AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 26, 1998
REGISTRATION NO. 333-39987
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------------
U.S. PHYSICIANS, INC.
(Exact name of registrant as specified in its charter)
---------------------------
<TABLE>
<S> <C> <C>
PENNSYLVANIA 8011 23-2795906
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification No.)
incorporation or Classification Code
organization) Number)
</TABLE>
220 COMMERCE DRIVE, FORT WASHINGTON, PA 19034, (215) 542-2170
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
THOMAS J. KEANE
Chairman, President and Chief Executive Officer
U.S. PHYSICIANS, INC.
220 Commerce Drive
Fort Washington, PA 19034, (215) 542-2170
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
---------------------------
Copy to:
JASON M. SHARGEL, ESQUIRE MARK KESSEL, ESQUIRE
JOHN M. COOGAN, JR., ESQUIRE SHEARMAN & STERLING
WOLF, BLOCK, SCHORR AND SOLIS-COHEN LLP 599 LEXINGTON AVENUE
TWELFTH FLOOR PACKARD BUILDING NEW YORK, NY 10022
111 SOUTH 15TH STREET (212) 848-4000
PHILADELPHIA, PA 19102-2678
(215) 977-2000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As promptly as practicable after the effective date of this Registration
Statement.
If 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. / /
CALCULATION OF REGISTRATION FEE
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<S> <C> <C> <C> <C>
PROPOSED
MAXIMUM
TITLE OF EACH CLASS OF PROPOSED MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION
REGISTERED REGISTERED(1) PER SHARE PRICE(1)(2) FEE
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Common Stock,
$.01 par value.......................... 4,025,000 $15.00 $60,375,000 $17,810.63(3)
==============================================================================================================
</TABLE>
(1) Includes shares which the Underwriters have a right to purchase to cover
over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o).
(3) Includes $2,659.11 paid with the filing of Amendment No. 2 to this
Registration Statement and $15,151.52 paid by the Registrant upon the
initial filing of this Registration Statement on November 12, 1997.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
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 sales 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 MAY 26, 1998
3,500,000 SHARES
[LOGO]
COMMON STOCK
All of the 3,500,000 shares of Common Stock, par value $.01 per share (the
"Common Stock"), offered hereby are being sold by U.S. PHYSICIANS, Inc. (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 $13.00 and $15.00 per share. See "Underwriting" for a discussion
of the factors to be considered in determining the initial public offering
price. Application has been made to have the Common Stock approved for quotation
on The Nasdaq Stock Market's National Market under the symbol "USPY."
SEE "RISK FACTORS" ON PAGES 7 TO 15 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF 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.
================================================================================
Price to Underwriting Proceeds to
Public Discount(1) Company(2)
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Per Share................ $ $ $
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Total(3)................. $ $ $
================================================================================
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting expenses payable by the Company estimated at $3.3 million.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 525,000 additional shares of Common Stock solely to cover over-
allotments, if any. If the Underwriters exercise this option in full, the
Price to Public will total $_______, Underwriting Discount will total
$________ and the Proceeds to Company will total $ . See
"Underwriting."
---------------------------
The shares of Common Stock are offered by the several Underwriters named
herein, subject to receipt and acceptance by them and subject to their right to
reject any order in whole or in part. It is expected that delivery of the
certificates representing such shares will be made against payment therefor at
the offices of NationsBanc Montgomery Securities LLC on or about , 1998.
NationsBanc Montgomery Securities LLC
Piper Jaffray Inc.
The date of this Prospectus is , 1998
<PAGE>
[MAP OF MID-ATLANTIC UNITED STATES AND SURROUNDING STATES IDENTIFYING AREAS IN
WHICH THE COMPANY MANAGES OR HAS AGREEMENTS TO MANAGE PHYSICIAN PRACTICES
AND ANCILLARY SERVICE PROVIDERS]
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING STABILIZING BIDS, SYNDICATE COVERING TRANSACTIONS AND THE IMPOSITION
OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements of the Company and the
Notes thereto appearing elsewhere in this Prospectus.
Except as otherwise indicated, all information in this Prospectus assumes
that the Underwriters' overallotment option will not be exercised and gives
effect to the following transactions which, except as indicated below, will
occur simultaneously with or prior to the completion of the Offering: (i) the
1-for-7.63475 reverse split of the issued and outstanding Common Stock; (ii) the
automatic conversion of all outstanding shares of the Company's Series A
Convertible Preferred Stock, $.01 par value (the "Series A Preferred Stock"),
and the Company's Series B Convertible Preferred Stock, $.01 par value (the
"Series B Preferred Stock," and, together with the Series A Preferred Stock, the
"Convertible Preferred Stock"), into 1,020,514 shares of Common Stock (the
"Preferred Stock Conversion"); (iii) the automatic conversion of all outstanding
warrants to purchase 488,890 shares of Series B Preferred Stock ("Series B
Warrants") into warrants to purchase 168,091 shares of Common Stock ("Common
Stock Warrants" and, together with the Series B Warrants "Warrants")and an
increase in the exercise price from $8.39 per share to an exercise price per
share equal to the initial public offering price (the "Series B Warrant
Conversion"); (iv) the exercise of outstanding Common Stock Warrants to purchase
5,707 shares of Common Stock at an exercise price of $.08 per share which is
deemed to have occurred because of the nominal exercise price (the "Deemed
Warrant Exercise"); (v) the automatic conversion of the Company's convertible
bridge notes ("Convertible Bridge Notes") in the aggregate principal amount of
$2,550,000 into 182,143 shares of Common Stock (the "Convertible Bridge Note
Conversion"); (vi) the repricing of Warrants to purchase an aggregate of 37,691
shares of Common Stock at original exercise prices ranging from $24.05 to $31.68
per share to a new exercise price per share equal to the initial public offering
price (the "Warrant Exchange"); and (vii) the issuance of 2,255,199 shares of
Common Stock issued in connection with Affiliation Transactions (as defined
below). The information in this Prospectus assumes that the Offering will be
completed at an initial public offering price of $14.00 per share. In addition,
except as otherwise noted, all information in this Prospectus assumes (i) no
exercise of outstanding employee and affiliate stock options (the "Options") to
purchase 1,101,615 shares of Common Stock; (ii) no conversion of the Company's
outstanding convertible notes (the "Convertible Affiliation Notes") in the
aggregate principal amount of $19.4 million which are convertible into 1,383,233
shares of Common Stock; (iii) no conversion of the Company's outstanding
convertible exchange notes ("Convertible Exchange Notes") which, together with
Common Stock Warrants to purchase 200,000 shares of Common Stock at an exercise
price per share equal to 120% of the initial public offering price, are being
issued in the aggregate principal amount of $6,000,000 in exchange for the
cancellation of all of the Company's then issued and outstanding shares of
Series C Convertible Preferred Stock, $.01 par value ("Series C Preferred
Stock"), and for the cancellation of Common Stock Warrants previously issued in
connection with the sale of the Series C Preferred Stock (the "Series C
Preferred Stock Exchange"); and (iv) no exercise of outstanding Common Stock
Warrants to purchase an aggregate of 496,853 shares of Common Stock at exercise
prices per share ranging from 100% to 120% of the initial public offering price.
The information in this Prospectus reflects the cancellation of certain Warrants
with exercise prices ranging from $24.05 to $31.68 per share and the issuance of
replacement Warrants with an exercise price per share equal to the initial
public offering price, the repricing of certain Warrants which now have an
exercise price equal to the initial public offering price and the issuance of
certain additional Warrants with an exercise price per share equal to 120% of
the initial public offering price. The Series C Preferred Stock Exchange, the
Series B Warrant Conversion and the Warrant Exchange are expected to occur on or
about May 27, 1998. The issuance of Convertible Bridge Notes is expected to be
completed on or about June 10, 1998 pursuant to an agreement to be entered into
on or about May 27, 1998. See "Management -- Stock Incentive Plans," "Certain
Transactions," "Description of Capital Stock" and "Underwriting."
THE COMPANY
The Company is an integrator and manager of specialist medical practices
and ancillary services that currently is affiliated with 50 physicians providing
care in 37 locations and, upon completion of the Initial Affiliation
Transactions, will be affiliated with 123 physicians providing care in 89
locations in four states in the mid-Atlantic region. The Company believes that,
as consumers demand higher quality care and payors focus on overall treatment
costs rather than only physician fees, specialists increasingly will be the
patient's preferred point of access to the health care delivery system and will
control, directly or indirectly, a growing percentage of health care
expenditures. The Company targets local service areas in which it can establish
significant market density with its affiliated specialist physician practices
and ancillary services, in order to derive significant operating
3
<PAGE>
leverage with payors, employers and consumers. The Company's affiliated
specialists currently include orthopedic surgeons, physiatrists, neurologists,
oncologists, urologists, obstetrician/gynecologists, radiologists,
ophthalmologists, otolaryngologists, pain management specialists and
occupational medicine specialists. In addition, the Company's affiliates provide
ancillary services such as physical and occupational therapy and diagnostic
imaging and, upon completion of the Initial Affiliation Transactions, will
operate an ambulatory surgery center.
Escalating health care costs have resulted in the growth of managed care,
which frequently involves restricting access by insured parties to providers,
decreasing levels of reimbursement to providers, reducing the number and
duration of hospital inpatient stays and, more recently, transferring risk from
payors to providers. Many payors have also attempted to control costs by
reducing the utilization and reimbursement of specialists through the use of
primary care "gatekeepers." Patients and employers, however, are becoming more
conscious of not only the cost of care, but also of the quality of care and
levels of customer service, and are often demanding greater physician choice and
the option of seeking care directly from specialists.
The Company believes that specialist physicians have a greater
understanding of the treatment and management of complex disease and injury
conditions and can therefore provide more timely, appropriate and, ultimately,
less costly care to patients requiring more acute treatment. As a result, the
Company believes that the market will increasingly demand greater access to
specialists for acute care. In addition, consumers of health care will begin to
differentiate among providers based on customer service in areas such as
scheduling, patient follow-up and aftercare and the availability of a variety of
services at the patient's point of access.
The Company's objective is to make its Affiliated Practices a leading
source of specialist physician and ancillary services in each of its local
service areas. Key elements of the Company's strategy to attain this objective
are to: (i) develop integrated local networks of specialists and ancillary
service providers in suburban and rural markets in the mid-Atlantic region, in
which the Company can achieve significant market density and operating leverage;
(ii) enhance same practice growth in its affiliated physician practices through
the addition of new physicians and new practice locations, enhancement of payor
contracting, and improvement of practice management and practice marketing;
(iii) increase ancillary and other revenues through, for example, physical and
occupational therapy, diagnostic imaging and ambulatory surgery; (iv) grow in
existing and new service areas through Affiliation Transactions and the
Company's Provider Network (as defined below); (v) capitalize on its
specialists' clinical leadership by establishing, marketing and providing
complex disease and injury management services; and (vi) integrate the Company's
management information systems in its affiliated physician practices.
The Company conducts its operations primarily through affiliation with
professional corporations ("PCs") in each state in which the Company provides
services, which PCs provide specialist physician services and certain other
health care services in their respective states. The Company does not engage in
the practice of medicine. The Company, together with the PCs, establishes and
develops its operations generally by entering into affiliation transactions
("Affiliation Transactions") pursuant to agreements ("Affiliation Agreements")
with physicians desiring to become affiliated with the Company and the PCs
("Affiliated Physicians"). In the Affiliation Transactions, Affiliated
Physicians generally transfer their medical practices ("Affiliated Practices")
to the Company and the relevant PCs, with the Company acquiring all of the
non-medical assets, such as leases, furniture, equipment and supplies, and the
PC acquiring the medical assets, consisting primarily of pharmaceuticals and
patient records and documentation. In return, the Affiliated Physicians receive
a combination of cash, promissory notes ("Affiliation Notes"), Convertible
Affiliation Notes, shares of Common Stock and/or Options in amounts negotiated
between the Company and the respective Affiliated Physicians. In addition, the
Affiliated Physicians generally enter into employment agreements with the
relevant PCs, with terms ranging from five to ten years, and receive as
compensation a percentage of the net revenues related to their Affiliated
Practice, less certain expenses. The average percentage of pro forma net
revenues paid to Affiliated Physicians as base compensation is approximately
38%. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business -- Affiliation Transactions."
The Company has entered into management agreements (the "Management
Agreements") with each of the PCs. Pursuant to the Management Agreements, which
have 40-year terms and provide for continuing renewal terms of five years
(unless either party elects not to renew), the Company manages the business
operations and all non-medical aspects of the business of the PCs and employs
and supervises all personnel providing services on behalf of the PCs, except for
the services of physicians and certain other licensed medical personnel
(collectively, "Professionals") required by state law to be employed directly by
the PCs.
4
<PAGE>
Physician services and other health care services are provided to patients by
the PCs which employ the Affiliated Physicians and other Professionals, and the
PCs are compensated for such services by private third party and managed care
payors, Medicare and other governmental payors, and other sources. As
compensation for the Company's services to the PCs under the Management
Agreements, the PCs, other than the PC operating in New York (the "New York
PC"), pay to the Company an amount equal to all billings by the PCs less
expenses for physician and other Professional compensation and certain other
expenses. The New York PC pays the Company an amount equal to the Company's
costs plus a percentage of such costs. The Affiliated Practices and Affiliated
Physicians are affiliated with the Company as a result of the significant
control that the Company has pursuant to the Management Agreements over the PCs
that own the Affiliated Practices and employ the Affiliated Physicians. See
"Business -- Management and Services Agreement; Control of PCs."
While certain of the Affiliated Practices have operated over extended
periods of time, the Company has had limited operations to date. The Company
consummated its first Affiliation Transactions in January 1997. Each Affiliation
Transaction that has closed to date remains subject to a repurchase option, if
the Offering is not completed by a specified date and accordingly is not
considered completed for accounting purposes (the "Conditional Affiliation
Transactions"); such repurchase option expires upon completion of the Offering.
Pursuant to the Conditional Affiliation Transactions, the Company provides
management services to 18 Affiliated Practices with a total of 50 Affiliated
Physicians. The Company also has entered into agreements with respect to
Affiliation Transactions that are expected to close upon completion of the
Offering that would add 23 Affiliated Practices with a total of 73 Affiliated
Physicians (the "IPO Affiliation Transactions" and, together with the
Conditional Affiliation Transactions, the "Initial Affiliation Transactions").
Also, the Company has completed three incidental transactions (the "Completed
Transactions"), including the acquisition of a provider of physical therapy
services. In addition, in order to supplement its Affiliated Practices and
Affiliated Physicians and to enhance contracting leverage, the Company is
developing a provider network which includes physicians not affiliated with the
Company (the "Provider Network"). Subject to certain established parameters
agreed upon by the Company and the physicians participating in the Provider
Network, the Company has non-exclusive authority on behalf of such physicians to
contract with managed care organizations, insurance companies and other
third-party payors for managed care contracts and for agreements establishing
rates of payment and reimbursement for services provided by such participating
physicians to the enrollees and beneficiaries of such payors.
The Company was formed as a Pennsylvania corporation in July 1994. The
Company's principal executive office is located in suburban Philadelphia at 220
Commerce Drive, Fort Washington, Pennsylvania 19034, and its telephone number is
(215) 542-2170.
THE OFFERING
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<S> <C>
Common Stock offered by the Company.......... 3,500,000 shares
Common Stock to be outstanding after the
Offering................................... 7,481,578 shares
Use of Proceeds.............................. To make required cash payments in connection
with the IPO Affiliation Transactions; to
repay the Convertible Affiliation Notes; to
repay certain indebtedness of the Company and
for working capital and other general
corporate purposes, including possible future
Affiliation Transactions and acquisitions.
See "Use of Proceeds."
Proposed Nasdaq National Market symbol....... USPY
</TABLE>
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk, including, among others, risks related to limited operating
history, integration of operations, limited capital, need for additional
financing and going concern risks, ability to service debt, growth strategy,
intangible assets, government regulation, relationships with third party payors,
provision of medical services, dependence on management information systems,
year 2000 compliance, dependence on Affiliated Physicians, dependence on key
personnel, competition in the delivery of health care services and in
affiliating with specialist physician practices, control by principal
shareholders and anti-takeover provisions, shares eligible for future sale,
dilution and lack of a prior public market and potential for volatility of stock
price. See "Risk Factors."
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
------------------------- -----------------------------------
1997 1998
1997 PRO FORMA 1997 1998 PRO FORMA
ACTUAL AS ADJUSTED (1) ACTUAL ACTUAL AS ADJUSTED (1)
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STATEMENT OF OPERATIONS DATA:
Net revenues................................. $ 4,218 $ 81,983 $ 248 $ 2,310 $ 21,943
Cost of revenues............................. 1,179 70,361 23 678 17,745
------- --------- ------- ------- ---------
Gross profit................................. 3,039 11,622 225 1,632 4,198
Operating expenses:
General and administrative................. 7,684 7,684 1,064 1,602 1,602
Depreciation and amortization.............. 210 5,931 16 115 1,643
------- --------- ------- ------- ---------
Income (loss) from operations................ (4,855) (1,993) (855) (85) 953
Interest expense, net........................ 1,407 4,829 52 746 1,500
Other (income) expense, net.................. -- (127) -- -- (26)
------- --------- ------- ------- ---------
Income (loss) before income taxes............ (6,262) (6,695) (907) (831) (521)
Income tax provision (benefit)............... -- (1,945) -- -- (26)
------- --------- ------- ------- ---------
Net income (loss)............................ $(6,262) $ (4,750) $ (907) $ (831) $ (495)
======= ========= ======= ======= =========
Pro forma net income (loss)
per common share (2)....................... $ (0.65) $ (0.07)
========= =========
Shares used in computing pro forma net income
(loss) per common share (2)................ 7,268 7,294
========= =========
</TABLE>
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<CAPTION>
MARCH 31, 1998
-----------------------------------------
PRO FORMA
ACTUAL PRO FORMA (3) AS ADJUSTED (4)
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BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 1,627 $ 4,291 $ 3,572
Working capital (deficit)................................... (29,128) (57,331) 8,291
Total assets (5)............................................ 58,518 145,730 143,764
Cash due to Initial Affiliation Transactions................ -- 62,689 --
Current portion of long-term debt........................... 24,063 11,571 11,571
Long-term debt, less current portion........................ 11,543 32,916 55,021
Convertible preferred stock securities...................... 10,775 -- --
Shareholders' equity (deficit).............................. (8,769) 26,091 68,361
</TABLE>
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(1) Adjusted on a pro forma basis to give effect to (i) the Completed
Transactions, (ii) the 18 Conditional Affiliation Transactions which, for
accounting purposes, will occur simultaneously with the completion of the
Offering, (iii) the 23 IPO Affiliation Transactions which will occur
simultaneously with the completion of the Offering, and (iv) the increase in
interest expense related to the borrowings on the Line of Credit (as defined
below) partially offset by the reduction in interest expense resulting from
the assumed use of the estimated net proceeds of the Offering made hereby
to retire certain long-term debt obligations, as if all of the foregoing
transactions had occurred as of the beginning of the respective periods.
Excludes a dividend of $2,050,250 (estimated as of June 15, 1998) against
net income available to common shareholders in connection with the Series C
Preferred Stock Exchange that will be taken in the quarter that the Series
C Preferred Stock Exchange takes place. See "Use of Proceeds." The pro
forma statement of operations data does not purport to represent what the
Company's results of operations would have been had such transactions
occurred as of the beginning of the respective periods or project the
Company's results for any future period. See the Unaudited Pro Forma
Consolidated Financial Statements.
(2) For information concerning the computation of pro forma net income (loss)
per common share, see Note 6 of Notes to Unaudited Pro Forma Consolidated
Financial Statements.
(3) Adjusted on a pro forma basis to give effect to (i) the Series C Preferred
Stock Exchange, (ii) the issuance of $2,550,000 of Convertible Bridge Notes
and warrants to purchase 91,071 shares of Common Stock at an exercise price
per share equal to 120% of the IPO Price (the "Convertible Bridge Note
Issuance") (iii) the Convertible Bridge Note Conversion; (iv) the 18
Conditional Affiliation Transactions and the 23 IPO Affiliation
Transactions, (v) the Preferred Stock Conversion, (vi) the Series B Warrant
Conversion, (vii) the Warrant Exchange and (viii) the Deemed Warrant
Exercise. In connection with the Series C Preferred Stock Exchange, the
Company will record a dividend of $2,050,250 (estimated as of June 15, 1998)
in the quarter that the Series C Preferred Stock Exchange takes place.
(4) Adjusted on a pro forma as adjusted basis to give effect to (i) the pro
forma adjustments described in Note 3 above and (ii) the sale of the Common
Stock offered hereby (at an assumed initial public offering price of $14.00
per share), the borrowings under the Line of Credit and the application of
the net proceeds therefrom. See "Use of Proceeds" and the Unaudited Pro
Forma Consolidated Financial Statements.
(5) Includes $125,000 on an actual basis and $103.4 million on a pro forma and
pro forma as adjusted basis of intangible assets at March 31, 1998.
6
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating the Company and an
investment in the shares of Common Stock offered by this Prospectus. Certain
statements contained herein and under "Prospectus Summary," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business" including, without limitation, those concerning the Company's
strategy and the Company's growth plans, contain certain forward-looking
statements concerning the Company's operations, economic performance and
financial condition. Because such statements involve risks and uncertainties,
actual results may differ materially from those expressed or implied by such
forward-looking statements. Factors that could cause such differences include,
but are not limited to, those discussed under "Risk Factors."
LIMITED OPERATING HISTORY; RISKS RELATED TO INTEGRATION OF OPERATIONS
The Company commenced operations in January 1997 upon the completion of its
first Initial Affiliation Transactions. Prior to such time, the Company
conducted no significant operations. The Company has a limited operating history
and is subject to various uncertainties and risks characteristic of companies in
comparable stages of development.
As a result of the Conditional Affiliation Transactions, the Company
provides management services to 18 Affiliated Practices with a total of 50
Affiliated Physicians and has entered into Affiliation Agreements with respect
to IPO Affiliation Transactions that are expected to close upon completion of
the Offering that would add 23 Affiliated Practices with a total of 73
Affiliated Physicians. The Company is or will be responsible, upon completion of
the Offering, for the management of substantially all non-medical aspects of the
operations of, and for the employment and supervision of most non-physician
personnel providing services to, these Affiliated Practices. Prior to their
affiliation with the Company, the Affiliated Practices operated as separate
entities, and there can be no assurance that the Company will be able to
integrate and manage successfully the assets, personnel and operations of the
Affiliated Practices, including billing and collections, information systems and
human resources or that such integration will result in profitable operations.
In addition, there can be no assurance that the Initial Affiliation Transactions
will not result in a loss of patients previously associated with the Affiliated
Practices or other unanticipated adverse consequences. Any of such events or
conditions could have a material adverse effect on the Company.
LIMITED CAPITAL; NEED FOR ADDITIONAL FINANCING; GOING CONCERN RISKS
Limited Capital; Need for Additional Financing. The Company's growth
strategy requires a substantial amount of cash to finance Affiliation
Transactions, for working capital and for capital expenditures. As of March 31,
1998 the Company had cash and a working capital deficit of $1.6 million and
$29.1 million, respectively. The Company expects to obtain $2.6 million in
connection with the Convertible Bridge Note Issuance pursuant to an agreement to
be entered into on or about May 27, 1998. The Company has obtained a commitment
letter from NationsBank, N.A. pursuant to which such bank and certain other
banks for which the bank will serve as agent will provide a $75.0 million line
of credit (the "Line of Credit"). Upon completion of the Offering, the Company
expects to be able to obtain loans under the Line of Credit in the maximum
aggregate principal amount of $40.0 million. In addition, upon meeting certain
conditions, the Company will be able to obtain additional loans under the Line
of Credit with a maximum aggregate principal amount of $35.0 million. The
Company believes that the net proceeds of this Offering, the Line of Credit,
cash generated from operations and working capital will be sufficient to fund
the Company's requirements for a period of approximately one year from the
completion of the Offering. Subsequent to that time, the Company is likely to
require additional debt and/or equity financing. There is no assurance that the
Company will be able to obtain sufficient subsequent debt or equity financing on
favorable terms or at all. If the Company is unable to secure adequate
financing, its ability to implement its growth strategy will be impaired and its
financial condition and results of operations are likely to be materially
adversely affected. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
Going Concern Risks. The Consolidated Financial Statements of the Company
have been prepared assuming that the Company will continue as a going concern.
As outlined in the Report of Independent Public Accountants on page F-8 to this
Prospectus, the Company has incurred losses since its inception and, as of March
31, 1998, had an accumulated deficit of $12.6 million. As indicated above, the
Company's growth strategy will require substantial additional funds to finance
acquisitions, for working capital and for capital
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expenditures. These matters raise substantial doubt about the Company's ability
to continue as a going concern. Management plans in regard to these matters are
described in Note 2 to the Consolidated Financial Statements. The Consolidated
Financial Statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or amounts and
classifications of liabilities that might be necessary should the Company be
unable to continue as a going concern. The Company's ability to obtain the
financing necessary to continue as a going concern is largely dependent on its
ability to demonstrate success in entering into Affiliation Transactions and in
managing the Affiliated Practices that are acquired by the PCs.
RISKS REGARDING ABILITY TO SERVICE DEBT
Immediately after application of the proceeds, the Company expects to have
outstanding approximately $34.1 million of indebtedness incurred in connection
with or assumed under Affiliation Transactions, $6.0 million of indebtedness
under the Convertible Exchange Notes, $4.0 million of indebtedness to certain
security holders and $1.3 million of other indebtedness. The Company also
expects to incur additional indebtedness pursuant to the Line of Credit,
approximately $22.6 million of which is expected to be incurred immediately upon
completion of the Offering. As a result, a substantial portion of the Company's
cash flow will be devoted to debt service. In addition, any future indebtedness
which the Company incurs in order to pursue its strategy of growth through
additional Affiliation Transactions will reduce the amount of cash flow
otherwise available to support the Company's existing operations. There can be
no assurance that the Company will be able to generate sufficient cash flow from
operations to cover required debt service payments. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
RISKS ASSOCIATED WITH GROWTH STRATEGY
The Company intends to grow through Affiliation Transactions and same
practice growth. Identifying appropriate specialty physician practices,
negotiating Affiliation Agreements with such physician practices and
consummating economically attractive Affiliation Transactions with such
practices may be a complex, difficult and costly process. There can be no
assurance that suitable affiliation opportunities will be identified or that
Affiliation Transactions will be consummated on terms favorable to the Company,
on a timely basis or at all. In addition, the Company's ability to achieve same
practice growth will be dependent upon its ability to add physicians to existing
Affiliated Practices, add practice locations, integrate new specialties and
sub-specialties into existing practices, increase local practice marketing,
improve contracting with payor sources, enhance practice management and utilize
physicians across multiple practice locations. The Company's ability to achieve
such growth may be limited by a variety of factors, including shortages of
specialist physicians, adverse changes in local and regional health care
industry conditions, regulatory and economic conditions affecting payor
contracting and reimbursement or the failure to achieve expected efficiencies
and economies of scale in the integration of Affiliated Practices. In addition,
there can be no assurance that the Company will be able to successfully
integrate additional Affiliated Practices into its existing operations, or that
such integration and the measures taken to achieve same practice growth will not
result in the loss of a significant number of patients by the applicable
Affiliated Practices after the completion of the relevant Affiliation
Transactions or other unanticipated adverse consequences. The Company's results
will be materially adversely affected if it is unable to implement its growth
strategy successfully or to manage growth effectively.
RISKS RELATED TO INTANGIBLE ASSETS
As a result of the Company's various Affiliation Transactions, intangible
assets, net of accumulated amortization, of approximately $103.4 million on a
pro forma as adjusted basis have been recorded on the Company's pro forma
balance sheet as of March 31, 1998. These intangible assets, which represent
approximately 72% of total pro forma as adjusted assets as of March 31, 1998,
are being amortized over periods of three to 25 years. The Company expects the
amount allocable to intangible assets on its balance sheet to increase in the
future in connection with additional Affiliation Transactions, which will
increase the Company's amortization expense. In the event of any sale or
liquidation of the Company or a portion of its assets, there can be no assurance
that the value of the Company's intangible assets will be realized. In addition,
the Company continually evaluates whether events and circumstances have occurred
which would indicate that any portion of the remaining balance of the amount
allocable to the Company's intangible assets may not be recoverable. When
factors indicate that the carrying value of the Company's intangible assets may
be
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impaired, the Company may be required to reduce the carrying value of such
assets. Any future determination requiring the write-off of a significant
portion of unamortized intangible assets could have a material adverse effect on
the Company's business, financial condition and results of operations. See Note
3 of Notes to Consolidated Financial Statements.
GOVERNMENT REGULATION
Anti-kickback and Anti-referral Laws. The health care industry is highly
regulated at the federal and state levels. Laws regulating the industry include
the fraud and abuse provisions of the Social Security Act, which include the
"anti-kickback" and "anti-referral" (i.e., Stark) laws. The "anti-kickback" laws
prohibit the offering, payment, solicitation or receipt of any direct or
indirect remuneration for the referral of Medicare or Medicaid or other state or
federal health benefit patients or for the ordering or providing of Medicare or
Medicaid or other state or federal health benefit covered services, items or
equipment. The "anti-referral" laws impose restrictions on physicians' referrals
for designated health services to entities with which they have financial
relationships. Violations of these laws may result in recoupment of certain
Medicare payments and substantial civil or criminal penalties for individuals or
entities, including civil monetary penalties and exclusion from participation in
the Medicare and Medicaid programs. Many states, including states in which the
Affiliated Practices are located, have adopted laws similar to the
"anti-kickback" laws and "anti-referral" laws. The laws of many states also
prohibit physicians from splitting fees with non-physicians and prohibit
business corporations from practicing medicine. These laws vary from state to
state and are enforced by the courts and by regulatory authorities with
substantial discretion. A determination of liability under any such laws could
have a material adverse effect on the Company. Although the Company believes it
is in material compliance with applicable federal and state laws, given the
complexity of such laws, there is no assurance that the Company may not be
deemed to be in violation thereof or that in the future it will be able to
remain in material compliance with these laws. Furthermore, many aspects of the
relationship between the Company and the PCs have not been the subject of
judicial or regulatory interpretation. There is no assurance that a review of
the Company's business by courts or by health care, tax, labor or other
regulatory authorities would not result in determinations that could adversely
affect the Company's operations, or that the health care regulatory environment
will not change so as to restrict the Company's existing operations or potential
for expansion. Proposed rules were published under the anti-referral statute on
January 9, 1998 and, following public comment on the proposed rules, final rules
are expected to be promulgated, although it is uncertain when such final rules
will be promulgated. If adopted in their current form, absent further
clarification, such proposed rules would likely require some modification of the
compensation arrangements under the employment agreements between the Company's
affiliated PCs and the Affiliated Physicians ("Employment Agreements") pursuant
to provisions thereof which generally allow such modification by the Company to
comply with such changes in law. There can be no assurance that the provisions
of such rules as finalized, or any additional rules, will not have a material
adverse effect on the structure or operations of the Company. Numerous
legislative proposals have been introduced or proposed in the U.S. Congress and
in some state legislatures that would effect major changes in the U.S. health
care system nationally or at the state level. It is not clear at this time what
proposals, if any, will be adopted or, if adopted, what effect, if any, such
proposals would have on the Company's business. Certain proposals, such as
reducing Medicare and Medicaid expenditures, implementing price controls and
permitting greater flexibility of states' administration of Medicaid, could
adversely affect the Company. There can be no assurance that currently proposed
or future health care legislation or other changes in the administration or
interpretation of governmental health care programs will not have a material
adverse effect on the Company.
Antitrust. The Company is also subject to certain federal and state
antitrust laws, some of which could prohibit the potential control by the
Company of certain specialist physician services within a relevant market,
which, among other effects, may adversely affect the Company's ability to engage
in Affiliation Transactions. In addition, certain laws which prohibit or
restrict the fixing or setting of prices, the tying of services and other
similar activities may adversely affect the Company's ability to negotiate payor
contracts on behalf of the PCs or the Provider Network if such activities were
deemed to be in violation of such prohibitions or restrictions.
Fee-splitting Laws. Certain New York state regulations prohibit physicians
from sharing or splitting fees with persons not authorized to practice medicine.
This prohibition precludes the Company from receiving fees from its affiliated
PC operating in New York (the "New York PC") which constitute a percentage of or
are otherwise dependent upon the income or receipts of the New York PC. The
Company believes that the
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compensation arrangement for services provided to the New York PC under the
relevant Management Agreement, which provides for a fee based on the Company's
costs plus an additional percentage of the Company's costs, complies with
applicable New York state law and regulation. However, there can be no assurance
that certain actions by New York state regulatory authorities would not result
in a judicial or administrative determination with regard to such compensation
structure that could adversely affect the Company's operations. If the Company
is found to be engaged in a fee splitting arrangement with the New York PC, the
New York PC and its Affiliated Physicians would be subject to charges of
professional misconduct with penalties ranging from censure to reprimand to
revocation of their professional licenses, potentially resulting in the Company
being deprived of its ability to operate its business with, and to collect fees
due and owing from, the New York PC, which would have a material adverse effect
on the Company and its operations.
Corporate Practice of Medicine. Most states prohibit business corporations
from engaging in the practice of medicine. Many states prohibit a business
corporation from employing a physician. Some states interpret the "practice of
medicine" broadly to include activities of corporations such as the Company that
have an indirect impact on the practice of medicine. The Company intends to
operate so as to not exercise any responsibility on behalf of Affiliated
Physicians pursuant to the Management Agreements that could be construed as
constituting or affecting the practice of medicine. However, such laws and legal
doctrines have been subjected to only limited judicial and regulatory
interpretation and there is no assurance that, if challenged, the Company would
be considered to be in compliance with all such laws and doctrines. A
determination in any state that the Company is engaged in the corporate practice
of medicine could render any Management Agreement between the Company and a PC
located in such state unenforceable or subject to modification in a manner
adverse to the Company and subject the Company to other sanctions.
Insurance Laws. Laws in all states regulate the business of insurance and
the operation of HMOs. Many states also regulate the establishment and operation
of networks of health care providers under the auspices of an integrated
delivery system ("IDS"). While these laws do not generally apply to companies
that provide management services to networks of physicians or to physician
practice groups that assume financial risk under a subcapitation agreement with
a managed care organization, there is no assurance that regulatory authorities
of the states in which the Company operates would not apply these laws to
require licensure or some lesser regulation of the Company's operations as an
insurer, as an HMO or as a provider network or IDS. Some 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 others, laws and regulations providing
for minimum capital requirements and other safety and soundness requirements.
There is no assurance that future interpretations or amendments of insurance and
health care network laws by regulatory authorities in these states or in states
into which the Company may expand will not require licensure or a restructuring
of some or all of the Company's operations. The Company also believes that
additional regulation at the state level will be forthcoming. In addition, state
regulations in this area may be affected or superseded by federal standards for
provider service organizations that are currently being developed through
rulemaking required by the Balanced Budget Act of 1997 (the "BBA").
See "Business -- Government Regulation."
RISKS RELATED TO RELATIONSHIPS WITH THIRD PARTY PAYORS
Physician groups typically bill various third party payors, such as
governmental programs (e.g., Medicare and Medicaid), private insurance plans and
managed care plans, for the health care services provided to their patients.
Such third party payors increasingly are negotiating the prices charged for
medical services, pharmaceuticals and other supplies in order to lower
reimbursement and utilization rates. Third party payors can also deny
reimbursement for medical services, pharmaceuticals and other supplies if they
determine that a treatment was not performed in accordance with treatment
protocols established by such payors or for other reasons. Loss of revenue by
the PCs as a result of such payors' cost containment efforts could have a
material adverse effect on the Company. The Company anticipates that the PCs and
the Provider Network will eventually offer their services to payors on a fully
or partially capitated basis (i.e., fixed payments would be made to the
applicable provider based on the number of covered patients for whom the
provider was responsible during a specified time period and actuarial
assumptions related thereto, rather than based on specific services rendered) or
other risk-sharing basis, including certain "case rate" or other similar
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arrangements under which payors provide a fixed fee to the Company for managing
and/or providing physician and other medical services rendered in connection
with the treatment of certain injuries, disease states or other episodes of
care. To the extent that patients or enrollees covered by a capitated or other
risk-sharing contract require more frequent or extensive care than is
anticipated by the Company, the revenue to the Company derived from such
contracts may be insufficient to cover the costs of the services provided. There
is no assurance that the PCs or the Provider Network will be able to enter into
such contracts that will generate sufficient revenues to cover the costs of
services provided under such contracts or that such contracts would be
profitable to the PCs and, ultimately, the Company. If the PCs or the Provider
Network enter into capitation or other risk-sharing arrangements, they may be
considered to be in the business of insurance, in which event they could become
subject to various regulatory and licensing requirements that could have a
material adverse effect on the Company.
The federal government has implemented, through the Medicare program, a
resource-based relative value scale ("RBRVS") payment methodology for health
care provider services. RBRVS is a fee schedule that, except for certain
geographical and other adjustments, pays similarly situated health care
providers 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 or the
Health Care Financing Administration ("HCFA"). To date, the implementation of
RBRVS has reduced payment rates for certain of the procedures historically
provided by the Affiliated Practices. Further reductions could significantly
affect the PCs, each of which derives a portion of its revenue from Medicare.
RBRVS types of payment systems have also been adopted by certain private third
party payors and may become a predominant payment methodology. Expanded
implementation of such programs would reduce payments from private third party
payors, and could indirectly reduce revenue to the Company. The Balanced Budget
Act of 1997 includes certain provisions that over time are designed to limit
increases in Medicare payments and that may have the effect of reducing
reimbursement to Affiliated Practices. It is probable that new and more
restrictive Medicare payment rules, procedures and programs for determining
global Medicare capitation fees will be implemented in the future.
The Company currently provides or intends to provide specialist physician
services and ancillary services to patients on behalf of the workers'
compensation programs in certain states in which the Company operates. There can
be no assurance that reductions in applicable fee schedules, movement by one or
more of such state programs toward managed care models or other regulatory
changes will not have an adverse effect on the revenues received by the PCs for
the provision of such services. See "Business -- Reimbursement for Services" and
"-- Government Regulation."
RISKS INHERENT IN PROVISION OF MEDICAL SERVICES
The PCs, the Affiliated Physicians and physicians who become members of the
Provider Network are involved in the delivery of health care services to the
public, and are exposed to the risk of professional liability claims. Even
though the Company does not directly provide health care services, it is
possible for the Company to be joined as a defendant in any such claim due to
its relationship with the PCs and the Provider Network. Even if the Company is
not a direct party, successful claims against a PC would generally adversely
affect the amount of management fees from the applicable PC to which the Company
is entitled. Claims of this nature, if successful, could result in damage awards
to the claimants in excess of the limits of any applicable insurance coverage.
Insurance against losses related to claims of this type can be expensive and
costs may vary widely from state to state and year to year. The Company and the
PCs maintain liability insurance in amounts and coverages the Company believes
are appropriate. Nevertheless, successful malpractice claims asserted against
the PCs, the Provider Network or the Company could have a material adverse
effect on the Company. See "Business -- Insurance" and "-- Legal Proceedings."
DEPENDENCE ON MANAGEMENT INFORMATION SYSTEMS
The successful execution of the Company's strategy is, in part, dependent
on its ability to integrate practice management information and financial
information systems into the Affiliated Practices as soon as practicable upon
the consummation of each Affiliation Transaction. To date, the Company's
practice management information system has been implemented in 17 locations and
it is expected to be implemented by the end of 1999 in substantially all of the
Affiliated Practices that become affiliated with the Company through the Initial
Affiliation Transactions. In addition, the Company's financial information
system has been implemented in all of the Affiliated Practices that became
affiliated with the Company through the
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Conditional Affiliation Transactions. In addition to their integral role in
helping the PCs realize operating efficiencies, such systems are critical to
negotiating, pricing and managing fully or partially capitated managed care
contracts and other risk-sharing arrangements. The Company believes that its
existing practice management information and financial information systems are
adequate for the operation of the Company's business and the successful
implementation of its strategy. However, the Company will need to continue to
invest in, and administer, sophisticated management information systems to
support these activities. The Company 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 and as new technologies become available.
Such modifications, improvements or replacements may require substantial
expenditures and may require interruptions in operations during periods of
implementation. The failure to implement successfully and maintain practice
management information and financial information systems would have a material
adverse effect on the Company. See "Business -- Management Information Systems."
RISKS RELATED TO YEAR 2000 COMPLIANCE
Many existing computer programs use only two digits to identify a year in
the date field. These programs were designed and developed without considering
the impact of the upcoming century change in the year 2000. If not corrected,
many computer applications could fail or create erroneous results when
processing year 2000 information. The Company's business may be adversely
affected if the Company and its affiliated PCs and/or other organizations with
which the Company and its affiliated PCs do business, particularly fiscal
intermediaries under the Medicare program and other third-party payors, are
unsuccessful in completing in a timely manner the conversion to applications
that can process year 2000 dates. The Company's financial information system
will not require any modification to be year 2000 compliant. The Company's
practice management information system has recently been upgraded to be year
2000 compliant. The upgraded version is currently being tested by its
third-party vendor and is expected to be released in September 1998 and fully
implemented by the end of 1998. Until the Company's systems have been
implemented in all of the Affiliated Practices, certain of the Affiliated
Practices' systems may not be year 2000 compliant. The Company intends to
schedule the implementation of its systems in Affiliated Practices so that
substantially all of the systems utilized by Affiliated Practices will be year
2000 compliant by the end of 1999. The Company has initiated communications with
the primary payors from which it receives reimbursement, such as Blue Cross/Blue
Shield and Medicare. There is no assurance that the systems of such payors or of
other companies with which the Company has significant relationships will be
made year 2000 compliant in a timely manner or that a failure by any such payor
or other company to make its systems year 2000 compliant will not have a
material adverse effect on the Company. See "Business -- Management Information
Systems."
DEPENDENCE ON AFFILIATED PHYSICIANS
Substantially all of the Company's revenue is currently earned by the
Company pursuant to Management Agreements with the PCs. Upon consummation of all
the Initial Affiliation Transactions, the Company's Affiliated Practices will
employ a total of 123 Affiliated Physicians generally pursuant to employment
agreements between the PCs and the Affiliated Physicians (the "Employment
Agreements"). While the Company intends to maintain, through the PCs, its
relationships with the Affiliated Physicians employed by the PCs, the
termination of employment by a sufficient number of Affiliated Physicians or the
significant deterioration of the business or operations of a sufficient number
of the Affiliated Practices could have a material adverse effect on the
applicable PC and the Company. Although Affiliated Physicians generally are
required to pay liquidated damages to the PC in the event that they terminate
their employment prematurely, are subject to certain restrictive covenants
during the terms of their respective Employment Agreements, and are generally
prohibited from becoming employees of or from being managed by other physician
practice entities, hospitals and certain other entities for a period of two
years following employment, such Affiliated Physicians generally will be able to
compete with the Company at the end of their respective employment terms
(generally five to seven years from the date of the applicable Employment
Agreement) by returning to private practice. The loss of the services of and
such competition from former Affiliated Physicians could have a material adverse
effect on the Company's operations and results. In addition, each of the PCs
generally operates within one state, and a deterioration of economic or other
conditions within such state could have a material adverse impact upon the PC
and the Company. Such results, as well as a deterioration in the financial
condition of a substantial number of the other physicians or physician groups
affiliated with the Company
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through the Provider Network, could also have a material adverse effect on the
Company. See "Business -- Affiliation Transactions."
DEPENDENCE ON KEY PERSONNEL
The Company is highly dependent on its executive officers, particularly
Thomas J. Keane, the Company's Chairman, President and Chief Executive Officer.
The loss of Mr. Keane or its other executive officers could have a material
adverse effect on the implementation of the Company's strategy and the
operations of the Company. There can be no assurance that the Company will be
successful in retaining its key personnel. The Company's success is also
dependent on its ability to attract and retain additional key personnel which it
requires. The loss of the services of one or more of its key personnel or the
inability to add additional key personnel could have a material adverse effect
on the Company. See "Management."
COMPETITION IN THE DELIVERY OF HEALTH CARE SERVICES AND IN AFFILIATING WITH
SPECIALIST PHYSICIAN PRACTICES
The business of providing health care and related services is intensely
competitive. The Company is potentially in competition with a number of health
care organizations and institutions such as publicly- and privately-owned
physician practice management businesses, hospitals and other institutions and
organizations, managed care organizations, single- and multi-specialty physician
groups and solo practitioners, in two broad areas of competition: competition in
the delivery of health care services and competition in affiliating with
specialist physician practices.
Competition in the Delivery of Health Care Services. The Company's success
is highly dependent upon the success of its Affiliated Practices and Affiliated
Physicians in the delivery of health care services to patients and other
consumers, including managed care organizations, insurers, Medicare and other
third-party payors. The Company's Affiliated Practices and Affiliated Physicians
must compete with hospitals and other health care institutions and
organizations, single- and multi-specialty physician groups, some of which are
operated by physician practice management companies, and solo practitioners.
Many of such competitors have substantially greater resources than those of the
Company's Affiliated Practices and Affiliated Physicians.
Competition in Affiliating with Specialist Physician Practices. An
important element of the Company's growth strategy is the identification of and
affiliation with additional specialist physician practices. The Company must
compete with other publicly- and privately-owned physician practice management
businesses, hospitals and other health care organizations and institutions which
also seek to acquire or affiliate with such specialist physician practices. Most
of such entities have been in business longer than the Company, and have
substantially greater assets and resources than those of the Company. The
Company believes other health care companies and institutions have also been
investigating forming single- or multi-specialty physician practice management
companies, and still other businesses with substantial resources may decide to
enter the specialist physician practice management business, all of which
entities are potentially in competition with the Company. See "Business --
Competition."
PRINCIPAL SHAREHOLDERS; ANTI-TAKEOVER PROVISIONS
Mr. Keane, Edison Venture Fund III, L.P. ("Edison"), Dominion Fund IV
("Dominion"), Keystone Venture IV, L.P. ("Keystone") and NEPA Venture Fund II,
L.P. ("NEPA") (collectively, the "Principal Shareholders") will own, after the
Offering, approximately 19.0% of the outstanding Common Stock. As a result, the
Principal Shareholders would have substantial influence with respect to all
matters requiring approval by the Company's shareholders, including the election
of directors. See "Principal Shareholders" and "Shares Eligible for Future
Sale." In addition, the Company is subject to the anti-takeover provisions of
Subchapter F of Chapter 25 of the Pennsylvania Business Corporation Law of 1988,
as amended (the "BCL"), which prohibit the Company from engaging in a "business
combination" with an "interested shareholder" for a period of five years after
the date of the transaction as a result of which such shareholder became an
"interested shareholder" unless the business combination is approved in a
prescribed manner. These provisions of the BCL, together with other provisions
in the Company's Amended and Restated Articles of Incorporation, as amended (the
"Articles"), and By-laws, may discourage acquisition bids for the Company by
persons unrelated to certain existing shareholders. The effect of the Principal
Shareholders' stock ownership and these provisions may be to limit the price
that investors might be willing to pay in the future for shares of the Common
Stock or to prevent or delay a merger, takeover or other change in control of
the Company and
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thus discourage attempts to acquire the Company. In addition, the Company's
Board of Directors has the authority to issue up to 5,000,000 shares of
Preferred Stock ("Preferred Stock") and to determine the price, rights,
preferences and privileges of those shares without any further vote or action by
the shareholders. The rights of the holders of Common Stock will be subject to,
and may be adversely affected by, the rights of the holders of any Preferred
Stock that may be issued in the future. The issuance of Preferred Stock, while
providing flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire a majority of the outstanding voting stock of the
Company. The Company has no present plan to issue any shares of Preferred Stock.
The Company's Articles and By-laws contain other provisions, such as provisions
for a classified Board of Directors, notice requirements for shareholders'
nominations of directors and limitations on the shareholders' ability to remove
directors or to present proposals to the shareholders for a vote, all of which
may have the further effect of making it more difficult for a third party to
gain control of or to acquire the Company. See "Description of Capital Stock."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of the Common Stock in the public market
following the Offering could adversely affect the market price of the Common
Stock. Upon the completion of the Offering, the Company will have 7,481,578
shares of Common Stock outstanding. Of these shares, the 3,500,000 shares of
Common Stock sold in the Offering will be freely tradeable without restriction
or further registration under the Securities Act of 1933, as amended (the
"Securities Act"). The remaining 3,981,578 shares of Common Stock outstanding as
of the date of this Prospectus are "restricted securities" as defined by Rule
144 under the Securities Act ("Rule 144"). Of these shares, all but 196,218
shares have been held for more than one year and would be able to be sold in
accordance with the provisions of Rule 144 beginning 90 days from the date of
this Prospectus. See "Shares Eligible for Future Sale."
Upon the completion of the Offering, there will be 1,101,615 shares of
Common Stock issuable upon exercise of outstanding Options under the Company's
1997 Stock Incentive Plan (the "Stock Incentive Plan"), 1995 Company Stock
Option Plan (the "1995 Company Option Plan") and 1995 Affiliate Stock Option
Plan (the "1995 Affiliate Option Plan," and, together with the Stock Incentive
Plan and the 1995 Company Option Plan, the "Stock Incentive Plans").
Approximately 278,459 of the Options will be exercisable upon completion of the
Offering and the remainder will vest in various amounts through June 2001. In
addition, 895,983 shares will be eligible for issuance upon the exercise of
Options not yet granted under the Stock Incentive Plan. The Company intends to
file a registration statement or statements covering the shares of Common Stock
issuable under the Stock Incentive Plans upon exercise of Options within one
year from the date of this Prospectus. The shares registered under such
registration statement or statements will be available for resale in the open
market upon the exercise of Options, subject to Rule 144 volume limitations
applicable to affiliates. See "Management -- Stock Incentive Plans."
The Company and each executive officer and director and certain other
shareholders of the Company have agreed that, for a period of 180 days after the
date of this Prospectus (the "Lock-up Period"), they will not, without the prior
written consent of NationsBanc Montgomery Securities LLC, issue, offer to sell,
contract to sell or otherwise sell, dispose of, loan, pledge or grant any rights
with respect to any shares of Common Stock, any options or warrants to purchase
any shares of Common Stock or any securities convertible into or exercisable or
exchangeable for or that represent the right to receive any shares of Common
Stock or enter into any swap, option, future, forward or other agreement that
transfers, in whole or in part, the economic consequences of ownership of the
Common Stock, except in certain limited circumstances. See "Underwriting."
The Company and certain of its security holders are parties to agreements
under which such parties may cause certain shares of Common Stock to be
registered for sale under the Securities Act. See "Certain Transactions."
DILUTION
The initial public offering price is substantially higher than the net
tangible book value per share of the Common Stock. Purchasers of shares of
Common Stock in the Offering will suffer immediate and substantial dilution of
$18.69 (assuming an initial public offering price of $14.00 per share) in the
pro forma as adjusted net tangible book value per share of Common Stock. See
"Dilution."
14
<PAGE>
NO PRIOR PUBLIC MARKET; POTENTIAL VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Common
Stock, and there can be no assurance that an active trading market will develop
or be sustained after the Offering. The initial public offering price will be
determined through negotiation between the Company and the Representatives of
the Underwriters and may bear no relationship to the price at which the Common
Stock will trade after the Offering. See "Underwriting" for a discussion of the
factors to be considered in determining the initial public offering price. The
market price of the Common Stock may be volatile and may be significantly
affected by factors such as actual or anticipated fluctuations in the Company's
operating results, announcements of new areas of business by the Company or its
competitors, developments with respect to conditions and trends in the Company's
business or in the health care industry as a whole, governmental regulation,
changes in estimates by securities analysts of the Company's or its competitors'
future financial performance, general market conditions and other factors, many
of which are beyond the Company's control. In addition, the stock market has
from time to time experienced significant price and volume fluctuations that
have adversely affected the market prices of securities of companies
irrespective of such companies' operating performances.
USE OF PROCEEDS
The net proceeds to the Company from the sale of shares of Common Stock
offered by the Company hereby are estimated to be $42.3 million ($49.1 million
if the Underwriters' over-allotment option is exercised in full), assuming an
initial public offering price of $14.00 per share and after deducting the
estimated underwriting discounts and commissions and offering expenses payable
by the Company. The Company also expects to incur indebtedness under the Line of
Credit in the amount of approximately $22.6 million immediately upon completion
of the Offering.
The net proceeds of the Offering and the initial indebtedness under the
Line of Credit are expected to be applied as follows: approximately $44.2
million to make required cash payments in connection with the IPO Affiliation
Transactions; and $18.9 million to repay Convertible Affiliation Notes issued in
connection with the Conditional Affiliation Transactions which bear interest at
an annual rate of 6%. In addition, the Company anticipates applying
approximately $0.5 million to repay certain indebtedness assumed pursuant to
various Affiliation Transactions, which indebtedness bears interest at annual
rates ranging from 6.0% to 9.5%. Any remainder of the net proceeds will be used
for working capital and other general corporate purposes. Pending such uses, the
Company intends to invest the net proceeds from the Offering in investment
grade, interest-bearing instruments.
The Company intends to enter into Affiliation Transactions and possibly to
seek acquisitions of businesses that are complementary to those of the Company,
and a portion of the net proceeds from the Offering and the Line of Credit may
be used for such purposes. While the Company engages from time to time in
discussions with respect to such transactions, the Company has no commitments or
agreements with respect to any such transactions as of the date of this
Prospectus, other than the Initial Affiliation Transactions, and there can be no
assurance that any such transactions will be completed.
DIVIDEND POLICY
Prior to the Offering, the Company has not paid cash dividends on its
capital stock. The Company currently expects it will retain its future earnings
for use in the operation and expansion of its business and does not anticipate
paying any cash dividends in the foreseeable future.
15
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1998, (i) on an actual basis; (ii) on a pro forma basis to give effect
to (a) the Series C Preferred Stock Exchange, (b) the Convertible Bridge Note
Issuance, (c) the Convertible Bridge Note Conversion, (d) the 18 Conditional
Affiliation Transactions which, for accounting purposes, will occur
simultaneously with completion of the Offering, (e) the 23 IPO Affiliation
Transactions which will occur simultaneously with completion of the Offering,
(f) the Preferred Stock Conversion, (g) the Series B Warrant Conversion, (h) the
Warrant Exchange and (i) the Deemed Warrant Exercise, as if all of the foregoing
transactions had occurred on March 31, 1998; and (iii) on a pro forma as
adjusted basis to give effect to the pro forma adjustments and to the sale of
3,500,000 shares of Common Stock offered hereby (at an assumed public offering
price of $14.00 per share) and the application of the net proceeds therefrom as
described in "Use of Proceeds." See the Unaudited Pro Forma Consolidated
Financial Statements. This table should be read in conjunction with the
Consolidated Financial Statements of the Company and the Notes thereto appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1998
--------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- -------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Short-Term Debt:
Current portion of notes payable on Initial Affiliation
Transactions.......................................... $21,669 $ 6,802 $ 6,802
Current portion of other long-term debt.................. 2,394 4,769 4,769
------- -------- --------
Total current portion of long-term debt............. 24,063 11,571 11,571
Pro forma cash due to Initial Affiliation Transactions... -- 62,689 --
------- -------- --------
Total short-term debt............................... 24,063 74,260 11,571
------- -------- --------
Long-Term Debt:
Line of Credit........................................... -- -- 22,605
Notes payable on Initial Affiliation Transactions........ 9,309 23,343 23,343
Other long-term debt..................................... 2,234 9,573 9,073
------- -------- --------
Total long-term debt................................ 11,543 32,916 55,021
------- -------- --------
Series A convertible preferred stock....................... 2,182 -- --
------- -------- --------
Series B convertible preferred stock....................... 3,821 -- --
------- -------- --------
Series C convertible preferred stock....................... 3,921 -- --
------- -------- --------
Series B convertible preferred stock warrants.............. 851 -- --
------- -------- --------
Common Stock to be issued on Conditional Affiliation
Transactions............................................. 11,716 -- --
------- -------- --------
Shareholders' Equity (Deficit):
Common Stock, $.01 par value 25,000,000 shares
authorized; 518,015 shares (actual); 3,981,578 shares
(pro forma); 7,481,578 shares (as adjusted) issued and
outstanding(1)........................................ 5 40 75
Additional paid-in capital............................... 3,022 37,883 80,118
Common Stock warrants.................................... 825 2,777 2,777
Accumulated deficit...................................... (12,621) (14,609) (14,609)
------- -------- --------
Total shareholders' equity (deficit).................. (8,769) 26,091 68,361
------- -------- --------
Total capitalization................................ $49,328 $133,267 $134,953
======= ======== ========
</TABLE>
- ------------------
(1) Excludes as of May 25, 1998 (i) 2,000,000 shares of Common Stock reserved
for issuance under the Company Stock Option Plans of which 1,101,615 shares
were issuable upon the exercise of outstanding Options, and (ii) 496,853
shares of Common Stock issuable upon exercise of Warrants outstanding. This
information reflects the anticipated increase in the number of shares
available for grant under the Stock Incentive Plan from 163,725 to
1,574,315 and the cancellation and repricing of Warrants and Options that
will occur on or prior to the completion of the IPO contemplated by this
Prospectus. See "Management -- Stock Incentive Plans" and "Certain
Transactions."
16
<PAGE>
DILUTION
As of March 31, 1998, the Company had a net tangible book value (deficit)
of approximately $(15.2) million or $(29.41) per share. Net tangible book value
(deficit) per share represents the total assets of the Company, less (i)
identifiable intangible assets and (ii) total liabilities (including Convertible
Preferred Stock and Series B Warrants), divided by the number of shares of
Common Stock outstanding at that date. The decrease in pro forma net tangible
book value (deficit) per share of $9.35 reflected in the following table is
attributable to the 18 Conditional Affiliation Transactions that, for accounting
purposes, will occur simultaneously with the completion of this Offering, the 23
IPO Affiliation Transactions which will occur simultaneously with the Offering,
the Series C Preferred Stock Exchange, the Convertible Bridge Note Issuance, the
Convertible Bridge Note Conversion, Preferred Stock Conversion, the Series B
Warrant Conversion, the Warrant Exchange and the Deemed Warrant Exercise. After
giving effect to the sale of 3,500,000 shares offered by the Company hereby (at
an assumed initial public offering price of $14.00 per share) and the
application of the net proceeds therefrom, the pro forma as adjusted net
tangible book value (deficit) of the Company at March 31, 1998 would have been
approximately $(35.1) million or $(4.69) per share. This represents an immediate
increase in historical net tangible book value of $15.37 per share to existing
shareholders and an immediate dilution of $18.69 per share to new investors. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share..................... $ 14.00
Net tangible book value (deficit) per share at March 31,
1998................................................... $(29.41)
Decrease per share attributable to the:
Initial Affiliation Transactions
Series C Preferred Stock Exchange, Convertible
Bridge Note Issuance, Convertible Bridge Note
Conversion, Preferred Stock Conversion,
Series B Warrant Conversion, Warrant Exchange
and Deemed Warrant Exercise....................... 9.35
-------
Pro forma net tangible book value (deficit) per share
before the Offering.................................. (20.06)
Increase per share attributable to new investors....... 15.37
-------
Pro forma as adjusted net tangible book value (deficit) per
share after the Offering........................................ (4.69)
-------
Dilution per share to new investors......................... $ 18.69
=======
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 1998,
the difference among existing common shareholders, shareholders who will receive
shares as a result of the Initial Affiliation Transactions, shareholders who
will receive shares as a result of the Preferred Stock Conversion, holders of
Convertible Bridge Notes who will receive Common Stock from the Convertible
Bridge Note Conversion, holders of Warrants who will receive Common Stock from
the Deemed Warant Exercise and new investors with respect to the number of
shares of Common Stock purchased from the Company, the total consideration paid
and the average price paid per share (based upon, in the case of new investors,
an assumed public offering price of $14.00 per share):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing common shareholders............ 518,015 7% $ 480,295 1% $ 0.93
Initial Affiliation Transaction
shareholders.......................... 2,255,199 30 31,572,786 35 14.00
Preferred shareholders.................. 1,020,514 14 6,124,997 7 6.00
Convertible Bridge Notes Conversion..... 182,143 2 2,550,000 3 14.00
Deemed Warrant Exercise................. 5,707 -- 457 -- 0.08
New investors........................... 3,500,000 47 49,000,000 54 14.00
--------- --- ----------- ---
Total................................. 7,481,578 100% $89,728,535 100%
========= === =========== ===
</TABLE>
The foregoing computations assume as of May 25, 1998 (i) no exercise of
outstanding Options to purchase 1,101,615 shares of Common Stock at exercise
prices ranging from $3.74 per share to the initial public offering price per
share and (ii) no exercise of outstanding Warrants to purchase 496,853 shares of
Common Stock at
17
<PAGE>
exercise prices per share ranging from 100% to 120% of the initial public
offering price. This information reflects the cancellation and repricing of
Warrants and Options that will occur on or prior to the completion of the IPO
contemplated by the Prospectus. To the extent these Options and Warrants are
exercised, there will be further dilution to new investors. See "Description of
Capital Stock," "Underwriting," and "Management -- Stock Incentive Plans."
SELECTED FINANCIAL DATA
The selected historical financial data of the Company as of December 31,
1996 and 1997 and for the three years in the period ended December 31, 1997,
have been derived from the audited Consolidated Financial Statements of the
Company included elsewhere in this Prospectus. The selected historical financial
data of the Company as of December 31, 1994 and 1995 and for the period from
inception (July 14, 1994) to December 31, 1994 have been derived from
Consolidated Financial Statements of the Company not included in this
Prospectus. The selected historical financial data of the Company as of March
31, 1998 and for the three months ended March 31, 1997 and 1998 are derived from
the unaudited Consolidated Financial Statements of the Company and, in the
opinion of management, include all adjustments (consisting of only normal
recurring adjustments) that the Company considers necessary for a fair
presentation of the financial position and results of operations for such
periods. The selected historical financial data of the Company should be read in
conjunction with the Consolidated Financial Statements of the Company and the
Notes thereto appearing elsewhere in this Prospectus. The selected pro forma
financial data set forth below as of March 31, 1998, and for the year ended
December 31, 1997 and the three months ended March 31, 1998, have been derived
from the Unaudited Pro Forma Consolidated Financial Statements of the Company.
The pro forma selected financial data are not necessarily indicative of the
actual results of operations or financial position that would have been achieved
had the Completed Transactions, Initial Affiliation Transactions and the
Offering been completed as of January 1, 1997, nor are the statements
necessarily indicative of the Company's future results of operations or
financial position. See the Unaudited Pro Forma Consolidated Financial
Statements.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
FROM INCEPTION ----------------------------------------- -------------------------------
(JULY 14, 1994) 1997 1998
TO PRO FORMA PRO FORMA
DECEMBER 31, 1994 1995 1996 1997 AS 1997 1998 AS
ACTUAL ACTUAL ACTUAL ACTUAL ADJUSTED (1) ACTUAL ACTUAL ADJUSTED (1)
----------------- ------ ------- ------- ------------ ------- ------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues................... $ -- $ -- $ 70 $ 4,218 $81,983 $ 248 $2,310 $21,943
Cost of revenues............... -- -- -- 1,179 70,361 23 678 17,745
----- ----- ------- ------- ------- ------ ------ -------
Gross profit................... -- -- 70 3,039 11,622 225 1,632 4,198
Operating expenses:
General and administrative... 321 692 2,295 7,684 7,684 1,064 1,602 1,602
Depreciation and
amortization............... -- 2 6 210 5,931 16 115 1,643
----- ----- ------- ------- ------- ------ ------ -------
Income (loss) from
operations................... (321) (694) (2,231) (4,855) (1,993) (855) (85) 953
Interest expense, net.......... -- 11 13 1.407 4,829 52 746 1,500
Other (income) expense, net.... -- (25) 492 -- (127) -- -- (26)
----- ----- ------- ------- ------- ------ ------ -------
Income (loss) before income
taxes........................ (321) (680) (2,736) (6,262) (6,695) (907) (831) (521)
Income tax provision
(benefit).................... -- -- -- -- (1,945) -- -- (26)
----- ----- ------- ------- ------- ------ ------ -------
Net income (loss).............. $(321) $(680) $(2,736) $(6,262) $(4,750) $ (907) $ (831) $ (495)
===== ===== ======= ======= ======= ====== ====== =======
Pro forma net income (loss) per
common share (2)............. $ (0.65) $ (0.07)
======= =======
Shares used in computing pro
forma net income (loss) per
common share (2)............. 7,268 7,294
======= =======
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, 1998
----------------------------------- -----------------------------------------
PRO FORMA
1994 1995 1996 1997 ACTUAL PRO FORMA (3) AS ADJUSTED (4)
----- ------- ------- ------- ------- ------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............... $ -- $ 1,395 $ 2,066 $ 1,166 $ 1,627 $ 4,291 $ 3,572
Working capital (deficit)............... (25) 1,225 697 (29,161) (29,128) (57,331) 8,291
Total assets(5)......................... -- 1,492 2,632 54,005 58,518 145,730 143,764
Cash due to Initial Affiliation
Transactions.......................... -- -- -- -- -- 62,689 --
Current portion of long-term debt....... -- -- -- 25,393 24,063 11,571 11,571
Long-term debt, less current portion.... 262 172 172 12,272 11,543 32,916 55,021
Convertible preferred stock
securities............................ -- 2,159 4,087 6,842 10,775 -- --
Shareholders' equity (deficit).......... (287) (1,028) (3,353) (9,414) (8,769) 26,091 68,361
</TABLE>
- ------------------
(1) Adjusted on a pro forma basis to give effect to (i) the Completed
Transactions, (ii) the 18 Conditional Affiliation Transactions which, for
accounting purposes, will occur simultaneously with the completion of the
Offering, (iii) the 23 IPO Affiliation Transactions which will occur
simultaneously with the completion of the Offering and (iv) the increase in
interest expense related to the borrowings on the Line of Credit partially
offset by the reduction in interest expense resulting from the assumed use
of the estimated net proceeds of the Offering made hereby to retire certain
long-term debt obligations, as if all of the foregoing transactions had
occurred as of the beginning of the respective periods. Excludes a dividend
of $2,050,250 (estimated as of June 15, 1998) against net income available
to common shareholders in connection with the Series C Preferred Stock
Exchange that will be taken in the quarter that the Series C Preferred
Stock Exchange takes place. See "Use of Proceeds." The pro forma statement
of operations data does not purport to represent what the Company's results
of operations would have been had such transactions occurred as of the
beginning of the respective periods or project the Company's results for
any future period. See the Unaudited Pro Forma Consolidated Financial
Statements.
(2) For information concerning the computation of pro forma net income (loss)
per common share see Note 6 of Notes to Unaudited Pro Forma Consolidated
Financial Statements.
(3) Adjusted on a pro forma basis to give effect to (i) the Series C Preferred
Stock Exchange, (ii) the Convertible Bridge Note Issuance, (iii) the
Convertible Bridge Note Conversion, (iv) the 18 Conditional Affiliation
Transactions and the 23 IPO Affiliation Transactions, (v) the Preferred
Stock Conversion, (vi) the Series B Warrant Conversion, (vii) the Warrant
Exchange and (viii) the Deemed Warrant Exercise; as if all of the foregoing
transactions had occurred on March 31, 1998. In connection with the Series C
Preferred Stock Exchange the Company will record a dividend of $2,050,250
(estimated as of June 15, 1998) in the quarter that the Series C Preferred
Stock Exchange takes place.
(4) Adjusted on a pro forma as adjusted basis to give effect to (i) the pro
forma adjustments described in Note 3 above and (ii) the sale of the Common
Stock offered hereby (at an assumed initial public offering price of $14.00
per share), the borrowings under the Line of Credit and the application of
the net proceeds therefrom. See "Use of Proceeds" and the Unaudited Pro
Forma Consolidated Financial Statements.
(5) Includes $125,000 on an actual and $103.4 million on a pro forma and pro
forma as adjusted basis of intangible assets at March 31, 1998.
19
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
Except as indicated below, the following unaudited pro forma consolidated
statements of operations for the three months ended March 31, 1998 and the year
ended December 31, 1997 and the unaudited pro forma consolidated balance sheet
as of March 31, 1998 are based on the historical Consolidated Financial
Statements of the Company, adjusted to give effect to the 18 Conditional
Affiliation Transactions which, for accounting purposes, will occur
simultaneously with the completion of an initial public offering by the Company
(the "IPO"), the 23 IPO Affiliation Transactions that will occur upon completion
of the Offering and the Completed Transactions. A list of the practices
affiliated with the Company pursuant to the Conditional Affiliation Transactions
and the IPO Affiliation Transactions is set forth under "Business -- Development
and Operations."
The unaudited pro forma consolidated statements of operations have been
prepared assuming the above transactions occurred on January 1, 1997. The
unaudited pro forma consolidated balance sheet has been prepared assuming that
the Initial Affiliation Transactions had occurred on March 31, 1998 and also
reflects the IPO, the Series C Preferred Stock Exchange, the Convertible Bridge
Note Issuance, the Convertible Bridge Note Conversion, the Preferred Stock
Conversion, the Series B Warrant Conversion, the Warrant Exchange and the Deemed
Warrant Exercise, as if such transactions had occurred on March 31, 1998. The
transactions and the related adjustments are described in the notes hereto.
The unaudited pro forma consolidated statements of operations also give
effect to the increase in interest expense related to borrowings on the Line of
Credit partially offset by the reduction in interest expense resulting from
the assumed use, as of the beginning of the respective periods, of the estimated
net proceeds of the Offering to retire certain long-term obligations, together
with accrued interest. The unaudited pro forma consolidated statements of
operations exclude a dividend of $2,050,250 (estimated as of June 15, 1998)
against net income available to common shareholders in connection with the
Series C Preferred Stock Exchange that will be taken in the quarter that the
Series C Preferred Stock Exchange takes place.
The pro forma adjustments, including the purchase price allocations, are
preliminary, based on estimates, available information and certain assumptions,
and may be revised as additional information becomes available. The pro forma
financial information does not purport to represent what the Company's results
of operations or financial position would have been had such transactions in
fact occurred on those dates, or to project the Company's results of operations
or financial position for any future period or date, nor does it give effect to
any matters other than those described in the notes thereto. The pro forma
financial information should be read in conjunction with the Consolidated
Financial Statements of the Company and the Financial Statements of certain of
the parties to the above transactions appearing elsewhere in this Prospectus.
See "Risk Factors."
The unaudited pro forma consolidated statement of operations for the year
ended December 31, 1997 does not give effect to one Conditional Affiliation
Transaction and one IPO Affiliation Transaction and the unaudited pro forma
consolidated statement of operations for the three months ended March 31, 1998
does not give effect to one IPO Affiliation Transaction. Both of these
transactions pertain to practices operated by the New York P.C. In January 1998,
the Company began managing the operations of the Conditional Affiliation
Transaction and has recognized a management fee in its historical statement of
operations for the three months ended March 31, 1998. As described more fully in
"Business -- Management and Services Agreements; Control of PCs," the fees
received by the Company for its services to the New York PC is based on the
Company's cost of providing such services plus an additional amount equal to a
percentage of such costs. Because the Company has not previously managed the IPO
Affiliation Transaction and has managed the Conditional Affiliation Transaction
for a short period of time, the Company's fees are not factually determinable or
reasonably estimatable and thus are excluded from the pro forma statements of
operations for periods during which they were not managed.
20
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL FINANCIAL STATEMENTS (NOTE 1)
--------------------------------------- TRANSACTION OFFERING
U.S. PHYSICIANS, INC. PRO FORMA PRO FORMA
AND SUBSIDIARIES TRANSACTIONS ADJUSTMENTS PRO FORMA ADJUSTMENTS
--------------------- ------------ ----------- --------- -----------
(NOTE 2) (NOTE 3) (NOTE 3)
<S> <C> <C> <C> <C> <C>
Net revenues:
Net patient revenues........................ $ 388 $ 20,231 $ -- $20,619 $ --
Management fees from Conditional Affiliation
Transactions.............................. 1,771 -- (1,771) -- --
Management fees............................. -- 1,058 93 1,151 --
Other revenues.............................. 151 22 -- 173 --
------- -------- ------- ------- -------
Total net revenues........................ 2,310 21,311 (1,678) 21,943 --
Cost of revenues............................. 678 19,471 (2,404) 17,745 --
------- -------- ------- ------- -------
Gross profit................................. 1,632 1,840 726 4,198 --
Operating expenses:
General and administrative.................. 1,602 -- -- 1,602 --
Depreciation and amortization............... 115 432 1,096 1,643 --
------- -------- ------- ------- -------
Income (loss) from operations................ (85) 1,408 (370) 953 --
Other (income) expense....................... -- (26) -- (26) --
Interest income.............................. (28) -- -- (28) --
Interest expense............................. 774 150 267 1,191 337
------- -------- ------- ------- -------
Income (loss) before income taxes............ (831) 1,284 (637) (184) (337)
Income tax provision (benefit)............... -- 107 2 109 (135)
------- -------- ------- ------- -------
Net income (loss)............................ $ (831) $ 1,177 $ (639) $ (293) $ (202)
======= ======== ======= ======= =======
Pro forma net income (loss) per common share
(Note 6).................................... $ (0.08)
=======
Shares used in computing pro forma net income
(loss) per common share (Note 6)............ 3,794
=======
<CAPTION>
PRO FORMA
AS ADJUSTED
-----------
<S> <C>
Net revenues:
Net patient revenues........................ $20,619
Management fees from Conditional Affiliation
Transactions.............................. --
Management fees............................. 1,151
Other revenues.............................. 173
-------
Total net revenues........................ 21,943
Cost of revenues............................. 17,745
-------
Gross profit................................. 4,198
Operating expenses:
General and administrative.................. 1,602
Depreciation and amortization............... 1,643
-------
Income (loss) from operations................ 953
Other (income) expense....................... (26)
Interest income.............................. (28)
Interest expense............................. 1,528
-------
Income (loss) before income taxes............ (521)
Income tax provision (benefit)............... (26)
-------
Net income (loss)............................ $ (495)
=======
Pro forma net income (loss) per common share
(Note 6).................................... $ (0.07)
=======
Shares used in computing pro forma net income
(loss) per common share (Note 6)............ 7,294
=======
</TABLE>
See accompanying notes to unaudited pro forma consolidated financial statements.
21
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL FINANCIAL STATEMENTS (NOTE 1)
--------------------------------------- TRANSACTION OFFERING
U.S. PHYSICIANS, INC. PRO FORMA PRO FORMA
AND SUBSIDIARIES TRANSACTIONS ADJUSTMENTS PRO FORMA ADJUSTMENTS
--------------------- ------------ ----------- --------- -----------
(NOTE 2) (NOTE 4) (NOTE 4)
<S> <C> <C> <C> <C> <C>
Net revenues:
Net patient revenues........................ $ 446 $ 79,438 $ -- $79,884 $ --
Management fees from Conditional Affiliation
Transactions.............................. 2,691 -- (2,691) -- --
Management fees............................. 155 2,668 (1,650) 1,173 --
Other revenues.............................. 926 -- -- 926 --
------- -------- ------- ------- -------
Total net revenues........................ 4,218 82,106 (4,341) 81,983 --
Cost of revenues............................. 1,179 78,103 (8,921) 70,361 --
------- -------- ------- ------- -------
Gross profit................................. 3,039 4,003 4,580 11,622 --
Operating expenses:
General and administrative.................. 7,684 -- -- 7,684 --
Depreciation and amortization............... 210 1,676 4,045 5,931 --
------- -------- ------- ------- -------
Income (loss) from operations................ (4,855) 2,327 535 (1,993) --
Other (income) expense....................... -- (127) -- (127) --
Interest income.............................. (94) (18) -- (112) --
Interest expense............................. 1,501 634 1,738 3,873 1,068
------- -------- ------- ------- -------
Income (loss) before income taxes............ (6,262) 1,838 (1,203) (5,627) (1,068)
Income tax provision (benefit)............... -- 132 (1,650) (1,518) (427)
------- -------- ------- ------- -------
Net income (loss)............................ $(6,262) $ 1,706 $ 447 $(4,109) $ (641)
======= ======== ======= ======= =======
Pro forma net income (loss) per common share
(Note 6).................................... $ (1.09)
=======
Shares used in computing pro forma net income
(loss) per common share (Note 6)............ 3,768
=======
<CAPTION>
PRO FORMA
AS ADJUSTED
-----------
<S> <C>
Net revenues:
Net patient revenues........................ $79,884
Management fees from Conditional Affiliation
Transactions.............................. --
Management fees............................. 1,173
Other revenues.............................. 926
-------
Total net revenues........................ 81,983
Cost of revenues............................. 70,361
-------
Gross profit................................. 11,622
Operating expenses:
General and administrative.................. 7,684
Depreciation and amortization............... 5,931
-------
Income (loss) from operations................ (1,993)
Other (income) expense....................... (127)
Interest income.............................. (112)
Interest expense............................. 4,941
-------
Income (loss) before income taxes............ (6,695)
Income tax provision (benefit)............... (1,945)
-------
Net income (loss)............................ $(4,750)
=======
Pro forma net income (loss) per common share
(Note 6).................................... $ (0.65)
=======
Shares used in computing pro forma net income
(loss) per common share (Note 6)............ 7,268
=======
</TABLE>
See accompanying notes to unaudited pro forma consolidated financial statements.
22
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
MARCH 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL FINANCIAL STATEMENTS (NOTE 1) TRANSACTION
--------------------------------------- AND OTHER OFFERING
U.S. PHYSICIANS, INC. PRO FORMA PRO FORMA
AND SUBSIDIARIES TRANSACTIONS ADJUSTMENTS PRO FORMA ADJUSTMENTS
ASSETS --------------------- ------------ ----------- --------- -----------
(NOTE 2) (NOTE 5) (NOTE 5)
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents................... $ 1,627 $ 1,575 $ 1,089 $ 4,291 $ (719)
Accounts receivable......................... 350 25,376 (6,418) 19,308 --
Due from Conditional Affiliation
Transactions.............................. 1,387 996 (2,383) -- --
Prepaid expenses and other.................. 541 1,530 3,502 5,573 --
Deferred income taxes....................... -- 4 (4) -- --
------- -------- --------- -------- -------
Total current assets.................. 3,905 29,481 (4,214) 29,172 (719)
Property and equipment, net.................. 2,567 7,030 -- 9,597 --
Investment in Conditional Affiliation
Transactions................................ 49,202 -- (49,202) -- --
Intangible assets, net....................... 125 -- 103,307 103,432 --
Deffered offering costs...................... 2,552 -- -- 2,552 (2,552)
Deferred income taxes........................ -- 132 652 784 --
Other assets................................. 167 395 (369) 193 1,305
------- -------- --------- -------- -------
$58,518 $ 37,038 $ 50,174 $145,730 $(1,966)
======= ======== ========= ======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabiltiies:
Current portion of notes payable on Initial
Affiliation Transactions.................. $21,669 $ -- $ (14,867) $ 6,802 $ --
Current portion of other long-term debt..... 2,394 3,674 (1,299) 4,769 --
Accounts payable............................ 1,165 2,769 (1,542) 2,392 --
Accrued expenses............................ 6,809 4,714 (2,288) 9,235 (3,652)
Deferred income taxes....................... -- 1,827 (1,211) 616 --
Pro forma cash due to Initial Affiliation
Transactions.............................. -- -- 62,689 62,689 (62,689)
Due to Conditional Affiliation
Transactions.............................. 996 1,387 (2,383) -- --
------- -------- --------- -------- -------
Total current liabilities............. 33,033 14,371 39,099 86,503 (66,341)
------- -------- --------- -------- -------
Notes payable on Initial Affiliation
Transactions................................ 9,309 -- 14,034 23,343 --
------- -------- --------- -------- -------
Line of credit............................... -- -- -- -- 22,605
------- -------- --------- -------- -------
Other long-term debt......................... 2,234 2,253 5,086 9,573 (500)
------- -------- --------- -------- -------
Other long-term liabilities.................. 220 1,100 (1,100) 220 --
------- -------- --------- -------- -------
Deferred income taxes........................ -- 67 (67) -- --
------- -------- --------- -------- -------
Convertible preferred stock securities....... 10,775 -- (10,775) -- --
------- -------- --------- -------- -------
Common Stock to be issued on Conditional
Affiliation Transactions.................... 11,716 -- (11,716) -- --
------- -------- --------- -------- -------
Shareholders' equity (deficit):
Common Stock................................ 5 102 (67) 40 35
Additional paid-in capital.................. 3,022 577 34,284 37,883 42,235
Common stock warrants....................... 825 -- 1,952 2,777 --
Accumulated deficit......................... (12,621) 18,568 (20,556) (14,609) --
------- -------- --------- -------- -------
Total shareholders' equity
(deficit)........................... (8,769) 19,247 15,613 26,091 42,270
------- -------- --------- -------- -------
$58,518 $ 37,038 $ 50,174 $145,730 $(1,966)
======= ======== ========= ======== =======
<CAPTION>
PRO FORMA
AS ADJUSTED
-----------
<S> <C>
Current assets:
Cash and cash equivalents................... $ 3,572
Accounts receivable......................... 19,308
Due from Conditional Affiliation
Transactions.............................. --
Prepaid expenses and other.................. 5,573
Deferred income taxes....................... --
---------
Total current assets.................. 28,453
Property and equipment, net.................. 9,597
Investment in Conditional Affiliation
Transactions................................ --
Intangible assets, net....................... 103,432
Deffered offering costs...................... --
Deferred income taxes........................ 784
Other assets................................. 1,498
---------
$ 143,764
=========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT
Current liabiltiies:
Current portion of notes payable on Initial
Affiliation Transactions.................. $ 6,802
Current portion of other long-term debt..... 4,769
Accounts payable............................ 2,392
Accrued expenses............................ 5,583
Deferred income taxes....................... 616
Pro forma cash due to Initial Affiliation
Transactions.............................. --
Due to Conditional Affiliation
Transactions.............................. --
---------
Total current liabilities............. 20,162
---------
Notes payable on Initial Affiliation
Transactions................................ 23,343
---------
Line of credit............................... 22,605
---------
Other long-term debt......................... 9,073
---------
Other long-term liabilities.................. 220
---------
Deferred income taxes........................ --
---------
Convertible preferred stock securities....... --
---------
Common Stock to be issued on Conditional
Affiliation Transactions.................... --
---------
Shareholders' equity (deficit):
Common Stock................................ 75
Additional paid-in capital.................. 80,118
Common stock warrants....................... 2,777
Accumulated deficit......................... (14,609)
---------
Total shareholders' equity
(deficit)........................... 68,361
---------
$ 143,764
=========
</TABLE>
See accompanying notes to unaudited pro forma consolidated financial statements.
23
<PAGE>
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL AND BASIS OF PRESENTATION:
U.S. PHYSICIANS, Inc. (the "Company") is an integrator and manager of
specialist medical practices and ancillary services that, upon completion of the
Initial Affiliation Transactions (as defined below), will include 123 physicians
providing care in 89 locations in four states in the mid-Atlantic region.
Since January 1997, the Company and its affiliated professional
corporations ("PCs") have acquired either the stock or the majority of the
assets of 18 physician practices (the "Conditional Affiliation Transactions").
However, because each of the Affiliation Agreements relating to the Conditional
Affiliation Transactions contains a repurchase provision that gives the selling
owners an option, in the event that an IPO has not been completed by the Company
by a specified date, to repurchase their practice, the Conditional Affiliation
Transactions are not considered effective for applying purchase accounting until
the completion of an IPO. For the period of time between the closing of the
Conditional Affiliation Transactions and the completion of the IPO, the Company
is generally entitled to a management fee equal to the income or loss earned by
each practice and is responsible for centrally managing the cash of each
practice.
In addition to the Conditional Affiliation Transactions discussed above,
since January 1, 1997, the Company has entered into Affiliation Agreements to
purchase 23 physician practices which will close upon completion of the IPO (the
"IPO Affiliation Transactions" and, together with the Conditional Affiliation
Transactions, the "Initial Affiliation Transactions"). There is no interim
management agreement in place between the Company and the practices that are
parties to the IPO Affiliation Transactions.
Also, since January 1, 1997, the Company has acquired three health care
businesses (the "Completed Transactions").
Upon the date that the Company completes an IPO, the Initial Affiliation
Transactions will be accounted for in accordance with EITF 97-2 "Application of
FASB Statement No. 94, Consolidation of All Majority-Owned Subsidiaries, and APB
No. 16, Business Combinations to Physician Practice Management Entities and
Certain Other Entities with Contractual Management Arrangement" ("EIT 97-2").
The Company's adoption of EITF 97-2 will not impact the Company's compliance
with APB No. 25 or SFAS No. 123. The Company conducts its operations primarily
through Management Agreements with PCs in each state in which the Company
provides services. Pursuant to the Management Agreements, which have 40-year
terms and provide for continuing renewal terms of five years (unless either
party elects not to renew), the Company manages the business operations and all
non-medical aspects of the business of the PCs and employs and supervises all
personnel providing services on behalf of the PCs, except for the services of
physicians and certain other licensed medical personnel required by state law to
be employed directly by the PCs. In addition, each PC (except the PC operating
in New York, the "New York PC"), the officers and directors of which are
generally officers of the Company, has the contractual right to designate, in
its sole discretion, at any time, the licensed physician or other Professional
who is the owner of the capital stock of the PC ("nominee arrangements").
Physician services and other health care services are provided to patients by
the PCs which employ the Affiliated Physicians and other health care providers,
and the PCs are compensated for such services by private third party and managed
care payors, Medicare and other governmental payors, and other sources. As
compensation for the Company's services thereunder, the PCs, other than the New
York PC, pay to the Company an amount equal to all billings by the PCs less
expenses for physician and other Professional compensation and certain other
expenses, and the New York PC pays the Company an amount equal to the Company's
costs plus a percentage of such costs. As a result of the Management Agreements
and the nominee arrangements, the Company has established an
other-than-temporary controlling financial interest in each PC (except with
respect to the New York PC) and accordingly each PC (except the New York PC) is
consolidated with the financial statements of the Company. All significant
intercompany accounts and transactions have been eliminated.
24
<PAGE>
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. GENERAL AND BASIS OF PRESENTATION: -- (CONTINUED)
The historical balance sheet data for the Affiliated Practices as of March
31, 1998 represents the combined March 31, 1998 balance sheets for the
Conditional Affiliation Transactions, all of which will be considered effective,
for purposes of purchase accounting, simultaneously with completion of the IPO
and the IPO Affiliation Transactions that will be effective simultaneously with
the completion of the IPO. The historical statement of operations data for the
year ended December 31, 1997 represents the results of operations of the
Completed Transactions from January 1, 1997 to their respective dates of
acquisition and for the Completed Transaction which closed after December 31,
1997 and the Initial Affiliation Transactions for the entire year. The
historical statement of operations data for the three months ended March 31,
1998 represent the results of operations of the Completed Transactions closed
after December 31, 1997 from January 1, 1998 to its respective date of
acquisition and for the Initial Affiliation Transactions for the entire period.
See the Consolidated Financial Statements of the Company and the Financial
Statements of certain of entities party to the above transactions appearing
elsewhere in this Prospectus.
2. AFFILIATION TRANSACTIONS:
Simultaneously with the completion of the IPO, the Company's Conditional
Affiliation Transactions will, for accounting purposes, be considered effective
and the Company and its affiliated PCs will purchase all of the outstanding
capital stock or substantially all of the net assets of the parties to the IPO
Affiliation Transactions. The Initial Affiliation Transactions will be accounted
for using the purchase method of accounting, with the Company treated as the
accounting acquirer.
The following table sets forth the consideration to be paid (assuming the
Initial Affiliation Transactions occurred on March 31, 1998) in cash, notes,
Convertible Notes and shares of Common Stock to each of the applicable
Affiliated Practices or their owners. The Company will issue Common Stock at the
IPO price at a value that is calculated based upon the Company's total
valuation. In the event this value is less than the amount provided for in the
Affiliation Agreements, certain shareholders of the Company have guaranteed, to
the extent of the value of a specified number of shares of Common Stock, a value
of the Common Stock to the selling owners (the "Guarantee Agreement"). Under the
terms of the Guarantee Agreement, if the value of Common Stock issued pursuant
to the Affiliation Transactions does not equal or exceed the guaranteed value,
based on the closing price of the stock, as defined, over a ten day pricing
period that ends two years from the date that the IPO is completed, these
shareholders will transfer shares, subject to a specified maximum number of
shares, with a market value equal to the guaranteed value less the value during
such pricing period. In consideration for the Guarantee Agreement, if required,
these Shareholders will receive warrants to purchase 100,000 shares of Common
Stock at an exercise price of 120% of the IPO Price. These warants, which would
expire in June 2002, were valued at $561,000, based on an independent valuation
and will be recorded as additional purchase price for the Affiliation
Transactions if the Guarantee Agreement is required. The Common Stock to be
issued has been recorded at the guaranteed value to the selling owners, net of a
15% discount. The 15% discount is warranted due to the restrictions on the sale
and transferability of the shares issued. If a 10% discount were used, annual
pro forma goodwill amortization would increase by approximately $65,000. The
total estimated purchase price of $126.7 million, including approximately $2.1
million of transaction costs, for the Initial Affiliation Transactions is based
upon preliminary estimates, subject to certain purchase price adjustments at and
following closing.
<TABLE>
<CAPTION>
ESTIMATED
CONVERTIBLE SHARES OF FAIR VALUE
CASH NOTES NOTES COMMON STOCK OF SHARES
------- ------- ----------- ------------ ----------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Conditional Affiliation Transactions.............. $ 2,396 $12,354 $21,284 984,574 $ 11,716
IPO Affiliation Transactions...................... 43,908 17,786 -- 1,270,625 15,120
------- ------- ------- ---------- --------
$46,304 $30,140 $21,284 2,255,199 $ 26,836
======= ======= ======= ========== ========
</TABLE>
25
<PAGE>
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. AFFILIATION TRANSACTIONS: -- (CONTINUED)
The following tables set forth selected financial data related to the
historical financial statements for the Affiliation Transactions:
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
CONDITIONAL IPO
COMPLETED AFFILIATION AFFILIATION TOTAL
TRANSACTIONS TRANSACTIONS TRANSACTIONS TRANSACTIONS
------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Total net revenues...................................... $ 22 $ 8,445 $ 12,844 $ 21,311
====== ======== ======== ========
Gross profit............................................ $ (43) $ 99 $ 1,784 $ 1,840
====== ======== ======== ========
Income (loss) from operations........................... $ (43) $ 28 $ 1,423 $ 1,408
====== ======== ======== ========
Net income (loss)....................................... $ (56) $ 30 $ 1,203 $ 1,177
====== ======== ======== ========
</TABLE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
CONDITIONAL IPO
COMPLETED AFFILIATION AFFILIATION TOTAL
TRANSACTIONS TRANSACTIONS TRANSACTIONS TRANSACTIONS
------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Total net revenues...................................... $ 367 $ 32,240 $ 49,499 $ 82,106
====== ======== ======== ========
Gross profit............................................ $ (337) $ 777 $ 3,563 $ 4,003
====== ======== ======== ========
Income (loss) from operations........................... $ (341) $ 475 $ 2,193 $ 2,327
====== ======== ======== ========
Net income (loss)....................................... $ (346) $ 449 $ 1,603 $ 1,706
====== ======== ======== ========
</TABLE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1998
<TABLE>
<CAPTION>
CONDITIONAL IPO
COMPLETED AFFILIATION AFFILIATION TOTAL
TRANSACTIONS TRANSACTIONS TRANSACTIONS TRANSACTIONS
------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Total current assets.................................... $ -- $ 10,493 $ 18,988 $ 29,481
======== ======== ======== ========
Total long-term assets.................................. $ -- $ 2,396 $ 5,161 $ 7,557
======== ======== ======== ========
Total assets............................................ $ -- $ 12,889 $ 24,149 $ 37,038
======== ======== ======== ========
Total current liabilities............................... $ -- $ 5,860 $ 8,511 $ 14,371
======== ======== ======== ========
Total long-term liabilities............................. $ -- $ 495 $ 2,925 $ 3,420
======== ======== ======== ========
Total shareholders' equity (deficit).................... $ -- $ 6,534 $ 12,713 $ 19,247
======== ======== ======== ========
</TABLE>
26
<PAGE>
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS ADJUSTMENTS -- THREE
MONTHS ENDED MARCH 31, 1998:
The following table summarizes the unaudited pro forma consolidated
statement of operations adjustments for the three months ended March 31, 1998
(in thousands):
<TABLE>
<CAPTION>
OFFERING
TOTAL PRO FORMA
TRANSACTION PRO FORMA ADJUSTMENTS TRANSACTION ADJUSTMENTS
----------------------------------------------------------- PRO FORMA -----------
(A) (B) (C) (D) (E) (F) ADJUSTMENTS (G) (H)
------ -------- -------- -------- ------ -------- ----------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues:
Net patient revenues......... $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
Management fees from
Conditional Affiliation
Transactions............... (1,771) -- -- -- -- -- (1,771) -- --
Management fees.............. 432 -- -- -- -- (339) 93 -- --
Other revenues............... -- -- -- -- -- -- -- -- --
------ -------- -------- -------- ------ -------- --------- --------- -----
Total net revenues......... (1,339) -- -- -- -- (339) (1,678) -- --
Cost of revenues.............. (1,339) (726) -- -- -- (339) (2,404) -- --
------ -------- -------- -------- ------ -------- --------- --------- -----
Gross profit.................. -- 726 -- -- -- -- 726 -- --
Operating expenses:
General and
administrative............. -- -- -- -- -- -- -- -- --
Depreciation and
amortization............... -- -- 1,096 -- -- -- 1,096 -- --
------ -------- -------- -------- ------ -------- --------- --------- -----
Income (loss) from
operations................... -- 726 (1,096) -- -- -- (370) -- --
Other (income) expense........ -- -- -- -- -- -- -- -- --
Interest income............... -- -- -- -- -- -- -- -- --
Interest expense.............. -- -- -- 267 -- -- 267 337 --
------ -------- -------- -------- ------ -------- --------- --------- -----
Income (loss) before income
taxes........................ -- 726 (1,096) (267) -- -- (637) (337) --
Income tax provision
(benefit).................... -- -- -- -- 2 -- 2 -- (135)
------ -------- -------- -------- ------ -------- --------- --------- -----
Net income (loss)............. $ -- $ 726 $ (1,096) $ (267) $ (2) $ -- $ (639) $ (337) $ 135
====== ======== ======== ======== ====== ======== ========= ========= =====
<CAPTION>
TOTAL
OFFERING
PRO FORMA
ADJUSTMENTS
-----------
<S> <C>
Net revenues:
Net patient revenues......... $ --
Management fees from
Conditional Affiliation
Transactions............... --
Management fees.............. --
Other revenues............... --
---------
Total net revenues......... --
Cost of revenues.............. --
---------
Gross profit.................. --
Operating expenses:
General and
administrative............. --
Depreciation and
amortization............... --
---------
Income (loss) from
operations................... --
Other (income) expense........ --
Interest income............... --
Interest expense.............. 337
---------
Income (loss) before income
taxes........................ (337)
Income tax provision
(benefit).................... (135)
---------
Net income (loss)............. $ (202)
=========
</TABLE>
- ------------------
(a) Reflects the elimination of intercompany activity among the Company and the
parties to the Conditional Affiliation Transactions and the reclassification
of the management fee earned by the New York PC.
(b) Reflects the reduction in salaries, bonuses and benefits to the physicians.
These reductions represent the difference between the actual salaries,
bonuses and benefits paid to physicians as compared to the amounts
calculated by applying the provisions of the written employment agreements,
entered into pursuant to the Initial Affiliation Transactions, to the
historical statement of operations data. Such employment agreements are for
terms ranging from 5 to 15 years, contain restrictions related to
competition and provide for liquidated damages if the physician terminates
the employment agreement or is terminated for cause.
(c) Reflects the amortization of intangible assets based upon the Company's
preliminary allocation of purchase price for the Initial Affiliation
Transactions and the Completed Transaction closed after December 31, 1997.
The intangible assets include the following: goodwill of $101.8 million
which is being amortized over a period of 25 years, and other intangibles of
$1.5 million which are being amortized over a period of 3 to 7 years.
Amortization expense of $20,000 has been excluded for the New York PC IPO
Affiliation Transaction ($1.8 million of intangible assets) since as
discussed in "Basis of Presentation" this practice's results of operation
can not be included in the Pro Forma Statements of Operations for the period
during which they were not managed.
(d) Reflects the additional interest expense related to the convertible notes
and the notes issued in connection with the Initial Affiliation
Transactions.
(e) Reflects the incremental provision (benefit) for federal and state income
taxes based on the effective tax rate that would have resulted on a C
Corporation basis assuming consolidated tax filing status.
(f) Reflects the elimination of management fee revenue and management fee
expense between two related Affiliation Transactions.
(g) Reflects (i) the increase in interest expense related to the $22.6 million
borrowing on the Line of Credit and (ii) the elimination of interest expense
resulting from the repayment of certain long-term debt obligations. Excludes
a dividend of $2,050,250 (estimated as of June 15, 1998) against net income
available to common shareholders in connection with the Series C Preferred
Stock Exchange that will be taken in the quarter that the Series C Preferred
Stock Exchange takes place.
(h) Reflects the incremental provision (benefit) for federal and state income
taxes based on the effective tax rate that would have resulted on a C
Corporation basis assuming consolidated tax filing status.
27
<PAGE>
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS ADJUSTMENTS -- YEAR
ENDED DECEMBER 31, 1997:
The following table summarizes the unaudited pro forma consolidated
statement of operations adjustments for the year ended December 31, 1997 (in
thousands):
<TABLE>
<CAPTION>
OFFERING
TOTAL PRO FORMA
TRANSACTION PRO FORMA ADJUSTMENTS TRANSACTION ADJUSTMENTS
---------------------------------------------------------------- PRO FORMA ---------------------
(A) (B) (C) (D) (E) (F) ADJUSTMENTS (G) (H)
------ -------- -------- -------- ------ -------- ----------- ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues:
Net patient revenues... $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
Management fees from
Conditional
Affiliation
Transactions......... (2,691) -- -- -- -- -- (2,691) -- --
Management fees........ -- -- -- -- -- (1,650) (1,650) -- --
Other revenues......... -- -- -- -- -- -- -- -- --
------ -------- -------- -------- ------ -------- --------- --------- ------
Total net revenues... (2,691) -- -- -- -- (1,650) (4,341) -- --
Cost of revenues........ (2,691) (4,580) -- -- -- (1,650) (8,921) -- --
------ -------- -------- -------- ------ -------- --------- --------- ------
Gross profit............ -- 4,580 -- -- -- -- 4,580 -- --
Operating expenses:
General and
administrative....... -- -- -- -- -- -- -- -- --
Depreciation and
amortization......... -- -- 4,045 -- -- -- 4,045 -- --
------ -------- -------- -------- ------ -------- --------- --------- ------
Income (loss) from
operations............. -- 4,580 (4,045) -- -- -- 535 -- --
Other (income)
expense................ -- -- -- -- -- -- -- -- --
Interest income......... -- -- -- -- -- -- -- -- --
Interest expense........ -- -- -- 1,738 -- -- 1,738 1,068 --
------ -------- -------- -------- ------ -------- --------- --------- ------
Income (loss) before
income
taxes.................. -- 4,580 (4,045) (1,738) -- -- (1,203) (1,068) --
Income tax provision
(benefit).............. -- -- -- -- (1,650) -- (1,650) -- (427)
------ -------- -------- -------- ------ -------- --------- --------- ------
Net income (loss)....... $ -- $ 4,580 $ (4,045) $ (1,738) $1,650 $ -- $ 447 $ (1,068) $ 427
====== ======== ======== ======== ====== ======== ========= ========= ======
<CAPTION>
TOTAL
OFFERING
PRO FORMA
ADJUSTMENTS
-----------
<S> <C>
Net revenues:
Net patient revenues... $ --
Management fees from
Conditional
Affiliation
Transactions......... --
Management fees........ --
Other revenues......... --
-------
Total net revenues... --
Cost of revenues........ --
-------
Gross profit............ --
Operating expenses:
General and
administrative....... --
Depreciation and
amortization......... --
-------
Income (loss) from
operations............. --
Other (income)
expense................ --
Interest income......... --
Interest expense........ 1,068
-------
Income (loss) before
income
taxes.................. (1,068)
Income tax provision
(benefit).............. (427)
-------
Net income (loss)....... $ (641)
=======
</TABLE>
- ------------------
(a) Reflects the elimination of intercompany activity among the Company and the
parties to the Conditional Affiliation Transactions and the Completed
Transaction closed after December 31, 1997.
(b) Reflects the reduction in salaries, bonuses and benefits to the physicians.
These reductions represent the difference between the actual salaries,
bonuses and benefits paid to physicians as compared to the amounts
calculated by applying the provisions of the written employment agreements,
entered into pursuant to the Initial Affiliation Transactions, to the
historical statement of operations data. Such employment agreements are for
terms ranging from 5 to 15 years, contain restrictions related to
competition and provide for liquidated damages if the physician terminates
the employment agreement or is terminated for cause.
(c) Reflects the amortization of intangible assets based upon the Company's
preliminary allocation of purchase price for the Initial Affiliation
Transactions and the Completed Transaction closed after December 31, 1997.
The intangible assets include the following: goodwill of $101.8 million
which is being amortized over a period of 25 years, and other intangibles of
$1.5 million which are being amortized over a period of 3 to 7 years.
Amortization expense of $0.4 million has been excluded for the New York PC
Conditional Affiliation Transaction and the New York PC IPO Affiliation
Transaction ($10.3 million of intangible assets) since as discussed in
"Basis of Presentation" these practices are excluded from the Pro Forma
Statements of Operations.
(d) Reflects the additional interest expense related to the convertible notes
and the notes issued in connection with the Initial Affiliation Transactions
and the Completed Transaction closed after December 31, 1997.
(e) Reflects the incremental provision (benefit) for federal and state income
taxes based on the effective tax rate that would have resulted on a C
Corporation basis assuming consolidated tax filing status.
(f) Reflects the elimination of management fee revenue and management fee
expense between two related Affiliation Transactions.
(g) Reflects (i) the increase in interest expense related to the $22.6 million
borrowing on the Line of Credit and (ii) the elimination of interest expense
resulting from the repayment of certain long-term debt obligations. Excludes
a dividend of $2,050,250 (estimated as of June 15, 1998) against net income
available to common shareholders in connection with the Series C Preferred
Stock Exchange that will be taken in the quarter that the Series C Preferred
Stock Exchange takes place.
(h) Reflects the incremental provision (benefit) for federal and state income
taxes based on the effective tax rate that would have resulted on a C
Corporation basis assuming consolidated tax filing status.
28
<PAGE>
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET ADJUSTMENTS -- MARCH 31, 1998:
The following table summarizes the unaudited pro forma consolidated balance
sheet adjustments as of March 31, 1998 (in thousands):
<TABLE>
<CAPTION>
OFFERING
OTHER TOTAL PRO
PRO FORMA TRANSACTION TRANSACTION FORMA
ADJUSTMENTS PRO FORMA ADJUSTMENTS AND OTHER ADJUSTMENTS
----------- -------------------------------------- PRO FORMA -------
(A) (B) (C) (D) (E) ADJUSTMENTS (F)
----------- ------- -------- ------- ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................... $ 2,551 $ -- $ -- $ -- $(1,462) $ 1,089 $63,570
Accounts receivable.......................... -- -- -- -- (6,418) (6,418) --
Due from Conditional Affiliation
Transactions............................... -- (2,383) -- -- -- (2,383) --
Prepaid expenses and other................... -- -- -- -- 3,502 3,502 --
Deferred income taxes........................ -- -- (4) -- -- (4) --
------- ------- -------- ------- ------- --------- -------
Total current assets................... 2,551 (2,383) (4) -- (4,378) (4,214) 63,570
Property and equipment, net................... -- -- -- -- -- -- --
Investment in Conditional Affiliation
Transactions................................. -- -- (49,202) -- -- (49,202) --
Intangible assets, net........................ -- -- 40,609 64,102 (1,404) 103,307 --
Deferred offering costs....................... -- -- -- -- -- -- (2,552)
Deferred income taxes......................... -- -- 618 -- 34 652 --
Other assets.................................. -- -- -- -- (369) (369) 1,305
------- ------- -------- ------- ------- --------- -------
$ 2,551 $(2,383) $ (7,979) $64,102 $(6,117) $ 50,174 $62,323
======= ======= ======== ======= ======= ========= =======
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Current portion of notes payable on Initial
Affiliation Transactions................... $ -- $ -- $(18,424) $ 3,557 $ -- $ (14,867) $ --
Current portion of other long-term debt...... -- -- -- -- (1,299) (1,299)
Accounts payable............................. -- -- -- -- (1,542) (1,542) --
Accrued expenses............................. -- -- 517 -- (2,805) (2,288) (2,552)
Deferred income taxes........................ -- -- (1,756) -- 545 (1,211) --
Pro forma cash due to Initial Affiliation
Transactions............................... -- -- 18,781 43,908 -- 62,689 --
Due to Conditional Affiliation
Transactions............................... -- (2,383) -- -- -- (2,383) --
------- ------- -------- ------- ------- --------- -------
Total current liabilities.............. -- (2,383) (882) 47,465 (5,101) 39,099 (2,552)
------- ------- -------- ------- ------- --------- -------
Notes payable on Initial Affiliation
Transactions................................. -- -- (195) 14,229 -- 14,034 --
------- ------- -------- ------- ------- --------- -------
Line of credit................................ -- -- -- -- -- -- 22,605
------- ------- -------- ------- ------- --------- -------
Other long-term debt.......................... 5,303 -- -- -- (217) 5,086 --
------- ------- -------- ------- ------- --------- -------
Other long-term liabilities................... -- -- -- -- (1,100) (1,100) --
------- ------- -------- ------- ------- --------- -------
Deferred income taxes......................... -- -- (368) -- 301 (67) --
------- ------- -------- ------- ------- --------- -------
Convertible preferred stock securities........ (10,775) -- -- -- -- (10,775) --
------- ------- -------- ------- ------- --------- -------
Common Stock to be Issued on Conditional
Affiliation Transactions..................... -- -- (11,716) -- -- (11,716) --
------- ------- -------- ------- ------- --------- -------
Shareholders' equity (deficit):
Common Stock................................. 12 -- (4) (75) -- (67) 35
Additional paid-in capital................... 8,046 -- 11,640 14,598 -- 34,284 42,235
Common stock warrants........................ 1,952 -- -- -- -- 1,952 --
Accumulated deficit.......................... (1,987) -- (6,454) (12,115) -- (20,556) --
------- ------- -------- ------- ------- --------- -------
Total shareholders' equity (deficit)... 8,023 -- 5,182 2,408 -- 15,613 42,270
------- ------- -------- ------- ------- --------- -------
$ 2,551 $(2,383) $ (7,979) $64,102 $(6,117) $ 50,174 $62,323
======= ======= ======== ======= ======= ========= =======
<CAPTION>
TOTAL
OFFERING
PRO FORMA
(G) (H) ADJUSTMENTS
-------- ------- -----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................... $(63,789) $ (500) $ (719)
Accounts receivable.......................... -- -- --
Due from Conditional Affiliation
Transactions............................... -- -- --
Prepaid expenses and other................... -- -- --
Deferred income taxes........................ -- -- --
-------- ------- -------
Total current assets................... (63,789) (500) (719)
Property and equipment, net................... -- -- --
Investment in Conditional Affiliation
Transactions................................. -- -- --
Intangible assets, net........................ -- -- --
Deferred offering costs....................... -- -- (2,552)
Deferred income taxes......................... -- -- --
Other assets.................................. -- -- 1,305
-------- ------- -------
$(63,789) $ (500) $(1,966)
======== ======= =======
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Current portion of notes payable on Initial
Affiliation Transactions................... $ -- $ -- $ --
Current portion of other long-term debt......
Accounts payable............................. -- -- --
Accrued expenses............................. (1,100) -- (3,652)
Deferred income taxes........................ -- -- --
Pro forma cash due to Initial Affiliation
Transactions............................... (62,689) -- (62,689)
Due to Conditional Affiliation
Transactions............................... -- -- --
-------- ------- -------
Total current liabilities.............. (63,789) -- (66,341)
-------- ------- -------
Notes payable on Initial Affiliation
Transactions................................. -- -- --
-------- ------- -------
Line of credit................................ -- -- 22,605
-------- ------- -------
Other long-term debt.......................... -- (500) (500)
-------- ------- -------
Other long-term liabilities................... -- -- --
-------- ------- -------
Deferred income taxes......................... -- -- --
-------- ------- -------
Convertible preferred stock securities........ -- -- --
-------- ------- -------
Common Stock to be Issued on Conditional
Affiliation Transactions..................... -- -- --
-------- ------- -------
Shareholders' equity (deficit):
Common Stock................................. -- -- 35
Additional paid-in capital................... -- -- 42,235
Common stock warrants........................ -- -- --
Accumulated deficit.......................... -- -- --
-------- ------- -------
Total shareholders' equity (deficit)... -- -- 42,270
-------- ------- -------
$(63,789) $ (500) $(1,966)
======== ======= =======
</TABLE>
29
<PAGE>
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET ADJUSTMENTS -- MARCH 31,
1998: -- (CONTINUED)
- ------------------
(a) Reflects (i) the Series C Preferred Stock Exchange, (ii) the Convertible
Bridge Note Issuance, (iii) the Convertible Bridge Note Conversion, (iv) the
Preferred Stock Conversion, (v) the Series B Warrant Conversion, (vi) the
Warrant Exchange and (vii) the Deemed Warrant Exercise. In connection with
the Series C Preferred Stock Exchange the Company will record a dividend of
$2,050,250 (estimated as of June 15, 1998) in the quarter that the Series C
Preferred Stock Exchange takes place.
(b) Reflects the elimination of the intercompany accounts among the Company and
the parties to the Conditional Affiliation Transactions.
(c) Reflects the Conditional Affiliation Transactions and the allocation of the
purchase price using the purchase method of accounting. The purchase price
is estimated at $48.5 million, consisting of (i) $2.4 million in cash, (ii)
$12.4 million in notes, (iii) $21.3 million in convertible notes, (iv)
984,574 shares of Common Stock valued at $14.00 per share (or $11.7 million)
and (v) estimated transaction costs of $0.7 million (see Note 2). As of
March 31, 1998, the Company had recorded $48.5 million of the purchase price
for the Conditional Affiliation Transactions that were signed prior to March
31, 1998.
A summary of the total purchase price and applicable allocation thereof for
the Conditional Affiliation Transactions is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Total purchase price.................................................................... $ 48,485
Less: Assets acquired................................................................... (12,889)
Plus: Liabilities assumed............................................................... 6,355
Less: Deferred tax adjustment........................................................... (1,342)
--------
Excess of purchase price over fair value of tangible assets acquired.................... 40,609
Plus: Purchase accounting adjustments (See (e) below)................................... (79)
--------
Net adjustment for excess of cost over fair value of tangible assets acquired........... $ 40,530
========
</TABLE>
The net adjustment for excess of cost over fair value of tangible assets
acquired is comprised of the following:
<TABLE>
<CAPTION>
AMORTIZATION
AMOUNT PERIOD
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Goodwill.................................................................. $ 39,920 25 years
Other intangibles......................................................... 610 3 to 7 years
--------
$ 40,530
========
</TABLE>
(d) Reflects the IPO Affiliation Transactions and the allocation of the purchase
price using the purchase method of accounting. The purchase price is
estimated at $78.2 million, consisting of (i) $43.9 million in cash, (ii)
$17.8 million in notes, (iii) 1,270,625 shares of Common Stock valued at
$14.00 per share (or $15.1 million) and (iv) estimated transaction costs of
$1.4 million (see Note 2). As of March 31, 1998, the Company had recorded
$0.7 million of the purchase price for costs incurred related to the IPO
Affiliation Transactions that were signed prior to March 31, 1998.
A summary of the total purchase price and applicable allocation thereof for
the IPO Affiliation Transactions is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Total purchase price.................................................................... $ 78,211
Less: Assets acquired................................................................... (24,149)
Plus: Liabilities assumed............................................................... 11,436
Less: Deferred tax adjustment........................................................... (1,396)
--------
Excess of purchase price over fair value of tangible assets acquired.................... 64,102
Plus: Purchase accounting adjustments (See (e) below)................................... (1,325)
--------
Net adjustment for excess of cost over fair value of tangible assets acquired........... $ 62,777
========
</TABLE>
The net adjustment for excess of cost over fair value of tangible assets
acquired is comprised of the following:
<TABLE>
<CAPTION>
AMORTIZATION
AMOUNT PERIOD
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Goodwill.................................................................. $ 61,832 25 years
Other intangibles......................................................... 945 3 to 7 years
--------
$ 62,777
========
</TABLE>
(e) Reflects assets and liabilities excluded from net assets in certain Initial
Affiliation Transactions, including specific cash balances.
(f) Reflects (i) the net cash of $42.3 million from the sale of 3,500,000 shares
of Common Stock, net of estimated underwriting discounts and commissions and
offering expenses payable by the Company, (based on an assumed IPO price of
$14.00 per share) and (ii) the net cash of $21.3 million from the borrowing
on the Line of Credit, net of estimated arrangement and commitment fees of
$1.3 million.
(g) Reflects the payment of the cash consideration for the Initial Affiliation
Transactions, including estimated transaction costs that have not been paid
as of March 31, 1998.
(h) Reflects the use of a portion of the net proceeds of the IPO to repay
certain long-term debt obligations.
30
<PAGE>
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. PRO FORMA NET INCOME (LOSS) PER COMMON SHARE:
The shares used in computing pro forma net income (loss) per common share
includes the following:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1997 1998
------------ ------------
<S> <C> <C>
Weighted average shares of Common Stock................................. 514,961 517,942
Dilutive effect of Common stock options................................. -- --
Shares issued in connection with Initial Affiliation Transactions....... 2,255,199 2,255,199
Preferred Stock Conversion.............................................. 998,109 1,020,514
---------- ----------
Pro forma shares................................................... 3,768,269 3,793,655
Shares issued in the IPO necessary to pay the cash portion of the
Initial Affiliation Transactions consideration........................ 3,500,000 3,500,000
---------- ----------
Pro forma as adjusted shares............................................ 7,268,269 7,293,655
========== ==========
</TABLE>
31
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the results of operations and
financial condition of the Company should be read in conjunction with the
Consolidated Financial Statements of the Company and the Notes thereto included
elsewhere in this Prospectus. Certain statements contained herein and under
"Prospectus Summary," "Risk Factors" and "Business" including, without
limitation, those concerning the Company's strategy and the Company's growth
plans, contain certain forward-looking statements concerning the Company's
operations, economic performance and financial condition. Because such
statements involve risks and uncertainties, actual results may differ materially
from those expressed or implied by such forward-looking statements. Factors that
could cause such differences include, but are not limited to, those discussed
under "Risk Factors."
OVERVIEW
The Company is an integrator and manager of specialist medical practices
and ancillary services that currently is affiliated with 50 physicians providing
care in 37 locations and, upon completion of the Initial Affiliation
Transactions, will have 123 Affiliated Physicians providing care in 89 locations
in four states in the mid-Atlantic region. The Company believes that, as
consumers demand higher quality care and payors focus on overall treatment costs
rather than only physician fees, specialists increasingly will be the patient's
point of access to the health care delivery system and will control, directly or
indirectly, a growing percentage of health care expenditures. The Company
targets local service areas in which it can establish significant market density
with its affiliated specialist physician practices and ancillary services, in
order to derive significant operating leverage with payors, employers and
consumers. The Company's affiliated specialists currently include orthopedic
surgeons, physiatrists, neurologists, oncologists, urologists,
obstetrician/gynecologists, radiologists, ophthalmologists, otolaryngologists,
pain management specialists and occupational medicine specialists. In addition,
the Company's affiliates provide ancillary services such as physical and
occupational therapy and diagnostic imaging and, upon completion of the Initial
Affiliation Transactions, will operate an ambulatory surgery center.
The Company had no significant operations prior to entering into its first
Initial Affiliation Transactions in January 1997. Since January 1, 1997, the
Company has entered into Conditional Affiliation Transactions with 18 practices
comprising 50 physicians. In addition to the Conditional Affiliation
Transactions, since January 1, 1997, the Company has entered into agreements
with respect to IPO Affiliation Transactions with 23 physician practices
comprising 73 physicians, which will close upon completion of the Offering. The
Company has also entered into the three Completed Transactions.
The Company conducts its operations primarily through Management Agreements
with PCs in each state to which the Company provides services. Pursuant to the
Management Agreements, which have 40-year terms and provide for continuing
renewal terms of five years (unless either party elects not to renew), the
Company manages the business operations and all non-medical aspects of the
business of the PCs and employs and supervises all personnel providing services
on behalf of the PCs, except for the services of physicians and certain other
licensed medical personnel required by state law to be employed directly by the
PCs. Physician services and other health care services are provided to patients
by the PCs which employ the Affiliated Physicians and other health care
providers, and the PCs are compensated for such services by private third party
and managed care payors, Medicare and other governmental payors, and other
sources. As compensation for the Company's services to the PCs under the
Management Agreements, the PCs, other than the New York PC, pay to the Company
an amount equal to all billings by the PCs less expenses for physician and other
Professional compensation and certain other expenses, and the New York PC pays
the Company an amount equal to the Company's costs plus a percentage of such
costs. See "Business -- Management and Services Agreements; Control of PCs."
Because of laws restricting the corporate practice of medicine in the
states in which the Company operates, the Company does not own the Affiliated
Practices, but instead enters into exclusive long-term Management Agreements
with PCs that operate the Affiliated Practices. The Management Agreements give
the Company broad decision-making authority over all major operations of the
affiliated PC, except for the provision of physician and other medical services
as required by state law. With the exception of the New York PC, each PC, the
officers and directors of which are generally officers of the Company, has the
contractual
32
<PAGE>
right to designate at any time, in its sole discretion, the physician or other
Professional who is the owner of the capital stock of the PC at a nominal cost
("nominee arrangements"). Through the Management Agreements and the nominee
arrangements, the Company has significant long-term financial interests in the
PCs, which interests are unilaterally saleable and transferable by the Company
and fluctuate based upon the actual performance of the operations of the PCs.
HISTORICAL FINANCIAL DATA
Basis of Presentation
The Company's historical financial data included in "Selected Financial
Data" include the results of operations of the parties to the Conditional
Affiliation Transactions and the Completed Transactions. The Conditional
Affiliation Transactions contain a repurchase provision that gives the selling
owners an option, in the event that an initial public offering has not been
completed by the Company by a specified date (the "Repurchase Date"), to
repurchase the applicable stock or net assets (the "Repurchase Period") by
returning all of the consideration received, excluding certain cash payments
made to the selling owners at the initial closing of the Conditional Affiliation
Transactions. Such repurchase option expires upon completion of the Offering. If
the selling owners exercise their rights to repurchase their practices, the
aggregate amount of consideration that would be retained by the selling owners
is $2.1 million. Pursuant to the three Completed Transactions, the Company
acquired a provider of physical therapy services and two other entities, the
assets of one of which were subsequently sold and the other one of which no
longer has material operations. See "Business -- Affiliation Transactions."
In accordance with Accounting Principles Board Opinion No. 16, "Accounting
for Business Combinations," the Conditional Affiliation Transactions are not
considered effective for purposes of applying purchase accounting until the date
that the Company completes an initial public offering (the "Final Closing
Date"). Accordingly, the Conditional Affiliation Transactions (except with
respect to the New York physician practices), for the period from the closing of
the Initial Affiliation Transactions (the "Initial Closing Date") to March 31,
1997, for the period from January 1, 1998 to March 31, 1998 and for the period
from the Initial Closing Date to December 31, 1997, are accounted for as
management agreements, as opposed to Affiliation Transactions accounted for
under the purchase method of accounting and consolidated with those of the
Company. As a result, for the period of time between the Initial Closing Date
and the Final Closing Date, the Company is entitled to all of the residual net
income or loss (after deducting physicians' compensation) pursuant to the
Management Agreements. This net income or loss is non-refundable even if the
repurchase right is exercised. Management fees from the New York PC represent
the amount of non-medical costs paid by the Company on behalf of the practices
plus a percentage of such costs. Net revenues included in historical results of
operations represent net management fees earned under the Management Agreements
entered into pursuant to the Conditional Affiliation Transactions and net
revenues from the Completed Transactions. Effective with the completion of the
Offering, net revenues attributable to practices which are parties to the
Conditional Affiliation Transactions will be presented using a different basis
of accounting (see "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Pro Forma Financial Data"). As a result, subsequent
to the Offering, net revenues attributable to practices which are parties to
Conditional Affiliation Transactions will not be comparable to historical net
revenues of such practices prior to the Offering.
Cost of revenues included in the historical financial data represents labor
and overhead attributable to the businesses acquired pursuant to the Completed
Transactions and costs incurred in advance of revenues from the Provider
Network.
Results of Operations
The Company was formed in July 1994. Prior to entering into its first
Initial Affiliation Transactions in January 1997, the Company's operations
consisted primarily of a physical rehabilitation facility, operated as a joint
venture with a hospital system, that commenced in 1995 and was terminated in
1996. As a result, comparisons of 1997 results of operations with prior periods
are not meaningful.
33
<PAGE>
Three Months Ended March 31, 1997 and 1998
Revenues. Revenue increased $2.1 million to $2.3 million for the three
months ended March 31, 1998 from $0.2 million for the comparable 1997 period.
The increase reflected approximately $1.5 million in new management fee revenue
from the addition of ten Conditional Affiliation Transactions and $0.4 million
of net patient revenue generated by the operations of five newly opened or
acquired ancillary physical therapy centers.
Cost of Revenues. Cost of revenues was $0.7 million for the three months
ended March 31, 1998 compared to a nominal amount for the three months ended
March 31, 1997 period. The increase in cost of revenue primarily resulted from
the commencement and operation of Affiliated Practices and the physical therapy
centers.
General and Administrative. General and administrative expenses increased
51% to $1.6 million for the three months ended March 31, 1998 from $1.1 million
for the comparable 1997 period. The increase in general and administrative
expenses is primarily attributable to the growth in the administrative functions
in order to successfully manage the Initial Affiliation Transactions.
Depreciation and Amortization. Depreciation expense was $0.1 million for
the three months ended March 31, 1998 compared to a nominal amount for the
comparable 1997 period. The increase in depreciation expense resulted primarily
from an increase in capital expenditures including additional office space and
furniture, computer hardware and software and medical equipment.
Interest. Interest expense increased $0.7 million to $0.8 million for the
three months ended March 31, 1998 from $0.1 million for the comparable 1997
period. The increase is primarily attributable to the issuance of debt to
finance continuing operations and the issuance of Affiliation Notes payable and
Convertible Affiliation Notes payable to increase the number of Affiliated
Practices.
Year Ended December 31, 1997
Revenues. Net revenues for the year ended December 31, 1997 consist
primarily of management fees earned under the Management Agreements. Net
revenues for the period also include net patient revenues from amounts billed to
third-party payors and patients for services rendered by physical therapy and
rehabilitation practices acquired or opened by the Company in 1997. Other
revenues represent revenues for billing and collection services performed for
unaffiliated physician practices.
Cost of Revenue. Cost of revenues for the year ended December 31, 1997
primarily represents labor and overhead attributable to the businesses acquired
pursuant to the Completed Transactions and costs incurred in advance of revenues
from the Provider Network.
General and Administrative. General and administrative expenses for the
year ended December 31, 1997 and prior periods presented represent primarily (i)
compensation, occupancy and overhead costs relating to the Company's
headquarters and (ii) legal, accounting and other professional fees. In
addition, the Company recorded a charge of $1,203,000 related to the write down
of identifiable intangible assets related to one of the Completed Transactions
and a charge of $325,681 related to the exercise of the repurchase provision by
the selling owners of four Affiliated Practices. See "Business -- Affiliation
Transactions."
Depreciation and Amortization. Depreciaion and amortization expense for
the year ended December 31, 1997 resulted from an increase in capital
expenditure including additional office furniture, computer hardware and
software and medical equipment.
Interest. Interest expense for the year ended December 31, 1997 represents
primarily interest on long-term debt, including approximately $24.5 million of
Affiliation Notes and Convertible Affiliation Notes issued in connection with
Conditional Affiliation Transactions completed during 1997.
PRO FORMA FINANCIAL DATA
Effective with the completion of the Offering, the Conditional Affiliation
Transactions will be considered effective for purposes of applying the purchase
method of accounting. The Pro Forma Financial Data reflect the results of
operations of the Company assuming the Conditional Affiliation Transactions and
the IPO Affiliation Transactions had occurred as of the beginning of the periods
presented and such transactions were accounted for under the purchase method of
accounting as of such date. The Pro Forma Financial Data also
34
<PAGE>
reflect the fact that, because of significant long-term interests in the
Affiliated Practices effective with the Offering, the Pro Forma Financial Data
include the consolidated accounts of the Company and all wholly-owned and
beneficially-owned subsidiaries (which for accounting purposes includes the PCs,
except the New York PC). All significant intercompany accounts and transactions
have been eliminated.
The Pro Forma Financial Data reflect net patient revenues on a consolidated
basis, unlike certain other physician practice management companies, which
record management fee revenues. Company net patient revenues represent amounts
billed by the Affiliated Practices to third-party payors and patients for
services rendered. Such amounts also include any monthly capitation payments
received from third-party payors pursuant to managed care contracts.
Cost of revenues consists primarily of physician and non-physician practice
labor and labor-related costs, practice occupancy costs, professional liability
insurance and practice materials and supplies. Under employment agreements with
the Company's affiliated PCs, physician base salaries are generally based upon a
specific percentage of the net revenues attributable to the physicians in each
practice. The average percentage of pro forma net revenues paid to physicians as
base compensation is approximately 38%. See "Business--Affiliation
Transactions."
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company's operations have been financed primarily through the
sale of Series A and B Convertible Preferred Stock, Series C Preferred Stock and
Convertible Bridge Notes and term loans from shareholders of the Company. See
"Certain Transactions."
The non-contingent consideration paid for the Conditional Affiliation
Transactions includes an aggregate of approximately $2.4 million of cash, $12.4
million of Affiliation Notes, $21.3 million of Convertible Affiliation Notes and
rights to receive 984,574 shares of Common Stock.
Consideration to be paid at the Offering for the IPO Affiliation
Transactions includes an aggregate of approximately $43.9 million of cash, $17.8
million of Affiliation Notes and rights to receive 1,270,625 shares of Common
Stock.
In addition, in connection with certain Affiliation Transactions, the
Company is obligated to pay additional consideration in cash or Common Stock
("Contingent Consideration") to sellers of practices contingent upon achievement
of certain net revenues and pre-tax earnings criteria primarily over periods of
one to three years from the date of the applicable Affiliation Transactions.
Payment under these Contingent Consideration arrangements will be accounted for
as adjustments to the purchase price of the Affiliated Practices, with a
corresponding increase in goodwill and the related amount of amortization
thereof in periods following the payment. The amount of Contingent Consideration
to be issued cannot be determined until the Contingent Consideration periods
terminate. If the Affiliated Practices attain, but do not exceed, specified net
revenue and profitability criteria, the Company would be obligated to make
aggregate payments of Contingent Consideration equal to $5.9 million. No amounts
would be paid if the minimum net revenue and profitability objectives are not
met. If the Affiliated Practices achieve the maximum net revenue and
profitability criteria, the Company would be obligated to make payments of
Contingent Consideration equal to $14.8 million.
The Company intends to continue to grow through both Affiliation
Transactions and internal growth. See "Business -- Strategy." Management
presently intends to maintain the rate of Affiliation Transactions in the
foreseeable future at a rate approximately equal to the rate experienced during
the period from January 1, 1997 through March 31, 1998. Management anticipates
that the terms of payment in connection with future Affiliation Transactions
will continue to be a combination of cash, notes and shares of Common Stock. For
certain Affiliation Transactions, a portion of the purchase price will be paid
at closing and a portion will be contingent upon achievement of contingent
payment criteria. It is anticipated that funds required for future Affiliation
Transactions and the integration of Affiliated Practices into the Company will
be provided from the proceeds of the Offering, proceeds of future borrowings
under the Line of Credit and internally generated funds. However, there can be
no assurance that the Company will identify suitable candidates for Affiliation
Transactions in the future, will be able to obtain suitable financing or that
any such Affiliation Transactions will occur. See "Risk Factors -- Risks
Associated with Growth Strategy."
35
<PAGE>
As of March 31, 1998, the Company had a working capital deficit of
approximately $29.1 million and cash and cash equivalents of approximately $1.6
million. The Company has incurred losses since its inception and is subject to
those risks associated with companies in the early stages of development. These
conditions have raised substantial doubt about the Company's ability to continue
as a going concern.
In January 1998, the Company completed the issuance of 1,343,374 shares of
its Series C Preferred Stock and related Warrants to purchase shares of Common
Stock for an aggregate purchase price of $6.0 million. Such shares of Series C
Preferred Stock and Warrants were issued to certain shareholders of the Company,
and the exercise price of such Warrants was determined by an independent
valuation. The Series C Preferred Stock and such Warrants were subsequently
exchanged for the Convertible Bridge Notes and related Warrants. See "Certain
Transactions."
Pursuant to an agreement to be entered into on or about May 27, 1998, the
Company expects that certain shareholders of the Company will purchase from the
Company Convertible Bridge Notes for an aggregate purchase price of $2,550,000,
which Convertible Bridge Notes will be due and payable on June 1, 1999, will
bear interest at an annual rate of 4.82% and, upon completion of the Offering,
will be converted into an aggregate number of shares of Common Stock equal to
the aggregate outstanding principal amount of the Convertible Bridge Notes
divided by the Price to Public. In connection therewith, such shareholders also
will receive Warrants to purchase a number of shares of Common Stock equal to
50% of the number of shares of Common Stock issuable upon conversion of the
Convertible Bridge Notes with an exercise price of 120% of the initial public
offering price. At an assumed initial public offering price of $14.00, such
holders will receive Warrants to purchase an aggregate of 91,071 shares at an
exercise price of $16.80 per share. See "Certain Transactions."
In May 1998, the Company received a commitment from NationsBank, N.A.
("NationsBank") with respect to the Line of Credit. Pursuant to the Line of
Credit, NationsBank and certain other banks for which NationsBank will serve as
agent will provide revolving credit loans to the Company of up to $75.0 million,
bearing interest at LIBOR plus 300 basis points for the first nine months from
closing and LIBOR plus variable incremental rate alternatives thereafter. In
order to obtain loans in excess of $40.0 million under the Line of Credit, the
Company must meet certain conditions. The Line of Credit will expire three years
from the date of closing of the Offering and future borrowings are subject to
the satisfaction by the Company of certain covenants, including covenants
regarding cash flows, total debt, fixed charges and net worth. The Line of
Credit will be secured by 100% of the capital stock of all subsidiaries and
substantially all personal property of the Company. The Company expects in incur
indebtedness of approximately $22.6 million under the Line of Credit immediately
upon the completion of the Offering.
The Company expects that the proceeds from the sale of Series C Preferred
Stock, the Convertible Bridge Notes, the Offering, borrowings on the Line of
Credit and cash generated from operations will be adequate to fund the Company's
cash requirements for approximately the next year. Subsequent to that time, the
Company is likely to require additional debt and/or equity financing. There is
no assurance that the Company will be able to obtain such subsequent financing.
The Company's growth strategy will be impaired and its financial condition and
results of operations are likely to be materially adversely affected if the
Company fails to satisfy certain covenants relating to availability of
borrowings under the Line of Credit and/or fails to secure additional financing.
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BUSINESS
GENERAL
The Company is an integrator and manager of specialist medical practices
and ancillary services that currently is affiliated with 50 physicians providing
care in 37 practice locations and, upon completion of the Initial Affiliation
Transactions, will be affiliated with 123 Affiliated Physicians providing care
in 89 locations in four states in the mid-Atlantic region. The Company believes
that, as consumers demand higher quality care and payors focus on overall
treatment costs rather than only physician fees, specialists increasingly will
be the patient's preferred point of access to the health care delivery system
and will control, directly or indirectly, a growing percentage of health care
expenditures. The Company targets local service areas in which it can establish
significant market density with its affiliated specialist physician practices
and ancillary services, in order to derive significant operating leverage with
payors, employers and consumers. The Company's affiliated specialists currently
include orthopedic surgeons, physiatrists, neurologists, oncologists,
urologists, obstetrician/gynecologists, radiologists, ophthalmologists,
otolaryngologists, pain management specialists and occupational medicine
specialists. In addition, the Company's affiliates provide ancillary services
such as physical and occupational therapy and diagnostic imaging and, upon
completion of the Initial Affiliation Transactions, will provide ambulatory
surgery.
INDUSTRY OVERVIEW
The health care delivery system in the United States has been undergoing
substantial change, largely in response to the escalating cost of health care.
According to the Congressional Budget Office, national expenditures for health
care have grown from an estimated $27 billion, or 5.1% of the gross domestic
product ("GDP"), in 1960 to an estimated $1 trillion, or 13.6% of GDP, in 1996,
and are projected by the Congressional Budget Office to increase to more than $2
trillion, or 16.2% of GDP, by 2007. In 1995, approximately 85% of health care
expenditures were attributable to services provided by physicians and/or
provided under physician direction.
Escalating health care costs have resulted in an increasing emphasis on
cost containment by third party payors and government programs. Cost containment
efforts have generally taken the form of managed care, which frequently involves
restricting access by insured parties to providers, decreasing levels of
reimbursement to providers, reducing the number and duration of hospital
inpatient stays and, more recently, transferring risk from payors to providers
through capitation and other risk-sharing arrangements.
Many payors have attempted to reduce overall health care expenditures in
large part by reducing the utilization and reimbursement of specialists. These
payors have reduced specialist utilization by providing reimbursement only to
patients who seek services from specialists who are part of such payor's panel
of contracted physicians, by designating primary care physicians as
"gatekeepers" who are required to pre-approve the access of patients to
specialists and by providing to such primary care physicians various financial
incentives designed to limit specialist referrals. Recently, however, consumers
of physician services, including both patients and employers, are becoming more
conscious of not only the cost of care, but also the quality of care and levels
of customer service. The Company believes that specialist physicians have a
greater understanding of the treatment and management of complex disease and
injury conditions and therefore provide complex disease and injury care which
may be more efficient, and ultimately less costly, for patients requiring more
acute treatment. As a result of these factors, the Company believes there will
be a continued, gradual movement toward greater access to specialists for acute
care. The Company also believes that a growing number of health care consumers
place an increased emphasis on customer service, including factors such as more
flexible physician office hours, scheduling efficiency to reduce patient waiting
time, the provision of patient follow-up and aftercare and the availability of a
greater variety of services at more convenient locations.
In addition to restricting access to specialists, payors have attempted to
reduce the variability of provider-related expenses through an increasing
variety and volume of risk-sharing arrangements involving physicians, including
fully or partially capitated and episode of care or "case rate" arrangements.
The Company believes that the prudent sharing of risk by physicians can only
occur when physicians are organized in sufficient critical mass in local service
areas to reasonably bear risk and have access to the quantity and quality of
clinical information that is essential to managing risk pools effectively.
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Physician Practice Management Industry. The trends in the health care
market described above, among other factors, have placed many small and
mid-sized physician groups at a competitive disadvantage and precipitated
significant changes in the manner in which physicians organize themselves.
Physicians are increasingly abandoning traditional private practice in favor of
affiliations with larger organizations which have a more significant market
presence and which can provide management expertise, capital and information
systems that enhance the quality, efficiency and competitiveness of physician
practices. Despite this trend toward affiliation, physician practices remain
largely fragmented, with only about one-third of the 716,000 non-federal
physicians (i.e., physicians who do not provide services directly through
Veterans Administration, public health or other federal programs) in the U.S.
belonging to a group practice and fewer than seven percent of the non-federal
physicians in the U.S. practicing in affiliation with publicly-held physician
practice management companies in 1996.
Specialist Physician Services; Complex Disease and Injury Management. It is
estimated that approximately 546,000, or 76%, of the non-federal physicians in
the U.S. are specialists. Reimbursement of specialists is predominately on a
"fee for service" as opposed to a "capitated" or other risk-sharing basis. Fully
capitated risk-sharing arrangements, under which providers undertake to provide
a specified range of services for a predetermined fixed fee per managed care
enrollee, have been far more prevalent among primary care physicians.
The Company believes that for most insured populations a majority of health
care dollars are spent on a relatively small percentage of such populations. The
conditions typically requiring the most extensive treatment include cancer,
heart disease, musculoskeletal injury or disease, diabetes and infectious
diseases. The management of such complex diseases and injuries generally
requires the services of one or more specialist physicians for certain aspects
of patient care, including diagnosis, restorative and palliative treatment
(which includes both invasive surgery and non-invasive drug therapies),
rehabilitation and aftercare, all of which frequently involve the coordination
of other specialist physicians, ancillary services and pharmaceutical treatment.
The Company believes that its Affiliated Physicians who engage in complex
disease and injury management will benefit from their familiarity with and
enhanced access to other Affiliated Physicians who are leading practitioners in
other specialties, as well as their access to ancillary services provided by the
PCs.
The Company initially is focusing primarily on developing integrated local
service area networks of specialists involved in the treatment of
musculoskeletal injury and disease, cancer, women's health and other areas of
complex disease and injury management. The Company has generally entered local
service areas by affiliating first with a leading practice in such area that
specializes in musculoskeletal care and is distinguished by its market share,
clinical quality and leadership, historical profitability and potential for
growth. The Company then attracts and affiliates with additional specialty
physicians in the local market to obtain local market density to derive
operating leverage. Operating leverage is derived by adding physician
sub-specialists, capturing ancillary revenues, enhancing payor relationships and
maximizing management and marketing resources. Orthopedic surgeons are the
primary providers of musculoskeletal care. In addition to orthopedic surgeons,
musculoskeletal care is also provided by physiatrists, neurosurgeons,
neurologists, rheumatologists, podiatrists, occupational medicine specialists
and rehabilitative therapists. The American Academy of Orthopedic Surgeons (the
"AAOS") estimates that in 1995 there were approximately 23,000 orthopedic
surgeons, 5,500 physiatrists, 4,900 neurosurgeons, 11,400 neurologists, 3,500
rheumatologists, and 3,000 occupational medicine specialists in the U.S. The
AAOS estimates that in 1995 less than five percent of all orthopedic practices
were affiliated with physician practice management companies. According to the
AAOS, the market for musculoskeletal care in the U.S. grew from approximately
$60 billion in 1988 to $72 billion in 1992. This increase is attributable to
several factors, including advancements in medical technology and the aging of
the overall population. In 1992, the 65-and-over age group represented
approximately 12% of the U.S. population, but accounted for over half of all
expenditures for musculoskeletal care. Recent trends in musculoskeletal care
include an increasing number of procedures performed on an outpatient basis and
consolidation of surgical and non-surgical specialists. The Company believes
these trends are largely attributable to advancements in less invasive surgical
techniques, less frequent and shorter hospital inpatient stays, inherently lower
costs of the outpatient environment and increased consumer demand for outpatient
settings and fully integrated services, including ancillary services such as
physical therapy and diagnostic imaging.
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In addition to practices specializing in the treatment of musculoskeletal
injury and disease, the Company has entered into Affiliation Agreements with
Affiliated Practices specializing in cancer care, women's health and eye care.
The Company believes that such areas are subject to certain trends similar to
those found in musculoskeletal care, including advancements in less invasive
surgical techniques, less frequent and shorter hospital stays mandated by
payors, inherently lower costs of the outpatient environment and consumer demand
for direct access to specialists, outpatient settings and more fully integrated
services.
Mid-Atlantic Market. The Company's overall target market is the
mid-Atlantic region, which includes Pennsylvania, New Jersey, New York, Maryland
and Delaware, and the Company may extend its overall target market to include
the states surrounding this region. The mid-Atlantic region and surrounding
states account for approximately one-third of the U.S. population. The physician
services market in this region is particularly fragmented, with an average
private practice size of approximately four physicians.
STRATEGY
The Company's objective is to make its Affiliated Practices a leading
source of specialist physician and ancillary services in each of its local
service areas. The Company believes it will enable its Affiliated Physicians to
have greater control over patient care and premium dollars in each of their
local service areas.
The key elements of the Company's strategy to attain this objective are to:
Develop integrated local networks of specialists in the mid-Atlantic
region. Health care is generally provided and contracted for in local service
areas. The Company believes that consumers of health care services generally
seek care in the immediate vicinity of their home or workplace. The Company
seeks to be a leading source of specialist physician and ancillary services in
terms of market share, demonstrated quality, clinical leadership and
cost-effectiveness of its health care services in each of its local service
areas. To achieve this leadership position, the Company targets suburban and
rural markets in the mid-Atlantic region, in which it can achieve significant
market density and operating leverage. The Company believes that obtaining a
leadership position in each of its markets will enhance its attractiveness to
payors, employers and consumers. In addition, the establishment of local market
multiple specialist networks is expected to increase revenues from referrals
among Affiliated Practices and from ancillary services provided by the PCs
within such networks.
Focus on same practice growth. The Company expects to enhance same
practice revenue and margin growth for each of its Affiliated Practices by (i)
adding same-speciality physicians to existing practices, (ii) adding new
practice locations, (iii) integrating new specialties and sub-specialties into
existing practices, (iv) increasing local practice marketing, (v) improving
payor contracting in order to achieve greater patient volume and enhanced
reimbursement, (vi) enhancing practice management, including billing and
collection procedures, patient scheduling and flow, quality assurance, customer
service and utilization management and (vii) utilizing physicians across
multiple practice locations. The Company is currently implementing one or more
of these measures in each of its Affiliated Practices, including, to date, the
addition of same specialty physicians to four Affiliated Practices, the
integration of new specialties or sub-specialties into three Affiliated
Practices and the addition of new practice locations to two Affiliated
Practices. In addition, in order to enhance same practice revenue growth,
Affiliated Physicians are compensated based directly on the productivity of
their practices. The Company believes that same practice revenue growth, as well
as expected cost-reduction opportunities arising from economies of scale, such
as group purchasing and the centralization of management, billing and collection
and accounting functions, will enhance the profitability of each of its
Affiliated Practices.
Increase ancillary and other revenues. The Company is focusing initially
on adding ancillary and other services based on the following criteria: (i)
ability to complement the type of specialists in its networks, (ii) management
experience in operating the particular ancillary services and (iii) relatively
low barriers to entry in the relevant market. Upon completion of the Offering,
the Company, either directly or through the PCs, will provide physical therapy
and rehabilitation services in 12 locations and diagnostic imaging in four
locations, and will manage an ambulatory surgery center. Complementing its
regional focus and operating leverage, the Company believes its relationships
with Affiliated Physicians will enable it to facilitate intra-network referrals
and capture an increased volume and variety of ancillary service revenues in a
manner that comports with applicable law. The Company intends to develop
additional types of ancillary services, as well as
39
<PAGE>
additional locations for the provision of ancillary services, and, when
appropriate, to identify and pursue related acquisition opportunities.
The Company believes that its concentration of specialist Affiliated
Physicians (and, eventually, their ability to share data on a common clinical
information system) will be attractive to clinical research organizations
("CROs") and pharmaceutical and medical device companies desiring to conduct
clinical trials utilizing practicing physicians outside the hospital setting,
and that participation in such clinical trials may be a source of the Company's
revenue growth in the future.
Grow through Affiliation Transactions and Provider Network. The Company
believes it can realize substantial operating and payor contracting leverage by
completing additional Affiliation Transactions and further developing the
Provider Network. The Company's goal is to develop each local service area
network of Affiliated Practices into a leading provider of specialist physician
and related ancillary services in such service area. The Company generally seeks
to enter a new local service area by affiliating with a leading practice that is
highly visible and has a reputation for quality health care. Additional
practices will be added in local service areas based on a number of criteria,
including type of specialty or sub-specialty, reputation of practice and
physicians, historical financial performance, growth potential, geographic
location and potential for development of related ancillary services. The
Company believes that its attractiveness to payors and to physicians who may
wish to affiliate with the Company and the PCs will be enhanced by growth in the
Company's size, scope and geographic coverage of its specialist physician
services and related ancillary services.
The Company is supplementing its Affiliated Practices by developing its
Provider Network, thereby expanding the Company's geographic coverage for
contracting purposes and, as a result, its leverage in negotiations with third
party payors. The Company has non-exclusive contracting authority for the
physicians and other providers in its Provider Network, subject to the
successful negotiation with payors of specified minimum levels of reimbursement
and certain other contractual provisions. The Company expects to receive fees
from certain payors based upon the number of individuals who are insured by such
payors and have access to the Provider Network. In addition, the Company also
intends to generate revenues based on its ability to negotiate payor contracts
for the Provider Network at reimbursement levels in excess of specified levels
of reimbursement. The Provider Network also enables the Company to establish
relationships with physicians who may wish to affiliate with the Company and the
PCs in the future. See "-- Provider Network."
Implement practice management information system. To date, the Company has
implemented its practice management information system in 17 locations and
intends to have implemented the system by the end of 1999 in substantially all
of the Affiliated Practices that become affiliated with the Company through the
Initial Affiliation Transactions. The Company believes that practice management
information is critical to the growth of integrated health care delivery and
that the availability of detailed practice management and clinical data is
fundamental to improving the quality of care, reducing the cost of care, and,
ultimately, competing effectively for the health care premium dollar. The
Company believes that its practice management information system will allow its
Affiliated Physicians to engage more efficiently in complex disease and injury
management, particularly in those cases requiring care by various Affiliated
Physicians across specialty lines and involving physician coordination and
sharing of clinical data. The Company also is developing additional clinical
information components to its practice management information system that will
provide a platform for applying clinical pathways, measuring outcomes and
enhancing medical management. In addition, the Company believes this system will
be attractive to CROs and pharmaceutical and medical device companies engaging
in clinical trials.
Provide disease and injury management services. Specialist physicians
manage the treatment of complex disease and injury conditions commencing with
diagnosis and continuing through the implementation of restorative and
palliative care (both invasive and non-invasive), the selected involvement of
other specialist physicians and ancillary service providers, the prescription of
rehabilitation, pharmaceutical and other therapies and the provision of
follow-up services and aftercare. The Company intends to utilize its integrated
multiple specialist networks to deliver a variety of disease and injury
management services to patients, payors and employers. The Company plans to
enter into relationships, including certain limited risk-sharing arrangements,
with managed care organizations, health insurers and employers, under which the
Company will be a preferred or exclusive source of disease and injury management
services in areas such as sports medicine, workers' compensation, cancer care,
eye care, incontinence and women's health.
40
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DEVELOPMENT AND OPERATIONS
The Company targets local service areas in the mid-Atlantic region of the
United States. To date, the Company's primary focus has been local service areas
in suburban and rural markets, with its Affiliated Practices currently located
in Pennsylvania, New Jersey, Delaware and New York.
The Company completed its first Initial Affiliation Transactions in January
1997. Including both the Conditional Affiliation Transactions and the IPO
Affiliation Transactions, the Company has entered into Affiliation Agreements
with 41 Affiliated Practices, comprising 123 Affiliated Physicians (including
eight physicians added to Affiliated Practices subsequent to the respective
Affiliation Transactions). A list of the Affiliated Practices acquired in the
Company's 18 Conditional Affiliation Transactions and 23 IPO Affiliation
Transactions is set forth below.
CONDITIONAL AFFILIATION TRANSACTIONS
Alan I. Snyder, M.D. Associates, Inc.
Bone and Joint Specialists of Western Pennsylvania, PC
Bryn Mawr Urology Associates, Inc.
Center for Women's Healthcare, PC and Corazon G. Gemil, M.D., PC
Cesare, Metzger, Coyle and Henzes, Inc.
Craig D. Morgan, M.D.
Elizabeth Wende Breast Clinic
Lehigh Valley Orthopedics, Inc.
Main Line Joint Replacement, PC
Orthopaedic and Sports Medicine Specialists of the Main Line, Inc.
Orthopaedic Surgery and Sports Medicine, Inc.
RJK Medical Associates, Ltd.
South Shore Orthopedics, PA
Sports Medicine and Rehabilitation Center, Inc. and Related Companies
Steel Valley Orthopedic Association, Inc.
Valley Forge Facial Plastic Surgery/Ear, Nose & Throat Associates, Ltd.
Vermeire Orthopaedic Surgeons, Inc.
Victor R. Kalman, D.O.
IPO AFFILIATION TRANSACTIONS
Alan E. Ottenstein, M.D.
Associated Surgeons, PC
Associates in Urology, PC
Christopher G. Lynch, M.D.
Curamed, LLC
Dennis James Bonner, M.D., Ltd.
James C. Berman, M.D.
Karl J. Marchenese, M.D., PC
Neil Chesen, M.D., PC
Nevyas Eye Associates, PC
Non-Surgical Solutions, Inc.
North Coast Orthopedics, Inc.
Northern Ophthalmic Associates, Inc.
Northwest Orthopedic Associates, PC
Oncology and Hematology Associates, PA
Orthopedic Associates of Pittsburgh, Inc.
Philadelphia Orthopedic Group, PC
Philadelphia Uro-Gynecologic Associates, PC
Primary Care & Rehabilitation, PC and Medical Consultants, PC
Suburban Pain Control Center
Surgical Care Physicians, PC
Vineland Obstetrical and Gynecological, PA
Women's Physicians & Surgeons, PA
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Upon completion of the Initial Affiliation Transactions, the Company's
Affiliated Physicians and other Professionals will provide services in seven
geographic markets, as set forth below:
<TABLE>
<CAPTION>
NUMBER OF ANCILLARY AND
GEOGRAPHIC MARKETS PHYSICIANS SPECIALTIES OTHER SERVICES
- ------------------------------ --------- --------------------------------------- -----------------------------
<S> <C> <C> <C>
Southeastern Pennsylvania 52 Orthopedics, physiatry, urology, Physical therapy/
(Bucks, Chester, Delaware otolaryngology, obstetrics/gynecology, rehabilitation, ambulatory
and Montgomery Counties) ophthalmology, addiction, pain surgery
management
Southern/Coastal New Jersey 27 Orthopedics, neurology, physiatry, Physical therapy/
(Atlantic, Burlington, obstetrics/gynecology, oncology, pain rehabilitation
Camden, Cape May and Ocean management
Counties)
Western Pennsylvania (Clarion, 17 Orthopedics, occupational medicine Physical therapy/
Crawford, Mercer, Venango rehabilitation, diagnostic
and Allegheny Counties) imaging
Northwestern New York (Monroe 13 Breast cancer, ophthalmology Diagnostic imaging
County)
Central Pennsylvania (Lehigh 7 Orthopedics, physiatry, ophthalmology Physical therapy/
and Berks Counties) rehabilitation
Northeastern Pennsylvania 4 Orthopedics
(Lackawanna County)
Delaware (New Castle County) 3 Orthopedics, internal medicine Physical therapy/
rehabilitation
</TABLE>
Upon completion of the Initial Affiliation Transactions, the Company's
Affiliated Physicians will comprise 59 physicians specializing in
musculoskeletal injury and disease and 64 physicians specializing in other
specialties such as ophthalmology, oncology, gynecology/obstetrics, urology and
otolaryngology. The Company has focused initially on the above specialties
because of (i) the Company's expertise and history of relationships with
specialist physicians in these areas; (ii) the degree to which these specialties
lend themselves to ancillary service development; and (iii) the high dollar
volume of reimbursement for services in these specialties.
Each of the geographic markets outlined above comprises one or more service
areas. Each service area is distinguished by its distinct consumer/patient
demographics, major health care institutions and payors. The Company manages its
operations on a service area basis, assigning management responsibility to area
managers responsible for one or more service areas. Each Affiliated Practice
(which may have one or more locations) is managed by a practice manager, who is
responsible for the daily operations of all non-medical aspects of the business
of such Affiliated Practice and the supervision of non-medical personnel
providing services to such Affiliated Practice. The Affiliated Practices in a
service area are supported and managed by one of the Company's area managers,
who assist the practice managers in the integration of the Affiliated Practice,
in accessing the Company's various resources to assist in the operation of the
Affiliated Practice, in the enhancement of synergies across Affiliated Practices
in such service area and in the assessment and implementation of growth
opportunities for such Affiliated Practices, including the pursuit of additional
practices with which the Company may seek to complete an Affiliation
Transaction. The area managers and the practice managers are supported by the
Company's centralized functions at its Fort Washington, Pennsylvania
headquarters, including billing and collections, human resources, sales and
marketing, contracting, finance and accounting, reimbursement, provider
relations, legal and management information systems.
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Substantially all of the personnel providing non-medical services to the
Affiliated Practices are employed by the Company, while the Affiliated
Physicians, other physicians and certain other licensed medical personnel (to
the extent required by law) are generally employed by the applicable PCs. The
Company's employees manage all non-medical aspects of the operations of the
Affiliated Practices, including billing and collections, human resources, sales
and marketing, contracting, finance and accounting, reimbursement, provider
relations, legal and management information systems. The Affiliated Practices
generally operate in facilities leased and maintained by the Company and utilize
supplies, equipment and furniture provided by the Company. Certain management
personnel at the Affiliated Practice level, including practice managers, are
eligible to receive incentive compensation based upon the profitability levels
of the applicable Affiliated Practice.
The Company intends to provide one or more of the following ancillary and
other services in each of its markets, generally through its affiliated PCs:
physical and occupational therapy, diagnostic imaging and ambulatory surgery.
The Company intends to develop additional ancillary services, as well as
additional locations for the provision of ancillary services, and, when
appropriate, to identify and pursue related acquisition opportunities. Upon
completion of the Offering, the Company, either directly or through the PCs,
will provide physical therapy and rehabilitation services in 12 locations and
diagnostic imaging in four locations and will manage an ambulatory surgery
center.
The Company has formed committees of physicians to develop clinical
pathways that will provide treatment guidelines for the delivery of medical
services associated with specific episodes of care. The Company believes such
guidelines will assist its Affiliated Physicians in establishing medical service
patterns that demonstrate the highest quality of care. The Company intends to
assess the effectiveness of these guidelines in the achievement of clinical
outcomes in patient care by Affiliated Practices. The Company expects these
measures to enhance its ability to provide disease and injury management
services to payors, employers and consumers.
REIMBURSEMENT FOR SERVICES
The Company's Affiliated Practices derive their revenues from a variety of
payors, including private third party payors and managed care providers,
Medicare and workers' compensation insurance programs. Of the revenues for
April 1998 of the Affiliated Practices which affiliated with the Company in
the Conditional Affiliation Transactions, approximately 75% are attributable to
private third party payors, managed care and workers' compensation providers and
approximately 21% and 4% are attributable to Medicare/Medicaid and self-pay,
respectively.
Private third party and managed care payors. Rates paid by private third
party payors (such as Blue Cross/Blue Shield and other indemnity health
insurance providers) are based on established health care provider charges.
Specialist physician services generally are reimbursed by such payors on a
fee-for-service basis, based on the physician's usual and customary charge for
the type and amount of services provided, or on a discounted fee-for-service
basis, which involves negotiated rates for specified procedures and services.
Recently, case rate payments, in which providers receive fixed payments for all
treatment provided to a patient based on the patient's classification of illness
or injury, have been adopted by certain private third party payors and may
become a predominant payment methodology in the future. Wider implementation of
such programs could reduce or limit increases in payments from private third
party payors and could indirectly reduce the revenues of the Company. An
increasing portion of the Company's revenues is expected to be derived from
managed care payors (primarily health maintenance organizations ("HMOs") and
insurance companies) that make payments under discounted fee-for-service, case
rate and capitation arrangements. Although rates paid by managed care payors are
generally lower than commercial indemnity rates, managed care payors can provide
access to large volumes of patients. Under capitated arrangements with such
managed care payors, providers deliver health care services to managed care
enrollees for payments based on the number of enrollees and typically bear
(subject to stop-loss insurance coverage) all or a portion of the risk that the
cost of such services may exceed these capitated payments.
Medicare. The federal government has implemented, through the Medicare
program, the resource-based relative value scale ("RBRVS") payment methodology
for health care provider services. RBRVS is a fee
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<PAGE>
schedule that, except for geographic and other adjustments, pays similarly
situated health care providers the same amount for the same services. The RBRVS
is subject to annual increases or decreases at the discretion of Congress or the
Health Care Financing Administration ("HCFA"). To date, the implementation of
RBRVS has reduced payment rates for certain of the procedures provided by the
Affiliated Practices. Furthermore, in implementation of the Balanced Budget Act
of 1997 (the "BBA"), it is expected that, during a four-year period beginning in
1999, HCFA will phase in adjustments to certain components of the RBRVS that
will generally decrease reimbursement to physicians for services rendered in a
hospital setting, and potentially increase reimbursement to physicians for
services rendered in a non-institutional setting. The BBA also contains various
measures that over time are designed to limit increases in Medicare payments and
that may have the effect of reducing reimbursement to Affiliated Practices.
Workers' compensation. Workers' compensation is a state-mandated,
comprehensive insurance program that requires employers to fund medical
expenses, lost wages and other costs resulting from work-related injuries and
illnesses. Provider reimbursement methods vary on a state-by-state basis. Most
states, including Pennsylvania and New York, have adopted fee schedules (that
vary from state to state) that prescribe the maximum amount of reimbursement
that a health care provider can receive, while in states without fee schedules,
health care providers are generally reimbursed based on usual, customary and
reasonable fees charged in the state in which the services are provided.
PROVIDER NETWORK
The Company is supplementing its Affiliated Practices by developing its
Provider Network, which enhances the Company's geographic coverage for
contracting purposes and, as a result, its leverage in negotiations with third
party payors. The Company has non-exclusive authority on behalf of the
physicians and other providers in the Provider Network to contract with managed
care organizations, insurance companies and other third-party payors for managed
care contracts and for agreements establishing rates of payment and
reimbursement for services provided by such participating physicians to the
enrollees and beneficiaries of such payors, provided that the Company is able to
successfully negotiate with such payors for specified minimum levels of
reimbursement and certain other contractual provisions. The Company intends to
receive fees from certain payors based upon the number of individuals who are
insured by such payors and have access to the Provider Network. In addition, the
Company also intends to generate revenues based on its ability to negotiate
payor contracts for the Provider Network at reimbursement levels in excess of
specified levels of reimbursement. The Provider Network also enables the Company
to establish relationships with physicians who may wish to affiliate with the
Company and the PCs in the future. The Company currently has over 2,500
physicians under contract in the Provider Network, including approximately 370
primary care physicians. The Company has not generated any material revenues to
date from the operation of the Provider Network.
MARKETING
The marketing of specialist physician services has historically been
limited. The Company believes that specialist physician services can be marketed
effectively to payors, employers and consumers by emphasizing the availability
of direct access to specialist physicians and the nature of the complex disease
and injury management services they provide. There are two core elements of the
Company's marketing strategy:
Local practice and service area marketing. Local marketing consists
primarily of targeted practice and/or service area marketing of Affiliated
Practices and Affiliated Physicians. The Company employs marketing
representatives whose primary goals are (i) to attract new sources of referrals
to the Company's Affiliated Practices and (ii) to ensure that physicians and
others who currently refer patients to the Company's Affiliated Practices and
providers of the Company's ancillary and other services are satisfied with
clinical outcomes and customer service provided by such Affiliated Physicians
and other providers. Other marketing programs include conducting patient
education seminars, distributing brochures, press releases and newsletters,
developing relationships with local employers and educational institutions and
systems and utilizing direct mail and yellow page advertising programs.
Marketing of specific disease and injury management services. The Company
is currently marketing and expects to significantly increase its marketing of
specific disease and injury management services to payors and
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consumers. Such marketing typically might include one or more of patient
education seminars, direct mail and print or radio advertising. Disease and
injury management services currently being marketed include the treatment of
osteoporosis, incontinence, sports injuries and breast cancer.
MANAGEMENT INFORMATION SYSTEMS
The Company believes that integrated practice management information and
financial information systems are essential to the development of integrated
health care delivery capabilities and fundamental to improving the quality of
care, reducing the cost of care and enhancing the Company's attractiveness to
payors.
The Company has selected a third-party practice management information
system that it is implementing in each of its Affiliated Practices. This
practice management information system links all of the Company's Affiliated
Practice locations via a frame relay network to the Company's Fort Washington,
Pennsylvania headquarters, and gives the Company the ability to monitor the
operations of its Affiliated Practices on a real-time basis. To date, the
Company has implemented this system in 17 locations and expects to have
implemented this practice management information system by the end of 1999 in
substantially all of the Affiliated Practices that become affiliated with the
Company through the Initial Affiliation Transactions. The Company believes that
utilizing a common practice management information system will enhance its
ability to cost-effectively monitor, manage and generate management data
regarding the operations of its Affiliated Practices. The system currently
provides management with uniform practice information including patient
scheduling, procedure histories, billing and collection and other relevant data.
The system also has the potential to interface with an electronic patient
medical record system and to incorporate proprietary clinical pathways currently
being developed by the Company.
The Company's financial information system is centralized in its Fort
Washington, Pennsylvania headquarters. All Affiliated Practices are integrated
with this system as soon as practicable upon the Company's consummation of an
Affiliation Transaction with such Affiliated Practice, typically within one
week.
Data from both the practice management information and financial
information systems is captured and maintained in a common relational database.
The Company believes that this database of practice management and financial
information will facilitate quantitative analysis of outcomes, quality and cost,
which analysis will in turn enhance the Company's ability to contract with
payors and to control costs and will assist in the continued development of
proprietary clinical pathways.
The Company's financial information system will not require any
modification to be year 2000 compliant. The Company's practice management
information system has recently been upgraded to be year 2000 compliant. The
upgraded version is currently being tested by its third party vendor and is
expected to be released in September 1998 and fully implemented by the end of
1998. Until the Company's systems have been implemented in all of the Affiliated
Practices, certain of the Affiliated Practices' systems may not be year 2000
compliant. The Company intends to schedule the implementation of its systems in
Affiliated Practices so that substantially all of the systems utilized by
Affiliated Practices will be year 2000 compliant by the end of 1999. The Company
has initiated communications with the primary payors from which it receives
reimbursement, such as Blue Cross/Blue Shield and Medicare. There is no
assurance that the systems of such payors or of other companies with which the
Company has significant relationships will be made year 2000 compliant in a
timely manner or that a failure by any such payor or other company to make its
systems year 2000 compliant will not have a material adverse on the Company. See
"Risk Factors -- Risks Related to Year 2000 Compliance."
AFFILIATION TRANSACTIONS
The Company and the PCs enter into affiliation transactions ("Affiliation
Transactions") pursuant to agreements ("Affiliation Agreements") with physicians
desiring to become affiliated with the Company and the PCs ("Affiliated
Physicians"). Pursuant to Affiliation Agreements, the physicians or, in certain
cases, professional corporations or partnerships owned by such physicians,
generally transfer the assets of their practices or the equity of such
professional corporations or partnerships to the Company and the relevant PC.
The Company acquires the non-medical assets, such as leases, furniture,
equipment and supplies, and the
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medical assets, consisting primarily of pharmaceuticals and patient records and
documentation, are transferred to the relevant PC. In consideration for such
sale, the Affiliated Physicians receive a combination of cash, Affiliation
Notes, Convertible Affiliation Notes, shares of Common Stock and/or Options in
amounts negotiated between the Company and the Affiliated Physicians involved in
such Affiliation Transaction. The Affiliation Agreements generally contain
restrictive covenants pursuant to which the Affiliated Physicians may not
compete with the Company within a relevant market area for a period of five
years following the closing date of the Affiliation Transaction. In addition,
generally each Affiliated Physician executes an employment agreement
("Employment Agreement") with the relevant PC pursuant to which the Affiliated
Physician generally receives as compensation for physician services a percentage
of the revenues of the PC related to their Affiliated Practice (less
compensation paid to certain other licensed providers in the relevant Affiliated
Practice and certain other expenses), as well as in some instances a bonus based
on the Affiliated Physician's personal productivity. Since the level of
physician reimbursement is related to the physician's personal productivity, the
Company believes that this structure provides an effective incentive to increase
productivity and profitability. If the Affiliated Physician voluntarily elects
to terminate the Employment Agreement during its term or is terminated by the PC
for cause, the Affiliated Physician is required to pay to the PC liquidated
damages in amounts generally ranging from one-half to twice the amount of the
Affiliated Physician's annual salary, bonus and pension contributions, with the
specific level of liquidated damages depending upon the number of years
remaining in the employment term at the time of termination. In most cases, no
liquidated damages would be paid if employment is so terminated after a term of
five to seven years. In addition, the Affiliated Physician is subject to a
restrictive covenant under the Employment Agreement which generally prevents the
Affiliated Physician from competing with the PC within a relevant market area
during the term of his or her Employment Agreement, and for a period of two
years thereafter. However, if an Affiliated Physician does not terminate his or
her employment prior to the end of the employment term, and has not been
discharged by the PC for cause, the Affiliated Physician may, immediately after
the employment term, return to private practice, alone or with former partners
in the applicable Affiliated Practice (and/or in most cases with one additional
physician), subject, during the two years following the end of the employment
term, to certain limitations on affiliation with certain health care
organizations and providers, such as other physician practice management
entities, HMOs or other third party insurers, hospitals or hospital systems, or
any integrated delivery systems or similar or comparable entities. An Affiliated
Physician's obligations under the restrictive covenant are not relieved or
limited by a required payment to the PC of liquidated damages by such Affiliated
Physician who prematurely terminates his or her employment with the PC or is
terminated by the PC for cause.
In February 1998, the Company entered into an Affiliation Agreement with
respect to an IPO Affiliation Transaction with Alan E. Ottenstein, M.D.,
pursuant to which Dr. Ottenstein's physician practice will become an Affiliated
Practice upon completion of the Offering. Such Affiliated Practice provides
specialty physician and ancillary services including pain management, neurology
and diagnostic imaging and comprises a total of four Affiliated Physicians.
Pursuant to the terms of the Affiliation Agreement, the Company will pay to Dr.
Ottenstein cash in the amount of $6.9 million, and will issue to Dr. Ottenstein
an aggregate of 246,429 shares of Common Stock and Affiliation Notes in the
aggregate principal amount of $3,891,605 in connection with the acquisition of
the assets of such Affiliated Practice. None of the other Initial Affiliation
Transactions involved consideration equal to at least 10% of the aggregate
consideration for all the Initial Affiliation Transactions.
Four former Affiliated Practices with a total of 19 physicians with which
the Company had previously completed Affiliation Transactions terminated their
affiliation with the Company pursuant to repurchase options which became
exercisable (or, in one case, pursuant to the terms of the respective
Affiliation Agreement), when the Company did not complete an initial public
offering by dates specified in their respective Affiliation Agreements, thereby,
subject to certain terms and conditions, effectively terminating such
Affiliation Transactions. References to Affiliation Transactions in this
Prospectus exclude these terminated Affiliation Transactions, unless otherwise
indicated.
Although the Company intends that future Affiliation Transactions will be
entered into on terms similar to those described above, the terms of future
Affiliation Transactions may be materially different as a result of regulatory,
financial, operational and other considerations.
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MANAGEMENT AND SERVICES AGREEMENTS; CONTROL OF PCS
The Company has entered into Management and Services Agreements (the
"Management Agreements") with each of the Company's affiliated PCs. The
Management Agreements each have a term of 40 years and, unless either party
elects not to renew, automatically renew for additional five-year terms. Neither
party may terminate the Management Agreement, provided that the Company may
terminate, in the event of a breach of a material provision by the PC or if the
PC materially breaches its obligations to obtain medical licenses and
participation agreements from all physicians employed by it or under contract to
it or fails to maintain malpractice insurance and, in the case of the Management
Agreement with the medical PC operating in New York (the "New York PC"), upon
120 days prior written notice; and the PC may terminate, in the event the
Company files a voluntary petition in bankruptcy or any bankruptcy proceeding is
filed against the Company which in either case remains undismissed for a period
of 360 days. Under the Management Agreements, the PCs are responsible for the
hiring and supervision of all physicians as well as nurses, therapists,
technicians and other licensed health care providers (collectively,
"Professionals") who provide services independently or incidental to physician
services and are responsible for the payment of all compensation to such
Professionals, except to the extent that Professionals other than physicians
become employees of the Company. In addition, the PC is responsible for the
appointment of medical directors, the monitoring of the quality of medical
services provided and the adoption of peer review/quality assessment programs,
the maintenance of medical records, the establishment and revision (after
consultation with the Company) of fee schedules and certain other duties as may
be required by law. The Company remains solely responsible for the business
operation of the PCs and for the management of all non-medical aspects of the
PCs, including the leasing of office locations, the provision of medical
equipment and furnishings, the employment of all necessary clerical, secretarial
and bookkeeping personnel and the payment of salaries of such personnel,
assistance in the negotiation of employment agreements with nursing staff,
technicians and other allied and ancillary health care personnel, the management
of payroll and personnel related activities, the supervision of all employees
(other than Professionals), the procurement of all medical supplies (to the
extent permitted by law), the provision of insurance (provided that the PCs have
the exclusive responsibility for maintaining malpractice liability insurance for
Professionals), the maintenance of all books and records, the provision of all
billing services, the provision of marketing services and certain other
services. The Company either arranges financing for the PCs or, as necessary,
advances funds to the PCs, with such advanced funds to be repaid to the Company
together with interest accruing at the rate from time to time charged to the
Company by its primary lender (or, if there is no such lender, the prime rate
plus 2%).
In Pennsylvania and New Jersey, in addition to the affiliated PCs through
which the Company's Affiliated Physicians provide physician services, the
Company has established additional PCs which provide ancillary services,
currently comprising physical and occupational therapy, under Management and
Services Agreements substantially identical to those between the Company and the
PCs that employ the Affiliated Physicians. From time to time, the Company may
establish one or more additional affiliated PCs in various states, which
affiliated PCs will provide physician services, ancillary services, or a
combination thereof.
As compensation for the Company's services under the Management Agreements
(other than in New York), the PCs pay to the Company an amount equal to all
receipts, including without limitation receipts from billings for medical
services and for the services of Professionals other than physicians, for
medical supplies, for ancillary medical services and for facility and equipment
charges ("Gross Collected Revenues"), less all compensation expenses to be paid
in accordance with the PC's employment agreements with physicians and other
Professionals, insurance costs, legal and accounting fees, taxes and certain
other incidental expenses which are paid by the PC but otherwise would be the
obligation of the Company ("Permitted Expenses"), and less the amounts of any
advances repaid to the Company and any accrued interest thereon. The PC's
Permitted Expenses may not exceed 20% of the Gross Collected Revenues on an
annual basis, provided that the PC is not subject to any limit with respect to
the payment of amounts due to physicians under employment agreements. In New
York, the Company receives a fee for its services based on the Company's costs
of providing such services plus an additional amount equal to 18% of such costs.
The Company retains a security interest in all of the PC's accounts receivable,
cash, bank accounts, medical supplies and the proceeds thereof. The PC is also
subject to certain covenants of exclusivity, non-competition and non-disclosure.
Under the Management Agreements, PCs indemnify and hold harmless the
Company against all liabilities as a result of the performance of medical
services or ancillary services or any other acts or omissions
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of the PC or its shareholders, agents, employees or subcontractors (other than
the Company). The Company indemnifies and holds harmless each PC and its
officers, directors, shareholders and employees from liabilities resulting as a
consequence of the Company's gross negligence or wilful misconduct in its
performance under the Management Agreement. In addition, each Management
Agreement provides that, in the event that Medicare or Medicaid, any other payor
or any other federal, state or local government or agency establishes laws,
regulations or policies materially affecting the method or amounts of payment
from the PCs to the Company under the Management Agreement or which otherwise
materially affect either party's rights or obligations thereunder, either party
may amend the Management Agreement to reflect such event, provided that no such
amendment may alter the basic economic status of the parties under the
Management Agreement.
All of the voting capital stock of each PC is owned by a single physician
or other Professional who has entered into a shareholder agreement with the PC
pursuant to which such shareholder's ability to transfer the capital stock of
the PC is subject to a right of first refusal in favor of the PC or its
designated transferee, and pursuant to which the PC may remove such person as a
shareholder of the PC with or without cause and require such person to sell the
shares of the PC (except that the shareholder of the New York PC may be removed,
and required to sell, for cause only) to the PC or a designee of the PC legally
qualified to own such shares. The shareholder of each PC has agreed to elect to
the board of directors of the PC persons selected by the Company. The boards of
directors of the PCs operating in Pennsylvania and New Jersey are classified
into classes of directors who serve for multi-year terms and consists solely of
officers of the Company (and, where required by law, the physician or other
Professional shareholder), who may be removed by the shareholder only for cause.
The bylaws of the PCs (other than the New York PC) provide that directors must
at all times be either a licensed physician, an appropriately licensed
Professional or an officer of the Company. The agreements with respect to the
New York PC and the PC operating in Delaware contain various provisions which
restrict the ability of the directors and officers of the PC to alter each such
PC's relationship with the Company under the relevant Management Agreement. The
Company believes that the ownership and management structure of the PCs is
highly favorable to the maintenance of the relationship of the Company and the
PCs under the respective Management Agreements.
Although the Company intends that future agreements with PCs will be
similar to those described above, the terms of future agreements may be
materially different as a result of regulatory, financial, operational and other
considerations.
As a result of an Affiliation Transaction, the Company also provides
management services to two Affiliated Practices in New Jersey with a total of
six Affiliated Physicians. Such Affiliated Practices and Affiliated Physicians
are not owned by any of the Company's affiliated PCs, but instead are
operated under professional corporations owned by such Affiliated Physicians.
The Company provides management services to such professional corporations
pursuant to management agreements and receives percentages of the revenues of
such professional corporations ranging from 50% to 55% as payment for such
services.
GOVERNMENT REGULATION
The delivery of health care services has become one of the most highly
regulated of professional and business endeavors in the United States. Both the
federal government and the individual state governments are responsible for
overseeing the activities of individuals and businesses engaged in the delivery
of health care services. Federal law and regulations pertain primarily to the
Medicare program and the Medicaid program, each of which is financed, at least
in part, with federal funds. State jurisdiction is based upon the state's
interest in regulating the quality of health care in the state, regardless of
the source of payment. Recent laws, including the Health Insurance Portability
and Accountability Act ("HIPAA") and the BBA, have expanded the coverage of such
regulation to other federally funded health care programs.
The Company believes its operations are in material compliance with
applicable laws; however, the Company has not received or applied for a legal
opinion from counsel or an advisory opinion from any federal or state judicial
or regulatory authority to this effect, and many aspects of the Company's
business operations have not been the subject of state or federal regulatory
interpretation. The laws applicable to the Company are subject to amendment and
to evolving interpretations, and therefore there is no assurance that a review
of the Company or the Affiliated Practices by a court or law enforcement or
regulatory authority would not result in a determination that could have a
material adverse effect on the Company. Furthermore, there is no assurance
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that the laws applicable to the Company and the Affiliated Practices will not be
amended in a manner that could have a material adverse effect on the Company.
See "Risk Factors -- Government Regulation."
Federal Law
The federal health care laws apply in any case in which a PC is providing
an item or service that is reimbursable under Medicare, Medicaid or other
federally funded health care program or in which the Company is claiming
reimbursement from Medicare, Medicaid or other federally funded health care
programs on behalf of the PCs or physicians who are participating in the
Provider Network. The principal federal laws include those that prohibit the
filing of false or improper claims with the Medicare or Medicaid programs, those
that prohibit unlawful inducements for the referral of business reimbursable
under Medicare or Medicaid and those that prohibit the provision of certain
designated services by a health care provider to a patient if the patient was
referred by a physician with which the provider has certain types of financial
relationships.
False and Other Improper Claims. The federal government is authorized to
seek criminal, civil and administrative penalties with respect to any health
care provider that files a false claim for reimbursement from Medicare, Medicaid
or other federally funded health care program. Criminal penalties are also
available in the case of claims filed with private insurers if the government
can show that the claims constitute mail fraud or wire fraud, or a violation
under state law which separately covers health care fraud under criminal
statutes. While the criminal statutes are generally reserved for instances
evincing requisite fraudulent intent as defined by statute, the criminal and
administrative penalty statutes are being applied by the government in an
increasingly broad range of circumstances. The government has taken the
position, for example, that a pattern of claiming reimbursement for unnecessary
services violates these statutes if the claimant should have known that the
services were unnecessary. The government has also taken the position that
claiming reimbursement for services that are of substandard quality is a
violation of the false claims statutes if the claimant should have known that
the services were substandard.
The Company believes that its billing activities on behalf of the PCs and
the Provider Network are in material compliance with such laws, but there is no
assurance that the Company's activities will not be challenged or scrutinized by
governmental authorities. A determination that the Company has violated such
laws could have a material adverse impact on the Company.
Anti-Kickback Law. A federal law commonly known as the "Anti-kickback Law"
(as amended) prohibits the offer, solicitation, payment or receipt of anything
of value (direct or indirect, overt or covert, in cash or in kind) which is
intended to induce the referral of Medicare, Medicaid or other federally funded
health care program patients, or the ordering of items or services reimbursable
under those programs. The law also prohibits remuneration that is intended to
induce the recommendation of, or the arranging for, the provision of items or
services reimbursable under Medicare, Medicaid or other federally funded health
care programs. The law has been broadly interpreted by a number of courts to
prohibit remuneration that is offered or paid for otherwise legitimate purposes
if the circumstances show that one purpose of the arrangement is to induce
referrals. Even bona fide investment interests in a health care provider may be
questioned under the Anti-kickback Law if the government concludes that the
opportunity to invest was offered with the intent to induce prohibited
referrals. The penalties for violations of this law include criminal sanctions,
civil monetary penalties and exclusion from the Medicare and Medicaid programs.
In part to address concerns regarding the implementation of the
Anti-kickback Law, the federal government in 1991 published regulations that
provide exceptions, or "safe harbors," for certain transactions that will not be
deemed to violate the Anti-kickback Law. Among the safe harbors included in the
regulations were provisions relating to the sale of physician practices,
management and personal services agreements and employee relationships.
Subsequently, regulations were proposed offering safe harbor protection to
additional activities, including referrals within group practices consisting of
active investors. Proposed amendments clarifying the existing safe harbor
regulations were published in 1994. If any of the proposed regulations are
ultimately adopted, they would result in substantive changes to existing
regulations. The failure of an activity to qualify under a safe harbor
provision, while potentially leading to greater regulatory scrutiny, does not
render the activity illegal per se.
There are several aspects of the Company's relationships with physicians to
which the Anti-kickback Law may be relevant. In some instances, for example, the
government may construe some of the marketing and
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managed care contracting activities of, or exclusive dealing arrangements
required by, the Company as arranging for the referral of patients to the
Affiliated Physicians or physicians with whom the Company has a relationship
through the Provider Network.
Although neither the investments in the Company by physicians nor the
Management Agreements between the Company and the PCs necessarily qualify for
protection under the safe harbor regulations, the Company does not believe that
these activities constitute the type of activities the Anti-kickback Law is
intended to prohibit. A determination that the Company has violated the
Anti-kickback Law could have a material adverse effect on the Company.
Anti-referral Law. The "anti-referral" (i.e. Stark) laws prohibit a
physician from referring a patient to a health care provider for certain
designated health services reimbursable by Medicare or Medicaid if the physician
has a financial relationship with that provider, including an investment
interest, a loan or debt relationship or a compensation relationship. In
addition to the conduct directly prohibited by the law, the statute also
prohibits schemes that are designed to obtain referrals indirectly that cannot
be made directly. The penalties for violating the law include (i) a refund of
any Medicare or Medicaid payments for services that resulted from an unlawful
referral, (ii) civil fines and (iii) exclusion from the Medicare and Medicaid
programs.
The Company does not currently provide any designated health service under
the anti-referral laws, but rather provides management services to affiliated
PCs that may themselves provide designated services in a manner structured to
comply with the anti-referral laws. However, because the Company will provide
management services related to designated health services provided by Affiliated
Physicians, there is no assurance that the Company will not be deemed the
provider of those services for purposes of the anti-referral laws and,
accordingly, the recipient of referrals from Affiliated Physicians. In that
event, such referrals will be permissible only if (i) the financial arrangements
under the Management Agreements with the PCs meet certain exceptions in the
anti-referral laws and (ii) the ownership of shares of Common Stock of the
Company by the referring physicians meets certain investment exceptions under
the anti-referral laws. The Company believes that the financial arrangements
under the Management Agreements qualify for applicable exceptions under the
anti-referral laws; however, there is no assurance that a review by courts or
regulatory authorities would not result in a contrary determination. In
addition, the Company will not meet the anti-referral law exception related to
investment interests until the Company's stockholders' equity exceeds $75
million. Proposed rules were published under the anti-referral statute on
January 9, 1998, and following public comment on the proposed rules, final rules
are expected to be promulgated, although it is uncertain when such final rules
will be promulgated. If adopted in their current form, absent further
clarification such proposed rules would likely require some modification of the
compensation arrangements under the Employment Agreements with the Company's
Affiliated Physicians pursuant to provisions thereof which generally allow such
modification by the Company to comply with such changes in law. There can be no
assurance that the provisions of such rules as finalized, or any additional
rules, will not have a material adverse effect on the structure or operations of
the Company.
Antitrust. The Company is also subject to certain federal and state
antitrust laws, some of which could prohibit the potential control by the
Company of certain specialist physician services within a relevant market,
which, among other effects, may adversely affect the Company's ability to engage
in Affiliation Transactions. In addition, certain laws which prohibit or
restrict the fixing or setting of prices, the tying of services and other
similar activities may adversely affect the Company's ability to negotiate payor
contracts on behalf of the PCs or the Provider Network if such activities were
deemed to be in violation of such prohibitions or restrictions.
State Law
State Anti-Kickback Laws. Many states have laws that prohibit payment of
kickbacks in return for the referral of patients. Some of these laws apply only
to services reimbursable under state Medicaid programs. However, a number of
these laws apply to all health care services in the state, regardless of the
source of payment for the service. Based on judicial administrative
interpretations of the Anti-kickback Law, the Company believes that these laws
prohibit payments to referral sources where a purpose for payment is for
referrals. However, the laws in most states regarding kickbacks have been
subjected to limited judicial and regulatory interpretation, and therefore there
is no assurance that the Company's activities will be found to be
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in compliance therewith. Noncompliance with such laws could have an adverse
effect upon the Company and subject it and Affiliated Physicians to penalties
and sanctions.
State Self-Referral Laws. A number of states have enacted self-referral
laws that are similar in purpose to the federal anti-referral laws, but which
impose different restrictions. Some states, for example, only prohibit referrals
when the physician's financial relationship with a health care provider is based
upon an investment interest of a certain magnitude. Other state laws apply only
to a limited number of designated health services. Some states do not prohibit
referrals to owned or related entities, but require that a patient be informed
of the financial relationship when a referral is made. Although the Company
believes that its operations are in material compliance with the anti-referral
laws of the states in which the PCs are located, there is no assurance that the
Company's activities will be found in compliance therewith. Noncompliance with
such laws could have an adverse effect upon the Company and subject it and
Affiliated Physicians to penalties and sanctions.
Fee-Splitting Laws. Many states prohibit a physician from splitting with a
referral source the fees generated from physician services. Other states have a
broader prohibition against any splitting of a physician's fees, regardless of
whether the other party is a referral source. In most states, it is not
considered to be fee-splitting when the payment made by the physician is
reasonable reimbursement for services rendered on the physician's behalf.
The compensation provisions of the Company's Management Agreements with the
PCs have been designed in a manner which the Company believes complies with
applicable state laws relating to fee-splitting. There can be no certainty,
however, that, if challenged, the Company and the PCs will be found to be in
compliance with each state's fee-splitting laws. A determination in any state
that the Company is engaged in any unlawful fee-splitting arrangement could
render a Management Agreement or any other management and services agreement
between the Company and a PC located in such state unenforceable or subject to
modification in a manner adverse to the Company and subject the Company to other
sanctions.
Certain New York state regulations prohibit a physician from sharing or
splitting fees with persons not authorized to practice medicine. This
prohibition precludes the Company from receiving fees from its affiliated New
York PC which constitute a percentage of or are otherwise dependent upon the
income or receipts of the New York PC. The Company believes that the
compensation arrangement for services provided to the New York PC under the
relevant Management Agreement, which provides for a fee based on the Company's
costs plus an additional percentage of the Company's costs, complies with
applicable New York state law and regulation. However, there is no assurance
that certain actions by New York state regulatory authorities would not result
in a judicial or administrative determination with regard to such compensation
structure that could adversely affect the Company's operations. If the Company
is found to be engaged in a fee-splitting arrangement with the New York PC, the
New York PC and its Affiliated Physicians would be subject to charges of
professional misconduct and penalties ranging from censure to reprimand to
revocation of their professional licenses, and the Company could be deprived of
its ability to operate its business with, and to collect fees due and owing
from, the New York PC, which would have a material adverse effect on the Company
and its operations.
Corporate Practice of Medicine. Most states prohibit business corporations
from engaging in the practice of medicine. Many states prohibit a business
corporation from employing a physician. States differ, however, with respect to
the extent to which a licensed physician can affiliate with corporate entities
for the delivery of medical services. Some states interpret the "practice of
medicine" broadly to include activities of corporations such as the Company that
have an indirect impact on the practice of medicine, even where the physician
rendering the medical services is not an employee of the corporation and the
corporation exercises no discretion with respect to the diagnosis or treatment
of a particular patient.
The Company intends not to exercise any responsibility on behalf of
Affiliated Physicians pursuant to the Management Agreements that could be viewed
as comprising the practice of medicine. Accordingly, the Company believes that
its operations do not violate applicable state laws relating to the corporate
practice of medicine. Such laws and legal doctrines have been subjected to only
limited judicial and regulatory interpretation and there is no assurance that,
if challenged, the Company would be considered to be in compliance with all such
laws and doctrines. A determination in any state that the Company is engaged in
the corporate practice of medicine could render any Management Agreement between
the Company and a PC
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located in such state unenforceable or subject to modification in a manner
adverse to the Company and subject the Company to other sanctions.
Insurance Laws. Laws in all states regulate the business of insurance and
the operation of HMOs. Many states also regulate the establishment and operation
of networks of health care providers under the auspices of an integrated
delivery system ("IDS"). While these laws do not generally apply to companies
that provide management services to networks of physicians or to physician
practice groups that assume financial risk under a subcapitation agreement with
a managed care organization, there is no assurance that regulatory authorities
of the states in which the Company operates would not apply these laws to
require licensure or some lesser regulation of the Company's operations as an
insurer, as an HMO or as a provider network or IDS. Other 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 others, laws and regulations providing
for minimum capital requirements and other safety and soundness requirements.
The Company believes that its current and proposed operations are in compliance
with these laws in the states in which it currently does business, but there is
no assurance that future interpretations or amendments of insurance and health
care network laws by regulatory authorities in these states or in the states
into which the Company may expand will not require licensure or a restructuring
of some or all of the Company's operations.
The National Association of Insurance Commissioners ("NAIC") in 1995
endorsed a policy proposing the state regulation of risk assumption by
physicians. The policy proposes prohibiting physicians from entering into
capitated payment or other risk sharing contracts except through HMOs or
insurance companies. Several states have adopted regulations implementing the
NAIC policy in some form. In states where such regulations have been adopted,
PCs will be precluded from entering into capitated contracts directly with
employers, individuals and benefit plans unless they qualify to do business as
HMOs or insurance companies. In addition, in December 1996, the NAIC issued a
white paper entitled "Regulation of Health Risk Bearing Entities," which sets
forth issues to be considered by state insurance regulators when considering new
regulations and encourages that a uniform body of regulation be adopted by the
states. The Company believes that additional regulation at the state level will
be forthcoming in response to the NAIC initiatives. In addition, state
regulations in this area may be affected or superseded by federal standards for
provider service organizations that are currently being developed through
rulemaking required by the BBA.
COMPETITION IN THE DELIVERY OF HEALTH CARE SERVICES AND IN AFFILIATING WITH
SPECIALIST PHYSICIAN PRACTICES
The business of providing health care and related services is intensely
competitive. The Company is potentially in competition with a number of health
care organizations and institutions such as publicly- and privately-owned
physician practice management businesses, hospitals and other institutions and
organizations, managed care organizations, single- and multi-specialty physician
groups and solo practitioners, in two broad areas of competition: competition in
the delivery of health care services and competition in affiliating with
specialist physician practices.
Competition in the Delivery of Health Care Services. The Company's success
is highly dependent upon the success of its Affiliated Practices and Affiliated
Physicians in the delivery of health care services to patients and other
consumers, including managed care organizations, insurers, Medicare and other
third-party payors. The Company's Affiliated Practices and Affiliated Physicians
must compete with hospitals and other health care institutions and
organizations, single- and multi-specialty physician groups, some of which are
operated by physician practice management companies, and solo practitioners.
Many of such competitors have substantially greater resources than those of the
Company's Affiliated Practices and Affiliated Physicians.
Competition in Affiliating with Specialist Physician Practices. An
important element of the Company's growth strategy is the identification of and
affiliation with additional specialist physician practices. The Company must
compete with other publicly- and privately-owned physician practice management
businesses, hospitals and other health care organizations and institutions which
also seek to acquire or affiliate with such specialist physician practices. Most
of such entities have been in business longer than the Company, and have
substantially greater assets and resources than those of the Company. The
Company believes other health care companies and institutions have also been
investigating forming single- or multi-specialty physician practice management
companies, and still other businesses with substantial resources may decide to
enter the specialist
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<PAGE>
physician practice management business, all of which entities are potentially in
competition with the Company.
INSURANCE
The provision of medical services entails an inherent risk of professional
malpractice and other similar claims. However, the Company does not influence or
control the practice of medicine by physicians or have responsibility for
compliance with certain regulatory and other requirements directly applicable to
the rendering of professional services by physicians, physician groups or other
health care providers. As a result of the relationship between the Company and
the PCs, the Company may become subject to medical malpractice actions under
various theories, including successor liability and certain theories relating to
the power to control or direct care. There can be no assurance that claims,
suits or complaints relating to services and products provided by the PCs will
not be asserted against the Company in the future. The Company's medical
professional liability insurance provides coverage of up to $1 million per
occurrence, with maximum coverage of $3 million per year. The Company's general
liability insurance provides coverage of up to $3 million per occurrence, with
maximum coverage of $3 million per year.
The physicians employed by the PCs are required to maintain medical
malpractice liability insurance in amounts which are mandated by the state in
which they practice. While the Company believes such insurance policies are
appropriate in amount and coverage for its current operations, there is no
assurance that the coverage maintained by the PCs and the Company will be
sufficient to cover all future claims or will continue to be available in
adequate amounts or at a reasonable cost.
EMPLOYEES
As of April 30, 1998, the Company had a total of 319 employees and the PCs
had a total of 128 employees. None of the employees of the Company or the PCs is
represented by a labor union, other than two Affiliated Physicians in Delaware.
The Company believes that its and the PCs' relations with their respective
employees are good.
PROPERTIES
The Company's headquarters are located in approximately 13,400 square feet
of leased office space in Fort Washington, Pennsylvania, pursuant to leases
which expire in June and October 2002 and contain one-year renewal options. The
Company believes that these facilities are adequate for the foreseeable future.
The Affiliated Practices operate in offices leased by the Company with widely
varying terms.
LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings. The
Company's Affiliated Physicians and the PCs are from time to time subject to
medical malpractice claims. Such claims, if successful, could result in
substantial damage awards that may exceed the limits of insurance coverage. The
Company believes that all presently pending claims are adequately covered by
insurance.
The Company received a letter dated December 22, 1997 from counsel to
Orthopedic Associates of Lancaster and its physician shareholders (collectively,
"OAL"), with which the Company had previously entered into an Affiliation
Transaction that was subsequently terminated. In that letter, OAL makes certain
claims against the Company, including intentional misrepresentations as to
factual matters (including misrepresentations in the initial filing of the
Registration Statement of which this Prospectus is a part), fraudulent
inducement, misappropriation of funds and certain other breach of contract
claims. OAL has made an initial claim for damages and has reserved the right to
make additional claims. The Company has had discussions with representatives of
OAL in an attempt to resolve these issues amicably, but no resolution has been
achieved to date. Although the Company believes that the claims of OAL are
without merit, and intends to defend itself vigorously and assert counterclaims
if an amicable resolution cannot be reached, there is no assurance that OAL will
not initiate litigation against the Company based on the claims set forth in
that letter and possibly other claims, or that such claims will be resolved on
terms favorable to the Company.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Thomas J. Keane........................... 41 Chairman, President and Chief Executive Officer
Martin G. Chilek.......................... 47 Senior Vice President--Administration and Secretary
Edward R. Miersch......................... 41 Senior Vice President and Chief Operating Officer
Warren D. Barratt......................... 38 Senior Vice President, Treasurer and Chief Financial
Officer
John M. Hogan............................. 38 Vice President and General Counsel
Linda F. Larson........................... 50 Vice President--Management Information Systems
Annemarie Armstrong....................... 35 Vice President--Marketing
Lewis S. Sharps, M.D...................... 49 Chief Medical Officer
James M. McCrossin........................ 40 Vice President--Operations
Mark G. Hardin............................ 47 Vice President and Controller
Kerry J. Dale............................. 42 Director
William P. Ferretti....................... 54 Director
Gustav H. Koven, III...................... 55 Director
Daniel Promislo........................... 65 Director
</TABLE>
Thomas J. Keane has served as the Chairman, President and Chief Executive
Officer of the Company since its inception in July 1994. From 1989 to 1993, Mr.
Keane was President and CEO of WorkHab, Inc., which, as the managing partner of
a series of entities, provided workers' compensation services for work-related
injuries through managed care agreements with businesses and physician referral
sources and was sold to Medifit of America in 1993. From 1988 to 1989, Mr. Keane
was Vice President--Marketing at Cellcor Therapies, a startup company in the
immunotherapy business. From 1981 to 1988, Mr. Keane was Vice President of Fox
Chase Cancer Center ("Fox Chase") and held the position of Executive Director
for a variety of entities affiliated with Fox Chase. Prior to Fox Chase, Mr.
Keane was a senior consultant within the emerging business practice group of
Coopers & Lybrand.
Martin G. Chilek has been Senior Vice President--Administration and
Secretary of the Company since July 1997 and prior to such time served as Vice
President and Secretary of the Company since joining the Company in December
1995. From January 1992 until joining the Company, he was a general partner of
the Edison Venture Fund specializing in health care investments. From 1979 to
1992, Mr. Chilek served in various capacities with the Humana Inc., including
serving as Director of Acquisitions and Development from 1985 to 1988 and
Director of Humana Venture Capital, the equity investment affiliate of Humana
Inc., from 1988 until 1992.
Edward R. Miersch has been Senior Vice President and Chief Operating
Officer of the Company since July 1997 and prior to such time served as Vice
President--Operations of the Company since joining the Company in July 1996.
From April 1994 until joining the Company, Mr. Miersch served as Eastern Region
President of the Outpatient Rehabilitation Division of NovaCare, Inc.
("NovaCare"), a provider of physical therapy and rehabilitation services. He
served as President of Pat Croce's Sports Physical Therapists, Inc. from 1980
until September 1993, at which time that company was acquired by RehabClinics,
Inc., which was acquired by NovaCare in early 1994. Mr. Miersch also served as
Director of Physical Therapy and Sports Medicine at Haverford Community Hospital
from 1980 to 1986.
Warren D. Barratt has been Senior Vice President, Treasurer and Chief
Financial Officer of the Company since July 1997 and prior to such time served
as Vice President, Treasurer and Chief Financial Officer since joining the
Company in September 1996. From June 1994 until joining the Company, Mr. Barratt
served as Chief Financial Officer of The Pet Practice, Inc. ("The Pet
Practice"), a provider of
54
<PAGE>
veterinary care, until its merger with Veterinary Centers of America, Inc. in
July 1996. From 1982 to June 1994, Mr. Barratt held various positions with Price
Waterhouse LLP.
John M. Hogan has been Vice President and General Counsel of the Company
since joining the Company in October 1996. From February 1995 until joining the
Company, Mr. Hogan served as Assistant General Counsel of NovaCare, with primary
responsibility for representation of the NovaCare Outpatient Rehabilitation
Division. From March 1992 to February 1995, Mr. Hogan practiced law at Weissburg
and Aronson in San Diego, California. From 1985 to March 1992, Mr. Hogan
practiced law at Saul, Ewing, Remick & Saul in Philadelphia, Pennsylvania.
Linda F. Larson has been Vice President--Management Information Systems of
the Company since joining the Company in October 1996. From February 1995 until
joining the Company, Ms. Larson served as Director of Information Systems at The
Pet Practice. She was Director of Information Systems of the Hospital Division
of NovaCare from 1991 until January 1995. Before joining NovaCare in 1991, she
was Director of System Development and Maintenance at National Medical
Enterprises, Specialty Hospital Group.
Annemarie Armstrong has been Vice President--Marketing of the Company since
joining the Company in March 1998. From June 1996 until February 1998, Ms.
Armstrong served as Vice President, Corporate Marketing and Communications, at
Albert Einstein Healthcare Network, a 1,200-bed health care system in
Philadelphia. From March 1992 to June 1996, Ms. Armstrong was Associate Vice
President, Corporate Marketing and Communications, at Albert Einstein Healthcare
Network. From 1987 to March 1992, she served as Director of Public Relations for
Albert Einstein Healthcare Foundation.
Lewis S. Sharps, M.D., F.A.C.S., is a practicing orthopedic surgeon who has
been Chief Medical Officer of the Company since March 1996. Dr. Sharps was a
managing partner of Orthopaedic Surgery and Sports Medicine, P.C. from July 1980
until it became an Affiliated Practice of the Company in March 1997. Dr. Sharps
served as President of Orthopaedic Rehabilitation and Sports Center, P.C. from
1985 until February 1994 at which time that company was acquired by NovaCare. He
serves as a Director of the Pennsylvania Orthopaedic Society, chairs its
Political Action Committee, and will become President of that organization in
2000.
James M. McCrossin has been Vice President--Operations of the Company since
December 1997 and prior to such time served as Director of Operations since
joining the Company in July 1996. From September 1993 until joining the Company,
Mr. McCrossin served as Area Vice President of the Mid Atlantic Region of the
Outpatient Rehabilitation Division of NovaCare. He served as Vice President and
General Manager of Pat Croce's Sports Physical Therapists, Inc. from 1984 until
September 1993 at which time that company was acquired by RehabClinics, Inc.,
which was acquired by NovaCare in 1994.
Mark G. Hardin has been Vice President, Assistant Treasurer and Controller
of the Company since December 1997 and prior to such time served as Assistant
Vice President, Assistant Treasurer and Controller since joining the Company in
October 1996. From September 1994 until joining the Company, Mr. Hardin served
as Controller of The Pet Practice, which merged with Veterinary Centers of
America, Inc. in July 1996. He served as Controller of Everfast, Inc., a
retailer and wholesaler of decorative fabrics, from February 1991 until June
1994. Mr. Hardin served as Assistant Controller for McCrory Stores, Inc., a
variety retailer, from 1986 to 1991. He previously served as Director of General
Accounting for Service Merchandise Company and Assistant Director of Financial
Accounting for H.J. Wilson Co. from 1982 to 1986.
Kerry J. Dale has been a director of the Company since January 1997. Mr.
Dale is a General Partner of Keystone Venture Capital and an officer of the
general partner of Keystone Venture IV, L.P. ("Keystone"), which he joined in
1988. From 1982 to 1988, he was an owner/operator of two related manufacturers
of industrial products.
William P. Ferretti has been a director of the Company since May 1995. Mr.
Ferretti is the Chairman and Chief Executive Officer of Medstar Television,
Inc., a television programming company, which he co-founded in 1982. Mr.
Ferretti is also a principal of the general partner of NEPA Venture Fund--II,
L.P. ("NEPA"). He is a former director of Access Health. Mr. Ferretti currently
serves on the board of directors of Vitas Health Care Corp., a provider of
hospice services in homes, hospitals and nursing homes and MHM Services, Inc.,
an American Stock Exchange-listed behavioral health services company.
55
<PAGE>
Gustav H. Koven, III has been a director of the Company since September
1996. Mr. Koven is a General Partner of Edison Venture Fund, which he joined in
1990, and a general partner of the general partner of Edison Venture Fund III,
L.P. ("Edison"). From 1985 to 1990, Mr. Koven served as President of Chase
Manhattan Capital Corp. From 1980 to 1985, he served as a Vice President in
Corporate Development and Planning at The Chase Manhattan Bank. Before joining
Chase in 1980, Mr. Koven held marketing and corporate development positions at
Union Carbide. He serves as a director of Novalis Corporation, a provider of
services and software for managed care organizations.
Daniel Promislo has been a director of the Company since February 1995 and
since November 1997 has been Managing Director of the law firm of Wolf, Block,
Schorr and Solis-Cohen LLP, where he was a partner specializing in corporate and
securities law from 1977 to 1994. For more than five years, he has been the
President and a Director of Historical Documents Company and Historical Souvenir
Company, manufacturers of souvenirs related to American history. Mr. Promislo is
also a trustee of Resource Asset Investment Trust, a real estate investment
trust.
CLASSIFIED BOARD; COMMITTEES
The Company's Board of Directors is divided into three classes. Each class
holds office until the third annual meeting for the election of directors
following the election of such class, except that the initial terms of the Class
I, Class II and Class III directors expire in 1999, 2000 and 2001, respectively.
Messrs. Dale and Koven are Class I directors, Messrs. Ferretti and Promislo are
Class II directors and Mr. Keane is a Class III director.
The Board of Directors has a Compensation Committee, which currently is
composed of the entire Board of Directors, and an Audit Committee composed of
Messrs. Ferretti, Koven and Promislo. The Compensation Committee determines
salaries and bonuses and other compensation matters for officers of the Company,
administers employee health and benefit plans, and administers the Stock
Incentive Plans and any similar plans created in the future. The Audit Committee
recommends the appointment of the Company's independent public accountants and
reviews the scope and results of audits, internal accounting controls and tax
and other accounting related matters.
DIRECTOR COMPENSATION
Each non-employee director of the Company is expected to receive a fee of
$1,000 per meeting of the Board of Directors attended, plus reimbursement of
out-of-pocket expenses. In addition, non-employee directors may receive annual
or other additional grants of options in amounts that have not yet been
determined.
EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth certain
information with respect to compensation paid or accrued by the Company during
1997 and 1996 to the Company's Chief Executive Officer and to the other four
most-highly compensated executive officers of the Company (the Chief Executive
Officer and such other four executive officers, collectively, the "Named
Executive Officers").
56
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
NAME AND -------------------- ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1)
------------------ ---- -------- ------- ---------------
<S> <C> <C> <C> <C>
Thomas J. Keane............................................. 1997 $157,205 -0- $ 879
Chairman, President and Chief Executive Officer 1996 150,102 -0- 612
Edward R. Miersch........................................... 1997 200,914 -0- 1,114
Senior Vice President and Chief Operating Officer 1996 96,154 -0- 163
Martin G. Chilek............................................ 1997 150,870 -0- 862
Senior Vice President--Administration and Secretary 1996 149,341 -0- 612
Warren D. Barratt........................................... 1997 125,264 $25,000 846
Senior Vice President, Treasurer and Chief Financial 1996 37,981 25,000 51
Officer
James M. McCrossin.......................................... 1997 150,456 -0- 493
Vice President--Operations 1996 38,462 -0- 78
</TABLE>
- ------------------
(1) Such compensation in 1997 consisted of a $400 contribution by the Company to
each of the Named Executive Officers under the Company's retirement savings
plan and life insurance premiums as follows: Mr. Keane, $479; Mr. Miersch,
$714; Mr. Chilek, $462; Mr. Barratt, $446; and Mr. McCrossin, $93.
Stock Option Grants. The following table contains information concerning
the grant of stock options under the Stock Incentive Plans to each of the Named
Executive Officers during 1997.
OPTION GRANTS
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
------------------------------------------------------- ANNUAL RATES OF
NUMBER OF STOCK PRICE
SECURITIES % OF TOTAL APPRECIATION FOR
UNDERLYING OPTIONS GRANTED EXERCISE OPTION TERM($)
OPTIONS TO EMPLOYEES PRICE EXPIRATION --------------------
NAME GRANTED(#) IN FISCAL 1997 ($/SH) DATE 5% 10%
---- ---------- --------------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Thomas J. Keane.................... 26,196 15.7% $15.40 7/24/07 $193,969 $547,821
Edward R. Miersch.................. 26,196 15.7% $14.00 7/24/07 230,643 584,495
Martin G. Chilek................... 6,549 3.9% $14.00 7/24/07 57,661 146,121
Warren D. Barratt.................. 26,196 15.7% $14.00 7/24/07 230,643 584,495
James M. McCrossin................. 5,239 3.2% $14.00 7/24/07 46,127 116,895
</TABLE>
Option Values. The following table sets forth certain information
regarding stock options held as of December 31, 1997 by the Named Executive
Officers. None of the Named Executive Officers exercised stock options during
1997.
FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
FISCAL YEAR END(#) FISCAL YEAR END($)(1)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Thomas J. Keane........................................ -0- 26,196 $ -0- $ -0-
Edward R. Miersch...................................... 4,511 35,217 46,283 92,566
Martin G. Chilek....................................... 9,022 11,059 92,566 46,272
Warren D. Barratt...................................... 4,511 35,217 28,735 57,374
James M. McCrossin..................................... 1,310 7,859 12,593 25,182
</TABLE>
- ------------------
(1) There was no public trading market for the Common Stock as of December 31,
1997. These values have been calculated on the basis of the assumed initial
public offering price of $14.00 per share, less the applicable per share
exercise price.
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<PAGE>
EMPLOYMENT AGREEMENTS
The Company entered into an employment agreement with Thomas J. Keane,
Chairman, President and Chief Executive Officer, in October 1997. The agreement
has an initial term of three years and automatically renews for successive
one-year terms unless either party elects not to renew. The agreement provides
for an annual base salary of $157,532 and further provides that Mr. Keane will
be included in any bonus system, pool or incentive compensation program for
senior executives of the Company that may be implemented by the Board. The
agreement further provides that Mr. Keane's positions, titles or
responsibilities will not be diminished materially without his consent. In the
event Mr. Keane's employment is terminated for reasons other than his death,
disability or for cause, or if the Company elects not to renew his employment
for any additional term, the Company is obligated to continue to pay Mr. Keane
his then current base salary for the greater of a period of six months or the
remainder of the initial term or any additional term, or until such time as he
commences other full time employment, whichever occurs earlier. In the event Mr.
Keane's employment is terminated without cause upon a change in control (as
defined), he is entitled to receive a lump sum payment upon such termination
equal to 300% of his then current base salary plus 300% of any annual incentive
compensation for the prior year. The agreement also contains covenants with
respect to confidential information as well as a restrictive covenant which
generally prevents Mr. Keane from owning a material interest in or being
employed by or affiliated with competitors of the Company during his term of
employment and for a period of one year thereafter.
The Company entered into an employment agreement with Martin G. Chilek,
Senior Vice President--Administration and Secretary, in December 1995 which was
amended and restated in October 1997. The employment agreement expires in
December 1998 and automatically renews for successive one-year terms unless
either party elects not to renew. The agreement provides for an annual base
salary of $150,000 and that Mr. Chilek will be included in any bonus system,
pool or incentive compensation plan for senior executives of the Company that
may be implemented by the Board. In addition, the agreement provides for a grant
to Mr. Chilek under the 1995 Company Option Plan of Options to purchase 13,532
shares of Common Stock at an exercise price of $3.74 per share, which options
are intended to be "incentive stock options" ("ISOs") within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code") and
become exercisable in three equal installments upon each of the first three
anniversaries of the first day of Mr. Chilek's employment with the Company,
provided that, in the event of any consolidation, merger or the sale or transfer
of substantially all of the assets of the Company to another corporation in
which the Company is not the surviving entity, any remaining options shall be
exercisable in full whether or not the right to exercise such options has
accrued. In the event Mr. Chilek's employment is terminated for reasons other
than his death, disability or for cause, or if the Company elects not to renew
his employment for any additional term, then the Company shall continue to pay
Mr. Chilek his then-current base salary for the greater of a period of six
months or the remainder of the initial term or any additional term, or until
such time as he commences other full-time employment, whichever occurs earlier.
In the event Mr. Chilek's employment is terminated without cause upon a change
of control, he is entitled to receive a lump sum payment upon such termination
equal to the greater of: 200% of his then-current base salary plus 200% of any
annual incentive compensation for the prior year, or 100% of his then-current
base salary plus 100% of his annual incentive compensation for the remainder of
the initial term or any additional term. The agreement also contains covenants
with respect to confidential information as well as a restrictive covenant which
generally prevents Mr. Chilek from owning a material interest in or being
employed by or affiliated with competitors of the Company during his term of
employment and for a period of one year thereafter.
The Company entered into an employment agreement with Edward R. Miersch,
Senior Vice President and Chief Operating Officer, in May 1996 which was amended
and restated in October 1997. The employment agreement expires in June 1999 and
automatically renews for successive one-year terms unless either party elects
not to renew. The agreement provides for a base salary of $200,000 and that Mr.
Miersch will be included in any bonus system, pool or incentive compensation
plan for senior executives of the Company that may be implemented by the Board.
In addition, the agreement provides for a grant to Mr. Miersch under the 1995
Company Option Plan of options to purchase 13,532 shares of Common Stock at an
exercise price of $3.74 per share, which options are intended to be ISOs and
become exercisable in three equal installments upon each of the first three
anniversaries of the first day of Mr. Miersch's employment with the Company,
provided that, in the event of any consolidation, merger or the sale or transfer
of substantially all of the assets of the Company to another corporation in
which the Company is not the surviving entity, any
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<PAGE>
remaining options shall be exercisable in full whether or not the right to
exercise such options has accrued. In the event Mr. Miersch's employment is
terminated for reasons other than his death, disability or for cause, or if the
Company elects not to renew his employment for any additional term, then the
Company shall continue to pay Mr. Miersch his then-current base salary for the
greater of six months or the remainder of the initial term or any additional
term, or until such time as he commences other full-time employment, whichever
occurs earlier. In the event Mr. Miersch's employment is terminated without
cause upon a change of control, he is entitled to receive a lump sum payment
upon such termination equal to the greater of: 200% of his then-current base
salary plus 200% of any annual incentive compensation for the prior year, or
100% of his then-current base salary plus 100% of his annual incentive
compensation for the remainder of the initial term or any additional term. The
agreement also contains covenants with respect to confidential information as
well as a restrictive covenant which generally prevents Mr. Miersch from owning
a material interest in or being employed by or affiliated with competitors of
the Company during his term of employment and for a period of one year
thereafter.
The Company entered into an employment agreement with Warren D. Barratt,
Senior Vice President, Treasurer and Chief Financial Officer, in August 1996
which was amended and restated in October 1997. The employment agreement expires
in September 1999 and automatically renews for successive one-year terms unless
either party elects not to renew. The agreement provides for a base salary of
$125,000 and two initial bonuses of $25,000 and that Mr. Barratt will be
included in any bonus system, pool or incentive compensation plan for senior
executives of the Company that may be implemented by the Board. In addition, the
agreement provides for a grant to Mr. Barratt under the 1995 Company Option Plan
of options to purchase 13,532 shares of Common Stock at an exercise price of
$7.63 per share, which options are intended to be ISOs and become exercisable in
three equal installments upon each of the first three anniversaries of the first
day of Mr. Barratt's employment with the Company, provided that, in the event of
any consolidation, merger or the sale or transfer of substantially all of the
assets of the Company to another corporation in which the Company is not the
surviving entity, any remaining options shall be exercisable in full whether or
not the right to exercise such options has accrued. In the event Mr. Barratt's
employment is terminated for reasons other than his death, disability or for
cause, or if the Company elects not to renew his employment for any additional
term, then the Company shall continue to pay Mr. Barratt his then-current base
salary for the greater of six months or the remainder of the initial term or any
additional term, or until such time as he commences other full-time employment,
whichever occurs earlier. In the event Mr. Barratt's employment is terminated
without cause upon a change of control, he is entitled to receive a lump sum
payment upon such termination equal to the greater of: 200% of his then-current
base salary plus 200% of any annual incentive compensation for the prior year,
or 100% of his then-current base salary plus 100% of his annual incentive
compensation for the remainder of the initial term or any additional term. The
agreement also contains covenants with respect to confidential information as
well as a restrictive covenant which generally prevents Mr. Barratt from owning
a material interest in or being employed by or affiliated with competitors of
the Company during his term of employment and for a period of one year
thereafter.
STOCK INCENTIVE PLANS
Stock Incentive Plan
Under the Company's 1997 Stock Incentive Plan (the "Stock Incentive Plan"),
a variety of awards, including Options, stock appreciation rights and restricted
and unrestricted stock grants may be made to the Company's employees, officers,
directors, affiliates, consultants and advisors who are expected to contribute
to the Company's future growth and success. The Company has reserved 1,574,315
shares of Common Stock for issuance under the Stock Incentive Plan.
Notwithstanding the foregoing, under the terms of the Stock Incentive Plan,
Options to acquire more than 250,000 shares of Common Stock may not be granted
to any individual optionee during any one fiscal year of the Company.
Approximately 400 individuals are currently eligible to receive grants or awards
under the Stock Incentive Plan. The Compensation Committee will administer the
Stock Incentive Plan and determine the price and other terms upon which awards
shall be made. Options may be granted either in the form of ISOs or
non-statutory stock Options. The option exercise price of ISOs may not be less
than the fair market value of the Common Stock on the date of the grant. While
the Company currently anticipates that most grants under the Stock Incentive
Plan will consist of Options, the Company may grant stock appreciation rights,
which represent rights to receive any excess in value of shares of Common Stock
over the exercise price; restricted stock awards, which entitle recipients to
acquire shares of
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<PAGE>
Common Stock, subject to the right of the Company to repurchase all or a part of
such shares at their purchase price in the event that the conditions specified
in the award are not satisfied; or unrestricted stock awards, which represent
grants of shares to participants free of any restrictions under the Stock
Incentive Plan. Options or other awards that are granted under the Stock
Incentive Plan but expire unexercised are available for future grants. The
Company has granted Options to purchase 860,778 shares of Common Stock to date
under the Stock Incentive Plan. It is not anticipated that any stock
appreciation right or restricted or unrestricted stock grants will be made under
the Stock Incentive Plan prior to the completion of the Offering.
Under the terms of the Stock Incentive Plan, if a "Change of Control"
(which is defined as including certain changes in the ownership or corporate
structure of the Company, as well as a liquidation of the Company or any other
event that may be defined by the Company's Board of Directors as constituting a
Change of Control) occurs, the Compensation Committee (or such other committee
as may be charged with responsibility for administration of the Stock Incentive
Plan) has the right to take whatever actions are deemed to be necessary or
desirable with respect to any outstanding Options (which actions may be taken on
a case by case basis), including, without limitation, the acceleration of the
expiration or termination of the Options (to a date no earlier than thirty days
after notice is given to the optionees affected) and the acceleration of the
exercisability of any outstanding Options.
In general, no income is recognized by an optionee on the grant of an
Option. On the exercise of an Option, the excess of the fair market value of the
shares acquired over the option exercise price paid for the shares (the
"spread") is recognized as income if the option is a non-statutory option. If
the Option is an ISO, the spread will be taken into account as income for
purposes of the federal alternative minimum tax, but not for purposes of the
regular federal income tax. The Company generally is allowed a deduction for
federal income tax purposes equal to the income recognized by an optionee on
exercise of a non-statutory Option (subject to applicable limitations on
deductibility of compensation expenses, including the limitations imposed under
Section 162(m) of the Code), but is allowed no deduction with respect to the
exercise of an ISO.
If an optionee exercises an ISO and holds the shares acquired beyond a
required holding period (which ends on the later of two years after the date the
ISO was granted or one year after the shares were acquired), the optionee will
recognize capital gain (or loss) on the disposition of the shares determined by
reference to the optionee's purchase price. The tax liability, if any,
attributable to such a subsequent disposition will depend, in part, on the
optionee's holding period. The maximum tax liability on capital gains with
respect to property that has been held more than 18 months is 20%. If an
optionee exercises an ISO and sells without satisfying the applicable holding
period (a "disqualifying disposition"), the sale will result in ordinary
compensation income equal to the excess of the amount realized over the price
paid for the shares. The Company will be allowed a deduction equal to the amount
of ordinary income recognized by the optionee on a disqualifying disposition.
If shares which are acquired on exercise of a non-statutory Option are
subject to any restrictions that would be treated as creating a risk of
forfeiture that is "substantial," in the absence of a special election by the
optionee under Section 83(b) of the Code, the tax treatment described above will
vary, as the income to the optionee (and the deduction to the Company) will be
determined as of the date the substantial risk of forfeiture lapses.
Section 162(m) of the Code set limits on the deductibility of compensation
in excess of $1,000,000 paid by publicly held companies to certain "covered"
employees (the "million dollar cap"). It is anticipated that compensation
expense attributable to the exercise of non-statutory options granted under the
Stock Incentive Plan will be exempt from these limitations pursuant to certain
exemptions contained in Treasury Regulations promulgated by the IRS.
1995 Company Option Plan and 1995 Affiliate Option Plan
In 1995, the Company adopted the 1995 Company Option Plan and the 1995
Affiliate Option Plan. An aggregate of Options to purchase 221,977 shares of
Common Stock have been granted under the 1995 Company Option Plan. An aggregate
of Options to purchase 21,262 shares of Common Stock have been granted under the
1995 Affiliate Option Plan. All such Options were granted with a 10-year term
and with an exercise price equal to the fair market value of the Common Stock as
determined by the Board of Directors at the date of grant. The 1995 Company
Option Plan and the 1995 Affiliate Option Plan have been amended to provide that
no additional Options may be granted pursuant to such plans.
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CERTAIN TRANSACTIONS
Thomas J. Keane, Chairman, President and Chief Executive Officer of the
Company, has received shares of Common Stock in exchange for services rendered
to the Company as follows: in July 1994, he received 133,600 shares, and in
February 1995, he received 232,426 shares.
Daniel Promislo, a director of the Company, has received shares of Common
Stock in exchange for services rendered to the Company as follows: in September
1994, he received 3,929 shares; in February 1995, he received 6,836 shares; in
November 1995, he received 26,914 shares; and in July 1996, he received 3,275
shares.
From the Company's inception through January 1995, TJK Holdings Inc., a
corporation owned by Mr. Keane, made advances to the Company in the aggregate
amount of $262,000, of which amount $90,000 was repaid during 1995 and remains
outstanding and $172,000 bears interest at an annual rate of 6%.
In February 1995, the Company issued shares of Series A Preferred Stock to
Edison Venture Fund III, L.P. ("Edison") and NEPA Venture Fund II, L.P.
("NEPA"), each of which owns beneficially more than five percent of the
outstanding Common Stock of the Company, as follows: to Edison, 856,164 shares
of Series A Preferred Stock for a purchase price of $1,249,999; and to NEPA,
513,699 shares of Series A Preferred Stock for a purchase price of $750,001. See
"Description of Capital Stock."
In February 1996, William P. Ferretti, a director of the Company, purchased
26,914 shares of Common Stock for $100,000. In July 1996, Edward R. Miersch,
Senior Vice President and Chief Operating Officer of the Company, purchased
53,461 shares of Common Stock for $200,000.
In December 1996, the Company issued shares of Series B Preferred Stock and
Common Stock Warrants to Keystone Venture IV, L.P. ("Keystone"), which owns
beneficially more than five percent of the outstanding Common Stock of the
Company, and to Edison and NEPA as follows: to Keystone, 396,825 shares of
Series B Preferred Stock and 10,395 Common Stock Warrants for an aggregate
purchase price of $1,250,000; to Edison, 128,968 shares of Series B Preferred
Stock and 3,378 Common Stock Warrants for an aggregate purchase price of
$406,250; and to NEPA, 109,127 shares of Series B Preferred Stock and 2,859
Common Stock Warrants for an aggregate purchase price of $343,750. See
"Description of Capital Stock."
In February 1997, the Company issued shares of Series B Preferred Stock and
Common Stock Warrants to various investors, including 31,746 shares of Series B
Preferred Stock for a purchase price of $99,500 and 832 Common Stock Warrants
for a purchase price of $500 to Mr. Keane; and 317,460 shares of Series B
Preferred Stock for a purchase price of $995,000 and 8,316 Common Stock Warrants
for a purchase price of $5,000 to Dominion Fund IV ("Dominion"), which owns
beneficially more than five percent of the outstanding Common Stock of the
Company.
In April 1997, Dominion made a loan to the Company in the aggregate
principal amount of $2,000,000, bearing interest at an annual rate of 12%, which
remains outstanding. In connection with the loan, the Company granted to
Dominion a security interest in all of the Company's assets. Dominion has
subsequently agreed to extend the term of such loan for a period of two years
from completion of the Offering and to release such security interest. Also, in
connection with such loan, the Company issued to Dominion a Series B Warrant to
purchase 266,667 shares of Series B Preferred Stock at an exercise price of
$3.15 per share, which Series B Warrant expires four years from the date of
completion of the Offering. See "Description of Capital Stock" and "Use of
Proceeds."
In September 1996, James M. McCrossin, Vice President -- Operations of the
Company, purchased 9,823 shares of Common Stock for $75,000.
In September 1997, certain shareholders of the Company made bridge loans to
the Company in the following respective principal amounts: Dominion, $1,500,000;
Keystone, $150,000; Edison, $125,000; NEPA, $125,000; and Mr. Keane, $100,000.
Such loans remain outstanding and bear interest at an annual rate of 10%. Such
loans have subsequently been extended for a period of two years from completion
of the Offering. In connection with such loans, the Company issued to Dominion a
Series B Warrant to purchase 166,667 shares of Series B Preferred Stock at an
exercise price of $3.15 per share and Series B Warrants to purchase shares of
Series B Preferred Stock to the other lenders in the following
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amounts: Keystone, 16,667 shares; Edison, 13,889 shares; NEPA, 13,889 shares;
and Mr. Keane, 11,111 shares. All of such Series B Warrants expire four years
from the date of completion of the Offering. See "Description of Capital Stock"
and "Use of Proceeds."
In January 1998, Dominion made a loan to the Company in the principal
amount of $800,000, bearing interest at a rate of 8% per annum, which principal
amount and $2,104 of accrued interest were repaid by the Company in January 1998
with a payment of $502,140 in cash and the issuance of shares of Series C
Preferred Stock described below. In connection with the repayment of such loan,
the Company issued to Dominion Common Stock Warrants to purchase 5,050 shares of
Common Stock, subject to anti-dilution and other adjustments, which Common Stock
Warrants expire January 16, 2008.
In January 1998, the Company issued shares of Series C Preferred Stock and
Common Stock Warrants to Capital Ventures International ("CVI"), which prior to
giving effect to the Series C Preferred Stock Exchange owned beneficially more
than five percent of the outstanding Common Stock of the Company, and to
Dominion, Keystone, Edison, NEPA and Mr. Keane, as follows: to CVI, 722,892
shares of Series C Preferred Stock and 26,196 Common Stock Warrants for an
aggregate purchase price of $3,000,000; to Dominion, 9,468 shares of Series C
Preferred Stock and 2,620 Common Stock Warrants for an aggregate purchase price
of $300,000; to Keystone, 7,890 shares of Series C Preferred Stock and 2,183
Common Stock Warrants for an aggregate purchase price of $250,000; to Edison,
54,217 shares of Series C Preferred Stock and 1,965 Common Stock Warrants for an
aggregate purchase price of $225,000; to NEPA, 6,312 shares of Series C
Preferred Stock and 1,946 Common Stock Warrants for an aggregate purchase price
of $200,000; and to Mr. Keane, 3,156 shares of Series C Preferred Stock and 873
Common Stock Warrants for an aggregate purchase price of $100,000. Each of such
Common Stock Warrants expires on December 31, 2000.
In May 1998, the Company issued, in exchange for all of the Company's
issued and outstanding shares of Series C Preferred Stock and the Common Stock
Warrants issued in connection therewith, Convertible Exchange Notes in the
aggregate principal amount of $6,000,000 and Common Stock Warrants to purchase
an aggregate of 200,000 shares of Common Stock at an exercise price per share
equal to 120% of the Price to Public in the Offering to, among other parties,
CVI, Dominion, Keystone, Edison, NEPA and Mr. Keane, as follows: to CVI,
Convertible Exchange Notes in the principal amount of $3,000,000 and 100,000
Common Stock Warrants, in exchange for 722,892 shares of Series C Preferred
Stock; to Dominion, Convertible Exchange Notes in the principal amount of
$300,000 and 10,000 Common Stock Warrants, in exchange for 72,289 shares of
Series C Preferred Stock; to Keystone, Convertible Exchange Notes in the
principal amount of $250,000 and 8,335 Common Stock Warrants, in exchange for
60,241 shares of Series C Preferred Stock; to Edison, Convertible Exchange Notes
in the principal amount of $225,000 and 7,500 Common Stock Warrants, in exchange
for 54,217 shares of Series C Preferred Stock; to NEPA, Convertible Exchange
Notes in the principal amount of $200,000 and 6,665 Common Stock Warrants, in
exchange for 48,193 shares of Series C Preferred Stock; and to Mr. Keane,
Convertible Exchange Notes in the principal amount of $100,000 and 3,335 Common
Stock Warrants, in exchange for 24,096 shares of Series C Preferred Stock. The
principal amount of the Convertible Exchange Notes is payable in four equal
quarterly installments on each of August 31, 1999, November 30, 1999, February
28, 2000 and May 31, 2000, and the outstanding principal amounts bear interest
at a rate of 8% per annum, compounded monthly in arrears and payable at the same
time as the principal payments. The Exchange Notes must be prepaid in full upon
the occurrence of certain events, including upon the completion of an offering
of securities subsequent to the Offering that results in proceeds of at least
$30 million, at the election of the holders of at least 50% of the outstanding
principal amount of the Convertible Exchange Notes. Upon the completion of the
Offering at the election of the lender under the Line of Credit, scheduled
payments of principal and interest under the Convertible Exchange Notes may be
made by the issuance of shares of a new series of convertible preferred stock.
This convertible preferred stock would pay a 8% cumulative, compounded annual
dividend and would be convertible into shares of Common Stock at the option of
the holder, based on 100% of the market price of the Common Stock during a
pricing period immediately prior to the conversion and would be mandatorily
convertible in August 2000. The Common Stock Warrants issued in connection with
the Convertible Exchange Notes expire in May 2003.
In May 1998, certain shareholders of the Company agreed to purchase
Convertible Bridge Notes from the Company in the following respective amounts:
Dominion, $1,100,000; Edison, $700,000; Keystone,
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$450,000; NEPA, $200,000; and CVI, $100,000. The Convertible Bridge Notes are
due and payable on June 1, 1999, bear interest at an annual rate of 4.82% and,
upon completion of the Offering, will be converted into an aggregate number of
shares of Common Stock equal to the aggregate outstanding principal amount of
such loans divided by the Price to Public. In connection therewith, the Company
also issued to such shareholders Warrants to purchase a number of shares of
Common Stock equal to 50% of the number of shares of Common Stock issuable upon
conversion of the Convertible Bridge Notes with an exercise price of 120% of the
Price to Public in the Offering. These Common Stock Warrants expire in May 2003.
At an assumed Price to Public of $14.00, such holders will receive Common Stock
Warrants to purchase an aggregate of 91,071 shares at an exercise price of
$16.80 per share, as follows: to Dominion, 39,286 Common Stock Warrants; to
Edison, 25,000 Common Stock Warrants; to Keystone, 16,071 Common Stock Warrants;
to NEPA, 7,143 Common Stock Warrants; and to CVI, 3,571 Common Stock Warrants.
In May 1998, in connection with the issuance by the Company of the
Convertible Bridge Notes and Convertible Exchange Notes described above, all
previously issued Common Stock Warrants still outstanding were amended to
provide that the exercise price per share of all such Warrants will be equal to
the Price to Public in the Offering, and the Series B Warrants were amended to
become Common Stock Warrants to purchase 168,091 shares of Common Stock at the
Price to Public in the Offering.
The Company, Mr. Keane, Dominion, Edison, Keystone and NEPA and certain
other holders of the Series A Preferred Stock and Series B Preferred Stock and
the Warrants are parties to an Amended and Restated Registration Rights
Agreement dated as of December 31, 1996, as amended (the "Series A and B
Registration Rights Agreement"), to provide for the registration under the
Securities Act of the shares of Common Stock issuable upon conversion of the
Series A Preferred Stock and Series B Preferred Stock and exercise of the
Warrants issued in connection therewith (the "Underlying Shares") owned by such
shareholders. The Series A and B Registration Rights Agreement provides that the
holders of at least 40% of the Underlying Shares may demand registration of at
least 20% of the Underlying Shares originally issued ("Demand Registration").
The Company is required to effect a total of two Demand Registrations. In
connection with any Demand Registration, the Company and Mr. Keane, for their
own accounts, may include shares of Common Stock in any such registration,
subject to reduction by a managing underwriter if such inclusion would adversely
affect the marketing of the shares to be included in the Demand Registration.
The Series A and B Registration Rights Agreement also provides for incidental
registration of the Underlying Shares with respect to any registrations of
Common Stock undertaken by the Company (other than registrations on Forms S-4
and S-8 and registrations for the benefit of a holder of Warrants to purchase
5,707 shares of Common Stock). The Series A and B Registration Rights Agreement
provides the holders of Underlying Shares the right to register their shares on
Form S-3 if and when the Company becomes eligible to use such form. The costs to
register shares will be borne by the Company, except for underwriting discounts
and commissions. The Series A and B Registration Rights Agreement also requires
the Company to indemnify each selling shareholder for violations of certain
securities laws in connection with a registration that results in losses to the
selling shareholder, unless a violation is caused by such shareholder. In turn,
the selling shareholders must indemnify the Company for losses due to any
violation of securities laws by them in the registration process.
In connection with the Series C Preferred Stock Exchange, the Company, CVI,
Keystone, Edison, NEPA, Dominion, Mr. Keane and the other holders of the
Convertible Exchange Notes are entering into a Registration Rights Agreement
dated as of May 26, 1998 (the "Exchange Registration Rights Agreement" and,
together with the Series A and B Registration Rights Agreement, the
"Registration Rights Agreements"), to provide for the registration under the
Securities Act of the shares of Common Stock issuable upon conversion of the
convertible preferred stock issuable upon conversion of the Convertible Exchange
Notes and the exercise of the Warrants issued in connection therewith
(collectively, the "Exchange Underlying Shares") owned by such parties. The
Exchange Registration Rights Agreement provides that the Company shall have
current and effective, on or before the first anniversary of the completion of
the Offering, a registration statement covering the resale of the shares of
Common Stock issuable upon the exercise of such Warrants and, prior to the
issuance of such convertible preferred stock, a registration statement covering
the shares of Common Stock issuable upon the conversion thereof, and that such
registration statements shall remain current and effective until all such shares
of Common Stock have been sold under the registration statement
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or may be resold under Rule 144(k) under the Securities Act or until the
aggregate number of such shares of Common Stock equals less than one percent of
the outstanding shares of Common Stock of the Company. The Exchange Registration
Rights Agreement provides that, in the event of a breach by the Company of its
obligation to cause the registration statements to become and remain effective,
in addition to other remedies, the Company must pay liquidated damages in the
amount per month of approximately 1.5% of the purchase price of the shares
covered by the applicable registration statement (pro rated for partial months)
during the term of any breach. The Exchange Registration Rights Agreement also
provides for incidental registration of the Exchange Underlying Shares with
respect to any registration of Common Stock undertaken by the Company (other
than registrations on Forms S-4 and S-8), and contains certain other provisions
similar to those in the Series A and B Registration Rights Agreement.
In May 1998, in consideration of the agreement by Affiliated Physicians who
were parties to the Initial Affiliation Transactions to amend their respective
Affiliation Agreements, Edison, Keystone, NEPA, Dominion, Mr. Keane, Mr.
Promislo and Mr. Ferretti (the "Transferring Shareholders") severally agreed to
transfer up to an aggregate of 1,273,858 shares of Common Stock to such
Affiliated Physicians in the event that the price per share of the Common Stock
did not reach certain specified levels by the second anniversary of the
completion of the Offering (the "Guarantee Transaction"). In connection
therewith, the Company has agreed to issue to the Transferring Shareholders
Warrants to purchase an aggregate of 100,000 shares of Common Stock with an
exercise price per share equal to 120% of the Price to Public in the Offering
(or $16.80 per share, at an assumed Price to Public of $14.00), as follows: to
Edison, 29,890 Warrants; to Keystone, 10,710 Warrants; to NEPA, 18,790 Warrants,
to Dominion, 8,570 Warrants; to Mr. Keane, 27,020 Warrants; to Mr. Promislo,
2,910 Warrants; and to Mr. Ferretti, 2,110 Warrants. In the event that the
Underwriters' overallotment option is not exercised and the Price to Public in
the Offering equals $13.00 or more, it is anticipated that the Transferring
Shareholders will have no obligation to transfer shares and, in such event, no
Warrants will be issued in connection therewith.
Mr. Promislo is currently Managing Director of Wolf, Block, Schorr and
Solis-Cohen LLP, which provides legal services to the Company.
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PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the ownership
of the Common Stock as of May 26, 1998 and as adjusted to reflect the sale of
shares offered pursuant to this Prospectus, by (i) each of the Company's Named
Executive Officers and directors; (ii) all of the Company's executive officers
and directors as a group; and (iii) each person known to the Company to own more
than five percent of the outstanding shares of Common Stock.
<TABLE>
<CAPTION>
PERCENT OF OUTSTANDING
NUMBER OF SHARES SHARES
BENEFICIALLY OWNED ----------------------------
PRIOR TO THE PRIOR TO THE AFTER THE
NAME OF BENEFICIAL OWNER OFFERING OFFERING OFFERING
- ------------------------ ------------------ ------------ ---------
<S> <C> <C> <C>
Thomas J. Keane(1).............................................. 416,266 23.7% 5.5%
Edward R. Miersch(2)............................................ 133,912 7.4 1.8
Martin G. Chilek(3)............................................. 54,446 3.1 *
Warren D. Barratt(4)............................................ 57,562 3.2 *
James M. McCrossin(5)........................................... 28,000 1.6 *
Kerry J. Dale(6)................................................ 0 * *
William P. Ferretti(7).......................................... 26,914 1.6 *
Gustav H. Koven, III(8)......................................... 0 * *
Daniel Promislo (9)............................................. 37,025 2.2 *
Edison Venture Fund III, L.P.(10)............................... 445,466 25.7 5.9
NEPA Venture Fund II, L.P.(11).................................. 261,293 15.1 3.5
Keystone Venture IV, L.P.(12)................................... 184,706 10.6 2.5
Dominion Fund IV(13)............................................ 345,027 18.4 4.5
All executive officers and
directors as a group (14 persons)(14)......................... 901,868 42.6 11.5
</TABLE>
- ------------------
* Less than one percent.
(1) Includes currently exercisable Warrants to purchase 4,652 shares at an
exercise price of $14.00 per share and currently exercisable Options to
purchase 34,673 shares at an exercise price of $15.40 per share. Does not
include Warrants to purchase 3,333 shares and Options to purchase 69,347
shares not currently exercisable or Warrants to purchase 27,020 shares
which may be issued to Mr. Keane pursuant to the Guarantee Transaction. See
"Certain Transactions." Mr. Keane's address is care of the Company, 220
Commerce Drive, Fort Washington, PA 19034.
(2) Includes currently exercisable Options to purchase 45,778 shares at an
exercise price of $3.74 per share and 34,673 shares at an exercise price of
$14.00 per share. Does not include Options to purchase 92,236 shares not
currently exercisable. Mr. Miersch's address is care of the Company, 220
Commerce Drive, Fort Washington, PA 19034.
(3) Consists of currently exercisable Options to purchase 45,778 shares at
$3.74 per share and 8,008 shares at an exercise price of $14.00. Does not
include Options to purchase 40,226 shares not currently exercisable.
(4) Consists of currently exercisable Options to purchase 22,889 shares at an
exercise price of $7.63 per share and 34,673 shares at an exercise price of
$14.00 per share. Does not include Options to purchase 115,125 shares not
currently exercisable.
(5) Includes currently exercisable Options to purchase 11,077 shares at an
exercise price of $3.74 per share, 1,108 shares at $7.63 per share and
6,935 shares at $14.00 per share. Does not include Options to purchase
21,623 shares not currently exercisable.
(6) Does not include 168,580 shares and currently exercisable Warrants to
purchase 16,126 shares at an exercise price of $14.00 per share owned by
Keystone, of which Mr. Dale is an officer of the general partner of the
general partner.
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(7) Does not include Warrants to purchase 2,110 shares which may be issued to
Mr. Ferretti pursuant to the Guarantee Transaction. See "Certain
Transactions." Also does not include 253,659 shares and currently
exercisable Warrants to purchase 7,634 shares at an exercise price of
$14.00 per share owned by NEPA, of which Mr. Ferretti is a principal of the
general partner.
(8) Does not include 437,312 shares and currently exercisable Warrants to
purchase 8,154 shares at an exercise price of $14.00 per share owned by
Edison, of which Mr. Koven is a general partner of the general partner.
(9) Does not include Warrants to purchase 2,910 shares which may be issued to
Mr. Promislo pursuant to the Guarantee Transaction. See "Certain
Transactions." Also does not include 3,929 shares owned by Mr. Promislo's
children, all of whom are adults. Mr. Promislo disclaims any beneficial
ownership with respect to such shares.
(10) Includes currently exercisable Warrants to purchase 8,154 shares at an
exercise price of $14.00 per share. Does not include Warrants to purchase
100,000 shares not currently exercisable or Warrants to purchase 29,890
shares which may be issued to Edison pursuant to the Guarantee Transaction.
See "Certain Transactions." The address for Edison is care of Edison
Venture Fund, 997 Lenox Drive #3, Lawrenceville, NJ 08648.
(11) Includes currently exercisable Warrants to purchase 7,634 shares at an
exercise price of $14.00 per share. Does not include Warrants to purchase
13,810 shares not currently exercisable or Warrants to purchase 18,790
shares which may be issued to NEPA pursuant to the Guarantee Transaction.
See "Certain Transactions." The address for NEPA is care of Mid-Atlantic
Venture Funds, 125 Goodman Drive, Bethlehem, PA 18015.
(12) Includes currently exercisable Warrants to purchase 16,126 shares at an
exercise price of $14.00 per share. Does not include Warrants to purchase
24,404 shares not currently exercisable or Warrants to purchase 10,710
shares which may be issued pursuant to the Guarantee Transaction. See
"Certain Transactions." The address for Keystone is care of Keystone
Venture Capital Management Company, 1601 Market Street, Suite 2500,
Philadelphia, PA 19103.
(13) Includes currently exercisable Warrants to purchase 157,306 shares at an
exercise price of $14.00 per share. Does not include Warrants to purchase
49,286 shares not currently exercisable or Warrants to purchase 8,570
shares which may be issued pursuant to the Guarantee Transaction. See
"Certain Transactions." The address for Dominion is care of Dominion
Ventures, Inc., 44 Montgomery Street, Suite 4200, San Francisco, CA 94104.
(14) See notes one through nine above. Includes currently exercisable Options to
purchase 102,633 shares at an exercise price of $3.74 per share, 52,244
shares at an exercise price of $7.63 per share, 204,445 shares at an
exercise price of $14.00 per share and 34,673 shares at an exercise price
of $15.40 per share. Does not include Options to purchase 450,775 shares
not currently exercisable, Warrants to purchase 3,333 shares not currently
exercisable or Warrants to purchase 32,040 shares which may be issued
pursuant to the Guarantee Transaction. See "Certain Transactions."
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DESCRIPTION OF CAPITAL STOCK
Upon completion of the Offering, the authorized capital stock of the
Company will consist of 50,000,000 shares of Common Stock, and 5,000,000 shares
of undesignated Preferred Stock, par value $.01 ("Preferred Stock"). Of the
Common Stock, 3,981,578 shares are issued and outstanding, and an aggregate of
1,101,615 shares are reserved for issuance pursuant to outstanding Options
issued pursuant to the Stock Incentive Plans. In addition, upon completion of
the Offering, the Company will have outstanding Warrants to purchase 205,782
shares of Common Stock at an exercise price per share equal to the Price to
Public in the Offering, which Warrants expire at various times commencing
December 31, 1999 through January 16, 2008, and Warrants to purchase 291,071
shares of Common Stock at an exercise price per share equal to 120% of the Price
to Public in the Offering, which Warrants expire in May 2003. The Company also
has outstanding Convertible Exchange Notes which, at the election of the lender
under the Company's Line of Credit, may be repaid by the issuance of shares of a
new series of convertible preferred stock, which convertible preferred stock
would pay a 10% cumulative, compounded annual dividend and would be convertible
into shares of Common Stock, at the option of the holder, based on 100% of the
market price of the Common Stock during a pricing period immediately prior to
the conversion and would be mandatorily convertible in August 2000. No shares of
the undesignated Preferred Stock are issued and outstanding.
The Company's authorized capital stock also currently includes 1,506,849
shares of Series A Preferred Stock, all of which are outstanding as of the date
of this Prospectus, and 1,830,158 shares of Series B Preferred Stock, of which
1,246,031 shares are outstanding as of the date of this Prospectus. All of such
outstanding shares will be converted into an aggregate of 1,020,514 shares of
Common Stock on the completion of this Offering. After the completion of the
Offering, no shares of Convertible Preferred Stock will be outstanding or
authorized for issuance.
The holders of Common Stock are entitled to receive dividends, when and as
declared by the Board of Directors, out of funds legally available therefor and
to receive pro rata the assets of the Company legally available for distribution
upon liquidation after payment to holders of Preferred Stock having a
liquidation preference over the Common Stock. In addition, holders of Common
Stock are entitled to one vote per share on all matters voted on by shareholders
generally, including the election of directors, and do not have cumulative
voting rights. There are no preemptive, conversion or redemption rights
applicable to the shares of the Common Stock. The currently outstanding shares
of Common Stock are, and the shares of Common Stock offered by the Company
hereby, upon issuance by the Company against receipt of the purchase price
therefor, will be, fully paid and non-assessable.
The Board of Directors is empowered by the Company's Amended and Restated
Articles of Incorporation, as amended (the "Articles"), to designate and issue
from time to time one or more classes or series of Preferred Stock without any
action of the shareholders. The Board of Directors may fix and determine the
relative rights, preferences and limitations of each class or series so
authorized. The issuance of, or the ability to issue, the Preferred Stock could
adversely affect the voting power and other rights of the holders of the Common
Stock or could have the effect of decreasing the market price of the Common
Stock or of discouraging or making difficult any attempt by a person or group to
obtain control of the Company, including any attempt involving a bid for the
Common Stock at a premium over the then market price. The Company does not have
any present intention to issue any Preferred Stock, other than the issuance of
shares of a new series of convertible preferred stock in repayment of the
Convertible Exchange Notes at the election of the lender under the Line of
Credit as described above.
Subchapter F of Chapter 25 of the Pennsylvania Business Corporation Law of
1988, as amended (the "BCL"), which is applicable to the Company, may have an
anti-takeover effect and may delay, defer or prevent a tender offer or takeover
attempt that a shareholder might consider in his or her best interest, including
those attempts that might result in a premium over the market price for the
shares held by shareholders. In general, Subchapter F of Chapter 25 of the BCL
delays for five years and imposes conditions upon "business combinations"
between an "interested shareholder" and the Company, unless prior approval
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<PAGE>
of the Board of Directors is given. The term "business combination" is defined
broadly to include various merger, consolidation, division, exchange or sale
transactions, including transactions utilizing the Company's assets for purchase
price amortization or refinancing purposes. An "interested shareholder," in
general, would be a beneficial owner of shares entitling that person to cast at
least 20% of the votes that all shareholders would be entitled to cast in an
election of directors of the Company.
As permitted by the BCL, the Articles and the By-laws provide that a
director shall not be personally liable, as such, for monetary damages for any
action taken, or any failure to take any action, unless the director breaches or
fails to perform the duties of his or her office under the BCL, and the breach
or failure to perform constitutes self-dealing, willful misconduct or
recklessness. These provisions, however, do not apply to the responsibility or
liability of a director pursuant to any criminal statute, or to the liability of
a director for the payment of taxes pursuant to local, Pennsylvania or federal
law. These provisions offer persons who serve on the Board of Directors of the
Company protection against awards of monetary damages for negligence in the
performance of their duties. The Articles and the By-laws also provide that
every person who is or was a director or executive officer of the Company, or of
any corporation which he or she served as such at the request of the Company,
shall be indemnified by the Company to the fullest extent permitted by law
against all expenses and liabilities reasonably incurred by or imposed upon him
or her, in connection with any proceeding to which he or she may be made, or
threatened to be made, a party, or in which he or she may become involved by
reason of his or her being or having been a director or executive officer of the
Company, or of such other corporation, whether or not he or she is a director or
executive officer of the Company or such other corporation at the time the
expenses or liabilities are incurred, and that such directors and executive
officers are entitled to the advancement of expenses in connection therewith.
The By-laws provide that shareholders seeking to nominate candidates for
election as directors at an annual or a special meeting of shareholders must
provide timely notice thereof in writing. To be timely, a stockholder's notice
must be delivered to, or mailed and received at, the principal executive offices
of the Company (i) in the case of an annual meeting that is called for a date
that is within 30 days before or after the anniversary date of the immediately
preceding annual meeting of shareholders, not less than 120 days prior to the
anniversary of the date that the Company's proxy statement was released to
stockholders in connection with the immediately preceding annual meeting, and
(ii) in the case of an annual meeting that is called for a date that is not
within 30 days before or after the anniversary date of the immediately preceding
annual meeting, or in the case of a special meeting of shareholders called for
the purpose of electing directors, not later than the close of business on the
tenth day following the day on which notice of the date of the meeting was
mailed or public disclosure of the date of the meeting was made, whichever
occurs first. The By-laws also specify certain requirements for a shareholder's
notice to be in proper written form.
Application has been made to have the Common Stock approved for quotation
on The Nasdaq Stock Market's National Market under the symbol "USPY."
The Transfer Agent and Registrar for the Common Stock is American Stock
Transfer & Trust Company.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has been no public market for the Common
Stock. Sales of substantial amounts of shares of the Common Stock in the public
market following the Offering could adversely affect the market price of the
Common Stock, making it more difficult for the Company to sell equity securities
in the future at a time and price which it deems appropriate.
Upon the completion of the Offering, assuming no exercise of the
overallotment option, the Company will have outstanding 7,481,578 shares of
Common Stock. Of these shares, the 3,500,000 shares of Common Stock sold in the
Offering will be freely tradeable without restriction or registration under the
Securities Act. The remaining 3,981,578 shares of Common Stock outstanding as of
the date of this Prospectus are "restricted securities" as defined by Rule 144,
all but 196,218 of which have been held for more than one year and would be able
to be sold in accordance with the provisions of Rule 144 beginning 90 days after
the date of this Prospectus.
In general, under Rule 144, a person who has beneficially owned shares for
at least one year, including an "affiliate," as that term is defined in the
Securities Act, is entitled to sell within any three-month period a number of
shares that does not exceed the greater of one percent of the then outstanding
shares of Common Stock (approximately 74,816 shares after the completion of the
Offering), or the average weekly trading volume during the four calendar weeks
preceding filing of notice of such sale, subject to certain requirements
concerning availability of public information, manner and notice of sale.
In addition, affiliates must comply with the restrictions and requirements
of Rule 144, other than the one-year holding period requirements, in order to
sell shares of Common Stock which are not restricted securities. Under Rule
144(k), a person who is not an affiliate and has not been an affiliate for at
least three months prior to the sale and who has beneficially owned restricted
shares for at least a two year holding period may resell such shares without
compliance with the foregoing restrictions.
Upon the completion of the Offering, it is expected that there will be
1,101,615 shares of Common Stock issuable upon exercise of outstanding Options
granted under the Stock Incentive Plans, 278,459 of which are currently vested
and the remainder of which will vest in various installments through June 2001.
Pursuant to the Underwriting Agreement, the Company has agreed not to file, at
any time prior to the date 180 days from the date of this Prospectus, a
registration statement under the Securities Act covering any of such shares. The
Company, however, intends to file a registration statement or statements
covering a portion of these shares within one year from the date of this
Prospectus. The shares registered under such registration statement will be
available for resale in the open market upon the exercise of vested options,
subject to Rule 144 volume limitations applicable to affiliates.
In addition, upon completion of the Offering, the Company will have
outstanding Warrants to purchase 205,782 shares of Common Stock at an exercise
price per share equal to the Price to Public in the Offering, which Warrants
expire at various times commencing December 31, 1999 through January 16, 2008,
and Warrants to purchase 291,071 shares of Common Stock at an exercise price per
share equal to 120% of the Price to Public in the Offering, which Warrants
expire in May 2003. The Company also has outstanding Convertible Exchange Notes
which, at the election of the lender under the Company's Line of Credit, may be
repaid by the issuance of shares of a new series of convertible preferred stock,
which convertible preferred stock would pay a 8% cumulative, compounded annual
dividend and would be convertible into shares of Common Stock, at the option of
the holder, based on 100% of the market price of the Common Stock during a
pricing period immediately prior to the conversion and would be mandatorily
convertible in August 2000.
The Company, each executive officer and director and certain other
shareholders of the Company have agreed that, for a period of 180 days after the
date of this Prospectus (the "Lock-Up Period"), they will not, without the prior
written consent of NationsBanc Montgomery Securities LLC, issue, offer to sell,
contract to sell or otherwise sell, dispose of, loan, pledge or grant any rights
with respect to any shares of Common Stock, any options or warrants to purchase
any shares of Common Stock or any securities convertible into or
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<PAGE>
exercisable or exchangeable for or that represent the right to receive any
shares of Common Stock or enter into any swap, option, future, forward or other
agreement that transfers, in whole or in part, the economic consequences of
ownership of the Common Stock, except in certain limited circumstances.
For a description of the Registration Rights Agreements, which provide
registration rights, including rights to Demand Registration, to holders of the
Convertible Preferred Stock and Warrants, see "Certain Transactions."
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, represented by NationsBanc Montgomery Securities LLC
and Piper Jaffray Inc. (the "Representatives"), have severally agreed to
purchase from the Company the number of shares of Common Stock indicated below
opposite their respective names at the initial public offering price less the
underwriting discount set forth on the cover page of this Prospectus. The
Underwriting Agreement provides that the obligations of the Underwriters to pay
for and accept delivery of the shares of Common Stock are subject to certain
conditions precedent and that the Underwriters are committed to purchase all of
such shares, if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
NationsBanc Montgomery Securities LLC.......................................
Piper Jaffray Inc...........................................................
Total..................................................................
-------
</TABLE>
The Representatives have advised the Company that the Underwriters may
allow to select dealers a concession of not more than $0.__ per share, and such
dealers may reallow a concession of not more than $0.__ to certain other
dealers. After the public offering, the public offering price, concession and
reallowance to dealers may be reduced by the Representatives. No such reduction
shall change the amount of proceeds to be received by the Company as set forth
on the cover page of this Prospectus.
The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to a maximum
of 525,000 additional shares of Common Stock to cover over-allotments, if any,
at the same price per share as the initial 3,500,000 shares to be purchased by
the Underwriters. To the extent that the Underwriters exercise this option, each
of the Underwriters will be committed to purchase such additional shares in
approximately the same proportion as set forth in the above table.
The Underwriting Agreement provides that the Company will indemnify the
several Underwriters against certain liabilities, including civil liabilities
under the Securities Act, or will contribute to payments the Underwriters may be
required to make in respect thereof.
Each executive officer and director and certain other shareholders of the
Company have agreed with the Representatives for the Lock-Up Period not to offer
to sell, contract to sell, or otherwise sell, dispose of, loan, pledge or grant
any rights with respect to any shares of Common Stock, any options or warrants
to purchase any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for or that represent the right to receive any
shares of Common Stock or enter into any swap, option, future, forward or other
agreement that transfers, in whole or in part, the economic consequences of
ownership of the Common Stock owned as of the date of this Prospectus or
thereafter acquired directly by such holders for with respect to which they have
or hereafter acquire the power of disposition, without the prior written consent
of NationsBanc Montgomery Securities LLC, subject to certain limited exceptions.
However, NationsBanc Montgomery Securities LLC may, in its sole discretion at
any time or from time to time, without notice, release all or any portion of the
securities subject to the lock-up agreements. In addition, the Company has
agreed that during the Lock-Up Period, it will not, without the prior written
consent of NationsBanc
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Montgomery Securities LLC, issue, sell, contract to sell or otherwise dispose of
any shares of Common Stock, any options or warrants to purchase any shares of
Common Stock or any securities convertible into, exercisable for or exchangeable
for or represent the right to receive any shares of Common Stock or enter into
any swap, option, future, forward or other agreement that transfers, in whole or
in part, the economic consequences of ownership of the Common Stock, other than
the issuance of Common Stock upon the exercise of outstanding Options and
Warrants, the Company's issuance of Options under existing Stock Incentive Plans
and certain other conditions. See "Shares Eligible For Future Sale."
Prior to the Offering, there has been no public market for the shares of
Common Stock. The initial public offering price will be negotiated among the
Company and the Representatives. Among the factors to be considered in
determining the initial public offering price of the Common Stock, in addition
to prevailing market conditions, will be the Company's historical performance,
estimates of the business potential and earnings prospects of the Company, an
assessment of the Company's management and the consideration of the above
factors in relation to market valuation of companies in related businesses.
The Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority in excess of 5% of the number of shares of
Common Stock offered hereby.
The Representatives, on behalf of the Underwriters, may engage in
over-allotment, stabilizing transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Securities Exchange act
of 1934, as amended (the "Exchange Act"). Over-allotment involves syndicate
sales in excess of the offering size, which creates a syndicate short position.
Stabilizing transactions permit bids to purchase the underlying security so long
as the stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of the Common Stock in the open market after the
distribution has been completed in order to cover syndicate short positions.
Penalty bids permit the Representatives to reclaim a selling concession from a
syndicate member when the Common Stock originally sold by such syndicate member
is purchased in a syndicate covering transaction to cover syndicate short
positions. Such stabilizing transactions, syndicate covering transactions and
penalty bids may cause the price of the Common Stock to be higher than in would
otherwise be in the absence of such transactions. These transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
From time to time in the ordinary course of their respective business,
certain of the Underwriters and their affiliates have engaged in and may in the
future engage in commercial and/or investment banking transactions with the
Company and its affiliates. In addition, NationsBank, N.A., an affiliate of
NationsBanc Montgomery Securities LLC, has entered into a commitment letter with
respect to the Line of Credit with the Company.
LEGAL MATTERS
Wolf, Block, Schorr and Solis-Cohen LLP, Philadelphia, Pennsylvania, has
rendered an opinion that the shares of Common Stock offered hereby will be
legally issued, fully paid and non-assessable. Daniel Promislo, a director of
the Company, is the Managing Director of Wolf, Block, Schorr and Solis-Cohen LLP
and presently owns 37,025 shares of Common Stock. Cozen and O'Connor P.C.,
Philadelphia, Pennsylvania, has reviewed the matters set forth under "Risk
Factors -- Government Regulation" and " -- Risks Related to Relationships with
Third Party Payors" and "Business -- Reimbursement for Services" and " --
Government Regulation." The validity of the Common Stock will be passed upon for
the Underwriters by Shearman & Sterling, New York, New York. Shearman & Sterling
may rely as to matters of Pennsylvania law on the opinion of Wolf, Block, Schorr
and Solis-Cohen LLP.
EXPERTS
The audited financial statements included in this Prospectus and elsewhere
in the Registration Statement, to the extent and for the periods indicated on
their reports, have been audited by Arthur Andersen LLP, independent public
accountants, and are included herein in reliance upon the authority of said firm
as experts in giving said reports. Reference is made to said reports (for U.S.
PHYSICIANS, Inc., Network Medical, Inc., Philadelphia Orthopedic Group, LLP and
Philadelphia Uro-Gynecologic Associates, PC) in which the opinions contain an
explanatory fourth paragraph relating to such companies' ability to continue as
a going concern.
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ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), 450 Fifth Street, N.W., Washington, D.C. 20549, a Registration
Statement on Form S-1 under the Securities Act with respect to the shares of
Common Stock offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company and the
shares of Common Stock, reference is hereby made to the Registration Statement
and the exhibits and schedules filed as a part thereof. Statements contained in
this Prospectus as to the contents of any contract or other document are not
necessarily complete and, in each instance, reference is made to the copy of
such contract or document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference. The
Registration Statement, including exhibits and schedules thereto, may be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
Commission's Regional Offices located at Seven World Trade Center, Suite 1300,
New York, New York 10048, and Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such materials may also be obtained at
prescribed rates from the Public Reference Section of the Commission,
Washington, D.C. 20549. In addition, registration statements and certain other
filings made with the Commission through its Electronic Data Gathering, Analysis
and Retrieval ("EDGAR") systems are publicly available through the Commission's
site on the Internet's World Wide Web, located at http://www.sec.gov. The
Registration Statement, including all exhibits thereto and amendments thereof,
has been filed with the Commission through EDGAR.
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U.S. PHYSICIANS, INC.
INDEX TO FINANCIAL STATEMENTS
I. U.S. PHYSICIANS, INC.
Report of Independent Public Accountants.................... F-8
Consolidated Balance Sheets as of December 31, 1996 and 1997
and March 31, 1998 (unaudited)............................ F-9
Consolidated Statements of Operations for the years ended
December 31, 1995, 1996 and 1997, and for the three months
ended March 31, 1997 and 1998 (unaudited)................. F-10
Consolidated Statements of Convertible Preferred Stock
Securities, Common Stock to be Issued on Conditional
Affiliation Transactions and Shareholders' Equity
(Deficit) for the years ended December 31, 1995, 1996 and
1997, and for the three months ended
March 31, 1998 (unaudited)................................ F-11
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997, and for the three months
ended March 31, 1997 and 1998 (unaudited)................. F-12
Notes to Consolidated Financial Statements.................. F-13
II. CONDITIONAL AFFILIATION TRANSACTIONS
BONE AND JOINT SPECIALISTS OF WESTERN PENNSYLVANIA, PC
Report of Independent Public Accountants.................... F-35
Balance Sheets as of December 31, 1996 and 1997 and March
31, 1998 (unaudited)...................................... F-36
Statements of Operations for the years ended December 31,
1995, 1996 and 1997, and for the three months ended March
31, 1997 and 1998 (unaudited)............................. F-37
Statements of Owners' Equity for the years ended December
31, 1995, 1996 and 1997, and for the three months ended
March 31, 1998 (unaudited)................................ F-38
Statements of Cash Flows for the years ended December 31,
1995, 1996 and 1997, and for the three months ended March
31, 1997 and 1998 (unaudited)............................. F-39
Notes to Financial Statements............................... F-40
BRYN MAWR UROLOGY ASSOCIATES, INC.
Report of Independent Public Accountants.................... F-44
Balance Sheets as of December 31, 1996 and 1997 and March
31, 1998 (unaudited)...................................... F-45
Statements of Operations and Retained Earnings for the years
ended December 31, 1995, 1996 and 1997, and for the three
months ended March 31, 1997 and 1998 (unaudited).......... F-46
Statements of Cash Flows for the years ended December 31,
1995, 1996 and 1997, and for the three months ended March
31, 1997 and 1998 (unaudited)............................. F-47
Notes to Financial Statements............................... F-48
CENTER FOR WOMEN'S HEALTHCARE, PC AND CORAZON G. GEMIL,
M.D., PC
Report of Independent Public Accountants.................... F-53
Combined Balance Sheets as of December 31, 1996 and 1997 and
March 31, 1998 (unaudited)................................ F-54
Combined Statements of Operations and Owner's Deficit for
the years ended December 31, 1995, 1996 and 1997, and for
the three months ended March 31, 1997 and 1998
(unaudited)............................................... F-55
Combined Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997, and for the three months
ended March 31, 1997 and 1998 (unaudited)................. F-56
Notes to Combined Financial Statements...................... F-57
F-1
<PAGE>
CESARE, METZGER, COYLE AND HENZES, INC.
Report of Independent Public Accountants.................... F-61
Balance Sheets as of December 31, 1996 and 1997 and March
31, 1998 (unaudited)...................................... F-62
Statements of Operations for the years ended December 31,
1995, 1996 and 1997, and for the three months ended March
31, 1997 and 1998 (unaudited)............................. F-63
Statements of Shareholders' Equity for the years ended
December 31, 1995, 1996 and 1997, and for the three months
ended March 31, 1998 (unaudited).......................... F-64
Statements of Cash Flows for the years ended December 31,
1995, 1996 and 1997, and for the three months ended March
31, 1997 and 1998 (unaudited)............................. F-65
Notes to Financial Statements............................... F-66
LEHIGH VALLEY ORTHOPEDICS, INC.
Report of Independent Public Accountants.................... F-70
Balance Sheets as of December 31, 1996 and 1997 and March
31, 1998 (unaudited)...................................... F-71
Statements of Operations and Retained Earnings for the years
ended December 31, 1995, 1996 and 1997, and for the three
months ended March 31, 1997 and 1998 (unaudited).......... F-72
Statements of Cash Flows for the years ended December 31,
1995, 1996 and 1997, and for the three months ended March
31, 1997 and 1998 (unaudited)............................. F-73
Notes to Financial Statements............................... F-74
NETWORK MEDICAL, INC.
Report of Independent Public Accountants.................... F-79
Balance Sheets as of September 30, 1996 and 1997 and January
15, 1998 (unaudited)...................................... F-80
Statements of Operations for the years ended September 30,
1995, 1996 and 1997, and for the period from October 1,
1997 to January 15, 1998 (unaudited)...................... F-81
Statements of Shareholders' Deficit for the years ended
September 30, 1995, 1996 and 1997, and for the period from
October 1, 1997 to January 15, 1998 (unaudited)........... F-82
Statements of Cash Flows for the years ended September 30,
1995, 1996 and 1997, and for the period from October 1,
1997 to January 15, 1998 (unaudited)...................... F-83
Notes to Financial Statements............................... F-84
ORTHOPAEDIC AND SPORTS MEDICINE SPECIALISTS OF THE MAIN
LINE, INC.
Report of Independent Public Accountants.................... F-88
Balance Sheets as of December 31, 1996 and 1997 and March
31, 1998 (unaudited)...................................... F-89
Statements of Operations and Retained Earnings for the years
ended December 31, 1995, 1996 and 1997, and for the three
months ended March 31, 1997 and 1998 (unaudited).......... F-90
Statements of Cash Flows for the years ended December 31,
1995, 1996 and 1997, and for the three months ended March
31, 1997 and 1998 (unaudited)............................. F-91
Notes to Financial Statements............................... F-92
ORTHOPAEDIC SURGERY AND SPORTS MEDICINE, INC.
Report of Independent Public Accountants.................... F-97
Balance Sheets as of December 31, 1996 and 1997 and March
31, 1998 (unaudited)...................................... F-98
Statements of Operations and Retained Earnings for the years
ended December 31, 1995, 1996 and 1997, and for the three
months ended March 31, 1997 and 1998 (unaudited).......... F-99
Statements of Cash Flows for the years ended December 31,
1995, 1996 and 1997, and for the three months ended March
31, 1997 and 1998 (unaudited)............................. F-100
Notes to Financial Statements............................... F-101
F-2
<PAGE>
RJK MEDICAL ASSOCIATES, LTD.
Report of Independent Public Accountants.................... F-105
Balance Sheets as of December 31, 1996 and 1997 and March
31, 1998 (unaudited)...................................... F-106
Statements of Operations and Retained Earnings for the years
ended December 31, 1996 and 1997, and for the three months
ended March 31, 1997 and 1998 (unaudited)................. F-107
Statements of Cash Flows for the years ended December 31,
1996 and 1997, and for the three months ended March 31,
1997 and 1998 (unaudited)................................. F-108
Notes to Financial Statements............................... F-109
SOUTH SHORE ORTHOPEDICS, PA
Report of Independent Public Accountants.................... F-113
Balance Sheets as of March 31, 1997 and 1998................ F-114
Statements of Operations and Retained Earnings for the years
ended March 31, 1996, 1997, and 1998...................... F-115
Statements of Cash Flows for the years ended March 31, 1996,
1997 and 1998............................................. F-116
Notes to Financial Statements............................... F-117
SPORTS MEDICINE AND REHABILITATION CENTER, INC. AND RELATED
COMPANIES
Report of Independent Public Accountants.................... F-121
Combined Balance Sheets as of December 31, 1996 and 1997 and
March 31, 1998 (unaudited)................................ F-122
Combined Statements of Operations for the years ended
December 31, 1995, 1996 and 1997, and for the three months
ended March 31, 1997 and 1998 (unaudited)................. F-123
Combined Statements of Owner's Equity for the years ended
December 31, 1995, 1996 and 1997, and for the three months
ended March 31, 1998 (unaudited).......................... F-124
Combined Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997, and for the three
months ended March 31, 1997 and 1998 (unaudited).......... F-125
Notes to Combined Financial Statements...................... F-126
STEEL VALLEY ORTHOPEDIC ASSOCIATION, INC.
Report of Independent Public Accountants.................... F-130
Balance Sheets as of February 28, 1997 and 1998............. F-131
Statements of Operations and Retained Earnings for the years
ended February 29, 1996 and February 28, 1997 and 1998.... F-132
Statements of Cash Flows for the years ended February 29,
1996 and February 28, 1997 and 1998....................... F-133
Notes to Financial Statements............................... F-134
VALLEY FORGE FACIAL PLASTIC SURGERY/EAR,
NOSE & THROAT ASSOCIATES, LTD.
Report of Independent Public Accountants.................... F-138
Balance Sheets as of September 30, 1996 and 1997 and March
31, 1998 (unaudited)...................................... F-139
Statements of Operations and Retained Earnings for the years
ended September 30, 1995, 1996 and 1997, and for the six
months ended March 31, 1997 and 1998 (unaudited).......... F-140
Statements of Cash Flows for the years ended September 30,
1995, 1996 and 1997, and for the six months ended March
31, 1997 and 1998 (unaudited)............................. F-141
Notes to Financial Statements............................... F-142
F-3
<PAGE>
III. INITIAL PUBLIC OFFERING ("IPO") AFFILIATION TRANSACTIONS
ALAN E. OTTENSTEIN, M.D.
Report of Independent Public Accountants.................... F-146
Combined Balance Sheets as of December 31, 1996 and 1997 and
March 31, 1998 (unaudited)................................ F-147
Combined Statements of Operations and Owner's Equity for the
years ended December 31, 1995, 1996 and 1997, and for the
three months ended March 31, 1997 and 1998 (unaudited).... F-148
Combined Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997, and for the three months
ended March 31, 1997 and 1998 (unaudited)................. F-149
Notes to Combined Financial Statements...................... F-150
ASSOCIATED SURGEONS, PC
Report of Independent Public Accountants.................... F-154
Balance Sheets as of December 31, 1996 and 1997 and March
31, 1998 (unaudited)...................................... F-155
Statements of Operations and Retained Earnings for the years
ended December 31, 1996 and 1997, and for the three months
ended March 31, 1997 and 1998 (unaudited)................. F-156
Statements of Cash Flows for the years ended December 31,
1996 and 1997, and for the three months ended March 31,
1997 and 1998 (unaudited)................................. F-157
Notes to Financial Statements............................... F-158
ASSOCIATES IN UROLOGY, PC
Report of Independent Public Accountants.................... F-162
Balance Sheets as of December 31, 1996 and 1997 and March
31, 1998 (unaudited)...................................... F-163
Statements of Operations and Retained Earnings for the years
ended December 31, 1995, 1996 and 1997, and for the three
months ended March 31, 1997 and 1998 (unaudited).......... F-164
Statements of Cash Flows for the years ended December 31,
1995, 1996 and 1997, and for the three months ended March
31, 1997 and 1998 (unaudited)............................. F-165
Notes to Financial Statements............................... F-166
CURAMED, LLC
Report of Independent Public Accountants.................... F-170
Combined Balance Sheets as of December 31, 1996 and 1997 and
March 31, 1998 (unaudited)................................ F-171
Combined Statements of Operations for the years ended
December 31, 1995, 1996 and 1997, and for the three months
ended March 31, 1997 and 1998 (unaudited)................. F-172
Combined Statements of Owners' Equity for the years ended
December 31, 1995, 1996 and 1997, and for the three months
ended March 31, 1998 (unaudited).......................... F-173
Combined Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997, and for the three months
ended March 31, 1997 and 1998 (unaudited)................. F-174
Notes to Combined Financial Statements...................... F-175
F-4
<PAGE>
DENNIS JAMES BONNER, M.D., LTD.
Report of Independent Public Accountants.................... F-178
Balance Sheets as of December 31, 1996 and 1997 and March
31, 1998 (unaudited)...................................... F-179
Statements of Operations and Retained Earnings for the years
ended December 31, 1995, 1996 and 1997, and for the three
months ended March 31, 1997 and 1998 (unaudited).......... F-180
Statements of Cash Flows for the years ended December 31,
1995, 1996 and 1997, and for the three months ended March
31, 1997 and 1998 (unaudited)............................. F-181
Notes to Financial Statements............................... F-182
NEIL CHESEN, M.D., PC
Report of Independent Public Accountants.................... F-186
Balance Sheets as of December 31, 1996 and 1997 and March
31, 1998 (unaudited)...................................... F-187
Statements of Operations and Retained Earnings (Accumulated
Deficit) for the years ended December 31, 1996 and 1997,
and for the three months ended March 31, 1997 and 1998
(unaudited)............................................... F-188
Statements of Cash Flows for the years ended December 31,
1996 and 1997, and for the three months ended March 31,
1997 and 1998 (unaudited)................................. F-189
Notes to Financial Statements............................... F-190
NEVYAS EYE ASSOCIATES, PC
Report of Independent Public Accountants.................... F-194
Combined Balance Sheets as of December 31, 1996 and 1997 and
March 31, 1998 (unaudited)................................ F-195
Combined Statements of Operations and Owners' Equity for the
years ended December 31, 1995, 1996 and 1997, and for the
three months ended March 31, 1997 and 1998 (unaudited).... F-196
Combined Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997, and for the three months
ended March 31, 1997 and 1998 (unaudited)................. F-197
Notes to Combined Financial Statements...................... F-198
NORTHERN OPHTHALMIC ASSOCIATES, INC.
Report of Independent Public Accountants.................... F-202
Balance Sheets as of November 30, 1996 and 1997 and February
28, 1998 (unaudited)...................................... F-203
Statements of Operations and Retained Earnings for the years
ended November 30, 1995, 1996 and 1997, and for the three
months ended February 28, 1997 and 1998 (unaudited)....... F-204
Statements of Cash Flows for the years ended November 30,
1995, 1996 and 1997, and for the three months ended
February 28, 1997 and 1998 (unaudited).................... F-205
Notes to Financial Statements............................... F-206
NORTHWEST ORTHOPEDIC ASSOCIATES, PC
Report of Independent Public Accountants.................... F-210
Balance Sheets as of December 31, 1996 and 1997 and March
31, 1998 (unaudited)...................................... F-211
Statements of Operations and Retained Earnings for the years
ended December 31, 1995, 1996 and 1997, and for the three
months ended March 31, 1997 and 1998 (unaudited).......... F-212
Statements of Cash Flows for the years ended December 31,
1995, 1996 and 1997, and for the three months ended March
31, 1997 and 1998 (unaudited)............................. F-213
Notes to Financial Statements............................... F-214
F-5
<PAGE>
ONCOLOGY AND HEMATOLOGY ASSOCIATES, PA
Report of Independent Public Accountants.................... F-217
Balance Sheets as of December 31, 1996 and 1997 and March
31, 1998 (unaudited)...................................... F-218
Statements of Operations and Retained Earnings for the years
ended December 31, 1995, 1996 and 1997, and for the three
months ended March 31, 1997 and 1998 (unaudited).......... F-219
Statements of Cash Flows for the years ended December 31,
1995, 1996 and 1997, and for the three months ended March
31, 1997 and 1998 (unaudited)............................. F-220
Notes to Financial Statements............................... F-221
ORTHOPEDIC ASSOCIATES OF PITTSBURGH, INC.
Report of Independent Public Accountants.................... F-225
Balance Sheets as of September 30, 1996 and 1997 and March
31, 1998 (unaudited)...................................... F-226
Statements of Operations for the years ended September 30,
1995, 1996 and 1997, and for the six months ended March
31, 1997 and 1998 (unaudited)............................. F-227
Statements of Shareholders' Equity for the years ended
September 30, 1995, 1996 and 1997, and for the six months
ended March 31, 1998 (unaudited).......................... F-228
Statements of Cash Flows for the years ended September 30,
1995, 1996 and 1997, and for the six months ended March
31, 1997 and 1998 (unaudited)............................. F-229
Notes to Financial Statements............................... F-230
PHILADELPHIA ORTHOPEDIC GROUP, LLP
Report of Independent Public Accountants.................... F-234
Balance Sheets as of December 31, 1997 and March 31, 1998
(unaudited)............................................... F-235
Statements of Operations for the year ended December 31,
1997, and for the three months ended March 31, 1997 and
1998 (unaudited).......................................... F-236
Statements of Owners' Deficit for the year ended December
31, 1997, and for the three months ended March 31, 1998
(unaudited)............................................... F-237
Statements of Cash Flows for the year ended December 31,
1997, and for the three months ended March 31, 1997 and
1998 (unaudited).......................................... F-238
Notes to Financial Statements............................... F-239
PHILADELPHIA URO-GYNECOLOGIC ASSOCIATES, PC
Report of Independent Public Accountants.................... F-243
Balance Sheets as of December 31, 1996 and 1997 and March
31, 1998 (unaudited)...................................... F-244
Statements of Operations and Accumulated Deficit for the
years ended December 31, 1996 and 1997, and for the three
months ended March 31, 1997 and 1998 (unaudited).......... F-245
Statements of Cash Flows for the years ended December 31,
1996 and 1997, and for the three months ended March 31,
1997 and 1998 (unaudited)................................. F-246
Notes to Financial Statements............................... F-247
F-6
<PAGE>
PRIMARY CARE & REHABILITATION, PC
AND MEDICAL CONSULTANTS, PC
Report of Independent Public Accountants.................... F-251
Combined Balance Sheets as of December 31, 1996 and 1997 and
March 31, 1998 (unaudited)................................ F-252
Combined Statements of Operations and Owner's Equity for the
years ended December 31, 1995, 1996 and 1997, and for the
three months ended March 31, 1997 and 1998 (unaudited).... F-253
Combined Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997, and for the three months
ended March 31, 1997 and 1998 (unaudited)................. F-254
Notes to Combined Financial Statements...................... F-255
SUBURBAN PAIN CONTROL
Report of Independent Public Accountants.................... F-259
Balance Sheets as of December 31, 1996 and 1997 and March
31, 1998 (unaudited)...................................... F-260
Statements of Operations and Owner's Equity for the years
ended December 31, 1995, 1996 and 1997, and for the three
months ended March 31, 1997 and 1998 (unaudited).......... F-261
Statements of Cash Flows for the years ended December 31,
1995, 1996 and 1997, and for the three months ended March
31, 1997 and 1998 (unaudited)............................. F-262
Notes to Financial Statements............................... F-263
VINELAND OBSTETRICAL AND GYNECOLOGICAL, PA
Report of Independent Public Accountants.................... F-266
Balance Sheets as of December 31, 1996 and 1997 and March
31, 1998 (unaudited)...................................... F-267
Statements of Operations and Retained Earnings for the years
ended December 31, 1995, 1996 and 1997, and for the three
months ended March 31, 1997 and 1998 (unaudited).......... F-268
Statements of Cash Flows for the years ended December 31,
1995, 1996 and 1997, and for the three months ended March
31, 1997 and 1998 (unaudited)............................. F-269
Notes to Financial Statements............................... F-270
WOMEN'S PHYSICIANS AND SURGEONS, PA
Report of Independent Public Accountants.................... F-275
Balance Sheets as of December 31, 1996 and 1997 and March
31, 1998 (unaudited)...................................... F-276
Statements of Operations and Retained Earnings for the years
ended December 31, 1996 and 1997, and for the three months
ended March 31, 1997 and 1998 (unaudited)................. F-277
Statements of Cash Flows for the years ended December 31,
1996 and 1997, and for the three months ended March 31,
1997 and 1998 (unaudited)................................. F-278
Notes to Financial Statements............................... F-279
F-7
<PAGE>
After the stock split as discussed in Note 3 to the Company's consolidated
financial statements is effected, we expect to be in a position to render the
following audit report.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.
May 26, 1998
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To U.S. PHYSICIANS, Inc.:
We have audited the accompanying consolidated balance sheets of U.S. PHYSICIANS,
Inc. (a Pennsylvania corporation) and subsidiaries as of December 31, 1996 and
1997, and the related consolidated statements of operations, convertible
preferred stock securities, common stock to be issued on conditional affiliation
transactions and shareholders' equity (deficit) and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of U.S. PHYSICIANS, Inc. and
subsidiaries as of December 31, 1996 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has a significant working
capital deficit and an accumulated deficit and has incurred losses since its
inception. Further, the Company's growth strategy will require substantial
additional funds to finance acquisitions, for working capital and for capital
expenditures. These matters raise substantial doubt about the Company's ability
to continue as a going concern. Management plans in regard to these matters are
described in Note 2. The accompanying financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts or amounts and classifications of liabilities that might be necessary
should the Company be unable to continue as a going concern.
F-8
<PAGE>
U.S. PHYSICIANS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
-------------------------
DECEMBER 31, 1998
-------------------------- 1998 PRO FORMA
1996 1997 ACTUAL (NOTE 15)
----------- ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................ $ 2,066,089 $ 1,166,118 $ 1,626,733 $ 4,177,190
Accounts receivable, net......................... -- 320,860 350,076 350,076
Due from Conditional Affiliation Transactions.... -- 937,517 1,386,755 1,386,755
Prepaid expenses and other....................... 47,824 317,445 540,888 540,888
----------- ------------ ----------- -----------
Total current assets......................... 2,113,913 2,741,940 3,904,452 6,454,909
Property and equipment, net........................ 251,177 2,051,840 2,567,114 2,567,114
Investment in Conditional Affiliation
Transactions..................................... 223,806 47,332,155 49,202,410 49,202,410
Intangible assets, net............................. -- 126,501 124,906 124,906
Deferred offering costs............................ -- 1,543,713 2,552,124 2,552,124
Other assets....................................... 42,835 208,956 167,260 167,260
----------- ------------ ----------- -----------
$ 2,631,731 $ 54,005,105 $58,518,266 $61,068,723
=========== ============ =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of notes payable on Conditional
Affiliation Transactions....................... $ -- $ 23,191,005 $21,668,635 $21,668,635
Current portion of long-term debt................ -- 2,202,108 2,394,396 2,394,396
Accounts payable................................. 682,468 947,102 1,165,623 1,165,623
Accrued expenses................................. 734,656 5,686,400 6,808,749 6,808,749
Due to Conditional Affiliation Transactions...... -- 554,131 995,715 995,715
----------- ------------ ----------- -----------
Total current liabilities.................... 1,417,124 32,580,746 33,033,118 33,033,118
----------- ------------ ----------- -----------
Notes payable on Conditional Affiliation
Transactions..................................... -- 9,546,757 9,309,116 9,309,116
----------- ------------ ----------- -----------
Other long-term debt............................... 172,000 2,725,357 2,234,136 7,536,536
----------- ------------ ----------- -----------
Other long-term liabilities........................ 309,241 233,483 219,822 219,822
----------- ------------ ----------- -----------
Series A convertible preferred stock............... 2,169,082 2,179,390 2,181,967 --
----------- ------------ ----------- -----------
Series B convertible preferred stock............... 1,917,752 3,811,131 3,820,620 --
----------- ------------ ----------- -----------
Series C convertible preferred stock............... -- -- 3,921,131 --
----------- ------------ ----------- -----------
Series B convertible preferred stock warrants...... -- 851,000 851,000 --
----------- ------------ ----------- -----------
Common Stock to be issued on Conditional
Affiliation Transactions......................... -- 11,490,903 11,716,413 11,716,413
----------- ------------ ----------- -----------
Commitments and contingencies (Note 14)
Shareholders' equity (deficit):
Common Stock, $.01 par value; 25,000,000 shares
authorized; 513,326, 517,578, 518,015 and
1,726,379 shares issued and outstanding........ 5,134 5,177 5,180 17,263
Additional paid-in capital....................... 386,315 447,262 3,022,217 11,067,478
Common Stock warrants............................ 33,500 223,000 825,000 2,777,400
Accumulated deficit.............................. (3,778,417) (10,089,101) (12,621,454) (14,608,423)
----------- ------------ ----------- -----------
Total shareholders' equity (deficit)......... (3,353,468) (9,413,662) (8,769,057) (746,282)
----------- ------------ ----------- -----------
$ 2,631,731 $ 54,005,105 $58,518,266 $61,068,723
=========== ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
<PAGE>
U.S. PHYSICIANS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------- -----------------------
1995 1996 1997 1997 1998
--------- ----------- ----------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues:
Net patient revenues..................... $ -- $ -- $ 446,224 $ -- $ 387,542
Management fees from Conditional
Affiliation Transactions............... -- -- 2,846,224 222,536 1,771,227
Other revenues........................... -- 69,833 925,637 25,000 150,981
--------- ----------- ----------- --------- -----------
-- 69,833 4,218,085 247,536 2,309,750
Cost of revenues........................... -- -- 1,178,851 22,892 677,506
--------- ----------- ----------- --------- -----------
Gross profit............................... -- 69,833 3,039,234 224,644 1,632,244
Operating expenses:
General and administrative............... 691,740 2,295,202 7,683,728 1,063,278 1,602,754
Depreciation and amortization............ 2,525 5,881 210,398 15,880 114,933
--------- ----------- ----------- --------- -----------
Loss from operations................. (694,265) (2,231,250) (4,854,892) (854,514) (85,443)
Loss in terminated joint venture........... 56,012 528,829 -- -- --
Interest income............................ (80,597) (36,714) (94,361) (18,015) (27,828)
Interest expense........................... 10,688 12,870 1,501,889 70,100 773,234
--------- ----------- ----------- --------- -----------
Net loss................................... $(680,368) $(2,736,235) $(6,262,420) $(906,599) $ (830,849)
========= =========== =========== ========= ===========
Pro forma net loss per common share (Note
3) (unaudited)........................... $ (4.14) $ (0.54)
=========== ===========
Shares used in computing pro forma net loss
per common share (Note 3) (unaudited).... 1,513,070 1,538,456
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-10
<PAGE>
U.S. PHYSICIANS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK SECURITIES, COMMON STOCK
TO BE ISSUED ON CONDITIONAL AFFILIATION TRANSACTIONS AND SHAREHOLDERS' EQUITY
(DEFICIT)
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK SECURITIES
--------------------------------------------------------------------
SERIES A SERIES B SERIES B WARRANTS
---------------------- ---------------------- ------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ---------- --------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994.................. -- $ -- -- $ -- -- $ --
Sale of Series A Preferred Stock............. 1,506,849 2,148,466 -- -- -- --
Accretion of redemption premium on Series A
Preferred Stock............................ -- 10,308 -- -- -- --
Issuance of Common Stock for services
rendered................................... -- -- -- -- -- --
Purchase of Common Stock..................... -- -- -- -- -- --
Net loss..................................... -- -- -- -- -- --
--------- ---------- --------- ---------- ------- --------
Balance at December 31, 1995.................. 1,506,849 2,158,774 -- -- -- --
Sale of Series B Preferred Stock............. -- -- 634,920 1,917,752 -- --
Accretion of redemption premium on Series A
Preferred Stock............................ -- 10,308 -- -- -- --
Sale of Common Stock......................... -- -- -- -- -- --
Issuance of Common Stock for services
rendered................................... -- -- -- -- -- --
Net loss..................................... -- -- -- -- -- --
--------- ---------- --------- ---------- ------- --------
Balance at December 31, 1996.................. 1,506,849 2,169,082 634,920 1,917,752 -- --
Sale of Series B Preferred Stock............. -- -- 611,111 1,855,423 -- --
Accretion of redemption premium on Series A
Preferred Stock............................ -- 10,308 -- -- -- --
Accretion of redemption premium on Series B
Preferred Stock............................ -- -- -- 37,956 -- --
Sale of Common Stock......................... -- -- -- -- -- --
Exercise of Common Stock options............. -- -- -- -- -- --
Issuance of Common Stock warrants in
connection with the Demand Note............ -- -- -- -- -- --
Issuance of Series B warrants in connection
with the Term Loan and the
Term Notes................................. -- -- -- -- 488,890 851,000
Common Stock to be issued in connection with
Conditional Affiliation Transactions....... -- -- -- -- -- --
Net loss..................................... -- -- -- -- -- --
--------- ---------- --------- ---------- ------- --------
Balance at December 31, 1997.................. 1,506,849 2,179,390 1,246,031 3,811,131 488,890 851,000
Sale of Series C Stock (unaudited)........... -- -- -- -- -- --
Accretion of Preferred Stock dividend
(unaudited)................................ -- -- -- -- -- --
Accretion of redemption premium on Series A
Preferred Stock (unaudited)................ -- 2,577 -- -- -- --
Accretion of redemption premium on Series B
Preferred Stock (unaudited)................ -- -- -- 9,489 -- --
Accretion of redemption premium on Series C
Preferred Stock (unaudited)................ -- -- -- -- -- --
Exercise of Common Stock options
(unaudited)................................ -- -- -- -- -- --
Issuance of Common Stock warrants in
connection with the Second Demand Note
(unaudited)................................ -- -- -- -- -- --
Common Stock to be issued in connection with
Conditional Affiliation Transactions
(unaudited)................................ -- -- -- -- -- --
Net loss (unaudited)......................... -- -- -- -- -- --
--------- ---------- --------- ---------- ------- --------
Balance at March 31, 1998 (unaudited)......... 1,506,849 $2,181,967 1,246,031 $3,820,620 488,890 $851,000
========= ========== ========= ========== ======= ========
<CAPTION>
COMMON STOCK TO BE
CONVERTIBLE PREFERRED STOCK SECURITIES ISSUED ON CONDITIONAL
-------------------------------------- AFFILIATION
SERIES C TRANSACTIONS
---------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT
--------- ---------- --------- -----------
<S> <C> <C> <C> <C>
Balance at December 31, 1994.................. -- $ -- -- $ --
Sale of Series A Preferred Stock............. -- -- -- --
Accretion of redemption premium on Series A
Preferred Stock............................ -- -- -- --
Issuance of Common Stock for services
rendered................................... -- -- -- --
Purchase of Common Stock..................... -- -- -- --
Net loss..................................... -- -- -- --
--------- ---------- --------- -----------
Balance at December 31, 1995.................. -- -- -- --
Sale of Series B Preferred Stock............. -- -- -- --
Accretion of redemption premium on Series A
Preferred Stock............................ -- -- -- --
Sale of Common Stock......................... -- -- -- --
Issuance of Common Stock for services
rendered................................... -- -- -- --
Net loss..................................... -- -- -- --
--------- ---------- --------- -----------
Balance at December 31, 1996.................. -- -- -- --
Sale of Series B Preferred Stock............. -- -- -- --
Accretion of redemption premium on Series A
Preferred Stock............................ -- -- -- --
Accretion of redemption premium on Series B
Preferred Stock............................ -- -- -- --
Sale of Common Stock......................... -- -- -- --
Exercise of Common Stock options............. -- -- -- --
Issuance of Common Stock warrants in
connection with the Demand Note............ -- -- -- --
Issuance of Series B warrants in connection
with the Term Loan and the
Term Notes................................. -- -- -- --
Common Stock to be issued in connection with
Conditional Affiliation Transactions....... -- -- 965,622 11,490,903
Net loss..................................... -- -- -- --
--------- ---------- --------- -----------
Balance at December 31, 1997.................. -- -- 965,622 11,490,903
Sale of Series C Stock (unaudited)........... 1,445,784 2,881,693 -- --
Accretion of Preferred Stock dividend
(unaudited)................................ -- -- -- --
Accretion of redemption premium on Series A
Preferred Stock (unaudited)................ -- -- -- --
Accretion of redemption premium on Series B
Preferred Stock (unaudited)................ -- -- -- --
Accretion of redemption premium on Series C
Preferred Stock (unaudited)................ -- 1,039,438 -- --
Exercise of Common Stock options
(unaudited)................................ -- -- -- --
Issuance of Common Stock warrants in
connection with the Second Demand Note
(unaudited)................................ -- -- -- --
Common Stock to be issued in connection with
Conditional Affiliation Transactions
(unaudited)................................ -- -- 18,952 225,510
Net loss (unaudited)......................... -- -- -- --
--------- ---------- --------- -----------
Balance at March 31, 1998 (unaudited)......... 1,445,784 $3,921,131 984,574 $11,716,413
========= ========== ========= ===========
<CAPTION>
SHAREHOLDERS' EQUITY (DEFICIT)
------------------------------------------------------------------------------------
COMMON STOCK TOTAL
COMMON STOCK ADDITIONAL WARRANTS SHAREHOLDERS'
------------------- PAID-IN ------------------ ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL SHARES AMOUNT DEFICIT (DEFICIT)
--------- ------- ---------- ------- -------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994.................. 448,382 $4,484 $ -- -- $ -- $ (291,483) $ (286,999)
Sale of Series A Preferred Stock............. -- -- -- -- -- -- --
Accretion of redemption premium on Series A
Preferred Stock............................ -- -- -- -- -- (10,308) (10,308)
Issuance of Common Stock for services
rendered................................... 26,914 269 99,731 -- -- -- 100,000
Purchase of Common Stock..................... (55,442) (554) (99,731) -- -- (49,715) (150,000)
Net loss..................................... -- -- -- -- -- (680,368) (680,368)
--------- ------- ---------- ------- -------- ------------ -----------
Balance at December 31, 1995.................. 419,854 4,199 -- -- -- (1,031,874) (1,027,675)
Sale of Series B Preferred Stock............. -- -- -- 16,632 33,500 -- 33,500
Accretion of redemption premium on Series A
Preferred Stock............................ -- -- -- -- -- (10,308) (10,308)
Sale of Common Stock......................... 90,198 902 374,098 -- -- -- 375,000
Issuance of Common Stock for services
rendered................................... 3,274 33 12,217 -- -- -- 12,250
Net loss..................................... -- -- -- -- -- (2,736,235) (2,736,235)
--------- ------- ---------- ------- -------- ------------ -----------
Balance at December 31, 1996.................. 513,326 5,134 386,315 16,632 33,500 (3,778,417) (3,353,468)
Sale of Series B Preferred Stock............. -- -- -- 16,009 62,500 -- 62,500
Accretion of redemption premium on Series A
Preferred Stock............................ -- -- -- -- -- (10,308) (10,308)
Accretion of redemption premium on Series B
Preferred Stock............................ -- -- -- -- -- (37,956) (37,956)
Sale of Common Stock......................... 2,287 23 53,617 -- -- -- 53,640
Exercise of Common Stock options............. 1,965 20 7,330 -- -- -- 7,350
Issuance of Common Stock warrants in
connection with the Demand Note............ -- -- -- 5,707 127,000 -- 127,000
Issuance of Series B warrants in connection
with the Term Loan and the
Term Notes................................. -- -- -- -- -- -- --
Common Stock to be issued in connection with
Conditional Affiliation Transactions....... -- -- -- -- -- -- --
Net loss..................................... -- -- -- -- -- (6,262,420) (6,262,420)
--------- ------- ---------- ------- -------- ------------ -----------
Balance at December 31, 1997.................. 517,578 5,177 447,262 38,348 223,000 (10,089,101) (9,413,662)
Sale of Series C Stock (unaudited)........... -- -- 2,571,625 85,137 520,000 -- 3,091,625
Accretion of Preferred Stock dividend
(unaudited)................................ -- -- -- -- -- (650,000) (650,000)
Accretion of redemption premium on Series A
Preferred Stock (unaudited)................ -- -- -- -- -- (2,577) (2,577)
Accretion of redemption premium on Series B
Preferred Stock (unaudited)................ -- -- -- -- -- (9,489) (9,489)
Accretion of redemption premium on Series C
Preferred Stock (unaudited)................ -- -- -- -- -- (1,039,438) (1,039,438)
Exercise of Common Stock options
(unaudited)................................ 437 3 3,330 -- -- -- 3,333
Issuance of Common Stock warrants in
connection with the Second Demand Note
(unaudited)................................ -- -- -- 5,050 82,000 -- 82,000
Common Stock to be issued in connection with
Conditional Affiliation Transactions
(unaudited)................................ -- -- -- -- -- -- --
Net loss (unaudited)......................... -- -- -- -- -- (830,849) (830,849)
--------- ------- ---------- ------- -------- ------------ -----------
Balance at March 31, 1998 (unaudited)......... 518,015 $5,180 $3,022,217 128,535 $825,000 $(12,621,454) $(8,769,057)
========= ======= ========== ======= ======== ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-11
<PAGE>
U.S. PHYSICIANS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------- -------------------------
1995 1996 1997 1997 1998
---------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net loss.......................................... $ (680,368) $(2,736,235) $(6,262,420) $ (906,599) $ (830,849)
Adjustments to reconcile net loss to net cash used
in operating activities--
Depreciation and amortization................. 2,525 5,881 210,398 15,880 114,933
Amortization of debt discount................. -- -- 272,380 -- 165,220
Stock issued for services rendered............ 100,000 12,250 -- -- --
Loss in terminated joint venture.............. 56,012 528,829 -- -- --
Write-off of Investment in Conditional
Affiliation Transactions................... -- -- 1,203,000 -- --
Loss on Repurchased Practices................. -- -- 325,681 -- --
Changes in assets and liabilities--
Accounts receivable........................ -- -- (320,860) (19,573) (29,216)
Due from Conditional Affiliation
Transactions............................. -- -- (937,517) (390,133) (449,238)
Prepaid expenses and other................. (19,818) (28,006) (269,621) (63,641) (223,443)
Other assets............................... -- (42,835) (166,121) (25,993) 91,696
Accounts payable........................... 103,442 579,026 264,634 (511,821) 218,521
Accrued expenses........................... 60,853 387,786 1,612,385 418,496 (497,308)
Due to Conditional Affiliation
Transactions............................. -- -- 554,131 222,108 441,584
---------- ----------- ----------- ----------- -----------
Net cash used in operating activities.... (377,354) (1,293,304) (3,513,930) (1,261,276) (998,100)
---------- ----------- ----------- ----------- -----------
Investing activities:
Purchases of property and equipment............... (16,126) (184,555) (1,727,140) (163,858) (578,533)
Net proceeds from sale of property and
equipment....................................... -- -- 549,492 -- --
Completed Acquisitions............................ -- -- (150,000) -- --
Cash deposits on Conditional Affiliation
Transactions.................................... -- -- (2,124,882) (897,000) (196,778)
Cash deposits on Repurchased Practices............ -- -- (333,000) -- --
Cash deposits returned from Repurchased
Practices....................................... -- -- 165,316 -- --
Investment in joint venture....................... (120,289) (177,002) -- -- --
---------- ----------- ----------- ----------- -----------
Net cash used in financing activities.... (136,415) (361,557) (3,620,214) (1,060,858) (775,311)
---------- ----------- ----------- ----------- -----------
Financing activities:
Proceeds from long-term debt...................... -- -- 4,850,000 -- 800,000
Repayment of long-term debt....................... (90,000) -- (66,188) (7,495) (1,728,364)
Repayments of notes payable on Conditional
Affiliation Transactions........................ -- -- (370,555) -- (2,814,261)
Repayments of notes payable of Repurchased
Practices....................................... -- -- (157,997) -- --
Net proceeds from sale of Common Stock............ -- 375,000 53,640 -- --
Net proceeds from exercise of Common Stock
options......................................... -- -- 7,350 -- 3,333
Repurchase of Common Stock........................ (150,000) -- -- -- --
Net proceeds from sale of Series A Preferred
Stock........................................... 2,148,466 -- -- -- --
Net proceeds from sale of Series B Preferred
Stock........................................... -- 1,951,252 1,917,923 1,917,923 --
Net proceeds from sale of Series C Preferred
Stock........................................... -- -- -- -- 5,973,318
---------- ----------- ----------- ----------- -----------
Net cash provided by financing
activities............................. 1,908,466 2,326,252 6,234,173 1,910,428 2,234,026
---------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents....................................... 1,394,697 671,391 (899,971) (411,706) 460,615
Cash and cash equivalents, beginning of period...... 1 1,394,698 2,066,089 2,066,089 1,166,118
---------- ----------- ----------- ----------- -----------
Cash and cash equivalents, end of period............ $1,394,698 $ 2,066,089 $ 1,166,118 $ 1,654,383 $ 1,626,733
========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-12
<PAGE>
U.S. PHYSICIANS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
1. BUSINESS AND ORGANIZATION:
U.S. PHYSICIANS, Inc. (a Pennsylvania corporation) and its affiliated
professional corporations (the "Company"), is an integrator and manager of
specialist medical practices and ancillary services that, upon completion of the
Initial Affiliation Transactions (as defined below), will have practice
locations in four states in the mid-Atlantic region. The Company, primarily
through affiliation agreements with physician practices, is developing
integrated, multiple specialist physician networks in various health care
service areas in the mid-Atlantic region and surrounding states.
As of March 31, 1998, the Company and its affiliated professional
corporations had entered into Affiliation Agreements under which they have
acquired either the stock or the majority of the assets of 18 physician
practices (the "Conditional Affiliation Transactions"). In consideration, the
selling owners received a combination of cash, notes, convertible notes and
rights to receive shares of the Company's Common Stock in the future.
The Affiliation Agreements for the Conditional Affiliation Transactions
contain a repurchase provision that gives the selling owners an option, in the
event that an initial public offering ("IPO") has not been completed by the
Company by a specified date (the "Repurchase Date"), to repurchase the net
assets of their practice by returning all of the consideration received,
excluding the nonrefundable cash consideration. The repurchase option may be
exercised at any time after the Repurchase Date and expires upon completion of
an IPO. The Repurchase Dates for the 18 Conditional Affiliation Transactions are
as follows: fifteen occur on June 15, 1998 and three occur on June 30, 1998. If
the selling owners exercise their option to repurchase their practice, the
aggregate amount of the cash consideration that would be retained by the selling
owners is $2,321,660.
In accordance with Accounting Principles Board Opinion No. 16, "Accounting
for Business Combinations," ("APB No. 16"), the Conditional Affiliation
Transactions are not considered effective for applying purchase accounting until
the date that the Company completes an IPO (the "Final Closing Date"). Pursuant
to the Affiliation Agreements for the period of time between the closing of the
Affiliation Agreement (the "Initial Closing Date") and the Final Closing Date,
the Company is entitled to a management fee equal to the residual net income or
loss earned by each practice and is responsible for centrally managing the cash
of each practice. Accordingly, the statements of operations for the three months
ended March 31, 1997 and 1998 and the year ended December 31, 1997 include
management fee revenue for the residual net income or loss earned by the
practice for the period from the Initial Closing Date to March 31, 1997, for the
period from January 1, 1998 to March 31, 1998 and for the period from the
Initial Closing Date to December 31, 1997, respectively. The balance sheets as
of December 31, 1997 and March 31, 1998 contain Due to/from Conditional
Affiliation Transactions accounts to reflect the net cash activity for the
respective period.
In addition to the Conditional Affiliation Transactions discussed above,
since January 1, 1997, the Company and its affiliated professional corporations
have entered into Affiliation Agreements to purchase 23 physician practices,
which will close upon the completion of the Company's IPO, as defined (the "IPO
Affiliation Transactions" and, with the Conditional Affiliation Transactions,
the "Initial Affiliation Transactions"). There is no interim management
agreement in place between the Company and the physician practices that are
parties to IPO Affiliation Transactions. In accordance with APB No. 16, the IPO
Affiliation Transactions are not considered effective for applying purchase
accounting until the Company completes its IPO, as defined.
Upon the date that the Company completes an IPO the Company will account
for the Initial Affiliation Transactions in accordance with the Emerging Issues
Task Force of the Financial Accounting Standards Board Issue No. 97-2
"Application of FASB Statement No. 94, Consolidation of All Majority-Owned
Subsidiaries,
F-13
<PAGE>
U.S. PHYSICIANS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
1. BUSINESS AND ORGANIZATION: -- (CONTINUED)
and APB Opinion No. 16, Business Combinations to Physician Practice Management
Entities and Certain Other Entities with Contractual Management Arrangements"
("EITF 97-2"). (See Note 3 -- Principles of Consolidation.)
In addition to the Initial Affiliation Transactions discussed above, the
selling owners of four physician practices (the "Repurchased Practices") that
were acquired between January and September 1997 exercised their repurchase
provisions (See Note 3).
Also, since 1997, the Company has acquired substantially all of the assets
of a medical billings and collection company, a physical therapy practice, and a
multi-county physician contracting network (the "Completed Transactions") (See
Note 5). The assets of the medical billings and collection company were later
sold in May 1998 for nominal consideration.
2. LIQUIDITY:
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As of March 31, 1998, the Company had
a working capital deficit of $29,128,666 and an accumulated deficit of
$12,621,454. Included in the working capital deficit is $21,668,635 for the
current portion of notes payable issued on Conditional Affiliation Transactions
as of March 31, 1998. The Company has incurred losses since its inception and is
subject to those risks associated with companies in the early stages of
development. Substantial financing will be required to continue the Company's
affiliation transactions strategy and to fund operations.
Pursuant to an agreement to be entered into on or about May 27, 1998, the
Company expects to raise $2.6 million through the issuance of convertible bridge
notes (See Note 8) in order to fund the Company's short term working capital
needs and to fund any necessary acquisition or affiliation payments pending
completion of the IPO. In addition, the Company has obtained a commitment for a
$75 million revolving line of credit (See Note 8) with a bank to provide
additional funding for future working capital needs and affiliation transactions
which is contingent upon the completion of the IPO. Available borrowings under
the revolving line of credit are anticipated to be approximately $40.0 million
contingent upon completion of an IPO in June 1998. The Company expects that
adequate financing will be available to fund the Company's working capital needs
and to fund the required acquisition payments. However, there is no assurance
that the Company will be able to obtain sufficient debt or equity financing on
favorable terms or at all. If the Company is unable to secure adequate
financing, its ability to implement its growth strategy will be impaired and its
financial condition and results of operations are likely to be materially
adversely affected.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Statements
The consolidated financial statements for the three months ended March 31,
1997 and 1998 are unaudited, and in the opinion of management, include all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the financial position as of March 31, 1998 and the results
of its operations for the three months ended March 31, 1997 and 1998. The
results of operations for the three months ended March 31, 1998 are not
necessarily indicative of the results to be expected for the entire year.
F-14
<PAGE>
U.S. PHYSICIANS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and all wholly and beneficially owned subsidiaries including its affiliated
professional corporations.
As described in Note 1, the Conditional Transaction and the Initial
Affiliation Transactions are not considered effective for accounting purposes
until the date that the Company completes an IPO (the "Effective Date").
Accordingly for the period of time prior to the Effective Date, the Conditional
Affiliation Transactions are treated as Management Agreements. Under the
Management Agreement the Company is entitled to the residual net income or loss
earned by the Conditional Affiliation Transactions, other than the New York
Conditional Affiliation Transaction, from the Initial Closing Date to the
Effective Date. The New York Affiliation Transaction pays the Company an amount
equal to the Company's costs plus a percentage of such costs.
Upon the date that the Company completes an IPO, the Initial Affiliation
Transactions will be accounted for in accordance with EITF 97-2. Due to laws
restricting the corporate practice of medicine in the states in which the
Company operates, simultaneous with the effective date of the Affiliation
Agreement, the physicians of the physician practice enter into employment
agreements with a single professional corporation in the state in which they
practice. There is a 40-year Management and Services Agreement ("Management
Agreement") in place between the Company and the professional corporation.
Through the Management Agreement, the Company has exclusive authority over
decision making relating to all major ongoing operations of the underlying
professional corporations with the exception of the professional aspects of
medical practice as required by state law. Under the Management Agreement, the
Company establishes annual operating and capital budgets for the professional
corporations and compensation guidelines for the licensed medical professionals.
In addition, the applicable professional corporation (other than the
professional corporation in New York, the "New York PC"), the officers and
directors of which are generally officers of the Company, has the contractual
right to designate, in its sole discretion, at any time, the licensed doctor who
is the owner of the capital stock of the professional corporation ("Nominee
Arrangements"). The Company, through the Nominee Arrangement, has the ability to
establish and implement guidelines for the selection, hiring and firing of
medical professionals. Through the Management Agreement and the Nominee
Arrangements, the Company has significant long-term financial interests in the
professional corporations, the interests in which are unilaterally saleable and
transferable by the Company and fluctuate based upon the actual performance of
the operations of the professional corporations. The Company has established an
other-than-temporary controlling financial interest in each professional
corporation (except with respect to the New York PC) and accordingly, upon
completion of the IPO or the lapse of the repurchase provision, each
professional corporation, (except the New York PC) will be consolidated with the
financial statements of the Company. The two New York Affiliation Transactions
(one Conditional Affiliation Transaction and one IPO Affiliation Transaction)
will continue to be treated as Management Agreements.
All significant intercompany accounts and transactions have been
eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-15
<PAGE>
U.S. PHYSICIANS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
Revenues
Revenues from patients, third party-payors and others are recorded at
established rates, net of provision for bad debts and contractual adjustments,
in the period that services are rendered. Contractual adjustments represent the
difference between charges at established rates and the estimated amount to be
reimbursed.
Management fees from Conditional Affiliation Transactions which closed
prior to December 31, 1997 represent the residual net income or loss (after
deducting the physicians compensation pursuant to the new employment agreements)
of the physician practices that are parties to the Conditional Affiliation
Transactions for the period from the Initial Closing Date to December 31, 1997.
The Company is entitled to this residual net income or loss pursuant to the
Affiliation Agreements (see Notes 1 and 5) and such residual net income or loss
is nonrefundable even if the repurchase provision is exercised. Management fees
from the New York Conditional Affiliation Transaction which closed subsequent to
December 31, 1997 will equal the Company's cost plus a percentage of such costs.
For the year ended December 31, 1997, other revenues consist of $494,794 in
management fees related to the Repurchased Practices, $126,000 in management
fees for other medical providers which are not Initial Affiliation Transactions,
and $304,843 in fees charged to customers for billing and collection services
provided by the Company's wholly owned subsidiary, which was sold in May 1998
(see Note 5).
Accounts Receivable
Accounts receivable primarily consist of receivables from patients,
third-party payors and others. Such amounts are recorded net of contractual
allowances and estimated bad debts. Accounts receivable is net of contractual
allowances and estimated bad debts of $163,005 for the year ended December 31,
1997.
Concentration of Credit Risk
The Company grants credit without collateral to its patients, most of whom
are insured under third-party payor agreements. The Company manages credit risk
with the various public and private insurance providers, as appropriate.
Allowances for doubtful accounts have been made for potential losses, when
appropriate.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is provided using the straight-line method over the estimated useful
lives of the assets which range from three to seven years. Leasehold
improvements are amortized on a straight-line basis over the shorter of the
lease term or estimated useful life of the assets.
Investment in Conditional Affiliation Transactions
As of December 31, 1997, Investment in Conditional Affiliation Transactions
consists of various external costs, including legal, accounting, and other
professional services associated with Conditional Affiliation Transactions and
the consideration paid in connection with the Conditional Affiliation
Transactions which includes $2,124,882 of nonrefundable deposits, $186,861 of
deferred cash payments, $11,624,602 of notes payable, $21,483,715 of convertible
notes payable and $11,490,903 of Common Stock to be issued in the
F-16
<PAGE>
U.S. PHYSICIANS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
future (see Note 5). Subsequent to December 31, 1997, in connection with
extending the Repurchase Date for certain Conditional Affiliation Transactions,
the Company paid additional consideration of $225,000 in notes payable and
$75,000 in convertible notes payable. Internal costs associated with completing
acquisitions have been expensed as incurred. Upon the Final Closing Date of the
Conditional Affiliation Transactions, the Investment in Conditional Affiliation
Transactions will be allocated to the fair value of the tangible assets acquired
and liabilities assumed with any excess allocated to identifiable intangible
assets.
On January 16, 1998, the Final Closing Date occurred for a Conditional
Affiliation Transaction, a multi-county physician contracting network, upon the
lapsing of the repurchase provision. The Affiliation Agreement for the network
was entered into in conjunction with another Conditional Affiliation Transaction
that had the same owners, who exercised their repurchase provision in December
1997 (the "December Repurchase"). The relationship between the network and the
December Repurchase was such that the anticipated future results of this network
was significantly dependent upon the assistance of members of the December
Repurchased Practice. Therefore, in connection with the December Repurchase, the
Company evaluated the recoverability of its costs included in the Investment in
Conditional Affiliation Transactions account. This included a review of
historical and projected operating results as well as an evaluation of the
network's close association with the December Repurchase. Based upon this
review, the Company recorded a charge of $1,203,000 for the year ended December
31, 1997 representing the purchase price consideration of $250,000 in
Affiliation Notes Payable, $275,000 in Convertible Affiliation Notes Payable
(see Note 7), and $678,000 of liabilities assumed in excess of assets.
Management believes that these costs are not recoverable based on the projected
cash flows from this entity. This charge is included in general and
administrative expenses on the accompanying statement of operations.
In connection with the exercise of the repurchase provision by four
Repurchased Practices, the Company reduced the Investment in Conditional
Affiliation Transactions by the previously issued consideration consisting of
$6,199,003 in notes, $1,606,000 in convertible notes, and $4,845,001 in Common
Stock to be issued. In addition, the Company expensed $167,684 in non refundable
cash deposits and $157,997 in payments made on the notes. Such expense amounts,
which are net of cash received from the practices of $165,316, are included in
general and administrative expenses for the year ended December 31, 1997.
Significant Affiliation Agreements
For the year ended December 31, 1997, three of the Conditional Affiliation
Transactions, Bone and Joint Specialists of Western Pennsylvania, PC;
Orthopaedic and Sports Medicine Specialists of the Main Line, Inc.; and Valley
Forge Facial Plastic Surgery/Ear, Nose & Throat Associates, Ltd., generated
10.0%, 10.6% and 10.7%, respectively, of total management fees from Conditional
Affiliation Transactions.
Deferred Offering Costs
Deferred offering costs consist of external costs including legal,
accounting and other professional services which are necessary to complete the
Company's IPO. These costs will be charged against the proceeds from the IPO
upon its successful completion.
Intangible Assets
Assets and liabilities acquired in connection with business combinations
accounted for under the purchase method are recorded at their respective fair
values. The excess of the purchase price over the fair value of the tangible net
assets acquired is amortized on a straight-line basis over the estimated useful
lives of
F-17
<PAGE>
U.S. PHYSICIANS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
the intangible assets, which range from three to 25 years. Intangible assets
include covenants not-to-compete, patient lists and goodwill.
Subsequent to its acquisitions, the Company continually evaluates whether
later events and circumstances have occurred that indicate the remaining
estimated useful life of intangible assets may warrant revision or that the
remaining balance may not be recoverable. When factors indicate that intangible
assets should be evaluated for possible impairment, the Company uses an estimate
of the related undiscounted cash flows over the remaining life of the intangible
asset in measuring whether the intangible asset is recoverable. As of December
31, 1997, management believes that no revision to the remaining useful lives or
write-down of intangible assets is required.
Terminated Joint Venture
Prior to adopting its current physician practice management strategy, the
Company was party to a joint venture which operated a cancer rehabilitation
facility. The Company had a 50% interest in the joint venture and shared in
profits and losses equally. In connection with the joint venture termination in
1996, the Company assumed 100% of certain lease obligations totalling $401,500
and recorded certain other charges totalling $57,503.
Income Taxes
The Company records income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109").
Under SFAS No. 109, the liability method is used in accounting for income taxes.
Under this method, deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax bases of assets and
liabilities and are measured using enacted tax rates and laws that are expected
to be in effect when the differences reverse. A valuation allowance is
established against deferred tax assets unless the Company believes it is more
likely than not that the benefit will be realized.
Stock Split
On June , 1998, the Company effected a 1 to 7.6348 reverse stock split.
All references in the accompanying consolidated financials statements to the
number of common shares and per-share amounts have been retroactively restated
to reflect the reverse stock split.
Statements of Cash Flows Information
For the years ended December 31, 1995, 1996 and 1997, the Company paid $0,
$2,605 and $159,844 in interest, respectively. No taxes were paid.
Disclosures About the Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments" requires disclosure about the fair value of
financial instruments. Carrying amounts of all financial instruments (including
cash and cash equivalents, accounts receivable, accounts payable, accrued
liabilities, notes payable and long-term debt) approximate their fair values.
F-18
<PAGE>
U.S. PHYSICIANS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
Unaudited Pro Forma Net Loss Per Common Share
Pro forma net loss per common share was calculated by dividing net loss by
the weighted average number of common shares outstanding for the respective
periods adjusted for the dilutive effect of common stock equivalents, which
consist of stock options and warrants using the treasury stock method. Pursuant
to the policy of the staff of the Securities and Exchange Commission, the
calculation of shares used in computing pro forma net loss per Common share
includes the Series A and Series B Convertible Preferred Stock which will
convert into 592,101 and 428,413 shares of Common Stock, respectively, at an
assumed IPO price of $14.00, on consummation of the IPO contemplated in the
Prospectus as if they were converted to Common Stock on their original date of
issuance.
Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS
No. 130"). SFAS No. 130 is effective for fiscal years beginning after December
15, 1997. SFAS No. 130 establishes standards for the reporting and display of
comprehensive income in a set of financial statements. Comprehensive income is
defined as the change in net assets of a business enterprise during a period
from transactions generated from non-owner sources. It includes all changes in
equity during a period except those resulting from investments by owners and
distributions to owners. The Company had no material comprehensive income for
the three months ended March 31, 1997 and 1998.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 "Disclosure about Segments of an
Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 applies to
all public companies and is effective for fiscal years beginning after December
15, 1997. SFAS No. 131 requires that business segment financial information be
reported in the financial statements utilizing the management approach. The
management approach is defined as the manner in which management organizes the
segments within the enterprise for making operating decisions and assessing
performance. Management believes that the adoption of SFAS No. 131 will not have
a material impact on the financial statements.
4. RISKS AND UNCERTAINTIES:
The Company's future results of operations involve a number of risks and
uncertainties. Factors that could cause the Company's future operating results
to vary materially from expectations include, but are not limited to, limited
operating history, integration of operations, growth strategy, limited capital,
the need for additional financing and going concern risk, ability to service
debt, government regulation, relationships with third party payors, provision of
medical services, dependence on information systems, dependence on Affiliated
Physicians, the existence of the repurchase option in the Affiliation Agreements
through the date that the Company completes an IPO, competition, dependence on
key personnel and the realizability of intangible assets.
5. COMPLETED AND AFFILIATION TRANSACTIONS:
Completed Transactions
On May 19, 1997, the Company acquired substantially all of the assets of an
independent physical therapy practice for $150,000 in cash. On April 7, 1997, in
consideration for the assumption of certain nominal liabilities, the Company
acquired substantially all of the assets of a business specializing in medical
billings and
F-19
<PAGE>
U.S. PHYSICIANS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
5. COMPLETED AND AFFILIATION TRANSACTIONS: -- (CONTINUED)
collections for medical providers. On April 30, 1998, the Company sold
substantially all of the assets of this business for nominal consideration.
Revenues and net loss for the year ended December 31, 1997 were $305,000 and
$101,000, respectively, and revenues and net loss for the three months ended
March 31, 1998 were $123,000 and $12,000, respectively. Both of these
acquisitions have been accounted for using the purchase method of accounting
with the total purchase price allocated to the fair value of assets and
liabilities. The results of operations of each acquisition are included in the
accompanying statement of operations from each of their respective acquisition
dates.
The following table displays the noncash assets and liabilities that were
consolidated during the year ended December 31, 1997 as a result of the two
acquisitions:
Noncash assets (liabilities)
Property and equipment.................................. $ 37,732
Intangible assets....................................... 129,083
Accounts payable and accrued expenses................... (16,815)
--------
Cash paid................................................. $150,000
========
On January 16, 1998, the Final Closing Date occurred for a Conditional
Affiliation Transaction, a multi-county physician contracting network, upon the
lapsing of the repurchase provision. In connection therewith, the Company
recorded a charge of $1,203,000 for the year ended December 31, 1997
(See Note 3).
Conditional and IPO Affiliation Transactions
During the year ended December 31, 1997, the Company and its affiliated
professional corporations entered into Affiliation Agreements and acquired
either the stock or the majority of the assets of 21 physician practices. The
consideration given by the Company in these acquisitions was a combination of
cash, notes, convertible notes and Common Stock to be issued in the future. Each
of the agreements contains a repurchase provision that gives the selling owners
an option, in the event that an IPO has not been completed by the Company by a
specified date, to repurchase their practice by returning all of the
consideration received excluding the nonrefundable cash consideration. The
repurchase provision was exercised by the selling owners of four of the 21
physician practices. Because of this provision, these transactions are not
considered effective for applying purchase accounting until either the date that
the Company completes an IPO or the repurchase provision lapses (the "Final
Closing Date"). However, for the period of time from the closing of the
agreement (the "Initial Closing Date") through the Final Closing Date, the
Company is entitled to a management fee equal to the residual net income or loss
earned by each practice and is responsible for centrally managing the cash of
each practice. Accordingly, the statements of operations for the three months
ended March 31, 1997 and 1998 and the year ended December 31, 1997 include
management fee revenue for the residual net income or loss earned by the
practice for the period from the Initial Closing Date to March 31, 1997, for the
period from January 1, 1998 to March 31, 1998 and for the period from the
Initial Closing Date to December 31, 1997, respectively. The balance sheets as
of December 31, 1997 and March 31, 1998 contain Due to/from Conditional
Affiliation Transactions accounts to reflect the net cash activity for the
respective period. The balance sheet also reflects an Investment in Conditional
Affiliation Transactions account which includes external transaction costs and
the consideration paid by the Company to the selling owners since legally the
transactions have closed.
As of December 31, 1997, the total consideration issuable by the Company to
the selling owners consists of $2,124,882 in cash, $186,861 of deferred cash
payments, $11,624,602 in notes, $21,483,715 in convertible notes and $11,490,903
in Common Stock to be issued in the future (965,622 shares of Common Stock
F-20
<PAGE>
U.S. PHYSICIANS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
5. COMPLETED AND AFFILIATION TRANSACTIONS: -- (CONTINUED)
assuming an IPO price of $14.00 per share). Subsequent to December 31, 1997, in
connection with extending the Repurchase Date for certain Conditional
Affiliation Transactions, the Company paid additional consideration of $225,000
of notes payable and $75,000 of convertible notes payable. The Affiliation
Agreements provide for a portion of the purchase price to be issued in shares of
the Company's Common Stock upon the closing of an IPO. The Company will issue
Common Stock at the IPO price at a value that is calculated based upon the
Company's total valuation. In the event this value is less than the amount
provided for in the Affiliation Agreements, certain shareholders of the Company
have guaranteed, to the extent of the value of a specified number of shares of
Common Stock, a value of the Common Stock to the selling owners (the "Guarantee
Agreement"). Under the terms of the Guarantee Agreement, if the value of Common
Stock issued pursuant to the Affiliation Transactions does not equal or exceed
the guaranteed value, based on the closing price of the stock, as defined, over
a ten day pricing period that ends two years from the date that the IPO is
completed, these shareholders will transfer shares, subject to a specified
maximum number of shares, with a market value equal to the guaranteed value less
the value during such period. In consideration for the Guarantee Agreement, if
required, these shareholders will receive warrants to purchase 100,000 shares of
Common Stock at an exercise price of 120% at the IPO price or $16.80 (at an
assumed IPO price of $14.00). These warrants, which would expire in June 2002,
were valued at $561,000, based on an independent valuation, and will be recorded
as additional purchase price for the Affiliation Transactions if the Guarantee
Agreement is required. The Common Stock to be issued has been recorded at the
guaranteed value to the selling owners net of a 15% discount due to the
restriction on the sale and transferability of the shares to be issued.
After December 31, 1997, the Company and its affiliated professional
corporations have entered into an Affiliation Agreement and acquired the
majority of the assets of one physician practice. This transaction has the same
repurchase provision as the transactions made prior to December 31, 1997 and
accordingly will not be considered effective for applying purchase accounting
until the Final Closing Date. The total consideration paid by the Company to the
selling owner was $754,250 in notes and $225,510 in Common Stock to be issued in
the future (18,952 shares of Common Stock assuming an IPO stock price of $14.00
per share). The Common Stock to be issued has been recorded at the guaranteed
value to the selling owners net of a 15% discount due to the restriction on the
sale and transferability of the shares to be issued.
In addition to the Conditional Affiliation Transactions discussed above,
since January 1, 1997, the Company has entered into Affiliation Agreements to
purchase 23 physician practices, which will close upon the completion of an IPO
by the Company (the "IPO Affiliation Transactions"). The total purchase price to
be paid by the Company to the selling owners will be cash of $43,907,750 notes
of $17,786,627 and Common Stock of $15,120,438 (1,270,625 shares of Common Stock
assuming an IPO price of $14.00 per share). The Common Stock will be recorded at
the guaranteed value to the selling owners net of a 15% discount due to the
restriction on the sale and transferability of the shares to be issued.
Additional consideration could be paid in connection with the Conditional
and the IPO Affiliation Transactions if specific financial criteria are attained
(see Note 14).
F-21
<PAGE>
U.S. PHYSICIANS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
6. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1997
-------- ----------
<S> <C> <C>
Medical equipment........................................... $ -- $ 386,842
Office equipment............................................ 235,837 1,331,196
Furniture and fixtures...................................... 21,547 229,749
Leasehold improvements...................................... 2,199 267,732
-------- ----------
259,583 2,215,519
Less -- Accumulated depreciation and amortization........... (8,406) (163,679)
-------- ----------
$251,177 $2,051,840
======== ==========
</TABLE>
7. NOTES PAYABLE ON CONDITIONAL AFFILIATION TRANSACTIONS:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Convertible Notes Payable for Conditional Affiliation
Transactions, annual payments of principal through
September 2002, interest of 6% payable annually........... $21,121,285
Notes Payable for Conditional Affiliation Transactions,
annual payments of principal through September 2002,
interest of 6% payable annually........................... 11,616,477
-----------
32,737,762
Less -- Current portion..................................... (23,191,005)
-----------
$ 9,546,757
===========
</TABLE>
In connection with the Conditional Affiliation Transactions (see Note 5),
the Company issued convertible notes (the "Convertible Affiliation Notes") and
subordinated notes (the "Affiliation Notes Payable") to the selling owners.
During 1997, the Company negotiated the extension of the Repurchase Dates for
certain Conditional Affiliation Transactions with the prepayment of $370,555 of
the Convertible Affiliation Notes.
The Convertible Affiliation Notes are payable in five equal annual
installments commencing on the first anniversary date unless the Company files a
Registration Statement for an IPO. If the Company files a Registration
Statement, the Convertible Affiliation noteholder can elect either, (i) to have
all or any portion of the principal and accrued interest paid in full upon the
closing of the IPO, (ii) to have all or any portion of the principal and accrued
interest converted into Common Stock of the Company at the IPO price or (iii) to
maintain the Convertible Affiliation Notes with the original terms. Based upon
elections of the convertible noteholders in response to the Company's filing of
a Registration Statement in November 1997, $20,802,285 of the Convertible
Affiliation Notes will be paid in full upon the closing of the IPO and the
remaining balance of $319,000 will be payable under the original terms. These
amounts have been reflected in the classification of the Convertible Affiliation
Notes in the December 31, 1997 balance sheet.
F-22
<PAGE>
U.S. PHYSICIANS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
7. NOTES PAYABLE ON CONDITIONAL AFFILIATION TRANSACTIONS: -- (CONTINUED)
Maturities of these notes as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
AFFILATION CONVERTIBLE
NOTES AFFILATION
PAYABLE NOTES
----------- -----------
<S> <C> <C>
1998....................................................... $ 2,324,920 20,866,085
1999....................................................... 2,324,920 63,800
2000....................................................... 2,324,920 63,800
2001....................................................... 2,324,920 63,800
2002....................................................... 2,316,795 63,800
----------- -----------
$11,616,475 $21,121,285
=========== ===========
</TABLE>
8. OTHER LONG-TERM DEBT:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1997
-------- ----------
<S> <C> <C>
Term loan, monthly principal payments of $55,556 beginning
May 1999 through April 2002, interest at 12%, net of
original issue discount of $351,050....................... $ -- $1,648,950
Term notes, monthly principal payments of $166,667 beginning
June 1998 through May 1999, interest at 10% through May
1998 and 12% thereafter, net of original issue discount of
$354,570.................................................. -- 1,645,430
Demand note, due on demand or otherwise due in May 1998,
interest at 12% through February 1998 and 15% thereafter,
secured by shares of common stock pledged by the Company's
President................................................. -- 850,000
Note payable to an Officer of the Company, payable in four
quarterly installments commencing on May 1, 1995, with
interest at 6%, payments under the note are only required
to the extent the Company has net profits................. 131,000 131,000
Note payable to an affiliated physician for medical
equipment purchase, payable in monthly installments of
$1,074 through June 2000, interest at 7.5%................ -- 32,614
Note payable to bank, payable in monthly installments of
$803 through February 2000, interest at 9.35%,
collateralized by equipment............................... -- 18,839
Advances from an Officer of the Company, no definitive
repayment terms, with interest at 6%...................... 41,000 41,000
Capital lease obligations................................... -- 559,632
-------- ----------
172,000 4,927,465
Less -- Current portion..................................... -- (2,202,108)
-------- ----------
$172,000 $2,725,357
======== ==========
</TABLE>
In April 1997, the Company entered into a $2,000,000 term loan (the "Term
Loan") with a preferred shareholder, which is secured by substantially all of
the Company's assets. In connection with the IPO contemplated by this
Prospectus, the Term Loan will be due in eight quarterly installments beginning
on September 1, 1998, or otherwise is payable in 36 equal monthly installments
of $55,556 beginning on May 1,
F-23
<PAGE>
U.S. PHYSICIANS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
8. OTHER LONG-TERM DEBT: -- (CONTINUED)
1999 through April 1, 2002. The Term Loan bears interest at 12%, which is
payable monthly. In connection with the Term Loan, the Company issued warrants
to purchase 266,667 shares of Series B Convertible Preferred Stock at an
exercise price of $3.15 per share. The warrants are automatically convertible at
the option of the holder, into warrants to purchase 91,686 shares of Common
Stock at an exercise price of $31.68 per share. The warrants were valued at
$413,000, based on an independent valuation, and have been recorded as an
original issue discount on the Term Loan. On or prior to completion of the IPO
contemplated by this Prospectus (see Note 15), the warrants to purchase 266,667
shares of Series B Convertible Preferred Stock will automatically convert into
warrants to purchase 91,686 shares of Common Stock at an exercise price equal to
the initial public offering price per share. The warrants will expire on the
earlier of April 2007 or four years after the IPO. Based on an independent
valuation, and assuming a $14.00 IPO price per share, the value of the old
warrants exceeds the value of the new warrants by $184,000. This difference will
be recorded as a reduction of the original discount on the Term Loan. The
original issue discount is being amortized as interest expense over the life of
the Term Loan. In addition, the Company is required to comply with various
financial and nonfinancial covenants, the most restrictive of which are
limitations on the assumption of additional non-acquisition related debt,
minimum net worth requirements, as defined, and limitations on capital
expenditures.
In September 1997, the Company issued $2,000,000 of subordinated term notes
(the "Term Notes") to certain common and preferred shareholders. The Term Notes
bear interest at 10% through May 31, 1998 and 12% thereafter. The Term Notes are
payable beginning June 1, 1998 through May 1, 1999 in twelve monthly principal
installments of $166,667. However, in connection with the IPO contemplated by
this Prospectus, the Term Note holders have agreed that the Term Notes will be
due in eight quarterly installments beginning on September 1, 1998. In
connection with the Term Note, the Company issued warrants to purchase 222,223
shares of Series B Convertible Preferred Stock with exercise prices ranging from
45% of the IPO price to $3.15 per share. The warrants are automatically
convertible at the option of the holder into warrants to purchase 76,405 shares
of Common Stock with exercise prices ranging from $0.82 (based on on assumed
$14.00 IPO price) to $3.15. The warrants were valued at $438,000 based on an
independent valuation, and have been recorded as an original issue discount on
the Term Notes. On or prior to completion of the IPO contemplated by this
Prospectus (see Note 15), the warrants to purchase 222,223 shares of Series B
Convertible Preferred Stock will automatically convert into warrants to purchase
76,405 shares of Common Stock at an exercise price equal to the initial public
offering price per share. These warrants expire on the earlier of ten years from
the grant date or four years from completion of an IPO. Based on an independent
valuation, and assuming a $14.00 IPO price per share, the value of the old
warrants exceeded the value of the new warrants by $243,000. This difference
will be recorded as a reduction of original discount on the Term Notes. The
original issue discount is being amortized as interest expense over the
remaining life of the Term Notes. In addition, if the Company has a default
under the terms of the Term Notes, as defined, the Company is required to issue
additional warrants to purchase 58,214 shares of the Company's Common Stock at
an exercise price of $0.08 per share.
In November 1997, the Company issued a $850,000 demand note (the "Demand
Note") which was secured by shares of common stock pledged by the Company's
President. The Demand Note was repaid in January 1998 in connection with the
issuance of the Series C Stock. Interest on the Demand Note accrued at 12%. In
connection with the Demand Note, the Company issued warrants to purchase 5,707
shares of the Company's Common Stock at an exercise price of $0.08 per share.
These warrants, which expire November 25, 2004, were valued at $127,000 and have
been recorded as an original issue discount on the Demand Note. The original
issue discount was expensed as interest expense on the date the Demand Note was
issued since it was due on demand.
F-24
<PAGE>
U.S. PHYSICIANS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
8. OTHER LONG-TERM DEBT: -- (CONTINUED)
In December 1997, the Company entered into an agreement for the sale and
leaseback of certain equipment with a financing company. The Company sold
certain equipment with a net book value of $484,000 for cash proceeds of
$549,552. Monthly payments under the four year capital lease agreement are
$14,000 which includesinterest of 12.3%. The deferred gain of $66,000 is being
amortized over the life of the lease. At December 31, 1997, the unamortized
portion of the deferred gain is included in "accrued expenses".
Long-term debt maturities as of December 31, 1997, are as follows:
1998............................................ $2,202,108
1999............................................ 1,579,547
2000............................................ 816,252
2001............................................ 812,955
2002............................................ 222,223
----------
5,633,085
Less -- Unamortized discount.................... (705,620)
----------
$4,927,465
==========
In January 1998, the Company issued an $800,000 demand note (the "Second
Demand Note") to a preferred shareholder. The Second Demand Note bears interest
of 8%. In connection with the Second Demand Loan, the Company issued warrants to
purchase 5,050 shares of Common Stock at an exercise price of $31.68 per share.
The warrants were valued at $81,000, based on an independent valuation, and have
been recorded as an original issue discount on the Second Demand Loan. On or
prior to completion of the IPO contemplated by this Prospectus (see Note 15),
the Company will change the exercise price of the warrants to the initial public
offering price per share. The warrants expire on January 20, 2008. Based on an
independent valuation, and assuming a $14.00 IPO price per share, the value of
the repriced warrants exceeded the value of the old warrants by $14,100. This
difference will be recorded as interest expense on the date the warrants were
repriced since the Second Demand Note was repaid in January 1998.
On or prior to completion of the IPO contemplated by this Prospectus (see
Note 15), the Company will issue $6,000,000 of convertible notes payable (the
"Convertible Exchange Notes") together with warrants to purchase 200,000 shares
of Common Stock at an exercise price equal to 120% of the initial public
offering price per share in exchange for the cancellation of all Series C
Convertible Prefered Stock and the cancellation of all Common Stock Warrants
previously issued in connection with the sale of the Series C Preferred Stock
(See Note 9). The Convertible Exchange Notes will bear interest at 8%. Principal
and interest payments are due in four quarterly installments commencing fifteen
months after the exchange. The warrants, which expire five years from the date
of the exchange, were valued at $1,125,000 and will be recorded as an original
issue discount on the Convertible Exchange Notes. The original issued discount
will be amortized as interest expense over the life of the Convertible Exchange
Notes. Upon the completion of the Offering contemplated by this Prospectus, at
the election of the lender under the Line of Credit, scheduled payments of
principal and interest under the Convertible Exchange Notes may be made by the
issuance of shares of a new series of convertible preferred stock. This
convertible preferred stock would pay an 8% cumulative, compounded annual
dividend and would be convertible into shares of Common Stock at the option of
the holder, based on 100% of the market price of the Common Stock during a
pricing period immediately prior to the conversion and would be mandatorily
convertible in August 2000.
Pursuant to an agreement to be entered into on or about May 27, 1998 (see
Note 15), the Company expects to issue $2,550,000 of convertible notes payable
(the "Convertible Bridge Notes"). The Convertible Bridge Notes will bear
interest at 4.82%. Principal and accrued interest will be due on May 31, 1999.
In
F-25
<PAGE>
U.S. PHYSICIANS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
8. OTHER LONG-TERM DEBT: -- (CONTINUED)
connection therewith, such shareholders also will receive warrants to purchase a
number of shares of Common Stock equal to 50% of the number of shares of Common
Stock issuable upon conversion of the Convertible Bridge Notes with an exercise
price of 120% of the IPO price per share. At an assumed IPO Price of $14.00 per
share, such shareholders will receive warrants to purchase 91,071 shares at an
exercise price of $16.80 per share. These warrants, which expire five years from
the date of issuance, were valued at $542,000, based on an independent valuation
and assuming a $14.00 IPO price per share, and will be recorded as an original
issue discount on the Convertible Bridge Notes. The original issue discount will
be expensed as interest expense over the life of the Convertible Bridge Notes.
The Convertible Bridge Notes are mandatorily convertible into 182,143 shares of
Common Stock, subject to adjustment as defined, upon completion of the initial
public offering (assuming an IPO price of $14.00 per share).
In May 1998, the Company entered into a commitment for a $75 million
revolving line of credit (the "Line of Credit") that is senior to all other
indebtedness. Borrowings under the Line of Credit are available upon the
completion of an IPO. The Line of Credit bears interest at resetting rates, as
selected by the Company, based on various rate alternatives and the Company's
level of compliance with certain financial covenants, as defined. In addition to
interest and other customary fees, the Company is obligated to remit a fee of
0.5% per year on unused commitments, payable quarterly. The Line of Credit
becomes due and payable in full three years from the completion of an IPO. The
Company is required to comply with various financial and nonfinancial covenants,
the most restrictive of which are specified income and debt related ratios and
restrictions on the payment of dividends, acquisitions and the sale of property
and equipment, among other items as defined. The borrowings available under the
Line of Credit are also contingent upon the Company meeting certain financial
ratios and other criteria. Available borrowings under the Line of Credit are
anticipated to be $40.0 million contingent upon completion of an IPO in June
1998.
9. CONVERTIBLE PREFERRED STOCK:
Series A, Series B and Series C Convertible Preferred Stock
The Company is authorized to issue 1,506,849 shares of Series A Convertible
Preferred Stock ("Series A Preferred Stock"), 1,830,158 shares of Series B
Convertible Preferred Stock ("Series B Preferred Stock") and 1,445,784 shares of
Series C Convertible Preferred Stock ("Series C Preferred Stock").
In January 1995, the Company sold 1,506,849 shares of Series A Preferred
Stock for $2,148,466, net of expenses of $51,534. The Series A Preferred Stock
is convertible, at any time, at the holder's option into an aggregate of 592,101
shares of Common Stock, subject to adjustment as defined. The holders of Series
A Preferred Stock are entitled to cumulative quarterly dividends at the per
annum rate of $0.073 per share. No dividends have ever been declared on the
Series A Preferred Stock.
In December 1996 and February 1997, the Company sold 1,246,031 shares of
Series B Preferred Stock for $3,869,175, net of expenses of $55,825. The Series
B Preferred Stock is convertible, at any time, at the holder's option into an
aggregate of 428,413 shares of Common Stock, subject to adjustment as defined.
The holders of Series B Preferred Stock are entitled to cumulative quarterly
dividends at the per annum rate of $0.1575 per share. No dividends have ever
been declared on the Series B Preferred Stock. The holder of Series B Preferred
Stock also received warrants to purchase 32,641 shares of Common Stock at an
exercise price of $24.05 per share. The warrants were valued at $96,000, based
on an independent reduction, and have been recorded as a discount on the Series
B Preferred Stock. On or prior to completion of the IPO contemplated by this
Prospectus (See Note 15), the Company will change the exercise price of the
warrants to the initial public offering price per share. The warrants will
expire on December 31, 1999. Based upon an independent valuation, and assuming a
$14.00 IPO price per share, the increase in value of the new warrants of $80,700
will be recorded as a discount on the Series B Preferred Stock.
F-26
<PAGE>
U.S. PHYSICIANS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
9. CONVERTIBLE PREFERRED STOCK:--(CONTINUED)
In January 1998, the Company sold 1,445,784 shares of Series C Preferred
Stock for $5,973,318 net of expenses of $26,686. The Series C Preferred Stock
was convertible, at any time, at the holder's option into shares of Common Stock
based upon a conversion price, subject to adjustment, as defined. Based upon the
conversion features of the Series C Preferred Stock, the holders of the Series C
Preferred Stock were entitled to receive common stock with a value of $8,571,429
at the completion of the IPO. The holders of the Series C Preferred Stock also
received warrants to purchase 52,392 shares of Common Stock at an exercise price
of $31.68 per share which expire on December 31, 2000. The holders of the Series
C Preferred Stock were also entitled to receive additional warrants on February
27, 1998 and May 29, 1998 to purchase 19,647 and 39,294 shares of Common Stock,
respectively, at an exercise price of $31.68 per share, subject to adjustment as
defined, if the Company had not completed an IPO as of those dates. The warrants
which were issued and anticipated to be issued were valued at $375,000, based on
an independent valuation. Upon the sale of the Series C Preferred Stock, these
warrants and the in the money value of $2,571,429 associated with the conversion
feature of the Series C Preferred Stock, were recorded as a discount on the
Series C Preferred Stock.
In connection with the issuance of the Series C Preferred Stock, the
Company authorized the payment to the holders of the Series A and Series B
Preferred Stock of accrued dividends upon conversion to Common Stock.
Accordingly, the declaration of the dividend has been recognized and accrued for
in the financial statements as of and for the period March 31, 1998. The holders
of the Series A and Series B Preferred Stock have agreed to forgive these
dividends in the event the Company completes an IPO by June 15, 1998. In event
that an IPO is not completed by July 15, 1998, the dividends are payable upon
conversion.
On or prior to completion of the IPO contemplated by this Prospectus, the
holders of the Series C Preferred Stock will cancel their shares of Series C
Preferred Stock for $6,000,000 of Convertible Exchange Notes. In connection with
this transaction, the previously issued warrants will be canceled and the
holders of the Convertible Exchange Notes will receive warrants to purchase
200,000 shares of Common Stock at an exercise price equal to 120% of the initial
public offering price per share (see Note 8). In connection with this
transaction, the Company will record a dividend of $2,050,250 that will reduce
net income available to common shareholders.
Immediately prior to the consummation of an IPO of the Company's Common
Stock, as defined, all shares of Series A Preferred Stock and Series B Preferred
Stock will convert into 592,101 and 428,413 shares of Common Stock,
respectively, subject to adjustment as defined. In the event that an IPO is not
completed by February 1, 2000, the Company is required to redeem any outstanding
Series A Preferred Stock and Series B Preferred Stock upon written request of
two-thirds of the holders. The redemption price is equal to the aggregate stated
value of Series A Preferred Stock ($1.46 per share) and Series B Preferred Stock
($3.15 per share) plus dividends declared but unpaid. The Series A and Series B
(and Series C at March 31, 1998) Preferred Stock value in the accompanying
consolidated balance sheet reflects the original investment, less transaction
expenses plus the accretion recorded. The accretion is recognized to record the
Preferred Stock at the per share redemption value as of the redemption date.
The holders of the Series A and Series B Preferred Stock are entitled to
one vote for each share of Common Stock into which the Series A and Series B
Preferred Stock is convertible. The Series A and Series B Preferred Stock is
senior to Common Stock in liquidation and has a liquidation preference equal to
the aggregate stated value of Series A and Series B Preferred Stock plus accrued
and unpaid dividends, whether declared or not.
F-27
<PAGE>
U.S. PHYSICIANS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
9. CONVERTIBLE PREFERRED STOCK: -- (CONTINUED)
Series B Convertible Preferred Stock Warrants
In April 1997, in connection with the $2,000,000 Term Loan (see Note 8) the
Company issued warrants to purchase 266,667 shares of Series B Preferred Stock
at an exercise price of $3.15 per share. In September 1997, in connection with
the $2,000,000 Term Notes (see Note 8), the Company issued warrants to purchase
222,223 shares of Series B Preferred Stock at an exercise price of $3.15 per
share as to 166,667 shares and 45% of the IPO price, as defined, as to 55,556
shares. On or prior to completion of the IPO contemplated by this Prospectus
(see Note 15), the Series B Warrants issued with the Term Loan and the Term
Notes will automatically convert into warrants to purchase 91,686 and 76,405
shares of Common Stock, respectively, with an exercise price equal to the
initial public offering price per share.
10. SHAREHOLDERS' EQUITY:
Common Stock to be Issued
In connection with the Conditional Affiliation Transactions which occurred
between January 1, 1997 and December 31, 1997 (see Note 5), common shares valued
at $11,490,903 (965,622 shares of Common Stock assuming an IPO price of $14.00
per share) will be issued no later than the Final Closing Date. As previously
discussed, the Guarantee Agreement may require certain shareholders to transfer
shares to the selling owners if the Company's stock price does not achieve a
minimum value over a two year period, as defined (see Note 5). The Common Stock
to be issued has been recorded at the guaranteed value to the selling owners net
of a 15% discount due to restrictions on the sale and transferability of the
shares to be issued.
Stock Options
In October 1997, the Company ceased granting options under the U.S.
PHYSICIANS, Inc. 1995 Company Stock Option Plan (the "Company Plan") and the
U.S. PHYSICIANS, Inc. 1995 Affiliate Stock Option Plan (the "Affiliate Plan"),
for which there were 294,705 shares available for grant under the Company Plan
and 130,980 shares available under the Affiliate Plan. Simultaneously, the
Company established the 1997 Stock Incentive Plan (the "Incentive Plan") which
provides for the grant of options to employees of the Company and affiliates, as
defined. On or prior to the completion of the IPO, the number of shares
available for grant under the Incentive Plan will be increased from 163,725 to
1,574,315. Stock options are granted at an exercise price equal to the fair
value of the Common Stock as of the grant date and expire ten years from the
date of grant.
F-28
<PAGE>
U.S. PHYSICIANS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
10. SHAREHOLDERS' EQUITY: -- (CONTINUED)
The following summarizes the activity for the Company's stock option plans:
<TABLE>
<CAPTION>
WEIGHTED
EXERCISE PRICE AVERAGE AGGREGATE
OPTIONS PER SHARE EXERCISE PRICE PROCEEDS
--------- -------------- -------------- ----------
<S> <C> <C> <C> <C>
Balance, July 14, 1994 and December
31, 1994.......................... -- $ -- $ -- $ --
Granted........................... 27,850 3.74 3.74 104,189
--------- ------------ ------ ----------
Balance, December 31, 1995.......... 27,850 3.74 3.74 104,189
Granted........................... 64,394 3.74-24.05 7.18 461,579
Canceled.......................... (3,536) 3.74 3.74 (13,230)
--------- ------------ ------ ----------
Balance, December 31, 1996.......... 88,708 3.74-24.05 6.26 552,538
Granted........................... 208,690 24.05-57.26 24.89 5,192,642
Exercised......................... (1,965) 3.74 3.74 (7,350)
Canceled.......................... (29,206) 3.74-38.17 18.63 (544,566)
--------- ------------ ------ ----------
Balance, December 31, 1997.......... 266,227 $ 3.74-57.26 $19.55 $5,193,264
========= ============ ====== ==========
</TABLE>
Subsequent to December 31, 1997, the Company repriced options to purchase
191,271 shares of Common Stock with exercise prices ranging from $24.05 to
$57.26, granted new options to purchase 860,778 shares of Common Stock with an
exercise price equal to the IPO Price, cancelled option to purchase 24,953
shares of Common Stock with exercise prices ranging from $7.63 to $24.05 and an
employee exercised an option to purchase 437 shares of Common Stock at an
exercise price of $7.63.
The following table summarizes information relating to the Company's stock
option plans based upon each exercise price:
WEIGHTED
OPTIONS AVERAGE OPTIONS
OUTSTANDING AT REMAINING EXERCISABLE AT
OPTION DECEMBER 31, CONTRACTUAL DECEMBER 31,
EXERCISE PRICES 1997 LIFE (YEARS) 1997
- --------------- ---------------- ------------ ----------------
$ 3.74 32,304 8.27 1,746
$ 7.63 38,659 8.77 8,411
$24.05 167,759 9.51 18,571
$26.49 26,196 9.58 --
$30.54 982 9.69 --
$57.26 327 9.58 --
------- ---- ------
266,227 9.26 28,728
======= ==== ======
The Company accounts for all of its option plans under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB No. 25"), under which no compensation cost has been recognized. In 1995,
the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
No. 123"). SFAS No. 123 establishes a fair value based method of accounting for
stock-based compensation plans. This statement also applies to transactions in
which an entity issues its equity instruments to acquire goods or services from
non-employees. SFAS No. 123 requires that an employer's financial statements
include certain disclosures about stock-based employee compensation arrangements
regardless of the method used to account for the plan. The Company's adoption of
EITF 97-2 will not impact the Company's compliance with APB No. 25 or SFAS No.
123. Had the Company recognized compensation cost for its stock option plans
consistent with the provisions of SFAS No.
F-29
<PAGE>
U.S. PHYSICIANS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
10. SHAREHOLDERS' EQUITY: -- (CONTINUED)
123, the Company's net loss in the years ended December 31, 1995, 1996 and 1997
would have been increased to the following pro forma amounts:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1996 1997
--------- ----------- -----------
<S> <C> <C> <C>
Net loss, as reported.................... $(680,368) $(2,736,235) $(6,262,420)
Pro forma net loss....................... (681,050) (2,759,853) (6,624,458)
</TABLE>
The weighted average fair value of the options granted during the years
ended December 31, 1995, 1996 and 1997 is estimated as $1.07, $2.29 and $7.94
per share, respectively. The fair value of each option is estimated on the date
of grant using the Black-Scholes option pricing model with the following
assumptions:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1996 1997
--------- ----------- -----------
<S> <C> <C> <C>
Risk-free interest rate.................. 5.7% 6.5% 6.4%
Expected dividend yield.................. 0.0% 0.0% 0.0%
Expected life............................ 6 years 6 years 6 years
</TABLE>
In accordance with SFAS No. 123 no volatility factor was assumed since the
Company is not a public entity.
Common Stock Warrants
In connection with the December 1996 and February 1997 Series B Preferred
Stock issuances (see Note 9), the Company granted to the holders warrants to
purchase 16,632 and 16,009 shares of Common Stock, respectively, at an exercise
price of $24.05 per share. The warrants expire on December 31, 1999. On or prior
to completion of the IPO contemplated by this Prospectus (see Note 15), the
Company will change the exercise price of the warrants to the initial public
offering price per share.
In connection with the Demand Note issued in November 1997 (see Note 8),
the Company issued warrants to purchase 5,707 shares of Common Stock at an
exercise price of $0.08 per share. These warrants expire on November 25, 2004.
In connection with the Second Demand Note issued in January 1998 (see Note
8), the Company issued warrants to purchase 5,050 shares of Common Stock at an
exercise price of $31.68 per share. These warrants expire on January 18, 2008.
On or prior to completion of the IPO contemplated by this Prospectus (see Note
15), the Company will change the exercise price of the warrants to the initial
public offering price per share (see Note 9).
In connection with the January 1998 issuance of the Series C Preferred
Stock, the Company issued warrants to purchase 52,392 shares of Common Stock at
an exercise price of $31.68 per share (See Note 9). The warrants expire on
December 31, 2000. On February 27, 1998, the holders of the Series C Preferred
Stock received additional warrants to purchase 19,647 shares of Common Stock at
an exercise price of $31.68, subject to adjustment as defined, as the Company
had not completed an IPO as of that date. The holders of the Series C Preferred
Stock were entitled to receive additional warrants to purchase 39,294 shares of
Common Stock at an excerise price of $31.68 per share, subject to adjustment as
defined, on May 29, 1998 if the Company has not completed an IPO by this date.
On or prior to completion of the IPO contemplated by this Prospectus, the
holders of the Series C Preferred Stock will cancel their shares for the
Convertible Exchange Notes and all of their warrants will be canceled. The
holders of the Convertible Exchange Notes will receive warrants to purchase
200,000 shares of Common Stock at an exercise price equal to 120% of the IPO
price. These warrants will expire five years from the date of issuance
(See Note 8).
F-30
<PAGE>
U.S. PHYSICIANS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
11. INCOME TAXES:
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1995 1996 1997
--------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal................................................. $ -- $ -- $ --
State................................................... -- -- --
--------- ---------- ----------
Total current provision.............................. -- -- --
--------- ---------- ----------
Deferred:
Federal................................................. (200,563) (854,184) (1,616,538)
State................................................... (38,933) (165,812) (176,295)
--------- ---------- ----------
Total deferred benefit............................... (239,496) (1,019,996) (1,792,833)
Increase in valuation allowance........................... 239,496 1,019,996 1,792,833
--------- ---------- ----------
$ -- $ -- $ --
========= ========== ==========
</TABLE>
At December 31, 1997, the Company has net operating loss carryforwards
which begin to expire in 2009. Since the realization of the tax benefit
associated with these carryforwards is not assured, a valuation allowance was
recorded as required by SFAS No. 109. The Tax Reform Act of 1986 contains
provisions that may limit the net operating loss carryforwards available to be
used in any given year in the event of significant changes in ownership.
The effective tax rate on income before income taxes is reconciled to
statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Statutory federal rate...................................... (34.0)% (34.0)% (34.0)%
State income taxes, net of federal income tax benefit....... (6.6) (6.6) (6.6)
Valuation allowance......................................... 40.6 40.6 40.6
----- ----- -----
-- % -- % -- %
===== ===== =====
</TABLE>
The following is a summary of the deferred income tax assets and
liabilities:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1997
---------- ----------
<S> <C> <C>
Deferred tax assets:
Joint venture............................................. $ 163,055 $ 117,209
Accrued vacation.......................................... 22,328 85,859
Other..................................................... -- 312,702
Net operating losses...................................... 1,093,140 2,738,358
---------- ----------
1,278,523 3,254,128
Gross deferred tax liabilities.............................. (19,031) (167,948)
Less -- Valuation allowance................................. (1,259,492) (3,086,180)
---------- ----------
$ -- $ --
========== ==========
</TABLE>
12. EMPLOYEE BENEFIT PLAN:
In June 1997, the Company adopted a 401(k) defined contribution plan for
eligible employees. Employees are eligible to participate in the plan provided
that they have completed one year of service and
F-31
<PAGE>
U.S. PHYSICIANS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
12. EMPLOYEE BENEFIT PLAN: -- (CONTINUED)
have attained the age of 21. Employer matching contributions are discretionary
and determined on an annual basis. Employee contributions are fully vested while
employer contributions vest ratably over seven years. For the year ended
December 31, 1997, the Company contributed $17,549.
13. RELATED PARTY TRANSACTIONS:
A director of the Company is currently Managing Director of a law firm
which provides legal services to the Company. During the years ended December
31, 1996 and 1997, legal services of $165,553 and $197,705, respectively were
provided by this firm.
14. COMMITMENTS AND CONTINGENCIES:
Lease Obligations
The Company leases office space and certain equipment under noncancellable
operating lease agreements. Rental expense under noncancellable operating leases
for the years ended December 31, 1995, 1996 and 1997 was $20,836, $117,060 and
$225,751, respectively.
At December 31, 1997, minimum annual rental commitments under
noncancellable operating leases are as follows:
1998.............................................. $350,235
1999.............................................. 342,212
2000.............................................. 338,060
2001.............................................. 348,900
2002.............................................. 195,865
Thereafter........................................ 82,912
Litigation
In the normal course of business, the Company is a party to various claims
and legal proceedings. Although the ultimate outcome of these matters is
presently not determinable, management of the Company, after consultation with
legal counsel, does not believe that the resolution of these matters will have a
material effect upon the Company's financial position of results or operations.
The Company received a letter dated December 22, 1997 from counsel to
Orthopedic Associates of Lancaster and its physician shareholders (collectively,
"OAL"), with which the Company had previously entered into an Affiliation
Transaction that was subsequently terminated (See Note 3). In that letter, OAL
makes certain claims against the Company, including intentional
misrepresentations as to factual matters (including misrepresentations in the
initial filing of the Registration Statement of which this Prospectus is a
part), fraudulent inducement, misappropriation of funds and certain other breach
of contract claims. OAL has made an initial claim for damages and has reserved
the right to make additional claims. The Company has had discussions with
representatives of OAL in an attempt to resolve these issues amicably, but no
resolution has been achieved to date. Although the Company believes that the
claims of OAL are without merit, and intends to defend itself vigorously and
assert counterclaims if an amicable resolution cannot be reached, there is no
assurance that OAL will not initiate litigation against the Company based on the
claims set forth in that letter and possibly other claims, or that such claims
will be resolved on terms favorable to the Company.
The Company and its affiliated professional corporations maintain insurance
with respect to medical malpractice risks on an occurrence basis in amounts
believed to be customary. Management is not aware of any outstanding claims or
unasserted claims probable of assertion against it or its affiliated
professional corporations that would have a material impact on the Company's
financial position or results of operations.
The Pennsylvania Medical Professional Liability Catastrophic Loss Fund (the
"CAT Fund"), an agency fund of the Commonwealth of Pennsylvania, acts as a
service agent to facilitate the payment of medical malpractice claims exceeding
the primary layer of professional liability insurance carried by physicians and
other health care providers practicing in Pennsylvania. The CAT Fund policies
are retrospectively rated on a claims-made basis. The CAT Fund levies health
care provider surcharges, as a percentage of insurance premiums for basic
coverage, to pay claims and administrative expenses on behalf of CAT Fund
participants.
The CAT Fund is significantly underfunded and the Commonwealth has
indicated that the unfunded liability will be funded exclusively through
surcharge assessments in future years as claims are settled and paid. No
provision has been made for any future CAT Fund assessments in the accompanying
financial statements as the Company's portion of the CAT Fund unfunded liability
could not be reasonably estimated.
F-32
<PAGE>
U.S. PHYSICIANS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
14. COMMITMENTS AND CONTINGENCIES: -- (CONTINUED)
Employment Agreements
The Company has employment agreements with certain of its key executive
management. The agreements provide for minimum levels of compensation during
current and future years and are subject to adjustment, as defined. In addition,
the agreements provide for a lump sum payment, as defined, upon termination
without cause and change in control. The following table summarizes the
aggregate amounts the Company is obligated to pay to those employees as of
December 31, 1997 based on these agreements:
1998.............................................. $842,532
1999.............................................. 547,115
2000.............................................. 118,149
Contingent Consideration in Affiliation Transactions
In connection with certain Conditional Affiliation Transactions and IPO
Affiliation Transactions (see Note 5), the Company has entered into contractual
arrangements whereby cash or Common Stock may be issued to former owners of
acquired businesses upon attainment of specified financial criteria primarily
over periods of one to three years as set forth in the respective agreements.
The amount of the cash or Common Stock to be issued cannot be fully determined
until the periods expire and the attainment of criteria is established. If the
criteria are attained, but not exceeded, the amount of cash or Common Stock
which could be paid or issued under all Conditional Affiliation Transactions and
IPO Affiliation Transactions is $11,673,000. If the maximum targets are
achieved, the amount of cash or Common Stock which could be paid or issued is
$25,554,000, respectively. The Company will account for additional
consideration, when the specified financial criteria are achieved and it is
probable it will be paid, as additional purchase price for the related
acquisitions.
Health Care Regulatory Environment and Reliance on Government Programs
The health care industry in general and the services that the Company
provides are subject to extensive federal and state laws and regulations.
Additionally, a portion of the Company's net revenue is from payments by
government-sponsored health care programs, principally Medicare and Medicaid,
and is subject to audit and adjustments by applicable regulatory agencies.
Failure to comply with any of these laws or regulations, the results of
regulatory audits and adjustments, or changes in the amounts payable for the
Company's services under these programs could have a material adverse effect on
the Company's financial position and results of operations.
Year 2000 Compliance
The Company's business may be adversely affected if the Company and its
affiliated PCs and/or other organizations with which the Company and its
affiliated PCs do business, particularly fiscal intermediaries under the
Medicare program and other third-party payors, are unsuccessful in completing in
a timely manner the conversion to applications that can process year 2000 dates.
The Company's financial information system will not require any modification to
be year 2000 compliant. The Company's practice management information system has
recently been upgraded to be year 2000 compliant. The upgraded version is
currently being tested by its third-party vendor and is expected to be released
in September 1998 and fully implemented by the end of 1998. Until the Company's
systems have been implemented in all of the Affiliated Practices, certain of the
Affiliated Practices' systems may not be year 2000 compliant. The Company
intends to schedule the implementation of its systems in Affiliated Practices so
that substantially all of the systems utilized by Affiliated Practices will be
year 2000 compliant by the end of 1999. The Company has initiated communications
with the primary payors from which it receives reimbursement, such as Blue
Cross/Blue Shield and Medicare. There is no assurance that the systems of such
payors or of other companies with which the Company has significant
relationships will be made year 2000 compliant in a timely manner or that a
failure by
F-33
<PAGE>
U.S. PHYSICIANS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
14. COMMITMENTS AND CONTINGENCIES: -- (CONTINUED)
any such payor or other company to make its systems year 2000 compliant will not
have a material adverse effect on the Company.
15. UNAUDITED PRO FORMA MARCH 31, 1998 BALANCE SHEET:
The unaudited pro forma balance sheet at March 31, 1998 reflects the
following transactions which will occur on or prior to the completion of the IPO
contemplated by this Prospectus: (i) the automatic conversion of the Series A
and Series B Convertible Preferred Stock into Common Stock; (ii) the automatic
conversion of all outstanding warrants to purchase 488,890 shares of Series B
Convertible Preferred Stock into warrants to purchase 168,091 shares of Common
Stock at an exercise price equal to the initial public offering price per share;
(iii) the exercise of the outstanding warrant to purchase 5,707 shares of Common
Stock at an exercise price of $.08 per share; (iv) the issuance of $2,550,000 of
Convertible Bridge Notes and the automatic conversion of the Convertible Bridge
Notes into 182,143 shares of Common Stock (assuming a $14.00 IPO price per
share); (v) the repricing of an aggregate of 37,691 shares of Common Stock at
original exercise prices of $24.05 to $31.68 per share to a new exercise prices
equal to the initial public offering price per share and (vi) the cancellation
of all shares of Series C Preferred Stock and warrants previously issued in
exchange for $6,000,000 of Convertible Exchange Notes and new warrants.
The following table shows the effect of each adjustment:
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
1998 --------------------------------------------------------------------- 1998
ACTUAL (I) (II) (III) (IV) (V) (VI) PRO FORMA
----------- ---------- -------- -------- ---------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents..... $ 1,626,733 $ -- $ -- $ 457 $2,550,000 $ -- $ -- $ 4,177,190
=========== ========== ======== ======== ========== ======== ========== ===========
Long-term debt................ $ 2,234,136 $ -- $427,400 $ -- $ -- $ -- $4,875,000 $ 7,536,536
Series A convertible preferred
stock........................ 2,181,967 (2,181,967) -- -- -- -- -- --
Series B convertible preferred
stock........................ 3,820,620 (3,820,620) -- -- -- -- -- --
Series C convertible preferred
stock........................ 3,921,131 -- -- -- -- -- (3,921,131) --
Series B convertible preferred
stock warrants............... 851,000 -- (851,000) -- -- -- -- --
----------- ---------- -------- -------- ---------- -------- ---------- -----------
13,008,854 (6,002,587) (423,600) -- -- -- 953,869 7,536,536
----------- ---------- -------- -------- ---------- -------- ---------- -----------
Common stock.................. 5,180 10,205 -- 57 1,821 -- -- 17,263
Additional paid-in-capital.... 3,022,217 5,992,382 -- 127,400 2,006,179 (80,700) -- 11,067,478
Common stock warrants......... 825,000 -- 423,600 (127,000) 542,000 94,800 1,019,000 2,777,400
Accumulated deficit........... (12,621,454) -- -- -- -- (14,100) (1,972,869) (14,608,423)
----------- ---------- -------- -------- ---------- -------- ---------- -----------
(8,769,057) 6,002,587 423,600 457 2,550,000 -- (953,869) (746,282)
----------- ---------- -------- -------- ---------- -------- ---------- -----------
$ 4,239,797 $ -- $ -- $ 457 $2,550,000 $ -- $ -- $ 6,790,254
=========== ========== ======== ======== ========== ======== ========== ===========
</TABLE>
F-34
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Bone and Joint Specialists of Western Pennsylvania, PC:
We have audited the accompanying balance sheets of Bone and Joint Specialists of
Western Pennsylvania, PC (a Pennsylvania corporation) as of December 31, 1996
and 1997, and the related statements of operations, owners' equity and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Bone and Joint Specialists of
Western Pennsylvania, PC as of December 31, 1996 and 1997, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.
February 20, 1998
F-35
<PAGE>
BONE AND JOINT SPECIALISTS OF WESTERN PENNSYLVANIA, PC
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- MARCH 31,
1996 1997 1998
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 15,916 $ -- $ --
Accounts receivable, net of allowance of $463,272,
$916,110 and $992,910.................................. 377,303 580,380 662,027
Prepaid expenses and other................................ 21,780 9,577 2,418
-------- -------- --------
Total current assets................................. 414,999 589,957 664,445
-------- -------- --------
Property and equipment:
Equipment, furniture and fixtures......................... 417,167 417,167 417,167
Less -- Accumulated depreciation.......................... (163,230) (215,931) (231,504)
-------- -------- --------
253,937 201,236 185,663
-------- -------- --------
$668,936 $791,193 $850,108
======== ======== ========
LIABILITIES AND OWNERS' EQUITY
Current liabilities:
Current maturities of long-term debt...................... $ 46,751 $ 47,134 $ 47,134
Accounts payable.......................................... 31,683 18,814 69,165
Accrued compensation...................................... 25,922 162,731 199,572
Due to U.S. PHYSICIANS, Inc............................... -- 42,826 27,421
-------- -------- --------
Total current liabilities............................ 104,356 271,505 343,292
-------- -------- --------
Long-term debt.............................................. 116,852 69,390 56,518
-------- -------- --------
Commitments and contingencies (Note 6)
Owners' equity.............................................. 447,728 450,298 450,298
-------- -------- --------
$668,936 $791,193 $850,108
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-36
<PAGE>
BONE AND JOINT SPECIALISTS OF WESTERN PENNSYLVANIA, PC
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ -------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues.............................. $3,187,200 $2,492,447 $3,224,696 $721,627 $790,565
---------- ---------- ---------- -------- --------
Operating expenses:
Salaries, wages and benefits............ 2,281,363 1,673,331 2,089,281 446,643 558,558
Pharmaceuticals and medical supplies.... 99,334 65,770 93,955 47,184 13,242
General and administrative.............. 574,994 616,483 633,501 138,530 168,809
Management fee due
U.S. PHYSICIANS, Inc.................. -- -- 339,434 45,353 33,791
Depreciation............................ 88,245 90,775 52,701 32,634 15,573
---------- ---------- ---------- -------- --------
Income from operations.................... 143,264 46,088 15,824 11,283 592
Interest expense, net..................... 106,038 84,493 13,254 8,713 592
---------- ---------- ---------- -------- --------
Net income (loss)......................... $ 37,226 $ (38,405) $ 2,570 $ 2,570 $ --
========== ========== ========== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-37
<PAGE>
BONE AND JOINT SPECIALISTS OF WESTERN PENNSYLVANIA, PC
STATEMENTS OF OWNERS' EQUITY
<TABLE>
<S> <C>
Balance, January 1, 1995.................................... $495,535
Net income................................................ 37,226
--------
Balance, December 31, 1995.................................. 532,761
Net loss.................................................. (38,405)
Issuance of Common Stock.................................. 200
Distributions............................................. (46,828)
--------
Balance, December 31, 1996.................................. 447,728
Net income................................................ 2,570
--------
Balance, December 31, 1997.................................. 450,298
Net income (unaudited).................................... --
--------
Balance, March 31, 1998 (unaudited)......................... $450,298
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-38
<PAGE>
BONE AND JOINT SPECIALISTS OF WESTERN PENNSYLVANIA, PC
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------ -----------------
1995 1996 1997 1997 1998
-------- -------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss) $ 37,226 $(38,405) $ 2,570 $ 2,570 $ --
Adjustments to reconcile net income (loss) to
net cash provided by operating activities --
Depreciation............................. 88,245 90,775 52,701 32,634 15,573
Changes in assets and liabilities --
Accounts receivable.................... 80,243 (22,210) (203,077) (77,963) (81,647)
Due from related parties............... 38,716 -- -- -- --
Prepaid expenses and other............. 1,910 (5,780) 12,203 16,859 7,159
Accounts payable....................... 2,000 55,683 (12,869) (5,555) 50,351
Accrued compensation................... (111,182) (38,021) 136,809 87,424 36,841
Due to (from) U.S. PHYSICIANS, Inc..... -- -- 42,826 (66,350) (15,405)
-------- -------- -------- ------- -------
Net cash provided by operating
activities........................ 137,158 42,042 31,163 (10,381) 12,872
-------- -------- -------- ------- -------
Investing activities:
Purchases of property and equipment........... (192,944) (16,734) -- -- --
-------- -------- -------- ------- -------
Financing activities:
Proceeds from long-term debt.................. 161,986 75,452 -- -- --
Repayments on long-term debt.................. (162,941) (107,983) (47,079) (5,535) (12,872)
Proceeds from issuance of common stock........ -- 200 -- -- --
Distributions................................. -- (15,218) -- -- --
-------- -------- -------- ------- -------
Net cash used in financing
activities........................ (955) (47,549) (47,079) (5,535) (12,872)
-------- -------- -------- ------- -------
Net decrease in cash and cash equivalents....... (56,741) (22,241) (15,916) (15,916) --
Cash and cash equivalents, beginning of
period........................................ 94,898 38,157 15,916 15,916 --
-------- -------- -------- ------- -------
Cash and cash equivalents, end of period........ $ 38,157 $ 15,916 $ -- $ -- $ --
======== ======== ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-39
<PAGE>
BONE AND JOINT SPECIALISTS OF WESTERN PENNSYLVANIA, PC
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
1. ORGANIZATION AND BUSINESS:
William D. Fritz M.D. (the "Fritz Practice"), formerly Northwest
Orthopedic, and Orthopedic, Occupational and Sports Medicine Specialists (the
"Smith Practice"), formerly Venango Orthopedics and Sports Medicine Center,
provide medical orthopedic and rehabilitative services to the general public. On
October 7, 1996, the Fritz Practice and the Smith Practice merged to form Bone
and Joint Specialists of Western Pennsylvania, PC (the "Company"). The combined
practice serves Franklin, Grove City and Titusville, Pennsylvania as well as
surrounding areas in Western Pennsylvania. In conjunction with the merger,
certain assets and liabilities of the individual practices were not contributed
to the Company including cash of $15,218, net accounts receivable of $87,518,
property and equipment of $965,274, other assets of $5,090, payables of $40,000
and debt of $986,272.
On January 28, 1997 (the "Initial Closing Date"), the Company and the
selling owners entered into an Asset Acquisition Agreement, as amended through
April 21, 1998 (the "Affiliation Agreement") with U.S. PHYSICIANS, Inc. ("USP").
Under the terms of the Affiliation Agreement, USP and its affiliated
professional corporation acquired the majority of the assets and liabilities of
the Company in exchange for cash, notes, convertible notes and shares of USP
Common Stock, subject to adjustment, as defined. The Affiliation Agreement
contains a repurchase provision that allows the selling owners, in the event
that an initial public offering ("IPO") has not been completed by USP by June
15, 1998 (the "Repurchase Date"), to repurchase the net assets of their practice
by returning all of the consideration received excluding the initial cash
payment.
In accordance with Accounting Principles Board Opinion No. 16, the
Affiliation Agreement is not considered effective for applying purchase
accounting until either the date that USP completes an IPO or the repurchase
provision terminates (the "Final Closing Date"). Pursuant to the Affiliation
Agreement, for the period of time between the Initial Closing Date and the Final
Closing Date, USP is responsible for managing the Company, including cash
management, and receives a management fee equal to the income earned by the
Company. Accordingly, the statements of operations for the three months ended
March 31, 1997 and 1998 and the year ended December 31, 1997 include a
management fee charge for the income earned by the Company for the period from
the Initial Closing Date to March 31, 1997, for the three months ended March 31,
1998 and for the period from the Initial Closing Date to December 31, 1997,
respectively. The balance sheets as of December 31, 1997 and March 31, 1998
contain a Due to U.S. PHYSICIANS, Inc. account to reflect the net cash activity
for the respective period.
2. SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Statements
The financial statements for the three months ended March 31, 1997 and 1998
are unaudited, and in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the financial position as of March 31, 1998 and the results of
its operations for the three months ended March 31, 1997 and 1998. The results
of operations for the three-month period are not necessarily indicative of the
results to be expected for the entire year.
Principles of Combination
The financial statements combine the accounts of both the Fritz and Smith
Practices for all periods presented. Prior to the merger, these companies were
unrelated, and there were no transactions between
the entities.
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
F-40
<PAGE>
BONE AND JOINT SPECIALISTS OF WESTERN PENNSYLVANIA, PC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Fair Value of Financial Instruments
Financial instruments consist of cash and cash equivalents, accounts
receivable, certain current liabilities and debt obligations. The carrying
amounts reported in the balance sheets for these items approximate their fair
value.
Net Revenues
Revenues from patients, third-party payors and others are recorded at
established rates, net of provision for bad debts and contractual adjustments,
in the period that services are rendered. Contractual adjustments represent the
difference between charges at established rates and the estimated amount to be
reimbursed.
Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments
purchased with an original maturity of three months or less.
Accounts Receivable
Accounts receivable primarily consist of receivables from patients,
third-party payors and others. Such amounts are recorded net of contractual
allowances and estimated bad debts.
Concentration of Credit Risk
The Company extends credit to patients covered by programs such as
Medicare, 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.
Property and Equipment
Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to expense as incurred. Depreciation is provided over the
estimated useful life of each class of depreciable asset ranging from five to
seven years with the exception of building and improvements which are
depreciated over thirty years and are computed using the straight-line method.
Income Taxes
Prior to October 1996, the individual practices were treated as sole
proprietorships whereby income taxes were the responsibility of the individual
physicians. Effective in October 1996, the Company has elected treatment as an
"S" Corporation for both federal and state income tax purposes, and accordingly
is not taxed as a separate entity. The Company's taxable income or loss is
allocated to each owner and recognized on their individual tax return.
Accordingly, no provision for income taxes has been reflected in the
accompanying financial statements.
The Company reports certain income and expense items for income tax
purposes on a different basis than that reflected in the accompanying financial
statements. The primary differences are due to the cash basis of accounting for
income tax purposes. The cumulative amount of these differences as of December
31, 1997 was approximately $370,000. If the S Corporation status is terminated,
then a deferred income tax liability of approximately $90,000 related to these
cumulative differences would need to be reflected in the accompanying financial
statements.
F-41
<PAGE>
BONE AND JOINT SPECIALISTS OF WESTERN PENNSYLVANIA, PC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
Owners' Equity
Equity includes the capital stock and retained earnings of the Company.
Statements of Cash Flows Information
For the years ended December 31, 1995, 1996 and 1997, the Company paid
interest of $106,073, $84,052 and $13,254, respectively. Amounts paid for taxes
were insignificant.
In 1996, the Company entered into capital lease obligations of $74,800.
3. LONG-TERM DEBT:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1997
-------- --------
<S> <C> <C>
Equipment note with a bank, payable in monthly installments
of $6,944 through 1999, interest at bank's prime rate,
secured by equipment...................................... $ 90,853 $ 56,455
Capital lease obligations (see Note 6)...................... 72,750 60,069
-------- --------
163,603 116,524
Less -- Current maturities.................................. (46,751) (47,134)
-------- --------
$116,852 $ 69,390
======== ========
</TABLE>
Future maturities of long-term debt, excluding capital lease obligations
(see Note 6), as of December 31, 1997, are as follows:
1998........................................................ $34,070
1999........................................................ 22,385
-------
$56,455
=======
4. EMPLOYEE BENEFIT PLANS:
In 1994 and 1995, the Fritz and the Smith Practices, respectively,
terminated deferred profit sharing plans in which all employees were eligible to
participate after one year of service, as defined in the plan agreements. At the
time of termination, all participants became 100% vested in their plan benefits.
The assets of the plans are expected to be distributed to the participants
during 1998. Discretionary contributions to the Smith plan for the year ended
December 31, 1995, were $7,300.
The assets of both plans are held at local financial institutions which
serve as trustees for the
respective plans.
5. RELATED-PARTY TRANSACTIONS:
The Fritz Practice leased office space from its sole shareholder for
approximately $90,000 and $77,000 for the years ended December 31, 1995 and
1996, respectively. The Company leased office space from its two shareholders
for approximately $47,000 and $47,000 for the year ended December 31, 1996 and
1997, respectively.
F-42
<PAGE>
BONE AND JOINT SPECIALISTS OF WESTERN PENNSYLVANIA, PC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
6. COMMITMENTS AND CONTINGENCIES:
Lease Obligations
The company leases office space and equipment under noncancellable
operating and capital leases. Future minimum lease payments under the Company's
leases as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1998........................................................ $18,804 $16,800
1999........................................................ 18,804 --
2000........................................................ 18,804 --
2001........................................................ 17,237 --
-------
Total................................................ 73,649
Less -- Amounts representing interest....................... (13,580)
-------
Present value of future minimum lease payments.............. 60,069
Less -- Current maturities.................................. (13,064)
-------
$47,005
=======
</TABLE>
Rent expense, including related party leases (see Note 5), under operating
leases for the years ended December 31, 1995, 1996 and 1997, was $150,880,
$193,280 and $197,450, respectively. The cost of assets capitalized under
capital lease obligations was $74,800 as of December 31, 1997 and accumulated
depreciation was $16,029.
Insurance Policies
The Company maintains insurance with respect to medical malpractice risks
on an occurrence basis in amounts management believes to be adequate. Management
is not aware of any outstanding claims which would have a material impact on the
Company's financial position or results of operations.
The Pennsylvania Medical Professional Liability Catastrophic Loss Fund (the
"CAT Fund"), an agency fund of the Commonwealth of Pennsylvania, acts as a
service agent to facilitate the payment of medical malpractice claims exceeding
the primary layer of professional liability insurance carried by physicians and
other health care providers practicing in Pennsylvania. The CAT Fund policies
are retrospectively rated on a claims-made basis. The CAT Fund levies health
care provider surcharges, as a percentage of insurance premiums for basic
coverage, to pay claims and administrative expenses on behalf of CAT Fund
participants.
The CAT Fund is significantly underfunded and the Commonwealth has
indicated that the unfunded liability will be funded exclusively through
surcharge assessments in future years as claims are settled and paid. The
Company and the other CAT Fund participants received a surcharge assessment
during fiscal 1996 and 1997. No provision has been made for any future CAT Fund
assessments in the accompanying financial statements as the Company's portion of
the CAT Fund unfunded liability could not be reasonably estimated.
Health Care Regulatory Environment and Reliance on Government Programs
The health care industry in general and the services that the Company
provides are subject to extensive federal and state laws and regulations.
Additionally, a portion of the Company's net revenue is from payments by
government-sponsored health care programs, principally Medicare and Medicaid,
and is subject to audit and adjustments by applicable regulatory agencies.
Failure to comply with any of these laws or regulations, the results of
regulatory audits and adjustments, or changes in the amounts payable for the
Company's services under these programs could have a material adverse effect on
the Company's financial position and results of operations.
F-43
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Bryn Mawr Urology Associates, Inc.:
We have audited the accompanying balance sheets of Bryn Mawr Urology Associates,
Inc. (a Pennsylvania corporation) as of December 31, 1996 and 1997 and the
related statements of operations and retained earnings and cash flows for each
of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Bryn Mawr Urology Associates,
Inc. as of December 31, 1996 and 1997, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.
February 20, 1998
F-44
<PAGE>
BRYN MAWR UROLOGY ASSOCIATES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- MARCH 31,
1996 1997 1998
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 57,672 $ -- $ --
Accounts receivable, net of allowance of $248,566,
$363,958 and $385,707.................................. 517,922 687,155 640,912
Due from U.S. PHYSICIANS, Inc............................. -- 10,271 33,806
Due from related parties.................................. 8,348 -- --
Prepaid expenses and other................................ 97,861 186,942 71,000
-------- -------- --------
Total current assets................................. 681,803 884,368 745,718
-------- -------- --------
Property and equipment:
Equipment, furniture and fixtures......................... 151,590 151,590 151,590
Leasehold improvements.................................... 140,669 140,669 140,669
-------- -------- --------
292,259 292,259 292,259
Less -- Accumulated depreciation and amortization......... (201,686) (233,551) (236,634)
-------- -------- --------
90,573 58,708 55,625
-------- -------- --------
Deferred income taxes....................................... 15,224 15,224 15,224
-------- -------- --------
Other assets................................................ 10,005 -- --
-------- -------- --------
$797,605 $958,300 $816,567
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt...................... $ 30,000 $ 30,000 $ 30,000
Current maturities of officer loans....................... 65,360 -- --
Accounts payable.......................................... 319,681 525,763 365,271
Accrued compensation...................................... 95,354 128,263 157,022
Deferred income taxes..................................... 63,542 68,056 68,056
-------- -------- --------
Total current liabilities............................ 573,937 752,082 620,349
-------- -------- --------
Long-term debt.............................................. 112,500 82,500 72,500
-------- -------- --------
Commitments and contingencies (Note 7)
Shareholders' equity:
Common Stock, no par value, 1,000 shares authorized, 600
shares issued and outstanding.......................... 300 300 300
Retained earnings......................................... 110,868 123,418 123,418
-------- -------- --------
Total shareholders' equity........................... 111,168 123,718 123,718
-------- -------- --------
$797,605 $958,300 $816,567
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-45
<PAGE>
BRYN MAWR UROLOGY ASSOCIATES, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ -----------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues............................... $2,640,036 $2,630,529 $2,539,364 $ 577,762 $ 617,165
---------- ---------- ---------- ---------- ----------
Operating expenses:
Salaries, wages and benefits............. 1,411,350 1,528,663 1,252,514 214,576 365,233
Pharmaceuticals and medical supplies..... 508,357 591,529 688,269 172,332 166,666
General and administrative............... 636,306 539,972 325,410 122,632 98,806
Management fee (credit) due
U.S. PHYSICIANS, Inc................... -- -- 210,768 15,844 (20,317)
Depreciation and amortization............ 44,114 39,643 31,865 28,466 3,083
---------- ---------- ---------- ---------- ----------
Income (loss) from operations.............. 39,909 (69,278) 30,538 23,912 3,694
Interest expense, net...................... 18,451 19,582 11,096 4,470 3,694
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes.......... 21,458 (88,860) 19,442 19,442 --
Income tax (benefit) provision............. 6,717 (20,772) 6,892 6,892 --
---------- ---------- ---------- ---------- ----------
Net income (loss).......................... 14,741 (68,088) 12,550 12,550 --
Retained earnings, beginning of period..... 164,215 178,956 110,868 110,868 123,418
---------- ---------- ---------- ---------- ----------
Retained earnings, end of period........... $ 178,956 $ 110,868 $ 123,418 $ 123,418 $ 123,418
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-46
<PAGE>
BRYN MAWR UROLOGY ASSOCIATES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------ -------------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss).................................. $ 14,741 $(68,088) $ 12,550 $ 12,550 $ --
Adjustments to reconcile net income (loss) to net
cash
provided by operating activities --
Loss on disposal of property and equipment..... -- 33,013 -- -- --
Depreciation and amortization.................. 44,114 39,643 31,865 28,466 3,083
Deferred income taxes.......................... 6,936 (22,303) 4,514 4,514 --
Changes in assets and liabilities --
Accounts receivable......................... (91,077) (53,506) (169,233) (122,282) 46,243
Due from U.S. PHYSICIANS, Inc............... -- -- (10,271) -- (23,535)
Due from related parties.................... (3,174) 5,863 8,348 8,348 --
Prepaid expenses and other.................. (35,071) 15,717 (89,081) 97,581 115,942
Other assets................................ -- 1,660 10,005 10,005 --
Accounts payable............................ 70,260 114,462 206,082 (311,789) (160,492)
Due to U.S. Physicians, Inc................. -- -- -- 187,710 --
Accrued compensation........................ 26,936 (13,785) 32,909 100,085 28,759
-------- -------- -------- -------- --------
Net cash provided by operating
activities.............................. 33,665 52,676 37,688 15,188 10,000
-------- -------- -------- -------- --------
Investing activities:
Purchases of property and equipment................ (12,778) (56,379) -- -- --
-------- -------- -------- -------- --------
Financing activities:
Proceeds from long-term debt....................... -- 150,000 -- -- --
Repayments on long-term debt....................... (26,400) (60,300) (30,000) (7,500) (10,000)
Repayment of officer loans......................... -- (60,000) (65,360) (65,360) --
-------- -------- -------- -------- --------
Net cash provided by (used in) financing
activities.............................. (26,400) 29,700 (95,360) (72,860) (10,000)
-------- -------- -------- -------- --------
Net (decrease) increase in cash and cash
equivalents........................................ (5,513) 25,997 (57,672) (57,672) --
Cash and cash equivalents, beginning of period....... 37,188 31,675 57,672 57,672 --
-------- -------- -------- -------- --------
Cash and cash equivalents, end of period............. $ 31,675 $ 57,672 $ -- $ -- $ --
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-47
<PAGE>
BRYN MAWR UROLOGY ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
1. ORGANIZATION AND BUSINESS:
Bryn Mawr Urology Associates, Inc. (the "Company") provides urological and
incontinence care and related medical services to the general public. The
Company operates two divisions, Bryn Mawr Urology ("BMU") and Continence
Management Specialists ("CMS").
On February 19, 1997 (the "Initial Closing Date"), the Company and the
selling owners entered into a Stock Acquisition Agreement, as amended through
April 21, 1998, (the "Affiliation Agreement") with U.S. PHYSICIANS, Inc.
("USP"). Under the terms of the Affiliation Agreement, USP and its affiliated
professional corporation acquired the outstanding stock of the Company in
exchange for cash, notes, convertible notes and shares of USP Common Stock,
subject to adjustment, as defined. The Affiliation Agreement contains a
repurchase provision that allows the selling owners, in the event that an
initial public offering ("IPO") has not been completed by USP by June 15, 1998
(the "Repurchase Date"), to repurchase the stock of their practice by returning
all of the consideration received excluding the initial cash payment.
In accordance with Accounting Principles Board Opinion No. 16, the
Affiliation Agreement is not considered effective for applying purchase
accounting until either the date that USP completes an IPO or the repurchase
provision terminates (the "Final Closing Date"). Pursuant to the Affiliation
Agreement, for the period of time between the Initial Closing Date and the Final
Closing Date, USP is responsible for managing the Company, including cash
management, and receives a management fee equal to the income earned by the
Company. Accordingly, the statements of operations for the three months ended
March 31, 1997 and 1998 and for the year ended December 31, 1997 include a
management fee charge (credit) for the income earned by the Company for the
period from the Initial Closing Date to March 31, 1997, for the three months
ended March 31, 1998 and for the period from the Initial Closing Date to
December 31, 1997, respectively. The balance sheets as of December 31, 1997 and
March 31, 1998 contain a Due from U.S. PHYSICIANS, Inc. account to reflect the
net cash activity for the respective period.
2. SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Statements
The financial statements for the three months ended March 31, 1997 and 1998
are unaudited, and in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the financial position as of March 31, 1998 and the results of
its operations for the three months ended March 31, 1997 and 1998. The results
of operations for the three-month period are not necessarily indicative of the
results to be expected for the entire year.
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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
Financial instruments consist of cash and cash equivalents, accounts
receivable, certain current liabilities and debt obligations. The carrying
amounts reported in the balance sheets for these items approximate fair value.
F-48
<PAGE>
BRYN MAWR UROLOGY ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
Net Revenues
Revenues from patients, third-party payors and others are recorded at
established rates, net of provision for bad debts and contractual adjustments,
in the period that services are rendered. Contractual adjustments represent the
difference between charges at established rates and the estimated amount to be
reimbursed.
Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments
purchased with an original maturity of three months or less.
Accounts Receivable
Accounts receivable primarily consist of receivables from patients,
third-party payors and others. Such amounts are recorded net of contractual
allowances and estimated bad debts.
Concentration of Credit Risk
The Company extends credit to patients covered by programs such as
Medicare, 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.
Property and Equipment
Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to expense as incurred. Depreciation and amortization are
provided over the estimated useful lives of the applicable assets ranging from
five to ten years for equipment, furniture and fixtures and the remaining lease
term for leasehold improvements and are computed using the straight-line method.
Income Taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109").
SFAS No. 109 requires the liability method of accounting for deferred income
taxes. Deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities. Deferred tax assets or liabilities at the end of each period are
determined using the tax rate expected to be in effect when taxes are actually
paid or recovered.
Statements of Cash Flows Information
For the years ended December 31, 1995, 1996 and 1997, the Company paid
interest of $19,473, $19,587 and $11,052, respectively. Amounts paid for taxes
were not significant.
3. LONG-TERM DEBT:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
-------- --------
<S> <C> <C>
Note payable to bank, monthly principal payments of $2,500
plus interest at prime (8.5% at December 31, 1997) through
September 2001, collateralized by certain assets of the
Company................................................... $142,500 $112,500
Less -- Current maturities.................................. (30,000) (30,000)
-------- --------
$112,500 $ 82,500
======== ========
</TABLE>
F-49
<PAGE>
BRYN MAWR UROLOGY ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
3. LONG-TERM DEBT: -- (CONTINUED)
The Company advanced $50,000 of the proceeds from the note payable through
December 1997 to a related entity, SSE Leasing Associates ("SSE"), whose sole
shareholders are the owning physicians of the Company. The Company has the full
obligation of the debt included in its financial statements with an offsetting
receivable from SSE for its portion of the proceeds. At December 31, 1996,
advances due from SSE were $20,911. The notes are subject to certain covenants
as defined by the agreements and are guaranteed by the owning physicians of the
Company.
Minimum principal repayments for long-term debt as of December 31, 1997,
are as follows:
1998...................................................... $ 30,000
1999...................................................... 30,000
2000...................................................... 30,000
2001...................................................... 22,500
--------
$112,500
========
4. EMPLOYEE BENEFIT PLAN:
The Company provides a 401(k) profit sharing plan that covers all qualified
employees, as defined by the plan agreement. Contributions to the plan are
discretionary and are determined by the Company on an annual basis. The
contributions for the years ended December 31, 1995, 1996 and 1997, were
$68,195, $38,461 and $0, respectively. Employer contributions vest pro rata over
six years beginning after their first year as a participant. The three owning
physicians are the trustees of the plan.
5. RELATED PARTY TRANSACTIONS:
Due from related parties consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------
<S> <C>
Loan receivable from SSE (see Note 3).............. $12,673
Advance from SSE................................... --
Advances to officers............................... 5,680
-------
18,353
Less -- Current portion............................ (8,348)
-------
Amount included in other assets.................... $10,005
=======
</TABLE>
In 1995, the owners of BMU established a corporation, UroRehab, to provide
incontinence services to residents of long-term care facilities. Start-up cost
funding, the sharing of certain facilities and administrative services were
provided to UroRehab. The physicians will continue to provide management and
consultation services to UroRehab; however, the Company does not feel these
efforts will be significant.
In December 1994, the officers of the Company collectively loaned $150,000
to the Company. The loan was to be repaid in monthly installments of $1,062
including interest at 10% through January 1999. As of February 1995, the Company
and the officers amended the terms to monthly interest at 12% with no stated
repayment date for the remaining principal balance of $125,360. During 1996,
principal of $60,000 was repaid by the Company.
The Company leases a significant portion of its equipment from a related
entity, SSE. Payments made to SSE for the years ended December 31, 1995, 1996
and 1997, were $39,793, $37,146 and $41,964, respectively. In 1993, SSE also
paid $8,975 for leasehold improvements to office space on behalf of the Company.
During 1996, the Company repaid the balance due to SSE.
F-50
<PAGE>
BRYN MAWR UROLOGY ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
5. RELATED PARTY TRANSACTIONS:--(Continued)
In addition, the Company leases its office space from two separate
partnerships in which the owning physicians are partners (see Note 7).
6. INCOME TAXES:
The components of the income tax provision (benefit) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal.......................................... $ (131) $ 919 $ 1,427
State............................................ (88) 612 951
-------- -------- --------
(219) 1,531 2,378
-------- -------- --------
Deferred:
Federal.......................................... 4,162 (13,382) 2,708
State............................................ 2,774 (8,921) 1,806
-------- -------- --------
6,936 (22,303) 4,514
-------- -------- --------
$ 6,717 $(20,772) $ 6,892
======== ======== ========
</TABLE>
Income tax expense (benefit) differs from the amount currently payable or
receivable because certain expenses, primarily depreciation and accruals, are
reported in different periods for financial reporting and income tax purposes.
The Company is on a cash basis of accounting for income tax purposes.
The provision (benefit) for income taxes differs from the amount computed
by applying the U.S. Federal income tax rate (34%) because of the effect of the
following items:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Tax at U.S. Federal statutory rate................. $ 7,296 $(30,212) $ 7,718
Tax impact of Federal rate differential for
graduated rates.................................. (4,045) 16,653 (4,313)
State income taxes, net of federal benefit......... 2,168 (9,039) 2,270
Non-deductible travel and entertainment............ 1,298 1,826 1,217
-------- -------- --------
$ 6,717 $(20,772) $ 6,892
======== ======== ========
</TABLE>
The components of the net deferred tax liability, measured under SFAS No.
109, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
-------- --------
<S> <C> <C>
Deferred tax assets:
Property and equipment.................................... $ 15,224 $ 15,224
Net operating loss carryforward........................... 8,534 --
-------- --------
23,758 15,224
Deferred liabilities:
Cash to accrual adjustments............................... (72,076) (68,056)
-------- --------
Net deferred tax liability.................................. $(48,318) $(52,832)
======== ========
</TABLE>
F-51
<PAGE>
BRYN MAWR UROLOGY ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
7. COMMITMENTS AND CONTINGENCIES:
Lease Obligations
The Company leases office space in two buildings that are partially owned
by two of the owning physicians. As indicated in Note 5, the equipment is leased
from a related party, SSE. Future minimum lease payments under the Company's
leases are as follows:
<TABLE>
<CAPTION>
EQUIPMENT BUILDING
LEASES LEASES
--------- --------
<S> <C> <C>
1998......................................... $11,810 $ 72,009
1999......................................... 1,760 72,009
2000......................................... 1,760 24,978
2001......................................... 1,467 --
</TABLE>
Rent expense under noncancelable operating leases for the years ended
December 31, 1995, 1996 and 1997, was $127,594, $118,141 and $116,640,
respectively.
Insurance Policies
The Company maintains insurance with respect to medical malpractice risks
on an occurrence basis in amounts management believes to be adequate. Management
is not aware of any outstanding claims that would have a material impact on the
Company's financial position or results of operations.
The Pennsylvania Medical Professional Liability Catastrophic Loss Fund (the
"CAT Fund"), an agency fund of the Commonwealth of Pennsylvania, acts as a
service agent to facilitate the payment of medical malpractice claims exceeding
the primary layer of professional liability insurance carried by physicians and
other health care providers practicing in Pennsylvania. The CAT Fund policies
are retrospectively rated on a claims-made basis. The CAT Fund levies health
care provider surcharges, as a percentage of insurance premiums for basic
coverage, to pay claims and administrative expenses on behalf of CAT Fund
participants.
The CAT Fund is significantly underfunded and the Commonwealth has
indicated that the unfunded liability will be funded exclusively through
surcharge assessments in future years as claims are settled and paid. The
Company and the other CAT Fund participants received a surcharge assessment
during fiscal 1996 and 1997. No provision has been made for any future CAT Fund
assessments in the accompanying financial statements as the Company's portion of
the CAT Fund unfunded liability could not be reasonably estimated.
Health Care Regulatory Environment and Reliance on Government Programs
The health care industry in general and the services that the Company
provides are subject to extensive federal and state laws and regulations.
Additionally, a portion of the Company's net revenue is from payments by
government-sponsored health care programs, principally Medicare and Medicaid,
and is subject to audit and adjustments by applicable regulatory agencies.
Failure to comply with any of these laws or regulations, the results of
regulatory audits and adjustments, or changes in the amounts payable for the
Company's services under these programs could have a material adverse effect on
the Company's financial position and results of operations.
F-52
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Center for Women's Healthcare, PC and
Corazon G. Gemil, M.D., PC:
We have audited the accompanying combined balance sheets of the Center for
Women's Healthcare, PC and Corazon G. Gemil, M.D., PC (Pennsylvania
corporations) as of December 31, 1996 and 1997 and the related combined
statements of operations and owner's deficit and cash flows for the three years
in the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these combined 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 combined financial statements referred to above present
fairly, in all material respects, the financial position of the Center for
Women's Healthcare, PC and Corazon G. Gemil, M.D., PC as of December 31, 1996
and 1997, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
February 20, 1998
F-53
<PAGE>
CENTER FOR WOMEN'S HEALTHCARE, PC AND
CORAZON G. GEMIL, M.D., PC
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- MARCH 31,
1996 1997 1998
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 12,154 $ -- $ --
Accounts receivable, net of allowance of $51,129, $138,695
and $243,720........................................... 90,896 218,287 321,418
Prepaid expenses and other................................ -- -- 109,292
-------- -------- --------
Total current assets................................. 103,050 218,287 421,710
-------- -------- --------
Property and equipment:
Equipment, furniture and fixtures......................... 85,594 86,050 86,050
Leasehold improvements.................................... 50,389 50,389 50,389
-------- -------- --------
135,983 136,439 139,439
Less -- Accumulated depreciation and amortization......... (82,000) (87,586) (90,320)
-------- -------- --------
53,983 48,853 46,119
-------- -------- --------
$157,033 $267,140 $467,829
======== ======== ========
LIABILITIES AND OWNER'S DEFICIT
Current liabilities:
Short term notes payable.................................. $ 63,316 $ 18,312 $ 18,312
Accounts payable.......................................... 30,726 31,783 41,449
Accrued compensation...................................... 59,729 19,307 109,194
Due to U.S. PHYSICIANS, Inc............................... -- 134,841 235,977
Deferred service revenues................................. 118,880 118,880 118,880
-------- -------- --------
Total current liabilities............................ 272,651 323,123 523,812
-------- -------- --------
Deferred service revenues................................... 148,597 29,690 --
-------- -------- --------
Commitments and contingencies (Note 5)
Owner's deficit............................................. (264,215) (85,673) (55,983)
-------- -------- --------
$157,033 $267,140 $467,829
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-54
<PAGE>
CENTER FOR WOMEN'S HEALTHCARE, PC AND
CORAZON G. GEMIL, M.D., PC
COMBINED STATEMENTS OF OPERATIONS AND OWNER'S DEFICIT
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------- ---------------------
1995 1996 1997 1997 1998
---------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues................................... $ 696,901 $ 785,707 $ 811,481 $ 198,100 $ 253,004
---------- --------- --------- --------- ---------
Operating expenses:
Salaries, wages and benefits................. 482,994 558,935 441,283 95,080 161,785
Pharmaceuticals and medical supplies......... 10,606 17,394 16,098 8,361 4,354
General and administrative................... 277,138 182,539 153,173 22,293 65,989
Management fee due U.S. PHYSICIANS, Inc...... -- -- 135,069 10,313 18,142
Depreciation and amortization................ 15,532 12,639 5,586 1,781 2,734
---------- --------- --------- --------- ---------
Income (loss) from operations.................. (89,369) 14,200 60,272 60,272 --
Other income................................... 72,132 118,880 118,907 29,690 29,690
Interest expense, net.......................... (3,761) (661) (637) (637) --
---------- --------- --------- --------- ---------
Net income (loss).............................. (20,998) 132,419 178,542 89,325 29,690
Owner's deficit, beginning of period........... (375,636) (396,634) (264,215) (264,215) (85,673)
---------- --------- --------- --------- ---------
Owner's deficit, end of period................. $ (396,634) $(264,215) $ (85,673) $(174,890) $ (55,983)
========== ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-55
<PAGE>
CENTER FOR WOMEN'S HEALTHCARE, PC AND
CORAZON G. GEMIL, M.D., PC
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------ -------------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss)................................. $(20,998) $132,419 $178,542 $ 89,325 $ 29,690
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating
activities --
Depreciation and amortization................. 15,532 12,639 5,586 1,781 2,734
Changes in assets and liabilities --
Accounts receivable........................ 32,370 (3,606) (127,391) (41,377) (94,131)
Prepaid expenses and other................. 13,617 417 -- (15,103) (109,292)
Other assets............................... 30,386 1,859 -- -- --
Accounts payable........................... (26,757) (5,194) 1,057 (6,670) 9,666
Accrued compensation....................... (370) (21,752) (40,422) 28,876 89,887
Due to U.S. PHYSICIANS, Inc................ -- -- 134,841 6,164 101,136
Deferred service revenues.................. (82,961) (118,880) (118,907) (29,690) (29,690)
-------- -------- -------- -------- --------
Net cash (used in) provided by operating
activities............................. (39,181) (2,098) 33,306 33,306 --
-------- -------- -------- -------- --------
Investing activities:
Purchases of property and equipment............... (19,788) (3,169) (456) (456) --
-------- -------- -------- -------- --------
Financing activities:
Net proceeds (payments) on related party
payable......................................... 20,517 (23,396) 34,996 -- --
Proceeds from notes payable....................... 47,000 40,000 -- -- --
Repayments on notes payable....................... (2,718) (27,066) (80,000) (45,004) --
-------- -------- -------- -------- --------
Net cash provided by (used in) financing
activities............................. 64,799 (10,462) (45,004) (45,004) --
-------- -------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents....................................... 5,830 (15,729) (12,154) (12,154) --
Cash and cash equivalents, beginning of period...... 22,053 27,883 12,154 12,154 --
-------- -------- -------- -------- --------
Cash and cash equivalents, end of period............ $ 27,883 $ 12,154 $ -- $ -- $ --
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-56
<PAGE>
CENTER FOR WOMEN'S HEALTHCARE, PC AND
CORAZON G. GEMIL, M.D., PC
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
1. ORGANIZATION AND BUSINESS:
The Center for Women's Healthcare, PC and Corazon G. Gemil, M.D., PC
(collectively, the Company), were merged on January 1, 1996 with the Center for
Women's Healthcare, PC as the surviving entity. The Company provides obstetrical
and gynecological care and related medical services to the general public.
On March 6, 1997 (the "Initial Closing Date"), the Company and the selling
owner entered into an Asset Acquisition Agreement, as amended through April 22,
1998, (the "Affiliation Agreement") with U.S. PHYSICIANS, Inc. ("USP"). Under
the terms of the Affiliation Agreement, USP and its affiliated professional
corporation acquired the majority of the assets and liabilities of the Company
in exchange for cash, notes, convertible notes and shares of USP Common Stock,
subject to adjustment, as defined. The Affiliation Agreement contains a
repurchase provision that allows the selling owner, in the event that an initial
public offering ("IPO") has not been completed by USP by June 15, 1998 (the
"Repurchase Date"), to repurchase the net assets of her practice by returning
all of the consideration received excluding the initial cash payment.
In accordance with Accounting Principles Board Opinion No. 16, the
Affiliation Agreement is not considered effective for applying purchase
accounting until either the date that USP completes an IPO or the repurchase
provision terminates (the "Final Closing Date"). Pursuant to the Affiliation
Agreement, for the period of time between the Initial Closing Date and the Final
Closing Date, USP is responsible for managing the Company, including cash
management, and receives a management fee equal to the income earned by the
Company. Accordingly, the statement of operations includes a management fee
charge for the income earned by the Company. Accordingly, the statements of
operations for the three months ended March 31, 1997 and 1998 and the year ended
December 31, 1997 include a management fee charge for the income earned by the
Company for the period from the Initial Closing Date to March 31, 1997, for the
three months ended March 31, 1998 and for the period from the Initial Closing
Date to December 31, 1997, respectively. The balance sheets as of December 31,
1997 and March 31, 1998 contain a Due to U.S. PHYSICIANS, Inc. account to
reflect the net cash activity for the respective period.
2. SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Statements
The financial statements for the three months ended March 31, 1997 and 1998
are unaudited, and in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the financial position as of March 31, 1998 and the results of
its operations for the three months ended March 31, 1997 and 1998. The results
of operations for the three-month period are not necessarily indicative of the
results to be expected for the entire year.
Principles of Combination
The financial statements combine the accounts of both the Center for
Women's Healthcare, PC and Corazon G. Gemil, M.D., PC practices. Prior to the
merger, these companies were unrelated, and there were no transactions between
the entities.
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
F-57
<PAGE>
CENTER FOR WOMEN'S HEALTHCARE, PC AND
CORAZON G. GEMIL, M.D., PC
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Fair Value of Financial Instruments
Financial instruments consist of cash and cash equivalents, accounts
receivable, certain current liabilities and debt obligations. The carrying
amounts reported in the balance sheets for these items approximate fair value.
Net Revenues
Revenues from patients, third-party payors and others are recorded at
established rates, net of provision for bad debts and contractual adjustments,
in the period that services are rendered. Contractual adjustments represent the
difference between charges at established rates and the estimated amount to be
reimbursed.
Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments
purchased with an original maturity of three months or less.
Accounts Receivable
Accounts receivable primarily consists of receivables from patients,
third-party payors and others. Such amounts are recorded net of contractual
allowances and other estimated bad debts.
Concentration of Credit Risk
The Company extends credit to patients covered by programs such as
Medicare, 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.
Property and Equipment
Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to expense as incurred. Depreciation and amortization are
provided over the estimated useful lives of the applicable assets ranging from
five to seven years for equipment, furniture and fixtures and the remaining
lease term for leasehold improvements and are computed using the straight-line
method.
Deferred Service Revenues
During 1995, the Company committed to provide limited administrative
services at an area hospital and provide limited educational support to the
hospital and the community for a period of four years in exchange for the
settlement of a debt obligation of the Company to the hospital. The debt
reduction of $469,318 has been recorded as deferred service revenues in the
accompanying balance sheets and is being amortized ratably over the four years
as other income in the statements of operations.
F-58
<PAGE>
CENTER FOR WOMEN'S HEALTHCARE, PC AND
CORAZON G. GEMIL, M.D., PC
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
Owner's Deficit
Owner's deficit includes the capital stock, additional paid-in capital and
accumulated losses of The Center for Women's Healthcare, PC and Corazon G.
Gemil, M.D., PC.
Income Taxes
The Company has elected treatment as an "S" Corporation for both federal
and state income tax purposes, and accordingly is not taxed as a separate
entity. The Company's taxable income or loss is allocated to the owner and
recognized on her individual tax return. Accordingly, no provision for income
taxes has been reflected in the accompanying financial statements.
The Company reports certain income and expense items for income tax
purposes on a different basis than reflected in the accompanying financial
statements. The primary differences are due to the cash basis of accounting for
income tax purposes. The cumulative amount of these differences as of December
31, 1997 was approximately $131,000. If the S Corporation status is terminated,
then a deferred income tax liability of approximately $32,000 related to these
cumulative differences would need to be reflected in the accompanying financial
statements.
Statements of Cash Flows Information
For the years ended December 31, 1995, 1996 and 1997, the Company paid
interest of $3,592, $548 and $637, respectively. Amounts paid for taxes were not
significant.
3. SHORT TERM NOTES PAYABLE:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1997
------- -------
<S> <C> <C>
Demand note payable to bank, interest at prime plus 1%,
repaid March 1997......................................... $40,000 $ --
Demand note payable to shareholder, no stated interest rate
or repayment terms........................................ 23,316 18,312
------- -------
$63,316 $18,312
======= =======
</TABLE>
4. EMPLOYEE BENEFIT PLAN:
The Company maintains a profit sharing plan covering substantially all full
time employees who are at least 21 years of age and have completed 2 years of
service. Contributions to the plan are discretionary and are determined by the
Company on an annual basis. Employees vest in company contributions immediately.
For the years ended December 31, 1995, 1996 and 1997 discretionary
contribution's made by the Company were $45,000, 40,000 and $0.
F-59
<PAGE>
CENTER FOR WOMEN'S HEALTHCARE, PC AND
CORAZON G. GEMIL, M.D., PC
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
5. COMMITMENTS AND CONTINGENCIES:
Lease Obligations
Future minimum lease payments for property under noncancellable operating
leases primarily for office space as of December 31, 1997 are as follows:
1998............................................... $34,328
1999............................................... 34,328
2000............................................... 34,328
2001............................................... 34,328
2002............................................... 34,328
Thereafter......................................... 91,541
Rent expense under noncancellable operating leases for the years ended
December 31, 1995, 1996 and 1997 was $71,750, $40,049 and $34,328, respectively.
Insurance Policies
The Company maintains insurance with respect to medical malpractice risks
on an occurrence basis in amounts management believes to be adequate. Management
is not aware of any outstanding claims which would have a material impact on the
Company's financial position or results of operations.
The Pennsylvania Medical Professional Liability Catastrophic Loss Fund (the
"CAT Fund"), an agency fund of the Commonwealth of Pennsylvania, acts as a
service agent to facilitate the payment of medical malpractice claims exceeding
the primary layer of professional liability insurance carried by the physicians
and other health care providers practicing in Pennsylvania. The CAT Fund
policies are retrospectively rated on a claims-made basis. The CAT Fund levies
health care provider surcharges, as a percentage of insurance premiums for basic
coverage, to pay claims and administrative expenses on behalf of CAT Fund
participants.
The CAT Fund is significantly underfunded and the Commonwealth has
indicated that the unfunded liability will be funded exclusively through
surcharge assessments in future years as claims are settled and paid. The
Company and the other CAT Fund participants received a surcharge assessment
during fiscal 1996 and 1997. No provision has been made for any future CAT Fund
assessments in the accompanying financial statements as the Company's portion of
the CAT Fund unfunded liability could not be reasonably estimated.
Health Care Regulatory Environment and Reliance on Government Programs
The health care industry in general and the services that the Company
provides are subject to extensive federal and state laws and regulations.
Additionally, a portion of the Company's net revenue is from payments by
government-sponsored health care programs, principally Medicare and Medicaid,
and is subject to audit and adjustments by applicable regulatory agencies.
Failure to comply with any of these laws or regulations, the results of
regulatory audits and adjustments, or changes in the amounts payable for the
Company's services under these programs could have a material adverse effect on
the Company's financial position and results of operations.
F-60
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Cesare, Metzger, Coyle and Henzes, Inc.:
We have audited the accompanying balance sheets of Cesare, Metzger, Coyle and
Henzes, Inc. (a Pennsylvania corporation) as of December 31, 1996 and 1997, and
the related statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Cesare, Metzger, Coyle and
Henzes, Inc. as of December 31, 1996 and 1997, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
February 20, 1998
F-61
<PAGE>
CESARE, METZGER, COYLE AND HENZES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- MARCH 31,
1996 1997 1998
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2,784 $ -- $ --
Accounts receivable, net of allowance of $371,578,
$372,482 and $390,756.................................. 462,184 468,918 449,011
Prepaid expenses and other................................ 5,296 -- --
Due from U.S. Physicians, Inc............................. -- -- 58,012
Due from shareholder...................................... 5,470 -- --
-------- -------- --------
Total current assets................................. 475,734 468,918 507,023
-------- -------- --------
Property and equipment:
Equipment, furniture and fixtures......................... 137,152 137,152 137,152
Leasehold improvements.................................... 108,390 116,881 116,881
-------- -------- --------
245,542 254,033 254,033
Less -- Accumulated depreciation and amortization......... (158,995) (174,398) (175,543)
-------- -------- --------
86,547 79,635 78,490
-------- -------- --------
Cash surrender value of life insurance
(face value of $1,100,000)................................ 134,958 139,866 139,866
-------- -------- --------
$697,239 $688,419 $725,379
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit............................................ $ 40,000 $116,000 $155,987
Accounts payable.......................................... 12,590 13,041 33,518
Accrued compensation...................................... 99,034 27,369 9,448
Deferred income taxes..................................... 86,768 72,715 72,715
Due to U.S. PHYSICIANS, Inc............................... -- 5,583 --
-------- -------- --------
Total current liabilities............................ 238,392 234,708 271,668
-------- -------- --------
Deferred income taxes....................................... 7,870 5,499 5,499
-------- -------- --------
Commitments and contingencies (Note 6)
Shareholders' equity:
Common Stock, $1 par value; 100,000 shares authorized;
5,000 shares issued; 4,000 shares outstanding.......... 5,000 5,000 5,000
Additional paid-in capital................................ 66,218 66,218 66,218
Retained earnings......................................... 390,759 387,994 387,994
Treasury stock (1,000 shares at cost)..................... (11,000) (11,000) (11,000)
-------- -------- --------
Total shareholders' equity........................... 450,977 448,212 448,212
-------- -------- --------
$697,239 $688,419 $725,379
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-62
<PAGE>
CESARE, METZGER, COYLE AND HENZES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ -----------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues............................... $2,342,162 $2,185,229 $2,384,017 $ 610,146 $ 614,534
---------- ---------- ---------- ---------- ----------
Operating expenses:
Salaries, wages and benefits............. 1,575,985 1,560,865 1,612,776 344,629 402,899
Pharmaceuticals and medical supplies..... 54,219 53,294 51,993 12,290 16,703
General and administrative............... 595,144 618,290 558,977 202,096 110,194
Management fee due U.S. PHYSICIANS,
Inc.................................... -- -- 140,901 -- 78,493
Depreciation and amortization............ 20,484 21,960 15,403 4,847 1,145
---------- ---------- ---------- ---------- ----------
Income (loss) from operations.............. 96,330 (69,180) 3,967 46,284 5,100
Interest expense, net...................... 5,168 2,280 5,220 794 5,100
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes.......... 91,162 (71,460) (1,253) 45,490 --
Income tax provision (benefit)............. 23,725 (15,318) 1,512 11,054 --
---------- ---------- ---------- ---------- ----------
Net income (loss).......................... $ 67,437 $ (56,142) $ (2,765) $ 34,436 $ --
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-63
<PAGE>
CESARE, METZGER, COYLE AND HENZES, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED TREASURY SHAREHOLDERS'
STOCK CAPITAL EARNINGS STOCK EQUITY
------ ---------- -------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1995...................... $3,000 $58,650 $379,464 $(11,000) $430,114
Issuance of Common Stock.................... 1,000 3,098 -- -- 4,098
Net income.................................. -- -- 67,437 -- 67,437
------ ------- -------- -------- --------
Balance, December 31, 1995.................... 4,000 61,748 446,901 (11,000) 501,649
Issuance of Common Stock.................... 1,000 4,470 -- -- 5,470
Net loss.................................... -- -- (56,142) -- (56,142)
------ ------- -------- -------- --------
Balance, December 31, 1996.................... 5,000 66,218 390,759 (11,000) 450,977
Net loss.................................... -- -- (2,765) -- (2,765)
------ ------- -------- -------- --------
Balance, December 31, 1997.................... 5,000 66,218 387,994 (11,000) 448,212
Net income (unaudited)...................... -- -- -- -- --
------ ------- -------- -------- --------
Balance, March 31, 1998 (unaudited)........... $5,000 $66,218 $387,994 $(11,000) $448,212
====== ======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-64
<PAGE>
CESARE, METZGER, COYLE AND HENZES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------- ------------------
1995 1996 1997 1997 1998
------- -------- ------- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss)................................... $67,437 $(56,142) $(2,765) $ 34,436 $ --
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities --
Depreciation and amortization................... 20,484 21,960 15,403 4,847 1,145
Deferred income taxes........................... 12,392 (16,872) (16,424) 11,054 --
Changes in assets and liabilities --
Accounts receivable.......................... (63,462) 78,579 (6,734) (20,047) 19,907
Prepaid expenses and other................... (1,100) (5,522) 388 (952) --
Due from U.S. Physicians, Inc................ -- -- -- -- (58,012)
Due from shareholder......................... -- -- 5,470 5,470 --
Accounts payable............................. (3,889) (20,046) 451 10,413 20,477
Accrued compensation......................... 19,620 19,340 (71,665) 51,059 (17,921)
Due to U.S. PHYSICIANS, Inc.................. -- -- 5,583 -- (5,583)
------- -------- ------- -------- -------
Net cash provided by (used in) operating
activities............................... 51,482 21,297 (70,293) 96,280 (39,987)
------- -------- ------- -------- -------
Investing activities:
Purchases of property and equipment................. (16,252) (13,509) (8,491) -- --
------- -------- ------- -------- -------
Financing activities:
Net (payments) borrowings on line of credit......... (38,000) (7,000) 76,000 59,645 39,987
Proceeds from issuance of stock..................... 4,098 -- -- -- --
------- -------- ------- -------- -------
Net cash (used in) provided by financing
activities............................... (33,902) (7,000) 76,000 59,645 39,987
------- -------- ------- -------- -------
Net increase (decrease) in cash and cash
equivalents......................................... 1,328 788 (2,784) 155,925 --
Cash and cash equivalents, beginning of period........ 668 1,996 2,784 2,784 --
------- -------- ------- -------- -------
Cash and cash equivalents, end of period.............. $ 1,996 $ 2,784 $ -- $158,709 $ --
======= ======== ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-65
<PAGE>
CESARE, METZGER, COYLE AND HENZES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
1. ORGANIZATION AND BUSINESS:
Cesare, Metzger, Coyle and Henzes, Inc. (the "Company") is a
physician-owned medical practice serving the Scranton, Pennsylvania area. The
Company was formed in 1974 for the purpose of rendering orthopedic surgical
services.
On July 30, 1997, (the "Initial Closing Date") the Company and the selling
owners entered into a Stock Acquisition Agreement, as amended through April 22,
1998 (the "Affiliation Agreement") with U.S. PHYSICIANS, Inc. ("USP"). Under the
terms of the Affiliation Agreement, USP and its affiliated professional
corporation acquired the outstanding stock of the Company in exchange for cash,
notes, convertible notes and shares of USP Common Stock, subject to adjustment,
as defined. The Affiliation Agreement contains a repurchase provision that
allows the selling owners, in the event that an initial public offering ("IPO")
has not been completed by USP by June 15, 1998 (the "Repurchase Date"), to
repurchase the stock of their practice by returning all of the consideration
received, excluding the initial cash payment.
In accordance with Accounting Principles Board Opinion No. 16, the
Affiliation Agreement is not considered effective for applying purchase
accounting until either the date that USP completes an IPO or the repurchase
provision terminates (the "Final Closing Date"). Pursuant to the Affiliation
Agreement, for the period of time between the Initial Closing Date and the Final
Closing Date, USP is responsible for managing the Company, including cash
management, and receives a management fee equal to the income earned by the
Company. Accordingly, the statement of operations includes a management fee
charge for the income earned by the Company. Accordingly, the statements of
operations for the three months ended March 31, 1998 and the year ended December
31, 1997 include a management fee charge for the income earned by the Company
for the three months ended March 31, 1998 and for the period from the Initial
Closing Date to December 31, 1997, respectively. The balance sheets as of
December 31, 1997 and March 31, 1998 contain Due to/from U.S. PHYSICIANS, Inc.
accounts to reflect the net cash activity for the respective period.
2. SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Statements
The financial statements for the three months ended March 31, 1997 and 1998
are unaudited, and in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the financial position as of March 31, 1998 and the results of
its operations for the three months ended March 31, 1997 and 1998. The results
of operations for the three-month period are not necessarily indicative of the
results to be expected for the entire year.
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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
Financial instruments consist of cash and cash equivalents, accounts
receivable, certain current liabilities and debt obligations. The carrying
amounts reported in the balance sheets for these items approximate fair value.
Net Revenues
Revenues from patients, third party-payors and others are recorded at
established rates, net of provision for bad debts and contractual adjustments,
in the period that services are rendered. Contractual adjustments represent the
difference between charges at established rates and the estimated amount to be
reimbursed.
F-66
<PAGE>
CESARE, METZGER, COYLE AND HENZES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments
purchased with an original maturity of three months or less.
Accounts Receivable
Accounts receivable primarily consist of receivables from patients,
third-party payors and others. Such amounts are recorded net of contractual
allowances and estimated bad debts.
Concentration of Credit Risk
The Company extends credit to patients covered by programs such as
Medicare, 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.
Property and Equipment
Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to expense as incurred. Depreciation and amortization are
provided over the estimated useful life of each class of depreciable asset
ranging from five to seven years for equipment, furniture and fixtures and over
the remaining lease term for leasehold improvements and are computed using the
straight-line method.
Due from Shareholder
Amounts due from shareholder represents a promissory note from a
shareholder in conjunction with the issuance of stock.
Income Taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109").
SFAS No. 109 requires the liability method of accounting for deferred income
taxes. Deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities. Deferred tax assets or liabilities at the end of each period are
determined using the tax rate expected to be in effect when taxes are actually
paid or recovered.
Statements of Cash Flows Information
For the years ended December 31, 1995, 1996 and 1997, the Company paid
interest of $7,078, $3,936 and $5,220, respectively. Amounts paid for taxes were
not significant.
On October 1, 1996, the Company entered into an agreement with a physician
for the purchase of 1,000 shares of the Company's Common stock for $5,470. The
purchase price was represented by a promissory note receivable which was paid in
full during 1997.
3. LINE OF CREDIT:
In 1993, the Company entered into a credit agreement (the "Agreement") with
a local bank for a $147,000 line of credit. Interest is accrued on the
outstanding balance at the bank's prime rate plus 1.5% (9.0% at December 31,
1997). Outstanding borrowings plus any unpaid interest, fees or expenses are
guaranteed by the shareholders.
4. EMPLOYEE BENEFIT PLAN:
The Company provides a 401(k) profit sharing plan that covers all qualified
employees, as defined by the plan agreement. Employees vest immediately in all
contributions. The Company makes contributions of 5% of
F-67
<PAGE>
CESARE, METZGER, COYLE AND HENZES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
4. EMPLOYEE BENEFIT PLAN: -- (CONTINUED)
an employee's salary. For the years ended December 31, 1995, 1996 and 1997,
contributions to the plan were $57,032, $62,698 and $63,042, respectively.
5. INCOME TAXES:
The components of the income tax provision (benefit) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1995 1996 1997
------- -------- --------
<S> <C> <C> <C>
Current:
Federal........................................... $ 6,800 $ 932 $ 10,762
State............................................. 4,533 622 7,174
------- -------- --------
11,333 1,554 17,936
------- -------- --------
Deferred:
Federal........................................... 7,435 (10,123) (9,854)
State............................................. 4,957 (6,749) (6,570)
------- -------- --------
12,392 (16,872) (16,424)
------- -------- --------
$23,725 $(15,318) $ 1,512
======= ======== ========
</TABLE>
Income tax expense (benefit) differs from the amount currently payable or
receivable because certain expenses, primarily depreciation and accruals, are
reported in different periods for financial reporting and income tax purposes.
The Company is on a cash basis of accounting for income tax purposes.
The provision (benefit) for income taxes differs from the amount computed
by applying the U.S. Federal income tax rate (34%) because of the effect of the
following items:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1995 1996 1997
------- -------- --------
<S> <C> <C> <C>
Tax at U.S. Federal statutory rate.................. $30,995 $(24,296) $ (426)
Tax impact of Federal rate differential for
graduated rates................................... (18,245) 13,685 238
State income taxes, net of federal benefit.......... 8,500 (7,073) (125)
Non-deductible travel and entertainment............. 2,475 2,366 1,825
------- -------- --------
$23,725 $(15,318) $ 1,512
======= ======== ========
</TABLE>
The components of the net deferred tax liability, measured under SFAS No.
109, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1997
-------- -------
<S> <C> <C>
Deferred tax liabilities:
Property and equipment.................................... $ 7,870 $ 5,499
Cash to accrual adjustments............................... 86,768 72,715
-------- -------
Net deferred tax liability.................................. $ 94,638 $78,214
======== =======
</TABLE>
F-68
<PAGE>
CESARE, METZGER, COYLE AND HENZES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
6. COMMITMENTS AND CONTINGENCIES:
Lease Obligations
The Company leases its office space from entities affiliated with several
of the owners of the Company. Future minimum lease payments for noncancelable
operating leases primarily for office space as of December 31, 1997, are as
follows:
<TABLE>
<CAPTION>
RELATED-PARTY
LEASES OTHER LEASES
------------- ------------
<S> <C> <C>
1998..................................................... $ 87,262 $14,702
1999..................................................... 87,262 3,936
2000..................................................... 87,262 --
2001..................................................... 87,262 --
2002..................................................... 87,262 --
Thereafter............................................... 196,338 --
</TABLE>
Rent expense on related-party operating leases was $86,673, $87,262 and
$87,262 for the years ended December 31, 1995, 1996 and 1997, respectively. Rent
expense on nonrelated-party operating leases was $15,845, $32,133 and $31,240
for the years ended December 31, 1995, 1996 and 1997, respectively.
Insurance Policies
The Company maintains insurance with respect to medical malpractice risks
on an occurrence basis in amounts management believes to be adequate. Management
is not aware of any outstanding claims which would have a material impact on the
Company's financial position or results of operations.
The Pennsylvania Medical Professional Liability Catastrophic Loss Fund (the
"CAT Fund"), an agency fund of the Commonwealth of Pennsylvania, acts as a
service agent to facilitate the payment of medical malpractice claims exceeding
the primary layer of professional liability insurance carried by physicians and
other health care providers practicing in Pennsylvania. The CAT Fund policies
are retrospectively rated on a claims-made basis. The CAT Fund levies health
care provider surcharges, as a percentage of insurance premiums for basic
coverage, to pay claims and administrative expenses on behalf of CAT Fund
participants.
The CAT Fund is significantly underfunded and the Commonwealth has
indicated that the unfunded liability will be funded exclusively through
surcharge assessments in future years as claims are settled and paid. The
Company and the other CAT Fund participants received a surcharge assessment
during fiscal 1996 and 1997. No provision has been made for any future CAT Fund
assessments in the accompanying financial statements as the Company's portion of
the CAT Fund unfunded liability could not be reasonably estimated.
Health Care Regulatory Environment and Reliance on Government Programs
The health care industry in general and the services that the Company
provides are subject to extensive federal and state laws and regulations.
Additionally, a portion of the Company's net revenue is from payments by
government-sponsored health care programs, principally Medicare and Medicaid,
and is subject to audit and adjustments by applicable regulatory agencies.
Failure to comply with any of these laws or regulations, the results of
regulatory audits and adjustments, or changes in the amounts payable for the
Company's services under these programs could have a material adverse effect on
the Company's financial position and results of operations.
F-69
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Lehigh Valley Orthopedics, Inc.:
We have audited the accompanying balance sheets of Lehigh Valley Orthopedics,
Inc. (a Pennsylvania corporation) as of December 31, 1996 and 1997, and the
related statements of operations and retained earnings and cash flows for each
of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Lehigh Valley Orthopedics, Inc.
as of December 31, 1996 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
February 20, 1998
F-70
<PAGE>
LEHIGH VALLEY ORTHOPEDICS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- MARCH 31,
1996 1997 1998
---------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 94,936 $ 1,800 $ 1,800
Accounts receivable, net of allowance of $846,105,
$754,602 and $884,021................................. 734,509 457,380 536,336
Due from U.S. PHYSICIANS, Inc............................ -- 69,681 65,375
Prepaid expenses and other............................... 18,089 -- --
---------- -------- --------
Total current assets................................ 847,534 528,861 603,511
---------- -------- --------
Property and equipment:
Equipment, furniture and fixtures........................ 519,871 525,005 525,005
Leasehold improvements................................... 65,510 66,330 66,330
---------- -------- --------
585,381 591,335 591,335
Less -- Accumulated depreciation and amortization........ (370,394) (403,244) (407,658)
---------- -------- --------
214,987 188,091 183,677
---------- -------- --------
Deferred income taxes...................................... 40,793 51,665 51,665
---------- -------- --------
Other assets............................................... 17,619 4,817 4,817
---------- -------- --------
$1,120,933 $773,434 $843,670
========== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit........................................... $ 100,000 $100,000 $100,000
Current maturities of long-term debt..................... 99,882 99,137 98,773
Accounts payable......................................... 77,001 22,270 52,129
Accrued compensation..................................... 90,941 68,640 134,773
Deferred income taxes.................................... 138,409 104,446 104,446
Due to shareholders...................................... 530 -- --
---------- -------- --------
Total current liabilities........................... 506,763 394,493 490,121
---------- -------- --------
Long-term debt............................................. 433,914 348,777 323,385
---------- -------- --------
Commitments and contingencies (Note 7)
Shareholders' equity:
Common Stock, no par value; $10 stated value; 5,000
shares authorized, 100 shares issued and
outstanding........................................... 1,000 1,000 1,000
Retained earnings........................................ 179,256 29,164 29,164
---------- -------- --------
Total shareholders' equity.......................... 180,256 30,164 30,164
---------- -------- --------
$1,120,933 $773,434 843,670
========== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-71
<PAGE>
LEHIGH VALLEY ORTHOPEDICS, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ -----------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues............................... $4,318,868 $4,974,776 $4,026,728 $1,176,834 $1,129,777
---------- ---------- ---------- ---------- ----------
Operating expenses:
Salaries, wages and benefits............. 3,179,119 3,633,826 3,090,654 895,095 680,013
Pharmaceuticals and medical supplies..... 100,478 111,677 80,204 66,827 71,273
General and administrative............... 1,055,481 953,909 809,279 155,554 145,921
Management fee due U.S. PHYSICIANS,
Inc.................................... -- -- 134,562 -- 213,340
Depreciation and amortization............ 48,526 37,646 44,405 14,226 4,414
---------- ---------- ---------- ---------- ----------
Income (loss) from operations.............. (64,736) 237,718 (132,376) 45,132 14,816
Interest expense, net...................... 45,612 62,664 61,501 12,037 14,816
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes.......... (110,348) 175,054 (193,877) 33,095 --
Income tax provision (benefit)............. (23,236) 47,128 (43,785) 8,042 --
---------- ---------- ---------- ---------- ----------
Net income (loss).......................... (87,112) 127,926 (150,092) 25,053 --
Retained earnings, beginning of period..... 138,442 51,330 179,256 179,256 29,164
---------- ---------- ---------- ---------- ----------
Retained earnings, end of period........... $ 51,330 $ 179,256 $ 29,164 $ 204,309 $ 29,164
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-72
<PAGE>
LEHIGH VALLEY ORTHOPEDICS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------- ------------------
1995 1996 1997 1997 1998
-------- -------- --------- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss)................................. $(87,112) $127,926 $(150,092) $ 25,053 $ --
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating
activities --
Depreciation and amortization................. 48,526 37,646 44,405 14,225 4,414
Deferred income taxes......................... (20,508) 47,759 (44,835) 8,042 --
Loss on disposal of fixed assets.............. (31,894) -- (6,421) -- --
Changes in assets and liabilities --
Accounts receivable........................ (330,525) (53,025) 277,129 (144,645) (78,956)
Prepaid expenses and other................. 12,498 (2,512) 30,891 (26,874) --
Due from U.S. PHYSICIANS, Inc.............. -- -- (69,681) -- 4,306
Accounts payable........................... 58,243 (7,005) (54,731) 17,469 29,859
Due to shareholders........................ 62,755 (24,470) (530) (3,234) --
Accrued compensation....................... (128,745) 30,890 (22,301) 49,469 66,133
-------- -------- --------- -------- -------
Net cash (used in) provided by operating
activities............................. (416,762) 157,209 3,834 (60,495) 25,756
-------- -------- --------- -------- -------
Investing activities:
Purchases of property and equipment............... (242,552) (17,800) (42,032) (36,322) --
Sale of property and equipment.................... 59,958 19,293 30,944 -- --
-------- -------- --------- -------- -------
Net cash (used in) provided by investing
activities............................. (182,594) 1,493 (11,088) (36,322) --
-------- -------- --------- -------- -------
Financing activities:
Net borrowings on line of credit.................. 509 -- -- -- --
Proceeds from long-term debt...................... 782,496 152,494 326,078 113,000 --
Repayment of long-term debt....................... (172,883) (251,784) (411,960) (25,022) (25,756)
-------- -------- --------- -------- -------
Net cash provided by (used in) financing
activities............................. 610,122 (99,290) (85,882) 87,978 (25,756)
-------- -------- --------- -------- -------
Net increase (decrease) in cash and cash
equivalents....................................... 10,766 59,412 (93,136) (8,839) --
Cash and cash equivalents, beginning of period...... 24,758 35,524 94,936 94,936 1,800
-------- -------- --------- -------- -------
Cash and cash equivalents, end of period............ $ 35,524 $ 94,936 $ 1,800 $ 86,097 $ 1,800
======== ======== ========= ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-73
<PAGE>
LEHIGH VALLEY ORTHOPEDICS, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
1. ORGANIZATION AND BUSINESS:
Lehigh Valley Orthopedics, Inc. (the "Company") is a physician-owned
medical practice serving the Lehigh Valley, Pennsylvania area. The Company was
formed in 1978 for the purpose of rendering professional medical orthopedic and
rehabilitative services.
On August 1, 1997, the Company and the selling owners entered into a Stock
Acquisition Agreement, as amended through April 21, 1998, (the "Affiliation
Agreement") with U.S. PHYSICIANS, Inc. ("USP") (the "Initial Closing Date").
Under the terms of the Affiliation Agreement, USP and its affiliated
professional corporation acquired the outstanding stock of the Company effective
as of November 7, 1997 in exchange for cash, notes, convertible notes and shares
of USP Common Stock, subject to adjustment, as defined. The Affiliation
Agreement contains a repurchase provision that allows the selling owners, in the
event that an initial public offering ("IPO") has not been completed by USP by
June 15, 1998 (the "Repurchase Date"), to repurchase the stock of their practice
by returning all of the consideration received, excluding the initial cash
payment.
In accordance with Accounting Principles Board Opinion No. 16, the
Affiliation Agreement is not considered effective for applying purchase
accounting until either the date that USP completes an IPO or the repurchase
provision terminates (the "Final Closing Date"). Pursuant to the Affiliation
Agreement, for the period of time between the Initial Closing Date and the Final
Closing Date, USP is responsible for managing the Company, including cash
management, and receives a management fee equal to the income earned by the
Company. Accordingly, the statements of operations for the three months ended
March 31, 1998 and the year ended December 31, 1997 include a management fee
charge for the income earned by the Company for the three months ended March 31,
1998 and for the period from the Initial Closing Date to December 31, 1997,
respectively. The balance sheets as of December 31, 1997 and March 31, 1998
contain a Due from U.S. PHYSICIANS, Inc. account to reflect the net cash
activity for the respective period.
2. SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Statements
The financial statements for the three months ended March 31, 1997 and 1998
are unaudited, and in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the financial position as of March 31, 1998 and the results of
its operations for the three months ended March 31, 1997 and 1998. The results
of operations for the three-month period are not necessarily indicative of the
results to be expected for the entire year.
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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
Financial instruments consist of cash and cash equivalents, accounts
receivable, certain current liabilities and debt obligations. The carrying
amounts reported in the balance sheets for these items approximate fair value.
F-74
<PAGE>
LEHIGH VALLEY ORTHOPEDICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
Net Revenues
Revenues from patients, third-party payors and others are recorded at
established rates, net of provision for bad debts and contractual adjustments,
in the period that services are rendered. Contractual adjustments represent the
difference between charges at established rates and the estimated amount to be
reimbursed.
Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments
purchased with an original maturity of three months or less.
Accounts Receivable
Accounts receivable primarily consist of receivables from patients,
third-party payors and others. Such amounts are recorded net of contractual
allowances and estimated bad debts.
Concentration of Credit Risk
The Company extends credit to patients covered by programs such as
Medicare, 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.
Property and Equipment
Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to expense as incurred. Depreciation and amortization are
provided over the estimated useful lives of the applicable assets ranging from
five to seven years for equipment, furniture and fixtures and the related lease
term for leasehold improvements and are computed using the straight-line method.
Due to/from Shareholders
Amounts due to/from shareholders represent advances to or from shareholders
which are repaid in subsequent periods.
Income Taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109").
SFAS No. 109 requires the liability method of accounting for deferred income
taxes. Deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities. Deferred tax assets or liabilities at the end of each period are
determined using the tax rate expected to be in effect when taxes are actually
paid or recovered.
Statements of Cash Flows Information
For the years ended December 31, 1995, 1996 and 1997, the Company paid
interest of $46,250, $62,673 and $62,057, respectively. Amounts paid for taxes
were not significant.
3. LINE OF CREDIT:
The Company has a credit agreement with a local bank for a $100,000 line of
credit. Interest is accrued on the outstanding balance at the bank's prime rate
plus .50% through April 1995 and the bank's prime rate
F-75
<PAGE>
LEHIGH VALLEY ORTHOPEDICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
3. LINE OF CREDIT: -- (CONTINUED)
plus .25% from April 1995 forward (8.75% at December 31, 1997). Outstanding
borrowings plus any unpaid interest, fees or expenses are guaranteed by the
shareholders.
4. LONG-TERM DEBT:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
-------- --------
<S> <C> <C>
Note payable to a bank, interest at bank's prime rate plus
.25%, principal payments of $7,738 per month through June
2002...................................................... $510,714 $417,857
Note payable to a bank, interest at 8.5%, monthly payments
of principal and interest of $720 through March 2000...... 23,082 30,057
-------- --------
533,796 447,914
Less-Current maturities..................................... (99,882) (99,137)
-------- --------
$433,914 $348,777
======== ========
</TABLE>
Future maturities of long-term debt at December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998........................................................ $ 99,137
1999........................................................ 99,696
2000........................................................ 100,296
2001........................................................ 100,955
2002........................................................ 47,830
--------
$447,914
========
</TABLE>
5. EMPLOYEE BENEFIT PLAN:
The Company provides a 401(k) profit sharing plan that covers all qualified
employees, as defined by the plan agreement. Employees vest immediately.
Contributions to the plan are discretionary and are determined by the Company on
a September 30 plan year-end basis. Effective October 1, 1994, the Company no
longer contributes to the plan. For the years ended December 31, 1995, 1996 and
1997, no contributions were made to the plan.
6. INCOME TAXES:
The components of the income tax provision (benefit) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal......................................... $ (1,637) $ (379) $ 811
State........................................... (1,091) (252) 406
-------- -------- --------
(2,728) (631) 1,217
-------- -------- --------
Deferred:
Federal......................................... (12,305) 28,655 (30,001)
State........................................... (8,203) 19,104 (15,001)
-------- -------- --------
(20,508) 47,759 (45,002)
-------- -------- --------
$(23,236) $ 47,128 $(43,785)
======== ======== ========
</TABLE>
F-76
<PAGE>
LEHIGH VALLEY ORTHOPEDICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
6. INCOME TAXES: -- (CONTINUED)
Income tax expense (benefit) differs from the amount currently payable or
receivable because certain expenses, primarily depreciation and accruals, are
reported in different periods for financial reporting and income tax purposes.
The Company is on a cash basis of accounting for income tax purposes.
The provision (benefit) for income taxes differs from the amount computed
by applying the U.S. Federal income tax rate (34%) because of the effect of the
following items:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Tax at U.S. Federal statutory rate................ $(37,518) $ 59,518 $(62,858)
Tax impact of Federal rate differential for
graduated rates................................. 21,375 (33,165) 35,127
State income taxes, net of federal benefit........ (10,762) 17,569 (18,488)
Non-deductible travel and entertainment........... 3,669 3,206 2,434
-------- -------- --------
$(23,236) $ 47,128 $(43,785)
======== ======== ========
</TABLE>
The components of the net deferred tax liability, measured under SFAS No.
109, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
--------- ---------
<S> <C> <C>
Deferred tax assets --
Net operating loss carryforward........................... $ 50,427 $ 61,230
--------- ---------
Deferred tax liabilities --
Property and equipment.................................... (9,565) (9,565)
Cash to accrual adjustments............................... (138,478) (104,446)
--------- ---------
(148,043) (114,011)
--------- ---------
Net deferred tax liability.................................. $ (97,616) $ (52,781)
========= =========
</TABLE>
7. COMMITMENTS AND CONTINGENCIES:
Lease Obligations
Future minimum lease payments for noncancelable operating leases primarily
for office space as of December 31, 1997, are as follows:
<TABLE>
<S> <C>
1998............................................. $179,843
1999............................................. 182,610
2000............................................. 1,740
2001............................................. 1,740
2002............................................. 1,160
</TABLE>
Rent expense on operating leases was $176,212, $233,477 and $213,776 for
the years ended December 31, 1995, 1996 and 1997, respectively.
F-77
<PAGE>
LEHIGH VALLEY ORTHOPEDICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
7. COMMITMENTS AND CONTINGENCIES: -- (CONTINUED)
Insurance Policies
The Company maintains insurance with respect to medical malpractice risks
on an occurrence basis for all of the physicians except one in amounts
management believes to be adequate. The remaining physician has a malpractice
insurance policy on a claims basis. Management is not aware of any outstanding
claims which would have a material impact on the Company's financial position or
results of operations.
The Pennsylvania Medical Professional Liability Catastrophic Loss Fund (the
"CAT Fund"), an agency fund of the Commonwealth of Pennsylvania, acts as a
service agent to facilitate the payment of medical malpractice claims exceeding
the primary layer of professional liability insurance carried by physicians and
other health care providers practicing in Pennsylvania. The CAT Fund policies
are retrospectively rated on a claims-made basis. The CAT Fund levies health
care provider surcharges, as a percentage of insurance premiums for basic
coverage, to pay claims and administrative expenses on behalf of CAT Fund
participants.
The CAT Fund is significantly underfunded and the Commonwealth has
indicated that the unfunded liability will be funded exclusively through
surcharge assessments in future years as claims are settled and paid. The
Company and the other CAT Fund participants received a surcharge assessment
during fiscal 1996 and 1997. No provision has been made for any future CAT Fund
assessments in the accompanying financial statements as the Company's portion of
the CAT Fund unfunded liability could not be reasonably estimated.
Health Care Regulatory Environment and Reliance on Government Programs
The health care industry in general and the services that the Company
provides are subject to extensive federal and state laws and regulations.
Additionally, a portion of the Company's net revenue is from payments by
government-sponsored health care programs, principally Medicare and Medicaid,
and is subject to audit and adjustments by applicable regulatory agencies.
Failure to comply with any of these laws or regulations, the results of
regulatory audits and adjustments, or changes in the amounts payable for the
Company's services under these programs could have a material adverse effect on
the Company's financial position and results of operations.
F-78
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Network Medical, Inc.:
We have audited the accompanying balance sheets of Network Medical, Inc. (a
Pennsylvania corporation) as of September 30, 1996 and 1997, and the related
statements of operations, shareholders' deficit and cash flows for each of the
three years in the period ended September 30, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Network Medical, Inc. as of
September 30, 1996 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 1997, in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has experienced a net loss for each of the
three years in the period ended September 30, 1997 and has a substantial debt
obligation that is payable on demand. These matters raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 1. The accompanying
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or amounts and
classifications of liabilities that might be necessary should the Company be
unable to continue as a going concern.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
January 16, 1998
F-79
<PAGE>
NETWORK MEDICAL, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------- JANUARY 15,
1996 1997 1998
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 17,385 $ -- $ --
Accounts receivable....................................... 5,066 13,291 --
Prepaid expenses and other................................ 1,209 -- --
-------- -------- --------
Total current assets................................... 23,660 13,291 --
-------- -------- --------
Investments................................................. -- 50,000 50,000
-------- -------- --------
Property and equipment:
Equipment, furniture and fixtures......................... 8,931 8,931 8,931
Less -- Accumulated depreciation.......................... (2,164) (4,839) (5,277)
-------- -------- --------
6,767 4,092 3,654
-------- -------- --------
$ 30,427 $ 67,383 $ 53,654
======== ======== ========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Line of credit............................................ $350,000 $500,000 $500,000
Short-term note payable................................... 12,500 -- --
Accounts payable.......................................... 27,903 -- --
Accrued compensation...................................... 32,282 14,003 17,849
Due to U.S. PHYSICIANS, Inc............................... -- 171,414 209,678
-------- -------- --------
Total current liabilities.............................. 422,685 685,417 727,527
-------- -------- --------
Commitments and contingencies
Shareholders' deficit:
Common Stock, $1 par value; authorized 10,000,000 shares
of Class A; 10,000,000 shares of Class B; and 51,000
Founders shares; outstanding -- 51,000 Founders
shares................................................. 51,000 51,000 51,000
Additional paid-in capital................................ 136,500 136,500 136,500
Accumulated deficit....................................... (567,258) (805,534) (861,373)
Stock subscriptions receivable............................ (12,500) -- --
-------- -------- --------
Total shareholders' deficit............................ (392,258) (618,034) (673,873)
-------- -------- --------
$ 30,427 $ 67,383 $ 53,654
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-80
<PAGE>
NETWORK MEDICAL, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
OCTOBER 1, 1997
YEAR ENDED SEPTEMBER 30, TO
--------------------------------- JANUARY 15,
1995 1996 1997 1998
--------- --------- --------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues......................................... $ 10,111 $ 11,236 $ 42,269 $ 21,687
--------- --------- --------- --------
Operating expenses:
Salaries, wages and benefits................... 66,054 183,418 126,747 31,217
General and administrative..................... 50,220 275,424 112,398 33,220
Depreciation................................... 433 1,731 2,675 438
--------- --------- --------- --------
Loss from operations............................. (106,596) (449,337) (199,551) (43,188)
Interest expense, net............................ -- 8,169 38,725 12,651
--------- --------- --------- --------
Net loss......................................... $(106,596) $(457,506) $(238,276) $(55,839)
========= ========= ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-81
<PAGE>
NETWORK MEDICAL, INC.
STATEMENTS OF SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
ADDITIONAL STOCK
COMMON PAID-IN ACCUMULATED SUBSCRIPTIONS
STOCK CAPITAL DEFICIT RECEIVABLE TOTAL
------- ---------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1994........... $ -- $ -- $ (3,156) $ -- $ (3,156)
Issuance of Common Stock.............. 51,000 136,500 -- (88,500) 99,000
Net loss.............................. -- -- (106,596) -- (106,596)
------- -------- --------- -------- ---------
Balance at September 30, 1995........... 51,000 136,500 (109,752) (88,500) (10,752)
Payment of stock subscriptions........ -- -- -- 76,000 76,000
Net loss.............................. -- -- (457,506) -- (457,506)
------- -------- --------- -------- ---------
Balance at September 30, 1996........... 51,000 136,500 (567,258) (12,500) (392,258)
Payment of stock subscriptions........ -- -- -- 12,500 12,500
Net loss.............................. -- -- (238,276) -- (238,276)
------- -------- --------- -------- ---------
Balance at September 30, 1997........... 51,000 136,500 (805,534) -- (618,034)
Net loss (unaudited).................. -- -- (55,839) -- (55,839)
------- -------- --------- -------- ---------
Balance at January 15, 1998
(unaudited)........................... $51,000 $136,500 $(861,373) $ -- $(673,873)
======= ======== ========= ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-82
<PAGE>
NETWORK MEDICAL, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
OCTOBER 1, 1997
YEAR ENDED SEPTEMBER 30, TO
--------------------------------- JANUARY 15,
1995 1996 1997 1998
--------- --------- --------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Operating activities:
Net loss....................................... $(106,596) $(457,506) $(238,276) $(55,839)
Adjustments to reconcile net loss to net cash
used in operating activities --
Depreciation.............................. 433 1,731 2,675 438
Changes in assets and liabilities --
Accounts receivable..................... (1,154) (3,912) (8,225) 13,291
Prepaid expenses and other.............. -- (1,209) 1,209 --
Accounts payable........................ 15,992 8,091 (27,903) --
Accrued compensation.................... 4,858 27,424 (18,279) 3,846
Other................................... (13,905) -- -- --
Due to U.S. PHYSICIANS, Inc............. -- -- 171,414 38,264
--------- --------- --------- --------
Net cash used in operating
activities......................... (100,372) (425,381) (117,385) --
--------- --------- --------- --------
Investing activities:
Purchases of property and equipment............ (8,554) (377) -- --
Investments.................................... -- -- (50,000) --
--------- --------- --------- --------
Net cash used in investing
activities......................... (8,554) (377) (50,000) --
--------- --------- --------- --------
Financing activities:
Net borrowings from line of credit............. -- 350,000 150,000 --
Net borrowings (repayments) on short-term
note payable................................. -- 12,500 (12,500) --
Proceeds from issuance of stock................ 99,000 -- -- --
Proceeds from stock subscriptions.............. -- 76,000 12,500 --
--------- --------- --------- --------
Net cash provided by financing
activities......................... 99,000 438,500 150,000 --
--------- --------- --------- --------
Net (decrease) increase in cash and cash
equivalents.................................... (9,926) 12,742 (17,385) --
Cash and cash equivalents, beginning of period... 14,569 4,643 17,385 --
--------- --------- --------- --------
Cash and cash equivalents, end of period......... $ 4,643 $ 17,385 $ -- $ --
========= ========= ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-83
<PAGE>
NETWORK MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF JANUARY 15, 1998 AND FOR THE PERIOD ENDED
JANUARY 15, 1998 IS UNAUDITED)
1. ORGANIZATION AND BUSINESS:
Network Medical, Inc. (the "Company") assists physicians in delivering
health care services for workers' compensation injuries and administers a
network of physicians, employers, and third party administrators for the purpose
of providing high quality, cost effective care in a managed care environment.
On January 27, 1997 (the "Initial Closing Date"), the Company and the
selling owners entered into a Stock Acquisition Agreement, (the "Affiliation
Agreement") with U.S. PHYSICIANS, Inc. ("USP"). Under the terms of the
Affiliation Agreement, USP acquired 85% of the outstanding stock of the Company
in exchange for notes and convertible notes. The notes issued pursuant to the
Affiliation Agreement contain a repurchase provision that allows the selling
owners, in the event that an initial public offering ("IPO") has not been
completed by USP by December 31, 1997 (the "Repurchase Date"), and certain other
defined events do not occur by the Repurchase Date, to repurchase the stock of
the Company for a defined period of time (the "Repurchase Period") by returning
all of the notes received and, at the election of USP, by either delivering to
USP certificates representing 15% of the outstanding stock of the Company or by
delivering to USP promissory notes in the aggregate principal amount of USP's
capital contribution to the Company. On January 16, 1998, the Repurchase Period
ended as the selling owners did not exercise their rights to repurchase their
shares.
In accordance with Accounting Principles Board Opinion No. 16, the
Affiliation Transaction is considered effective for applying purchase accounting
on January 16, 1998, as the repurchase provision lapsed (the "Final Closing
Date"). In addition, pursuant to the Affiliation Agreement, for the period of
time between the Initial Closing Date and the Final Closing Date, USP was
responsible for managing the Company, including cash management. Accordingly,
the balance sheets as of January 15, 1998 and September 30, 1997 contain a Due
to U.S. PHYSICIANS, Inc. account to reflect the net cash activity for the same
period.
Going Concern
The Company has experienced a net loss for each of the three years in the
period ended September 30, 1997 and has a substantial debt obligation that is
payable upon demand. These matters raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are described in the following paragraph. The accompanying financial
statements do not include any adjustments related to the recoverability and
classification of recorded asset amounts or the amounts and classification of
liabilities that might be necessary should the Company be unable to continue as
a going concern.
For the year ended September 30, 1997, the Company reported a net loss of
$238,276, and as of September 30, 1997 had a total shareholders' deficiency of
$618,034. The Company is highly leveraged, with a line of credit due on demand
totaling $500,000 at September 30, 1997. In the event that the line of credit is
called by the bank, the shareholders of the Company who personally guaranteed
the debt would be required to satisfy the obligation. With the purchase of 85%
of the stock by USP in January 1997, management has implemented a plan to
control costs by reducing staff and is focusing on aggressively marketing its
products to increase revenues. There can be no assurances that the bank will not
demand payment on the line of credit or that the Company will be successful in
its attempts to control costs and raise revenues.
2. SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Statements
The financial statements for the period ended January 15, 1998, are
unaudited, and in the opinion of management, include all adjustments (consisting
only of normal recurring adjustments) necessary for a fair presentation of the
financial position as of January 15, 1998, and the results of its operations for
the period
F-84
<PAGE>
NETWORK MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF JANUARY 15, 1998 AND FOR THE PERIOD ENDED
JANUARY 15, 1998 IS UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
ended January 15, 1998. The results of operations for the period are not
necessarily indicative of the results to be expected for the entire year.
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 revenues and expenses during the
reporting period. Actual results could differ from
those estimates.
Fair Value of Financial Instruments
Financial instruments consist of cash and cash equivalents, accounts
receivable, certain current liabilities and debt obligations. The carrying
amounts reported in the balance sheets for these items approximate
fair value.
Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments
purchased with an original maturity of three months or less.
Property and Equipment
Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to expense as incurred. Depreciation is provided over the
estimated useful lives of the applicable assets ranging from five to ten years
and are computed using the straight-line method.
Income Taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109").
SFAS No. 109 requires the liability method of accounting for deferred income
taxes. Deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities. Deferred tax assets or liabilities at the end of each period are
determined using the tax rate expected to be in effect when taxes are actually
paid or recovered.
Statements of Cash Flows Information
For the years ended September 30, 1995, 1996 and 1997, the Company paid
interest of $0, $8,169 and $38,725, respectively. Amounts paid for taxes were
insignificant.
3. INVESTMENTS:
In November 1996, the Company acquired common stock of Preferred Care Life
Insurance Company ("PCLIC") for a purchase price of $100,000. Of the purchase
price, $50,000 was paid at acquisition and the balance will be paid at the time
PCLIC meets certain covenants contained in the purchase agreement. The purchase
entitles the Company to receive 95% of the net profits generated by PCLIC in the
Lancaster, Pennsylvania region, as defined.
F-85
<PAGE>
NETWORK MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF JANUARY 15, 1998 AND FOR THE PERIOD ENDED
JANUARY 15, 1998 IS UNAUDITED)
4. LINE OF CREDIT:
The Company has a line of credit totaling $500,000, bearing interest at the
bank's prime rate (8.5% at September 30, 1997). The line is due on demand and is
collateralized by the personal guarantees of certain of the selling owners. At
September 30, 1997, the balance outstanding on the line of credit was $500,000.
5. SHORT-TERM NOTE PAYABLE:
In 1996, the Company borrowed $12,500 from a bank, bearing interest at the
bank's prime rate (8.25% at September 30, 1996). The loan was guaranteed by a
shareholder and was repaid with the proceeds from the shareholder's stock
subscription receivable on November 29, 1996.
6. RELATED PARTY TRANSACTIONS:
The Company rents its property from a related entity. Rent expense amounted
to $950, $12,350 and $11,400 for the years ended September 30, 1995, 1996 and
1997, respectively. The lease expires in 1998. In addition, the Company owed
$13,905 for expense reimbursements to an entity related through common ownership
at September 30, 1994. This amount was paid in fiscal year 1995. Accounts
receivable as of September 30, 1996 includes $1,833 from providers who are also
shareholders.
7. INCOME TAXES:
The components of the income tax benefit are as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------
1995 1996 1997
------- -------- -------
<S> <C> <C> <C>
Current:
Federal............................................... $ -- $ -- $ --
State................................................. -- -- --
------- -------- -------
-- -- --
------- -------- -------
Deferred:
Federal............................................... (16,022) (68,494) (33,732)
State................................................. (10,682) (45,663) (16,614)
------- -------- -------
(26,704) (114,157) (50,346)
------- -------- -------
Increase in valuation allowance......................... 26,704 114,157 50,346
------- -------- -------
$ -- $ -- $ --
======= ======== =======
</TABLE>
Income tax expense (benefit) differs from the amount currently payable or
receivable because certain expenses, primarily depreciation and accruals, are
reported in different periods for financial reporting and income tax purposes.
F-86
<PAGE>
NETWORK MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF JANUARY 15, 1998 AND FOR THE PERIOD ENDED
JANUARY 15, 1998 IS UNAUDITED)
7. INCOME TAXES: -- (CONTINUED)
The provision (benefit) for income taxes differs from the amount computed
by applying the U.S. Federal income tax rate (34%) because of the effect of the
following items:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
1995 1996 1997
-------- --------- --------
<S> <C> <C> <C>
Tax at U.S. Federal statutory rate.................... $(36,243) $(152,775) $(67,232)
Tax impact of Federal rate differential for graduated
rates............................................... 20,197 84,136 36,429
State income taxes, net of federal benefit............ (10,660) (45,751) (19,774)
Other................................................. 2 233 231
Valuation allowance................................... 26,704 114,157 50,346
-------- --------- --------
$ -- $ -- $ --
======== ========= ========
</TABLE>
The components of the net deferred tax asset, measured under SFAS No. 109,
are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1996 1997
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward........................... $140,131 $178,153
Accrued expenses.......................................... 1,675 13,695
-------- --------
141,806 191,848
Gross deferred tax liabilities.............................. (304) --
Less valuation allowance.................................... (141,502) (191,848)
-------- --------
Net deferred tax asset...................................... $ -- $ --
======== ========
</TABLE>
8. STOCK SPLIT:
During the year ended September 30, 1996, the stockholders approved a
30-for-1 stock split for its existing shares and authorized 10,000,000 shares of
Class A and 10,000,000 shares of Class B Common Stock. All amounts in these
financial statements have been restated to reflect the stock split.
F-87
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Orthopaedic and Sports Medicine Specialists of the Main Line, Inc.:
We have audited the accompanying balance sheets of Orthopaedic and Sports
Medicine Specialists of the Main Line, Inc. (a Pennsylvania corporation) as of
December 31, 1996 and 1997 and the related statements of operations and retained
earnings and cash flows for each of the three years in the period ended December
31, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Orthopaedic and Sports Medicine
Specialists of the Main Line, Inc. as of December 31, 1996 and 1997, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
March 3, 1998
F-88
<PAGE>
ORTHOPAEDIC AND SPORTS MEDICINE SPECIALISTS OF
THE MAIN LINE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- MARCH 31,
1996 1997 1998
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 10,337 $ 26,625 $ 26,625
Accounts receivable, net of allowance of $848,707,
$793,722 and $919,018.................................. 456,996 564,018 831,080
-------- -------- --------
Total current assets................................. 467,333 590,643 857,705
-------- -------- --------
Property and equipment:
Equipment, furniture and fixtures......................... 243,082 243,082 243,082
Leasehold improvements.................................... 21,526 21,526 21,526
-------- -------- --------
264,608 264,608 264,608
Less -- Accumulated depreciation and amortization......... (149,097) (169,669) (175,434)
-------- -------- --------
115,511 94,939 89,174
-------- -------- --------
$582,844 $685,582 $946,879
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit............................................ $ 15,000 $ -- $ --
Current maturities of long-term debt...................... 1,438 1,384 1,384
Accounts payable.......................................... 9,190 11,844 43,659
Accrued compensation...................................... 106,405 61,142 74,187
Due to U.S. PHYSICIANS, Inc............................... -- 41,992 258,795
Deferred income taxes..................................... 104,344 142,913 142,913
-------- -------- --------
Total current liabilities............................ 236,377 259,275 520,938
-------- -------- --------
Long-term debt.............................................. 7,062 5,710 5,344
-------- -------- --------
Deferred income taxes....................................... 15,806 14,605 14,605
-------- -------- --------
Commitments and contingencies (Note 8)
Shareholders' equity:
Common Stock, $1 par value, 1,000 shares authorized,
100 shares issued and outstanding...................... 100 100 100
Retained earnings......................................... 323,499 405,892 405,892
-------- -------- --------
Total shareholders' equity........................... 323,599 405,992 405,992
-------- -------- --------
$582,844 $685,582 $946,879
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-89
<PAGE>
ORTHOPAEDIC AND SPORTS MEDICINE SPECIALISTS OF
THE MAIN LINE, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ -------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues................................... $2,123,495 $1,961,309 $2,229,943 $619,300 $778,466
---------- ---------- ---------- -------- --------
Operating expenses:
Salaries, wages and benefits................. 1,426,695 1,654,870 1,208,103 323,605 335,818
Pharmaceuticals and medical supplies......... 32,543 37,282 38,326 7,379 7,723
General and administrative................... 462,116 410,569 489,062 139,396 111,337
Management fee due U.S. PHYSICIANS, Inc...... -- -- 362,792 24,640 317,661
Depreciation and amortization................ 29,641 29,513 20,572 13,925 5,765
---------- ---------- ---------- -------- --------
Income (loss) from operations.................. 172,500 (170,925) 111,088 110,355 162
Interest (expense) income, net................. (3,707) (506) 67 800 (162)
---------- ---------- ---------- -------- --------
Income (loss) before income taxes.............. 168,793 (171,431) 111,155 111,155 --
Income tax provision (benefit)................. 42,517 (41,244) 28,762 28,762 --
---------- ---------- ---------- -------- --------
Net income (loss).............................. 126,276 (130,187) 82,393 82,393 --
Retained earnings, beginning of period......... 327,410 453,686 323,499 323,499 405,892
---------- ---------- ---------- -------- --------
Retained earnings, end of period............... $ 453,686 $ 323,499 $ 405,892 $405,892 $405,892
========== ========== ========== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-90
<PAGE>
ORTHOPAEDIC AND SPORTS MEDICINE SPECIALISTS OF
THE MAIN LINE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------- ------------------
1995 1996 1997 1997 1998
-------- --------- --------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss)................................ $126,276 $(130,187) $ 82,393 $82,393 $ --
Adjustments to reconcile net income (loss) to net
cash provided by operating activities --
Depreciation and amortization................ 29,641 29,513 20,572 13,925 5,765
Deferred income taxes........................ 39,590 (39,799) 37,368 37,368 --
Changes in assets and liabilities --
Accounts receivable....................... (98,306) 92,610 (107,022) (25,806) (267,062)
Prepaid expenses and other................ (69,322) 69,322 -- -- --
Due to U.S. PHYSICIANS, Inc............... -- -- 41,992 15,174 216,803
Accounts payable.......................... 3,054 (1,724) 2,654 (5,322) 31,815
Accrued compensation...................... 4,288 20,746 (45,263) (85,989) 13,045
-------- --------- --------- ------- --------
Net cash provided by operating
activities............................ 35,221 40,481 32,694 31,743 366
-------- --------- --------- ------- --------
Investing activities:
Purchases of property and equipment.............. (6,595) (20,035) -- -- --
-------- --------- --------- ------- --------
Financing activities:
Net borrowings (repayments) on line of credit.... (17,000) 15,000 (15,000) (15,000) --
Proceeds from long-term debt..................... 139,519 8,500 635 -- --
Repayments on long-term debt..................... (84,118) (62,388) (2,041) (455) (366)
Repayments on shareholder loans.................. (40,200) -- -- -- --
-------- --------- --------- ------- --------
Net cash used in financing activities... (1,799) (38,888) (16,406) (15,455) (366)
-------- --------- --------- ------- --------
Net (decrease) increase in cash and cash
equivalents...................................... 26,827 (18,442) 16,288 16,288 --
Cash and cash equivalents, beginning of period..... 1,952 28,779 10,337 10,337 26,625
-------- --------- --------- ------- --------
Cash and cash equivalents, end of period........... $ 28,779 $ 10,337 $ 26,625 $26,625 $ 26,625
======== ========= ========= ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-91
<PAGE>
ORTHOPAEDIC AND SPORTS MEDICINE SPECIALISTS OF
THE MAIN LINE, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
1. ORGANIZATION AND BUSINESS:
Orthopaedic and Sports Medicine Specialists of the Main Line, Inc. (the
"Company") is a physician owned medical practice serving the Philadelphia,
Pennsylvania area. The Company is engaged in the business of rendering health
care services in the area of orthopedic, surgical and related support services.
On March 17, 1997, (the "Initial Closing Date"), the Company and the
selling owners entered into a Stock Acquisition Agreement, as amended through
April 21, 1998, (the "Affiliation Agreement") with U.S. PHYSICIANS, Inc.
("USP"). Under the terms of the Affiliation Agreement, USP and its affiliated
professional corporation acquired the outstanding stock of the Company in
exchange for cash, notes, convertible notes and shares of USP Common Stock,
subject to adjustment, as defined. The Affiliation Agreement contains a
repurchase provision that allows the selling owners, in the event that an
initial public offering ("IPO") has not been completed by USP by June 15, 1998
(the "Repurchase Date"), to repurchase the stock of their practice by returning
all of the consideration received, excluding the initial cash payment.
In accordance with Accounting Principles Board Opinion No. 16, the
Affiliation Agreement is not considered effective for applying purchase
accounting until either the date that USP completes an IPO or the repurchase
provision terminates (the "Final Closing Date"). Pursuant to the Affiliation
Agreement, for the period of time between the Initial Closing Date and the Final
Closing Date, USP is responsible for managing the Company, including cash
management, and receives a management fee equal to the income earned by the
Company. Accordingly, the statements of operations for the three months ended
March 31, 1997 and 1998 and the year ended December 31, 1997 include a
management fee charge for the income earned by the Company for the period from
the Initial Closing Date to March 31, 1997, for the three months ended March 31,
1998 and for the period from the Initial Closing Date to December 31, 1997,
respectively. The balance sheets as of December 31, 1997 and March 31, 1998
contain a Due to U.S. PHYSICIANS, Inc. account to reflect the net cash activity
for the respective period.
2. SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Statements
The financial statements for the three months ended March 31, 1997 and 1998
are unaudited, and in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the financial position as of March 31, 1998 and the results of
its operations for the three months ended March 31, 1997 and 1998. The results
of operations for the three-month period are not necessarily indicative of the
results to be expected for the entire year.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain 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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
Financial instruments consist of cash and cash equivalents, accounts
receivable, certain current liabilities and debt obligations. The carrying
amounts reported in the balance sheets for these items approximate fair value.
F-92
<PAGE>
ORTHOPAEDIC AND SPORTS MEDICINE SPECIALISTS OF
THE MAIN LINE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
Net Revenues
Revenues from patients, third-party payors and others are recorded at
established rates, net of provision for bad debts and contractual adjustments,
in the period that services are rendered. Contractual adjustments represent the
difference between charges at established rates and the estimated amount to be
reimbursed.
Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments
purchased with an original maturity of three months or less.
Accounts Receivable
Accounts receivable primarily consist of receivables from patients,
third-party payors and others. Such amounts are recorded net of contractual
allowances and estimated bad debts.
Concentration of Credit Risk
The Company extends credit to patients covered by programs such as
Medicare, 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.
Property and Equipment
Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to expense as incurred. Depreciation and amortization are
provided over the estimated useful lives of the applicable assets ranging from
five to seven years for equipment, furniture and fixtures and the remaining
lease term for leasehold improvements and are computed using the straight-line
method.
Income Taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109").
SFAS No. 109 requires the liability method of accounting for deferred income
taxes. Deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities. Deferred tax assets or liabilities at the end of each period are
determined using the tax rate expected to be in effect when taxes are actually
paid or recovered.
Statements of Cash Flows Information
For the years ended December 31, 1995, 1996 and 1997, the Company paid
interest of $3,763, $2,114 and $733, respectively. Amounts paid for taxes were
not significant.
3. LINE OF CREDIT:
On December 31, 1997, the Company's $55,000 line of credit expired. The
line is secured by substantially all of the Company's assets and bears interest
at the bank's prime rate plus 1% (9.5% at December 31, 1997). At December 31,
1996 and 1997, the Company had $15,000 and $0 outstanding under the line,
respectively.
F-93
<PAGE>
ORTHOPAEDIC AND SPORTS MEDICINE SPECIALISTS OF
THE MAIN LINE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
4. LONG-TERM DEBT:
The Company has financed all or a portion of its malpractice insurance
premiums with a bank with one-year notes. In January 1995 and December 1995, the
Company borrowed $77,131 and $62,388, respectively. For the years ended December
31, 1995 and 1996, the interest rate on these notes was 8.5% and 8.5%,
respectively. No amounts are outstanding as of December 31, 1997.
In December 1996, the Company entered into an agreement with a bank to
borrow $8,500 for the purchase of new equipment, payable monthly through
December 2001. The note bears an interest rate of 9.5%.
5. EMPLOYEE BENEFIT PLAN:
The Company maintains a profit sharing plan covering substantially all
full-time employees who are at least 21 years of age and completed one year of
service in which at least 1,000 hours are worked. Employer contributions vest
ratably in 20% increments over five years commencing after the second year of
employment. The Company's contributions to the plan totaled $74,977, $86,173 and
$0 for the years ended December 31, 1995, 1996 and 1997.
6. RELATED-PARTY TRANSACTIONS:
The Company paid $85,000, $85,000 and $70,968 for the years ended December
31, 1995, 1996 and 1997, respectively, for the lease of office space from a
shareholder. The lease agreement expires on March 17, 2002.
7. INCOME TAXES:
The components of the income tax provision (benefit) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
------- -------- -------
<S> <C> <C> <C>
Current:
Federal............................................ $ 1,756 $ (867) $(5,164)
State.............................................. 1,171 (578) (3,442)
------- -------- -------
2,927 (1,445) (8,606)
------- -------- -------
Deferred:
Federal............................................ 23,754 (23,879) 22,421
State.............................................. 15,836 (15,920) 14,947
------- -------- -------
39,590 (39,799) 37,368
------- -------- -------
$42,517 $(41,244) $28,762
======= ======== =======
</TABLE>
Income tax expense (benefit) differs from the amount currently payable or
receivable because certain expenses, primarily depreciation and accruals, are
reported in different periods for financial reporting and income tax purposes.
The Company is on a cash basis of accounting for income tax purposes.
F-94
<PAGE>
ORTHOPAEDIC AND SPORTS MEDICINE SPECIALISTS OF
THE MAIN LINE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
7. INCOME TAXES: -- (CONTINUED)
The provision (benefit) for income taxes differs from the amount computed
by applying the U.S. Federal income tax rate (34%) because of the effect of the
following items:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Tax at U.S. Federal statutory rate................. $ 57,390 $(58,286) $ 37,793
Tax impact of Federal rate differential for
graduated rates.................................. (32,510) 32,788 (21,119)
State income taxes, net of federal benefit......... 16,587 (16,999) 11,116
Non-deductible travel and entertainment............ 1,050 1,253 972
-------- -------- --------
$ 42,517 $(41,244) $ 28,762
======== ======== ========
</TABLE>
The components of the net deferred tax liability, measured under SFAS No.
109, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
-------- --------
<S> <C> <C>
Deferred tax liabilities --
Property and equipment............................. $ 15,806 $ 14,605
Cash to accrual adjustments........................ 104,344 142,913
-------- --------
Net deferred tax liability........................... $120,150 $157,518
======== ========
</TABLE>
8. COMMITMENTS AND CONTINGENCIES:
Lease Obligations
Minimum annual rental commitments for noncancelable operating leases having
terms in excess of one year as of December 31, 1996, are as follows:
<TABLE>
<CAPTION>
RELATED
PARTY
LEASES
-------
<S> <C>
1998...................................................... $66,290
1999...................................................... 66,290
2000...................................................... 66,290
2001...................................................... 66,290
2002...................................................... 16,572
</TABLE>
Rental expense, including related party leases (see Note 6), under
noncancelable operating leases for the years ended December 31, 1995, 1996 and
1997 was $218,045, $203,879 and $174,221, respectively.
Insurance Policies
The Company maintains insurance with respect to medical malpractice risks
on an occurrence basis in amounts management believes to be adequate. Management
is not aware of any outstanding claims which would have a material impact on the
Company's financial position or results of operations.
The Pennsylvania Medical Professional Liability Catastrophic Loss Fund (the
"CAT Fund"), an agency fund of the Commonwealth of Pennsylvania, acts as a
service agent to facilitate the payment of medical malpractice claims exceeding
the primary layer of professional liability insurance carried by physicians and
other health care providers practicing in Pennsylvania. The CAT Fund policies
are retrospectively rated on a
F-95
<PAGE>
ORTHOPAEDIC AND SPORTS MEDICINE SPECIALISTS OF
THE MAIN LINE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
8. COMMITMENTS AND CONTINGENCIES: -- (CONTINUED)
claims-made basis. The CAT Fund levies health care provider surcharges, as a
percentage of insurance premiums for basic coverage, to pay claims and
administrative expenses on behalf of CAT Fund participants.
The CAT Fund is significantly underfunded and the Commonwealth has
indicated that the unfunded liability will be funded exclusively through
surcharge assessments in future years as claims are settled and paid. The
Company and the other CAT Fund participants received a surcharge assessment
during fiscal 1996 and 1997. No provision has been made for any future CAT Fund
assessments in the accompanying financial statements as the Company's portion of
the CAT Fund unfunded liability could not be reasonably estimated.
Health Care Regulatory Environment and Reliance on Government Programs
The health care industry in general and the services that the Company
provides are subject to extensive federal and state laws and regulations.
Additionally, a portion of the Company's net revenue is from payments by
government-sponsored health care programs, principally Medicare and Medicaid,
and is subject to audit and adjustments by applicable regulatory agencies.
Failure to comply with any of these laws or regulations, the results of
regulatory audits and adjustments, or changes in the amounts payable for the
Company's services under these programs could have a material adverse effect on
the Company's financial position and results of operations.
F-96
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Orthopaedic Surgery and Sports Medicine, Inc.:
We have audited the accompanying balance sheets of Orthopaedic Surgery and
Sports Medicine, Inc. (a Pennsylvania corporation) as of December 31, 1996 and
1997, and the related statements of operations and retained earnings and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Orthopaedic Surgery and Sports
Medicine, Inc. as of December 31, 1996 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
February 28, 1998
F-97
<PAGE>
ORTHOPAEDIC SURGERY AND SPORTS MEDICINE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- MARCH 31,
1996 1997 1998
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 59,096 $ 864 $ 864
Accounts receivable, net of allowance of $546,021,
$756,270 and $902,113.................................. 632,261 699,669 873,777
Due from U.S. PHYSICIANS, Inc............................. -- 96,854 114,957
Prepaid expenses and other................................ 5,813 54,173 6,208
-------- -------- ----------
Total current assets................................. 697,170 851,560 995,806
-------- -------- ----------
Property and equipment:
Equipment, furniture and fixtures......................... 123,760 123,760 123,760
Leasehold improvements.................................... 81,680 81,680 81,680
-------- -------- ----------
205,440 205,440 205,440
Less -- accumulated depreciation and amortization......... (192,002) (194,766) (199,070)
-------- -------- ----------
13,438 10,674 6,370
-------- -------- ----------
Patient list, net........................................... 46,750 29,750 25,500
-------- -------- ----------
Other assets................................................ 2,500 -- --
-------- -------- ----------
$759,858 $891,984 $1,027,676
======== ======== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit............................................ $212,428 $249,428 $ 249,428
Accounts payable.......................................... 161,754 17,358 44,222
Accrued compensation...................................... 9,927 141,432 250,260
-------- -------- ----------
Total current liabilities............................ 384,109 408,218 543,910
-------- -------- ----------
Commitments and contingencies (Note 6)
Shareholders' equity:
Common Stock, no par value; 100 shares authorized, issued
and outstanding........................................ 200 200 200
Retained earnings......................................... 375,549 483,566 483,566
-------- -------- ----------
Total shareholders' equity........................... 375,749 483,766 483,766
-------- -------- ----------
$759,858 $891,984 $1,027,676
======== ======== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-98
<PAGE>
ORTHOPAEDIC SURGERY AND SPORTS MEDICINE, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ -------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues................................... $2,733,804 $2,993,431 $3,145,257 $894,160 $850,059
---------- ---------- ---------- -------- --------
Operating expenses:
Salaries, wages and benefits................. 2,466,886 2,124,375 2,233,189 682,791 582,417
Pharmaceuticals and medical supplies......... 21,357 58,380 30,449 3,506 19,951
General and administrative................... 400,714 507,050 475,880 85,544 137,373
Management fee due
U.S. PHYSICIANS, Inc....................... -- -- 268,364 475 98,236
Depreciation and amortization................ 20,219 22,777 19,764 18,767 8,554
---------- ---------- ---------- -------- --------
Income (loss) from operations.................. (175,372) 280,849 117,611 103,077 3,528
Interest income (expense) net.................. (16,167) (19,285) (9,594) 4,940 (3,528)
---------- ---------- ---------- -------- --------
Net income (loss).............................. (191,539) 261,564 108,017 108,017 --
Retained earnings, beginning of period......... 305,524 113,985 375,549 375,549 483,566
---------- ---------- ---------- -------- --------
Retained earnings, end of period............... $ 113,985 $ 375,549 $ 483,566 $483,566 $483,566
========== ========== ========== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-99
<PAGE>
ORTHOPAEDIC SURGERY AND SPORTS MEDICINE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- -------------------
1995 1996 1997 1997 1998
--------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss)............................... $(191,539) $261,564 $108,017 $108,017 $ --
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities --
Depreciation and amortization............... 20,219 22,777 19,764 18,767 8,554
Changes in assets and liabilities --
Accounts receivable...................... 154,074 (218,441) (67,408) (68,207) (174,108)
Due from shareholders.................... 17,477 21,676 -- -- --
Due to (from) U.S. PHYSICIANS, Inc....... -- -- (96,854) 41,720 (18,103)
Prepaid expenses and other............... 1,725 (150) (45,860) 2,105 47,965
Accounts payable......................... (92,242) 19,168 (144,396) (158,751) 26,864
Accrued compensation..................... 111,262 (136,931) 131,505 11,117 108,828
--------- -------- -------- -------- --------
Net cash provided by (used in)
operating activities................. 20,976 (30,337) (95,232) (45,232) --
--------- -------- -------- -------- --------
Investing activities:
Purchases of property and equipment............. (5,608) -- -- -- --
Sale of property and equipment.................. -- 4,358 -- -- --
--------- -------- -------- -------- --------
Net cash (used in) provided by
investing activities................. (5,608) 4,358 -- -- --
--------- -------- -------- -------- --------
Financing activities:
Net borrowings (payments) on line of credit..... 74,365 (27,749) 37,000 (13,000) --
Repayments on long-term debt.................... (42,500) (21,250) -- -- --
--------- -------- -------- -------- --------
Net cash (used in) provided by
financing activities................. 31,865 (48,999) 37,000 (13,000) --
--------- -------- -------- -------- --------
Net (decrease) increase in cash and cash
equivalents..................................... 47,233 (74,978) (58,232) (58,232) --
Cash and cash equivalents, beginning of period.... 86,841 134,074 59,096 59,096 864
--------- -------- -------- -------- --------
Cash and cash equivalents, end of period.......... $ 134,074 $ 59,096 $ 864 $ 864 $ 864
========= ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-100
<PAGE>
ORTHOPAEDIC SURGERY AND SPORTS, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
1. ORGANIZATION AND BUSINESS:
Orthopaedic Surgery and Sports Medicine, Inc. (the "Company") is a
physician-owned medical practice serving the Philadelphia, Pennsylvania area.
The Company was formed in July 1978 for the purpose of rendering professional
medical orthopaedic and rehabilitative services.
On March 31, 1997 (the "Initial Closing Date"), the Company and the selling
owners entered into a Stock Acquisition Agreement, as amended through April 21,
1998 (the "Affiliation Agreement"), with U.S. PHYSICIANS, Inc. ("USP"). Under
the terms of the Affiliation Agreement, USP at its affiliated professional
corporation acquired the outstanding stock of the Company in exchange for cash,
notes, convertible notes and shares of USP Common Stock, subject to adjustment,
as defined. The Affiliation Agreement contains a repurchase provision that
allows the selling owners, in the event that an initial public offering ("IPO")
has not been completed by USP by June 15, 1998 (the "Repurchase Date"), to
repurchase the stock of their practice by returning all of the consideration
received, excluding the initial cash payment.
In accordance with Accounting Principles Board Opinion No. 16, the
Affiliation Agreement is not considered effective for applying purchase
accounting until either the date that USP completes an IPO or the repurchase
provision terminates (the "Final Closing Date"). Pursuant to the Affiliation
Agreement, for the period of time between the Initial Closing Date and the Final
Closing Date, USP is responsible for managing the Company, including cash
management, and receives a management fee equal to the income earned by the
Company. Accordingly, the statements of operations for the three months ended
March 31, 1997 and 1998 and the year ended December 31, 1997 include a
management fee charge for the income earned by the Company for the period from
the Initial Closing Date to March 31, 1997, for the three months ended March 31,
1998 and for the period from the Initial Closing Date to December 31, 1997,
respectively. The balance sheets as of December 31, 1997 and March 31, 1998
contain a Due from U.S. PHYSICIANS, Inc. account to reflect the net cash
activity for the respective period.
2. SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Statements
The financial statements for the three months ended March 31, 1997 and 1998
are unaudited, and in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the financial position as of March 31, 1998 and the results of
its operations for the three months ended March 31, 1997 and 1998. The results
of operations for the three-month period are not necessarily indicative of the
results to be expected for the entire year.
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 revenues and expenses during the
reporting period. Actual results could differ from
those estimates.
Fair Value of Financial Instruments
Financial instruments consist of cash and cash equivalents, accounts
receivable, certain current liabilities and debt obligations. The carrying
amounts reported in the balance sheets for these items approximate
fair value.
F-101
<PAGE>
ORTHOPAEDIC SURGERY AND SPORTS MEDICINE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
Net Revenues
Revenues from patients, third-party payors and others are recorded at
established rates, net of provision for bad debts and contractual adjustments,
in the period that services are rendered. Contractual adjustments represent the
difference between charges at established rates and the estimated amount to be
reimbursed.
Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments
purchased with an original maturity of three months or less.
Accounts Receivable
Accounts receivable primarily consist of receivables from patients,
third-party payors and others. Such amounts are recorded net of contractual
allowances and estimated bad debts.
Concentration of Credit Risk
The Company extends credit to patients covered by programs such as
Medicare, 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.
Property and Equipment
Property and equipment are stated at cost. Repairs and maintenance are
charged to expense as incurred. Depreciation and amortization are provided over
the estimated useful lives of the applicable assets ranging from five to seven
years for equipment, furniture and fixtures and the remaining lease term for
leasehold improvements and are computed using the straight-line method.
Patient List
The patient list represents the value assigned to patient relationships
obtained from other physicians. The patient list is being amortized on a
straight-line basis over five years. For each of the years ended December 31,
1995, 1996 and 1997 amortization expense was $17,000.
Due from Shareholders
Due from shareholders represent advances to shareholders which are repaid
in subsequent periods.
Income Taxes
The Company has elected treatment as an "S" Corporation for both federal
and state income tax purposes, and accordingly is not taxed as a separate
entity. The Company's taxable income or loss is allocated to each owner and
recognized on their individual tax return. Accordingly, no provision for income
taxes has been reflected in the accompanying financial statements.
The Company reports certain income and expense items for income tax
purposes on a different basis than that reflected in the accompanying financial
statements. The primary differences are due to the cash basis of accounting for
income tax purposes. The cumulative amount of these differences as of December
31, 1997 was approximately $500,000. If the S Corporation status is terminated,
then a deferred income tax liability of
F-102
<PAGE>
ORTHOPAEDIC SURGERY AND SPORTS MEDICINE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
approximately $125,000 related to these cumulative differences would need to be
reflected in the accompanying financial statements.
Statements of Cash Flows Information
For the years ended December 31, 1995, 1996 and 1997, the Company paid
interest of $16,167, $19,285 and $21,050, respectively.
Reclassification
Certain previously reported amounts have been reclassified to conform with
the current period presentation.
3. LINE OF CREDIT:
In June 1993, the Company entered into a credit agreement (the "Agreement")
with a local bank for a $250,000 line of credit. Under the terms of the
Agreement, the Company must maintain a zero balance for a period of at least 30
consecutive days for each 12-month period. Interest is accrued on the
outstanding balance at the bank's commercial lending rate plus .25% (9.50% at
December 31, 1997). Outstanding borrowings plus any unpaid interest, fees or
expenses are guaranteed by an owning physician and his spouse.
4. NOTE PAYABLE:
In September 1994, the Company signed a note payable for the purchase of a
patient list. The $74,375 note is payable in quarterly principal payments of
$10,625 plus interest at 6%. The balance was paid off in June 1996.
5. EMPLOYEE BENEFIT PLAN:
The Company provides a 401(k) profit sharing plan that covers all qualified
employees, as defined by the plan agreement. Employees vest pro rata over five
years beginning after their first year as a participant. Contributions to the
plan are discretionary and are determined by the Company on an annual basis. For
the years ended December 31, 1995, 1996 and 1997, no contributions were made to
the plan.
6. COMMITMENTS AND CONTINGENCIES:
Lease Obligations
The Company leases some of its office space from entities affiliated with
certain of the owners of medical groups affiliated with the Company. Future
minimum lease payments for noncancellable operating leases primarily for office
space as of December 31, 1997, are as follows:
<TABLE>
<CAPTION>
RELATED-PARTY NONRELATED-PARTY
LEASES LEASES
------------- ----------------
<S> <C> <C>
1998........................................... $139,048 $10,243
1999........................................... 55,935 7,111
2000........................................... 59,292 6,604
2001........................................... -- 3,812
</TABLE>
Rent expense on related-party operating leases was $128,304, $110,420 and
$133,552 for the years ended December 31, 1995, 1996 and 1997, respectively.
Rent expense on nonrelated-party operating leases was $41,309, $99,582 and
$42,693 for the years ended December 31, 1995, 1996 and 1997, respectively.
F-103
<PAGE>
ORTHOPAEDIC SURGERY AND SPORTS MEDICINE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
6. COMMITMENTS AND CONTINGENCIES: -- (CONTINUED)
Employment Agreements
The Company has employment agreements with two employees that require
minimum levels of compensation. The following table summarizes the aggregate
minimum annual compensation due under the agreements as of December 31, 1997:
<TABLE>
<S> <C>
1998...................................................... $170,000
1999...................................................... 202,500
2000...................................................... 235,000
2001...................................................... 125,000
</TABLE>
Insurance Policies
The Company maintains insurance with respect to medical malpractice risks
on an occurrence basis in amounts management believes to be adequate. Management
is not aware of any outstanding claims which would have a material impact on the
Company's financial position or results of operations.
The Pennsylvania Medical Professional Liability Catastrophic Loss Fund (the
"CAT Fund"), an agency fund of the Commonwealth of Pennsylvania, acts as a
service agent to facilitate the payment of medical malpractice claims exceeding
the primary layer of professional liability insurance carried by physicians and
other health care providers practicing in Pennsylvania. The CAT Fund policies
are retrospectively rated on a claims-made basis. The CAT Fund levies health
care provider surcharges, as a percentage of insurance premiums for basic
coverage, to pay claims and administrative expenses on behalf of CAT Fund
participants.
The CAT Fund is significantly underfunded and the Commonwealth has
indicated that the unfunded liability will be funded exclusively through
surcharge assessments in future years as claims are settled and paid. The
Company and the other CAT Fund participants received a surcharge assessment
during fiscal 1996 and 1997. No provision has been made for any future CAT Fund
assessments in the accompanying financial statements as the Company's portion of
the CAT Fund unfunded liability could not be reasonably estimated.
Health Care Regulatory Environment and Reliance on Government Programs
The health care industry in general and the services that the Company
provides are subject to extensive federal and state laws and regulations.
Additionally, a portion of the Company's net revenue is from payments by
government-sponsored health care programs, principally Medicare and Medicaid,
and is subject to audit and adjustments by applicable regulatory agencies.
Failure to comply with any of these laws or regulations, the results of
regulatory audits and adjustments, or changes in the amounts payable for the
Company's services under these programs could have a material adverse effect on
the Company's financial position and results of operations.
F-104
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To RJK Medical Associates, Ltd.:
We have audited the accompanying balance sheets of RJK Medical Associates, Ltd.
(a Pennsylvania corporation) as of December 31, 1996 and 1997 and the related
statements of operations and retained earnings 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 audits 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 RJK Medical Associates, Ltd. as
of December 31, 1996 and 1997, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
February 20, 1998
F-105
<PAGE>
RJK MEDICAL ASSOCIATES, LTD.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- MARCH 31,
1996 1997 1998
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 30,332 $ 5,936 $ 5,936
Accounts receivable, net of allowance of $308,605,
$442,697 and $511,664.................................. 221,973 296,803 354,281
Due from U.S. PHYSICIANS, Inc............................. -- 14,907 --
Prepaid expenses and other................................ 2,719 -- --
-------- -------- --------
Total current assets................................. 255,024 317,646 360,217
-------- -------- --------
Property and equipment:
Equipment, furniture and fixtures......................... 144,933 146,087 146,087
Less -- Accumulated depreciation.......................... (104,998) (109,790) (110,397)
-------- -------- --------
39,935 36,297 35,690
-------- -------- --------
Deferred income taxes....................................... -- 32,776 32,776
-------- -------- --------
$294,959 $386,719 $428,683
======== ======== ========
LIABILITIES AND RETAINED EARNINGS
Current liabilities:
Accounts payable.......................................... $ 28,748 $ 26,430 $ 26,229
Accrued compensation...................................... 15,253 77,140 31,722
Due to U.S. PHYSICIANS, Inc............................... -- -- 87,583
Deferred income taxes..................................... 3,149 46,416 46,416
-------- -------- --------
Total current liabilities............................ 47,150 149,986 191,950
-------- -------- --------
Deferred income taxes....................................... 9,417 -- --
-------- -------- --------
Commitments and contingencies (Note 5)
Retained earnings........................................... 238,392 236,733 236,733
-------- -------- --------
$294,959 $386,719 $428,683
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-106
<PAGE>
RJK MEDICAL ASSOCIATES, LTD.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------- ---------------------------
1996 1997 1997 1998
------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net revenues............................ $943,045 $909,384 $227,020 $272,958
-------- -------- -------- --------
Operating expenses:
Salaries, wages and benefits.......... 717,654 751,057 187,142 166,417
General and administrative............ 162,885 27,391 16,034 3,145
Management fee due U.S. PHYSICIANS,
Inc................................ -- 126,733 22,474 102,789
Depreciation.......................... 3,356 4,792 1,959 607
-------- -------- -------- --------
Income (loss) before income taxes....... 59,150 (589) (589) --
Income tax provision.................... 14,989 1,070 -- --
-------- -------- -------- --------
Net income (loss)....................... 44,161 (1,659) (589) --
Retained earnings, beginning of
period................................ 194,231 238,392 238,392 236,733
-------- -------- -------- --------
Retained earnings, end of period........ $238,392 $236,733 $237,803 $236,733
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-107
<PAGE>
RJK MEDICAL ASSOCIATES, LTD.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------- ---------------------------
1996 1997 1997 1998
------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Operating activities:
Net income (loss)..................... $ 44,161 $ (1,659) $ (589) $ --
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities --
Depreciation..................... 3,356 4,792 1,959 607
Deferred income taxes............ 11,527 1,074 -- --
Changes in assets and
liabilities --
Accounts receivable........... (12,471) (74,830) (64,973) (57,478)
Due from U.S. PHYSICIANS,
Inc......................... -- (14,907) -- 14,907
Prepaid expenses and other.... (418) 2,719 (2,903) --
Accounts payable.............. (12,158) (2,318) (2,066) (201)
Accrued compensation.......... (21,004) 61,887 7,680 (45,418)
Due to U.S. PHYSICIANS,
Inc......................... -- -- 36,638 87,583
-------- -------- -------- --------
Net cash provided by (used
in) operating
activities............... 12,993 (23,242) (24,254) --
-------- -------- -------- --------
Investing activities:
Purchases of property and equipment... (2,500) (1,154) (142) --
-------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents........................... 10,493 (24,396) (24,376) --
Cash and cash equivalents, beginning of
period................................ 19,839 30,332 30,332 5,936
-------- -------- -------- --------
Cash and cash equivalents, end of
period................................ $ 30,332 $ 5,936 $ 5,936 $ 5,936
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-108
<PAGE>
RJK MEDICAL ASSOCIATES, LTD.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
1. ORGANIZATION AND BUSINESS:
RJK Medical Associates, Ltd. (the "Company") is a physician owned medical
practice serving the Philadelphia, Pennsylvania area. The Company was formed in
1980 for the purpose of rendering professional medical orthopedic and
rehabilitative services and related medical services to the general public.
On January 13, 1997 (the "Initial Closing Date"), the Company and the
selling owner entered into an Asset Acquisition Agreement, as amended through
April 21, 1998 (the "Affiliation Agreement"), with U.S. PHYSICIANS, Inc.
("USP"). Under the terms of the Affiliation Agreement, USP and its affiliated
professional corporation acquired the majority of the assets of the Company in
exchange for cash, notes, convertible notes and shares of USP Common Stock,
subject to adjustment, as defined. The Affiliation Agreement contains a
repurchase provision that allows the selling owner, in the event that an initial
public offering ("IPO") has not been completed by USP by June 15, 1998 (the
"Repurchase Date"), to repurchase the net assets of his practice by returning
all of the consideration received, excluding the initial cash payment.
In accordance with Accounting Principles Board Opinion No. 16, the
Affiliation Agreement is not considered effective for applying purchase
accounting until either the date that USP completes an IPO or the repurchase
provision terminates (the "Final Closing Date"). Pursuant to the Affiliation
Agreement, for the period of time between the Initial Closing Date and the Final
Closing Date, USP is responsible for managing the Company, including cash
management, and receives a management fee equal to the income earned by the
Company. Accordingly, the statements of operations for the three months ended
March 31, 1997 and 1998 and the year ended December 31, 1997 include a
management fee charge for the income earned by the Company for the period from
the Initial Closing Date to March 31, 1997, for the three months ended March 31,
1998 and for the period from the Initial Closing Date to December 31, 1997,
respectively. The balance sheets as of December 31, 1997 and March 31, 1998
contain Due to/from U.S. PHYSICIANS, Inc. accounts to reflect the net cash
activity for the respective period.
2. SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Statements
The financial statements for the three months ended March 31, 1997 and 1998
are unaudited, and in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the financial position as of March 31, 1998 and the results of
its operations for the three months ended March 31, 1997 and 1998. The results
of operations for the three-month period are not necessarily indicative of the
results to be expected for the entire year.
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 revenues and expenses during the
reporting period. Actual results could differ from
those estimates.
F-109
<PAGE>
RJK MEDICAL ASSOCIATES, LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
Fair Value of Financial Instruments
Financial instruments consist of cash and cash equivalents, accounts
receivable and certain current liabilities. The carrying amounts reported in the
balance sheets for these items approximate fair value.
Net Revenues
Revenues from patients, third-party payors and others are recorded at
established rates, net of provision for bad debts and contractual adjustments,
in the period that services are rendered. Contractual adjustments represent the
difference between charges at established rates and the estimated amount to be
reimbursed.
Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments
purchased with an original maturity of three months or less.
Accounts Receivable
Accounts receivable primarily consist of receivables from patients,
third-party payors and others. Such amounts are recorded net of contractual
allowances and estimated bad debts.
Concentration of Credit Risk
The Company extends credit to patients covered by programs such as
Medicare, 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.
Property and Equipment
Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to expense as incurred. Depreciation is provided over the
estimated useful lives of the applicable assets ranging from five to seven years
and is computed using the straight-line method.
Income Taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109").
SFAS No. 109 requires the liability method of accounting for deferred income
taxes. Deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities. Deferred tax assets or liabilities at the end of each period are
determined using the tax rate expected to be in effect when taxes are actually
paid or recovered.
Statements of Cash Flows Information
Amounts paid for interest and taxes were not significant.
3. EMPLOYEE BENEFIT PLAN:
The Company provides a 401(k) profit sharing plan that covers all qualified
employees, as defined by the plan agreement. Employees vest pro rata over five
years beginning after their first year as a participant. Contributions to the
plan are discretionary and are determined by the Company on an annual basis. For
the years ended December 31, 1996 and 1997, contributions to the plan were
$30,000 and $0, respectively.
F-110
<PAGE>
RJK MEDICAL ASSOCIATES, LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
4. INCOME TAXES:
The components of the income tax provision are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1996 1997
------------ ------------
<S> <C> <C>
Current:
Federal................................ $ 2,077 $ (2)
State.................................. 1,385 (2)
------- -------
3,462 (4)
------- -------
Deferred:
Federal................................ 6,916 644
State.................................. 4,611 430
------- -------
11,527 1,074
------- -------
$14,989 $ 1,070
======= =======
</TABLE>
Income tax expense differs from the amount currently payable or receivable
because certain expense, primarily depreciation and accruals, are reported in
different periods for financial reporting and income tax purposes. The Company
is on a cash basis of accounting for income tax purposes.
The provision for income taxes differs from the amount computed by applying
the U.S. Federal income tax rate (34%) because of the effect of the following
items:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1996 1997
------------ ------------
<S> <C> <C>
Tax at U.S. Federal statutory rate....... $20,111 $ (200)
Tax impact of Federal rate differential
for graduated rates.................... (11,758) 112
State income taxes, net of federal
benefit................................ 5,569 (59)
Non-deductible travel and
entertainment.......................... 1,067 1,217
------- -------
$14,989 $ 1,070
======= =======
</TABLE>
The components of the net deferred tax liability, measured under SFAS No.
109, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1996 1997
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carrryforward......... $ -- $ 42,193
-------- --------
Deferred tax liabilities:
Property and equipment................... (9,417) (9,417)
Cash to accrual adjustments.............. (3,149) (46,416)
-------- --------
(12,566) (55,833)
-------- --------
Net deferred tax liability............... $(12,566) $(13,640)
======== ========
</TABLE>
F-111
<PAGE>
RJK MEDICAL ASSOCIATES, LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
5. COMMITMENTS AND CONTINGENCIES:
Lease Obligations
The Company has verbal leases for office space from the hospitals where the
Company has operations. Rent expense on operating leases was $12,456 and $13,854
for the years ended December 31, 1996 and 1997, respectively.
Insurance Policies
The Company maintains insurance with respect to medical malpractice risks
on an occurrence basis in amounts management believes to be adequate. Management
is not aware of any outstanding claims which would have a material impact on the
Company's financial position or results of operations.
The Pennsylvania Medical Professional Liability Catastrophic Loss Fund (the
"CAT Fund"), an agency fund of the Commonwealth of Pennsylvania, acts as a
service agent to facilitate the payment of medical malpractice claims exceeding
the primary layer of professional liability insurance carried by physicians and
other health care providers practicing in Pennsylvania. The CAT Fund policies
are retrospectively rated on a claims-made basis. The CAT Fund levies health
care provider surcharges, as a percentage of insurance premiums for basic
coverage, to pay claims and administrative expenses on behalf of CAT Fund
participants.
The CAT Fund is significantly underfunded and the Commonwealth has
indicated that the unfunded liability will be funded exclusively through
surcharge assessments in future years as claims are settled and paid. The
Company and the other CAT Fund participants received a surcharge assessment
during fiscal 1996 and 1997. No provision has been made for any future CAT Fund
assessments in the accompanying financial statements as the Company's portion of
the CAT Fund unfunded liability could not be reasonably estimated.
Health Care Regulatory Environment and Reliance on Government Programs
The health care industry in general and the services that the Company
provides are subject to extensive federal and state laws and regulations.
Additionally, a portion of the Company's net revenue is from payments by
government-sponsored health care programs, principally Medicare and Medicaid,
and is subject to audit and adjustments by applicable regulatory agencies.
Failure to comply with any of these laws or regulations, the results of
regulatory audits and adjustments, or changes in the amounts payable for the
Company's services under these programs could have a material adverse effect on
the Company's financial position and results of operations.
F-112
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To South Shore Orthopedics, PA:
We have audited the accompanying balance sheets of South Shore Orthopedics, PA
(a New Jersey corporation) as of March 31, 1997 and 1998, and the related
statements of operations and retained earnings and cash flows for each of the
three years in the period ended March 31, 1998. 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 South Shore Orthopedics, PA as
of March 31, 1997 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended March 31, 1998, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
May 11, 1998
F-113
<PAGE>
SOUTH SHORE ORTHOPEDICS, PA
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
---------------------
1997 1998
---------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 123,856 $ 397
Accounts receivable, net of allowance of $780,468 and
$558,372............................................... 878,773 503,236
Due from U.S. PHYSICIANS, Inc............................. -- 74,298
Prepaid expenses and other................................ 2,771 249,897
---------- --------
Total current assets................................. 1,005,400 827,828
---------- --------
Property and equipment:
Equipment, furniture and fixtures......................... 161,331 161,331
Leasehold improvements.................................... 27,051 27,051
---------- --------
188,382 188,382
Less -- Accumulated depreciation and amortization......... (154,972) (164,057)
---------- --------
33,410 24,325
---------- --------
$1,038,810 $852,153
========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit............................................ $ 27,843 $ --
Accounts payable.......................................... 10,267 73,103
Accrued compensation...................................... 292,424 113,269
Deferred income taxes..................................... 196,574 164,464
Due to U.S. PHYSICIANS, Inc............................... 8,559 --
---------- --------
Total current liabilities............................ 535,667 350,836
---------- --------
Commitments and contingencies (Note 8)
Shareholders' equity:
Common Stock, no par value, 100 shares authorized, issued
and outstanding........................................ 2,000 2,000
Retained earnings......................................... 501,143 499,317
---------- --------
Total shareholders' equity........................... 503,143 501,317
---------- --------
$1,038,810 $852,153
========== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-114
<PAGE>
SOUTH SHORE ORTHOPEDICS, PA
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Net revenues................................................ $1,804,697 $2,443,359 $1,406,019
---------- ---------- ----------
Operating expenses:
Salaries, wages and benefits.............................. 1,236,400 1,569,334 799,079
Pharmaceuticals and medical supplies...................... 44,784 41,733 18,571
General and administrative................................ 591,906 699,395 246,904
Management fee due U.S. PHYSICIANS, Inc................... -- 19,665 331,300
Depreciation and amortization............................. 14,811 18,026 9,085
---------- ---------- ----------
Income (loss) from operations............................... (83,204) 95,206 1,080
Interest expense, net....................................... 11,821 17,946 1,080
---------- ---------- ----------
Income (loss) before income taxes........................... (95,025) 77,260 --
Income tax provision (benefit).............................. (19,854) 27,480 1,826
---------- ---------- ----------
Net income (loss)........................................... (75,171) 49,780 (1,826)
Retained earnings, beginning of period...................... 526,534 451,363 501,143
---------- ---------- ----------
Retained earnings, end of period............................ $ 451,363 $ 501,143 $ 499,317
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-115
<PAGE>
SOUTH SHORE ORTHOPEDICS, PA
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Operating activities:
Net income (loss)......................................... $(75,171) $ 49,780 $ (1,826)
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities --
Depreciation and amortization......................... 14,811 18,026 9,085
Deferred income taxes................................. (15,237) 49,406 (32,110)
Changes in assets and liabilities --
Accounts receivable................................ (31,840) (145,453) 375,537
Due from U.S. PHYSICIANS, Inc...................... -- -- (74,298)
Prepaid expenses and other......................... (10,282) 18,100 (247,126)
Accounts payable................................... 3,966 (2,382) 62,836
Accrued compensation............................... 9,017 218,328 (179,155)
Due to U.S. PHYSICIANS, Inc........................ -- 8,559 (8,559)
-------- -------- --------
Net cash (used in) provided by operating
activities..................................... (104,736) 214,364 (95,616)
-------- -------- --------
Investing activities:
Purchases of property and equipment....................... (37,241) -- --
-------- -------- --------
Financing activities:
Net borrowings (payments) on line of credit............... 48,500 (20,657) (27,843)
Proceeds from long-term debt.............................. 150,000 -- --
Repayments on long-term debt.............................. (10,000) (140,000) --
-------- -------- --------
Net cash provided by (used in) financing
activities..................................... 188,500 (160,657) (27,843)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents........ 46,523 53,707 (123,459)
Cash and cash equivalents, beginning of period.............. 23,626 70,149 123,856
-------- -------- --------
Cash and cash equivalents, end of period.................... $ 70,149 $123,856 $ 397
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-116
<PAGE>
SOUTH SHORE ORTHOPEDICS, PA
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BACKGROUND:
South Shore Orthopedics, P.A. (the "Company") is a physician-owned medical
practice serving the southern New Jersey area. The Company is engaged in the
business of rendering health care services in the area of orthopedic, medical,
surgical and related support services.
On March 10, 1997 (the "Initial Closing Date"), the Company and the selling
owners entered into a Stock Acquisition Agreement, as amended through April 21,
1998, (the "Affiliation Agreement") with U.S. PHYSICIANS, Inc. ("USP"). Under
the terms of the Affiliation Agreement, USP and its affiliated professional
corporation acquired the outstanding stock of the Company in exchange for cash,
notes, convertible notes and shares of USP Common Stock, subject to adjustment,
as defined. The Affiliation Agreement contains a repurchase provision that
allows the selling owners, in the event that an initial public offering ("IPO")
has not been completed by USP by June 15, 1998 (the "Repurchase Date"), to
repurchase the stock of their practice by returning all of the consideration
received, excluding the initial cash payment.
In accordance with Accounting Principles Board Opinion No. 16, the
affiliation transaction is not considered effective for applying purchase
accounting until either the date that USP completes an IPO or the repurchase
provision lapses (the "Final Closing Date"). Pursuant to the Affiliation
Agreement, for the period of time between the Initial Closing Date and the Final
Closing Date, USP is responsible for managing the Company, including cash
management, and receives a management fee equal to the income earned by the
Company. Accordingly, the statements of operations for the years ended March 31,
1997 and 1998 include a management fee charge for the income earned by the
Company for the period from the Initial Closing Date to March 31, 1997 and for
the year ended March 31, 1998, respectively. The balance sheets as of March 31,
1997 and 1998 contain Due to/from U.S. PHYSICIANS, Inc. accounts to reflect the
net cash activity for the respective period.
2. SIGNIFICANT ACCOUNTING POLICIES:
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain 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 revenues and expenses during the
reporting period. Actual results could differ from
those estimates.
Fair Value of Financial Instruments
Financial instruments consist of cash and cash equivalents, accounts
receivable, certain current liabilities and debt obligations. The carrying
amounts reported in the balance sheets for these items approximate
fair value.
Net Revenues
Revenues from patients, third-party payors and others are recorded at
established rates, net of provision for bad debts and contractual adjustments,
in the period that services are rendered. Contractual adjustments represent the
difference between charges at established rates and the estimated amount to be
reimbursed.
Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments
purchased with an original maturity of three months or less.
Accounts Receivable
F-117
<PAGE>
SOUTH SHORE ORTHOPEDICS, PA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
Accounts receivable primarily consist of receivables from patients,
third-party payors and others. Such amounts are recorded net of contractual
allowances and other estimated bad debts.
Concentration of Credit Risk
The Company extends credit to patients covered by programs such as
Medicare, 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.
Property and Equipment
Property and equipment are stated at cost. Expenditures for maintenance are
charged to expense as incurred. Depreciation is provided using the straight-line
method over the estimated useful life of each class of depreciable asset ranging
from five to seven years for equipment, furniture and fixtures and over the
remaining lease term for leasehold improvements.
Income Taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109").
SFAS No. 109 requires the liability method of accounting for deferred income
taxes. Deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities. Deferred tax assets or liabilities at the end of each period are
determined using the tax rate expected to be in effect when taxes are actually
paid or recovered.
Statements of Cash Flows Information
For the years ended March 31, 1996, 1997 and 1998, the Company paid
interest of $9,656, $16,334 and $1,760, respectively. Amounts paid for taxes
were not significant.
3. LINE OF CREDIT:
In May 1995, the Company entered into a credit agreement (the "Agreement")
with a local bank for a $50,000 line of credit. The line is unsecured and bears
interest at the bank's prime rate plus 1%. Under the terms of the Agreement, the
Company must maintain a zero balance for a period of at least 30 consecutive
days for each 12-month period. Borrowings under the line are secured by
substantially all of the Company's assets. At March 31, 1997, the Company had
$27,843 outstanding against the line. The line expired on June 30, 1997.
4. LONG-TERM DEBT:
In December 1995, the Company entered into an agreement with a bank to
borrow $150,000 for the costs associated with employing an additional physician
and establishing a new facility. The note was payable monthly in 60 equal
installments of $2,500 plus interest equal to the Bank's prime rate plus 1%
(9.5% at March 31, 1997). In December 1996, the physician's employment was
terminated and the operations of the additional facility were transferred to the
departing physician. In consideration for this transaction, the physician
assumed the $122,500 remaining balance of the loan.
F-118
<PAGE>
SOUTH SHORE ORTHOPEDICS, PA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. EMPLOYEE BENEFIT PLAN:
The Company maintains a profit sharing plan covering substantially all
full-time employees who are at least 21 years of age and have completed one year
of service. The Company's contributions to the plan totaled $61,815, $58,818 and
$0 for the years ended March 31, 1996, 1997 and 1998.
6. RELATED-PARTY TRANSACTIONS:
For the years ended March 31, 1996, 1997 and 1998, the Company paid $34,800
for the lease of office space in a building owned by a shareholder of the
Company. There is no formal lease agreement for this space.
The Company also leases office space from a partnership in which the
shareholders of the Company hold a cumulative 22.22% interest. The monthly rent
is negotiated annually. For the years ended March 31, 1996, 1997 and 1998, the
Company paid rent of $58,586, $46,543 and $48,652, respectively.
7. INCOME TAXES:
The components of the income tax provision (benefit) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal.......................................... $ (2,770) $(13,156) $ 20,361
State............................................ (1,847) (8,770) 13,575
-------- -------- --------
(4,617) (21,926) 33,936
-------- -------- --------
Deferred:
Federal.......................................... (9,142) 29,644 (19,266)
State............................................ (6,095) 19,762 (12,844)
-------- -------- --------
(15,237) 49,406 (32,110)
-------- -------- --------
$(19,854) $ 27,480 $ 1,826
======== ======== ========
</TABLE>
Income tax expense (benefit) differs from the amount currently payable or
receivable because certain expenses, primarily depreciation and accruals, are
reported in different periods for financial reporting and income tax purposes.
The Company is on a cash basis of accounting for income tax purposes.
The provision (benefit) for income taxes differs from the amount computed
by applying the U.S. Federal income tax rate (34%) because of the effect of the
following items:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------
1996 1997 1998
-------- ------- -------
<S> <C> <C> <C>
Tax at U.S. Federal statutory rate................... $(32,308) $26,268 $ --
Tax impact of Federal rate differential for graduated
rates.............................................. 18,747 (11,391) --
State income taxes, net of federal benefit........... (9,041) 9,919 --
Non-deductible travel and entertainment.............. 2,748 2,684 1,826
-------- ------- -------
$(19,854) $27,480 $ 1,826
======== ======= =======
</TABLE>
F-119
<PAGE>
SOUTH SHORE ORTHOPEDICS, PA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES: -- (CONTINUED)
The components of the net deferred tax liability, measured under SFAS No.
109, are as follows:
<TABLE>
<CAPTION>
MARCH 31,
------------------------
1997 1998
--------- ---------
<S> <C> <C>
Deferred tax liabilities --
Cash to accrual adjustments............................... $(196,574) $(164,464)
--------- ---------
Net deferred tax liability.................................. $(196,574) $(164,464)
========= =========
</TABLE>
8. COMMITMENTS AND CONTINGENCIES:
Lease Obligations
Total minimum annual rental commitments for noncancellable operating leases
having terms in excess of one year as of March 31, 1998, are as follows:
1999............................................... $41,969
2000............................................... 10,082
Rental expense, including related party leases (see Note 6), under
noncancellable operating leases for the years ended March 31, 1996, 1997 and
1998, was $165,586, $154,972 and $132,610, respectively.
Insurance Policies
The Company maintains insurance with respect to medical malpractice risks
on an occurrence basis in amounts management believes to be adequate. Management
is not aware of any outstanding claims which would have a material impact on the
Company's financial position or results of operations.
Health Care Regulatory Environment and Reliance on Government Programs
The health care industry in general and the services that the Company
provides are subject to extensive federal and state laws and regulations.
Additionally, a portion of the Company's net revenue is from payments by
government-sponsored health care programs, principally Medicare and Medicaid,
and is subject to audit and adjustments by applicable regulatory agencies.
Failure to comply with any of these laws or regulations, the results of
regulatory audits and adjustments, or changes in the amounts payable for the
Company's services under these programs could have a material adverse effect on
the Company's financial position and results of operations.
F-120
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Sports Medicine & Rehabilitation Center, Inc.:
We have audited the accompanying combined balance sheets of Sports Medicine &
Rehabilitation Center, Inc. and related companies identified in Note 1 as of
December 31, 1996 and 1997 and the related combined statements of operations,
owner's equity and cash flows for each of the three years in the period ended
December 31, 1997. These combined financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
combined 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 combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall combined
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Sports
Medicine & Rehabilitation Center, Inc. and related companies identified in Note
1 as of December 31, 1996 and 1997, and the combined results of their operations
and their cash flows for each of the three years in the period ended December
31, 1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
February 20, 1998
F-121
<PAGE>
SPORTS MEDICINE & REHABILITATION CENTER, INC.
AND RELATED COMPANIES (SEE NOTE 1)
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- MARCH 31,
1996 1997 1998
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 269,759 $ -- $ --
Accounts receivable, net of allowance of $780,467,
$1,595,432 and $1,828,308........................... 718,260 1,127,148 1,362,380
Prepaid expenses and other............................. 13,328 188,353 202,804
---------- ---------- ----------
Total current assets.............................. 1,001,347 1,315,501 1,565,184
---------- ---------- ----------
Property and equipment:
Equipment, furniture and fixtures...................... 356,437 366,334 366,334
Leasehold improvements................................. 29,622 42,492 42,492
---------- ---------- ----------
386,059 408,826 408,826
Less -- Accumulated depreciation and amortization...... (285,483) (319,315) (328,203)
---------- ---------- ----------
100,576 89,511 80,623
---------- ---------- ----------
$1,101,923 $1,405,012 $1,645,807
========== ========== ==========
LIABILITIES AND OWNER'S EQUITY
Current liabilities:
Accounts payable....................................... $ 37,319 $ 28,188 $ 44,803
Accrued compensation................................... 52,780 13,029 37,333
Due to U.S. PHYSICIANS, Inc............................ -- 189,506 389,382
---------- ---------- ----------
Total current liabilities......................... 90,099 230,723 471,518
---------- ---------- ----------
Commitments and contingencies (Note 4)
Owner's equity........................................... 1,011,824 1,174,289 1,174,289
---------- ---------- ----------
$1,101,923 $1,405,012 $1,645,807
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-122
<PAGE>
SPORTS MEDICINE & REHABILITATION CENTER, INC.
AND RELATED COMPANIES (SEE NOTE 1)
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ --------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- --------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues.................................. $2,862,909 $3,206,586 $3,290,008 $ 750,605 $750,083
---------- ---------- ---------- --------- --------
Operating expenses:
Salaries, wages and benefits................ 1,621,785 1,895,690 2,288,078 630,994 470,561
Pharmaceuticals and medical supplies........ 52,987 104,346 41,317 26,792 8,215
General and administrative.................. 1,054,387 975,285 531,593 191,434 104,477
Management fee due U.S. PHYSICIANS, Inc. ... -- -- 232,723 -- 157,942
Depreciation and amortization............... 56,672 54,811 33,832 14,996 8,888
---------- ---------- ---------- --------- --------
Income (loss) from operations................. 77,078 176,454 162,465 (113,611) --
Interest income............................... 3,874 -- -- 1,558 --
---------- ---------- ---------- --------- --------
Net income (loss)............................. $ 80,952 $ 176,454 $ 162,465 $(112,053) $ --
========== ========== ========== ========= ========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-123
<PAGE>
SPORTS MEDICINE & REHABILITATION CENTER, INC.
AND RELATED COMPANIES (SEE NOTE 1)
COMBINED STATEMENTS OF OWNER'S EQUITY
<TABLE>
<S> <C>
Balance, January 1, 1995.................................... $ 836,349
Net income................................................ 80,952
----------
Balance, December 31, 1995.................................. 917,301
Distributions............................................. (81,931)
Net income................................................ 176,454
----------
Balance, December 31, 1996.................................. 1,011,824
Net income................................................ 162,465
----------
Balance, December 31, 1997.................................. 1,174,289
Net income (unaudited).................................... --
----------
Balance, March 31, 1998 (unaudited)......................... $1,174,289
==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-124
<PAGE>
SPORTS MEDICINE & REHABILITATION CENTER, INC.
AND RELATED COMPANIES (SEE NOTE 1)
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------ --------------------
1995 1996 1997 1997 1998
-------- -------- -------- --------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss)............................... $ 80,952 $176,454 $162,465 $(112,053) $ --
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities --
Depreciation and amortization............... 56,672 54,811 33,832 14,996 8,888
Changes in assets and liabilities --
Accounts receivable...................... (111,864) (102,438) (408,888) 198,748 (235,232)
Prepaid expenses and other............... (15,525) 14,246 (175,025) 8,633 (14,451)
Accounts payable......................... 17,150 3,759 (9,131) (30,311) 16,615
Accrued compensation..................... 6,415 20,606 (39,751) (16,679) 24,304
Due to U.S. PHYSICIANS, Inc.............. -- -- 189,506 -- 199,876
-------- -------- -------- --------- --------
Net cash provided by (used in)
operating activities................. 33,800 167,438 (246,992) 63,334 --
-------- -------- -------- --------- --------
Investing activities:
Purchases of property and equipment............. (50,548) (73,749) (22,767) (22,767) --
-------- -------- -------- --------- --------
Financing activities:
Distributions................................... -- (57,136) -- -- --
-------- -------- -------- --------- --------
Net (decrease) increase in cash and cash
equivalents..................................... (16,748) 36,553 (269,759) 40,567 --
Cash and cash equivalents, beginning of period.... 249,954 233,206 269,759 269,759 --
-------- -------- -------- --------- --------
Cash and cash equivalents, end of period.......... $233,206 $269,759 $ -- $ 310,326 $ --
======== ======== ======== ========= ========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-125
<PAGE>
SPORTS MEDICINE & REHABILITATION CENTER, INC.
AND RELATED COMPANIES (SEE NOTE 1)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
1. ORGANIZATION AND BUSINESS:
Sports Medicine & Rehabilitation Center, Inc. and related companies (the
"Company") provide physiatry care and related medical services to the general
public. The combined financial statements include the combined accounts of
Sports Medicine & Rehabilitation Center, Inc. (a Pennsylvania professional
corporation), Industrial Rehabilitation (a Pennsylvania partnership), James
Bonner - PT Testing (a Pennsylvania sole proprietorship), James Bonner - PT (a
Pennsylvania sole proprietorship) and James Bonner Physical Medicine (a
Pennsylvania sole proprietorship). Effective January 1, 1996, the net assets of
Industrial Rehabilitation were distributed to the partners and the operations
became part of Sports Medicine & Rehabilitation Center, Inc.
On April 4, 1997 (the Initial Closing Date), the Company and the selling
owner entered into an Asset Acquisition Agreement, as amended through April 23,
1998 (the "Affiliation Agreement") with U.S. PHYSICIANS, Inc. ("USP"). Under the
terms of the Affiliation Agreement, USP and its affiliated professional
corporation acquired the majority of the assets and liabilities of the Company
in exchange for cash, notes, convertible notes and shares of USP Common Stock,
subject to adjustment, as defined. The Affiliation Agreement contains a
repurchase provision that allows the selling owner, in the event that an initial
public offering ("IPO") has not been completed by USP by June 15, 1998 (the
"Repurchase Date"), to repurchase the net assets of his practice by returning
all of the consideration received excluding the initial cash payment.
In accordance with Accounting Principles Board Opinion No. 16, the
Affiliation Agreement is not considered effective for applying purchase
accounting until either the date that USP completes an IPO or the repurchase
provision terminates (the "Final Closing Date"). Pursuant to the Affiliation
Agreement, for the period of time between the Initial Closing Date and the Final
Closing Date, USP is responsible for managing the Company, including cash
management, and receives a management fee equal to the income earned by the
Company. Accordingly, the statements of operations for the three months ended
March 31, 1998 and the year ended December 31, 1997 include a management fee
charge for the income earned by the Company for the three months ended March 31,
1998 and for the period from the Initial Closing Date to December 31, 1997,
respectively. The balance sheets as of December 31, 1997 and March 31, 1998
contain a Due to U.S. PHYSICIANS, Inc. account to reflect the net cash activity
for the respective period.
2. SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Statements
The financial statements for the three months ended March 31, 1997 and 1998
are unaudited, and in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the financial position as of March 31, 1998 and the results of
their operations for the three months ended March 31, 1997 and 1998. The results
of operations for the three-month period are not necessarily indicative of the
results to be expected for the entire year.
Principles of Combination
The combined financial statements include the accounts of Sports Medicine &
Rehabilitation Center, Inc. and related companies (see Note 1). The related
companies are controlled by the sole shareholder of Sports Medicine &
Rehabilitation Center, Inc. All material intercompany accounts and transactions
have been eliminated in combination.
F-126
<PAGE>
SPORTS MEDICINE & REHABILITATION CENTER, INC.
AND RELATED COMPANIES (SEE NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain 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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
Financial instruments consist of cash and cash equivalents, accounts
receivable and certain current liabilities. The carrying amounts reported in the
balance sheets for these items approximate fair value.
Net Revenues
Revenues from patients, third-party payors and others are recorded at
established rates, net of provision for bad debts and contractual adjustments,
in the period that services are rendered. Contractual adjustments represent the
difference between charges at established rates and the estimated amount to be
reimbursed.
Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments
purchased with an original maturity of three months or less.
Accounts Receivable
Accounts receivable primarily consist of receivables from patients,
third-party payors and others. Such amounts are recorded net of contractual
allowances and estimated bad debts.
Concentration of Credit Risk
The Company extends credit to patients covered by programs such as
Medicare, Medicaid and private insurers. The Company manages credit risk with
the various public and private insurance providers, as appropriate. Allowances
for bad debt have been made for potential losses when appropriate.
Property and Equipment
Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to expense as incurred. Depreciation and amortization are
provided over the estimated useful life of each class of depreciable asset
ranging from five to seven years and are computed using the straight-line
method.
Income Taxes
Sports Medicine & Rehabilitation Center, Inc. and related companies have
elected treatment as either an "S" Corporation, partnership or sole
proprietorship for both federal and state income tax purposes, and accordingly
are not taxed as separate entities. The companies' taxable income or loss is
allocated to the owner and recognized on his individual tax return. Accordingly,
no provision for income taxes has been reflected in the accompanying financial
statements.
F-127
<PAGE>
SPORTS MEDICINE & REHABILITATION CENTER, INC.
AND RELATED COMPANIES (SEE NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
The Company reports certain income and expense items for income tax
purposes on a different basis than that reflected in the accompanying financial
statements. The primary differences are due to the cash basis of accounting for
income tax purposes. The cumulative amount of these differences as of December
31, 1997, was approximately $1,075,000. If the S Corporation, partnership and
sole proprietorship status is terminated, then a deferred income tax liability
of approximately $260,000 related to these cumulative differences would need to
be reflected in the accompanying financial statements.
Owner's Equity
Owner's equity includes the capital stock, partners capital and retained
earnings of the Company.
Statements of Cash Flows Information
Amounts paid for interest and taxes were not significant.
Effective January 1, 1996, the net assets of Industrial Rehabilitation were
distributed to the partners including cash of $57,136, property of $15,941 and
other net assets of $8,854.
3. RELATED-PARTY TRANSACTIONS:
The Company paid $13,403 and $15,902 during the years ended December 31,
1996 and 1997, respectively for the lease of office space from the shareholder.
The Company is leasing the space on a month to month basis.
4. COMMITMENTS AND CONTINGENCIES:
Lease Obligations
Rent expense under all noncancellable operating leases for the years ended
December 31, 1995, 1996 and 1997 was $142,771, $184,973 and $152,832,
respectively. The Company leases office space and equipment under noncancellable
operating leases. Future minimum lease payments under the Company's leases as of
December 31, 1997, are as follows:
1998............................................... $51,040
1999............................................... 56,144
Insurance Policies
The Company maintains insurance with respect to medical malpractice risks
on an occurrence basis in amounts management believes to be adequate. Management
is not aware of any outstanding claims which would have a material impact on the
Company's financial position or results of operations.
The Pennsylvania Medical Professional Liability Catastrophic Loss Fund (the
"CAT Fund"), an agency fund of the Commonwealth of Pennsylvania, acts as a
service agent to facilitate the payment of medical malpractice claims exceeding
the primary layer of professional liability insurance carried by physicians and
other health care providers practicing in Pennsylvania. The CAT Fund policies
are retrospectively rated on a claims-made basis. The CAT Fund levies health
care provider surcharges, as a percentage of insurance premiums for basic
coverage, to pay claims and administrative expenses on behalf of CAT Fund
participants.
F-128
<PAGE>
SPORTS MEDICINE & REHABILITATION CENTER, INC.
AND RELATED COMPANIES (SEE NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
4. COMMITMENTS AND CONTINGENCIES: -- (CONTINUED)
The CAT Fund is significantly underfunded and the Commonwealth has
indicated that the unfunded liability will be funded exclusively through
surcharge assessments in future years as claims are settled and paid. The
Company and the other CAT Fund participants received a surcharge assessment
during fiscal 1996 and 1997. No provision has been made for any future CAT Fund
assessments in the accompanying financial statements as the Company's portion of
the CAT Fund unfunded liability could not be reasonably estimated.
Health Care Regulatory Environment and Reliance on Government Programs
The health care industry in general and the services that the Company
provides are subject to extensive federal and state laws and regulations.
Additionally, a portion of the Company's net revenue is from payments by
government-sponsored health care programs, principally Medicare and Medicaid,
and is subject to audit and adjustments by applicable regulatory agencies.
Failure to comply with any of these laws or regulations, the results of
regulatory audits and adjustments, or changes in the amounts payable for the
Company's services under these programs could have a material adverse effect on
the Company's financial position and results of operations.
F-129
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Steel Valley Orthopedic Association, Inc.:
We have audited the accompanying balance sheets of Steel Valley Orthopedic
Association, Inc. (a Pennsylvania corporation) as of February 28, 1997 and 1998,
and the related statements of operations and retained earnings and cash flows
for each of the three years in the period ended February 28, 1998. 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 Steel Valley Orthopedic
Association, Inc. as of February 28, 1997 and 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
February 28, 1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
April 30, 1998
F-130
<PAGE>
STEEL VALLEY ORTHOPEDIC ASSOCIATION, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
FEBRUARY 28,
-------------------
1997 1998
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 64,645 $ --
Accounts receivable, net of allowance of $349,747 and
$416,730............................................... 369,459 200,638
Due from U.S. PHYSICIANS, Inc............................. -- 137,500
Prepaid expenses and other................................ 33,273 2,138
-------- --------
Total current assets................................. 467,377 340,276
-------- --------
Property and equipment:
Equipment, furniture and fixtures......................... 512,105 625,386
Leasehold improvements.................................... 26,801 40,369
-------- --------
538,906 665,755
Less -- Accumulated depreciation and amortization......... (408,878) (420,829)
-------- --------
130,028 244,926
-------- --------
Deferred income taxes....................................... 315 20,130
-------- --------
Other assets................................................ 1,216 --
-------- --------
$598,936 $605,332
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit............................................ $ 46,659 $175,000
Current maturities of capitalized lease obligations....... 12,246 17,363
Accounts payable.......................................... 42,690 19,372
Accrued compensation...................................... 173,614 6,134
Deferred income taxes..................................... 52,789 87,864
-------- --------
Total current liabilities............................ 327,998 305,733
-------- --------
Capitalized lease obligations............................... 17,363 --
-------- --------
Commitments and contingencies (Note 7)
Shareholders' equity:
Common Stock, $10 par value, 1,000 shares authorized,
500 shares issued and outstanding...................... 5,000 5,000
Retained earnings......................................... 248,575 294,599
-------- --------
Total shareholders' equity........................... 253,575 299,599
-------- --------
$598,936 $605,332
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-131
<PAGE>
STEEL VALLEY ORTHOPEDIC ASSOCIATION, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Net revenues............................................ $2,867,209 $2,911,760 $2,720,651
---------- ---------- ----------
Operating expenses:
Salaries, wages and benefits.......................... 2,137,832 2,238,063 1,699,616
Pharmaceuticals and medical supplies.................. 76,147 89,760 64,544
General and administrative............................ 632,530 614,449 718,817
Management fee due
U.S. PHYSICIANS, Inc............................... -- -- 127,550
Depreciation and amortization......................... 38,270 36,636 31,410
Loss on disposal of fixed assets...................... -- -- 8,581
---------- ---------- ----------
Income (loss) from operations........................... (17,570) (67,148) 70,133
Interest income (expense), net.......................... (3,400) 1,912 (8,443)
---------- ---------- ----------
Income (loss) before income taxes....................... (20,970) (65,236) 61,690
Income tax provision (benefit).......................... (4,966) (15,596) 15,666
---------- ---------- ----------
Net income (loss)....................................... (16,004) (49,640) 46,024
Retained earnings, beginning of period.................. 314,219 298,215 248,575
---------- ---------- ----------
Retained earnings, end of period........................ $ 298,215 $ 248,575 $ 294,599
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-132
<PAGE>
STEEL VALLEY ORTHOPEDIC ASSOCIATION, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Operating activities:
Net income (loss)..................................... $(16,004) $(49,640) $ 46,024
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities --
Loss on disposal of property and equipment....... -- -- 8,581
Depreciation and amortization.................... 38,270 36,636 31,410
Deferred income taxes............................ (5,480) (14,754) 15,260
Changes in assets and liabilities --
Accounts receivable........................... 69,685 (23,180) 168,821
Prepaid expenses and other.................... (18,377) 68,230 31,135
Due from U.S. PHYSICIANS, Inc................. -- -- (137,500)
Accounts payable.............................. 16,615 (5,663) (23,318)
Accrued compensation.......................... 20,264 16,225 (167,480)
-------- -------- --------
Net cash provided by (used in) operating
activities............................... 104,973 27,854 (27,067)
-------- -------- --------
Investing activities:
Purchases of property and equipment................... (8,005) (65,513) (153,673)
-------- -------- --------
Financing activities:
Net proceeds (repayments) on line of credit........... (40,000) 46,659 128,341
Payments on capitalized lease obligations............. (8,683) (10,743) (12,246)
-------- -------- --------
Net cash (used in) provided by financing
activities............................... (48,683) 35,916 116,095
-------- -------- --------
Net increase (decrease) in cash and cash equivalents.... 48,285 (1,743) (64,645)
Cash and cash equivalents, beginning of
period................................................ 18,103 66,388 64,645
-------- -------- --------
Cash and cash equivalents, end of period................ $ 66,388 $ 64,645 $ --
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-133
<PAGE>
STEEL VALLEY ORTHOPEDIC ASSOCIATION, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS:
Steel Valley Orthopedic Association, Inc. (the "Company") is a
physician-owned medical practice serving the Pittsburgh, Pennsylvania, area. The
Company was formed in 1971 for the purpose of rendering orthopedic surgical
services. The Company has a fiscal year end as of the last day in February;
herein referred to as "fiscal year end."
On August 27, 1997, (the "Initial Closing Date") the Company and the
selling owners entered into a Stock Acquisition Agreement, as amended on March
30, 1998 through April 21, 1998, (the "Affiliation Agreement") with U.S.
PHYSICIANS, Inc. ("USP"). Under the terms of the Affiliation Agreement, USP and
its affiliated professional corporation acquired the majority of the assets of
the Company in exchange for cash, notes, convertible notes and shares of USP
Common Stock, subject to adjustment, as defined. The Affiliation Agreement
contains a repurchase provision that allows the selling owners, in the event
that an initial public offering ("IPO") has not been completed by USP by June
15, 1998, (the "Repurchase Date"), to repurchase the net assets of their
practice by returning all of the consideration received excluding the initial
cash payment.
In accordance with Accounting Principles Board Opinion No. 16, the
Affiliation Agreement is not considered effective for applying purchase
accounting until either the date that USP completes an IPO or the repurchase
provision terminates (the "Final Closing Date"). Pursuant to the Affiliation
Agreement, for the period of time between the Initial Closing Date and the Final
Closing Date, USP is responsible for managing the Company, including cash
management, and receives a management fee equal to the income earned by the
Company. Accordingly, the statement of operations includes a management fee
charge for the income earned by the Company for the period from the Initial
Closing Date to February 28, 1998, and the balance sheet as of February 28, 1998
contains a Due from U.S. PHYSICIANS, Inc. account to reflect the net cash
activity for the same period.
2. SIGNIFICANT ACCOUNTING POLICIES:
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
Financial instruments consist of cash and cash equivalents, accounts
receivable, certain current liabilities and debt obligations. The carrying
amounts reported in the balance sheet for these items approximate fair value.
Net Revenues
Revenues from patients, third-party payors and others are recorded at
established rates, net of provision for bad debts and contractual adjustments,
in the period that services are rendered. Contractual adjustments represent the
difference between charges at established rates and the estimated amount to be
reimbursed.
In September 1996, the Company entered into an agreement with a third party
to provide medical services to subscribing participants. Under this agreement
the Company receives monthly capitation payments based on the number of
participants, regardless of services actually provided by the Company. Total
revenues received under this agreement for the years ended February 28, 1997 and
1998 were $429,220 and $276,525, respectively.
F-134
<PAGE>
STEEL VALLEY ORTHOPEDIC ASSOCIATION, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments
purchased with an original maturity of three months or less.
Accounts Receivable
Accounts receivable primarily consist of receivables from patients,
third-party payors and others. Such amounts are recorded net of contractual
allowances and estimated bad debts.
Concentration of Credit Risk
The Company extends credit to patients covered by programs such as
Medicare, 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.
Property and Equipment
Property and equipment are stated at cost. Repairs and maintenance are
charged to expense as incurred. Depreciation is provided over the estimated
useful lives of the applicable assets ranging from five to seven years for
equipment, furniture and fixtures and the remaining lease term for leasehold
improvements and are computed using the straight-line method.
Income Taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109").
SFAS No. 109 requires the liability method of accounting for deferred income
taxes. Deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities. Deferred tax assets or liabilities at the end of each period are
determined using the tax rate expected to be in effect when taxes are actually
paid or recovered.
Statements of Cash Flows Information
For the fiscal years ended 1996, 1997 and 1998, the Company paid interest
of $6,561, $4,683 and 9,538, respectively. Amounts paid for taxes were not
significant.
3. LINE OF CREDIT:
In fiscal year 1996, the Company entered into a credit agreement with a
local bank for $150,000. The line has no specified expiration date. Interest is
accrued on the outstanding balance at the bank's prime rate plus .25%.
In fiscal year 1997, the Company entered into a credit agreement with a
local bank for $25,000. The line has no specified expiration date. Interest is
accrued on the outstanding balance at the bank's prime rate plus .25%.
4. EMPLOYEE BENEFIT PLAN:
The Company maintains a defined contribution money purchase pension plan
that covers all qualified employees, as defined by the plan agreement.
Contributions to the plan are discretionary and are determined by the Company on
an annual basis. Employees are fully vested in Company contributions after seven
years. For the fiscal years 1996, 1997 and 1998, contributions to the plan were
$55,540, $83,934 and $20,752, respectively.
F-135
<PAGE>
STEEL VALLEY ORTHOPEDIC ASSOCIATION, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. RELATED PARTY:
The Company has an operating lease for a piece of equipment from an entity
affiliated with owners of the Company. The lease is a month to month lease with
monthly payments of $1,514.
6. INCOME TAXES:
The components of the income tax provision (benefit) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------------
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Current:
Federal................................... $ 308 $ (505) $ 243
State..................................... 206 (337) 163
------- -------- -------
514 (842) 406
------- -------- -------
Deferred:
Federal................................... (3,288) (8,852) 9,157
State..................................... (2,192) (5,902) 6,103
------- -------- -------
(5,480) (14,754) 15,260
------- -------- -------
$(4,966) $(15,596) $15,666
======= ======== =======
</TABLE>
Income tax expense (benefit) differs from the amount currently payable or
receivable because certain expenses, primarily depreciation and accruals, are
reported in different periods for financial reporting and income tax purposes.
The Company is on a cash basis of accounting for income tax purposes.
The provision (benefit) for income taxes differs from the amount computed
by applying the U.S. Federal income tax rate (34%) because of the effect of the
following items:
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------------
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Tax at U.S. Federal statutory rate.......... $(7,130) $(22,180) $20,975
Tax impact of Federal rate differential for
graduated rates........................... 3,907 12,521 (11,721)
State income taxes, net of federal
benefit................................... (2,148) (6,439) 6,169
Non-deductible travel and entertainment..... 405 502 243
------- -------- -------
$(4,966) $(15,596) $15,666
======= ======== =======
</TABLE>
The components of the net deferred tax liability, measured under SFAS No.
109, are as follows:
<TABLE>
<CAPTION>
FEBRUARY 28,
------------------------------
1997 1998
------------ ------------
<S> <C> <C>
Deferred tax assets --
Net operating loss carryforward................ $ 7,419 $ 20,776
-------- --------
Deferred tax liabilities --
Property and equipment......................... (7,104) (646)
Cash to accrual adjustments.................... (52,789) (87,864)
-------- --------
(59,893) (88,510)
-------- --------
Net deferred tax liability....................... $(52,474) $(67,734)
======== ========
</TABLE>
F-136
<PAGE>
STEEL VALLEY ORTHOPEDIC ASSOCIATION, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES:
Lease Obligations
Future minimum lease payments under the Company's leases as of February 28,
1998 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
FISCAL YEAR LEASES LEASES
- ----------- -------- ---------
<S> <C> <C>
1999................................................. $ 18,778 $135,211
2000................................................. -- 93,367
2001................................................. -- 82,466
2002................................................. -- 78,832
2003................................................. -- 78,832
Thereafter........................................... -- 249,508
--------
Total........................................... 18,778
Less -- Amounts representing interest................ (1,415)
--------
Present value of future minimum lease payments....... 17,363
Less -- Current maturities........................... (17,363)
--------
$ --
========
</TABLE>
Rent expense under noncancelable operating leases for the fiscal years
1996, 1997 and 1998 was $93,051, $102,267 and $133,328, respectively. The cost
of assets capitalized under capitalized lease obligations aggregated $59,235 as
of February 28, 1998 and accumulated depreciation was $44,757.
Insurance Policies
The Company maintains insurance with respect to medical malpractice risks
on an occurrence basis in amounts management believes to be adequate. Management
is not aware of any outstanding claims which would have a material impact on the
Company's financial position or results of operations.
The Pennsylvania Medical Professional Liability Catastrophic Loss Fund (the
"CAT Fund"), an agency fund of the Commonwealth of Pennsylvania, acts as a
service agent to facilitate the payment of medical malpractice claims exceeding
the primary layer of professional liability insurance carried by physicians and
other health care providers practicing in Pennsylvania. The CAT Fund policies
are retrospectively rated on a claims-made basis. The CAT Fund levies health
care provider surcharges, as a percentage of insurance premiums for basic
coverage, to pay claims and administrative expenses on behalf of CAT Fund
participants.
The CAT fund is significantly underfunded and the Commonwealth has
indicated that the unfunded liability will be funded exclusively through
surcharge assessments in future years as claims are settled and paid. The
Company and the other CAT Fund participants received a surcharge assessment
during fiscal 1996, 1997, and 1998. No provision has been made for any future
CAT Fund assessments in the accompanying financial statements as the Company's
portion of the CAT Fund unfunded liability could not be reasonably estimated.
Health Care Regulatory Environment and Reliance on Government Programs
The health care industry in general and the services that the Company
provides are subject to extensive federal and state laws and regulations.
Additionally, a portion of the Company's net revenue is from payments by
government-sponsored health care programs, principally Medicare and Medicaid,
and is subject to audit and adjustments by applicable regulatory agencies.
Failure to comply with any of these laws or regulations, the results of
regulatory audits and adjustments, or changes in the amounts payable for the
Company's services under these programs could have a material adverse effect on
the Company's financial position and results of operations.
F-137
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Valley Forge Facial Plastic Surgery/Ear, Nose & Throat Associates, Ltd.:
We have audited the accompanying balance sheets of Valley Forge Facial Plastic
Surgery/Ear, Nose & Throat, Ltd. (a Pennsylvania corporation) as of September
30, 1996 and 1997 and the related statements of operations and retained earnings
and cash flows for each of the three years in the period ended September 30,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Valley Forge Facial Plastic
Surgery/Ear, Nose & Throat Associates, Ltd. as of September 30, 1996 and 1997,
and the results of its operations and its cash flows for each of the three years
in the period ended September 30, 1997, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
December 20, 1997
F-138
<PAGE>
VALLEY FORGE FACIAL PLASTIC SURGERY/
EAR, NOSE & THROAT ASSOCIATES, LTD.
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------- MARCH 31,
1996 1997 1998
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ -- $ 84,554 $ --
Accounts receivable, net of allowance of $482,604,
$369,328 and $356,197.................................. 405,891 349,551 471,467
Due from U.S. PHYSICIANS, Inc............................. -- 41,910 93,508
Prepaid expenses and other................................ 37,590 1,012 --
-------- -------- --------
Total current assets................................. 443,481 477,027 564,975
-------- -------- --------
Property and equipment:
Equipment, furniture and fixtures......................... 232,347 183,898 183,898
Leasehold improvements.................................... 34,540 34,540 34,540
-------- -------- --------
266,887 218,438 218,438
Less -- Accumulated depreciation and amortization......... (244,792) (213,064) (216,976)
-------- -------- --------
22,095 5,374 1,462
-------- -------- --------
$465,576 $482,401 $566,437
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 35,407 $ 22,311 $ 48,031
Accrued compensation...................................... 103,606 62,949 121,265
Deferred income taxes..................................... 81,752 87,869 87,869
-------- -------- --------
Total current liabilities............................ 220,765 173,129 257,165
-------- -------- --------
Commitments and contingencies (Note 6)
Shareholders' equity:
Common Stock, $10 par value, 1,000 shares authorized,
100 shares issued and outstanding...................... 1,000 1,000 1,000
Retained earnings......................................... 243,811 308,272 308,272
-------- -------- --------
Total shareholders' equity........................... 244,811 309,272 309,272
-------- -------- --------
$465,576 $482,401 $566,437
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-139
<PAGE>
VALLEY FORGE FACIAL PLASTIC SURGERY/
EAR, NOSE & THROAT ASSOCIATES, LTD.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
------------------------------------ ---------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- -------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues................................. $1,945,585 $2,049,394 $2,173,755 $927,309 $1,218,725
---------- ---------- ---------- -------- ----------
Operating expenses:
Salaries, wages and benefits............... 1,302,642 1,243,634 1,287,027 558,623 650,927
Pharmaceuticals and medical supplies....... 133,858 160,871 160,896 102,682 141,625
General and administrative................. 498,626 493,519 441,105 263,377 157,230
Management fee due U.S. PHYSICIANS, Inc.... -- -- 195,609 -- 265,031
Depreciation and amortization.............. 4,152 12,732 3,235 1,699 3,912
---------- ---------- ---------- -------- ----------
Income (loss) from operations................ 6,307 138,638 85,883 928 --
Interest income, net......................... 1,152 1,761 1,100 805 --
---------- ---------- ---------- -------- ----------
Income (loss) before income taxes............ 7,459 140,399 86,983 1,733 --
Income tax provision (benefit)............... 4,143 35,598 22,522 421 --
---------- ---------- ---------- -------- ----------
Net income (loss)............................ 3,316 104,801 64,461 1,312 --
Retained earnings, beginning of period....... 135,694 139,010 243,811 243,811 308,272
---------- ---------- ---------- -------- ----------
Retained earnings, end of period............. $ 139,010 $ 243,811 $ 308,272 $245,123 $ 308,272
========== ========== ========== ======== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-140
<PAGE>
VALLEY FORGE FACIAL PLASTIC SURGERY/
EAR, NOSE & THROAT ASSOCIATES, LTD.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
---------------------------- -------------------
1995 1996 1997 1997 1998
------- -------- ------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss).................................. $ 3,316 $104,801 $64,461 $ 1,312 $ --
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities --
Depreciation and amortization.................. 4,152 12,732 3,235 1,699 3,912
Deferred income taxes.......................... 4,251 25,180 6,117 421 --
Changes in assets and liabilities --
Accounts receivable......................... (19,337) (135,128) 56,340 88,299 (121,916)
Due from U.S. PHYSICIANS, Inc............... -- -- (41,910) -- (51,598)
Prepaid expenses and other.................. 1,325 (8,273) 36,578 20,121 1,012
Accounts payable............................ 7,255 12,582 (13,096) (3,825) 25,720
Accrued compensation........................ (26,170) (11,823) (40,657) 26,017 58,316
------- -------- ------- -------- --------
Net cash (used in) provided by operating
activities.............................. (25,208) 71 71,068 134,044 (84,554)
------- -------- ------- -------- --------
Investing activities:
Purchases of property and equipment................ -- (8,580) -- -- --
Sale of property and equipment..................... -- -- 13,486 -- --
------- -------- ------- -------- --------
Net cash (used in) provided by investing
activities.............................. -- (8,580) 13,486 -- --
------- -------- ------- -------- --------
Net (decrease) increase in cash and cash
equivalents........................................ (25,208) (8,509) 84,554 134,044 (84,554)
Cash and cash equivalents, beginning of period....... 33,717 8,509 -- -- 84,554
------- -------- ------- -------- --------
Cash and cash equivalents, end of period............. $ 8,509 $ -- $84,554 $134,044 $ --
======= ======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-141
<PAGE>
VALLEY FORGE FACIAL PLASTIC SURGERY/
EAR, NOSE & THROAT ASSOCIATES, LTD.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE SIX MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
1. ORGANIZATION AND BUSINESS:
Valley Forge Facial Plastic Surgery/Ear, Nose & Throat Associates, Ltd.
(the "Company") is a physician owned medical practice serving the Philadelphia,
Pennsylvania area. The Company is engaged in the business of rendering health
care services in the area of otolaryngology, as well as facial plastic surgery.
On May 29, 1997 (the "Initial Closing Date"), the Company and the selling
owners entered into a Stock Acquisition Agreement, as amended through April 20,
1998, (the "Affiliation Agreement") with U.S. PHYSICIANS, Inc. ("USP"). Under
the terms of the Affiliation Agreement, USP and its affiliated professional
corporation acquired the outstanding stock of the Company in exchange for cash,
notes, convertible notes and shares of USP Common Stock, subject to adjustment,
as defined. The Affiliation Agreement contains a repurchase provision that
allows the selling owners, in the event that an initial public offering ("IPO")
has not been completed by USP by June 15, 1998 (the "Repurchase Date"), to
repurchase the stock of their practice by returning all of the consideration
received, excluding the initial cash payment.
In accordance with Accounting Principles Board Opinion No. 16, the
affiliation transaction is not considered effective for applying purchase
accounting until either the date that USP completes an IPO or the repurchase
provision lapses (the "Final Closing Date"). Pursuant to the Affiliation
Agreement, for the period of time between the Initial Closing Date and the Final
Closing Date, USP is responsible for managing the Company, including cash
management, and receives a management fee equal to the income earned by the
Company. Accordingly, the statements of operations for the six months ended
March 31, 1998 and the year ended September 30, 1997 include a management fee
charge for the income earned by the Company for the six months ended March 31,
1998 and for the period from the Initial Closing Date to September 30, 1997,
respectively. The balance sheets as of September 30, 1997 and March 31, 1998
contain a Due from U.S. PHYSICIANS, Inc. account to reflect the net cash
activity for the respective period.
2. SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Statements
The financial statements for the six months ended March 31, 1997 and 1998,
are unaudited, and in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the financial position as of March 31, 1998, and the results of
its operations for the six months ended March 31, 1997 and 1998. The results of
operations for the six-month period are not necessarily indicative of the
results to be expected for the entire year.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain 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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
Financial instruments consist of cash and cash equivalents, accounts
receivable and certain current liabilities. The carrying amounts reported in the
balance sheets for these items approximate fair value.
F-142
<PAGE>
VALLEY FORGE FACIAL PLASTIC SURGERY/
EAR, NOSE & THROAT ASSOCIATES, LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE SIX MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
Net Revenues
Revenues from patients, third-party payors and others are recorded at
established rates, net of provision for bad debts and contractual adjustments,
in the period that services are rendered. Contractual adjustments represent the
difference between charges at established rates and the estimated amount to be
reimbursed.
Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments
purchased with an original maturity of three months or less.
Accounts Receivable
Accounts receivable primarily consist of receivables from patients,
third-party payors and others. Such amounts are recorded net of contractual
allowances and estimated bad debts.
Concentration of Credit Risk
The Company extends credit to its patients, covered by programs such as
Medicare, 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.
Property and Equipment
Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to expense as incurred. Depreciation and amortization are
provided over the estimated useful life of each class of depreciable asset
ranging from five to seven years for equipment, furniture and fixtures and over
the related lease term for leasehold improvements and are computed using the
straight-line method.
Income Taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109").
SFAS No. 109 requires the liability method of accounting for deferred income
taxes. Deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities. Deferred tax assets or liabilities at the end of each period are
determined using the tax rate expected to be in effect when taxes are actually
paid or recovered.
Statements of Cash Flows Information
Amounts paid for interest and taxes were not significant.
3. EMPLOYEE BENEFIT PLAN:
The Company maintains a profit sharing plan covering substantially all
full-time employees who are at least 21 years of age and completed one year of
service in which at least 1,000 are worked. The Company's contributions to the
plan totaled $103,132, $26,963, and $0 for the years ended September 30, 1995,
1996 and 1997, respectively. The Company intends to terminate the profit sharing
plan in connection with the anticipated sale (see Note 1).
F-143
<PAGE>
VALLEY FORGE FACIAL PLASTIC SURGERY/
EAR, NOSE & THROAT ASSOCIATES, LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE SIX MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
4. RELATED-PARTY TRANSACTIONS:
The Company paid $118,500, $118,500 and $101,250 during the years ended
September 30, 1995, 1996 and 1997, respectively, for the lease of office space
from the shareholders.
5. INCOME TAXES:
The components of the income tax provision are as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------
1995 1996 1997
------ ------- -------
<S> <C> <C> <C>
Current:
Federal..................................... $ (65) $ 6,251 $ 9,843
State....................................... (43) 4,167 6,562
------ ------- -------
(108) 10,418 16,405
------ ------- -------
Deferred
Federal..................................... 2,551 15,108 3,670
State....................................... 1,700 10,072 2,447
------ ------- -------
4,251 25,180 6,117
------ ------- -------
$4,143 $35,598 $22,522
====== ======= =======
</TABLE>
Income tax expense differs from the amount currently payable or receivable
because certain expenses, primarily depreciation and accruals, are reported in
different periods for financial reporting and income tax purposes. The Company
is on a cash basis of accounting for income tax purposes.
The provision for income taxes differs from the amount computed by applying
the U.S. Federal income tax rate (34%) because of the effect of the following
items:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------
1995 1996 1997
------ ------- -------
<S> <C> <C> <C>
Tax at U.S. Federal statutory rate............ $2,536 $47,735 $27,981
Tax impact of Federal rate differential for
graduated rates............................. (1,402) (28,237) (15,636)
State income taxes, net of federal benefit.... 757 12,998 8,230
Non-deductible travel and entertainment....... 2,252 3,102 1,947
------ ------- -------
$4,143 $35,598 $22,522
====== ======= =======
</TABLE>
The components of the net deferred tax liability, measured under SFAS No.
109, are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------
1996 1997
------- -------
<S> <C> <C>
Deferred tax liabilities:
Cash to accrual adjustments......................... $81,752 $87,869
------- -------
Net deferred tax liabilities.......................... $81,752 $87,869
======= =======
</TABLE>
F-144
<PAGE>
VALLEY FORGE FACIAL PLASTIC SURGERY/
EAR, NOSE & THROAT ASSOCIATES, LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE SIX MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
6. COMMITMENTS AND CONTINGENCIES:
Lease Obligations
Rental expense, including related party leases (see Note 4), under
noncancellable operating leases for the years ended September 30, 1995, 1996 and
1997 was $175,562, $141,254 and $119,218, respectively. Future minimum lease
payments under the Company's leases as of September 30, 1997 are as follows:
<TABLE>
<S> <C>
1998............................................. $118,500
1999............................................. 118,500
2000............................................. 118,500
2001............................................. 118,500
2002............................................. 118,500
Thereafter....................................... 197,500
</TABLE>
Insurance Policies
The Company is subject to certain claims and legal actions that have arisen
in the ordinary course of its business. The Company has insurance coverage that
includes malpractice insurance. The Company believes that the ultimate
liability, if any, with respect to these claims and legal actions, will not have
a material effect on the financial position or results of operations of the
Company.
The Pennsylvania Medical Professional Liability Catastrophic Loss Fund (the
"CAT Fund"), an agency of the Commonwealth of Pennsylvania, acts as a service
agent to facilitate the payment of medical malpractice claims exceeding the
primary layer of professional liability insurance carried by physicians and
other health care providers practicing in Pennsylvania. The CAT Fund policies
are retrospectively rated on a claims-made basis. The CAT Fund levies health
care provider surcharges, as a percentage of insurance premiums for basic
coverage, to pay claims and administrative expenses on behalf of CAT Fund
participants.
The CAT Fund is significantly underfunded and the Commonwealth has
indicated that the unfunded liability will be funded exclusively through
surcharge assessments in future years as claims are settled and paid. The
Company and other CAT Fund participants received a surcharge assessment during
fiscal 1996 and 1997. No provision has been made for any future CAT Fund
assessments in the accompanying financial statements as the Company's portion of
the CAT Fund unfunded liability could not be reasonably estimated.
Health Care Regulatory Environment and Reliance on Government Programs
The health care industry in general and the services that the Company
provides are subject to extensive federal and state laws and regulations.
Additionally, a portion of the Company's net revenue is from payments by
government-sponsored health care programs, principally Medicare and Medicaid,
and is subject to audit and adjustments by applicable regulatory agencies.
Failure to comply with any of these laws or regulations, the results of
regulatory audits and adjustments, or changes in the amounts payable for the
Company's services under these programs could have a material adverse effect on
the Company's financial position and results of operations.
F-145
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Alan E. Ottenstein, M.D. and Related Practices:
We have audited the accompanying combined balance sheets of Dr. Alan E.
Ottenstein, M.D. and related practices (see Note 1) as of December 31, 1996 and
1997 and the related combined statements of operations and owner's equity and
cash flows for each of the three years in the period ended December 31, 1997.
These combined financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these combined
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 combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall combined
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Dr. Alan E.
Ottenstein, M.D. and related practices as of December 31, 1996 and 1997, and the
combined results of their operations and their cash flows for each of the three
years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
March 6, 1998
F-146
<PAGE>
DR. ALAN E. OTTENSTEIN, M.D.
AND RELATED PRACTICES
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- MARCH 31,
1996 1997 1998
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 79,660 $ 111,976 $ 167,400
Accounts receivable, net of allowance of $8,671,906,
$10,775,082 and $11,531,569......................... 3,955,480 3,877,247 3,989,276
Prepaid expenses and other............................. 128,171 172,945 224,858
---------- ---------- ----------
Total current assets.............................. 4,163,311 4,162,168 4,381,534
---------- ---------- ----------
Property and equipment:
Equipment, furniture and fixtures...................... 3,304,989 3,331,833 3,331,833
Leasehold improvements................................. 137,006 587,273 599,636
---------- ---------- ----------
3,441,995 3,919,106 3,931,469
Less--Accumulated depreciation and amortization........ (1,433,971) (1,951,847) (2,101,067)
---------- ---------- ----------
2,008,024 1,967,259 1,830,402
---------- ---------- ----------
$6,171,335 $6,129,427 $6,211,936
========== ========== ==========
LIABILITIES AND OWNER'S EQUITY
Current liabilities:
Current maturities of long-term debt................... $ 619,499 $ 910,066 $ 866,617
Accounts payable....................................... 217,721 110,771 186,662
Accrued compensation................................... 71,779 85,820 90,137
---------- ---------- ----------
Total current liabilities......................... 908,999 1,106,657 1,143,416
---------- ---------- ----------
Long-term debt........................................... 1,445,321 1,170,422 1,022,459
---------- ---------- ----------
Commitments and contingencies (Note 4)
Owner's equity........................................... 3,817,015 3,852,348 4,046,061
---------- ---------- ----------
$6,171,335 $6,129,427 $6,211,936
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-147
<PAGE>
DR. ALAN E. OTTENSTEIN, M.D.
AND RELATED PRACTICES
COMBINED STATEMENTS OF OPERATIONS AND OWNER'S EQUITY
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ -----------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues....................... $4,821,213 $4,622,935 $4,502,584 $1,036,436 $1,214,095
---------- ---------- ---------- ---------- ----------
Operating expenses:
Salaries, wages and benefits..... 2,513,421 1,564,879 1,951,369 201,133 470,237
Pharmaceuticals and medical
supplies...................... 307,862 322,996 202,703 56,760 19,163
General and administrative....... 2,535,721 1,845,246 1,559,686 322,886 326,612
Depreciation and amortization.... 394,092 501,067 517,876 138,834 149,220
---------- ---------- ---------- ---------- ----------
Income (loss) from operations...... (929,883) 388,747 270,950 316,823 248,863
Interest expense................... 239,681 273,888 235,617 58,919 55,150
---------- ---------- ---------- ---------- ----------
Net income (loss).................. (1,169,564) 114,859 35,333 257,904 193,713
Owner's equity, beginning of
period........................... 4,871,720 3,702,156 3,817,015 3,817,015 3,852,348
---------- ---------- ---------- ---------- ----------
Owner's equity, end of period...... $3,702,156 $3,817,015 $3,852,348 $4,074,919 $4,046,061
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-148
<PAGE>
DR. ALAN E. OTTENSTEIN, M.D.
AND RELATED PRACTICES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------- -------------------
1995 1996 1997 1997 1998
----------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss)..................... $(1,169,564) $114,859 $ 35,333 $257,904 $193,713
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities --
Depreciation and amortization.... 394,092 501,067 517,876 138,834 149,220
Changes in assets and liabilities
--
Accounts receivable........... 779,178 61,301 78,233 108,768 (112,029)
Prepaid expenses and other.... (19,235) (46,492) (44,774) (24,639) (51,913)
Accounts payable.............. 147,769 13,704 (106,950) (131,912) 75,891
Accrued compensation.......... 9,010 25,099 14,041 44,079 4,317
----------- -------- -------- -------- --------
Net cash provided by
operating activities..... 141,250 669,538 493,759 393,034 259,199
----------- -------- -------- -------- --------
Investing activities:
Purchases of property and equipment... (216,760) (127,621) (477,111) (2,370) (12,363)
----------- -------- -------- -------- --------
Financing activities:
Proceeds from long-term debt.......... 105,000 -- 650,000 -- --
Repayments on long-term debt.......... (520,012) (604,990) (634,332) (429,936) (191,412)
----------- -------- -------- -------- --------
Net cash (used in) provided
by financing
activities............... (415,012) (604,990) 15,668 (429,936) (191,412)
----------- -------- -------- -------- --------
Net (decrease) increase in cash and cash
equivalents........................... (490,522) (63,073) 32,316 (39,272) 55,424
Cash and cash equivalents, beginning of
period................................ 633,255 142,733 79,660 79,660 111,976
----------- -------- -------- -------- --------
Cash and cash equivalents, end of
period................................ $ 142,733 $ 79,660 $111,976 $ 40,388 $167,400
=========== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-149
<PAGE>
DR. ALAN E. OTTENSTEIN, M.D.
AND RELATED PRACTICES
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
1. ORGANIZATION AND BUSINESS:
Dr. Alan E. Ottenstein, M.D. and related practices (the Company) consists
of Lawrenceville Neurological Associates, Hamilton Neurodiagnostic Associates,
Center for Stroke Prevention, Inc., Neurological Associates of Mercer County,
Open MRI, Inc., Neurology Pain Center (all New Jersey corporations) and Dr. Alan
E. Ottenstein, M.D. (a sole proprietorship). These practices provide
neurological and pain management services to the general public.
On February 12, 1998, the Company and the selling owner entered into an
Asset Acquisition Agreement, as amended through April 23, 1998, (the
"Affiliation Agreement") with U.S. PHYSICIANS, Inc. ("USP"). Under the terms of
the Affiliation Agreement, USP and its affiliated professional corporation
acquired the majority of the assets and liabilities of the Company in exchange
for cash, notes and shares of USP Common Stock, subject to adjustment, as
defined. The closing as defined in the Affiliation Agreement will occur upon the
completion of an initial public offering by USP. If the closing has not occurred
prior to September 30, 1998, the Affiliation Agreement may be terminated by
either the Company or USP by written notice to the other party.
2. SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Statements
The financial statements for the three months ended March 31, 1997 and 1998
are unaudited, and in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the financial position as of March 31, 1998 and the results of
its operations for the three months ended March 31, 1997 and 1998. The results
of operations for the three-month period are not necessarily indicative of the
results to be expected for the entire year.
Principles of Combination
The combined financial statements include the accounts of Alan E.
Ottenstein, M.D. and related practices (see Note 1). The related companies are
controlled by Dr. Alan E. Ottenstein. All material intercompany accounts and
transactions have been eliminated in combination.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain 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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
Financial instruments consist of cash and cash equivalents, accounts
receivable, certain current liabilities and debt obligatons. The carrying
amounts reported in the balance sheets for these items approximate fair value.
Net Revenues
Revenues from patients, third-party payors and others are recorded at
established rates, net of provision for bad debts and contractual adjustments,
in the period that services are rendered. Contractual adjustments represent the
difference between charges at established rates and the estimated amount to be
reimbursed.
F-150
<PAGE>
DR. ALAN E. OTTENSTEIN, M.D.
AND RELATED PRACTICES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments
purchased with an original maturity of three months or less.
Property and Equipment
Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to expense as incurred. Depreciation and amortization are
provided over the estimated useful lives of the applicable assets ranging from
five to seven years for equipment, furniture and fixtures and the related lease
term for leasehold improvements and are computed using the straight-line method.
The net book value of equipment held under capital leases at December 31, 1997
is $583,000.
Accounts Receivable
Accounts receivable primarily consist of receivables from patients,
third-party payors and others. Such amounts are recorded net of contractual
allowances and estimated bad debts.
Concentration of Credit Risk
The Company extends credit to patients covered by programs such as
Medicare, Medicaid and private insurers. The Company manages credit risk with
the various public and private insurance providers, as appropriate. Allowances
for bad debt have been made for potential losses when appropriate.
Income Taxes
The Company and related practices has elected treatment as a sole
proprietorship or an "S" Corporation for both federal and state income tax
purposes, and accordingly are not taxed as separate entities. The Company's
taxable income or loss is allocated to the owner and recognized on his
individual tax return. Accordingly, no provision for income taxes has been
reflected in the accompanying financial statements.
The Company reports certain income and expense items for income tax
purposes on a different basis than that reflected in the accompanying financial
statements. The primary differences are due to the cash basis of accounting for
income tax purposes. The cumulative amount of these differences as of December
31, 1997 was approximately $2,700,000. If the S Corporation status is
terminated, then a deferred income tax liability of approximately $918,000
related to these cumulative differences would need to be reflected in the
accompanying financial statements.
Owner's Equity
Owner's equity includes the capital stock and retained earnings of the
Company.
Statements of Cash Flows Information
For the years ended December 31, 1995, 1996 and 1997, the Company paid
interest of $239,681, $273,888 and $235,617. Amounts paid for taxes were not
significant.
In 1995, the Company acquired equipment under a capital lease for
$1,166,000.
F-151
<PAGE>
DR. ALAN E. OTTENSTEIN, M.D.
AND RELATED PRACTICES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
3. LONG-TERM DEBT:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1997
---------- ----------
<S> <C> <C>
Capital lease, monthly payments of $28,688 including
interest at 11.5%.................................. $1,056,364 $ 904,496
Note payable to a bank, monthly payments of $10,833
plus interest at bank's base rate plus 1%.......... -- 606,667
Note payable, monthly payments of $22,569 including
interest at 10.5%.................................. 627,524 413,983
Note payable, monthly payments of $20,974
including interest at 10.7%........................ 261,432 88,275
Mortgage payable to a bank, monthly payments of $997
including interest at 7.75%........................ 42,361 33,718
Note payable to a bank, monthly payments of $3,195
plus interest at 10%............................... 9,385 --
Note payable, monthly payments of $1,710 including
interest at 7.5%................................... 19,710 3,388
Note payable, monthly payments of $2,138 including
interest at 9.25%.................................. 35,811 17,786
Other................................................ 12,233 12,175
---------- ----------
2,064,820 2,080,488
Less - Current maturities............................ (619,499) (910,066)
---------- ----------
$1,445,321 $1,170,422
========== ==========
</TABLE>
Future maturities of long-term debt at December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998............................................ $ 910,066
1999............................................ 591,853
2000............................................ 361,902
2001............................................ 130,000
2002............................................ 86,667
----------
$2,080,488
==========
</TABLE>
4. COMMITMENTS AND CONTINGENCIES:
Lease Obligations
Future minimum lease payments for noncancelable operating leases primarily
for office space as of December 31, 1997, are as follows:
<TABLE>
<S> <C>
1998............................................ $ 243,284
1999............................................ 277,800
2000............................................ 219,255
2001............................................ 171,696
2002............................................ 45,862
</TABLE>
Rent expense on operating leases was $235,613, $242,730 and $290,099 for
the years ended December 31, 1995, 1996 and 1997, respectively.
F-152
<PAGE>
DR. ALAN E. OTTENSTEIN, M.D.
AND RELATED PRACTICES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
4. COMMITMENTS AND CONTINGENCIES: -- (CONTINUED)
Insurance Policies
The Company maintains insurance with respect to medical malpractice risks
on an occurrence basis in amounts management believes to be adequate. Management
is not aware of any outstanding claims which would have a material impact on the
Company's financial position or results of operations.
Health Care Regulatory Environment and Reliance on Government Programs
The health care industry in general and the services that the Company
provides are subject to extensive federal and state laws and regulations.
Additionally, a portion of the Company's net revenue is from payments by
government-sponsored health care programs, principally Medicare and Medicaid,
and is subject to audit and adjustments by applicable regulatory agencies.
Failure to comply with any of these laws or regulations, the results of
regulatory audits and adjustments, or changes in the amounts payable for the
Company's services under these programs could have a material adverse effect on
the Company's financial position and results of operations.
F-153
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Associated Surgeons, PC:
We have audited the accompanying balance sheets of Associated Surgeons, PC (a
Pennsylvania corporation) as of December 31, 1996 and 1997 and the related
statements of operations and retained earnings 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 Associated Surgeons, PC as of
December 31, 1996 and 1997, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
February 20, 1998
F-154
<PAGE>
ASSOCIATED SURGEONS, PC
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- MARCH 31,
1996 1997 1998
---------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 98,931 $ 32,831 $ 84,666
Accounts receivable, net of allowance of $1,320,965,
$992,035 and $1,116,068................................. 881,018 632,063 649,651
Due from related parties.................................. 55,799 88,351 27,107
Prepaid expenses and other................................ 103,588 128,143 25,485
---------- -------- --------
Total current assets.................................. 1,139,336 881,388 786,909
---------- -------- --------
Property and equipment:
Equipment, furniture and fixtures......................... 152,663 153,114 153,333
Less -- Accumulated depreciation.......................... (99,963) (119,429) (122,906)
---------- -------- --------
52,700 33,685 30,427
---------- -------- --------
$1,192,036 $915,073 $817,336
========== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable.............................................. $ 67,875 $ 14,715 $ --
Accounts payable.......................................... 129,141 204,805 150,423
Accrued compensation...................................... 260,815 205,440 222,646
Deferred income taxes..................................... 172,924 111,055 81,202
---------- -------- --------
Total current liabilities............................. 630,755 536,015 454,271
---------- -------- --------
Deferred income taxes....................................... 3,130 2,618 2,341
---------- -------- --------
Commitments and contingencies (Note 8)
Shareholders' equity:
Common Stock, $1 par value; 700 shares authorized, issued
and outstanding......................................... 700 700 700
Additional paid-in capital................................ 25,559 25,559 25,559
Retained earnings......................................... 531,892 350,181 334,465
---------- -------- --------
Total shareholders' equity............................ 558,151 376,440 360,724
---------- -------- --------
$1,192,036 $915,073 $817,336
========== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-155
<PAGE>
ASSOCIATED SURGEONS, PC
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
----------------------- -------------------
1996 1997 1997 1998
---------- ---------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net revenues.............................................. $3,507,513 $3,430,580 $714,197 $972,248
---------- ---------- -------- --------
Operating expenses:
Salaries, wages and benefits............................ 2,740,658 2,936,230 669,769 693,050
Pharmaceuticals and medical supplies.................... 25,647 25,134 9,550 9,469
General and administrative.............................. 555,822 695,750 147,997 306,425
Depreciation............................................ 25,277 19,466 4,868 3,477
---------- ---------- -------- --------
Income (loss) from operations............................. 160,109 (246,000) (117,987) (40,173)
Interest (expense) income, net............................ (3,629) 5,665 -- 102
---------- ---------- -------- --------
Income (loss) before income taxes......................... 156,480 (240,335) (117,987) (40,071)
Income tax provision (benefit)............................ 40,185 (58,624) (28,671) (24,355)
---------- ---------- -------- --------
Net income (loss)......................................... 116,295 (181,711) (89,316) (15,716)
Retained earnings, beginning of period.................... 415,597 531,892 531,892 350,181
---------- ---------- -------- --------
Retained earnings, end of period.......................... $ 531,892 $ 350,181 $442,576 $334,465
========== ========== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-156
<PAGE>
ASSOCIATED SURGEONS, PC
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
--------------------- -------------------
1996 1997 1997 1998
--------- --------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Operating activities:
Net income (loss)......................................... $ 116,295 ($181,711) $(89,316) $(15,716)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities--
Depreciation.......................................... 25,277 19,466 4,868 3,477
Deferred income taxes................................. 38,609 (62,381) (28,671) (30,130)
Changes in assets and liabilities--
Accounts receivable.............................. (71,495) 248,955 109,694 (17,588)
Due from related parties......................... 8,421 (32,552) (12,282) 61,244
Prepaid expenses and other....................... (22,140) (24,555) 57,166 102,658
Accounts payable................................. (34,584) 75,664 2,046 (54,382)
Accrued compensation............................. 170,947 (55,375) (4,256) 17,206
--------- --------- -------- --------
Net cash provided by (used in) operating
activities................................... 231,330 (12,489) 39,249 66,769
--------- --------- -------- --------
Investing activities:
Purchases of property and equipment....................... (2,630) (451) -- (219)
--------- --------- -------- --------
Financing activities:
Repayments on line of credit.............................. (150,000) -- -- --
Proceeds from notes payable............................... 175,695 100,645 -- --
Repayments on notes payable............................... (155,464) (153,805) (67,875) (14,715)
--------- --------- -------- --------
Net cash used in financing activities.......... (129,769) (53,160) (67,875) (14,715)
--------- --------- -------- --------
Net increase (decrease) in cash and cash equivalents........ 98,931 (66,100) (28,626) 51,835
Cash and cash equivalents, beginning of period.............. -- 98,931 98,931 32,831
--------- --------- -------- --------
Cash and cash equivalents, end of period.................... $ 98,931 $ 32,831 $ 70,305 $ 84,666
========= ========= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-157
<PAGE>
ASSOCIATED SURGEONS, PC
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
1. ORGANIZATION AND BUSINESS:
Associated Surgeons, PC (the "Company") is a physician owned medical
practice serving the Philadelphia, Pennsylvania area. The Company was formed in
August 1995.
On March 31, 1998, the Company entered into a Stock Acquisition Agreement,
as amended through April 24, 1998, (the "Affiliation Agreement") with U.S.
PHYSICIANS, Inc. ("USP"). Under the terms of the Affiliation Agreement, USP and
its affiliated professional corporation will acquire the stock of the Company in
exchange for cash, notes payable and USP Common Stock, subject to adjustment as
defined. The closing, as defined in the Affiliation Agreement, will occur upon
completion of an initial public offering by USP. If the closing has not occurred
prior to June 15, 1998, the Affiliation Agreement may be terminated by either
the Company or USP by written notice to the other party.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Statements
The financial statements for the three months ended March 31, 1997 and 1998
are unaudited, and in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the financial position as of March 31, 1998 and the results of
its operations for the three months ended March 31, 1997 and 1998. The results
of operations for the three-month period are not necessarily indicative of the
results to be expected for the entire year.
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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
Financial instruments consist of cash and cash equivalents, accounts
receivable, certain current liabilities and debt obligations. The carrying
amounts reported in the balance sheets for these items approximate fair value.
Net Revenues
Revenues from patients, third-party payors and others are recorded at
established rates, net of provision for bad debts and contractual adjustments,
in the period that services are rendered. Contractual adjustments represent the
difference between charges at established rates and the estimated amount to be
reimbursed.
F-158
<PAGE>
ASSOCIATED SURGEONS, PC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments
purchased with an original maturity of three months or less.
Accounts Receivable
Accounts receivable primarily consist of receivables from patients,
third-party payors and others. Such amounts are recorded net of contractual
allowances and estimated bad debts.
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.
Property and Equipment
Equipment, furniture and fixtures are stated at cost. Expenditures for
maintenance and repairs are charged to expense as incurred. Depreciation is
provided over the estimated useful life of each class of depreciable asset
ranging from five to seven years and is computed using the straight-line method.
Income Taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109").
SFAS No. 109 requires the liability method of accounting for deferred income
taxes. Deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities. Deferred tax assets or liabilities at the end of each period are
determined using the tax rate expected to be in effect when taxes are actually
paid or recovered.
Statements of Cash Flows Information
For the years ended December 31, 1996 and 1997, the Company paid interest
of $5,931 and $0, respectively. Amounts paid for taxes were not significant.
3. LINE OF CREDIT:
The Company had a credit agreement with a local bank for a $600,000 line of
credit. The line was paid off and closed in September 1996.
4. NOTE-PAYABLE:
The Company has financed its malpractice insurance premiums with one-year
notes. In June 1996 and 1997, the Company borrowed $175,695 and $100,645,
payable in eight and seven monthly installments, bearing interest at 6.5% and
7.0%, respectively.
5. EMPLOYEE BENEFIT PLAN:
The Company provides a 401(k) profit sharing plan that covers all qualified
employees, as defined by the Plan Agreement. Employees vest pro rata over five
years beginning after their second year as a participant. Contributions to the
plan are discretionary and are determined by the Company on an annual basis. For
the
F-159
<PAGE>
ASSOCIATED SURGEONS, PC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
5. EMPLOYEE BENEFIT PLAN: -- (CONTINUED)
years ended December 31, 1996 and 1997, Company contributions to the plan were
$119,231 and $120,192, respectively.
6. RELATED-PARTY TRANSACTIONS:
The Company paid $100,200 and $102,000 during the years ended December 31,
1996 and 1997, respectively, for the lease of office space from a partnership
owned by the Company's shareholders.
The Company has a loan receivable from the shareholder partnership at
December 31, 1996 and 1997 of $55,799 and $88,351, respectively. The loan is due
on demand and bears interest at a rate of 8.25%.
7. INCOME TAXES:
The components of the income tax provision (benefit) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------
1996 1997
------- --------
<S> <C> <C>
Current:
Federal.............................................. $ 946 $ 2,255
State................................................ 630 1,502
------- --------
1,576 3,757
------- --------
Deferred:
Federal.............................................. 23,165 (37,427)
State................................................ 15,444 (24,954)
------- --------
38,609 (62,381)
------- --------
$40,185 $(58,624)
======= ========
</TABLE>
Income tax expense (benefit) differs from the amount currently payable or
receivable because certain expenses, primarily depreciation and accruals, are
reported in different periods for financial reporting and income tax purposes.
The Company is on a cash basis of accounting for income tax purposes.
The provision for income taxes differs from the amount computed by applying
the U.S. Federal income tax rate (34%) because of the effect of the following
items:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------
1996 1997
-------- --------
<S> <C> <C>
Tax at U.S. Federal statutory rate................... $ 52,667 $(81,714)
Tax impact of Federal rate differential for graduated
rates.............................................. (29,432) 45,664
State income taxes, net of federal benefit........... 15,490 (24,034)
Non-deductible travel and entertainment.............. 1,460 1,460
-------- --------
$ 40,185 $(58,624)
======== ========
</TABLE>
F-160
<PAGE>
ASSOCIATED SURGEONS, PC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
7. INCOME TAXES: -- (CONTINUED)
The components of the net deferred tax liability, measured under SFAS No.
109, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
-------- --------
<S> <C> <C>
Deferred liabilities:
Property and equipment............................. $ 3,130 $ 2,618
Cash to accrual adjustments........................ 172,924 111,055
-------- --------
Net deferred tax liability........................... $176,054 $113,673
======== ========
</TABLE>
8. COMMITMENTS AND CONTINGENCIES:
Lease Obligations
Rental expense, including related party leases (See Note 6) under
noncancellable operating leases for the years ended December 31, 1996 and 1997
was $100,600 and $103,800, respectively. There are no annual rental commitments
for noncancellable operating leases having terms in excess of one year as of
December 31, 1997.
Insurance Policies
The Company maintains insurance with respect to medical malpractice risks
on an occurrence basis in amounts management believes to be adequate. Management
is not aware of any outstanding claims, which would have a material impact on
the Company's financial position or results of operations.
The Pennsylvania Medical Professional Liability Catastrophic Loss Fund (the
"CAT Fund"), an agency fund of the Commonwealth of Pennsylvania, acts as a
service agent to facilitate the payment of medical malpractice claims exceeding
the primary layer of professional liability insurance carried by physicians and
other health care providers practicing in Pennsylvania. The CAT Fund policies
are retrospectively rated on a claims-made basis. The CAT Fund levies health
care provider surcharges, as a percentage of insurance premiums for basic
coverage, to pay claims and administrative expenses on behalf of CAT Fund
participants.
The CAT Fund is significantly underfunded and the Commonwealth has
indicated that the unfunded liability will be funded exclusively through
surcharge assessments in future years as claims are settled and paid. The
practice and the other CAT Fund participants received a surcharge assessment
during fiscal 1996 and 1997. No provision has been made for any future CAT Fund
assessments in the accompanying financial statements as the practice's portion
of the CAT Fund unfunded liability could not be reasonably estimated.
Health Care Regulatory Environment and Reliance on Government Programs
The health care industry in general and the services that the Company
provides are subject to extensive federal and state laws and regulations.
Additionally, a portion of the Company's net revenue is from payments by
government-sponsored health care programs, principally Medicare and Medicaid,
and is subject to audit and adjustments by applicable regulatory agencies.
Failure to comply with any of these laws or regulations, the results of
regulatory audits and adjustments, or changes in the amounts payable for the
Company's services under these programs could have a material adverse effect on
the Company's financial position and results of operations.
F-161
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Associates in Urology, PC:
We have audited the accompanying balance sheets of Associates in Urology, PC as
of December 31, 1996 and 1997 and the related statements of operations and
retained earnings and cash flows for each of the three years in the period ended
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Associates in Urology, PC as of
December 31, 1996 and 1997 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
February 26, 1998
F-162
<PAGE>
ASSOCIATES IN UROLOGY, PC
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- MARCH 31,
1996 1997 1998
-------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 67 $ 50 $ 215,292
Accounts receivable, net of allowance of $682,188,
$923,060 and $989,929................................. 904,295 1,025,917 887,199
Prepaid expenses and other............................... 22,195 78,461 34,027
-------- ---------- ----------
Total current assets................................ 926,557 1,104,428 1,136,518
-------- ---------- ----------
Property and equipment:
Equipment, furniture and fixtures........................ 272,945 290,314 290,949
Leasehold improvements................................... 18,899 18,899 18,899
-------- ---------- ----------
291,844 309,213 309,848
Less -- Accumulated depreciation and amortization........ (230,178) (261,956) (269,589)
-------- ---------- ----------
61,666 47,257 40,259
-------- ---------- ----------
$988,223 $1,151,685 $1,176,777
======== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit........................................... $ 87,000 $ 98,000 $ --
Accounts payable......................................... 84,844 46,149 165,932
Accrued compensation..................................... 85,236 70,456 62,632
Deferred income taxes.................................... 298,328 385,523 319,103
-------- ---------- ----------
Total current liabilities........................... 555,408 600,128 547,667
-------- ---------- ----------
Deferred income taxes...................................... 7,828 5,782 3,302
-------- ---------- ----------
Commitments and contingencies (Note 6)
Shareholders' equity:
Common Stock, $50 par value,
100 shares authorized and issued, 1 share
outstanding........................................... 5,000 5,000 5,000
Retained earnings........................................ 439,787 560,575 640,608
Treasury stock, 99 shares at cost........................ (19,800) (19,800) (19,800)
-------- ---------- ----------
Total shareholders' equity.......................... 424,987 545,775 625,808
-------- ---------- ----------
$988,223 $1,151,685 $1,176,777
======== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-163
<PAGE>
ASSOCIATES IN UROLOGY, PC
STATEMENTS OF OPERATIONS
AND RETAINED EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ -----------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues............................... $3,235,260 $3,453,780 $3,352,627 $ 506,537 $ 815,797
---------- ---------- ---------- ---------- ----------
Operating expenses:
Salaries, wages and benefits............. 2,205,206 1,953,539 1,961,174 298,640 389,987
Pharmaceuticals and medical supplies..... 602,748 782,477 655,963 136,319 111,683
General and administrative............... 506,553 542,230 500,775 111,480 169,568
Depreciation and amortization............ 16,171 29,886 31,778 7,285 7,633
---------- ---------- ---------- ---------- ----------
Income (loss) from operations.............. (95,418) 145,648 202,937 (47,187) 136,926
Interest expense, net...................... -- -- 1,623 1,703 453
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes.......... (95,418) 145,648 201,314 (48,890) 136,473
Income tax provision (benefit)............. (33,634) 66,935 80,526 (19,556) 56,440
---------- ---------- ---------- ---------- ----------
Net income (loss).......................... (61,784) 78,713 120,788 (29,334) 80,033
Retained earnings, beginning of period..... 422,858 361,074 439,787 439,787 560,575
---------- ---------- ---------- ---------- ----------
Retained earnings, end of period........... $ 361,074 $ 439,787 $ 560,575 $ 410,453 $ 640,608
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-164
<PAGE>
ASSOCIATES IN UROLOGY, PC
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------ -------------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss)................................ $(61,784) $ 78,713 $120,788 $(29,334) $ 80,033
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating
activities --
Depreciation and amortization................ 16,171 29,886 31,778 7,285 7,633
Deferred income taxes........................ (36,775) 81,712 85,149 (19,556) (68,900)
Changes in assets and liabilities --
Accounts receivable....................... 138,219 (211,080) (121,622) 124,981 138,718
Prepaid expenses and other................ (5,417) 17,640 (56,266) (3,220) 44,434
Accounts payable.......................... (48,185) 9,561 (38,695) 49,065 119,783
Accrued compensation...................... 45,500 (61,291) (14,780) 7,776 (7,824)
-------- -------- -------- -------- --------
Net cash provided by (used in) operating
activities............................ 47,729 (54,859) 6,352 136,997 313,877
-------- -------- -------- -------- --------
Investing activities:
Purchases of property and equipment.............. (48,054) (32,124) (17,369) (8,404) (635)
-------- -------- -------- -------- --------
Financing activities:
Net borrowings (repayments) on line of credit.... -- 87,000 11,000 (30,000) (98,000)
-------- -------- -------- -------- --------
Net (decrease) increase in cash and cash
equivalents...................................... (325) 17 (17) 98,593 215,242
Cash and cash equivalents, beginning of period..... 375 50 67 67 50
-------- -------- -------- -------- --------
Cash and cash equivalents, end of period........... $ 50 $ 67 $ 50 $ 98,660 $215,292
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-165
<PAGE>
ASSOCIATES IN UROLOGY, PC
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
1. ORGANIZATION AND BUSINESS:
Associates in Urology, PC (the "Company") provides urological and
incontinence care services and related medical services to the general public.
On January 28, 1998, the Company entered into a Stock Acquisition
Agreement, as amended through April 22, 1998, (the "Affiliation Agreement") with
U.S. PHYSICIANS, Inc. ("USP"). Under the terms of the Affiliation Agreement, USP
and its affiliated professional corporation will acquire the stock of the
Company in exchange for cash and USP Common Stock, subject to adjustment as
defined. The closing, as defined in the Affiliation Agreement, will occur upon
the completion of an initial public offering by USP. If the closing has not
occurred prior to June 15, 1998, the Affiliation Agreement may be terminated by
either the Company or USP by written notice to the other party.
2. SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Statements
The financial statements for the three months ended March 31, 1997 and 1998
are unaudited, and in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the financial position as of March 31, 1998 and the results of
its operations for the three months ended March 31, 1997 and 1998. The results
of operations for the three-month period are not necessarily indicative of the
results to be expected for the entire year.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain 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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
Financial instruments consist of cash and cash equivalents, accounts
receivable, certain current liabilities and debt obligations. The carrying
amounts reported in the balance sheets for these items approximate fair value.
Net Revenues
Revenues from patients, third-party payors and others are recorded at
established rates, net of provision for bad debts and contractual adjustments,
in the period services are rendered. Contractual adjustments represent the
difference between charges at established rates and the estimated amount to be
reimbursed.
F-166
<PAGE>
ASSOCIATES IN UROLOGY, PC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments
purchased with an original maturity of three months or less.
Accounts Receivable
Accounts receivable primarily consist of receivables from patients,
third-party payors and others. Such amounts are recorded net of contractual
allowances and estimated bad debts.
Concentration of Credit Risk
The Company extends credit to patients covered by programs such as
Medicare, Medicaid and private insurers. The Company manages credit risk with
the various public and private insurance providers, as appropriate. Allowances
for bad debt have been made for potential losses when appropriate.
Property and Equipment
Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to expense as incurred. Depreciation and amortization are
provided over the estimated useful life of each class of depreciable asset
ranging from three to ten years and are computed using the straight-line method.
Income Taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109").
SFAS No. 109 requires the liability method of accounting for deferred income
taxes. Deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities. Deferred tax assets or liabilities at the end of each period are
determined using the tax rate expected to be in effect when taxes are actually
paid or recovered.
Statements of Cash Flows Information
Amounts paid for interest and taxes were not significant.
3. LINE OF CREDIT:
At December 31, 1997, the Company had a $100,000 line of credit. The line
is secured by substantially all of the Company's assets and bears interest at
the bank's prime rate plus 0.5% (9.0% at December 31, 1997). At December 31,
1996 and 1997, the Company had $87,000 and $98,000 outstanding under the line,
respectively. The line expires on May 31, 1998.
4. EMPLOYEE BENEFIT PLANS:
The Company maintains profit sharing and money purchase pension plans
covering substantially all full-time employees who have completed one year of
service. Employer contributions vest ratably in 20% increments over five years
commencing after the second year of employment. The Company's contributions to
the plans totaled $157,838, $166,342 and $181,160 for the years ended December
31, 1995, 1996 and 1997.
F-167
<PAGE>
ASSOCIATES IN UROLOGY, PC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
5. INCOME TAXES:
The components of the income tax provision (benefit) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1995 1996 1997
-------- -------- -------
<S> <C> <C> <C>
Current:
Federal............................................... $ 2,670 $(12,561) $(2,773)
State................................................. 471 (2,216) (1,850)
-------- -------- -------
3,141 (14,777) (4,623)
-------- -------- -------
Deferred:
Federal............................................... (31,259) 69,455 51,090
State................................................. (5,516) 12,257 34,059
-------- -------- -------
(36,775) 81,712 85,149
-------- -------- -------
$(33,634) $ 66,935 $80,526
======== ======== =======
</TABLE>
Income tax expense (benefit) differs from the amount currently payable or
receivable because certain expenses, primarily depreciation and accruals, are
reported in different periods for financial reporting and income tax purposes.
The Company is on a cash basis of accounting for income tax purposes.
The provision (benefit) for income taxes differs from the amount computed
by applying the U.S. Federal income tax rate (34%) because of the effect of the
following items:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1995 1996 1997
-------- ------- -------
<S> <C> <C> <C>
Tax at U.S. Federal statutory rate...................... $(33,510) $49,520 $68,447
State income taxes, net of federal benefit.............. (5,914) 9,619 11,072
Non-deductible travel and entertainment................. 5,790 7,796 1,007
-------- ------- -------
$(33,634) $66,935 $80,526
======== ======= =======
</TABLE>
The components of the net deferred tax liability, measured under SFAS No.
109, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1997
-------- --------
<S> <C> <C>
Deferred tax liabilities --
Property and equipment................................. $ 7,828 $ 5,782
Cash to accrual adjustments............................ 298,328 385,523
-------- --------
Net deferred tax liability................................ $306,156 $391,305
======== ========
</TABLE>
6. COMMITMENTS AND CONTINGENCIES:
Lease Obligations
Rent expense under all noncancellable operating leases for the years ended
December 31, 1995, 1996 and 1997 was $140,534, $131,057 and $123,844,
respectively. The Company leases office space and equipment under noncancellable
operating leases. Future minimum lease payments under the Company's leases as of
December 31, 1997, are as follows:
F-168
<PAGE>
ASSOCIATES IN UROLOGY, PC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
6. COMMITMENTS AND CONTINGENCIES: -- (CONTINUED)
<TABLE>
<S> <C>
1998.............................................. $128,330
1999.............................................. 124,840
2000.............................................. 114,880
2001.............................................. 100,936
2002.............................................. 40,602
</TABLE>
Insurance Policies
The Company maintains insurance with respect to medical malpractice risks
on an occurrence basis in amounts management believes to be adequate. Management
is not aware of any outstanding claims which would have a material impact on the
Company's financial position or results of operations.
The Pennsylvania Medical Professional Liability Catastrophic Loss Fund (the
"CAT Fund"), an agency fund of the Commonwealth of Pennsylvania, acts as a
service agent to facilitate the payment of medical malpractice claims exceeding
the primary layer of professional liability insurance carried by physicians and
other health care providers practicing in Pennsylvania. The CAT Fund policies
are retrospectively rated on a claims-made basis. The CAT Fund levies health
care provider surcharges, as a percentage of insurance premiums for basic
coverage, to pay claims and administrative expenses on behalf of CAT Fund
participants.
The CAT Fund is significantly underfunded and the Commonwealth has
indicated that the unfunded liability will be funded exclusively through
surcharge assessments in future years as claims are settled and paid. The
Company and the other CAT Fund participants received a surcharge assessment
during fiscal 1996 and 1997. No provision has been made for any future CAT Fund
assessments in the accompanying financial statements as the Company's portion of
the CAT Fund unfunded liability could not be reasonably estimated.
Health Care Regulatory Environment and Reliance on Government Programs
The health care industry in general and the services that the Company
provides are subject to extensive federal and state laws and regulations.
Additionally, a portion of the Company's net revenue is from payments by
government-sponsored health care programs, principally Medicare and Medicaid,
and is subject to audit and adjustments by applicable regulatory agencies.
Failure to comply with any of these laws or regulations, the results of
regulatory audits and adjustments, or changes in the amounts payable for the
Company's services under these programs could have a material adverse effect on
the Company's financial position and results of operations.
F-169
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Curamed, LLC:
We have audited the accompanying combined balance sheets of Curamed, LLC and
related companies identified in Note 1 as of December 31, 1996 and 1997 and the
related combined statements of operations, owners' equity and cash flows for
each of the three years in the period ended December 31, 1997. These combined
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these combined 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 combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall combined
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Curamed,
LLC and related companies identified in Note 1 as of December 31, 1996 and 1997,
and the combined results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
February 13, 1998
F-170
<PAGE>
CURAMED, LLC
AND RELATED COMPANIES (SEE NOTE 1)
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- MARCH 31,
1996 1997 1998
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 21,746 $ 2,932 $ 2,373
Management fee receivable.............................. 1,906,303 2,408,078 2,568,499
Prepaid expenses and other............................. 40,808 15,592 15,410
---------- ---------- ----------
Total current assets.............................. 1,968,857 2,426,602 2,586,282
---------- ---------- ----------
Property and equipment:
Equipment, furniture and fixtures...................... 806,799 793,027 793,027
Less -- Accumulated depreciation....................... (755,571) (774,779) (783,306)
---------- ---------- ----------
51,228 18,248 9,721
---------- ---------- ----------
$2,020,085 $2,444,850 $2,596,003
========== ========== ==========
LIABILITIES AND OWNERS' EQUITY
Current liabilities:
Due to affiliates...................................... $ 28,115 $ -- $ --
Accounts payable....................................... 136,565 120,007 128,391
Capital lease obligation............................... 364,403 364,403 364,403
---------- ---------- ----------
Total current liabilities......................... 529,083 484,410 492,794
---------- ---------- ----------
Commitments and contingencies (Note 4)
Owners' equity........................................... 1,491,002 1,960,440 2,103,209
---------- ---------- ----------
$2,020,085 $2,444,850 $2,596,003
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-171
<PAGE>
CURAMED, LLC
AND RELATED COMPANIES (SEE NOTE 1)
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ ---------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- -------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net management fee revenue................... $1,793,188 $2,357,354 $2,518,322 $903,191 $1,058,462
---------- ---------- ---------- -------- ----------
Operating expenses:
Salaries, wages and benefits............... 738,516 824,189 968,593 248,620 212,024
General and administrative................. 519,031 808,837 779,708 149,470 132,622
Depreciation............................... 51,857 46,585 31,013 8,456 8,527
---------- ---------- ---------- -------- ----------
Income from operations....................... 483,784 677,743 739,008 496,645 705,289
Interest (expense) income.................... (558) 182 1,680 -- --
---------- ---------- ---------- -------- ----------
Net income................................... $ 483,226 $ 677,925 $ 740,688 $496,645 $ 705,289
========== ========== ========== ======== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-172
<PAGE>
CURAMED, LLC
AND RELATED COMPANIES (SEE NOTE 1)
COMBINED STATEMENTS OF OWNERS' EQUITY
<TABLE>
<S> <C>
Balance, January 1, 1995.................................... $ 681,071
Distributions............................................. (15,220)
Net income................................................ 483,226
----------
Balance, December 31, 1995.................................. 1,149,077
Distributions............................................. (336,000)
Net income................................................ 677,925
----------
Balance, December 31, 1996.................................. 1,491,002
Distributions............................................. (271,250)
Net income................................................ 740,688
----------
Balance, December 31, 1997.................................. 1,960,440
----------
Distributions (unaudited)................................. (562,520)
Net Income (unaudited).................................... 705,289
----------
Balance, March 31, 1998 (unaudited)......................... $2,103,209
==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-173
<PAGE>
CURAMED, LLC
AND RELATED COMPANIES (SEE NOTE 1)
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------ -------------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income....................................... $483,226 $677,925 $740,688 $496,645 $705,289
Adjustments to reconcile net income to net cash
provided by operating
activities --
Depreciation................................. 51,857 46,585 31,013 8,456 8,527
Changes in assets and liabilities --
Management fee receivable................. (528,071) (377,743) (501,775) (160,779) (160,421)
Prepaid expenses and other................ 3,370 (6,469) 25,216 398 182
Accounts payable.......................... 30,326 5,739 (16,558) (21,405) 8,384
Due to affiliates......................... (1,000) 23,015 (28,115) (28,115) --
-------- -------- -------- -------- --------
Net cash provided by operating
activities............................ 39,708 369,052 250,469 295,200 561,961
-------- -------- -------- -------- --------
Investing activities:
Purchases of property and equipment.............. (5,318) (12,280) -- -- --
Cash received from sale of property and
equipment...................................... -- -- 1,967 -- --
-------- -------- -------- -------- --------
Net cash (used in) provided by investing
activities..................................... (5,318) (12,280) 1,967 -- --
-------- -------- -------- -------- --------
Financing activities:
Repayments on capital lease obligation........... (19,914) -- -- -- --
Distributions.................................... (15,220) (336,000) (271,250) (281,765) (562,520)
-------- -------- -------- -------- --------
Net cash used in financing activities... (35,134) (336,000) (271,250) (281,765) (562,520)
-------- -------- -------- -------- --------
Net (decrease) increase in cash and cash
equivalents...................................... (744) 20,772 (18,814) 13,435 (559)
Cash and cash equivalents, beginning of period..... 1,718 974 21,746 21,746 2,932
-------- -------- -------- -------- --------
Cash and cash equivalents, end of period........... $ 974 $ 21,746 $ 2,932 $ 35,181 $ 2,373
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-174
<PAGE>
CURAMED, LLC
AND RELATED COMPANIES (SEE NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
1. ORGANIZATION AND BUSINESS:
Curamed, LLC and related companies (the "Company") are physician practice
management companies providing services to physician practices located in New
Jersey specializing in providing pain management services care and related
medical services to the general public. The combined financial statements
include the combined accounts of Curamed, LLC (a New Jersey Limited Liability
Corporation) and Center for Neurodiagnostic Services of SJ, Inc., Center for
Neurodiagnostic Services, Inc., Center for Neurodiagnostic Services of West
Orange, Inc., Center for Neurodiagnostic Services of NJ, Inc., and Center for
Neurodiagnostic Services of PA, Inc (all New Jersey corporations).
On December 10, 1997, the Company and the selling owners entered into an
Asset Acquisition Agreement, as amended through April 23, 1998, (the
"Affiliation Agreement") with U.S. PHYSICIANS, Inc. ("USP"). Under the terms of
the Affiliation Agreement, USP and its affiliated professional corporation
acquired the majority of the assets and liabilities of the Company in exchange
for cash, notes and shares of USP Common Stock, subject to adjustment, as
defined. The closing, as defined in the Affiliation Agreement, will occur upon
the completion of an initial public offering by USP. If the closing has not
occurred prior to August 1, 1998 the Affiliation Agreement may be terminated by
either the Company or USP by written notice to the other party.
2. SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Statements
The financial statements for the three months ended March 31, 1997 and 1998
are unaudited, and in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the financial position as of March 31, 1998 and the results of
their operations for the three months ended March 31, 1997 and 1998. The results
of operations for the three-month period are not necessarily indicative of the
results to be expected for the entire year.
Principles of Combination
The combined financial statements include the accounts of Curamed, LLC and
related companies (see Note 1). The related companies are operated under common
control by the shareholders of Curamed, LLC. All material intercompany accounts
and transactions have been eliminated in combination.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain 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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
Financial instruments consist of cash and cash equivalents, management fee
receivable, certain current liabilities and debt obligations. The carrying
amounts reported in the balance sheets for these items approximate fair value.
F-175
<PAGE>
CURAMED, LLC
AND RELATED COMPANIES (SEE NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
Net Management Fee Revenue
The Company's revenue represents the contractual fees earned under its
management and administrative services agreements ("Management Agreements").
Under the Mangement Agreements, the Company is contractually responsible for
providing defined management services. The Management Agreements range from 1 to
5 years and provide for fees ranging from 50% to 100% of collected revenues, as
defined.
Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments
purchased with an original maturity of three months or less.
Management Fee Receivable
Management fee receivable consists of amounts due from the managed
physician practices.
Concentration of Credit Risk
The managed physician practices extend credit to patients covered by
programs such as Medicare, Medicaid and private insurers. As the manager of the
physician practices, the Company manages credit risk with the various public and
private insurance providers, as appropriate.
Property and Equipment
Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to expense as incurred. Depreciation and amortization are
provided over the estimated useful life of each class of depreciable asset
ranging from five to seven years and are computed using the straight-line
method.
Income Taxes
Curamed, LLC and related companies have elected treatment as either an "S"
Corporation or partnership for both federal and state income tax purposes, and
accordingly are not taxed as separate entities. The companies' taxable income or
loss is allocated to the owner and recognized on his individual tax return.
Accordingly, no provision for income taxes has been reflected in the
accompanying financial statements.
The Company reports certain income and expense items for income tax
purposes on a different basis than that reflected in the accompanying financial
statements. The primary differences are due to the cash basis of accounting for
income tax purposes. The cumulative amount of these differences as of December
31, 1997, was approximately $2,321,000. If the S Corporation and partnership
status was terminated, then a deferred income tax liability of approximately
$929,000 related to these cumulative differences would need to be reflected in
the accompanying financial statements.
F-176
<PAGE>
CURAMED, LLC
AND RELATED COMPANIES (SEE NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
Owners' Equity
Owner's equity includes the capital stock and retained earnings of the
Company.
Statements of Cash Flows Information
Amounts paid for interest and taxes were not significant.
3. CAPITAL LEASE OBLIGATION:
In 1990, the Company entered into an agreement to lease certain equipment.
The agreement was amended in 1992 to restructure the payment terms. In 1994, the
Company defaulted on the agreement and has not made any payments subsequent to
September 1994. Marine Midland Bank ("Marine") filed suit against the Company in
1996 demanding payment of approximately $482,000, representing the past due
balance, costs of collection and reasonable attorney fees. The recorded
liability for the capital lease obligation represents the present value of the
future lease payments. The Company has been negotiating a settlement with Marine
and believes that the recorded amount is adequate to cover the final settlement.
4. COMMITMENTS AND CONTINGENCIES:
Lease Obligations
Rent expense under all noncancellable operating leases for the years ended
December 31, 1995, 1996 and 1997 was $123,031, $118,761 and $122,451,
respectively. The Company leases office space and equipment under noncancellable
operating leases. Future minimum lease payments for the year ended December 31,
1997, are as follows:
<TABLE>
<S> <C>
1998.............................................. $106,998
1999.............................................. 40,138
2000.............................................. 32,460
</TABLE>
Insurance Policies
The Company maintains insurance in amounts management believes to be
adequate. Management is not aware of any outstanding claims which would have a
material impact on the Company's financial position or results of operations.
Health Care Regulatory Environment and Reliance on Government Programs
The health care industry in general and the services that the Company
provides are subject to extensive federal and state laws and regulations.
Additionally, a portion of the Company's net revenue is from payments by
government-sponsored health care programs, principally Medicare and Medicaid,
and is subject to audit and adjustments by applicable regulatory agencies.
Failure to comply with any of these laws or regulations, the results of
regulatory audits and adjustments, or changes in the amounts payable for the
Company's services under these programs could have a material adverse effect on
the Company's financial position and results of operations.
F-177
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Dennis James Bonner, M.D., Ltd.:
We have audited the accompanying balance sheets of Dennis James Bonner, M.D.,
Ltd. (a Pennsylvania Corporation) as of December 31, 1996 and 1997 and the
related statements of operations and retained earnings and cash flows for each
of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Dennis James Bonner, M.D., Ltd.
as of December 31, 1996, and 1997, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
February 28, 1998
F-178
<PAGE>
DENNIS JAMES BONNER, M.D., LTD.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- MARCH 31,
1996 1997 1998
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 35,799 $ 54,347 $ 138,388
Accounts receivable, net of allowance of $1,370,745,
$1,891,182 and $2,053,685........................... 966,325 1,092,346 1,050,638
Prepaid expenses and other............................. 450 -- --
---------- ---------- ----------
Total current assets................................ 1,002,574 1,146,693 1,189,026
---------- ---------- ----------
Property and equipment:
Equipment, furniture and fixtures...................... 761,878 782,778 782,778
Less -- Accumulated depreciation....................... (631,813) (675,870) (691,121)
---------- ---------- ----------
130,065 106,908 91,657
---------- ---------- ----------
Other assets............................................. 8,689 7,289 7,289
---------- ---------- ----------
$1,141,328 $1,260,890 $1,287,972
========== ========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt................... $ 26,571 $ 26,571 $ 26,571
Accounts payable....................................... 38,525 50,000 100,000
Accrued compensation................................... 8,254 53,763 115,266
---------- ---------- ----------
Total current liabilities........................... 73,350 130,334 241,837
---------- ---------- ----------
Long-term debt........................................... 72,395 48,212 41,975
---------- ---------- ----------
Commitments and contingencies (Note 6)
Stockholder's equity:
Common Stock, $1 par, 1,000 shares authorized, issued
and outstanding..................................... 1,000 1,000 1,000
Additional paid-in capital............................. 79,578 79,578 79,578
Retained earnings...................................... 915,005 1,001,766 923,582
---------- ---------- ----------
Total stockholder's equity.......................... 995,583 1,082,344 1,004,160
---------- ---------- ----------
$1,141,328 $1,260,890 $1,287,972
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-179
<PAGE>
DENNIS JAMES BONNER, M.D., LTD.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ -----------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues................................... $2,458,025 $2,543,561 $2,077,391 $ 522,178 $ 469,347
---------- ---------- ---------- ---------- ----------
Operating expenses:
Salaries, wages and benefits................. 1,455,969 1,426,883 1,339,284 292,298 314,552
Pharmaceuticals and medical supplies......... 93,730 101,190 82,706 8,680 7,156
General and administrative................... 820,384 741,717 519,419 241,176 209,322
Depreciation and amortization................ 49,422 44,985 44,057 13,147 15,251
---------- ---------- ---------- ---------- ----------
Income (loss) from operations.................. 38,520 228,786 91,925 (33,123) (76,934)
Interest expense, net.......................... 4,801 4,542 5,164 1,250 1,250
---------- ---------- ---------- ---------- ----------
Net income (loss).............................. 33,719 224,244 86,761 (34,373) (78,184)
Retained earnings, beginning of period......... 657,042 690,761 915,005 915,005 1,001,766
---------- ---------- ---------- ---------- ----------
Retained earnings, end of period............... $ 690,761 $ 915,005 $1,001,766 $ 880,632 $ 923,582
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-180
<PAGE>
DENNIS JAMES BONNER, M.D., LTD.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------ -------------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss)................................... $ 33,719 $224,244 $ 86,761 $(34,373) $(78,184)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities--
Depreciation and amortization................... 49,422 44,985 44,057 13,147 15,251
Loss on disposal of property and equipment...... 91,770 31,314 -- -- --
Changes in assets and liabilities--
Accounts receivable.......................... (11,295) (221,321) (126,021) (856) 41,708
Prepaid expenses and other................... 150 (5,591) 1,850 -- --
Accounts payable............................. -- 25 11,475 -- 50,000
Accrued compensation......................... 1,485 (13,109) 45,509 11,437 61,503
-------- -------- -------- -------- --------
Net cash provided by (used in) operating
activities............................... 165,251 60,547 63,631 (10,645) 90,278
-------- -------- -------- -------- --------
Investing activities:
Purchases of property and equipment................. (95,477) (112,580) (20,900) -- --
-------- -------- -------- -------- --------
Financing activities:
Proceeds from issuance of long-term debt............ -- 99,506 -- -- --
Repayment on long-term debt......................... (39,902) (43,159) (24,183) (6,237) (6,237)
-------- -------- -------- -------- --------
Net cash (used in) provided by financing
activities............................... (39,902) 56,347 (24,183) (6,237) (6,237)
-------- -------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents......................................... 29,872 4,314 18,548 (16,882) 84,041
Cash and cash equivalents, beginning of period........ 1,613 31,485 35,799 35,799 54,347
-------- -------- -------- -------- --------
Cash and cash equivalents, end of period.............. $ 31,485 $ 35,799 $ 54,347 $ 18,917 $138,388
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-181
<PAGE>
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
1. ORGANIZATION AND BUSINESS:
Dennis James Bonner, M.D., Ltd. (the "Company") was formed in 1982 as a
physician owned medical practice engaged in the rendering of professional
medical rehabilitative services to the general public.
On October 20, 1997, the Company entered into an Asset Acquisition
Agreement, as amended through April 20, 1998, (the "Affiliation Agreement") with
U.S. PHYSICIANS ("USP"). Under the terms of the Affiliation Agreement, USP and
its affiliated professional corporation will acquire the majority of the assets
and liabilities of the Company in exchange for cash, notes payable and USP
Common Stock, subject to adjustment as defined. The closing, as defined in the
Affiliation Agreement, will occur upon the completion of an initial public
offering by USP. If the closing has not occurred prior to June 15, 1998, the
Affiliation Agreement may be terminated by either the Company or USP by written
notice to the other party.
2. SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Statements
The financial statements for the three months ended March 31, 1997 and 1998
are unaudited, and in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the financial position as of March 31, 1998 and the results of
its operations for the three months ended March 31, 1997 and 1998. The results
of operations for the three-month period are not necessarily indicative of the
results to be expected for the entire year.
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 revenues and expenses during the
reporting period. Actual results could differ from
those estimates.
Fair Value of Financial Instruments
Financial instruments consist of cash and cash equivalents, accounts
receivable, certain current liabilities and debt obligations. The carrying
amounts reported in the balance sheets for these items approximate
fair value.
Net Revenues
Revenues from patients, third-party payors and others are recorded at
established rates, net of provision for bad debts and contractual adjustments,
in the period that services are rendered. Contractual adjustments represent the
difference between charges at established rates and the estimated amount to be
reimbursed.
Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments
purchased with an original maturity of three months or less.
Accounts Receivable
Accounts receivable primarily consist of receivables from patients,
third-party payors and others. Such amounts are recorded net of contractual
allowances and estimated bad debts.
F-182
<PAGE>
DENNIS JAMES BONNER, M.D., LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
Concentration of Credit Risk
The Company extends credit to patients covered by programs such as
Medicare, 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.
Property and Equipment
Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to expense as incurred. Depreciation and amortization are
provided over the shorter of the estimated useful lives of the applicable assets
or the lease term and are computed using the straight-line method. The
depreciation lives for property and equipment range from five to seven years.
Income Taxes
The Company has elected treatment as an "S" Corporation for both federal
and state income tax purposes, and accordingly is not taxed as a separate
entity. The Company's taxable income or loss is allocated to each owner and
recognized on their individual tax return. Accordingly, no provision for income
taxes has been reflected in the accompanying financial statements.
The Company reports certain income and expense items for income tax
purposes on a different basis than that reflected in the accompanying financial
statements. The primary differences are due to the cash basis of accounting for
income tax purposes. The cumulative amount of these differences as of December
31, 1997 was approximately $960,000. If the S Corporation status is terminated,
then a deferred income tax liability of approximately $235,000 related to these
cumulative differences would need to be reflected in the accompanying financial
statements.
Statements of Cash Flows Information
For the years ended December 31, 1995, 1996 and 1997, the Company paid
interest of $4,813, $4,554 and $5,167, respectively.
F-183
<PAGE>
DENNIS JAMES BONNER, M.D., LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
3. LONG-TERM DEBT:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
--------- ---------
<S> <C> <C>
Note payable to a bank, payable in monthly installments of
$602 plus interest at 8.25%, final payment due May
2001...................................................... $ 26,701 $ 19,477
Note payable to a bank, payable in monthly installments of
$551 including interest at 7.5%, final payment due
December 2000............................................. 22,717 17,658
Note payable to a bank, payable in monthly installments of
$321 including interest at 9.0%, final payment due January
2000...................................................... 10,346 7,298
Note payable to a financial services company, payable in
monthly installments of $727 including interest at 7.9%,
final payment due April 2001.............................. 28,343 24,451
Note payable to a bank, payable in monthly installments of
$480, including interest, final payment due February
1999...................................................... 10,859 5,899
--------- ---------
98,966 74,783
Less -- Current maturities............................. (26,571) (26,571)
--------- ---------
$ 72,395 $ 48,212
========= =========
</TABLE>
Minimum principal repayments for long-term debt as of December 31, 1997,
are as follows:
<TABLE>
<S> <C>
1998............................................... $26,571
1999............................................... 23,995
2000............................................... 16,032
2001............................................... 8,185
-------
$74,783
=======
</TABLE>
4. EMPLOYEE BENEFIT PLAN:
The Corporation has a defined contribution profit sharing plan. For the
years ended December 31, 1995, 1996 and 1997, the Company has elected not to
make a contribution to the plan. The Corporation has also received written
approval from the Internal Revenue Service to begin termination of the profit
sharing plan and is still in the process of dissolving this plan.
5. RELATED-PARTY TRANSACTIONS:
The Company rents office space from T. Baxter, Inc. which is a corporation
related by common ownership. The Company also rents office space from Langhorne
Medical Building Partners, a partnership in which Dr. Bonner is a partner.
Rent expense on related-party operating leases was $90,510, $81,106 and
$34,048 for the years ended December 31, 1995, 1996 and 1997, respectively.
F-184
<PAGE>
DENNIS JAMES BONNER, M.D., LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
6. COMMITMENTS AND CONTINGENCIES:
Lease Obligations
Future minimum lease payments for noncancellable operating leases primarily
for office space as of December 31, 1997, are as follows:
<TABLE>
<CAPTION>
NONRELATED-PARTY
LEASES
----------------
<S> <C>
1998......................................... $33,764
1999......................................... 2,405
</TABLE>
Rent expense on nonrelated-party operating leases was $60,694, $62,744 and
$68,482 for the years ended December 31, 1995, 1996 and 1997, respectively.
Insurance Policies
The Company maintains insurance with respect to medical malpractice risks
on an occurrence basis in amounts management believes to be adequate. Management
is not aware of any outstanding claims which would have a material impact on the
Company's financial position or results of operations.
The Pennsylvania Medical Professional Liability Catastrophic Loss Fund (the
"CAT Fund"), an agency fund of the Commonwealth of Pennsylvania, acts as a
service agent to facilitate the payment of medical malpractice claims exceeding
the primary layer of professional liability insurance carried by physicians and
other health care providers practicing in Pennsylvania. The CAT Fund policies
are retrospectively rated on a claims-made basis. The CAT Fund levies health
care provider surcharges, as a percentage of insurance premiums for basic
coverage, to pay claims and administrative expenses on behalf of CAT Fund
participants.
The CAT Fund is significantly underfunded and the Commonwealth has
indicated that the unfunded liability will be funded exclusively through
surcharge assessments in future years as claims are settled and paid. The
practice and the other CAT Fund participants received a surcharge assessment
during fiscal 1996 and 1997. No provision has been made for any future CAT Fund
assessments in the accompanying financial statements as the practice's portion
of the CAT Fund unfunded liability could not be reasonably estimated.
Health Care Regulatory Environment and Reliance on Government Programs
The health care industry in general and the services that the Company
provides are subject to extensive federal and state laws and regulations.
Additionally, a portion of the Company's net revenue is from payments by
government-sponsored health care programs, principally Medicare and Medicaid,
and is subject to audit and adjustments by applicable regulatory agencies.
Failure to comply with any of these laws or regulations, the results of
regulatory audits and adjustments, or changes in the amounts payable for the
Company's services under these programs could have a material adverse effect on
the Company's financial position and results of operations.
F-185
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Neil Chesen, M.D., PC:
We have audited the accompanying balance sheets of Neil Chesen, M.D., PC (a
Pennsylvania corporation) as of December 31, 1996 and 1997 and the related
statements of operations and retained earnings (accumulated 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 Neil Chesen, M.D., PC as of
December 31, 1996 and 1997, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
February 10, 1998
F-186
<PAGE>
NEIL CHESEN, M.D., PC
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- MARCH 31,
1996 1997 1998
------------ ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ -- $ -- $ 56,073
Accounts receivable, net of allowance of $50,210,
$92,257 and $67,773............................ 121,059 163,157 100,622
Inventories....................................... 15,558 16,614 16,551
Prepaid expenses and other........................ 3,466 10,905 2,008
-------- -------- --------
Total current assets......................... 140,083 190,676 175,254
-------- -------- --------
Property and equipment:
Equipment, furniture and fixtures................. 272,225 118,201 118,201
Less -- Accumulated depreciation.................. (159,205) (29,754) (35,291)
-------- -------- --------
113,020 88,447 82,910
-------- -------- --------
Intangible assets, net.............................. 31,984 17,508 15,079
-------- -------- --------
$285,087 $296,631 $273,243
======== ======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Line of credit.................................... $ 50,000 $107,000 $ 70,000
Currrent portion of long-term debt................ 66,061 19,155 17,956
Accounts payable.................................. 34,029 12,454 43,444
Accrued compensation.............................. -- 29,622 12,627
-------- -------- --------
Total current liabilities.................... 150,090 168,231 144,027
-------- -------- --------
Long-term debt...................................... 142,502 115,939 115,065
-------- -------- --------
Commitments and contingencies (Note 5)
Shareholder's equity (deficit):
Common Stock, $1 par value, 1,000 shares
authorized, 100 shares issued and
outstanding.................................... 100 100 100
Retained earnings (accumulated deficit)........... (7,605) 12,361 14,051
-------- -------- --------
Total shareholder's equity (deficit)......... (7,505) 12,461 14,151
-------- -------- --------
$285,087 $296,631 $273,243
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-187
<PAGE>
NEIL CHESEN, M.D., PC
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (ACCUMULATED DEFICIT)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------ ----------------------
1996 1997 1997 1998
-------- ---------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net revenues.................................. $837,206 $1,171,473 $275,175 $274,049
-------- ---------- -------- --------
Operating expenses:
Salaries, wages and benefits................ 499,853 643,365 139,163 191,019
Pharmaceuticals and supplies................ 64,357 62,417 14,456 9,877
General and administrative.................. 296,499 379,421 51,667 59,683
Depreciation and amortization............... 35,992 49,527 10,921 7,966
-------- ---------- -------- --------
Income (loss) from operations................. (59,495) 36,743 58,968 5,504
Interest expense, net......................... 10,614 16,777 3,293 3,814
-------- ---------- -------- --------
Net income (loss)............................. (70,109) 19,966 55,675 1,690
Retained earnings (accumulated deficit),
beginning of period......................... 62,504 (7,605) (7,605) 12,361
-------- ---------- -------- --------
Retained earnings (accumulated deficit), end
of period................................... $ (7,605) $ 12,361 $ 48,070 $ 14,051
======== ========== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-188
<PAGE>
NEIL CHESEN, M.D., PC
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------- ----------------------
1996 1997 1997 1998
------------ -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Operating activities:
Net income (loss)......................... $(70,109) $ 19,966 $ 55,675 $ 1,690
Adjustments to reconcile net income (loss)
to net cash (used in) provided by
operating activities --
Loss on disposal of property and
equipment......................... -- 11,512 -- --
Depreciation and amortization........ 35,992 49,527 10,921 7,966
Changes in assets and liabilities --
Accounts receivable............... (17,579) (42,098) 5,176 62,535
Inventories....................... 972 (1,056) (993) 63
Prepaid expenses and other........ (3,466) (7,439) -- 8,897
Accounts payable.................. 34,029 (21,575) (10,360) 30,990
Accrued compensation.............. (6,286) 29,622 13,138 (16,995)
-------- -------- -------- --------
Net cash (used in) provided by
operating activities......... (26,447) 38,459 73,557 95,146
-------- -------- -------- --------
Investing activities:
Purchases of property and equipment....... (96,167) (21,990) (5,914) --
Purchase of covenant not to compete....... (25,000) -- -- --
-------- -------- -------- --------
Net cash used in investing
activities................... (121,167) (21,990) (5,914) --
-------- -------- -------- --------
Financing activities:
Net borrowings (payments) on line of
credit................................. (15,000) 57,000 (20,500) (37,000)
Proceeds from long-term debt.............. 158,164 -- -- --
Repayments on long-term debt.............. (27,235) (73,469) (21,970) (2,073)
-------- -------- -------- --------
Net cash provided by (used in)
financing activities......... 115,929 (16,469) (42,470) (39,073)
-------- -------- -------- --------
Net (decrease) increase in cash and cash
equivalents............................... (31,685) -- 25,173 56,073
Cash and cash equivalents, beginning of
period.................................... 31,685 -- -- --
-------- -------- -------- --------
Cash and cash equivalents, end of period.... $ -- $ -- $ 25,173 $ 56,073
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-189
<PAGE>
NEIL CHESEN, M.D., PC
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
1. ORGANIZATION AND BUSINESS:
Neil Chesen, M.D., PC (the "Company") is a physician owned medical practice
serving the Reading, Pennsylvania area. The Company was formed in 1994 for the
purpose of rendering professional medical ophthalomolic services and related
medical services to the general public.
On December 19, 1997, the Company entered into an Asset Acquisition
Agreement, as amended on April 28, 1998, (the "Affiliation Agreement") with U.S.
PHYSICIANS, Inc. ("USP"). Under the terms of the Affiliation Agreement, USP and
its affiliated professional corporation will acquire the majority of the assets
and liabilities of the Company in exchange for cash, notes payable and USP
Common Stock, subject to adjustment as defined. The closing, as defined in the
Affiliation Agreement, will occur upon completion of an initial public offering
by USP. If the closing has not occurred prior to August 15, 1998, the
Affiliation Agreement may be terminated by either the Company or USP by written
notice to the other party.
2. SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Statements
The financial statements for the three months ended March 31, 1997 and 1998
are unaudited, and in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the financial position as of March 31, 1998 and the results of
its operations for the three months ended March 31, 1997 and 1998. The results
of operations for the three-month period are not necessarily indicative of the
results to be expected for the entire year.
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 revenues and expenses during the
reporting period. Actual results could differ from
those estimates.
Fair Value of Financial Instruments
Financial instruments consist of cash and cash equivalents, accounts
receivable, certain current liabilities and debt obligations. The carrying
amounts reported in the balance sheets for these items approximate fair value.
Net Revenues
Revenues from patients, third-party payors and others are recorded at
established rates, net of provision for bad debts and contractual adjustments,
in the period that services are rendered. Contractual adjustments represent the
difference between charges at established rates and the estimated amount to be
reimbursed.
F-190
<PAGE>
NEIL CHESEN, M.D., PC
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments
purchased with an original maturity of three months or less.
Accounts Receivable
Accounts receivable primarily consist of receivables from patients,
third-party payors and others. Such amounts are recorded net of contractual
allowances and estimated bad debts.
Intangible Assets
Goodwill and covenants not to compete are amortized over three and seven
years respectively. For the year ended December 31, 1996 and 1997, amortization
expense related to those intangibles was $7,887 and $14,476, respectively. The
Company reviews the recorded amounts of intangible assets for impairments
whenever events or changes in circumstances indicate that the carrying amount of
the asset may not be recoverable. If this review indicates that the carrying
amount of the asset may not be recoverable, as determined based on the
undiscounted cash flows of the operations acquired over the remaining
amortization periods, the carrying value of the asset is reduced to fair value.
Concentration of Credit Risk
The Company extends credit to patients covered by programs such as
Medicare, 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.
Property and Equipment
Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to expense as incurred. Depreciation is provided over the
estimated useful lives of the applicable assets ranging from five to seven years
and is computed using the straight-line method.
Income Taxes
The Company has elected treatment as an "S" Corporation for both federal
and state income tax purposes, and accordingly is not taxed as a separate
entity. The Company's taxable income or loss is allocated to each owner and
recognized on their individual tax return. Accordingly, no provision for income
taxes has been reflected in the accompanying financial statements.
The Company reports certain income and expense items for income tax
purposes on a different basis than that reflected in the accompanying financial
statements. The primary differences are due to the cash basis of accounting for
income tax purposes. The cumulative amount of these differences as of December
31, 1997 was approximately $162,000. If the S Corporation status is terminated,
then a deferred income tax liability of approximately $43,000 related to these
cumulative differences would need to be reflected in the accompanying financial
statements.
F-191
<PAGE>
NEIL CHESEN, M.D., PC
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
Statements of Cash Flows Information
Amounts paid for interest for the year ended December 31, 1996 and 1997
were $11,113 and $16,938, respectively. Amounts paid for taxes were not
significant.
3. LINE OF CREDIT:
The Company has a line of credit for $125,000 with a local bank. Interest
is accrued on the outstanding balance at the bank's commercial rate (9.5% at
December 31, 1997). Outstanding borrowings under the line as of December 31,
1996 and 1997 were $50,000 and $107,000, respectively.
4. LONG-TERM DEBT:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1996 1997
------------ -------------
<S> <C> <C>
Note payable to a bank, payable in monthly installments
of $1,488 including interest at 10%, repaid in
1997................................................. $ 19,587 $ --
Note payable to a bank, payable in monthly installments
of $1,515 including interest at 7.7%, repaid in
1997................................................. 26,439 --
Note payable to a bank, payable in monthly installments
of $631 including interest at 8.5%, repaid in 1997... 14,986 --
Note payable to a bank, payable in monthly installments
of $1,250 including interest at 8.75%, final payment
due December 2001.................................... 124,661 120,554
Other debt............................................. 22,890 14,540
-------- --------
208,563 135,094
Less -- Current portion.............................. (66,061) (19,155)
-------- --------
$142,502 $115,939
======== ========
</TABLE>
Minimum principal repayments for long-term debt as of December 31, 1997,
are as follows:
<TABLE>
<S> <C>
1998.......................................... $ 19,155
1999.......................................... 5,035
2000.......................................... 5,494
2001.......................................... 105,410
--------
$135,094
========
</TABLE>
5. COMMITMENTS AND CONTINGENCIES:
Lease Obligations
The Company leases one of its office facilities from the shareholder of the
Company. This building was purchased by the shareholder in July 1997.
Additionally, the Company has another office location which is leased from a
non-related party. Future minimum lease payments for related-party and
nonrelated-party noncancellable operating leases primarily for office space are
as follows:
<TABLE>
<CAPTION>
RELATED-PARTY NONRELATED-PARTY
LEASES LEASES
------------- ----------------
<S> <C> <C>
1998.......................................... $11,850 $21,504
1999.......................................... -- 21,504
2000.......................................... -- 5,376
</TABLE>
F-192
<PAGE>
NEIL CHESEN, M.D., PC
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
5. COMMITMENTS AND CONTINGENCIES: -- (CONTINUED)
Rent expense on related-party operating leases was $16,350 for the year
ended December 31, 1997. Rent expense on nonrelated-party operating leases was
$24,638 and $31,319 for the year ended December 31, 1996 and 1997, respectively.
Insurance Policies
The Company maintains insurance with respect to medical malpractice risks
on an occurrence basis in amounts management believes to be adequate. Management
is not aware of any outstanding claims which would have a material impact on the
Company's financial position or results of operations.
The Pennsylvania Medical Professional Liability Catastrophic Loss Fund (the
"CAT Fund"), an agency fund of the Commonwealth of Pennsylvania, acts as a
service agent to facilitate the payment of medical malpractice claims exceeding
the primary layer of professional liability insurance carried by physicians and
other health care providers practicing in Pennsylvania. The CAT Fund policies
are retrospectively rated on a claims-made basis. The CAT Fund levies health
care provider surcharges, as a percentage of insurance premiums for basic
coverage, to pay claims and administrative expenses on behalf of CAT Fund
participants.
The CAT Fund is significantly underfunded and the Commonwealth has
indicated that the unfunded liability will be funded exclusively through
surcharge assessments in future years as claims are settled and paid. The
Company and the other CAT Fund participants received a surcharge assessment
during fiscal 1996 and 1997. No provision has been made for any future CAT Fund
assessments in the accompanying financial statements as the Company's portion of
the CAT Fund unfunded liability could not be reasonably estimated.
Health Care Regulatory Environment and Reliance on Government Programs
The health care industry in general and the services that the Company
provides are subject to extensive federal and state laws and regulations.
Additionally, a portion of the Company's net revenue is from payments by
government-sponsored health care programs, principally Medicare and Medicaid,
and is subject to audit and adjustments by applicable regulatory agencies.
Failure to comply with any of these laws or regulations, the results of
regulatory audits and adjustments, or changes in the amounts payable for the
Company's services under these programs could have a material adverse effect on
the Company's financial position and results of operations.
F-193
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Nevyas Eye Associates, PC:
We have audited the accompanying combined balance sheets of Nevyas Eye
Associates, PC (a Pennsylvania corporation) as of December 31, 1996 and 1997,
and the related combined statements of operations and owners' equity and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined 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 combined financial statements referred to above present
fairly, in all material respects, the financial position of Nevyas Eye
Associates, PC as of December 31, 1996 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
March 10, 1998
F-194
<PAGE>
NEVYAS EYE ASSOCIATES, PC
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- MARCH 31,
1996 1997 1998
---------- ---------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 240,228 $ 142,447 $ 71,532
Accounts receivable, net of allowance of $774,449,
$727,750 and $901,276............................... 772,252 699,210 807,108
Prepaid expenses and other............................. 34,642 10,279 4,984
---------- ---------- ----------
Total current assets................................ 1,047,122 851,936 883,624
---------- ---------- ----------
Property and equipment:
Equipment, furniture and fixtures...................... 3,974,646 4,345,424 4,414,822
Less -- Accumulated depreciation....................... (2,421,550) (2,767,087) (2,866,538)
---------- ---------- ----------
1,553,096 1,578,337 1,548,284
---------- ---------- ----------
Intangible assets........................................ 62,500 57,500 56,250
---------- ---------- ----------
Other assets............................................. 13,437 3,440 17,428
---------- ---------- ----------
$2,676,155 $2,491,213 $2,505,584
========== ========== ==========
LIABILITIES AND OWNERS' EQUITY
Current liabilities:
Shareholder note....................................... $1,219,536 $1,103,010 $1,050,198
Accounts payable....................................... 291,257 193,930 245,896
---------- ---------- ----------
Total current liabilities...................... 1,510,793 1,296,940 1,296,094
---------- ---------- ----------
Commitments and contingencies (Note 7)
Owners' equity........................................... 1,165,362 1,194,273 1,209,490
---------- ---------- ----------
$2,676,155 $2,491,213 $2,505,584
========== ========== ==========
The accompanying notes are an integral part of these combined financial statements.
</TABLE>
F-195
<PAGE>
NEVYAS EYE ASSOCIATES, PC
COMBINED STATEMENTS OF OPERATIONS AND OWNERS' EQUITY
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ -----------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues....................... $5,609,858 $5,731,781 $5,646,925 $1,281,269 $1,418,789
---------- ---------- ---------- ---------- ----------
Operating expenses:
Salaries, wages and benefits..... 2,821,580 2,522,602 2,466,940 657,001 652,385
Pharmaceuticals and medical
supplies...................... 366,372 412,480 395,972 94,411 98,969
General and administrative....... 2,142,821 2,429,898 2,307,190 596,127 534,224
Depreciation and amortization.... 312,719 333,547 342,275 76,576 100,702
---------- ---------- ---------- ---------- ----------
Income (loss) from operations...... (33,634) 33,254 134,548 (142,846) 32,509
Interest expense, net.............. 53,008 99,366 105,637 24,151 17,292
---------- ---------- ---------- ---------- ----------
Net income (loss).................. (86,642) (66,112) 28,911 (166,997) 15,217
Owners' equity, beginning of
period........................... 1,318,116 1,231,474 1,165,362 1,165,362 1,194,273
---------- ---------- ---------- ---------- ----------
Owners' equity, end of period...... $1,231,474 $1,165,362 $1,194,273 $ 998,365 $1,209,490
========== ========== ========== ========== ==========
The accompanying notes are an integral part of these combined financial statements.
</TABLE>
F-196
<PAGE>
NEVYAS EYE ASSOCIATES, PC
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- -------- -------- --------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss)............................... $ (86,642) $(66,112) $ 28,911 $(166,997) $ 15,217
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities --
Depreciation and amortization................. 312,719 333,547 342,275 76,577 100,701
Changes in assets and liabilities --
Accounts receivable......................... 196,199 (88,386) 73,042 92,985 (107,898)
Prepaid expenses and other.................. 2,259 (28,353) 24,363 (8,399) 34,211
Other assets................................ 21,154 (9,802) 9,998 -- (13,987)
Accounts payable............................ (4,067) 22,076 (97,327) (42,880) 23,051
--------- -------- -------- --------- --------
Net cash provided by (used in) operating
activities............................. 441,622 162,970 381,262 (48,714) 51,295
--------- -------- -------- --------- --------
Investing activities:
Purchases of property and equipment............. (519,429) (363,703) (362,517) (33,730) (69,398)
--------- -------- -------- --------- --------
Financing activities:
Net borrowings (repayments) on shareholder
note.......................................... 137,640 154,991 (116,526) (19,313) (52,812)
--------- -------- -------- --------- --------
Net increase (decrease) in cash and cash
equivalents..................................... 59,833 (45,742) (97,781) (101,757) (70,915)
Cash and cash equivalents, beginning of period.... 226,137 285,970 240,228 240,228 142,447
--------- -------- -------- --------- --------
Cash and cash equivalents, end of period.......... $ 285,970 $240,228 $142,447 $ 138,471 $ 71,532
========= ======== ======== ========= ========
The accompanying notes are an integral part of these combined financial statements.
</TABLE>
F-197
<PAGE>
NEVYAS EYE ASSOCIATES, PC
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
1. ORGANIZATION AND BUSINESS:
Nevyas Eye Associates, PC is an ophthalmic medical practice serving the
Philadelphia, Pennsylvania area. The Company was formed in October 1969. The
combined financial statements include the combined accounts of Nevyas Eye
Associates, PC and Nevyas Eye Associates of New Jersey, PC (collectively, the
"Company").
On March 11, 1998, the Company entered into an Asset Acquisition Agreement,
as amended through April 23, 1998, (the "Affiliation Agreement"), with U.S.
PHYSICIANS ("USP"). Under the terms of the Affiliation Agreement, USP and its
affiliated professional corporation will acquire the majority of the assets and
liabilities of the Company in exchange for cash, notes payable and USP Common
Stock, subject to adjustment as defined. The closing, as defined in the
Affiliation Agreement, will occur upon the completion of an initial public
offering by USP. If the closing has not occurred prior to September 1, 1998, the
Affiliation Agreement may be terminated by either the Company or USP by written
notice to the other party.
2. SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Statements
The financial statements for the three months ended March 31, 1997 and 1998
are unaudited, and in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the financial position as of March 31, 1998 and the results of
its operations for the three months ended March 31, 1997 and 1998. The results
of operations for the three-month period are not necessarily indicative of the
results to be expected for the entire year.
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 revenues and expenses during the
reporting period. Actual results could differ from
those estimates.
Fair Value of Financial Instruments
Financial instruments consist of cash and cash equivalents, accounts
receivable, certain current liabilities and debt obligations. The carrying
amounts reported in the balance sheets for these items approximate
fair value.
Net Revenues
Revenues from patients, third-party payors and others are recorded at
established rates, net of provision for bad debts and contractual adjustments,
in the period that services are rendered. Contractual adjustments represent the
difference between charges at established rates and the estimated amount to be
reimbursed.
F-198
<PAGE>
NEVYAS EYE ASSOCIATES, PC
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments
purchased with an original maturity of three months or less.
Accounts Receivable
Accounts receivable primarily consist of receivables from patients,
third-party payors and others. Such amounts are recorded net of contractual
allowances and estimated bad debts.
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.
Property and Equipment
Equipment, furniture and fixtures are stated at cost. Expenditures for
maintenance and repairs are charged to expense as incurred. Depreciation is
provided over the estimated useful life of each class of depreciable asset
ranging from five to seven years and are computed using the straight-line
method.
Intangible Assets
Intangible assets include the excess of cost over the net asset value of an
acquired physician practice and covenant not to compete and are being amortized
over 15 years. The Company continually evaluates whether later events and
circumstances have occurred that indicate the remaining estimated useful life of
intangible assets may warrant revision or that the remaining balance may not be
recoverable. When factors indicate that intangible assets should be evaluated
for possible impairment, the Company uses an estimate of the related
undiscounted operating income over the remaining life of the intangible asset in
measuring whether the intangible asset is recoverable. As of December 31, 1997,
management believes that no revision to the remaining useful lives or write-down
of intangible assets is required.
Owner's Equity
Owner's equity includes the capital stock, additional paid-in capital, a
note receivable for the issuance of capital stock (see Note 5) and the retained
earnings of Nevyas Eye Associates, PC and Nevyas Eye Associates of New Jersey,
PC.
Income Taxes
The Company has elected treatment as an "S" Corporation for both federal
and state income tax purposes, and accordingly is not taxed as a separate
entity. The Company's taxable income or loss is allocated to each owner and
recognized on their individual tax return. Accordingly, no provision for income
taxes has been reflected in the accompanying financial statements.
The Company reports certain income and expense items for income tax
purposes on a different basis than that reflected in the accompanying financial
statements. The primary differences are due to the cash basis of accounting for
income tax purposes. The cumulative amount of these differences as of December
31, 1997 was approximately $715,000. If the S Corporation status is terminated,
then a deferred income tax liability of approximately $174,000 related to these
cumulative differences would need to be reflected in the accompanying financial
statements.
F-199
<PAGE>
NEVYAS EYE ASSOCIATES, PC
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
Statements of Cash Flows Information
For the years ended December 31, 1995, 1996 and 1997, the Company paid
interest of $61,912, $104,596 and $105,800, respectively. Amounts paid for taxes
were not significant.
3. INTANGIBLE ASSETS:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
------- -------
<S> <C> <C>
Excess of cost over net asset value of acquired
physician practice................................... $25,000 $25,000
Covenant not to compete................................ 50,000 50,000
------- -------
75,000 75,000
Less -- Accumulated amortization....................... (12,500) (17,500)
------- -------
$62,500 $57,500
======= =======
</TABLE>
4. SHAREHOLDER NOTE:
On January 15, 1997, the Company amended its loan agreement (the
"Agreement") with its Sole Shareholder. Under the terms of the Agreement, the
Company may borrow up to $1,650,000. There are no stated principal repayment
terms. Interest is accrued on the outstanding borrowings at 8% and is due on
demand.
5. PROMISSORY NOTE:
In September 1997, the Company issued a $133,000 promissory note (the
"Promissory Note") in consideration for shares of the Capital Stock of Nevyas
Eye Associates of Pennsylvania, PC. Accordingly, the Promissory Note has been
included in Owners' equity. The Promissory Note bears interest which is payable
annually and accrues at a rate of 6%. Principal payments on the Promissory Note
are due in three equal annual installments commencing December 31, 1999.
6. EMPLOYEE BENEFIT PLAN:
The Company provides a 401(k) profit sharing plan that covers all qualified
employees, as defined by the plan agreement. Employees vest pro rata over five
years beginning after their first year as a participant. The Company matches 25%
of amounts contributed by the employees, subject to limitation. For the years
ended December 31, 1995, 1996 and 1997, there have been no contributions to the
plan.
7. COMMITMENTS AND CONTINGENCIES:
Lease Obligations
Future minimum lease payments for noncancellable operating leases primarily
for office space as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998........................................... $ 421,217
1999........................................... 402,317
2000........................................... 410,716
2001........................................... 396,199
2002........................................... 395,615
2003 and thereafter............................ 1,588,323
</TABLE>
F-200
<PAGE>
NEVYAS EYE ASSOCIATES, PC
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
7. COMMITMENTS AND CONTINGENCIES: -- (CONTINUED)
Rent expense on operating leases was $475,513, $452,198 and $559,914 for
the years ended December 31, 1995, 1996 and 1997, respectively.
Insurance Policies
The Company maintains insurance with respect to medical malpractice risks
on an occurrence basis in amounts management believes to be adequate. Management
is not aware of any outstanding claims which would have a material impact on the
Company's financial position or results of operations.
The Pennsylvania Medical Professional Liability Catastrophic Loss Fund (the
"CAT Fund"), an agency fund of the Commonwealth of Pennsylvania, acts as a
service agent to facilitate the payment of medical malpractice claims exceeding
the primary layer of professional liability insurance carried by physicians and
other health care providers practicing in Pennsylvania. The CAT Fund policies
are retrospectively rated on a claims-made basis. The CAT Fund levies health
care provider surcharges, as a percentage of insurance premiums for basic
coverage, to pay claims and administrative expenses on behalf of CAT Fund
participants.
The CAT Fund is significantly underfunded and the Commonwealth has
indicated that the unfunded liability will be funded exclusively through
surcharge assessments in future years as claims are settled and paid. The
Company and the other CAT Fund participants received a surcharge assessment
during fiscal 1996 and 1997. No provision has been made for any future CAT Fund
assessments in the accompanying financial statements as the Company's portion of
the CAT Fund unfunded liability could not be reasonably estimated.
Health Care Regulatory Environment and Reliance on Government Programs
The health care industry in general and the services that the Company
provides are subject to extensive federal and state laws and regulations.
Additionally, a portion of the Company's net revenue is from payments by
government-sponsored health care programs, principally Medicare and Medicaid,
and is subject to audit and adjustments by applicable regulatory agencies.
Failure to comply with any of these laws or regulations, the results of
regulatory audits and adjustments, or changes in the amounts payable for the
Company's services under these programs could have a material adverse effect on
the Company's financial position and results of operations.
F-201
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Northern Ophthalmic Associates, Inc.:
We have audited the accompanying balance sheets of Northern Ophthalmic
Associates, Inc. (a Pennsylvania corporation) as of November 30, 1996 and 1997,
and the related statements of operations and retained earnings and cash flows
for each of the three years in the period ended November 30, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Northern Ophthalmic Associates,
Inc. as of November 30, 1996 and 1997, and the results of its operations and its
cash flows for each of the three years in the period ended November 30, 1997, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
February 17, 1998
F-202
<PAGE>
NORTHERN OPHTHALMIC ASSOCIATES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
NOVEMBER 30,
------------------- FEBRUARY 28,
1996 1997 1998
-------- -------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 8,744 $ 15,921 $ 1,964
Accounts receivable, net of allowance of $128,927,
$102,878 and $108,056.................................. 157,511 118,281 125,473
Due from shareholder...................................... -- -- 15,000
-------- -------- --------
Total current assets................................... 166,255 134,202 142,437
-------- -------- --------
Property and equipment:
Equipment, furniture and fixtures......................... 986,914 986,914 986,914
Less -- Accumulated depreciation.......................... (588,980) (676,095) (697,680)
-------- -------- --------
397,934 310,819 289,234
-------- -------- --------
Intangible assets........................................... 39,333 35,999 35,999
-------- -------- --------
$603,522 $481,020 $467,670
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit............................................ $ 66,640 $ 63,731 $ 60,467
Current maturities of long-term debt...................... 107,634 49,656 65,306
Accounts payable.......................................... 32,956 51,060 46,771
-------- -------- --------
Total current liabilities......................... 207,230 164,447 172,544
-------- -------- --------
Long-term debt.............................................. 122,940 72,042 53,289
-------- -------- --------
Commitments and contingencies (Note 7)
Shareholders' equity:
Common Stock, $1 par value; 200 shares authorized, issued
and outstanding........................................ 200 200 200
Retained earnings......................................... 273,152 244,331 241,637
-------- -------- --------
Total shareholders' equity............................. 273,352 244,531 241,837
-------- -------- --------
$603,522 $481,020 $467,670
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-203
<PAGE>
NORTHERN OPHTHALMIC ASSOCIATES, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED NOVEMBER 30, FEBRUARY 28,
------------------------------------ -------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues.......................... $1,830,986 $1,639,488 $1,610,233 $381,734 $398,337
---------- ---------- ---------- -------- --------
Operating expenses:
Salaries, wages and benefits........ 1,096,764 919,805 914,576 228,897 231,558
Pharmaceuticals and medical
supplies......................... 173,945 170,419 167,375 37,933 48,672
General and administrative.......... 472,899 440,786 435,300 110,012 91,092
Depreciation and amortization....... 71,311 75,671 90,449 21,585 21,585
---------- ---------- ---------- -------- --------
Income (loss) from operations......... 16,067 32,807 2,533 (16,693) 5,430
Interest expense, net................. 28,977 27,663 31,354 7,837 8,124
---------- ---------- ---------- -------- --------
Net income (loss)..................... (12,910) 5,144 (28,821) (24,530) (2,694)
Retained earnings, beginning of
period.............................. 280,918 268,008 273,152 273,152 244,331
---------- ---------- ---------- -------- --------
Retained earnings, end of period...... $ 268,008 $ 273,152 $ 244,331 $248,622 $241,637
========== ========== ========== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-204
<PAGE>
NORTHERN OPHTHALMIC ASSOCIATES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED NOVEMBER 30, FEBRUARY 28,
------------------------------ ------------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss).................................. $(12,910) $ 5,144 $(28,821) $(24,530) $(2,694)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities --
Depreciation and amortization.................... 71,311 75,671 90,449 21,585 21,585
Changes in assets and liabilities --
Accounts receivable............................ (3,733) (15,789) 39,230 38,584 (7,192)
Due from shareholder........................... -- -- -- -- (15,000)
Prepaid expenses and other..................... 1,000 8,479 -- -- --
Accounts payable............................... 2,387 9,363 18,104 10,059 (4,289)
-------- -------- -------- -------- -------
Net cash provided by operating activities... 58,055 82,868 118,962 45,698 (7,590)
-------- -------- -------- -------- -------
Investing activities:
Purchase of property and equipment................. (24,206) -- -- -- --
Sale of property and equipment..................... -- 9,706 -- -- --
-------- -------- -------- -------- -------
Net cash (used in) provided by investing
activities................................ (24,206) 9,706 -- -- --
-------- -------- -------- -------- -------
Financing activities:
Net borrowings (repayments) on line of credit...... 25,000 (33,360) (2,909) 5,400 (3,264)
Proceeds from long-term debt....................... -- -- -- -- 15,000
Repayments on long-term debt....................... (77,891) (100,475) (108,876) (31,708) (18,103)
-------- -------- -------- -------- -------
Net cash used in financing activities....... (52,891) (133,835) (111,785) (26,308) (6,367)
-------- -------- -------- -------- -------
Net increase (decrease) in cash and cash
equivalents........................................ (19,042) (41,261) 7,177 19,390 (13,957)
Cash and cash equivalents, beginning of period....... 69,047 50,005 8,744 8,744 15,921
-------- -------- -------- -------- -------
Cash and cash equivalents, end of period............. $ 50,005 $ 8,744 $ 15,921 $ 28,134 $ 1,964
======== ======== ======== ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-205
<PAGE>
NORTHERN OPHTHALMIC ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF FEBRUARY 28, 1998 AND FOR THE
THREE MONTHS ENDED FEBRUARY 28, 1997 AND 1998 IS UNAUDITED)
1. ORGANIZATION AND BUSINESS:
Northern Ophthalmic Associates, Inc. (the "Company") is an ophthalmic
medical practice serving the Philadelphia, Pennsylvania area. The Company was
formed in December 1984.
On September 30, 1997, the Company entered into an Asset Acquisition
Agreement, as amended through April 21, 1998, (the "Affiliation Agreement"),
with U.S. PHYSICIANS ("USP"). Under the terms of the Affiliation Agreement, USP
and its affiliated professional corporation will acquire the majority of the
assets and liabilities of the Company in exchange for cash, notes payable and
USP Common Stock, subject to adjustment as defined. The closing, as defined in
the Affiliation Agreement, will occur upon the completion of an initial public
offering by USP. If the closing has not occurred prior to June 15, 1998, the
Affiliation Agreement may be terminated by either the Company or USP by written
notice to the other party.
2. SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Statements
The financial statements for the three months ended February 28, 1997 and
1998, are unaudited, and in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the financial position as of February 28, 1998, and the results
of its operations for the three months ended February 28, 1997 and 1998. The
results of operations for the three-month period are not necessarily indicative
of the results to be expected for the entire year.
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 revenues and expenses during the
reporting period. Actual results could differ from
those estimates.
Fair Value of Financial Instruments
Financial instruments consist of cash and cash equivalents, accounts
receivable, certain current liabilities and debt obligations. The carrying
amounts reported in the balance sheets for these items approximate
fair value.
Net Revenues
Revenues from patients, third-party payors and others are recorded at
established rates, net of provision for bad debts and contractual adjustments,
in the period that services are rendered. Contractual adjustments represent the
difference between charges at established rates and the estimated amount to be
reimbursed.
Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments
purchased with an original maturity of three months or less.
Accounts Receivable
Accounts receivable primarily consist of receivables from patients,
third-party payors and others. Such amounts are recorded net of contractual
allowances and estimated bad debts.
F-206
<PAGE>
NORTHERN OPHTHALMIC ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF FEBRUARY 28, 1998 AND FOR THE
THREE MONTHS ENDED FEBRUARY 28, 1997 AND 1998 IS UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
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.
Property and Equipment
Equipment, furniture and fixtures are stated at cost. Expenditures for
maintenance and repairs are charged to expense as incurred. Depreciation is
provided over the estimated useful life of each class of depreciable asset
ranging from five to seven years.
Intangible Assets
Intangible assets include the excess of cost over the net asset value of an
acquired physician practice and a covenant not to compete and are being
amortized over 15 years. The Company continually evaluates whether later events
and circumstances have occurred that indicate the remaining estimated useful
life of intangible assets may warrant revision or that the remaining balance may
not be recoverable. When factors indicate that intangible assets should be
evaluated for possible impairment, the Company uses an estimate of the related
undiscounted operating income over the remaining life of the intangible asset in
measuring whether the intangible asset is recoverable. As of November 30, 1997,
management believes that no revision to the remaining useful lives or write-down
of intangible assets is required.
Income Taxes
The Company has elected treatment as an "S" Corporation for both federal
and state income tax purposes and accordingly is not taxed as a separate entity.
The Company's taxable income or loss is allocated to each owner and recognized
on their individual tax return. Accordingly, no provision for income taxes has
been reflected in the accompanying financial statements.
The Company reports certain income and expense items for income tax
purposes on a different basis than that reflected in the accompanying financial
statements. The primary differences are due to the cash basis of accounting for
income tax purposes. The cumulative amount of these differences as of November
30, 1997 was approximately $80,000. If the S Corporation status is terminated,
then a deferred income tax liability of approximately $20,000 related to these
cumulative differences would need to be reflected in the accompanying financial
statements.
Statements of Cash Flows Information
For the years ended November 30, 1995, 1996 and 1997, the Company paid
interest of $28,977, $27,663 and $31,354 respectively. Amounts paid for taxes
were not significant.
F-207
<PAGE>
NORTHERN OPHTHALMIC ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF FEBRUARY 28, 1998 AND FOR THE
THREE MONTHS ENDED FEBRUARY 28, 1997 AND 1998 IS UNAUDITED)
3. INTANGIBLE ASSETS:
<TABLE>
<CAPTION>
NOVEMBER 30,
----------------------
1996 1997
-------- --------
<S> <C> <C>
Excess of cost over net asset value of acquired
physician practice.................................. $ 20,334 $ 20,334
Covenant not to compete............................... 76,000 76,000
-------- --------
96,334 96,334
Less -- Accumulated amortization...................... (57,001) (60,335)
-------- --------
$ 39,333 $ 35,999
======== ========
</TABLE>
4. LINE OF CREDIT:
The Company has a credit agreement with a bank for $75,000 line of credit.
Interest is accrued on the outstanding balance at the rate of 9%. Outstanding
borrowings under the line as of November 30, 1996 and 1997 were $66,640 and
$63,731, respectively. Outstanding borrowings plus any unpaid interest, fees or
expenses are guaranteed by the Company's shareholders.
5. LONG-TERM DEBT:
<TABLE>
<CAPTION>
NOVEMBER 30,
-----------------------
1996 1997
-------- ---------
<S> <C> <C>
Note payable to a lending agent, interest at 22.40%, monthly
payments of $995 per month through May 2001............... $ 41,676 $ 32,415
Note payable to a bank, interest at 9.75%, monthly payments
of $6,586 per month through September 1997................ 66,096 --
Note payable to an auto dealer, interest at 4.99%, monthly
payments of $1,237 through February 1999.................. 33,387 18,549
Note payable to a bank, interest at 6.75%, monthly payments
of $588 through February 1999............................. 13,440 7,467
Note payable to a bank, interest at 8.75%, monthly payments
of $1,185, due in full by April 2001...................... 75,975 63,267
-------- ---------
230,574 121,698
Less -- Current maturities.................................. (107,634) (49,656)
-------- ---------
$122,940 $ 72,042
======== =========
</TABLE>
Future annual maturities of long-term debt at November 30, 1997 are as
follows:
<TABLE>
<S> <C>
1998............................................. $ 49,656
1999............................................. 31,872
2000............................................. 24,354
2001............................................. 15,816
--------
$121,698
========
</TABLE>
F-208
<PAGE>
NORTHERN OPHTHALMIC ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF FEBRUARY 28, 1998 AND FOR THE
THREE MONTHS ENDED FEBRUARY 28, 1997 AND 1998 IS UNAUDITED)
6. EMPLOYEE BENEFIT PLAN:
The Company provides a 401(k) profit sharing plan that covers all qualified
employees, as defined by the plan agreement. Employees vest pro rata over five
years beginning after their first year as a participant. The Company matches
twenty-five cents for every dollar contributed by the employees. For the years
ended November 30, 1995, 1996 and 1997, contributions to the plan were $0,
$2,465 and $8,391.
7. COMMITMENTS AND CONTINGENCIES:
Lease Obligations
Future minimum lease payments for noncancellable operating leases primarily
for office space as of November 30, 1997 are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
- -----------
<S> <C>
1998............................................. $143,912
1999............................................. 133,658
2000............................................. 137,668
2001............................................. 141,798
2002............................................. 146,052
</TABLE>
Rent expense on operating leases was $132,405, $129,027 and $149,311 for
the years ended November 30, 1995, 1996 and 1997, respectively.
Insurance Policies
The Company maintains insurance with respect to medical malpractice risks
on an occurrence basis in amounts management believes to be adequate. Management
is not aware of any outstanding claims which would have a material impact on the
Company's financial position or results of operations.
The Pennsylvania Medical Professional Liability Catastrophic Loss Fund (the
"CAT Fund"), an agency fund of the Commonwealth of Pennsylvania, acts as a
service agent to facilitate the payment of medical malpractice claims exceeding
the primary layer of professional liability insurance carried by physicians and
other health care providers practicing in Pennsylvania. The CAT Fund policies
are retrospectively rated on a claims-made basis. The CAT Fund levies health
care provider surcharges, as a percentage of insurance premiums for basic
coverage, to pay claims and administrative expenses on behalf of CAT Fund
participants.
The CAT Fund is significantly underfunded and the Commonwealth has
indicated that the unfunded liability will be funded exclusively through
surcharge assessments in future years as claims are settled and paid. The
Company and the other CAT Fund participants received a surcharge assessment
during fiscal 1996 and 1997. No provision has been made for any future CAT Fund
assessments in the accompanying financial statements as the Company's portion of
the CAT Fund unfunded liability could not be reasonably estimated.
Health Care Regulatory Environment and Reliance on Government Programs
The health care industry in general and the services that the Company
provides are subject to extensive federal and state laws and regulations.
Additionally, a portion of the Company's net revenue is from payments by
government-sponsored health care programs, principally Medicare and Medicaid,
and is subject to audit and adjustments by applicable regulatory agencies.
Failure to comply with any of these laws or regulations, the results of
regulatory audits and adjustments, or changes in the amounts payable for the
Company's services under these programs could have a material adverse effect on
the Company's financial position and results of operations.
F-209
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Northwest Orthopedic Associates, PC:
We have audited the accompanying balance sheets of Northwest Orthopedic
Associates, PC (a Pennsylvania corporation) as of December 31, 1996 and 1997,
and the related statements of operations and retained earnings and cash flows
for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Northwest Orthopedic
Associates, PC as of December 31, 1996 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
February 17, 1998
F-210
<PAGE>
NORTHWEST ORTHOPEDIC ASSOCIATES, PC
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- MARCH 31,
1996 1997 1998
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2,343 $ 3,013 $ 9,382
Accounts receivable, net of allowance of
$130,558, $130,061 and $116,990........................ 153,956 91,923 108,956
Prepaid expenses and other................................ 5,000 5,000 --
-------- -------- --------
Total current assets................................. 161,299 99,936 118,338
-------- -------- --------
Property and equipment:
Equipment, furniture and fixtures......................... 295,060 297,041 245,078
Less -- Accumulated depreciation.......................... (238,550) (253,902) (213,681)
-------- -------- --------
56,510 43,139 31,397
-------- -------- --------
Deferred income taxes....................................... -- 4,702 4,240
-------- -------- --------
$217,809 $147,777 $153,975
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt........................................... $ -- $ -- $ 12,254
Accounts payable.......................................... 23,862 30,770 20,224
Accrued compensation...................................... 12,860 17,725 18,611
Deferred income taxes..................................... 30,409 18,959 19,105
Due to shareholders....................................... -- 4,500 4,500
-------- -------- --------
Total current liabilities............................ 67,131 71,954 74,694
-------- -------- --------
Deferred income taxes....................................... 8,694 -- --
-------- -------- --------
Commitments and contingencies (Note 4)
Shareholders' equity:
Common Stock, $10 par value; 2,000 shares
authorized; 300 issued and 200 outstanding............. 3,000 3,000 3,000
Additional paid in capital................................ 3,000 3,000 3,000
Retained earnings......................................... 140,926 74,765 78,223
Treasury stock, 100 shares at cost........................ (4,942) (4,942) (4,942)
-------- -------- --------
Total shareholders' equity........................... 141,984 75,823 79,281
-------- -------- --------
$217,809 $147,777 $153,975
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-211
<PAGE>
NORTHWEST ORTHOPEDIC ASSOCIATES, PC
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ -------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues.......................... $1,415,223 $1,251,074 $1,002,547 $227,929 $294,339
---------- ---------- ---------- -------- --------
Operating expenses:
Salaries, wages and benefits........ 934,178 852,746 664,334 201,116 186,448
Pharmaceuticals and medical
supplies......................... 78,537 83,722 51,495 7,503 9,705
General and administrative.......... 357,890 319,282 360,255 89,712 90,801
Depreciation........................ 32,137 33,865 15,352 3,094 2,266
---------- ---------- ---------- -------- --------
Income (loss) from operations......... 12,481 (38,541) (88,889) (73,496) 5,119
Interest expense (income), net........ 1,592 (160) 1,804 (254) 165
---------- ---------- ---------- -------- --------
Income (loss) before income taxes..... 10,889 (38,381) 90,693 (73,242) 4,954
Income tax provision (benefit)........ 2,982 (8,860) (24,532) (17,798) 1,496
---------- ---------- ---------- -------- --------
Net income (loss)..................... 7,907 (29,521) (66,161) (55,444) 3,458
Retained earnings, beginning of
period.............................. 162,540 170,447 140,926 140,926 74,765
---------- ---------- ---------- -------- --------
Retained earnings, end of period...... $ 170,447 $ 140,926 $ 74,765 $ 85,482 $ 78,223
========== ========== ========== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-212
<PAGE>
NORTHWEST ORTHOPEDIC ASSOCIATES, PC
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------- ------------------
1995 1996 1997 1997 1998
------- -------- -------- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss).......................... $ 7,907 $(29,521) $(66,161) $(55,444) $ 3,458
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating
activities --
Loss on disposal of
property and equipment............. -- -- -- -- 9,476
Depreciation.......................... 32,137 33,865 15,352 3,097 2,266
Deferred income taxes................. 2,560 (8,152) (24,846) (17,798) 608
Changes in assets and liabilities --
Accounts receivable................ (18,719) 29,353 62,033 63,908 (17,033)
Accounts payable................... 3,347 (6,392) 6,908 (6,182) (10,546)
Accrued compensation............... (2,070) (1,458) 4,865 1,216 886
Due to shareholder................. -- -- 4,500 -- --
Prepaid expenses and other......... -- -- -- -- 5,000
------- -------- -------- -------- -------
Net cash provided by (used in)
operating activities.......... 25,162 17,695 2,651 (11,203) (5,885)
------- -------- -------- -------- -------
Investing activities:
Purchases of property and equipment........ (5,620) (2,087) (1,981) (1,741) --
------- -------- -------- -------- -------
Financing activities:
Proceeds from long-term debt............... -- -- -- 35,000 15,000
Repayments on long-term debt............... (24,886) (20,000) -- -- (2,746)
------- -------- -------- -------- -------
Net cash (used in) provided by
financing activities.......... (24,886) (20,000) -- 35,000 12,254
------- -------- -------- -------- -------
Net (decrease) increase in cash and cash
equivalents................................ (5,344) (4,392) 670 22,056 6,369
Cash and cash equivalents, beginning of
period..................................... 12,079 6,735 2,343 2,343 3,013
------- -------- -------- -------- -------
Cash and cash equivalents, end of period..... $ 6,735 $ 2,343 $ 3,013 $ 24,399 $ 9,382
======= ======== ======== ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-213
<PAGE>
NORTHWEST ORTHOPEDIC ASSOCIATES, PC
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
1. ORGANIZATION AND BUSINESS:
Northwest Orthopedic Associates, PC (the "Company") is an orthopedic
medical practice serving the Western Pennsylvania area. The Company was formed
in February 1973.
On October 1, 1997, the Company entered into a Stock Acquisition Agreement,
as amended through April 21, 1998, (the "Affiliation Agreement"), with U.S.
PHYSICIANS, Inc. ("USP"). Under the terms of the Affiliation Agreement, USP and
its affiliated professional corporation will acquire the stock of the Company in
exchange for cash, notes payable and USP Common Stock, subject to adjustment as
defined. The closing, as defined in the Affiliation Agreement, will occur upon
the completion of an initial public offering by USP. If the closing has not
occurred prior to June 15, 1998, the Affiliation Agreement may be terminated by
either the Company or USP by written notice to the other party.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Statements
The financial statements for the three months ended March 31, 1997 and
1998, are unaudited, and in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the financial position as of March 31, 1998, and the results of
its operations for the three months ended March 31, 1997 and 1998. The results
of operations for the three-month period are not necessarily indicative of the
results to be expected for the entire year.
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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
Financial instruments consist of cash and cash equivalents, accounts
receivable, certain current liabilities and debt obligations. The carrying
amounts reported in the balance sheets for these items approximate fair value.
Net Revenues
Revenues from patients, third-party payors and others are recorded at
established rates, net of provision for bad debts and contractual adjustments,
in the period that services are rendered. Contractual adjustments represent the
difference between charges at established rates and the estimated amount to be
reimbursed.
Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments
purchased with an original maturity of three months or less.
Accounts Receivable
Accounts receivable primarily consist of receivables from patients,
third-party payors and others. Such amounts are contractual and estimated bad
debts.
Concentration of Credit Risk
The Company extends credit to patients covered by programs such as
Medicare, 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.
Property and Equipment
Equipment, furniture and fixtures are stated at cost. Expenditures for
maintenance and repairs are charged to expense as incurred. Depreciation is
provided over the estimated useful life of the applicable assets ranging from
five to seven years and is computed using the straight-line method.
F-214
<PAGE>
NORTHWEST ORTHOPEDIC ASSOCIATES, PC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
Due to Shareholder
Amounts due to shareholders represent amounts borrowed from a shareholder
to be repaid in a subsequent period.
Income Taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109").
SFAS No. 109 requires the liability method of accounting for deferred income
taxes. Deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities. Deferred tax assets or liabilities at the end of each period are
determined using the tax rate expected to be in effect when taxes are actually
paid or recovered.
Statements of Cash Flows Information
For the years ended December 31, 1995, 1996 and 1997, the Company paid
interest of $2,385, $2,114 and $2,319, respectively. Amounts paid for taxes were
not significant.
3. INCOME TAXES:
The components of the income tax provision (benefit) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1995 1996 1997
------ ------- --------
<S> <C> <C> <C>
Current:
Federal............................................. $ 253 $ (424) $ 188
State............................................... 169 (284) 126
------ ------- --------
422 (708) 314
------ ------- --------
Deferred:
Federal............................................. 1,536 (4,891) (14,908)
State............................................... 1,024 (3,261) (9,938)
------ ------- --------
2,560 (8,152) (24,846)
------ ------- --------
$2,982 $(8,860) $(24,532)
====== ======= ========
</TABLE>
Income tax expense (benefit) differs from the amount currently payable or
receivable because certain expenses, primarily depreciation and accruals, are
reported in different periods for financial reporting and income tax purposes.
The Company is on a cash basis of accounting for income tax purposes.
The provision (benefit) for income taxes differs from the amount computed
by applying the U.S. Federal income tax rate (34%) because of the effect of the
following items:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
------ -------- --------
<S> <C> <C> <C>
Tax at U.S. Federal statutory rate................... $3,702 $(13,050) $(34,025)
Tax impact of Federal rate differential for graduated
rates.............................................. (2,132) 7,399 19,014
State income taxes, net of federal benefit........... 1,047 (3,767) (10,007)
Non-deductible travel and entertainment.............. 365 558 486
------ -------- --------
$2,982 $ (8,860) $(24,532)
====== ======== ========
</TABLE>
F-215
<PAGE>
NORTHWEST ORTHOPEDIC ASSOCIATES, PC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
3. INCOME TAXES: -- (CONTINUED)
The components of the net deferred tax liability, measured under SFAS No.
109, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
-------- --------
<S> <C> <C>
Deferred tax asset --
Net operating loss carryforward..................... $ -- $ 7,424
-------- --------
Deferred tax liabilities --
Property and equipment.............................. (8,694) (2,722)
Cash to accrual adjustments......................... (30,409) (18,959)
-------- --------
(39,103) (21,681)
-------- --------
Net deferred tax liability............................ $(39,103) $(14,257)
======== ========
</TABLE>
4. COMMITMENTS AND CONTINGENCIES:
Lease Obligations
The Company leases some of its office space from shareholders of the
Company. Future minimum lease payments for related-party and nonrelated-party
noncancellable operating leases primarily for office space as of December 31,
1997, are as follows:
<TABLE>
<CAPTION>
RELATED-PARTY NONRELATED-PARTY
LEASES LEASES
------------- ----------------
<S> <C> <C>
1998.................................. $50,400 $ 2,409
</TABLE>
Rent expense on related-party operating leases was $50,400 for each of the
years ended December 31, 1995, 1996 and 1997. Rent expense on nonrelated-party
operating leases was $64,325, $66,105 and $73,046 for the years ended December
31, 1995, 1996 and 1997, respectively.
Insurance Policies
The Company maintains insurance with respect to medical malpractice risks
on an occurrence basis in amounts management believes to be adequate. Management
is not aware of any outstanding claims which would have a material impact on the
Company's financial position or results of operations.
The Pennsylvania Medical Professional Liability Catastrophic Loss Fund (the
"CAT Fund"), an agency fund of the Commonwealth of Pennsylvania, acts as a
service agent to facilitate the payment of medical malpractice claims exceeding
the primary layer of professional liability insurance carried by physicians and
other health care providers practicing in Pennsylvania. The CAT Fund policies
are retrospectively rated on a claims-made basis. The CAT Fund levies health
care provider surcharges, as a percentage of insurance premiums for basic
coverage, to pay claims and administrative expenses on behalf of CAT Fund
participants.
The CAT Fund is significantly underfunded and the Commonwealth has
indicated that the unfunded liability will be funded exclusively through
surcharge assessments in future years as claims are settled and paid. The
Company and the other CAT Fund participants received a surcharge assessment
during fiscal 1996 and 1997. No provision has been made for any future CAT Fund
assessments in the accompanying financial statements as the Company's portion of
the CAT Fund unfunded liability could not be reasonably estimated.
Health Care Regulatory Environment and Reliance on Government Programs
The health care industry in general and the services that the Company
provides are subject to extensive federal and state laws and regulations.
Additionally, a portion of the Company's net revenue is from payments by
government-sponsored health care programs, principally Medicare and Medicaid,
and is subject to audit and adjustments by applicable regulatory agencies.
Failure to comply with any of these laws or regulations, the results of
regulatory audits and adjustments, or changes in the amounts payable for the
Company's services under these programs could have a material adverse effect on
the Company's financial position and results of operations.
F-216
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Oncology and Hematology Associates, PA:
We have audited the accompanying balance sheets of Oncology and Hematology
Associates, PA (a New Jersey corporation) as of December 31, 1996 and 1997, and
the related statements of operations and retained earnings and cash flows for
each of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Oncology and Hematology
Associates, PA as of December 31, 1996 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
February 4, 1998
F-217
<PAGE>
ONCOLOGY AND HEMATOLOGY ASSOCIATES, PA
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- MARCH 31,
1996 1997 1998
-------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,728 $ 41,115 $ 37,555
Accounts receivable, net of allowance of $114,246,
$174,921 and $161,210.................................. 173,606 312,324 328,789
Prepaid expenses and other................................ 567 367 808
-------- ---------- --------
Total current assets................................. 175,901 353,806 367,152
-------- ---------- --------
Property and equipment:
Equipment, furniture and fixtures......................... 170,812 171,873 171,873
Less -- Accumulated depreciation.......................... (127,800) (139,224) (142,081)
-------- ---------- --------
43,012 32,649 29,792
-------- ---------- --------
Deferred income taxes....................................... 6,338 11,211 11,886
-------- ---------- --------
Other assets................................................ 36,616 7,773 7,773
-------- ---------- --------
$261,867 $ 405,439 $416,603
======== ========== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Note payable to shareholder............................... $ -- $ 25,000 $ --
Accounts payable.......................................... 128,889 68,462 90,547
Accrued compensation...................................... 14,296 38,222 35,467
Deferred income taxes..................................... 7,405 50,239 56,334
-------- ---------- --------
Total current liabilities............................ 150,590 181,923 182,348
-------- ---------- --------
Commitments and contingencies (Note 5)
Shareholder's equity:
Common Stock, no par, 100 shares authorized and
issued, 50 shares outstanding.......................... 3,766 3,766 3,766
Retained earnings......................................... 172,169 284,408 295,147
Treasury stock, 50 shares at cost......................... (64,658) (64,658) (64,658)
-------- ---------- --------
Total shareholder's equity........................... 111,277 223,516 234,255
-------- ---------- --------
$261,867 $ 405,439 $416,603
======== ========== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-218
<PAGE>
ONCOLOGY AND HEMATOLOGY ASSOCIATES, PA
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ -------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues................................... $2,168,924 $2,000,191 $2,408,158 $614,989 $517,871
---------- ---------- ---------- -------- --------
Operating expenses:
Salaries, wages and benefits................. 1,677,382 1,351,788 1,265,094 286,321 319,461
Pharmaceuticals and medical supplies......... 285,615 368,819 719,368 153,636 83,880
General and administrative................... 257,406 370,095 261,124 67,610 96,706
Depreciation................................. 13,873 12,321 11,424 2,857 2,857
---------- ---------- ---------- -------- --------
Income (loss) from operations.................. (65,352) (102,832) 151,148 104,565 14,967
Interest income (expense), net................. 1,837 2,313 (197) (208) --
---------- ---------- ---------- -------- --------
Income (loss) before income taxes.............. (63,515) (100,519) 150,951 104,357 14,967
Income tax provision (benefit)................. (16,393) (23,091) 38,712 25,359 4,228
---------- ---------- ---------- -------- --------
Net income (loss).............................. (47,122) (77,428) 112,239 78,998 10,739
Retained earnings, beginning of period......... 296,719 249,597 172,169 172,169 284,408
---------- ---------- ---------- -------- --------
Retained earnings, end of period............... $ 249,597 $ 172,169 $ 284,408 $251,167 $295,147
========== ========== ========== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-219
<PAGE>
ONCOLOGY AND HEMATOLOGY ASSOCIATES, PA
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------ -------------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss)................................ $(47,122) $(77,428) $112,239 $ 78,998 $ 10,739
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities
--
Depreciation................................. 13,873 12,321 11,424 2,857 2,857
Deferred income taxes........................ (23,318) (19,805) 37,961 25,359 5,420
Loss on disposal of investment............... -- -- 28,843 -- --
Changes in assets and liabilities --
Accounts receivable....................... 18,939 27,799 (138,718) (77,309) (16,465)
Prepaid expenses and other................ 61 -- 200 200 (441)
Accounts payable.......................... 19,499 55,824 (60,427) (4,426) 22,085
Accrued compensation...................... 398 1,948 23,926 (9,456) (2,755)
Other assets.............................. 15,058 7,773 -- -- --
-------- -------- -------- -------- --------
Net cash (used in) provided by operating
activities............................ (2,612) 8,432 15,448 16,223 21,440
-------- -------- -------- -------- --------
Investing activities:
Purchases of property and equipment.............. (9,099) -- (1,061) (1,061) --
-------- -------- -------- -------- --------
Financing activities:
Proceeds from note payable to shareholder........ -- -- 25,000 -- --
Repayment on note payable to shareholder......... (15,000) (15,000) -- -- (25,000)
-------- -------- -------- -------- --------
Net cash (used in) provided by financing
activities............................ (15,000) (15,000) 25,000 -- (25,000)
-------- -------- -------- -------- --------
Net (decrease) increase in cash and cash
equivalents...................................... (26,711) (6,568) 39,387 15,162 (3,560)
Cash and cash equivalents, beginning of period..... 35,007 8,296 1,728 1,728 41,115
-------- -------- -------- -------- --------
Cash and cash equivalents, end of period........... $ 8,296 $ 1,728 $ 41,115 $ 16,890 $ 37,555
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-220
<PAGE>
ONCOLOGY AND HEMATOLOGY ASSOCIATES, PA
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
1. ORGANIZATION AND BUSINESS:
Oncology and Hematology Associates, PA (the "Company") is a physician-owned
medical practice in Woodbury, New Jersey. The Company was formed in 1971 for the
purpose of both cancer evaluation and treatment and evaluation of patients with
hematologic disorders.
On April 18, 1997, the Company entered into a Stock Acquisition Agreement,
as amended through April 22, 1998, (the "Affiliation Agreement") with U.S.
PHYSICIANS, Inc. ("USP"). Under the terms of the Affiliation Agreement, USP and
its affiliated professional corporation will acquire the stock of the Company in
exchange for cash and USP Common Stock, subject to adjustment as defined. The
closing, as defined in the Affiliation Agreement, will occur upon the completion
of an initial public offering by USP. If the closing has not occurred prior to
June 15, 1998, the Affiliation Agreement may be terminated by either the Company
or USP by written notice to the other party.
2. SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Statements
The financial statements for the three months ended March 31, 1997 and 1998
are unaudited, and in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the financial position as of March 31, 1998 and the results of
its operations for the three months ended March 31, 1997 and 1998. The results
of operations for the three-month period are not necessarily indicative of the
results to be expected for the entire year.
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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
Financial instruments consist of cash and cash equivalents, accounts
receivable and certain current liabilities. The carrying amounts reported in the
balance sheets for these items approximate fair value.
Net Revenues
Revenues from patients, third-party payors and others are recorded at
established rates, net of provision for bad debts and contractual adjustments,
in the period that services are rendered. Contractual adjustments represent the
difference between charges at established rates and the estimated amount to be
reimbursed.
Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments
purchased with an original maturity of three months or less.
Accounts Receivable
Accounts receivable primarily consist of receivables from patients,
third-party payors and others. Such amounts are recorded net of contractual
allowances and estimated bad debts.
F-221
<PAGE>
ONCOLOGY AND HEMATOLOGY ASSOCIATES, PA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
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.
Property and Equipment
Property and equipment are stated at cost. Expenditures for repairs and
maintenance are charged to expense as incurred. Depreciation is provided over
the estimated useful life of the applicable assets ranging from five to seven
years for equipment, furniture, and fixtures and is computed using the
straight-line method.
Income Taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109").
SFAS No. 109 requires the liability method of accounting for deferred income
taxes. Deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities. Deferred tax assets or liabilities at the end of each period are
determined using the tax rate expected to be in effect when taxes are actually
paid or recovered.
Note Payable to Shareholder
In December 1994, 1995 and 1997, the Company signed a short-term
interest-free note payable to the shareholder. The 1994 and 1995 notes were
repaid in January 1995 and 1996, respectively.
Statements of Cash Flows Information
Amounts paid for interest and taxes were not significant.
3. EMPLOYEE BENEFIT PLAN:
The Company provides a 401(k) profit sharing plan that covers all qualified
employees, as defined by the plan agreement. Employees vest pro rata over six
years beginning after their first year as a participant. Contributions to the
plan are discretionary and are determined by the Company on an annual basis. For
the years ended December 31, 1995, 1996 and 1997, contributions to the plan were
$47,937, $0 and $0, respectively.
F-222
<PAGE>
ONCOLOGY AND HEMATOLOGY ASSOCIATES, PA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
4. INCOME TAXES:
The components of the income tax provision (benefit) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal..................................... $ 4,455 $ (1,972) $ 458
State....................................... 2,970 (1,314) 293
-------- -------- --------
7,425 (3,286) 751
-------- -------- --------
Deferred:
Federal..................................... (14,291) (11,883) 23,156
State....................................... (9,527) (7,922) 14,805
-------- -------- --------
(23,818) (19,805) 37,961
-------- -------- --------
$(16,393) $(23,091) $ 38,712
======== ======== ========
</TABLE>
Income tax expense (benefit) differs from the amount currently payable or
receivable because certain expenses, primarily depreciation and accruals, are
reported in different periods for financial reporting and income tax purposes.
The Company is on a cash basis of accounting for income tax purposes.
The provision (benefit) for income taxes differs from the amount computed
by applying the U.S. Federal income tax rate (34%) because of the effect of the
following items:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Tax at U.S. Federal statutory rate............ $(21,595) $(34,176) $ 51,323
Tax impact of Federal rate differential for
graduated rates............................. 11,029 19,591 (28,681)
State income taxes, net of federal benefit.... (7,044) (9,723) 15,095
Non-deductible travel and entertainment....... 1,217 1,217 975
-------- -------- --------
$(16,393) $(23,091) $ 38,712
======== ======== ========
</TABLE>
The components of the net deferred tax liability, measured under SFAS No.
109, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1997
------- --------
<S> <C> <C>
Deferred tax assets--
Net operating loss carryforward................ $16,561 $ 19,158
------- --------
Deferred tax liabilities--
Property and equipment......................... (10,223) (7,947)
Cash to accrual adjustments.................... (7,405) (50,239)
------- --------
(17,628) (58,186)
------- --------
Net deferred tax liability....................... $(1,067) $(39,028)
======= ========
</TABLE>
F-223
<PAGE>
ONCOLOGY AND HEMATOLOGY ASSOCIATES, PA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
5. COMMITMENTS AND CONTINGENCIES:
Lease Obligations
The Company leases its administrative office space from the shareholder. In
addition, the medical office is leased from Woodbury Medical Center Associates
in which the Company has a 7% partnership interest. During 1997, the Company
disposed of the partnership interest and wrote off the investment. Future
minimum lease payments for noncancellable operating leases for office space and
medical equipment having terms in excess of one year as of December 31, 1997,
are as follows:
<TABLE>
<CAPTION>
NON-
RELATED RELATED PARTY
PARTY LEASE LEASE
----------- -------------
<S> <C> <C>
1998................................................ $67,250 $11,400
1999................................................ 67,250 2,850
2000................................................ 66,333 --
2001................................................ 23,967 --
</TABLE>
Rent expense on related party operating leases for the years ended December
31, 1995, 1996 and 1997 was $56,428, $56,428 and $59,333, respectively. Rent
expense on nonrelated party operating leases for the years ended December 31,
1995, 1996 and 1997 was $12,060, $36,732 and $26,676, respectively.
Employment Agreement
On May 1, 1996, the Company entered into a seven-year employment agreement
with a physician which includes his gross annual salary of $236,000.
Insurance Policies
The Company maintains insurance with respect to medical malpractice risks
on an occurrence basis in amounts management believes to be adequate. Management
is not aware of any outstanding claims, which would have a material impact on
the Company's financial position or results of operations.
Health Care Regulatory Environment and Reliance on Government Programs
The health care industry in general and the services that the Company provides
are subject to extensive federal and state laws and regulations. Additionally, a
portion of the Company's net revenue is from payments by government-sponsored
health care programs, principally Medicare and Medicaid, and is subject to audit
and adjustments by applicable regulatory agencies. Failure to comply with any of
these laws or regulations, the results of regulatory audits and adjustments, or
changes in the amounts payable for the Company's services under these programs
could have a material adverse effect on the Company's financial position and
results of operations.
F-224
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Orthopedic Associates of Pittsburgh, Inc.:
We have audited the accompanying balance sheets of Orthopedic Associates of
Pittsburgh, Inc. (a Pennsylvania corporation) as of September 30, 1996 and 1997,
and the related statements of operations, shareholders' equity and cash flows
for each of the three years in the period ended September 30, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Orthopedic Associates of
Pittsburgh, Inc. as of September 30, 1996 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
September 30, 1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
December 12, 1997
F-225
<PAGE>
ORTHOPEDIC ASSOCIATES OF PITTSBURGH, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------- MARCH 31,
1996 1997 1998
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 89,357 $ 31,983 $ 65,134
Accounts receivable, net of allowance of $388,973,
$377,428
and $405,174............................................ 475,411 461,301 418,117
Prepaid expenses and other................................ 38,559 43,155 51,192
-------- -------- --------
Total current assets.................................. 603,327 536,439 534,443
-------- -------- --------
Property and equipment:
Equipment, furniture and fixtures......................... 463,741 464,559 464,559
Leasehold improvements.................................... 51,842 59,410 59,410
-------- -------- --------
515,583 523,969 523,969
Less -- Accumulated depreciation and amortization......... (423,514) (465,697) (485,005)
-------- -------- --------
92,069 58,272 38,964
-------- -------- --------
Other assets................................................ 5,963 5,963 5,963
-------- -------- --------
$701,359 $600,674 $579,370
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit............................................ $ 85,000 $ 80,000 $ --
Current maturities of long-term debt...................... 34,858 -- --
Accounts payable.......................................... 33,427 35,905 53,310
Deferred income taxes..................................... 117,034 115,490 106,157
-------- -------- --------
Total current liabilities............................. 270,319 231,395 159,467
-------- -------- --------
Long-term debt.............................................. 70,020 -- --
-------- -------- --------
Deferred income taxes....................................... 36,968 24,216 29,446
-------- -------- --------
Commitments and contingencies (Note 7)
Shareholders' equity:
Common Stock, $1 par value, 3,000 shares authorized, 2,063
shares issued and 1,407, 1,025 and 1,025 shares
outstanding............................................. 2,063 2,063 2,063
Additional paid in capital................................ 123,168 339,169 339,169
Retained earnings......................................... 461,884 416,894 462,288
Treasury stock, 656, 1,038 and 1,038 shares at cost....... (263,063) (413,063) (413,063)
-------- -------- --------
Total shareholders' equity............................ 324,052 345,063 390,457
-------- -------- --------
$701,359 $600,674 $579,370
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-226
<PAGE>
ORTHOPEDIC ASSOCIATES OF PITTSBURGH, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
------------------------------------ -----------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues............................... $4,506,677 $3,888,067 $3,562,214 $1,870,383 $1,626,610
---------- ---------- ---------- ---------- ----------
Operating expenses:
Salaries, wages and benefits............. 3,301,356 2,847,501 2,771,381 1,250,237 1,157,885
Pharmaceuticals and medical supplies..... 125,970 97,790 81,897 57,798 49,751
General and administrative............... 1,022,440 865,033 707,235 333,734 337,261
Depreciation and amortization............ 58,427 51,567 42,183 22,172 19,308
---------- ---------- ---------- ---------- ----------
Income (loss) from operations.............. (1,516) 26,176 (40,482) 206,442 62,405
Interest expense........................... 8,358 12,379 18,207 15,841 1,232
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes.......... (9,874) 13,797 (58,689) 190,601 61,173
Income tax provision (benefit)............. (1,178) 4,822 (13,699) 48,622 15,779
---------- ---------- ---------- ---------- ----------
Net income (loss).......................... $ (8,696) $ 8,975 $ (44,990) $ 141,979 $ 45,394
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-227
<PAGE>
ORTHOPEDIC ASSOCIATES OF PITTSBURGH, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------- PAID-IN RETAINED TREASURY
SHARES AMOUNT CAPITAL EARNINGS STOCK TOTAL
------ ------ ---------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1994............... 2,063 $2,063 $123,168 $461,605 $(150,000) $436,836
Net loss................................ -- -- -- (8,696) -- (8,696)
----- ------ -------- -------- --------- --------
Balance, September 30, 1995............... 2,063 2,063 123,168 452,909 (150,000) 428,140
Purchase of treasury stock.............. -- -- -- -- (113,063) (113,063)
Net income.............................. -- -- -- 8,975 -- 8,975
----- ------ -------- -------- --------- --------
Balance, September 30, 1996............... 2,063 2,063 123,168 461,884 (263,063) 324,052
Capital contribution.................... -- -- 216,001 -- -- 216,001
Purchase of treasury stock.............. -- -- -- -- (150,000) (150,000)
Net loss................................ -- -- -- (44,990) -- (44,990)
----- ------ -------- -------- --------- --------
Balance, September 30, 1997............... 2,063 2,063 339,169 416,894 (413,063) 345,063
Net income (unaudited).................. -- -- -- 45,394 -- 45,394
----- ------ -------- -------- --------- --------
Balance, March 31, 1998 (unaudited)....... 2,063 $2,063 $339,169 $462,288 $(413,063) $390,457
===== ====== ======== ======== ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-228
<PAGE>
ORTHOPEDIC ASSOCIATES OF PITTSBURGH, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
----------------------------- ------------------
1995 1996 1997 1997 1998
------- -------- -------- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss).................................. $(8,696) $ 8,975 $(44,990) $141,979 $45,394
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities--
Depreciation and amortization.................. 58,427 51,567 42,183 22,172 19,308
Deferred income taxes.......................... (1,313) 5,431 (14,296) 48,622 (4,103)
Changes in assets and liabilities--
Accounts receivable......................... (57,091) 102,391 14,110 33,181 43,184
Prepaid expenses and other.................. 422 8,382 (4,596) (27,407) (8,037)
Accounts payable............................ (4,523) (16,146) 2,478 23,006 17,405
Accrued compensation........................ 13,354 (54,481) -- -- --
------- -------- -------- -------- -------
Net cash provided by (used in) operating
activities.............................. 580 106,119 (5,111) 241,553 113,151
------- -------- -------- -------- -------
Investing activities:
Purchases of property and equipment................ (23,034) (21,352) (8,386) (8,386) --
------- -------- -------- -------- -------
Financing activities:
Net borrowings (repayments) on line of credit...... 35,000 -- (5,000) 5,000 (80,000)
Proceeds from long-term debt....................... 10,000 -- -- -- --
Repayments on long-term debt....................... (60,000) (8,185) (104,878) (38,988) --
Purchase of treasury stock......................... -- -- (150,000) -- --
Capital contributions.............................. -- -- 216,001 -- --
------- -------- -------- -------- -------
Net cash used in financing activities..... (15,000) (8,185) (43,877) (33,988) (80,000)
------- -------- -------- -------- -------
Net increase (decrease) in cash and cash
equivalents........................................ (37,454) 76,582 (57,374) 199,179 33,151
Cash and cash equivalents, beginning of period....... 50,229 12,775 89,357 89,357 31,983
------- -------- -------- -------- -------
Cash and cash equivalents, end of period............. $12,775 $ 89,357 $ 31,983 $288,536 $65,134
======= ======== ======== ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-229
<PAGE>
ORTHOPEDIC ASSOCIATES OF PITTSBURGH, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE SIX
MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
1. ORGANIZATION AND BUSINESS:
Orthopedic Associates of Pittsburgh, Inc. (the "Company") is a
physician-owned medical practice serving the Pittsburgh, Pennsylvania, area. The
Company was formed in September 1974 for the purpose of rendering professional
medical services.
On April 18, 1997, the Company entered into a Stock Acquisition Agreement,
as amended through April 20, 1998, (the "Affiliation Agreement"), with U.S.
PHYSICIANS, Inc. ("USP"). Under the terms of the Affiliation Agreement, USP and
its affiliated professional corporation will acquire stock of the Company in
exchange for cash, notes payable and USP Common Stock, subject to adjustment as
defined. The closing, as defined in the Affiliation Agreement, will occur upon
the completion of an initial public offering by USP. If the closing has not
occurred prior to June 15, 1998, the Affiliation Agreement may be terminated by
either the Company or USP by written notice to the other party.
2. SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Statements
The financial statements for the six months ended March 31, 1997 and 1998,
are unaudited, and in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the financial position as of March 31, 1998, and the results of
its operations for the six months ended March 31, 1997 and 1998. The results of
operations for the six-month period are not necessarily indicative of the
results to be expected for the entire years.
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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
Financial instruments consist of cash and cash equivalents, accounts
receivable, certain current liabilities and debt obligations. The carrying
amounts reported in the balance sheets for these items approximate fair value.
Net Revenues
Revenues from patients, third-party payors and others are recorded at
established rates, net of provision for bad debts and contractual adjustments,
in the period that services are rendered. Contractual adjustments represent the
difference between charges at established rates and the estimated amount to be
reimbursed.
The Company has an agreement with a related party to provide medical
services to subscribing participants. Under this agreement the Company receives
monthly capitation payments based on the number of participants, regardless of
services actually provided by the Company. Total revenues received under this
agreement for the years ended September 30, 1995, 1996 and 1997 were $530,391,
$458,649 and $366,267, respectively.
F-230
<PAGE>
ORTHOPEDIC ASSOCIATES OF PITTSBURGH, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE SIX
MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments
purchased with an original maturity of three months or less.
Accounts Receivable
Accounts receivable primarily consist of receivables from patients,
third-party payors and others. Such amounts are recorded net of contractual
allowances and estimated bad debts.
Concentration of Credit Risk
The Company extends credit to patients covered by programs such as
Medicare, 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.
Property and Equipment
Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to expense as incurred. Depreciation and amortization are
provided over the estimated useful lives of the related assets ranging from five
to seven years for equipment, furniture and fixtures and the remaining lease
term for leasehold improvements and is computed using the straight-line method.
Income Taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109").
SFAS No. 109 requires the liability method of accounting for deferred income
taxes. Deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities. Deferred tax assets or liabilities at the end of each period are
determined using the tax rate expected to be in effect when taxes are actually
paid or recovered.
Statements of Cash Flows Information
For the years ended September 30, 1995, 1996 and 1997, the Company paid
interest of $8,358, $12,379, and $18,207, respectively. Amounts paid for taxes
were not significant.
In 1996, the Company purchased treasury shares from a former shareholder
and issued a note payable in the amount of $113,063.
3. LINE OF CREDIT:
The Company has a line of credit for $150,000 with a local bank. Interest
is accrued on the outstanding balance at the bank's prime rate plus 1% (9.5% at
September 30, 1997). Outstanding borrowings under the line as of September 30,
1996 and 1997 were $85,000 and $80,000, respectively.
F-231
<PAGE>
ORTHOPEDIC ASSOCIATES OF PITTSBURGH, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE SIX
MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
4. NOTE PAYABLE TO FORMER SHAREHOLDER:
In August 1996, the Company purchased a shareholder's interest for $113,063
and issued a note payable.
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
1996 1997
-------- --------
<S> <C> <C>
Note payable to shareholder, monthly payments of
$3,649 including interest of 10% through July 1999
(repaid in 1997)................................... $104,878 $ --
Less -- Current maturities........................... (34,858) --
-------- --------
$ 70,020 $ --
======== ========
</TABLE>
5. EMPLOYEE BENEFIT PLAN:
The Company maintains a profit sharing plan that covers all qualified
employees, as defined by the plan agreement. Contributions to the plan are
discretionary and are determined by the Company on an annual basis. Employees
vest in Company contributions, as defined. For the years ended September 30,
1995, 1996 and 1997, contributions to the plan were $236,481, $212,986 and
$177,000, respectively.
6. INCOME TAXES:
The components of the income tax (benefit) provision are as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------
1995 1996 1997
------- ------ --------
<S> <C> <C> <C>
Current:
Federal..................................... $ 81 $ (365) $ 358
State....................................... 54 (244) 239
------- ------ --------
135 (609) 597
------- ------ --------
Deferred:
Federal..................................... (788) 3,259 (8,578)
State....................................... (525) 2,172 (5,718)
------- ------ --------
(1,313) 5,431 (14,296)
------- ------ --------
$(1,178) $4,822 $(13,699)
======= ====== ========
</TABLE>
Income tax (benefit) expense differs from the amount currently payable or
receivable because certain expenses, primarily depreciation and accruals, are
reported in different periods for financial reporting and income tax purposes.
The Company is on a cash basis of accounting for income tax purposes.
The (benefit) provision for income taxes differs from the amount computed
by applying the U.S. Federal income tax rate (34%) because of the effect of the
following items:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------
1995 1996 1997
------- ------ --------
<S> <C> <C> <C>
Tax at U.S. Federal statutory rate............ $(3,357) $4,691 $(19,954)
Tax impact of Federal rate differential for
graduated rates............................. 1,856 (2,530) 11,150
State income taxes, net of federal benefit.... (1,001) 1,441 (5,869)
Non-deductible travel and entertainment....... 1,324 1,220 974
------- ------ --------
$(1,178) $4,822 $(13,699)
======= ====== ========
</TABLE>
F-232
<PAGE>
ORTHOPEDIC ASSOCIATES OF PITTSBURGH, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE SIX
MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
6. INCOME TAXES: -- (CONTINUED)
The components of the net deferred tax liability, measured under SFAS No.
109, are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------
1996 1997
--------- ---------
<S> <C> <C>
Deferred tax assets --
Net operating loss carryforward.................... $ -- $ 9,980
--------- ---------
Deferred tax liabilities --
Property and equipment............................. (36,968) (34,196)
Cash to accrual adjustments........................ (117,034) (115,490)
--------- ---------
(154,002) (149,686)
--------- ---------
Net deferred tax liability........................... $(154,002) $(139,706)
========= =========
</TABLE>
7. COMMITMENTS AND CONTINGENCIES:
Lease Obligations
The Company leases office space in two locations. Rent expense on operating
leases was $378,791, $278,185 and $193,105 for the years ended September 30,
1995, 1996 and 1997, respectively. Future minimum lease payments for
noncancellable operating leases as of September 30, 1997 are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
- -----------
<S> <C>
1998............................................. $120,649
1999............................................. 59,261
</TABLE>
Insurance Policies
The Company maintains insurance with respect to medical malpractice risks
on an occurrence basis in amounts management believes to be adequate. Management
is not aware of any outstanding claims which would have a material impact on the
Company's financial position or results of operations.
The Pennsylvania Medical Professional Liability Catastrophic Loss Fund (the
"CAT Fund"), an agency fund of the Commonwealth of Pennsylvania, acts as a
service agent to facilitate the payment of medical malpractice claims exceeding
the primary layer of professional liability insurance carried by physicians and
other health care providers practicing in Pennsylvania. The CAT Fund policies
are retrospectively rated on a claims-made basis. The CAT Fund levies health
care provider surcharges, as a percentage of insurance premiums for basic
coverage, to pay claims and administrative expenses on behalf of CAT Fund
participants.
The CAT Fund is significantly underfunded and the Commonwealth has
indicated that the unfunded liability will be funded exclusively through
surcharge assessments in future years as claims are settled and paid. The
practice and the other CAT Fund participants received a surcharge assessment
during fiscal 1996 and 1997. No provision has been made for any future CAT Fund
assessments in the accompanying financial statements as the practice's portion
of the CAT Fund unfunded liability could not be reasonably estimated.
Health Care Regulatory Environment and Reliance on Government Programs
The health care industry in general and the services that the Company
provides are subject to extensive federal and state laws and regulations.
Additionally, a portion of the Company's net revenue is from payments by
government-sponsored health care programs, principally Medicare and Medicaid,
and is subject to audit and adjustments by applicable regulatory agencies.
Failure to comply with any of these laws or regulations, the results of
regulatory audits and adjustments, or changes in the amounts payable for the
Company's services under these programs could have a material adverse effect on
the Company's financial position and results of operations.
F-233
<PAGE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Philadelphia Orthopedic Group, LLP:
We have audited the accompanying balance sheet of Philadelphia Orthopedic Group,
LLP (a Pennsylvania corporation) as of December 31, 1997 and the related
statements of operations, owners' deficit and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Philadelphia Orthopedic Group,
LLP as of December 31, 1997, and the results of its operations and its cash
flows for the year then ended, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has experienced a net loss for the year ended
December 31, 1997 and has a substantial debt obligation due in 1998. These
matters raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 1. The accompanying financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
amounts and classifications of liabilities that might be necessary should the
Company be unable to continue as a going concern.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
March 27, 1998
F-234
<PAGE>
PHILADELPHIA ORTHOPEDIC GROUP, LLP
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 11,994 $ 4,029
Accounts receivable, net of allowance of $900,700 and
$753,664............................................... 321,360 322,616
-------- --------
Total current assets................................. 333,354 326,645
-------- --------
Property and equipment:
Equipment, furniture and fixtures......................... 481,364 495,155
Leasehold improvements.................................... 212,984 215,204
-------- --------
694,348 710,359
Less -- Accumulated depreciation and amortization......... (636,723) (642,791)
-------- --------
57,625 67,568
-------- --------
$390,979 $394,213
======== ========
LIABILITIES AND OWNERS' DEFICIT
Current liabilities:
Bank overdraft............................................ $ -- $ 52,250
Short-term debt........................................... 126,129 32,782
Current maturities of long-term debt...................... 81,251 113,927
Line of credit............................................ 15,202 8,618
Accounts payable.......................................... 48,787 99,840
Accrued compensation...................................... 172,173 201,638
Deferred rent............................................. 11,848 10,569
-------- --------
Total current liabilities............................ 455,390 519,624
-------- --------
Long-term debt.............................................. 142,708 151,735
-------- --------
Commitments and contingencies (Note 7)
Owners' deficit............................................. (207,119) (277,146)
-------- --------
$390,979 $394,213
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-235
<PAGE>
PHILADELPHIA ORTHOPEDIC GROUP, LLP
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
1997 1997 1998
------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Net revenues............................................... $2,214,391 $591,953 $483,147
---------- -------- --------
Operating expenses:
Salaries, wages and benefits............................. 1,304,660 324,284 339,105
Pharmaceuticals and medical supplies..................... 36,811 2,116 1,041
General and administrative............................... 902,090 261,061 195,154
Depreciation and amortization............................ 30,605 7,652 6,068
---------- -------- --------
Loss from operations....................................... (59,775) (3,160) (58,221)
Interest expense, net...................................... 20,388 3,315 4,744
Other expense (income), net................................ 3,981 (5,031) 7,062
---------- -------- --------
Net loss................................................... $ (84,144) $ (1,444) $(70,027)
========== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-236
<PAGE>
PHILADELPHIA ORTHOPEDIC GROUP, LLP
STATEMENTS OF OWNERS' DEFICIT
<TABLE>
<S> <C>
BALANCE, DECEMBER 31, 1996.................................. $ (9,375)
Purchase of partnership interest.......................... (113,600)
Net loss.................................................. (84,144)
---------
BALANCE, DECEMBER 31, 1997.................................. (207,119)
Net loss (unaudited)...................................... (70,027)
---------
BALANCE, MARCH 31, 1998 (unaudited)......................... $(277,146)
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-237
<PAGE>
PHILADELPHIA ORTHOPEDIC GROUP, LLP
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
1997 1997 1998
------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Operating activities:
Net loss................................................. $(84,144) $ (1,444) $(70,027)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities --
Depreciation and amortization....................... 30,605 7,652 6,068
Changes in assets and liabilities --
Accounts receivable.............................. (89,642) (44,584) (1,256)
Prepaid expenses and other....................... 16,544 -- --
Accounts payable................................. 17,728 114,440 51,053
Accrued compensation............................. 1,293 27,557 29,465
Deferred rent.................................... (21,941) (19,280) (1,279)
-------- -------- --------
Net cash (used in) provided by operating
activities.................................. (129,557) 84,341 14,024
-------- -------- --------
Investing activities:
Purchases of property and equipment...................... (2,190) -- (16,011)
Purchase of partnership interest......................... (69,425) -- --
-------- -------- --------
Net cash used in investing activities.......... (71,615) -- (16,011)
-------- -------- --------
Financing activities:
Bank overdraft........................................... -- -- 52,250
Net payments on line of credit........................... (14,798) (12,000) (6,584)
Repayments on long-term debt............................. (65,995) (6,584) (22,297)
Proceeds from long-term debt............................. 255,000 -- 64,000
Repayment on short-term debt............................. (165,041) (50,022) (93,347)
Proceeds from short-term debt............................ 180,299 -- --
-------- -------- --------
Net cash provided by (used in) financing
activities.................................. 189,465 (68,606) (5,978)
-------- -------- --------
Net decrease in cash and cash equivalents.................. (11,707) 15,735 (7,965)
Cash and cash equivalents, beginning of period............. 23,701 23,701 11,994
-------- -------- --------
Cash and cash equivalents, end of period................... $ 11,994 $ 39,436 $ 4,029
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-238
<PAGE>
PHILADELPHIA ORTHOPEDIC GROUP, LLP
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
1. ORGANIZATION AND BUSINESS:
Philadelphia Orthopedic Group, LLP (the "Company") is a professional
corporation serving the Philadelphia, Pennsylvania area. The Company was formed
in 1988 for the purpose of rendering professional orthopedic services and
related medical services to the general public.
On April 4, 1998, the Company entered into an Asset Acquisition Agreement,
as amended on April 23, 1998 (the "Affiliation Agreement"), with U.S. PHYSICIANS
("USP"). Under the terms of the Affiliation Agreement, USP and its affiliated
professional corporation will acquire the majority of the assets and liabilities
of the Company in exchange for cash, notes payable and USP Common Stock, subject
to adjustment as defined. The closing, as defined in the Affiliation Agreement,
will occur upon the completion of an initial public offering by USP. If the
closing has not occurred prior to August 1, 1998 (the "Termination Date"), the
Affiliation Agreement may be terminated by either the Company or USP by written
notice to the other party. The Termination Date can be extended to December 31,
1998, if USP makes a payment, as defined.
Going Concern
The Company has experienced a net loss for the year ended December 31, 1997
and has substantial debt obligations due in 1998. These matters raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are described in the following
paragraph. The accompanying financial statements do not include any adjustments
related to the recoverability and classification of recorded asset amounts or
the amounts and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern.
For the year ended December 31, 1997, the Company reported a net loss of
$84,144, and as of December 31, 1997 had an accumulated deficit of $207,119. The
Company is highly leveraged, with debt obligations due in 1998 totalling
$222,582. Management has implemented a plan to control costs by reducing staff.
There can be no assurances that the Company will be successful in its attempts
to control costs.
2. SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Statements
The financial statements for the three months ended March 31, 1997 and 1998
are unaudited, and in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the financial position as of March 31, 1998 and the results of
its operations for the three months ended March 31, 1997 and 1998. The results
of operations for the three-month period are not necessarily indicative of the
results to be expected for the entire year.
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 revenues and expenses during the
reporting period. Actual results could differ from
those estimates.
Fair Value of Financial Instruments
Financial instruments consist of cash and cash equivalents, accounts
receivable, certain current liabilities and debt obligations. The carrying
amounts reported in the balance sheets for these items approximate fair value.
F-239
<PAGE>
PHILADELPHIA ORTHOPEDIC GROUP, LLP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
Net Revenues
Revenues from patients, third-party payors and others are recorded at
established rates, net of provision for bad debts and contractual adjustments,
in the period that services are rendered. Contractual adjustments represent the
difference between charges at established rates and the estimated amount to be
reimbursed.
Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments
purchased with an original maturity of three months or less.
Accounts Receivable
Accounts receivable primarily consist of receivables from patients,
third-party payors and others. Such amounts are recorded net of contractual
allowances and estimated bad debts.
Concentration of Credit Risk
The Company extends credit to patients covered by programs such as
Medicare, 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.
Property and Equipment
Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to expense as incurred. Depreciation is provided over the
estimated useful lives of the applicable assets ranging from five to seven years
and is computed using the straight-line method.
Income Taxes
The Company has elected treatment as a partnership for both federal and
state income tax purposes and accordingly is not taxed as a separate entity. The
Company's taxable income or loss is allocated to the owners and recognized on
their individual tax returns. Accordingly, no provision for income taxes has
been reflected in the accompanying financial statements.
The Company reports certain income and expense items for income tax
purposes on a different basis than that reflected in the accompanying financial
statements. The primary differences are due to the cash basis of accounting for
income tax purposes. The cumulative amount of these differences as of December
31, 1997 was approximately $217,000. If the partnership status is terminated,
then a deferred income tax asset of approximately $87,000, subject to
utilization of net operating loss carryforwards, related to these cumulative
differences would need to be reflected in the accompanying financial statements.
Statements of Cash Flows Information
Amounts paid for interest for the year ended December 31, 1997 was $17,542.
Amounts paid for taxes were not significant.
During 1997, the Company bought-out one of its partners for $113,600 of
which $69,425 was paid in cash during April 1997. The remaining $44,175 plus
interest of $3,313 is to be paid during April 1998.
F-240
<PAGE>
PHILADELPHIA ORTHOPEDIC GROUP, LLP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
3. LINE OF CREDIT:
The Company has a line of credit totaling $99,872 bearing interest at the
bank's prime rate plus 2.5% (11% at December 31, 1997). The line is due in June
1998. At December 31, 1997, the balance outstanding on the line of credit was
$15,202.
4. SHORT-TERM NOTES PAYABLE:
In June 1997, the Company signed a note payable with a bank to finance
their 1997 malpractice insurance premium. The $180,299 note is payable in eleven
monthly installments of $16,391 plus interest at the bank's prime rate plus 1%
(9.5% at December 31, 1997). The balance is payable in full on May 1, 1998.
In April 1997, the Company signed an agreement with one of its partners to
purchase his interest in the partnership. The agreement called for a $113,600
buy-out of which $69,425 was paid in cash during April 1997. The remaining
$44,175 plus $3,313 of interest is due April 1998.
5. LONG-TERM DEBT:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Note payable to a bank, bearing interest at 9.5%, principal
payments of $3,854 per month through October 2001......... $177,292
Note payable to a bank, bearing interest at prime plus 1%
(9.5%, at December 31, 1997), principal payments of $2,917
per month through April 1999.............................. 46,667
--------
223,959
Less -- Current maturities.................................. (81,251)
--------
$142,708
========
</TABLE>
Future maturities of long-term debt at December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998............................................... $ 81,251
1999............................................... 57,917
2000............................................... 46,250
2001............................................... 38,541
--------
$223,959
========
</TABLE>
6. EMPLOYEE BENEFIT PLANS:
The Company provides a money purchase pension plan and a profit sharing
plan that cover all qualified employees, as defined by the plan agreements.
Employees vest immediately. Contributions to the plan are discretionary and are
determined by the Company on an annual basis. For the year ended December 31,
1997, contributions to the plans were $123,000.
7. COMMITMENTS AND CONTINGENCIES:
Lease Obligations
Rent expense on operating leases was $216,526 for the year ended December
31, 1997.
Future minimum lease payments for noncancelable operating leases primarily
for office space as of December 31, 1997 are as follows:
F-241
<PAGE>
PHILADELPHIA ORTHOPEDIC GROUP, LLP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
7. COMMITMENTS AND CONTINGENCIES: -- (CONTINUED)
<TABLE>
<S> <C>
1998...................................................... $125,037
1999...................................................... 126,652
2000...................................................... 71,199
2001...................................................... 71,199
2002...................................................... 71,199
</TABLE>
Insurance Policies
The Company maintains insurance with respect to medical malpractice risks
on an occurrence basis in amounts management believes to be adequate. Management
is not aware of any outstanding claims which would have a material impact on the
Company's financial position or results of operations.
The Pennsylvania Medical Professional Liability Catastrophic Loss Fund (the
"CAT Fund"), an agency fund of the Commonwealth of Pennsylvania, acts as a
service agent to facilitate the payment of medical malpractice claims exceeding
the primary layer of professional liability insurance carried by physicians and
other health care providers practicing in Pennsylvania. The CAT Fund policies
are retrospectively rated on a claims-made basis. The CAT Fund levies health
care provider surcharges, as a percentage of insurance premiums for basic
coverage, to pay claims and administrative expenses on behalf of CAT Fund
participants.
The CAT Fund is significantly underfunded and the Commonwealth has
indicated that the unfunded liability will be funded exclusively through
surcharge assessments in future years as claims are settled and paid. The
Company and the other CAT Fund participants received a surcharge assessment
during fiscal 1997. No provision has been made for any future CAT Fund
assessments in the accompanying financial statements as the Company's portion of
the CAT Fund unfunded liability could not be reasonably estimated.
Health Care Regulatory Environment and Reliance on Government Programs
The health care industry in general and the services that the Company
provides are subject to extensive federal and state laws and regulations.
Additionally, a portion of the Company's net revenue is from payments by
government-sponsored health care programs, principally Medicare and Medicaid,
and is subject to audit and adjustments by applicable regulatory agencies.
Failure to comply with any of these laws or regulations, the results of
regulatory audits and adjustments, or changes in the amounts payable for the
Company's services under these programs could have a material adverse effect on
the Company's financial position and results of operations.
F-242
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Philadelphia Uro-Gynecologic Associates, PC:
We have audited the accompanying balance sheets of Philadelphia Uro-Gynecologic
Associates, PC (a Pennsylvania corporation) as of December 31, 1996 and 1997 and
the related statements of operations and accumulated 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 Philadelphia Uro-Gynecologic
Associates, PC as of December 31, 1996 and 1997, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has experienced a net loss for the two years
ended December 31, 1997 and has a substantial debt obligation that is due on May
31, 1998. These matters raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1. The accompanying financial statements do not include
any adjustments relating to the recoverability and classification of recorded
asset amounts or amounts and classifications of liabilities that might be
necessary should the Company be unable to continue as a going concern.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
February 27, 1998
F-243
<PAGE>
PHILADELPHIA URO-GYNECOLOGIC ASSOCIATES, PC
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- MARCH 31,
1996 1997 1998
-------- -------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,026 $ -- $ --
Accounts receivable, net of allowance of $54,190, $65,624
and $76,870............................................ 54,141 40,366 43,240
Prepaid expenses and other................................ 13,500 13,500 10,125
-------- -------- --------
Total current assets................................. 68,667 53,866 53,365
-------- -------- --------
Property and equipment:
Equipment, furniture and fixtures......................... 97,482 97,482 97,482
Less -- Accumulated depreciation.......................... (41,868) (59,956) (62,678)
-------- -------- --------
55,614 37,526 34,804
-------- -------- --------
Other assets................................................ 6,226 5,408 5,216
-------- -------- --------
$130,507 $ 96,800 $ 93,385
======== ======== ========
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current liabilities:
Bank overdraft............................................ $ -- $ 10,481 --
Current maturities of long-term debt...................... 18,074 17,264 9,500
Line of credit............................................ 94,000 150,000 150,000
Accounts payable.......................................... 33,546 53,194 79,667
Accrued compensation...................................... 5,784 25,619 7,416
-------- -------- --------
Total current liabilities............................ 151,404 256,558 246,583
-------- -------- --------
Long-term debt.............................................. 31,825 18,294 20,658
-------- -------- --------
Commitments and contingencies (Note 6)
Shareholder's deficit:
Common stock, $1.00 par value, 10,000 shares authorized,
100 shares issued and outstanding...................... 100 100 100
Accumulated deficit....................................... (52,822) (178,152) (173,956)
-------- -------- --------
Total shareholder's deficit............................ (52,722) (178,052) (173,856)
-------- -------- --------
$130,507 $ 96,800 $ 93,385
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-244
<PAGE>
PHILADELPHIA URO-GYNECOLOGIC ASSOCIATES, PC
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
-------------------- ---------------------
1996 1997 1997 1998
-------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net revenues...................................... $575,740 $ 487,299 $ 117,049 $ 111,557
-------- --------- --------- ---------
Operating expenses:
Salaries, wages and benefits.................... 380,036 377,563 112,102 52,136
Pharmaceuticals and medical supplies............ 34,639 69,499 14,880 6,742
General and administrative...................... 155,432 126,494 46,048 41,070
Depreciation and amortization................... 18,572 18,906 3,789 2,914
-------- --------- --------- ---------
Income (loss) from operations..................... (12,939) (105,163) (59,770) 8,695
Interest expense, net............................. 17,518 20,167 3,202 4,499
-------- --------- --------- ---------
Net income (loss)................................. (30,457) (125,330) (62,972) 4,196
Accumulated deficit, beginning of period.......... (22,365) (52,822) (52,822) (178,152)
-------- --------- --------- ---------
Accumulated deficit, end of period................ $(52,822) $(178,152) $(115,794) $(173,956)
======== ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-245
<PAGE>
PHILADELPHIA URO-GYNECOLOGIC ASSOCIATES, PC
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
-------------------- ------------------
1996 1997 1997 1998
-------- --------- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
Operating activities:
Net income (loss).................................. $(30,457) $(125,330) $(62,972) $ 4,196
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities
--
Depreciation and amortization................. 18,572 18,906 3,789 2,914
Changes in assets and liabilities --
Accounts receivable........................ (14,526) 13,775 (3,703) (2,874)
Prepaid expenses and other................. 1,973 -- 3,375 3,375
Accounts payable........................... 11,711 19,648 5,755 26,473
Accrued compensation....................... (14,571) 19,835 5,496 (18,203)
-------- --------- -------- -------
Net cash (used in) provided by operating
activities............................ (27,298) (53,166) (48,260) 15,881
-------- --------- -------- -------
Investing activities:
Purchases of property and equipment................ (2,793) -- -- --
-------- --------- -------- -------
Financing activities:
Net proceeds from line of credit................... 27,305 56,000 -- --
Proceeds (repayments) on long-term debt............ (10,464) (14,341) 49,500 (5,400)
Bank overdraft..................................... -- 10,481 (2,266) (10,481)
-------- --------- -------- -------
Net cash provided by (used in) financing
activities............................ 16,841 52,140 47,234 (15,881)
-------- --------- -------- -------
Net decrease in cash and cash equivalents............ (13,250) (1,026) (1,026) --
Cash and cash equivalents, beginning of period....... 14,276 1,026 1,026 --
-------- --------- -------- -------
Cash and cash equivalents, end of period............. $ 1,026 $ -- $ -- $ --
======== ========= ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-246
<PAGE>
PHILADELPHIA URO-GYNECOLOGIC ASSOCIATES, PC
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
1. ORGANIZATION AND BUSINESS:
Philadelphia Uro-Gynecologic Associates, PC (the "Company") is a
professional corporation serving the Philadelphia, Pennsylvania area. The
Company was formed in 1993 for the purpose of rendering professional urological
and gynecological services and related medical services to the general public.
On January 21, 1998, the Company entered into an Asset Acquisition
Agreement, as amended through April 22, 1998 (the "Affiliation Agreement"), with
U.S. PHYSICIANS ("USP"). Under the terms of the Affiliation Agreement, USP and
its affiliated professional corporation will acquire the majority of the assets
and liabilities of the Company in exchange for cash, notes payable and USP
Common Stock, subject to adjustment as defined. The closing, as defined in the
Affiliation Agreement, will occur upon the completion of an initial public
offering by USP. If the closing has not occurred prior to June 15, 1998 the
Affiliation Agreement may be terminated by either the Company or USP by written
notice to the other party.
Going Concern
The Company has experienced a net loss for the two years ended December 31,
1997 and has a substantial debt obligation that is due May 31, 1998. These
matters raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are described in
the following paragraph. The accompanying financial statements do not include
any adjustments related to the recoverability and classification of recorded
asset amounts or the amounts and classification of liabilities that might be
necessary should the Company be unable to continue as a going concern.
For the year ended December 31, 1997, the Company reported a net loss of
$125,330, and as of December 31, 1997 had an accumulated deficit of $178,152.
The Company is highly leveraged, with a line of credit which expires on May 31,
1998 with an outstanding balance of $150,000 at December 31, 1997. In the event
that the line of credit is not renewed by the bank, the Company would be
required to satisfy the obligation. Management has implemented a plan to control
costs by reducing staff. There can be no assurances that the bank will renew the
line of credit or that the Company will be successful in its attempts to control
costs.
2. SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Statements
The financial statements for the three months ended March 31, 1997 and 1998
are unaudited, and in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the financial position as of March 31, 1998 and the results of
its operations for the three months ended March 31, 1997 and 1998. The results
of operations for the three-month period are not necessarily indicative of the
results to be expected for the entire year.
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 revenues and expenses during the
reporting period. Actual results could differ from
those estimates.
Fair Value of Financial Instruments
Financial instruments consist of cash and cash equivalents, accounts
receivable, certain current liabilities and debt obligations. The carrying
amounts reported in the balance sheets for these items approximate fair value.
F-247
<PAGE>
PHILADELPHIA URO-GYNECOLOGIC ASSOCIATES, PC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
Net Revenues
Revenues from patients, third-party payors and others are recorded at
established rates, net of provision for bad debts and contractual adjustments,
in the period that services are rendered. Contractual adjustments represent the
difference between charges at established rates and the estimated amount to be
reimbursed.
Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments
purchased with an original maturity of three months or less.
Accounts Receivable
Accounts receivable primarily consist of receivables from patients,
third-party payors and others. Such amounts are recorded net of contractual
allowances and estimated bad debts.
Concentration of Credit Risk
The Company extends credit to patients covered by programs such as
Medicare, 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.
Property and Equipment
Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to expense as incurred. Depreciation is provided over the
estimated useful lives of the applicable assets ranging from five to seven years
and is computed using the straight-line method.
Income Taxes
The Company has elected treatment as an "S" Corporation for both federal
and state income tax purposes and accordingly is not taxed as a separate entity.
The Company's taxable income or loss is allocated to the owner and recognized on
his individual tax return. Accordingly, no provision for income taxes has been
reflected in the accompanying financial statements.
The Company reports certain income and expense items for income tax
purposes on a different basis than that reflected in the accompanying financial
statements. The primary differences are due to the cash basis of accounting for
income tax purposes. The cumulative amount of these differences as of December
31, 1997 was approximately $120,000. If the S Corporation status is terminated,
then a deferred income tax asset of approximately $31,000, subject to
utilization of net operating loss carryforwards, related to these cumulative
differences would need to be reflected in the accompanying financial statements.
Statements of Cash Flows Information
Amounts paid for interest for the year ended December 31, 1996 and 1997 was
$17,542 and $20,167, respectively. Amounts paid for taxes were not significant.
3. LINE OF CREDIT:
The Company has a line of credit in the amount of $150,000 bearing interest
at the bank's prime rate plus 2% (10.5% at December 31, 1997). The line expires
on May 31, 1998 and is collateralized by the accounts
F-248
<PAGE>
PHILADELPHIA URO-GYNECOLOGIC ASSOCIATES, PC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
3. LINE OF CREDIT: -- (CONTINUED)
receivable and equipment of the Company. At December 31, 1996 and 1997, the
balance outstanding on the line of credit was $94,000 and $150,000,
respectively.
4. LONG-TERM DEBT:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1997
------- -------
<S> <C> <C>
Note payable to a bank, bearing interest at 8.75%, principal
payments of $792 per month through March 1999............. $21,375 $11,876
Capitalized lease obligations............................... 28,524 23,682
------- -------
49,899 35,558
Less -- Current maturities.................................. (18,074) (17,264)
------- -------
$31,825 $18,294
======= =======
</TABLE>
Future maturities of long-term debt at December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998............................................... $17,264
1999............................................... 8,455
2000............................................... 9,839
-------
$35,558
=======
</TABLE>
5. EMPLOYEE BENEFIT PLAN:
The Company provides a 401(k) profit sharing plan that covers all qualified
employees, as defined by the plan agreement. Employees vest immediately.
Contributions to the plan are discretionary and are determined by the Company on
an annual basis. For the years ended December 31, 1996 and 1997, contributions
to the plan were $4,000 and $3,510, respectively.
6. COMMITMENTS AND CONTINGENCIES:
Lease Obligations
Rent expense on operating leases was $40,587 and $39,345 for the years ended
December 31, 1996 and 1997, respectively.
F-249
<PAGE>
PHILADELPHIA URO-GYNECOLOGIC ASSOCIATES, PC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
6. COMMITMENTS AND CONTINGENCIES: -- (CONTINUED)
Future minimum lease payments under the Company's leases as of December 31,
1997 are as follows:
<TABLE>
<S> <C>
1998....................................................... $39,345
1999....................................................... 39,345
2000....................................................... 14,279
2001....................................................... 12,000
</TABLE>
Insurance Policies
The Company maintains insurance with respect to medical malpractice risks
on an occurrence basis in amounts management believes to be adequate. Management
is not aware of any outstanding claims which would have a material impact on the
Company's financial position or results of operations.
The Pennsylvania Medical Professional Liability Catastrophic Loss Fund (the
"CAT Fund"), an agency fund of the Commonwealth of Pennsylvania, acts as a
service agent to facilitate the payment of medical malpractice claims exceeding
the primary layer of professional liability insurance carried by physicians and
other health care providers practicing in Pennsylvania. The CAT Fund policies
are retrospectively rated on a claims-made basis. The CAT Fund levies health
care provider surcharges, as a percentage of insurance premiums for basic
coverage, to pay claims and administrative expenses on behalf of CAT Fund
participants.
The CAT Fund is significantly underfunded and the Commonwealth has
indicated that the unfunded liability will be funded exclusively through
surcharge assessments in future years as claims are settled and paid. The
Company and the other CAT Fund participants received a surcharge assessment
during fiscal 1996 and 1997. No provision has been made for any future CAT Fund
assessments in the accompanying financial statements as the Company's portion of
the CAT Fund unfunded liability could not be reasonably estimated.
Health Care Regulatory Environment and Reliance on Government Programs
The health care industry in general and the services that the Company
provides are subject to extensive federal and state laws and regulations.
Additionally, a portion of the Company's net revenue is from payments by
government-sponsored health care programs, principally Medicare and Medicaid,
and is subject to audit and adjustments by applicable regulatory agencies.
Failure to comply with any of these laws or regulations, the results of
regulatory audits and adjustments, or changes in the amounts payable for the
Company's services under these programs could have a material adverse effect on
the Company's financial position and results of operations.
F-250
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Primary Care & Rehabilitation, PC and Medical Consultants, PC:
We have audited the accompanying combined balance sheets of Primary Care &
Rehabilitation, PC and Medical Consultants, PC as of December 31, 1996 and 1997
and the related combined statements of operations and owner's equity and cash
flows for each of the three years in the period ended December 31, 1997. These
combined financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these combined
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 combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall combined
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Primary
Care & Rehabilitation, PC and Medical Consultants, PC as of December 31, 1996
and 1997, and the combined results of their operations and their cash flows for
each of the three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
February 13, 1998
F-251
<PAGE>
PRIMARY CARE & REHABILITATION, PC
AND MEDICAL CONSULTANTS, PC
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- MARCH 31,
1996 1997 1998
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 638 $ 831 $ 215,255
Accounts receivable, net of allowance of $1,693,205,
$2,644,052 and $2,917,941........................... 1,878,409 2,766,174 2,872,574
Prepaid expenses and other............................. 733 150 368
---------- ---------- ----------
Total current assets.............................. $1,879,780 $2,767,155 $3,088,197
========== ========== ==========
LIABILITIES AND OWNER'S EQUITY
Current liabilities:
Accrued management fee................................. $1,099,080 $1,474,716 $1,525,449
Accounts payable....................................... 33,255 226,947 280,112
Accrued compensation................................... 60,000 75,708 143,119
Deferred taxes......................................... 234,182 100,780 63,810
---------- ---------- ----------
Total current liabilities......................... 1,426,517 1,878,151 2,012,490
---------- ---------- ----------
Deferred compensation.................................... 110,000 50,000 50,000
---------- ---------- ----------
Commitments and contingencies (Note 4)
Owner's equity........................................... 343,263 839,004 1,025,707
---------- ---------- ----------
$1,879,780 $2,767,155 $3,088,197
========== ========== ==========
The accompanying notes are an integral part of these combined financial statements.
</TABLE>
F-252
<PAGE>
PRIMARY CARE & REHABILITATION, PC
AND MEDICAL CONSULTANTS, PC
COMBINED STATEMENTS OF OPERATIONS AND OWNER'S EQUITY
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ ---------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- -------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues........................ $2,348,786 $3,362,701 $3,605,447 $964,783 $ 886,275
Operating expenses:
Salaries, wages and benefits...... 567,595 1,228,110 1,188,628 283,201 324,272
General and administrative........ 578,507 114,878 244,795 31,755 22,945
Management fee.................... 1,061,784 1,574,378 1,650,048 385,548 338,733
---------- ---------- ---------- -------- ----------
Income from operations.............. 140,900 445,335 521,976 264,279 200,325
Interest income (expense)........... -- (458) -- -- --
---------- ---------- ---------- -------- ----------
Income before income taxes.......... 140,900 444,877 521,976 264,279 200,325
Income tax provision................ 60,949 178,066 26,235 18,157 13,622
---------- ---------- ---------- -------- ----------
Net income.......................... 79,951 266,811 495,741 246,122 186,703
Owner's equity (deficit), beginning
of period......................... (3,499) 76,452 343,263 343,263 839,004
---------- ---------- ---------- -------- ----------
Owner's equity, end of period....... $ 76,452 $ 343,263 $ 839,004 $589,385 $1,025,707
========== ========== ========== ======== ==========
The accompanying notes are an integral part of these combined financial statements.
</TABLE>
F-253
<PAGE>
PRIMARY CARE & REHABILITATION, PC
AND MEDICAL CONSULTANTS, PC
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------ -------------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income.............................. $ 79,951 $266,811 $495,741 $246,122 $186,703
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities --
Deferred taxes..................... 64,812 167,599 (133,402) (5,834) (36,970)
Changes in assets and liabilities
--
Accounts receivable............. (770,161) (827,213) (887,765) (314,561) (106,400)
Prepaid expenses and other...... (708) -- 583 696 (218)
Accounts payable................ 7,906 (40,893) 193,692 4,222 53,165
Accrued management fee.......... 404,677 464,976 375,636 89,744 50,733
Deferred compensation........... 230,000 (60,000) (44,292) 53,561 67,411
-------- -------- -------- -------- --------
Net cash provided by (used in)
operating activities....... 16,477 (28,720) 193 73,950 214,424
-------- -------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents............................. 16,477 (28,720) 193 73,950 214,424
Cash and cash equivalents, beginning of
period.................................. 12,881 29,358 638 638 831
-------- -------- -------- -------- --------
Cash and cash equivalents, end of
period.................................. $ 29,358 $ 638 $ 831 $ 74,588 $215,255
======== ======== ======== ======== ========
The accompanying notes are an integral part of these combined financial statements.
</TABLE>
F-254
<PAGE>
PRIMARY CARE & REHABILITATION, PC
AND MEDICAL CONSULTANTS, PC
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
1. ORGANIZATION AND BUSINESS:
Primary Care & Rehabilitation, PC ("PC&R") and Medical Consultants, PC
("Medical Consultants") (collectively, the "Company") provide pain management
and related medical services to the general public.
On December 10, 1997, the Company and the selling owner entered into an
Asset Acquisition Agreement, as amended through April 23, 1998, (the
"Affiliation Agreement") with U.S. PHYSICIANS, Inc. ("USP"). Under the terms of
the Affiliation Agreement, USP and its affiliated professional corporation
acquired the majority of the assets and liabilities of the Company in exchange
for cash, notes payable and USP Common Stock, subject to adjustment, as defined.
The closing as defined in the Affiliation Agreement will occur upon the
completion of an initial public offering by USP. If the closing has not occurred
prior to August 1, 1998, the Affiliation Agreement may be terminated by either
the Company or USP by written notice to the other party.
2. SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Statements
The financial statements for the three months ended March 31, 1997 and 1998
are unaudited, and in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the financial position as of March 31, 1998 and the results of
its operations for the three months ended March 31, 1997 and 1998. The results
of operations for the three-month period are not necessarily indicative of the
results to be expected for the entire year.
Principles of Combination
The combined financial statements include the accounts of PC&R and Medical
Consultants (see Note 1). The related companies are controlled by the sole
shareholder of the Company. All material intercompany accounts and transactions
have been eliminated in combination.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain 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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
Financial instruments consist of cash and cash equivalents, accounts
receivable and certain current liabilities. The carrying amounts reported in the
balance sheets for these items approximate fair value.
Net Revenues
Revenues from patients, third-party payors and others are recorded at
established rates, net of provision for bad debts and contractual adjustments,
in the period that services are rendered. Contractual adjustments represent the
difference between charges at established rates and the estimated amount to be
reimbursed.
F-255
<PAGE>
PRIMARY CARE & REHABILITATION, PC
AND MEDICAL CONSULTANTS, PC
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments
purchased with an original maturity of three months or less.
Accounts Receivable
Accounts receivable primarily consist of receivables from patients,
third-party payors and others. Such amounts are recorded net of contractual
allowances and estimated bad debts.
Concentration of Credit Risk
The Company extends credit to patients covered by programs such as
Medicare, Medicaid and private insurers. The Company manages credit risk with
the various public and private insurance providers, as appropriate. Allowances
for bad debt have been made for potential losses when appropriate.
Accrued Management Fee
Accrued management fees consist of amounts due to a physician management
company for services rendered pursuant to management agreements.
Income Taxes
Medical Consultants accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109").
SFAS No. 109 requires the liability method of accounting for deferred income
taxes. Deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities. Deferred tax assets or liabilities at the end of each period are
determined using the tax rate expected to be in effect when taxes are actually
paid or recovered.
For 1995 and 1996, PC&R accounted for income taxes under SFAS No. 109.
Effective January 1, 1997, PC&R elected treatment as an "S" Corporation for both
federal and state income tax purposes and accordingly the taxable income or loss
effective as of that date with the exception of the book versus tax basis
differences will be allocated to the owners and recognized on their individual
tax returns. PC&R continues to provide a deferred tax liability to the extent
that it is subject to taxes on the net unrecognized book versus tax basis
differences.
Owner's Equity
Owner's equity includes the capital stock and retained earnings of the
Company.
Statements of Cash Flows Information
Amounts paid for interest and taxes were not significant.
F-256
<PAGE>
PRIMARY CARE & REHABILITATION, PC
AND MEDICAL CONSULTANTS, PC
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
3. INCOME TAXES:
The components of the income tax provision are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
------- -------- -------
<S> <C> <C> <C>
Current:
Federal..................................... $(3,284) $ 8,897 $ 5,501
State....................................... (579) 1,570 971
------- -------- -------
(3,863) 10,467 6,472
------- -------- -------
Deferred:
Federal..................................... 55,090 142,459 16,799
State....................................... 9,722 25,140 2,964
------- -------- -------
64,812 167,599 19,763
------- -------- -------
$60,949 $178,066 $26,235
======= ======== =======
</TABLE>
Income tax expense differs from the amount currently payable because
certain revenues and expenses are reported in different periods for financial
reporting and income tax purposes. The Company is on a cash basis of accounting
for income tax purposes.
The provision for income taxes differs from the amount computed by applying
the U.S. Federal income tax rate (34%) because of the effect of the following
items:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
------- -------- -------
<S> <C> <C> <C>
Tax at U.S. Federal statutory rate............ $49,185 $149,943 $22,275
State income taxes, net of federal benefit.... 8,680 26,460 3,519
Non-deductible travel and entertainment....... 3,084 1,663 441
------- -------- -------
$60,949 $178,066 $26,235
======= ======== =======
</TABLE>
The components of the net deferred tax liability measured under SFAS No.
109, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
-------- --------
<S> <C> <C>
Deferred tax liability
Cash to accrual adjustments.......................... $234,182 $100,780
-------- --------
Net deferred tax liability............................. $234,182 $100,780
======== ========
</TABLE>
4. COMMITMENTS AND CONTINGENCIES:
Management Agreements
The Company has entered into Management Agreements with Curamed, LLC, a
physician management company, and its related operating companies. PC&R's
agreement was effective on February 13, 1995 and provides for a management fee
of 50% of the gross collected revenues. The agreement has a five year term with
automatic five year renewals unless either party provides six months notice.
Medical Consultants agreement provides for a management fee of 100% of the gross
collected revenues, less certain retained expenses, as defined.
F-257
<PAGE>
PRIMARY CARE & REHABILITATION, PC
AND MEDICAL CONSULTANTS, PC
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
4. COMMITMENTS AND CONTINGENCIES: -- (CONTINUED)
Deferred Compensation:
In 1995, the Company entered into an agreement with a former physician to
pay $265,000 in 53 monthly installments of $5,000 for services already rendered.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
-------- --------
<S> <C> <C>
Agreed monthly payments of $5,000 through November
1999................................................. $170,000 $110,000
Less: Current portion (included in accrued
compensation)..................................... (60,000) (60,000)
-------- --------
$110,000 $ 50,000
======== ========
</TABLE>
Insurance Policies
The Company maintains insurance with respect to medical malpractice risks
on an occurrence basis in amounts management believes to be adequate. Management
is not aware of any outstanding claims which would have a material impact on the
Company's financial position or results of operations.
Health Care Regulatory Environment and Reliance on Government Programs
The health care industry in general and the services that the Company
provides are subject to extensive federal and state laws and regulations.
Additionally, a portion of the Company's net revenue is from payments by
government-sponsored health care programs, principally Medicare and Medicaid,
and is subject to audit and adjustments by applicable regulatory agencies.
Failure to comply with any of these laws or regulations, the results of
regulatory audits and adjustments, or changes in the amounts payable for the
Company's services under these programs could have a material adverse effect on
the Company's financial position and results of operations.
F-258
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Suburban Pain Control:
We have audited the accompanying balance sheets of Suburban Pain Control (a
Pennsylvania sole proprietorship) as of December 31, 1996 and 1997 and the
related statements of operations and owner's equity and cash flows for each of
the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Suburban Pain Control as of
December 31, 1996, and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
February 27, 1998
F-259
<PAGE>
SUBURBAN PAIN CONTROL
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- MARCH 31,
1996 1997 1998
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 4,389 $ 89,437 $ 74,073
Accounts receivable, net of allowance of $615,071,
$924,317 and $1,068,640................................ 247,188 403,228 517,357
Prepaid expenses and other................................ 1,126 3,323 1,126
-------- -------- --------
Total current assets................................... 252,703 495,988 592,556
-------- -------- --------
Property and equipment:
Equipment, furniture and fixtures......................... 31,881 45,902 54,093
Less -- Accumulated depreciation.......................... (8,103) (13,659) (15,591)
-------- -------- --------
23,778 32,243 38,502
-------- -------- --------
$276,481 $528,231 $631,058
======== ======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable.......................................... $ 7,553 $ 1,701 15,670
Accrued compensation...................................... 4,040 3,320 3,243
-------- -------- --------
Total current liabilities.............................. 11,593 5,021 18,913
-------- -------- --------
Commitments and contingencies (Note 4)
Owner's equity.............................................. 264,888 523,210 612,145
-------- -------- --------
$276,481 $528,231 $631,058
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-260
<PAGE>
SUBURBAN PAIN CONTROL
STATEMENTS OF OPERATIONS AND OWNER'S EQUITY
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ -------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues................................... $1,457,979 $2,102,041 $2,565,366 $630,004 $761,108
---------- ---------- ---------- -------- --------
Operating expenses:
Salaries, wages and benefits................. 1,211,202 1,934,027 2,204,858 484,381 630,064
Pharmaceuticals and medical supplies......... 2,142 6,078 6,526 1,415 3,042
General and administrative................... 80,776 114,328 90,104 17,308 37,135
Depreciation................................. 2,913 4,296 5,556 1,264 1,932
---------- ---------- ---------- -------- --------
Net income..................................... 160,946 43,312 258,322 125,636 88,935
Owner's equity, beginning of period............ 60,630 221,576 264,888 264,888 523,210
---------- ---------- ---------- -------- --------
Owner's equity, end of period.................. $ 221,576 $ 264,888 $ 523,210 $390,524 $612,145
========== ========== ========== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-261
<PAGE>
SUBURBAN PAIN CONTROL
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------ -------------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income....................................... $160,946 $ 43,312 $258,322 $125,636 $ 88,935
Adjustments to reconcile net income to net cash
provided by (used in) operating activities --
Depreciation................................. 2,913 4,296 5,556 1,264 1,932
Changes in assets and liabilities --
Accounts receivable....................... (85,152) (120,163) (156,040) (77,334) (114,129)
Prepaid expenses and other................ (3,285) 5,367 (2,197) -- 2,197
Accounts payable.......................... 628 6,925 (5,852) (2,845) 13,969
Accrued compensation...................... 2,959 1,082 (720) (269) (77)
-------- -------- -------- -------- --------
Net cash provided by (used in) operating
activities............................ 79,009 (59,181) 99,069 46,452 (7,173)
-------- -------- -------- -------- --------
Investing activities:
Purchases of property and equipment.............. (15,755) (3,613) (14,021) (3,505) (8,191)
-------- -------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents...................................... 63,254 (62,794) 85,048 42,947 (15,364)
Cash and cash equivalents, beginning of period..... 3,929 67,183 4,389 4,389 89,437
-------- -------- -------- -------- --------
Cash and cash equivalents, end of period........... $ 67,183 $ 4,389 $ 89,437 $ 47,336 $ 74,073
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-262
<PAGE>
SUBURBAN PAIN CONTROL
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
1. ORGANIZATION AND BUSINESS:
Suburban Pain Control (the "Company") was formed in 1994 as a
physician-owned medical practice. The Company provides pain management and
related medical services to the general public.
On April 27, 1998, the Company entered into an Asset Acquisition Agreement,
as amended through April 28, 1998, (the "Affiliation Agreement") with U.S.
PHYSICIANS ("USP"). Under the terms of the Affiliation Agreement, USP and its
affiliated professional corporation will acquire the majority of the assets and
liabilities of the Company in exchange for cash, notes payable and USP Common
Stock, subject to adjustment as defined. The closing, as defined in the
Affiliation Agreement, will occur upon the completion of an initial public
offering by USP. If the closing has not occurred prior to June 15, 1998, the
Affiliation Agreement may be terminated by either the Company or USP by written
notice to the other party.
2. SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Statements
The financial statements for the three months ended March 31, 1997 and 1998
are unaudited, and in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the financial position as of March 31, 1998 and the results of
its operations for the three months ended March 31, 1997 and 1998. The results
of operations for the three-month period are not necessarily indicative of the
results to be expected for the entire year.
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 revenues and expenses during the
reporting period. Actual results could differ from
those estimates.
Fair Value of Financial Instruments
Financial instruments consist of cash and cash equivalents, accounts
receivable and certain current liabilities. The carrying amounts reported in the
balance sheets for these items approximate fair value.
Net Revenues
Revenues from patients, third-party payors and others are recorded at
established rates, net of provision for bad debts and contractual adjustments,
in the period that services are rendered. Contractual adjustments represent the
difference between charges at established rates and the estimated amount to be
reimbursed.
Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments
purchased with an original maturity of three months or less.
Accounts Receivable
Accounts receivable primarily consist of receivables from patients,
third-party payors and others. Such amounts are recorded net of contractual
allowances and estimated bad debts.
Concentration of Credit Risk
The Company extends credit to patients covered by programs such as
Medicare, 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.
F-263
<PAGE>
SUBURBAN PAIN CONTROL
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
Property and Equipment
Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to expense as incurred. Depreciation and amortization are
provided over the estimated useful lives of the applicable assets and are
computed using the straight-line method. The depreciation life for property and
equipment is seven years.
Income Taxes
The Company has elected treatment as a sole proprietorship for both federal
and state income tax purposes, and accordingly is not taxed as a separate
entity. The Company's taxable income or loss is allocated to the owner and
recognized on their individual tax return. Accordingly, no provision for income
taxes has been reflected in the accompanying financial statements.
The Company reports certain income and expense items for income tax
purposes on a different basis than that reflected in the accompanying financial
statements. The primary differences are due to the cash basis of accounting for
income tax purposes. The cumulative amount of these differences as of December
31, 1997 was approximately $410,000. If the sole proprietorship status is
terminated, then a deferred income tax liability of approximately $165,000
related to these cumulative differences would need to be reflected in the
accompanying financial statements.
3. EMPLOYEE BENEFIT PLANS:
On January 1, 1996, the Company established a defined contribution money
purchase plan and a 401(k) profit sharing plan. Both plans cover all full-time
employees subject to minimum age and length of service requirements. Employees
vest in employer contributions pro rata over five years. Employee contributions
vest immediately. Contributions to the defined contribution money purchase plan
are based on the salaries of covered employees. Contributions to the 401(k)
profit sharing plan are discretionary and are determined by the Company on an
annual basis. For the years ended December 31, 1996 and 1997, the Company's
contributions to both plans were $31,894 and $35,551, respectively.
4. COMMITMENTS AND CONTINGENCIES:
Lease Obligations
Future minimum lease payments for noncancellable operating leases primarily
for office space as of December 31, 1997, are as follows:
1998................................................ $6,755
Rent expense on operating leases was $6,755, $13,510 and $13,510 for the
years ended December 31, 1995, 1996 and 1997, respectively.
Insurance Policies
The Company maintains insurance with respect to medical malpractice risks
on an occurrence basis in amounts management believes to be adequate. Management
is not aware of any outstanding claims which would have a material impact on the
Company's financial position or results of operations.
The Pennsylvania Medical Professional Liability Catastrophic Loss Fund (the
"CAT Fund"), an agency fund of the Commonwealth of Pennsylvania, acts as a
service agent to facilitate the payment of medical malpractice claims exceeding
the primary layer of professional liability insurance carried by physicians and
other health care providers practicing in Pennsylvania. The CAT Fund policies
are retrospectively rated on a
F-264
<PAGE>
SUBURBAN PAIN CONTROL
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
4. COMMITMENTS AND CONTINGENCIES: -- (CONTINUED)
claims-made basis. The CAT Fund levies health care provider surcharges, as a
percentage of insurance premiums for basic coverage, to pay claims and
administrative expenses on behalf of CAT Fund participants.
The CAT Fund is significantly underfunded and the Commonwealth has
indicated that the unfunded liability will be funded exclusively through
surcharge assessments in future years as claims are settled and paid. The
practice and the other CAT Fund participants received a surcharge assessment
during fiscal 1996 and 1997. No provision has been made for any future CAT Fund
assessments in the accompanying financial statements as the practice's portion
of the CAT Fund unfunded liability could not be reasonably estimated.
Health Care Regulatory Environment and Reliance on Government Programs
The health care industry in general and the services that the Company
provides are subject to extensive federal and state laws and regulations.
Additionally, a portion of the Company's net revenue is from payments by
government-sponsored health care programs, principally Medicare and Medicaid,
and is subject to audit and adjustments by applicable regulatory agencies.
Failure to comply with any of these laws or regulations, the results of
regulatory audits and adjustments, or changes in the amounts payable for the
Company's services under these programs could have a material adverse effect on
the Company's financial position and results of operations.
F-265
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Vineland Obstetrical and Gynecological, PA:
We have audited the accompanying balance sheets of Vineland Obstetrical and
Gynecological, PA (a New Jersey corporation) as of December 31, 1996 and 1997
and the related statements of operations and retained earnings and cash flows
for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Vineland Obstetrical and
Gynecological, PA as of December 31, 1996 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
February 6, 1998
F-266
<PAGE>
VINELAND OBSTETRICAL AND GYNECOLOGICAL, PA
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
-------------------- -----------
1996 1997 1998
-------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 78,264 $ 31,557 $ 115,075
Accounts receivable, net of allowance of $378,431,
$370,361 and $300,021.................................. 412,754 384,483 256,925
Prepaid expenses and other................................ 7,270 113,444 57,774
-------- --------- ---------
Total current assets................................. 498,288 529,484 429,774
-------- --------- ---------
Property and equipment:
Equipment, furniture and fixtures......................... 278,247 278,247 278,247
Less -- Accumulated depreciation.......................... (166,182) (194,277) (200,026)
-------- --------- ---------
112,065 83,970 78,221
-------- --------- ---------
Other assets................................................ 4,300 4,300 4,300
-------- --------- ---------
$614,653 $ 617,754 $ 512,295
======== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note-payable.............................................. $ 30,000 $ 168,773 $ 114,921
Current maturities of long-term debt...................... 25,422 7,502 7,502
Accounts payable.......................................... 109,129 123,206 72,250
Accrued compensation...................................... 173,677 81,005 145,584
Deferred income taxes..................................... 20,355 10,772 2,382
-------- --------- ---------
Total current liabilities............................ 358,583 391,258 342,639
-------- --------- ---------
Long-term debt.............................................. 4,494 -- --
-------- --------- ---------
Deferred income taxes....................................... 12,567 9,841 9,006
-------- --------- ---------
Deferred compensation....................................... 19,390 -- --
-------- --------- ---------
Commitments and contingencies (Note 7)
Shareholders' equity:
Common Stock, no par value; 1,000 shares authorized, 500
issued and 300 outstanding............................. 59,151 59,151 59,151
Additional paid-in capital................................ 3,832 3,832 3,832
Retained earnings......................................... 191,636 188,672 132,667
Treasury stock at cost, 200 shares........................ (35,000) (35,000) (35,000)
-------- --------- ---------
Total shareholders' equity........................... 219,619 216,655 160,650
-------- --------- ---------
$614,653 $ 617,754 $ 512,295
======== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-267
<PAGE>
VINELAND OBSTETRICAL AND GYNECOLOGICAL, PA
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ -----------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues............................... $3,350,136 $3,437,967 $2,950,615 $ 726,979 $ 664,649
---------- ---------- ---------- ---------- ----------
Operating expenses:
Salaries, wages and benefits............. 2,208,700 2,252,914 1,953,877 500,286 543,217
Pharmaceuticals and medical supplies..... 92,026 106,596 131,049 42,302 13,493
General and administrative............... 953,584 1,025,599 831,095 221,015 173,394
Depreciation............................. 29,179 32,893 28,095 7,757 5,749
---------- ---------- ---------- ---------- ----------
Income (loss) from operations.............. 66,647 19,965 6,499 (44,381) (71,204)
Interest expense, net...................... 9,763 6,655 5,583 1,192 1,846
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes.......... 56,884 13,310 916 (45,573) (73,050)
Income tax provision (benefit)............. 18,257 8,564 3,880 (11,074) (17,045)
---------- ---------- ---------- ---------- ----------
Net income (loss).......................... 38,627 4,746 (2,964) (34,499) (56,005)
Retained earnings, beginning of period..... 148,263 186,890 191,636 191,636 188,672
---------- ---------- ---------- ---------- ----------
Retained earnings, end of period........... $ 186,890 $ 191,636 $ 188,672 $ 157,137 $ 132,667
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-268
<PAGE>
VINELAND OBSTETRICAL AND GYNECOLOGICAL, PA
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------- -------------------
1995 1996 1997 1997 1998
-------- ------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss)................................. $ 38,627 $ 4,746 $ (2,964) $(34,499) $(56,005)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating
activities--
Depreciation.................................. 29,179 32,893 28,095 7,757 5,749
Deferred income taxes......................... 17,854 10,105 (12,309) (11,074) (9,225)
Changes in assets and liabilities--
Accounts receivable...................... (84,935) 18,295 28,271 100,335 127,558
Due from related parties................. (14,105) 16,666 -- -- --
Prepaid expenses and other............... (7,420) 150 (106,174) (165,331) 55,670
Accounts payable......................... (2,099) 36,518 14,077 (7,641) (50,956)
Accrued compensation..................... 78,167 (40,749) (92,672) (17,080) 64,579
Deferred compensation.................... (33,240) (33,240) (19,390) 13,850 --
-------- ------- -------- -------- --------
Net cash provided by (used in)
operating activities................. 22,028 45,384 (163,066) (113,683) 137,370
-------- ------- -------- -------- --------
Investing activities:
Purchases of property and equipment............... (85,873) (4,200) -- -- --
-------- ------- -------- -------- --------
Financing activities:
Proceeds from long-term debt...................... 25,000 10,000 -- -- --
Repayments on long-term debt...................... (35,124) (51,827) (22,414) (14,332) --
Proceeds from note payable........................ -- 30,000 257,418 220,440 --
Repayments on note payable........................ -- -- (118,645) (55,110) (53,852)
-------- ------- -------- -------- --------
Net cash (used in) provided by
financing activities................. (10,124) (11,827) 116,359 150,998 (53,852)
-------- ------- -------- -------- --------
Net (decrease) increase in cash and cash
equivalents....................................... (73,969) 29,357 (46,707) 37,315 83,518
Cash and cash equivalents, beginning of period...... 122,876 48,907 78,264 78,264 31,557
-------- ------- -------- -------- --------
Cash and cash equivalents, end of period............ $ 48,907 $78,264 $ 31,557 $115,579 $115,075
======== ======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-269
<PAGE>
VINELAND OBSTETRICAL AND GYNECOLOGICAL, PA
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
1. ORGANIZATION AND BUSINESS:
Vineland Obstetrical and Gynecological, PA (the "Company") is an obstetrics
and a gynecology medical practice serving the Southern New Jersey area. The
Company was formed in June 1969.
On August 29, 1997, the Company entered into a Stock Acquisition Agreement,
as amended through April 21, 1998 (the "Affiliation Agreement"), with U.S.
PHYSICIANS, Inc. ("USP"). Under the terms of the Affiliation Agreement, USP and
its affiliated professional corporation will acquire the stock of the Company in
exchange for cash, notes payable and USP Common Stock, subject to adjustment as
defined. The closing, as defined in the Affiliation Agreement, will occur upon
completion of an initial public offering by USP. If the closing has not occurred
prior to June 15, 1998, the Affiliation Agreement may be terminated by either
the Company or USP by written notice to the other party.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Statements
The financial statements for the three months ended March 31, 1997 and 1998
are unaudited, and in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the financial position as of March 31, 1998 and the results of
its operations for the three months ended March 31, 1997 and 1998. The results
of operations for the three-month period are not necessarily indicative of the
results to be expected for the entire year.
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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
Financial instruments consist of cash and cash equivalents, accounts
receivable, certain current liabilities and debt obligations. The carrying
amounts reported in the balance sheets for these items approximate fair value.
Net Revenues
Revenues from patients, third-party payors and others are recorded at
established rates, net of provision for bad debts and contractual adjustments,
in the period that services are rendered. Contractual adjustments represent the
difference between charges at established rates and the estimated amount to be
reimbursed.
The Company also receives fees from a local hospital for providing clinic
services. Clinic fees included in net revenues for the years ended December 31,
1995, 1996 and 1997, were $857,663, $849,086 and $593,040, respectively.
Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments
purchased with an original maturity of three months or less.
F-270
<PAGE>
VINELAND OBSTETRICAL AND GYNECOLOGICAL, PA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
Accounts Receivable
Accounts receivable primarily consist of receivables from patients,
third-party payors and others. Such amounts are recorded net of contractual
allowances and estimated bad debts.
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.
Property and Equipment
Equipment, furniture and fixtures are stated at cost. Expenditures for
maintenance and repairs are charged to expense as incurred. Depreciation is
provided over the estimated useful life of each class of depreciable asset
ranging from five to seven years and is computed using the straight-line method.
Income Taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109").
SFAS No. 109 requires the liability method of accounting for deferred income
taxes. Deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities. Deferred tax assets or liabilities at the end of each period are
determined using the tax rate expected to be in effect when taxes are actually
paid or recovered.
Statements of Cash Flows Information
For the years ended December 31, 1995, 1996 and 1997, the Company paid
interest of $10,139, $7,989 and $5,827, respectively. Amounts paid for taxes
were not significant.
Reclassifications
Certain reclassifications have been made to prior year financial statements
to conform with the current year presentation.
3. NOTES PAYABLE:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
-------- --------
<S> <C> <C>
Note payable to a bank, interest at 9.25%, payable on demand
and due in full in February 1998.......................... $ -- $ 75,000
Note payable to a bank, interest at 5.99%, payable in
monthly installments of $15,700 through June 1998......... -- 93,773
Note payable to a bank, interest at 9.25%, payable on demand
and due in full in August 1997............................ 30,000 --
-------- --------
$ 30,000 $168,773
======== ========
</TABLE>
F-271
<PAGE>
VINELAND OBSTETRICAL AND GYNECOLOGICAL, PA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
4. LONG-TERM DEBT:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
-------- --------
<S> <C> <C>
Note payable to a bank, interest at 9.0%, monthly payments
of $1,880 through November 1997........................... $ 19,878 $ --
Installment notes to employees, interest at 9.0%, no stated
repayment terms........................................... 10,038 7,502
-------- --------
29,916 7,502
Less -- Current maturities.................................. (25,422) (7,502)
-------- --------
$ 4,494 $ --
======== ========
</TABLE>
5. EMPLOYEE BENEFIT PLAN:
The Company provides a pension and a profit sharing plan covering all
full-time employees subject to minimum age and length of service requirements.
Pension plan expense is determined based on the salaries of the covered
employees, and is integrated with social security. Profit sharing plan expense
is determined annually by decision of the Board of Directors. Effective January
1, 1996, the corporation has frozen the pension plan. The corporation has
adopted a 401(k) profit sharing plan with a 10% matching contribution by the
employer. For the years ended December 31, 1995, 1996 and 1997, contributions to
the plans were $184,695, $60,572 and $44,699, respectively.
6. INCOME TAXES:
The components of the income tax provision are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Current:
Federal.................................... $ 242 $ (925) $ 9,713
State...................................... 161 (616) 6,476
------- ------- -------
403 (1,541) 16,189
------- ------- -------
Deferred:
Federal.................................... 10,712 6,063 (7,385)
State...................................... 7,142 4,042 (4,924)
------- ------- -------
17,854 10,105 (12,309)
------- ------- -------
$18,257 $ 8,564 $ 3,880
======= ======= =======
</TABLE>
Income tax expense differs from the amount currently payable or receivable
because certain expenses, primarily depreciation and accruals, are reported in
different periods for financial reporting and income tax purposes. The Company
is on a cash basis of accounting for income tax purposes.
F-272
<PAGE>
VINELAND OBSTETRICAL AND GYNECOLOGICAL, PA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
6. INCOME TAXES: -- (CONTINUED)
The provision for income taxes differs from the amount computed by applying
the U.S. Federal income tax rate (34%) because of the effect of the following
items:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1995 1996 1997
-------- -------- -------
<S> <C> <C> <C>
Tax at U.S. Federal statutory rate......... $ 19,341 $ 4,525 $ 311
Tax impact of Federal rate differential for
graduated rates.......................... (10,869) (2,298) (174)
State income taxes, net of federal
benefit.................................. 5,648 1,485 92
Non-deductible travel and entertainment.... 4,137 4,852 3,651
-------- -------- -------
$ 18,257 $ 8,564 $ 3,880
======== ======== =======
</TABLE>
The components of the net deferred tax liability, measured under SFAS No.
109, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
------- -------
<S> <C> <C>
Deferred liabilities:
Property and equipment............................... $12,567 $ 9,841
Cash to accrual adjustments.......................... 20,355 10,772
------- -------
Net deferred tax liability............................. $32,922 $20,613
======= =======
</TABLE>
7. COMMITMENTS AND CONTINGENCIES:
Lease Obligations
The corporation has entered into an informal lease agreement with APGO
Associates. The partners of APGO Associates are also shareholders of the
corporation. As the lease with APGO Associates is informal, there are no future
minimum lease payments included in the table below. Future minimum lease
payments for noncancellable operating leases, excluding related party leases,
primarily for office space as of December 31, 1997, are as follows:
<TABLE>
<CAPTION>
NONRELATED-PARTY
LEASES
----------------
<S> <C>
1998....................................... $45,574
1999....................................... 21,540
</TABLE>
Rent expense on related-party operating leases was $82,800, $85,800 and
$90,000 for the years ended December 31, 1995, 1996 and 1997, respectively. Rent
expense on nonrelated-party operating leases was $28,800, $29,400 and $41,880
for the years ended December 31, 1995, 1996 and 1997, respectively.
F-273
<PAGE>
VINELAND OBSTETRICAL AND GYNECOLOGICAL, PA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
7. COMMITMENTS AND CONTINGENCIES: -- (CONTINUED)
Deferred Compensation
Pursuant to a deferred compensation agreement, the Company must pay a
former physician for services already rendered.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
-------- --------
<S> <C> <C>
Deferred compensation agreement, monthly payments of
$2,770 through July 1, 1998........................ $ 52,630 $ 19,390
Less -- Current portion (included in accrued
compensation)...................................... (33,240) (19,390)
-------- --------
$ 19,390 $ --
======== ========
</TABLE>
Insurance Policies
The Company maintains insurance with respect to medical malpractice risks
on an occurrence basis in amounts management believes to be adequate. Management
is not aware of any outstanding claims, which would have a material impact on
the Company's financial position or results of operations.
Health Care Regulatory Environment and Reliance on Government Programs
The health care industry in general and the services that the Company
provides are subject to extensive federal and state laws and regulations.
Additionally, a portion of the Company's net revenue is from payments by
government-sponsored health care programs, principally Medicare and Medicaid,
and is subject to audit and adjustments by applicable regulatory agencies.
Failure to comply with any of these laws or regulations, the results of
regulatory audits and adjustments, or changes in the amounts payable for the
Company's services under these programs could have a material adverse effect on
the Company's financial position and results of operations.
F-274
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Women's Physicians and Surgeons, PA:
We have audited the accompanying balance sheets of Women's Physicians and
Surgeons, PA (a New Jersey corporation) as of December 31, 1996 and 1997 and the
related statements of operations and retained earnings 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 Women's Physicians and
Surgeons, PA as of December 31, 1996 and 1997, and the results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
February 27, 1998
F-275
<PAGE>
WOMEN'S PHYSICIANS AND SURGEONS, PA
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- MARCH 31,
1996 1997 1998
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 75,604 $ 27,855 $ 56,027
Accounts receivable, net of allowance of $562,409,
$722,255
and $574,094........................................... 407,808 392,243 358,880
Prepaid expenses and other................................ -- 5,027 133,515
-------- -------- --------
Total current assets................................. 483,412 425,125 548,422
-------- -------- --------
Property and equipment:
Equipment, furniture and fixtures......................... 523,345 547,593 547,592
Less -- Accumulated depreciation.......................... (391,083) (429,229) (436,994)
-------- -------- --------
132,262 118,364 110,598
-------- -------- --------
$615,674 $543,489 $659,020
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft............................................ $129,454 $ -- $ --
Current portion of capital lease obligation............... -- 6,420 6,420
Accounts payable.......................................... 78,399 56,183 215,785
Accrued compensation...................................... 138,168 148,781 138,303
Due to affiliates......................................... 23,960 44,300 30,559
Deferred income taxes..................................... 6,537 29,661 32,966
-------- -------- --------
Total current liabilities............................ 376,518 285,345 424,033
-------- -------- --------
Capital lease obligation.................................... -- 8,501 6,896
-------- -------- --------
Deferred income taxes....................................... 14,976 13,800 12,200
-------- -------- --------
Deferred compensation....................................... 164,386 88,760 63,849
-------- -------- --------
Commitments and contingencies (Note 5)
Shareholders' equity:
Common Stock, no par value; 2,500 shares authorized, 100
issued and 50 outstanding.............................. 7,802 7,802 7,802
Retained earnings......................................... 81,992 169,281 174,240
Treasury stock at cost, 50 shares......................... (30,000) (30,000) (30,000)
-------- -------- --------
Total shareholders' equity........................... 59,794 147,083 152,042
-------- -------- --------
$615,674 $543,489 $659,020
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-276
<PAGE>
WOMEN'S PHYSICIANS AND SURGEONS, PA
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
----------------------- -------------------
1996 1997 1997 1998
---------- ---------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net revenues.............................................. $3,333,316 $3,067,078 $766,899 $761,498
---------- ---------- -------- --------
Operating expenses:
Salaries, wages and benefits............................ 2,269,339 1,986,390 514,641 508,653
Pharmaceuticals and medical supplies.................... 101,229 133,792 29,455 30,823
General and administrative.............................. 816,494 784,959 193,400 202,620
Depreciation............................................ 33,868 38,146 16,726 7,766
---------- ---------- -------- --------
Income from operations.................................... 112,386 123,791 12,677 11,636
Interest expense, net..................................... 22,631 6,756 4,492 4,674
---------- ---------- -------- --------
Income before income taxes................................ 89,755 117,035 8,185 6,962
Income tax provision...................................... 22,742 29,746 2,349 2,003
---------- ---------- -------- --------
Net income................................................ 67,013 87,289 5,836 4,959
Retained earnings, beginning of period.................... 14,979 81,992 81,992 169,281
---------- ---------- -------- --------
Retained earnings, end of period.......................... $ 81,992 $ 169,281 $ 87,828 $174,240
========== ========== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-277
<PAGE>
WOMEN'S PHYSICIANS AND SURGEONS, PA
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
------------------- ------------------
1996 1997 1997 1998
-------- -------- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
Operating activities:
Net income................................................ $ 67,013 $ 87,289 $ 5,536 $ 4,959
Adjustments to reconcile net income to net cash
provided by operating activities--
Depreciation.......................................... 33,868 38,146 16,726 7,766
Deferred income taxes................................. 22,494 21,948 1,783 1,705
Changes in assets and liabilities--
Accounts receivable.............................. (96,407) 15,565 17,745 33,363
Due to affiliates................................ 8,960 20,340 34,012 (13,741)
Prepaid expenses and other....................... 20,661 (5,027) 28,578 5,027
Accounts payable................................. 33,298 (22,216) 16,053 26,087
Accrued compensation............................. 38,695 10,613 46,059 (10,478)
Deferred compensation............................ (74,792) (75,626) (19,600) (24,911)
-------- -------- -------- -------
Net cash provided by operating activities...... 53,790 91,032 146,892 29,777
-------- -------- -------- -------
Investing activities:
Purchases of property and equipment....................... (45,878) (9,327) (2,500) --
-------- -------- -------- -------
Financing activities:
Repayments on bank overdraft.............................. (74,911) (129,454) (129,454) --
Repayment on capital lease obligation..................... -- -- -- (1,605)
-------- -------- -------- -------
Net cash used in financing activities.......... (74,911) (129,454) (129,454) (1,605)
-------- -------- -------- -------
Net decrease in cash and cash equivalents................... (66,999) (47,749) 14,938 28,172
Cash and cash equivalents, beginning of period.............. 142,603 75,604 75,604 27,855
-------- -------- -------- -------
Cash and cash equivalents, end of period.................... $ 75,604 $ 27,855 $ 90,542 $56,027
======== ======== ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-278
<PAGE>
WOMEN'S PHYSICIANS AND SURGEONS, PA
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
1. ORGANIZATION AND BUSINESS:
Women's Physicians and Surgeons, PA (the "Company") is an obstetrics and a
gynecology medical practice serving the Southern New Jersey area. The Company
was formed in May 1975.
On March 4, 1998, the Company entered into a Stock Acquisition Agreement,
as amended through April 23, 1998, (the "Affiliation Agreement") with U.S.
PHYSICIANS, Inc. ("USP"). Under the terms of the Affiliation Agreement, USP and
its affiliated professional corporation will acquire the stock of the Company in
exchange for cash, notes payable and USP Common Stock, subject to adjustment as
defined. The closing, as defined in the Affiliation Agreement, will occur upon
completion of an initial public offering by USP. If the closing has not occurred
prior to July 31, 1998 (the "Termination Date"), the Affiliation Agreement may
be terminated by either the Company or USP by written notice to the other party.
The Termination Date can be extended to December 31, 1998, if USP makes a
payment, as defined.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Statements
The financial statements for the three months ended March 31, 1997 and 1998
are unaudited, and in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the financial position as of March 31, 1998 and the results of
its operations for the three months ended March 31, 1997 and 1998. The results
of operations for the three-month period are not necessarily indicative of the
results to be expected for the entire year.
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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
Financial instruments consist of cash and cash equivalents, accounts
receivable, certain current liabilities and debt obligations. The carrying
amounts reported in the balance sheets for these items approximate fair value.
Net Revenues
Revenues from patients, third-party payors and others are recorded at
established rates, net of provision for bad debts and contractual adjustments,
in the period that services are rendered. Contractual adjustments represent the
difference between charges at established rates and the estimated amount to be
reimbursed.
F-279
<PAGE>
WOMEN'S PHYSICIANS AND SURGEONS, PA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments
purchased with an original maturity of three months or less.
Accounts Receivable
Accounts receivable primarily consist of receivables from patients,
third-party payors and others. Such amounts are recorded net of contractual
allowances and estimated bad debts.
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.
Property and Equipment
Equipment, furniture and fixtures are stated at cost. Expenditures for
maintenance and repairs are charged to expense as incurred. Depreciation is
provided over the estimated useful life of each class of depreciable asset
ranging from five to seven years and is computed using the straight-line method.
Due to Affiliates
Due to affiliates consists of various notes payable with repayment terms
through December 1998 bearing interest at rates ranging from 7.75% to 9.0%.
Income Taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109").
SFAS No. 109 requires the liability method of accounting for deferred income
taxes. Deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities. Deferred tax assets or liabilities at the end of each period are
determined using the tax rate expected to be in effect when taxes are actually
paid or recovered.
Statements of Cash Flows Information
For the years ended December 31, 1996 and 1997, the Company paid interest
of $18,497 and $20,638, respectively. Amounts paid for taxes were not
significant.
3. EMPLOYEE BENEFIT PLAN:
The Company provides a 401(k) profit sharing plan with a discretionary
matching contribution that covers all full-time employees subject to minimum age
and length of service requirements. Employees contributions vest immediately.
Contributions to the plan are discretionary and are determined by the owning
physicians on an annual basis. For the years ended December 31, 1996 and 1997,
contributions to the plan were $115,224 and $31,091, respectively.
F-280
<PAGE>
WOMEN'S PHYSICIANS AND SURGEONS, PA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
4. INCOME TAXES:
The components of the income tax provision are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------
1996 1997
------- -------
<S> <C> <C>
Current:
Federal.............................................. $ 149 $ 4,679
State................................................ 99 3,119
------- -------
248 7,798
------- -------
Deferred:
Federal.............................................. 13,496 13,169
State................................................ 8,998 8,779
------- -------
22,494 21,948
------- -------
$22,742 $29,746
======= =======
</TABLE>
Income tax expense differs from the amount currently payable or receivable
because certain expenses, primarily depreciation and accruals, are reported in
different periods for financial reporting and income tax purposes. The Company
is on a cash basis of accounting for income tax purposes.
The provision for income taxes differs from the amount computed by applying
the U.S. Federal income tax rate (34%) because of the effect of the following
items:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------
1996 1997
------- -------
<S> <C> <C>
Tax at U.S. Federal statutory rate..................... $30,432 $39,792
Tax impact of Federal rate differential for graduated
rates................................................ (17,006) (22,237)
State income taxes, net of federal benefit............. 8,951 11,704
Non-deductible travel and entertainment................ 365 487
------- -------
$22,742 $29,746
======= =======
</TABLE>
The components of the net deferred tax liability, measured under SFAS No.
109, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
------- -------
<S> <C> <C>
Deferred liabilities:
Property and equipment............................... $14,976 $13,800
Cash to accrual adjustments.......................... 6,537 29,661
------- -------
Net deferred tax liability............................. $21,513 $43,461
======= =======
</TABLE>
5. COMMITMENTS AND CONTINGENCIES:
Lease Obligations
The corporation has entered into two lease agreements with a related-party
for office space. The corporation has also entered into other nonrelated-party
operating and capital lease agreements. Future minimum lease payments for
noncancellable operating leases, primarily for office space as of December 31,
1997, are as follows:
F-281
<PAGE>
WOMEN'S PHYSICIANS AND SURGEONS, PA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
5. COMMITMENTS AND CONTINGENCIES: -- (CONTINUED)
<TABLE>
<CAPTION>
NONRELATED-PARTY NONRELATED-PARTY RELATED-PARTY
CAPITAL LEASES OPERATING LEASES LEASES
---------------- ---------------- -------------
<S> <C> <C> <C>
1998......................... $ 6,420 $24,762 $114,000
1999......................... 5,886 24,762 114,000
2000......................... 2,615 16,652 114,000
2001......................... -- 2,803 28,500
2002......................... -- 505 --
-------
Present value of future
minimum lease payments..... 14,921
Less -- Current maturities... (6,420)
-------
$ 8,501
=======
</TABLE>
Rent expense on related-party operating leases was $114,000 and $114,000
for the years ended December 31, 1996 and 1997, respectively. Rent expense on
nonrelated-party operating leases was $14,300 and $15,100 for the years ended
December 31, 1996 and 1997, respectively. The cost of assets capitalized under
capital lease obligations was $19,248 as of December 31, 1997 and accumulated
depreciation was $1,925.
Deferred Compensation
Pursuant to several deferred compensation agreements, the Company must pay
former physicians for services already rendered.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1997
-------- -------
<S> <C> <C>
Deferred compensation agreement, monthly payments of
$5,250 through August 1, 1999....................... $152,341 $98,624
Deferred compensation agreement, monthly payments of
$1,286 through April 1, 1999........................ -- 19,395
Deferred compensation agreement, monthly payments of
$2,304 through August 1, 2000....................... 86,837 65,761
-------- -------
239,178 183,780
Less -- Current portion (included in accrued
compensation)....................................... (74,792) (95,020)
-------- -------
$164,386 $88,760
======== =======
</TABLE>
Insurance Policies
The Company maintains insurance with respect to medical malpractice risks
on an occurrence basis in amounts management believes to be adequate. Management
is not aware of any outstanding claims, which would have a material impact on
the Company's financial position or results of operations.
Health Care Regulatory Environment and Reliance on Government Programs
The health care industry in general and the services that the Company
provides are subject to extensive federal and state laws and regulations.
Additionally, a portion of the Company's net revenue is from payments by
government-sponsored health care programs, principally Medicare and Medicaid,
and is subject to audit and adjustments by applicable regulatory agencies.
Failure to comply with any of these laws or regulations, the results of
regulatory audits and adjustments, or changes in the amounts payable for the
Company's services under these programs could have a material adverse effect on
the Company's financial position and results of operations.
F-282
<PAGE>
================================================================================
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus and, if given or made, such information or representations must not
be relied upon as having been authorized by the Company or any of the
Underwriters. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the securities to
which it relates or an offer to sell or the solicitation of an offer to buy such
securities in any circumstances in which such offer or solicitation is unlawful.
Neither the delivery of this Prospectus nor any sale made hereunder shall, under
any circumstances, create any implication that there has been no change in the
affairs of the Company since the date hereof or that the information contained
herein is correct as of any time subsequent to its date.
----------------------------------------
TABLE OF CONTENTS
----------------------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary................... 3
Risk Factors......................... 7
Use of Proceeds...................... 15
Dividend Policy...................... 15
Capitalization....................... 16
Dilution............................. 17
Selected Financial Data.............. 18
Unaudited Pro Forma Consolidated
Financial Statements............... 20
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 32
Business............................. 37
Management........................... 54
Certain Transactions................. 61
Principal Shareholders............... 65
Description of Capital Stock......... 67
Shares Eligible for Future Sale...... 69
Underwriting......................... 70
Legal Matters........................ 71
Experts.............................. 71
Additional Information............... 72
Index to Financial Statements........ F-1
</TABLE>
Until ___________ __, 1998 (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 obligation of dealers to deliver a Prospectus when acting as
Underwriters and with respect to their unsold allotments or subscriptions.
================================================================================
================================================================================
3,500,000 SHARES
[U.S. PHYSICIANS LOGO]
COMMON STOCK
------------------------
PROSPECTUS
------------------------
NationsBanc Montgomery
Securities LLC
Piper Jaffray Inc.
, 1998
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. Other Expenses of Issuance and Distribution.
The following table sets forth expenses in connection with the issuance and
distribution of the securities being registered, all of which are being borne by
the Registrant.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $17,810.63
National Association of Securities Dealers, Inc. fee........ 5,500
Nasdaq Stock Market Inc./National Market listing fee........
Printing and engraving expenses.............................
Accountants' fees and expenses..............................
Legal fees and expenses.....................................
Blue Sky qualification fees and expenses....................
Transfer agent's fees and expenses..........................
Directors' and officers' insurance..........................
Miscellaneous...............................................
----------
TOTAL..................................................
==========
</TABLE>
The foregoing, except for the Securities and Exchange Commission
registration fee, the National Association of Securities Dealers, Inc. fee and
the Nasdaq Stock Market Inc. fee, are estimates.
ITEM 14. Indemnification of Directors and Officers.
Subchapter D (Sections 1741 through 1750) of Chapter 17 of the Pennsylvania
Business Corporation Law of 1988, as amended (the "BCL"), contains provisions
for mandatory and discretionary indemnification of a corporation's directors,
officers, employees and agents (collectively, "Representatives"), and related
matters.
Under Section 1741, subject to certain limitations, a corporation has the
power to indemnify directors, officers and other Representatives under certain
prescribed circumstances against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
in connection with a threatened, pending or completed action or proceeding,
whether civil, criminal, administrative or investigative, to which any of them
is a party or threatened to be made a party by reason of his being a
Representative of the corporation or serving at the request of the corporation
as a Representative of another corporation, partnership, joint venture, trust or
other enterprise, if he acted in good faith and in a manner he reasonably
believed to be in, or not opposed to, the best interests of the corporation and,
with respect to any criminal proceeding, had no reasonable cause to believe his
conduct was unlawful.
Section 1742 provides for indemnification with respect to derivative
actions similar to that provided by Section 1741. However, indemnification is
not provided under Section 1742 in respect of any claim, issue or matter as to
which a Representative has been adjudged to be liable to the corporation unless
and only to the extent that the proper court determines upon application that,
despite the adjudication of liability but in view of all the circumstances of
the case, a Representative is fairly and reasonably entitled to indemnity for
the expenses that the court deems proper.
Section 1743 provides that indemnification against expenses is mandatory to
the extent that a Representative has been successful on the merits or otherwise
in defense of any such action or proceeding referred to in Section 1741 or 1742.
Section 1744 provides that unless ordered by a court, any indemnification
under Section 1741 or 1742 shall be made by the corporation only as authorized
in the specific case upon a determination that indemnification of a
Representative is proper because the Representative met the applicable standard
of conduct, and such determination will be made by the board of directors by a
majority vote of a quorum of directors not parties to the action or proceeding;
if a quorum is not obtainable or if obtainable and a majority of disinterested
directors so directs, by independent legal counsel; or by the shareholders.
Section 1745 provides that expenses incurred by a Representative in
defending any action or proceeding referred to in Subchapter D of Chapter 17 of
the BCL may be paid by the corporation in advance of the final
II-1
<PAGE>
disposition of such action or proceeding upon receipt of an undertaking by or on
behalf of the Representative to repay such amount if it shall ultimately be
determined that he is not entitled to be indemnified by the corporation.
Section 1746 provides generally that except in any case where the act or
failure to act giving rise to the claim for indemnification is determined by a
court to have constituted willful misconduct or recklessness, the
indemnification and advancement of expenses provided by Subchapter D of Chapter
17 of the BCL shall not be deemed exclusive of any other rights to which a
Representative seeking indemnification or advancement of expenses may be
entitled under any bylaw, agreement, vote of shareholders or disinterested
directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding that office.
Section 1747 grants a corporation the power to purchase and maintain
insurance on behalf of any Representative against any liability incurred by him
in his capacity as a Representative, whether or not the corporation would have
the power to indemnify him against that liability under Subchapter D of Chapter
17 of the BCL.
Sections 1748 and 1749 apply the indemnification and advancement of
expenses provisions contained in Subchapter D of Chapter 17 of the BCL to
successor corporations resulting from consolidation, merger or division and to
service as a representative of a corporation or an employee benefit plan.
Section 1750 provides that the indemnification and advancement of expenses
provided by, or granted pursuant to, Subchapter D of Chapter 17 of the BCL
shall, unless otherwise provided when authorized or ratified, continue as to a
person who has ceased to be a Representative and shall inure to the benefit of
the heirs and personal representatives of such Representative.
Article Ninth of the Registrant's Second Amended and Restated Articles of
Incorporation, filed as Exhibit 3.1 hereto, provides indemnification to
directors and officers of the Registrant against all expenses, liability and
loss incurred as a result of such person's being a party to, or threatened to be
made a party to, any action, suit or proceeding by reason of the fact that he or
she is or was a director or officer of the Registrant or is or was serving at
the request of the Registrant as a director, officer, employee or agent of
another enterprise, to the fullest extent authorized by the BCL.
Article VII of the Registrant's By-laws, filed as Exhibit 3.2 hereto,
generally permits indemnification of directors and officers to the fullest
extent authorized by the BCL. Article VII further permits the Registrant to
maintain insurance, at its expense, to protect itself and any such director or
officer of the Registrant or another enterprise against any such expenses,
liability or loss.
The Registrant intends to purchase directors' and officers' liability
insurance.
See Section 8 of the Underwriting Agreement, filed as Exhibit 1 hereto,
pursuant to which the Underwriters agree to indemnify the Registrant, its
directors, officers and controlling persons against certain liabilities,
including liabilities under the Securities Act of 1933, as amended.
ITEM 15. Recent Sales of Unregistered Securities.
On July 14, 1994, in connection with the Registrant's incorporation, the
Registrant issued 1,020,000 shares of Common Stock to Thomas J. Keane, Chief
Executive Officer and President of the Registrant, for services rendered.
On September 30, 1994, for services rendered, the Registrant issued 45,000
shares of Common Stock to Noreen E. Burke, an employee of the Registrant, 30,000
shares of Common Stock to Daniel Promislo, a consultant to the Registrant, and
45,000 shares of Common Stock to James L. Weese, a consultant to the Registrant.
On February 1, 1995, in connection with the Registrant's initial
capitalization, the Registrant sold 2,568,492 shares of Series A Preferred Stock
to Edison Venture Fund III, L.P. ("Edison"), 1,541,097 shares of Series A
Preferred Stock to NEPA Venture Fund II, L.P. ("NEPA") and 410,958 shares of
Series A Preferred Stock to Major Oil, Inc. (which shares were subsequently
transferred to Killion Liquidating Trust) for an aggregate purchase price of
$2,200,000. On February 1, 1995, the Registrant also issued 1,774,518 shares of
Common Stock to Thomas J. Keane, 52,194 shares of Common Stock to Daniel
Promislo and 78,288 shares of Common Stock to Noreen E. Burke valued at a price
of $0.01 per share. Also on February 1, 1995, the Registrant issued 78,288
shares of Common Stock to James L. Weese valued at a price of $0.01 per share
and
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<PAGE>
entered into a Subscription Agreement with Mr. Weese, whereby the Registrant
sold 30,000 shares of Common Stock to Mr. Weese for an aggregate price of
$10,000.
On November 21, 1995, the Registrant issued 205,479 shares of Common Stock
to Daniel Promislo in consideration of services rendered to the Registrant.
On February 23, 1996, the Registrant sold 205,479 shares of Common Stock to
William P. Ferretti, a director of the Registrant, for an aggregate price of
$100,000.
On July 30, 1996, the Registrant sold 408,163 shares of Common Stock to
Edward R. Miersch, an officer of the Registrant, for an aggregate price of
$200,000.
On July 30, 1996, the Registrant issued 25,000 shares of Common Stock to
Daniel Promislo in consideration of services rendered to the Company.
On September 13, 1996, the Registrant sold 75,000 shares of Common Stock to
James M. McCrossin, an employee of the Registrant, for an aggregate price of
$75,000.
On December 31, 1996, the Registrant sold 396,825 shares of Series B
Preferred Stock and issued a Warrant to purchase 79,365 shares of Common Stock
to Keystone Venture IV, L.P. ("Keystone") for an aggregate price of $1,250,000;
128,968 shares of Series B Preferred Stock and issued a Warrant to purchase
25,794 shares of Common Stock to Edison for an aggregate price of $406,250; and
109,127 shares of Series B Preferred Stock and issued a Warrant to purchase
21,825 shares of Common Stock to NEPA for an aggregate price of $343,750.
On February 20, 1997, the Registrant sold 317,460 shares of Series B
Preferred Stock and issued a Warrant to purchase 63,492 shares of Common Stock
to Dominion Fund IV ("Dominion") for an aggregate price of $1,000,000; sold
71,429 shares of Series B Preferred Stock and issued a Warrant to purchase
14,286 shares of Common Stock to E.J.K. Real Estate Services Limited for an
aggregate price of $225,000; sold 63,492 shares of Series B Preferred Stock and
issued a Warrant to purchase 12,698 shares of Common Stock to Glenville Capital
Partners, L.P. for an aggregate price of $200,000; sold 31,746 shares of Series
B Preferred Stock and issued a Warrant to purchase 6,349 shares of Common Stock
to each of Thomas J. Keane, Douglas P. Heller, Charles Schwab & Co., Inc. FBO
William J. Barry IRA and Pasquale W. Croce, Jr. for an aggregate price of
$100,000, respectively; and sold 15,873 shares of Series B Preferred Stock and
issued a Warrant to purchase 3,175 shares of Common Stock to each of Robert W.
Muir, Jr. and Joseph J. Croce for an aggregate price of $50,000, respectively.
On April 7, 1997, the Registrant issued a Senior Subordinated Note in the
principal amount of $2,000,000 and issued a Warrant to purchase 266,667 shares
of Series B Preferred Stock to Dominion.
On June 13, 1997, the Registrant sold 7,937 shares of Common Stock to Lewis
S. Sharps, M.D. and 9,523 shares of Common Stock to an entity of which Dr.
Sharps is a beneficial owner for an aggregate purchase price of $55,000.
On September 8, 1997, the Registrant issued a Subordinated Note in the
principal amount of $1,500,000 and a Warrant to purchase 166,667 shares of
Series B Preferred Stock to Dominion, issued a Subordinated Note in the
principal amount of $150,000 and Warrants to purchase 16,667 shares of Series B
Preferred Stock to Keystone; issued a Subordinated Note in the principal amount
of $125,000 and Warrants to purchase 13,889 shares of Series B Preferred Stock
to each of Edison and NEPA; and issued a Subordinated Note in the principal
amount of $100,000 and Warrants to purchase 11,111 shares of Series B Preferred
Stock to Thomas J. Keane.
On October 29, 1997, the Registrant issued 15,000 shares of Common Stock to
Donaldson, Lufkin and Jenrette Securities Corporation FBO Lucia S. Rosenberg IRA
for a purchase price of $7,350 pursuant to the exercise of a stock option.
On November 25, 1997, the Registrant issued to Canpartners Investments IV,
LLC a note in the principal amount of $850,000 and Warrants to purchase 43,573
shares of Common Stock.
On January 8, 1998, the Registrant issued to Dominion a note in the
principal amount of $800,000, and on January 20, 1997, the Registrant issued to
Dominion Warrants to purchase 38,555 shares of Common Stock in connection with
the repayment of such note.
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<PAGE>
On January 16, 1998, the Registrant sold shares of Series C Preferred Stock
and Common Stock Warrants to Capital Ventures International ("CVI"), Lancaster
Investment Partners, L.P. ("Lancaster"), LIP Advisors, LLC ("LIP"), Dominion,
Keystone, Edison, NEPA and Mr. Keane, as follows: to CVI, 722,892 shares of
Series C Preferred Stock and Warrants to purchase 200,000 shares of Common Stock
for an aggregate purchase price of $3,000,000; to Lancaster, 361,446 shares of
Series C Preferred Stock and Warrants to purchase 100,000 shares of Common Stock
for an aggregate purchase price of $1,500,000; to LIP, 102,410 shares of Series
C Preferred Stock and Warrants to purchase 28,333 shares of Common Stock for an
aggregate purchase price of $425,000; to Dominion, 72,289 shares of Series C
Preferred Stock and Warrants to purchase 20,000 shares of Common Stock for an
aggregate purchase price of $300,000; to Keystone, 60,241 shares of Series C
Preferred Stock and Warrants to purchase 16,667 shares of Common Stock for an
aggregate purchase price of $250,000; to Edison, 54,217 shares of Series C
Preferred Stock and Warrants to purchase 15,000 shares of Common Stock for an
aggregate purchase price of $225,000; to NEPA, 48,193 shares of Series C
Preferred Stock and Warrants to purchase 13,333 shares of Common Stock for an
aggregate purchase price of $200,000; and to Mr. Keane, 24,096 shares of Series
C Preferred Stock and Warrants to purchase 6,667 shares of Common Stock for an
aggregate purchase price of $100,000.
On February 2, 1998, the Registrant issued 3,333 shares of Common Stock to
Carlyn Barry-Todorow for a purchase price of $3,333 in connection with the
exercise of a stock option.
Information concerning the sale or issuance of the Registrant's securities
in connection with Affiliation Transactions is set forth below:
On January 13, 1997, the Registrant issued to RJK Medical Associates, Ltd.
Affiliation Notes in the aggregate principal amount of $274,995 and Convertible
Affiliation Notes in the aggregate principal amount of $444,000 and the right to
receive an aggregate of 36,666 shares of Common Stock in connection with the
acquisition of certain assets of such entity.
On January 27, 1997, the Registrant issued to certain physicians and
individuals Affiliation Notes in the aggregate principal amount of $250,000 and
Convertible Affiliation Notes in the aggregate principal amount of $275,000 in
connection with the acquisition of the stock of Network Medical, Inc.
On January 28, 1997, the Registrant issued to Bone and Joint Specialists of
Western Pennsylvania, P.C. Affiliation Notes in the aggregate principal amount
of $750,000 and Convertible Affiliation Notes in the aggregate principal amount
of $1,543,000 and the right to receive an aggregate of 100,000 shares of Common
Stock in connection with the acquisition of certain assets of such entity.
On February 19, 1997, the Registrant issued to certain physicians
Affiliation Notes in the aggregate principal amount of $1,049,990 and
Convertible Affiliation Notes in the aggregate principal amount of $1,266,750
and the right to receive an aggregate of 104,375 shares of Common Stock in
connection with the acquisition of the stock of Bryn Mawr Urology Associates,
Inc.
On February 19, 1997, the Registrant issued to certain physicians
Affiliation Notes in the aggregate principal amount of $412,500 and Convertible
Affiliation Notes in the aggregate principal amount of $693,000 and the right to
receive an aggregate of 39,286 shares of Common Stock in connection with the
acquisition of the stock of Neurological Regional Associates, PA. The Company
subsequently repurchased all such securities in connection with the termination
of such acquisition.
On February 26, 1997, the Registrant issued to a physician Affiliation
Notes in the aggregate principal amount of $146,700 and Convertible Affiliation
Notes in the aggregate principal amount of $165,000 and the right to receive an
aggregate of 13,333 shares of Common Stock in connection with the acquisition of
the stock of Vermeire Orthopaedic Surgeons, Inc.
On March 6, 1997, the Registrant issued to Center for Women's Health Care,
P.C. Affiliation Notes in the aggregate principal amount of $326,665 and
Convertible Affiliation Notes in the aggregate principal amount of $482,665 and
the right to receive an aggregate of 33,334 shares of Common Stock in connection
with the acquisition of certain assets of such entity.
On March 10, 1997, the Registrant issued to certain physicians Affiliation
Notes in the aggregate principal amount of $667,750 and Convertible Affiliation
Notes in the aggregate principal amount of $1,105,000 and the right to receive
an aggregate of 76,667 shares of Common Stock in connection with the acquisition
of the stock of South Shore Orthopedics, PA.
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<PAGE>
On March 12, 1997 the Registrant issued to certain physicians Affiliation
Notes in the aggregate principal amount of $776,000 and Convertible Affiliation
Notes in the aggregate principal amount of $1,137,000 and the right to receive
an aggregate of 109,374 shares of Common Stock in connection with the
acquisition of the stock of Orthopaedic and Sports Medicine Specialists of the
Main Line, Inc.
On March 21, 1997, the Registrant issued to certain physicians Affiliation
Notes in the aggregate principal amount of $750,000 and Convertible Affiliation
Notes in the aggregate principal amount of $1,526,000 and the right to receive
an aggregate of 100,000 shares of Common Stock in connection with the
acquisition of the stock of Orthopaedic Surgery & Sports Medicine, Inc.
On April 4, 1997, the Registrant issued to Sports Medicine and
Rehabilitation Center, Inc. Affiliation Notes in the aggregate principal amount
of $912,500 and Convertible Affiliation Notes in the aggregate principal amount
of $1,325,000 and the right to receive an aggregate of 110,416 shares of Common
Stock in connection with the acquisition of certain assets of such entity.
On May 5, 1997, the Registrant issued to a physician Affiliation Notes in
the aggregate principal amount of $311,000 and Convertible Affiliation Notes in
the aggregate principal amount of $439,000 and the right to receive an aggregate
of 33,333 shares of Common Stock in connection with the acquisition of the stock
of Family Care of Lancaster, Inc. The Company subsequently repurchased all of
such securities in connection with the termination of such acquisition.
On May 7, 1997, the Registrant issued to a physician Affiliation Notes in
the aggregate principal amount of $81,250 and the right to receive an aggregate
of 8,125 shares of Common Stock in connection with the acquisition of the stock
of Alan I. Snyder, M.D. Associates, Inc.
On May 29, 1997, the Registrant issued to certain physicians Affiliation
Notes in the aggregate principal amount of $715,000 and Convertible Affiliation
Notes in the aggregate principal amount of $1,438,000 and the right to receive
an aggregate of 61,667 shares of Common Stock in connection with the acquisition
of the stock of Valley Forge Facial Plastic Surgery/Ears, Nose & Throat
Associates, Ltd.
On June 26, 1997, the Registrant issued to certain physicians Affiliation
Notes in the aggregate principal amount of $5,390,000 and the right to receive
an aggregate of 332,143 shares of Common Stock in connection with the
acquisition of the stock of Orthopedic Associates of Lancaster, Ltd. The Company
subsequently repurchased all of such securities in connection with the
termination of such acquisition.
On July 8, 1997, the Registrant issued to Seneca Medical Center, Inc.
Affiliation Notes in the aggregate principal amount of $178,500 and Convertible
Affiliation Notes in the aggregate principal amount of $539,000 and the right to
receive an aggregate of 11,905 shares of Common Stock in connection with the
acquisition of certain assets of such entity. The Company subsequently
repurchased all of such securities in connection with the termination of such
acquisition.
On July 30, 1997, the Registrant issued to certain physicians Affiliation
Notes in the aggregate principal amount of $550,000 and Convertible Affiliation
Notes in the aggregate principal amount of $974,300 and the right to receive an
aggregate of 73,333 shares of Common Stock in connection with the acquisition of
the stock of Cesare, Metzger, Coyle and Henzes, Inc.
On August 27, 1997, the Registrant issued to certain physicians Affiliation
Notes in the aggregate principal amount of $750,000 and Convertible Affiliation
Notes in the aggregate principal amount of $993,750 and the right to receive an
aggregate of 100,000 shares of Common Stock in connection with the acquisition
of the stock of Steel Valley Orthopedic Association, P.C.
On September 30, 1997, the Registrant issued to a physician Affiliation
Notes in the aggregate principal amount of $2,310,000 and Convertible
Affiliation Notes in the aggregate principal amount of $3,878,000 and the right
to receive an aggregate of 269,000 shares of Common Stock in connection with the
acquisition of certain assets of The Elizabeth Wende Breast Clinic.
On October 27, 1997, the Registrant issued to a physician Affiliation Notes
in the aggregate principal amount of $137,500 and Convertible Affiliation Notes
in the aggregate principal amount of $262,000 and the right to receive an
aggregate of 18,333 shares of Common Stock in connection with the acquisition of
the stock of Main Line Joint Replacement, P.C.
On November 1, 1997, the Registrant issued to a physician Affiliation Notes
in the aggregate principal amount of $517,375 and Convertible Affiliation Notes
in the aggregate principal amount of $708,750 and the right to receive an
aggregate of 50,583 shares of Common Stock in connection with the acquisition of
certain
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<PAGE>
assets of Craig D. Morgan, M.D.
On November 4, 1997, the Registrant issued to certain physicians
Affiliation Notes in the aggregate principal amount of $873,877 and Convertible
Affiliation Notes in the aggregate principal amount of $2,087,500 and the right
to receive an aggregate of 86,665 shares of Common Stock in connection with the
acquisition of the stock of Lehigh Valley Orthopedics, Inc.
On March 4, 1998, the Registrant issued to a physician Affiliation Notes in
the aggregate principal amount of $754,250 and the right to receive an aggregate
of 26,533 shares of Common Stock in connection with the acquisition of certain
assets of Victor R. Kalman, D.O.
Set forth below is certain information concerning the sale or issuance of
the Registrant's securities in connection with the IPO Affiliation Transactions
to be completed in connection with the Offering:
Upon the consummation of the Offering, the Registrant will issue to Alan E.
Ottenstein, M.D. an aggregate of 246,429 shares of Common Stock and Affiliation
Notes in the aggregate principal amount of $3,891,605 in connection with the
acquisition of certain assets of such Affiliated Practice.
Upon the consummation of the Offering, the Registrant will issue to certain
physicians an aggregate of 71,786 shares of Common Stock and Affiliation Notes
in the aggregate principal amount of $1,256,250 in connection with the
acquisition of the stock of Associated Surgeons, PC.
Upon the consummation of the Offering, the Registrant will issue to certain
physicians an aggregate of 50,000 shares of Common Stock and Affiliation Notes
in the aggregate principal amount of $700,000 in connection with the acquisition
of the stock of Associates in Urology, PC.
Upon the consummation of the Offering, the Registrant will issue to
Christopher G. Lynch, M.D. an aggregate of 9,643 shares of Common Stock and
Affiliation Notes in the aggregate principal amount of $180,000 in connection
with the acquisition of certain assets of such Affiliated Practice.
Upon the consummation of the Offering, the Registrant will issue to
Curamed, LLC an aggregate of 211,964 shares of Common Stock and Affiliation
Notes in the aggregate principal amount of $3,020,500 in connection with the
acquisition of certain assets of such entity.
Upon the consummation of the Offering, the Registrant will issue to Dennis
James Bonner, M.D., Ltd. an aggregate of 55,357 shares of Common Stock and
Affiliation Notes in the aggregate principal amount of $775,000 in connection
with the acquisition of certain assets of such Affiliated Practice.
Upon the consummation of the Offering, the Registrant will issue to James
C. Berman, M.D. an aggregate of 17,857 shares of Common Stock in connection with
the acquisition of certain assets of such Affiliated Practice.
Upon the consummation of the Offering, the Registrant will issue to certain
physicians an aggregate of 87,500 shares of Common Stock in connection with the
acquisition of the stock of Karl J. Marchenese, M.D., PC.
Upon the consummation of the Offering, the Registrant will issue to Neil
Chesen, M.D., PC an aggregate of 13,929 shares of Common Stock and Affiliation
Notes in the aggregate principal amount of $495,000 in connection with the
acquisition of certain assets of such Affiliated Practice.
Upon the consummation of the Offering, the Registrant will issue to Nevyas
Eye Associates, PC an aggregate of 107,143 shares of Common Stock and
Affiliation Notes in the aggregate principal amount of $1,500,000 in connection
with the acquisition of certain assets of such entity.
Upon the consummation of the Offering, the Registrant will issue to
Non-Surgical Solutions, Inc. an aggregate of 11,607 shares of Common Stock and
Affiliation Notes in the aggregate principal amount of $162,500 in connection
with the acquisition of certain assets or such Affiliated Practice.
Upon the consummation of the Offering, the Registrant will issue to a
physician an aggregate of 15,179 shares of Common Stock and Affiliation Notes in
the aggregate principal amount of $212,500 in connection with the acquisition of
the stock of North Coast Orthopedics, Inc.
Upon the consummation of the Offering, the Registrant will issue to
Northern Ophthalmic Associates, Inc. an aggregate of 26,786 shares of Common
Stock and Affiliation Notes in the aggregate principal amount of $450,375 in
connection with the acquisition of certain assets of such entity.
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<PAGE>
Upon the consummation of the Offering, the Registrant will issue to certain
physicians an aggregate of 16,964 shares of Common Stock and Affiliation Notes
in the aggregate principal amount of $237,500 in connection with the acquisition
of the stock of Northwest Orthopedic Associates, PC.
Upon the consummation of the Offering, the Registrant will issue to certain
physicians an aggregate of 21,429 shares of Common Stock in connection with the
acquisition of the stock of Oncology and Hemotology Associates, PA.
Upon the consummation of the Offering, the Registrant will issue to certain
physicians an aggregate of 80,357 shares of Common Stock and Affiliation Notes
in the aggregate principal amount of $1,125,000 in connection with the
acquisition of the stock of Orthopedic Associates of Pittsburgh, Inc.
Upon the consummation of the Offering, the Registrant will issue to
Philadelphia Orthopedic Group, PC an aggregate of 54,643 shares of Common Stock
and Affiliation Notes in the aggregate principal amount of $1,223,382 in
connection with the acquisition of certain assets of such entity.
Upon the consummation of the Offering, the Registrant will issue to
Philadelphia Uro-Gynecologic Associates, PC an aggregate of 11,161 shares of
Common Stock and Affiliation Notes in the aggregate principal amount of $156,250
in connection with the acquisition of certain assets of such entity.
Upon the consummation of the Offering, the Registrant will issue to Primary
Care & Rehabilitation, PC and Medical Consultants, PC an aggregate of 20,179
shares of Common Stock and Affiliation Notes in the aggregate principal amount
of $382,500 in connection with the acquisition of certain assets of such entity.
Upon the consummation of the Offering, the Registrant will issue to
Suburban Pain Control Center an aggregate of 60,268 shares of Common Stock in
connection with the acquisition of certain assets of such entity.
Upon the consummation of the Offering, the Registrant will issue to
Surgical Care Physicians, PC an aggregate of 30,357 shares of Common Stock and
Affiliation Notes in the aggregate principal amount of $425,000 in connection
with the acquisition of certain assets of such entity.
Upon the consummation of the Offering, the Registrant will issue to certain
physicians an aggregate of 25,714 shares of Common Stock and Affiliation Notes
in the aggregate principal amount of $839,260 in connection with the acquisition
of the stock of Vineland Obstetrical and Gynecological, PA.
Upon the consummation of the Offering, the Registrant will issue to certain
physicians an aggregate of 24,375 shares of Common Stock and Affiliation Notes
in the aggregate principal amount of $753,555 in connection with the acquisition
of the stock of Women's Physicians & Surgeons, PA.
Registration under the Securities Act of the securities issued in the
transactions described in this Item was not required because such securities
were issued in transactions not involving any "public offering" within the
meaning of Section 4(2) of said Act, in reliance in part on Rule 506 under said
Act.
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<PAGE>
ITEM 16. Exhibits and Financial Statement Schedules.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO.
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<S> <C> <C>
1 -- Form of Underwriting Agreement.
3.1.1 -- Second Amended and Restated Articles of Incorporation of the
Company.
3.1.2 -- Amendment to Second Amended and Restated Articles of
Incorporation of the Company.
3.1.3 -- Third Amended and Restated Articles of Incorporation of the
Company.
3.2.1 -- Amended and Restated By-laws of the Company.
**3.2.2 -- Form of Second Amended and Restated By-laws of the Company.
**5 -- Opinion of Wolf, Block, Schorr and Solis-Cohen LLP with
respect to the legality of the securities being offered.
10.1 -- 1995 Company Stock Option Plan.
10.2 -- 1995 Affiliate Stock Option Plan.
*10.3 -- Form of Stock Incentive Plan.
10.4.1 -- Amended and Restated Registration Rights Agreement by and
among the Company, Thomas J. Keane, Keystone Venture IV,
L.P., Edison Venture Fund III, L.P., NEPA Venture Fund II,
L.P., Dominion Fund IV, Joseph J. Croce, Douglas P. Heller,
E.J.K. Real Estate Services Limited, Glenville Capital
Partners, L.P., Robert W. Muir, Jr., Pasquale W. Croce, Jr.
and Charles Schwab & Co., Inc, f/b/o William J. Barry IRA,
dated as of December 31, 1996.
10.4.2 -- Amendment to Amended and Restated Registration Rights
Agreement dated as of February 6, 1997.
10.4.3 -- Amendment to Amended and Restated Registration Rights
Agreement dated as of January 16, 1998.
10.5 -- Amended and Restated Management and Services Agreement
between the Company and U.S. Medical Services of
Pennsylvania, P.C. dated as of January 6, 1997.
*10.6 -- Amended and Restated Management and Services Agreement
between the Company and U.S. Medical Services of New Jersey,
P.C. dated as of March 17, 1998.
10.7 -- Management and Services Agreement between the Company and
U.S. Medical Services of Delaware, P.C. dated as of November
1, 1997.
10.8 -- Employment Agreement between the Company and Thomas J. Keane
dated as of October 9, 1997.
10.9 -- Amended and Restated Employment Agreement between the
Company and Martin G. Chilek dated as of October 9, 1997.
10.10 -- Amended and Restated Employment Agreement between the
Company and Edward R. Miersch dated as of October 9, 1997.
10.11 -- Amended and Restated Employment Agreement between the
Company and Warren D. Barratt dated as of October 9, 1997.
10.12 -- Amended and Restated Employment Agreement between the
Company and John M. Hogan dated as of October 9, 1997.
10.13 -- Amended and Restated Employment Agreement between the
Company and Linda F. Larson dated as of October 9, 1997.
10.14 -- Amended and Restated Shareholders' Agreement between U.S.
Medical Services of Pennsylvania, P.C. and James F. Bonner,
M.D. dated September 10, 1997.
10.15 -- Amended and Restated Shareholders' Agreement between U.S.
Medical Services of New Jersey, P.C. and James F. Bonner,
M.D. dated September 10, 1997.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO.
- ---------
<S> <C> <C>
10.16 -- Shareholders Agreement between U.S. Medical Services of
Delaware, P.A. and John E. Hocutt, Jr., M.D. dated November
3, 1997.
10.17 -- Form of Common Stock Purchase Warrant.
*10.18.1 -- Asset Purchase Agreement between the Company and Alan E.
Ottenstein, M.D. dated February 12, 1998.
*10.18.2 -- Amendment to Asset Purchase Agreement between the Company
and Alan E. Ottenstein, M.D. dated April 23, 1998.
*10.19 -- Commitment letter with respect to credit facility among
NationsBank, N.A., NationsBanc Montgomery Securities LLC and
the Company dated May 21, 1998.
10.20 -- Stock Repurchase Agreement between the Company and Thomas J.
Keane dated as of February 1, 1995.
10.21 -- Registration Rights Agreement among the Company, Capital
Ventures International, Lancaster Investment Partners, L.P.,
Keystone Venture IV, L.P., Edison Venture Fund III, L.P.,
NEPA Venture Fund II, L.P., Dominion Fund IV and Thomas J.
Keane dated as of January 16, 1998.
10.22 -- Form of Common Stock Warrant.
10.23 -- Amended and Restated Employment Agreement between the
Company and Lewis S. Sharps, M.D., F.A.C.S. dated as of
April 10, 1997.
*10.24 -- Management and Services Agreement between the Company and
U.S. Medical Services of New York, P.C. dated as of December
8, 1997.
*10.25 -- Management and Services Agreement dated as of March 17, 1998
between the Company and U.S. Medical Services of the Garden
State, P.C.
*10.26 -- Management and Services Agreement dated as of April 1, 1998
between the Company and U.S. Rehabilitation Services of
Pennsylvania, P.C.
*11 -- Statement regarding Computation of Per Share Earnings.
*21 -- Subsidiaries of the Company.
*23.1 -- Consent of Arthur Andersen LLP.
**23.2 -- Consent of Wolf, Block, Schorr and Solis-Cohen LLP (included
as part of Exhibit 5).
*23.3 -- Consent of Cozen and O'Connor P.C.
*27 -- Financial Data Schedule.
</TABLE>
- ------------------
* Filed with this Amendment to the Registration Statement.
** To be filed by amendment.
II-9
<PAGE>
(b) Financial Statement Schedules
Financial Statement Schedules have been omitted because they are
inapplicable or the information is provided in the Financial Statements,
including the Notes thereto, included in the Prospectus.
ITEM 17. Undertakings.
The undersigned Registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to Item 14 above, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained
in a 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 the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
II-10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment to its Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Philadelphia,
Pennsylvania on the 26th day of May, 1998.
U.S. PHYSICIANS, INC.
By: /s/ WARREN D. BARRATT
-------------------------
Warren D. Barratt
Senior Vice President, Treasurer and
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/THOMAS J. KEANE* Chairman, President and Chief May 26, 1998
- --------------------------- Executive Officer (principal
Thomas J. Keane executive officer)
/s/WARREN D. BARRATT Senior Vice President, Treasurer May 26, 1998
- --------------------------- and Chief Financial Officer
Warren D. Barratt (principal financial and accounting
officer)
/s/KERRY J. DALE* Director May 26, 1998
- ---------------------------
Kerry J. Dale
/s/WILLIAM P. FERRETTI* Director May 26, 1998
- ---------------------------
William P. Ferretti
/s/GUSTAV H. KOVEN, III* Director May 26, 1998
- ---------------------------
Gustav H. Koven, III
/s/DANIEL PROMISLO* Director May 26, 1998
- ---------------------------
Daniel Promislo
- ---------
*By /s / WARREN D. BARRATT
---------------------------------
Attorney-in-fact
</TABLE>
II-11
U.S. PHYSICIANS, INC.
1997 STOCK INCENTIVE PLAN
1. Purpose. U.S. PHYSICIANS, Inc., a Pennsylvania corporation
(the "Company"), hereby adopts the U.S. PHYSICIANS, Inc. 1997 Stock Incentive
Plan (the "Plan"). The Plan is intended to recognize the contributions made to
the Company by employees (including employees who are members of the Board of
Directors) of the Company or any Affiliate, to provide such persons with
additional incentive to devote themselves to the future success of the Company
or an Affiliate, and to improve the ability of the Company or an Affiliate to
attract, retain, and motivate individuals upon whom the Company's sustained
growth and financial success depend, by providing such persons with an
opportunity to acquire or increase their proprietary interest in the Company
through receipt of rights to acquire the Company's Common Stock, $.01 par value
(the "Common Stock"), and through the transfer or issuance of Common Stock. In
addition, the Plan is intended as an additional incentive to directors of the
Company who are not employees of the Company or an Affiliate to serve on the
Board of Directors and to devote themselves to the future success of the Company
by providing them with an opportunity to acquire or increase their proprietary
interest in the Company through the receipt of rights to acquire Common Stock.
Furthermore, the Plan may be used to encourage consultants and advisors of the
Company to further the success of the Company.
2. Definitions. Unless the context clearly indicates
otherwise, the following terms shall have the following meanings:
"Act" shall mean the Securities Act of 1933, as amended.
"Affiliate" shall mean a corporation which is a parent
corporation or a subsidiary corporation with respect to the Company within the
meaning of Section 424(e) or (f) of the Code.
"Award" shall mean a transfer of Common Stock made pursuant
to the terms of the Plan.
"Award Agreement" shall mean the agreement between the
Company and a Grantee with respect to an Award made pursuant to the Plan.
"Board of Directors" shall mean the Board of Directors of
the Company.
"Change of Control" shall have the meaning as set forth in
Section 9 of the Plan.
"Code" shall mean the Internal Revenue Code of 1986, as
amended.
"Committee" shall have the meaning set forth in Section 3
of the Plan.
<PAGE>
"Common Stock" shall have the meaning set forth in Section
1 of the Plan.
"Company" shall mean U.S. PHYSICIANS, Inc., a Pennsylvania
corporation.
"Disability" shall have the meaning set forth in Section
22(e)(3) of the Code.
"Employee" shall mean an employee of the Company or an
Affiliate.
"Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
"Fair Market Value" shall have the meaning set forth in
Subsection 8(b) of the Plan.
"Grantee" shall mean a person to whom an Award has been
granted pursuant to the Plan.
"ISO" shall mean an Option granted under the Plan which is
intended to qualify as an "incentive stock option" within the meaning of Section
422(b) of the Code.
"Non-Employee Director" shall mean a member of the Board of
Directors of the Company who is a "non-employee director" of the Company within
the meaning of Rule 16b-3.
"Non-qualified Stock Option" shall mean an Option granted
under the Plan which is not intended to qualify, or otherwise does not qualify,
as an "incentive stock option" within the meaning of Section 422(b) of the Code.
"Option" shall mean either an ISO or a Non-qualified Stock
Option granted under the Plan.
"Optionee" shall mean a person to whom an Option has been
granted under the Plan, which Option has not been exercised and has not expired
or terminated.
"Option Document" shall mean the document described in
Section 8 of the Plan, as applicable, which sets forth the terms and conditions
of each grant of Options.
"Option Price" shall mean the price at which Shares may be
purchased upon exercise of an Option, as calculated pursuant to Subsection 8(b)
of the Plan.
-2-
<PAGE>
"Rule 16b-3" shall mean Rule 16b-3 promulgated under the
Exchange Act.
"SAR" shall have the meaning set forth in Section 11 of the
Plan.
"Section 16 Person" shall mean any person who is a
"director" or an "officer" within the meaning of Rule 16a-1(f) promulgated under
the Exchange Act or any successor rule.
"Shares" shall mean the shares of Common Stock of the
Company which are the subject of Options or granted as Awards under the Plan.
3. Administration of the Plan. The Board of Directors may
administer the Plan itself or may designate a committee or committees composed
of two or more of members of the Board of Directors. At the discretion of the
Board of Directors, a separate committee may be designated consisting of two or
more Non-Employee Directors to operate and administer the Plan with respect to
only Section 16 Persons, while appointing another committee or itself to
administer the Plan with respect to all other persons eligible to participate in
the Plan. Any such committee or committees designated by the Board of Directors,
and the Board of Directors itself in its administrative capacity with respect to
the Plan, is referred to as the "Committee."
(a) Meetings. The Committee shall hold meetings at such
times and places as it may determine, shall keep minutes of its meetings, and
shall adopt, amend and revoke such rules or procedures as it may deem proper;
provided, however, that it may take action only upon the agreement of a majority
of the whole Committee. Any action which the Committee shall take through a
written instrument signed by a majority of its members shall be as effective as
though it had been taken at a meeting duly called and held.
(b) Indemnification. Service on the Committee shall
constitute service as a member of the Board of Directors of the Company. Each
member of the Committee shall be entitled, without further act on his or her
part, to indemnity from the Company and limitation of liability to the fullest
extent provided by applicable law and by the Company's Articles of Incorporation
and/or By-laws in connection with or arising out of any action, suit or
proceeding with respect to the administration of the Plan or the granting of
Options thereunder in which he or she may be involved by reason of his or her
being or having been a member of the Committee, whether or not he or she
continues to be such member of the Committee at the time of the action, suit or
proceeding.
(c) Exculpation. No member of the Committee shall be
personally liable for monetary damages as such for any action taken or any
failure to take any action in connection with the administration of the Plan or
the granting of Options or Awards thereunder unless (i) the member of the
Committee has breached or failed to perform the duties of his office under
Subchapter B of Chapter 17 of the Pennsylvania Business Corporation Law of 1988,
as amended, and (ii) the breach or failure to perform constitutes self-dealing,
willful misconduct or
-3-
<PAGE>
recklessness; provided, however, that the provisions of this Subsection 3(c)
shall not apply to the responsibility or liability of a member of the Committee
pursuant to any criminal statute or to the liability of a member of the
Committee for the payment of taxes pursuant to local, state or federal law.
(d) Interpretation. The Committee shall have the power and
authority to interpret the Plan and to adopt rules and regulations for its
administration that are not inconsistent with the express terms of the Plan. Any
such actions by the Committee shall be final, binding and conclusive on all
parties in interest.
4. Grants under the Plan. Grants under the Plan may be in the
form of a Non-qualified Stock Option, an ISO or a combination thereof, at the
discretion of the Committee.
5. Eligibility. All Employees, members of the Board of
Directors and consultants and advisors to the Company shall be eligible to
receive Options and Awards hereunder. Consultants and advisors shall be eligible
only if they render bona fide services to the Company unrelated to the offer or
sale of securities; provided, however, that the limitation contained in this
sentence shall not apply to the extent that the inapplicability of such
limitation will not disqualify the Common Stock from being eligible for
registration on Form S-8 (or any successor form) under the Act. The Committee,
in its sole discretion, shall determine whether an individual qualifies as an
Employee.
6. Shares Subject to Plan. The aggregate maximum number of
Shares for which Awards or Options may be granted pursuant to the Plan is
_________________ (___________). The number of Shares which may be issued under
the Plan shall be further subject to adjustment in accordance with Section 10.
The Shares shall be issued from authorized and unissued Common Stock or Common
Stock held in or hereafter acquired for the treasury of the Company. If an
Option terminates or expires without having been fully exercised for any reason
or if Shares subject to an Award have been conveyed back to the Company pursuant
to the terms of an Award Agreement, the Shares for which the Option was not
exercised or the Shares that were conveyed back to the Company may again be the
subject of one or more Options or Awards granted pursuant to the Plan.
7. Term of the Plan. The Plan is effective as of October 9,
1997, the date on which it was adopted by the Board of Directors, subject to
approval by its shareholders. No ISO may be granted under the Plan after October
8, 2007.
8. Option Documents and Terms. Each Option granted under the
Plan shall be a Non-qualified Stock Option unless the Option shall be
specifically designated at the time of grant to be an ISO for Federal income tax
purposes. If any Option designated an ISO is determined for any reason not to
qualify as an incentive stock option within the meaning of Section 422 of the
Code, such Option shall be treated as a Non-qualified Stock Option for all
purposes under the provisions of the Plan. Options granted pursuant to the Plan
shall be evidenced by the Option Documents in such form as the Committee shall
from time to time
-4-
<PAGE>
approve, which Option Documents shall comply with and be subject to the
following terms and conditions and such other terms and conditions as the
Committee shall from time to time require which are not inconsistent with the
terms of the Plan.
(a) Number of Option Shares. Each Option Document shall
state the number of Shares to which it pertains. An Optionee may receive more
than one Option, which may include Options which are intended to be ISO's and
Options which are not intended to be ISO's, but only on the terms and subject to
the conditions and restrictions of the Plan. Notwithstanding anything herein to
the contrary, no Optionee shall be granted Options during one fiscal year of the
company for more than Two Hundred and Fifty Thousand Shares (250,000) (such
number to be subject to adjustment in accordance with Section 10).
(b) Option Price. Each Option Document shall state the
Option Price which, for a Non-qualified Stock Option, may be less than, equal
to, or greater than the Fair Market Value of the Shares on the date the Option
is granted and, for an ISO, shall be at least 100% of the Fair Market Value of
the Shares on the date the Option is granted as determined by the Committee in
accordance with this Subsection 8(b); provided, however, that if an ISO is
granted to an Optionee who then owns, directly or by attribution under Section
424(d) of the Code, shares possessing more than ten percent of the total
combined voting power of all classes of stock of the Company or an Affiliate,
then the Option Price shall be at least 110% of the Fair Market Value of the
Shares on the date the Option is granted. If the Common Stock is traded in a
public market, then the Fair Market Value per share shall be, if the Common
Stock is listed on a national securities exchange or included in the NASDAQ
System, the last reported sale price thereof for the "Valuation Date" (as
hereinafter defined), or, if the Common Stock is not so listed or included, the
mean between the last reported "bid" and "asked" prices thereof on the Valuation
Date, as reported on NASDAQ or, if not so reported, as reported by the National
Daily Quotation Bureau, Inc. or as reported in a customary financial reporting
service, as applicable and as the Committee determines. If the Common Stock is
not traded in a public market, Fair Market Value shall be determined in good
faith by the Committee. For purposes of the determination of Fair Market Value
under this Section 8(b), the Valuation Date shall be the immediately preceding
business day unless the transaction with respect to which Fair Market Value is
being determined occurs following the closing of the exchange, the NASDAQ
System, NASDAQ or the financial reporting service, as applicable, in which case
the Valuation Date shall be the date on which the transaction occurs.
(c) Exercise. No Option shall be deemed to have been
exercised prior to the receipt by the Company of written notice of such exercise
and (unless arrangements satisfactory to the Company have been made for payment
through a broker in accordance with procedures permitted by Regulation P of the
Federal Reserve Board) of payment in full of the Option Price for the Shares to
be purchased. Each such notice shall specify the number of Shares to be
purchased and shall (unless the Shares are covered by a then current
registration statement or a Notification under Regulation A under the Act),
contain the Optionee's acknowledgment in form and substance satisfactory to the
Company that (a) such Shares are being purchased for investment and not for
distribution or resale (other than a distribution or
-5-
<PAGE>
resale which, in the opinion of counsel satisfactory to the Company, may be made
without violating the registration provisions of the Act), (b) the Optionee has
been advised and understands that (i) the Shares have not been registered under
the Act and are "restricted securities" within the meaning of Rule 144 under the
Act and are subject to restrictions on transfer and (ii) the Company is under no
obligation to register the Shares under the Act or to take any action which
would make available to the Optionee any exemption from such registration, (c)
such Shares may not be transferred without compliance with all applicable
federal and state securities laws, and (d) an appropriate legend referring to
the foregoing restrictions on transfer and any other restrictions imposed under
the Option Documents may be endorsed on the certificates. Notwithstanding the
foregoing, if the Company determines that issuance of Shares should be delayed
pending (A) registration under federal or state securities laws, (B) the receipt
of an opinion of counsel satisfactory to the Company that an appropriate
exemption from such registration is available, (C) the listing or inclusion of
the Shares on any securities exchange or an automated quotation system or (D)
the consent or approval of any governmental regulatory body whose consent or
approval is necessary in connection with the issuance of such Shares, the
Company may defer exercise of any Option granted hereunder until any of the
events described in this sentence has occurred.
(d) Medium of Payment. Subject to the terms of the
applicable Option Document, an Optionee shall pay for Shares (i) in cash, (ii)
by certified or cashier's check payable to the order of the Company, or (iii) by
such other mode of payment as the Committee may approve, including payment
through a broker in accordance with procedures permitted by Regulation P of the
Federal Reserve Board. The Optionee may also exercise the Option in any manner
contemplated by Section 11. Furthermore, the Committee may provide in an Option
Document that payment may be made in whole or in part in shares of the Company's
Common Stock held by the Optionee. If payment is made in whole or in part in
shares of the Company's Common Stock, then the Optionee shall deliver to the
Company certificates registered in the name of such Optionee representing the
shares owned by such Optionee, free of all liens, claims and encumbrances of
every kind and having an aggregate Fair Market Value on the date of delivery
that is at least as great as the Option Price of the Shares (or relevant portion
thereof) with respect to which such Option is to be exercised by the payment in
shares of Common Stock, endorsed in blank or accompanied by stock powers duly
endorsed in blank by the Optionee. In the event that certificates for shares of
the Company's Common Stock delivered to the Company represent a number of shares
in excess of the number of shares required to make payment for the Option Price
of the Shares (or relevant portion thereof) with respect to which such Option is
to be exercised by payment in shares of Common Stock, the stock certificate or
certificates issued to the Optionee shall represent (i) the Shares in respect of
which payment is made, and (ii) such excess number of shares. Notwithstanding
the foregoing, the Committee may impose from time to time such limitations and
prohibitions on the use of shares of the Common Stock to exercise an Option as
it deems appropriate.
-6-
<PAGE>
(e) Termination of Options.
(i) No Option shall be exercisable after the first to
occur of the following:
(A) Expiration of the Option term specified in the
Option Document, which, in the case of an ISO, shall not occur after (1) ten
years from the date of grant, or (2) five years from the date of grant if the
Optionee on the date of grant owns, directly or by attribution under Section
424(d) of the Code, shares possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Company or of an Affiliate;
(B) Except to the extent otherwise provided in an
Optionee's Option Document, a finding by the Committee, after full consideration
of the facts presented on behalf of both the Company and the Optionee, that the
Optionee has been engaged in disloyalty to the Company or an Affiliate,
including, without limitation, fraud, embezzlement, theft, commission of a
felony or proven dishonesty in the course of the Optionee's employment or
service, or has disclosed trade secrets or confidential information of the
Company or an Affiliate. In such event, in addition to immediate termination of
the Option, the Optionee shall automatically forfeit all Shares for which the
Company has not yet delivered the share certificates upon refund by the Company
of the Option Price. Notwithstanding anything herein to the contrary, the
Company may withhold delivery of share certificates pending the resolution of
any inquiry that could lead to a finding resulting in a forfeiture;
(C) The date, if any, set by the Board of Directors
as an accelerated expiration date in the event of the liquidation or dissolution
of the Company;
(D) The occurrence of such other event or events as
may be set forth in the Option Document as causing an accelerated expiration of
the Option; or
(E) Except as otherwise set forth in the Option
Document and subject to the foregoing provisions of this Subsection 8(e), three
months after the Optionee's employment or service with the Company or its
Affiliates terminates for any reason other than Disability or death or one year
after such termination due to Optionee's Disability or death. With respect to
this Subsection 8(e)(i)(E), the only Options that may be exercised during the
three-month or one-year period, as the case may be, are Options which were
exercisable on the last date of such employment or service and not Options
which, if the Optionee were still employed or rendering service during such
three-month or one-year period, would become exercisable, unless the Option
Document specifically provides to the contrary. The terms of an executive
severance agreement or other agreement between the Company and an Optionee,
approved by the Committee, whether entered into prior or subsequent to the grant
of an Option, which provide for Option exercise dates later than those set forth
in Subsection 8(e)(i) shall be deemed to be Option terms approved by the
Committee and consented to by the Optionee.
-7-
<PAGE>
(ii) Notwithstanding the foregoing, the Committee may
extend the period during which all or any portion of an Option may be exercised
to a date no later than the Option term specified in the Option Document
pursuant to Subsection 8(e)(i)(A), provided that any change pursuant to this
Subsection 8(e)(ii) which would cause an ISO to become a Non-qualified Stock
Option may be made only with the consent of the Optionee.
(iii) Notwithstanding anything to the contrary
contained in the Plan or an Option Document, an ISO shall be treated as a
Non-qualified Stock Option to the extent such ISO is exercised at any time after
the expiration of the time period permitted under the Code for the exercise of
an ISO.
(f) Transfers. No Option granted under the Plan may be
transferred, except by will or by the laws of descent and distribution except as
otherwise set forth in the Option Document or to the extent that the Committee
otherwise determines.
(g) Limitation on ISO Grants. To the extent that the
aggregate fair market value of the shares of Common Stock (determined at the
time the ISO is granted) with respect to which ISO's under all incentive stock
option plans of the Company or its Affiliates are exercisable for the first time
by the Optionee during any calendar year exceeds $100,000, such ISO's shall, to
the extent of such excess, be treated as Non-qualified Stock Options.
(h) Other Provisions. Subject to the provisions of the
Plan, the Option Documents shall contain such other provisions including,
without limitation, provisions authorizing the Committee to accelerate the
exercisability of all or any portion of an Option granted pursuant to the Plan,
additional restrictions upon the exercise of the Option or additional
limitations upon the term of the Option, as the Committee shall deem advisable.
Unless otherwise specified in the applicable Option Document, no Options granted
under the Plan shall be exercisable at any date which occurs during the six
month period starting on the date the Option is granted.
(i) Amendment. Subject to the provisions of the Plan, the
Committee shall have the right to amend any Option Document or Award Agreement
issued to an Optionee or Award holder, subject to the Optionee's or Award
holder's consent if such amendment is not favorable to the Optionee or Award
holder, or if such amendment has the effect of changing an ISO to a
Non-Qualified Stock Option, except that the consent of the Optionee or Award
holder shall not be required for any amendment made pursuant to Subsection
8(e)(i)(C) or Section 9 of the Plan, as applicable.
9. Change of Control. In the event of a Change of Control, the
Committee may take whatever actions it deems necessary or desirable with respect
to any of the Options outstanding which need not be treated identically,
including, without limitation, accelerating (a) the expiration or termination
date in the respective Option Documents to a date no earlier than thirty (30)
days after notice of such acceleration is given to the Optionees, and/or (b) the
exercisability of the Option.
-8-
<PAGE>
A "Change of Control" shall be deemed to have
occurred upon the earliest to occur of the following events:
(i) any "person" as such term is used in Sections 13(d)
and 14(d) of the Exchange Act (other than the Company, any subsidiary of the
Company, any "person" (as hereinabove defined) acting on behalf of the Company
as underwriter pursuant to an offering who is temporarily holding securities in
connection with such offering, any trustee or other fiduciary holding securities
under an employee benefit plan of the Company, or any "person" (as hereinabove
defined) who, on the date the Plan is effective, shall have been the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act) of or have voting
control over shares of capital stock of the Company possessing more than
twenty-five percent (25%) of the combined voting power of the Company's then
outstanding securities) is or becomes the "beneficial owner" (as hereinabove
defined), directly or indirectly, of securities of the Company representing
twenty-five percent (25%) or more of the combined voting power of the Company's
then outstanding securities;
(ii) during any period of not more than two consecutive
years (not including any period prior to the date the Plan is effective),
individuals who at the beginning of such period constitute the Board of
Directors, and any new director (other than a director designated by a "person"
(as hereinabove defined) who has entered into an agreement with the Company to
effect a transaction described in clause (i), (iii) or (iv) of this Section 9)
whose election by the Board of Directors or nomination for election by the
Company's shareholders was approved by a vote of at least two-thirds of the
directors then still in office who either were directors at the beginning of the
period or whose election or nomination for election was previously so approved,
cease for any reason to constitute at least a majority thereof;
(iii) the shareholders of the Company approve a merger
or consolidation of the Company with any other corporation or other legal
entity, other than (1) a merger or consolidation which would result in the
voting securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity) more than fifty percent (50%) of
the combined voting power of the voting securities of the Company or such
surviving entity outstanding immediately after such merger or consolidation or
(2) a merger or consolidation effected to implement a recapitalization of the
Company (or similar transaction) in which no "person" (as hereinabove defined)
(other than a "person" who, on the date the Plan is effective, shall have been
the "beneficial owner" (as hereinabove defined) of or have voting control over
shares of capital stock of the Company possessing more than twenty five percent
(25%) of the combined voting power of the Company's then outstanding securities)
acquires more than twenty-five percent (25%) of the combined voting power of the
Company's then outstanding securities;
(iv) the shareholders of the Company approve a plan of
complete liquidation of the Company or an agreement for the sale or disposition
by the Company of all or substantially all of the Company's assets (or any
transaction having a similar effect); or
-9-
<PAGE>
(v) a "change of control" (as may hereinafter be
defined by the Board of Directors for the express purposes of this Plan) has
occurred.
10. Adjustments on Changes in Capitalization.
(a) In the event that the outstanding Shares are changed by
reason of a reorganization, merger, consolidation, recapitalization,
reclassification, stock split-up, combination or exchange of shares and the like
(not including the issuance of Common Stock on the conversion of other
securities of the Company which are convertible into Common Stock) or dividends
payable in Shares, an equitable adjustment shall be made by the Committee in the
aggregate number of shares available under the Plan and in the number of Shares
and price per Share subject to outstanding Options. Unless the Committee makes
other provisions for the equitable settlement of outstanding Options, if the
Company shall be reorganized, consolidated, or merged with another corporation
or other legal entity, or if all or substantially all of the assets of the
Company shall be sold or exchanged, an Optionee shall at the time of issuance of
the stock under such corporate event be entitled to receive upon the exercise of
his or her Option the same number and kind of shares of stock or the same amount
of property, cash or securities as he or she would have been entitled to receive
upon the occurrence of any such corporate event as if he or she had been,
immediately prior to such event, the holder of the number of Shares covered by
his or her Option.
(b) Any adjustment under this Section 10 in the number of
Shares subject to Options shall apply proportionately to only the unexercised
portion of any Option granted hereunder. If fractions of a Share would result
from any such adjustment, the adjustment shall be revised to the next lower
whole number of Shares.
(c) The Committee shall have authority to determine the
adjustments to be made under this Section, and any such determination by the
Committee shall be final, binding and conclusive.
11. Stock Appreciation Rights (SARs).
(a) In General. Subject to the terms and conditions of the
Plan, the Committee may, in its sole and absolute discretion, grant to an
Optionee the right to surrender an Option to the Company, in whole or in part,
and to receive in exchange therefor payment by the Company of an amount equal to
the excess of the Fair Market Value of the shares of Common Stock subject to
such Option, or portion thereof, so surrendered (determined in the manner
described in section 8(b) as of the date the SARs are exercised) over the
exercise price to acquire such shares (which right shall be referred to as an
"SAR"). Except as may otherwise be provided in an Option Document, such payment
may be made, as determined by the Committee in accordance with subsection 11(c)
below and set forth in the Option Document, either in shares of Common Stock or
in cash or in any combination thereof.
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<PAGE>
(b) Grant. Each SAR shall relate to a specific Option
granted under the Plan and shall be granted to the Optionee concurrently with
the grant of such Option by inclusion of appropriate provisions in the Option
Document pertaining thereto. The number of SARs granted to an Optionee shall not
exceed the number of shares of Common Stock which such Optionee is entitled to
purchase pursuant to the related Option. The number of SARs held by an Optionee
shall be reduced by (i) the number of SARs exercised under the provisions of the
Option Document pertaining to the related Option, and (ii) the number of shares
of Common Stock purchased pursuant to the exercise of the related Option.
(c) Payment. The Committee shall have sole discretion to
determine whether payment in respect of SARs granted to any Optionee shall be
made in shares of Common Stock, or in cash, or in a combination thereof. If
payment is made in Common Stock, the number of shares of Common Stock which
shall be issued pursuant to the exercise of SARs shall be determined by dividing
(i) the total number of SARs being exercised, multiplied by the amount by which
the Fair Market Value (as determined under section 8(b)) of a share of Common
Stock on the exercise date exceeds the exercise price for shares covered by the
related Option, by (ii) the Fair Market Value of a share of Common Stock on the
exercise date of the SARs. No fractional share of Common Stock shall be issued
on exercise of an SAR; cash may be paid by the Company to the individual
exercising an SAR in lieu of any such fractional share. If payment on exercise
of an SAR is to be made in cash, the individual exercising the SAR shall receive
in respect of each share to which such exercise relates an amount of money equal
to the difference between the Fair Market Value of a share of Common Stock on
the exercise date and the exercise price for shares covered by the related
Option.
(d) Limitations. SARs shall be exercisable at such times
and under such terms and conditions as the Committee, in its sole and absolute
discretion, shall determine; provided, however, that an SAR may be exercised
only at such times and by such individuals as the related Option under the Plan
and the Option Agreement may be exercised.
12. Terms and Conditions of Awards. Awards granted pursuant to
the Plan shall be evidenced by written Award Agreements in such form as the
Committee shall from time to time approve, which Award Agreements shall comply
with and be subject to the following terms and conditions and such other terms
and conditions which the Committee may from time to time require which are not
inconsistent with the terms of the Plan.
(a) Number of Shares. Each Award Agreement shall state the
number of shares of Common Stock to which it pertains.
(b) Purchase Price. Each Award Agreement shall specify the
purchase price, if any, which applies to the Award. If the Board specifies a
purchase price, the Grantee shall be required to make payment on or before the
date specified in the Award Agreement. A Grantee shall pay for Shares (i) in
cash, (ii) by certified check payable to the order of the Company, or (iii) by
such other mode of payment as the Committee may approve.
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<PAGE>
(c) Grant. In the case of an Award which provides for a
grant of Shares without any payment by the Grantee, the grant shall take place
on the date specified in the Award Agreement. In the case of an Award which
provides for a payment, the grant shall take place on the date the initial
payment is delivered to the Company, unless the Committee or the Award Agreement
otherwise specifies. Stock certificates evidencing Shares granted pursuant to an
Award shall be issued in the sole name of the Grantee. Notwithstanding the
foregoing, as a precondition to a grant, the Company may require an
acknowledgment by the Grantee as required with respect to Options under Section
8.
(d) Conditions. The Committee may specify in an Award
Agreement any conditions under which the Grantee of that Award shall be required
to convey to the Company the Shares covered by the Award. Upon the occurrence of
any such specified condition, the Grantee shall forthwith surrender and deliver
to the Company the certificates evidencing such Shares as well as completely
executed instruments of conveyance. The Committee, in its discretion, may
provide that certificates for Shares transferred pursuant to an Award be held in
escrow by the Company or an officer of the Company until such time as each and
every condition has lapsed and that the Grantee be required, as a condition of
the Award, to deliver to such escrow agent or Company officer stock powers
covering the Award Shares duly endorsed by the Grantee. Unless otherwise
provided in the Award Agreement, distributions made on Shares held in escrow
will be deposited in escrow, to be distributed to the party becoming entitled to
the Shares on which the distribution was made. Stock certificates evidencing
Shares subject to conditions shall bear a legend to the effect that the Common
Stock evidenced thereby is subject to repurchase or conveyance to the Company in
accordance with an Award made under the Plan and that the Shares may not be sold
or otherwise transferred.
(e) Lapse of Conditions. Upon termination or lapse of each
and every forfeiture condition, if any, the Company shall cause certificates
without the legend referring to the Company's repurchase right (but with any
other legends that may be appropriate) evidencing the Shares covered by the
Award to be issued to the Grantee upon the Grantee's surrender of the legended
certificates held by him or her to the Company.
(f) Rights as Shareholder. Upon payment of the purchase
price, if any, for Shares covered by an Award and compliance with the
acknowledgment requirement of subsection 12(c), the Grantee shall have all of
the rights of a shareholder with respect to the Shares covered thereby,
including the right to vote the Shares and receive all dividends and other
distributions paid or made with respect thereto, except to the extent otherwise
provided by the Committee or in the Award Agreement.
13. Amendment of the Plan. The Board of Directors of the
Company may amend the Plan from time to time in such manner as it may deem
advisable. Nevertheless, the Board of Directors of the Company may not change
the class of individuals eligible to receive an ISO or increase the maximum
number of Shares as to which Options may be granted or the maximum number of
Shares as to which Options may be granted to any one employee during one fiscal
year of the Company without obtaining approval, within twelve months before or
after
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<PAGE>
such action, by the shareholders in the manner required by applicable state law.
Notwithstanding anything herein to the contrary, the Committee may, at its sole
discretion, amend the Plan and any outstanding Option or Award to (i) eliminate
any provision it determines is no longer required to comply with Rule 16b-3 as a
result of revisions to Rule 16b-3 which are generally effective after the date
the Plan is effective or (ii) provide the holder of the Option or Award an
exemption from potential liability under Section 16(b) of the Exchange Act and
the rules and regulations thereunder.
14. No Commitment to Retain. The grant of an Option or Award
pursuant to the Plan shall not be construed to imply or to constitute evidence
of any agreement, express or implied, on the part of the Company or any
Affiliate to retain the Optionee or Grantee as an employee, consultant or
advisor of the Company or any Affiliate, as a member of the Board of Directors
or in any other capacity.
15. Withholding of Taxes. In connection with any event
relating to an Option or Award, the Company shall have the right to (a) require
the recipient to remit or otherwise make available to the Company an amount
sufficient to satisfy any federal, state and/or local withholding tax
requirements prior to the delivery or transfer of any certificate or
certificates for such Shares or (b) take whatever other action it deems
necessary to protect its interests with respect to tax liabilities. The
Company's obligations under the Plan shall be conditioned on the Optionee's or
Grantee's compliance, to the Company's satisfaction, with any withholding
requirement.
16. Interpretation. The Plan is intended to enable
transactions under the Plan with respect to directors to satisfy the conditions
of Rule 16b-3; to the extent that any provision of the Plan would cause a
conflict with such conditions or would cause the administration of the Plan as
provided in Section 3 to fail to satisfy the conditions of Rule 16b-3, such
provision shall be deemed null and void to the extent permitted by applicable
law. This section shall not be applicable if no class of the Company's equity
securities is then registered pursuant to Section 12 of the Exchange Act.
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AMENDED AND RESTATED MANAGEMENT AND SERVICES AGREEMENT
This AMENDED AND RESTATED MANAGEMENT AND SERVICES AGREEMENT dated as of
March 17, 1998 ("Agreement") by and between U.S. PHYSICIANS, INC., a
Pennsylvania corporation ("Manager") and U.S. MEDICAL SERVICES of NEW JERSEY,
P.C., a New Jersey professional corporation ("P.C." and together with the
Manager, the "Parties"), amends and restates the Management and Services
Agreement dated February 13, 1997 by and between the Parties.
BACKGROUND
A. P.C. intends to provide physical therapy and related services
(collectively, "PT Services") to the general public at various locations in the
State of New Jersey (the "Sites").
B. For reasons of quality, efficiency and economy, P.C. has determined
that it should obtain the services of another entity to manage the Sites and to
perform certain administrative, billing and marketing services for P.C.
C. P.C. believes that such delegation of the management aspects of its
practice will enable it to better concentrate on the practice of physical
therapy and therefor improve the PT Services provided by P.C.
D. P.C. will maintain the sole responsibility of providing PT Services
at the Sites and for matters involving patient care.
E. Manager desires to assume the management of the business operations
of P.C. and to negotiate agreements with insurers, employers and other
purchasers of physical therapy services for the provision of PT Services of P.C.
F. Manager will provide financing to P.C. necessary for the operations
of P.C.
G. Manager has developed facilities and management services designed to
make available to qualified physical therapists the facilities, equipment,
supplies, management services, capital financing, support staff, marketing and
other support services necessary to permit such physical therapists to provide
physical therapy services on a cost-efficient basis and to enhance the ability
of P.C. to enter into competitive arrangements with insurers, employers and
other purchasers of physical therapy services.
H. P.C. desires that Manager make available to P.C. such financing,
management services and facilities, and agrees
<PAGE>
hereby to compensate Manager for such services as described herein.
I. Manager is willing to make such financing, management services and
facilities available to P.C. on the terms and conditions provided in this
Agreement.
NOW, THEREFORE, in consideration of the foregoing, and of the promises
and mutual covenants contained herein, the parties hereto, intending to be
legally bound hereby, agree as follows:
1. Agreement to Manage and Provide Technical and Support Services. P.C.
hereby engages Manager, and Manager accepts such engagement, to manage the Sites
on behalf of P.C. and for its account, to market PT Services provided through
P.C. to purchasers of physical therapy services and to provide the financing,
services and facilities set forth in this Agreement, on the terms and conditions
set forth herein.
2. Term. The term of this Agreement shall begin as of the date hereof
(the "Commencement Date") and shall end on the fortieth (40th) anniversary of
such date unless sooner terminated in accordance with the provisions of
Paragraph 12. Unless either party elects to terminate this Agreement at the end
of the initial term or any renewal term, by giving written notice to the other
party ninety (90) days before the expiration of the then current term, this
Agreement shall be deemed to have been automatically renewed for an additional
term of five (5) years.
3. Duties and Responsibilities of P.C. P.C. shall be responsible for
all PT Services at the Sites and shall render such PT Services to the public as
will maximize the quality and efficiency of the treatment of patients. P.C.
shall be solely responsible for the following items:
(a) Therapists and Other Health Care Providers. P.C. shall hire,
engage, supervise, evaluate and terminate all physical therapists, nurses,
technicians and other health care providers (collectively, "Professionals") at
the Sites, whether they are employees of P.C. or independent contracts of P.C.,
and, subject to the prior written consent of Manager, establish compensation and
benefits for such Professionals. P.C. shall not increase or decrease the amount
of such compensation and/or benefits without the prior written consent of
Manager. P.C. shall be responsible for the payment of all compensation payable
to Professionals, except to the extent that physical therapists, nurses,
technicians and other health care providers may become employees of Manager
pursuant to Section 4(a)(iv) of this Agreement.
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<PAGE>
(b) PT Directors. P.C. shall designate one or more PT Directors, each
of whom is properly qualified to perform the supervisory, quality assurance and
credentialing (collection and verification of information) functions necessary
for the rendering of appropriate PT Services at the Sites.
(c) Quality and Cost-Effectiveness of PT Services. P.C. shall monitor
the quality of PT Services practiced by all Professionals at the Sites, to
assure that such care meets currently accepted standards of medical competence
and is in accordance with currently approved methods and practices in the
physical therapy profession and related fields. P.C. shall adopt a peer
review/quality assessment program to monitor and evaluate the quality and
cost-effectiveness of PT Services provided by Professionals at the Sites, and
shall assure that appropriate PT Services are rendered in a cost-effective
manner.
(d) Medical Records. P.C. shall maintain the medical records of the
patients of P.C. in accordance with applicable law. Manager may, at its option,
assist in the development of policies and procedures for efficient maintenance
and retrieval of medical records, subject to applicable law. Confidentially, and
availability of medical records for inspection by authorized agencies or
individuals, shall be maintained in accordance with applicable state and federal
laws.
(e) Professional Fees. For purposes of establishing budgetary
assumptions for the Sites, P.C. after consultation with Manager, shall:
i) determine a fee schedule or schedules for each Site prior to the
inception of operations at that Site; and
ii) determine revisions to such fee schedule or schedules not less than
thirty (30) days prior to the effective date of any proposed amendment to such
fee schedule. Manager shall be authorized to negotiate fees for services with
third-party payors on behalf of P.C.
(f) Daily Statements. P.C. shall prepare and submit to Manger, or cause
its physical therapists and, if applicable, other Professionals, to prepare and
submit, daily statements of professional services rendered and any prescribed
related matters, on such form, with such detail and in such manner as Manager
shall from time to time provide to P.C., in order to permit Manager to cause
proper billing for such services to be rendered.
(g) Protocols. P.C. shall cooperate with Manager to develop utilization
review standards, treatment protocols and
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<PAGE>
similar guidelines, as required, to establish measures for the delivery of high
quality and cost-effective physical therapy.
4. Duties and Responsibilities of Manager.
(a) Management Services. Manager shall be solely responsible for the
business operation of the Sites and assumes responsibility for the management of
all non-medical aspects of the Sites, except as otherwise specifically
prohibited by law or limited by this Agreement, and shall provide the following
services:
i) Manager shall lease, acquire or otherwise procure one or more Sites
in which P.C. shall conduct its practice.
ii) Manager shall provide all reasonable and necessary medical
equipment, furnishings and furniture required in the day-to-day operation of the
Sites. MANAGER SUPPLIES THE EQUIPMENT AS IS. MANAGER IS NOT A MANUFACTURER OF,
AND IS NOT ENGAGED IN THE SALE OR DISTRIBUTION OF, THE EQUIPMENT. MANAGER IS NOT
AN AGENT OF THE MANUFACTURER OF THE SELLER OF THE EQUIPMENT. MANAGER MAKES NO
REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, REGARDING THE MERCHANTABILITY,
FITNESS, DESIGN OR SUITABILITY FOR ANY PURPOSE OR ANY CONDITION OF, OR THE
QUALITY OR CAPACITY OF, OR THE MATERIAL OR WORKMANSHIP, IN THE EQUIPMENT.
iii) Manager shall employ all necessary clerical, secretarial and
bookkeeping personnel reasonably necessary for the conduct of P.C.'s operations
at the Sites. Manager shall determine and cause to be paid the salaries and
fringe benefits of all such personnel.
iv) Manager shall assist in negotiating employment agreements or
contracts with therapists, nursing staff, technicians and other allied and
ancillary health care personnel. All persons whose services are billed to
Medicare, Medicaid or other third-party payors shall be employed by P.C.; except
to the extent applicable law authorizes billings by P.C. for supervised services
rendered by persons not employed by P.C.
v) Manager shall administer P.C.'s payroll and personnel-related
activities.
vi) Manager shall supervise all of Manager's employees; provided,
however, that P.C. shall supervise Professionals to the extent necessary to
maintain P.C.'s responsibility for the medical aspects of the practice and to
comply with requirements of applicable law.
vii) Manager shall, unless prohibited by law, order and procure all
Medical Supplies (as hereinafter defined),
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<PAGE>
office supplies and other supplies necessary in the operation of the Sites to
enable P.C. to deliver quality PT Services in a cost-effective manner. The
ultimate oversight, supervision and ownership for all Medical Supplies is and
shall remain the sole responsibility of P.C. "Medical Supplies" shall mean all
drugs, pharmaceuticals, products, substances, items or devises whose purchase,
possession, maintenance, administration, prescription or security require the
authorization or order of a licensed health care provider or require a permit,
registration, certification or other governmental authorization held by a
licensed health care provider as specified under any applicable federal or state
law.
viii) Manager shall cause to be placed and in kept in force all forms
of insurance needed to protect adequately P.C. and itself, in connection with
the operation of the Sites, including, but not limited to, where appropriate,
workers' compensation insurance, public liability insurance, fire and extended
coverage insurance, surety bonding, business interruption insurance, burglary
and theft insurance; provided, however, that P.C. shall have the exclusive
responsibility for maintaining malpractice liability insurance for the
Professionals pursuant to Paragraph 6, but which the Manager shall procure and
administer for P.C.
ix) Manager shall maintain a comprehensive system of office records,
books and accounts reflecting the income and expenses of the Sites, which books
and records may be inspected by P.C. at any reasonable time during regular
business hours. Records shall be maintained for at least four (4) years from the
date of service or from any governmental inquiry related thereto, and made
available upon request to officers, representatives or agents of the Secretary
of Health and Human Services or of the Comptroller General of the United States
General Accounting Officer.
x) Manager shall prepare and submit to P.C. monthly financial
statements with respect to the operation of the Sites.
xi) Manager shall provide all janitorial, grounds and maintenance
services for the Sites.
xii) Manager shall maintain, service and repair all equipment, or use
reasonable efforts to have lessors or contracted service providers perform such
necessary maintenance, service and repair.
xiii) Manager shall provide printing, stationery, forms, postage,
duplicating, telecopying, photocopying and other support services as are
reasonably necessary and appropriate for the operation of the Sites.
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<PAGE>
(b) Billing Services. Manager shall provide, or cause to be provided,
the following billing services to P.C.:
i) a competent management executive for the supervision of the billing
and collection functions of P.C.'s business;
ii) services with respect to billing of patients, insurance companies,
government entities and third party payors and collecting all charges made to
P.C.'s patients, excluding, however, any obligation to initiate legal
proceedings for collection, although Manager may do so at its sole and absolute
discretion;
iii) preparation of all necessary medical letters and reports,
insurance forms, governmental agencies' claim forms and workers' compensation
claim forms;
iv) preparation and mailing of all necessary required patient
statements and invoices and reasonable follow-up on such preparation and
mailing;
v) response by telephone or letter with reasonable dispatch and
promptness to any reasonable patient inquiry or request for assistance in the
interpretation of insurance policies or reimbursement programs and handling, to
the best of its ability, of any complaint involving professional services or
fees; and
vi) operating procedure manuals for clerical staff.
(c) Marketing Services. Manager, at its sole discretion and with due
regard to the economic costs and anticipated benefits, my provide, or cause to
be provided, the following marketing services to P.C.:
i) promotion of the Sites' services and facilities by marketing
representatives of Manager through contact with referring physicians and
potential referring physicians;
ii) preparation and distribution of informational and promotional
materials, including descriptions of services, fee schedules, newsletters,
testimonials and other sales promotional pieces, subject to prior approval of
P.C., which shall be deemed to be given unless Manager receives written
disapproval within three (3) days after P.C. receives the promotional materials;
iii) subject to the need of certain third party payors to maintain some
form of exclusivity, promotion of
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<PAGE>
the Sites through contact and continued liaison with administrative directors of
area HMO's, PPO's, unions and self-insured clients and other third-party payors;
and
iv) conducting open houses receptions for new Sites, seminars for
physicians, therapists and office staff, speaking engagements for physical
therapists who request Manager to assist them in organizing such engagements,
newspaper interviews and magazine articles when initiated and requested by an
interviewer or magazine.
(d) Provision of Funds. Manager shall arrange financing for P.C. or, if
no financing can be reasonably arranged, Manager shall advance funds to P.C. in
the event P.C. does not have sufficient cash on hand to pay its expenses as and
when due. Any such advance by Manager shall be repaid to Manager together with
interest at the rate from time to time charges to Manager by its primary lender
(or in the event there is no such lender, at an annual rate equal to the prime
rate announced from time to time in the Wall Street Journal plus 2%) out of
available cash in subsequent months prior tot he payment of fees due Manager
pursuant to subparagraph 8(a).
(e) Deposit of Collections. Manager, in the name of P.C., shall deposit
in the appropriate bank accounts ("Bank Accounts") all receipts arising from the
operation of the Site(s) received by Manager on behalf of P.C. and shall use
reasonable diligence to see that disbursements from such accounts are made by
and on behalf of P.C. in such amounts and at such times as may be required by
this Agreement. P.C. shall provide Manager with all authorizations necessary to
enable Manager to make the deposits and disbursements required by this
subparagraph (e).
5. Relationship of the Parties.
(a) Independent Contractors. P.C. and Manager are independent
contractors and the relationship between them is that of professional
corporation and an independent supplier of non-medical services and facilities.
Nothing in this Agreement shall be construed to create a principal-agent,
employer-employee, mater-servant, partnership or joint venture relationship.
(b) P.C. - Patient - Manager Relationships. The professional
relationship between P.C. and its patients shall, at al times during the term of
this Agreement, be solely between P.C., its physical therapists and other
Professionals and their patients. P.C. shall have complete responsibility for
its physical therapy practice and that of Professional employees or independent
contractors. Manager shall not interfere with the exercise of professional
judgment by the physical therapists and other Professionals employed by P.C. nor
shall Manager interfere
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<PAGE>
with, control, direct, or supervise P.C., or any physical therapist or other
Professional employee or independent contractor, in connection with the
provision of medical or ancillary services by P.C. In connection with the care
and treatment of its patients, P.C. shall be solely responsible for supervising
all personnel performing medical or ancillary services. To the extent any act or
service set forth in this Agreement required to be performed by Manager is
construed by a court of competent jurisdiction or by the appropriate licensure
bureaus or divisions of the New Jersey Department of State to constitute the
practice of medicine, the requirement to perform that act or service by Manager
shall be deemed waived and unenforceable. In addition, if in the opinion of
counsel to Manager, any act or service set forth in this Agreement required to
be performed by Manager is likely to be considered to constitute the unlawful
practice of physical therapy, the requirement to perform that act or service by
Manager shall be deemed waived and unenforceable. All decisions as to which
individuals shall utilize the services of P.C. shall be the sole responsibility
of P.C.; provided, however, that Manager may negotiate contracts with employers,
unions, health care insurers, HMOs, PPOs and other third-party payors to arrange
for the provision of PT Services by P.C.
6. Malpractice Insurance.
(a) Minimum Policy. On its own behalf and on behalf of each physical
therapist or other Professional its employs, and each physical therapist or
other Professional contracting with P.C. for the provision of professional
services, P.C. shall provide and keep in force a malpractice insurance policy or
policies of standard form in the State of New Jersey, with limits mutually
acceptable to Manager and P.C. The policies shall be obtained by P.C. or, as the
case may be, by each such physical therapist or other Professional employed by
P.C., or contracting with P.C., and certificates thereof shall be delivered to
Manager prior to the inception of operations of any Site, together with evidence
of the payment of the premiums thereon, and shall be placed with insurance
companies authorized and licenses to issue such policies in the State of New
Jersey at rates deemed reasonable and appropriate and having reserves in an
amount deemed to be reasonably adequate by P.C. and Manager. P.C. shall use its
best efforts to name Manager as an additional insured party on all malpractice
insurance and Manager may, at its option, participate in the procurement of
cost-effective coverage on behalf of P.C. P.C. shall provide documentation to
Manager that all such insurance is in full force and effect on each subsequent
anniversary of the Commencement Date and not less than ten (10) days prior to
the earlier of the dates upon which P.C. employs or enters into a contract with
any Professional to provide services at Site.
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<PAGE>
(b) Loss of Malpractice Insurance or Medicare/Medicaid Provider Status.
P.C. hereby agrees that it will immediately suspend any physical therapist or
other Professional for whom malpractice insurance cannot reasonably obtained or
whose malpractice insurance is canceled, and such physical therapist or other
Professional shall not be reinstated or permitted to practice at any Site until
such time as the malpractice policy is reinstate. P.C. will notify Manger within
24 hours of receipt of notice or information that any physical therapist or
other Professional is not in compliance with the provisions of this Agreement
pertaining to malpractice insurance, or has been suspended or terminated from
participation in Medicare or Medicaid. Manager shall have the right to cancel
this Agreement within three (3) days of learning that such physical therapist or
other Professional has not been suspended by P.C. Failure to suspend a physical
therapist or other Professional who is not in compliance with the provisions of
this Agreement pertaining to Medicare/Medicaid participation status, malpractice
insurance failure to replace such insurance should it be canceled, or failure to
provide such timely notice, shall constitute a breach of this Agreement pursuant
to Paragraph 12.
7. Representations of P.C. P.C. hereby makes the following
representations to Manager, each of which is material and is be relied on by
Manager, and shall be true as of the date hereof and shall survive the date
hereof:
(a) Professional Corporation. P.C. is a professional corporation duly
incorporated under the laws of the state of New Jersey and has the power and
authority to carry on its business as it is contemplated by this Agreement.
(b) Physical Therapists and Other Professionals Licenses. Each physical
therapist employed by or under contract with P.C. to provide PT Services is, and
will continue to be, duly licensed to practice physical therapy in the State of
New Jersey, is properly trained, competent and experienced in physical therapy,
and has in force, and will continue to maintain, medical malpractice insurance
pursuant to the provisions of this Agreement. P.C. will assure that all other
Professionals rendering services pursuant to this Agreement shall be duly
licensed and appropriately supervised by P.C. in accordance with applicable laws
and current community standards. P.C. shall enter into a written agreement in
form and substance satisfactory to Manager, with each Professional employed by
or under contract with P.C. to render services hereunder (the "Employment
Agreements").
(c) Provider Numbers. P.C. shall maintain provider numbers for Blue
Cross, Blue Shield, Medicare and Medicaid (collectively "Provider Numbers"). To
the extent
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<PAGE>
practicable, group assignment accounts will be established to facilitate
billings.
(d) Information Accurate. Any and all factual information furnished by
P.C. to Manager including, but not limited to, financial statements and fee
schedules of P.c., are true and accurate in every material respect as of the
date on which such information was furnished.
(e) Professional Conduct. P.C. has and will continue to conduct its
professional activities in accordance and compliance with any and all laws,
regulations and ethical and professional standards applicable thereto. P.C. will
assure that all Professionals employed by or under contract with P.C. maintain
appropriate licenses, credentials, and privileges in good standing, and have not
been terminated or otherwise precluded from rendering services under Medicare or
Medicaid, other federal or state health care programs, or for other third-party
payors with which Manager may negotiate agreements to provide PT Services.
8. Compensation.
(a) Payment of Fees. The parties hereto recognize that Manager's
expenses, and the expenses of the Sites, will vary substantially depending on
the volume and type of patient services. The parties further recognize the
inherent uncertainties and the difficulty of predicting monthly expenses, volume
of services, the collection of revenues, the extent of obligations and the risks
that Manager has taken and will take with respect to capital expenditures,
equipment lease obligations and other obligations incurred in connection with
the establishment and furnishing of the Sites, and additionally recognize the
need to provide Manager with sufficient revenues to pay all operating expenses
and to provide Manager with a return on its investment commensurate with the
risks being assumed by Manager. Therefore, the parties agree that P.C. shall pay
to Manager as compensation for all the services rendered by Manager pursuant to
the terms of this Agreement an amount equal to the Gross Collected Revenues
less: (i) the amount of the Permitted Expenses of P.C. and (ii) the amount of
advances repaid to Manager pursuant to subparagraph 8(d). The term "Gross
Collected Revenues" shall mean all billings (including, without limitation,
billings for PT Services and for the services of other Professionals, medical
supplies, charges for ancillary services and facility and equipment charges)
collected by P.C. for services rendered at the Sites. The term "Permitted
Expenses" shall mean: (i) all salaries, bonuses and fringe benefits required to
be paid in accordance with the Employment Agreements or pursuant to applicable
law; (ii) insurance costs; (iii) legal and account fees; (iv) taxes; and (v)
other incidental expenses that for purposes of convenience are paid by P.C. but
would
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otherwise be the obligation of Manager. Payment for the services provided
hereunder shall be made through a daily sweep by Manager, of the cash contained
in the bank accounts of P.C., into bank accounts of Manager. Manager shall
reconcile amounts payable hereunder on a quarterly basis.
(b) Application of Revenues. P.C. hereby agrees to the application of
the Gross Collected Revenues to the purposes and priorities specified in this
Agreement. P.c. authorizes Manager to make disbursements from the Bank Accounts
to pay Manager amounts owed to it by P.C.
(c) P.C.'s Expenses. P.C. agrees that its Permitted Expenses shall not
exceed twenty percent (20%) of the Gross Collected Revenues calculated on an
annual basis, without the consent of Manager; provided, however, that P.C. shall
not be subject to any such limit with respect to payment of amounts due under
the Employment Agreements between P.C. and its Professional employees.
(d) Grant of Security Interest. As security for the payment by P.C. of
the compensation due to Manager pursuant to this Agreement and for any advances
made by Manager to P.C. pursuant to subparagraph 4(d), P.C. hereby grants
Manager a security interest in all of P.C.'s accounts receivable, cash, bank
accounts, Medical Supplies and proceeds of the foregoing (collective, the
"Secured Assets"). At the request of Manager, P.C. shall execute and deliver to
Manger any and all documents requested by Manager to evidence or perfect the
security interest granted hereby, including, but not limited to, UCC-1 Financing
Statements. This Agreement shall constitute a security agreement.
(e) Review of Books. Each party shall have the right at least annually
to have a certified public accountant review the other party's books to
determine whether that party has complied with this Agreement.
9. Books, Office Equipment, Etc.
(a) P.C.'s Ownership. All Medical Supplies (as defined in Paragraph
4(a)(vii)) and patient records shall at all times be and remain P.C.'s property;
provided, however, that, upon termination of this Agreement, P.C. shall provide
any successor entity providing services at any Site, upon request by such
successor within ninety (90) days after termination of this Agreement and at the
successor's expense, access to, and copies of, such records relating to PT
Services performed at such Site by P.C. during the term hereof as such successor
feels are reasonable necessary in order for such successor to provide continuing
PT Services. Notwithstanding the foregoing, no patient records will be made
available without the written
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consent of the patient if such is required by law. Manager shall reimburse P.C.
the reasonable cost of making such copies as are required to comply with this
subparagraph 9(a).
(b) Manager's Ownership. All professional instruments, equipment,
computers, computer software programs and other management information systems,
supplies, samples, forms, charts, logs, brochures, building information,
policies and procedures, protocols, outcome studies, contracts or any other
materials or information furnished to P.C. by Manager are and shall remain the
sole property of Manger; if Manager requests the return of such equipment or
materials at any time after the term of this Agreement, P.C. shall immediately
deliver the same to Manager.
10. Exclusivity, Non-Competition and Non-Disclosure Agreement.
(a) Exclusivity. P.C. agrees that during the term of this Agreement it
shall provide PT Services exclusively at Sites managed by Manager pursuant to
this Agreement unless the parties hereto otherwise expressly agree in writing.
(b) Non-Competition. During the term of this Agreement and for two (2)
years following termination, P.C. shall not:
i) employ any individual previously working for Manager as its
employee;
ii) directly or indirectly induce or attempt to influence any employee
of Manager to terminate employment with Manager; or
iii) engage in, or have any interest in, directly or indirectly (as
proprietor, partner, stockholder, principal, agent, broker, employee,
consultant, or lender) any business or physical therapy or physical
rehabilitation facility within the Restricted Area which is engaged in providing
PT Services such as those provided at the Sites or providing management services
similar to those provided by Manager. Restricted Area shall mean the area within
a six (6) mile radius of any Site.
(c) Non-Disclosure. During the term of this Agreement and at all times
thereafter, neither P.C. nor its shareholders or physical therapists shall
disclose, communicate or divulge, or use for the direct or indirect benefit of
any person, firm, association or company (except any material referred to in
subparagraph 9(a) above) any information regarding the business methods,
business policies, procedures, protocols, techniques, information systems or
trade secrets, or other
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knowledge or processes of or developed or used by Manager, or any other
confidential information relating to or dealing with the business operations or
activities of Manager (including, but not limited to financial information),
made known to P.C. or its employees or independent contractors or learned or
acquired by P.C., it employees or independent contractors during the term of
this Agreement. In furtherance of the foregoing, P.C. agrees not to disclose,
communicate or divulge to any third party the terms of this Agreement.
(d) Reasonableness of Restrictions. The parties acknowledge that the
restrictions contained in subparagraphs 10(a), 10(b) and 10(c) are reasonable
and necessary to protect the legitimate interests and substantial investment of
Manager and that any violation of these restrictions would result in immediate
irreparable injury to Manager. If the period of time or geographical area
specified in subparagraph 10(b) and 10(c) should be adjudged unreasonable in any
proceeding then the period of time or geographic area shall be reduced by the
elimination or reduction of such portion thereof so that such restrictions may
be enforced for such time or area as is adjudged to be reasonable. P.C. and
Manager acknowledge that, in the event of a violation of any such restrictions,
Manager shall be entitled to preliminary and permanent injunctive relief as well
as an equitable accounting of all earnings, profits and other benefits arising
from such violations, which rights shall be cumulative and in addition to any
other rights or remedies to which Manager may be entitled. In the event of a
violation, the period referred to in subparagraph 10(b) shall be extended by a
period of time equal to that period beginning with the commencement of any such
violation and ending when such violation shall have been finally terminated in
good faith.
(e) Additional Covenants. P.C. shall secure covenants similar to those
specified with respect to P.C. in this Paragraph 10 (subject to geographic
limitations consistent with the Professional's activities for P.C.) from: (i)
each Professional employed by or contracting with P.C., and from (ii) each
shareholder and all future shareholders. Such covenants shall provide that
Manager shall be a third party beneficiary of each such covenant and may enforce
such covenants. P.C. shall provide to Manager proof of compliance with this
subsection upon Manager's request. P.C. agrees that it shall take all actions
necessary to enforce such covenants. P.C. covenants and agrees that it shall
operate in the manner necessary to constitute a "group practice," as such term
is defined in 42 U.S.C. ss.1395nn(h)(4)(A), and that all referrals within and
among members of the group shall comport with the requirements of 42 U.S.C.
ss.1395 and other applicable laws and implementing regulations.
(f) Survival. The provision of this Paragraph 10 shall survive the
expiration or termination of this Agreement.
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11. Power of Attorney. P.C. hereby appoints Manager, for the term
hereof (including all renewal terms) and thereafter until all amounts due to
Manager have been paid, to be its true and lawful attorney-in-fact, for the
following purposes:
(a) to collect accounts receivable owing to P.C. in P.C.'s name and on
its behalf;
(b) to receive payments from Blue Cross, Blue Shield, insurance
companies, health care plans, Medicare, Medicaid and all other third party
payors in P.C.'s name and on its behalf for deposit in the Bank Accounts;
(c) to take possession of, endorse in the name of P.C. (and/or in the
name of an individual Professional) such payment intended for the payment of a
Professional's bills and deposit in the Bank Accounts any notes, checks, money
orders, cash and other instruments received in payment of accounts receivable;
(d) to initiate the institution of legal proceedings in P.C.'s name to
collect any account and monies owed to P.C., to enforce the rights of P.C. under
any contract or in connection with the rendering of any service and to contest
adjustments and decisions by government agencies (or fiscal intermediaries) and
third-party payors;
(e) to negotiate payments to P.C. under this Agreement to the extent
otherwise permitted by law;
(f) to perfect a security interest in the Secured Assets of P.C.; and
(g) to do any other act, make any payment or execute any document on
behalf of P.C. to cure any default by P.C. of this Agreement; provided, such act
by Manager must comply with any applicable law.
12. Termination and Breach.
(a) General Breach by P.C. In the event that P.C. should be in default
in the performance of any material provision of this Agreement, and such default
is not cured within thirty (30) days after receipt of written notice of such
default from Manager, Manager, at its option, may terminate this Agreement by
delivering written notice to P.C. at any time after expiration of such thirty
(30) day period.
(b) Failure to Maintain Malpractice Insurance or Licenses or
Participation Agreements. If P.C. should materially breach any of its
obligations pursuant to Paragraph 6 or its obligation to maintain, or cause to
be maintained the
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professional licenses or participation agreements of all physical therapists
employed by it, or under contract to it, or to dismiss those who do not maintain
their professional licenses and participation agreements under the same terms
and conditions in Paragraph 6 pertaining to the maintenance of malpractice
insurance, and if such breach is not cured within ten (10) days after receipt by
P.C. of written notification of such breach from Manager, Manager may either
cure the breach itself, where possible, at the expense of P.C., or terminate
this Agreement upon written notice to P.C.
(c) Bankruptcy of Manager. In the event Manager files any voluntary
petition in bankruptcy or any bankruptcy proceeding is filed against Manager
which in either case remains undismissed for a period of 360 days, P.C., at its
option, may terminate this Agreement by delivering written notice to Manager at
any time after such 360 day period and prior to the dismissal of such
proceeding.
(d) Effect of Termination. After the termination of this Agreement,
Manager shall continue to collect the accounts receivable which are on the books
of P.C. as of the date of termination and shall be entitled to receive as its
fee for services rendered prior to termination the amount of the Gross Collected
Revenues with respect to such accounts receivable (whenever collected) less the
amount of then unpaid Permitted Expenses incurred prior to termination.
13. Indemnification.
(a) P.C. P.C. shall indemnify and hold Manager, its officers,
directors, stockholders, employees, agents, parents and subsidiaries harmless
from and against all claims, demands, costs, expenses, liabilities and losses
(including attorneys' and other professional fees) caused or asserted to have
been caused by or as a result of the performance of PT Services or ancillary
services or any other acts or omissions by P.C. and/or its shareholders, agents,
employees or subcontractors (other than Manager).
(b) Manager. Manager shall indemnify and hold P.C., its officers,
directors, shareholders and employees harmless from and against all claims,
demands, costs, expenses, liabilities and losses (including attorneys' and other
professional fees) which may result against P.C. as a consequence of Manager's
gross negligence or willful misconduct in connection with Manager's performance
of this Agreement.
(c) Survival. The provisions of this Paragraph 13 shall survive the
expiration or termination of this Agreement.
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14. Legislative Limitations. Notwithstanding any other provisions of
this Agreement, if the governmental agencies (or their representatives) that
administer Medicare or Medicaid, or any other payor, or any other federal, state
or local government or agency, passes, issues or promulgates any law, rule,
regulation, standard or interpretation at any time while this Agreement is in
effect which prohibits, restricts, limits or in any way materially changes the
method or amounts of reimbursement or payment for services rendered under this
Agreement, or give the other party notice of intent to amend this Agreement to
the satisfaction of the noticing party, to reflect the prohibition, restriction,
limitation or change, provided, however, that no such amendment shall alter the
basic economic status of the parties pursuant to this Agreement. If this
Agreement is not so amended in writing within sixty (60) days after such notice
is given, the parties agree to submit the issues of such an amendment to
arbitration in accordance with subparagraph 15(k); provided, however, that if at
the election of either party, a formal appeal is filed with the relevant
government agency, or a suit is filed in a court of competent jurisdiction, so
as to stay the implementation of any such law, rule, regulation, standard or
interpretation, during the period of such stay, the right to amend as set forth
above shall also be stayed.
15. Miscellaneous.
(a) Indulgences, Etc. The failure or delay on the part of any party to
exercise any right, remedy, power or privilege under this Agreement shall not
operate as a waiver thereof, nor shall any single or partial exercise of any
right, remedy, power or privilege preclude any other or further exercise of the
same or of any other right, remedy, power or privilege, nor shall any waiver of
any right, remedy, power or privilege with respect to any occurrence be
construed as a waiver of such right, remedy, power or privilege with respect to
any other occurrence. No waiver shall be effective unless it is in writing and
is signed by the party asserted to have granted such waiver.
(b) Controlling Law. This Agreement and all provisions relating to its
validity, interpretation, performance and enforcement shall be governed by and
construed in accordance with the laws of the State of New Jersey.
(c) Notices. All notices, requests, demands and other communications
required or permitted under this Agreement shall be in writing and shall be
deemed to have been duly given, made and received when delivered (personally, by
carrier service such as Federal Express, or by other messenger) or upon actual
receipt of registered or certified mail, postage prepaid, return receipt
requested, addressed as set forth below:
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i) If to Manager:
U.S. PHYSICIANS, Inc.
220 Commerce Drive, Suite 400
Fort Washington, PA 19034
Attention: President
ii) If to P.C.:
U.S. Medical Services of New Jersey, P.C.
220 Commerce Drive
Fort Washington, PA 19034
Attention: President
In addition, notice by mail should be by air mail if posted outside of
the continental United States.
Any party may alter the address to which communications or copies are
to be sent by giving notice of such change of address conformity with the
provisions of this subparagraph 15(c).
(d) Binding Nature of Agreement; Assignment. This Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
heirs, personal representatives, successors and assigns. Notwithstanding the
foregoing, P.C. may not assign or transfer its rights or obligations under this
Agreement without the prior written consent of Manager. Manager may assign or
transfer all or any portion of its rights or obligations under this Agreement
without the consent of P.C.
(e) Execution in Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be deemed to be an original as
against any party whose signature appears thereon, and all of which shall
together constitute one and the same instrument. This Agreement shall become
binding when one or more counterparts hereof, individually or taken together,
shall bear the signatures of all of the parties reflected hereon as the
signatories.
(f) Severability and Reformation. The provisions of this Agreement are
independent of and severable from each other, and no provision shall be affected
or rendered invalid or unenforceable by virtue of the fact that for any reason
any other provision may be invalid or unenforceable in whole or in part. If or
to the extent this Agreement is reasonably deemed to violate applicable law, the
parties agree to negotiate in good faith to amend the Agreement to the extent
possible, consistent with its purposes, to conform to law.
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(g) Entire Agreement. This Agreement contains the entire understanding
among the parties with respect to the subject matter hereof, and supersedes all
prior and contemporaneous agreements and understandings, inducements or
conditions, express or implied, oral or written, except as herein contained.
This Agreement may not be modified or amended other than by an agreement in
writing.
(h) Paragraph Headings. The paragraph headings in this Agreement are
for convenience only, form no part of this Agreement and shall not affect its
interpretation.
(i) Gender, Etc. Words used herein, regardless of the number and gender
specifically used, shall be deemed and construed to include any other number,
singular or plural, and any other gender, masculine, feminine or neuter, as the
context indicates is appropriate.
(j) Number of Days. In computing the number of days for purposes of
this Agreement, all days shall be counted, including Saturdays, Sundays and
holidays; provided, however, that, if the final day of any time period falls on
a Saturday, Sunday or holiday, then the final day shall be deemed to be the next
day which is not a Saturday, Sunday or holiday.
(k) Arbitration. Any dispute (including a claimed breach of the terms
hereof) arising out of or in connection with this Agreement, other than a
claimed breach of Paragraph 10 of this Agreement to which this subparagraph
15(k) shall not be applicable, shall be resolved by arbitration conducted by the
American Arbitration Association in Philadelphia, Pennsylvania, in accordance
with its rules then in existence. The arbitrators shall not contravene or vary
in any respect any of the terms or provisions of this Agreement except as
provided in Paragraph 14. The award of the arbitrators shall be final and
binding upon the parties hereto, their heirs, administrators, executors,
successors and assigns, and judgment upon such award may be entered in any court
having jurisdiction thereof.
(l) Force Majeure. Neither party shall be liable or deemed to be in
default for any delay or failure to perform under this Agreement resulting,
directly or indirectly, from acts of God, civil or military authority, acts of
public enemy, war, accidents, fires, explosions, earthquakes, floods, strikes or
other work interruptions by either party's employees or any other similar cause
beyond the reasonable control of the non-performing party.
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IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement on the date first above written.
U.S. PHYSICIANS, INC.
By: /s/ Thomas J. Keane
----------------------------
Thomas J. Keane
President
U.S. MEDICAL SERVICES OF NEW
JERSEY, P.C.
By: /s/ Thomas J. Keane
----------------------------
Thomas J. Keane
Vice President
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ASSET PURCHASE AGREEMENT
THIS IS AN AGREEMENT made on the 12th day of February, 1998,
by and among U.S. PHYSICIANS, Inc., a Pennsylvania corporation ("USP"), the
corporations which are signatories hereto (other than USP) ("Selling P.C." or
"Selling P.C.s") and Alan E. Ottenstein, M.D. (hereinafter referred to as
"Physician" or "Physicians"):
BACKGROUND
A. Each Selling P.C. provides the care and related medical
services set forth opposite its name on Schedule "A" to the Selling P.C.s'
Disclosure Schedule which has been delivered to USP prior to the execution of
this Agreement (Schedule "A" and other Schedules referred to in this Agreement
are part of the Selling P.C.s' Disclosure Schedule) to the general public from
its offices set forth on Schedule "A."
B. Physician is the sole shareholder of each Selling P.C. and
provides neurology, magnetic resonance imaging and pain management care as a
sole proprietor from his offices at 2997 Princeton Pike, Lawrenceville, New
Jersey (together with the practices described in Paragraph A (the "Practices")).
C. Physician owns all of the issued and outstanding shares of
capital stock of each Selling P.C., the number of such shares owned by Physician
being set forth opposite his name on Schedule "B."
D. Attached hereto is a seventeen (17) page Rider to Asset
Purchase Agreement (the "Rider") which forms a part of this Agreement.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants set forth, the parties, intending to be legally bound, agree as
follows:
1. Sale and Purchase of Assets. Upon the terms and subject to
the conditions of this Agreement, Physician and each Selling P.C. agrees to
sell, convey, transfer, assign and deliver to USP and USP agrees to purchase
from Physician and each Selling P.C. on the Closing Date (as defined in the
Rider), all of the
<PAGE>
assets, rights, properties and business of Physician relating
to the Practices and each Selling P.C., except for the Excluded Assets (as
defined in the Rider), all free and clear of any and all liens, claims,
liabilities, obligations, pledges, encumbrances, charges and restrictions of
every kind, nature and description, except to the extent of any claims,
liabilities and obligations expressly assumed by USP (collectively, the
"Assets").
2. Payment of Purchase Price. The Purchase Price payable by
USP shall consist of and be paid as follows:
(a) on April 30, 1998, if Closing has not occurred on or
prior to such date, USP shall pay Physician and each Selling P.C. an aggregate
of Fifty Thousand Dollars ($50,000), with the amount payable to Physician and
each Selling P.C. being as set forth in Schedule 3 by check;
(b) on June 30, 1998, if Closing has not occurred on or
prior to such date, USP shall pay Physician and each Selling P.C. an aggregate
of Fifty Thousand Dollars ($50,000), with the amount payable to Physician and
each Selling P.C. being as set forth in Schedule 3, by check;
(c) at Closing (as defined in the Rider), USP shall deliver
to Physician and each Selling P.C. an aggregate of Six Million Nine Hundred
Thousand Dollars ($6,900,000) less the amounts, if any, paid to Physician and
the Selling P.C.'s pursuant to subparagraphs 2(a) and (b) (less the amount
referred to in subparagraph 3(c) of the Rider), with the amount payable to
Physician and each Selling P.C. being as set forth in Schedule 3 by wire
transfer in accordance with instructions delivered by Physician to USP or by
bank cashier's check, at the discretion of USP;
(d) at Closing, USP shall deliver to Physician and each
Selling P.C. promissory notes in the aggregate principal amount of Three Million
Four Hundred Fifty Thousand Dollars ($3,450,000) with the amount payable to
Physician and each Selling P.C. being as set forth in Schedule 3 in the form of
Exhibit "A" (together with the note referred to in subparagraph 2(d), the "Note"
or "Notes");
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(e) at Closing, USP shall deliver to Physician and each
Selling P.C. one or more stock certificates issued to Physician and Selling P.C.
(the "Stock Certificate") representing in the aggregate such number of shares of
its common stock as is obtained by dividing $3,450,000 by the price per share to
the public in USP's initial public offering (the "Shares") with the amount
issued to Physician and each Selling P.C. being as set forth in Schedule 3. The
Stock Certificate shall be subject to the terms of, and shall bear the legends
set forth in, Paragraph 17 of the Rider;
(f) at Closing, USP shall deliver to Physician a promissory
note in the aggregate principal amount of Four Hundred Forty-One Thousand Six
Hundred Five Dollars ($441,605) payable to Physician in the form of Exhibit "E;"
(g) at Closing, USP shall deliver to Physician options to
purchase 50,000 shares of common stock of USP, which options shall be subject to
USP's standard grant letter, shall have an exercise price per share equal to the
price per share to the public in USP's initial public offering and shall first
become exercisable in three equal annual installments with the first installment
becoming exercisable on the first anniversary hereof; and
(h) with respect to each year during the ten year period
(the "Earnout Period") commencing with the Closing Date if the first of the
month, or the first day of the month immediately succeeding the Closing Date if
the Closing Date is not the first day of the month, USP shall pay Physician 40%
of the Profits Before Taxes of MRI Services, as hereinafter defined, rendered at
1245 Whitehorse-Mercerville Road, Suites 403 and 404, Hamilton, New Jersey (the
"MRI Locations") as provided in this subparagraph. Profit Before Taxes of MRI
Services means cash receipts received by the affiliate of USP which employs
Physician resulting from payments for MRIs administered after the Closing Date
from the MRI Locations ("Cash Receipts"), minus (A) occupancy expenses
(including, but not limited to, amounts for utilities, facility rent, common
area maintenance charges, property tax and insurance), (B) staff expenses
(including, but not limited to, salary, bonus, payroll taxes, perquisites and
professional liability insurance premiums relating to physicians
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and all other staff), (C) supplies, (D) advertising and promotional expenses,
(E) equipment expenses (including, but not limited to, lease costs,
repairs, maintenance and interest but not including lease costs, principal and
interest included in the Debt), (F) other direct expenses and (G) allocated
overhead expenses (including, but not limited to, billing and collection, human
resources and accounting) equal to 8% of the Cash Receipts. Within forty-five
(45) days after the end of each of the first three three month periods of each
year during the Earnout Period, USP shall estimate the amount that would be due
to Physician pursuant to this subparagraph based on the portion of the year then
ended and shall pay Physician an amount equal to 85% of the amount which would
be due to him pursuant to this subparagraph less amounts previously paid to
Physician pursuant to this sentence with respect to such year. Within ninety
(90) days after the end of each year during the Earnout Period, USP shall
determine the actual amount due Physician for the year then ended and either (I)
USP shall pay Physician the amount, if any, by which 40% of the Profits Before
Taxes of MRI Services for such year exceeds the amount previously paid to
Physician pursuant to this subparagraph with respect to such year, or (II)
Physician shall pay USP the amount, if any, by which the amounts previously paid
to Physician by USP pursuant to this subparagraph exceeds 40% of the Profits
Before Taxes of MRI Services for such year.
3. Intentionally Omitted.
4. Financial Statements. The financial statements included as
Schedule "6(b)" are the Balance Sheets of Physician and each Selling P.C. as at
September 30, 1997 (and, for purposes of Closing, the Balance Sheet of Physician
and each Selling P.C. as at December 31, 1997) and the tax returns for Physician
and each Selling P.C. for the years ended December 31, 1995 and December 31,
1996 (the Balance Sheets as of September 30, 1997 are referred to as the
"Warranted Balance Sheet" and September 30, 1997 is referred to as the "Balance
Sheet Date") and the related Statements of Income (Loss) and the Sources and
Application of Funds for the period ended as of the Balance Sheet Date and all
related Schedules and Notes to the foregoing. The financial statements were
compiled by William J. Keephart, CPA, P.A. and the tax returns were prepared by
William J. Keephart, CPA, P.A. Each Selling P.C. and Physician shall cooperate
fully
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with USP and its representatives in connection with any required audit of the
Practices in anticipation of an initial public offering of the common stock of
USP.
5. Accounts Receivable. At least $6,500,000 of the accounts
receivable on the books of Physician and the Selling P.C.s as of the Closing
Date will be collected on or before the second anniversary of the Closing Date.
The accounts receivable on the books of Physician and Selling P.C.s as of the
Closing Date are referred to in this paragraph as "Accounts Receivable." Within
forty-five days after the second anniversary of the Closing Date, Selling P.C.s
and Physician shall pay USP the amount by which the Accounts Receivable
collected on or before the second anniversary of Closing was less than
$6,500,000. On a quarterly basis after USP has received $6,500,000 of Accounts
Receivable (the "Initial Amount") USP shall pay Selling P.C.s an amount equal to
90% of Accounts Receivable collected in such quarter after the Initial Amount.
Any amounts collected from patients or third party payors which have been billed
by both Selling P.C.s and an affiliate of USP shall be credited as identified by
such payor, but in the absence of any identification or notice of dispute,
during the first two years after the Closing Date shall be credited to the
oldest invoice addressed to such payor with respect to such patient and
thereafter to the newest invoice.
6. Other Matters. USP agrees that during the Earnout Period,
it will involve Physician in the budget process with respect to MRI Services at
the MRI Locations and Pain Management Centers and will review the results of
operations of the MRI Services at the MRI Locations and Pain Management Centers
with Physician on a quarterly basis.
7. Incorporation of Rider. The Rider is incorporated by
reference into and made a part of this Agreement.
8. Address for Notices. Notices shall be addressed to Selling
P.C.s and Physician at 2997 Princeton Pike, Lawrenceville, New Jersey, 08648,
with a copy to Martin L. Monaco, Jr., Esquire, Fox, Rothschild, O'Brien &
Frankel, 997 Lennox Drive, Building 3, Lawrenceville, New Jersey, 08648-3261;
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provided, however, that notices to Physician after Closing shall be sent to the
last address for Physician in the records of P.C.
9. Execution in Counterparts. This Agreement may be executed
in any number of counterparts, each of which shall be deemed to be an original
as against any party whose signature appears thereon, and all of which shall
together constitute one and the same instrument. This Agreement shall become
binding when one or more counterparts hereof, individually or taken together,
shall bear the signatures of all of the parties reflected as the signatories.
10. Entire Agreement. This Agreement, including the Rider,
Schedules and Exhibits (which are incorporated in this Agreement by reference)
contains the entire understanding among the parties with respect to its subject
matter, and supersedes all prior and contemporaneous agreements and
understandings, inducements or conditions, express or implied, oral or written,
except as herein contained. The express terms of this Agreement control and
supersede any course of performance and/or usage of the trade inconsistent with
any of the terms hereof. This Agreement may not be modified or amended other
than by an agreement in writing signed by all signatories hereto.
IN WITNESS WHEREOF, the parties hereto have executed
this Agreement as of the date first above written.
U.S. PHYSICIANS, INC.
By: Thomas J. Keane
----------------------------
President
Alan E. Ottenstein
-----------------------------
Alan E. Ottenstein
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LAWRENCEVILLE NEUROLOGY CHERRY HILL DIAGNOSTIC
ASSOCIATES, P.A. ASSOCIATES, P.A.
By: Alan E. Ottenstein By: Alan E. Ottenstein
---------------------- -------------------------
President President
HAMILTON NEURODIAGNOSTIC BRICK DIAGNOSTIC ASSOCIATES,
ASSOCIATES, P.A. P.A.
By: Alan E. Ottenstein By: Alan E. Ottenstein
---------------------- -------------------------
President President
CENTER FOR STROKE PREVENTION, INC. NEUROLOGY PAIN CENTER, P.A.
By: Alan E. Ottenstein By: Alan E. Ottenstein
---------------------- -------------------------
President President
NEUROLOGY ASSOCIATES OF MERCER ALAN OTTENSTEIN, M.D., P.C.
COUNTY, P.A.
By: Alan E. Ottenstein By: Alan E. Ottenstein
---------------------- -------------------------
President President
OPEN MRI, INC.
By: Alan E. Ottenstein
----------------------
President
NEW BRUNSWICK DIAGNOSTIC
ASSOCIATES, P.A.
By: Alan E. Ottenstein
----------------------
President
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RIDER TO ASSET PURCHASE AGREEMENT
This Rider is attached to an Asset Purchase Agreement and forms a part
of such Agreement. Any term used in this Rider which is defined in the Asset
Purchase Agreement shall have the meaning set forth in the Asset Purchase
Agreement. The term "Agreement" used in this Rider means the Asset Purchase
Agreement, including this Rider.
1. The Assets. The following Assets are being purchased by USP (the
"Assets"):
(i) all of the furniture, fixtures, machinery, equipment and
physical assets of Physician relating to the Practices and each Selling P.C.;
(ii) all of the inventory owned by Physician relating to the
Practices and each Selling P.C.;
(iii) all supplies, instruments and equipment owned by
Physician relating to the Practices and each Selling P.C.;
(iv) the rights in, to and under all leases of equipment,
furniture, machinery, supplies, instruments and other items of tangible personal
property relating to the Practices;
(v) all rights in, to and under all contracts, agreements,
insurance policies (other than life and malpractice), purchase orders and
commitments of Physician relating to the Practices and each Selling P.C. listed
in Schedules "6(c)", "6(d)-1" and "6(f)" and to the extent transfers are
requested by USP, agreements listed in Schedule "6(g)";
(vi) copies of all books and records of Physician relating to
the Practices and each Selling P.C., including, without limitation, all credit
records, payroll records, computer records, computer programs, contracts,
agreements, operating manuals, schedules of assets, correspondence, books of
account, files, papers, books and all other public and confidential business
records, whether such records are in hard copy form or electronically or
magnetically stored;
(vii) all franchises, licenses, permits, certificates,
approvals and other governmental authorizations, necessary to own and operate
all of the Assets;
(viii) all of Physician's and each Selling P.C.'s right, title
and interest in and to all intellectual property, trademarks, tradenames and
telephone numbers used in connection with any of the Practices;
(ix) all rights in, to and under all representations,
warranties, covenants and guarantees made or provided by third parties to or for
the benefit of Physician and/or Selling P.C.s with respect to the Assets;
(x) all of Physician's and each Selling P.C.'s prepaid
expenses, prepaid insurance, deposits and other similar items relating to the
Assets;
(xi) all of Physician's and each Selling P.C.'s accounts
receivable;
(xii) $25,000 of cash;
(xiii) all goodwill of Physician and each Selling P.C.
relating or attributable to or arising from the Assets;
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(xiv) all of Physician's and each Selling P.C.'s drugs,
pharmaceuticals, products, substances, items or devices whose purchase,
possession, maintenance, administration, prescription or security requires the
authorization or order of a licensed health care provider or requires a permit,
registration, certification or any other governmental authorization held by a
licensed health care provider as specified under any federal or state law, or
both; and
(xv) all of Physician's and each Selling P.C.'s records of
identity, diagnosis, evaluation or treatment of patients.
2. Excluded Assets. USP shall not acquire and Physician and/or each
Selling P.C. shall retain all cash (except as provided in subparagraph 1 (xii)),
cash equivalents, life insurance policies, malpractice insurance policies,
provider numbers, automobiles, other items set forth on Schedule 2 and contracts
and agreements not specifically agreed to be assumed by USP.
3. Purchase Price.
(a) Purchase Price. The maximum purchase price for the Assets shall
be as set forth in the Asset Purchase Agreement, subject to adjustment as
provided in subparagraph (c) below.
(b) Payment of Purchase Price. The Purchase Price payable by USP
shall be paid as set forth in the Asset Purchase Agreement.
(c) Adjustment to Purchase Price. If Physician or any Selling P.C.
has a claims made malpractice insurance policy, the cash portion of the Purchase
Price payable by USP shall be reduced by an amount equal to the premium of a
"tail" malpractice insurance policy naming such Selling P.C., Physician and one
or more affiliates of USP as a named insured in an amount and from an insurance
company acceptable to USP. If applicable, promptly after Closing USP shall pay
such amount to the insurance company to purchase the "tail" insurance policy.
(d) Allocation of Purchase Price. The Purchase Price and assumption
of liabilities shall be allocated among the assets acquired by USP as set forth
in an allocation schedule to be agreed to by Selling P.C.s, Physician and USP
within forty-five (45) days after the date hereof. Following Closing, USP shall
provide Selling P.C. a copy of a Form 8594 which has been completed by USP
consistent with the methodology set forth on the foregoing allocation schedule.
USP and Selling P.C. agree to file all tax returns consistent with the
allocations on the Form 8594 provided by USP.
4. Intentionally Omitted.
5. Assumption of Liabilities. As further consideration for the transfer
of the Assets, USP hereby assumes and shall hereafter satisfy, discharge,
perform and fulfill as they become due (a) the obligations and liabilities of
each Selling P.C. that relate to periods, events or circumstances occurring on
or after the Closing Date in, to and under the agreements set forth on Schedules
"6(c)", "6(d)-1" and "6(f)," and (b) those liabilities described on Schedule
5(b) hereto, in the maximum amount indicated on Schedule 5(b) (collectively the
"Debt"). Except for the foregoing, USP is not assuming or discharging any debts,
obligations, liabilities or commitments of, or claims against, any Selling P.C.
or Physician, whether accrued now or hereafter, whether fixed or contingent, or
whether known or unknown, or any claims asserted against the Assets relating to
any events prior to the Closing Date, including, without limitation, (i) any and
all taxes payable by Physician or any Selling P.C. with respect to income
received, (ii) taxes imposed on Physician or any Selling P.C. in connection with
the transfer of the Assets contemplated hereby, (iii) all federal, state and
local taxes, levies and similar charges owed by Physician or any Selling P.C.
relating to periods prior to the Closing Date, including, but not limited to,
payroll taxes and (iv) any and all liabilities or claims relating to or arising
from providing professional medical services or failing to provide professional
medical services, prior to the Closing Date.
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6. Representations, Warranties and Agreements of Selling P.C.s and
Physician. As material inducement to USP to enter into this Agreement and to
close hereunder, each Selling P.C. and Physician hereby jointly and severally
make the following representations, warranties and agreements to and with USP:
(a) Corporate Status; Authority; Outstanding Stock. Each Selling
P.C. is a professional corporation (except that Open MRI, Inc. is a business
corporation) duly organized, validly existing and in good standing under the
laws of the state of its incorporation, which state is set forth on Schedule
"6(a)," and has the power and authority to own its properties and to carry on
its business as it is now being conducted. The execution, delivery and
performance of this Agreement by each Selling P.C. have been duly authorized by
all necessary corporate action on the part of each Selling P.C. and this
Agreement constitutes the valid and binding obligation of each Selling P.C.,
enforceable against it in accordance with its terms. Each Selling P.C. has an
authorized capital as set forth on Schedule "6(a)". The shares listed on
Schedule "A" comprise all the issued shares of each Selling P.C.'s capital stock
and are validly issued and outstanding, fully paid and non-assessable. There are
no options, warrants, rights, stockholder agreements or other instruments or
agreements outstanding giving any person the right to acquire any shares of
capital stock of each Selling P.C. nor are there any commitments to issue or
execute any such options, warrants, rights, instruments or agreements. The
minute books and stock records of each Selling P.C. are complete and accurate
and all signatures included therein are the genuine signatures of the persons
whose signatures are required.
(b) Financial Statements. The Financial Statements identified in the
Asset Purchase Agreement as constituting Schedule "6(b)" were compiled by
certified public accountants identified in the Asset Purchase Agreement in
accordance with the cash method of accounting using principles and practices
consistently applied throughout the periods reported upon and consistent with
past periods, and fairly and accurately present the financial position of
Physician and each Selling P.C. as at the dates of such Balance Sheets, and the
results of the operations of Physician and such Selling P.C. for the periods
reported upon.
(c) Real Estate. No Selling P.C. has any interest in any real estate
except each Selling P.C. leases, as tenant, the premises described on Schedule
"6(c)" as being so leased. Except as otherwise excluded under Paragraph 2 of
this Rider, Physician has no interest in any real estate used by him or the
Selling P.C.s in connection with the Practices, except Physician leases, as
tenant, the premises described on Schedule "6(c)" as being so leased. Except as
shown on such Schedule to the best of Physician's and each Selling P.C.'s
knowledge, all of the buildings, fixtures and improvements leased by each
Selling P.C., all heating and air conditioning equipment, plumbing, electrical
and other mechanical facilities which are part of, or located in, such buildings
or improvements, are in good operating condition and repair, and do not require
any repairs other than normal routine maintenance to maintain them in good
condition and repair.
(d) Personal Property. Except as shown on Schedule "6(d)", (i)
Physician and/or each Selling P.C. has good, valid and marketable title to all
personal property, tangible and intangible, reflected on the Warranted Balance
Sheet, and to all other personal property used in the Practices owned by any of
them free and clear of all, liens, mortgages, pledges, security interests,
restrictions, prior assignments, encumbrances and claims of every kind or
character, and (ii) to the best of Physician's and each Selling P.C.'s knowledge
all equipment, furniture and fixtures, and other tangible personal property of
Physician relating to the Practice and each Selling P.C. is in good operating
condition and repair and does not require any repairs other than normal routine
maintenance to maintain such property in good operating condition and repair.
Physician and/or each Selling P.C. is the owner of all the personal property now
located in or upon the premises occupied by it and of all personal property
which it uses in the operation of its business, except as shown on Schedule
"6(d)-1," which lists all such property leased, the name and address of the
lessor, and the date, term and financial information of the lease. All of
Physician's and Selling P.C.s' inventory of materials, supplies and medical
assets, is usable in the ordinary course of business and is free from known
material defects. No claim has been asserted against Physician or any Selling
P.C. involving any conflict or claim of conflict of its trade names or
trademarks with the tradenames, trademarks or corporate names of others, and
Selling P.C.s and Physician have no knowledge of any basis for any such claim of
conflict. Each Selling P.C. and/or Physician is the sole and exclusive owner of
its trade names and trademarks and has the sole and exclusive right to use such
trade names and trademarks. To the best of Selling P.C.s' knowledge, no process
or procedure used by any Selling P.C. infringes upon any patent, patent
application, trade secret, trademark or trade name of any other party.
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(e) Insurance. Physician and Selling P.C.s maintain insurance
policies bearing the numbers, for the terms, with the companies, in the amounts,
providing the general coverage, and with the premiums set forth on Schedule
"6(e)". All of such policies are in full force and effect and neither Physician
nor any Selling P.C. is in default of any material provision thereof. Neither
Physician nor any Selling P.C. has received notice from any issuer of any such
policies of its intention to cancel or refusal to renew any policy issued by it.
Neither Physician nor any Selling P.C. has had any casualty loss or occurrence
that may give rise to any claim covered by insurance, and neither Selling P.C.s
nor Physician is aware of any occurrence that may give rise to any such
uncovered claim. A claim is deemed to be uncovered if it involves a deductible
in excess of $1,000. All claims against Physician and/or any Selling P.C.
covered by insurance have been reported to the applicable insurance carrier on a
timely basis.
(f) Contracts, Leases, Agreements and Other Commitments. Neither
Physician nor any Selling P.C. is a party to or bound by any written, oral or
implied contract, agreement, lease, power of attorney, guaranty, surety
arrangement, or other commitment, including but not limited to any contract or
agreement for the purchase or sale of inventory or equipment or for the
rendition of services, except for the following (which are collectively called
the "Selling P.C. Agreements"):
(i) The leases and agreements described on Schedules "6(c),"
"6(d)," "6(d)-1" and "6(g)"; and
(ii) The agreements listed on Schedule "6(f)".
True, correct and complete copies of all of the Selling P.C.
Agreements (including all amendments thereto) have been delivered to USP.
All of the Selling P.C. Agreements are valid, binding and
enforceable against the respective parties thereto in accordance with their
respective terms. Except as shown on Schedule "6(f)", each Selling P.C. and all
other parties to all of the Selling P.C. Agreements have performed all
obligations required to be performed to date under such agreements and none of
Physician, any Selling P.C. nor any such other party is in default or in arrears
under the terms thereof, and no condition exists or event has occurred which,
with the giving of notice or lapse of time or both, would constitute a default
thereunder. The consummation of this Agreement will not result in an impairment
or termination of any of Physician's or any Selling P.C.'s rights under any
Selling P.C. Agreement. None of the terms or provisions of any Selling P.C.
Agreement materially adversely affects the business, prospects, conditions,
affairs or operations of Physician or any Selling P.C. or any of their
respective properties or assets.
(g) Labor, Employment Contracts, and Employee Benefit Programs.
Without limiting the generality of subparagraph 6(f), neither Physician nor any
Selling P.C. is a party to any collective bargaining agreement or employment
agreement (except as set forth in Schedule "6(g)"), and neither Physician nor
any Selling P.C. is a party to any pending or threatened labor dispute.
Physician and each Selling P.C. has performed all its obligations pursuant to
the agreements set forth in Schedule "6(g)" and at the request of USP or its
affiliated designee all such agreements are transferable to USP or its
affiliated designee, as such parties may determine, and no notices or consents
are necessary to such transfer, except as set forth on Schedule "6(g)."
Physician and each Selling P.C. has complied with all applicable provisions of
the Employee Retirement Income Security Act of 1974, as amended, ("ERISA") and
all applicable Federal, state and local laws relating to the employment of
labor, including but not limited to the provisions thereof relative to wages,
hours, collective bargaining, contributions to pension or benefit plans, and
payment of Social Security taxes, and neither Physician nor any Selling P.C. is
liable for any arrears of wages or any taxes or penalties for failure to comply
with any of the foregoing. No "reportable event" (as that term is defined in
Section 4043 of ERISA or regulations thereunder) has occurred and is continuing
with respect to any employee benefit plan of Physician or any Selling P.C., and
the present value of all benefits vested under all of Physician's and each
Selling P.C.'s "employee pension benefit plans" (as that term is defined in
Section 3 of ERISA) do not exceed the value of the assets of such plans
allocable to such vested benefits. None of such plans nor any trusts created
thereunder have incurred any "accumulated funding deficiency", as such term is
defined in Section 302 of ERISA since the effective date of Section 302. Neither
Physician nor any Selling P.C. currently or during the past five (5) years has
had any written or oral retirement, pension, profit sharing, stock option,
bonus, hospitalization, vacation or other employee benefit plan, practice,
agreement or
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understanding, except as set forth in Schedule "6(g)-1". All employees of
Physician and each Selling P.C. are paid salaries in accordance with the
schedules set forth on Schedule "6(g)-2", which also shows their job titles,
hours of employment and all accrued vacation or compensation in lieu of vacation
payable to each employee. There is no employee of Physician or any Selling P.C.
whose employment is not terminable at will.
(h) Litigation. Except for the matters set forth on Schedule "6(h)",
neither any Selling P.C. nor Physician during the past five years has been or is
currently a party to or to their knowledge threatened with any suit, action,
arbitration, administrative or other proceeding, or governmental investigation.
Each claim against any Selling P.C. or Physician for professional liability
shown on Schedule "6(h)" has been reported to the applicable insurance carrier
on a timely basis, and such insurer has accepted coverage with respect to each
such claim. There is no judgment, decree, award or order outstanding against any
Selling P.C. or Physician and neither Physician nor any Selling P.C. is
contemplating the institution of any suit, action, arbitration, administrative
or other proceeding.
(i) Conflicting Interests. No director, officer or employee of
Physician or any Selling P.C. and no Physician or any relative or any affiliate
of any of the foregoing has any pecuniary interest in any supplier of Physician
or any Selling P.C. or in any other business enterprise with which Physician or
any Selling P.C. conducts business or with which Physician or any Selling P.C.
is in competition.
(j) Compliance with Law and Regulations. Each Selling P.C. and
Physician is in compliance and has at all times during the past five (5) years
complied with all requirements of law, Federal, state and local, and all
requirements of all governmental bodies or agencies having jurisdiction over it,
the conduct of its business, the use of its properties and assets, and all
premises occupied by it (including, without limitation, Medicare and
environmental requirements), and, without limiting the foregoing, each Selling
P.C. and/or Physician has paid all monies and obtained all licenses, permits,
certificates, and authorizations needed or required for the conduct of its
business and the use of its properties and the premises occupied by it.
Physician and each Selling P.C. has properly filed all reports and other
documents required to be filed with any Federal, state and local government or
subdivision or agency thereof. Neither any Selling P.C. nor Physician has
received any notice, not heretofore complied with, from any Federal, state or
municipal authority or any insurance or inspection body that any of its
properties, facilities, equipment, or business procedures or practices, fails to
comply with, or is subject to any liability or potential liability under, any
applicable law, ordinance, regulation, environmental, building or zoning law, or
requirement of any public authority or body. Notwithstanding the foregoing,
there shall be no breach of the foregoing representations and warranties in this
subparagraph 6(j) unless the breach had or will have a material adverse effect
on Selling P.C., Physician, any Practice, USP or any affiliate of USP. All
licenses, permits, orders and approvals issued by any governmental body or
agency currently in effect and pertaining to the property, assets or business of
Physician or any of the Selling P.C.s are listed on Schedule "6(j)."
(k) Agreement Not in Breach of Other Instruments Affecting Selling
P.C.s; Governmental Consent. The execution and delivery of this Agreement, the
consummation of the transaction provided for herein, and the fulfillment of the
terms hereof (i) will not result in the imposition of any lien, security
interest or encumbrance, or in the breach of any of the terms and provisions of,
or result in a termination or modification of, or constitute a default under, or
conflict with, or cause any acceleration of any obligation of any Selling P.C.
under, or permit any other party to modify or terminate, any agreement or other
instrument by which any Selling P.C. is bound, any judgment, decree, order, or
award of any court, governmental body, or arbitrator, or any applicable law,
rule or regulation and (ii) do not require the consent of any governmental
authority.
(l) Filing of Tax Returns. Physician and each Selling P.C. has filed
all Federal, state and local tax returns required to be filed in accordance with
provisions of law pertaining thereto and has paid all taxes and assessments
(including, without limitation of the foregoing, income, withholding, excise,
unemployment, Social Security, occupation, transfer, franchise, property, sales
and use taxes and all penalties and interest in respect thereof) required to
have been paid to date. Attached as part of Schedule "6(l)" are true, correct
and complete copies of all Federal and State income tax returns, including all
amendments thereto, filed by Physician and each Selling P.C. with respect to the
last three (3) years.
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(m) Actions since Balance Sheet Date. Since the Balance Sheet Date,
Physician and each Selling P.C.:
(i) has not taken any action outside of the ordinary and usual
course of business;
(ii) has paid all of its debts and obligations as they became
due;
(iii) has used its best efforts to preserve its business
organization intact, to keep available the services of its employees, and to
preserve its relationships with its patients, suppliers and others with whom it
deals; and
(iv) has not purchased or redeemed any shares of stock of any
Selling P.C., or paid compensation at rates in excess of the rates prevailing on
the Balance Sheet Date.
(n) Accounts Receivable. All accounts receivable are based on actual
and bona fide services rendered or the sale or rental of equipment, merchandise
and supplies by Physician or a Selling P.C. in the ordinary course of business.
Physician and each Selling P.C. has delivered to all third party payors all
requested supporting claim documents with respect to each account receivable and
all information set forth in the bill and supporting claim documents are true,
complete and correct.
(o) No Material Adverse Change. Since the Balance Sheet Date, there
has not been and there is not threatened any material adverse change in the
financial condition, business, prospects or affairs of Physician or any Selling
P.C. or any material physical damage or loss to any of its properties or assets
or to the premises occupied by it (whether or not such damage or loss is covered
by insurance).
(p) Statements and Other Documents Not Misleading. Neither this
Agreement, including all Schedules, nor the closing documents, nor any other
financial statement, document or other instrument heretofore or hereafter
furnished by any Selling P.C. or Physician to USP in connection with the
transactions contemplated hereby contains or will contain any untrue statement
of any material fact or omits or will omit to state any material fact required
to be stated in order to make such statement, document or other instrument not
misleading. There is no fact known to any Selling P.C. or Physician, other than
such matters which affect the healthcare industry generally, which materially
adversely affects the business, prospects, financial condition or affairs of any
Selling P.C. or Physician or any of its properties or assets which has not been
set forth in this Agreement, the Schedules or the other documents furnished to
USP on or prior to the date hereof in connection with the transactions
contemplated hereby.
7. Further Representations and Warranties of Physician. As material
inducement to USP to enter into this Agreement and to close hereunder, Physician
makes the following representations and warranties to USP:
(a) Ownership of Capital Stock of Selling P.C. Physician owns the
number of shares of common stock of each Selling P.C. set forth opposite his
name on Schedule "B". Physician has good, marketable and unencumbered title to
such shares, free and clear of all liens, security interests, pledges, claims,
options and rights of others. No transfer of record ownership of, or beneficial
interest in, any of such shares will be made between the date hereof and
Closing.
(b) Agreement Not in Breach of Other Instruments Affecting
Physician. The execution and delivery of this Agreement, the consummation of the
transaction provided for herein, and the fulfillment of the terms hereof by
Physician, will not result in the breach of any of the terms and provisions of,
or constitute a default under, or conflict with, any agreement or other
instrument by which Physician is bound, any judgment, decree, order, or award of
any court, governmental body, or arbitrator, or any applicable law, rule or
regulation.
(c) Other Matters. With respect to Physician, none of the following
events has occurred during the past three years:
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(i) loss, suspension, revocation or non-renewal of either (A)
Physician's license to practice medicine in any state, or (B) Physician's DEA
registration and/or authorization to prescribe controlled substances or
narcotics;
(ii) exclusion or suspension from participation in the Medicare
or Medicaid programs or imposition of Civil Monetary Penalty sanction for
violation of Medicare or Medicaid laws, rules or regulations (excluding
recoupments, recoveries or adjustments which are not Civil Monetary Penalties);
(iii) adverse action affecting the scope of Physician's license
to practice medicine or Physician's right to treat patients covered by workers'
compensation or other state regulated programs;
(iv) Physician becoming ineligible for professional liability
insurance, or the cost of such insurance becoming 50% or more expensive for
Physician relative to the average physician providing comparable services in a
comparable geographic area due to Physician's malpractice claim history;
(v) suspension, revocation or restriction of Physician's
privileges at a hospital for reasons relating to clinical competency or conduct,
or surrender of Physician's privileges at a hospital under threat of
disciplinary action relating to clinical competency or conduct;
(vi) Physician becoming an Impaired Professional (defined as (A)
having an addictive disease which could impair Physician's ability to perform
Physician's duties; (B) having diverted a controlled substance; or (C) being
incompetent to practice medicine at a level that meets the minimum requirements
of licensure); or
(vii) Physician's indictment for any felony, whether or not
related to rendering medical services.
(d) Valid and Binding Agreement. This Agreement constitutes the
valid and binding obligation of Physician, and is enforceable against Physician
in accordance with its terms.
8. Representations and Warranties of USP. As material inducement to
each Selling P.C. and Physician to enter into this Agreement, USP makes the
following representations and warranties to each Selling P.C. and Physician:
(a) Corporate Status and Authority. USP is a corporation duly
organized, validly existing and in good standing under the laws of the
Commonwealth of Pennsylvania, and has the corporate power to acquire the Assets
to be acquired hereunder. The execution, delivery and performance of this
Agreement by USP have been duly authorized by all necessary corporate action on
the part of USP, and this Agreement constitutes the valid and binding obligation
of USP, enforceable against it in accordance with its terms.
(b) Shares. The Shares, when issued and delivered pursuant to this
Agreement, will be validly issued, fully paid and non-assessable.
(c) Agreement Not in Breach of Other Instruments. The execution and
delivery of this Agreement, the consummation of the transactions provided for
herein, and the fulfillment of the terms hereof by USP, will not result in the
breach of any of the terms and provisions of, or constitute a default under, or
conflict with, or cause any acceleration of any obligation of USP under, any
agreement, indenture or other instrument to which USP is bound, USP's Articles
of Incorporation or By-laws, any judgment, decree, or order, or award of any
court, governmental body, or arbitrator, or any applicable law, rule, or
regulation.
(e) Statements Not Misleading. Neither this Agreement, nor the
Private Placement Memorandum (as described in Paragraph 17(b)) contains or will
contain any untrue statement of any material fact or omits or will omit to state
any material fact required to be stated in order to make such document not
misleading.
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9. Intentionally Omitted.
10. Continuation and Survival of Representations and Warranties. All
representations and warranties made in this Agreement shall continue to be true
and correct at and as of the Closing Date and at all times between the signing
of this Agreement and the Closing Date, as if made at each of such times;
provided, however, that at Closing each Selling P.C. may deliver to USP
modifications of Schedule "6(f)" arising from changes thereto arising in the
ordinary course of business since the date hereof, provided further that none of
such changes are materially adverse to the business or financial condition of
any Selling P.C. or any Practice and do not arise from any occurrence or
circumstance which would constitute a violation of Paragraph 12. If any party
shall learn of a representation or warranty being or becoming untrue at or prior
to Closing, such party shall promptly notify all of the other parties. All such
representations and warranties shall survive the consummation of the
transactions provided for in this Agreement. No such representation or warranty
shall be deemed to have been waived, affected or impaired by any investigations
made by any party to this Agreement.
11. USP's Inspection Rights. Physician and each Selling P.C. shall give
to USP and its designated employees or representatives full access to all of the
properties and assets of Physician and each Selling P.C. and to all of
Physician's and each Selling P.C.'s documents, books and records relating to its
current and past operations and business, and permit them to make copies thereof
and also permit such employees or representatives to interview and question
Physician's and each Selling P.C.'s employees. USP and its affiliates will not
reveal any confidential data and/or information supplied by Physician or any
Selling P.C. except to its management, counsel, accountants, insurance
representatives, investment bankers and like agents, for purposes relating to
the evaluation and consummation of the transactions contemplated by this
Agreement; provided, however, that USP may include any such data and/or
information to the extent necessary in connection with any public or private
offering of its securities. In the event the transactions contemplated by this
Agreement are not consummated, such data and information will not be used by USP
or its affiliates except as provided in the preceding sentence and will be
returned to Physician and Selling P.C.s. Notwithstanding the foregoing, neither
USP nor any affiliate of USP shall have access to any records of Physician or
any Selling P.C. if such access would violate any applicable law or regulation.
12. Conduct of the Business of Physician and Selling P.C.s Pending
Closing. Between the date hereof and the Closing hereunder, Physician and
Selling P.C.s will:
(a) Not take or suffer or permit any action which would render
untrue any of the representations or warranties of Selling P.C.s or Physician,
and not omit to take any action, the omission of which would render untrue any
such representation or warranty.
(b) Conduct its business in a good and diligent manner in the
ordinary and usual course.
(c) Not enter into any contract, agreement, commitment or
arrangement with any party, other than contracts for the rendition of service
and contracts for the purchase of materials and supplies in the ordinary and
usual course of business, and not amend, modify or terminate any Selling P.C.
Agreement without the prior written consent of USP.
(d) Use its best efforts to preserve its business organization
intact, to keep available the services of its employees, and to preserve its
relationships with patients, suppliers and others with whom it deals.
(e) Not reveal, orally or in writing, to any party, other than USP,
any affiliate of USP or USP's or USP's authorized agents, any of the business
procedures and practices followed by it in the conduct of its business or any
technology used in its practice.
(f) Maintain in full force and effect all of the insurance policies
listed on Schedule "6(e)" and make no change in any insurance coverage without
the prior written consent of USP. If Physician or any Selling P.C. has an
occurrence basis malpractice insurance policy, Physician and/or such Selling
P.C. shall provide USP with
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evidence that the malpractice insurance carrier has agreed to give USP at least
fifteen (15) days written notice before any termination, cancellation or
modification of such insurance policy.
(g) Keep the premises occupied by it and all of its equipment and
other tangible personal property in good order and repair and perform all
necessary repairs and maintenance.
(h) Continue to maintain all of its usual business books and records
in accordance with its past practices.
(i) Not amend its Articles/Certificate of Incorporation or By-Laws.
(j) Not redeem or otherwise acquire any shares of its capital stock
or issue any capital stock or any option, warrant or right relating thereto.
(k) Not increase the compensation or rate of compensation payable to
any of its employees except in the ordinary course of business and consistent
with past practices, provided all such permitted increases to any one employee
shall not exceed $1,000 without the prior written consent of USP.
(l) Maintain its corporate existence and not merge or consolidate
with any other entity.
(m) Comply with all provisions of any Selling P.C. Agreement
applicable to it and all applicable laws, rules and regulations.
(n) Terminate all employment agreements between any Selling P.C. and
Physician effective upon the Closing.
(o) Collect and bill accounts receivable in accordance with past
practices and not take any actions to accelerate the collection of accounts
receivable.
13. Conditions Precedent to USP's Obligation to Close. The following
shall be conditions precedent to the obligation of USP to close hereunder, any
of which may be waived in whole or part by USP:
(a) Each of the representations and warranties of Selling P.C.s or
Physician contained in this Agreement is now, and, except as to those expressly
limited to the date hereof, at all times after the date of this Agreement to and
including the time of Closing shall be, true and correct, subject to the
provisions of Paragraph 10 hereof.
(b) Each of the agreements, covenants and undertakings of each
Selling P.C. and Physician contained in this Agreement, except for those calling
for performance after Closing, will have been fully performed and complied with
at or before Closing.
(c) No litigation, governmental action or other proceedings seeking
to restrain or prohibit the transactions contemplated by this Agreement, or
involving or potentially involving a liability, obligation or loss on the part
of Selling P.C.s or Physician of twenty five thousand dollars ($25,000) or more
(whether or not covered by insurance), or which by reason of the nature of the
relief sought might have a material adverse effect on Physician's or any Selling
P.C.'s Practice, shall be threatened in good faith or commenced against any
Selling P.C. or Physician with respect to any matter, or against USP, any
affiliate of USP or any other person with respect to the consummation of the
transactions provided for herein.
(d) USP shall have received proceeds (prior to underwriters'
discounts, fees and expenses) from a public offering of its common stock of at
least $30 million.
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(e) All actions, proceedings, instruments and documents required to
perform this Agreement or incident thereto, and all other legal matters, shall
have been approved by counsel for USP, it being understood that such approval
shall not be unreasonably withheld.
(f) All documents required to be delivered by Selling P.C.s and
Physician at or prior to Closing shall have been delivered or shall be tendered
at the time and place of Closing.
(g) Physician shall not have exercised or attempted to exercise such
Physician's right of rescission with respect to the transactions contemplated
hereby under Section 207(m) of the Pennsylvania Securities Act of 1972, as
amended.
14. Conditions Precedent to Selling P.C.s' and Physician's Obligation
To Close. The following shall be conditions precedent to the obligation of
Selling P.C.s and Physician to close hereunder, any of which may be waived by
Physician (on behalf of himself and all Selling P.C.s):
(a) Each of the representations and warranties of USP contained in
this Agreement is now, and, except as to those expressly limited to the date
hereof, at all times after the date of this Agreement to and including the time
of Closing shall be, true and correct.
(b) Each of the agreements, covenants, and undertakings of USP
contained in this Agreement, except for those calling for performance after
Closing, will have been fully performed and complied with at or before Closing.
(c) No litigation, governmental action or other proceedings shall be
threatened in good faith or commenced against any Selling P.C. or Physician with
respect to the consummation of the transaction provided for herein.
(d) USP shall have received proceeds (prior to underwriters'
discounts, fees and expenses) from a public offering of its common stock of at
least $30 million.
(e) All actions, proceedings, instruments and documents required to
perform this Agreement or incident thereto, and all other legal matters, shall
have been approved by counsel for Selling P.C.s, it being understood that such
approval shall not be unreasonably withheld.
(f) All documents required to be delivered by USP at or prior to
Closing shall have been delivered or shall be tendered at the time and place of
Closing.
15. Closing.
(a) Closing Date. The Closing of the transaction provided for in
this Agreement (herein sometimes called the "Closing") shall take place at such
place and time as is designated by USP, in written notice given to Physician at
least five (5) days prior to the date designated. The date and time of Closing
is sometimes herein called the "Closing Date". In the event the Closing has not
occurred on or prior to September 30, 1998, this Agreement may be terminated by
either USP or Physician (on behalf of himself and all Selling P.C.s) by written
notice to the other party.
(b) Deliveries by Selling P.C.s and Physician at Closing. At
Closing, Physician and Selling P.C.s will deliver or cause to be delivered to
USP the following:
(i) such bills of sale, endorsements, certificates of title,
assignments and other instruments of transfer and conveyance as shall be
effective to vest title in the Assets in USP;
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(ii) certificates of the President of each Selling P.C. and
Physician, dated as of the Closing Date, confirming (A) the truth and
correctness of all of the representations and warranties of Selling P.C.s and
Physician contained herein as of the Closing Date and as of all times between
the date hereof and the Closing Date, subject to the provisions of Paragraph 10
hereof, (B) that all agreements and covenants of Selling P.C.s and Physician
specified herein have been complied with, and (C) that Physician has not
exercised or taken any action with a view to exercising any rights of rescission
under Section 207(m) of the Pennsylvania Securities Act of 1972, as amended,
with respect to the transactions contemplated hereby;
(iii) the certificate of the Secretary or Assistant Secretary of
each Selling P.C., dated the Closing Date, that the necessary action of the
Board of Directors and shareholders of such Selling P.C. have been taken to
authorize the consummation by such Selling P.C. of the transactions provided for
herein;
(iv) the favorable legal opinion of counsel for Selling P.C.s,
dated the Closing Date, as to the matters set forth in Exhibit "D" attached
hereto;
(v) a subsistence or "good standing" certificate for each
Selling P.C. dated as of a date within ten (10) days prior to the Closing Date;
(vi) the original copy (other than tax returns) of each document
listed on the Schedules;
(vii) employment agreement with Rider in the form set forth on
Exhibit "B" executed by Physician (the "Employment Agreement");
(viii) a copy of each Selling P.C.'s malpractice insurance
policy;
(ix) if not delivered previously, the evidence required by
subparagraph 12(f) relating to occurrence basis malpractice insurance; and
(x) all consents of third parties necessary for the transfer of
the Assets and assumption of the Debt.
(c) Deliveries by USP at Closing. At the Closing, USP will deliver
or cause to be delivered to Selling P.C. the following:
(i) the amounts referred to in subparagraph 2(c) of the Asset
Purchase Agreement by wire transfer or bank cashier's check from USP;
(ii) the Notes referred to in subparagraphs 2(d) and 2(f) of the
Asset Purchase Agreement;
(iii) the Stock Certificates referred to in subparagraph 2(e) of
the Asset Purchase Agreement;
(iv) the Certificate of the President or a Vice-President of
USP, dated the Closing Date, confirming the truth and correctness of all of the
representations and warranties of USP contained herein as of the Closing Date
and as of all times between the date hereof and the Closing Date;
(v) the Certificate of the Secretary or an Assistant Secretary
of USP, dated the Closing Date, that the necessary corporate action by the Board
of Directors of USP has been taken to authorize the consummation by USP of the
transactions provided for herein; and
(vi) the Employment Agreement.
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(d) Pre-Closing. At the request of USP, the parties shall conduct a
pre-closing at a time and place designated by USP, at which all documents to be
delivered pursuant to subparagraphs 15(b) and (c) (other than pursuant to
subparagraphs 15(c)(i) and (iii)) shall be executed and placed in escrow with
counsel to USP. Counsel to USP shall (i) date all documents as of the Closing
Date except if notified by a party or its counsel at least 24 hours prior to
Closing that a document contains an inaccuracy and an amendment is submitted,
(ii) fill in any blanks in the documents, the completion of which is based on
fact and the insertion is ministerial, and (iii) release the documents from
escrow upon the receipt by such counsel of (x) the Stock Certificate(s) and (y)
either bank cashiers' checks specified in subparagraph 15(c)(i) or confirmation
from a bank that it has sent the wire transfer specified in subparagraph
15(c)(i).
(e) Post-Closing. Within five (5) days after the Closing, each
Selling P.C. shall deliver to USP a detailed aged accounts receivable schedule
dated as of the Closing Date, showing the name and address of each payor, the
date and amount of each invoice, the name and insurance policy number, if any,
of each patient and such other information as USP may request.
16. Indemnification.
(a) Basic Provision.
(i) Each Selling P.C. and Physician hereby jointly and severally
indemnify and agree to hold harmless USP and USP's affiliates, and their
respective successors and assigns, from, against and in respect of the amount of
any and all Deficiencies (as defined in subparagraph 16(b)(i)).
(ii) USP hereby indemnifies and agrees to hold harmless each
Selling P.C. and Physician from any and all Deficiencies (as defined in
subparagraph 16(b)(ii).
(iii) Parties obligated to indemnify other parties pursuant to
this Paragraph 16 are sometimes individually referred to as an "Indemnitor" and
collectively as "Indemnitors" and the parties who are entitled to be indemnified
pursuant to this Paragraph 16 are sometimes individually referred to as
"Indemnitee" and collectively as "Indemnitees."
(b) Definition of "Deficiencies".
(i) As used in this Paragraph 16, "Deficiencies" when the
Selling P.C.s and Physician are the Indemnitors means any and all loss or damage
resulting from:
(A) any misrepresentation, breach of warranty, or any
non-fulfillment of any warranty, representation, covenant or agreement on the
part of each Selling P.C. or Physician contained herein;
(B) any error contained in any statement, report,
certificate or other document or instrument delivered to USP or an affiliate of
USP pursuant to this Agreement or contained in any Schedule;
(C) any claim, debt, liability or obligation or any alleged
claim, debt, liability or obligation of Physician or Selling P.C. to any party,
incurred prior to Closing hereunder or arising from any matter or thing
occurring prior to Closing hereunder, including but not limited to claims made
by governmental authorities for taxes, or otherwise, except for liabilities
expressly assumed by USP pursuant to this Agreement; and
(D) any and all acts, suits, proceedings, demands,
assessments, judgments, attorneys' and other professional fees, costs and
expenses incident to any of the foregoing.
(ii) As used in this Paragraph 16, "Deficiencies" when USP is
the Indemnitor means any and all loss or damage resulting from:
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(A) any misrepresentation, breach of warranty or any
non-fulfillment of any warranty, representation, covenant or agreement on the
part of USP contained herein;
(B) any claim, debt, liability or obligation or any alleged
claim, debt or obligation expressly assumed by USP pursuant to this Agreement;
and
(C) any and all acts, suits, proceedings, demands,
assessments, judgments, attorneys' and other professional fees, costs and
expenses incident to any of the foregoing.
(c) Procedures for Establishment of Deficiencies.
(i) In the event that any claim shall be asserted by any party
against one or more of the Indemnitees which, if sustained, would result in a
Deficiency, the applicable Indemnitees, within a reasonable time after learning
of such claim, shall notify the Indemnitors of such claim, and shall extend to
the Indemnitors a reasonable opportunity to defend against such claim, at the
Indemnitors' sole expense and through legal counsel acceptable to the applicable
Indemnitees, provided that the Indemnitors proceed in good faith, expeditiously
and diligently. No determination shall be made pursuant to subparagraph (ii)
below while such defense is still being made until the earlier of (A) the
resolution of said claim by the Indemnitors with the claimant, or (B) the
termination of the defense by the Indemnitors against such claim or the failure
of the Indemnitors to prosecute such defense in good faith in an expeditious and
diligent manner. The applicable Indemnitees shall be entitled to rely upon the
opinion of its counsel as to the occurrence of either of said events. The
applicable Indemnitees shall, at their option and expense, have the right to
participate in any defense undertaken by Indemnitors with legal counsel of their
own selection. No settlement or compromise of any claim which may result in a
Deficiency may be made by Indemnitors without the prior written consent of the
applicable Indemnitees unless (y) prior to such settlement or compromise
Indemnitors acknowledge in writing their obligation to pay in full the amount of
the settlement or compromise and all associated expenses and (z) the applicable
Indemnitees are furnished with security reasonably satisfactory to the
applicable Indemnitees that Indemnitors will in fact pay such amount and
expenses.
(ii) In the event that the applicable Indemnitees assert the
existence of any Deficiency, the applicable Indemnitees shall give written
notice to the Indemnitors of the nature and amount of the Deficiency asserted.
If the Indemnitors, within a period of fifteen (15) days after the giving of the
applicable Indemnitees' notice, shall not give written notice to the applicable
Indemnitees announcing their intent to contest such assertion (such notice by
the Indemnitors being called the "contest notice"), such assertion of the
applicable Indemnitees shall be deemed accepted and the amount of the Deficiency
shall be deemed established. In the event, however, that a contest notice is
given to the applicable Indemnitees within said fifteen-day period, then the
contested assertion of a Deficiency shall be settled by arbitration to be held
in Philadelphia, Pennsylvania in accordance with the rules of the American
Arbitration Association then obtaining. The costs of the arbitrators and the
arbitration shall be borne 50% by the Indemnitors and 50% by the applicable
Indemnitees. The determination of the arbitrator(s) shall be delivered in
writing to the Indemnitors and the applicable Indemnitees and shall be final,
binding and conclusive upon all of the parties hereto, and the amount of the
Deficiency, if any, determined to exist, shall be deemed established.
(iii) The applicable Indemnitees and the Indemnitors may agree
in writing, at any time, as to the existence and amount of a Deficiency, and,
upon the execution of such agreement such Deficiency shall be deemed
established.
(d) Payment of Deficiencies. The Indemnitors, jointly and severally,
hereby agree to pay the amount of established Deficiencies to the applicable
Indemnitees within five (5) days after the establishment thereof in cash. Any
amounts not paid by Indemnitors when due under this subparagraph shall bear
interest from the due date thereof until the date paid at a rate equal to the
lesser of (i) 10% per annum or (ii) the highest rate permitted by applicable
law. USP and/or any affiliate of USP may, in its sole discretion, offset any
amounts due to it or any other Indemnitee, against the Notes or any obligation
it owes to any Physician.
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17. Restrictions on Securities; Securities Laws Compliance Procedures.
(a) Restrictions on Shares. The Shares may not be sold, assigned,
pledged or otherwise transferred (any sale, assignment, pledge or transfer is
hereinafter referred to as a "transfer") by Selling P.C. except in accordance
with the provisions of this Paragraph 17. None of the Shares may be transferred
prior to the second anniversary of Closing. Twenty-five percent (25%) of the
Shares shall become transferrable on each of the second and third anniversaries
of Closing and the remaining fifty percent (50%) of the Shares shall become
transferrable on the fourth anniversary of Closing. Notwithstanding the
foregoing, if Physician owes an affiliate of USP which employs Physician amounts
pursuant to Section 11 of the employment agreement with such affiliate in excess
of the next installment due by USP to Physician pursuant to the Notes, such
number of shares owned by Physician as is necessary to result in proceeds of
such sale being equal to the amount due to such affiliate shall become
transferrable on the date the amount is due, subject to applicable restrictions
contained in securities laws and provided arrangements satisfactory to USP and
such affiliate are made to ensure that the proceeds of any such sale are paid
directly to such affiliate. The Stock Certificates shall bear legends that USP
deems necessary or appropriate to reflect the foregoing restrictions and
restrictions relating to applicable securities laws. USP shall give its transfer
agent applicable stop transfer instructions. Physician or any Selling P.C. (as
applicable) shall have the power to vote the Shares and receive any dividends or
distribution thereon even though the Shares are not yet transferrable, provided
that any dividends or distributions received in common stock of USP shall be
subject to the same restrictions as the Shares to which they relate are subject.
(b) Knowledge Respecting USP. Each Selling P.C. and Physician
represent and acknowledge that (i) they know, or have had the opportunity to
acquire, all information concerning the business, affairs, financial condition
and prospects of USP which they deem relevant to make a fully informed decision
regarding the consummation of the transactions contemplated hereby, (ii) they
have been supplied by USP with, and have reviewed materials described by USP as,
the Private Placement Memorandum, and (iii) the information contained in the
Accredited Investor and Suitability Information Questionnaire previously
delivered by such Physician to USP is true and correct. Without limiting the
foregoing, each Selling P.C. and Physician understand and acknowledge that
neither USP nor anyone acting on its behalf has made any representations or
warranties other than those contained herein respecting USP or the future
conduct of USP's business, and neither any Selling P.C. nor Physician has relied
upon any representations or warranties other than those contained herein in the
belief that they were made on behalf of USP.
(c) Status of the Notes and Shares. Each Selling P.C. and Physician
agree, acknowledge and confirm that it and such Physician have been advised and
understand as follows:
(i) Each Selling P.C. and Physician is acquiring the Notes, the
Shares and the options for investment and without a view to any distribution or
resale thereof, other than a distribution or resale which, in the opinion of
counsel, which opinion is satisfactory to USP, may be made without violating the
registration provisions of the Securities Act of 1933, as amended (the "1933
Act"), the Pennsylvania Securities Act of 1972, as amended (the "1972 Act") or
any other applicable state securities laws. Neither the Notes, the Shares nor
the options (or shares underlying the options) have been registered under the
1933 Act, the 1972 Act or the laws of any other state and therefore, in addition
to the limitations on transfer of the Shares set forth in subparagraph 17(a), if
any Selling P.C. is a Pennsylvania corporation or Physician is a Pennsylvania
resident neither the Notes, the Shares nor the options may be sold in any event
for twelve (12) months after their acquisition by Physician or such Selling
P.C., and thereafter the Notes, the Shares the options and the shares underlying
the options must be held indefinitely unless subsequently registered under such
acts or an exemption from registration is available. USP is under no obligation
to register the Notes, the Shares, the options or the shares underlying the
options under the 1933 Act, the 1972 Act or the laws of any other state or to
take any action which would make available an exemption from such registration.
(ii) USP may refuse to effect a transfer of the Notes.
(iii) In accordance with Section 207(m) of the 1972 Act, any
Selling P.C. or Physician, if a Pennsylvania corporation or resident, may
rescind this Agreement without any liability, obligation or duty to USP or any
other person by giving notice of cancellation to USP within two (2) business
days after the execution of this
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Agreement. If any Selling P.C. or Physician who is a Pennsylvania resident
desires to rescind this Agreement it shall give notice to USP within the
foregoing time period.
18. Third Party Consents. To the extent the requisite consent of any
third party to the assignment of any contract which USP or its designee has
agreed to assume hereunder has not been obtained prior to the Closing Date, the
Closing shall nevertheless take place if USP determines in its sole and
reasonable discretion that any such contract is not material, but Physician or
the applicable Selling P.C. shall not be deemed to have assigned the contract to
which such consent relates nor shall USP or its designee (as applicable) be
deemed to have assumed the same unless and until such consent shall have been
granted. If, at a date subsequent to the Closing Date, any previously unobtained
consent shall be obtained, Physician or such Selling P.C. (as applicable) shall
be deemed to have assigned to USP or its designee (as applicable) the contract
to which such consent relates and USP or its designee (as applicable) shall be
deemed to have assumed the same as of the Closing Date, provided USP or its
designee (as applicable) shall have continuously received the benefit of such
contract from and after the Closing Date. If any such consent is not obtained or
if an attempt to assignment would be ineffective or would impair any of
Physician's or Selling P.C.'s rights so that USP or its designee (as applicable)
would not receive the benefits of the contract to which the same relates, then
Physician and such Selling P.C. agree to use their best efforts and to cooperate
fully with USP or its designee (as applicable) in order continuously to obtain
for USP or its designee (as applicable) the benefits of such contract from and
after the Closing Date. To the extent that USP or its designee does not receive
the benefits of such contracts, Physician and such Selling P.C. shall indemnify
USP or its designee (as applicable) and hold it harmless of and from all loss of
value, liability, costs and expenses as a result of the failure to obtain such
consent and receive such benefits. In the event Physician or the applicable
Selling P.C. and USP do not agree on the loss of value, liability, costs and
expenses resulting from the failure to obtain one or more costs and receive such
benefits, the dispute shall be settled by arbitration to be held in
Philadelphia, Pennsylvania in accordance with the rules of the American
Arbitration Association then obtaining. The cost of the arbitrator(s) and the
arbitration shall be borne 50% by Physician and the applicable Selling P.C. and
50% by USP. The determination of the arbitrator(s) shall be delivered in writing
to Physician and USP and shall be final, binding and conclusive upon the parties
hereto.
19. Further Assurances. USP, Selling P.C.s and Physician agree to
execute and deliver all such other instruments and take all such other action as
any party may reasonably request from time to time, before or after Closing and
without payment of further consideration, in order to effectuate the
transactions provided for herein. The parties shall cooperate fully with each
other and with their respective counsel and accountants in connection with any
steps required to be taken as part of their respective obligations under this
Agreement, including, without limitation, the preparation of financial
statements. Without limiting the foregoing, each Selling P.C. and Physician
agree to endorse and deliver any and all checks to USP which they receive in
payment of any account receivable purchased by USP. Each Selling P.C. and
Physician hereby authorize any employee of USP to endorse on behalf of such
Selling P.C. or Physician (as applicable) any checks to USP which USP receives
which are payable to a Selling P.C. or Physician and which are in payment of any
account receivable purchased by USP. Each Selling P.C. and Physician shall take
any and all actions reasonably requested by USP to assist USP in obtaining the
proceeds of the accounts receivable, including, but not limited to, giving
change of address notices to payors.
20. Restrictive Covenants.
(a) Duration and Extent of Restriction. Each Selling P.C. and/or
Physician shall not, directly or indirectly, for a period of five (5) years
following the Closing (the "Time Restriction"):
(i) induce any existing or former patient of Physician or any
Selling P.C. or any affiliate of USP to terminate his or her relationship with
such affiliate; provided, however, that Physician shall not be prohibited from
treating an individual who has independently determined to terminate his
relationship with such affiliate except in the circumstances otherwise
prohibited under this Paragraph 20;
(ii) induce or attempt to influence any employee, independent
contractor and/or consultant of USP or any affiliate of USP to terminate his or
her relationship with USP or such affiliate;
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(iii) induce or attempt to influence any hospital, healthcare
facility, professional or other person or entity that has a referring
relationship with Physician or any Selling P.C. or any affiliate of USP, or any
HMO or other health care insurer that has an arrangement for the provision of
health care services with USP or any affiliate of USP to terminate or not to
renew such relationship with USP or such affiliate; or
(iv) render professional services at, on behalf of, or have any
interest in, directly or indirectly (as principal, partner, stockholder,
proprietor, agent, broker, employee, consultant, lender or otherwise), any
business or facility where neurology, magnetic resonance imaging and/or pain
management services are rendered (including a private physician's office) or
which engages in the management of physician offices that provide neurology,
magnetic resonance imaging and/or pain management services within the Restricted
Area. The Restricted Area shall mean the area within a twelve (12) mile radius
of 2997 Princeton Pike, Lawrenceville, New Jersey, 1245 Whitehorse-Mercerville
Road, Hamilton, New Jersey and any additional site at which Physician, at any
time during Physician's employment by any affiliate of USP, rendered substantial
medical services. Nothing in the foregoing subparagraph 20(a)(iv) shall be
deemed, however, to prevent any Physician from being an employee of any
affiliate of USP or owning securities of USP.
(b) Remedies for Breach. Each Selling P.C. and Physician acknowledge
that the restrictions contained in subparagraph 20(a) above in view of the
medical and business practices of USP and its affiliates are reasonable and
necessary in order to protect the legitimate interests of USP and its
affiliates, and that any violation thereof would result in irreparable injury to
USP and its affiliates. Each Selling P.C. and Physician therefore acknowledge
and agree that, in the event of any violation thereof, USP and/or its affiliates
shall be authorized and entitled to obtain, from any court of competent
jurisdiction, preliminary and permanent injunctive relief as well as damages and
an equitable accounting of all earnings, profits and other benefits arising out
of such violation, which rights and remedies shall be cumulative and in addition
to any other rights or remedies to which USP and/or its affiliates may be
entitled.
(c) Judicial Modifications. If the period of time or the area
specified in subparagraph 20(a) above should be adjudged unreasonable in any
proceeding, then the period of time shall be reduced by such number of months or
the area shall be reduced by the elimination of such portion thereof or both so
that such restrictions may be enforced in such area and for such time as is
adjudged to be reasonable.
(d) Extension of Restriction. In the event of any breach or
violation of the restriction contained in subparagraph 20(a) above, the period
therein specified shall abate during the time of any violation thereof and that
portion remaining at the time of commencement of any violation shall not begin
to run until such violation has been fully and finally cured.
21. Indemnity Against Brokerage Commissions. USP and its affiliates, on
the one hand and each Selling P.C. and Physician on the other hand hereby
represent and warrant that there is no corporation, firm or person entitled to
receive from it any brokerage commission or finder's fee in connection with this
Agreement or the transactions provided for herein, and each hereby indemnifies
and agrees to save the other parties harmless from and against any claim for
brokerage commission or finder's fee based on any retention or alleged retention
of a broker or finder by it.
22. Miscellaneous.
(a) Indulgences, Etc. Neither the failure nor any delay on the part
of any party hereto to exercise any right, remedy, power or privilege
(singularly or collectively, a "Right") under this Agreement shall operate as a
waiver thereof, nor shall any single or partial exercise of any Right, preclude
any other or further exercise of the same or of any other Right, nor shall any
waiver of any Right with respect to any occurrence be construed as a waiver of
such Right with respect to any other occurrence.
(b) Controlling Law. This Agreement and all questions relating to
its validity, interpretation, performance and enforcement (including without
limitation, provisions concerning limitations of actions), shall be governed by
and construed in accordance with the laws of the Commonwealth of Pennsylvania,
other than conflicting
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choice-of-law provisions, and without the aid of any canon, custom, or rule of
law requiring construction against the drafting party.
(c) Notices. All notices, requests, demands and other communications
required or permitted under this Agreement shall be in writing and shall be
deemed to have been duly given, made and received only when delivered
(personally, by courier service such as Federal Express, or by other messenger)
or when deposited in the United States mails, registered or certified mail,
postage prepaid, return receipt requested, addressed to USP at 220 Commerce
Drive, Ft. Washington, PA 19034, Attn: President (with a copy to Cozen and
O'Connor, 1900 Market Street, Philadelphia, Pennsylvania, 19103, Attn: Sandra A.
Bloch) and to Selling P.C. or Physician as set forth in the Asset Purchase
Agreement (with a copy to Fox, Rothschild, O'Brien & Frankel, 997 Lennox Drive,
Building 3, Lawrenceville, New Jersey, 08648-3261, Attention: Martin L. Monaco,
Jr., Esquire). In addition, notice by mail shall be by airmail if posted outside
of the continental United States. Any party may alter the address to which
communications or copies are to be sent by giving notice of such change of
address in conformity with the provision of this paragraph for the giving of
notice.
(d) Schedules and Exhibits. All Schedules and Exhibits referred to
in this Agreement are hereby incorporated by reference into, and made a part of,
this Agreement.
(e) Binding Nature of Agreement; Assignment. This Agreement shall be
binding upon and inure to the benefit of the parties and their respective heirs,
personal representatives, successors and assigns, except that Selling P.C.s and
Physician may not assign or transfer their rights or obligations under this
Agreement without the prior written consent of USP.
(f) Provisions Separable. The provisions of this Agreement are
independent of and separable from each other, and no provision shall be affected
or rendered invalid or unenforceable by virtue of the fact that for any reason
any other or others of them may be invalid or unenforceable in whole or in part.
(g) Knowledge of Selling P.C. For purposes of this Agreement, the
phrase "to the knowledge of Selling P.C." or the like shall refer to the
knowledge, after due investigation, of Physician, the business manager of each
Practice, if any, and the office manager(s) of each Practice.
(h) Paragraph Headings. The paragraph headings in this Agreement are
for convenience only; they form no part of this Agreement and shall not affect
its interpretation.
(i) Gender, Etc. Words used, regardless of the number and gender
specifically used, shall be deemed and construed to include any other number,
singular or plural, and any other gender, masculine, feminine or neuter, as the
context requires.
(j) Number of Days. In computing the number of days for purposes of
this Agreement, all days shall be counted, including Saturdays, Sundays and
holidays; provided, however, that if the final day of any time period falls on a
Saturday, Sunday or holiday on which federal banks are or may elect to be
closed, then the final day shall be deemed to be the next day which is not a
Saturday, Sunday or such holiday.
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EXHIBITS
A. Note
B. Employment Agreement
C. Intentionally Omitted
D. Opinion of Counsel to Selling P.C.
E. Note
SCHEDULES
A Practices and Location
B Share Ownership
2 Personal Items which are a part of Excluded Assets
3 Allocation of Consideration
5(b) Debt
6(a) Incorporation; Authorized Capital
6(b) Financial Statements
6(c) Leased Real Estate
6(d) Personal Property Liens and Conditions
6(d)-1 Personal Property Leases
6(e) Insurance
6(f) Contracts, etc.
6(g) Labor and Employee Matters
6(g)-1 Benefit Plans
6(g)-2 Salaries
6(h) Litigation
6(j) Licenses, Permits, etc.
6(l) Tax Returns
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EXHIBIT "A"
PROMISSORY NOTE
$________________ ____________, 1998
FOR VALUE RECEIVED, U.S. Physicians, Inc., a Pennsylvania
corporation (the "Company") hereby promises to pay to __________, P.C. (the
"Payee") the principal amount of __________________ Dollars ($____________) in
five equal annual installments of _________ Dollars ($______) commencing on the
first anniversary date and terminating on the fifth anniversary date of this
Note. Interest on the unpaid principal balance at the rate of six percent (6%)
per annum shall be paid on the date principal payments are made. The entire
amount of the unpaid principal plus accrued interest shall be due and payable on
the fifth anniversary date.
The principal and interest shall be paid at _________ or such
other address as the Payee shall specify in writing.
The Company may at any time and from time to time prepay all
or any portion of the principal sum of this Note without penalty or premium.
This Note is given pursuant to the terms of an Asset Purchase
Agreement dated ________ __, 1998. The Company may set off its obligation
hereunder against any debt or liability of the Payee or any affiliate of the
Payee to the Company or any affiliate of the Company. This Note is not
transferable except with the prior written consent of the Company, which consent
may be withheld in the Company's absolute discretion.
The Company hereby waives presentment, demand, protest, notice
of protest and all other demands or notices of any sort in connection with the
delivery, acceptance, performance, default, dishonor or enforcement of this
Note, except as specifically provided herein.
The happening of any of the following shall constitute an
event of default:
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(a) the Company fails to pay any installment of principal or
interest within a period of ten (10) days after such
installment is due, the holder of this Note notifies the
Company of the default by written notice sent to 220
Commerce Drive, Fort Washington, Pennsylvania, 19034 (or
such other address as the Company shall specify in
writing) by registered mail, return receipt requested,
and the Company does not cure the default by making the
required payment within ten (10) days after receiving
such notice;
(b) the Company admits in writing its inability to pay its
debts as they become due;
(c) the commencement of any proceeding in bankruptcy wherein
the Company is designated as the debtor under the Federal
Bankruptcy Code, as amended from time to time, or any
successor statute, or under any other act or law, whether
state or federal for the relief of debtors, now or
hereafter existing and the proceeding is not discharged
within 120 days after its commencement.
This Note is made and delivered in and shall be governed by
the laws of the Commonwealth of Pennsylvania.
IN WITNESS WHEREOF, the undersigned has caused this Note to be
executed the day and year first above written.
U.S. PHYSICIANS, INC.
By:______________________________
Vice President
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EXHIBIT "B"
EMPLOYMENT AGREEMENT
THIS IS AN AGREEMENT, made on the _______ day of
_____________, 1998, by and between U.S. Medical Services of New Jersey, P.C.
(the "P.C."), and Alan E. Ottenstein, M.D., an individual (the "Physician").
B A C K G R O U N D
A. P.C. wishes to employ Physician and Physician wishes to
enter into the employ of P.C. on the terms and conditions contained in this
Agreement.
B. Attached hereto is an eight (8) page Rider to Employment
Agreement (the "Rider") which forms a part of this Agreement.
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained in this Agreement and intending to be legally bound, P.C. and
Physician agree as follows:
1. Employment. P.C. employs Physician and Physician accepts
employment by P.C. for the period and upon the terms and conditions contained in
this Agreement.
2. Duties and Responsibilities. Physician shall serve P.C.
generally as a physician specializing in the practice of neurology, magnetic
resonance imaging and pain management and shall have such authority and such
responsibilities as P.C. reasonably may determine from time to time.
3. Base Compensation.
(a) As compensation for all the services rendered by
Physician to P.C., P.C. shall pay Physician: (i) 40% (the "Physician
Percentage") of the "Net Revenue of the Practice," as that term is defined on
Exhibit "A" less amounts paid or payable (including the costs of family health
coverage if required by contract) for such period to other Practice Physicians,
nurse practitioners, physician assistants and all other professional medical
personnel who are entitled to reimbursement from third parties for services
provided in their name who are not providing MRI services ("Base Salary"). The
Base Salary will be paid in the manner provided below. Notwithstanding the
foregoing, during the
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Initial Period (as defined below), in lieu of the foregoing, Physician shall
receive as an advance $100,000 per month less amounts paid or payable for such
period to other Practice Physicians, nurse practitioners, physician assistants
and all other professional medical personnel who are entitled to reimbursement
from third parties for services provided in their name who are not providing MRI
services (the "Advance").
(b) Within 45 days after the end of each calendar quarter
(the "Determination Period") during the term of this Agreement (a "quarter")
commencing with the end of the Initial Period, P.C. shall determine: (i) the Net
Revenue of the Practice for the Initial Period or the quarter then ended,
whichever is applicable; (ii) the Profit Before Taxes of MRI services; (iii) the
amount Physician was entitled to receive as Base Salary during the Initial
Period or such quarter, whichever is applicable (the "Current Base Salary"); and
(iv) the difference, if any, between the amount paid to Physician during the
Initial Period or such quarter and the amount that Physician was entitled to
receive during the Initial Period or such quarter (the "Difference").
(c) If the Difference is a positive number (i.e., the
amount to which Physician was entitled with respect to the applicable quarter
exceeds the amount paid), P.C. shall pay Physician the amount of the Difference
within 5 days after the end of the Determination Period. If the Difference is a
negative number, P.C. shall proportionately reduce the next payments due
Physician during the remainder of the then current quarter by the amount of the
Difference.
(d) In addition to and before any adjustments that result
from a negative Difference, each quarter after the Initial Period P.C. shall
adjust the amount payable to Physician so that it equals 90% of the most
recently determined Current Base Salary. Notwithstanding anything in this
Agreement to the contrary, the Current Base Salary in the quarter following the
Initial Period shall be based only upon the immediately preceding calendar
quarter and not upon the entire Initial Period. If the amount of the Current
Base Salary is not determined for any quarter until one or more payments have
been made to Physician in such quarter the remaining payments of Current Base
Salary will be adjusted proportionately.
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(e) The Initial Period means the time beginning with the
date of this Agreement and ending on the last day of the calendar quarter which
is closest to, but not more than, nine months following the date of this
Agreement. For example, if the date of this Agreement is February 20, the
Initial Period would end on June 30 and if the date of this Agreement is October
2, the Initial Period would end on March 30. Notwithstanding the foregoing, if
at the end of the initial nine month period, the average accounts receivable
turnover percentage of the accounts receivable of the Practice Physicians is
110% or more of the average accounts receivable turnover percentage of the
Practice Physicians during the last full twelve months immediately preceding the
date first written above, then the Initial Period shall be extended by an
additional three months.
(f) The Advance during the time when it is applicable or
90% of the Current Base Salary, as it is determined or adjusted from time to
time, shall be paid in equal installments pursuant to P.C.'s customary payroll
payment procedure then in effect, but not less frequently than monthly.
(g) As additional compensation hereunder, P.C. shall pay
Physician 25% of cash receipts received by P.C. as payment for facility charges
in connection with pain management services provided by the Practice Physicians
from the Locations. The parties shall reasonably and mutually agree as to the
amount of facility charges received by P.C. from time to time.
4. Additional Compensation.
(a) In addition to the compensation provided in Section 3
above, P.C. shall pay Physician with respect to each year during the term of
this Agreement:
(i) 7.5% of the Profit Before Taxes of MRI Services
rendered at a New MRI Facility that are less than or equal to a 40% Pre-Tax
Profit Margin for such New MRI Facility and 25% of the Profit Before Taxes of
MRI Services rendered at a New MRI Facility that are above a 40% Pre-Tax Profit
Margin for such New MRI Facility if Physician is employed by P.C. on the last
day of such year. "New MRI Facility" means a facility (A) opened after the date
hereof, (B) that does not replace an MRI Location, (C)
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that is not at a Location, (D) that is owned by P.C., and (E) with which
Physician was materially involved in establishing and developing the operation
and overseeing its management and administration in the year to which the
payment relates by providing the services set forth on Schedule 4(a)(i). Profit
Before Taxes of MRI Services rendered at a New MRI Facility means cash receipts
received by P.C. resulting from payments for MRIs administered after the date
hereof at a New MRI Facility ("MRI Revenue") minus (I) occupancy expenses
(including, but not limited to, amounts for utilities, facility rent, common
area maintenance charges, property tax and insurance), (II) staff expenses
(including, but not limited to, salary, bonus, payroll taxes, perquisites and
professional liability insurance premiums relating to physicians and all other
staff), (III) supplies, (IV) advertising and promotional expenses, (V) equipment
expenses (including, but not limited to, lease costs, depreciation,
amortization, repairs, maintenance and interest), (VI) other direct expenses and
(VII) allocated overhead expenses (including, but not limited to, billing and
collection, human resources and accounting) equal to 8% of MRI Revenue. Pre-Tax
Profit Margin for a New MRI Facility means Profit Before Taxes of MRI Services
rendered at a New MRI Facility for such New MRI Facility divided by MRI Revenue
for such New MRI Facility;
(ii) 7.5% of the Profit Before Taxes of any New Pain
Management Facility (as hereinafter defined) for each of the first five years of
operations during the term of this Agreement plus 25% of any portion of the
Profit Before Taxes of any New Pain Management Facility that are above a 40%
Pre-Tax Profit Margin during any such year if Physician is employed by P.C. on
the last day of such year. New Pain Management Facility means any pain
management program developed after the date hereof in an office of P.C. or an
affiliate of P.C. with which Physician was materially involved in establishing
and developing the operations by providing the services described on Schedule
4(a)(ii). Profit Before Taxes of a New Pain Management Facility means cash
receipts received by P.C. resulting from payments for pain management services
after the date hereof rendered at a New Pain Management Facility ("NPM Cash
Receipts") minus (A) occupancy expenses (including, but not limited to, amounts
for utilities, facility rent, common area maintenance charges, property tax and
insurance), (B) staff expenses (including, but not limited to, salary, bonus,
payroll taxes,
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perquisites and professional liability insurance premiums relating to physicians
and all other staff), (C) supplies, (D) advertising and promotional expenses,
(E) equipment expenses (including, but not limited to, lease costs,
depreciation, amortization, repairs, maintenance and interest), (F) other direct
expenses, and (G) allocated overhead expenses (including, but not limited to,
billing and collection, human resources and accounting) equal to 8% of NPM Cash
Receipts. Pre-Tax Profit Margin of any New Pain Management Facility means Profit
Before Taxes of such New Pain Management Facility divided by NPM Cash Receipts
of such New Pain Management Facility; and
(iii) 4% of the Profit Before Taxes of any Trainee Pain
Management Facility (as hereinafter defined) for each of the first three years
of operations during the term of this Agreement. Trainee Pain Management
Facility means any pain management program developed after the date hereof in an
office of P.C. or an affiliate of P.C. with which Physician was not materially
involved in establishing and developing the operations, but a physician who was
trained by Physician at the request of P.C. was materially involved in
establishing and developing the operations. Profit Before Taxes of any Trainee
Pain Management Facility means cash receipts received by P.C. resulting from
payments for pain management services after the date hereof rendered at a
Trainee Pain Management Facility ("TPM Cash Receipts") minus (A) occupancy
expenses (including, but not limited to, amounts for utilities, facility rent,
common area maintenance charges, property tax and insurance), (B) staff expenses
(including, but not limited to, salary, bonus, payroll taxes, perquisites and
professional liability insurance premiums relating to physicians and all other
staff), (C) supplies, (D) advertising and promotional expenses, (E) equipment
expenses (including, but not limited to, lease costs, depreciation,
amortization, repairs, maintenance and interest), (F) other direct expenses, and
(G) allocated overhead expenses (including, but not limited to, billing and
collection, human resources and accounting) equal to 8% of TPM Cash Receipts.
The payments provided for in this paragraph shall continue after the date of the
termination of this Agreement if P.C. terminates this Agreement prior to the end
of the original term.
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(iv) P.C. shall estimate the amount due Physician
pursuant to subparagraphs 4(a)(i), (ii) and (iii) within forty-five (45) days
after the end of each of the first three three month periods of each year during
the term of this Agreement based on the portion of the year then ended and shall
pay Physician as an advance 85% of the estimated amount due to him less amounts
previously paid to Physician pursuant to this sentence with respect to such
year. Within seventy-five (75) days after the end of each year during the term
of this Agreement, P.C. shall calculate the actual amounts due to Physician
pursuant to such subparagraphs and either (A) P.C. shall pay Physician the
amount by which the actual amount due to Physician pursuant to subparagraph
4(a)(i), (ii) and (iii) with respect to such year exceeds the amount paid to him
as an advance pursuant to the first sentence of this subparagraph, or (B)
Physician shall pay P.C. the amount by which the amount paid to Physician as an
advance pursuant to the first sentence of this subparagraph exceeds the actual
amount due to Physician pursuant to subparagraph 4(a)(i), (ii) and (iii).
(b) Within thirty (30) days after each New Pain Management
Facility first bills for its services, P.C. shall cause U.S. Physicians, Inc. to
deliver to Physician an option to purchase 5,000 shares of common stock of USP.
The exercise price per share shall equal the closing price of USP's common stock
on the day the New Pain Management Facility first bills for its services. The
options shall vest in three equal annual installments, with the first
installment vesting on the first anniversary of the day the New Pain Management
Facility first bills and the second and third installments shall vest on the
second and third anniversary of such date; provided, however, if this Agreement
terminates for any reason other than termination by P.C., any portion of the
options which have not vested shall be forfeited and if P.C. terminates this
Agreement without cause, the options shall become immediately vested on the last
day of Physician's employment. The options shall be subject to USP's standard
option grant letter.
5. Vacation. Physician shall be entitled to six (6) weeks
vacation per year plus two (2) weeks per year for continuing medical education.
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6. Hospital. Physician shall, at all times, cause at least one
of the Practice Physicians to be a member of the Medical Staff, with admitting
privileges, of St. Francis Medical Center.
7. Controlling Law. This Agreement and all questions relating
to its validity, interpretation, performance and enforcement (including, without
limitation, provisions concerning limitations of actions), shall be governed by
and construed in accordance with the laws of New Jersey, and without the aid of
any canon, custom or rule of law requiring construction against the draftsman.
8. Incorporation of Rider. The Rider is incorporated by
reference into and made a part of this Agreement.
9. Execution in Counterparts. This Agreement may be executed
in any number of counterparts, each of which shall be deemed to be an original
as against any party whose signature appears thereon, and all of which shall
together constitute one and the same instrument. This Agreement shall become
binding when one or more counterparts hereof, individually or taken together,
shall bear the signatures of all of the parties reflected hereon as the
signatories.
10. Entire Agreement. This Agreement, including the Rider,
Schedules and Exhibits (which are incorporated in this Agreement by reference),
contains the entire understanding among the parties with respect to its subject
matter, and supersedes all prior and contemporaneous agreements and
understandings, inducements or conditions, express or implied, oral or written,
except as herein contained. The express terms of this Agreement control and
supersede any course of performance and/or usage of the trade inconsistent with
any of the terms hereof. This Agreement may not be modified or amended other
than by an agreement in writing, signed by all signatories hereto.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered as of the date first above written.
U.S. MEDICAL SERVICES OF
NEW JERSEY, P.C.
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By:___________________________
Vice President
________________________, M.D.
Alan E. Ottenstein
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EXHIBIT "A"
Net Revenue of the Practice means the sum of (a) cash receipts received
by P.C. resulting from payments by or on behalf of patients who received
services, including pain management services, other than MRI services, on or
after the date hereof, rendered by Alan E. Ottenstein, M.D., Russell Abrams,
M.D., Jay Klazmer, D.O. and any additional physicians who primarily render
services from 2997 Princeton Pike, Lawrenceville, New Jersey or 1245
Whitehorse-Mercerville Road, Suite 421, Hamilton, New Jersey (the "Locations")
or replacement physicians for such physicians (collectively, the "Practice
Physicians") plus (b) cash receipts received by P.C. resulting from payments by
or on behalf of patients who received services other than MRI services at the
Locations on or after the date hereof rendered by any nurse practitioner,
physician assistant or other professional medical personnel who is entitled to
reimbursement from third parties for services provided in his/her name, plus (c)
cash receipts received by P.C. on account of invoices billed by P.C. for
services other than MRI services at the Locations, on or after the date hereof,
rendered by personnel other than the Practice Physicians but under the
supervision of the Practice Physicians ("Ancillary Services") so long as the
services are substantially the same as the Ancillary Services rendered by
personnel of the Practice Physicians immediately prior to the date hereof, plus
(d) the dollar amount of capitation payments received by P.C. (without deduction
of any administrative fee or other charge, except any amount withheld by P.C. to
cover the costs of out-of-area care under a capitation contract, with any unused
portion of such withhold to be distributed to the Designated Physicians (as
defined below) pursuant to the methods described below) that are attributed to
the Practice Physicians, for any period beginning on or after the date hereof,
pursuant to the following formula: With respect to each payor who makes
capitated payments to P.C. in return for the agreement of P.C. to provide or
arrange for the provision of designated covered services to the members of the
payor plan, P.C. shall, during the first 12 months of each such agreement,
determine those physician employees of P.C. who are providers of the designated
covered services in the service area covered by such agreement (the "Designated
Physicians"), determine, pursuant to actuarial analysis, the amount of such
capitation payments that will be allocated to the Designated Physicians in the
aggregate, and allocate such capitated payments to the net revenue of the
Designated Physicians, on a Per Member Per Month basis, based upon
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the number of members of the applicable plan assigned to the Practice from the
entire pool of members covered under such plan, which assignment shall be made
based upon the zip codes of the members of such plan. For each 12-month period
after the first 12 months of each capitated agreement, P.C. shall allocate
capitated payments to the Designated Physicians on the basis described herein,
or on a basis that adjusts for P.C. experience concerning resource utilization,
quality management criteria, plan cost effectiveness and other reasonable
criteria.
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RIDER TO EMPLOYMENT AGREEMENT
This Rider is attached to an Employment Agreement and forms a part of
such Agreement. Any term used in this Rider which is defined in the Employment
Agreement shall have the meaning set forth in the Employment Agreement. The term
"Agreement" used in this Rider means the Employment Agreement, including this
Rider.
1. Employment. The engagement of Physician as an employee of P.C. is
set forth in the Employment Agreement.
2. Duties and Responsibilities.
(a) Physician shall discharge the following responsibilities:
treatment of patients in accordance with general professional standards;
completion of the medical charts and records with the detail then required by
P.C. in a legible form and/or any other form of transmission but in any event in
a timely manner; performance of clinical and diagnostic testing services;
participation in occasional continuing education programs in order to maintain
competency; and performance and maintenance of necessary or appropriate
administrative duties, including but not limited to preparation of reports,
claims, correspondence and records relating to all professional services
rendered under this Agreement. Physician shall perform any other duties
reasonably requested by P.C., including but not limited to any duties and
responsibilities of P.C. set forth in any agreement between P.C. and any
insurer, HMO or other third party relating to the provision of medical services
of the type practiced by Physician.
(b) Throughout the term of this Agreement, Physician shall devote
Physician's entire working time, energy, skill and best efforts to the
performance of Physician's duties hereunder in a manner which will faithfully
and diligently further the business and interests of P.C. Physician represents
that Schedule "A" attached hereto sets forth certain information concerning the
hours, call obligations and related matters of Physician's current practice.
P.C. and Physician agree that Physician will generally work and be available to
work similar hours for P.C., but Physician understands that circumstances and
scheduling problems, as well as professional duties and emergencies will require
Physician to work additional hours or different days from time to time if P.C.'s
practice so requires.
3. Term. This Agreement shall be for a term of ten years commencing on
the date of this Agreement, unless sooner terminated as hereinafter provided.
4. Compensation.
(a) For all the services rendered by Physician to P.C., P.C. shall
pay Physician the amounts set forth in the Employment Agreement.
(b) P.C. will pay all state license fees reasonably necessary or
appropriate.
(c) Throughout the term of this Agreement and as long as they are
kept in force by P.C., Physician shall be entitled to participate in and receive
the benefits of any health insurance, profit sharing or retirement plans made
available to other similarly situated employees of P.C.
(d) Physician shall be entitled to such number of weeks of vacation
during each year of the term of this Agreement as is set forth in the Employment
Agreement. Any vacation not used in any year shall be forfeited and shall not be
carried over into any other year.
(e) P.C. shall, in its discretion, either pay the premiums for or
provide professional liability insurance for Physician complying with the
Pennsylvania Health Care Services Malpractice Act or any successor statute. If
on the date hereof, Physician has claims made basis professional liability
insurance, Physician shall pay for and purchase (or cause to be purchased) a
"tail" insurance policy insuring Physician for malpractice that may be alleged
to have occurred during any period Physician had claims made professional
liability insurance in an amount acceptable to P.C. If on the date hereof
Physician has occurrence basis professional liability insurance or Physician has
claims made basis professional liability insurance and has purchased (or caused
to be purchased) a "tail" pursuant to the preceding sentence and, in either
case, P.C. provides professional liability insurance for Physician on a claims
made basis during the term of this Agreement, then, on the earlier of the date
P.C. ceases to provide claims made professional liability insurance for
Physician or the date of termination of this Agreement, P.C. shall purchase a
"tail" insurance policy insuring
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Physician for malpractice that may be alleged to have occurred during the term
of such claims made insurance policy in an amount in effect immediately prior to
the termination of such policy.
(f) All amounts payable under this Agreement shall be subject to
withholding of applicable federal, state and local taxes and all other taxes, if
any, required to be withheld.
5. Expenses. Physician shall be responsible for the payment of all
expenses relating to all of the following: (i) travel, meals, lodging and other
expenses reasonably incurred to attend professional meetings and educational
programs annually, (ii) continuing medical education, (iii) dues and fees for
professional association membership, (iv) professional license fees; (v)
subscriptions for professional publications, (vi) automobile mileage incurred in
connection with Physician's services hereunder in accordance with the
regulations of the Internal Revenue Service and (vii) mobile/cellular telephone
charges in connection with Physician's services hereunder; and (viii) business
entertainment.
6. Fees.
(a) P.C. shall arrange for all billing and collection functions for
all professional services rendered by Physician. Physician shall take all steps
reasonably requested by P.C. to assist in the billing and collection of funds
due for such professional services, including the establishment of an
"assignment account" for purposes of Medicare, Blue Shield and any other third
party billing.
(b) Except as provided in the succeeding sentence, Physician agrees
to turn over to P.C. any and all fees paid or assigned to Physician for all
professional services (including, but not limited to, research grants, medical
director fees, fees related to clinical and/or pharmaceutical trials and expert
witness or other legal/medical fees) which Physician performs during the term of
this Agreement, including any third party fee assignments from any insurer,
intermediary or other party. Physician may retain any and all book royalties and
lecture fees.
7. Disability.
(a) If Physician becomes unable to perform Physician's essential
duties hereunder, with or without reasonable accommodations, due to partial or
total disability or incapacity resulting from a mental or physical illness or
any similar cause ("Disabled"), P.C. will continue the payment of Physician's
base salary at its then current rate for a period of ninety (90) days following
the date Physician is first unable to perform Physician's duties due to being
Disabled. Thereafter, P.C. shall have no obligation for base salary or other
compensation payments to Physician during the continuance of such disability or
incapacity.
(b) If Physician is Disabled for a cumulative period of 180 days
during any twelve month period, P.C. shall have the right, in its discretion, to
terminate this Agreement thereafter, in which event P.C. shall have no further
obligations or liabilities hereunder after the date of such termination.
8. Death. If Physician dies, this Agreement shall terminate on the date
of death and P.C. shall have no further obligations or liabilities hereunder
after the date of such termination.
9. Intentionally Omitted.
10. Discharge. P.C. may, in its sole discretion, discharge Physician
immediately, without prior notice, upon any of the following:
(a) Professional Matters:
(i) loss, suspension, revocation or non-renewal which has not
been reinstated within thirty (30) days of either (A) Physician's license to
practice medicine in any state in which Physician is licensed on the date of
this Agreement or becomes licensed after such date, or (B) Physician's DEA
registration and/or authorization to prescribe controlled substances or
narcotics;
(ii) exclusion or suspension from participation in the
Medicare or Medicaid programs, which exclusion or suspension is not cured within
thirty (30) days, or imposition of Civil Monetary Penalty sanction for
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violation of Medicare or Medicaid laws, rules or regulations (excluding
recoupments, recoveries or adjustments which are not Civil Monetary Penalties),
which exclusion, suspension or imposition did not result from Physician
complying with the rules and regulations of P.C.;
(iii) adverse action affecting the scope of Physician's
license to practice medicine or Physician's right to treat patients covered by
workers' compensation or other state regulated programs;
(iv) if Physician becomes ineligible for professional
liability insurance, or the cost of such insurance becomes 50% or more expensive
for Physician relative to the average physician providing comparable services in
a comparable geographic area due to Physician's malpractice claim history and
P.C.'s quality assurance committee has recommended that Physician's employment
be terminated;
(v) breach of Paragraph 6 of the Employment Agreement that is
not cured within ninety (90) days;
(vi) any allegation that Physician engaged in improper conduct
or breach of medical ethics in connection with rendering medical services which,
after investigation by P.C., P.C. believes has reasonable merit and P.C.'s
Medical Review Committee has concurred with P.C.'s determination to discharge
Physician; or
(vii) if Physician becomes an Impaired Professional (defined
as (a) having an addictive disease which, in P.C.'s reasonable judgment, could
impair Physician's ability to perform Physician's duties hereunder and for which
Physician is not pursuing appropriate treatment; (b) having diverted a
controlled substance; or (c) being incompetent to practice medicine at a level
that meets the minimum requirements of licensure).
(b) General Matters:
(i) Physician's conviction for any felony, whether or not
related to rendering medical services;
(ii) any material violation by Physician of the terms and
conditions of this Agreement which has not been cured within ten (10) days after
notice from P.C. to Physician; provided, however, that P.C. need not give notice
more than twice in any twelve (12) month period and if P.C. does not have to
give notice, Physician does not have a cure period; and provided further that
P.C.'s Medical Review Committee has concurred that Physician should be
discharged;
(iii) any material violation by Physician, after due notice
from P.C., of the policies of P.C. provided P.C.'s Medical Review Committee has
concurred that Physician should be discharged; or
(iv) any act of theft, conversion or embezzlement or attempt
to do any of the foregoing or any solicitation or acceptance of any kickback or
bribe by Physician related to Physician's duties to P.C. which enriches or is
intended to enrich Physician or Physician's designee whether or not such
enrichment results in monetary loss to P.C.
Physician shall give P.C. written notice of any of the events listed in
(a)(i) through (vii) or (b)(i) above within three (3) business days after the
occurrence of such event. Upon the termination of this Agreement pursuant to
this section, P.C. shall have no further obligations or liabilities hereunder.
11. Liquidated Damages.
(a) Physician acknowledges and agrees that:
(i) P.C. and its affiliates have made a substantial investment
to establish the office in which Physician will practice; and
(ii) P.C. and its affiliates will incur substantial loss and
damages if Physician fails to fulfill Physician's obligations to remain employed
by P.C. pursuant to the terms of this Agreement, including, but not limited to,
a loss of much or most of the investment to establish the office in which
Physician will practice, an adverse effect on the strategic location (both
geographic and in the nature of the practice) of P.C.'s network of physicians, a
loss of
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referral sources, professional credibility and continuity to P.C., and an
adverse impact on the ability of P.C. to establish and/or carry out contracts
for the delivery of medical services.
(b) Due to the difficulty of measuring the loss and damages to P.C.
and its affiliates referred to in subparagraph 11(a) above, Physician agrees
that in the event Physician voluntarily terminates this Agreement or if P.C.
terminates this Agreement for cause (pursuant to Paragraph 10 of this Rider) (a
"Termination Event"), Physician shall pay P.C. as liquidated damages an amount
equal to: two times the Agreed Amount (as defined below) if the Termination
Event occurs on or prior to the second anniversary of the date of this
Agreement; one and one-half times the Agreed Amount if the Termination Event
occurs after the second anniversary, but on or prior to the third anniversary of
the date of this Agreement; the Agreed Amount if the Termination Event occurs
after the third anniversary, but on or prior to the fifth anniversary of the
date of this Agreement; or, one-half of the Agreed Amount if the Termination
Event occurs after the fifth anniversary, but prior to the tenth anniversary of
the date of this Agreement. As used herein, the Agreed Amount means a dollar
amount equal to the sum of Physician's salary, bonus, additional compensation
and pension contributions hereunder during the 12 month period immediately
preceding the Termination Event plus $750,000. If Physician has been employed
hereunder for a period of less than one year as of the Termination Event, then
the Agreed Amount shall be determined by annualizing the dollar amount of
Physician's salary, bonus and pension contributions hereunder during the period
of employment.
(c) P.C. and Physician agree that the foregoing payments constitute
a reasonable forecast of the amount necessary to compensate P.C. and its
affiliates for the harm they will suffer by reason of Physician's failure to
remain employed by P.C. for the full term of this Agreement.
(d) Physician shall make payment to P.C. of the amount due pursuant
to this paragraph within five (5) days of the Termination Event first by U.S.
Physicians, Inc. offsetting an amount equal to the next payment due to Physician
pursuant to the Notes dated the date hereof by U.S. Physicians, Inc. and any
remaining amount shall be paid in cash. If the payment is not made when due,
P.C. or any affiliate of P.C., in its sole discretion, may, in addition to its
other remedies available at law and/or equity, offset such amount against any
amount payable by P.C. or such affiliate to Physician or an affiliate of
Physician. Any amounts not paid when due shall bear interest at the per annum
rate equal to the lesser of (y) 1.5% in excess of the prime rate of interest
announced from time to time by P.C.'s primary bank or (z) the highest rate
permitted by applicable law.
(e) The obligation to pay liquidated damages pursuant to this
Paragraph 11 is independent of, and in no way removes, modifies or affects, the
restrictions contained in Paragraph 13.
(f) The provisions of this Paragraph 11 shall not be applicable in
the event Physician's employment terminates due to death or disability.
12. P.C. Property. All patient information, charts, records, personnel
and other policies manuals, data processing reports, service area analyses,
invoices, price lists or information, treatment protocols, outcome studies,
computer software, information reporting forms or systems, or any other
materials or data of any kind furnished to Physician by P.C., an affiliate of
P.C. or any management company that provides, directly or indirectly,
substantial management services to P.C. ("Manager") or developed by Physician on
behalf of P.C. or at P.C.'s direction or for P.C.'s use or otherwise in
connection with Physician's employment hereunder, are and shall remain the sole
and confidential property of P.C. or such affiliate or Manager as the case may
be. If P.C., an affiliate of P.C. or a Manager requests the return of such
materials at any time during or at or after the termination of Physician's
employment, Physician shall immediately deliver the same to P.C., such affiliate
or Manager, as the case may be.
13. Noncompetition, Trade Secrets, Etc.
(a) Physician shall not, directly or indirectly, during the term of
this Agreement and for a period of two years after its termination for any
reason whatsoever (the "Time Restriction"):
(i) induce any existing or former patient of P.C. to terminate
his or her relationship with P.C.; provided, however, that Physician shall not
be prohibited from treating an individual who has independently determined to
terminate his or her relationship with P.C. except in the circumstances
otherwise prohibited under this Paragraph 13;
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(ii) induce or attempt to influence any employee, independent
contractor or consultant of P.C. to terminate his or her relationship with P.C.;
(iii) induce or attempt to influence any hospital, healthcare
facility, professional or other person or entity that has a referring
relationship with P.C., or any HMO or other health care insurer that has an
arrangement for the provision of health care services with P.C., an affiliate of
P.C. or a Manager, to terminate or not to renew such relationship; or
(iv) render professional services at, on behalf of or have any
interest in, directly or indirectly (as proprietor, partner, stockholder,
principal, agent, broker, employee, consultant, or lender), any business or
facility where neurology, magnetic resonance imaging and/or pain management
services are rendered (including a private physician's office) within the
Restricted Area. The Restricted Area shall mean the area within a twelve (12)
mile radius of the Locations and any additional site at which Physician, at any
time during the term of this Agreement, rendered substantial medical services.
Nothing in the foregoing subparagraph 13(a)(iv) shall be deemed, however, to
prevent Physician from owning securities of any Manager.
All of the restrictive covenants contained in this subparagraph 13(a)
will be terminated except for subparagraph 13(a)(iii) if the following
conditions have been, and in the case of clause (z), below, continue to be,
satisfied:
(y) Physician has not terminated Physician's employment with P.C. prior to
the end of the term of this Agreement or been discharged by P.C. for cause
(pursuant to Paragraph 10 of this Rider); and
(z) during the Time Restriction Physician does not engage in the practice
of neurology, magnetic resonance imaging and/or pain management in the
Restricted Area unless (I) the resulting practice is independent and not owned,
part of or managed, directly or indirectly, by a physician practice management
entity, an HMO or other third party insurer, a hospital or hospital system,
physician/hospital organization, any other integrated medical delivery system or
any comparable or similar entity; and (II) the resulting practice does not
employ, engage as an independent contractor or have as a shareholder, partner or
member more than one physician with whom Physician was not engaged in the
practice of medicine in the same entity on the day immediately prior to the date
of this Agreement.
(b) During the term of this Agreement and at all times thereafter,
Physician shall not use for Physician's personal benefit, or disclose,
communicate or divulge to, or use for the direct or indirect benefit of any
person, firm, association or company other than P.C., any information regarding
the business methods, business policies, information reporting forms or systems,
management information systems, computer software programs, procedures,
techniques, research or development projects or results, outcome studies, trade
secrets, fee schedules or practices or other knowledge or processes of, or
developed by or on behalf of, P.C., an affiliate of P.C. or a Manager, or any
names and addresses of patients, customers or clients or any data on or relating
to past, present or prospective patients, customers or clients or any other
confidential information, including, without limitation, information relating to
agreements with health care insurers, HMOs and third party payors, relating to
or dealing with the business operations or activities of P.C., an affiliate of
P.C. or a Manager made known to Physician or learned or acquired by Physician
while in the employ of P.C.
(c) Any and all writings, inventions, clinical research activities,
improvements, processes, computer software programs, procedures and/or
techniques which Physician may make, conceive, discover or develop, either
solely or jointly with any other person or persons, at any time during the term
of this Agreement, whether during working hours or at any other time and whether
at the request or upon the suggestion of P.C. or otherwise, which relate to or
are useful in connection with any business now or hereafter carried on or
contemplated by P.C., including developments or expansions of its present fields
of operations, shall be the sole and exclusive property of P.C. Physician shall
make full disclosure to P.C. of all such writings, inventions, clinical research
activities, improvements, processes, procedures and techniques, and shall do
everything necessary or desirable to vest the absolute title thereto in P.C.
Physician shall not submit any article, study or other writing to any person for
publication or otherwise or conduct any clinical research activities without the
prior written consent of the President or Executive Vice President of P.C.
Physician shall write and prepare all specifications and procedures regarding
such inventions, improvements, processes, procedures and techniques and
otherwise aid and assist P.C. so that P.C. can prepare and present applications
for copyright or letters patent therefor and can secure such copyright or
letters patent wherever possible, as well as reissues, renewals, and extensions
thereof, and can obtain the record title to such copyright or patents so that
P.C. shall
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be the sole and absolute owner thereof in all countries in which it may desire
to have copyright or patent protection. Physician shall not be entitled to any
additional or special compensation or reimbursement regarding any and all such
writings, inventions, improvements, processes, procedures and techniques and any
amounts received by Physician from third parties shall be remitted to P.C.
promptly. Notwithstanding the foregoing, in the event Physician develops any new
techniques, he shall have a royalty-free, non-exclusive non-transferable license
to use such technique after the termination of this Agreement.
(d) Physician acknowledges that each affiliate of P.C. and
each Manager is a third party beneficiary of the provisions of the foregoing
subparagraphs (a), (b) and (c) and that the restrictions contained in such
subparagraphs, in view of the medical and business practices of P.C., its
affiliates and Manager are reasonable and necessary in order to protect the
legitimate interests of P.C., its affiliates and Manager, and that any violation
thereof would result in irreparable injuries to P.C., its affiliates and
Manager. Physician therefore acknowledges and agrees that in the event of
Physician's violation of any of these restrictions, P.C. and/or each affiliate
of P.C. and each Manager shall be authorized and entitled to obtain, from any
court of competent jurisdiction, preliminary and permanent injunctive relief as
well as damages and an equitable accounting of all earnings, profits and other
benefits arising from such violation, which rights and remedies shall be
cumulative and in addition to any other rights or remedies to which P.C., its
affiliates and Manager may be entitled.
(e) If the period of time or the area specified in subparagraph (a)
should be adjudged unreasonable in any proceeding, then the period of time shall
be reduced by such number of months or the area shall be reduced by the
elimination of such portion thereof or both so that such restrictions may be
enforced in such area and for such time as is adjudged to be reasonable.
(f) In the event of any breach or violation of the restriction
contained in subparagraph (a) above, the period therein specified shall abate
during the time of any violation thereof and that portion remaining at the time
of commencement of any violation shall not begin to run until such violation has
been fully and finally cured.
14. Prior Agreements. Physician represents to P.C. that (a) there are no
restrictions, agreements or understandings whatsoever to which Physician is a
party which would prevent or make unlawful Physician's execution of this
Agreement or Physician's employment hereunder, (b) Physician's execution of this
Agreement and Physician's employment hereunder shall not constitute a breach of
any contract, agreement or understanding, oral or written, to which Physician is
a party or by which Physician is bound and (c) Physician is free and able to
execute this Agreement and to enter into employment by P.C.
15. Representations and Warranties of P.C. As material inducement to
Physician to enter into this Agreement, P.C. makes the following representations
and warranties to Physician:
(a) Corporate Status and Authority. P.C. is a professional
corporation duly organized, validly existing and in good standing under the laws
of the state of its incorporation. The execution, delivery and performance of
this Agreement by P.C. have been duly authorized by all necessary corporate
action on the part of P.C. and this Agreement constitutes the valid and binding
obligations of P.C. enforceable against it in accordance with its terms.
(b) Agreement Not In Breach of Other Instruments. The execution and
delivery of this Agreement, the consummation of the transaction provided for
herein and the fulfillment of the terms hereof by P.C. will not result in the
breach of any of the terms and provisions of, or constitute a default under, or
conflict with, or cause any acceleration of any obligations of P.C. under, any
agreement, indenture or other instrument to which P.C. is bound, P.C.'s Articles
of Incorporation or By-Laws, any judgment, decree or order or award of any
court, governmental body or arbitrator, or any applicable law, rule or
regulation.
16. Change of Law. P.C. reserves the right to amend the terms of this
Agreement, including, without limitation, the Exhibits hereto, as appropriate in
the case of any change in law, including, without limitation, the promulgation
of new regulations under, or interpretation by a court or governmental agency,
authority or body of, existing law, that, in the reasonable judgment of P.C.,
necessitates such amendment; provided, however, any such change will not have a
significant adverse economic effect on Physician. If Physician believes any such
change has a significant adverse economic effect on him, within fifteen (15)
days after learning of the proposed amendment he shall give P.C. written notice
stating with particularity the reasons for his belief and his proposed
alternative. Physician and
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P.C. shall use their good faith efforts to reach agreement on an amendment
within thirty (30) days after P.C. receives Physician's notice. If P.C. and
Physician do not reach agreement within such thirty (30) day period, the dispute
as to whether the amendment results in a significant adverse effect on Physician
and if so, an appropriate amendment shall be settled exclusively by binding
arbitration, which shall be conducted by a single arbitrator in Philadelphia,
Pennsylvania in accordance with the National Health Lawyer's Association
Alternative Dispute Resolution Services Rules of Practice for Arbitration, and
judgment on the award rendered by the arbitrator may be entered in any court
having jurisdiction thereof.
17. Miscellaneous.
(a) Indulgences. Etc. Neither the failure nor any delay on the part
of either party to exercise any right, remedy, power or privilege (singularly or
collectively, a "Right") under this Agreement shall operate as a waiver of a
Right, nor shall any single or partial exercise of any Right preclude any other
or further exercise of the same or of any other Right, nor shall any waiver of
any Right with respect to any occurrence be construed as a waiver of such Right
with respect to any other occurrence. No waiver shall be effective unless it is
in writing and is signed by the party asserted to have granted such waiver.
(b) Notices. All notices, requests, demands and other communications
required or permitted under this Agreement shall be in writing and shall be
deemed to have been duly given, made and received only when delivered
(personally, by courier service such as Federal Express, or by other messenger)
or when deposited in the United States mails, registered or certified mail,
postage prepaid, return receipt requested, addressed to Physician at 2997
Princeton Pike, Lawrenceville, New Jersey, 08648, with a copy to Martin L.
Monaco, Jr., Esquire, Fox, Rothschild, O'Brien & Frankel, 997 Lennox Drive,
Building 3, Lawrenceville, NJ 08648-3261 and to P.C. at 220 Commerce Road, Ft.
Washington, PA 19034. In addition, notice by mail shall be by air mail if posted
outside of the continental United States. Any party may alter the address to
which communications or copies are to be sent by giving notice of such change of
address in conformity with the provisions of this paragraph for the giving of
notice.
(c) Binding Nature of Agreement. This Agreement shall be binding
upon and inure to the benefit of P.C. and its successors and assigns and shall
be binding upon Physician, and Physician's heirs and legal representatives. Each
affiliate of P.C. and each Manager shall be a third party beneficiary of the
provisions of Paragraphs 11, 12 and 13.
(d) Provisions Separable. The provisions of this Agreement are
independent of and separable from each other, and no provision shall be affected
or rendered invalid or unenforceable by virtue of the fact that for any reason
any other or others of them may be invalid or unenforceable in whole or in part.
(e) Paragraph Headings. The paragraph headings in this Agreement are
for convenience only; they form no part of this Agreement and shall not affect
its interpretation.
(f) Gender, Etc. Words used, regardless of the number and gender
specifically used, shall be deemed and construed to include any other number,
singular or plural, and any other gender, masculine, feminine or neuter, as the
context indicates is appropriate.
(g) Number of Days. In computing the number of days for purposes of
this Agreement, all days shall be counted, including Saturdays, Sundays and
holidays; provided, however, that if the final day of any time period (other
than the termination of the term of this Agreement) falls on a Saturday, Sunday
or holiday on which Federal banks are or may elect to be closed, then the final
day shall be deemed to be the next day which is not a Saturday, Sunday or such
holiday.
(h) Other Matters. The parties hereto acknowledge that P.C. retains
control over the employment decisions relating to all personnel, but P.C. agrees
that it shall not reassign or demote Jean Woolman or Toni McKeown to one of its
offices which is not located at 2997 Princeton Pike, Lawrenceville, New Jersey
or 1245 Whitehorse-Mercerville Road, Suite 421, Hamilton, New Jersey without
Physician's prior consent. P.C. further agrees that it shall, within three (3)
months after the date first written above, offer to Ms. Woolman and Ms. McKeown
employment agreements providing for a salary of no less than $123,000 per year
in the case of Ms. Woolman and $48,000 per year in the case of Ms. McKeown, and
providing for such benefits as are provided by P.C. to comparable employees.
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EXHIBIT "C"
FORM OF OPINION OF COUNSEL TO SELLING P.C.
A. Selling P.C. is a corporation duly organized, validly
existing and in good standing under the laws of the State of _________, has all
requisite power and authority to carry on its business as now conducted and to
own, lease and operate its properties, to execute and deliver the Asset Purchase
Agreement and to consummate the transactions contemplated thereby.
B. The execution, delivery and performance of the Asset
Purchase Agreement by Selling P.C. and the consummation of the transactions
contemplated thereby have been duly authorized by all necessary corporate action
on the part of Selling P.C. and do not conflict with or result in a breach or
constitute a default under Selling P.C.'s corporate charter or by-laws or, to
the best of the undersigned's knowledge, any indenture, mortgage, deed of trust
or other agreement or instrument to which Selling P.C. or any Physician is a
party or by which Selling P.C. or any Physician is bound.
C. The Asset Purchase Agreement has been duly executed and
delivered by Selling P.C. and each Physician and is a valid and legally binding
obligation of Selling P.C. and each Physician, enforceable in accordance with
its terms except as enforceability may be affected by bankruptcy, insolvency or
other laws or equitable principles affecting creditors' rights generally.
D. No consent, approval, order, waiver or authorization of, or
registration, filing or qualification with, any court or governmental agency or
body is required for the execution, delivery and performance by Selling P.C. or
any Physician of the Asset Purchase Agreement and/or the consummation of the
transactions contemplated thereby.
E. Each Employment Agreement has been duly executed and
delivered by the Physician who is a signatory thereof and constitutes a valid
and legally binding obligation of each such
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Physician enforceable in accordance with its terms except as enforceability may
be affected by bankruptcy, insolvency or other laws or equitable principles
affecting creditors' rights generally. The execution, delivery and performance
of the Employment Agreement by each signatory thereof, to the best of the
undersigned's knowledge, do not conflict with any agreement or instrument to
which the Physician which is a signatory thereof is a party or by which such
Physician is bound.
F. To our knowledge, there are no pending or threatened suits,
actions, arbitrations, administrative or other proceedings, governmental
investigations, judgments, decrees, awards or orders outstanding against or with
respect to the Selling P.C. or any Physician or any of their properties or
assets which affects or questions the validity of the Asset Purchase Agreement
or any Employment Agreement or the performance of their respective obligations
thereunder or any other action to be taken pursuant thereto.
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EXHIBIT "D"
PROMISSORY NOTE
$441,605 ____________, 1998
FOR VALUE RECEIVED, U.S. Physicians, Inc., a Pennsylvania
corporation (the "Company") hereby promises to pay to Alan E. Ottenstein (the
"Payee") the principal amount of Four Hundred Forty-One Thousand Six Hundred
Five Dollars ($441,605) plus interest at the rate of six percent (6%) per annum
in five equal annual installments of Sixty Thousand Dollars ($60,000) commencing
on the first anniversary date and terminating on the fifth anniversary date of
this Note. The entire amount of the unpaid principal plus accrued interest shall
be due and payable on the fifth anniversary date.
The principal and interest shall be paid at _________ or such
other address as the Payee shall specify in writing.
The Company may at any time and from time to time prepay all
or any portion of the principal sum of this Note without penalty or premium.
This Note is given pursuant to the terms of an Asset Purchase
Agreement dated ________ __, 1998. The Company may set off its obligation
hereunder against any debt or liability of the Payee or any affiliate of the
Payee to the Company or any affiliate of the Company. This Note is not
transferable except with the prior written consent of the Company, which consent
may be withheld in the Company's absolute discretion.
The Company hereby waives presentment, demand, protest, notice
of protest and all other demands or notices of any sort in connection with the
delivery, acceptance, performance, default, dishonor or enforcement of this
Note, except as specifically provided herein.
The happening of any of the following shall constitute an
event of default:
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(a) the Company fails to pay any installment of principal or
interest within a period of ten (10) days after such
installment is due, the holder of this Note notifies the
Company of the default by written notice sent to 220
Commerce Drive, Fort Washington, Pennsylvania, 19034 (or
such other address as the Company shall specify in
writing) by registered mail, return receipt requested, and
the Company does not cure the default by making the
required payment within ten (10) days after receiving such
notice;
(b) the Company admits in writing its inability to pay its
debts as they become due;
(c) the commencement of any proceeding in bankruptcy wherein
the Company is designated as the debtor under the Federal
Bankruptcy Code, as amended from time to time, or any
successor statute, or under any other act or law, whether
state or federal for the relief of debtors, now or
hereafter existing and the proceeding is not discharged
within 120 days after its commencement.
This Note is made and delivered in and shall be governed by
the laws of the Commonwealth of Pennsylvania.
IN WITNESS WHEREOF, the undersigned has caused this Note to be
executed the day and year first above written.
U.S. PHYSICIANS, INC.
By:
--------------------------------
Vice President
-48-
AMENDMENT TO ASSET PURCHASE AGREEMENT
THIS AMENDMENT TO ASSET PURCHASE AGREEMENT ("Amendment") is made as of
April 23, 1998, by and among U.S. PHYSICIANS, Inc. ("USP"), the corporations
which are signatories hereto (other than USP) ("Selling PC") and Alan E.
Ottenstein, M.D. ("Physician").
BACKGROUND
A. USP, Selling PC and Physician are parties to an Asset Purchase
Agreement with Rider, dated February 12, 1998 (the "Purchase Agreement").
B. USP, Selling PC and Physician desire to amend the Purchase Agreement
as indicated herein.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants set forth herein, the parties, intending to be legally bound hereby,
agree as follows:
1. Subparagraph 2(e) of the Purchase Agreement is hereby amended in its
entirety to read as follows:
(e) at Closing, USP shall issue to Physician and each Selling P.C. one
or more stock certificates (the "Stock Certificates") representing in
the aggregate a number of shares of USP common stock as determined by
Schedule 2(e)-1 hereto (the "USP Shares"). If (i) the product of the
number of USP Shares issued to Physician and the Selling PCs multiplied
by the price per share to the public of USP common stock sold in the
initial public offering of the Common Stock of USP (the "IPO") is less
than $3,450,000, and (ii) on the second anniversary date of the IPO,
the product of the number of USP Shares originally issued to Physician
and the Selling PCs, as adjusted as provided below, multiplied by the
"Two-Year Share Price," as defined below (such product is referred to
herein as the "Two-Year Market Value"), does not equal or exceed
$3,450,000, as adjusted as provided below (such dollar amount is
referred to herein as the "Value Guarantee"), then the shareholders of
USP listed on Schedule 2(e)-2 hereto (collectively, the "Transferring
Shareholders"), in the ratio indicated on Schedule 2(e)-2 hereto (the
"Guarantee Ratio"), shall, within ten (10) days thereafter, transfer to
Physician and/or Selling PCs a total number of shares of USP common
stock equal to (x) the Value Guarantee minus the Two-Year Market Value,
divided by (y) the Two-Year Share Price. Any shares of USP common stock
transferred under the immediately preceding sentence will be deemed
"USP Shares" for all purposes hereunder. Notwithstanding the foregoing,
in no case will any Transferring Shareholder be required to transfer to
Physician and the Selling PCs and to all other physicians and entities
for the benefit of whom such Transferring Shareholder is agreeing to
the arrangement described herein, an aggregate number of shares in
excess of the number of shares of USP common
<PAGE>
stock owned of record by such Transferring Shareholder as of the date
of Closing of the IPO. The parties acknowledge that the obligations of
the Transferring Shareholders hereunder are several but not joint.
As used herein, "Two-Year Share Price" means the average closing price
of USP's common stock for the ten (10) consecutive business days
immediately preceding the second anniversary date of the IPO. The
agreement of the Transferring Shareholders to the terms contained
herein is evidenced by the Share Agreement that has been executed by
the Transferring Shareholders, a copy of which has been delivered to
Physician.
References to USP Shares shall be based on the capitalization of USP at
the time of the closing of the IPO and accordingly is on a "post-split
basis," reflecting any forward or reverse stock split (by stock
dividend or otherwise) that may be effected between the date hereof and
the closing of the IPO. References to USP Shares will be deemed
adjusted by any forward or reverse stock splits (by stock dividend or
otherwise) that occur following the closing of the IPO.
The obligations of the Transferring Shareholders under this
subparagraph 2(e) shall terminate automatically if, at any time prior
to the second anniversary date of the IPO, the average closing price of
USP's common stock for any ten (10) consecutive business days, when
multiplied by the number of USP Shares originally issued to Physician
and the Selling PCs, equals at least $3,450,000.
Subject to the limitations on transfer contained in Paragraph 17 of the
Rider, Physician and the Selling PCs may freely transfer the USP Shares
prior to the second anniversary date of the IPO; provided, however
that, on and after any transfer(s) the Two Year Market Value shall be
calculated by using the USP Shares that are held by Physician and the
Selling PCs immediately following all transfers (rather than the number
of USP Shares originally issued to Physician and the Selling PCs) and
the Value Guarantee shall be adjusted so that it equals the product of
3,450,000 multiplied by a fraction, the numerator of which is the
number of USP Shares originally issued to Physician and the Selling PCs
that remain held by Physician and the Selling PCs immediately following
all transfers and the denominator of which is the number of USP Shares
originally issued to Physician and the Selling PCs.
2. The parties hereby agree that the language indicated on Schedule A
hereto will be deemed added to the Notes issued to Physician and the Selling PCs
at the time of Closing under the Purchase Agreement. Physician and the Selling
PCs agree that, at any time requested by USP, they will promptly return to USP
each existing Note, and any amendments thereto, marked "cancelled," and accept
in return therefor a revised Note that includes the language indicated on
Schedule A hereto but that is otherwise identical to the existing Note and any
amendments thereto.
<PAGE>
3. The last sentence of subparagraph 15(a) of the Rider to Purchase
Agreement is hereby amended in its entirety to read as follows: "In the event
the Closing has not occurred on or prior to June 15, 1998, Physician shall have
the right, at any time thereafter, to present to USP a bona fide offer from an
unaffiliated third party to purchase the Practices; upon any such presentation
of an offer, USP shall, within 15 days after receipt of such offer, either agree
to match the terms of such offer, or notify Physician and each Selling PC that
USP is terminating this Agreement. In any case, if Closing has not occurred on
or prior to September 30, 1998, either USP or Physician may terminate this
Agreement, upon 15 days prior written notice to the other party, at any time
thereafter.
4. Physician and the Selling PCs confirm that each continues to be an
"accredited investor" as defined in the Securities Act of 1933, as amended, and
has been given the opportunity: (a) to examine USP's Registration Statement on
Form S-1, as amended, as filed with the Securities and Exchange Commission, and
such other documents as each of them may deem relevant, and (b) to ask such
questions and obtain such information concerning USP as each of them deem
relevant.
5. Physician and the Selling PCs agree: (a) to maintain the
confidentiality of all confidential information provided to them by USP in
connection with this Amendment, and (b) not to use such information for any
purpose, including without limitation trading in the securities of USP, other
than evaluating whether to enter into this Amendment.
6. The parties hereby ratify and reaffirm the Purchase Agreement in all
other respects.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the date first written above.
U.S. PHYSICIANS, INC.
By: /s/ Thomas J. Keane
------------------------
/s/ Alan E. Ottenstein
----------------------------
Alan E. Ottenstein
LAWRENCEVILLE NEUROLOGY
ASSOCIATES, P.A.
By: /s/ Alan E. Ottenstein
-------------------------
President
HAMILTON NEURODIAGNOSTIC
ASSOCIATES, P.A.
<PAGE>
By: /s/ Alan E. Ottenstein
-------------------------
President
CENTER FOR STROKE
PREVENTION, INC.
By: /s/ Alan E. Ottenstein
-------------------------
President
NEUROLOGY ASSOCIATES OF
MERCER COUNTY, P.A.
By: /s/ Alan E. Ottenstein
-------------------------
President
OPEN MRI, INC.
By: /s/ Alan E. Ottenstein
-------------------------
President
NEW BRUNSWICK DIAGNOSTIC
ASSOCIATES, P.A.
By: /s/ Alan E. Ottenstein
-------------------------
President
CHERRY HILL DIAGNOSTIC ASSOCIATES, P.A.
By: /s/ Alan E. Ottenstein
-------------------------
President
<PAGE>
BRICK DIAGNOSTIC
ASSOCIATES, P.A.
By: /s/ Alan E. Ottenstein
-------------------------
President
NEUROLOGY PAIN CENTER, P.A.
By: /s/ Alan E. Ottenstein
-------------------------
President
ALAN OTTENSTEIN, M.D.
By: /s/ Alan E. Ottenstein
-------------------------
President
<PAGE>
SCHEDULE 2(e)-1
The percentage of the Value Guarantee that will be issued to Selling PC, or
Physicians, as applicable, in the form of shares of USP, will vary according to
the multiple of projected earnings at which USP is priced in the IPO. For
example: If the IPO multiple is 16 times projected earnings, 100% of the Value
Guarantee will be delivered at the IPO. If the IPO multiple is 15 times
projected earnings, 63.5% of the Value Guarantee will be delivered at the IPO.
If the IPO multiple is 14 times projected earnings, 50% of the Value Guarantee
will be delivered at the IPO. If the IPO multiple is 13 times projected
earnings, 37.5% of the Value Guarantee will be delivered at the IPO.
<PAGE>
SCHEDULE 2(e)-2
TRANSFERRING SHAREHOLDERS GUARANTEE RATIO(1)
Thomas J. Keane 30.33%
NEPA Venture Fund II, L.P. 19.27%
Edison Venture Fund III, L.P. 30.64%
Keystone Venture IV, L.P. 10.98%
Dominion Fund V, a Delaware Limited Partnership 8.78%
(1) This Guarantee Ratio applies to all USP shares owned of record by such
Transferring Shareholders, except the shares of USP common stock resulting
from the conversion of the Series D Convertible Preferred Stock held by the
foregoing.
If the shares represented by the above have been fully transferred pursuant
to the Value Guarantee, then, if required to meet the Value Guarantee,
Transferring Shareholders will transfer, pro rata, the shares of common
stock held by the foregoing resulting from the conversion of the shares of
Series D Convertible Preferred Stock.
<PAGE>
SCHEDULE A
5. Subordination. Amounts owing under this Note (including, without
limitation, principal, interest, fees, charges, expenses and other amounts) are
expressly made subordinate and junior in right of payment to the prior payment
in full in cash and cash equivalents (and termination of commitments) of all
Senior Bank Debt to the extent and in the manner provided herein. Prior to (i)
the occurrence of an Insolvency Proceeding or (ii) notice from the Bank Agent of
the occurrence of an event of default under the Senior Bank Debt, the Company
may make payment, and the holder hereof may receive, principal (including
voluntary prepayments), interest and other amounts owing under this Note. After
(i) the occurrence of an Insolvency Proceeding or (ii) notice from the Bank
Agent of the occurrence of an event of default under the Senior Bank Debt, then
unless the Insolvency Proceeding shall have been dismissed or the event of
default shall have been remedied or waived, as appropriate,
(A) no payment shall be made, direct or indirect, on or in respect of
this Note and the holder of this Note shall not exercise any remedies under
this Note,
(B) any payment or other amounts payable on or in respect of this Note
shall be paid directly to the Bank Agent for application to the Senior Bank
Debt, and
(C) if, notwithstanding the foregoing provisions, the holder of this
Note shall receive payment on or in respect of this Note in contravention
of the provisions hereof, such amounts shall be received and held in trust
for the benefit of the Senior Bank Debt and will be promptly paid over to
the Bank Agent for application to the Senior Bank Debt,
until the Senior Bank Debt shall first have been paid in full in cash or cash
equivalents.
As used herein:
"Company Credit Agreement" means that Credit Agreement dated as of
____, 19___, among the Company, the Lenders identified therein and
NationsBank, N.A., as Administrative Agent, as amended, modified and
supplemented.
"Bank Agent" means the Agent under the Company Credit Agreement, being
initially NationsBank, N.A.
"Insolvency Proceeding" means any bankruptcy or insolvency proceeding,
or any receivership, liquidation, arrangement, reorganization or other
similar case or proceeding in connection therewith, in respect of the
Company or its creditors, as such, or its assets, or any liquidation,
dissolution or other winding up of the Company, whether voluntary or
involuntary and whether or not involving insolvency or bankruptcy, or any
assignment for the benefit of creditors.
"Senior Bank Debt" means (i) all principal (including reimbursement
obligations owing in respect of letters of credit) of and interest on the
loans and other obligations, and all other amounts (including guaranty
obligations, fees, indemnities, charges, expenses and other monetary
obligations) owing from time to time by the Company to the Bank Agent or
any Lender under the Company Credit Agreement or any other Credit Document
referenced therein, each as amended, modified or supplemented from time to
time, (ii) all obligations (including guaranty obligations) owing from time
<PAGE>
to time in respect of any refinancing, refunding, renewal or restructuring
of all or any portion of the principal (including reimbursement obligations
owing in respect of letters of credit) owing under, interest owing thereon
or other amounts relating to the Company Credit Agreement or any other
Credit Document referenced therein, as amended, modified or supplemented,
(iii) all obligations of the Company to a Lender or an affiliate of a
Lender under the Company Credit Agreement under an interest rate protection
agreement or foreign currency protection agreement permitted under the
Company Credit Agreement, and (iv) without limiting the foregoing, all
interest accruing subsequent to the commencement of an Insolvency
Proceeding.
Exhibit 10.19
May 21, 1998
Warren D. Barratt
Chief Financial Officer
U.S. Physicians, Inc.
220 Commerce Drive
Ft. Washington, PA 19034
Re: $75 million Revolving Credit Facility in favor of U.S. Physicians, Inc.
Dear Mr. Barratt:
We understand that U.S. Physicians, Inc., a Pennsylvania corporation (the
"Company" or "you") wishes to establish a revolving credit facility of up to $75
million (sometimes hereafter referred to as the "Credit Facility" or the
"Facility"). In connection therewith, (i) NationsBank, N.A. is pleased to advise
you of its agreement to arrange up to $75 million in commitments for the
revolving credit facility (subsequent to completion of the initial public
offering contemplated and receipt of the net proceeds therefrom), its commitment
to provide up to $40 million for the revolving credit facility in conjunction
with the initial public offering and an additional $35 million thereafter
subject to satisfaction of various financial covenants to be determined, and its
agreement to act as administrative and collateral agent for the revolving credit
facility, and (ii) NationsBanc Montgomery Securities, LLC ("NMS" and together
with NationsBank, "we" or "us") is pleased to advise you of its agreement to act
as arranger and syndication agent for the revolving credit facility, in each
case on the terms and conditions set forth herein and in the Summary of Terms
and Conditions attached as Annex I (the "Term Sheet"). Capitalized terms used
but not otherwise defined herein shall have the meanings provided in the Term
Sheet.
In addition to the terms and conditions set forth herein, the commitments of
NationsBank and NMS hereunder are subject to (i) execution by the Company of the
fee letter delivered in connection herewith and payment of the portion of fees
called for therein with acceptance of this commitment letter, (ii) the
negotiation, execution and delivery of the definitive documentation with respect
thereto in form satisfactory to us, (iii) the absence of a material adverse
change in the business, assets, liabilities (actual or contingent), operations,
condition (financial or otherwise) or prospects of the Company, individually and
together with its subsidiaries taken as a whole, and (iv) the absence of a
material adverse change in or disruption of the financial, capital or bank
syndication markets.
You agree to actively assist us in syndication of the revolving credit facility,
including assistance with preparation of an offering memorandum and related
materials, making financial and other information available to us, and the
prospective members of the syndicate, and making appropriate officers and
advisors available for discussion thereof. We will, after consultation with you,
manage and control all aspects of the syndication, including selection of
members of the syndicate, allocation of commitments and fees (including, with
respect to fees, allocation by and between NationsBank and NMS), and designation
of titles. You agree that in the event a syndication is not achieved in a manner
satisfactory to us, you will consider and cooperate with us in development of
alternative credit structures which might
<PAGE>
Mr. Warren D. Barratt
May 21, 1998
Page 2
result in a successful syndication. You agree to refrain from engaging in, or
entertaining, alternative financings during the syndication process.
By acceptance of this letter agreement, you hereby (i) represent and warrant
that (A) the information provided by you and your representatives to us and to,
or for, the prospective members of the syndicate is complete and correct in all
material respects and does not contain any untrue statement of material fact or
omit any material fact necessary to prevent them from being misleading, and (B)
the financial projections were prepared in good faith upon assumption believed
to be reasonable, and (ii) agree to pay all reasonable out-of-pocket fees and
expenses (including reasonable expenses of due diligence and reasonable fees and
expenses of our counsel), regardless of whether the revolving credit facility is
closed.
In the event that NationsBank or NMS should become involved in any capacity in
any action, proceeding or investigation in connection with the revolving credit
facility or any matter contemplated herein, the Company will reimburse us for
our legal and other expenses (including the cost of investigation and
preparation) as incurred, and will indemnify and hold harmless us, our
affiliates and our and their respective directors, officers, employees and
agents (the "Indemnified Parties") from and against any and all losses, claims,
damages and liabilities, joint or several, related to or arising out of any
matters contemplated herein, unless and only to the extent that it shall be
finally judicially determined that such loss, claim, damage or liability shall
have resulted primarily from the gross negligence or willful misconduct of the
party seeking indemnification.
The obligations of the Company under two immediately preceding paragraphs shall
survive and remain in force and effect regardless of (i) whether definitive
documentation for the revolving credit facility shall be executed or (ii)
termination of this letter agreement and the commitments hereunder.
This letter agreement and the commitments and undertakings hereunder may be
disclosed to third parties only with our prior consent.
This letter agreement shall be governed by and construed in accordance with the
laws of the State of North Carolina without regard to conflict of laws
principles, and may be amended and modified only with the prior written consent
of the parties hereto. Neither this letter agreement, nor the rights and
interests hereunder, may be assigned or otherwise transferred by the Company
without our prior written consent. This letter agreement supersedes and replaces
any and all proposals and commitment letters, if any, previously delivered by us
relating to the revolving credit facilities.
This offer will expire at 11:59 p.m. EDT on Thursday, May 21, 1998 unless you
shall accept the terms hereof by execution and return of a copy of this letter
agreement to us prior to such time (which may include facsimile transmission
with telephonic confirmation of our receipt), whereupon this letter agreement
and any fee letter executed in connection herewith shall become a binding
agreement. The commitments and undertakings of NationsBank and NMS set forth
herein will expire at 11:59 p.m. EDT
<PAGE>
Mr. Warren D. Barratt
May 21, 1998
Page 3
on Friday, July 31, 1998, unless the revolving credit facility has been
established and the definitive documentation therefor shall have been executed
and delivered by such time.
Very truly yours,
NATIONSBANK, N.A. NATIONSBANC MONTGOMERY
SECURITIES, LLC
By: /s/ William D. Duke By: /s/ James Yuhas
-------------------------- ---------------------------------
Name: William D. Duke Name: James Yuhas
Title: Vice President Title: Vice President
ACCEPTED AND AGREED:
U.S. PHYSICIANS, INC.
By: /s/ Warren D. Barratt
--------------------------
Name: Warren D. Barratt
Title: Senior Vice President
Date: May 21, 1998
<PAGE>
Annex I
U.S. PHYSICIANS, INC.
SUMMARY OF TERMS AND CONDITIONS
May 1998
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
BORROWER: U.S. Physicians, Inc., a Pennsylvania corporation
GUARANTORS: All domestic subsidiaries of the Borrower, now existing and after
acquired or existing. The guarantees shall be guarantee of payment
and not of collection
ADMINISTRATIVE AGENT: NationsBank, N.A.("NationsBank" or the "Agent") will act as sole
and exclusive administrative agent. As such, NationsBank will
negotiate with the Borrower, act as the primary contact for the
Borrower and perform all other duties associated with the role of
exclusive administrative agent. No other agents or co-agents may be
appointed without the prior written consent of NationsBank and
NMS.
ARRANGER &
SYNDICATION AGENT: NationsBanc Montgomery Securities LLC ("NMS").
LENDERS: A syndicate of financial institutions (including NationsBank)
arranged by NMS, which institutions shall be acceptable to the
Borrower, the Arranger and the Agent (collectively, the "Lenders").
CLOSING: The effective date of the loan documentation, to be no later than
July 31, 1998.
SENIOR CREDIT
FACILITY: An aggregate principal amount of up to $75 million will be available
upon the conditions hereinafter set forth:
Revolving Credit Facility: $75 million revolving credit facility (the
"Facility"), which will include a $__ million sublimit for the
issuance of standby letters of credit (each a "Letter of Credit").
Letters of Credit will be issued by NationsBank (in such capacity, the
"Fronting Bank"). The Lenders will purchase an irrevocable and
unconditional participation in the Letters of Credit.
PROCEEDS: The proceeds of the Facility may be used for (i) working capital,
capital expenditures, and other lawful corporate purposes, including
acquisitions; and (ii) refinancing existing indebtedness.
MATURITY: The Facility shall terminate and all amounts outstanding thereunder
shall be due and payable in full three (3) years from Closing.
SECURITY: Pledge of 100% of the capital stock of all domestic subsidiaries
(direct and indirect, now existing and after acquired or existing) of
1
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U.S. PHYSICIANS, INC.
SUMMARY OF TERMS AND CONDITIONS
May 1998
------------------------------------------------------------------------------
the Borrower and 65% of the capital stock of all foreign subsidiaries
(direct and indirect, now existing and after acquired or existing) of
the Borrower.
Security interest in all personal property, existing and
after-acquired, of the Borrower and the Guarantors (including
accounts, contracts, inventory, equipment, intellectual property,
investment property, license agreements and general intangibles).
Mortgages and liens (including collateral assignments of leases and
landlord's consents and waivers in connection therewith) on all real
property owned and leased by the Borrower and the Guarantors.
The foregoing pledges, security interests and liens shall be extended
to the Agent for the benefit of (i) the Lenders under the Facility and
(ii) the Lenders and their affiliates in connection with rate hedging
obligations under interest protection agreements with the Borrower and
the Guarantors relating to the loans and obligations under the
Facility, and shall in each case be first priority liens, subject only
to limited permitted liens (to be determined).
MANDATORY COMMITMENT
REDUCTIONS: The aggregate Revolving Commitments will be permanently reduced by
100% of the net proceeds received in connection with the issuance or
placement of debt (other than the Facility) or equity (excluding the
initial public offering), sale or disposition of assets (including
securitization transactions).
OPTIONAL PREPAYMENTS
AND COMMITMENT
REDUCTIONS: The Borrower may prepay the Facility in whole or in part at any time
without penalty, subject to reimbursement of the Lenders' breakage and
redeployment costs in the case of prepayment of LIBOR borrowings, or
may permanently reduce the amount of Commitments on three days'
written notice.
CONDITIONS
PRECEDENT TO CLOSING: The initial funding of the Facility will be subject to satisfaction of
the conditions precedent deemed appropriate by the Agent and the
Lenders including, but not limited to, the following:
(i) The completion of further due diligence with respect to the
Borrower and its subsidiaries (including review of compliance
with Medicare, Medicaid and Stark I and II and other health
care laws) in scope and determination satisfactory to
NationsBank and NMS in their sole discretion.
2
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U.S. PHYSICIANS, INC.
SUMMARY OF TERMS AND CONDITIONS
May 1998
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(ii) The negotiation, execution and delivery of definitive
documentation with respect to the Facility satisfactory to
NMS, the Agent and the Lenders.
(iii) The Agent shall have received (a) satisfactory opinions of
counsel to the Borrower and the other obligors (which shall
cover, among other things, authority, legality, validity,
binding effect and enforceability of the documents for the
Facility) and such corporate resolutions, certificates and
other documents as the Agent shall reasonably require and (b)
satisfactory evidence that the Agent (on behalf of the
Lenders) holds a perfected, first priority lien in all
collateral for the Facility, subject to no other liens except
for permitted liens to be determined.
(iv) The Agent shall have received and, in each case, approved the
consolidated financial statements of the Borrower and its
subsidiaries for the fiscal years 1996 and 1997, including
balance sheets, income and cash flow statements audited by
independent public accountants of recognized national
standing and prepared in conformity with GAAP, interim
monthly financial statements and monthly working capital
detail for the trailing twelve months and next two (2)
projected years and thereafter annually for the fiscal year
then ending and the next two (2) projected years.
(v) There shall not have occurred a material adverse change since
December 31, 1997 (being the date of the most recent audited
financial statements available) in the business, assets,
operations, condition (financial or otherwise) or prospects
of the Borrower and its subsidiaries or in the facts and
information regarding such entities as represented to date.
(vi) The absence of any action, suit, investigation or proceeding
pending or threatened in any court or before any arbitrator
or governmental authority that, if decided adversely to the
Borrower, purports to affect the Borrower or its subsidiaries
or any transaction contemplated hereby in any material
respect or on the ability of the Borrower and its
subsidiaries to perform their obligations under the documents
to be executed in connection with the Facility.
(vii) The Borrower and its subsidiaries shall be in compliance in
all material respects with all existing financial
obligations.
3
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U.S. PHYSICIANS, INC.
SUMMARY OF TERMS AND CONDITIONS
May 1998
------------------------------------------------------------------------------
(viii) Receipt and review, with results satisfactory to the Agent
and its counsel, of information regarding litigation, tax,
accounting, labor, insurance, pension liabilities (actual or
contingent), real estate leases, material contracts, debt
agreements, property ownership, and contingent liabilities of
the Borrower and its subsidiaries.
(ix) The absence of any material disruption or material adverse
change in the financial or capital markets generally which
the Agent or NMS, in their discretion, deems material in
connection with the syndication of the Facility.
(x) Review and approval of the structure, form and terms of
subordinated seller financing notes given by the Borrower to
physicians and physician practice groups.
(xi) Review and approval of the service and management contracts
with practice and services groups and of the employment
contacts with physicians and health care providers.
(xii) evidence of completion of the planned public offering of
equity by the Borrower and its receipt of at least $42
million in net proceeds therefrom (after deduction of
underwriting and other related fees, and costs and expenses
relating thereto).
REPRESENTATIONS &
WARRANTIES:
Usual and customary for transactions of this type, to include without
limitation: (i) corporate status; power, authority and enforceability
of the loan documents; (ii) compliance with applicable law (including
Medicare, Medicaid, Stark I and II), contracts and organizational
documents; (iii) absence of material litigation, legal and
administrative investigations and proceedings, environmental
liabilities, liens and contingent liabilities; (iv) accuracy of
specified financial statements and no material adverse change; (v)
receipt of required governmental or third party approvals; (vi) use of
proceeds, (vii) compliance with margin regulations and Investment
Company Act; (viii) compliance with, and absence of material
liabilities under, ERISA; (ix) ownership and rights to licenses,
patents, trademarks and other intellectual property; (x) payment of
taxes; (xi) full disclosure and no material mistatements, and (xii)
perfected liens and security interests.
PERMITTED
ACQUISITIONS: Acquisitions will be permitted so long as (i) the Borrower is in pro
forma compliance with its financial covenants, (ii) the acquisition is
in a similar or related line of business as the Borrower, (iii) the
acquired company becomes a guarantor (and its assets are pledged as
4
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U.S. PHYSICIANS, INC.
SUMMARY OF TERMS AND CONDITIONS
May 1998
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provided above), (iv) no event of default exists or would be created
by the acquisition.
COVENANTS: Usual and customary for transactions of this type, to include
without limitation: (i) delivery of financial statements (annual
audited consolidated financial statements of the Borrower and its
subsidiaries to be provided within 90 days after each fiscal year
with no default letter and compliance certificate; quarterly
unaudited statements and a compliance certificate to be provided
within 45 days following each of the first three fiscal quarters);
(ii) delivery of monthly management reporting statements for a
period of twelve (12) months following closing, (iii) notices of
default, material litigation and material governmental and
environmental proceedings; (iv) compliance with laws; (v) payment
of taxes; (vi) maintenance of insurance; (vii) limitations on
indebtedness (including letters of credit, guarantees and other
contingent liabilities) and liens; (viii) limitations on
investments; (ix) limitations on dividends and other restricted
payments; (x) limitations on capital expenditures; (xi) limitations
on transactions with affiliates; (xii) limitations on mergers,
consolidations, sales, transfers of assets and incurrence of debt;
and (xiii) compliance with, and limitation of liabilities under,
ERISA.
Financial covenants to include (but not be
limited to):
o Minimum monthly Consolidated EBITDA at levels to be
determined.
o Maximum Consolidated Leverage Ratio (Consolidated Funded Debt
to Consolidated EBITDA) at levels to be determined.
o Maximum Consolidated Senior Leverage Ratio (Consolidated
Senior Funded Debt to Consolidated EBITDA) at levels to be
determined.
o Minimum Fixed Charge Coverage Ratio (Consolidated Adjusted
EBITDA, adjusted for rents and capital expenditures, to
Consolidated Fixed Charges, including interest expense,
scheduled principal payments, cash taxes and rents) measured
on a rolling four quarter basis, at levels to be determined.
o Minimum Consolidated Net Worth of 85% of Consolidated Net
Worth as of the closing date plus 75% of quarterly net income
(not less than zero) plus 100% of net proceeds from equity
issuances.
5
<PAGE>
Annex I
U.S. PHYSICIANS, INC.
SUMMARY OF TERMS AND CONDITIONS
May 1998
------------------------------------------------------------------------------
EVENTS OF DEFAULT: Usual and customary in transactions of this nature, to include,
without limitation, (i) nonpayment of principal, interest, fees or
other amounts, (ii) violation of covenants, (iii) inaccuracy of
representations and warranties, (iv) cross-default to other material
agreements and indebtedness, (v) bankruptcy, (vi) material
judgments, (vii) ERISA, (viii) actual or asserted invalidity of any
loan documents or security interests and (ix) Change in Control (to
be defined) of the Borrower.
ASSIGNMENTS/
PARTICIPATIONS: Each Lender will be permitted to make assignments to other
financial institutions approved by the Borrower and the Agent,
which approval shall not be unreasonably withheld. Lenders will be
permitted to sell participations with voting rights limited to
significant matters such as changes in amount, rate, and maturity
date and releases of collateral and guarantors. Assignments shall
be in minimum principal amounts of $5 million (or the entire
remaining amount of commitments). An assignment fee of $3,500
is payable by the Lender to the Agent upon any such assignment
occurring (including an assignment by a Lender to another Lender).
WAIVERS &
AMENDMENTS: Amendments and waivers of the provisions of the loan agreement
and other definitive credit documentation will require the approval
of Lenders holding loans and commitments representing more than
50% of the aggregate amount of loans and commitments under the
Facility, except that the consent of all the Lenders shall be
required with respect to (i) increases in commitment amounts, (ii)
reduction in amount of principal, interest, or fees, (iii)
extensions of scheduled maturities or times for payment, and (iv)
release of all or substantially all of the collateral and release of
all or substantially all of the Guarantors.
INDEMNIFICATION: The Borrower shall indemnify the Lenders from and against all
losses, liabilities, claims, damages or expenses relating to the
Loans, the Borrower's use of loan proceeds or the commitments,
including but not limited to reasonable attorneys' fees and
settlements costs. This indemnification shall survive and continue
for the benefit of the Lenders at all times after the Borrower's
acceptance of the Lenders' commitments for the Facility,
notwithstanding any failure of the Facility to close.
GOVERNING LAW: New York. Waiver of right to jury trial.
6
<PAGE>
Annex I
U.S. PHYSICIANS, INC.
SUMMARY OF TERMS AND CONDITIONS
May 1998
------------------------------------------------------------------------------
OTHER: This term sheet is intended as an outline
only and does not purport to summarize all
the conditions, covenants, representations,
warranties and other provisions which would
be contained in definitive legal
documentation for the Facility contemplated
hereby.
<PAGE>
Addendum I
U.S. PHYSICIANS, INC.
FEES AND EXPENSES
May 1998
- --------------------------------------------------------------------------------
INTEREST RATES: The Facility shall initially bear interest at a rate equal to LIBOR
plus 300 basis points for a period of nine (9) months from the
closing date. Thereafter, the Facility shall bear interest at a
rate equal to LIBOR plus the Applicable Margin for LIBOR Loans
or the Alternate Base Rate (defined as the higher of (i) the
NationsBank prime rate and (ii) the Federal Funds rate plus .50%)
plus the Applicable Margin for Base Rate Loans.
The Borrower may select interest periods of 1, 2, 3 or 6 months for
LIBOR loans, subject to availability.
A penalty rate shall apply on all loans in the event of default at a
rate per annum of 2% above the applicable interest rate.
COMMITMENT FEE: The Borrower will initially pay a Commitment Fee of 50 basis points,
calculated on the basis of actual number of days elapsed in a year of
360 days, on the unused portion of the Facility, payable quarterly in
arrears.
PERFORMANCE PRICING: The Applicable Margin and Commitment Fee, for any fiscal
quarter, shall be determined by a pricing matrix based on the
Consolidated Leverage Ratio (Consolidated Funded Debt to Consolidated
EBITDA) at levels to be determined.
LETTER OF CREDIT FEES: Letter of credit fees are due quarterly in arrears to be shared
proportionately by the Lenders. Fees will be equal to the
Applicable Margin for LIBOR Loans on a per annum basis plus a
fronting fee of 12.5 basis points per annum to be paid to the
Fronting Bank for its own account. Fees will be calculated on the
aggregate stated amount for each letter of credit for the stated
duration thereof.
COST AND YIELD
PROTECTION: The usual for transactions and facilities of this type, including,
without limitation, in respect of prepayments, changes in capital
adequacy and capital requirements or their interpretation, illegality,
unavailability, and reserves without proration or offset.
EXPENSES: The Borrower agrees to reimburse the Agent for all reasonable out of
pocket legal fees and expenses incurred in the preparation and
execution of the Facility. The Borrower will reimburse the Agent and
each Lender for all reasonable out of pocket legal fees and expenses
incurred in connection with the enforcement of the Facility.
</TABLE>
MANAGEMENT AND SERVICES AGREEMENT
This MANAGEMENT AND SERVICES AGREEMENT dated December 1, 1997 (the "Agreement")
by and between U.S. PHYSICIANS, Inc., a Pennsylvania corporation ("Manager") and
U.S. Medical Services of New York, P.C., a Pennsylvania professional corporation
("P.C.").
BACKGROUND
A. P.C. intends to provide specialty and primary medical care and
related medical services (collectively, "Medical Services") to the general
public at various locations in the State of New York (the "Sites") and has filed
an application for authority to do business and conduct a medical practice in
the State of New York.
B. For reasons of quality, efficiency and economy, P.C. has determined
that it should obtain the services of another entity to manage the Sites and to
perform certain administrative, billing and marketing services for P.C.
C. P.C. believes that such delegation of the management aspects of its
practice will enable it to better concentrate on the practice of medicine and
therefore improve the Medical Services provided by P.C.
D. P.C. will maintain the sole responsibility of providing Medical
Services at the Sites and for matters involving patient care.
E. Manager has considerable experience in providing management and
administrative services to medical practices throughout the Mid-Atlantic region.
F. Manager desires to assume the management of the business operations
of P.C. and to negotiate agreements with insurers, employers and other
purchasers of health care services for the provision of Medical Services by P.C.
G. Manager will provide financing to P.C. necessary for the operations
of P.C.
H. Manager has developed facilities and management services designed to
make available to qualified physicians the facilities, equipment, supplies,
management services, capital financing, support staff, marketing and other
support services necessary to permit such physicians to provide medical services
on a cost-efficient basis and to enhance the ability of P.C. to enter into
competitive arrangements with insurers, employers and other purchasers of health
care services.
I. P.C. desires that Manager make available to P.C. such financing,
management services and facilities, and agrees hereby to compensate Manager for
such services as described herein. P.C. anticipates that, in light of the
dynamic changes in health care, particularly in New York, it will be required to
expand the scope of and locations for, the delivery of Medical Services it
provides or makes available to the public. P.C. further anticipates that the
scope of, and cost associated with, the financing and management services to be
rendered and the facilities to be provided by Manager hereunder will change with
the expansion of P.C.'s medical practice and the development of additional
Sites.
<PAGE>
J. Manager is willing to make such financing, management services and
facilities available to P.C. on the terms and conditions provided in this
Agreement.
NOW, THEREFORE, in consideration of the foregoing, and of the promises
and mutual covenants contained herein, the parties hereto, intending to be
legally bound hereby, agree as follows:
1. Agreement to Manage and Provide Administrative and Support Services.
P.C. hereby engages Manager, and Manager accepts such engagement, to manage the
Sites on behalf of P.C. and for its account, to market Medical Services provided
through P.C. to purchasers of health care services and to provide the financing,
services and facilities set forth in this Agreement, on the terms and conditions
set forth herein.
2. Term. The term of this Agreement shall begin as of the date the New
York Department of State approves the P.C.'s application of authority to conduct
business in New York (the "Commencement Date") and shall end on the fortieth
(40th) anniversary of such date unless sooner terminated in accordance with the
provisions of Paragraph 12. Unless either party elects to terminate this
Agreement at the end of the initial term or any renewal term, by giving written
notice to the other party ninety (90) days before the expiration of the then
current term, this Agreement shall be deemed to have been automatically renewed
for an additional term of five (5) years.
3. Duties and Responsibilities of P.C. P.C. shall be responsible for
all Medical Services at the Sites and shall render such Medical Services to the
public as will maximize the quality and efficiency of the treatment of patients.
P.C. shall be solely responsible for the following items:
(a) Physicians and Other Health Care Providers. P.C. shall hire,
engage, supervise, evaluate and terminate all physicians, nurses, physical
therapists, and other health care providers (collectively, "Professionals") at
the Sites, whether they are employees of P.C. or independent contractors of
P.C., and, upon sixty (60) days' prior written notice to and prior consultation
with Manager, establish compensation and benefits for such Professionals. P.C.
shall not increase or decrease the amount of such compensation and/or benefits
without providing Manager sixty (60) days' notice of the change and prior
consultation with Manager. P.C. shall be responsible for the payment of all
compensation payable to Professionals, except to the extent that nurses,
physical therapists, and other health care providers may become employees of
Manager pursuant to subparagraph 4(a)(iv) of this Agreement.
(b) Medical Directors. P.C. shall designate one or more Medical
Directors, each of whom is properly qualified to perform the supervisory,
quality assurance and credentialing (collection and verification of information)
functions necessary for the rendering of appropriate Medical Services at the
Sites.
<PAGE>
(c) Quality and Cost-Effectiveness of Medical Services. P.C.
shall monitor the quality of Medical Services practiced by all Professionals at
the Sites, to assure that such care meets currently accepted standards of
medical competence and is in accordance with currently approved methods and
practices in the medical profession and related fields. P.C. shall adopt a peer
review/quality assessment program to monitor and evaluate the quality and
cost-effectiveness of Medical Services provided by Professionals at the Sites,
and shall assure that appropriate Medical Services are rendered in a
cost-effective manner.
(d) Medical Records. P.C. shall maintain the medical records of the
patients of P.C. in accordance with applicable law. Manager may, at P.C.'s
request, assist in the development of policies and procedures for efficient
maintenance and retrieval of medical records, subject to applicable law.
Confidentiality, and availability of medical records for inspection by
authorized agencies or individuals, shall be maintained in accordance with
applicable state and federal laws.
(e) Medical Fees. For purposes of establishing budgetary
assumptions for the Sites, P.C., after providing Manager with sixty (60) days
prior notice and prior consultation with Manager, shall:
(i) determine a fee schedule or schedules for each Site prior to
the inception of operations at that Site; and
(ii) determine revisions to such fee schedule or schedules not
less than thirty (30) days prior to the effective date of any proposed amendment
to such fee schedule. Manager shall be authorized to negotiate fees for services
with third-party payors on behalf of P.C.
(f) Daily Statements. P.C. shall prepare and submit to Manager, or
cause its physicians and, if applicable, other Professionals, to prepare and
submit, daily statements of professional services rendered and any prescribed
related matters, on such form, with such detail and in such manner as Manager
shall from time to time provide to P.C., in order to permit Manager to cause
proper billing for such services to be rendered.
(g) Protocols. P.C. shall, following prior consultation with
Manager, develop and implement utilization review standards, treatment protocols
and similar guidelines to establish measures for the delivery of high quality
and cost-effective medical care.
4. Duties and Responsibilities of Manager.
(a) Management Services. Manager shall be solely responsible for the
business operation of the Sites and assumes responsibility for the management of
all non-medical aspects of the Sites, except as otherwise specifically
prohibited by law or limited by this Agreement, and shall provide the following
services:
<PAGE>
(i) Manager shall lease, acquire or otherwise procure one or
more Sites in which P.C. shall conduct its practice. The selection of the
location and the addition of new practice sites shall be determined by the P.C.
upon providing Manager sixty (60) days' prior written notice of its intent to
change the location of a Site or add a new Site and following consultation with
and recommendations of Manager regarding any such selection or addition.
(ii) Manager shall provide all reasonable and necessary medical
equipment, furnishings and furniture required in the day-to-day operation of the
Sites. MANAGER SUPPLIES THE EQUIPMENT AS IS. MANAGER IS NOT A MANUFACTURER OF,
AND IS NOT ENGAGED IN THE SALE OR DISTRIBUTION OF, THE EQUIPMENT. MANAGER IS NOT
AN AGENT OF THE MANUFACTURER OR THE SELLER OF THE EQUIPMENT. MANAGER MAKES NO
REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, REGARDING THE MERCHANTABILITY,
FITNESS, DESIGN OR SUITABILITY FOR ANY PURPOSE OR ANY CONDITION OF, OR THE
QUALITY OR CAPACITY OF, OR THE MATERIAL OR WORKMANSHIP, IN THE EQUIPMENT.
(iii) Manager shall employ all necessary clerical, secretarial
and bookkeeping personnel reasonably necessary for the conduct of P.C.'s
operations at the Sites. Manager shall determine and cause to be paid the
salaries and fringe benefits of all such personnel.
(iv) Manager shall assist P.C. in negotiating employment
agreements or contracts with nursing staff, technicians and other allied and
ancillary health care personnel. All persons whose services are billed to
Medicare, Medicaid or other third-party payors as under the supervision of
physicians shall be employed by P.C.; provided, however, that employment
agreements may be assumed by and assigned to Manager at the request of Manager
if and to the extent applicable law authorizes billings by P.C. for supervised
services rendered by persons not employed by P.C.
(v) Manager shall administer P.C.'s payroll and
personnel-related activities.
(vi) Manager shall supervise all of Manager's employees;
provided, however, that P.C. shall supervise Professionals to the extent
necessary to maintain P.C.'s responsibility for the medical aspects of the
practice and to comply with requirements of applicable law.
(vii) Manager shall, unless prohibited by law, order and procure
all Medical Supplies (as hereinafter defined), office supplies and other
supplies necessary in the operation of the Sites to enable P.C. to deliver
quality Medical Services in a cost-effective manner. The ultimate oversight,
supervision and ownership for all Medical Supplies is and shall remain the sole
responsibility of P.C. "Medical Supplies" shall mean all drugs, pharmaceuticals,
products, substances, items or devices whose purchase, possession, maintenance,
administration, prescription or security require the authorization or order of a
licensed health care provider or require a permit, registration, certification
or other governmental authorization held by a licensed health care provider as
specified under any applicable federal or state law.
<PAGE>
(viii) Manager shall cause to be placed and kept in force all
forms of insurance needed to protect adequately P.C. and itself, in connection
with the operation of the Sites, including, but not limited to, where
appropriate, workers' compensation insurance, public liability insurance, fire
and extended coverage insurance, surety bonding, business interruption
insurance, burglary and theft insurance; provided, however, that P.C. shall have
the exclusive responsibility for maintaining malpractice liability insurance for
the Professionals pursuant to Paragraph 6, but which the Manager shall procure
and administer for P.C.
(ix) Manager shall maintain a comprehensive system of office
records, books and accounts reflecting the income and expenses of the Sites,
which books and records may be inspected by P.C. at any reasonable time during
regular business hours. Records shall be maintained for at least four (4) years
from the date of service or from any governmental inquiry related thereto, and
made available upon request to officers, representatives or agents of the
Secretary of Health and Human Services or of the Comptroller General of the
United States General Accounting Officer.
(x) Manager shall prepare and submit to P.C. monthly financial
statements with respect to the operation of the Sites.
(xi) Manager shall provide all janitorial, grounds and
maintenance services for the Sites.
(xii) Manager shall maintain, service and repair all equipment,
or use reasonable efforts to have lessors or contracted service providers
perform such necessary maintenance, service and repair.
(xiii) Manager shall provide printing, stationery, forms,
postage, duplicating, telecopying, photocopying and other support services as
are reasonably necessary and appropriate for the operation of the Sites.
<PAGE>
(b) Billing Services. Manager shall provide, or cause to be
provided, the following billing services to P.C.:
(i) a competent management executive for the supervision of the
billing and collection functions of P.C.'s business;
(ii) services with respect to billing of patients, insurance
companies, government entities and third party payors and collecting all charges
made to P.C.'s patients, excluding, however, any obligation to initiate legal
proceedings for collection, although Manager may do so at its sole and absolute
discretion;
(iii) preparation of all necessary medical letters and reports,
insurance forms, governmental agencies' claim forms and workers' compensation
claim forms;
(iv) preparation and mailing of all necessary and required
patient statements and invoices and reasonable follow-up on such preparation and
mailing;
(v) response by telephone or letter with reasonable dispatch and
promptness to any reasonable patient inquiry or request for assistance in the
interpretation of insurance policies or reimbursement programs and handling, to
the best of its ability, of any complaint involving professional services or
fees; and
(vi) operating procedure manuals for clerical staff.
(c) Marketing Services. Manager, at its sole discretion and with due
regard to the economic costs and anticipated benefits, may provide, or cause to
be provided, the following marketing services to P.C.:
(i) promotion of the Sites' services and facilities by marketing
representatives of Manager through contact with referring physicians and
potential referring physicians;
(ii) preparation and distribution of informational and
promotional materials, including descriptions of services, newsletters,
testimonials and other sales promotional pieces, subject to prior approval of
P.C., which shall be deemed to be given unless Manager receives written
disapproval within ten (10) days after P.C. receives the promotional materials;
(iii) subject to the need of certain third party payors to
maintain some form of exclusivity, promotion of the Sites through contact and
continued liaison with administrative directors of area HMO's, PPO's, unions and
self-insured clients and other third-party payors; and
<PAGE>
(iv) conducting open house receptions for new Sites, seminars
for physicians and office staff, speaking engagements for physicians who request
Manager to assist them in organizing such engagements, newspaper interviews and
magazine articles when initiated and requested by an interviewer or magazine.
(d) Provision of Funds. Manager shall arrange financing for P.C. or,
if no financing can be reasonably arranged, Manager shall advance funds to P.C.
in the event P.C. does not have sufficient cash on hand to pay its expenses as
and when due. Any such advance by Manager shall be repaid to Manager together
with interest at the rate from time to time charged to Manager by its primary
lender (or in the event there is no such lender, at an annual rate equal to the
prime rate announced from time to time in the Wall Street Journal plus 2%) out
of available cash in subsequent months prior to the payment of fees due Manager
pursuant to subparagraph 8(a).
(e) Deposit of Collections. Manager, in the name of P.C., shall
deposit in the appropriate bank accounts ("Bank Accounts") all receipts arising
from the operation of the Site(s) received by Manager on behalf of P.C. and
shall use reasonable diligence to see that disbursements from such accounts are
made by and on behalf of P.C. in such amounts and at such times as may be
required by this Agreement. P.C. shall provide Manager with all authorizations
necessary to enable Manager to make the deposits and disbursements required by
this subparagraph (e).
(f) Payment of Expenses. The parties agree and acknowledge that
Manager shall be solely responsible for all costs and expenses incurred in
connection with rendering the services Manager has undertaken as described in
Paragraph 4 above, and that Manager's sole compensation for such services shall
be as described in Paragraph 8 below.
(g) Other Services. Any additional services required by P.C. that
are not listed or identified in this Agreement shall be rendered for P.C. only
by an amendment to this Agreement.
5. Relationship of the Parties.
(a) Independent Contractors. P.C. and Manager are independent
contractors and the relationship between them is that of professional
corporation and an independent supplier of non-medical services and facilities.
Nothing in this Agreement shall be construed to create a principal-agent,
employer-employee, master-servant, partnership or joint venture relationship.
(b) P.C. - Patient - Manager Relationships. The professional
relationship between P.C. and its patients shall, at all times during the term
of this Agreement, be solely between P.C., its physicians and other
Professionals and their patients. P.C. shall have complete responsibility for
its medical practice and that of Professional employees or independent
contractors. Manager shall not interfere with the exercise of medical judgment
by the physicians and other Professionals employed by P.C. nor shall Manager
interfere with, control, direct, or supervise P.C., or any physician or other
Professional employee or independent contractor, in connection with the
provision of medical or ancillary services by P.C. In connection with the care
and treatment of its patients, P.C. shall be solely responsible for supervising
all personnel performing medical or ancillary services. To the extent any act or
service set forth in this Agreement required to be performed by Manager is
construed by a court of competent jurisdiction or by the appropriate licensure
bureaus or divisions of the Pennsylvania Department of State or the New York
Department of Health or Education to constitute the practice of medicine, the
requirement to perform that act or service by Manager shall be deemed waived and
unenforceable. In addition, if in the opinion of counsel to Manager, any act or
service set forth in this Agreement required to be performed by Manager is
likely to be considered to constitute the practice of medicine, the requirement
to perform that act or service by Manager shall be deemed waived and
unenforceable. All decisions as to which individuals shall utilize the services
of P.C. shall be the sole responsibility of P.C.; provided, however, that
Manager may negotiate on behalf of P.C. contracts with employers, unions, health
care insurers, HMOs, PPOs and other third-party payors.
<PAGE>
6. Malpractice Insurance.
(a) Minimum Policy. On its own behalf and on behalf of each
physician or other Professional its employs, and each physician or other
Professional contracting with P.C. for the provision of professional services,
P.C. shall provide and keep in force a malpractice insurance policy or policies
of standard form in the State of New York, with limits mutually acceptable to
Manager and P.C. The policies shall be obtained by P.C. or, as the case may be,
by each such physician or other Professional employed by P.C., or contracting
with P.C., and certificates thereof shall be delivered to Manager prior to the
inception of operations of any Site, together with evidence of the payment of
the premiums thereon, and shall be placed with insurance companies authorized
and licensed to issue such policies in the State of New York at rates deemed
reasonable and appropriate and having reserves in an amount deemed to be
reasonably adequate by P.C. and Manager. P.C. shall use its best efforts to name
Manager as an additional insured party on all malpractice insurance and Manager
may, at its option, participate in the procurement of cost-effective coverage on
behalf of P.C. P.C. shall provide documentation to Manager that all such
insurance is in full force and effect on each subsequent anniversary of the
Commencement Date and not less than ten (10) business days prior to the earlier
of the dates upon which P.C. employs or enters into a contract with any
Professional to provide services at a Site.
(b) Loss of Malpractice Insurance of Medicare/Medicaid Provider
Services. P.C. hereby agrees that it will immediately suspend any physician or
other Professional for whom malpractice insurance cannot be reasonably obtained
or whose malpractice insurance is canceled, and such physician or other
Professional shall not be reinstated or permitted to practice at any Site until
such time as the malpractice policy is reinstated. P.C. will notify Manager
within 24 hours of receipt of notice or information that any physician or other
Professional is not in compliance with the provisions of this Agreement
pertaining to malpractice insurance, or has been suspended or terminated from
participation in Medicare or Medicaid. Failure to suspend a physician or other
Professional who is not in compliance with the provisions of this Agreement
pertaining to Medicare/Medicaid participation status, malpractice insurance,
failure to replace such insurance should it be canceled, or failure to provide
such timely notice, shall constitute a breach of this Agreement pursuant to
Paragraph 12.
<PAGE>
7. Intentionally omitted.
8. Compensation.
(a) Payment of Fees. (i) The parties hereto recognize that Manager's
expenses, and the expenses of the Sites, will vary substantially depending on
the volume and type of patient services. The parties further recognize the
inherent uncertainties and the difficulty of predicting monthly expenses, volume
of services, the extent of obligations and the risks that Manager has taken and
will take with respect to capital expenditures, equipment lease obligations and
other obligations incurred in connection with the establishment and furnishing
of the Sites, and additionally recognize the need to provide Manager with
sufficient revenues to pay all operating expenses and to provide Manager with a
return on its investment commensurate with the risks being assumed by Manager.
Therefore, the parties agree that P.C. shall pay to Manager as compensation for
all the services rendered by Manager pursuant to the terms of this Agreement, an
amount equal to one hundred and eighteen percent (118%) of the annual expenses
incurred by Manager in rendering the management and administrative services
described herein (the "Management Fee"). For purposes of this Agreement, such
annual expenses shall include without limitation (i) salaries and benefits and
other costs of providing the administrative and clerical staff necessary for the
operation of the Sites; (ii) salaries and benefits and other costs of any
professional staff engaged or employed by Manager to perform services on behalf
of P.C. in accordance with subparagraph 4(a) above, (iii) cost of leasing office
space for the Site(s); (iv) purchase and maintenance of the management
information systems provided to the P.C., including hardware, software,
installation and maintenance costs; (v) all expenses incurred in maintenance of
the Site(s), including all utilities, security and maintenance; (vi) liability
insurance premiums; (vii) cost of capital to maintain the medical practice of
the P.C. as described in subparagraph 4(d); (viii) cost of Medical Supplies;
(ix) marketing expenses; (x) depreciation expenses; (xi) consultant, legal and
accounting fees incurred in connection with the Site(s) on behalf of the P.C.;
and (xii) all other expenses incurred by Manager in carrying out its obligations
under this Agreement.
(ii) Because of the difficulty of predicting actual monthly
expenses, the parties agree that Manager shall receive a fixed monthly
Management Fee that is intended to approximate the actual expenses incurred by
Manager. The initial monthly Management Fee, subject to mutually and reasonably
agreeable adjustment from time to time in the case of any increase or decrease
in the number of physicians providing Medical Services through P.C., or the
number of locations at which such physicians provide such Medical Services,
shall equal $450,000. Manager shall have the right to reconcile the monthly
payments with the amounts actually due and payable hereunder to Manager on a
quarterly basis, and Manager will provide P.C. with evidence of such
reconciliation.
(b) Authorization for Withdrawal from P.C. Bank Account. P.C.
authorizes Manager to make disbursements from the Bank Accounts to pay Manager
amounts owed to it by P.C., including the Management Fee, and amounts owed to
third parties as required hereunder. Payment of the monthly Management Fee (or
any amounts due Manager as a result of any quarterly reconciliation) shall not
be subject to deduction or offset by P.C.
<PAGE>
(c) Grant of Security Interest. As security for the payment by P.C.
of the compensation due to Manager pursuant to this Agreement and for any
advances made by Manager to P.C. pursuant to subparagraph 4(d), P.C. hereby
grants Manager a security interest in all of P.C.'s accounts receivable
(including all rights to payment by the Medicare or Medicaid programs, any
governmental body, insurance company, managed care organization or self-insured
health plan to the extent permitted by law), cash, bank accounts, Medical
Supplies and proceeds of the foregoing (collectively, the "Secured Assets"). At
the request of Manager, P.C. shall execute and deliver to Manager any and all
documents requested by Manager to evidence or perfect the security interest
granted hereby, including, but not limited to, UCC-1 Financing Statements. This
Agreement shall constitute a security agreement.
(d) Review of Books. Each party, at its sole expense, shall have the
right at least annually to have a certified public accountant review the other
party's books to determine whether that party has complied with this Agreement.
9. Books, Office Equipment, Etc.
(a) P.C.'s Ownership. All Medical Supplies (as defined in
subparagraph 4(a)(vii)) and patient records shall at all times be and remain
P.C.'s property; provided, however, that, upon termination of this Agreement,
P.C. shall provide any successor entity providing services at any Site, upon
request by such successor within ninety (90) days after termination of this
Agreement and at the successor's expense, access to, and copies of, such records
relating to Medical Services performed at such Site by P.C. during the term
hereof as such successor feels are reasonably necessary in order for such
successor to provide continuing Medical Services. Notwithstanding the foregoing,
no patient records will be made available without the written consent of the
patient if such is required by law. Manager shall reimburse P.C. the reasonable
cost of making such copies as are required to comply with this subparagraph
9(a).
(b) Manager's Ownership. All professional instruments, equipment,
computers, computer software programs and other management information systems,
supplies, samples, forms, charts, logs, brochures, building information,
policies and procedures, protocols, outcome studies, contracts or any other
materials or information furnished to P.C. by Manager are and shall remain the
sole property of Manager; if Manager requests the return of such equipment or
materials at any time after the term of this Agreement, P.C. shall immediately
deliver the same to Manager.
<PAGE>
10. Exclusivity, Non-Competition and Non-Disclosure Agreement.
(a) Exclusivity. P.C. agrees that during the term of this Agreement
it shall provide Medical Services exclusively at Sites managed by Manager
pursuant to this Agreement unless the parties hereto otherwise expressly agree
in writing.
(b) Non-Competition. During the term of this Agreement and for
twelve (12) months following termination, P.C. shall not:
(i) employ any individual previously working for Manager as its
employee;
(ii) directly or indirectly induce or attempt to influence any
employee of Manager to terminate employment with Manager; or
(iii) engage in, or have any interest in, directly or indirectly
(as proprietor, partner, stockholder, principal, agent, broker, employee,
consultant, or lender) any business or medical facility within the Restricted
Area which is engaged in providing Medical Services such as those provided at
the Sites or providing management services similar to those provided by Manager.
Restricted Area shall mean the area within a six (6) mile radius of any Site
located outside of the New York City metropolitan area (including Westchester
and Nassau counties) and a three (3) mile radius of any Site located with the
New York City metropolitan area.
(c) Non-disclosure. During the term of this Agreement and at all
times thereafter, P.C. shall not disclose, communicate or divulge, or use for
the direct or indirect benefit of any person, firm, association or company
(except any material referred to in subparagraph 9(a) above) any confidential
information regarding the business methods, business policies, procedures,
protocols, techniques, information systems or trade secrets, or other knowledge
or processes of or developed or used by Manager, or any other confidential
information relating to or dealing with the business operations or activities of
Manager (including, but not limited to financial information), made known to
P.C. or its employees or independent contractors or learned or acquired by P.C.,
its employees or independent contractors during the term of this Agreement. In
furtherance of the foregoing, P.C. agrees not to disclose, communicate or
divulge to any third party the terms of this Agreement unless so ordered by act
of law or other governing body having the authority to compel P.C. to do so.
(d) Reasonableness of Restrictions. The parties acknowledge that the
restrictions contained in subparagraphs 10(a), 10(b) and 10(c) are reasonable
and necessary to protect the legitimate interests and substantial investment of
Manager and that any violation of these restrictions would result in immediate
irreparable injury to Manager. If the period of time or geographical area
specified in subparagraph 10(b) and 10(c) should be adjudged unreasonable in any
proceeding, then the period of time or geographic area shall be reduced by the
elimination or reduction of such portion thereof so that such restrictions may
be enforced for such time or area as is adjudged to be reasonable. P.C. and
Manager acknowledge that, in the event of a violation of any such restrictions,
Manager shall be entitled to preliminary and permanent injunctive relief as well
as an equitable accounting of all earnings, profits and other benefits arising
from such violation, which rights shall be cumulative and in addition to any
other rights or remedies to which Manager may be entitled. In the event of a
violation, the period referred to in subparagraph 10(b) shall be extended by a
period of time equal to that period beginning with the commencement of any such
violation and ending when such violation shall have been finally terminated in
good faith.
<PAGE>
(e) Survival. The provision of this Paragraph 10 shall survive the
expiration or termination of this Agreement.
11. Power of Attorney. P.C. hereby appoints Manager, for the term
hereof (including all renewal terms) and thereafter until all amounts due to
Manager have been paid, to be its true and lawful attorney-in-fact, for the
following purposes:
(a) to collect accounts receivable owing to P.C. during the term of
this Agreement in P.C.'s name and on its behalf;
(b) to receive payments from Blue Cross, Blue Shield, insurance
companies, health care plans, Medicare, Medicaid and all other third party
payors in P.C.'s name and on its behalf for deposit in the Bank Accounts;
(c) to take possession of, endorse in the name of P.C. (and/or in
the name of an individual Professional) such payment intended for the payment of
a Professional's bills during the term of this Agreement and deposit in the Bank
Accounts any notes, checks, money orders, cash and other instruments received in
payment of accounts receivable;
(d) to initiate the institution of legal proceedings in P.C.'s name
to collect any account and monies owed to P.C., to enforce the rights of P.C.
under any contract or in connection with the rendering of any service and to
contest adjustments and decisions by government agencies (or fiscal
intermediaries) and third-party payors;
(e) to negotiate payments to P.C. under this Agreement to the extent
otherwise permitted by law;
(f) to perfect a security interest in the Secured Assets of P.C.;
and
(g) to do any other act, make any payment or execute any document on
behalf of P.C. to cure any default by P.C. of this Agreement; provided, such act
by Manager must comply with any applicable law.
<PAGE>
12. Termination and Breach.
(a) General Breach by P.C. In the event that P.C. should be in
default in the performance of any material provision of this Agreement, and such
default is not cured within thirty (30) days after receipt of written notice of
such default from Manager, Manager, at its option, may terminate this Agreement
by delivering written notice to P.C. at any time after expiration of such thirty
(30) day period.
(b) Failure to Maintain Malpractice Insurance or Licenses or
Participation Agreements. If P.C. should materially breach any of its
obligations pursuant to Paragraph 6 or its obligation to maintain, or cause to
be maintained, the medical licenses or participation agreements of all
physicians employed by it, or under contract to it, or to dismiss those who do
not maintain their medical licenses and participation agreements under the same
terms and conditions in Paragraph 6 pertaining to the maintenance of malpractice
insurance, and if such breach is not cured within ten (10) business days after
receipt by P.C. of written notification of such breach from Manager, Manager may
either cure the breach itself, where possible, at the expense of P.C., or
terminate this Agreement upon written notice to P.C.
(c) Bankruptcy of Manager. In the event Manager files any voluntary
petition in bankruptcy or any bankruptcy proceeding is filed against Manager
which in either case remains undismissed for a period of 180 days, P.C., at its
option, may terminate this Agreement by delivering written notice to Manager at
any time after such 180 day period and prior to the dismissal of such
proceeding.
(d) Termination by Manager. Manager may, at any time after the first
12 months of the term hereof, terminate this Agreement upon one hundred twenty
(120) days' prior written notice to P.C.
(e) Effect of Termination. Upon the termination of this Agreement,
Manager shall cause a final accounting and reconciliation to be performed no
later than ninety (90) days following the effective termination date hereof, and
P.C. shall pay all amounts remaining due to Manager as the Management Fee for
services rendered prior to the termination of this Agreement within five (5)
days following the completion of the reconciliation. The provisions of this
subparagraph 12(e) shall survive the termination of the Agreement.
13. Indemnification.
(a) P.C. P.C. shall indemnify and hold Manager, its officers,
directors, stockholders, employees, agents, parents and subsidiaries harmless
from and against all claims, demands, costs, expenses, liabilities and losses
(including attorneys' and other professional fees) caused or asserted to have
been caused by or as a result of the negligent performance of Medical Services
or ancillary services or any other negligent acts or omissions by, or willful
misconduct of, P.C. and/or its shareholders, agents, employees or subcontractors
(other than Manager).
<PAGE>
(b) Manager. Manager shall indemnify and hold P.C., its officers,
directors, stockholders, employees, agents, parents and subsidiaries harmless
from and against all claims, demands, costs, expenses, liabilities and losses
(including attorneys' and other professional fees) caused or asserted to have
been caused by or as a result of any negligent acts or omissions by, or willful
misconduct of, Manager and/or its shareholders, agents, employees or
subcontractors.
(c) Survival. The provisions of this Paragraph 13 shall
survive the expiration or termination of this Agreement.
14. Legislative Limitations. Notwithstanding any other provisions of
this Agreement, if the governmental agencies (or their representatives) that
administer Medicare or Medicaid, or any other payor, or any other federal, state
or local government or agency, passes, issues or promulgates any law, rule,
regulation, standard or interpretation at any time while this Agreement is in
effect which prohibits, restricts, limits or in any way materially changes the
method or amounts of reimbursement or payment for services rendered under this
Agreement, or which otherwise materially affects either party's rights or
obligations hereunder, either party may give the other party notice of intent to
amend this Agreement to the satisfaction of the noticing party, to reflect the
prohibition, restriction, limitation or change, provided, however, that no such
amendment shall alter the basic economic status of the parties pursuant to this
Agreement. If this Agreement is not so amended in writing within sixty (60) days
after such notice is given, the parties agree to submit the issue of such an
amendment to arbitration in accordance with subparagraph 15(k); provided,
however, that if at the election of either party, a formal appeal is filed with
the relevant governmental agency, or a suit is filed in a court of competent
jurisdiction, so as to stay the implementation of any such law, rule,
regulation, standard or interpretation, during the period of such stay, the
right to amend as set forth above shall also be stayed.
15. Miscellaneous.
(a) Indulgences, Etc. The failure or delay on the part of any party
to exercise any right, remedy, power or privilege under this Agreement shall not
operate as a waiver thereof, nor shall any single or partial exercise of any
right, remedy, power or privilege preclude any other or further exercise of the
same or of any other right, remedy, power or privilege, nor shall any waiver of
any right, remedy, power or privilege with respect to any occurrence be
construed as a waiver of such right, remedy, power or privilege with respect to
any other occurrence. No waiver shall be effective unless it is in writing and
is signed by the party asserted to have granted such waiver.
(b) Controlling Law. This Agreement and all provisions relating to
its validity, interpretation, performance and enforcement shall be governed by
and construed in accordance with the laws of the Commonwealth of Pennsylvania.
(c) Notices. All notices, requests, demands and other
communications required or permitted under this Agreement shall be in writing
and shall be deemed to have been duly given, made and received when delivered
(personally, by carrier service such as Federal Express, or by other messenger)
or upon actual receipt of registered or certified mail, postage prepaid, return
receipt requested, addressed as set forth below:
<PAGE>
(i) If to Manager:
U.S. PHYSICIANS, Inc.
220 Commerce Drive, Suite 400
Fort Washington, PA 19034
Attention: President
With a copy, given in the manner prescribed above, to:
Wende W. Young, M.D.
1351 Mt. Hope Avenue
Rochester, NY 14620
(ii) If to P.C.:
U.S. Medical Services of New York, P.C.
220 Commerce Drive
Fort Washington, PA 19034
Attention: President
In addition, notice by mail should be by air mail if posted outside
of the continental United States.
Any party may alter the address to which communications or
copies are to be sent by giving notice of such change of address in conformity
with the provisions of this subparagraph 15(c).
(d) Binding Nature of Agreement; Assignment. This Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
heirs, personal representatives, successors and assigns. Notwithstanding the
foregoing, P.C. may not assign or transfer its rights or obligations under this
Agreement without the prior written consent of Manager. Manager may assign or
transfer all or any portion of its rights or obligations under this Agreement
without the consent of P.C.
(e) Execution in Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be deemed to be an original as
against any party whose signature appears thereon, and all of which shall
together constitute one and the same instrument. This Agreement shall become
binding when one or more counterparts hereof, individually or taken together,
shall bear the signatures of all of the parties reflected hereon as the
signatories.
<PAGE>
(f) Severability and Reformation. The provisions of this Agreement
are independent of and severable from each other, and no provision shall be
affected or rendered invalid or unenforceable by virtue of the fact that for any
reason any other provision may be invalid or unenforceable in whole or in part.
If or to the extent this Agreement is reasonably deemed to violate applicable
law, the parties agree to negotiate in good faith to amend the Agreement to the
extent possible, consistent with its purposes, to conform to law.
(g) Entire Agreement. This Agreement contains the entire
understanding among the parties with respect to the subject matter hereof, and
supersedes all prior and contemporaneous agreements and understandings,
inducements or conditions, express or implied, oral or written, except as herein
contained. This Agreement may not be modified or amended other than by an
agreement in writing.
(h) Paragraph Headings. The paragraph headings in this Agreement are
for convenience only, form no part of this Agreement and shall not affect its
interpretation.
(i) Gender, Etc. Words used herein, regardless of the number and
gender specifically used, shall be deemed and construed to include any other
number, singular or plural, and any other gender, masculine, feminine or neuter,
as the context indicates is appropriate.
(j) Number of Days. Unless otherwise specified herein, in computing
the number of days for purposes of this Agreement, all days shall be counted,
including Saturdays, Sundays and holidays; provided, however, that, if the final
day of any time period falls on a Saturday, Sunday or holiday, then the final
day shall be deemed to be the next day which is not a Saturday, Sunday or
holiday.
(k) Arbitration. Any dispute (including a claimed breach of the
terms hereof) arising out of or in connection with this Agreement, other than a
claimed breach of Paragraph 10 of this Agreement to which this subparagraph
15(k) shall not be applicable, shall be resolved by arbitration conducted by the
American Arbitration Association in Philadelphia, Pennsylvania, in accordance
with its rules then in existence. The arbitrators shall not contravene or vary
in any respect any of the terms or provisions of this Agreement except as
provided in Paragraph 14. The award of the arbitrators shall be final and
binding upon the parties hereto, their heirs, administrators, executors,
successors and assigns, and judgment upon such award may be entered in any court
having jurisdiction thereof. Nothing in this provision shall restrict the
ability of either party hereto to seek any equitable remedy, including
injunctive relief or specific performance, for damages caused by the other
party's breach or attempted breach of this Agreement in any court of competent
jurisdiction. The prevailing party in any arbitration proceeding resulting from
this Agreement shall be entitled to recover its reasonable attorneys' fees and
costs from the non-prevailing party.
(l) Force Majeure. Neither party shall be liable or deemed to be in
default for any delay or failure to perform under this Agreement resulting,
directly or indirectly, from acts of God, civil or military authority, acts of
public enemy, war, accidents, fires, explosions, earthquakes, floods, strikes or
other work interruptions by either party's employees or any other similar cause
beyond the reasonable control of the non-performing party.
<PAGE>
IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement on the date first above written.
U.S. PHYSICIANS, INC.
By: /s/ Thomas J. Keane
------------------------------
Thomas J. Keane
President
U.S. MEDICAL SERVICES OF
NEW YORK, P.C.
By: /s/ Thomas J. Keane
------------------------------
President
MANAGEMENT AND SERVICES AGREEMENT
This MANAGEMENT AND SERVICES AGREEMENT dated as of March 17, 1998, the
("Agreement") by and between U.S. PHYSICIANS, INC., a Pennsylvania business
corporation ("Manager") and U.S. MEDICAL SERVICES OF THE GARDEN STATE, P.C., a
New Jersey professional service corporation ("P.C.").
BACKGROUND
A. P.C. intends to provide specialty and primary medical care and
related medical services (collectively, "Medical Services") to the general
public at various locations in the State of New Jersey (the "Sites").
B. For reasons of quality, efficiency and economy, P.C. has determined
that it should obtain the services of another entity to manage the Sites and to
perform certain administrative, billing and marketing services for P.C.
C. P.C. believes that such delegation of the management aspects of its
practice will enable it to better concentrate on the practice of medicine and
therefore improve the Medical Services provided by P.C.
D. P.C. will maintain the sole responsibility of providing Medical
Services at the Sites and for matters involving patient care.
E. Manager desires to assume the management of the business operations
of P.C. and to negotiate agreements with insurers, employers and other
purchasers of health care services for the provision of Medical Services of P.C.
F. Manager will provide financing to P.C. necessary for the operations
of P.C.
G. Manager has developed facilities and management services designed to
make available to qualified physicians the facilities, equipment, supplies,
management services, capital financing, support staff, marketing and other
support services necessary to permit such physicians to provide medical services
on a cost-efficient basis and to enhance the ability of P.C. to enter into
competitive arrangements with insurers, employers and other purchasers of health
care services.
H. P.C. desires that Manager make available to P.C. such financing,
management services and facilities, and agrees
<PAGE>
hereby to compensate Manager for such services as described herein.
I. Manager is willing to make such financing, management services and
facilities available to P.C. on the terms and conditions provided in this
Agreement.
NOW, THEREFORE, in consideration of the foregoing, and of the promises
and mutual covenants contained herein, the parties hereto, intending to be
legally bound hereby, agree as follows:
1. Agreement to Manage and Provide Technical and Support Services. P.C.
hereby engages Manager, and Manager accepts such engagement, to manage the Sites
on behalf of P.C. and for its account, to market Medical Services provided
through P.C. to purchasers of health care services and to provide the financing,
services and facilities set forth in this Agreement, on the terms and conditions
set forth herein.
2. Term. The term of this Agreement shall begin as of the date hereof
(the "Commencement Date") and shall end on the fortieth (40th) anniversary of
such date unless sooner terminated in accordance with the provisions of
Paragraph 12. Unless either party elects to terminate this Agreement at the end
of the initial term or any renewal term, by giving written notice to the other
party ninety (90) days before the expiration of the then current term, this
Agreement shall be deemed to have been automatically renewed for an additional
term of five (5) years.
3. Duties and Responsibilities of P.C. P.C. shall be responsible for
all Medical Services at the Sites and shall render such Medical Services to the
public as will maximize the quality and efficiency of the treatment of patients.
P.C. shall be solely responsible for the following items:
(a) Physicians and Other Health Care Providers. P.C. shall hire,
engage, supervise, evaluate and terminate all physicians, nurses, physical
therapists, technicians and other health care providers (collectively,
"Professionals") at the Sites, whether they are employees of P.C. or independent
contractors of P.C., and, subject to the prior written consent of Manager,
establish compensation and benefits for such Professionals. P.C. shall not
increase or decrease the amount of such compensation and/or benefits without the
prior written consent of Manager. P.C. shall be responsible for the payment of
all compensation payable to Professionals, except to the extent that nurses,
physical therapists, technicians and other health care providers may become
employees of Manager pursuant to Section 4(a)(iv) of this Agreement.
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<PAGE>
(b) Medical Directors. P.C. shall designate one or more Medical
Directors, each of whom is properly qualified to perform the supervisory,
quality assurance and credentialing (collection and verification of information)
functions necessary for the rendering of appropriate Medical Services at the
Sites.
(c) Quality and Cost-Effectiveness of Medical Services. P.C. shall
monitor the quality of Medical Services practiced by all Professionals at the
Sites, to assure that such care meets currently accepted standards of medical
competence and is in accordance with currently approved methods and practices in
the medical profession and related fields. P.C. shall adopt a peer
review/quality assessment program to monitor and evaluate the quality and
cost-effectiveness of Medical Services provided by Professionals at the Sites,
and shall assure that appropriate Medical Services are rendered in a
cost-effective manner.
(d) Medical Records. P.C. shall maintain the medical records of the
patients of P.C. in accordance with applicable law. Manager may, at its option,
assist in the development of policies and procedures for efficient maintenance
and retrieval of medical records, subject to applicable law. Confidentially, and
availability of medical records for inspection by authorized agencies or
individuals, shall be maintained in accordance with applicable state and federal
laws.
(e) Medical Fees. For purposes of establishing budgetary assumptions
for the Sites, P.C., after consultation with Manager, shall:
(i) determine a fee schedule or schedules for each Site prior to the
inception of operations at that Site; and
(ii) determine revisions to such fee schedule or schedules not less
than thirty (30) days prior to the effective date of any proposed amendment to
such fee schedule. Manager shall be authorized to negotiate fees for services
with third-party payors on behalf of P.C.
(f) Daily Statements. P.C. shall prepare and submit to Manager, or
cause its physicians and, if applicable, other Professionals, to prepare and
submit, daily statements of professional services rendered and any prescribed
related matters, on such form, with such detail and in such manner as Manager
shall from time to time provide to P.C., in order to permit Manager to cause
proper billing for such services to be rendered.
(g) Protocols. P.C. shall cooperate with Manager to develop utilization
review standards, treatment protocols and
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<PAGE>
similar guidelines, as required, to establish measures for the delivery of high
quality and cost-effective medical care.
4. Duties and Responsibilities of Manager.
(a) Management Services. Manager shall be solely responsible for the
business operation of the Sites and assumes responsibility for the management of
all nonmedical aspects of the Sites, except as otherwise specifically prohibited
by law or limited by this Agreement, and shall provide the following services:
(i) Manager shall lease, acquire or otherwise procure one or more Sites
in which P.C. shall conduct its practice.
(ii) Manager shall provide all reasonable and necessary medical
equipment, furnishings and furniture required in the day to day operation of the
Sites. MANAGER SUPPLIES THE EQUIPMENT AS IS. MANAGER IS NOT A MANUFACTURER OF,
AND IS NOT ENGAGED IN THE SALE OR DISTRIBUTION OF, THE EQUIPMENT. MANAGER IS NOT
AN AGENT OF THE MANUFACTURER OR THE SELLER OF THE EQUIPMENT. MANAGER MAKES NO
REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, REGARDING THE MERCHANTABILITY,
FITNESS, DESIGN OR SUITABILITY FOR ANY PURPOSE OR ANY CONDITION OF, OR THE
QUALITY OR CAPACITY OF, OR THE MATERIAL OR WORKMANSHIP IN THE EQUIPMENT.
(iii) Manager shall employ all necessary clerical, secretarial and
bookkeeping personnel reasonably necessary for the conduct of P.C.'s operations
at the Sites. Manager shall determine and cause to be paid the salaries and
fringe benefits of all such personnel.
(iv) Manager shall assist in negotiating employment agreements or
contracts with nursing staff, technicians and other allied and ancillary health
care personnel. All persons whose services are billed to Medicare, Medicaid or
other third party payors as under the supervision of physicians shall be
employed by P.C.; provided, however, that employment agreements may be assumed
by and assigned to Manager at the request of Manager if and to the extent
applicable law authorizes billings by P.C. for supervised services rendered by
persons not employed by P.C.
(v) Manager shall administer P.C.'s payroll and personnel related
activities.
(vi) Manager shall supervise all of Manager's employees; provided,
however, that P.C. shall supervise Professionals to the extent necessary to
maintain P.C.'s responsibility for the medical aspects of the practice and to
comply with requirements of applicable law.
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<PAGE>
(vii) Manager shall, unless prohibited by law, order and procure all
Medical Supplies (as hereinafter defined), office supplies and other supplies
necessary in the operation of the Sites to enable P.C. to deliver quality
Medical Services in a cost-effective manner. The ultimate oversight, supervision
and ownership for all Medical Supplies is and shall remain the sole
responsibility of P.C. "Medical Supplies" shall mean all drugs, pharmaceuticals,
products, substances, items or devices whose purchase, possession, maintenance,
administration, prescription or security require the authorization or order of a
licensed health care provider or require a permit, registration, certification
or other governmental authorization held by a licensed health care provider as
specified under any applicable federal or state law.
(viii) Manager shall cause to be placed and kept in force all forms of
insurance needed to protect adequately P.C. and itself, in connection with the
operation of the Sites, including, but not limited to, where appropriate,
workers' compensation insurance, public liability insurance, fire and extended
coverage insurance, surety bonding, business interruption insurance, burglary
and theft insurance; provided, however, that P.C. shall have the exclusive
responsibility for maintaining malpractice liability insurance for the
Professionals pursuant to Paragraph 6, but which the Manager shall procure and
administer for P.C.
(ix) Manager shall maintain a comprehensive system of office records,
books and accounts reflecting the income and expenses of the Sites, which books
and records may be inspected by P.C. at any reasonable time during regular
business hours. Records shall be maintained for at least four (4) years from the
date of service or from any governmental inquiry related thereto, and made
available upon request to officers, representatives or agents of the Secretary
of Health and Human Services or of the Comptroller General of the United States
General Accounting Office.
(x) Manager shall prepare and submit to P.C. monthly financial
statements with respect to the operation of the Sites.
(xi) Manager shall provide all janitorial, grounds and maintenance
services for the Sites.
(xii) Manager shall maintain, service and repair all equipment, or use
reasonable efforts to have lessors or contracted service providers perform such
necessary maintenance, service and repair.
(xiii) Manager shall provide printing, stationery, forms, postage,
duplicating, telecopying,
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<PAGE>
photocopying and other support services as are reasonably necessary and
appropriate for the operation of the Sites.
(b) Billing Services. Manager shall provide, or cause to be provided,
the following billing services to P.C.:
(i) a competent management executive for the supervision of the billing
and collection functions of P.C.'s business;
(ii) services with respect to billing of patients, insurance companies,
government entities and third party payors and collecting all charges made to
P.C.'s patients, excluding, however, any obligation to initiate legal
proceedings for collection, although Manager may do so at its sole and absolute
discretion;
(iii) preparation of all necessary medical letters and reports,
insurance forms, governmental agencies' claim forms and workers' compensation
claim forms;
(iv) preparation and mailing of all necessary required patient
statements and invoices and reasonable follow up on such preparation and
mailing;
(v) response by telephone or letter with reasonable dispatch and
promptness to any reasonable patient inquiry or request for assistance in the
interpretation of insurance policies or reimbursement programs and handling, to
the best of its ability, of any complaint involving professional services or
fees; and
(vi) operating procedure manuals for clerical staff.
(c) Marketing Services. Manager, at its sole discretion and with due
regard to the economic costs and anticipated benefits, may provide, or cause to
be provided, the following marketing services to P.C.:
(i) promotion of the Sites' services and facilities by marketing
representatives of Manager through contact with referring physicians and
potential referring physicians;
(ii) preparation and distribution of informational and promotional
materials, including descriptions of services, fee schedules, newsletters,
testimonials and other sales promotional pieces, subject to prior approval of
P.C., which shall be deemed to be given unless Manager receives written
disapproval within three (3) days after P.C. receives the promotional materials;
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<PAGE>
(iii) subject to the need of certain third party payors to maintain
some form of exclusivity, promotion of the Sites through contact and continued
liaison with administrative directors of area HMO's, PPO's, unions and self
insured clients and other third party payors; and
(iv) conducting open house receptions for new Sites, seminars for
physicians and office staff, speaking engagements for physicians who request
Manager to assist them in organizing such engagements, newspaper interviews and
magazine articles when initiated and requested by an interviewer or magazine.
(d) Provision of Funds. Manager shall arrange financing for P.C. or, if
no financing can be reasonably arranged, Manager shall advance funds to P.C. in
the event P.C. does not have sufficient cash on hand to pay its expenses as and
when due. Any such advance by Manager shall be repaid to Manager together with
interest at the rate from time to time charged to Manager by its primary lender
(or in the event there is no such lender, at an annual rate equal to the prime
rate announced from time to time in the Wall Street Journal plus 2%) out of
available cash in subsequent months prior to the payment of fees due Manager
pursuant to subparagraph 8(a).
(e) Deposit of Collections. Manager, in the name of P.C., shall deposit
in the appropriate bank accounts ("Bank Accounts") all receipts arising from the
operation of the Site(s) received by Manager on behalf of P.C. and shall use
reasonable diligence to see that disbursements from such accounts are made by
and on behalf of P.C. in such amounts and at such times as may be required by
this Agreement. P.C. shall provide Manager with all authorizations necessary to
enable Manager to make the deposits and disbursements required by this
subparagraph (e).
(f) Other Services. Any additional services required by P.C. that are
not listed or identified in this Agreement shall be rendered for P.C. only by an
amendment to this Agreement.
5. Relationship of the Parties.
(a) Independent Contractors. P.C. and Manager are independent
contractors and the relationship between them is that of professional
corporation and an independent supplier of nonmedical services and facilities.
Nothing in this Agreement shall be construed to create a principal-agent,
employer-employee, master-servant, partnership or joint venture relationship.
(b) P.C.-Patient-Manager Relationships. The professional relationship
between P.C. and its patients shall, at
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all times during the term of this Agreement, be solely between P.C., its
physicians and other Professionals and their patients. P.C. shall have complete
responsibility for its medical practice and that of Professional employees or
independent contractors. Manager shall not interfere with the exercise of
medical judgment by the physicians and other Professionals employed by P.C. nor
shall Manager interfere with, control, direct, or supervise P.C., or any
physician or other Professional employee or independent contractor, in
connection with the provision of medical or ancillary services by P.C. In
connection with the care and treatment of its patients, P.C. shall be solely
responsible for supervising all personnel performing medical or ancillary
services. To the extent any act or service set forth in this Agreement required
to be performed by Manager is construed by a court of competent jurisdiction or
by the appropriate licensure bureaus or divisions of the New Jersey Board of
Medical Examiners to constitute the practice of medicine, the requirement to
perform that act or service by Manager shall be deemed waived and unenforceable.
In addition, if in the opinion of counsel to Manager, any act or service set
forth in this Agreement required to be performed by Manager is likely to be
considered to constitute the practice of medicine, the requirement to perform
that act or service by Manager shall be deemed waived and unenforceable. All
decisions as to which individuals shall utilize the services of P.C. shall be
the sole responsibility of P.C.; provided, however, that Manager may negotiate
contracts with employers, unions, health care insurers, HMOs, PPOs and other
third party payors to arrange for the provision of Medical Services by P.C.
6. Malpractice Insurance.
(a) Minimum Policy. On its own behalf and on behalf of each physician
or other Professional that it employs, and each physician or other Professional
contracting with P.C. for the provision of professional services, P.C. shall
provide and keep in force a malpractice insurance policy or policies of standard
form in the State of New Jersey, with limits mutually acceptable to Manager and
P.C. The policies shall be obtained by P.C. or, as the case may be, by each such
physician or other Professional employed by P.C., or contracting with P.C., and
certificates thereof shall be delivered to Manager prior to the inception of
operations of any Site, together with evidence of the payment of the premiums
thereon, and shall be placed with insurance companies authorized and licensed to
issue such policies in the State of New Jersey at rates deemed reasonable and
appropriate and having reserves in an amount deemed to be reasonably adequate by
P.C. and Manager. P.C. shall use its best efforts to name Manager as an
additional insured party on all malpractice insurance and Manager may, at its
option, participate in the procurement of cost-effective coverage on behalf of
P.C. P.C. shall provide documentation to Manager that
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all such insurance is in full force and effect on each subsequent anniversary of
the Commencement Date and not less than ten (10) days prior to the earlier of
the dates upon which P.C. employs or enters into a contract with any
Professional to provide services at Site.
(b) Loss of Malpractice Insurance or Medicare/Medicaid Provider Status.
P.C. hereby agrees that it will immediately suspend any physician or other
Professional for whom malpractice insurance cannot be reasonably obtained or
whose malpractice insurance is cancelled, and such physician or other
Professional shall not be reinstated or permitted to practice at any Site until
such time as the malpractice policy is reinstated. P.C. will notify Manager
within 24 hours of receipt of notice or information that any physician or other
Professional is not in compliance with the provisions of this Agreement
pertaining to malpractice insurance, or has been suspended or terminated from
participation in Medicare or Medicaid. Manager shall have the right to cancel
this Agreement within three (3) days of learning that such physician or other
Professional has not been suspended by P.C. Failure to suspend a physician or
other Professional who is not in compliance with the provisions of this
Agreement pertaining to Medicare/Medicaid participation status, malpractice
insurance, failure to replace such insurance should it be cancelled, or failure
to provide such timely notice, shall constitute a breach of this Agreement
pursuant to Paragraph 12.
7. Representations of P.C. P.C. hereby makes the following
representations to Manager, each of which is material and is being relied on by
Manager, and shall be true as of the date hereof and shall survive the date
hereof:
(a) Professional Corporation. P.C. is a professional corporation duly
incorporated under the laws of the State of New Jersey and has the power and
authority to carry on its business as it is contemplated by this Agreement.
(b) Physicians and Medical Professionals Licensed. Each physician
employed by or under contract with P.C. to provide Medical Services is, and will
continue to be, duly licensed to practice medicine in the State of New Jersey,
is properly trained, competent and experienced in his or her medical specialty,
and has in force, and will continue to maintain, medical malpractice insurance
pursuant to the provisions of this Agreement. P.C. will assure that all other
Professionals rendering services pursuant to this Agreement shall be duly
licensed and appropriately supervised by P.C. in accordance with applicable laws
and current community standards. P.C. shall enter into a written agreement in
form and substance satisfactory to Manager, with each Professional employed by
or under contract with P.C. to render services hereunder (the "Employment
Agreements").
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(c) Provider Numbers. P.C. shall maintain provider numbers for Blue
Cross, Blue Shield, Medicare and Medicaid (collectively "Provider Numbers"). To
the extent practicable, group assignment accounts will be established to
facilitate billings.
(d) Information Accurate. Any and all factual information furnished by
P.C. to Manager including, but not limited to, financial statements and fee
schedules of P.C., are true and accurate in every material respect as of the
date on which such information was furnished.
(e) Professional Conduct. P.C. has and will continue to conduct its
professional activities in accordance and compliance with any and all laws,
regulations and ethical and professional standards applicable thereto. P.C. will
assure that all Professionals employed by or under contract with P.C. maintain
appropriate licenses, credentials, and privileges in good standing, and have not
been terminated or otherwise precluded from rendering services under Medicare or
Medicaid, other federal or state health care programs, or for other third party
payors with which Manager may negotiate agreements to provide Medical Services.
8. Compensation.
(a) Payment of Fees. The parties hereto recognize that Manager's
expenses, and the expenses of the Sites, will vary substantially depending on
the volume and type of patient services. The parties further recognize the
inherent uncertainties and the difficulty of predicting monthly expenses, volume
of services, the collection of revenues, the extent of obligations and the risks
that Manager has taken and will take with respect to capital expenditures,
equipment lease obligations and other obligations incurred in connection with
the establishment and furnishing of the Sites, and additionally recognize the
need to provide Manager with sufficient revenues to pay all operating expenses
and to provide Manager with a return on its investment commensurate with the
risks being assumed by Manager. Therefore, the parties agree that P.C. shall pay
to Manager as compensation for all the services rendered by Manager pursuant to
the terms of this Agreement an amount equal to the Gross Collected Revenues
less: (i) the amount of the Permitted Expenses of P.C. and (ii) the amount of
advances repaid to Manager pursuant to subparagraph 8(d). The term "Gross
Collected Revenues" shall mean all billings (including, without limitation,
billings for Medical Services and for the services of other Professionals,
medical supplies, charges for ancillary medical services and facility and
equipment charges) collected by P.C. for services rendered at the Sites. The
term "Permitted Expenses" shall mean: (i) all salaries, bonuses and fringe
benefits required to be paid in accordance with the Employment
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Agreements or pursuant to applicable law; (ii) insurance costs; (iii) legal and
accounting fees; (iv) taxes; and (v) other incidental expenses that for purposes
of convenience are paid by P.C. but would otherwise be the obligation of
Manager. Payment for the services provided hereunder shall be made through a
daily sweep, of the cash contained in the bank accounts of P.C., into bank
accounts of Manager. Manager shall reconcile amounts payable hereunder on a
quarterly basis.
(b) Application of Revenues. P.C. hereby agrees to the application of
the Gross Collected Revenues to the purposes and priorities specified in this
Agreement.
(c) P.C.'s Expenses. P.C. agrees that its Permitted Expenses shall not
exceed twenty percent (20%) of the Gross Collected Revenues calculated on an
annual basis, without the consent of Manager; provided, however, that P.C. shall
not be subject to any such limit with respect to payment of amounts due under
the Employment Agreements between P.C. and its physician employees.
(d) Grant of Security Interest. As security for the payment by P.C. of
the compensation due to Manager pursuant to this Agreement and for any advances
made by Manager to P.C. pursuant to subparagraph 4(d), P.C. hereby grants
Manager a security interest in all of P.C.'s accounts receivable, cash, bank
accounts, Medical Supplies and proceeds of the foregoing (collectively, the
"Secured Assets"). At the request of Manager, P.C. shall execute and deliver to
Manager any and all documents requested by Manager to evidence or perfect the
security interest granted hereby, including, but not limited to, UCC 1 Financing
Statements. This Agreement shall constitute a security agreement.
(e) Review of Books. Each party shall have the right at least annually
to have a certified public accountant review the other party's books to
determine whether that party has complied with this Agreement.
9. Books, Office Equipment, Etc.
(a) P.C.'s Ownership. All Medical Supplies (as defined in Paragraph
4(a)(vii)) and patient records shall at all times be and remain P.C.'s property;
provided, however, that, upon termination of this Agreement, P.C. shall provide
any successor entity providing services at any Site, upon request by such
successor within ninety (90) days after termination of this Agreement and at the
successor's expense, access to, and copies of, such records relating to Medical
Services performed at such Site by P.C. during the term hereof as such successor
feels are
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reasonably necessary in order for such successor to provide continuing Medical
Services. Notwithstanding the foregoing, no patient records will be made
available without the written consent of the patient if such is required by law.
Manager shall reimburse P.C. the reasonable cost of making such copies as are
required to comply with this subparagraph 9(a).
(b) Manager's Ownership. All professional instruments, equipment,
computers, computer software programs and other management information systems,
supplies, samples, forms, charts, logs, brochures, building information,
policies and procedures, protocols, outcome studies, contracts or any other
materials or information furnished to P.C. by Manager are and shall remain the
sole property of Manager; if Manager requests the return of such equipment or
materials at any time after the term of this Agreement, P.C. shall immediately
deliver the same to Manager.
10. Exclusivity, Non-Competition and Non-Disclosure Agreement.
(a) Exclusivity. P.C. agrees that during the term of this Agreement it
shall provide Medical Services exclusively at Sites managed by Manager pursuant
to this Agreement unless the parties hereto otherwise expressly agree in
writing.
(b) Non-Competition. During the term of this Agreement and for two (2)
years following termination, P.C. shall not:
(i) employ any individual previously working for Manager as its
employee;
(ii) directly or indirectly induce or attempt to influence any employee
of Manager to terminate employment with Manager; or
(iii) engage in, or have any interest in, directly or indirectly (as
proprietor, partner, stockholder, principal, agent, broker, employee,
consultant, or lender) any business or medical facility within the Restricted
Area which is engaged in providing Medical Services such as those provided at
the Sites or providing management services similar to those provided by Manager.
Restricted Area shall mean the area within a six (6) mile radius of any Site.
(c) Non-Disclosure. During the term of this Agreement and at all times
thereafter, neither P.C. nor its shareholders or physicians shall disclose,
communicate or divulge, or use for the direct or indirect benefit of any person,
firm, association or company (except any material referred to in
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<PAGE>
subparagraph 9(a) above) any information regarding the business methods,
business policies, procedures, protocols, techniques, information systems or
trade secrets, or other knowledge or processes of or developed or used by
Manager, or any other confidential information relating to or dealing with the
business operations or activities of Manager (including, but not limited to
financial information), made known to P.C. or its employees or independent
contractors or learned or acquired by P.C., its employees or independent
contractors during the term of this Agreement. In furtherance of the foregoing,
P.C. agrees not to disclose, communicate or divulge to any third party the terms
of this Agreement.
(d) Reasonableness of Restrictions. The parties acknowledge that the
restrictions contained in subparagraphs 10(a), 10(b) and 10(c) are reasonable
and necessary to protect the legitimate interests and substantial investment of
Manager and that any violation of these restrictions would result in immediate
irreparable injury to Manager. If the period of time or geographical area
specified in subparagraph 10(b) and 10(c) should be adjudged unreasonable in any
proceeding, then the period of time or geographic area shall be reduced by the
elimination or reduction of such portion thereof so that such restrictions may
be enforced for such time or area as is adjudged to be reasonable. P.C. and
Manager acknowledge that, in the event of a violation of any such restrictions,
Manager shall be entitled to preliminary and permanent injunctive relief as well
as an equitable accounting of all earnings, profits and other benefits arising
from such violation, which rights shall be cumulative and in addition to any
other rights or remedies to which Manager may be entitled. In the event of a
violation, the period referred to in subparagraph 10(b) shall be extended by a
period of time equal to that period beginning with the commencement of any such
violation and ending when such violation shall have been finally terminated in
good faith.
(e) Additional Covenants. P.C. shall secure covenants similar to those
specified with respect to P.C. in this Paragraph 10 (subject to geographic
limitations consistent with the Professional's activities for P.C.) from: (i)
each Professional employed by or contracting with P.C., and from (ii) each
shareholder and all future shareholders. Such covenants shall provide that
Manager shall be a third party beneficiary of each such covenant and may enforce
such covenants. P.C. shall provide to Manager proof of compliance with this
subsection upon Manager's request. P.C. agrees that it shall take all actions
necessary to enforce such covenants. P.C. covenants and agrees that it shall
operate in the manner necessary to constitute a "group practice," as such term
is defined in 42 U.S.C. ss. 1395(h)(4)(A), and that all referrals within and
among members of the group shall comport with the requirements of 42 U.S.C. ss.
1395 and other applicable laws and implementing regulations.
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(f) Survival. The provision of this Paragraph 10 shall survive the
expiration or termination of this Agreement.
11. Power of Attorney. P.C. hereby appoints Manager, for the term
hereof (including all renewal terms) and thereafter until all amounts due to
Manager have been paid, to be its true and lawful attorney in fact, for the
following purposes:
(a) to collect accounts receivable owing to P.C. in P.C.'s name and on
its behalf;
(b) to receive payments from Blue Cross, Blue Shield, insurance
companies, health care plans, Medicare, Medicaid and all other third party
payors in P.C.'s name and on its behalf for deposit in the Bank Accounts;
(c) to take possession of, endorse in the name of P.C. (and/or in the
name of an individual Professional) such payment intended for the payment of a
Professional's bills and deposit in the Bank Accounts any notes, checks, money
orders, cash and other instruments received in payment of accounts receivable;
(d) to initiate the institution of legal proceedings in P.C.'s name to
collect any account and monies owed to P.C., to enforce the rights of P.C. under
any contract or in connection with the rendering of any service and to contest
adjustments and decisions by government agencies (or fiscal intermediaries) and
third party payors;
(e) to negotiate payments to P.C. under this Agreement to the extent
otherwise permitted by law;
(f) to perfect a security interest in the Secured Assets of P.C.; and
(g) to do any other act, make any payment or execute any document on
behalf of P.C. to cure any default by P.C. of this Agreement; provided, such act
by Manager must comply with any applicable law.
12. Termination and Breach.
(a) General Breach by P.C.. In the event that P.C. should be in default
in the performance of any material provision of this Agreement, and such default
is not cured within thirty (30) days after receipt of written notice of such
default from Manager, Manager, at its option, may terminate this Agreement by
delivering written notice to P.C. at any time after expiration of such thirty
(30) day period.
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(b) Failure to Maintain Malpractice Insurance or Licenses or
Participation Agreements. If P.C. should materially breach any of its
obligations pursuant to Paragraph 6 or its obligation to maintain, or cause to
be maintained the medical licenses or participation agreements of all physicians
employed by it, or under contract to it, or to dismiss those who do not maintain
their medical licenses and participation agreements under the same terms and
conditions in Paragraph 6 pertaining to the maintenance of malpractice
insurance, and if such breach is not cured within ten (10) days after receipt by
P.C. of written notification of such breach from Manager, Manager may either
cure the breach itself, where possible, at the expense of P.C., or terminate
this Agreement upon written notice to P.C.
(c) Bankruptcy of Manager. In the event Manager files any voluntary
petition in bankruptcy or any bankruptcy proceeding is filed against Manager
which in either case remains undismissed for a period of 360 days, P.C., at its
option, may terminate this Agreement by delivering written notice to Manager at
any time after such 360 day period and prior to the dismissal of such
proceeding.
(d) Effect of Termination. After the termination of this Agreement,
Manager shall continue to collect the accounts receivable which are on the books
of P.C. as of the date of termination and shall be entitled to receive as its
fee for services rendered prior to termination the amount of the Gross Collected
Revenues with respect to such accounts receivable (whenever collected) less the
amount of then unpaid Permitted Expenses incurred prior to termination.
13. Indemnification.
(a) P.C. P.C. shall indemnify and hold Manager, its officers,
directors, stockholders, employees, agents, parents and subsidiaries harmless
from and against all claims, demands, costs, expenses, liabilities and losses
(including attorneys' and other professional fees) caused or asserted to have
been caused by or as a result of the performance of Medical Services or
ancillary services or any other acts or omissions by P.C. and/or its
shareholders, agents, employees or subcontractors (other than Manager).
(b) Manager. Manager shall indemnify and hold P.C., its officers,
directors, shareholders and employees harmless from and against all claims,
demands, costs, expenses, liabilities and losses (including attorneys' and other
professional fees) which may result against P.C. as a consequence of Manager's
gross negligence or willful misconduct in connection with Manager's performance
of this Agreement.
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<PAGE>
(c) Survival. The provisions of this Paragraph 13 shall survive the
expiration or termination of this Agreement.
14. Legislative Limitations. Notwithstanding any other provisions of
this Agreement, if the governmental agencies (or their representatives) that
administer Medicare or Medicaid, or any other payor, or any other federal, state
or local government or agency, passes, issues or promulgates any law, rule,
regulation, standard or interpretation at any time while this Agreement is in
effect which prohibits, restricts, limits or in any way materially changes the
method or amounts of reimbursement or payment for services rendered under this
Agreement, or either party may give the other party notice of intent to amend
this Agreement to the satisfaction of the noticing party, to reflect the
prohibition, restriction, limitation or change, provided, however, that no such
amendment shall alter the basic economic status of the parties pursuant to this
Agreement. If this Agreement is not so amended in writing within sixty (60) days
after such notice is given, the parties agree to submit the issue of such an
amendment to arbitration in accordance with subparagraph 15(k); provided,
however, that if at the election of either party, a formal appeal is filed with
the relevant governmental agency, or a suit is filed in a court of competent
jurisdiction, so as to stay the implementation of any such law, rule,
regulation, standard or interpretation, during the period of such stay, the
right to amend as set forth above shall also be stayed.
15. Miscellaneous.
(a) Indulgences, Etc. The failure or delay on the part of any party to
exercise any right, remedy, power or privilege under this Agreement shall not
operate as a waiver thereof, nor shall any single or partial exercise of any
right, remedy, power or privilege preclude any other or further exercise of the
same or of any other right, remedy, power or privilege, nor shall any waiver of
any right, remedy, power or privilege with respect to any occurrence be
construed as a waiver of such right, remedy, power or privilege with respect to
any other occurrence. No waiver shall be effective unless it is in writing and
is signed by the party asserted to have granted such waiver.
(b) Controlling Law. This Agreement and all provisions relating to its
validity, interpretation, performance and enforcement shall be governed by and
construed in accordance with the laws of the State of New Jersey.
(c) Notices. All notices, requests, demands and other communications
required or permitted under this Agreement shall be in writing and shall be
deemed to have been duly given, made and received when delivered (personally, by
carrier service such as Federal Express, or by other messenger) or upon actual
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receipt of registered or certified mail, postage prepaid, return receipt
requested, addressed as set forth below:
i) If to Manager:
U.S. PHYSICIANS, Inc.
220 Commerce Drive, Suite 400
Fort Washington, PA 19034
Attention: President
ii) If to P.C.:
U.S. Medical Services of the Garden State,
P.C.
220 Commerce Drive
Fort Washington, PA 19034
Attention: Chairman
In addition, notice by mail should be by air mail if posted outside of
the continental United States.
Any party may alter the address to which communications or copies are
to be sent by giving notice of such change of address in conformity with the
provisions of this subparagraph 15(c).
(d) Binding Nature of Agreement; Assignment. This Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
heirs, personal representatives, successors and assigns. Notwithstanding the
foregoing, P.C. may not assign or transfer its rights or obligations under this
Agreement without the prior written consent of Manager. Manager may assign or
transfer all or any portion of its rights or obligations under this Agreement
without the consent of P.C.
(e) Execution in Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be deemed to be an original as
against any party whose signature appears thereon, and all of which shall
together constitute one and the same instrument. This Agreement shall become
binding when one or more counterparts hereof, individually or taken together,
shall bear the signatures of all of the parties reflected hereon as the
signatories.
(f) Severability and Reformation. The provisions of this Agreement are
independent of and severable from each other, and no provision shall be affected
or rendered invalid or unenforceable by virtue of the fact that for any reason
any other provision may be invalid or unenforceable in whole or in part. If or
to the extent this Agreement is reasonably deemed to violate applicable law, the
parties agree to negotiate in good
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faith to amend the Agreement to the extent possible, consistent with its
purposes, to conform to law.
(g) Entire Agreement. This Agreement contains the entire understanding
among the parties with respect to the subject matter hereof, and supersedes all
prior and contemporaneous agreements and understandings, inducements or
conditions, express or implied, oral or written, except as herein contained.
This Agreement may not be modified or amended other than by an agreement in
writing.
(h) Paragraph Headings. The paragraph headings in this Agreement are
for convenience only, and form no part of this Agreement and shall not affect
its interpretation.
(i) Gender, Etc. Words used herein, regardless of the number and gender
specifically used, shall be deemed and construed to include any other number,
singular or plural, and any other gender, masculine, feminine or neuter, as the
context indicates is appropriate.
(j) Number of Days. In computing the number of days for purposes of
this Agreement, all days shall be counted, including Saturdays, Sundays and
holidays; provided, however, that, if the final day of any time period falls on
a Saturday, Sunday or holiday, then the final day shall be deemed to be the next
day which is not a Saturday, Sunday or holiday.
(k) Arbitration. Any dispute (including a claimed breach of the terms
hereof) arising out of or in connection with this Agreement, other than a
claimed breach of Paragraph 10 of this Agreement to which this subparagraph
15(k) shall not be applicable, shall be resolved by arbitration conducted by the
American Arbitration Association in Philadelphia, Pennsylvania, in accordance
with its rules then in existence. The arbitrators shall not contravene or vary
in any respect any of the terms or provisions of this Agreement except as
provided in Paragraph 14. The award of the arbitrators shall be final and
binding upon the parties hereto, their heirs, administrators, executors,
successors and assigns, and judgment upon such award may be entered in any court
having jurisdiction thereof.
(l) Force Majeure. Neither party shall be liable or deemed to be in
default for any delay or failure to perform under this Agreement resulting,
directly or indirectly, from acts of God, civil or military authority, acts of
public enemy, war, accidents, fires, explosions, earthquakes, floods, strikes or
other work interruptions by either party's employees or any other
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similar cause beyond the reasonable control of the non-performing party.
IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement on the date first above written.
U.S. PHYSICIANS, INC.
By: /s/ Thomas J. Keane
----------------------------
Thomas J. Keane
President
U.S. MEDICAL SERVICES OF
THE GARDEN STATE, P.C.
By: /s/ Thomas J. Keane
----------------------------
Thomas J. Keane
Vice President
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MANAGEMENT AND SERVICES AGREEMENT
This MANAGEMENT AND SERVICES AGREEMENT dated as of April 1, 1998
("Agreement") by and between U.S. PHYSICIANS, Inc., a Pennsylvania corporation
("Manager") and U.S. Rehabilitation Services of Pennsylvania, P.C., a
Pennsylvania professional corporation ("P.C.").
BACKGROUND
A. P.C. intends to provide physical therapy and related services
(collectively, "PT Services") to the general public at various locations in the
Commonwealth of Pennsylvania (the "Sites").
B. For reasons of quality, efficiency and economy, P.C. has determined that
it should obtain the services of another entity to manage the Sites and to
perform certain administrative, billing and marketing services for P.C.
C. P.C. believes that such delegation of the management aspects of its
practice will enable it to better concentrate on the practice of physical
therapy and therefor improve the PT Services provided by P.C.
D. P.C. will maintain the sole responsibility of providing PT Services at
the Sites and for matters involving patient care.
E. Manager desires to assume the management of the business operations of
P.C. and to negotiate agreements with insurers, employers and other purchasers
of physical therapy services for the provision of PT Services of P.C.
F. Manager will provide financing to P.C. necessary for the operations of
P.C.
G. Manager has developed facilities and management services designed to
make available to qualified physical therapists the facilities, equipment,
supplies, management services, capital financing, support staff, marketing and
other support services necessary to permit such physical therapists to provide
physical therapy services on a cost-efficient basis and to enhance the ability
of P.C. to enter into competitive arrangements with insurers, employers and
other purchasers of physical therapy services.
H. P.C. desires that Manager make available to P.C. such financing,
management services and facilities, and agrees
<PAGE>
hereby to compensate Manager for such services as described herein.
I. Manager is willing to make such financing, management services and
facilities available to P.C. on the terms and conditions provided in this
Agreement.
NOW, THEREFORE, in consideration of the foregoing, and of the promises and
mutual covenants contained herein, the parties hereto, intending to be legally
bound hereby, agree as follows:
1. Agreement to Manage and Provide Technical and Support Services. P.C.
hereby engages Manager, and Manager accepts such engagement, to manage the Sites
on behalf of P.C. and for its account, to market PT Services provided through
P.C. to purchasers of physical therapy services and to provide the financing,
services and facilities set forth in this Agreement, on the terms and conditions
set forth herein.
2. Term. The term of this Agreement shall begin as of the date hereof (the
"Commencement Date") and shall end on the fortieth (40th) anniversary of such
date unless sooner terminated in accordance with the provisions of Paragraph 12.
Unless either party elects to terminate this Agreement at the end of the initial
term or any renewal term, by giving written notice to the other party ninety
(90) days before the expiration of the then current term, this Agreement shall
be deemed to have been automatically renewed for an additional term of five (5)
years.
3. Duties and Responsibilities of P.C. P.C. shall be responsible for all PT
Services at the Sites and shall render such PT Services to the public as will
maximize the quality and efficiency of the treatment of patients. P.C. shall be
solely responsible for the following items:
(a) Therapists and Other Health Care Providers. P.C. shall hire, engage,
supervise, evaluate and terminate all physical therapists, nurses, technicians
and other health care providers (collectively, "Professionals") at the Sites,
whether they are employees of P.C. or independent contracts of P.C., and,
subject to the prior written consent of Manager, establish compensation and
benefits for such Professionals. P.C. shall not increase or decrease the amount
of such compensation and/or benefits without the prior written consent of
Manager. P.C. shall be responsible for the payment of all compensation payable
to Professionals, except to the extent that physical therapists, nurses,
technicians and other health care providers may become employees of Manager
pursuant to Section 4(a)(iv) of this Agreement.
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(b) PT Directors. P.C. shall designate one or more PT Directors, each of
whom is properly qualified to perform the supervisory, quality assurance and
credentialing (collection and verification of information) functions necessary
for the rendering of appropriate PT Services at the Sites.
(c) Quality and Cost-Effectiveness of PT Services. P.C. shall monitor
the quality of PT Services practiced by all Professionals at the Sites, to
assure that such care meets currently accepted standards of medical competence
and is in accordance with currently approved methods and practices in the
physical therapy profession and related fields. P.C. shall adopt a peer
review/quality assessment program to monitor and evaluate the quality and
cost-effectiveness of PT Services provided by Professionals at the Sites, and
shall assure that appropriate PT Services are rendered in a cost-effective
manner.
(d) Medical Records. P.C. shall maintain the medical records of the
patients of P.C. in accordance with applicable law. Manager may, at its option,
assist in the development of policies and procedures for efficient maintenance
and retrieval of medical records, subject to applicable law. Confidentially, and
availability of medical records for inspection by authorized agencies or
individuals, shall be maintained in accordance with applicable state and federal
laws.
(e) Professional Fees. For purposes of establishing budgetary
assumptions for the Sites, P.C. after consultation with Manager, shall:
i) determine a fee schedule or schedules for each Site prior to the
inception of operations at that Site; and
ii) determine revisions to such fee schedule or schedules not less
than thirty (30) days prior to the effective date of any proposed amendment to
such fee schedule. Manager shall be authorized to negotiate fees for services
with third-party payors on behalf of P.C.
(f) Daily Statements. P.C. shall prepare and submit to Manger, or
cause its physical therapists and, if applicable, other Professionals, to
prepare and submit, daily statements of professional services rendered and any
prescribed related matters, on such form, with such detail and in such manner as
Manager shall from time to time provide to P.C., in order to permit Manager to
cause proper billing for such services to be rendered.
(g) Protocols. P.C. shall cooperate with Manager to develop utilization
review standards, treatment protocols and
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similar guidelines, as required, to establish measures for the delivery of high
quality and cost-effective physical therapy.
4. Duties and Responsibilities of Manager.
(a) Management Services. Manager shall be solely responsible for the
business operation of the Sites and assumes responsibility for the management of
all non-medical aspects of the Sites, except as otherwise specifically
prohibited by law or limited by this Agreement, and shall provide the following
services:
i) Manager shall lease, acquire or otherwise procure one or more
Sites in which P.C. shall conduct its practice.
ii) Manager shall provide all reasonable and necessary medical
equipment, furnishings and furniture required in the day-to-day operation of the
Sites. MANAGER SUPPLIES THE EQUIPMENT AS IS. MANAGER IS NOT A MANUFACTURER OF ,
AND IS NOT ENGAGED IN THE SALE OR DISTRIBUTION OF, THE EQUIPMENT. MANAGER IS NOT
AN AGENT OF THE MANUFACTURER OF THE SELLER OF THE EQUIPMENT. MANAGER MAKES NO
REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, REGARDING THE MERCHANTABILITY,
FITNESS, DESIGN OR SUITABILITY FOR ANY PURPOSE OR ANY CONDITION OF, OR THE
QUALITY OR CAPACITY OF, OR THE MATERIAL OR WORKMANSHIP, IN THE EQUIPMENT.
iii) Manager shall employ all necessary clerical, secretarial and
bookkeeping personnel reasonably necessary for the conduct of P.C.'s operations
at the Sites. Manager shall determine and cause to be paid the salaries and
fringe benefits of all such personnel.
iv) Manager shall assist in negotiating employment agreements or
contracts with therapists, nursing staff, technicians and other allied and
ancillary health care personnel. All persons whose services are billed to
Medicare, Medicaid or other third-party payors shall be employed by P.C.; except
to the extent applicable law authorizes billings by P.C. for supervised services
rendered by persons not employed by P.C.
v) Manager shall administer P.C.'s payroll and personnel-related
activities.
vi) Manager shall supervise all of Manager's employees; provided,
however, that P.C. shall supervise Professionals to the extent necessary to
maintain P.C.'s responsibility for the medical aspects of the practice and to
comply with requirements of applicable law.
vii) Manager shall, unless prohibited by law, order and procure all
Medical Supplies (as hereinafter defined),
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office supplies and other supplies necessary in the operation of the Sites to
enable P.C. to deliver quality PT Services in a cost-effective manner. The
ultimate oversight, supervision and ownership for all Medical Supplies is and
shall remain the sole responsibility of P.C. "Medical Supplies" shall mean all
drugs, pharmaceuticals, products, substances, items or devises whose purchase,
possession, maintenance, administration, prescription or security require the
authorization or order of a licensed health care provider or require a permit,
registration, certification or other governmental authorization held by a
licensed health care provider as specified under any applicable federal or state
law.
viii) Manager shall cause to be placed and kept in force all forms
of insurance needed to protect adequately P.C. and itself, in connection with
the operation of the Sites, including, but not limited to, where appropriate,
workers' compensation insurance, public liability insurance, fire and extended
coverage insurance, surety bonding, business interruption insurance, burglary
and theft insurance; provided, however, that P.C. shall have the exclusive
responsibility for maintaining malpractice liability insurance for the
Professionals pursuant to Paragraph 6, but which the Manager shall procure and
administer for P.C.
ix) Manager shall maintain a comprehensive system of office records,
books and accounts reflecting the income and expenses of the Sites, which books
and records may be inspected by P.C. at any reasonable time during regular
business hours. Records shall be maintained for at least four (4) years from the
date of service or from any governmental inquiry related thereto, and made
available upon request to officers, representatives or agents of the Secretary
of Health and Human Services or of the Comptroller General of the United States
General Accounting Office.
x) Manager shall prepare and submit to P.C. monthly financial
statements with respect to the operation of the Sites.
xi) Manager shall provide all janitorial, grounds and maintenance
services for the Sites.
xii) Manager shall maintain, service and repair all equipment, or use
reasonable efforts to have lessors or contracted service providers perform such
necessary maintenance, service and repair.
xiii) Manager shall provide printing, stationery, forms, postage,
duplicating, telecopying, photocopying and other support services as are
reasonably necessary and appropriate for the operation of the Sites.
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(b) Billing Services. Manager shall provide, or cause to be provided,
the following billing services to P.C.:
i) a competent management executive for the supervision of the
billing and collection functions of P.C.'s business;
ii) services with respect to billing of patients, insurance
companies, government entities and third party payors and collecting all charges
made to P.C.'s patients, excluding, however, any obligation to initiate legal
proceedings for collection, although Manager may do so at its sole and absolute
discretion;
iii) preparation of all necessary medical letters and reports,
insurance forms, governmental agencies' claim forms and workers' compensation
claim forms;
iv) preparation and mailing of all necessary required patient
statements and invoices and reasonable follow-up on such preparation and
mailing;
v) response by telephone or letter with reasonable dispatch and
promptness to any reasonable patient inquiry or request for assistance in the
interpretation of insurance policies or reimbursement programs and handling, to
the best of its ability, of any complaint involving professional services or
fees; and
vi) operating procedure manuals for clerical staff.
(c) Marketing Services. Manager, at its sole discretion and with due
regard to the economic costs and anticipated benefits, may provide, or cause to
be provided, the following marketing services to P.C.:
i) promotion of the Sites' services and facilities by marketing
representatives of Manager through contact with referring physicians and
potential referring physicians;
ii) preparation and distribution of informational and promotional
materials, including descriptions of services, fee schedules, newsletters,
testimonials and other sales promotional pieces, subject to prior approval of
P.C., which shall be deemed to be given unless Manager receives written
disapproval within three (3) days after P.C. receives the promotional materials;
iii) subject to the need of certain third party payors to maintain
some form of exclusivity, promotion of
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the Sites through contact and continued liaison with administrative
directors of area HMO's, PPO's, unions and self-insured clients and other
third-party payors; and
iv) conducting open houses, receptions for new Sites, seminars for
physicians, therapists and office staff, speaking engagements for physical
therapists who request Manager to assist them in organizing such engagements,
newspaper interviews and magazine articles when initiated and requested by an
interviewer or magazine.
(d) Provision of Funds. Manager shall arrange financing for P.C. or,
if no financing can be reasonably arranged, Manager shall advance funds to P.C.
in the event P.C. does not have sufficient cash on hand to pay its expenses as
and when due. Any such advance by Manager shall be repaid to Manager together
with interest at the rate from time to time charged to Manager by its primary
lender (or in the event there is no such lender, at an annual rate equal to the
prime rate announced from time to time in the Wall Street Journal plus 2%) out
of available cash in subsequent months prior to the payment of fees due Manager
pursuant to subparagraph 8(a).
(e) Deposit of Collections. Manager, in the name of P.C., shall
deposit in the appropriate bank accounts ("Bank Accounts") all receipts arising
from the operation of the Site(s) received by Manager on behalf of P.C. and
shall use reasonable diligence to see that disbursements from such accounts are
made by and on behalf of P.C. in such amounts and at such times as may be
required by this Agreement. P.C. shall provide Manager with all authorizations
necessary to enable Manager to make the deposits and disbursements required by
this subparagraph (e).
5. Relationship of the Parties.
(a) Independent Contractors. P.C. and Manager are independent
contractors and the relationship between them is that of professional
corporation and an independent supplier of non-medical services and facilities.
Nothing in this Agreement shall be construed to create a principal-agent,
employer-employee, master-servant, partnership or joint venture relationship.
(b) P.C. - Patient - Manager Relationships. The professional
relationship between P.C. and its patients shall, at all times during the term
of this Agreement, be solely between P.C., its physical therapists and other
Professionals and their patients. P.C. shall have complete responsibility for
its physical therapy practice and that of Professional employees or independent
contractors. Manager shall not interfere with the exercise of professional
judgment by the physical therapists and other Professionals employed by P.C. nor
shall Manager interfere
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with, control, direct, or supervise P.C., or any physical therapist or other
Professional employee or independent contractor, in connection with the
provision of medical or ancillary services by P.C. In connection with the care
and treatment of its patients, P.C. shall be solely responsible for supervising
all personnel performing medical or ancillary services. To the extent any act or
service set forth in this Agreement required to be performed by Manager is
construed by a court of competent jurisdiction or by the appropriate licensure
bureaus or divisions of the Pennsylvania Department of State to constitute the
practice of medicine, the requirement to perform that act or service by Manager
shall be deemed waived and unenforceable. In addition, if in the opinion of
counsel to Manager, any act or service set forth in this Agreement required to
be performed by Manager is likely to be considered to constitute the unlawful
practice of physical therapy, the requirement to perform that act or service by
Manager shall be deemed waived and unenforceable. All decisions as to which
individuals shall utilize the services of P.C. shall be the sole responsibility
of P.C.; provided, however, that Manager may negotiate contracts with employers,
unions, health care insurers, HMOs, PPOs and other third-party payors to arrange
for the provision of PT Services by P.C.
6. Malpractice Insurance.
(a) Minimum Policy. On its own behalf and on behalf of each physical
therapist or other Professional it employs, and each physical therapist or
other Professional contracting with P.C. for the provision of professional
services, P.C. shall provide and keep in force a malpractice insurance policy or
policies of standard form in the Commonwealth of Pennsylvania, with limits
mutually acceptable to Manager and P.C. The policies shall be obtained by P.C.
or, as the case may be, by each such physical therapist or other Professional
employed by P.C., or contracting with P.C., and certificates thereof shall be
delivered to Manager prior to the inception of operations of any Site, together
with evidence of the payment of the premiums thereon, and shall be placed with
insurance companies authorized and licensed to issue such policies in the
Commonwealth of Pennsylvania at rates deemed reasonable and appropriate and
having reserves in an amount deemed to be reasonably adequate by P.C. and
Manager. P.C. shall use its best efforts to name Manager as an additional
insured party on all malpractice insurance and Manager may, at its option,
participate in the procurement of cost-effective coverage on behalf of P.C. P.C.
shall provide documentation to Manager that all such insurance is in full force
and effect on each subsequent anniversary of the Commencement Date and not less
than ten (10) days prior to the earlier of the dates upon which P.C. employs or
enters into a contract with any Professional to provide services at Site.
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(b) Loss of Malpractice Insurance or Medicare/Medicaid Provider
Status. P.C. hereby agrees that it will immediately suspend any physical
therapist or other Professional for whom malpractice insurance cannot reasonably
be obtained or whose malpractice insurance is canceled, and such physical
therapist or other Professional shall not be reinstated or permitted to practice
at any Site until such time as the malpractice policy is reinstated. P.C. will
notify Manager within 24 hours of receipt of notice or information that any
physical therapist or other Professional is not in compliance with the
provisions of this Agreement pertaining to malpractice insurance, or has been
suspended or terminated from participation in Medicare or Medicaid. Manager
shall have the right to cancel this Agreement within three (3) days of learning
that such physical therapist or other Professional has not been suspended by
P.C. Failure to suspend a physical therapist or other Professional who is not in
compliance with the provisions of this Agreement pertaining to Medicare/Medicaid
participation status, malpractice insurance failure to replace such insurance
should it be canceled, or failure to provide such timely notice, shall
constitute a breach of this Agreement pursuant to Paragraph 12.
7. Representations of P.C. P.C. hereby makes the following
representations to Manager, each of which is material and is be relied on by
Manager, and shall be true as of the date hereof and shall survive the date
hereof:
(a) Professional Corporation. P.C. is a professional corporation duly
incorporated under the laws of the Commonwealth of Pennsylvania and has the
power and authority to carry on its business as it is contemplated by this
Agreement.
(b) Physical Therapists and Other Professionals Licenses. Each
physical therapist employed by or under contract with P.C. to provide PT
Services is, and will continue to be, duly licensed to practice physical therapy
in the Commonwealth of Pennsylvania, is properly trained, competent and
experienced in physical therapy, and has in force, and will continue to
maintain, medical malpractice insurance pursuant to the provisions of this
Agreement. P.C. will assure that all other Professionals rendering services
pursuant to this Agreement shall be duly licensed and appropriately supervised
by P.C. in accordance with applicable laws and current community standards. P.C.
shall enter into a written agreement in form and substance satisfactory to
Manager, with each Professional employed by or under contract with P.C. to
render services hereunder (the "Employment Agreements").
(c) Provider Numbers. P.C. shall maintain provider numbers for Blue
Cross, Blue Shield, Medicare and Medicaid (collectively "Provider Numbers"). To
the extent
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practicable, group assignment accounts will be established to facilitate
billings.
(d) Information Accurate. Any and all factual information furnished
by P.C. to Manager including, but not limited to, financial statements and fee
schedules of P.C., are true and accurate in every material respect as of the
date on which such information was furnished.
(e) Professional Conduct. P.C. has and will continue to conduct its
professional activities in accordance and compliance with any and all laws,
regulations and ethical and professional standards applicable thereto. P.C. will
assure that all Professionals employed by or under contract with P.C. maintain
appropriate licenses, credentials, and privileges in good standing, and have not
been terminated or otherwise precluded from rendering services under Medicare or
Medicaid, other federal or state health care programs, or for other third-party
payors with which Manager may negotiate agreements to provide PT Services.
8. Compensation.
(a) Payment of Fees. The parties hereto recognize that Manager's
expenses, and the expenses of the Sites, will vary substantially depending on
the volume and type of patient services. The parties further recognize the
inherent uncertainties and the difficulty of predicting monthly expenses, volume
of services, the collection of revenues, the extent of obligations and the risks
that Manager has taken and will take with respect to capital expenditures,
equipment lease obligations and other obligations incurred in connection with
the establishment and furnishing of the Sites, and additionally recognize the
need to provide Manager with sufficient revenues to pay all operating expenses
and to provide Manager with a return on its investment commensurate with the
risks being assumed by Manager. Therefore, the parties agree that P.C. shall pay
to Manager as compensation for all the services rendered by Manager pursuant to
the terms of this Agreement an amount equal to the Gross Collected Revenues
less: (i) the amount of the Permitted Expenses of P.C. and (ii) the amount of
advances repaid to Manager pursuant to subparagraph 8(d). The term "Gross
Collected Revenues" shall mean all billings (including, without limitation,
billings for PT Services and for the services of other Professionals, medical
supplies, charges for ancillary services and facility and equipment charges)
collected by P.C. for services rendered at the Sites. The term "Permitted
Expenses" shall mean: (i) all salaries, bonuses and fringe benefits required to
be paid in accordance with the Employment Agreements or pursuant to applicable
law; (ii) insurance costs; (iii) legal and account fees; (iv) taxes; and (v)
other incidental expenses that for purposes of convenience are paid by P.C. but
would
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otherwise be the obligation of Manager. Payment for the services provided
hereunder shall be made through a daily sweep by Manager, of the cash contained
in the bank accounts of P.C., into bank accounts of Manager. Manager shall
reconcile amounts payable hereunder on a quarterly basis.
(b) Application of Revenues. P.C. hereby agrees to the application of
the Gross Collected Revenues to the purposes and priorities specified in this
Agreement. P.C. authorizes Manager to make disbursements from the Bank Accounts
to pay Manager amounts owed to it by P.C.
(c) P.C.'s Expenses. P.C. agrees that its Permitted Expenses shall
not exceed twenty percent (20%) of the Gross Collected Revenues calculated on an
annual basis, without the consent of Manager; provided, however, that P.C. shall
not be subject to any such limit with respect to payment of amounts due under
the Employment Agreements between P.C. and its Professional employees.
(d) Grant of Security Interest. As security for the payment by P.C.
of the compensation due to Manager pursuant to this Agreement and for any
advances made by Manager to P.C. pursuant to subparagraph 4(d), P.C. hereby
grants Manager a security interest in all of P.C.'s accounts receivable, cash,
bank accounts, Medical Supplies and proceeds of the foregoing (collective, the
"Secured Assets"). At the request of Manager, P.C. shall execute and deliver to
Manager any and all documents requested by Manager to evidence or perfect the
security interest granted hereby, including, but not limited to, UCC-1 Financing
Statements. This Agreement shall constitute a security agreement.
(e) Review of Books. Each party shall have the right at least
annually to have a certified public accountant review the other party's books to
determine whether that party has complied with this Agreement.
9. Books, Office Equipment, Etc.
(a) P.C.'s Ownership. All Medical Supplies (as defined in Paragraph
4(a)(vii)) and patient records shall at all times be and remain P.C.'s property;
provided, however, that, upon termination of this Agreement, P.C. shall provide
any successor entity providing services at any Site, upon request by such
successor within ninety (90) days after termination of this Agreement and at the
successor's expense, access to, and copies of, such records relating to PT
Services performed at such Site by P.C. during the term hereof as such successor
feels are reasonable necessary in order for such successor to provide continuing
PT Services. Notwithstanding the foregoing, no patient records will be made
available without the written
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consent of the patient if such is required by law. Manager shall reimburse P.C.
the reasonable cost of making such copies as are required to comply with this
subparagraph 9(a).
(b) Manager's Ownership. All professional instruments, equipment,
computers, computer software programs and other management information systems,
supplies, samples, forms, charts, logs, brochures, building information,
policies and procedures, protocols, outcome studies, contracts or any other
materials or information furnished to P.C. by Manager are and shall remain the
sole property of Manager; if Manager requests the return of such equipment or
materials at any time after the term of this Agreement, P.C. shall immediately
deliver the same to Manager.
10. Exclusivity, Non-Competition and Non-Disclosure Agreement.
(a) Exclusivity. P.C. agrees that during the term of this Agreement
it shall provide PT Services exclusively at Sites managed by Manager pursuant to
this Agreement unless the parties hereto otherwise expressly agree in writing.
(b) Non-Competition. During the term of this Agreement and for two
(2) years following termination, P.C. shall not:
i) employ any individual previously working for Manager as its
employee;
ii) directly or indirectly induce or attempt to influence any
employee of Manager to terminate employment with Manager; or
iii) engage in, or have any interest in, directly or indirectly (as
proprietor, partner, stockholder, principal, agent, broker, employee,
consultant, or lender) any business or physical therapy or physical
rehabilitation facility within the Restricted Area which is engaged in providing
PT Services such as those provided at the Sites or providing management services
similar to those provided by Manager. Restricted Area shall mean the area within
a six (6) mile radius of any Site.
(c) Non-Disclosure. During the term of this Agreement and at all
times thereafter, neither P.C. nor its shareholders or physical therapists shall
disclose, communicate or divulge, or use for the direct or indirect benefit of
any person, firm, association or company (except any material referred to in
subparagraph 9(a) above) any information regarding the business methods,
business policies, procedures, protocols, techniques, information systems or
trade secrets, or other
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knowledge or processes of or developed or used by Manager, or any other
confidential information relating to or dealing with the business operations or
activities of Manager (including, but not limited to financial information),
made known to P.C. or its employees or independent contractors or learned or
acquired by P.C., it employees or independent contractors during the term of
this Agreement. In furtherance of the foregoing, P.C. agrees not to disclose,
communicate or divulge to any third party the terms of this Agreement.
(d) Reasonableness of Restrictions. The parties acknowledge that the
restrictions contained in subparagraphs 10(a), 10(b) and 10(c) are reasonable
and necessary to protect the legitimate interests and substantial investment of
Manager and that any violation of these restrictions would result in immediate
irreparable injury to Manager. If the period of time or geographical area
specified in subparagraph 10(b) and 10(c) should be adjudged unreasonable in any
proceeding then the period of time or geographic area shall be reduced by the
elimination or reduction of such portion thereof so that such restrictions may
be enforced for such time or area as is adjudged to be reasonable. P.C. and
Manager acknowledge that, in the event of a violation of any such restrictions,
Manager shall be entitled to preliminary and permanent injunctive relief as well
as an equitable accounting of all earnings, profits and other benefits arising
from such violations, which rights shall be cumulative and in addition to any
other rights or remedies to which Manager may be entitled. In the event of a
violation, the period referred to in subparagraph 10(b) shall be extended by a
period of time equal to that period beginning with the commencement of any such
violation and ending when such violation shall have been finally terminated in
good faith.
(e) Additional Covenants. P.C. shall secure covenants similar to
those specified with respect to P.C. in this Paragraph 10 (subject to geographic
limitations consistent with the Professional's activities for P.C.) from: (i)
each Professional employed by or contracting with P.C., and from (ii) each
shareholder and all future shareholders. Such covenants shall provide that
Manager shall be a third party beneficiary of each such covenant and may enforce
such covenants. P.C. shall provide to Manager proof of compliance with this
subsection upon Manager's request. P.C. agrees that it shall take all actions
necessary to enforce such covenants. P.C. covenants and agrees that it shall
operate in the manner necessary to constitute a "group practice," as such term
is defined in 42 U.S.C. ss. 1395nn(h)(4)(A), and that all referrals within and
among members of the group shall comport with the requirements of 42 U.S.C. ss.
1395 and other applicable laws and implementing regulations.
(f) Survival. The provision of this Paragraph 10 shall survive the
expiration or termination of this Agreement.
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11. Power of Attorney. P.C. hereby appoints Manager, for the term hereof
(including all renewal terms) and thereafter until all amounts due to
Manager have been paid, to be its true and lawful attorney-in-fact, for the
following purposes:
(a) to collect accounts receivable owing to P.C. in P.C.'s name and
on its behalf;
(b) to receive payments from Blue Cross, Blue Shield, insurance
companies, health care plans, Medicare, Medicaid and all other third party
payors in P.C.'s name and on its behalf for deposit in the Bank Accounts;
(c) to take possession of, endorse in the name of P.C. (and/or in the
name of an individual Professional) such payment intended for the payment of a
Professional's bills and deposit in the Bank Accounts any notes, checks, money
orders, cash and other instruments received in payment of accounts receivable;
(d) to initiate the institution of legal proceedings in P.C.'s name
to collect any account and monies owed to P.C., to enforce the rights of P.C.
under any contract or in connection with the rendering of any service and to
contest adjustments and decisions by government agencies (or fiscal
intermediaries) and third-party payors;
(e) to negotiate payments to P.C. under this Agreement to the extent
otherwise permitted by law;
(f) to perfect a security interest in the Secured Assets of P.C.; and
(g) to do any other act, make any payment or execute any document on
behalf of P.C. to cure any default by P.C. of this Agreement; provided, such act
by Manager must comply with any applicable law.
12. Termination and Breach.
(a) General Breach by P.C.. In the event that P.C. should be in
default in the performance of any material provision of this Agreement, and such
default is not cured within thirty (30) days after receipt of written notice of
such default from Manager, Manager, at its option, may terminate this Agreement
by delivering written notice to P.C. at any time after expiration of such thirty
(30) day period.
(b) Failure to Maintain Malpractice Insurance or Licenses or
Participation Agreements. If P.C. should materially breach any of its
obligations pursuant to Paragraph 6 or its obligation to maintain, or cause to
be maintained the
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professional licenses or participation agreements of all physical therapists
employed by it, or under contract to it, or to dismiss those who do not maintain
their professional licenses and participation agreements under the same terms
and conditions in Paragraph 6 pertaining to the maintenance of malpractice
insurance, and if such breach is not cured within ten (10) days after receipt by
P.C. of written notification of such breach from Manager, Manager may either
cure the breach itself, where possible, at the expense of P.C., or terminate
this Agreement upon written notice to P.C.
(c) Bankruptcy of Manager. In the event Manager files any voluntary
petition in bankruptcy or any bankruptcy proceeding is filed against Manager
which in either case remains undismissed for a period of 360 days, P.C., at its
option, may terminate this Agreement by delivering written notice to Manager at
any time after such 360 day period and prior to the dismissal of such
proceeding.
(d) Effect of Termination. After the termination of this Agreement,
Manager shall continue to collect the accounts receivable which are on the books
of P.C. as of the date of termination and shall be entitled to receive as its
fee for services rendered prior to termination the amount of the Gross Collected
Revenues with respect to such accounts receivable (whenever collected) less the
amount of then unpaid Permitted Expenses incurred prior to termination.
13. Indemnification.
(a) P.C. P.C. shall indemnify and hold Manager, its officers,
directors, stockholders, employees, agents, parents and subsidiaries harmless
from and against all claims, demands, costs, expenses, liabilities and losses
(including attorneys' and other professional fees) caused or asserted to have
been caused by or as a result of the performance of PT Services or ancillary
services or any other acts or omissions by P.C. and/or its shareholders, agents,
employees or subcontractors (other than Manager).
(b) Manager. Manager shall indemnify and hold P.C., its officers,
directors, shareholders and employees harmless from and against all claims,
demands, costs, expenses, liabilities and losses (including attorneys' and other
professional fees) which may result against P.C. as a consequence of Manager's
gross negligence or willful misconduct in connection with Manager's performance
of this Agreement.
(c) Survival. The provisions of this Paragraph 13 shall survive the
expiration or termination of this Agreement.
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14. Legislative Limitations. Notwithstanding any other provisions of
this Agreement, if the governmental agencies (or their representatives) that
administer Medicare or Medicaid, or any other payor, or any other federal, state
or local government or agency, passes, issues or promulgates any law, rule,
regulation, standard or interpretation at any time while this Agreement is in
effect which prohibits, restricts, limits or in any way materially changes the
method or amounts of reimbursement or payment for services rendered under this
Agreement, or give the other party notice of intent to amend this Agreement to
the satisfaction of the noticing party, to reflect the prohibition, restriction,
limitation or change, provided, however, that no such amendment shall alter the
basic economic status of the parties pursuant to this Agreement. If this
Agreement is not so amended in writing within sixty (60) days after such notice
is given, the parties agree to submit the issues of such an amendment to
arbitration in accordance with subparagraph 15(k); provided, however, that if at
the election of either party, a formal appeal is filed with the relevant
government agency, or a suit is filed in a court of competent jurisdiction, so
as to stay the implementation of any such law, rule, regulation, standard or
interpretation, during the period of such stay, the right to amend as set forth
above shall also be stayed.
15. Miscellaneous.
(a) Indulgences, Etc. The failure or delay on the part of any party
to exercise any right, remedy, power or privilege under this Agreement shall not
operate as a waiver thereof, nor shall any single or partial exercise of any
right, remedy, power or privilege preclude any other or further exercise of the
same or of any other right, remedy, power or privilege, no shall any waiver of
any right, remedy, power or privilege with respect to any occurrence be
construed as a waiver of such right, remedy, power or privilege with respect to
any other occurrence. No waiver shall be effective unless it is in writing and
is signed by the party asserted to have granted such waiver.
(b) Controlling Law. This Agreement and all provisions relating to
its validity, interpretation, performance and enforcement shall be governed by
and construed in accordance with the laws of the Commonwealth of Pennsylvania.
(c) Notices. All notices, requests, demands and other communications
required or permitted under this Agreement shall be in writing and shall be
deemed to have been duly given, made and received when delivered (personally, by
carrier service such as Federal Express, or by other messenger) or upon actual
receipt of registered or certified mail, postage prepaid, return receipt
requested, addressed as set forth below:
- 16 -
<PAGE>
i) If to Manager:
U.S. PHYSICIANS, Inc.
220 Commerce Drive, Suite 400
Fort Washington, PA 19034
Attention: President
ii) If to P.C.:
U.S. Rehabilitation Services of Pennsylvania, P.C.
220 Commerce Drive
Fort Washington, PA 19034
Attention: President
In addition, notice by mail should be by air mail if posted outside of the
continental United States.
Any party may alter the address to which communications or copies are
to be sent by giving notice of such change of address conformity with the
provisions of this subparagraph 15(c).
(d) Binding Nature of Agreement; Assignment. This Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
heirs, personal representatives, successors and assigns. Notwithstanding the
foregoing, P.C. may not assign or transfer its rights or obligations under this
Agreement without the prior written consent of Manager. Manager may assign or
transfer all or any portion of its rights or obligations under this Agreement
without the consent of P.C.
(e) Execution in Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be deemed to be an original as
against any party whose signature appears thereon, and all of which shall
together constitute one and the same instrument. This Agreement shall become
binding when one or more counterparts hereof, individually or taken together,
shall bear the signatures of all of the parties reflected hereon as the
signatories.
(f) Severability and Reformation. The provisions of this Agreement
are independent of and severable from each other, and no provision shall be
affected or rendered invalid or unenforceable by virtue of the fact that for any
reason any other provision may be invalid or unenforceable in whole or in part.
If or to the extent this Agreement is reasonably deemed to violate applicable
law, the parties agree to negotiate in good faith to amend the Agreement to the
extent possible, consistent with its purposes, to conform to law.
- 17 -
<PAGE>
(g) Entire Agreement. This Agreement contains the entire understanding
among the parties with respect to the subject matter hereof, and supersedes
all prior and contemporaneous agreements and understandings, inducements or
conditions, express or implied, oral or written, except as herein
contained. This Agreement may not be modified or amended other than by an
agreement in writing.
(h) Paragraph Headings. The paragraph headings in this Agreement are
for convenience only, form no part of this Agreement and shall not affect its
interpretation.
(i) Gender, Etc. Words used herein, regardless of the number and
gender specifically used, shall be deemed and construed to include any other
number, singular or plural, and any other gender, masculine, feminine or neuter,
as the context indicates is appropriate.
(j) Number of Days. In computing the number of days for purposes of
this Agreement, all days shall be counted, including Saturdays, Sundays and
holidays; provided, however, that, if the final day of any time period falls on
a Saturday, Sunday or holiday, then the final day shall be deemed to be the next
day which is not a Saturday, Sunday or holiday.
(k) Arbitration. Any dispute (including a claimed breach of the terms
hereof) arising out of or in connection with this Agreement, other than a
claimed breach of Paragraph 10 of this Agreement to which this subparagraph
15(k) shall not be applicable, shall be resolved by arbitration conducted by the
American Arbitration Association in Philadelphia, Pennsylvania, in accordance
with its rules then in existence. The arbitrators shall not contravene or vary
in any respect any of the terms or provisions of this Agreement except as
provided in Paragraph 14. The award of the arbitrators shall be final and
binding upon the parties hereto, their heirs, administrators, executors,
successors and assigns, and judgment upon such award may be entered in any court
having jurisdiction thereof.
(l) Force Majeure. Neither party shall be liable or deemed to be in
default for any delay or failure to perform under this Agreement resulting,
directly or indirectly, from acts of God, civil or military authority, acts of
public enemy, war, accidents, fires, explosions, earthquakes, floods, strikes or
other work interruptions by either party's employees or any other similar cause
beyond the reasonable control of the non-performing party.
- 18 -
<PAGE>
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
on the date first above written.
U.S. PHYSICIANS, INC.
By: /s/ Thomas J. Keane
------------------------
Thomas J. Keane
President
U.S. REHABILITATION SERVICES OF
PENNSYLVANIA, P.C.
By: /s/ Thomas J. Keane
------------------------
Thomas J. Keane
President
- 19 -
EXHIBIT 11
U.S. PHYSICIANS, INC. AND SUBSIDIARIES
PRO FORMA NET LOSS PER COMMON SHARE CALCULATION
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1997 MARCH 31, 1998
----------------- ------------------
<S> <C> <C>
Pro forma net loss per common share:
Net loss ...................................................... $ (6,262) $ (831)
========== ==========
Weighted average number of shares issued and
outstanding................................................... 515 518
Preferred stock converted into common stock upon
consummation of the initial public offering .................. 998 1,021
---------- ----------
Shares used in computing pro forma net loss per common share... 1,513 1,539
========== ==========
Pro forma net loss per common shares .......................... $ (4.14) $ (0.54)
========== ==========
</TABLE>
Exhibit 21
Subsidiaries of the Company
The subsidiaries of U.S. PHYSICIANS, Inc. are:
Network Medical, Inc.
RRI Corp.
Bryn Mawr Urology Associates, Inc.
Vermeire Orthopaedic Surgeons, Inc.
Orthopaedic & Sports Medicine Specialists of the Main Line, Inc.
Alan I. Snyder, M.D. Associates, Inc.
Valley Forge Facial Plastic Surgery/Ear, Nose & Throat Associates, Inc.
Cesare, Metzger, Coyle & Henzes, Inc.
Steel Valley Orthopedic Association, Inc.
Main Line Joint Replacement, Inc.
Lehigh Valley Orthopedics, Inc.
EXHIBIT 23.1
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the use of our reports
and to all reference to our Firm included in or made a part of this
Registration Statement.
Arthur Andersen LLP
Philadelphia, Pa.,
May 26, 1998
CONSENT
We hereby expressly consent to the reference to our firm in the
Registration Statement on Form S-1, file number 333-39987, of U.S. PHYSICIANS,
Inc. (the "Registration Statement") in the prospectus filed as part of such
Registration Statement under the caption "Legal Matters."
COZEN AND O'CONNOR, P.C.
May 26, 1998
By: Mark H. Gallant
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> US
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1997 MAR-31-1998
<EXCHANGE-RATE> 1 1
<CASH> 1,166 1,627
<SECURITIES> 0 0
<RECEIVABLES> 447 513
<ALLOWANCES> 126 163
<INVENTORY> 0 0
<CURRENT-ASSETS> 2,742 3,904
<PP&E> 2,216 2,844
<DEPRECIATION> 164 277
<TOTAL-ASSETS> 54,005 58,518
<CURRENT-LIABILITIES> 32,581 33,033
<BONDS> 4,927 4,628
6,842 10,775
0 0
<COMMON> 5 5
<OTHER-SE> (9,419) (8,774)
<TOTAL-LIABILITY-AND-EQUITY> 54,005 58,518
<SALES> 3,292 2,159
<TOTAL-REVENUES> 4,218 2,310
<CGS> 1,179 678
<TOTAL-COSTS> 9,073 2,396
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,502 773
<INCOME-PRETAX> (6,262) (831)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (6,262) (831)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (6,262) (831)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
