized by its Certificate of Incorporation to issue
2,000,000 Preferred Shares. The Board of Directors is authorized to designate
with respect to each new series of Preferred Shares the number of shares in
each series, the dividend rates and dates of payment, voluntary and involuntary
liquidation preferences, redemption prices, whether or not dividend, shall be
cumulative and, if cumulative, the date or dates from which the same shall be
cumulative, the sinking fund provisions, if any, for redemption or purchase of
shares, the
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rights, if any, and the terms and conditions on which shares can be converted
into or exchanged for, or the rights to purchase, shares of any other class or
series, and the voting rights, if any. Any Preferred Shares issued will rank
prior to the Common Shares as to dividends and as to distributions in the event
of liquidation, dissolution or winding up of the Company. The ability of the
Board of Directors to issue Preferred Shares, while providing flexibility in
connection with possible acquisitions and other corporate purposes, could,
among other things, adversely affect the voting powers of holders of Common
Shares and, under certain circumstances, may discourage an attempt by others to
gain control of the Company. The Company may amend from time to time its
Certificate of Incorporation to increase the number of authorized Preferred
Shares. Any such amendment would require the approval of the holders of a
majority of the outstanding Common Shares and the approval of the holders of a
majority of the outstanding shares of all series of Preferred Shares voting
together as a single class without regard to series. As of the date of this
Prospectus, the Company had no Preferred Shares outstanding.
The applicable Prospectus Supplement will describe the following terms of
the offered series of Preferred Shares: (a) title and stated value of such
series; (b) the number of shares in such series; (c) the dividend payment dates
and the dividend rate or method of determination or calculation of such terms
applicable to the series; (d) applicable redemption provisions, if any; (e)
sinking fund or purchase fund provisions, if any; (f) the fixed liquidation
price and fixed liquidation premium, if any, applicable to the series; (g) the
conversion rights, if any, and the rate or basis of exchange or conversion into
other securities or method of determination thereof applicable to the series,
if any; (h) whether interests in such series will be represented by Depositary
Shares; (i) applicable voting rights; and (j) any other terms applicable
thereto.
Redemption
A series of Preferred Shares may be redeemable, in whole or in part, at
the option of the Company, and may be subject to mandatory redemption, in each
case upon terms, at the times and at the redemption prices set forth in the
Prospectus Supplement relating to such series.
The applicable Prospectus Supplement for any series of Preferred Shares
that is subject to mandatory redemption will specify the number of shares of
such series of Preferred Shares that shall be redeemed by the Company on the
date or dates to be specified, at a redemption price per share to be specified,
together with an amount equal to any accrued and unpaid dividends thereon to
the date of redemption.
If fewer than all the outstanding shares of any series of Preferred Shares
are to be redeemed, whether by mandatory or optional redemption, the selection
of the shares to be redeemed shall be determined by lot or pro rata as may be
determined by the Board of Directors or a duly authorized committee thereof, or
by any other method which may be determined by the Board of Directors or such
committee to be equitable. From and after the date of redemption (unless
default shall be made by the Company in providing for the payment of the
redemption price), dividends shall cease to accrue on the Preferred Shares
called for redemption and all rights of the holders thereof (except the right
to receive the redemption price) shall cease.
Conversion Rights; Preemptive Rights
The applicable Prospectus Supplement for any series of Preferred Shares
will state the terms, if any, on which shares of that series are convertible
into Common Shares or another series of preferred shares of the Company. The
Preferred Shares will have no preemptive rights.
Dividend Rights
The holders of the Preferred Shares of each series shall be entitled to
receive, if and when declared payable by the Board of Directors, out of assets
available therefor, dividends at, but not exceeding, the dividend rate for such
series (which may be fixed or variable), payable at such intervals and on such
dates as are provided in the resolution of the Board of Directors creating such
series. If such intervals and dividend payment dates shall vary from time to
time for such series, such resolution shall set forth the method by which such
intervals and such dates shall be determined. Such dividends on Preferred
Shares shall be paid before any dividends, other
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than a dividend payable in Common Shares of the Company, may be paid upon or
set apart for any shares of capital stock ranking junior to the Preferred
Shares in respect of dividends or liquidation rights (referred to in this
Prospectus as "stock ranking junior to the Preferred Shares").
Voting Rights
Except as indicated below or in the Prospectus Supplement relating to a
particular series of Preferred Shares, or except as expressly required by the
laws of the State of New York or other applicable law, the holders of the
Preferred Shares will not be entitled to vote. Except as indicated in the
Prospectus Supplement relating to a particular series of Preferred Shares, each
such share will be entitled to one vote on matters on which holders of such
series of Preferred Shares are entitled to vote. However, as more fully
described below under "Depositary Shares," if the Company elects to issue
Depositary Shares representing a fraction of a share of a series of Preferred
Shares, each such Depositary Share will, in effect, be entitled to such
fraction of a vote, rather than a full vote. Since each full share of any
series of Preferred Shares shall be entitled to one vote, the voting power of
such series, on matters on which holders of such series and holders of other
series of preferred shares are entitled to vote as a single class, shall depend
on the number of shares in such series, not the aggregate liquidation
preference or initial offering price of the shares of such series of Preferred
Shares.
Liquidation Rights
In the event of any liquidation, dissolution or winding up of the Company,
the holders of Preferred Shares shall be entitled to receive, for each share
thereof, the fixed liquidation or stated value for the respective series
together in all cases dividends accrued or in arrears thereon, before any
distribution of the assets shall be made to the holders of any stock ranking
junior to the Preferred Shares. If the assets distributable among the holders
of Preferred Shares should be insufficient to permit the payment of the full
preferential amounts fixed for all series, then the distribution shall be made
among the holders of each series ratably in proportion to the full preferential
amounts to which they are respectively entitled.
Miscellaneous
The Preferred Shares upon issuance and the receipt of full consideration
will be fully paid and nonassessable.
DESCRIPTION OF DEPOSITARY SHARES
General
The Company may, at its option, elect to offer fractional Preferred
Shares, rather than whole Preferred Shares. In the event such option is
exercised, the Company will issue to the public receipts for Depositary Shares,
each of which will represent a fraction (to be set forth in the Prospectus
Supplement relating to a particular series of Preferred Shares) of a share of a
particular series of Preferred Shares as described below.
The shares of any series of Preferred Shares represented by Depositary
Shares will be deposited under a Deposit Agreement (the "Deposit Agreement")
between the Company and a bank or trust company selected by the Company having
its principal office in the United States and having a combined capital and
surplus of at least $50,000,000 (the "Depositary Bank"). Subject to the terms
of the Deposit Agreement, each owner of a Depositary Share will be entitled, in
proportion to the applicable fraction of a Preferred Share represented by such
Depositary Share, to all the rights and preferences of the Preferred Shares
represented thereby (including dividend, voting, redemption and liquidation
rights).
The Depositary Shares will be evidenced by depositary receipts issued
pursuant to the Deposit Agreement ("Depositary Receipts"). Depositary Receipts
will be distributed to those persons purchasing fractional Preferred Shares in
accordance with the terms of the offering. If Depositary Shares are issued,
copies of the forms of Deposit Agreement and Depositary Receipt will be
incorporated by reference in the Registration Statement of which this
Prospectus is a part, and the following summary is qualified in its entirety by
reference to such documents.
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Pending the preparation of definitive engraved Depositary Receipts, the
Depositary Bank may, upon the written order of the Company, issue temporary
Depositary Receipts substantially identical to (and entitling the holders
thereof to all the rights pertaining to) the definitive Depositary Receipts but
not in definitive form. Definitive Depositary Receipts will be prepared
thereafter without unreasonable delay, and temporary Depositary Receipts will
be exchangeable for definitive Depositary Receipts at the Company's expense.
Withdrawal of Preferred Shares
Upon surrender of the Depositary Receipts to the Depositary Bank, the
owner of the Depositary Shares evidenced thereby is entitled to delivery at
such office of the number of whole Preferred Shares represented by such
Depositary Shares. If the Depositary Receipts delivered by the holder evidence
a number of Depositary Shares in excess of the number of Depositary Shares
representing the number of whole Preferred Shares to be withdrawn, the
Depositary Bank will deliver to such holder at the same time a new Depositary
Receipt evidencing such excess number of Depositary Shares. Owners of
Depositary Shares will be entitled to receive only whole Preferred Shares. In
no event will fractional Preferred Shares (or cash in lieu thereof) be
distributed by the Depositary Bank. Consequently, a holder of a Depositary
Receipt representing a fractional Preferred Share would be able to liquidate
his position only by a sale to a third party (in a public trading market
transaction or otherwise), unless the Depositary Shares are redeemed by the
Company or converted by the holder.
Dividends and Other Distributions
The Depositary Bank will distribute all cash dividends or other cash
distributions received in respect of the Preferred Shares to the record holders
of Depositary Shares relating to such Preferred Shares in proportion to the
number of such Depositary Shares owned by such holders.
In the event of a distribution other than in cash, the Depositary Bank
will distribute property received by it to the record holders of Depositary
Shares entitled thereto, unless the Depositary Bank determines that it is not
feasible to make such distribution, in which case the Depositary Bank may, with
the approval of the Company, sell such property and distribute the net proceeds
from such sale to such holders.
Redemption of Depositary Shares
If a series of Preferred Shares represented by Depositary Shares is
subject to redemption, the Depositary Shares will be redeemed from the proceeds
received by the Depositary Bank resulting from the redemption, in whole or in
part, of such series of Preferred Shares held by the Depositary Bank. The
redemption price per Depositary Share will be equal to the applicable fraction
of the redemption price per share payable with respect to such series of
Preferred Shares. Whenever the Company redeems Preferred Shares held by the
Depositary Bank, the Depositary Bank will redeem as of the same redemption date
the number of Depositary Shares representing the Preferred Shares so redeemed.
If fewer than all the Depositary Shares are to be redeemed, the Depositary
Shares to be redeemed will be selected by lot or pro rata as may be determined
by the Depositary Bank.
Voting the Preferred Shares
Upon receipt of notice of any meeting at which the holders of Preferred
Shares are entitled to vote, the Depositary Bank will mail the information
contained in such notice of meeting to the record holders of the Depositary
Shares relating to such Preferred Shares. Each record holder of such Depositary
Shares on the record date (which will be the same date as the record date for
the Preferred Shares) will be entitled to instruct the Depositary Bank as to
the exercise of the voting rights pertaining to the amount of Preferred Shares
represented by such holder's Depositary Shares. The Depositary Bank will
endeavor, insofar as practicable, to vote the amount of Preferred Shares
represented by such Depositary Shares in accordance with such instructions, and
the Company will agree to take all action which may be deemed necessary by the
Depositary Bank in order to enable the Depositary Bank to do so. The Depositary
Bank may abstain from voting Preferred Shares to the extent it does not receive
specific instructions from the holders of Depositary Shares representing such
Preferred Shares.
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Amendment and Termination of the Depositary Agreement
The form of Depositary Receipt evidencing the Depositary Shares and any
provision of the Deposit Agreement may at any time be amended by agreement
between the Company and the Depositary Bank. However, any amendment that
materially and adversely alters the rights of the holders of Depositary Shares
will not be effective unless such amendment has been approved by the holders of
at least a majority of the Depositary Shares then outstanding. The Deposit
Agreement may be terminated by the Company or the Depositary Bank only if (i)
all outstanding Depositary Shares have been redeemed or (ii) there has been a
final distribution in respect of the Preferred Shares in connection with any
liquidation, dissolution or winding up of the Company and such distribution has
been distributed to the holders of Depositary Receipts.
Charges of Depositary Bank
The Company will pay all transfer and other taxes and governmental charges
arising solely from the existence of the depositary arrangements. The Company
will pay charges of the Depositary Bank in connection with the initial deposit
of the Preferred Shares and any redemption of the Preferred Shares. Holders of
Depositary Receipts will pay other transfer and other taxes and governmental
charges and such other charges, including a fee for the withdrawal of Preferred
Shares upon surrender of Depositary Receipts, as are expressly provided in the
Deposit Agreement to be for their accounts.
Miscellaneous
The Depositary Bank will forward to holders of Depository Receipts all
reports and communications from the Company that are delivered to the
Depositary Bank and that the Company is required to furnish to the holders of
Preferred Shares.
Neither the Depositary Bank nor the Company will be liable if it is
prevented or delayed by law or any circumstance beyond its control in
performing its obligations under the Deposit Agreement. The obligations of the
Company and the Depositary Bank under the Deposit Agreement will be limited to
performance in good faith of their duties thereunder and they will not be
obligated to prosecute or defend any legal proceeding in respect of any
Depositary Shares or Preferred Shares unless satisfactory indemnity is
furnished. They may rely upon written advice of counsel or accountants, or upon
information provided by persons presenting Preferred Shares for deposit,
holders of Depositary Receipts or other persons believed to be competent and on
documents believed to be genuine.
Resignation and Removal of Depositary Bank
The Depositary Bank may resign at any time by delivering to the Company
notice of its election to do so, and the Company may at any time remove the
Depositary Bank, any such resignation or removal to take effect upon the
appointment of a successor Depositary Bank and its acceptance of such
appointment. Such successor Depositary Bank must be appointed within 60 days
after delivery of the notice of resignation or removal and must be a bank or
trust company having its principal office in the United States and having a
combined capital and surplus of at least $50,000,000.
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PLAN OF DISTRIBUTION
The Company may sell Offered Securities to one or more underwriters or
dealers for public offering and sale by them or may sell Offered Securities
directly to other purchasers, or through agents. The Prospectus Supplement with
respect to any Offered Securities will set forth the terms of the Offered
Securities, including the name or names of any underwriters, dealers or agents,
the price of the Offered Securities and the net proceeds to the Company from
such sale, any underwriting discounts and commissions or other items
constituting underwriters' compensation, any discounts or concessions allowed
or reallowed or paid to dealers and any securities exchanges on which such
Offered Securities may be listed.
If underwriters are used in the sale, the Offered Securities will be
acquired by the underwriters for their own account and may be resold from time
to time in one or more transactions, including negotiated transactions, at a
fixed public price or at varying prices determined at the time of sale. The
underwriter or underwriters with respect to a particular underwritten offering
of Offered Securities will be named in the Prospectus Supplement relating to
such offering, and if an underwriting syndicate is used, the managing
underwriter or underwriters will be set forth on the cover of such Prospectus
Supplement. Unless otherwise set forth in the Prospectus Supplement, the
obligations of the underwriters or agents to purchase the Offered Securities
will be subject to certain conditions precedent and the underwriters will be
obligated to purchase all the Offered Securities if any are purchased. Any
public offering price and any discounts and commissions or concessions allowed
or reallowed or paid to dealers may be changed from time to time.
If a dealer is utilized in the sale of any Offered Securities in respect
of which this Prospectus is delivered, the Company will sell such Offered
Securities to the dealer, as principal. The dealer may then resell such Offered
Securities to the public at varying prices to be determined by such dealer at
the time of resale. The name of the dealer and the terms of the transaction
will be set forth in the Prospectus Supplement relating thereto.
Offered Securities may be sold directly by the Company to one or more
institutional purchasers, or through agents designated by the Company from time
to time, at a fixed price, or prices, which may be changed, or at varying
prices determined at the time of sale. Any agent involved in the offer or sale
of the Offered Securities will be named, and any concessions payable by the
Company to such agent will be set forth, in the Prospectus Supplement relating
thereto. Unless otherwise indicated in the Prospectus Supplement, any such
agent will be acting on a best efforts basis for the period of its appointment.
In connection with the sale of the Offered Securities, underwriters or
agents may receive compensation from the Company or from purchasers of Offered
Securities for whom they may act as agents in the form of discounts,
concessions or commissions. Underwriters, agents and dealers participating in
the distribution of the Offered Securities may be deemed to be underwriters,
and any discounts or commissions received by them from the Company and any
profit on the resale of the Offered Securities by them may be deemed to be
underwriting discounts or commissions under the Securities Act.
Except for Common Shares, each series of Offered Securities will be a new
issue with no established trading market. Any underwriters to whom such Offered
Securities are sold by the Company for public offering and sale may make a
market in such Offered Securities, but such underwriters will not be obligated
to do so and may discontinue any market making at any time without notice. No
assurance can be given as to the liquidity of the trading market for any
Offered Securities.
Underwriters, dealers and agents may be entitled under agreements entered
into with the Company to indemnification by the Company against certain civil
liabilities, including under the Securities Act, or to contribution with
respect to payments that such agents, dealers, or underwriters may be required
to make with respect thereto. Underwriters, dealers, or agents and their
associates may be customers of, engage in transactions with and perform
services for, the Company in the ordinary course of business.
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LEGAL MATTERS
The validity of the Securities offered hereby will be passed upon for the
Company by Morse, Zelnick, Rose & Lander, LLP New York, New York and for any
underwriters, dealers or agents by Shearman & Sterling, New York, New York.
Members of the firm Morse, Zelnick, Rose & Lander, LLP beneficially own an
aggregate of 83,094 Common Shares of the Company.
EXPERTS
The audited financial statements incorporated by reference in this
Prospectus and elsewhere in the registration statement have been audited by
Arthur Andersen LLP and J. H. Cohn LLP, independent public accountants, as
indicated in their reports with respect thereto, which are incorporated by
reference herein, and are included herein in reliance upon the authority of
said firms as experts in accounting and auditing in giving said reports.
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No dealer, salesperson or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus Supplement or the accompanying Prospectus and, if given or made,
such information or representations must not be relied upon as having been
authorized by the Company or any of the Underwriters. This Prospectus
Supplement and the accompanying Prospectus do not constitute an offer to sell
or the solicitation of any offer to buy any security other than the Common
Shares nor do they constitute an offer to sell or a solicitation of any offer
to buy Common Shares by anyone in any jurisdiction in which such offer or
solicitation is not authorized, or in which the person making such offer or
solicitation is not qualified to do so, or to any person to whom it is unlawful
to make such offer or solicitation. Neither the delivery of this Prospectus
Supplement or the accompanying Prospectus nor any sale made hereunder shall,
under any circumstances, create any implication that the information contained
herein or therein is correct as of any time subsequent to its date.
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TABLE OF CONTENTS
Page
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Prospectus Supplement
Prospectus Supplement Summary .................. S-3
Price Range of Common Shares .................. S-7
Dividend Policy .............................. S-7
Use of Proceeds .............................. S-8
Capitalization ................................. S-9
Selected Financial Data ........................ S-10
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ................................. S-11
Business ....................................... S-17
Underwriting ................................. S-29
Legal Matters ................................. S-30
Experts ....................................... S-30
Prospectus
Available Information ........................ 2
Incorporation of Certain Documents by
Reference ................................. 2
The Company .................................... 3
Risk Factors ................................. 3
Ratio of Earnings to Fixed Charges ............ 10
Use of Proceeds .............................. 10
Management .................................... 11
Description of Debt Securities ............... 14
Description of Outstanding Capital Stock ...... 24
Description of Common Shares .................. 25
Description of Preferred Shares ............... 25
Description of Depositary Shares ............... 27
Plan of Distribution ........................... 30
Legal Matters ................................. 31
Experts ....................................... 31
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<PAGE>
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3,500,000 Common Shares
[GRAPHIC OMITTED]
COMPLETE MANAGEMENT, INC.
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PROSPECTUS SUPPLEMENT
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Prudential Securities Incorporated
Tucker Anthony
Incorporated
L.H. Friend, Weinress,
Frankson & Presson, Inc.
December , 1997
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