<PAGE> 1
Filed pursuant to Rule 424(a)
Registration No. 333-17091
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED NOVEMBER 29, 1996
PROSPECTUS
2,000,000 SHARES
[LOGO]
PHYSICIANS' SPECIALTY CORP.
COMMON STOCK
---------------------
Physicians' Specialty Corp. (the "Company") hereby offers 2,000,000 shares
of Common Stock, par value $.001 per share (the "Common Stock"), of the Company.
Prior to this offering (the "Offering"), there has been no public market for the
Common Stock. The Company intends to make an application for quotation of the
Common Stock on the Nasdaq National Market under the symbol "ENTS." See
"Underwriting" for information relating to the factors considered in determining
the initial public offering price.
---------------------
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF
RISK AND SUBSTANTIAL DILUTION. SEE "RISK FACTORS" COMMENCING ON PAGE 9.
---------------------
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.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
PRICE TO PROCEEDS TO
PUBLIC UNDERWRITING DISCOUNTS COMPANY(2)
AND COMMISSIONS(1)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share....................... $ $ $
- ----------------------------------------------------------------------------------------------------
Total(3)........................ $ $ $
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
(1) Does not include additional compensation to be received by the Underwriters
including (i) a non-accountable expense allowance of $
($ if the Over-Allotment Option (as defined below) is exercised in
full) and (ii) warrants to purchase 200,000 shares of Common Stock at a
price of $ per share (the "Underwriters' Warrants"). The Company
has agreed to indemnify the Underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, as amended (the
"Securities Act"). See "Underwriting."
(2) Before deducting expenses of the offering payable by the Company (including
the Underwriters' non-accountable expense allowance) estimated at
$ ($ if the Over-Allotment Option is exercised in full).
(3) The Company has granted the Underwriters a 45-day option to purchase up to
300,000 additional shares of Common Stock on the same terms and conditions
as set forth herein, solely to cover over-allotments, if any (the
"Over-Allotment Option"). If the Over-Allotment Option is exercised in
full, the total Price to Public, Underwriting Discounts and Commissions,
and Proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriting."
---------------------
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE OFFERED, SUBJECT TO PRIOR
SALE, WHEN, AS AND IF DELIVERED TO AND ACCEPTED BY THE UNDERWRITERS, AND SUBJECT
TO THE APPROVAL OF CERTAIN LEGAL MATTERS BY THEIR COUNSEL AND TO CERTAIN OTHER
CONDITIONS. THE UNDERWRITERS RESERVE THE RIGHT TO WITHDRAW, CANCEL OR MODIFY
THIS OFFERING AND TO REJECT ANY ORDER IN WHOLE OR IN PART. IT IS EXPECTED THAT
DELIVERY OF THE CERTIFICATES REPRESENTING THE COMMON STOCK WILL BE MADE AT THE
OFFICES OF BARINGTON CAPITAL GROUP, L.P., 888 SEVENTH AVENUE, NEW YORK, NEW YORK
10019 ON OR ABOUT , 1997.
---------------------
BARINGTON CAPITAL GROUP, L.P.
The date of this Prospectus is , 1997
<PAGE> 2
THE MAP DEPICTS THE ATLANTA METROPOLITAN AREA
AND THE LOCATION OF THE CLINICAL OFFICES OF
ATLANTA EAR, NOSE & THROAT ASSOCIATES, P.C.,
AND INDEPENDENT PHYSICIANS PROVIDING ENT
MEDICAL AND SURGICAL SERVICES UNDER THE
ENT NETWORKS' MANAGED CARE CONTRACTS
---------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
The Company intends to furnish its stockholders with annual reports
containing financial statements audited by its independent public accountants
and quarterly reports for the first three quarters of each fiscal year
containing unaudited interim financial information.
2
<PAGE> 3
As used in this Prospectus, unless the context otherwise requires, the
"Company" refers to (i) Physicians' Specialty Corp., a Delaware corporation and
its wholly-owned subsidiaries, PSC Management Corp. ("PSC Management") and PSC
Acquisition Corp. ("PSC Acquisition"), (ii) the Founding Practice (as defined)
and (iii) the ENT Networks (as defined). See "The Reorganization." Unless
otherwise indicated, the information in this Prospectus (i) assumes no exercise
of the Over-Allotment Option or the Underwriters' Warrants, (ii) gives effect to
a .6875 for 1 reverse stock split effected in November 1996, and (iii) gives
effect to the completion of the Reorganization (as defined) upon the closing of
the Offering. The consummation of the Offering is conditioned upon the
simultaneous closing of the Reorganization. Investors should carefully consider
the information set forth under the heading "Risk Factors."
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the financial statements and notes thereto appearing elsewhere
in this Prospectus and accordingly, should be read in conjunction with such
information, financial statements and notes thereto. Each prospective investor
is urged to read this Prospectus in its entirety.
THE COMPANY
Physicians' Specialty Corp. was recently organized to provide physician
practice management services to medical groups specializing in disorders and
diseases of the ear, nose and throat ("ENT"). Concurrently with the closing of
this Offering, the Company will acquire substantially all of the assets of
Atlanta Ear, Nose & Throat Associates, P.C. (the "Founding Practice"), the
largest ENT group practice in the State of Georgia, and the common stock of
three corporations (collectively, the "ENT Networks") which hold, manage and
administer capitated ENT managed care contracts covering an aggregate of
approximately 354,000 enrollees. According to the American Academy of
Otolaryngology -- Head and Neck Surgery, Inc. (the "Academy"), there were
approximately 8,400 ENT specialists in the United States as of December 31, 1995
and the Company estimates that approximately 70% of all ENT practices consist of
individual practitioners or small (less than four physician) group practices.
The Company is not aware of any other physician practice management company
focusing solely or substantially on managing ENT practices.
Increasing concern over the rising cost of health care in the United States
has led to the emergence and increasing prominence of managed care. Because
fee-for-service arrangements for compensating health care providers fail to
create incentives for the efficient utilization of resources and are generally
believed to contribute to health care cost increases, payors are selecting
alternative reimbursement methods, such as capitated arrangements, which shift
the financial risk of delivering health care from payors to providers. Under
capitated arrangements, the health care provider is typically paid by health
maintenance organizations ("HMOs") or other third-party payors a fixed amount
per enrollee per month. In return, the health care provider is responsible for
providing substantially all medical services, as set forth in the agreement with
the third-party payor, required by the payor's enrollees.
While the acceptance of greater responsibility and risk under capitated
arrangements provides physicians with the opportunity to retain and enhance
market share and operate at a more predictable level of profitability, the
acceptance of capitation carries with it significant requirements for
infrastructure, information systems, capital, network resources and management.
Individual physicians and small group practices tend to have limited
administrative capacity, limited capital to invest in new clinical equipment and
technologies and typically lack the information systems necessary to negotiate
and manage sophisticated risk-sharing contracts with payors. As a result,
individual physicians and small group practices are increasingly affiliating
with larger group practices and physician practice management companies, such as
the Company, which offer physicians clinical information and financial and
administrative management, as well as network development and payor contracting
services.
The Company's revenues to date have been derived from the provision,
through physicians at the Founding Practice, of fee-for-service medical services
and from contracts with HMOs and other managed care
3
<PAGE> 4
organizations, which compensate the Company and physicians associated with the
Company on a capitated basis. The Founding Practice, which includes 16
physicians, one dentist and 23 allied health care professionals operating 14
clinical locations in the greater Atlanta area, has provided ENT medical and
surgical services under capitated managed care contracts since 1982. At
September 30, 1996, the Founding Practice served as the primary provider panel
for the ENT Networks, providing capitated ENT medical and surgical services
required by an aggregate of approximately 354,000 enrollees of HMOs sponsored by
United HealthCare of Georgia ("United HealthCare"), Aetna Health Plans of
Georgia ("Aetna") and Cigna Health Care of Georgia ("Cigna"). The Founding
Practice, in conjunction with an independent software vendor, has developed a
comprehensive capitated network administration and utilization management system
(the "Capitated Network System") which the Company believes will enable more
effective analysis of clinical and cost data as well as management of the costs
and opportunities associated with capitated managed care arrangements, while
enabling physicians to deliver high quality medical care.
The Company's primary objective is to develop, manage and integrate ENT
practices into comprehensive networks for the provision of high quality,
cost-effective ENT medical and surgical services to capitated managed care
enrollees and fee-for-service patients. The Company's implementation strategy
includes (i) associating with additional ENT physician practices and physicians,
as well as specialists practicing in complementary fields, including audiology,
sleep medicine, allergy, plastic surgery and oral surgery, either by acquiring
assets or equity of physician practices ("affiliated practices") and entering
into management service agreements with such practices, or by contracting with
physician practices and independent physicians to provide management services;
(ii) developing multi-site ENT specialty provider networks responsive to the
demands of managed care payors seeking capitated provider relationships; (iii)
shifting to shared-risk capitated payment arrangements by acquiring the assets
of specialty practices with existing capitated contracts and negotiating new and
renewing capitated contracts with managed care organizations for such practices;
and (iv) implementing on a Company-wide basis management information systems
utilized by the Founding Practice.
The Company believes that as a result of the experience of the Company and
physicians at the Founding Practice in (i) providing ENT medical and surgical
services, (ii) negotiating, managing and administering capitated managed care
contracts and (iii) developing and utilizing sophisticated information systems,
including the Capitated Network System, the Company is well-positioned to
acquire and manage additional ENT practices, to negotiate capitated managed care
contracts and to capture a growing market share of capitated arrangements. The
Company is currently evaluating and is in various stages of discussions in
connection with the potential acquisition of assets or equity of an aggregate of
13 ENT and complementary group practices with an aggregate of approximately 30
physicians in Georgia, Alabama, New Jersey and Virginia. In addition, the
Company has reached an agreement in principle for the acquisition of the assets
of a two-physician ENT practice operating three clinical offices in the
metropolitan Atlanta area (the "Additional Acquisition"). There can be no
assurance, however, that any or all of these potential acquisitions will be
completed.
The Company was incorporated in Delaware in July 1996. The Company's
executive offices are located at The Medical Quarters, 5555 Peachtree Dunwoody
Road, Suite 235, Atlanta, Georgia 30342 and its telephone number is (404)
256-7535.
4
<PAGE> 5
THE OFFERING
Common Stock offered hereby......... 2,000,000 shares
Common Stock to be outstanding after
the Offering(1)..................... 5,328,725 shares
Use of Proceeds..................... For working capital, including future
acquisitions; to repay outstanding
indebtedness of the Founding Practice
and the Company and to expand the
Company's information systems. See "Use
of Proceeds" and "Certain
Transactions."
Proposed Nasdaq National Market
symbol.............................. ENTS
Risk factors........................ The Common Stock offered hereby
involves a high degree of risk. See
"Risk Factors."
- ---------------
(1) Excludes (i) 550,000 shares of Common Stock reserved for issuance under the
Company's 1996 Stock Option Plan, under which (a) options to purchase
227,500 shares of Common Stock have been granted, of which 62,500 are
immediately exercisable and (b) options to purchase 7,500 shares of Common
Stock have been granted, effective upon completion of the Offering, and
will be immediately exercisable; (ii) 275,000 shares of Common Stock
reserved for issuance under the Company's 1996 Health Care Professionals
Stock Option Plan, under which no options have been granted; (iii) shares
of Common Stock which may be issued in connection with the Additional
Acquisition and (iv) 200,000 shares of Common Stock issuable upon exercise
of the Underwriters' Warrants. See "Business -- Potential Practice
Acquisitions," "Management -- Stock Option Plans," "Description of Capital
Stock" and "Underwriting."
5
<PAGE> 6
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA AND OPERATING DATA)
The Company was incorporated in July 1996 and commenced operations in
August 1996 through the acquisition of the computer hardware of the ENT Networks
and the utilization of the Capitated Network System. The following summary
unaudited pro forma combined financial data gives effect to the Reorganization
as a combination of promoter interests, at historical costs, under generally
accepted accounting principles, and should be read in conjunction with the
financial statements of the Company, the Founding Practice and the ENT Networks
and notes thereto included elsewhere herein and "Management's Discussion and
Analysis of Financial Condition and Results of Operations." The financial data
set forth below reflect the unaudited pro forma combined historical financial
data of the Founding Practice and the ENT Networks as of and for the periods
indicated. Unless otherwise indicated, the unaudited pro forma statement of
operations data set forth below give effect to the Reorganization, the reverse
stock split and the implementation of the management services agreement between
the Company and the Founding Practice as if such transactions had occurred on
January 1, 1993 and the Offering as if such transaction had been consummated on
September 30, 1996. The unaudited pro forma balance sheet data gives effect to
such transactions, as if such transactions had been consummated on the balance
sheet date. The summary unaudited pro forma information does not purport to
represent what the Company's financial position or results of operations
actually would have been had the Reorganization and the Offering in fact
occurred on the dates indicated, or to project the Company's financial position
or results of operations for any future date or period. The pro forma
adjustments are based on currently available information and certain assumptions
that the Company believes are reasonable under the circumstances.
<TABLE>
<CAPTION>
NINE MONTH PERIOD
FISCAL YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------ -------------------
1995 1994 1993 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
SUMMARY STATEMENT OF OPERATIONS DATA:
Capitation and patient service revenues..... $ 12,167 $ 10,348 $ 8,376 $ 10,893 $ 9,078
Amounts retained by physician owners........ 2,675 2,328 2,270 2,178 2,099
------- ------- ------ ------- ------
Net revenues................................ 9,492 8,020 6,106 8,715 6,979
Expenses:
Salaries, wages and benefits.............. 3,922 2,929 2,277 3,719 2,768
General and administrative................ 1,907 1,486 1,435 2,026 1,439
Bad debt expense.......................... 233 110 61 229 178
Depreciation and amortization............. 281 267 262 269 211
Provider claims........................... 600 1,170 559 460 556
------- ------- ------ ------- ------
Total expenses.............................. 6,943 5,962 4,594 6,703 5,152
------- ------- ------ ------- ------
Operating income............................ $ 2,549 $ 2,058 $ 1,512 $ 2,012 $ 1,827
======= ======= ====== ======= ======
Supplemental pro forma net income(1)........ $ 1,565 $ 1,253 $ 1,133
Supplemental pro forma net income per
share(1).................................. $ .29 $ .23 $ .21
Supplemental weighted average shares
outstanding(1)............................ 5,396 5,396 5,396
OPERATING DATA AT END OF PERIOD:
Number of affiliated physicians............. 14 8 8 17 13
Number of allied health care
professionals............................. 15 12 12 21 15
Number of employees......................... 86 70 60 122 83
Number of clinical locations................ 11 8 8 14 11
Number of capitated covered lives........... 308,003 271,695 151,587 353,735 294,990
</TABLE>
6
<PAGE> 7
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996
--------------------------
PRO FORMA
PRO FORMA AS ADJUSTED(2)
--------- --------------
<S> <C> <C>
SUMMARY BALANCE SHEET DATA:
Working capital...................................................... $ 1,135 $ 16,348
Total assets......................................................... 6,118 20,469
Total debt........................................................... 1,709 0
Stockholders' equity................................................. 2,350 18,410
</TABLE>
- ---------------
(1) For all periods presented, the Founding Practice and the ENT Networks were S
corporations for federal and state income tax purposes and, accordingly,
were not subject to corporate income taxes. The supplemental pro forma net
income and supplemental net income per share for the year ended December
31, 1995 and for the nine month period ended September 30, 1996 have been
computed as if the Company were subject to federal and state corporate
income taxes based on the corporate income taxes in effect during the
respective periods and the Offering had been completed prior to such
periods.
(2) Adjusted to reflect the sale of the 2,000,000 shares of Common Stock offered
hereby at an assumed initial public offering price of $9.50 per share, the
receipt of the net proceeds therefrom, and the application of such net
proceeds to repay indebtedness of the Founding Practice and the Company.
See "Use of Proceeds" and "Certain Transactions."
7
<PAGE> 8
THE REORGANIZATION
Concurrently with the closing of the Offering, the Company will acquire (i)
substantially all of the assets of the Founding Practice and (ii) all of the
outstanding shares of common stock of ENT Center of Atlanta, Inc., Atlanta ENT
Center for Physicians, Inc. and Atlanta-AHP, Inc. (the "Reorganization"), the
three corporations comprising the ENT Networks, from Ramie A. Tritt, M.D., the
Chairman of the Board and President of the Company (the "Seller"). The ENT
Networks were formed by the Seller to enter into and administer the capitated
managed care contracts with United HealthCare, Aetna and Cigna. In connection
with the Reorganization, the Company will issue an aggregate of 2,767,500 shares
of Common Stock to the Founding Practice and to the Seller. The allocation of
such shares between the Founding Practice and the Seller will be based upon the
initial public offering price of the Common Stock, with the number of shares
issuable to the Seller to equal $7,750,000 divided by the initial public
offering price and the remaining shares of Common Stock issuable to the Founding
Practice. Based upon an assumed initial public offering price of $9.50 per
share, the Seller will receive 815,789 shares of Common Stock and the Founding
Practice will receive 1,951,711 shares of Common Stock. Upon the liquidation of
the existing professional corporation constituting the Founding Practice the
shares of Common Stock issued to it will be distributed to its stockholders,
527,938 of which shares will be distributed to Dr. Tritt, based on his
percentage ownership of the Founding Practice.
In connection with the acquisition of substantially all of the assets of
the Founding Practice, the Founding Practice will transfer the medical assets
not acquired by the Company to a newly-formed professional corporation ("New
Atlanta ENT"), which will simultaneously enter into a management services
agreement with the Company and employment agreements with its physicians. Unless
the context otherwise requires all references herein to the Founding Practice
include New Atlanta ENT. The management services agreement will provide for the
assignment to the Company by the Founding Practice of all or substantially all
of its rights and interest in the proceeds of its accounts receivable (or the
revenue it receives). The Company will retain an amount equal to operating and
non-operating expenses of the Founding Practice (which will be paid by the
Company) a portion of the Company's non-allocable overhead, and a percentage of
the excess of the revenue assigned to the Company over such expenses. The
remaining revenues will be remitted to the Founding Practice to pay physician
compensation and benefits. See "Business -- The Founding Practice and the ENT
Networks," "-- Company Operations," "Management" and "Certain Transactions."
8
<PAGE> 9
RISK FACTORS
THE SHARES OFFERED HEREBY INVOLVE SUBSTANTIAL RISKS AND SHOULD BE PURCHASED
ONLY BY PERSONS WHO CAN AFFORD TO SUSTAIN THE LOSS OF THEIR INVESTMENT. THE
FOLLOWING RISK FACTORS, IN ADDITION TO THE OTHER INFORMATION AND FINANCIAL DATA
SET FORTH ELSEWHERE IN THIS PROSPECTUS, SHOULD BE CONSIDERED CAREFULLY IN
EVALUATING THE COMPANY AND ITS BUSINESS BEFORE MAKING AN INVESTMENT IN THE
SHARES. THE RISKS DESCRIBED BELOW AND ELSEWHERE IN THIS PROSPECTUS ARE NOT
INTENDED TO BE AN EXHAUSTIVE LIST OF THE GENERAL OR SPECIFIC RISKS INVOLVED, BUT
MERELY IDENTIFY CERTAIN RISKS THAT ARE NOW FORESEEN BY THE COMPANY. IT MUST BE
RECOGNIZED THAT OTHER RISKS, NOT NOW FORESEEN, MIGHT BECOME SIGNIFICANT IN THE
FUTURE AND THAT THE RISKS WHICH ARE NOW FORESEEN MIGHT AFFECT THE COMPANY TO A
GREATER EXTENT THAN IS NOW FORESEEN OR IN A MANNER NOT NOW CONTEMPLATED. EACH
PROSPECTIVE INVESTOR SHOULD CAREFULLY CONSIDER ALL INFORMATION CONTAINED IN THIS
PROSPECTUS AND SHOULD GIVE PARTICULAR CONSIDERATION TO THE FOLLOWING RISK
FACTORS BEFORE DECIDING TO PURCHASE THE COMMON STOCK OFFERED HEREBY. THIS
PROSPECTUS INCLUDES FORWARD LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES, INCLUDING THOSE SET FORTH BELOW, AND ACTUAL RESULTS MAY VARY FROM
THOSE CURRENTLY ANTICIPATED.
RISKS RELATING TO ACQUISITIONS AND MANAGING GROWTH; NEED FOR ADDITIONAL FUNDS
A key element of the Company's strategy is to expand through acquisitions
of assets or equity of established specialty physician practices. Although the
Founding Practice and the ENT Networks have had substantial operations in one
geographic region, the Company has no experience in integrating multiple or
multi-state specialty physician practices. As the Company expands through
acquisitions, the Company will be required to hire and retain additional
management and administrative personnel and develop and expand operational
systems to support its growth. This growth will continue to place significant
demands on the Company's management, technical, financial and other resources.
The Company is evaluating and is in various stages of discussions in connection
with the potential acquisition of assets or equity of several ENT and
complementary group practices. However, the Company has no agreements or
arrangements with respect to the terms of any material acquisitions (other than
the agreements with the Founding Practice and the ENT Networks). Accordingly,
there can be no assurance that the Company will be able to acquire the assets or
equity of or profitably provide management services to the practices currently
being evaluated by the Company or any other specialty physician practices to be
acquired in the future. In addition, there can be no assurance that the Company
will be able to acquire additional specialty physician practices on terms
favorable to the Company, that the operations of any acquired practices can be
successfully integrated and combined efficiently into the Company's business,
that any anticipated benefits of the practice acquisitions will be realized, or
that there will not be substantial unanticipated costs associated with the
acquisition. The failure to manage growth effectively could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Although the Company intends to use a substantial portion of the proceeds
of the Offering for certain ENT and other specialty practice acquisitions
including some which it is currently evaluating, it will require significant
additional funds for future acquisitions and integration and management of
affiliated practices. The Company also intends to issue its securities in
connection with acquisitions, which could result in the dilution of existing
equity positions. The Company may also incur indebtedness to fund future
acquisitions and has a proposal from a bank relating to a credit facility;
however, there can be no assurance that this facility or any other credit
facility will be obtained on favorable terms or at all. The Company has no
commitments for any additional financing and there can be no assurance that such
financing will be available on acceptable terms, or at all. An inability to
obtain such financing on favorable terms could limit the Company's growth. As
the Company acquires additional physician practices, the Company may incur
significant charges for depreciation and amortization and, to the extent
financed through borrowing, interest expense which could adversely affect the
Company's future results of operations and may result in net losses. See
"-- Broad Discretion In Use of
9
<PAGE> 10
Proceeds; Inability of Stockholders to Evaluate Future Acquisitions,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business -- Strategy" and "Business -- Potential Practice Asset
Acquisitions."
BROAD DISCRETION IN USE OF PROCEEDS; INABILITY OF STOCKHOLDERS TO EVALUATE
FUTURE ACQUISITIONS
The Company has broad discretion with respect to the use of a substantial
portion of the net proceeds of the Offering which the Company intends to use to
acquire additional specialty practice assets. The Company is engaged in
discussions with several practices with ENT and complementary specialities and
has an agreement in principle relating to the Additional Acquisition (which
Additional Acquisition is not expected to be material to the Company's
operations); however, except with respect to the Reorganization, the Company has
no agreements or arrangements relating to any material future acquisitions and,
accordingly, it will have significant flexibility in identifying and selecting
prospective acquisition candidates. The Company does not intend to seek
stockholder approval for any acquisition, including those currently being
negotiated, unless required to do so by applicable law or regulations.
Accordingly, stockholders will not have an opportunity to review financial or
other information relating to acquisition candidates prior to consummation of an
acquisition. See "Use of Proceeds," "Business -- Strategy" and
"Business -- Potential Practice Asset Acquisitions."
DEPENDENCE ON AFFILIATED PHYSICIANS
All of the Company's revenues will initially be derived under a management
services agreement with the Founding Practice and capitated HMO contracts held
by the ENT Networks. Such revenues, and future revenues, will depend on the fees
and revenues generated by physicians practicing at physician practices, the
assets or equity of which are to be acquired by the Company, including
physicians at the Founding Practice ("affiliated physicians") and, to a lesser
extent, independent physicians contracting with the Company to participate in
the Company's provider networks ("independent physicians" and, together with
affiliated physicians, "associated physicians"). Although affiliated physicians,
including the stockholders of the Founding Practice, are expected to enter into
employment agreements with their respective practices, there can be no assurance
as to the continued services of any particular physician. In particular, Dr.
Tritt is expected to devote less time to his medical practice at the Founding
Practice as a result of his responsibilities to the Company. Associated
physicians can typically terminate their agreements to provide medical services
under managed care contracts by providing notice of such termination to the
payor. Termination of these agreements by associated physicians may result in
termination by the payor of a managed care contract between the Company and the
payor. Any material loss of revenue by affiliated physicians and, to a lesser
extent, independent physicians, whether as a result of the loss of network
physicians or the termination of managed care contracts resulting from the loss
of network physicians or otherwise, could have a material adverse effect on the
Company's business, financial condition or operating results. See
"Business -- Company Operations."
RISKS ASSOCIATED WITH CAPITATED FEE ARRANGEMENTS
During 1995 and the nine month period ended September 30, 1996,
approximately 66% and 70%, respectively, of the Company's pro forma combined net
revenues were derived from payments made on a fee-for-service basis by patients
and third-party payors (including government programs) and approximately 34% and
30%, respectively, of the Company's pro forma combined net revenues were derived
from capitated arrangements. As an increasing percentage of patients enroll in
managed care arrangements, the Company believes that its future success will
depend, in part, upon its ability to negotiate and manage, on behalf of its
associated physicians, contracts with HMOs, other managed care payors, employer
groups and other private third-party payors, pursuant to which services will be
provided on a capitated basis by some or all of the Company's associated
physicians, on terms favorable to the Company. Under these agreements, the
health care provider typically accepts a pre-determined amount per patient per
month from the payor in exchange for providing all necessary covered services to
the patients covered under the agreement. Such contracts pass much of the
financial risk of providing care, such as over-utilization, from the payor to
the provider. To the extent that patients or enrollees covered by such contracts
require more frequent or extensive care than is anticipated, operating margins
may be reduced or the revenues derived from such contracts may be insufficient
10
<PAGE> 11
to cover the costs of the services provided. In either event, the Company's
business, financial condition and operating results may be materially adversely
affected. As a result, the success of the Company will require effective
management of health care costs through various methods, including utilization
management and review, competitive pricing for purchased services and favorable
agreements with payors. The proliferation of such contracts in markets served by
the Company could result in increased predictability of revenues, but decreased
predictability of operating margins. There can be no assurance that the Company
will be able to negotiate, on behalf of its associated physicians, satisfactory
arrangements on a capitated basis or that such arrangements will be profitable
to the Company in the future.
DEPENDENCE ON CONTRACTS WITH MANAGED CARE ORGANIZATIONS
The Company's ability to expand is dependent in part on increasing the
number of managed care enrollees served by associated physicians, primarily
through negotiating additional and renewing existing contracts with managed care
organizations and contracting, on a favorable basis, with additional associated
physicians to provide prepaid medical services to such enrollees. Obtaining new
contracts increasingly involves a competitive bidding process. The Company will
be required to accurately anticipate the costs associated physicians will incur
in providing services under such contracts so that the Company only undertakes
contracts under which it can expect to realize adequate profit margins or
otherwise meet its objectives. There can be no assurance that the Company will
be successful in contracting with sufficient numbers of associated physicians to
meet the requirements of managed care organizations or in negotiating contracts
with managed care organization on terms favorable to the Company and its
associated physicians. Three HMOs, United HealthCare, Aetna and Cigna, together
accounted for 28%, 34%, 34% and 30% of pro forma combined net revenues of the
Company for the years ended December 31, 1993, 1994 and 1995 and the nine month
period ended September 30, 1996, respectively. Agreements with these HMOs are
generally subject to 90 to 120 day cancellation by either party, and are subject
to annual renegotiation of rates, covered benefits and other terms and
conditions. In conjunction with the recent acquisition of U.S. HealthCare by
Aetna Inc., representatives of Aetna Inc. have indicated a desire to convert the
Aetna capitated ENT managed care contract to an expanded panel (non-capitated)
modified shared risk arrangement which may be expanded to include the facility
component (inpatient and ambulatory surgery center services) as well as the
professional component (physician services) of ENT care. There can be no
assurance that such contract will remain exclusive or that such modification
will not occur and if such contract is modified, the potential economic impact
of such modification to the Company, if any, cannot be predicted. There can be
no assurance that any of these managed care agreements can be renewed or, if
renewed, that they will contain terms favorable to the Company and its
associated physicians. The loss of any of these contracts or significant
reductions in capitated reimbursement rates under these contracts could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business -- Managed Care Agreements."
POTENTIAL REDUCTIONS IN REIMBURSEMENT BY THIRD-PARTY PAYORS
The health care industry is undergoing significant change as third-party
payors attempt to control the cost, utilization and delivery of health care
services. Substantially all of the Company's net revenues on a pro forma
combined basis have been, and are expected to continue to be, derived from HMOs,
commercial insurers, Medicare and other third-party payors. Both government and
private payment sources have instituted cost containment measures designed to
limit payments made to health care providers by reducing reimbursement rates,
limiting services covered, increasing utilization review of services,
negotiating prospective or discounted contract pricing, adopting capitation
strategies and seeking competitive bids. There can be no assurance that such
measures will not adversely affect the amounts or types of services that may be
reimbursable to the Company in the future, or the future reimbursement
(including reductions in capitated rates) for any service offered by the
Company, either of which could have a material adverse effect on the Company's
business, financial condition or operating results. The Company believes that
these trends will continue to result in a reduction from historical levels in
per patient revenues at the Founding Practice and the ENT Networks. Furthermore,
government reimbursement programs are subject to statutory and regulatory
changes, retroactive rate adjustments, administrative rulings and government
restrictions, all of which could
11
<PAGE> 12
materially decrease the range of services covered by such programs or the
reimbursement rates paid to the Company for its services. Such future reductions
or changes would have a material adverse effect on the Company's business,
financial condition or operating results. Reimbursement rates vary depending on
the type of third-party payors. Changes in the composition of third-party payors
from higher reimbursement rate payors to lower reimbursement rate payors could
have an adverse effect on the Company's operating results. See "-- Dependence on
Contracts with Managed Care Organizations."
COMPETITION
The physician practice and network management industry is highly
competitive. The restructuring of the United States health care system is
leading to rapid consolidation of the health care delivery system into larger
and more organized groups and networks of health care providers. The Company
expects competition to increase as a result of this consolidation and ongoing
cost containment pressures, among other factors. The Company will compete with
management services organizations, for-profit and nonprofit hospitals, HMOs and
other competitors seeking to form strategic alliances with or provide management
services to physicians. The Company is unable to predict the extent of future
competition because of changing competitive conditions, changes in laws and
regulations, government budgeting, technological and economic developments and
other factors. In addition, certain companies, including hospitals and insurers,
that are expanding their presence in the physician services business, are
significantly larger, provide a wider variety of services, have greater
experience in providing physician practice management services, have longer
established relationships for these services and have access to substantially
greater financial resources than the Company. See "Business -- Competition."
The Company believes that competition for fee-for-service revenue is
dependent upon, among other things, the Company's geographic coverage, the
reputation and referral patterns of its affiliated physicians, the breadth of
ENT medical and surgical services provided and the composition of the physicians
practicing at affiliated practices. The Company's ability to compete
successfully for specialty capitated managed care contracts with managed care
organizations may depend upon, among other things, the Company's ability to
increase the number of associated physicians and other health care professionals
included in its network provider panel, through asset acquisitions of additional
specialty practices and by entering into network administration agreements with
independent physicians. The Company will compete with several substantially
larger physician practice management and related companies in identifying and
acquiring or contracting with such physician practices or physicians. There can
be no assurance the Company will be able to associate with a sufficient number
of competent physicians and other health care professionals to expand its
business.
The Company's associated physicians also compete in certain markets,
including the Atlanta market, with substantial numbers of other ENT specialists
as well as general practitioners. The success of the Company is dependent upon
its ability to recruit, train and retain qualified health care professionals in
new and existing markets. The Company faces competition for these personnel from
other health care providers, research and academic institutions, government
entities and other organizations. The availability of such personnel is limited,
and the inability to recruit and maintain relationships with these individuals
in certain geographic areas could have a material adverse effect on the
Company's future growth and operations. There can be no assurance that the
Company will be successful in hiring and retaining qualified health care
professionals. The inability to retain sufficient numbers of qualified personnel
could have a material adverse effect on the Company's operations. In addition, a
shortage of skilled personnel or the delay resulting from a need to train
personnel could have a material adverse effect on the Company's business,
financial condition or operating results.
GOVERNMENT REGULATION
Various state and federal laws regulate the relationships between providers
of health care services, physicians and other clinicians. These laws, among
others, include the Medicare and Medicaid anti-kickback statute and the
so-called "Stark Law." The anti-kickback statute prohibits the offer, payment,
solicitation or receipt of any direct or indirect remuneration in return for the
referral of patients for items or services, or for the ordering or arranging for
the furnishing of items or services for which payment may be made under
12
<PAGE> 13
Medicare or Medicaid or other federally-funded health care programs. The "Stark
Law" imposes restrictions on physicians' referrals for certain designated health
services to entities with which they have financial relationships. Violations of
these laws may result in substantial civil or criminal penalties, denial of
payment, and/or exclusion from participation in the Medicare, Medicaid and other
federally-funded health care programs. In addition, under separate statutes,
submission of claims for payment that are "not provided as claimed" may lead to
civil or criminal penalties or exclusion from participation in the Medicare,
Medicaid and other federally-funded programs. Such exclusion if applied to the
Founding Practice or any other physician practice acquired by the Company, could
result in a significant loss of reimbursement. A determination of liability
under any such laws could have a material adverse effect on the Company's
business, financial condition and operating results.
Several states, including Georgia, have adopted laws similar to the federal
"anti-kickback" and "anti-referral" laws that cover patients in private programs
as well as government programs. The laws of many states also prohibit physicians
from splitting fees with non-physicians and prohibit non-physician entities from
practicing medicine. These laws and their interpretation vary from state to
state and are enforced by the courts and by regulatory authorities with material
discretion. A determination of liability under any such laws could have a
material adverse effect on the Company.
Although the Company believes that its operations will be in substantial
compliance with existing applicable laws, the Company's business operations have
not been the subject of judicial or regulatory interpretation. There can be no
assurance that upon review, the Company's business and its contractual
arrangements with the Founding Practice and any practices which it has
arrangements with in the future will not be successfully challenged as
constituting the unlicensed practice of medicine. There can be no assurance that
review of the Company's business and its arrangements with affiliates by courts
or regulatory authorities will not result in determinations that could adversely
affect the operations of the Company or that the health care regulatory
environment will not change so as to restrict the Company's operations or their
expansion. In addition, the regulatory requirements of certain jurisdictions may
limit the Company's expansion into, or ability to continue operations within,
such jurisdictions if the Company is unable to modify its operational structure
to conform with such regulatory requirements. Any limitation on the Company's
ability to expand could have a material adverse effect on the Company's
operations. See "Business -- Government Regulation."
HEALTH CARE REFORM
Political, economic and regulatory influences are subjecting the health
care industry in the United States to fundamental change. Changes in the law,
new interpretations of existing laws, or changes in payment methodology or
amounts, may have a dramatic effect on the relative costs associated with doing
business and the amount of reimbursement provided by government and other third
party payors. In addition to specific health care legislation, both the
President and the Congress have expressed an interest in controlling the
escalation of health care expenditures and using health care reimbursement
policies to help control the federal deficit. In recent years, there have been
numerous initiatives on the federal and state levels for comprehensive reforms
affecting the payment for and availability of health care services. The Company
believes that such initiatives will continue during the foreseeable future.
Aspects of certain of these reforms as proposed in the past, such as further
reductions in Medicare and Medicaid payments and additional prohibitions on
physician ownership, directly or indirectly of facilities to which they refer
patients, if adopted, could adversely affect the Company. In addition, some
states in which the Company operates or may operate in the future are also
considering various health care reform proposals. The Company anticipates that
federal and state governments will continue to review and assess alternative
health care delivery systems and payment methodologies, and that public debate
of these issues will likely continue in the future. Due to uncertainties
regarding the ultimate features of reform initiatives and their enactment and
implementation, the Company cannot predict which, if any, of such reform
proposals will be adopted, when they may be adopted or what impact they may have
on the Company, and there can be no assurance that the adoption of reform
proposals will not have a material adverse effect on the Company's business,
financial condition or operating results. In addition, the actual announcement
of reform proposals and the investment community's reaction to such proposals,
as well as
13
<PAGE> 14
announcements by competitors and third-party payors of their strategies to
respond to such initiatives, could produce volatility in the trading and market
price of the Common Stock of the Company.
TECHNOLOGICAL CHANGE
The health care information industry is relatively new and is experiencing
rapid technological change, changes in physician and payor needs, frequent new
product introductions and evolving industry standards. As the computer and
software industries continue to experience rapid technological change, the
Company must be able to quickly and successfully adapt its clinical information
systems so that they continue to integrate well with the computer platforms and
other software employed by associated physicians. There can be no assurance that
the Company will not experience difficulties that could delay or prevent the
successful development and introduction of system enhancements or new systems in
response to technological changes. The Company's inability to respond to
technological changes in a timely and cost-effective manner could have a
material adverse effect on the Company's business, financial condition and
results of operations and on the price of the Common Stock by reducing the
Company's ability to efficiently and accurately analyze and anticipate the costs
incurred by associated physicians under the Company's capitated managed care
contracts. See "Business -- Information Systems."
DEPENDENCE ON KEY PERSONNEL; NEED FOR ADDITIONAL MANAGEMENT
The Company's success depends to a significant extent on Ramie A. Tritt,
M.D., the Company's Chairman of the Board and President, a principal stockholder
of the Company (and the principal stockholder, immediately prior to the
Reorganization, of the ENT Networks and the Founding Practice) and Richard D.
Ballard, the Company's Chief Executive Officer. The loss of Dr. Tritt or Mr.
Ballard could have a material adverse effect on the development and ultimate
likelihood of success of the Company's business. Although the Company has
entered into a five year and a three year employment agreement with Dr. Tritt
and Mr. Ballard, respectively, there can be no assurance that the Company will
be able to retain their services. The Company intends to obtain "key-man"
insurance coverage on both Dr. Tritt and Mr. Ballard. The Company is actively
seeking to hire a chief financial officer and following completion of the
Offering, anticipates recruiting additional executive officers and believes that
its future success will depend in part upon its ability to attract and retain
additional qualified management personnel. Competition for such personnel is
intense and the Company will compete for qualified personnel with numerous other
employers, some of whom have greater financial and other resources than the
Company. There can be no assurance that the Company will be successful in
attracting or retaining such personnel. See "Business -- Employees" and
"Management."
BENEFITS OF THE OFFERING TO INSIDERS
The Company intends to use a portion of the net proceeds of the Offering to
repay loans made to the Company by Gerald R. Benjamin, Vice Chairman of the
Board and a principal stockholder of the Company, the Founding Practice, Dr.
Tritt, and two entities whose principal stockholders were former directors of
the Company in the aggregate principal amount of $485,000 (the "Founders'
Loans") and to repay outstanding indebtedness of the Founding Practice
aggregating approximately $1.2 million. In connection with the repayment of the
outstanding indebtedness of the Founding Practice, guarantees with respect to
such indebtedness made by stockholders of the Founding Practice, including Dr.
Tritt and Michael J. Pickford, M.D. and Keith R. Jackson, M.D., principal
stockholders of the Company upon consummation of the Reorganization, will be
cancelled. The Company will also use $250,000 of the net proceeds of the
Offering to pay a consulting fee to an affiliate of Mr. Benjamin. In addition,
the Company has entered into employment agreements with each of Dr. Tritt, Mr.
Ballard and Mr. Benjamin providing for annual salaries of $350,000, $150,000 and
$60,000, respectively, plus bonuses. Each of Dr. Tritt and Mr. Benjamin will
devote only a portion of their time as executive officers of the Company. See
"Use of Proceeds," "Management -- Employment Agreements" and "Certain
Transactions."
14
<PAGE> 15
RISKS RELATING TO PROPOSED CREDIT FACILITY; CONSEQUENCES OF DEFAULT AND
COVENANTS EXPECTED UNDER PROPOSED CREDIT FACILITY
The Company has received a proposal from a bank to provide a $20 million
credit facility (the "Proposed Credit Facility"), subject to satisfaction by the
Company of certain conditions including completion of the Offering and repayment
of all indebtedness of the Founding Practice. There can be no assurance that the
Proposed Credit Facility will be obtained or, if obtained, that sufficient
borrowings (which will be governed by, among other factors, the Company's
earnings before interest, taxes, depreciation and amortization ("EBITDA")) will
be available to fund future proposed acquisitions. Advances under the Proposed
Credit Facility would bear interest at a variable rate. Accordingly, increases
in interest rates would increase the Company's interest expense and would
adversely affect the Company's cash flow and results of operations. If the
Proposed Credit Facility is obtained, the Company will be required to grant to
the bank a security interest in the capital stock of the Company's subsidiaries.
Therefore, in the event of a default under the credit agreement or a bankruptcy,
liquidation or reorganization of the Company, such stock would be available to
the bank to satisfy the Company's obligations to the bank before any payment
could be made to the Company's stockholders and, in such event, it is likely
that the Company's stockholders would forfeit all or a substantial portion of
their investment in the Company. The Company's ability to generate sufficient
cash flow to meet obligations incurred under the Proposed Credit Facility will
depend on the Company's future operations, which will in turn, be subject to
prevailing industry, economic, regulatory, and other factors, many of which are
beyond the Company's control. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
POTENTIAL CONFLICTS OF INTEREST
There have been and are currently agreements by and among the Company, the
Founding Practice and the ENT Networks and each of their respective officers,
directors and affiliates, and entities controlled by such officers, directors
and affiliates. In addition, Dr. Tritt, the Company's Chairman of the Board and
President, continues as a physician at the Founding Practice and will be subject
to competing demands on his time. Any future transactions and agreements between
the Company and such individuals and entities are subject to approval by a
majority of the Board of Directors, including a majority of the independent
directors. See "Management -- Employment Agreements" and "Certain Transactions."
POTENTIAL LIABILITY AND INSURANCE; LEGAL PROCEEDINGS
The provision of health care services entails the substantial risk of
potential claims of medical malpractice and similar claims. The Company does
not, itself, engage in the practice of medicine or assume responsibility for
compliance with regulatory requirements directly applicable to physicians and
will require associated physicians to maintain medical malpractice insurance.
Nevertheless, there can be no assurance that claims will not be asserted against
the Company in the event that services provided at the Founding Practice or any
affiliated practice are alleged to have resulted in injury or other adverse
effects. Although the Company expects to obtain liability insurance effective
upon the closing of the Offering that it believes will be adequate as to both
risk and amounts, successful malpractice claims could exceed the limits of the
Company's insurance and could have a material adverse effect on the Company's
business, financial condition or operating results. Moreover, there can be no
assurance that the Company will be able to obtain such insurance on commercially
reasonable terms or that any such insurance will provide adequate coverage
against potential claims. In addition, a malpractice claim asserted against the
Company could be costly to defend, could consume management resources and could
adversely affect the Company's reputation and business, regardless of the merit
or eventual outcome of such claim. In addition, in connection with the
acquisition of the assets of the Founding Practice, the Company is assuming many
of the stated liabilities of such practice. Additionally, claims may be asserted
against the Company for events related to the Founding Practice that occurred
prior to the Reorganization. The Company expects to obtain insurance coverage
effective upon the closing of the Offering related to those risks that it
believes is adequate as to the risks and amounts, although there can be no
assurance that any successful claims will not exceed applicable policy limits or
that the Company will be able to obtain such insurance on commercially
reasonable terms. In addition, the Company is negotiating liability
15
<PAGE> 16
insurance, on behalf of the Founding Practice, that will become effective on the
closing of the Reorganization and the Offering and will name the Company as an
additional insured. See "Business -- Liability and Insurance" and "-- Legal
Proceedings."
ABSENCE OF PRIOR TRADING MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Common
Stock, and there is no assurance that an active market for the Common Stock will
develop or be sustained after the Offering. The initial public offering price
will be determined by negotiation between the Company and the Underwriters and
may bear no relationship to the price at which the Common Stock will trade after
completion of the Offering. See "Underwriting" for factors to be considered in
determining such offering price. The market price of the Common Stock following
the Offering could be subject to significant fluctuations in response to a
number of factors, including variations in the Company's quarterly operating
results, changes in estimates of the Company's earnings, perceptions about
market conditions in the health care industry or the impact of various health
care reform proposals and general economic conditions, some of which are
unrelated to the Company's operating performance. In addition, the stock market
generally has experienced significant price and volume fluctuations. These
market fluctuations could have an adverse effect on the market price or
liquidity of the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Future sales of shares of Common Stock by existing stockholders pursuant to
Rule 144 under the Securities Act of 1933, as amended (the "Securities Act"),
through the exercise of outstanding registration rights or through the issuance
of shares of Common Stock upon exercise of options, warrants or otherwise, could
have an adverse effect on the price of the Company's Common Stock. The 2,000,000
shares of Common Stock offered hereby will be freely tradeable without
restriction under the Securities Act, except if any shares are purchased by
"affiliates" as defined under Rule 144. The remaining 3,328,725 shares
outstanding upon completion of the Offering (including the shares of Common
Stock issued in connection with the Reorganization) are "restricted securities"
as that term is defined under Rule 144 and may not be sold publicly unless they
are registered under the Securities Act or are sold pursuant to Rule 144 or
another exemption from registration. Of the restricted securities, 550,000
shares issued in connection with the formation of the Company will become
eligible for sale pursuant to Rule 144 commencing July 1998. An additional
62,500 shares of Common Stock issuable upon the exercise of vested options will
also become eligible for sale in the public market pursuant to Rule 701 and Rule
144 under the Securities Act beginning 90 days from the date of this Prospectus.
Holders of all of such shares have agreed not to sell, transfer or otherwise
dispose of any of their shares for a period of 12 months from the date of this
Prospectus without the prior written consent of Barington Capital Group, L.P.,
on behalf of the Underwriters. In addition, the holders of the Underwriters'
Warrants have certain demand and "piggyback" registration rights with respect to
their securities and all existing holders of the Common Stock (the "Existing
Stockholders") and all stockholders acquiring shares of Common Stock in
connection with the Reorganization (the "Acquisition Stockholders") will have
"piggyback" registration rights with respect to their shares of Common Stock.
The sale of a substantial number of shares of Common Stock in the public market,
or the perception that such sales could occur, could adversely affect the market
price of the Common Stock and impair the Company's ability to raise additional
capital in the future. See "Management -- Stock Option Plans," "Shares Eligible
for Future Sale" and "Underwriting."
DILUTION; RECENT SALES OF COMMON STOCK AT A PRICE SUBSTANTIALLY BELOW INITIAL
PUBLIC OFFERING PRICE
In connection with the formation of the Company in July 1996, Bock Benjamin
& Co., Partners, a partnership of which Gerald R. Benjamin, the Company's Vice
Chairman and Secretary, is a partner, and Ramie A. Tritt, M.D., the Company's
Chairman of the Board and President, were each issued 275,000 shares of Common
Stock, at a purchase price of approximately $.0018 per share. In November 1996,
Dr. Tritt purchased an additional 11,225 shares of Common Stock at a purchase
price of approximately $.0042 per share. In connection with the Reorganization,
the Company will issue an aggregate of 2,767,500 shares of Common Stock, of
which Dr. Tritt, as the owner of the ENT Networks and as a shareholder of the
Founding
16
<PAGE> 17
Practice, will receive an aggregate of 1,343,727 shares of Common Stock, based
upon an assumed initial public offering price of $9.50 per share. See "The
Reorganization." Investors purchasing shares of Common Stock in the Offering
will incur immediate and substantial net tangible book value dilution of
approximately $6.05 per share, or 63.7%, assuming an initial public offering
price of $9.50 per share. This dilution will be increased to the extent that
holders of outstanding options to purchase Common Stock at prices below the
initial public offering price exercise such options. See "Dilution," "Principal
Stockholders" and "Certain Transactions."
CONTROL OF COMPANY; POTENTIAL ANTI-TAKEOVER PROVISIONS
Upon the completion of the Offering, the officers and directors of the
Company will own or control approximately 35.7% of the outstanding shares of
Common Stock of the Company (33.8% if the Over-Allotment Option is exercised in
full). As a result, such individuals will generally be able to influence
significantly the outcome of corporate transactions or other matters submitted
for stockholder approval. Such influence by principal stockholders could
preclude any unsolicited acquisition of the Company and consequently adversely
affect the market price of the Common Stock. In addition, the Company's Board of
Directors is authorized to issue from time to time, without stockholder
authorization, shares of preferred stock with such terms and conditions as the
Board of Directors may determine in its sole discretion. The Company is also
subject to a Delaware statute regulating business combinations. Any of these
provisions could discourage, hinder or preclude an unsolicited acquisition of
the Company and could make it less likely that stockholders receive a premium
for their shares as a result of any such attempt. In addition, upon the
occurrence of certain events, including the merger of the Company and a sale of
all or substantially all of the assets of the Company, all outstanding options
under the Company's 1996 Stock Option Plan will become immediately exercisable.
The employment agreements with Dr. Tritt, Mr. Ballard and Mr. Benjamin provide
for termination by the executives and the payment of severance compensation to
the executives upon a change of control of the Company. See "Management,"
"Principal Stockholders" and "Description of Capital Stock."
ABSENCE OF DIVIDENDS.
The Company has never paid any cash dividends on its Common Stock and does
not intend to pay cash dividends in the foreseeable future. The Company
currently intends to retain all earnings, if any, for the development of its
business. The Proposed Credit Facility contemplates restrictions on the payment
of dividends. See "Dividend Policy" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
17
<PAGE> 18
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,000,000 shares of
Common Stock offered hereby, at an assumed initial public offering price of
$9.50 per share and after deducting underwriting discounts and the estimated
expenses payable by the Company, are estimated to be approximately $16,060,000
($18,596,500 if the Over-Allotment Option is exercised in full).
<TABLE>
<CAPTION>
APPROXIMATE PERCENTAGE OF
EXPECTED APPLICATION AMOUNT NET PROCEEDS
- ------------------------------------------------------------------ ----------- -------------
<S> <C> <C>
Working capital................................................... $13,991,000 87.1%
Repayment of indebtedness of Founding Practice.................... 1,204,000 7.5
Repayment of Company indebtedness................................. 515,000 3.2
Information systems............................................... 350,000 2.2
----------- -----
$16,060,000 100%
=========== =====
</TABLE>
The Company intends to use approximately $13,991,000 of the net proceeds to
fund future Company acquisitions of physician practice assets and for general
corporate purposes, including general and administrative expenses and the
payment of a consulting fee incurred in connection with the formation of the
Company, the Offering and the Reorganization. An integral part of the Company's
business strategy is to grow through acquisitions. Although the Company is
evaluating and is engaged in discussions in connection with the potential
acquisitions of the assets or equity of an aggregate of 13 ENT and complementary
group practices, except with respect to the Reorganization, the Company has no
agreements relating to any material acquisition and there can be no assurance
that any such acquisitions will be consummated. See "Risk Factors -- Risks
Relating to Acquisitions and Managing Growth; Need for Additional Funds,"
"Business -- Potential Practice Acquisitions and "Certain Transactions."
The Company intends to repay outstanding indebtedness of the Founding
Practice in the principal amount of $1,196,000, plus accrued interest ($8,000 at
September 30, 1996), of which 45%, 15% and 15%, respectively, is guaranteed by
Dr. Tritt and Michael J. Pickford, M.D. and Keith R. Jackson, M.D., principal
stockholders of the Company upon consummation of the Reorganization. This
indebtedness was incurred in connection with equipment leases and matures on
July 10, 2001 and accrues annual interest at the prime rate less 0.25%.
The Company will also repay Company indebtedness in the principal amount of
$505,000, plus accrued interest ($10,000 at September 30, 1996), owed to the
Founding Practice, officers and principal stockholders of the Company and two
entities whose principal stockholders were former directors of the Company, (i)
$485,000 of which was incurred to pay legal, accounting and other fees in
connection with the formation of the Company, the Reorganization and the
Offering and is evidenced by promissory notes maturing on the earlier of
completion of the Offering or June 30, 1997 and bearing simple interest at a
prime rate as announced by NationsBank of Georgia, N.A. ("NationsBank") and (ii)
$20,000 of which was incurred in connection with the acquisition of certain
assets (primarily computer hardware) of the ENT Networks and is evidenced by a
promissory note maturing on the earlier of completion of the Offering or June
30, 1997 and bearing simple interest at a prime rate as announced by
NationsBank. See "Certain Transactions."
The Company intends to use approximately $350,000 of the net proceeds to
expand its information systems.
Pending such uses, the Company intends to invest the net proceeds of this
Offering in short-term, investment grade, interest-bearing securities.
DIVIDEND POLICY
The Company expects that it will retain all earnings, if any, generated by
its operations for the development and growth of its business and does not
anticipate paying any cash dividends to its stockholders in the foreseeable
future. Any future determination as to dividend policy will be made by the Board
of Directors of the Company in its discretion, and will depend on a number of
factors, including the future earnings, if any, capital requirements, financial
condition and business prospectus of the Company and such other factors as the
Board of Directors may deem relevant. In addition, the terms of the Proposed
Credit Facility would restrict the payment of cash dividends. See "Risk
Factors -- Absence of Dividends" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
18
<PAGE> 19
CAPITALIZATION
The following table sets forth at September 30, 1996 (i) the actual
capitalization of the Company, (ii) the pro forma capitalization giving effect
to the consummation of the Reorganization and the related issuance of an
aggregate of 2,767,500 shares of Common Stock and (iii) the pro forma
capitalization as adjusted to give effect to the sale of the 2,000,000 shares of
Common Stock offered hereby at an assumed initial public offering price of $9.50
per share, the receipt of the estimated net proceeds therefrom and the
application of the net proceeds to repay the Company indebtedness and the
outstanding indebtedness of the Founding Practice. See "Use of Proceeds." This
table should be read in conjunction with the Financial Statements and the notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- ---------- -----------
<S> <C> <C> <C>
Total debt(1)............................................ $505,000 $1,709,274 $ 0
Stockholders' Equity:
Preferred Stock, $1.00 par value; 10,000 authorized; no
shares issued and outstanding....................... -- -- --
Common Stock, $.001 par value; 50,000,000 shares
authorized; 550,000 shares issued and outstanding
actual; 3,328,725 shares issued and outstanding pro
forma and 5,328,725 shares issued and outstanding
pro forma as adjusted(2)............................ 550 3,329 5,329
Additional paid-in capital............................... 450 1,963,884(3) 18,021,884(3)
Retained Earnings........................................ (4,911) 382,451 382,451
-------- ---------- -----------
Total stockholders' equity..................... (3,911) 2,349,664 18,409,664
-------- ---------- -----------
Total capitalization........................... $501,089 $4,058,938 $18,409,664
======== ========== ===========
</TABLE>
- ---------------
(1) Excludes capital lease obligations. See Note 7 of Notes to Financial
Statements of the Founding Practice.
(2) Excludes (i) 550,000 shares of Common Stock reserved for issuance under the
Company's 1996 Stock Option Plan, under which (a) options to purchase
227,500 shares of Common Stock have been granted, of which 62,500 are
immediately exercisable and (b) options to purchase 7,500 shares of Common
Stock have been granted, effective upon completion of the Offering, and
will be immediately exercisable; (ii) 275,000 shares of Common Stock
reserved for issuance under the Company's 1996 Health Care Professionals
Stock Option Plan, under which no options have been granted; (iii) shares
of Common Stock which may be issued in connection with the Additional
Acquisition and (iv) 200,000 shares of Common Stock issuable upon exercise
of the Underwriters' Warrants. See "Management -- Stock Option Plans,"
"Description of Capital Stock" and "Underwriting."
(3) See Note 7 to the Unaudited Pro Forma Combined Financial Statements of the
Company.
19
<PAGE> 20
DILUTION
The Company had a pro forma combined net tangible book value as of
September 30, 1996 of approximately $(3,900), or approximately $(.01) per share
giving effect to the sale of 550,000 shares in connection with the formation of
the Company. Net tangible book value per share is equal to the Company's total
tangible assets less its total liabilities, divided by the number of shares of
Common Stock outstanding. After giving effect to the Reorganization the pro
forma net tangible book value at September 30, 1996 would have been
approximately $2,350,000 or $.72 per share. After giving further effect to the
sale of the 2,000,000 shares of Common Stock in the Offering at an assumed
initial public offering price of $9.50 per share and receipt and application of
the estimated net proceeds therefrom to repay indebtedness, the pro forma net
tangible book value at September 30, 1996 would have been approximately
$18,410,000, or approximately $3.45 per share. This represents an immediate
increase in such net tangible book value of approximately $3.45 per share to
existing stockholders and an immediate dilution in net tangible book value of
approximately $6.05 per share to new investors purchasing shares in the
Offering. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share........................ $9.50
Net tangible book value before the Reorganization and the Offering... $(.01)
Increase per share attributable to the Reorganization................ .72
Increase per share attributable to the Offering...................... 2.74
-----
Pro forma net tangible book value per share after the Reorganization
and the Offering..................................................... 3.45
-----
Dilution of net tangible book value per share to new investors......... $6.05
=====
</TABLE>
The following table sets forth, giving effect to the completion of the
Reorganization and the Offering, the number of shares of Common Stock purchased
from the Company, the total consideration paid and the average price per share
paid by the Existing Stockholders, by the Acquisition Stockholders, and by new
investors in the Offering (assuming an initial public offering price of $9.50
per share and before deducting the underwriting discount and estimated offering
expenses):
<TABLE>
<CAPTION>
TOTAL
SHARES PURCHASED CONSIDERATION AVERAGE
------------------- ----------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing Stockholders.............. 561,225 10.5% $ 1,048 0.0% $ .0019
Acquisition Stockholders........... 2,767,500 51.9 2,504,000(1) 11.6 .90
New Investors...................... 2,000,000 37.6 19,000,000 88.4 9.50
--------- ------- ----------- ------ -
Total.................... 5,328,725 100.0% $21,505,048 100.0%
========= ======= =========== =======
</TABLE>
- ---------------
(1) Represents the pro forma combined net tangible book value of the assets of
the Founding Practice and the ENT Networks acquired by the Company in
exchange for 2,767,500 shares of Common Stock in connection with the
Reorganization. See Notes 6 and 7 to the Unaudited Pro Forma Combined
Financial Statements of the Company.
The foregoing tables do not give effect to the exercise of options and the
Underwriters' Warrants. To the extent that such options and warrants are
exercised, there will be additional dilution to new investors. See
"Management -- Stock Option Plans" and "Underwriting."
20
<PAGE> 21
SELECTED FINANCIAL DATA
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
The following information for the Founding Practice, the ENT Networks and
the Company has been derived from the financial statements of the respective
entities. The Company was incorporated in July 1996 and commenced operations in
August 1996 through the acquisition of the computer hardware of the ENT Networks
and utilization of the Capitated Network System. The selected financial
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the audited
financial statements of the Company, the Founding Practice and the ENT Networks
and notes thereto included elsewhere in this Prospectus. The information for the
nine month periods ended September 30, 1996 and 1995, respectively, has been
derived from the unaudited financial statements of the Founding Practice, the
ENT Networks and the Company which, in the opinion of management, include all
adjustments, consisting only of normal recurring adjustments necessary for a
fair statement of the results of operations for unaudited statements.
ATLANTA EAR, NOSE & THROAT ASSOCIATES, P.C.
<TABLE>
<CAPTION>
NINE MONTH
PERIOD ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------- ---------------
1995 1994 1993 1992 1991 1996 1995
------- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net patient service revenue......... $10,291 $8,124 $7,195 $5,505 $3,971 $9,522 $7,627
Expenses:
Physician owner compensation...... 3,961 3,344 3,170 2,887 2,143 3,339 3,030
Salaries, wages and benefits...... 3,922 2,929 2,277 1,253 1,226 3,705 2,768
General and administrative........ 1,885 1,474 1,386 1,151 525 2,009 1,431
Bad debt expense.................. 233 110 61 51 40 229 178
Depreciation and amortization..... 275 259 262 148 37 263 206
Other expense (income), net....... 15 8 39 15 0 (23) 14
------- ------ ------ ------ ------ ------ ------
Total expenses...................... 10,291 8,124 7,195 5,505 3,971 9,522 7,627
------- ------ ------ ------ ------ ------ ------
Operating income.................... $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
======= ====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents....................................... $ 402 $ 455
Total assets.................................................... 3,436 4,656
Total debt...................................................... 980 1,204
</TABLE>
ENT NETWORKS
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER
YEAR ENDED DECEMBER 31, 30,
---------------------------------------- ---------------
1995 1994 1993 1992 1991 1996 1995
------ ------ ------ ------ ---- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenue............................ $4,168 $3,510 $2,315 $1,743 $818 $3,286 $3,044
Operating expenses..................... 3,134 2,629 1,869 1,364 695 2,530 2,322
Operating income....................... 1,034 881 446 379 123 756 722
</TABLE>
21
<PAGE> 22
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, 1995 SEPTEMBER 30, 1996
----------------- ------------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................................... $ 302 $ 771
Total assets................................................. 306 776
Owner's equity............................................... (129) 388
</TABLE>
PHYSICIANS' SPECIALTY CORP.
<TABLE>
<CAPTION>
FROM INCEPTION
(JULY 31, 1996)
THROUGH
SEPTEMBER 30, 1996
------------------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Net revenue................................................................. $ 15
Expenses:
Salaries, wages and benefits.............................................. 13
Depreciation and amortization............................................. 1
Other expenses............................................................ 6
---
Total expenses.............................................................. 20
---
Operating loss.............................................................. $ (5)
==============
</TABLE>
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30, 1996
------------------
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................................... $322
Total assets................................................................ 686
Total debt.................................................................. 505
Stockholders' equity........................................................ (4)
</TABLE>
22
<PAGE> 23
UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA AND OPERATING DATA)
The following unaudited pro forma combined statements of operations give
effect to the Reorganization of the Company, the Founding Practice and the ENT
Networks. The unaudited pro forma financial information and notes thereto do not
purport to represent what the Company's results of operations or financial
position would actually have been if such transactions had occurred on such
dates or project the Company's results of operations or financial position for
future periods or dates. The pro forma adjustments are based upon current
available information and upon certain assumptions that management of the
Company believes are reasonable in the circumstances. The following unaudited
pro forma financial statements and related notes should be read in conjunction
with the Unaudited Pro Forma Combined Financial Statements and other financial
information pertaining to the Company, including "Capitalization" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTH PERIOD
FISCAL YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------ -------------------
1995 1994 1993 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Capitation and patient service revenues..... $ 12,167 $ 10,348 $ 8,376 $ 10,893 $ 9,078
Amounts retained by physician owners........ 2,675 2,328 2,270 2,178 2,099
------- ------- ------- ------- -------
Net revenues................................ 9,492 8,020 6,106 8,715 6,979
Expenses:
Salaries, wages and benefits.............. 3,922 2,929 2,277 3,719 2,768
General and administrative................ 1,907 1,486 1,435 2,026 1,439
Bad debt expense.......................... 233 110 61 229 178
Depreciation and amortization............. 281 267 262 269 211
Provider claims........................... 600 1,170 559 460 556
------- ------- ------- ------- -------
Total expenses.............................. 6,943 5,962 4,594 6,703 5,152
------- ------- ------- ------- -------
Operating income............................ $ 2,549 $ 2,058 $ 1,512 $ 2,012 $ 1,827
======= ======= ======= ======= =======
Supplemental pro forma net income(1)........ $ 1,565 $ 1,253 $ 1,133
Supplemental pro forma net income per
share(1).................................. $ .29 $ .23 $ .21
Supplemental weighted average shares
outstanding(1)............................ 5,396 5,396 5,396
OPERATING DATA AT END OF PERIOD:
Number of affiliated physicians........... 14 8 8 17 13
Number of allied health care
professionals.......................... 15 12 12 21 15
Number of employees....................... 86 70 60 122 83
Number of clinical locations.............. 11 8 8 14 11
Number of capitated covered lives ........ 308,003 271,695 151,587 353,735 294,990
</TABLE>
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30, 1996
------------------
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................................... $1,549
Total assets................................................................ 6,118
Total debt.................................................................. 1,709
Stockholders' equity........................................................ 2,350
</TABLE>
- ---------------
(1) For all periods presented, the Founding Practice and the ENT Networks were S
corporations for federal and state income tax purposes and, accordingly,
were not subject to corporate income taxes. The supplemental pro forma net
income and supplemental pro forma net income per share for the year ended
December 31, 1995 and for the nine month periods ended September 30, 1996
and 1995 have been computed as if the Company were subject to federal and
state corporate income taxes based on the corporate income taxes in effect
during the respective periods and the Offering had been completed.
23
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion has been divided into two sections, the first
relating to the pro forma combined operations of the Company and the second
relating to the historical operations of the Founding Practice, the ENT Networks
and the Company, the entity whose Common Stock is being issued in connection
with the Reorganization and the Offering. The following discussion of the pro
forma combined results of operations and financial position of the Company and
the historical results of operations and financial position of the Founding
Practice, the ENT Networks and the Company should be read in conjunction with
the Company unaudited pro forma combined financial statements and the audited
and unaudited financial statements of the Founding Practice, the ENT Networks,
and the Company, and the notes thereto, appearing elsewhere in this Prospectus.
OVERVIEW
Physicians' Specialty Corp. is a physician practice management company
organized to provide comprehensive management services to physician practices
specializing in diseases and disorders of the ear, nose and throat and
complementary specialties. Concurrently with the closing of this Offering, the
Company will effect the Reorganization in which the Company will acquire all of
the common stock of the ENT Networks and substantially all of the assets of the
Founding Practice. See "The Reorganization." The Company's revenues are derived
from the provision, through affiliated physicians, of fee-for-service medical
services and from contracts with HMOs and other managed care organizations which
compensate the Company and its affiliated physicians on a capitated basis. In
the capitated arrangements, the Company is typically paid by the HMO or other
third party payor on behalf of the associated physicians a fixed amount per
enrollee per month. In return, the Company, through associated physicians, is
responsible for the provision of substantially all of the ENT medical and
surgical services, as set forth in the agreement with the third-party payor,
required by enrollees. In addition, the Company is responsible for the
compensation of associated physicians.
The Company's relationship with its affiliated physicians is set forth in
asset purchase and management services agreements. Through the asset purchase
agreement, the Company typically acquires for fair value substantially all of
the non-medical assets of a physician practice. The management services
agreement, typically having a term of 40 years, delineates the responsibilities
and obligations of each party. Under the management services agreement, the
affiliated physician practice assigns to the Company substantially all of its
right and interest in the proceeds of its accounts receivable (or the revenue it
receives). The Company retains an amount equal to operating and non-operating
expenses of the affiliated physician practice (which are paid directly by the
Company), a portion of the Company's non-allocable overhead, and a percentage of
the excess of the revenue assigned to the Company over such expenses. The
remaining revenues are remitted to the affiliated practice to pay physician
compensation and benefits pursuant to employment agreements between the practice
and each physician.
The unaudited pro forma combined financial statements of the Company for
the years ended December 31, 1995, 1994, and 1993 and for the nine month periods
ended September 30, 1996 and September 30, 1995 have been prepared to reflect a
combination of promoter interests, at historical costs, under generally accepted
accounting principles. Pro forma combined net revenues include fees earned
pursuant to management services agreements along with capitation revenues
received directly by the Company from payors.
24
<PAGE> 25
RESULTS OF OPERATIONS
The following tables set forth certain unaudited pro forma combined results
of operations of the Company for the periods indicated giving effect to the
Reorganization as if it had occurred on January 1, 1993. The information set
forth below is based upon the historical audited and unaudited financial
statements of the Company, the Founding Practice and the ENT Networks and gives
effect to the assumptions and adjustments in the accompanying notes thereto. The
Founding Practice and the ENT Networks are S corporations, and accordingly, do
not pay or provide for income taxes at the entity level. Therefore, the
following information is provided on a pre-tax basis. Following the consummation
of the Reorganization, the Company estimates that its effective tax rate will be
approximately 38% to 40%. See the Unaudited Pro Forma Combined Financial
Statements of the Company and the notes thereto. This pro forma information may
not be indicative of the results of operations or financial position that would
have occurred or existed if the transactions described above had been
consummated on the date assumed and do not purport to project the Company's
results of operations for any future date or period.
<TABLE>
<CAPTION>
NINE MONTH PERIOD
FISCAL YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------ -------------------
1995 1994 1993 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(AMOUNTS IN THOUSANDS, EXCEPT OPERATING DATA)
STATEMENT OF OPERATIONS DATA:
Capitation and patient service revenues..... $ 12,167 $ 10,348 $ 8,376 $ 10,893 $ 9,078
Amounts retained by physician owners........ 2,675 2,328 2,270 2,178 2,099
-------- -------- -------- -------- --------
Net revenues................................ $ 9,492 $ 8,020 $ 6,106 $ 8,715 $ 6,979
Expenses:
Salaries, wages and benefits.............. $ 3,922 $ 2,929 $ 2,277 $ 3,719 $ 2,768
General and administrative................ 1,907 1,486 1,435 2,026 1,439
Bad debt expense.......................... 233 110 61 229 178
Depreciation and amortization............. 281 267 262 269 211
Provider claims........................... 600 1,170 559 460 556
-------- -------- -------- -------- --------
Total expenses.............................. 6,943 5,962 4,594 6,703 5,152
-------- -------- -------- -------- --------
Operating income............................ $ 2,549 $ 2,058 $ 1,512 $ 2,012 $ 1,827
======== ======== ======== ======== ========
OPERATING DATA AT END OF PERIOD:
Number of affiliated physicians............. 14 8 8 17 13
Number of allied health care
professionals............................. 15 12 12 21 15
Number of employees......................... 86 70 60 122 83
Number of clinical locations................ 11 8 8 14 11
Number of capitated covered lives........... 308,003 271,695 151,587 353,735 294,990
</TABLE>
25
<PAGE> 26
The following table sets forth, as a percentage of pro forma combined net
revenues, certain pro forma combined statement of operations data for the
periods indicated giving effect to the Reorganization as if it had occurred on
January 1, 1993:
<TABLE>
<CAPTION>
NINE MONTH
FISCAL YEAR ENDED PERIOD ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------- ---------------
1995 1994 1993 1996 1995
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Capitation and patient service revenues.... 128.2% 129.0% 137.2% 125.0% 130.1%
Amounts retained by physician owners....... 28.2% 29.0% 37.2% 25.0% 30.1%
----- ----- ----- ----- -----
Net revenues............................... 100.0% 100.0% 100.0% 100.0% 100.0%
Expenses:
Salaries, wages and benefits............. 41.3% 36.5% 37.3% 42.7% 39.7%
General and administrative............... 20.1% 18.5% 23.5% 23.2% 20.6%
Bad debt expense......................... 2.5% 1.4% 1.0% 2.6% 2.6%
Depreciation and amortization............ 3.0% 3.3% 4.3% 3.1% 3.0%
Provider claims.......................... 6.3% 14.6% 9.2% 5.3% 8.0%
----- ----- ----- ----- -----
Total expenses............................. 73.2% 74.3% 75.3% 76.9% 73.9%
----- ----- ----- ----- -----
Operating income........................... 26.8% 25.7% 24.7% 23.1% 26.1%
===== ===== ===== ===== =====
</TABLE>
PRO FORMA COMBINED RESULTS OF OPERATIONS
Nine Months Ended September 30, 1996 as Compared to Nine Months Ended September
30, 1995
Capitation and patient service revenues increased by $1,815,000 or 20.0% to
$10,893,000 for the nine month period ended September 30, 1996 from $9,078,000
for the nine month period ended September 30, 1995. Of this increase,
$1,573,000, or approximately 86.7%, was attributable to an increase in
fee-for-service revenues realized by the Company associated with the opening of
three additional clinic office locations and the addition of four affiliated
physicians. The remainder, $242,000, or approximately 13.3%, was attributable to
increased revenues received from HMO payors under capitated arrangements.
The number of lives covered under capitated plans increased by 19.9% to
353,735 at September 30, 1996 from 294,990 at September 30, 1995.
Amounts retained by physician owners of $2,178,000 and $2,099,000 for the
nine month period ended September 30, 1996 and 1995, respectively, includes all
compensation and benefits paid or payable to physician owners during the period.
The physician owners determined such payments based on cash earnings available
for distribution, including cash to be realized from the collection of accounts
receivable.
Salaries, wages and benefits increased by $951,000 or 34.4% to $3,719,000
for the nine month period ended September 30, 1996 from $2,768,000 for the nine
month period ended September 30, 1995. This increase resulted primarily from the
addition of 39 full-time employees during the nine month period ended September
30, 1996 in conjunction with the opening of three additional clinic office
locations.
General and administrative expenses increased by $587,000 or 40.8% to
$2,026,000 for the nine month period ended September 30, 1996 from $1,439,000
for the nine month period ended September 30, 1995 . The increase related to the
opening of additional clinic office locations and the expansion of
administrative infrastructure required to support anticipated practice growth.
The Company typically incurs expenses related to the opening of new facilities
prior to generating revenues.
Bad debt expense increased by $51,000 or 28.7% to $229,000 for the nine
month period ended September 30, 1996 from $178,000 for the nine month period
ended September 30, 1995. This increase was attributable largely to
uncollectible patient self-pay and per visit co-payment amounts.
26
<PAGE> 27
Provider claim expense decreased by $96,000 or 17.3% to $460,000 for the
nine month period ended September 30, 1996 from $556,000 for the nine month
period ended September 30, 1995 due to the increase in the number of affiliated
physicians staffing the capitated contracts held by the ENT Networks (which
reduced the frequency by which claims were paid to unaffiliated physician
providers).
Year Ended December 31, 1995 as Compared to Year Ended December 31, 1994
Capitation and patient service revenues increased by $1,819,000 or 17.6% to
$12,167,000 for the year ended December 31, 1995 from $10,348,000 for the year
ended December 31, 1994. Of this increase, $1,161,000, or approximately 63.8%,
was attributable to an increase in fee-for-service revenues realized by the
Company in connection with the opening of three additional clinic office
locations and the addition of six affiliated physicians. The remainder,
$658,000, or approximately 36.2%, was attributable to increased revenues
received from HMO payors under capitated arrangements.
The number of lives covered under capitated plans increased by 13.4% to
308,003 at December 31, 1995 from 271,695 at December 31, 1994.
Amounts retained by physician owners of $2,675,000 and $2,328,000 for the
year ended December 31, 1995 and 1994, respectively, includes all compensation
and benefits paid or payable to physician owners during the period. The
physician owners determined such payments based on cash earnings available for
distribution, including cash realized from the collection of accounts
receivable.
Salaries, wages and benefits increased by $993,000 or 33.9% to $3,922,000
for the year ended December 31, 1995 from $2,929,000 for the year ended December
31, 1994. This increase resulted primarily from the addition of six employee
physicians and 10 support staff in 1995 in conjunction with the opening of three
additional clinic office locations.
General and administrative expenses increased by $421,000 or 28.3% to
$1,907,000 for the year ended December 31, 1995 from $1,486,000 for the year
ended December 31, 1994 . The increase related to the opening of three clinic
office locations and the expansion of administrative infrastructure required to
support anticipated practice growth.
Bad debt expense increased by $123,000 or 112.0% to $233,000 for the year
ended December 31, 1995 from $110,000 for the year ended December 31, 1994. This
increase was attributable largely to uncollectible patient self-pay and per
visit co-payment amounts.
Depreciation and amortization expense increased by $14,000 or 5.2% to
$281,000 for the year ended December 31, 1995 from $267,000 for the year ended
December 31, 1994, reflecting no material changes in the composition of the
Company's fixed assets or depreciation methods.
Provider claim expense decreased by $570,000 or 48.7% to $600,000 for the
year ended December 31, 1995 from $1,170,000 for the year ended December 31,
1994 due to the addition of six affiliated physicians staffing the capitated
contracts held by the ENT Networks in 1995 (which reduced the frequency by which
claims were paid to unaffiliated physician providers).
Year Ended December 31, 1994 as Compared to Year Ended December 31, 1993
Capitation and patient service revenues increased by $1,972,000 or 23.5% to
$10,348,000 for the year ended December 31, 1994 from $8,376,000 for the year
ended December 31, 1993. Of this increase, $1,196,000, or approximately 60.6%,
was attributable to increased revenues received from HMO payors under capitated
arrangements. The remainder, $776,000, or approximately 39.4%, was attributable
to an increase in fee-for-service revenues.
The number of lives covered under capitated plans increased by 79.2% to
271,695 at December 31, 1994 from 151,587 at December 31, 1993.
Amounts retained by physician owners of $2,328,000 and $2,270,000 for the
years ended December 31, 1994 and 1993, respectively, includes all compensation
and benefits paid or payable to physician owners during
27
<PAGE> 28
the period. The physician owners determined such payments based on cash earnings
available for distribution, including cash realized from the collection of
accounts receivable.
Salaries, wages and benefits increased by $652,000 or 28.6% to $2,929,000
for the year ended December 31, 1994 from $2,277,000 for the year ended December
31, 1993. This increase resulted primarily from the addition in 1994 of 10
non-physician clinical employees and support staff.
General and administrative expenses increased by $51,000 or 0.1% to
$1,486,000 for the year ended December 31, 1994 from $1,435,000 for the year
ended December 31, 1993.
Bad debt expense increased by $49,000 or 80.3% to $110,000 for the year
ended December 31, 1994 from $61,000 for the year ended December 31, 1993. This
increase was attributable largely to uncollectible patient self-pay and per
visit co-payment amounts.
Depreciation and amortization expense increased by $5,000 or 1.9% to
$267,000 for the year ended December 31, 1994 from $262,000 for the year ended
December 31, 1993, reflecting that there were no material changes in the
composition of the Company's fixed assets or depreciation methods.
Provider claim expense increased by $611,000 or 109.3% to $1,170,000 for
the year ended December 31, 1994 from $559,000 for the year ended December 31,
1993 due to a 79.2% increase in the number of capitated lives covered by the ENT
Networks.
HISTORICAL RESULTS OF OPERATIONS
Physicians' Specialty Corp.
Physicians' Specialty Corp. was incorporated in July 1996 and has conducted
only limited activities to date, primarily consisting of acquiring computer
hardware of the ENT Networks and negotiating the agreements relating to the
Reorganization, and will not conduct significant operations until the closing of
the Reorganization and the Offering. The Company has incurred and will continue
to incur various legal, accounting, and auditing costs in connection with the
Reorganization and the Offering, $485,000 of which have been funded by loans and
the remainder of which are expected to be paid with the proceeds of the
Offering. The loans were provided by the Founding Practice, officers of the
Company and affiliates of former directors of the Company, a portion of which
will be repaid from the proceeds of the Offering. See "Use of Proceeds".
The ENT Networks and The Founding Practice
The ENT Networks were formed exclusively to hold and administer capitated
ENT managed care contracts with three HMO payors covering managed care enrollees
in the metropolitan Atlanta marketplace. The ENT Networks have incurred general
and administrative expenses of approximately $148,000, $124,000 and $75,000 for
the years ended December 31, 1995, 1994 and 1993, respectively, related to the
payment of medical director fees in connection with the administration and
management of managed care contracts, a majority of which fees will terminate
upon consummation of the Reorganization. The only other material operating
expense incurred by the ENT Networks was payment of provider claims to
compensate associated physicians. Accordingly, with the exception of references
to capitation revenues and these expenses, the discussion and analysis of the
pro forma combined results of operations set forth above relates solely to the
Founding Practice.
28
<PAGE> 29
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth a summary of the significant components of
historical cash flows for the Founding Practice and the ENT Networks for the
periods indicated:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NINE MONTH
DECEMBER 31, PERIOD ENDED
------------------------- SEPTEMBER 30,
1995 1994 1993 1996
------ ------- ------ -------------
<S> <C> <C> <C> <C>
(AMOUNTS IN THOUSANDS)
Cash Flows From Operating Activities
The Founding Practice......................... $ 455 $ 378 $ 410 $ 609
The ENT Networks.............................. 960 1,190 464 731
------ ------ ------ ------
$1,415 $ 1,568 $ 874 $ 1,340
------ ------ ------ ------
Cash Flows From Investing Activities
The Founding Practice......................... $ (541) $ (162) $ (322) $ (780)
The ENT Networks.............................. (6) (11) (2) (6)
------ ------ ------ ------
$ (547) $ (173) $ (324) $ (786)
------ ------ ------ ------
Cash Flows From Financing Activities
The Founding Practice......................... $ 464 $ (242) $ (52) $ 224
The ENT Networks.............................. (943) (1,000) (485) (255)
------ ------ ------ ------
$ (479) $(1,242) $ (537) $ (31)
------ ------ ------ ------
</TABLE>
During the nine month period ended September 30, 1996, net cash provided by
operating activities of the Founding Practice and the ENT Networks was $609,000
and $731,000, respectively. Cash utilized for investing activities in the nine
month period ended September 30, 1996 by the Founding Practice and the ENT
Networks was $780,000 and $6,000, respectively, in each case, consisting
entirely of capital expenditures. Borrowings, net of repayments, in the nine
month period ended September 30, 1996 by the Founding Practice was $224,000.
Cash distributions in the nine month period ended September 30, 1996 by the ENT
Networks to the owner was $255,000.
During 1995, net cash provided by operating activities of the Founding
Practice and the ENT Networks was $517,000 and $960,000, respectively. Cash
utilized for investing activities in 1995 by the Founding Practice and the ENT
Networks was $541,000 and $6,000, respectively, in each case, consisting
entirely of capital expenditures. Borrowings, net of repayments, in 1995 by the
Founding Practice was $464,000. Cash distributions by the ENT Networks to the
owner in 1995 was $943,000.
During 1994, net cash provided by operating activities of the Founding
Practice and the ENT Networks was $378,000 and $1,190,000, respectively. Cash
utilized for investing activities in 1994 by the Founding Practice and the ENT
Networks was $162,000 and $11,000, respectively, in each case, consisting
entirely of capital expenditures. Net repayments of borrowings in 1994 by the
Founding Practice was $242,000. Cash distributions by the ENT Networks to the
owner in 1994 was $1,000,000.
During 1993, net cash provided by operating activities of the Founding
Practice and the ENT Networks was $411,000 and $464,000, respectively. Cash
utilized for investing activities in 1993 by the Founding Practice and the ENT
Networks was $322,000 and $2,000, respectively, in each case, consisting
entirely of capital expenditures. Net repayments of borrowings in 1993 by the
Founding Practice was $52,000. Cash distributions by the ENT Networks to the
owner in 1993 was $485,000.
Upon consummation of the Reorganization, the operating cash flows generated
by the Founding Practice will no longer be suppressed by the payment of bonus
compensation to physician owners in amounts sufficient to eliminate operating
income as has historically been the practice of the Founding Practice. In
addition, the
29
<PAGE> 30
payment of S corporation distributions to the stockholder of the ENT Networks
will cease upon consummation of the Reorganization.
The Company has received a proposal from a bank to provide a credit
facility of $20,000,000 (the "Proposed Credit Facility") primarily to provide
financing for the acquisition of assets of physician practices. The Proposed
Credit Facility would be secured by the assignment of the Company's stock in all
its subsidiaries, would be guaranteed by all subsidiaries (including future
subsidiaries) and would restrict the Company from pledging its assets to any
other party. Advances for working capital would be governed by a borrowing base
related primarily to the Company's EBITDA. Based on the borrowing base at
September 30, 1996 after giving effect to the Offering and the Reorganization,
the maximum availability under the Proposed Credit Facility would be $7,900,000.
Advances would bear interest at the Company's option of either a prime-based
rate or a LIBOR-based rate and interest-only payments would be required for the
first two years from the date of the closing of the Proposed Credit Facility,
with maturity in five years from the advance date.
The Proposed Credit Facility would contain affirmative and negative
covenants which would, among other things, require the Company to maintain
certain financial ratios (including maximum indebtedness to pro forma EBITDA
ratio, maximum indebtedness to capital ratio, minimum net worth, minimum current
ratio, and minimum fixed charges coverage), limit the amounts of additional
indebtedness, dividends, advances to officers, shareholders and physicians,
investments and advances to subsidiaries and restrict changes in management and
the Company's business.
The Company intends to acquire the assets of additional ENT and
complementary specialty practices and to fund this growth in part with the net
proceeds of this Offering and borrowings under the Proposed Credit Facility, if
obtained, as well as through equity issuances. The Company is currently
evaluating and is in various stages of discussions in connection with the
potential acquisition of assets or equity of an aggregate of 13 ENT and
complementary group practices with an aggregate of approximately 30 physicians
in Georgia, Alabama, New Jersey and Virginia. In addition, the Company has
reached an agreement in principle for the Additional Acquisition, the completion
of which is conditioned upon the execution of a definitive purchase agreement.
The Additional Acquisition is expected to close following the closing of the
Offering and is not expected to be material to the Company's operations. In
consideration for the assets of this practice, the two physicians will receive
shares of Common Stock. In addition, concurrently with the closing of such
acquisition, the two physicians are expected to enter into employment agreements
with the Founding Practice and the practice will become a party to the
management services agreement between the Company and the Founding Practice. The
Company has no other agreements or arrangements with respect to the terms of any
other material acquisitions (other than the agreements with the Founding
Practice and the ENT Networks) and, accordingly, there can be no assurance that
any of the acquisitions under evaluation will be completed, as to the terms of
any such acquisition or as to the Company's ability to complete future
acquisitions. See "Risk Factors -- Risks Related to Acquisitions and Managing
Growth; Need for Additional Funds" and "Business -- Potential Practice
Acquisitions."
The Company believes that the net proceeds of the Offering, together with
cash flow expected to be generated from operations, will be sufficient to fund
the Company's anticipated acquisition, expansion and working capital needs for
approximately the next 12 months (24 months if the Proposed Credit Facility is
obtained). There can be no assurance that borrowings under the Proposed Credit
Facility will be available or that alternative financing will be available for
future acquisitions or expansion of the Company's business.
Upon completion of the Offering, the Company will be a party to employment
agreements with three executive officers providing for aggregate annual salaries
of $560,000, plus bonuses.
30
<PAGE> 31
SEASONALITY
The Company's business is subject to seasonal patient visits and
fee-for-service revenues are typically lower during the third quarter of the
Company's fiscal year. This lower level of patient visits is attributable to
physician vacations, patients returning to school and seasonal illness patterns.
Capitated revenues, however, are not susceptible to seasonal influences.
Quarterly results also may be materially affected by the timing of acquisitions
and the timing and magnitude of costs related to acquisitions. Results for any
quarter, therefore, may not necessarily be indicative of the results that the
Company may achieve for any subsequent fiscal quarter or for a full fiscal year.
31
<PAGE> 32
BUSINESS
GENERAL
The Company was recently organized to provide physician practice management
services to medical groups specializing in ENT disorders and diseases.
Concurrently with the closing of this Offering, the Company will acquire
substantially all of the assets of the Founding Practice, the largest ENT group
practice in the State of Georgia, and the common stock of the ENT Networks which
hold, manage and administer capitated ENT managed care contracts covering an
aggregate of approximately 354,000 enrollees. According to the Academy, there
were approximately 8,400 ENT specialists in the United States as of December 31,
1995 and the Company estimates that approximately 70% of all ENT practices
consist of individual practitioners or small (less than four physician) group
practices. The Company is not aware of any other physician practice management
company focusing solely or substantially on managing ENT practices.
Increasing concern over the rising cost of health care in the United States
has led to the emergence and increasing prominence of managed care. Because
fee-for-service arrangements for compensating health care providers fail to
create incentives for the efficient utilization of resources and are generally
believed to contribute to health care cost increases, payors are selecting
alternative reimbursement methods, such as capitated arrangements, which shift
the financial risk of delivering health care from payors to providers. Under
capitated arrangements, the health care provider is typically paid by HMOs or
other third-party payors a fixed amount per enrollee per month. In return, the
health care provider is responsible for providing substantially all medical
services, as set forth in the agreement with the third-party payor, required by
the payor's enrollees.
While the acceptance of greater responsibility and risk under capitated
arrangements provides physicians with the opportunity to retain and enhance
market share and operate at a more predictable level of profitability, the
acceptance of capitation carries with it significant requirements for
infrastructure, information systems, capital, network resources and management.
Individual physicians and small group practices tend to have limited
administrative capacity, limited capital to invest in new clinical equipment and
technologies and typically lack the information systems necessary to negotiate
and manage sophisticated risk-sharing contracts with payors. As a result,
individual physicians and small group practices are increasingly affiliating
with larger group practices and physician practice management companies, such as
the Company, which offer physicians clinical information and financial and
administrative management, as well as network development and payor contracting
services.
The Company's revenues to date have been derived from the provision,
through physicians at the Founding Practice, of fee-for-service medical services
and from contracts with HMOs and other managed care organizations, which
compensate the Company and physicians associated with the Company on a capitated
basis. The Founding Practice, which includes 16 physicians, one dentist and 23
allied health care professionals operating 14 clinical locations in the greater
Atlanta area, has provided ENT medical and surgical services under capitated
managed care contracts since 1982. At September 30, 1996, the Founding Practice
served as the primary provider panel for the ENT Networks, providing capitated
ENT medical and surgical services required by an aggregate of approximately
354,000 enrollees of HMOs sponsored by United HealthCare, Aetna and Cigna. The
Founding Practice, in conjunction with an independent software vendor, has
developed the Capitated Network System which the Company believes will enable
more effective analysis of clinical and cost data as well as management of the
costs and opportunities associated with capitated managed care arrangements,
while enabling physicians to deliver high quality medical care.
The Company believes that as a result of the experience of the Company and
the physicians at the Founding Practice in (i) providing ENT medical and
surgical services, (ii) negotiating, managing and administering capitated
managed care contracts and (iii) developing and utilizing sophisticated
information systems, including the Capitated Network System, the Company is
well-positioned to acquire and manage additional ENT practices, to negotiate
capitated managed care contracts and to capture a growing market share of
capitated arrangements. The Company is currently evaluating and is in various
stages of discussions in connection with the potential acquisition of the assets
or equity of an aggregate of 13 ENT and complementary group practices with an
aggregate of approximately 30 physicians in Georgia, Alabama, New Jersey and
Virginia. In addition, the Company has reached an agreement in principle for the
acquisition of a two
32
<PAGE> 33
physician ENT practice operating three clinical offices in the metropolitan
Atlanta area. There can be no assurance, however, that any or all of these
potential aquisitions will be completed.
HEALTH CARE INDUSTRY OVERVIEW
General
Health care is one of the largest industries in the United States,
representing total expenditures exceeding $900 billion in 1994, with
approximately $180 billion directly attributable to physician services,
according to the Federal Health Care Financing Administration. Health care in
the United States historically has been delivered by a fragmented system of
health care providers, including hospitals, individual physicians and small
groups of specialist and primary care physicians. A 1996 American Medical
Association study estimates that there are over 110,000 physicians practicing in
4,300 multi-specialty group practices of three or more physicians and over
86,000 physicians practicing in 13,600 single specialty group practices in the
United States.
The Company believes that significant opportunities exist to assist ENT
specialty physicians and specialists practicing in complementary fields, such as
audiology, sleep medicine, allergy, plastic surgery and oral surgery, in
managing and administering group practices and networks. More importantly, since
clinical decisions made by physicians impact overall health care expenditures,
the Company believes that opportunities exist to reduce practice costs by
assisting physicians in managing the clinical aspects of ENT and related group
practices and networks. The Company believes its physician practice and network
management services and clinical information systems will enable ENT and related
physicians to control more effectively both the quality and cost of health care
and provide them with the resources necessary to function effectively in a
managed care environment.
Trends in the Health Care Industry
Increasing concern over the rising cost of health care in the United States
has led to the emergence and increasing prominence of managed care. Because
fee-for-service arrangements for compensating health care providers fail to
create incentives for the efficient utilization of resources and are therefore
generally believed to contribute to health care cost increases at rates
significantly higher than inflation, payors are rapidly moving to replace
fee-for-service reimbursement with alternative reimbursement methods, including
capitated and other fixed-fee arrangements. The growth in enrollment in programs
provided by payors using these new reimbursement methods is shifting the
financial risk of delivering health care from payors to providers.
Health care cost containment pressures have increased physician management
responsibilities while lowering reimbursement rates to physicians. While the
acceptance of greater responsibility and risk under capitated arrangements
provides physicians with the opportunity to retain and enhance market share and
operate at a more predictable level of profitability, the acceptance of
capitation also carries with it significant requirements for infrastructure,
information systems, capital, network resources and financial and medical
management. Because most physicians practice individually or in two-person
groups, their negotiating leverage with payors and access to economies of scale
are limited. Individual physicians and small group practices also tend to have
limited administrative capacity, limited ties to other health care providers
(restricting their ability to coordinate care across a variety of specialties),
limited capital to invest in new clinical equipment and technologies and limited
purchasing power with vendors of medical supplies. In addition, individual
physicians and small group practices typically lack the information systems
necessary to manage sophisticated risk-sharing contracts with payors and to
efficiently implement disease management programs.
In response to the foregoing factors, individual physicians and small group
practices are increasingly affiliating with larger group practices and physician
practice management companies. Physician practice management companies offer
physicians access to information and management systems, leverage with vendors
and payors and capital resources. In addition, many payors and their
intermediaries, including governmental entities and HMOs, are increasingly
looking to outside providers of physician services to develop and maintain
quality outcomes, management programs and patient care data. Such payors and
intermediaries
33
<PAGE> 34
seek to share the risk of providing health care services through capitation
arrangements which provide for fixed payments for patient care over a specified
period of time.
STRATEGY
The Company's strategy is to consolidate and manage ENT and related
specialty physician practices and provider networks which provide high quality,
cost-effective medical and surgical services in select geographic markets. The
key elements of this strategy are to:
Acquire and Affiliate with ENT and Complementary Physician
Practices. The Company intends to develop significant market presence by
acquiring assets or equity of practices of, or contracting with,
established specialty physicians with established reputations in select
markets for providing quality medical care in ENT and complementary fields,
such as audiology, sleep medicine, allergy, plastic surgery and oral
surgery. The Company believes this will increase its market share in target
regions while ensuring appropriate quality treatment and maintaining
patient satisfaction. As the Company acquires the practices of, and
affiliates with, additional ENT and related specialists, the Company will
be able to provide a wide range of support and ancillary services
frequently unavailable to independent specialty practitioners.
Develop Provider Networks. The Company intends to integrate its
associated physicians into multi-site ENT and related specialty provider
networks. In addition to physicians employed by practices whose assets are
acquired by the Company, the Company intends to enter into network
administration agreements with independent ENT and other specialty
physicians providing for their inclusion in managed care provider panels in
targeted geographic markets. By employing sophisticated demographic,
utilization and economic analysis tools, the Company believes it can
effectively develop specialty provider networks responsive to the demands
and desires of managed care payors seeking capitated provider
relationships. In addition, the Company believes that the managed care
arrangements in place at the Founding Practice or at future practices
managed by the Company will be attractive to newly-affiliating physicians
joining the Company's affiliated provider panels.
Shift to Capitated Payment Arrangements. The Company believes that in
the future, the primary opportunity for profitability on a sustained basis
in the management of ENT specialty practices lies in capitated payor
arrangements which address the administrative demands of managed care. The
Company believes that the current ENT market presence of the Founding
Practice and the ENT Networks, as well as their experience in capitated
managed care arrangements and the development of the Capitated Network
System, will enhance the Company's ability to market the services of the
Founding Practice, as well as future practices affiliating with the
Company, and negotiate favorable risk sharing arrangements with additional
managed care payors. In addition, the Company intends to expand and
diversify its network provider panels by affiliating with additional ENT
physicians and specialists practicing in complementary fields, thereby
enhancing the marketability of the Company's network provider panels to
managed care payors.
Implement and Expand Information Systems. The Company believes that
access to clinical patient data is critical to cost containment and quality
outcomes, which are fundamental to negotiating appropriate capitation
contracts. The Company intends to use the management information systems
developed and maintained by the Founding Practice and intends to expand
these systems so as to effectively manage capitated contracts for
additional ENT physicians and physicians practicing in fields complementary
to ENT. These systems collect and analyze clinical and administrative data,
facilitating automation of many routine clinical functions, and provide
access to the clinical and financial data necessary to perform outcome
studies, cost analyses, utilization management and utilization reviews. The
Company believes that the Capitated Network System will enable it to
effectively manage the utilization of medical services provided to managed
care enrollees.
34
<PAGE> 35
OTOLARYNGOLOGY
Otolaryngology, the management of diseases of the ear, nose, nasal
passages, sinuses, larynx, mouth and throat, as well as structures of the neck
and face, is the oldest medical specialty in the United States. An
otolaryngologist, a physician trained in the medical and surgical fields of ear,
nose and throat disorders, is commonly referred to as an Ear, Nose and Throat
(ENT) Specialist. According to the Academy, more than 50% of all U.S. physician
office visits are directly related to ENT problems frequently treated by primary
care physicians, pediatricians, allergists and otolaryngologists. Based upon a
1994 American Group Practice Association study, the Company estimates that 1994
revenues generated by ENTs in the United States exceeded $6 billion. ENT
services in the United States are delivered largely through individual and small
single specialty group practices and multi-specialty clinics. In the early
1900s, ENT and eye care specialists generally practiced jointly in group
practices. While a select number of large, combined eye, ear, nose and throat
practices exist, most ENT and eye care professionals migrated toward single
specialty group practices as specialization occurred. The Academy reports that
there were approximately 8,400 ENT specialists in the United States as of
December 31, 1995 and, based upon membership in the Academy, the Company
estimates that approximately 70% of all ENT practices consist of individual
practitioners or small (less than four physician) group practices.
Otolaryngology subspecialties include the following:
Pediatric Otolaryngology which includes the medical and surgical
treatment of diseases of the ear, nose and throat in children.
Head and Neck Surgery which includes the surgical and medical
treatment of cancerous and noncancerous tumors in the head and neck,
including thyroid and parathyroid surgery.
Rhinology which includes the medical and surgical treatment of
disorders of the nose and sinuses.
Allergy which includes the medical treatment of inhalant allergies
affecting the upper respiratory system.
Facial Plastics and Reconstructive Surgery which includes the
treatment of cosmetic, functional and reconstructive abnormalities of the
face and neck.
Otology/Neurotology which includes the medical and surgical treatment
of diseases of the ear, including traumatic and cancerous disorders of the
external, middle and inner ear, as well as the nerve pathways which affect
hearing and balance.
Laryngology which includes medical and surgical treatment of disorders
of the throat, including the voice.
THE FOUNDING PRACTICE AND THE ENT NETWORKS
The Founding Practice is the largest otolaryngology group practice in the
State of Georgia. Founded in 1979, the practice has grown to include 16
physicians, one dentist, 15 audiologists, seven physician assistants and one
clinical esthetician. The practice offers a wide range of ENT subspecialty
services, including pediatric otolaryngology, head and neck surgery, rhinology,
facial plastics, otology and neurotology and laryngology. Additionally, the
practice provides audiology services, hearing aid sales, TMJ diagnostics and
laser snoring and sleep apnea surgical services. Serving infants, children and
adults, the practice has 14 clinical locations and its affiliated physicians
maintain privileges at 18 hospitals and two ambulatory surgical centers
throughout metropolitan Atlanta. Ramie A. Tritt, M.D., Chairman of the Board and
President and a principal stockholder of the Company, is the President and a
principal stockholder of the Founding Practice. See "Certain Transactions."
The Founding Practice began providing ENT medical and surgical services
under a capitated managed care contract in 1982 covering approximately 50,000
enrollees. At September 30, 1996, the Founding Practice served as the primary
ENT provider panel for three capitated managed care contracts covering an
aggregate of approximately 354,000 enrollees. Each managed care contract is
administered by separate corporations owned
35
<PAGE> 36
by Dr. Tritt and formed solely for the purpose of holding, managing and
administering such contract, which corporations together comprise the ENT
Networks. The ENT Networks, through affiliated physicians at the Founding
Practice and 20 independent physicians, provide all of the ENT medical and
surgical services required by enrollees of HMOs sponsored by United HealthCare,
Cigna and Aetna in the greater Atlanta market, through capitated arrangements.
The three capitated managed care contracts administered by the ENT Networks
covered the following respective number of enrollees, or covered lives, at
September 30, 1996:
<TABLE>
<CAPTION>
CAPITATED COVERED LIVES
-----------------------
<S> <C>
United HealthCare of Georgia..................................... 149,050
Cigna Health Care of Georgia..................................... 163,758
Aetna Health Plans of Georgia.................................... 40,927
-------
353,735
=======
</TABLE>
The following chart illustrates the increase from December 31, 1991, to
December 31 of each year from 1992 through 1995 and at September 30, 1996 in the
number of enrollees covered under capitated managed care contracts pursuant to
which the Founding Practice provided ENT medical and surgical services:
BAR GRAPH
For the years ended December 31, 1993, 1994 and 1995 and the nine month
period ended September 30, 1996, approximately 16%, 16%, 22% and 20%,
respectively, of the net revenues of the Founding Practice were attributable to
ENT services rendered pursuant to the managed care contracts of the ENT
Networks.
In conjunction with the recent acquisition of U.S. HealthCare by Aetna
Inc., representatives of Aetna Inc. have indicated a desire to convert the Aetna
capitated ENT managed care contract to an expanded panel (non-capitated)
modified shared risk arrangement which may be expanded to include the facility
component (inpatient and ambulatory surgery center services) as well as the
professional component (physician services) of ENT care. There can be no
assurance that such contract will remain exclusive or that such modification
will not occur and if such contract is modified, the potential economic impact
of such modification to the Company, if any, cannot be predicted. See "Risk
Factors -- Dependence on Contracts with Managed Care Organizations."
Affiliated physicians at the founding practice and independent physicians
provide ENT medical and surgical services to enrollees under the capitated
managed care contracts held by the ENT Networks pursuant to a participation
agreement with each of the ENT Networks. Pursuant to the participation
agreements, the physicians must follow established administrative procedures,
such as referring enrollees to participating providers and obtaining prior
authorization for certain medical procedures, and must participate in
utilization management and quality management programs. Each of the ENT Networks
compensate the physicians
36
<PAGE> 37
providing ENT medical and surgical services to enrollees under their capitated
managed care contract. Under the participation agreements, the physicians are
required to procure and maintain medical malpractice and general liability
insurance. The participation agreements may be terminated (i) by the respective
ENT Network without cause upon 60 days notice or with cause upon 30 days notice
and (ii) by a physician, with or without cause, upon 60 days notice. In
addition, the participation agreements automatically terminate upon the
termination of the relevant capitated managed care contract.
Based on its experience in providing ENT services on a capitated basis, the
Founding Practice, in conjunction with an independent software vendor, developed
the Capitated Network System, a comprehensive capitated administration and
utilization management system which the Company believes will enable it to
effectively analyze clinical and cost data necessary to manage capitated
arrangements and assist associated physicians in improving quality outcomes. See
"-- Information Systems."
POTENTIAL PRACTICE ACQUISITIONS
The Company is evaluating and is in various stages of discussion in
connection with the potential acquisition of assets or equity of 13 ENT and
complementary group practices, certain of which, if consummated could have a
material impact on the Company's results of operations. The 13 practices under
evaluation are located in the States of Georgia, Alabama, New Jersey and
Virginia have the following characteristics:
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF
STATE SPECIALTY PRACTICES PHYSICIANS
- ----------- ------------------- ----------
<S> <C> <C>
Georgia ENT/Sleep Medicine 8
Alabama ENT 9
New Jersey ENT 8
Virginia ENT/Allergy 5
</TABLE>
In addition, the Company has reached an agreement in principle for the
acquisition of the assets of a two physician ENT practice operating three
clinical sites in the metropolitan Atlanta area which is conditioned on the
execution of a definitive purchase agreement and, if completed, is expected to
close following the Offering and is not expected to be material to the Company's
operations. In consideration for the assets of this practice, the two physicians
will receive shares of Common Stock and will receive "piggyback" registration
rights with respect to these shares of Common Stock. Concurrently with the
closing of this acquisition, the two physicians are expected to enter into
employment agreements with the Founding Practice and the practice will become a
party to the management services agreement between the Company and the Founding
Practice.
The Company has no other agreements or arrangements with respect to the
terms of any other material acquisitions (other than the agreements with the
Founding Practice and the ENT Networks) and, accordingly, there can be no
assurance that any of the acquisitions under evaluation will be completed, as to
the terms of any such acquisition or as to the Company's ability to integrate
any additional acquisitions into its business. See "Risk Factors -- Risks
Related to Acquisitions and Managing Growth; Need for Additional Funds."
MANAGED CARE CONTRACTS
The ENT Networks entered into capitated managed care contracts with United
HealthCare, Cigna and Aetna in 1991, 1992 and 1994, respectively. The current
contract with United HealthCare is a renewal of an earlier contract and expires
in May 1998. The current contracts with Cigna and Aetna are the original
contracts and provide for automatic annual renewals. Pursuant to its capitated
managed care agreements, the ENT Networks are paid a fixed amount per enrollee
per month by the respective payors in exchange for agreeing to provide ENT
medical services required by enrollees. The contracts with Cigna and Aetna
provide for an annual renegotiation of the capitation rates and the contract
with United HealthCare provides for an annual increase in such rates based on
the percentage change of a consumer index identified in the contract. In
37
<PAGE> 38
addition, under the Cigna and Aetna managed care contracts the ENT Networks are
reimbursed for providing certain non-capitated services.
Under the managed care agreements, the ENT Networks and the participating
affiliated physicians and independent physicians are obligated, except under
certain circumstances, to refer enrollees to physicians and hospitals that have
a contractual arrangement with the payor under each contract. In addition, the
ENT Networks, the participating Founding Practice physicians and the independent
physicians are required to participate in quality management and utilization
management programs established by each payor. Quality management is the process
established by the payor to improve the quality of covered services and
utilization management is the process established to review whether certain
health care services provided to enrollees are in accordance with the
requirements established by each payor.
The managed care contracts may be terminated by either party (i) for cause,
including a material breach of the contract, generally upon 30 to 60 days notice
by the terminating party or (ii) without cause generally upon 90 to 120 days
notice by the terminating party.
NETWORK DEVELOPMENT AND MANAGEMENT
In addition to expanding through ENT and complementary specialty practice
asset acquisitions, the Company intends to develop ENT specialty provider
networks designed to enter into or provide greater access to capitated managed
care contracts with payors. These networks are expected to be comprised of ENT
specialty physicians and specialists practicing in complementary fields, such as
audiology, sleep medicine, allergy, plastic surgery and oral surgery, as well as
other health care providers. The networks are expected to include practices
managed by the Company and, eventually, independent physicians and other health
care providers engaged in ENT and related specialties and contracting with the
Company under network administration agreements. These agreements are generally
expected to provide for management of the provider panel, negotiation of managed
care agreements and performance of utilization management functions. The Company
anticipates working with specialty group practices in developing capitated
contract proposals, evaluating and assembling provider panels, negotiating
contract rate schedules and exclusions, managing utilization, and developing
provider compensation methodologies.
While the Company anticipates deriving revenue from its network development
and management activities, the Company believes the principal benefits from
including affiliated as well as independent physicians in its networks will be
the expansion and diversification of provider panels available to HMO enrollees,
as increasingly required by HMOs, and the ability of the Company to more
effectively evaluate a specialty practice prior to committing to an acquisition
of the assets of such practice.
INFORMATION SYSTEMS
The Company will support the free-standing practice management systems
utilized by the Founding Practice to facilitate patient scheduling, billing and
collection, accounts receivable, management, provider productivity analysis and
select cash disbursement functions. Rather than superseding systems utilized by
future affiliated practices, the Company intends to develop software to bridge
(or interface) an affiliated practice's systems with the Company's system in
order to streamline consolidated financial reporting, accounts receivable
management and productivity analysis functions. Additionally, the Company
anticipates providing and is evaluating the individual patient electronic
medical record system utilized by the Founding Practice for possible
implementation at future affiliated physician practices. The Company believes
that the use of this system may enhance operating efficiency through automation
of many routine functions, as well as the capacity to link "procedure specific"
treatment protocols, thereby enhancing the physician's ability to provide
cost-effective patient care.
The Company believes that effective and efficient access to key clinical
patient data is critical in controlling costs and improving quality outcomes as
the Company and the ENT Networks renew and enter into additional capitated
managed care contracts. The Company currently utilizes the Capitated Network
System, developed and enhanced by the Founding Practice in collaboration with an
unaffiliated software
38
<PAGE> 39
vendor. The Company is currently negotiating a license to any rights held by the
vendor. The Capitated Network System integrates the following five functions:
- Tracking referrals from primary care physicians
- Issuing and managing authorization for surgeries and tracking diagnoses,
procedures and admissions
- Processing claims for physician payment
- Providing extensive customized management reports (including diagnosis
and procedure utilization data)
- Maintaining support files
The emergence of managed care has increased the need for specific and
extensive information collection, analysis and management so that providers can
better demonstrate outcomes and quantify the revenues and expenses associated
with managed care contracts. The Company believes that the Capitated Network
System will allow physicians, at the point of care and on a real-time basis, to
(i) access patient-specific medical and payor information, (ii) provide
extensive customized management reports and utilization reviews, (iii) issue and
manage authorization for surgeries and (iv) track diagnoses, procedures and
admissions. As a result, the Company believes that the Capitated Network System
will provide the Company with a competitive advantage in procuring and
administering specialty capitated managed care contracts.
COMPANY OPERATIONS
The Company intends to provide management and administrative services to
associated physicians, including access to integrated management information
systems, lower cost professional liability insurance, employee benefit programs,
and capital equipment, as well as access to marketing resources and the
Capitated Network System. The Company believes its services can provide
physicians relief from administrative burdens, access to economies of scale, and
access to capital, while allowing them to focus on providing high quality and
cost-effective medical care. The Company further believes that it can enhance
growth in ENT and related specialty practices affiliating with the Company by
expanding managed care arrangements, assisting in the recruiting of new
physicians and expanding and adding services that have historically been
performed outside of such practices.
Affiliated Physicians
The relationship between the Company and its affiliated physicians will be
set forth in asset or stock acquisition agreements, management services
agreements and employment agreements. Through an asset or stock acquisition
agreement, the Company will, depending on regulatory and other factors, either
(i) acquire substantially all of the assets utilized in the practice and assume
certain liabilities, leases and other contracts of such practice or (ii) acquire
the equity of the practice. The management services agreements generally will
have an initial term of 40 years, and will provide for the Company to manage the
affiliated practice while enabling the affiliated physicians to retain their
autonomy through their professional corporations, thereby maintaining governance
of physician-specific clinical issues. Typically, the physicians in a practice
group to be acquired by the Company will sign employment agreements with the
acquired medical group providing for an initial term of five years and
containing noncompetition covenants.
Acquisition Agreements
Pursuant to an acquisition agreement, including the acquisition agreement
entered into between the Company and the Founding Practice, the Company,
generally through PSC Management, will either (i) acquire substantially all of
the assets utilized in a practice (other than certain excluded assets such as
employment agreements and patient charts, records and files) and assume certain
liabilities, leases and other contracts of the practice group or (ii) acquire
the equity of the practice. The practice to be acquired will remain liable for
the payment of excluded liabilities under the acquisition agreement. Each
acquisition agreement will provide that the medical practice to be acquired and
the stockholders of such practice, if any, will not, for a period of time
following the closing of the acquisition, compete with the Company within a
specified geographic area, will not solicit patients of the Company within such
geographic area and will not
39
<PAGE> 40
solicit employees of the Company. The acquisition agreement will also contain
standard representations and warranties and indemnification by each of the
parties to the agreement. In addition, the closing of the acquisition will be
conditioned upon, among other things, the execution and delivery of (i) an
employment agreement between select physicians affiliated with the practice to
be acquired and such practice and (ii) a management services agreement between
the Company and such practice. See "Certain Transactions."
Management Services Agreements
Pursuant to management services agreements, the Company, through PSC
Management, will act as the exclusive manager and administrator of an affiliated
practice. Upon the closing of the Offering, the Company will enter into a
management services agreement with the Founding Practice. The management
services agreements generally, and the management services agreement to be
entered into with the Founding Practice upon the consummation of the
Reorganization, will provide for the affiliated practice to assign to the
Company all or substantially all of its rights and interest in the proceeds of
its accounts receivable (or the revenue it receives). For providing services
pursuant to such agreement, the Company will retain an amount equal to the
operating and non-operating expenses of the practice (which will be paid by the
Company), a portion of the Company's non-allocable overhead, and a percentage of
the excess of the revenue assigned to the Company over such expenses. The
remaining revenues will be remitted to the affiliated practice to pay physician
compensation and benefits. See "Certain Transactions."
Under a management services agreement, the Company, among other things,
will (i) act as the exclusive manager and administrator relating to all
(non-clinical) operations of the affiliated practice, (ii) bill patients,
insurance companies and other third-party payors and collect on behalf of the
affiliated practice the fees for professional medical services and other
services and products rendered or sold by the affiliated practice, (iii)
provide, as necessary, clerical, accounting, purchasing, payroll, legal,
bookkeeping and computer services and personnel and information management
services to the affiliated practice, (iv) supervise and maintain custody of all
files and records of the affiliated practice, (v) provide facilities, furniture
and equipment for the affiliated practice, (vi) prepare all annual and capital
operating budgets of the affiliated practice, (vii) order and purchase inventory
and supplies as reasonably required by the affiliated practice, (viii) market
the services provided by the affiliated practice, (ix) provide financial and
business assistance to the affiliated practice, in the negotiation,
establishment, evaluation and administration of contracts and relationships with
managed care and other similar providers and payors and (x) perform
administrative services relating to the recruitment of physicians for the
affiliated practice.
The affiliated practice will retain the responsibility for, among other
things, (i) compensating physician employees, (ii) the payment of insurance
premiums and deductibles for professional liability insurance policies, (iii)
ensuring that affiliated physicians have the required licenses, credentials,
approvals and other certifications needed to perform their duties and (iv)
complying with certain federal and state laws and regulations applicable to the
practice of medicine. In addition, the affiliated practice will retain exclusive
control over all aspects of the practice of medicine and the delivery of medical
services.
The Company will establish an advisory board at each affiliated practice
comprised of physicians at the affiliated practice and Company management
personnel whose responsibilities will be advisory in nature. The advisory board
will review, evaluate and make recommendations to the affiliated practice and
the Company with respect to strategic and operational planning, physician
employment and recruitment, patient fees and collection policies, quality review
and the establishment and maintenance of relationships with managed care and
other similar providers and payors.
The management services agreements, generally, and the management services
agreement with the Founding Practice, will be for an initial term of 40 years,
which may be extended for separate and successive five-year terms. The
management services agreements may be terminated by either party if the other
party (i) files a petition in bankruptcy or other similar events occur or (ii)
defaults on the performance of a material duty or obligation, which default
continues without cure for a specified term after notice.
During the term of the management services agreement, the affiliated
practice will agree, with respect to management services, not to compete with
the Company and the other practices for which the Company
40
<PAGE> 41
provides management services within a specified geographic area. In addition,
during the term of the management services agreement and for a period following
the termination of such agreement, the affiliated practice will agree not to
solicit any employee of the Company or persons affiliated with the Company and
for a period following the termination of such agreement the affiliated practice
will not contract with any entity for the provision of comprehensive management
services substantially of the kind contemplated by the management services
agreement. The affiliated practice will also agree not to disclose certain
confidential and proprietary information relating to the Company and the
affiliated practice.
Physician Employment Agreements
Physicians in medical practices which enter into management services
agreements with the Company, including the Founding Practice, will typically
enter into employment agreements with the affiliated medical practice providing
for an initial term of five years, which will be automatically renewed for
successive one year terms unless an affiliated physician or the medical practice
elects not to renew the term by providing at least 90 days written notice of
such election or such agreement is otherwise terminated for cause or the death
or disability of an affiliated physician. Affiliated physicians will be paid
based upon either productivity or other negotiated formulas agreed upon between
the affiliated physician and the medical practice, and the medical practice will
provide the affiliated physicians with health, death and disability insurance
and other benefits. Affiliated physicians will be obligated to obtain and
maintain professional liability insurance coverage; however, the medical
practice will reimburse affiliated physicians for the cost of such insurance.
Pursuant to the employment agreements, affiliated physicians will agree not to
compete with the medical practice, not to solicit patients of the medical
practice and not to interfere with employees of the medical practice for a
certain period following the termination of such employment agreement unless the
agreement is terminated by the affiliated physician for cause. In addition,
affiliated physicians will agree not to disclose any confidential and
proprietary information of the medical practice during the term of the agreement
and for a certain period following the termination of the agreement.
Furthermore, under the employment agreements, affiliated physicians will assign
to the medical practice all contracts with HMOs or other managed care
arrangements and will grant an irrevocable power of attorney to the medical
practice to enter into such contracts on behalf of the physician.
COMPETITION
The physician practice management industry is highly competitive. The
restructuring of the United States health care system is leading to rapid
consolidation of the existing highly-fragmented health care delivery system into
larger and more organized groups and networks of health care providers. The
Company expects competition to increase as a result of this consolidation and
ongoing cost containment pressures among other factors. The Company will compete
with management services organizations, for-profit and nonprofit hospitals, HMOs
and other competitors seeking to form strategic alliances with physicians or
provide management services to physicians. The Company believes that the quality
of its management services, experience in developing, managing and administering
capitated managed care contracts, the breadth of its ENT medical and surgical
services provided and the utility of the Capitated Network System positions it
to compete favorably for affiliation with additional ENT and complementary group
practices.
The Company is unable to predict the extent of future competition because
of changing competitive conditions, changes in laws and regulations, government
budgeting, technological and economic developments and other factors. However,
there are certain companies, including hospitals and insurers, that are
expanding their presence in the health care industry and are significantly
larger, provide a wider variety of services, have greater experience in
providing health care management services, have longer established relationships
with customers for these services and have access to substantially greater
financial resources than the Company.
The Company believes that competition for fee-for-service revenue is
dependent upon, among other things, the Company's geographic coverage, the
reputation and referral patterns of affiliated physicians, the breadth of ENT
medical and surgical services provided and the composition of the physicians
practicing at affiliated practices and that the Company is well positioned to
compete on these bases. The Company's ability to compete successfully for
specialty capitated managed care contracts may depend upon, among other things,
the Company's ability to increase the number of associated physicians and other
health care professionals
41
<PAGE> 42
included in its network provider panel through asset or equity acquisitions of
additional specialty practices and by entering into network agreements with
independent physicians. There can be no assurance that suitable acquisitions can
be accomplished on terms favorable to the Company or that financing, if
necessary, can be obtained for such acquisitions. In addition, there can be no
assurance that the Company would be able to operate profitably any facilities,
businesses or other assets it may acquire, effectively integrate the operations
of such acquisition into its network or otherwise achieve the intended benefits
of such acquisition.
The Company's associated physicians also compete in certain markets,
including the Atlanta market, with substantial numbers of other ENT specialists
as well as general practitioners. The success of the Company is dependent upon
its ability to recruit, train and retain qualified health care professionals in
new and existing markets. The Company faces competition for these personnel from
other health care providers, research and academic institutions, government
entities and other organizations. The availability of such personnel is limited,
and the inability to recruit and maintain relationships with these individuals
in certain geographic areas could have a material adverse effect on the
Company's future growth and operations. There can be no assurance that the
Company will be successful in hiring and retaining qualified health care
professionals. The inability to retain sufficient numbers of qualified personnel
could have a material adverse effect on the Company's operations. In addition, a
shortage of skilled personnel or the delay resulting from a need to train
personnel could have a material adverse effect on the Company's business,
financial condition or operating results.
The Company, and the health care industry as a whole, face the challenge of
continuing to provide quality patient care while dealing with rising costs,
strong competition for patients and a general reduction of reimbursement rates
by both private and government payors. As both private and government payors are
reducing the scope of what may be reimbursed and reducing reimbursement levels
for covered services and products, national and state efforts to reform the
United States health care system may further impact reimbursement rates. Changes
in medical technology, existing and future legislation, regulations and
interpretations and competitive contracting for provider services by private and
government payors may require changes in the Company's facilities, equipment,
personnel, rates and/or services in the future.
GOVERNMENT REGULATION
The health care industry is highly regulated, and there can be no assurance
that the regulatory environment in which the Company operates and intends to
operate will not change significantly and adversely in the future. In general,
regulation of the health care industry, including scrutiny of the methods and
levels of payment to health care providers is increasing. The Company believes
that health care legislation, regulations and interpretations will continue to
change and, as a result, plans to routinely monitor developments in health care
law. The Company expects to modify its agreements and operations from time to
time as the business and regulatory environments change. While the Company
believes it will be able to structure all of its agreements and operations in
accordance with applicable law, the lack of definitive interpretations of many
statutory and regulatory provisions means that there can be no assurance that
the Company's arrangements are in compliance with such provisions or will not be
successfully challenged. See "Risk Factors -- Government Regulation."
Government Reimbursement Programs
Under the federal Medicare program, payment for physician services (other
than under Medicare risk contracts) is based on an annually adjusted fixed fee
schedule known as the Resource-Based Relative Value Scale ("RBRVS"). This
payment system, derived from historically customary and prevailing charge data,
is intended to reflect the relative resources required to provide a given
service as compared to another service. Fee schedule amounts are also based upon
a geographic adjustment factor and certain national conversion factors. The
RBRVS system is undergoing continual modifications and the Company anticipates
that the RBRVS fee schedule will continue to result in reductions from
historical levels in the per patient payment from the Medicare program. Because
the Company anticipates that approximately 10% of its revenues will be derived
from government-funded health care programs (principally, Medicare and
Medicaid), the Company
42
<PAGE> 43
does not believe that such reductions will result in a material adverse change
in the results of operations of the Company. The Medicaid program is a partially
federal-funded state administered program for the indigent. Payment to
physicians under state Medicaid programs is generally based upon fee schedules.
Both the Medicare and Medicaid programs are subject to statutory and regulatory
changes, retroactive and prospective rate adjustments, administrative rulings,
interpretations of policy, intermediary/carrier determinations and government
funding restrictions, all of which may materially increase or decrease the rate
of program payments to physicians and other health care practitioners.
Stark Legislation and Fraud and Abuse Laws
The Company is subject to a variety of laws and regulations governing the
referral of patients to facilities with which the referring physician has a
financial relationship. Significant prohibitions against physician referrals
were enacted by Congress in the Omnibus Budget Reconciliation Act of 1993. These
prohibitions, commonly known as "Stark II," amended prior physician
self-referral legislation known as "Stark I" by dramatically enlarging the field
of physician-owned or physician-interested entities to which the referral
prohibitions apply. Effective January 1, 1995, Stark II prohibits, subject to
certain exceptions, a physician (or a member of the physician's immediate
family) from referring Medicare or Medicaid patients for "designated health
services" to an entity with which the physician has a financial relationship.
Financial arrangements include both ownership arrangements and compensation
arrangements, including such an arrangement with the physician's own group
practice. The designated health services include clinical laboratory services,
radiology services, radiation therapy services, physical and occupational
therapy services, durable medical equipment, parenteral and enteral nutrients,
equipment and supplies, prosthetics, orthotics, outpatient prescription drugs,
home health services and inpatient and outpatient hospital services. The
penalties for violating Stark II include a prohibition on payment by Medicare or
Medicaid for services resulting from prohibited referrals, and civil penalties
of as much as $15,000 for each violative referral and $100,000 for participation
in a "circumvention scheme." The Company believes that its activities are not in
violation of Stark I or Stark II. However, the Stark legislation is broad and
ambiguous. Interpretative regulations clarifying the provisions have only been
issued with respect to Stark I (clinical laboratory services), and have not yet
been issued with respect to Stark II (the other designated health services). In
addition, a number of states have enacted similar laws which apply to referrals
made for services reimbursed by all payors, and not simply Medicare or Medicaid.
Future regulations could require the Company to modify the form of its
relationships with physician organizations. Moreover, the violation of Stark I
or II by the Company's affiliated physician organizations could result in
significant fines and loss of reimbursement which could materially adversely
affect the Company.
The Company is also subject to federal and state fraud and abuse laws.
These laws include the Medicare and Medicaid anti-kickback statute, which
prohibits, among other things, the offer, payment, solicitation or receipt of
any remuneration, directly or indirectly in return for the referral of patients,
or arranging for the furnishing of items and services that are paid for in whole
or in part by Medicare, Medicaid or other federally-funded programs. The courts
and the Office of Inspector General of The Department of Health and Human
Services have stated that the anti-kickback statute is violated if one purpose,
as opposed to a primary or sole purpose, of the arrangement is to induce
referrals. Violations of the anti-kickback statute are punishable by criminal or
civil penalties, and/or exclusion of the provider from future participation in
the Medicare, Medicaid and other federally-funded programs. The federal
government has published exemptions, or "safe harbors," for business
transactions that will be deemed not to violate the anti-kickback statute.
Although satisfaction of the requirements of these safe harbors provides
protection from enforcement action under the anti-kickback legislation, failure
to meet the safe harbors does not necessarily mean that the activity violates
the statutory prohibitions. Rather, the legality of a particular business
arrangement will be assessed by comparing the particular facts of the
transaction to the proscriptions of the statute. In addition, a number of states
have enacted similar laws, which vary from state to state, prohibiting
remuneration or fee-splitting arrangements between health care providers for the
referral of patients to a particular provider, regardless of the payor source.
Also, under separate statutes, submission of claims for payment that are "not
provided as claimed" may lead to civil money penalties, criminal fines and
imprisonment and/or exclusion from participation in the Medicare, Medicaid and
other federally-funded health care programs. These false claims
43
<PAGE> 44
statutes include the Federal False Claims Act, which allows any person to bring
suit alleging false or fraudulent Medicare or Medicaid claims or other
violations of the statute and to share in any amounts paid by the entity to the
government in fines or settlement. Such qui tam actions have increased
significantly in recent years and have increased the risk that a health care
company will have to defend a false claims action, pay fines or be excluded from
participation in the Medicare and/or Medicaid programs as a result of an
investigation arising out of such an action. Recently, Congress enacted the
Health Insurance Portability and Accounting Act of 1996, which includes an
expansion of certain fraud and abuse provisions to other federal health care
programs. Due to the breadth of the statutory provisions of the Fraud and Abuse
Laws and the absence of definitive regulations or court decisions addressing the
type of arrangements by which the Company and its affiliated entities conduct
and will conduct their business, from time to time certain of their practices
may be subject to challenge under these laws.
The Company has attempted to structure its business relations to comply
with the Stark Legislation, the Fraud and Abuse Laws and all other applicable
health care laws and regulations. However, there can be no assurance that such
laws will be interpreted in a manner consistent with the Company's practices.
There can be no assurance that challenges under such laws or regulations or new
laws or regulations will not require the Company or its affiliated entities to
change their practices or will not have a material adverse effect on the
Company's business, financial condition or operating results. In addition, state
legislatures and other governmental entities are considering additional measures
restricting or regulating referrals, and there can be no assurance that new laws
or regulations will not be enacted which will require restructuring of the
Company's operations or otherwise have a material adverse effect on the
Company's business, financial conditions or operating results.
Health Care Reform
Political, economic and regulatory influences are subjecting the health
care industry in the United States to fundamental change. Changes in the law,
new interpretations of existing laws, or changes in payment methodology or
amounts, may have a dramatic effect on the relative costs associated with doing
business and the amount of reimbursement by government and other third party
payors. In addition to specific health care legislation, both the President and
the Congress have expressed an interest in controlling the escalation of health
care expenditures and using health care reimbursement policies to help control
the federal deficit. In recent years, there have been numerous initiatives on
the federal and state levels for comprehensive reforms affecting the payment for
and availability of health care services. For example, in 1995, Congress passed
legislation to reduce significantly Medicare and Medicaid expenditures over
seven years, which would have cut payments to health care providers
participating in the Medicare and Medicaid programs. Although President Clinton
vetoed this legislation, the administration's counterproposal would have
included similar, although less drastic, Medicare and Medicaid payment
reductions. The Company anticipates that federal and state governments will
continue to review and assess alternative health care delivery systems and
payment methodologies, and public debate of these issues will likely continue in
the future. Due to uncertainties regarding the ultimate features of reform
initiatives and their enactment and implementation, the Company cannot predict
which, if any, of such reform proposals will be adopted, when they may be
adopted or what impact they may have on the Company, and there can be no
assurance that the adoption of reform proposals will not have a material adverse
effect on the Company's business, operating results or financial conditions. In
addition, the actual announcement of reform proposals and the investment
community's reaction to such proposals, as well as announcements by competitors
and third-party payors of their strategies to respond to such initiatives, could
produce volatility in the trading and market price of the Common Stock. In
addition, some states in which the Company may operate in the future are
considering various health care reform proposals.
Other Licensing Requirements
Every state imposes licensing requirements on individual physicians, and
some regulate facilities and services operated by physicians. In addition, many
states require physicians to obtain regulatory approval, including certificates
of need, before establishing certain types of health care facilities, offering
certain
44
<PAGE> 45
services, or making certain capital expenditures in excess of statutory
thresholds for health care equipment, facilities or services. To date, the
Company and the Founding Practice have not been required to obtain certificates
of need or similar approvals for their activities. In connection with the
expansion of its operations into new markets and contracting with managed care
companies, the Company and its affiliated practices may become subject to
compliance with additional regulations. Finally, the Company and its affiliated
practices are subject to federal, state and local laws dealing with issues such
as occupational safety, employment, medical leave, insurance regulation, civil
rights and discrimination, medical waste and other environmental issues.
Increasingly, federal, state and local governments are expanding the regulatory
requirements for businesses, including medical practices. The imposition of
these regulatory requirements may have the effect of increasing operating costs
and reducing the profitability of the Company's operations.
Restrictions on Corporate Practice of Medicine
The laws of certain states in which the Company operates or may operate in
the future prohibit nonphysician entities from practicing medicine, exercising
control over physicians or engaging in certain practices such as fee-splitting
with physicians. Although the Company has structured its affiliations with
physician groups so that the associated physicians maintain exclusive authority
regarding the delivery of medical care, there can be no assurance that these
laws will be interpreted in a manner consistent with the Company's practices or
that other laws or regulations will not be enacted in the future that could have
a material adverse effect on the Company's business. If a corporate practice of
medicine law is interpreted in a manner that is inconsistent with the Company's
practices, the Company would be required to restructure or terminate its
relationship with the applicable physician group in order to bring its
activities into compliance with such law. The termination of, or failure of the
Company to successfully restructure, any such relationship could result in fines
or a loss of revenue that could have a material adverse effect on the Company's
business, financial condition or operating results.
LIABILITY AND INSURANCE
The provision of health care services entails the risk of potential claims
of medical malpractice and similar claims. The Company does not, itself, engage
in the practice of medicine or have responsibility for compliance with
regulatory requirements directly applicable to physicians and requires
affiliated physicians performing medical services at its facilities to maintain
medical malpractice insurance. Nevertheless, malpractice claims may be asserted
against the Company directly in the event that services rendered by the Company
or procedures performed at one of the Company's facilities are alleged to have
resulted in injury or other adverse effects. Although the Company intends, upon
consummation of the Reorganization, to obtain liability insurance that it
believes will be adequate as to both risk and amounts, successful malpractice
claims could exceed the limits of the Company's insurance and could have a
material adverse effect on the Company's business, financial condition or
operating results. Moreover, a malpractice claim asserted against the Company
could be costly to defend, could consume management resources and could
adversely affect the Company's reputation and business, regardless of the merit
or eventual outcome of such claim. In addition, there can be no assurance that
the Company will be able to obtain such insurance on commercially reasonable
terms in the future or that any such insurance will provide adequate coverage
against potential claims. See "Risk Factors -- Liability and Insurance, Legal
Proceedings."
The Company will require each associated physician or group to obtain and
maintain professional liability insurance coverage. Such insurance would provide
coverage, subject to policy limits in the event the Company were held liable as
a co-defendant in a lawsuit for professional malpractice against a physician. In
addition, the Company generally is indemnified under the management agreements
by the affiliated physician groups for liabilities resulting from the
performance of medical services.
EMPLOYEES
Upon the closing of the Offering and the consummation of the
Reorganization, the Company will have approximately 124 full-time employees. The
Company intends to hire additional management and administra-
45
<PAGE> 46
tion personnel, including a chief financial officer. None of the Company's
employees is represented by a labor union and the Company believes its relations
with its employees are satisfactory.
PROPERTIES
The Company currently shares office space with the Founding Practice
pursuant to an oral agreement under which the Company does not pay rent and
anticipates leasing approximately 2,500 square feet of office space for its
executive office in Atlanta, Georgia. The lease will provide for annual rent of
approximately $50,000 during 1997, subject to specified annual increases. Upon
closing of the Offering and consummation of the Reorganization, the Company will
assume the leases for the 14 facilities currently used by the Founding Practice
which have varying remaining terms ranging from three months to 13 years and six
months and aggregate annual rent of approximately $850,000. In addition, the
Founding Practice has entered into a five-year lease for an additional facility,
the construction of which is expected to be completed by June 1997. The lease
provides for annual rent of approximately $55,000 and will be assumed by the
Company upon closing of the Offering and the Reorganization. The Company
believes that the shared office space, together with the office space it
anticipates leasing and the assumed leases will be suitable for the current and
anticipated needs of the Company, the Founding Practice and the ENT Networks.
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
46
<PAGE> 47
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the names, ages and positions of the
executive officers and directors of the Company and the persons expected to
become executive officers or directors of the Company upon completion of the
Offering:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------- --- -------------------------------------------
<S> <C> <C>
Ramie A. Tritt, M.D........................ 47 Chairman of the Board and President
Gerald R. Benjamin(2)...................... 38 Vice Chairman of the Board, Secretary and
Director
Richard D. Ballard(1)...................... 48 Chief Executive Officer and Director
Lawrence P. Kraska......................... 32 Vice President -- Operations(3)
Edward R. Casas, M.D.(1)(2)................ 36 Director
Steven L. Posar, M.D.(1)(2)................ 47 Director(3)
</TABLE>
- ---------------
(1) Member of Compensation Committee
(2) Member of Audit Committee
(3) Effective upon completion of the Offering
Ramie A. Tritt, M.D. has served as the Chairman of the Board and President
of the Company since its inception in July 1996. Dr. Tritt serves as President
of the Founding Practice, a multi-site otolaryngology group practice which is a
successor to a practice founded by Dr. Tritt in 1979. Dr. Tritt was a founding
Member and currently serves as President of Georgia Multi-Specialty Group,
L.L.C., a consortium of 15 specialty group practices, encompassing approximately
650 physicians, which contracts with payors for specialty medical services
throughout metropolitan Atlanta. Dr. Tritt also serves as President and Medical
Director of the ENT Center of Atlanta, Inc., Atlanta ENT Center for Physicians,
Inc., and Atlanta AHP, Inc., three otolaryngology provider networks (comprising
the ENT Networks) established to contract with HMOs in greater Atlanta.
Gerald R. Benjamin has served as Vice Chairman and Secretary of the Company
since its inception in July 1996. Mr. Benjamin serves as Chief Executive Officer
of Premier HealthCare, a division of Bock, Benjamin & Co., a boutique health
care investment banking concern which Mr. Benjamin co-founded in 1993. Prior to
founding Bock, Benjamin & Co., Mr. Benjamin served as Chief Executive Officer of
Premier HealthCare, Inc., a health care venture development and management firm
which Mr. Benjamin co-founded in 1991. Prior to co-founding Premier HealthCare,
Inc., Mr. Benjamin served for ten years as Managing Partner and Director of
Corporate Finance Services for Williams, Benjamin, Benator & Libby, an Atlanta,
Georgia-based Certified Public Accounting firm.
Richard D. Ballard has served as the Chief Executive Officer and a director
of the Company since November 1996. Prior to joining the Company, Mr. Ballard
served as Vice President of Recruiting for Physicians' Online, Inc., founding an
intranet physician recruiting service. Prior to joining Physicians' Online in
September 1995, Mr. Ballard served as Executive Vice President, President and
Chief Executive Officer of Allegiant Physician Services, Inc. (formerly Premier
Anesthesia, Inc.). Prior to joining Premier Anesthesia in 1988, Mr. Ballard
served for six years as Executive Vice President of Jackson & Coker Inc., a
national physician recruiting firm and for seven years as director of national
recruiting for Spectrum Emergency Care Inc.
Lawrence P. Kraska will become the Vice President-Operations of the Company
concurrently with the completion of the Offering. Mr. Kraska has served as the
Administrator of the Founding Practice, since June 1994. Prior to joining the
Founding Practice, Mr. Kraska provided hospital administration, physician
recruiting and practice management services as the Regional Director of
Professional Relations for the Atlanta division of National Medical Enterprises
from July 1993 to May 1994, for Charter Medical Corporation --
47
<PAGE> 48
Charter Peachford Hospital from September 1992 to June 1993 and as the
Administrator for The Center For Psychiatry, a large multi-specialty mental
health group practice, from March 1990 to August 1992.
Edward R. Casas, M.D. has served as a director of the Company since
November 1996. Dr. Casas is President of PrimeCare International, Inc., a
California-based multi-site primary care physician practice management concern.
Prior to joining PrimeCare in September of 1996, Dr. Casas served as Vice
President of Mergers and Acquisitions for the Physician Practice Management
Division of Caremark International Inc. Prior to joining Caremark International
in December 1992, Dr. Casas completed his active duty service as a designated
Flight Surgeon in support of Marine special operations and as a clinical
Departmental Head in Aerospace Medicine in the United States Navy. Prior to
completing his medical training, Dr. Casas was Executive Vice President of CES
Corporation, an investment banking concern. Dr. Casas is a graduate of
Northwestern University's Medical School and Kellogg Graduate School of
Management where he concurrently earned a Medical Doctorate, a Masters of
Management and a Masters in Public Health.
Steven L. Posar, M.D. will become a director of the Company concurrently
with the completion of the Offering. Dr. Posar currently serves as Senior Vice
President, Operations Group of AHI HealthCare Systems, Inc., a publicly traded
independent physician management company. Prior to joining AHI in 1991, Dr.
Posar served as Medical Director of Blue Cross of California, a managed care
payor with approximately 2.5 million enrollees in sponsored HMO and preferred
provider organization plans. Prior to joining Blue Cross of California, Dr.
Posar spent three years as Chief of Cigna Medical Center, and staff medical
director of Cigna Healthplan of Los Angeles, a staff model HMO with
approximately 450,000 enrollees. Dr. Posar received his M.D. degree from
Michigan State University.
Dr. Tritt and Mr. Benjamin were elected as directors of the Company
pursuant to an agreement entered into in connection with the formation of the
Company. See "Certain Transactions."
All directors hold office until the next annual meeting of stockholders or
until their successors are elected and qualified; vacancies and any additional
positions created by board action are filled by action of the existing Board of
Directors. Officers are elected to serve, subject to the discretion of the Board
of Directors, until their successors are appointed.
The Company has agreed for the five year period commencing upon
consummation of the Offering, to nominate, if requested by Barington Capital
Group, L.P., ("Barington") and use its best efforts (including the solicitation
of proxies) to elect one designee of Barington to the board of directors of the
Company. No designee has been chosen as of the date hereof.
The Board of Directors has established a Compensation Committee and an
Audit Committee. Upon completion of the Offering, the Compensation Committee
will consist of three directors. 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 Company's stock
option plans.
Upon completion of the Offering, the Audit Committee will consist of three
directors. The Audit Committee is authorized to review, with the Company's
independent accountants, the scope and timing of audit services and any other
services that the accountants are asked to perform, their report on the
Company's financial statements following completion of their audit and the
Company's policies and procedures with respect to internal accounting and
financial controls. In addition, the Audit Committee makes annual
recommendations to the Board of Directors for the appointment of independent
public accountants for the ensuing year.
DIRECTOR COMPENSATION
Directors who are not officers or employees of the Company ("Independent
Directors") are entitled to compensation of $1,500 for each Board of Directors
meeting attended and are reimbursed for expenses actually incurred in connection
with attending such meetings. Independent Directors are also awarded initial
grants of non-qualified stock options to purchase 7,500 shares of Common Stock
upon joining the Board of
48
<PAGE> 49
Directors and annual grants of non-qualified stock options to purchase 2,500
shares of Common Stock. All options are granted at the then fair market value.
See "-- Stock Option Plans" and "Certain Transactions."
LIMITATION ON LIABILITY; INDEMNIFICATION AGREEMENTS
The General Corporation Law of the State of Delaware permits a corporation
through its Certificate of Incorporation to eliminate the personal liability of
its directors to the corporation or its stockholders for monetary damages for
breach of fiduciary duty of loyalty and care as a director, with certain
exceptions. The exceptions include a breach of the director's duty of loyalty,
acts or omissions not in good faith or which involve intentional misconduct or
knowing violation of law, improper declarations of dividends, and transactions
from which the directors derived an improper personal benefit. The Company's
Certificate of Incorporation exonerates its directors from monetary liability to
the fullest extent permitted by this statutory provision but does not restrict
the availability of non-monetary and other equitable relief. The Company's By-
Laws provide that the Company shall indemnify its directors and officers to the
fullest extent permitted by Delaware Law. See "Description of Capital Stock."
The Company also intends to enter into Indemnification Agreements with each
of its directors and executive officers. Each such Indemnification Agreement
will provide that the Company will indemnify the indemnitee against expenses,
including reasonable attorney's fees, judgments, penalties, fines and amounts
paid in settlement actually and reasonably incurred by him in connection with
any civil or criminal action or administrative proceeding arising out of the
performance of his duties as an officer, director, employee or agent of the
Company. Such indemnification will be available if the acts of the indemnitee
were in good faith, if the indemnitee acted in a manner he reasonably believed
to be in or not opposed to the best interests of the Company and, with respect
to any criminal proceeding, the indemnitee had no reasonable cause to believe
his conduct was unlawful.
EXECUTIVE COMPENSATION
As the Company was not organized until July 1996, the Company did not
accrue or pay any compensation to any of its executive officers in the year
ended December 31, 1995 or to date. Compensation to executive officers will be
governed by employment agreements between the Company and such executive
officers.
EMPLOYMENT AGREEMENTS
On November 26, 1996, the Company entered into employment agreements with
Ramie A. Tritt, M.D., Richard D. Ballard and Gerald R. Benjamin (effective as of
the date of this Prospectus with respect to each of Dr. Tritt and Mr. Benjamin).
Pursuant to the employment agreements, Dr. Tritt, Mr. Ballard and Mr. Benjamin
have agreed to serve as the Company's President, Chief Executive Officer and
Vice-Chairman, respectively. The employment agreements with Dr. Tritt, Mr.
Ballard and Mr. Benjamin, provide for an initial term of five, three and three
years, respectively, with automatic renewals for successive one year terms
unless terminated by either party.
The employment agreement with Dr. Tritt provides for an annual base salary
of $350,000 plus an annual bonus of up to 50% of his base salary, to be approved
by the Board of Directors, in consideration of his devoting approximately 50% of
his business time each week to serving as the President of the Company. The
agreement acknowledges that the remaining 50% of Dr. Tritt's business time each
week will be spent performing ENT medical and surgical services at the Founding
Practice for which time Dr. Tritt will be separately compensated. The employment
agreement with Dr. Tritt provides for increases in Dr. Tritt's annual base
salary, subject to approval of the Board of Directors, if the amount of time he
devotes as President of the Company is greater than anticipated. Upon the
consummation of the Reorganization, Dr. Tritt will also enter into an employment
agreement with the Founding Practice. The employment agreement with Mr. Ballard
provides for an annual base salary of $150,000 plus an annual bonus of up to 50%
of his base salary, to be approved by the Board of Directors. The employment
agreement with Mr. Benjamin provides that he will
49
<PAGE> 50
work part-time for the Company and will receive an annual base salary of $60,000
plus an annual bonus of up to 50% of his base salary, to be approved by the
Board of Directors.
Each employment agreement provides for termination of the executive's
employment by the Company prior to the expiration of its term in the event of
the executive's death or disability or for cause. Each employment agreement also
provides that either party may terminate the employment agreement, effective at
the end of the term or any renewal term, upon 60 days notice of termination. The
Company may terminate each employment agreement without cause and, upon such
termination, the executive will be entitled to receive his base salary for a
period of one year following the date of termination (subject to a 100% offset
for salary received from subsequent employment during such one year period
(subject to certain exclusion in the case of Dr. Tritt and Mr. Benjamin)). In
addition, each employment agreement provides that the executive may terminate
his employment agreement upon a change of control of the Company by providing at
least 30 days notice of termination. Upon termination of the employment
agreement following a change of control, the executive will be entitled to
severance compensation in the amount of two times his taxable compensation for
the previous fiscal year.
Pursuant to the employment agreements, each of the executives has agreed
not to compete with the Company, solicit any of the Company's customers or
employees or disclose any confidential information or trade secrets during the
term of their employment agreement and for certain periods of time following the
termination of such employment agreement.
STOCK OPTION PLANS
1996 STOCK OPTION PLAN
GENERAL
In November 1996, the Board of Directors adopted and the Company's
stockholders approved the 1996 Stock Option Plan (the "1996 Plan"), under which
550,000 shares of the Company's authorized but unissued Common Stock are
authorized for issuance pursuant to the grant by the Company of options to
officers, directors, employees, consultants and independent contractors of the
Company. The purposes of the 1996 Plan are to ensure the retention of existing
executive personnel, key employees, directors and consultants of the Company, to
attract and retain competent new executive personnel, key employees, directors
and consultants and to provide additional incentive to all such persons by
permitting them to participate in the ownership of the Company. The 1996 Plan
terminates in November 2006.
The 1996 Plan will be administered by the Board of Directors or a committee
of the Board of Directors. The 1996 Plan provides for automatic grants of
options to certain directors in the manner set forth below under "Directors'
Options."
Options granted under the 1996 Plan may be either incentive options or
non-qualified options. Incentive options granted under the 1996 Plan are
exercisable for a period of up to 10 years from the date of grant at an exercise
price which is not less than the fair market value of the Common Stock on the
date of the grant, except that the term of an incentive option granted under the
Plan to a stockholder owning more than 10% of the outstanding voting power of
the Company may not exceed five years and its exercise price may not be less
than 110% of the fair market value of the Common Stock on the date of the grant.
To the extent that the aggregate fair market value, as of the date of grant, of
the shares for which incentive options become exercisable for the first time by
an optionee during the calendar year exceeds $100,000, the portion of such
option which is in excess of the $100,000 limitation will be treated as a
non-qualified option. Only employees of the Company or a subsidiary of the
Company shall be eligible to receive incentive options. Additionally, the
aggregate number of shares of Common Stock that may be subject to options
granted to any person in a calendar year shall not exceed 35% of the maximum
number of shares of Common Stock which may be issued from time to time under the
1996 Plan. Options granted under the 1996 Plan to officers, directors or
employees of the Company may be exercised only while the optionee is employed or
retained by the Company or within 90 days of the date of termination of the
employment relationship or directorship. However, options which are exercisable
at the time of termination by reason of death or permanent disability of the
optionee may be exercised within 12 months of the date of termination of the
employment relationship or directorship.
50
<PAGE> 51
Upon the exercise of an option, payment may be made by cash or by any other
means that the Board of Directors or the committee determines.
As of November 30, 1996, the number of employees, officers and directors of
the Company eligible to receive grants under the 1996 Plan was approximately six
persons. The number of consultants and advisors to the Company eligible to
receive grants under the 1996 Plan is not determinable. An optionee may be
granted more than one option under the 1996 Plan. The Board of Directors or the
committee will, in its discretion, determine (subject to the terms of the 1996
Plan) who will be granted options, the time or times at which options shall be
granted, the number of shares subject to each option and whether the options are
incentive options or non-qualified options. In making such determination,
consideration may be given to the value of the services rendered by the
respective individuals, their present and potential contributions to the success
of the Company and its subsidiaries and such other factors deemed relevant in
accomplishing the purpose of the 1996 Plan.
Under the 1996 Plan, the optionee has none of the rights of a stockholder
with respect to the shares until such shares are issued upon the exercise of the
option. No adjustment shall be made for dividends or distributions or other
rights for which the record date is prior to the date of exercise, except as
provided in the 1996 Plan. During the lifetime of the optionee, an option shall
be exercisable only by the optionee. No option may be sold, pledged, assigned,
hypothecated, transferred or disposed of in any manner other than by will or by
the laws of decent and distribution.
The Board of Directors may amend or terminate the 1996 Plan except that
stockholder approval is required for certain amendments to the 1996 Plan. No
action taken by the Board may materially and adversely affect any outstanding
option grant without the consent of the optionee.
Under current tax law, there are no Federal income tax consequences to
either the employee or the Company on the grant of non-qualified options if
granted under the terms set forth in the 1996 Plan. Upon exercise of a
non-qualified option, the excess of the fair market value of the shares subject
to the option over the option price (the "Spread") at the date of exercise is
taxable as ordinary income to the optionee in the year it is exercised and is
deductible by the Company as compensation for Federal income tax purposes, if
Federal income tax is withheld on the Spread. However, if the shares are subject
to vesting restrictions conditioned on future employment or the holder is
subject to the short-swing profits liability restrictions of Section 16(b) of
the Securities and Exchange Act of 1934 (the "Exchange Act") of (i.e., is an
executive officer, director or 10% stockholder of the Company) then taxation and
measurement of the Spread is deferred until such restrictions lapse, unless a
special election is made under Section 83(b) of the Code to report such income
currently without regard to such restrictions. The optionee's basis in the
shares will be equal to the fair market value on the date taxation is imposed
and the holding period commences on such date.
Incentive option holders incur no regular Federal income tax liability at
the time of grant or upon exercise of such option, assuming that the optionee
was an employee of the Company from the date the option was granted until 90
days before such exercise. However, upon exercise, the Spread must be added to
regular Federal taxable income in computing the optionee's "alternative minimum
tax" liability. An optionee's basis in the shares received upon exercise of an
incentive stock option will be the option price of such shares for regular
income tax purposes. No deduction is allowable to the Company for Federal income
tax purposes in connection with the grant or exercise of such option.
If the holder of shares acquired through exercise of an incentive option
sells such shares within two years of the date of grant of such option or within
one year from the date of exercise of such option (a "Disqualifying
Disposition"), the optionee will realize income taxable at ordinary rates.
Ordinary income is reportable during the year of such sale equal to the
difference between the option price and the fair market value of the shares at
the date the option is exercised, but the amount includable as ordinary income
shall not exceed the excess, if any, of the proceeds of such sale over the
option price. In addition to ordinary income, a Disqualifying Disposition may
result in taxable income subject to capital gains treatment if the sales
proceeds exceed the optionee's basis in the shares (i.e., the option price plus
the amount includable as ordinary income). The amount of the optionee's taxable
ordinary income will be deductible by the Company in the year of the
Disqualifying Disposition.
51
<PAGE> 52
At the time of sale of shares received upon exercise of an option (other
than a Disqualifying Disposition of shares received upon the exercise of an
incentive option), any gain or loss is deemed long-term or short-term capital
gain or loss, depending upon the holding period. The holding period for
long-term capital gain or loss treatment is more than one year.
The foregoing is not intended to be an exhaustive analysis of the tax
consequences relating to stock options issued under the 1996 Plan. For instance,
the treatment of options under state and local tax laws, which is not described
above, may differ from the treatment for Federal income tax purposes.
As of November 27, 1996, 227,500 options have been granted under the 1996
Plan at an exercise price of $6.80 per share, of which 165,000, 55,000 and 7,500
options were granted to Mr. Ballard, Mr. Kraska and Dr. Casas, respectively. As
of November 27, 1996, 41,250 and 13,750 of the options granted to Mr. Ballard
and Mr. Kraska, respectively, have vested and all of the options granted to Dr.
Casas have vested. 7,500 options have been granted to Dr. Posar, effective upon
completion of the Offering, at an exercise price equal to the initial public
offering price, all of which will vest on the closing date.
Directors' Options
The 1996 Plan provides for the automatic grant of non-qualified stock
options to purchase shares of Common Stock ("Director Options") to directors of
the Company who are not employees or principal stockholders of the Company
("Eligible Directors"). Eligible Directors of the Company elected after the date
hereof will be granted Director Options to purchase 7,500 shares of Common Stock
on the date they are first elected or appointed a director (an "Initial Director
Option"). Further, commencing on the day immediately following the date of the
annual meeting of stockholders for the Company's fiscal year ending December 31,
1997, each Eligible Director, other than directors who received an Initial
Director Option since the last annual meeting, will be granted Director Options
to purchase 2,500 shares of Common Stock ("Automatic Grant") on the day
immediately following the date of each annual meeting of stockholders, as long
as such director is a member of the Board of Directors. The exercise price for
each share subject to a Director Option shall be equal to the fair market value
of the Common Stock on the date of grant. Director Options will expire the
earlier of 10 years after the date of grant or 90 days after the termination of
the director's service on the Board of Directors.
1996 HEALTH CARE PROFESSIONALS STOCK OPTION PLAN.
In November, 1996, the Company adopted the 1996 Health Care Professionals
Stock Option Plan (the "1996 Professionals Plan"), under which 275,000 shares of
the Company's authorized but unissued Common Stock are authorized for issuance
pursuant to the grant by the Company of options to physicians or dentists who
are employed by the Company's affiliated practices or who provide medical and
surgical services to enrollees of managed care contracts held by the Company.
The purposes of the 1996 Professionals Plan are to ensure the retention of
existing physicians and dentists, to attract and retain competent new physicians
and to provide additional incentive to all such persons by permitting them to
participate in the ownership of the Company. The 1996 Professionals Plan
terminates in November 2006.
The 1996 Professionals Plan will be administered by the Board of Directors
or a committee of the Board of Directors. Options granted under the 1996
Professionals Plan will be non-qualified options and will vest over a period of
five years. Generally, such options will expire upon the termination of
employment or the advisory or consultant relationship with the Company or on the
day prior to the 10th anniversary of the date of grant, whichever occurs first.
The options granted under the 1996 Professionals Plan will be exercisable at an
exercise price which is not less than the fair market value of the Common Stock
on the date of grant.
As of November 27, 1996, no options under the 1996 Professionals Plan have
been granted.
52
<PAGE> 53
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the ownership
of Common Stock for (i) each person known by the Company to own beneficially
more than five percent of the outstanding voting stock, (ii) each director and
named executive officer of the Company and (iii) all executive officers and
directors of the Company as a group, prior to the Offering and as adjusted to
give effect to the sale of the Common Stock offered hereby and the issuance of
the Common Stock in connection with the Reorganization.
<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES
NUMBER OF SHARES BENEFICIALLY
BENEFICIALLY OWNED(2) OWNED(2)
---------------------- -------------------
NAME AND ADDRESS OF BEFORE AFTER BEFORE AFTER
BENEFICIAL OWNER(1) OFFERING OFFERING OFFERING OFFERING
- ------------------------------------------------------ -------- --------- -------- --------
<S> <C> <C> <C> <C>
Ramie A. Tritt, M.D.(3)............................... 286,225 1,629,952 51.0% 30.6%
Bock, Benjamin & Co., Partners(4)..................... 275,000 275,000 49.0 5.2
3414 Peachtree Road
Suite 238
Atlanta, Georgia 30326
Gerald R. Benjamin(4)................................. 275,000 275,000 49.0 5.2
Richard D. Ballard(5)................................. 41,250 41,250 6.8 *
Lawrence P. Kraska(6)................................. 13,750 13,750 2.4 *
Edward R. Casas, M.D.(7).............................. 7,500 7,500 1.3 *
Steven L. Posar, M.D.(8).............................. -- 7,500 -- *
Michael J. Pickford, M.D.(9).......................... -- 296,270 -- 5.6
Keith R. Jackson, M.D.(9)............................. -- 278,704 -- 5.2
All executive officers and directors of the Company as
a group (6 persons)(10)............................. 623,725 1,974,952 100.0% 36.6%
</TABLE>
- ---------------
* Less than 1%
(1) Unless otherwise indicated, the address is c/o Physicians' Specialty Corp.,
The Medical Quarters, 5555 Peachtree Dunwoody Road, Suite 235, Atlanta,
Georgia 30342. Except as otherwise indicated, each of the parties listed
above has sole voting and investment power over the shares owned.
(2) In computing the number and percentage ownership of shares beneficially
owned by a person, shares of Common Stock subject to options held by that
person that are exercisable within 60 days are deemed outstanding. Such
shares, however, are not deemed outstanding for purposes of computing the
percentage ownership of stockholders other than such person.
(3) Includes 1,343,727 shares to be issued or distributed to Dr. Tritt, the
Chairman of the Board and President of the Company, in connection with the
Reorganization, based upon an assumed initial public offering price of
$9.50 per share. The Company will issue an aggregate of 2,767,500 shares of
Common Stock in connection with the Reorganization and the number of shares
to be issued to be allocated between the Founding Practice and the ENT
Networks, and accordingly, to be issued or distributed to Dr. Tritt, are
subject to adjustment. See "The Reorganization" and "Certain Transactions."
(4) Mr. Benjamin, the Vice Chairman of the Board and Secretary of the Company,
is a partner in Bock, Benjamin & Co., Partners. Mr. Benjamin may be deemed
to beneficially own these shares of Common Stock.
(5) Represents shares of Common Stock issuable upon exercise of options that are
immediately exercisable. Excludes 123,750 shares of Common Stock issuable
upon exercise of options which are not exercisable within 60 days.
(6) Represents shares of Common Stock issuable upon exercise of options that are
immediately exercisable. Excludes 41,250 shares of Common Stock issuable
upon exercise of options which are not exercisable within 60 days.
(7) Represents shares of Common Stock issuable upon exercise of options that are
immediately exercisable.
(8) Represents shares of Common Stock issuable upon exercise of options which
have been granted, effective upon completion of the Offering, that are
immediately exercisable.
53
<PAGE> 54
(9) Represents shares of Common Stock to be issued to such stockholder in
connection with the acquisition of the Founding Practice, based upon an
assumed initial public offering price of $9.50 per share and upon such
stockholder's percentage ownership of the Founding Practice. See "The
Reorganization" and "Certain Transactions."
(10) Includes 62,500 shares of Common Stock issuable upon exercise of options
that are immediately exercisable. In addition, upon completion of the
Offering, includes 7,500 shares of Common Stock issuable upon exercise of
options granted to Dr. Posar that are immediately exercisable. Excludes
165,000 shares of Common Stock issuable upon exercise of options which are
not exercisable within 60 days.
54
<PAGE> 55
CERTAIN TRANSACTIONS
FORMATION TRANSACTIONS
In connection with the formation of the Company in July 1996, Ramie A.
Tritt, M.D. and Bock, Benjamin & Co., Partners, a partnership in which Gerald R.
Benjamin, the Company's Vice Chairman and Secretary, is a partner, each
purchased 275,000 shares of Common Stock at a purchase price of approximately
$.0018 per share. In November 1996, Dr. Tritt purchased an additional 11,225
shares of Common Stock at a purchase price of approximately $.0042 per share.
Dr. Tritt and Bock, Benjamin & Co., Partners have "piggyback" registration
rights with respect to the shares of Common Stock held by them.
In July 1996, the Founding Practice, Dr. Tritt, Mr. Benjamin and two
entities whose principal stockholders were former directors of the Company (the
"Former Directors") loaned $170,500, $33,500, $33,500 and an aggregate of
$247,500, respectively, to the Company for legal, accounting and other fees in
connection with the formation of the Company, the Offering and the
Reorganization. The loans are evidenced by promissory notes bearing interest at
a prime rate as announced by NationsBank, and payable on the closing of the
Offering. The Company has agreed in principle to enter into a termination
agreement which provides for approximately $77,472 of the loans made by the
Former Directors to be paid upon execution of such agreement and the outstanding
balance of such loans to be paid at the closing of the Offering. In addition, at
the closing of the Offering, the Company will pay $250,000 to Premier
HealthCare, a corporation of which Mr. Benjamin is a principal, for consulting
services in connection with the formation of the Company, the Offering and the
Reorganization. See "Use of Proceeds."
THE REORGANIZATION
Concurrently with the closing of the Offering, the Company will acquire
substantially all of the assets of the Founding Practice and will acquire all of
the outstanding shares of common stock of ENT Networks from Dr. Tritt (the
"Seller"). In connection with the Reorganization, the Company will issue an
aggregate of 2,767,500 shares of Common Stock to the Founding Practice and to
the Seller. The allocation of such shares between the Founding Practice and the
Seller will be based upon the initial public offering price of the Common Stock,
with the number of shares of Common Stock issuable to the Seller to equal
$7,750,000 divided by the initial public offering price and the remainder
issuable to the Founding Practice. Based upon an assumed initial public offering
price of $9.50 per share, the Seller will receive 815,789 shares of Common Stock
and the Founding Practice will receive 1,951,711 shares of Common Stock (of
which 527,938 will be distributed to Dr. Tritt, based on his percentage
ownership of the Founding Practice).
The assets of the Founding Practice will be acquired pursuant to an Asset
Acquisition Agreement, dated as of November 25, 1996, by and among PSC
Management, the Company, the Founding Practice and the Acquisition Stockholders,
(the "Asset Acquisition Agreement"). The Asset Acquisition Agreement provides
for the Company, through PSC Management, to acquire, on the closing date of the
Offering, substantially all of the assets (other than certain excluded assets
such as employment agreements and patient charts, records and files) and
liabilities (other than certain excluded liabilities) of the Founding Practice.
The Founding Practice will remain liable for the payment of excluded
liabilities, if any, under the Asset Acquisition Agreement. The Asset
Acquisition Agreement provides that all of the non-physician employees of the
Founding Practice will be offered employment with PSC Management upon the
closing of the acquisition. Under the Asset Acquisition Agreement, the Founding
Practice and the Acquisition Stockholders have agreed that for a period of five
years following the closing of the acquisition they will not compete with the
Company within an eight mile radius of any of the primary offices of the
Founding Practice (the "Geographic Territory"), will not solicit customers of
the Company within the Geographic Territory and will not solicit employees of
the Company.
The Asset Acquisition Agreement contains representations and warranties and
indemnification by each of the parties to the agreement. The closing of the
acquisition is conditioned upon, among other things, the execution and delivery
of (i) an employment agreement between each of the Acquisition Stockholders and
the Founding Practice, (ii) a management services agreement between PSC
Management, the Company and the
55
<PAGE> 56
Founding Practice and (iii) a registration rights agreement between the Company
and each of the Acquisition Stockholders, pursuant to which the Acquisition
Stockholders will have "piggyback" registration rights with respect to their
shares of Common Stock.
In addition, pursuant to the Acquisition Agreement, dated as of November
25, 1996, by and among PSC Acquisition, the Company, the Seller and the ENT
Networks (the "Stock Acquisition Agreement"), the Company, through PSC
Acquisition, will acquire, on the closing date of the Offering, all of the
outstanding shares of common stock of the corporations comprising the ENT
Networks. The Stock Acquisition Agreement contains representations and
warranties and indemnification by each of the parties to the agreement. The
closing of the Stock Acquisition Agreement is conditioned upon, among other
things, the execution of a registration rights agreement between the Company and
the Seller pursuant to which the Seller will have "piggyback" registration
rights with respect to the shares of Common Stock received by him pursuant to
such agreement. In August 1996, the Company, through PSC Management, acquired
certain assets (primarily computer hardware) of and entered into a management
agreement with the ENT Networks, which agreement will terminate upon the
consummation of the Reorganization, and began utilizing the Capitated Network
System. In connection with the acquisition of these assets, the Company executed
a promissory note payable to the ENT Networks in the principal amount of
$20,000, and bearing interest at a prime rate as announced by NationsBank which
note will be paid, and the proceeds distributed to Dr. Tritt upon consummation
of the Reorganization. See "The Reorganization," "Business -- The Founding
Practice and The ENT Networks" and "-- Company Operations -- Management Services
Agreement."
The Company intends to use a portion of the net proceeds of this Offering
to repay outstanding indebtedness, including accrued interest, of the Founding
Practice which at September 30, 1996 aggregated approximately $1,204,000. In
connection with the repayment of this indebtedness, guarantees made by Dr.
Tritt, Michael J. Pickford, M.D. and Keith R. Jackson, M.D., principal
stockholders of the Company, upon consummation of the Reorganization for 45%,
15% and 15%, respectively, of such indebtedness will be cancelled. See "Risk
Factors -- Benefits to Insiders of the Offering" and "Use of Proceeds."
LEASES
The Founding Practice leases its administrative offices and one clinical
location from Dr. Tritt. The lease provides for monthly rental payments of
approximately $39,500, subject to annual increases. Upon consummation of the
Reorganization, the Company will assume the Founding Practice's obligations
under this lease.
The Founding Practice leases one clinical location from Duluth Professional
Center, L.P., a Georgia limited partnership, of which Dr. Pickford, is a limited
partner. The lease provides for monthly rental payments of approximately $3,255,
subject to annual increases. Upon consummation of the Reorganization, the
Company will assume the Founding Practice's obligations under this lease.
The Founding Practice leases one clinical location from Eastside Physicians
Center, L.P., a Georgia limited partnership, of which Dr. Tritt, Dr. Pickford
and Dr. Jackson are limited partners. The lease provides for monthly rental
payments of approximately $5,500, subject to annual increases. Upon consummation
of the Reorganization, the Company will assume the Founding Practice's
obligations under this lease.
The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. All future transactions, including loans, between
the Company and its officers, directors and principal stockholders and their
affiliates will be approved by a majority of the Board of Directors, including a
majority of the independent and disinterested outside directors of the Board of
Directors.
DESCRIPTION OF CAPITAL STOCK
Set forth below is a summary of the terms of the capital stock of the
Company. Such summary is qualified in its entirety by reference to the Company's
Certificate of Incorporation (the "Charter"), attached as an exhibit hereto and
to the applicable provisions of the General Corporation Law of the State of
Delaware (the "DGCL").
56
<PAGE> 57
The Company's authorized capital stock currently consists of 50,000,000
shares of Common Stock, $.001 par value, and 10,000 shares of Preferred Stock,
$1.00 par value.
COMMON STOCK
Immediately prior to the date hereof, there were 561,225 shares of Common
Stock outstanding held by two stockholders of record. Holders of shares of
Common Stock are entitled to one vote at all meetings of stockholders for each
share held by them and are not entitled to cumulative voting. Holders of Common
Stock have no preemptive rights, no other rights to subscribe for additional
shares of the Company, and no conversion rights or rights of redemption. Subject
to preferences that may be applicable to any outstanding Preferred Stock,
holders of Common Stock are entitled to receive ratably such dividends as may be
declared by the Board of Directors out of funds legally available therefor. See
"Dividend Policy." Upon liquidation, all holders of Common Stock are entitled to
participate pro rata in the assets of the Company available for distribution,
subject to the rights of any class of preferred stock then outstanding. All of
the outstanding shares of Common Stock are, and the shares to be issued pursuant
to the Offering will be, when issued, fully paid and nonassessable.
PREFERRED STOCK
None of the 10,000 shares of Preferred Stock authorized by the Company's
Charter will be issued or outstanding upon completion of the Offering. The Board
of Directors has the authority to issue Preferred Stock in one or more series
and to fix the rights, preferences, privileges and restrictions thereof,
including dividend rights, dividend rates, conversion rights, voting rights,
terms of redemption, redemption prices, liquidation preferences and the number
of shares constituting any series of the designation of such series, without
further vote or action by the stockholders. The issuance of Preferred Stock may
have the effect of delaying, deferring or preventing a change in control of the
Company without further action by the stockholders and may adversely affect the
voting and other rights of the holders of Common Stock, including the loss of
voting control to others.
UNDERWRITERS' WARRANTS
The Company has agreed to grant to the Underwriters, upon the closing of
the Offering, the Underwriters' Warrants to purchase up to 200,000 shares of
Common Stock. The Underwriters' Warrants cannot be transferred, sold, assigned
or hypothecated for one year, except to any successor, officer or partner of
each of the Underwriters. The Underwriters' Warrants are exercisable during the
four-year period commencing one year from the date of this Prospectus at an
exercise price of $ per share of Common Stock (120% of the initial
public offering price) subject to adjustment in certain events to protect
against dilution. The holders of the Underwriters' Warrants have certain demand
and piggyback registration rights. See "Underwriting."
ANTITAKEOVER EFFECTS OF PROVISIONS OF THE CHARTER, BY-LAWS AND CERTAIN OTHER
AGREEMENTS
Stockholders' rights and related matters are governed by the DGCL, the
Charter and the By-Laws. Certain provisions of the DGCL, the Charter and the
By-Laws, which are summarized below, may discourage or make more difficult a
takeover attempt that a stockholder might consider in its best interest. Such
provisions may also adversely affect prevailing market prices for the Common
Stock.
Advance Notice Requirements for Stockholder Proposals and Director Nominations
The By-Laws contain advance notice procedures with regard to stockholder
proposals and the nomination, other than by or at the direction of the Board of
Directors or a committee thereof, of candidates for election as directors of the
Company. These procedures provide that notice of stockholder proposals and
stockholder nominations for the election of directors at an annual meeting must
be in writing and received by the Secretary of the Company no later than 60 days
nor more than 90 days prior to such annual meeting (or if less than 70 days'
notice of a meeting of stockholders is given, stockholder proposals and
nominations must be
57
<PAGE> 58
delivered to the Secretary of the Company no later than the close of business on
the tenth day following the day notice was mailed). The notice of stockholder
nominations must set forth certain information with respect to each nominee who
is not an incumbent director.
Business Combination Provisions
The Company is subject to a Delaware statute regulating "business
combinations," defined to include a broad range of transactions, between
Delaware corporations and "interested stockholders," defined as persons who have
acquired at least 15% of a corporation's stock. Under such statute a corporation
may not engage in any business combination with any interested stockholder for a
period of three years after the date such person became an interested
stockholder unless certain conditions are satisfied. The statute contains
provisions enabling a corporation to avoid the statute's restrictions.
The Company has not sought to "elect out" of the statute, and, therefore,
upon closing of the Offering and the registration of its shares of Common Stock
under the Exchange Act, the restrictions imposed by such statute will apply to
the Company.
LIMITATION OF LIABILITY OF DIRECTORS AND OFFICERS
The Charter provides that a director or officer of the Company will not be
personally liable to the Company or its stockholders for monetary damages for
breach of fiduciary duty as a director or officer, except for liability (i) for
any breach of the director's or officer's duty of loyalty to the Company or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174 of
the DGCL which concerns unlawful payment of dividends, stock purchases or
redemptions or (iv) for any transaction from which the director or officer
derived an improper personal benefit.
While the Charter provides directors and officers with protection from
awards for monetary damages for breaches of their duty of care, it does not
eliminate such duty. Accordingly, the Charter will have no effect on the
availability of equitable remedies such as an injunction or rescission based on
a director's or officer's breach of his duty of care.
The Company intends to enter into Indemnification Agreements with each of
its directors and executive officers. Each such Indemnification Agreement will
provide that the Company will indemnify the indemnitee against expenses,
including reasonable attorney's fees, judgments, penalties, fines and amounts
paid in settlement actually and reasonably incurred by him in connection with
any civil or criminal action or administrative proceeding arising out of the
performance of his duties as an officer, director, employee or agent of the
Company. Such indemnification will be available if the acts of the indemnitee
were in good faith, if the indemnitee acted in a manner he reasonably believed
to be in or not opposed to the best interests of the Company and, with respect
to any criminal proceeding, the indemnitee had no reasonable cause to believe
his conduct was unlawful. See "Management -- Limitation on Liability;
Indemnification Agreements."
TRANSFER AGENT AND REGISTRAR
SunTrust Corp. will act as transfer agent and registrar for the Common
Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 5,328,725 shares of
Common Stock outstanding, assuming that the Underwriters' over-allotment option
is not exercised. Of these shares, the 2,000,000 shares offered hereby will be
freely tradeable without restriction or further registration under the
Securities Act, unless purchased by "affiliates" of the Company as that term is
defined in Rule 144 under the Securities Act ("Rule 144") described below. The
remaining 3,328,725 shares outstanding upon completion of the Offering
(including the shares of Common Stock issued in connection with the
Reorganization) are "restricted securities" as that term is defined under Rule
144 (the "Restricted Shares") and may not be sold publicly unless they are
registered under the Securities Act or are sold pursuant to Rule 144 or another
58
<PAGE> 59
exemption from registration. 550,000 Restricted Shares issued in connection with
the formation of the Company will become eligible for sale pursuant to Rule 144
commencing July 1998.
Beginning 90 days after the date of this Prospectus, certain shares
issuable upon exercise of options granted by the Company prior to the date of
this Prospectus will also be eligible for sale in the public market pursuant to
Rule 701 under the Securities Act. In general, Rule 701 permits resales of
shares issued pursuant to certain compensatory benefit plans and contracts
commencing 90 days after the issuer becomes subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended, in reliance
upon Rule 144 but without compliance with certain restrictions, including the
holding period requirements, contained in Rule 144. If all the requirements of
Rule 701 are met, an aggregate of approximately 62,500 shares of Common Stock
issuable upon exercise of outstanding options will be eligible for sale pursuant
to such rule beginning 90 days after the date of this Prospectus.
Notwithstanding the foregoing, all stockholders of the Company prior to the
Offering, have agreed not to sell, transfer or otherwise dispose of any shares
of the Company's Common Stock without the prior written consent of Barington
Capital Group, L.P., on behalf of the Underwriters for a period of 12 months
after the date of this Prospectus. See "Underwriting."
In general under Rule 144, a person (or persons whose shares are
aggregated) who has beneficially owned Restricted Shares for at least two years,
including persons who may be deemed to be "affiliates" of the Company, would be
entitled to sell within any three-month period a number of shares that does not
exceed the greater of (i) one percent of the then outstanding shares of Common
Stock or (ii) the average weekly trading volume in the Common Stock during the
four calendar weeks preceding such sale. Sales under Rule 144 are also subject
to certain requirements as to the manner of sale, notice and the availability of
current public information about the Company. In addition, a person who is not
deemed to have been an affiliate of the Company at any time during the 90 days
preceding a sale, and who has beneficially owned for at least three years the
shares proposed to be sold, would be entitled to sell such shares under Rule
144(k) without regard to the requirements described above.
The Commission has proposed certain amendments to Rule 144 that would
reduce to one year the holding period required prior to restricted securities
becoming eligible for resale in the public market under Rule 144 and would
reduce to two years the holding period required prior to a person becoming
eligible to effect sales under Rule 144(k). This proposal, if adopted, would
result in a substantial number of shares of Common Stock becoming eligible for
resale in the public markets significantly sooner than would otherwise be the
case, which could adversely affect the market price for the Common Stock. No
assurance can be given concerning whether or when such proposal will be adopted
by the Commission.
Holders of the Underwriters' Warrants have certain demand and piggyback
registration rights. In addition, the Existing Stockholders and the Acquisition
Stockholders have "piggyback" registration rights with respect to their shares
of Common Stock. See "Certain Transactions," "Description of Capital Stock --
Underwriters' Warrants" and "Underwriting."
Prior to the Offering, there has been no market for the Common Stock of the
Company, and the Company cannot predict what effect, if any, that sales of
Common Stock or the availability of Common Stock for sale will have on the
market price of such securities prevailing from time to time. Nevertheless,
sales of substantial amounts of Common Stock in the public market could
adversely affect prevailing market prices and the ability of the Company to
raise equity capital in the future.
59
<PAGE> 60
UNDERWRITING
Subject to the terms and conditions contained in the Underwriting Agreement
each of the Underwriters named below has severally agreed to purchase from the
Company, and the Company has agreed to sell to such Underwriter, the respective
number of shares of Common Stock set forth opposite the name of such
Underwriter:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
-------------------------------------------------------------------------- ---------
<S> <C>
Barington Capital Group, L.P..............................................
Total...........................................................
---------
2,000,000
</TABLE>
The several Underwriters have agreed to purchase all of the shares of
Common Stock offered hereby (other than shares that may be purchased under the
Over-Allotment Option) if any are purchased. The Underwriters propose initially
to offer the shares to the public at the price set forth on the cover page of
this Prospectus. The Underwriters may allow a selling concession not exceeding
$ per share of Common Stock to certain dealers. The Underwriters may
allow, and such dealers may reallow, a concession not in excess of $
per share to other dealers. The public offering price and concessions may be
changed by the Underwriters after the initial public offering.
The Company has granted an option to the Underwriters during the 45-day
period after the date of this Prospectus, to purchase up to an aggregate of
300,000 additional shares of Common Stock at the public offering price, less the
underwriting discounts and commissions. The Underwriters may exercise the option
only for the purpose of covering over-allotments made in connection with the
sale of the Common Stock offered hereby. To the extent that the Underwriters
exercise their option, each Underwriter will be committed, subject to certain
conditions, to purchase a number of such additional shares proportionate to such
Underwriter's initial commitment.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act. The Company has
also agreed to pay to the Underwriters a non-accountable expense allowance equal
to 3% of the aggregate offering price of the shares of Common Stock offered
hereby (including any shares of Common Stock purchased pursuant to the
Over-Allotment Option) of which $35,000 has been paid to date.
The Company has also agreed to sell to the Underwriters, upon the closing
of the Offering for nominal consideration, the Underwriters' Warrants to
purchase up to 200,000 shares of Common Stock. The Underwriters' Warrants cannot
be transferred, sold, assigned or hypothecated for one year, except to any
successor, officer or partner of each of the Underwriters. The Underwriters'
Warrants are exercisable during the four-year period commencing one year from
the date of this Prospectus at an exercise price of $ per share of
Common Stock (120% of the initial public offering price) subject to adjustment
in certain events to protect against dilution. The Company has agreed to
register during the four-year period commencing one year after the date of this
Prospectus, on two separate occasions, the securities issuable upon exercise
thereof under the Securities Act, the initial such registration to be at the
Company's expense and the second at the expense of the holders. The Company has
also granted certain piggyback registration rights to the holders of the
Underwriters' Warrants.
The Underwriters have advised the Company that they do not intend to
confirm sales to accounts over which they exercise discretionary authority.
The Company, its directors and officers and the holders of all of the
Company's outstanding Common Stock have agreed with the Underwriter not to sell,
contract to sell or otherwise dispose of any of the Company's securities held by
them for a period of 12 months following the date of this Prospectus without the
prior written consent of Barington Capital Group, L.P., on behalf of the
Underwriters, except for certain exceptions and under certain circumstances.
60
<PAGE> 61
The Company has agreed for the five year period commencing upon
consummation of the Offering, to nominate, if requested by Barington, and use
its best efforts (including the solicitation of proxies) to elect one designee
of Barington to the board of directors of the Company. No designee has been
chosen as of the date hereof.
Prior to the Offering, there has been no public market for the Common
Stock. Consequently, the public offering price has been determined by
arms-length negotiation between the Company and the Underwriters and does not
necessarily bear any relationship to the Company's book value, assets, past
operating results, financial condition, or other established criteria of value.
Factors considered in determining such price included an assessment of the
Company's recent financial results and current financial condition, future
prospects of the Company, the qualifications of the Company's management, the
general condition of the securities markets and other relevant factors.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Bachner, Tally, Polevoy & Misher LLP, New York, New
York. The statements in the Prospectus under "Risk Factors -- Government
Regulation," "-- Healthcare Reform Proposals" and "Business -- Government
Regulation" are the subject of an opinion by Reed Smith Shaw & McClay,
Washington, D.C., regulatory counsel to the Company. Certain legal matters will
be passed upon for the Underwriters by Kramer, Levin, Naftalis & Frankel, New
York, New York.
EXPERTS
The audited financial statements of Atlanta Ear, Nose & Throat Associates,
P.C., the ENT Networks and Physicians' Specialty Corp. included in this
Prospectus and elsewhere in the Registration Statement, to the extent and for
the periods indicated in their reports, have been audited by Arthur Andersen
LLP, independent public accountants, and are included herein in reliance upon
the authority of said firm as experts giving said reports.
ADDITIONAL INFORMATION
The Company has filed a Registration Statement on Form S-1 under the
Securities Act with the Securities and Exchange Commission (the "Commission") in
Washington, D.C. with respect to the shares of Common Stock offered hereby. This
Prospectus, which is part of the Registration Statement, does not contain all of
the information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company and the
Common Stock offered hereby, reference is hereby made to the Registration
Statement and such exhibits and schedules, which may be inspected without charge
at the office of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549. Reports and other information filed by the Company with the Commission
can be inspected and copied at the public reference facilities maintained by the
Commission at the following addresses: New York Regional Office, Seven World
Trade Center, 13th Floor, New York, New York 10048; and Chicago Regional Office,
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. Copies of such material can be obtained from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. Statements contained in this Prospectus as to the contents of
any contract or other document referred to are not necessarily complete and in
each instance reference is made to the copy of such contract or document filed
as an exhibit to the Registration Statement, each such statement being qualified
in all respects by such reference.
61
<PAGE> 62
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
I. PHYSICIANS' SPECIALTY CORP.
Report of Independent Public Accountants.......................................... F-2
Consolidated Balance Sheets at September 30, 1996................................. F-3
Consolidated Statement of Operations for the Period from Inception (July 31, 1996)
to September 30, 1996........................................................... F-4
Consolidated Statement of Stockholders' Equity for the Period from Inception (July
31, 1996) to September 30, 1996................................................. F-5
Consolidated Statement of Cash Flows for the Period from Inception (July 31, 1996)
to September 30, 1996........................................................... F-6
Notes to Consolidated Financial Statements........................................ F-7
II. ATLANTA EAR, NOSE & THROAT ASSOCIATES, P.C.
Report of Independent Public Accountants.......................................... F-9
Balance Sheets at December 31, 1995 and 1994 and September 30, 1996 (unaudited)... F-10
Statements of Operations for the Years Ended December 31, 1995, 1994 and 1993 and
for the Nine Months Ended September 30, 1996 and 1995 (unaudited)............... F-11
Statements of Owners' Equity for the Years Ended December 31, 1995, 1994 and 1993
and for the Nine Months Ended September 30, 1996 (unaudited).................... F-12
Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993 and
for the Nine Months Ended September 30, 1996 and 1995 (unaudited)............... F-13
Notes to Financial Statements..................................................... F-14
III. THE ENT NETWORKS
Report of Independent Public Accountants.......................................... F-19
Combined Balance Sheets at December 31, 1995 and 1994 and September 30, 1996
(unaudited)..................................................................... F-20
Combined Statements of Operations for the Years Ended December 31, 1995, 1994 and
1993 and for the Nine Months Ended September 30, 1996 and 1995 (unaudited)...... F-21
Combined Statements of Owner's Equity for the Years Ended December 31, 1995, 1994
and 1993 and for the Nine Months Ended September 30, 1996 (unaudited)........... F-22
Combined Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and
1993 and for the Nine Months Ended September 30, 1996 and 1995 (unaudited)...... F-23
Notes to Combined Financial Statements............................................ F-24
IV. UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
Unaudited Pro Forma Combined Balance Sheet at September 30, 1996.................. P-2
Unaudited Pro Forma Combined Statement of Operations for the Nine Months Ended
September 30, 1996.............................................................. P-3
Unaudited Pro Forma Combined Statement of Operations for the Year Ended December
31, 1995........................................................................ P-4
Notes to Unaudited Pro Forma Combined Financial Statements........................ P-5
</TABLE>
F-1
<PAGE> 63
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Physicians' Specialty Corp.:
We have audited the accompanying consolidated balance sheet of PHYSICIANS'
SPECIALTY CORP. (a Delaware corporation) as of September 30, 1996 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the period from inception (July 31, 1996) to September 30, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Physicians' Specialty Corp.
as of September 30, 1996 and the results of their operations and their cash
flows for the period from inception (July 31, 1996) to September 30, 1996 in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Atlanta, Georgia
November 13, 1996
F-2
<PAGE> 64
PHYSICIANS' SPECIALTY CORP.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996
-------------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..................................................... $ 322,184
Accounts receivable........................................................... 14,617
--------
336,801
--------
EQUIPMENT, net (Notes 2 and 3).................................................. 19,333
DEFERRED OFFERING COSTS AND OTHER (Note 2)...................................... 329,713
--------
Total................................................................. $ 685,847
========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued interest......................................... $ 184,758
Short-term debt (Note 4)...................................................... 505,000
--------
689,758
--------
STOCKHOLDERS' EQUITY (Note 6):
Preferred stock, $1.00 par value; 10,000 shares authorized; no shares issued
and outstanding............................................................ 0
Common stock, $0.001 par value; 50,000,000 shares authorized; 550,000 shares
issued and outstanding..................................................... 550
Additional paid-in capital.................................................... 450
Accumulated deficit........................................................... (4,911)
--------
Total stockholders' equity............................................ (3,911)
--------
Total liabilities and stockholders' equity............................ $ 685,847
========
</TABLE>
The accompanying notes are an integral part of this consolidated balance sheet.
F-3
<PAGE> 65
PHYSICIANS' SPECIALTY CORP.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
INCEPTION
(JULY 31,
1996) TO
SEPTEMBER 30,
1996
-------------
<S> <C>
REVENUES........................................................................ $14,617
-------
OPERATING EXPENSES:
Salaries, wages, and benefits................................................. 13,289
General and administrative expenses........................................... 5,517
Depreciation and amortization................................................. 722
-------
19,528
-------
NET LOSS........................................................................ $(4,911)
=======
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
F-4
<PAGE> 66
PHYSICIANS' SPECIALTY CORP.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (JULY 31, 1996)
TO SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
ADDITIONAL
COMMON STOCK PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------- ------ ---------- ----------- -------
<S> <C> <C> <C> <C> <C>
BALANCE, inception (July 31, 1996)............. 0 $ 0 $ 0 $ 0 $ 0
Issuance of common stock..................... 550,000 550 450 0 1,000
Net loss..................................... 0 0 0 (4,911) (4,911)
------- ------ ---------- ----------- -------
BALANCE, September 30, 1996.................... 550,000 $550 $450 $(4,911) $(3,911)
======= ====== ======= ========= =======
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
F-5
<PAGE> 67
PHYSICIANS' SPECIALTY CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION
(JULY 31, 1996)
TO SEPTEMBER 30, 1996
---------------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................................ $ (4,911)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization........................................ 722
Increase in accounts receivable...................................... (14,617)
Increase in accounts payable......................................... 184,758
Increase in other assets............................................. (1,100)
---------
Total adjustments............................................... 169,763
---------
Net cash provided by operating activities....................... 164,852
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.................................................... (20,000)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under short-term debt........................................ 505,000
Issuance of common stock................................................ 1,000
Deferred offering costs................................................. (328,668)
---------
Net cash provided by financing activities....................... 177,332
---------
NET INCREASE IN CASH AND CASH EQUIVALENTS................................. 322,184
---------
CASH AND CASH EQUIVALENTS, inception (July 31, 1996)...................... 0
---------
CASH AND CASH EQUIVALENTS, September 30, 1996............................. $ 322,184
=========
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
F-6
<PAGE> 68
PHYSICIANS' SPECIALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
1. ORGANIZATION
Physicians' Specialty Corp. was organized in July of 1996 to provide
physician practice management services to medical groups specializing in
disorders and diseases of the ear, nose and throat.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Physicians' Specialty Corp. and its subsidiaries, all of which are wholly owned
(collectively, the "Company"). Intercompany balances and transactions have been
eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS
Cash flows, cash and cash equivalents include cash on hand and in checking
and money market accounts.
EQUIPMENT
Equipment is recorded at cost. Depreciation is computed on the
straight-line method over the estimated service lives of depreciable assets
(five years). Maintenance and repairs are charged to expense as incurred. The
cost of renewals and betterments is capitalized and depreciated over the
applicable estimated useful lives. The cost and accumulated depreciation of
assets sold, retired, or otherwise disposed of are removed from the accounts,
and the related gain or loss is credited or charged to income.
DEFERRED OFFERING COSTS
The Company has capitalized legal and consulting expenses incurred through
September 30, 1996 related to a stock offering. These costs will be offset
against the proceeds upon completion of the stock offering.
ORGANIZATION COSTS
The Company has capitalized legal expenses incurred prior to July 31, 1996
related to the organization and start-up of the Company. These costs are
included in other assets on the balance sheet and are being amortized over a
three-year period.
REVENUE RECOGNITION
The Company recognizes revenue at the date management services are
provided.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company estimates that the carrying amounts of financial instruments,
including cash and cash equivalents, accounts receivable, accounts payable, and
short-term debt approximated their fair values as of September 30, 1996 due to
the relatively short maturity of these instruments.
F-7
<PAGE> 69
PHYSICIANS' SPECIALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. EQUIPMENT
Equipment at September 30, 1996 consisted of the following:
<TABLE>
<S> <C>
Equipment.................................................................. $20,000
Less accumulated depreciation.............................................. (667)
-------
$19,333
=======
</TABLE>
4. SHORT-TERM DEBT
The Company's short-term debt at September 30, 1996 consisted of promissory
notes in principal amounts ranging from $20,000 to $170,500 and bearing simple
interest at a bank prime rate (6% at September 30, 1996). Amounts are payable to
various related party organizations and individuals. The short-term debt matures
at the earlier of the completion of a stock offering or June 30, 1997.
Management has the capacity to fund requisite cash operating needs.
5. INCOME TAXES
Deferred income tax assets and liabilities arise from differences between
the tax basis of an asset or liability and its reported amount in the financial
statements. Deferred tax balances are calculated by applying the provisions of
enacted tax law to determine the amount of taxes payable or refundable currently
or in future years.
Deferred tax assets for the Company arise mainly as a result of net
operating losses deductible for income tax purposes. The Company evaluates the
need for a valuation allowance related to the deferred tax assets based on
recent earnings, anticipated future operating profits, and the anticipated
reversal of taxable temporary differences, if any. Income tax net operating loss
carryforwards totaled approximately $4,900 as of September 30, 1996. A valuation
allowance was recorded at September 30, 1996 for approximately $1,900 to offset
this net deferred tax asset.
6. STOCKHOLDERS' EQUITY
Stockholders' equity includes the respective capital stock, additional
paid-in capital and accumulated deficit of the Company. Subsequent to the period
ended September 30, 1996, the Company declared a .6875 to 1 reverse stock split.
All financial information has been restated to reflect for the stock split.
7. RELATED-PARTY TRANSACTIONS
The Company is currently providing management services to the ENT Networks,
a related party.
The Company utilizes office space of a related party for which no rent or
other consideration is charged.
8. SUBSEQUENT EVENT
In November 1996, the Company adopted two stock option plans, the 1996
Stock Option Plan and the 1996 Health Care Professionals Stock Option Plan. The
Company has authorized up to 825,000 options to purchase shares under these
plans.
F-8
<PAGE> 70
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Atlanta Ear, Nose, and Throat Associates, P.C.:
We have audited the accompanying balance sheets of ATLANTA EAR, NOSE, AND
THROAT ASSOCIATES, P.C. (a Georgia corporation) as of December 31, 1995 and 1994
and the related statements of operations, owners' equity, and cash flows for
each of the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Atlanta Ear, Nose, and
Throat Associates, P.C. as of December 31, 1995 and 1994 and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
October 15, 1996
F-9
<PAGE> 71
ATLANTA EAR, NOSE, AND THROAT ASSOCIATES, P.C.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- SEPTEMBER 30,
1995 1994 1996
---------- ---------- -------------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 2)...................... $ 401,517 $ 23,832 $ 455,135
Accounts receivable, less estimated allowances for
uncollectible accounts of $66,317, $34,619, and
$86,504 in 1995, 1994 and 1996, respectively (Note
2)................................................... 2,003,634 1,592,738 2,432,706
Prepayments and other................................... 23,180 19,071 60,402
---------- ---------- ----------
2,428,331 1,635,641 2,948,243
PROPERTY AND EQUIPMENT, net (Note 3)...................... 986,094 720,023 1,502,762
OTHER ASSETS.............................................. 21,735 8,473 205,342
---------- ---------- ----------
Total assets.................................... $3,436,160 $2,364,137 $ 4,656,347
========== ========== ==========
LIABILITIES AND OWNERS' EQUITY
CURRENT LIABILITIES:
Current portion of notes payable (Note 4)............... $ 178,000 $ 286,190 $ 357,120
Accounts payable........................................ 112,473 171,326 141,661
Accrued compensation to owners.......................... 1,564,396 1,051,219 2,504,412
Other accrued liabilities............................... 713,769 559,880 740,478
---------- ---------- ----------
2,568,638 2,068,615 3,743,671
---------- ---------- ----------
NOTES PAYABLE, long-term (Note 4)......................... 802,000 230,000 847,154
---------- ---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 7)
OWNERS' EQUITY (Note 2):
Common stock, $1 par value; 10,000 shares authorized;
1,000 shares issued and outstanding.................. 1,000 1,000 1,000
Additional paid-in capital.............................. 64,522 64,522 64,522
Retained earnings....................................... 0 0 0
---------- ---------- ----------
Total owners' equity............................ 65,522 65,522 65,522
---------- ---------- ----------
Total liabilities and owners' equity............ $3,436,160 $2,364,137 $ 4,656,347
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-10
<PAGE> 72
ATLANTA EAR, NOSE, AND THROAT ASSOCIATES, P.C.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------- -----------------------
1995 1994 1993 1996 1995
----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
NET PATIENT SERVICE REVENUES (Note
2)................................ $10,290,549 $8,123,653 $7,195,068 $9,522,449 $7,627,075
----------- ---------- ---------- ---------- ----------
OPERATING EXPENSES:
Salaries, wages, and benefits..... 3,922,240 2,928,834 2,276,999 3,705,384 2,767,500
Compensation to
owner-physicians............... 3,961,310 3,343,812 3,169,990 3,339,477 3,030,408
General and administrative
expenses....................... 1,884,613 1,473,805 1,385,935 2,009,402 1,430,783
Bad debt expense.................. 233,069 109,694 60,788 229,100 178,125
Depreciation and amortization..... 275,072 258,818 262,349 262,879 206,304
----------- ---------- ---------- ---------- ----------
10,276,304 8,114,963 7,156,061 9,546,242 7,613,120
----------- ---------- ---------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS....... 14,245 8,690 39,007 (23,793) 13,955
OTHER (INCOME) EXPENSE, net......... 14,245 8,690 39,007 (23,793) 13,955
----------- ---------- ---------- ---------- ----------
NET INCOME.......................... $ 0 $ 0 $ 0 $ 0 $ 0
=========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-11
<PAGE> 73
ATLANTA EAR, NOSE, AND THROAT ASSOCIATES, P.C.
STATEMENTS OF OWNERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ---------- -------- -------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1993.......................... 1,000 $1,000 $ 64,522 $0 $65,522
Net income.......................................... 0 0 0 0 0
--
----- ------ ------- -------
BALANCE, December 31, 1994.......................... 1,000 1,000 64,522 0 65,522
Net income.......................................... 0 0 0 0 0
--
----- ------ ------- -------
BALANCE, December 31, 1995.......................... 1,000 1,000 64,522 0 65,522
===== ====== ======= == =======
Net income (unaudited).............................. 0 0 0 0 0
--
----- ------ ------- -------
BALANCE, September 30, 1996 (unaudited)............. 1,000 $1,000 $ 64,522 $0 $65,522
===== ====== ======= == =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-12
<PAGE> 74
ATLANTA EAR, NOSE, AND THROAT ASSOCIATES, P.C.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------ -----------------------
1995 1994 1993 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................... $ 0 $ 0 $ 0 $ 0 $ 0
---------- ---------- ---------- ---------- ----------
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization... 275,072 258,818 262,349 262,879 206,304
(Increase) decrease in assets:
Accounts receivable........... (410,896) (266,738) (29,000) (429,072) (128,578)
Prepayments and other
assets..................... (17,371) (1,650) (2,290) (220,829) (60,982)
Increase (decrease) in
liabilities:
Accounts payable.............. (58,853) (98,659) 116,202 29,188 (107,624)
Accrued liabilities........... 667,066 486,267 62,970 966,725 1,175,574
---------- ---------- ---------- ---------- ----------
Total adjustments.......... 455,018 378,038 410,231 608,891 1,084,694
---------- ---------- ---------- ---------- ----------
Net cash provided by
operating activities..... 455,018 378,038 410,231 608,891 1,084,694
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............... (541,143) (162,435) (321,915) (779,547) (366,166)
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on notes
payable......................... (286,000) (241,810) (222,447) (275,726) (220,000)
Borrowings under notes payable..... 749,810 0 170,000 500,000 0
---------- ---------- ---------- ---------- ----------
Net cash provided by (used
in) financing
activities............... 463,810 (241,810) (52,447) 224,274 (220,000)
---------- ---------- ---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... 377,685 (26,207) 35,869 53,618 498,528
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD................ 23,832 50,039 14,170 401,517 23,832
---------- ---------- ---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD............................. $ 401,517 $ 23,832 $ 50,039 $ 455,135 $ 522,360
========== ========== ========== ========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest........................ $ 33,666 $ 40,379 $ 51,729 $ 64,050 $ 29,569
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-13
<PAGE> 75
ATLANTA EAR, NOSE, AND THROAT ASSOCIATES, P.C.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
1. THE COMPANY AND BASIS OF PRESENTATION
Atlanta Ear, Nose, and Throat Associates, P.C. (the "Company") was
organized in 1988. The Company currently has seventeen physicians, fifteen
audiologists, six physician assistants, and over one hundred total employees.
The physicians within the group deal with a wide variety of ear, nose, and
throat specialties, including general otolaryngology, pediatric otolaryngology,
head and neck surgery, neuro-otology, and facial plastic surgery. The group also
provides comprehensive audiology services. There are currently fourteen office
locations throughout the metropolitan Atlanta area.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and in checking and money
market accounts.
ACCOUNTS RECEIVABLE
Accounts receivable principally represent receivables from patients and
third-party payers for medical services provided by physician owners and
employees. Such amounts are recorded net of estimated contractual allowances.
Contractual adjustments result from the differences between the rates charged by
the physicians for services performed and the amounts allowed by the Medicare
and Medicaid programs and other public and private insurers. An allowance for
uncollectible accounts has been established to provide for losses on
uncollectible accounts based on management's estimates and historical
collection.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is computed on
the straight-line method over the estimated service lives of depreciable assets
(life of the lease for leasehold improvements, five to seven years for
equipment, and seven years for furniture and fixtures). Maintenance and repairs
are charged to expense as incurred. The cost of renewals and betterments is
capitalized and depreciated over the applicable estimated useful lives. The cost
and accumulated depreciation of assets sold, retired, or otherwise disposed of
are removed from the accounts, and the related gain or loss is credited or
charged to income.
OWNERS' EQUITY
Owners' equity includes the respective capital stock, partnership capital
and retained earnings of the Company. Various types of agreements exist among
the owners which call for the transfer of a physician's ownership interest by
the continuing owners in the case of certain events such as the owner's
retirement or death.
F-14
<PAGE> 76
ATLANTA EAR, NOSE, AND THROAT ASSOCIATES, P.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company estimates that the carrying amounts of financial instruments,
including cash and cash equivalents, accounts receivable, accounts payable and
debt, approximated their fair values as of each balance sheet date because of
the relatively short maturity of these instruments.
NET PATIENT SERVICE REVENUES
Patient service revenues are reported at the estimated realizable amounts
from patients, third-party payers (which include managed care providers,
commercial insurance carriers, and health maintenance organizations), and others
for services rendered. Additionally, the Company participates in agreements with
managed care organizations to provide services at negotiated rates.
CONCENTRATION OF CREDIT RISK
The Company extends credit to patients covered by insurance programs such
as governmental programs like Medicare and Medicaid and private insurers. The
Company manages credit risk with the various public and private insurance
providers, as appropriate. Allowances for doubtful accounts have been made for
potential losses, where appropriate.
INTERIM FINANCIAL STATEMENTS
The Company has made all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of the financial condition of the
Company as of September 30, 1996 and the results of operations for the nine
months ended September 30, 1995 and 1996, as presented in the accompanying
unaudited financial statements.
3. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1995 and 1994 and September 30, 1996
consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- SEPTEMBER
1995 1994 30, 1996
---------- ---------- ------------
<S> <C> <C> <C>
Leasehold improvements........................ $ 225,519 $ 145,843 $ 378,546
Equipment..................................... 1,588,376 1,148,649 1,797,055
Furniture and fixtures........................ 152,905 140,021 570,746
---------- ---------- ----------
1,966,800 1,434,513 2,746,347
Less accumulated depreciation................. (980,706) (714,490) (1,243,585)
---------- ---------- ----------
$ 986,094 $ 720,023 $ 1,502,762
========== ========== ==========
</TABLE>
F-15
<PAGE> 77
ATLANTA EAR, NOSE, AND THROAT ASSOCIATES, P.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. NOTES PAYABLE
The Company's notes payable at December 31, 1995 and 1994 and September 30,
1996 are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1995 1994 1996
-------- -------- -------------
<S> <C> <C> <C>
Note payable to bank dated December 23, 1993;
principal of $848,000 and interest (at Prime
less 0.25%) due monthly through June 22, 1998;
secured by all property and equipment.......... $230,000 $516,190 $ 32,190
Note payable to bank dated December 26, 1995;
principal of $750,000 and interest (at Prime
less 0.25%) due monthly beginning December 26,
1995 through March 25, 1996 based on terms of
refinancing; secured by all property and
equipment...................................... 750,000 0 0
Note payable to bank dated July 11, 1996;
principal of $1,212,500 and interest (at Prime
less 0.25%) due monthly through July 10, 2001;
secured by accounts receivable and property and
equipment...................................... 0 0 1,172,084
-------- -------- ----------
980,000 516,190 1,204,274
Less current portion............................. 178,000 286,190 357,120
-------- -------- ----------
Notes payable due after one year................. $802,000 $230,000 $ 847,154
======== ======== ==========
</TABLE>
The aggregate maturities of notes payable at December 31, 1995 are as
follows:
<TABLE>
<S> <C>
1996...................................................................... $178,000
1997...................................................................... 254,542
1998...................................................................... 152,542
1999...................................................................... 152,542
2000 and thereafter....................................................... 242,374
--------
$980,000
========
</TABLE>
5. INCOME TAXES
The Company has elected to be taxed as an S corporation as permitted by the
Internal Revenue Code. As an S corporation, the Company is not a taxable entity,
and separately stated items of income, loss, deduction, and credit are passed
through to and taken into account by the individual owners in computing their
federal and state individual income tax liabilities.
6. EMPLOYEE BENEFIT PLAN
The Company sponsors a defined contribution plan under Section 401(k) of
the Internal Revenue Code covering substantially all employees. The plan
requires that the Company provide a 25% matching contribution for up to 6% of an
employee's contribution base up to specified limitations. The total cost of the
Company's plan was approximately $9,755 and $5,991 in 1995 and 1994,
respectively.
F-16
<PAGE> 78
ATLANTA EAR, NOSE, AND THROAT ASSOCIATES, P.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases facilities under operating leases which expire at
various dates through December 2010. Future minimum lease payments under these
leases as of December 31, 1995 are as follows:
<TABLE>
<S> <C>
1996..................................................................... $ 893,841
1997..................................................................... 838,264
1998..................................................................... 771,816
1999..................................................................... 648,336
2000 and thereafter...................................................... 5,129,024
</TABLE>
Lease expense for the years ended December 31, 1995, 1994, and 1993 and for
the nine months ended September 30, 1996 totaled approximately $597,000,
$471,000, $487,000 and $716,000, respectively.
INSURANCE
The Company is insured with respect to medical malpractice risks on a
claims made basis. Accordingly, coverage relates only to claims made during the
policy term. Historically, any claims paid have been within the insurance policy
limits. Management is not aware of any claims against it or its affiliated
medical practices which might have a material impact on the Company's financial
position or results of operations.
EMPLOYMENT AGREEMENTS
Certain management personnel and physician employees are covered by
employment agreements that vary in length from one to five years, which include,
among other terms, salary and benefits provisions. Future minimum payments under
these agreements as of December 31, 1995 are approximately:
<TABLE>
<S> <C>
1996..................................................................... $4,087,500
1997..................................................................... 950,000
1998..................................................................... 540,000
1999..................................................................... 140,000
2000 and thereafter...................................................... 0
</TABLE>
8. LEGAL PROCEEDINGS
The Company is subject to legal proceedings and claims which arise in the
ordinary course of business. In the opinion of management, the amount of
potential liability with respect to these actions will not materially affect the
Company's financial position or results of operations.
9. RELATED-PARTY TRANSACTIONS
For the years ended December 31, 1995, 1994, and 1993, the Company paid
approximately $250,000 annually in rent for its location at the Medical Quarters
to a certain stockholder who owns this location.
For the year ended December 31, 1995, the Company paid approximately
$38,000 in rent for its Snellville location to a partnership in which certain
stockholders are partners.
For the years ended December 31, 1995, 1994, and 1993, the Company paid
approximately $40,000 annually in rent for its Duluth location to a partnership
in which a certain stockholder is partner.
For the years ended December 31, 1995, 1994, and 1993, and for the nine
months ended September 30, 1996 and 1995, the Company received approximately
$2,292,000, $1,286,000, $1,333,000, $1,930,000, and $1,593,000, respectively, in
discounted fee-for-service payments from three companies which are solely owned
F-17
<PAGE> 79
ATLANTA EAR, NOSE, AND THROAT ASSOCIATES, P.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
by a certain stockholder of the Company. In addition for the years ended
December 31, 1995, 1994 and 1993, and for the nine months ended September 30,
1996 and 1995, the Company received approximately $65,000, $29,000, $54,000,
$22,000 and $45,000, respectively, in salary and expense reimbursements from
these three companies for work performed by two employees of the Company.
10. SUBSEQUENT EVENT
NEW DEBT
On July 11, 1996 the Company entered into a new $1,212,500 loan agreement
with a bank to replace its existing $750,000 secured note payable and to finance
the purchase of property and equipment. The new loan agreement is evidenced by a
secured promissory note payable to the bank by July 10, 2001 that bears interest
at a per annum rate of prime rate less 0.25%. This loan agreement is guaranteed
by the owners of the Company up to 120% of their ownership interests.
F-18
<PAGE> 80
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Atlanta-AHP, Inc.,
ENT Center of Atlanta, Inc., and
Atlanta ENT Center, Inc.:
We have audited the accompanying combined balance sheets of ATLANTA-AHP,
INC., ENT CENTER OF ATLANTA, INC., AND ATLANTA ENT CENTER, INC. (Georgia
corporations) (collectively, the "ENT Networks") as of December 31, 1995 and
1994 and the related combined statements of operations, owner's equity, and cash
flows for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the ENT Networks' management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the ENT Networks as of
December 31, 1995 and 1994 and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1995 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
October 15, 1996
F-19
<PAGE> 81
ENT NETWORKS
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1995 1994 1996
-------- -------- -------------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................. $302,054 $291,496 $ 771,311
EQUIPMENT, net............................................... 4,041 4,574 4,702
-------- -------- --------
Total assets....................................... $306,095 $296,070 $ 776,013
======== ======== ========
LIABILITIES AND OWNER'S EQUITY
CURRENT LIABILITIES:
Claims payable............................................. $436,043 $550,000 $ 387,651
-------- -------- --------
COMMITMENTS AND CONTINGENCIES (Note 5)
OWNER'S EQUITY:
Common stock, no par value; 210,000 shares authorized;
2,000 shares issued and outstanding..................... -- -- --
Additional paid-in capital................................. 2,000 2,000 2,000
Retained earnings.......................................... (131,948) (255,930) 386,362
-------- -------- --------
Total owner's equity............................... (129,948) (253,930) 388,362
-------- -------- --------
Total liabilities and owner's equity............... $306,095 $296,070 $ 776,013
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these combined balance sheets.
F-20
<PAGE> 82
ENT NETWORKS
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------ -----------------------
1995 1994 1993 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
CAPITATION REVENUE................... $4,168,279 $3,510,747 $2,314,513 $3,285,614 $3,043,862
---------- ---------- ---------- ---------- ----------
OPERATING EXPENSES:
Salaries, wages, and benefits...... 64,600 28,752 53,500 22,072 44,745
General and administrative
expenses........................ 170,792 136,757 122,815 112,247 122,658
Depreciation....................... 6,395 7,795 873 5,696 4,796
Provider claims.................... 2,892,646 2,455,964 1,692,309 2,389,767 2,149,673
---------- ---------- ---------- ---------- ----------
3,134,433 2,629,268 1,869,497 2,529,782 2,321,872
---------- ---------- ---------- ---------- ----------
INCOME FROM OPERATIONS............... 1,033,846 881,479 445,016 755,832 721,990
OTHER INCOME, net.................... 33,476 25,388 10,413 17,828 23,049
---------- ---------- ---------- ---------- ----------
NET INCOME........................... $1,067,322 $ 906,867 $ 455,429 $ 773,660 $ 745,039
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-21
<PAGE> 83
ENT NETWORKS
COMBINED STATEMENTS OF OWNER'S EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1992................... 0 $0 $2,000 $ (133,226) $ (131,226)
Distributions.............................. 0 0 0 (485,000) (485,000)
Net income................................. 0 0 0 455,429 455,429
--
----- ------ ----------- -----------
BALANCE, December 31, 1993................... 2,000 0 2,000 (162,797) (160,797)
Distributions.............................. 0 0 0 (1,000,000) (1,000,000)
Net income................................. 0 0 0 906,867 906,867
--
----- ------ ----------- -----------
BALANCE, December 31, 1994................... 2,000 0 2,000 (255,930) (253,930)
Distributions.............................. 0 0 0 (943,340) (943,340)
Net income................................. 0 0 0 1,067,322 1,067,322
--
----- ------ ----------- -----------
BALANCE, December 31, 1995................... 2,000 0 2,000 (131,948) (129,948)
Distributions (unaudited).................. 0 0 0 (255,350) (255,350)
Net income (unaudited)..................... 0 0 0 773,660 773,660
--
----- ------ ----------- -----------
BALANCE, September 30, 1996 (unaudited)...... 2,000 $0 $2,000 $ 386,362 $ 388,362
===== == ====== =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-22
<PAGE> 84
ENT NETWORKS
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------ -----------------------
1995 1994 1993 1996 1995
---------- ----------- --------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income........................ $1,067,322 $ 906,867 $ 455,429 $ 773,660 $ 745,039
---------- ----------- --------- ---------- ----------
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and
amortization................. 6,395 7,795 873 5,696 4,796
Increase (decrease) in claims
payable...................... (113,957) 275,000 7,236 (48,392) 121,290
---------- ----------- --------- ---------- ----------
Total adjustments......... (107,562) 282,795 8,109 (42,696) 126,086
---------- ----------- --------- ---------- ----------
Net cash provided by
operating activities.... 959,760 1,189,662 463,538 730,964 871,125
---------- ----------- --------- ---------- ----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Capital expenditures.............. (5,862) (11,059) (2,183) (6,357) (5,862)
---------- ----------- --------- ---------- ----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Distributions to owners........... (943,340) (1,000,000) (485,000) (255,350) 0
---------- ----------- --------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS.................. 10,558 178,603 (23,645) 469,257 865,263
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD............... 291,496 112,893 136,538 302,054 291,496
---------- ----------- --------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD............................ $ 302,054 $ 291,496 $ 112,893 $ 771,311 $1,156,759
========== =========== ========= ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-23
<PAGE> 85
ENT NETWORKS
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
1. ORGANIZATION
Atlanta-AHP, Inc. ("AHP"), ENT Center of Atlanta, Inc. ("ENT Center"), and
Atlanta ENT Center, Inc. ("Atlanta ENT") (collectively "ENT Networks" or the
"Company") were organized as Georgia S corporations. The ENT Networks have
contracts to administer capitated specialty services in the greater Atlanta area
through affiliated physicians and other independent physicians.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying combined financial statements include the accounts of AHP,
ENT Center, and Atlanta ENT and have been combined because of common control and
ownership. All significant intercompany accounts and transactions have been
eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and in checking and money
market accounts.
EQUIPMENT
Equipment is recorded at cost. Depreciation is computed using the
straight-line method over the estimated service lives of depreciable assets
(five to seven years). Maintenance and repairs are charged to expense as
incurred. The cost of renewals and betterments is capitalized and depreciated
over the applicable estimated useful lives. The cost and accumulated
depreciation of assets sold, retired, or otherwise disposed of are removed from
the accounts, and the related gain or loss is credited or charged to income.
CLAIMS PAYABLE
The cost of providing healthcare services is accrued for in the period in
which it is provided to a member based in part on estimates, including an
accrual for medical services provided but not reported to the ENT Networks.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company estimates that the carrying amounts of financial instruments,
including cash and cash equivalents and accounts payable, approximated their
fair values as of each balance sheet date because of the relatively short
maturity of these instruments.
CAPITATION REVENUE
Membership contracts are on a yearly basis and are subject to cancellation.
Premiums are due monthly and are recognized as revenue during the period in
which the ENT Networks is obligated to provide services to members.
F-24
<PAGE> 86
ENT NETWORKS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
INTERIM FINANCIAL STATEMENTS
The ENT Networks have made all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of the financial condition of the
ENT Networks as of September 30, 1996, and the results of operations for the
nine months ended September 30, 1996 and 1995 as presented in the accompanying
unaudited financial statements.
3. EQUIPMENT
Equipment at December 31, 1995 and 1994 and September 30, 1996 consisted of
the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1994 1996
-------- ------- -------------
<S> <C> <C> <C>
Equipment............................................. $ 19,648 $13,786 $ 26,005
Less accumulated depreciation......................... (15,607) (9,212) (21,303)
-------- --------
$ 4,041 $ 4,574 $ 4,702
======== ========
</TABLE>
4. INCOME TAXES
The ENT Networks have elected to be taxed as S corporations as permitted by
the Internal Revenue Code. As an S corporation, ENT Networks is not a taxable
entity, and separately stated items of income, loss, deduction, and credit are
passed through to and taken into account by the individual owners in computing
their federal and state individual income tax liabilities.
5. COMMITMENTS AND CONTINGENCIES
The Company is subject to legal proceedings and claims which arise in the
ordinary course of business. In the opinion of management, the amount of
potential liability with respect to these actions will not materially affect ENT
Networks' financial position or results of operations.
6. RELATED-PARTY TRANSACTIONS
For the years ended December 31, 1995, 1994, and 1993 and for the nine
months ended September 30, 1996 and 1995, the ENT Networks paid approximately
$2,292,000, $1,286,000, $1,133,000, $1,930,000 and $1,593,0000, respectively, in
discounted fee-for-service payments to a company in which an owner is the
shareholder. In addition, for the years ended December 31, 1995, 1994, and 1993
and for the nine months ended September 30, 1996 and 1995, the ENT Networks paid
approximately $65,000, $29,000, $54,000, $22,000 and $45,000, respectively, in
salary and expense reimbursements to this related company for work performed by
two of its employees.
For the years ended December 31, 1995, 1994, and 1993 and for the nine
months ended September 30, 1996 and 1995, the ENT Networks paid approximately
$148,000, $124,000, $75,000, $101,000 and $114,000, respectively, to its owner
and a related physician in administrative and management fees.
F-25
<PAGE> 87
The following Unaudited Pro Forma Combined Statements of Operations give
effect to the Reorganization of Physicians' Specialty Corp., Atlanta Ear, Nose &
Throat Associates, P.C. and the ENT Networks as if it had been consummated as of
January 1, 1995. The Unaudited Pro Forma Combined Balance Sheet gives effect to
the Reorganization as if it had occurred on September 30, 1996. The unaudited
pro forma combined financial information and notes thereto do not purport to
represent what the Company's results of operations or financial position would
actually have been if such transactions had occurred on such dates or project
the Company's results of operations or financial position for future periods or
dates. The pro forma adjustments are based upon currently available information
and upon certain assumptions that management of the Company believes are
reasonable in the circumstances. The following unaudited pro forma financial
statements and related notes should be read in conjunction with other financial
information pertaining to the Company, including the audited financial
statements, "Capitalization" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere in this
Prospectus.
P-1
<PAGE> 88
PHYSICIANS' SPECIALTY CORP.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
---------------------------------------------------------------------------------
ATLANTA PHYSICIANS'
EAR, NOSE, ENT SPECIALTY UNADJUSTED PRO-FORMA PRO-FORMA
& THROAT NETWORKS CORP. TOTAL ADJUSTMENTS TOTAL
---------- -------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash
equivalents.......... $ 455,135 $771,311 $ 322,184 $1,548,630 $ 0 $1,548,630
Accounts receivable,
net.................. 2,432,706 0 14,617 2,447,323 0 2,447,323
Inventory............... 0 0 0 0 0 0
Prepayments and other... 60,402 0 0 60,402 0 60,402
---------- -------- ----------- ---------- ----------- ----------
2,948,243 771,311 336,801 4,056,355 0 4,056,355
PROPERTY AND EQUIPMENT
(net)................... 1,502,762 4,702 19,333 1,526,797 0 1,526,797
OTHER ASSETS.............. 205,342 0 329,713 535,055 0 535,055
---------- -------- ----------- ---------- ----------- ----------
Total assets.... $4,656,347 $776,013 $ 685,847 $6,118,207 $ 0 $6,118,207
========= ======== ======== ========= ========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes
payable -- banks..... $ 357,120 $ 0 $ 505,000 $ 862,120 $ 0 $ 862,120
Accrued compensation to
owners............... 2,504,412 0 0 2,504,412 (2,504,412)(7) 0
Accounts payable........ 141,661 387,651 184,758 714,070 0 714,070
Accrued expenses........ 740,478 0 0 740,478 0 740,478
Deferred taxes.......... 0 0 0 0 604,721(6) 604,721
---------- -------- ----------- ---------- ----------- ----------
3,743,671 387,651 689,758 4,821,080 (1,899,691) 2,921,389
LONG-TERM DEBT............ 847,154 0 0 847,154 0 847,154
STOCKHOLDERS' EQUITY...... 65,522 388,362 (3,911) 449,973 1,899,691(7)(6) 2,349,664
---------- -------- ----------- ---------- ----------- ----------
Total
liabilities
and
stockholders'
equity........ $4,656,347 $776,013 $ 685,847 $6,118,207 $ 0 $6,118,207
========= ======== ======== ========= ========== =========
</TABLE>
See the notes to unaudited pro forma combined financial statements.
P-2
<PAGE> 89
PHYSICIANS' SPECIALTY CORP.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTH PERIOD ENDED SEPTEMBER 30, 1996
----------------------------------------------------------------------------------
ATLANTA PHYSICIANS'
EAR, NOSE, ENT SPECIALTY UNADJUSTED PRO-FORMA PRO-FORMA
& THROAT NETWORKS CORP TOTAL ADJUSTMENTS TOTAL
---------- ---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Capitation and patient
service revenues........ $9,522,449 $3,285,614 $14,617 $12,822,680 $(1,930,144)(3) $10,892,536
Less: amounts retained by
physician owners........ 3,339,477 0 0 3,339,477 (1,161,668)(2) 2,177,809
---------- ---------- ------- ----------- ----------- -----------
Net revenues.............. 6,182,972 3,285,614 14,617 9,483,203 (768,476) 8,714,727
Expenses
Salaries, wages &
benefits............. 3,705,384 22,072 13,289 3,740,745 (22,072)(3) 3,718,673
General &
administrative....... 2,009,402 112,248 5,517 2,127,167 (100,793)(4) 2,026,374
Bad debt expense........ 229,100 0 0 229,100 0 229,100
Depreciation and
amortization......... 262,879 5,696 722 269,297 0 269,297
Provider claims......... 0 2,389,767 0 2,389,767 (1,930,144)(3) 459,623
---------- ---------- ------- ----------- ----------- -----------
6,206,765 2,529,783 19,528 8,756,076 (2,053,009) 6,703,067
Operating income (loss)... (23,793) 755,831 (4,911) 727,127 1,284,533 2,011,660
Other expense (income),
net..................... (23,793) (17,828) 0 (41,621) (41,621)
---------- ---------- ------- ----------- ----------- -----------
Pretax income............. 0 773,659 (4,911) 768,748 1,284,533 2,053,281
Provision for income
taxes................... 0 0 0 0 800,780(5) 800,780
---------- ---------- ------- ----------- ----------- -----------
Net income...... $ 0 $ 773,659 $(4,911) $ 768,748 $ 483,753 $ 1,252,501
========== ========== ======= =========== =========== ===========
</TABLE>
See the accompanying notes to unaudited pro forma combined financial statements.
P-3
<PAGE> 90
PHYSICIANS' SPECIALTY CORP.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1995
---------------------------------------------------------------------
ATLANTA
EAR, NOSE, ENT UNADJUSTED PRO-FORMA PRO-FORMA
& THROAT NETWORKS TOTAL ADJUSTMENTS TOTAL
----------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Capitation and patient service
revenues........................ $10,290,549 $4,168,279 $14,458,828 $(2,292,149)(3) $12,166,679
Less: amounts retained by
physician owners................ 3,961,310 0 3,961,310 (1,286,319)(2) 2,674,991
----------- ---------- ----------- ----------- -----------
Net revenues...................... 6,329,239 4,168,279 10,497,518 (1,005,830) 9,491,688
Expenses
Salaries, wages & benefits...... 3,922,240 64,600 3,986,840 (64,600)(3) 3,922,240
General & administrative........ 1,884,613 170,792 2,055,405 (148,080)(4) 1,907,325
Bad debt expense................ 233,069 0 233,069 0 233,069
Depreciation and amortization... 275,072 6,394 281,466 0 281,466
Provider claims................. 0 2,892,647 2,892,647 (2,292,149)(3) 600,498
----------- ---------- ----------- ----------- -----------
6,314,994 3,134,433 9,449,427 (2,504,829) 6,944,598
Operating income (loss)........... 14,245 1,033,846 1,048,091 1,498,999 2,547,090
Other expense (income), net....... 14,245 (33,476) (19,231) (19,231)
----------- ---------- ----------- ----------- -----------
Pretax income..................... 0 1,067,322 1,067,322 1,498,999 2,566,321
Provision for income taxes........ 0 0 0 1,000,865(5) 1,000,865
----------- ---------- ----------- ----------- -----------
Net income...................... $ 0 $1,067,322 $ 1,067,322 $ 498,134 $ 1,565,456
=========== ========== =========== =========== ===========
</TABLE>
See the accompanying notes to unaudited pro forma combined financial statements.
P-4
<PAGE> 91
PHYSICIANS' SPECIALTY CORP.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(1) The following is a summary of the adjustments reflected in the
Unaudited Pro Forma Financial Statements assuming the Reorganization of the ENT
Networks and Atlanta Ear, Nose and Throat Associates, P.C. with Physicians'
Specialty Corp. This Reorganization will be accomplished as a combination of
promoter interests at historical costs under generally accepted accounting
principles.
(2) Reflects the adjustment for a management service agreement with Atlanta
Ear, Nose and Throat Associates, P.C. that would allocate operating income
(after corporate and operating expenses) on a percentage basis between
Physicians' Specialty Corp. and Atlanta Ear, Nose and Throat Associates, P.C.
(3) Reflects the elimination of intercompany revenue and expenses between
Atlanta Ear, Nose and Throat Associates, P.C. and the ENT Networks.
(4) Reflects the elimination of management fees paid to certain
stockholders related to the ENT Networks that will not be paid after the
Reorganization.
(5) Reflects the establishment of a provision for income taxes at a 39%
effective tax rate for Physicians' Specialty Corp. after the Reorganization.
Atlanta Ear, Nose and Throat Associates, P.C. and the ENT Networks, before the
Reorganization, are S corporations with the corporations owing no federal or
state taxes and the owners of each entity being responsible for their tax
payment.
(6) Reflects the establishment of deferred taxes for Physicians' Specialty
Corp. after the Reorganization.
(7) Reflects the contribution of the physician owners to the
Reorganization. Physicians are paid based upon cash collections and the amount
of payment owed to the physicians on outstanding accounts receivable at the time
of the Reorganization will be contributed as capital by the physicians.
P-5
<PAGE> 92
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO
WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO
ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary..................... 3
The Reorganization..................... 8
Risk Factors........................... 9
Use of Proceeds........................ 18
Dividend Policy........................ 18
Capitalization......................... 19
Dilution............................... 20
Management's Discussion And Analysis of
Financial Condition And Results of
Operations........................... 24
Business............................... 32
Management............................. 47
Principal Stockholders................. 53
Certain Transactions................... 55
Description of Capital Stock........... 56
Shares Eligible for Future Sale........ 58
Underwriting........................... 60
Legal Matters.......................... 61
Experts................................ 61
Additional Information................. 61
Index to Financial Statements.......... F-1
Unaudited Pro Forma Combined Financial
Statements........................... P-1
</TABLE>
---------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
2,000,000 SHARES
[LOGO]
PHYSICIANS'
SPECIALTY CORP.
COMMON STOCK
--------------------
PROSPECTUS
--------------------
BARINGTON
CAPITAL GROUP, L.P.
, 1997
- ------------------------------------------------------
- ------------------------------------------------------
