<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 30, 1997
REGISTRATION NO. 333-30205
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
PRE-EFFECTIVE
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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AMERICAN PHYSICIAN PARTNERS, INC.
(Exact name of registrant as specified in charter)
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DELAWARE 8099 75-2648089
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
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AMERICAN PHYSICIAN PARTNERS, INC.
2301 NATIONSBANK PLAZA
901 MAIN STREET
DALLAS, TX 75202-3721
(214) 761-3100
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------------
PAUL M. JOLAS, ESQ.
GENERAL COUNSEL AND SENIOR VICE PRESIDENT
AMERICAN PHYSICIAN PARTNERS, INC.
2301 NATIONSBANK PLAZA
901 MAIN STREET
DALLAS, TX 75202-3721
(214) 761-3100
(Name and address, including zip code, and telephone number, including area
code, of agent for service)
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Copies to:
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RICHARD A. FINK, ESQ. FREDERICK W. KANNER, ESQ.
BROBECK, PHLEGER & HARRISON LLP DEWEY BALLANTINE
4675 MACARTHUR COURT, SUITE 1000 1301 AVENUE OF THE AMERICAS
NEWPORT BEACH, CA 92660 NEW YORK, NY 10019-6092
(714) 752-7535 (212) 259-8000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the Registration Statement becomes effective.
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If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED SEPTEMBER , 1997
PROSPECTUS
5,000,000 SHARES
[AMERICAN PHYSICIAN PARTNERS, INC. LOGO]
COMMON STOCK
------------------
All of the shares of Common Stock offered hereby are being sold by American
Physician Partners, Inc. ("APPI" or the "Company").
Prior to this offering, there has been no public market for the Common
Stock. It is currently estimated that the initial public offering price will be
between $14.00 and $16.00 per share. See "Underwriting" for information relating
to the factors to be considered in determining the initial public offering
price. The Common Stock has been approved for quotation on the Nasdaq Stock
Market's National Market (the "Nasdaq National Market") under the symbol "APPM."
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN THE COMMON STOCK OFFERED
HEREBY.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- -------------------------------------------------------------------------------------------------------------
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Per Share $ $ $
- -------------------------------------------------------------------------------------------------------------
Total(3) $ $ $
=============================================================================================================
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(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting offering expenses estimated at $ payable by the
Company.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
750,000 additional shares of Common Stock on the same terms as set forth
above solely to cover over-allotments, if any. If such option is exercised
in full, the total Price to Public, Underwriting Discounts and Commissions
and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."
------------------
The shares of Common Stock are being offered by the several Underwriters
named herein, subject to prior sale, when, as and if accepted by them and
subject to certain conditions. It is expected that certificates for the shares
of Common Stock offered hereby will be available for delivery on or about
, 1997 at the offices of Smith Barney Inc., 333 West 34th Street,
New York, New York 10001.
------------------
SMITH BARNEY INC.
COWEN & COMPANY
PIPER JAFFRAY INC.
ROBERTSON, STEPHENS & COMPANY
, 1997
<PAGE> 3
[Map -- showing locations of the Founding Affiliated Practices and the Company's
corporate headquarters.]
Company Headquarters
Dallas, Texas
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING
BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING TRANSACTIONS OR
IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Simultaneously with the closing of this offering,
American Physician Partners, Inc. ("APPI") will acquire certain tangible and
intangible assets, and assume certain liabilities, of seven radiology practices
located in California, Kansas, Maryland, New York and Texas (each radiology
practice, a "Founding Affiliated Practice" and, collectively, the "Founding
Affiliated Practices") in exchange for cash and shares of its Common Stock (each
a "Reorganization" and, collectively, the "Reorganizations"). As used herein,
"Affiliated Practices" refers to the Founding Affiliated Practices and such
additional radiology practices, management service organizations, diagnostic
imaging centers and other related businesses that the Company may acquire in the
future. Unless otherwise indicated, all references to "APPI" mean American
Physician Partners, Inc. prior to the consummation of the Reorganizations and
references herein to the "Company" include APPI and its subsidiaries.
THE COMPANY
The Company was formed in April 1996 to provide practice management
services to radiology practices with a focus on the development, consolidation
and management of integrated radiology and imaging center networks. Upon
completion of this offering, the Company will provide practice management
services to seven radiology practices consisting of 223 physicians practicing at
42 hospitals and 65 diagnostic imaging centers ("ICs") in California, Kansas,
Maryland, New York and Texas. The Company will derive its revenue from service
fees in exchange for the provision of management, administrative, technical and
other non-medical services to the Affiliated Practices.
Radiology services in the United States are delivered through a fragmented
system of local providers, including small to medium-sized groups of diagnostic
and interventional radiologists and radiation oncologists. According to a 1995
report prepared by SMG Marketing Group, total spending on diagnostic imaging
services is estimated at $56 to $70 billion annually. According to the American
College of Radiology, approximately 27,000 radiologists were actively involved
in patient care in the United States in 1996, practicing in more than 3,200
groups with a typical size of six radiologists per group.
Cost-containment pressures on health care providers have placed small to
medium-sized physician groups at a competitive disadvantage, since their
practices typically have relatively high operating costs and often lack the
capital, information systems and management expertise necessary to provide both
high-quality and cost-effective medical care. To remain competitive, physician
practices are seeking to affiliate with larger organizations that manage the
non-medical aspects of their practices and provide access to greater capital
resources, more efficient cost structures and more favorable relationships with
payors. The Company believes that an integrated network of radiologists and
facilities offering a comprehensive array of radiology services can provide
significant advantages to patients, physicians, hospitals and payors.
The Founding Affiliated Practices provide a wide range of diagnostic and
therapeutic services, including x-ray and fluoroscopy, magnetic resonance
imaging, computed tomography, mammography, ultrasound, nuclear medicine,
radiation oncology and interventional radiology. The Founding Affiliated
Practices were selected based on a variety of factors, including: physician and
practice credentials and reputation; competitive market position; subspecialty
mix of physicians; historical financial performance and growth potential; and
willingness to embrace the Company's vision and philosophy regarding the
provision of radiology services. The Company intends to provide Affiliated
Practices with the necessary capital resources and expertise to invest in new
technologies, complete consolidating acquisitions, implement sophisticated
management information systems, promote efficient practice patterns, develop
coordinated marketing efforts and realize purchasing economies of scale.
The Company's objective is to develop integrated networks of radiology
groups and ICs that can provide wide geographic coverage and subspecialty
expertise. The Company intends to provide the networks with sophisticated
management, state-of-the-art information systems and appropriate capital for
expansion. The Company's strategy is to (i) emphasize quality service, (ii)
expand within its selected markets, (iii) improve
3
<PAGE> 5
operating efficiencies within the Affiliated Practices and (iv) expand into new
regional markets through acquisitions of or affiliations with additional
radiology practices and ICs.
THE REORGANIZATIONS
Simultaneously with the closing of this offering, the Company will acquire
certain tangible and intangible non-medical assets and liabilities of the
Founding Affiliated Practices (including interests in imaging center joint
ventures with third-parties) in connection with the Reorganizations.
Substantially all of the proceeds of this offering will be used to fund the cash
portion of the consideration to be paid for the non-medical assets of the
Founding Affiliated Practices and to repay approximately $12.1 million of
indebtedness assumed in connection with the Reorganizations. See "Use of
Proceeds." Upon consummation of the Reorganizations, the Company will enter into
long-term service agreements (the "Service Agreements") with the Founding
Affiliated Practices pursuant to which the Company will provide management,
administrative, technical, and non-medical business services (including the
provision of facilities, equipment and non-medical personnel) to the Founding
Affiliated Practices in exchange for a service fee.
The Service Agreements have a 40-year term, subject to earlier termination
under certain circumstances. The service fees represent physician groups
revenue, net less amounts retained by physician groups. Physician groups
revenue, net consists of the revenue of the Affiliated Practices reported at the
estimated realizable amounts from patients, third-party payors and others for
services rendered, net of contractual and other adjustments. The service fees
payable to the Company by the Affiliated Practices under the Service Agreements
vary based on the fair market value, as determined in arms' length negotiations,
and the nature and extent of services provided. Where state law allows, the
service fees due under the Service Agreements are derived from two distinct
revenue streams: (i) the Affiliated Practice pays a service fee based on a
negotiated percentage (Founding Affiliated Practice service fees range from 20%
to 25%) of the adjusted professional revenues as defined in the Service
Agreement; and (ii) the Affiliated Practice pays a service fee based on 100% of
the adjusted technical revenues as defined in the Service Agreement, which
equals the fair value of the services provided. In states where the law requires
a flat fee structure, the Company has negotiated a base service fee, which is
equal to the fair market value of the services provided under the Service
Agreement and which is renegotiated each year to equal the fair market value of
the services provided under the Service Agreement. Adjusted professional
revenues and adjusted technical revenues are determined by deducting certain
contractually agreed-upon expenses (non-physician salaries and benefits, rent,
depreciation, insurance, interest and other non-physician costs) from physician
groups revenue of the Affiliated Practice. In addition, the Company receives
income from joint ventures in which the Affiliated Practices hold ownership
interests. Physician compensation is determined by the Affiliated Practices
pursuant to employment arrangements between the Affiliated Practice and the
individual physicians. See "Business -- Service Agreements." The Company does
not participate in the negotiation of physician employment arrangements.
Pursuant to the terms of the Service Agreements, the Founding Affiliated
Practices will continue to provide professional radiological services and will
maintain full control over the provision of professional radiological services.
The Company will not engage in the practice of medicine or provide professional
radiological services. As a result of the Reorganizations and upon completion of
this offering, the Founding Affiliated Practices and certain officers and
directors of the Company will own approximately 70.7% of the outstanding shares
of Common Stock. See "Certain Transactions -- Reorganizations" and "Principal
Stockholders."
Prior to this offering and consummation of the Reorganizations, the Company
has not conducted any significant operations. The Company's principal offices
are located at 2301 NationsBank Plaza, 901 Main Street, Dallas, Texas 75202, and
its telephone number at that address is (214) 761-3100.
4
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THE OFFERING
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Common Stock being offered................... 5,000,000 shares(1)
Common Stock outstanding after the 18,354,125 shares(1)(2)
offering...................................
Use of proceeds.............................. To fund the cash portion of the consideration
to be paid for the non-medical assets of the
Founding Affiliated Practices and to repay
certain indebtedness assumed in connection
with the Reorganizations. See "Use of
Proceeds" and "Certain Transactions."
Proposed Nasdaq National Market symbol....... APPM
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(1) Excludes up to 750,000 shares that may be sold by the Company pursuant to
the Underwriters' over-allotment option. See "Underwriting."
(2) Based on the number of shares of Common Stock outstanding as of August 15,
1997. Includes 10,916,625 shares of Common Stock to be issued in connection
with the Reorganizations and 437,500 shares of Common Stock issuable upon
conversion of the outstanding $3,500,000 principal balance of Convertible
Promissory Notes bearing interest at 6% per annum (the "Convertible Notes").
The Convertible Notes convert into Common Stock at a conversion price of
$8.00 per share (assuming an initial public offering price of at least
$14.00). The Company intends to call the Convertible Notes for redemption as
soon as practicable after the date of this Prospectus. Excludes 1,421,000
shares of Common Stock issuable upon exercise of stock options outstanding
as of September 12, 1997 having a weighted average exercise price of $1.68
per share. The number of shares to be outstanding on completion of this
offering will increase if the initial public offering price is lower than
$14.00 per share. See "Description of Capital Stock," "Shares Eligible for
Future Sale," "Management -- Stock Option Plan" and Note 4 of Notes to
Financial Statements of APPI.
RISK FACTORS
The Common Stock offered hereby involves a high degree of risk. See "Risk
Factors."
---------------
Unless otherwise indicated, all information contained in this Prospectus:
(i) assumes no exercise of the Underwriters' option to purchase from the Company
up to 750,000 additional shares of Common Stock to cover over-allotments, if
any; (ii) has been adjusted to give effect to the conversion of the Convertible
Notes into Common Stock upon consummation of this offering; (iii) has been
adjusted to give effect to the Reorganizations; and (iv) assumes no exercise of
outstanding options to purchase 1,421,000 shares of Common Stock. The number of
shares of Common Stock to be issued in each Reorganization and upon conversion
of the Convertible Notes will depend on the initial public offering price of the
Common Stock. The disclosures herein relating to the shares of Common Stock to
be issued in connection with the Reorganizations and upon conversion of the
Convertible Notes are estimated, assuming an initial public offering price of
$15.00 per share. Four directors own an aggregate of $437,500 in principal
amount of the Convertible Notes. See "Certain Transactions." The Company intends
to call the Convertible Notes for redemption as soon as practicable after the
date of this Prospectus. There can be no assurance that holders of the
Convertible Notes will elect to convert the Convertible Notes into Common Stock
in connection with the redemption. The Convertible Notes convert into Common
Stock at a conversion price of $8.00 per share (assuming an initial public
offering price of at least $14.00).
5
<PAGE> 7
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT STATEMENT OF OPERATIONS DATA)
Upon the completion of this offering and pursuant to the Reorganizations,
the Company will acquire certain assets and liabilities of, and enter into the
Service Agreements with, the Founding Affiliated Practices. Due to the fact that
the Company has had no significant operations to date, no pro forma statement of
operations has been included in this Prospectus. The amount and composition of
costs to be incurred by the Company related to the provision of management
services to the Founding Affiliated Practices may differ from the costs
historically incurred by the Founding Affiliated Practices; therefore, the costs
presented in the individual financial statements of the Founding Affiliated
Practices may not be representative of the Company's costs on a pro forma basis.
The following pro forma as adjusted balance sheet data gives effect to the
Reorganizations, the conversion of the Convertible Notes, the completion of this
offering (assuming a public offering price of $15.00 per share) and the
application of the estimated net proceeds therefrom as if they had occurred on
June 30, 1997. Since APPI and the Founding Affiliated Practices were not under
common control or management as of June 30, 1997, the pro forma as adjusted
balance sheet data is not necessarily indicative of the financial position that
would have been achieved had these events actually occurred on such date. The
following financial data should be read in conjunction with the information set
forth under "Use of Proceeds," "American Physician Partners, Inc. Unaudited Pro
Forma Combined Balance Sheet" and "Selected Financial Data" and in the
historical financial statements of APPI and the Founding Affiliated Practices
included elsewhere herein.
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HISTORICAL
------------------------------------
PERIOD FROM
INCEPTION PERIOD FROM
(APRIL 30, 1996) JANUARY 1, 1997
TO TO
DECEMBER 31, 1996 JUNE 30, 1997
----------------- ---------------
(UNAUDITED)
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STATEMENT OF OPERATIONS DATA:
Revenues.................................................... $ -- $ --
----------- -----------
Costs and expenses:
Salaries and benefits..................................... 545,949 901,065
Rent and lease expense.................................... 57,015 114,134
General and administrative................................ 299,585 412,494
Depreciation.............................................. 2,612 12,691
Interest expense.......................................... 36,031 104,792
Professional services..................................... 607,482 143,859
Marketing expense......................................... 114,067 43,499
----------- -----------
Total costs and expenses.......................... 1,662,741 1,732,534
----------- -----------
Interest income............................................. 13,198 33,135
----------- -----------
Net loss.................................................... $(1,649,543) $(1,699,399)
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HISTORICAL PRO FORMA
--------------------------------- AS ADJUSTED
DECEMBER 31, 1996 JUNE 30, 1997 JUNE 30, 1997
----------------- ------------- -------------
(UNAUDITED) (UNAUDITED)
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BALANCE SHEET DATA:
Cash and cash equivalents............................. $ 2,491 $ 110 $ 2,935
Working capital....................................... 2,029 (5,337) 17,225
Total assets.......................................... 2,578 2,486 73,468
Long-term debt and capital leases, net of current
portion............................................. 3,500 -- 15,746
Stockholders' equity.................................. (1,400) (3,099) 34,546
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RISK FACTORS
In addition to the other information contained in this Prospectus,
prospective investors should consider carefully the factors listed below in
evaluating an investment in the shares of Common Stock offered hereby. This
Prospectus contains forward-looking statements that include risks and
uncertainties, and address, among other things, acquisition and expansion
strategy, use of proceeds, projected capital expenditures, liquidity, possible
third-party payor arrangements, cost reduction strategies, integration of the
Affiliated Practices, possible effects of changes in government regulation and
managed care and availability of insurance. These statements may be found under
"Prospectus Summary," "Risk Factors," "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business" and elsewhere in this Prospectus. Actual events or results may differ
materially from those discussed in forward-looking statements as a result of
various factors, including, without limitation, the risk factors set forth below
and matters set forth elsewhere in this Prospectus.
ABSENCE OF COMBINED OPERATING HISTORY; NO PRIOR OPERATING EXPERIENCE
APPI was incorporated in April 1996, has generated no revenue to date and
has conducted no significant operations other than in connection with this
offering and the pending Reorganizations. The Company will derive a substantial
portion of its revenue from service fees it receives from the Affiliated
Practices for managing certain non-medical aspects of their operations. The
service fees paid to the Company generally will be based on the revenue of the
Affiliated Practices. The Company's success will depend in large part on its
ability to apply its management experience and implement practices, systems and
marketing plans to enhance the revenue and profitability of the Affiliated
Practices. To date, the Founding Affiliated Practices have been operated as
independent entities without common management. Moreover, the Company has no
preexisting relationship with any of the Founding Affiliated Practices and has
not managed any physician groups in the past. Due to this lack of prior
operating experience, there can be no assurance that the Company will be able to
integrate successfully the assets and personnel of the Founding Affiliated
Practices or to successfully implement its operating strategies with and
profitably provide management and administrative services to the Founding
Affiliated Practices or any other Affiliated Practices. There can be no
assurance that the Company will be profitable on a quarterly or annual basis in
the future.
DEPENDENCE ON AFFILIATED RADIOLOGISTS; RISK OF TERMINATION OF SERVICE AGREEMENTS
The Company's operations are entirely dependent on its continued
affiliation through Service Agreements with the Founding Affiliated Practices
and any other practices with which it may affiliate in the future. There can be
no assurance that the Founding Affiliated Practices or any other Affiliated
Practices will operate profitably or that the Service Agreements will not be
terminated. Two of the Founding Affiliated Practices (Advanced Radiology, LLC
and The Ide Group, P.C.) are expected to contribute in the aggregate
approximately 50% of the service fees to be paid to the Company by the Founding
Affiliated Practices, based on their historical net patient revenue and
expenses. The Service Agreements with the Founding Affiliated Practices will
have terms of 40 years, but may be terminated by either party if (i) the other
party (a) files a petition in bankruptcy or other similar events occur or (b)
defaults in the performance of a material duty or obligation, which default
continues for a specified period after notice or (ii) an opinion is rendered by
a law firm of nationally-recognized expertise in health care law that a material
term of the Service Agreement is in violation of applicable law (or a court or
regulatory agency finds as such) and such violation cannot be cured. The Company
generates its revenue through the service fees it receives pursuant to the
Service Agreements. The termination of any of the Founding Affiliated Practices'
Service Agreements could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business --
Service Agreements." The Company anticipates that, to the extent that it enters
into management relationships with additional practices, the Service Agreements
entered into with such Affiliated Practices will have provisions providing for
the terms, termination and repurchase of assets similar to those contained in
the Service Agreements with the Founding Affiliated Practices. Any termination
of the Service Agreements with such Affiliated Practices could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Service Agreements."
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Each Founding Affiliated Practice will enter into employment agreements
with the key radiologists associated with each such Founding Affiliated
Practice. The employment agreements generally will be for a term of five years.
Although the Company, in conjunction with the Founding Affiliated Practices,
will endeavor to maintain and renew such contracts, in the event a significant
number of such radiologists terminate their relationships with the Company, the
Company's business could be adversely affected. The Company anticipates that, to
the extent it enters into Service Agreements with other Affiliated Practices,
similar employment agreements will be entered into between such Affiliated
Practices and the key radiologists associated with their respective practices;
as such, the Company will face similar risks if a significant number of such
radiologists terminate their relationships with the Affiliated Practices.
Further, if a significant number of radiologists or other medical service
providers become unable or unwilling to continue in their roles, the Company's
business could be adversely affected. Neither the Company nor the Founding
Affiliated Practices maintains insurance on the lives of any affiliated
physician for the benefit of the Company. See "Business -- Affiliation
Structure."
UNCERTAINTY REGARDING THE ENFORCEABILITY OF NONCOMPETITION PROVISIONS
The Service Agreements require the Founding Affiliated Practices to enter
into and enforce agreements with the stockholders and full-time radiologists at
each Founding Affiliated Practice (subject to certain exceptions) that include
covenants not to compete with the Company for a period of two years after
termination of employment. See "Business -- Service Agreements." The Company
anticipates that Service Agreements that may be entered into with Affiliated
Practices in the future will also contain similar covenants requiring such
Affiliated Practices to restrict the ability of the stockholders and full-time
radiologists at such Affiliated Practices to compete with the Company. In most
states, a covenant not to compete will be enforced only to the extent it is
necessary to protect a legitimate business interest of the party seeking
enforcement, does not unreasonably restrain the party against whom enforcement
is sought and is not contrary to public interest. This determination is made
based on all of the facts and circumstances of the specific case at the time
enforcement is sought. For this reason, it is not possible to predict with
certainty whether a court will enforce such a covenant in a given situation. In
addition, the Company is not aware of any judicial precedents which have
addressed whether a management company's interest under a management agreement
will be viewed as the type of protectable business interest that would permit it
to enforce such a covenant. The inability of the Company to enforce such
anti-competition covenants could have a material adverse effect on the Company's
business, financial condition and results of operations.
RELIANCE ON REFERRALS
The Company is dependent on referrals from third parties to its owned,
operated or managed ICs and to other ICs or hospitals to which the Affiliated
Practices provide professional services in each of the markets where the Company
conducts business. A substantial portion of these referrals are made by
physicians who have no contractual obligation or economic incentive to refer
patients to those ICs or hospitals. The Company's owned, operated or managed ICs
and the Founding Affiliated Practices compete with local radiologists and
technical imaging service providers including non-profit and for profit
hospitals and heath systems. The Company generates revenue from fees charged for
technical services provided at its owned, operated or managed ICs and from
service fees that it receives from the Affiliated Practices. Neither the Company
nor any Founding Affiliated Practice is dependent on any single referral source
for a material portion of its revenue. If a sufficiently large number of
physicians elected at any time to discontinue referring patients to the ICs
affiliated with the Company, it would have a material adverse effect on the
Company's business, financial condition and results of operations. In addition,
there is potential for disruption of relationships in connection with the
acquisition or assumption of control of a particular IC by the Company, and
there can be no assurance that the Company will retain all of the business
conducted by that IC at the time of acquisition or assumption of control by the
Company.
Further, in an effort to control costs, non-governmental health care payors
have implemented cost containment programs which could limit the ability of
physicians to refer patients to the Company's owned, operated or managed ICs.
For example, persons enrolled in prepaid health care plans, such as health
8
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maintenance organizations ("HMOs"), often are not free to choose where they
obtain diagnostic imaging, interventional radiology or radiation oncology
services. Rather, the health plan provides these services directly or contracts
with providers and requires its enrollees to obtain such services only from such
providers. Some insurance companies and self-insured employers also limit such
services to contracted providers. Such "closed panel" systems are now common in
the managed care environment. Other systems create an economic disincentive for
referrals to providers outside of the plan's designated panel of providers.
Although the Company intends to seek managed care contracts for its owned,
operated or managed ICs and to assist the Affiliated Practices to obtain
contracts to provide professional and technical radiology services, there can be
no assurance that the Company will be able to compete successfully for managed
care contracts against larger companies with greater resources.
RISKS ASSOCIATED WITH ACQUISITIONS AND EXPANSION STRATEGY
General
The Company's business strategy includes growth through the acquisition of
radiology practice assets, management service organizations ("MSOs"), ICs and
related businesses and entry into and maintenance of agreements to provide
management and administrative services to radiology practices, including
services designed to improve operating efficiencies. There can be no assurance
that the Company will be able to acquire and retain the assets of, or provide
management and administrative services to, additional radiology practices, MSOs
or ICs, profitably provide such services or successfully integrate such
additional relationships, or successfully improve operating efficiencies of the
Affiliated Practices. In addition, there can be no assurance that the assets of
radiology practices acquired in the future, or the relationships entered into in
the future, will be beneficial to the successful implementation of the Company's
overall strategy or that such assets and relationships will ultimately produce
returns that justify their related investment or implementation by the Company.
See "Business -- Business Strategy." Affiliated Practices acquired in the future
may have disparate cultures, operating and information systems and
organizational structures. Failure of the Company to acquire additional
practices and to successfully integrate and profitably manage or improve the
operating efficiencies of the Affiliated Practices could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company's ability to expand its operations is dependent upon factors
such as its ability to (i) identify attractive and willing candidates for
acquisition, (ii) adapt or amend the Company's structure to comply with present
or future federal and state legal requirements affecting the Company's
arrangements with physician practice groups, including state prohibitions on
fee-splitting, corporate practice of medicine and referrals to facilities in
which physicians have a financial interest (see "-- Government Regulation"),
(iii) obtain regulatory approvals and certificates of need, where necessary, and
comply with licensing requirements applicable to the Company, the Affiliated
Practices and the physicians associated with the Affiliated Practices, including
their respective facilities (see "-- Government Regulation"), and (iv) expand
the Company's infrastructure and management to accommodate expansion. There can
be no assurance that the Company will be able to achieve these objectives or its
planned growth, that the assets of radiology practices, MSOs or ICs will
continue to be available for acquisition by the Company or that the addition of
such assets or management relationships will be profitable. Further,
acquisitions involve a number of special risks, including possible adverse
effects on the Company's operating results, diversion of management's attention
and resources, failure to retain key acquired personnel, amortization or
write-off of acquired intangible assets and risks associated with unanticipated
events or liabilities, some or all of which could have a material adverse effect
on the Company's business, financial condition and results of operations.
Potential Need for Additional Capital
The Company intends to finance future acquisitions by using shares of the
Common Stock for all or a portion of the consideration to be paid. In the event
that the Common Stock does not maintain a sufficient valuation, or potential
acquisition candidates are otherwise unwilling to accept Common Stock as part of
the consideration for the sale of the assets of their businesses, the Company
may be required to utilize more of its cash resources in order to pursue its
acquisition program. The Company may also incur indebtedness to fund
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future acquisitions. The Company has obtained a commitment letter for a
$100,000,000 credit facility (the "Credit Facility") from GE Capital Corporation
("GECC"). The Company and GECC have substantially completed negotiations of a
credit agreement regarding the proposed Credit Facility and are in the process
of negotiating ancillary credit documents. The Company anticipates that such
credit facility will be effective concurrently with the closing of this
offering, although there can be no assurance to that effect. The Company's
growth could be limited and its existing operations impaired unless it is able
to obtain additional capital through subsequent debt or equity financings. There
can be no assurance that the Company will be able to obtain such additional
financing or that, if available, such financing will be on terms acceptable to
the Company. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources." As a result,
there can be no assurance that the Company will be able to implement its
acquisition strategy successfully.
Risks Relating to Antitrust Laws
The Company intends to expand both in areas where the Founding Affiliated
Practices currently operate as well as in new markets. Although the Company will
continue to structure its operations in an effort to comply with applicable
antitrust laws, there can be no assurance that federal or state governmental
authorities would not view the Company as being dominant in a particular market
and, therefore, cause the Company to divest itself of any particular Affiliated
Practice or related assets. In addition, these laws could prevent acquisitions
of practices that would be integrated into existing Affiliated Practices if such
acquisitions substantially lessen competition or tend to create a monopoly.
GOVERNMENT REGULATION
State and Federal Fraud and Abuse, Anti-Kickback and Anti-Referral Laws
Various federal and state laws regulate the relationships between providers
of health care services, physicians and other clinicians. See
"Business -- Government Regulation and Supervision." These laws include the
fraud and abuse provisions of the Social Security Act, which include the federal
"anti-kickback" and Stark or anti-referral laws. The "anti-kickback" laws
prohibit the offering, payment, solicitation or receipt of any direct or
indirect remuneration for the referral of Medicare, Medicaid or other
governmental program patients or for the recommendation, leasing, arranging,
purchasing, ordering or providing of Medicare or Medicaid covered services,
items or equipment. Violations of the "anti-kickback" laws may result in
substantial civil or criminal penalties for individuals or entities, including
large civil monetary penalties and exclusion from participation in the Medicare,
Medicaid and other governmental programs. The Balanced Budget Act of 1997
("BBA97") contains certain reform provisions relating to the Medicare, Medicaid
and other governmental programs, that are intended to assist the government in
its efforts to enforce the "anti-kickback" laws, including adding a civil money
penalty and broadening the scope of circumstances under which mandatory or
permissive exclusion from the programs may apply. Such exclusion and penalties
if applied to the Company's owned, operated or managed ICs, the Affiliated
Practices or physicians affiliated with the Affiliated Practices, could result
in significant loss of reimbursement to the effected individuals and entities. A
determination of liability under any such laws could have a material adverse
effect on the Company's business, financial condition and results of operations.
Certain provisions contained in the Omnibus Budget Reconciliation Act of
1989 ("Stark I") and the Omnibus Budget Reconciliation Act of 1993 ("Stark II"),
and subsequent amendments, prohibit physician referrals for certain "designated
health services," including, without limitation, radiology services to entities
with which a physician or an immediate family member has a financial
relationship (collectively, the "Stark Law"). The Stark Law also prohibits
entities from presenting or causing to be presented a claim or bill to any
individual, third party payor, or other entity for designated health services
furnished under a prohibited referral. A violation of the Stark Law by the
Company, an Affiliated Practice or physicians affiliated with the Affiliated
Practices, may result in significant civil penalties, which may include
exclusion or suspension of the physician or entity from future participation in
the Medicare and Medicaid programs and substantial fines. A determination of
violation under such law by any of these persons or entities could have a
material adverse effect on the Company's business, financial condition and
results of operation.
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Several states have adopted laws similar to the federal "anti-kickback" and
Stark Law that cover patients in private programs as well as government
programs. All of the states in which the Founding Affiliated Practices are
located have adopted a form of "anti-kickback" law and almost all of those
states (California, Kansas, Maryland and New York) have also adopted a form of
anti-referral law. These laws and their interpretations vary from state to state
and are enforced by the courts and regulatory authorities, each with broad
discretion. A determination of liability under any such laws could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Corporate Practice of Medicine; Fee Splitting
The laws of many states, including each of the states in which the Founding
Affiliated Practices are located, also prohibit business corporations, such as
the Company, from exercising control over the medical judgments or decisions of
physicians and from engaging in certain financial arrangements, such as fee-
splitting, with physicians. These laws and their interpretations vary from state
to state and are enforced by both the courts and regulatory authorities, each
with broad discretion. The Company's strategy is to acquire certain assets and
assume certain liabilities of, and to enter into Service Agreements with,
Affiliated Practices. Pursuant to the Service Agreements, the Company will
provide management, administrative, technical and other non-medical services to
the Affiliated Practices in exchange for a service fee. The Company intends that
to structure its relationships with the Affiliated Practices (including the
purchase of assets, and the provision of services under the Services Agreements,
so as to result in the Company's practice of medicine or its exercise of control
over the medical judgments or decisions of the Affiliated Practices or their
physicians. There can be no assurance that regulatory authorities or other
parties will not assert that the Company is engaged in the corporate practice of
medicine in such states or that the payment of service fees to the Company by
the Affiliated Practices pursuant to the Service Agreements constitutes
fee-splitting or the corporate practice of medicine. If such a claim was
successfully asserted, the Company could be subject to civil and criminal
penalties and could be required to restructure or terminate its contractual
arrangements. Such results or the inability of the Company to successfully
restructure its relationships to comply with such statutes could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Service Agreements."
Licensing and Certification Laws
The ownership, construction, operation, expansion and acquisition of ICs
are subject to various federal and state laws, regulations and approvals
concerning the licensing of facilities, personnel, certificates of need and
other required certificates for certain types of health care facilities and
major medical equipment. Although the laws of the five states in which the
Founding Affiliated Practices are located do not subject ICs to certificate of
need or separate licensing requirements as stand-alone imaging centers, the laws
of other states could limit the Company's ability to acquire new imaging
equipment or expand or replace its equipment at ICs in other states. No
assurances can be given that the required regulatory approvals for any future
acquisitions, expansions or replacements will be granted to the Company, and the
failure to obtain such approvals could materially and adversely affect the
Company's business, financial condition and results of operations. See
"Business -- Government Regulation and Supervision."
Compliance
Although the Company intends to structure and conduct its proposed
operation as described in this prospectus so as to comply with applicable
federal and state laws. Neither the Company's current or anticipated business
operations nor the operations of the Founding Affiliated Practices have been the
subject of judicial or regulatory interpretation. There can be no assurance that
a review of the Company's business by courts or regulatory authorities will not
result in determinations that could adversely affect the operations of the
Company or that the health care regulatory environment will not change so as to
restrict the Company's operations. In addition, the regulatory framework of
certain jurisdictions may limit the Company's expansion into, or ability to
continue operations within, such jurisdictions if the Company is unable to
modify its operational structure to conform with such regulatory framework. Any
limitation on the Company's ability to
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expand could have a material adverse effect on the Company's business, financial
condition and results of operations.
Reform Initiatives; Increased Enforcement
In addition to existing government health care regulations, there have been
numerous initiatives at the federal and state levels for comprehensive reforms
affecting the payment for and availability of health care services. The Company
believes that such initiatives will continue during the foreseeable future.
Certain aspects of these reforms as proposed in the past, such as further
reductions in Medicare and Medicaid payments, if adopted, could materially and
adversely affect the Company's business, financial condition and results of
operations.
Federal regulatory and law enforcement authorities have recently increased
enforcement activities with respect to Medicare and Medicaid fraud and abuse
regulations and other reimbursement laws and rules, including laws and
regulations that govern the Company's activities. There can be no assurance that
the Company's activities will not be investigated, that claims will not be made
against the Company or that these increased enforcement activities will not
directly or indirectly have an adverse effect on the Company's business,
financial condition and results of operations or the market price of the Common
Stock.
Insurance Laws and Regulations
Certain states have enacted statutes or adopted regulations affecting risk
assumption in the health care industry, including statutes and regulations that
subject any physician or physician network engaged in risk-based contracting to
applicable insurance laws and regulations, which may include, among other
things, laws and regulations providing for minimum capital requirements and
other safety and soundness requirements. Failure to comply with these statutes
and regulations could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, implementation of
additional regulations or compliance requirements could result in substantial
costs to the Company and the Affiliated Practices. The inability to enter into
capitated or other risk-sharing arrangements or the cost of complying with
certain applicable laws that would permit expansion of the Company's risk-based
contracting activities could have a material adverse effect on the Company's
business, financial condition and results of operations.
REIMBURSEMENT TRENDS AND COST CONTAINMENT
The Company's revenue will be derived from service fees paid to the Company
by the Affiliated Practices pursuant to the Service Agreements and through its
ownership, operation and management of ICs. Substantially all of the revenue of
the Affiliated Practices and such ICs is currently derived from government
sponsored health care programs (principally, Medicare and Medicaid) and private
third-party payors. During the six month period ended June 30, 1997,
approximately 21% of the pro forma combined revenue of the Founding Affiliated
Practices was derived from government approved health care programs and
approximately 79% of the pro forma combined revenue of the Founding Affiliated
Practices was derived from private third-party payors. The health care industry
is experiencing a trend toward cost containment as government and private
third-party payors seek to impose lower reimbursement and utilization rates and
negotiate reduced payment schedules with service providers. The Company believes
that these trends will continue to result in a reduction from historical levels
in per-patient revenue for its Affiliated Practices and ICs and that the results
of operations of the Affiliated Practices are likely to continue to be affected
by lower reimbursement levels. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Further reductions in payments
or other changes in reimbursement for health care services could have a material
adverse effect on the Company's business, financial condition and results of
operations unless the Company is otherwise able to offset such payment
reductions.
Rates paid by private third-party payors are based on established physician
and hospital charges and are generally higher than Medicare reimbursement rates.
Any decrease in the relative number of patients covered by private insurance
could have a material adverse effect on the Company's business, financial
condition and results of operations.
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The federal government has implemented, through the Medicare program, a
resource-based relative value scale ("RBRVS") payment methodology for physician
services. The RBRVS is a fee schedule that, except for certain geographical and
other adjustments, pays similarly-situated physicians the same amount for the
same services. The RBRVS is adjusted each year and is subject to increases or
decreases at the discretion of Congress. To date, the implementation of the
RBRVS has reduced payment rates for certain of the procedures historically
provided by the Affiliated Practices. The Balanced Budget Act of 1997 ("BBA 97")
provides for reductions in the rate of growth of payments for physician
services, including services historically provided by the Affiliated Practices,
in the amount of $5.3 billion over a five-year period ending in 2002. In
addition, BBA 97 provides for the implementation of a resource-based methodology
for payment of physician practice expenses under the physician fee schedule over
a four-year period beginning in fiscal year 1999. Adoption of this methodology
is expected to reduce payments for services historically provided by the
Affiliated Practices.
RBRVS-type payment systems also have been adopted by certain private
third-party payors and the Company believes that it is likely that other private
third-party payors will adopt this payment methodology in the future.
Wider-spread implementation of such programs could reduce payments by private
third-party payors and could indirectly reduce the Company's operating margins
to the extent that the costs of providing management, administrative, technical
and non-medical services related to such procedures could not be proportionately
reduced. There can be no assurance that such cost reduction efforts by
governmental or private third-party payors will not have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business -- Government Regulation and Supervision."
Private third-party payors and Medicare and Medicaid have increased their
use of managed care as a means of cost containment. Increasingly, private
third-party payors negotiate discounts from established physician and hospital
charges or require capitation or other risk sharing arrangements as a condition
of patient referral to physician groups such as the Affiliated Practices. The
BBA 97 also includes provisions designed to increase the enrollment of Medicare
and Medicaid participants in managed care programs. The inability of the Company
to negotiate satisfactory arrangements with managed care companies could have a
material adverse effect on the Company's business, financial condition and
results of operations.
RISKS ASSOCIATED WITH MANAGED CARE CONTRACTS AND CAPITATED FEE ARRANGEMENTS
During the six month period ended June 30, 1997, approximately 96% of the
combined revenue of the Founding Affiliated Practices was derived from payments
made on a fee-for-service basis by patients and third-party payors (including
government programs) and approximately 4% of the combined revenue of the
Founding Affiliated Practices was derived from capitated arrangements. Under
capitated or other risk-sharing arrangements, the health care provider typically
is paid a pre-determined amount per-patient per-month from the payor in exchange
for providing all necessary covered services to patients covered under the
arrangement. Such contracts pass much of the financial risk of providing care,
including the risk of over-utilization, from the payor to the provider. The
Company believes that its success will, in part, be dependent upon the Company's
ability to negotiate, on behalf of the Affiliated Practices and the Company's
owned, operated or managed ICs, contracts with HMOs, employer groups and other
third-party payors pursuant to which services will be provided on a risk-sharing
or capitated basis by some or all of such Affiliated Practices or ICs.
Risk-sharing arrangements result in greater predictability of revenue, but
greater unpredictability of expenses and, consequently, profitability. There can
be no assurance that the Company will be able to negotiate, on behalf of its
Affiliated Practices or the Company's owned, operated or managed ICs,
satisfactory arrangements on a capitated or other risk-sharing basis. In
addition, to the extent that patients or enrollees covered by such contracts
require more frequent or extensive care than is anticipated, the Company would
incur unanticipated costs not offset by additional revenue, which would reduce
operating margins. In the worst case, the revenue derived from such contracts
may be insufficient to cover the costs of the services provided. Any such
reduction or elimination of earnings could have a material adverse effect on the
Company's business, financial condition and results of operations.
Furthermore, various quality assurance programs and organizations have been
created to scrutinize managed care organizations and their providers. In
response to such programs, managed care organizations
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and providers have developed their own quality assurance programs to address a
variety of areas including patient access to services, patient satisfaction,
outcomes and performance measures and utilization of services. These quality
assurance measures involve various costs associated with their implementation
and operation and depend, in part, upon the sophistication and compatibility of
existing systems and operations of the Affiliated Practices as well as the
Company's ability to integrate those systems and operations. The Company's
inability to develop strong quality assurance measures in conjunction with its
Affiliated Practices could place the Company and its Affiliated Practices at a
competitive disadvantage and have a material adverse effect on the Company's
business, financial condition and results of operations.
COMPETITION
The Company is under competitive pressure to acquire and retain the assets
of, and to provide management and administrative services to, additional
radiology practices, MSOs and ICs. There are a number of publicly-traded
companies focused on owning or managing ICs, including U.S. Diagnostic, Inc.,
Medical Resources, Inc., TeamHealth (a subsidiary of MedPartners, Inc.), and
Health Images (a division of HEALTHSOUTH Corporation). The Company is aware of
at least two privately-held physician practice management companies focused on
professional and technical radiology services. Several companies, both publicly
and privately held, that have established operating histories and, in some
instances, greater resources than the Company are pursuing the acquisition of
general and specialty physician practices (including radiology in the case of
TeamHealth, a subsidiary of MedPartners, Inc.) and the management of such
practices. Additionally, some hospitals, clinics, health care companies, HMOs
and insurance companies engage in activities similar to those of the Company.
There can be no assurance that the Company will be able to compete effectively
for the acquisition of, or affiliation with, radiology practices, that
additional competitors will not enter the market, that such competition will not
make it more difficult or expensive to acquire the assets of, and provide
management and administrative services to, radiology practices on terms
beneficial to the Company or that competitive pressures will not otherwise
adversely affect the Company. See "Business -- Competition."
The Affiliated Practices and the Company's owned, operated or managed ICs
compete with numerous local radiology and imaging service providers. The Company
believes that changes in governmental and private reimbursement policies and
other factors have resulted in increased competition among providers for the
provision of medical services to consumers. There can be no assurance that the
Affiliated Practices and the Company's owned, operated or managed ICs will be
able to compete effectively in the markets that they serve, which inability to
compete could materially and adversely affect the Company's business, financial
condition and results of operations.
Further, the Affiliated Practices will compete with other providers for
managed care contracts. The Company believes that trends toward managed care
have resulted, and will continue to result, in increased competition for such
contracts. Other radiology practices and MSOs may have more experience than the
Affiliated Practices and the Company in obtaining such contracts. There can be
no assurance that the Affiliated Practices and the Company will be able to
obtain future business from managed care entities which will allow the Company
to compete effectively in the markets that they serve, which inability to
compete could materially and adversely affect the Company's business, financial
condition and results of operations.
POTENTIAL LIABILITY AND INSURANCE; LEGAL PROCEEDINGS
The provision of medical services entails an inherent risk of professional
malpractice and other similar claims. Although the Company intends to structure
its relationships with the Affiliated Practices under the Service Agreements in
a manner that will not constitute the practice of medicine, there can be no
assurance that claims, suits or complaints relating to services and products
provided by Affiliated Practices will not be asserted against the Company in the
future. Additionally, the Company owns, operates and manages ICs, which exposes
the Company to professional liability claims. The Company maintains insurance
policies with coverages that it believes are appropriate in light of the risks
attendant to its business. In addition, pursuant to the Service Agreements, the
Affiliated Practices are required to maintain professional liability insurance.
Nevertheless, there can be no assurance that successful malpractice or other
claims will not be asserted
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against the Affiliated Practices or the Company that exceed the scope of
coverage or applicable policy limits or which could otherwise have a material
adverse effect on the Company's business, financial condition and results of
operations.
The availability and cost of professional liability insurance has been
affected by various factors, many of which are beyond the control of the Company
and the Affiliated Practices. There can be no assurance that adequate liability
insurance will be available to the Company in the future at acceptable costs or
that the future cost of such insurance to the Company and the Affiliated
Practices will not have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Corporate
Liability and Insurance."
In connection with the Reorganizations, the Company will assume and succeed
to substantially all of the obligations of each Founding Affiliated Practice.
Further, in connection with the acquisition of the assets of other Affiliated
Practices in the future, the Company anticipates that it will typically succeed
to some or all of the liabilities of such Affiliated Practices. Therefore,
claims may be asserted against the Company for events that occurred prior to the
acquisition of the assets of certain of the Affiliated Practices.
The physicians employed by the Founding Affiliated Practices are from time
to time subject to malpractice claims. Such malpractice claims, if successful,
could result in damages which may exceed applicable insurance coverage for such
malpractice claims. While each Founding Affiliated Practice and the Company
maintain insurance consistent with industry practice, there can be no assurance
that the amount of insurance currently maintained by them will satisfy all
claims made against them or that a Founding Affiliated Practice or the Company
will be able to obtain insurance in the future at satisfactory rates or in
adequate amounts. Further, there are certain claims against the Founding
Affiliated Practices which are not covered by insurance (see note 11 to the
Consolidated Financial Statements of Advanced Radiology, LLC and Subsidiary).
The Company cannot predict the effect that any such claims, regardless of their
outcome, might have on its business or reputation.
The Company has not been named in any of the lawsuits against a Founding
Affiliated Practice; however, there can be no assurance that the Company will
not subsequently be named as a defendant in one or more of these lawsuits
following consummation of the Reorganizations. Each Founding Affiliated Practice
has retained responsibility for, and agreed to indemnify the Company in full
against, the liabilities associated with these lawsuits. In the event the
Company is subsequently added as a party in any of these lawsuits, or a monetary
judgment is entered against the Company and a Founding Affiliated Practice is
not required or is unable to satisfy its indemnification obligations to the
Company, the Company's business, results of operations and financial condition
could be materially adversely affected.
On September 1, a new law became effective in the state of Texas that
permits injured patients to sue health insurance carriers, health maintenance
organizations and other managed care entities for medical malpractice. There can
be no assurance that this legislation will not increase the cost of liability
insurance to the Company for services provided in Texas or any other states in
which the Company does business if similar legislation is adopted in those
states.
In connection with the Reorganizations, the shareholders of the Founding
Affiliated Practices have agreed to indemnify the Company for certain claims.
There can be no assurance that the Company will be able to receive payment under
any such indemnity agreements or that the failure to fully recover such amounts
will not have a material adverse effect on the Company's business, financial
condition or results of operations.
DEPENDENCE ON INFORMATION SYSTEMS
The current information systems of the Founding Affiliated Practices
consist of disparate, non-integrated accounting, practice management and other
information systems. In order to facilitate the extensive information management
requirements necessary to effectively manage operations, compete for managed
care contracts and achieve standardization and efficiencies of scale, the
Company intends to create a network infrastructure and deploy two company-wide
information systems. The design or selection and implementation of the various
components of these systems and the integration throughout the Company and the
Affiliated
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Practices and subsequent administration will entail an aggregate estimated
expenditure of approximately $3.0 million and significant management resources.
The Company intends to implement such systems within the first 12 months
following this offering, but may experience unanticipated delays, complications
and expenses in implementing, integrating and operating such systems.
Furthermore, such systems may require modifications, improvements or
replacements as the Company expands or if new technologies become available.
Such modifications, improvements or replacements may require substantial
expenditures and may require interruptions in operations during periods of
implementation. There can be no assurance that the Company will be able to
implement and operate these information systems effectively or that these
systems will produce the expected benefits. The failure to successfully
implement and maintain operational and financial information systems could
prevent the Company from efficiently accumulating data from disparate systems
maintained by the Affiliated Practices and generating operational data necessary
to more effectively manage the Affiliated Practices which could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Operations and Development -- Information
Management."
DEPENDENCE ON KEY PERSONNEL
The Company is dependent upon the ability and experience of its executive
officers and key personnel for the management of the Company and the
implementation of its business strategy. The Company currently has employment
contracts with four of its executive officers and a consulting agreement with
one other executive officer. Because of the difficulty in finding adequate
replacements for such personnel, the loss of the services of any such personnel
or the Company's inability in the future to attract and retain management and
other key personnel could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company does not
maintain key man insurance for any of its executive officers. See
"Management -- Employment Agreements; Covenants Not to Compete" and "Certain
Transactions."
SHARES ELIGIBLE FOR FUTURE SALE
The market price of the Common Stock could be adversely affected by the
sale of substantial amounts of Common Stock in the public market following this
offering. Upon the completion of the Reorganizations, the conversion of the
Convertible Notes and completion of this offering, the Company will have
outstanding 18,354,125 shares of Common Stock, assuming an initial public
offering price of $15.00 per share. The 5,000,000 shares of Common Stock to be
sold in this offering will be freely tradable without restriction under the
Securities Act of 1993, as amended (the "Securities Act"), unless acquired by
"affiliates" of the Company, as that term is defined under the Securities Act or
contractually restricted.
Simultaneously with the closing of this offering, security holders of the
Founding Affiliated Practices will receive, in the aggregate, 10,916,625 shares
of Common Stock as a portion of the consideration for their practices, which
shares will have been registered under the Securities Act. Certain other
stockholders of the Company will hold, in the aggregate, an additional 2,000,000
shares of Common Stock, none of which are being offered by this Prospectus and
none of which were acquired in transactions registered under the Securities Act.
Such unregistered shares may not be sold except in transactions registered under
the Securities Act or pursuant to an exemption from registration. The holders of
these 12,916,625 shares of Common Stock have entered into agreements with the
Company pursuant to which such holders have agreed not to sell any shares of
Common Stock owned by them at the time of consummation of the Reorganizations
for a period of 12 months following this offering, and to thereafter limit the
sale of such Common Stock to 25% of such shares upon expiration of such 12-month
period following this offering; up to an additional 25% of such shares upon
expiration of the 18-month period following this offering, and the remaining 50%
of such shares upon expiration of a 24-month period following this offering.
Further, each of the holders of the Convertible Notes have entered into
agreements with the Company pursuant to which each holder has agreed not to sell
any portion of the Convertible Notes or any shares of the Common Stock issued or
issuable upon conversion thereof for a period of the 24 months following the
date the Convertible Notes were issued to such holder (which Notes were issued
between September 30, 1996 and December 31, 1996). The Company has agreed with
the Underwriters not to waive the restrictive provisions of those agreements for
180 days after the date of
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this Prospectus without the prior written consent of Smith Barney Inc. Upon
expiration of these agreements, the registered shares of Common Stock will be
eligible for resale in the public market and the unregistered shares of Common
Stock, the Convertible Notes and the shares of Common Stock issued or issuable
upon conversion of the Convertible Notes will become eligible for sale in the
public market, subject to the provisions of Rule 144 of the Securities Act. See
"Shares Eligible for Future Sale."
In addition, the Company, its officers and directors and all other holders
of Common Stock and securities convertible into or exercisable or exchangeable
for Common Stock have agreed that for a period of 180 days after the date of
this Prospectus they will not, without the prior written consent of Smith Barney
Inc., offer, sell, contract to sell or otherwise dispose of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock
except, in the case of the Company, in certain limited circumstances. See
"Shares Eligible for Future Sale."
CONTROL BY EXISTING STOCKHOLDERS
Following the completion of the Reorganizations, the conversion of the
Convertible Notes and completion of this offering, members of the Board of
Directors and the executive officers of the Company will own approximately 11.2%
(excludes shares received by Directors who are also security holders of Founding
Affiliated Practices), and the security holders of the Founding Affiliated
Practices will own approximately 59.5%, of the outstanding shares of Common
Stock. The Company's Amended and Restated Bylaws do not provide for cumulative
voting. The Company's Amended and Restated Bylaws provide that, following the
consummation of this offering, the Board of Directors must nominate two
physicians licensed to practice medicine from the Affiliated Practices for
election to the Board of Directors at each annual meeting of the Company's
stockholders (three physicians licensed to practice medicine from the Affiliated
Practices if the size of the Board of Directors increases to nine). Although to
the knowledge of the Company such directors and other persons do not have any
arrangements or understandings among themselves with respect to the voting of
the shares of Common Stock beneficially owned by such persons, following the
completion of this offering, such persons will be able to control the affairs of
the Company. See "Principal Stockholders."
ANTI-TAKEOVER CONSIDERATIONS
Certain provisions of the Company's Restated Certificate of Incorporation,
the Company's Amended and Restated Bylaws and Delaware law could discourage
potential acquisition proposals, delay or prevent a change in control of the
Company and, consequently, limit the price that investors might be willing to
pay in the future for shares of the Common Stock. These provisions include the
inability to remove directors except for cause and the Company's ability to
issue, without further stockholder approval, shares of preferred stock with
rights and privileges senior to the Common Stock. The Company also is subject to
Section 203 of the Delaware General Corporation Law which, subject to certain
exceptions, prohibits a Delaware corporation from engaging in any of a broad
range of business combinations with an "interested stockholder" for a period of
three years following the date that such stockholder became an interested
stockholder. See "Description of Capital Stock."
The Company has entered into employment agreements with four of its
executive officers which contain provisions that require the Company to pay
certain amounts to such employees upon their termination following certain
events including a change of control of the Company. Such agreements may delay
or prevent a change of control of the Company. See "Management -- Employment
Agreements; Covenants-Not-to-Compete."
NO PRIOR MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Common
Stock, and there can be no assurance that an active public market for the Common
Stock will develop or continue after this offering. The initial public offering
price has been determined by negotiations among the Company and the several
Underwriters named herein, and may not be indicative of the market price for the
Common Stock after this offering. See "Underwriting" for factors considered in
determining the initial public offering price. There can
17
<PAGE> 19
be no assurance that the market price for the Common Stock will not decline
below the initial market price. From time to time after this offering, there may
be significant volatility in the market price for the Common Stock. The trading
price of the Common Stock could be subject to significant fluctuations in
response to variations in the Company's quarterly operating results, general
trends in the Company's industry, regulatory and reimbursement developments,
changes in earnings estimates by securities analysts and other factors affecting
the Company's industry or the securities market as a whole. Any such
fluctuations may adversely affect the market price of the Common Stock.
IMMEDIATE AND SUBSTANTIAL DILUTION
The purchasers of the shares of Common Stock offered hereby will experience
immediate and substantial dilution in the net tangible book value of their
shares of Common Stock in the amount of $13.16 per share (based on an assumed
public offering price of $15.00 per share and after giving effect to the
Reorganizations and conversion of the Convertible Notes). See "Dilution." In the
event the Company issues additional Common Stock in the future, including shares
that may be issued in connection with future acquisitions, or upon the exercise
of options, purchasers of Common Stock in this offering may experience further
dilution in the net tangible book value per share of Common Stock.
18
<PAGE> 20
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered hereby, based upon an assumed initial public offering price of $15.00
per share and after deducting the estimated offering expenses payable by the
Company and the underwriting discounts and commissions ("Net Proceeds"), are
estimated to be approximately $66.7 million ($76.8 million if the Underwriters'
over-allotment option is exercised in full). Of this amount, approximately $54.6
million will be used to pay the cash portion of the consideration for the assets
of the Founding Affiliated Practices and approximately $12.1 million will be
used to repay certain indebtedness previously incurred by the Founding
Affiliated Practices. The indebtedness to be repaid from the Net Proceeds bears
interest at annual rates ranging from 5.35% to 10.36% with a weighted average
interest rate of 8.20% and would otherwise mature at various dates through the
year 2001. The indebtedness incurred by the Founding Affiliated Practices within
the last year that is to be repaid with portions of the Net Proceeds was
incurred for capital expenditures, acquisitions and working capital.
DIVIDEND POLICY
APPI has not paid any cash dividends since its inception. The Company
currently intends to retain all future earnings for the operation and expansion
of its business and, accordingly, the Company does not anticipate that any cash
dividends will be declared or paid on its Common Stock in the foreseeable
future. Any payment of such dividends in the future will be at the discretion of
the Board of Directors and will depend upon the earnings and financial position
of the Company, its results of operations, its capital needs, plans for
expansion, contractual restrictions to which the Company may be subject and such
other factors as the Board of Directors may deem appropriate. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
19
<PAGE> 21
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) as of
June 30, 1997, (ii) on a pro forma basis giving effect to the Reorganizations
and the distribution to the Founding Affiliated Practices, and (iii) on a pro
forma basis as adjusted to give effect to (a) the sale of the 5,000,000 shares
of Common Stock offered hereby (assuming an initial public offering price of
$15.00 per share and after deducting underwriting discounts and commissions and
estimated offering expenses) and the application of the estimated Net Proceeds
therefrom as described under "Use of Proceeds", (b) the conversion of the
Convertible Notes, and (c) borrowings under the Credit Facility to occur upon
the consummation of this offering, which will be used to refinance substantially
all funded debt other than capital leases and a note payable to a bank. This
table should be read in conjunction with "American Physician Partners, Inc.
Unaudited Pro Forma Combined Balance Sheet," "Selected Financial Data," and the
financial statements of APPI and the Founding Affiliated Practices included
elsewhere herein.
The Reorganizations include (a) the issuance of 10,916,625 shares of Common
Stock to the Founding Affiliated Practices, (b) the payment of $54.6 million,
all of which is to be paid to the Founding Affiliated Practices in cash at
closing, and (c) the receipt of assets used by the Founding Affiliated
Practices, and the assumption of related debt, with a net book value of $22.4
million at June 30, 1997.
<TABLE>
<CAPTION>
JUNE 30, 1997
-------------------------------------------
PRO FORMA
ADJUSTED FOR PRO FORMA
ACTUAL DISTRIBUTION AS ADJUSTED
----------- ------------ ------------
<S> <C> <C> <C>
Current portion of notes payable and capital
leases.......................................... $ 3,500,000 $ 11,834,054 $ 1,347,442
=========== ============ ============
Distribution payable.............................. $ -- $ 54,583,125 $ --
GECC Revolving Credit Facility.................... -- -- 11,751,194
Other long-term debt and capital leases, net of
current portion................................. -- 16,253,933 3,994,842
Stockholders' equity (deficit):
Preferred Stock, $.0001 par value; 10,000,000
shares authorized; no shares outstanding..... -- -- --
Common Stock, $.0001 par value, 50,000,000
shares authorized; 2,000,000 shares issued
and outstanding, actual; and 18,403,020
shares issued and outstanding, pro forma as
adjusted(1).................................. 200 1,297 1,797
Additional paid-in capital...................... 249,800 25,921,398 95,785,132
Accumulated deficit............................. (3,348,942) (61,241,073)(2) (61,241,073)(2)
----------- ------------ ------------
Total stockholders' equity (deficit).... (3,098,942) (35,318,378) 34,545,856
=========== ============ ============
Total capitalization.................... $ 401,058 $ 47,352,734 $ 51,639,334
=========== ============ ============
</TABLE>
- ---------------
(1) Excludes 1,421,000 shares issuable upon exercise of options outstanding as
of September 12, 1997, at a weighted average exercise price of $1.68 per
share. The number of shares issuable in connection with the Reorganizations
and upon conversion of the Convertible Notes will increase if the initial
public offering price is lower than $14.00 per share. See "Certain
Transactions -- Reorganizations," "Shares Eligible for Future Sale,"
"Description of Capital Stock" and Note 4 of Notes to Financial Statements
of APPI.
(2) Adjusted to reflect the Reorganizations and distribution of $54.6 million to
the Founding Affiliated Practices, all of which is to be paid out of
proceeds from this offering.
20
<PAGE> 22
DILUTION
The net tangible book value of the Company at June 30, 1997 was
approximately $(3.1 million) or $(1.55) per share. Giving effect to the
Reorganizations and the conversion of the Convertible Notes (but not this
offering), the pro forma net tangible book value of the Company at June 30, 1997
would have been approximately $22.0 million or $1.64 per share. Therefore, the
increase in pro forma net tangible book value per share due to the
Reorganizations is $3.20 per share. After giving effect to the sale of the
shares of Common Stock offered hereby (assuming a public offering price of
$15.00 per share and after deducting underwriting discounts and commissions and
estimated offering expenses), the adjusted pro forma net tangible book value of
the Company at June 30, 1997 would have been approximately $33.7 million or
$1.84 per share, representing an immediate increase in net tangible book value
of $.19 per share to existing stockholders and an immediate dilution of $13.16
per share to the investors purchasing shares in this offering ("New Investors").
The following table illustrates this per share dilution to New Investors:
<TABLE>
<S> <C> <C>
Assumed initial public offering price....................... $ 15.00
Historical net tangible book value........................ $(1.55)
Increase due to the Reorganizations and conversion of the
Convertible Notes...................................... 3.20
Increase attributable to New Investors.................... .19
------
Pro forma adjusted net tangible book value after this
offering.................................................. 1.84
--------
Dilution to New Investors................................... $ 13.16
========
</TABLE>
The following table sets forth at the date of this Prospectus the number of
shares of Common Stock purchased from the Company, the total consideration to
the Company and the average price per share paid by existing stockholders (after
giving effect to the Reorganizations and conversion of the Convertible Notes)
and by the New Investors (assuming a public offering price of $15.00 per share
and before deducting underwriting discounts and commissions and estimated
offering expenses):
<TABLE>
<CAPTION>
SHARES ACQUIRED TOTAL CONSIDERATION
--------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing
stockholders(1)......... 13,354,125 72.8% $(31,716,000) (73.3)% $(2.37)
New Investors............. 5,000,000 27.2 75,000,000 173.3 15.00
---------- ----- ------------ -----
Total........... 18,354,125 100.0% $ 43,284,000 100.0%
========== ===== ============ =====
</TABLE>
- ---------------
(1) Consists of management, the holders of the Convertible Notes, John
Pappajohn, Derace L. Schaffer, M.D., and persons receiving Common Stock in
connection with the Reorganizations. Total consideration for existing
stockholders represents the combined stockholders' equity before this
offering adjusted to reflect the payment of approximately $54.6 million in
cash by the Company in connection with the Reorganizations and the
conversion of the Convertible Notes. The tangible assets received in
exchange for this consideration includes the net book value of the Founding
Affiliated Practices of approximately $22.4 million. See "Capitalization."
As of September 12, 1997, there were 1,421,000 shares issuable upon the
exercise of stock options having a weighted average exercise price of $1.68
per share. To the extent these options are exercised, there will be further
dilution to New Investors.
21
<PAGE> 23
AMERICAN PHYSICIAN PARTNERS, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
The following unaudited pro forma combined balance sheet gives effect to
the Reorganizations as a combination of promoter interests, at historical costs,
and is based upon the historical financial statements of APPI and each of the
Founding Affiliated Practices. In addition, the unaudited pro forma combined
balance sheet gives effect to this offering (assuming a public offering price of
$15.00 per share) and the conversion of the Convertible Notes. The unaudited pro
forma combined balance sheet gives effect to the completion of such transactions
as if they had occurred on June 30, 1997. Due to the fact that the Company has
had no significant operations to date, no pro forma statement of operations has
been included in this Prospectus. The amount and composition of costs to be
incurred by the Company, related to the provision of management services to the
Founding Affiliated Practices may differ from the costs historically incurred by
the Founding Affiliated Practices; therefore, the costs presented in the
individual financial statements of the Founding Affiliated Practices may not be
representative of the Company's costs on a pro forma basis. The unaudited pro
forma combined balance sheet and notes thereto should be read in connection with
the other financial information, including the audited financial statements of
APPI and each of the Founding Affiliated Practices and notes thereto, included
elsewhere in this Prospectus.
The unaudited pro forma combined balance sheet is presented for
illustrative purposes only and is not necessarily indicative of the financial
position that would have been achieved if the Reorganizations, the conversion of
the Convertible Notes and this offering had been consummated on June 30, 1997.
22
<PAGE> 24
AMERICAN PHYSICIAN PARTNERS, INC.
PRO FORMA COMBINED BALANCE SHEET
JUNE 30, 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PACIFIC RADIOLOGY ROCKLAND
ADVANCED THE IDE M&S X-RAY IMAGING AND NUCLEAR RADIOLOGICAL
APPI RADIOLOGY GROUP PRACTICES CONSULTANTS MEDICINE GROUP
------- --------- ------- --------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................. $ 110 $ 185 $ 238 $ 760 $ -- $ 887 $ 369
Accounts receivable, net................... -- 15,042 5,262 3,702 1,934 2,022 2,843
Other receivables.......................... 43 375 -- 192 -- -- --
Other current assets....................... 95 669 125 73 2,296 221 410
------- ------- ------ ------ ------ ------ -------
Total current assets................. 248 16,271 5,625 4,727 4,230 3,130 3,622
Property and equipment, net................. 167 14,860 998 758 1,862 662 5,269
Investments in joint ventures............... -- 1,101 -- 1,420 -- 1,322 --
Deferred income taxes....................... -- -- -- -- -- -- 1,203
Notes receivable............................ -- -- -- -- -- -- --
Intangible assets, net...................... -- -- -- 678 133 -- --
Other assets, net........................... 2,072 1,529 608 46 107 88 2,144
------- ------- ------ ------ ------ ------ -------
Total assets......................... $ 2,487 $33,761 $7,231 $7,629 $6,332 $5,202 $12,238
======= ======= ====== ====== ====== ====== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings...................... $ -- $ 2,900 $ -- $ -- $ -- $1,000 $ --
Accounts payable and accrued expenses...... 2,086 2,007 2,022 257 1,278 209 189
Accrued salaries and benefits.............. -- 1,606 562 153 288 419 541
Due to joint ventures...................... -- 693 -- -- -- -- --
Deferred income taxes...................... -- -- -- -- 855 1,006 573
Current portion of deferred compensation... -- -- -- 83 -- -- --
Current portion of long-term debt.......... 3,500 3,909 436 231 844 119 1,675
Current portion of capital lease
obligations.............................. -- -- -- 13 -- -- 546
Distribution payable....................... -- -- -- -- -- -- --
Other current liabilities.................. -- 749 -- -- -- -- --
------- ------- ------ ------ ------ ------ -------
Total current liabilities............ 5,586 11,864 3,020 737 3,265 2,753 3,524
Deferred income taxes....................... -- -- 1,123 -- 11 -- --
Deferred compensation, net of current
portion.................................... -- -- -- 1,346 -- -- 3,600
Long-term debt, net of current portion...... -- 4,813 1,422 178 2,801 -- 5,563
Capital lease obligations, net of current
portion.................................... -- -- -- 37 -- -- 1,378
Long-term debt -- GECC revolving credit
facility................................... -- -- -- -- -- -- --
Other liabilities........................... -- 359 -- -- -- -- --
------- ------- ------ ------ ------ ------ -------
Total liabilities.................... 5,586 17,036 5,565 2,298 6,077 2,753 14,065
------- ------- ------ ------ ------ ------ -------
Minority interests in consolidated
subsidiaries............................... -- 408 -- 506 -- -- --
Stockholders' equity:
Common stock............................... -- -- -- -- -- -- --
Additional paid-in capital................. 250 -- -- -- -- -- --
Accumulated earnings (deficit)............. (3,349) 16,317 1,666 4,825 255 2,449 (1,827)
------- ------- ------ ------ ------ ------ -------
Total stockholders' equity........... (3,099) 16,317 1,666 4,825 255 2,449 (1,827)
------- ------- ------ ------ ------ ------ -------
Total liabilities and stockholders'
equity.............................. $ 2,487 $33,761 $7,231 $7,629 $6,332 $5,202 $12,238
======= ======= ====== ====== ====== ====== =======
<CAPTION>
VALLEY PRO FORMA
RADIOLOGY UNADJUSTED PRO FORMA PRO FORMA DISTRIBUTION ADJUSTED FOR
GROUP TOTAL ADJUSTMENTS COMBINED ADJUSTMENT DISTRIBUTION
--------- ---------- ----------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents.................. $ 386 $ 2,935 $ -- $ 2,935 $ -- $ 2,935
Accounts receivable, net................... 2,076 32,881 -- 32,881 -- 32,881
Other receivables.......................... -- 610 (219)(a) 391 -- 391
Other current assets....................... 8 3,897 (2,182)(a) 1,715 -- 1,715
------ ------- -------- ------- -------- --------
Total current assets................. 2,470 40,323 (2,401) 37,922 -- 37,922
Property and equipment, net................. 1,220 25,796 (88)(a) 25,708 -- 25,708
Investments in joint ventures............... 27 3,870 88(a) 3,958 -- 3,958
Deferred income taxes....................... -- 1,203 (1,111)(b) 92 -- 92
Notes receivable............................ 403 403 -- 403 -- 403
Intangible assets, net...................... -- 811 -- 811 -- 811
Other assets, net........................... 36 6,630 -- 6,630 -- 6,630
------ ------- -------- ------- -------- --------
Total assets......................... $4,156 $79,036 $ (3,512) $75,524 $ -- $ 75,524
====== ======= ======== ======= ======== ========
Current liabilities:
Short-term borrowings...................... $ 678 $ 4,578 $ -- $ 4,578 $ -- $ 4,578
Accounts payable and accrued expenses...... 97 8,145 -- 8,145 -- 8,144
Accrued salaries and benefits.............. 257 3,826 (996)(a) 2,830 -- 2,830
Due to joint ventures...................... -- 693 -- 693 -- 693
Deferred income taxes...................... 372 2,806 5,892(b) 8,698 -- 8,698
Current portion of deferred compensation... -- 83 (83)(a) -- -- --
Current portion of long-term debt.......... 561 11,275 -- 11,275 -- 11,275
Current portion of capital lease
obligations.............................. -- 559 -- 559 559
Distribution payable....................... -- -- -- -- 54,583(a) 54,583
Other current liabilities.................. -- 749 -- 749 -- 749
------ ------- -------- ------- -------- --------
Total current liabilities............ 1,965 32,714 4,813 37,527 54,583 92,109
Deferred income taxes....................... 37 1,171 35(b) 1,206 -- 1,206
Deferred compensation, net of current
portion.................................... -- 4,946 (4,946)(a) -- -- --
Long-term debt, net of current portion...... 167 14,944 (105)(a) 14,839 -- 14,839
Capital lease obligations, net of current
portion.................................... -- 1,415 -- 1,415 -- 1,415
Long-term debt -- GECC revolving credit
facility................................... -- -- -- -- -- --
Other liabilities........................... -- 359 -- 359 -- 359
------ ------- -------- ------- -------- --------
Total liabilities.................... 2,169 55,549 (203) 55,346 54,583 109,928
------ ------- -------- ------- -------- --------
Minority interests in consolidated
subsidiaries............................... -- 914 -- 914 -- 914
Stockholders' equity:
Common stock............................... -- -- 1(c) 1 -- 1
Additional paid-in capital................. -- 250 25,673(d) 25,922 -- 25,922
(1)(c)
Accumulated earnings (deficit)............. 1,987 22,323 (3,309)(a)(b) (6,659) (54,583)(a) (61,241)
(25,673)(d)
------ ------- -------- ------- -------- --------
Total stockholders' equity........... 1,987 22,573 (3,309) 19,264 (54,583) (35,318)
------ ------- -------- ------- -------- --------
Total liabilities and stockholders'
equity.............................. $4,156 $79,036 $ (3,512) $75,524 $ -- $ 75,524
====== ======= ======== ======= ======== ========
<CAPTION>
OFFERING PRO FORMA
ADJUSTMENTS AS ADJUSTED
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents.................. $ 66,656(e) $ 2,935
(54,583)(e)
(12,073)(e)
Accounts receivable, net................... -- 32,881
Other receivables.......................... -- 391
Other current assets....................... -- 1,715
-------- --------
Total current assets................. -- 37,922
Property and equipment, net................. -- 25,708
Investments in joint ventures............... -- 3,958
Deferred income taxes....................... -- 92
Notes receivable............................ -- 403
Intangible assets, net...................... -- 811
Other assets, net........................... (2,056)(e) 4,574
-------- --------
Total assets......................... $ (2,056) $ 73,468
======== ========
Current liabilities:
Short-term borrowings...................... $ (4,578)(f) --
Accounts payable and accrued expenses...... (1,764)(e) 6,380
Accrued salaries and benefits.............. -- 2,830
Due to joint ventures...................... -- 693
Deferred income taxes...................... -- 8,698
Current portion of deferred compensation... -- --
Current portion of long-term debt.......... (6,987)(f) 788
(3,500)(g)
Current portion of capital lease
obligations.............................. -- 559
Distribution payable....................... (54,583)(e) --
Other current liabilities.................. -- 749
-------- --------
Total current liabilities............ (71,412) 20,697
Deferred income taxes....................... -- 1,206
Deferred compensation, net of current
portion.................................... -- --
Long-term debt, net of current portion...... (12,073)(e) 2,580
(186)(f)
Capital lease obligations, net of current
portion.................................... -- 1,415
Long-term debt -- GECC revolving credit
facility................................... 11,751(f) 11,751
Other liabilities........................... -- 359
-------- --------
Total liabilities.................... (71,920) 38,008
-------- --------
Minority interests in consolidated
subsidiaries............................... -- 914
Stockholders' equity:
Common stock............................... 1(e) 2
Additional paid-in capital................. 66,363(e) 95,785
3,500(g)
Accumulated earnings (deficit)............. -- (61,241)
-------- --------
Total stockholders' equity........... 69,864 34,546
-------- --------
Total liabilities and stockholders'
equity.............................. $ (2,056) $ 73,468
======== ========
</TABLE>
23
<PAGE> 25
AMERICAN PHYSICIAN PARTNERS, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL INFORMATION
APPI was incorporated in April 1996 and has conducted no significant
operations and generated no revenue to date other than in connection with this
offering and the Reorganizations. The following is a summary of the adjustments
reflected in the Unaudited Pro Forma Combined Balance Sheet assuming the
Reorganizations, this offering and conversion of the Convertible Notes. The
Reorganizations will be accounted for as a combination of promoter interests, at
historical costs, under generally accepted accounting principles. APPI will not
be acquiring equity interests in the Founding Affiliated Practices, but will be
acquiring substantially all of the assets of the Founding Affiliated Practices.
Upon completion of the Reorganizations, the Company will not consolidate
the financial position of the Founding Affiliated Practices.
The adjustments reflected in the unaudited pro forma combined balance sheet
are as follows:
(a) To eliminate assets not acquired and liabilities not assumed by the
Company and to reflect the $54.6 million distribution to the
Founding Affiliated Practices. The Company will not be assuming any
physician related assets and liabilities, such as notes receivable
from physicians, accrued physician compensation, deferred physician
compensation, and assets and liabilities related to other physician
benefit plans.
(b) To record the establishment of deferred income taxes for the
Company after the Reorganizations.
(c) To record the issuance of Common Stock to the Founding Affiliated
Practices.
(d) To record the reclassification of the Founding Affiliated
Practices's earnings (deficit) accumulated prior to this offering
to additional paid-in capital.
(e) To reflect the effects of this offering, including the use of
estimated net cash proceeds from the issuance of Common Stock, to
pay the $54.6 million distribution to the Founding Affiliated
Practices and to reduce debt.
(f) To reflect borrowings under the $100,000,000 credit facility (the
"Credit Facility") with GE Capital Corporation ("GECC") which will
occur contemporaneously with this offering. The proceeds from these
borrowings will be used to refinance all remaining funded debt,
except capital leases and one note payable.
(g) To reflect the conversion of all $3,500,000 of Convertible Notes
issued by the Company into 437,500 shares of Common Stock at the
time of this offering.
24
<PAGE> 26
SELECTED FINANCIAL DATA
(IN THOUSANDS)
The following information for APPI has been derived from the Company's
financial statements. APPI was incorporated in April 1996 and has conducted no
significant operations and generated no revenue to date other than in connection
with this offering and the pending Reorganizations. Results for interim periods
are not necessarily indicative of those to be expected for a full fiscal year.
The selected financial information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the audited financial statements of APPI and notes thereto
included elsewhere in this Prospectus.
AMERICAN PHYSICIAN PARTNERS, INC.
<TABLE>
<CAPTION>
FROM INCEPTION
(APRIL 30, 1996) SIX MONTHS
THROUGH ENDED
DECEMBER 31, 1996 JUNE 30, 1997
----------------- -------------
(UNAUDITED)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue............................................... $ -- $ --
Expenses:
Salaries, wages and benefits.............................. 546 901
Depreciation and amortization............................. 3 13
Other expenses............................................ 1,101 785
------- --------
Total expenses.............................................. 1,650 1,699
------- --------
Net loss.................................................... $(1,650) $ (1,699)
======= ========
</TABLE>
<TABLE>
<CAPTION>
AS OF
JUNE 30, 1997
--------------
(UNAUDITED)
<S> <C>
BALANCE SHEET DATA:
Total assets................................................ $ 2,486
Total debt.................................................. 3,500
Stockholders' deficit....................................... (3,099)
</TABLE>
25
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis contains certain statements of a
forward-looking nature relating to future events or the future financial
performance of the Company. Such statements are only predictions and the actual
events or results may differ materially from the results discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in "Risk Factors,"
as well as those discussed elsewhere in this Prospectus. The historical results
set forth in this discussion and analysis are not indicative of trends with
respect to any actual or projected future financial performance of the Company.
This discussion and analysis should be read in conjunction with the Financial
Statements and the related Notes thereto included elsewhere in this Prospectus.
OVERVIEW
APPI has conducted no significant operations to date but will be acquiring,
in connection with the Reorganizations and this offering, tangible and
intangible assets and liabilities of, and entering into Service Agreements with,
the Founding Affiliated Practices. Through the Service Agreements, the Company
will be providing management, administrative, technical and non-medical services
to the Affiliated Practices in return for service fees. The service fees
represent the physician groups revenue, net less amounts retained by physician
groups. Physician groups revenue, net consists of the revenue of the Affiliated
Practices reported at the estimated realizable amounts from patients,
third-party payors and others for services rendered, net of contractual and
other adjustments. The service fees payable to the Company by the Affiliated
Practices under the Service Agreements vary based on the fair market value, as
determined in arms' length negotiations, and the nature and extent of services
provided. Where state law allows, the service fees due under the Service
Agreements are derived from two distinct revenue streams: (i) the Affiliated
Practice pays a service fee based on a negotiated percentage (Founding
Affiliated Practice service fees range from 20% to 25%) of the adjusted
professional revenues as defined in the Service Agreement; and (ii) the
Affiliated Practice pays a service fee based on 100% of the adjusted technical
revenues as defined in the Service Agreement, which equals the fair value of the
services provided. In states where the law requires a flat fee structure, the
Company has negotiated a base service fee, which is equal to the fair market
value of the services provided under the Service Agreement and which is
renegotiated each year to equal the fair market value of the services provided
under the Service Agreement. As structured, the base service fee will result in
the Company receiving substantially the same amount of service fee as it would
have received under its negotiated percentage fee structure. The service fees
received by the Company under either fee structure provide the Company with a
net profits or equivalent interest in the Founding Affiliated Practices and, as
a result, the Company will display the revenues, net of the amounts retained by
physicians, and expenses of the Founding Affiliated Practices in its historical
consolidated statement of operations once the Reorganizations have occurred. The
aggregate initial base service fees are $9,261,000. Adjusted professional
revenues and adjusted technical revenues are determined by deducting certain
contractually agreed-upon expenses (non-physician salaries and benefits, rent,
depreciation, insurance, interest and other non-physician costs) from physician
groups revenue of the Affiliated Practice. In addition, the Company receives
income from joint ventures in which the Affiliated Practices hold ownership
interests. Physician compensation is determined by the Affiliated Practices
pursuant to employment arrangements between the Affiliated Practice and the
individual physicians. The Company does not participate in the negotiation of
physician employment arrangements.
The Company expects that the expenses incurred by the Company associated
with its obligations under the Service Agreements will generally be the same as
the operating costs and expenses that would have otherwise been incurred by the
Founding Affiliated Practices, including: the salaries, wages and benefits of
non-physician personnel; medical supplies expenses involved in administering
technical aspects of the practices; the office (general and administrative)
expenses of the practices; depreciation and amortization of assets acquired from
the Affiliated Practices; and certain other items. As further described in
"Business -- Business Strategy", the Company intends to implement measures
designed to reduce these operating costs and expenses through purchase
discounts, economies of scale, benchmarking programs and more effective
equipment utilization. In addition to the operating costs and expenses discussed
above, the Company will be
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incurring additional personnel and administrative expenses in connection with
establishing and maintaining corporate and regional offices, which will provide
management, administrative, marketing and acquisition services.
In accordance with Staff Accounting Bulletin ("SAB") No. 48, "Transfers of
Nonmonetary Assets by Promoters or Shareholders," published by the Securities
and Exchange Commission (the "Commission"), the acquisition of the assets and
assumption of certain liabilities for all of the Founding Affiliated Practices
pursuant to the Reorganizations is accounted for by the Company at the
transferors' historical cost basis with the shares of Common Stock to be issued
in those transactions being valued at the historical cost of the non-monetary
assets acquired net of liabilities assumed. Each of the securityholders of the
Founding Affiliated Practices is deemed to be a promoter of this offering. The
cash consideration will be reflected as a dividend by APPI to the owners of the
Founding Affiliated Practices. SAB No. 48 will not be applicable to any
acquisitions made by the Company subsequent to this offering. It is currently
anticipated that the Company's future acquisitions of certain assets and
liabilities of Affiliated Practices may result in substantial annual non-cash
amortization charges for intangible assets in the Company's statements of
operations.
An integral part of the Company's business strategy is to grow through
acquisitions and to expand the Affiliated Practices. Although the Company is
currently engaged in discussions with several such potential acquisition
candidates, except as disclosed in this Prospectus, the Company has not entered
into any letters of intent or definitive purchase agreements with respect to any
such acquisitions. No assurance can be provided that any such acquisitions will
be consummated.
RESULTS OF OPERATIONS
APPI has conducted no significant operations to date and will not conduct
significant operations until the Reorganizations and this offering are
completed. APPI has incurred and continues to incur various legal, accounting,
travel and marketing costs in connection with the Reorganizations and this
offering. As of June 30, 1997, such expenses had been funded primarily by the
proceeds received from the issuance of $3.5 million in Convertible Notes. In
addition, during 1996, APPI borrowed $0.4 million in the form of notes from its
stockholders. As of June 30, 1997, these notes had been fully paid.
APPI has recorded a full valuation allowance against its deferred tax
assets because of its current financial condition, its limited operating history
and its operating losses recorded to date. If the Company does achieve
profitability in the future, the valuation allowance will be reduced by a credit
to income.
LIQUIDITY AND CAPITAL RESOURCES
If the Reorganizations and this offering had occurred on June 30, 1997, the
Company would have had pro forma working capital of $17.2 million (assuming an
initial offering price of $15.00 per share and after giving effect to the use of
proceeds from this offering in the manner set forth in "Use of Proceeds").
The Company anticipates making capital expenditures during the remainder of
1997 of approximately $7.0 million, primarily for the purchase of imaging and
teleradiology equipment. In addition to these capital expenditures, the Company
is working to establish relationships with third-party vendors regarding the
potential purchase and implementation of management information systems that
could involve additional expenditures of approximately $2.4 million during the
remainder of 1997 and thereafter. The Company also expects to make acquisitions
of the assets of practices during 1997 that will involve the use of cash and
Common Stock. The Company has obtained a commitment letter for a $100,000,000
credit facility (the "Credit Facility") from GE Capital Corporation ("GECC").
The Company and GECC have substantially completed negotiations regarding a
credit agreement for the Credit Facility and are in the process of negotiating
ancillary credit documents. The Company anticipates that such Credit Facility
will be effective concurrently with the closing of this offering and, when
combined with the Company's cash from operations, will be utilized for capital
expenditures and other general corporate purposes, including future
acquisitions.
Under the proposed terms of the Credit Facility, the Company will pay a
commitment fee, which will be capitalized and amortized as an adjustment to
interest expense using the effective interest method. The
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interest rate under the Credit Facility will be, at the Company's option, (i)
reserve adjusted LIBOR plus 1.375%, or (ii) the prime rate plus 0.375%. The
Credit Facility, which will expire six years from the closing date of the
facility, will include certain restrictive covenants including prohibitions on
the payment of dividends and the maintenance of certain financial ratios
(including minimum debt-service coverage and maximum debt-to-EBITDA, as
defined). At the date of this filing, there are no borrowings under the Credit
Facility. Subsequent completion of this offering, the Company intends to borrow
approximately $22,000,000 under the Credit Facility to refinance existing
indebtedness of the Founding Affiliated Practices and fund working capital.
The Company anticipates that funds generated from this offering, after
giving effect to the use of proceeds from this offering in the manner set forth
in "Use of Proceeds", funds generated from operations, cash and cash
equivalents, and funds available under the Credit Facility will be sufficient to
meet the Company's working capital requirements and debt obligations and to
finance any necessary capital expenditures through the end of 1998. Expansion of
the Company's business through acquisitions may require additional funds, which,
to the extent not provided by internally-generated sources, cash, and the Credit
Facility, would require the Company to seek additional debt or equity financing.
The Company intends to call the Convertible Notes for redemption upon
completion of this offering. Upon the call, the Convertible Notes may, at the
election of the noteholders of at least 50% of the outstanding principal amount,
be converted into shares of Common Stock at a conversion price of $8.00 per
share. The Company believes that all of the holders of the Convertible Notes
will elect to convert to Common Stock prior to the redemption. In the event that
some or all of the holders of the Convertible Notes fail to convert their
respective Convertible Notes into Common Stock, the Company intends to make the
redemption payment of up to $3,500,000 plus accrued interest with the proceeds
from the proposed Credit Facility.
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BUSINESS
GENERAL
The Company was formed in April 1996 to provide physician practice
management and administrative services to radiology practices with a focus on
the development, consolidation and management of integrated radiology and
imaging center networks. Upon completion of this offering, the Company will
provide practice management services to seven radiology practices consisting of
223 physicians practicing at 42 hospitals and 65 diagnostic imaging centers
("ICs") in California, Kansas, Maryland, New York and Texas. The Company will
derive its revenue from the provision of management, administrative, technical
and other non-medical services to the Affiliated Practices.
The typical relationship with an Affiliated Practice would involve the
acquisition by the Company of all of the non-medical assets (tangible and
intangible) of the Affiliated Practice and entry into a long-term Service
Agreement with the Affiliated Practice at the time of acquisition pursuant to
which the Company would provide a wide range of management, administrative,
technical and non-medical services in exchange for a service fee. If the
Affiliated Practice owns and operates an IC, the Company would typically acquire
all of the IC-related assets (e.g., x-ray, MRI and CT equipment). As a result,
the Affiliated Practice would rely on the Company to provide all necessary
non-medical business and administrative services and the Affiliated Practice
would continue to employ all of the professional personnel (i.e. the
radiologists) who would continue to provide professional medical services for
and on behalf of the Affiliated Practice.
The Founding Affiliated Practices provide a wide range of diagnostic and
therapeutic services, including x-ray and fluoroscopy, magnetic resonance
imaging, computed tomography, mammography, ultrasound, nuclear medicine,
radiation oncology and interventional radiology. The Founding Affiliated
Practices were selected based on a variety of factors, including: physician and
practice credentials and reputation; competitive market position; subspecialty
mix of physicians; historical financial performance and growth potential; and
willingness to embrace the Company's vision and philosophy regarding the
provision of radiology services. The Company intends to provide Affiliated
Practices with the necessary capital resources and expertise to invest in new
technologies, complete consolidating acquisitions, implement sophisticated
management information systems, promote efficient practice patterns, develop
coordinated marketing efforts and realize purchasing economies of scale.
The Company's objective is to develop integrated networks of radiology
groups and ICs that can provide wide geographic coverage and subspecialty
expertise. The Company intends to provide the networks with sophisticated
management, state-of-the-art information systems and appropriate capital for
expansion. The Company's strategy is to (i) emphasize quality service, (ii)
expand within its selected markets, (iii) improve operating efficiencies within
the Affiliated Practices and (iv) expand into new regional markets through
acquisitions of or affiliations with additional radiology practices and ICs.
The Company was incorporated in Delaware in April 1996, and prior to this
offering has not conducted any significant operations. In connection with the
Reorganizations, APPI will acquire certain assets and liabilities of, and enter
into long-term Service Agreements with, the Founding Affiliated Practices.
Pursuant to the Service Agreements, the Company will provide management,
administrative, technical and non-medical business services to the Founding
Affiliated Practices in exchange for a service fee. The Service Agreements have
a 40-year term, subject to earlier termination under certain circumstances. See
"-- Service Agreements" and "Certain Transactions -- The Reorganizations."
INDUSTRY BACKGROUND
Market Overview
The Health Care Financing Administration estimates that national health
care spending in 1995 was approximately $1 trillion, including approximately
$200 billion for physician services and an additional $600 billion for health
care expenditures under the control or influence of physicians. According to the
American College of Radiology, an estimated 350 million radiological procedures
were performed in the
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United States during 1995. Total spending on radiology services including
diagnostic imaging, interventional radiology and radiation oncology was
estimated at $56 to $70 billion according to a 1995 report prepared by SMG
Marketing Group. Diagnostic imaging, including interventional radiology
procedures, accounted for approximately 82% of the aggregate amount spent on
radiological services performed in the United States, with radiation oncology
services accounting for approximately 18%.
Fees charged for diagnostic imaging, interventional radiology and radiation
oncology procedures consist generally of a technical component relating to
facilities, equipment and non-physician personnel and a professional component
consisting of fees paid to physicians for the interpretation of diagnostic
images, the performance of interventional radiology procedures and the treatment
of radiation oncology patients. Technical facilities are located within
hospitals and in approximately 2,200 outpatient centers throughout the United
States. Professional radiology services are provided by board certified
radiologists, general practitioners and other specialists. There are
approximately 3,200 radiology groups in the United States comprised of
approximately 27,000 practicing radiologists. These groups have a typical size
of six members, but vary in size up to approximately 100 physicians serving a
specific market. Approximately 88% of all radiologists perform diagnostic
procedures, including interventional radiology procedures, and approximately 12%
practice radiation oncology.
Radiology
In general, radiology includes diagnostic imaging, interventional radiology
and radiation oncology. Imaging procedures use energy waves to penetrate human
tissue and generate images of the body, which can be recorded on film or
digitized for display on a video monitor. Diagnostic imaging procedures are used
to diagnose diseases and physical injuries and are performed in hospitals,
physicians' offices, outpatient centers and ICs. Interventional radiology
procedures include the use of radiological methods to monitor and guide
catheters, stents, drains and needles to open clogged vessels, relieve
obstructed kidneys, perform biopsies of mass lesions, drain abscess collections
and lower pressure in certain vessels. Generally, these interventional
procedures are more time efficient, more cost-effective and less invasive than
surgical alternatives and have historically been performed in a hospital setting
to enable utilization of hospital support services. Radiation oncology
procedures use a variety of radiation sources to treat cancer and/or relieve
pain caused by certain tumors and are performed in hospitals and free-standing
outpatient centers.
The principal diagnostic imaging modalities include the following, all of
which are non-invasive:
General Radiology: X-Ray and Fluoroscopy. X-rays utilize roentgen rays
to penetrate the body and record images of organs and structures on film.
Fluoroscopy utilizes ionizing radiation combined with a video viewing
system for real time monitoring of organs. X-ray and fluoroscopy are the
most frequently used imaging modalities.
Computed Tomography ("CT"). CT utilizes a computer to direct the
movement of an x-ray tube to produce multiple cross sectional images of a
particular organ or area of the body. CT is used to detect tumors and other
conditions affecting bones and internal organs. It is also used to detect
the occurrence of strokes, hemorrhages and infections. CT provides higher
resolution images than conventional x-rays, but generally not as well
defined as those produced by magnetic resonance.
Magnetic Resonance Imaging ("MRI"). MRI utilizes a strong magnetic
field in conjunction with low energy electromagnetic waves which are
processed by a computer to produce high-resolution images of body tissue
including the brain, spine, abdomen, heart and extremities. Unlike CT and
conventional x-rays, MRI does not utilize ionizing radiation, which can
cause tissue damage in high doses.
Mammography. Mammography is a specialized form of radiology utilizing
low dosage x-rays to visualize breast tissue and is the primary screening
tool for breast cancer. Mammography procedures also include the biopsy of
cells to assist in the diagnosis of breast cancer.
Ultrasound. Ultrasound imaging utilizes high-frequency sound waves to
develop images of internal organs, unborn fetuses and the vascular system.
Ultrasound has widespread applications, particularly for procedures in
obstetrics, gynecology and cardiology.
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Nuclear Medicine. Nuclear medicine utilizes short-lived radioactive
isotopes which release small amounts of radiation that can be recorded by a
gamma camera and processed by a computer to produce an image of various
anatomical structures or to assess the function of various organs such as
the heart, kidneys, thyroid and bones. Nuclear medicine is used primarily
to study anatomic and metabolic functions.
Trends In Radiology
Technological Advancements. The Company believes that advances in
technology, including the development and continued enhancements of MRI, CT,
nuclear medicine, ultrasound and interventional radiology have contributed to
the growth of the diagnostic imaging industry. These technological advances have
resulted in increased professional and technical utilization and have produced
diagnostic procedures that are safer, more accurate and less-invasive than
techniques previously utilized. While traditional x-rays continue to be the
primary imaging modality based on the number of procedures performed, the use of
advanced diagnostic imaging modalities such as MRI and CT has increased rapidly
in recent years because these modalities allow physicians to diagnose a wide
variety of diseases and injuries quickly and accurately without exploratory
surgery or other surgical or invasive procedures, which are usually more
expensive, involve greater risk to the patient and result in longer
rehabilitation time. As a result, hospital days are shortened or eliminated and
time lost from work is significantly reduced. In addition, diagnostic imaging is
increasingly used as a screening tool for preventive care. The Company believes
that future technological advances will enhance the ability of radiologists to
diagnose and direct treatment, thereby lowering overall health care costs.
Recent technological advancements include: magnetic resonance spectroscopy,
which can differentiate malignant from benign lesions; magnetic resonance
angiography, which can produce three-dimensional images of body parts and assess
the status of blood vessels; spiral computed tomography, which permits three-
dimensional images of body parts; monoclonal antibody studies utilizing nuclear
medicine to localize certain cancers that would otherwise be difficult to detect
or treat; and the development of teleradiology, which digitally transmits
radiological images from one location to another for interpretation. The Company
believes that the utilization of both the diagnostic and therapeutic
capabilities of radiology will continue to increase because of its
cost-effective, time-efficient and risk/benefit advantages over alternative
procedures (including surgery) and that newer technologies and future
technological advancements will result in further sub-specialization and
increased utilization of professional and technical radiological services.
Reimbursement Patterns. Payment for radiology services comes primarily from
third-party payors such as private insurers (including traditional indemnity
insurance plans), managed care plans (including HMOs and PPOs) and governmental
payors (including Medicare and Medicaid). Historically, radiologists and other
physicians generally provided medical services on a fee-for-service basis. The
fee-for-service model provides few incentives for the efficient utilization of
resources and has contributed to increases in health care costs at rates
significantly higher than inflation. As managed care entities and other payors
have focused on providing care in a more cost-effective manner, they have
demanded and received significant discounts from fee-for-service rates charged
for radiological procedures. As a result, physicians have seen a decrease in per
procedure reimbursements from managed care and governmental entities for such
procedures. More recently, payors have focused on shifting more of the financial
risk for the provision of cost-effective services to providers through
capitation and other risk-sharing arrangements. Significant changes of this type
will require the Company to become more actively involved in assisting its
Affiliated Practices in developing practice guidelines and appropriateness
criteria and managing the utilization of radiological procedures.
The Company believes that the shift in financial risk from payors to
providers decreases the attractiveness of under-utilized imaging equipment
within a general practitioner's office and will accelerate the centralization of
resources to high-volume centers. According to an article published in the
American Journal of Radiology in 1993, approximately 64% of all radiological
procedures (primarily x-rays and ultrasound) performed in freestanding ICs and
physicians' offices were performed by non-radiologist physicians including
internists, family and general practitioners and orthopedists. The Company
believes that the general diagnostic imaging services performed by
non-radiologists may be directed to radiologists by managed care entities
seeking to have services performed at the lowest overall cost. As a result, the
Company believes that managed care
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entities, provided with utilization reports, will focus on reducing costs by
shifting radiological procedures performed by non-radiologists to radiologists.
Consolidation of ICs. Concurrent with the growth of managed care and strict
controls on Medicare reimbursement for inpatient costs, diagnostic imaging
services began to shift from hospital settings to ICs in the early 1980s. While
many of these ICs were developed by physicians and hospitals, a subsequent
change in federal law restricted the referral of patients by a physician to a
facility in which the physician maintained an ownership interest. As a result,
many physicians sold their interests in ICs to hospitals, radiologists and
companies engaged exclusively in the ownership, operation and management of ICs.
The Company believes that many of these entities have and will continue to
consolidate the ownership of ICs.
Referral Sources. Non-radiologists, including specialists and primary care
physicians, direct the utilization of radiology services. Most industry
marketing has been focused on developing relationships with these referring
physicians. As more patients move to managed care plans, the Company believes
physicians will have fewer referral options for diagnostic imaging procedures.
In addition, the Company believes that managed care entities will increasingly
demand that providers of radiology services share in the financial risks
associated with providing services for the lives covered by the managed care
entities. As the choices for radiology referrals decrease, the Company believes
that quality of care, subspecialty expertise and patient and referring physician
satisfaction will be important factors in determining referral patterns.
Trends in Radiology Organizations. The trends toward managed care, cost
containment and health care consolidation have combined to limit the number of
positions available and the salaries paid to radiologists. In addition, small
independent physician groups and individual practices are typically at a
competitive disadvantage to larger associations or networks of physicians
because they lack the capital necessary to (i) expand the geographic coverage of
the practice and the imaging modalities offered, (ii) develop state-of-the-art
information systems and (iii) purchase costly new imaging technologies, each of
which can improve quality of care and reduce costs. Generally, they also lack
the cost accounting and quality management systems necessary to allow physicians
to price and monitor complex risk-sharing arrangements with third-party payors.
Additionally, small to medium-sized groups and individual practices often do not
have contractual ties with other providers nor do they have the ability to offer
a broad range of subspecialty imaging services. Small practices often have
higher operating costs (since overhead must be spread over a relatively small
revenue base) and minimal vendor purchasing power. In order to remain
competitive in the changing medical service environment, radiologists are
beginning to affiliate with or create larger organizations by adding
radiologists to their groups, creating or joining a network or an independent
physician association or affiliating with a physician practice management entity
such as the Company.
BUSINESS STRATEGY
The Company's objective is to develop integrated networks of radiology
groups and ICs that can provide wide geographic coverage and subspecialty
expertise. The Company intends to provide the networks with sophisticated
management, state-of-the-art information systems and appropriate capital for
expansion. The Company's strategy is to (i) emphasize quality service, (ii)
expand within its selected markets, (iii) improve operating efficiencies within
the Affiliated Practices and (iv) expand into new regional markets through
acquisitions of or affiliations with additional radiology practices and ICs.
Emphasize Quality Service
The Company plans to make patient service and referring physician
satisfaction a key element of its strategy. The Company intends to form regional
service networks and invest in advanced teleradiology technologies to provide
greater geographic coverage, improve response time and increase overall patient
accessibility. The Company will seek to offer, through its Affiliated Practices,
subspecialty expertise such as interventional radiology and radiation oncology
to address the full range of radiology service needs of patients, referring
physicians, hospitals and payors. The Company also intends to provide capital to
the Affiliated Practices to upgrade existing imaging equipment and purchase
equipment for newer modalities. In addition, the Company plans to implement
information systems which will provide the Company's payors and referral
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sources with outcomes data, cost analyses, utilization management data and other
analyses, in each case with the objective of maximizing patient, referring
physician, hospital and payor satisfaction.
Expand Within Existing Regional Markets
A key element of the Company's strategy is to expand and leverage the
resources and capabilities of its Affiliated Practices to offer high-quality,
comprehensive and competitively priced diagnostic, interventional and
therapeutic radiology programs within selected markets. The Company believes
that cost-conscious payors, particularly those interested in utilizing or
implementing risk sharing or global capitation arrangements, will prefer to
contract with a single provider for a full range of radiology services within
select geographic markets. The Company plans to acquire and affiliate with
additional complementary radiology practices and, when feasible, acquire,
operate and manage ICs to broaden the range of, and increase the capacity to
deliver, services within its markets. The Company intends to market its
comprehensive service offerings and geographic coverage to obtain payor
contracts.
Improve Operating Efficiencies
The Company intends to utilize its management infrastructure and the
collective knowledge of and information generated by its Affiliated Practices to
identify and promote practice operating efficiencies that benefit all Affiliated
Practices. The Company believes that information technology is critical to such
efforts and plans to implement sophisticated management and financial
information systems to obtain and disseminate information relating to practice
patterns, equipment utilization, facilities and personnel and operating
profitability. The Company believes such information will enable Affiliated
Practices to enhance quality of care, increase revenue, improve cash management
and more effectively control costs. The Company believes that the establishment
of systems that promote "best practices" and operating efficiencies can provide
the Company and its Affiliated Practices with a competitive advantage in
negotiating and obtaining managed care contracts. In addition, the Company
intends to capitalize on the size and purchasing power of the combined
Affiliated Practices to take advantage of economies of scale and to reduce the
cost of administering and operating such practices.
Expand into New Markets
The Company plans to expand into new geographic markets by acquiring and
affiliating with profitable radiology practices that have strong reputations and
competitive positions in their local markets. The Company intends to focus on
markets where there are significant prospects for physician networking and
practice consolidation, high patient-provider ratios and favorable overall
economic conditions. The Company intends to focus on acquiring and affiliating
with platform practices allowing the Company to pursue the expansion strategy
discussed above. The Company believes that it will be attractive to potential
Affiliated Practices because of its (i) exclusive focus on radiology, (ii)
governance structure which promotes physician input, (iii) service fee structure
which aligns the Company's revenue growth incentives with those of the
Affiliated Practices and (iv) transaction structure which permits physicians to
become stockholders of the Company and further aligns the interests of the
Company and the Affiliated Practices. The Company expects that its Affiliated
Practices will be instrumental in identifying potential acquisitions and
affiliations with future Affiliated Practices or ICs.
AFFILIATION STRUCTURE
APPI was formed to provide physician practice management and administrative
services to radiology practices and to own, operate and manage ICs. The
Company's business model is based on a "partnership" with its Affiliated
Practices in which the Company manages the non-medical functions of the
Affiliated Practices in a manner that promotes physician participation and input
in areas such as practice enhancement and operating efficiencies, marketing and
long-term strategy development. The Company believes that its partnering
approach (i.e., shared ownership, economic interest and governance) enables
physicians to provide input in the management and affairs of their practice and
aligns the interests of physicians in the Affiliated Practices with those of the
Company in promoting practice growth and operating efficiencies. The Company
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believes its model will be attractive to potential practice acquisition
candidates. For a discussion of the contractual arrangements between the Company
and its Affiliated Practices, see "Business -- Service Agreements."
In connection with the Reorganizations, the Company will acquire certain
tangible and intangible assets and assume certain liabilities of the Founding
Affiliated Practices. The Company will pay the purchase price for such
transactions in shares of its Common Stock and, to a lesser extent, cash. At the
time of the Reorganizations, the Company will enter into a 40-year Service
Agreement with each Founding Affiliated Practice pursuant to which the Company
will provide a wide range of management, administrative, technical and
non-medical services. For providing services under the Service Agreement, the
Company will receive a fee which is structured to align the interests of the
Company and the Founding Affiliated Practices. Additionally, the Service
Agreements restrict the Founding Affiliated Practices from competing with the
Company and other Affiliated Practices within a specified geographic area during
the term of the Service Agreements and also require each Affiliated Practice to
obtain and enforce similar restrictive covenants with the full-time physicians
affiliated with their practices. As part of its growth strategy, the Company
intends to acquire the assets of and enter into similar long-term Service
Agreements with additional radiology practices based on the partnership model it
has established with the Founding Affiliated Practices.
Additionally, pursuant to the Reorganizations, the Company will acquire
interests in certain joint venture arrangements currently held by the Founding
Affiliated Practices and certain physicians associated with the Founding
Affiliated Practices. The joint venture arrangements represent partnerships with
various hospitals or health systems serviced by certain of the Founding
Affiliated Practices and were formed for the purpose of owning and operating
ICs. Professional services at the joint venture ICs are performed by certain of
the Founding Affiliated Practices. With respect to the six joint venture
interests acquired from Advanced Radiology, LLC, the Company will acquire a 50%
interest in five joint ventures and a controlling interest in one joint venture.
With respect to M&S X-Ray Practices, the Company will acquire a controlling
interest in two joint ventures and a minority interest in three joint ventures.
The Company believes a shared governance approach is critical to the
long-term success of a physician practice management company. While the Company
will have the primary responsibility for managing the non-medical functions of
its Affiliated Practices, it will operate within a governance structure which
promotes physician involvement in the direction and management of the Affiliated
Practices and the Company. This will be accomplished by the Company and each
Affiliated Practice establishing a Joint Planning Board consisting of three to
six members. The Joint Planning Boards will have responsibility for (i)
establishing payor contracting guidelines, (ii) making recommendations with
respect to operating budgets and capital expenditures and (iii) developing
marketing strategies and long-term objectives for their respective practices.
The Company believes the Joint Planning Boards will promote participation by
physicians in the overall management of their practices and serve as a means for
the Company and its Affiliated Practices to communicate effectively and exchange
information. In addition, the Company intends to establish a Physician Advisory
Board, the primary focus of which will be to enhance the quality of services
provided by the Company and its Affiliated Practices. The Physician Advisory
Board will consist of 9 to 12 practicing physicians from the Affiliated
Practices and will be chaired by the Company's Senior Vice President of
Physician Affairs. This board will serve as a forum in which members can discuss
and make recommendations regarding clinical applications, practice protocols,
appropriateness criteria, utilization guidelines, best practices and managed
care issues. Recommendations will be communicated to all Affiliated Practice
physicians, however, the adoption of such recommendations will be at the
discretion of the Affiliated Practices.
OPERATIONS AND DEVELOPMENT
General
The Founding Affiliated Practices consist of seven radiology practices,
comprised of 223 radiologists, located in five states. All of the Founding
Affiliated Practices provide professional services, which consist of the
supervision, performance and interpretation of radiological procedures in
hospitals, ICs or other settings. As a result of the Reorganizations, the
Company will own and operate 54 ICs and operate and manage 11
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<PAGE> 36
additional ICs through joint venture relationships. In addition, the Founding
Affiliated Practices currently provide professional radiology services to 42
hospitals. In the aggregate, the Founding Affiliated Practices will provide all
subspecialty diagnostic and interventional radiology and radiation oncology
services. Substantially all of the 223 radiologists are board certified.
The number and type of modalities offered at the Company's owned, operated
or managed ICs are determined by the demand for such services within their
respective market areas. Presently, 55 of these ICs offer multiple modalities
including various combinations of MRI, CT, mammography, ultrasound, nuclear
medicine, fluoroscopy and traditional radiography. By offering a wide spectrum
of imaging modalities, the Company intends to market itself as a full-service
provider of diagnostic imaging services. In addition to the ICs, the Founding
Affiliated Practices provide professional services to hospitals, hospital
outpatient facilities, physicians' offices, mobile imaging units and nursing
homes.
The Company intends to expand its operations into new markets principally
through the acquisition of platform practices. Prior to entering a new market,
the Company will consider various factors including the population,
demographics, market potential, competitive environment, degree of managed care
penetration, supply of radiologists, existing imaging services and general
economic conditions within the market. The Company will seek to identify and
affiliate with group practices which have a significant market presence or which
the Company believes can achieve such a presence in the near term. The Company
will identify potential acquisition candidates through a variety of means,
including targeted contacts of radiologists by the Company, participation in
professional conferences, referrals from Affiliated Practices and direct
inquiries by radiologists.
Set forth below are the locations and certain other information with
respect to the Founding Affiliated Practices as of June 30, 1997:
<TABLE>
<CAPTION>
IMAGING CENTERS
----------------------------- TOTAL
PRACTICE HOSPITAL OWNED AND JOINT NON-PHYSICIAN
LOCATION PHYSICIANS AFFILIATIONS(1) OPERATED SITES VENTURES(2) PERSONNEL
-------- ---------- --------------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Baltimore, MD........................... 87 10 23 6 518
Rochester, NY........................... 30 5 8 0 127
Oakland, CA............................. 24 5 7 0 60
San Jose, CA............................ 24 4 6 0 72
San Antonio, TX......................... 20 5 3 4 107
Topeka, KS.............................. 24 11 2 1 49
New City, NY............................ 14 2 5 0 147
--- -- -- --- -----
Totals........................ 223 42 54 11 1,080
=== == == === =====
</TABLE>
- ---------------
(1) Hospital affiliations represent contractual or other relationships with
hospitals where the Founding Affiliated Practices provide diagnostic and
interventional radiology or radiation oncology services. In 41 of the 42
hospitals, the Founding Affiliated Practices provide substantially all of
the diagnostic and interventional radiology services provided by
radiologists at such hospitals.
(2) Joint ventures represent partnerships with various hospitals or health
systems serviced by certain of the Founding Affiliated Practices and were
formed for the purpose of owning and operating ICs. Professional services at
the joint venture ICs are performed by certain of the Founding Affiliated
Practices.
The Founding Affiliated Practices were selected based on a variety of
factors, including: physician and practice credentials and reputation;
competitive market position; subspecialty mix of physicians; historical
financial performance and growth potential; and willingness to embrace the
Company's vision and philosophy regarding the provision of radiology services.
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<PAGE> 37
Services
The Company intends to provide its Affiliated Practices with management
expertise and the capital necessary to compete in a managed care environment.
Specifically, the Company intends to support the Affiliated Practices with
management expertise in the following areas:
<TABLE>
<CAPTION>
MANAGEMENT EXPERTISE APPLICATION
-------------------- -----------
<S> <C>
Strategic Management Provision of strategic advice and
guidance through the proactive
management of practice operations and
pursuit of new market opportunities.
Reimbursement Management Implementation of billing, collection,
reporting and negotiation processes,
procedures and performance standards in
order to maximize practice revenue and
create new or improved contracting
opportunities.
Information Management Use of advanced technology, networking,
communications, systems integration and
data base development/management tools
and skills to increase physician and
practice productivity and effectiveness.
Practice Management Identification of operational savings
opportunities and implementation of
programs to enhance practice revenue and
operating performance.
Practice Marketing Implementation of radiology marketing
techniques and concepts to focus on
increasing imaging revenue and customer
satisfaction.
Technical Operations Management Implementation of systems, procedures,
management techniques and standards to
increase the effectiveness, efficiency
and profitability of a practice's
technical operations and to improve
productivity and relationships with
patients, physicians and payors.
Materials Management/Purchasing Development and implementation of a
national group purchasing arrangement to
provide cost savings related to
equipment purchasing, leasing and
maintenance and the purchase of
supplies.
</TABLE>
The Company intends to provide its Affiliated Practices with capital for
(i) technological advances, including teleradiology and upgraded diagnostic
imaging equipment, (ii) information systems and (iii) additional ICs and imaging
equipment. Set forth below are specific areas in which the Company intends to
provide capital resources to the Affiliated Practices:
<TABLE>
<CAPTION>
AREA OF EXPENDITURE OBJECTIVE
------------------- ---------
<S> <C>
Advanced Imaging Equipment Provision of high-quality imaging and
image management, including
teleradiology, to maximize facility and
equipment utilization and improve
quality and service to patients,
referring physicians, hospitals and
payors.
Financial and Information Systems Integration of disparate clinical and
financial systems into one common data
repository and coordination of
centralized scheduling, transcription,
utilization and patient flow functions.
Network/Communications Infrastructure Implementation of technologies to link
voice, data and image transmission
capabilities.
ICs Investment in equipment and facilities,
including the construction of new
facilities, the acquisition of existing
facilities or the relocation or
consolidation of existing ICs and
related equipment to achieve the most
efficient use of resources.
</TABLE>
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<PAGE> 38
Information Management
The Company believes that integrated radiology networks require extensive
information management systems to effectively manage operations, compete for
managed care contracts and achieve standardization and efficiencies of scale.
The Company intends to create a network infrastructure, including a Financial
Accounting System ("FAS") and Executive Information System ("EIS"), which may
utilize components of the Founding Affiliated Practices' existing information
systems. The Company is also evaluating the feasibility of deploying other
standard information systems, including a managed care system and a radiology
information system.
The Company intends to implement its initial information management plans
in two phases. During the first phase, the Company intends to focus on building
basic infrastructure. Specifically, the Company intends to create a network
communications infrastructure and implement the FAS during the remainder of
1997. The network communications infrastructure will provide access to the FAS
and EIS, facilitate the gathering of key operational data and increase internal
communications capabilities through the enterprise-wide deployment of standard
office automation applications. The Company expects that the network
infrastructure will provide the foundation for the sharing and utilization of
certain information among the Affiliated Practices and the Company. The network
will be created with standard components to be managed centrally in order to
minimize the need for local information systems personnel.
The Company intends to deploy the FAS to facilitate timely and accurate
financial reporting throughout the Company. Specifically, the Company intends to
deploy general ledger, accounts payable, payroll and materials management
systems at each of the Affiliated Practices. The FAS will be designed to
facilitate the consistent, efficient reporting of financial information across
all practices using one standard chart of accounts with a single set of
accounting practices and financial controls. The Company expects that the
deployment of the FAS will streamline and simplify the financial reporting
process and will provide a tool for managing practice efficiency benchmarks.
During phase two, the Company expects to focus on assimilating and
analyzing data from its Affiliated Practices' disparate information systems. In
this phase, the Company intends to deploy an EIS that will facilitate the
management reporting of key operational data. The Company anticipates that the
EIS will provide a repository to store pertinent encounter data and initially
will use the Affiliated Practices' practice management systems, radiology
information systems and the FAS as primary data sources. It is anticipated that
the EIS will provide variance, utilization, reimbursement efficiency and trend
analysis reporting capabilities. The Company believes that the EIS will enable
Affiliated Practices to enhance the quality of information, increase revenue,
improve operating efficiencies and more effectively control costs. There can be
no assurance that the Company will be able to implement the FAS or EIS, that it
will not encounter delays in the implementation or that these systems will
produce the expected benefits. See "Risk Factors -- Dependence on Information
Systems."
SERVICE AGREEMENTS
Upon consummation of the Reorganizations, the Company will be a party to a
Service Agreement with each Founding Affiliated Practice under which the Company
will become the exclusive manager and administrator of non-medical services
relating to the operation of the Founding Affiliated Practice. The following
summary of the Service Agreement is intended to be a brief description of the
standard form of the Service Agreement that the Company will be a party to with
each Founding Affiliated Practice. The Service Agreements may vary from the
description below depending on the requirements of local regulations and
negotiations with the individual Founding Affiliated Practices. The Company
expects to enter into agreements with similar provisions with Affiliated
Practices in the future.
The service fees payable to the Company by the Affiliated Practices under
the Service Agreements vary based on fair market value, as determined in
arms'-length negotiations, and the nature and extent of services provided. Where
state law allows, service fees due under the Service Agreements are derived from
two distinct revenue streams: (i) the Affiliated Practice pays a service fee
based on a negotiated percentage (Founding Affiliated Practice service fees
range from 20% to 25%) of the adjusted professional revenues as defined in the
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<PAGE> 39
Service Agreement; and (ii) the Affiliated Practice pays a service fee based on
100% of the adjusted technical revenues as defined in the Service Agreement,
which equals the fair value of the services provided. In states where the law
requires a flat fee structure, the Company has negotiated a base service fee,
which is equal to the fair market value of the services provided under the
Service Agreement and which is renegotiated each year to equal the fair market
value of the services provided under the Service Agreement. Adjusted
professional revenues and adjusted technical revenues are determined by
deducting certain contractually agreed-upon expenses (non-physician salaries and
benefits, rent, depreciation, insurance, interest and other non-physician costs)
from physician groups revenue of the Affiliated Practice. In addition, the
Company will receive income from joint ventures in which the Company will hold
ownership interests. Revenues will be billed by the Company on behalf of the
Affiliated Practices. Payments will be received by the Affiliated Practice and
transferred to the Company on a daily basis. On a monthly basis the Company will
calculate the amount of service fees due and remit to the Affiliated Practices
an amount equal to the difference between the net revenues of the Affiliated
Practice and the service fees calculated by the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operation -- Overview."
Set forth below is a sample calculation of the service fees under the two
fee structures described above. The calculation is for illustrative purposes
only and does not represent the actual or potential service fee that would be
payable by any practice, the results of any practice or the relationship of
revenues and expenses.
<TABLE>
<CAPTION>
NEGOTIATED PERCENTAGE STRUCTURE BASE FEE STRUCTURE
-------------------------------- --------------------------------
PROFESSIONAL TECHNICAL TOTAL PROFESSIONAL TECHNICAL TOTAL
------------ --------- ----- ------------ --------- -----
<S> <C> <C> <C> <C> <C> <C>
Net Revenues......................... 1,200 800 2,000 1,200 800 2,000
Agreed-upon expenses(1).............. 170 594 764 170 594 764
----- --- ----- ----- --- -----
Adjusted Professional/Technical
Revenues........................... 1,030 206 1,236 1,030 206 1,236
----- --- ----- ===== === =====
Negotiated service fee %............. 20% 100% NA NA NA
Service Fee.......................... 206 206 412 --
===== ===
Base Service Fee..................... -- 412
Reimbursement of expenses............ 764 764
----- -----
Service Fee Revenue.................. 1,176 1,176
===== =====
</TABLE>
- ---------------
(1) Expenses include non-physician salaries and benefits, rent, depreciation,
insurance, interest, and other non-physician costs.
Pursuant to the Service Agreement, the Company will, among other things:
(i) act as the exclusive manager and administrator of non-physician services
relating to the operation of the Founding Affiliated Practice, subject to
matters reserved to the Founding Affiliated Practice or referred to the Joint
Planning Board; (ii) aid in the billing of hospitals, insurance companies and
other third-party payors and collect on behalf of the Founding Affiliated
Practice the fees for professional medical and other services rendered by the
Founding Affiliated Practice; (iii) provide, as necessary, clerical, accounting,
purchasing, payroll, legal, bookkeeping and computer services and personnel,
information management, preparation of certain tax returns and medical
transcribing services; (iv) supervise and maintain custody of substantially all
files and records; (v) provide facilities for the Founding Affiliated Practice;
(vi) prepare, in consultation with the Joint Planning Board and the Founding
Affiliated Practice, all annual operating and capital budgets; (vii) order and
purchase inventory and supplies as necessary; (viii) implement, in consultation
with the Joint Planning Board and the Founding Affiliated Practice, national and
local public relations or advertising programs; (ix) provide financial and
business assistance in the negotiation, establishment, supervision and
maintenance of contracts and relationships with managed care and other similar
providers and payors; and (x) assist the Founding Affiliated Practice with
obtaining medical malpractice insurance for its physicians and other medical
professionals.
The Service Agreements require the Company and each Founding Affiliated
Practice to establish a Joint Planning Board consisting of no less than three or
more than six members; two designees of the Company
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<PAGE> 40
(each with one vote) and no less than one or more than four designee(s) of the
Founding Affiliated Practice (representing two votes in the aggregate). Each
Joint Planning Board will have responsibilities that include developing
long-term strategic objectives relating to practice expansion and payor
contracting guidelines, promoting practice efficiencies, recommending capital
expenditures and generally serving as a means by which the Company and each of
the Founding Affiliated Practices will communicate and exchange information. The
Company intends to continue to establish Joint Planning Boards in the future,
some of which may be on a regional level.
Under the Service Agreements, each Founding Affiliated Practice will remain
responsible for (i) hiring and compensating its physicians and certain other
medical professionals, (ii) the licensing, credentialling and certification
necessary to conduct its practice, (iii) obtaining and maintaining medical
malpractice insurance for the professional entity and its physician employees,
(iv) providing professional radiological services and (v) complying with federal
and state laws, regulations and other ethical standards applicable to the
practice of radiology. Pursuant to the Service Agreements, the Founding
Affiliated Practices will maintain full control over the provision of
professional radiological services. The Company will not engage in the practice
of medicine or provide professional radiological services. In addition, the
Service Agreements with the Founding Affiliated Practices also contain
provisions whereby both the Company and each Founding Affiliated Practice have
agreed to certain restrictions on accepting or pursuing radiology opportunities
within a 15-mile radius (decreasing to 10 miles upon the expiration of 12
months) of any of the Company's owned, operated or managed ICs at which the
Founding Affiliated Practice provides professional radiology services or any
hospital at which a Founding Affiliated Practice provides on-site professional
radiology services. Each Service Agreement also restricts the applicable
Founding Affiliated Practice from competing with the Company and other
Affiliated Practices within a specified geographic area during the term of such
Service Agreement. In addition, the Service Agreements require the Founding
Affiliated Practices to enter into and enforce agreements with the stockholders
and full-time radiologists at each Founding Affiliated Practice (subject to
certain exceptions) that include covenants not to compete with the Company for a
period of two years after termination of employment.
The Service Agreements are for an initial term of 40 years, with automatic
extensions of five years unless notice of termination is given. The Service
Agreements may be terminated by either party if (i) the other party (a) files a
petition in bankruptcy or other similar events occur or (b) defaults in the
performance of a material duty or obligation, which default continues for a
specified period after notice or (ii) an opinion is rendered by a law firm of
nationally-recognized expertise in health care law that a material term of the
Service Agreement is in violation of applicable law (or a court or regulatory
agency finds as such) and such violation cannot be cured.
Each Service Agreement may also be terminated by the Company if the
Founding Affiliated Practice or a physician employee engages in conduct, or is
formally accused of conduct, for which the physician employee's license to
practice medicine reasonably would be expected to be subject to revocation or
suspension or is otherwise disciplined by any licensing, regulatory or
professional entity or institution, the result of any of which (in the absence
of termination of such physician or other action to monitor or cure such act or
conduct) does or reasonably would be expected to materially adversely affect the
Founding Affiliated Practice. In addition, the Company may terminate each
Service Agreement with any Founding Affiliated Practice if, during the first
five years of the Service Agreement, more than 33 1/3% of the total number of
physicians employed or retained by such practice are no longer employed or
retained by such practice other than because of certain events, including death,
permanent disability, pre-qualified retirement or involuntary loss of hospital
contracts or privileges.
Upon termination of a Service Agreement with a Founding Affiliated
Practice, depending upon the termination event, the Company may have the right
to require such Founding Affiliated Practice to purchase and assume, or the
Founding Affiliated Practice may have the right to require the Company to sell,
assign and transfer to it, the assets and related liabilities and obligations
associated with the professional and technical radiology services provided by
the Founding Affiliated Practice immediately prior to such termination. The
purchase price for such assets, liabilities and obligations will be the lesser
of fair market value thereof or the
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<PAGE> 41
return of the consideration received in the Reorganization; provided, however,
that the purchase price shall not be less than the net book value of the assets
being purchased.
PRACTICE MARKETING
The Company intends to focus its marketing efforts on referring physicians,
hospitals and managed care organizations. Prior to the Reorganizations, the
Founding Affiliated Practices' marketing efforts were based primarily upon the
professional reputations and individual efforts of such practices and its
radiologists. The Company believes there is an opportunity to capitalize on the
professional reputations of the Founding Affiliated Practices by applying
professional sales and marketing techniques to increase the Affiliated
Practices' volume of business and expand the potential geographic market for
each Affiliated Practice beyond its local physician community.
In addition, the Company will seek to secure new contracts and expand
existing contracts with managed care organizations for the provision of
radiology services. The Company is prepared to negotiate flexible arrangements
with managed care organizations on behalf of the Affiliated Practices.
GOVERNMENT REGULATION AND SUPERVISION
General
The health care industry is highly regulated, and there can be no assurance
that the regulatory environment in which the Company operates will not change
significantly in the future. The ability of the Company to operate profitably
will depend in part upon the Company, the Affiliated Practices and their
affiliated physicians obtaining and maintaining all necessary licenses,
certificates of need and other approvals and operating in compliance with
applicable health care regulations. The Company believes that health care
regulations will continue to change and, therefore, intends to monitor
developments in health care law and the Company expects to modify its operations
from time to time as the business and regulatory environment changes. There can
be no assurance that the Company will be able to modify its operations so as to
address changes in the regulatory environment.
Licensing and Certification Laws
Every state imposes licensing requirements on individual physicians and on
facilities operated, or services performed, by physicians. In addition, federal
and state laws regulate HMOs and other managed care organizations with which
Affiliated Practices or their affiliated physicians may have contracts. Many
states require regulatory approval, including certificates of need, before
establishing or expanding certain types of health care facilities, offering
certain services or making expenditures in excess of statutory thresholds for
health care equipment, facilities or programs. In connection with the expansion
of existing operations and the entry into new markets, the Company, the
Affiliated Practices or their affiliated physicians may become subject to
additional regulation.
Fee-Splitting; Corporate Practice of Medicine
The laws of many states (including each of the states in which the Founding
Affiliated Practices are located) prohibit physicians from splitting fees with
non-physicians and prohibit non-physician entities from practicing medicine.
These laws vary from state to state and are enforced by the courts and by
regulatory authorities with broad discretion. Although the Company intends to
structure its proposed operating structures and methods as described in this
Prospectus so as to comply with existing applicable laws, the Company's business
operations have not been the subject of judicial or regulatory interpretation.
There can be no assurance that a review of the Company's business by courts or
regulatory authorities will not result in determinations that could adversely
affect the operations of the Company or that the health care regulatory
environment will not change so as to restrict the Company's planned operations
and expansion. In addition, the regulatory framework of certain jurisdictions
may limit the Company's expansion into such jurisdictions if the Company is
unable to modify its operational structure to conform with such regulatory
framework.
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<PAGE> 42
Medicare Physician Payment System
The Company believes that regulatory trends in cost containment will
continue to result in a reduction from historical levels in per-patient revenue
for medical practices. The federal government has implemented, through the
Medicare program, the RBRVS payment methodology for physician services. The
RBRVS is a fee schedule that, except for certain geographical and other
adjustments, pays similarly situated physicians the same amount for the same
services. The RBRVS is adjusted each year and is subject to increases or
decreases at the discretion of Congress. To date, the implementation of the
RBRVS has reduced payment rates for certain of the procedures historically
provided by the Founding Affiliated Practices. BBA 97 provides for reductions in
the rate of growth of payments for physician services, including services
historically provided by the Affiliated Practices, in the amount of $5.3 billion
over a five-year period ending in 2002. In addition, BBA 97 provides for the
implementation of a resource-based methodology for payment of physician practice
expenses under the physician fee schedule over a four-year period beginning in
1999. Adoption of this methodology is expected to reduce payments for services
historically provided by the Affiliated Practices. There can be no assurance
that any reduced operating margins could be offset by the Company through cost
reductions, increased volume, the introduction of additional procedures or
otherwise. Private third-party payors and Medicare and Medicaid have increased
their use of managed care as a means of cost containment. Increasingly, private
third-party payors negotiate discounts from established physician and hospital
charges or require capitation or other risk sharing arrangements as a condition
of patient referral to physician groups such as the Affiliated Practices. BBA 97
also includes provisions designed to increase the enrollment of Medicare and
Medicaid participants in managed care programs. The inability of the Company to
negotiate satisfactory arrangements with managed care companies would have a
material adverse effect on the Company's business, financial condition and
results of operation.
Rates paid by non-governmental insurers, including those that provide
Medicare supplemental insurance, are based on established physician and hospital
charges and are generally higher than Medicare payment rates. A change in the
makeup of the patient mix of the medical practices that results in a decrease in
patients covered by private insurance plans could adversely affect the Company's
revenue and income.
Medicare and Medicaid have increased their use of managed care as a means
of cost containment. As with private third party payors, Medicare and Medicaid
managed care contractors negotiate discounts from established physician and
hospital charges or require capitation or other risk sharing arrangements as a
condition of patient referral to physician groups such as the Affiliated
Practices. BBA 97 includes provisions designed to increase the enrollment of
Medicare and Medicaid participants in managed care programs. The inability of
the Company to negotiate satisfactory arrangements with Medicare and Medicaid
managed care contractors could have a material adverse effect on the Company's
business, financial condition and results of operation.
Medicare and Medicaid Fraud and Abuse
Federal law prohibits the offer, payment, solicitation or receipt of any
form of remuneration in return for, or in order to induce, (i) the referral of a
person, (ii) the furnishing or arranging for the furnishing of items or services
reimbursable under Medicare or Medicaid programs or (iii) the purchase, lease or
order or arranging or recommending purchasing, leasing or ordering of any item
or service reimbursable under Medicare or Medicaid. Pursuant to this
anti-kickback law, the federal government has recently announced a policy of
increased scrutiny of joint ventures and other transactions among health care
providers in an effort to reduce potential fraud and abuse relating to Medicare
costs. The applicability of these provisions to many business transactions in
the health care industry has not yet been subject to judicial and regulatory
interpretation. Noncompliance with the federal anti-kickback legislation can
result in exclusion from Medicare and Medicaid programs and civil and criminal
penalties.
The Company believes that although it will receive fees under the Service
Agreements for management and administrative services, it is not in a position
to make or influence referrals of patients or services reimbursed under Medicare
or Medicaid programs to Affiliated Practices or their affiliated physicians, or
to receive such referrals. Such service fees are intended by the Company to be
consistent with fair market value
41
<PAGE> 43
in arms' length transactions for the nature and amount of management and
administrative services rendered. For these reasons, the Company does not
believe that fees payable to it should be viewed as remuneration for referring
or influencing referrals of patients or services covered by such programs as
prohibited by statute. If, however, the Company is deemed to be in a position to
make, influence or receive referrals from or to physicians, or the Company is
deemed to be a provider under the Medicare or Medicaid programs, the operations
of the Company could be subject to scrutiny under federal and state
anti-kickback and anti-referral laws and the Company's operations could be
materially and adversely affected.
Significant prohibitions against physician referrals have been enacted by
Congress. These prohibitions, commonly known as "Stark II," amended prior
physician self-referral legislation known as "Stark I" by dramatically enlarging
the field of physician-owned or physician-interested entities to which the
referral prohibitions apply. Stark II prohibits a physician from referring
Medicare or Medicaid patients to an entity providing "designated health
services", including without limitation radiology services, in which the
physician has an ownership or investment interest, or with which the physician
has entered into a compensation arrangement. The penalties for violating Stark
II include a prohibition on payment by these government programs and civil
penalties of as much as $15,000 for each violative referral and $100,000 for
participation in a "circumvention scheme." The Company believes that although it
will receive fees under the Service Agreements for management and administrative
services, it is not in a position to make or influence referrals of patients.
In addition, the Company intends to structure its acquisition of the assets
of existing practices so as to not violate the anti-kickback and Stark II laws
and regulations. Specifically, the Company believes the consideration paid by
the Company to physicians to acquire the tangible and intangible assets
associated with their practices is consistent with fair market value in arms'
length transactions and not intended to induce the referral of patients. Should
this practice be deemed to constitute an arrangement designed to induce the
referral of Medicare or Medicaid patients, then the Company's acquisitions could
be viewed as possibly violating anti-kickback and anti-referral laws and
regulations. A determination of liability under any such laws could have a
material adverse effect on the Company's business, financial condition and
results of operations.
HealthCare Reform Initiatives
In addition to existing government health care regulation, there have been
numerous initiatives on the federal and state levels for comprehensive reforms
affecting the payment for and availability of health care services. The Company
believes that such initiatives will continue during the foreseeable future.
Certain aspects of these reforms as proposed in the past, such as further
reductions in Medicare and Medicaid payments and additional prohibitions on
physician ownership, directly or indirectly, of facilities to which they refer
patients, if adopted, could adversely affect the Company. Concern about the
potential effects of such reform measures has contributed to the volatility of
stock prices of many companies in health care and related industries and may
similarly affect the market price of the Common Stock.
Compliance Program
With the assistance of the Company's special health care regulatory
counsel, the Company intends to implement a program to monitor compliance with
federal and state laws and regulations applicable to health care entities. The
Company intends to appoint a compliance officer who will be charged with
implementing and supervising the Company's compliance program, which will
involve the adoption of (i) "Standards of Conduct" for its employees and
affiliates and (ii) an "Ethics Process" that will specify how employees,
affiliates and others may report regulatory or ethical concerns to the Company's
compliance officer. As part of the Ethics Process, the Company intends to
introduce various methods designed to facilitate the reporting of any regulatory
and ethical issues to the compliance officer for investigation or appropriate
corrective action. In addition, the Company intends to conduct or have its
special health care regulatory counsel conduct periodic audits of various
aspects of its operations, including the Affiliated Practices. The Company also
intends to initiate a training program designed to familiarize its employees
with the regulatory requirements and the elements of the Company's compliance
program.
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<PAGE> 44
Insurance Laws and Regulation
Certain states have enacted statutes or adopted regulations affecting risk
assumption in the health care industry, including statutes and regulations that
subject any physician or physician network engaged in risk-based contracting to
applicable insurance laws and regulations, which may include, among other
things, laws and regulations providing for minimum capital requirements and
other safety and soundness requirements. The Company believes that it and the
Affiliated Practices are currently in compliance with such insurance laws and
regulations. However, implementation of additional regulations or compliance
requirements could result in substantial costs to the Company and the Affiliated
Practices. The inability to enter into capitated or other risk-sharing
arrangements or the cost of complying with certain applicable laws that would
permit expansion of the Company's risk-based contracting activities could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Federal regulatory and law enforcement authorities have recently increased
enforcement activities with respect to Medicare and Medicaid fraud and abuse
regulations and other reimbursement laws and rules, including laws and
regulations that govern the Company's contemplated activities. There can be no
assurance that the Company's contemplated activities will not be investigated,
that claims will not be made against the Company or that these increased
enforcement activities will not directly or indirectly have an adverse effect on
the Company's business, financial condition and results of operation.
COMPETITION
The Affiliated Practices and the Company's owned, operated or managed ICs
will compete with local radiologist and technical and imaging service providers
(including for profit and non-profit hospital and health systems) in each of the
markets served by the Company. The Company believes that changes in
governmental, private reimbursement policies and other factors have resulted in
increased competition among providers for medical services to consumers and that
cost, accessibility, quality and scope of services provided are the principal
factors that affect competition. There can be no assurance that the Affiliated
Practices and the Company's owned, operated or managed ICs will be able to
compete effectively in the markets that they serve, which inability to compete
could adversely affect the Company.
The Company believes that the current trends in the hospital industry have
resulted in increased competition by radiology groups for hospital contracts.
Each of the Founding Affiliated Practices provides radiology services to
hospitals. These relationships can be affected through competition with other
radiology groups, the outsourcing of the radiology and imaging functions within
the hospital or closure of the hospital due to consolidation or financial
instability. There can be no assurance that each of the Founding Affiliated
Practices will maintain its current hospital relationships and be able to renew
or extend its current arrangements under favorable terms or effectively compete
for new relationships.
The Company is under competitive pressures for the acquisition and
retention of the assets of, and the provision of management, technical and
administrative services to, additional radiology practices, MSOs and ICs. There
are a number of publicly-traded companies focused on owning or managing ICs,
including U.S. Diagnostic Labs Inc., Medical Resources, Inc., and Health Images
(a division of HEALTHSOUTH Corporation). The Company is aware of two
privately-held physician practice management companies focused on professional
and technical radiology services. Several companies, both publicly and privately
held, that have established operating histories and, in some instances, greater
resources than the Company are pursuing the acquisition of general and specialty
physician practices (including radiology in the case of TeamHealth, a subsidiary
of MedPartners, Inc.) and the management of such practices. Additionally, some
hospitals, clinics, health care companies, HMOs and insurance companies engage
in activities similar to those of the Company. There can be no assurance that
the Company will be able to compete effectively with such competitors for the
acquisition of, or affiliation with, radiology practices, that additional
competitors will not enter the market, that such competition will not make it
more difficult or expensive to acquire the assets of, and provide management,
administrative, technical and non-medical services to, radiology practices on
terms beneficial to the Company or that competitive pressures will not otherwise
adversely affect the Company.
43
<PAGE> 45
FACILITIES AND EMPLOYEES
The Company's corporate headquarters are located at 2301 NationsBank Plaza,
901 Main Street, Dallas, Texas 75202, in approximately 13,349 square feet
occupied under a lease which expires on September 30, 2001. As of September 12,
1997, the Company had 19 employees and, upon consummation of the
Reorganizations, the Company expects that it will have approximately 1,100
employees, of which approximately 30 will be employed at the Company's
headquarters and regional offices and the remainder will be employed at the
Founding Affiliated Practices. The Company believes that its relationship with
its employees is good. See "Business -- Development and Operations."
CORPORATE LIABILITY AND INSURANCE
The Founding Affiliated Practices maintain professional liability insurance
coverage primarily on a claims made basis. Such insurance provides coverage for
claims asserted when the policy is in effect regardless of when the events that
caused the claim occurred. As a result of the Reorganizations, the Company will
in some cases succeed to certain liabilities of the Founding Affiliated
Practices. Therefore, claims may be asserted after the Reorganizations against
the Company for events which occurred prior to the Reorganizations. Following
the Reorganizations, the Company and the Affiliated Practices intend to maintain
insurance coverage similar to the coverage previously maintained by the Founding
Affiliated Practices. On September 1, 1997, a new law became effective in the
state of Texas that permits injured patients to sue health insurance carriers,
health maintenance organizations and other managed care entities for medical
malpractice. There can be no assurance that this legislation will not increase
the cost of liability insurance to the Company for services provided in Texas or
any other states in which the Company does business if similar legislation is
adopted in those states.
The provision of medical services entails an inherent risk of professional
malpractice and other similar claims. The Company's intent is to not influence
or control the practice of medicine by physicians or have responsibility for
compliance with certain regulatory and other requirements directly applicable to
physicians and physician groups. As a result of the relationship between the
Company and the Affiliated Practices, however, the Company may become subject to
medical malpractice actions under various theories, including successor
liability. There can be no assurance that claims, suits or complaints relating
to services provided by Affiliated Practices will not be asserted against the
Company in the future. The Company expects to maintain insurance coverage that
it believes will be adequate. The Company anticipates that such insurance will
extend to professional liability claims that may be asserted against employees
of the Company that work on site at Affiliated Practice locations. In addition,
pursuant to the Service Agreements, the Founding Affiliated Practices are
required (and the Company intends to require any other Affiliated Practices) to
maintain comprehensive professional liability insurance. The availability and
cost of such insurance is affected by various factors, many of which are beyond
the control of the Company and Affiliated Practices. The cost of such insurance
to the Company and the Affiliated Practices may have an adverse effect on the
Company's operations. In addition, successful malpractice or other claims
asserted against Affiliated Practices or the Company that exceed applicable
policy limits could have a material adverse effect on the Company.
In connection with the Reorganizations, the shareholders of the Founding
Affiliated Practices have agreed to indemnify the Company for certain claims.
There can be no assurance that the Company will be able to receive payments
under any such indemnity agreements or that the failure to fully recover such
amounts will not have a material adverse effect on the Company's business,
financial condition or results of operations.
Following the Reorganizations, the Founding Affiliated Practices will be
required by the terms of the Service Agreements to maintain medical malpractice
liability insurance consistent with minimum limits mandated in their hospital
contracts or by applicable state law. It is anticipated that the minimum amounts
to be maintained will be $1 million per occurrence and $3 million in the
aggregate. The Company intends to maintain general liability and umbrella
coverage of $5 million per occurrence and $5 million in the aggregate.
Additionally, the Company will maintain workers' compensation insurance on all
employees. Coverage will be placed on a statutory basis and will respond to each
state's specific requirements.
44
<PAGE> 46
LEGAL PROCEEDINGS
The Company is not a party to any suits or complaints relating to services
provided by the Company or the Founding Affiliated Practices, although there can
be no assurances that claims will not be asserted against the Company in the
future. The Company will become subject to certain pending claims as the result
of successor liability in connection with the Reorganizations; however, the
Company believes that the ultimate resolution of such claims will not have a
material adverse effect on the business, financial condition or results of
operation of the Company.
Although the Company has not been named in any of the lawsuits against a
Founding Affiliated Practice, there can be no assurance that the Company will
not subsequently be named as a defendant in one or more of these lawsuits
following consummation of the Reorganizations. Each Founding Affiliated Practice
has retained responsibility for, and agreed to indemnify the Company in full
against, the liabilities associated with these lawsuits. In the event the
Company is subsequently added as a party in any of these lawsuits, or a monetary
judgment is entered against the Company and a Founding Affiliated Practice is
not required or is unable to satisfy its indemnification obligations to the
Company, the Company's business, results of operations and financial condition
could be materially adversely affected.
45
<PAGE> 47
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
executive officers and directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Gregory L. Solomon(1)(2).................. 52 President, Chief Executive Officer and Director
Lawrence R. Muroff, M.D.(1)(2)............ 54 Chairman of the Board of Directors and Senior Vice
President of Physician Affairs
Mark S. Martin............................ 37 Senior Vice President and Chief Operating Officer
Sami S. Abbasi............................ 32 Senior Vice President and Chief Financial Officer
Paul M. Jolas............................. 33 Senior Vice President, General Counsel and
Secretary
John W. Colloton(3)(4).................... 66 Director
John Pappajohn(2)(4)...................... 68 Director
Derace L. Schaffer, M.D.(1)(3)............ 49 Director
Less T. Chafen, M.D....................... 55 Director Nominee
Michael L. Sherman, M.D................... 55 Director Nominee
</TABLE>
- ---------------
(1) Member of the Executive Committee of the Board of Directors.
(2) Member of the Acquisition Committee of the Board of Directors.
(3) Member of the Compensation and Stock Plan Administration Committee of the
Board of Directors.
(4) Member of the Audit Committee of the Board of Directors.
Gregory L. Solomon has served as President, Chief Executive Officer and a
director of the Company since its inception. From April 1995 through September
1995, Mr. Solomon served as Chairman of the Board of Directors and Chief
Executive Officer of Physicians Resource Group, Inc., a publicly-traded
physician practice management company which provides management and
administrative services to ophthalmic and optometric practices. Physicians
Resource Group, Inc. became a public company in June 1995 and is listed on the
New York Stock Exchange. From December 1994 through April 1995, Mr. Solomon
served as a consultant to Physicians Resource Group, Inc. From February 1991
through December 1994, Mr. Solomon served as Chairman of the Board of Directors
and Chief Executive Officer of Associated Optical, Inc., a company that provided
optical laboratory services and distributed contact lenses to private
practitioners, retailers and third-party providers of eye care. From March 1983
through February 1991, he served as President, Chief Executive Officer and a
director of Allco Chemical Corporation, a manufacturer of specialty chemicals
serving the electronic and aerospace industries. Mr. Solomon received his M.B.A.
in finance from Indiana University and his B.S. in economics from Xavier
University.
Lawrence R. Muroff, M.D. has served as Chairman of the Board of Directors
and Senior Vice President of Physician Affairs of the Company since its
inception. In connection with the Reorganizations, the Company will establish a
Physician Advisory Board and Dr. Muroff will serve as its chairman. Dr. Muroff
has served as President of Educational Symposia, Inc., an educational company
which provides qualified teaching credits to radiologists and certain referring
physicians, since January 1975. He has also served as President of Imaging
Consultants, Inc., a company which provides consulting services to radiology
groups, hospital corporations and other entities involved in diagnostic imaging,
since May 1994. Dr. Muroff holds appointments as Clinical Professor of Radiology
at the University of South Florida, College of Medicine (from 1982 to the
present); the University of Florida, College of Medicine (from 1988 to the
present); and the H. Lee Moffitt Cancer Center & Research Institute (from 1994
to the present). From 1974 through 1994, Dr. Muroff was a partner in Sheer,
Ahearn & Associates, a radiology group based in Florida. Dr. Muroff received his
M.D. from Harvard Medical School; his B.M.Sc. in basic medical science from
Dartmouth Medical School; and his A.B. in liberal arts from Dartmouth College.
46
<PAGE> 48
Mark S. Martin has served as Chief Operating Officer and Senior Vice
President of the Company since June 1996. From January 1993 through June 1996,
Mr. Martin served as Executive Vice President of Practice Management Development
and Support for Medaphis Physician Services Corporation, a subsidiary of
Medaphis Corporation, a publicly-traded company which provides business and
information services to physicians, physician group practices and hospitals.
From October 1987 through December 1992, he served as Vice President of
Financial Services for CompMed, Inc., a company which provided comprehensive
management and administrative services to hospital-based physicians and
physician groups, with a primary emphasis on radiology. From 1982 through 1987,
Mr. Martin was employed by KPMG Peat Marwick as a tax manager. Mr. Martin was
licensed as a Certified Public Accountant in 1982. He received his B.A. in
accounting from Capital University.
Sami S. Abbasi has served as Chief Financial Officer and Senior Vice
President of the Company since August 1996. From January 1995 through July 1996,
Mr. Abbasi served as Vice President in the Health Care Group of Robertson,
Stephens & Company. His responsibilities included investment banking business
development and transaction execution with emerging growth publicly-held and
privately-held companies in the health care industry, with specific emphasis on
physician practice management companies. From 1988 through January 1995, he held
various positions with Citicorp Securities, Inc., including Vice President and
Senior Analyst -- Health Care Group. Mr. Abbasi received his M.B.A. from the
University of Rochester and his B.A. in economics from the University of
Pennsylvania.
Paul M. Jolas has served as General Counsel and Senior Vice President of
the Company since August 1996 and as Secretary of the Company since October
1996. From September 1989 through July 1996, Mr. Jolas was an attorney with the
law firm of Haynes and Boone, L.L.P. in Dallas, Texas, where he practiced in the
corporate finance section and was responsible for a broad range of corporate and
securities transactions including numerous initial and secondary public
offerings of equity and debt securities, mergers and acquisitions and public
company reporting requirements. Mr. Jolas received his J.D. from Duke University
School of Law and his B.A. in economics from Northwestern University.
John W. Colloton became a director of the Company in June 1997. Mr.
Colloton served as the director of the University of Iowa Hospitals and Clinics
from 1971 to 1993, and since 1993, has been Vice President for Statewide Health
Services for the University of Iowa. He also serves as a director of the
following companies: Baxter International, Inc.; MidAmerican Energy, Inc.;
Wellmark, Inc. (Blue Cross and Blue Shield of Iowa and South Dakota); OncorMed,
Inc.; and Iowa State Bank and Trust Company. Mr. Colloton is also a trustee of
the University of Pennsylvania Medical Center. Mr. Colloton, who earned his M.A.
in Hospital and Health Administration from the University of Iowa, has been
elected to the Institute of Medicine of the National Academy of Sciences and has
received Distinguished Service Awards from both the American Hospital
Association and the Association of American Medical Colleges.
John Pappajohn has been a director of the Company since its inception.
Since 1969, Mr. Pappajohn has been the President and principal stockholder of
Equity Dynamics, Inc., a financial consulting firm, and the sole owner of
Pappajohn Capital Resources, a venture capital firm, both located in Des Moines,
Iowa. He also serves as a director of the following public companies: Core,
Inc.; Drug Screening Systems, Inc.; Fuisz Technologies Ltd.; OncorMed, Inc.; The
Care Group, Inc.; PACE HealthManagement Systems, Inc.; Patient InfoSystems,
Inc.; and HealthDesk Corporation. Mr. Pappajohn received his Bachelors degree in
business from the University of Iowa.
Derace L. Schaffer, M.D. has been a director of the Company since its
inception. Dr. Schaffer is President of The Ide Group, P.C., one of the Founding
Affiliated Practices, as well as the Lan Group, a venture capital firm. He also
serves as a director of the following public companies: The Care Group, Inc.,
Oncor, Inc., and Patient InfoSystems, Inc. He is also a director of several
private companies, including Automated Dispatch Solutions, Inc., Medical Records
Corporation, NeuralMed, Inc., NeuralTech, Inc. and Preferred Oncology Networks
of America, Inc. Dr. Schaffer is a board certified radiologist. He received his
postgraduate radiology training at the Harvard Medical School and Massachusetts
General Hospital, where he served as Chief Resident. Dr. Schaffer is a member of
Alpha Omega Alpha, the national medical honor society, and is Clinical Professor
of Radiology at the University of Rochester School of Medicine.
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<PAGE> 49
Less T. Chafen, M.D. has been nominated and approved to serve as a Director
of the Company effective upon consummation of this offering. Since 1978, Dr.
Chafen has served as the Chairman of the Board of Pacific Imaging Consultants, a
Medical Group, Inc., one of the Founding Affiliated Practices. Dr. Chafen
received his M.D. from Loma Linda University and his B.A. in zoology and
chemistry from Columbia Union College.
Michael L. Sherman, M.D. has been nominated and approved to serve as a
Director of the Company effective upon consummation of this offering. Since
1995, Dr. Sherman has served as the President of Advanced Radiology, LLC, one of
the Founding Affiliated Practices. From 1992 to 1995, Dr. Sherman served as the
Managing Partner of Drs. Copeland, Hyman & Shackman. Dr. Sherman received his
M.D. from the University of Maryland Medical School and his A.B. in history and
pre-medicine from Duke University.
BOARD OF DIRECTORS
Upon consummation of this offering, the number of directors of the Company
will be fixed at seven. Directors of the Company are elected by the stockholders
at each annual meeting to serve until the next annual meeting of the
stockholders or until their successors are duly elected and qualified.
The Company's Board of Directors has established an Executive Committee, an
Acquisition Committee, an Audit Committee and a Compensation and Stock Plan
Administration Committee. The Executive Committee exercises all the powers of
the Board of Directors between meetings of the Board of Directors, except such
powers as are reserved to the Board of Directors by law. Upon consummation of
this offering, the Executive Committee will consist of Mr. Solomon and Drs.
Muroff and Schaffer. The Acquisition Committee evaluates acquisition proposals
regarding radiology physician practices, MSOs, ICs and related businesses. Upon
consummation of this offering, the Acquisition Committee will consist of Messrs.
Solomon and Pappajohn and Dr. Muroff, with two directors to be named at a later
date. The Audit Committee recommends the firm to be appointed as independent
accountants to audit the Company's financial statements and to perform services
related to the audit, reviews the scope and results of the audit with the
independent accountants, reviews with management and the independent accountants
the Company's year-end operating results and considers the adequacy of the
Company's internal accounting procedures. Upon consummation of this offering,
the Audit Committee will consist of Mr. Pappajohn, Mr. Colloton and a director
to be named at a later date. The Compensation and Stock Plan Administration
Committee reviews and recommends the compensation arrangements for all directors
and officers and administers the Company's benefit plans, including the
Company's 1996 Stock Option Plan. Upon consummation of this offering, the
Compensation and Stock Plan Administration Committee will consist of Dr.
Schaffer, Mr. Colloton and a director to be named at a later date.
Directors of the Company who are also employees receive no additional
compensation for their services as members of the Board of Directors or as
members of Board Committees.
The Company has no regular compensation arrangements with its non-employee
directors. However, the Company's 1996 Stock Option Plan provides for automatic
grants of non-qualified options to purchase 30,000 shares of Common Stock to
non-employee directors at the time any such director is first elected or
appointed as a non-employee director. Each such option (i) entitles the director
to purchase shares of the Common Stock at an exercise price equal to the fair
market value of the Common Stock on the automatic grant date, (ii) is first
exercisable with respect to 10,000 shares underlying the option on the first
anniversary of the automatic grant date and is exercisable with respect to the
remaining shares underlying the option in 24 equal monthly installments over the
next 24 months (provided such person remains a director of the Company) and
(iii) terminates on the day prior to the tenth anniversary of the automatic
grant date. On the date of each annual stockholders meeting held after this
offering, each non-employee director who is to continue to serve on the Board of
Directors shall automatically be granted an option to purchase 10,000 shares of
Common Stock, provided that the initial 30,000-share option grant to such
individual was made at least three years prior to the date of such meeting. Each
such 10,000-share option grant shall become exercisable in 12 equal monthly
installments over the next 12 months following the grant date.
48
<PAGE> 50
All directors of the Company are reimbursed for travel expenses incurred in
attending meetings of the Board of Directors and for other incidental expenses
for serving as a director.
EXECUTIVE COMPENSATION
Summary Compensation
The following table sets forth certain information regarding the
compensation paid by APPI for services rendered in all capacities to APPI during
1996 to the Company's Chief Executive Officer and the four other most highly
paid executive officers (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------
-------------------------------------- SECURITIES
NAME AND OTHER ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION SALARY($) BONUS($) COMPENSATION($) OPTIONS(#) COMPENSATION($)
------------------ --------- -------- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Gregory L. Solomon...................... $142,500 -- -- 250,000 $ 4,518(1)
President and Chief Executive Officer
Lawrence R. Muroff, M.D. ............... 75,000 -- -- 230,000 --
Chairman of the Board of Directors and
Senior Vice President of Medical
Affairs
Mark S. Martin.......................... 84,529 -- -- 180,000 25,274(2)
Senior Vice President and Chief
Operating Officer
Sami S. Abbasi.......................... 66,667 -- -- 180,000 5,619(3)
Senior Vice President and Chief
Financial Officer
Paul M. Jolas........................... 58,333 -- -- 140,000 945(4)
Senior Vice President and General
Counsel
</TABLE>
- ---------------
(1) Represents amount of health insurance premiums reimbursed by the Company.
(2) Represents amount of health insurance premiums and $24,399 in relocation
expenses reimbursed by the Company.
(3) Represents amount of health insurance premiums and $4,103 in relocation
expenses reimbursed by the Company.
(4) Represents amount of health insurance premiums reimbursed by the Company.
49
<PAGE> 51
Option Grants During 1996
The following table presents information regarding 1996 grants of options
to purchase shares of Common Stock for each of the Named Executive Officers:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF STOCK
SECURITIES PERCENT OF TOTAL PRICE APPRECIATION FOR
UNDERLYING OPTIONS GRANTED EXERCISE OR OPTION TERM(3)
OPTIONS TO EMPLOYEES BASE PRICE -----------------------
NAME GRANTED(1) IN FISCAL YEAR ($/SH)(2) EXPIRATION DATE 5%($) 10%($)
---- ---------- ---------------- ----------- --------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Gregory L. Solomon.......... 250,000(4) 20.2% $0.125 04/30/06 $19,653 $49,804
Lawrence R. Muroff, M.D..... 230,000(5) 18.5 0.125 04/30/06 18,081 45,820
Mark S. Martin.............. 180,000(4) 14.5 0.125 06/11/06 14,150 35,859
Sami S. Abbasi.............. 180,000(4) 14.5 0.125 07/31/06 14,150 35,859
Paul M. Jolas............... 140,000(6) 11.3 0.125 07/31/06 11,006 27,890
</TABLE>
- ---------------
(1) All options were granted at fair market value at the date of grant, as
determined by the Board of Directors. These options vest monthly over a
five-year period.
(2) The option exercise price may be paid in shares of Common Stock owned by the
executive officer, in cash, or in any other form of valid consideration as
determined by the Compensation and Stock Plan Administration Committee in
its discretion.
(3) The dollar amounts in these columns represent the potential realizable value
that might be realized upon exercise of the options immediately prior to the
expiration of their term, assuming that the market price of Common Stock
appreciates in value from the date of grant at assumed annual rates of 5%
and 10%. These assumed rates of appreciation are prescribed by the rules and
regulations of the Securities and Exchange Commission, and therefore are not
intended to forecast possible future appreciation, if any, of the price of
the Common Stock. These numbers do not take into account provisions of
certain options providing for termination of the option following
termination of employment, nontransferability or vesting over periods.
(4) Upon consummation of this offering, this option becomes exercisable with
respect to the greater of 50% of the shares covered thereby or the actual
number of shares that have vested. The remainder of the shares underlying
the option become exercisable in equal monthly installments over the
remaining vesting period. These numbers do not take into account provisions
of certain options providing for termination of the option following
termination of employment, nontransferability or vesting over periods.
(5) As to 200,000 shares, upon consummation of this offering, this option
becomes exercisable with respect to the greater of 100,000 shares or the
actual number of shares that have vested, and the remainder of such shares
become exercisable in equal monthly installments over the remaining vesting
period. As to 30,000 shares, 10,000 shares become exercisable on the first
anniversary of the date of grant and the remaining shares become exercisable
in 24 equal monthly installments over the next 24 months. These numbers do
not take into account provisions of certain options providing for
termination of the option following termination of consulting relationships,
cessation of services as a director of the Company or nontransferability.
(6) Upon consummation of this offering, this option becomes exercisable with
respect to the greater of 25% of the shares covered thereby or the actual
number of shares that have vested upon consummation of this offering. The
remainder of the shares underlying the option become exercisable in equal
monthly installments over the remaining vesting period. These numbers do not
take into account provisions of certain options providing for termination of
the option following termination of employment, nontransferability or
vesting over periods.
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<PAGE> 52
Aggregated Option Exercises During 1996 and Year-end Option Values
No stock options were exercised by the Named Executive Officers during the
fiscal year ended December 31, 1996. The following table sets forth certain
information regarding unexercised stock options held by each of the Named
Executive Officers as of December 31, 1996:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
FISCAL YEAR-END(#) FISCAL YEAR-END(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Gregory L. Solomon............................ 29,166 220,834 $433,844 $3,284,906
Lawrence R. Muroff, M.D....................... 23,333 176,667 347,078 2,627,922
Mark S. Martin................................ 18,000 162,000 267,750 2,409,750
Sami S. Abbasi................................ 12,000 168,000 178,500 2,499,000
Paul M. Jolas................................. 9,333 130,667 138,828 1,943,672
</TABLE>
- ---------------
(1) Based on an assumed initial public offering price of $15.00 per share, less
the option exercise price.
STOCK OPTION PLAN
In May 1996, the Board of Directors adopted, and the stockholders of the
Company subsequently approved, the Company's 1996 Stock Option Plan (the
"Plan"). The purpose of the Plan is to provide directors, key employees and
certain advisors with additional incentives by increasing their proprietary
interest in the Company. Under the Plan, the aggregate amount of Common Stock
with respect to which options may be granted may not exceed 3,000,000 shares.
The Plan is intended to qualify for favorable treatment under Section 16 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), pursuant to
Rule 16b-3 promulgated thereunder ("Rule 16b-3").
The Plan provides for the grant of incentive stock options ("ISOs") as
defined in Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), and non-qualified stock options (collectively, "Awards"). Following the
consummation of this offering, the Plan will be administered by the Compensation
and Stock Plan Administration Committee, which will be comprised of two or more
non-employee directors who are "disinterested" within the meaning of Rule 16b-3
(the "Committee"). Prior to the consummation of this offering, the Plan has been
administered by the Company's full Board of Directors. The Board of Directors
currently has, and the Committee will have, following consummation of this
offering, subject to the terms of the Plan, the sole authority to grant Awards
under the Plan, to construe and interpret the Plan and to make all other
determinations and take any and all actions necessary or advisable for the
administration of the Plan.
All of the Company's employees, non-employee directors and advisors are
eligible to receive Awards under the Plan, but only employees of the Company are
eligible to receive ISOs. Options will be exercisable during the period
specified in each option agreement and will generally be exercisable in
installments pursuant to a vesting schedule to be designated by the Committee.
Notwithstanding the provisions of any option agreement, options will become
immediately exercisable in the event of a "change in control" (as defined in the
Plan) of the Company and in the event of certain mergers and reorganizations of
the Company. No option will remain exercisable later than ten years after the
date of grant (or five years from the date of grant in the case of ISOs granted
to holders of more than 10% of the Common Stock).
The exercise price for ISOs granted under the Plan may be no less than the
fair market value of the Common Stock on the date of grant (110% of fair market
value in the case of ISOs granted to holders of more than 10% of the Company's
Common Stock). The exercise price for nonqualified options granted under the
Plan may be no less than 85% of the fair market value of the Common Stock on the
date of grant.
The Plan provides for automatic grants of non-qualified options to purchase
30,000 shares of Common Stock to non-employee directors at the time a director
is first elected or appointed as a non-employee director to vest over a term of
36 months, provided that such person continues to serve as a director of the
Company. In
51
<PAGE> 53
addition, upon expiration of the 36-month period following the initial option
grant to such non-employee director, such non-employee director shall
automatically be granted at each annual stockholders meeting a non-qualified
option to purchase 10,000 shares of Common Stock vesting over a term of 12
months. Each such option entitles the director to purchase shares of Common
Stock at an exercise price equal to the fair market value of the Common Stock on
the automatic grant date. Each option shall have a ten year term measured from
the automatic grant date.
The Plan will also permit the Company to grant stock options to advisors
and consultants of the Company who are employed as physicians of an Affiliated
Practice. Generally, such options will expire upon the termination of employment
with the Affiliated Practice or the advisory or consultant relationship with the
Company or on the day prior to the tenth anniversary of the date of grant,
whichever occurs first.
The Company anticipates that upon the consummation of this offering it will
have outstanding options to purchase a total of approximately 1,681,000 shares
of Common Stock to its employees, directors and consultants. Generally, the
outstanding options are exercisable based on a monthly vesting schedule over 60
months. The Company anticipates that it will issue additional options
concurrently with or shortly following consummation of this offering. Such
options will be exercisable at the fair market value of the Common Stock on the
date of grant.
CASH BONUS PROGRAM
In April 1997, the Board of Directors adopted, and the stockholders of the
Company subsequently approved, the Company's Cash Bonus Program (the "Program").
The purpose of the Program is to establish a bonus plan pursuant to which
eligible employees will be entitled to receive cash bonuses based on the
performance of the Company. Those employees eligible to receive cash bonuses
under the Program include the executive officers of the Company and certain key
employees whose responsibilities and activities are closely connected to the
Company's overall performance.
Under the Program, cash bonuses are calculated as a percentage of each
eligible employee's base salary, with such percentage being determined based
upon the annual increase in the Company's earnings per share. In addition, each
eligible employee may receive a cash bonus based upon the achievement of certain
individual objectives and the Company's overall performance. The Program will
become effective upon consummation of this offering and will be administered by
the Compensation and Stock Plan Administration Committee of the Board of
Directors.
EMPLOYMENT AGREEMENTS; COVENANTS-NOT-TO-COMPETE
The Company has entered into employment agreements with Gregory L. Solomon,
Mark S. Martin, Sami S. Abbasi and Paul M. Jolas, each of whom shall receive
following this offering annual salaries at the rate of $225,000, $190,000,
$190,000 and $150,000, respectively. Each employment agreement has a term of one
year with automatic successive one-year renewal periods. Each employment
agreement provides that in the event of a termination of employment by the
Company (i) other than for cause, (ii) upon disability or (iii) upon voluntary
termination by employee due to an adverse change in duties, such employee shall
be entitled to receive from the Company a payment equal to one-half of the
amount of such employee's then current annual base salary, to be paid in one
lump sum, plus a payment for all accrued but unpaid wages and expense
reimbursements. Such employment agreements provide that in the event such
employee's employment terminates following a change in control transaction (as
defined in such employment agreements) of the Company, the Company shall pay
such employee two times such employee's then current annual base salary.
Each such employment agreement contains a covenant-not-to-compete with the
Company for a period of one year following termination of employment.
52
<PAGE> 54
CERTAIN TRANSACTIONS
On April 30, 1996, Derace L. Schaffer, M.D., a director of the Company,
purchased 1,000,000 shares of Common Stock in the Company for $125,000 and John
Pappajohn, a director of the Company, and his affiliates purchased 1,000,000
shares of Common Stock for $125,000. During August 1996, Mr. Pappajohn and Dr.
Schaffer advanced a total of $400,000 to the Company as loans which were repaid
on October 31, 1996, out of the proceeds of the Company's private placement of
the Convertible Notes. Dr. Schaffer owns $107,500 in principal amount of the
Convertible Notes. Mr. Pappajohn owns $250,000 in principal amount of the
Convertible Notes. On July 17, 1997, Mr. Pappajohn advanced $150,000 to the
Company as a loan bearing interest at an annual rate of 6%. On July 25, 1997,
Mr. Pappajohn and Dr. Schaffer, personally guaranteed a $1,000,000 line of
credit for the benefit of the Company. The Company repaid the $150,000 loan from
Mr. Pappajohn on August 21, 1997 out of the proceeds of the $1,000,000 line of
credit.
The Company and Lawrence R. Muroff, M.D., Chairman of the Board of
Directors of the Company and Senior Vice President of Physician Affairs, entered
into a consulting agreement in August 1997 pursuant to which Dr. Muroff receives
annual compensation of $100,000 (prorated for actual months worked) in exchange
for rendering consulting services to the Company. The annual compensation under
such agreement will increase to $112,500 following consummation of this
offering. As part of his consulting arrangement, Dr. Muroff received option
grants for 200,000 shares of Common Stock. In addition, he received option
grants for 30,000 shares for his services as a member of the Company's Board of
Directors. See "Business -- Management -- Option Grants During 1996."
The Company and Michael L. Sherman, M.D., a director nominee of the
Company, entered into a consulting agreement in August 1996 pursuant to which
Dr. Sherman received an option grant for 20,000 shares of Common Stock. In
addition, the Company and Dr. Sherman entered into a consulting agreement for
which Dr. Sherman will receive annual compensation of $100,000 commencing on the
date following the consummation of this offering.
In connection with the Reorganizations of Advanced Radiology, LLC, Ide
Group, P.C. and Pacific Imaging Consultants, Dr. Sherman will receive 63,718
shares of Common Stock and $318,589, Dr. Schaffer will receive 94,256 shares of
Common Stock and $471,279 and Dr. Less T. Chafen will receive 31,994 shares of
Common Stock and $159,972, respectively.
REORGANIZATIONS
The Company will consummate the Reorganizations simultaneously with the
closing of this offering.
The total consideration to be paid to each Founding Affiliated Practice and
its respective securityholders in connection with the Reorganizations described
below was determined by management based on an analysis of each practice's
relative cash flows and operating cash flows before physician costs and was
determined on a consistent basis, assuming an initial public offering price of
$15.00 per share. To the extent that the initial public offering price exceeds
$14.00 per share the total consideration paid to the securityholders of each
Founding Affiliated Practice will increase in amount; and to the extent that the
initial public offering price is less than $14.00 per share, the total number of
shares issued to the securityholders of each Founding Affiliated Practice will
increase. The amount to be paid to each physician owner is based on his/her
ownership interest in the Founding Affiliated Practice. There has been and is no
relationship between the Company and any person making any determination of
amounts to be paid to the individual physician owners of the Founding Affiliated
Practices.
In connection with each Reorganization, the medical assets (e.g., payor
contracts and patient records) will be transferred to a new professional entity
that will be owned by the physicians of the respective Founding Affiliated
Practice. The Company will acquire the remaining non-medical assets from each
Founding Affiliated Practice. As a result of the Reorganizations, the Company
will not own an equity interest in the professional entities.
The following is a brief discussion of the Reorganizations.
53
<PAGE> 55
Advanced Radiology, LLC
Advanced Radiology, LLC ("Advanced") is a Maryland limited liability
company comprised of six professional association members which, in the
aggregate, have 92 physician shareholders. In June 1997, the Company entered
into agreements to acquire certain tangible and intangible assets, and assume
certain liabilities, of Advanced, pursuant to which, upon completion of the
Reorganization, the Company will have acquired all of the non-medical assets of
Advanced. Pursuant to the terms of the agreements, the securityholders of
Advanced will receive 3,562,500 shares of Common Stock valued at $53,437,500 in
the aggregate and $17,812,500 in cash.
The Ide Group, P.C.
The Ide Group, P.C. ("Ide") is a New York corporation which has 22
physician shareholders. In June 1997, the Company entered into an agreement to
acquire certain tangible and intangible assets, and assume certain liabilities,
of Ide, pursuant to which, upon completion of the Reorganization, the Company
will have acquired all of the non-medical assets of Ide. Pursuant to the terms
of the agreement, the securityholders of Ide will receive 2,026,500 shares of
Common Stock valued at $30,397,500 in the aggregate and $10,132,500 in cash.
Pacific Imaging Consultants
Pacific Imaging Consultants ("Pacific") consists of California corporations
which have an aggregate of 26 physician shareholders. In June 1997, the Company
entered into agreements to acquire certain tangible and intangible assets, and
assume certain liabilities, of Pacific, pursuant to which, upon completion of
the Reorganization, the Company will have acquired all of the non-medical assets
of Pacific. Pursuant to the terms of the agreement, the securityholders of
Pacific will receive 703,875 shares of Common Stock valued at $10,558,125 in the
aggregate and $3,519,375 in cash.
Radiology and Nuclear Medicine, P.A.
Radiology and Nuclear Medicine, P.A. ("RNM") is a Kansas corporation which
has 24 physician shareholders. In June 1997, the Company entered into agreements
to acquire certain tangible and intangible assets, and assume certain
liabilities, of RNM, pursuant to which, upon completion of the Reorganization,
the Company will have acquired all of the non-medical assets of RNM. Pursuant to
the terms of the agreement, the securityholders of RNM will receive 958,500
shares of Common Stock valued at $14,377,500 in the aggregate and $4,792,500 in
cash.
Valley Radiology Group
Valley Radiology Group ("Valley") consists of California corporations which
have an aggregate of 19 physician shareholders. In June 1997, the Company
entered into agreements to acquire certain tangible and intangible assets, and
assume certain liabilities, of Valley, pursuant to which, upon completion of the
Reorganization, the Company will have acquired all of the non-medical assets of
Valley. Pursuant to the terms of the agreements, the securityholders of Valley
will receive 623,250 shares of Common Stock valued at $9,348,750 in the
aggregate and $3,116,250 in cash.
Rockland Radiological Group
Rockland Radiological Group ("Rockland") consists of New York corporations
which have an aggregate of 13 physician shareholders. In June 1997, the Company
entered into agreements to acquire certain tangible and intangible assets, and
assume certain liabilities, of Rockland, pursuant to which, upon completion of
the Reorganization, the Company will have acquired all of the non-medical assets
of Rockland. Pursuant to the terms of the agreements, the securityholders of
Rockland will receive 1,446,375 shares of Common Stock valued at $21,695,625 in
the aggregate and $7,231,875 in cash.
54
<PAGE> 56
M & S X-Ray Practices
The M&S X-Ray Practices ("M&S") consist of Texas corporations and limited
partnerships which have an aggregate of 19 partners and shareholders. In June
1997, the Company entered into agreements to acquire certain tangible and
intangible assets, and assume certain liabilities, of M & S, pursuant to which
upon completion of the Reorganization, the Company will acquire all of the
non-medical assets of M & S. Pursuant to the terms of the agreements, the
securityholders of M & S will receive 1,595,625 shares of Common Stock valued at
$23,934,375 in the aggregate and $7,978,125 in cash.
The following table provides certain information concerning the
securityholders of the Founding Affiliated Practices, including cash
distributions to be paid in connection with the Reorganizations. Each of the
below listed securityholders of the Founding Affiliated Practices is deemed to
be a promoter of this offering.
<TABLE>
<CAPTION>
CONSIDERATION TO BE
RECEIVED
---------------------------
ASSETS TO BE NUMBER OF CASH
FOUNDING AFFILIATED PRACTICES CONTRIBUTED(1) SHARES DISTRIBUTION
----------------------------- -------------- ----------- ------------
<S> <C> <C> <C>
Advanced Radiology, LLC
Neil Borelli, M.D. .............................. $ 388,072 41,216 $ 206,079
Edward Carter, M.D. ............................. 388,072 41,216 206,079
Valeriano Fugos, M.D. ........................... 388,072 41,216 206,079
Richard Harr, M.D. .............................. 388,072 41,216 206,079
Harry Knipp, M.D. ............................... 388,072 41,216 206,079
Nathan Stofberg, M.D. ........................... 305,891 32,488 162,439
Larry Snyder, M.D. .............................. 612,139 65,014 325,067
Samuel Anderman, M.D. ........................... 612,139 65,014 325,067
Sheldon Bearman, M.D. ........................... 612,139 65,014 325,067
Michael Sherman, M.D. ........................... 612,139 65,014 325,067
Charles Weiner, M.D. ............................ 612,139 65,014 325,067
Bruce Berlanstein, M.D. ......................... 612,139 65,014 325,067
John A. Reeder, M.D. ............................ 612,139 65,014 325,067
Jack Copeland, M.D. ............................. 428,323 45,491 227,454
Edward Mishner, M.D. ............................ 612,139 65,014 325,067
Blair Andrew, M.D. .............................. 612,139 65,014 325,067
Anuradha Bhasin, M.D. ........................... 612,139 65,014 325,067
Bennett Sweren, M.D. ............................ 612,139 65,014 325,067
Laurence Goldstein, M.D. ........................ 612,139 65,014 325,067
James Winthrop, M.D. ............................ 612,139 65,014 325,067
Robert Van Beisen, M.D. ......................... 612,139 65,014 325,067
Danllo Espinola, M.D. ........................... 612,139 65,014 325,067
Judy Destouet, M.D. ............................. 612,139 65,014 325,067
W. David McNeely, M.D. .......................... 601,405 63,874 319,367
Christopher Feifarek, M.D. ...................... 601,405 63,874 319,367
Douglas Brunner, M.D. ........................... 601,405 63,874 319,367
J. Stephen Cunat, M.D. .......................... 601,405 63,874 319,367
J. Thayer Simmons, M.D. ......................... 601,405 63,874 319,367
J. Dave Faison, M.D. ............................ 601,405 63,874 319,367
Daniel Aronson, M.D. ............................ 488,365 51,868 259,339
Paul Barnett, M.D. .............................. 488,365 51,868 259,339
Barbara Braitman, M.D. .......................... 488,365 51,868 259,339
Barton Cockey, M.D. ............................. 488,365 51,868 259,339
Colleene Cooke, M.D. ............................ 488,365 51,868 259,339
Lynn Harris-McCorkie, M.D. ...................... 488,365 51,868 259,339
Malonnie Kinnison, M.D. ......................... 488,365 51,868 259,339
</TABLE>
55
<PAGE> 57
<TABLE>
<CAPTION>
CONSIDERATION TO BE
RECEIVED
---------------------------
ASSETS TO BE NUMBER OF CASH
FOUNDING AFFILIATED PRACTICES CONTRIBUTED(1) SHARES DISTRIBUTION
----------------------------- -------------- ----------- ------------
<S> <C> <C> <C>
Henry Munitz, M.D. .............................. 488,365 51,868 259,339
Margaret Lynch-Nyhan, M.D. ...................... 488,365 51,868 259,339
Rogello Naraval, M.D. ........................... 488,365 51,868 259,339
Henry Wang, M.D. ................................ 488,365 51,868 259,339
Richard Rosenbaum, M.D. ......................... 607,108 64,479 322,395
Allan Skrenta, M.D. ............................. 607,108 64,479 322,395
Lee Goodman, M.D. ............................... 607,108 64,479 322,395
Fred C. Ashman, M.D. ............................ 303,543 32,239 161,192
Luther Wells, Jr., M.D. ......................... 607,108 64,479 322,395
Frank Giargiana, M.D. ........................... 303,543 32,239 161,192
N. Nourmohammadi, M.D. .......................... 607,108 64,479 322,395
Russell Gelman, M.D. ............................ 607,108 64,479 322,395
Martin Auster, M.D. ............................. 382,034 40,575 202,873
Philip E.B. Byrd, Jr., M.D. ..................... 382,034 40,575 202,873
David M. Elder, M.D. ............................ 382,034 40,575 202,873
Bijan Keramati, M.D. ............................ 382,034 40,575 202,873
Sanford D. Minkin, M.D. ......................... 382,034 40,575 202,873
Pedro P. Purcell, M.D. .......................... 382,034 40,575 202,873
Marcos Roffe, M.D. .............................. 382,034 40,575 202,873
David J. Safferman, M.D. ........................ 382,034 40,575 202,873
Lyle T. Saylor, M.D. ............................ 382,034 40,575 202,873
Robert M. Stroud, Jr., M.D. ..................... 382,034 40,575 202,873
Jack Arnold, M.D. ............................... 731,552 77,696 388,479
Stewart Axelbaum, M.D. .......................... 731,552 77,696 388,479
John Bodine, M.D. ............................... 731,552 77,696 388,479
Carlton Jenkins, M.D. ........................... 731,552 77,696 388,479
Henry Lewis, M.D. ............................... 731,552 77,696 388,479
Allison Oidfield, M.D. .......................... 365,933 38,865 194,323
The Ide Group, P.C.
Ted D. Barnett, M.D. ............................ 336,350 94,256 471,279
Laurence W. Betts, M.D. ......................... 336,350 94,256 471,279
Frederick S. Cohn, M.D. ......................... 336,350 94,256 471,279
Fredrick S. Erdman, M.D. ........................ 168,175 47,128 235,640
Nancy A. Gadziala, M.D. ......................... 336,350 94,256 471,279
Ronald L. Hainen, M.D. .......................... 336,350 94,256 471,279
Steven G. Herbert, M.D. ......................... 336,350 94,256 471,279
Francis M. Kelley, M.D. ......................... 336,350 94,256 471,279
John D. Kennedy, M.D. ........................... 336,350 94,256 471,279
Michael E. Lebowitz, M.D. ....................... 336,350 94,256 471,279
David J. Millet, M.D. ........................... 336,350 94,256 471,279
George W. Parker, M.D. .......................... 336,350 94,256 471,279
Kenneth D. Pearsen, M.D. ........................ 336,350 94,256 471,279
Victor S. Regenbogen, M.D. ...................... 336,350 94,256 471,279
Derace L. Schaffer, M.D. ........................ 336,350 94,256 471,279
W. Winslow Schrank, M.D. ........................ 336,350 94,256 471,279
Robert F. Spataro, M.D. ......................... 336,350 94,256 471,279
Bruce J. Thaler, M.D. ........................... 336,350 94,256 471,279
Richard E. Tobin, M.D. .......................... 336,350 94,256 471,279
</TABLE>
56
<PAGE> 58
<TABLE>
<CAPTION>
CONSIDERATION TO BE
RECEIVED
---------------------------
ASSETS TO BE NUMBER OF CASH
FOUNDING AFFILIATED PRACTICES CONTRIBUTED(1) SHARES DISTRIBUTION
----------------------------- -------------- ----------- ------------
<S> <C> <C> <C>
Rosemary Utz, M.D. .............................. 336,350 94,256 471,279
Herman A. Wallinga, M.D. ........................ 336,350 94,256 471,279
David M. Wolf, M.D. ............................. 336,350 94,256 471,279
M&S X-Ray Practices
Neil J. Bowie, M.D. ............................. 91,266 61,460 307,130
F. Joseph Carabin, M.D. ......................... 464,148 98,808 493,977
Robert W. Daehler, M.D. ......................... 225,877 38,681 193,515
Morgan G. Dunne, M.D. ........................... 225,877 38,681 193,515
Gregory C. Godwin, M.D. ......................... 438,777 93,127 465,571
Polly B. Hansen, M.D. ........................... 256,793 48,285 241,532
Michael D. Howard, M.D. ......................... 470,105 100,142 500,646
Philip S. Kline, M.D. ........................... 496,831 108,967 544,774
Julio C. Otazo, M.D. ............................ 502,966 111,527 557,571
R.K. Daniel Peterson, M.D. ...................... 516,479 114,553 572,700
Randall S. Preissig, M.D. ....................... 633,901 140,846 704,167
Rise P. Ross, M.D. .............................. 426,864 90,459 452,233
Jose A. Saldana, M.D. ........................... 516,479 114,553 572,700
Anthony F. Smith, M.D. .......................... 253,463 45,706 228,640
Robert L. Thompson, M.D. ........................ 490,060 108,637 543,121
A. Kenneth Trevino, M.D. ........................ 225,877 38,681 193,515
Howard R. Unger, Jr., M.D. ...................... 225,877 38,681 193,515
Jeremy N. Wiersig, M.D. ......................... 294,250 57,351 286,863
Gary L. Wilson, M.D. ............................ 263,161 47,030 235,259
W. Gregory Wojcik, M.D. ......................... 455,793 99,449 497,180
Pacific Imaging Consultants
John W. Barr, M.D. .............................. 188,642 31,994 159,972
Richard S. Breiman, M.D. ........................ 188,642 31,994 159,972
Less T. Chafen, M.D. ............................ 188,642 31,994 159,972
Frederick K. Chin, M.D. ......................... 188,642 31,994 159,972
Richard H. Culhane, M.D. ........................ 188,642 31,994 159,972
Edward Drasin, M.D. ............................. 188,642 31,994 159,972
Hayden Evans, M.D. .............................. 188,642 31,994 159,972
Michael J. Faer, M.D. ........................... 188,642 31,994 159,972
Charles E. Fiske, M.D. .......................... 188,642 31,994 159,972
Steven B. Hammerschlag, M.D. .................... 188,642 31,994 159,972
David C. Hansen, M.D. ........................... 188,642 31,994 159,972
Allen V. Havener, M.D. .......................... 188,642 31,994 159,972
Ira E. Kanter, M.D. ............................. 188,642 31,994 159,972
Richard J. Keene, M.D. .......................... 188,642 31,994 159,972
Carl J. Mani, M.D. .............................. 188,642 31,994 159,972
Susan C. Marks, M.D. ............................ 188,642 31,994 159,972
Jeremy A. McCreary, M.D. ........................ 188,642 31,994 159,972
Patrick J. Perkins, M.D. ........................ 188,642 31,994 159,972
Philip J. Rich, M.D. ............................ 188,642 31,994 159,972
Douglas C. Riehle, M.D. ......................... 188,642 31,994 159,972
Gary G. Shrago, M.D. ............................ 188,642 31,994 159,972
Juanit O. Villanueva, M.D. ...................... 188,642 31,994 159,972
</TABLE>
57
<PAGE> 59
<TABLE>
<CAPTION>
CONSIDERATION TO BE
RECEIVED
---------------------------
ASSETS TO BE NUMBER OF CASH
FOUNDING AFFILIATED PRACTICES CONTRIBUTED(1) SHARES DISTRIBUTION
----------------------------- -------------- ----------- ------------
<S> <C> <C> <C>
Radiology and Nuclear Medicine, P.A.
Stephen D. Coon, M.D. ........................... 216,743 39,938 199,688
Russell Clay Harvey, M.D. ....................... 216,743 39,938 199,688
Richard Meidinger, M.D. ......................... 216,743 39,938 199,688
Dennis C. Petterson, M.D. ....................... 216,743 39,938 199,688
Peter E. Schloesser, M.D. ....................... 216,743 39,938 199,688
William J. Walls, M.D. .......................... 216,743 39,938 199,688
Timothy A. Allen, M.D. .......................... 216,743 39,938 199,688
Philip L. Duniven, M.D. ......................... 216,743 39,938 199,688
Mikel D. Elder, M.D. ............................ 216,743 39,938 199,688
Benjamin A. Franklin, M.D. ...................... 216,743 39,938 199,688
John D. Gay, M.D. ............................... 216,743 39,938 199,688
Crosby L. Gernon, M.D. .......................... 216,743 39,938 199,688
Mark Greenberg, M.D. ............................ 216,743 39,938 199,688
Watlon S. Launey, M.D. .......................... 216,743 39,938 199,688
James W. Owen, M.D. ............................. 216,743 39,938 199,688
Vernon J. Peterson, M.D. ........................ 216,743 39,938 199,688
Phillip B. Sisk, M.D. ........................... 216,743 39,938 199,688
Jack W. Snarr, M.D. ............................. 216,743 39,938 199,688
Stephen J. Tempero, M.D. ........................ 216,743 39,938 199,688
James P. Werner, M.D. ........................... 216,743 39,938 199,688
Russell E. Greene, M.D. ......................... 216,743 39,938 199,688
Judith A. Kooser, M.D. .......................... 216,743 39,938 199,688
Ralph D. Reymond, M.D. .......................... 216,743 39,938 199,688
Terry J. Wall, M.D. ............................. 216,743 39,938 199,688
Rockland Radiological Group
Herbert Z. Geller, M.D. ......................... 855,829 111,260 556,298
Hector L. Correa, M.D. .......................... 855,829 111,260 556,298
Nancy A. Sussman, M.D. .......................... 855,829 111,260 556,298
Robert F. Mackey, M.D. .......................... 855,829 111,260 556,298
Elliot V. Handler, M.D. ......................... 855,829 111,260 556,298
Daniel J. Cohen, M.D. ........................... 855,829 111,260 556,298
Steven I. Klein, M.D. ........................... 855,829 111,260 556,298
Mark E. Geller, M.D. ............................ 855,829 111,260 556,298
Leslie M. Ossip, M.D. ........................... 855,829 111,260 556,298
Joel M. Schwarz, M.D. ........................... 855,829 111,260 556,298
Kenneth I. Blumberg, M.D. ....................... 855,829 111,260 556,298
Roger J. Frey, M.D. ............................. 855,829 111,260 556,298
Clara Chudow, M.D. .............................. 855,829 111,260 556,298
Valley Radiology Group
Richard Baxter, M.D. ............................ 191,330 31,265 156,326
Robert Filpi, M.D. .............................. 232,219 33,662 167,512
Keith Fraker, M.D. .............................. 232,219 33,662 167,512
Franklin Gee, M.D. .............................. 232,219 33,662 167,512
Bruce Hyman, M.D. ............................... 232,219 33,662 167,512
Young Kang, M.D. ................................ 191,330 31,265 156,326
Andrew Koo, M.D. ................................ 232,219 33,662 167,512
Edward Lebowitz, M.D. ........................... 232,219 33,662 167,512
Peter Long, M.D. ................................ 232,219 33,662 167,512
</TABLE>
58
<PAGE> 60
<TABLE>
<CAPTION>
CONSIDERATION TO BE
RECEIVED
---------------------------
ASSETS TO BE NUMBER OF CASH
FOUNDING AFFILIATED PRACTICES CONTRIBUTED(1) SHARES DISTRIBUTION
----------------------------- -------------- ----------- ------------
<S> <C> <C> <C>
Cyril McDonald, M.D. ............................ 232,219 33,662 167,512
Michael Myers, M.D. ............................. 191,330 31,265 156,326
John Noonan, M.D. ............................... 232,219 33,662 167,512
Harjit Sekhon, M.D. ............................. 191,330 31,265 156,326
Richard Silberstein, M.D. ....................... 232,219 33,662 167,512
Drew Sullivan, M.D. ............................. 191,330 31,265 156,326
Stephen Teng, M.D. .............................. 232,219 33,662 167,512
Eric Trefelner, M.D. ............................ 191,330 31,265 156,326
James Vaudagna, M.D. ............................ 232,219 33,662 167,512
William T. McLaughlin, M.D. ..................... 220,261 31,708 157,742
----------- ----------- -----------
Total.................................... $73,034,930 10,916,625 $54,572,714
=========== =========== ===========
</TABLE>
- ---------------
(1) Assets to Be Contributed reflects the historical book value of the assets of
each Founding Affiliated Practice, including their patient receivable
balance. The non-monetary assets are reflected at historical cost in
accordance with SAB No. 48. All monetary assets are recorded at fair value,
which is approximated by the historical costs recorded by the Founding
Affiliated Practices.
59
<PAGE> 61
The following chart depicts the Company's organizational structure
following this offering and the consummation of the Reorganizations.
Organization Structure following this offering and the consummation of the
Reorganizations
60
<PAGE> 62
COMPANY POLICY
It is anticipated that future transactions with affiliates of the Company
will be minimal, will be approved by a majority of the disinterested members of
the Board of Directors and will be made on terms no less favorable to the
Company than could be obtained from unaffiliated third parties. The Company does
not intend to make any loans to, or incur any indebtedness to, any of its
executive officers or directors.
61
<PAGE> 63
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to the beneficial
ownership of Common Stock as of August 15, 1997, and as adjusted, to give effect
to the Reorganizations, the conversion of the Convertible Notes and completion
of this offering, by (i) all persons known to the Company to be the beneficial
owner of 5% or more of the Common Stock, (ii) each director of the Company,
(iii) each Named Executive Officer, and (iv) all directors and executive
officers as a group. This table does not include shares of Common Stock that may
be purchased pursuant to options not exercisable within 60 days of the
consummation of this offering. All persons listed have sole voting and
investment power with respect to their shares unless otherwise indicated.
<TABLE>
<CAPTION>
PERCENTAGE OWNED(2)
------------------------
SHARES BENEFICIALLY BEFORE THE AFTER THE
NAME OWNED(1) OFFERING OFFERING
---- ------------------- ---------- ---------
<S> <C> <C> <C>
Gregory L. Solomon(3)(4)............................. 135,682 6.4% *%
Lawrence R. Muroff, M.D.(3)(5)....................... 124,545 5.9 *
Mark S. Martin(3)(6)................................. 94,000 4.5 *
Sami S. Abbasi(3)(7)................................. 93,830 4.5 *
Paul M. Jolas(3)(8).................................. 39,468 1.9 *
Derace L. Schaffer, M.D.(3)(9)....................... 1,122,694 50.7 6.1
John Pappajohn(3)(10)................................ 1,046,250 51.1 5.7
John W. Colloton(3).................................. 0 * *
Michael L. Sherman, M.D.(3)(11)...................... 83,718 1.0 *
Less T. Chafen(3)(12)................................ 31,994 * *
Edgewater Private Equity Fund, II, L.P.(13).......... 250,000 11.1 1.3
All directors and executive officers as a group (10
persons)(14)....................................... 2,767,018 100.0 14.5%
</TABLE>
- ---------------
* Less than one percent.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting or investment power
with respect to securities. Shares of Common Stock issuable upon the
exercise or conversion of stock options or other securities currently
exercisable or convertible, or exercisable or convertible within 60 days of
September 12, 1997 are deemed outstanding and to be beneficially owned by
the person holding such option or security for purposes of computing such
person's percentage ownership, but are not deemed outstanding for the
purpose of computing the percentage ownership of any other person. Except
for shares held jointly with a person's spouse or subject to applicable
community property laws, or as indicated in the footnotes to this table,
each stockholder identified in the table possesses sole voting and
investment power with respect to all shares of Common Stock shown as
beneficially owned by such stockholder.
(2) Applicable percentage of ownership is based on 2,000,000 shares of Common
Stock outstanding as of September 12, 1997 and 18,403,020 shares of Common
Stock outstanding upon consummation of this offering, the Reorganizations
and conversion of the Convertible Notes.
(3) The address of Messrs. Solomon, Martin, Abbasi, Jolas, Pappajohn and
Colloton and Drs. Muroff, Schaffer, Chafen and Sherman is c/o American
Physician Partners, Inc., 2301 NationsBank Plaza, 901 Main Street, Dallas,
Texas 75202.
(4) Includes 5,000 shares of Common Stock into which $40,000 in certain
Convertible Notes issued by the Company and held by Mr. Solomon are
convertible. See "Description of Capital Stock -- Convertible Notes." Also
includes 130,682 shares of Common Stock issuable upon exercise of options
exercisable within 60 days of September 12, 1997.
(5) Includes 5,000 shares of Common Stock into which $40,000 in certain
Convertible Notes issued by the Company and held by Dr. Muroff are
convertible. See "Description of Capital Stock -- Convertible Notes." Also
includes 104,545 shares of Common Stock issuable upon exercise of options
exercisable
62
<PAGE> 64
within 60 days of September 12, 1997; and exercisable options to purchase
15,000 shares of Common Stock in connection with service as a Director of
the Company.
(6) Includes 94,000 shares of Common Stock issuable upon exercise of options
exercisable within 60 days of September 12, 1997.
(7) Includes 93,830 shares of Common Stock issuable upon exercise of options
exercisable within 60 days of September 12, 1997.
(8) Includes 39,468 shares of Common Stock issuable upon exercise of options
exercisable within 60 days of September 12, 1997.
(9) Includes 13,438 shares of Common Stock into which $107,500 in certain
Convertible Notes issued by the Company and held by Dr. Schaffer are
convertible. Also includes exercisable option to purchase 14,167 shares of
Common Stock in connection with service as a Director of the Company
exercisable within 60 days of September 12, 1997. Also includes 94,256
shares received in connection with the reorganization of Ide as part of the
Reorganizations.
(10) Includes 31,250 shares of Common Stock into which $250,000 in certain
Convertible Notes issued by the Company and held by Mr. Pappajohn are
convertible. Also includes exercisable option to purchase 14,167 shares of
Common Stock in connection with service as a Director of the Company
exercisable within 60 days of September 12, 1997. Also includes 200,000
shares held by Halkis Ltd., a sole proprietorship owned by Mr. Pappajohn,
150,000 owned by Thebes Ltd., a sole proprietorship owned by Mr.
Pappajohn's spouse, Mary Pappajohn, and 150,000 shares owned directly by
Mary Pappajohn. Mr. Pappajohn disclaims beneficial ownership of the shares
owned by Thebes Ltd. and by Mary Pappajohn.
(11) Includes exercisable options to purchase 20,000 shares of Common Stock in
connection with service as a Consultant to the Company. Also includes
63,718 shares received in connection with the reorganization of Advanced as
part of the Reorganizations.
(12) Includes 31,994 shares of Common Stock received in connection with the
reorganization of Pacific as part of the Reorganizations.
(13) Includes 250,000 shares of Common Stock into which $2,000,000 in certain
Convertible Notes issued by the Company and held by Edgewater are
convertible.
(14) Includes 538,525 shares of Common Stock issuable upon exercise of options
exercisable within 60 days of September 12, 1997 and 54,688 shares of
Common Stock issuable upon conversion of Convertible Notes.
63
<PAGE> 65
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company's authorized capital stock consists of 50,000,000 shares of
Common Stock, par value $.0001 per share, and 10,000,000 shares of preferred
stock, par value $.0001 per share (the "Preferred Stock").
As of the date of this Prospectus and giving effect to the Reorganizations,
the conversion of the Convertible Notes, and the completion of this offering,
the Company will have outstanding 18,354,125 shares of Common Stock (assuming an
initial public offering price of $15.00 per share) and no shares of Preferred
Stock.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share on all
matters voted upon by stockholders, including the election of directors.
Subject to the rights of any then outstanding shares of Preferred Stock,
the holders of the Common Stock are entitled to such dividends as may be
declared in the discretion of the Board of Directors out of funds legally
available therefor. Holders of the Common Stock are entitled to share ratably in
the net assets of the Company upon liquidation after payment or provision for
all liabilities and any preferential liquidation rights of any Preferred Stock
then outstanding. The holders of Common Stock have no preemptive rights to
purchase shares of stock of the Company. Shares of Common Stock are not subject
to any redemption provisions and are not convertible into any other securities
of the Company. All outstanding shares of Common Stock are, and the shares of
Common Stock being offered hereby will be, upon payment of consideration
therefor, fully paid and nonassessable.
PREFERRED STOCK
Preferred Stock may be issued from time to time at the discretion of the
Board of Directors as shares of one or more series. Subject to the provisions of
the Company's Restated Certificate of Incorporation and limitations prescribed
by law, the Board of Directors is expressly authorized to adopt resolutions to
issue the shares, to fix the number of shares and to change the number of shares
constituting any series, and to provide for or change the voting powers,
designations, preferences and relative, participating, optional or other special
rights, qualifications, limitations or restrictions thereof, including dividend
rights (including whether dividends are cumulative), dividend rates, terms of
redemption (including sinking fund provisions), redemption prices, conversion
rights and liquidation preferences of the shares constituting any class or
series of Preferred Stock, in each case without any further action or vote by
the stockholders.
One of the effects of undesignated Preferred Stock may be to enable the
Board of Directors to render more difficult or to discourage an attempt to
obtain control of the Company by means of a tender offer, proxy contest, merger
or otherwise, and thereby to protect the continuity of the Company's management.
The issuance of shares of Preferred Stock pursuant to the Board of Directors'
authority described above may adversely affect the rights of the holders of
Common Stock. For example, Preferred Stock issued by the Company may rank prior
to the Common Stock as to dividend rights, liquidation preference or both, may
have full or limited voting rights and may be convertible into shares of Common
Stock. Accordingly, the issuance of shares of Preferred Stock may discourage
bids for the Common Stock at a premium to, or may otherwise adversely affect,
the market price of the Common Stock.
CONVERTIBLE NOTES
The following summaries of certain provisions of the Convertible Notes and
the Registration Rights Agreement do not purport to be complete and are subject
to, and are qualified in their entirety by reference to, all provisions of the
Convertible Notes and the Registration Rights Agreement.
64
<PAGE> 66
General
The Convertible Notes represent unsecured general obligations of the
Company and are convertible into Common Stock as described below. The
Convertible Notes bear interest at the annual rate of 6%, and all accrued but
unpaid interest shall be due and payable upon the closing of this offering. In
the event the Convertible Notes are not converted into Common Stock by January
31, 1998, all accrued interest is due and payable immediately and the interest
rate will increase to the prime rate as published in The Wall Street Journal
plus 2% per annum thereafter, payable quarterly. Interest will be computed on
the basis of a 360-day year comprised of 12 30-day months. As of the date of
this Prospectus, the outstanding principal amount of the Convertible Notes was
$3,500,000.
Optional Redemption
The Convertible Notes are redeemable at the option of the Company, in whole
or in part, at the time of or any time after this offering. The Convertible
Notes are redeemable in their principal amount on at least 15 days' written
notice at the option of the Company, in whole or in part, together with accrued
and unpaid interest. The Company intends to call the Convertible Notes for
redemption as soon as practicable following the date of this Prospectus.
Conversion Rights
Upon receipt of written notice of redemption by the Company, the holders
may convert the principal of such Convertible Notes into Common Stock upon
approval of at least 50% of the outstanding principal of the Convertible Notes.
Upon conversion, holders of the Convertible Notes will receive shares of Common
Stock at the rate of one share of Common Stock for each $8.00 of Convertible
Note principal (the "Conversion Price"). Proportional adjustments shall be made
to the conversion ratio for splits, dividends, recapitalizations, and other
distributions of the Common Stock. The Conversion Price shall be reduced,
subject to several exceptions, if the Company sells any of its Common Stock for
less than $8.00 per share, to a price determined by dividing (i) an amount equal
to the sum of (A) the number of shares of Common Stock outstanding immediately
prior to such sale (including as outstanding all shares of Common Stock issuable
upon conversion of Convertible Notes) multiplied by the then existing Conversion
Price, and (B) the consideration, if any, received by the Company upon such
sale, by (ii) the total number of shares of Common Stock outstanding immediately
after the sale, including those issuable upon conversion of the Convertible
Notes. No adjustment is made to the Conversion Price for options granted to
officers, employees, directors and consultants of the Company pursuant to any
stock option plan of the Company, including the Plan.
Each Convertible Note may be converted into shares of Common Stock at the
then effective Conversion Price (i) upon approval of the holders of at least 50%
of the outstanding principal amount of the Convertible Notes following the
closing of an initial public offering of the Common Stock pursuant to an
effective registration statement under the Securities Act in which the aggregate
gross proceeds received by the Company equals or exceeds $10,000,000 prior to
January 31, 1998, or (ii) upon approval of the holders of at least 50% of the
outstanding principal amount of the Convertible Notes on or after January 31,
1998.
If the Company sells shares of Common Stock for less than $14.00 per share
in this offering, the conversion rate shall be adjusted so that at the time of
conversion the aggregate market value of the Common Stock into which the
Convertible Notes are converted will equal the principal of the Convertible
Notes times 1.75.
Lock-up
Each of the holders of the Convertible Notes has entered into a lock-up
agreement with the Company, pursuant to which each such holder has agreed with
the Company not to sell the Convertible Notes or the shares of Common Stock
issued or issuable upon conversion thereof owned by them at the time for a
period of 24 months following issuance of such Convertible Notes (which Notes
were issued between September 30 and December 31, 1996). The Company has agreed
with the Underwriters not to waive this lock-up agreement for 180 days following
the date of this Prospectus.
65
<PAGE> 67
Registration Rights
The holders of the Convertible Notes have certain registration rights upon
conversion of the Convertible Notes into Common Stock. At any time from and
after 12 months following this offering, and not later than September 30, 2001,
holders owning 50% or more of the aggregate of the shares of Common Stock into
which any of the Convertible Notes have been or can be converted shall have the
right on one occasion to require the Company to prepare and file a registration
statement under the Securities Act covering such shares of Common Stock, and the
Company, at its expense, will use its best efforts to cause such registration
statement to become effective as soon as possible.
In addition, the holders of Convertible Notes shall be entitled, subject to
the approval of the underwriter, to two "piggyback" registrations at the
Company's expense, as part of a registration by the Company of its shares of
Common Stock at any time subsequent to 12 months after the date of this
offering, but prior to September 30, 2001. Holders of the Convertible Notes are
granted the right on up to two occasions at the Company's expense, and prior to
September 30, 2001, to have their shares registered on Form S-3, if such form is
available for use by the Company and such holder or holders. The registration
rights are subject to a number of terms and conditions, including but not
limited to, requirements as to minimum offering size and reaching satisfactory
underwriting terms.
STATUTORY BUSINESS COMBINATION PROVISION
The Company is subject to the provisions of Section 203 ("Section 203") of
the Delaware General Corporation Law (the "DGCL"). Section 203 provides, with
certain exceptions, that a Delaware corporation may not engage in any of a broad
range of business combinations with a person or an affiliate, or associate of
such person, who is an "interested stockholder" for a period of three years from
the date that such person became an interested stockholder unless: (i) the
transaction resulting in a person becoming an interested stockholder, or the
business combination, is approved by the Board of Directors of the corporation
before the person becomes an interested stockholder; (ii) the interested
stockholder acquired 85% or more of the outstanding voting stock of the
corporation in the same transaction that makes such person an interested
stockholder (excluding shares owned by the persons who are both officers and
directors of the corporation, and shares held by certain employee stock
ownership plans); or (iii) on or after the date the person becomes an interested
stockholder, the business combination is approved by the corporation's board of
directors and by the holders of at least 66% of the corporation's outstanding
voting stock at an annual or special meeting, excluding the shares owned by the
interested stockholder. Under Section 203, an "interested stockholder" is
defined as any person who is (i) the owner of 15% or more of the outstanding
voting stock of the corporation or (ii) an affiliate or associate of the
corporation and who was the owner of 15% or more of the outstanding voting stock
of the corporation at any time within the three-year period immediately prior to
the date on which it is sought to be determined whether such person is an
interested stockholder.
A corporation may, at its option, exclude itself from the coverage of
Section 203 by amending its certificate of incorporation or bylaws by action of
its stockholders to exempt itself from coverage. The Company has not adopted
such an amendment to the Company's Restated Certificate of Incorporation or
Amended and Restated Bylaws. The applicability of Section 203 to the Company
could delay or prevent a change in control of the Company and, consequently,
could adversely affect the market price for the Common Stock.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Section 145 of the Delaware General Corporation Law, the Company can
indemnify its directors and officers against liabilities they may incur in such
capacities, including liabilities under the Securities Act. The Company's
Amended and Restated Bylaws provide that the Company will indemnify its
directors and officers to the fullest extent permitted by law and require the
Company to advance litigation expenses upon receipt by the Company of an
undertaking by the director or officer to repay such advances if it is
ultimately determined that the director or officer is not entitled to
indemnification. The Amended and Restated Bylaws
66
<PAGE> 68
further provide that rights conferred under such Bylaws do not exclude any other
right such persons may have or acquire under any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise.
The Company's Restated Certificate of Incorporation provides that, pursuant
to Delaware law, its directors shall not be liable for monetary damages for
breach of the directors' fiduciary duty of care to the Company and its
stockholders. This provision in the Restated Certificate of Incorporation does
not eliminate the duty of care, and in appropriate circumstances equitable
remedies such as injunctive or other forms of nonmonetary relief will remain
available under Delaware law. In addition, each director will continue to be
subject to liability for breach of the director's duty of loyalty to the Company
or its stockholders, for acts or omissions not in good faith or involving
intentional misconduct or knowing violations of law, for actions leading to
improper personal benefit to the director, and for payment of dividends or
approval of stock repurchases or redemptions that are unlawful under Delaware
law. The provision also does not affect a director's responsibilities under any
other law, such as the federal securities laws or state or federal environmental
laws.
The Company intends to enter into agreements to indemnify its directors and
certain of its officers in addition to the indemnification provided for in the
Restated Certificate of Incorporation and Amended and Restated Bylaws. These
agreements, among other things, will indemnify the Company's directors and
certain of its officers for certain expenses (including attorneys' fees),
judgments, fines and settlement amounts incurred by such person in any action or
proceeding, including any action by or in the right of the Company, on account
of services as a director or officer of the Company, or as a director or officer
of any other company or enterprise to which the person provides services at the
request of the Company.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is Chase Mellon
Shareholder Services, LLC.
SHARES ELIGIBLE FOR FUTURE SALE
The market price of the Common Stock could be adversely affected by the
sale of substantial amounts of Common Stock in the public market following this
offering. Upon the completion of this offering, the Company will have
outstanding 18,354,125 shares of Common Stock. The 5,000,000 shares of Common
Stock to be sold in this offering will be freely tradable without restriction
under the Securities Act unless acquired by "affiliates" of the Company, as that
term is defined under the Securities Act or contractually restricted.
Simultaneously with the closing of this offering, securityholders of the
Founding Affiliated Practices will receive, in the aggregate, 10,916,625 shares
of Common Stock as a portion of the consideration for their practices, which
shares will have been registered under the Securities Act. Certain other
stockholders of the Company will hold, in the aggregate, an additional 2,000,000
shares of Common Stock, none of which are being offered by this Prospectus and
none of which were acquired in transactions registered under the Securities Act.
Such unregistered shares may not be sold except in transactions registered under
the Securities Act or pursuant to an exemption from registration. The holders of
these 12,916,625 shares of Common Stock have entered into agreements with the
Company pursuant to which such holders have agreed not to sell any shares of
Common Stock owned by them at the time of consummation of the Reorganization for
a period of 12 months following this offering, and to thereafter limit the sale
of such Common Stock to 25% of such shares upon expiration of such 12-month
period following this offering; up to an additional 25% of such shares upon
expiration of an 18-month period following this offering, and the remaining 50%
of such shares upon expiration of a 24-month period following this offering.
Further, each of the holders of the Convertible Notes have also entered into
agreements with the Company pursuant to which each holder has agreed not to sell
any portion of the Convertible Notes or any shares of the Common Stock issued or
issuable upon conversion thereof for a period of 24 months following the date
the Convertible Notes were issued to such holder (which Convertible Notes were
issued between September 30, 1996 and December 31, 1996). The Company has agreed
with the Underwriters not to waive the restrictive provisions of these
agreements for 180 days after the date of this Prospectus without the prior
written consent of Smith Barney Inc. Upon expiration of these agreements, the
registered shares of Common Stock will be eligible for resale in the public
market and the
67
<PAGE> 69
unregistered shares of Common Stock, the Convertible Notes and the shares of
Common Stock issued or issuable upon conversion of the Convertible Notes will
become eligible for sale in the public market, subject to the provisions of Rule
144 of the Securities Act.
In addition, the Company, its officers and directors and all other holders
of Common Stock and securities convertible into or exercisable or exchangeable
for Common Stock have agreed that for a period of 180 days after the date of
this Prospectus they will not, without the prior written consent of Smith Barney
Inc., offer, sell, contract to sell or otherwise dispose of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock
except, in the case of the Company, in certain limited circumstances.
The Company anticipates that prior to the consummation of this offering,
the Company will have outstanding under its Plan options to purchase
approximately 1,681,000 shares of Common Stock, and at or shortly following
consummation of this offering the Company anticipates that it will issue options
to purchase up to 275,000 shares of Common Stock under its 1996 Stock Option
Plan. The Company intends to register the shares of Common Stock issuable upon
exercise of the options granted under its 1996 Stock Option Plan so that such
shares will be eligible for resale in the public market. The sale of the shares
will be subject to the lock-up provisions described above.
In general, under Rule 144 as currently in effect, if one year has elapsed
since the later of the date of the acquisition of restricted shares of Common
Stock from the Company or any affiliate of the Company, the acquiror or
subsequent holder thereof may sell, within any three-month period, a number of
shares that does not exceed the greater of 1% of the then-outstanding shares of
Common Stock or the average weekly trading volume of the Common Stock on all
exchanges and/or reported through the automated quotation system of a registered
securities association during the four calendar weeks preceding the date on
which notice of the sale is filed with the Securities and Exchange Commission.
Sales under Rule 144 are also subject to certain manner of sale provisions,
notice requirements and the availability of current public information about the
Company. If two years have elapsed since the later of the date of acquisition of
restricted shares of Common Stock from the Company or any affiliate of the
Company and the acquiror or subsequent holder thereof is deemed not to have been
an affiliate of the Company at any time during the 90 days preceding a sale,
such person will be entitled to sell such shares under Rule 144(k) without
regard to the limitations described above.
Prior to this offering there has been no market for the Common Stock, and
no prediction can be made as to the effect, if any, that the sale of shares or
the availability of shares for sale will have on the market price prevailing
from time to time. Nevertheless, sales of substantial amounts of the Common
Stock in the public market could adversely affect prevailing market prices and
the ability of the Company to raise equity capital in the future.
68
<PAGE> 70
UNDERWRITING
Under the terms and subject to the conditions contained in the Underwriting
Agreement dated the date hereof, each Underwriter named below has severally
agreed to purchase, and the Company has agreed to sell to such Underwriter,
shares of Common Stock which equal the number of shares set forth opposite the
name of such Underwriter below.
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
----------- ----------------
<S> <C>
Smith Barney Inc. ..........................................
Cowen & Company.............................................
Piper Jaffray Inc. .........................................
Robertson, Stephens & Company LLC...........................
---------
Total............................................. 5,000,000
=========
</TABLE>
The Underwriters are obligated to take and pay for all shares of Common
Stock offered hereby (other than those covered by the over-allotment option
described below) if any such shares are taken.
The Underwriters, for whom Smith Barney Inc., Cowen & Company, Piper
Jaffray Inc. and Robertson, Stephens & Company LLC are acting as representatives
(the "Representatives"), propose initially to offer part of the shares of Common
Stock directly to the public at the public offering price set forth on the cover
page hereof and part to certain dealers at a price that represents a concession
not in excess of $ per share under the public offering price. The
Underwriters may allow, and such dealers may reallow, a concession not in excess
of $ per share to other Underwriters or to certain other dealers. After
the initial public offering, the public offering price and such concessions may
be changed by the Underwriters. The Representatives have informed the Company
that the Underwriters do not intend to confirm sales to accounts over which they
exercise discretionary authority.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to an aggregate of 750,000
additional shares of Common Stock at the public offering price set forth on the
cover page hereof less underwriting discounts and commissions. The Underwriters
may exercise such option to purchase additional shares solely for the purpose of
covering over-allotments, if any, incurred in connection with the sale of the
shares offered hereby. To the extent such option is exercised, each Underwriter
will become obligated, subject to certain conditions, to purchase approximately
the same percentage of such additional shares as the number set forth next to
such Underwriter's name in the preceding table bears to the total number of
shares in such table.
The Company and the Underwriters have agreed to indemnify each other
against certain liabilities, including liabilities under the Securities Act.
Each holder of Convertible Notes and each holder of shares of Common Stock
to be issued in the Reorganizations has agreed with the Company to certain
contractual restrictions on resales of such securities and, in the case of the
Convertible Notes, the underlying Common Stock. The Company has agreed with the
Underwriters not to waive the restrictive provisions of these agreements for 180
days after the date of this Prospectus without the prior written consent of
Smith Barney Inc. In addition, the Company, its officers and directors and all
other holders of Common Stock and securities convertible into or exercisable or
exchangeable for Common Stock have agreed that for a period of 180 days after
the date of this Prospectus they will not,
69
<PAGE> 71
without the prior written consent of Smith Barney Inc., offer, sell, contract to
sell or otherwise dispose of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock except, in the case of the Company,
in certain limited circumstances. See "Shares Eligible for Future Sale."
In connection with this offering and in accordance with applicable law and
industry practice, the Underwriters may over-allot or effect transactions which
stabilize, maintain or otherwise affect the market price of the Common Stock at
levels above those which might otherwise prevail in the open market, including
by entering stabilizing bids, effecting syndicate covering transactions or
imposing penalty bids. A stabilizing bid means the placing of any bid, or the
effecting of any purchase, for the purpose of pegging, fixing or maintaining the
price of a security. A syndicate covering transaction means the placing of any
bid on behalf of the underwriting syndicate or the effecting of any purchase to
reduce a short position created in connection with the offering. A penalty bid
means an arrangement that permits Smith Barney Inc., as managing underwriter, to
reclaim a selling concession from a syndicate member in connection with the
offering when shares of Common Stock originally sold by the syndicate member are
purchased in syndicate covering transactions. Such transactions may be effected
on the Nasdaq National Market, in the over-the-counter market, or otherwise. The
Underwriters are not required to engage in any of these activities. Any such
activities, if commenced, may be discontinued at any time.
Cowen & Company, one of the Representatives, purchased $200,000 principal
amount of the Convertible Notes in December 1996 at a purchase price equal to
100% of the principal amount thereof. The Convertible Notes held by Cowen &
Company were purchased on the same terms as, are pari passu with, and provide
the same privileges as, all of the Convertible Notes sold by the Company.
Prior to this offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price for the Common Stock has
been determined by negotiations between the Company and the Representatives.
Among the factors considered in determining the initial public offering price
were the history of, and the prospects for, the Company's business and the
industry in which it competes, an assessment of the Company's management, its
past and present operations, the past and present earnings of the Company and
the trend of such earnings, the prospects for earning of the Company, the
present state of the Company's development, the general condition of the
securities market at the time of this offering and the market prices and
earnings of similar securities of comparable companies at the time of this
offering.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Brobeck, Phleger & Harrison LLP, Newport Beach, California and for
the Underwriters by Dewey Ballantine, New York, New York. As of the date of this
Prospectus, certain members and investment partnerships of Brobeck, Phleger &
Harrison LLP beneficially own $67,500 in principal amount of the Convertible
Notes.
EXPERTS
The financial statements of American Physician Partners, Inc. as of
December 31, 1996 and for the period from inception (April 30, 1996) to December
31, 1996, included in this Registration Statement have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their report with
respect thereto, and are included herein in reliance upon the authority of said
firm as experts in giving said report.
The consolidated financial statements of Advanced Radiology, LLC, the
combined financial statements of M&S X-Ray Practices, the combined financial
statements of Pacific Imaging Consultants, the financial statements of Radiology
and Nuclear Medicine, P.A., the combined financial statements of Rockland
Radiological Group, and the combined financial statements of Valley Radiology
Group included in this Registration Statement, have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their reports with
respect thereto, and are included herein in reliance upon the authority of said
firm as experts in giving said reports.
70
<PAGE> 72
The combined financial statements of The Ide Group, P.C. and Ide Diagnostic
Imaging Associates included in this Registration Statement have been audited by
DeJoy, Knauf & Blood LLP, independent public accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
ADDITIONAL INFORMATION
A Registration Statement on Form S-1 including amendments thereto relating
to the Common Stock offered hereby has been filed by the Company with the
Securities and Exchange Commission, Washington, D.C. This Prospectus does not
contain all of the information set forth in the Registration Statement and the
exhibits and schedules thereto. Statements contained in this Prospectus as to
the contents of any contract or other document referred to are not necessarily
complete and in each instance reference is made to the copy of such contract or
other document filed as an exhibit to the Registration Statement, and each such
statement is qualified by such reference. For further information with respect
to the Company and the Common Stock offered hereby, reference is made to the
Registration Statement, including the exhibits and schedules and the Company's
Registration Statement on Form S-4 (No. 333-31611) relating to the
Reorganizations, including exhibits and schedules. A copy of the Registration
Statement may be inspected without charge at the Securities and Exchange
Commission's principal office located at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, the New York Regional Office located at 7 World Trade
Center, Suite 1300, New York, New York 10048, and the Chicago Regional Office
located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511 and copies of all or any part thereof may be obtained from
the Public Reference Section of the Securities and Exchange Commission. The
Registration Statement may also be obtained from the website that the Securities
and Exchange Commission maintains at http://www.sec.gov.
71
<PAGE> 73
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
AMERICAN PHYSICIAN PARTNERS, INC.
Report of Independent Public Accountants.................. F-3
Balance Sheets as of December 31, 1996, and June 30, 1997
(unaudited)............................................ F-4
Statements of Income for the period from inception (April
30, 1996) to December 31, 1996, and the six months
ended June 30, 1997 (unaudited)........................ F-5
Statements of Stockholders' Deficit for the period from
inception (April 30, 1996) to December 31, 1996, and
the six months ended June 30, 1997 (unaudited)......... F-6
Statements of Cash Flows for the period from inception
(April 30, 1996) to December 31, 1996, and the six
months ended June 30, 1997 (unaudited)................. F-7
Notes to Financial Statements............................. F-8
ADVANCED RADIOLOGY, LLC AND SUBSIDIARY
Report of Independent Public Accountants.................. F-12
Consolidated Balance Sheets as of December 31, 1995 and
1996, and June 30, 1997 (unaudited).................... F-13
Consolidated Statements of Income for the years ended
December 31, 1995 and 1996, and the six months ended
June 30, 1996 and 1997 (unaudited)..................... F-14
Consolidated Statements of Owners' Equity for the years
ended December 31, 1995 and 1996, and the six months
ended June 30, 1997 (unaudited)........................ F-15
Consolidated Statements of Cash Flows for the years ended
December 31, 1995 and 1996, and the six months ended
June 30, 1996 and 1997 (unaudited)..................... F-16
Notes to Consolidated Financial Statements................ F-17
THE IDE GROUP, P.C. AND IDE DIAGNOSTIC IMAGING ASSOCIATES
Independent Auditors' Report.............................. F-25
Combined Balance Sheets as of June 30, 1994, 1995, and
1996 and June 30, 1997 (unaudited)..................... F-26
Combined Statements of Income for the years ended June 30,
1994, 1995, and 1996 and June 30, 1997 (unaudited)..... F-27
Combined Statements of Changes in Stockholders' Equity and
Partners' Capital for the years ended June 30, 1994,
1995, and 1996, and June 30, 1997
(unaudited)............................................ F-28
Combined Statements of Cash Flows for the years ended June
30, 1994, 1995, and 1996, and June 30, 1997
(unaudited)............................................ F-29
Notes to Combined Financial Statements.................... F-30
M & S X-RAY PRACTICES
Report of Independent Public Accountants.................. F-36
</TABLE>
Combined Balance Sheets as of December 31, 1995 and 1996,
and June 30, 1997
(unaudited)............................................ F-37
Combined Statements of Income for the years ended December
31, 1995 and 1996, and the six months ended June 30,
1996 and 1997 (unaudited).............................. F-38
Combined Statements of Owners' Equity for the years ended
December 31, 1995 and 1996, and the six months ended
June 30, 1997 (unaudited).............................. F-39
Combined Statements of Cash Flows for the years ended
December 31, 1995 and 1996, and the six months ended
June 30, 1996 and 1997 (unaudited)..................... F-40
Notes to Combined Financial Statements.................... F-41
F-1
<PAGE> 74
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
PACIFIC IMAGING CONSULTANTS
Report of Independent Public Accountants.................. F-47
Combined Balance Sheets as of December 31, 1995 and 1996,
and June 30, 1997
(unaudited)............................................ F-48
Combined Statements of Income for the years ended December
31, 1995 and 1996, and the six months ended June 30,
1996 and 1997 (unaudited).............................. F-49
Combined Statements of Owners' Equity (Deficit) for the
years ended December 31, 1995 and 1996, and the six
months ended June 30, 1997 (unaudited)................. F-50
Combined Statements of Cash Flows for the years ended
December 31, 1995 and 1996, and the six months ended
June 30, 1996 and 1997 (unaudited)..................... F-51
Notes to Combined Financial Statements.................... F-52
RADIOLOGY AND NUCLEAR MEDICINE, P.A.
Report of Independent Public Accountants.................. F-58
Balance Sheets as of December 31, 1995 and 1996, and June
30, 1997 (unaudited)................................... F-59
Statements of Income for the years ended December 31, 1995
and 1996, and the six months ended June 30, 1996 and
1997 (unaudited)....................................... F-60
Statements of Owners' Equity for the years ended December
31, 1995 and 1996, and the six months ended June 30,
1997 (unaudited)....................................... F-61
Statements of Cash Flows for the years ended December 31,
1995 and 1996, and the six months ended June 30, 1996
and 1997 (unaudited)................................... F-62
Notes to Financial Statements............................. F-63
ROCKLAND RADIOLOGICAL GROUP
Report of Independent Public Accountants.................. F-68
Combined Balance Sheets as of September 30, 1995 and 1996,
and June 30, 1997
(unaudited)............................................ F-69
Combined Statements of Income for the years ended
September 30, 1994, 1995 and 1996, and the nine months
ended June 30, 1996 and 1997 (unaudited)............... F-70
Combined Statements of Owners' Equity (Deficit) for the
years ended September 30, 1994, 1995 and 1996, and the
nine months ended June 30, 1997 (unaudited)............ F-71
Combined Statements of Cash Flows for the years ended
September 30, 1994, 1995 and 1996, and the nine months
ended June 30, 1996 and 1997 (unaudited)............... F-72
Notes to Combined Financial Statements.................... F-73
VALLEY RADIOLOGY GROUP
Report of Independent Public Accountants.................. F-78
Combined Balance Sheets as of December 31, 1995 and 1996,
and June 30, 1997
(unaudited)............................................ F-79
Combined Statements of Income for the years ended December
31, 1995 and 1996, and the six months ended June 30,
1996 and 1997 (unaudited).............................. F-80
Combined Statements of Owners' Equity for the years ended
December 31, 1995 and 1996, and the six months ended
June 30, 1997 (unaudited).............................. F-81
Combined Statements of Cash Flows for the years ended
December 31, 1995 and 1996, and the six months ended
June 30, 1996 and 1997 (unaudited)..................... F-82
Notes to Combined Financial Statements.................... F-83
</TABLE>
F-2
<PAGE> 75
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
American Physician Partners, Inc.:
We have audited the accompanying balance sheet of American Physician
Partners, Inc. -- A Development Stage Company (a Delaware corporation) as of
December 31, 1996, and the related statements of income, stockholders' deficit,
and cash flows for the period from inception (April 30, 1996) to December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of American Physician Partners,
Inc. -- A Development Stage Company as of December 31, 1996, and the results of
its operations and its cash flows for the period from inception (April 30, 1996)
to December 31, 1996, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
April 10, 1997
F-3
<PAGE> 76
AMERICAN PHYSICIAN PARTNERS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 2,490,679 $ 110,237
Prepaid expenses.......................................... 15,002 137,859
----------- -----------
Total current assets.............................. 2,505,681 248,096
PROPERTY AND EQUIPMENT, net of accumulated depreciation
of $2,612 and $15,303 at December 31, 1996 and June 30,
1997, respectively........................................ 57,405 166,654
DEFERRED IPO COSTS.......................................... -- 2,055,766
OTHER ASSETS................................................ 14,480 15,711
----------- -----------
Total assets...................................... $ 2,577,566 $ 2,486,227
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accrued expenses.......................................... $ 477,109 $ 2,085,169
CONVERTIBLE NOTES PAYABLE................................... 3,500,000 3,500,000
----------- -----------
Total liabilities................................. 3,977,109 5,585,169
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Preferred stock, $.0001 par value; 10,000,000 shares
authorized; no shares outstanding...................... -- --
Common stock, $.0001 par value; 20,000,000 shares
authorized; 2,000,000 shares issued and outstanding.... 200 200
Additional paid-in capital................................ 249,800 249,800
Accumulated deficit....................................... (1,649,543) (3,348,942)
----------- -----------
Total stockholders' deficit....................... (1,399,543) (3,098,942)
----------- -----------
Total liabilities and stockholders' deficit....... $ 2,577,566 $ 2,486,227
=========== ===========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-4
<PAGE> 77
AMERICAN PHYSICIAN PARTNERS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION PERIOD FROM
(APRIL 30, 1996) JANUARY 1, 1997,
TO TO
DECEMBER 31, JUNE 30,
1996 1997
---------------- ----------------
(UNAUDITED)
<S> <C> <C>
REVENUES.................................................... $ -- $ --
COSTS AND EXPENSES:
Salaries and benefits..................................... 545,949 901,065
Rent and lease expense.................................... 57,015 114,134
General and administrative................................ 299,585 412,494
Depreciation.............................................. 2,612 12,691
Interest expense.......................................... 36,031 104,792
Professional services..................................... 607,482 143,859
Marketing expense......................................... 114,067 43,499
----------- -----------
Total costs and expenses.......................... 1,662,741 1,732,534
----------- -----------
INTEREST INCOME............................................. 13,198 33,135
----------- -----------
NET LOSS.................................................... $(1,649,543) $(1,699,399)
=========== ===========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-5
<PAGE> 78
AMERICAN PHYSICIAN PARTNERS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------ PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- ------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, April 30, 1996 (inception)..... -- $ -- $ -- $ -- $ --
Issuance of common stock.............. 2,000,000 200 249,800 -- 250,000
Net loss.............................. -- -- -- (1,649,543) (1,649,543)
--------- ---- -------- ----------- -----------
BALANCE, December 31, 1996.............. 2,000,000 200 249,800 (1,649,543) (1,399,543)
Net loss (unaudited).................. -- -- -- (1,699,399) (1,699,399)
--------- ---- -------- ----------- -----------
BALANCE, June 30, 1997 (unaudited)...... 2,000,000 $200 $249,800 $(3,348,942) $(3,098,942)
========= ==== ======== =========== ===========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-6
<PAGE> 79
AMERICAN PHYSICIAN PARTNERS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION
(APRIL 30,
1996) TO SIX MONTHS
DECEMBER 31, ENDED
1996 JUNE 30, 1997
--------------- -------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(1,649,543) $(1,699,399)
Adjustments to reconcile net loss to net cash used in
operating activities --
Depreciation........................................... 2,612 12,691
Changes in assets and liabilities --
Prepaid expenses..................................... (15,002) (122,857)
Intangible asset..................................... -- (2,055,766)
Other assets......................................... (14,480) (1,231)
Accrued expenses..................................... 477,109 1,608,060
----------- -----------
Net cash used in operating activities............. (1,199,304) (2,258,502)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (60,017) (121,940)
----------- -----------
Net cash used in investing activities............. (60,017) (121,940)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable................... 400,000 --
Payments on notes payable................................. (400,000) --
Proceeds from issuance of convertible notes payable....... 3,500,000 --
Issuance of common stock.................................. 250,000 --
----------- -----------
Net cash provided by financing activities......... 3,750,000 --
----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS....................... 2,490,679 (2,380,442)
CASH AND CASH EQUIVALENTS, at inception..................... -- 2,490,679
----------- -----------
CASH AND CASH EQUIVALENTS, end of year...................... $ 2,490,679 $ 110,237
=========== ===========
SUPPLEMENTAL DISCLOSURE:
Cash paid during the period
Interest............................................... $ 7,104 $ --
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-7
<PAGE> 80
AMERICAN PHYSICIAN PARTNERS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. DESCRIPTION OF BUSINESS:
American Physician Partners, Inc. -- A Development Stage Company (the
"Company"), a Delaware corporation, is a radiology practice management entity.
The Company is a development stage company which through December 31, 1996, had
no revenue or significant operations. During the period from inception (April
30, 1996) to December 31, 1996, the Company reported a net loss of approximately
$1.6 million primarily as a result of general and administrative expenses
incurred during its startup and organizational stage. The Company's operating
prospects are dependent upon a number of factors including the ability to
attract physicians to its business concept and integrate their operations,
competition from similar entities as the Company and overall trends in the
healthcare industry (including the effects of government regulation and
reimbursement trends).
2. SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The financial statements have been prepared on the accrual basis of
accounting and include the accounts of the Company.
The Company's financial statements have been prepared in anticipation of an
initial public offering of the Company's common stock (the "offering").
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less when purchased to be cash equivalents.
Property and Equipment
Property and equipment, consisting of furniture, fixtures, and equipment,
are stated at cost. Depreciation is calculated using the straight-line method
over the estimated useful lives of the assets (five years).
Net Loss Per Share
Net loss per share data has not been presented as historical information
does not reflect the distribution to the promoters (see Note 8) which will occur
in conjunction with the offering and will be paid with the proceeds thereof.
In February 1997, the Financial Accounting Standards Board issued Statement
128, "Earnings Per Share" (FASB No. 128.) This Statement simplifies the
standards for computing earnings per share previously found in APB No. 15,
"Earnings Per Share," and applies to entities with publicly held common stock or
potential publicly held common stock. FASB No. 128 is effective for financial
statements for both interim and annual periods ending after December 31, 1997,
early application is not permitted.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
F-8
<PAGE> 81
AMERICAN PHYSICIAN PARTNERS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Basis of Presentation -- Interim Financial Statements
The interim financial statements have been prepared by the Company without
audit, pursuant to the rules and regulations of Accounting Principles Board
("APB") Opinion No. 28, "Interim Financial Reporting." Certain information and
footnote disclosures normally included in the financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to APB Opinion No. 28; nevertheless, management of the Company
believes that the disclosures herein are adequate to prevent the information
presented from being misleading. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly the
financial position of the Company with respect to the results of its operations
for the interim period from January 1, 1997, to June 30, 1997, has been included
herein. The results of operations for the interim period is not necessarily
indicative of the results for the full year.
3. CONVERTIBLE NOTES PAYABLE:
During 1996, the Company issued $3,500,000 in convertible notes (the
"Notes"). As of December 31, 1996, $40,000 and $357,000 of the Notes are held by
employees and shareholders, respectively. The interest rate on the Notes is 6%
and they mature on January 31, 1998. The Notes may, at the election of the
noteholders of at least 50% of the outstanding principal amount, be converted
into shares of common stock at a conversion price of $8 per share, subject to
certain limitations, as defined in the Note agreement. In addition, upon or
after the effective date of the offering, the Company may redeem the Notes at
par in whole or in part. The Company expects that the note holders will elect
conversion upon the Company's request for redemption.
If the Notes remain outstanding at January 31, 1998, the interest rate
increases to the prime rate plus 2% per annum.
The Company issued $400,000 in notes to stockholders during 1996. The
interest rate on these notes was the bank base lending rate. These notes were
paid in full prior to December 31, 1996.
4. COMMON STOCK AND STOCK OPTION PLAN:
Common Stock
During 1996, the Company's Board of Directors issued 2,000,000 shares of
common stock. No shares of stock were held by employees at December 31, 1996.
Stock Option Plan
During 1996, the Company's Board of Directors approved a Stock Option Plan
(the "Plan") under which 3,000,000 options to purchase shares of the Company's
common stock may be granted to key directors, employees and other health care
professionals associated with the Company, as defined by the Plan. Options
granted under the Plan may be either incentive stock options (ISO) or
nonqualified stock options (NQSO). The option price per share under the Plan may
not be less than 100% of the fair market value at the grant date for ISO and may
not be less than 85% of the fair market value at the grant date for NQSO.
Generally, options vest over a 5-year period.
The Company accounts for its stock-based compensation arrangements under
the provisions of Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB No. 25). In 1995, Financial Accounting Standards
Board Statement No. 123, "Accounting for Stock-Based Compensation" (FASB No.
123), was issued, whereby companies may elect to account for stock-based
compensation using a fair value based method or continue measuring compensation
expense using the intrinsic value method prescribed in APB No. 25. FASB No. 123
requires that companies electing to continue to use the intrinsic
F-9
<PAGE> 82
AMERICAN PHYSICIAN PARTNERS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
value method make pro forma disclosure of net income and net income per share as
if the fair value based method of accounting had been applied.
The Company used the minimum value method to estimate the fair value of
options. For purposes of the minimum value method, the Company used U.S.
Treasury strip rates for its risk-free interest rates, assumed no volatility or
future dividends, and assumed the expected life of the options through the
applicable expiration dates. The pro forma effects of adopting FASB No. 123's
fair value based method for the period ended December 31, 1996 were not
materially different from the corresponding APB No. 25 intrinsic value
methodology because the weighted average grant-date fair value of options
granted during the period was negligible. However, the effects of applying FASB
No. 123 during 1996 are not likely to be representative of the effects on pro
forma net income for future years because the vesting of options will cause
additional incremental expense to be recognized in future periods.
As of December 31, 1996, 1,210,000 options were granted and 1,790,000
options were available to be granted under the Plan. The weighted average
exercise prices for total granted options and total exercisable options were
$.74 and $.20, respectively, at December 31, 1996. The following table
summarizes information for the significant option groups outstanding at December
31, 1996:
<TABLE>
<CAPTION>
EXERCISE OPTIONS REMAINING EXERCISABLE
PRICE OUTSTANDING LIFE OPTIONS
- -------- ----------- ----------- -----------
(YEARS)
<C> <C> <C> <C>
$ .125 1,115,000 10 99,083
8.00 95,000 10 917
</TABLE>
Upon the effective date of the offering, the vesting period of 480,000
options will accelerate. Acceleration of the vesting period does not change the
measurement date pursuant to the provisions of APB 25 and accordingly no
compensation expense will be recognized.
5. INCOME TAXES:
The Company has incurred losses since inception. At December 31, 1996, the
Company has a net operating loss carryforward for income tax purposes of
approximately $1,647,000 available to reduce future amounts of taxable income.
If not utilized to offset future taxable income, the net operating loss
carryforward will expire in 2011.
The deferred tax benefit of approximately $600,000 generated during 1996
has been fully offset by a valuation allowance. The Company has recorded a full
valuation allowance against its deferred tax asset because of the Company's
current financial condition, its limited operating history, and its operating
losses recorded to date. If the Company does achieve profitability in the
future, the valuation allowance will be reduced by a credit to income.
6. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Instruments," requires disclosure about the fair value of
financial instruments. The carrying amounts and the estimated fair values for
these financial instruments as of December 31, 1996, were as follows:
<TABLE>
<CAPTION>
CARRYING ESTIMATED
AMOUNT FAIR VALUE
---------- ----------
<S> <C> <C>
Cash and cash equivalents................................... $2,490,679 $2,490,679
Convertible notes payable................................... 3,500,000 3,421,687
</TABLE>
F-10
<PAGE> 83
AMERICAN PHYSICIAN PARTNERS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES:
Leases
Lease expense of $57,015 for the period ended December 31, 1996, consists
of corporate office space and corporate equipment.
The following is a schedule of future minimum lease payments under
noncancelable operating leases as of December 31, 1996:
<TABLE>
<S> <C>
1997........................................................ $164,865
1998........................................................ 164,865
1999........................................................ 164,220
2000........................................................ 157,125
2001........................................................ 130,940
</TABLE>
8. SUBSEQUENT EVENTS:
The Company plans to reorganize and complete an initial public offering. As
part of this transaction, all nonmonetary assets and certain monetary assets
(primarily accounts receivable, cash, and other monetary assets such as
inventory, deposits, prepaids and miscellaneous other receivables, but excluding
notes receivable from physicians) and liabilities, excluding those liabilities
payable to physicians such as accrued or defined physician compensation, and
certain other liabilities payable to physicians related to other benefit plans
of seven radiology practices (the "Founding Affiliated Practices") will be
exchanged for the Company's common stock and cash. Each of the stockholders of
the Founding Affiliated Practices is deemed to be a promoter of the offering.
The exchange will be accounted for at the historical cost basis with the stock
being valued at the historical cost of the net assets exchanged. The cash
payments to the owners of the Founding Affiliated Practices will be reflected as
dividends paid by the Company. Concurrent with these exchanges, the physicians
will create new medical professional corporations (PC's) which will enter into
40-year service agreements with the Company. Additionally, all physicians will
enter into employment and noncompete agreements with the new PC's.
As of the closing date, the Company will agree to pay the owners of the
Founding Affiliated Practices amounts equal to their existing cash and net
accounts receivable, less certain accounts payable and accrued liabilities of
the Founding Affiliated Practices.
The following summarized unaudited pro forma information assumes the
exchange between the Company and the Founding Affiliated Practices, but does not
give effect to the offering or the distribution to promoters. This pro forma
information assumes the exchanges occurred on June 30, 1997 (in thousands):
<TABLE>
<S> <C>
Balance sheet --
Working capital........................................... $ 3,895
Total assets.............................................. 75,524
Long-term debt and capital leases, net of current
maturities............................................. 19,754
Stockholders' equity...................................... 19,264
</TABLE>
This pro forma information may not be indicative of actual results if the
transactions had occurred on the dates indicated or which may be realized in the
future.
F-11
<PAGE> 84
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Advanced Radiology, LLC:
We have audited the accompanying consolidated balance sheets of Advanced
Radiology, LLC (a Maryland limited liability company) and subsidiary as of
December 31, 1996 and 1995, and the related consolidated statements of income,
owners' equity, and cash flows for each of the years then ended December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Advanced Radiology, LLC and
subsidiary as of December 31, 1996 and 1995, and the results of their operations
and their cash flows for each of the years then ended December 31, 1996, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
February 21, 1997
F-12
<PAGE> 85
ADVANCED RADIOLOGY, LLC AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- JUNE 30,
1995 1996 1997
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents......................... $ 1,822,724 $ 3,048,169 $ 184,677
Accounts receivable, net of allowances of
$11,656,529, $13,591,727, and $14,922,987 at
December 31, 1995 and 1996 and June 30, 1997 ,
respectively................................... 9,957,828 12,041,297 15,042,029
Other receivables................................. -- 229,162 374,624
Other current assets.............................. 406,753 1,509,912 669,365
----------- ----------- -----------
Total current assets...................... 12,187,305 16,828,540 16,270,695
PROPERTY AND EQUIPMENT, net......................... 12,871,519 13,950,022 14,860,394
INVESTMENTS IN AFFILIATED ENTITIES.................. 497,345 743,586 1,101,109
OTHER ASSETS, net................................... 226,060 2,229,957 1,529,445
----------- ----------- -----------
Total assets.............................. $25,782,229 $33,752,105 $33,761,643
=========== =========== ===========
LIABILITIES AND OWNERS' EQUITY
CURRENT LIABILITIES:
Revolving credit facilities....................... $ 1,700,000 $ 4,000,000 $ 2,900,000
Accounts payable and accrued expenses............. 2,591,707 625,224 2,007,387
Accrued salaries and benefits..................... 2,073,807 1,328,370 1,605,918
Due to joint ventures............................. 1,162,296 1,430,415 693,257
Current portion of long-term debt................. 2,357,143 3,999,473 3,909,343
Other current liabilities......................... -- 248,450 748,789
----------- ----------- -----------
Total current liabilities................. 9,884,953 11,631,932 11,864,694
----------- ----------- -----------
LONG-TERM DEBT, net of current portion.............. 5,142,857 6,708,214 4,812,573
OTHER LIABILITIES................................... -- 359,012 359,012
----------- ----------- -----------
Total liabilities......................... 15,027,810 18,699,158 17,036,279
MINORITY INTEREST................................... -- 381,698 408,103
OWNERS' EQUITY...................................... 10,754,419 14,671,249 16,317,261
----------- ----------- -----------
Total liabilities and owners' equity...... $25,782,229 $33,752,105 $33,761,643
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-13
<PAGE> 86
ADVANCED RADIOLOGY, LLC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------- -------------------------
1995 1996 1996 1997
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES:
Medical service revenue, net............. $37,357,073 $51,692,004 $23,241,501 $31,103,238
Other revenue............................ 1,476,239 1,189,986 524,288 456,914
----------- ----------- ----------- -----------
Total revenue.................... 38,833,312 52,881,990 23,765,789 31,560,152
Less: Distributions to physician owners.... (12,355,000) (20,563,799) (8,600,000) (12,199,998)
----------- ----------- ----------- -----------
Net revenue...................... 26,478,312 32,318,191 15,165,789 19,360,154
COSTS AND EXPENSES:
Costs of affiliated physician services... 811,926 2,293,233 1,589,158 2,308,427
Practice salaries, wages and benefits.... 10,051,129 12,317,949 5,567,355 7,683,633
Practice supplies........................ 2,626,338 3,206,294 1,576,699 1,838,344
Practice rent and lease expense.......... 2,184,472 2,301,575 1,306,004 1,598,479
Depreciation and amortization............ 3,022,977 3,449,649 1,745,353 1,979,488
Other practice expenses.................. 4,184,188 6,272,470 2,694,655 3,542,759
Interest expense......................... 1,003,042 751,086 307,409 445,779
----------- ----------- ----------- -----------
Total costs and expenses......... 23,884,072 30,592,256 14,786,633 19,396,909
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE MINORITY INTEREST AND
EQUITY IN EARNINGS OF INVESTMENTS........ 2,594,240 1,725,935 379,156 (36,755)
EQUITY IN EARNINGS OF INVESTMENTS.......... 634,659 1,207,670 680,447 642,367
MINORITY INTEREST IN INCOME OF CONSOLIDATED
SUBSIDIARIES............................. -- (18,055) 9,239 (26,405)
----------- ----------- ----------- -----------
NET INCOME................................. $ 3,228,899 $ 2,915,550 $ 1,068,842 $ 579,207
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-14
<PAGE> 87
ADVANCED RADIOLOGY, LLC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OWNERS' EQUITY
<TABLE>
<S> <C>
BALANCE, December 31, 1994.................................. --
Net assets contributed upon formation..................... $ 5,225,520
Capital contributions..................................... 2,300,000
Net income................................................ 3,228,899
------------
BALANCE, December 31, 1995.................................. 10,754,419
Contribution of practice net assets....................... 1,001,280
Net income................................................ 2,915,550
------------
BALANCE, December 31, 1996.................................. 14,671,249
Capital Contributions (unaudited)......................... 1,066,805
Net income (unaudited).................................... 579,207
------------
BALANCE, June 30, 1997 (unaudited).......................... $ 16,317,261
============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-15
<PAGE> 88
ADVANCED RADIOLOGY, LLC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------- ---------------------------
1995 1996 1996 1997
------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................... $ 3,228,899 $ 2,915,550 $ 1,068,842 $ 579,207
Adjustments to reconcile net income to net cash provided
by operating activities --
Minority interest in income of consolidated
subsidiaries......................................... -- 18,055 (9,239) 26,405
Depreciation and amortization.......................... 3,022,977 3,449,649 1,745,353 1,979,488
Investment (income) loss from affiliated entities...... (634,659) (1,207,670) (680,447) (642,367)
(Gain) loss on sale of assets.......................... 12,302 379 -- --
Changes in assets and liabilities
(Increase) decrease in --
Accounts receivable, net............................. (9,957,828) (2,083,469) (731,663) (3,000,732)
Other receivables and other current assets........... (724,734) (261,143) (1,548,458) 695,085
Other noncurrent assets.............................. (242,636) (2,023,516) (1,208,878) --
Increase (decrease) in --
Accounts payable and accrued expenses................ 2,307,168 (1,966,483) 992,615 1,382,163
Accrued salaries and benefits........................ 2,073,806 (745,436) (2,012,306) 277,548
Due to joint ventures................................ 1,608,528 268,119 (269,952) (737,158)
Other liabilities.................................... -- 248,450 -- 500,338
------------ ------------ ------------ ------------
Net cash provided by operating activities......... 698,823 (1,387,515) (2,654,133) 1,059,977
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of capital equipment.............. -- -- -- --
Purchases of capital equipment........................... (1,821,663) (3,295,696) (1,333,481) (2,189,347)
Contributions to partnerships............................ (61,198) (265,426) -- (302,772)
Distributions received from affiliated entities.......... 59,407 1,246,214 655,043 587,616
------------ ------------ ------------ ------------
Net cash used in investing activities............. (1,823,454) (2,314,908) (678,438) (1,904,503)
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt............................. 9,000,000 5,114,881 -- --
Repayment of long-term debt.............................. (10,047,645) (2,850,656) (239,873) (1,985,771)
Net increase in line of credit........................... 1,700,000 2,300,000 1,778,000 (1,100,000)
Contributions from members............................... 2,300,000 -- -- 1,066,805
Proceeds from the sale of stock.......................... -- -- -- --
Minority interest contribution to joint venture.......... -- 363,643 363,644 --
------------ ------------ ------------ ------------
Net cash used in financing activities............. 2,952,355 4,927,868 1,901,771 (2,018,966)
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....... 1,822,724 1,225,445 (1,430,800) (2,863,492)
CASH AND CASH EQUIVALENTS, beginning of period............. -- 1,822,724 1,822,724 3,048,169
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of period................... $ 1,822,724 $ 3,048,169 $ 391,924 $ 184,677
============ ============ ============ ============
SUPPLEMENTAL DISCLOSURE:
Cash interest paid....................................... $ 1,003,000 $ 751,086 $ 307,409 $ 445,779
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-16
<PAGE> 89
ADVANCED RADIOLOGY, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
1. BUSINESS, ORGANIZATION AND BASIS OF PRESENTATION:
Advanced Radiology, LLC (the "Company") is a Maryland limited liability
company organized to provide radiology and imaging healthcare services. Its
offices are located in the Baltimore, Maryland, metropolitan area. The Company
was organized in October 1994 and began providing healthcare services in January
1995.
The consolidated financial statements include the accounts of the Company
and its seventy-three percent owned subsidiary, MRI at St. Joseph Medical
Center, LLC ("MRI"). All significant intercompany accounts and transactions have
been eliminated in consolidation.
The Company was formed through the contribution of assets of five existing
radiology practices -- Drs. Copeland, Hyman, and Shackman, P.A. ("Copeland");
Drs. Thomas, Wallop, Kim, and Lewis, P.A. ("Arundel"); Diagnostic Imaging
Associates, P.A. (DIAPA); Drs. DeCarlo, Lyon, Hearn, and Pazourek, P.A.
("DeCarlo"); and Carroll Imaging Associates, P.A. ("Carroll") (collectively, the
"Practices"). Effective January 1, 1995, the Practices contributed certain
assets (primarily fixed assets and investments in joint ventures) and the debt
related to those assets in exchange for ownership interests in the Company. The
Company did not acquire the ownership interests of the Practices. The Practices
remain in existence and continue to employ all physician-owners. Distributions
are made by the Company to the Practices, who then pay all physician-owner
salaries. Such distributions have been included as a reduction of medical
service revenues in the consolidated statements of income.
The initial formation of the Company has been accounted for as the
contribution of assets to a joint venture, and accordingly, all assets have been
recorded at the respective historical carrying amount, which approximates fair
value, of the entity making such contribution. The following assets and
liabilities were contributed to the Company on January 1, 1995:
<TABLE>
<CAPTION>
COPELAND ARUNDEL DIAPA DECARLO CARROLL TOTAL
----------- ----------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Fixed assets............ $10,603,937 $ 2,082,667 $ 931,433 $ 502,922 $ 37,939 $14,158,898
Investments in joint
venture............... 124,418 -- -- -- (336,732) (212,314)
Debt.................... (5,888,683) (1,705,357) (670,203) (262,405) (20,998) (8,547,646)
Other................... (175,534) 19,732 (19,414) 923 875 (173,418)
----------- ----------- --------- --------- --------- -----------
Net assets
contributed........... $ 4,664,138 $ 397,042 $ 241,816 $ 241,440 $(318,916) $ 5,225,520
=========== =========== ========= ========= ========= ===========
</TABLE>
Each of the Practices received Class B membership interests in the Company.
Such Class B interests represent in excess of 99% of the Company's ownership.
The Class A members are approximately 50 physicians, each owning an .01%
interest. The Class B members appoint the Management Committee, which has the
authority to manage regular operations of the Company.
In April 1996, Harbor Radiologists, P.A. ("Harbor") was admitted as a
14.30% Class B member of the Company. Its shareholders were also admitted as
Class A members. The estimated fair market values of assets and liabilities
contributed by Harbor in exchange for an interest in the Company are as follows:
<TABLE>
<S> <C>
Fixed Assets............................................. $1,921,376
Debt..................................................... (943,461)
Other.................................................... 23,365
----------
Estimated fair market value.............................. $1,001,280
==========
</TABLE>
The accompanying consolidated financial statements have been prepared on
the accrual basis of accounting.
F-17
<PAGE> 90
ADVANCED RADIOLOGY, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of
three months or less when purchased to be cash equivalents.
Accounts Receivable
Accounts receivable primarily consist of receivables from patients,
insurers, government programs and other third-party payors for medical services
provided by physicians. Such amounts are reduced by an allowance for contractual
adjustments and other uncollectible amounts.
Property and Equipment
Property and equipment is recorded at cost. Depreciation on furniture,
fixtures and equipment is computed using the straight-line method over the
estimated useful lives of the assets. Leasehold improvements are amortized on
the straight-line method over the shorter of the noncancelable lease term or
estimated useful life of the asset. However, if the noncancelable lease term
expires in the near future and if the lease contains a renewal option of which
management is reasonably assured of exercising, the amortization period is the
shorter of the lease term including the renewal option period or the estimated
useful life.
Investments in Affiliated Entities
Investments in joint venture partnerships are accounted for using the
equity method. In addition, the Company holds two investments in entities
accounted for under the cost method.
Other Assets
Other assets include loan origination costs, organization costs, deposits
and other assets. Loan origination costs are being amortized on a straight-line
basis over a four-year period. Organizations costs are being amortized on a
straight-line basis over a five-year period.
Medical Service Revenues
Medical service revenue are accounted for in the period in which the
services are provided. The revenue are reported at the estimated realizable
amounts from patients, third party payors and others. Provisions for estimated
third party payor adjustments are estimated and recorded in the period the
related services are provided. Any adjustment to the amounts is recorded in the
period in which the revised amount is determined. A significant portion of the
Company's medical service revenue are related to Medicare and other governmental
programs. Medicare and other governmental programs reimburse physicians based on
fee schedules which are determined by the related governmental agency.
Additionally, the Company participates in agreements with managed care
organizations to provide services at negotiated rates.
All physician owners are employed by the Practices. Distributions are made
by the Company to the Practices, who then pay all physician owner salaries. Such
distributions have been included as a reduction of medical service revenues in
the consolidated statements of income.
Costs of Affiliated Physician Services
Costs of Affiliated Physician Services include all compensation to
non-owner physicians, as well as certain benefits, educational and travel costs
paid to non-owner physicians and physician owners.
F-18
<PAGE> 91
ADVANCED RADIOLOGY, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes
There is no provision for income taxes in the accompanying consolidated
financial statements. The members include their respective share of Company
profits and losses in their individual and corporate tax returns.
Concentration of Credit Risk
The Company extends credit to patients covered by programs such as Medicare
and Medicaid and private insurers. The Company manages credit risk with the
various public and private insurance providers, as appropriate. Allowances for
bad debts have been made for potential losses when appropriate.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Basis of Presentation -- Interim Financial Statements
The interim financial statements have been prepared by the Company without
audit, pursuant to the rules and regulations of Accounting Principles Board
("APB") Opinion No. 28, "Interim Financial Reporting." Certain information and
footnote disclosures normally included in the financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to APB Opinion No. 28; nevertheless, management of the Company
believes that the disclosures herein are adequate to prevent the information
presented from being misleading. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly the
financial position of the Company with respect to the results of its operations
for the interim periods from January 1, 1996, to June 30, 1996, and from January
1, 1997, to June 30, 1997, have been included herein. The results of operations
for the interim periods are not necessarily indicative of the results for the
full year.
3. INVESTMENTS IN AFFILIATED ENTITIES:
In 1995, investments in affiliated entities consist of 50% interests in two
partnerships (Franklin Imaging Joint Venture ("Franklin") and Advanced Imaging
of Carroll County Limited Partnership (AICC)), which perform radiology and
imaging healthcare services, and 50% of the common stock of a corporation
(Advanced Medical Imaging, Inc. (AMI)) which enters into and administers managed
care contracts for radiology services.
F-19
<PAGE> 92
ADVANCED RADIOLOGY, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In January 1996, the Company became a 50% member in Poole Road Imaging, LLC
("Poole"), which was organized to perform radiology and imaging healthcare
services in the Carroll County General Hospital service area. The Company's
initial capital contribution consisted primarily of the fixed assets at its
Poole Road office, which had a net book value of approximately $712,000 at
December 31, 1995. The Poole Road office is now operated by Poole. In August,
1996, the Company became a 50% member in Health Systems Imaging, LLC, which owns
and operates diagnostic imaging centers. These investment balances at December
31 are as follows:
<TABLE>
<CAPTION>
1995 1996
--------- --------
<S> <C> <C>
Franklin.................................................... $ 856,535 $539,843
AICC........................................................ (330,555) (71,075)
AMI......................................................... (33,635) 17,424
Health Systems Imaging, LLC................................. -- 107,598
Poole....................................................... -- 64,796
Other....................................................... 5,000 85,000
--------- --------
$ 497,345 $743,586
========= ========
</TABLE>
Summary information from the unaudited financial statements of Franklin as
of and for the year ended December 31, 1996, is as follows:
<TABLE>
<S> <C>
Current assets.............................................. $2,981,926
Total assets................................................ 3,123,695
Current liabilities......................................... 1,275,441
Total liabilities........................................... 1,662,751
Partners' equity............................................ 1,460,944
Revenue..................................................... $5,202,128
Net income.................................................. $1,567,258
</TABLE>
4. PROPERTY AND EQUIPMENT:
Property and equipment at December 31 consists of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
(YEARS) 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Medical equipment.......................... 5-10 $ 19,312,384 $ 24,716,479
Leasehold improvements..................... 3-19 5,267,811 5,900,495
Furniture and fixtures..................... 5-7 4,156,432 5,078,959
------------ ------------
28,736,627 35,695,933
Accumulated depreciation and
amortization............................. (15,865,108) (21,745,911)
------------ ------------
Property and equipment, net.............. $ 12,871,519 $ 13,950,022
============ ============
</TABLE>
F-20
<PAGE> 93
ADVANCED RADIOLOGY, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. LONG-TERM DEBT:
Long-term debt as of December 31 is as follows:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Mercantile Safe Deposit and Trust -- prime plus 1/4% (8.5%
at December 31, 1996), due December 31, 1998............. $ 7,500,000 $ 5,142,858
Mercantile Safe Deposit and Trust -- prime (8.25% at
December 31, 1996), due June 30, 2001.................... -- 2,706,667
Mercantile Safe Deposit and Trust -- prime (8.25% at
December 31, 1996), due 2001............................. -- 2,214,882
First National Bank of Maryland notes -- 30 day LIBOR plus
2.25% (8.03% at December 30, 1996), due March 1999....... -- 643,280
----------- -----------
Total long-term debt....................................... 7,500,000 10,707,687
Less current maturities.................................... (2,357,143) (3,999,473)
----------- -----------
Total long term debt, net of current portion............... $ 5,142,857 $ 6,708,214
=========== ===========
</TABLE>
The Company has a $5,000,000 revolving line of credit for working capital
purposes with Mercantile Safe Deposit and Trust Company ("Mercantile"). At
December 31, 1996, the Company had $4,000,000 outstanding under the line. In
addition, the Company has a $15,000,000 revolving credit facility with
Mercantile for equipment purchases. Advances under the credit facilities bear
interest at bank's prime rate, payable monthly. The interest rate at December
31, 1996, was 8.25%. The maturity date is July 3, 1997 or on such later date as
the bank may elect; however, on an annual basis, the bank may approve a one-year
extension. Advances under the credit facility, when combined with any
outstanding balances on two of the term loan note payables described above, are
limited to $20,000,000 in total. At December 31, 1996, the maximum amount of
funds available under the credit facility approximated $8,200,000. Advances are
collateralized by a first lien on all assets of the Company and the guarantees
of the five Class B members.
In connection with the term and revolving credit facility to Mercantile,
the Company is required to maintain a liabilities to net worth ratio not
exceeding 1 to 1, and a minimum cash flow coverage ratio of at least 1.25 to 1.
In addition, the agreement provides that at no time shall total debt to
Mercantile exceed 80% of the fair market value of the Company's fixed assets,
plus the Company's and guarantors' eligible accounts receivable (as defined).
Future maturities of long-term debt at December 31, 1996, are as follows:
<TABLE>
<S> <C>
1997.................................................... $ 3,999,473
1998.................................................... 3,824,027
1999.................................................... 1,031,566
2000.................................................... 1,022,976
2001.................................................... 829,645
-----------
$10,707,687
===========
</TABLE>
F-21
<PAGE> 94
ADVANCED RADIOLOGY, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. LEASES:
The Company leases office facilities and certain equipment under various
noncancelable operating leases that expire at various dates through 2004.
Certain of the office leases provide for renewal options. Future minimum lease
payments under noncancelable operating leases at December 31, 1996, are as
follows:
<TABLE>
<S> <C>
1997..................................................... $1,608,947
1998..................................................... 1,319,045
1999..................................................... 952,888
2000..................................................... 552,661
2001..................................................... 498,810
----------
Total.......................................... $4,932,351
==========
</TABLE>
Total rent expense was approximately $2,069,000 in 1995, and $2,156,000 in
1996.
The Company has also entered into a three-year agreement, expiring in April
1998, whereby it pays a quarterly fee for selection, procurement, repair and
maintenance of its radiology and imaging equipment. Total fees paid under this
arrangement approximate $950,000 per year, and are subject to adjustment to
reflect changes in the equipment and clinical needs of the Company.
7. EMPLOYEE BENEFIT PLAN:
The Company sponsors a 401(k) plan for employees of the Company and its
five corporate members who have completed one year of service and are at least
age 21. The plan does not provide for employer matching contributions, but does
allow discretionary employer contributions. The Company's contribution in 1995
was $1,911,000, which was remitted in February 1996. Included in this amount is
$1,455,000 relating to Class A members, which is included in distributions to
owners in the accompanying statement of owners' equity. The Company's
contribution for 1996 was $2,136,000, which was remitted in March 1997. Included
in this amount is $1,605,000 relating to Class A members, which is included in
distributions.
8. RELATED-PARTY TRANSACTIONS:
As indicated in Note 3, the Company has 50% partnership interests in
Franklin, AICC, and Poole. A Class B member of the Company has a 50% partnership
interest in Greater Baltimore Diagnostic Imaging Partnership (GBDIP). Under
agreements with these partnerships (Franklin, AICC, GBDIP, and Poole), the
Company performs professional, billing, and management services. These services
are billed to the partnerships based primarily upon agreed-upon percentages of
the partnerships' cash basis revenue. Management and professional fees earned
from these partnerships are as follows:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Franklin.......................................... $1,678,000 $1,851,000
AICC.............................................. 162,000 204,000
GBDIP............................................. 149,000 474,000
Poole............................................. -- 364,000
---------- ----------
$1,989,000 $2,893,000
========== ==========
</TABLE>
F-22
<PAGE> 95
ADVANCED RADIOLOGY, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company also collects the receivables of the partnerships and
periodically remits the collections to them. In addition, the Company pays
certain expenses on behalf of the partnerships and is periodically reimbursed by
them.
Amounts due to/(from) affiliated entities at December 31 are as follows:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Franklin.................................................... $ 980,183 $ 687,226
AICC........................................................ (61,800) 186,303
GBDIP....................................................... 243,913 110,298
Poole....................................................... -- 99,644
Health Systems Imaging, LLC................................. -- 346,944
---------- ----------
$1,162,296 $1,430,415
========== ==========
</TABLE>
The Company performs radiology and imaging healthcare services under
managed care contracts entered into and administered by AMI (see Note 3), and
remits a management fee to AMI. Such management fees were not significant in
1995 and 1996. In addition, the Company pays certain expenses on behalf of AMI
and is periodically reimbursed. There are no significant amounts due from or to
AMI at December 31, 1995 and 1996.
The Company leases seven of its office facilities from entities in which
certain of the Company's members have ownership interests. Rent expense relating
to such facilities was approximately $800,000 in 1995 and $796,000 in 1996.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107 requires all entities
to disclose the fair value of certain financial instruments in their financial
statements. The carrying amounts of accounts receivable, accounts payable and
accrued expenses approximate fair value due to the short maturity of these
instruments. The carrying amount of the Company's long-term debt also
approximates fair value.
10. MEMBERSHIP REDEMPTION OPTION:
Under the terms of the Company's operating agreement, at any time on or
after October 17, 1999, the Company has the option to redeem the membership
interests of all of the Class B members (which are the corporate members of the
Company) at a price equal to the then positive capital account balances of such
members, or, if such balances are zero or negative, for a price of $10.
Twenty-five percent of the redemption price is to be paid no later than six
months after the exercise of the option with the remainder generally being paid
in three annual installments, including interest.
11. CONTINGENCIES:
The Company is a defendant in certain claims arising from alleged acts of
malpractice. Legal counsel for the Company is of the opinion that such claims
are adequately covered by malpractice insurance.
The Company is a defendant in a lawsuit brought by two former employees of
a Class B member alleging employment discrimination. Total damages claimed are
$80 million. The case has been compelled to binding arbitration; however, no
Scheduling Order has been issued, and no substantive discovery has taken place.
In the opinion of management, the ultimate disposition of this case will not
have a material adverse effect on the Company's financial condition or results
of operations.
F-23
<PAGE> 96
ADVANCED RADIOLOGY, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1996, the Company became self-insured for employee health insurance
benefits. Stop-loss insurance coverage has been purchased which covers all
claims exceeding $35,000 per family with an aggregate maximum limit of 125% of
expected claims, as determined by the insurance company (approximately $684,000
in 1996).
12. SUBSEQUENT EVENTS:
On August 13, 1996, the Company entered into a letter of intent with
American Physician Partners, Inc. (APPI) under which APPI will acquire certain
assets and liabilities of the Company in exchange for common stock and cash.
Completion of the transaction is subject to certain conditions, including the
execution of a forty-year service agreement, stockholder approval by both
parties and successful completion of an initial public offering by APPI. Under
the terms of the service agreement, APPI will provide practice management,
administration and other services to the physicians for a negotiated service
fee. All nonprofessional employees shall become employees of APPI. In addition,
APPI will assume responsibility for all maintenance, repairs, improvements,
leases and other general operating expenses.
Effective January 1, 1997, Drs. Perilla, Sindler & Associates, P.A. (PSA)
contributed certain assets and liabilities to the Company in exchange for an
11.39% ownership interest. This transaction will be accounted for using the
purchase method.
F-24
<PAGE> 97
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
The Ide Group, P.C.:
We have audited the accompanying combined balance sheets of The Ide Group,
P.C. (a New York professional corporation) and Ide Diagnostic Imaging Associates
(a New York general partnership) as of June 30, 1997, 1996 and 1995, and the
related combined statements of income, changes in stockholders' equity and
partners' capital, and cash flows for the three years then ended. These
financial statements are the responsibility of the Companies' management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of The Ide Group, P.C.
and Ide Diagnostic Imaging Associates as of June 30, 1997, 1996, and 1995, and
the results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
DEJOY, KNAUF & BLOOD LLP
Rochester, New York,
August 5, 1997
F-25
<PAGE> 98
THE IDE GROUP, P.C.
IDE DIAGNOSTIC IMAGING ASSOCIATES
COMBINED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
---------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............. $ 238,071 $ 199,048 $ 268,854
Accounts receivable, net of allowance
for doubtful accounts and
contractual adjustments of
$1,185,000, $1,857,000 and
$2,425,000 at June 30, 1997, 1996
and 1995, respectively.............. 5,261,378 4,770,648 4,235,067
Supplies on hand...................... 81,988 116,938 99,177
Prepaids and deposits................. 43,649 23,085 65,247
----------- ----------- -----------
Total current assets............ 5,625,086 5,109,719 4,668,345
----------- ----------- -----------
PROPERTY AND EQUIPMENT, at cost:
Radiology equipment................... 4,625,916 5,147,974 5,000,123
Furniture and fixtures................ 1,385,415 1,560,388 1,534,760
Leasehold improvements................ 409,119 409,862 555,785
----------- ----------- -----------
6,420,450 7,118,224 7,090,668
Less -- Accumulated depreciation...... (5,423,810) (5,787,413) (5,104,880)
----------- ----------- -----------
996,640 1,330,811 1,985,788
----------- ----------- -----------
OTHER ASSETS:
Cash surrender value of life insurance
policies............................ 348,649 337,326 314,591
Refundable bonds...................... 10,000 43,950 50,950
Other assets.......................... 38,541 38,541 10,274
----------- ----------- -----------
397,190 419,817 375,815
----------- ----------- -----------
TOTAL ASSETS............................ $7,018,916 $ 6,860,347 $ 7,029,948
=========== =========== ===========
LIABILITIES, STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Line of credit........................ $ -- $ -- $ 200,000
Accounts payable...................... 1,633,103 755,391 759,743
Current portion of long-term debt..... 436,440 380,000 841,463
Accrued liabilities................... 388,877 355,346 77,628
Accrued profit sharing................ 198,820 -- 240,678
Accrued vacation...................... 362,864 342,579 320,027
----------- ----------- -----------
Total current liabilities....... 3,020,104 1,833,316 2,439,539
----------- ----------- -----------
LONG-TERM LIABILITIES:
Long-term debt........................ 1,250,227 1,361,667 1,145,650
Life insurance loans payable.......... 171,379 171,379 167,613
Deferred income taxes................. 1,041,833 1,185,742 811,965
----------- ----------- -----------
2,463,439 2,718,788 2,125,228
----------- ----------- -----------
STOCKHOLDERS' EQUITY AND PARTNERS'
CAPITAL:
Common stock ($1 par, 20,000 shares
authorized, 2,400 shares issued and
outstanding)........................ 2,400 2,400 2,300
Additional paid-in capital............ 3,268 3,268 3,268
Retained earnings..................... 1,529,955 2,034,754 1,594,827
Partners' capital..................... -- 268,071 865,036
Less -- Treasury stock................ (250) (250) (250)
----------- ----------- -----------
Total stockholders' equity and
partners' capital............. 1,535,373 2,308,243 2,465,181
----------- ----------- -----------
TOTAL LIABILITIES, STOCKHOLDERS'
EQUITY
AND PARTNERS' CAPITAL......... $7,018,916 $ 6,860,347 $ 7,029,948
=========== =========== ===========
</TABLE>
The accompanying notes to combined financial statements are an integral part of
these balance sheets.
F-26
<PAGE> 99
THE IDE GROUP, P.C.
IDE DIAGNOSTIC IMAGING ASSOCIATES
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
REVENUE:
Medical service revenue, net......................... $26,892,138 $25,996,948 $25,521,062
Other revenue........................................ 11,323 22,736 12,692
----------- ----------- -----------
26,903,461 26,019,684 25,533,754
----------- ----------- -----------
COSTS AND EXPENSES:
Costs of affiliated physician services............... 15,279,935 11,483,239 10,935,981
Practice salaries wages and benefits................. 3,203,763 3,080,586 3,141,263
Practice supplies.................................... 1,289,106 1,558,493 1,597,236
Practice rent and lease expense...................... 3,982,938 3,598,904 3,532,920
Depreciation and amortization........................ 532,053 835,326 838,919
Other practice expenses.............................. 3,150,236 3,356,050 3,241,889
Interest expense..................................... 111,569 202,195 225,447
----------- ----------- -----------
Total costs and expenses..................... 27,549,600 24,114,793 23,513,655
----------- ----------- -----------
INCOME (LOSS) BEFORE (PROVISION FOR) BENEFIT FROM
DEFERRED INCOME TAXES................................ (646,139) 1,904,891 2,020,099
(PROVISION FOR) BENEFIT FROM DEFERRED INCOME TAXES..... 141,340 (374,977) 182,454
----------- ----------- -----------
NET INCOME (LOSS)...................................... $ (504,799) $ 1,529,914 $ 2,202,553
=========== =========== ===========
</TABLE>
The accompanying notes to combined financial statements are an integral part of
these statements.
F-27
<PAGE> 100
THE IDE GROUP, P.C.
IDE DIAGNOSTIC IMAGING ASSOCIATES
COMBINED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------- PAID-IN RETAINED PARTNERS' TREASURY
SHARES AMOUNT CAPITAL EARNINGS CAPITAL STOCK TOTAL
------ ------ ---------- ---------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, June 30, 1994..... 2,000 2,000 3,268 1,665,141 1,509,174 (100) 3,179,483
Net income (loss).......... -- -- -- (70,314) 2,272,867 -- 2,202,553
Sale of stock.............. 300 300 -- -- -- -- 300
Purchase of stock.......... -- -- -- -- -- (150) (150)
Capital distributions...... -- -- -- -- (2,917,005) -- (2,917,005)
----- ------ ------ ---------- ---------- ----- ----------
BALANCE, June 30, 1995..... 2,300 2,300 3,268 1,594,827 865,036 (250) 2,465,181
Net income................. -- -- -- 439,927 1,089,987 -- 1,529,914
Sale of stock.............. 100 100 -- -- -- -- 100
Capital contributions...... -- -- -- -- 68,661 -- 68,661
Capital distributions...... -- -- -- -- (1,755,613) -- (1,755,613)
----- ------ ------ ---------- ---------- ----- ----------
BALANCE, June 30, 1996..... 2,400 2,400 3,268 2,034,754 268,071 (250) 2,308,243
Net loss................... -- -- -- (504,799) -- -- (504,799)
Capital distributions...... -- -- -- -- (268,071) -- (268,071)
----- ------ ------ ---------- ---------- ----- ----------
BALANCE, June 30, 1997..... 2,400 $2,400 $3,268 $1,529,955 $ -- $(250) $1,535,373
===== ====== ====== ========== ========== ===== ==========
</TABLE>
The accompanying notes to combined financial statements are an integral part of
these statements.
F-28
<PAGE> 101
THE IDE GROUP, P.C.
IDE DIAGNOSTIC IMAGING ASSOCIATES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------------------------
1997 1996 1995
---------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ (504,799) $ 1,529,914 $ 2,202,553
---------- ----------- -----------
Adjustments to reconcile net income to net cash provided
by operating activities --
Depreciation and amortization.......................... 532,053 835,326 838,919
Deferred taxes......................................... (143,909) 373,777 (191,327)
(Increase) decrease in accounts receivable............. (490,730) (535,581) 377,070
Decrease (increase) in prepaids and deposits........... (20,564) 42,162 172,264
(Increase) decrease in supplies on hand................ 34,950 (17,761) 16,233
(Increase) decrease in other assets.................... -- (28,267) 4,514
Increase (decrease) in accounts payable................ 877,712 (4,352) 74,873
Increase (decrease) in accrued profit sharing.......... 198,820 (240,678) 240,678
Increase (decrease) in accrued liabilities............. 53,816 300,270 12,428
---------- ----------- -----------
Total adjustments................................. 1,042,148 724,896 1,545,652
---------- ----------- -----------
Net cash provided by operating activities......... 537,349 2,254,810 3,748,205
---------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................ (197,882) (180,349) (1,281,275)
(Increase) decrease in purchase deposits.................. -- -- 459,168
Decrease in refundable bonds.............................. 33,950 7,000 2,100
Capital contributions and net stock purchases............. -- 68,761 150
Capital distributions..................................... (268,071) (1,755,613) (2,917,005)
Increase in cash surrender value of life insurance
policies............................................... (11,323) (22,735) (12,692)
---------- ----------- -----------
Net cash used by investing activities............. (443,326) (1,882,936) (3,749,554)
---------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments on line of credit.......................... -- (200,000) (400,000)
Principal payments on long-term debt...................... (380,000) (633,585) (910,767)
Net proceeds from issuance of long-term debt.............. 325,000 391,905 455,000
---------- ----------- -----------
Net cash provided (used) by financing activities....... (55,000) (441,680) (855,767)
---------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 39,023 (69,806) (857,116)
CASH AND CASH EQUIVALENTS, beginning of year................ 199,048 268,854 1,125,970
---------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of year...................... $ 238,071 $ 199,048 $ 268,854
========== =========== ===========
</TABLE>
The accompanying notes to combined financial statements are an integral
part of these statements.
F-29
<PAGE> 102
THE IDE GROUP, P.C.
IDE DIAGNOSTIC IMAGING ASSOCIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
JUNE 30, 1997, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Presentation and Principles of Combination
The accompanying combined financial statements present the combined
financial position, results of operations, and cash flows of The Ide Group, P.C.
("Ide"), a New York professional corporation, and Ide Diagnostic Imaging
Associates ("IDIA"), a New York general partnership. Ide was formed to practice
medicine specializing in radiology and radiation oncology in the Rochester, New
York region. IDIA provided magnetic resonance imaging services in the Rochester,
New York region. Effective January 1, 1996, substantially all of the operations
of IDIA were assumed by Ide.
Ide and IDIA are affiliated through common ownership. All material
intercompany balances and transactions are eliminated in combination.
Basis of Accounting
The accompanying financial statements are prepared using the accrual basis
of accounting.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and reported amounts of revenue and expenses
during the reporting periods. Actual results could differ from these estimates.
Revenue Recognition
Revenue is recognized when the related service is performed. Revenue is
recorded net of allowances for contractual adjustments and estimated
uncollectible accounts.
Supplies on Hand
Supplies on hand are stated at the lower of cost, determined on the
first-in, first-out basis, or market.
Property and Equipment
Depreciation and amortization of property and equipment are computed using
methods and lives prescribed under the Internal Revenue Code, which are as
follows:
<TABLE>
<S> <C>
Radiology equipment......................................... 5 years
Furniture and fixtures...................................... 5-7 years
Leasehold improvements...................................... 4-39 years
</TABLE>
F-30
<PAGE> 103
THE IDE GROUP, P.C.
IDE DIAGNOSTIC IMAGING ASSOCIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
2. LONG-TERM DEBT:
Long-term debt consisted of the following at June 30:
<TABLE>
<CAPTION>
TERMS 1997 1996 1995
----- ---------- ---------- ----------
<S> <C> <C> <C> <C>
M&T Bank-
Term loan agreement....................... (a ) $1,361,667 $1,741,667 $ --
Term loan agreement....................... (b ) 325,000 -- --
Chase Manhattan Bank-Term loan agreement.... (c ) -- -- 1,987,113
---------- ---------- ----------
1,686,667 1,741,667 1,987,113
Less- Current portion..................... (436,440) (380,000) (841,463)
---------- ---------- ----------
Long-term portion......................... $1,250,227 $1,361,667 $1,145,650
========== ========== ==========
</TABLE>
- ---------------
(a) During fiscal 1996, Ide refinanced its term loan agreement with M&T Bank
("The Bank"). The term loan agreement requires 60 equal monthly principal
payments of $31,667 through January 2001 plus interest. Interest on the term
loan is fixed at 7.74%. The term loan is secured by substantially all of
Ide's assets. Ide has received a commitment from the Bank to allow
borrowings up to a maximum of $3,000,000.
(b) The term loan agreement requires 60 equal monthly installments of $6,674
including interest through June 2002. Interest on the term loan is fixed at
8.54%. The term loan is secured by substantially all of Ide's assets.
(c) Ide refinanced this term loan agreement in fiscal 1996.
As part of the financial covenants contained in Ide's agreements with M&T
Bank, Ide must generate no less than zero taxable income as reflected in
Ide's federal tax return and tangible net worth is not to decline by more
than 20% during any fiscal year. At June 30, 1997, Ide was in default of
both of these covenants. Waivers of these defaults have been obtained from
the bank.
The aggregate annual maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
- ------------------------------------------------------------ ----------
<S> <C>
1998........................................................ $ 436,440
1999........................................................ 439,446
2000........................................................ 444,726
2001........................................................ 292,142
2002........................................................ 73,913
----------
$1,686,667
==========
</TABLE>
3. LINES OF CREDIT:
Ide has a line of credit facility with M&T Bank under which Ide may borrow
up to $1,300,000 at the prime rate (8.5% at June 30, 1997). There were no
borrowings outstanding under this line at June 30, 1997 and 1996. The line of
credit agreement requires that there be no outstanding borrowings under the line
for at least thirty consecutive days each year.
F-31
<PAGE> 104
THE IDE GROUP, P.C.
IDE DIAGNOSTIC IMAGING ASSOCIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Ide previously had an agreement with Chase Manhattan Bank, N.A. which
permitted Ide to borrow up to $600,000 through February 28, 1996. Borrowings
under the agreement were $200,000 at June 30, 1995. The note was repaid in full
and terminated in February 1996.
4. LIFE INSURANCE LOANS PAYABLE:
Ide's life insurance loans payable are secured by the cash surrender value
of the related policies. These policies bear interest at rates which range from
a fixed rate of five percent to rates which float with the prime rate. It is
Ide's intention to not repay these loans during the next year. Therefore, the
loans are reflected as a long-term liability in the accompanying balance sheets.
5. INCOME TAXES:
Ide follows the provisions of Statement of Financial Accounting Standards
Number 109, "Accounting for Income Taxes."
Deferred taxes are recognized for temporary differences between the basis
of assets and liabilities for financial statement and income tax purposes. The
differences result from the use of the cash basis of accounting for income tax
purposes and the use of the accrual basis of accounting for financial statement
purposes, and consist primarily of accounts receivable, accounts payable,
accrued liabilities and net operating loss carryforwards. It is Ide's intention
in future years to pay compensation to employees in amounts sufficient to reduce
taxable income to zero each year.
For federal tax return purposes, Ide has approximately $500,000 of net
operating loss carryforwards as of June 30, 1997, which expire in the years 2006
through 2012.
The results of the Partnerships' operations are reported in the individual
federal and state income tax returns of the partners. The Partnership files
informational returns and, therefore, no provision for income taxes is recorded.
6. REFUNDABLE BONDS:
Refundable bonds consist of deposits required for each Ide physician by
Ide's medical malpractice mutual insurance carrier. The bonds are refundable
from the free and divisible surplus of the insurance company upon cessation of
medical practice of the Ide physician. The bonds earn interest at the rate of
6%.
7. EMPLOYEE BENEFIT PLANS:
Ide maintains a discretionary qualified defined contribution 401(k) and
profit sharing plan ("the Plan"), covering substantially all employees of Ide
and IDIA who have attained the age of 21 and who have met certain minimum
eligibility requirements. The plan is subject to provisions of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"). The plan also
provides that participants will be able to contribute up to 15% of their
compensation not to exceed $9,500. Ide contributes an amount equal to 25% of an
employee elective deferrals up to 4% of each employee's compensation.
In addition, Ide maintains a qualified discretionary supplemental profit
sharing plan which is subject to provisions of ERISA. The profit sharing expense
under these plans was $490,769, $539,737 and $518,107 for the years ended June
30, 1997, 1996 and 1995, respectively.
F-32
<PAGE> 105
THE IDE GROUP, P.C.
IDE DIAGNOSTIC IMAGING ASSOCIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES:
Deferred Compensation Agreements
Each Ide shareholder physician's employment contract contains a deferred
compensation agreement. Under the terms of these agreements, these individuals
will receive payments at retirement or death for past services performed. At
June 30, 1997, 1996 and 1995 the vested amount of deferred compensation balances
total approximately $8,966,681, $9,015,593, and $7,329,000, respectively. These
balances will be paid out over time at indeterminable future dates and in
indeterminable future amounts. As such, the amount of liability that would be
recorded in the balance sheet is not reasonably estimable.
Leases
Ide occupies certain offices under lease agreements expiring at various
dates through December, 2000. The minimum rental commitment under all leases in
effect at June 30, 1997 are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
- ----------- --------
<S> <C> <C>
1998................................................................ $505,021
1999................................................................ 230,818
2000................................................................ 155,514
2001................................................................ 64,797
--------
$956,150
========
</TABLE>
The Partnership leases office space under leases expiring through 1998. The
Partnership is fully reimbursed for its office space rental expense under the
terms of its agreement with MICA (see Note 12).
9. RELATED PARTIES:
On January 1, 1996, Ide purchased the property and equipment of a related
entity, IDIA.
Ide has an agreement with an affiliated company whereby the affiliate
performs billing and collection functions for services rendered by Ide. Ide pays
the affiliate a fee based on the amount of billings collected. Payments to this
affiliate were $1,348,805, $1,547,143, and $1,324,882 in fiscal 1997, 1996 and
1995, respectively.
10. CREDIT RISK CONCENTRATIONS:
Ide and IDIA maintain bank account balances which, at times, exceeded the
federally insured limit during the years ended June 30, 1997, 1996 and 1995. The
Companies have not experienced losses related to these deposits and management
does not believe that the Companies are exposed to any significant credit risk
with respect to these accounts.
At June 30, 1997, Ide has approximately $1,465,416 of accounts receivable
due from Health Maintenance Organizations ("HMOs") which is subject to
retrospective adjustment. This amount represents withholdings by the HMOs to be
used against any operating losses incurred by the HMO. In fiscal 1996, Ide
received 80% of funds withheld under its contract with one HMO relating to
calendar 1995. Other than fiscal 1996, Ide has historically collected the full
amount of withheld funds each year.
Substantially all of the Companies' revenue is derived from services
performed in the greater Rochester, New York metropolitan area.
F-33
<PAGE> 106
THE IDE GROUP, P.C.
IDE DIAGNOSTIC IMAGING ASSOCIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Substantially all of the Companies' revenue is derived from providing
medical services to patients covered under contracts with Blue Cross/Blue Shield
of Greater Rochester or affiliates, Blue Choice, Preferred Care, Medicare, or
Medicaid. Changes in the reimbursement rates Ide receives under these contracts
could have a material effect on Ide's financial position and operations.
Subsequent to June 30, 1996, Ide's management became aware of the intention
of the Rochester Community Individual Practice Association and the Rochester
Individual Practice Association, with whom Ide is a participating provider, to
adopt Resource-Based Relative Value Scale ("RBRVS") fee schedule methodologies.
These fee schedules will be implemented effective October 1, 1997. These
Individual Practice Associations ("IPA's") contract with Blue Choice and
Preferred Care, respectively. Approximately 60% of Ide's revenue is derived from
services provided to patients of Blue Choice and Preferred Care. The IPA's have
proposed community-wide budgets for imaging services based upon 1996
community-wide reimbursement levels. These budgets may reflect reductions in
community-wide imaging reimbursement of 12% in 1998 and 26% in 1999 and
thereafter.
11. SUPPLEMENTARY CASH FLOW DISCLOSURES:
Ide considers all highly liquid instruments purchased with an original
maturity of three months or less to be cash equivalents.
Cash payments for income taxes and interest are as follows for the years
ended June 30:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Income taxes....................................... $ 2,569 $ 1,200 $ 8,873
-------- -------- --------
Interest........................................... $126,763 $202,798 $224,452
======== ======== ========
</TABLE>
12. EXCLUSIVE SUPPLY AGREEMENT:
On January 1, 1996, Ide assumed the obligations of an agreement between
IDIA and MICA Imaging and Medical Imaging Centers of America, Inc. ("MICA") in
which IDIA agreed to sell to MICA its magnetic resonance imaging ("MRI")
equipment and not to compete with MICA for the provision of MRI services in the
City of Rochester ("City") and within a twenty-five mile radius of the City.
This covenant not to compete also applies to all shareholders of Ide for the
duration of their participation as shareholders and for two years thereafter.
In accordance with the agreement, Ide has the right of first refusal for
the thirty year term of the agreement to provide professional radiology services
at facilities located in specified states in the Northeast except under certain
circumstances as outlined in the agreement.
MICA has the right of first refusal to provide MRI equipment, cryogens
and/or maintenance at any location in specific states in the Northeast where Ide
obtains the right to provide MRI equipment, cryogens and/or maintenance or where
Ide owns, leases or subleases office space for the purposes of providing MRI
services.
Ide also has assumed equipment leases with MICA covering equipment sold by
IDIA to MICA and other MRI equipment operated in private offices located on the
campuses of certain Rochester area hospitals. These lease terms range from five
to thirty years. The rental payments are based upon the aggregate number of MRI
scans performed by Ide using the leased MRI equipment.
If certain events occur under this agreement, Ide may be required to
purchase all fixed and mobile MRI equipment owned by MICA and leased to Ide as
well as to assume leases for fixed MRI equipment leased by
F-34
<PAGE> 107
THE IDE GROUP, P.C.
IDE DIAGNOSTIC IMAGING ASSOCIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
MICA and subleased to Ide by MICA. Ide also may be required to pay MICA a
pro-rata portion of the amount for the exclusive supply contract.
13. ACQUISITION AGREEMENT:
During fiscal 1997, the Company entered into an acquisition agreement with
American Physician Partners, Inc. ("APPI") under which APPI will acquire all of
the non-medical assets of Ide through a merger transaction.
The non-medical assets consist of cash, imaging equipment, accounts
receivable, supplies on hand and other assets. These non-medical assets will be
separated from the medical assets through a reorganization of Ide to be
completed before the transaction with APPI. This reorganization will result in
the creation of a new entity ("New Ide") to provide regulated medical services.
APPI will assume certain liabilities of Ide pursuant to the agreement.
Completion of the transaction is subject to certain conditions, including
the execution of a forty-year service agreement, stockholder approval by both
parties and successful completion of an initial public offering by APPI. Under
the terms of the service agreement, APPI will provide practice management,
administration and other services to New Ide for a negotiated service fee. All
non-professional employees shall become employees of APPI. In addition, APPI
will assume responsibility for all maintenance, repairs, improvements, lease and
other general operating expenses.
F-35
<PAGE> 108
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
M&S X-Ray Practices:
We have audited the accompanying combined balance sheets of M&S X-Ray
Practices (see Note 1) as of December 31, 1996 and 1995, and the related
combined statements of income, owners' equity, and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of M&S X-Ray Practices as of
December 31, 1996 and 1995, and the results of their operations and their cash
flows for the years then ended in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
March 5, 1997
F-36
<PAGE> 109
M&S X-RAY PRACTICES
COMBINED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ JUNE 30,
1995 1996 1997
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................ $ 435,968 $ 425,619 $ 759,813
Accounts receivable, net of allowances of $5,650,732,
$4,887,279 and $5,282,236 at December 31, 1995 and
1996 and June 30, 1997, respectively.............. 3,138,151 3,182,876 3,701,703
Other receivables.................................... 44,472 33,859 192,255
Prepaid expenses and other current assets............ 99,141 73,896 73,068
---------- ---------- ----------
Total current assets......................... 3,717,732 3,716,250 4,726,839
PROPERTY AND EQUIPMENT, net............................ 1,252,330 746,268 757,540
INVESTMENT IN JOINT VENTURES........................... 1,023,079 1,170,953 1,419,785
OTHER ASSETS, net...................................... 733,529 698,269 723,643
---------- ---------- ----------
Total assets................................. $6,726,670 $6,331,740 $7,627,807
========== ========== ==========
LIABILITIES AND OWNERS' EQUITY
CURRENT LIABILITIES:
Accounts payable..................................... $ 422,362 $ 190,036 $ 257,337
Accrued expenses..................................... 382,943 24,669 --
Accrued salaries and benefits........................ 112,440 144,961 151,632
Current portion of deferred compensation............. 160,718 83,000 83,000
Current portion of long-term debt.................... 908,626 351,645 230,541
Current portion of capital lease obligations......... 11,773 12,783 12,783
---------- ---------- ----------
Total current liabilities.................... 1,998,862 807,094 735,293
DEFERRED COMPENSATION, net of current portion.......... 1,285,458 1,345,817 1,345,817
CAPITAL LEASE OBLIGATIONS, net of current portion...... 50,018 37,235 37,235
LONG-TERM DEBT, net of current portion................. 541,842 212,408 178,221
---------- ---------- ----------
Total liabilities............................ 3,876,180 2,402,554 2,296,566
COMMITMENTS AND CONTINGENCIES
MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES........ 314,858 346,033 506,203
OWNERS' EQUITY......................................... 2,535,632 3,583,153 4,825,038
---------- ---------- ----------
Total liabilities and owners' equity......... $6,726,670 $6,331,740 $7,627,807
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-37
<PAGE> 110
M&S X-RAY PRACTICES
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------------- ------------------------
1995 1996 1996 1997
----------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES:
Medical service revenue, net.......... $14,720,403 $14,776,742 $7,458,604 $7,011,550
Other revenue......................... 347,765 421,603 253,084 208,527
----------- ----------- ---------- ----------
Total revenue................. 15,068,168 15,198,345 7,711,688 7,220,077
COSTS AND EXPENSES:
Cost of affiliated physician
services........................... 8,866,396 8,703,013 3,938,889 3,485,918
Practice salaries, wages and
benefits........................... 1,227,517 1,337,633 402,249 998,893
Practice supplies..................... 495,959 583,610 272,042 316,495
Practice rent and lease expense....... 249,568 271,677 118,114 148,683
Depreciation and amortization......... 963,148 670,617 332,729 147,923
Other practice expense................ 1,907,070 1,541,530 1,304,450 615,682
Interest expense...................... 123,958 69,694 40,814 16,210
----------- ----------- ---------- ----------
Total costs and expenses...... 13,833,616 13,177,774 6,409,287 5,729,804
----------- ----------- ---------- ----------
INCOME BEFORE MINORITY INTERESTS AND
EQUITY IN EARNINGS OF INVESTMENTS..... 1,234,552 2,020,571 1,302,401 1,490,273
EQUITY IN EARNINGS OF INVESTMENTS....... 212,751 604,625 273,172 427,350
MINORITY INTERESTS IN INCOME OF
CONSOLIDATED SUBSIDIARIES............. (216,452) (249,365) (122,266) (160,170)
----------- ----------- ---------- ----------
NET INCOME.............................. $ 1,230,851 $ 2,375,831 $1,453,307 $1,757,453
=========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-38
<PAGE> 111
M&S X-RAY PRACTICES
COMBINED STATEMENTS OF OWNERS' EQUITY
<TABLE>
<S> <C>
BALANCE, December 31, 1994.................................. $ 2,624,570
Issuance of stock......................................... 100,000
Purchases of stock........................................ (56,418)
Distributions to stockholders............................. (1,363,371)
Net income................................................ 1,230,851
-----------
BALANCE, December 31, 1995.................................. 2,535,632
Issuance of stock......................................... 100,000
Distributions to stockholders............................. (1,428,310)
Net income................................................ 2,375,831
-----------
BALANCE, December 31, 1996.................................. 3,583,153
Issuance of stock (unaudited)............................. 78,408
Distributions to shareholders (unaudited)................. (593,976)
Net income (unaudited).................................... 1,757,453
-----------
BALANCE, June 30, 1997 (unaudited).......................... $ 4,825,038
===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-39
<PAGE> 112
M&S X-RAY PRACTICES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------- -----------------------
1995 1996 1996 1997
----------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................... $ 1,230,851 $ 2,375,831 $1,453,307 $1,757,453
Adjustments to reconcile net income to net
cash provided by operating activities --
Minority interest in income of consolidated
subsidiaries............................. 216,452 249,365 122,266 160,170
Depreciation and amortization.............. 963,148 670,617 332,729 147,923
Investment income from joint ventures...... (212,751) (604,625) (273,172) (427,350)
Changes in assets and liabilities --
(Increase) decrease in --
Accounts receivable, net................. (417,068) (44,725) (268,012) (518,827)
Prepaid expenses and other current
assets................................ (33,748) 35,858 (219,557) (211,386)
Increase (decrease) in --
Accounts payable and accrued expenses.... 383,567 (590,600) 37,605 42,632
Accrued salaries and benefits............ (58,284) 15,162 30,683 6,671
----------- ----------- ---------- ----------
Net cash provided by operating
activities.......................... 2,072,167 2,106,883 1,215,849 957,286
----------- ----------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment........... (60,437) (99,295) (6,255) (130,751)
Distributions received from joint ventures.... 188,790 426,751 287,271 178,518
----------- ----------- ---------- ----------
Net cash provided by investing
activities.......................... 128,353 327,456 281,016 47,767
----------- ----------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt.................. 30,000 96,000 -- 89,000
Repayment of long-term debt................... (974,392) (982,415) (498,022) (244,291)
Principal payments on capital lease
obligation................................. (5,534) (11,773) -- --
Proceeds from sale of stock................... 100,000 100,000 172,423 78,408
Purchases of stock............................ (56,418) -- -- --
Distributions to stockholders and minority
interest holders........................... (1,633,511) (1,646,500) (722,660) (593,976)
----------- ----------- ---------- ----------
Net cash used in financing
activities.......................... (2,539,855) (2,444,688) (1,048,259) (670,859)
----------- ----------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................... (339,335) (10,349) 448,606 334,194
CASH AND CASH EQUIVALENTS, beginning of year.... 775,303 435,968 435,968 425,619
----------- ----------- ---------- ----------
CASH AND CASH EQUIVALENTS,
end of year................................... $ 435,968 $ 425,619 $ 884,574 $ 759,813
=========== =========== ========== ==========
SUPPLEMENTAL DISCLOSURES:
Interest paid................................. $ 122,937 $ 68,294 $ 40,814 $ 16,210
</TABLE>
NONCASH FINANCING ACTIVITY:
A capital lease obligation of $67,325 was incurred during 1995 when the Company
entered into a lease for new equipment.
The accompanying notes are an integral part of these combined financial
statements.
F-40
<PAGE> 113
M&S X-RAY PRACTICES
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
1. BUSINESS, ORGANIZATION AND BASIS OF PRESENTATION:
The accompanying combined financial statements combine the accounts of five
entities under common ownership: M&S X-ray Associates ("M&S"), a Texas
professional association, Madison Square Joint Venture ("Madison"), South Texas
MR, Inc. ("South Texas"), San Antonio MR Inc. ("San Antonio"), and Lexington MR
Ltd. ("Lexington") (collectively the "Company"), all of which are located in San
Antonio, Texas. M&S, a company specializing in radiological medicine, has and an
eight percent investment in Stone Oak Limited Partnership, a real estate limited
partnership. In addition, M&S holds forty-nine percent interest in Southeast
Baptist Imaging Center, a joint venture which owns and operates a diagnostic
imaging center. Madison is also engaged in the practice of radiological
medicine. South Texas holds a forty-nine percent interest in two joint ventures
which own and operate diagnostic imaging centers -- Northeast Baptist MRI Center
and Baptist Imaging Center. San Antonio holds a sixty percent interest in
Lexington, a company which owns and operates diagnostic imaging centers. An
additional nineteen percent of Lexington is owned by individual radiologists
included in the common ownership group. All intercompany transactions have been
eliminated.
The accompanying combined financial statements have been prepared on the
accrual basis of accounting.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of
three months or less when purchased to be cash equivalents.
Accounts Receivable
Accounts receivable primarily consist of receivables from patients,
insurers, government programs and other third-party payors for medical services
provided by physicians. Such amounts are reduced by an allowance for contractual
adjustments and other uncollectible amounts.
Property and Equipment
Property and equipment are recorded at cost. Depreciation on furniture,
fixtures and equipment is computed using the straight-line method over the
estimated useful lives of the assets. Leasehold improvements are amortized on
the straight-line method over the shorter of the noncancelable lease term or
estimated useful life of the asset. However, if the noncancelable lease term
expires in the near future and if the lease contains a renewal option of which
management is reasonably assured of exercising, the amortization period is the
shorter of the lease term including the renewal option period or the estimated
useful life.
Investments in Joint Ventures
Investments in joint ventures are accounted for using the equity method. In
addition, the Company holds an investment in a limited partnership which is
accounted for using the cost method.
Other Assets
Other assets are comprised of organization costs, loan origination costs
and goodwill. Loan origination costs are amortized on a straight-line basis over
the term of the loan. Organization costs are amortized on a straight-line basis
over a five-year period. Goodwill is amortized on a straight-line basis over 15
years.
F-41
<PAGE> 114
M&S X-RAY PRACTICES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred Compensation
Under the terms of the physician employment agreements, physicians who have
completed a minimum of five years of service are entitled to a payment equal to
two-thirds of their final compensation upon retirement or when they cease to be
employees of the Company. These payments are made in sixty equal monthly
payments beginning upon attainment of age 70 or the date when the physician
leaves the Company. The estimated present value of these liabilities is accrued
ratably during the five year service period.
Medical Service Revenues
Medical service revenue are accounted for in the period in which the
services are provided. The revenue are reported at the estimated realizable
amounts from patients, third party payors and others. Provisions for estimated
third party payor adjustments are estimated and recorded in the period the
related services are provided. Any adjustment to the amounts is recorded in the
period in which the revised amount is determined. A significant portion of the
Company's medical service revenue are related to Medicare and other governmental
programs. Medicare and other governmental programs reimburse physicians based on
fee schedules which are determined by the related governmental agency.
Additionally, the Company participates in agreements with managed care
organizations to provide services at negotiated rates.
Costs of Affiliated Physician Services
Costs of Affiliated Physician Services include physician compensation and
benefits paid or payable to owner and non-owner physicians during the period.
Income Taxes
As each of the consolidated entities is a non-taxable entity, there is no
provision for income taxes in the accompanying financial statements. The
individual owners include their respective share of Company profits and losses
in their tax returns.
Concentration of Credit Risk
The Company extends credit to patients covered by programs such as Medicare
and Medicaid and private insurers. The Company manages credit risk with the
various public and private insurance providers, as appropriate. Allowances for
bad debts have been made for potential losses when appropriate.
Use of Estimates
The preparation of combined financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Basis of Presentation -- Interim Financial Statements
The interim financial statements have been prepared by the Company without
audit, pursuant to the rules and regulations of Accounting Principles Board
("APB") Opinion No. 28, "Interim Financial Reporting." Certain information and
footnote disclosures normally included in the financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to APB Opinion No. 28; nevertheless, management of the Company
believes that the disclosures herein are adequate to prevent the information
presented from being misleading. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly the
financial position of the
F-42
<PAGE> 115
M&S X-RAY PRACTICES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Company with respect to the results of its operations for the interim periods
from January 1, 1996, to June 30, 1996, and from January 1, 1997, to June 30,
1997, have been included herein. The results of operations for the interim
periods are not necessarily indicative of the results for the full year.
3. PROPERTY AND EQUIPMENT:
Property and equipment at December 31, consists of the following:
<TABLE>
<CAPTION>
ESTIMATED USEFUL
LIVES (YEARS) 1995 1996
---------------- ----------- -----------
<S> <C> <C> <C>
Equipment................................. 5 $ 5,587,074 $ 5,670,340
Leasehold improvements.................... 1-15 448,734 448,734
Furniture and fixtures.................... 5 390,014 390,014
Computer software......................... 3-5 111,797 124,081
----------- -----------
6,537,619 6,633,169
Less -- Accumulated depreciation and
amortization............................ (5,285,289) (5,886,901)
----------- -----------
Property and equipment, net..... $ 1,252,330 $ 746,268
=========== ===========
</TABLE>
4. INVESTMENTS IN JOINT VENTURES:
Investments in joint ventures consist of 49% interests in three joint
ventures, each of which perform radiology and imaging healthcare services, and
an 8% interest in a real estate limited partnership. The carrying amounts of
these investments at December 31, are as follows:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Southeast Baptist Imaging Center............................ $ 666,365 $ 735,770
Baptist Imaging Center...................................... 206,061 140,770
Northeast Baptist MRI Center................................ 77,835 229,996
Stone Oak Limited Partnership............................... 72,818 64,417
---------- ----------
$1,023,079 $1,170,953
========== ==========
</TABLE>
Summary information from the unaudited financial statements of the three
joint ventures, accounted for under the equity method, as of and for the year
ended December 31, 1996, is as follows:
<TABLE>
<CAPTION>
SOUTHEAST
BAPTIST BAPTIST NORTHEAST
IMAGING IMAGING BAPTIST
CENTER CENTER MRI CENTER
----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Current assets..................................... $1,338,915 $292,712 $ 623,320
Total assets....................................... 3,209,657 324,022 660,898
Current liabilities................................ 915,634 28,785 188,984
Total liabilities.................................. 1,684,905 28,785 188,984
Partners' equity................................... 1,524,752 295,237 471,914
Revenues........................................... $3,173,674 $776,433 $2,054,265
Net income......................................... $ 143,974 $266,003 $ 826,283
Distributions to shareholders...................... $ -- $400,000 $ 515,000
</TABLE>
F-43
<PAGE> 116
M&S X-RAY PRACTICES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. LONG-TERM DEBT:
Long-term debt consists of the following as of December 31:
<TABLE>
<CAPTION>
1995 1996
-------- ---------
<S> <C> <C>
Note payable to related party, bearing interest at prime
(8.5% at December 31, 1995), due in 1996. Paid in full.... $ 30,000 $ --
Note payable to bank, bearing interest at 6.4%, due in 1998.
Quarterly payments of $49,000 plus interest,
collateralized by certain equipment. ..................... 539,000 343,000
Note payable to bank, bearing interest at 6.25%, due in
1996. Monthly payments of $2,780, collateralized by
certain equipment. Paid in full........................... 5,355 --
Note payable to bank, bearing interest at 6.25%, due in
1997. Monthly payments of $7,779, collateralized by
certain equipment......................................... 111,869 23,117
Note payable to bank, bearing interest at 8.25%, due in
2000. Monthly payments of $2,361, collateralized by
certain equipment......................................... -- 85,557
Note payable to bank, bearing interest at 6.25%, due in
1997. Monthly payments of $47,656, collateralized by
certain equipment......................................... 641,591 94,421
Note payable, bearing interest at 6.25%, due in 1997.
Monthly payments of $9,118, collateralized by certain
equipment................................................. 122,653 17,958
-------- ---------
Long-term debt.................................... 1,450,468 564,053
Less-current portion.............................. (908,626) (351,645)
-------- ---------
Long-term debt, net of current portion............ $541,842 $ 212,408
======== =========
</TABLE>
Future maturities of long-term debt at December 31, 1996, are as follows:
<TABLE>
<S> <C>
1997 $351,645
1998 170,751
1999 25,818
2000 15,839
--------
$564,053
========
</TABLE>
6. CAPITAL LEASE OBLIGATIONS:
The following represents the Company's outstanding capital lease
obligations at December 31:
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Capital lease for computer software, due in 2000, payable in
monthly installments of $1,369 collateralized by the
equipment................................................. $61,791 $50,018
======= =======
</TABLE>
F-44
<PAGE> 117
M&S X-RAY PRACTICES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1996, the minimum annual lease commitments under capital
lease obligations are as follows:
<TABLE>
<S> <C>
1997........................................................ $ 16,433
1998........................................................ 16,433
1999........................................................ 16,433
2000........................................................ 8,496
--------
Total minimum lease payments due............................ $ 57,795
Less- Amounts representing interest....................... (7,777)
--------
Present value of minimum lease payments..................... $ 50,018
Less- Current portion..................................... (12,783)
--------
Long-term obligations, net of current portion............... $ 37,235
========
</TABLE>
7. LEASES:
The Company leases office facilities under various noncancelable operating
leases that expire at various dates through 1998. The Company leases office
space from Stone Oak Limited Partners (see Note 4) under a lease that expires in
1997. Certain of the office leases provide for renewal options. Future minimum
lease payments under noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
RELATED
PARTIES OTHER
------- --------
<S> <C> <C>
1997........................................................ $59,252 $111,345
1998........................................................ -- 24,485
------- --------
Total............................................. $59,252 $135,830
======= ========
</TABLE>
Total rent expense in 1995 and 1996 was $240,395 and $260,067,
respectively. Included in rent expense was rent paid to related parties in the
amount of $88,878 in both 1995 and 1996.
8. EMPLOYEE BENEFIT PLAN:
The Company sponsors a 401(k) profit sharing plan. Employees of the Company
who are at least age 21 may participate in the 401(k) plan after one year of
service and are eligible for profit sharing after two years of service. The plan
provides for employer matching and profit sharing contributions. The Company's
contributions for 1995 and 1996 were $86,080 and $100,259, respectively.
9. RELATED-PARTY TRANSACTIONS:
Under agreements with affiliated joint ventures (Southeast Baptist Imaging
Center, Baptist Imaging Center, and Northeast Baptist MRI Center), the Company
performs professional, billing, and management services for these joint
ventures. These services are billed to the joint ventures based primarily upon
agreed-upon percentages of the joint ventures' cash basis revenue. Management
fee income from joint ventures is included in other revenue in the accompanying
combined statements of income and consist as follows:
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Southeast Baptist Imaging Center............................ $138,658 $183,212
Baptist Imaging Center...................................... 12,375 12,000
Northeast Baptist MRI Center................................ 96,750 96,100
-------- --------
$247,783 $291,312
======== ========
</TABLE>
F-45
<PAGE> 118
M&S X-RAY PRACTICES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The Company also collects the receivables of the joint ventures, and then
periodically remits the collections to them. In addition, the Company pays
certain expenses on behalf of the joint ventures, and is periodically reimbursed
by them. At December 31, 1996, there were no significant balances due from (to)
the joint ventures.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107 requires all entities
to disclose the fair value of certain financial instruments in their financial
statements. Accordingly, the carrying amounts of accounts receivable, accounts
payable and accrued expenses approximate fair value due to the short maturity of
these instruments. The carrying amount of the Company's long-term debt and
capital lease obligations also approximates fair value.
11. CONTINGENCIES:
The Company is subject to various claims and legal actions which arise in
the ordinary course of business. In the opinion of management, the ultimate
resolution of such matters will not have a material adverse effect on the
Company's financial position or results of operations.
12. SUBSEQUENT EVENTS:
On September 24, 1996, the Company entered into a letter of intent with
American Physician Partners, Inc. (APPI) under which APPI will acquire certain
assets and liabilities of the Company in exchange for common stock and cash.
Completion of the transaction is subject to certain conditions, including the
execution of a forty-year service agreement, stockholder approval by both
parties and successful completion of an initial public offering by APPI. Under
the terms of the service agreement, APPI will provide practice management,
administration and other services to the physicians for a negotiated service
fee. All nonprofessional employees shall become employees of APPI. In addition,
APPI will assume responsibility for all maintenance, repairs, improvements,
lease and other general operating expenses.
F-46
<PAGE> 119
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Pacific Imaging Consultants:
We have audited the accompanying combined balance sheets of Pacific Imaging
Consultants (see Note 1) as of December 31, 1995 and 1996, and the related
combined statements of income, owners' equity (deficit) and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Pacific Imaging Consultants
as of December 31, 1995 and 1996, and the results of their operations and their
cash flows for the years then ended in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
March 19, 1997
F-47
<PAGE> 120
PACIFIC IMAGING CONSULTANTS
COMBINED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------ -----------
1995 1996 1997
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................. $ -- $ -- $ --
Accounts receivable, net of allowances of $1,358,461,
$2,107,857 and $2,115,899 at December 31, 1995 and
1996 and June 30, 1997, respectively............... 1,310,879 1,878,911 1,933,826
Prepaid pension expense............................... 197,049 2,100,113 2,100,113
Prepaid expenses and other............................ 62,072 197,251 195,619
---------- ---------- ----------
Total current assets.......................... 1,570,000 4,176,275 4,229,558
PROPERTY AND EQUIPMENT, net............................. 2,851,444 2,260,861 1,862,327
INTANGIBLE ASSETS, net.................................. 145,601 133,251 133,251
OTHER ASSETS, net....................................... 121,641 190,502 107,212
---------- ---------- ----------
Total assets.................................. $4,688,686 $6,760,889 $6,332,348
========== ========== ==========
LIABILITIES AND OWNERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable...................................... $ 412,823 $ 898,582 $ 787,863
Accrued salaries and benefits......................... 240,402 287,512 287,512
Accrued liabilities................................... 444,034 490,882 490,155
Deferred income tax liability......................... 165,440 868,958 854,803
Current portion of long-term debt..................... 1,522,779 844,241 844,241
---------- ---------- ----------
Total current liabilities..................... 2,785,478 3,390,175 3,264,574
DEFERRED INCOME TAX LIABILITY........................... 10,871 11,268 11,268
LONG-TERM DEBT, net of current portion.................. 2,742,162 3,133,004 2,801,226
OWNERS' EQUITY (DEFICIT)................................ (849,825) 226,442 255,280
---------- ---------- ----------
Total liabilities and owners' equity
(deficit)................................... $4,688,686 $6,760,889 $6,332,348
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-48
<PAGE> 121
PACIFIC IMAGING CONSULTANTS
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------------- ------------------------
1995 1996 1996 1997
----------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES:
Medical service revenue, net.......... $11,245,044 $13,119,112 $5,552,390 $6,978,357
Other revenue......................... 203,296 175,408 81,772 73,422
----------- ----------- ---------- ----------
Total revenue................. 11,448,340 13,294,520 5,634,162 7,051,779
COSTS AND EXPENSES:
Costs of affiliated physician
services........................... 5,896,675 7,214,725 2,859,709 4,055,877
Practice salaries, wages and
benefits........................... 1,604,303 1,839,889 842,225 965,805
Practice supplies..................... 485,942 568,235 242,416 258,417
Practice rent and lease expense....... 355,073 384,615 209,742 195,362
Depreciation and amortization......... 996,058 981,289 488,370 474,546
Other practice expenses............... 1,739,436 1,939,384 829,491 985,557
Interest expense...................... 475,007 311,377 197,632 155,534
----------- ----------- ---------- ----------
Total costs and expenses...... 11,552,494 13,239,514 5,669,585 7,091,098
----------- ----------- ---------- ----------
INCOME (LOSS) BEFORE TAXES, UNUSUAL ITEM
AND EXTRAORDINARY ITEM................ (104,154) 55,006 (35,423) (39,319)
UNUSUAL ITEM -- gain on curtailment of
defined benefit pension plan.......... -- 1,903,064 1,903,064 --
----------- ----------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES....... (104,154) 1,958,070 1,867,641 (39,319)
INCOME TAX EXPENSE (BENEFIT)............ 104,194 715,493 672,351 (14,155)
----------- ----------- ---------- ----------
INCOME (LOSS) BEFORE EXTRAORDINARY
ITEM.................................. (208,348) 1,242,577 1,195,290 (25,164)
EXTRAORDINARY ITEM -- gain on
refinancing of debt................... -- 134,084 -- --
----------- ----------- ---------- ----------
NET INCOME (LOSS)....................... $ (208,348) $ 1,376,661 $1,195,290 $ (25,164)
=========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-49
<PAGE> 122
PACIFIC IMAGING CONSULTANTS
COMBINED STATEMENTS OF OWNERS' EQUITY (DEFICIT)
<TABLE>
<S> <C>
BALANCE, December 31, 1994.................................. $ (612,553)
Sale of stock............................................. 36,076
Net loss.................................................. (208,348)
Distributions............................................. (65,000)
----------
BALANCE, December 31, 1995.................................. (849,825)
Repurchase of stock....................................... (22,394)
Net income................................................ 1,376,661
Distributions............................................. (278,000)
----------
BALANCE, December 31, 1996.................................. 226,442
Net income (unaudited).................................... (25,164)
Contributions from Owners (unaudited)..................... 72,000
Repurchase of Stock (unaudited)........................... (17,998)
----------
BALANCE, June 30, 1997 (unaudited).......................... $ (255,280)
==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-50
<PAGE> 123
PACIFIC IMAGING CONSULTANTS
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------ -------------------------
1995 1996 1996 1997
---------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)....................... $ (208,348) $ 1,376,661 $ 1,195,290 $ (25,164)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities --
Depreciation and amortization........ 996,058 981,289 488,370 474,546
Deferred income taxes................ 104,194 703,915 672,351 (14,155)
Gain on refinancing of debt.......... -- 134,084 -- --
Changes in assets and liabilities --
(Increase) decrease in --
Accounts receivable, net........ (114,465) (568,032) 276,173 (54,915)
Prepaid pension expense......... 4,666 (1,903,064) (1,903,064) --
Prepaid expenses and other...... 33,991 (135,179) (3,630) 1,632
Other assets, net............... (72,334) (68,861) (336,021) 83,290
Increase (decrease) in --
Accounts payable................ 40,282 485,759 153,049 (110,719)
Accrued salaries and benefits... (4,595) 47,110 (112,901) --
Accrued liabilities............. 360,805 46,848 382,487 (727)
---------- ----------- ----------- -----------
Net cash provided by operating
activities.................... 1,140,254 1,100,530 812,104 353,788
---------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment..... (388,595) (378,356) (43,174) (76,012)
---------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt............ 198,992 585,868 -- --
Repayment of long-term debt............. (921,727) (1,007,648) (490,930) (331,778)
Contributions from (distributions to)
owners............................... (65,000) (278,000) (278,000) 72,000
Sale (purchases) of stock............... 36,076 (22,394) -- (17,998)
---------- ----------- ----------- -----------
Net cash used in financing
activities.................... (751,659) (722,174) (768,930) (277,776)
---------- ----------- ----------- -----------
NET CHANGE IN CASH........................ -- -- -- --
CASH, beginning of year................... -- -- -- --
---------- ----------- ----------- -----------
CASH, end of year......................... $ -- $ -- $ -- $ --
========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURES:
Cash interest paid...................... $ 477,736 $ 283,081 $ 197,632 $ 155,534
Cash paid for income taxes.............. $ -- $ 11,578 $ 9,975 $ 8,593
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-51
<PAGE> 124
PACIFIC IMAGING CONSULTANTS
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
1. BUSINESS, ORGANIZATION AND BASIS OF PRESENTATION:
The accompanying financial statements combine the accounts of three
entities under common ownership: Pacific Imaging Consultants, A Medical Group,
Inc. ("Pacific"), a California corporation formerly known as East Bay Medical
Imaging; Total Medical Imaging (TMI), a California S-corporation; and Lafayette
Medical Imaging Health Services (LMI), a California general partnership
(collectively the "Company"), all of which are located in the San Francisco Bay
area. The Company specializes in radiological medicine and the operation of
diagnostic imaging equipment. All intercompany transactions have been
eliminated.
The accompanying financial statements have been prepared on the accrual
basis of accounting.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Accounts Receivable
Accounts receivable primarily consist of receivables from patients,
insurers, government programs and other third-party payors for medical services
provided by physicians. Such amounts are reduced by an allowance for contractual
adjustments and other uncollectible amounts.
Property and Equipment
Property and equipment is recorded at cost. Depreciation on furniture,
fixtures and equipment is computed using the straight-line method over the
estimated useful lives of the assets. Leasehold improvements are amortized on
the straight-line method over the shorter of the noncancelable lease term or
estimated useful life of the asset. However, if the noncancelable lease term
expires in the near future and if the lease contains a renewal option of which
management is reasonably assured of exercising, the amortization period is the
shorter of the lease term including the renewal option period or the estimated
useful life.
Intangible Assets
Intangible assets are comprised of organization costs and noncompete
agreements. Organization costs are being amortized on a straight-line basis over
a five-year period. Noncompete agreements are amortized on a straight-line basis
over the life of the agreements.
Other Assets
Other assets are comprised of equity investments in affiliated entities,
deposits and other receivables. Investments in affiliated entities are being
accounted for under the cost method and equity method as appropriate, based on
percentage of ownership and control of the entity. Such investments are not
material at December 31, 1996.
Medical Service Revenues
Medical service revenue are accounted for in the period in which the
services are provided. The revenue are reported at the estimated realizable
amounts from patients, third party payors and others. Provisions for estimated
third party payor adjustments are estimated and recorded in the period in which
the related services are provided. Any adjustment to the amounts is recorded in
the period in which the revised amount is determined. A significant portion of
the Company's medical service revenue are related to Medicare and other
governmental programs. Medicare and other governmental programs reimburse
physicians based on fee schedules which are determined by the related
governmental agency. Additionally, the Company participates in agreements with
managed care organizations to provide services at negotiated rates.
F-52
<PAGE> 125
PACIFIC IMAGING CONSULTANTS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Costs of Affiliated Physician Services
Costs of Affiliated Physician Services include physician compensation and
benefits paid or payable to owner and non-owner physicians during the period.
Income Taxes
Pacific accounts for income taxes under the liability method which states
that deferred income taxes are determined based on the estimated future tax
effects of differences between the financial reporting and income tax basis of
assets and liabilities given the provisions of enacted tax laws. Deferred income
tax provisions are based on the changes to the asset or liability from period to
period. TMI is an S-corporation and LMI is a general partnership, and
accordingly, there is no provision for income taxes related to these entities.
The individual owners include their respective share of profits and losses in
their tax returns.
Concentration of Credit Risk
The Company extends credit to patients covered by programs such as Medicare
and Medicaid and private insurers. The Company manages credit risk with the
various public and private insurance providers, as appropriate. Allowances for
bad debts have been made for potential losses when appropriate.
Use of Estimates
The preparation of combined financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the combined
financial statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Basis of Presentation -- Interim Financial Statements
The interim financial statements have been prepared by the Company without
audit, pursuant to the rules and regulations of Accounting Principles Board
("APB") Opinion No. 28, "Interim Financial Reporting." Certain information and
footnote disclosures normally included in the financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to APB Opinion No. 28; nevertheless, management of the Company
believes that the disclosures herein are adequate to prevent the information
presented from being misleading. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly the
financial position of the Company with respect to the results of its operations
for the interim periods from January 1, 1996, to June 30, 1996, and from January
1, 1997, to June 30, 1997, have been included herein. The results of operations
for the interim periods are not necessarily indicative of the results for the
full year.
F-53
<PAGE> 126
PACIFIC IMAGING CONSULTANTS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment at December 31, consists of the following:
<TABLE>
<CAPTION>
ESTIMATED USEFUL
LIVES (YEARS) 1995 1996
---------------- ----------- -----------
<S> <C> <C> <C>
Building.................................. 39 $ 122,645 $ 123,817
Automobiles............................... 5 22,818 22,818
Leasehold improvements.................... 5-10 670,479 670,479
Furniture and equipment................... 5-7 5,873,926 6,251,110
----------- -----------
6,689,868 7,068,224
Less -- Accumulated depreciation and
amortization............................ (3,838,424) (4,807,363)
----------- -----------
Property and equipment, net............... $ 2,851,444 $ 2,260,861
=========== ===========
</TABLE>
4. LONG-TERM DEBT:
Long-term debt consists of the following as of December 31:
<TABLE>
<CAPTION>
1995 1996
----------- ----------
<S> <C> <C>
Notes payable to Third Party, bearing interest at 7.5%, due
in 1999. Monthly payments of $5,009 including
interest................................................. $ 196,545 $ 136,648
Note payable to Service Provider, noninterest bearing,
balance due in 1996...................................... 13,405 --
Note payable to Bank, bearing interest at the U.S. Treasury
Securities rate plus 3.25% (9.125% at December 31, 1996),
due in 2003. Monthly payments of $1,052 including
interest................................................. 71,502 65,584
Notes payable to Bank, bearing interest at prime (8.5% at
December 31, 1995), due at various dates through 2001.
Monthly payments of $4,509 plus interest................. 443,615 --
Note payable to Bank, bearing interest at prime plus .25%
(8.75% at December 31, 1995), due in 1999. Monthly
payments of $6,636 including interest.................... 633,157 --
Note payable to Bank, bearing interest at prime plus 1%
(9.5% at December 31, 1995), due in 1998. Monthly
payments of $10,411 plus interest........................ 324,999 --
Notes payable to Finance Company, bearing interest ranging
from 8.97% to 9.72%, due in 1998, secured by accounts
receivable and certain property and equipment. Monthly
payments of $97,299 including interest................... 2,581,718 --
Note payable to Bank, bearing interest at the U.S. Treasury
Securities rate plus 2% (7.92% at December 31, 1996),
secured by accounts receivable and certain property and
equipment, due in 2001. Monthly payments of $92,017
including interest....................................... $ -- $3,775,013
----------- ----------
4,264,941 3,977,245
Less -- Current maturities................................. (1,522,779) (844,241)
----------- ----------
$ 2,742,162 $3,133,004
=========== ==========
</TABLE>
F-54
<PAGE> 127
PACIFIC IMAGING CONSULTANTS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
In August 1996, the Company refinanced all outstanding bank debt. The
previous notes had interest rates ranging from the prime rate to a fixed rate of
9.25%. The new note bears interest at the rate of U.S. Treasury securities plus
2%. The refinancing resulted in a gain of $134,084, which has been reflected as
an extraordinary item in the accompanying financial statements.
Future maturities of long-term debt at December 31, 1996, are as follows:
<TABLE>
<S> <C>
1997..................................................... $ 844,241
1998..................................................... 920,658
1999..................................................... 973,590
2000..................................................... 1,021,470
2001..................................................... 217,286
----------
$3,977,245
==========
</TABLE>
5. OPERATING LEASES:
The Company leases seven facilities under various noncancelable operating
leases that expire at various dates through 2000. Future minimum lease payments
under noncancelable leases are as follows:
<TABLE>
<S> <C>
1997...................................................... $231,936
1998...................................................... 222,312
1999...................................................... 184,492
2000...................................................... 133,418
2001...................................................... 150,206
Thereafter................................................ 67,695
--------
$990,059
========
</TABLE>
6. INCOME TAXES:
The provisions for income taxes consist of the following:
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Current income tax expense..................... $ -- $ 11,578
Deferred income tax expense.................... 104,194 703,915
-------- --------
Total income tax expense....................... $104,194 $715,493
======== ========
</TABLE>
Significant components of the Company's deferred tax liabilities as of
December 31, are as follows:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Current:
Deferred tax assets --
Accounts payable and accrued liabilities............... $ 131,425 $ 180,275
Deferred tax (liabilities) --
Accounts receivable, net............................... (296,865) (402,191)
Prepaid pension expense................................ -- (647,042)
--------- ---------
Total net current deferred tax liabilities........ $(165,440) $(868,958)
========= =========
Noncurrent:
Deferred tax (liabilities) --
Depreciation........................................... $ (10,871) $ (11,268)
========= =========
</TABLE>
F-55
<PAGE> 128
PACIFIC IMAGING CONSULTANTS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The differences between the provision for income taxes and the amounts
computed by applying the statutory Federal income tax rate to income (loss)
before income taxes are due to the income (losses) of S-Corporations and
partnerships included in these combined financial statements.
7. EMPLOYEE BENEFIT PLAN:
The Company has a defined benefit pension plan covering all physician
employees and shareholders. The benefits are based on the final pay of each
physician, with minimum flat dollar limits. The Company's funding policy is to
contribute annually the maximum amount that can be deducted for federal income
tax purposes. Contributions are intended to provide not only for benefits
attributed service to date but also for those expected to be earned in the
future.
Effective May 31, 1996, the Company curtailed the benefits under the plan
through Board of Director resolution to terminate the Plan. Plan benefits were
effectively frozen at this date and physicians will earn no additional defined
benefits for future services. All unrecognized prior service cost and
unrecognized net obligation from the initial application of SFAS 87 have been
reduced to zero as of the effective date of the curtailment, resulting in a gain
from curtailment of approximately $1.9 million. The plan of settlement has not
been determined and subsequent gain or loss may be recorded upon settlement.
The following table sets forth the plan's funded status and amounts
recognized in the Company's balance sheet at December 31,
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Actuarial present value of benefits obligations:
Accumulated benefit obligation, including vested
benefits of $3,556,952 and $4,723,679,
respectively......................................... $(3,594,203) $(4,723,679)
=========== ===========
Projected benefit obligation for service rendered to
date................................................. $(4,392,486) $(4,723,679)
Plan assets at fair value, primarily...................... 6,345,352 6,823,792
----------- -----------
Plan assets in excess of projected benefit obligations.... 1,952,866 2,100,113
Unrecognized net obligation at initial adoption of SFAS
No. 87.................................................. (1,755,817) --
----------- -----------
Prepaid pension cost included in other assets............. $ 197,049 $ 2,100,113
=========== ===========
</TABLE>
Net periodic pension cost for 1995 and 1996 included the following
components (in thousands)
<TABLE>
<CAPTION>
1995 1996
--------- -----------
<S> <C> <C>
Service cost-benefits earned during the period............. $ 828,307 $ --
Interest cost on projected benefit obligation.............. 286,658 331,193
Actual return on plan assets............................... (269,853) (478,440)
Net amortization........................................... (39,035) (1,755,817)
--------- -----------
Net periodic pension cost (benefit)........................ $ 806,077 $(1,903,064)
========= ===========
Weighted average discount rate............................. 7.39% 7.54%
Rate of increase in future compensation.................... 3.00% N/A
Expected long-term rate of return on assets................ 7.39% 7.54%
</TABLE>
In 1996, the Company began sponsoring a 401(k) and profit sharing plan for
employees of the Company and its two corporate members, who have completed one
year of service and are at least age 21. The 401(k) plan provides for employer
matching contributions equal to three percent of gross salary for eligible
employees. The Company made no contributions to the plan in 1996. Physician
shareholders contributed $88,688 on behalf of the employees of the Company.
F-56
<PAGE> 129
PACIFIC IMAGING CONSULTANTS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
8. RELATED-PARTY TRANSACTIONS:
The Company has a non-interest bearing note receivable from an employee.
Amounts outstanding at December 31, 1995 and 1996 were $85,000 and $94,836,
respectively. The note has no stated maturity date.
The Company has a note receivable from a physician which bears interest at
8.5% and matures in August, 1995. Amounts outstanding at December 31, 1995 and
1996 were $38,936 and $36,173, respectively.
At December 31, 1995, the Company had a $25,000 note receivable from a
physician. This note was paid in full in 1996.
At December 31, 1996, the Company had a $10,000 note receivable from a
physician which bears interest at 8.25% and matures in 1997. In addition, in
1996, the Company made non-interest bearing advances totaling $70,287 to certain
physicians. These advances are to be repaid in 1997.
The Company has an ownership interest in a real estate partnership. Rent
paid to this partnership was $49,752 in 1995 and 1996.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107 requires all entities
to disclose the fair value of certain financial instruments in their financial
statements. Accordingly, the carrying amounts of accounts receivable, accounts
payable and accrued expenses approximate fair value due to the short maturity of
these instruments. The carrying amount of the Company's long-term debt also
approximates fair value.
10. CONTINGENCIES:
The Company is subject to various claims and legal actions which arise in
the ordinary course of business. In the opinion of management, the ultimate
resolution of such matters will not have a material adverse effect on the
Company's financial position or results of operation.
11. SUBSEQUENT EVENTS:
On February 26, 1997, the Company entered into a letter of intent with
American Physician Partners, Inc. (APPI) under which APPI will acquire certain
assets and liabilities of the Company in exchange for common stock and cash.
Completion of the transaction is subject to certain conditions, including the
execution of a forty-year service agreement, stockholder approval by both
parties and successful completion of an initial public offering by APPI. Under
the terms of the service agreement, APPI will provide practice management,
administration and other services to the physicians for a negotiated service
fee. All nonprofessional employees shall become employees of APPI. In addition,
APPI will assume responsibility for all maintenance, repairs, improvements,
lease and other general operating expenses.
Effective January 1, 1997, the Company and Valley Radiology Group, a group
of radiologists in San Jose, California, formed a management services
organization to manage their operations.
F-57
<PAGE> 130
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Radiology and Nuclear Medicine, P.A.:
We have audited the accompanying balance sheets of Radiology and Nuclear
Medicine, P.A., (a Kansas corporation) as of December 31, 1995 and 1996 and the
related statements of income, owners' equity, and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Radiology and Nuclear
Medicine, P.A., as of December 31, 1995 and 1996 and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
February 21, 1997
F-58
<PAGE> 131
RADIOLOGY AND NUCLEAR MEDICINE, P.A.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30,
1995 1996 1997
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................ $ 223,067 $ 173,258 $ 887,376
Accounts receivable, net of allowances of $1,664,580,
$1,922,264 and $2,281,491 at December 31, 1995, 1996
and June 30, 1997, respectively....................... 1,596,469 1,756,271 2,021,553
Prepaid expenses and other current assets............. 230,531 220,937 220,937
---------- ---------- ----------
Total current assets............................. 2,050,067 2,150,466 3,129,866
PROPERTY AND EQUIPMENT, net................................ 626,684 572,172 662,005
INVESTMENTS IN JOINT VENTURES.............................. 1,251,110 1,269,545 1,321,507
OTHER ASSETS, net.......................................... 85,361 88,368 88,451
---------- ---------- ----------
Total assets..................................... $4,013,222 $4,080,551 $5,201,829
========== ========== ==========
LIABILITIES AND OWNERS' EQUITY
CURRENT LIABILITIES:
Accounts payable......................................... $ 65,064 $ 64,561 $ 64,561
Accrued expenses......................................... 35,943 48,322 144,026
Accrued salaries and benefits............................ 399,750 361,571 419,087
Deferred income taxes.................................... 489,332 536,241 1,005,735
Short-term borrowings.................................... 1,400,000 1,400,000 1,000,000
Current portion of long-term debt........................ 174,371 186,611 119,399
---------- ---------- ----------
Total current liabilities........................ 2,564,460 2,597,306 2,752,808
LONG-TERM DEBT, net of current portion..................... 234,528 45,784 --
---------- ---------- ----------
Total liabilities................................ 2,798,988 2,643,090 2,752,808
COMMITMENTS AND CONTINGENCIES
OWNERS' EQUITY............................................. 1,214,234 1,437,461 2,449,021
---------- ---------- ----------
Total liabilities and owners' equity............. $4,013,222 $4,080,551 $5,201,829
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-59
<PAGE> 132
RADIOLOGY AND NUCLEAR MEDICINE, P.A.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------------- ------------------------
1995 1996 1996 1997
----------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES:
Medical service revenue, net.......... $13,725,958 $13,448,096 $6,601,598 $6,943,616
Other revenue......................... 122,672 124,084 17,957 17,697
----------- ----------- ---------- ----------
Total revenue................. 13,848,630 13,572,180 6,619,555 6,961,313
COSTS AND EXPENSES:
Costs of affiliated physician
services........................... 10,700,150 10,265,121 3,965,406 4,132,057
Practice salaries, wages and
benefits........................... 1,807,179 1,743,761 657,808 682,530
Practice supplies..................... 385,666 293,545 166,273 134,796
Practice rent and lease expense....... 260,347 272,617 130,173 130,173
Depreciation and amortization......... 187,612 202,058 89,358 90,241
Other practice expenses............... 816,860 822,598 405,116 444,782
Interest expense...................... 67,542 70,530 57,805 57,884
----------- ----------- ---------- ----------
Total costs and expenses...... 14,225,356 13,670,230 5,471,939 5,672,463
----------- ----------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES AND
EQUITY IN EARNINGS OF INVESTMENTS..... (376,726) (98,050) 1,147,616 1,288,850
EQUITY IN EARNINGS OF INVESTMENTS....... 311,311 292,442 189,665 192,204
INCOME TAX EXPENSE (BENEFIT)............ (33,212) 57,305 423,918 469,494
----------- ----------- ---------- ----------
NET INCOME (LOSS)....................... $ (32,203) $ 137,087 $ 913,363 $1,011,560
=========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-60
<PAGE> 133
RADIOLOGY AND NUCLEAR MEDICINE, P.A.
STATEMENTS OF OWNERS' EQUITY
<TABLE>
<S> <C>
BALANCE, December 31, 1994.................................. $1,270,173
Net loss.................................................. (32,203)
Dividends paid............................................ (23,736)
----------
BALANCE, December 31, 1995.................................. 1,214,234
Sale of treasury stock.................................... 104,716
Net income................................................ 137,087
Dividends paid............................................ (18,576)
----------
BALANCE, December 31, 1996.................................. 1,437,461
Net income (unaudited).................................... 1,011,560
----------
BALANCE, June 30, 1997 (unaudited).......................... $2,449,021
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-61
<PAGE> 134
RADIOLOGY AND NUCLEAR MEDICINE, P.A.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
----------------------- --------------------------
1995 1996 1996 1997
---------- ---------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).......................... $ (32,203) $ 137,087 $ 913,363 $1,011,560
Adjustments to reconcile net income (loss)
to net cash used in operating
activities --
Depreciation and amortization........... 187,612 202,058 89,358 90,241
Deferred income taxes................... (63,815) 46,909 424,007 469,494
Equity in earnings of investments....... (311,311) (292,440) (189,665) (192,204)
Gain on sale of assets.................. (2,410) (6,519) -- --
Changes in assets and liabilities --
(Increase) decrease in --
Accounts receivable, net........... 196,804 (159,802) 58,156 (265,282)
Prepaid expenses and other current
assets........................... (14,393) 9,594 -- --
Other assets....................... (6,231) (3,007) (308) (83)
Increase (decrease) in --
Accounts payable and accrued
expenses......................... (19,073) 11,876 96,605 95,704
Accrued salaries and benefits...... 52,323 (38,178) (205,733) 57,516
--------- --------- ----------- ----------
Net cash provided by (used in)
operating activities.......... (12,697) (92,422) 1,185,783 1,266,946
--------- --------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of furniture and equipment,
net..................................... (296,206) (147,547) (21,786) (180,074)
Proceeds from sale of fixed assets......... 2,410 7,020 -- --
Distributions from investments............. 515,447 273,502 373 140,242
--------- --------- ----------- ----------
Net cash provided by (used in)
investing activities.......... 221,651 132,975 (21,413) (39,832)
--------- --------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt................ (185,023) (176,502) (108,010) (112,996)
Repayment of short-term borrowings......... -- -- (1,000,000) (400,000)
Sale of treasury stock..................... -- 104,716 -- --
Dividends paid............................. (23,736) (18,576) -- --
--------- --------- ----------- ----------
Net cash used in financing
activities.................... (208,759) (90,362) (1,108,010) (512,996)
--------- --------- ----------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................ 195 (49,809) 56,360 714,118
CASH AND CASH EQUIVALENTS, beginning of
period..................................... 222,872 223,067 223,067 173,258
--------- --------- ----------- ----------
CASH AND CASH EQUIVALENTS,
end of period.............................. $ 223,067 $ 173,258 $ 279,427 $ 887,376
========= ========= =========== ==========
SUPPLEMENTAL DISCLOSURE:
Cash interest paid......................... $ 67,542 $ 70,530 $ 57,805 $ 57,884
Cash income taxes paid..................... $ 30,603 $ 17,616 $ -- $ 1,108
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-62
<PAGE> 135
RADIOLOGY AND NUCLEAR MEDICINE, P.A.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
1. BUSINESS, ORGANIZATION AND BASIS OF PRESENTATION:
Radiology and Nuclear Medicine, a Professional Association (the "Company"),
is a professional corporation organized under the laws of the State of Kansas to
provide diagnostic radiology medical imaging and radiation oncology services.
Its offices are located in Topeka, Kansas and the surrounding area.
The accompanying financial statements have been prepared on the accrual
basis of accounting.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of
three months or less when purchased to be cash equivalents.
Accounts Receivable
Accounts receivable primarily consist of receivables from patients,
insurers, government programs and other third-party payors for medical services
provided by physicians. Such amounts are reduced by an allowance for contractual
adjustments and other uncollectible amounts.
Property and Equipment
Property and equipment are recorded at cost. Depreciation on furniture,
fixtures and equipment is computed using straight-line methods over the
estimated useful lives of the assets. Leasehold improvements are amortized on
the straight-line method over the shorter of the noncancelable lease term or
estimated useful life of the asset. However, if the noncancelable lease term
expires in the near future and if the lease contains a renewal option of which
management is reasonably assured of exercising, the amortization period is the
shorter of the lease term including the renewal option period or the estimated
useful life.
Investments in Affiliated Entities
The Company has investments in two partnerships, Magnetic Resonance Imaging
Center of Kansas ("MRI") and Medical Building West Associates, LP ("MBW") which
are accounted for using the equity method and the cost method, respectively (see
Note 3).
Other Noncurrent Assets
Other noncurrent assets consist of deposits with insurance companies and a
note receivable.
Medical Service Revenues
Medical service revenue are accounted for in the period in which the
services are provided. Revenues are reported at the estimated realizable amounts
from patients, third party payors and others. Provisions for estimated third
party payor adjustments are estimated and recorded in the period the related
services are provided. Any adjustment to the amounts is recorded in the period
in which the revised amount is determined. A significant portion of the
Company's medical service revenue are related to Medicare and other governmental
programs. Medicare and other governmental programs reimburse physicians based on
fee schedules which are determined by the related governmental agency.
Additionally, the Company participates in agreements with managed care
organizations to provide services at negotiated rates.
F-63
<PAGE> 136
RADIOLOGY AND NUCLEAR MEDICINE, P.A.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes
The Company accounts for income taxes under the liability method which
states that deferred income taxes are to be determined based on the estimated
future tax effects of differences between the financial reporting and income tax
bases of assets and liabilities given the provisions of enacted tax laws.
Deferred income tax provisions are based on the changes to the asset or
liability from period to period.
Concentration of Credit Risk
The Company extends credit to patients covered by programs such as Medicare
and Medicaid and private insurers. The Company manages credit risk with the
various public and private insurance providers, as appropriate. Allowances for
bad debts have been made for potential losses when appropriate.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Basis of Presentation - Interim Financial Statements
The interim financial statements have been prepared by the Company without
audit, pursuant to the rules and regulations of Accounting Principles Board
("APB") Opinion No. 28, "Interim Financial Reporting." Certain information and
footnote disclosures normally included in the financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to APB Opinion No. 28; nevertheless, management of the Company
believes that the disclosures herein are adequate to prevent the information
presented from being misleading. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly the
financial position of the Company with respect to the results of its operations
for the interim periods from January 1, 1996, to June 30, 1996, and from January
1, 1997, to June 30, 1997, have been included herein. The results of operations
for the interim periods are not necessarily indicative of the results for the
full year.
3. INVESTMENTS:
Investments in affiliated entities primarily consist of a 22% interest in
MRI and a 15% interest in MBW. The purpose of MRI is to own and operate real and
personal property. The purpose of MBW is to acquire/own land for the production
of income. The initial amount contributed to MBW was $1,000,000.
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
MBW......................................................... $ 966,667 $ 966,667
MRI......................................................... 283,948 302,878
Other....................................................... 495 --
---------- ----------
$1,251,110 $1,269,545
========== ==========
</TABLE>
F-64
<PAGE> 137
RADIOLOGY AND NUCLEAR MEDICINE, P.A.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY AND EQUIPMENT:
Property and equipment at December 31, consists of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL
LIVES
(YEARS) 1995 1996
--------- ----------- -----------
<S> <C> <C> <C>
Equipment........................................ 5 - 10 $ 3,715,478 $ 3,781,288
Leasehold improvements........................... 10 319,532 319,532
Furniture and fixtures........................... 5 62,447 116,758
----------- -----------
4,097,457 4,217,578
Less -- Accumulated depreciation and
amortization................................... (3,470,773) (3,645,406)
----------- -----------
Property and equipment, net.................... $ 626,684 $ 572,172
=========== ===========
</TABLE>
5. SHORT-TERM BORROWINGS:
At December 31, 1995 and 1996, the Company had $1,400,000 of short-term
working capital notes outstanding. The interest rate on these borrowings was
8.5% and 8.25% at December 31, 1995 and 1996, respectively and the notes are due
within a one year period.
6. LONG-TERM DEBT:
Long-term debt consists of the following as of December 31:
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Note payable to physician, bearing interest at 5.35%, due in
1998. Annual payments of $20,870 plus interest............ 62,607 41,737
Note payable to physician, bearing interest at 6.34%, due in
1997. Annual payments of $21,347 plus interest............ 42,694 21,347
Note payable to bank, bearing interest at the index of the
weekly average yield on U.S. Treasury securities plus 2%
(8.34% and 7.56% at December 31, 1995 and 1996,
respectively), due in 1998. Monthly payments of $12,912
and $12,643 in 1995 and 1996, respectively, secured by the
Company's interest in a limited partnership............... 303,598 169,311
-------- --------
Long-term debt.................................... 408,899 232,395
Less- Current maturities.......................... (174,371) (186,611)
-------- --------
Long-term debt, net of current maturities......... $234,528 $ 45,784
======== ========
</TABLE>
Future maturities of long-term debt at December 31, 1996, are as follows:
<TABLE>
<S> <C>
1997....................................................... $186,611
1998....................................................... 45,784
--------
$232,395
========
</TABLE>
Under the terms of a Stock Purchase Agreement between the Company and its
stockholders, the Company is required to repurchase the stock of each
stockholder upon retirement or at any time the stockholder ceases to be an
employee of the Company. The purchase price is based upon the then accounts
receivable balances of the Company, tax-effected, plus owners' equity of the
Company as of the end of the previous year, with certain defined adjustments.
The purchase price is paid in annual installments, not to
F-65
<PAGE> 138
RADIOLOGY AND NUCLEAR MEDICINE, P.A.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
exceed five years, with unpaid balances bearing interest at the lesser of 9% or
the U.S. Treasury Note rate. At December 31, 1996, the Company had $63,084
payable under these arrangements.
7. INCOME TAXES:
The provisions for income taxes for the years ended December 31, consist of
the following:
<TABLE>
<CAPTION>
1995 1996
-------- -------
<S> <C> <C>
Current income tax expense.................................. $ 30,603 $10,396
Deferred income tax expense (benefit)....................... (63,815) 46,909
-------- -------
Total income tax expense (benefit)................ $(33,212) $57,305
======== =======
</TABLE>
Significant components of the Company's net deferred tax assets as of
December 31, are as follows:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Deferred tax assets:
Depreciation.............................................. $ 44,576 $ 50,331
Accounts payable and accrued liabilities.................. 87,272 85,679
Deferred tax liabilities:
Accounts receivable....................................... (542,800) (597,133)
Other..................................................... (78,380) (75,118)
--------- ---------
Net deferred tax liabilities........................... $(489,332) $(536,241)
========= =========
</TABLE>
The differences between the provision (benefit) for income taxes and the
amounts computed by applying the statutory Federal income tax rate to income
(loss) before income taxes are due to disallowed passive losses from certain
investments.
8. LEASES:
The Company leases office facilities under various noncancelable operating
leases that expire in 2007. Future minimum lease payments under noncancelable
operating leases are as follows:
<TABLE>
<S> <C>
1997..................................................... $ 177,396
1998..................................................... 149,742
1999..................................................... 149,742
2000..................................................... 149,742
2001..................................................... 149,742
Thereafter............................................... 885,974
----------
$1,662,338
==========
</TABLE>
The Company has also entered into various agreements, expiring in April
1997, whereby it pays a monthly fee for selection, procurement, repair and
maintenance of its radiology and imaging equipment. The fees paid are expected
to approximate $57,000 per year.
9. EMPLOYEE BENEFIT PLAN:
The Company sponsors a defined contribution pension plan for employees of
the Company who have completed one year of service, with a minimum of 1,000
hours worked. The plan provides for employer contributions of 10% of
compensation up to a maximum eligible compensation of $150,000. The Company's
contribution for 1995 and 1996 was approximately $472,000 and $477,000,
respectively.
F-66
<PAGE> 139
RADIOLOGY AND NUCLEAR MEDICINE, P.A.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company also sponsors a 401(k) plan for employees of the Company who
have completed one year of service, with a minimum 1,000 hours worked. The plan
provides for employer matching contributions of one-half of employee
contributions, up to 2% of the employee's salary. The plan also allows for
employer discretionary contributions. The Company's contributions for 1995 and
1996 were approximately $189,000 and $185,000, respectively.
10. RELATED-PARTY TRANSACTIONS:
As indicated in Note 3, the Company has a 15% partnership interest in MBW
from which the Company leases its office space. Rent expense relating to such
facilities was approximately $150,000 in 1995 and 1996.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107 requires all entities
to disclose the fair value of certain financial instruments in their financial
statements. Accordingly, the carrying amounts of accounts receivable, accounts
payable, accrued expenses, short-term borrowings and long-term debt approximate
fair value due to the short maturity of these instruments.
12. CONTINGENCIES:
Litigation
The Company is subject to various claims and legal actions which arise in
the ordinary course of business. In the opinion of management, the ultimate
resolution of such matters will not have a material adverse effect on the
Company's financial position or results of operations.
Insurance
The Company is self-insured for employee health benefits. Stop-loss
insurance coverage has been purchased to cover claims exceeding certain
retention limits. At December 31, 1996, the Company's maximum exposure for
health insurance claims was $20,000 per family with an aggregate maximum limit
of 125% of expected claims, as determined by the insurance company
(approximately $379,000 in 1996.) An estimate of the amount due and payable on
existing claims for which the Company is liable is included in accrued expenses.
13. SUBSEQUENT EVENTS:
On January 20, 1997, the Company entered into a letter of intent with
American Physician Partners, Inc. (APPI) under which APPI will acquire certain
assets and liabilities of the Company in exchange for common stock and cash.
Completion of the transaction is subject to certain conditions, including the
execution of a forty-year service agreement, stockholder approval by both
parties and successful completion of an initial public offering by APPI. Under
the terms of the service agreement, APPI will provide practice management,
administration and other services to the physicians for a negotiated service
fee. All nonprofessional employees shall become employees of APPI. In addition,
APPI will assume responsibility for all maintenance, repairs, improvements,
lease and other general operating expenses.
F-67
<PAGE> 140
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Rockland Radiological Group:
We have audited the accompanying combined balance sheets of Rockland
Radiological Group (Note 1) as of September 30, 1995 and 1996, and the related
combined statements of income, owners' equity (deficit), and cash flows for each
of the three years in the period ended September 30, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Rockland Radiological Group
as of September 30, 1995 and 1996, and the results of their operations and their
cash flows for each of the three years in the period ended September 30, 1996,
in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
March 19, 1997
F-68
<PAGE> 141
ROCKLAND RADIOLOGICAL GROUP
COMBINED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------- JUNE 30,
1995 1996 1997
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................. $ 198,387 $ 226,579 $ 368,633
Accounts receivable, net of allowances of $2,457,694,
$2,614,800 and $3,840,588 at September 30, 1995 and
1996 and June 30, 1997, respectively............... 2,686,087 2,995,190 2,842,436
Prepaid expenses and other current assets............. 194,872 212,011 409,638
----------- ----------- -----------
Total current assets.......................... 3,079,346 3,433,780 3,620,707
PROPERTY AND EQUIPMENT, net............................. 3,811,459 4,152,971 5,268,947
DEFERRED INCOME TAX ASSET............................... 854,993 1,029,209 1,203,425
OTHER ASSETS, net....................................... 30,626 2,000 2,143,996
----------- ----------- -----------
Total assets.................................. $ 7,776,424 $ 8,617,960 $12,237,075
=========== =========== ===========
LIABILITIES AND OWNERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable...................................... $ 202,486 $ 196,728 $ 188,710
Accrued salaries and benefits......................... 604,948 541,492 541,492
Deferred income tax liability......................... 533,921 639,961 572,785
Current portion of long-term debt..................... 719,078 944,199 1,675,146
Current portion of capital lease obligations.......... 1,077,848 1,193,100 545,557
----------- ----------- -----------
Total current liabilities..................... 3,138,281 3,515,480 3,523,690
DEFERRED COMPENSATION................................... 2,592,054 3,167,979 3,599,923
CAPITAL LEASE OBLIGATIONS, net of current portion....... 2,557,615 1,364,515 1,377,890
LONG-TERM DEBT, net of current portion.................. 1,832,526 2,548,330 5,562,941
----------- ----------- -----------
Total liabilities............................. 10,120,476 10,596,304 14,064,444
OWNERS' EQUITY (DEFICIT)................................ (2,344,052) (1,978,344) (1,827,369)
----------- ----------- -----------
Total liabilities and owners' equity
(deficit)................................... $ 7,776,424 $ 8,617,960 $12,237,075
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-69
<PAGE> 142
ROCKLAND RADIOLOGICAL GROUP
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30, NINE MONTHS ENDED JUNE 30,
--------------------------------------- ---------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Medical service revenues, net......... $15,078,280 $17,823,023 $17,302,049 $11,560,883 $13,541,174
Other revenues........................ 2,023 1,110 30,759 203,442 126,251
----------- ----------- ----------- ----------- -----------
Total revenues................ 15,080,303 17,824,133 17,332,808 11,764,325 13,667,425
COSTS AND EXPENSES:
Costs of affiliated physician
services........................... 3,674,505 7,074,008 6,051,448 4,824,530 4,799,315
Practice salaries, wages and
benefits........................... 3,916,578 4,118,141 4,251,812 2,967,423 3,542,507
Practice supplies..................... 603,087 1,181,653 1,146,608 856,491 1,033,193
Practice rent and lease expense....... 188,399 163,878 110,413 78,347 90,281
Depreciation and amortization......... 1,605,316 1,628,181 1,350,324 974,819 1,110,446
Other practice expenses............... 3,565,411 4,001,394 3,577,232 1,883,911 2,607,857
Interest expense...................... 1,082,044 702,967 581,786 531,967 591,243
----------- ----------- ----------- ----------- -----------
Total costs and expenses...... 14,635,340 18,870,222 17,069,623 12,117,488 13,774,842
NET INCOME (LOSS) BEFORE INCOME TAXES... 444,963 (1,046,089) 263,185 (353,163) (107,417)
INCOME TAX EXPENSE (BENEFIT)............ 57,662 (335,568) (71,023) (439,332) (258,392)
----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS)....................... $ 387,301 $ (710,521) $ 334,208 $ 86,169 $ 150,975
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-70
<PAGE> 143
ROCKLAND RADIOLOGICAL GROUP
COMBINED STATEMENTS OF OWNERS' EQUITY (DEFICIT)
<TABLE>
<S> <C>
BALANCE, September 30, 1993................................. $(2,059,332)
Sale of stock............................................. 11,000
Net income................................................ 387,301
-----------
BALANCE, September 30, 1994................................. (1,661,031)
Sale of stock............................................. 27,500
Net loss.................................................. (710,521)
-----------
BALANCE, September 30, 1995................................. (2,344,052)
Sale of stock............................................. 31,500
Net income................................................ 334,208
-----------
BALANCE, September 30, 1996................................. (1,978,344)
Net income (unaudited).................................... 150,975
-----------
BALANCE, June 30, 1997 (unaudited).......................... $(1,827,369)
===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-71
<PAGE> 144
ROCKLAND RADIOLOGICAL GROUP
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED SEPTEMBER 30, JUNE 30,
------------------------------------ -------------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).......................... $ 387,301 $ (710,521) $ 334,208 $ 86,169 $ 150,975
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities --
Depreciation and amortization........... 1,605,316 1,628,181 1,350,324 974,819 1,110,446
Deferred income taxes................... 57,662 (335,568) (71,023) (410,148) (241,392)
Changes in assets and liabilities --
(Increase) decrease in --
Accounts receivable, net........... (602,918) (163,544) (309,103) 141,781 152,754
Prepaid expenses and other current
assets........................... (175,810) 234,131 (17,139) (350,186) (197,627)
Other assets....................... 27,569 39,814 28,626 (10,787) (2,141,996)
Increase (decrease) in --
Accounts payable................... 277,466 (296,427) (5,758) (1) (8,018)
Accrued salaries and benefits...... 10,656 280,840 (63,456) 142,956 --
Deferred compensation.............. 46,693 753,358 575,925 565,019 431,944
---------- ---------- ---------- ----------- -----------
Net cash provided by (used in)
operating activities.......... 1,633,935 1,430,264 1,822,604 1,139,622 (742,914)
---------- ---------- ---------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of furniture and equipment....... (683,491) (275,043) (1,688,989) (1,471,184) (2,226,422)
---------- ---------- ---------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt............... 2,877,000 132,750 1,710,030 1,689,933 4,088,000
Repayment of long-term debt................ (3,018,703) (235,524) (769,105) (501,973) (342,442)
Principal payments on capital lease
obligations............................. (657,836) (1,231,754) (1,077,848) (684,363) (634,168)
Proceeds from sale of stock................ 11,000 27,500 31,500 -- --
---------- ---------- ---------- ----------- -----------
Net cash provided by (used in)
financing activities.......... (788,539) (1,307,028) (105,423) 503,597 3,111,390
---------- ---------- ---------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................ 161,905 (151,807) 28,192 172,035 142,054
CASH AND CASH EQUIVALENTS, beginning of
period..................................... 188,289 350,194 198,387 198,387 226,579
---------- ---------- ---------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of period..... $ 350,194 $ 198,387 $ 226,579 $ 370,422 $ 368,633
========== ========== ========== =========== ===========
SUPPLEMENTAL DISCLOSURES:
Cash interest paid......................... $ 602,225 $ 700,180 $ 607,321 $ 531,967 $ 591,243
Cash income taxes paid..................... $ -- $ -- $ -- $ -- $ --
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-72
<PAGE> 145
ROCKLAND RADIOLOGICAL GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1994, 1995, AND 1996
1. BUSINESS, ORGANIZATION AND BASIS OF PRESENTATION:
The accompanying financial statements combine the accounts of nine entities
under common ownership: Mid Rockland Imaging Associates, P.C. ("MRI"), Rockland
Radiological Group, P.C. ("RRG"), Nyack Magnetic Resonance Imaging, P.C.
("NMR"), Central Imaging Associates, P.C., Advanced Imaging of Bergen, P.A.,
Pelham Imaging Associates, P.C., Women's Imaging Consultants, P.C., Montvale
Regional Imaging of Bergen, P.A., and Advanced Imaging of Orange County, P.C.
(collectively the "Company"), all of which are located in the states of New York
and New Jersey and specialize in the practice of radiological medicine. All
intercompany items and transactions have been eliminated.
The accompanying financial statements have been prepared on the accrual
basis of accounting.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and cash equivalents
The Company considers all highly liquid investments with maturities of
three months or less when purchased to be cash equivalents.
Accounts Receivable
Accounts receivable primarily consist of receivables from patients,
insurers, government programs and other third-party payors for medical services
provided by physicians. Such amounts are reduced by an allowance for contractual
adjustments and other uncollectible amounts.
Property and Equipment
Property and equipment is recorded at cost. Depreciation on furniture,
fixtures and equipment is computed using the straight-line method over the
estimated useful lives of the assets. Leasehold improvements are amortized on
the straight-line method over the shorter of the noncancelable lease term or
estimated useful life of the asset. However, if the noncancelable lease term
expires in the near future and if the lease contains a renewal option of which
management is reasonably assured of exercising, the amortization period is the
shorter of the lease term including the renewal option period or the estimated
useful life.
Deferred Compensation
Under the terms of the physician employment agreements, physicians who have
completed a minimum of eight years of service are entitled to a payment of up to
one hundred percent of their final compensation upon retirement or when they
cease to be employees of the Company. The percentage of salary received by the
physician varies based upon the number of years of service. These payments are
made in 36 equal monthly payments beginning upon attainment of age 70 or the
date when the physician leaves the Company. The estimated present value of these
obligations is being accrued ratably during the eight year service period.
Medical Service Revenue
Medical service revenues are accounted for in the period in which the
services are provided. The revenues are reported at the estimated realizable
amounts from patients, third party payors and others. Provisions for estimated
third party payor adjustments are estimated and recorded in the period the
related services are provided. Any adjustment to the amounts is recorded in the
period in which the revised amount is determined. A significant portion of the
Company's medical service revenues are related to Medicare and other
governmental programs. Medicare and other governmental programs reimburse
physicians based on fee
F-73
<PAGE> 146
ROCKLAND RADIOLOGICAL GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
schedules which are determined by the related governmental agency. Additionally,
the Company participates in agreements with managed care organizations to
provide services at negotiated rates.
Costs of Affiliated Physician Services
Costs of Affiliated Physician Services include physician compensation and
benefits paid or payable to owner and non-owner physicians during the period.
Income Taxes
MRI and RRG account for income taxes under the liability method which
states that deferred income taxes are to be determined based on the estimated
future tax effects of differences between the financial reporting and income tax
basis of assets and liabilities given the provisions of enacted tax laws.
Deferred income tax provisions are based on the changes to the asset or
liability from period to period. The remaining companies included in the
accompanying combined financial statements are S corporations, and accordingly,
there is no provision for income taxes related to these entities. The individual
owners include their respective share of Company profits and losses in their tax
returns.
Concentration of Credit Risk
The Company extends credit to patients covered by programs such as Medicare
and Medicaid and private insurers. The Company manages credit risk with the
various public and private insurance providers, as appropriate. Allowances for
bad debts have been made for potential losses when appropriate.
Use of Estimates
The preparation of combined financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the combined
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Basis of Presentation -- Interim Financial Statements
The interim financial statements have been prepared by the Company without
audit, pursuant to the rules and regulations of Accounting Principles Board
("APB") Opinion No. 28, "Interim Financial Reporting." Certain information and
footnote disclosures normally included in the financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to APB Opinion No. 28; nevertheless, management of the Company
believes that the disclosures herein are adequate to prevent the information
presented from being misleading. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly the
financial position of the Company with respect to the results of its operations
for the interim periods from October 1, 1995, to June 30, 1996, and from October
1, 1996, to June 30, 1997, have been included herein. The results of operations
for the interim periods are not necessarily indicative of the results for the
full year.
F-74
<PAGE> 147
ROCKLAND RADIOLOGICAL GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment at September 30, consists of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL
LIVES (YEARS) 1995 1996
--------------- ---------- -----------
<S> <C> <C> <C>
Equipment.................................. 5 $6,852,399 $ 8,348,140
Leasehold improvements..................... 15 640,515 782,200
Furniture and fixtures..................... 7 642,978 679,762
Capitalized building lease................. 15 2,634,333 2,648,401
---------- -----------
10,770,225 12,458,503
Less -- Accumulated depreciation and
amortization............................. (6,958,766) (8,305,532)
---------- -----------
Property and equipment, net...... $3,811,459 $ 4,152,971
========== ===========
</TABLE>
4. LONG-TERM DEBT:
Long-term debt consists of the following as of September 30:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Note payable to related party, bearing interest at 10%, due
in 1997. Monthly payments of $6,453 including interest.... $ 90,642 $ 19,042
Note payable to previous shareholder, bearing interest at
8%, due in 1996. Monthly payment of $4,000 plus
interest.................................................. 12,000 --
Note payable to vendor, bearing interest at 10.36%, due in
1998. Monthly payments of $1,339 including interest....... 34,448 20,712
Note payable to vendor, bearing interest at 8.26%, due in
2001. Monthly payments of $8,955 including interest....... -- 396,552
Note payable to Bank, bearing interest at 8.34%, due in
1999. Monthly payments of $49,603 plus interest, secured
by accounts receivable and certain property and
equipment................................................. 2,281,764 1,686,528
Note payable to Bank, bearing interest at 8.21%, due in
2000, secured by accounts receivable and certain property
and equipment. Monthly payments of $2,250 plus
interest.................................................. 132,750 105,750
Note payable to Bank, bearing interest at 8.95%, due in
2001. Monthly payments of $24,881 including interest...... -- 1,200,000
Note payable to vendor, bearing interest at 9.53%, due in
2001. Monthly payments of $1,419 including interest....... -- 63,945
---------- ----------
Total long-term debt...................................... 2,551,604 3,492,529
Less -- Current maturities................................ (719,078) (944,199)
---------- ----------
Total long-term debt, net of current portion.............. $1,832,526 $2,548,330
========== ==========
</TABLE>
Future maturities of long-term debt at September 30, 1996, are as follows:
<TABLE>
<S> <C>
1997..................................................... $ 944,199
1998..................................................... 942,087
1999..................................................... 866,460
2000..................................................... 399,584
2001..................................................... 340,199
----------
$3,492,529
==========
</TABLE>
F-75
<PAGE> 148
ROCKLAND RADIOLOGICAL GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. CAPITAL LEASES:
The Company leases certain medical equipment and facilities under capital
leases. These leases have been capitalized using the implicit rate stated in
each lease. Future payments due under capital leases as of September 30, 1996,
are as follows:
<TABLE>
<S> <C>
1997.................................................... $ 1,412,563
1998.................................................... 1,389,510
1999.................................................... 60,374
-----------
Total minimum lease payments due........................ 2,862,447
Less -- Amounts representing interest................. (304,832)
-----------
Present value of minimum lease payments................. 2,557,615
Less -- Current portion............................... (1,193,100)
-----------
Long-Term obligation.................................... $ 1,364,515
===========
</TABLE>
6. INCOME TAXES:
The provisions for income taxes consist of the following:
<TABLE>
<CAPTION>
1994 1995 1996
------- --------- --------
<S> <C> <C> <C>
Current income tax expense......................... $ -- $ -- $ --
Deferred income tax expense (benefit).............. 57,662 (335,568) (71,023)
------- --------- --------
Total income tax expense (benefit)....... $57,662 $(335,568) $(71,023)
======= ========= ========
</TABLE>
Significant components of the Company's net deferred tax assets and
liabilities as of September 30, are as follows:
<TABLE>
<CAPTION>
1995 1996
--------- ----------
<S> <C> <C>
Current:
Deferred tax assets --
Accounts payable and accrued liabilities............... $ 248,176 $ 241,283
Deferred tax (liabilities) --
Accounts receivable.................................... (773,933) (870,234)
Other.................................................. (8,164) (11,010)
--------- ----------
Total net current deferred tax liabilities........ $(533,921) $ (639,961)
========= ==========
Noncurrent:
Deferred tax assets --
Deferred compensation.................................. $ 881,298 $1,077,113
Deferred tax (liabilities) --
Depreciation........................................... (26,305) (47,904)
--------- ----------
Total net noncurrent deferred tax assets.......... $ 854,993 $1,029,209
========= ==========
</TABLE>
The differences between the provision (benefit) for income taxes and the amounts
computed by applying the statutory Federal income tax rate to income (loss)
before income taxes are due to the income (losses) of S-Corporations included in
these combined financial statements.
7. OPERATING LEASES:
The Company leases two facilities under various noncancelable operating
leases that expire at various dates through 1999. The Company leases a portion
of the MRI building under a lease that expires in 1998, and
F-76
<PAGE> 149
ROCKLAND RADIOLOGICAL GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
also maintains a lease at the Nyack Hospital through NMR. Future minimum lease
payments under noncancelable leases at September 30, are as follows:
<TABLE>
<S> <C>
1997...................................................... $103,970
1998...................................................... 96,014
1999...................................................... 3,958
</TABLE>
8. EMPLOYEE BENEFIT PLAN:
The Company sponsors a profit sharing and 401(k) plan for employees of the
Company, who have completed one year of service and are at least age 21. The
plan provides for employer profit sharing contributions, depending upon the
level of the employee. The plan also provides for employees matching
contributions of 100% of employee contributions, up to 3% of the employee's
salary. The Company's contributions for 1994, 1995, and 1996 were $253,656,
$363,809, and, $404,047 respectively.
9. RELATED-PARTY TRANSACTIONS:
The Company leases office space from a limited partnership. Two
shareholders own an interest in this limited partnership. The Company paid rent
related to these leases of $659,500, $698,500, and $726,310 for the years ended
December 31, 1994, 1995, and 1996, respectively.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107 requires all entities
to disclose the fair value of certain financial instruments in their financial
statements. The carrying amounts of accounts receivable, accounts payable and
accrued expenses approximate fair value due to the short maturity of these
instruments. The carrying amount of the Company's long-term debt and capital
leases also approximates fair value.
11. CONTINGENCIES:
The Company is subject to various claims and legal actions which arise in
the ordinary course of business. In the opinion of management, the ultimate
resolution of such matters will not have a material adverse effect on the
Company's financial position or results of operations.
12. SUBSEQUENT EVENTS:
On November 15, 1996, the Company entered into a letter of intent with
American Physician Partners, Inc. (APPI) under which APPI will acquire certain
assets and liabilities of the Company in exchange for common stock and cash.
Completion of the transaction is subject to certain conditions, including the
execution of a forty-year service agreement, stockholder approval by both
parties and successful completion of an initial public offering by APPI. Under
the terms of the service agreement, APPI will provide practice management,
administration and other services to the physicians for a negotiated service
fee. All nonprofessional employees shall become employees of APPI. In addition,
APPI will assume responsibility for all maintenance, repairs, improvements,
lease and other general operating expenses.
In April, 1997, the Company entered into an agreement to purchase certain
assets of Kingston Diagnostic Radiology, P.C. for $2,000,000 in cash and certain
assumed liabilities of approximately $1,850,000. Completion of the transaction
is subject to execution of a five-year service contract.
On March 11, 1997, Wallkill Radiology Associates, P.C. ("Wallkill")
contributed all of its assets to the Company. In exchange, the sole stockholder
of Wallkill was made an equal partner of the Company. At December 31, 1996,
Wallkill had total assets of approximately $480,000. For the year ended December
31, 1996, Wallkill had total revenues of approximately $1,480,000.
F-77
<PAGE> 150
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Valley Radiology Group:
We have audited the accompanying combined balance sheets of Valley
Radiology Group (Note 1) as of December 31, 1995 and 1996, and the related
combined statements of income, owners' equity, and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Valley Radiology Group as of
December 31, 1995 and 1996, and the results of their operations and their cash
flows for the years then ended in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
March 19, 1997
F-78
<PAGE> 151
VALLEY RADIOLOGY GROUP
COMBINED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ JUNE 30,
1995 1996 1997
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............. $1,212,535 $1,014,649 $ 386,310
Accounts receivable, net of allowances
of $1,624,631, $2,021,861 and
$2,293,536 at December 31, 1995 and
1996 and June 30, 1997,
respectively....................... 1,632,342 1,616,645 2,076,098
Prepaid expenses and other............ 9,228 28,414 7,650
---------- ---------- ----------
Total current assets.......... 2,854,105 2,659,708 2,470,058
PROPERTY AND EQUIPMENT, net............. 198,263 1,253,425 1,219,586
INVESTMENTS IN AFFILIATED ENTITIES...... 369,172 104,031 26,720
NOTES RECEIVABLE........................ 428,448 405,500 402,500
OTHER ASSETS, net....................... 163,353 61,440 36,003
---------- ---------- ----------
Total assets.................. $4,013,341 $4,484,104 $4,154,867
========== ========== ==========
LIABILITIES AND OWNERS' EQUITY
CURRENT LIABILITIES:
Accounts payable...................... $ 229,216 $ 94,550 $ 94,822
Accrued salaries and benefits......... 944,296 757,428 257,322
Deferred income tax liability......... 156,004 259,988 372,329
Line of credit payable................ 57,000 825,100 678,333
Current portion of long-term debt..... 298,298 329,028 560,604
---------- ---------- ----------
Total current liabilities..... 1,684,814 2,266,094 1,963,410
DEFERRED INCOME TAX LIABILITY........... 8,344 37,261 37,261
LONG-TERM DEBT, net of current
portion............................... 675,142 395,065 167,188
---------- ---------- ----------
Total liabilities............. 2,368,300 2,698,420 2,167,859
OWNERS' EQUITY.......................... 1,645,041 1,785,684 1,987,008
---------- ---------- ----------
Total liabilities and owners'
equity...................... $4,013,341 $4,484,104 $4,154,867
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-79
<PAGE> 152
VALLEY RADIOLOGY GROUP
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------- -------------------------
1995 1996 1996 1997
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES:
Medical service revenues, net......... $10,156,958 $10,974,993 $5,461,462 $5,895,340
Other revenues........................ 350,331 198,605 109,023 59,057
----------- ----------- ---------- ----------
Total revenues................ 10,507,289 11,173,598 5,570,485 5,954,397
COSTS AND EXPENSES:
Costs of affiliated physician
services........................... 5,510,802 5,383,728 2,549,462 2,708,341
Practice salaries, wages and
benefits........................... 2,268,596 2,592,672 1,143,074 1,247,927
Practice supplies..................... 176,051 355,777 211,656 160,382
Practice rent and lease expense....... 466,155 420,260 228,310 232,769
Depreciation and amortization......... 168,900 223,248 111,624 165,919
Other practice expenses............... 1,385,743 1,337,118 702,027 723,317
Interest expense...................... 53,387 73,475 30,773 55,840
(Gain) loss on sale of equipment...... 20,099 (37,386) (24,930) (930)
----------- ----------- ---------- ----------
Total costs and expenses...... 10,049,733 10,348,892 4,951,996 5,293,565
INCOME BEFORE TAXES AND EQUITY IN
EARNINGS OF INVESTMENTS............... 457,556 824,706 618,489 660,832
EQUITY IN EARNINGS (LOSS) OF
INVESTMENTS........................... 13,698 (18,997) -- --
----------- ----------- ---------- ----------
INCOME BEFORE INCOME TAXES.............. 471,254 805,709 618,489 660,832
INCOME TAX EXPENSE (BENEFIT)............ (110,919) 132,901 105,143 112,341
----------- ----------- ---------- ----------
NET INCOME.............................. $ 582,173 $ 672,808 $ 513,346 $ 548,491
=========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-80
<PAGE> 153
VALLEY RADIOLOGY GROUP
COMBINED STATEMENTS OF OWNERS' EQUITY
<TABLE>
<S> <C>
BALANCE, December 31, 1994.................................. $1,270,013
Sale of stock............................................. 1,304
Net income................................................ 582,173
Distributions............................................. (208,449)
----------
BALANCE, December 31, 1995.................................. 1,645,041
Purchase of stock......................................... (165)
Net income................................................ 672,808
Distributions............................................. (532,000)
----------
BALANCE, December 31, 1996.................................. 1,785,684
Net income (unaudited).................................... 548,491
Distributions (unaudited)................................. (346,250)
Purchase of stock (unaudited)............................. (917)
----------
BALANCE, June 30, 1997 (unaudited).......................... $1,987,008
==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-81
<PAGE> 154
VALLEY RADIOLOGY GROUP
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31 SIX MONTHS ENDED JUNE 30,
----------------------- -------------------------
1995 1996 1996 1997
---------- ---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................... $ 582,173 $ 672,808 $ 513,346 $ 548,491
Adjustments to reconcile net income to net cash
provided by operating activities --
Depreciation and amortization.................... 168,900 223,248 111,624 165,919
Deferred income taxes............................ (110,919) 132,901 105,142 112,341
Investment income from affiliated entities....... (13,698) 18,997 5,470 77,311
Changes in assets and liabilities --
(Increase) decrease in --
Accounts receivable, net....................... 242,584 15,697 (309,189) (459,453)
Prepaid expenses and other..................... (8,284) (19,186) (11,882) 20,764
Other assets................................... 10,508 28,242 34,156 4,240
Increase (decrease) in --
Accounts payable............................... (9,662) (134,666) 526 272
Accrued liabilities............................ (609,468) -- -- --
Accrued salaries and benefits.................. 703,728 (186,868) (754,595) (500,106)
---------- ---------- ---------- ----------
Net cash provided by (used in) operating
activities................................ 955,862 751,173 (305,402) (30,221)
---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment................. (14,671) (1,204,739) (297,307) (110,883)
Proceeds from notes receivable...................... 26,826 22,948 19,948 3,000
Distributions from affiliated entities.............. 297,000 246,144 -- --
---------- ---------- ---------- ----------
Net cash provided by (used in) investing
activities................................ 309,155 (935,647) (277,359) (107,883)
---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt........................ 745,000 300,000 300,000 185,000
Repayment of long-term debt......................... (731,144) (549,347) (159,075) (181,301)
Net change in line of credit payable................ (143,000) 768,100 (57,000) (146,767)
Distributions to owners............................. (208,449) (532,000) (292,500) (346,250)
Sales (purchases) of stock.......................... 1,304 (165) (32) (917)
---------- ---------- ---------- ----------
Net cash used in financing activities....... (336,289) (13,412) (208,607) (490,235)
---------- ---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH....................... 928,728 (197,886) (791,368) (628,339)
CASH AND CASH EQUIVALENTS, beginning of year.......... 283,807 1,212,535 1,212,535 1,014,649
---------- ---------- ---------- ----------
CASH AND CASH EQUIVALENTS, end of year................ $1,212,535 $1,014,649 $ 421,167 $ 386,310
========== ========== ========== ==========
SUPPLEMENTAL DISCLOSURES:
Cash interest paid.................................. $ 80,134 $ 73,475 $ 30,773 $ 55,840
Cash income taxes paid.............................. $ -- $ -- $ -- $ --
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-82
<PAGE> 155
VALLEY RADIOLOGY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
1. BUSINESS, ORGANIZATION AND BASIS OF PRESENTATION:
The accompanying financial statements combine the accounts of three
entities under common ownership: Valley Radiologists Medical Group, Inc.
("Valley"), a California corporation; LXL, Ltd. ("LXL"), a California general
partnership; and LXL Building Partnership ("LXLB"), a California general
partnership (collectively the "Company"), all of which are located in northern
California and specialize in the practice of radiological medicine and the
ownership and operation of diagnostic imaging equipment. All intercompany
transactions have been eliminated.
The accompanying financial statements have been prepared on the accrual
basis of accounting.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash equivalents
The Company considers all highly liquid investments with maturities of
three months or less when purchased to be cash equivalents.
Accounts Receivable
Accounts receivable primarily consist of receivables from patients,
insurers, government programs and other third-party payors for medical services
provided by physicians. Such amounts are reduced by an allowance for contractual
adjustments and other uncollectible amounts.
Property and Equipment
Property and equipment are recorded at cost. Depreciation on furniture,
fixtures and equipment is computed using the straight-line method over the
estimated useful lives of the assets. Leasehold improvements are amortized on
the straight-line method over the shorter of the noncancelable lease term or
estimated useful life of the asset. However, if the noncancelable lease term
expires in the near future and if the lease contains a renewal option of which
management is reasonably assured of exercising, the amortization period is the
shorter of the lease term including the renewal option period or the estimated
useful life.
Investments in Affiliated Entities
Investments in affiliated entities are accounted for using the equity
method.
Other Assets
Other assets are comprised of organization costs, noncompete agreements and
security deposits. Organization costs are being amortized on a straight-line
basis over a five-year period. Noncompete agreements are amortized on a
straight-line basis over the life of the agreements.
Medical Service Revenues
Medical service revenues are accounted for in the period in which the
services are provided. The revenues are reported at the estimated realizable
amounts from patients, third party payors and others. Provisions for estimated
third party payor adjustments are estimated and recorded in the period in which
the related services are provided. Any adjustment to the amounts is recorded in
the period in which the revised amount is determined. A significant portion of
the Company's medical service revenues are related to Medicare and other
governmental programs. Medicare and other governmental programs reimburse
physicians based on fee schedules which are determined by the related
governmental agency. Additionally, the Company participates in agreements with
managed care organizations to provide services at negotiated rates.
F-83
<PAGE> 156
VALLEY RADIOLOGY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND 1996
Costs of Affiliated Physician Services
Costs of Affiliated Physician Services include physician compensation and
benefits paid or payable to owner and non-owner physicians during the period.
Income Taxes
Valley accounts for income taxes under the liability method which states
that deferred income taxes are determined based on the estimated future tax
effects of differences between the financial reporting and income tax basis of
assets and liabilities given the provisions of enacted tax laws. Deferred income
tax provisions are based on the changes to the asset or liability from period to
period. LXL and LXLB are partnerships, and accordingly, there is no provision
for income taxes related to these entities. The individual owners include their
respective share of profits and losses in their tax returns.
Concentration of Credit Risk
The Company extends credit to patients covered by programs such as Medicare
and Medicaid and private insurers. The Company manages credit risk with the
various public and private insurance providers, as appropriate. Allowances for
bad debts have been made for potential losses when appropriate.
Use of Estimates
The preparation of combined financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the combined
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Basis of Presentation - Interim Financial Statements
The interim financial statements have been prepared by the Company without
audit, pursuant to the rules and regulations of Accounting Principles Board
("APB") Opinion No. 28, "Interim Financial Reporting." Certain information and
footnote disclosures normally included in the financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to APB Opinion No. 28; nevertheless, management of the Company
believes that the disclosures herein are adequate to prevent the information
presented from being misleading. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly the
financial position of the Company with respect to the results of its operations
for the interim periods from January 1, 1996, to June 30, 1996, and from January
1, 1997, to June 30, 1997, have been included herein. The results of operations
for the interim periods are not necessarily indicative of the results for the
full year.
3. NOTES RECEIVABLE:
Notes receivable primarily consist of a $400,000 note receivable from a
third party, due July 18, 1999 with monthly interest only payments until that
date. The note bears interest of 8.0%.
4. INVESTMENTS IN AFFILIATED ENTITIES:
Investments in affiliated entities primarily consist of 40% interests in
two partnerships (Santa Clara Valley MRI ("Santa Clara") and Sunnyvale MRI
("Sunnyvale"), each of which perform radiology and
F-84
<PAGE> 157
VALLEY RADIOLOGY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND 1996
imaging healthcare services. These investments are being accounted for under the
equity method of accounting. Balances at December 31 are as follows:
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Santa Clara................................................. $387,564 $ --
Sunnyvale................................................... (20,734) 98,089
Other....................................................... 2,342 5,942
-------- --------
$369,172 $104,031
======== ========
</TABLE>
5. PROPERTY AND EQUIPMENT:
Property and equipment at December 31, consists of the following:
<TABLE>
<CAPTION>
ESTIMATED USEFUL
LIVES (YEARS) 1995 1996
---------------- ---------- ----------
<S> <C> <C> <C>
Equipment................................... 5 $4,236,818 $4,056,426
Leasehold improvements...................... 5-13 370,130 413,604
Furniture and fixtures...................... 5-7 109,415 113,561
---------- ----------
4,716,363 4,583,591
Less -- Accumulated depreciation and
amortization.............................. (4,518,100) (3,330,166)
---------- ----------
Property and equipment, net....... $ 198,263 $1,253,425
========== ==========
</TABLE>
F-85
<PAGE> 158
VALLEY RADIOLOGY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND 1996
6. LONG-TERM DEBT:
Long-term debt consists of the following as of December 31:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Note payable to Bank, bearing interest at prime plus .5%
(8.75% on December 31, 1996), due March 1, 2000, secured
by accounts receivable and certain property and equipment.
Monthly payments of $12,420 plus interest. ............... $ 606,700 $ 244,962
Note payable to Bank, bearing interest at prime plus .5%
(8.75% on December 31, 1996), due May 1, 2001, secured by
accounts receivable and certain property and equipment.
Monthly payments of $5,000 including interest. ........... -- 261,649
Note payable to physician, bearing interest at prime,
adjustable every April 1 and October 1, (8.75% on December
31, 1995), due March 31, 1996. Monthly payments of $4,201
plus interest. ........................................... 12,604 --
Note payable to physician, bearing interest at prime,
adjustable every May 1 and November 1, (8.75% on December
31, 1995), due April 30, 1996. Monthly payments of $4,167
plus interest. ........................................... 16,666 --
Note payable to physician, noninterest bearing, due December
31, 1998. Monthly payments of $6,250. .................... 225,000 150,000
Note payable to physician, noninterest bearing, due June 30,
1998. Monthly payments of $3,749. ........................ 112,470 67,482
--------- ---------
Total long-term debt........................................ 973,440 724,093
Less -- Current maturities.................................. (298,298) (329,028)
--------- ---------
Total long-term debt, net of current portion................ $ 675,142 $ 395,065
========= =========
</TABLE>
Future maturities of long-term debt at December 31, 1996, are as follows:
<TABLE>
<S> <C>
1997.................................................... $329,028
1998.................................................... 253,416
1999.................................................... 60,000
2000.................................................... 60,000
2001.................................................... 21,649
--------
$724,093
========
</TABLE>
During 1995, the Company maintained a $300,000 line of credit for working
capital purposes bearing interest at the prime rate (8.5% on December 31, 1995).
The amount outstanding at December 31, 1995 was $57,000. The Company currently
maintains a $900,000 line of credit bearing interest at the prime rate (8.25% on
December 31, 1996). The amount outstanding at December 31, 1996 was $825,100.
Under the terms of the physician employment agreements, any physician who
is a shareholder in the Company and has been employed as a full-time
professional for a continuous four year period is entitled to a payout upon
retirement or when they cease to be employees of the Company. The payout is
equal to the physician's pro rata share of 80% of accounts receivable less
amounts owed to former shareholders. Payments are made in forty-eight equal
monthly amounts beginning the month after employment ceases. At December 31,
1996, the Company had $217,482 payable under these arrangements.
F-86
<PAGE> 159
VALLEY RADIOLOGY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND 1996
Notes payable to physicians outstanding at December 31, 1995 represents
amounts paid to two former physicians for non-compete agreements.
7. INCOME TAXES:
The provisions for income taxes for the years ended December 31, consist of
the following:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Current income tax expense................................. $ -- $ --
Deferred income tax expense (benefit)...................... (110,919) 132,901
--------- ---------
Total income tax expense (benefit)............... $(110,919) $ 132,901
========= =========
</TABLE>
Significant components of the Company's deferred tax assets and liabilities
as of December 31, are as follows:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Current:
Deferred tax assets --
Accounts payable and accrued salaries and benefits.... $ 398,993 $ 289,672
Deferred tax (liabilities) --
Accounts receivable, net.............................. (554,997) (549,660)
--------- ---------
Total net current deferred tax liabilities....... $(156,004) $(259,988)
========= =========
Noncurrent:
Deferred tax liabilities --
Depreciation.......................................... $ (8,344) $ (37,261)
========= =========
</TABLE>
The differences between the provision (benefit) for income taxes and the
amounts computed by applying the statutory Federal income tax rate to income
before income taxes are due to disallowed passive losses from certain
investments.
8. EMPLOYEE BENEFIT PLAN:
The Company sponsors a profit sharing plan for employees of the Company,
who have completed one year of service. The plan provides for discretionary
employer contributions. The Company's contributions for 1995 and 1996 were
$480,858 and $500,000, respectively.
9. OPERATING LEASES:
The Company leases various facilities under noncancelable operating leases
that expire at various dates through 1999. Future minimum lease payments under
noncancelable leases are as follows:
<TABLE>
<S> <C>
1997..................................................... $ 348,256
1998..................................................... 293,206
1999..................................................... 220,521
2000..................................................... 156,802
2001..................................................... 156,802
Thereafter............................................... 370,016
----------
$1,545,603
==========
</TABLE>
F-87
<PAGE> 160
VALLEY RADIOLOGY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND 1996
10. RELATED-PARTY TRANSACTIONS:
As indicated in Note 4, the Company has 40% partnership interests in Santa
Clara and Sunnyvale. Under agreements with these partnerships, the Company
performs professional and management services. Management fees are billed to the
partnership based primarily upon agreed-upon rates per case. Management and
professional fees earned from these partnerships are as follows:
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Santa Clara................................................. $198,327 $ 25,664
Sunnyvale................................................... 343,698 266,338
-------- --------
$542,025 $292,002
======== ========
</TABLE>
11. FAIR VALUE OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107 requires all entities
to disclose the fair value of certain financial instruments in their financial
statements. The carrying amounts of accounts receivable, accounts payable and
accrued expenses approximate fair value due to the short maturity of these
instruments. The carrying amount of the Company's long-term debt also
approximates fair value.
12. CONTINGENCIES:
The Company is subject to various claims and legal actions which arise in
the ordinary course of business. In the opinion of management, the ultimate
resolution of such matters will not have a material adverse effect on the
Company's financial position or results of operations.
13. SUBSEQUENT EVENTS:
On March 6, 1997, the Company entered into a letter of intent with American
Physician Partners, Inc. (APPI) under which APPI will acquire certain assets and
liabilities of the Company in exchange for common stock and cash. Completion of
the transaction is subject to certain conditions, including the execution of a
forty-year service agreement, stockholder approval by both parties and
successful completion of an initial public offering by APPI. Under the terms of
the service agreement, APPI will provide practice management, administration and
other services to the physicians for a negotiated service fee. All
nonprofessional employees shall become employees of APPI. In addition, APPI will
assume responsibility for all maintenance, repairs, improvements, lease and
other general operating expenses.
In 1997, the Company refinanced its $900,000 line of credit with a term
note. The term note provides for borrowings of $925,000 due February 2002.
Effective January 1, 1997, the Company and Pacific Imaging Consultants, a
group of radiologists in Oakland, California, formed a management services
organization to manage their operations.
F-88
<PAGE> 161
======================================================
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED HEREBY, NOR DOES
IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCE CREATE ANY
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary..................... 3
The Company............................ 3
The Reorganizations.................... 4
The Offering........................... 5
Risk Factors........................... 7
Use of Proceeds........................ 19
Dividend Policy........................ 19
Capitalization......................... 20
Dilution............................... 21
American Physician Partners, Inc.
Unaudited Pro Forma Combined Balance
Sheet................................ 22
Selected Financial Data................ 25
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 26
Business............................... 29
Management............................. 46
Certain Transactions................... 53
Principal Stockholders................. 62
Description of Capital Stock........... 64
Shares Eligible For Future Sale........ 67
Underwriting........................... 69
Legal Matters.......................... 70
Experts................................ 70
Additional Information................. 71
Index to Financial Statements.......... F-1
</TABLE>
UNTIL , 1997, (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
======================================================
======================================================
5,000,000 SHARES
[AMERICAN PHYSICIAN PARTNERS, INC. LOGO]
COMMON STOCK
------------
PROSPECTUS
, 1997
------------
SMITH BARNEY INC.
COWEN & COMPANY
PIPER JAFFRAY INC.
ROBERTSON, STEPHENS & COMPANY
======================================================
<PAGE> 162
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses to be paid by the Company
(other than underwriting compensation expected to be incurred) in connection
with the offering described in this Registration Statement.
<TABLE>
<S> <C>
SEC Registration Fee........................................ $ 27,879
NASD filing................................................. 9,700
Blue Sky Fees and Expenses.................................. 5,000
Printing and Engraving Costs................................ *
Legal Fees and Expenses..................................... *
Accounting Fees and Expenses................................ *
Transfer Agent and Registrar Fees and Expenses.............. *
Miscellaneous............................................... *
--------
Total............................................. $ *
========
</TABLE>
- ---------------
* To be supplied by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Amended Bylaws provide that the Company shall, to the fullest
extent permitted by Section 145 of the DGCL, as amended from time to time,
indemnify all persons whom it may indemnify pursuant thereto.
Section 145 of the DGCL permits a corporation, under specified
circumstances, to indemnify its directors, officers, employees or agents against
expenses (including attorney's fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by them in connection with any
action, suit or proceeding brought by third parties by reason of the fact that
they were or are directors, officers, employees or agents of the corporation, if
such directors, officers, employees or agents acted in good faith and in a
manner they reasonably believed to be in or not opposed to the best interests of
the corporation and, with respect to any criminal action or proceeding, had no
reason to believe their conduct was unlawful. In a derivative action, i.e., one
by or in the right of the corporation, indemnification may be made only for
expenses actually and reasonably incurred by directors, officers, employees or
agents in connection with the defense or settlement of an action or suit, and
only with respect to a matter as to which they shall have acted in good faith
and in a manner they reasonably believed to be in or not opposed to the best
interests of the corporation, except that no indemnification shall be made if
such person shall have been adjudged liable to the corporation, unless and only
to the extent that the court in which the action or suit was brought shall
determine upon application that the defendant directors, officers, employees or
agents are fairly and reasonably entitled to indemnity for such expenses despite
such adjudication of liability.
Article VI of the Company's Restated Certificate of Incorporation, as
amended, provides that the Company's directors will not be personally liable to
the Company or its stockholders for monetary damages resulting from breaches of
their fiduciary duty as directors except for liability (a) for any breach of the
duty of loyalty to the Company or its stockholders, (b) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, (c) under Section 174 of the DGCL or (d) for any transaction from which
the director derived an improper personal benefit.
Reference is made to Article VIII of the Company's Amended and Restated
Bylaws filed as an Exhibit to this Registration Statement, which provides for
indemnification of directors and officers.
Simultaneous with completion of this offering, the Company entered into an
indemnification agreement with certain of its directors and director nominees,
pursuant to which the Company agreed to indemnify such
II-1
<PAGE> 163
persons for losses arising out of any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement of which
this Prospectus forms a part.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The following information relates to securities of the Company issued or
sold within the past three years that were not registered under the Securities
Act:
(i) In May 1996, the Company issued 2,000,000 shares of Common Stock
to John Pappajohn, Halkis Ltd., Mary Pappajohn, Thebes Ltd. and Derace L.
Schaffer, M.D. in connection with the initial capitalization of the Company
for an aggregate purchase price of $250,000. This transaction was effected
without registration under the Securities Act in reliance upon the
exemptions provided by Section 4(2) of the Securities Act.
(ii) Between September 30, 1996 and December 31, 1996, the Company
issued an aggregate of $3,500,000 of Convertible Promissory Convertible
Notes to 21 institutional and individual investors. This transaction was
effected without registration of the Convertible Promissory Convertible
Notes under the Securities Act in reliance upon the exemptions provided by
Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated
thereunder.
In relying on the exemptions provided by Section 4(2) of the Securities Act
and Rule 506 of Regulation D promulgated thereunder in connection with the
private placements described above, the Company relied upon written
representations of the persons acquiring the Company's shares of Common Stock
and Convertible Notes, that they were acquiring such shares or notes for
investment purposes and that they had received adequate opportunity to obtain
information, and had reviewed such information, regarding the Company.
Certificates and notes representing the shares and the Convertible Notes,
respectively, issued to these persons contained a legend restricting transfer
thereof absent registration under the Securities Act or the availability of an
exemption therefrom.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<C> <S>
1.1 -- Form of Underwriting Agreement.*
2.1 -- Agreement and Plan of Reorganization and Merger, dated
June 27, 1997 by and among American Physician Partners,
Inc., Carroll Imaging Associates, P.A., Diagnostic
Imaging Associates, P.A., Drs. Copeland, Hyman and
Shackman, P.A., Drs. Decarlo, Lyon, Hearn & Pazourek,
P.A., Drs. Thomas, Wallop, Kim & Lewis, P.A., Harbor
Radiologists, P.A., and Perilla, Syndler & Associates,
P.A.**
2.2 -- Agreement and Plan of Reorganization and Merger, dated
June 27, 1997 by and between American Physician Partners,
Inc., and Radiology and Nuclear Medicine, A Professional
Association.**
2.3 -- Agreement and Plan of Reorganization and Merger, dated
June 27, 1997 by and between American Physician Partners,
Inc., and Mid Rockland Imaging Associates, P.C.**
2.4 -- Agreement and Plan of Reorganization and Merger, dated
June 27, 1997 by and between American Physician Partners,
Inc., and Rockland Radiological Group, P.C.**
2.5 -- Agreement and Plan of Reorganization and Merger, dated
June 27, 1997 by and between American Physician Partners,
Inc., and Advanced Imaging of Orange County, P.C.**
2.6 -- Agreement and Plan of Reorganization and Merger, dated
June 27, 1997 by and between American Physician Partners,
Inc., and Central Imaging Associates, P.C.**
</TABLE>
II-2
<PAGE> 164
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<C> <S>
2.7 -- Agreement and Plan of Reorganization and Merger, dated
June 27, 1997 by and between American Physician Partners,
Inc., and Nyack Magnetic Resonance Imaging, P.C.**
2.8 -- Agreement and Plan of Reorganization and Merger, dated
June 27, 1997 by and between American Physician Partners,
Inc., and Pelham Imaging Associates, P.C.**
2.9 -- Agreement and Plan of Reorganization and Merger, dated
June 27, 1997 by and between American Physician Partners,
Inc., and Women's Imaging Consultants, P.C.**
2.10 -- Agreement and Plan of Reorganization and Merger, dated
June 27, 1997 by and between American Physician Partners,
Inc., and Pacific Imaging Consultants, A Medical Group,
Inc.**
2.11 -- Agreement and Plan of Reorganization and Merger, dated
June 27, 1997 by and between American Physician Partners,
Inc., and Total Medical Imaging, Inc.**
2.12 -- Agreement and Plan of Reorganization and Merger, dated
June 27, 1997 by and between American Physician Partners,
Inc., and Valley Radiologists Medical Group, Inc.**
2.13 -- Agreement and Plan of Reorganization and Merger, dated
June 27, 1997 by and between American Physician Partners,
Inc., and The Ide Group, P.C.**
2.14 -- Agreement and Plan of Reorganization and Merger, dated
June 27, 1997 by and between American Physician Partners,
Inc., and M & S X-Ray Associates, P.A.**
2.15 -- Agreement and Plan of Reorganization and Merger, dated
June 27, 1997 by and between American Physician Partners,
Inc., and South Texas MR, Inc.**
2.16 -- Agreement and Plan of Reorganization and Merger, dated
June 27, 1997 by and between American Physician Partners,
Inc., and San Antonio MR, Inc.**
2.17 -- Agreement and Plan of Exchange, dated June 27, 1997 by
and among American Physician Partners, Inc., Lexington
MR, Ltd., and the Sellers.**
2.18 -- Agreement and Plan of Exchange, dated June 27, 1997 by
and among American Physician Partners, Inc., Madison
Square Joint Venture and the Sellers.**
2.19 -- Agreement and Plan of Exchange, dated June 27, 1997 by
and among American Physician Partners, Inc., South Texas
No. 1 MRI Limited Partnership, a Texas limited
partnership, and the Sellers.**
2.20 -- Agreement and Plan of Exchange, dated June 27, 1997 by
and among American Physician Partners, Inc., San Antonio
MRI Partnership No. 2 Ltd., a Texas limited partnership,
and the Sellers.**
2.21 -- Agreement and Plan of Exchange, dated June 27, 1997 by
and among American Physician Partners, Inc., and the
Sellers.**
3.1 -- Restated Certificate of Incorporation of American
Physician Partners, Inc.
3.2 -- Amended and Restated Bylaws of American Physician
Partners, Inc.
4.1 -- Form of certificate evidencing ownership of Common Stock
of American Physician Partners, Inc.*
4.2 -- Form of Convertible Promissory Note of American Physician
Partners, Inc.**
5.1 -- Opinion of Brobeck, Phleger & Harrison LLP
10.1 -- American Physician Partners, Inc. 1996 Stock Option
Plan.**
10.2 -- Employment Agreement between American Physician Partners,
Inc. and Gregory L. Solomon.**
10.3 -- Employment Agreement between American Physician Partners,
Inc. and Mark S. Martin.**
10.4 -- Employment Agreement between American Physician Partners,
Inc. and Sami S. Abbasi.**
</TABLE>
II-3
<PAGE> 165
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<C> <S>
10.5 -- Employment Agreement between American Physician Partners,
Inc. and Paul M. Jolas.**
10.6 -- Form of Indemnification Agreement for certain Directors
and Officers.*
10.7 -- Form of Registration Rights Agreement.**
10.8 -- Service Agreement, dated , 1997, by and
among American Physician Partners, Inc., APPI-Advanced
Radiology, Inc. and Carroll Imaging Associates, P.A.,
Diagnostic Imaging Associates, P.A., Drs. Thomas, Wallop,
Kim & Lewis, P.A., Drs. Copeland, Hyman & Shackman, P.A.,
Drs. DeCarlo, Lyon, Hearn & Pazourek, Harbor
Radiologists, P.A., Perilla, Sindler & Associates, P.A.**
10.9 -- Service Agreement dated , 1997, by and
among American Physician Partners, Inc., Ide Admin Corp.
and Ide Imaging Group, P.C.**
10.10 -- Service Agreement dated , 1997, by and
among American Physician Partners, Inc., M & S X-Ray
Associates, P.A. and M & S Imaging Associates, P.A.**
10.11 -- Service Agreement dated , 1997, by and
among American Physician Partners, Inc., Rockland
Radiological Group, P.C. and The Greater Rockland
Radiological Group, P.C.**
10.12 -- Service Agreement dated , 1997, by and
among American Physician Partners, Inc., Advanced Imaging
of Orange County, P.C. and The Greater Rockland
Radiological Group, P.C.**
10.13 -- Service Agreement dated , 1997, by and
among American Physician Partners, Inc., Central Imaging
Associates, P.C. and The Greater Rockland Radiological
Group, P.C.**
10.14 -- Service Agreement dated , 1997, by and
among American Physician Partners, Inc., Nyack Magnetic
Resonance Imaging, P.C. and The Greater Rockland
Radiological Group, P.C.**
10.15 -- Service Agreement dated , 1997, by and
among American Physician Partners, Inc., Pelham Imaging
Associates, P.C. and The Greater Rockland Radiological
Group, P.C.**
10.16 -- Service Agreement dated , 1997, by and
among American Physician Partners, Inc., Women's Imaging
Consultants, P.C. and The Greater Rockland Radiological
Group, P.C.**
10.17 -- Service Agreement dated , 1997, by and
among American Physician Partners, Inc., APPI-Pacific
Imaging, Inc. and PIC Medical Group, Inc.**
10.18 -- Service Agreement dated , 1997, by and
among American Physician Partners, Inc., Radiology and
Nuclear Medicine, a Professional Association and RNM
L.L.C.**
10.19 -- Service Agreement dated , 1997, by and
among American Physician Partners, Inc., APPI-Valley
Radiology, Inc. and Valley Radiology Medical Associates,
Inc.**
11.1 -- Statement re computation of per share earnings.*
21.1 -- Subsidiaries.*
23.1 -- Consent of Arthur Andersen LLP.
23.2 -- Consent of DeJoy, Knauf & Blood, LLP.
23.4 -- Consent of Brobeck, Phleger & Harrison LLP (contained in
its opinion filed as Exhibit 5.1).
24.1 -- Power of Attorney.***
</TABLE>
II-4
<PAGE> 166
- ---------------
* To be filed by amendments.
** Incorporated by reference to the corresponding Exhibit number to the
Registrant's Registration Statement No. 333-31611 on Form S-4.
*** Previously filed.
(b) Financial Statement Schedules.
Schedules are omitted because they are not required, are not applicable, or
the information is included in the financial statements or the notes thereto.
ITEM 17. UNDERTAKINGS.
The Registrant hereby undertakes to provide the Underwriters at the closing
specified in the Underwriting Agreement, certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of a
registration statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registration pursuant to the provisions described in Item 14 hereof, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-5
<PAGE> 167
SIGNATURE PAGE
Pursuant to the requirements of the Securities Act of 1933, as amended,
American Physician Partners, Inc. has duly caused this Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Dallas, State of Texas, on September 30, 1997.
AMERICAN PHYSICIAN PARTNERS, INC.
By: /s/ GREGORY L. SOLOMON
-------------------------------------
Gregory L. Solomon
President and Chief Executive Officer
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ GREGORY L. SOLOMON President, Chief Executive September 30, 1997
- ----------------------------------------------------- Officer, and Director
Gregory L. Solomon (Principal Executive
Officer)
/s/ GREGORY L. SOLOMON* Chairman of the Board of September 30, 1997
- ----------------------------------------------------- Directors and Senior Vice
Lawrence R. Muroff, M.D. President of Physician
Affairs
/s/ GREGORY L. SOLOMON* Senior Vice President and September 30, 1997
- ----------------------------------------------------- Chief Financial Officer
Sami S. Abbasi (Principal Financial
Officer)
/s/ GREGORY L. SOLOMON* Controller and Treasurer September 30, 1997
- ----------------------------------------------------- (Principal Accounting
Steve W. Ratton, Jr. Officer)
/s/ GREGORY L. SOLOMON* Director September 30, 1997
- -----------------------------------------------------
John W. Colloton
/s/ GREGORY L. SOLOMON* Director September 30, 1997
- -----------------------------------------------------
John Pappajohn
/s/ GREGORY L. SOLOMON* Director September 30, 1997
- -----------------------------------------------------
Derace L. Schaffer, M.D.
</TABLE>
* By Power of Attorney
II-6
<PAGE> 168
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGES
------- ----------- ------------
<C> <S> <C>
1.1 -- Form of Underwriting Agreement.*
2.1 -- Agreement and Plan of Reorganization and Merger, dated
June 27, 1997 by and among American Physician Partners,
Inc., Carroll Imaging Associates, P.A., Diagnostic
Imaging Associates, P.A., Drs. Copeland, Hyman and
Shackman, P.A., Drs. Decarlo, Lyon, Hearn & Pazourek,
P.A., Drs. Thomas, Wallop, Kim & Lewis, P.A., Harbor
Radiologists, P.A., and Perilla, Syndler & Associates,
P.A.**
2.2 -- Agreement and Plan of Reorganization and Merger, dated
June 27, 1997 by and between American Physician Partners,
Inc., and Radiology and Nuclear Medicine, A Professional
Association.**
2.3 -- Agreement and Plan of Reorganization and Merger, dated
June 27, 1997 by and between American Physician Partners,
Inc., and Mid Rockland Imaging Associates, P.C.**
2.4 -- Agreement and Plan of Reorganization and Merger, dated
June 27, 1997 by and between American Physician Partners,
Inc., and Rockland Radiological Group, P.C.**
2.5 -- Agreement and Plan of Reorganization and Merger, dated
June 27, 1997 by and between American Physician Partners,
Inc., and Advanced Imaging of Orange County, P.C.**
2.6 -- Agreement and Plan of Reorganization and Merger, dated
June 27, 1997 by and between American Physician Partners,
Inc., and Central Imaging Associates, P.C.**
2.7 -- Agreement and Plan of Reorganization and Merger, dated
June 27, 1997 by and between American Physician Partners,
Inc., and Nyack Magnetic Resonance Imaging, P.C.**
2.8 -- Agreement and Plan of Reorganization and Merger, dated
June 27, 1997 by and between American Physician Partners,
Inc., and Pelham Imaging Associates, P.C.**
2.9 -- Agreement and Plan of Reorganization and Merger, dated
June 27, 1997 by and between American Physician Partners,
Inc., and Women's Imaging Consultants, P.C.**
2.10 -- Agreement and Plan of Reorganization and Merger, dated
June 27, 1997 by and between American Physician Partners,
Inc., and Pacific Imaging Consultants, A Medical Group,
Inc.**
2.11 -- Agreement and Plan of Reorganization and Merger, dated
June 27, 1997 by and between American Physician Partners,
Inc., and Total Medical Imaging, Inc.**
2.12 -- Agreement and Plan of Reorganization and Merger, dated
June 27, 1997 by and between American Physician Partners,
Inc., and Valley Radiologists Medical Group, Inc.**
2.13 -- Agreement and Plan of Reorganization and Merger, dated
June 27, 1997 by and between American Physician Partners,
Inc., and The Ide Group, P.C.**
2.14 -- Agreement and Plan of Reorganization and Merger, dated
June 27, 1997 by and between American Physician Partners,
Inc., and M & S X-Ray Associates, P.A.**
2.15 -- Agreement and Plan of Reorganization and Merger, dated
June 27, 1997 by and between American Physician Partners,
Inc., and South Texas MR, Inc.**
</TABLE>
<PAGE> 169
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGES
------- ----------- ------------
<C> <S> <C>
2.16 -- Agreement and Plan of Reorganization and Merger, dated
June 27, 1997 by and between American Physician Partners,
Inc., and San Antonio MR, Inc.**
2.17 -- Agreement and Plan of Exchange, dated June 27, 1997 by
and among American Physician Partners, Inc., Lexington
MR, Ltd., and the Sellers.**
2.18 -- Agreement and Plan of Exchange, dated June 27, 1997 by
and among American Physician Partners, Inc., Madison
Square Joint Venture and the Sellers.**
2.19 -- Agreement and Plan of Exchange, dated June 27, 1997 by
and among American Physician Partners, Inc., South Texas
No. 1 MRI Limited Partnership, a Texas limited
partnership, and the Sellers.**
2.20 -- Agreement and Plan of Exchange, dated June 27, 1997 by
and among American Physician Partners, Inc., San Antonio
MRI Partnership No. 2 Ltd., a Texas limited partnership,
and the Sellers.**
2.21 -- Agreement and Plan of Exchange, dated June 27, 1997 by
and among American Physician Partners, Inc., and the
Sellers.**
3.1 -- Restated Certificate of Incorporation of American
Physician Partners, Inc.
3.2 -- Amended and Restated Bylaws of American Physician
Partners, Inc.
4.1 -- Form of certificate evidencing ownership of Common Stock
of American Physician Partners, Inc.*
4.2 -- Form of Convertible Promissory Note of American Physician
Partners, Inc.**
5.1 -- Opinion of Brobeck, Phleger & Harrison LLP
10.1 -- American Physician Partners, Inc. 1996 Stock Option
Plan.**
10.2 -- Employment Agreement between American Physician Partners,
Inc. and Gregory L. Solomon.**
10.3 -- Employment Agreement between American Physician Partners,
Inc. and Mark S. Martin.**
10.4 -- Employment Agreement between American Physician Partners,
Inc. and Sami S. Abbasi.**
10.5 -- Employment Agreement between American Physician Partners,
Inc. and Paul M. Jolas.**
10.6 -- Form of Indemnification Agreement for certain Directors
and Officers.*
10.7 -- Form of Registration Rights Agreement.**
10.8 -- Service Agreement, dated , 1997, by and
among American Physician Partners, Inc., APPI-Advanced
Radiology, Inc. and Carroll Imaging Associates, P.A.,
Diagnostic Imaging Associates, P.A., Drs. Thomas, Wallop,
Kim & Lewis, P.A., Drs. Copeland, Hyman & Shackman, P.A.,
Drs. DeCarlo, Lyon, Hearn & Pazourek, Harbor
Radiologists, P.A., Perilla, Sindler & Associates, P.A.**
10.9 -- Service Agreement dated , 1997, by and
among American Physician Partners, Inc., Ide Admin Corp.
and Ide Imaging Group, P.C.**
10.10 -- Service Agreement dated , 1997, by and
among American Physician Partners, Inc., M & S X-Ray
Associates, P.A. and M & S Imaging Associates, P.A.**
10.11 -- Service Agreement dated , 1997, by and
among American Physician Partners, Inc., Rockland
Radiological Group, P.C. and The Greater Rockland
Radiological Group, P.C.**
</TABLE>
<PAGE> 170
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGES
------- ----------- ------------
<C> <S> <C>
10.12 -- Service Agreement dated , 1997, by and
among American Physician Partners, Inc., Advanced Imaging
of Orange County, P.C. and The Greater Rockland
Radiological Group, P.C.**
10.13 -- Service Agreement dated , 1997, by and
among American Physician Partners, Inc., Central Imaging
Associates, P.C. and The Greater Rockland Radiological
Group, P.C.**
10.14 -- Service Agreement dated , 1997, by and
among American Physician Partners, Inc., Nyack Magnetic
Resonance Imaging, P.C. and The Greater Rockland
Radiological Group, P.C.**
10.15 -- Service Agreement dated , 1997, by and
among American Physician Partners, Inc., Pelham Imaging
Associates, P.C. and The Greater Rockland Radiological
Group, P.C.**
10.16 -- Service Agreement dated , 1997, by and
among American Physician Partners, Inc., Women's Imaging
Consultants, P.C. and The Greater Rockland Radiological
Group, P.C.**
10.17 -- Service Agreement dated , 1997, by and
among American Physician Partners, Inc., APPI-Pacific
Imaging, Inc. and PIC Medical Group, Inc.**
10.18 -- Service Agreement dated , 1997, by and
among American Physician Partners, Inc., Radiology and
Nuclear Medicine, a Professional Association and RNM
L.L.C.**
10.19 -- Service Agreement dated , 1997, by and
among American Physician Partners, Inc., APPI-Valley
Radiology, Inc. and Valley Radiology Medical Associates,
Inc.**
11.1 -- Statement re computation of per share earnings.*
21.1 -- Subsidiaries.*
23.1 -- Consent of Arthur Andersen LLP.
23.2 -- Consent of DeJoy, Knauf & Blood, LLP.
23.4 -- Consent of Brobeck, Phleger & Harrison LLP (contained in
its opinion filed as Exhibit 5.1).
24.1 -- Power of Attorney.***
</TABLE>
- ---------------
* To be filed by amendments.
** Incorporated by reference to the corresponding Exhibit number to the
Registrant's Registration Statement No. 333-31611 on Form S-4.
*** Previously filed.
<PAGE> 1
EXHIBIT 3.1
RESTATED CERTIFICATE OF INCORPORATION OF
AMERICAN PHYSICIAN PARTNERS, INC.
American Physician Partners, Inc. (the "Corporation") was
incorporated under and by virtue of the General Corporation Law of the State of
Delaware on April 30, 1996.
The Corporation DOES HEREBY CERTIFY:
FIRST: The name of the Corporation is American Physician
Partners, Inc. This Restated Certificate of Incorporation (this "Certificate")
integrates and amends the Certificate of Incorporation filed on April 30, 1996,
and was duly adopted by written consent of the stockholders in accordance with
the applicable provisions of Sections 228, 242 and 245 of the Delaware General
Corporation Law.
SECOND: The Certificate of Incorporation of the Corporation
shall be amended and restated to read in full as follows:
ARTICLE I.
The name of the Corporation shall be: American Physician
Partners, Inc.
ARTICLE II.
The address of the registered office of the Corporation in the
State of Delaware is 9 East Loockerman Street, in the City of Dover, County of
Kent and the name of the registered agent at that address is National
Registered Agents, Inc.
ARTICLE III.
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of Delaware.
ARTICLE IV.
A. The Corporation is authorized to issue two classes of
stock to be designated, respectively, "Common Stock" and "Preferred Stock." The
total number of shares which the corporation is authorized to issue is Sixty
Million (60,000,000) shares. Fifty Million (50,000,000) shares shall be Common
Stock, par value $.0001 per share and Ten Million (10,000,000) shares shall be
Preferred Stock, par value $.0001 per share.
B. The Preferred Stock may be issued from time to time in one
or more series. The Board of Directors is hereby authorized, within the
limitations and restrictions stated in this Restated Certificate of
Incorporation, to fix or alter the dividend rights, dividend rate, conversion
rights, voting rights, rights and terms of redemption (including sinking fund
provisions), the redemption price or prices, and the liquidation preferences of
any wholly unissued series of Preferred Stock, and the number of shares
constituting any such series and
<PAGE> 2
the designation thereof, or any of them, and to increase or decrease the number
of shares of any series subsequent to the issue of shares of that series, but
not below the number of shares of such series then outstanding. In case the
number of shares of any series shall be so decreased, the shares constituting
such decrease shall resume the status which they had prior to the adoption of
the resolution originally fixing the number of shares of such series.
ARTICLE V.
A director of the Corporation shall not be personally liable to
the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the Corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law, (iii) under Section 174 of the Delaware General
Corporation Law, or (iv) for any transaction from which the director derived
any improper personal benefit. If the Delaware General Corporation Law is
amended after approval by the stockholders of this Article to authorize the
Corporation action further eliminating or limiting the personal liability of
directors then the liability of a director of the Corporation shall be
eliminated or limited to the broadest and maximum extent permitted by the
Delaware General Corporation Law as so amended.
ARTICLE VI.
A. The Corporation shall, to the broadest and maximum extent
permitted by Delaware law, as the same exists from time to time indemnify each
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative by reason of the fact that he or she
is or was a director or officer of the Corporation, or is or was serving at the
request of the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him or her in connection with
such action, suit or proceeding.
B. In addition, the Corporation shall, to the broadest and
maximum extent permitted by Delaware law, as the same may exist from time to
time pay to such person any and all expenses (including attorneys' fees)
incurred in defending or settling any such action, suit or proceeding in
advance of the final disposition of such action, suit or proceeding upon
receipt of an undertaking by or on behalf of the director or officer, to repay
such amount if it shall ultimately be determined by a final judgment or other
final adjudication that he or she is not entitled to be indemnified by the
Corporation as authorized in this Article VI.
C. Subsections (A) and (B) of this Article VI to the contrary
notwithstanding, the Corporation shall not indemnify any such person with
respect to any of the following matters: (i) remuneration paid to such person
if it shall be determined by a final judgment or other final adjudication that
such remuneration was in violation of law; or (ii) any accounting of profits
made from the purchase or sale by such person of the Corporation's securities
within the meaning of Section 16(b) of the Securities Exchange Act of 1934 and
amendments thereto or similar provisions of any federal, state or local
statutory law; or (iii) actions brought about or contributed to by the
dishonesty of such person, if a final judgment or other final adjudication
adverse to such person establishes that acts of active and deliberate
dishonesty were committed
<PAGE> 3
or attempted by such person with actual dishonest purpose and intent and were
material to the adjudication; or (iv) actions based on or attributable to such
person having gained any personal profit or advantage to which he or she was
not entitled, in the event that a final judgment or other final adjudication
adverse to such person establishes that such person in fact gained such
personal profit or other advantage to which he or she was not entitled; or (v)
any matter in respect of which a final decision by a court with competent
jurisdiction shall determine that indemnification is unlawful.
D. The rights to indemnification and to the advancement of
expenses conferred in this Article VI shall not be exclusive of any other right
which any person may have or hereafter acquire under any statute, this Restated
Certificate of Incorporation, the Bylaws of the Corporation, by agreement, vote
of stockholders, or disinterested directors or otherwise.
ARTICLE VII.
The management of the business and the conduct of the affairs of
the Corporation shall be vested in its Board of Directors. The number of
directors which shall constitute the whole Board of Directors shall be fixed
by, or in the manner provided in, the Bylaws of the Corporation.
ARTICLE VIII.
Meetings of stockholders may be held within or without the State
of Delaware, as the Bylaws of the Corporation may provide. The books of the
Corporation may be kept (subject to any provision contained in the Delaware
General Corporation law) outside the State of Delaware at such place or places
as may be designated from time to time by the Board of Directors or in the
Bylaws of the corporation.
ARTICLE IX.
Election of directors at an annual or special meeting of
stockholders need not be by written ballot unless the Bylaws of the Corporation
shall so provide.
ARTICLE X.
Special meetings of the stockholders of the Corporation for any
purpose or purposes may be called at any time by the Board of Directors or by a
committee of the Board of Directors which has been duly designated by the Board
of Directors and whose powers and authority, as provided in a resolution of the
Board of Directors or in the Bylaws of the Corporation, include the power to
call such meetings, but such special meetings may not be called by any other
person or persons; provided, however, that if and to the extent that any
special meeting of stockholders may be called by any other person or persons
specified in any provisions of this Restated Certificate of Incorporation or
any amendment thereto or any certificate filed under Section 151(g) of the
General Corporation Law of Delaware (or its successor statute as in effect from
time to time hereunder), then such special meeting may also be called by the
person or persons in the manner, at the times and for the purposes so
specified.
3
<PAGE> 4
ARTICLE XI.
The corporation reserves the right to amend, alter, change or
repeal any provision contained in this Restated Certificate of Incorporation,
in the manner now or hereafter prescribed by statute, and all rights conferred
on stockholders herein are granted subject to this reservation.
THE UNDERSIGNED, being duly elected Secretary of American
Physician Partners, Inc., a Delaware corporation hereto sets his hand on this
Restated Certificate of Incorporation on this ___ day of August, 1997.
------------------------------------
Paul M. Jolas, Secretary
4
<PAGE> 1
EXHIBIT 3.2
AMENDED AND RESTATED BYLAWS
OF
AMERICAN PHYSICIAN PARTNERS, INC.,
A DELAWARE CORPORATION
ARTICLE I
OFFICES
Section 1. Registered Office. The registered office shall be at the
office of National Registered Agents, Inc.
Section 2. Other Offices. The corporation may also have offices at
such other places both within and without the State of Delaware as the Board of
Directors may on an annual basis determine or the business of the corporation
may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. Annual Meeting. An annual meeting of the stockholders for
the election of directors shall be held at such place either within or without
the State of Delaware as shall be designated on an annual basis by the Board of
Directors and stated in the notice of the meeting. Meetings of stockholders
for any other purpose may be held at such time and place, within or without the
State of Delaware, as shall be stated in the notice of the meeting or in a duly
executed waiver of notice thereof.
Section 2. Notice of Annual Meeting. Written notice of the annual
meeting stating the place, date and hour of the meeting shall be given to each
stockholder entitled to vote at such meeting not less than ten (10) nor more
than sixty (60) days before the date of the meeting.
Section 3. Voting List. The officer who has charge of the stock ledger
of the corporation shall prepare and make, or cause a third party to prepare
and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also
be produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
<PAGE> 2
Section 4. Special Meetings. Special meetings of the stockholders of
this corporation, for any purpose or purposes, unless otherwise prescribed by
statute or by the Certificate of Incorporation of the Corporation, as may be
amended or restated (hereinafter, the "Certificate of Incorporation"), shall be
called by the President or Secretary at the request in writing of the
President, a majority of the members of the Board of Directors or holders of at
least 20% of the total voting power of all outstanding shares of stock of this
corporation then entitled to vote, and may not be called absent such a request.
Such request shall state the purpose or purposes of the proposed meeting.
Section 5. Notice of Special Meetings. As soon as reasonably
practicable after receipt of a request as provided in Section 4 of this Article
II, written notice of a special meeting, stating the place, date (which shall
be not less than ten (10) nor more than sixty (60) days from the date of the
notice) and hour of the special meeting and the purpose or purposes for which
the special meeting is called, shall be given to each stockholder entitled to
vote at such special meeting.
Section 6. Scope of Business at Special Meeting. Business transacted
at any special meeting of stockholders shall be limited to the purposes stated
in the notice.
Section 7. Quorum. The holders of a majority of the stock issued and
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the stockholders for the
transaction of business, except as otherwise provided by statute or by the
Certificate of Incorporation. If, however, such quorum shall not be present or
represented at any meeting of the stockholders, the chairman of the meeting or
the stockholders entitled to vote thereat, present in person or represented by
proxy, shall have power to adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum shall be present
or represented. At such adjourned meeting at which a quorum shall be present
or represented, any business may be transacted which might have been transacted
at the meeting as originally notified. If the adjournment is for more than
thirty (30) days, or if after the adjournment a new record date is fixed for
the adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting as provided in Section 5
of this Article II.
Section 8. Qualifications to Vote. The stockholders of record on the
books of the corporation at the close of business on the record date as
determined by the Board of Directors and only such stockholders shall be
entitled to vote at any meeting of stockholders or any adjournment thereof.
Section 9. Record Date. The Board of Directors may fix a record date
for the determination of the stockholders entitled to notice of or to vote at
any stockholders' meeting and at any adjournment thereof, and to fix a record
date for any other purpose. The record date shall not be more than sixty (60)
nor less than ten (10) days before the date of such meeting. If no record date
is fixed by the Board of Directors, the record date for determining
stockholders entitled to notice of or to vote at a meeting of stockholders
shall be at the close of business on the day next preceding the day on which
notice is given, or if notice is waived, at the close of
<PAGE> 3
business on the day next preceding the day on which the meeting is held. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for
the adjourned meeting.
Section 10. Action at Meetings. When a quorum is present at any
meeting, the vote of the holders of a majority of the stock having voting power
present in person or represented by proxy shall decide any question brought
before such meeting, unless the question is one upon which by express provision
of applicable law or of the Certificate of Incorporation, a different vote is
required, in which case such express provision shall govern and control the
decision of such question.
Section 11. Voting and Proxies. Unless otherwise provided in the
Certificate of Incorporation, each stockholder shall at every meeting of the
stockholders be entitled to one (1) vote in person or by proxy for each share
of the capital stock having voting power held by such stockholder, but no proxy
shall be voted on after three (3) years from its date, unless the proxy
provides for a longer period. Each proxy shall be revocable unless expressly
provided therein to be irrevocable and unless it is coupled with an interest
sufficient in law to support an irrevocable power
Section 12. Nominations for Board of Directors. Nominations for
election to the Board of Directors must be made by the Board of Directors or by
any stockholder of any outstanding class of capital stock of the corporation
entitled to vote for the election of directors. Nominations, other than those
made by the Board of Directors of the corporation, must be preceded by
notification in writing in fact received by the Secretary of the corporation
not less than sixty (60) days prior to any meeting of stockholders called for
the election of directors. Such notification shall contain the written consent
of each proposed nominee to serve as a director if so elected and the following
information as to each proposed nominee and as to each person, acting alone or
in conjunction with one or more other persons as a partnership, limited
partnership, syndicate or other group, who participates or is expected to
participate in making such nomination or in organizing, directing or financing
such nomination or solicitation of proxies to vote for the nominee:
(a) the name, age, residence, address, and business address of
each proposed nominee and of each such person;
(b) the principal occupation or employment, the name, type of
business and address of the corporation or other organization in which such
employment is carried on of each proposed nominee and of each such person;
(c) the amount of stock of the corporation owned beneficially,
either directly or indirectly, by each proposed nominee and each such person;
and
3
<PAGE> 4
(d) a description of any arrangement or understanding of each
proposed nominee and of each such person with each other or any other person
regarding future employment or any future transaction to which the corporation
will or may be a party.
The presiding officer of the meeting shall have the authority to
determine and declare to the meeting that a nomination not preceded by
notification made in accordance with the foregoing procedure shall be
disregarded.
Section 13. Stockholder Proposals for Meetings. At any meeting of the
stockholders, only such business shall be conducted as shall be properly before
the meeting. To be properly before a meeting, business must be (a) specified
in the notice of meeting (or any supplement thereto) given by or at the
direction of the Board of Directors, (b) otherwise properly brought before the
meeting by or at the direction of the Board of Directors, or (c) otherwise
properly brought before the meeting by a stockholder. For business to be
properly brought before a meeting by a stockholder, the stockholder must have
given timely notice thereof in writing to the Secretary. To be timely, a
stockholder's notice must be delivered to or mailed and received at the
principal place of business of the corporation not less than thirty (30) days
nor more than sixty (60) days prior to the meeting; provided, however, that in
the event that less than forty (40) days notice or prior public disclosure of
the date of the meeting is given or made to stockholders, notice by the
stockholder to be timely must be received not later than the close of business
on the tenth day following the day on which such notice of the date of the
meeting was mailed or such public disclosure was made. A stockholder's written
notice to the Secretary shall set forth as to each matter the stockholder
proposes to bring before the meeting (a) a brief description of the business
desired to be brought before the meeting and the reasons for conducting such
business at the meeting, (b) the name and address as they appear on the
corporation's books of the stockholder proposing such business, (c) the class
and number of shares of the corporation which are beneficially owned by such
stockholder, and (d) any material interest of such stockholder in such
business. Notwithstanding anything in these Bylaws to the contrary, no
business shall be conducted at a meeting unless properly brought before such
meeting in accordance with the procedures set forth in this Section 13 of
Article II. The chairman of the meeting shall, if the facts warrant, determine
and declare to the meeting that business was not properly brought before the
meeting in accordance with the provisions of this Section 13 of Article II and
if it shall be so determined, the chairman of the meeting shall so declare this
to the meeting and such business not properly brought before the meeting shall
not be transacted.
ARTICLE III
DIRECTORS
Section 1. Powers. The business of the corporation shall be managed by
or under the direction of its Board of Directors, which may exercise all such
powers of the corporation and do all such lawful acts and things as are not by
applicable law or by the Certificate of Incorporation or by these Bylaws
directed or required to be exercised or done by the stockholders.
4
<PAGE> 5
Section 2. Number; Election; Tenure and Qualification. The number of
directors which shall constitute the whole Board of Directors shall be fixed
from time to time by resolution of the Board of Directors or by the stockholders
at an annual meeting of the stockholders provided that the number of directors
shall be not less than four (4) nor more than nine (9). At such time as the
number of Directors is increased to seven (7) directors, at least two (2) of the
seven (7) directors shall be licensed physicians ("Affiliated Physicians")
who, at the time of nomination to serve as a director, perform professional
("Affiliated Physicians") medical services for or on behalf of a radiology
practice management services organization, diagnostic imaging center or other
related business that the Company has acquired. Notwithstanding the preceding
sentence, in the event the number of directors is increased to nine (9), then at
least three (3) of the nine (9) directors shall be Affiliated Physicians. Except
as provided in Section 3 of this Article III, the directors shall be elected at
the annual meeting of the stockholders by a plurality vote of the shares
represented in person or by proxy and each director elected shall hold office
for a one year term or until his successor is elected and qualified unless he
shall resign, become disqualified, disabled or otherwise removed. Directors
need not be stockholders.
Section 3. Vacancies and Newly Created Directorships. Unless otherwise
provided in the Certificate of Incorporation, vacancies and newly-created
directorships resulting from any increase in the authorized number of directors
may be filled by a majority of the directors then in office, though less than a
quorum, or by a sole remaining director. The directors so chosen shall serve
for the remainder of the term of the vacated directorships being filled and
until their successors are duly elected and shall qualify, unless sooner
displaced. If there are no directors in office, then an election of directors
may be held in the manner provided by statute.
Section 4. Location of Meetings. The Board of Directors of the
corporation may hold meetings, both regular and special, either within or
without the State of Delaware.
Section 5. Meeting of Newly Elected Board of Directors. The first
meeting of each newly elected Board of Directors shall be held immediately
following the annual meeting of stockholders and no notice of such meeting
shall be necessary to the newly elected directors in order legally to
constitute the meeting, provided a quorum shall be present. In the event such
meeting is not held at such time, the meeting may be held at such time and
place as shall be specified in a notice given as hereinafter provided for
special meetings of the Board of Directors, or as shall be specified in a
written waiver signed by all of the directors.
Section 6. Regular Meetings. Regular meetings of the Board of
Directors may be held upon at least seven (7) days prior written notice at such
time and at such place as shall from time to time be determined by the Board of
Directors; provided that any director who is absent when such a determination
is made shall be given notice of such location. Notice may be waived in
accordance with Section 229 of the Delaware General Corporation Law.
Section 7. Special Meetings. Special meetings of the Board of
Directors may be called by the President on seven (7) days' notice to each
director by mail or two (2) days' notice to each director by overnight courier
service or facsimile; special meetings shall be called by the President or
Secretary in a like manner and on like notice on the written request of two (2)
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directors unless the Board of Directors consists of only one (1) director, in
which case special meetings shall be called by the President or Secretary in a
like manner and on like notice on the written request of the sole director.
Notice may be waived in accordance with Section 229 of the Delaware General
Corporation Law.
Section 8. Quorum and Action at Meetings. At all meetings of the Board
of Directors, a majority of the directors then in office shall constitute a
quorum for the transaction of business, and the act of a majority of the
directors present at any meeting at which there is a quorum shall be the act of
the Board of Directors, except as may be otherwise specifically provided by
statute or by the Certificate of Incorporation. If a quorum shall not be
present at any meeting of the Board of Directors, the directors present thereat
may adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present.
Section 9. Action Without a Meeting. Unless otherwise restricted by
the Certificate of Incorporation or these Bylaws, any action required or
permitted to be taken at any meeting of the Board of Directors or of any
committee thereof may be taken without a meeting, if all members of the board
or committee, as the case may be, consent thereto in writing, and the writing
or writings are filed with the minutes of proceedings of the Board of Directors
or committee.
Section 10. Telephonic Meeting. Unless otherwise restricted by the
Certificate of Incorporation or these Bylaws, members of the Board of
Directors, or any committee designated by the Board of Directors, may
participate in a meeting of the Board of Directors, or any committee, upon
proper notice duly given, by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and such participation in a meeting shall
constitute presence in person at the meeting.
Section 11. Committees. The Board of Directors may, by resolution
passed by a majority of the whole board, designate one or more committees, each
committee to consist of one (1) or more of the directors of the corporation.
The Board of Directors may designate one or more directors as alternate members
of any committee, who may replace any absent or disqualified member at any
meeting of the committee. In the absence of disqualification of a member of a
committee, the member or members thereof present at any meeting and not
disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member.
Section 12. Committee Authority. Any such committee, to the extent
provided in the resolution of the Board of Directors, shall have and may
exercise all the powers and authority of the Board of Directors in the
management of the business and affairs of the corporation, and may authorize
the seal of the corporation to be affixed to all papers which may require it;
but no such committee shall have the power or authority in reference to
amending the Certificate of Incorporation, adopting an agreement of merger or
consolidation, recommending to the stockholders the sale, lease or exchange of
all or substantially all of the corporation's property
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and assets, recommending to the stockholders a dissolution of the corporation
or a revocation of a dissolution, amending the Bylaws of the corporation, or
any action requiring unanimous consent of the Board of Directors pursuant to
the terms of the Certificate of Incorporation; and, unless the resolution or
the Certificate of Incorporation expressly so provide, no such committee shall
have the power or authority to declare a dividend or to authorize the issuance
of stock. Such committee or committees shall have such name or names as may be
determined from time to time by resolution adopted by the Board of Directors.
Section 13. Committee Minutes. Each committee shall keep regular
minutes of its meetings and report the same to the Board of Directors when
required.
Section 14. Directors Compensation. Unless otherwise restricted by the
Certificate of Incorporation or these Bylaws, the Board of Directors shall have
the authority to fix the compensation of directors. The directors may be paid
their expenses, if any, of attendance at each meeting of the Board of Directors
and may be paid a fixed sum for attendance at each meeting of the Board of
Directors or a stated salary as director. No such payment shall preclude any
director from serving the corporation in any other capacity and receiving
compensation therefor. Members of special or standing committees may be
allowed like compensation for attending committee meetings.
Section 15. Resignation. Any director or officer of the corporation may
resign at any time. Each such resignation shall be made in writing and shall
take effect at the time specified therein, or, if no time is specified, at the
time of its receipt by either the Board of Directors, the President or the
Secretary. The acceptance of a resignation shall not be necessary to make it
effective unless expressly so provided in the resignation.
ARTICLE IV
NOTICES
Section 1. Notice to Directors and Stockholders. Whenever, under the
provisions of the statutes or of the Certificate of Incorporation or of these
Bylaws, notice is required to be given to any director or stockholder, it shall
not be construed to mean personal notice, but such notice may be given in
writing, by mail, addressed to such director or stockholder, at his address as
it appears on the records of the corporation, with postage thereon prepaid, and
such notice shall be deemed to be given at the time when the same shall be
deposited in the United States mail. An affidavit of the Secretary or an
Assistant Secretary or of the transfer agent of the corporation that the notice
has been given shall in the absence of fraud, be prima facie evidence of the
facts stated therein. Notice to directors may also be given by telephone,
facsimile or telegram.
Section 2. Waiver. Whenever any notice is required to be given under
the provisions of the statutes or of the Certificate of Incorporation or of
these Bylaws, a waiver thereof in writing, signed by the person or persons
entitled to said notice, whether before or after the time stated therein, shall
be deemed equivalent thereto. The written waiver need not specify the business
to be transacted at, nor the purpose of, any regular or special meeting of the
stockholders, directors, or members of a committee of directors. Attendance of
a person at a
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meeting shall constitute a waiver of notice of such meeting, except when the
person attends a meeting for the express purpose of objecting at the beginning
of the meeting, to the transaction of any business because the meeting is not
lawfully called or convened.
ARTICLE V
OFFICERS
Section 1. Enumeration. The officers of the corporation shall be
chosen by the Board of Directors and shall be a President, a Secretary, a
Treasurer or Chief Financial Officer and such other officers with such other
titles as the Board of Directors shall determine. The Board of Directors may
elect from among its members a Chairman or Chairmen of the Board and a Vice
Chairman of the Board. The Board of Directors may also choose one (1) or more
Vice-Presidents and Assistant Secretaries. Any number of offices may be held
by the same person, unless the Certificate of Incorporation or these Bylaws
otherwise provide.
Section 2. Election. The Board of Directors at its first meeting after
each annual meeting of stockholders shall elect a President, a Secretary, a
Treasurer and such other officers with such other titles as the Board of
Directors shall determine.
Section 3. Appointment of Other Agents. The Board of Directors may
appoint such other officers and agents as it shall deem necessary, who shall
hold their offices for such terms and shall exercise such powers and perform
such duties as shall be determined from time to time by the Board of Directors.
Section 4. Compensation. The salaries of all officers of the
corporation shall be fixed by the Board of Directors or a committee thereof.
The salaries of agents of the corporation shall, unless fixed by the Board of
Directors, be fixed by the President or any Vice-President of the corporation.
Section 5. Tenure. The officers of the corporation shall hold office
until their successors are chosen and qualify. Any officer elected or
appointed by the Board of Directors may be removed at any time by the
affirmative vote of a majority of the directors of the Board of Directors. Any
vacancy occurring in any office of the corporation shall be filled by the Board
of Directors.
Section 6. Chairman of the Board and Vice-Chairman of the Board. The
Chairman or Chairmen of the Board, if any, shall preside at all meetings of the
Board of Directors and of the stockholders at which he or they shall be
present. He or they shall have and may exercise such powers as are, from time
to time, assigned to him or them by the Board and as may be provided by law.
In the absence of the Chairman of the Board, the Vice Chairman of the Board, if
any, shall preside at all meetings of the Board of Directors and of the
stockholders at which he shall be present. He shall have and may exercise such
powers as are, from time to time, assigned to him by the Board of Directors and
as may be provided by law.
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Section 7. President. The President shall be the Chief Operating
Officer of the corporation and the Chief Executive Officer of the corporation
unless such titles are assigned to a Chairman of the Board; and in the absence
of a Chairman and Vice Chairman of the Board he shall preside as the chairman
of meetings of the stockholders and the Board of Directors; he shall have
general and active management of the business of the corporation and shall see
that all orders and resolutions of the Board of Directors are carried into
effect. The President or any Vice-President shall execute bonds, mortgages and
other contracts requiring a seal, under the seal of the corporation, except
where required or permitted by law to be otherwise signed and executed and
except where the signing and execution thereof shall be expressly delegated by
the Board of Directors to some other officer or agent of the corporation.
Section 8. Vice-President. In the absence of the President or in the
event of his inability or refusal to act, the Vice-President, if any (or in the
event there be more than one Vice-President, the Vice-Presidents in the order
designated by the Board of Directors, or in the absence of any designation,
then in the order of their election) shall perform the duties of the President,
and when so acting shall have all the powers of and be subject to all the
restrictions upon the President. The Vice-President shall perform such other
duties and have such other powers as the Board of Directors may from time to
time prescribe.
Section 9. Secretary. The Secretary shall attend all meetings of the
Board of Directors and all meetings of the stockholders and record all the
proceedings of the meetings of the corporation and of the Board of Directors in
a book to be kept for that purpose and shall perform like duties for the
standing committees when required. He shall give, or cause to be given, notice
of all meetings of the stockholders and special meetings of the Board of
Directors, and shall perform such other duties as may be prescribed by the
Board of Directors or President, under whose supervision he shall be subject.
He shall have custody of the corporate seal of the corporation and he, or an
Assistant Secretary, shall have authority to affix the same to any instrument
requiring it and when so affixed, it may be attested by his signature or by the
signature of such Assistant Secretary. The Board of Directors may give general
authority to any other officer to affix the seal of the corporation and to
attest the affixing by his signature.
Section 10. Assistant Secretary. The Assistant Secretary, or if there
be more than one (1), the Assistant Secretaries in the order determined by the
Board of Directors (or if there be no such determination, then in the order of
their election) shall, in the absence of the Secretary or in the event of his
inability or refusal to act, perform the duties and exercise the powers of the
Secretary and shall perform such other duties and have such other powers as the
Board of Directors may from time to time prescribe.
Section 11. Treasurer. The Treasurer shall have the custody of the
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the corporation and shall
deposit all moneys and other valuable effects in the name and to the credit of
the corporation in such depositories as may be designated by the Board of
Directors. The Treasurer shall disburse the funds of the corporation as may be
ordered by the Board of Directors, President or Chief Operating Officer, taking
proper vouchers for such disbursements, and shall render to the President,
Chief Operating Officer and the Board of
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Directors, at its regular meetings, or when the Board of Directors so requires,
an account of all his transactions as Treasurer and of the financial condition
of the corporation. If required by the Board of Directors, the Treasurer shall
give the corporation a bond (which shall be renewed every six (6) years) in
such sum and with such surety or sureties as shall be satisfactory to the Board
of Directors for the faithful performance of the duties of his office and for
the restoration to the corporation, in case of his death, resignation,
retirement or removal from office, of all books, papers, vouchers, money and
other property of whatever kind in his possession or under his control
belonging to the corporation.
ARTICLE VI
CAPITAL STOCK
Section 1. Certificates. Every holder of stock in the corporation
shall be entitled to have a certificate, signed by, or in the name of the
corporation by, the Chairman or Vice-Chairman of the Board of Directors, or the
President or a Vice-President and the Treasurer or the Secretary or an
Assistant Secretary of the corporation, certifying the number of shares owned
by him in the corporation. Certificates may be issued for partly paid shares
and in such case upon the face or back of the certificates issued to represent
any such partly paid shares, the total amount of the consideration to be paid
therefor and the amount paid thereon shall be specified.
Section 2. Class or Series. If the corporation shall be authorized to
issue more than one class of stock or more than one series of any class, the
powers, designations, preferences and relative, participating, optional or
other special rights of each class of stock or series thereof and the
qualifications, limitations or restrictions of such preferences and/or rights
shall be set forth in full or summarized on the face or back of the certificate
which the corporation shall issue to represent such class or series of stock,
provided that, except as otherwise provided in Section 202 of the General
Corporation Law of Delaware, in lieu of the foregoing requirements, there may
be set forth on the face or back of the certificate which the corporation shall
issue to represent such class or series of stock, a statement that the
corporation will furnish without charge to each stockholder who so requests the
powers, designations, preferences and relative, participating, optional or
other special rights of each class of stock or series thereof and the
qualifications, limitations or restrictions of such preferences and/or rights.
Section 3. Signature. Any of or all of the signatures on the
certificate may be facsimile. In case any officer, transfer agent or registrar
who has signed or whose facsimile signature has been placed upon a certificate
shall have ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the corporation with the same effect
as if he were such officer, transfer agent or registrar at the date of issue.
Section 4. Lost Certificates. The Board of Directors may direct a new
certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the corporation alleged to have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the person
claiming the certificate of stock to be lost, stolen or destroyed. When
authorizing such issue of a new certificate or certificates, the Board of
Directors may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or
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destroyed certificate or certificates, or his legal representative, to
advertise the same in such manner as it shall require and/or to give the
corporation a bond in such sum as it may direct as indemnity against any claim
that may be made against the corporation with respect to the certificate
alleged to have been lost, stolen or destroyed.
Section 5. Transfer of Stock. Upon surrender to the corporation or the
transfer agent of the corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignation or authority to
transfer, it shall be the duty of the corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate and record the
transaction upon its books.
Section 6. Record Date. In order that the corporation may determine
the stockholders entitled to notice of or to vote at any meeting of stockholder
or any adjournment thereof, or to express consent to corporate action in
writing without a meeting, or entitled to receive payment of any dividend or
other distribution or allotment of any rights, or entitled to exercise any
rights in respect of any change, conversion or exchange of stock or for the
purpose of any other lawful action, the Board of Directors may fix, in advance,
a record date, which shall not be more than sixty (60) nor less than ten (10)
days before the date of such meeting, nor more than sixty (60) days prior to
any other action. A determination of stockholders of record entitled to notice
of or to vote at a meeting of stockholders shall apply to any adjournment of
the meeting; provided, however, that the Board of Directors may fix a new
record date for the adjourned meeting.
Section 7. Registered Stockholders. The corporation shall be entitled
to recognize the exclusive right of a person registered on its books as the
owner of shares to receive dividends, and to vote as such owner, and to hold
liable for calls and assessments a person registered on its books as the owner
of shares and shall not be bound to recognize any equitable or other claim to
or interest in such share or shares on the part of any other person, whether or
not it shall have express or other notice thereof, except as otherwise provided
by the laws of Delaware.
ARTICLE VII
GENERAL PROVISIONS
Section 1. Dividends. Dividends upon the capital stock of the
corporation, subject to the provisions of the Certificate of Incorporation, if
any, may be declared by the Board of Directors at any regular or special
meeting, pursuant to law. Dividends may be paid in cash, in property or in
shares of capital stock, subject to the provisions of the Certificate of
Incorporation. Before payment of any dividend, there may be set aside out of
any funds of the corporation available for dividends such sum or sums as the
Board of Directors from time to time, in their absolute discretion, think
proper as a reserve or reserves to meet contingencies, or for equalizing
dividends, or for repairing or maintaining any property of the corporation, or
for such other purposes as the Board of Directors shall think conducive to the
interest of the corporation, and the Board of Directors may modify or abolish
any such reserve in the manner in which it was created.
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Section 2. Checks. All checks or demands for money and notes of the
corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.
Section 3. Fiscal Year. The fiscal year of the corporation shall be
fixed by resolution of the Board of Directors.
Section 4. Seal. The Board of Directors may adopt a corporate seal
having inscribed thereon the name of the corporation, the year of its
organization and the words "Corporate Seal, Delaware". The seal may be used by
causing it or a facsimile thereof to be impressed or affixed or reproduced or
otherwise.
Section 5. Loans. The Board of Directors of this corporation may,
without stockholder approval, authorize loans to, or guaranty obligations of,
or otherwise assist, including, without limitation, the adoption of employee
benefit plans under which loans and guarantees may be made, any officer or
other employee of the corporation or of its subsidiary, including any officer
or employee who is a director of the corporation or its subsidiary, whenever,
in the judgment of the Board of Directors, such loan, guaranty or assistance
may reasonably be expected to benefit the corporation. The loan, guaranty or
other assistance may be with or without interest, and may be unsecured, or
secured in such manner as the Board of Directors shall approve, including,
without limitation, a pledge of shares of stock of the corporation.
ARTICLE VIII
INDEMNIFICATION
Section 1. Scope. The corporation shall, to the fullest extent
permitted by Section 145 of the Delaware General Corporation Law, as that
Section may be amended and supplemented from time to time, indemnify any
director, officer, employee or agent of the corporation, against expenses
(including attorneys' fees), judgments, fines, amounts paid in settlement
and/or other matters referred to in or covered by that Section, by reason of
the fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise.
Section 2. Advancing Expenses. Expenses incurred by a director of the
corporation in defending a civil or criminal action, suit or proceeding by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation (or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise) shall be paid by the corporation in advance
of the final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director to repay such amount if it shall
ultimately be determined that he is not entitled to be indemnified by the
corporation as authorized by relevant provisions of the Delaware General
Corporation Law; provided, however, the corporation shall not be required to
advance such expenses to a director (i) who commences any action, suit or
proceeding as a plaintiff unless such advance is specifically approved by a
majority of the Board of Directors, or (ii) who is a
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party to an action, suit or proceeding brought by the corporation and approved
by a majority of the Board of Directors which alleges willful misappropriation
of corporate assets by such director, disclosure of confidential information in
violation of such director's fiduciary or contractual obligations to the
corporation, or any other willful and deliberate breach in bad faith of such
director's duty to the corporation or its stockholders.
Section 3. Liability Offset. The corporation's obligation to provide
indemnification under this Article VIII shall be offset to the extent the
indemnified party is indemnified by any other source including, but not limited
to, any applicable insurance coverage under a policy maintained by the
corporation, the indemnified party or any other person.
Section 4. Continuing Obligation. The provisions of this Article VIII
shall be deemed to be a contract between the corporation and each director of
the corporation who serves in such capacity at any time while this bylaw is in
effect, and any repeal or modification thereof shall not affect any rights or
obligations then existing with respect to any state of facts then or
theretofore existing or any action, suit or proceeding theretofore or
thereafter brought based in whole or in part upon any such state of facts.
Section 5. Nonexclusive. The indemnification and advancement of
expenses provided for in this Article VIII shall (i) not be deemed exclusive of
any other rights to which those indemnified may be entitled under any by-law,
agreement or vote of stockholders or disinterested directors or otherwise, both
as to action in their official capacities and as to action in another capacity
while holding such office, (ii) continue as to a person who has ceased to be a
director and (iii) inure to the benefit of the heirs, executors and
administrators of such a person.
Section 6. Other Persons. In addition to the indemnification rights of
directors, officers, employees, or agents of the corporation, the Board of
Directors in its discretion shall have the power on behalf of the corporation
to indemnify any other person made a party to any action, suit or proceeding
who the corporation may indemnify under Section 145 of the Delaware General
Corporation Law.
Section 7. Definitions. The phrases and terms set forth in this
Article VIII shall be given the same meaning as the identical terms and phrases
are given in Section 145 of the Delaware General Corporation Law, as that
Section may be amended and supplemented from time to time.
ARTICLE IX
AMENDMENTS
Except as otherwise provided in the Certificate of Incorporation, these
Bylaws may be altered, amended or repealed, or new Bylaws may be adopted, by
the holders of a majority of the outstanding voting shares or by the Board of
Directors, when such power is conferred upon the Board of Directors by the
Certificate of Incorporation, at any regular meeting of the stockholders or of
the Board of Directors or at any special meeting of the stockholders or of the
Board of Directors if notice of such alteration, amendment, repeal or adoption
of new Bylaws
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be contained in the notice of such special meeting. If the power to adopt,
amend or repeal Bylaws is conferred upon the Board of Directors by the
Certificate of Incorporation, it shall not divest or limit the power of the
stockholders to adopt, amend or repeal Bylaws.
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CERTIFICATE OF SECRETARY
The undersigned certifies:
(1) That the undersigned is the duly elected and acting
Secretary of American Physician Partners, Inc., a Delaware corporation
(the "Corporation"); and
(2) That the foregoing Amended and Restated Bylaws
constitute the Bylaws of the Corporation as duly adopted by the Action
by Written Consent in Lieu of a Meeting by the Board of Directors of
American Physician Partners, Inc., dated the _____ day of August, 1997.
IN WITNESS WHEREOF, I have hereunto subscribed my name and
affixed the seal of the Corporation as of this ____ day of August, 1997.
____________________________
Paul M. Jolas, Secretary
[SEAL]
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EXHIBIT 5.1
American Physician Partners, Inc.
2301 NationsBank Plaza
901 Main Street
Dallas, Texas 75202-3721
Attention: Paul M. Jolas, Esq.
Re: Registration Statement on Form S-1 (Registration No. 333-30205)
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 (Registration
No. 333-30205) initially filed by American Physician Partners, Inc. (the
"Company") with the Securities and Exchange Commission ("SEC") on June 27,
1997, as amended by Pre-Effective Amendment No. 1 filed with the SEC on August
22, 1997 and Pre-Effective Amendment No. 2 filed with the SEC on September 15,
1997 (the "Registration Statement"), in connection with the registration under
the Securities Act of 1933, as amended, of up to 5,000,000 shares of Common
Stock, $.0001 par value (the "Shares") which includes an over-allotment option
granted to the Underwriters to purchase additional Shares. The Shares are to
be sold to the Underwriters as described in the Registration Statement for
resale to the public. As your counsel in connection with this transaction, we
have examined the proceedings taken and are familiar with the proceedings
proposed to be taken by you in connection with the sale and issuance of the
Shares.
It is our opinion that, upon conclusion of the proceedings being taken
or contemplated by us to be taken prior to the issuance of the Shares, and
upon completion of the proceedings being taken in order to permit the
transactions to be carried out in accordance with the securities laws of the
various states where required, the Shares, when issued and sold in the manner
described in the Registration Statement, will be legally issued, fully paid and
nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement, and further consent to all references to our name wherever appearing
in such Registration Statement, including the Prospectus constituting a part
thereof, and any amendment thereto. Subject to the foregoing sentence, this
opinion is given as of the date hereof solely for your benefit and may not be
relied upon, circulated, quoted or otherwise referred to for any purpose without
our prior written consent.
Very truly yours,
BROBECK, PHLEGER & HARRISON LLP
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our Firm) included in or made a part of this
registration statement.
/s/ ARTHUR ANDERSEN LLP
Dallas, Texas
September 30, 1997
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report,
dated January 3, 1997, on our audit of the combined financial statements of The
Ide Group, P.C. and Ide Diagnostic Imaging Associates (and to all references to
our Firm) included in or made a part of this registration statement.
/s/ DEJOY, KNAUF & BLOOD, LLP
Rochester, New York
September 30, 1997.
