<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------------- ----------------
Commission file Number: 001-12759
Physicians' Specialty Corp.
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(Exact Name of Registrant as Specified in its charter)
Delaware 58-2251438
- ------------------------------ ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1150 Lake Hearn Drive, Suite 640 Atlanta, Georgia 30342
----------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
404-256-7535
----------------------------------------------------------------------
(Registrant's telephone number, including area code)
N/A
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(Former name or former address, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
There were 8,841,359 shares of common stock, par value $.001 per share,
outstanding as of August 13, 1998.
<PAGE> 2
Physicians' Specialty Corp.
Index
Part 1 - Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at June 30, 1998
And December 31, 1997.................................................3
Consolidated Statements of Operations
for the Three and Six Months Ended June 30, 1998 and 1997.............4
Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 1998 and 1997......................5
Notes to Consolidated Financial Statements............................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations .......................11
Part II - Other Information
Item 2. Changes in Securities and Use of Proceeds............................14
Item 5. Other Information....................................................14
Item 6. Exhibits and Reports on Form 8-K.....................................15
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PHYSICIANS' SPECIALTY CORP.
Condensed Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------- -----------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $10,607,798 $ 5,351,639
Accounts receivable, net of allowance for doubtful
accounts of $457,005 and $261,714 in
1998 and 1997, respectively 16,402,540 9,273,565
Notes receivable 80,000 81,682
Prepayments and other 751,551 335,650
----------- -----------
Total current assets 27,841,889 15,042,536
PROPERTY AND EQUIPMENT, net 7,009,294 3,431,707
INTANGIBLE ASSETS, net 23,478,157 11,793,777
OTHER ASSETS 601,613 330,338
----------- -----------
Total Assets $58,930,953 $30,598,358
=========== ===========
LIABILITIES AND SHAREHOLDERS ' EQUITY
CURRENT LIABILITIES:
Due to physicians $ 2,058,566 $ 1,177,009
Accounts payable and accrued expenses 3,985,420 3,057,880
Deferred income taxes 890,093 338,218
----------- -----------
Total current liabilities 6,934,079 4,573,107
SUBORDINATED SELLER NOTES & DEBENTURE 7,563,701 911,715
----------- -----------
Total liabilities 14,497,780 5,484,822
SHAREHOLDERS' EQUITY:
Common stock, $.001 par value; 50,000,000 shares authorized
issued: 8,841,359 in 1998 and 6,503,098 in 1997 8,842 6,503
Additional paid-in capital 40,638,263 23,401,657
Retained earnings 3,786,068 1,705,376
----------- -----------
Total shareholders' equity 44,433,173 25,113,536
----------- -----------
Total liabilities and shareholders' equity $58,930,953 $30,598,358
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
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<PAGE> 4
PHYSICIANS' SPECIALTY CORP.
Consolidated Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues
Patient service revenues $ 264,569 $ 293,814 $ 573,524 $ 320,175
Capitation revenues 1,145,368 1,301,703 2,310,674 1,357,551
Management fees 7,235,132 2,668,918 13,159,402 2,825,660
----------- ----------- ----------- -----------
Net revenue 8,645,069 4,264,435 16,043,600 4,503,386
Expenses
Provider claims, wages, benefits 3,961,630 2,360,886 7,280,557 2,544,391
General and administrative 2,562,405 1,089,953 4,819,759 1,122,737
Depreciation and amortization 403,331 93,771 686,120 96,555
----------- ----------- ----------- -----------
Operating expenses 6,927,366 3,544,610 12,786,436 3,763,683
Operating income 1,717,703 719,825 3,257,164 739,703
Other income - net 124,659 119,306 153,559 132,499
----------- ----------- ----------- -----------
Pretax income 1,842,362 839,131 3,410,723 872,202
Provision for income taxes 718,411 327,261 1,330,031 340,159
----------- ----------- ----------- -----------
Net income $ 1,123,951 511,870 $ 2,080,692 $ 532,043
=========== =========== =========== ===========
Earnings per share:
Basic $ 0.15 $ 0.09 $ 0.29 $ 0.15
Diluted $ 0.14 $ 0.09 $ 0.27 $ 0.15
Weighted average shares outstanding
Basic 7,695,730 5,904,648 7,106,869 3,519,742
Diluted 8,240,675 5,904,648 7,640,821 3,519,742
</TABLE>
See accompanying notes to consolidated financial statement.
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<PAGE> 5
PHYSICIAN'S SPECIALTY CORP.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30
-----------------------------
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,080,692 $ 532,043
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 686,120 96,555
Compensation expense 32,987 48,000
Increase in accounts receivable (3,197,606) (35,501)
Increase in prepayments and other (686,091) 133,144
Increase in accounts payable and accrued liabilities 972,442 674,348
------------ ------------
Total Adjustments (2,192,148) 916,548
------------ ------------
Net cash (used in) provided by operating activities (111,456) 1,448,591
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment for acquisitions, net of cash acquired (10,310,258) 0
Purchase of property and equipment (917,354) (164,322)
------------ ------------
Net cash used in investing activities (11,227,612) (164,322)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock, net of offering costs 16,520,043 15,408,094
Borrowing under short-term debt 75,185 170,000
Repayment of short-term debt 0 (2,258,562)
Repayment of long-term debt 0 0
Deferred offering costs 0 0
------------ ------------
Net cash provided by financing activities 16,595,228 13,319,532
------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 5,256,159 14,603,891
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 5,351,639 123,540
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 10,607,798 $ 14,727,341
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
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<PAGE> 6
Physicians' Specialty Corp.
Notes to the Consolidated Financial Statements (Unaudited)
June 30, 1998
NOTE 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") and
related specialties. 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 greater
Atlanta, Georgia; Chicago, Illinois; Birmingham, Alabama; the South Florida area
and Southern New York and Northern New Jersey.
NOTE 2. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries and have been prepared in accordance with
generally accepted accounting principles for interim financial reporting and in
accordance with Rule 10-01 of Regulation S-X. Accordingly, they do not include
all of the information and notes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, the
accompanying unaudited consolidated financial statements contain all adjustments
(consisting of normal recurring items) necessary for a fair presentation of the
results for the interim periods presented. These financial statements and
footnote disclosures should be read in conjunction with the audited financial
statements and the notes thereto included in the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1997.
NOTE 3. 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 liabilities of (i) Atlanta Ear, Nose & Throat Associates,
P.C., (ii) ENT & Allergy Associates, Inc. (iii) Metropolitan Ear, Nose & Throat,
P.C., (iv) Atlanta Head and Neck Surgery, P.C. and (v) Ear, Nose & Throat
Associates, P.C. (collectively, the "Initial Practices"), and all of the
outstanding shares of common stock of three corporations holding managed care
contracts (the "ENT Networks") in March 1997 (the "Reorganization"). In
connection with the acquisition of assets of the initial 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).
POST REORGANIZATION ACQUISITIONS THROUGH MARCH 31, 1998
Since the Reorganization, the Company 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 Ear, Nose & Throat Associates, P.C, (ii) Ear Nose & Throat
Specialists, P.C., (iii) Ear, Nose & Throat Specialists, Head & Neck Surgery,
P.C., (iv) Northside Ear, Nose & Throat Associates, P.C., (v) Otolaryngology
Medical & Surgical Associates, Ltd., (vi) Cobb Ear, Nose & Throat Associates,
P.C., (vii) James J. Murata. M.D., P.A. 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.
In connection with the acquisition of assets or equity of these practices,
the Company (i) paid an aggregate of approximately $5.1 million in cash, (ii)
issued an aggregate of 611,215 shares of Common Stock (valued at an aggregate of
approximately $4.6 million), (iii) agreed to issue an aggregate of 301,779
additional shares of Common Stock (valued at an aggregate of approximately $2.7
million) to three 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 non-interest
bearing contingent subordinated 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
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<PAGE> 7
contingent notes are payable by the Company, 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. 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.
ACQUISITIONS FROM APRIL 1, 1998 THROUGH JUNE 30, 1998
During the three month period ended June 30, 1998, the Company 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 (i) John C. Westerkamm, M.D., P.A. ("Westerkamm"),
and (ii) Napoleon G. Bequer, M.D., P.A. ("Bequer"). In connection with the
acquisition of assets or equity of these practices, the Company (i) paid an
aggregate of approximately $415,000 in cash, (ii) discharged approximately
$260,000 of liabilities, (iii) issued a subordinated convertible promissory note
in the principal amount of $250,000 which note matures in April 2000 and accrues
interest at a rate of 6.0% per annum and is convertible into shares of Common
Stock valued at the average closing price of such Common Stock for the ten
trading days, preceding the date of delivery of such shares, (iv) issued an
aggregate of approximately 18,000 shares of Common Stock (valued at an aggregate
of approximately $163,000), and (v) agreed to issue approximately 18,000
additional shares of Common Stock (valued at an aggregate of approximately
$163,000) to one of the affiliated practices beginning in June 1999. In
connection with these acquisitions the Company paid an aggregate of
approximately $63,300 to Premier HealthCare, an affiliate of the Company's Vice
Chairman and Secretary, for advisory services rendered.
In addition on May 27, 1998, pursuant to a Stock Purchase Agreement, the
Company, through PSC Acquisition Corp., a wholly-owned subsidiary of the
Company, acquired (i) substantially all of the tangible assets and assumed
certain contractual liabilities of Physicians' Domain, Inc., a White Plains, New
York based ENT physician practice management company ("Physicians' Domain") and
(ii) the stock of three corporations that are successors to three ENT physician
practices affiliated with Physicians' Domain employing an aggregate of 20
physicians and 16 allied health care professionals with 11 clinical offices in
Southern New York and Northern New Jersey (collectively, "PDI"). In connection
with the PDI transaction, the Company (i) paid approximately $5.4 million in
cash, (ii) discharged approximately $3.8 million of liabilities of PDI and (iii)
issued a subordinated long-term promissory note in the principal amount of
approximately $6.4 million , which note matures in May 2003, accrues interest at
a rate of 6.0% per annum, payable quarterly, is secured by the fixed assets
acquired by the Company in the transaction and is subordinate to senior
indebtedness, including borrowings under the Company's credit facility. In
addition, the Company will pay an additional $500,000, in cash or shares of
Common Stock at the Company's option, if the PDI practices achieve stipulated
performance targets. Pursuant to the stock purchase agreement, the physicians at
PDI have the right to nominate one member to the Board of Directors of the
Company. Steven H. Sacks, M.D., a nominee of the physicians at PDI, was
appointed to the Board of Directors of the Company on August 12, 1998. In
connection with the PDI transaction, the Company paid approximately $260,000 to
Premier HealthCare for advisory services rendered
The Company also entered into management services agreements with two newly
organized ENT practices employing the 20 ENT physicians in connection with the
PDI transaction. The management services agreements provide for an aggregate
fixed annual management fee of approximately $2.0 million, plus reimbursement of
practice operating expenses. Pursuant to the management services agreements, the
fixed management fee is subject to annual increases after May 27, 2003
consistent with the annual percentage increase in the consumer price index for
the prior year. The management services agreements also 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 Company used a portion of the net proceeds received from the Company's
public offering in May 1998 to pay the cash component of and to discharge the
indebtedness of PDI assumed by the Company in connection with the PDI
transaction.
NOTE 4. PUBLIC OFFERINGS
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 a
portion of which were used for repayment of indebtedness of the acquired
practices, repayment of indebtedness of the Company, payment of a consulting
fee, and for general corporate purposes and working capital requirements.
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<PAGE> 8
On May 15, 1998, the Company completed a public offering of 2,050,263
shares of its common stock (i) 2,000,000 of which shares were sold by the
Company and (ii) 50,263 of which were sold by certain stockholders of the
Company. On May 19, 1998 the Company's underwriters exercised their option to
purchase 307,540 additional shares of common stock from the Company to cover
over-allotments. The net proceeds to the Company from the offering and exercise
of the over-allotment shares were approximately $16,520,000, with approximately
$5,400,000 and $3,800,000 respectively, used to pay the cash portion of the
purchase price of the PDI transaction and to repay outstanding indebtedness of
PDI.
On May 12, 1998 the Company also completed the registration under the
Securities Act of 1933, as amended (the "Act"), of an aggregate of 3,146,514
shares of Common Stock, of which (i) 2,750,000 shares may be issued from time to
time by the Company in connection with potential future affiliation transactions
with ENT physicians or related specialty practices or the merger with or
acquisition by the Company of other related businesses or assets, (ii) 220,000
shares of Common Stock are issuable upon exercise of warrants issued to the
representatives of the underwriters in the IPO which may be sold from time to
time by the holders of the warrants after issuance and (iii) 176,514 shares of
Common Stock are issuable in December 1998 in connection with a practice asset
acquisition completed in December 1997, which may be sold from time to time by
the physician stockholders after issuance.
NOTE 5. MANAGEMENT FEE REVENUE
The Company records revenue on a management fee basis as derived from
physician practices managed by the Company in which a controlling equity
ownership interest does not exist. Management fees are composed of (i) a varying
percentage of affiliated practice patient service revenue (typically 12.5%),
(ii) a fixed management fee in connection with the PDI affiliation of
approximately $2,045,000 per year, subject to certain increases, and (iii)
reimbursement of practice operating expenses (excluding compensation to
physicians and physician assistants). Management fee revenue earned by the
Company is detailed as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------- -------
1998 1997 1998 1997
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Percentage of affiliated practice patient service
revenue and fixed management fee $1,856,299 $ 618,398 $ 3,216,045 $ 729,673
Reimbursement of practice operating expenses 5,378,833 2,050,520 9,943,357 2,095,987
---------- ---------- ----------- ----------
Total management fee revenue $7,235,132 $2,668,918 $13,159,402 $2,825,660
========== ========== =========== ==========
</TABLE>
There currently exists wide disparity in the methods of recording revenue
in the physician practice management (PPM) industry. The Company believes the
following unaudited supplemental information, which includes patient service
revenue of both owned as well as managed practices ("system wide" revenue)
allows a reader of the Company's financial statements to evaluate comparability
with other PPM companies recording patient services revenue on a consolidated
basis for financial reporting purposes. The unaudited supplemental "system wide"
information is being presented for supplemental purposes only and should be read
in conjunction with the Company's financial statements.
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<PAGE> 9
Supplemental System Wide Information
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------- -------
1998 1997 1998 1997
----------- ---------- ----------- ----------
Supplemental Net Patient Service
<S> <C> <C> <C> <C>
Revenue:
Owned Practice $ 264,569 $ 293,814 $ 573,524 $ 320,175
Managed Practices 12,515,482 4,627,267 23,006,667 5,130,842
----------- ---------- ----------- ----------
Total Supplemental Patient
Service Revenue 12,780,051 4,921,081 23,580,191 5,451,017
Plus:
Capitation Revenue $ 1,145,368 $1,301,703 $ 2,310,674 $1,357,551
Management Fees 288,071 39,989 326,690 88,318
----------- ---------- ----------- ----------
Total Supplemental
System wide Revenue $14,213,490 $6,262,773 $26,217,555 $6,896,886
Less:
Amounts Retained by
Physicians Groups 5,568,421 1,998,338 10,173,958 2,393,500
----------- ---------- ----------- ----------
Total Net Revenue $ 8,645,069 $4,264,435 $16,043,600 $4,503,386
=========== ========== =========== ==========
</TABLE>
NOTE 6. 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 method over a period of 25 years. At June 30, 1998, the
amount of such intangible assets was approximately $23,988,000, with accumulated
amortization totaling approximately $510,000.
NOTE 7. 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 adoption of SFAS No. 130 for fiscal
1998 was not material to the Company's financial statements.
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
consideration. EITF 97-2 also has addressed the accounting method for future
combinations
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<PAGE> 10
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.
NOTE 8. SUBSEQUENT EVENTS
In July 1998, the Company received notification from CIGNA Healthcare of
Georgia, Inc. ("CIGNA") that as a result of the financial issues associated with
FPA Medical Management, Inc., ("FPA"), CIGNA was terminating its relationship
with FPA and was assuming FPA's responsibility under the agreement effective
August 1, 1998 and that the future capitation payments to be received by the
Company would be paid by CIGNA beginning with the June 1998 payment.
In August 1998 the Company received an additional notice from CIGNA stating
that FPA, in connection with its bankruptcy filing on July 20, 1998, had
obtained a court order from the US Bankruptcy Court prohibiting CIGNA, and other
payors, from making any direct payments to physicians or organizations managing
capitated managed care contracts for FPA, such as the Company, for services
prior to August 1, 1998. As of July 31, 1998 the Company recorded a receivable
due from FPA of approximately $24,000. There can be no assurance that such
amount will be paid by FPA or CIGNA.
On July 31, 1998, the Company executed a four year $45.0 million amended
and restated syndicated Credit Facility with NationsBank, N.A. as agent and
lender and PNC Bank and Rabobank Nederland as lenders, replacing the Company's
previous $20 million credit facility. Advances under the Credit Facility will
bear interest, at the Company's option, at either a prime-based rate or a LIBOR
based rate with interests only payments required until termination of the
agreement. Borrowings under the Credit Facility may be used to finance permitted
acquisitions and investments, to refinance existing debt, and for working
capital and general corporate purposes. Revolving loans under the Credit
Facility may be borrowed repaid and reborrowed prior to the termination date of
the facility. The Credit Facility contains various affirmative and negative
covenants, which among other things require the Company to maintain certain
financial ratios or to meet certain financial requirements, including ratios of
funded debt and senior funded debt to earnings before interest, taxes,
depreciation and amortization; a minimum net worth; and a fixed charge coverage
ratio, and sets certain restrictions on investments, acquisitions, mergers and
sale of assets. Borrowings under the Credit Facility are secured by the capital
stock of the Company's material subsidiaries, the Company's (and such
subsidiaries') accounts receivable, and the Company's rights under its
management services agreements with physician practice groups. As of August
1998, the Company had no outstanding borrowings under the Credit Facility.
Note 9.
The Company has calculated its basic and diluted earnings per share in
accordance with SFAS No. 128, "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 periods
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.
A reconciliation of the number of weighted average shares used in
calculating basic and diluted earnings per share is as follows:
<TABLE>
Three Months Ended Six Months Ended
1998 1997 1998 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Weighted average number of common
shares outstanding - basic 7,695,730 5,904,648 7,106,869 3,519,742
Effect of potentially dilutive shares outstanding 431,490 -- 431,577 --
Effect of convertible debt 113,455 -- 102,375 --
--------- --------- --------- ---------
Weighted average number of common shares
Outstanding - diluted 8,240,675 5,904,648 7,640,821 3,519,742
========= ========= ========= =========
</TABLE>
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<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for the descriptions of historical facts contained herein,
statements concerning future results, performance or expectations are
forward-looking statements. Actual results, performance or developments could
differ materially from those expressed or implied by such forward-looking
statements as a result of known and unknown risks, uncertainties and other
factors including those described from time to time in the Company's filings
with the Securities and Exchange Commission, under "Risk Factors" and elsewhere,
including the Company's limited operating history; risks associated with
combined operations; and risks relating to acquisitions and managing growth;
dependence on affiliated physicians; dependence on managed care organizations
and risks associated with capitated arrangements, including potential reductions
in reimbursement; risks relating to credit facility and substantial leverage;
competition; regulatory risks; and other risks.
GENERAL
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 through August 7, 1998, 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 three ENT physician practices with three
physicians 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, and the stock and related assets of three
corporations that are successors to three ENT physician practices employing an
aggregate of 20 physicians in Southern New York and Northern New Jersey. In
addition, the Company acquired substantially all of the tangible assets of
Physicians' Doman, a White Plains, New York based ENT physician practice
management company. As a result of these acquisitions as of August 13, 1998, the
Company was affiliated with 69 physicians, one TMJ specialist and 69 allied
health care professionals with 55 clinical offices in Alabama, Florida, Georgia,
Illinois, New York and New Jersey.
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 either a stipulated percentage of revenue
generated by or on behalf of physicians practicing at (non-owned) affiliated
practices or a fixed dollar amount of management fee, along with reimbursement
of Practice Expenses (as defined). Capitation revenue consists of fixed monthly
payments received by the Company directly from health maintenance organizations
("HMOs") (or payors subcontracting with HMOs) or third party payors. 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.
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
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.
The Company's relationships with its affiliated physicians are set forth in
various asset acquisition agreements and management services agreements. The
management services agreements, which have a term of 40 years, delineate the
responsibilities and obligations of the physician practices and the Company.
These agreements provide for the affiliated practices to assign to the
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<PAGE> 12
Company all of its non-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 agreement.
The Company is responsible for the payment of operating expenses of the
affiliated physician practices, including salaries and benefits of non-medical
employees of the practices, lease obligations for office space and equipment,
medical and office supplies, and the non-operating expenses of the affiliated
physician practices, including depreciation, amortization and interest. The
Company pays for all such expenses directly out of the proceeds of the accounts
receivable assigned to the Company by the affiliated physician practices. In
addition, under the management services agreements, the Company retains as a
part of its management fee, a stipulated percentage (typically 12.5%) of all
revenues (after adjustment for contractual allowances) generated by or on behalf
of physicians practicing at such practice or a fixed dollar amount of management
fee, as payment for the Company's management services and non-allocable costs
incurred by the Company attributable to the provision of management services.
Contractual allowances are the difference between the amounts customarily
charged by physicians practicing at such practice and the amounts received
pursuant to negotiated fee schedules from payors under indemnity arrangements,
managed care contracts and preferred provider arrangements. The percentage
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.
The Company holds, manages and administers capitated managed care contracts
with Cigna HealthCare of Georgia, Inc. ("CIGNA"), United HealthCare of Georgia,
Inc. and FPA Medical Management, Inc. (which contract is being assumed by
CIGNA, effective August 1, 1998) 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. At
June 30, 1998, the Company's three capitated managed care contracts covered an
aggregate of 320,137 enrollees.
On June 12, 1998, the Company entered into a capitated managed care
agreement with The Morgan Health Group, Inc ("Morgan"). Pursuant to the
agreement, commencing August 1, 1998, the Company's affiliated physicians in the
metropolitan Atlanta area will provide ENT medical and surgical services to
enrollees of health care plans which have contracted with Morgan for the
provision of medical and surgical services. At June 30, 1998, there were
approximately 60,000 enrollees under the agreement with Morgan. Pursuant to the
agreement with Morgan, the Company will receive a fixed amount per enrollee per
month from Morgan and will compensate each participating physician on discounted
fee-for-service basis for providing ENT medical and surgical services to
enrollees under the agreement. The initial term of the agreement is for two
years and expires in August 2000. Following the initial term, the agreement will
automatically be renewed for successive one year periods. The agreement can be
terminated by Morgan for cause upon 30 days prior written notice, by the Company
upon 45 days prior written notice for non payment of amounts owed to the Company
by Morgan, and by either party without cause upon 90 days prior written notice.
Results Of Operations
Comparisons of the six month period ended June 30, 1998 with data for the
six month period ended June 30, 1997 are not meaningful since the Company did
not commence business operations until the closing of the reorganization and its
IPO on March 26, 1997.
Revenue. Management fees increased to $7,235,132 for the three months ended
June 30, 1998 as compared with $2,668,918 for the same period in 1997, an
increase of $4,566,214 or 171%. The increase in management fees is attributable
to an increase in the number of physicians affiliated with the Company at June
30, 1998 to 68 as compared with 22 for the same period in 1997 as a result of
the Company's acquisitions since the Reorganization. Capitation revenues
decreased to $1,145,368 for the three months ended June 30, 1998 as compared
with $1,301,703 for the same period in 1997, a decrease of $156,335 or 12%. The
decrease in capitation revenues is primarily attributable to a modification by
Aetna Health Plans of Georgia ("Aetna") of its delivery system of physician
specialty services in the Atlanta market which resulted in the termination of
its capitated managed care contracts with each physician specialty group
including the Company, effective June 30, 1997. Patient service revenues
decreased to $264,569 for the three months ended June 30, 1998 as compared with
$293,814 for the same period in 1997, a decrease of $29,245 or 10%. The decrease
in patient service revenues is mainly attributable to an increase in contractual
adjustments from third party payors in the Birmingham, Alabama market. Such
adjustments represent the difference between charges at established rates
compared with actual recoverable amounts.
As a result of the foregoing factors, the Company's net revenue increased
to $8,645,069 for the three months ended June 30, 1998 as compared with
$4,264,435 for the same period in 1997, an increase of $4,380,634 or 103%.
On a supplemental basis, patient service revenue generated by physicians
who were affiliated with the Company for both periods ended June 30, 1997 and
1998 increased on average approximately 15% per physician.
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Provider claims, wages, and benefits. Provider claims, wages and benefits,
increased to $3,961,630 for the three months ended June 30, 1998 as compared
with $2,360,886 for the same period in 1997, an increase of $1,600,744 or 68%.
The dollar increase in provider claims, wages and benefits was primarily
attributable to the addition of non-medical personnel at the Company's
affiliated practices required to support the increase in the number of
affiliated physician groups managed by the Company. As a percent of net revenue,
provider claims, wages and benefits decreased to 45% for the three months ended
June 30, 1998 as compared to 55% for the same period in 1997. This decrease was
primarily attributable to the increase in net revenue that was greater than the
incremental increase in wages and benefits.
General and administrative. General and administrative expenses increased
to $2,562,405 for the three months ended June 30, 1998 as compared with
$1,089,953 for the same period in 1997, an increase of $1,472,452 or 135%. This
increase was primarily attributable to the to the addition of personnel and
greater support costs associated with the Company's rapid expansion since June
30, 1997. As a percent of net revenue, general and administrative expenses
increased to 30% for the three months ended June 30, 1998 as compared to 26% for
the same period in 1997, as a result of the foregoing factors.
Depreciation and Amortization. Depreciation and amortization expenses
increased to $403,331 for the three months ended June 30, 1998 as compared with
$93,771 for the same period in 1997, an increase of $309,560 or 330%. This
increase was primarily the result of the amortization of intangible assets
associated with the Company's affiliation with physician groups, as well as
investments in equipment, leasehold improvements and management information
systems. As a percent of net revenue, depreciation and amortization expense
increased to 4% for the three months ended June 30, 1998 as compared with 2% for
the same period in 1997, as a result of the foregoing factors. The Company
believes amortization expense will increase substantially in future periods as a
result of the PDI transaction.
Other Income - net. Other income-net increased to $124,659 for the three
months ended June 30, 1998 as compared with $119,306 for the same period in
1997, an increase of $5,353 or 4%. Other income is derived from interest income
earned on the short term investment of excess cash and cash equivalents as well
as interest charges to affiliated practices for additions to clinical equipment,
leasehold improvements and other fixed assets, net of amounts of interest
expense related primarily to the subordinated seller notes and debenture. The
Company believes interest expense will increase substantially in future periods
as a result of the PDI transaction.
Income Taxes. Income taxes for the quarters ended June 30, 1998 and 1997
were provided for at 39% effective tax rate.
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 June 30, 1998, the Company had working capital of $20,907,810, compared
to $10,469,429 at December 31, 1997, an increase of $10,438,381. The increase in
working capital was due primarily to an increase in net accounts receivable of
$7,128,975, an increase in cash of $5,256,159 primarily as a result of the
Company's public offering of Common Stock in May 1998, offset by an increase in
accounts payable, accrued expenses and payments to physicians of $1,809,097.
For the six month period ended June 30, 1998 net cash used in operating
activities was $111,456 compared to net cash provided by operating activities of
$1,448,591 for the same period in 1997. Net cash used in investing activities
for the six months ended June 30, 1998 was $11,229,612 with $10,310,258 expended
as cash consideration for acquisitions, including PDI. Net cash provided by
financing activities for the six months ended June 30, 1998 was $16,595,227 with
$16,520,043 received pursuant to the Company's public offering in May 1998, net
of offering costs.
During the three month period ended June 30, 1998, the Company 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 (i) Westerkamm and (ii) Bequer. In connection with
the acquisition of assets or equity of these practices, the Company (i) paid an
aggregate of approximately $415,000 in cash, (ii) discharged approximately
$260,000 of liabilities, (iii) issued a subordinated convertible promissory note
in the principal amount of $250,000 which note matures in April 2000 and accrues
interest at a rate of 6.0% per annum and is convertible into shares of Common
Stock valued at the average closing price of such Common Stock for the ten
trading days, preceding the date of delivery of such shares, (iv) issued an
aggregate of approximately 18,000 shares of Common Stock (valued at an aggregate
of approximately $163,000), and (v) agreed to issue approximately 18,000
additional shares of Common Stock (valued at an aggregate of approximately
$163,000) to one of the
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<PAGE> 14
affiliated practices beginning in June, 1999. In connection with these
acquisitions, other than PDI the Company paid an aggregate of approximately
$63,300 to Premier HealthCare, an affiliate of the Company's Vice Chairman and
Secretary, for advisory services rendered.
In addition, on May 27, 1998, pursuant to a Stock Purchase Agreement, the
Company, through PSC Acquisition Corp., a wholly-owned subsidiary of the
Company, acquired (i) substantially all of the tangible assets and assumed
certain contractual liabilities of Physicians' Domain, Inc., a White Plains, New
York based ENT physician practice management company ("Physicians' Domain") and
(ii) the stock of three corporations that are successors to three ENT physician
practices affiliated with Physicians' Domain employing an aggregate of 20
physicians and 16 allied health care professionals with 11 clinical offices in
Southern New York and Northern New Jersey (collectively, "PDI"). In connection
with the PDI transaction, the Company (i) paid approximately $5.4 million in
cash, (ii) discharged approximately $3.8 million of liabilities of PDI and (iii)
issued a subordinated long-term promissory note in the principal amount of
approximately $6.4 million , which note matures in May 2003, accrues interest at
a rate of 6.0% per annum, payable quarterly, is secured by the fixed assets
acquired by the Company in the transaction and is subordinate to senior
indebtedness, including borrowings under the Company's credit facility. In
addition, the Company will pay an additional $500,000, in cash or shares of
Common Stock at the Company's option, if the PDI practices achieve stipulated
performance targets. Pursuant to the stock purchase agreement, the physicians at
PDI have the right to nominate one member to the Board of Directors of the
Company. Steven H. Sacks, M.D., a nominee of the physicians at PDI, was
appointed to the Board of Directors of the Company on August 12, 1998. In
connection with the PDI transaction, the Company paid approximately $260,000 to
Premier HealthCare for advisory services rendered
The Company also entered into management services agreements with two newly
organized ENT practices employing the 20 ENT physicians in connection with the
PDI transaction,. The management services agreements provide for an aggregate
fixed annual management fee of approximately $2.0 million, plus reimbursement of
practice operating expenses. Pursuant to the management services agreements, the
fixed management fee is subject to annual increases after May 27, 2003
consistent with the annual percentage increase in the consumer price index for
the prior year. The management services agreements also 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 Company used a portion of the net proceeds received from the Company's
public offering in May 1998 to pay the cash component of and to discharge the
indebtedness of PDI assumed by the Company in connection with the PDI
transaction.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The shares of Common Stock issued in the Company's IPO were registered
under a registration statement on Form S-1 (File No. 333-17091) which was
declared effective by the Securities and Exchange Commission (the "Commission")
on March 20, 1997.
During the three months ended June 30, 1998 a portion of the net proceeds
received from the Company's IPO in March 1997 were used by the Company (i) to
pay $415,000 in cash in connection with the acquisition of the assets of
Westerkamm and Bequer (ii) to discharge $260,000 of liabilities, (iii) to pay
approximately $323,300 to Premier Healthcare, an affiliate of the Company's Vice
Chairman and Secretary for consulting services in connection with the
acquisition of assets of Westerkamm, Bequer and PDI and (iv) to purchase, among
other things, medical and computer equipment and office furniture in the
aggregate amount of approximately $457,000.
ITEM 5. OTHER INFORMATION
In July 1998, the Company received notification from CIGNA Healthcare of
Georgia, Inc. ("CIGNA") that as a result of the financial issues associated with
FPA Medical Management, Inc., ("FPA") CIGNA was terminating its relationship
with FPA and that the future capitation payments to be received by the Company
from FPA pursuant to the capitated managed care contract between the Company and
FPA would be paid by CIGNA beginning with the June 1998 payment.
On July 31, 1998, the Company executed a four year $45.0 million amended
and restated syndicated Credit Facility with NationsBank, N.A. as agent and
lender and PNC Bank and Rabobank Nederland as lenders. Advances under the Credit
Facility will bear interest, at the Company's option, at either a prime-based
rate or a LIBOR based rate with interest only payments required until
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<PAGE> 15
termination of the agreement. Borrowings under the Credit Facility may be used
to finance permitted acquisitions and investments, to refinance existing debt,
and for working capital and general corporate purposes. Revolving loans under
the Credit Facility may be borrowed repaid and reborrowed prior to the
termination date of the facility. The Credit Facility contains various
affirmative and negative covenants, which among other things require the Company
to maintain certain financial ratios or to meet certain financial requirements,
including ratios of funded debt and senior funded debt to earnings before
interest, taxes, depreciation and amortization; a minimum net worth; and a fixed
charge coverage ratio, and sets certain restrictions on investments,
acquisitions, mergers and sale of assets. Borrowings under the Credit Facility
are secured by the capital stock of the Company's material subsidiaries, the
Company's (and such subsidiaries') accounts receivable, and the Company's rights
under its management services agreements with physician practice groups. As of
August 13, 1998, the Company had no outstanding borrowings under the Credit
Facility.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.47 Management Services Agreement dated May 27, 1998 among the
Registrant, PSC Management Corp. and ENT Associates LLP. (1)
10.48 Management Services Agreement dated May 27, 1998 among the
Registrant, PSC Management Corp. and ENT Associates of New Jersey,
P.C. (1)
10.49 Termination Letter terminating the Stock Purchase Agreement dated
May 22, 1998 by and among the Registrant, PSC Acquisition Corp.
and the other parties named therein. (1)
10.50 Stock Purchase Agreement dated as of May 27, 1998 by and among the
Registrant, PSC Acquisition Corp. and the other parties named
therein (superseding the Stock Purchase Agreement dated as of May
1, 1998 by and among the Registrant, PSC Acquisition Corp. and the
other parties named therein and filed as Exhibit 10.40 to he
Registrant's Quarterly Report on Form 10-Q for the three months
ended March 31, 1998). (1)
10.51 Promissory Note in the Principal Amount of $6,401,986 issued by
PSC Acquisition Corp and PSC Management Corp. and guarantied by
the Registrant to Kurzman & Kisenberg, LLP as agent for the
parties named therein. (1)
10.52 Provider Agreement dated June 12, 1998 by and between the Morgan
Health Group, and ENT Center of Atlanta, Inc., a wholly-owned
subsidiary of the Registrant.*
27 Financial Data Schedule (for SEC use only)
- -------------
* Confidential treatment has been requested with respect to
portions of this exhibit.
(1) Incorporated by reference to the Registrant's Current Report
on Form 8-K filed with the Securities and Exchange Commission
on June 8, 1998.
(b) Report on Form 8-K
The Registrant filed a Form 8-K on June 8, 1998 reporting
information under Item 2.
The Registrant filed a Form 8-K/A on August 4, 1998 under Item
7 filing the historical financial Statements of Ear, Nose &
Throat Associates, P.C. and pro forma financial Statements of
the Registrant as required by Item 7.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHYSICIANS' SPECIALTY CORP.
DATE August 14, 1998 /s/ Robert A. DiProva
---------------- -----------------------------------------
Robert A. DiProva
Executive Vice President and
Chief Financial Officer
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<PAGE> 1
EXHIBIT 10.52
Portions of this Exhibit have been omitted pursuant to a request for
confidential treatment. The omitted portions, marked by an * and [ ], have
been separately filed with the Commission.
PROVIDER GROUP AGREEMENT
This PROVIDER GROUP AGREEMENT ("Agreement") is made and entered into
this 12th day of June, 1998, by and between THE MORGAN HEALTH GROUP, INC., a
Georgia corporation ("MHG"), with its principal place of business at 5555
Triangle Parkway, Suite 300, Norcross, Georgia 30092, and ENT Center of Atlanta
Inc., a wholly owned subsidiary of Physicians Specialty Corp. ("Provider
Group"), having its principal place of business at 1150 Lake Hearn Drive, Suite
640, Atlanta, GA 30342.
RECITALS
WHEREAS, MHG intends to enter into agreements with insurers,
self-insured employers and other payors ("Plans"), for the provision of medical
services to persons enrolled as Members of such Plans on a capitated or
discounted fee-for-service basis; and
WHEREAS, MHG and Provider Group desire to enter into a contract whereby
(a) Provider Group agrees to provide for the medical services on behalf of MHG
to Members of Plans which contract with MHG pursuant to MHG's Payor Network
Program; and (b) Provider Group agrees to participate with and on behalf of its
network physicians in MHG's Physician Participation Program.
NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein, the parties agree as follows:
ARTICLE I
EXHIBITS; DEFINITIONS
1.1 Exhibits: All schedules attached hereto and any exhibits to
such schedules are incorporated by reference and made a part of this Agreement
1.2 Definitions: As used herein, the following terms shall have
the following meanings:
(a) "Capitation Payment" - the monthly payment due to
Provider Group from MHG for the provision of Covered
Services to Members.
(b) "Copayment" - a fee that is charged to Members for
certain Covered Services and collected by Specialist
or Provider Group.
(c) "Covered Services" - those health care services,
equipment and supplies customarily furnished by
physicians practicing medicine in the specialty of
Otolaryngology in the Atlanta metropolitan area
including, but not limited
<PAGE> 2
to, the services identified and described on the
attached Exhibit A, which a Member is entitled to
receive from a Plan pursuant to the Evidence of
Coverage and which Provider Group is obligated to
provide to Members pursuant to this Agreement.
(d) "Emergency" - Those healthcare services that are
provided for a condition of recent onset and
sufficient severity, including, but not limited to,
severe pain, that would lead a prudent lay person,
possessing an average knowledge of medicine and
health, to believe that his/her condition, sickness
or injury is of such a nature that failure to obtain
immediate care could result in placing the patient's
health or the patient's unborn child's health in
serious jeopardy, serious impairment of bodily
functions, or serious dysfunction of any bodily organ
or part. This definition shall include all emergency
services required to be provided by Provider Group
and its affiliated Specialists under federal law.
(e) "Evidence of Coverage" - the document issued by a
Plan to a Member that describes the benefits and
services to which the Member is entitled under the
Plan.
(f) "Medical Director" - a physician employed or
contracted by MHG who is authorized by MHG to be
responsible for administering MHG's medical affairs
and for serving as MHG's medical liaison to
contracting Plans.
(g) "Member" - a person who is enrolled in a Plan,
including enrolled dependents, and is entitled to
receive Covered Services.
(h) "Participating Hospital" - a hospital that has
entered into an agreement with MHG to provide Covered
Services to Members.
(i) "Participating Provider" - a physician or other
licensed healthcare practitioner who has entered into
an agreement with MHG to provide Covered Services to
Members.
(j) "Plan" - an insurer, self-insured employer or other
payor that has entered into an agreement with MHG
pursuant to which MHG will arrange for the provision
of medical services to persons enrolled as Members of
such Plan on a capitated or discounted
fee-for-service basis.
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<PAGE> 3
(k) "Plan Medical Director" - a physician employed or
contracted by a Plan who is authorized by such Plan
to be responsible for administering such Plan's
medical affairs and for serving as such Plan's
medical liaison to MHG.
(l) "Service Area" - MHG's service area is defined by the
following listing of Georgia counties: Barrow,
Bartow, Butts, Clayton, Cobb, Cherokee, Coweta,
Dawson, DeKalb, Douglas, Fayette, Forsyth, Fulton,
Gwinnett, Henry, Hall, Jasper, Newton, Paulding,
Rockdale, Spalding and Walton.
(m) "Specialist" - a physician or other healthcare
professional employed by or under contract with
Provider Group who has agreed to furnish Covered
Services to Members pursuant to this Agreement.
ARTICLE II
PROVISION OF MEDICAL SERVICES
2.1 COVERED SERVICES: Provider Group, through its Specialist's,
agrees to arrange for the provision of Covered Services to each Member in
accordance with the terms of this Agreement. Provider Group either has entered
or has agreed to enter into and maintain agreements with each of its
Specialist's, pursuant to which such Specialist agrees to comply with the terms
and conditions of this Agreement. In providing Covered Services to Members under
this Agreement, Provider Group agrees that its Specialist's (a) shall use
diligent efforts and professional skills and judgment, (b) shall perform
professional and supervisory services and shall render care to Members in
accordance with and in a manner consistent with customary and recognized
standards of the medical profession, and (c) shall conduct themselves in a
manner consistent with the Principles of Medical Ethics of the American Medical
Association. Provider Group acknowledges that its Specialists have an
independent responsibility to provide health care to Members and that any action
by MHG or a Plan pursuant to its utilization management, referral management and
discharge planning programs in no way absolves its Specialists of the
responsibility to provide appropriate medical care to Members.
2.2 NONDISCRIMINATION: Provider Group agrees that Specialists
will: (1) not differentiate or discriminate in its provision of Covered Services
to Members because of race, color, national origin, ancestry, religion, sex,
marital status, sexual orientation, or age; and (2) render Covered Services to
Members in the same manner, in accordance with the same standards, and within
the same time availability as offered to other individuals receiving services
from Specialists affiliated with Provider Group, consistent with existing
medical ethical/legal requirements for providing continuity of care to any
patient.
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<PAGE> 4
2.3 HOURS: Provider Group agrees that each Specialist will be
available to provide Covered Services during normal office hours, and that each
Specialist will provide or arrange for customary coverage for evenings,
weekends, illnesses and similar periods when such Specialist is off-duty.
2.4 WARRANTIES: Provider Group hereby warrants and represents that
each Specialist who provides Covered Services to Members pursuant to this
Agreement is duly licensed to practice his or her profession in the State of
Georgia and is in good standing with the applicable Georgia professional
licensing board.
2.5 CHANGE IN STATUS OF LICENSURE OR HOSPITAL PRIVILEGES: If at
any time during the term of this Agreement, any Specialist shall have his or her
Georgia professional license suspended, conditioned or revoked such individual
Specialist's will be immediately suspended by Provider Group as a participant in
this Agreement without regard to whether or not such suspension, condition or
revocation has been finally adjudicated. In the event Provider Group becomes
aware that a Specialist is the subject of a material complaint, investigation or
proceeding relating to Specialist's Georgia professional license, Provider Group
shall promptly notify MHG in writing of such material complaint, investigation
or proceeding and keep MHG advised of the status thereof. Provider Group agrees
to notify MHG in writing within seventy-two (72) hours whenever there is a
material change in any Specialist's professional licensure or the status of any
Specialist's hospital privileges, whether at a Participating Hospital or non-
participating hospital.
2.6 HOSPITAL PRIVILEGES: Provider Group agrees that, to the extent
it has the ability, each Specialist will obtain and maintain privileges with at
least one Participating Hospital. Provider Group agrees that at least one
Specialist in Provider Group will maintain or be in the process of obtaining
staff privileges at each Participating Hospital under contract with MHG.
2.7 ASSISTANTS: Provider Group shall require that its
Specialist's, at Specialist's sole cost and expense, employ such assistants or
employees as Provider Group Specialist's deems necessary to perform Covered
Services in Specialist's office. MHG may not control, direct, or supervise
Specialist's assistants or employees in the performance of those Covered
Services.
2.8 COMPLIANCE WITH ADMINISTRATIVE PROCEDURES: Provider Group
agrees to comply with any administrative procedures which may be adopted from
time to time by MHG and/or a Plan regarding Member utilization, quality
management and reporting procedures relating to the performance of Covered
Services pursuant to this Agreement. Upon reasonable notice Provider Group
further agrees to comply with any reasonable responsibilities timely requested
in writing by MHG with respect to Medicare payment procedure(s).
2.9 COMPLIANCE WITH LAWS AND REGULATIONS: Provider Group shall
require that Specialist's agree to comply with all federal, state and local laws
and regulations applicable to Specialist's furnishing of medical services
pursuant to this Agreement. Provider Group also will
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<PAGE> 5
require its Specialist's to cooperate with MHG so that MHG may meet any
requirements imposed on MHG by federal, state and local laws and regulations.
2.10 COOPERATION WITH PLAN MEDICAL DIRECTORS: Provider Group
understands that contracting Plans will place certain obligations upon MHG
regarding the quality of care received by Members and that contracting Plans in
certain instances will have the right to oversee and review the quality of care
administered to Members. Provider Group shall require Specialist's to cooperate
with Plan Medical Directors in the Plan Medical Directors' review of the quality
of care administered to Members consistent with the requirements of MHG and the
applicable Plan. In addition, Provider Group agrees to cooperate with the MHG
Medical Director(s) in the performance and administration of the services,
programs and procedures which are the subject matter of this Agreement.
2.11 COMPLIANCE WITH MHG PHARMACEUTICAL FORMULARIES: Upon MHG's
approval of a contracting Plan's pharmaceutical formulary, Provider Group shall
use its best efforts to require its Specialist's to comply with the
pharmaceutical formulary(ies) developed and/or adopted by MHG and contracting
Plans, unless prior authorization to use pharmaceuticals not listed on the
formulary is obtained from a MHG Medical Director.
2.12 UTILIZATION REVIEW PROGRAM: A utilization review program has
been established to review the medical necessity of Covered Services furnished
by Specialist's affiliated with Provider Group to Members on an inpatient and
outpatient basis. Such program includes pre-admission, concurrent and
retrospective review and is in addition to any utilization review program
required by a contracting Plan. Provider Group shall require its Specialist's to
comply with such utilization review program.
2.13 QUALITY ASSURANCE PROGRAM: A quality assurance program has
been established to review the quality of Covered Services furnished by
Specialist's affiliated with Provider Group to Members on an inpatient and
outpatient basis. Such program is in addition to any quality assurance program
required by a contracting Plan. Provider Group shall require its Specialist's to
comply with such quality assurance program.
2.14 GRIEVANCE PROCEDURE: A grievance procedure has been
established for the processing of any patient complaint regarding Covered
Services furnished by Specialist's. Provider Group shall require its
Specialist's to abide by MHG's grievance procedure, which resolves patient's
complaints and concerns regarding access and care, and other related issues.
2.15 PRIOR AUTHORIZATION AND REFERRAL PROCEDURES: Provider Group
agrees to require its Specialist's to authorize in accordance with the
applicable Plan requirements prior to rendering any Covered Services requiring
prior authorization. Provider Group also agrees to comply with the referral
procedures of the applicable Plan.
-5-
<PAGE> 6
2.16 HOSPITAL ADMISSION AUTHORIZATION: Provider Group shall require
its Specialists to admit Members only to the Participating Hospital approved by
the Member's Plan, unless an appropriate bed or service is unavailable or in the
event of an emergency.
2.17 PUBLICATION OF ROSTER OF PARTICIPATING PROVIDERS: Provider
Group agrees that MHG and each Plan may use Provider Group's or Specialist's
name, address, phone number, type of practice and willingness to accept new
patients in the MHG or Plan roster of Participating Providers. The roster may be
inspected by and is intended to be used by prospective Members, prospective MHG
physicians and others. MHG may utilize Provider Group's or Specialists' names
for normal promotional activities and advertisements.
ARTICLE III
PAYMENT FOR MEDICAL SERVICES
3.1 AMOUNT AND TIMING OF PAYMENT: In consideration for the
provision of Covered Services, MHG shall pay Provider Group the Capitation
Payment provided for on Exhibit B hereto on or before the fifteenth (15th) of
each month. Provider Group shall be solely responsible for providing
compensation to its Specialist's. MHG and Provider Group acknowledge that the
Capitation Payment specified on Exhibit B is based on the current scope of
Covered Services to be furnished by Provider Group and on the current
enrollment, benefit structure, copayments and deductibles of the contracting
Plans. In the event that there is a material increase in the scope or
utilization of the Covered Services to be furnished by Specialist's affiliated
with Provider Group or the enrollment of the contracting Plans, or a material
decrease in number of covered lives or a material change in the benefit
structure, copayments or deductibles of the contracting Plans, MHG and Provider
Group shall negotiate in good faith a revised Capitation Payment to account for
such increase or change. Provider Group agrees to provide MHG with all
information required of Provider Group pursuant to MHG's contract with Plans on
a timely basis.
3.2 IDENTIFICATION OF MEMBERS: MHG will provide a method by which
Members can appropriately identify themselves as Members of a Plan.
3.3 PAYMENT FROM MEMBERS: Provider Group shall require
Specialist's to look only to MHG for compensation for Covered Services and shall
at no time bill, charge, or seek compensation or reimbursement from Members for
such Covered Services, except that Provider Group and Specialist's may seek
payment directly from Members for: (1) all applicable Copayments specifically
permitted under a Plan, (2) services which are not Covered Services and (3) if
the Member requests health care services after being informed by Provider Group
or a Specialist prior to the rendering of such services that the services have
been determined to be medically unnecessary and Member confirms his/her request
in writing. MHG shall have no responsibility to Provider Group for fees or
charges owed by Members for non-Covered Services. MHG acknowledges that it has
no rights to any such Copayments or charges for non-
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<PAGE> 7
Covered Services. This provision shall survive the termination of this Agreement
for services rendered prior to such termination, regardless of the cause giving
rise to termination and shall be construed to be for the benefit of Members, and
supersedes any oral or written agreement to the contrary.
3.4 COORDINATION OF BENEFITS: Provider Group and affiliated
Specialist's shall use best efforts to identify whether a Member is eligible for
medical benefits or coverage under more than one group health benefits contract
or policy (including Medicare or Medicaid). If such other contracts or policies
have primary responsibility for payment of any services delivered to a Member by
Specialist, Specialist agrees to provide such information to MHG and to bill
such primary party for such services. Any reimbursements obtained by Provider
Group from such primary party will be retained by Provider Group and/or the
affiliated Specialist's.
ARTICLE IV
COMMITTEES
4.1 MEDICAL QUALITY REVIEW COMMITTEE: A Medical Quality Review
Committee shall be constituted from time to time consisting of Participating
Providers having agreements with MHG similar to this Agreement. Such Medical
Quality Review Committee shall develop and implement a continuous quality
improvement ("CQI") program. Provider Group agrees to participate, as
appropriate, in such CQI program. In addition, such Medical Quality Review
Committee shall advise and consult with MHG regarding the effectiveness,
efficiency and appropriateness of medical services provided by Specialist's and
may provide Provider Group with educational programs and materials which are a
part of the CQI program.
4.2 CASE MANAGEMENT COMMITTEE: A Case Management Committee shall
be constituted from time to time consisting of Participating Providers having
agreements with MHG similar to this Agreement. Such Case Management Committee
shall review on a prospective, concurrent and retrospective basis the quality,
appropriateness and utilization of Covered Services provided by MHG to Members
and otherwise fulfill any functions delegated to the Case Management Committee
pursuant to any of MHG's contracts with Plans.
ARTICLE V
LIABILITY INSURANCE
5.1 MALPRACTICE INSURANCE: Provider Group shall require each
Specialist to obtain and maintain at such Specialist's sole cost and expense,
through the entire term of this Agreement, a policy of professional malpractice
liability insurance with a licensed insurance company admitted to do business in
the State of Georgia in a minimum amount of One Million Dollars ($1,000,000) per
claim and Three Million Dollars ($3,000,000) in the annual aggregate, to cover
any loss, liability or damage alleged to have been committed by such Specialist.
Subject
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<PAGE> 8
to the MHG credentialing and recredentialing policies and procedures, Provider
Group shall either require it's Specialist's, to obtain and maintain a "tail"
policy for a period of not less than five (5) years following the effective
termination date of the foregoing policy in the event the policy is a "claims
made" policy and said "tail" policy shall have the same policy limits as the
primary professional liability policy or an extended endorsement from its new
carrier to cover claims made during the five year period after termination.
Provider Group agrees to require it's Specialist to notify MHG in writing no
less than ten (10) days prior to any termination, revocation or material
modification of the liability and malpractice coverage described in this
paragraph. In no event will Provider Group be liable for Specialist's not having
adequate malpractice insurance as this is a part of MHG's responsibility in
accordance MHG's credentialing and recredentialing policies and procedures.
5.2 PROOF OF INSURANCE: Provider Group shall from time to time, on
the reasonable request of MHG, furnish to MHG written evidence that the policy
of insurance required under Section 5.1 hereof is in full force and effect, and
valid and existing in accordance with the provisions of said paragraph.
ARTICLE VI
BOOKS AND RECORDS
6.1 MAINTENANCE OF RECORDS: Provider Group and affiliated
Specialist's will maintain such medical, financial and administrative records in
such form and content as are required by state and federal laws and regulations.
Provider Group or affiliated Specialist's agrees to retain such information and
records for a period of at least six (6) years from and after the termination of
this Agreement and agrees to permit access to and inspection of such information
and records by MHG, its authorized representatives, the applicable Plan, the
Georgia Department of Insurance and the United States Department of Health and
Human Services at all reasonable times and upon demand.
6.2 CONFIDENTIALITY: Provider Group and affiliated Specialist's
agrees to maintain the confidentiality of medical records in accordance with
state and federal laws and regulations and current professional standards.
6.3 ACCESS TO RECORDS: Provider Group and affiliated Specialist's
will provide in a timely manner such information and records, or access thereto,
as MHG, its authorized representatives, or the applicable Plan, may reasonably
request for purposes of claim adjudication, administration of utilization and
quality assurance programs and reimbursement administration. Provider Group or
affiliated Specialist's will obtain from a Member all authorizations to release
such information as may be required by law.
6.4 DISCLOSURE OF PROVIDER GROUP INFORMATION AND RECORDS: Provider
Group hereby authorizes MHG to release information relating to Provider Group's
professional
-8-
<PAGE> 9
credentialing policies and procedures, Member utilization statistics, quality
performance and other information relating to the medical services provided by
Provider Group pursuant to this Agreement to Plans without Provider Group's
prior consent. Individual physician confidentiality will be maintained.
ARTICLE VII
CREDENTIALING PROCESS
CREDENTIALING/RECREDENTIALING PROCESS: The participation of Specialist's
affiliated with Provider Group is contingent upon the Specialist successfully
completing the MHG Credentialing and/or Recredentialing Process. This process is
defined by the MHG Credentialing Policies & Procedures. Unsuccessful completion
of any Specialist in Provider Group's panel of the credentialing/recredentialing
process will terminate the participation status of the Specialist upon the date
of receipt of initial notice of termination by the MHG. Acknowledgment of
receipt by certified mail, hand delivery, or courier shall constitute receipt of
notice. Recredentialing occurs every two years.
Specialist may appeal unsuccessful credentialing/recredentialing determinations
through the MHG Credentialing Appeal Process. Should the
credentialing/recredentialing decision be upheld, termination of the
participating Specialist will stand, effective the date of receipt of the notice
of termination by the Specialist noted above. Should the appeal reverse the
credentialing/recredentialing determination, the participating status of the
Specialist will continue in force and effect from the date of the appeal
reversal and all rights and responsibilities inherent in the contract will
apply.
ARTICLE VIII
TERM, TERMINATION AND CONTINUING OBLIGATION
8.1 TERM: This Agreement will become effective on August 1, 1998
and will be effective for a period of twenty-four (24) months thereafter
("Initial Term"). This Agreement will automatically be renewed for successive
periods of twelve (12) months each on the same terms and conditions contained
herein, unless sooner terminated pursuant to the terms of this Agreement.
8.2 IMMEDIATE TERMINATION: Anything in this Agreement to the
contrary notwithstanding, MHG shall have the right to cancel this Agreement in
the event that MHG determines that Provider Group is in breach of this
Agreement, after MHG gives Provider Group thirty (30) days prior written notice
thereof and affords Provider Group the right to cure such breach within such
thirty (30)-day period.
-9-
<PAGE> 10
8.3 TERMINATION WITHOUT CAUSE: This Agreement may be terminated by
Provider Group at any time, without cause, by giving of ninety (90) days prior
written notice to MHG. This Agreement may be terminated by MHG at any time,
without cause, by giving of ninety (90) days prior written notice to Provider
Group. This requirement of prior notification will not prevent MHG from
requiring Provider Group from immediately suspending or terminating any
Specialist when MHG reasonably determines that the continuation of the Agreement
may negatively affect patient care. MHG reserves the right to terminate any
Specialist upon thirty (30) days prior written notice to Provider Group.
8.4 TERMINATION FOR NON-PAYMENT: This Agreement may be terminated
by Provider Group by giving of forty-five (45) days prior written notice for
non-payment by MHG of the Capitation Payment or other amounts owed to Provider
Group by MHG under this Agreement.
8.5 TERMINATION OF AGREEMENT WITH PLAN: In the event that the
agreement between MHG and a contracting Plan to provide medical services is
terminated for any reason, MHG may terminate this Agreement with respect to such
Plan at least thirty (30) days prior written notice to Provider Group.
8.6 RESPONSIBILITY FOR MEMBERS AT TERMINATION: Specialists
affiliated with Provider Group shall continue to provide Covered Services to a
Member who is receiving Covered Services from Provider Group on the effective
termination date of this Agreement until the Covered Services being rendered to
the Member by Specialist's are completed (consistent with existing medical
ethical/legal requirements for providing continuity of care to a patient),
unless MHG or a Plan makes reasonable and medically appropriate provision for
the assumption of such Covered Services by another physician or other
appropriate healthcare professional. MHG shall compensate Provider Group for
those Covered Services provided to a Member pursuant to this Section 8.6 (prior
to and following the effective termination date of this Agreement) in accordance
with a fee-for-service basis established by MHG from time to time using the
Medicare allowable fee schedule.
ARTICLE IX
MISCELLANEOUS
9.1 NOTICES: Any notices required or permitted to be given
hereunder by either party to the other party may be given by personal delivery
in writing or by registered or certified mail, postage prepaid, with return
receipt requested. Notices shall be addressed to the parties at addresses
appearing in the introductory paragraph on the first page of this Agreement, but
each party may change such party's address by written notice given in accordance
with this paragraph. Notices delivered personally will be deemed communicated as
of actual receipt. Mailed notices will be deemed communicated as of three (3)
days after mailing.
-10-
<PAGE> 11
9.2 ENTIRE AGREEMENT OF THE PARTIES: This Agreement supersedes any
and all agreements, either written or oral, between the parties hereto with
respect to the subject matter contained herein and contains all of the covenants
and agreements between the parties with respect to the subject matter hereof.
Each party to this Agreement acknowledges that no representations, inducements,
promises, or agreements, oral or otherwise, have been made by either party, or
anyone acting on behalf of either party, which are not embodied herein, and that
no other agreement, statement, or promise not contained in this Agreement shall
be valid or binding. Except as otherwise provided herein, any effective
modification must be in writing signed by the party to be charged.
9.3 SEVERABILITY: If any provision of this Agreement is determined
to be invalid, void or unenforceable, the remaining provisions will nevertheless
continue in full force and effect.
9.4 ARBITRATION: Any controversy or claim arising out of or
relating to this Agreement or the breach thereof shall be settled by arbitration
in accordance with the rules of commercial arbitration of the American
Arbitration Association and judgment upon the award rendered by the
arbitrator(s) may be entered in any court having jurisdiction thereof. Such
arbitration shall occur within the County of Fulton, State of Georgia unless the
parties mutually agree to have such proceeding in some other locale. The
arbitrator(s) may in any such proceeding award attorneys' fees and costs to the
prevailing party, but shall not award punitive damages.
9.5 GOVERNING LAW: This Agreement shall be governed by and
construed in accordance with the laws of the State of Georgia.
9.6 ASSIGNMENT: Either Party shall have the right to assign this
Agreement to a parent, subsidiary or affiliate of either party without the prior
consent of the other party. However, either party shall not have the right to
assign any of its rights or delegate any of its duties hereunder to any
non-affiliated entity, without receiving the prior written consent of the other
party. Provider Group's arrangement for medical service coverage pursuant to
Section 2.1 hereof shall not constitute an assignment for purposes of this
Section 9.6. This Agreement shall be binding upon, and shall insure to the
benefit of, the parties to it, and their respective heirs, legal
representatives, successors and assigns. Either party shall notify the other
party in writing at least thirty (30) days in advance of any proposed change in
the ownership or structure of MHG or Provider Group (i.e. be purchased or be the
nonsurvivor in a merger) ["Proposed Change"]. If the Proposed Change is not
acceptable to either party, it may terminate the Agreement as of the effective
date of the Proposed Change, by giving written notice to the other party no
later than sixty (60) days after receipt of written notice of the Proposed
Change. If either party does not receive notice of termination from the other
party within sixty (60) days after receipt of notice, the other party will be
deemed to have accepted such Proposed Change as of its effective date.
-11-
<PAGE> 12
9.7 NON-SOLICITATION OF MEMBERS: During the initial term of this
Agreement, any subsequent term of this Agreement and for a period of twelve (12)
months following the termination of this Agreement, Provider Group shall not
directly or indirectly engage in the solicitation of Members or any employer of
said Members without MHG's prior written consent. For purposes of this
Agreement, "solicitation" shall mean any action by Provider Group which MHG may
reasonably interpret to be designed to persuade a Member to discontinue his/her
relationship with MHG, to disenroll from a Plan contracting with MHG, or to
encourage a Member to receive health care directly from Provider Group on a
fee-for-service basis. Notwithstanding the foregoing, following the termination
of this Agreement, Provider Group may notify Members who are patients of
Provider Group that Provider Group is no longer associated with MHG.
9.8 INDEPENDENT CONTRACTOR: At all times relevant and pursuant to
the terms and conditions of this Agreement, each Specialist providing medical
services pursuant to this Agreement is and shall be construed to be an
independent contractor practicing such Specialist's profession and shall not be
deemed to be or construed to be an agent, servant or employee of MHG.
9.9 CONFIDENTIALITY: The terms and provisions of this Agreement
are confidential and shall not be disclosed by either party except as necessary
to the performance of this Agreement or as required by law. In addition, either
party shall maintain all "trade secret information" confidential. For purposes
of this Agreement, "trade secret information" shall include, but shall not be
limited to: all MHG/Provider Group Plan agreements and the information contained
therein, all contractual and financial arrangements, and all manuals, policies,
forms, records, files (other than patient medical files) CQI data and lists of
either party. Either party shall not disclose any trade secret information for
its own benefit or gain either during the term of this Agreement or after the
date of termination of this Agreement.
9.10 WAIVER: The waiver of any provision, or of the breach of any
provision, of this Agreement must be set forth specifically in writing and
signed by the waiving party. Any such waiver shall not operate or be deemed to
be a waiver of any prior or future breach of such provision or of any other
provision.
9.11 HEADINGS: The subject headings of the articles and paragraphs
of this Agreement are included for purposes of convenience only and shall not
affect the construction or interpretation of any of its provisions
9.12 NO THIRD PARTY BENEFICIARIES: Nothing in this Agreement,
express or implied, is intended or shall be construed to confer upon any person,
firm or corporation (other than the parties hereto and their respective
successors or assigns) any remedy or claim under or by reason of this Agreement
or any term, covenant or condition hereof, as third party beneficiaries or
-12-
<PAGE> 13
otherwise, and all of the terms, covenants and conditions hereof shall be for
the sole and exclusive benefit of the parties hereto and their successors and
assigns.
EXECUTED on the date and year first above written.
THE MHG HEALTH GROUP, INC. ("MHG")
By: /s/ Melissa A. Akins
--------------------------------------
Physician's Specialty Corp.
("PROVIDER GROUP")
By: /s/ Ramie A. Tritt, M.D.
--------------------------------------
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<PAGE> 14
The information below marked by * and [ ] has been omitted pursuant to
a request for confidential treatment. The omitted portion has been separately
filed with the Commission.
EXHIBIT A
ENT HEALTH SERVICES COVERED UNDER CAPITATED ARRANGEMENT
1. Physician's Services, including inpatient and outpatient health care
services.
2. Laboratory and Radiology services rendered in Provider's facility.
3. Audiology services rendered in the Provider's facility office.
4. All emergency and urgent services rendered by Providers for members covered
by plan.
5. All approved ENT related CPT codes except the CPT codes listed in #11
below.
HEALTH SERVICES WHICH ARE NOT COVERED UNDER THE CAPITATED
ARRANGEMENT
1. Durable medical equipment items referred to the applicable participating
provider(s) specified by Payor.
2. Physical and/or Occupational Therapy service-such service will be referred
to the applicable owned, licensed ambulatory center(s).
3. Hospital and all other facility charges for inpatient and outpatient
service (including physician-owned, licensed ambulatory surgery center(s).
4. Hearing aids and implants of hearing devices (including CPT codes [ * ]).
5. Laboratory, vascular laboratory and radiology services referred by
Otolaryngologist to applicable participating Providers specified by Payor.
6. Home health services and Hospice care.
7. Pharmaceutical charges dispensed by applicable participating Providers
specified by Payor.
8. Chronic pain management.
9. Cosmetic services.
10. Dental procedures including TMJ therapy, splints and muscle spasm
treatments.
11. The following CPT codes:
[ * ]
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<PAGE> 15
The information below marked by * and [ ] has been omitted pursuant to a request
for confidential treatment. The omitted portion has been separately filed with
the Commission.
(Exhibit A - continued)
[ * ]
-15-
<PAGE> 16
The information below marked by * and [ ] has been omitted pursuant to a
request for confidential treatment. The omitted portion has been separately
filed with the Commission.
EXHIBIT B
CAPITATION PAYMENT
MHG shall pay PSC [ * ] Per Commercial Plan Member Per Month (the "Capitation
payment") for the covered members* assigned to Provider Group in accordance with
each MHG affiliated payor benefit plan including out of network benefits (claim
payment and utilization management) where MHG is responsible for out of network
services (Employers Health EPO & MorCare Georgia products within the Service
Area as defined in this Agreement). Within ninety (90) calendar days following
the last day of the month in question, MHG shall have the right to make
retroactive upward and downward adjustments to the Capitation Payment for such
month based on changes in membership.
Each monthly Capitation Payment will be calculated based on
current Plan enrollment and will be accompanied by a statement showing the
calculation of the payment, the names of the Members for which payment is being
received, and all services provided to each Member.
*MHG Covered Members exclude any members that are assigned to MHG Primary Care
Physicians that have entered into a contractual relationship with MHG that
includes ENT risk.
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<PAGE> 17
The information below marked by * and [ ] has been omitted pursuant to a request
for confidential treatment. The omitted portion has been separately filed with
the Commission.
Letter of Agreement
This letter sets forth the understanding between ENT Center of Atlanta, Inc. a
wholly owned subsidiary of Physicians' Specialty Corporation ("Provider Group")
and the Morgan Health Group, Inc. ("MHG") regarding the provision of claims
payment services to non-participating providers of Provider Group for the dates
of service during months of August and September 1998.
SCOPE OF AGREEMENT
MHG agrees to adjudicate all claims for non-participating providers of Provider
Group in accordance with the attached list of Participating Providers, for dates
of service during the months of August and September 1998. MHG is providing such
claims payment services on behalf of Provider Group. It is understood that MHG
will pay the above referenced claims based on the current MHG Fee Schedule and
will [ * ] of these paid amounts from the capitation payment due to Provider
Group. MHG will provide monthly claims payment detail reports to Provider Group
for the claims paid on behalf of Provider Group.
If this letter accurately sets forth the terms of our mutual understanding
relative to the claims payment activities for August and September 1998 dates of
service, please execute this Letter of Agreement and return the executed
document to my attention.
Sincerely,
/s/ Melissa A. Akins
Melissa A. Akins
V.P. of Payor and Provider Relations
AGREED AND ACCEPTED, THIS 12TH DAY OF JUNE, 1998.
ENT Center of Atlanta, Inc.
/s/ Ramie A. Tritt, M.D. 6/12/98
- --------------------------------------------------------------------
Signature Date
RAMIE A. TRITT, M.D.
- --------------------------------------------------------------------
Print Name
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF PHYSICIANS SPECIALTY FOR THE 6 MONTHS ENDED JUNE 30,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 10,607,798
<SECURITIES> 0
<RECEIVABLES> 16,402,540
<ALLOWANCES> 0
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<CURRENT-ASSETS> 27,841,889
<PP&E> 7,009,294
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<COMMON> 8,842
<OTHER-SE> 40,638,263
<TOTAL-LIABILITY-AND-EQUITY> 58,930,953
<SALES> 16,043,600
<TOTAL-REVENUES> 16,043,600
<CGS> 0
<TOTAL-COSTS> 12,786,436
<OTHER-EXPENSES> 153,559
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,410,723
<INCOME-TAX> 1,330,031
<INCOME-CONTINUING> 2,080,692
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