<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 17, 1998
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------
PHYSICIANS' SPECIALTY CORP.
(Exact name of Registrant as Specified in Its Charter)
------------------------------
<TABLE>
<S> <C> <C>
DELAWARE 8011 58-2251438
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
1150 LAKE HEARN DRIVE, SUITE 640 ATLANTA, GEORGIA 30342
(404) 256-7535
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
------------------------------
RAMIE A. TRITT, M.D.
CHAIRMAN AND PRESIDENT
PHYSICIANS' SPECIALTY CORP.
1150 LAKE HEARN DRIVE, SUITE 640
ATLANTA, GEORGIA 30342
(404) 256-7535
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
------------------------------
COPIES TO:
<TABLE>
<S> <C>
JILL M. COHEN, ESQ. STEVEN R. FINLEY, ESQ.
BACHNER, TALLY, POLEVOY & MISHER LLP GIBSON, DUNN & CRUTCHER LLP
380 MADISON AVENUE 200 PARK AVENUE
NEW YORK, NEW YORK 10017 NEW YORK, NEW YORK 10166
(212) 687-7000 (212) 351-4000
</TABLE>
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
OF SECURITIES TO BE REGISTERED REGISTERED SHARE(1) PRICE REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.001 par
value(2)...................... 2,472,500 $10.4375 $25,806,719 $7,613
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for purpose of calculating the registration fee pursuant to
Rule 457(c) under the Securities Act of 1933, as amended, based on the
average of the high and low prices of the Common Stock on the Nasdaq
National Market on April 13, 1998.
(2) Includes 322,500 shares of Common Stock that may be purchased by the
Underwriters from the Company to cover over-allotments, if any.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
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 APRIL 17, 1998
<TABLE>
<S> <C>
(Physicians' 2,150,000 SHARES
Specialty PHYSICIANS' SPECIALTY CORP.
Corp. Logo) COMMON STOCK
</TABLE>
------------------------------
Of the 2,150,000 shares of Common Stock offered hereby (the "Offering"),
2,000,000 shares are being sold by Physicians' Specialty Corp. (the "Company")
and 150,000 shares are being sold by the Selling Stockholders. See "Selling
Stockholders." The Company will not receive any of the proceeds from the sale of
shares of Common Stock by the Selling Stockholders. The Common Stock of the
Company (the "Common Stock") is quoted on the Nasdaq National Market under the
symbol "ENTS." On April 14, 1998, the last reported sale price of the Common
Stock on the Nasdaq National Market was $10.625 per share. See "Price Range of
Common Stock" and "Dividend Policy."
------------------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" ON PAGES 8 THROUGH 18.
------------------------------
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>
==================================================================================================================
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share......................... $ $ $ $
- ------------------------------------------------------------------------------------------------------------------
Total(3).......................... $ $ $ $
==================================================================================================================
</TABLE>
(1) The Company and Selling Stockholders have agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted the Underwriters a 45-day option to purchase up to
322,500 additional shares of Common Stock on the same terms and conditions
as set forth above solely to cover over-allotments, if any. If the
Underwriters exercise this option in full, the total Price to Public,
Underwriting Discounts and Commissions, Proceeds to Company and Proceeds to
Selling Stockholders will be $ , $ , $ and
$ , respectively. See "Underwriting."
------------------------------
The shares of Common Stock are offered by the several Underwriters named
herein, subject to prior sale, when, as and if accepted by them and subject to
certain conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject any orders in whole or in part. It is expected
that the certificates for the shares of Common Stock will be available for
delivery at the offices of Volpe Brown Whelan & Company, LLC, One Maritime
Plaza, San Francisco, California, on or about , 1998.
VOLPE BROWN WHELAN & COMPANY
HAMBRECHT & QUIST
BARINGTON CAPITAL GROUP
The date of this Prospectus is , 1998.
<PAGE> 3
Description of Map on Inside Cover
Map of the eastern United States indicating the states in which the Company's
affiliated practices are located and the states in which the Company's probable
practice acquisitions are located. The map also indicates the locations of the
Company's affiliated practices in the greater metropolitan Atlanta area.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE MARKET PRICE OF THE COMMON
STOCK. SUCH TRANSACTIONS MAY INCLUDE THE PURCHASE OF COMMON STOCK FOLLOWING THE
PRICING OF THE OFFERING TO COVER A SYNDICATE SHORT POSITION IN THE COMMON STOCK
OR FOR THE PURPOSE OF MAINTAINING THE PRICE OF THE COMMON STOCK AND THE
IMPOSITION OF PENALTY BIDS. IN CONNECTION WITH THIS OFFERING, CERTAIN
UNDERWRITERS AND SELLING GROUP MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES
MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMPANY'S COMMON STOCK
ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE
"UNDERWRITING."
2
<PAGE> 4
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. As used in this Prospectus,
unless the context otherwise requires, the "Company" refers to Physicians'
Specialty Corp., a Delaware corporation, and its wholly-owned subsidiaries (i)
PSC Management Corp. ("PSC Management"), PSC Acquisition Corp., ENT & Allergy
Associates, Inc. and South Florida Otolaryngology, Inc. and (ii) ENT Center of
Atlanta, Inc., Atlanta ENT Center for Physicians, Inc. and Atlanta-AHP, Inc.
(collectively, the "ENT Networks"). Unless otherwise indicated, (i) all pro
forma information in this Prospectus gives effect to the acquisition of the
assets or equity of the Practices (as defined) and the Probable Practice
Acquisitions (as defined) as if all of the transactions were consummated on
January 1, 1997 and (ii) the information in this Prospectus assumes no exercise
of the Underwriters' over-allotment option. Investors should carefully consider
the information set forth under the heading "Risk Factors."
THE COMPANY
Physicians' Specialty Corp. is the leading physician practice management
company focusing on affiliating with and managing physician practices
specializing in the treatment and management of diseases and disorders of the
ear, nose and throat, head and neck ("ENT"). The Company provides comprehensive
practice management services to ENT physician practices and health care
providers, including specialists practicing in the fields of allergy, audiology,
oral surgery, plastic surgery and sleep medicine (collectively, the "Related
Specialties" or "Related Specialists"). The Company seeks to affiliate with
physician practices and health care providers who provide high quality, cost
effective medical and surgical services to fee-for-service patients and managed
care enrollees. Services provided by the Company include financial and
administrative management, enhancement of clinical operations, access to
ancillary services, network development and payor contracting services,
including the negotiation and administration of capitated arrangements. The
Company is currently affiliated with 47 physicians, one temporo-mandibular joint
("TMJ") specialist and 51 allied health care professionals with 41 clinical
offices in Alabama, Florida, Georgia and Illinois and expects to add 28
physicians and 23 allied health care professionals with 16 clinical offices in
the New York metropolitan area and South Florida in connection with the Probable
Practice Acquisitions. The Company holds, manages and administers capitated ENT
managed care contracts covering an aggregate of approximately 315,000 enrollees
of health maintenance organization ("HMO") plans of United HealthCare of
Georgia, Inc. ("United HealthCare") and Cigna HealthCare of Georgia, Inc.
("Cigna") and enrollees of HMOs which have contracted with FPA Medical
Management, Inc. ("FPA").
The Company's objective is to position its affiliated physicians as the
leading providers of ENT and Related Specialty medical and surgical services in
each of its markets. The Company's strategy is to establish a market presence by
affiliating with and managing a market leading ENT practice which serves as a
platform for the implementation of the Company's market development and
physician practice management model. Following an initial practice affiliation,
the Company seeks to affiliate with additional ENT and Related Specialty
practices within that market. In March 1997, the Company acquired substantially
all of the assets of Atlanta Ear, Nose & Throat Associates, P.C. ("Atlanta
ENT"), an ENT physician practice in metropolitan Atlanta (the "Reorganization"),
which expanded from three physicians in 1982 to 17 physicians in 1997. As a
result of increasing the number of physicians at Atlanta ENT, utilizing allied
health care professionals and expanding the geographic coverage of the practice,
Atlanta ENT's revenue increased from $1.6 million in 1982 to $20.3 million in
1997, representing compound annual revenue growth of 18.5% during such period.
By capitalizing on its experience in managing and administering capitated
contracts with managed care organizations and developing provider panels,
Atlanta ENT increased the number of enrollees to which its physicians provided
ENT medical and surgical services from approximately 50,000 in 1982 to over
300,000 in 1997. In connection with the Reorganization, the Company also
acquired substantially all of the assets of three additional ENT physician
practices with five physicians in metropolitan Atlanta. Since the
Reorganization, the Company has further expanded its presence in the Atlanta
market by acquiring substantially all of the assets of five additional ENT
physician practices with 12 physicians. As a result of these additional
affiliations, the Company currently has 34 affiliated physicians and 40
3
<PAGE> 5
allied health care professionals with 32 clinical offices in the greater Atlanta
market and the Company believes Atlanta ENT is the largest independent
(non-academic) ENT physician group practice in the United States.
In addition to entering the Atlanta market in March 1997, the Company
acquired substantially all of the assets of a two physician ENT practice in
Birmingham, Alabama and since the Reorganization, the Company has entered into
two additional markets by affiliating with a four physician ENT practice in the
metropolitan Chicago area and two ENT physician practices employing eight
physicians in South Florida. In March 1998, the Company entered into a
non-binding letter of intent relating to the proposed affiliation with six ENT
physician practices associated with Physicians' Domain, Inc., a New York based
ENT physician practice management company ("Physicians' Domain" and together
with the six ENT practices, "PDI"). Upon completion of the PDI transaction, if
consummated on the terms contemplated, the Company will add 26 physicians and 21
allied health care professionals with 14 clinical offices in the New York
metropolitan area. In addition, the Company has non-binding letters of intent
relating to the proposed acquisition of assets or equity of two ENT physician
practices consisting of an aggregate of two physicians and two allied health
care professionals with two clinical offices in South Florida (together with
PDI, the "Probable Practice Acquisitions"). Although the Company expects to
complete these acquisitions in the near future, there can be no assurance that
any of these acquisitions will be completed or that the Company will be able to
integrate any of these practices into its business.
Although the Company primarily focuses on the growth of its affiliated
practices, the Company also intends to evaluate and selectively expand into new
markets. The Company believes its strategy of expanding its affiliated practices
in existing markets optimally positions the practices for growth by adding
physicians, allied health care professionals and ancillary services, which
better enables the affiliated practices to meet the needs of patients and payors
and realize operating efficiencies. This strategy is also designed to allow the
Company's affiliated physicians to enhance practice performance by achieving or
obtaining same practice revenue growth, geographic expansion, expansion in the
breadth of services offered and managed care contracts.
Based upon a 1997 American Group Practice Association study, the Company
estimates that revenue generated by ENT physicians in the United States exceeded
$6.2 billion in 1996. According to the American Academy of Otolaryngology-Head
and Neck Surgery, Inc. (the "Academy"), there were approximately 8,600 ENT
physicians in the United States as of December 31, 1996. Based upon membership
in the Academy, the Company estimates that approximately 70% of all ENT
practices consist of individual practitioners or small group practices (less
than four physicians). The Company has observed that ENT physicians and Related
Specialists are increasingly seeking to form larger group practices and
affiliate with physician practice management companies which understand the
needs of ENT physicians and can enhance practice performance. The Company
believes that ENT physicians and Related Specialists desire to affiliate with
the Company because of (i) the Company's ENT and Related Specialty focus, (ii)
its management, (iii) its managed care expertise, (iv) the availability of
expansion capital, (v) the management resources necessary to effectively manage
the practice and develop ancillary services and (vi) the access to ENT specific
proprietary management information systems, all of which are frequently
unavailable to independent groups and solo specialty practitioners.
The Company was incorporated in Delaware in July 1996. The Company's
executive offices are located at 1150 Lake Hearn Drive, Suite 640, Atlanta,
Georgia 30342 and its telephone number is (404) 256-7535.
4
<PAGE> 6
THE OFFERING
Common Stock offered by the Company....... 2,000,000 shares
Common Stock offered by the Selling
Stockholders.............................. 150,000 shares
Common Stock to be outstanding after the
Offering.................................. 8,515,863 shares(1)
Use of proceeds........................... To repay a portion of indebtedness
under a promissory note and
borrowings under the Company's
credit facility to be incurred in
connection with the PDI
acquisition, if consummated, for
working capital and general
corporate purposes, for the cash
component of future acquisitions,
capital equipment and information
systems, and to pay a consulting
fee. See "Use of Proceeds."
Nasdaq National Market symbol............. ENTS
- ------------------------------
(1) Excludes (i) 1,100,000 shares of Common Stock reserved for issuance under
the Company's 1996 Stock Option Plan, under which options to purchase
646,940 shares of Common Stock have been granted at exercise prices ranging
from $6.80 to $12.125 per share, (ii) 275,000 shares of Common Stock
reserved for issuance under the Company's 1996 Health Care Professionals
Stock Option Plan, under which options to purchase 65,000 shares of Common
Stock have been granted at exercise prices ranging from $6.00 to $11.50 per
share, (iii) 220,000 shares of Common Stock issuable upon exercise of
outstanding warrants at an exercise price of $10.80 per share, (iv) 250,000
shares of Common Stock reserved for issuance under the Company's 1997
Employee Stock Purchase Plan, (v) an aggregate of 301,779 shares of Common
Stock to be issued to certain affiliated practices beginning in September
1998 and (vi) shares of Common Stock to be issued in connection with the
Probable Practice Acquisitions with a value at the time of issuance of
approximately $357,500. See "Business -- Acquisition of ENT
Practices -- Post Reorganization Acquisitions," " -- Probable Practice
Acquisitions," "Management -- Stock Option and Purchase Plans" and
"Description of Capital Stock."
5
<PAGE> 7
SUMMARY COMBINED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
------------------------------------------------------------
PRO FORMA FOR
COMPLETED AND
PRO FORMA FOR PROBABLE
COMPLETED PRACTICE
ACTUAL(1) ACQUISITIONS(2)(3) ACQUISITIONS(2)(4)
------------------ ------------------ ------------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue
Management fees................................ $ 10,974 $ 24,923 $ 44,026
Capitation revenue............................. 3,619 4,876 4,876
Patient service revenue........................ 967 1,263 1,263
---------- ---------- ----------
Net revenue...................................... 15,560 31,062 50,165
Expenses
Provider claims, wages, benefits............... 7,819 14,622 22,074
General and administrative..................... 4,371 9,331 16,891
Depreciation and amortization.................. 377 1,070 2,547
---------- ---------- ----------
Operating expenses............................... 12,567 25,023 41,512
---------- ---------- ----------
Operating income................................. 2,993 6,039 8,653
Net income....................................... $ 2,060 $ 3,923 $ 4,481
========== ========== ==========
Basic and diluted earnings per share............. $ 0.42 $ 0.57 $ 0.65
Weighted average shares outstanding.............. 4,966,778 6,909,325 6,945,075
Supplemental system-wide revenue (5)............. $ 25,191 $ 45,477 $ 68,790
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------------
ACTUAL PRO FORMA(6)
------------------ ------------------
<S> <C> <C> <C>
OPERATING DATA:
Number of affiliated physicians (including physicians
employed by the Company)........................................... 47* 76*
Number of allied health care professionals........................... 48 74
Number of other employees............................................ 285 422
Number of clinical locations......................................... 40 57
Number of capitated covered lives.................................... 315,409 315,409
</TABLE>
- ------------------------------
* Includes one TMJ specialist.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------------------------------------
PRO FORMA AS
ACTUAL(1) PRO FORMA(2)(6) ADJUSTED(2)(7)
------------------ ------------------ ------------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.................................. $ 10,469 $ 6,921 $ 18,624
Total assets..................................... 30,598 54,230 61,733
Total debt....................................... 912 21,587 10,387
Stockholders' equity............................. 25,114 25,830 44,533
</TABLE>
6
<PAGE> 8
- ------------------------------
(1) The historical consolidated financial information should be read in
conjunction with the consolidated financial statements of the Company and
the notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" appearing elsewhere herein. The
consolidated financial statement data for the year ended December 31, 1997
have been derived from and are qualified by reference to the audited
consolidated financial statements of the Company included elsewhere herein,
which have been audited by Arthur Andersen LLP, the Company's independent
public accountants.
(2) The summary unaudited pro forma combined financial data should be read in
conjunction with the financial statements of the Company, Atlanta ENT, the
ENT Networks, Cobb Ear, Nose & Throat Associates, P.C. ("Cobb") and Ear,
Nose & Throat Associates, P.C., a medical practice whose shareholders own
50% of the equity of Physicians' Domain ("ENT Associates"), and the notes
thereto included elsewhere herein, the unaudited pro forma combined
financial statements of the Company and the notes thereto included elsewhere
herein and "Management's Discussion and Analysis of Financial Condition and
Results of Operations." The summary unaudited pro forma combined data does
not purport to represent what the Company's financial position or results of
operations actually would have been had such transactions 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.
(3) Represents the unaudited pro forma combined results of operations for the
Company's affiliated practices (excluding Probable Practice Acquisitions) as
if the acquisition of the assets or equity of these practices had occurred
on January 1, 1997.
(4) Represents the unaudited pro forma combined results of operations for the
Company's affiliated practices and the Probable Practice Acquisitions
(including the PDI practices, which consist of 26 physicians with 14
clinical offices in the New York metropolitan area) as if the acquisition of
the assets or equity of the Company's affiliated practices and the Probable
Practice Acquisitions had occurred on January 1, 1997.
(5) The unaudited supplemental system-wide revenue is being presented for
supplemental purposes only and should be read in conjunction with the
Company's financial statements. In accordance with a recently issued
Consensus Opinion issued by the Emerging Issues Task Force of the FASB
("EITF 97-2"), the Company is evaluating pertinent criteria contained in
each of its management services agreements. Based upon the provisions of
EITF 97-2, the Company anticipates that during 1998 it will begin
consolidating the operating results of the majority of its managed physician
practices. Upon adoption of consolidation, all previously issued Company
financial statements will be restated to reflect consolidation of revenue.
This restatement will not affect the Company's previously reported operating
income. See "Management's Discussion and Analysis of Financial Conditions
and Results of Operations."
(6) Gives pro forma effect to the acquisition of the Company's affiliated
practices and the Probable Practice Acquisitions as if the acquisition of
the assets or equity of these practices had occurred on December 31, 1997.
(7) Adjusted to reflect (i) the sale of the 2,000,000 shares of Common Stock
offered by the Company hereby at an assumed offering price of $10.625 per
share, the last reported sale price per share on the Nasdaq National Market
on April 14, 1998, and the receipt of the net proceeds therefrom and (ii)
repayment of borrowings under the Company's credit facility and a portion of
the note to be issued in connection with the proposed PDI acquisition with a
portion of the net proceeds from the Offering.
7
<PAGE> 9
RISK FACTORS
The securities offered hereby are highly speculative in nature and involve
a high degree of risk. Prior to making an investment decision, prospective
investors should give careful consideration to, among other things, the risk
factors set forth below. This Prospectus contains forward-looking statements
within the meaning of the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995. Reference is made in particular to the
description of the Company's plans and objectives for future operations,
assumptions underlying such plans and objectives and other forward-looking
statements included in "Prospectus Summary," "Risk Factors," "Use of Proceeds,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business" in this Prospectus. Such statements may be identified
by the use of forward-looking terminology such as "may," "will," "expect,"
"believe," "estimate," "anticipate," "continue," or similar terms, variations of
such terms or the negative of such terms. Such statements are based on
management's current expectations and are subject to a number of factors and
uncertainties which could cause actual results to differ materially from those
described in the forward-looking statements. Factors which could cause such
results to differ materially from those described in the forward-looking
statements include those set forth below.
Limited Operating History; Limited History of Combined Operations. The
Company was formed in July 1996 and, prior to its affiliation with the ENT
practices in March 1997 (the "Initial Practices"), the Company had no history of
operations or earnings. In addition, the Company has completed the acquisition
of assets of certain ENT practices since March 1997 (the "Additional Practices"
and together with the Initial Practices, the "Practices"). Prior to the
acquisition by the Company of the Practices, the Practices operated as separate
independent entities, and accordingly, the Company has limited experience in
integrating and managing multiple or multi-state specialty physician practices.
The Company also has limited experience in integrating and managing physician
practices outside the Atlanta area. Therefore, there can be no assurance that
the Company will be able to successfully manage physician practices outside of
the metropolitan Atlanta area, successfully integrate the operations of the
Practices, the Probable Practice Acquisitions, if completed, or future
affiliating practices and implement Company-wide systems and procedures
necessary to successfully manage the combined business on a profitable basis.
The Company's management group has been assembled only recently, and there can
be no assurance that the management group will be able to successfully manage
the combined entity. The inability of the Company to successfully integrate the
Practices, and, if completed, the Probable Practice Acquisitions or any future
affiliating practices would have a material adverse effect on the Company's
business, financial condition and results of operations.
Risks Relating to Acquisitions and Managing Growth. An integral part of
the Company's business strategy is growth through acquisitions. The Company's
acquisition strategy presents risks that could materially adversely affect the
Company's business and financial performance, including the diversion of
management's attention, the difficulties associated with the assimilation of the
operations and personnel of affiliated practices, the contingent and latent
risks associated with the past operations of and other unanticipated problems
arising in affiliated practices and increased competition for acquisition
opportunities. As the Company expands through acquisitions, the Company will be
required to hire and retain additional management and administrative personnel
and to 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. Furthermore, as the Company acquires
additional physician practice assets, the Company will incur significant
additional charges for depreciation and amortization and, to the extent debt
financing is used, interest expense which would have the effect of reducing the
Company's earnings and adversely affecting cash flow. The Company intends to
continue to issue equity securities in connection with future acquisitions and
may seek additional equity financings, which would result in the dilution of
existing equity positions. Concurrently with the Offering, the Company is
registering for resale under the Securities Act of 1933, as amended (the
"Securities Act"), 2,750,000 shares of Common Stock which may be issued by the
Company from time to time in connection with future affiliation transactions
with ENT physician and Related Specialty practices or the acquisition by the
Company of other related businesses or assets. There can be no assurance that
the Company will be able to acquire the assets or equity of or profitably
provide management services to any specialty physician practices that may be
acquired in the future, including the Probable Practice Acquisitions, or
effectively implement its acquisition strategy or that such strategy will be
successful. Furthermore, there can be no assurance that the Company will be able
to affiliate
8
<PAGE> 10
with additional specialty physician practices on terms favorable to the Company,
that the operations of any such practices can be successfully integrated into
the Company's business, that any anticipated benefits of the affiliations will
be realized, or that there will not be substantial unanticipated costs
associated with the acquisitions. The failure to manage growth effectively could
have a material adverse effect on the Company's business, financial condition
and results of operations and would negatively affect the Company's ability to
execute its acquisition strategy. The Company's ability to consummate future
acquisitions depends to a significant extent on the efforts of Gerald R.
Benjamin, the Company's Vice Chairman and Secretary. See "Dependence on Key
Personnel; Need for Additional Management."
Risks Relating to the Probable Practice Acquisitions. The Company is
evaluating and is in various stages of discussions in connection with the
potential acquisition of assets or equity of several ENT physician practices and
Related Specialty practices, including the Probable Practice Acquisitions.
However, the Company has no agreements or arrangements with respect to the terms
of any particular acquisitions, except for the non-binding letters of intent for
the Probable Practice Acquisitions. The letters of intent are mere statements of
intention and each of the Probable Practice Acquisitions is subject to various
conditions to closing, including the negotiation and execution of an acquisition
agreement related to such potential acquisition. Accordingly, there can be no
assurance that the Company will be able to consummate any of the Probable
Practice Acquisitions. The proposed PDI transaction, if consummated, with 26
physicians with 14 clinical offices in the New York metropolitan area, will be
the Company's largest acquisition to date, and there can be no assurance that
the Company will be able to successfully manage PDI or successfully integrate
the operations of PDI with the Company's operations. In addition, this
acquisition will substantially increase the Company's outstanding indebtedness.
See "-- Limited Operating History; Limited History of Combined Operations,"
"-- Potential Substantial Leverage; Risks Relating to Credit Facility,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Strategy."
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 affiliate with additional ENT and Related Specialty practices.
The Company also intends to issue its securities in connection with certain
future affiliations. Concurrently with the Offering, the Company is registering
for resale under the Securities Act 2,750,000 shares of Common Stock which may
be issued by the Company from time to time in connection with future affiliation
transactions with ENT physician and Related Specialty practices or the
acquisition by the Company of other related businesses or assets. The Company is
engaged in discussions with several ENT and Related Specialty practices;
however, except with respect to the Probable Practice Acquisitions, the Company
has no agreements or arrangements with respect to any particular future
affiliations 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 evaluated, 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. There can be no assurance that the Company will
use such net proceeds in a manner that enhances stockholder value. See "Use of
Proceeds" and "Business -- Strategy."
Dependence on Affiliated Physicians. All of the Company's revenue is
derived (i) under management services agreements with affiliated practices, (ii)
from patient service revenue generated by physicians employed by the Company and
(iii) under capitated managed care contracts held by the Company. Revenue
derived by the Company under management services agreements depends on the fees
and revenue generated by affiliated physicians. The management fee under
management services agreements the Company may enter into with physician
practices located in certain states, including New York, however, may not vary
based upon the revenue generated by the practices. As a result, these management
services agreements will have fixed management fees, which fees will be subject
to increase upon (i) the management by the Company of ancillary business
developed or acquired or (ii) the acquisition of additional physician practices
which are merged into an existing practice. Therefore, growth in the Company's
management fees under these arrangements will be dependent on the Company's
ability to achieve the foregoing. Although affiliated physicians are expected to
enter into employment agreements with their respective practices, there can be
no assurance as to the continued services of any particular
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physician. In particular, 32 of 48 of the affiliated physicians are employed by
Atlanta ENT and generate a substantial portion of the Company's revenue. Revenue
derived by the Company under capitated managed care contracts depends on the
continued participation of affiliated physicians providing medical services to
enrollees of the managed care companies and, to a lesser extent, independent
physicians ("independent physicians" and, together with affiliated physicians,
"associated physicians") contracting with the Company to participate in provider
networks which are developed by 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, 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 and results of operations. See
"Business -- Company Operations."
Risks Associated with Capitated Arrangements Including Risk of
Over-Utilization by Managed Care Enrollees, Risk of Reduction of Capitated Rates
and Regulatory Risks. During the year ended December 31, 1997, approximately
77% of the net revenue of the Company was derived from payments made on a
fee-for-service basis by patients and third party payors (including government
programs) and approximately 23% of the net revenue of the Company was derived
from capitated arrangements. Under capitated contracts, the health care provider
typically accepts a pre-determined amount for professional services per patient
per month from the payor in exchange for providing all covered professional
services to the enrollees under the agreement. Such contracts pass much of the
financial risk of providing care, such as over-utilization, from the payor to
the provider. The Company compensates associated physicians on a discounted
fee-for-service basis for providing ENT medical and surgical professional
services to enrollees of the managed care company. Because the Company incurs
costs based on the frequency and extent of professional services provided by
such physicians, but only receives a fixed fee for agreeing to provide such
services, to the extent that the enrollees covered by such managed care
contracts require more frequent or extensive care than is anticipated, the
Company's operating margins may be reduced and, in certain cases, the revenue
derived from such contracts may be insufficient to cover the costs of the
services provided. In either event, the Company's business, financial condition
and results of operations may be materially adversely affected. As an increasing
percentage of patients enroll in managed care arrangements, the Company's future
success will depend in part upon its ability to negotiate, on behalf of
associated physicians, contracts with managed care payors on terms favorable to
the Company and upon its effective management of health care costs through
various methods, including competitive pricing and utilization management and
review for purchased services. The proliferation of capitated contracts in
markets served by the Company could result in decreased predictability of
operating margins. There can be no assurance that the Company will be able to
negotiate, on behalf of associated physicians, satisfactory arrangements on a
capitated basis or that such arrangements will be profitable to the Company in
the future. In addition, in certain jurisdictions, capitated agreements in which
the provider bears the risk are regulated under insurance laws. The degree to
which these capitated arrangements are regulated by insurance laws varies on a
state by state basis, and as a result, the Company may be limited in Alabama,
Florida, Georgia and Illinois and other states in which it may seek to enter
into or arrange capitated agreements for its associated physicians when those
capitated contracts involve the assumption of risk. See "-- Dependence on
Contracts with Managed Care Organizations."
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 medical professional services to such enrollees. 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 additional or renewing existing contracts with
managed care organizations on terms favorable to the Company and associated
physicians. The Company's capitated managed care contracts together accounted
for approximately 23% of the net revenue of the Company for the year ended
December 31, 1997. Aetna Health Plans of Georgia ("Aetna") modified its delivery
system of physician specialty services in the Atlanta market and terminated its
capitated managed care contracts with each physician specialty group, including
the Company, effective June 30, 1997. The Company's affiliated physicians at
Atlanta ENT and Allatoona E.N.T. & Facial Plastic Surgery, P.C.
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<PAGE> 12
("Allatoona ENT") continue to provide services to Aetna under new physician
provider agreements, which reimburse physicians on a modified fee-for-service
basis. The Company's capitated managed care agreements with United HealthCare
and Cigna are subject to 90 to 120 day cancellation by either party, and in the
case of Cigna is subject to annual renegotiation of rates, covered benefits and
other terms and conditions. The agreement with United HealthCare expires in May
1998 and there can be no assurance the Company will be able to renew this
agreement, or, if renewed, that it will contain terms favorable to the Company
and associated physicians. The Company's capitated managed care agreement with
FPA provides for a renegotiation of the capitation fees 15 months into the
initial term of the agreement. In the event that parties cannot renegotiate the
capitation fees within 60 days, the agreement may be terminated by either party.
The agreement also provides for annual renegotiation of the capitation fees
following the initial term, which expires in August 2000, and may be terminated
at any time by FPA for cause. There can be no assurance that the Company will be
able to renew any of these managed care agreements or, if renewed, that they
will contain terms favorable to the Company and 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 "-- Risks
Associated with Capitated Arrangements Including Risk of Over-Utilization by
Managed Care Enrollees, Risk of Reduction of Capitated Rates and Regulatory
Risks," "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and "Business -- Capitated Managed Care Contracts; Network
Development and Management."
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 revenue of the Company and affiliated practices has
been, and is expected to continue to be, derived from managed care companies,
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 in the future, or the future reimbursement (including reductions in
capitated rates) for any service offered by associated physicians, either of
which could have a material adverse effect on the Company's business, financial
condition or results of operations. The Company believes that these trends will
continue to result in a reduction of per patient revenue at affiliated
practices. Furthermore, government reimbursement programs are subject to
statutory and regulatory changes, retroactive rate adjustments, administrative
rulings and government restrictions, all of which could materially decrease the
range of services covered by such programs or the reimbursement rates paid for
the ENT medical and surgical services provided by associated physicians. Any
future reductions or changes could have a material adverse effect on the
Company's business, financial condition or results of operations. 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 results
of operations. See "-- Dependence on Contracts with Managed Care Organizations."
Potential Substantial Leverage; Risks Relating to Credit
Facility. Although the Company intends to use a substantial portion of the net
proceeds of the Offering to acquire the assets or equity of certain ENT and
Related Specialty practices, including the Probable Practice Acquisitions and
other acquisitions which it is currently evaluating, it will require significant
additional funds for future acquisitions and integration and management of
affiliated practices. In connection with the acquisition of assets or equity of
the Additional Practices, the Company (i) issued long-term promissory notes in
the aggregate principal amount of approximately $912,000, which promissory notes
have varying maturity dates and interest rates and are convertible into shares
of Common Stock at the option of the holders, (ii) issued various contingent
promissory notes in the aggregate principal amount of approximately $3.0 million
which are payable only upon the holders of such notes attaining certain earnings
or other performance thresholds, certain of which notes are convertible into
shares of Common Stock, and (iii) issued and agreed to issue an aggregate of
approximately 913,000 shares of Common Stock. In the event the proposed PDI
transaction is consummated on the terms contemplated, the Company will (i) issue
a promissory note in the principal amount of approximately $16.2 million and
(ii) borrow approximately $4.2 million under its $20.0 million Credit Facility
with NationsBank, N.A. (the "Credit Facility"). Pursuant to the
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<PAGE> 13
terms of the letter of intent, the promissory note will accrue interest at a
rate of 6% per annum, payable quarterly, will be secured by the fixed assets
acquired by the Company in the transaction and will be subordinate to the Credit
Facility. Pursuant to the proposed terms of the promissory note, approximately
$9.2 million of the principal amount of the note will mature five years from the
date of issuance and approximately $7.0 million of the principal of the note
will mature upon the earlier of (i) three days following the closing of the
Offering or (ii) December 31, 1998. At December 31, 1997, the Company's
indebtedness would have been approximately $10.4 million on a pro forma basis
after giving effect to the Probable Practice Acquisitions and the Offering and
the application of the net proceeds therefrom, representing approximately 18.9%
of the Company's total capitalization. Accordingly, the Company is subject to
all of the risks associated with substantial indebtedness, including the risk
that the Company's cash flow may not be sufficient to make required payments of
principal and interest on the indebtedness. The Company intends to continue to
issue its securities in connection with future acquisitions, which could result
in the dilution of existing equity positions. See "-- Broad Discretion In Use of
Proceeds; Inability of Stockholders to Evaluate Future Acquisitions,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business -- Strategy" and "-- Acquisition of ENT Practices."
The Company may incur additional indebtedness to fund future acquisitions,
including additional borrowings under the Credit Facility. Borrowings are
available under the Credit Facility to provide financing for the acquisition of
assets or equity of physician practices and for working capital and will be
governed by, among other factors, the Company's earnings before interest, taxes,
depreciation and amortization ("EBITDA"). There can be no assurance that amounts
available under the Credit Facility will be sufficient to fund future
acquisitions or, if such amounts are not sufficient, that the Company will be
able to obtain additional financing on terms acceptable to the Company or at
all. An inability to obtain such financing on favorable terms could limit the
Company's growth. As the Company acquires additional physician practice assets,
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.
Any borrowings of the Company under the Credit Facility will bear interest at a
variable rate. Accordingly, increases in interest rates would increase the
Company's interest expense which would have the effect of reducing the Company's
earnings and adversely affecting cash flow. The Company is required to maintain
certain financial ratios and is restricted from engaging in certain activities
under the Credit Facility. The Company has granted to the bank a security
interest in the capital stock of its subsidiaries and all accounts receivable of
the Company, including the accounts receivable of affiliated practices assigned
to the Company under the management services agreements. Therefore, in the event
of a default under the credit agreement or a bankruptcy, liquidation or
reorganization of the Company, such stock and assets 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, the Company's
stockholders could lose 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 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. As of December 31, 1997, the Company had no borrowings under the Credit
Facility. However, in the event the proposed PDI acquisition is consummated on
the terms contemplated, the Company expects to borrow approximately $4.2 million
under the Credit Facility to repay debt of PDI. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Influence of Ramie A. Tritt, M.D.; Potential Anti-takeover
Provisions. Upon the completion of the Offering, Dr. Tritt, the Chairman of the
Board and President of the Company, will beneficially own approximately 20.7% of
the outstanding Common Stock and the physicians at Atlanta ENT, an affiliated
practice, together with Dr. Tritt, the President of Atlanta ENT, in the
aggregate will beneficially own approximately 36.4% of the outstanding Common
Stock. The officers and directors of the Company in the aggregate will
beneficially own approximately 24.2% of the outstanding shares of Common Stock
(23.3% if the Underwriters' over-allotment option is exercised in full). As a
result, Dr. Tritt may be able to influence significantly the election of
directors and the outcome of corporate transactions or other matters submitted
for stockholder approval. Such influence by Dr. Tritt 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
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issue from time to time, without stockholder approval, shares of preferred stock
with such terms and conditions as the Board of Directors may determine in its
sole discretion. The Company is 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, which may adversely affect the market price of the Common Stock. 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 the Company's executive officers
allow 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 and Selling Stockholders" and "Description of Capital
Stock."
Competition. The physician practice management industry is highly
competitive. The restructuring of the 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 competes
with physician practice management companies, hospitals, managed care companies,
physician practices and other competitors seeking to affiliate with physicians
or provide management services to physicians. Many of these competitors 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. There can be no assurance the
Company will be able to affiliate with a sufficient number of competent
physicians and other health care professionals to expand its business.
Physicians are facing the challenge of providing quality patient care while
experiencing rising costs, strong competition for patients and a general
reduction of reimbursement rates by both private and government payors. The
Company believes that competition for patients is dependent upon, among other
things, the geographic coverage of affiliated practices, the reputation and
referral patterns of affiliated physicians and the breadth of ENT and Related
Specialty medical and surgical services provided by physicians practicing at
affiliated practices. Therefore, the success of the Company is dependent upon
the ability of the Company and its affiliated practices 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.
There can be no assurance that sufficient numbers of qualified health care
professionals can be hired and retained. The inability to hire and retain such
health care professionals could have a material adverse effect on the Company's
business, financial condition and results of operations.
Concern over the rising cost of health care has led to the emergence and
increased prominence of managed care and a resulting increase in competition for
managed care contracts. The Company's ability to compete successfully for
exclusive managed care contracts may depend upon the Company's ability to manage
utilization under such contracts and to increase the number of associated
physicians and other health care professionals included in its provider
networks. The Company competes with physician practice management companies,
multi-specialty physician practices and certain other entities for exclusive
managed care contracts and there can be no assurance that managed care companies
will seek to contract with an entity, such as the Company, that is affiliated
with physicians providing services in a single specialty rather than an entity
that is affiliated with physicians providing multi-specialty services. The
inability of the Company to enter into such arrangements in the future on behalf
of affiliated practices could have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business -- Competition."
Antitrust Risks. The Company and its affiliated practices are subject to
federal and state antitrust statutes that prohibit conduct such as price fixing,
market allocation and other anti-competitive activities by groups of
competitors. The federal and state antitrust enforcement agencies have brought
civil and criminal enforcement actions against the joint activities of physician
organizations that violate antitrust laws. Anti-competitive activity may also be
subject to private lawsuits by those injured by the activity. Collaboration
regarding the pricing of services, market allocation and certain other types of
joint action, however, may be permissible in the context of an integrated joint
venture if those activities are ancillary to otherwise legitimate purposes of
the joint venture. The federal antitrust agencies, the Federal Trade Commission
and the United States Department of Justice, have
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established "antitrust safety zones" for physician networks that meet certain
criteria. The antitrust safety zones are for networks in which providers share
substantial financial risk (e.g., capitation or substantial withholding) and in
which the providers constitute less than specified percentages (20% for
exclusive networks and 30% for nonexclusive networks) of total providers in a
specialty or subspecialty in the market. Conduct outside the safety zones is not
necessarily unlawful, but antitrust regulatory authorities will give greater
scrutiny to the potential impact on overall competition. State antitrust
agencies may or may not rely on antitrust analysis similar to that of the
federal agencies. A determination that the Company's operations violate federal
or state antitrust laws could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, an
antitrust claim asserted by federal or state antitrust agencies or a private
party against the Company could be costly to defend, could consume management
resources and could adversely affect the Company's business regardless of the
merit or eventual outcome of such claim.
Government Regulation. The health care industry is highly regulated, and
there can be no assurance that the regulatory environment in which the Company
operates will not change significantly in the future. In general, regulation of
health care companies is increasing. Every state imposes licensing requirements
on individual physicians and on facilities and services operated by physicians.
Many states require regulatory approval, including certificates of need, before
establishing certain types of health care facilities, offering certain services
or making expenditures in excess of statutory thresholds for health care
equipment, facilities or programs. To date, neither the Company nor its
affiliated practices have been required to obtain certificates of need for their
activities. Federal and state laws also regulate HMOs and other managed care
organizations. In connection with the expansion of existing operations and the
entry into new markets and managed care arrangements, the Company and its
affiliated practices may become subject to compliance with additional
regulation.
The Company and its affiliated practices are also subject to federal, state
and local laws addressing issues such as occupational health and safety,
employment, medical leave, insurance regulations, civil rights and
discrimination, and medical waste and other environmental issues. At an
increasing rate, federal, state and local governments are expanding the
regulatory requirements on 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.
Various state and federal laws regulate the relationships between providers
of health care services, physicians and other clinicians. These laws, among
others, include the federal anti-kickback statute and the federal "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 Medicare, Medicaid or
federally-funded health care programs. The Stark Law prohibits 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 federally-funded health care
programs. To the extent that the Company is deemed to be a separate provider of
medical services under its management services agreements and to receive
referrals from physicians, the financial arrangements could be subject to
scrutiny under the Stark Law or anti-kickback statute. One of the Company's
wholly owned subsidiaries does employ physicians, and as such, it does maintain
a provider number. In addition, under separate statutes, submission of claims
for payment that are "not provided as claimed," are false, fictitious or
fraudulent or misrepresent a material fact may lead to substantial civil or
criminal penalties to the Company or one or more of its affiliated practices. It
may also result in the exclusion from participation in the Medicare, Medicaid
and federally-funded programs which could result in a significant loss of
reimbursement. The Company's arrangements have not been the subject of federal
judicial or regulatory interpretation. A determination of liability under any
such laws could have a material adverse effect on the Company's business,
financial condition and results of operations.
Several states, including Alabama, Florida, Georgia, Illinois, New York and
New Jersey have adopted laws similar to the Stark Law and federal anti-kickback
law 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. In Illinois, it is unlawful for a physician to divide with
anyone other than physicians with whom the physician practices in a legally
recognized entity or organization any fee or other form of compensation for
professional
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services not personally rendered. In Georgia, physicians are prohibited from
dividing fees with any person or entity for referring a patient and from
referring patients for certain designated health care services to any entity
with which the physician has a financial relationship. In Florida, the Florida
Board of Medicine recently issued a declaratory statement, which has been stayed
pending its appeal, indicating that certain types of arrangements between
physicians and physician practice management companies may violate fee splitting
and patient referral laws. If upheld, such declaratory statement could be
construed as prohibiting physician management agreements pursuant to which the
management company is paid based on a percentage of revenue or profit generated
by the managed care practice. In addition, the declaratory statement could be
construed as restricting the manner in which the management company provides
marketing services to a managed practice. In New York, physicians are prohibited
from directly or indirectly requesting, receiving or participating in the
division, transference, assignment, rebate, splitting or refunding of a fee for,
or directly requesting, receiving or profiting by means of a credit or other
valuable consideration as a commission, discount or gratuity, in connection with
the furnishing of professional care or services, outside of a medical practice
partnership, professional corporation or university faculty practice. New York
law also prohibits a physician from directly or indirectly offering, giving,
soliciting or receiving or agreeing to receive, any fee or other consideration
to or from a third party for the referral of a patient or in connection with the
performance of a professional service. New York law also prohibits, with certain
narrowly defined exceptions, a physician from referring patients for certain
health services to health care providers with which the physician, or a member
of a physician's immediate family, has a financial relationship. With certain
exceptions, it is unlawful in New Jersey for a physician to refer patients for
health care services to health care providers with which the physician and/or
the physician's immediate family has a significant beneficial interest. A
significant beneficial interest is any financial interest, including but not
limited to an equity or ownership interest, in an entity that provides or
arranges for the provision of health care services. The laws of some states,
including certain states in which the Company operates or may operate, prohibit
non-physician entities from practicing medicine or from exercising control over
the professional judgments or decisions of physicians concerning the treatment
and diagnosis of patients. In Illinois, there is case law which prohibits
corporations (other than specifically licensed Medicaid corporations or hospital
corporations) from providing professional medical services or employing
physicians. In Georgia, there is case law which could also be interpreted as
prohibiting a corporation from employing physicians. Florida law does not
prohibit the corporate practice of medicine although it does prohibit the
corporate practice of other medical services such as dentistry and optometry. In
Alabama, recent interpretations by state authorities have indicated that a
corporation may employ physicians as long as the physicians exercise their
independent professional judgment in rendering medical decisions concerning the
treatment and diagnosis of patients. New York law contains strict prohibitions
against the corporate practice of medicine and corporations controlled by
non-physicians are prohibited from employing physicians and engaging in the
practice of medicine, unless the corporate entity is licensed to do so pursuant
to Article 28 of the New York Public Health Law (e.g., hospitals, clinics). New
Jersey law indirectly prohibits the corporate practice of medicine. The New
Jersey State Board of Medical Examiners has adopted regulations which allow only
certain types of general corporations to employ or engage physicians under
limited circumstances. 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.
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 affiliated practices
and any practices with which it has arrangements in the future will not be
successfully challenged as constituting the unlicensed practice of medicine or
unlawful splitting of fees by physicians with non-physicians. 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. Additionally, any claim or proceeding asserted by
state or federal agencies or a private person against the Company or its
affiliated practices 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, 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
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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
continuously subjecting the health care industry in the United States to
fundamental change. On August 5, 1997, President Clinton signed the Balanced
Budget Act of 1997 (the "Balanced Budget Act") which contemplates savings of
$115 billion in Medicare spending and $13 billion in Medicaid spending over the
five-year period from 1998 to 2002. The savings will result primarily from
reductions in reimbursements to providers due to several factors, including but
not limited to, alterations in the methodology for calculating physician fee
schedule payments, application of a budget neutrality adjustment to prevent
physician fees from increasing above a certain aggregate amount, and expansion
of options for Medicare delivery including provider-sponsored organizations,
HMOs, preferred provider organizations and private fee-for-service plans. The
Balanced Budget Act also establishes more stringent sanctions for convictions of
health care related crimes including permanent exclusion from participation in
the Medicare Program after conviction of three health care related crimes and
imposition of civil monetary penalties for violations of the federal
anti-kickback statute. Due to the recent enactment of this health care reform
and uncertain interpretation of these reform measures by regulatory authorities,
it is difficult to determine the impact that this reform will have upon the
Company and its affiliated physicians, and there can be no assurance that these
reform measures will not have a material adverse effect on the Company's
business, financial condition or results of operations. In addition to federal
health care reform, 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 both federal and state governments will continue to
review and assess alternative health care delivery systems and payment
methodologies and that additional reforms will likely occur in the future. Due
to uncertainties regarding the additional reforms and their enactment and
implementation, the Company cannot predict which, if any, 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 results of operations. In addition, the actual announcement by
competitors and third party payors of their strategies to respond to such
initiatives or reforms could produce volatility in the trading and market price
of the Common Stock of the Company. See "Business -- Government Regulation."
Dependence on Key Personnel; Need for Additional Management. The Company's
success depends to a significant extent on the ability of its executive officers
and key personnel, including Ramie A. Tritt, M.D., the Chairman of the Board and
President of the Company and a principal stockholder of the Company (and a
principal stockholder of an affiliated practice), Richard D. Ballard, the
Company's Chief Executive Officer, and Lawrence P. Kraska, the Company's Vice
President-Operations. In addition, the Company's ability to consummate future
acquisitions depends to a significant extent on the efforts of Gerald R.
Benjamin, the Company's Vice Chairman and Secretary. The loss of Dr. Tritt, Mr.
Ballard, Mr. Benjamin or Mr. Kraska could have a material adverse effect on the
development and likelihood of success of the Company's business. The Company
believes that its future success will also depend in part upon its ability to
attract and retain additional management personnel. The Company anticipates
recruiting additional executive officers and management personnel following the
closing of the Offering. 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 "Management."
Potential Conflicts of Interest. There have been and are currently
agreements by and among the Company, certain affiliated practices, each of their
respective officers, directors and affiliates, and entities controlled by such
officers, directors and affiliates. In addition, Dr. Tritt is a physician at an
affiliated 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. Although the Company does not itself engage in
the practice of medicine or assume responsibility for compliance with regulatory
requirements
16
<PAGE> 18
directly applicable to physicians, there can be no assurance that claims will
not be asserted against the Company in the event that services provided by
physicians at affiliated practices are alleged to have resulted in injury or
other adverse effects. Medical malpractice claims have been asserted and are
pending against a number of managed care companies. In addition, legislation has
been proposed in various states expressly providing for medical malpractice
liability for managed care companies. In the event that regulatory authorities
determine that the Company is a managed care company, the enactment of any such
laws could have a material adverse effect on the Company's business, financial
condition or results of operations. 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 results of operations.
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. 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 connection with
the acquisition of assets or equity of affiliated practices, the Company may
assume or acquire certain of the stated liabilities of such practices.
Therefore, claims may be asserted against the Company for events related to an
affiliated practice that occurred prior to its affiliation with the Company.
There can be no assurance that any successful claims will not exceed applicable
policy limits of the insurance coverage maintained by the Company or such
affiliated practices. See "Business -- Liability and Insurance" and "-- Legal
Proceedings."
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 adapt quickly and successfully
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 by reducing the Company's ability to
facilitate receipt of accounts receivable of affiliated practices and to
efficiently and accurately analyze and anticipate the costs incurred by
associated physicians providing medical services pursuant to capitated managed
care contracts. See "Business -- Information Systems."
Year 2000. The Company has commenced review of its computer systems to
identify the systems that could be affected by the "Year 2000" issue and will
develop an implementation plan to resolve the issue. The Year 2000 issue is the
result of computer programs being written using two digits rather than four to
define the applicable year. Any of the Company's programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a major system failure or
miscalculations. If modifications to existing software or converting to new
software is not completed on a timely basis, the Year 2000 problem may have a
material adverse effect on the Company's business, financial condition and
results of operations. Third-party payors with whom the Company has
relationships with may also be affected by the Year 2000. The failure of such
payors to resolve the Year 2000 problem could, among other things, affect their
ability to reimburse the Company in a timely manner which, in turn, could have a
material adverse effect on the Company's cash flow and results of operations.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Possible Volatility of Stock Price. The stock market often experiences
significant price and volume fluctuations that may be unrelated to the operating
performance of particular companies. The market price of the Common Stock 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. These market fluctuations could have an adverse effect on
the market price or liquidity of the Common Stock.
17
<PAGE> 19
Shares Eligible for Future Sale; Registration Rights. Future sales of
shares of Common Stock by current stockholders 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. Of the 8,515,863 shares of
Common Stock to be outstanding after the Offering, approximately 4,400,000
shares, including the 2,150,000 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
4,115,863 shares outstanding upon completion of the Offering, of which 2,055,205
shares are held by affiliates of the Company and 2,060,658 are held by
non-affiliates of the Company, 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, 3,504,648 shares (including a
portion of the shares of Common Stock being offered by the Selling Stockholders
pursuant to this Prospectus) are currently eligible for sale pursuant to Rule
144. The remaining 611,215 shares will become eligible for sale pursuant to Rule
144 at various times commencing July 1998. In addition, an aggregate of 800,000
shares of Common Stock issuable pursuant to the Company's stock purchase plan or
upon exercise of options granted or to be granted under the Company's 1996 Stock
Option Plan are eligible, upon exercise, for sale to the public pursuant to
Registration Statements on Form S-8 filed by the Company. Concurrently with this
Offering, the Company is registering for resale under the Securities Act
2,750,000 shares of Common Stock which may be issued by the Company from time to
time in connection with future affiliation transactions with ENT physician and
Related Specialty practices or the merger with or acquisition by the Company of
other related businesses or assets. In connection with the Company's initial
public offering in March 1997 (the "IPO"), the Company issued warrants to
purchase up to 220,000 shares of Common Stock to the representatives of the
underwriters in the IPO, which warrants became exercisable in March 1998. All
directors and executive officers of the Company and certain stockholders of the
Company, including the Selling Stockholders, holding an aggregate of
approximately 3,470,000 shares of Common Stock and approximately 270,000 vested
options have agreed not to offer, sell, contract to sell or otherwise dispose of
any shares of Common Stock or securities convertible into or exercisable or
exchangeable for, or any rights to purchase or acquire, shares of Common Stock
(other than the 150,000 shares of Common Stock being sold by the Selling
Stockholders pursuant to this Prospectus) for a period of 180 days following the
date of this Prospectus, without the prior written consent of Volpe Brown Whelan
& Company, LLC. The holders of an aggregate of 4,535,863 shares of Common Stock
and warrants to purchase shares of Common Stock have certain demand and
piggyback registration rights with respect to their shares of Common Stock. The
Company has requested or received waivers from holders of registration rights
that are currently exercisable waiving their rights to have their securities
(other than the shares of Common Stock being offered by the Selling Stockholders
pursuant to this Prospectus) registered in this Offering. 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 and Purchase Plans," "Description
of Capital Stock -- Warrants," "Shares Eligible for Future Sale" and
"Underwriting."
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 Credit Facility contains restrictions on the
payment of dividends. See "Dividend Policy" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
18
<PAGE> 20
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,000,000 shares of
Common Stock offered by the Company hereby at an assumed public offering price
of $10.625 per share, the last reported sale price of the Common Stock on the
Nasdaq National Market on April 14, 1998, and after deducting underwriting
discounts and the estimated expenses of the Offering payable by the Company
(excluding a $200,000 consulting fee), are estimated to be approximately $18.9
million ($22.1 million if the Underwriters' over-allotment option is exercised
in full). The Company will not receive any of the proceeds from the sale of
shares of Common Stock by the Selling Stockholders.
In the event the proposed PDI transaction is consummated on the terms
contemplated, the Company anticipates that approximately $7.0 million and $4.2
million of the net proceeds of the Offering will be used to repay a portion of
the principal of the promissory note to be issued in connection with the PDI
acquisition and borrowings under the Credit Facility which will be incurred in
connection with the PDI transaction, respectively. The promissory note will
accrue annual interest at 6%, payable quarterly. Pursuant to the proposed terms
of the promissory note, approximately $9.2 million of the principal amount of
the note will mature five years from the date of issuance and approximately $7.0
million of the principal amount of the note will mature upon the earlier of (i)
three days following the closing of the Offering or (ii) December 31, 1998. The
borrowings under the Credit Facility mature in April 2002 and bear interest, at
the Company's option, at either a prime-base rate or a LIBOR-based rate. The
remaining approximately $7.7 million of net proceeds of the Offering will be
used to fund future acquisitions of ENT and Related Specialty practice assets or
equity, for capital equipment and information systems and for general corporate
purposes. In addition, at the closing of the Offering, the Company will pay
$200,000 to Premier HealthCare, an affiliate of Gerald R. Benjamin, the Vice
Chairman of the Board and Secretary of the Company, for consulting services in
connection with the Offering.
The Company is evaluating and is engaged in discussions in connection with
the potential acquisition of the assets or equity of other additional ENT
physician and Related Specialty practices, however except with respect to the
Probable Practice Acquisitions, the Company has no agreements or arrangements
relating to any particular additional acquisition and there can be no assurance
that any such acquisitions will be consummated. In the event that any of these
acquisitions or any future acquisitions are consummated, the Company expects to
use a portion of the net proceeds of the Offering to pay all or a portion of the
purchase price of such acquisitions. See "Business -- Strategy."
Pending utilization as described above, the Company intends to invest the
net proceeds of the Offering in short-term, investment grade, interest-bearing
securities.
19
<PAGE> 21
PRICE RANGE OF COMMON STOCK
The Common Stock began trading on the Nasdaq National Market on March 21,
1997 and is quoted under the symbol "ENTS." Prior to that date, there was no
public market for the Common Stock. The following table presents quarterly
information on the price range of the Common Stock. This information indicates
the high and low sale prices reported on the Nasdaq National Market for the
periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
1997
First Quarter (from March 21)............................... $ 8.250 $ 7.250
Second Quarter.............................................. 7.625 5.000
Third Quarter............................................... 11.000 5.500
Fourth Quarter.............................................. 13.750 8.250
1998
First Quarter............................................... $12.000 $ 8.438
Second Quarter (through April 14)........................... 11.500 10.375
</TABLE>
As of April 14, 1998, the number of record holders of Common Stock was
approximately 50 and the Company believes that the number of beneficial owners
of Common Stock exceeds 900. On April 14, 1998, the last reported sale price on
the Nasdaq National Market for the Common Stock was $10.625.
DIVIDEND POLICY
The Company has never paid cash dividends on the Common Stock. The Company
expects that it will retain all earnings, if any, 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 prospects of the Company
and such other factors as the Board of Directors may deem relevant. In addition,
the Credit Facility restricts the payment of cash dividends. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
20
<PAGE> 22
CAPITALIZATION
The following table sets forth the actual debt and capitalization of the
Company as of (i) December 31, 1997, (ii) December 31, 1997 on a pro forma basis
giving effect to the consummation of the acquisitions of (a) James J. Murata,
M.D., P.A. ("Murata"), which practice is included with the Company's affiliated
practice in South Florida, and (b) the Probable Practice Acquisitions and (iii)
December 31, 1997 on a pro forma as adjusted basis giving effect to the sale of
the 2,000,000 shares of Common Stock offered by the Company hereby, at an
assumed public offering price of $10.625 per share, the last reported sale price
of the Common Stock on the Nasdaq National Market on April 14, 1998, and the
initial application of the estimated net proceeds therefrom. See "Use of
Proceeds." This table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Financial Statements and the notes thereto included herein.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Total long-term debt........................................ $ 912 $17,387 $10,387
------- ------- -------
Stockholders' equity:
Preferred Stock, $1.00 par value; 10,000 shares
authorized; no shares issued and outstanding........... -- -- --
Common Stock, $.001 par value; 50,000,000 shares
authorized; 6,503,098 shares issued and outstanding
actual; 6,515,863 shares issued and outstanding pro
forma and 8,515,863 shares issued and outstanding pro
forma as adjusted(1)................................... 7 7 9
Additional paid-in capital................................ 23,401 24,118 42,819
Retained earnings......................................... 1,705 1,705 1,705
------- ------- -------
Total stockholders' equity........................ 25,113 25,830 44,533
------- ------- -------
Total capitalization.............................. $26,025 $43,217 $54,920
======= ======= =======
</TABLE>
- ------------------------------
(1) Excludes (i) 1,100,000 shares of Common Stock reserved for issuance under
the Company's 1996 Stock Option Plan, under which options to purchase
646,940 shares of Common Stock have been granted at exercise prices ranging
from $6.80 to $12.125 per share, (ii) 275,000 shares of Common Stock
reserved for issuance under the Company's 1996 Health Care Professionals
Stock Option Plan, under which options to purchase 65,000 shares of Common
Stock have been granted at exercise prices ranging from $6.00 to $11.50 per
share, (iii) 220,000 shares of Common Stock issuable upon exercise of
outstanding warrants at an exercise price of $10.80 per share, (iv) 250,000
shares of Common Stock reserved for issuance under the Company's 1997
Employee Stock Purchase Plan, (v) an aggregate of 301,779 shares of Common
Stock to be issued to certain affiliated practices beginning in September
1998 and (vi) shares of Common Stock to be issued in connection with the
Probable Practice Acquisitions with a value at the time of issuance of
approximately $357,500. See "Business -- Acquisition of ENT
Practices -- Post Reorganization Acquisitions," "-- Probable Practice
Acquisitions," "Management -- Stock Option and Purchase Plans," "Description
of Capital Stock" and Note 9 to the Financial Statements of the Company.
21
<PAGE> 23
UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The unaudited pro forma combined financial statements and the notes thereto
should be read in conjunction with other financial information, including the
audited financial statements of the Company, Atlanta ENT, the ENT Networks, and
Cobb and ENT Associates and the notes thereto included elsewhere herein. The
unaudited pro forma combined statement of operations gives effect to the
acquisition of assets of the Initial Practices and the equity of the ENT
Networks (the "Reorganization") and the acquisition of assets of the Additional
Practices and the consummation of the Probable Practice Acquisitions and the
Management Services Agreements (as defined) between the Company and the
physician practices as if such transactions had occurred on January 1, 1997 and
the unaudited pro forma combined balance sheet gives effect to such transactions
as if they had occurred on December 31, 1997. The unaudited pro forma combined
financial statements are presented for illustrative purposes only and are not
necessarily indicative of the operating results or financial position that would
have been achieved if the Reorganization or the acquisition of assets of the
Additional Practices or the Probable Practice Acquisitions had been consummated
at the beginning of the period presented, nor are they necessarily indicative of
the future operating results of the Company. The unaudited pro forma combined
financial statements do not give effect to any cost savings or integration which
may have resulted from the Reorganization or the acquisition of assets of the
Additional Practices or may result from the Probable Practice Acquisitions.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-------------------------------------------------------------------------------------------
ADJUSTMENTS(1)
-------------------------------------
INITIAL
PHYSICIANS' PRACTICES PROBABLE
SPECIALTY & THE ENT ADDITIONAL PRACTICE PRO FORMA PRO FORMA PRO FORMA
CORP. NETWORKS PRACTICES ACQUISITIONS ADJUSTMENTS COMBINED AS ADJUSTED
----------- --------- ---------- ------------ ----------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Management fees......... $ 10,974 $ -- $ -- -- $ 33,052(2) $ 44,026 $ 44,026
Capitation revenue...... 3,619 1,257 -- -- -- 4,876 4,876
Patient service
revenue............... 967 4,862 14,169 23,692 (42,427)(3) 1,263 1,263
--------- ------- ------- ------- -------- --------- ---------
Net revenue......... 15,560 6,119 14,169 23,692 (9,375) 50,165 50,165
Expenses
Provider claims,
wages, benefits..... 7,819 4,848 9,926 16,161 (16,680)(4) 22,074 22,074
General and
administrative...... 4,371 1,166 3,794 7,560 -- 16,891 16,891
Depreciation and
amortization........ 377 98 191 779 1,102(5) 2,547 2,547
--------- ------- ------- ------- -------- --------- ---------
Operating
expenses.......... 12,567 6,112 13,911 24,500 (15,578) 41,512 41,512
--------- ------- ------- ------- -------- --------- ---------
Operating income
(loss)................ 2,993 7 258 (808) 6,203 8,653 8,653
Other (income) expense,
net................... (429) 7 (17) 306 1,440(6) 1,307 507
--------- ------- ------- ------- -------- --------- ---------
Pretax income (loss).... 3,422 -- 275 (1,114) 4,763 7,346 8,146
Provision (benefit) for
income taxes.......... 1,362 (40) 121 2 1,420(7) 2,865 3,177
--------- ------- ------- ------- -------- --------- ---------
Net income (loss)... $ 2,060 $ 40 $ 154 ($1,116) $ 3,343 $ 4,481 $ 4,969
========= ======= ======= ======= ======== ========= =========
Weighted average shares
outstanding
(diluted)............. 4,966,778 6,945,075(8) 8,945,075(9)
========= ========= =========
Basic and diluted
earnings per share.... $ 0.42 $ 0.65 $ 0.56
========= ========= =========
</TABLE>
See notes to unaudited pro forma combined financial data.
22
<PAGE> 24
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------------------------------------------------------------------------
PHYSICIANS' PROBABLE PRO FORMA
SPECIALTY PRACTICE ACQUISITION PRO FORMA OFFERING AS
CORP. MURATA ACQUISITIONS ADJUSTMENTS(10) COMBINED ADJUSTMENTS(9) ADJUSTED(9)
----------- ------ ------------ --------------- --------- -------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents.... $ 5,352 $ 4 $ -- $(2,712) $ 2,644 $ 7,503 $10,147
Accounts receivable, net..... 9,274 75 5,525 -- 14,874 -- 14,874
Other current assets......... 416 -- -- -- 416 -- 416
------- ---- ------ ------- ------- ------- -------
Current assets............... 15,042 79 5,525 (2,712) 17,934 7,503 25,437
Property and equipment (net)... 3,432 125 2,900 -- 6,457 -- 6,457
Intangible Assets, net......... 11,794 -- -- 17,715 29,509 -- 29,509
Other assets................... 330 -- -- -- 330 -- 330
------- ---- ------ ------- ------- ------- -------
Total assets................. $30,598 $204 $8,425 $15,003 $54,230 $ 7,503 $61,733
======= ==== ====== ======= ======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable................ $ -- $ -- $4,200 $(4,200) $ 4,200 $(4,200) $ --
4,200
Accounts payable and accrued
expenses................... 4,235 80 -- (80) 4,235 -- 4,235
Deferred taxes............... 338 -- -- 2,240 2,578 -- 2,578
------- ---- ------ ------- ------- ------- -------
Current liabilities........ 4,573 80 4,200 2,160 11,013 (4,200) 6,813
Subordinated seller notes...... 912 -- -- 16,475 17,387 (7,000) 10,387
Stockholders' equity........... 25,113 124 4,225 (3,632) 25,830 18,703 44,533
------- ---- ------ ------- ------- ------- -------
Total liabilities and
stockholders' equity....... $30,598 $204 $8,425 $15,003 $54,230 $ 7,503 $61,733
======= ==== ====== ======= ======= ======= =======
</TABLE>
See notes to unaudited pro forma combined financial data.
23
<PAGE> 25
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The following is a summary of the adjustments reflected in the Unaudited
Pro Forma Combined Financial Statements assuming the acquisition of assets or
equity of the Practices and the consummation of the Probable Practice
Acquisitions had occurred on January 1, 1997 with respect to the unaudited pro
forma combined statement of operations and as of December 31, 1997 with respect
to the unaudited pro forma combined balance sheet.
(1) Reflects operations of acquired practices from January 1, 1997 through
their respective date of acquisition by the Company.
(2) Management fees have been calculated based upon the management services
agreements. For providing services pursuant to the management services
agreements, the Company retains a fixed amount or varying percentage of all
revenue generated by or on behalf of physicians practicing at the practice
(after adjusting for, among other things, uncollectible accounts and contractual
allowances). The Company is responsible for the payment of operating expenses of
the affiliated practice, including salaries and benefits of non-medical
employees of the practice, lease obligations for office space and equipment and
medical and office supplies and the non-operating expenses of the affiliated
physician practice, including depreciation, amortization and interest.
Management fee adjustments under the management services agreements are
calculated as follows.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
-----------------
(IN THOUSANDS)
<S> <C>
ATLANTA MARKET
Atlanta ENT............................................... $ 3,671
Additional Atlanta Practices.............................. 895
ENT Specialists........................................... 860
ENT Head & Neck........................................... 1,173
Northside................................................. 321
Cobb ENT.................................................. 4,057
CHICAGO MARKET
OMSA...................................................... 2,056
SOUTH FLORIDA MARKET
ENTSF..................................................... 4,128
James J. Murata........................................... 585
-------
Pro Forma Patient Service Revenue...................... $17,746
Management Fee %....................................... 12.5%
-------
$ 2,218(A)
NORTH GEORGIA MARKET
Allatoona................................................. $ 608
Pro Forma Patient Service Revenue...................... $ 608
Management Fee %....................................... 15.0%
-------
$ 91(B)
PROBABLE PRACTICE ACQUISITIONS (includes the $3.0 million
fixed management fee for PDI)............................. $ 3,312(C)
-------
Pro Forma Management Fees (A) + (B) + (C)......... $ 5,621
Pro Forma Practice Operating Expenses............. 27,431
-------
Pro Forma Management Fee Adjustment............... $33,052
=======
</TABLE>
Under the current management services agreements, the Company retains on an
annual basis 12.5% to 15.0% of affiliated physician practice revenue. Under
certain management services agreements, in the event the affiliated practice's
revenue exceeds 150% of such practice's annual revenue in the year prior to its
affiliation with the Company (the "Threshold Amount"), the Company will be
entitled to receive incentive compensation (in lieu of the 12.5% amount) for the
remainder of such fiscal year in amounts ranging from 20% to 25% of the
affiliated practice's income (net practice revenue less practice expenses),
prior to the payment of physician compensation and benefits. In connection with
the proposed PDI transaction, the contemplated management
24
<PAGE> 26
services agreements will contain a fixed monthly management fee, subject to
annual escalation based on increases in the consumer price index after the fifth
anniversary of the date of the agreement. The other two Probable Practice
Acquisitions will be subject to the Company's management services agreement with
ENTSF.
There is no management fee adjustment for ENT & Allergy Associates because
physicians at ENT & Allergy Associates are directly employed by the Company. See
Note 2 below.
(3) Reflects the elimination of patient service revenue for all physician
practices with which the Company has management services agreements but does not
directly employ the physicians of such practices, except for the physicians of
ENT & Allergy Associates.
(4) Reflects the elimination of physician compensation at the practices in
which the Company does not have an equity ownership. After the Company collects
its management fees pursuant to the management services agreements and pays the
operating and non-operating expenses, the remaining revenue is remitted to the
affiliated practice to pay physician compensation and benefits pursuant to
employment agreements between the practice and each individual physician and to
pay physician assistant compensation and benefits. The reduction of physician
compensation at ENT & Allergy Associates is a result of a contractual agreement
with the Company. Also reflects the net cost of additional employment contracts
entered into by the Company for certain management positions. The adjustments do
not include bonuses due to their subjective nature and requisite board approval
for the granting of bonuses based upon meeting certain profitability and
non-financial goals.
(5) Reflects amortization of intangibles and deferred organization costs of
the Company.
(6) Reflects interest expense in connection with the subordinated
promissory notes and advances under the Company's Credit Facility incurred in
connection with certain of the Company's acquisitions computed at rates of
approximately 6% and 9% per annum, respectively.
(7) Reflects the establishment of a provision for income taxes at an
estimated 39% effective tax rate, which consists of a 34% statutory federal tax
rate and an average state statutory tax rate of 5%.
(8) Reflects weighted average shares outstanding for common stock and stock
equivalents (which have been calculated using the treasury stock method) giving
effect to the acquisition of Murata and the consummation of the Probable
Practice Acquisitions.
(9) Adjusted to reflect (i) the sale of 2,000,000 shares of Common Stock
offered by the Company at an assumed offering price of $10.625 per share, the
last reported sale price of the Common Stock on the Nasdaq National Market on
April 14, 1998; and (ii) repayment of borrowings under the Company's credit
facility and a portion of the promissory note issued in connection with the
proposed PDI Acquisition with a portion of the net proceeds of the Offering.
Interest expense has been recomputed in connection with the aforementioned debt
reduction. The contemplated application of Offering proceeds is depicted as
follows:
<TABLE>
<S> <C>
Gross proceeds (2.0 million shares at $10.625).............. $21,250,000
Underwriting costs and expenses............................. 2,347,500
Consulting fee.............................................. 200,000
-----------
2,547,500
-----------
Net proceeds........................................... $18,702,500
less: PDI Promissory Note reduction......................... 7,000,000
Credit Facility reduction.............................. 4,200,000
-----------
11,200,000
-----------
Increase in cash and cash equivalents....................... $ 7,502,500
===========
</TABLE>
(10) Reflects the acquisition of the tangible and identifiable intangible
assets of Murata and the Probable Practice Acquisitions.
25
<PAGE> 27
SELECTED FINANCIAL DATA
The following historical consolidated financial information should be read
in conjunction with the consolidated financial statements of the Company and the
notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" appearing elsewhere herein. The consolidated
financial statement data for the period from July 31, 1996 (inception) to the
fiscal year ended December 31, 1996 and for the year ended December 31, 1997
have been derived from and are qualified by reference to the audited
consolidated financial statements of the Company included elsewhere herein,
which have been audited by Arthur Andersen LLP, the Company's independent public
accountants.
<TABLE>
<CAPTION>
FROM INCEPTION
(JULY 31, 1996)
THROUGH YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997
----------------- -----------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenue................................................. $ 51 $ 15,560
Expenses
Provider claims, wages and benefits....................... 47 7,819
General and administrative................................ 357 4,371
Depreciation and amortization............................. 2 377
---------- ----------
Operating expenses.......................................... 406 12,567
---------- ----------
Operating income (loss)..................................... (355) 2,993
Net income (loss)........................................... $ (355) $ 2,060
========== ==========
Earnings (loss) per share
Basic earnings (loss) per share........................... $ (0.64) $ 0.42
Diluted earnings (loss) per share......................... $ (0.64) $ 0.42
Weighted average shares outstanding
Basic..................................................... 552,894 4,868,035
Diluted................................................... 552,894 4,966,778
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------
(IN THOUSANDS)
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 5,352
Working capital............................................. 10,469
Total assets................................................ 30,598
Total debt.................................................. 912
Stockholders' equity........................................ 25,113
</TABLE>
26
<PAGE> 28
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 historical operations of the Company and the second relating to
the unaudited pro forma combined operations of the Company. The following
discussion of the historical results of operations and financial position of the
Company and the unaudited pro forma combined results of operations and financial
position of the Company should be read in conjunction with the Company's
financial statements and the Company's unaudited pro forma combined financial
statements, and the notes thereto, appearing elsewhere herein. In these
discussions, most percentages and dollar amounts have been rounded to aid
presentation. As a result, all such figures are approximations.
OVERVIEW
The Company is a physician practice management company which provides
comprehensive management services to physician practices specializing in the
treatment and management of ENT diseases and disorders, including specialists
practicing in the fields of allergy, audiology, oral surgery, plastic surgery
and sleep medicine. In March 1997, simultaneously with the closing of the
Company's IPO, the Company effected the Reorganization in which the Company
acquired all of the common stock of the ENT Networks and substantially all of
the assets of the Initial Practices. Since the consummation of the
Reorganization, the Company has acquired substantially all of the assets of four
ENT physician practices with ten physicians in the metropolitan Atlanta area,
one ENT physician practice with two physicians in North Georgia, one ENT
physician practice with four physicians in the metropolitan Chicago area and one
ENT physician practice with one physician in South Florida, as well as the stock
and related assets of six professional associations comprising one ENT physician
practice group with seven physicians in South Florida. As a result of these
acquisitions, the Company is currently affiliated with 47 physicians, one TMJ
specialist and 51 allied health care professionals with 41 clinical locations in
Alabama, Florida, Georgia and Illinois and expects to add 28 physicians and 23
allied health care professionals with 16 clinical offices in the New York
metropolitan area and South Florida in connection with the Probable Practice
Acquisitions.
The Company's revenue is derived (i) under management services agreements
with affiliated practices; (ii) from capitated managed care contracts held by
the ENT Networks, wholly-owned subsidiaries of the Company; and (iii) from
patient service revenue generated by the Company's wholly-owned subsidiary, ENT
& Allergy Associates, which directly employs physicians in Birmingham, Alabama.
Management fees consist of a stipulated percentage of revenue generated by
or on behalf of physicians practicing at (non-owned) affiliated practices, along
with reimbursement of Practice Expenses (as defined). Capitation revenue
consists of fixed monthly payments received by the Company directly from HMOs
(or payors subcontracting with HMOs). Patient service revenue consists of gross
charges, less allowances for bad debts and contractual adjustments, generated by
or on behalf of physicians practicing at the Company's wholly-owned subsidiary,
ENT & Allergy Associates.
References to "supplemental system-wide revenue" include patient service
revenue generated by all company-affiliated and owned practices, together with
capitation revenue received by the Company.
Operating expenses consist of (i) provider claims, wages and benefits, (ii)
general and administrative expenses and (iii) depreciation and amortization.
Provider claims include claims paid or incurred in connection with medical and
surgical services provided to managed care enrollees covered under the Company's
capitated managed care agreements. Wages and benefits include all salary and
benefit costs associated with corporate and clinic level personnel. General and
administrative expenses include all other corporate and clinic level operating
expenses, including real and personal property rent, medical and office
supplies, utilities and professional fees. Depreciation and amortization expense
includes non-cash charges related to corporate and clinic level equipment
depreciation, along with amortization of intangible assets, including the costs
of acquisitions in excess of the fair value of tangible and identifiable
intangible assets acquired. Depreciation is computed utilizing the straight-line
method over lives ranging from three to seven years, while intangible assets are
amortized utilizing the straight-line method primarily over a period of 25
years.
27
<PAGE> 29
In March 1998, the Company entered into a non-binding letter of intent
relating to the Company's proposed acquisition of substantially all of the
tangible assets of Physicians' Domain, along with the equity of corporations
that are successors to six ENT physician practices affiliated with Physicians'
Domain. Upon completion of the PDI transaction, if consummated on the terms
contemplated, the Company will add 26 physicians and 21 allied health care
professionals with 14 clinical offices in the New York metropolitan area. In
addition, the Company has non-binding letters of intent for the two other
Probable Practice Acquisitions. These two ENT physician practices consist of an
aggregate of two physicians and two allied health care professionals with two
clinical offices in South Florida. Although the Company intends to complete
these acquisitions in the near future, there can be no assurance that any of
these acquisitions will be completed, as to the terms of such acquisitions or
that the Company will be able to integrate any of the Probable Practice
Acquisitions into its business. In the event that these acquisitions are
completed, the Company expects that the purchase prices will be comprised of
cash, promissory notes or shares of Common Stock, or a combination thereof. See
"-- Liquidity and Capital Resources."
MANAGEMENT SERVICES AGREEMENTS
The management services agreements delineate the responsibilities and
obligations of the affiliated practices and the Company. Pursuant to the
management services agreements, the affiliated practices assign to the Company
all of their non-governmental accounts receivable and all of their rights and
interest in the proceeds of their governmental accounts receivable and grant to
the Company the right to collect and retain the proceeds of the accounts
receivable for the Company's account to be applied in accordance with the
agreements. The Company incurs and is responsible for the payment of (i)
operating expenses of the affiliated practice, including salaries and benefits
of non-medical employees of the practice, lease obligations of office space and
equipment, medical and office supplies and (ii) the non-operating expenses of
the affiliated practice (the "Practice Expenses"). The Company pays for all such
expenses directly out of the proceeds of the accounts receivable assigned to the
Company by the affiliated practice. In addition, under the existing management
services agreements, the Company retains, as a part of its management fee, a
stipulated percentage (generally between 12.5% and 15%) of all revenue (after
adjustment for contractual allowances) generated by or on behalf of physicians
practicing at such practice. Contractual allowances are the differences between
the amounts customarily charged by physicians practicing at such practice and
the amounts received pursuant to negotiated fee schedules from payors under
managed care, governmental and indemnity arrangements. In certain states where
the Company expects to do business, such as New York, the Company expects to be
reimbursed for the Practice Expenses and to be paid a fixed management fee. The
fixed management fee to be paid by the professional corporations under the
management services agreements with the Company to be entered into in connection
with the proposed PDI transaction is expected to be $3.0 million per year, in
the aggregate, subject to annual increases consistent with the annual percentage
increase in the consumer price index for the prior year after the fifth
anniversary of the execution of the management services agreement. Pursuant to
the terms of the letter of intent with PDI, the management services agreements
are also expected to provide for mutually agreed increases in the fixed
management fee upon (i) the management by the Company of ancillary business
developed or acquired or (ii) the acquisition of additional physician practices
which are merged into the existing PDI practices. The percentage or fixed
components of the management fee to be retained by the Company under future
management services agreements will be determined based upon negotiations
between the Company and future affiliating practices and may vary significantly
in the future.
CAPITATED MANAGED CARE CONTRACTS
The Company holds capitated managed care contracts with Cigna, United
HealthCare and FPA which require the Company to contract for the provision of
substantially all of the ENT medical and surgical professional services required
by the enrollees of these managed care companies in the metropolitan Atlanta
area. The Company has contracted with associated physicians, including those at
the Company's affiliated practices in Atlanta and North Georgia, to provide
substantially all of such medical professional services in exchange for
compensation on a discounted fee-for-service basis. Affiliated physicians
provided 87% of 1997 services, based upon claims paid or incurred, in connection
with the Company's capitated managed care contracts.
28
<PAGE> 30
The Company incurs direct costs (or provider claims) based on medical
services provided by the participating physicians to the managed care company's
enrollees, and as a result, if capitation amounts received by the Company are
reduced by the managed care companies or if enrollees covered by capitated
contracts require more frequent or more extensive care than is anticipated,
operating margins may be reduced or the revenue derived from such contracts may
be insufficient to cover the direct costs of the professional services provided
by associated physicians to enrollees under the contracts, requiring the Company
to adjust its discounted fee-for-service rates paid to participating physicians.
As a result, the Company's business, financial condition and results of
operations may be adversely affected, particularly if the Company is unable to
renegotiate compensation levels paid to participating physicians under the
participation agreements on a timely or favorable basis or negotiate capitated
managed care contracts on terms favorable to the Company. See
"Business -- Capitated Managed Care Contracts; Network Development and
Management."
Prior to entering into a capitated managed care contract, the Company
analyzes the costs of managing such contracts including a study of the number of
lives to be covered, the geographic region to be covered and the historical
utilization patterns of enrollees. The Company then determines the capitation
fee (generally, a fixed amount per enrollee per month) necessary to generate
acceptable returns under the contract and negotiates the capitation rate with
the managed care company. Capitated managed care contracts frequently provide
for annual renegotiation of capitation fees and adjustments in such capitation
fees based upon changes in the number of enrollees under the contracts, changes
in the types of professional services to be provided under the contracts and
changes in the geographic areas to be covered under the contracts.
To assist in monitoring and controlling direct costs (or provider claims)
under capitated managed care contracts held by the Company, the Company utilizes
the Capitated Network System, a comprehensive capitation administration and
utilization management system. The Company believes the Capitated Network System
enables it to effectively analyze clinical and cost data necessary to monitor
and control expenses and manage profitability under capitated arrangements and
to accurately anticipate the costs participating physicians will incur in
providing services under such contracts so that the Company undertakes contracts
which it can expect to realize adequate profit margins or otherwise meet its
objectives.
During the year ended December 31, 1997, 23.2% and 14.3% of the Company's
net revenue and supplemental system-wide revenue, respectively, were derived
from capitated arrangements.
RESULTS OF OPERATIONS -- HISTORICAL
The Company was incorporated in July 1996 and did not conduct any
significant operations prior to the closing of the Reorganization in March 1997.
Accordingly, no revenue and only nominal general and administrative expenses
were incurred during the period from inception to the closing of the
Reorganization. However, the Company did incur various legal, accounting and
auditing costs in connection with the IPO and Reorganization during the period
from inception through December 31, 1996.
YEAR ENDED DECEMBER 31, 1997
Revenue. Net revenue for the year ended December 31, 1997 was $15.6
million, consisting of $11.0 million of management fees, $3.6 million of
capitation revenue and $967,000 of net patient service revenue. The number of
covered lives under the capitated managed care contracts was 315,000 at December
31, 1997.
Supplemental system-wide revenue for the year ended December 31, 1997 was
$25.2 million. Supplemental system-wide revenue increased each quarter during
1997 in conjunction with increases in affiliated practice (same physician)
revenue, as well as revenue associated with acquired practices. Supplemental
system-wide revenue increased from $4.4 million (pro forma giving effect to the
Reorganization as if it had occurred on January 1, 1997) during the first
quarter of 1997 to $9.8 million during the fourth quarter of 1997. Of this
increase, 7.5% (or $405,000) was attributable to same physician revenue growth
and 92.5% (or $5.0 million) was attributable to revenue associated with acquired
practices.
Effective June 30, 1997 the Company's affiliated physicians at Atlanta ENT
and Allatoona ENT began providing medical and surgical services to Aetna HMO
enrollees on a discounted fee-for-service basis,
29
<PAGE> 31
superseding a previous capitated arrangement entered into with Aetna.
Accordingly, capitation revenue decreased $176,000 (or 13.5%) in the fourth
quarter of 1997 compared to the second quarter of 1997. Under the new Aetna
fee-for-service arrangement, the Company believes that for the six months ended
December 31, 1997 its affiliated physicians captured the vast majority of Aetna
patient service revenue related to ENT services in the Atlanta market.
Accordingly, the Company does not believe that the termination of the Aetna
capitated arrangement had or will have a material adverse effect on the
Company's business, financial condition or results of operations.
Operating Expenses. Operating expenses for the year ended December 31,
1997 were $12.6 million, or 80.8% of net revenue, consisting of provider claims,
wages and benefits ($7.8 million, or 50.3% of net revenue); general and
administrative expenses ($4.4 million, or 28.1% of net revenue); and
depreciation and amortization expense ($377,000, or 2.4% of net revenue). The
Company had 285 employees and 40 clinical locations at December 31, 1997.
Other Income (Expense). Other income (expense) for the year ended December
31, 1997 was $429,000 of interest income, net of immaterial amounts of interest
expense.
Income Taxes. Income tax expense for the year ended December 31, 1997 was
$1.4 million, or 39.8% of pre-tax income.
RESULTS OF OPERATIONS -- UNAUDITED PRO FORMA COMBINED
The unaudited pro forma combined results of operations reflect the
operations of the Company as if the acquisition of assets of the Practices and
the consummation of the Probable Practice Acquisitions had occurred on January
1, 1997.
YEAR ENDED DECEMBER 31, 1997
Revenue. Pro forma combined net revenue for the year ended December 31,
1997 was $50.2 million, consisting of $44.0 million of pro forma combined
management fees, $4.9 million of pro forma combined capitated revenue and $1.3
million of pro forma combined net patient service revenue.
Operating Expenses. Pro forma combined operating expenses for the year
ended December 31, 1997 were $41.5 million, or 82.8% of pro forma combined net
revenue, consisting of provider claims, wages and benefits ($22.1 million or
44.0% of pro forma combined net revenue); general and administrative expenses
($16.9 million or 33.7% of pro forma combined net revenue); and depreciation and
amortization expense ($2.5 million or 5.1% of pro forma combined net revenue).
Other Income (Expense). Pro forma combined other income (expense) for the
year ended December 31, 1997 consisted of net interest expense of $1.3 million
or 2.6% of pro forma combined net revenue. Interest expense related to
promissory notes and advances under the Company's Credit Facility incurred in
connection with certain of the Company's acquisitions has been computed at rates
of 6% and 9% per annum, respectively.
Income Taxes. Pro forma combined income tax expense for the year ended
December 31, 1997 was $2.9 million, or 39.0% of pre-tax income.
30
<PAGE> 32
QUARTERLY RESULTS OF OPERATIONS
The following sets forth the quarterly operating results of the Company for
the year ended December 31, 1997 and should be read in conjunction with the
consolidated financial statements of the Company and the notes thereto appearing
elsewhere herein.
<TABLE>
<CAPTION>
1997 QUARTER ENDED
-----------------------------------------------------
MARCH 31(1) JUNE 30 SEPT. 30 DEC. 31
----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C>
Net revenue...................................... $ 239 $4,264 $4,938 $6,119
Operating income................................. 20 720 962 1,291
Pretax income.................................... 33 839 1,089 1,461
Net income....................................... 20 512 664 864
Diluted earnings per share....................... $ 0.02 $ 0.09 $ 0.11 $ 0.13
Supplemental system-wide revenue(2).............. $1,336 $6,263 $7,785 $9,807
SUPPLEMENTAL INFORMATION:
Number of affiliated physicians.................. 24 24 34 47
Number of affiliated allied health care
professionals.................................. 26 26 42 48
Number of clinical locations..................... 19 19 32 40
</TABLE>
- ------------------------------
(1) The Company commenced business operations simultaneously with the closing of
its IPO and the Reorganization on March 26, 1997. Accordingly, the quarterly
data presented herein represents Company operations for the five days ending
March 31, 1997.
(2) The unaudited supplemental system-wide revenue is being presented for
supplemental purposes only and should be read in conjunction with the
Company's financial statements. In accordance with EITF 97-2, the Company is
evaluating pertinent criteria contained in each of its management services
agreements. Based upon the provisions of EITF 97-2, the Company anticipates
that during 1998 it will begin consolidating the operating results of the
majority of its managed physician practices. Upon adoption of consolidation,
all previously issued Company financial statements will be restated to
reflect consolidation of revenue. This restatement will not affect the
Company's previously reported operating income.
LIQUIDITY AND CAPITAL RESOURCES
The Company utilizes capital primarily (i) to acquire assets or equity of
physician practices, (ii) to acquire equipment utilized by affiliated practices,
(iii) to fund corporate capital expenditures including management information
systems and (iv) to fund ongoing corporate working capital requirements. At
December 31, 1997, the Company had working capital of $10.5 million, including
cash and cash equivalents of $5.4 million.
Net cash used in operating activities was $1.3 million for the year ended
December 31, 1997 compared with net cash provided by operating activities of
$81,000 for the period from inception (July 31, 1996) through December 31, 1996.
The Company conducted limited operating activities prior to the closing of its
IPO and the Reorganization in March 1997. Net cash used in operating activities
consists of the Company's net income, increased by non-cash expenses such as
depreciation and amortization, and adjusted by changes in the components of
working capital, primarily accounts receivable and income taxes. For the year
ended December 31, 1997, the Company remitted estimated income tax payments of
$2.2 million related to Company pre-tax earnings and the realization of accounts
receivable acquired in connection with physician practice acquisitions having
zero basis for income tax purposes.
Net cash used in investing activities was $5.7 million and $22,000 for the
year ended December 31, 1997 and the period from inception (July 31, 1996)
through December 31, 1996, respectively. The Company's uses of cash in investing
activities related exclusively to physician practice asset acquisitions and
capital expenditures.
Net cash provided by financing activities for the year ended December 31,
1997 and for the period from inception (July 31, 1996) through December 31, 1996
was $12.2 million and $65,000, respectively. The
31
<PAGE> 33
Company realized net proceeds of $14.3 million in connection with its IPO, of
which $2.3 million was utilized to extinguish debt assumed in connection with
physician practice asset acquisitions. For the period from inception through
December 31, 1996, cash provided by financing activities consisted of the
proceeds of borrowings under short term notes advanced by Company founders and
affiliates. Deferred offering costs of $442,000 were funded in 1996 in
connection with the IPO. Although the Company had no debt outstanding under the
Credit Facility at December 31, 1997, in the event the proposed PDI transaction
is consummated on the terms contemplated, the Company expects to use cash and
borrow $4.2 million under the Credit Facility, which amount will be repaid with
a portion of the net proceeds from the Offering. In connection with a 1997
physician practice acquisition, the Company issued long-term promissory notes in
the aggregate principal amount of $912,000, which promissory notes bear simple
interest, payable quarterly, at 5.61% per annum, have varying maturity dates,
and are convertible into shares of Common Stock at the option of the holders. In
connection with 1997 practice acquisitions, the Company issued various
contingent promissory notes in the aggregate principal amount of $3.0 million
which are payable only in the event the holders of such notes attain certain
performance targets, certain of which notes are payable by the Company, at the
Company's option, in shares of Common Stock.
In April 1997, the Company entered into a $20.0 million credit facility
with NationsBank, N.A. primarily to provide financing for the acquisition of
assets or equity of physician practices and for working capital purposes.
Borrowings under the Credit Facility (i) are secured by the assignment to the
bank of the Company's stock in all of its subsidiaries and the Company's
accounts receivable, including the accounts receivable assigned to the Company
by affiliated practices pursuant to management services agreements, (ii) are
guaranteed by all subsidiaries (including future subsidiaries) and (iii)
restrict the Company from pledging its assets to any other party. Advances for
working capital are governed by a borrowing base related primarily to the
Company's EBITDA. EBITDA is used by the Company as an indicator of a company's
ability to incur and service debt. EBITDA should not be considered an
alternative to operating income, net income, cash flows or any other measure of
performance as determined in accordance with generally accepted accounting
principles, as an indicator of operating performance, or as a measure of
liquidity. Based on the borrowing base at December 31, 1997 after giving effect
to the Offering, the acquisition of the assets of Murata and the consummation of
the Probable Practice Acquisitions, the maximum availability under the Credit
Facility would have been approximately $18.1 million. Advances bear interest at
the Company's option of either a prime-based rate or a LIBOR-based rate and
interest-only payments are required for the first three years from the date of
the closing of the Credit Facility, with maturity in April 2002. In April 1998,
the Company received a proposal letter from NationsBank, N.A. providing for an
increase in the Credit Facility from $20.0 million to $45.0 million and an
amendment to certain of the other terms of the Credit Facility. However, there
can be no assurance that the Company will be able to obtain such increase or
amendments.
The Credit Facility contains affirmative and negative covenants which,
among other things, require the Company to maintain certain financial ratios
(including maximum indebtedness to pro forma EBITDA, maximum indebtedness to
capital, minimum net worth, minimum current ratio and minimum fixed charges
coverage), limit the amounts of additional indebtedness, dividends, advances to
officers, shareholders and physicians, acquisitions, investments and advances to
subsidiaries, and restrict changes in management and the Company's business.
The Company intends to acquire the assets or equity of additional ENT and
Related Specialty practices and to fund this growth in part with its existing
cash resources, the net proceeds of the Offering and borrowings under the Credit
Facility, as well as through equity and debt issuances. In March 1998, the
Company entered into a non-binding letter of intent with PDI relating to the
Company's proposed affiliation with six ENT physician practices associated with
Physicians' Domain. Upon completion of the PDI transaction, if consummated on
the terms contemplated, the Company will add 26 physicians and 21 allied health
care professionals with 14 clinical offices in the New York metropolitan area.
Based on the terms of the letter of intent, the aggregate consideration to be
paid by the Company in connection with the PDI acquisition, if such transaction
is consummated, will be $22.5 million consisting of $2.1 million in cash, the
repayment of approximately $4.2 million of outstanding indebtedness of PDI and
the issuance of a promissory note in the principal amount of $16.2 million. The
letter of intent provides that the promissory note will accrue interest at a
rate of 6% per annum, payable quarterly, will be secured by the fixed assets
acquired in the transaction and will be subordinate to the Credit Facility.
Pursuant to the proposed terms of the promissory note, $9.2 million of the
principal amount of the note will mature five years
32
<PAGE> 34
from the date of issuance and $7.0 million of the principal of the note will
mature upon the earlier of (i) three days following the closing of the Offering
or (ii) December 31, 1998. In the event the proposed PDI transaction is
consummated on the terms contemplated, the Company expects to borrow
approximately $4.2 million under the Credit Facility to pay the outstanding
indebtedness of PDI at the closing of the transaction. At the closing of the
Offering, if the PDI transaction is consummated, the Company will use $7.0
million and $4.2 million of the net proceeds of the Offering, respectively, to
repay (i) a portion of the promissory note issued in connection with the PDI
transaction and (ii) borrowings under the Credit Facility. Pursuant to the terms
of the letter of intent, the Company will also pay an additional $500,000,
payable in shares of Common Stock at the Company's option, if these practices
achieve stipulated performance targets. The Company expects to recognize a
non-recurring non-cash charge relating to the restructuring of certain of the
operations at PDI, if the transaction is consummated. The Company has not yet
determined the extent of the restructuring and therefore, the Company has not
yet estimated the amount of such non-cash charge. In addition, the Company has
non-binding letters of intent for the other Probable Practice Acquisitions for
an aggregate purchase price of $1.2 million. These two ENT physician practices
consist of an aggregate of two physicians and two allied health care
professionals with two clinical offices located in South Florida. The Company
will pay $370,000 (net of salary paid to Gerald R. Benjamin by the Company) to
Premier HealthCare, an affiliate of Mr. Benjamin, the Company's Vice Chairman
and Secretary, for consulting services in connection with the Probable Practice
Acquisitions, if such transactions are consummated on the terms contemplated.
Although the Company expects to complete these acquisitions in the near future,
there can be no assurance that any of these acquisitions will be completed, as
to the terms of such acquisitions or that the Company will be able to integrate
any of these Probable Practice Acquisitions into its business. In the event that
any of the other Probable Practice Acquisitions are completed, the Company
expects that the purchase price will be comprised of cash, promissory notes, or
shares of Common Stock of the Company, or a combination thereof. The Company is
currently evaluating and is in various stages of discussions in connection with
the potential acquisition of assets or equity of other additional ENT physician
and Related Specialty practices. However, the Company has no agreements or
arrangements with respect to the terms of any other specific acquisitions (other
than the Probable Practice Acquisitions) 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 "Certain Transactions."
The Company believes that the net proceeds of the Offering and borrowings
under the Credit Facility, together with existing cash resources and cash flow
expected to be generated from operations, will be sufficient to fund the
Company's anticipated acquisition, expansion and working capital needs for at
least the next 18 to 24 months. No assurance can be given that such existing
cash resources or proceeds of the Offering will be sufficient to satisfy the
Company's cash requirements for the next 18 to 24 months or beyond. There can be
no assurance that borrowings under the Credit Facility will be available or that
alternative financing will be available for future acquisitions or expansion of
the Company's business.
NEW ACCOUNTING PRONOUNCEMENT
The Emerging Issues Task Force of the FASB has recently issued its
Consensus on Issue 97-2 ("EITF 97-2"). EITF 97-2 addresses certain specific
matters pertaining to the physician practice management industry. EITF 97-2
would be effective for the Company for its year ending December 31, 1998. EITF
97-2 addresses the ability of physician practice management companies to
consolidate the results of physician practices with which it has an existing
contractual relationship. The Company is still in the process of analyzing the
effect on all of its contractual relationships, but currently believes that
certain contracts would meet the criteria of EITF 97-2 for consolidating their
results of operations, which would require the Company to restate its prior
period financial statements to reflect such consolidation. This restatement will
not affect the Company's previously reported operating income. EITF 97-2 also
has addressed the accounting method for future combinations with individual
physician practices. The Company believes that, based upon the criteria set
forth in EITF 97-2, virtually all of its future acquisitions of individual
physician practices will continue to be accounted for under the purchase method
of accounting.
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<PAGE> 35
YEAR 2000
The Company has commenced review of its computer systems to identify the
systems that could be affected by the "Year 2000" issue and will develop an
implementation plan to resolve the issue. The Year 2000 problem is the result of
computer programs being written using two digits rather than four to define the
applicable year. Any of the Company's programs that have time-sensitive software
may recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a major system failure or miscalculations. The Company presently
believes that, with modifications to the existing software and converting to new
software, the Year 2000 problem will not pose significant operational problems
for the Company's computer systems as so modified and converted. The Company
expects to spend approximately $115,000, in the aggregate, in 1998 and 1999 to
modify its existing software or convert to new software in order for the
Company's software to be Year 2000 compliant.
SEASONALITY
The Company's business is subject to seasonal patient visits to affiliated
physicians. Fee-for-service revenue is 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 revenue, however, is 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.
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<PAGE> 36
BUSINESS
GENERAL
The Company is the leading physician practice management company focusing
on affiliating with and managing ENT physician practices. The Company provides
comprehensive practice management services to ENT physician practices and health
care providers, including specialists practicing in the fields of allergy,
audiology, oral surgery, plastic surgery and sleep medicine (the "Related
Specialties" or the "Related Specialists"). The Company seeks to affiliate with
physician practices and health care providers who provide high quality, cost
effective medical and surgical services to fee-for-service patients and managed
care enrollees. Services provided by the Company include financial and
administrative management, enhancement of clinical operations, access to
ancillary services, network development and payor contracting services,
including the negotiation and administration of capitated arrangements. The
Company is currently affiliated with 47 physicians, one TMJ specialist and 51
allied health care professionals with 41 clinical locations in Alabama, Florida,
Georgia and Illinois and expects to add 28 physicians and 23 allied health care
professionals with 16 clinical offices in the New York and South Florida in
connection with the Probable Practice Acquisitions. The Company holds, manages
and administers capitated ENT managed care contracts covering an aggregate of
approximately 315,000 enrollees of HMO plans of United HealthCare and Cigna and
enrollees of HMOs which have contracted with FPA.
HEALTH CARE INDUSTRY OVERVIEW
GENERAL
The health care delivery system in the United States has been undergoing
substantial change, largely in response to concerns over the quality and
escalating cost of health care. According to the Federal Health Care Financing
Administration ("HCFA"), national health care spending in 1996 exceeded $1.0
trillion, with approximately $200 billion of such expenditures directly
attributable to physician services and an additional $640 billion under the
direction of physicians. HCFA projects that national health care spending will
be approximately $1.5 trillion in 2000, representing a compounded annual growth
rate of approximately 10.7%. The growth in health care expenditures has
increased the demand by government and third party payors to control health care
costs. The emphasis on cost containment, the consolidation of the health care
market in general, the increased market share of managed care companies, the
transfer of risk from payors to providers and the focus on improving the quality
of patient care have precipitated and accelerated significant changes in the way
physicians organize themselves.
Health care in the United States historically has been delivered by a
fragmented system of health care providers, including hospitals, individual
physicians and physician group practices. Individual physicians and small group
practices tend to have limited capacity for any of the following: ties to other
health care providers (restricting their ability to coordinate care across a
variety of specialties); access to patients; capital to invest in new clinical
equipment and technologies; and purchasing power with vendors of medical
supplies. In addition, individual physicians and small group practices typically
lack the negotiating leverage with payors and information systems necessary to
obtain and manage risk-sharing contracts.
In response to the foregoing factors, physicians are increasingly forming
larger group practices and affiliating with physician networks and physician
hospital organizations. In addition, physicians and physician group practices
are affiliating with physician practice management companies in order to gain
greater access to third party payor contracts, patient information and
management systems, leverage with vendors and payors, capital resources and
ancillary services frequently unavailable to independent practitioners. In
addition, many payors and their intermediaries, including governmental entities
and managed care companies, are increasingly looking to outside providers of
physician services to develop and maintain quality outcomes, management programs
and patient care data.
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<PAGE> 37
OTOLARYNGOLOGY
Otolaryngology is the management of diseases and disorders of the ear,
nose, nasal passages, sinuses, larynx, mouth and throat, as well as structures
of the neck and face. An otolaryngologist is commonly referred to as an ENT
physician and provides some or all of the following subspecialty services:
- Pediatric Otolaryngology: the medical and surgical treatment of diseases
of the ear, nose and throat in children.
- Head and Neck Surgery: the medical and surgical treatment of cancerous
and noncancerous tumors in the head and neck, including thyroid and
parathyroid surgery.
- Rhinology: the medical and surgical treatment of disorders of the nose
and sinuses.
- Allergy: the medical treatment of inhalant allergies affecting the upper
respiratory system.
- Facial Plastic and Reconstructive Surgery: the surgical treatment of
cosmetic, functional and reconstructive abnormalities of the face and
neck.
- Otology/Neurotology: 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: the medical and surgical treatment of disorders of the
throat, including the voice.
ENT services in the United States are delivered largely through individual
and small single specialty group practices and, to a lesser extent,
multi-specialty clinics. Based upon a 1997 American Group Practice Association
study, the Company estimates that revenue generated by ENT physicians in the
United States exceeded $6.2 billion in 1996.
According to the American Academy of Otolaryngology-Head and Neck Surgery,
Inc. (the "Academy"), there were approximately 8,600 ENT physicians in the
United States as of December 31, 1996. Based upon membership in the Academy, the
Company estimates that approximately 70% of all ENT practices consist of
individual practitioners or small group practices (less than four physicians).
The Company has observed that ENT physicians and Related Specialists are
increasingly seeking to form larger group practices and affiliate with physician
practice management companies which understand the needs of ENT physicians and
can enhance practice performance.
STRATEGY
The Company's objective is to position its affiliated physicians as the
leading providers of ENT and Related Specialty medical and surgical services in
each of its markets. The Company's strategy is to establish a market presence by
affiliating with and managing a market leading ENT practice which serves as a
platform for the implementation of the Company's market development and
physician practice management model. Following an initial practice affiliation,
the Company seeks to affiliate with additional ENT and Related Specialty
practices within that market. This strategy is intended to allow the Company's
affiliated practices to enhance practice performance by achieving or obtaining
same practice revenue growth, geographic expansion, expansion in the breadth of
services offered and managed care contracts. The Company believes that ENT
physicians and Related Specialists desire to affiliate with the Company because
of (i) the Company's ENT and Related Specialty focus, (ii) its management, (iii)
its managed care expertise, (iv) the availability of expansion capital, (v) the
management resources necessary to effectively manage the practice and develop
ancillary services and (vi) the access to ENT specific proprietary management
information systems, all of which are frequently unavailable to independent
groups and solo specialty practitioners. Key elements of the Company's strategy
are to:
Affiliate with Additional ENT and Related Specialty Practices in Existing
Markets. The Company has affiliated practices in Atlanta, South Florida,
Chicago and Birmingham, Alabama, and, assuming the closing of the PDI
transaction, the New York metropolitan area. The Company's primary focus is to
generate growth in existing markets by affiliating with additional ENT and
Related Specialty practices. The Company believes that this strategy of
expansion will better enable affiliated practices to meet the needs of patients
and payors and
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<PAGE> 38
realize operating efficiencies. By focusing on its affiliated practices in these
markets, the Company anticipates delivering a wide range of management,
financial and ancillary services with increasing efficiency.
Selectively Expand into New Markets. Although the Company primarily
focuses on the growth of its affiliated practices, the Company also intends to
evaluate and selectively expand into new markets. The Company's strategy is to
establish a significant market presence in select markets by affiliating with
and managing a market leading ENT practice which serves as a platform for the
implementation of the Company's market development and physician practice
management model. The Company evaluates potential affiliation candidates based
on a number of factors, including physician credentials and reputation,
competitive market position, managed care experience, subspecialist
representation, historical financial performance and practice growth potential.
Enhance Performance of Affiliated Practices. The Company seeks to enhance
practice performance by (i) expanding the breadth of services offered by the
practice, (ii) adding ancillary services offered by the practice, such as
ambulatory surgery centers, hearing centers, sleep laboratories, audiology and
speech pathology, (iii) increasing the number of affiliated practice physicians
to realize operating efficiencies, (iv) introducing allied health care
professionals to the practice, (v) expanding the practice's geographic coverage
to provide access to a larger patient base and (vi) providing management
services, proprietary technology, capital resources and increased purchasing
power.
Employ Proprietary Information Systems. The Company believes that access
to patient data is critical to cost containment, pricing, quality outcomes and
managing risk associated with capitated managed care contracts. The Company's
Capitated Network System, a proprietary comprehensive network administration and
utilization management system designed specifically for ENT practices, provides
effective and efficient access to key patient data and performs the complex
processing and analytical tasks required to manage risk contracts effectively.
The Company's system facilitates the automation of many routine functions and
provides affiliated physicians with Internet access to the clinical and
financial data necessary to issue and manage authorization for surgeries, to
track diagnosis, procedures and admissions and to perform outcome studies, cost
analysis, quality assurance and utilization management and reviews. Access to
this data allows the Company to assist affiliated physicians in negotiating and
managing risk contracts.
Negotiate and Manage Exclusive Payor Arrangements. ENT physicians and
Related Specialists are increasingly seeking to affiliate with large group
practices and physician practice management companies in order to gain access to
provider panels of third party payors, to strengthen their negotiating position
with managed care payors and to improve their ability to manage risk contracts.
The Company intends to develop multi-site ENT and Related Specialty provider
networks in markets where the Company has developed a market presence in order
to assist its affiliated physicians in obtaining managed care contracts,
providing specialty services and increasing access to patients. The Company
currently holds, manages and administers capitated ENT managed care contracts
covering approximately 315,000 enrollees and believes that its experience in
negotiating and managing risk contracts, its utilization of the Capitated
Network System and its management's experience in forming specialty provider
networks enhance its ability to market the services of the Company's affiliated
physicians to managed care payors and to negotiate risk contracts with such
payors.
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<PAGE> 39
THE AFFILIATED PRACTICES
The Company is affiliated with 47 physicians, one TMJ specialist and 51
allied health care professionals with 41 clinical offices in Alabama, Florida,
Georgia and Illinois. The following table sets forth certain information
concerning the Company's affiliated practices:
<TABLE>
<CAPTION>
ALLIED
YEAR HEALTH CARE OFFICE
MEDICAL GROUP LOCATION AREAS SERVED FOUNDED PHYSICIANS PROFESSIONALS LOCATIONS
- ------------- -------- ------------ ------- ---------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Atlanta Ear, Nose & Atlanta, Metropolitan Atlanta 1979 32* 39 31
Throat Associates, Georgia
P.C.
ENT & Allergy Birmingham, Birmingham 1988 2 1 1
Associates, Inc. Alabama
Allatoona E.N.T. & Cartersville, Cartersville 1994 2 1 1
Facial Plastic Georgia
Surgery, P.C.
Otolaryngology Chicago, Barington, 1981 4 3 3
Medical & Surgical Illinois Crystal Lake and
Associates, Ltd. McHenry
Ear, Nose & Throat Boca Raton, Boca Raton, 1981 8 7 5
Associates of South Florida Pompano Beach,
Florida, P.A. West Palm Beach &
Delray Beach
Sub-Total 48* 51 41
-- -- --
Probable Practice Metropolitan Metropolitan 28 23 16
Acquisitions New York & New York,
South Palm Beach & Fort
Florida Lauderdale
Total 76* 74 57
== == ==
</TABLE>
- ------------------------------
* Includes one TMJ specialist.
ATLANTA EAR, NOSE & THROAT ASSOCIATES, P.C.
The Company believes Atlanta ENT is the largest independent (non-academic)
otolaryngology group practice in the United States. Atlanta ENT consists of 31
ENT physicians, one TMJ specialist, 28 audiologists, eight physician assistants,
two nurse practitioners and one clinical esthetician with 31 clinical offices.
Atlanta ENT offers a wide range of ENT subspecialty services, including
pediatric otolaryngology, head and neck surgery, rhinology, facial plastic and
reconstructive surgery, otology and laryngology, to children and adults in the
metropolitan Atlanta area. The practice also provides audiology services,
hearing aid sales, TMJ diagnostics and snoring and sleep apnea laser surgical
services. The affiliated physicians at Atlanta ENT maintain privileges at 18
hospitals and three 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 founder of Atlanta ENT. See
"Certain Transactions."
ENT & ALLERGY ASSOCIATES, INC.
ENT & Allergy Associates, Inc. is a wholly-owned subsidiary of the Company
and consists of two ENT physicians and one audiologist with one clinical office.
ENT & Allergy Associates provides a wide range of ENT subspecialty services,
including allergy testing and treatment, head and neck surgery, rhinology,
facial plastic and reconstructive surgery, otology, neurotology and laryngology,
to children and adults in the metropolitan Birmingham area.
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<PAGE> 40
ALLATOONA E.N.T. & FACIAL PLASTIC SURGERY, P.C.
Allatoona ENT consists of two ENT physicians and one audiologist with one
clinical office. Allatoona ENT provides a wide range of ENT subspecialty
services, including allergy testing and treatment, head and neck surgery,
rhinology, facial plastic and reconstructive surgery, otology and laryngology,
to children and adults in the North Georgia area. In addition, the physicians at
Allatoona ENT have instituted a hearing screening program for infants and
newborns.
OTOLARYNGOLOGY MEDICAL & SURGICAL ASSOCIATES, LTD.
Otolaryngology Medical & Surgical Associates, Ltd. ("OMSA") consists of
four ENT physicians and three clinical audiologists with three clinical offices
in the Barington, Crystal Lake and McHenry suburbs of Chicago. OMSA provides a
wide range of ENT subspecialty services, including head and neck surgery,
rhinology, facial plastic and reconstructive surgery, otology and laryngology,
to children and adults in the metropolitan Chicago area. The practice also
provides audiology services, hearing aid sales and snoring and sleep apnea
surgical services. The affiliated physicians at OMSA maintain privileges at
three hospitals and one ambulatory surgical center in metropolitan Chicago.
EAR, NOSE & THROAT ASSOCIATES OF SOUTH FLORIDA, P.A.
Ear, Nose & Throat Associates of South Florida, P.A. ("ENTSF") consists of
eight ENT physicians and seven clinical audiologists with five clinical offices
in Boca Raton, Pompano Beach, West Palm Beach and Delray Beach, Florida. ENTSF
provides a wide range of ENT subspecialty services, including allergy testing
and treatment, head and neck surgery, rhinology, facial plastic, otology and
neurotology, to children and adults in the South Florida area. The practice also
provides audiology services, hearing aid sales and snoring and sleep apnea
surgical services. The affiliated physicians at ENTSF maintain privileges at six
hospitals and two ambulatory surgical centers in South Florida.
PROBABLE PRACTICE ACQUISITIONS
In March 1998, the Company entered into a non-binding letter of intent with
PDI relating to the proposed affiliation with six ENT physician practices
consisting of 26 physicians and 21 allied health care professionals with 14
clinical offices located in the New York metropolitan area. In addition, the
Company has non-binding letters of intent for the other Probable Practice
Acquisitions. These two other Probable Practice Acquisitions consist of an
aggregate of two physicians and two allied health care professionals with two
clinical offices in South Florida. Although the Company expects to complete
these acquisitions in the near future, there can be no assurance that any of
these acquisitions will be completed, as to the terms of such acquisitions or
that the Company will be able to integrate any of these practices, including
PDI, into its business. See "-- Acquisition of ENT Practices -- Probable
Practice Acquisitions."
COMPANY OPERATIONS
Upon affiliating with the Company, the physician practice enters into a
long term management services agreement with the Company. Under the terms of a
management services agreement, the Company employs the practice's non-medical
personnel, provides offices for the practice and provides services in the areas
of practice management, information systems and negotiation and management of
payor contracts. The non-medical personnel, along with additional personnel at
the Company's headquarters, manage the day-to-day non-medical operations of each
affiliated practice, including providing administrative, bookkeeping, scheduling
and other routine services. The governance structure established by the Company
pursuant to its management services agreements facilitates close cooperation
between the Company and the affiliated practice, while ensuring that the
affiliated practice maintains clinical autonomy.
Pursuant to the terms of the management services agreements, the Company
assists the affiliated practices in strategic planning, preparation of operating
budgets and capital project analysis. The Company coordinates group purchasing
of supplies, inventory and insurance for the practices. In addition, the Company
assists the affiliated practices in physician recruitment by introducing
physician candidates to the affiliated practices and advising the
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<PAGE> 41
affiliated practices in structuring employment arrangements. The Company also
provides or arranges for a variety of additional services relating to the
day-to-day non-medical operations of the affiliated practices, including (i)
managing and monitoring each practice's billing levels, invoicing and accounts
receivable collection by payor type, (ii) accounting, payroll and legal services
and records and (iii) cash management and centralized disbursements. These
services are designed to reduce the amount of time physicians spend on
administrative matters, thereby enabling the physicians to dedicate more of
their efforts toward the delivery of health care.
The Company establishes an advisory board at each affiliated practice
consisting of physicians of the affiliated practice and Company management
personnel whose responsibilities are advisory in nature. The advisory board
reviews, evaluates and makes recommendations to the officers of the affiliated
practice and the officers of the Company with respect to such matters as
strategic and operational planning, physician employment and recruitment,
collection policies, quality review and the establishment and maintenance of
relationships with managed care and other payors. Notwithstanding
recommendations of the advisory board, the Company has ultimate control over all
decisions relating to the non-medical operations of the affiliated practice and
the affiliated practice has ultimate control over all decisions relating to the
practice of medicine. See "-- Affiliation Agreements."
CAPITATED MANAGED CARE CONTRACTS; NETWORK DEVELOPMENT AND MANAGEMENT
The Company intends to develop additional ENT and Related Specialty
provider networks in markets where the Company has developed a market presence
in order to assist its affiliated physicians in obtaining managed care
contracts, providing specialty services and increasing access to patients. The
Company believes that its experience in negotiating and managing risk contracts,
its utilization of the Capitated Network System and its management's experience
in forming specialty provider networks enhance its ability to market the
services of the Company's affiliated physicians to managed care payors and to
negotiate risk contracts with such payors. Atlanta ENT began providing ENT
medical and surgical professional services under a capitated managed care
contract in 1982 covering approximately 50,000 enrollees. In order to provide
ENT medical and surgical professional services under its capitated managed care
contracts, the ENT Networks assembled an ENT provider panel consisting of
physicians at Atlanta ENT and Allatoona ENT and independent physicians. At
December 31, 1997, Atlanta ENT and Allatoona ENT served as the primary ENT
provider network for three capitated managed care contracts for United
HealthCare, Cigna and FPA covering an aggregate of approximately 315,000
enrollees in the metropolitan Atlanta area. The following table sets forth the
covered lives for each managed care contract:
<TABLE>
<CAPTION>
CAPITATED
COVERED LIVES
-------------
<S> <C>
United HealthCare of Georgia, Inc........................... 162,141
Cigna HealthCare of Georgia, Inc............................ 143,164
FPA Medical Management, Inc................................. 10,104
-------
315,409
=======
</TABLE>
These managed care contracts are held, managed and administered by three
wholly-owned subsidiaries of the Company which together comprise the ENT
Networks. The Company, through the ENT Networks, also manages the existing
provider networks and performs quality assurance and utilization management
under each contract. The ENT Networks receive a pre-determined capitation fee
for professional services per enrollee per month from the payors of the managed
care contracts in exchange for agreeing to provide ENT medical and surgical
professional services required by enrollees. In turn, the ENT Networks have
contracted with physicians at Atlanta ENT and Allatoona ENT and with independent
physicians to provide such services to these enrollees. The physicians providing
services are compensated by the ENT Networks on a discounted fee-for-service
basis. For the year ended December 31, 1997, approximately 23% of the net
revenue of the Company was attributable to ENT medical and surgical professional
services rendered pursuant to the managed care contracts of the ENT Networks.
The Company intends to develop or acquire additional ENT provider networks
in order to enter into managed care contracts with payors. The Company expects
that the networks will consist of affiliated ENT physicians and Related
Specialists as well as independent physicians and other health care providers
engaged in
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<PAGE> 42
ENT and the Related Specialties, who will enter into network administration
agreements with the Company. These agreements will provide for management of the
provider network, negotiation of managed care contracts and performance of
quality assurance and utilization management functions by the Company. The
Company anticipates working with specialty group practices in developing
capitated contract proposals, evaluating and assembling provider networks,
negotiating contract rate schedules and exclusions, managing utilization and
developing provider compensation methodologies. The Company also anticipates
eventually tracking outcomes to demonstrate the cost effectiveness of care being
delivered in connection with its managed care contracts. The Company believes
the principal benefit from including affiliated as well as independent
physicians in its provider networks will be the expansion and diversification of
provider networks available to managed care enrollees, as increasingly required
by managed care companies.
INFORMATION SYSTEMS
The Company supports free-standing practice management systems utilized by
affiliated practices to facilitate patient scheduling, billing and collection,
accounts receivable management, provider productivity analysis and certain cash
disbursement functions. Rather than replacing systems utilized by affiliated
practices, the Company generally integrates an affiliated practice's systems in
order to streamline consolidated financial reporting, accounts receivable
management and productivity analysis functions. The Company is also evaluating
patient electronic medical record systems for possible implementation at
affiliated practices. The Company believes that the use of an electronic medical
record 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
quality cost-effective patient care.
The Company believes that effective and efficient access to key patient
data is critical in controlling costs and improving quality outcomes in
connection with managing risk contracts. The Company's Capitated Network System,
a proprietary comprehensive network administration and utilization management
system designed specifically for ENT practices, provides effective and efficient
access to key patient data and performs the complex processing and analytical
tasks required to manage risk contracts effectively. The Company's system
facilitates the automation of many routine functions and provides affiliated
physicians with Internet access to the clinical and financial data necessary to
issue and manage authorization for surgeries, to track diagnosis, procedures and
admissions and to perform outcome studies, cost analysis, quality assurance and
utilization management and reviews.
The Capitated Network System integrates the following functions:
- Tracking referrals from primary care and other 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 Company believes that the Capitated Network System provides it with a
competitive advantage in procuring, managing and administering risk contracts.
COMPETITION
The physician practice management industry is highly competitive. The
restructuring of the 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 consolidation and ongoing cost
containment pressures, among other factors. The Company competes with physician
practice management companies, hospitals, managed care companies, physician
practices and other competitors seeking to affiliate with physicians or provide
management services to physicians. Many of these competitors are significantly
larger, provide a wider variety of services, have greater experience in
providing practice management services, have longer established relationships
with customers for these services and have access to substantially greater
financial resources than the Company. There can be no assurance the Company will
be able to affiliate with a sufficient number of competent physicians and other
health care
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<PAGE> 43
professionals to expand its business. The Company believes that the quality of
its management services, experience in procuring, managing and administering
capitated managed care contracts, the breadth of ENT medical and surgical
professional services provided by affiliated physicians and the utility of the
Capitated Network System position it to compete favorably for affiliation with
additional ENT and Related Specialty practices.
Physicians are facing the challenge of providing quality patient care while
experiencing rising costs, strong competition for patients and a general
reduction of reimbursement rates by both private and government payors. The
Company believes that competition for patients is dependent upon, among other
things, the geographic coverage of affiliated practices, the reputation and
referral patterns of affiliated physicians and the breadth of ENT and Related
Specialty medical and surgical professional services provided by physicians
practicing at affiliated practices. Therefore, the success of the Company is
dependent upon the ability of the Company and its affiliated practices 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. There can be no assurance that sufficient numbers of
qualified health care professionals can be hired and retained. The inability to
hire and retain such health care professionals could have a material adverse
effect on the Company's business, financial condition and results of operations.
Concern over the rising cost of health care has led to the emergence and
increased prominence of managed care and a resulting increase in competition for
managed care contracts. The Company's ability to compete successfully for
managed care contracts may depend upon the Company's ability to manage
utilization under such contracts and to increase the number of associated
physicians and other health care professionals included in its provider
networks.
MEDICAL ADVISORY BOARD
The Company established a Medical Advisory Board whose responsibilities
include, among other duties, (i) reviewing the medical appropriateness of the
Company's policies and procedures with respect to disease management and
utilization management protocols and practice and surgery guidelines, (ii)
consulting with the Company on acquisitions, (iii) reviewing the medical
appropriateness of information systems utilized or developed by the Company,
(iv) evaluating new medical technologies to be utilized by affiliated practices
and (v) developing and coordinating Company sponsored managed care and practice
management seminars for ENT physicians. The Medical Advisory Board consists of
three affiliated ENT physicians, including Ramie A. Tritt, M.D., the Company's
Chairman of the Board and President, and five non-affiliated ENT physicians.
AFFILIATION AGREEMENTS
The relationship between the Company and affiliated practices and
physicians is set forth in asset or stock acquisition agreements, management
services agreements and employment agreements.
ACQUISITION AGREEMENTS
Pursuant to acquisition agreements (the "Acquisition Agreements"), the
Company or a wholly-owned subsidiary of the Company acquires either (i)
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 assumes certain leases and other contracts or obligations of the
practice group or (ii) the equity of the practice. The practice remains liable
for the payment of liabilities not assumed by the Company under the acquisition
agreement. The Acquisition Agreements provide that the medical practice 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 practice within such
geographic area and will not solicit employees of the Company. The Acquisition
Agreements also contain representations and warranties and indemnification
provisions by each of the parties to the agreement. The closing of acquisitions
are conditioned upon, among other things, the execution and delivery of (i)
employment agreements between the practice and each of its physicians and (ii) a
management services agreement between the Company and the practice.
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MANAGEMENT SERVICES AGREEMENTS
The Company has entered into management services agreements with Atlanta
ENT, Allatoona ENT, ENT & Allergy Associates, OMSA and ENTSF on substantially
the terms described below (the "Management Services Agreements"). The Management
Services Agreements provide for the affiliated practice to assign to the Company
all of its non-governmental accounts receivable and all of its rights and
interest in the proceeds of its governmental accounts receivable (or the revenue
it receives) to the extent permitted by applicable law and to grant to the
Company the right to collect and retain the proceeds of the accounts receivable
(or revenue) for the Company's account to be applied in accordance with the
Management Services Agreement. Although such proceeds of the accounts receivable
(or revenue) are collected by the Company on behalf of the practice, the
practice grants to the Company the right to grant a security interest and factor
such amounts and accounts receivable to secure Company borrowings under the
Credit Facility.
The Company generally retains a management fee equal to (i) a stipulated
percentage of all revenue generated by or on behalf of physicians at the
affiliated practice (after adjustment for contractual allowances) as payment for
the services provided by the Company and non-allocable costs incurred by the
Company attributable to the provision of management services under the
Management Services Agreement and (ii) an amount equal to all operating and
capital expenses of the practice, including depreciation, amortization and
interest. In certain states where the Company expects to do business, such as
New York, the Company will be reimbursed for the operating and non-operating
expenses of the affiliated practice and will be paid a fixed management fee,
which fixed fee may increase based upon (i) the management by the Company of
ancillary business developed or acquired or (ii) the acquisition of additional
physician practices which are merged into the existing affiliated practice. The
Company is responsible for the payment for and incurs (i) operating expenses of
the affiliated practice, including salaries and benefits of non-medical
employees of the practice, lease obligations for office space and equipment and
medical and office supplies and (ii) the non-operating expenses of the
affiliated practice. The Company pays for all such expenses directly out of the
proceeds of the accounts receivable (or revenue) assigned to the Company by the
affiliated practice. The remaining net practice revenue is remitted to the
affiliated practice, which is responsible for and pays compensation and benefits
to (i) physicians pursuant to employment agreements between the practice and
each physician and (ii) physician assistants.
The affiliated practice retains the responsibility for, among other things,
(i) compensating physician employees and physician assistants, (ii) paying
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
retains exclusive control over all aspects of the practice of medicine and the
delivery of medical services.
Under the Management Services Agreements, the Company, among other things,
(i) acts as the exclusive manager and administrator relating to all non-medical
operations of the affiliated practice, (ii) bills patients, insurance companies
and other third party payors and collects, 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) provides, as necessary,
clerical, accounting, purchasing, payroll, bookkeeping and computer services and
personnel and information management services to the affiliated practice, (iv)
supervises and maintains custody of all files and records of the affiliated
practice, (v) provides facilities, furniture and equipment for the affiliated
practice, (vi) prepares all annual and capital operating budgets of the
affiliated practice, (vii) orders and purchases inventory and supplies as
reasonably required by the affiliated practice, (viii) assists in marketing the
services provided by the affiliated practice, where allowable, (ix) provides
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) performs
administrative services relating to the recruitment of physicians for the
affiliated practice.
The Management Services Agreements are 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.
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During the term of a Management Services Agreement, the affiliated practice
agrees, with respect to management services, not to compete with the Company and
the other practices for which the Company provides management services within a
specified geographic area. In addition, during the term of a Management Services
Agreement and for a period following the termination of such agreement, the
affiliated practice agrees not to solicit any employee of the Company or persons
affiliated with the Company or to contract with any entity for the provision of
management services substantially of the kind contemplated by the Management
Services Agreement. The affiliated practice also agrees not to disclose certain
confidential and proprietary information relating to the Company and the
affiliated practice.
PHYSICIAN EMPLOYMENT AGREEMENTS
Physicians at Atlanta ENT, Allatoona ENT, OMSA, ENTSF and ENT & Allergy
Associates have employment agreements with their respective affiliated practice.
The employment agreements with the physicians at Atlanta ENT, Allatoona ENT,
OMSA and ENTSF generally provide for an initial term of five years, which will
be automatically renewed for successive one or two 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. The employment agreements with the physicians of ENT & Allergy
Associates, a wholly-owned subsidiary of the Company, provide for an initial
term of six years and six months, which will be automatically renewed for
successive one or two year terms unless a physician or ENT & Allergy Associates
elects not to renew. Affiliated physicians are compensated based upon either
productivity or other negotiated formulas agreed upon between the affiliated
physician and the medical practice, and the medical practice may provide the
affiliated physicians with health, death and disability insurance and other
benefits. Affiliated physicians are obligated to obtain and maintain
professional liability insurance coverage which may be procured on behalf of the
affiliated physicians by the Company. Pursuant to the employment agreements,
affiliated physicians 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. However, in certain states (such as Alabama), certain types
of restrictive covenants, including non-competition covenants, are deemed to be
unenforceable as against professionals (including physicians) and in other
states (such as Florida, Georgia and Illinois) such provisions may be deemed to
be unenforceable if a court determines that the duration of the restriction, the
territory covered by such restriction or the activities restricted were
unreasonable or otherwise violated public policy. In addition, affiliated
physicians 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 agree to assign to the medical practice all
revenue related to contracts with managed care companies and grant an
irrevocable power of attorney to the medical practice to enter into such
contracts on behalf of the physicians. The employment agreements also provide
that the affiliated physicians exercise independent professional and ethical
judgment in all patient care responsibilities.
ACQUISITION OF ENT PRACTICES
THE REORGANIZATION
The Company acquired substantially all of the assets (other than certain
excluded assets such as employment agreements and patient charts, records and
files) and certain contractual liabilities of (i) Atlanta ENT, (ii) ENT &
Allergy Associates and (iii) Metropolitan Ear, Nose & Throat, P.C., Atlanta Head
and Neck Surgery, P.C. and Ear, Nose & Throat Associates, P.C. (the "Additional
Atlanta Practices") and all of the outstanding shares of common stock of the
corporations comprising the ENT Networks in March 1997. In connection with the
acquisition of assets of each of the practices and the common stock of the ENT
Networks, the Company issued an aggregate of 3,104,755 shares of Common Stock
(valued at the time of issuance at approximately $24.8 million). See "-- The
Affiliated Practices," "-- Affiliation Agreements" and "Certain Transactions."
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POST REORGANIZATION ACQUISITIONS
Since the Reorganization, the Company has acquired (a) substantially all of
the assets (other than certain excluded assets such as employment agreements and
patient charts, records and files) and assumed certain contractual liabilities
of (i) Allatoona ENT, (ii) Ear, Nose & Throat Specialists, P.C. ("ENT
Specialists"), (iii) Ear, Nose & Throat Specialists, Head & Neck Surgery, P.C.
("ENT Head & Neck"), (iv) Northside Ear, Nose & Throat Associates, P.C.
("Northside"), (v) OMSA, (vi) Cobb and (vii) Murata and (b) the stock of six
professional associations owned by seven ENT physicians and a partnership owned
and operated by the professional associations in Palm Beach and Broward
Counties, Florida. See "-- The Affiliated Practices" and "-- Affiliation
Agreements."
In connection with the acquisition of assets or equity of these practices,
the Company (i) paid an aggregate of approximately $5.2 million in cash, (ii)
issued an aggregate of 611,215 shares of Common Stock (valued at the time of
issuance at an aggregate of approximately $4.7 million), (iii) agreed to issue
an aggregate of 301,779 additional shares of shares of Common Stock (valued at
an aggregate of approximately $2.8 million) to three of the affiliated practices
beginning in September 1998, (iv) issued convertible promissory notes in the
aggregate principal amount of approximately $912,000, which notes mature in
October 2000, accrue interest at a rate of 5.61% per annum and are convertible
into shares of Common Stock at a conversion price of $10.00 per share and (v)
issued non-interest bearing contingent promissory notes in the aggregate
principal amount of approximately $3.0 million. The payment of these notes is
contingent upon the physicians or practice holding such notes reaching certain
performance targets. Substantially all of these contingent notes are payable
either in cash, or at the Company's option, in shares of Common Stock, valued at
the average closing price of the Common Stock for the ten trading days preceding
the date of delivery of such shares. All of the promissory notes are subordinate
to the Credit Facility. In connection with these acquisitions, the Company paid
an aggregate of $429,000 to Premier HealthCare, an affiliate of Gerald R.
Benjamin, the Company's Vice Chairman and Secretary, for advisory services
rendered by Premier HealthCare. See "Certain Transactions."
In connection with the OMSA acquisition, the physician shareholders of OMSA
granted to Dr. Tritt (or his designee or assignee) the option to acquire all of
the ownership interest of such physician shareholders in OMSA in the event that
at any time there are less than two shareholders who continue as full time
physician-employees of OMSA and those shareholders who remain do not, in Dr.
Tritt's or management of the Company's sole discretion, control the operations
of OMSA in a manner consistent with the requirements of the Management Services
Agreement between OMSA and the Company. In order to exercise the option, Dr.
Tritt or his designee or assignee must at the time of exercise be licensed to
practice medicine in the State of Illinois. See "Certain Transactions."
PROBABLE PRACTICE ACQUISITIONS
In March 1998, the Company entered into a non-binding letter of intent with
PDI relating to the Company's proposed acquisition of substantially all of the
tangible assets of Physicians' Domain, along with the equity of corporations
that are successors to six ENT physician practices affiliated with Physicians'
Domain. Upon completion of the PDI transaction, if consummated on the terms
contemplated, the Company will add 26 physicians and 21 allied health care
professionals with 14 clinical offices in the New York metropolitan area. Based
on the terms of the letter of intent, the aggregate consideration to be paid by
the Company in connection with the PDI acquisition, if such transaction is
consummated, will be approximately $22.5 million consisting of approximately
$2.1 million in cash, the repayment of approximately $4.2 million of outstanding
indebtedness of PDI and the issuance of a promissory note in the principal
amount of approximately $16.2 million. The letter of intent provides that the
promissory note will bear interest at a rate of 6% per annum, payable quarterly,
will be secured by the fixed assets acquired by the Company in the transaction
and will be subordinate to the Credit Facility. Pursuant to the proposed terms
of the promissory note approximately $9.2 million of the principal amount of the
note will mature five years from the date of issuance and approximately $7.0
million principal amount of the note will mature upon the earlier of (i) three
days following the closing of the Offering and (ii) December 31, 1998. Pursuant
to the letter of intent, (i) the Company will receive a break-up fee equal to
$250,000 in the event the transaction is not consummated on or before June 1,
1998, (ii) the physicians at these practices will have the right to nominate one
member to the Board of Directors of the Company and (iii) the
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Company will pay an additional $500,000, payable in shares of Common Stock at
the Company's option, if these practices achieve stipulated performance targets.
In the event the PDI transaction is consummated, at the closing of the Offering,
the Company will use approximately $7.0 million and $4.2 million of the net
proceeds of the Offering, respectively, to repay (i) a portion of the principal
of the promissory note to be issued in connection with the PDI transaction and
(ii) borrowings under the Credit Facility to be incurred in connection with the
PDI transaction. The terms of the letter of intent provide that the management
services agreements to be entered into in the PDI transaction will have a term
of 40 years and will provide for (i) an aggregate fixed management fee equal to
approximately $3.0 million per year, subject to annual increases after the fifth
anniversary of the execution of the management services agreement consistent
with the annual percentage increase in the consumer price index for the prior
year, and (ii) reimbursement of all operating and non-operating expenses of the
practice. The terms of the letter of intent also provide that the management
services agreements to be entered into in the PDI transaction are also expected
to provide for mutually agreed increases in the fixed management fee upon (i)
the management by the Company of ancillary business developed or acquired or
(ii) the acquisition of additional physician practices which are merged into the
existing PDI practices. In addition, the Company has non-binding letters of
intent for the other Probable Practice Acquisitions for an aggregate purchase
price of $1.2 million. These two ENT physician practices consist of an aggregate
of two physicians and two allied health care professionals with two clinical
offices in South Florida. Although the Company expects to complete these
acquisitions in the near future, there can be no assurance that any of these
acquisitions will be completed, as to the terms of such acquisitions or that the
Company will be able to integrate any of these Probable Practice Acquisitions
into its business.
The Company will pay approximately $370,000 (net of salary paid to Gerald
R. Benjamin by the Company) to Premier HealthCare, an affiliate of Mr. Benjamin,
the Company's Vice Chairman and Secretary, for consulting services in connection
with the Probable Practice Acquisitions, if such transactions are consummated on
the terms contemplated. See "Certain Transactions."
CAPITATED AGREEMENTS WITH THIRD PARTY PAYORS
The ENT Networks entered into capitated managed care contracts with United
HealthCare, Cigna and FPA in 1991, 1992 and 1997, respectively. The current
contract with United HealthCare is a renewal of an earlier contract and expires
in May 1998. Under the contract with United HealthCare, capitation fees are
automatically increased annually based upon the percentage change, in the
Atlanta region, of a consumer index identified in the contract. The current
contract with Cigna is the original contract and provides for automatic annual
renewals and annual renegotiation of the capitation fees. The managed care
contracts with Cigna and United HealthCare 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. The contract with FPA has an initial
team of three years and provides for automatic annual renewals following the
initial term. The agreement with FPA provides for a renegotiation of the
capitation fees 15 months into the initial term of the agreement. In the event
that parties cannot renegotiate the capitation fees within 60 days, the
agreement may be terminated by either party. The agreement also provides for
annual renegotiation of the capitation fees following the initial term and may
be terminated at any time by FPA for cause. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Pursuant to participation agreements between the ENT Networks and the
physicians providing services to the managed care enrollees, the physicians must
follow administrative procedures established by the Company and the managed care
companies, such as referring enrollees to participating providers, obtaining
prior authorization for certain medical procedures and participating in quality
assurance and utilization management programs. Quality assurance 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. Under the participation agreements, the
physicians are also required to procure and maintain medical malpractice and
general liability insurance. The participation agreements may be terminated by
(i) the respective ENT Network without cause upon 60 days notice or with cause
upon 30 days notice and (ii) a physician, with or without cause,
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upon 60 days notice. In addition, the participation agreements automatically
terminate upon the termination of the relevant capitated managed care contract.
GOVERNMENT REGULATION
The health care industry is highly regulated, and there can be no assurance
that the regulatory environment in which the Company operates will not change
significantly and adversely in the future. The regulation of the health care
industry, including scrutiny of the methods and levels of payment to health care
providers, is increasing at both the federal and state levels. Federal and state
authorities are expending significant resources to enforce both federal and
state health care laws and to combat fraud in the health care industry.
Additionally, in 1997, Congress enacted the Balanced Budget Act which contains
several amendments to the enabling laws for the Medicare and Medicaid Programs.
These amendments do affect the methods and levels of payment to health care
providers, and at this time, it is not clear how or to what extent these
amendments will affect the operation of the Company and its affiliated
practices. Additionally, the Company believes that health care legislation,
regulations and interpretations will continue to change and, as a result, plans
to continue routinely to 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.
GOVERNMENT REIMBURSEMENT PROGRAMS
Under the federal Medicare program, payment for physician services (other
than under Medicare risk contracts and Medicare+Choice plans) is based on an
annually adjusted fixed fee schedule known as the Resource-Based Relative Value
Scale ("RBRVS"). This payment system 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 a
national conversion factor which converts relative value units into payment
amounts and insures that expenditures remain within budgetary constraints. The
Balanced Budget Act modified the RBRVS system to adjust the per patient payments
from the Medicare program for certain physician services, and the Company
anticipates further modifications in the RBRVS system in the future.
Additionally, the Balanced Budget Act creates the Medicare+Choice plan which
provides Medicare beneficiaries with the option to receive services through
managed care entities including HMOs and preferred provider organizations, and
payment for physician services under the Medicare+Choice plan may be on a
capitated basis as opposed to the RBRVS system. This change of payment method
may result in an overall decrease in compensation for physician services under
the Medicare program. Because the Company anticipates that approximately 10% of
its revenue will be derived from government-funded health care programs
(principally, Medicare and Medicaid), the Company 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 federally-funded state
administered program for the indigent. Payment to physicians under state
Medicaid programs is generally based upon fee schedules; however, some states
have authorized Medicaid HMOs, and payments for physician services under these
programs may be on a capitated basis. 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 providers.
STARK LEGISLATION, FRAUD AND ABUSE LAWS AND SIMILAR LAWS
The Company and its affiliated physicians are subject to a variety of laws
and regulations governing the referral of patients for certain health services
to entities 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. The Stark Law
prohibits, subject to certain exceptions,
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a physician (or a member of the physician's immediate family) from referring
Medicare patients for "designated health services" to an entity with which the
physician has a financial relationship. In addition, a state cannot receive
federal financial payment under the Medicaid program for designated health
services furnished to an individual on the basis of a physician referral that
would result in a denial of payments under the Medicare program if Medicare
covered the services to the same extent and under the same terms and conditions
as under the state Medicaid plan. 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 Stark Law further imposes reporting
requirements on any entity providing covered items or services for which payment
may be made under Medicare or Medicaid. An entity is required to report
information concerning the entity's ownership, investment and compensation
arrangements. The penalties for violating the Stark Law include a prohibition on
payment by Medicare or federal financial payment under the Medicaid program 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 the Stark Law. However, the Stark Law is broad and ambiguous. Final
regulations under the provisions of Stark I (clinical laboratory services) were
issued on August 14, 1995, and proposed regulations clarifying the provisions of
the Stark Law were published on January 9, 1998. Although the proposed
regulations do not have the effect of law, they provide guidance to HCFA's
interpretation of the Stark Law. Therefore, the Company expects to review the
proposed regulations to determine if any changes in the operations of the
Company or its affiliated practices are appropriate.
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. For example, the Georgia Patient Self-Referral Act of 1993 (the
"Georgia Act") prohibits a physician from making a referral to an entity in
which the physician or a family member has an ownership interest or compensation
relationship if the referral is for any of a list of designated health services.
The list of designated health services includes clinical laboratory services,
physical therapy services, rehabilitation services, diagnostic imaging services,
pharmaceutical services, durable medical equipment and outpatient surgical
services. Exceptions are provided for physicians' services and certain in-office
ancillary services of a group practice, as defined by the Georgia Act.
Similarly, the Florida Patient Self-Referral Act of 1992 (the "Florida Act")
prohibits any health care provider from making a referral of any health care
item or service to an entity in which the health care provider has an investment
interest. However, certain referrals are not covered by the Florida Act,
including referrals of physicians services within a group practice or ancillary
services performed under the direct supervision of a physician or group
practice. The Illinois Health Care Worker Self-Referral Act (the "Illinois Act")
prohibits health care workers from referring patients for health services to an
entity outside the health care worker's office or group practice in which the
health care worker is an investor, unless the health care worker directly
provides health services within the entity and will be personally involved with
the provision of care to the referred patient. New York's self-referral law
prohibits, with certain narrowly defined exceptions, a physician from referring
patients for certain health services to health care providers with which the
physician, or a member of a physician's immediate family, has a financial
relationship. New Jersey's self-referral law prohibits, with a few narrow
exceptions, a physician from referring patients for certain health care services
to health care providers with which the physician and/or the physician's
immediate family has a significant beneficial interest. The Company believes
that its activities are not in violation of these laws. However, there can be no
assurances that future interpretations of these laws will not require structural
and organizational modification of the Company's affiliation structure in those
states. Additionally, future legislation or regulations could require the
Company to modify the form of its relationships with physician organizations.
Moreover, the violation of the Stark Law or similar state laws by the Company's
affiliated physician organizations could result in significant fines and loss of
reimbursement which could materially adversely affect the Company's business,
financial condition and results of operations.
The Company and its affiliated physicians are also subject to federal and
state fraud and abuse laws (the "Fraud and Abuse Laws"). These laws include the
federal anti-kickback statute, which prohibits, among other things, the offer,
payment, solicitation or receipt of any remuneration, directly or indirectly in
return for the
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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 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 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
federally-funded health care programs. These false claims 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. Congress also enacted the Health Insurance Portability and
Accountability Act of 1996, which includes an expansion of certain fraud and
abuse provisions to 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 Law, the Fraud and Abuse Laws and all other applicable federal
and state health care laws and regulations. However, there can be no assurance
that such laws and regulations 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 results of
operations. Furthermore, the addition of ancillary services may require the
Company or its affiliated practices to alter their operations to comply with
applicable federal or state health care laws and regulations. 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 results of operations.
HEALTH CARE REFORM
Political, economic and regulatory influences are continuously subjecting
the health care industry in the United States to fundamental change. On August
5, 1997, President Clinton signed the Balanced Budget Act of 1997 (the "Balanced
Budget Act") which contemplates savings of $115 billion in Medicare spending and
$13 billion in Medicaid spending over the five-year period from 1998 to 2002.
The savings will result primarily from reductions in reimbursements to providers
due to several factors, including but not limited to, alterations in the
methodology for calculating physician fee schedule payments, application of a
budget neutrality adjustment to prevent physician fees from increasing above a
certain aggregate amount and expansion of options for Medicare delivery
including provider-sponsored organizations, HMOs, preferred provider
organizations and private fee-for-service plans. The Balanced Budget Act also
establishes more stringent sanctions for convictions of health care related
crimes including permanent exclusion from participation in the Medicare Program
after conviction of three health care related crimes and imposition of civil
monetary penalties for violations of the federal anti-kickback statute. Due to
the recent enactment of this health care reform and uncertain interpretation of
these reform measures by regulatory authorities, it is difficult to determine
the impact that this reform will have upon
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the Company and its affiliated physicians, and there can be no assurance that
these reform measures will not have a material adverse effect on the Company's
business, financial condition or results of operations. In addition to federal
health care reform, 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 both federal and state governments will continue to
review and assess alternative health care delivery systems and payment
methodologies, and that additional reforms will likely occur in the future. Due
to uncertainties regarding the additional reforms and their enactment and
implementation, the Company cannot predict which, if any, 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 results of operations. In addition, the actual announcement by
competitors and third party payors of their strategies to respond to such
initiatives or reforms, could produce volatility in the trading and market price
of the Common Stock of the Company.
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 services, or making certain capital expenditures in excess of statutory
thresholds for health care equipment, facilities or services. To date, the
Company and its affiliated practices have not been required to obtain
certificates of need or similar approvals for their activities. However, the
addition of ancillary services by one of the affiliated practices or changes in
law or regulations could require licensure, a certificate of need, or both.
There is no assurance that such required state regulatory approvals could be
obtained, or even if initially obtained, would not thereafter be withdrawn or
restricted. 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. In
addition, 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 AND UNLAWFUL FEE SPLITTING
The laws of certain states in which the Company operates or may operate in
the future prohibit non-physician entities from practicing medicine or from
exercising control over the professional judgments or decisions of physicians
concerning the treatment and diagnosis of patients. In Illinois, there is case
law which prohibits corporations (other than specifically licensed medical
corporations or hospital corporations) from providing professional medical
services or employing physicians. In Georgia, there is also case law which could
be interpreted as prohibiting a corporation from employing physicians, but the
continued viability of such doctrine in Georgia is unclear. Florida law does not
prohibit the corporate practice of medicine although it does prohibit the
corporate practice of other medical services such as dentistry and optometry. In
Alabama, recent interpretations by state authorities have indicated that a
corporation may employ physicians as long as the physicians exercise their
independent professional judgment in rendering medical decisions concerning the
treatment and diagnosis of patients. New York law contains strict prohibitions
against the corporate practice of medicine, and corporations controlled by
non-physicians are prohibited from employing physicians and engaging in the
practice of medicine, unless the corporate entity is licensed to do so pursuant
to Article 28 of the New York Public Health Law (e.g., hospitals and clinics).
New Jersey law indirectly prohibits the corporate practice of medicine. The New
Jersey State Board of Medical Examiners has adopted regulations which allow only
certain types of general corporations to employ or engage physicians under
limited circumstances. Although the Company has structured its affiliations with
physician groups so that the associated physicians maintain exclusive authority
regarding the delivery of medical care and exercise their independent
professional judgment in rendering medical decisions, there can be no assurance
that these laws will be interpreted in a manner consistent
50
<PAGE> 52
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.
In addition, the laws of certain states in which the Company operates or
may operate in the future prohibit certain practices such as splitting fees with
physicians or receiving fees for the referral of patients. In Illinois, it is
unlawful for a physician to divide with anyone other than physicians with whom
the physician practices in a legally recognized entity or organization any fee
or other form of compensation for professional services. In Florida, the Board
of Medicine recently issued a declaratory statement (the "Declaratory
Statement") interpreting Florida fee splitting statutes. The Declaratory
Statement, which has been stayed pending its appeal to the Florida courts, is
broadly drafted and could be construed as prohibiting physician management
companies from being compensated based on a percentage of the managed practice's
revenue or profit. In addition, the Declaratory Statement could be construed as
restricting the manner in which the management company provides marketing
services to a managed practice. If Florida courts uphold the Declaratory
Statement, the Company could be required to revise its contracts with its
affiliated practices in a manner that could have adverse effects on the Company.
In New York, physicians are prohibited from directly or indirectly requesting,
receiving or participating in the division, transference, assignment, rebate,
splitting or refunding of a fee for, or directly requesting, receiving or
profiting by means of a credit or other valuable consideration as a commission,
discount or gratuity, in connection with the furnishing of professional care or
services, outside of a medical practice partnership, professional corporation or
university faculty practice. New York law also prohibits a physician from
directly or indirectly offering, giving, soliciting or receiving or agreeing to
receive, any fee or other consideration to or from a third party for the
referral of a patient or in connection with the performance of a professional
service. Although the Company has endeavored to structure its affiliations with
physician groups to comply with applicable state fee splitting laws and
anti-referral laws, 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 which could have a
material adverse effect on the Company's business, financial condition and
results of operations. If a corporate practice of medicine law or fee splitting
statute 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 results of operations.
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, there can be no assurance that malpractice
will not be asserted against the Company directly in the event that services or
procedures performed at one of the Company's facilities are alleged to have
resulted in injury or other adverse effects. In addition, in connection with the
acquisition of assets of affiliated practices, the Company has assumed certain
of the stated liabilities of such practices. Additionally, claims may be
asserted against the Company for events related to affiliated practices that
occurred prior to its affiliation with the Company. Although the Company
maintains 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 results of operations. 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.
In addition to the liability insurance maintained by the Company, the
Company is named as an additional insured on the professional liability
insurance policies held by affiliated physicians. Such insurance would provide
coverage, subject to policy limits in the event the Company were held liable as
a co-defendant in a
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<PAGE> 53
lawsuit for professional malpractice against an affiliated physician. In
addition, the Company is indemnified under the Management Services Agreements by
the affiliated physician groups for liabilities resulting from the performance
of medical services.
EMPLOYEES
As of March 31, 1998, the Company had approximately 323 full-time
employees, including two physicians and 51 allied health care professionals.
None of the Company's employees is represented by a labor union and the Company
believes its relations with its employees are good.
PROPERTIES
The Company leases approximately 5,000 square feet of office space for its
executive offices in Atlanta, Georgia. The lease provides for annual rent of
approximately $80,000, subject to specified annual increases, and expires in
July 2002. The Company also leases the 41 facilities currently used by the
physicians at the affiliated practices. These leases have varying remaining
terms ranging from approximately one month to 13 years and aggregate annual rent
of approximately $2.1 million. The Company believes that these facilities are
suitable for the current and anticipated needs of the Company. See "Certain
Transactions."
LEGAL PROCEEDINGS
No legal proceedings are currently pending against the Company, and the
Company is not aware of any outstanding claims against any of its affiliated
practices that would have a material adverse effect on the Company's business,
financial condition or results of operations. The Company and its affiliated
practices may be involved from time to time in litigation incidental to their
respective businesses.
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<PAGE> 54
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the names, ages and positions of the
executive officers and directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Ramie A. Tritt, M.D....................... 48 Chairman of the Board and President
Gerald R. Benjamin(1)..................... 40 Vice Chairman of the Board, Secretary and
Director
Richard D. Ballard(2)..................... 49 Chief Executive Officer and Director
Robert A. DiProva......................... 50 Executive Vice President and Chief Financial
Officer
Lawrence P. Kraska........................ 33 Vice President -- Operations
Edward R. Casas, M.D.(1)(2)............... 38 Director
Sidney Kirschner(1)....................... 63 Director
Steven L. Posar, M.D.(1)(2)............... 48 Director
</TABLE>
- ------------------------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
Ramie A. Tritt, M.D. has served as Chairman of the Board and President of
the Company since its inception in July 1996. Dr. Tritt serves as President of
Atlanta ENT, a multi-site otolaryngology group practice which is a successor to
a practice founded by Dr. Tritt in 1979. 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
established to contract with HMOs in greater Atlanta, each of which is a
wholly-owned subsidiary of the Company. 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 the metropolitan Atlanta area. Dr. Tritt has served on the ENT
Physician Advisory Board of the Ambulatory Surgery Division of Columbia HCA
since January 1997 and also serves on the Editorial Board of Physician's Managed
Care Report, a managed care publication, and the Credentials Committee of
Aetna/U.S. HealthCare of Georgia. Dr. Tritt also serves on the Company's Medical
Advisory Board. Dr. Tritt received his M.D. degree from McGill University.
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. Prior to forming Williams,
Benjamin, Benator & Libby in 1982, Mr. Benjamin was a member of the Atlanta
office of Ernst & Young. Mr. Benjamin is a Certified Public Accountant and
received his B.S. degree in accounting from the University of Kentucky.
Richard D. Ballard has served as 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.), an anesthesia contracting and physician practice management
company. 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.
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<PAGE> 55
Robert A. DiProva has served as an Executive Vice President and Chief
Financial Officer of the Company since March 1997. Mr. DiProva served as Vice
President-Administration, Chief Financial Officer, Secretary and Treasurer of
A.D.A.M. Software, Inc., a publicly traded medical software company, from
September 1995 to February 1997. Prior to joining A.D.A.M. Software in 1995, Mr.
DiProva served for six years as Vice President, Chief Financial Officer and
Treasurer of DATEQ Information Network, Inc., a publicly traded data management
company. Mr. DiProva is a Certified Public Accountant and received his M.B.A.
from Emory University.
Lawrence P. Kraska has served as Vice President-Operations of the Company
since March 1997. Prior to joining the Company, Mr. Kraska served as
Administrator of Atlanta ENT. Prior to joining Atlanta ENT in June 1994, 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 -- 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.
Mr. Kraska received his M.B.A. from Kennesaw State University.
Edward R. Casas, M.D. has served as a director of the Company since
November 1996. Dr. Casas currently serves as Chief Executive Officer of
PrimeCare International, Inc., a California-based multi-site primary care
physician practice management concern. Prior to joining PrimeCare in September
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 an M.D., a Masters of
Management and a Masters in Public Health.
Sidney Kirschner has served as a director of the Company since March 1997.
Mr. Kirschner currently serves as President and Chief Executive Officer of
Northside Hospital, a 455 bed tertiary care facility located in Atlanta,
Georgia. Prior to joining Northside Hospital in 1992, Mr. Kirschner served in
numerous executive capacities, including President, Chief Executive Officer and
Chairman of the Board, of National Service Industries, Inc. a publicly traded
diversified manufacturing and industrial services concern. Mr. Kirschner is a
member of the Board of Directors of two public companies: Fortune Co. and
Superior Surgical Manufacturing Company, Inc.
Steven L. Posar, M.D. has served as a director of the Company since March
1997. Dr. Posar currently serves as President, Chief Operating and Chief Medical
Officer of For Health International, Inc., a long term care and insurance
services company. Prior to joining For Health International in November 1997,
Dr. Posar served as Senior Vice President, Operations Group of AHI HealthCare
Systems, Inc., a publicly traded independent physician management company,
recently acquired by FPA Medical Management, Inc. Prior to joining AHI in 1991,
Dr. Posar served as Medical Director of Blue Cross of California, a managed care
payor. 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. Dr. Posar received his M.D. degree from Michigan State University.
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. All officers serve at the discretion of the Board of Directors.
BOARD COMMITTEES
The Board of Directors has established an Audit Committee and a
Compensation Committee. The Audit Committee consists of four directors and
reviews, with the Company's independent accountants, (i) the scope and timing of
audit services and any other services that the accountants are asked to perform,
(ii) the independent accountants report on the Company's financial statements
following completion of their audit and (iii) 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.
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<PAGE> 56
The Compensation Committee consists of three directors and (i) reviews and
recommends to the Board of Directors the compensation and benefits of all
officers of the Company and (ii) reviews general policy matters relating to
compensation and benefits of employees of the Company.
EXECUTIVE COMPENSATION
The following summary compensation table sets forth the aggregate
compensation paid or accrued by the Company to Richard D. Ballard, the Company's
Chief Executive Officer, and to executive officers whose annual compensation
exceeded $100,000 for fiscal 1997, for services rendered during the fiscal years
ended December 31, 1997 and 1996 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION ------------
---------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND POSITION YEAR SALARY BONUS(7) COMPENSATION OPTIONS COMPENSATION(8)
- ----------------- ---- -------- -------- ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Richard D. Ballard.......... 1997 $150,000 -- -- -- $ 4,398
Chief Executive Officer 1996 10,385(1) -- -- 179,968 --
Ramie A. Tritt, M.D. ....... 1997 263,846(2) -- -- -- --
Chairman of the Board and 1996 --(2) -- $210,268(3) -- --
President
Gerald R. Benjamin.......... 1997 45,231(4) -- -- -- --
Vice Chairman of the
Board and Secretary
Lawrence P. Kraska.......... 1997 98,000(5) -- -- -- 2,829
Vice President
-- Operations
Robert A. DiProva........... 1997 104,933(6) -- -- 119,980 2,733
Executive Vice President
and Chief Financial
Officer
</TABLE>
- ------------------------------
(1) Mr. Ballard's employment commenced as of November 26, 1996 and, accordingly,
represents amounts accrued from November 26, 1996 to December 31, 1996, all
of which was paid in 1996. See "-- Employment Agreements."
(2) No compensation was paid or accrued by the Company during 1996 to Dr. Tritt,
who received compensation in the form of distributions from the ENT Networks
and Atlanta ENT. Dr. Tritt's employment commenced as of March 26, 1997, and
accordingly, represents amounts accrued from March 26, 1997 to December 31,
1997, all of which was paid in 1997. Pursuant to an employment agreement
effective March 26, 1997 between Dr. Tritt and the Company, Dr. Tritt is
entitled to an annual salary of $350,000, subject to adjustments, plus a
performance related bonus to be approved by the Board of Directors. Excludes
compensation received by Dr. Tritt from Atlanta ENT for medical services
provided by Dr. Tritt as a physician at Atlanta ENT during the year ended
December 31, 1997. See "-- Employment Agreements."
(3) Represents the fair market value, on the date acquired, of an aggregate of
30,945 shares of Common Stock purchased by Dr. Tritt in November and
December 1996, less the actual purchase price paid by Dr. Tritt for such
shares.
(4) Mr. Benjamin's employment with the Company commenced as of March 26, 1997
and, accordingly, represents amounts accrued from March 26, 1997 to December
31, 1997, all of which was paid in 1997. Pursuant to an employment agreement
effective March 26, 1997 between Mr. Benjamin and the Company, during 1997
Mr. Benjamin was employed on a part time basis by the Company and was
entitled to an annual salary of $60,000, plus a performance related bonus to
be approved by the Board of Directors. In March 1998, Mr. Benjamin's
employment agreement was amended to provide that Mr. Benjamin would be
employed on a full time basis by the Company and would receive an annual
salary of $150,000. Excludes amounts paid by the Company during the year
ended December 31, 1997 to Premier HealthCare, a division of Bock, Benjamin
& Co., an entity in which Mr. Benjamin is a principal, in the aggregate
amount of
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<PAGE> 57
approximately $647,000 for consulting services in connection with
acquisitions and certain other transactions. See "-- Employment Agreements"
and "Certain Transactions."
(5) Mr. Kraska's employment commenced as of March 26, 1997 and, accordingly,
represents amounts accrued from March 26, 1997 to December 31, 1997, all of
which was paid in 1997. Pursuant to an employment agreement effective March
26, 1997 between Mr. Kraska and the Company, Mr. Kraska is entitled to an
annual salary of $130,000, plus a performance related bonus to be approved
by the Board of Directors. See "-- Employment Agreements."
(6) Mr. DiProva's employment commenced as of March 26, 1997 and, accordingly,
represents amounts accrued from March 26, 1997 to December 31, 1997, all of
which was paid in 1997. Pursuant to an employment agreement effective March
26, 1997 between Mr. DiProva and the Company, Mr. DiProva is entitled to an
annual salary of $120,000, plus a performance related bonus to be approved
by the Board of Directors. See "-- Employment Agreements."
(7) The Company did not approve or pay any bonuses to the named executive
officers during the year ended December 31, 1997.
(8) Amounts shown in this column represent medical insurance premiums paid by
the Company.
OPTION GRANTS IN THE LAST FISCAL YEAR
The following table sets forth certain information regarding stock options
granted to the Named Executive Officers during the fiscal year ended December
31, 1997. No stock appreciation rights were granted to these individuals during
such year.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------- POTENTIAL REALIZABLE VALUE
NUMBER OF % OF TOTAL AT ASSUMED ANNUAL RATES
SECURITIES OPTIONS OF STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE OR FOR OPTION TERM(2)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION ----------------------------
NAME GRANTED(1) FISCAL YEAR ($/SH) DATE 5% 10%
- ---- ---------- ------------ ----------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Richard D. Ballard............ -- -- -- -- -- --
Ramie A. Tritt, M.D........... -- -- -- -- -- --
Gerald R. Benjamin............ -- -- -- -- -- --
Lawrence R. Kraska............ -- -- -- -- -- --
Robert A. DiProva............. 119,980 62.3% $6.80 3/26/07 $ 513,092 $1,300,277
</TABLE>
- ------------------------------
(1) The options listed in the table are exercisable in equal annual installments
of 25% on a cumulative basis commencing March 26, 1997.
(2) Calculated by multiplying the exercise price by the annual appreciation rate
shown (as prescribed by the Securities and Exchange Commission rules) and
compounded for the term of the options, subtracting the exercise price per
share and multiplying the gain per share by the number of shares covered by
the options. These amounts are not intended to forecast possible future
appreciation, if any, of the price of the Company's Common Stock. The actual
value realized upon exercise of the options will depend on the fair market
value of the Company's Common Stock on the date of exercise.
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<PAGE> 58
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
The following table sets forth certain information with respect to the
exercise of stock options during fiscal 1997 by the Named Executive Officers and
the number and value of unexercised options held by each of the Named Executive
Officers as of December 31, 1997.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END(1)
ACQUIRED ON VALUE ----------------------------- -----------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Richard D. Ballard.... -- -- 89,984 89,984 $321,693 $321,693
Ramie A. Tritt, M.D... -- -- -- -- -- --
Gerald R. Benjamin.... -- -- -- -- -- --
Lawrence P. Kraska.... -- -- 29,996 29,996 107,236 107,236
Robert A. DiProva..... -- -- 29,995 89,985 107,232 321,696
</TABLE>
- ------------------------------
(1) Calculated by multiplying the number of unexercised in-the-money options
outstanding at December 31, 1997 by the difference between the fair market
value of the Common Stock at December 31, 1997 ($10.375) and the option
exercise price.
DIRECTOR COMPENSATION
Directors who are officers or employees of the Company or a subsidiary of
the Company are not compensated for attending Board of Directors meetings.
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 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 and Purchase Plans."
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
March 26, 1997 with respect to each of Dr. Tritt and Mr. Benjamin). Pursuant to
the employment agreements, Dr. Tritt, Mr. Ballard and Mr. Benjamin 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 initial annual base
salary of $350,000 plus an annual performance related 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
President of the Company. 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 50%. 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 Atlanta ENT pursuant to an employment agreement with
Atlanta ENT. Pursuant to the employment agreement with Atlanta ENT, Dr. Tritt
will receive compensation from Atlanta ENT pursuant to a formula based upon
medical services provided by Dr. Tritt as a physician at Atlanta ENT. Dr. Tritt
does not receive compensation for providing services as a Medical Director under
the capitated managed care contracts held by the ENT Networks. In February 1997,
the Company and Dr. Tritt entered into an amended and restated employment
agreement which provides that Dr. Tritt's annual base salary from the Company in
any year will be reduced, dollar for dollar, if in such year his annual
compensation from Atlanta ENT exceeds $970,000. For the year ended December 31,
1997, Dr. Tritt's annual compensation
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<PAGE> 59
from Atlanta ENT did not exceed $970,000, and therefore, Dr. Tritt's annual base
salary from the Company was not reduced.
The employment agreement with Mr. Ballard provides for an annual base
salary of $150,000 plus an annual performance related bonus of up to 50% of his
base salary, to be approved by the Board of Directors. The employment agreement
with Mr. Benjamin provided that Mr. Benjamin would work part time for the
Company and his annual base salary would be $60,000. In March 1998, Mr.
Benjamin's employment agreement was amended and provides that he will work full
time for the Company and will receive an annual base salary of $150,000 plus an
annual performance related bonus of up to 50% of his base salary, to be approved
by the Board of Directors.
Each of the employment agreements with Dr. Tritt, Mr. Ballard and Mr.
Benjamin 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 upon notice to the executive
and the executive may terminate the agreement upon a change of control of the
Company by providing at least 30 days notice of termination by the executive.
Upon termination in either such case, 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 exclusions in the case of Dr. Tritt and
Mr. Benjamin)). In addition, each employment agreement provides that upon
termination of the employment agreement by the Company or its successor
following a change of control, the executive will be entitled to severance
compensation in the amount of two times his taxable compensation for the most
recently concluded fiscal year.
In January 1997, the Company entered into an employment agreement with
Robert A. DiProva, effective March 26, 1997. The employment agreement provides
for an initial term of three years from the effective date, with automatic
renewals for successive one year terms unless terminated by either party and
provides for an annual base salary of $120,000 plus an annual performance
related bonus of up to 50% of his base salary, to be approved by the Board of
Directors. In addition to the terms contained in the agreements with Dr. Tritt,
Mr. Ballard and Mr. Benjamin, Mr. DiProva's employment agreement permits
termination by Mr. DiProva if his responsibilities are materially diminished or
if his base salary is reduced by 10% or more. If the agreement is terminated for
either of these reasons, Mr. DiProva will be entitled to receive his base salary
for a period of one year following the date of termination (subject to 100%
offset for salary received from subsequent employment during such one year
period).
In February 1997, the Company entered into an employment agreement with
Lawrence P. Kraska, effective March 26, 1997. The employment agreement provides
for an initial term of three years from the effective date, with automatic
renewals for successive one year terms unless terminated by either party, and
provides for an annual base salary of $130,000 plus an annual performance
related bonus of up to 50% of his base salary, to be approved by the Board of
Directors. The employment agreement provides for termination of Mr. Kraska's
employment by the Company prior to the expiration of its term in the event of
Mr. Kraska's death or disability or for cause. The 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 the employment agreement without cause and, upon
termination, Mr. Kraska 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). In
addition, the employment agreement provides that upon termination of the
employment agreement by the Company or its successor following a change of
control, Mr. Kraska will be entitled to severance compensation in the amount of
two times his taxable compensation for the most recently concluded fiscal year.
Pursuant to each of the foregoing 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.
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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 has entered into Indemnification Agreements with each of its
directors and executive officers. Each such Indemnification Agreement provides
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.
STOCK OPTION AND PURCHASE 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"). In March
1998, the Board of Directors adopted an amendment to the 1996 Plan to increase
the number of shares of Common Stock authorized under the 1996 Plan to 1,100,000
shares of the Company's authorized but unissued Common Stock authorized for
issuance pursuant to the grant by the Company of options to officers, directors,
employees, consultants and independent contractors of the Company and approved
the submission of such increase to the stockholders of the Company for their
approval. 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 and will be administered by the Board of Directors
or a committee of the Board of Directors.
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 grant, except that the term of an incentive option granted under the
1996 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
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termination of the employment relationship or directorship. 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.
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, subject to
stockholder approval 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.
As of March 31, 1998, options to purchase 646,940 shares of Common Stock
have been granted under the 1996 Plan, including directors' options, at exercise
prices ranging from $6.80 to $12.125 per share, of which options to purchase
263,395 shares of Common Stock are currently exercisable.
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 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").
In addition, 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 purpose of the 1996 Professionals Plan is 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 and 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 March 31, 1998, options to purchase 65,000 shares of Common Stock
have been granted under the 1996 Professionals Plan at exercise prices ranging
from $6.00 to $11.50 per share, 5,000 of which are currently exercisable.
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1997 EMPLOYEE STOCK PURCHASE PLAN
The Company's 1997 Employee Stock Purchase Plan (the "Stock Purchase Plan")
was approved by the Board of Directors in November 1997, subject to stockholder
approval. The Stock Purchase Plan is intended to qualify as an "employee stock
purchase plan" under Section 423 of the Internal Revenue Code of 1986, as
amended (the "Code"), in order to provide employees of the Company with an
opportunity to purchase Common Stock through payroll deductions. An aggregate of
250,000 shares of the Company's Common Stock have been reserved for issuance
under the Stock Purchase Plan and are available for purchase thereunder, subject
to adjustment in the event of a stock split, stock dividend or other similar
change in the Common Stock or the capital structure of the Company. All
employees of the Company (and employees of "subsidiary corporations" and "parent
corporations" of the Company (as defined by the Code) designated by the
administrator of the Stock Purchase Plan) who customarily work more than five
months in any calendar year, customarily work more than 20 hours per week and
have been employed for at least six months are eligible to participate in the
Stock Purchase Plan. Non-employee directors, consultants and employees subject
to the rules or laws of a foreign jurisdiction that prohibit or make impractical
the participation of such employees in the Stock Purchase Plan are not eligible
to participate in the Stock Purchase Plan.
The Stock Purchase Plan designates Offering Periods, Purchase Periods and
Purchase Dates. The initial Offering Period will begin on April 15, 1998 and
will end on December 31, 1998. Subsequent Offering Periods shall commence on
January 1 of each year and end on the December 31 occurring thereafter. Purchase
Periods are six month periods, with the initial Purchase Period commencing on
the effective date of the Stock Purchase Plan and ending on June 30, 1998.
Thereafter, Purchase Periods will commence each July 1 and January 1. Purchase
Dates are the last day of each Purchase Period. The Board of Directors may
establish a different term for one or more Purchase Periods and/or different
commencing dates and/or Purchase Dates for such Purchase Periods.
On the first day of each Purchase Period, a participating employee is
granted a purchase right which is a form of option to be automatically exercised
on the forthcoming Purchase Dates within the Offering Period during which
deductions are to be made from the pay of participants (in accordance with their
authorizations) and credited to their accounts under the Stock Purchase Plan. On
the Purchase Date, the participant's withheld salary is used to purchase shares
of Common Stock of the Company, unless such participant has withdrawn from an
offering. The price per share at which shares of Common Stock are to be
purchased under the Stock Purchase Plan during any Purchase Period is the lesser
of (a) 85% of the fair market value of the Common Stock on the date of the grant
of the option (the commencement of the Purchase Period) or (b) 85% of the fair
market value of the Common Stock on the Purchase Date (the last day of a
Purchase Period). The participant's purchase right is exercised in this manner
on the two Purchase Dates arising in the Offering Period.
Payroll deductions may range from 1% to 10% (in whole percentage
increments) of a participant's regular base pay, exclusive of overtime, bonuses,
shift-premiums or commissions. Participants may not make direct cash payments to
their accounts. The maximum number of shares of Common Stock which any employee
may purchase under the Stock Purchase Plan during a calendar year is 2,500
shares. Certain additional limitations on the amount of Common Stock which may
be purchased during any calendar year are imposed by the Code.
The Stock Purchase Plan will be administered by the Board of Directors or a
committee designated by the Board, which will have the authority to terminate or
amend the Stock Purchase Plan (subject to specified restrictions) and otherwise
to administer the Stock Purchase Plan and to resolve all questions relating to
the administration of the Stock Purchase Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended December 31, 1997 Mr. Ballard, the Company's
Chief Executive Officer, served as a member of the Compensation Committee.
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CERTAIN TRANSACTIONS
FORMATION TRANSACTIONS
In connection with the formation of the Company in July 1996, Ramie A.
Tritt, M.D., the Company's Chairman of the Board and President, and Bock,
Benjamin & Co., Partners, L.P., 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. In December 1996, Dr.
Tritt and Bock, Benjamin & Co., Partners, L.P. purchased an additional 19,720
and 18,948 shares of Common Stock, respectively, at purchase prices of
approximately $.0056 and $.0081, respectively, per share. Dr. Tritt and Bock,
Benjamin & Co., Partners, L.P. have "piggyback" registration rights with respect
to the shares of Common Stock held by them. 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.
In July 1996, Atlanta ENT, Dr. Tritt and Mr. Benjamin loaned $170,500,
$33,500 and $33,500, respectively, to the Company for legal, accounting and
other fees in connection with the formation of the Company, the IPO and the
Reorganization. The loans were evidenced by promissory notes bearing interest at
a prime rate as announced by NationsBank, and payable upon the closing of the
IPO. In February 1997, the ENT Networks and Bock, Benjamin & Co., Partners,
L.P., loaned the Company approximately $168,108 and $1,892, respectively,
evidenced by promissory notes bearing interest at the NationsBank prime rate and
payable upon the closing of the IPO. All of these loans were repaid, with
interest, in March 1997 with a portion of the net proceeds of the IPO.
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 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,
with interest at a prime rate as announced by NationsBank. The agreement
terminated in March 1997 upon consummation of the Reorganization and the note
was repaid in March 1997 with a portion of the net proceeds of the IPO, which
amount was distributed to Dr. Tritt.
Each of Dr. Tritt, Gerald R. Benjamin, Bock, Benjamin & Co., Partners,
L.P., Atlanta ENT and the ENT Networks may be deemed to be a "promoter" or
"founder" of the Company, as defined under the Securities Act.
THE REORGANIZATION
In March 1997, upon consummation of the Company's IPO, the Company acquired
substantially all of the assets of Atlanta ENT and acquired all of the
outstanding shares of common stock of the ENT Networks from Dr. Tritt. The
aggregate purchase price paid to Atlanta ENT and Dr. Tritt in connection with
the Reorganization was approximately $22.1 million, of which approximately $14.4
million was paid to Atlanta ENT and approximately $7.7 million was paid to Dr.
Tritt as owner of the ENT Networks. The entire purchase price was paid in shares
of Common Stock. Accordingly, Dr. Tritt received 968,750 shares of Common Stock
and Atlanta ENT received 1,798,750 shares of Common Stock (of which 486,562 were
distributed to Dr. Tritt, based on his percentage ownership of Atlanta ENT).
The Company used a portion of the net proceeds of the IPO to repay
outstanding indebtedness, including accrued interest, of Atlanta ENT in the
amount of approximately $1.1 million. In connection with the repayment of this
indebtedness a guarantee made by Dr. Tritt for 45% of such indebtedness was
cancelled.
The purchase prices for the ENT Networks and Atlanta ENT were negotiated
between Mr. Benjamin, representing the Company, and Dr. Tritt representing the
ENT Networks and Atlanta ENT. While the Company believes that such purchase
prices reflected fair market value, such purchase prices may be deemed not to
have resulted from arm's length negotiation because of Dr. Tritt's affiliation
with the Company. However, the Company believes such purchase prices represented
multiples of the revenue, operating income and cash flow from operations of the
ENT Networks and Atlanta ENT that were comparable with multiples paid for
similar entities with similar size and geographic coverage.
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LEASES
The Company leases one clinical location from Dr. Tritt. The lease is for
approximately 23,200 square feet and provides for monthly rental payments of
approximately $47,000, subject to annual increases. The Company also leases one
clinical location from Eastside Physicians Center, L.P., a Georgia limited
partnership, of which Dr. Tritt is a limited partner. The lease is for
approximately 3,500 square feet and provides for monthly rental payments of
approximately $5,750, subject to annual increases.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with each of its
executive officers and has granted options to certain of its executive officers.
See "Management -- Employment Agreements."
ADVISORY AND CONSULTING AGREEMENTS
In May 1997, the Company entered into an agreement with Premier HealthCare,
an affiliate of Gerald R. Benjamin, the Company's Vice Chairman and Secretary,
which agreement was amended in March 1998, pursuant to which Premier HealthCare
will assist the Company as a financial advisor in connection with acquisitions
and similar transactions. The agreement provides that in the event that the
Company completes any transaction in which Premier HealthCare performed advisory
services, Premier HealthCare will receive a fee equal to (i) its out-of-pocket
expenses and (ii) 5% of the initial $1 million of Transaction Value (as defined
below), 4% of the next $1 million of Transaction Value, 3% of the next $1
million of Transaction Value, 2% of the next $1 million of Transaction Value and
1% of the amount of Transaction Value in excess of $4 million. Transaction Value
is defined under the agreement as the product of (i) the pro forma annual
management fee to be derived by the Company in connection with the proposed
transaction and (ii) 7.5. Pursuant to the agreement, the fee to be paid to
Premier HealthCare for a particular transaction will be reduced by any finder's
fee payable by the Company, which has been approved by Premier HealthCare, and
the aggregate fee to be paid to Premier HealthCare in any given year will be
reduced by the product of (i) $12,500 and (ii) the number of months in any year
in which Mr. Benjamin is employed by the Company (the "Reduction Amount").
During 1997, based on Mr. Benjamin's 1997 salary, the Reduction Amount was
$45,000. Commencing March 1998, the Reduction Amount was increased to $150,000
based upon an increase in Mr. Benjamin's annual salary. For example, as of March
1998, provided Mr. Benjamin is employed by the Company at his current salary,
the aggregate fee to be paid to Premier HealthCare in any given year will be
reduced by $150,000. The agreement may be terminated by either party upon 90
days written notice to the other.
During the year ended December 31, 1997, the Company paid an aggregate of
approximately $647,000 to Premier HealthCare, a division of Bock, Benjamin &
Co., an entity in which Mr. Benjamin is a principal, consisting of (i) $250,000
for consulting services in connection with the formation of the Company and the
Reorganization and (ii) approximately $397,000 (net of $45,000, the amount of
salary paid to Mr. Benjamin by the Company during 1997) for consulting services
in connection with the acquisition of assets or equity of the Additional
Practices. In addition, in 1998, the Company paid approximately $32,000 (net of
salary paid to Mr. Benjamin by the Company) to Premier HealthCare in connection
with the acquisition of assets of Murata in February 1998. In addition, the
Company will pay approximately $370,000 (net of salary paid to Mr. Benjamin by
the Company) to Premier HealthCare for consulting services in connection with
the Probable Practice Acquisitions, if such transactions are consummated on the
terms contemplated, and $200,000 to Premier HealthCare for consulting services
in connection with the Offering. See "Use of Proceeds."
OMSA TRANSACTION
In connection with the OMSA transaction, the physician shareholders of OMSA
granted to Dr. Tritt (or his designee or assignee) the option to acquire all of
the ownership interest of such physician shareholders in OMSA in the event that
at any time there are less than two shareholders who continue as full time
physician-employees of OMSA and those shareholders who remain do not, in Dr.
Tritt's or management of the Company's sole discretion, control the operations
of OMSA in a manner consistent with the requirements of the management
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services agreement between OMSA and the Company. In order to exercise the
option, Dr. Tritt or his designee or assignee must at the time of exercise be
licensed to practice medicine in the State of Illinois.
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 subject to approval by a majority of the Board of Directors,
including a majority of the Independent Directors of the Board of Directors.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of Common Stock prior to the Offering and as adjusted to give effect
to the sale of the Common Stock offered hereby, by (i) each stockholder known by
the Company to own beneficially more than five percent of the outstanding Common
Stock, (ii) each director and Named Executive Officer of the Company, (iii) each
Selling Stockholder, none of whom are officers or directors of the Company and
(iv) all executive officers and directors of the Company as a group.
<TABLE>
<CAPTION>
SHARES SHARES
BENEFICIALLY OWNED BENEFICIALLY OWNED
PRIOR TO OFFERING(2) NUMBER OF AFTER OFFERING(2)
--------------------- SHARES -------------------
NAME AND ADDRESS OF BENEFICIAL OWNER(1) NUMBER PERCENT OFFERED NUMBER PERCENT
- --------------------------------------- ---------- -------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
Ramie A. Tritt, M.D.(3)........................ 1,776,441 27.2% -- 1,776,441 20.8%
Gerald R. Benjamin(4).......................... 303,948 4.7 -- 303,948 3.6
Richard D. Ballard(5).......................... 99,984 1.5 -- 99,984 1.2
Lawrence P. Kraska(6).......................... 42,496 * -- 42,496 *
Robert A. DiProva(7)........................... 67,490 1.0 -- 67,490 *
Edward R. Casas, M.D.(8)....................... 7,500 * -- 7,500 *
Steven L. Posar, M.D.(8)....................... 7,500 * -- 7,500 *
Sidney Kirschner(8)............................ 7,500 * -- 7,500 *
David Goodman, M.D.(9)......................... 40,888 * 10,000 30,888 *
Gary Livingston, M.D.(9)....................... 55,526 * 27,763 27,763 *
David Parks, M.D.(10).......................... 70,604 1.1 25,000 45,604 *
Ted Rolander, M.D.(9).......................... 82,234 1.3 10,000 72,234 *
Marc Routman, M.D.............................. 58,311 * 12,000 46,311 *
S. Terry Shapiro, M.D.(10)..................... 70,604 1.1 23,500 47,104 *
Arthur Torsiglieri, M.D........................ 141,325 2.2 41,737 99,588 1.2
All executive officers and directors of the
Company as a group (8 persons)(11)........... 2,312,859 34.2% -- 2,312,859 26.4%
</TABLE>
- ------------------------------
* Less than 1%
(1) Unless otherwise indicated, the address is c/o Physicians' Specialty Corp.,
1150 Lake Hearn Drive, Suite 640, 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 of the date of this Prospectus
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 (i) 1,455,312 shares of Common Stock owned directly by Dr. Tritt,
(ii) 12,500 shares of Common Stock issuable upon exercise of options that
are exercisable within 60 days of the date of this Prospectus and (iii)
2,684 shares of Common Stock held by Dr. Tritt's mother as custodian for
Dr. Tritt's children. Excludes 37,500 shares of Common Stock issuable upon
exercise of options which are not exercisable within 60 days of the date of
this Prospectus.
(4) Includes (i) 293,948 shares of Common Stock owned by Bock, Benjamin & Co.,
Partners, L.P., and (ii) 10,000 shares of Common Stock issuable upon
exercise of options that are exercisable within 60 days of the date of this
Prospectus. Excludes 30,000 shares of Common Stock issuable upon exercise
of options which are not exercisable within 60 days of the date of this
Prospectus.
(5) Represents shares of Common Stock issuable upon exercise of options that
are exercisable within 60 days of the date of this Prospectus. Excludes
119,984 shares of Common Stock issuable upon exercise of options which are
not exercisable within 60 days of the date of this Prospectus.
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(6) Represents shares of Common Stock issuable upon exercise of options that
are exercisable within 60 days of the date of this Prospectus. Excludes
67,496 shares of Common Stock issuable upon exercise of options which are
not exercisable within 60 days of the date of this Prospectus.
(7) Represents shares of Common Stock issuable upon exercise of options that
are exercisable within 60 days of the date of this Prospectus. Excludes
82,490 shares of Common Stock issuable upon exercise of options which are
not exercisable within 60 days of the date of this Prospectus.
(8) Represents shares of Common Stock issuable upon exercise of options that
are exercisable within 60 days of the date of this Prospectus.
(9) Includes shares of Common Stock to be issued to such stockholder by the
Company in September 1998 as part of the purchase price for assets acquired
pursuant to an asset purchase agreement entered into in September 1997.
(10) Includes shares of Common Stock to be issued to such stockholder by the
Company in December 1998 as part of the purchase price for assets acquired
pursuant to an asset purchase agreement entered into in December 1997.
(11) Includes 254,970 shares of Common Stock issuable upon exercise of options
that are exercisable within 60 days of the date of this Prospectus.
Excludes 337,470 shares of Common Stock issuable upon exercise of options
which are not exercisable within 60 days of the date of this Prospectus.
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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") and to the applicable provisions of
the General Corporation Law of the State of Delaware (the "DGCL").
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 6,515,863 shares of Common
Stock outstanding. 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.
WARRANTS
In connection with IPO, the Company issued warrants to purchase up to
220,000 shares of Common Stock to the representatives of the underwriters in the
IPO. Barington Capital Group, L.P. was a representative in connection with the
IPO. These warrants cannot be transferred, sold, assigned or hypothecated for
one year, except to any successor, officer or partner of each of the
representatives. The warrants are exercisable during the four-year period
commencing on March 20, 1998 at an exercise price of $10.80 per share, subject
to adjustment in certain events to protect against dilution. The warrants
include a provision permitting the holder to elect a cashless exercise. The
holders of the 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
67
<PAGE> 69
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 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, 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 has entered into Indemnification Agreements with each of its
directors and executive officers. Each such Indemnification Agreement provides
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
The transfer agent and registrar for the Common Stock is SunTrust Corp.
68
<PAGE> 70
SHARES ELIGIBLE FOR FUTURE SALE
Of the 8,515,863 shares of Common Stock to be outstanding after the
Offering, approximately 4,400,000 shares, including the 2,150,000 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 4,115,863 shares outstanding upon
completion of the Offering, of which 2,055,205 shares are held by affiliates of
the Company and 2,060,658 are held by non-affiliates of the Company, 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, 3,504,648 shares (including a portion of the shares of Common Stock
being offered by the Selling Stockholders pursuant to this Prospectus) are
currently eligible for sale pursuant to Rule 144. The remaining 611,215 shares
will become eligible for sale pursuant to Rule 144 at various times commencing
July 1998. In addition, an aggregate of 800,000 shares of Common Stock issuable
pursuant to the Stock Purchase Plan or upon exercise of options granted or to be
granted under the Company's 1996 Stock Option Plan are eligible, upon exercise,
for sale to the public pursuant to Registration Statements on Form S-8 filed by
the Company. Concurrently with the Offering, the Company is registering for
resale under the Securities Act 2,750,000 shares of Common Stock which may be
issued by the Company from time to time in connection with future affiliation
transactions with ENT physician and Related Specialty practices or the merger
with or acquisition by the Company of other related businesses or assets. In
connection with the IPO, the Company issued warrants to purchase up to 220,000
shares of Common Stock to the representatives of the underwriters in the IPO,
which warrants became exercisable in March 1998. See "Management -- Stock Option
and Purchase Plans" and "Description of Capital Stock -- Warrants."
In general under Rule 144, a person (or persons whose shares are
aggregated) who has beneficially owned restricted securities for at least one
year, 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
two 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.
All directors and executive officers of the Company and certain
stockholders of the Company, including the Selling Stockholders, holding an
aggregate of approximately 3,470,000 shares of Common Stock and approximately
270,000 vested options have agreed not to offer, sell, contract to sell or
otherwise dispose of any shares of Common Stock or securities convertible into
or exercisable or exchangeable for, or any rights to purchase or acquire, shares
of Common Stock (other than the 150,000 shares of Common Stock being sold by the
Selling Stockholders pursuant to this Prospectus) for a period of 180 days
following the date of this Prospectus, without the prior written consent of
Volpe Brown Whelan & Company, LLC. See "Underwriting."
The holders of an aggregate of 4,535,863 shares of Common Stock and
warrants to purchase shares of Common Stock have certain registration rights
with respect to their shares of Common Stock. The Company has requested or
received waivers from holders of registration rights that are currently
exercisable waiving their rights to have their securities (other than the shares
of Common Stock being offered by the Selling Stockholders pursuant to this
Prospectus) registered in the Offering.
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, or the perception that such sales
could occur, could adversely affect prevailing market prices and the ability of
the Company to raise equity capital in the future.
69
<PAGE> 71
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company and the Selling Stockholders have agreed to sell to each of the
underwriters named below (the "Underwriters"), and each of such Underwriters,
for whom Volpe Brown Whelan & Company, LLC, Hambrecht & Quist LLC and Barington
Capital Group, L.P. (the "Representatives") are acting as representatives, has
agreed severally to purchase from the Company the respective number of shares of
Common Stock set forth opposite the name below. The Underwriters are committed
to purchase and pay for all shares if any shares are purchased.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- ----------- ---------
<S> <C>
Volpe Brown Whelan & Company, LLC...........................
Hambrecht & Quist LLC.......................................
Barington Capital Group, L.P. ..............................
---------
Total..................................................... 2,150,000
=========
</TABLE>
The Representatives have advised the Company and the Selling Stockholders
that the Underwriters propose to offer the shares of Common stock to the public
at the public offering price set forth on the cover page of this Prospectus and
to certain dealers at such price less a concession of not in excess of
$ per share, of which $ per share may be reallocated to other
dealers. After the Offering, the public offering price, concession and
reallowance to dealers may be reduced by the Representatives. No such reduction
will change the amount of net proceeds to be received by the Company as set
forth on the cover page of this Prospectus.
The Company has granted the Underwriters an option for 45 days after the
date of this Prospectus to purchase, at the public offering price, less the
underwriting discounts and commissions as set forth on the cover page of this
Prospectus, up to 322,500 additional shares of Common Stock at the same price
per share as the Company and Selling Stockholders receive for the 2,150,000
shares of Common Stock offered hereby, solely to cover over-allotments, if any.
If the Underwriters exercise their over-allotment option, the Underwriters have
severally agreed, subject to certain conditions, to purchase approximately the
same percentage thereof that the number of shares of Common Stock to be
purchased by each of them, as shown in the foregoing table, bears to the
2,150,000 shares of Common Stock offered hereby. The Underwriters may exercise
such option only to cover over-allotments in connection with the sale of the
2,150,000 shares of Common Stock offered hereby.
The Offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the Offering without notice. The Underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
Barington Capital Group acted as one of the representatives of the
underwriters in the IPO. In connection with the IPO, Barington Capital Group
received warrants to purchase 110,000 shares of Common Stock at an exercise
price of $10.80 per share, underwriting discounts and commissions of $141,178
and a consulting fee of $393,500.
Each of the Company's executive officers and directors and certain
stockholders of the Company, including the Selling Stockholders, have agreed not
to offer, sell, contract to sell or otherwise dispose of any shares of Common
Stock or securities convertible into or exercisable or exchangeable for, or any
rights to purchase or acquire, Common Stock (other than the 150,000 shares of
Common Stock being sold by the Selling Stockholders pursuant to this Prospectus)
for a period of 180 days following the date of this Prospectus, without the
prior written consent of Volpe Brown Whelan & Company, LLC. The Company also has
agreed not to offer, sell, contract to sell or otherwise dispose of any shares
of Common Stock or any securities convertible into or exchangeable for, or any
rights to purchase or acquire, Common Stock for a period of 180 days following
the date
70
<PAGE> 72
of this Prospectus without the prior written notice of Volpe Brown Whelan &
Company, LLC, except for the shares of Common Stock offered by the Company
pursuant to this Prospectus, the granting of options pursuant to the Company's
existing stock options plans and the issuance of shares of Common Stock in
connection with the existing stock purchase plan and acquisitions. Volpe Brown
Whelan & Company, LLC, in its discretion, may waive the foregoing restrictions
in whole or in part, with or without a public announcement of such action.
The Underwriters may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation M
under the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Over-allotment involves syndicate sales in excess of the offering size, which
creates syndicate short positions. Stabilizing transactions permit bids to
purchase the underlying security so long as the stabilizing bids do not exceed a
specified maximum. Syndicate covering transactions involve purchase of shares of
the Common Stock in the open market after distribution has been completed in
order to cover syndicate short positions. Penalty bids permit the Underwriters
to reclaim a selling concession from a syndicate member when the shares of
Common Stock originally sold by such syndicate member are purchased in a
syndicate covering transaction to cover syndicate short positions. Such
stabilizing transactions, syndicate covering transactions and penalty bids may
cause the price of Common Stock to be higher than it would otherwise be in the
absence of such transactions.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities that may be incurred in connection with
the Offering, including liabilities under the Securities Act, or to contribute
to payments that the Underwriters may be required to make in respect thereof.
The rules of the Securities and Exchange Commission (the "Commission")
generally prohibit the Underwriters and other members of the selling group from
making a market in the Common Stock during the "cooling off" period immediately
preceding the commencement of sales in the Offering. The Commission has,
however, adopted an exemption from these rules that permits passive market
making under certain conditions. These rules permit an Underwriter or other
member of the selling group to continue to make a market in the Common Stock
subject to the conditions, among others, that its bid to exceed the highest bid
by a market maker not connected with the Offering and that its net purchases on
any one trading day not exceed prescribed limits. Pursuant to these exemptions,
certain Underwriters and other members of the selling group intend to engage in
passive market making in the Common Stock during the cooling off period.
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. Certain legal matters will be passed upon for the Underwriters by Gibson,
Dunn & Crutcher LLP, New York, New York.
EXPERTS
The audited financial statements of Physicians' Specialty Corp., Atlanta
Ear, Nose & Throat Associates, P.C., the ENT Networks, Cobb E.N.T. Associates,
P.C. and Ear, Nose & Throat Associates, P.C. 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.
71
<PAGE> 73
ADDITIONAL INFORMATION
The Company is subject to the reporting requirements of the Exchange Act
and in accordance therewith will file reports and other information with the
Commission. The Company has filed a Registration Statement on Form S-1 under the
Securities Act with 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. The
Commission maintains a web site that contains reports, proxy and information
statements and other information regarding issues that file electronically with
the Commission. The address of such site is http://www.sec.gov. 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.
72
<PAGE> 74
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PHYSICIANS' SPECIALTY CORP. AND SUBSIDIARIES
Unaudited Pro Forma Combined Financial Data................. F-2
Unaudited Pro Forma Combined Statement of Operations for the
Year Ended December 31, 1997.............................. F-3
Unaudited Pro Forma Combined Balance Sheet at December 31,
1997...................................................... F-4
Notes to Unaudited Pro Forma Combined Financial Data........ F-5
Report of Independent Public Accountants.................... F-7
Consolidated Balance Sheets at December 31, 1996 and 1997... F-8
Consolidated Statements of Operations for the Period from
Inception (July 31, 1996) to December 31, 1996 and for the
Year Ended December 31, 1997.............................. F-9
Consolidated Statements of Stockholders' Equity for the
Period from Inception (July 31, 1996) to December 31, 1996
and for the Year Ended December 31, 1997.................. F-10
Consolidated Statements of Cash Flows for the Period from
Inception (July 31, 1996) to December 31, 1996 and for the
Year Ended December 31, 1997.............................. F-11
Notes to Consolidated Financial Statements.................. F-12
EAR, NOSE & THROAT ASSOCIATES, P.C. (a medical practice
whose shareholders own 50% of the equity of Physicians'
Domain)
Report of Independent Public Accountants.................... F-22
Balance Sheets at December 31, 1996 and 1997................ F-23
Statements of Operations for the Two Years Ended December
31, 1997.................................................. F-24
Statements of Stockholders' Equity (Deficit) for the Two
Years Ended December 31, 1997............................. F-25
Statements of Cash Flows for the Two Years Ended December
31, 1997.................................................. F-26
Notes to Financial Statements............................... F-27
COBB E.N.T. ASSOCIATES, P.C.
Report of Independent Public Accountants.................... F-34
Balance Sheet at August 31, 1997............................ F-35
Statement of Operations for the Year Ended August 31,
1997...................................................... F-36
Statement of Stockholders' Equity for the Year Ended August
31, 1997.................................................. F-37
Statement of Cash Flows for the Year Ended August 31,
1997...................................................... F-38
Notes to Financial Statements............................... F-39
ATLANTA EAR, NOSE AND THROAT ASSOCIATES, P.C.
Report of Independent Public Accountants.................... F-43
Balance Sheet at December 31, 1996.......................... F-44
Statements of Operations for the Two Years Ended December
31, 1996.................................................. F-45
Statements of Owners' Equity for the Two Years Ended
December 31, 1996......................................... F-46
Statements of Cash Flows for the Two Years Ended December
31, 1996.................................................. F-47
Notes to Financial Statements............................... F-48
ENT NETWORKS
Report of Independent Public Accountants.................... F-52
Combined Balance Sheet at December 31, 1996................. F-53
Combined Statements of Operations for the Two Years Ended
December 31, 1996......................................... F-54
Combined Statements of Owner's Equity for the Two Years
Ended December 31, 1996................................... F-55
Combined Statements of Cash Flows for the Two Years Ended
December 31, 1996......................................... F-56
Notes to Combined Financial Statements...................... F-57
</TABLE>
F-1
<PAGE> 75
PHYSICIANS' SPECIALTY CORP.
UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The unaudited pro forma financial statements and the notes thereto should
be read in conjunction with other financial information, including the audited
financial statements of the Company, Ear, Nose & Throat Associates, P.C., Cobb
E.N.T. Associates, P.C., Atlanta ENT and the ENT Networks and the notes thereto
included elsewhere herein. The unaudited pro forma combined statement of
operations gives effect to the Reorganization and the acquisition of assets of
the Additional Practices and the consummation of the Probable Practice
Acquisitions and the Management Services Agreements between the Company and the
physician practices as if such transactions had occurred on January 1, 1997 and
the unaudited pro forma combined balance sheet gives effect as if such
transactions had occurred on December 31, 1997.
The unaudited pro forma combined financial statements are presented for
illustrative purposes only and are not necessarily indicative of the operating
results or financial position that would have been achieved if the
Reorganization or the acquisition of assets of the Additional Practices or the
Probable Practice Acquisitions had been consummated at the beginning of the
period presented, nor are they necessarily indicative of the future operating
results of the Company. The unaudited pro forma combined financial statements do
not give effect to any cost savings or integration which may have resulted from
the Reorganization or the acquisition of assets of the Additional Practices or
may result from the Probable Practice Acquisitions.
F-2
<PAGE> 76
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
PHYSICIANS' ENT NORTH-
SPECIALTY INITIAL ALLA- ENT HEAD & SIDE COBB
CORP. PRACTICES TOONA SPECIALISTS NECK ENT OMSA ENTSF ENT MURATA
----------- --------- ----- ----------- ------ ------ ------ ------ ------ ------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management fees........ $ 10,974 $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
Capitation revenue..... 3,619 1,257 -- -- -- -- -- -- -- --
Patient service
revenue............... 967 4,862 608 860 1,173 321 2,056 4,128 4,438 585
--------- ------ ---- ---- ------ ---- ------ ------ ------ ----
Net revenue........... 15,560 6,119 608 860 1,173 321 2,056 4,128 4,438 585
Expenses
Provider claims,
wages, benefits..... 7,819 4,848 520 656 1,012 185 1,420 3,000 2,758 375
General and
administrative...... 4,371 1,166 104 193 165 134 593 1,093 1,282 230
Depreciation and
amortization........ 377 98 11 12 -- 2 35 53 68 10
--------- ------ ---- ---- ------ ---- ------ ------ ------ ----
Operating
expenses.......... 12,567 6,112 635 861 1,177 321 2,048 4,146 4,108 615
--------- ------ ---- ---- ------ ---- ------ ------ ------ ----
Operating income
(loss)................ 2,993 7 (27) (1) (4) -- 8 (18) 330 (30)
Other (income) expense,
net................... (429) 7 (27) 1 (4) -- 6 (18) 25 --
--------- ------ ---- ---- ------ ---- ------ ------ ------ ----
Pretax income (loss)... 3,422 -- -- (2) -- -- 2 -- 305 (30)
Provision (benefit) for
income taxes.......... 1,362 (40) -- (2) -- -- 2 -- 121 --
--------- ------ ---- ---- ------ ---- ------ ------ ------ ----
Net income (loss)..... $ 2,060 $ 40 $ -- $ -- $ -- $ -- $ -- $ -- $ 184 $(30)
========= ====== ==== ==== ====== ==== ====== ====== ====== ====
Pro forma weighted
average shares
outstanding -- diluted 4,966,778
=========
Basic and diluted
earnings per share.... $ 0.42
=========
<CAPTION>
EXISTING
PRO FORMA PRO FORMA PROBABLE PRO-FORMA PRO-FORMA PRO-FORMA
SUBTOTAL ADJUSTMENTS COMBINED ACQUISITIONS ADJUSTMENTS COMBINED AS ADJUSTED
-------- ----------- --------- ------------ ----------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Management fees........ $10,974 $13,949(2) $ 24,923 $ -- $ 19,103(2) $ 44,026 44,026
Capitation revenue..... 4,876 -- 4,876 -- -- 4,876 4,876
Patient service
revenue............... 19,998 (18,735)(3) 1,263 23,692 (23,692)(3) 1,263 1,263
------- ------- --------- ------- -------- --------- ---------
Net revenue........... 35,848 (4,786) 31,062 23,692 (4,589) 50,165 50,165
Expenses
Provider claims,
wages, benefits..... 22,593 (8,174)(4) 14,622 16,161 (8,709)(4) 22,074 22,074
203(4)
General and
administrative...... 9,331 -- 9,331 7,560 -- 16,891 16,891
Depreciation and
amortization........ 666 404(5) 1,070 779 698(5) 2,547 2,547
------- ------- --------- ------- -------- --------- ---------
Operating
expenses.......... 32,590 (7,567) 25,023 24,500 (8,011) 41,512 41,512
------- ------- --------- ------- -------- --------- ---------
Operating income
(loss)................ 3,258 2,781 6,039 (808) 3,422 8,653 8,653
Other (income) expense,
net................... (439) 46(6) (393) 306 1,394(6) 1,307 507
------- ------- --------- ------- -------- --------- ---------
Pretax income (loss)... 3,697 2,735 6,432 (1,114) 2,028 7,346 8,146
Provision (benefit) for
income taxes.......... 1,443 1,066(7) 2,509 2 354(7) 2,865 3,177
------- ------- --------- ------- -------- --------- ---------
Net income (loss)..... $ 2,254 $ 1,669 $ 3,923 $(1,116) $ 1,674 $ 4,481 $ 4,969
======= ======= ========= ======= ======== ========= =========
Pro forma weighted
average shares
outstanding -- diluted 6,909,325 6,945,075(8) 8,945,075(9)
========= ========= =========
Basic and diluted
earnings per share.... $ 0.57 $ 0.65 $ 0.56
========= ========= =========
</TABLE>
See notes to unaudited pro forma combined financial data.
F-3
<PAGE> 77
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------------------------------------------------------------------------
PHYSICIANS' PROBABLE PRO FORMA
SPECIALTY PRACTICE ACQUISITION PRO FORMA OFFERING COMBINED
CORP. MURATA ACQUISITION ADJUSTMENTS(10) COMBINED ADJUSTMENTS(9) AS ADJUSTED(9)
----------- ------ ------------ --------------- --------- -------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash
equivalents......... $ 5,352 $ 4 $ -- $(2,712) $ 2,644 $ 7,503 $10,147
Accounts receivable,
net................. 9,274 75 5,525 -- 14,874 -- 14,874
Other current assets... 416 -- -- -- 416 -- 416
------- ---- ------ ------- ------- ------- -------
Current assets...... 15,042 79 5,525 (2,712) 17,934 7,503 25,437
------- ---- ------ ------- ------- ------- -------
Property & equipment
(net)............. 3,432 125 2,900 -- 6,457 -- 6,457
Intangible assets
(net)............. 11,794 -- -- 17,715 29,509 -- 29,509
Other assets........ 330 -- -- -- 330 -- 330
------- ---- ------ ------- ------- ------- -------
Total assets...... $30,598 $204 $8,425 $15,003 $54,230 $ 7,503 $61,733
======= ==== ====== ======= ======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable.......... $ -- $ -- $4,200 $(4,200) $ 4,200 $(4,200) $ --
4,200
Accounts payable and
accrued expenses.... 4,235 80 -- (80) 4,235 -- 4,235
Deferred taxes......... 338 -- -- 2,240 2,578 -- 2,578
------- ---- ------ ------- ------- ------- -------
Current
liabilities....... 4,573 80 4,200 2,160 11,013 (4,200) 6,813
------- ---- ------ ------- ------- ------- -------
Subordinated seller
notes.................. 912 -- -- 16,475 17,387 (7,000) 10,387
Stockholders' equity..... 25,113 124 4,225 (3,632) 25,830 18,703 44,533
------- ---- ------ ------- ------- ------- -------
Total liabilities and
stockholders'
equity.............. $30,598 $204 $8,425 $15,003 $54,230 $ 7,503 $61,733
======= ==== ====== ======= ======= ======= =======
</TABLE>
See notes to unaudited pro forma combined financial data.
F-4
<PAGE> 78
PHYSICIANS' SPECIALTY CORP.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The following is a summary of the adjustments reflected in the Unaudited
Pro Forma Combined Financial Statements assuming the acquisition of asset or
equity of the Practices and the consummation of the Probable Practice
Acquisitions had occurred on January 1, 1997.
(1) Reflects operations of acquired practices from January 1, 1997 through
their respective date of acquisition by the Company.
(2) Management fees have been calculated based upon the management services
agreements. For providing services pursuant to the management services
agreements, the Company retains a fixed amount or varying percentage of all
revenue generated by or on behalf of physicians practicing at the practice
(after adjusting for, among other things, uncollectible accounts and contractual
allowances). The Company is responsible for the payment of operating expenses of
the affiliated practice, including salaries and benefits of non-medical
employees of the practice, lease obligations for office space and equipment and
medical and office supplies and the non-operating expenses of the affiliated
physician practice, including depreciation, amortization and interest.
Management fee adjustments under the management services agreements are
calculated as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
-----------------
(IN THOUSANDS)
<S> <C>
ATLANTA MARKET
Atlanta ENT............................................... $ 3,671
Additional Atlanta Practices.............................. 895
ENT Specialists........................................... 860
ENT Head & Neck........................................... 1,173
Northside................................................. 321
Cobb ENT.................................................. 4,057
CHICAGO MARKET
OMSA...................................................... 2,056
SOUTH FLORIDA MARKET
ENTSF..................................................... 4,128
James J. Murata........................................... 585
-------
Pro Forma Patient Service Revenue................. $17,746
Management Fee %.................................. 12.5%
-------
$ 2,218(A)
NORTH GEORGIA MARKET
Allatoona................................................. $ 608
Pro Forma Patient Service Revenue................. $ 608
Management Fee %.................................. 15.0%
-------
$ 91(B)
PROBABLE PRACTICE ACQUISITIONS (includes the $3.0 million
fixed management fee for PDI)............................. $ 3,312(C)
Pro Forma Management Fees (A) + (B) + (C)......... $ 5,621
Pro Forma Practice Operating Expenses............. 27,431
-------
Pro Forma Management Fee Adjustment............... $33,052
=======
</TABLE>
F-5
<PAGE> 79
Under the current management services agreements, the Company retains on an
annual basis 12.5% to 15.0% of affiliated physician practice revenue. Under
certain management services agreements, in the event the affiliated practice's
revenue exceeds 150% of such practice's annual revenue in the year prior to its
affiliation with the Company (the "Threshold Amount") the Company will be
entitled to receive incentive compensation (in lieu of the 12.5% amount) for the
remainder of such fiscal year in amounts ranging from 20% to 25% of the
affiliated practice's income (net practice revenue less practice expenses),
prior to the payment of physician compensation and benefits. In connection with
the proposed PDI transaction, the contemplated management services agreements
will contain a fixed monthly management fee, subject to annual escalation based
on increases of the consumer price index after the fifth anniversary of the date
of the agreement. The other two Probable Practice Acquisitions will be subject
to the Company's management services agreement with ENTSF.
There is no management fee adjustment for ENT & Allergy Associates because
physicians at ENT & Allergy Associates are directly employed by the Company. See
Note 2 below.
(3) Reflects the elimination of patient service revenue for all physician
practices with which the Company has management services agreements but does not
directly employ the physicians of such practices, except for the physicians of
ENT & Allergy Associates.
(4) Reflects the elimination of physician compensation at the practices in
which the Company does not have an equity ownership. After the Company collects
its management fees pursuant to the management services agreements and pays the
operating and non-operating expenses, the remaining revenue is remitted to the
affiliated practice to pay physician compensation and benefits pursuant to
employment agreements between the practice and each individual physician and to
pay physician assistant compensation and benefits. The reduction of physician
compensation at ENT & Allergy Associates is a result of a contractual agreement
with the Company. Also reflects the net cost of additional employment contracts
entered into by the Company for certain management positions. The adjustments do
not include bonuses due to their subjective nature and requisite board approval
for the granting of bonuses based upon meeting certain profitability and
non-financial goals.
(5) Reflects amortization of intangibles and deferred organization costs of
the Company.
(6) Reflects interest expense in connection with the subordinated
promissory notes and advances under the Company's Credit Facility incurred in
connection with certain of the Company's acquisitions computed at rates of
approximately 6% and 9% per annum, respectively.
(7) Reflects the establishment of a provision for income taxes at an
estimated 39% effective tax rate, which consists of a 34% statutory federal tax
rate and an average state statutory tax rate of 5%.
(8) Reflects weighted average shares outstanding for common stock and stock
equivalents (which have been calculated using the treasury stock method) giving
effect to the acquisition of Murata and the consummation of the Probable
Practice Acquisitions.
(9) Adjusted to reflect (i) the sale of 2,000,000 shares of Common Stock
offered by the Company at an assumed offering price of $10.625 per share, the
last reported sale price of the Common Stock on the Nasdaq National Market on
April 14, 1998; and (ii) repayment of borrowings under the Company's credit
facility and a portion of the promissory note issued in connection with the
proposed PDI Acquisition with a portion of the net proceeds of the Offering.
Interest expense has been recomputed in connection with the aforementioned debt
reduction. The contemplated application of Offering proceeds is depicted as
follows:
<TABLE>
<S> <C>
Gross proceeds (2.0 million shares at $10.625).............. $21,250,000
Underwriting costs and expenses............................. 2,347,500
Consulting fee.............................................. 200,000
-----------
2,547,500
-----------
Net proceeds.......................................... 18,702,500
less: PDI Promissory Note reduction........................ 7,000,000
Credit Facility reduction............................. 4,200,000
-----------
11,200,000
-----------
Increase in cash and cash equivalents....................... $ 7,502,500
===========
</TABLE>
(10) Reflects the acquisition of the tangible and identifiable intangible
assets of Murata and the Probable Practice Acquisitions.
F-6
<PAGE> 80
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Physicians' Specialty Corp.:
We have audited the accompanying consolidated balance sheets of PHYSICIANS'
SPECIALTY CORP. (a Delaware corporation) AND SUBSIDIARIES as of December 31,
1996 and 1997 and the related consolidated statements of operations,
stockholders' equity, and cash flows for the period from inception (July 31,
1996) to December 31, 1996 and for the year ended December 31, 1997. 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 Physicians' Specialty Corp.
and subsidiaries as of December 31, 1996 and 1997 and the results of their
operations and their cash flows for the period from inception (July 31, 1996) to
December 31, 1996 and for the year ended December 31, 1997 in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 12, 1998
F-7
<PAGE> 81
PHYSICIANS' SPECIALTY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1997
--------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 123,540 $ 5,351,639
Accounts receivable, net of allowance for doubtful
accounts of $0 and $261,714 in 1996 and 1997,
respectively........................................... 26,976 9,273,565
Notes receivable.......................................... -- 81,682
Prepayments and other..................................... -- 335,650
--------- -----------
Total current assets.............................. 150,516 15,042,536
EQUIPMENT, NET.............................................. 19,897 3,431,707
INTANGIBLE ASSETS, NET...................................... -- 11,793,777
OTHER ASSETS................................................ 442,567 330,338
--------- -----------
Total assets...................................... $ 612,980 $30,598,358
========= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable............................................. $ 505,000 $ --
Due to physicians......................................... 108,828 1,177,009
Accounts payable.......................................... 9,442 397,185
Accrued expenses.......................................... -- 1,701,667
Accrued income taxes...................................... -- 321,302
Provider claims payable................................... -- 637,726
Deferred income taxes..................................... -- 338,218
--------- -----------
Total current liabilities......................... 623,270 4,573,107
SUBORDINATED SELLER NOTES................................... -- 911,715
--------- -----------
Total liabilities................................. 623,270 5,484,822
--------- -----------
COMMITMENTS AND CONTINGENCIES (NOTE 11)
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value; 10,000 shares
authorized, no shares issued and outstanding at
December 31, 1996 and 1997, respectively............... -- --
Common stock, $0.001 par value; 50,000,000 shares
authorized, 599,893 and 6,503,098 shares issued and
outstanding at December 31, 1996 and 1997,
respectively........................................... 600 6,503
Additional paid-in capital................................ 343,711 23,401,657
Retained earnings (deficit)............................... (354,601) 1,705,376
--------- -----------
Total stockholders' equity........................ (10,290) 25,113,536
--------- -----------
Total liabilities and stockholders' equity........ $ 612,980 $30,598,358
========= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-8
<PAGE> 82
PHYSICIANS' SPECIALTY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM INCEPTION (JULY 31, 1996) TO DECEMBER 31, 1996
AND FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
1996 1997
--------- -----------
<S> <C> <C>
REVENUE:
Management fees........................................... $ 51,240 $10,973,756
Capitation revenue........................................ -- 3,619,408
Net patient service revenue............................... -- 966,646
--------- -----------
Total revenue..................................... 51,240 15,559,810
--------- -----------
OPERATING EXPENSES:
Provider claims, wages, and benefits...................... 46,582 7,819,370
General and administrative................................ 357,340 4,370,611
Depreciation and amortization............................. 1,919 377,286
--------- -----------
Total operating expenses.......................... 405,841 12,567,267
--------- -----------
OPERATING INCOME (LOSS)..................................... (354,601) 2,992,543
OTHER INCOME, NET........................................... -- 429,254
--------- -----------
INCOME (LOSS) BEFORE INCOME TAXES........................... (354,601) 3,421,797
PROVISION FOR INCOME TAXES.................................. -- 1,361,820
--------- -----------
NET INCOME (LOSS)........................................... $(354,601) $ 2,059,977
========= ===========
EARNINGS (LOSS) PER SHARE:
Basic..................................................... $ (0.64) $ 0.42
========= ===========
Diluted................................................... $ (0.64) $ 0.42
========= ===========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic..................................................... 552,894 4,868,035
========= ===========
Diluted................................................... 552,894 4,966,778
========= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-9
<PAGE> 83
PHYSICIANS' SPECIALTY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (JULY 31, 1996) TO DECEMBER 31, 1996
AND FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED
------------------ PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
--------- ------ ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, INCEPTION (JULY 31, 1996)..... -- $ -- $ -- $ -- $ --
Issuance of common stock............. 599,893 600 711 -- 1,311
Compensation expense................. -- -- 343,000 -- 343,000
Net loss..................... -- -- -- (354,601) (354,601)
--------- ------ ----------- ---------- -----------
BALANCE, DECEMBER 31, 1996............. 599,893 600 343,711 (354,601) (10,290)
Issuance of common stock, net of
offering cost..................... 2,200,000 2,200 14,272,859 -- 14,275,059
Issuance of common stock--practice
acquisitions...................... 3,703,205 3,703 8,737,087 -- 8,740,790
Compensation expense................. -- -- 48,000 -- 48,000
Net income................... -- -- -- 2,059,977 2,059,977
--------- ------ ----------- ---------- -----------
BALANCE, DECEMBER 31, 1997............. 6,503,098 $6,503 $23,401,657 $1,705,376 $25,113,536
========= ====== =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-10
<PAGE> 84
PHYSICIANS' SPECIALTY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (JULY 31, 1996) TO DECEMBER 31, 1996
AND FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
1996 1997
--------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $(354,601) $ 2,059,977
--------- -----------
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Depreciation and amortization.......................... 1,919 377,286
Provision for deferred income taxes.................... -- (338,218)
Compensation expense................................... 343,000 48,000
Increase in accounts receivable........................ (26,976) (3,971,923)
Increase in prepayments and other...................... (1,100) (318,721)
Increase in accounts payable and accrued liabilities... 118,270 853,751
--------- -----------
Total adjustments................................. 435,113 (3,349,825)
--------- -----------
Net cash (used in) provided by operating activities.... 80,512 (1,289,848)
--------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment for acquisitions, net of cash acquired............ -- (4,933,104)
Purchase of property and equipment........................ (21,706) (870,526)
Decrease in other assets.................................. -- 135,078
--------- -----------
Net cash used in investing activities............. (21,706) (5,668,552)
--------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock, net of offering costs........... 1,311 14,275,059
Borrowing under short-term debt........................... 505,000 170,000
Repayment of short-term debt.............................. -- (505,000)
Repayment of long-term debt............................... -- (1,753,560)
Deferred offering costs................................... (441,577) --
--------- -----------
Net cash provided by financing activities......... 64,734 12,186,499
--------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS..................... 123,540 5,228,099
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. -- 123,540
--------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 123,540 $ 5,351,639
========= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-11
<PAGE> 85
PHYSICIANS' SPECIALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
1. ORGANIZATION
Physicians' Specialty Corp. (the "Company") was organized in July 1996 to
provide comprehensive physician practice management services to physician
practices and health care providers specializing in the treatment and management
of diseases and disorders of the ear, nose, throat, head, and neck ("ENT"). The
Company commenced its business activities upon consummation of the
reorganization, as described in Note 3, and its initial public offering ("IPO")
on March 26, 1997. The Company provides financial and administrative management,
enhancement of clinical operations, network development, and payor contracting
services, including the negotiation and administration of capitated
arrangements. The Company has operations in Atlanta, Georgia; Chicago, Illinois;
Birmingham, Alabama; and Boca Raton, Florida.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries, all of which are wholly owned. 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 and disclosures in the Company's
financial statements and the accompanying notes. Actual results could differ
from those estimates.
Cash and Cash Equivalents
The Company considers cash on deposit with financial institutions and all
highly liquid investments with original maturities of three months or less to be
cash and cash equivalents.
Equipment
Equipment is recorded at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of depreciable assets for
financial statement reporting purposes. 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 operations.
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 accompanying balance sheets and are being
amortized over a five-year period.
Intangible Assets
The Company's physician practice acquisitions involve the purchase of
tangible and intangible assets and the assumption of certain liabilities of the
acquired practices. As part of the purchase price allocation, the Company
allocates the purchase price to the tangible and identifiable intangible assets
acquired and liabilities assumed based on estimated fair market values. Costs of
acquisitions in excess of the net estimated fair value of tangible and
identifiable intangible assets acquired and liabilities assumed are amortized
using the straight-line
F-12
<PAGE> 86
PHYSICIANS' SPECIALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
method over a period of 25 years. At December 31, 1997, the amount of such
intangible assets was approximately $11,884,000, with accumulated amortization
totaling $90,405.
Revenue Recognition
The Company primarily generates management fee revenue from contracts in
which the Company provides management services to physician practices. In
addition, the Company generates revenue from capitated managed care contracts.
The Company also generates net patient revenue through employed physicians.
Revenue is recognized as services are performed.
Accounts Receivable and Allowance for Doubtful Accounts
The Company provides an allowance for doubtful accounts equal to the
estimated losses expected to be incurred in the collection of accounts
receivable. Bad debt expense was $0 and $133,794 during 1996 and 1997,
respectively.
Capitated Contracts
The Company establishes accruals for costs incurred in connection with its
capitated contracts based on historical trends. Any contracts that would have a
realized loss would be immediately accrued for and the loss would be charged to
operations.
Fair Value of Financial Instruments
The Company estimates that the carrying amounts of financial instruments,
including cash and cash equivalents, accounts receivable, accounts payable,
subordinated seller note, and short-term debt approximated their fair values as
of December 31, 1996 and 1997 due to the relatively short maturity of these
instruments.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." SFAS No. 130 is designed to improve the reporting of
changes in equity from period to period. SFAS No. 130 is effective for fiscal
years beginning after December 15, 1997. The Company will adopt SFAS No. 130 for
fiscal 1998. Management does not expect SFAS No. 130 to have a significant
impact on the Company's financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." SFAS No. 131 requires that an enterprise
disclose certain information about operating segments. SFAS No. 131 is effective
for financial statements for the Company's fiscal year ending December 31, 1998.
The Company does not expect that SFAS No. 131 will require significant revision
of prior disclosures.
The Emerging Issues Task Force of the FASB has recently issued its
Consensus on Issue 97-2 ("EITF 97-2"). EITF 97-2 addresses certain specific
matters pertaining to the physician practice management industry. EITF 97-2
would be effective for the Company for its year ending December 31, 1998. EITF
97-2 addresses the ability of physician practice management companies to
consolidate the results of physician practices with which it has an existing
contractual relationship. The Company is in the process of analyzing the effect
of all its contractual relationships but currently believes that certain
contracts would meet the criteria of EITF 97-2 for consolidating the results of
operations of the related physician practices, which would require the Company
to restate its prior period financial statements to conform to such
consolidation. EITF 97-2 also has addressed the accounting method for future
combinations with individual physician practices. The Company believes that,
based on the criteria set forth in EITF 97-2, virtually all of its future
acquisitions of individual physician practices will continue to be accounted for
under the purchase method of accounting.
F-13
<PAGE> 87
PHYSICIANS' SPECIALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Earnings Per Share
The Company has restated its earnings per share to conform with SFAS No.
128, "Earnings Per Share." This new statement requires presentation of basic and
diluted earnings per share. Basic earnings per share are calculated by dividing
net income available to common stockholders by the weighted average number of
common shares outstanding for the years presented. Diluted earnings per share
reflects the potential dilution that could occur if securities and other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of the
entity. Interest expense, net of tax, of approximately $8,000 related to the
subordinated seller notes is added to net income in computing diluted earnings
per share in 1997.
A reconciliation of the number of weighted average shares used in
calculating basic and diluted earnings per share is as follows:
<TABLE>
<CAPTION>
1996 1997
------- ---------
<S> <C> <C>
Weighted average number of common shares
outstanding-basic......................................... 552,894 4,868,035
Effect of potentially dilutive shares outstanding........... -- 83,294
Effect of convertible debt.................................. -- 15,449
------- ---------
Weighted average number of common shares
outstanding-diluted....................................... 552,894 4,966,778
======= =========
</TABLE>
Income Taxes
The Company follows the practice of providing for income taxes based on
SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 requires recognition
of deferred tax liabilities and assets for the expected future tax consequences
of events that have been included in the financial statements or tax returns.
Industry Risks
The health care industry is subject to numerous laws and regulations at all
levels of government. These laws and regulations include, but are not
necessarily limited to, matters such as licensure, accreditation, government
health care program participation requirements, reimbursement for patient
services, and Medicare and Medicaid fraud and abuse. Recently, government
activity has increased with respect to investigations and allegations concerning
possible violations of fraud and abuse statutes and regulations by health care
providers. Violations of these laws could result in significant fines and
penalties as well as significant payments for services previously billed. The
Company is subject to similar regulatory reviews. A determination of liability
under any such laws could have a material effect on the Company's financial
position, results of operations, stockholders' equity, and cash flows.
Supplemental Disclosures of Cash Flow Information
<TABLE>
<CAPTION>
1996 1997
-------- -----------
<S> <C> <C>
Cash paid during the period for interest.................... $ -- $ 87,474
Cash paid during the period for income taxes, net of
refunds................................................... -- 2,233,550
Liabilities assumed in connection with businesses
acquired.................................................. -- (5,758,144)
</TABLE>
Reclassifications
Certain amounts in the December 31, 1996 financial statements have been
reclassified to conform to the current year presentation.
F-14
<PAGE> 88
PHYSICIANS' SPECIALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. REORGANIZATION
Concurrently with the closing of the Company's IPO, the Company acquired
substantially all of the assets of Atlanta Ear, Nose, & Throat Associates, P.C.,
three additional ENT practices in the metropolitan Atlanta area (collectively,
"Atlanta ENT"), and one ENT practice in Birmingham, Alabama. In addition, the
Company purchased the common stock of three corporations (the "ENT Networks"),
which as of that date held, managed, and administered capitated ENT managed care
contracts for enrollees of health maintenance organizations ("HMOs") sponsored
by United Healthcare of Georgia, AEtna Health Plans of Georgia ("AEtna"), and
Cigna Health Care of Georgia ("Cigna").
In connection with the acquisitions, the Company issued an aggregate of
3,104,755 shares of common stock and entered into management services agreements
with the physician practices providing for the comprehensive management of the
practices by the Company, while enabling the practices to retain authority over
the provision of medical care. The management services agreement with Atlanta
ENT provides for the assignment to the Company by Atlanta ENT of all or
substantially all of its nongovernmental accounts receivable and all of its
rights and interest in the proceeds of its governmental accounts receivable and
grants to the Company the right to collect and retain the proceeds of the
accounts receivable for the Company's account to be applied in accordance with
the agreement. The Company is responsible for the payment of operating and
nonoperating expenses of Atlanta ENT (excluding compensation to physicians and
physician assistants) and is responsible for the payment of all such expenses
directly out of the proceeds of the accounts receivable assigned to the Company
by Atlanta ENT. In addition, the Company retains a management fee equal to 12.5%
of all revenue (after adjustment for contractual allowances) generated by or on
behalf of physicians practicing at Atlanta ENT, subject to specified maximum
annual amounts, as payment for the Company's services and nonallocable costs
incurred by the Company attributable to the provision of management services
under the management services agreement. The remaining revenue is remitted to
Atlanta ENT to pay physician and physician assistant compensation and benefits.
Simultaneous with the acquisition of substantially all of the assets of ENT
and Allergy Associates, the physicians at ENT and Allergy Associates entered
into employment agreements with PSC Alabama, a wholly owned subsidiary of the
Company. The assignment of accounts receivable, realization of revenue, and
allocation of costs and expenses are governed by a management services agreement
between PSC Alabama and the Company, which is substantially similar to the
management services agreement between Atlanta ENT and the Company.
4. INITIAL PUBLIC OFFERING
On March 26, 1997, the Company completed its IPO of 2,200,000 shares of its
common stock. The net proceeds of the IPO were approximately $14,275,000 and
were used for repayment of indebtedness of the acquired practices, repayment of
indebtedness of the Company, payment of a consulting fee, general corporate
purposes, and working capital requirements.
5. ACQUISITIONS
Since the IPO, the Company has acquired (a) substantially all of the assets
(other than certain excluded assets such as employment agreements and patient
charts, records, and files) and assumed certain contractual liabilities of (i)
Allatoona ENT, (ii) Ear, Nose & Throat Specialists, P.C. ("ENT Specialists"),
(iii) Ear, Nose & Throat Specialists, Head & Neck Surgery, P.C. ("ENT
Specialists H&N"), (iv) Northside Ear, Nose & Throat Associates, P.C.
("Northside"), (v) Otolaryngology, Medical, and Surgical Associates, LTD.
("OMSA"), and (vi) Cobb Ear, Nose & Throat Associates, P.C. ("Cobb") and (b) the
stock of six professional associations owned by seven ENT physicians and a
partnership owned and operated by the professional associations in Palm Beach
and Broward Counties, Florida (collectively, "ENT of South Florida").
F-15
<PAGE> 89
PHYSICIANS' SPECIALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the acquisition of assets or equity of these practices,
the Company (i) paid an aggregate of approximately $5.0 million in cash, (ii)
issued an aggregate of 598,450 shares of common stock (valued at the time of
issuance at an aggregate of approximately $4.5 million), (iii) agreed to issue
an aggregate of 276,249 additional shares of Common Stock (valued at an
aggregate of approximately $2.5 million) to two of the affiliated practices
beginning in September 1998, (iv) issued subordinated convertible promissory
notes in the aggregate principal amount of approximately $912,000, which notes
mature in October 2000 and accrue interest at a rate of 5.61% per annum and are
convertible into shares of common stock at a conversion price of $10.00 per
share, and (v) issued noninterest-bearing contingent subordinated promissory
notes in the aggregate principal amount of approximately $3.0 million. The
contingent notes are payable in shares of common stock, valued at the average
closing price of the common stock for the ten trading days preceding the date of
delivery of such shares, and the payment of these notes is contingent upon the
physicians or practice holding such notes reaching performance targets. In
connection with these acquisitions, the Company paid an aggregate of
approximately $397,000 to Premier HealthCare, an affiliate of the Company's Vice
Chairman and Secretary, for advisory services rendered by Premier HealthCare.
In connection with the OMSA acquisition, the physician shareholders of OMSA
granted to the Chairman of the Board and President of the Company (or his
designee or assignee), the option to acquire all of the ownership interest of
such physician shareholders in OMSA in the event that at any time there are less
than two shareholders who continue as full time physician-employees of OMSA and
those shareholders who remain do not, at the optionee's or management of the
Company's sole discretion, control the operations of OMSA in a manner consistent
with the requirements of the Management Services Agreement between OMSA and the
Company. In order to exercise the option, the optionee or his designee or
assignee must at the time of exercise be licensed to practice medicine in the
State of Illinois.
6. EQUIPMENT
Equipment at December 31, 1996 and 1997 consisted of the following:
<TABLE>
<CAPTION>
1996 1997 USEFUL LIVES
------- ---------- -------------
<S> <C> <C> <C>
Equipment........................................... $21,706 $1,132,111 3 to 7 years
Computer system and software........................ -- 432,157 3 years
Furniture and fixtures.............................. -- 1,678,971 7 years
Automobiles......................................... -- 57,548 5 years
Leasehold improvements.............................. -- 495,144 3 to 5 years
------- ----------
Total cost................................ 21,706 3,795,931
Less accumulated depreciation....................... (1,809) (364,224)
------- ----------
$19,897 $3,431,707
======= ==========
</TABLE>
7. CREDIT AGREEMENT, SUBORDINATED DEBT, AND NOTES PAYABLE
On April 30, 1997, the Company closed on a five-year $20 million Credit
Agreement (the "Credit Agreement") with NationsBank, N.A. (the "Bank"), with up
to $5.0 million of such $20 million available for working capital purposes.
Advances under the Credit Agreement will bear interest at either a prime-based
rate or a LIBOR-based rate, at the Company's option, with interest-only payments
required during the first three years of the credit agreement. Thereafter, in
years four and five of the agreement, the term loan commitment will be reduced
to $13,333,333 and $6,666,666, respectively. Borrowings under the Credit
Agreement are secured by the capital stock of the Company's subsidiaries and the
Company's accounts receivable and will be secured by acquisition documents in
connection with physician practice equity or assets acquired. At December 31,
1997, the Company had no outstanding borrowings under the Credit Agreement.
F-16
<PAGE> 90
PHYSICIANS' SPECIALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Credit Agreement contains certain restrictive covenants, including,
among other things, consent from the Bank related to additional acquisitions and
restrictions on additional indebtedness. In addition, the Company must maintain
certain financial covenants, including, among others, a minimum current ratio, a
minimum tangible net worth, a minimum debt service coverage ratio, and a minimum
interest coverage ratio. The Company was in compliance with the debt covenants
at December 31, 1997.
Concurrent with the acquisition of ENT of South Florida (Note 5), the
Company issued subordinated convertible promissory notes in the aggregate
principal amount of $911,715, which notes mature in October 2000 and accrue
interest at a rate of 5.61%. The Notes are convertible into shares of Common
Stock at a conversion price of $10.00 per share.
Short-Term Debt
The Company's short-term debt at December 31, 1996 consisted of promissory
notes in principal amounts ranging from $20,000 to $170,500 and bearing simple
interest at a bank prime rate (8.25% at December 31, 1996). The amounts were
repaid in 1997 from the proceeds of the IPO.
8. INCOME TAXES
For all periods presented, the accompanying financial statements reflect
provisions for income taxes computed in accordance with the requirements of SFAS
No. 109.
The following summarizes the components of the income tax provision:
<TABLE>
<CAPTION>
1996 1997
--------- ----------
<S> <C> <C>
Current:
Federal................................................... $ -- $ 868,153
State..................................................... -- 155,449
Deferred:
Federal................................................... -- 279,108
State..................................................... -- 59,110
--------- ----------
Provision for income taxes........................ $ -- $1,361,820
========= ==========
</TABLE>
The provision for income taxes differs from the amounts computed by
applying federal statutory rates due to the following:
<TABLE>
<CAPTION>
1996 1997
--------- ----------
<S> <C> <C>
Provision computed at the federal statutory rate............ $(120,564) $1,163,411
State income taxes, net of federal income tax benefit....... (14,042) 142,573
Amortization of intangibles................................. -- 18,116
Nondeductible compensation expense.......................... 130,260 --
Other, net.................................................. (1,674) 43,740
Change in valuation allowance............................... 6,020 (6,020)
--------- ----------
Provision for income taxes........................ $ -- $1,361,820
========= ==========
</TABLE>
F-17
<PAGE> 91
PHYSICIANS' SPECIALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effect of significant temporary differences representing deferred
tax assets and liabilities at December 31, 1996 and 1997 is as follows:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Deferred income tax assets:
Accrued shareholder compensation.......................... $ -- $ 129,433
Allowance for doubtful accounts........................... -- 10,745
Net operating loss carryforward........................... 6,500 --
--------- ---------
Total deferred income tax assets.................. 6,500 140,178
Deferred income tax liabilities:
Acquired accounts receivable.............................. -- (418,458)
Depreciation and amortization............................. (480) (59,938)
--------- ---------
Total deferred tax liabilities.................... (480) (478,396)
--------- ---------
Valuation allowance....................................... (6,020) --
--------- ---------
Net deferred income tax liabilities............... $ -- $(338,218)
========= =========
</TABLE>
The Company had no income tax net operating loss carryforward as of
December 31, 1997.
Management believes that a valuation allowance against deferred income tax
assets is not considered necessary at December 31, 1997 based on the Company's
earnings history, the projections for future taxable income, and other relevant
considerations over the periods during which the deferred tax assets are
deductible.
9. STOCKHOLDERS' EQUITY
The Company has authorized 10,000 shares of preferred stock with $1.00 par
value. No shares have been issued, and therefore, there were no shares
outstanding at December 31, 1996 and 1997. The board of directors has the
authority to issues these shares and to fix dividends, voting and conversion
rights, redemption provisions, liquidation preferences, and other rights and
restrictions. During the period ended December 31, 1996, the Company declared a
.6875 to 1 reverse stock split. All financial information has been restated to
reflect for the stock split. In connection with certain stock issuances during
1996 and 1997, the Company recorded a charge to compensation of approximately
$343,000, and $48,000, respectively.
10. STOCK PLANS
Stock Option Plans
In November 1996, the Company adopted two stock option plans, the 1996
Stock Option Plan (the "1996 Plan") and the 1996 Health Care Professionals Stock
Option Plan (the "Health Care Professionals Plan").
The Company may grant options for up to 825,000 shares under two plans, the
1996 Plan and the Health Care Professionals Plan. The Company has granted
options for up to 247,460 and 439,940 shares through December 31, 1996 and 1997,
respectively, under the 1996 Plan and has granted options for up to 0 and 35,000
shares under the Health Care Professionals Plan through December 31, 1996 and
1997, respectively. The 1996 Plan and the Health Care Professional Plan options
vest over periods ranging from three to five years, and all
F-18
<PAGE> 92
PHYSICIANS' SPECIALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
expire after ten years. A summary of the status of the Company's two stock
option plans at December 31, 1996 and 1997 is presented in the table below:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
OPTION PRICE EXERCISE
SHARES (PER SHARE) PRICE
------- ------------- --------
<S> <C> <C> <C>
Outstanding at inception (July 31, 1996)............. -- $ 0.00 $0.00
Granted............................................ 247,460 6.80 6.80
Exercised.......................................... -- N/A N/A
Canceled........................................... -- N/A N/A
------- ------------- -----
Outstanding at December 31, 1996..................... 247,460 6.80 6.80
Granted............................................ 227,480 6.00-12.125 7.42
Exercised.......................................... -- -- 0.00
Canceled........................................... (3,000) 8.00 8.00
------- ------------- -----
Outstanding as of December 31, 1997.................. 471,940 $6.00-$12.125 $7.09
======= ============= =====
</TABLE>
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Options exercisable at year-end............................. 67,490 173,100
Weighted average exercise price of options exercisable at
year-end.................................................. $6.80 $6.91
Per share weighted average fair value of options granted
during the period......................................... $3.96 $4.78
</TABLE>
The weighted average remaining contractual life of options outstanding at
December 31, 1997 was nine years.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," but applies Accounting Principles
Board Opinion No. 25 and related interpretations in accounting for its stock
option plans. If the Company had elected to recognize compensation cost for
these plans based on the fair value at the grant dates for awards under the
plans, consistent with the method prescribed by SFAS No. 123, net income (loss)
and earnings (loss) per share would have been changed to the pro forma amounts
indicated below at December 31, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
--------- ----------
<S> <C> <C>
Net income (loss):
As reported............................................... $(354,601) $2,059,977
Pro forma................................................. (634,924) 1,464,400
Earnings (loss) per share:
Basic:
As reported............................................ (0.64) 0.42
Pro forma.............................................. (1.15) 0.30
Diluted:
As reported............................................ (0.64) 0.42
Pro forma.............................................. (1.15) 0.30
</TABLE>
The fair value of the Company's stock options used to compute pro forma net
income (loss) and earnings (loss) per share disclosures is the estimated present
value at grant date using the Black-Scholes option pricing model with the
following weighted average assumptions for 1996 and 1997: dividend yield of 0%,
expected volatility of 44%, and a risk-free interest rate range of 6%-6.9%, and
an expected holding period of seven years.
F-19
<PAGE> 93
PHYSICIANS' SPECIALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1997 Employee Stock Purchase Plan
The Company's 1997 Employee Stock Purchase Plan (the "Stock Purchase Plan")
was approved by the Board of Directors in November 1997, subject to stockholder
approval at the Company's 1997 Annual Meeting of Stockholders. The Stock
Purchase Plan is intended to qualify as an "employee stock purchase plan" under
Section 423 of the Internal Revenue Code of 1986, as amended, in order to
provide employees of the Company with an opportunity to purchase common stock
through payroll deductions. An aggregate of 250,000 shares of the Company's
common stock have been reserved for issuance under the Stock Purchase Plan and
are available for purchase thereunder.
11. COMMITMENTS AND CONTINGENCIES
Litigation
The Company and its affiliated physician groups are insured with respect to
medical malpractice risks on a claims-made basis. In the opinion of management,
the amount of potential liability with respect to these claims will not
materially affect the Company's financial position or results of operations.
No legal proceedings are currently pending against the Company, and the
Company is not aware of any outstanding claims against any of its affiliated
practices that would have a material adverse effect on the Company's business,
financial condition, or results of operations. The Company and its affiliated
practices may be involved from time to time in litigation incidental to their
respective businesses.
Employment Agreements
The Company has entered into employment agreements with certain executive
officers of the Company. The agreements, which are substantially similar,
provide for compensation to the officers in the form of annual base salaries.
The employment agreements also provide for severance benefits upon the
occurrence of certain events, including a change in control, as defined.
Leases
The Company leases equipment and certain medical office facilities under
noncancelable operating lease agreements which expire in various years through
2010. Rental expenses under these leases amounted to approximately $0 and
$1,157,000 in 1996 and 1997, respectively.
Future minimum rental commitments under all noncancelable operating lease
agreements, excluding lease agreements that expire within one year, are as
follows as of December 31, 1997:
<TABLE>
<S> <C>
1998........................................................ $ 2,113,431
1999........................................................ 1,943,142
2000........................................................ 1,596,943
2001........................................................ 1,173,892
2002........................................................ 971,281
Thereafter.................................................. 5,671,620
-----------
Total............................................. $13,470,309
===========
</TABLE>
12. RELATED-PARTY TRANSACTIONS
In May 1997, the Company entered into an agreement with Premier HealthCare,
an affiliate of the Company's Vice Chairman and Secretary, pursuant to which
Premier HealthCare will assist the Company as a financial adviser in connection
with acquisitions and similar transactions. In the event that the Company
completes any transaction in which Premier HealthCare performed advisory
services, Premier HealthCare will
F-20
<PAGE> 94
PHYSICIANS' SPECIALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
receive a fee equal to (i) its out-of-pocket expenses and (ii) 5% of the initial
$1.0 million of Transaction Value, as defined, 4% of the next $1 million of
Transaction Value, 3% of the next $1 million of Transaction Value, 2% of the
next $1 million of Transaction Value, and 1% of the amount of Transaction Value
in excess of $4 million. Pursuant to the agreement, the fee to be paid to
Premier HealthCare for a particular transaction will be reduced by any finder's
fee payable by the Company, which has been approved by Premier HealthCare, and
the aggregate fee to be paid to Premier Healthcare in any given year will be
reduced by the product of (i) $5,000 and (ii) the number of months in any year
in which the Company's Vice Chairman and Secretary is employed by the Company.
So long as the Company's Vice Chairman and Secretary is employed by the Company
at his current salary, the aggregate fee to be paid to Premier HealthCare in any
given year will be reduced by $60,000. The agreement may be terminated by either
party upon 90 days written notice to the other.
During the year ended December 31, 1997, the Company paid an aggregate of
$647,000 to Premier HealthCare consisting of (i) $250,000 for consulting
services in connection with the formation of the Company and the reorganization
and (ii) $397,000 for consulting services in connection with the acquisition of
assets or equity of the additional practices which were acquired during 1997.
Leases
The Company leases one clinical location from the Company's chairman. The
lease is for approximately 23,200 square feet and provides for monthly rental
payments of approximately $47,000, subject to annual increases. The Company also
leases one clinical location from Eastside Physicians Center, L.P., a Georgia
limited partnership, of which Company's chairman is a limited partner. The lease
is for approximately 3,500 square feet and provides for monthly rental payments
of approximately $5,750, subject to annual increases. The future minimum rental
commitments related to these two leases is included in Note 11. During 1996, the
Company utilized office space of a related party for which no rent or other
consideration was charged.
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1997
--------------------------------
FIRST SECOND THIRD FOURTH
----- ------ ------ ------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C>
Revenue..................................................... $ 239 $4,264 $4,938 $6,119
Operating income............................................ 20 720 962 1,291
Net income.................................................. 20 512 664 864
Basic net income per share.................................. 0.02 0.09 0.11 0.14
Diluted net income per share................................ $0.02 $ 0.09 $ 0.11 $ 0.13
Weighted average shares outstanding
Basic..................................................... 836 5,905 6,207 6,329
Diluted................................................... 865 5,905 6,275 6,658
</TABLE>
14. SUBSEQUENT EVENTS (UNAUDITED)
On February 1, 1998 the Company acquired the nonmedical practice assets of
an office located in DelRay Beach, Florida. This transaction will be accounted
for under the purchase method of accounting.
In March 1998, the Board of Directors adopted an amendment to the 1996 Plan
to increase the number of shares of common stock authorized under the 1996 Plan
to 1,100,000 shares of the Company's authorized but unissued common stock
authorized for issuance pursuant to the grant by the Company of options to
officers, directors, employees, consultants, and independent contractors of the
Company.
F-21
<PAGE> 95
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Ear, Nose & Throat Associates, P.C.:
We have audited the accompanying balance sheets of EAR, NOSE & THROAT
ASSOCIATES, P.C. (a New York corporation) as of December 31, 1996 and 1997 and
the related statements of operations, stockholders' equity (deficit), and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Ear, Nose & Throat
Associates, P.C. as of December 31, 1996 and 1997 and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
April 13, 1998
F-22
<PAGE> 96
EAR, NOSE & THROAT ASSOCIATES, P.C.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1997
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 692 $ 116,371
Accounts receivable, net of allowance for doubtful
accounts of $150,354 and $466,172 at December 31, 1996
and 1997, respectively................................. 1,809,818 2,431,055
Notes receivable from employees 129,852 --
---------- ----------
Total current assets.............................. 1,940,362 2,547,426
EQUIPMENT, net.............................................. 979,531 981,318
DUE FROM RELATED PARTY...................................... 133,049 1,383,313
DEFERRED INCOME TAXES....................................... 140,952 --
INTANGIBLE ASSETS........................................... 553,186 657,265
OTHER ASSETS................................................ 11,092 22,761
---------- ----------
Total assets...................................... $3,758,172 $5,592,083
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable.......................................... $ 574,679 $ 298,816
Due to related party...................................... -- 188,543
Accrued expenses.......................................... 189,204 442,585
Accrued shareholder compensation.......................... 1,275,300 1,310,053
Current portion of long-term debt and capital lease
obligations............................................ 678,333 2,855,801
---------- ----------
Total current liabilities......................... 2,717,516 5,095,798
DEFERRED INCOME TAXES....................................... -- 6,538
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, less current
portion................................................... 1,163,036 101,239
---------- ----------
Total liabilities................................. 3,880,552 5,203,575
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 10)
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, no par value; 200 shares authorized, 112 and
126 shares issued and outstanding at December 31, 1996
and 1997, respectively................................. -- --
Additional paid-in capital................................ 2,233 293,687
Retained earnings (deficit)............................... (124,613) 94,821
---------- ----------
Total stockholders' equity (deficit).............. (122,380) 388,508
---------- ----------
Total liabilities and stockholders' equity
(deficit)....................................... $3,758,172 $5,592,083
========== ==========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-23
<PAGE> 97
EAR, NOSE & THROAT ASSOCIATES, P.C.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1996 1997
---------- -----------
<S> <C> <C>
NET PATIENT SERVICE REVENUE:................................ $7,758,807 $12,519,142
---------- -----------
OPERATING EXPENSE:
Salaries, wages, and benefits............................... 2,530,982 4,189,254
Compensation to stockholder-physicians...................... 2,334,316 3,564,287
General and administrative expense.......................... 3,113,258 2,799,251
Physician practice management expense....................... -- 944,415
Depreciation and amortization............................... 326,433 405,777
---------- -----------
Total operating expenses.......................... 8,304,989 11,902,984
---------- -----------
INCOME (LOSS) FROM OPERATIONS............................... (546,182) 616,158
INTEREST EXPENSE............................................ (122,076) (249,234)
---------- -----------
INCOME (LOSS) BEFORE INCOME TAXES........................... (668,258) 366,924
BENEFIT (PROVISION) FOR INCOME TAXES........................ 19,316 (147,490)
---------- -----------
NET INCOME (LOSS)........................................... $ (648,942) $ 219,434
========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-24
<PAGE> 98
EAR, NOSE & THROAT ASSOCIATES, P.C.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED
--------------- PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
------ ------ ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995...................... 84 $-- $ 2,233 $ 524,329 $ 526,562
Stock dividend................................ 28 -- -- -- --
Net loss...................................... -- -- -- (648,942) (648,942)
--- --- -------- --------- ---------
BALANCE, December 31, 1996...................... 112 -- 2,233 (124,613) (122,380)
Issuance of common stock -- practice
acquisition................................ 14 -- 291,454 -- 291,454
Net income.................................... -- -- -- 219,434 219,434
--- --- -------- --------- ---------
BALANCE, December 31, 1997...................... 126 $-- $293,687 $ 94,821 $ 388,508
=== === ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-25
<PAGE> 99
EAR, NOSE & THROAT ASSOCIATES, P.C.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1996 1997
---------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $ (648,942) $ 219,434
---------- -----------
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Non-cash expense.......................................... -- 127,000
Depreciation and amortization............................. 326,433 398,167
(Benefit) provision for deferred taxes.................... (19,316) 147,490
Changes in operating assets and liabilities, net of effect
from acquisitions:
Accounts receivable.................................... 272,268 (457,207)
Prepayments and other.................................. 905 33,790
Accrued shareholder compensation....................... (47,796) 34,753
Accounts payable and accrued liabilities............... 477,649 149,061
---------- -----------
Total adjustments................................. 1,010,143 433,054
---------- -----------
Net cash provided by operating activities......... 361,201 652,488
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loan to related party, net................................ -- (1,250,264)
Repayment of employee and shareholder loans, net.......... 193,937 2,852
Payment for acquisitions, net............................. (470,000) (185,000)
Purchase of property and equipment, net................... (629,134) (220,068)
---------- -----------
Net cash used in investing activities............. (905,197) (1,652,480)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (repayments) from capital leases, net.......... 102,705 (379,159)
Repayments of note payable................................ (508,749) (1,814,215)
Repayments of loans to physicians......................... (55,227) (135,955)
Borrowings from physicians................................ 298,102 60,000
Proceeds from issuance of note payable.................... 706,668 3,385,000
---------- -----------
Net cash provided by financing activities......... 543,499 1,115,671
---------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS..................... (497) 115,679
CASH AND CASH EQUIVALENTS, beginning of year................ 1,189 692
---------- -----------
CASH AND CASH EQUIVALENTS, end of year...................... $ 692 $ 116,371
========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-26
<PAGE> 100
EAR, NOSE & THROAT ASSOCIATES, P.C.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
1. ORGANIZATION
Ear, Nose & Throat Associates, P.C. ("ENT") was incorporated on December
18, 1973 to provide treatment and management of diseases and disorders of the
ear, nose, throat, head, and neck. ENT has operations in Westchester and Putnam
Counties, New York.
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 and disclosures in ENT's financial
statements and the accompanying notes. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS
ENT considers cash on deposit with financial institutions and all highly
liquid investments with original maturities of three months or less to be cash
and cash equivalents.
EQUIPMENT
Equipment is recorded at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of depreciable assets for
financial statement reporting purposes. 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.
INTANGIBLE ASSETS
ENT's physician practice acquisitions involve the purchase of tangible and
intangible assets and the assumption of certain liabilities of the acquired
practices. As part of the purchase price allocation, ENT allocates the purchase
price to the tangible and identifiable intangible assets acquired and
liabilities assumed based on estimated fair market values. Costs of acquisitions
in excess of the net estimated fair value of tangible and identifiable
intangible assets acquired and liabilities assumed are amortized using the
straight-line method over a period of 25 years. At December 31, 1996 and 1997,
the amount of such intangible assets was approximately $438,000 and $673,000
with related accumulated amortization totaling approximately $15,000 and
$45,000, respectively.
Also included in intangible assets is a noncompete agreement ENT entered
into in conjunction with a buyout of a former shareholder. The noncompete
agreement stipulated that the former shareholder could not engage in the
practice of medicine specializing in ENT within a certain radius of his former
office for a period of 48 months. At December 31, 1996 and 1997, the gross
amount of this noncompete agreement was $402,000 and the related accumulated
amortization was approximately $272,000 and $373,000, respectively.
NET PATIENT SERVICE REVENUE
Net patient service revenue is reported at estimated net realizable amounts
from patients, third-party payors, and others for services rendered. Revenue
under third-party payor agreements is subject to audit and retroactive
adjustment. Provisions for estimated third-party settlements are provided in the
period the related services are rendered. Differences between estimated amounts
accrued and final settlements are reported in the year of settlement. ENT
recognizes revenue as services are performed.
F-27
<PAGE> 101
EAR, NOSE & THROAT ASSOCIATES, P.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
ALLOWANCE FOR DOUBTFUL ACCOUNTS
ENT provides an allowance for doubtful accounts equal to the estimated
losses expected to be incurred in the collection of accounts receivable. Bad
debt expense during 1996 and 1997 was $16,695 and $315,818, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
ENT estimates that the carrying amounts of financial instruments, including
cash and cash equivalents, accounts receivable, and accounts payable
approximated their fair values as of December 31, 1996 and 1997 due to the
relatively short maturity of these instruments. Notes payable and capital leases
approximated their fair value based on borrowings currently available to ENT for
similar terms and average maturities.
INCOME TAXES
ENT follows the practice of providing for income taxes based on Statement
of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes." SFAS No. 109 requires recognition of deferred tax liabilities and assets
for the expected future tax consequences of events that have been included in
the financial statements or tax returns.
INDUSTRY RISKS
The health care industry is subject to numerous laws and regulations at all
levels of government. These laws and regulations include, but are not
necessarily limited to, such matters as licensure, accreditation, government
health care program participation requirements, reimbursement for patient
services, and Medicare and Medicaid fraud and abuse. Recently, government
activity has increased with respect to investigations and allegations concerning
possible violations of fraud and abuse statutes and regulations by health care
providers. Violations of these laws could result in significant fines and
penalties as well as significant payments for services previously billed. ENT is
subject to similar regulatory reviews. A determination of liability under any
such laws could have a material effect on ENT's financial position, results of
operations, stockholders' equity, and cash flows.
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Cash paid during the year for interest...................... $122,076 $238,167
Liabilities assumed in connection with businesses
acquired.................................................. 56,666 17,000
</TABLE>
3. ACQUISITIONS
During 1996 and 1997, ENT acquired substantially all of the assets (other
than certain excluded assets, such as employment agreements and patient charts,
records and files) and assumed certain contractual liabilities of four physician
practices.
In connection with the acquisition of assets or equity of these practices,
ENT paid an aggregate of $655,000 in cash and issued 14 shares of common stock
(valued at the time of issuance at approximately $291,000). Upon completion of
these acquisitions, ENT entered into employment agreements with the former
owners for employment periods ranging from three to five years. The acquisitions
were accounted for under the purchase method of accounting.
F-28
<PAGE> 102
EAR, NOSE & THROAT ASSOCIATES, P.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. EQUIPMENT
Equipment at December 31, 1996 and 1997 consisted of the following:
<TABLE>
<CAPTION>
1996 1997 USEFUL LIVES
----------- ----------- -------------------
<S> <C> <C> <C>
Medical equipment.......................... $ 1,366,837 $ 1,643,756 Seven years
Computer system and software............... 148,160 148,160 Three years
Furniture and fixtures..................... 215,334 215,337 Seven years
Automobiles................................ 47,952 47,952 Five years
Leasehold improvements..................... 524,060 524,060 Three to five years
----------- -----------
Total cost....................... 2,302,343 2,579,265
Less accumulated depreciation.............. (1,322,812) (1,597,947)
----------- -----------
$ 979,531 $ 981,318
=========== ===========
</TABLE>
Depreciation expense was approximately $214,000 and $275,000 in 1996 and
1997, respectively.
5. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
ENT's long-term debt and capital lease obligations as of December 31, 1996
and 1997 consist of the following:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Notes payable with interest payable monthly at rates varying
from 6.5% to 9.65%; varying monthly principal payments;
maturing on various dates from December 31, 1997 through
January 2002; secured by substantially all assets and
contract rights of ENT.................................... $1,161,587 $ --
$92,000 note payable to a physician dated October 15, 1994;
payable in monthly installments of $1,855, including
interest at 8%, through November 15, 1998................. 39,442 19,616
$150,000 note payable to a physician dated April 30, 1996;
payable in monthly installments of $2,083, including
interest at 9.25%, through May 1, 2000 with a lump-sum
payment of $50,000 due May 1, 2000........................ 108,527 92,915
$181,111 note payable to a physician dated August 1, 1996;
payable in monthly installments of $8,109, including
interest at the rate of 7%, through August 1, 1998........ 152,654 63,200
$60,000 note payable to a physician dated June 1, 1997;
payable in monthly installments of $2,213, including
interest at 8%, through December 1, 1999.................. -- 48,937
Capital lease obligations with interest rates ranging from
10.25% to 18.15%, payable monthly at various amounts;
maturing October 1998 through December 2002; secured by
leased assets............................................. 379,159 --
$2,200,000 note payable to bank dated April 24, 1997;
payable in monthly installments of $45,935, including
interest at prime plus .75% (9.25% at December 31, 1997),
through May 2002.......................................... -- 1,998,939
$400,000 note payable to bank dated October 30, 1997;
payable in monthly installments of $8,285, including
interest at prime plus .75% (9.25% at December 31, 1997)
through October 30, 2002.................................. -- $ 383,433
</TABLE>
F-29
<PAGE> 103
EAR, NOSE & THROAT ASSOCIATES, P.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
$350,000 note payable to bank dated April 24, 1997; interest
payable monthly at prime plus .75% (9.25% at December 31,
1997), principal payment due annually on outstanding
balance................................................... -- 350,000
---------- ----------
Total............................................. 1,841,369 2,957,040
Less current maturities..................................... (678,333) (2,855,801)
---------- ----------
Long-term debt.............................................. $1,163,036 $ 101,239
========== ==========
</TABLE>
On April 24, 1997, ENT entered into a $2,950,000 term loan agreement (the
"Agreement") with Manufacturers and Traders Trust Company. The Agreement
consisted of a $2,200,000 term loan (the "Term Loan"), $350,000 revolving line
of credit (the "Revolver"), and a $400,000 grid term loan (the "Grid Loan"). ENT
used the proceeds from the Term Loan to pay down its existing bank notes payable
and capital leases. The proceeds from the Grid Loan were used to finance the
purchase, installation, and implementation of the new management software system
and hardware for PDI, as stipulated by the bank. The proceeds from the Revolver
were used to fund working capital.
Borrowings outstanding under the Agreement primarily incur interest at the
Bank's Prime Rate (8.5% at December 31, 1997) plus .75%. The Agreement is
presently secured by substantially all of ENT's assets, a gross receipts
security pledge, and personal guarantees of the stockholders, limited to their
proportional share of ENT.
The Agreement stipulates monthly interest and principal payments amortized
over 60 months on both the Grid Loan and the Term Loan. The Revolver payments
are monthly interest payments only, with an annual renewal period required.
The Agreement contains certain restrictive covenants, including, among
other things, limitations on additional indebtedness, transfers of assets, and
mergers and acquisitions. In addition, ENT must maintain certain financial
covenants, including, among other things, a minimum tangible net worth and debt
service ratio. ENT was in default of one of its debt covenants at December 31,
1997 and therefore, the Term Loan and Grid Loan have been classified as current
liabilities in the accompanying balance sheet.
The aggregate future maturities of long-term debt as of December 31, 1997
are as follows:
<TABLE>
<S> <C>
1998........................................................ 2,855,801
1999........................................................ 44,215
2000........................................................ 57,024
----------
$2,957,040
==========
</TABLE>
6. INCOME TAXES
For all periods presented, the accompanying financial statements reflect
provisions for income taxes computed in accordance with the requirements of SFAS
No. 109.
F-30
<PAGE> 104
EAR, NOSE & THROAT ASSOCIATES, P.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following summarizes the components of the income tax (benefit)
provision:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Current:
Federal................................................... $ -- $ --
State..................................................... -- --
Deferred:
Federal................................................... (16,071) 114,255
State..................................................... (3,245) 33,235
-------- --------
Total income tax (benefit) provision.............. $(19,316) $147,490
======== ========
</TABLE>
The provision for income taxes differs from the amounts computed by
applying federal statutory rates due to the following:
<TABLE>
<CAPTION>
1996 1997
--------- --------
<S> <C> <C>
(Benefit) provision computed at the federal statutory
rate...................................................... $(227,207) $124,754
State income taxes, net of federal income tax benefit....... (38,492) 21,134
Other.......................................................
Permanent differences....................................... 39,136 16,021
Change in valuation allowance............................... 207,247 (14,419)
--------- --------
Total income tax (benefit) provision.............. $ (19,316) $147,490
========= ========
</TABLE>
The tax effect of significant temporary differences representing deferred
tax assets and liabilities at December 31, 1996 and 1997 is as follows:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Deferred tax assets:
Accrued liabilities....................................... $ 814,450 $ 894,655
Book over tax depreciation................................ 58,767 83,211
Net operating loss carryforward........................... 242,442 228,023
---------- ----------
Total deferred income tax assets.................. 1,115,659 1,205,889
---------- ----------
Deferred tax liabilities:
Accounts receivable....................................... 722,841 970,963
Tax over book amortization of goodwill.................... 9,424 13,441
---------- ----------
Total deferred tax liabilities.................... 732,265 984,404
---------- ----------
Valuation allowance....................................... (242,442) (228,023)
---------- ----------
Net deferred tax assets (liabilities)....................... $ 140,952 $ (6,538)
========== ==========
</TABLE>
ENT had income tax net operating loss carryforwards totaling approximately
$607,000 and $571,000 as of December 31, 1996 and 1997, respectively, which
expire in 2010.
The increase in valuation allowance in 1996 is the result of ENT's
valuation allowance for net operating loss carryforwards generated during 1996.
The decrease in valuation allowance in 1997 is a result of the 1996 loss
carryforwards utilized in 1997.
F-31
<PAGE> 105
EAR, NOSE & THROAT ASSOCIATES, P.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. EMPLOYEE BENEFIT PLAN
401(K) PLAN
ENT initiated a 401(k) plan covering all of its eligible employees and
stockholders on May 1, 1997. Under the plan, employees generally may contribute
up to 15% of their pretax eligible compensation. ENT makes a discretionary
contribution to each employee's account in an amount equal to 25% of the
employee's contribution, up to 4% of the employee's compensation. ENT
contributed $19,845 to the plan during 1997.
PROFIT-SHARING PLAN
ENT also initiated a Profit-Sharing Plan ("Sharing Plan") covering all of
its eligible employees and stockholders. Under the Sharing Plan, ENT makes a
discretionary contribution to each employee's account based on a percentage of
the employee's compensation. This percentage can range from 1% to 15% of
eligible compensation, with a 1997 percentage of 3.75%. ENT contributed $222,154
to the Sharing Plan during 1997.
8. RELATED-PARTY TRANSACTIONS
During June 1995, an executive employee of ENT entered into an employee
agreement with the agreement stipulating an employee loan from ENT. The original
amount of the loan was for $50,000 with interest payable annually at a rate of
6%. During 1996, ENT paid for certain expenses of the employee and, accordingly,
increased the loan balance outstanding. At December 31, 1996, the balance
outstanding was approximately $127,000. During 1997, the outstanding balance was
included as expense in the accompanying statement of operations.
In April 1997, ENT entered into a five-year management service agreement
(the "MSA") with Physicians' Domain Inc. ("PDI"). The stockholders of ENT are
approximately 40% owners of PDI. The MSA stipulates that PDI will provide
financial and administrative management, enhancement of clinical operations,
network development, billing and collection, negotiation, establishment,
supervision, and maintenance of contracts and relationships related to managed
care contracts. In return, ENT pays a management fee based on the number of
full-time physicians and an additional annual amount payable in monthly
installments. ENT is also responsible for all the operating and nonoperating
expenses incurred by PDI on behalf of managing ENT. During 1997, ENT incurred
charges of approximately $955,000 related to the MSA.
Upon completion of the debt financing during April 1997 (Note 5), ENT
allocated a portion of the repayments to PDI. This allocation is based on cost
incurred by ENT in assisting the start-up of PDI. This amount as well as other
start-up related charges not included in debt financing allocation are included
on the accompanying balance sheet.
9. STOCK DIVIDEND
ENT declared a stock dividend to all stockholders of record on June 1,
1996. The stock dividend was a dividend of 4 shares for every 12 shares owned by
the stockholders.
10. COMMITMENTS AND CONTINGENCIES
LITIGATION
ENT and its affiliated physician groups are insured with respect to medical
malpractice risks on a claims-made basis. In the opinion of management, the
amount of potential liability with respect to these claims will not materially
affect ENT's financial position or results of operations.
F-32
<PAGE> 106
EAR, NOSE & THROAT ASSOCIATES, P.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
EMPLOYMENT AGREEMENTS
ENT has entered into employment agreements with the shareholders of ENT and
certain nonshareholder physicians. The agreements, which are substantially
similar, provide for compensation to the shareholders in the form of a monthly
salary based on respective collections. The employment agreements also contain
restrictive covenants relating to the practice of ENT medicine within 24 months
after the employment agreements expire. The employment agreements with the
nonshareholder physicians are similar to the shareholder agreements, except for
the monthly salary which is based on annual compensation, as defined. The
physician employment agreements range from three to five years.
OPERATING LEASES
ENT leases certain medical office facilities under noncancelable operating
lease agreements which expire in various years through 2006. Rental expenses
under these leases amounted to approximately $486,000 and $618,000 in 1996 and
1997, respectively.
Future minimum rental commitments under all noncancelable operating lease
agreements, excluding lease agreements that expire within one year, are as
follows as of December 31, 1997:
<TABLE>
<S> <C>
1998........................................................ $ 665,799
1999........................................................ 566,052
2000........................................................ 528,160
2001........................................................ 435,932
2002........................................................ 179,544
Thereafter.................................................. 253,070
----------
Total............................................. $2,628,557
==========
</TABLE>
11. SUBSEQUENT EVENT
On March 30, 1998, ENT signed a definitive letter of intent with
Physicians' Specialty Corp. ("PSC"), a physicians' practice management company.
PSC has agreed to acquire substantially all of the tangible assets of ENT and
PDI. Upon final acquisition, a successor practice to ENT will enter into a
management agreement with PSC whereby PSC would manage the practice for a fixed
annual fee, as defined.
F-33
<PAGE> 107
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Cobb E.N.T. Associates, P.C.:
We have audited the accompanying balance sheet of COBB E.N.T. ASSOCIATES,
P.C. (a Georgia corporation) as of August 31, 1997 and the related statements of
operations, stockholders' equity, and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
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 Cobb E.N.T. Associates, P.C.
as of August 31, 1997 and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
March 10, 1998
F-34
<PAGE> 108
COBB E.N.T. ASSOCIATES, P.C.
BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
AUGUST 31,
1997
----------
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 15,367
Accounts receivable, net of allowance for doubtful
accounts of $84,121.................................... 1,307,464
Note receivable due from related party.................... 5,000
Prepayments and other..................................... 28,073
----------
Total current assets.............................. 1,355,904
EQUIPMENT, net.............................................. 299,696
----------
Total assets...................................... $1,655,600
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to bank..................................... $ 88,815
Revolving credit facility................................. 70,250
Accounts payable.......................................... 153,173
Accrued compensation...................................... 84,718
Other accrued liabilities................................. 14,756
----------
Total current liabilities......................... 411,712
----------
DEFERRED INCOME TAXES....................................... 425,550
----------
NOTES PAYABLE, less current portion......................... 125,698
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY:
Common stock, no par value; 100,000 shares authorized, 500
shares issued at August 31, 1997....................... --
Additional paid-in capital................................ 18,183
Retained earnings......................................... 707,972
Less treasury stock, at cost (166 shares)................. (33,515)
----------
Total stockholders' equity........................ 692,640
----------
Total liabilities and stockholders' equity........ $1,655,600
==========
</TABLE>
The accompanying notes are an integral part of this balance sheet.
\
F-35
<PAGE> 109
COBB E.N.T. ASSOCIATES, P.C.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1997
---------------------
<S> <C>
NET PATIENT SERVICE REVENUE:................................ $4,438,097
OPERATING EXPENSES:
Salaries, wages, and benefits............................. 1,107,761
Compensation to stockholder-physicians.................... 1,650,289
General and administrative expense........................ 1,282,328
Depreciation.............................................. 67,524
----------
Total operating expenses.......................... 4,107,902
----------
INCOME FROM OPERATIONS...................................... 330,195
----------
OTHER INCOME (EXPENSE):
Interest expense.......................................... (25,486)
Other income.............................................. 352
----------
(25,134)
----------
INCOME BEFORE INCOME TAXES.................................. 305,061
PROVISION FOR INCOME TAXES.................................. (120,794)
----------
NET INCOME.................................................. $ 184,267
==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-36
<PAGE> 110
COBB E.N.T. ASSOCIATES, P.C.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY STOCK
--------------- PAID-IN RETAINED ------------------
SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT TOTAL
------ ------ ---------- -------- ------ --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, August 31, 1996................ 500 $ -- $18,183 $523,705 166 $ (33,515) $508,373
Net income..................... -- -- -- 184,267 -- -- 184,267
--- ---- ------- -------- --- --------- --------
BALANCE, August 31, 1997................ 500 $ -- $18,183 $707,972 166 $ (33,515) $692,640
=== ==== ======= ======== === ========= ========
</TABLE>
The accompanying notes are an integral part of this statement.
F-37
<PAGE> 111
COBB E.N.T. ASSOCIATES, P.C.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
---------------------
1997
----
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 184,267
---------
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation........................................... 67,524
Gain on the sale of assets............................. (1,743)
Deferred income taxes.................................. (50,856)
Changes in operating assets and liabilities:
Accounts receivable, net............................. (261,560)
Other assets......................................... 29,357
Accounts payable and accrued liabilities............. 1,507
---------
Total adjustments................................. (215,771)
---------
Net cash used in operating activities............. (31,504)
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Note receivable due from related party.................... (5,000)
Acquisition of equipment.................................. (175,603)
Proceeds from sale of equipment........................... 19,038
---------
Net cash used in investing activities............. (161,565)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments under revolving credit facility, net........... (12,750)
Principal payments on notes payable....................... (113,183)
Borrowings under notes payable............................ 232,991
---------
Net cash provided by financing activities......... 107,058
---------
NET CHANGE IN CASH AND CASH EQUIVALENTS..................... (86,011)
CASH AND CASH EQUIVALENTS, beginning of year................ 101,378
---------
CASH AND CASH EQUIVALENTS, end of year...................... $ 15,367
=========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest............................................... $ 25,486
=========
Taxes.................................................. $ 41,000
=========
</TABLE>
The accompanying notes are an integral part of this statement.
F-38
<PAGE> 112
COBB E.N.T. ASSOCIATES, P.C.
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1997
1. NATURE OF OPERATIONS
Cobb E.N.T. Associates, P.C. ("Cobb ENT") was incorporated on August 25,
1972 in the state of Georgia. Cobb ENT is a medical practice that deals with a
variety of ear, nose, and throat specialties.
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 and disclosures in the Cobb ENT's
financial statements and the accompanying notes. Accordingly, actual results
could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cobb ENT considers cash on deposit with financial institutions and all
highly liquid investments with original maturities of three months or less to be
cash equivalents.
NET PATIENT SERVICE REVENUE
Net patient service revenue is reported at estimated net realizable amounts
from patients, third-party payors, and others for services rendered. Revenue
under third-party payor agreements is subject to audit and retroactive
adjustment. Provisions for estimated third-party settlements are provided in the
period the related services are rendered. Differences between estimated amounts
accrued and final settlements are reported in the year of settlements. Cobb ENT
recognizes revenue when the services are performed.
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Cobb ENT provides an allowance for doubtful accounts equal to the estimated
losses expected to be incurred in the collection of accounts receivable. Bad
debt expense for 1997 was $153,346.
INCOME TAXES
Cobb ENT follows the practice of providing for income taxes based on
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes." SFAS No. 109 requires recognition of deferred tax liabilities and
assets for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Deferred tax income or
expense is recognized for the changes in net deferred tax assets or liabilities,
plus changes in the valuation allowance.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cobb ENT estimated that the carrying amount of financial instruments,
including cash and cash equivalents, accounts receivable and accounts payable
approximated their fair values at August 31, 1997. Notes payable approximated
fair value based on borrowings currently available to Cobb ENT for similar terms
and average maturities.
INDUSTRY RISKS
The health care industry is subject to numerous laws and regulations at all
levels of government. These laws and regulations include, but are not
necessarily limited to, matters such as licensure, accreditation, government
health care program participation requirements, reimbursement for patient
services, and Medicare and Medicaid fraud and abuse. Recently, government
activity has increased with respect to investigations and allegations concerning
possible violations of fraud and abuse statutes and regulations by health care
providers. Violations of these laws could result in significant fines and
penalties as well as significant payments for services previously billed. Cobb
ENT is subject to similar regulatory reviews. A determination of liability under
any such laws could have a material effect on the Cobb ENT's financial position,
results of operations, stockholders' equity, and cash flows.
F-39
<PAGE> 113
COBB E.N.T. ASSOCIATES, P.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
EQUIPMENT
Equipment is carried at cost. Expenditures for maintenance and repairs are
expensed currently, while renewals and betterments that materially extend the
life of an asset are capitalized. The cost of assets sold, retired, or otherwise
disposed of and the related allowance for depreciation are eliminated from the
accounts, and any resulting gain or loss is included in operations.
Depreciation is provided using straight-line method over the estimated
useful lives for financial reporting and accelerated method for income tax
purposes. The detail of equipment at August 31, 1997 is as follows:
<TABLE>
<CAPTION>
USEFUL LIVES
-------------------
<S> <C> <C>
Automobiles............................................. $ 186,460 Five years
Computers............................................... 62,980 Five years
Furniture and fixtures.................................. 244,175 Five to seven years
Medical equipment....................................... 252,620 Five to seven years
Leasehold improvements.................................. 80,994 Three to five years
---------
827,229
Less accumulated depreciation........................... (527,533)
---------
Net equipment................................. $ 299,696
=========
</TABLE>
3. INCOME TAXES
The accompanying financial statements reflect the provision for income
taxes computed in accordance with the requirements of SFAS No. 109. The
following summarizes the components of the income tax provision (benefit) for
the year ended August 31, 1997:
<TABLE>
<S> <C>
Current:
Federal................................................... $144,519
State..................................................... 27,131
Deferred:
Federal................................................... (42,818)
State..................................................... (8,038)
--------
Provision for income taxes........................ $120,794
========
</TABLE>
The provision for income taxes differs from the amounts computed by
applying federal statutory rates due to the following:
<TABLE>
<S> <C>
Provision computed at the federal statutory rate............ $103,721
State income taxes, net of federal income tax benefit....... 12,601
Other, net.................................................. 4,472
--------
Provision for income taxes........................ $120,794
========
</TABLE>
F-40
<PAGE> 114
COBB E.N.T. ASSOCIATES, P.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The tax effect of significant temporary differences representing deferred
tax assets and liabilities at August 31, 1997 are as follows:
<TABLE>
<S> <C>
Deferred income tax assets:
Accrued liabilities....................................... $ 49,262
--------
Deferred income tax liabilities:
Tax over financial reporting depreciation................. 77,787
Accounts receivable, net.................................. 397,025
--------
Total deferred income tax liabilities............. 474,812
--------
Net deferred income tax liabilities......................... $425,550
========
</TABLE>
Management believes that a valuation allowance is not considered necessary
based on the Cobb ENT's earnings history, the projections for future taxable
income and other relevant considerations over the periods during which the
deferred income tax assets are expected to be deductible.
4. NOTES PAYABLE AND REVOLVING CREDIT FACILITY
Cobb ENT's notes payable as of August 31, 1997 are as follows:
<TABLE>
<S> <C>
$22,095 note payable to bank dated July 12, 1996; payable in
monthly installments of $456, including interest at 8.75%,
through July 1, 2001; secured by certain medical
equipment................................................. $ 18,073
$17,297 note payable to bank dated April 15, 1997; payable
in quarterly installments of $1,200, including interest at
8.75%, secured by an automobile........................... 16,435
$43,386 note payable to bank dated October 5, 1996; payable
in monthly installments of $689, including interest at
8.5%, through October 1, 2000, with a lump-sum payment of
$22,481 due October 1, 2000; secured by an automobile..... 39,477
$24,095 note payable to bank dated February 1, 1994; payable
in monthly installments of $602, including interest at 8%,
through October 15, 2001; secured by an automobile........ 3,476
$80,400 note payable to bank dated December 30, 1996 payable
in monthly installments of $7,047, including interest at
9.25%, through January 1, 1998............................ 34,396
$49,240 note payable to bank dated April 1, 1997; payable in
monthly installments of $705, including interest at 8.25%
through March 1, 2001 with a lump-sum payment of $29,395
due March 1, 2001; secured by an automobile............... 47,813
$33,381 note payable to bank dated May 3, 1996; payable in
monthly installments of $690, including interest at 8.75%,
through May 1, 2001; secured by a computer................ 26,306
$28,618 note payable to bank dated August 20, 1997; payable
in monthly installments of $592, including interest at
8.75%, through August 15, 2001; secured by an automobile.. 28,537
--------
Total............................................. 214,513
Less current maturities..................................... (88,815)
--------
Total long-term notes payable..................... $125,698
========
</TABLE>
On October 24, 1996, Cobb ENT entered into a credit agreement (the "Credit
Facility") providing maximum borrowings of $125,000 with a maturity date of
October 24, 1997. The Credit Facility consists of a $125,000 promissory note
payable. Cobb ENT uses the proceeds to fund working capital needs. Cobb ENT
F-41
<PAGE> 115
COBB E.N.T. ASSOCIATES, P.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
incurs interest expense related to the outstanding borrowing amount at 9.25%,
payable monthly. The Credit Facility is presently secured by substantially all
of Cobb ENT's assets, with the exception of assets collateralized under
preexisting credit arrangements. At August 31, 1997, the borrowings outstanding
under the Credit Facility were $70,250.
In connection with the acquisition by Physicians' Specialty Corp. ("PSC")
(Note 7), Cobb ENT paid all of its outstanding indebtedness before the
acquisition.
5. BENEFIT PLAN
Cobb ENT has a defined Contribution Plan whereby Cobb ENT makes a
discretionary contribution to the Plan. During 1997, Cobb ENT contributed
$162,053 to the Plan. Cobb ENT's contributions are allocated to eligible
participants based on eligible compensation percentages, as defined.
6. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
Cobb ENT leases facilities and office equipment under operating leases
which expire in various years through 2006. Future minimum lease payments under
these leases as of August 31, 1997 are as follows:
<TABLE>
<S> <C>
1998........................................................ $ 251,103
1999........................................................ 248,157
2000........................................................ 228,803
2001........................................................ 119,036
2002........................................................ 115,980
2003 and thereafter......................................... 508,420
----------
$1,471,499
==========
</TABLE>
Rental expense related to noncancelable operating leases was $285,079
during the year ended August 31, 1997.
LEGAL PROCEEDINGS
Cobb ENT is subject to legal proceedings and third-party 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
Cobb ENT's financial position or results of operations.
EMPLOYMENT AGREEMENTS
Cobb ENT has entered into employment agreements with certain physicians and
office personnel. The agreements, which are similar, provide for compensation to
the employees in the form of annual base salaries.
7. SUBSEQUENT EVENT
On December 31, 1997, Cobb ENT entered into an asset purchase agreement
with PSC, a Delaware corporation. This agreement provided for PSC to acquire
certain amounts of accounts receivable and fixed assets in exchange for cash and
stock in PSC. Concurrent with this agreement, Cobb ENT entered into a management
agreement whereby PSC would manage Cobb ENT for a certain percentage of revenue,
as defined.
F-42
<PAGE> 116
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Atlanta Ear, Nose, and Throat Associates, P.C.:
We have audited the accompanying balance sheet of ATLANTA EAR, NOSE, AND
THROAT ASSOCIATES, P.C. (a Georgia corporation) as of December 31, 1996 and the
related statements of operations, owners' equity, and cash flows for each of the
two years in the period ended December 31, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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, 1996 and the results of its
operations and its cash flows for each of the two years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
January 17, 1997
F-43
<PAGE> 117
ATLANTA EAR, NOSE, AND THROAT ASSOCIATES, P.C.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 2)........................ $ 4,409
Accounts receivable, less estimated allowances for
uncollectible accounts of $56,014 in 1996 (Note 2)..... 2,967,772
Account receivable due from related party (Notes 2 and
9)..................................................... 309,222
Note receivable due from related party (Note 9)........... 170,500
Prepayments and other..................................... 76,851
----------
3,528,754
PROPERTY AND EQUIPMENT, net................................. 1,329,915
OTHER ASSETS................................................ 39,649
----------
Total assets...................................... $4,898,318
==========
LIABILITIES AND OWNERS' EQUITY
CURRENT LIABILITIES:
Current portion of note payable (Note 4).................. $ 242,496
Accounts payable.......................................... 240,012
Accrued compensation to owners............................ 2,553,194
Other accrued liabilities................................. 775,422
----------
3,811,124
----------
NONCURRENT LIABILITIES:
Deferred rent............................................. 152,708
Note payable, net of current portion (Note 4)............. 868,964
----------
1,021,672
----------
COMMITMENTS AND CONTINGENCIES (Notes 7 and 8)
OWNERS' EQUITY (Note 2):
Common stock, $1 par value; 10,000 shares authorized;
1,000 shares issued and outstanding.................... 1,000
Additional paid-in capital................................ 64,522
Retained earnings......................................... 0
----------
Total owners' equity.............................. 65,522
----------
Total liabilities and owners' equity.............. $4,898,318
==========
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-44
<PAGE> 118
ATLANTA EAR, NOSE, AND THROAT ASSOCIATES, P.C.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1996
----------- -----------
<S> <C> <C>
NET PATIENT SERVICE REVENUES (Note 2):
Related party (Note 9).................................... $ 2,619,165 $ 2,969,202
Other..................................................... 7,671,384 10,639,910
----------- -----------
10,290,549 13,609,112
----------- -----------
OPERATING EXPENSES:
Salaries, wages, and benefits............................. 3,922,240 5,208,972
Compensation to owner-physicians.......................... 3,961,310 5,005,696
Bad debt expense.......................................... 233,069 196,567
General and administrative expenses:
Related party.......................................... 276,235 519,830
Other.................................................. 1,608,378 2,320,777
Depreciation and amortization............................. 275,072 360,594
----------- -----------
10,276,304 13,612,436
----------- -----------
INCOME (LOSS) FROM OPERATIONS............................... 14,245 (3,324)
OTHER (INCOME) EXPENSE, net (Note 10)....................... 14,245 (3,324)
----------- -----------
NET INCOME.................................................. $ -- $ --
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-45
<PAGE> 119
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, 1994.......................... 1,000 $1,000 $64,522 $-- $65,522
Net income.......................................... -- -- -- -- --
----- ------ ------- --- -------
BALANCE, December 31, 1995.......................... 1,000 1,000 64,522 -- 65,522
Net income.......................................... -- -- -- -- --
----- ------ ------- --- -------
BALANCE, December 31, 1996.......................... 1,000 $1,000 $64,522 $-- $65,522
===== ====== ======= === =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-46
<PAGE> 120
ATLANTA EAR, NOSE, AND THROAT ASSOCIATES, P.C.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996
--------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ -- $ --
--------- -----------
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 275,072 360,594
(Increase) decrease in assets:
Accounts receivable.................................. (410,896) (1,273,360)
Prepayments and other assets......................... (17,371) (71,585)
Increase (decrease) in liabilities:
Accounts payable..................................... (58,853) 127,539
Accrued liabilities and deferred rent................ 667,066 1,203,159
--------- -----------
Total adjustments................................. 455,018 346,347
--------- -----------
Net cash provided by operating activities......... 455,018 346,347
--------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Notes receivable due from related party................... -- (170,500)
Capital expenditures...................................... (541,143) (704,415)
--------- -----------
Net cash provided by (used in) investing activities....... (541,143) (874,915)
--------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on notes payable....................... (286,000) (368,540)
Borrowings under notes payable............................ 749,810 500,000
--------- -----------
Net cash provided by (used in) financing
activities...................................... 463,810 131,460
--------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 377,685 (397,108)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 23,832 401,517
--------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 401,517 $ 4,409
========= ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest............................................... $ 33,666 $ 87,641
========= ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-47
<PAGE> 121
ATLANTA EAR, NOSE, AND THROAT ASSOCIATES, P.C.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
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, seven 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 using
accelerated methods 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 common stock, additional paid-in
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.
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.
F-48
<PAGE> 122
ATLANTA EAR, NOSE, AND THROAT ASSOCIATES, P.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
3. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1996 consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
Leasehold improvements...................................... $ 321,870
Equipment................................................... 2,000,194
Furniture and fixtures...................................... 346,708
-----------
2,668,772
Less accumulated depreciation............................... (1,338,857)
-----------
$ 1,329,915
===========
</TABLE>
4. NOTES PAYABLE
The Company's note payable at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
1996
----------
<S> <C>
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.................................... $1,111,460
----------
1,111,460
Less current portion........................................ 242,496
----------
Notes payable due after one year............................ $ 868,964
==========
</TABLE>
The aggregate maturities of notes payable at December 31, 1996 are as
follows:
<TABLE>
<S> <C>
1997........................................................ $ 242,496
1998........................................................ 242,496
1999........................................................ 242,496
2000........................................................ 242,496
2001 and thereafter......................................... 141,476
----------
$1,111,460
==========
</TABLE>
F-49
<PAGE> 123
ATLANTA EAR, NOSE, AND THROAT ASSOCIATES, P.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 $9,755 and $15,767 in 1995 and 1996, respectively.
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, 1996 are as follows:
<TABLE>
<S> <C>
1997........................................................ $ 925,382
1998........................................................ 866,591
1999........................................................ 722,956
2000........................................................ 652,659
2001 and thereafter......................................... 4,599,171
</TABLE>
Lease expense for the years ended December 31, 1995 and 1996, totaled
approximately $597,000 and $1,004,000, 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, 1996 are approximately:
<TABLE>
<S> <C>
1997........................................................ $950,000
1998........................................................ 540,000
1999........................................................ 140,000
2000 and thereafter......................................... --
</TABLE>
8. LEGAL PROCEEDINGS
The Company is subject to legal proceedings and third party 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.
F-50
<PAGE> 124
ATLANTA EAR, NOSE, AND THROAT ASSOCIATES, P.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. RELATED PARTY TRANSACTIONS
For the years ended December 31, 1995 and 1996, the Company expensed
approximately $215,000 and $430,000, respectively, in annual rent for its
location at the Medical Quarters to a certain stockholder who owns this
location.
For the years ended December 31, 1995 and 1996, the Company expensed
approximately $39,000 and $68,000, respectively, in rent for its Snellville
location to a partnership in which certain stockholders are partners.
For the years ended December 31, 1995 and 1996, the Company expensed
approximately $22,000, and $22,000, respectively, in annual rent for its Duluth
location to a partnership in which a certain stockholder is partner.
For the years ended December 31, 1995 and 1996, the Company recorded
revenue of approximately $2,619,000 and $2,969,000, respectively, in discounted
fee-for-service payments from three companies which are solely owned by a
certain stockholder of the Company. In addition for the years ended December 31,
1995 and 1996, the Company recorded approximately $65,000 and $48,000,
respectively, in salary and expense reimbursements from these three companies
for work performed by two employees of the Company.
During 1996, the Company loaned $170,500 to a related party organization.
This unsecured note receivable is due the earlier of the closing of a stock
offering or June 30, 1997, bearing interest at prime.
10. OTHER INCOME AND EXPENSE
Other (income) expense, net for the years ended December 31, 1995 and 1996
is as follows:
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Recruiting fee revenue...................................... $ -- $(72,223)
Interest expense............................................ 33,666 87,641
Interest income............................................. (8,863) (10,619)
Miscellaneous income........................................ (10,558) (8,123)
-------- --------
$ 14,245 $ (3,324)
======== ========
</TABLE>
F-51
<PAGE> 125
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, 1996 and the
related combined statements of operations, owner's equity, and cash flows for
each of the two years in the period ended December 31, 1996. 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, 1996 and the results of their operations and their cash flows for
each of the two years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
January 17, 1997
F-52
<PAGE> 126
ENT NETWORKS
COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $827,649
EQUIPMENT, net.............................................. 13,084
--------
Total assets...................................... $840,733
========
LIABILITIES AND OWNER'S EQUITY
CURRENT LIABILITIES:
Claims payable............................................ $ 36,866
Claims payable due to related party....................... 309,222
--------
346,088
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
Retained earnings......................................... 492,645
--------
Total owner's equity.............................. 494,645
--------
Total liabilities and owner's equity.............. $840,733
========
</TABLE>
The accompanying notes are an integral part of this combined balance sheet.
F-53
<PAGE> 127
ENT NETWORKS
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996
---------- ----------
<S> <C> <C>
CAPITATION REVENUE (Note 2)................................. $4,168,279 $4,452,995
---------- ----------
OPERATING EXPENSES:
Salaries, wages, and benefits:
Related party.......................................... 64,600 48,379
Other.................................................. -- 36,121
General and administrative expenses:
Related party.......................................... 170,792 167,397
Other.................................................. -- --
Depreciation.............................................. 6,395 2,672
Provider claims:
Related party.......................................... 2,619,165 2,969,202
Other.................................................. 273,481 247,751
---------- ----------
3,134,433 3,471,522
---------- ----------
INCOME FROM OPERATIONS...................................... 1,033,846 981,473
OTHER INCOME, net........................................... 33,476 23,470
---------- ----------
NET INCOME.................................................. $1,067,322 $1,004,943
========== ==========
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-54
<PAGE> 128
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, 1994................... 2,000 $ -- $2,000 $ (255,930) $ (253,930)
Distributions.............................. -- -- -- (943,340) (943,340)
Net income................................. -- -- -- 1,067,322 1,067,322
----- ---- ------ ----------- -----------
BALANCE, December 31, 1995................... 2,000 -- 2,000 (131,948) (129,948)
Distributions.............................. -- -- -- (380,350) (380,350)
Net income................................. -- -- -- 1,004,943 1,004,943
----- ---- ------ ----------- -----------
BALANCE, December 31, 1996................... 2,000 $ -- $2,000 $ 492,645 $ 494,645
===== ==== ====== =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-55
<PAGE> 129
ENT NETWORKS
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $1,067,322 $1,004,943
---------- ----------
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 6,395 2,672
Increase (decrease) in claims payable.................. (113,957) (89,955)
---------- ----------
Total adjustments................................. (107,562) (87,283)
---------- ----------
Net cash provided by operating activities......... 959,760 917,660
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (5,862) (11,715)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to owners................................... (943,340) (380,350)
---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 10,558 525,595
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 291,496 302,054
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 302,054 $ 827,649
========== ==========
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-56
<PAGE> 130
ENT NETWORKS
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
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 accelerated
methods 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.
PROVIDER CLAIMS
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-57
<PAGE> 131
ENT NETWORKS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. EQUIPMENT
Equipment at December 31, 1996 consisted of the following:
<TABLE>
<CAPTION>
DECEMBER
31,
--------
1996
--------
<S> <C>
Equipment................................................... $ 31,363
Less accumulated depreciation............................... (18,279)
--------
$ 13,084
========
</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 third party 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 and 1996, the ENT Networks expensed
approximately $2,619,000 and $2,969,000, 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 and 1996, the ENT Networks
recorded approximately $65,000 and $48,000, 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 and 1996, the ENT Networks expensed
approximately $171,000 and $167,000, respectively, to its owner and a related
physician in administrative and management fees.
F-58
<PAGE> 132
=======================================================
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, ANY SELLING STOCKHOLDER 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
Risk Factors............................ 8
Use of Proceeds......................... 19
Price Range of Common Stock............. 20
Dividend Policy......................... 20
Capitalization.......................... 21
Unaudited Pro Forma Combined Financial
Data.................................. 22
Selected Financial Data................. 26
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 27
Business................................ 35
Management.............................. 53
Certain Transactions.................... 62
Principal and Selling Stockholders...... 65
Description of Capital Stock............ 67
Shares Eligible for Future Sale......... 69
Underwriting............................ 70
Legal Matters........................... 71
Experts................................. 71
Additional Information.................. 72
Index to Financial Statements........... F-1
</TABLE>
=======================================================
=======================================================
2,150,000 SHARES
PHYSICIANSI SPECIALTY CORP. LOGO
PHYSICIANS'
SPECIALTY CORP.
COMMON STOCK
---------------------------
PROSPECTUS
, 1998
---------------------------
VOLPE BROWN WHELAN & COMPANY
HAMBRECHT & QUIST
BARINGTON CAPITAL GROUP
======================================================
<PAGE> 133
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses payable by the Registrant in connection with the
issuance and distribution of the securities being registered (other than
underwriting discounts and commissions) are as follows:
<TABLE>
<CAPTION>
AMOUNT
------
<S> <C>
SEC Registration Fee........................................ $7,613
NASD Filing Fee............................................. 3,081
Nasdaq Listing Fee.......................................... 17,500
Printing and Engraving Expenses............................. *
Accounting Fees and Expenses................................ *
Legal Fees and Expenses..................................... *
Blue Sky Fees and Expenses.................................. *
Transfer Agent's Fees and Expenses.......................... *
Miscellaneous Expenses...................................... *
------
Total............................................. *
======
</TABLE>
- ------------------------------
* To be completed by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Certificate of Incorporation and By-Laws of the Registrant provides
that the Company shall indemnify any person to the full extent permitted by the
General Corporation Law of the State of Delaware (the "DGCL"). Section 145 of
the DGCL, relating to indemnification, is hereby incorporated herein by
reference.
Insofar as indemnification for liabilities under the Securities Act may be
permitted to directors, officers or controlling persons of the Company pursuant
to the Company's Certificate of Incorporation, By-Laws and the DGCL, the Company
has been informed that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is therefore unenforceable.
The Company's Certificate of Incorporation includes certain provisions
permitted pursuant to Delaware law whereby officers and directors of the Company
are to be indemnified against certain liabilities. The Company's Certificate of
Incorporation also limits, to the fullest extent permitted by Delaware law, a
director's liability for monetary damages for breach of fiduciary duty,
including gross negligence, except liability for (i) breach of the director's
duty of loyalty, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of the law, (iii) the unlawful
payment of a dividend or unlawful stock purchase or redemption and (iv) any
transaction from which the director derives an improper personal benefit.
Delaware law does not eliminate a director's duty of care and this provision has
no effect on the availability of equitable remedies such as injunction or
rescission based upon a director's breach of the duty of care.
In accordance with Section 102(a)(7) of the DGCL, the Certificate of
Incorporation of the Registrant eliminates the personal liability of directors
to the Company or its stockholders for monetary damages for breach of fiduciary
duty as a director with certain limited exceptions set forth in Section
102(a)(7).
The Registrant has entered into indemnification agreements with each of its
executive officers and directors, the form of which was filed as Exhibit 10.15
to the Registrant's Registration Statement on Form S-1 (File No. 333-17091)
hereto and reference is hereby made to such form.
Reference is made to the Underwriting Agreement (Exhibit 1.1) which
provides for indemnification by the Underwriters of the Registrant, its officers
and directors.
II-1
<PAGE> 134
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In connection with the formation of the Registrant, Ramie A. Tritt, M.D.
and Bock, Benjamin & Co., Partners, L.P. were each issued, in August 1996,
275,000 shares of Common Stock of the Registrant 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 December 1996, Dr. Tritt and Bock, Benjamin & Co.,
Partners, L.P. purchased an additional 19,720 and 18,948 shares of Common Stock,
respectively, at purchase prices of approximately $.0056 and $.0081,
respectively, per share.
In connection with the acquisition in March 1997 of substantially all of
the assets of (i) Atlanta Ear, Nose & Throat Associates, P.C., (ii) Metropolitan
Ear, Nose & Throat, P.C., (iii) Atlanta Head and Neck Surgery, P.C., (iv) Ear,
Nose & Throat Associates, P.C. and (v) W.J. Cornay, III, M.D., P.C. and (vi) the
outstanding shares of capital stock of ENT Networks, the Company issued an
aggregate of 3,104,755 shares of Common Stock to the physician shareholders of
the practices and the physician owner of the ENT Networks.
In connection with the acquisition of substantially all of the assets of
(i) Allatoona in July 1997, (ii) ENT Specialists in July 1997, (iii) ENT
Specialist, H&N in July 1997, (iv) Northside in August 1997, (v) OMSA in
September 1997, (vi) Cobb in December 1997, and (vii) Murata in February 1998
the Company issued an aggregate of 611,215 shares of Common Stock, agreed to
issue an aggregate of 301,779 additional shares of Common Stock beginning in
September 1998, and issued approximately $750,000 aggregate principal amount of
contingent convertible promissory notes, $600,000 of principal amount of which
is payable solely in Common Stock, and the remaining $150,000 is payable in cash
or common stock. Payment of these notes is contingent upon the holders of such
notes reaching certain performance thresholds. All of the shares of Common Stock
and notes were issued to the physician shareholders of the practices.
In connection with the acquisition of six Florida professional corporations
and related assets, in October 1997, the Company issued (i) approximately
$912,000 aggregate principal amount of convertible promissory notes, which notes
mature in October 2000, accrue simple interest at a rate of 5.61% per annum and
are convertible, at the option of the holders, into shares of Common Stock at
$10.00 per share and (ii) approximately $2.25 million aggregate principal amount
of contingent convertible promissory notes which are payable, contingent upon
the holders of such notes reaching certain performance thresholds. These notes
are payable in Common Stock, at the option of the Company, and are non-interest
bearing. These notes were issued to the physician shareholders of the practice.
The above transactions were private transactions not involving a public
offering and were exempt from the registration provisions of the Securities Act
of 1933, as amended, pursuant to Section 4(2) or Regulation D thereof. The sale
of securities was without the use of an underwriter, and the certificates
evidencing the shares bear a restrictive legend permitting the transfer thereof
only upon registration of the shares or an exemption under the Securities Act of
1933, as amended.
ITEM 16. EXHIBITS
<TABLE>
<C> <S> <C>
1.1 -- Form of Underwriting Agreement
3.1 -- Certificate of Incorporation of the Registrant(1)
3.2 -- Amended and Restated By-laws of the Registrant(1)
4.1 -- Promissory Notes issued by the Registrant(5)
5.1 -- Opinion of Bachner, Tally, Polevoy & Misher LLP*
10.1 -- Asset Acquisition Agreement dated November 26, 1996 between
the Registrant, PSC Management Corp. and Atlanta Ear, Nose &
Throat Associates, P.C. ("Atlanta ENT")(1)
10.2 -- Acquisition Agreement dated November 26, 1996 between the
Registrant, PSC Acquisition Corp. and Ramie A. Tritt,
M.D.(1)
10.3 -- Amended and Restated Employment Agreement between the
Registrant and Ramie A. Tritt, M.D. dated as of February 10,
1997(1)
</TABLE>
II-2
<PAGE> 135
<TABLE>
<C> <S> <C>
10.4 -- Employment Agreement between the Registrant and Richard D.
Ballard dated as of November 26, 1996(1)
10.5 -- Employment Agreement between the Registrant and Gerald R.
Benjamin dated as of November 26, 1996(1)
10.6 -- Management Services Agreement to be entered into between the
Registrant, PSC Management Corp. and Atlanta ENT(1)
10.7 -- Asset Purchase Agreement dated August 1, 1996 among PSC
Management Corp. ("PSC Management") and ENT Center of
Atlanta, Inc., Atlanta ENT Center for Physicians, Inc. and
Atlanta-AHP, Inc. (the "ENT Networks")(1)
10.8 -- Form of Registration Rights Agreement(1)
10.9 -- Promissory Note payable by PSC Management to the ENT
Networks in the principal amount of $20,000(1)
10.10 -- Lease Agreement for office space located at The Medical
Quarters, 5555 Peachtree Dunwoody Road, Suite 235, Atlanta,
Georgia dated October 1, 1988 between Atlanta ENT and Ramie
A. Tritt, M.D., as amended(1)
10.11 -- Lease Agreement for office space located at the Gwinnett
Medical Building, 3540 Duluth Park Lane, Duluth Georgia
dated December 29, 1989 between Duluth Professional Center,
L.P., Gwinnett Pulmonology, P.C. and Atlanta ENT as
amended(1)
10.12 -- Lease Agreement for office space located at Eastside
Physicians Center, 1700 Tree Lane, Snellville, Georgia dated
July 11, 1994 and effective June 1, 1995 between Atlanta ENT
and Eastside Physicians Center, L.P.(1)
10.13 -- 1996 Stock Option Plan(1)
10.14 -- 1996 Health Care Professionals Stock Option Plan(1)
10.15 -- Form of Indemnification Agreement(1)
10.16 -- Group Practice Managed Care Agreement dated September 1,
1992 by and between CIGNA HealthCare of Georgia, Inc. and
The ENT Center of Atlanta, Inc.+(1)
10.17 -- Physician Network Participation Agreement dated as of July
1, 1994 by and between Atlanta-AHP, Inc. and Aetna Health
Management, Inc.+(1)
10.18 -- Agreement dated June 1, 1995 by and between United
HealthCare of Georgia, Inc. and Atlanta ENT Center for
Physicians, Inc.+(1)
10.19 -- Non-Negotiable Promissory Note payable by the Registrant to
Gerald R. Benjamin in the principal amount of $33,500 (one
in a series of identical notes in the aggregate amount of
$485,000)(1)
10.20 -- Non-Negotiable Promissory Note payable by the Registrant to
Ramie A. Tritt, M.D. in the principal amount of $33,500 (one
in a series of identical notes in the aggregate amount of
$485,000)(1)
10.21 -- Termination Agreement effective as of October 7, 1996 by and
among Kevin Thomas, M.D., Stephen B. Levine, M.D., various
affiliated professional corporations affiliated with Thomas
and Levine, Ramie A. Tritt, M.D., Atlanta ENT, Rande H.
Lazar, M.D., Otolaryngology of Memphis, P.C., Gerald R.
Benjamin, Premier HealthCare and the Registrant(1)
10.22 -- Commitment Letter from NationsBank, N.A. to the
Registrant(1)
10.23 -- Employment Agreement between the Registrant and Robert A.
DiProva dated as of January 6, 1997(1)
10.24 -- Employment Agreement between the Registrant and Lawrence P.
Kraska dated as of February 11, 1997(1)
10.25 -- Acquisition Agreement dated as of February 13, 1997 by and
among the Registrant, PSC Acquisition Corp. and Metropolitan
Ear, Nose & Throat, P.C.(1)
10.26 -- Acquisition Agreement dated as of February 13, 1997 by and
among the Registrant, PSC Acquisition Corp. and Atlanta Head
and Neck Surgery, P.C.(1)
10.27 -- Acquisition Agreement dated as of February 13, 1997 by and
among the Registrant, PSC Acquisition Corp. and Ear, Nose &
Throat Associates, P.C.(1)
10.28 -- Acquisition Agreement dated as of February 20, 1997 by and
among the Registrant, PSC Acquisition Corp. and W.J. Cornay,
III, M.D., P.C.(1)
</TABLE>
II-3
<PAGE> 136
<TABLE>
<C> <S> <C>
10.29 -- Non-Negotiated Promissory Note payable by the Registrant to ENT Center of Atlanta, Inc. in the
principal amount of $168,108.46(1)
10.30 -- Non-Negotiable Promissory Note payable by the Registrant to Bock, Benjamin & Co., Partners, L.P. in the
principal amount of $1,891.54(1)
10.31 -- Consulting Agreement dated August 16, 1996 between the Registrant and Barington Capital Group, L.P., as
amended(1)
10.32 -- Formation Agreement dated June 26, 1996 by and among Kevin Thomas, M.D., Stephen B. Levine, M.D.,
various affiliated professional corporations affiliated with Thomas and Levine, Ramie A. Tritt, M.D.,
Atlanta ENT, Rande H. Lazar, M.D., Otolaryngology of Memphis, P.C., Gerald R. Benjamin and Premier
HealthCare(1)
10.33 -- Credit Facility by and between the Registrant and NationsBank, N.A. (South) dated April 30, 1997(2)
10.34 -- Agreement dated May 19, 1997 by and between the Registrant and Premier HealthCare(3)
10.35 -- Management Services Agreement dated July 1, 1997 by and among New Allatoona E.N.T. & Facial Plastic
Surgery, P.C., Thomas U. Muller, M.D., PSC Management Corp. and the Registrant(4)
10.36 -- Management Services Agreement dated September 22, 1997 by and among New Otolaryngology Medical and
Surgical Associates, Ltd., PSC Management Corp. and the Registrant(4)
10.37 -- Specialist Group Physician Agreement dated August 1, 1997 by and between AHI Medical Group Atlanta,
P.C. and ENT Center of Atlanta, Inc.(4)+
10.38 -- Lease dated July 31, 1997 by and between the Registrant and Pavilion Partners, L.P.(4)
10.39 -- Stock Purchase Agreement dated as of October 31, 1997 by and among the Registrant, PSC Management
Corp., South Florida Otolaryngology, Inc. and the other parties named therein(5)
10.40 -- Asset Purchase Agreement dated December 31, 1997 among the Registrant, PSC Management Corp. and Cobb
Ear, Nose & Throat Associates, P.C.(5)
10.41 -- Management Services Agreement dated October 31, 1997 by and among New Ear, Nose & Throat Associates of
South Florida, P.A., PSC Management Corp. and the Registrant(6)
10.42 -- 1997 Employee Stock Purchase Plan(6)
10.43 -- Amendment No. 1 to Restated and Amended Lease Agreement dated January 1, 1998 between Ramie A. Tritt,
M.D. and the Registrant as successor in interest to Atlanta ENT(5)
10.44 -- Amendment dated March 19, 1998 to Agreement dated May 19, 1997 by and between the Registrant and
Premier HealthCare(6)
10.45 -- Amendment No. 1 to Employment Agreement dated as of March 25, 1998 between the Registrant and Gerald R.
Benjamin.
21.1 -- Subsidiaries of the Registrant(6)
23.1 -- Consent of Bachner, Tally, Polevoy & Misher LLP (Exhibit 5.1)*
23.2 -- Consent of Arthur Andersen LLP -- Included on page II-8
24.1 -- Power of Attorney -- Included on page II-6
27.1 -- Financial Data Schedule
</TABLE>
- ------------------------------
+ Confidential treatment was granted with respect to portions of this exhibit.
* To be filed by amendment.
(1) Incorporated by reference to the Registrant's Registration Statement on Form
S-1 (File No. 333-17091) declared effective on March 20, 1997.
(2) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the three months ended March 31, 1997.
(3) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the six months ended June 30, 1997.
(4) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the nine months ended September 30, 1997.
(5) Incorporated by reference to the Registrant's Current Report on Form 8-K
filed on March 24, 1998.
II-4
<PAGE> 137
(6) Incorporated by reference to Registrant's Annual Report on Form 10-K for the
year ended December 31, 1997.
ITEM 17. UNDERTAKINGS
UNDERTAKING REQUIRED BY REGULATION S-K, ITEM 512(H)
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
UNDERTAKINGS REQUIRED BY REGULATION S-K, ITEM 512(I)
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, as amended, the information omitted from the form of prospectus
filed as part of this Registration Statement in reliance upon Rule
430A and contained in the form of prospectus filed by the Registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act
shall be deemed to be part of this Registration Statement as of the
time it was declared effective.
(2) For purposes of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.
II-5
<PAGE> 138
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement or Amendment thereto to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Atlanta, State of Georgia on the 16 day of April, 1998.
PHYSICIANS' SPECIALTY CORP.
By: /s/ RAMIE A. TRITT, M.D.
------------------------------------
Ramie A. Tritt, M.D.
Chairman of the Board and President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below under the heading "Signature" constitutes and appoints Ramie A. Tritt,
M.D. and Gerald R. Benjamin or either of them, his true and lawful
attorney-in-fact and gent with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities to sign any
or all amendments (including post-effective amendments) to this registration
statement and any related registration statement filed under Rule 462(b), and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, each acting alone, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully for all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, each acting alone, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
SIGNATURE
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ RAMIE A. TRITT, M.D. Chairman of the Board and April 16,
- ----------------------------------------------------- President (principal executive 1998
Ramie A. Tritt, M.D. officer)
/s/ RICHARD D. BALLARD Chief Executive Officer and April 16,
- ----------------------------------------------------- Director 1998
Richard D. Ballard
/s/ GERALD R. BENJAMIN Vice Chairman of the Board and April 16,
- ----------------------------------------------------- Secretary 1998
Gerald R. Benjamin
/s/ ROBERT A. DIPROVA Executive Vice President and April 16,
- ----------------------------------------------------- Chief Financial Officer 1998
Robert A. DiProva
/s/ LAWRENCE P. KRASKA Vice President-Operations April 16,
- ----------------------------------------------------- 1998
Lawrence P. Kraska
/s/ EDWARD R. CASAS, M.D. Director April 16,
- ----------------------------------------------------- 1998
Edward R. Casas, M.D.
</TABLE>
II-6
<PAGE> 139
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ SIDNEY KIRSCHNER Director April 16,
- ----------------------------------------------------- 1998
Sidney Kirschner
/s/ STEVEN L. POSAR, M.D. Director April 16,
- ----------------------------------------------------- 1998
Steven L. Posar, M.D.
</TABLE>
II-7
<PAGE> 140
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports and to all references to our firm included in or made a part of this
Registration Statement.
Arthur Andersen LLP
Atlanta, Georgia
April 16, 1998
II-8
<PAGE> 1
EXHIBIT 1.1
2,150,000 Shares(1)
PHYSICIANS' SPECIALTY CORP.
Common Stock
UNDERWRITING AGREEMENT
__________, 1998
Volpe, Brown Whelan & Company, LLC
As Representatives of the several Underwriters
c/o Volpe, Brown Whelan & Company, LLC
One Maritime Plaza, 11th Floor
San Francisco, California 94111
Dear Sirs and Madams:
Physicians' Specialty Corp., a Delaware corporation (the "Company"),
proposes to issue and sell 2,000,000 shares of its authorized but unissued
Common Stock, $.001 par value (the "Common Stock"), and the stockholders of the
Company named in Schedule II hereto (collectively, the "Selling
Securityholders") propose to sell an aggregate of 150,000 shares of Common Stock
of the Company (the "Firm Shares"). The Company and the Selling Securityholders
propose to grant to the Underwriters (as defined below) an option to purchase up
to 322,500 additional shares of Common Stock (the "Optional Shares" and, with
the Firm Shares, collectively, the "Shares"). The Common Stock is more fully
described in the Registration Statement and the Prospectus hereinafter
mentioned.
The Company and the Selling Securityholders severally hereby confirm
the agreements made with respect to the purchase of the shares by the several
underwriters, for whom you are acting, named in Schedule I hereto (collectively,
the "Underwriters," which term shall also include any underwriter purchasing
Shares pursuant to Section 3(b) hereof). You represent and warrant that you have
been authorized by each of the other Underwriters to enter into this Agreement
on its behalf and to act for it in the manner herein provided.
SECTION 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
hereby represents and warrants to the several Underwriters as of the date hereof
and as of each Closing Date (as defined below) that:
- -------------------
(1) Plus an option to purchase from the Company and the Selling Securityholders
up to 322,500 additional shares to cover over-allotments.
<PAGE> 2
(a) The Company has filed with the Securities and Exchange
Commission (the "Commission") a registration statement on Form S-l (No.
333-______), including the related preliminary prospectus, for the registration
under the Securities Act of 1933, as amended (the "Securities Act") of the
Shares. Copies of such registration statement and of each amendment thereto, if
any, including the related preliminary prospectus (meeting the requirements of
Rule 430A of the rules and regulations of the Commission) heretofore filed by
the Company with the Commission have been delivered to you.
The term Registration Statement as used in this agreement shall
mean such registration statement, including all exhibits and financial
statements, all information omitted therefrom in reliance upon Rule 430A and
contained in the Prospectus referred to below, in the form in which it became
effective, and any registration statement filed pursuant to Rule 462(b) of the
rules and regulations of the Commission with respect to the shares (a "Rule
462(b) registration statement"), and, in the event of any amendment thereto
after the effective date of such registration statement (the "Effective Date"),
shall also mean (from and after the effectiveness of such amendment) such
registration statement as so amended (including any Rule 462(b) registration
statement). The term Prospectus as used in this Agreement shall mean the
prospectus relating to the Shares first filed with the Commission pursuant to
Rule 424(b) and Rule 430A (or if no such filing is required, as included in the
Registration Statement) and, in the event of any supplement or amendment to such
prospectus after the Effective Date, shall also mean (from and after the filing
with the Commission of such supplement or the effectiveness of such amendment)
such prospectus as so supplemented or amended. The term Preliminary Prospectus
as used in this Agreement shall mean each preliminary prospectus included in
such registration statement prior to the time it becomes effective.
The Registration Statement has been declared effective under the
Securities Act, and no post-effective amendment to the Registration Statement
has been filed as of the date of this Agreement. The Company has caused to be
delivered to you copies of each Preliminary Prospectus and has consented to the
use of such copies for the purposes permitted by the Securities Act.
(b) Each of the Company and its subsidiaries have been duly
incorporated and is validly existing as a corporation in good standing under the
laws of the jurisdiction of its incorporation, has full corporate power and
authority to own or lease its properties and conduct its business as described
in the Registration Statement and the Prospectus and as being conducted, and is
duly qualified as a foreign corporation and in good standing in all
jurisdictions in which the character of the property owned or leased or the
nature of the business transacted by it makes qualification necessary (except
where the failure to be so qualified would not have a material adverse effect on
the business, business prospects, properties, condition (financial or otherwise)
or results of operations of the Company and its subsidiaries, taken as a whole).
(c) The Company does not own or control, directly or indirectly,
any corporation, association or other entity other than the subsidiaries listed
in Exhibit 21 to the Registration Statement. Except as described in the
Prospectus, the Company owns all of the outstanding capital stock of its
subsidiaries free and clear of all claims, liens, charges and encumbrances. The
Company and each of its subsidiaries are in possession of and operating in
compliance with all
2
<PAGE> 3
material authorizations, licenses, permits, consents, certificates and orders
material to the conduct of their respective businesses as described in the
Prospectus, all of which are valid and in full force and effect.
(d) Since the respective dates as of which information is given in
the Registration Statement and the Prospectus, there has not been any materially
adverse change in the business, business prospects, properties, condition
(financial or otherwise) or results of operations of the Company and its
subsidiaries, taken as a whole, whether or not arising from transactions in the
ordinary course of business, other than as set forth in the Registration
Statement and the Prospectus, and since such dates, except in the ordinary
course of business, neither the Company nor any of its subsidiaries has entered
into any material transaction not referred to in the Registration Statement and
the Prospectus.
(e) The Registration Statement and the Prospectus comply, and on
the Closing Date (as hereinafter defined) and any later date on which Optional
Shares are to be purchased, the Prospectus will comply, in all material
respects, with the provisions of the Securities Act and the Securities Exchange
Act of 1934, as amended (the "Exchange Act") and the rules and regulations of
the Commission thereunder; on the Effective Date, the Registration Statement did
not contain any untrue statement of a material fact and did not omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein not misleading; and, on the Effective Date the Prospectus
did not and, on the Closing Date and any later date on which Optional Shares are
to be purchased, will not contain any untrue statement of a material fact or
omit to state any material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; provided, however, that none of the representations and warranties
in this subparagraph (e) shall apply to statements in, or omissions from, the
Registration Statement or the Prospectus made in reliance upon and in conformity
with information herein or otherwise furnished in writing to the Company by or
on behalf of the Underwriters for use in the Registration Statement or the
Prospectus.
(f) The Company has authorized and outstanding capital stock as
set forth under the heading "Capitalization" in the Prospectus. The issued and
outstanding shares of Common Stock have been duly authorized and validly issued,
are fully paid and nonassessable, have been issued in compliance with all
federal and state securities laws, and were not issued in violation of or
subject to any preemptive rights or other rights to subscribe for or purchase
securities. All issued and outstanding shares of capital stock of each
subsidiary of the Company have been duly authorized and validly issued and are
fully paid and nonassessable. Except as disclosed in or contemplated by the
Prospectus and the financial statements of the Company and the related notes
thereto included in the Prospectus, neither the Company nor any subsidiary has
any outstanding options to purchase, or any preemptive rights or other rights to
subscribe for or to purchase, any securities or obligations convertible into, or
any contracts or commitments to issue or sell, shares of its capital stock or
any such options, rights, convertible securities or obligations. The description
of the Company's stock option, stock bonus and other stock plans or
arrangements, and the options or other rights granted and exercised thereunder,
set forth in the Prospectus accurately and fairly presents the information
required by the Securities Act and the Rules and Regulations to be shown with
respect to such plans, arrangements, options and rights.
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(g) The Shares are duly authorized, are (or, in the case of Shares
to be sold by the Company, will be, when issued and sold to the Underwriters as
provided herein) validly issued, fully paid and nonassessable and conform to the
description thereof in the Prospectus. No further approval or authority of the
stockholders or the Board of Directors of the Company will be required for the
transfer and sale of the Shares to be sold by the Selling Securityholders or the
issuance and sale of the Shares to be sold by the Company as contemplated
herein.
(h) The Shares to be sold by the Selling Securityholders are
listed and duly admitted to trading on the Nasdaq National Market, and prior to
the Closing Date, the Shares to be issued and sold by the Company will be
authorized for listing on the Nasdaq National Market upon official notice of
issuance.
(i) The Shares to be sold by the Company will be sold free and
clear of any pledge, lien, security interest, encumbrance, claim or equitable
interest, and will conform to the description thereof contained in the
Prospectus. No preemptive right, co-sale right, registration right, right of
first refusal or other similar right to subscribe for or purchase securities of
the Company exists with respect to the issuance and sale of the Shares by the
Company pursuant to this Agreement. No stockholder of the Company has any right
which has not been waived, or complied with, to require the Company to register
the sale of any shares owned by such stockholder under the Securities Act in the
public offering contemplated by this Agreement.
(j) The Company has full corporate power and authority to enter
into this Agreement and perform the transactions contemplated hereby. This
Agreement has been duly authorized, executed and delivered by the Company and
constitutes a valid and binding obligation of the Company, enforceable in
accordance with its terms, except as enforceability may be limited by general
equitable principles, bankruptcy, insolvency, reorganization, moratorium laws
affecting creditors' rights generally and except as to those provisions relating
to indemnity or contribution for liabilities arising under federal and state
securities laws. The making and performance of this Agreement by the Company and
the consummation of the transactions contemplated hereby (i) will not violate
any provisions of the Certificate of Incorporation, Bylaws or other
organizational documents of the Company or any of its subsidiaries, and (ii)
will not conflict with, result in a material breach or violation of, or
constitute, either by itself or upon notice or the passage of time or both, a
material default under (A) any agreement, mortgage, deed of trust, lease,
franchise, license, indenture, permit or other instrument to which the Company
or any of its subsidiaries is a party or by which the Company or any of its
subsidiaries or any of their respective properties may be bound or affected, or
(B) any statute or any authorization, judgment, decree, order, rule or
regulation of any court or any regulatory body, administrative agency or other
governmental body applicable to the Company or any of its subsidiaries or any of
their respective properties. No consent, approval, authorization or other order
of any court, regulatory body, administrative agency or other governmental body
that has not already been obtained is required for the execution and delivery of
this Agreement or the consummation of the transactions contemplated by this
Agreement, except for compliance with the Securities Act, the Blue Sky laws
applicable to the public offering of the Shares by the several Underwriters and
the clearance of such offering with the National Association of Securities
Dealers, Inc. (the "NASD").
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(k) The consolidated financial statements and schedules of the
Company and the related notes thereto included in the Registration Statement and
the Prospectus present fairly on a consolidated basis the financial position of
the Company and its subsidiaries as of the respective dates of such financial
statements and schedules, and the results of operations and cash flows of the
Company and its subsidiaries for the respective periods covered thereby. Such
statements, schedules and related notes have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis
throughout the periods specified, as certified by the independent accountants
named in Section 10(f). No other financial statements or schedules are required
to be included in the Registration Statement. The selected financial data set
forth in the Prospectus under the captions "Capitalization" and "Selected
Consolidated Financial Information" fairly present the information set forth
therein on the basis stated in the Registration Statement.
(l) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are executed
in accordance with management's general or specific authorizations, (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets, (iii) access to assets is permitted only in
accordance with management's general or specific authorization, and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences. The representations and warranties given by the Company and its
officers to its independent public accountants for the purpose of supporting the
letters referred to in Section 10(g) are true and correct.
(m) Neither the Company nor any of its subsidiaries is (i) in
violation or default of any provision of its Certificate of Incorporation,
Bylaws or other organizational documents, or (ii) in a material breach of or
default with respect to any provision of any agreement, judgment, decree, order,
mortgage, deed of trust, lease, franchise, license, indenture, permit or other
instrument to which it is a party or by which it or any of its properties are
bound; and there does not exist any state of facts which, with notice or lapse
of time or both would constitute such a breach or default on the part of the
Company and its subsidiaries, taken as a whole.
(n) There are no contracts or other documents required to be
described in the Registration Statement or to be filed as exhibits to the
Registration Statement by the Securities Act or by the Rules and Regulations
which have not been described or filed as required. The contracts so described
in the Prospectus are in full force and effect on the date hereof.
(o) Except as disclosed in the Prospectus, there are no legal or
governmental actions, suits or proceedings pending or threatened to which the
Company or any of its subsidiaries is or is threatened to be made a party or of
which property owned or leased by the Company or any of its subsidiaries is or
is threatened to be made the subject, which actions, suits or proceedings could,
individually or in the aggregate, prevent or adversely affect the transactions
contemplated by this Agreement or result in a material adverse change in the
business, business prospects, properties, condition (financial or otherwise), or
results of operations of the Company or its subsidiaries; and no labor
disturbance by the employees of the Company or any of its subsidiaries exists or
is imminent which could materially adversely affect the business, business
prospects, properties, condition (financial or otherwise), or results of
operations of the Company
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or its subsidiaries. Neither the Company nor any of its subsidiaries is a party
or subject to the provisions of any material injunction, judgment, decree or
order of any court, regulatory body, administrative agency or other governmental
body. Except as disclosed in the Prospectus, there are no material legal or
governmental actions, suits or proceedings pending or, to the Company's
knowledge, threatened against any executive officers or directors of the
Company.
(p) The Company or the applicable subsidiary has good and
marketable title to all the properties and assets reflected as owned in the
financial statements hereinabove described (or elsewhere in the Prospectus),
subject to no lien, mortgage, pledge, charge or encumbrance of any kind except
(i) those, if any, reflected in such financial statements (or elsewhere in the
Prospectus), or (ii) those which are not material in amount to the Company or
its subsidiaries, and do not adversely affect the use made and proposed to be
made of such property by the Company or its subsidiaries. The Company or the
applicable subsidiary holds its leased properties under valid and binding
leases. Except as disclosed in the Prospectus, the Company owns or leases all
such properties as are necessary to its operations as now conducted or as
proposed to be conducted.
(q) Since the respective dates as of which information is given in
the Registration Statement and Prospectus, and except as described in or
specifically contemplated by the Prospectus: (i) the Company and its
subsidiaries have not (A) incurred any liabilities or obligations, indirect,
direct or contingent, or (B) entered into any oral or written agreement or other
transaction, which in the case of (A) or (B) is not in the ordinary course of
business; (ii) the Company and its subsidiaries have not sustained any material
loss or interference with their respective businesses or properties from fire,
flood, windstorm, accident or other calamity, whether or not covered by
insurance; (iii) the Company and its subsidiaries have not paid or declared any
dividends or other distributions with respect to their respective capital stock
and the Company and its subsidiaries are not in default in the payment of
principal or interest on any outstanding debt obligations; (iv) there has not
been any change in the capital stock of the Company or its subsidiaries (other
than upon the sale of the Shares hereunder or upon the exercise of any options
or warrants disclosed in the Prospectus); (v) there has not been any material
increase in the short- or long-term debt of the Company and its subsidiaries;
and (vi) there has not been any material adverse change or any development
involving or which may reasonably be expected to involve a prospective material
adverse change, in the business, business prospects, condition (financial or
otherwise), properties, or results of operations of the Company or its
subsidiaries.
(r) The Company and its subsidiaries are conducting business in
compliance with all applicable laws, rules and regulations of the jurisdictions
in which they are conducting business, except where the failure to be so in
compliance would not have a material adverse effect on the business, business
prospects, properties, condition (financial or otherwise) or results of
operations of the Company or its subsidiaries.
(s) The Company and its subsidiaries have filed all necessary
federal, state and foreign income and franchise tax returns, and all such tax
returns are complete and correct in all material respects, and the Company and
its subsidiaries have not failed to pay any taxes which were payable pursuant to
said returns or any assessments with respect thereto. The Company has
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<PAGE> 7
no knowledge of any tax deficiency which has been or is likely to be threatened
or asserted against the Company or its subsidiaries.
(t) The Company has not distributed, and will not distribute prior
to the later to occur of (i) completion of the distribution of the Shares, or
(ii) the expiration of any time period within which a dealer is required under
the Securities Act to deliver a prospectus relating to the Shares, any offering
material in connection with the offering and sale of the Shares other than the
Prospectus, the Registration Statement and any other materials permitted by the
Securities Act and consented to by the Underwriters.
(u) Each of the Company and its subsidiaries maintains insurance
of the types and in the amounts generally deemed adequate for their business,
including, but not limited to, directors' and officers' insurance, insurance
covering real and personal property owned or leased by the Company and its
subsidiaries against theft, damage, destruction, acts of vandalism and all other
risks customarily insured against, all of which insurance is in full force and
effect. The Company has not been refused any insurance coverage sought or
applied for, and the Company has no reason to believe that it will not be able
to renew its existing insurance coverage as and when such coverage expires or to
obtain similar coverage from similar insurers as may be necessary to continue
its business at a cost that would not materially adversely affect the business,
business prospects, properties, condition (financial or otherwise) or results of
operations of the Company or its subsidiaries.
(v) Neither the Company nor any of its subsidiaries nor, to the
best of the Company's knowledge, any of their employees or agents has at any
time during the last five years (i) made any unlawful contribution to any
candidate for foreign office, or failed to disclose fully any contribution in
violation of law, or (ii) made any payment to any foreign, federal or state
governmental officer or official or other person charged with similar public or
quasi-public duties, other than payments required or permitted by the laws of
the United States or any jurisdiction thereof.
(w) The Company has not taken and will not take, directly or
indirectly, any action designed to or that might be reasonably expected to cause
or result in stabilization or manipulation of the price of the Common Stock to
facilitate the sale or resale of the Shares.
(x) The Company has caused (i) each of its executive officers and
directors as set forth in the Prospectus and (ii) each holder of 5% of the
outstanding Common Stock (including shares issuable upon the exercise or
conversion of any option, warrant or other security) to furnish to the
Underwriters an agreement in form and substance satisfactory to Volpe Brown
Whelan & Company, LLC ("Volpe Brown Whelan & Company") pursuant to which each
such party has agreed that during the period of 180 days after the date the
Registration Statement becomes effective, without the prior written consent of
Volpe Brown Whelan & Company, such party will not (i) offer, sell, contract to
sell, make any short sale (including without limitation short against the box),
pledge or otherwise dispose of, directly or indirectly, any shares of the Common
Stock, options to acquire Common Stock or securities convertible into or
exchangeable for, or any other rights to purchase or acquire, the Common Stock
(including without limitation Common Stock which may be deemed to be
beneficially owned in accordance with the rules and
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<PAGE> 8
regulations of the Commission) other than the exercise or conversion of
outstanding options, warrants or convertible securities; or (ii) enter into any
swap or other agreement that transfers, in whole or in part, any of the economic
consequences or ownership of Common Stock, whether any such transaction
described in (i) or (ii) is to be settled by delivery of Common Stock or such
other securities, in cash or otherwise provided, however, that bona fide gift
transactions and transfers which will not result in any change in beneficial
ownership may be permitted if the transferee enters into a lock-up agreement in
substantially the same form covering the remainder of the lock-up period.
(y) Except as specifically disclosed in the Prospectus, the
Company and its subsidiaries have sufficient trademarks, trade names, patent
rights, copyrights, licenses, approvals and governmental authorizations to
conduct their businesses as now conducted; the expiration of any trademarks,
trade names, patent rights, copyrights, licenses, approvals or governmental
authorizations would not have a material adverse effect on the business,
business prospects, properties, condition (financial or otherwise) or results of
operations have been of the Company or its subsidiaries; the Company has no
knowledge of any infringement by the Company or its subsidiaries of trademark,
trade name rights, patent rights, copyrights, licenses, trade secret or other
similar rights of others; and no claims have been made or are threatened against
the Company or its subsidiaries regarding trademark, trade name, patent,
copyright, license, trade secret or other infringement which could have a
material adverse effect on the business, business prospects, properties,
condition (financial or otherwise) or results of operations or prospects of the
Company and its subsidiaries.
(z) Except as disclosed in the Prospectus, (i) the Company and
its subsidiaries are in compliance in all material respects with all rules, laws
and regulation relating to the use, treatment, storage and disposal of toxic
substances and protection of health or the environment ("Environmental Laws")
which are applicable to their business, (ii) neither the Company nor any of its
subsidiaries has received any notice from any governmental authority or third
party of an asserted claim under Environmental Laws, (iii) no facts currently
exist that will require the Company or any of its subsidiaries to make future
material capital expenditures to comply with Environmental Laws, and (iv) to the
knowledge of the Company, no property which is or has been owned, leased or
occupied by the Company or any of its subsidiaries has been designated as a
Superfund site pursuant to the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended (42 U.S.C. ss. 9601, et
seq.), or otherwise designated as a contaminated site under applicable state or
local law.
(aa) The Company is not an "investment company" within the meaning
of the Investment Company Act of 1940, as amended.
(bb) Except as disclosed in the Prospectus, (i) the Company and
its subsidiaries are in compliance in all material respects with all rules, laws
and regulation relating to the regulation of the healthcare industry
("Healthcare Regulations") which are applicable to their business, (ii) neither
the Company nor any of its subsidiaries has received any notice from any
governmental authority or third party of an asserted claim under any Healthcare
Regulations and (iii) no facts currently exist that will require the Company or
any of its subsidiaries to make future material capital expenditures to comply
with Healthcare Regulations.
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(cc) Neither the Company nor any of its subsidiaries is currently
involved in any material labor dispute, nor, to the knowledge of the Company, is
any material labor dispute threatened which, if such dispute were to occur,
would be reasonably likely to result in a material adverse change in the
condition (financial or otherwise), earnings, operations, business or business
prospects of the Company and its subsidiaries considered as a whole. No
collective bargaining agreement exists with any of the Company's employees and,
to the best of the Company's knowledge, no such agreement is imminent.
(dd) There are no outstanding loans, advances (except normal
advances for business expenses in the ordinary course of business) or guarantees
of indebtedness by the Company to or for the benefit of any of the officers or
directors of the Company or any of the members of the families of any of them,
which are required to be disclosed in the Registration Statement or Prospectus
and are not so disclosed.
SECTION 2. REPRESENTATIONS AND WARRANTIES, AND COVENANTS, OF THE
SELLING SECURITYHOLDERS.
Each of the Selling Securityholders severally and not jointly,
represents and warrants and covenants to the several Underwriters as of the date
hereof and as of each Closing Date hereinafter mentioned that:
(a) Each such Selling Securityholder has reviewed the representations
and warranties of the Company and, although such Selling Securityholder has not
independently verified the accuracy of such representations and warranties, such
Selling Securityholder has no reason to believe that such representations and
warranties of the Company contained in Section 1 are not true and correct in all
respects.
(b) Such Selling Securityholder has good and marketable title to the
Shares to be sold by such Selling Securityholder hereunder, free and clear of
all liens, encumbrances, equities, security interests and claims whatsoever,
with full right and authority to deliver the same hereunder, subject, in the
case of each Selling Securityholder, to the rights of _______________, as
Custodian (the "Custodian"), and that upon the delivery of and payment for such
Shares hereunder, the several Underwriters will receive good and marketable
title thereto, free and clear of all liens, encumbrances, equities, security
interests and claims whatsoever.
(c) Certificates in negotiable form for the Shares to be sold by such
Selling Securityholder have been placed in custody under a Custody Agreement for
delivery under this Agreement with the Custodian; such Selling Securityholder
specifically agrees that the Shares represented by the certificates so held in
custody for such Selling Securityholder are subject to the interests of the
several Underwriters and the Company, that the arrangements made by such Selling
Securityholder for such custody, including the Power of Attorney provided for in
such Custody Agreement, are to that extent irrevocable, and that the obligations
of such Selling Securityholder shall not be terminated by any act of such
Selling Securityholder or by operation of law, whether by the death or
incapacity of such Selling Securityholder (or, in the case of a Selling
Securityholder that is not an individual, the dissolution or liquidation of such
Selling Securityholder) or the occurrence of any other event; if any such death,
incapacity, dissolution,
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<PAGE> 10
liquidation or other such event should occur before the delivery of such shares
of the shares hereunder, certificates for the Shares shall be delivered by the
Custodian in accordance with the terms and conditions of this Agreement as if
such death, incapacity, dissolution, liquidation or other event had not
occurred, regardless of whether the Custodian shall have received notice of such
death, incapacity, dissolution, liquidation or other event.
(d) Such Selling Securityholder has reviewed the Registration Statement
and Prospectus and, although such Selling Securityholder has not independently
verified the accuracy or completeness of all the information contained therein,
nothing has come to the attention of such Selling Securityholder that would lead
such Selling Securityholder to believe that (i) on the Effective Date, the
Registration Statement contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary in
order to make the statements therein not misleading; and, (ii) on the Effective
Date the Prospectus contained and, on the Closing Date and any later date on
which Optional Shares are to be purchased contains, any untrue statement of a
material fact or omitted or omits to state any material fact necessary in order
to make the statements therein, in the light of the circumstances under which
they were made, not misleading.
(e) All information in the Registration Statement or the Prospectus, or
any amendment or supplement thereto, relating to such Selling Securityholder
(including without limitation the information relating to the Selling
Securityholder which is set forth in the Prospectus under the caption "Principal
and Selling Securityholders"), and all representations and warranties of such
Selling Securityholder in the Custody Agreement are true and correct in all
respects and do not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
information in the light of the circumstances under which they were made not
misleading. The sale of the Shares by such Selling Securityholder pursuant
hereto is not prompted by such Selling Securityholder's knowledge of any
material information concerning the Company or any subsidiary which is not set
forth in the Prospectus.
(f) Such Selling Securityholder has full power and authority to enter
into this Agreement and the Custody Agreement and perform the transactions
contemplated hereby and thereby. This Agreement and the Custody Agreement have
been duly authorized, executed and delivered by or on behalf of such Selling
Securityholder and the form of such Securityholder Agreement has been delivered
to you.
(g) The making and performance of this Agreement and the Custody
Agreement and the consummation of the transactions contemplated hereby and
thereby will not result in a breach or violation by such Selling Securityholder
of any of the terms or provisions of, or constitute a default by such Selling
Securityholder under, any indenture, mortgage, deed of trust, trust
(constructive or other), loan agreement, lease, franchise, license or other
agreement or instrument to which such Selling Securityholder is a party or by
which such Selling Securityholder or any of its properties is bound, any
statute, or any judgment, decree, order, rule or regulation of any court or
governmental agency or body applicable to such Selling Securityholder or any of
its properties.
(h) Such Selling Securityholder has not taken and will not take,
directly or indirectly, any action designed to or that might reasonably be
expected to cause or result in stabilization or
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manipulation of the price of any security of the Company to facilitate the sale
or resale of the Shares.
(i) Each of the Selling Securityholders agrees that during the period
of 180 days after the date of the Registration Statement becomes effective,
without the prior written consent of Volpe Brown Whelan & Company, such Selling
Securityholder will not (i) offer, sell, make any short sale (including without
limitation short against the box), pledge or otherwise dispose of, directly or
indirectly, any of the Common Stock, options to acquire Common Stock or
securities convertible into or exchangeable for or any other rights to purchase
or acquire the Common Stock (including without limitation Common Stock which may
be deemed to be beneficially owned in accordance with the rules and regulations
of the Commission) other than the exercise or conversion of outstanding options,
warrants or convertible securities or (ii) enter into any swap or other
agreement that transfers, in whole or in part, any of the economic consequences
or ownership of Common Stock, whether any such transaction described in (i) or
(ii) is to be settled by delivery of Common Stock or such other securities, in
cash or otherwise; provided, however, that bona fide gift transactions and
transfers which will not result in any change in beneficial ownership may be
permitted if the transferee enters into a lock-up agreement in substantially the
same form covering the remainder of the lock-up period.
SECTION 3. PURCHASE OF THE SHARES BY THE UNDERWRITERS.
(a) On the basis of the representations and warranties and subject to
the terms and conditions herein set forth, the Company agrees to issue and sell
2,000,000 of the Firm Shares to the several Underwriters, each Selling
Securityholder agrees to sell to the several Underwriters the number of the Firm
Shares set forth in Schedule II opposite the name of such Selling
Securityholder, and each of the Underwriters agrees to purchase from the Company
and the Selling Securityholders the respective aggregate number of Firm Shares
set forth opposite its name in Schedule I. The price at which such Firm Shares
shall be sold by the Company and the Selling Securityholders and purchased by
the several Underwriters shall be $_____ per share. The obligation of each
Underwriter to the Company and each of the Selling Securityholders shall be to
purchase from the Company and the Selling Securityholders that number of Firm
Shares which represents the same proportion of the total number of Firm Shares
to be sold by each of the Company and the Selling Securityholders pursuant to
this Agreement as the number of Firm Shares set forth opposite the name of such
Underwriter in Schedule I hereto represents of the total number of shares of the
Firm Shares to be purchased by all Underwriters pursuant to this Agreement, as
adjusted by you in such manner as you deem advisable to avoid fractional shares.
In making this Agreement, each Underwriter is contracting severally and not
jointly; except as provided in Section 3(b) and (c), the agreement of each
Underwriter is to purchase only the respective number of shares of the Firm
Shares specified in Schedule I.
(b) If for any reason one or more of the Underwriters shall fail or
refuse (otherwise than for a reason sufficient to justify the termination of
this Agreement under the provisions of Section 9 or 10 hereof) to purchase and
pay for the number of Shares agreed to be purchased by such Underwriter or
Underwriters, the Company or the Selling Securityholders shall immediately give
notice thereof to you, and the non-defaulting Underwriters shall have the right
within 24 hours after the receipt by you of such notice to purchase, or procure
one or more other
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<PAGE> 12
Underwriters to purchase, in such proportions as may be agreed upon between you
and such purchasing Underwriter or Underwriters and upon the terms herein set
forth, all or any part of Shares which such defaulting Underwriter or
Underwriters agreed to purchase. If the non-defaulting Underwriters fail so to
make such arrangements with respect to all such shares and portion, the number
of Shares which each non-defaulting Underwriter is otherwise obligated to
purchase under this Agreement shall be automatically increased on a pro rata
basis to absorb the remaining shares and portion which the defaulting
Underwriter or Underwriters agreed to purchase; provided, however, that the
non-defaulting Underwriters shall not be obligated to purchase the portion which
the defaulting Underwriter or Underwriters agreed to purchase if the aggregate
number of such Shares exceeds 10% of the total number of Shares which all
Underwriters agreed to purchase hereunder. If the total number of Shares which
the defaulting Underwriter or Underwriters agreed to purchase shall not be
purchased or absorbed in accordance with the two preceding sentences, the
Company and the Selling Securityholders shall have the right, within 24 hours
next succeeding the 24-hour period above referred to, to make arrangements with
other underwriters or purchasers satisfactory to you for purchase of such Shares
and portion on the terms herein set forth. In any such case, either you or the
Company and the Selling Securityholders shall have the right to postpone the
Closing Date determined as provided in Section 5 hereof for not more than seven
business days after the date originally fixed as the Closing Date pursuant to
Section 5 in order that any necessary changes in the Registration Statement, the
Prospectus or any other documents or arrangements may be made. If neither the
non-defaulting Underwriters nor the Company and the Selling Securityholders
shall make arrangements within the 24-hour periods stated above for the purchase
of all of the Shares which the defaulting Underwriter or Underwriters agreed to
purchase hereunder, this Agreement shall be terminated without further act or
deed and without any liability on the part of the Company or the Selling
Securityholders to any non-defaulting Underwriter and without any liability on
the part of any non-defaulting Underwriter to the Company or the Selling
Securityholders. Nothing in this Section 3(b), and no action taken hereunder,
shall relieve any defaulting Underwriter from liability in respect of any
default of such Underwriter under this Agreement.
(c) On the basis of the representations, warranties and covenants
herein contained, and subject to the terms and conditions herein set forth, the
Company and the Selling Securityholders grant an option to the several
Underwriters to purchase, severally and not jointly, up to 322,500 Optional
Shares from the Company and the Selling Securityholders at the same price per
share as the Underwriters shall pay for the Firm Shares. Said option may be
exercised only to cover over-allotments in the sale of the Firm Shares by the
Underwriters and may be exercised in whole or in part at any time on or before
the thirtieth day after the date of this Agreement upon written or telegraphic
notice by you to the Company setting forth the aggregate number of Optional
Shares as to which the several Underwriters are exercising the option. Delivery
of certificates for the Optional Shares, and payment therefor, shall be made as
provided in Section 5 hereof. The number of Optional Shares to be purchased by
each Underwriter shall be the same percentage of the total number of Optional
Shares to be purchased by the several Underwriters as such Underwriter is
purchasing of the Firm Shares, as adjusted by you in such manner as you deem
advisable to avoid fractional shares.
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SECTION 4. OFFERING BY UNDERWRITERS.
(a) The terms of the initial public offering by the Underwriters of the
Shares to be purchased by them shall be as set forth in the Prospectus. The
Underwriters may from time to time change the public offering price after the
closing of the initial public offering and increase or decrease the concessions
and discounts to dealers as they may determine.
(b) The information (insofar as such information relates to the
Underwriters) set forth in the last paragraph on the front cover page and under
"Underwriting" in the Registration Statement, any Preliminary Prospectus and the
Prospectus relating to the Shares constitutes the only information furnished by
the Underwriters to the Company for inclusion in the Registration Statement, any
Preliminary Prospectus, and the Prospectus, and you on behalf of the respective
Underwriters represent and warrant to the Company that the statements made
therein are correct.
SECTION 5. DELIVERY OF AND PAYMENT FOR THE SHARES.
(a) Delivery of certificates for the Firm Shares and the Optional
Shares (if the option granted by Section 3(c) hereof shall have been exercised
not later than 7:00 A.M., San Francisco time, on the date two business days
preceding the Closing Date), and payment therefor, shall be made at the office
of Gibson, Dunn & Crutcher LLP, 200 Park Avenue, New York, New York at 7:00
a.m., San Francisco time, on the fourth(2) business day after the date of this
Agreement, or at such time on such other day, not later than seven full business
days after such fourth business day, as shall be agreed upon in writing by the
Company, the Selling Securityholders and you. The date and hour of such delivery
and payment (which may be postponed as provided in Section 3(b) hereof) are
herein called the "Closing Date".
(b) If the option granted by Section 3(c) hereof shall be exercised
after 7:00 a.m., San Francisco time, on the date two business days preceding the
Closing Date, delivery of certificates for the shares of Optional Shares, and
payment therefor, shall be made at the office of Gibson, Dunn & Crutcher LLP,
200 Park Avenue, New York, New York at 7:00 a.m., San Francisco time, on the
third business day after the exercise of such option.
(c) Payment for the shares purchased from the Company shall be made to
the Company or its order, and payment for the shares purchased from the Selling
Securityholders shall be made, in the discretion of the Underwriters, to them or
to the Custodian, for the account of the Selling Securityholders, in each case
by (i) one or more certified or official bank check or checks in next day funds
(and the Company and the Selling Securityholders agree not to deposit any such
check in the bank on which drawn until the day following the date of its
delivery to the Company or the Custodian, as the case may be) or (ii) federal
funds wire transfer. Such payment
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(2) This assumes that the transaction will be priced after the close of market
and that T + 4 will apply to the transaction. If the pricing took place
before or during market hours (which will generally not be the case), the
closing would be three business days after pricing.
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shall be made upon delivery of certificates for the shares to you for the
respective accounts of the several Underwriters (including without limitation by
"full-fast" electronic transfer by Depository Trust Company) against receipt
therefor signed by you. Certificates for the shares to be delivered to you shall
be registered in such name or names and shall be in such denominations as you
may request at least one business day before the Closing Date, in the case of
Firm Shares, and at least one business day prior to the purchase thereof, in the
case of the Optional Shares. Such certificates will be made available to the
Underwriters for inspection, checking and packaging at the offices of agent of
Volpe Brown Whelan & Company's clearing agent, Bear Sterns Securities Corp., on
the business day prior to the Closing Date or, in the case of the Optional
Shares, by 3:00 p.m., New York time, on the business day preceding the date of
purchase.
It is understood that you, individually and not on behalf of the
Underwriters, may (but shall not be obligated to) make payment to the Company
and the Selling Securityholders for shares to be purchased by any Underwriter
whose check shall not have been received by you on the Closing Date or any later
date on which Optional Shares are purchased for the account of such Underwriter.
Any such payment by you shall not relieve such Underwriter from any of its
obligations hereunder.
SECTION 6. COVENANTS OF THE COMPANY. The Company and the Selling
Securityholders covenant and agree as follows:
(a) The Company will (i) prepare and timely file with the Commission
under Rule 424(b) a Prospectus containing information previously omitted at the
time of effectiveness of the Registration Statement in reliance on Rule 430A and
(ii) not file any amendment to the Registration Statement or supplement to the
Prospectus of which you shall not previously have been advised and furnished
with a copy or to which you shall have reasonably objected in writing or which
is not in compliance with the Securities Act or the rules and regulations of the
Commission.
(b) The Company will promptly notify each Underwriter in the event of
(i) the request by the Commission for amendment of the Registration Statement or
for supplement to the Prospectus or for any additional information, (ii) the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement, (iii) the institution or notice of intended institution
of any action or proceeding for that purpose, (iv) the receipt by the Company of
any notification with respect to the suspension of the qualification of the
shares for sale in any jurisdiction, or (v) the receipt by it of notice of the
initiation or threatening of any proceeding for such purpose. The Company will
make every reasonable effort to prevent the issuance of such a stop order and,
if such an order shall at any time be issued, to obtain the withdrawal thereof
at the earliest possible moment.
(c) The Company will (i) on or before the Closing Date, deliver to you
a signed copy of the Registration Statement as originally filed and of each
amendment thereto filed prior to the time the Registration Statement becomes
effective and, promptly upon the filing thereof, a signed copy of each
post-effective amendment, if any, to the Registration Statement (together with,
in each case, all exhibits thereto unless previously furnished to you) and will
also deliver to you, for distribution to the Underwriters, a sufficient number
of additional conformed copies of each of the
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<PAGE> 15
foregoing (but without exhibits) so that one copy of each may be distributed to
each Underwriter, (ii) as promptly as possible deliver to you and send to the
several Underwriters, at such office or offices as you may designate, as many
copies of the Prospectus as you may reasonably request, and (iii) thereafter
from time to time during the period in which a prospectus is required by law to
be delivered by an Underwriter or dealer, likewise send to the Underwriters as
many additional copies of the Prospectus and as many copies of any supplement to
the Prospectus and of any amended prospectus, filed by the Company with the
Commission, as you may reasonably request for the purposes contemplated by the
Securities Act.
(d) If at any time during the period in which a prospectus is required
by law to be delivered by an Underwriter or dealer any event relating to or
affecting the Company, or of which the Company shall be advised in writing by
you, shall occur as a result of which it is necessary, in the opinion of counsel
for the Company or of counsel for the Underwriters, to supplement or amend the
Prospectus in order to make the Prospectus not misleading in the light of the
circumstances existing at the time it is delivered to a purchaser of the shares,
the Company will forthwith prepare and file with the Commission a supplement to
the Prospectus or an amended prospectus so that the Prospectus as so
supplemented or amended will not contain any untrue statement of a material fact
or omit to state any material fact necessary in order to make the statements
therein, in the light of the circumstances existing at the time such Prospectus
is delivered to such purchaser, not misleading. If, after the initial public
offering of the shares by the Underwriters and during such period, the
Underwriters shall propose to vary the terms of offering thereof by reason of
changes in general market conditions or otherwise, you will advise the Company
in writing of the proposed variation, and, if in the opinion either of counsel
for the Company or of counsel for the Underwriters such proposed variation
requires that the Prospectus be supplemented or amended, the Company will
forthwith prepare and file with the Commission a supplement to the Prospectus or
an amended prospectus setting forth such variation. The Company authorizes the
Underwriters and all dealers to whom any of the shares may be sold by the
several Underwriters to use the Prospectus, as from time to time amended or
supplemented, in connection with the sale of the shares in accordance with the
applicable provisions of the Securities Act and the applicable rules and
regulations thereunder for such period.
(e) Prior to the filing thereof with the Commission, the Company will
submit to you, for your information, a copy of any post-effective amendment to
the Registration Statement and any supplement to the Prospectus or any amended
prospectus proposed to be filed.
(f) The Company will cooperate, when and as requested by you, in the
qualification of the shares for offer and sale under the securities or blue sky
laws of such jurisdictions as you may designate and, during the period in which
a prospectus is required by law to be delivered by an Underwriter or dealer, in
keeping such qualifications in good standing under said securities or blue sky
laws; provided, however, that the Company shall not be obligated to file any
general consent to service of process or to qualify as a foreign corporation in
any jurisdiction in which it is not so qualified. The Company will, from time to
time, prepare and file such statements, reports, and other documents as are or
may be required to continue such qualifications in effect for so long a period
as you may reasonably request for distribution of the shares.
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<PAGE> 16
(g) During a period of five years commencing with the date hereof, the
Company will furnish to you, and to each Underwriter who may so request in
writing, copies of all periodic and special reports furnished to stockholders of
the Company and of all information, documents and reports filed with the
Commission.
(h) Not later than the 45th day following the end of the fiscal quarter
first occurring after the first anniversary of the Effective Date, the Company
will make generally available to its security holders an earnings statement in
accordance with Section 11(a) of the Securities Act and Rule 158 thereunder.
(i) For a period of one year commencing with the date hereof, the
Company agrees, at the Company's expense, to cause the Company's regularly
engaged independent certified public accountants to review (but not audit) the
Company's financial statements in accordance with the procedures specified by
the American Institute of Certified Public Accountants for a review of interim
financial information as described in Statement on Auditing Standards No. 71
"Interim Financial Information" for each of the three fiscal quarters prior to
the announcement of quarterly financial information, the filing of the Company's
Quarterly Report on Form 10-Q with the Commission and the mailing of quarterly
financial information to stockholders of the Company.
(j) The Company agrees to pay all costs and expenses incident to the
performance of its obligations under this Agreement, including all costs and
expenses incident to (i) the preparation, printing and filing with the
Commission and the NASD of the Registration Statement, any Preliminary
Prospectus and the Prospectus, (ii) the furnishing to the Underwriters and the
persons designated by them of copies of any Preliminary Prospectus and of the
several documents required by Section 6(c) to be so furnished, (iii) the
printing of this Agreement and related documents delivered to the Underwriters,
(iv) the preparation, printing and filing of all supplements and amendments to
the Prospectus referred to in Section 6(d), (v) the furnishing to you and the
Underwriters of the reports and information referred to in Section 6(g) and (vi)
the printing and issuance of stock certificates, including the transfer agent's
fees. The Selling Securityholders will pay any transfer taxes incident to the
transfer to the Underwriters of the Shares being sold by the Selling
Securityholders.
(k) The Company agrees to reimburse you, for the account of the several
Underwriters, for blue sky fees and related disbursements (including counsel
fees and disbursements and cost of printing memoranda for the Underwriters) paid
by or for the account of the Underwriters or their counsel in qualifying the
shares under state securities or blue sky laws and in the review of the offering
by the NASD.
(l) The provisions of Section 6(i) and (j) are intended to relieve the
Underwriters from the payment of the expenses and costs which the Company hereby
agrees to pay and shall not affect any agreement which the Company and the
Selling Securityholders may make, or may have made, for the sharing of any such
expenses and costs.
(m) The Company and each of the Selling Securityholders hereby agrees
that, without the prior written consent of Volpe Brown Whelan & Company, the
Company or such Selling Securityholder, as the case may be, will not, for a
period of 180 days following the date the
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<PAGE> 17
Registration Statement becomes effective, (i) offer, sell, contract to sell,
make any short sale (including without limitation short against the box),
pledge, or otherwise dispose of, directly or indirectly, any shares of Common
Stock or any options to acquire shares of Common Stock or securities convertible
into or exchangeable or exercisable for or any other rights to purchase or
acquire Common Stock (including without limitation Common Stock which may be
deemed to be beneficially owned in accordance with the rules and regulations of
the Commission) other than the exercise or conversion of outstanding options,
warrants or convertible securities or (ii) enter into any swap or other
agreement that transfers, in whole or in part, any of the economic consequences
or ownership of Common Stock, whether any such transaction described in clause
(i) or (ii) above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise; provided, however, that bona fide gift
transactions and transfers which will not result in any change in beneficial
ownership may be permitted if the transferee enters into a lock-up agreement in
substantially the same form covering the remainder of the lock-up period. The
foregoing sentence shall not apply to (A) the shares to be sold to the
Underwriters pursuant to this Agreement, (B) shares of Common Stock issued by
the Company upon the exercise of options granted under the option plans of the
Company (the "Option Plans") or upon the exercise of warrants outstanding as of
the date hereof all as described in footnote (2) to the table under the caption
"Capitalization" in the Preliminary Prospectus, and (C) options to purchase
Common Stock granted under the Option Plans.
(n) The Company is familiar with the Investment Company Act of 1940, as
amended, and has in the past conducted its affairs, and will in the future
conduct its affairs, in such a manner to ensure that the Company was not and
will not be an "investment company" or a company "controlled" by an "investment
company" within the meaning of the Investment Company Act of 1940, as amended,
and the rules and regulations thereunder.
(o) The Company agrees to maintain directors' and officers' insurance
in amounts customary for the size and nature of the Company's business for a
period of two years from the date of this Agreement.
SECTION 7. INDEMNIFICATION AND CONTRIBUTION.
(a) Subject to the provisions of paragraph (f) of this Section 7, the
Company and the Selling Securityholders jointly and severally agree to indemnify
and hold harmless each Underwriter and each person (including each partner or
officer thereof) who controls any Underwriter within the meaning of Section 15
of the Securities Act from and against any and all losses, claims, damages or
liabilities, joint or several, to which such indemnified parties or any of them
may become subject under the Securities Act, the Exchange Act, or the common law
or otherwise, and the Company and the Selling Securityholders jointly and
severally agree to reimburse each such Underwriter and controlling person for
any legal or other expenses (including, except as otherwise hereinafter
provided, reasonable fees and disbursements of counsel) incurred by the
respective indemnified parties in connection with defending against any such
losses, claims, damages or liabilities or in connection with any investigation
or inquiry of, or other proceeding which may be brought against, the respective
indemnified parties, in each case arising out of or based upon (i) any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement (including the Prospectus as part thereof and any
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<PAGE> 18
Rule 462(b) registration statement) or any post-effective amendment thereto
(including any Rule 462(b) registration statement), or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or (ii) any untrue
statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus or the Prospectus (as amended or as supplemented if the
Company shall have filed with the Commission any amendment thereof or supplement
thereto) or the omission or alleged omission to state therein a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided, however,
that (1) the indemnity agreements of the Company and the Selling Securityholders
contained in this paragraph (a) shall not apply to any such losses, claims,
damages, liabilities or expenses if such statement or omission was made in
reliance upon and in conformity with information furnished as herein stated or
otherwise furnished in writing to the Company by or on behalf of any Underwriter
for use in any Preliminary Prospectus or the Registration Statement or the
Prospectus or any such amendment thereof or supplement thereto, (2) the
indemnity agreement contained in this paragraph (a) with respect to any
Preliminary Prospectus shall not inure to the benefit of any Underwriter from
whom the person asserting any such losses, claims, damages, liabilities or
expenses purchased the shares which is the subject thereof (or to the benefit of
any person controlling such Underwriter) if at or prior to the written
confirmation of the sale of such Stock a copy of the Prospectus (or the
Prospectus as amended or supplemented) was not sent or delivered to such person
and the untrue statement or omission of a material fact contained in such
Preliminary Prospectus was corrected in the Prospectus (or the Prospectus as
amended or supplemented) unless the failure is the result of noncompliance by
the Company with Section 6(c) hereof, and (3) each Selling Securityholder shall
only be liable under this paragraph with respect to (A) information pertaining
to such Selling Securityholder furnished by or on behalf of such Selling
Securityholder expressly for use in any Preliminary Prospectus or the
Registration Statement or the Prospectus or any such amendment thereof or
supplement thereto or (B) facts that would constitute a breach of any
representation or warranty of such Selling Securityholder set forth in Section
2(b) hereof. The indemnity agreements of the Company and the Selling
Securityholders contained in this Section 7(a) and the representations and
warranties of the Company and the Selling Securityholders contained in Section 1
and 2 hereof shall remain operative and in full force and effect regardless of
any investigation made by or on behalf of any indemnified party and shall
survive the delivery of and payment for the shares.
(b) Each Underwriter severally agrees to indemnify and hold harmless
the Company, each of its officers who signs the Registration Statement on his
own behalf or pursuant to a power of attorney, each of its directors, each other
Underwriter and each person (including each partner or officer thereof) who
controls the Company or any such other Underwriter within the meaning of Section
15 of the Securities Act, and the Selling Securityholders from and against any
and all losses, claims, damages or liabilities, joint or several, to which such
indemnified parties or any of them may become subject under the Securities Act,
the Exchange Act, or the common law or otherwise and to reimburse each of them
for any legal or other expenses (including, except as otherwise hereinafter
provided, reasonable fees and disbursements of counsel) incurred by the
respective indemnified parties in connection with defending against any such
losses, claims, damages or liabilities or in connection with any investigation
or inquiry of, or other proceeding which may be brought against, the respective
indemnified parties, in each case arising out of or
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based upon (i) any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement (including the Prospectus as part
thereof and any Rule 462(b) registration statement) or any post-effective
amendment thereto (including any Rule 462(b) registration statement) or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading or
(ii) any untrue statement or alleged untrue statement of a material fact
contained in the Prospectus (as amended or as supplemented if the Company shall
have filed with the Commission any amendment thereof or supplement thereto) or
the omission or alleged omission to state therein a material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading, if such statement or omission was made in
reliance upon and in conformity with information furnished as herein stated or
otherwise furnished in writing to the Company by or on behalf of such
indemnifying Underwriter for use in the Registration Statement or the Prospectus
or any such amendment thereof or supplement thereto. The indemnity agreement of
each Underwriter contained in this Section 7(b) shall remain operative and in
full force and effect regardless of any investigation made by or on behalf of
any indemnified party and shall survive the delivery of and payment for the
shares.
(c) Each party indemnified under the provision of Section 7(a) and (b)
agrees that, upon the service of a summons or other initial legal process upon
it in any action or suit instituted against it or upon its receipt of written
notification of the commencement of any investigation or inquiry of, or
proceeding against, it in respect of which indemnity may be sought on account of
any indemnity agreement contained in such paragraphs, it will promptly give
written notice (the "Notice") of such service or notification to the party or
parties from whom indemnification may be sought hereunder. No indemnification
provided for in such paragraphs shall be available to any party who shall fail
so to give the Notice if the party to whom such Notice was not given was unaware
of the action, suit, investigation, inquiry or proceeding to which the Notice
would have related and was prejudiced by the failure to give the Notice, but the
omission so to notify such indemnifying party or parties of any such service or
notification shall not relieve such indemnifying party or parties from any
liability which it or they may have to the indemnified party for contribution or
otherwise than on account of such indemnity agreement. Any indemnifying party
shall be entitled at its own expense to participate in the defense of any
action, suit or proceeding against, or investigation or inquiry of, an
indemnified party. Any indemnifying party shall be entitled, if it so elects
within a reasonable time after receipt of the Notice by giving written notice
(the "Notice of Defense") to the indemnified party, to assume (alone or in
conjunction with any other indemnifying party or parties) the entire defense of
such action, suit, investigation, inquiry or proceeding, in which event such
defense shall be conducted, at the expense of the indemnifying party or parties,
by counsel chosen by such indemnifying party or parties and reasonably
satisfactory to the indemnified party or parties; provided, however, that (i) if
the indemnified party or parties reasonably determine that there may be a
conflict between the positions of the indemnifying party or parties and of the
indemnified party or parties in conducting the defense of such action, suit,
investigation, inquiry or proceeding or that there may be legal defenses
available to such indemnified party or parties different from or in addition to
those available to the indemnifying party or parties, then counsel for the
indemnified party or parties shall be entitled to conduct the defense to the
extent reasonably determined by such counsel to be necessary to protect the
interests of the indemnified party or parties and (ii) in any event, the
indemnified party
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or parties shall be entitled to have counsel chosen by such indemnified party or
parties participate in, but not conduct, the defense. If, within a reasonable
time after receipt of the Notice, an indemnifying party gives a Notice of
Defense and the counsel chosen by the indemnifying party or parties is
reasonably satisfactory to the indemnified party or parties, the indemnifying
party or parties will not be liable under Section 7(a) through (c) for any legal
or other expenses subsequently incurred by the indemnified party or parties in
connection with the defense of the action, suit, investigation, inquiry or
proceeding, except that (A) the indemnifying party or parties shall bear the
legal and other expenses incurred in connection with the conduct of the defense
as referred to in clause (i) of the proviso to the preceding sentence and (B)
the indemnifying party or parties shall bear such other expenses as it or they
have authorized to be incurred by the indemnified party or parties. If, within a
reasonable time after receipt of the Notice, no Notice of Defense has been
given, the indemnifying party or parties shall be responsible for any legal or
other expenses incurred by the indemnified party or parties in connection with
the defense of the action, suit, investigation, inquiry or proceeding.
(d) If the indemnification provided for in this Section 7 is
unavailable or insufficient to hold harmless an indemnified party under Section
7(a) or (b), then each indemnifying party, in lieu of indemnifying such
indemnified party, shall contribute to the amount paid or payable by such
indemnified party as a result of the losses, claims, damages or liabilities
referred to in Section 7(a) or (b) (i) in such proportion as is appropriate to
reflect the relative benefits received by each indemnifying party from the
offering of the shares or (ii) if the allocation provided by clause (i) above is
not permitted by applicable law, in such proportion as is appropriate to reflect
not only the relative benefits referred to in clause (i) above but also the
relative fault of each indemnifying party in connection with the statements or
omissions that resulted in such losses, claims, damages or liabilities, or
actions in respect thereof, as well as any other relevant equitable
considerations. The relative benefits received by the Company and the Selling
Securityholders on the one hand and the Underwriters on the other shall be
deemed to be in the same respective proportions as the total net proceeds from
the offering of the shares received by the Company and the Selling
Securityholders and the total underwriting discount received by the
Underwriters, as set forth in the table on the cover page of the Prospectus,
bear to the aggregate public offering price of the shares. Relative fault shall
be determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by each indemnifying party and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such untrue statement or omission.
The parties agree that it would not be just and equitable if
contributions pursuant to this Section 7(d) were to be determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take into account
the equitable considerations referred to in the first sentence of this Section
7(d). The amount paid by an indemnified party as a result of the losses, claims,
damages or liabilities, or actions in respect thereof, referred to in the first
sentence of this Section 7(d) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating, preparing to defend or defending against any action or claim
which is the subject of this Section 7(d). Notwithstanding the provisions of
this Section 7(d), no Underwriter shall be required to contribute any amount in
excess of the underwriting discount applicable to the
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<PAGE> 21
shares purchased by such Underwriter. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations in this Section 7(d)
to contribute are several in proportion to their respective underwriting
obligations and not joint.
Each party entitled to contribution agrees that upon the service of a
summons or other initial legal process upon it in any action instituted against
it in respect of which contribution may be sought, it will promptly give written
notice of such service to the party or parties from whom contribution may be
sought, but the omission so to notify such party or parties of any such service
shall not relieve the party from whom contribution may be sought from any
obligation it may have hereunder or otherwise (except as specifically provided
in Section 7(c)).
(e) Neither the Company nor the Selling Securityholders will, without
the prior written consent of each Underwriter, settle or compromise or consent
to the entry of any judgment in any pending or threatened claim, action, suit or
proceeding in respect of which indemnification may be sought hereunder (whether
or not such Underwriter or any person who controls such Underwriter within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act is
a party to such claim, action, suit or proceeding) unless such settlement,
compromise or consent includes an unconditional release of such Underwriter and
each such controlling person from all liability arising out of such claim,
action, suit or proceeding.
(f) The liability of each Selling Securityholder under such Selling
Securityholder's representations and warranties contained in paragraph (a) of
Section 2 hereof and under the indemnity and reimbursement agreements contained
in the provisions of this Section 7 and Section 8 hereof shall be limited to an
amount equal to the initial public offering price of the shares sold by such
Selling Securityholder to the Underwriters. The Company and the Selling
Securityholders may agree, as among themselves and without limiting the rights
of the Underwriters under this Agreement, as to the respective amounts of such
liability for which they each shall be responsible.
SECTION 8. REIMBURSEMENT OF CERTAIN EXPENSES. In addition to their
other obligations under Section 7 of this Agreement (and subject, in the case of
a Selling Securityholder, to the provisions of Section 7(f)), the Company and
the Selling Securityholders hereby jointly and severally agree to reimburse on a
monthly basis the Underwriters for all reasonable legal and other expenses
incurred in connection with investigating or defending any claim, action,
investigation, inquiry or other proceeding arising out of or based upon any
statement or omission, or any alleged statement or omission, described in
Section 7(a), notwithstanding the absence of a judicial determination as to the
propriety and enforceability of the obligations under this Section 8 and the
possibility that such payments might later be held to be improper; provided,
however, that (i) to the extent any such payment is ultimately held to be
improper, the persons receiving such payments shall promptly refund them and
(ii) such persons shall provide to the Company, upon request, reasonable
assurances of their ability to effect any refund, when and if due.
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SECTION 9. TERMINATION. This Agreement may be terminated by you at any
time prior to the Closing Date by giving written notice to the Company and the
Selling Securityholders in accordance with Section 10, or if after the date of
this Agreement trading in the Common Stock shall have been suspended, or if
there shall have occurred (i) the engagement in hostilities or an escalation of
major hostilities by the United States or the declaration of war or a national
emergency by the United States on or after the date hereof, (ii) any outbreak of
hostilities or other national or international calamity or crisis or change in
economic or political conditions if the effect of such outbreak, calamity,
crisis or change in economic or political conditions in the financial markets of
the United States or the Company's industry sector would, in the Underwriters'
reasonable judgment, make the offering or delivery of the shares impracticable,
(iii) suspension of trading in securities generally or a material adverse
decline in value of securities generally on the New York Stock Exchange, the
American Stock Exchange, or The Nasdaq Stock Market, or limitations on prices
(other than limitations on hours or numbers of days of trading) for securities
on either such exchange or system, (iv) the enactment, publication, decree or
other promulgation of any federal or state statute, regulation, rule or order
of, or commencement of any proceeding or investigation by, any court,
legislative body, agency or other governmental authority which in the
Underwriters' reasonable opinion materially and adversely affects or will
materially or adversely affect the business or operations of the Company, (v)
declaration of a banking moratorium by either federal or New York State
authorities or (vi) the taking of any action by any federal, state or local
government or agency in respect of its monetary or fiscal affairs which in the
Underwriters' reasonable opinion has a material adverse effect on the securities
markets in the United States. If this Agreement shall be terminated pursuant to
this Section 9, there shall be no liability of the Company or the Selling
Securityholders to the Underwriters and no liability of the Underwriters to the
Company or the Selling Securityholders; provided, however, that in the event of
any such termination the Company and the Selling Securityholders agree to
indemnify and hold harmless the Underwriters from all costs or expenses incident
to the performance of the obligations of the Company and the Selling
Securityholders under this Agreement, including all costs and expenses referred
to in Section 6(i) and (j).
SECTION 10. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of
the several Underwriters to purchase and pay for the shares shall be subject to
the performance by the Company and by the Selling Securityholders of all their
respective obligations to be performed hereunder at or prior to the Closing Date
or any later date on which Optional Shares are to be purchased, as the case may
be, and to the following further conditions:
(a) The Registration Statement shall have become effective; and no stop
order suspending the effectiveness thereof shall have been issued and no
proceedings therefor shall be pending or threatened by the Commission.
(b) The legality and sufficiency of the sale of the shares hereunder
and the validity and form of the certificates representing the shares, all
corporate proceedings and other legal matters incident to the foregoing, and the
form of the Registration Statement and of the Prospectus (except as to the
financial statements contained therein), shall have been approved at or prior to
the Closing Date by Gibson, Dunn & Crutcher LLP, counsel for the Underwriters.
22
<PAGE> 23
(c) You shall have received from Bachner, Tally, Polevoy & Misher LLP,
counsel for the Company and the Selling Securityholders, and from Troutman
Sanders LLP, regulatory counsel for the Company, opinions, addressed to the
Underwriters and dated the Closing Date, covering the matters set forth in Annex
A and Annex B hereto, respectively, and if Optional Shares are purchased at any
date after the Closing Date, additional opinions from each such counsel,
addressed to the Underwriters and dated such later date, confirming that the
statements expressed as of the Closing Date in such opinions remain valid as of
such later date.
(d) You shall be satisfied that (i) as of the Effective Date, the
statements made in the Registration Statement and the Prospectus were true and
correct, and neither the Registration Statement nor the Prospectus omitted to
state any material fact required to be stated therein or necessary in order to
make the statements therein, respectively, not misleading; (ii) since the
Effective Date, no event has occurred which should have been set forth in a
supplement or amendment to the Prospectus which has not been set forth in such a
supplement or amendment; (iii) since the respective dates as of which
information is given in the Registration Statement in the form in which it
originally became effective and the Prospectus contained therein, there has not
been any material adverse change or any development involving a prospective
material adverse change in or affecting the business, properties, financial
condition or results of operations of the Company and its subsidiaries, taken as
a whole, whether or not arising from transactions in the ordinary course of
business, and, since such dates, except in the ordinary course of business,
neither the Company nor any of its subsidiaries has entered into any material
transaction not referred to in the Registration Statement in the form in which
it originally became effective and the Prospectus contained therein; (iv) the
Commission has not issued any order preventing or suspending the use of the
Prospectus or any Preliminary Prospectus filed as a part of the Registration
Statement or any amendment thereto; no stop order suspending the effectiveness
of the Registration Statement has been issued; and to the best knowledge of the
respective signers, no proceedings for that purpose have been instituted or are
pending or contemplated under the Securities Act; (v) neither the Company nor
any of its subsidiaries has any material contingent obligations which are not
disclosed in the Registration Statement and the Prospectus; (vi) there are not
any pending or known threatened legal proceedings to which the Company or any of
its subsidiaries is a party or of which property of the Company or any of its
subsidiaries is the subject which are material and which are not disclosed in
the Registration Statement and the Prospectus; (vii) there are not any
franchises, contracts, leases or other documents which are required to be filed
as exhibits to the Registration Statement which have not been filed as required;
and (viii) the representations and warranties of the Company herein are true and
correct in all material respects as of the Closing Date or any later date on
which Optional Shares are to be purchased, as the case may be.
(e) You shall have received on the Closing Date and on any later date
on which Optional Shares are purchased a certificate, dated the Closing Date or
such later date, as the case may be, and signed by the President and the Chief
Financial Officer of the Company, stating that the respective signers of said
certificate have carefully examined the Registration Statement in the form in
which it originally became effective and the Prospectus contained therein and
any supplements or amendments thereto, and that the statements included in
Section 10(d)(i) through (viii) are true and correct.
23
<PAGE> 24
(f) You shall have received from Arthur Andersen LLP a letter or
letters, addressed to the Underwriters and dated the Closing Date and any later
date on which Optional Shares are purchased, confirming that they are
independent public accountants with respect to the Company within the meaning of
the Securities Act and the applicable published rules and regulations thereunder
and based upon the procedures described in their letter which shall have been
delivered to you concurrently with the execution of this Agreement (the
"Original Letter"), but carried out to a date not more than three business days
prior to the Closing Date or such later date on which Optional Shares are
purchased (i) confirming, to the extent true, that the statements and
conclusions set forth in the Original Letter are accurate as of the Closing Date
or such later date, as the case may be, and (ii) setting forth any revisions and
additions to the statements and conclusions set forth in the Original Letter
which are necessary to reflect any changes in the facts described in the
Original Letter since the date of the Original Letter or to reflect the
availability of more recent financial statements, data or information. The
letters shall not disclose any change, or any development involving a
prospective change, in or affecting the business or properties of the Company or
any of its subsidiaries which, in your sole judgment, makes it impractical or
inadvisable to proceed with the public offering of the shares or the purchase of
the Optional Shares as contemplated by the Prospectus.
(g) You shall have received from Arthur Andersen LLP a letter stating
their review of the Company's system of internal accounting controls, to the
extent they deemed necessary in establishing the scope of their examination of
the Company's financial statements as at December 31, 1997, did not disclose any
weakness in internal controls that they considered to be a material weakness.
(h) You shall have been furnished evidence in usual written or
telegraphic form from the appropriate authorities of the several jurisdictions,
or other evidence satisfactory to you, of the qualification referred to in
Section 6(f) hereof.
(i) Prior to the Closing Date, the shares to be issued and sold by the
Company shall have been duly authorized for listing by the Nasdaq National
Market upon official notice of issuance.
(j) On or prior to the Closing Date, you shall have received from all
directors, officers, and beneficial holders of more than 5% of the outstanding
Common Stock, stockholders agreements, in form reasonably satisfactory to Volpe
Brown Whelan & Company, stating that without the prior written consent of Volpe
Brown Whelan & Company, such person or entity will not, for a period of 180 days
following the date the Registration Statement became effective, (i) offer, sell,
contract to sell, make any short sale (including without limitation short
against the box), pledge, or otherwise dispose of, directly or indirectly, any
shares of Common Stock or any options to acquire shares of Common Stock or
securities convertible into or exchangeable or exercisable for or any other
rights to purchase or acquire Common Stock (including without limitation Common
Stock which may be deemed to be beneficially owned in accordance with the rules
and regulations of the Commission) other than the exercise or conversion of
outstanding options, warrants or convertible securities or (ii) enter into any
swap or other agreement that transfers, in whole or in part, any of the economic
consequences or ownership of Common Stock, whether any such transaction
described in clause (i) or (ii) above is to be settled by delivery of
24
<PAGE> 25
Common Stock or such other securities, in cash or otherwise; provided, however,
that bona fide gift transactions and transfers which will not result in any
change in beneficial ownership may be permitted if the transferee enters into a
lock-up agreement in substantially the same form covering the remainder of the
lock-up period.
All the agreements, opinions, certificates and letters mentioned above
or elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if Gibson, Dunn & Crutcher LLP, counsel for the
Underwriters, shall be satisfied that they comply in form and scope.
In case any of the conditions specified in this Section 10 shall not be
fulfilled, this Agreement may be terminated by you by giving notice to the
Company and to the Selling Securityholders. Any such termination shall be
without liability of the Company or the Selling Securityholders to the
Underwriters and without liability of the Underwriters to the Company or the
Selling Securityholders; provided, however, that (i) in the event of such
termination, the Company and the Selling Securityholders agree to indemnify and
hold harmless the Underwriters from all costs or expenses incident to the
performance of the obligations of the Company and the Selling Securityholders
under this Agreement, including all costs and expenses referred to in Section
6(i) and (j), and (ii) if this Agreement is terminated by you because of any
refusal, inability or failure on the part of the Company or the Selling
Securityholders to perform any agreement herein, to fulfill any of the
conditions herein, or to comply with any provision hereof other than by reason
of a default by any of the Underwriters, the Company will reimburse the
Underwriters severally upon demand for all out-of-pocket expenses (including
reasonable fees and disbursements of counsel) that shall have been incurred by
them in connection with the transactions contemplated hereby.
SECTION 11. CONDITIONS OF THE OBLIGATION OF THE COMPANY AND THE SELLING
SECURITYHOLDERS. The obligation of the Company and the Selling Securityholders
to deliver the shares shall be subject to the conditions that (a) the
Registration Statement shall have become effective and (b) no stop order
suspending the effectiveness thereof shall be in effect and no proceedings
therefor shall be pending or threatened by the Commission.
In case either of the conditions specified in this Section 11 shall not
be fulfilled, this Agreement may be terminated by the Company and the Selling
Securityholders by giving notice to you. Any such termination shall be without
liability of the Company and the Selling Securityholders to the Underwriters and
without liability of the Underwriters to the Company or the Selling
Securityholders; provided, however, that in the event of any such termination
the Company and the Selling Securityholders jointly and severally agree to
indemnify and hold harmless the Underwriters from all costs or expenses incident
to the performance of the obligations of the Company and the Selling
Securityholders under this Agreement, including all costs and expenses referred
to in Section 6(i) and (j).
SECTION 12. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement
shall inure to the benefit of the Company, the Selling Securityholders and the
several Underwriters and, with respect to the provisions of Section 7 hereof,
the several parties (in addition to the Company, the Selling Securityholders and
the several Underwriters) indemnified under the provisions of said
25
<PAGE> 26
Section 7, and their respective personal representatives, successors and
assigns. Nothing in this Agreement is intended or shall be construed to give to
any other person, firm or corporation any legal or equitable remedy or claim
under or in respect of this Agreement or any provision herein contained. The
term "successors and assigns" as herein used shall not include any purchaser, as
such purchaser, of any of the shares from any of the several Underwriters.
SECTION 13. NOTICES. Except as otherwise provided herein, all
communications hereunder shall be in writing or by telegraph and, if to the
Underwriters, shall be mailed, telegraphed or delivered to Volpe Brown Whelan &
Company, LLC, One Maritime Plaza, 11th Floor, San Francisco, California 94111,
Attention: Steven D. Piper; and if to the Company, shall be mailed, telegraphed
or delivered to it at its office, 1150 Lake Hearn Drive, Suite 640, Atlanta,
Georgia, Attention: Ramie A. Tritt, M.D.; and if to the Selling Securityholders,
shall be mailed, telegraphed or delivered to the Selling Securityholders in care
of ______________ at ______________. All notices given by telegraph shall be
promptly confirmed by letter.
SECTION 14. MISCELLANEOUS. The reimbursement, indemnification and
contribution agreements contained in this Agreement and the representations,
warranties and covenants in this Agreement shall remain in full force and effect
regardless of (a) any termination of this Agreement, (b) any investigation made
by or on behalf of any Underwriter or controlling person thereof, or by or on
behalf of the Company or the Selling Securityholders or their respective
directors or officers, and (c) delivery and payment for the shares under this
Agreement; provided, however, that if this Agreement is terminated prior to the
Closing Date, the provisions of Section 6(m) hereof shall be of no further force
or effect.
SECTION 15. PARTIAL UNENFORCEABILITY. The invalidity or
unenforceability of any Section, paragraph or provision of this Agreement shall
not affect the validity or enforceability of any other Section, paragraph or
provision hereof. If any Section, paragraph or provision of this Agreement is
for any reason determined to be invalid or unenforceable, there shall be deemed
to be made such minor changes (and only such minor changes) as are necessary to
make it valid and enforceable.
SECTION 16. APPLICABLE LAW. This Agreement shall be governed by and
construed in accordance with the internal laws (and not the laws pertaining to
conflicts of laws) of the State of California.
SECTION 17. GENERAL. This Agreement constitutes the entire agreement of
the parties to this Agreement and supersedes all prior written or oral and all
contemporaneous oral agreements, understandings and negotiations with respect to
the subject matter hereof. This Agreement may be executed in several
counterparts, each one of which shall be an original, and all of which shall
constitute one and the same document.
In this Agreement, the masculine, feminine and neuter genders and the
singular and the plural include one another. The section headings in this
Agreement are for the convenience of the parties only and will not affect the
construction or interpretation of this Agreement. This Agreement may be amended
or modified, and the observance of any term of this Agreement may be waived,
only by a writing signed by the Company, the Selling Securityholders and you.
26
<PAGE> 27
Any person executing and delivering this Agreement as Attorney-in-fact
for the Selling Securityholders represents by so doing that he has been duly
appointed as Attorney-in-fact by such Selling Securityholder pursuant to a
validly existing and binding Power of Attorney which authorizes such
Attorney-in-fact to take such action. Any action taken under this Agreement by
any of the Attorneys-in-fact will be binding on all of the Selling
Securityholders.
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to us the enclosed copies hereof, whereupon,
when confirmed and accepted by the Underwriters as evidenced by the signature of
Volpe Brown Whelan & Company, LLC below, it
27
<PAGE> 28
will become a binding agreement among the Company and the several Underwriters,
including you, all in accordance with its terms.
Very truly yours,
PHYSICIANS' SPECIALTY CORP.
By:
------------------------------
Title:
---------------------------
THE SELLING SECURITYHOLDERS
By:
----------------------------
Attorney-in-fact
The foregoing Underwriting
Agreement is hereby confirmed
and accepted by us in San
Francisco, California as of
the date first above written.
VOLPE BROWN WHELAN & COMPANY, LLC
Acting for ourselves and as
Representatives of the several
Underwriters named in the
attached Schedule A
By:
-------------------------------------
Principal
28
<PAGE> 29
SCHEDULE I
UNDERWRITERS
<TABLE>
<CAPTION>
NUMBER OF
SHARES
TO BE
UNDERWRITERS PURCHASED
============================================================================================================
<S> <C>
Volpe Brown Whelan & Company, LLC.......................................................
Hambrecht & Quist LLC...................................................................
Barington Capital Group.................................................................
Total...................................................................... 2,150,000
=============
</TABLE>
I-1
<PAGE> 30
SCHEDULE II
SELLING SECURITYHOLDERS
<TABLE>
<CAPTION>
NUMBER OF
NAME AND ADDRESS SHARES
OF SELLING SECURITYHOLDERS TO BE SOLD
=============================================================================================================
<S> <C>
Total......................................................................
=================
</TABLE>
II-1
<PAGE> 31
A-4
ANNEX A
MATTERS TO BE COVERED IN THE OPINION OF BACHNER, TALLY, POLEVOY & MISHER LLP
COUNSEL FOR THE COMPANY
AND THE SELLING SECURITYHOLDERS
(i) Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of the jurisdiction of its incorporation, is duly qualified as a foreign
corporation and in good standing in each state of the United States of America
in which the nature of its business or its ownership or leasing of property
requires such qualification, and has full corporate power and authority to own
or lease its properties and conduct its business as described in the
Registration Statement; all the issued and outstanding capital stock of each of
the subsidiaries of the Company has been duly authorized and validly issued and
is fully paid and nonassessable, and is owned by the Company free and clear of
all liens, encumbrances and security interests, and to the best of such
counsel's knowledge, no options, warrants or other rights to purchase,
agreements or other obligations to issue or other rights to convert any
obligations into shares of capital stock or ownership interests in such
subsidiaries are outstanding;
(ii) the authorized capital stock of the Company consists of 10,000
shares of Preferred Stock, $1.00 par value, of which there are no shares
outstanding, and 50,000,000 shares of Common Stock, $0.001 par value, of which
there are outstanding 8,515,863 shares; all of the outstanding shares of such
capital stock (including the Firm Shares and the Optional Shares issued, if any)
have been duly authorized and validly issued and are fully paid and
nonassessable; any Optional Shares purchased after the Closing Date have been
duly authorized and, when issued and delivered to, and paid for by, the
Underwriters as provided in the Underwriting Agreement, will be validly issued
and fully paid and nonassessable; and no preemptive rights of, or rights of
refusal in favor of, stockholders exist with respect to the Shares, or the issue
and sale thereof, pursuant to the Certificate of Incorporation or Bylaws of the
Company or any other instrument and, to the knowledge of such counsel, there are
no contractual preemptive rights that have not been waived, rights of first
refusal or rights of co-sale which exist with respect to the Shares being sold
by the Selling Securityholders or the issue and sale of the Shares by the
Company;
(iii) the Registration Statement has become effective under the
Securities Act and, to the best of such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement or suspending or
preventing the use of the Prospectus is in effect and no proceedings for that
purpose have been instituted or are pending or contemplated by the Commission;
(iv) the Registration Statement and the Prospectus (except as to the
financial statements and schedules and other financial data contained therein,
as to which such counsel need express no opinion) comply as to form in all
material respects with the requirements of the Securities Act, the Exchange Act
and with the rules and regulations of the Commission thereunder;
A-1
<PAGE> 32
(v) such counsel have no reason to believe that the Registration
Statement (except as to the financial statements and schedules and other
financial and statistical data contained therein, as to which such counsel need
not express any opinion or belief) at the Effective Date contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not misleading, or
that the Prospectus (except as to the financial statements and schedules and
other financial and statistical data contained therein, as to which such counsel
need not express any opinion or belief), as of its date or at the Closing Date
(or any later date on which Optional Shares are purchased), contained or
contains any untrue statement of a material fact or omitted or omits to state a
material fact necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading;
(vi) the information required to be set forth in the Registration
Statement in answer to Items 9, 10 (insofar as it relates to such counsel) and
11(c) of Form S-1 is to the best of such counsel's knowledge accurately and
adequately set forth therein in all material respects or no response is required
with respect to such Items, and the description of the Company's stock option
plans and the options granted and which may be granted thereunder and the
options granted otherwise than under such plans set forth in the Prospectus
accurately and fairly presents the information required to be shown with respect
to said plans and options to the extent required by the Securities Act and the
rules and regulations of the Commission thereunder;
(vii) such counsel do not know of any franchises, contracts, leases,
documents or legal proceedings, pending or threatened, which in the opinion of
such counsel are of a character required to be described in the Registration
Statement or the Prospectus or to be filed as exhibits to the Registration
Statement, which are not described and filed as required;
(viii) the Underwriting Agreement has been duly authorized, executed
and delivered by the Company;
(ix) the Underwriting Agreement has been duly executed and delivered
by or on behalf of the Selling Securityholders and the Custody Agreement between
the Selling Securityholders and _____________, as Custodian, and the Power of
Attorney referred to in such Custody Agreement have been duly executed and
delivered by the several Selling Securityholders;
(x) the Company has full corporate power and authority to enter into
the Underwriting Agreement and to sell and deliver the Shares to be sold by it
to the several Underwriters; the Underwriting Agreement is a valid and binding
agreement of the Company enforceable in accordance with its terms, except as
enforceability may be limited by general equitable principles, bankruptcy,
insolvency, reorganization, moratorium or other laws affecting creditor's rights
generally and except as to those provisions relating to indemnity or
contribution for liabilities arising under federal and state securities laws (as
to which no opinion need be expressed);
(x) the Underwriting Agreement, the Custody Agreement and the Power
of Attorney are valid and binding agreements of each of the Selling
Securityholders enforceable in accordance with their terms except as
enforceability may be limited by general equitable principles, bankruptcy,
insolvency, reorganization, moratorium or other laws affecting creditors' rights
A-2
<PAGE> 33
generally and except with respect to those provisions relating to indemnity or
contribution for liabilities under the Securities Act, as to which no opinion
need be expressed, and each Selling Securityholder has full legal right and
authority to enter into the Underwriting Agreement, the Custody Agreement and
the Power of Attorney and to sell, transfer and deliver in the manner provided
in the Underwriting Agreement the Shares sold by such Selling Securityholder
hereunder;
(xi) the issue and sale by the Company of the Shares sold by the
Company as contemplated by the Underwriting Agreement will not conflict with, or
result in a breach of, or constitute a default under the Certificate of
Incorporation or Bylaws of the Company or any of its subsidiaries or any
agreement or instrument known to such counsel to which the Company or any of its
subsidiaries is a party or by which any of its properties may be bound, or any
applicable law or regulation, or so far as is known to such counsel, any order,
writ, injunction or decree, of any jurisdiction, court or governmental
instrumentality;
(xii) to the best of such counsel's knowledge, the transfer and sale
by the Selling Securityholders of the Shares to be sold by the Selling
Securityholders as contemplated by the Underwriting Agreement, the Power of
Attorney and the Custody Agreement will not conflict with, result in a breach
of, or constitute a default under any agreement or instrument known to such
counsel to which any of the Selling Securityholders is a party or by which any
of the Selling Securityholders or any of their properties may be bound, or any
applicable law or regulation, or so far is known to such counsel, order, writ,
injunction or decree of any jurisdiction, court or governmental instrumentality
body;
(xiii) all holders of securities of the Company having rights to the
registration of shares of Common Stock, or other securities, because of the
filing of the Registration Statement by the Company have waived such rights or
such rights have expired by reason of lapse of time following notification of
the Company's intent to file the Registration Statement;
(xiv) good and marketable title to the Shares under the Underwriting
Agreement, free and clear of all liens, encumbrances, equities, security
interests and claims, has been transferred to the Underwriters who have
severally purchased such Shares under the Underwriting Agreement, assuming for
the purpose of this opinion that the Underwriters purchased the same in good
faith without notice of any adverse claims;
(xv) no consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation of the transactions
contemplated in the Underwriting Agreement, except such as have been obtained
under the Securities Act and such as may be required under state securities or
blue sky laws in connection with the purchase and distribution of the Shares by
the Underwriters and the clearance of the offering with the NASD; and
(xvi) the Shares sold by the Selling Securityholders are listed and
duly admitted to trading on the Nasdaq National Market, and the shares issued
and sold by the Company will have been duly authorized for listing by the Nasdaq
National Market upon official notice of issuance.
----------------------------------
A-3
<PAGE> 34
Counsel rendering the foregoing opinion may rely as to questions of law
not involving the laws of the United States or of the State of Delaware, upon
opinions of local counsel satisfactory in form and scope to counsel for the
Underwriters. Copies of any opinions so relied upon shall be delivered to the
Representatives and to counsel for the Underwriters and the foregoing opinion
shall also state that counsel knows of no reason the Underwriters are not
entitled to rely upon the opinions of such local counsel.
A-4
<PAGE> 35
ANNEX B
MATTERS TO BE COVERED IN THE OPINION OF TROUTMAN SANDERS
REGULATORY COUNSEL FOR THE COMPANY
Such counsel are familiar with the governmental regulation of the
heathcare industry ("Healthcare Regulation") to which the Company and its
subsidiaries are subject and have read the Registration Statement and the
Prospectus, including particularly the portions of the Registration Statement
and the Prospectus referring to Heathcare Regulation and:
(i) The statements in the Registration Statement and the Prospectus
under the captions "Risk Factors --Antitrust Risks, --Government Regulation,
- --Heath Care Reform" and "Business --Government Regulation," are accurate and
complete statements or summaries of the matters therein set forth and nothing
has come to such counsel's attention that causes such counsel to believe that
the above-described portions of the Registration Statement and the Prospectus
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading;
(ii) to the best of such counsel's knowledge, there are no legal or
governmental proceedings pending against the Company or any of its subsidiaries
relating to Heath Care Regulation, and to the best of such counsel's knowledge
no such proceedings are threatened or contemplated by governmental authorities
or others;
(iii) such counsel do not know of any contracts or other documents,
relating to governmental regulation affecting the Company or any of its
subsidiaries of a character required to be filed as an exhibit to the
Registration Statement or required to be described in the Registration Statement
or the Prospectus that are not filed or described as required; and
(iv) except as set forth in the Prospectus, to the best of such
counsel's knowledge, the Company and its subsidiaries are in material compliance
with all laws and regulations relating to Heath Care Regulation.
B-1
<PAGE> 1
EXHIBIT 10.45
FIRST AMENDMENT TO EXECUTIVE EMPLOYMENT AGREEMENT
This FIRST AMENDMENT TO EXECUTIVE EMPLOYMENT AGREEMENT (the "Amendment") is
made and entered into as of the 25th day of March, 1998, by and between
PHYSICIANS' SPECIALITY CORP., a Delaware corporation ("PSC"), and GERALD R.
BENJAMIN, an individual resident of the state of Georgia ("Executive").
WITNESSETH:
WHEREAS, PSC and Executive entered into that certain Executive Employment
Agreement dated November 26, 1996 (the "Agreement");
WHEREAS, PSC and Executive desire to amend the Agreement as hereinafter set
forth;
NOW, THEREFORE, in consideration of the premises, the mutual covenants and
agreements hereinafter set forth, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto,
intending to be legally bound, do hereby agree as follows:
1. All capitalized terms contained in this Amendment and not otherwise
defined herein shall have the respective meanings given to such terms in the
Agreement.
2. Section 1.1 of the Agreement is hereby amended by inserting the
following sentence after the period at the end of the second sentence for such
section: "Executive may hold such other offices of Company to which the Board
of Directors may, from time to time, appoint Executive and to which Executive
consents to serve."
3. Section 1.1 of the Agreement is hereby further amended by inserting
the following sentence after the period at the end of such section; "Executive
shall devote his full time (i.e., no less than 40 hours per week) to performing
his obligations hereunder and shall perform his obligations hereunder
diligently, faithfully and to the best of Executive's abilities.
Notwithstanding the foregoing, Executive shall continue to serve as Chairman of
Bock, Benjamin & Co. and have other financial interests and income in
connection therewith or delivered therefrom."
4. Commencing as of the date of this Amendment, Executive's Base Salary
shall be increased to a rate of One Hundred Fifty Thousand Dollars ($150,000)
per annum.
5. This Amendment may be executed in several counterparts, each of which
shall be deemed to be an original, and such counterparts shall together
constitute one and the same instrument.
6. This Amendment shall be governed by the laws of the State of Georgia.
<PAGE> 2
7. Except as amended hereby, the Agreement shall remain in full force
and effect in accordance with its terms and is hereby ratified and confirmed.
IN WITNESS WHEREOF, the Parties have executed this Amendment as of the day
and year first above written.
PHYSICIANS' SPECIALTY CORP.
By /s/ RICHARD D. BALLARD
-----------------------------
Title: CEO
-------------------------
/s/ GERALD R. BENJAMIN
--------------------------------
Gerald R. Benjamin
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
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0
0
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