<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 15, 1999
REGISTRATION NO. 333-78565
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
---------------------
PRE-EFFECTIVE
AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
THE PLASTIC SURGERY COMPANY
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
GEORGIA 8741 58-2317410
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
104 WEST ANAPAMU STREET, SUITE G
SANTA BARBARA, CALIFORNIA 93101
TELEPHONE: (805) 963-0400
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
DENNIS E. CONDON
CHIEF EXECUTIVE OFFICER
104 WEST ANAPAMU STREET, SUITE G
SANTA BARBARA, CALIFORNIA 93101
TELEPHONE: (805) 963-0400
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
COPIES TO:
<TABLE>
<S> <C>
PAUL A. QUIROS, ESQ. JAMES WALKER IV, ESQ.
LYNN S. SCOTT, ESQ. TERRESA R. TARPLEY, ESQ.
KING & SPALDING NELSON MULLINS RILEY &
191 PEACHTREE STREET SCARBOROUGH, L.L.P.
ATLANTA, GEORGIA 30303 999 PEACHTREE STREET, SUITE 1400
TELEPHONE: (404) 572-4600 ATLANTA, GEORGIA 30309
TELEPHONE: (404) 817-6000
</TABLE>
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of the Registration Statement.
---------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
---------------
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
---------------
If this form is a post-effective amendment filed pursuant to Rule 462(d)
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,
check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
[ARTWORK DEPICTED IN PROSPECTUS]
1. Inside front page includes the following text:
IDEALME.COM
Title bar at top of page states:
cosmetic surgery decisions made in
the privacy of your own home
Title bar preceding screen shots states: (Except for Image No. 6, persons
depicted are not actual patients)
On the left two-thirds portion of the page are eight screen shots depicting
pages described on the Idealme.com website, and described by the following
text which appears on the right one-third of the page:
2/3 IDEALME.COM offers the visitor an immediate opportunity to tour two
different communities, one designed to educate women about procedures and
one aimed at those procedures specific to men.
4 PROCEDURE EDUCATION
Over twenty-five different cosmetic surgery procedures will be described.
5 ONLINE PATIENT FINANCING
Once a visitor has made a decision that he or she desires a cosmetic
surgery procedure, the visitor may, from the privacy of his or her home,
apply and qualify for one of the online procedure financing plans.
6. ONLINE COMPUTER IMAGING OF DESIRED RESULTS
Idealme.com offers visitors a comprehensive at-home exploration for their
cosmetic procedure research. A digital or scanned photo can be e-mailed to
computer imaging artists along with a description of the desired change.
7. NEW TECHNOLOGY AND CLINICAL TRIALS
Technology breakthroughs, clinical trial information and new cosmetic
surgery procedures will be detailed in a dedicated site.
8. DOCTOR DIRECTORY
Once a patient has researched the information on a given procedure,
considered how he or she might look with those cosmetic changes and
determined that he or she can afford the surgery through financing, a
directory of Board certified plastic surgeons can be accessed.
In the bottom center portion of the page, the following text appears:
THE PLASTIC SURGERY COMPANY
104 West Anapamu Street, Suite G - Santa Barbara, CA - 93101
Toll Free: 888-729-8060 - 805-963-0400 - Fax: 805-965-8230
2. Inside back cover page portrays the following: graphics portray a map of
the continental United States and Hawaii with points representing the
locations of allied practices.
Title bar at top of page states: The Plastic Surgery Company
30 Allied Practices Serving 22
Metropolitan Areas through 39 Offices.
<PAGE> 3
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED SEPTEMBER 15, 1999
2,400,000 SHARES OF COMMON STOCK
THE PLASTIC SURGERY
COMPANY
The Plastic Surgery Company is offering 2,400,000 shares of common stock in
an initial public offering. We anticipate that the public offering price will be
between $10.00 and $12.00 per share.
The common stock has been approved for listing on the American Stock
Exchange under the symbol "PSU" subject to notice of issuance.
SEE "RISK FACTORS" BEGINNING ON PAGE 5 FOR RISKS THAT YOU SHOULD CONSIDER
BEFORE INVESTING IN SHARES OF OUR COMMON STOCK.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PER SHARE TOTAL
---------- ----------
<S> <C> <C>
Public offering price....................................... $ $
---------- ----------
Underwriting discounts and commissions...................... $ $
---------- ----------
Proceeds to The Plastic Surgery Company..................... $ $
---------- ----------
</TABLE>
We and certain selling shareholders have granted the underwriters an option
for 45 days to purchase up to an additional 360,000 shares at the same price
indicated above solely to cover overallotments.
H.C. Wainwright & Co. Logo
(Cruttenden Roth Logo)
The date of this prospectus is , 1999.
<PAGE> 4
YOU MAY RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE INFORMATION DIFFERENT FROM THAT CONTAINED IN
THIS PROSPECTUS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR THE SALE OF COMMON
STOCK MEANS THAT INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AFTER THE
DATE OF THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL OR SOLICITATION
OF AN OFFER TO BUY THESE SHARES OF COMMON STOCK IN ANY CIRCUMSTANCES UNDER WHICH
THE OFFER OR SOLICITATION IS UNLAWFUL.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 1
Risk Factors................................................ 5
Forward-Looking Statements.................................. 14
Use of Proceeds............................................. 15
Dividend Policy............................................. 15
Dilution.................................................... 16
Capitalization.............................................. 17
Selected Financial Data..................................... 18
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 19
Business.................................................... 27
Management.................................................. 36
Principal and Selling Shareholders.......................... 43
Certain Transactions........................................ 44
Description of Capital Stock................................ 46
Shares Eligible for Future Sale............................. 49
Underwriting................................................ 50
Legal Matters............................................... 52
Experts..................................................... 52
Additional Information...................................... 52
Index to Financial Statements............................... F-1
</TABLE>
i
<PAGE> 5
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
Because this is only a summary, it does not contain all of the information that
may be important to you. You should read the entire prospectus carefully, and
you should consider the information set forth under "Risk Factors" and in our
financial statements and notes, before deciding to invest in shares of our
common stock.
THE PLASTIC SURGERY COMPANY
At the closing of this offering, we will provide business development
services and Internet solutions to our alliance of 36 surgeons certified by the
American Board of Plastic Surgery, the Board, or Board eligible plastic
surgeons, and one surgeon certified by the Canadian Board of Plastic Surgery,
located in 22 metropolitan markets throughout the United States. Our consumer
website, Idealme.com, allows consumers to research available procedures, submit
inquiries regarding cosmetic surgery procedures, view possible cosmetic changes
through online imaging technology, obtain financing for procedures and locate
Board certified cosmetic surgeons. We provide our web-based services free of
charge to consumers, except for a fee for online imaging. Our surgeon website,
ThePlasticSurgeryCo.com, will provide allied surgeons online access to our
national buying program and facilitate "best practices" study groups among our
allied surgeons. Our business development services include the implementation of
strategic business plans, practice-specific consumer awareness programs, patient
financing plans, patient education strategies and materials and related services
and products. We believe that we will generate substantially all of our future
revenues from service fees paid by each practice under our business services
agreements which generally provide for us to receive 15% of the net cash
collected by the practice. We have not conducted any significant operations or
earned any revenue to date.
OUR MARKET
The market for plastic surgery, which includes both cosmetic and
reconstructive procedures, exceeds $15 billion per year according to Form and
Figure magazine. We estimate that cosmetic surgery procedures represent
approximately $10 billion of industry revenues and remain 100% private pay
without the expense containment pressures associated with third party
reimbursement. The market for cosmetic surgery procedures has grown rapidly over
the last several years. From 1992 to 1998, facelifts, liposuction and breast
augmentations have increased approximately 75%, 260% and 300%, respectively, and
approximately 2.8 million cosmetic surgery procedures were performed in 1998,
according to a survey by the American Society of Aesthetic Plastic Surgery.
During this period, the Internet has emerged as a global communications medium,
enabling millions of people worldwide to communicate, share information and
conduct business electronically. According to International Data Corporation,
the number of Internet users worldwide will grow from an estimated 97 million in
1998 to an estimated 319 million by 2002. We believe that cosmetic surgeons can
use the Internet to improve the quality of patient education and increase the
efficiency of their practices.
OUR SOLUTION
Our business development services and Internet solutions are designed to
increase the number of procedures performed by our allied surgeons, improve the
quality of patient education and increase practice efficiency. We have a
consumer website and are developing a surgeon website to facilitate the exchange
of information among surgeons and between surgeons and prospective or existing
patients via the Internet. Content on our consumer website, Idealme.com, is a
combination of informational and interactive pages that provides consumers with
information about procedures, outcomes and surgeon qualifications. Idealme.com
allows us to influence purchase decisions at the consumer level and leverage the
clinical expertise and reputation of our allied surgeons. Our surgeon website,
ThePlasticSurgeryCo.com, will provide our allied surgeons online access to our
national buying programs and will facilitate "best practices" study groups among
our allied surgeons, while highlighting the benefits of becoming affiliated with
us.
1
<PAGE> 6
We believe our solution provides the following benefits to our consumers
and surgeons:
BENEFITS TO CONSUMERS
- Informs consumers about cosmetic surgery procedures and related topics;
- Allows consumers to view possible cosmetic changes through online imaging
technology;
- Provides online financing plan application and approval;
- Links consumers with both allied surgeons and subscribing surgeons through
our online directory; and
- Offers our online magazines, health and beauty products and related
magazines and books.
BENEFITS TO SURGEONS
- Will offer access to our national buying program;
- Will facilitate "best practices" knowledge sharing and provide an online
forum for allied surgeons;
- Will describe our business to potential allied surgeons and highlight career
opportunities with allied practices;
- Will profile each practice and its surgeons for inclusion on our websites;
- Institutes patient financing plans;
- Implements practice-specific consumer awareness programs; and
- Designates and trains patient coordinators and develops patient education
programs and materials.
OUR STRATEGY
Our goal is to use our business development services and our consumer and
surgeon websites to affiliate with a large number of plastic surgeons and
improve their practices. To achieve this goal, we intend to provide high quality
business development services to our allied surgeons, increase consumer and
surgeon awareness of our websites, analyze each practice's operations and
develop a strategic plan for the practice, attract consumer inquiries regarding
cosmetic surgery information and services and continue to improve and enhance
our services.
OUR HISTORY
With and as a condition to the closing of this offering, 30 separate
plastic surgery practices will transfer to us certain operating assets in
exchange for cash, notes and shares of our common stock, and they will enter
into long-term business services agreements with us. These founding practices
include 37 plastic surgeons operating 39 offices in 22 metropolitan markets.
Our executive offices are located at 104 West Anapamu Street, Suite G,
Santa Barbara, California 93101, and our telephone number at that address is
(805) 963-0400. Effective May 13, 1999, we changed our name from Better Image,
Inc. to The Plastic Surgery Company. Our Internet addresses are www.Idealme.com
and www.ThePlasticSurgeryCo.com. While we believe information contained on our
websites is material to our allied surgeons and potential consumers of cosmetic
surgery procedures, such information is not necessarily material to potential
purchasers of our common stock. Investors should only rely on information
contained in this prospectus in making an investment decision.
2
<PAGE> 7
THE OFFERING
Shares offered by us........................ 2,400,000 shares(1)
Total shares outstanding after the
offering.................................... 5,170,262 shares(1)(2)
Use of proceeds............................. Funding the cash portion of the
consideration to be paid to the
founding practices; paying
accrued salaries and consulting
fees of our employees and
consultants; repaying
indebtedness of the founding
practices; and funding website
development and maintenance,
future allied practice
acquisitions, development of
satellite offices and for
general corporate purposes.
American Stock Exchange symbol.............. PSU
- ---------------
(1) Does not include up to 291,375 shares that the underwriters may purchase
from us if they exercise their overallotment option in full.
(2) Excludes: (a) 1,578,704 shares issuable upon exercise of stock options and
warrants outstanding as of September 10, 1999, at a weighted average
exercise price of $2.90 per share; (b) 1,026,500 shares issuable upon
exercise of stock options and warrants that will be issued upon closing of
this offering with an exercise price equal to the initial public offering
price; and (c) 240,000 shares of common stock issuable upon exercise of
stock purchase warrants to be issued to the representatives of the
underwriters upon closing of this offering at an exercise price equal to
120% of the initial public offering price. See "Capitalization,"
"Management -- Stock Option Plans," "Underwriting" and notes 7 and 8 to our
financial statements.
---------------------
Unless otherwise indicated, all information in this prospectus assumes (1)
no exercise of the overallotment option granted to the underwriters, (2) an
initial public offering price of $11.00 per share, and (3) a 0.15-for-1 reverse
stock split of the common stock.
The term "allied practice" includes (a) the founding plastic surgery
practices that will, upon the closing of this offering, transfer to us certain
of their operating assets and enter into long-term business services agreements
with us and (b) practices that may enter into similar agreements with us in the
future. Allied practices also include plastic surgery practices that may enter
into management services agreements with us but do not transfer their operating
assets to us. The term "allied surgeon" includes each plastic surgeon who has
entered into an employment agreement with an allied practice. Unless otherwise
indicated, references in this prospectus to "business services agreements"
include consulting agreements that we have entered into with practices in
certain states in lieu of business services agreements due to the regulations in
those states.
Unless otherwise indicated, we derived the industry information referenced
in this prospectus from the Plastic Surgery Information Service and from the
National Clearinghouse of Plastic Surgery Statistics, both sponsored by the
American Society of Plastic and Reconstructive Surgeons. Approximately 97% of
all plastic surgeons certified by the American Board of Plastic Surgery are
members of this society.
RISK FACTORS
Investment in our common stock involves a high degree of risk and could
result in a loss of your entire investment. See "Risk Factors" for a discussion
of various risks associated with an investment in our common stock.
3
<PAGE> 8
SUMMARY FINANCIAL DATA
The following financial information for the period from April 30, 1997
(inception) to December 31, 1997 and for the year ended December 31, 1998 is
derived from our audited financial statements. The following financial
information for the six months ended June 30, 1998 and 1999 and at June 30, 1999
is derived from our unaudited financial statements. We have had no significant
operations to date and will not conduct significant operations until this
offering is completed.
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 30, 1997 SIX MONTHS ENDED JUNE 30,
(INCEPTION) TO YEAR ENDED -------------------------------------
DECEMBER 31, 1997 DECEMBER 31, 1998 1998 1999
----------------- ----------------- ----------------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue...................... $ -- $ -- $ -- $ --
------- ------- ------- -------
Total expenses............... 1,888 3,211 839 2,698
Other income................. 8 8 3 6
------- ------- ------- -------
Net loss..................... $(1,880) $(3,203) $ (836) $(2,692)
======= ======= ======= =======
Basic and diluted net loss
per share................. $ (8.49) $(12.30) $ (3.33) $ (8.99)
======= ======= ======= =======
Shares used in computing
basic and diluted net loss
per share................. 221 260 251 299
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1999
---------------------------------------
PRO FORMA
ACTUAL PRO FORMA(1) AS ADJUSTED(2)
------- ------------ --------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................ $ 91 $ 91 $ 8,157
Working capital (deficit)................................ (2,369) (15,903) 6,535
Total assets............................................. 3,612 17,959 26,025
Total long-term liabilities.............................. -- 3,331 3,331
Total shareholders' (deficit) equity..................... 1,152 (1,420) 21,018
</TABLE>
- ---------------
(1) The pro forma balance sheet data gives effect to our acquisitions of 30
founding practices as if they had occurred on June 30, 1999.
(2) Gives effect to the sale by us of 2,400,000 shares of common stock offered
hereby at an assumed initial public offering price of $11.00, after
deducting estimated underwriting discounts and commissions and estimated
offering expenses. See "Use of Proceeds."
4
<PAGE> 9
RISK FACTORS
You should carefully consider the following risk factors, in addition to
the other information set forth in this prospectus, before purchasing shares of
our common stock. Each of these risk factors could adversely affect our
business, operating results and financial condition, as well as adversely affect
the value of an investment in our common stock.
BECAUSE WE HAVE NO COMBINED OPERATING HISTORY WITH THE FOUNDING PRACTICES, THERE
IS NO HISTORICAL INFORMATION UPON WHICH YOU CAN EVALUATE OUR COMBINED BUSINESS
We have not conducted any operations or generated any revenues to date.
Each of the founding practices has been operating as a separate, independent
entity. The combined historical financial results of the founding practices
cover periods when each practice operated separately and may not be indicative
of our future financial or operating results. We have never managed plastic
surgery practices and have not demonstrated an ability to do so.
OUR REVENUE DEPENDS ON THE EFFORTS OF OUR ALLIED SURGEONS
We derive substantially all of our revenues from fees we receive for
services we provide to allied practices under our long-term business services
agreements. Our fees under these agreements increase if the revenues of our
allied practices increase, and decrease if the revenues of our allied practices
decrease. However, the success of the allied practices essentially depends upon
the efforts of our allied surgeons, and we do not employ the allied surgeons or
control or own their practices. We do not set the fee schedules for procedures
performed by our allied surgeons. Each individual practice sets its own fees.
Our business services agreements have 20 or 25 year terms, subject to earlier
termination if one party materially defaults in its performance or upon a change
of control. Termination of these agreements or failure by the allied surgeons to
maintain their practices or their medical licenses could reduce our revenues and
negatively affect our financial results. Furthermore, allied surgeons execute
employment agreements with allied practices. These agreements generally have
five year terms. We cannot guarantee that allied surgeons will complete the five
year term or renew their employment at the end of the term. If allied surgeons
do not complete their employment terms or do not renew their contracts, our
revenues will be adversely affected. Some of our allied surgeons are age 60 or
over and may or may not have associate surgeons. The presence of associate
surgeons at allied practices may provide continuity to those practices in the
event of the death or retirement of allied surgeons; however, some of the allied
surgeons have had associates in the past and not retained them for a variety of
reasons. There can be no assurance that our allied surgeons will be able to
attract and retain associate surgeons, and the failure to do so may adversely
affect our operations over the long-term and reduce our revenues.
AGREEMENTS BETWEEN THE ALLIED SURGEONS AND THEIR ALLIED PRACTICES MAY NOT BE
ENFORCEABLE
We and each allied practice enter into an acquisition or merger agreement
that allows us to acquire certain operating assets of the allied practice. We
and each allied practice also enter into a long-term business services agreement
that requires us to provide certain business services and requires the practice
to pay us certain fees for those services. The value of the business services
agreements depends in part on the ability of each allied practice to maintain
its business. The allied practice enters into employment agreements with its
allied surgeons, who are owners of the allied practice, that contain non-compete
and other provisions. We are not a party to these employment agreements. The
laws of each state differ concerning the enforceability of covenants not to
compete, but generally states will enforce a covenant to the extent necessary to
protect a legitimate business interest if the covenant does not unreasonably
restrain the allied surgeon or conflict with public interest. The state courts
examine all of the facts and circumstances at the time a party seeks to enforce
a non-compete covenant. Although we have attempted to structure the employment
agreements to allow enforcement, we are not able to predict with certainty
whether or not a court will enforce a covenant in any given situation based on
the facts and circumstances at the time. Since we do not directly employ the
allied surgeons, a court may not allow us to protect our business interest in
preventing an allied surgeon from competing with his former allied practice. If
a former allied surgeon competes with his former allied practice
5
<PAGE> 10
and the courts refuse to enforce the non-compete covenant, our allied practices
would be subject to increased competition, which could materially and adversely
affect our business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- The Founding Practices -- Business Services Agreements."
DIFFICULTIES IN IMPLEMENTING OUR EXPANSION STRATEGIES MAY ADVERSELY AFFECT OUR
BUSINESS AND PROSPECTS
We intend to acquire the operating assets of additional practices in the
future. Our ability to grow through acquisitions will depend upon:
- the availability of suitable candidates at acceptable acquisition prices;
- the market value of our common stock;
- the availability of capital to complete acquisitions;
- governmental regulation; and
- integration of the allied practices.
In pursuing acquisitions of allied practices, we may compete with other
companies with similar growth strategies. Some of these companies may be larger
and have greater financial and other resources than we have. Competition for
these targets likely would result in increased prices of, and a diminished pool
of, possible targets. If we are not able to consummate future allied practice
acquisitions or are required to pay higher prices, we may not be able to expand
our network of allied surgeons.
Future acquisitions could also have a significant impact on our financial
condition and capital needs and create fluctuations in our quarterly and annual
operating results. We assume certain liabilities in connection with acquisitions
that could have a material adverse effect on our revenues and financial results.
Although we are indemnified by the allied practices for assumed liabilities, any
payments of indemnification amounts could reduce practice revenues available to
pay operating expenses. Future acquisitions may require us to issue additional
stock and incur additional debt. In addition, some acquisitions completed before
the closing of this offering and all acquisitions completed after the closing of
this offering will require us to amortize the costs of goodwill and intangible
assets, which could have a material adverse effect on our financial results. If
our stock does not maintain a sufficient market value or additional physician
practices do not accept stock for part of the acquisition price, we may be
required to use our cash resources more rapidly than intended. We do not
currently have a line of credit or other financing to fund acquisition costs,
and we anticipate that we will need further acquisition financing in the form of
debt or equity. We cannot guarantee that we will be able to obtain additional
financing on favorable terms or at all. If we fail to obtain additional
financing we may not be able to effectively implement our expansion strategy.
IF OUR AGREEMENTS REQUIRE US TO LOAN FUNDS TO ALLIED PRACTICES AT A TIME WHEN WE
DO NOT HAVE FUNDS AVAILABLE, WE MAY DEFAULT IN OUR OBLIGATIONS TO THE ALLIED
PRACTICES
Under our business services agreements, if a practice does not generate
funds sufficient to cover its operating expenses, we must fund the excess
operating expenses. The amount that we may have to fund is unlimited. Therefore,
we may become obligated to pay excess operating expenses, but we may not have
sufficient funds available to pay these expenses. In such an event, we would be
in breach of our business services agreement with the allied practice, which
would give the allied practice the right to terminate their business services
agreement with us.
If a practice does not generate sufficient funds to cover its operating
expenses and we fund these excess operating expenses on its behalf, we will
record the amount of these operating expenses as a receivable, which will bear
interest. The allied practice will be required to repay this receivable to us
out of its future resources. The obligation of the allied practices to repay
this receivable will not be securitized or prioritized and will not have a
definite maturity date. There is also no guarantee that a practice will generate
sufficient revenue to repay all or a part of any such receivable.
6
<PAGE> 11
COMPETITION COULD REDUCE OUR REVENUES
We have no experience in providing services to plastic surgeons, and our
competitors already have extensive experience in providing services. Our
competitors include national and regional providers of management services that
may already provide services to plastic surgeons or may decide to do so in the
future. Some of these competitors may have greater financial, development,
marketing and sales resources than we have. Competition may affect our ability
to attract additional practices and the ability of the allied practices to
compete in their local markets. Allied practices also compete in local markets
with surgeons who perform the procedures traditionally performed by plastic
surgeons for lower prices. Reductions in the numbers of procedures performed or
in the prices for procedures could materially and adversely affect our revenues
and financial results.
There are many companies that provide Internet and non-Internet based
information, marketing and advertising services to the healthcare industry.
These Internet healthcare companies will compete with us for consumer traffic.
We expect competition to increase because there are no substantial barriers to
entry into the market for Internet services. Increased competition could result
in reductions in the fees we receive for subscription services, reduced visitor
traffic to our websites and an inability to obtain content and links to other
sites. Any of these occurrences could materially and adversely affect our
business, financial condition and results of operations. Our principal
competitors in the Internet information area include websites that deliver
consumer healthcare information, either as their sole focus or as part of a more
broadly based site, such as Health Oasis, Intelihealth, iVillage, Onhealth,
Thrive Online, Mediconsult and WebMD, website development firms and general
purpose consumer online service providers. Our ability to compete with our
Internet website services depends on a number of factors, including quality of
content, ease of use, timing and market acceptance of new and enhanced services
and other factors outside our control.
IF WE DO NOT CONTINUALLY ENHANCE AND DEVELOP THE CONTENT AND SERVICES PROVIDED
THROUGH OUR WEBSITES, WE MAY NOT BE ABLE TO ATTRACT CONSUMERS AND SURGEONS AND
INCREASE OUR REVENUES
To remain competitive, we must continue to enhance and improve our
websites' content and services. We will produce only a portion of the editorial
content available on our websites. We rely on third parties for most of our
content. There can be no assurance that acceptable content will be available to
us on favorable terms or at all. Other websites may present the same or similar
content in a superior manner to our websites, which may adversely affect the
number of consumers and surgeons who visit our websites. In addition, we must
continually develop and improve the responsiveness, functionality and features
of our websites and create other products and services that will require the
development or licensing of increasingly complex technologies. We may not
succeed in developing, obtaining or introducing content, features, functions,
products and services that will attract consumers and surgeons.
FAILURE TO INTEGRATE OUR ALLIED PRACTICES COULD STRAIN OUR MANAGERIAL,
OPERATIONAL AND FINANCIAL RESOURCES
We will acquire 30 founding practices upon the closing of this Offering,
and we anticipate acquiring additional allied practices in the future. We must
effectively integrate these allied practices to be successful. This process is
time consuming, and we cannot guarantee that there will not be substantial
unanticipated costs or problems. Acquisitions require us to attract and retain
competent and experienced management personnel and require the integration of
accounting systems, management information systems and other operating systems.
Upon our acquisition of the founding practices, the founding practices will not
be fully integrated into our accounting and management information systems, and
we cannot guarantee that we will be able to successfully complete this
integration in the near future. There can also be no assurance that we will be
able to attract suitable management or other personnel or effectively expand our
operating systems. During the first few months after an acquisition, our
expenses related to an acquisition may exceed the revenue we realize from the
acquisition and may have a negative effect on our short-term operating results.
Our financial results in fiscal quarters immediately following a material
acquisition or series of acquisitions, including the acquisitions of the
founding practices, may decline while we attempt to integrate the acquisition or
acquisitions. As we pursue our expansion strategy, we may not be able to
continue to successfully integrate acquisitions, and any failure or inability to
do so may cause our revenues to decline. The success of our
7
<PAGE> 12
expansion strategy will depend on our ability to effectively manage an
increasing number of new acquisitions while continuing to manage our existing
business.
WE MAY BE SUBJECT TO MALPRACTICE LIABILITY BECAUSE OUR ALLIED SURGEONS HAVE
LIABILITY FOR PERFORMING PROCEDURES
Each allied surgeon may be exposed to professional liability and other
claims by providing plastic surgery procedures to the public. Each allied
practice is required to maintain general liability and malpractice insurance. As
a result of providing our business development services, we may be named as a
co-defendant in lawsuits against our allied surgeons. Because we do not practice
medicine, we cannot purchase medical malpractice insurance. We do not control
the practice of plastic surgery or the compliance of the allied surgeons and/or
allied practices with regulations or other requirements relating to the practice
of medicine. Successful claims could result in large damage awards that could
exceed insurance limits. The allied practices indemnify us for liability arising
from malpractice claims but the practices may not have funds available to
indemnify us. Successful claims may reduce our earnings and have a material and
adverse effect on our business, financial condition and results of operation. We
maintain insurance coverage for our directors and officers and general liability
insurance. We believe we have adequate coverage, but large damage awards may
exceed our coverage, require us to pay the expenses of our officers and
directors and reduce our earnings. Also, adequate coverage may not always be
available at acceptable costs and on favorable terms.
GOVERNMENT REGULATION MAY DETRIMENTALLY AFFECT US AND REDUCE OUR SERVICES FEES
AND EARNINGS
The medical industry and plastic surgery practices are regulated
extensively at the state and federal levels. We will not control the practice of
plastic surgery by our allied surgeons. However, review of our business
relationships by regulatory authorities or the courts or changes in the
regulatory environment may result in determinations that could adversely affect
the amount of service fees we receive from our allied practices and negatively
affect our earnings. Certain states prohibit non-medical entities from
practicing medicine, owning all or certain assets of a medical practice,
employing physicians or controlling the content of a physician's advertisements.
Certain states also prohibit physicians from paying any portion of fees received
for medical services in consideration for the referral of a patient or from
paying a percentage of revenue to nonphysicians. In addition, many states impose
limits on the procedures that may be delegated by a plastic surgeon to other
staff members. These laws and their interpretations vary from state to state and
are enforced by regulatory authorities with broad discretion. The legality of
our business services agreements may be successfully challenged and
enforceability of their provisions could be limited and prevent us from
receiving service fees. The laws and regulations of states in which we may seek
to expand may require changes in the form of relationships we enter into with
plastic surgeons. These types of changes could restrict our operations in those
states or prevent us from affiliating with plastic surgery practices in those
states. In addition, the laws and regulations of states in which allied
practices presently operate may change or be interpreted in the future to either
restrict or adversely affect our agreements with allied practices in those
states. Currently, the majority of our business services agreements with
founding practices provide for service fees based on 15% of net cash
collections. If changes in these laws require us to revise these agreements and
use consulting agreements with our fees based on a fixed dollar amount with a
fixed percentage increase, our revenues could be materially and adversely
affected.
The United States Congress has considered various healthcare reform
proposals, including comprehensive revisions to the current healthcare system.
It is uncertain what legislative proposals will be adopted in the future or what
actions federal or state legislatures or third-party payors may take in
anticipation of or in response to any healthcare reform proposals or
legislation. Changes in the healthcare industry, such as the growth of managed
care organizations or provider networks, may result in lower payment levels for
the services of the allied surgeons and lower revenues for us.
Generally, fees received from private pay patients are higher than those
from third party payors that have cost containment requirements. Although
approximately 80% of the founding practices' current revenues come from private
pay patients, a decrease in the number of private pay patients could occur due
to federal or state legislative initiatives. Currently most procedures
reimbursed under Medicare, Medicaid or other third-
8
<PAGE> 13
party payment programs (including commercial insurers, managed care
organizations, health maintenance organizations or preferred provider
organizations) for plastic surgery services are related to reconstructive
procedures. The costs of most cosmetic surgery procedures, which currently
represent approximately 75% of the procedures performed by the founding allied
surgeons, are not reimbursed by governmental or private payors and are not
subject to cost containment requirements. Comprehensive healthcare reform that
includes reimbursement for the costs of cosmetic surgery procedures could affect
the payment for and availability of services, including discounted reimbursement
rates or more procedures falling under third-party coverage. These changes could
lower the revenues of the allied practices.
Many states prohibit physicians from using advertising that includes any
name other than the physician's, or from advertising in any manner likely to
lead a person to believe that a non-physician is engaged in the delivery of
medical services. Our business services agreements require all advertising to
conform to these requirements. We have endeavored to structure our websites to
avoid violation of any state licensing requirements, but a state regulatory
authority may allege that some portion of our Internet business violates these
statutes. Any such allegation could result in a material adverse effect on our
business, results of operation and financial condition.
IF ANTITRUST AND MEDICARE/MEDICAID ANTI-KICKBACK LAWS ARE DETERMINED TO APPLY TO
US, WE COULD BE SUBJECT TO FINES AND OTHER PENALTIES AND OUR ALLIED PRACTICES
COULD BE EXCLUDED FROM PARTICIPATION IN FEDERAL HEALTHCARE PROGRAMS
Federal and state antitrust laws are designed to eliminate practices that
interfere with free competition. In particular, these laws prohibit:
- mergers, joint ventures, consolidations, and the acquisition of stock or
assets where the effect may be to substantially lessen competition or
tend to create a monopoly;
- contracts, combinations, and conspiracies that unreasonably restrain
trade;
- monopolization, attempts to monopolize and conspiracies to monopolize;
and
- unfair methods of competition and unfair or deceptive acts or practices,
referrals and kickbacks.
We may be subject to private or governmental investigations or claims.
Violations or alleged violations may result in imprisonment, criminal and civil
fines, treble damages, fees and costs. Federal and state enforcement agencies
have subjected the healthcare industry to increasing scrutiny in recent years
which is likely to continue in the future.
The Medicare/Medicaid anti-kickback statute prohibits the payment or
receipt of any remuneration in return for the referral of patients for services
covered under federal health care programs, including the Medicare and Medicaid
programs, or in return for purchasing, leasing, ordering, or arranging for or
recommending the purchase, lease or order of any item or service that is covered
under a federal health care program. A violation of the anti-kickback statute is
a felony, punishable by imprisonment, fines, or both and may also result in the
imposition of civil money penalties and exclusion from participation in any
federal health care program. The anti-kickback statute has been broadly
interpreted by the courts and enforcement agencies. In addition, many states
have laws that prohibit the payment or receipt of any remuneration in return for
the referral of patients or the purchase of items or services under both
government and private health care programs. Violations of these state laws may
result in payment not being made for the items or services rendered, loss of a
healthcare provider's license, fines, or criminal penalties. These statutes and
regulations vary widely from state to state, are often vague and, in many
states, have not been interpreted by courts or regulatory agencies. Although we
believe that our current business arrangements with allied practices do not
implicate the federal anti-kickback statute or state anti-kickback laws, there
can be no assurance that our business arrangements will not be subject to
scrutiny or an enforcement action or that these laws will not be interpreted in
such a way as to prohibit certain aspects of our current business service
arrangements.
9
<PAGE> 14
DUE TO LAWS AND REGULATIONS GOVERNING THE INTERNET, OUR REVENUES MAY DECLINE
There is, and will be, an increasing number of laws and regulations
pertaining to the Internet. These laws or regulations may relate to liability
for information received from or transmitted over the Internet, online content
regulation, user privacy and quality of products and services. In addition, the
applicability to the Internet of existing laws governing intellectual property
ownership and infringement, copyright, trademark, trade secret, obscenity,
libel, employment, personal privacy and other issues is uncertain and
developing.
Our websites retain personal information about our users which we obtain
with their consent. If unauthorized persons penetrate our network security and
gain access to, or otherwise misappropriate, our users' personal information, we
could be subject to liability. Such liability could include claims for the
misuse of personal information, such as for unauthorized marketing purposes or
unauthorized use of credit cards. These claims could result in litigation, our
involvement in which, regardless of the outcome, could require us to expend
significant time and financial resources. Moreover, to the extent any of the
data constitutes or is deemed to constitute patient health records, a breach of
privacy could violate federal law.
The Federal Trade Commission and state governmental bodies have recently
investigated the disclosure of personal identifying information obtained from
individuals by Internet companies. The federal government has also made
legislative proposals in this area. We could incur additional expenses if new
regulations regarding the use of personal information are introduced or if any
regulator chooses to investigate our privacy practices. Any new law or
regulation, or the adverse application or interpretation of existing laws, may
decrease the growth in the use of the Internet or our websites. This could
decrease the demand for our services, increase our cost of doing business and
reduce our earnings. The potential imposition of liability upon us for our
content or services resulting from changes in government regulations could
require us to implement measures to reduce our exposure to this liability, which
might require us to expend substantial resources or to discontinue Internet
service offerings.
IF OUR INTERNET ACTIVITIES BECOME SUBJECT TO TAXATION, OUR CASH FLOWS AND
RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED
A number of legislative proposals have been made at the federal, state and
local level and by certain foreign governments, that would impose additional
taxes on the sale of goods and services over the Internet or Internet related
activities. Such legislation or other attempts at regulating commerce or the
Internet may impair the growth of commerce on the Internet and, as a result,
adversely affect our opportunity to derive financial benefit from such
activities.
IF WE ARE SUBJECT TO CLAIMS BASED ON THE CONTENT WE PROVIDE ON THE INTERNET, WE
COULD INCUR UNANTICIPATED EXPENSES AND BE LIABLE FOR DAMAGES
We may be subject to claims for defamation, negligence, product liability,
copyright, or trademark infringement, or other matters based on content and
information on our websites supplied by us or third parties. These types of
claims have been brought, sometimes successfully, against other online service
companies in the past. We may also be subject to claims or incur liability for
the content on other websites that are linked to our websites or for content and
materials that may be posted by visitors in chat rooms or bulletin boards. Even
if any such claims do not result in liability to us, we could incur significant
costs investigating and defending against such claims and in implementing
measures to reduce our exposure to these types of claims.
BECAUSE OF OUR DEPENDENCE ON BOTH THE SUCCESSFUL LAUNCHING AND CONTINUED
FUNCTIONING OF OUR WEBSITES, OUR BUSINESS WOULD SUFFER IF EITHER WERE TO FAIL
Early stage companies such as ours frequently encounter risks and
difficulties in new and rapidly evolving markets, including the Internet market.
Some of the risks and uncertainties that we face relate to our ability to
design, develop and implement effective marketing and advertising programs for
our websites, build our technical infrastructure to manage our growth
effectively, respond effectively to actions taken by our competitors, attract
consumers to our websites, increase awareness of our brand name, develop visitor
loyalty
10
<PAGE> 15
and integrate technologies and services. Our Internet solutions are a key part
of our strategy, and difficulties with our websites could negatively affect our
business and prospects.
The functioning of our websites is important to our business, reputation
and ability to attract consumers and surgeons to our websites. We depend upon
the continuous, reliable and secure operation of Internet servers and related
hardware and software. To the extent that service is interrupted or delayed, we
could experience a decrease in traffic and revenue. We do not at present have
any back up systems or a formal disaster recovery plan. Substantially all of our
communications hardware and some of our other computer hardware operations are
located in northern California. Events such as power losses, telecommunication
failures, computer viruses, electronic break-ins or other similar disruptive
problems could also adversely affect our websites.
Our websites must accommodate a high volume of traffic and deliver
information that is updated frequently. Our websites may experience slower
response times or decreased traffic for a variety of reasons including
technological deficiencies. In addition, our visitors depend on Internet service
providers, online service providers and other website operators for access to
our websites. Many of them have experienced significant outages in the past and
could experience outages, delays and other difficulties due to system failures
unrelated to our systems in the future. Some of the services we expect to
provide, such as video imaging may require technologically advanced systems to
function seamlessly and quickly. We may not be able to develop, acquire and
maintain these services, which failure could have a material adverse effect on
our business, financial condition and results of operation.
The continuous enhancement of our websites is dependent upon the success of
development efforts that will be performed by our employees and by independent
contractors. To the extent that these development efforts are delayed or
unsuccessful, we will incur additional development expenses and may not remain
competitive in the design and use of our websites.
BECAUSE OUR BUSINESS REQUIRES THE SECURE TRANSMISSION OF DATA OVER THE INTERNET,
WE COULD BECOME SUBJECT TO CLAIMS AND OTHER LIABILITIES IF A BREACH OF SECURITY
OCCURS
A significant barrier to communications and commerce over the Internet has
been the need for secure transmission of confidential information. Internet
usage and access by consumers of our websites could decline if a compromise of
security occurs with respect to our websites. We may incur significant costs to
provide security and protect against the threat of security breaches or to
alleviate problems caused by such breaches. Experienced programmers could
attempt to penetrate our network security. Programmers who are able to penetrate
our network security could misappropriate proprietary information or cause
interruptions in our services, and we could be required to expend capital and
resources to protect against or alleviate problems caused. To the extent our
activities involve the storage or transmission of confidential information, such
as credit information, security breaches could expose us to claims, litigation
and other potential liabilities.
IF WE FACE A CLAIM OF INTELLECTUAL PROPERTY INFRINGEMENT BY A THIRD PARTY OR
FAIL TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, WE COULD BE LIABLE FOR
SIGNIFICANT DAMAGES OR LOSE OUR INTELLECTUAL PROPERTY RIGHTS
We rely on a combination of copyright, trademark and trade secret laws and
contractual provisions to establish and protect our proprietary rights. We have
registered the domain names "www.Idealme.com," "www.ThePlasticSurgeryCo.com,"
and approximately 25 other domain names. However, we have not yet applied for
federal registration of any trademarks, including trademarks for our corporate
name or our domain names, and, thus, we cannot guarantee that we will be able to
secure registration of these names. If we are required to change our corporate
name, current and potential customers could be confused and our business could
be disrupted. Any of these potential effects could seriously harm our business,
prospects, financial condition and operating results. In addition, any name
change effected after this offering could result in confusion to investors,
which could seriously harm the market price of our common stock.
There can be no assurance that the steps we may take to protect our
proprietary rights will be adequate, that we will be able to secure trademark or
service mark registrations for our marks in the United States or in foreign
countries or that third parties will not infringe upon or misappropriate our
copyrights, trademarks,
11
<PAGE> 16
service marks, domain names and similar proprietary rights. In addition,
effective copyright and trademark protection may be unenforceable or limited in
certain foreign countries, and the global nature of the Internet makes it
impossible to control the ultimate destination of our services. It is possible
that our competitors or others will adopt product or service names similar to
ours, thereby impeding our ability to build brand identity and possibly leading
to customer confusion. Moreover, because domain names derive value from an
individual's ability to remember such names, we cannot guarantee that our domain
names will not lose their value if, for example, users begin to rely on
mechanisms other than domain names to access online resources.
THE LOSS OF KEY PERSONNEL COULD HARM OUR BUSINESS
Our success depends, to a significant extent, upon the efforts and
abilities of Dennis Condon, David Challoner, Patricia Altavilla and other
members of senior management. The loss of the services of one or more of these
key employees could disrupt our business and expansion strategy and cause our
revenues to decline.
YOU WILL INCUR IMMEDIATE AND SUBSTANTIAL DILUTION
You will experience an immediate and substantial dilution of $10.18 in the
net tangible book value per share of common stock from the initial public
offering price. Assuming an initial public offering price of $11.00 per share of
common stock, our pro forma net tangible book value as of June 30, 1999 after
giving effect to this offering would be $0.82 per share.
EXISTING SHAREHOLDERS HAVE SUBSTANTIAL CONTROL OVER THE COMPANY AND CAN MAKE
DECISIONS THAT COULD ADVERSELY AFFECT OUR STOCK PRICE
Following this offering, members of management and the owners of the
founding practices will beneficially own approximately 60% of our outstanding
common stock (57% if the underwriters' over-allotment option is exercised in
full). If these persons acted together, they would have sufficient voting power
to control the outcome of corporate actions submitted to our shareholders for
approval and to control our management and affairs, including the election of
our board of directors.
OUR STOCK HAS NOT TRADED PUBLICLY AND AFTER THIS OFFERING ITS MARKET PRICE MAY
FLUCTUATE WIDELY
Prior to this offering, there has not been a public market for our common
stock. We do not know the extent to which investor interest in us will lead to
the development of an active trading market for our common stock or how our
common stock will trade in the future. The market price of our common stock is
likely to be subject to wide fluctuations. The market prices of the securities
of Internet-related companies have been especially volatile and these securities
may be overvalued. If analysts view us as an Internet-related company and if the
market for Internet-related stocks or the stock market in general experiences a
loss of investor confidence, the market price of our common stock could be
materially and adversely affected for reasons unrelated to our business or
results of operations. The initial public offering price will be determined by
negotiations between us and the representatives of the underwriters. You may not
be able to resell your shares at or above the initial public offering price.
The price at which our common stock will trade depends upon a number of
factors, including our historical and anticipated operating results and general
market and economic conditions, some of which are beyond our ability to control.
Factors such as fluctuations in our financial and operating results,
developments affecting us, the markets in which we compete or our industry could
also cause the market price of our common stock to fluctuate substantially. In
addition, the stock market has from time to time experienced extreme price and
volume fluctuations. These broad market fluctuations may adversely affect the
market price of our common stock.
12
<PAGE> 17
SHARES ELIGIBLE FOR SALE IN THE FUTURE COULD NEGATIVELY AFFECT OUR STOCK PRICE
The market price of our common stock could decline due to sales of a large
number of shares of our common stock or the perception that such sales could
occur. These factors could also make it more difficult for us to raise funds
through future offerings of common stock.
After this offering, 5,170,262 shares of our common stock will be
outstanding (5,461,637 shares if the underwriters' over-allotment option is
exercised in full). Of these shares, the 2,400,000 shares sold in this offering
(2,691,375 shares if the underwriters' over-allotment option is exercised in
full) will be freely tradeable without restrictions under the Securities Act,
except for any shares purchased by our "affiliates" (as defined in Rule 144
under the Securities Act). Our officers and directors and our shareholders
beneficially owning more than 1% of our common stock have entered into lock-up
agreements pursuant to which they have agreed not to offer or sell any shares of
common stock for an initial period of 180 days after the date of this prospectus
without the prior written consent of Cruttenden Roth, on behalf of the
underwriters. These individuals have also agreed, pursuant to lock-up
agreements, for an additional period of 180 days commencing on the last day of
the initial lock-up period, not to offer or sell any shares of their common
stock unless they effect the transaction through Cruttenden Roth. Cruttenden
Roth may, at any time and without notice, waive the terms of the lock-up
agreements. Upon expiration of the initial lockup period, 2,770,262 shares may
be sold in the future subject to compliance with the volume limitations and
other restrictions of Rule 144.
PROBLEMS RELATING TO THE YEAR 2000 ISSUE COULD ADVERSELY AFFECT OUR BUSINESS
Some of our software programs may not recognize calendar dates beginning in
the Year 2000. As a result of this problem, some of these systems could fail to
operate or fail to produce correct results. Accordingly, we are reviewing our
internal computer programs and systems to determine if they will be Year 2000
compliant. We presently believe that our computer systems will be Year 2000
compliant in a timely manner, but undetected errors or defects may remain.
Furthermore, we depend on third parties for most of the services provided
through our websites. We are in the process of contacting these third party
suppliers regarding their Year 2000 readiness. If these parties are affected by
the Year 2000 problem, our ability to provide services to our subscribers may be
materially adversely affected. For further information, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Impact of Year 2000."
A THIRD PARTY COULD BE PREVENTED FROM ACQUIRING YOUR SHARES AT A PREMIUM TO THE
MARKET PRICE BECAUSE OF OUR ANTI-TAKEOVER PROVISIONS
Certain provisions of Georgia law and certain provisions of our Articles of
Incorporation and Bylaws could delay or impede the removal of incumbent
directors and could make it more difficult for a third-party to acquire, or
could discourage a third-party from attempting to acquire, control of us. Such
provisions could limit the price that investors might be willing to pay in the
future for shares of our common stock. Our Articles of Incorporation and Bylaws
impose various procedural and other requirements (including a staggered board of
directors, advance notice provisions and the issuance of preferred stock as
described below) that could make it more difficult for shareholders to effect
certain corporate actions. The Articles give our board of directors the
authority to issue up to 20,000,000 shares of preferred stock and to determine
the price, rights, preferences and restrictions, including voting rights of such
shares, without any further vote or action by our shareholders. The rights of
holders of common stock will be subject to, and may be adversely affected by,
the rights of the holders of any preferred stock issued in the future. The "fair
price" and "business combinations" statutes under Georgia law we adopted may
restrict certain business combinations by interested shareholders. Our business
services agreements contain change in control provisions which give allied
practices the right to terminate the business services agreements if any
"person" as defined in the Securities Exchange Act of 1934 through acquisition
or aggregation, becomes the beneficial owner directly or indirectly of 15% or
more of the combined voting power of our outstanding voting stock. These change
in control provisions may hinder, delay, deter or prevent a tender offer, proxy
contest or other attempted takeover because of the potential loss of revenue if
the business services agreements are terminated.
13
<PAGE> 18
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. We have based these
forward-looking statements largely on our current expectations and projections
about future events and financial trends affecting the financial condition of
our business. These forward-looking statements are subject to a number of risks,
uncertainties and assumptions about us, including among other things:
- General economic and business conditions, both nationally and in our
markets;
- Our acquisition opportunities;
- Our expectations and estimates concerning future financial performance,
financing plans and the impact of competition;
- Successful implementation of our growth strategy;
- Anticipated trends in our business;
- Existing and future governmental regulations affecting our business; and
- Other risk factors set forth in the "Risk Factors" section of this
prospectus.
In addition, in this prospectus, the words "believe", "may", "will", "estimate",
"continue", "anticipate", "intend", "expect", "could", "should", "would" and
similar expressions, as they relate to us or our management, are intended to
identify forward-looking statements.
14
<PAGE> 19
USE OF PROCEEDS
The net proceeds to us from the sale of our common stock in the offering
are estimated to be $22.4 million ($25.4 million if the underwriters'
over-allotment option is exercised in full), after deducting underwriting
discounts and commissions and estimated offering expenses of $4.0 million. We
will not receive any proceeds from sales of shares by the selling shareholders
upon exercise of the overallotment option. See "Principal and Selling
Shareholders." We intend to use the net proceeds as follows:
- $12.4 million to pay the cash portion of the consideration to the
founding practices;
- $1.4 million to pay accrued salaries and consulting fees of our employees
and consultants;
- $485,000 to repay indebtedness of the founding practices assumed by us;
and
- the balance for the development and maintenance of our websites,
potential acquisitions of allied practices, development of satellite
offices and general corporate purposes, including working capital and
capital expenditures.
Pending such uses, we may invest the net proceeds temporarily in short-term,
investment grade, interest bearing securities or guaranteed obligations of the
U.S. government.
DIVIDEND POLICY
Except for our payment of $5.7 million in cash consideration to the
founding practices, which will be accounted for under Staff Accounting Bulletin
No. 48, "Transfers of Nonmonetary Assets by Promoters and Shareholders," SAB 48,
in connection with the acquisition of the assets of certain of those practices
and recorded as a cash dividend for financial accounting purposes, we have not
declared or paid, and we do not anticipate declaring or paying, any dividends on
our common stock in the foreseeable future. Our board of directors will, in its
discretion, make any future determination to declare or pay dividends. Any
future determination will depend upon then existing conditions, including our
financial condition, results of operations, contractual and statutory
restrictions, capital requirements, business prospects and other factors as our
board of directors deems relevant.
15
<PAGE> 20
DILUTION
Purchasers of the common stock in the offering will experience immediate
and substantial dilution in the net tangible book value of the common stock from
the initial public offering price. Net tangible book value per share represents
the amount of our total tangible assets less our total liabilities, divided by
the number of shares of common stock outstanding. At June 30, 1999, we had a pro
forma net tangible book value (deficit) of ($18.2) million or ($6.57) per share
of common stock. Pro forma net tangible book value is equal to pro forma assets,
excluding intangible assets, less pro forma liabilities. After giving effect to
the sale of 2,400,000 shares of common stock offered by us at an assumed initial
public offering price of $11.00 per share and, after the deduction of
underwriting discounts and commissions and estimated offering expenses payable
by us, our pro forma net tangible book value at June 30, 1999, would have been
$4.2 million or $0.82 per share. This represents an immediate increase in such
net tangible book value of $7.39 per share to existing shareholders and an
immediate and substantial dilution of $10.18 per share to new investors
purchasing common stock in the offering. The following table illustrates this
per share dilution.
<TABLE>
<S> <C> <C>
Assumed initial public offering price....................... $11.00
Pro forma net tangible book value deficit at June 30,
1999................................................... $ (6.57)
Increase attributable to new investors.................... 7.39
Pro forma net tangible book value after this offering....... 0.82
------
Dilution in pro forma net tangible book value to new
investors................................................. $10.18
======
</TABLE>
The following table summarizes, on a pro forma basis set forth above at
June 30, 1999, the differences between existing shareholders and new investors
in the offering with respect to the number of shares of common stock purchased
from us, the total consideration paid to us and the average consideration paid
per share (before the deduction of underwriting discounts and commissions and
estimated offering expenses payable by us):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------- --------------------- PRICE
NUMBER(1) PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders.................... 2,770,262 53.6% $ 2,001,440 7.0% $ 0.72
New investors............................ 2,400,000 46.4 26,400,000 93.0 11.00
--------- ----- ----------- ------
Total.......................... 5,170,262 100.0% $28,401,440 100.0%
========= ===== =========== ======
</TABLE>
- ---------------
(1) Does not include up to 291,375 shares that the underwriters may purchase
from us if they exercise their over-allotment option.
If the underwriters' over allotment option is exercised in full, we will
issue an additional 291,375 shares of common stock to new investors who will
then own 49.3% of the total of 5,461,637 shares of our common stock outstanding.
In addition, the total consideration from new investors will be $29.6 million,
which is 93.7% of the total of $31.6 million paid for all shares of common stock
outstanding. The issuance of additional common stock by us will result in
further dilution to you.
16
<PAGE> 21
CAPITALIZATION
The following table sets forth our historical, pro forma, and pro forma as
adjusted capitalization as of June 30, 1999, after deducting underwriting
discounts and commissions and estimated offering expenses. You should read the
following table in conjunction with the Unaudited Pro Forma Balance Sheet and
related notes and our audited financial statements and accompanying notes
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1999
-------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(1) AS ADJUSTED(2)(3)
------- ------------ ------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Current portion of long-term debt and notes payable..... $ -- $ 13,587 $ 680
======= ======== ========
Total long-term debt.................................... $ -- $ 3,331 $ 3,331
Shareholders' (deficit) equity:
Preferred stock; 20,000,000 shares authorized; no
shares issued and outstanding...................... -- -- --
Common stock, no par value; 100,000,000 shares
authorized; 383,213 shares issued and outstanding,
actual; 2,770,262 shares issued and outstanding,
pro forma; 5,170,262 shares issued and outstanding,
pro forma as adjusted(4)........................... -- -- --
Additional paid-in capital............................ (2,437) 237 22,675
Warrants.............................................. 11,363 11,363 11,363
Accumulated deficit................................... (7,774) (13,020) (13,020)
------- -------- --------
Total shareholders' (deficit) equity.......... 1,152 (1,420) 21,018
------- -------- --------
Total capitalization.......................... $ 1,152 $ 1,911 $ 24,349
======= ======== ========
</TABLE>
- ---------------
(1) The pro forma balance sheet data gives effect to our acquisitions of 30
founding practices as if they had occurred on June 30, 1999.
(2) Gives effect to the sale by us of 2,400,000 shares of common stock offered
hereby at an assumed initial public offering price of $11.00, after
deducting estimated underwriting discounts and commissions and estimated
offering expenses. See "Use of Proceeds."
(3) Does not include up to 291,375 shares that the underwriters may purchase
from us if they exercise their over allotment option.
(4) Excludes an aggregate of (a) 1,578,704 shares issuable upon exercise of
stock options and warrants outstanding as of September 10, 1999, (b)
1,026,500 shares issuable upon exercise of stock options and warrants that
will be issued upon closing of this offering and (c) an aggregate of 240,000
shares issuable upon exercise of warrants that will be issued to the
representatives of the underwriters upon completion of this offering.
17
<PAGE> 22
SELECTED FINANCIAL DATA
The following financial information for the period from April 30, 1997
(inception) to December 31, 1997 and for the year ended December 31, 1998 is
derived from our audited financial statements. The following financial
information for the six months ended June 30, 1998 and 1999 and at June 30, 1999
is derived from our unaudited financial statements. We have had no significant
operations to date and will not conduct significant operations until this
offering is completed.
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 30, 1997 SIX MONTHS ENDED JUNE 30,
(INCEPTION) TO YEAR ENDED -------------------------------------
DECEMBER 31, 1997 DECEMBER 31, 1998 1998 1999
----------------- ----------------- ----------------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue...................... $ -- $ -- $ -- $ --
------- ------- ------ -------
Total expenses............... 1,888 3,211 839 2,698
Other income................. 8 8 3 6
------- ------- ------ -------
Net loss..................... $(1,880) $(3,203) $ (836) $(2,692)
======= ======= ====== =======
Basic and diluted net loss
per share................. $ (8.49) $(12.30) $(3.33) $ (8.99)
======= ======= ====== =======
Shares used in computing
basic and diluted net loss
per share................. 221 260 251 299
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
------------------ JUNE 30,
1997 1998 1999
----- ------- ---------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................ $ 184 $ 403 $ 91
Working capital (deficit)................................ (176) (1,348) (2,369)
Total assets............................................. 202 440 3,612
Total long-term liabilities.............................. -- -- --
Total shareholders' (deficit) equity..................... (158) (1,311) 1,152
</TABLE>
18
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with
our financial statements and related notes included elsewhere in this
prospectus.
OVERVIEW
At the closing of the offering, we will provide business development
services and Internet solutions to our alliance of 36 Board certified or Board
eligible plastic surgeons and one surgeon certified by the Canadian Board of
Plastic Surgery located in 22 metropolitan markets throughout the United States.
In the future we intend to provide business services and acquire certain assets
of, or to manage, additional plastic surgery practices. Our Internet strategy is
important to our business. We have two proprietary websites: Idealme.com, our
consumer website; and ThePlasticSurgeryCo.com, our surgeon website. Idealme.com
allows consumers to research available procedures, submit inquiries regarding
cosmetic surgery procedures, view possible cosmetic changes through online
imaging technology, obtain financing for procedures and locate Board certified
cosmetic surgeons. ThePlasticSurgeryCo.com will provide allied surgeons online
access to our national buying programs and facilitate "best practices" study
groups among our allied surgeons. We have not conducted any significant
operations or earned any revenue to date, and we believe that we will generate
substantially all of our future revenues from service fees earned under our
business services agreements with allied surgeons, which generally provide for
us to receive 15% of the net cash collected by each practice.
THE FOUNDING PRACTICES
Upon the closing of the offering, we will be aligned with 37 plastic
surgeons. Simultaneously with the closing of the offering, we will enter into
business services agreements with 17 founding practices, accounted for pursuant
to SAB 48, and 13 additional founding practices accounted for based on the fair
value of the assets. The fair value acquisitions will result in approximately
$13.3 million of intangible assets which will be amortized over periods ranging
from 10 to 15 years. SAB 48 is a Staff Accounting Bulletin which was issued by
the Securities and Exchange Commission. Our transactions with the 17 founding
practices that will be accounted for under SAB 48 will involve the transfer of
nonmonetary assets, primarily medical and surgical equipment, from the founding
practices in exchange for cash and common stock. The amount of cash to be
received by each of these 17 founding practices will not exceed 25% of the total
value of the founding practice. The shareholders of these 17 founding practices
are considered promoters. SAB 48 requires the transfer of nonmonetary assets by
promoters for stock of a company prior to or at the time of an initial public
offering to be recorded at the historical cost basis of the assets transferred.
Therefore, we will account for the transfer of nonmonetary assets from these 17
founding practices under SAB 48 and will record the nonmonetary assets
transferred at their historical costs.
The aggregate consideration paid by us to the founding practices is
approximately $42.7 million, including 2,387,049 shares of common stock based on
an assumed initial offering price of $11.00, approximately $4.0 million in
promissory notes and approximately $12.4 million in cash, all of which is
payable at the closing of the transfer of assets of the founding practices,
which will occur simultaneously with the closing of the offering. Cash proceeds
from the offering will be used to pay the cash portion of the consideration. See
"Use of Proceeds."
Eleven of our founding practices resulted from our acquisition in May 1999
of the right to negotiate business services agreements with plastic surgery
practices originally contacted by ISIS Cosmetic Surgery Partners, Inc. ISIS, a
company not affiliated with us, had entered into letters of intent, which
included an exclusive negotiations clause, with certain plastic surgery
practices. We began preliminary discussions with ISIS in February 1999. In May
1999, ISIS entered into an agreement with us when it was unable to obtain
financing necessary to execute its business plan. Under this agreement, we
purchased ISIS's exclusive negotiation rights with respect to these plastic
surgery practices for 92,213 shares of common stock and cash of approximately
$400,000. We will account for the purchase of these rights as an asset
acquisition and will amortize the intangible asset over 14 years. The
amortization period for the contract rights purchased from
19
<PAGE> 24
ISIS was determined by reference to the amortization periods for the business
services agreements with the founding practices resulting from the transaction
with ISIS. The 14-year period was calculated as a weighted average of the
amortization lives and resulting intangible assets for these business services
agreements. Upon the closing of the offering, we will enter into business
services agreements with these plastic surgery practices. As a result of
entering into these business services agreements, we will record intangible
assets that will be amortized over periods ranging from 10 to 15 years.
Intangible assets consist of the excess of the purchase price over the fair
value of the net assets acquired from the asset acquisitions at fair value and
the transaction with ISIS. For these allied practices, the business services
agreements have a term of 25 years. We have allocated these intangible assets to
the value obtained through entering into business services agreements. We
believe that no other identifiable intangible asset was generated by these
acquisitions. We will amortize the intangible assets over the estimated useful
lives taking into consideration various qualitative factors, including the terms
of the business services agreements. We consider the unique characteristics of
each practice being managed and uncertainties resulting from our inability or
the practice's inability to perform over the term of the business services
agreements. These factors take into consideration the probability that a
practice will be able to extend its existence indefinitely and thus enable us to
recover, through profitable operations, the carrying value of the intangible
assets. These factors include the following:
- The strength of the local market as evidenced by such factors as location
in the United States, market demographics, and the number of plastic
surgery procedures performed in the market;
- Market recognition of the practice name;
- The existence of business services agreements with other practices in the
same market that could provide continuity of the practice, if necessary;
- The number of surgeons in the practice;
- The ages of the surgeons in the practice;
- The historical operating experience of the practice;
- Past experience of the practice in attracting and retaining associates;
and
- The terms and conditions of the employment agreements with the surgeons.
We considered the above factors for each individual practice acquired to
determine the appropriate amortization life of between 10 and 15 years. The
primary factors we considered for practices that will be amortized over a 10
year period included the older age of the allied surgeon and the lack of an
associate surgeon or an affiliated practice in the market. The primary factors
we considered for practices that will be amortized over a 15 year period
included the relatively younger age of the allied surgeon, the larger size of
the market in which the allied surgeon is located, the favorable historical
operating results of the allied practice, and either the addition of an
associate in the practice, the active search by the allied surgeon for an
associate surgeon or the existence of an affiliated practice in the same market.
We review the carrying value of our long-lived assets and goodwill at least
quarterly on a practice by practice basis to determine if facts and
circumstances exist which would suggest that assets might be impaired or that
the amortization period needs to be modified. Among the factors we consider in
making the evaluation are changes in the practices' market position, reputation,
profitability, geographic penetration, the relationship with the physicians and
any changes in the legal or regulatory environment. If facts and circumstances
are present which may indicate that the carrying amount of the asset may not be
recoverable, we will prepare a projection of the undiscounted cash flows of the
specific practice and determine if the long-lived assets and/or goodwill are
recoverable based on these undiscounted cash flows. If the carrying value of the
assets exceeds the undiscounted cash flow, then we will adjust the carrying
amount of these assets to their estimated fair value. We will determine
estimated fair value by reference to quoted market prices, if available, or by
considering the prices for similar assets or the results of valuation techniques
that include the present value of the estimated future cash flows.
20
<PAGE> 25
Each allied surgeon affiliated with the founding practices is Board
certified, except for one surgeon who is eligible for Board certification and
one surgeon who is certified by the Canadian Board of Plastic Surgery. Board
certification requires that the surgeon graduate from an accredited medical
school, complete at least five years of additional residency, practice plastic
surgery for two years and pass comprehensive written and oral examinations. Each
allied surgeon, in his sole discretion, determines the fees to be charged for
services provided to patients based on market conditions and other factors
deemed appropriate by the allied surgeon.
We will recognize revenue from providing services to the practices pursuant
to the business services agreements on a monthly basis as each practice collects
its cash. The business services agreements provide that each practice will pay
our fees based on a percentage of the net cash collected by that practice. Our
revenue will consist of the sum of the service fee and amounts equal to the
operating expenses of the practice assumed by us under the business services
agreements. We will separately disclose in our future financial statements the
revenue from service fees and operating expenses. The operating expenses of the
practice that are our responsibility and which we are legally obligated to pay
include the following:
- salaries, benefits, payroll taxes, workers compensation, health
insurance and other benefit plans, and other direct expenses of
non-medical employees that are our employees located at the practice;
- direct costs of all employees or consultants that provide services to
each practice's office;
- medical and office supplies;
- lease or rent payments, utilities, telephone and maintenance expenses
for practice facilities;
- property taxes on our assets located at the practice offices;
- property, casualty and liability insurance premiums, excluding
malpractice insurance which is the responsibility of the practice;
- surgeon recruiting expenses; and
- advertising and expenses attributable to the promotion of practice
offices.
We will assume all of the above expenses and will pay the third-party
provider of the goods and services. These expenses will be recorded in our
financial statements as expenses because we are legally obligated to pay them.
In exchange for assuming these expenses and providing business services, we will
record revenue in amounts equal to the assumed expenses plus the service fee
described above.
The practice will retain the responsibility for payment of any and all
direct employment expenses, including benefits, for any surgeon or other
employee that we are prohibited from employing by applicable law. In addition,
the practice will retain responsibility for the payment of expenses for
continuing education, seminars, professional licenses, professional membership
dues and malpractice insurance and all other expenses of any surgeon. These
expenses that will remain the responsibility of the practice will not be
included in reimbursed operating expenses which is a component of our revenue.
Acquisition Agreements. We have entered into acquisition agreements with
each of the founding practices or the allied surgeons. These acquisition
agreements may be in the form of an asset purchase and sale agreement, a stock
purchase and sale agreement or an agreement and plan of reorganization whereby
we merge with the allied practice. Based on applicable state laws and
regulations, the operating assets of each practice, which include equipment,
inventory, accounts receivable, furniture and other personal property, or some
combination, will be transferred to us pursuant to the acquisition agreements.
As consideration for entering into an acquisition agreement, we will pay
consideration consisting of a combination of common stock, notes and cash.
Business Services Agreements. We have entered into business services
agreements with each of the founding practices. These agreements may be in the
form of a service agreement or consulting agreement as dictated by state law.
Each service agreement generally requires that we provide the following services
for the allied practices:
- acquisition and maintenance of specified furnishings and equipment;
- provision of suitable offices and facilities;
21
<PAGE> 26
- payroll processing;
- employment of necessary personnel, excluding plastic surgeons and certain
medical personnel;
- development of business systems procedures and forms;
- procurement and inventory management;
- assistance in acquiring malpractice insurance;
- cash management;
- assisting with advertising, marketing and practice development;
- development of appropriate business systems;
- supervision, management and organization of files and records; and
- financial reporting and analysis.
If we enter into a lease on behalf of the allied practice, the allied practice
will sublease from us. Under the service agreements, we will recognize revenues
in amounts equal to the assumed expenses plus service fees based on the net cash
collected. In future agreements, we may recognize revenues in amounts equal to
the assumed expenses plus a fixed dollar amount with annual fixed percentage
increases.
If required by applicable state law or regulations, an allied practice may
enter into a consulting agreement with us that contains certain of the same
provisions as the service agreement, including: (a) provisions relating to the
obligation to loan funds to the allied practice in the event the allied practice
is unable to pay its current expenses, (b) repurchase of assets and assumption
of liabilities by the allied practice upon expiration or termination, (c)
covenant not to compete, and (d) indemnification. Under the consulting
agreement, we will provide the following services to allied practices in
exchange for a fixed dollar annual fee with annual fixed percentage increases:
- consulting with respect to equipment and office needs;
- preparing staffing models appropriate for the allied practice;
- advising and training with respect to business systems;
- purchasing and maintaining inventory;
- advising with respect to and providing or arranging accounting and
bookkeeping services;
- assisting with the acquisition of malpractice insurance;
- advising with respect to developing a marketing plan;
- assessing the financial feasibility of establishing new offices;
- providing billing and collection services; and
- assisting the allied practices in organizing and developing filing and
recording systems.
The business services agreements have either 20 or 25 year terms for the
founding practices, beginning on the date of this offering. We anticipate
executing business services agreements with 25 year terms for each allied
practice affiliated with us after this offering. The business services
agreements are subject to termination by either party in the event the
non-terminating party becomes subject to voluntary or involuntary bankruptcy
proceedings or materially breaches the agreement, subject to a cure period. The
allied practices may also terminate the business services agreements if we are
subject to a change of control not approved by our board of directors. Upon the
termination of the business services agreements, except upon our breach, the
allied practice and its shareholders are subject to a two year covenant not to
compete which prohibits within a specified territory the following (a)
advertising in print and electronic media; (b) soliciting patients, surgeons or
staff associated with the allied practice; and (c) soliciting any referrals from
any physician who referred one or more patients to the allied practice within
three years prior to the date of such termination.
Pursuant to these business services agreements, we must pay the operating
expenses of a practice. To the extent a practice's operating expenses exceed
revenues, we must pay the excess but the allied practice will be obligated to
repay us, with interest, out of future revenues. The obligation of the allied
practice to repay these advances will not be securitized or prioritized and will
not have a definite maturity date. Under the business
22
<PAGE> 27
services agreements, the allied surgeons maintain full control over and
ownership of the allied practices, determine which clinical personnel will be
employed by the allied practices and establish their own practice standards to
promote quality plastic surgery care. We do not engage in the practice of
medicine. Each allied surgeon is responsible for the compliance of his or her
allied practice with state and local regulations, licensing and certification
requirements applicable to the practice of plastic surgery.
Employment Agreements. Each allied surgeon who is an equity holder in an
allied practice or who provides plastic surgery services through an allied
practice an average of more than ten days a month either at the time of
execution of the business services agreement or any time thereafter is required
to execute an employment agreement with the allied practice. Each employment
agreement generally provides that the allied surgeon will perform professional
services for the allied practice over a period ranging from 5 to 25 years,
commencing on the date of the offering, with automatic renewal for additional
one year terms. After the expiration of the initial term, either the allied
practice or the allied surgeon may terminate the employment agreement at any
time without cause by giving ninety days' prior written notice. Each allied
surgeon's compensation will be a percentage of the net cash collected by the
allied practice after the payment of the service fee and all operating expenses
of the allied practice, with such percentage to be determined by the allied
practice. The allied surgeon agrees that upon termination or expiration of the
employment agreement, he or she will not compete for a period of two years in
the market in which the allied practice operates an office, will not solicit
former patients of the allied practice, will not solicit referrals from any
physician who referred one or more patients to the allied surgeon or the allied
practice within the two years prior to the termination, and will limit the
methods of advertising in the area in which any allied practice is located.
FINANCING PLANS
Third party financing companies will provide online financing for patients
of our allied practices and will be responsible for the approval and application
process. These companies will assume all of the risks related to financing. The
individual practice will receive a payment from these companies equal to 85% to
90% of the financed amount. These companies will not have any recourse against
the individual practices or us for any unpaid balances. Application and approval
procedures will be instituted by these companies and terms of payment will vary
based on the creditworthiness of the patient. Our employees located at the
allied practice will bill patients for services.
POSSIBLE SOURCES OF FUTURE REVENUES
After the closing of the offering, we also intend to enter into "management
services agreements," rather than "business services agreements," with select
plastic surgery practices. Pursuant to management services agreements, we will
provide business development services and Internet solutions and receive service
fees. The expenses we expect to incur under the management services agreements
will be substantially the same as the expenses we expect to incur under the
business services agreements. We will recognize revenues from these agreements
based on a percentage of the net cash collected by the allied practice which is
commensurate with the level and timing of services being provided. We will not
acquire operating assets of allied practices entering into management services
agreements, and we will not assume the operating expenses of these practices.
Because we will not assume the operating expenses of the practices entering into
management services agreements, we will not record the operating expenses as
revenue or expense in our income statement.
We will list on Idealme.com cosmetic surgeons who are not allied with us
and are located in areas where we are not affiliated with an allied practice.
After a few months, we will contact these surgeons to determine whether they
want to continue to be listed in our directory. If so, we intend to enter into
subscription agreements with these surgeons to allow them to continue to be
included in the directory of Board certified or Board eligible cosmetic surgeons
on Idealme.com. These subscribing surgeons listed on our website directory will
be listed for the convenience of potential consumers located in areas where we
are not affiliated with an allied practice. We will not investigate the
qualifications of the surgeons who subscribe for this service. Our website will
advise consumers to independently investigate each surgeon's qualifications.
Subscribing surgeons will pay us a fee for the directory listing which we will
recognize as revenue as it is earned. We may generate future revenues from the
sale of products and services through our proprietary websites. The revenue
23
<PAGE> 28
generated may include fees from banner and sponsorship advertising,
subscriptions to our online magazine and video imaging.
RESULTS OF OPERATIONS
We have not conducted any significant operations or earned any operating
revenue to date. We will not earn any revenues until we acquire the founding
practices.
From inception through June 30, 1999, we incurred start-up costs of
approximately $7.8 million, consisting primarily of operating expenses such as
salaries, consulting fees, rent and professional fees. The cumulative cash
outlay for our start-up expenses was approximately $2.2 million from inception
(April 30, 1997) to June 30, 1999.
For the period from inception (April 30, 1997) to December 31, 1997, the
year ended December 31, 1997 and the six months ended June 30, 1998 and 1999,
salaries, wages and benefits included salaries for all of our employees,
compensation expense related to the issuance of equity securities and related
employee benefits. For the period from inception to December 31, 1997, we
incurred approximately $1.2 million in compensation expense related to warrants
and stock that we issued to employees and non employees. For the year ended
December 31, 1998, we incurred approximately $788,000 in compensation expense in
connection with our issuance of stock to employees and non employees. For the
six months ended June 30, 1999, we incurred approximately $1.1 million in
compensation expense in connection with the issuance of warrants to employees
and nonemployees. The remaining salaries, wages and benefits differs between the
period from inception (April 30, 1997) to December 31, 1997, the year ended
December 31, 1998 and between the six months ended June 30, 1998 and 1999, due
to the addition of several senior management members in 1998 and 1999.
General and administrative expenses primarily include professional fees,
office expenses and accrued relocation expenses. Professional fees have
increased since inception. Additionally, in 1998, we accrued approximately
$175,000 for relocation expenses for lease obligations that we cancelled upon
our corporate relocation to Santa Barbara, California.
Other income is from investments in money market funds of our proceeds from
the sale of our common stock. This income differs among periods primarily due to
the amount of cash invested.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our start-up costs primarily through
private sales of our securities. If the acquisitions of the founding practices
had occurred on June 30, 1999, we would have had a pro forma working capital
deficit of approximately $15.9 million, including the accrual of $12.4 million
for cash payable to the founding practices. We will require capital for the
following purposes:
- to fund the cash portion of the acquisitions of the founding practices of
approximately $12.4 million;
- to pay accrued salaries and consulting fees of our employees or
consultants of approximately $1.4 million;
- to repay indebtedness of the founding practices of approximately
$485,000;
- to pay amounts owed to allied practices pursuant to notes issued in the
acquisitions of the founding practices;
- to pay, if necessary, operating expenses;
- to form additional affiliations with plastic surgery practices;
- to pay costs associated with the development and maintenance of our
websites;
- to fund corporate costs for providing business services; and
- to pay certain costs related to the development of satellite offices and
related services for allied practices, including site selection and
marketing research and support.
24
<PAGE> 29
The notes issued in the acquisitions of the founding practices bear
interest at 8% per annum and provide for equal monthly payments of principal and
interest over the five year term of the note.
Each business services agreement obligates us, with no limitation, to pay
the operating expenses of an allied practice. These operating expenses will be
paid out of individual practice cash accounts that we control. To the extent a
practice's operating expenses exceed its revenues, we will be required to pay
any excess expense but the allied practice will be obligated to repay this
amount to us with interest. We will record this amount as a receivable from the
practice bearing interest at the prime rate as published in The Wall Street
Journal plus one percent. The allied practice will be required to repay any
receivable to us out of its future revenues. This receivable will be repaid
after the payment of the service fee and before the allied surgeon receives any
compensation. There is no defined payment date related to this receivable. We
intend to fund these excess operating expenses from working capital or
borrowings under a credit facility, which we anticipate establishing following
the closing of the offering. Since approximately 75% of the procedures performed
by our allied surgeons are cosmetic with fees generally paid no later than the
time the procedure is performed, we believe that our requirement to finance the
excess operating expenses of the allied practices can be funded through our
working capital. In addition, our allied practices must pay our service fees and
their operating expenses before the surgeons receive any funds from the
practice. We do not believe that a lag in collections of patient receivables
would occur or if occurred would significantly affect our liquidity.
We believe that the net proceeds of the offering, expected cash flow from
operations and anticipated borrowings under a credit facility we expect to be
established after the offering will be sufficient to fund our ongoing operations
and our planned capital needs for the next 12 months. However, if the capital
sources above are insufficient to satisfy our liquidity requirements, we may
need to sell additional equity or debt securities or increase our anticipated
credit facility. To the extent we are unable to obtain a credit facility after
the offering, we may not be able to fully implement our acquisition program.
INTEREST RATE RISK
We do not trade in derivative financial instruments nor do we engage in any
commodity trading activities. Our exposure to interest rates relates primarily
to our investments of cash and cash equivalents. We invest cash and cash
equivalents in financial instruments with original maturities of three months or
less. These investments are denominated in U.S. dollars. Any interest earned on
these investments is recorded as interest income in the statements of
operations. Because of the short maturity of our investments, a near term change
in interest rates would not materially affect our financial position, results of
operations or cash flows.
IMPACT OF YEAR 2000
Many computer systems and software products are coded to accept only
two-digit entries in date code fields. Beginning in the year 2000, these date
code fields will need to distinguish 21st century dates from 20th century dates.
As a result, computer systems and software used by many companies may need to be
upgraded to comply with "Year 2000" requirements. Although we believe that our
software is Year 2000 compliant, we may discover coding errors or other defects
in the future. We have appointed a Year 2000 task force to assess the scope of
our risks and bring our applications into compliance. This task force is
undertaking its assessment of our compliance and recently began testing our
corporate business and information systems. To date, we have discovered few
problems during our Year 2000 testing, and we have fixed those identified in our
day to day operating environment. We intend to complete the compliance testing
in September 1999. To date, we have incurred minimal expenses related to Year
2000 compliance and expect to incur immaterial expenses in 1999 related to Year
2000 compliance. We have not adopted a contingency plan to address possible
risks to our systems.
We rely on a number of software programs and systems provided by third
parties, any of which could contain coding which is not Year 2000 compliant.
These systems include server software to operate the network servers, software
controlled routers, switches and other components of the data network, firewall,
security, monitoring and back-up software used by us, as well as desktop PC
applications software. In each case, we employ widely available software
applications from leading third-party vendors and expect that these
25
<PAGE> 30
vendors will provide any required upgrades or modifications in a timely fashion.
However, if any third party software suppliers fail to provide Year 2000
compliant versions of the software, our operations could be disrupted.
Year 2000 compliance problems also could undermine the general
infrastructure necessary to support our operations. For instance, we depend on
third-party Internet service providers or hosting centers to provide connections
to the Internet and to customer information systems. Any interruption of service
from these Internet service providers or hosting centers could result in a
temporary interruption of our services. Any interruption in the security,
access, monitoring or power systems at the Internet service providers or hosting
centers could result in an interruption of services. Moreover, it is difficult
to predict what effects Year 2000 compliance problems will have on the integrity
and stability of the Internet. If businesses and consumers are not able to
reliably access the Internet, the demand for our Internet solutions could
decline, resulting in an adverse impact to our business, financial condition and
results of operations.
26
<PAGE> 31
BUSINESS
At the closing of this offering, we will provide business development
services and Internet solutions to our alliance of 36 Board certified or Board
eligible plastic surgeons and one surgeon certified by the Canadian Board of
Plastic Surgery located in 22 metropolitan markets throughout the United States.
Our consumer website, Idealme.com, allows consumers to research available
procedures, submit inquiries regarding cosmetic surgery procedures, view
possible cosmetic changes through online imaging technology, obtain financing
for procedures and locate Board certified plastic surgeons. We expect our
consumer website to increase the number of procedures performed by our allied
surgeons. We provide our web-based services free of charge to consumers, except
for a fee for online imaging. Our surgeon website, ThePlasticSurgeryCo.com, will
provide allied surgeons online access to our national buying program and
facilitate "best practices" study groups among our allied surgeons. Our business
development services include the implementation of strategic business plans,
practice-specific programs, patient financing plans, patient education
strategies and materials and related services and products. We believe that we
will generate substantially all of our future revenues from service fees paid by
each practice under our business services agreements which generally provide for
us to receive 15% of the net cash collected by the practice. We were
incorporated in April 1997 and have not conducted any significant operations to
date.
BACKGROUND
The market for plastic surgery, which includes both cosmetic and
reconstructive procedures, exceeds $15 billion per year according to Form and
Figure magazine. The market for cosmetic surgery procedures has grown rapidly
over the last several years. From 1992 to 1998, facelifts, liposuction and
breast augmentations have increased approximately 75%, 260% and 300%,
respectively. During this period, the Internet has emerged as a global
communications medium, enabling millions of people worldwide to communicate,
share information and conduct business electronically. According to
International Data Corporation, the number of Internet users worldwide will grow
from an estimated 97 million in 1998 to an estimated 319 million by 2002. We
believe that cosmetic plastic surgeons can use the Internet to improve quality
of patient education and increase practice efficiency.
Plastic Surgery Trends
Cosmetic surgery procedures reshape normal anatomical features to improve
the patient's appearance and self-esteem. These procedures include elective
aesthetic procedures such as facelifts, liposuction and breast augmentations. We
estimate that cosmetic surgery constitutes approximately $10 billion of the
plastic surgery industry and remains 100% private pay without government
reimbursement pressures. In contrast, reconstructive surgery procedures reshape
abnormal anatomical features caused by congenital defects, developmental
abnormalities, trauma, infection or disease, usually to improve function but
also to approximate normal appearance. We believe that revenue from
reconstructive procedures constitutes approximately 30%, or $5 billion, of the
industry and is primarily reimbursed by third party payors.
The primary market for cosmetic surgery procedures is women aged 19 to 50.
In 1997, nearly 85% of all cosmetic surgery procedures performed were for women
and approximately 70% were for adults aged 50 and under. Recent trends indicate
men are having more cosmetic surgery procedures, as evidenced by male
liposuction and facelift procedures tripling and doubling, respectively, since
1992. Approximately 2.8 million cosmetic surgery procedures were performed in
1998, according to a survey by the American Society of Aesthetic Plastic
Surgery. The market for cosmetic surgery procedures has grown rapidly over the
last several years, and we expect this market to continue to grow as a result of
various factors, including:
- aging of the baby boomer generation;
- increasing media attention to and cultural acceptance of cosmetic
surgery;
- continuing improvements in technology resulting in less invasive
procedures and shorter recovery times;
- growing awareness of available cosmetic surgery procedures through
consumer education; and
- increasing availability and access to healthcare information via the
Internet.
27
<PAGE> 32
The consumer market is served in part by approximately 5,000 Board
certified plastic surgeons in the United States. In recent years, fees for
reconstructive procedures have declined primarily due to cost containment
pressures from third party payors. As a result, many plastic surgeons have
attempted to shift the focus of their practices from reconstructive to cosmetic
surgery procedures. This has resulted in increased competition for private pay
cosmetic surgery procedures. Physicians practicing in other disciplines, such as
ophthalmologists and dermatologists, are also performing cosmetic surgery
procedures traditionally performed by plastic surgeons, such as eyelid surgery
and liposuction, to earn the higher fees associated with these procedures.
Consequently, plastic surgeons are attempting to emphasize the importance of
having plastic surgery procedures performed by Board certified plastic surgeons.
Internet-Based Healthcare Information Trends
The Internet is a comprehensive and inexpensive information source that has
dramatically improved information flow, enhanced communications and increased
business opportunities for healthcare providers. Cyber Dialogue, an on-line
survey company, estimates that 17 million adults in the U.S. searched online for
health information in 1998, an increase of 119% from July 1996, and that
approximately 50% of these individuals made purchases after seeking information
on the Internet. According to Cyber Dialogue, these users are better educated,
have higher household incomes and are most often female. The growing interest in
cosmetic surgery is creating increased demand for reliable, easy access to
cosmetic surgery information. Cosmetic surgery is an elective, private pay niche
that benefits by direct to consumer information. Consumers of cosmetic surgery
procedures are more involved than average healthcare consumers in choosing which
procedures are performed, the results they wish to achieve and the surgeons they
believe are most qualified to perform the procedure. In addition, the Internet
provides cosmetic surgery consumers privacy in researching their choices.
OUR SOLUTION
Our business development services and Internet solutions are designed to
increase the number of procedures performed by our allied surgeons, improve the
quality of patient education and increase practice efficiency. We have a
consumer website and are developing a surgeon website to facilitate the exchange
of information between surgeons and prospective and existing patients and the
exchange of information among surgeons, via the Internet. Content on our
consumer website, Idealme.com, is a combination of informational and interactive
pages that provide consumers with information about procedures, outcomes and
surgeon qualifications. Idealme.com allows us to influence purchase decisions at
the consumer level and leverage the clinical expertise and reputation of our
allied surgeons. Our surgeon website, ThePlasticSurgeryCo.com, will provide our
allied surgeons online access to our national buying programs and will
facilitate "best practices" study groups among our allied surgeons, while
highlighting the benefits of becoming affiliated with us.
BENEFITS TO CONSUMERS
Informs consumers about cosmetic surgery procedures and related
topics. Idealme.com contains regularly updated, comprehensive information about
cosmetic surgery procedures ranging from specific procedures to other
health-related topics such as wellness, skin care and diet. We believe the
quality of the information we provide about cosmetic surgery procedures and
related topics will help to establish our consumer website as a relevant and
trusted information source. On Idealme.com, a consumer is able to view a photo
gallery which contains several before and after pictures for each type of
procedure. Idealme.com also consolidates information on new technologies and
leading edge procedures.
Allows consumers to view possible cosmetic changes through online imaging
technology. On Idealme.com, we offer interactive, online computer imaging which
allows consumers to view possible cosmetic changes for a fee. Computer imaging
technology allows a potential consumer of cosmetic surgery procedures to submit
a digital photograph, have the image modified to reflect the potential
consumer's desired procedure and receive the modified image via e-mail. This
technology enhances the potential consumer's ability to more fully evaluate
cosmetic surgery alternatives.
Provides online financing plan application and approval. Potential
cosmetic surgery consumers can apply directly through our website for financing
of cosmetic surgery procedures through third party financing
28
<PAGE> 33
companies. A visitor to Idealme.com will be able to review options for financing
plans, access and submit online applications and receive approval, all from the
privacy of home.
Links consumers with both allied surgeons and subscribing surgeons through
our online directory. Each allied surgeon will have his own web page that may
be accessed by hyperlinks from Idealme.com. Potential consumers can enter their
zip code and access a list of allied surgeons' web pages in their local market.
Subscribing surgeons are listed on our website directory for the convenience of
potential consumers located in areas where we are not affiliated with an allied
practice. Prior to linking directly to an allied surgeon's website, a consumer
is able to view a short video introducing the allied surgeon, the surgeon's
patient coordinator, and the services provided by the surgeon. An allied
surgeon's website also highlights the surgeon's clinical expertise and cosmetic
procedure focus and gives information regarding any upcoming seminars offered by
the allied surgeon. Idealme.com also allows potential consumers to research the
background, credentials and professional qualifications of the surgeons listed
in the surgeon directory through hyperlinks to the websites of the American
Medical Association, the Administrators in Medicine and the American Board of
Medical Specialities.
Offers our online magazines, health and beauty products and related
magazines and books. We intend to reinforce our brand awareness through our
online magazine. This magazine will present various articles on cosmetic surgery
procedures and the latest technological developments and techniques. Our
articles will address key topics affecting the cosmetic surgery industry such as
the critical nature of choosing a Board certified plastic surgeon to perform
cosmetic surgery procedures. A consumer visiting Idealme.com may register for a
subscription to the Cosmetic Surgery Online Magazine and will be able to
purchase health and beauty products and related magazines. Our online magazine
will be produced quarterly and e-mailed to subscribers, and archived editions
will be stored and available on the website. We also intend to partner with
recognizable health and beauty product companies to provide related products
through our website. Through these partnerships, informational and clinical
products, such as skin care products, will be available for purchase through our
website.
BENEFITS TO SURGEONS
Will offer access to our national buying programs. Our network of allied
surgeons gives us collective buying power to negotiate favorable terms with key
suppliers and vendors. Our national buying program includes our negotiated
pricing discounts and quantities and types of products available. Allied
surgeons can choose, through our surgeon website, the products and services that
we can provide at a lower cost due to our collective buying power. We also
intend to negotiate favorable prices and terms with manufacturers and
distributors of equipment and technology such as lasers and photographic imaging
and ultrasonic liposuction machines.
Will facilitate "best practices" knowledge sharing and provide an online
forum for allied surgeons. By creating an alliance of plastic surgeons with
shared strategic and economic goals, we believe we can create an environment in
which each allied surgeon will share his "best practices" with other allied
surgeons to increase the overall success of the alliance. We will assist in the
sharing of this knowledge by researching and documenting methods and programs in
the most successful allied practices and by condensing and customizing the most
effective strategies into transferable templates to be implemented by other
allied practices. Only allied surgeons will be able to access these "best
practices" through our surgeon website, newsletters and quarterly allied surgeon
educational meetings. ThePlasticSurgeryCo.com will also provide an online forum,
for sharing the latest clinical techniques, specialized procedures that
affiliates have developed, questions and answers on clinical challenges and
comments on experiences with the latest equipment and instruments.
Will describe our business to potential allied surgeons and highlight
career opportunities with allied practices. Through ThePlasticSurgeryCo.com,
plastic surgeons will have access to information outlining the benefits of an
alliance with us and career opportunities for association with our allied
surgeons. The description of our business is designed to attract potential
allied surgeons and to assist us in the recruiting process. This information
will include testimonials from allied surgeons who have had success with our
various programs, links to Idealme.com and the opportunity to post questions and
receive an e-mail response from us and our
29
<PAGE> 34
allied surgeons. Our career placement information will include the practice
location, a description of the position and a profile of the allied surgeon and
practice.
Will profile each practice and its surgeons for inclusion on our
websites. We will collect information on each allied surgeon in order to
complete our standard template webpage. The template webpage will include items
such as credentials, specialized procedures, available related services and
representative before and after pictures. We will also highlight the staff and
the facility and provide a streaming video introducing the surgeon and the
patient coordinator. Each allied surgeon will have this template webpage as part
of Idealme.com. From these webpages, a consumer may either e-mail the surgeon
for an appointment or link directly to the various custom pages that our allied
surgeons have established.
Institutes patient financing plans. Elective cosmetic surgery is not
covered by third party payors and is not affordable for much of the potential
market. By instituting patient financing plans through third party financing
companies, we can assist our allied surgeons in providing cosmetic services to a
segment of the population that would not otherwise be able to afford cosmetic
surgery procedures. Patient financing plans increase consumer access to cosmetic
surgery procedures and allow allied surgeons to reach an expanded audience,
thereby increasing the overall potential patient population.
Implements practice-specific consumer awareness programs. Cosmetic surgery
remains a 100% private pay, retail oriented business. As such, reaching the
market with consumer awareness programs is key to growing a successful plastic
surgery practice. We assist our allied surgeons in developing consumer awareness
programs specific to each allied practice, which incorporate our website
capabilities, market demographics, various media vehicles such as seminars,
newspaper ads, direct mailings and radio, and available cosmetic surgery
procedures and related services.
Designates and trains patient coordinators and develops patient education
programs and materials. Generally, there is little consistency in the patient
management process in plastic surgery practices resulting in inefficient patient
flow and inhibiting effective patient education and counseling. In an effort to
maximize efficiency we assist our allied surgeons in designating and training
the appropriate person as a patient coordinator. The patient coordinator will
manage the initial patient consultation and educate the patient to increase the
patient's awareness of the various cosmetic surgery procedures. We intend to
create and develop patient education program manuals and materials for the
allied surgeons to complement the efforts of the patient coordinator, which will
also be available through ThePlasticSurgeryCo.com. The primary objective of the
patient education process will be to fully inform patients about their chosen
procedures, raise the patient's awareness of alternative or complementary
procedures or services and educate the patient about the allied surgeon's
background and clinical expertise. We believe that a better educated patient
will increase a practice's conversion rate and sales of related services, is
more likely to elect to have a procedure performed and is more likely to be
satisfied with the outcome and become a referral source for the surgeon.
OUR STRATEGY
Our goal is to use our business development services and our consumer and
surgeon websites to affiliate with a large number of plastic surgeons and
improve their practices. To achieve this goal, we intend to:
Provide high quality business development services to our allied
surgeons. We will target Board certified and Board eligible surgeons and will
align with these surgeons through acquisitions or the establishment of a
management relationship. We have a dedicated development team that seeks to
identify surgeons who maintain a reputation for high quality care within their
community and peer group, are located in attractive metropolitan markets and
provide an opportunity for increased revenue growth. We believe Idealme.com and
ThePlasticSurgeryCo.com will also generate interest in and demand for our
business development and other services from Board certified and Board eligible
cosmetic surgeons.
Increase consumer and surgeon awareness of our websites. We intend to
increase awareness of our websites by advertising in various media such as
magazines and other print media. We believe that increasing awareness of our
websites is critical to attract new consumers and surgeons, raise awareness of
available cosmetic surgery procedures and increase the number of cosmetic
surgery procedures performed by our allied surgeons.
30
<PAGE> 35
Analyze each practice's operations and develop a strategic plan for the
practice. After a plastic surgeon aligns with us, we conduct an in depth
analysis of his practice's operations. We review existing consumer awareness
programs, revenues by cosmetic and reconstructive procedures, procurement
programs, information systems and patient flow. We then develop a strategic plan
for the practice for streamlining operations and improving consumer awareness
programs.
Attract consumer inquiries regarding cosmetic surgery information and
services. The Internet is increasingly the medium of choice for people seeking
healthcare information, and we believe that Idealme.com will position us to
attract consumer inquiries regarding cosmetic surgery procedures. We intend to
build a network of websites from our library of plastic surgery related
proprietary domain names in order to capture a broader number of plastic surgery
inquiries and information searches. Each website will have its own set of
relevant keywords intended to be within a broad topic inquiry search in plastic
surgery, ranging from procedures and products to services.
Continue to improve and enhance our services. We intend to assist our
allied surgeons in introducing new or additional services such as hair removal
and skin care. We expect these services to serve as a cross-selling opportunity
for our allied surgeons. We also intend to continue to develop programs to
enable our allied surgeons to increase the profitability of their practices. We
intend to update and expand the content on our consumer and surgeon websites and
implement new technologies to enhance the quality of services we provide for
surgeons and consumers.
THE FOUNDING ALLIED PRACTICES
The 30 founding allied practices include 36 Board certified or Board
eligible plastic surgeons and one surgeon certified by the Canadian Board of
Plastic Surgery operating 39 offices located in 22 metropolitan markets. The
founding practices generated combined revenue of approximately $41.6 million in
1998. Approximately 75% of the procedures performed by our allied surgeons are
cosmetic. We believe that each of the founding practices is a leading practice
in its market. We selected the founding practices based upon a variety of
factors, including:
- Board certification, licensing and good standing of allied surgeons;
- practice size, historical financial performance and potential for future
growth;
- geographic location; and
- reputation among local consumers and peers within the plastic surgery
industry.
The following table sets forth the number of surgeons and locations of our
founding allied surgeons.
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
METROPOLITAN MARKET SURGEONS OFFICES
- ------------------- --------- ---------
<S> <C> <C>
California
Los Angeles............ 3 5
San Francisco.......... 1 1
Colorado
Denver................. 5 4
Florida
Ft. Myers.............. 1 2
Orlando................ 2 2
Miami.................. 1 2
Georgia
Atlanta................ 1 1
Hawaii
Honolulu............... 1 3
Kansas
Kansas City............ 1 1
Maryland
Baltimore.............. 2 2
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
METROPOLITAN MARKET SURGEONS OFFICES
- ------------------- --------- ---------
<S> <C> <C>
Maine
Portland............... 1 1
New York
New York............... 3 5
North Carolina
Raleigh................ 1 1
Ohio
Cincinnati............. 1 1
Cleveland.............. 2 1
Oklahoma
Oklahoma City.......... 1 1
Oregon
Portland............... 1 1
Pennsylvania
Philadelphia........... 4 1
Texas
Amarillo............... 1 1
Austin................. 2 1
Houston................ 1 1
Virginia
Virginia Beach......... 1 1
---- ---
37 39
==== ===
</TABLE>
31
<PAGE> 36
OPERATIONS
We will make available support and services to the allied practices,
including administrative and back office functions, purchasing, marketing,
training and patient education programs. We intend to offer to the allied
surgeons a variety of operating procedures and systems designed to improve the
productivity and increase the revenue of each allied practice and to achieve
economies of scale, such as:
- national group purchasing contracts for medical and office supplies and
equipment, implants and pharmaceuticals;
- centralized payroll processing and employee benefits packages;
- appropriate credit and collection policies to accommodate specific needs
of the target market of each allied practice;
- patient flow and work flow enhancements from physical improvements in
design of facilities to increase the number of patients seen and the
productivity of the allied surgeons; and
- promotional programs to include newsletters, direct mail, seminars and
patient financing to expand the allied surgeon's patient base.
We intend to institute operating efficiencies and economies on a per market
or per allied practice basis after thorough analysis, including review of work
flow, patient flow, aged accounts receivable history, facilities, employee work
load and productivity, and employee and patient satisfaction.
GOVERNMENT REGULATION
Overview. The health care industry is highly regulated, and there can be
no assurance that the regulatory environment in which we operate will not change
significantly and adversely in the future. In general, regulation of health care
providers and companies is increasing.
Every state imposes licensing requirements on medical doctors and on their
facilities and services. In addition, many states require regulatory approval,
including certificates of need, before establishing certain types of health care
facilities, offering certain services or making expenditures in excess of
statutory thresholds for health care equipment, facilities, or programs. The
execution of a business services agreement with an allied practice currently
does not require any health care regulatory approval on our part or on the part
of the allied practice. However, in connection with the expansion of existing
operations and the entry into new markets, we and our allied practices may
become subject to additional regulation.
Health Care Regulations. Federal and state laws regulate the health care
industry, the relationships between practice management companies such as us and
physicians, and the relationships among physicians and other providers of health
care services.
Corporate Practice of Medicine. The laws of many states prohibit
corporations and other entities that are not owned entirely by medical doctors
from employing medical doctors, having control over clinical decisions, or
engaging in other activities deemed to constitute the practice of medicine. We
will contract with professional associations, which will be owned by one or more
medical doctors and which in turn will employ or contract with physicians and
other health care providers to provide professional services. We will perform
only non-professional services, will not represent to the public that we provide
medical services, and will not exercise influence or control over the practices
of the medical doctors employed by the professional associations. The business
services agreements and consulting agreements specifically provide that all
decisions required by law to be made by licensed physicians or other licensed
professionals shall be made by those individuals. While certain shareholders of
managed professional corporations that practice medicine may also be involved in
company management, they act independently when making decisions on behalf of
their professional corporations and we will have no right, and will not attempt
to exercise any right, to control those decisions.
32
<PAGE> 37
Fee-Splitting and Anti-kickback Laws
State Law. Many states prohibit "fee-splitting" by physicians with any
party except other physicians in the same professional practice association. In
most cases, these laws have been construed as applying to the payment of a
portion of a fee to another person for referring a patient or otherwise
generating business and not to prohibit payment of reasonable compensation for
facilities and services, other than the generation of referrals, even if the
payment is based on a percentage of the practice's revenues. In addition, most
states have laws prohibiting the payment or receipt of any remuneration that is
intended to induce referrals for health care products or services. For example,
the Florida fee-splitting law prohibits the payment or receipt of any
commission, bonus, kickback, or rebate, or engaging in any split-fee arrangement
in any form for patient referrals to providers of goods or services. According
to a Florida court of appeals decision interpreting this law, it does not
prohibit a management fee that is based on a percentage of gross income of a
professional practice if the manager does not refer patients to the practice.
Other states, such as New York, have fee-splitting statutes that have been
interpreted to prohibit any compensation arrangement that is based on a
percentage of physicians' revenue.
Federal Law. The fraud and abuse provisions of the Medicare and Medicaid
statutes prohibit the payment or receipt of any remuneration in return for the
referral of patients covered by federally funded health care programs such as
Medicare and Medicaid, or in return for purchasing, leasing, ordering, or
arranging for the purchase, lease or order of any product or service that is
covered by such programs, and impose significant penalties for false or improper
billings under such programs. In addition, under legislation known as the "Stark
Bill," physicians' referrals for certain designated health services to entities
with which they have a financial relationship are prohibited unless certain
exceptions apply. Violations of these laws may result in substantial civil or
criminal penalties, including exclusion from participation in the Medicare and
Medicaid programs, or recoveries of prior payment.
The several laws described above have civil and criminal penalties and have
been subject to judicial and regulatory interpretation. They are enforced by
regulatory agencies vested with broad discretion in interpreting them. Our
agreements and proposed activities have not been examined by federal or state
authorities under these laws and regulations. Currently, we are not a separate
provider of Medicare or state health program reimbursed services. Although we
believe that our operations and those of our allied practices will be conducted
so as to comply with all of the foregoing laws, there can be no assurance that
these operations will not be successfully challenged as violative of one or more
such laws. In addition, these laws and their interpretation vary from state to
state. The regulatory framework of certain jurisdictions may limit our expansion
into, or ability to continue operations within, such jurisdictions if we are
unable to modify our operational structure to conform with such regulatory
framework. Any limitation on our ability to expand could have an adverse effect
on us. See "Risk Factors -- Government regulation may detrimentally affect us
and reduce our services fees and earnings."
Impact of Healthcare Reform. The United States Congress has considered
various healthcare reform proposals, including comprehensive revisions to the
current healthcare system. It is uncertain what legislative proposals will be
adopted in the future or what actions federal or state legislatures or
third-party payors may take in anticipation of or in response to any healthcare
reform proposals or legislation. Changes in the healthcare industry, such as the
growth of managed care organizations or provider networks, may result in lower
payment levels for the services of the allied surgeons and lower revenues for
us.
Internet Regulation. There are an increasing number of laws and
regulations pertaining to the Internet. In addition, a number of legislative and
regulatory proposals are under consideration by federal, state, local and
foreign governments and agencies. Laws or regulations may be adopted with
respect to the Internet relating to liability for information retrieved from or
transmitted over the Internet, online content regulation, visitor privacy,
taxation and quality of products and services. Moreover, the applicability to
the Internet of existing laws governing issues such as intellectual property
ownership and infringement, copyright, trademark, trade secret, obscenity,
libel, employment and personal privacy is uncertain and developing. Any new
legislation or regulation, or the application or interpretation of existing laws
may have an adverse effect on our Internet business. In addition to Internet
regulation, our websites may be subject to numerous state and
33
<PAGE> 38
federal laws that govern the delivery of healthcare services and goods in the
United States. These laws range from laws prohibiting the offer, payment or
receipt of remuneration to induce referrals to entities providing healthcare
services and goods to licensure requirements as well as special protection for
healthcare data. These laws are complex and are under constant revision and
interpretation. These laws and their active enforcement, particularly in the
areas of healthcare fraud, affect the way all healthcare providers structure
their business relationships and deliver healthcare services and goods. New
developments in this area could affect the structure and operation of our
Internet business. In the event some state or federal regulatory agency
determined that our relationship with one or more of our advertisers that
deliver healthcare services or goods violate any such laws, then we could be
subjected to fines and other costs and could be required to revise or terminate
that portion of our business.
Liability for Information Retrieved from Our Websites and from the
Internet. Content may be accessed on our websites and this content may be
downloaded by visitors and subsequently transmitted over the Internet. This
could result in claims against us based on a variety of theories, including
defamation, practicing medicine without a license, malpractice, obscenity,
negligence, copyright or trademark infringement or other theories based on the
nature, publication and distribution of this content. Some of these types of
claims have been brought, sometimes successfully, against providers of Internet
services in the past. In addition, we may be subject to claims alleging that, by
directly or indirectly providing links to other websites, we are liable for
copyright or trademark infringement or the wrongful actions of third parties
through their respective websites. Any claims brought against us in this respect
may have a material and adverse effect on our business.
Domain Names. Domain names are Internet "addresses." The current system
for registering, allocating and managing domain names has been the subject of
litigation, including trademark litigation, and of proposed regulatory reform.
We have registered Idealme.com, ThePlasticSurgeryCo.com and approximately 25
additional domain names. There can be no assurance that our domain names will
not lose their value, or that we will not have to obtain entirely new domain
names in addition to or in lieu of our current domain names if reform efforts
result in a restructuring of the current system.
Jurisdiction. Due to the global nature of the Internet, it is possible
that, although transmissions by us over the Internet originate primarily in the
United States, the governments of states and foreign countries might attempt to
regulate our transmissions or prosecute us for violations of their laws. These
laws may be modified, or new laws enacted, in the future. Any of the foregoing
developments could have a material adverse effect on our business, results of
operations and financial condition. In addition, as our service is available
over the Internet in multiple states and foreign countries, these jurisdictions
may claim that we are required to qualify to do business as a foreign
corporation in each state or foreign country. We have not qualified to do
business as a foreign corporation in every jurisdiction. Our failure to qualify
as a foreign corporation in a jurisdiction where we are required to do so could
subject us to taxes and penalties and could result in our inability to enforce
contracts in such jurisdictions. Any new legislation or regulation, the
application of laws and regulations from jurisdictions whose laws do not
currently apply to our business, or the application of existing laws and
regulations to the Internet and other online services could have a material
adverse effect on our business, financial condition, and results of operations.
COMPETITION
There are several companies that affiliate with physicians in the area of
plastic surgery, and we realize that additional entities may enter this market.
We intend to capitalize on the reputations and relationships of the founding
practices and their allied surgeons to assist us in affiliating with additional
plastic surgery practices. Based on our preliminary review and analysis of, and
discussions with, the founding practices, we believe that our emphasis on high
quality patient care and our business, marketing, technological and practice-
growth support systems will encourage plastic surgeons to affiliate with us.
The business of providing plastic surgery services is highly competitive in
each market in which the allied surgeons operate. Allied surgeons compete with
plastic surgeons that maintain single offices or operate a single satellite
office, as well as with plastic surgeons that maintain group practices or
operate in multiple offices. Allied surgeons also compete with general surgeons
and dermatologists and ophthalmologists who provide
34
<PAGE> 39
certain plastic surgery services. The provision of plastic surgery services by
such general practitioners and dermatologists has increased in recent years. We
believe that with the operations and growth strategies outlined above, the
allied surgeons will continue to be leaders in their respective markets.
We are aware of several entities that provide healthcare information
through the Internet. These entities will compete with our efforts to provide
relevant healthcare information to the Internet consumer and establish brand
loyalty to their websites. All of these companies compete with us for visitor
traffic. We expect competition to continue to increase as there are no
substantial barriers to entry in our market. Increased competition could result
in reductions in fees we receive for subscription services, reduced visitor
traffic to our website, or loss of market share. Any of these occurrences could
materially and adversely affect our business, financial condition and results of
operations. Competition is also likely to increase significantly, not only as
new entities enter the market, but also as current competitors expand their
services. Our principal competitors in the Internet sector of our business are
Onhealth, HealthOasis, Intelihealth, iVillage, Thrive Online, Mediconsult and
WebMD.
SEASONALITY
The allied practices typically experience a significant decrease in demand
for and revenue from cosmetic surgery procedures during July and August.
EMPLOYEES
As of September 10, 1999, we had 8 employees. Upon completion of the
acquisitions of the founding practices, we will employ an aggregate of
approximately 165 full-time and approximately 100 part-time employees. None of
our employees are covered by a collective bargaining agreement. We consider our
relationship with our employees to be good.
INTELLECTUAL PROPERTY
We have not applied for federal registration of the service mark "The
Plastic Surgery Company." We intend to use this name in our marketing and
advertising campaigns in order to associate the name The Plastic Surgery Company
with a reputation for nationwide quality plastic surgery care.
LITIGATION AND INSURANCE
We are not a party to any pending litigation that if adversely determined
would have a material adverse effect on our operations. Many of the founding
practices have pending litigation arising in the ordinary course of business.
Each allied surgeon must disclose all pending material litigation relating to
his practice in his acquisition agreement. In a stock purchase or merger
transaction, we will assume the liabilities of the practice prior to the
transaction relating to litigation. We intend to vigorously defend any and all
litigation. We maintain general liability insurance for us and on behalf of our
allied practices. We believe that, where permitted by applicable law and
insurers, we will be named as an additional insured under the policies of the
allied practices. The allied surgeons maintain professional liability insurance
covering the delivery of health services. Also, we are indemnified under the
business services agreements for liabilities we incur as a result of the
performance of medical services by allied surgeons. Successful malpractice
claims against allied practices could have an adverse effect on our
profitability. While we believe we have adequate liability insurance coverage,
there can be no assurance that a pending or future claim or claims will not be
successful or, if successful, will not exceed the limits of available insurance
coverage. There can also be no assurance that coverage will continue to be
available at acceptable costs and on favorable terms.
FACILITIES
We lease approximately 2,900 square feet of office space in Santa Barbara,
California for our headquarters and approximately 2,600 square feet of office
space in Atlanta, Georgia.
35
<PAGE> 40
MANAGEMENT
The following table sets forth the age and position of each of our
executive officers and directors:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Jonathan E. Wilfong........................ 50 Chairman of the Board
Dennis E. Condon(1)........................ 50 President, Chief Executive Officer and
Director
Gunnar Sundstrom........................... 53 Chief Financial Officer
David H. Challoner......................... 39 Chief Development Officer
Patricia A. Altavilla...................... 41 Executive Vice President of Marketing and
Business Planning
Robert A. Ersek, M.D., F.A.C.S.(1)......... 60 Director
Richard A. Mladick, M.D., F.A.C.S.(1)...... 64 Director
John C. Schantz, M.D., F.A.C.S.(1)......... 56 Director
W. Grant Stevens, M.D., F.A.C.S.(1)........ 45 Director
Mark A. Kaiser(1).......................... 41 Director
</TABLE>
- ---------------
(1) Agreed to serve as directors upon the closing of the offering.
EXECUTIVE OFFICERS AND DIRECTORS
Jonathan E. Wilfong, Chairman of the Board. Mr. Wilfong is our founder and
served as our Chief Executive Officer until June 1998, and has served as
Chairman of the Board of Directors since 1997. From June 1996 to May 1997, Mr.
Wilfong served as a consultant for OrthAlliance, Inc., a public company which
provides business development services to orthodontic practices, and from May
1997 to May 1999 he served as Chairman of the Board of OrthAlliance, Inc. and
continues to serve as a director. In 1996, Mr. Wilfong founded Newfound Capital
Associates, an investment banking advisory firm. Mr. Wilfong is a Certified
Public Accountant, and from 1983 to 1996 was a partner with Price Waterhouse LLP
in Atlanta, Georgia and Greenville, South Carolina where he worked primarily
with high growth companies.
Dennis E. Condon, President, Chief Executive Officer and Director. Mr.
Condon has served as our President and Chief Executive Officer since June 1998
and will be appointed a director immediately upon the closing of the offering.
From 1984 until joining us, Mr. Condon was employed by Mentor Corporation, an
international supplier of medical products and technology, serving from 1991 to
1998 as President of the Mentor's medical device division specializing in
aesthetic surgery implants and electromechanical medical instrumentation.
Gunnar Sundstrom, Chief Financial Officer. Mr. Sundstrom has served as
Chief Financial Officer since May 1999. From 1992 to 1999, Mr. Sundstrom was
employed by Mentor's medical device division, serving as Vice President and
Controller since 1996.
David H. Challoner, Chief Development Officer. Mr. Challoner joined us as
Chief Development Officer in October 1997. From August 1994 to September 1997,
Mr. Challoner directed the start-up of Rejuve, Inc., a cosmetic laser center
company, and served as its Chief Development Officer. From 1993 to 1994, Mr.
Challoner founded and was President of Ocupro, Inc., an ophthalmology practice
management company. In December 1994, Ocupro merged with Equivision, Inc.
(subsequently Equimed, Inc.) and Mr. Challoner served in a development capacity
for Equimed, Inc., until July 1996.
Patricia A. Altavilla, Executive Vice President of Marketing and Business
Planning. Ms. Altavilla has served as our Vice President of Marketing and
Business Planning since August 1998. From 1984 to 1998, Ms. Altavilla was
employed by Mentor, serving as Vice President of Marketing since 1993.
Robert A. Ersek, M.D., F.A.C.S., Director. Dr. Ersek has agreed to serve
as and will be appointed a director immediately upon the closing of the
offering. Dr. Ersek has been practicing plastic surgery in Austin,
36
<PAGE> 41
Texas since 1978. In 1996, he formed Personique, Inc., a company focusing on
patient orientation procedures. Dr. Ersek is the former President of both the
Austin Plastic Surgery Society and the Lipoplasty Society of Board Certified
Plastic Surgeons of North America. Since 1970, he has served as the Medical
Director and a member of the Board of Directors of Genetic Laboratories Wound
Care, a wound care product manufacturing company, now a wholly-owned subsidiary
of Derma Science. Dr. Ersek is a member of the American Medical Association, a
fellow of the American College of Surgeons and the American Board of Plastic
Surgery, American Society of Plastic and Reconstructive Surgeons, and American
Aesthetic Surgery Society. Dr. Ersek received his M.D. in 1966 from Hahnemann
University Medical School, performed an internship and general surgery residency
at the University of Minnesota, a residency in plastic surgery at Tulane
University and a fellowship in plastic surgery at the University of Mississippi.
Richard A. Mladick, M.D., F.A.C.S., Director. Dr. Mladick has agreed to
serve as and will be appointed a director immediately upon the closing of the
offering. Dr. Mladick has been practicing plastic surgery since 1968 and founded
and serves as director of Plastic Surgery Center, Inc., a founding practice in
Virginia Beach, Virginia. Dr. Mladick is a former President of the Virginia
Society of Plastic and Reconstructive Surgeons. He received his M.D. from
Northwestern University Medical School in 1959 and completed residency in
plastic surgery from Duke University Medical Center in 1968.
John C. Schantz, M.D., F.A.C.S., Director. Dr. Schantz has agreed to serve
as and will be appointed a director immediately upon the closing of the
offering. Dr. Schantz founded Plastic Surgery Associates, P.C., a founding
practice, in Lancaster, Pennsylvania in 1978. He currently serves as the Chief
of the Division of Plastic Surgery at Lancaster General Hospital and serves on
the active staff of HealthSouth Surgery Center of Lancaster. He is a member of
the Governing Board, Department of Surgery and serves as Chairman, Surgical
Practice Council at the Lancaster General Hospital. He is a member of the
American Society of Plastic and Reconstructive Surgeons and a fellow of the
American College of Surgeons. Dr. Schantz received his M.D. in 1971 from
Hahnemann Medical College and completed his residency training at the Hershey
Medical Center, Hershey, Pennsylvania.
W. Grant Stevens, M.D., F.A.C.S., Director. Dr. Stevens has agreed to
serve as and will be appointed a director immediately upon the closing of the
offering. Dr. Stevens has served as President of W. Grant Stevens, M.D., Inc.
(d/b/a/ Plastic Surgery Associates), a founding practice in Marina Del Ray,
California, since 1988. Dr. Stevens is a Board Certified Diplomate of the
American Board of Plastic Surgery and is a member of the American Society of
Plastic and Reconstructive Surgeons, The American Society of Aesthetic Plastic
Surgery, the California Society of Plastic Surgeons, as well as several other
professional societies. Dr. Stevens is also on the clinical faculty at U.C.L.A.
Dr. Stevens served as Chairman of the Department of Surgery and was on the
Medical Executive Committee at Daniel Freeman Marina Hospital from 1989 through
1996. Dr. Stevens is an editorial advisory board member of Cosmetic Surgery
Times, Plastic Surgery Products, and Wounds: A Compendium of Current Research
and Practice. Dr. Stevens received his M.D. with honors in 1980 from the
Washington University School of Medicine in St. Louis, Missouri, where he also
completed his plastic surgery training. Dr. Stevens also received the Special
Congressional Certificate of Recognition and the Distinguished Service Citation
from the Medical Board of California.
Mark A. Kaiser, Director. Mr. Kaiser has agreed to serve as and will be
appointed a director immediately upon the closing of the offering. Mr. Kaiser is
Chairman of the Board and Chief Executive Officer of Caredata.com, Inc., a
healthcare Internet content company. Prior to joining Caredata.com in 1991, Mr.
Kaiser was Vice President of Sales and Marketing for Charter Medical
Corporation, a chain of psychiatric hospitals. From 1987 to 1990 Mr. Kaiser
served as Senior Vice President of Marketing at Telecom USA, a publicly traded
long distance company acquired by MCI Communications Corporation. Mr. Kaiser is
a member of the Board of Directors of R.S. Andrews Enterprises, Inc., a national
home services contractor. Mr. Kaiser holds Bachelor of Science degrees in
Computer Science and Mathematics from Furman University.
37
<PAGE> 42
BOARD OF DIRECTORS
Classification of Board of Directors. Our board of directors is divided
into three classes, which consist, as nearly as practicable, of one-third of the
total number of directors serving on the board. The board may have up to nine
members and is currently composed of one member. Immediately prior to the
closing of the acquisitions of the founding practices, the board will be
expanded to eight members. The members of each class serve staggered three-year
terms. The initial term of class I expires at the annual shareholders' meeting
in 2000, the initial term of class II expires at the annual shareholders'
meeting in 2001, and the initial term of class III expires at the annual
shareholders' meeting in 2002. Drs. Mladick and Schantz will be members of class
I, Drs. Ersek and Stevens and Mr. Kaiser will be members of class II; and Mr.
Wilfong and Mr. Condon will be members of class III.
Directors appointed will serve until their respective successors are
elected and qualified. At each annual meeting of shareholders, or at a special
meeting of shareholders called for purposes that include the election of
directors, directors will be appointed to succeed those in the class whose terms
then expire, with each director so appointed to serve for a term of three years.
Additional Directorships, Vacancies and Removal of Directors. The board is
authorized to create additional directorships and abolish any vacant
directorships. Newly created directorships and vacancies may be filled by a
majority vote of the remaining directors then in office, to hold office until
the next annual meeting of shareholders, and until their successors shall be
appointed and qualified. Our bylaws provide that directors may be removed with
or without cause by the shareholders only at a shareholders' meeting for which
notice of the removal action has been given. The directors elected by a
particular voting group may be removed only by the shareholders in that voting
group.
BOARD COMMITTEES
The board has an executive committee, a nominating committee, an audit
committee and a compensation committee. The executive committee is authorized to
take all action which may be delegated by the board under Georgia law. The
nominating committee recommends candidates for election to the board, examines
the performance of incumbent directors and makes recommendations concerning the
retention of directors. The audit committee recommends the annual appointment of
the company's auditors, with whom the audit committee reviews the scope of audit
and non-audit assignments and related fees, accounting principles used by the
company in financial reporting and the adequacy of the company's internal
control procedures. The compensation committee administers the Employee Stock
Plan. See "-- Stock Option Plans -- Administration of the Stock Option Plans."
The compensation committee also has the responsibility for reviewing and
approving salaries, bonuses and other compensation including benefits of
executive officers.
DIRECTOR COMPENSATION
Members of the board are reimbursed for their out-of-pocket expenses for
each meeting attended, but otherwise serve without cash compensation. We have
adopted the 1999 Non-Employee Director Stock Plan, pursuant to which each
non-employee director receives a nondiscretionary grant to purchase 10,000
shares of common stock upon his or her election or appointment to the board and,
if serving as a non-employee director following the annual meeting each year, an
additional non-discretionary grant for the purchase of 10,000 shares of common
stock. See "-- Stock Option Plans -- 1999 Non-Employee Director Stock Plan."
COMPENSATION COMMITTEE INTERLOCKS
We did not have a compensation committee prior to the offering. Prior to
the offering, the Board (Mr. Wilfong) determined executive compensation. None of
our executive officers serve as a member of a compensation committee or as a
director of any entity of which our directors serve as an executive officer.
In June of 1997, we entered into a consulting agreement, which was amended
on September 30, 1998, with Mr. Wilfong, the Chairman of the Board of Directors.
Under his consulting agreement, Mr. Wilfong has agreed to provide us with
financial and general business services, and we have agreed to pay Mr. Wilfong a
38
<PAGE> 43
consulting fee of $428,000 for such services. This consulting fee is payable in
monthly installments of $8,000, with the balance, net of payments made through
September 30, 1998, payable at the effective date of the offering. Mr. Wilfong
has agreed to allow us to defer payment of the balance of $292,000 until such
time as we establish a credit facility. From September 30, 1998 to the earlier
of September 30, 1999 or 90 days after the effective date of the offering, Mr.
Wilfong will receive monthly payments of $8,000. Mr. Wilfong will also receive a
bonus accrued and earned in 1998 of $150,000 payable upon the closing of the
offering.
On May 13, 1999, we sold to Mr. Wilfong warrants to purchase 700,000 shares
of common stock at an exercise price per share equal to $2.50. The purchase
price was $.50 per share. We received a note from Mr. Wilfong in the amount of
$350,000 for the $.50 purchase price of the warrants. The note is full recourse,
matures three years from the date of issuance and accrues interest at a rate of
8% per annum. Interest is payable on a quarterly basis beginning the first
quarter after the closing of the offering, but no later than September 30, 1999.
The warrants may be exercised in whole or in part for a five year term
commencing on the date of issuance. The warrants are not subject to adjustment
for stock splits, stock dividends or any other reorganization of our outstanding
stock. We recorded a charge to additional paid-in capital related to the
issuance of these warrants based on the fair value of our common stock on the
date of issuance of $8.93 per share.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
In accordance with Georgia law, our Articles of Incorporation provide that
no director will be personally liable for breach of fiduciary duty as a director
except for
- any appropriation, in violation of the director's duties, of any
business opportunity of the company;
- acts or omissions that involve intentional misconduct or a knowing
violation of the law;
- liabilities that relate to unlawful payments of dividends and
unlawful stock repurchases and redemptions; or
- any transaction from which the director derived an improper personal
benefit.
This provision does not eliminate a director's fiduciary duties; it merely
eliminates the possibility of damage awards against a director personally which
may be occasioned by certain unintentional breaches, including situations that
may involve grossly negligent business decisions, by the director of those
duties. The provision has no effect on the availability of equitable remedies,
such as injunctive relief or rescission, which might be necessitated by a
director's breach of his or her fiduciary duties. However, equitable remedies
may not be available as a practical matter where transactions, such as merger
transactions, have already been consummated. The inclusion of this provision in
our Articles of Incorporation may have the effect of reducing the likelihood of
derivative litigation against directors, and may discourage or deter
shareholders or management from bringing a lawsuit against directors for breach
of their duty of care, even though such an action, if successful, might
otherwise have benefitted us and our shareholders.
Our Bylaws provide that we shall indemnify and hold harmless each of our
directors, officers, employees and agents to the extent that he or she is or was
a party, or is threatened to be made a party, to any threatened, pending or
completed action, suit, or proceeding, whether civil, criminal, administrative
or investigative by reason of the fact that such person is or was our director,
officer, employee or agent, against any expenses, judgments, fines and amounts
paid in settlement in connection with such action, suit or proceeding; provided,
however, that no indemnification shall be made for:
- any appropriation, in violation of the director's duties, of any business
opportunity of the company;
- acts or omissions that involve intentional misconduct or a knowing
violation of the law;
- any liability that relates to unlawful payments of dividends and unlawful
stock repurchases and redemptions; or
- any transaction from which the director derived an improper personal
benefit.
39
<PAGE> 44
Our Bylaws provide that we shall have the power to purchase and maintain
insurance on behalf of any of our directors, officers, employees or agents
against any liability asserted against and incurred by such person in any such
capacity, whether or not we have the power to indemnify such person against such
liability at that time under our Articles of Incorporation or Bylaws.
EXECUTIVE COMPENSATION
The following table sets forth information with respect to all compensation
paid or accrued in the fiscal years ended December 31, 1997 and 1998, for
services rendered in all capacities to us by our Chief Executive Officer and
other officers earning in excess of $100,000. We were incorporated in April 1997
and did not conduct any operations prior to that time.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------------------------
OTHER ANNUAL
YEAR SALARY(1) BONUS(2) COMPENSATION(3)
---- --------- -------- ---------------
<S> <C> <C> <C> <C>
Dennis E. Condon................................... 1998 $100,000 $ 30,000 $ --
President, Chief Executive Officer
and Director
Jonathan E. Wilfong................................ 1998 264,750 150,000 --
Chairman of the Board, former Chief Executive 1997 187,250 -- --
Officer
David H. Challoner................................. 1998 195,000 -- 900
Chief Development Officer 1997 52,500 -- --
</TABLE>
- ---------------
(1) Includes total accrued and unpaid salary of $16,666 for Mr. Condon, $316,000
for Mr. Wilfong and $124,500 for Mr. Challoner and amounts paid under
consulting agreements. See "Certain Transactions" and "-- Compensation
Committee Interlocks."
(2) All bonus amounts are accrued and unpaid.
(3) Represents health insurance premium reimbursements.
OPTION GRANTS DURING LAST FISCAL YEAR
The following table sets forth certain information with respect to stock
options granted to each of the Named Executive Officers during 1998, including
the potential realizable value over the 5 year term of the options based on
assumed rates of stock appreciation of 5% and 10%, compounded annually. These
assumed rates of appreciation comply with the rules of the SEC and do not
represent the Company's estimate of future stock price. Actual gains, if any, on
stock option exercises will be dependent on the future performance of the common
stock. In 1998, the Company granted options to acquire up to an aggregate of
13,500 shares to employees, all under the Company's Stock Option Plan and all at
an exercise price equal to not less than the fair market value of the common
stock on the date of grant as determined in good faith by the board of
directors.
<TABLE>
<CAPTION>
POTENTIAL
INDIVIDUAL GRANTS REALIZABLE
--------------------------------------------------- VALUE AT ASSUMED
NUMBER ANNUAL RATES OF
OF PERCENT OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTIONS TERMS
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION ------------------
NAME GRANTED FISCAL 1998 SHARE DATE 5% 10%
- ---- ---------- ------------- --------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Dennis E. Condon(1)................. 9,000 67% $33.33 6-15-03 $ -- $ --
</TABLE>
- ---------------------
(1) Does not reflect options to purchase 300,000 shares of common stock to be
granted upon the closing of the offering with an exercise price equal to the
initial public offering price.
40
<PAGE> 45
No Named Executive Officer exercised any stock option during the fiscal
year ended December 31, 1998. The following table sets forth certain information
regarding stock options held as of December 31, 1998 by the Named Executive
Officers. The "Value of Unexercised In-the-Money Options at December 31, 1998"
is based upon a value of $11.00 per share, the assumed offering price, minus the
per share exercise price, multiplied by the number of shares underlying the
option.
<TABLE>
<CAPTION>
FISCAL YEAR-END OPTION VALUES
----------------------------------------------------------
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT DECEMBER 31, 1998 AT DECEMBER 31, 1998
---------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Dennis E. Condon............................... 9,000 -- -- --
</TABLE>
EMPLOYMENT AGREEMENTS
We have entered into employment agreements with Mr. Condon, Mr. Challoner,
and Ms. Altavilla providing for annual base salaries of $200,000, $150,000 and
$150,000, respectively, with Mr. Condon, Mr. Challoner, and Ms. Altavilla each
being eligible for a cash bonus of up to 30% of his or her base salary if
certain annual financial performance targets are met. Pursuant to the
agreements, the company granted Mr. Condon and Ms. Altavilla options to purchase
9,000 and 4,500 shares of common stock, respectively, at an exercise price of
$33.33 per share with such options vesting on June 15, 1998 and August 1, 1998,
respectively. Additionally, the company will grant at the closing of the
offering options for the purchase of common stock to each of Mr. Condon, Mr.
Challoner, and Ms. Altavilla for 300,000, 150,000 and 150,000, shares
respectively at the price to the public in the offering with 20% of these
options vesting upon the effective date of the offering and the remainder
vesting 20% per year on each of the first four anniversary dates of the
offering. Each of these employment agreements is for an initial term of five
years with an automatic renewal for successive one year terms unless prior
notice of termination is provided. The company may terminate an employment
agreement for cause, without cause upon 30 days prior written notice, or upon
death or disability of the employee. The employee may terminate the employment
agreement within 120 days after a constructive termination (as defined therein).
If the employee's employment is terminated by the company without cause, by the
employee within 120 days following a constructive termination, or upon
occurrence of a change in control, we will pay the employee on the date of
termination:
- severance pay in the amount of two times annual base salary;
- base salary accrued but unpaid from the last monthly payment date to the
date of termination;
- specified expense reimbursements;
- a pro-rata portion of the annual maximum bonus for the year in which the
termination occurs; and
- two times the amount of the bonus actually earned for the prior calendar
year, or if the termination occurs during the first year of employment,
two times the pro-rata portion of the annual maximum bonus for the first
year.
Each agreement prohibits the employee from competing with us for a period of two
years following termination of employment.
We have entered into an employment agreement with Mr. Sundstrom providing
for an annual base salary of $130,000. Mr. Sundstrom will receive a bonus of
$15,000 upon the closing of the offering. Under the agreement, Mr. Sundstrom
will receive 100,000 options for the purchase of the common stock at the price
to the public in the offering. Twenty percent of these options will vest on the
closing of the offering, with the remainder vesting 20% per year on each
anniversary date of the offering.
STOCK OPTION PLANS
We have adopted the 1998 Employee Stock Option Plan and the 1999
Non-Employee Director Stock Plan. We intend to register the shares of common
stock issuable upon exercise of options granted under these
41
<PAGE> 46
plans. Upon registration, such shares will be eligible for resale in the public
market, subject to applicable rules and regulations of the Securities Act.
1998 Employee Stock Option Plan. The board has adopted and the
shareholders have approved the 1998 Employee Stock Option Plan. Awards under the
employee plan are to be determined by the compensation committee and granted to
officers and employees as incentive or non-incentive stock options. The employee
plan may be terminated by the board at any time.
Eight hundred forty thousand shares of common stock are reserved for
issuance pursuant to the employee plan, subject to certain anti-dilution
provisions. Options for the purchase of 755,000 shares of common stock will be
granted at the closing of the offering to certain officers and employees at an
exercise price equal to the price to the public in the offering. These options
will vest 20% upon the closing of the offering, with the balance vesting 20% per
year on the first through fourth anniversary dates of the date of grant. The
options expire five years from the date of grant. Mr. Condon and Ms. Altavilla
were granted non-qualified options under the employee plan for the purchase of
9,000 and 4,500 shares of common stock, respectively, at an exercise price of
$33.33 per share. These options vest 100% upon the effective date of their
respective employment agreements. See "Management -- Employment Agreements."
1999 Non-Employee Director Stock Plan. The board has adopted and the
shareholders have approved the 1999 Non-Employee Director Stock Plan. Awards
under this plan are to be granted to non-employee directors to purchase shares
of our common stock.
Two hundred eighty thousand shares of common stock are reserved for
issuance to the non-employee directors under the director plan. Each person who
is elected or appointed a non-employee director will be granted a
nondiscretionary option to purchase 10,000 shares of common stock at the time of
his or her election or appointment. Beginning in 2000, each person who continues
to serve as a non-employee director following the annual meeting each year will
receive a nondiscretionary option to purchase 10,000 shares of common stock.
Options issued to non-employee directors under this plan will be non-qualified
stock options, and will expire ten years from the date of the grant. The
exercise price will be equal to the average closing bid price for the five
trading days before election or appointment of the director. Options issued to
non-employee directors become exercisable on the first anniversary of the date
of the grant.
Administration of the Stock Option Plans. The employee plan will be
administered by the compensation committee of the board. The director plan is
self-governing. Under the employee plan, the compensation committee will
determine who will receive, and the times at which, awards are granted, the
types of awards granted, and all other terms and conditions of the awards. Under
the employee plan, the compensation committee must consist of at least two
directors, and for grants of options or awards to any persons subject to Section
16 of the Exchange Act, the committee must consist of at least two directors who
are non-employee directors under Rule 16b-3.
42
<PAGE> 47
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of common stock as of September 10, 1999 and as adjusted to reflect
the completion of this offering and the acquisitions of the founding practices
by:
- each of our directors and executive officers;
- all of our directors and executive officers as a group; and
- each person who is known by us to own beneficially more than 5% of our
common stock.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE OF
BENEFICIALLY OWNED(1) COMMON STOCK
---------------------- ----------------------
BEFORE THE AFTER THE BEFORE THE AFTER THE
NAME AND ADDRESS(1) OFFERING OFFERING OFFERING OFFERING
- ------------------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Jonathan E. Wilfong(2)................................ 822,250 822,250 23.6% 13.3%
Dennis E. Condon(3)................................... 197,750 197,750 6.7% 3.5%
Patricia A. Altavilla(4).............................. 64,625 64,625 2.3% 1.2%
David H. Challoner(5)................................. 50,250 50,250 1.8% 0.9%
Gunnar Sundstrom(6)................................... 20,000 20,000 0.7% 0.4%
Robert A. Ersek, M.D., F.A.C.S. ...................... 329,392 329,392 11.9% 6.0%
Mark A. Kaiser........................................ -- -- -- --
Richard A. Mladick, M.D., F.A.C.S.(7)................. 64,715 64,715 2.3% 1.2%
John C. Schantz, M.D., F.A.C.S. ...................... 37,290 37,290 1.3% 0.7%
W. Grant Stevens, M.D., F.A.C.S.(8)................... 457,164 451,164 15.8% 8.1%
William G. Armiger, M.D., F.A.C.S. ................... 316,326 316,326 11.4% 5.8%
S.L. Schlesinger, M.D., F.A.C.S.(9)................... 158,253 155,253 5.7% 2.8%
All directors and executive officers as a group (10
persons)............................................ 2,043,436 2,037,436 51.8% 30.7%
</TABLE>
- ---------------
(1) Unless otherwise indicated, the address of each of the beneficial owners
identified is c/o The Plastic Surgery Company, 104 West Anapamu, Suite G,
Santa Barbara, California 93101. Except as otherwise indicated, such
beneficial owners have sole voting and investment power with respect to all
shares of common stock owned by them, subject to community property laws
where applicable.
(2) Includes (i) 105,000 shares of common stock held of record; (ii) 700,000
shares subject to presently exercisable warrants; and (iii) 2,250 shares of
common stock and 15,000 shares subject to presently exercisable warrants
held of record by his wife. Mr. Wilfong disclaims beneficial ownership of
the shares held by his wife.
(3) Includes (i) 3,750 shares of common stock held of record; and (ii) 194,000
shares subject to presently exercisable options.
(4) Includes (i) 2,625 shares of common stock held of record; and (ii) 62,000
shares subject to presently exercisable options.
(5) Includes (i) 5,250 shares of common stock held of record; and (ii) 45,000
shares subject to presently exercisable warrants and options.
(6) Includes 20,000 shares subject to presently exercisable options.
(7) Includes (i) 52,487 shares of common stock held of record; and (ii) 12,228
shares subject to presently exercisable warrants.
(8) Includes (i) 327,164 shares of common stock held of record; (ii) 115,000
shares subject to presently exercisable warrants; and (iii) 15,000 shares
subject to presently exercisable warrants held by his wife. Dr. Stevens
disclaims beneficial ownership of the warrants held by his wife. The number
of shares Dr. Stevens will own after the offering reflects 6,000 shares of
common stock Dr. Stevens will sell if the underwriters exercise their over
allotment option in full.
(9) Includes (i) 138,253 shares of common stock held of record; and (ii) 20,000
shares subject to presently exercisable warrants. The number of shares Dr.
Schlesinger will own after the offering reflects 3,000 shares of common
stock Dr. Schlesinger will sell if the underwriters exercise their
overallotment option in full.
43
<PAGE> 48
The following table indicates shares of common stock that shareholders will
sell if the underwriters exercise their overallotment option.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE OF
-------------------------------------- COMMON STOCK
OWNED SOLD IN THE OWNED ----------------------
BEFORE THE OVERALLOTMENT AFTER THE BEFORE THE AFTER THE
NAME OFFERING OPTION OFFERING OFFERING OFFERING
- ---- ---------- ------------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
W. Grant Stevens, M.D., F.A.C.S.(1).......... 327,164 6,000 321,164 11.8% 5.9%
S.L. and Laura A. Schlesinger, M.D.,
F.A.C.S.(1)................................ 138,253 3,000 135,253 5.0% 2.5%
Randall A. Schmidt, D.D.S. .................. 12,750 7,500 5,250 * *
Ronald O. Parsons, D.D.S. ................... 9,660 9,660 -- -- --
Paul A. Quiros............................... 9,000 9,000 -- -- --
Hilbert Dreesen.............................. 6,090 6,090 -- -- --
David C. Poole............................... 4,500 4,500 -- -- --
Michael D. and Patricia Y. Goodwin........... 3,660 3,660 -- -- --
MC Investments, LLC.......................... 3,000 3,000 -- -- --
Cliff McGehee................................ 2,250 1,125 1,125 * *
Dorothy B. McGehee........................... 2,250 1,125 1,125 * *
Marilyn M. Elkins............................ 2,250 1,125 1,125 * *
Sands Family Trust........................... 2,100 600 1,500 * *
Dana E. Fender, D.D.S. ...................... 1,500 1,500 -- -- --
Wayne Hester, D.D.S. ........................ 1,500 1,500 -- -- --
Darrell and Barbara Measel................... 1,200 1,200 -- -- --
Sammy A. Caves, D.D.S. ...................... 1,200 600 600 * *
Ronald L. Receveur, D.D.S. .................. 990 990 -- -- --
Gerald Smernoff, D.D.S. ..................... 750 750 -- -- --
Jim Burns.................................... 750 750 -- -- --
John Fuller.................................. 750 750 -- -- --
Shirley J. Smith............................. 750 750 -- -- --
C. Graham McGehee............................ 600 300 300 * *
E. William Koons, III........................ 600 600 -- -- --
Elizabeth McGehee............................ 600 300 300 * *
Howard C. Chandler........................... 600 600 -- -- --
Meredith R. Elkins........................... 600 300 300 * *
Gregory Thompson............................. 450 450 -- -- --
Cheryl Morgan Haynes......................... 300 300 -- -- --
Frances C. Wilfong........................... 300 150 150 * *
James L. Johnson, Sr......................... 300 150 150 * *
Della D. Morgan.............................. 150 150 -- -- --
Ronald F. Morgan............................. 150 150 -- -- --
</TABLE>
- ---------------
* Less than one percent
(1) Drs. Schlesinger and Stevens are allied surgeons. Does not include options,
warrants and other securities beneficially owned by these individuals.
CERTAIN TRANSACTIONS
Simultaneously with and as a condition to the closing of the offering, we
will acquire certain operating assets of, or the stock of 17 founding practices
in exchange for cash and shares of our common stock, which will be accounted for
under SAB 48, and we will enter into business services agreements with these
founding practices. In addition, we will acquire 13 founding practices which
will be accounted for at the fair value of the assets. Each of these
transactions was individually negotiated by us and each founding practice with
respect to all material terms including, without limitation, valuation. Our
executive officers and Mr. Wilfong negotiated the transactions with the founding
practices. The aggregate consideration to be paid by us to these founding
44
<PAGE> 49
practices upon closing of the offering is approximately $42.7 million,
consisting of 2,387,049 shares of our common stock and approximately $12.4
million in cash and the delivery of approximately $4.0 million in promissory
notes. The cash portion of the consideration will be paid from proceeds received
by us in the offering. Drs. Ersek, Mladick, Schantz and Stevens, all of whom
will be our directors, will receive 329,392, 50,649, 37,290 and 321,164 shares
of our common stock, respectively, and $905,827, $1,392,849, $102,547 and
$883,201 in cash, respectively, as a result of the acquisition of the founding
practices. Dr. Mladick will also receive $835,709 evidenced by a note payable
from us. Drs. Armiger and Schlesinger will receive 316,327 and 135,253 shares of
our common stock and $869,898 and $214,045 in cash, respectively, as a result of
the acquisition of their founding practices. The consideration that we agreed to
pay each of the founding practices of Drs. Armiger, Ersek, Mladick, Schantz,
Schlesinger and Stevens was calculated in the same manner as the consideration
for each of the other founding practices.
Upon the closing of the acquisition of the founding practices, we will
enter into a business services agreement with each of Drs. Armiger, Ersek,
Mladick, Schantz, Schlesinger and Stevens, substantially on the terms described
for such agreements in "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- The Founding Practices -- Business
Services Agreements."
The following table provides certain information concerning the
stockholders of the Founding Practices (who are considered promoters) that will
be accounted for under SAB 48.
<TABLE>
<CAPTION>
CONSIDERATION TO BE RECEIVED
---------------------------------------
ASSETS TO BE LIABILITIES CASH VALUE OF NUMBER OF
CONTRIBUTED(1) ASSUMED(1) DISTRIBUTION SHARES(2) SHARES(2)
-------------- -------------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
William G. Armiger, M.D.,
F.A.C.S......................... $ 171,489 $ -- $ 869,898 $ 3,479,591 316,327
Kenneth R. Arthur, M.D.,
F.A.C.S......................... 3,973 -- 102,546 410,185 37,289
John L. Baeke, M.D................ 59,571 -- 307,149 1,228,594 111,690
Robert A. Ersek, M.D., F.A.C.S.... 225,764 -- 905,827 3,623,310 329,392
Michael S. Flood, M.D.,
F.A.C.S......................... 3,973 -- 102,546 410,186 37,290
Stanley P. Gulin, M.D.,
F.A.C.S......................... 224,598 53,661 297,143 1,188,573 108,052
Stiles T. Jewett, Jr., M.D.,
F.A.C.S......................... 56,723 -- 117,985 471,938 42,903
John C. Kelleher, Jr., M.D.,
F.A.C.S......................... 29,101 -- 340,242 1,360,967 123,724
Graham M. Kemsley, M.D.,
F.R.C.S......................... 49,684 -- 246,331 985,324 89,575
John L. LeRoy, M.D., F.A.C.S...... 7,487 -- 60,898 243,594 22,145
Robert V. Mandraccia, M.D......... -- 220,000 880,000 80,000
Richard M. Nazareth, M.D.,
F.A.C.S......................... 41,443 -- 304,973 1,219,893 110,899
John C. Schantz, M.D., F.A.C.S.... 3,973 -- 102,547 410,186 37,290
S.L. Schlesinger, M.D.,
F.A.C.S......................... 24,207 211,412 214,045 1,487,783 135,253
Joel B. Singer, M.D., F.A.C.S..... 9,328 -- 201,119 804,478 73,134
Charles W. Spenler, M.D........... -- -- 132,097 528,390 48,036
W. Grant Stevens, M.D.,
F.A.C.S......................... 14,548 220,000 883,201 3,532,806 321,164
Gloria Thomas, M.D................ 46,870 -- 150,624 602,498 54,773
Verne M. Weisberg, M.D.,
F.A.C.S......................... 5,000 -- 178,856 715,422 65,038
---------- -------- ---------- ----------- ----------
Total................... $ 977,732 $485,073 $5,738,027 $23,583,718 2,143,974
========== ======== ========== =========== ==========
</TABLE>
- ---------------
(1) Assets to be contributed reflect the historical book value of the assets of
each practice, as of June 30, 1999. Of the assets to be contributed,
approximately 95% are property and equipment. Liabilities assumed are debts
of the practice.
(2) Assumes an initial public offering price of $11.00, the mid-point of the
estimated initial public offering price range.
Under a consulting agreement that terminated on September 30, 1998, we paid
Mr. Challoner $110,500 and issued him a warrant to purchase 15,000 shares of
common stock at $16.67 per share, exercisable on or before October 1, 2002. Mr.
Challoner will receive an additional $99,500 upon the closing of the offering.
45
<PAGE> 50
On May 13, 1999, we sold warrants to purchase 1,390,204 shares of common
stock at an exercise price per share equal to $2.50. The purchase price was $.50
per share. We received cash proceeds of $303,852 from the sale of these
warrants. We received notes from Mr. Wilfong (Chairman of the Board), Mr. Condon
(President and Chief Executive Officer), and Ms. Altavilla (Executive Vice
President of Marketing and Business Planning) in the amount of $350,000, $12,500
and $8,750, respectively, for the $.50 per share purchase price of the warrants.
The notes are full recourse notes that mature three years from the date of
issuance and accrue interest at a rate of 8% per annum. Interest is payable on a
quarterly basis beginning the first quarter after the closing of the offering,
but no later than September 30, 1999. The warrants may be exercised in whole or
in part for a five year term commencing on the date of issuance. The warrants
are not subject to adjustment for stock splits, stock dividends or any other
reorganization of our outstanding stock. We recorded a charge to additional
paid-in capital related to the issuance of these warrants based on the fair
value of our common stock on the date of issuance of $8.93 per share. For
additional information regarding Mr. Wilfong, see "Management -- Compensation
Committee Interlocks."
We will grant warrants to purchase an aggregate of 146,500 shares of common
stock with an exercise price per share equal to the initial public offering
price, exercisable for a five year term commencing on the closing of the
offering, to the following allied surgeons: 75,000 to Dr. Stevens, who is a
director, for referring allied surgeons to us for affiliation and assisting us
in recruiting of our officers; and 8,750 to Dr. Dinner, 8,750 to Dr. Ellenby,
12,000 to Dr. Jewett, 30,000 to Dr. Schlesinger, and 12,000 to Dr. Singer for
referring allied surgeons to us for affiliation. We will record expense related
to these warrants at the closing of the offering.
We also issued warrants to individuals not affiliated with us to purchase
an aggregate of 125,000 shares of common stock with an exercise price per share
equal to the initial public offering price, exercisable for a five year term
commencing on the date of the offering, for referring allied surgeons to us. We
will record expense related to these warrants at the closing of the offering.
On May 12, 1999, we issued warrants to purchase 100,000 shares of common
stock to Mr. Condon and warrants to purchase 10,000 shares of common stock to
Ms. Altavilla for an exercise price per share equal to $2.50. The warrants are
not subject to adjustment for stock splits, stock dividends or any other
reorganization of our outstanding stock. We recorded expense related to the
issuance of these warrants based on the fair value of our common stock on the
date of issuance of $8.93 per share.
In June 1999, we agreed to pay to Mr. Condon a cash bonus in the amount of
$75,000 for past services provided. This cash bonus will be paid upon the
completion of the offering.
DESCRIPTION OF CAPITAL STOCK
The following summary description of capital stock is not intended to be
complete and is subject to the provisions of the Articles of Incorporation and
Bylaws, copies of which have been included as exhibits to the registration
statement of which this prospectus forms a part, and the applicable provisions
of Georgia law. The following discussion is qualified in its entirety by
reference to such exhibits.
We have authority to issue up to 100,000,000 shares of common stock, no par
value per share. Immediately prior to the date of the offering, 13,500 shares of
common stock were issuable pursuant to outstanding options to purchase common
stock and 1,565,204 shares of common stock were issuable pursuant to warrants to
purchase common stock. As of the completion of the acquisitions of the founding
practices and the offering, there will be 5,170,262 shares of common stock
issued and outstanding.
COMMON STOCK
As of September 10, 1999, there were 383,213 shares of common stock
outstanding and held of record by 82 shareholders.
Each holder of common stock is entitled to one vote for each share held on
all matters submitted to a vote of shareholders. Holders of common stock are
entitled to such dividends as may be declared from time to time by the board out
of funds legally available therefore, subject to any contractual limitations.
Holders of
46
<PAGE> 51
common stock will participate as one class with respect to any dividends
declared and paid on the stock. There are no redemption, sinking fund,
conversion or preemptive rights with respect to the shares of common stock. The
holders of common stock will share ratably in all assets of the company
remaining after the payment of liabilities in the event of any dissolution,
liquidation, or winding up of the company. All presently issued and outstanding
shares of common stock are fully paid and nonassessable.
PREFERRED STOCK
The Articles of Incorporation authorize the Board of Directors, from time
to time and without any stockholder action or approval, to provide for the
issuance of up to 20,000,000 shares of preferred stock, in one or more series,
and to fix the relative rights and preferences of the shares, including voting
powers, dividend rights, liquidation preferences, redemption rights and
conversion privileges. As of the date hereof, the board has not provided for the
issuance of any series of preferred stock, and there are no agreements or
understandings for the issuance of any preferred stock. Because of its broad
discretion with respect to the creation and issuance of preferred stock without
stockholders approval, the board could adversely affect the voting power of the
holders of common stock and, by issuing shares of preferred stock with certain
voting, conversion and/or redemption rights, could discourage any attempt to
obtain control of us.
WARRANTS
Warrants for the purchase of 1,565,204 shares of common stock have been
issued and are outstanding. The exercise price per share of the warrants is
equal to (a) $16.67 or (b) $2.50 per share. For a more detailed discussion of
these warrants, see "Certain Transactions."
GEORGIA ANTI-TAKEOVER STATUTES
Georgia law restricts certain business combinations with "interested
shareholders" and contains fair price requirements applicable to certain mergers
with certain "interested shareholders" that are summarized below. The
restrictions imposed by these statutes will not apply to a corporation unless it
elects to be covered by these statutes. We have elected to be covered by these
restrictions.
Georgia law regulates business combinations such as mergers,
consolidations, share exchanges and asset purchases where the acquired business
has at least 100 shareholders residing in Georgia and has its principal office
in Georgia, and where the acquiror became an "interested shareholder" of the
corporation, unless either
- prior to such time, the board approves either the business combination or
the transaction by which such shareholder became an interested
shareholder;
- in the transaction that resulted in the shareholder becoming an
interested shareholder, the interested shareholder became the beneficial
owner of at least 90% of the outstanding voting stock of the company
which was not held by directors, officers, affiliates thereof,
subsidiaries or certain employee stock option plans of the company; or
- subsequent to becoming an interested shareholder, such shareholder
acquired additional shares resulting in such shareholder owning at least
90% of the outstanding voting stock of the company and the business
combination is approved by a majority of the disinterested shareholders'
shares not held by directors, officers, affiliates thereof, subsidiaries
or certain employee stock option plans of the company.
Under the relevant provisions of Georgia law, a "business combination" is
defined to include, among other things,
- any merger, consolidation, share exchange or any sale, transfer or other
disposition (or series of related sales or transfers) of assets of the
company having an aggregate book value of 10% or more of the company's
net assets (measured as of the end of the most recent fiscal quarter),
with an interested shareholder of the company or any other corporation
which is or, after giving effect to such business combination, becomes an
affiliate of any such interested shareholder;
- the liquidation or dissolution of the company;
47
<PAGE> 52
- the receipt by an interested shareholder of any benefit from any loan,
advance, guarantee, pledge, tax credit or other financial benefit from
the company, other than in the ordinary course of business; and
- certain other transactions involving the issuance or reclassification of
securities of the company which produce the result that 5% or more of the
total equity shares of the company, or of any class or series thereof, is
owned by an interested shareholder.
An "interested shareholder" is defined by Georgia law to include any person
or entity that, together with its affiliates, beneficially owns or has the right
to own 10% or more of the outstanding voting shares of the company, or any
person that is an affiliate of the company and has, at any time within the
preceding two-year period, been the beneficial owner of 10% or more of the
outstanding voting shares of the company. The restrictions on business
combinations shall not apply to any person who was an interested shareholder
before the adoption of the Bylaws which made the provisions applicable to the
company nor to any persons who subsequently become interested shareholders
inadvertently, subsequently divest sufficient shares so that the shareholder
ceases to be an interested shareholder and would not, at any time within the
five-year period immediately before a business combination involving the
shareholder, have been an interested shareholder but for the inadvertent
acquisition. The statute restricting business combinations is broad in its scope
and is designed to inhibit unfriendly acquisitions.
Georgia law prohibits certain business combinations between a Georgia
corporation and an "interested shareholder" unless:
- certain "fair price" criteria are satisfied;
- the business combination is unanimously approved by the continuing
directors;
- the business combination is recommended by at least two-thirds of the
continuing directors of the company and approved by a majority of the
votes entitled to be cast by holders of common stock, other than the
common stock beneficially owned by the interested shareholder who is a
party to the business combination; or
- the interested shareholder has been such for at least three years and has
not increased his ownership position in such three-year period by more
than one percent in any twelve-month period. For these purposes,
"business combination" generally includes any merger, asset-sale, share
exchange, or other transaction resulting in a financial benefit to an
interested shareholder, defined to mean a person who is the beneficial
owner of 10% or more of the common stock. The fair price statute is
designed to inhibit unfriendly acquisitions that do not satisfy the
specified "fair price" requirements.
ANTI-TAKEOVER EFFECTS
The foregoing provisions of the Articles and Bylaws and Georgia law could
discourage potential acquisition proposals and could delay or prevent a change
in control. These provisions are intended to enhance the continuity and
stability of the board and the policies formulated by the board and to
discourage certain types of transactions that may involve an actual or
threatened change in control. These provisions are also designed to reduce our
vulnerability to an unsolicited acquisition proposal and to discourage certain
tactics that may be used in proxy fights. Such provisions, however, may
discourage third parties from making tender offers for our shares. As a result,
the market price of the common stock may not benefit from any premium that might
occur in anticipation of a potential or actual change in control. Such
provisions also may have the effect of preventing changes in our management. The
board is classified into three classes, consisting, as nearly as practicable, of
one-third of the total number of directors serving on the board, which will
total seven directors immediately upon the closing of the offering. The members
of each class will serve staggered one, two and three year terms and,
thereafter, for successive three year terms. This provision for directors' terms
could also discourage potential acquisition proposals and could delay or prevent
a change in control of the company.
48
<PAGE> 53
TRANSFER AGENT
The transfer agent and registrar for the Common Stock is American Stock
Transfer Company.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock. The market price of our common stock could drop due to sales of a large
number of shares of our common stock or the perception that such sales could
occur. These factors could also make it more difficult to raise funds through
future offerings of common stock.
After this offering, 5,170,262 shares of common stock will be outstanding,
5,461,637 shares if the underwriters exercise their over-allotment options and
2,001,204 shares of common stock will be issuable upon the exercise of
exercisable outstanding options and warrants. See "Capitalization." Of these
shares, the 2,400,000 shares (2,691,375 shares if the underwriters exercise
their over-allotment options in full) sold in this offering will be freely
tradeable without restriction under the Securities Act except for any shares
purchased by "affiliates" of the company as defined in Rule 144 under the
Securities Act. The remaining 2,770,262 shares are "restricted securities"
within the meaning of Rule 144 under the Securities Act. The restricted
securities generally may not be sold unless they are registered under the
Securities Act or are sold pursuant to an exemption from registration, such as
the exemption provided by Rule 144 under the Securities Act.
Our officers and directors and our shareholders beneficially owning more
than 1% of our common stock and all selling shareholders in the over-allotment
option have entered into lock-up agreements pursuant to which they have agreed
not to offer or sell any shares of common stock for an initial period of 180
days after the date of this prospectus without the prior written consent of
Cruttenden Roth, on behalf of the underwriters. These individuals have also
agreed, pursuant to the lock-up agreements, for an additional period of 180 days
commencing on the last day of the lock-up period, not to offer or sell any
shares of their common stock unless they effect the transaction through
Cruttenden Roth. See "Underwriting." Also, Cruttenden Roth may, at any time and
without notice, waive these lock-up agreements specified in the underwriting
agreements on some shares. Following the initial lock-up period, these shares
will not be eligible for sale in the public market without registration under
the Securities Act unless such sales meet the conditions and restrictions of
Rule 144 as described below.
In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated), including an affiliate, who has beneficially owned
shares for a period of at least one year is entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of 1% of
the then-outstanding shares of common stock and the average weekly trading
volume in the common stock during the four calendar weeks immediately preceding
the date on which the notice of such sale on Form 144 is filed with the SEC.
Sales under Rule 144 are also subject to certain provisions relating to notice
and manner of sale and the availability of current public information about the
company. In addition, a person (or persons whose shares are aggregated) who has
not been an affiliate of the company at any time during the 90 days immediately
preceding a sale, and who has beneficially owned the shares for at least two
years, would be entitled to sell such shares under Rule 144(k) without regard to
the volume limitation and other conditions described above. The foregoing
summary of Rule 144 is not intended to be a complete description.
As soon as practicable following the consummation of this offering, we
intend to file a registration statement under the Securities Act to register the
shares of common stock available for issuance pursuant to its stock option plans
as of the date of this prospectus. See "Management -- Stock Option Plans."
Shares issued pursuant to these plans after the effective date of such
registration statement will be available for sale in the open market subject to
the lock-up period and, for our affiliates, subject to certain conditions and
restrictions of Rule 144.
49
<PAGE> 54
UNDERWRITING
Subject to the terms and conditions of our underwriting agreement, the
underwriters named below, for whom Cruttenden Roth Incorporated and H.C.
Wainwright & Co., Inc. are acting as representatives, have severally agreed to
purchase from us, and we have agreed to sell to the underwriters, the respective
number of shares of common stock set forth opposite each underwriter's name
below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
Cruttenden Roth Incorporated................................
H.C. Wainwright & Co., Inc..................................
---------
Total............................................. 2,400,000
=========
</TABLE>
Our underwriting agreement provides that the obligations of the
underwriters are subject to certain conditions precedent, including the absence
of any material adverse change in our business and the receipt of certificates,
opinions and letters from our counsel and independent public accountants. The
nature of the underwriters' obligation is such that they are committed to
purchase and pay for all the shares of common stock if any are purchased.
We have been advised by the representatives that the underwriters propose
to offer the shares of common stock directly to the public on the terms set
forth on the cover page of this prospectus. The underwriters may allow selected
dealers a concession of not more than $ per share, and the underwriters may
allow, and such selected dealers may reallow, a concession of not more than
$ per share, to other dealers. After the initial public offering of the
shares, the public offering price and other selling terms may be changed by the
representatives. No change in such terms shall change the amount of proceeds to
be received by us as set forth on the cover page of this prospectus.
We and certain selling shareholders have granted an option to the
underwriters, exercisable for a period of 45 days after the date of this
prospectus, to purchase up to an additional 360,000 shares of common stock at
the same price per share as the initial shares to be purchased by the
underwriters to cover overallotments, if any. To the extent that the
underwriters exercise this option, each of the underwriters will be committed,
subject to certain conditions, to purchase such additional shares of common
stock in approximately the same proportion as set forth in the above table.
The representatives of the underwriters have advised us that they do not
expect any sales of the shares of common stock offered hereby to be made to
discretionary accounts controlled by the underwriters.
We have agreed to pay the representatives a nonaccountable expense
allowance equal to 1% of the aggregate price of the shares of common stock
offered hereby (including with respect to shares of common stock underlying the
overallotment option, if and to the extent it is exercised) set forth on the
front cover of this prospectus. The representatives' expenses in excess of the
nonaccountable expense allowance, including legal expenses, will be borne by the
representatives.
We have agreed to issue to the representatives at the closing of the
offering warrants to purchase up to 240,000 shares of common stock at an
exercise price per share equal to 120% of the initial per share public offering
price. The representatives' warrants are exercisable for a period of three years
beginning two years from the date of this prospectus.
The holders of the representatives' warrants will have no voting, dividend
or other shareholder rights until the representatives' warrants are exercised.
The terms of the representatives' warrants were established as the result of
negotiations between the representatives and us. If the representatives'
warrants are exercised, the representatives may realize additional compensation.
By their terms, the representatives' warrants will be restricted from sale,
transfer, assignment or hypothecation, except to persons that are officers of
either of the
50
<PAGE> 55
representatives. The number of shares covered by the representatives' warrants
and the exercise price are subject to adjustment to prevent dilution. In
addition, we have granted certain rights to the holders of the representatives'
warrants to register the representatives' warrants and the common stock
underlying the representatives' warrants under the Securities Act.
Total compensation to the representatives and the underwriters is as
follows:
- Commissions -- $ per share of common stock sold;
- Nonaccountable expense allowance -- $ per share of common stock
sold; and
- Warrants to purchase up to 240,000 shares of common stock at 120% of
the per share offering price.
Our directors and officers and our shareholders beneficially owning more
than 1% of our common stock have entered into lock-up agreements with Cruttenden
Roth which provide that they will not offer, sell or otherwise dispose of any
common stock for an initial period of 180 days after the date of this prospectus
without the prior written consent of Cruttenden Roth, on behalf of the
underwriters. These individuals have also agreed, pursuant to the lock-up
agreements, for an additional period of 180 days commencing on the last day of
the initial lock-up period, not to offer or sell their common stock unless they
effect the transaction through Cruttenden Roth. Cruttenden Roth may charge usual
and customary fees and commissions for these transactions. Cruttenden Roth has
no present intention to release the locked-up shares prior to expiration of the
initial lock-up period although Cruttenden Roth may release the locked-up shares
prior to expiration of such period. The granting of any release would be
conditioned, in the judgment of Cruttenden Roth, on such sale not materially
adversely impacting the prevailing trading market for the common stock on the
American Stock Exchange. Specifically, factors such as average trading volume,
recent price trends, and the need for additional public float in the market for
the common stock would be considered in evaluating such a request.
Prior to the offering, there has been no established trading market for the
common stock. Consequently, the initial public offering price for the common
stock offered hereby has been determined by negotiations between the
representatives and us. Among the factors considered in such negotiations were
the preliminary demand for the common stock, the prevailing market and economic
conditions, our results of operations, estimates of our business potential and
prospects, the present state of our business operations, an assessment of our
management, the consideration of these factors in relation to the market
valuation of comparable companies in related businesses, the current condition
of the markets in which we operate, and other factors deemed relevant. There can
be no assurance that an active trading market will develop for the common stock
or that the common stock will trade in the public market after the offering at
or above the initial public offering price.
The representatives have advised us that, pursuant to Regulation M under
the Securities Act, some persons participating in the offering may engage in
transactions, including stabilizing bids, syndicate covering transactions or the
imposition of penalty bids, that may have the effect of stabilizing or
maintaining the market price of the shares of common stock at a level above that
which might otherwise prevail in the open market. A "stabilizing bid" is a bid
for or the purchase of shares of common stock on behalf of the underwriters for
the purpose of fixing or maintaining the price of the common stock. A "syndicate
covering transaction" is the bid for or purchase of common stock on behalf of
the underwriters to reduce a short position incurred by the underwriters in
connection with the offering. A "penalty bid" is an arrangement permitting the
representatives to reclaim the selling concession otherwise accruing to an
underwriter or syndicate member in connection with the offering if the common
stock originally sold by such underwriter or syndicate member purchased by the
representatives in a syndicate covering transaction and has therefore not been
effectively placed by such underwriter or syndicate member. The representatives
have advised us that such transactions may be effected on the American Stock
Exchange or otherwise and, if commenced, may be discontinued at any time.
The underwriting agreement provides that we will indemnify the underwriters
and their controlling persons against liabilities under the Securities Act or
will contribute to payments the underwriters and their controlling persons may
be required to make in respect thereof.
51
<PAGE> 56
LEGAL MATTERS
Certain legal matters in connection with the sale of the shares of common
stock offered in this offering will be passed upon for us by King & Spalding,
Atlanta, Georgia. Certain legal matters in connection with the offering will be
passed upon for the underwriters by Nelson Mullins Riley & Scarborough, L.L.P.,
Atlanta, Georgia. A partner in the law firm of King & Spalding owns 9,000 shares
of our common stock on the date of this prospectus and intends to sell all of
these shares if the underwriters exercise their over-allotment option in full.
EXPERTS
The financial statements for The Plastic Surgery Company, formerly known as
Better Image, Inc., as of December 31, 1997 and 1998 and for the period from
inception (April 30, 1997) to December 31, 1997 and for the year ended December
31, 1998 included in this prospectus and elsewhere in the registration statement
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said reports.
ADDITIONAL INFORMATION
We have filed with the Commission a registration statement on Form S-1
under the Securities Act with respect to the common stock offered hereby. This
prospectus, which constitutes a part of the registration statement, does not
contain all of the information set forth in the registration statement.
Statements contained in this prospectus as to the contents of any contract or
other document referred to are not necessarily complete. In each such instance,
reference is made to the copy of such contract or other document filed as an
exhibit to the registration statement. Prospective investors may read and copy
the registration statement and its exhibits and schedules without charge at the
Public Reference Room maintained by the Commission at 450 5th Street, N.W.,
Washington, D.C. 20549, and at the Commission's regional offices in Chicago,
Illinois and New York, New York. Prospective investors may obtain information on
the operation of the Public Reference Rooms by calling the Commission at
1-800-SEC-0330. In addition, we are required to file electronic versions of
these documents with the Commission through the Commission's Electronic Data
Gathering, Analysis, and Retrieval (EDGAR) system. The Commission maintains a
World Wide Web site at http://www.sec.gov that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. Also, the common stock has been approved for
listing on the American Stock Exchange, subject to notice of issuance. Reports
and other information concerning us also may be inspected at the offices of the
American Stock Exchange, 86 Trinity Place, New York, New York 10006.
We intend to furnish our shareholders with annual reports containing
financial statements audited by our independent public accountants. We also
intend to furnish our shareholders with quarterly reports containing unaudited
financial statements for the first three fiscal quarters of each fiscal year.
52
<PAGE> 57
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
The Plastic Surgery Company
Report of Independent Public Accountants.................. F-2
Balance Sheets at December 31, 1997 and 1998 and June 30,
1999 (Unaudited)....................................... F-3
Statements of Operations for the Period from Inception
(April 30, 1997) to December 31, 1997, for the Year
Ended December 31, 1998, For the Period from Inception
(April 30, 1997) to December 31, 1998 and for the Six
Months Ended June 30, 1998 and 1999 (Unaudited)........ F-4
Statements of Shareholders' Equity (Deficit) For the
Period From Inception (April 30, 1997) to December 31,
1997, for the Year Ended December 31, 1998 and for the
Six Months Ended June 30, 1999 (Unaudited)............. F-5
Statements of Cash Flows For the Period From Inception
(April 30, 1997) to December 31, 1997, for the Year
Ended December 31, 1998, For the Period from Inception
(April 30, 1997) to December 31, 1998 and for the Six
Months Ended June 30, 1998 and 1999 (Unaudited)........ F-6
Notes to Financial Statements............................. F-7
Unaudited Pro Forma Balance Sheet
Unaudited Pro Forma Combined Balance Sheet at June 30,
1999................................................... F-21
Notes to Unaudited Pro Forma Balance Sheet................ F-22
</TABLE>
F-1
<PAGE> 58
After the stock split as discussed in Note 8 to the financial statements of The
Plastic Surgery Company is approved by the board of directors, we expect to be
in a position to render the following audit report.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
May 13, 1999
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Plastic Surgery Company:
We have audited the accompanying balance sheets of The Plastic Surgery
Company (a development stage enterprise, a Georgia corporation and formerly
known as Better Image, Inc.) as of December 31, 1997 and 1998 and the related
statements of operations, shareholders' deficit, and cash flows for the period
from inception (April 30, 1997) to December 31, 1997 and for the year ended
December 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 The Plastic Surgery Company
as of December 31, 1997 and 1998 and the results of its operations and its cash
flows for the period from inception (April 30, 1997) to December 31, 1997 and
for the year ended December 31, 1998 in conformity with generally accepted
accounting principles.
F-2
<PAGE> 59
THE PLASTIC SURGERY COMPANY
(A DEVELOPMENT-STAGE ENTERPRISE)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- JUNE 30,
1997 1998 1999
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................. $ 184,151 $ 402,860 $ 91,179
EQUIPMENT, at cost...................................... 19,724 45,760 48,087
Less accumulated depreciation......................... (1,973) (8,521) (13,155)
----------- ----------- -----------
Equipment, net..................................... 17,751 37,239 34,932
----------- ----------- -----------
INTANGIBLE ASSETS....................................... -- -- 3,500,580
Less accumulated amortization......................... -- -- (14,586)
----------- ----------- -----------
Intangible assets, net............................. -- -- 3,485,994
----------- ----------- -----------
Total assets.................................. $ 201,902 $ 440,099 $ 3,612,105
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable...................................... $ 56,486 $ 571,142 $ 946,130
Accrued employee and consultant compensation.......... 303,895 1,179,812 1,514,462
----------- ----------- -----------
Total current liabilities..................... 360,381 1,750,954 2,460,592
----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock; no par value; 100,000,000 shares
authorized, 246,000, 283,890 and 383,213 shares
issued and outstanding at December 31, 1997 and
1998 and June 30, 1999............................. -- -- --
Paid-in capital....................................... 1,471,440 3,521,940 (2,437,160)
Warrants.............................................. 250,000 250,000 11,363,095
Deficit accumulated during the development stage...... (1,879,919) (5,082,795) (7,774,422)
----------- ----------- -----------
Total shareholders' equity (deficit).......... (158,479) (1,310,855) 1,151,513
----------- ----------- -----------
Total liabilities and shareholders' equity
(deficit)................................... $ 201,902 $ 440,099 $ 3,612,105
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE> 60
THE PLASTIC SURGERY COMPANY
(A DEVELOPMENT-STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE PERIOD
FROM INCEPTION FOR THE FROM INCEPTION FOR THE SIX FOR THE SIX
(APRIL 30, 1997) YEAR ENDED (APRIL 30, 1997) MONTHS ENDED MONTHS ENDED
TO DECEMBER 31, DECEMBER 31, TO DECEMBER 31, JUNE 30, JUNE 30,
1997 1998 1998 1998 1999
---------------- ------------ ---------------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE...................... $ -- $ -- $ -- $ -- $ --
EXPENSES
Salaries, wages, and
benefits................ 1,732,576 2,181,990 3,914,566 562,437 1,800,799
General and
administrative.......... 155,289 1,028,509 1,183,798 276,898 896,745
----------- ----------- ----------- ---------- -----------
Total expenses..... 1,887,865 3,210,499 5,098,364 839,335 2,697,544
OTHER INCOME................. 7,946 7,623 15,569 3,664 5,917
----------- ----------- ----------- ---------- -----------
NET LOSS..................... $(1,879,919) $(3,202,876) $(5,082,795) $ (835,671) $(2,691,627)
=========== =========== =========== ========== ===========
Basic and diluted net loss
per share.................. $ (8.49) $ (12.30) $ (3.33) $ (8.99)
=========== =========== ========== ===========
Weighted average shares
outstanding................ 221,497 260,439 250,639 299,360
=========== =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 61
THE PLASTIC SURGERY COMPANY
(A DEVELOPMENT-STAGE ENTERPRISE)
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED TOTAL
COMMON STOCK DURING SHAREHOLDERS'
------------------ PAID-IN DEVELOPMENT EQUITY
SHARES AMOUNT CAPITAL STAGE WARRANTS (DEFICIT)
--------- ------ ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT APRIL 30, 1997 -- $ -- $ -- $ -- $ -- $ --
Common stock issued to
founders and employees..... 216,000 -- 721,440 -- -- 721,440
Common stock issued to
investors.................. 30,000 -- 500,000 -- -- 500,000
Common stock sold to
consultant from
shareholder................ -- -- 250,000 -- -- 250,000
Warrants granted to
consultant................. -- -- -- -- 250,000 250,000
Net loss..................... -- -- -- (1,879,919) -- (1,879,919)
--------- ---- ----------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 1997... 246,000 -- 1,471,440 (1,879,919) 250,000 (158,479)
Common stock issued to
investors.................. 37,890 -- 1,263,000 -- -- 1,263,000
Common stock sold to
consultants and employees
from shareholder........... -- -- 787,500 -- -- 787,500
Net loss..................... -- -- -- (3,202,876) -- (3,202,876)
--------- ---- ----------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 1998... 283,890 -- 3,521,940 (5,082,795) 250,000 (1,310,855)
Common stock issued to
investors (unaudited)...... 7,110 -- 237,000 -- -- 237,000
Warrants issued to employees
and consultants
(unaudited)................ -- -- -- -- 1,148,112 1,148,112
Warrants issued to
shareholders (unaudited)... -- -- (9,269,880) -- 9,964,983 695,103
Stock issued to ISIS
(unaudited)................ 92,213 -- 3,073,780 -- -- 3,073,780
Net loss (unaudited)......... -- -- -- (2,691,627) -- (2,691,627)
--------- ---- ----------- ----------- ----------- -----------
BALANCE AT JUNE 30, 1999
(unaudited).................. 383,213 $ -- $(2,437,160) $(7,774,422) $11,363,095 $ 1,151,513
========= ==== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 62
THE PLASTIC SURGERY COMPANY
(A DEVELOPMENT-STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE PERIOD
FROM INCEPTION FOR THE FROM INCEPTION FOR THE SIX FOR THE SIX
(APRIL 30, 1997) YEAR ENDED (APRIL 30, 1997) MONTHS ENDED MONTHS ENDED
TO DECEMBER 31, DECEMBER 31, TO DECEMBER 31, JUNE 30, JUNE 30,
1997 1998 1998 1998 1999
---------------- ------------ ---------------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss....................... $(1,879,919) $(3,202,876) $(5,082,795) $(835,671) $(2,691,627)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and
amortization............... 1,973 6,548 8,521 2,200 19,220
Expense related to
warrants................... 250,000 -- 250,000 -- --
Expense related to stock and
warrant issuances to
founders and employees..... 720,000 -- 720,000 -- 1,148,112
Expense related to stock sold
to employees and
consultants by
shareholder................ 250,000 787,500 1,037,500 -- --
Changes in assets and
liabilities:
Accounts payable........... 56,486 514,656 571,142 45,443 374,988
Accrued employee and
consultant
compensation............ 303,895 875,917 1,179,812 345,920 725,900
----------- ----------- ----------- --------- -----------
Total adjustments....... 1,582,354 2,184,621 3,766,975 393,563 2,268,220
----------- ----------- ----------- --------- -----------
Net cash used in
operating
activities............ (297,565) (1,018,255) (1,315,820) (442,108) (423,407)
----------- ----------- ----------- --------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of equipment.......... (19,724) (26,036) (45,760) (3,834) (2,327)
Purchase of contract rights
from ISIS.................... -- -- -- -- (426,800)
----------- ----------- ----------- --------- -----------
Net cash used in
investing
activities............ (19,724) (26,036) (45,760) (3,834) (429,127)
----------- ----------- ----------- --------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Warrants issued to investors -- -- -- -- 303,853
Common stock issued to
founders..................... 1,440 -- 1,440 -- --
Common stock issued to
investors.................... 500,000 1,263,000 1,763,000 413,000 237,000
----------- ----------- ----------- --------- -----------
Net cash provided by
financing
activities............ 501,440 1,263,000 1,764,440 413,000 540,853
----------- ----------- ----------- --------- -----------
NET CHANGE IN CASH AND CASH
EQUIVALENTS.................... 184,151 218,709 402,860 (32,942) (311,681)
CASH AND CASH EQUIVALENTS,
beginning of period............ -- 184,151 -- 184,151 402,860
----------- ----------- ----------- --------- -----------
CASH AND CASH EQUIVALENTS, end of
period......................... $ 184,151 $ 402,860 $ 402,860 $ 151,209 $ 91,179
=========== =========== =========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 63
THE PLASTIC SURGERY COMPANY
(A DEVELOPMENT-STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 IS UNAUDITED)
1. BUSINESS AND ORGANIZATION
The Plastic Surgery Company (formerly known as Better Image, Inc.)(the
"Company") was incorporated as a Georgia corporation on April 30, 1997. Upon the
closing of an initial public offering (the "Offering"), the Company will provide
business development services and Internet solutions to plastic surgery
practices.
Upon the closing of the Offering, the Company will effect the transfer (the
"Transfer"), of certain operating assets and certain liabilities of, or the
stock of an entity holding certain assets and certain liabilities of, plastic
surgery practice entities (the "Founding Practices"). The Company will enter
into long-term business services agreements with these Founding Practices. The
Company will account for certain of the Founding Practices acquired in the
Transfers under Staff Accounting Bulletin No. 48, "Transfers of Nonmonetary
Assets by Promoters and Shareholders" ("SAB 48"). The shareholders of these
Founding Practices are considered promoters. The Company will account for the
remaining Founding Practices acquired in the Transfers at fair value which will
result in intangible assets being recorded. The Company will amortize these
intangible assets over periods ranging from 10 to 15 years. (See Note
2 -- Intangible Assets.)
The Company has had no significant operations to date, and the financial
statements have been prepared on the basis that the Transfers will occur,
although no assurance can be made that the Transfers will be completed or that
the Company will be successful in completing planned future acquisitions. The
accompanying financial statements are presented on a historical basis and do not
include any adjustments related to the Transfers. In order to expand in the
future, the Company will need further acquisition financing in the form of debt
or equity financing. There can be no assurance that such financing will be
available.
In the Transfers, the Company will acquire certain operating assets or the
stock of entities holding certain operating assets of the Founding Practices in
exchange for cash, notes and shares of common stock and will enter into
long-term business services agreements with each practice. The Company is unable
to hold certain assets of the practices under applicable state law. These assets
will not be acquired by the Company. Each Founding Practice transaction was
individually negotiated between the Company and the Founding Practice as to all
material terms. For the Transfers accounted for under SAB 48, the Founding
Practice will receive up to a maximum of 25% of the total consideration for each
transaction in cash and the balance in shares of common stock. For the Transfers
not accounted for under SAB 48, the Founding Practice will receive 50% in cash,
30% in notes and the balance in shares of common stock. The actual number of
shares of common stock to be issued by the Company in the Transfers shall be
determined subtracting the cash and note portions from the total consideration
and dividing such remaining amount by the initial public offering price. The
Transfers accounted for under SAB 48 will result in the assets and liabilities
of the Founding Practices being recorded at their historical costs. For the
Transfers not accounted for under SAB 48, the Company will record the Transfers
at fair value as asset acquisitions and will record intangible assets that will
be amortized over periods ranging from 10 to 15 years. (See Note 2 -- Intangible
Assets.) The assets to be transferred include receivables, supplies inventory,
prepaid expenses, net equipment and certain other current and non-current
assets. The liabilities to be transferred include long-term debt. The cash paid
to the Founding Practices accounted for under SAB 48 will be recorded as a
dividend by the Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Revenue from managing the practices pursuant to the business services
agreements will be recognized on a monthly basis as cash is collected by the
practice. The revenue of the Company will consist of the sum of the
F-7
<PAGE> 64
THE PLASTIC SURGERY COMPANY
(A DEVELOPMENT-STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 IS UNAUDITED)
service fees and amounts equal to the operating expenses of the practice assumed
by the Company, which we will be legally obligated to pay under such business
services agreements. See Note 5 "Operating Expenses of the Founding Practices"
for a discussion of those expenses that will be the responsibility and legal
obligation of the Company and included as a component of the Company's revenue.
In general, the business services agreements provide for the payment of fees to
the Company based on a percentage of the net cash collected by the Founding
Practices. Expenses not required to be paid by the Company pursuant to the
agreements primarily consist of professional expenses of the surgeons. The
Company will separately disclose in future financial statements the revenue from
service fees and operating expenses.
The Emerging Issues Task Force of the Financial Accounting Standards Board
issued its consensus Opinion 97-2 ("EITF 97-2"), which addresses certain
specific matters pertaining to the practice management industry. EITF 97-2 will
be effective for the Company upon the Offering. EITF 97-2 addresses the ability
of certain practice management companies to consolidate the results of certain
practices with which it has an existing contractual relationship. The Company
currently will not consolidate the operations of the plastic surgery practices
that it manages as the agreements with the practices do not meet the
requirements for consolidation as set forth in EITF 97-2.
After the closing of the Offering, the Company also intends to enter into
"management services agreements" with select plastic surgery practices rather
than "business services agreements". Pursuant to the management services
agreements, the Company will provide business development services and Internet
solutions and receive service fees. The Company expects its incurred expenses
under the management services agreements will be substantially similar to those
incurred under the business services agreements. The Company will recognize
revenues from these agreements based on a percentage of the net cash collected
by the practice which is commensurate with the level and timing of services
being provided. The Company will not acquire operating assets of the practices
entering into management services agreements, and will not assume the operating
expenses of these practices. Because the Company will not assume the operating
expenses of these practices, the Company will not record the operating expenses
as revenue or expense in its income statement.
The Company will enter into subscription agreements with subscribing
surgeons which will allow these surgeons to be included in the directory of
Board certified or Board eligible cosmetic surgeons on the Company's consumer
website. Subscribing surgeons will pay the Company a fee for the directory
listing which will be recognized as revenue as it is earned.
The Company anticipates generating future revenues from the sale of
products and services through the Company's proprietary websites. The revenue
generated may include fees from banner and sponsorship advertising,
subscriptions to our online magazine and video imaging.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments purchased within 90
days or less of maturity. They are recorded at cost which approximates fair
value.
F-8
<PAGE> 65
THE PLASTIC SURGERY COMPANY
(A DEVELOPMENT-STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 IS UNAUDITED)
EQUIPMENT
Equipment is stated at cost less accumulated depreciation. Depreciation is
provided using the straight-line method over the assets' estimated useful lives
of five to seven years.
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1997 1998 1999
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Equipment consisted of the following:
Computer equipment....................................... $14,275 $21,914 $ 24,241
Furniture and fixtures................................... 5,449 23,846 23,846
------- ------- --------
19,724 45,760 48,087
Less accumulated depreciation......................... (1,973) (8,521) (13,155)
------- ------- --------
$17,751 $37,239 $ 34,932
======= ======= ========
</TABLE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of cash and accounts payable approximate their fair
values principally because of the short-term maturities of these instruments.
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 and
assumptions.
STOCK OPTIONS AND WARRANTS
The Company accounts for the issuance of options and warrants to employees
in accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB No. 25"). Options and warrants issued to
employees at an exercise price at or above fair value at the date of grant would
require no compensation expense to be recorded under APB No. 25. Options and
warrants issued to non-employees are accounted for under Statement of Financial
Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS
No. 123"). Options and warrants issued to non-employees will require
compensation expense to be recorded for the fair value of the equity instrument
issued less any consideration received.
BASIC AND DILUTED NET LOSS PER SHARE
Basic and diluted net loss per share was computed in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share", using
the weighted average number of common shares outstanding. Diluted net loss per
share does not include the impact of common stock equivalents for options and
warrants of 15,000, 28,500, 15,000 and 1,578,704 for the period from inception
(April 30, 1997) to December 31, 1997, for the year ended December 31, 1998 and
for the six months ended June 30, 1998 and 1999, respectively, as their effect
would be anti-dilutive.
F-9
<PAGE> 66
THE PLASTIC SURGERY COMPANY
(A DEVELOPMENT-STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 IS UNAUDITED)
ACCRUED EXPENSES
During 1998, the Company decided to move its corporate headquarters from
Atlanta, Georgia to Santa Barbara, California. In connection with this decision,
the Company accrued approximately $138,000 in 1998 related to contractual lease
agreements that will not benefit future periods.
COMPREHENSIVE LOSS
Comprehensive loss for the period from Inception (April 30, 1997) to
December 31, 1997, for the year ended December 1998 and for the six months ended
June 30, 1998 and 1999 is the same as net loss presented in the accompanying
statements of operations.
INTANGIBLE ASSETS
Intangible assets consist of the excess of the purchase price over the fair
value of the net assets acquired from the asset acquisitions at fair value and
the purchase of contract rights discussed in Note 8. For the acquired practices,
the business services agreements have a term of 25 years. The Company has
allocated these intangible assets to the value obtained through entering into
business services agreements. The Company believes that no other identifiable
intangible asset was generated by these acquisitions. The Company will amortize
the intangible assets over their estimated useful lives taking into
consideration various qualitative factors, including the terms of the business
services agreements. The Company will consider the unique characteristics of
each practice being managed and uncertainties resulting from the Company's
inability or the practices' inability to perform over the term of the applicable
business services agreement. These factors take into consideration the
probability that a practice will be able to extend its existence indefinitely
and thus enable the Company to recover through profitable operations the
carrying value of the intangible assets. These factors include the following:
- The strength of the local market as evidenced by such factors as location
in the country, market demographics, and the number of plastic surgery
procedures performed in the market;
- Market recognition of the practice name;
- The existence of business services agreements with other practices in the
same market that could provide continuity of the practice, if necessary;
- The number of surgeons in the practice;
- The ages of the surgeons in the practice;
- The historical operating experience of the practice;
- Past experience of the practice to attract and retain associates; and
- The terms and conditions of the employment agreement with the surgeons.
Based on the above factors, the Company is amortizing intangible assets
over periods ranging from 10 to 15 years.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews the carrying value of its long-lived assets and
goodwill at least quarterly on a practice by practice basis to determine if
facts and circumstances exist which would suggest that assets might
F-10
<PAGE> 67
THE PLASTIC SURGERY COMPANY
(A DEVELOPMENT-STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 IS UNAUDITED)
be impaired or that the amortization period needs to be modified. Among the
factors the Company considers in making the evaluation are changes in the
practices' market position, reputation, profitability geographic penetration,
the relationship with the physicians and any changes in the legal or regulatory
environment. If facts and circumstances are present which may indicate that the
carrying amount of the asset may not be recoverable, the Company will prepare a
projection of the undiscounted cash flows of the specific practice and determine
if the long-lived assets and/or goodwill are recoverable based on these
undiscounted cash flows. If the carrying value of the assets exceeds the
undiscounted cash flow, the Company will adjust the carrying amount of these
assets to their estimated fair value. The Company will determine estimated fair
value by reference to quoted market prices, if available, or by considering the
prices for similar assets or the results of valuation techniques that include
the present value of the estimated future cash flows.
INTERIM UNAUDITED FINANCIAL INFORMATION
The financial statements as of June 30, 1999 and for the six months ended
June 30, 1998 and 1999 are unaudited; however, in the opinion of management, all
adjustments (consisting solely of normal recurring adjustments) necessary for a
fair presentation of the unaudited financial statements for these interim
periods have been included. The results of interim periods are not necessarily
indicative of the results to be obtained for a full year.
NEW ACCOUNTING PRONOUNCEMENT
In June of 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. SFAS No.
133 is effective for the Company beginning with fiscal 2000. Management does not
expect the adoption of SFAS No. 133 to have a significant impact on the
financial position or results of operations of the Company.
3. SHAREHOLDERS' DEFICIT
The Company was incorporated in the State of Georgia on April 30, 1997.
Shortly after the date of incorporation, 216,000 shares of common stock were
issued to the founders and certain employees for $.006 per share. The Company
recorded $720,000 in expense on these shares based on a fair value of
approximately $3.33 per share as determined by management.
In May 1997, the Company began selling 30,000 shares of common stock to
affiliates of anticipated Founding Practices and other unrelated investors
through a private placement memorandum ("PPM") at a price of approximately
$16.67 per share. As of December 31, 1997, all 30,000 shares were issued under
the PPM for net proceeds of $500,000.
In December 1997, a principal stockholder of the Company sold 15,000 shares
of his common stock to a consultant of the Company for $.013 per share. The
Company recorded expense of $250,000 on these shares in 1997 based on a fair
value of approximately $16.67 per share as determined by management.
In March 1998, the Company began selling 45,000 shares of common stock to
affiliates of anticipated Founding Practices and other unrelated investors
through a second private placement memorandum ("PPM2") at a price of
approximately $33.33 per share. As of December 31, 1998, 37,890 shares were
issued under the PPM2 for net proceeds of $1,263,000.
F-11
<PAGE> 68
THE PLASTIC SURGERY COMPANY
(A DEVELOPMENT-STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 IS UNAUDITED)
In November 1998, a principal stockholder of the Company sold 23,625 shares
of his common stock to certain employees and consultants of the Company for
approximately $.013 per share. The Company recorded expense of $787,500 on these
shares in 1998 based on a fair value of approximately $33.33 per share as
determined by management.
In January and February of 1999, the Company sold the remaining 7,110
shares of common stock under PPM2 for net proceeds of $237,000 at a price of
approximately $33.33 per share.
4. INCOME TAXES
As reflected in the accompanying statements of operations, the Company
incurred a loss from operations during the period from inception (April 30,
1997) to December 31, 1997, for the year ended December 31, 1998 and for the six
months ended June 30, 1999. Due to the limited operations of the Company since
its inception and the pending offering, a valuation allowance has been recorded
to fully reserve for the deferred tax benefits. The components of the deferred
tax assets as of December 31, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1998
------------ ------------
<S> <C> <C>
Net operating loss carryforwards............................ $ 579,814 $ 646,368
Accrued liabilities and organizational expenses............. 133,213 569,691
--------- -----------
Total deferred tax assets......................... 713,027 1,216,059
Valuation allowance............................... (713,027) (1,216,059)
--------- -----------
Net deferred tax assets................. $ -- $ --
========= ===========
</TABLE>
The net operating loss carryforwards begin expiring in 2012. A valuation
allowance has been provided on the deferred tax assets as management believes
that it is more likely than not that future operations, due to the limited
operating history of the Company, will not result in realization of the net
operating loss carryforwards or deferred tax assets. The Company will record the
benefits from the deferred tax assets when it is more likely than not that these
assets will be realized. There are no significant differences in the tax and
book bases of the Company's assets or liabilities that would give rise to
deferred tax balances.
5. TRANSACTIONS WITH FOUNDING PRACTICES
As discussed in Note 1, the Company plans to complete, through a series of
stock acquisitions and mergers and asset transfers, the acquisition of certain
assets and assumption of certain liabilities of the Founding Practices
concurrently with an initial public offering of shares of its common stock.
The Founding Practices will enter into 20 or 25 year business service
agreements with the Company. Additionally, the surgeons at the Founding
Practices will enter into employment agreements including noncompete provisions
with the Founding Practices.
AGREEMENTS WITH FOUNDING PRACTICES
As part of the business services arrangements, each Founding Practice has
entered into three agreements: (i) an acquisition agreement pursuant to which
the Company purchases certain operating assets of each practice; (ii) a business
services agreement whereby the Company agrees to provide management or
consulting services to the practice; and (iii) an employment agreement between
the practice and each surgeon who is an equity holder in the practice or who
provides services through such practice on an average of more
F-12
<PAGE> 69
THE PLASTIC SURGERY COMPANY
(A DEVELOPMENT-STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 IS UNAUDITED)
than ten days each month. To the extent we enter into these agreements in future
acquisitions, the terms may differ materially from the terms described below.
Acquisition Agreements. The Founding Practices and the surgeons have
entered into an acquisition agreements with the Company which may be in the form
of (i) an asset purchase and sale agreement; (ii) a stock purchase and sale
agreement; or (iii) an agreement and plan of reorganization whereby the practice
merges with the Company (individually an "acquisition agreement" or collectively
"acquisition agreements"). Based on applicable state laws and regulations, the
operating assets of each practice, which include equipment, inventory, accounts
receivable, furniture and other personal property, or some combination thereof
will be transferred to the Company pursuant to the acquisition agreements. As
consideration for entering into an acquisition agreement, the Company will pay
consideration consisting of a combination of common stock, notes and cash.
Business Services Agreements. Each Founding Practice will enter into a
business services agreement, in the form of a service agreement or consulting
agreement as dictated by state law. Each service agreement generally requires
that the Company provide the following services for the practices: acquisition
and maintenance of specified furnishings and equipment; provision of suitable
offices and facilities; payroll processing; employment of necessary personnel
(excluding plastic surgeons and certain medical personnel); development of
business systems procedures and forms; procurement and inventory management;
assistance in acquiring malpractice insurance; cash management; advertising,
marketing and practice development; development of appropriate business systems;
supervision, management and organization of files and records; and financial
reporting and analysis. Any leases entered into by the Company on behalf of the
practice will be subleased by the practice from the Company. Under the service
agreements, the Company will receive a service fee of 15% of net cash collected.
If required by applicable state law or regulations, a practice may enter into
consulting agreements that contain certain of the same provisions as the
business services agreement, including: (i) provisions relating to the
obligation to loan funds to the practice in the event the practice is unable to
pay its current expenses, (ii) repurchase of assets and assumption of
liabilities by the practice upon expiration or termination, (iii) assignment,
(iv) covenant not to compete, (v) term and termination, and (vi)
indemnification. Under consulting agreements, the Company will provide the
following services to practices in exchange for a fixed dollar annual fee with
annual fixed percentage increase: consulting with respect to equipment and
office needs; preparing staffing models appropriate for the practice; advising
and training with respect to business systems; purchasing and maintaining
inventory; advising with respect to and providing or arranging accounting and
bookkeeping services; assisting with the acquisition of malpractice insurance;
advising with respect to developing a marketing plan; assessing the financial
feasibility of establishing new offices; providing billing and collection
services; and assisting the practices in organizing and developing filing and
recording systems. Pursuant to these business services agreements, the Company
must pay the operating expenses of a practice. To the extent a practice's
operating expenses exceed revenues, the practice will be responsible for the
difference.
The business services agreements have either 20 or 25 year terms for the
Founding Practices, beginning on the date of the Offering. The Company
anticipates executing business services agreements with 25 year terms for each
allied practice affiliated with the Company after the Offering. The business
services agreements are subject to termination by either party in the event the
non-terminating party becomes subject to voluntary or involuntary bankruptcy
proceedings or materially breaches the agreement, subject to a cure period. The
practices may also terminate the business services agreements if the Company is
subject to a change of control. Upon the termination of the business services
agreements (except upon a breach by the Company), the practice and its
shareholders are subject to a two year covenant not to compete which prohibits
the
F-13
<PAGE> 70
THE PLASTIC SURGERY COMPANY
(A DEVELOPMENT-STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 IS UNAUDITED)
following within a specified territory the following: (i) advertising in print
and electronic media (ii) soliciting patients, surgeons or staff associated with
the practice and (iii) soliciting any referrals from any physician who referred
one or more patients to the practice within three years prior to the date of
such termination.
Under the business services agreements, the surgeons maintain full control
over and ownership of the practices, determine which personnel will be
affiliated with the practices and establish their own practice standards to
promote quality plastic surgery care. The Company does not engage in the
practice of medicine. Each surgeon is responsible for the compliance of his or
her practice with state and local regulations, licensing, and certification
requirements applicable to the practice of plastic surgery. Each practice, in
its sole discretion, determines the fees to be charged for services provided to
patients based upon market conditions in the service area and other factors
deemed appropriate by the practice.
Employment Agreements. Each surgeon who is an equity holder in a practice
or who provides plastic surgery services through a practice an average of more
than ten days a month either at the time of execution of the business services
agreement or any time thereafter is required to execute an employment agreement
with the practice. Each employment agreement generally provides that the surgeon
will perform professional services for the practice over periods ranging from 5
to 25 years, commencing on the date of the Offering, with automatic renewal for
additional one year terms. After the expiration of the initial term, either the
practice or the surgeon may terminate the employment agreement at any time
without cause by giving ninety days prior written notice. Each surgeon's
compensation will be a percentage of net cash collected by the practice after
the payment of the service fee and all operating expenses of the practice, with
such percentage to be determined by the practice. The surgeon agrees that upon
termination or expiration of the employment agreement, he or she will not
compete for a period of two years in the market in which the practice operates
an office, will not solicit former patients of the practice, will not solicit
referrals from any physician who referred one or more patients to the surgeon or
the practice within the two years prior to the termination, and will limit the
methods of advertising in the area in which a practice is located.
The employment agreement is between the surgeon and the practice and the
Company is not a party to the employment agreement. The parties to the
employment agreement can amend the employment agreement without the Company's
consent. The practice, however, enters into a business services agreement with
the Company that requires the practice to enter into the employment agreements,
in the form attached to the business services agreement, with all owners of the
practice or any surgeon who performs surgery for the practice for at least ten
days a month. If the practice or the surgeon modifies the employment agreement
in a way that causes the practice to breach any of the terms of the business
services agreement, the Company will be entitled to enforce the terms of the
business services agreement against the practice. The Company cannot guarantee
that the surgeon will complete the 5 or 25 year term or renew his or her
employment at the end of the term. If the surgeon does not complete his or her
employment terms or does not renew his or her contract, the Company's revenues
will be adversely affected.
F-14
<PAGE> 71
THE PLASTIC SURGERY COMPANY
(A DEVELOPMENT-STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 IS UNAUDITED)
CALCULATION OF SERVICES FEES
Under the business services agreements, the Company will recognize revenue
in amounts equal to the assumed expenses plus service fees of 15% of the net
cash collected by the practice. In the future, the Company may recognize
revenues in amounts equal to the assumed expenses plus a fixed dollar amount
with annual fixed percentage increases. Net cash collected is defined as revenue
resulting from fees and charges for each month earned and collected by and on
behalf of the practice as a result of professional services provided by the
practice's surgeons and those under the surgeons' supervision and other fees or
income generated by the practice, less any adjustments for refunds or other
items that do not generate a fee.
OPERATING EXPENSES OF THE FOUNDING PRACTICES
Subsequent to the Transfers, the Company will be responsible and have a
legal obligation for the payment of certain operating expenses incurred by the
practice to the extent permitted by applicable law. These expenses include the
following:
- Salaries, benefits, payroll taxes, workers compensation, health insurance
and other benefit plans, and other direct expenses of non-medical
employees of the Company at each practice office,
- Direct costs of all employees or consultants that provide services to
each practice office,
- Medical and office supplies,
- Lease or rent payments, utilities, telephone and maintenance expenses for
practice facilities,
- Property taxes on the Company assets located at practice offices,
- Property, casualty and liability insurance premiums, excluding
malpractice insurance which will be the responsibility of the practice,
- Surgeon recruiting expenses, and
- Advertising and other expenses attributable to the promotion of practice
offices.
All of the above expenses will be assumed by the Company and be paid
directly to the third-party provider of the goods or services. These operating
expenses will be paid out of individual practice cash accounts that are
controlled by the Company. These expenses will be recorded in the Company's
financial statements because the Company is legally obligated to pay these
expenses. In exchange for assuming these expenses and providing management
services, the Company will record revenue in amounts equal to the assumed
expenses plus the management fee described above.
The Founding Practices will retain responsibility for the payment of any
and all direct employment expenses, including benefits, for any surgeon or other
employee that the Company is prohibited from employing by applicable state law.
In addition, the Founding Practices will retain responsibility for the payment
of expenses for continuing education, seminars, professional licenses,
professional membership dues and malpractice insurance and all other expenses of
any surgeon. These expenses will remain the responsibility of the Founding
Practices and will not be included in reimbursed operating expenses, which is a
component of the Company's revenue. See Note 2 "Revenue Recognition" for further
discussion of the revenue of the Company.
Each business services agreement obligates the Company, with no limitation,
to pay the operating expenses of a practice. To the extent a practice's
operating expenses exceed its revenues, the practice will be responsible for the
difference. The Company will record the difference (excess operating expenses)
as a receivable from the practice bearing interest at the prime rate as
published in The Wall Street Journal plus one percent. Any receivable created
will be repaid as an operating expense. This receivable will be repaid after
F-15
<PAGE> 72
THE PLASTIC SURGERY COMPANY
(A DEVELOPMENT-STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 IS UNAUDITED)
the payment of the service fee and before the surgeon receives any compensation.
There is no defined payment date related to this receivable. The Company will
fund the excess operating expenses from working capital or borrowings under a
credit facility, which the Company anticipates establishing following the
closing of the Offering.
FINANCING PLANS
Third party financing companies will provide online financing for patients
of the Company's allied practices and will be responsible for the approval and
application process. These companies will assume all of the risks related to
financing. The practice will receive a payment from these companies equal to 85%
to 90% of the financed amount. These companies will not have any recourse
against the individual practices or the Company for any unpaid balances.
Application and approval procedures will be instituted by these companies and
terms of payment will vary upon the creditworthiness of the patient. The billing
of patients is the responsibility of the Company employees located at the
practice.
6. COMMITMENTS AND CONTINGENCIES
The Company will be subject to certain government regulations at the
federal and state levels. In compliance with certain regulatory requirements,
the Company will not control the practice of medicine. The business services
agreements may be challenged by certain states as to their legality. There also
can be no assurance that the laws and regulations of states in which the Company
will maintain operations will not change or be interpreted in the future to
restrict the Company's relationships with the Founding Practices.
Each surgeon may be exposed to professional liability and other claims by
providing plastic surgery procedures to the public. Each Founding Practice is
required to maintain general liability and malpractice insurance. As a result of
providing business services, the Company may be named as a co-defendant in
lawsuits against surgeons affiliated with the Founding Practices. The Company
does not control the practice of plastic surgery and cannot purchase malpractice
insurance. The Company does not control the compliance of the surgeons with
regulations or other requirements relating to the practice of medicine.
Successful claims could result in large damage awards that could exceed
insurance limits. Insurance coverage can be very expensive and vary from state
to state. The practices indemnify the Company for liability arising from
malpractice claims but any indemnification might reduce a practice's ability to
pay its expenses. Successful claims may have a material and adverse effect on
the Company's revenues and financial results. The Company maintains professional
liability coverage for its directors and officers and general liability
insurance.
7. STOCK OPTIONS AND WARRANTS
The Company has established the 1998 Employee Stock Option Plan. All
options issued under this plan will be accounted for in accordance with APB No.
25, and any required compensation expense on these options will be recorded at
the date of grant. The total number of shares to be granted under the plan may
not exceed 840,000 shares. The Company had 13,500 options outstanding and
exercisable under the plan at December 31, 1998 and had 826,500 shares available
for future grants.
The Company has adopted the 1999 Non-Employee Director Stock Plan. The
total number of shares to be granted under the plan may not exceed 280,000
shares. No options were outstanding under this director plan as of December 31,
1998.
In October 1997, the Company granted a consultant warrants to purchase
15,000 shares of common stock at an exercise price of approximately $16.67 per
share. These warrants were 100% vested at the date of grant.
F-16
<PAGE> 73
THE PLASTIC SURGERY COMPANY
(A DEVELOPMENT-STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 IS UNAUDITED)
This individual subsequently became an employee of the Company in October 1998.
The Company recorded compensation expense in 1997 of $250,000 on these warrants
based on a fair value per share of approximately $16.67 as determined by
management.
A summary of changes in outstanding warrants and options during the period
from inception (April 30, 1997) to December 31, 1997 and for the year ended
December 31, 1998 is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE EXERCISE
WARRANTS OPTIONS PRICE PRICE
-------- ------- --------------- --------
<S> <C> <C> <C> <C>
April 30, 1997...................................... -- -- $ -- $ --
Granted........................................... 15,000 -- 16.67 16.67
Exercised......................................... -- -- -- --
Cancelled......................................... -- -- -- --
------- ------
December 31, 1997................................... 15,000 --
Granted........................................... -- 13,500 $ 33.33 $33.33
Exercised......................................... -- -- -- --
Cancelled......................................... -- -- -- --
------- ------
December 31, 1998................................... 15,000 13,500 $16.67 - $33.33 $24.56
======= ======
</TABLE>
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123
SFAS No. 123 requires the Company to disclose pro forma net loss and net
loss per share as if the Company had accounted for its employee stock option
grants under SFAS No. 123. The fair value of each option and warrant granted has
been estimated as of the date of grant using the Black-Scholes valuation model
with the following assumptions:
<TABLE>
<S> <C>
- - Dividend yield 0
- - Expected volatility 49%
- - Risk-free interest rate at the date of grant 5.38% - 5.47%
- - Expected life 5 years
</TABLE>
Using these assumptions, the fair value of the employee stock options
granted during 1998 was $223,168, which would be expensed in 1998 as all options
granted were fully vested on the date of grant.
The weighted average fair market value of options at the date of grant for
1998 was $33.33.
The following pro forma information adjusts the net loss and net loss per
share of common stock for the impact of SFAS No. 123:
<TABLE>
<CAPTION>
1998
-----------
<S> <C>
Net loss:
As reported............................................... $(3,202,876)
Pro forma in accordance with SFAS No. 123................. $(3,426,044)
Net loss per share:
As reported............................................... $ (12.30)
Pro forma in accordance with SFAS No. 123................. $ (13.15)
</TABLE>
F-17
<PAGE> 74
THE PLASTIC SURGERY COMPANY
(A DEVELOPMENT-STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 IS UNAUDITED)
The following table summarizes the range of exercise price, weighted
average exercise price and weighted average remaining contractual lives for the
options and warrants outstanding as of December 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED
WEIGHTED WEIGHTED AVERAGE
AVERAGE AVERAGE REMAINING
NUMBER OF RANGE OF FAIR EXERCISE CONTRACTUAL
YEAR OF GRANT SHARES EXERCISE PRICE VALUE PRICE LIFE
- ------------- --------- -------------- -------- -------- -----------
<S> <C> <C> <C> <C> <C>
1997............................... 15,000 $16.67 $16.67 $16.67 4 years
1998............................... 13,500 $33.33 $33.33 $33.33 5 years
</TABLE>
At the closing of the Offering, the Company will grant options to purchase
755,000 shares of common stock at the Offering price. These options vest 20%
annually from the date of the Offering. The Company will account for these
options under APB No. 25. As the exercise price will equal the fair value of the
option on the date of grant, the Offering date, no compensation expense will be
recorded.
8. SUBSEQUENT EVENTS
STOCK SPLIT
Immediately before the effective date of the Offering, the Company will
effect an assumed .15 for 1 reverse stock split. Accordingly, the accompanying
financial statements reflect the assumed reverse stock split as if it occurred
at the beginning of each period presented.
FOUNDING PRACTICE INFORMATION
The combined operating data of the Founding Practices for the year ended
December 31, 1998 and for the six months ended June 30, 1999 was as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1998 JUNE 30, 1999
----------------- ----------------
(UNAUDITED)
<S> <C> <C>
Patient Revenues...................................... $41,595,370 $22,738,520
Operating Expenses (unaudited)........................ 27,201,423 14,980,146
</TABLE>
The Company's service fee under business services agreements is based on
15% of the net cash collected by the practice. Patient revenues and operating
expenses above are presented on an accrual basis as required by generally
accepted accounting principles. The difference between the net cash collected
and the accrual basis net patient revenue for the Founding Practices in any
given period is not material. The payment of the service fee of 15% of net cash
collected would not differ materially from that calculated as 15% of accrual
basis revenues between reporting periods. The operating expenses of the Founding
Practices are presented as the accrual basis operating expenses will be recorded
as a component of net revenues in the statement of operations of the Company
beginning with the date of Transfers. The historical information for the
Founding Practices presented herein is not related to the financial position or
results of operations of the Company. This information is presented solely for
the purpose of providing disclosures to potential investors regarding the group
of entities with which the Company will enter into business services agreements.
The Founding Practices were not operated under common control or management
during the fiscal year ended December 31, 1998 or the six months ended June 30,
1999.
F-18
<PAGE> 75
THE PLASTIC SURGERY COMPANY
(A DEVELOPMENT-STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 IS UNAUDITED)
PURCHASE OF RIGHTS
Certain of the Founding Practices resulted from the Company's acquisition
in May 1999 of the right to negotiate business development agreements with
plastic surgery practices originally contacted by ISIS Cosmetic Surgery
Partners, Inc. ("ISIS"). With the closing of the Offering, the Company will
enter into business services agreements with these plastic surgery practices. In
connection with this acquisition, the Company paid aggregate consideration of
approximately $3,500,000, which consisted of 92,213 shares of common stock
valued at approximately $33.33 per share and cash of approximately $400,000.
ISIS had entered into letters of intent, which included an exclusive
negotiations clause, with certain practices to have those practices enter into
management services agreements with ISIS at a later date. ISIS was to provide
services similar to the Company. ISIS and the Company were unrelated entities at
the time of the purchase. The acquisition was accounted for as an asset
acquisition and the Company will amortize the intangible asset over 14 years.
The amortization period for the contract rights purchased from ISIS was
determined by reference to the amortization periods for the business services
agreements with the Founding Practices resulting from the transaction with ISIS.
The 14-year period was calculated as a weighted average of the amortization
lives and resulting intangible assets for these business services agreements.
ISSUANCE OF WARRANTS
On May 13, 1999, the Company sold warrants to purchase 1,390,204 shares of
common stock at an exercise price per share equal to $2.50. The purchase price
was $.50 per warrant. The Company received cash proceeds of $303,852 from the
sale of these warrants. The Company received notes from a consultant and certain
officers and employees in the amount of $391,250, for the $.50 per warrant
purchase price of the warrants. The notes are full recourse notes that mature
three years from the date of issuance and accrue interest at a rate of 8% per
annum. Interest is payable on a quarterly basis beginning the first quarter
after the closing of the Offering, but no later than September 30, 1999. The
warrants may be exercised in whole or in part for a five year term commencing on
the date of issuance. The warrants are not subject to adjustment for split up,
stock dividends or any other reorganization of the Company's outstanding stock.
As the warrants were a cost of raising capital, the Company recorded a charge to
additional paid-in capital of $9,269,880 related to the issuance of these
warrants based on the fair value of the Company's common stock on the date of
issuance of $8.93 per share.
Certain Founding Practice surgeons will receive warrants to purchase an
aggregate of 146,500 shares of common stock with an exercise price per share
equal to the initial public offering price, exercisable for a five year term
commencing on the closing of the Offering, for referring surgeons for
affiliation with the Company and assistance in the recruitment of officers of
the Company. The Company will record expense related to these warrants at the
closing of the Offering.
The Company also issued warrants to individuals not affiliated with the
Company to purchase an aggregate of 125,000 shares of common stock with an
exercise price per share equal to the initial public offering price, exercisable
for a five year term commencing on the date of the Offering, for referring
surgeons to the Company. The Company will record expense related to these
warrants at the closing of the Offering.
On May 12, 1999, the Company issued warrants to purchase 160,000 shares of
common stock to certain employees and a consultant of the Company for an
exercise price per share equal to $2.50. The warrants are not subject to
adjustment for split up, stock dividends or any other reorganization of the
Company's outstanding stock. The Company recorded expense of $1,148,112 related
to the issuance of these warrants based on the fair value of the Company's
common stock on the date of issuance of $8.93 per share.
F-19
<PAGE> 76
THE PLASTIC SURGERY COMPANY
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
JUNE 30, 1999
Simultaneously with and as a condition to the closing of the offering, the
Company will acquire certain operating assets and assume certain liabilities of
30 separate plastic surgery practices (collectively, the "Founding Practices")
in exchange for cash, shares of common stock and promissory notes and enter into
long-term business services agreements with the Founding Practices (the
"Transfers"). In May of 1999, the Company purchased, for common stock and cash,
the rights to negotiate business services agreements with certain Founding
Practices who signed letters of intent which contained an exclusive negotiations
clause with ISIS Cosmetic Surgery Partners, Inc. ("ISIS").
The unaudited pro forma balance sheet gives effect to the following as if
they occurred on June 30, 1999 (1) the Transfers, and (2) the sale by the
Company of 2,400,000 shares of common stock at an assumed initial public
offering price of $11.00 per share. The proforma balance sheet is based upon the
historical financial statements of The Plastic Surgery Company and the Founding
Practices as a group. The unaudited pro forma balance sheet should be read in
conjunction with other financial information, including the financial statements
of The Plastic Surgery Company, included elsewhere in this Prospectus. Certain
of the Transfers are not deemed to be business combinations and will be
accounted for in accordance with SAB 48. The Transfers accounted for under SAB
48 will result in assets and liabilities of the Founding Practices being
recorded by the Company at the historical cost to the Founding Practices. The
consideration paid to these Founders will be in cash and common stock of the
Company. The remaining Transfers will be accounted at fair value as asset
acquisitions. The Transfers accounted for as asset acquisitions will result in
assets and liabilities being recorded by the Company at fair value and
intangible assets being recorded for the excess value of consideration over the
fair value of those assets. The consideration paid to these Founding Practices
will be in cash, promissory notes and stock of the Company. The number of shares
of common stock issued in the Transfers will depend on the initial public
offering price. The unaudited pro forma balance sheet is presented for
illustrative purposes only and is not necessarily indicative of the operating
results or financial position that would have been achieved if the above
transactions had been consummated on the date indicated, nor is it necessarily
indicative of our future operating results.
F-20
<PAGE> 77
THE PLASTIC SURGERY COMPANY
PRO FORMA BALANCE SHEET
JUNE 30, 1999
<TABLE>
<CAPTION>
ASSET
SAB48 ACQUISITION POST
FOUNDING FOUNDING PRO FORMA PRO FORMA OFFERING
TPSC PRACTICES PRACTICES ADJUSTMENTS COMBINED ADJUSTMENTS
----------- ---------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents...... $ 91,179 $ 680,174 $1,091,123 $ (680,174)(1) $ 91,179 $ 22,438,000(5)
(1,091,123)(2) (12,422,574)(6)
(630,462)(6)
(833,630)(6)
(485,073)(7)
Patient receivables, net....... -- 1,752,115 254,921 (1,752,115)(1) -- --
(254,921)(2)
Other current assets........... -- 276,712 425,604 (223,051)(1) 53,661 --
(425,604)(2)
----------- ---------- ---------- ----------- ----------- ------------
Total current assets.... 91,179 2,709,001 1,771,648 (4,426,988) 144,840 8,066,261
Equipment, net................. 34,932 1,257,405 884,041 (333,333)(1) 1,035,806 --
(884,041)(2)
76,802(4)
Intangible assets, net......... 3,485,994 -- -- 13,292,292(4) 16,778,286 --
Other assets................... -- 36,020 97,815 (36,020)(1) -- --
(97,815)(2)
----------- ---------- ---------- ----------- ----------- ------------
Total assets............ $ 3,612,105 $4,002,426 $2,753,504 $ 7,590,897 $17,958,932 $ 8,066,261
=========== ========== ========== =========== =========== ============
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Accounts payable............... $ 946,130 $ 284,145 $ 225,827 $ (284,145)(1) $ 946,130 $ (833,630)(6)
(225,827)(2)
Accrued liabilities............ 1,514,462 303,558 63,357 (303,558)(1) 1,514,462 (630,462)(6)
(63,357)(2)
Current portion of long-term
debt.......................... -- 679,026 535,374 (193,953)(1) 1,164,652 (485,073)(7)
(535,374)(2)
679,579(4)
Payable to Founding
Practices..................... -- -- -- 5,738,027(3) 12,422,574 (12,422,574)(6)
6,684,547(4)
----------- ---------- ---------- ----------- ----------- ------------
Total current
liabilities........... 2,460,592 1,266,729 824,558 11,495,939 16,047,818 (14,371,739)
Long-term debt, less current
portion....................... -- 427,088 829,440 (427,088)(1) 3,331,151 --
(829,440)(2)
3,331,151(4)
----------- ---------- ---------- ----------- ----------- ------------
Total liabilities....... 2,460,592 1,693,817 1,653,998 13,570,562 19,378,969 (14,371,739)
----------- ---------- ---------- ----------- ----------- ------------
SHAREHOLDERS' EQUITY (DEFICIT)
Capital stock................. -- -- -- -- -- --
Additional paid-in capital.... (2,437,160) -- -- 2,673,817(4) 236,657 22,438,000(5)
Warrants...................... 11,363,095 -- -- 11,363,095
Accumulated deficit........... (7,774,422) -- -- (1,815,949)(1) (13,019,789)
(5,738,027)(3)
2,308,609(3)
Combined Founding Practices's
Equity...................... -- 2,308,609 1,099,506 (1,099,506)(2) -- --
(2,308,609)(3)
----------- ---------- ---------- ----------- ----------- ------------
Total shareholders' equity
(deficit)................... 1,151,513 2,308,609 1,099,506 (5,979,665) (1,420,037) 22,438,000
----------- ---------- ---------- ----------- ----------- ------------
Total liabilities and
shareholders' equity........ $ 3,612,105 $4,002,426 $2,753,504 $ 7,590,897 $17,958,932 $ 8,066,261
=========== ========== ========== =========== =========== ============
<CAPTION>
PRO FORMA
AS ADJUSTED
------------
<S> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents...... $ 8,157,440
Patient receivables, net....... --
Other current assets........... 53,661
------------
Total current assets.... 8,211,101
Equipment, net................. 1,035,806
Intangible assets, net......... 16,778,286
Other assets................... --
------------
Total assets............ $ 26,025,193
============
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Accounts payable............... $ 112,500
Accrued liabilities............ 884,000
Current portion of long-term
debt.......................... 679,579
Payable to Founding
Practices..................... --
------------
Total current
liabilities........... 1,676,079
Long-term debt, less current
portion....................... 3,331,151
------------
Total liabilities....... 5,007,230
------------
SHAREHOLDERS' EQUITY (DEFICIT)
Capital stock................. --
Additional paid-in capital.... 22,674,657
Warrants...................... 11,363,095
Accumulated deficit........... (13,019,789)
Combined Founding Practices's
Equity...................... --
------------
Total shareholders' equity
(deficit)................... 21,017,963
------------
Total liabilities and
shareholders' equity........ $ 26,025,193
============
</TABLE>
F-21
<PAGE> 78
THE PLASTIC SURGERY COMPANY
NOTES TO UNAUDITED PRO FORMA BALANCE SHEET
1. Reflects the removal of certain assets not acquired and certain
liabilities not assumed in connection with the acquisition of the Founding
Practices accounted for in accordance with SAB 48. The Company is unable to
purchase certain assets pursuant to applicable state law and will not
assume certain personal liabilities of the Founding Practices. The
operating assets acquired and liabilities assumed are as follows:
<TABLE>
<S> <C>
Equipment, net.............................................. $924,072
Current portion of long-term debt........................... 485,073
Other assets................................................ 53,661
</TABLE>
2. Reflects the removal of the historical basis of assets,
liabilities, and equity of the Founding Practices acquired and accounted at
fair value as asset acquisitions.
3. Reflects the issuance of 2,143,974 shares of common stock of the
Company and the accrual of cash owed of $5,738,027 reflected as a dividend
for the acquisition of the Founding Practices accounted for in accordance
with SAB 48.
4. Reflects the issuance of 243,075 shares of common stock of the
Company valued at the assumed initial public offering price of $11.00 per
share, notes payable of $4,010,730, the accrual of cash owed of $6,684,547
and the establishment of the fair value of the assets acquired and
liabilities assumed for the acquisition of certain assets of the Founding
Practices acquired and accounted for at fair value as asset acquisitions.
The intangible assets will be amortized over periods ranging from 10 to 15
years. The operating assets acquired are as follows:
<TABLE>
<S> <C>
Equipment, net.............................................. $76,802
</TABLE>
5. Reflects the issuance of 2,400,000 shares of common stock of the
Company valued at $11.00 per share and receipt of net proceeds of
$22,438,000.
6. Reflects the payment of $12,422,574 to owners of the Founding
Practices and $1,464,092 for accrued compensation and consulting fees.
7. Reflects the payment of the notes payable assumed from the Founding
Practices of $485,073.
F-22
<PAGE> 79
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THE PLASTIC SURGERY
COMPANY
UNTIL , 1999 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS THAT BUY, SELL OR TRADE THESE SHARES OF COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 80
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses (other than underwriting
discounts and commissions) in connection with the offering described in this
Registration Statement, all of which shall be paid by the company. All such
amounts (except the SEC Registration Fee, the NASD Filing Fee and the American
Stock Exchange Listing Fee) are estimated.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee......... $ 10,742
National Association of Securities Dealers Filing Fee....... 4,364
American Stock Exchange Listing Fee......................... 35,000
Blue Sky Fees and Expenses.................................. 10,000
Accountants' Fees and Expenses.............................. 450,000
Legal Fees and Expenses..................................... 700,000
Transfer Agent and Registrar Fees and Expenses.............. 5,000
Printing and Engraving Expenses............................. 370,000
Miscellaneous............................................... 264,894
----------
Total*............................................ $1,850,000
==========
</TABLE>
- ---------------
* The selling shareholders will not bear any portion of these expenses.
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Georgia Business Corporation Code permits a corporation to eliminate or
limit the personal liability of a director to the corporation or its
shareholders for monetary damages for breach of duty of care or other duty as a
director, provided that no provisions shall eliminate or limit the liability of
a director: (A) for any appropriation, in violation of his duties, of any
business opportunity of the corporation; (B) for acts or omissions which involve
intentional misconduct or a knowing violation of law; (C) for unlawful corporate
distributions; or (D) for any transaction from which the director received an
improper personal benefit. This provision pertains only to breaches of duty by
directors in their capacity as directors (and not in any other corporate
capacity, such as officers) and limits liability only for breaches of fiduciary
duties under Georgia corporate law (and not for violation of other laws, such as
the Federal securities laws).
Pursuant to the company's Amended and Restated Articles of Incorporation
and Bylaws, officers and directors shall be indemnified by the company to the
fullest extent allowed under Georgia law for claims brought against them in
their capacities as officers and directors. Indemnification is not allowed if
the officer or director does not act in good faith and in a manner reasonably
believed to be in the best interests of the company, or if the officer or
director had no reasonable cause to believe his conduct was lawful. Accordingly,
indemnification may occur for liabilities arising under the Securities Act.
The company and the underwriters have agreed to indemnify each other
(including officers and directors) against liabilities, including liabilities
under the Securities Act. Insofar as indemnification for liabilities arising
under the Securities Act may be permitted for directors, officers and
controlling persons of the company pursuant to the foregoing provisions or
otherwise, the company has been advised that in the opinion of the Commission,
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
The company has purchased insurance on behalf of its directors and officers
against certain liabilities that may be asserted against, or incurred by, such
persons in their capacities as directors and officers of the registrant, or that
may arise out of their status as directors or officers of the registrant,
including liabilities under federal and state securities laws.
II-1
<PAGE> 81
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On May 15, 1997, in connection with the formation of the company, we issued
216,000 shares of common stock, no par value per share at $.006 per share to
approximately 14 founding individuals. This issuance was exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.
From June 2, 1997 to October 30, 1997, we issued 30,000 shares of common
stock to 24 investors for $16.67 per share. These sales were exempt from
registration under Regulation D ("Regulation D") promulgated under Section 4(2)
of the Securities Act of 1933.
On October 1, 1997, we granted to a consultant of the company warrants to
purchase 15,000 shares of our common stock at $16.67 per share. The warrants are
exercisable for five years from the grant date. We relied on exemptions from
registration under the Securities Act.
From March 2, 1998 to February 24, 1999, we issued 45,000 shares of common
stock to 24 investors for $33.33 per share. All of these sales were to
accredited investors and were exempt from registration under Regulation D.
On June 15, 1998 and August 1, 1998, we granted to employees an aggregate
of 13,500 options with an exercise price of $33.33 per share. We relied on the
exemption in Rule 701 promulgated under the Securities Act of 1933, as amended
("Rule 701") for the grants.
On May 13, 1999, we issued to various employees warrants to purchase
160,000 shares of our common stock at $2.50 per share. The warrants are
exercisable for 5 years from date of grant. We relied on Rule 701 for exemption
from registration under the Securities Act.
On May 13, 1999, we sold to our existing shareholders for $.50 per share
warrants to purchase 1,390,204 shares of our common stock at $2.50 per share.
The warrants are exercisable for five years from the grant date. Four of the
purchasers purchased the warrants in exchange for notes issued to the company in
an aggregate principal amount of $391,250. We relied on Regulation D for
exemption from registration under the Securities Act.
On May 13, 1999, we issued to Isis Cosmetic Surgery Partners, Inc. 92,213
shares of our common stock in exchange for rights to negotiate business
development agreements with certain plastic surgery practices. These shares will
be distributed to 24 shareholders. We relied on exemptions from registration
under the Securities Act.
In each issuance, we also relied on exemptions from registration under
state securities regulations.
The Company used the proceeds from the above referenced sales to fund
working capital and operating expenses. No underwriter was engaged in connection
with these sales.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
1.1 -- Form of Underwriting Agreement
2.1** -- Form of Agreement and Plan of Reorganization between the
company and founding practices
2.2** -- Form of Amendment to the Form of Agreement and Plan of
Reorganization between the company and founding practices
2.3** -- Form of Purchase and Sale Agreement between the company and
founding practices
2.4** -- Form of Stock Purchase and Sale Agreement between the
company and the founding practices
2.5** -- Letter Agreement between the company and Isis Cosmetic
Surgery Partners, Inc. dated May 13, 1999
3.1** -- Form of Amended and Restated Articles of Incorporation
3.2** -- Form of Amended and Restated Bylaws
4.1** -- Specimen Common Stock Certificate
4.2 -- Form of Warrant Agreement between the company and the
representatives of the underwriters
</TABLE>
II-2
<PAGE> 82
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
5.1** -- Opinion of King & Spalding as to the legality of the common
stock being registered
10.1** -- Employment Agreement between the company and Dennis E.
Condon dated June 15, 1998
10.2** -- Employment Agreement between the company and David H.
Challoner dated November 1, 1998
10.3** -- Amendment to Employment Agreement between the company and
David Challoner dated February 25, 1999
10.4** -- Employment Agreement between the company and Patricia
Altavilla dated July 22, 1998
10.5** -- Amendment to Employment Agreement between the company and
Patricia A. Altavilla dated March 1, 1999.
10.6** -- Consulting Agreement between the company and Jonathan E.
Wilfong dated September 30, 1998
10.7** -- Form of Service Agreement between the company and the
founding practices
10.8** -- Form Amendment to Form of Service Agreement between the
company and the founding practices
10.9** -- Form of Consulting and Business Services Agreement between
the company and the founding practices
10.10** -- Form of Employment Agreement between the allied surgeons and
the allied practices
10.11** -- 1998 Employee Stock Option Plan
10.12** -- 1999 Non-Employee Director Stock Plan
10.13** -- Amendment to Employment Agreement between the company and
Dennis E. Condon dated June 30, 1999
10.14** -- Amendment to Employment Agreement between the company and
Patricia Altavilla dated June 30, 1999
10.15 -- Offer of Employment to Gunnar Sundstrom
23.1 -- Consent of Arthur Andersen LLP
23.2** -- Consent of King & Spalding (contained in Exhibit 5.1)
23.3** -- Consent of John C. Schantz, M.D.
23.4** -- Consent of Dennis E. Condon
23.5** -- Consent of Robert A. Ersek, M.D.
23.6** -- Consent of W. Grant Stevens, M.D.
23.7** -- Consent of Richard A. Mladick, M.D.
23.8** -- Consent of Mark A. Kaiser
24.1** -- Powers of Attorney (contained on the signature page)
27.1** -- Financial Data Schedule (for SEC use only)
27.2** -- Financial Data Schedule (for SEC use only)
27.3** -- Financial Data Schedule (for SEC use only)
</TABLE>
- ---------------
** Previously filed.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the
Underwriters, at the closing specified in the Underwriting Agreement,
certificates representing the shares of Common Stock offered hereby in such
denominations and registered in such names as required by the Underwriters 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 the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In
II-3
<PAGE> 83
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 securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question of whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
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 a
part of the registration statement in reliance upon Rule 430A and contained
in a form prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 84
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused Amendment No. 4 to the Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Santa Barbara,
State of California on September 13, 1999.
THE PLASTIC SURGERY COMPANY
By: /s/ DENNIS E. CONDON
------------------------------------
Dennis E. Condon
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, Amendment No. 4
to the Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JONATHAN WILFONG Chairman of the Board September 13, 1999
- -----------------------------------------------------
Jonathan Wilfong
/s/ DENNIS CONDON President and Chief September 13, 1999
- ----------------------------------------------------- Executive Officer
Dennis Condon (Principal Executive
Officer)
/s/ GUNNAR SUNDSTROM Chief Financial Officer September 13, 1999
- ----------------------------------------------------- (Principal Accounting
Gunnar Sundstrom Officer)
</TABLE>
II-5
<PAGE> 85
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ----------- ------------
<C> <C> <S> <C>
1.1 -- Form of Underwriting Agreement..............................
2.1** -- Form of Agreement and Plan of Reorganization between the
company and the founding practices..........................
2.2** -- Form of Amendment to the Form of Agreement and Plan of
Reorganization between the company and the founding
practices...................................................
2.3** -- Form of Purchase and Sale Agreement between the company and
the founding practices......................................
2.4** -- Form of Stock Purchase and Sale Agreement between the
company and the founding practices..........................
2.5** -- Letter Agreement between the company and Isis Cosmetic
Surgery Partners, Inc. dated May 13, 1999...................
3.1** -- Form of Amended and Restated Articles of Incorporation......
3.2** -- Form of Amended and Restated Bylaws.........................
4.1** -- Specimen Common Stock Certificate...........................
4.2 -- Form of Warrant Agreement between the company and the
representatives of the underwriters.........................
5.1** -- Opinion of King & Spalding as to the legality of the common
stock being registered......................................
10.1** -- Employment Agreement between the company and Dennis E.
Condon dated June 15, 1998..................................
10.2** -- Employment Agreement between the company and David H.
Challoner dated November 1, 1998............................
10.3** -- Amendment to Employment Agreement between the company and
David Challoner dated February 25, 1999.....................
10.4** -- Employment Agreement between the company and Patricia
Altavilla dated July 22, 1998...............................
10.5** -- Amendment to Employment Agreement between the company and
Patricia A. Altavilla dated March 1, 1999...................
10.6** -- Consulting Agreement between the company and Jonathan E.
Wilfong dated September 30, 1998............................
10.7** -- Form of Service Agreement between the company and the
founding practices..........................................
10.8** -- Form of Amendment to Form of Service Agreement between the
company and the founding practices..........................
10.9** -- Form of Consulting and Business Services Agreement between
the company and the founding practices......................
10.10** -- Form of Employment Agreement between the allied surgeons and
the allied practices........................................
10.11** -- 1998 Employee Stock Option Plan.............................
10.12** -- 1999 Non-Employee Director Stock Plan.......................
10.13** -- Amendment to Employment Agreement between the company and
Dennis E. Condon dated June 30, 1999
10.14** -- Amendment to Employment Agreement between the company and
Patricia Altavilla dated June 30, 1999
10.15 -- Offer of Employment to Gunnar Sundstrom.....................
</TABLE>
II-6
<PAGE> 86
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ----------- ------------
<C> <C> <S> <C>
23.1 -- Consent of Arthur Andersen LLP..............................
23.2** -- Consent of King & Spalding (contained in Exhibit 5.1).......
23.3** -- Consent of John C. Schantz, M.D.............................
23.4** -- Consent of Dennis E. Condon.................................
23.5** -- Consent of Robert A. Ersek, M.D.............................
23.6** -- Consent of W. Grant Stevens, M.D............................
23.7** -- Consent of Richard A. Mladick, M.D..........................
23.8** -- Consent of Mark A. Kaiser...................................
24.1** -- Powers of Attorney (contained on the signature page)........
27.1** -- Financial Data Schedule (for SEC use only)..................
27.2** -- Financial Data Schedule (for SEC use only)..................
27.3** -- Financial Data Schedule (for SEC use only)..................
</TABLE>
** Previously filed.
II-7
<PAGE> 1
EXHIBIT 1.1
THE PLASTIC SURGERY COMPANY
2,760,000 SHARES OF COMMON STOCK
FORM OF UNDERWRITING AGREEMENT
________________, 1999
Cruttenden Roth Incorporated
H.C. Wainwright & Co., Inc.
c/o Cruttenden Roth Incorporated
24 Corporate Plaza
Newport Beach, CA 92660
Ladies and Gentlemen:
The Plastic Surgery Company, a Georgia corporation (the "Company"),
proposes to sell to the several underwriters named in Schedule I hereto (the
"Underwriters") 2,400,000 shares (the "Firm Shares") of the Company's common
stock, no par value per share (the "Common Stock"). The Company and the
shareholders of the Company named in Schedule II hereto (the "Selling
Shareholders") have also agreed to grant to you an option (the "Option") to
purchase up to _________ (the "Company Option Shares") and ________ (the
"Selling Shareholder Option Shares") additional shares of Common Stock,
respectively, on the terms and for the purposes set forth in Section 1(b)
hereof. The Company Option Shares and the Selling Shareholder Option Shares are
hereinafter referred to collectively as the "Option Shares." The Firm Shares
and the Option Shares are hereinafter collectively referred to as the "Shares."
The Company and the Selling Shareholders confirm as follows their
agreements with you.
1. AGREEMENT TO SELL AND PURCHASE; PUBLIC OFFERING;
UNDERWRITER'S WARRANTS.
(a) On the basis of the representations, warranties and covenants
herein contained, and subject to all the terms and conditions of this
Agreement, the Company agrees to sell to the Underwriters the Firm Shares, and
each of the Underwriters, severally and not jointly, agrees to purchase at the
purchase price of $________ per share the number of Firm Shares set forth
opposite such Underwriter's name in Schedule I hereto.
(b) Subject to all the terms and conditions of this Agreement, the
Company and the Selling Shareholders set forth in Schedule II hereto also grant
the Underwriters the Option to purchase, severally and not jointly, up to
___________ Company Option Shares and ___________ Selling Shareholder Option
Shares in the amounts set forth opposite each Selling Shareholder's name in
Schedule II hereto, each at the same price per share as you shall pay for the
Firm Shares. The Option may be exercised only to cover over-allotments in the
sale of the Firm Shares and may be exercised in whole or in part at any time or
from time to time on or
<PAGE> 2
before the 45th day after the date of the Prospectus (as defined below) upon
written or telegraphic notice (the "Option Shares Notice") by you to the
Company and the Attorney-in-Fact (as defined herein) for the Selling
Shareholders no later than 12:00 noon, Atlanta, Georgia time, at least two and
no more than ten business days before the date and time specified for closing
in the Option Shares Notice (the "Option Closing Date") setting forth the
aggregate number of Option Shares to be purchased. In the event the
Underwriters elect to purchase less than all of the Option Shares, the Selling
Shareholder Option Shares shall be purchased first, pro rata, in the amounts up
to those set forth on Schedule II hereto prior to purchasing any Company Option
Shares. On the Option Closing Date, the Company will issue and sell and the
Selling Shareholders will sell to the Underwriters the number of Option Shares
set forth in the Option Shares Notice, and unless otherwise adjusted by the
Underwriters, each of the Underwriters will purchase such percentage of the
Option Shares as is equal to the percentage of Firm Shares that such
Underwriter is purchasing.
(c) After the Registration Statement becomes effective, upon the
authorization by you of the release of the Shares, the several Underwriters
propose to offer the Firm Shares and the Option Shares purchased by the
Underwriters for sale initially at the price per share set forth in the
Prospectus (the initial offering price) and upon the terms set forth therein.
(d) On the Closing Date, the Company will further issue and sell to
you for a total purchase price of $250.00, warrants entitling the holders
thereof to purchase an aggregate of 240,000 shares of Common Stock, at an
initial exercise price of $_____ per share [120% OF THE PUBLIC OFFERING PRICE
FOR THE SHARES] (the "Underwriter's Warrants") for a period of three (3) years,
such period to commence twenty-four (24) months after the Effective Date. Such
Underwriter's Warrants shall contain such other terms and provisions as may be
set forth in an agreement with respect thereto (the "Warrant Agreement")
executed and delivered by the Company and you simultaneously with the execution
and delivery of this Agreement. As provided in the Warrant Agreement, you may
designate that the Underwriter's Warrants be issued in varying amounts directly
to your respective bona fide officers and not to you. Such designation will be
made by you only if you determine that such issuances would not violate the
Rules of Conduct of the National Association of Securities Dealers, Inc.
relating to the review of corporate financing arrangements. The holders of the
Underwriter's Warrants will be entitled to the registration rights set forth in
the Warrant Agreement.
2. DELIVERY AND PAYMENT.
Delivery of the Firm Shares shall be made to you by or on behalf of
the Company against payment of the purchase price by federal funds wire
transfer payable in same day funds to the order of the Company at the offices
of Nelson Mullins Riley & Scarborough, L.L.P., 999 Peachtree Street, N.E.,
Suite 1400, Atlanta, Georgia 30309, or at such other place as may be agreed
upon by the Underwriters and the Company, at 10:00 a.m., Atlanta, Georgia time,
on the third full business day following the date of this Agreement (the
"Closing Date"), or at such other time on such date, or at such other place, as
may be agreed upon by the Company and the Underwriters.
2
<PAGE> 3
To the extent the Option is exercised, delivery of the Option Shares
against payment therefor (in the manner specified above) will take place at the
offices specified above on the Option Closing Date (which, subject to the
requirements set forth above for the Option Shares Notice, may be the Closing
Date).
Certificates evidencing the Shares shall be in definitive form and
shall be registered in such names and in such denominations as you shall
request not less than 48 hours prior to the Closing Date or the Option Closing
Date, as the case may be, by written notice to the Company. For the purpose of
expediting the checking and packaging of certificates for the Shares, the
Company agrees to make such certificates available for inspection at least 24
hours prior to the Closing Date or the Option Closing Date, as the case may be,
at a location to be designated by you. If the Underwriters so elect, delivery
of the Shares may be made by credit through full fast transfer to the accounts
designated by the Underwriters at The Depository Trust Company.
The cost of original issue tax stamps, if any, in connection with the
issuance and delivery of the Shares by the Company to the Underwriters shall be
borne by the Company. The Company will pay and save each of the Underwriters
and any subsequent holder of the Shares harmless from any and all liabilities
with respect to or resulting from any failure or delay in paying federal and
state stamp and other transfer taxes, if any, which may be payable or
determined to be payable in connection with the original issuance or sale to
such Underwriter of the Firm Shares and Option Shares.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents, warrants and covenants to each of the
Underwriters that:
(a) The Company has prepared and has filed with the Securities and
Exchange Commission (the "Commission") a registration statement (Registration
No. 333-78565) on Form S-1 relating to the Shares, including a preliminary
prospectus and such amendments to such registration statement as may have been
required to the date of this Agreement, under the provisions of the Securities
Act of 1933, as amended (the "Act"), and the rules and regulations
(collectively referred to as the "Rules and Regulations") of the Commission
thereunder. The registration statement and all amendments thereto have been
duly authorized and executed by the Company in accordance with the Rules and
Regulations. The term "preliminary prospectus" as used herein means a
preliminary prospectus as contemplated by Rule 430 or Rule 430A of the Rules
and Regulations included at any time as part of the registration statement.
Copies of such registration statement and amendments and of each related
preliminary prospectus have been delivered to you. If such registration
statement has not become effective, a further amendment to such registration
statement, including a form of final prospectus, necessary to permit such
registration statement to become effective, will be filed promptly by the
Company with the Commission. If such registration statement has become
effective, a final prospectus containing information permitted to be omitted at
the time of effectiveness by Rule 430A of the Rules and Regulations will be
filed promptly by the Company with the Commission in accordance with Rule
424(b) of the Rules and Regulations,
3
<PAGE> 4
if required. The term "Registration Statement" as used herein means the
registration statement as amended at the time it becomes or became effective
(the "Effective Date"), including financial statements and all exhibits and any
information deemed to be included by Rule 430A. The term "Prospectus" means the
prospectus as first filed with the Commission pursuant to Rule 424(b) of the
Rules and Regulations or, if no such filing is required, the form of final
prospectus included in the Registration Statement at the Effective Date.
(b) On the Effective Date, the date the Prospectus is first filed
with the Commission pursuant to Rule 424(b) (if required), at all times
subsequent thereto through and including the Closing Date and, if later, the
Option Closing Date and when any post-effective amendment to the Registration
Statement becomes effective or any amendment or supplement to the Prospectus is
filed with the Commission, the Registration Statement and the Prospectus (as
amended or as supplemented if the Company shall have filed with the Commission
any amendment or supplement thereto), including the financial statements
included in the Prospectus, did or will comply with all applicable provisions
of the Act and the Rules and Regulations and did or will contain all statements
required to be stated therein in accordance with the Act and the Rules and
Regulations. On the Effective Date and when any post-effective amendment to the
Registration Statement becomes effective, no part of the Registration Statement
or any such amendment or supplement did or will contain an untrue statement of
a material fact or omit to state a material fact required to be stated therein
or necessary in order to make the statements therein not misleading. On the
date any amendment or supplement to the Prospectus is filed with the Commission
and at the Closing Date and, if later, the Option Closing Date, the Prospectus
did not or will not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The foregoing
representations and warranties in this Section 3(b) do not apply to any
statements or omissions made in reliance on and in conformity with information
relating to the Underwriters furnished in writing to the Company by the
Underwriters specifically for inclusion in the Registration Statement or
Prospectus or any amendment or supplement thereto. The Company acknowledges
that the only information relating to the Underwriters furnished in writing to
the Company by the Underwriters specifically for inclusion in the Registration
Statement, any preliminary prospectus and the Prospectus is the information in
the last paragraph on the cover page and the statements set forth under the
heading "Underwriting" in any preliminary prospectus or the Prospectus.
(c) The Company has no subsidiaries (as defined in the Rules and
Regulations). The Company is, and at the Closing Date and, if later, the Option
Closing Date will be, a corporation duly organized, validly existing and in
good standing under the laws of the State of Georgia. The Company has, and at
the Closing Date and, if later, the Option Closing Date will have, full power
and authority to conduct all the activities conducted by it, to own or lease
all the assets owned or leased by it and to conduct its business as described
in the Registration Statement and the Prospectus. The Company is, and at the
Closing Date and, if later, the Option Closing Date will be, duly licensed or
qualified to do business and in good standing as a foreign corporation in all
jurisdictions in which the nature of the activities conducted by it or the
character of the assets owned or leased by it makes such licensing or
qualification
4
<PAGE> 5
necessary, and no proceeding has been instituted in any jurisdiction revoking,
limiting or curtailing, or seeking to revoke, limit or curtail, the Company's
power, authority, licensing or qualification. The Company does not own, and at
the Closing Date and, if later, the Option Closing Date will not own, directly
or indirectly, any shares of stock or any other equity or long-term debt
securities of any corporation or have any equity interest in any firm,
partnership, joint venture, association or other entity. Complete and correct
copies of the Amended and Restated Articles of Incorporation (the "Restated
Articles") and the Amended and Restated Bylaws (the "Bylaws") of the Company
and all amendments thereto have been delivered to you, and no changes therein
will be made subsequent to the date hereof and prior to the Closing Date or, if
later, the Option Closing Date.
(d) The outstanding shares of the Company's Common Stock have been,
and the Shares when issued and delivered pursuant to this Agreement and the
shares of Common Stock to be issued upon exercise of the Underwriter's Warrants
will be, duly authorized, validly issued, fully paid and nonassessable and will
not be subject to any preemptive or similar right. The Underwriter's Warrants,
when issued, paid for and delivered in accordance with the terms of the Warrant
Agreement, will be duly authorized, validly issued, fully paid and
nonassessable and will not be subject to any preemptive or similar right. The
description of the Common Stock in the Registration Statement and the
Prospectus is, and at the Closing Date and, if later, the Option Closing Date
will be, complete and accurate in all material respects. All offers and sales
of securities of the Company have been at all relevant times duly registered
under or exempt from the registration requirements of the Act and were duly
registered under or exempt from the registration requirements of all applicable
state securities or Blue Sky laws. Except as set forth in the Prospectus and
except for options issued under the Company's stock option plans, the Company
does not have outstanding, and at the Closing Date and, if later, the Option
Closing Date will not have outstanding, any options to purchase, or any rights
or warrants to subscribe for, or any securities or obligations convertible
into, or any contracts or commitments to issue or sell any shares of Common
Stock or any such warrants, convertible securities or obligations. The
description of the Company's stock option, stock bonus and other stock plans or
arrangements, and the options or other rights granted and exercised thereunder,
set forth in the Prospectus accurately and fairly presents in all material
respects the information required to be shown with respect to such plans,
arrangements, options and rights.
(e) The financial statements together with the related notes and
schedules included in the Registration Statement or the Prospectus are accurate
in all material respects and present fairly the financial condition of the
Company as of the respective dates thereof and the results of operations and
cash flows of the Company for the respective periods covered thereby, all in
conformity with generally accepted accounting principles applied on a
consistent basis throughout the entire period involved, except as otherwise
disclosed in the Prospectus. The financial and statistical data set forth in
the Prospectus under the captions "Prospectus Summary," "Summary Financial
Data," "Use of Proceeds," "Dilution," "Capitalization," "Selected Financial
Data," "Management's Discussion and Analysis of Financial Condition and Results
of Operations," "Business" and "Principal and Selling Shareholders" have been
compiled on a basis consistent with that of the audited financial statements
contained in the Registration Statement and Prospectus and fairly present in
all material respects the
5
<PAGE> 6
information set forth therein. No other financial statements or schedules of
the Company are required by the Act, the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), or the Rules and Regulations to be included in
the Registration Statement or the Prospectus. Arthur Andersen LLP (the
"Accountants"), who have reported on certain of such financial statements and
schedules, are independent auditors with respect to the Company as required by
the Act and the Rules and Regulations.
(f) The Company maintains a system of internal accounting controls
sufficient to assure that: (i) transactions are executed in accordance with
management's general or specific authorizations; (ii) transactions are recorded
as necessary to permit preparation of financial statements in conformity with
generally accepted accounting principles and to maintain accountability for
assets; (iii) access to assets is permitted only in accordance with
management's general or specific authorization; and (iv) the recorded
accountability for assets is compared with existing assets at reasonable
intervals and appropriate action is taken with respect to any differences. The
Company's system of internal accounting controls is sufficient to meet the
broad objectives of internal accounting control insofar as those objectives
pertain to the prevention or detection of errors or irregularities in amounts
that would be material in relation to the Company's financial statements; and,
except as disclosed in the Prospectus, neither the Company nor, to the
Company's knowledge, any employee or agent of the Company has made any payment
of funds of the Company or received or retained any funds in violation of any
law, rule or regulation, the receipt or payment of which could have a material
adverse effect on the Company.
(g) There are no outstanding loans, advances (except normal advances
for business expenses in the ordinary course of business) or guarantees of
indebtedness by the Company to or for the benefit of any of the officers or
directors of the Company or any of the members of the families of any of them,
nor has there been any transaction between or among the Company or any of its
affiliates, officers or directors or any affiliate or affiliates of any such
officer or directors, except as disclosed in the Registration Statement and the
Prospectus.
(h) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus and prior to the Closing
Date and, if later, the Option Closing Date, except as set forth in the
Registration Statement and the Prospectus, (i) there has not been and will not
have been any material adverse change in the business, properties, business
prospects, condition (financial or otherwise) or results of operations of the
Company, arising for any reason whatsoever, (ii) the Company has not incurred
nor will it incur any material liabilities or obligations, direct or
contingent, except in the ordinary course of business, (iii) the Company has
not entered into any material transaction not in the ordinary course of
business, (iv) the Company has not and will not have paid or declared any
dividends or other distributions of any kind on any class of its capital stock,
(v) there has not been and will not have been any change in the capitalization
of the Company other than pursuant to the exercise of employee stock options or
the issuance of shares under the Company's stock option plans and (vi) there
has not been any loss or damage (whether or not insured) to the property of the
Company which has been sustained or will have been sustained which has a
material
6
<PAGE> 7
adverse effect on the business, business prospects, condition (financial or
otherwise) or results of operations of the Company.
(i) The Company has timely filed all necessary federal, state and
foreign income and franchise tax returns and has paid all taxes shown thereon
to the extent such taxes have become due and are not being contested in good
faith, and there is no tax deficiency that has been or, to the best of the
Company's knowledge, might be asserted against the Company that might have a
material adverse effect on the business, properties, business prospects,
condition (financial or otherwise) or results of operations of the Company, and
all tax liabilities are adequately provided for on the books of the Company.
(j) The Company is not an "investment company" or an "affiliated
person" of, or "promoter" or "principal underwriter" for, an "investment
company," as such terms are defined in the Investment Company Act of 1940, as
amended.
(k) Except as set forth in the Registration Statement and the
Prospectus, there are no actions, suits or proceedings pending or, to the
knowledge of the Company, threatened against or affecting the Company or, to
the knowledge of the Company, any of its respective officers in their capacity
as such, before or by any federal or state court, commission, regulatory body,
administrative agency or other governmental body, domestic or foreign, wherein
an unfavorable ruling, decision or finding would materially and adversely
affect the business, properties, business prospects, condition (financial or
otherwise) or results of operations of the Company or prevent or materially
hinder the consummation of this Agreement or the Warrant Agreement.
(l) The Company has not at any time during the past five years: (i)
made any unlawful contributions to any candidate for any political office, or
failed fully to disclose any contribution in violation of law; or (ii) made any
payment to any state, federal or foreign government official, or other person
charged with similar public or quasi-public duty (other than payment required
or permitted by applicable law).
(m) The Company has, and at the Closing Date and, if later, the
Option Closing Date will have: (i) all material governmental licenses,
certificates, permits, consents, orders, approvals and other authorizations
necessary to carry on its business as contemplated in the Prospectus; (ii)
complied in all material respects with all laws, regulations and orders
applicable to it or its business or properties; and (iii) performed all
obligations required to be performed by it and is not, and at the Closing Date
and, if later, the Option Closing Date will not be, in default, under any
contract or other instrument material to it to which it is a party or by which
its property is bound or affected where such default would materially and
adversely affect the business, properties, business prospects, condition
(financial or otherwise) or results of operations of the Company or prevent or
materially hinder the consummation of this Agreement or the Warrant Agreement.
To the best knowledge of the Company, as of the date of this Agreement, the
Closing Date and, if later, the Option Closing Date no other party under any
contract or other instrument to which it is a party is in default thereunder.
The Company
7
<PAGE> 8
is not, and at the Closing Date and, if later, the Option Closing Date will not
be, in violation of any provision of the Restated Articles or Bylaws.
(n) No consent, approval, authorization or order of, or any filing
or declaration with, any court or governmental agency or body is required for
the consummation by the Company of the transactions on its part contemplated by
this Agreement and the Warrant Agreement, except such as have been obtained
under the Act or the Rules and Regulations and such as may be required under
state securities or Blue Sky laws or the bylaws and rules of the National
Association of Securities Dealers, Inc. (the "NASD") in connection with the
purchase and distribution by the Underwriters of the Shares and the
Underwriter's Warrants to be sold by the Company.
(o) The filing of the Registration Statement and the execution and
delivery of this Agreement and the Warrant Agreement have been duly authorized
by the Board of Directors of the Company, and the Company has full corporate
power and authority to enter into this Agreement and the Warrant Agreement and
to perform its obligations hereunder and thereunder. This Agreement and the
Warrant Agreement have been duly executed and delivered by the Company and
constitute valid and binding agreements of the Company enforceable against the
Company in accordance with the terms hereof and thereof, except as
enforceability may be limited by applicable equitable principles, or by
bankruptcy, insolvency, reorganization, moratorium or similar laws from time to
time in effect affecting the enforcement of creditors' rights. The performance
of this Agreement and the Warrant Agreement and the consummation of the
transactions contemplated hereby and thereby will not result in the creation or
imposition of any material lien, charge or encumbrance upon any of the assets
of the Company pursuant to the terms or provisions of, or result in a breach or
violation of any of the terms or provisions of, or constitute a default under,
or give any other party a right to terminate any of its obligations under, or
result in the acceleration of any obligation under, the articles of
incorporation or bylaws of the Company, any indenture, mortgage, deed of trust,
voting trust agreement, loan agreement, bond, debenture, note agreement or
other evidence of indebtedness, lease, contract or other agreement or
instrument to which the Company is a party or by which the Company or any of
its properties are bound or affected, or violate or conflict with any judgment,
ruling, decree, order, statute, rule or regulation of any court or other
governmental agency or body applicable to the business or properties of the
Company, the occurrence of which would materially and adversely affect the
business, properties, business prospects, condition (financial or otherwise) or
results of operations of the Company or prevent or materially hinder the
consummation of this Agreement or the Warrant Agreement.
(p) The Company has good and marketable title to all properties and
assets described in the Registration Statement and Prospectus as owned by it,
free and clear of all liens, charges, encumbrances or restrictions, except such
as are described in the Prospectus or are not material to the business of the
Company. The Company has valid, subsisting and enforceable leases for the
properties described in the Prospectus as leased by it, except as
enforceability may be limited by applicable equitable principles, or by
bankruptcy, insolvency, reorganization, moratorium or similar laws from time to
time in effect affecting the
8
<PAGE> 9
enforcement of creditors' rights, and with such exceptions as are not material
and do not materially interfere with the use made and proposed to be made of
such properties by the Company, and the Company has no notice or knowledge of
any material claim of any sort which has been, or may be, asserted by anyone
adverse to the Company's rights as lessee or sublessee under any lease or
sublease described above, or affecting or questioning the Company's rights to
the continued possession of the leased or subleased premises under any such
lease or sublease in conflict with the terms thereof. The Company owns or
leases all such properties as are necessary to its operations as now conducted.
(q) The Company owns or possesses adequate rights to use all
patents, patent rights, inventions, trade secrets, know-how, trademarks,
service marks, trade names and copyrights which are necessary to conduct its
business as described in the Registration Statement and Prospectus; except as
set forth in the Registration Statement and the Prospectus, the Company has not
received any notice of, and has no knowledge of, any infringement of or
conflict with asserted rights of the Company by others with respect to any
patent, patent rights, inventions, trade secrets, know-how, trademarks, service
marks, trade names or copyrights, and the Company has not received any notice
of, and has no knowledge of, any infringement of or conflict with asserted
rights of others with respect to any patent, patent rights, inventions, trade
secrets, know-how, trademarks, service marks, trade names or copyrights owned
or used by the Company.
(r) To the best of the Company's knowledge, no labor disturbance by
the employees of the Company exists or is imminent; and the Company is not
aware of any existing or imminent labor disturbance by the employees of any of
its principal suppliers that could be expected to result in a material adverse
change in the business, properties, business prospects, condition (financial or
otherwise) or results of operations of the Company.
(s) The Company maintains insurance with insurers of recognized
financial responsibility of the types and in the amounts generally deemed
adequate for their respective business and consistent with insurance coverage
maintained by similar companies in similar businesses, including, but not
limited to, insurance covering real and personal property owned or leased by
the Company against theft, damage, destruction, acts of vandalism and all other
risks customarily insured against, all of which insurance is in full force and
effect; the Company has not been refused any insurance coverage sought or
applied for; and the Company has no reason to believe that it will not be able
to renew its existing insurance coverage as and when such coverage expires or
to obtain similar coverage from similar insurers.
(t) Except as described in the Registration Statement and the
Prospectus, to the best of the Company's knowledge, there is no factual basis
for any action, suit or other proceeding involving the Company or any of its
material assets for any failure of the Company, or any predecessor thereof, to
comply with any requirements of federal, state, local or foreign regulation
relating to air, water, solid waste management, hazardous or toxic substances,
or the protection of health or the environment. Except as described in the
Registration Statement and the Prospectus, none of the property owned or leased
by the Company is, to the best knowledge of the Company, contaminated with any
waste or hazardous substances, and the
9
<PAGE> 10
Company may not be deemed an "owner or operator" of a "facility" or "vessel"
which owns, possesses, transports, generates or disposes of a "hazardous
substance" as those terms are defined in Section 9601 of the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C.
ss.9601, et seq.
(u) All documents or contracts required to be filed as an exhibit to
the Registration Statement to which the Company is a party have been filed as
exhibits to the Registration Statement and have been duly authorized, executed
and delivered by the Company, constitute valid and binding agreements of the
Company and are enforceable against the Company in accordance with the terms
thereof.
(v) The Company has not taken and will not take, directly or
indirectly, any action designed to or which might reasonably be expected to
cause or result in stabilization or manipulation of the price of any security
of the Company to facilitate the sale or resale of the Shares or the Common
Stock, and the Company is not aware of any such action taken or to be taken by
affiliates of the Company. To assure compliance with Regulation M under the
Exchange Act, the Company will not make bids for or purchases of or induce bids
for or purchases of, directly or indirectly, any shares of Common Stock or
securities convertible into Common Stock of the Company until the distribution
of all shares of Common Stock being sold in the public offering has been
completed.
(w) No holder of securities of the Company has rights which have not
been waived to require the registration of any securities of the Company
because of the filing of the Registration Statement. There are no contracts,
agreements or understandings between the Company and any person granting such
person the right to require the Company to file a registration statement under
the Act with respect to any securities of the Company owned or to be owned by
such person or to require the Company to include such securities in the
securities registered pursuant to the Registration Statement or in any
securities being registered pursuant to any other registration statement filed
by the Company under the Act.
(x) The Company has taken such action as necessary to have the
Shares authorized for trading, and all of the Shares have been approved for
listing, on the American Stock Exchange ("AMEX") upon notice of issuance.
(y) Other than as contemplated by this Agreement, there is no
broker, finder or other party that is entitled to receive from the Company any
brokerage or finder's fee or other fee or commission as a result of any of the
transactions contemplated by this Agreement.
(z) On the Closing Date all transfer or other taxes (including
franchise, capital stock or other tax, other than income taxes, imposed by any
jurisdiction), if any, which are required to be paid in connection with the
sale and transfer of the Shares and the to the Underwriters hereunder will have
been fully paid or provided for by the Company and all laws imposing such taxes
will have been fully complied with in all material respects.
10
<PAGE> 11
(aa) No statement, representation, warranty or covenant made by the
Company in this Agreement or made in any certificate or document required by
this Agreement to be delivered to the Underwriters is or will be, when made,
inaccurate, untrue or incorrect in any material respect, unless such statement,
representation, warranty or covenant is qualified as to materiality, in which
case it is not or will not be, when made, inaccurate, untrue or incorrect.
(bb) To the best of the Company's knowledge, none of the Selling
Shareholders listed under the caption "Principal and Selling Shareholders"
section of the Prospectus is a member of the NASD that is participating in the
distribution of the Shares or a "person associated with a member," as that term
is defined in the NASD's Review of Corporate Financing Interpretation.
(cc) Any certificate signed by any officer of the Company and
delivered to you or to counsel for the Underwriters pursuant to the provisions
of this Agreement shall be deemed a representation and warranty to each
Underwriter as to the matters covered thereby.
(dd) The Company has not distributed and will not distribute prior to
the later of (i) the Closing Date or the Option Closing Date, as the case may
be, or (ii) completion of the distribution of the Shares, any offering material
in connection with the offering and sale of the Shares other than any
preliminary prospectuses, the Prospectus, the Registration Statement and other
materials, if any, permitted by the Act.
4. REPRESENTATIONS AND WARRANTIES OF THE SELLING SHAREHOLDERS.
Each of the Selling Shareholders, severally and not jointly,
represents, warrants and covenants to each Underwriter as of the Option Closing
Date (if any) that:
(a) Such Selling Shareholder at the Option Closing Date will have
good and marketable title to the Shares set forth in Schedule II to be sold by
such Selling Shareholder, free and clear of any liens, encumbrances, equities
and claims (other than as imposed by the Act or this Agreement), and full
right, power and authority to effect the sale and delivery of such Shares; and
upon the delivery of and payment for the Shares to be sold by such Selling
Shareholder pursuant to this Agreement, good and marketable title thereto, free
and clear of any liens, encumbrances, equities and claims, will be transferred
to the Underwriters.
(b) Such Selling Shareholder has duly executed and delivered the
Custody Agreement and Power of Attorney (the "Custody Agreement") in the form
previously delivered to the Underwriters, appointing Jonathan E. Wilfong and
Dennis E. Condon, and each of them, as such Selling Shareholder's
attorney-in-fact (the "Attorney-in-Fact") and the Company, as custodian (the
"Custodian"). The Attorney-in-Fact is authorized to execute, deliver and
perform this Agreement on behalf of such Selling Shareholder, to deliver the
Shares to be sold by such Selling Shareholder hereunder, to accept payment
therefor and otherwise to act on behalf of such Selling Shareholder in
connection with this Agreement. Certificates, in suitable form for transfer by
delivery or accompanied by duly executed instruments of transfer or assignment
in blank, representing the Shares to be sold by such
11
<PAGE> 12
Selling Shareholder hereunder have been deposited with the Custodian pursuant
to the Custody Agreement for the purpose of delivery pursuant to this
Agreement. Such Selling Shareholder agrees that the shares of Common Stock
represented by the certificates on deposit with the Custodian are subject to
the interests of the Company, the Underwriters and the other Selling
Shareholders hereunder, that the arrangements made for such custody and the
appointment of the Attorney-in-Fact are to that extent irrevocable, and that
the obligations of such Selling Shareholder hereunder shall not be terminated
except as provided in this Agreement and the Custody Agreement. If such Selling
Shareholder should die, become disabled or be declared incompetent, dissolve or
become insolvent, or if any other event should occur before the delivery of the
Shares of such Selling Shareholder hereunder, the certificates for such Shares
deposited with the Custodian shall be delivered by the Custodian in accordance
with the terms and conditions of this Agreement as if such death, disability,
incompetency, dissolution, insolvency or other event had not occurred,
regardless of whether or not the Custodian or the Attorney-in-Fact shall have
received notice thereof.
(c) Such Selling Shareholder, acting through its duly authorized
Attorney-in-Fact, has duly executed and delivered this Agreement; this
Agreement constitutes a legal, valid and binding obligation of such Selling
Shareholder; all authorizations and consents necessary for the execution and
delivery of this Agreement and the Custody Agreement on behalf of such Selling
Shareholder and for the sale and delivery of the Shares to be sold by such
Selling Shareholder hereunder have been given, except as may be required by the
Act or state securities laws or the NASD; and such Selling Shareholder has the
legal capacity and full right, power and authority to execute this Agreement
and the Custody Agreement.
(d) The performance of this Agreement and the Custody Agreement and
the consummation of the transactions contemplated hereby and thereby by each of
the Selling Shareholders will not result in a material breach or violation of,
or material conflict with, any of the terms or provisions of, or constitute a
material default by such Selling Shareholder under, any indenture, mortgage,
deed of trust (constructive or other), loan agreement, lease, franchise,
license or other agreement or instrument to which such Selling Shareholder or
any of its properties is bound, any statute, or any judgment, decree, order,
rule or regulation or any court or governmental agency or body applicable to
such Selling Shareholder or any of its properties.
(e) Such Selling Shareholder has not distributed and will not
distribute any prospectus or other offering material in connection with the
offer and sale of the Shares other than any preliminary prospectus prepared and
filed by the Company with the Commission or the Prospectus or other material
permitted by the Act.
(f) Such Selling Shareholder has reviewed and is familiar with the
Registration Statement as originally filed with the Commission and the
preliminary prospectus contained therein. To the knowledge of such Selling
Shareholder, the preliminary prospectus does not include an untrue statement of
a material fact, or omit to state a material fact necessary in order to make
the statements therein, in the light of the circumstances under which they were
made, not misleading; other than as disclosed to the Underwriters, such Selling
Shareholder is
12
<PAGE> 13
not prompted to sell the Shares to be sold by such Selling Shareholder by any
material, non-public information concerning the Company that is not set forth
in the preliminary prospectus or the Prospectus.
(g) To the extent that any statements or omissions made in the
Registration Statement, any preliminary prospectus, the Prospectus or any
amendment or supplement thereto are made in reliance upon and in conformity
with written information furnished to the Company by such Selling Shareholder
expressly for use therein, such Registration Statement, preliminary prospectus
and Prospectus and any amendments or supplements thereto did not and will not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading.
(h) No approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory body, administrative or other
governmental body is necessary in connection with the execution and delivery of
this Agreement by such Selling Shareholder, and the consummation by it of the
transactions herein contemplated (other than as required by the Act, state
securities laws and the NASD).
(i) Any certificates signed by or on behalf of such Selling
Shareholder as such and delivered to the Underwriters or to counsel for the
Underwriters pursuant to the terms of this Agreement shall be deemed a
representation and warranty by such Selling Shareholder to each Underwriter as
to the matters covered thereby.
(j) In order to document the Underwriters' compliance with the
reporting and withholding provisions of the Tax Equity and Fiscal
Responsibility Act of 1982 with respect to the transactions herein contemplated
such Selling Shareholder agrees to deliver to you prior to or at the Option
Closing Date a properly completed and executed United States Treasury
Department Form W-9 (or other applicable form or statement specified by
Treasury Department regulations in lieu thereof).
(k) Such Selling Shareholder has not taken and will not take,
directly or indirectly, any action intended to constitute or which has
constituted, or which might reasonably be expected to cause or result in,
stabilization or manipulation of the price of the Common Stock. To assure
compliance with Regulation M under the Exchange Act, such Selling Shareholder
will not make bids for or purchases of or induce bids for or purchases of,
directly or indirectly, any shares of Common Stock or securities convertible
into Common Stock of the Company until the distribution of all shares of Common
Stock being sold in the public offering has been completed.
5. COVENANTS OF THE COMPANY.
The Company covenants and agrees with each of the Underwriters as
follows:
(a) The Company will not, either prior to the Effective Date or
thereafter during such period as the Prospectus is required by law to be
delivered in connection with sales of the
13
<PAGE> 14
Shares by an underwriter or dealer, file any amendment or supplement to the
Registration Statement or the Prospectus, unless a copy thereof shall first
have been submitted to you within a reasonable period of time prior to the
filing thereof and you shall not have objected thereto in good faith.
(b) The Company will use its reasonable best efforts to cause the
Registration Statement and any amendment thereto, if not effective at the time
and date that this Agreement is executed by the parties hereto, to become
effective as promptly as possible and will notify you promptly and confirm such
advice in writing: (i) when the Registration Statement has become effective and
when any post-effective amendment thereto becomes effective; (ii) of any
request by the Commission for amendments or supplements to the Registration
Statement or the Prospectus or for additional information; (iii) of the
issuance by the Commission of any stop order suspending the effectiveness of
the Registration Statement or the initiation of any proceedings for that
purpose or the threat thereof; (iv) of the happening of any event during the
period mentioned in the second sentence of Section 5(e) that in the judgment of
the Company makes any statement made in the Registration Statement or the
Prospectus untrue or that requires the making of any changes in the
Registration Statement or the Prospectus in order to make the statements
therein, in light of the circumstances in which they are made, not misleading;
and (v) of receipt by the Company or any representatives or attorney of the
Company of any other communication from the Commission relating to the Company,
the Registration Statement, any preliminary prospectus or the Prospectus. If at
any time the Commission shall issue any order suspending the effectiveness of
the Registration Statement, the Company will make every reasonable effort to
obtain the withdrawal of such order at the earliest possible moment. If the
Company has omitted any information from the Registration Statement pursuant to
Rule 430A of the Rules and Regulations, the Company will use its best efforts
to comply with the provisions of and make all requisite filings with the
Commission pursuant to said Rule 430A and to notify the Underwriters promptly
of all such filings.
(c) The Company will furnish to you at or before the Closing Date,
without charge, four signed copies of the Registration Statement and of any
post-effective amendment thereto, including financial statements and schedules,
and all exhibits thereto, and will furnish you with such number of copies of
the Registration Statement, without exhibits, and all amendments thereto as you
may reasonably request.
(d) The Company will comply with all the provisions of any
undertakings contained in the Registration Statement. The Company will, from
time to time, after the effective date of the Registration Statement file with
the Commission such reports as are required by the Act, the Exchange Act, the
Rules and Regulations and the Exchange Act Rules and Regulations.
(e) On the Effective Date, and thereafter from time to time until
expiration of the period mentioned in the second sentence of this Section 5(e),
the Company will deliver to each of you, without charge, as many copies of the
Prospectus or any amendment or supplement thereto as you may reasonably
request. The Company consents to the use of the Prospectus or any amendment or
supplement thereto by you and by all dealers to whom the Shares may be sold,
both in connection with the offering or sale of the Shares and for any period
of time
14
<PAGE> 15
thereafter during which the Prospectus is required by law to be delivered in
connection therewith. If during such period of time any event shall occur which
in the judgment of the Company or your counsel should be set forth in the
Prospectus in order to make any statement therein, in light of the
circumstances under which it was made, not misleading, or if it is necessary to
supplement or amend the Prospectus to comply with law, the Company will
forthwith prepare and duly file with the Commission an appropriate supplement
or amendment thereto, and will deliver to each of you, without charge, such
number of copies thereof as you may reasonably request.
(f) The Company will use its reasonable best efforts to qualify to
register the Shares for sale under the securities or Blue Sky laws of such
jurisdictions as the Underwriters may reasonably designate and will make such
application and furnish such information as may be required for that purpose
and to comply with such laws; provided, that in no event shall the Company be
obligated to qualify to do business in any jurisdiction where it is not now so
qualified or to take any action which would subject it to general service of
process in any jurisdiction where it is not now so subject. The Company will,
from time to time, prepare and file such statements and reports as are or may
be required to continue such qualification in effect for so long a period as
the Underwriters may reasonably request.
(g) During a period of five years after the date hereof, the Company
will furnish to its shareholders as soon as practicable after the end of each
respective period annual reports (including financial statements audited by
independent certified public accountants) and unaudited quarterly reports of
operations for each of the first three quarters of the fiscal year, and will
furnish to you and the other several Underwriters hereunder, upon request (i)
concurrently with furnishing such reports to its shareholders, statements of
operations of the Company for each of the first three quarters in the form
furnished to the Company's shareholders, (ii) concurrently with furnishing to
its shareholders, a balance sheet of the Company as of the end of such fiscal
year, together with statements of operations, shareholders' equity and cash
flows of the Company for such fiscal year, accompanied by a copy of the
certificate or report thereon of independent certified public accountants,
(iii) as soon as they are available, copies of all reports (financial or other)
mailed to shareholders, (iv) as soon as they are available, copies of all
reports and financial statements furnished to or filed with the Commission, any
securities exchange or the NASD, (v) every material press release and every
material news item or article in respect of the Company or its affairs which
was generally released to shareholders or prepared by the Company and (vi) any
additional information of a public nature concerning the Company, or the
Subsidiaries, or its business which you may reasonably request. During such
five year period, in the event the Company has an active subsidiary or
subsidiaries, the foregoing financial statements shall be on a consolidated
basis to the extent that the accounts of the Company and such subsidiary or
subsidiaries are consolidated in reports furnished to its shareholders
generally.
(h) The Company will make generally available to holders of its
securities as soon as may be practicable but in no event later than the last
day of the 15th full calendar month following the calendar quarter in which the
Effective Date falls, an earnings statement (which need not be audited but
shall be in reasonable detail) for a period of 12 months ended
15
<PAGE> 16
commencing after the Effective Date, and satisfying the provisions of Section
11(a) of the Act (including Rule 158 of the Rules and Regulations).
(i) Whether or not the transactions contemplated by this Agreement
are consummated or this Agreement is terminated, the Company will pay, or
reimburse if paid by the Underwriters, all costs and expenses incident to the
performance of the obligations of the Company under this Agreement, including
but not limited to costs and expenses of or relating to: (i) the preparation,
printing, and filing of the Registration Statement and exhibits to it, each
preliminary prospectus; the Prospectus and any amendment or supplement to the
Registration Statement or the Prospectus; (ii) the preparation and delivery of
certificates representing the Shares; (iii) the printing of this Agreement and
other underwriting documents, including Underwriter's Questionnaires,
Underwriter's Powers of Attorney, Blue Sky Memorandum, Master Agreement Among
Underwriters and Master Selected Dealer Agreements, if any; (iv) furnishing
(including costs of shipping and mailing) such copies of the Registration
Statement, the Prospectus and any preliminary prospectus, and all amendments
and supplements thereto, as may be requested for use in connection with the
offering and sale of the Shares by the Underwriters or by dealers to whom
Shares may be sold; (v) the listing of the Shares on the American Stock
Exchange; (vi) any filings required to be made by you with the NASD (but not
the fees and disbursements of your counsel in connection therewith); (vii) the
exemption of the Shares for offer and sale under the securities or Blue Sky
laws of such jurisdictions designated pursuant to Section 5(f), including the
fees, disbursements and other charges of your counsel in connection therewith,
and the preparation and printing of preliminary, supplemental and final Blue
Sky memoranda; (viii) the transfer agent for the Shares; (ix) the fees and
expenses of counsel to the Company and of the Company's accountants; and (x)
any and all taxes (including any transfer, franchise, capital stock or other
tax imposed on any jurisdiction) on sales by the Company to the Underwriters
hereunder.
(j) In addition to the foregoing expenses, the Company shall pay to
Cruttenden Roth Incorporated on the Closing Date a non-accountable expense
allowance equal to 1% of the gross proceeds of the sale of the Shares. In the
event the transactions contemplated hereby are not consummated by reason of any
action by the Underwriters (except if such prevention is based upon a breach by
the Company of any covenant, representation or warranty contained herein or
because any other condition to the Underwriters' obligations hereunder required
to be fulfilled by the Company is not fulfilled), the Company shall not be
liable to the Underwriters for any out-of-pocket accountable expenses except
that the Underwriters may retain all monies paid to them prior to the
termination of this Agreement, but only to the extent of out-of-pocket
accountable expenses incurred by the Underwriters, and the Underwriters shall
return to the Company all monies received in excess of their out-of-pocket
accountable expenses. In the event the transactions contemplated hereby are not
consummated by reason of any action of the Company or because of a breach by
the Company of any covenant, representation or warranty contained herein, the
Company shall be liable for the out-of-pocket accountable expenses incurred by
the Underwriters, including attorneys' fees, less a credit of any amounts
previously paid by the Company to the Underwriters, and the Underwriters shall
return to the Company all monies received in excess of their out-of-pocket
accountable expenses.
16
<PAGE> 17
(k) The Company will not at any time, directly or indirectly, take
any action designed, or which might reasonably be expected, to cause or result
in, or which will constitute, stabilization of the price of the shares of
Common Stock to facilitate the sale or resale of any of the Shares. The Company
will not make bids for or purchases of or induce bids for or purchases of,
directly or indirectly, any shares of Common Stock or securities convertible
into Common Stock of the Company until the distribution of all shares of Common
Stock being sold in the public offering has been completed.
(l) The Company will apply the net proceeds from the offering and
sale of the Shares to be sold by the Company in the manner set forth in the
Prospectus under "Use of Proceeds." The Company will not distribute any
offering material in connection with the offering and sale of the Shares other
than any preliminary prospectus, the Prospectus, the Registration Statement or
other material permitted or required by the Act.
(m) During the period of 360 days commencing on the Closing Date,
the Company will not, without your prior written consent, grant options to
purchase shares of Common Stock, except in accordance with the provisions of
the Company's stock option plans as previously approved by the Company's
shareholders and as in effect on the date hereof.
(n) Except pursuant to this Agreement or with the prior written
consent of Cruttenden Roth, the Company will not, and the Company has provided
agreements executed by each of the Company's officers and directors and each
shareholder owning 1% or more of the Common Stock of the Company prior to the
Closing Date providing that none of them will, for a period of 180 days from
the date of the Prospectus (the "Lock-up Period"), offer, pledge, sell,
transfer, contract to sell, grant any option for the sale of, or otherwise
dispose of, directly or indirectly, any shares of Common Stock or any security
or other instrument which by its terms is convertible into, exercisable for, or
exchangeable for shares of Common Stock otherwise than with the prior written
consent of Cruttenden Roth; provided, however, that the exercise of stock
options or other purchases of Common Stock under stock option plans or other
incentive compensation arrangements for employees or directors as previously
approved by the Company's Board of Directors and as in effect on the date
hereof shall not be prohibited. The Company will not, and each of the foregoing
persons will not, for a period commencing on the last day of the Lock-up Period
and ending 180 days thereafter sell any Common Stock or otherwise engage in a
transaction which is designed to or could reasonably be expected to lead to or
result in a disposition of Common Stock or securities convertible into or
exchangeable for Common Stock, unless such sale or other transaction is
effected through Cruttenden Roth (which shall be entitled to charge usual and
customary fees and commissions).
(o) The Company will maintain and keep accurate books and records
reflecting its assets and maintain internal accounting controls which provide
reasonable assurance that: (i) transactions are executed in accordance with
management's authorization; (ii) transactions are recorded as necessary to
permit the preparation of the Company's financial statements and to maintain
accountability for the assets of the Company; (iii) access to the assets of the
Company is permitted only in accordance with management's authorization; and
(iv) the
17
<PAGE> 18
recorded accounts of the assets of the Company are compared with existing
assets at reasonable intervals.
(p) If at any time during the 90-day period after the Registration
Statement is declared effective, any rumor, publication or event relating to or
affecting the Company shall occur as a result of which, in your opinion, the
market price for the Shares has been or is likely to be materially affected
(regardless of whether such rumor, publication or event necessitates a
supplement to or amendment of the Prospectus), the Company will, after written
notice from you advising it as to the effect set forth above, consult with you
concerning the necessity of the Company issuing a press release or other public
statement responding to or commenting on such rumor, publication or event.
(q) The Company will supply you with copies of all correspondence to
and from, and all documents issued to and by, the Commission in connection with
the registration of the Shares under the Act.
(r) Prior to the Closing Date (and, if applicable, the Option
Closing Date), and for a period of ninety (90) days thereafter, the Company
will furnish to you, as soon as they have been prepared, copies of any
unaudited interim financial statements of the Company for any periods
subsequent to the periods covered by the financial statements appearing in the
Registration Statement and the Prospectus.
(s) Prior to the Closing Date (and, if applicable, the Option
Closing Date), the Company will not issue any press releases or other
communications directly or indirectly and will hold no press conferences with
respect to the Company, the business, properties, assets, liabilities,
financial condition or results of operations of the Company, or the offering of
the Shares, without your prior consent which shall not be unreasonably
withheld.
(t) The Company will use its best efforts to maintain the listing of
the Shares on the American Stock Exchange.
(u) The Company will maintain a transfer agent and, if necessary
under the jurisdiction of incorporation of the Company, a registrar (which may
be the same entity as the transfer agent) for its Common Stock.
(v) During a period of 180 days from the effective date of the
Registration Statement, the Company will not file a registration statement
registering any shares under any stock option plan or other employee benefit
plan.
(w) The Company will reserve and keep available that maximum number
of its authorized but unissued Common Stock which are issuable upon exercise of
the Underwriter's Warrants outstanding from time to time.
(x) For a period of two (2) years from the date of the Prospectus,
the Company, at its expense, shall cause its regularly engaged independent
certified public accountants to review
18
<PAGE> 19
in accordance with SAS 71 (but not audit) the Company's financial statements
for each of the first three (3) fiscal quarters prior to the announcement of
quarterly financial information, the filing of the Company's quarterly report
on Form 10-Q and the mailing of quarterly financial information to its
shareholders.
6. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS.
The respective obligations of the Underwriters to purchase and pay for
the Shares shall be subject to the following conditions:
(a) Notification that the Registration Statement has become
effective shall be received by you not later than 5:30 p.m., Atlanta, Georgia
time, on the date of this Agreement or at such later date and time as shall be
consented to in writing by you and all filings required by Rule 424, Rule 430A,
Rule 434 and Rule 462(b), if applicable, of the Rules and Regulations shall
have been made.
(b) (i) No stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for that
purpose shall be pending or, to the knowledge of the Company, threatened by the
Commission, (ii) no order suspending the effectiveness of the Registration
Statement or the exemption of the Shares under the securities or Blue Sky laws
of any jurisdiction shall be in effect, and no proceeding for such purpose
shall be pending before or threatened or contemplated by the Commission or the
authorities of any such jurisdiction, (iii) any request for additional
information on the part of the staff of the Commission or any such authorities
shall have been complied with to the satisfaction of the staff of the
Commission or such authorities and to the satisfaction of the Underwriters,
(iv) after the date hereof no amendment or supplement to the Registration
Statement or the Prospectus shall have been filed unless a copy thereof was
first submitted to you and you did not object thereto in good faith, (v) the
NASD, upon review of the terms of the public offering of the Shares, shall not
have objected to such offering, such terms or the Underwriters' participation
in the same, and (vi) and you shall have received certificates, dated the
Closing Date and the Option Closing Date, as the case may be, and signed by the
Chief Executive Officer and the Chief Financial Officer of the Company (who
may, as to proceedings threatened, rely upon the best of their information and
belief), to the effect of clauses (i), (ii) and (iii).
(c) Since the respective dates as of which information is given in
the Registration Statement and the Prospectus, (i) there shall not have been a
material adverse change, or any development involving a prospective material
adverse change, in the general affairs, business, business prospects,
properties, management, key personnel, condition (financial or otherwise) or
results of operations of the Company, whether or not arising from transactions
in the ordinary course of business, in each case other than as set forth in the
Registration Statement and the Prospectus (or, in the case of a prospective
change, other than as contemplated by the Registration Statement and the
Prospectus) and (ii) the Company shall not have sustained any material loss or
interference with its business or properties from fire, explosion, flood,
hurricane or other casualty or calamity, whether or not covered by insurance,
or from any labor dispute or any court or legislative or other governmental
action, order or decree, which
19
<PAGE> 20
is not set forth in the Registration Statement and the Prospectus, if in your
reasonable judgment any such development makes it inadvisable to consummate the
sale and delivery of the Shares by you at the public offering price. Since the
respective dates as of which information is given in the Registration Statement
and the Prospectus, there shall have been no litigation or other proceeding
instituted against the Company or any of its officers or directors in their
capacities as such, before or by any federal, state or local court, commission,
regulatory body, administrative agency or other governmental body, domestic or
foreign, in which litigation or proceeding an unfavorable ruling, decision or
finding would materially and adversely affect the business, properties,
business prospects, condition (financial or otherwise) or results of operations
of the Company.
(d) All corporate proceedings and other legal matters in connection
with this Agreement, the Registration Statement and the Prospectus, and the
registration, authorization, issue, sale and delivery of the Shares, shall have
been reasonably satisfactory to counsel to the Underwriters, and such counsel
shall have been furnished with such papers and information as they may
reasonably have requested to enable them to pass upon the matters referred to
in this Section 6(d).
(e) Each of the representations and warranties of the Company
contained herein shall be true, accurate and correct in all material respects
at the Closing Date and, with respect to the Option Shares, at the Option
Closing Date, as if made at the Closing Date and, with respect to the Option
Shares, at the Option Closing Date, and all covenants and agreements herein
contained to be performed on the part of the Company and all conditions herein
contained to be fulfilled or complied with by the Company at or prior to the
Closing Date and, with respect to the Option Shares, at or prior to the Option
Closing Date, shall have been duly performed, fulfilled or complied with.
(f) The Underwriters shall have received an opinion, dated the
Closing Date and, with respect to the Option Shares, the Option Closing Date,
satisfactory in form and substance to your counsel, from King & Spalding,
counsel to the Company, to the effect that:
(i) The Company has been duly incorporated and is validly
existing under the laws of the State of Georgia. The Company has the
corporate power and corporate authority under such laws to own its
properties and conduct its business as described in the Prospectus.
The Company is qualified to do business as a foreign corporation in
good standing in all other jurisdictions, except where the failure to
so qualify would not have a material adverse effect upon the Company.
(ii) As of the dates specified therein, the Company had
authorized and issued capital stock as set forth under the caption
"Capitalization" in the Prospectus.
(iii) The certificates evidencing the Shares are in due and
proper form. The Shares delivered on such Closing Date have been duly
authorized, validly issued and are fully paid and nonassessable and
conform to the description thereof contained in the Prospectus.
20
<PAGE> 21
(iv) The outstanding shares of Common Stock have been duly
authorized and validly issued, are fully paid and nonassessable and
conform to the description thereof contained in the Prospectus; and
the shareholders of the Company have no preemptive or similar rights
with respect to the Shares or the Common Stock. All offers and sales
of the Company's securities since incorporation were at all relevant
times duly registered or exempt from the registration requirements of
the Act and were duly registered or the subject of an exemption from
the registration requirements of applicable state securities or Blue
Sky laws.
(v) The shares of Common Stock of the Company issuable
upon exercise of the Underwriter's Warrants in accordance with the
terms of the Warrant Agreement and at the prices therein provided for,
have been duly authorized and reserved for issuance upon such
exercise, and such shares, when issued upon exercise in accordance
with the terms of the Warrant Agreement and at the price provided for,
will be duly and validly issued, fully paid and nonassessable.
(vi) Other than the Warrant Agreement, there are no
contracts, agreements or understandings known to such counsel between
the Company and any person granting such person the right to require
the Company to file a registration statement under the Act with
respect to any securities of the Company owned or to be owned by such
person or to require the Company to include such securities in the
securities registered pursuant to the Registration Statement or in any
securities being registered pursuant to any other registration
statement filed by the Company under the Act.
(vii) No consent, approval, authorization or order of, or
filing with, any governmental agency or body or any court is required
for the issuance or sale of the Shares or the issuance of the
Underwriter's Warrants or the Common Stock issuable upon exercise of
the Underwriter's Warrants or the consummation of the other
transactions contemplated by this Agreement and the Warrant Agreement,
except such as have been obtained and made under the Act, the Exchange
Act and such as may be required under state securities or Blue Sky
laws.
(viii) The filing of the Registration Statement has been duly
authorized by the Board of Directors of the Company. The execution,
delivery and performance of this Agreement and the Warrant Agreement
and the consummation of the transactions herein and therein
contemplated, including the issuance and sale of the Shares and
compliance with the provisions thereof, will not result in a breach or
violation of any of the terms or provisions of, or constitute a
default under, (A) applicable provisions of federal or state law or
regulation or, to the knowledge of such counsel, order of any federal
or state governmental agency or body or any court having jurisdiction
over the Company or any of its properties, (B) any material
obligation, agreement, covenant or condition contained in any
agreement or instrument to the knowledge of such counsel to which the
Company is a party or by which the Company is bound or to which any of
the properties of the Company is subject, or (C) the Restated Articles
or the Bylaws of
21
<PAGE> 22
the Company, and the Company has full power and authority to
authorize, issue and sell the Firm Shares and the Company Option
Shares as contemplated by this Agreement.
(ix) The Registration Statement was declared effective
under the Act as of the date and time specified in such opinion, the
Prospectus either was filed with the Commission pursuant to the
subparagraph of Rule 424(b) specified in such opinion on the date
specified therein or was included in the Registration Statement (as
the case may be), and, to the best of the knowledge of such counsel,
no stop order suspending the effectiveness of the Registration
Statement or any part thereof has been issued and no proceedings for
that purpose have been instituted or are pending or contemplated under
the Act; the Registration Statement and the Prospectus, and each
amendment or supplement thereto, as of their respective effective or
issue dates, complied as to form in all material respects with the
requirements of the Act and the Rules and Regulations (except that
such counsel need express no opinion as to financial statements,
schedules and other financial or statistical information included
therein); the descriptions in the Registration Statement and
Prospectus of the Restated Articles and Bylaws of the Company and of
federal or Georgia statutes, legal and governmental proceedings and
contracts and other documents are accurate in all material respects
and fairly present in all material respects the information required
to be shown; and such counsel does not know of any statutes or
regulations or any pending or threatened legal or governmental
proceedings, required to be described in the Prospectus which are not
described as required nor of any contracts or documents of a character
required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration Statement
which are not described and filed as required; it being understood
that such counsel need express no opinion as to the financial
statements, schedules or other financial or statistical data contained
in the Registration Statement or the Prospectus or as to the section
of the Prospectus entitled "Underwriting."
(x) This Agreement and the Warrant Agreement have been
duly authorized, executed and delivered by the Company and constitute
valid and legally binding obligations of the Company enforceable in
accordance with their terms, except (A) as such enforceability may be
limited by bankruptcy, insolvency, reorganization, fraudulent
conveyance or similar laws now or hereafter in effect relating to
creditors' rights or debtors' obligations generally; (B) that the
remedies of specific performance and injunctive and other forms of
relief are subject to general equitable principles, whether
enforcement is sought at law or in equity, and that such enforcement
may be subject to the discretion of the court before which any
proceedings therefor may be brought; and (C) as rights to indemnity
and contribution may be limited by state or federal laws relating to
securities or the policies underlying such laws.
(xi) To the knowledge of such counsel, the Company holds
all licenses, certificates, permits and approvals from all state,
federal and other regulatory authorities, and has satisfied in all
material respects the requirements imposed by regulatory bodies,
administrative agencies or other governmental bodies, agencies or
22
<PAGE> 23
officials, that are required for the Company lawfully to own, lease
and operate its properties and conduct its business as described in
the Prospectus, and, to the knowledge of such counsel, the Company is
conducting its business in compliance in all material respects with
all of the laws, rules and regulations of each jurisdiction in which
it conducts its business.
(xii) The statements made in the Registration Statement
under the captions "Business," "Dividend Policy," "Management,"
"Principal and Selling Shareholders," "Certain Transactions,"
"Capitalization," "Description of Capital Stock," and "Shares Eligible
for Future Sale," to the extent that they constitute summaries of
documents referred to therein or matters of law or legal conclusions,
have been reviewed by such counsel and are accurate summaries and
fairly present the information disclosed therein.
(xiii) The Company is not an "investment company" or a
company "controlled" by an "investment company" within the meaning of
the Investment Company Act of 1940, as amended.
Such opinion shall also contain a statement by counsel to the effect
that such counsel has no reason to believe that the Registration Statement, or
any amendment thereto, as of its effective date and at all times subsequent
thereto up to and on the Closing Date and the Option Closing Date (if
applicable), contained any untrue statement of a material fact or omitted to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading (other than the financial statements,
schedules and other financial or statistical data included in, or required to
be included in the Registration Statement or the Prospectus, as to which such
counsel need express no opinion), or that the Prospectus, or any Amendment or
supplement thereto, as of its issue date and at all times subsequent thereto up
to and on the Closing Date and the Option Closing Date (if applicable),
contained any untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading (other than the financial statements, schedules and other financial
or statistical data included in, or required to be included in the Registration
Statement or the Prospectus, as to which such counsel need express no opinion).
Counsel rendering the foregoing opinion may rely as to questions of
law not involving the laws of the United States or the State of Georgia upon
opinions of local counsel, and as to questions of fact upon representations or
certificates of officers of the Company or the Selling Shareholders and of
government officials, in which case their opinion is to state that they are so
relying and that they have no knowledge of any material misstatement or
inaccuracy in any such opinion.
(g) The Underwriters shall have received an opinion, dated the
Option Closing Date satisfactory in form and substance to your counsel, from
_________________________, counsel to the Selling Shareholders, to the effect
that:
23
<PAGE> 24
(i) This Agreement and the Custody Agreement have been
duly executed and delivered by or on behalf of each of the Selling
Shareholders and constitute valid and binding agreements of such
Selling Shareholders in accordance with their terms, except as
enforceability may be limited by applicable equitable principles or by
bankruptcy, insolvency, moratorium, reorganization or similar laws
from time to time in effect affecting the enforcement of creditors'
rights and except that the enforceability of the rights to indemnity
and contribution contained herein and therein may be limited by
federal or state laws and public policy underlying such laws.
(ii) To the knowledge of such counsel, the sale of the
Shares to be sold by each Selling Shareholder hereunder and the
compliance by such Selling Shareholder with all of the provisions of
this Agreement and the Custody Agreement and the consummation of the
transactions herein and therein contemplated will not conflict with or
result in a material breach or violation of any terms or provisions
of, or constitute a material default under any material indenture,
mortgage, deed of trust, loan agreement or other agreement or
instrument known to such counsel to which such Selling Shareholder is
a party or by which such Selling Shareholder is bound or to which any
of the property or assets of such Selling Shareholder is subject, or
applicable provisions of federal or statutory law or regulation or
order or any federal or state court or governmental agency or body
known to such counsel to be applicable to such Selling Shareholder or
the property of such Selling Shareholder.
(iii) To the knowledge of such counsel, no consent, approval,
authorization or order of any federal or state court or governmental
agency or body is required for the consummation of the transactions
contemplated by this Agreement in connection with the Shares to be
sold by each Selling Shareholder hereunder, except such as have been
obtained under the Act and such as may be required under state
securities or Blue Sky laws in connection with the purchase and
distribution of such Shares by the Underwriters, as to which such
counsel need express no opinion.
(iv) Assuming that the Underwriters will take delivery of
the Shares for value in good faith and without notice of any adverse
claim and that the Underwriters are not parties themselves to any
fraud or illegality affecting the Shares, and by delivery of a
certificate or certificates therefor, the Selling Shareholders will
transfer to the Underwriters good and marketable title to such shares,
free and clear of any pledge, lien, security interest, charge, claim,
equity or encumbrance of any kind.
In rendering such opinion, such counsel may rely as to matters of
fact, to the extent counsel deems proper, on certificates of the Selling
Shareholders and the representations and warranties contained herein and in the
Custody Agreement executed by such Selling Shareholder. Such counsel also may
rely as to matters of fact, to the extent deemed proper, on certificates of
responsible officers of the Company and public officials.
(h) You shall have received an opinion, dated the Closing Date
and, if applicable, the Option Closing Date, from Nelson Mullins Riley &
Scarborough, L.L.P., as your counsel,
24
<PAGE> 25
with respect to the Registration Statement, the Prospectus and this Agreement,
which opinion shall be satisfactory in all respects to you, and the Company
shall have furnished to such counsel such documents as they request for the
purpose of enabling them to pass upon such matters.
(i) You shall have received at or prior to the Closing Date from
Nelson Mullins Riley & Scarborough, L.L.P. a memorandum or memoranda, in form
and substance satisfactory to you, with respect to the exemption for offering
and sale by the Underwriters of the Shares under state securities or Blue Sky
laws of such jurisdictions as the Underwriters may have designated to the
Company.
(j) The Underwriters shall have received from the Accountants a
letter dated the date hereof, and at the Closing Date a second letter dated the
Closing Date (and, if applicable, the Option Closing Date), in form and
substance satisfactory to the Underwriters stating that they are independent
auditors with respect to the Company within the meaning of the Act and the
applicable Rules and Regulations, and the answer to Item 509 of Regulation S-K
set forth in the Registration Statement is correct insofar as it relates to
them, and stating that:
(i) In their opinion, the financial statements and
schedules examined by them and included in the Registration Statement
or Prospectus comply as to form in all material respects with the
applicable accounting requirements of the Act and the Rules and
Regulations and are presented in accordance with generally accepted
accounting principles; and they have made a review in accordance with
standards established by the American Institute of Certified Public
Accountants of the interim financial statements, selected financial
and operating data, and/or condensed financial statements derived from
audited financial statements of the Company.
(ii) The financial information included in the Preliminary
Prospectus and the Prospectus under the captions "Prospectus Summary,"
"Summary Financial and Operating Data" and "Selected Financial Data"
for each of the periods reflected therein agrees with the
corresponding amounts in the audited financial statements included in
the Prospectus or previously reported on by them.
(iii) On the basis of a reading of the latest available
interim financial statements (unaudited) of the Company, a reading of
the minute books of the Company, inquiries of officials of the Company
responsible for financial and accounting matters and other specified
procedures, all of which have been agreed to by the Underwriters,
nothing came to their attention that caused them to believe that:
a. the unaudited financial statements included in
the Registration Statement do not comply as to form in all
material respects with the accounting requirements of the
federal securities laws and the related published rules and
regulations thereunder or are not in conformity with
generally accepted accounting principles applied on a basis
consistent with the basis for the audited financial
statements contained in the Registration Statement;
25
<PAGE> 26
b. any other unaudited financial statement data
included in the Prospectus do not agree with the
corresponding items in the unaudited financial statements
from which data was derived and any such unaudited data were
not determined on a basis consistent with the basis for the
corresponding amounts in the audited financial statements
included in the Prospectus;
c. at a specified date not more than five days prior
to the date of delivery of such respective letter, there was
any change in the capital stock, decline in shareholders'
equity or increase in long-term debt of the Company, or any
decreases in working capital, net current assets or net
assets or other items specified by the Underwriters, in each
case as compared with amounts shown in the latest balance
sheets included in the Prospectus, except in each case for
changes, decreases or increases which the Prospectus
discloses have occurred or may occur or which are described
in such letters; and
d. for the period from the closing date of the
latest statements of operations included in the Prospectus to
a specified date not more than five days prior to the date of
delivery of such respective letter, there were any decreases
in net revenues or net income of the Company, or other items
appearing on the face of the statement of operations
specified by the Underwriters, or any increases in any items
appearing on the face of the statement of operations
specified by the Underwriters, in each case as compared with
the corresponding period of the preceding year, except in
each case for decreases which the Prospectus discloses have
occurred or may occur or which are described in such letter.
(iv) They have carried out certain specified procedures, not
constituting an audit, with respect to certain amounts, percentages
and financial information specified by you which are derived from the
general accounting records of the Company, which appear in the
Prospectus and have compared such amounts, percentages and financial
information with the accounting records of the Company and have found
them to be in agreement.
In the event that the letters to be delivered referred to above set
forth any such changes, decreases or increases, it shall be a further condition
to the obligations of the Underwriters that the Underwriters shall have
reasonably determined, after discussions with officers of the Company
responsible for financial and accounting matters and with the Accountants, that
such changes, decreases or increases as are set forth in such letters do not
reflect a material adverse change in the shareholders' equity or long-term debt
of the Company as compared with the amounts shown in the latest balance sheet
of the Company included in the Prospectus, or a material adverse change in
total net revenues or net income of the Company, in each case as compared with
the corresponding period of the prior year.
26
<PAGE> 27
(k) At the Closing Date and, as to the Option Shares, the Option
Closing Date, there shall be furnished to you a certificate, dated the date of
its delivery, signed by each of the Chief Executive Officer and Chief Financial
Officer of the Company, in form and substance satisfactory to you, to the
effect that:
(i) Each of the representations and warranties of the
Company contained in Section 3 of this Agreement were, when originally
made, and are, at the time such certificate is delivered, true and
correct in all material respects;
(ii) Each of the covenants required herein to be performed
by the Company on or prior to the delivery of such certificate has
been duly, timely and fully performed, and each condition herein
required to be complied with by the Company on or prior to the date of
such certificate has been duly, timely and fully complied with in all
material respects.
(l) On or prior to the Closing Date, you shall have received the
executed agreements referred to in Section 5(n).
(m) The Shares shall be exempt for offer and sale in such states as
you may reasonably request, each such exemption shall be in effect and not
subject to any stop order or other proceeding on the Closing Date or the Option
Closing Date.
(n) The Shares shall be listed on the American Stock Exchange, upon
official notice of issuance with respect to the Firm Shares and the Company
Option Shares.
(o) No Underwriter shall have advised the Company that the
Registration Statement, any preliminary prospectus, the Prospectus or any
amendment or any supplement thereto, contains an untrue statement of fact
which, in your reasonable judgment, is material, or omits to state a fact
which, in your reasonable judgment, is material and is required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading and the Company shall
not have cured such untrue statement of fact or stated a statement of fact
required to be stated therein.
(p) The Company shall have furnished to you such certificates, in
addition to those specifically mentioned herein, as you may have reasonably
requested as to the accuracy and completeness at the Closing Date and the
Option Closing Date of any statement in the Registration Statement or the
Prospectus, as to the accuracy at the Closing Date and the Option Closing Date
of the representations and warranties of the Company herein, as to the
performance by the Company of its obligations hereunder, or as to the
fulfillment of the conditions concurrent and precedent to your obligations
hereunder.
(q) The Selling Shareholders or the Attorney-in-Fact shall deliver
to the Underwriters a certificate dated the Option Closing Date, if any, and
executed by each Selling Shareholder or the Attorney-in-Fact to the effect that
the representations and warranties of the
27
<PAGE> 28
Selling Shareholders shall be true and correct in all material respects as of
the Option Closing Date.
(r) The Company shall execute and deliver to Cruttenden Roth
Incorporated and its designees the Underwriter's Warrants for an initial
exercise price of $_____ per share. The Underwriter's Warrants will be
substantially in the form as filed as an exhibit to the Registration Statement.
All such opinions, certificates, letters and documents will be in
compliance with the provisions of this Agreement only if they are reasonably
satisfactory to you and counsel for the Underwriters. The Company will furnish
you with such conformed copies of such opinions, certificates, letters and
documents as you may request.
If any of the conditions specified in this Section 6 shall not have
been satisfied at or prior to the Closing Date (and, if applicable, the Option
Closing Date) or waived by you in writing, this Agreement may be terminated by
you pursuant to Section 8 hereof.
7. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company will indemnify and hold harmless each Underwriter
(including, without limitation, in its capacity as an Underwriter or as a
"qualified independent underwriter" within the meaning of Rule 2700 of the
NASD), the directors, officers, employees and agents of each Underwriter and
each person, if any, who controls each Underwriter within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act, from and against any
and all losses, claims, liabilities, expenses and damages (including any and
all investigative, legal and other expenses reasonably incurred in connection
with, and any amount paid in settlement of, any action, suit or proceeding or
any claim asserted), to which they, or any of them, may become subject under
the Act, the Exchange Act or other federal or state statutory law or
regulation, at common law or otherwise, insofar as such losses, claims,
liabilities, expenses or damages arise out of or are based in whole or in part
upon (i) any inaccuracy in the representations and warranties of the Company
contained herein, (ii) any failure of the Company to perform its obligations
hereunder or under law or (iii) any untrue statement or alleged untrue
statement of a material fact contained in any preliminary prospectus, the
Registration Statement or the Prospectus or any amendment or supplement to the
Registration Statement or the Prospectus or in any documents filed under the
Exchange Act, or the omission or alleged omission to state in such document a
material fact required to be stated therein or necessary to make the statements
therein not misleading; provided, however, that the foregoing indemnity
agreement with respect to any preliminary prospectus or the Prospectus shall
not inure to the benefit of any Underwriter from whom the person asserting any
such losses, claims, damages or liabilities purchased Shares, or any person
controlling such Underwriter, if a copy of the Prospectus (as then amended or
supplemented if the Company shall have furnished any amendments or supplements
thereto) was not sent or given by or on behalf of such Underwriter to such
person, if required by law so to have been delivered, at or prior to the
written confirmation of the sale of the Shares to such person, and if the
Prospectus (as so amended or supplemented) would have cured the defect giving
rise to
28
<PAGE> 29
such loss, claim, damage or liability; and further provided, that the Company
will not be liable to the extent that such loss, claim, liability, expense or
damage arises from the sale of the Shares in the public offering to any person
by an Underwriter and is based on an untrue statement or omission or alleged
untrue statement or omission made in reliance on and in conformity with
information relating to an Underwriter furnished in writing to the Company by
an Underwriter expressly for inclusion in the Registration Statement, any
preliminary prospectus or the Prospectus. The Company acknowledges that the
information in the last paragraph on the cover page, the paragraphs relating to
stabilization and passive market making practices on the inside front cover and
the statements set forth under the heading "Underwriting" in any preliminary
prospectus and the Prospectus constitute the only information relating to any
Underwriter furnished in writing to the Company by you expressly for inclusion
in the Registration Statement, any preliminary prospectus or the Prospectus.
This indemnity agreement will be in addition to any liability that the Company
might otherwise have.
(b) Each Selling Shareholder agrees, severally and not jointly, to
indemnify and hold harmless each Underwriter (including, without limitation, in
its capacity as an Underwriter or as a "qualified independent underwriter"
within the meaning of Rule 2700 of the NASD), and each person, if any, who
controls any Underwriter within the meaning of either Section 15 of the Act or
Section 20 of the Exchange Act, and the Company, its directors, its officers
who sign the Registration Statement and each person, if any who controls the
Company within the meaning of either such Section, provided, however, that the
indemnification obligation of each Selling Shareholder shall be limited to the
net proceeds received by such Selling Shareholder with respect to the Shares
sold, from and against any and all losses, claims, damages and liabilities
caused by any untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement or the Prospectus (as amended or
supplemented if the Company shall have furnished any amendment or supplement
thereto) or any preliminary prospectus, or caused by any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, but only with
reference to information relating to such Selling Shareholder furnished in
writing by or on behalf of such Selling Shareholder expressly for use in the
Registration Statement or the Prospectus or in any preliminary prospectus;
provided, however, that the foregoing indemnity agreement shall be effective
only if Selling Shareholder Option Shares are sold pursuant to this Agreement;
further provided, that the foregoing indemnity agreement with respect to any
preliminary prospectus or the Prospectus shall not inure to the benefit of any
Underwriter from whom the person asserting any such losses, claims, damages or
liabilities purchased Shares, or any person controlling such Underwriter, if a
copy of the Prospectus (as then amended or supplemented if the Company shall
have furnished any amendments or supplements thereto) was not sent or given by
or on behalf of such Underwriter to such person, if required by law so to have
been delivered, at or prior to the written confirmation of the sale of the
Shares to such person, and if the Prospectus (as so amended or supplemented)
would have cured the defect giving rise to such loss, claim, damage or
liability; and further provided, that the Selling Shareholders will not be
liable to the extent that such loss, claim, liability, expense or damage arises
from the sale of the Shares in the public offering to any person by an
Underwriter and is based on an untrue statement or omission or
29
<PAGE> 30
alleged untrue statement or omission made in reliance on and in conformity with
information relating to an Underwriter furnished in writing to the Company by
an Underwriter expressly for inclusion in the Registration Statement, any
preliminary prospectus or the Prospectus. The Selling Shareholders acknowledge
that the information in the last paragraph on the cover page, the paragraphs
relating to stabilization and passive market making practices on the inside
front cover and the statements set forth under the heading "Underwriting" in
any preliminary prospectus and the Prospectus constitute the only information
relating to any Underwriter furnished in writing to the Company by you
expressly for inclusion in the Registration Statement, any preliminary
prospectus or the Prospectus. This indemnity agreement will be in addition to
any liability that each Selling Shareholder might otherwise have.
(c) Each Underwriter will indemnify and hold harmless the Company,
each Selling Shareholder, each person, if any, who controls the Company within
the meaning of Section 15 of the Act or Section 20 of the Exchange Act, each
director of the Company and each officer of the Company who signs the
Registration Statement to the same extent as the foregoing indemnity from the
Company to the Underwriters, but only insofar as losses, claims, liabilities,
expenses or damages arise out of or are based on any untrue statement or
omission or alleged untrue statement or omission made in reliance on and in
conformity with information relating to you furnished in writing to the Company
by you expressly for use in the Registration Statement, any preliminary
prospectus or the Prospectus; provided, however, that such indemnity shall not
be applicable to any Selling Shareholder if no Selling Shareholder Option
Shares are sold pursuant to this Agreement. The Company acknowledges that the
information set forth in the last paragraph on the cover page, the paragraphs
relating to stabilization and passive market making practices on the inside
front cover and the statements set forth under the heading "Underwriting" in
any preliminary prospectus and the Prospectus constitute the only information
relating to the Underwriters furnished in writing to the Company by the
Underwriters expressly for inclusion in the Registration Statement, any
preliminary prospectus or the Prospectus. This indemnity will be in addition to
any liability that the Underwriters might otherwise have.
(d) Any party that proposes to assert the right to be indemnified
under this Section 7 will, promptly after receipt of notice of commencement of
any action against such party in respect of which a claim is to be made against
an indemnifying party or parties under this Section 7, notify each such
indemnifying party of the commencement of such action, enclosing a copy of all
papers served, but the omission so to notify such indemnifying party will not
relieve it from any liability that it may have to any indemnified party under
the foregoing provisions of this Section 7 unless, and only to the extent that,
such omission results in the forfeiture of substantive rights or defenses by
the indemnifying party. If any such action is brought against any indemnified
party and it notifies the indemnifying party of its commencement, the
indemnifying party will be entitled to participate in and, to the extent that
it elects by delivering written notice to the indemnified party promptly after
receiving notice of the commencement of the action from the indemnified party,
jointly with any other indemnifying party similarly notified, to assume the
defense of the action, with counsel reasonably satisfactory to the indemnified
party, and after notice from the indemnifying party to the indemnified party of
its election to assume the defense, the indemnifying party will not be liable
to the indemnified party for any legal or other expenses except as provided
below and
30
<PAGE> 31
except for the reasonable costs of investigation subsequently incurred by the
indemnified party in connection with the defense. The indemnified party will
have the right to employ its own counsel in any such action, but the fees,
expenses and other charges of such counsel will be at the expense of such
indemnified party unless (i) the employment of counsel by the indemnified party
has been authorized in writing by the indemnifying party, (ii) the named
parties to any such action (including any impleaded parties) include both the
indemnified party and the indemnifying party, and the indemnified party shall
have been advised by such counsel that there may be one or more legal defenses
available to it which are different from or additional to those available to
the indemnifying party (in which case the indemnifying party shall not have the
right to assume the defense of such action on behalf of the indemnified party),
or (iii) the indemnifying party has not in fact employed counsel to assume the
defense of such action within a reasonable time after receiving notice of the
commencement of the action, in each of which cases the reasonable fees,
disbursements and other charges of counsel will be at the expense of the
indemnifying party or parties. It is understood that the indemnifying party or
parties shall not, in connection with any proceeding or related proceedings in
the same jurisdiction, be liable for the reasonable fees, disbursements and
other charges of more than one separate firm admitted to practice in such
jurisdiction at any one time for all such indemnified party or parties. All
such fees, disbursements and other charges will be reimbursed by the
indemnifying party promptly as they are incurred. An indemnifying party will
not be liable for any settlement of any action or claim effected without its
written consent (which consent will not be unreasonably withheld).
(e) In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in the foregoing
paragraphs of this Section 7 is applicable in accordance with its terms but for
any reason is held to be unavailable from the Company, the Underwriters or the
Selling Shareholders, then the Company, the Underwriters and the Selling
Shareholders will contribute to the total losses, claims, liabilities, expenses
and damages (including any investigative, legal and other expenses reasonably
incurred in connection with, and any amount paid in settlement of, any action,
suit or proceeding or any claim asserted, but after deducting any contribution
received by the Company from persons other than the Underwriters and the
Selling Shareholders, such as persons who control the Company within the
meaning of the Act, officers of the Company who signed the Registration
Statement and directors of the Company, who may be liable for contribution) to
which the Company, the Underwriters and the Selling Shareholders may be subject
in such proportion as shall be appropriate to reflect the relative benefits
received by the Company, the Underwriters and the Selling Shareholders. The
relative benefits received by the Company on the one hand and the Underwriters
on the other hand shall be deemed to be in the same respective proportions as
the total net proceeds from the offering (before deducting expenses) received
by the Company bears to the total underwriting discounts and commissions
received by the Underwriters, in each case as set forth in the table on the
cover page of the Prospectus. The relative benefits received by the Selling
Shareholders shall be deemed to be in proportion to the net proceeds to be
received by them in the offering, as set forth in the table on the cover page
of the Prospectus. If, but only if, the allocation provided by the foregoing
sentences is not permitted by applicable law, the allocation of contribution
shall be made in such proportion as is appropriate to reflect not only the
relative benefits referred to in the foregoing sentences but
31
<PAGE> 32
also the relative fault of the Company, the Underwriters and the Selling
Shareholders with respect to the statements or omissions which resulted in such
loss, claim, liability, expense or damage, or action in respect thereof, as
well as any other relevant equitable considerations with respect to such
offering. Such relative fault shall be determined by reference to whether the
untrue or alleged untrue statement of a material fact or omission or alleged
omission to state a material fact relates to information supplied by the
Company, the Underwriters or the Selling Shareholders, the intent of the
parties and their relative knowledge, access to information and opportunity to
correct or prevent such statement or omission. The Company, the Underwriters
and the Selling Shareholders agree that it would not be just and equitable if
contributions pursuant to this Section 7(d) were to be determined by pro rata
or per capita allocation (even if the Underwriters were treated as one entity
for such purpose) or by any other method of allocation which does not take into
account the equitable considerations referred to herein. The amount paid or
payable by an indemnified party as a result of the loss, claim, liability,
expense or damage, or action in respect thereof, referred to above in this
Section 7(d) shall be deemed to include, for purpose of this Section 7(d), any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 7(d), an Underwriter shall not
be required to contribute any amount in excess of the underwriting discounts
received by it (less the aggregate amount of any damages which such Underwriter
and its controlling persons have otherwise been required to pay in respect of
the same or any similar claim), no Selling Shareholder shall be required to
contribute any amount in excess of the net proceeds received by such Selling
Shareholder (less the amount such Selling Shareholder has otherwise been
required to pay in respect of the same or any similar claim) and no person
found guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) will be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations to
contribute as provided in this Section 7(d) are several in proportion to their
respective underwriting obligations and not joint. For purposes of this Section
7(d), any person who controls a party to this Agreement within the meaning of
the Act will have the same rights to contribution as that party, and each
officer and director of the Company who signed the Registration Statement will
have the same rights to contribution as the Company, subject in each case to
the provisions hereof. Any party entitled to contribution, promptly after
receipt of notice of commencement of any action against such party in respect
of which a claim for contribution maybe made under this Section 7(d), will
notify any such party or parties from whom contribution may be sought, but the
omission to notify will not relieve the party or parties from whom contribution
may be sought from any other obligation it or they may have under this Section
7(d). No party will be liable for contribution with respect to any action or
claim settled without its written consent (which consent will not be
unreasonably withheld).
(f) The indemnity and contribution agreements contained in this
Section 7 and the representations and warranties of the Company and the Selling
Shareholders contained in this Agreement shall remain operative and in full
force and effect regardless of (i) any investigation made by the Underwriters
or on their behalf, (ii) acceptance of any of the Shares and payment therefor
or (iii) any termination of this Agreement.
32
<PAGE> 33
(g) The parties to this Agreement hereby acknowledge that they are
sophisticated business persons who were represented by counsel during the
negotiations regarding the provisions hereof including, without limitation, the
provisions of this Section 7, and are fully informed regarding said provisions.
They further acknowledge that the provisions of this Section 7 fairly allocate
the risks in light of the ability of the parties to investigate the Company and
its business in order to assure that adequate disclosure is made in the
Registration Statement and Prospectus as required by the Act and the Exchange
Act.
8. TERMINATION.
The Underwriters' obligations under this Agreement may be terminated
at any time on or prior to the Closing Date (or, with respect to the Option
Shares, on or prior to the Option Closing Date), by notice to the Company from
the Underwriters, without liability on the part of any of the Underwriters to
the Company (provided, however, that this Section 8 and Sections 5(i), 5(j) and
7 shall be and always remain effective), if, prior to delivery and payment for
the Shares (or the Option Shares, as the case may be), in your reasonable
judgment, (i) the Company shall have failed, refused or been unable to perform
any agreement on its part to be performed, or because of such condition the
Underwriters' obligations hereunder required to be fulfilled are not fulfilled,
including, but not limited to, any change in the business, properties, business
prospects, condition (financial or otherwise) or results of operations of the
Company from that set forth in the Registration Statement or Prospectus which,
in your reasonable judgment, is material and adverse; (ii) any condition
specified in Section 6 of this Agreement shall not have been satisfied; (iii)
trading in any of the equity securities of the Company shall have been
suspended by the Commission, by an exchange that lists the Shares or by the
Nasdaq National Market; (iv) trading in securities generally on the New York
Stock Exchange, the American Stock Exchange or the Nasdaq National Market shall
have been suspended or limited or minimum or maximum prices shall have been
generally established on such exchange, or additional material governmental
restrictions, not in force on the date of this Agreement, shall have been
imposed upon trading in securities generally by such exchange or by order of
the Commission or any court of other governmental authority; (v) a general
banking moratorium shall have been declared by either federal or state
authorities; or (vi) any material adverse change in the financial or securities
markets in the United States or in political, financial or economic conditions
in the United States or any outbreak or material escalation of hostilities or
declaration by the United States of a national emergency or war or other
calamity, crisis, act of God or hostile act against the United States shall
have occurred the effect of any of which is such as to make it, in your
reasonable judgment, impracticable or inadvisable to market the Shares on the
terms and in the manner contemplated by the Prospectus.
9. SUBSTITUTION OF UNDERWRITERS.
If any Underwriter shall fail or refuse to purchase any of the Shares
which it has agreed to purchase hereunder, and the aggregate number of Shares
which such defaulting Underwriter agreed but failed or refused to purchase is
not more than one-tenth of the aggregate number of Shares, the other
Underwriters shall be obligated, severally, to purchase the Shares that such
33
<PAGE> 34
defaulting Underwriter agreed but failed or refused to purchase, in the
proportions which the number of Shares which they have respectively agreed to
purchase pursuant to Section 1 bears to the aggregate number of Shares which
all such non-defaulting Underwriters have so agreed to purchase, or in such
other proportions as you may specify; provided, that in no event shall the
maximum number of Shares which an Underwriter has been obligated to purchase
pursuant to Section 1 be increased pursuant to this Section 9 by more than
one-ninth of such number of Shares without the prior written consent of such
Underwriter. If an Underwriter shall fail or refuse to purchase any Shares and
the aggregate number of Shares which such defaulting Underwriter agreed but
failed or refused to purchase exceeds one-tenth of the aggregate number of the
Shares and arrangements satisfactory to the non-defaulting Underwriters or the
Company for the purchase of such Shares are not made within 48 hours after such
default, this Agreement will terminate without liability on the part of any
non-defaulting Underwriter or the Company for the purchase or sale of any
Shares under this Agreement. In any such case the Underwriters, the Company or
the Selling Shareholders shall have the right to postpone the Closing Date or
Option Closing Date, but in no event for longer than seven days, in order that
the required changes, if any, in the Registration Statement and in the
Prospectus or in any other documents or arrangements may be effected. Any
action taken pursuant to this Section 9 shall not relieve any defaulting
Underwriter from liability in respect to any default of such Underwriter under
this Agreement.
10. DEFAULT BY A SELLING SHAREHOLDER.
If any of the Selling Shareholders shall fail to sell and deliver the
number of Selling Shareholder Option Shares that such Selling Shareholder is
obligated to sell, the Underwriters may, at their option, by notice to the
Company, either (a) require the Company to sell and deliver such number of
shares of Common Stock as to which the Selling Shareholders have defaulted, (b)
elect to purchase the Firm Shares and the Option Shares that the Company and
the non-defaulting Selling Shareholders have agreed to sell pursuant to this
Agreement or (c) terminate this Agreement if the Company shall have refused to
sell and deliver to the Underwriters the shares of Common Stock referred to in
clause (a) of this Section 10.
In the event of a default under this Section 10 that does not result
in the termination of this Agreement, either the Underwriters or the Company
shall have the right to postpone the Closing Date for a period not exceeding
seven days in order to effect any required changes in the Registration
Statement or Prospectus or in any other documents or arrangements. No action
taken pursuant to this Section 10 shall relieve the Company or the Selling
Shareholder so defaulting from liability, if any, in respect of such default.
11. MISCELLANEOUS.
All communications hereunder shall be in writing and, if sent to any
of the Underwriters, shall be mailed, first class postage prepaid, sent via
reliable overnight delivery service, sent by facsimile (and by one of the two
preceding methods), delivered by hand or telegraphed and confirmed in writing
to the Underwriters in care of Cruttenden Roth Incorporated, 24 Corporate
Plaza, Newport Beach, CA 92660 Attention: Shelly Singhal, or if
34
<PAGE> 35
sent to the Company shall be sent by one of the foregoing methods to the
Company at The Plastic Surgery Company, 104 West Anapamu Street, Suite G, Santa
Barbara, CA 93101, Attention: Dennis E. Condon.
This Agreement has been and is made solely for the several
Underwriters' and the Company's and the Selling Shareholders' benefits and of
the controlling persons, directors and officers referred to in Section 7, and
their respective heirs, executors, administrators, successors and assigns, and
no other person shall acquire or have any right under or by virtue of this
Agreement. The term "successors and assigns" as used in this Agreement shall
not include a purchaser, as such purchaser, of Shares from an Underwriter.
This Agreement shall be governed by and construed in accordance with
the laws of the State of Georgia.
This Agreement may be signed in two or more counterparts with the same
effect as if the signatures thereto and hereto were upon the same instrument.
In case any provision in this Agreement shall be invalid, illegal or
unenforceable, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
THE COMPANY, EACH SELLING SHAREHOLDER AND YOU EACH HEREBY IRREVOCABLY
WAIVE ANY RIGHT THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY CLAIM BASED
UPON OR ARISING OUT OF THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
You hereby represent and warrant to the Company and each Selling
Shareholder that you have authority to act hereunder on behalf of the several
Underwriters, and any action hereunder taken by you will be binding upon all
the Underwriters.
35
<PAGE> 36
Please confirm that the foregoing correctly sets forth the agreement
among the Company, the Selling Shareholders and you.
Very truly yours,
THE PLASTIC SURGERY COMPANY
By:
Name:
Title:
SELLING SHAREHOLDERS:
By:
_____________________________________________
________________________, as Attorney-in-Fact
for each of the Selling Shareholders
identified on Schedule II
Confirmed and accepted as of the
date first above written.
CRUTTENDEN ROTH INCORPORATED
By:
---------------------------
Name:
Title:
36
<PAGE> 37
SCHEDULE I
UNDERWRITERS
<TABLE>
<CAPTION>
NUMBER OF
NAME OF UNDERWRITER FIRM SHARES
- ------------------- -----------
<S> <C>
TOTAL
</TABLE>
37
<PAGE> 38
SCHEDULE II
SELLING SHAREHOLDERS
FOR OPTION SHARES
<TABLE>
<CAPTION>
Number of
Option
Name of Selling Shareholder Shares
- --------------------------- ------
<S> <C>
TOTAL
</TABLE>
38
<PAGE> 1
EXHIBIT 4.2
FORM OF
WARRANT AGREEMENT
WARRANT AGREEMENT, dated as of __________, 1999, by and between THE
PLASTIC SURGERY COMPANY, a Georgia corporation (the "Company"), and ____________
_________________ (the "Underwriter").
The Company proposes to issue to the Underwriter warrants as
hereinafter described (the "Underwriter Warrants") to purchase up to an
aggregate of _______ shares, subject to adjustment as provided in Section 8
hereof (such shares, as adjusted, being hereinafter referred to as the "Shares")
of the Company's common stock, no par value per share (the "Common Shares"),
each Underwriter Warrant entitling the holder thereof to purchase one Common
Share, subject to adjustment as hereinbefore provided. All capitalized terms
used herein and not otherwise defined herein shall have the same meanings as in
that certain underwriting agreement, of even date herewith, by and between the
Company and the Underwriter (the "Underwriting Agreement"). In this Agreement,
the singular includes the plural and the plural includes the singular.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein set forth and for other good and valuable consideration, the
parties hereto agree as follows:
1. Issuance of Warrants; Form of Warrant. The Company will issue,
sell and deliver the Underwriter Warrants to the Underwriter or its bona fide
officers for an aggregate price of $250.00. The form of the Underwriter Warrants
and the form of election to purchase Shares to be attached thereto shall be
substantially as set forth on Exhibit A attached hereto. The Underwriter
Warrants shall be executed on behalf of the Company by the manual or facsimile
signature of the present or any future Chief Executive Officer, President or any
Vice President of the Company, under its corporate seal, affixed or in
facsimile, and attested by the manual or facsimile signature of the present or
any future Secretary or Assistant Secretary of the Company.
2. Registration. The Underwriter Warrants shall be numbered and
shall be registered in an Underwriter Warrant register (the "Underwriter Warrant
Register"). The Company shall be entitled to treat the registered holder of any
Underwriter Warrant on the Underwriter Warrant Register (the "Holder") as the
owner in fact thereof for all purposes and shall not be bound to recognize any
equitable or other claim to or interest in such Underwriter Warrant on the part
of any other person, and shall not be liable for any registration of transfer of
Underwriter Warrants which are registered or are to be registered in the name of
a fiduciary or the nominee of a fiduciary unless made with the actual knowledge
that a fiduciary or nominee is committing a breach of trust in requesting such
registration of transfer, or with such knowledge of such facts that its
participation therein amounts to bad faith. The Underwriter Warrants shall be
registered initially in the name of "____________________________" in such
denominations as the Underwriter may request in writing to the Company;
provided, however, that the Underwriter may designate that all or a portion of
the Underwriter Warrants be issued in varying amounts directly to its bona fide
officers, and not to the Underwriter. Such designation will only be made by the
Underwriter if it determines that such issuances would not violate the
interpretation of the Board of Governors of the National Association of
Securities Dealers, Inc. (the "NASD") relating to the review of corporate
financing arrangements.
3. Transfer of Warrants. The Underwriter Warrants will not be
sold, transferred,
<PAGE> 2
assigned or hypothecated, in part or in whole the (other than by
will or pursuant to the laws of descent and distribution), except to officers of
the Underwriter and thereafter only upon delivery thereof duly endorsed by the
Holder or by his duly authorized attorney or representative, or accompanied by
proper evidence of succession, assignment or authority to transfer. In all cases
of transfer by an attorney, the original power of attorney, duly approved, or an
official copy thereof, duly certified, shall be deposited with the Company. In
case of transfer by executors, administrators, guardians or other legal
representatives, duly authenticated evidence of their authority shall be
produced, and may be required to be deposited with the Company in its
discretion. Upon any registration of transfer, the Company shall deliver a new
Underwriter Warrant or Underwriter Warrants to the persons entitled thereto. The
Underwriter Warrants may be exchanged at the option of the Holder thereof for
another Underwriter Warrant, or other Underwriter Warrants, of different
denominations, of like tenor and representing in the aggregate the right to
purchase a like number of Common Shares upon surrender to the Company or its
duly authorized agent. Notwithstanding the foregoing, the Company shall have no
obligation to cause Underwriter Warrants to be transferred on its books to any
person if such transfer would violate the Securities Act of 1933, as amended
(the "Act").
4. Term of Warrants, Exercise of Warrants. Each Underwriter
Warrant entitles the registered owner thereof to purchase one Share at a
purchase price of $____ per Share [120% OF THE OFFERING PRICE TO THE PUBLIC]
(the "Exercise Price") at any time from the second anniversary of the effective
date of the Registration Statement until 5:00 p.m., New York City time, on
___________ ___, 2004) (the "Warrant Expiration Date"). Notwithstanding the
foregoing, if at 5:00 p.m. New York time on the Warrant Expiration Date, any
Holder or Holders of the Underwriter Warrants have not exercised their
Underwriter Warrants and the "current market price" (as such term is defined in
Section 8(d) below) for the Common Shares on the Warrant Expiration Date is
greater than the Exercise Price, then each such unexercised Underwriter Warrant
shall automatically be converted into a number of Common Shares equal to: the
number of Common Shares then issuable upon exercise of an Underwriter Warrant,
multiplied by a fraction, the numerator of which is the difference between (A)
the "current market price" for Common Shares on the Warrant Expiration Date and
(B) the Exercise Price, and the denominator of which is the "current market
price" on the Warrant Expiration Date. Prior to the Warrant Expiration Date, the
Company will not take any action which would terminate the Underwriter Warrants.
The Exercise Price and the Shares issuable upon exercise of the Underwriter
Warrants are subject to adjustment upon the occurrence of certain events
pursuant to the provisions of Section 8 of this Agreement. Subject to the
provisions of this Agreement, each Holder shall have the right, which may be
exercised as set forth in such Underwriter Warrants, to purchase from the
Company (and the Company shall issue and sell to such Holder) the number of
fully paid and nonassessable Common Shares specified in such Underwriter
Warrants, upon surrender to the Company, or its duly authorized agent, of such
Underwriter Warrants with the form of election to purchase attached thereto duly
completed and signed, with signatures guaranteed by a member firm of a national
securities exchange, a commercial bank or trust company located in the United
States or a member of the NASD and upon payment to the Company of the Exercise
Price, as adjusted in accordance with the provisions of Section 8 of this
Agreement, for the number of Shares in respect of which such Underwriter
Warrants are then exercised.
Payment of such Exercise Price may be made at the Holder's election (i)
by certified or official bank check, (ii) in the event that the Holder holds
Common Shares of the Company and such Common Shares are listed on a domestic
stock exchange or quoted in the domestic over-the-counter market, by
transferring to the Company an amount of such Common Shares which, when
multiplied by, the current market price of the Common Shares at the time of
exercise of such Underwriter Warrant, equals the aggregate amount of the
consideration payable upon such exercise, (iii) by surrendering to
2
<PAGE> 3
the Company the right to receive a portion of the number of Shares with respect
to which such Underwriter Warrant is then being exercised equal to the product
obtained by multiplying such number of Shares by a fraction, the numerator of
which is the Exercise Price in effect on the date of such exercise and the
denominator of which is the current market price of the Common Shares in effect
on such date, or (iv) by a combination of the foregoing methods of payment
selected by the Holder. For purposes of this paragraph, the current market price
of the Common Shares shall be calculated either (a) on the date which the form
of election to purchase attached hereto is deemed to have been sent to the
Company pursuant to Section 12 hereof ("Notice Date") or (b) as the average of
the last reported sale price for each of the five trading days preceding the
Notice Date, whichever of (a) or (b) is greater. In any case where the
consideration payable upon such exercise is being paid in whole or in part
pursuant to the provisions of clause (ii) or clause (iii) of the preceding
sentence, such exercise shall be accompanied by written notice from the Holder
specifying the manner of payment thereof, and in the case of clause (ii),
stating the amount of Common Shares of the Company to be applied to such
payment, and in the case of clause (iii), containing a calculation showing the
number of Shares with respect to which rights are being surrendered thereunder
and the net number of Shares to be issued after giving effect to such surrender.
No adjustment shall be made for any dividends on any Shares issuable upon
exercise of an Underwriter Warrant. Upon each surrender of Underwriter Warrants
and payment of the Exercise Price as aforesaid, the Company shall issue and
cause to be delivered with all reasonable dispatch to or upon the written order
of the Holder of such Underwriter Warrants and in such name or names as such
Holder may designate a certificate or certificates for the number of full Shares
so purchased upon the exercise of such Underwriter Warrants, together with cash,
as provided in Section 9 of this Agreement, in respect of any fractional Shares
otherwise issuable upon such surrender. Such certificate or certificates shall
be deemed to have been issued and any person so designated to be named therein
shall be deemed to have become a holder of record of such Shares as of the date
of the surrender of Underwriter Warrants and payment of the Exercise Price as
aforesaid; provided, however, that if, at the date of surrender of such
Underwriter Warrants and payment of such Exercise Price, the transfer books for
the Common Shares or other class of securities issuable upon the exercise of
such Underwriter Warrants shall be closed, the certificates for the Shares shall
be issuable as of the date on which such books shall next be opened (whether
before, on or after the Warrant Expiration Date) and until such date the Company
shall be under no duty to deliver any certificate for such Shares; provided,
further, however, that the transfer books of record, unless otherwise required
by law, shall not be closed at any one time for a period longer than twenty (20)
days. The rights of purchase represented by the Underwriter Warrants shall be
exercisable, at the election of the Holders thereof, either in full or from time
to time in part and, in the event that any Underwriter Warrant is exercised in
respect of less than all of the Shares issuable upon such exercise at any time
prior to the Warrant Expiration Date, a new Underwriter Warrant or Underwriter
Warrants will be issued for the remaining number of Shares specified in the
Underwriter Warrant so surrendered.
5. Payment of Taxes. The Company will pay all documentary stamp
taxes, if any, attributable to the issuance of Shares upon the exercise of
Underwriter Warrants; provided, however, that the Company shall not be required
to pay any tax or taxes which may be payable in respect of any transfer involved
in the issue or delivery of any certificates for Shares in a name other than
that of the Holder of Underwriter Warrants in respect of which such Shares are
issued.
6. Mutilated or Missing Warrants. In case any of the Underwriter
Warrants shall be mutilated, lost, stolen or destroyed, the Company may, in its
discretion, issue and deliver in exchange and substitution for and upon
cancellation of the mutilated Underwriter Warrant, or in lieu of and
substitution for the Underwriter Warrant lost, stolen or destroyed, a new
Underwriter Warrant of like tenor and representing an equivalent right or
interest, but only upon receipt of evidence reasonably
3
<PAGE> 4
satisfactory to the Company of such mutilation, loss, theft or destruction of
such Underwriter Warrant and indemnity, unless mutilated, also reasonably
satisfactory to the Company. An applicant for such substitute Underwriter
Warrants shall also comply with such other reasonable regulations and pay such
other reasonable charges as the Company may prescribe.
7. Reservation of Shares, etc. There have been reserved and the
Company shall at all times keep reserved, out of the authorized and unissued
Common Shares, a number of Common Shares sufficient to provide for the exercise
of the rights of purchase represented by the outstanding Underwriter Warrants.
American Stock Transfer and Trust Company, transfer agent for the Common Shares
(the "Transfer Agent"), and every subsequent transfer agent, if any, for the
Company's securities issuable upon the exercise of the Underwriter Warrants will
be irrevocably authorized and directed at all times until the Warrant Expiration
Date to reserve such number of authorized and unissued Common Shares as shall be
required for such purpose. The Company will keep a copy of this Agreement on
file with the Transfer Agent and with every subsequent transfer agent of the
Company's securities issuable upon the exercise of the Underwriter Warrants. The
Company will supply the Transfer Agent or any subsequent transfer agent with
duly executed certificates for such purpose and will itself provide or otherwise
make available any cash which may be distributable as provided in Section 9 of
this Agreement. All Underwriter Warrants surrendered in the exercise of the
rights thereby evidenced shall be canceled, and such canceled Underwriter
Warrants shall constitute sufficient evidence of the number of Shares that have
been issued upon the exercise of such Underwriter Warrants. No Common Shares
shall be subject to reservation in respect of unexercised Underwriter Warrants
subsequent to the Warrant Expiration Date.
8. Adjustments of Exercise Price and Number of Shares. The
Exercise Price and the number and kind of securities issuable upon exercise of
each Underwriter Warrant shall be subject to adjustment from time to time upon
the happening of certain events, as follows:
(a) In case the Company shall (i) declare a dividend on
its Common Shares in Common Shares or make a distribution of Common
Shares, (ii) subdivide its outstanding Common Shares, (iii) combine its
outstanding Common Shares into a smaller number of Common Shares or
(iv) issue by reclassification of the Common Shares other securities of
the Company (including any such reclassification in connection with a
consolidation or merger in which the Company is the continuing
corporation), the number of Shares purchasable upon exercise of each
Underwriter Warrant immediately prior thereto shall be adjusted so that
the Holder of each Underwriter Warrant shall be entitled to receive the
kind and number of Shares or other securities of the Company which he
would have owned or have been entitled to receive after the happening
of any of the events described above, had such Underwriter Warrant been
exercised immediately prior to the happening of such event or any
record date with respect thereto. An adjustment made pursuant to this
paragraph (a) shall become effective immediately after the effective
date of such event retroactive to immediately after the record date, if
any, for such event.
(b) In case the Company shall issue rights, options or
warrants to all holders of its Common Shares, without any charge to
such holders, entitling them (for a period expiring within 45 days
after the record date mentioned below in this paragraph (b)) to
subscribe for or to purchase Common Shares at a price per share that is
lower at the record date mentioned below than the then current market
price per Common Share (as defined in paragraph (d) below), the number
of Shares thereafter purchasable upon exercise of each Underwriter
Warrant shall be determined by multiplying the number of Shares
theretofore purchasable upon
4
<PAGE> 5
exercise of each Underwriter Warrant by a fraction, of which the
numerator shall be the number of Common Shares outstanding on such
record date plus the number of additional Common Shares offered for
subscription or purchase, and of which the denominator shall be the
number of Common Shares outstanding on such record date plus the number
of shares which the aggregate offering price of the total number of
Common Shares so offered would purchase at the then current market
price per Common Share. Such adjustment shall be made whenever such
rights, options or warrants are issued, and shall become effective
retroactively to immediately after the record date for the
determination of shareholders entitled to receive such rights, options
or warrants.
(c) In case the Company shall distribute to all holders
of its Common Shares stock other than Common Shares or evidences of its
indebtedness or assets (excluding cash dividends payable out of
consolidated earnings or retained earnings and dividends or
distributions referred to in paragraph (a) above) or rights, options or
warrants or convertible or exchangeable securities containing the right
to subscribe for or purchase Common Shares (excluding those referred to
in paragraph (b) above), then in each case the number of Shares
thereafter issuable upon the exercise of each Underwriter Warrant shall
be determined by multiplying the number of Shares theretofore issuable
upon the exercise of each Underwriter Warrant, by a fraction, of which
the numerator shall be the current market price per Common Share (as
defined in paragraph (d) below) on the record date mentioned below in
this paragraph (c), and of which the denominator shall be the current
market price per Common Share on such record date, less the then fair
value (as determined by the Board of Directors of the Company, whose
determination shall be conclusive) of the portion of the shares of
capital stock other than Common Shares or assets or evidences of
indebtedness so distributed or of such subscription rights, options or
warrants, or of such convertible or exchangeable securities applicable
to one Common Share. Such adjustment shall be made whenever any such
distribution is made, and shall become effective on the date of
distribution retroactive to immediately after the record date for the
determination of shareholders entitled to receive such distribution.
(d) For the purpose of any computation under paragraphs
(b) and (c) of this Section 8, the current market price per Common
Share at any date shall be the greater of (i) the average of the daily
closing prices for five (5) consecutive trading days commencing ten
(10) trading days before the date of such computation and (ii) the last
sale price on the date before the date of such computation. The closing
price for each day shall be the last reported sale price regular way
or, in case no such reported sale takes place on such day, the average
of the closing bid and asked prices regular way for such day, in either
case on the principal national securities exchange on which the shares
are listed or admitted to trading, or if they are not listed or
admitted to trading on any national securities exchange, but are traded
in the over-the-counter market, the closing sale price of the Common
Shares or, in case no sale is publicly reported, the average of the
representative closing bid and asked quotations for the Common Shares
on the Nasdaq SmallCap Market or any comparable system, or if the
Common Shares are not listed on the Nasdaq SmallCap Market or a
comparable system, the closing sale price of the Common Shares or, in
case no sale is publicly reported, the average of the closing bid and
asked prices as furnished by two members of the NASD selected from time
to time by the Company for that purpose.
(e) No adjustment in the number of Shares purchasable
hereunder shall be required unless such adjustment would require an
increase or decrease of at least one percent (1%) in the number of
Shares purchasable upon the exercise of each Underwriter Warrant;
provided,
5
<PAGE> 6
however, that any adjustments which by reason of this paragraph (e) are
not required to be made shall be carried forward and taken into account
in any subsequent adjustment, but not later than three years after the
happening of the specified event or events. All calculations shall be
made to the nearest one thousandth of a share. Anything in this Section
8 to the contrary notwithstanding, the Company shall be entitled, but
shall not be required, to make such changes in the number of Shares
purchasable upon the exercise of each Underwriter Warrant, in addition
to those required by this Section 8, as it in its discretion shall
determine to be advisable in order that any dividend or distribution in
shares of Common Shares, subdivision, reclassification or combination
of Common Shares, issuance of rights, warrants or options to purchase
Common Shares, or distribution of shares of capital stock other than
Common Shares, evidences of indebtedness or assets (other than
distributions of cash out of consolidated earnings or retained
earnings) or convertible or exchangeable securities hereafter made by
the Company to the holders of its Common Shares, shall not result in
any tax to the holders of its Common Shares or securities convertible
into Common Shares.
(f) Whenever the number of Shares purchasable upon the
exercise of each Underwriter Warrant is adjusted, as herein provided,
the Exercise Price shall be adjusted by multiplying the Exercise Price
in effect immediately prior to such adjustment by a fraction, of which
the numerator shall be the number of Shares purchasable upon the
exercise of each Underwriter Warrant immediately prior to such
adjustment, and of which the denominator shall be the number of Shares
so purchasable immediately thereafter.
(g) For the purpose of this Section 8, the term "Common
Shares" shall mean (i) the class of stock designated as the Common
Shares of the Company at the date of this Agreement or (ii) any other
class of stock resulting from successive changes or reclassifications
of such shares consisting solely of changes in par value, or from no
par value to par value, or from par value to no par value. In the event
that at any time, as a result of an adjustment made pursuant to
paragraph (a) above, the Holders shall become entitled to purchase any
shares of capital stock of the Company other than Common Shares,
thereafter the number of such other shares so purchasable upon exercise
of each Underwriter Warrant and the Exercise Price of such shares shall
be subject to adjustment from time to time in a manner and on terms as
nearly equivalent as practicable to the provisions with respect to the
Shares contained in paragraphs (a) through (f), inclusive, and
paragraphs (h) through (m), inclusive, of this Section 8, and the
provisions of Sections 4, 5, 7 and 10, with respect to the Shares,
shall apply on like terms to any such other shares.
(h) Upon the expiration of any rights, options, warrants
or conversion rights or exchange privileges, if any thereof shall not
have been exercised, the Exercise Price and the number of Common Shares
purchasable upon the exercise of each Underwriter Warrant shall, upon
such expiration, be readjusted and shall thereafter be such as it would
have been had it originally been adjusted (or had the original
adjustment not been required, as the case may be) as if (i) the only
Common Shares so issued were the Common Shares, if any, actually issued
or sold upon the exercise of such rights, options, warrants or
conversion rights or exchange privileges and (ii) such Common Shares,
if any, were issued or sold for the consideration actually received by
the Company upon such exercise plus the aggregate consideration, if
any, actually received by the Company for the issuance, sale or grant
of all of such rights, options, warrants or conversion rights or
exchange privileges whether or not exercised; provided, however, that
no such readjustment shall have the effect of increasing the Exercise
Price by an amount in excess of the amount of the adjustment initially
made in respect to the issuance, sale
6
<PAGE> 7
or grant of such rights, options, warrants or conversion rights or
exchange privileges.
(i) The Company may, at its option, at any time during
the term of the Underwriter Warrants, reduce the then current Exercise
Price to any amount deemed appropriate by the Board of Directors of the
Company.
(j) Whenever the number of Shares issuable upon the
exercise of each Underwriter Warrant or the Exercise Price of such
Shares is adjusted, as herein provided, the Company shall promptly mail
by first class mail postage prepaid to each Holder notice of such
adjustment or adjustments. The Company shall retain a firm of
independent public accountants (who may be the regular accountants
employed by the Company) to make any computation required by this
Section 8 and shall cause such accountants to prepare a certificate
setting forth the number of Shares issuable upon the exercise of each
Underwriter Warrant and the Exercise Price of such Shares after such
adjustment, setting forth a brief statement of the facts requiring such
adjustment and setting forth the computation by which such adjustment
was made. Such certificate shall be conclusive on the correctness of
such adjustment and each Holder shall have the right to inspect such
certificate during reasonable business hours.
(k) Except as provided in this Section 8, no adjustment
in respect of any dividends shall be made during the term of the
Underwriter Warrants or upon the exercise of the Underwriter Warrants.
(l) In case of any consolidation of the Company with or
merger of, the Company with or into another corporation or in case of
any sale or conveyance to another corporation of the property of the
Company as an entirety or substantially as an entirety, the Company or
such successor or purchasing corporation (or an affiliate of such
successor or purchasing corporation), as the case may be, agrees that
each Holder shall have the right thereafter upon payment of the
Exercise Price in effect immediately prior to such action to purchase
upon exercise of each Underwriter Warrant the kind and amount of shares
and other securities and property (including cash) which he would have
owned or have been entitled to receive after the happening of such
consolidation, merger, sale or conveyance had such Underwriter Warrant
been exercised immediately prior to such action. The provisions of this
paragraph (1) shall similarly apply to successive consolidations,
mergers, sales or conveyances.
(m) Notwithstanding any adjustment in the Exercise Price
or the number or kind of shares purchasable upon the exercise of the
Underwriter Warrants pursuant to this Agreement, certificates for
Underwriter Warrants issued prior or subsequent to such adjustment may
continue to express the same price and number and kind of Shares as are
initially issuable pursuant to this Agreement.
9. Fractional Interests. The Company shall not be required to
issue fractions of Shares on the exercise of Underwriter Warrants. If more than
one Underwriter Warrant shall be presented for exercise in full at the same time
by the same Holder, the number of Shares which shall be issuable upon the
exercise thereof shall be computed on the basis of the number of Shares issuable
on exercise of the Underwriter Warrants so presented. If any fraction of a Share
would, except for the provisions of this Section 9, be issuable on the exercise
of any Underwriter Warrant (or specified portions thereof), the Company shall
purchase such fraction for an amount in cash equal to the same fraction of the
current market price per Common Share (determined as provided in the second
sentence of Section 8(d) of this Agreement) on the date of exercise.
7
<PAGE> 8
10. Registration Rights.
(a) Demand Registration Rights. The Company covenants and
agrees with the Underwriter and any other or subsequent Holders of the
Registrable Securities (as defined in paragraph (e) of this Section 10) that,
upon written request of the then Holder(s) of at least a majority of the
aggregate of the Registrable Securities which were originally issued on the date
hereof to the Underwriter or its designees, made at any time within the period
commencing two years and ending five years after the Effective Date, the Company
will file as promptly as practicable and, in any event, within 45 days after
receipt of such written request, at its sole expense, no more than once, a
post-effective amendment (the "Amendment") to the Registration Statement, or a
new Registration Statement or a Regulation A Offering Statement (an "Offering
Statement") under the Act, registering or qualifying the Registrable Securities
for sale. Within fifteen (15) days after receiving any such notice, the Company
shall give notice to the other Holders of the Registrable Securities advising
that the Company is proceeding with such Amendment, Registration Statement or
Offering Statement and offering to include therein the Registrable Securities of
such Holders. The Company shall not be obligated to any such other Holder unless
such other Holder shall accept such offer by notice in writing to the Company
within ten (10) days thereafter. No other securities of the Company shall be
entitled to be included in such Amendment, Registration Statement or Offering
Statement. The Company will use its best efforts, through its officers,
directors, auditors and counsel in all matters necessary or advisable, to file
and cause to become effective such Amendment, Registration Statement or Offering
Statement as promptly as practicable and for a period of two years thereafter to
reflect in the Amendment, Registration Statement or Offering Statement financial
statements which are prepared in accordance with Section 10(a)(3) of the Act and
any facts or events arising that, individually, or in the aggregate, represent a
fundamental and/or material change in the Amendment, Registration Statement or
Offering Statement to enable information set forth in Amendment, Registration
Statement or Offering Statement to enable any Holders of the Underwriter
Warrants to either sell such Underwriter Warrants or to exercise such
Underwriter Warrants and sell Shares, or to enable any holders of Shares to sell
such Shares, during said two-year period. The Holders may sell the Registrable
Securities pursuant to the Amendment, Registration Statement or the Offering
Statement without exercising the Underwriter Warrants. If any registration
pursuant to this paragraph (a) is an underwritten offering, the Holders of a
majority of the Registrable Securities to be included in such registration shall
be entitled to select the underwriter or managing underwriter (in the case of a
syndicated offering) of such offering.
(b) Piggyback Registration Rights. The Company covenants
and agrees with the Underwriter and any other Holders or subsequent Holders of
the Registrable Securities that if, at any time within the period commencing two
years and ending five years after the Effective Date, it proposes to file a
Registration Statement or Offering Statement with respect to any class of
security (other than in connection with an offering to the Company's employees)
under the Act in a primary registration on behalf of the Company and/or in a
secondary registration on behalf of holders of such securities and the
registration form or Offering Statement to be used may be used for registration
of the Registrable Securities, the Company will give prompt written notice
(which in the case of a Registration Statement or notification pursuant to the
exercise of demand registration rights other than those provided in Section
10(a) of this Agreement, shall be within ten (10) business days after the
Company's receipt of notice of such exercise, in any event, shall be at least 45
days prior to such filing) to, the Holders of Registrable Securities (regardless
of whether some of the Holders shall have theretofore availed themselves of the
right provided in Section 10(a) of this Agreement) at the addresses appearing on
the records of the Company of its intention to file a Registration Statement or
Offering Statement and will offer to include in such registration statement or
Offering Statement to the maximum
8
<PAGE> 9
extent possible, and limited, in the case of a Regulation A offering, to the
amount of the available exemption, subject to subparagraphs (i) and (ii) of this
paragraph (b), such number of Registrable Securities with respect to which the
Company has received written requests for inclusion therein within ten (10) days
after the giving of notice by the Company. All registrations requested pursuant
to this Section 10(b) are referred to herein as "Piggyback Registrations." All
Piggyback Registrations pursuant to this Section 10(b) will be made solely at
the Company's expense. This paragraph is not applicable to a Registration
Statement filed by the Company with the Commission on Forms S-4 or S-8 or any
successor forms.
(i) Priority on Primary Registrations. If a Piggyback
Registration includes an underwritten primary registration on behalf of
the Company and the underwriter(s) for the offering being registered by
the Company shall determine in good faith and advise the Company in
writing that in its/their opinion the number of Registrable Securities
requested to be included in such registration exceeds the number that
can be sold in such offering without materially adversely affecting the
distribution of such securities by the Company, the Company will
include in such registration (A) first, the securities that the Company
proposes to sell and (B) second, the Registrable Securities requested
to be included in such registration, apportioned pro rata among the
Holders of Registrable Securities and (C) third, securities of the
holders of other securities requesting registration.
(ii) Priority on Secondary Registrations. If a Piggyback
Registration consists only of an underwritten secondary registration on
behalf of holders of securities of the Company (other than pursuant to
Section 10(a)), and the underwriter(s) for the offering being
registered by the Company advise the Company in writing that in
its/their opinion the number of Registrable Securities requested to be
included in such registration exceeds the number which can be sold in
such offering without materially adversely affecting the distribution
of such securities by the Company, the Company will include in such
registration (A) first, the securities requested to be included therein
by the holders requesting such registration and the Registrable
Securities requested to be included in such registration above, pro
rata, among all such holders on the basis of the number of shares
requested to be included by each such holder and (B) second, other
securities requested to be included in such registration.
Notwithstanding the foregoing, if any such underwriter shall determine
in good faith and advise the Company in writing that the distribution of the of
the Registrable Securities requested to be included in the registration
concurrently with the securities being registered by the Company would
materially adversely affect the distribution of such securities by the Company,
then the Holders of such Registrable Securities shall delay their offering for
such period ending on the earliest of (1) 90 days following the effective date
of the Company's registration statement, (2) the day upon which the underwriting
syndicate, if any, for such offering shall have been disbanded or, (3) such date
as the Company, managing underwriter and Holders of Registrable Securities shall
otherwise agree. In the event of such delay, the Company shall file such
supplements, post-effective amendments and take any such other steps as may be
necessary to permit such Holders to take their proposed offering and sale for a
period of 120 days immediately following the end of such period of delay. If any
party disapproves of the terms of any such underwriting, it may elect to
withdraw therefrom by written notice to the Company, the underwriter, and
Underwriter. Notwithstanding the foregoing, the Company shall not be required to
file a registration statement to include Shares pursuant to this Section 10(b)
if an opinion of independent counsel, reasonably satisfactory to counsel for the
Company and counsel for Underwriter, that the Shares proposed to be disposed of
may be transferred pursuant to the provisions of Rule 144(k) under the Act,
shall have been delivered to counsel for the Company.
9
<PAGE> 10
(c) Other Registration Rights. In addition to the rights
above provided, the Company will cooperate with the then Holders of the
Registrable Securities in preparing and signing any Registration Statement or
Offering Statement, in addition to the Registration Statements and Offering
Statements discussed above, required in order to sell or transfer the
Registrable Securities and will supply all information required therefor, but
such additional Registration Statement or Offering Statement shall be at the
then Holders' cost, and expense; provided, however, that if the Company elects
to register or qualify additional Common Shares, the cost and expense of such
Registration Statement or Offering Statement will be pro rated between the
Company and the Holders of the Registrable Securities according to the aggregate
sales price of the securities being issued, Notwithstanding the foregoing, the
Company will not be required to file a Registration Statement or Offering
Statement at a time when the audited financial statements required to be
included therein are not available, which time shall be limited to the period
commencing 45 days after the end of a fiscal year and ending 90 days after the
end of such fiscal year.
(d) Action to be Taken by the Company. In connection with
the registration of Registrable Securities in accordance with paragraphs (a),
(b) or (c) of this Section 10, the Company agrees to:
(i) Bear the expenses of any registration or
qualification under paragraphs (a) or (b) of this Section 10,
including, but not limited to, legal accounting, and printing fees;
provided, however, that in no event shall the Company be obligated to
pay (A) any fees and disbursements of special counsel for Holders of
Registrable Securities, or (B) any underwriters' discount or commission
in respect of such Registrable Securities, or (C) upon the exercise of
and demand registration right provided for in paragraph (a) of this
Section 10, the cost of and liability or similar insurance required by
an underwriter, to the extent that such costs are attributable solely
to the offering of such Registrable Securities, payment of which shall,
in each case, be the sole responsibility of the Holders of the
Registrable Securities;
(ii) Use its best efforts to register or qualify the
Registrable Securities for offer or sale under state securities or Blue
Sky laws of such jurisdictions as Underwriter shall reasonably request
and to do any and all other acts and things which may be necessary or
advisable to enable the holders to consummate the proposed sale,
transfer or other disposition of such securities in any jurisdiction;
and
(iii) Enter into a cross-indemnity agreement, in customary
form, with each underwriter, if any, and each holder of securities
included in such Amendment, Registration Statement or Offering
Statement,
(e) For purposes of this Section 10, (i) the term
"Holder" shall include holders of Shares, and (ii) the term "Registrable
Securities" shall mean both the Underwriter Warrants and the Shares issued upon
exercise of the Underwriter Warrants.
11. Notices to Holders.
(a) Nothing contained in this Agreement or in any of the
Underwriter Warrants shall be construed as conferring upon the Holders thereof
the right to vote or to receive dividends or to consent or to receive notice as
shareholders in respect of the meetings of shareholders or the election of
directors of the Company or any other matter, or any rights whatsoever as
shareholders of the Company; provided, however, that in the event that a meeting
of shareholders shall be called to
10
<PAGE> 11
consider and take action on a proposal for the voluntary dissolution of the
Company, other than in connection with a consolidation, merger or sale of all,
or substantially all, of its property, assets, business and good will as an
entirety, then and in that event the Company shall cause a notice thereof to be
sent by first-class mail, postage prepaid, at least twenty (20) days prior to
the date filed as a record date or the date of closing, the transfer books in
relation to such meeting, to each registered Holder of Underwriter Warrants at
such Holder's address appearing in the Underwriter Warrant Register; but failure
to mail or to receive such notice or any defect therein or in the mailing
thereof shall not affect the validity of any action taken in connection with
such voluntary dissolution. If such notice shall have been so given and if such
a voluntary dissolution shall be authorized at such meeting or any adjournment
thereof, then from and after the date on which such voluntary dissolution shall
have been duly authorized by the shareholders, the purchase rights represented
by the Underwriter Warrants and all other rights with respect thereto shall
cease and terminate.
(b) In the event the Company intends to make any
distribution on its Common Shares (or other securities which may be issuable in
lieu thereof upon the exercise of Underwriter Warrants), including, without
limitation, any such distribution to be made in connection with a consolidation
or merger in which the Company is the continuing corporation, or to issue
subscription rights or warrants to holders of its Common Shares, the Company
shall cause a notice of its intention to make such distribution to be sent by
first-class mail, postage prepaid, at least twenty (20) days prior to the date
fixed as a record date or the date of closing the transfer books in relation to
such distribution, to each registered Holder of Underwriter Warrants at such
Holder's address appearing, on the Underwriter Warrant Register, but failure to
mail or to receive such notice or any defect therein or in the mailing thereof
shall not affect the validity of any action taken in correction with such
distribution.
12. Notices. Any notice pursuant to this Agreement to be given or
made by the Holder of any Underwriter Warrant and/or the holder of any Share to
or on the Company shall be sufficiently given or made if sent by first-class
mail, postage prepaid, addressed as follows or to such other address as the
Company may designate by notice given in accordance with this Section 12, to the
Holders of Underwriter Warrants and/or the holders of Shares:
The Plastic Surgery Company
104 West Anapamu Street, Suite G
Santa Barbara, CA 93101
Attn: President
with a copy to: King & Spalding
191 Peachtree Street
Atlanta, GA 30303-1763
Attn: Lynn Scott, Esq.
Notices or demands authorized by this Agreement to be given or made by
the Company to or on the Holder of any Underwriter Warrant and/or the holder of
any Share shall be sufficiently given or made (except as otherwise provided in
this Agreement) if sent by first-class mail, postage prepaid, addressed to such
Holder or such holder of Shares at the address of such Holder or such holder of
Shares as shown on the Underwriter Warrant Register or the books of the Company,
as the case may be.
13. Governing Law. THIS AGREEMENT AND EACH UNDERWRITER WARRANT
ISSUED HEREUNDER SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
11
<PAGE> 12
WITH THE INTERNAL LAWS OF THE STATE OF CALIFORNIA WITHOUT REFERENCE TO
PRINCIPLES OF CONFLICT OF LAWS. The Company hereby agrees to accept service of
process by notice given to it pursuant to the provisions of Section 12.
14. Counterparts. This Agreement may be executed in any number of
counterparts, each of which so executed shall be deemed to be an original; but
such counterparts together shall constitute but one and the same agreement.
12
<PAGE> 13
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day, month and year first above written.
(Corporate Seal)
THE PLASTIC SURGERY COMPANY
Attest:
By:
Dennis E. Condon
Secretary President
Attest:
By:
Name:
Title:
13
<PAGE> 14
EXHIBIT A
No.___________ _______ Warrants
VOID AFTER 5:00 P.M. NEW YORK CITY TIME
ON ___________, 2004
THE PLASTIC SURGERY COMPANY
Warrant Certificate
THIS CERTIFIES THAT for value received _________________________ or
registered assigns, is the owner of the number of warrants set forth above, each
of which entities the owner thereof to purchase at any time from _____________,
2001, until 5:00 p.m., New York City time on _______________, 2004 (the "Warrant
Expiration Date"), one fully paid and nonassessable Common Share, without par
value (the "Common Shares"), of The Plastic Surgery Company, a Georgia
corporation (the "Company"), at the purchase price of $____ per share (the
"Exercise Price") upon presentation and surrender of this Warrant Certificate
with the Form of Election to Purchase duly executed. The number of Warrants
evidenced by this Warrant Certificate (and the number of shares which may be
purchased upon exercise thereto set forth above), and the Exercise Price per
share set forth above, are the number and Exercise Price as of the date of
original issuance of the Warrants, based on the Common Shares of the Company as
constituted at such date. As provided in the Warrant Agreement referred to
below, the Exercise Price and the number or kind of shares which may be
purchased upon the exercise of the Warrants evidenced by this Warrant
Certificate are, upon the happening of certain events, subject to modification
and adjustment.
This Warrant Certificate is subject to, and entitled to the benefits
of, all of the terms, provisions and conditions of an agreement, dated as of
_______________, 1999 (the "Warrant Agreement"), between the Company and
____________, which Warrant Agreement is hereby incorporated herein by
reference and made a part hereof and to which Warrant Agreement reference is
hereby made for a full description of the rights, limitations of rights, duties
and immunities hereunder of the Company and the holders of the Warrant
Certificates. Copies of the Warrant Agreement are on file at the principal
office of the Company.
This Warrant Certificate, with or without other Warrant Certificates,
upon surrender at the principal office of the Company, may be exchanged for
another Warrant Certificate or Warrant Certificates of like tenor and date
evidencing Warrants entitling the holder to purchase a like aggregate number of
Common Shares as the Warrants evidenced by the Warrant Certificate or Warrant
Certificates surrendered entitled such holder to purchase. If this Warrant
Certificate shall be exercised in part, the holder hereof shall be entitled to
receive upon surrender hereof another Warrant Certificate or Warrant
Certificates for the number of whole Warrants not exercised.
No fractional Common Shares will be issued upon the exercise of any
Warrant or Warrants evidenced hereby, but in lieu thereof a cash payment will be
made, as provided in the Warrant Agreement.
No holder of this Warrant Certificate shall be entitled to vote or
receive dividends or be
14
<PAGE> 15
deemed the holder of Common Shares, any other securities of the Company which
may at any time be issuable on the exercise hereof for any purpose, nor shall
anything contained in the Warrant Agreement or herein be construed to confer
upon the holder hereof, as such, any of the rights of a stockholder of the
Company or any right to vote for the election of directors or upon any matter
submitted to stockholders at any meeting thereof, or to give or withhold consent
to any corporate action (whether upon any recapitalization, issue of stock,
reclassification of stock, change of par value or change of stock to no par
value, consolidation, merger, conveyance, or otherwise) or, except as provided
in the Warrant Agreement, to receive notice of meetings, or to receive dividends
or subscription rights or otherwise, until the Warrant or Warrants evidenced by
this Warrant Certificate shall have been exercised and the shares shall have
become deliverable as provided in the Warrant Agreement.
If this Warrant shall be surrendered for exercise within any period
during which the transfer books for the Company's Common Shares or other class
of stock purchasable upon the exercise of this Warrant are closed for any
purpose, the Company shall not be required to make delivery of certificates for
shares purchasable upon such exercise until the date of the reopening of said
transfer books.
IN WITNESS WHEREOF, The Plastic Surgery Company has caused the
signature (or facsimile signature) of its President and its Secretary to be
printed hereon and its corporate seal (or facsimile) to be printed hereon.
Dated: August ___, 1999
THE PLASTIC SURGERY COMPANY
By:
Dennis E. Condon
President
(Corporate Seal)
Attest:
Secretary
15
<PAGE> 16
FORM OF ELECTION TO PURCHASE
(To be executed if holder desires to exercise the Warrant Certificate.)
TO:
The undersigned hereby irrevocably elects to exercise Warrants
represented by this Warrant Certificate to purchase the Common Shares issuable
upon the exercise of such Warrants and requests that certificates for such
shares be issued in the name of:
(Please insert social security or other identifying number)
(Please print name and address)
If such number of Warrants shall not be all the Warrants evidenced by this
Warrant Certificate, a new Warrant Certificate for the balance remaining of such
Warrants shall be registered in the name of and delivered to:
Please insert social security number or other identifying number
(Please print name and address)
Dated:
Signature
(signature must conform in all respects to
name of holder as specified on the face of
this Warrant Certificate)
Signature Guaranteed:
- ------------------------------
16
<PAGE> 17
FORM OF
ASSIGNMENT
(To be executed by the registered holder if such holder desires to
transfer the Warrant Certificates.)
FOR VALUE RECEIVED, _____________________ hereby sells, assigns and
transfers unto ______________________________________ this Warrant Certificate,
together with all right, title and interest herein, and does hereby irrevocably
constitute and appoint ________________, to transfer the within Warrant
Certificate on the books of the within-named Company, with full power of
substitution.
Dated:
Signature:
Signature Guaranteed:
- ------------------------------
NOTICE
The signature of the foregoing Assignment must correspond to the name
as written upon the face of this Warrant Certificate in every particular,
without alteration or enlargement or any change whatsoever.
17
<PAGE> 1
EXHIBIT 10.15
THE PLASTIC SURGERY COMPANY
OFFER OF EMPLOYMENT
To: Gunnar Sundstrom
We are pleased to make you an offer of employment with The Plastic Surgery
Company as Chief Financial Officer. With the mutually signing of this document
your employment will begin on May 24th, 1999.
Salary - Your salary compensation with The Plastic Surgery Company is $130,000
annual compensation paid once a month on the 15th.
Bonus - Your compensation package includes eligibility for an annual bonus of
up to 30% of your annual base salary. This bonus will be paid within two months
of the end of the calendar year and will be based on objective project targets
(MBO's) and on the performance of the company as compared to our corporate
profitability targets.
IPO Bonus - A special one-time bonus is included in your compensation package.
You will receive a one-time bonus of $15,000 within two weeks of a successful
IPO.
Stock Options - You have been granted 100,000 stock options at the IPO price
which will be effective as of the IPO date. The stock options vest at the rate
of 20% of the allotment each year over a five year period. Your first 20% or
20,000 options are vested concurrent with the launch of a successful IPO. An
additional 20,000 stock options vest at the annual anniversary of the IPO date
for the next four years.
Benefits - You will be entitled to the standard benefits (e.g. Health Plan,
401k, etc.) that the company puts into place for all of the executive staff.
These benefits have not been finalized but will be a priority to define and
implement in the post IPO period.
/s/ Gunnar Sundstrom May 21st, 1999 /s/ Dennis E. Condon May 21st, 1999
- ----------------------- ---------------------
Gunnar Sundstrom Dennis E. Condon
Chief Financial Officer President and CEO
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to use of our report (and
all references to our Firm) included in this Registration Statement for The
Plastic Surgery Company.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
September 13, 1999
