<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 29, 1997
REGISTRATION NO. 333-33247
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
INTEGRATED PHYSICIAN SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 8742 23-2820597
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or Industrial Classification Identification No.)
organization) Code Number)
</TABLE>
INTEGRATED PHYSICIAN SYSTEMS, INC.
2644 BRISTOL ROAD
WARRINGTON, PENNSYLVANIA 18976
(Address of principal place of business)
SCOTT G. POLLOCK
PRESIDENT AND CHIEF EXECUTIVE OFFICER
INTEGRATED PHYSICIAN SYSTEMS, INC.
2644 BRISTOL ROAD
WARRINGTON, PENNSYLVANIA 18976
(215) 343-1942/(215) 343-8761 (TELECOPY)
(Name, address, and telephone number of principal executive offices and agent
for service)
COPIES TO:
<TABLE>
<S> <C>
ROBERT STEVEN BROWN, ESQ. LAWRENCE B. FISHER, ESQ.
STEPHEN H. GRAY, ESQ. ORRICK, HERRINGTON & SUTCLIFFE LLP
BROCK FENSTERSTOCK SILVERSTEIN 666 FIFTH AVENUE
MCAULIFFE & WADE LLC NEW YORK, NEW YORK 10103
153 EAST 53RD STREET (212) 506-5000/(212) 506-5151 (TELECOPY)
NEW YORK, NEW YORK 10022
(212) 371-2000/(212) 371-5500 (TELECOPY)
</TABLE>
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after the effective date of this 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. /X/
IF THIS FORM IS FILED TO REGISTER ADDITIONAL SECURITIES PURSUANT TO RULE
462(B) UNDER THE SECURITIES ACT, PLEASE CHECK THE FOLLOWING BOX AND LIST THE
SECURITIES ACT REGISTRATION STATEMENT NUMBER OF THE EARLIER EFFECTIVE
REGISTRATION STATEMENT FOR THE SAME OFFERING. / /
IF THIS FORM IS A POST-EFFECTIVE AMENDMENT FILED PURSUANT TO RULE 462(C)
UNDER THE SECURITIES ACT, CHECK THE FOLLOWING BOX AND LIST THE SECURITIES ACT
REGISTRATION STATEMENT NUMBER OF THE EARLIER EFFECTIVE REGISTRATION STATEMENT
FOR THE SAME OFFERING. / /
IF DELIVERY OF THE PROSPECTUS IS EXPECTED TO BE MADE PURSUANT TO RULE 434,
PLEASE CHECK THE FOLLOWING BOX. / /
------------------------
CALCULATION OF REGISTRATION FEE
See attached page.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF SECURITIES PROPOSED PROPOSED MAXIMUM
TO AMOUNT TO BE MAXIMUM OFFERING AGGREGATE OFFERING AMOUNT OF
BE REGISTERED REGISTERED PRICE PER UNIT (1) PRICE (1) REGISTRATION FEE
<C> <S> <C> <C> <C>
Common Stock, par value $.01 per 2,300,000
share Shares (2) $7.50 $ 17,250,000.00 $ 5,227.27
Class A Redeemable Common Stock 2,300,000
Purchase Warrants Warrants (3)(5) $0.10 $ 230,000.00 $ 69.70
Common Stock, par value $.01 per
share, issuable upon exercise of
the Class A Redeemable Common
Stock Purchase Warrants 2,300,000 Shares $10.50 $ 24,150,000.00 $ 7,318.18
[6 1/2% to 8%] Convertible
Subordinated Debentures due
, 2004, including
Common Stock issuable upon
conversion of such Debentures $28,750,000(4)(5) 100% 28,750,000.00 $ 8,712.13
Representative's Warrants 200,000 Warrants (5) .0001 20.00 --
Common Stock, par value
$.01 per share, underlying the 200,000
Representative's Warrants Shares 9.00 1,800,000.00 $ 545.45
Class A Redeemable Common Stock
Purchase Warrants underlying the
Representative's Warrants 200,000 Warrants $.12 24,000.00 $ 7.27
Common Stock, par value $.01 per
share, issuable upon exercise of
the Class A Redeemable Common
Stock Purchase Warrants underlying
the Representative's Warrants 200,000 Shares $10.50 2,100,000.00 $ 636.36
Convertible Subordinated
Debentures underlying
Representative's Warrants,
including Common Stock to be
issued upon the conversion thereof $2,500,000 (4) 100% 2,500,000.00 $ 757.57
TOTAL -- -- $ 76,804,020.00 $ 23,273.93(6)
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Includes 300,000 shares of common stock, par value $.01 per share (the
"Common Stock"), of the Company which the Underwriters have the option to
purchase solely to cover over-allotments, if any.
(3) Includes 300,000 warrants (the "Warrants") which the Underwriters have the
option to purchase solely to cover over-allotments, if any.
(4) Includes $3,750,000 principal amount of [6 1/2% to 8%] Convertible
Subordinated Debentures due , 2004 (the "Debentures") which the
Underwriters have the option to purchase solely to cover over-allotments, if
any.
(5) Pursuant to Rule 416, there are also being registered such indeterminate
number of shares of Common Stock as may become issuable pursuant to the
anti-dilution provisions of the Debentures, the Warrants, and the
Representative's Warrants.
(6) A filing fee of $15,242.36 was previously paid. Accordingly, an additional
filing fee of $8,031.57 is included herewith.
<PAGE>
SUBJECT TO COMPLETION, DATED OCTOBER 29, 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PROSPECTUS
[LOGO]
INTEGRATED PHYSICIAN SYSTEMS, INC.
$25,000,000 [6 1/2% TO 8%] CONVERTIBLE SUBORDINATED DEBENTURES DUE 2004,
2,000,000 SHARES OF COMMON STOCK AND
2,000,000 CLASS A REDEEMABLE COMMON STOCK PURCHASE WARRANTS
------------------------
This Prospectus relates to the offering (the "Offering") of $25,000,000
aggregate principal amount of % Convertible Subordinated Debentures due 2004
(the "Debentures"), 2,000,000 shares of Common Stock, par value $.01 per share
(the "Common Stock"), and 2,000,000 Class A Redeemable Common Stock Purchase
Warrants (the "Warrants") of Integrated Physician Systems, Inc., a Delaware
corporation (the "Company"). The Debentures, the Common Stock, and the Warrants
are sometimes hereinafter referred to as the "Securities."
Interest on the Debentures will be payable semi-annually on and
of each year, commencing , 1998, at the rate of % per
annum [6 1/2% to 8%]. The Debentures are convertible into shares of Common Stock
at any time prior to maturity, unless previously redeemed, at a conversion price
per share of $ [120% to 130% of the initial public offering price of the
Common Stock], subject to adjustment as hereinafter provided. The Debentures are
redeemable, in whole or in part, at the option of the Company, at a redemption
price equal to 100% of the principal amount, plus accrued and unpaid interest,
at any time on or after , 2000 [36 months after issuance], provided
that the closing sale price of the Common Stock, during the 20 consecutive
trading days prior to the date of the notice of redemption, has equaled or
exceeded $ [150% of the initial public offering price of the Common Stock],
subject to adjustment in certain events. The Debentures are subordinated to all
existing and future Senior Indebtedness (as hereinafter defined) and are
effectively subordinated to all indebtedness of the Company. At June 30, 1997,
the Company had pro forma consolidated indebtedness to which the Debentures
would be effectively subordinated aggregating approximately $572,000. See
"Description of Debentures."
Each Warrant entitles the registered holder thereof to purchase, at any time
commencing on , 1997 [the date of this Prospectus] and terminating on
, 2002 [five years after the date of this Prospectus], one share of Common
Stock at a price of $ per share [140% of the initial public offering
price per share of Common Stock], subject to adjustment in certain
circumstances. Commencing , 1999 [18 months after the date of this
Prospectus], the Company may redeem the Warrants, in whole but not in part, at
$.10 per Warrant on 30-days prior written notice to the warrantholders, provided
that the average closing sale price of the Common Stock, as reported on the
American Stock Exchange ("AMEX"), equals or exceeds $ per share [210% of
the initial public offering price per share of Common Stock] for any 20 trading
days within a period of 30 consecutive trading days ending on the fifth trading
day prior to the date of the notice of redemption. See "Description of
Securities."
Prior to this Offering, there has been no public market for the Debentures,
the Common Stock, or the Warrants, and there can be no assurance that such a
market will develop upon completion of this Offering, or, if developed, that it
will be sustained. It is currently anticipated that the initial public offering
price of the Common Stock and the Warrants will be $7.50 per share and $.10 per
Warrant, respectively. For information regarding the factors considered in
determining the terms of the Debentures and the Warrants and the initial
offering price of the Common Stock and the Warrants, see "Underwriting." The
Company has applied for listing of the Debentures, the Common Stock, and the
Warrants on AMEX under the symbols "IPH.C," "IPH," and "IPH.W," respectively.
------------------------------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 9 AND "DILUTION" FOR A DISCUSSION OF
CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE
PURCHASERS OF THE SECURITIES.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(2) COMPANY(3)
<S> <C> <C> <C>
Per Debenture............................................ 100%(1) % %
Per Share................................................ $ $ $
Per Warrant.............................................. $ $ $
Total(4)................................................. $ $ $
</TABLE>
(1) Plus accrued and unpaid interest, if any, from , 1997
(2) Does not include additional consideration to be received by Nolan Securities
Corp., SouthWall Capital Corp., and Dirks & Company, Inc., the
representatives (the "Representatives") of the several underwriters (the
"Underwriters"), in the form of a non-accountable expense allowance. In
addition, see "Underwriting" for information concerning indemnification and
contribution arrangements with the Underwriters and other compensation
payable to the Representatives.
(3) Before deducting estimated expenses of $ payable by the Company,
including the Representatives' non-accountable expense allowance.
(4) The Company has granted the Underwriters an option, exercisable within 45
days from the date of this Prospectus, to purchase up to an additional
$3,750,000 principal amount of Debentures and/or up to an additional 300,000
shares of Common Stock and/or up to an additional 300,000 Warrants upon the
same terms and conditions, solely to cover over-allotments, if any. If the
over-allotment option granted to the Underwriters is exercised in full, the
total Price to Public, Underwriting Discount, and Proceeds to Company will
be $ , $ , and $ , respectively. See "Underwriting."
The Securities offered hereby are being offered, subject to prior sale,
when, as, and if delivered to, and accepted by, the Underwriters, subject to
approval of certain legal matters by counsel and certain other conditions. The
Underwriters reserve the right to withdraw, modify, or cancel the Offering and
to reject any order in whole or in part. It is expected that delivery of
certificates representing the Securities offered hereby will be made against
payment therefor at the offices of on or about , 1997.
------------------------------
NOLAN SECURITIES CORP.
SOUTHWALL CAPITAL CORP.
DIRKS & COMPANY, INC.
The date of this Prospectus is , 1997
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE DEBENTURES, THE
COMMON STOCK, AND THE WARRANTS, INCLUDING PURCHASES OF THE DEBENTURES, THE
COMMON STOCK, AND/OR THE WARRANTS TO STABILIZE THEIR RESPECTIVE MARKET PRICES,
PURCHASES OF THE DEBENTURES, COMMON STOCK, AND/OR WARRANTS TO COVER SOME OR ALL
OF A SHORT POSITION MAINTAINED BY THE UNDERWRITERS IN THE DEBENTURES, THE COMMON
STOCK, AND/OR THE WARRANTS RESPECTIVELY, AND THE IMPOSITION OF PENALTY BIDS. FOR
A DISCUSSION OF THESE ACTIVITIES, SEE "UNDERWRITING."
The Company intends to furnish to its securityholders annual reports
containing financial statements audited and reported on by its independent
certified public accountants after the end of each fiscal year and make
available such other periodic reports as the Company may deem appropriate or as
may be required by law.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING
ELSEWHERE IN THIS PROSPECTUS. UPON CONSUMMATION OF THIS OFFERING, INTEGRATED
PHYSICIAN SYSTEMS, INC. (THE "COMPANY") WILL ACQUIRE CERTAIN ASSETS, AND ASSUME
CERTAIN LIABILITIES, ASSOCIATED WITH 12 MEDICAL PRACTICES (THE "INITIAL
AFFILIATED PRACTICES") AND WILL ENTER INTO MANAGEMENT SERVICES AGREEMENTS WITH
EACH SUCH MEDICAL PRACTICE. THE COMPANY WILL ALSO ACQUIRE 100% OF THE CAPITAL
STOCK OF A MEDICAL BILLING COMPANY, MEDICAL BILLING AND MANAGEMENT SYSTEMS,
INC., UPON CONSUMMATION OF THIS OFFERING (COLLECTIVELY, THE "ACQUISITIONS"). AS
USED HEREIN, "COMPANY" REFERS TO INTEGRATED PHYSICIAN SYSTEMS, INC. AND ITS
SUBSIDIARIES AND "AFFILIATED PRACTICES" REFERS TO THE INITIAL AFFILIATED
PRACTICES AND ANY PHYSICIAN PRACTICES WITH WHICH THE COMPANY MAY ENTER INTO
SIMILAR RELATIONSHIPS IN THE FUTURE. ALL REFERENCES TO "NETWORK BILLING SYSTEMS,
INC." OR "NBS" HEREIN REFERS TO MEDICAL BILLING AND MANAGEMENT SERVICES, INC.,
WHICH THE COMPANY WILL RENAME UPON CONSUMMATION OF THIS OFFERING. EXCEPT AS
OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS DOES NOT GIVE EFFECT TO
(I) THE EXERCISE OF THE REPRESENTATIVES' WARRANTS; (II) THE EXERCISE OF THE
UNDERWRITERS' OVER-ALLOTMENT OPTION; (III) THE EXERCISE OF THE WARRANTS; AND
(IV) THE ISSUANCE OF UP TO 300,000 SHARES OF COMMON STOCK UPON THE EXERCISE OF
OPTIONS WHICH MAY BE GRANTED UNDER THE COMPANY'S 1996 STOCK OPTION PLAN (THE
"PLAN"). THE INFORMATION IN THIS PROSPECTUS RELATING TO SHARES OF COMMON STOCK
AND PER SHARE AMOUNTS GIVES EFFECT TO THE ISSUANCE OF AN AGGREGATE OF 481,067
SHARES OF COMMON STOCK TO BE ISSUED IN CONNECTION WITH THE ACQUISITIONS.
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET
FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS.
THE COMPANY
Integrated Physician Systems, Inc. (the "Company") is a newly established
physician practice management organization ("PPMO") which is developing an
integrated health care delivery network in selected geographic areas through
affiliation with physician practices. Upon the closing of this Offering, the
operations of the Company will consist of (i) management of the Initial
Affiliated Practices, consisting of 12 medical practices located in New Jersey,
(ii) Professional Medical Images Ltd. ("PMI"), a wholly-owned subsidiary of the
Company which is engaged in the management of one independent practice
association ("IPA") which is currently affiliated with approximately 225
physicians in the State of New Jersey, and (iii) Network Billings Systems, Inc.
("NBS"), which is engaged in the development and management of physician fee
billing, electronic medical records, and utilization information systems for
medical practices. NBS currently manages patient and third party billing
services for 25 medical practices unaffiliated with the Company in Pennsylvania.
The Company's objective is to develop and manage an integrated health care
delivery network comprised of physician practices that provide high quality,
cost-effective care. The Company has focused, and intends, at least initially,
to continue to focus, its primary affiliation efforts on physician practices
located in New Jersey, New York, and Pennsylvania. The Company targets
physicians who are committed
to the delivery of high quality, cost-effective care and have a reputation with
their patients, peers, and payors for providing quality medical services and
that have the capacity to increase profitability through improved performance on
existing patient bases. When affiliating with a physician practice, the Company
will typically purchase the practice's non-real estate operating assets and
enter into a long-term practice management services agreement ("PMSA") with the
practice in exchange for a combination of Common Stock, cash, notes, other
securities of the Company, and/or the assumption of liabilities. Pursuant to the
PMSA, the Company will be responsible for providing the Affiliated Practice with
necessary office facilities, medical equipment, supplies, and medical staff such
as nurses, physician assistants and clerks, and will plan and manage the
activities of the Affiliated Practice in all respects other than the provision
of medical services. The Affiliated Practice will be responsible solely for the
rendering of medical services.
3
<PAGE>
The health care delivery system in the United States has been undergoing
substantial change, largely in response to concerns over the quality and
escalating cost of health care. National expenditures for health care grew from
$250 billion in 1980 to an estimated $1 trillion in 1995. Of the total estimated
1995 expenditures, physicians received approximately $200 billion for their own
services and controlled an additional $600 billion through the referral of
patients for additional care and services provided by others. Concerns over the
accelerating cost of health care have resulted in the increasing prominence of
managed care. The Company believes that traditional physician practices are at a
competitive disadvantage in a managed care environment because they typically
have high operating costs, have little purchasing power with suppliers, and must
spread overhead over a relatively small revenue base. In addition, these
physician practices often have insufficient capital to acquire equipment to
incorporate new technologies and often lack the sophisticated systems necessary
to contract effectively with managed care entities. Physician practices are
increasingly turning to organizations such as the Company to provide the
professional management expertise and capital required to compete in the managed
care environment and otherwise to assist them with the increasingly complex
management of physician practices. The Company believes that this has resulted
in a need for management organizations committed to preserving the professional
autonomy of physician practices and whose economic incentives are aligned with
those of physicians.
The Company's operating strategy includes the following: (i) targeting for
affiliation high quality and productive physician practices which are committed
to expanding and providing cost-effective care; (ii) integrating physician
practices into Company-coordinated strategic business units ("SBUs") to provide
physician and medical support services within specific geographic regions; (iii)
contracting with state and local governments to provide medical services for
elderly and indigent populations; (iv) enhancing the ability of the Affiliated
Practices to focus on clinical practice issues by relieving them of most
administrative functions; (v) implementing and utilizing sophisticated
information systems to manage patient care and control costs; (vi) coordinating
purchases of supplies, equipment, and services in order to realize economies of
scale; (vii) developing and enhancing IPA services and contracts; (viii)
positioning the Company to maximize managed care contract opportunities; and
(ix) developing ancillary services and broadening the specialties of the
Company's health care delivery network.
The Company was incorporated under the laws of the State of Delaware on
April 25, 1995. The Company's principal offices are located at 2644 Bristol
Road, Warrington, Pennsylvania 18976, and its telephone number is (215)
343-1942.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
SECURITIES OFFERED
Debentures................................... $25,000,000 aggregate principal amount of
[6 1/2% to 8%] Convertible Subordinated
Debentures due , 2004 (the
"Debentures")
Common Stock................................. 2,000,000 shares
Warrants..................................... 2,000,000 Warrants
DEBENTURE TERMS
Interest Payment Dates....................... Each and , commencing ,
1998
Maturity Date................................ , 2004
Conversion................................... The Debentures are convertible into shares of
Common Stock at any time prior to maturity,
unless previously redeemed, at a conversion
price of $ per share [120% to 130% of
the initial public offering price of the
Common Stock], subject to adjustment in
certain events.
Redemption at Option of Company.............. The Debentures are not redeemable prior to
, 2000. Thereafter, the Debentures
are redeemable, in whole or in part, from
time to time, at the option of the Company at
a redemption price equal to 100% of the
principal amount thereof plus accrued and
unpaid interest, provided that the Debentures
may not be redeemed prior to maturity unless
the closing sale price of the Common Stock
for 20 consecutive trading days prior to the
date of notice of such redemption has equaled
or exceeded $ , [150% of the initial
public offering price of the Common Stock],
subject to adjustment in certain events. See
"Description of Debentures-- Optional
Redemption."
Redemption at Option of Holders.............. In the event that a Repurchase Event (as
defined) occurs, subject to certain
conditions, each holder of a Debenture shall
have the right, at the holder's option, to
require the Company to purchase all or any
part of such holder's Debentures at 100% of
the principal amount thereof plus accrued and
unpaid interest through the date of
redemption.
Sinking Fund................................. If a sinking fund is established for any
indebtedness ranking junior to, or pari passu
with, the Debentures and which has a maturity
or weighted average time to maturity which is
on or prior to , 2004, the Debentures
will be entitled to an annual sinking fund
beginning in the Company's next fiscal year
calculated to retire that amount of
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
Debentures equal to the lesser of (i) the
same percentage of outstanding Debentures
prior to maturity as the percentage of the
principal amount of such other indebtedness
to be retired prior to maturity on the same
payment schedule as such other indebtedness
or (ii) such amount of Debentures necessary
to result in the Debentures having the same
weighted average time to maturity as the
other indebtedness.
Subordination................................ The Debentures are subordinated in right of
payment to all present and future Senior
Indebtedness (as defined) of the Company. The
Indenture will not restrict the incurrence of
additional Senior Indebtedness by the Company
or any indebtedness by any Subsidiary. See
"Description of Debentures."
WARRANT TERMS................................ Each Warrant entitles the registered holder
thereof to purchase, at any time commencing
on , 1997 [the date of this
Prospectus] and terminating on ,
2002 [five years after the date of this
Prospectus], one share of Common Stock at a
price of $ per share [140% of the initial
public offering price per share of Common
Stock], subject to adjustment in certain
circumstances. Commencing , 1999
[18 months after the date of this
Prospectus], the Company may redeem the
Warrants, in whole but not in part, at $.10
per Warrant on 30-days prior written notice
to the warrantholders, provided that the
average closing sale price of the Common
Stock, as reported on AMEX, equals or exceeds
$ per share [210% of the initial public
offering price per share of Common Stock] for
any 20 trading days within a period of 30
consecutive trading days ending on the fifth
trading day prior to the date of the notice
of redemption. See "Description of
Securities."
SECURITIES OUTSTANDING PRIOR TO THE OFFERING
Debentures................................... None
Common Stock................................. 2,183,067 shares (1)
Warrants..................................... None
SECURITIES OUTSTANDING IMMEDIATELY
FOLLOWING THE OFFERING
Debentures................................... $25,000,000 aggregate principal amount
Common Stock................................. 4,183,067 shares (1)
Warrants..................................... 2,000,000
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
USE OF PROCEEDS.............................. Payments due upon consummation of the
Acquisitions; funds available for future
acquisitions of additional physician
practices and/or other medical entities;
hardware, software, and installation cost of
an information system; repayment of certain
indebtedness; and general corporate and
working capital purposes.
RISK FACTORS................................. The purchase of the Securities offered hereby
is speculative and involves substantial risk.
Prospective investors should carefully review
and consider the information set forth under
"Risk Factors" and "Dilution."
PROPOSED AMEX TRADING SYMBOLS:
Debentures................................... "IPH.C"
Common Stock................................. "IPH"
Warrants..................................... "IPH.W"
</TABLE>
- ------------------------
(1) Gives effect to the contribution, on October 21, 1997, of 1,356,000 shares
of Common Stock to the Company by certain stockholders (the
"Recapitalization"). Such shares were simultaneously retired by the
Company.
7
<PAGE>
SUMMARY FINANCIAL INFORMATION
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
INCEPTION ---------------------------------------------
(APRIL 25, YEAR ENDED
1995) DECEMBER 31, 1996 1996 1997
THROUGH --------------------- --------------------- ----------------------
DECEMBER PRO PRO PRO
31, 1995 ACTUAL FORMA(1) ACTUAL FORMA(1) ACTUAL FORMA(1)
----------- --------- ---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Medical service revenue........ -- -- $17,130,000 -- $8,754,000 -- $7,962,000
Management fees................ -- -- -- -- -- 111,000 111,000
Medical billing and service -- 576,000
fees........................... -- 1,398,000 -- -- 1,101,000
Other revenue.................. -- -- 38,000 -- 48,000 -- 63,000
---------- ---------- ----------
Total revenue................ -- -- 18,566,000 -- 9,378,000 111,000 9,237,000
Costs and expenses:.............. --
Salaries and wages............. -- -- 13,294,000 -- 6,624,000 51,000 5,184,000
Medical supplies and -- 205,000
expenses....................... -- 426,000 -- -- 239,000
General and administrative -- 2,608,000
expenses....................... 4,000 4,174,000 2,000 78,000 3,390,000
Depreciation and 1,000 620,000
amortization................... 2,000 1,239,000 1,000 1,000 620,000
Interest expense............... -- -- 2,020,000 -- 1,010,000 135,000 1,010,000
----------- --------- ---------- --------- ---------- ---------- ----------
Total costs and expenses..... 1,000 6,000 21,153,000 3,000 11,067,000 265,000 10,443,000
Loss before income taxes......... (1,000) ( 6,000) (2,587,000 ( 3,000) (1,689,000) ( 154,000) (1,206,000)
Provision for income taxes....... -- -- -- -- -- -- --
----------- --------- ---------- --------- ---------- ---------- ----------
Net loss......................... $ (1,000) $( 6,000) $(2,587,000 $( 3,000) $(1,689,000) $( 154,000) $(1,206,000)
----------- --------- ---------- --------- ---------- ---------- ----------
----------- --------- ---------- --------- ---------- ---------- ----------
Pro forma net loss per $(0.41)
share(2)......................... $ (0.62) $ (0.29)
---------- ---------- ----------
---------- ---------- ----------
Pro forma weighted average 4,183,067
number of shares
outstanding(2)................... 4,183,067 4,183,067
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, 1997
-------------------- ------------------------
<S> <C> <C> <C> <C>
PRO FORMA, AS
1995 1996 ACTUAL ADJUSTED(1)(3)
--------- --------- --------- -------------
Working capital (deficiency)...................................... $ (74,000) $(149,000) $(329,000) $27,249,000
Total assets...................................................... 73,000 296,000 545,000 41,933,000
Total liabilities................................................. 74,000 179,000 431,000 25,686,000
Stockholders' equity (deficit).................................... (1,000) 117,000 114,000 16,247,000
</TABLE>
- ------------------------
(1) The pro forma statement of operations data for the fiscal year ended
December 31, 1996 and for the six months ended June 30, 1996 and 1997 is
presented as if the Acquisitions and the PMI acquisition had occurred on
January 1, 1996. The pro forma balance sheet data for June 30, 1997 is
presented as if the Acquisitions had occurred on June 30, 1997. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation" and Notes to Unaudited Pro Forma Financial Statements.
(2) See Note HH to the Unaudited Pro Forma Statement of Operations Adjustments.
(3) Gives effect on a pro forma basis to (i) the issuance after June 30, 1997 of
an aggregate principal amount of $125,000 Series A 10% Senior Notes (the
"Senior Notes") and 16,667 shares of Common Stock as part of a bridge
financing of the Company (the "Bridge Financing"), and (ii) the
Recapitalization, and as adjusted to reflect the sale of the Debentures, the
Common Stock, and the Warrants offered hereby, assuming an initial public
offering price of 100%, $7.50 per share, and $.10 per Warrant, respectively,
and the initial application of the net proceeds therefrom. See "Use of
Proceeds" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
8
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK. IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, THE
FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY
AND ITS BUSINESS BEFORE PURCHASING THE SECURITIES OFFERED HEREBY. PROSPECTIVE
INVESTORS SHOULD BE IN A POSITION TO RISK THE LOSS OF THEIR ENTIRE INVESTMENT.
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS,
INCLUDING THOSE SET FORTH IN THE FOLLOWING RISK FACTORS AND ELSEWHERE IN THIS
PROSPECTUS.
ABSENCE OF COMBINED OPERATING HISTORY; NO ASSURANCE OF PROFITABILITY. The
Company was incorporated in April 1995 and, to date, has conducted limited
operations and generated limited revenue. At June 30, 1997, the Company had a
working capital deficiency of approximately $329,000 and an accumulated deficit
of approximately $161,000. The likelihood of the future success of the Company
is highly speculative and must be considered in light of its limited operating
history, as well as the problems, expenses, difficulties, risks, and
complications frequently encountered in connection with similarly situated
companies in early stages of development. The Company is subject to all of the
business risks associated with a new enterprise, including constraints on its
financial and human resources, lack of established business relationships, and
uncertainties regarding affiliations and future revenues. The Company only
recently acquired PMI and has entered into agreements to acquire certain assets,
and assume certain liabilities, of the Initial Affiliated Practices and NBS upon
consummation of this Offering. In connection with the acquisition of the Initial
Affiliated Practices, the Company is entering into PMSAs to provide management
services to the Initial Affiliated Practices for initial terms of 40 years. The
Initial Affiliated Practices, NBS, and PMI operated as separate independent
entities before being acquired by the Company. There can be no assurance that
the process of integrating the management and administrative functions of the
Initial Affiliated Practices, NBS, and PMI will be successful or that the
Company will be able to manage these operations effectively or profitably and
successfully implement the Company's operating or expansion strategies. Failure
by the Company to successfully implement its operating and expansion strategies
would have a material adverse effect on the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business."
RISKS RELATED TO EXPANSION STRATEGY. The Company's expansion strategy
involves growth through affiliation with physician practices and the expansion
of such practices. The Company is subject to various risks associated with this
strategy, including the risks that the Company will be unable to identify and
recruit suitable affiliation candidates, successfully expand and manage the
Affiliated Practices, or successfully integrate the Affiliated Practices into
its existing operations. The Company's expansion is dependent on its ability to
affiliate with quality physician practices, to manage and control costs, and to
realize economies of scale. In addition, the success of the Company will depend
on its ability to integrate its management information system into each of the
Affiliated Practices. There can be no assurance that the Company will be able to
achieve and manage its planned expansion, that it will be able to successfully
implement its management information system, or that suitable physician
practices will be available for affiliation upon terms satisfactory to the
Company, or at all. There can be no assurance that the Company's expansion
strategy will be successful or that material modifications to the Company's
expansion strategy will not be required. The failure of the Affiliated Practices
to achieve anticipated performance levels could have a material adverse effect
on the Company's business, prospects, financial condition, and results of
operations. In pursuing its expansion strategy, the Company intends to expand
its presence into new geographic markets. In entering a new geographic market,
the Company will be required to comply with laws and regulations of
jurisdictions that differ materially from those applicable to the Company's
current operations, deal with different payors, as well as face competitors with
greater knowledge of such markets than the Company. There can be no assurance
that the Company will be able to effectively establish a presence in any new
market. See "Business-Strategy" and "Business-Government Regulation."
9
<PAGE>
ADDITIONAL FINANCING REQUIREMENTS. The Company's expansion strategy will
require substantial capital resources. Capital is required not only for the
acquisition of substantially all of the assets of the Affiliated Practices and
other medical entities, but also for the integration, operation, and expansion
of the Affiliated Practices and such medical entities. In addition, the
Company's Affiliated Practices and other acquired entities may, from time to
time, require capital for renovation, expansion, and the purchase of additional
medical equipment and technology. The Company believes that the net proceeds of
this Offering, together with anticipated revenues from operations, will be
sufficient to satisfy its capital requirements for at least 12 months following
the date of this Prospectus. There can be no assurance that such resources will
be sufficient to satisfy the Company's capital requirements for said period.
After the 12-month period, the Company may require additional financing in order
to meet its current plans for expansion. Such financing may take the form of the
issuance of common or preferred equity securities or debt securities, or may
involve bank financing. There can be no assurance that the Company will be able
to obtain needed additional capital on a timely basis, on favorable terms, or at
all. Any additional financing could result in dilution of the then-existing
equity positions, and increased interest and amortization expense. If the
Company is unable to secure additional sources of financing on terms and
conditions favorable to the Company, or at all, the Company's expansion strategy
could be materially adversely affected. In any of such events, the Company may
be unable to implement its current plans for expansion or to repay its debt
obligations. See "Use of Proceeds" and "Business--Strategy."
LIMITED MANAGEMENT RESOURCES. The Company's anticipated growth is expected
to place a significant strain on its managerial, operational, and financial
resources. To manage this growth, the Company will be required to significantly
expand its operational and financial systems and expand, train, and manage its
work force. The ability of the Company to attract and retain highly skilled
personnel is critical to the operations and expansion of the Company. The
Company faces competition for such personnel from other PPMOs and more
established organizations, many of which have significantly larger operations
and greater financial, marketing, human, and other resources than the Company.
There can be no assurance that the Company will be successful in attracting and
retaining qualified personnel on a timely basis, on competitive terms, or at
all. In the event that the Company is not successful in attracting and retaining
such personnel, the Company may be materially adversely affected. Further, the
Company anticipates that it will take time to integrate additional skilled
individuals into the Company's operations and to build a cohesive and efficient
workforce.
RELIANCE ON AFFILIATED PRACTICES. The Company will receive fees for
management services provided to its Affiliated Practices under the PMSAs.
Revenue received by the Company from the Affiliated Practices under the PMSAs
generally will depend on revenue generated by the Affiliated Practices. The
revenue from the Affiliated Practices will be dependent on fees generated by the
physicians employed by the Affiliated Practices. In connection with the PMSAs,
each physician will enter into an employment agreement, each of which will have
a three to five year term, with the professional corporation in which that
physician practices. The Company will not be receiving a fixed percentage of
revenues from the Affiliated Practices. Pursuant to the PMSAs, the Company will
receive 100% of the receivables from the Affiliated Practices and, before any
other expenses are paid, will return to the Affiliated Practices only such sums
as are necessary to pay certain designated expenses such as physician salaries,
physician payroll taxes, and continuing education costs. The Company will use
remaining amounts of such receivables to fund the operations of the Affiliated
Practices and its own operations. There can be no assurance that the Affiliated
Practices will generate sufficient revenues to fund the operations of the
Affiliated Practices and the Company or that they will generate sufficient
revenues to fund physician salaries. Consequently, there can be no assurance
that the revenues from the Affiliated Practices will be sufficient to allow the
Company to be profitable. A failure of the Affiliated Practices to generate
sufficient revenues could have a material adverse effect on the Company's
business, prospects, financial condition, and results of operations. Any loss of
revenue by the Affiliated Practices, including losses resulting from a
substantial reduction in the number of physicians employed by, or associated
with, the Affiliated Practices, could have a material adverse effect on the
business, prospects, financial condition, and results of operations of the
Company.
10
<PAGE>
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Affiliation Structure."
DEPENDENCE ON THIRD PARTY REIMBURSEMENT. The Company's ability to collect
fees in a timely manner, or at all, is affected by whether its Affiliated
Practices are reimbursed for their medical services and the amount of
reimbursement. Substantially all of the revenue of the Affiliated Practices,
which will be substantially all of the Company's revenue, will derive from
commercial health insurance, state workers' compensation programs, and other
third-party payors. All of these providers and programs are regulated at the
state or federal level. There are increasing and significant public and private
sector pressures to contain health care costs and to restrict reimbursement
rates for medical services. For example, it has been reported that the Medicare
program is expected to experience a deficiency of funds early in the next
century. Accordingly, Congress, in its fiscal year 1997 budget legislation,
called for, and considered, severe reductions in both the Medicare and Medicaid
programs. Several states have taken measures to reduce the reimbursement rates
paid to health care providers in their states. The Company believes that
additional states will implement reductions from time to time. Reductions in
Medicare and Medicaid rates often lead to reductions in the reimbursement rates
of other third-party payors as well. Thus, changes in the level of support by
federal and state governments of health care services, the methods by which
health care services may be delivered, and the prices of such services may all
have a material impact on the revenue of the Company, which in turn could have a
material adverse effect on the Company.
Third party payors may disagree with the description or coding of a bill for
medical services, or may contest a description or code under a lesser fee
schedule depending on the medical services rendered. Such disagreements on
description of professional services or bill coding, particularly where the
third party payor is a federal or state funded health care program, could result
in lesser reimbursement, which could have a material adverse effect on the
Company. Persistent disagreements or alleged "upcoding" could result in
allegations of fraud or false billing, both of which constitute felonies. Such
an allegation, if proven, could result in forfeitures of payment, civil money
penalties, civil fines, suspensions, or exclusion from participation in federal
or state funded health care programs, and could have a material adverse effect
on the Company. Investigation and prosecution for fraudulent or false billing
could have a material adverse effect on the Company, even if such allegations
were disproven.
The Company's income may be materially adversely affected if the Affiliated
Practices are unable to collect medical fees from third party payors or if there
is a delay in the submission of claims. Additionally, there may be long
collection cycles for such receivables. Many third party payors, particularly
insurance carriers covering automobile no-fault and workers' compensation claims
refuse, as a matter of business practice, to pay claims unless submitted to
arbitration. Further, third party payors may reject medical claims if, in their
judgment, the procedures performed were not medically necessary or if the
charges exceed such payor's allowable fee standards. In addition, some
receivables may not be collected because of omissions or errors in timely
completion of the required claim forms. The inability of the Affiliated
Practices to collect their receivables could materially adversely affect the
Company. See "Risk Factors-- Government Regulation," "Business-Third Party
Reimbursement," and "Business-Government Regulation."
GOVERNMENT REGULATION. Federal and state laws regulate the relationships
among providers of health care services, physicians, and other clinicians. These
laws include federal fraud and abuse provisions. Such provisions prohibit the
solicitation, receipt, payment, or offering of any direct or indirect
remuneration for the referral of patients for which reimbursement is made under
any federal or state funded health care program or for the recommending,
leasing, arranging, ordering, or providing of services covered by such programs.
States have similar laws that apply to patients covered by private and
government programs. Federal fraud and abuse laws also impose restrictions on
physicians' referrals for designated health services covered under Medicare or
Medicaid to entities with which they have financial relationships. Various
states have adopted similar laws that cover patients in private programs as well
as government programs. Recent actions of Congress, including the Health
Insurance Portability and Accountability Act of 1996 and the
11
<PAGE>
Balanced Budget Act of 1997, have expanded the coverage of fraud and abuse
provisions, enhanced the enforcement efforts of the federal government in
pursuing fraud and abuse, and have increased the penalties related to violations
of the various fraud and abuse provisions. There can be no assurance that the
federal and state governments will not consider additional prohibitions on
physician ownership, directly or indirectly, of facilities to which they refer
patients, which could adversely affect the Company. Violations of these laws may
result in substantial civil or criminal penalties for individuals or entities,
including large civil money penalties and exclusion from participation in
federal or state health care programs. Such exclusion, if applied to the
Affiliated Practices could result in significant loss of reimbursement and could
have a material adverse effect on the Company.
Federal law also prohibits conduct that may be, or result in, price-fixing
or other anticompetitive conduct. Moreover, the Company may in the future
contract with licensed insurance companies and/or HMOs. Certain of such
contracts may require the Affiliated Practices on behalf of which the Company
contracts to assume risk in connection with providing health care service under
capitation arrangements. To the extent that the Company or the Affiliated
Practices may be in the business of insurance as a result of entering into such
arrangements, they may be subject to a variety of regulatory and licensing
requirements applicable to insurance companies or HMOs. There can be no
assurance that review of the Company's or the Affiliated Practices' businesses
by courts or regulatory authorities will not result in a determination that
could materially adversely affect the operations of the Company or such
Affiliated Practices or that the health care regulatory environment will not
change so as to restrict the Company's or such Affiliated Practices' existing
operations or their expansion.
Moreover, the laws of many states, such as New York, where the Company
intends to acquire physician practices, prohibit physicians from sharing
professional fees, or "splitting fees," with anyone other than a member of the
same profession. These laws and their interpretations vary from state to state
and are enforced by the courts and by regulatory authorities with broad
discretion. Expansion of the operations of the Company to certain jurisdictions,
including New York, may require structural and organizational modifications of
the Company's form of relationship with the Affiliated Practices, which could
have an adverse effect on the Company. Although the Company believes that the
operations of the Initial Affiliated Practices as the Company will operate them
upon their acquisition are in compliance in all material respects with existing
applicable laws, there can be no assurance that review of the Company's business
by courts or regulatory authorities will not result in a determination that
could adversely affect the operations of the Company or that the health care
regulatory environment will not change so as to restrict the Company's existing
operations or its expansion.
Every state imposes licensing requirements on individual physicians and on
certain other health care providers and facilities. Many states require
regulatory approval, including licensing to render care or certificates of need
before establishing certain types of health care services which entail the
acquisition of expensive medical equipment or facilities. While the performance
of management services on behalf of a medical practice does not currently
require any regulatory approval, there can be no assurance that such activities
will not be subject to licensure in the future. Such requirements could have a
material adverse effect on the Company and its operations. See "Business -
Government Regulation."
STATE LAWS PROHIBITING THE CORPORATE PRACTICE OF MEDICINE. Affiliated
Practices are anticipated to be business corporations wholly-owned by the
Company in the states in which the Company believes general business
corporations are permitted to own a medical practice. In other states, including
New Jersey, New York, and Pennsylvania, the Affiliated Practices will be formed
as professional corporations owned by one or more medical doctors licensed to
practice medicine under the applicable state law. Corporations such as the
Company are not permitted under certain state laws, including New Jersey, New
York, and Pennsylvania, to practice medicine or exercise control over the
medical judgments or decisions of practitioners. Laws regulating the corporate
practice of medicine and the interpretation thereof vary from state to state and
are enforced by the courts and by regulatory authorities with broad discretion.
The Company believes that it performs only non-medical administrative services,
does not represent to the public or its clients that
12
<PAGE>
it provides medical services, and does not exercise influence or control over
the practice of medicine by the practitioners with whom it contracts. Expansion
of the operations of the Company to certain jurisdictions may require structural
and organizational modifications of the Company's form of relationship with
practitioners in order to comply with laws regulating the corporate practice of
medicine, which could have an adverse effect on the Company. Although the
Company believes its operations, as currently conducted, are in compliance in
all material respects with existing applicable laws, there can be no assurance
that the Company's structure will not be challenged as constituting the
unlicensed practice of medicine or that the enforceability of the agreements
underlying this structure will not be limited. If such a challenge were made
successfully in any state, the Company could be subject to civil and criminal
penalties under such state's law and could be required to restructure its
contractual arrangements in that state. Such results, or the inability to
successfully restructure its contractual arrangements, could have a material
adverse effect upon the Company. See "Business--Government Regulation."
HEALTH CARE REFORM. Although Congress has failed to pass comprehensive
health care reform legislation, the Company anticipates that Congress and state
legislatures will continue to review and assess alternative health care delivery
and payment systems and may in the future propose and adopt legislation
effecting fundamental changes in the health care delivery system. Also, Congress
is expected to consider major reductions in the rate of increase of Medicare and
Medicaid spending as a part of efforts to balance the budget of the United
States. The Company cannot predict the ultimate timing, scope, or effect of any
legislation concerning health care reform, including legislation affecting the
Medicare and Medicaid programs. Any proposed federal legislation, if adopted,
could result in significant changes in the availability, delivery, pricing, and
payment for health care services and products. Various states also have
undertaken, or are considering, significant health care reform initiatives.
Although it is not possible to predict whether any health care reform
legislation will be adopted or, if adopted, the exact manner and the extent to
which the Company will be affected, it is likely that the Company will be
affected in some fashion, and there can be no assurance that any health care
reform legislation, if and when adopted, will not have a material adverse effect
on the Company.
EXPOSURE TO PROFESSIONAL LIABILITY. In recent years, physicians, hospitals,
and other participants in the health care industry have become subject to an
increasing number of lawsuits alleging medical malpractice and related legal
theories. Many of these lawsuits involve large claims and substantial defense
costs. The Company does not engage in the practice of medicine or provide
medical services, nor does it control the practice of medicine by the Affiliated
Practices or the compliance with regulatory and other requirements directly
applicable to the Affiliated Physicians and Affiliated Practices; however, there
can be no assurance that the Company will not become involved in such litigation
in the future. See "Business -- Professional Liability Insurance."
The PMSAs will require the Affiliated Practices to maintain, at their
expense, professional liability insurance for themselves and each physician
employed by, or otherwise providing medical services for, the Affiliated
Practices in the minimum amount of $1,000,000 per occurrence and $3,000,000 in
the aggregate. In addition, each of the Affiliated Practices will undertake to
comply with all applicable regulations and requirements, and the Company will be
indemnified under the PMSA for claims against the Company arising in connection
with actions by the Affiliated Practices. The Company has applied for general
liability insurance for itself and requires that it be named as an additional
insured party on the professional liability insurance policies of the Affiliated
Practices pursuant to the PMSA. In addition, the Company will maintain liability
insurance on its non-physician professional employees, such as nurses and
midwives.
There can be no assurance that the Company, its employees, the Affiliated
Practices, or the physicians employed by, or associated with, the Affiliated
Practices will not be subject to claims in amounts that exceed the coverage
limits or that such coverage will be available when needed. Further, there can
be no assurance that professional liability or other insurance will continue to
be available to the Affiliated Practices in the future at adequate levels, at an
acceptable cost, or at all. A successful claim against the Company or an
Affiliated Practice in excess of the relevant insurance coverage could have a
material
13
<PAGE>
adverse effect upon the Company. Claims against the Company or an Affiliated
Practice, regardless of the merits or eventual outcomes, may also have a
material adverse effect on the Company.
RISKS ASSOCIATED WITH MANAGED CARE CONTRACTS. While none of the Initial
Affiliated Practices are currently materially dependent upon capitated fee
arrangements, the Company believes that an increasing percentage of patients
will be coming under the control of managed care entities. The Company believes
that its success will, in part, depend upon its ability to negotiate on behalf
of the Affiliated Practices favorable managed care contracts with HMOs and other
private third-party payors. Such contracts often shift much of the financial
risk of providing care from the payor to the provider by requiring the provider
to furnish all or a portion of its services in exchange for a fixed, or
"capitated," fee per member patient per month, regardless of the level of such
patients' utilization rates and, sometimes in the case of primary care
physicians, to accept financial risk for health care services not normally
furnished by such physicians (e.g., specialty physician or hospital services).
The Company intends to negotiate capitation agreements with managed care
organizations. Some managed care agreements also offer "shared risk" provisions
under which physicians and physician practice management concerns can earn
additional compensation based on the utilization of services by members, but may
be required to bear a portion of any loss in connection with such "shared-risk"
provisions. Any such losses could, in the future, have a material adverse effect
on the Company. In order for capitation contracts, especially any with
"shared-risk" provisions, to be profitable for the Company, the Company must
effectively monitor the utilization of its services delivered to members of the
managed care organization who are patients of the Affiliated Practices and, to
the extent such Affiliated Practices are responsible for overall patient care,
monitor the utilization of specialist physicians or hospitals, negotiate
favorable rates with such other providers, and obtain, on favorable terms, stop
loss protection limiting its per enrollee exposure above specified thresholds.
There can be no assurance that the Company will be able to negotiate
satisfactory managed care contracts for the Affiliated Practices. Nor can there
be any assurance that any managed care contracts it enters into on behalf of the
Affiliated Practices will not adversely affect the Company or the Affiliated
Practices.
COMPETITION. The physician practice management industry is highly
competitive. The Company is subject to significant competition both in
affiliating with physician practices and in seeking managed care contracts on
behalf of the Affiliated Practices. Its competitors include hospitals, managed
care organizations, and other PPMOs. In comparison with the Company, many of its
competitors are larger and have substantially greater resources, provide a wider
variety of services, and have longer established relationships with purchasers
of such services. There can be no assurance that the Company will be able to
compete effectively, that additional competitors will not enter the market, or
that such competition will not make it more difficult to enter into affiliations
with physician practices on terms beneficial to the Company. The Company also
experiences competition in the recruitment and retention of qualified physicians
and other health care professionals on behalf of the Affiliated Practices. There
can be no assurance that the Company will be able to recruit or retain a
sufficient number of qualified physicians and other health care professionals to
expand its operations. See "Business-Competition."
DEPENDENCE ON KEY EMPLOYEES. The Company is dependent substantially upon
the efforts of Scott G. Pollock, Chief Executive Officer and a Director of the
Company, Peter R. Heisen, M.D., President, Chief Medical Officer, and a Director
of the Company, and Dennis B. Liotta, M.D., Executive Vice President, Chief
Operating Officer, and a Director of the Company. The loss of, or unavailability
of, any of these individuals or the inability of the Company to attract other
qualified employees could have a material adverse effect upon the Company. The
Company has entered into employment agreements with these key executives, with
minimum terms of at least three years. In addition, the Company has obtained,
and is the sole owner and beneficiary of, an insurance policy in the amount of
$1,000,000 on the life of each of Mr. Pollock and Drs. Heisen and Liotta. See
"Management."
14
<PAGE>
NO PRIOR PUBLIC MARKET; ARBITRARY DETERMINATION OF PUBLIC OFFERING PRICES;
POSSIBLE VOLATILITY OF DEBENTURE, COMMON STOCK AND WARRANT MARKET PRICES. Prior
to this Offering, there has been no public market for any of the Securities
offered hereby, and there can be no assurance that an active public market for
any of the Securities will develop or, if developed, be sustained after this
Offering. The terms of the Debentures and the Warrants and the initial public
offering prices of the Common Stock and the Warrants were arbitrarily determined
by negotiation between the Company and the Representatives, and do not
necessarily bear any relationship to the Company's assets, book value, results
of operations, or any other generally accepted criteria of value. From time to
time after this Offering, there may be significant volatility in the market
price of the Debentures, the Common Stock, and the Warrants. Quarterly operating
results of the Company or other developments affecting the Company, such as
announcements by the Company or its competitors regarding acquisitions or
dispositions, new procedures, changes in general conditions in the economy or
the health care industry, and general market conditions could cause the market
prices of the Securities to fluctuate substantially. The equity markets have, on
occasion, experienced significant price and volume fluctuations that have
affected the market prices for many companies' securities and have often been
unrelated to the operating performance of these companies. Concern about the
potential effects of health care reform measures has contributed to the
volatility of stock prices in companies in health care and related industries
and may similarly affect the price of any or all of the Securities following
this Offering. See "Underwriting."
LACK OF EXPERIENCE OF REPRESENTATIVES. Nolan Securities Corp. has been in
business since February 1991 and has participated in two public offerings as a
co-manager and two public offerings as a member of the underwriting syndicate.
Dirks & Company, Inc. commenced operations in July 1997 and has not co-managed
or participated as an underwriter in any public offering of securities.
SouthWall Capital Corp. commenced operations as an underwriter in May 1996 and
has co-managed one public offering and participated as an underwriter in nine
public offerings to date. Accordingly, none of the Representatives have
extensive experience as a co-manager or underwriter of public offerings of
securities. In addition, each of the Representatives are relatively small firms
and no assurance can be given that any of the Representatives will be able to
participate as a market maker in any of the Securities. No assurance can be
given that any broker-dealer will make a market in any of the Securities. See
"Underwriting."
NO DIVIDENDS. The Company has not paid cash dividends on the Common Stock
since inception and does not intend to pay any dividends to its stockholders in
the foreseeable future. The Company currently intends to reinvest earnings, if
any, in the development and expansion of its business. See "Dividend Policy."
IMMEDIATE AND SUBSTANTIAL DILUTION; DISPARITY OF CONSIDERATION. The
purchasers of the shares of Common Stock offered hereby will experience
immediate and substantial dilution in the net tangible book value of the shares
of Common Stock of $6.58 per share, or approximately 87.7% per share. Additional
dilution to future net tangible book value per share may occur upon the exercise
of the Warrants, the Representatives' Warrants, and options to be issued under
the Plan. The current stockholders of the Company, including the directors and
entities and persons affiliated with them acquired their shares of Common Stock
for nominal consideration. As a result, new investors will bear substantially
all of the risks inherent in an investment in the Company. See "Dilution."
SUBSTANTIAL CONTROL BY MANAGEMENT. Upon the closing of this Offering, the
Company's officers and directors will own approximately 27.2% of the outstanding
shares of Common Stock (approximately 25.4% of the outstanding shares of Common
Stock if the Underwriters' over-allotment option is exercised in full). As a
result, such persons may have the ability to control the election all of the
directors of the Company and to control the outcome of all issues submitted to a
vote of the stockholders of the Company. Furthermore, such concentration of
ownership could limit the price that certain investors might be willing to pay
in the future for shares of Common Stock and could have the effect of making it
more difficult for a
15
<PAGE>
third party to acquire, or of discouraging a third party from attempting to
acquire control of, the Company. See "Principal Stockholders."
SHARES ELIGIBLE FOR FUTURE SALE The sale, or availability for sale, of a
substantial number of shares of Common Stock in the public market subsequent to
this Offering pursuant to Rule 144 under the Securities Act ("Rule 144") or
otherwise could materially adversely affect the market price of the Common Stock
and could impair the Company's ability to raise additional capital through the
sale of its equity securities or debt financing. Of the 4,183,067 shares of
Common Stock to be outstanding upon completion of this Offering, the 2,000,000
shares of Common Stock offered hereby (2,300,000 shares of Common Stock if the
Underwriters' over-allotment option is exercised in full), will be immediately
freely tradeable without restriction under the Securities Act, except for any
securities purchased by affiliates of the Company, which securities will be
subject to the resale limitations of Rule 144 under the Securities Act. The
availability of Rule 144 to the holders of restricted securities of the Company
would be conditioned on, among other factors, the availability of certain public
information concerning the Company. The remaining 2,183,067 shares of Common
Stock are "restricted securities" as that term is defined in Rule 144 and may,
under certain circumstances, be sold without registration under the Securities
Act. All existing stockholders of the Company, including all of the executive
officers and directors of the Company, have agreed, however, not to sell or
otherwise dispose of any securities of the Company for a period of 18 months
from the date of this Prospectus without the Representative's prior written
consent. After such 18-month period, all 2,183,067 shares may be sold in
accordance with Rule 144. See "Shares Eligible for Future Sale."
POTENTIAL ADVERSE EFFECT OF REPRESENTATIVES' WARRANTS. At the consummation
of the Offering, the Company will sell to the Representatives and/or their
designees, for nominal consideration, warrants to purchase up to an aggregate of
$2,500,000 principal amount of Debentures, up to 200,000 shares of Common Stock,
and/or up to 200,000 Warrants (the "Representatives' Warrants"). The
Representatives' Warrants are exercisable for a period of four years commencing
one year after the effective date of this Offering, at an exercise price of 100%
of the principal amount of Debentures, $ per share of Common Stock [140% of
the initial public offering price per share of the Common Stock], and $ per
Warrant [140% of the initial public offering price of the Warrants],
respectively. The Warrants obtained upon exercise of the Representatives'
Warrants will be exercisable for a period of four years commencing at the
beginning of the second year after the effective date of this Offering, at an
exercise price of $ per share [140% of the exercise price of the Warrants].
For the term of the Representatives' Warrants, the holders thereof will have, at
nominal cost, the opportunity to profit from a rise in the market price of the
Securities without assuming the risk of ownership, with a resulting dilution in
the interest of other security holders. As long as the Representatives' Warrants
remain unexercised, the Company's ability to obtain additional capital might be
adversely affected. Moreover, the Representatives may be expected to exercise
the Representatives' Warrants at a time when the Company would, in all
likelihood, be able to obtain any needed capital through a new offering of its
securities on terms more favorable than those provided by the Representatives'
Warrants. See "Underwriting."
SPECULATIVE NATURE OF THE WARRANTS. The Warrants do not confer any rights
of Common Stock ownership on their holders, such as voting rights or the right
to receive dividends, but rather represent the right to acquire shares of Common
Stock at a fixed price for a limited period of time. Specifically, commencing
, 1997 [the date of this Prospectus], holders of the Warrants may
exercise their right to acquire shares of Common Stock and pay an exercise price
of $ per share [140% of the initial public offering price per share of
Common Stock], subject to adjustment upon the occurrence of certain dilutive
events, until , 2002 [five years after the date of this Prospectus],
after which date any unexercised Warrants will expire and have no further value.
Moreover, following the completion of this Offering, the market value of the
Warrants will be uncertain and there can be no assurance that the market value
of the Warrants will equal or exceed their initial public offering price. There
can be no assurance that the market price of the Common Stock will ever equal or
exceed the exercise price of the Warrants and, consequently, whether it will
ever be profitable for holders of the Warrants to exercise the Warrants.
16
<PAGE>
POTENTIAL ADVERSE EFFECT OF REDEMPTION OF WARRANTS. Commencing ,
1999 [18 months after the date of this Prospectus], the Warrants are subject to
redemption by the Company at $0.10 per Warrant on 30 days prior written notice
to the warrantholders if the average closing sale price of the Common Stock as
reported on AMEX equals or exceeds $ per share [210% of the initial public
offering price of the Common Stock] of Common Stock for any 20 trading days
within a period of 30 consecutive trading days ending on the fifth trading day
prior to the date of the notice of redemption. If the Warrants are redeemed,
holders of the Warrants will lose their rights to exercise the Warrants after
the expiration of the 30-day notice of redemption period. Upon receipt of a
notice of redemption, holders would be required to: (i) exercise the Warrants
and pay the exercise price at a time when it may be disadvantageous for them to
do so; (ii) sell the Warrants at the current market price, if any, when they
might otherwise wish to hold the Warrants; or (iii) accept the redemption price,
which is likely to be substantially less than the market value of the Warrants
at the time of redemption. See "Description of Securities."
POTENTIAL ADVERSE EFFECT OF SUBSTANTIAL NUMBER OF SHARES OF COMMON STOCK
RESERVED. The Company has reserved a total of at least 2,700,000 shares of
Common Stock for issuance as follows: (i) 2,000,000 shares for issuance upon
exercise of the 2,000,000 Warrants; (ii) 200,000 shares for issuance upon
exercise of the Representatives' Warrants; (iii) 200,000 shares for issuance
upon exercise of the Warrants underlying the Representatives' Warrants; (iv)
300,000 shares for issuance upon exercise of options to be granted under the
Plan; and (v) an additional indeterminate number of shares to be issued upon
conversion, if any, of the Debentures. The existence of the Warrants, the
Representatives' Warrants, the Debentures, and any other options or warrants may
adversely affect the Company's ability to consummate future equity financing.
Further, the holders of such warrants and options may exercise them at a time
when the Company would otherwise be able to obtain additional equity capital on
terms more favorable to the Company. See "Shares Eligible for Future Sale."
LEGAL RESTRICTIONS ON SALES OF COMMON STOCK UNDERLYING THE WARRANTS. The
Warrants are not exercisable unless, at the time of the exercise, the Company
has a current prospectus covering the offer and sale of the shares of Common
Stock issuable upon exercise of the Warrants, and such shares have been
registered, qualified, or are deemed to be exempt under the securities laws of
the state of residence of the exercising holder of the Warrants. Although the
Company has agreed to use its best efforts to keep a registration statement
covering the shares of Common Stock issuable upon the exercise of the Warrants
effective for the term of the Warrants, if it fails to do so for any reason, the
Warrants may be deprived of value.
The Common Stock and Warrants are separately transferable immediately upon
issuance. Purchasers may buy Warrants in the aftermarket in, or may move to,
jurisdictions in which the shares of Common Stock underlying the Warrants are
not so registered or qualified during the period that the Warrants are
exercisable. In this event, the Company would be unable to issue shares to those
person desiring to exercise their Warrants, and holders of Warrants would have
no choice but to attempt to sell the Warrants in a jurisdiction where such sale
is permissible or allow them to expire unexercised. See "Description of
Securities."
PREFERRED STOCK; ANTI-TAKEOVER PROVISIONS. The Company's Certificate of
Incorporation, as amended, authorizes the Board of Directors to issue up to
1,000,000 shares of preferred stock, $.01 par value per share. The preferred
stock may be issued in one or more series, the terms of which may be determined
at the time of issuance by the Board of Directors, without further action by
stockholders, and may include voting rights (including the right to vote as a
series on particular matters), preferences as to dividends and liquidation,
conversion and redemption rights, and sinking fund provisions. No preferred
stock is currently outstanding, and the Company has no present plans for the
issuance of any preferred stock. However, the issuance of any such preferred
stock could materially adversely affect the rights of holders of Common Stock
and Warrants and, therefore, could reduce the value of the Common Stock and
Warrants. In
17
<PAGE>
addition, specific rights granted to future holders of preferred stock could be
used to restrict the Company's ability to merge with, or sell its assets to, a
third party. The ability of the Board of Directors to issue preferred stock
could discourage, delay, or prevent a takeover of the Company, thereby
preserving control of the Company by the current stockholders.
In addition, the Company is subject to Section 203 of the Delaware General
Corporation Law, which, subject to certain exceptions, prohibits a Delaware
corporation from engaging in any of a broad range of business combinations with
any "interested stockholder" for a period of three years following the date that
such stockholder became an interested stockholder. See "Description of
Securities."
POSSIBLE ACQUISITIONS AND BUSINESS OPPORTUNITIES; DISCRETIONARY USE OF NET
PROCEEDS. Approximately 49.6% ($17,681,000) of the estimated net proceeds from
the sale of the Debentures at an assumed initial public offering price of 100%,
and from the sale of the Common Stock and Warrants at assumed initial public
offering prices of $7.50 per share and $.10 per Warrant, respectively, has been
allocated to acquisitions of additional physician practices and other medical
entities. The Company's management will have broad discretion as to the
application of such net proceeds. Depending on the structure of any possible
acquisition or other business opportunity, the Company's Board of Directors may
have the power and authority under the laws of the State of Delaware to approve
and consummate such transaction on behalf of the Company without a stockholder
vote. See "Use of Proceeds."
SUBSTANTIAL PORTION OF NET PROCEEDS ALLOCATED FOR GENERAL CORPORATE AND
WORKING CAPITAL PURPOSES. Approximately 21.9% ($7,824,000) of the estimated net
proceeds from the sale of the Debentures at an assumed initial public offering
price of 100% and from the sale of the Common Stock and Warrants at assumed
initial public offering prices of $7.50 per share and $.10 per Warrant,
respectively, has been allocated for general corporate and working capital
purposes. Such proceeds may be utilized in the discretion of the Board of
Directors. As a result, investors will not know in advance how such net proceeds
will be utilized by the Company. See "Use of Proceeds."
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS INCLUDED IN THIS
PROSPECTUS. This Prospectus contains certain forward-looking statements
regarding the plans and objectives of management for future operations,
including plans and objectives relating to the Affiliated Practices. The
forward-looking statements included herein are based on current expectations
that involve numerous risks and uncertainties. The Company's plans and
objectives are based on a successful execution of the Company's expansion
strategy and assumptions that the Affiliated Practices will be profitable, that
the health care industry will not change materially or adversely, and that there
will be no unanticipated material adverse change in the Company's operations or
business. Assumptions relating to the foregoing involve judgments with respect
to, among other things, future economic, competitive and market conditions, and
future business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the control of the Company. Although the
Company believes that its assumptions underlying the forward-looking statements
are reasonable, any of the assumptions could prove inaccurate and, therefore,
there can be no assurance that the forward-looking statements included in this
Prospectus will prove to be accurate. In light of the significant uncertainties
inherent in the forward-looking statements included herein, particularly in view
of the Company's early stage operations, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives and plans of the Company will be achieved.
18
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the
Securities offered hereby are estimated to be approximately $35,656,000
(approximately $41,113,150 if the Underwriters' over-allotment option is
exercised in full) after deduction of underwriting discounts, the
non-accountable expense allowance, and other estimated offering expenses payable
by the Company in the amount of approximately $725,000, assuming an initial
public offering price for the Debentures of 100%, $7.50 per share of Common
Stock, and $.10 per Warrant, respectively. The Company intends to use the net
proceeds of this Offering as follows:
<TABLE>
<CAPTION>
APPROXIMATE APPROXIMATE
APPLICATION OF NET PROCEEDS AMOUNT PERCENTAGE
- ------------------------------------------------------------------------------------- ------------- -------------
<S> <C> <C>
Payments due upon consummation of the Acquisitions (1)............................... $ 7,937,000 22.3%
Funds available for acquisitions of additional physician practices and other medical
entities (2)....................................................................... 17,681,000 49.6%
Hardware, software, and installation cost of information system (3).................. 1,650,000 4.6%
Repayment of indebtedness (4)........................................................ 564,000 1.6%
General corporate and working capital purposes (5)................................... 7,824,000 21.9%
------------- -----
$ 35,656,000 100.0%
------------- -----
------------- -----
</TABLE>
- ------------------------
(1) The Company plans to consummate the Acquisitions concurrently with the
closing of this Offering. In connection with the Acquisitions, the Company
will acquire certain assets and assume certain liabilities of the Initial
Affiliated Practices and NBS. The costs of the Acquisitions will be paid
pursuant to the respective purchase agreements through a combination of
$7,936,500 in cash, notes in the aggregate principal amount of $114,000, an
aggregate of 481,067 shares of Common Stock, and the assumption of
liabilities in the amount of $467,324. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(2) The Company plans to acquire certain assets and assume certain liabilities
of other physician practices and other medical entities on terms the Company
expects to be similar to the Acquisitions. The Company intends to finance
these transactions through a combination of cash payments and issuances of
notes, shares of Common Stock, and/or other securities of the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(3) Represents the costs of the hardware, software, and the installation cost
associated with the information system that the Company intends to install
at each Affiliated Practice.
(4) Represents (i) repayment of advances to the Company from a third party in
the amount of $129,000 due upon the consummation of this Offering and
bearing interest at a rate of 10% per annum, (ii) repayment of an aggregate
principal amount of $435,000 of the Senior Notes sold by the Company in the
Bridge Financing, and (iii) certain accrued liabilities. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and "Certain Transactions."
(5) The remaining portion of the net proceeds will be allocated to working
capital and will be used by the Company for general corporate purposes,
including amounts required to pay officers' salaries, consultant and
professional fees, office and administrative expenses, and other corporate
expenses.
The foregoing represents the Company's best estimate of its allocation of
the net proceeds from the sale of the Securities offered hereby, based upon the
Company's currently contemplated operations, the Company's business plan, and
current economic and industry conditions, and is subject to reapportionment of
proceeds among the categories listed above or to new categories in response to,
among other things, changes in its plans, regulations, industry conditions, and
future revenues and expenditures.
Based on the Company's operating plan, the Company believes that the net
proceeds of this Offering, together with anticipated revenues from operations,
will be sufficient to satisfy its capital requirements for at least 12 months
following the date of this Prospectus. There can be no assurance that such
resources will be sufficient to satisfy the Company's capital requirements for
said period. After the 12-month period, the Company may require additional
financing in order to meet its current plans for expansion. Such financing may
take the form of the issuance of common or preferred equity securities or debt
securities, or may involve bank financing. There can be no assurance that the
Company will be able to obtain needed additional capital on a timely basis, on
favorable terms, or at all. Any additional financing could result in dilution of
the then-existing equity positions, and increased interest and amortization
expense. If the Company is unable to secure additional sources of financing on
terms and conditions favorable to the Company, or at all, the Company's
expansion strategy could be materially adversely affected. In any of such
events, the Company may be unable to implement its current plans for expansion
or to repay its debt obligations. See "Capitalization," "Management's Discussion
and Analysis of Financial Condition and Results of Operations," and
"Business--Development and Operations."
Net proceeds, if any, received by the Company from the sale of the
Securities issuable upon exercise of the Underwriters' over-allotment option,
and proceeds, if any, received by the Company upon exercise of the Warrants, the
Representatives' Warrants, and any options to be issued under the Plan, will be
utilized for general corporate and working capital purposes.
Pending their utilization by the Company, the Company intends to invest the
net proceeds of this Offering in interest-bearing deposit accounts, certificates
of deposit, or similar short-term investment grade financial instruments.
19
<PAGE>
DILUTION
At June 30, 1997, the pro forma negative net tangible book value of the
Company, after giving effect to (i) the issuance after June 30, 1997 of an
aggregate principal amount of $125,000 Senior Notes and 16,667 shares of Common
Stock as part of the Bridge Financing, (ii) the Acquisitions, and (iii) the
Recapitalization, was $(6,695,000), or approximately $(3.07) per share of Common
Stock based on 2,183,067 shares of Common Stock outstanding. The net tangible
book value per share represents the amount of the Company's total assets less
the amount of its intangible assets and liabilities, divided by the number of
shares of Common Stock outstanding. After giving effect to the receipt of net
proceeds from the sale of the Debentures, the shares of Common Stock, and the
Warrants offered hereby at assumed initial public offering prices of 100%, $7.50
per share, and $.10 per Warrant, respectively, and the initial application of
the net proceeds therefrom, the adjusted pro forma combined net tangible book
value of the Company at June 30, 1997, would have been $3,848,000, or
approximately $.92 per share of Common Stock. This would result in dilution to
the public investors of approximately $6.58 per share (or approximately 87.7%).
The following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share of Common
Stock....................................................... $ 7.50
Pro forma negative net tangible book value per share of
Common Stock prior to this Offering....................... $ (3.07)
Increase attributable to new investors.................... 3.99
---------
Pro forma net tangible book value per share of Common Stock
after this Offering......................................... .92
---------
Dilution in pro forma net tangible book value per share of
Common Stock to new investors............................... $ 6.58
---------
---------
</TABLE>
In the event the Underwriters' over-allotment option is exercised in full,
the pro forma net tangible book value as of June 30, 1997 would be $5,555,150,
or $1.24 per share of Common Stock, which would result in immediate dilution in
net tangible book value to new investors of approximately $6.26 per share.
The following table sets forth, on a pro forma basis, as of the date of this
Prospectus, the number of shares of Common Stock purchased, the percentage of
total shares of Common Stock purchased, the total consideration paid, the
percentage of total consideration paid, and the average price per share of
Common Stock paid by the investors in this Offering and the existing
stockholders of the Company:
<TABLE>
<CAPTION>
SHARES OF COMMON
STOCK PURCHASED TOTAL CONSIDERATION AVERAGE
----------------------- -------------------------- PRICE PER
NUMBER PERCENTAGE AMOUNT PERCENTAGE SHARE
---------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing Stockholders............................. 1,702,000 40.7% $ 30,000 * $ 0.01
Initial Affiliated Practices and NBS.............. 481,067 11.5% 3,608,000 19.4% $ 7.50
New Investors(1).................................. 2,000,000 47.8% 15,000,000 80.6% $ 7.50
---------- ----- ------------- -----
Total........................................... 4,183,067 100.0% $ 18,638,000 100.0%
---------- ----- ------------- -----
---------- ----- ------------- -----
</TABLE>
- ------------------------
* Represents less than 1%.
(1) Attributes no value to the Warrants.
20
<PAGE>
CAPITALIZATION
The following table sets forth, at June 30, 1997, the capitalization of the
Company (i) on an actual basis and (ii) on a pro forma, as adjusted basis,
giving effect to (a) the issuance after June 30, 1997 of the aggregate principal
amount of $125,000 Senior Notes and 16,667 shares of Common Stock as part of the
Bridge Financing, (b) the Recapitalization, and (c) the sale of the Debentures,
shares of Common Stock, and the Warrants at the assumed initial public offering
prices of 100%, $7.50 per share, and $.10 per Warrant, respectively, and the
initial application of the net proceeds therefrom, including the consummation of
the Acquisitions. This table should be read in conjunction with the Financial
Statements and Notes thereto appearing elsewhere in this Prospectus. See "Use of
Proceeds" and the Financial Statements and the Notes thereto.
<TABLE>
<CAPTION>
JUNE 30, 1997
-------------------------
<S> <C> <C>
PRO FORMA,
ACTUAL AS ADJUSTED
---------- -------------
Short-term debt........................................................................ $ 310,000 $ --
---------- -------------
---------- -------------
Long-term debt:
Debentures........................................................................... -- 25,000,000
Notes payable--current and long-term................................................. -- 572,000
---------- -------------
Total long-term debt............................................................. -- 25,572,000
---------- -------------
Stockholders' equity:
Preferred Stock--$.01 par value, authorized--
1,000,000 shares; none issued and outstanding...................................... -- --
Common Stock--$.01 par value, authorized--
50,000,000 shares; issued and outstanding
3,031,000 shares, actual and 4,183,067 shares,
pro forma as adjusted.............................................................. 30,000 42,000
Additional paid-in capital........................................................... 245,000 16,479,000
Accumulated earnings (deficit)....................................................... (161,000) (274,000)
---------- -------------
Total stockholders' equity............................................................. 114,000 16,247,000
---------- -------------
Total capitalization................................................................... $ 424,000 $ 41,819,000
---------- -------------
---------- -------------
</TABLE>
21
<PAGE>
DIVIDEND POLICY
The Company has not paid cash dividends on the Common Stock since inception
and does not intend to pay any dividends to its stockholders in the foreseeable
future. The Company currently intends to reinvest earnings, if any, in the
development and expansion of its business. The declaration of dividends in the
future will be at the election of the Board of Directors and will depend upon
the earnings, capital requirements, and financial position of the Company,
general economic conditions, and other pertinent factors.
22
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth selected financial data of the Company for
each of the periods indicated. The selected financial data of the Company for
the period from April 25, 1995 (inception) to December 31, 1995 and the year
ended December 31, 1996 are derived from the Financial Statements of the Company
which have been audited by Feldman Radin & Co., P.C., independent certified
public accountants. The selected financial data for the six month periods ended
June 30, 1996 and 1997 and as of June 30, 1997 were derived from the unaudited
financial statements of the Company. The unaudited financial statements include
all adjustments, consisting of normal recurring accruals, which the Company
considers necessary for a fair presentation of the financial position and the
results of operations for these periods. All of the information set forth below
should be read in conjunction with the Financial Statements of the Company and
related notes thereto appearing elsewhere in this Prospectus.
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
INCEPTION ----------------------------------------------------
(APRIL 25, YEAR ENDED
1995) DECEMBER 31, 1996 1996 1997
THROUGH ------------------------ ------------------------ --------------------------
DECEMBER PRO PRO PRO
31, 1995 ACTUAL FORMA(1) ACTUAL FORMA(1) ACTUAL FORMA(1)
----------- --------- ------------- --------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Medical service revenue............ -- -- $ 17,130,000 -- $ 8,754,000 -- $ 7,962,000
Management fees.................... -- -- -- -- -- 111,000 111,000
Medical billing and service fees... -- -- 1,398,000 -- 576,000 -- 1,101,000
Other revenue...................... -- -- 38,000 -- 48,000 -- 63,000
------------- ------------- -------------
Total revenue.................... -- -- 18,566,000 -- 9,378,000 111,000 9,237,000
Costs and expenses:..................
Salaries and wages................. -- -- 13,294,000 -- 6,624,000 51,000 5,184,000
Medical supplies and expenses...... -- -- 426,000 -- 205,000 -- 239,000
General and administrative
expenses......................... -- 4,000 4,174,000 2,000 2,608,000 78,000 3,390,000
Depreciation and amortization...... 1,000 2,000 1,239,000 1,000 620,000 1,000 620,000
Interest expense................... -- -- 2,020,000 -- 1,010,000 135,000 1,010,000
----------- --------- ------------- --------- ------------- ----------- -------------
Total costs and expenses......... 1,000 6,000 21,153,000 3,000 11,067,000 265,000 10,443,000
Loss before income taxes............. (1,000) (6,000) (2,587,000) (3,000) (1,689,000) (154,000) (1,206,000)
Provision for income taxes........... -- -- -- -- -- -- --
----------- --------- ------------- --------- ------------- ----------- -------------
Net loss............................. $ (1,000) $ (6,000) $ (2,587,000) $ (3,000) $ (1,689,000) $ (154,000) $ (1,206,000)
----------- --------- ------------- --------- ------------- ----------- -------------
----------- --------- ------------- --------- ------------- ----------- -------------
Pro forma net loss per share(2)...... $ (0.62) $ (0.41) $ (0.29)
------------- ------------- -------------
------------- ------------- -------------
Pro forma weighted average number of
shares outstanding(2).............. 4,183,067 4,183,067 4,183,067
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
- ------------------------
(1) The pro forma statement of operations data for the fiscal year ended
December 31, 1996 and for the six months ended June 30, 1996 and 1997 is
presented as if the Acquisitions and the PMI acquisition had occurred on
January 1, 1996. The pro forma balance sheet data for June 30, 1997 is
presented as if the Acquisitions had occurred on June 30, 1997. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation" and Notes to Unaudited Pro Forma Financial Statements."
(2) See Note HH to the Unaudited Pro Forma Statement of Operations Adjustments.
23
<PAGE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, 1997
-------------------- ------------------------
PRO FORMA, AS
1995 1996 ACTUAL ADJUSTED(1)(3)
--------- --------- --------- -------------
<S> <C> <C> <C> <C>
Working capital (deficiency)............................ $ (74,000) $(149,000) $(329,000) $27,249,000
Total assets............................................ 73,000 296,000 545,000 41,933,000
Total liabilities....................................... 74,000 179,000 431,000 25,686,000
Stockholders' equity (deficit).......................... (1,000) 117,000 114,000 16,247,000
</TABLE>
- ------------------------------
(3) Gives effect on a pro forma basis to (i) the issuance after June 30, 1997 of
Senior Notes in the aggregate principal amount of $125,000 and 16,667 shares
of Common Stock as part of the Bridge Financing, and (ii) the
Recapitalization, and as adjusted to reflect the sale of the Securities
offered hereby, assuming initial public offering prices of 100% for the
Debentures, $7.50 per share, and $.10 per Warrant, respectively, and the
initial application of the net proceeds therefrom. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND
UNCERTAINTIES. SEE "RISK FACTORS--RISKS ASSOCIATED WITH FORWARD-LOOKING
STATEMENTS INCLUDED IN THIS PROSPECTUS." ACTUAL EVENTS OR RESULTS MAY DIFFER
MATERIALLY FROM THOSE DISCUSSED IN FORWARD-LOOKING STATEMENTS AS A RESULT OF
VARIOUS FACTORS, INCLUDING, BUT NOT LIMITED TO, THOSE DISCUSSED IN "RISK
FACTORS." THE FOLLOWING DISCUSSION OF THE OPERATIONS AND FINANCIAL CONDITION OF
THE COMPANY SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S AUDITED FINANCIAL
STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS.
GENERAL
The Company was incorporated under the laws of the State of Delaware on
April 25, 1995. The Company's activities to date have consisted primarily of
developing corporate infrastructure, seeking capital to fund operations, seeking
affiliations with physician practices, negotiating acquisitions of certain
assets of such physician practices, and providing consulting services to one of
the Initial Affiliated Practices pursuant to a consulting agreement.
In April 1997, pursuant to a stock purchase agreement, the Company purchased
all of the outstanding capital stock of PMI from Dr. Dennis B. Liotta, the sole
shareholder of PMI, for $2,000. As a result of such transaction, PMI became a
wholly-owned subsidiary of the Company. In addition, the Company entered into an
employment agreement pursuant to which Dr. Liotta agreed to serve as the
Executive Vice President and Chief Operating Officer of the Company.
Simultaneously with the closing of this Offering, the Company intends to
exchange cash in the amount of $7,936,500, notes in the principal amount of
$114,000, 481,067 shares of Common Stock with an approximate value of $3,608,000
(based on an assumed initial public offering price of $7.50 per share), and to
assume liabilities in the amount of $467,324, in return for substantially all of
the assets of NBS and the Initial Affiliated Practices. The Initial Affiliated
Practices are all located in the State of New Jersey and are comprised of the
following entities: Joel Fuhrman, M.D., P.C., D/B/A Amwell Health Center, Bound
Brook Pediatric Associates, P.A., Branchberg Eye Physicians, P.A., Alexander
Kudryk, M.D., Audrey Hinds-McDonald, M.D., P.A., Hunterdon Ophthalmologists,
P.A., Richard M. Weeder, M.D., Felix Salerno, M.D., Kenneth Stern, M.D., P.A.,
Flemington Medical Group, P.A., John E. Durst, M.D., Reliance Medical Group,
P.C., and its affiliate Reliance Healthcare Group, Inc. These acquisitions will
be accounted for as a "purchase" and the excess of the purchase price over the
fair market value of the tangible assets acquired will be designated as
goodwill. Goodwill be amortized over a 20-year period. Substantially all of the
goodwill on the Company's pro forma balance sheet as of June 30, 1997 is related
to the acquisition of the Initial Affiliated Practices and NBS.
Simultaneously with the acquisition of their practice assets, each of the
physicians in the Initial Affiliated Practices will become employed, pursuant to
executed employment agreements, which generally have a term of five years, by a
professional corporation controlled by the Company (the "Affiliated PC"). The
Affiliated PCs are controlled by the Company by virtue of duly executed agency
agreements between the Company and David I. Rosen, M.D., the sole stockholder of
each of the Affiliated PCs. Dr. Rosen is the Vice President for Business
Development and a director of the Company. Pursuant to the agency agreements,
the Company has control over all significant decisions of the Affiliated PCs
except for decisions relating to the practice of medicine. The Company may
direct the sole stockholder with respect to the election of officers and
directors of the Affiliated PCs and may effect a change in the identity of the
sole stockholder in the event of the death, disability, retirement, or
termination of employment of Dr. Rosen. The shares of the common stock of the
Affiliated PCs have been placed in escrow by Dr. Rosen in order to allow for
easy effectuation of any changes in the identity of the sole stockholder.
Effective with the acquisition of the Initial Affiliated Practices, each
Affiliated PC will be subject to a PMSA between the Affiliated PC and the
Company whereby the Affiliated PC agrees to assign all of its accounts
receivable from all of its billings for medical services (essentially all of the
revenue of the Affiliated PC) to the Company as compensation for the services to
be provided by the Company to the
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Affiliated PC. The term of the PMSA generally is 40 years. The PMSA may not be
terminated by the Affiliated PC prior to its expiration date, except for default
by the Company or the bankruptcy of the Company.
Pursuant to the PMSA, the Company is responsible for providing to the
Affiliated PCs clinic and office facilities for the operation of the practice,
medical equipment and supplies required for the practice of medicine, various
management and administrative services, and working capital. Further, the
Company will employ substantially all of the practice's non-physician personnel.
The Company will provide administrative services including facilities
management, the negotiation and procurement of medical malpractice insurance
policies on behalf of the Affiliated Practices, and financial and accounting
services, including budgeting, billing, and third party reimbursement services.
In addition, the Company will provide expertise in the negotiation of managed
care contracts and the management of risk sharing arrangements.
Pursuant to the PMSA, the Company is at risk for, and is responsible for,
payment of all operating expenses of the Affiliated PC, including providing the
Affiliated PC with funds from which it can pay its physician salaries, payroll
taxes, benefits, and other related costs which the Company estimates will be
approximately 40% of the gross revenue of the Affiliated PC. Operating expenses
will consist, in large part, of the expenses incurred by the Company in
fulfilling its obligations under the PMSA. These expenses are the same as the
operating costs and expenses that would have been incurred by the Affiliated
Practice. In addition to these practice operating expenses, the Company will
also incur personnel and administrative expenses in connection with maintaining
a corporate office that provides management, administrative, and marketing
services to the Affiliated PCs. The Company's profitability will depend upon,
among other things, increasing market share, expanding health care services,
enhancing operating efficiencies, and developing favorable contractual
relationships with payors. There can be no assurance that the Affiliated
Practices will generate sufficient revenues to fund the operations of the
Affiliated Practices and the Company or that they will generate sufficient
revenues to fund physician salaries. Consequently, there can be no assurance
that the revenues from the Affiliated Practices will be sufficient to allow the
Company to be profitable. Any loss of revenue from the Affiliated Practices,
including losses from a substantial reduction in the number of physicians
employed by, or affiliated with, the Affiliated Practices or the inability of
the Affiliated Practices to collect fees from their patients and third party
payors, could have a material adverse effect on the Company.
Effective with the commencement of the PMSA, all billing and claim
submission for medical services rendered by the Affiliated PCs will be performed
by NBS, which will become a subsidiary of the Company effective with the closing
of this Offering. The Company intends to purchase and utilize new billing
software. The Company anticipates that the new billing system will cost the
Company approximately $500,000 to fully implement. The Company intends to pay
such costs from a portion of the net proceeds of this Offering. See "Use of
Proceeds." The Company believes that the new software and the personnel and
expertise of NBS will be sufficient to meet the needs of the Affiliated PCs.
Management believes that industry trends toward cost containment and lower
reimbursement rates will continue to result in a reduction in per patient
revenue. Further reductions in reimbursement rates could have an adverse effect
on the Company's operations unless the Company is otherwise able to offset such
payment reductions.
RESULTS OF OPERATIONS
The Company has conducted no significant operations to date and will not
conduct significant operations until the Acquisitions and the Offering are
completed. General and administrative expenses were incurred during the year
ended December 31, 1996 and during the six months ended June 30, 1997 in
connection with this Offering. The Company has incurred and will continue to
incur various legal, accounting, travel, personnel, and marketing costs in
connection with the Acquisitions and the Offering. See "Use of Proceeds."
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LIQUIDITY AND CAPITAL RESOURCES
The Company commenced operations on April 25, 1995 and, as of June 30, 1997,
the Company had a working capital deficiency of approximately $329,000 and an
accumulated deficit of approximately $161,000. The Company has generated limited
revenue since its inception.
Between December 1996 and July 1997, the Company consummated the Bridge
Financing, the gross proceeds of which were $310,000. Such proceeds were used by
the Company to fund the expenses relating to this Offering and other expenses in
connection with the operation of the Company's initial activities. The Bridge
Financing resulted in the issuance of 41,333 shares of Common Stock and Senior
Notes pursuant to which the Company is obligated to pay the aggregate principal
amount of $310,000, plus interest thereon. The Senior Notes bear interest at the
rate of 10% per annum and mature on the earlier of (i) one year from the date of
issuance and (ii) the closing of the Offering. The Company intends to repay the
Senior Notes, plus interest thereon, with a portion of the net proceeds from
this Offering. See "Use of Proceeds."
Wellness Concepts Inc. ("Wellness"), the founding stockholder of the
Company, has advanced $148,000 to the Company since inception. Such amount was
used to fund a portion of the costs of this Offering. As of September 30, 1997,
the balance owed by the Company to Wellness was $129,000, which the Company
intends to repay with a portion of the net proceeds of this Offering. See "Use
of Proceeds" and "Certain Transactions."
Effective April 1, 1997, the Company entered into a one year consulting
agreement with Reliance Medical Group, P.C. ("Reliance"), one of the Initial
Affiliated Practices. Under the terms of the consulting agreement, the Company
provides physician practice management services to Reliance in return for a
fixed monthly compensation of $25,000. Upon consummation of the Offering, the
consulting agreement will be terminated and Reliance will become an Affiliated
Practice.
The Company intends to design, develop, and install in its Affiliated
Practices, a management information system. The Company has estimated that the
total resources needed to fully implement the planned management information
system, including the applications to be utilized by NBS in the billing process,
should approximate $1,650,000. The Company intends to pay such sum from the net
proceeds of the Offering. See "Use of Proceeds." The Company expects to be able
to have its intended management information system fully operational within one
year of the Offering, although there can be no assurance that such system will
be fully operational by such time. Until then, the Company believes that the
information systems currently used by the Affiliated Practices will enable the
Company to provide management services during such transition period. See
"Business--Information System."
The Company anticipates that capital expenditures during the balance of 1997
and in 1998 will relate primarily to affiliations with additional physician
practices. Future acquisitions of physician practices are expected to be
structured similarly to the acquisitions of the Initial Affiliated Practices. It
is anticipated that funding for these purposes will be derived from the net
proceeds of this Offering and cash flow from operations. The Company has
allocated from the estimated net proceeds of this Offering, the sum of
$17,681,000 for payment of future acquisition costs. See "Use of Proceeds."
Based on the Company's operating plan, the Company believes that the net
proceeds of this Offering, and anticipated revenues from operations will be
sufficient to satisfy its capital requirements for at least 12 months following
the date of this Prospectus. There can be no assurance that such resources will
be sufficient to satisfy the Company's capital requirements for said period.
After the 12-month period, the Company may require additional financing in order
to meet its current plans for expansion. Such financing may take the form of the
issuance of common or preferred equity securities or debt securities, or may
involve bank financing. There can be no assurance that the Company will be able
to obtain needed additional capital on a timely basis, on favorable terms, or at
all. Any additional financing could result in dilution of the then-existing
equity positions, increased interest and amortization expense, or decreased
income to fund future expansion. In any of such events, the Company may be
unable to implement its current plans for expansion or to repay its debt
obligations.
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BUSINESS
GENERAL
The Company is a newly established PPMO which is developing an integrated
health care delivery network in selected geographic areas through affiliation
with physician practices. Upon the closing of this Offering, the operations of
the Company will consist of (i) management of the Initial Affiliated Practices,
consisting of 12 medical practices located in New Jersey, (ii) PMI, a
wholly-owned subsidiary of the Company which is engaged in the management of one
IPA which is currently affiliated with approximately 225 physicians in the State
of New Jersey, and (iii) NBS, which is engaged in the management of physician
fee billing, electronic medical records, and utilization information systems for
medical practices. NBS currently manages patient and third party billing
services for 25 medical practices unaffiliated with the Company in Pennsylvania.
The Company's objective is to develop and manage an integrated health care
delivery network comprised of physician practices that provide high quality,
cost-effective care. The Company has focused and intends, at least initially, to
continue to focus, its primary affiliation efforts on physician practices
located in New Jersey, New York, and Pennsylvania. The Company targets
physicians who are committed to the delivery of high quality, cost-effective
care and have a reputation with their patients, peers, and payors for providing
quality medical services and that have the capacity to increase profitability
through improved performance on existing patient bases. When affiliating with a
physician practice, the Company will typically purchase the practice's non-real
estate operating assets and enter into a long-term PMSA with the practice in
exchange for a combination of Common Stock, cash, notes, other securities of the
Company, and/or the assumption of liabilities. Pursuant to the PMSA, the Company
will be responsible for providing the Affiliated Practice with necessary office
facilities, medical equipment, supplies, and medical staff such as nurses,
physician assistants, and clerks, and will plan and manage the activities of the
Affiliated Practice in all respects. The Affiliated Practice will be solely
responsible for the rendering of medical services.
INDUSTRY BACKGROUND
The health care delivery system in the United States has been undergoing
substantial change, largely in response to concerns over the quality and
escalating cost of health care. National expenditures for health care grew from
$250 billion in 1980 to an estimated $1 trillion in 1995. Of the total estimated
1995 expenditures, physicians received approximately $200 billion for their own
services and controlled an additional $600 billion through the referral of
patients for additional care and services provided by others. Concerns over the
accelerating cost of health care have resulted in the increasing prominence of
managed care. The Company believes that traditional physician practices are at a
competitive disadvantage in a managed care environment because they typically
have high operating costs, have little purchasing power with suppliers, and must
spread overhead over a relatively small revenue base. In addition, these
physician practices often have insufficient capital to acquire equipment to
incorporate new technologies and often lack the sophisticated systems necessary
to contract effectively with managed care entities. Physician practices are
increasingly turning to organizations such as the Company to provide the
professional management expertise and capital required to compete in the managed
care environment and otherwise to assist them with the increasingly complex
management of physician practices. The Company believes that this has resulted
in a need for management organizations committed to preserving the professional
autonomy of physician practices and whose economic incentives are aligned with
those of physicians.
As a result of these changes in the marketplace, physicians are increasingly
abandoning traditional private practice in favor of affiliations with larger
organizations, such as PPMOs, which offer skilled and innovative management of
physician practices, sophisticated information systems, and capital resources.
Many payors and their intermediaries, including governmental entities and HMOs,
are increasingly looking to outside providers of physician services to develop
and maintain quality outcomes, management
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programs, and patient care data. In addition, such payors and intermediaries
look to share the risk of providing services through capitation arrangements
which provide for fixed payments for patient care over a specified period of
time.
The Company believes that PPMOs preserve the professional autonomy of
physician groups whose economic incentives are aligned with those of physicians.
Because of the position of primary care physicians in managing the delivery of
healthcare by both providing primary care and controlling patient referrals, the
Company further believes that multi-speciality groups with a substantial primary
care orientation are likely to be best positioned to succeed in the emerging
managed care environment because the specialty groups will be able to refer
patients within the Company's integrated health care delivery network.
STRATEGY
The Company's strategy is to develop and manage an integrated health care
delivery network that provides high quality, cost-effective care. The key
elements of this strategy are as follows:
TARGETING FOR AFFILIATION HIGH QUALITY AND PRODUCTIVE PHYSICIAN
PRACTICES WHICH ARE COMMITTED TO EXPANDING AND PROVIDING COST-EFFECTIVE
CARE. The Company targets physician practices which are committed to the
delivery of high quality, cost-effective care. As a management company, the
Company believes that it has identified, and will affiliate with upon
consummation of this Offering, high quality and growth-oriented physician
practices, which will form the base group of the health care delivery
network to be managed by the Company. The Company's objectives will be
satisfied by continuing to identify and affiliate with additional physician
practices, by coordinating SBUs consisting of Affiliated Practices, by
managing the business and administration of such practices, and by
identifying and negotiating managed care contracts for such practices. Once
it identifies and affiliates with additional practices, the Company will act
solely as a management company. The Company has focused and intends, at
least initially, to continue to focus its primary affiliation efforts on
physician practices located in New Jersey, New York, and Pennsylvania.
INTEGRATING PHYSICIAN PRACTICES INTO COMPANY-COORDINATED SBUS TO PROVIDE
PHYSICIAN AND MEDICAL SUPPORT SERVICES WITHIN SPECIFIC GEOGRAPHIC
REGIONS. The Company intends to organize the Affiliated Practices and any
related medical support services into SBUs. The SBUs will be designed to
provide a comprehensive range of physician and medical support services
within specific geographic regions. The Company believes that its SBU
structure will achieve operating efficiencies and enhance its ability to
secure contracts with managed care organizations. Under the SBU model,
physicians affiliated with the Company will continue to exercise the same
level of clinical autonomy they possessed prior to affiliation with the
Company, while at the same time capitalizing on the advantages of belonging
to a larger organization. Furthermore, the Company believes that such a
model will provide it with greater management control of its health care
delivery network.
CONTRACTING WITH STATE AND LOCAL GOVERNMENTS TO PROVIDE MEDICAL SERVICES
TO ELDERLY AND INDIGENT POPULATIONS. The Company believes that the
increasing cost of health care has begun to, and will in the future, cause
urban governments to subsidize health care services to the elderly and
indigent population. One of the Initial Affiliated Practices has a contract
with the city of Atlantic City, New Jersey, to deliver health care services
to the elderly and indigent. The Company believes that it will be able to
approach and contract directly with other local governments to provide low
cost, comprehensive medical care services, through the Affiliated Practices,
to the elderly and indigent.
ENHANCING THE ABILITY OF THE PHYSICIANS TO FOCUS ON CLINICAL PRACTICE
ISSUES BY RELIEVING THEM OF MOST ADMINISTRATIVE FUNCTIONS. Physicians in
independent practice are required to devote considerable time to process
paperwork for payors, as well as supervising the administration of their
offices. The Company intends to assume most of the administrative functions
of each Affiliated Practice, thereby
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enabling each physician to devote increased time to the provision of medical
care. Furthermore, Affiliated Physicians will participate in utilization and
quality management committees, which will be responsible for focusing on the
assessment and improvement of patient outcomes.
IMPLEMENTING AND UTILIZING AN INFORMATION SYSTEM TO MANAGE PATIENT CARE
AND TO CONTROL COSTS. The Company believes that information technology is
critical to the advancement of a quality health care delivery system. The
Company intends to develop and implement an information system that provides
for the ongoing collection and review of clinical and administrative data in
order to control overhead expenses, maximize reimbursement, and provide
effective utilization management. Furthermore, the Company believes that an
information system will enable the Affiliated Practices to collect and
retrieve clinical data more efficiently. The Company expects to be able to
have its intended management information system fully operational within one
year of the Offering, although there can be no assurance that such system
will be fully operational by such time. Until then, the Company believes
that the information systems currently used by the Affiliated Practices will
enable the Company to provide management services during such transition
period.
COORDINATING PURCHASES OF SUPPLIES, EQUIPMENT, AND SERVICES IN ORDER TO
REALIZE ECONOMIES OF SCALE. The Company believes that economies of scale
inherent in a health care delivery network with centralized billing,
collections, payroll, and accounting services will allow the Company to
reduce operating costs and enable the Company to negotiate quantity
purchasing contracts for supplies, equipment, and services on behalf of the
Affiliated Practices. In addition, the Company believes that a health care
delivery network configuration provides the Company the leverage to
negotiate rates and contract terms with HMOs and other payors more favorable
than the rates and terms that physician groups have historically been able
to obtain independently. Similarly, the Company believes that as a larger
entity it will have more bargaining power and will be able to negotiate more
favorable rates for purchased out-of-network physician services.
DEVELOPING AND ENHANCING IPA SERVICES AND CONTRACTS. The Company
believes that the health care industry will continue to be driven by local
market factors and that organized providers of health care, including IPAs,
will continue to play a significant role in delivering cost-effective,
quality medical care. Physicians affiliated with IPAs often seek additional
practice management services, including billing, staffing, and financial
management services, which the Company believes it can provide on
competitive terms. The Company anticipates that IPA management will be an
additional service that will allow it to enter new markets without initially
having to affiliate with physician practices.
POSITIONING THE COMPANY TO MAXIMIZE MANAGED CARE CONTRACT
OPPORTUNITIES. The complexities of the managed care environment create a
significant administrative burden for physicians. The growth of capitated
reimbursement presents the challenge of projecting costs of care based upon
patient populations, physician treatment patterns, and the specific
requirements of managed care contracts. The Company intends to develop and
utilize a management information system, which will be designed to improve
productivity, manage complex reimbursement methodologies, measure patient
satisfaction and outcomes of care, and integrate information from multiple
sources. This system will enable the Company to manage its risks associated
with managed care since the Company, not the Affiliated PCs, will bear such
risks in the future.
DEVELOPING ANCILLARY SERVICES AND BROADENING THE SPECIALTIES OF THE
COMPANY'S HEALTH CARE DELIVERY NETWORK IN ORDER TO ENHANCE REVENUES AND
PROFITABILITY. The Company may add ancillary services, such as pharmacy,
laboratory testing, radiologic imaging, and medical/surgical specialists
either by acquisition and affiliation or by direct contracting. Including
these services and specialists will enable the Company to deliver more
comprehensive services and intensify its market presence. As of the date of
this Prospectus, the Company has no understanding, commitment, or agreement
with respect to any acquisitions, affiliations, or direct contracting other
than the Acquisitions.
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DEVELOPMENT AND OPERATIONS
The Company has developed a physician practice model based on the formation
of SBUs consisting of physicians situated in the same geographic area. By
forming SBUs, the Company believes that physicians employed by the Affiliated
Practices will continue to exercise the same level of clinical autonomy they
possessed prior to affiliation with the Company, while at the same time
capitalizing on the advantages of belonging to a larger organization, including
the ability to exercise leverage in negotiating with managed care companies.
Furthermore, such a model is designed to provide the Company with greater
management control of its physician network. The Company believes that its SBU
model is replicable and will ultimately permit it to expand its operations
nationwide.
IDENTIFYING POTENTIAL AFFILIATIONS. The Company has focused, and intends,
at least initially, to continue to focus, its primary affiliation efforts on
primary care physician practices located in New Jersey, New York, and
Pennsylvania. The Company intends to expand its efforts to other states and to
specialty medical practices following the affiliation and integration of the
Initial Affiliated Practices. The Company's development goals emphasize the
affiliation of high-profile practices, both primary and specialty care, to meet
the needs of patients and payors, adjusted according to the dynamics of
individual markets.
The Company's success will largely depend upon the quantity and quality of
physician practices that it can attract to affiliate with the Company.
Management believes that the Company will have the financial resources,
experienced personnel, and information systems that will enable it to identify a
significant number of potential affiliates that meet the Company's criteria for
affiliation.
The Company targets markets by considering, among other things, the
following factors: (i) population size and distribution; (ii) physician practice
density, specialty composition, saturation, and average group size; (iii) local
competitors in the physician management business; (iv) level of managed care
penetration; and (v) local industry and economy. The Company focuses on
physicians within such markets who are committed to the delivery of high
quality, cost-effective care and have a reputation with their patients, peers,
and payors for providing quality medical services and that have the capacity to
increase profitability through improved performance on existing patient bases.
Once the Company identifies a potential affiliate, the Company conducts a
comprehensive analysis of the practice, including a thorough financial and
operational review and evaluation of staff, facilities, equipment, and systems.
Initially, an estimate of the current value of the practice is calculated based
on the practice's gross income, net profit, and new treatment contracts written
during the prior twelve months. In addition, current staff are interviewed to
determine their suitability for, and commitment to, the practice, and the
facilities and equipment are reviewed to ensure that they will support a larger
and growing practice without significant additional cost. Finally, the
practice's current systems for starting new patients, reviewing treatment
programs, scheduling, communicating with patients and referral sources,
marketing and controlling expenses, and the cost of upgrading or replacing the
systems, are analyzed.
If the practice satisfies the Company's criteria for affiliation, an offer
is made for the practice to affiliate with the Company. The Company outlines
proposed financial terms of the affiliation, including the Company's valuation
of the practice and the amount of cash, notes, and shares of Common Stock that
the Company proposes to pay to acquire certain assets of the PC associated with
the practice. Once the basic business terms of the affiliation are agreed to,
the parties proceed to execute an asset purchase agreement and/or goodwill
purchase agreement and the related PMSA.
Prior to affiliation with the Company, the medical practices to be acquired
practice medicine through sole proprietorships or through PCs owned by one or
more medical doctors licensed to practice medicine under applicable state law.
In connection with the acquisition of the physician practices by the Company,
the Company will acquire, pursuant to asset purchase agreements and/or goodwill
purchase agreements with the sole proprietorships or PCs, the furniture,
fixtures, medical equipment and supplies, goodwill, and certain other assets of
the practices. The Company will cause to be formed an Affiliated PC, to be owned
by a stockholder and/or officer of the Company, designated by the Board of
Directors, who is also a
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physician. The Affiliated PC will employ the affiliated physicians and will
carry on the practice previously conducted by such physicians. All of the
affiliated physicians will execute employment agreements with the Affiliated PC,
which will have terms of generally three to five years.
Effective with the acquisition of the Initial Affiliated Practices, each
Affiliated PC will be subject to a PMSA between the Affiliated PC and the
Company whereby the Affiliated PC agrees to assign all of its accounts
receivable from all of its billings for medical services (essentially all of the
revenue of the Affiliated PC) to the Company as compensation for the services to
be provided by the Company to the Affiliated PC. The term of the PMSA generally
is 40 years. The PMSA may not be terminated by the Affiliated PC prior to its
expiration date, except for default by the Company or the bankruptcy of the
Company.
Pursuant to the PMSA, the Company is responsible for providing to the
Affiliated PCs clinic and office facilities for the operation of the practice,
medical equipment and supplies required for the practice of medicine, various
management and administrative services, and working capital. Further, the
Company will employ substantially all of the practice's non-physician personnel.
The Company will provide administrative services including facilities
management, the negotiation and procurement of medical malpractice insurance on
behalf of the Affiliated Practices, and financial and accounting services,
including budgeting, billing and third party reimbursement services. In
addition, the Company will provide expertise in the negotiation of managed care
contracts and the management of risk sharing arrangements.
Pursuant to the PMSA, the Company is at risk for, and is responsible for,
payment of all operating expenses of the Affiliated PC, including providing the
Affiliated PC with funds from which it can pay its physician salaries, payroll
taxes, benefits, and other related costs which the Company estimates will be
approximately 40% of the gross revenue of the Affiliated PC. Operating expenses
will consist, in large part, of the expenses incurred by the Company in
fulfilling its obligations under the PMSA. These expenses are the same as the
operating costs and expenses that would have been incurred by the Affiliated
Practice. In addition to these practice operating expenses, the Company will
also incur personnel and administrative expenses in connection with maintaining
a corporate office that provides management, administrative, and marketing
services to the Affiliated PCs. The Company's profitability will depend upon,
among other things, increasing market share, expanding health care services,
enhancing operating efficiencies, and developing favorable contractual
relationships with payors.
OPERATIONS. To meet payor demand for price competitive quality services,
the Company intends to organize the Affiliated Practices into SBUs by utilizing
a market-based approach that incorporates a comprehensive range of physician and
medical support services within specific geographic regions. The Company will
engage in research activities and market analysis to determine the optimal
configuration of each SBU for its particular market.
The Company intends to enhance growth in the Affiliated Practices by adding
to, and expanding, managed care arrangements, assisting in the recruitment of
new physicians and adding services which historically have been performed
outside of the practices. The Company will work closely with the Affiliated
Physicians in targeting and recruiting physicians and in merging sole practices
or single specialty groups into the Affiliated Practices. The Company intends to
assist in the development of new and expanded ancillary services by providing
the needed capital resources and management services. In addition, the Company
intends to recognize and develop opportunities to provide services throughout a
market by positioning the Affiliated Practices in such a way that an entire
market is covered geographically. The Company believes this approach will
improve patient convenience and respond to coverage criteria essential to
payors.
The Company's organizational structure is designed to include physician
representation on the Company's Board of Directors. In addition, the Company and
each SBU will establish a Planning Board consisting of an SBU clinical director,
two physician representatives, and three representatives of the
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Company. The Planning Board's responsibilities include developing long-term
strategic objectives, recommending significant capital expenditures, and
facilitating communication and information exchange between the Company and each
of the SBUs. The representation of the Affiliated Physicians on each Planning
Board ensures that the physicians within each group will retain a significant
voice in the expansion and operation of their group, while benefitting from the
Company's management experience and expertise. As the Company expands, it
intends to establish Planning Boards on a regional level.
The Company's SBUs will consist predominantly of primary care and specialty
physicians organized in a similar configuration as the Initial Affiliated
Practices. The following table sets forth the configuration, consisting of five
initial SBUs, of the Company's Initial Affiliated Practices:
<TABLE>
<CAPTION>
NUMBER OF
LOCATION AFFILIATED PHYSICIANS SPECIALTIES
- ----------------------------------------- ----------------------- -----------------------------------------
<S> <C> <C>
Atlantic City, New Jersey................ 15 Primary Care / OB/GYN
Atlantic City, New Jersey................ 7 Primary Care / Pediatric Medicine
Atlantic City, New Jersey................ 5 Internal Medicine
Atlantic City, New Jersey................ 3 Primary Care
Hunterdon County, New Jersey............. 3 Primary Care
Hunterdon County, New Jersey............. 3 Opthamology
Hunterdon County, New Jersey............. 2 General Surgery
Somerset County, New Jersey.............. 1 Primary Care
Somerset County, New Jersey.............. 1 Primary Care / Pediatric Medicine
Hudson County, New Jersey................ 1 Primary Care
Monmouth County, New Jersey.............. 1 Primary Care
--
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Primary care includes family practice, internal medicine, pediatrics, and
obstetrics/gynecology. Physicians in such practice categories are regarded as
"gatekeepers" for the remainder of the health care industry and, as such, these
physicians generally coordinate patient care from various providers in various
settings to ensure appropriate care and resource utilization. By initially
developing primary care markets, the Company believes it will be able to
subsequently build an integrated comprehensive physician network that includes
specialty care practices, outpatient services, and ancillary services.
In April 1997, the Company acquired 100% of the capital stock of PMI. PMI
has, for the past seven years, been engaged in the business of the management of
IPAs. An IPA is generally composed of a group of geographically diverse
independent physicians who form an association for the purpose of contracting as
a single entity. PMI provides a number of administrative management services to
physician organizations, including, but not limited to, credentialing services,
licensing, group purchasing, managed care contracting, benefits administration,
and practice management. As a subsidiary of the Company, PMI will continue to
offer such services and products to those physician groups which are not yet
willing to be acquired by the Company, but are interested in receiving the
benefits to be derived from an association with a physician practice management
company. By contracting with these physician organizations, the Company believes
it will be able to expand its influence in the physician marketplace and will
have the opportunity to showcase its products and services. The Company believes
that the IPA structure not only increases the purchasing power of the
constituent practices, but also provides a foundation for the development of an
integrated physician network.
Effective upon the consummation of this Offering, the Company will acquire
100% of the capital stock of NBS. NBS has, for the past eleven years, been
engaged in the business of providing comprehensive medical billing and
collection services to physicians and medical practices throughout Pennsylvania.
In so doing, NBS has developed computer systems which streamline the collection
and processing of the data required for the efficient and cost-effective billing
of fees and medical services. Additionally, officials of
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NBS are familiar with the rules, regulations, customs, and practices related to
the often complex and complicated reimbursement procedures utilized by Medicare,
Medicaid, and managed care organizations with respect to payment for physician
services. Subsequent to the consummation of this Offering, the Company believes
it will benefit from this specialized knowledge and experience as it intends to
install the NBS billing and collection practices in each of the Affiliated
Practices. In addition, the Company believes that NBS's current customers, which
are currently unaffiliated with the Company, will provide it with a pool of
prospective acquisitions as well as an outlet for additional third party
management services offered by the Company.
MANAGEMENT AND ADMINISTRATION SERVICES. Upon affiliation with a physician
practice, the Company intends to assume most administrative functions of each
practice, including billing, collections, accounts payable, payroll, human
resources, purchasing, lease administration, property management, and
telecommunications, thereby enabling each physician to devote increased time to
the provision of medical care. Furthermore, Affiliated Physicians will
participate in utilization and quality management committees, which will be
responsible for focusing on the assessment and improvement of patient outcomes.
The Company anticipates that the Affiliated Physicians will be an integral part
of the ongoing evaluation and monitoring of medical care. As a result, the
Company anticipates that each Affiliated Practice will benefit from increased
efficiency and economies of scale.
The Company intends to provide medical management services to the Affiliated
Practices. These services will include:
UTILIZATION MANAGEMENT. Utilization management services have been designed
to be peer-to-peer. This means that the Affiliated Physicians within each SBU
will be responsible for reviewing and advising one another on how to better
manage operations and mitigate costs. Utilization management services will
encourage the Affiliated Physicians to provide cost-effective care to their
patients that emphasizes (i) disease prevention and (ii) the elimination of
unnecessary tests, procedures, hospitalizations, surgeries, and referrals to
specialty care physicians. In addition, the Company intends to design and
implement a management information system to enable the Company and the
Affiliated Practices to correct coding errors, which are typically made by
individual and small group practices, which the Company believes may result in
improved revenues. Additionally, regular chart reviews and billing audits will
allow the Company to do its own pre-loss risk management to prevent malpractice
claims.
CASE MANAGEMENT. The Company intends to utilize its management services to
advise the Affiliated Practices with respect to workers' compensation and
personal injury evaluation and treatment on an as needed basis. The Company's
management services will be comprised of both a clinical and an administrative
process by which health care services are identified, coordinated, implemented,
and evaluated on an ongoing basis for patients experiencing certain health
problems, particularly those that require longer-term treatment. In both the
workers' compensation and personal injury areas, the Company believes that the
case management approach will provide the Affiliated Practices with guidance,
prevent costly litigation, and allow for a continuum of care over an extended
treatment period. The Company believes that the success of these services with
the Affiliated Practices could lead to the future development of a similar
service to practices unaffiliated with the Company.
QUALITY ASSURANCE. The Company intends to implement programs that provide
both physicians and payors with quality assurance information on a regular
reporting basis. These programs include physician peer review, patient
satisfaction surveys, medical records auditing, and continuing
education/development for medical staff as required by accrediting
organizations, state law, and licensing requirements.
PHYSICIAN CREDENTIALING. The Company intends to maintain, and comply with,
the credentialing standards established by national accreditation bodies for
each of the Affiliated Physicians, without exception. The credentialing process
is an important part of any managed care contracting arrangement. The
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Company intends to comply with the standards of the National Committee on
Quality Assurance ("NCQA") and the Joint Commission on Accreditation of Health
Care Organizations.
ANCILLARY SERVICES. The Company intends to add ancillary services, such as
laboratory testing, pharmacy, imaging, and medical/surgical specialists to its
SBUs, on a SBU-by-SBU basis determined based on need, either by acquisition and
affiliation or by direct contracting. The Company believes that including these
services and specialists will enable the Company to deliver more comprehensive
services, which will increase its bargaining power with managed care companies
and payors and intensify its market presence. Management will rely on each SBU
to identify the need for services and medical/surgical specialities which will
augment its ability to deliver comprehensive health care.
MANAGED CARE
The Company intends to undertake the identification, evaluation, and
negotiation of managed care contracts on behalf of the Affiliated Practices.
Upon a physician practice's affiliation, the Company will begin managed care
contracting activities designed to increase the practice's revenues and market
share, including determining the value of existing third party relationships,
identifying desirable managed care contracts and network affiliations, and
identifying practice strengths and weaknesses with respect to managed care
contracting strategies, including: (i) practice-specific contracting designed to
increase access to managed care patients; (ii) development of global-priced
products which establish a single price for all the medical costs of a
designated procedure; (iii) specialty carve-outs and single specialty networks,
such as orthopedics, ophthalmology, and obstetrics/gynecology, that serve as
exclusive providers for managed care plans; and (iv) full-risk capitation by
contracting with a third party payor to provide all physician services and, in
some cases, hospital and other facility services for a fixed price. In addition,
the Company intends to "share" risk with licensed insurers, such as HMOs, under
the managed care contracts. By forming SBUs, the Company believes that it will
be well positioned to assist the Affiliated Physicians in gaining additional
market share, growing practice revenues, and efficiently managing practice
costs.
INFORMATION SYSTEM
The Company believes that information technology is essential to the
advancement of a quality health care delivery network. When a physician practice
becomes affiliated with the Company, the Company will evaluate the
administrative and clinical operation of the practice and reengineer the
practice to operate within the Company's information system. The Company intends
to implement a system that provides for the ongoing collection and review of
clinical and administrative data in order to control overhead expenses, maximize
reimbursement, and provide effective utilization management. In addition, the
Company intends to install a standardized system and set of procedures within
each Affiliated Practice. Furthermore, the Company believes that an information
system will enable the Affiliated Practices to collect and retrieve clinical
data more efficiently.
The Company believes that information collection, dissemination, analysis,
and management is a key to enabling the Company to compete in the managed care
marketplace. The Company has designed, and is in the process of purchasing the
hardware and software required to operate, a multi-layered, user-friendly,
comprehensive information system. The electronic medical record system which the
Company intends to purchase and install will enable the Affiliated Practices to
store all patient records in a central data bank allowing physicians "real time"
access to patient histories and orders. The physicians will record clinical and
billing information directly into the computer, using point and click
methodology, eliminating redundant work and inconsistencies in recording data.
This will improve the accuracy of the billing process while reducing back office
costs. In addition, the centralized collection of information in a relational
data base will enable the Company to measure, in specific geographic areas,
frequencies of illness and disease, treatment plans and protocols utilized, and
outcomes and results. The Company believes that this data will be a valuable
resource for managed care companies in their quest to control costs and improve
utilization and will provide both the Company and the managed care payor with
reliable statistics for use in managing
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risks, evaluating contracts, and improving processes. Another application within
the information system will automate patient registration, patient/physician
scheduling, insurance eligibility, and transmission of claims. The Company
believes that such processes improve efficiency, significantly reduce human
error, and reduce administrative costs.
The Company has estimated that the total resources needed to fully implement
the planned management information system, including the applications to be
utilized by NBS in the billing process, should approximate $1,650,000. The
Company intends to pay such sum from the net proceeds of the Offering. See "Use
of Proceeds." The Company expects to be able to have its intended management
information system fully operational within one year of the Offering. Until
then, the Company believes that the information systems currently used by the
Affiliated Practices will enable the Company to provide management services
during such transition period.
AFFILIATION STRUCTURE
The Company utilizes an affiliation structure that aligns the interests of
the Company with those of its physicians. Moreover, the affiliation structure is
designed to allow each Affiliated Practice to retain professional autonomy and
control over its medical practices through continued governance of its
professional corporation or similar organization.
Prior to affiliation with the Company, the medical practices to be acquired
practice medicine through sole proprietorships or through PCs owned by one or
more medical doctors licensed to practice medicine under applicable state law.
When a medical practice has agreed to affiliate with the Company, the Company
purchases the practice's non-real estate operating assets and assumes certain of
its liabilities, and the practice enters into a long-term PMSA with the Company
in exchange for a combination of Common Stock, cash, notes, other securities of
the Company, and/or the assumption of certain liabilities. The Company has
utilized as partial consideration for the Acquisitions, and intends to continue
to utilize, Common Stock in payment of a significant portion of its
consideration for Affiliated Practices.
The PMSAs provide that the physicians are responsible for the provision of
all medical services and the Company is responsible solely for the management of
the operations of all other aspects of the Affiliated Practice. The Company will
provide the physician practice with the facilities, equipment, and supplies used
in the medical practice, employ substantially all of the non-physician personnel
utilized by the practice, except those whose services are directly related to
the provision of medical care, and assume certain of the liabilities of the
physician practice.
The Company's PMSAs are generally for a term of 40 years and generally
cannot be terminated by either party without cause, which consists primarily of
bankruptcy or material default.
Under the terms of the PMSAs, the Affiliated Practices will assign all of
their revenue to the Company in return for the services and expertise provided
to the Affiliated Practices by the Company and for the assumption by the Company
of all of the overhead costs of the practice. The Company, in turn, will return
to the Affiliated Practices such sums, estimated to be approximately 40% of
revenues, as shall be required to pay physician compensation, taxes, benefits
and personal expenses. Each Affiliated Physician will provide medical services
to the Affiliated Practices pursuant to the terms of an employment agreement,
generally three to five years in duration, by which the physician earns a base
salary and can earn additional incentive compensation based upon the
profitability of the practice with which the physician is assigned. The
employment contract provides for the repayment to the Company of all or a
portion of the physician's share of the consideration paid by the Company for
the practice's non-real estate operating assets in the event of the physician's
breach of the contract. This relationship offers the physician an opportunity to
maintain a level of compensation equal to that which the physician earned prior
to the affiliation, while giving the practice access to capital, managment
expertise, information systems, and managed care contracts. Each Affiliated
Practice also enters into an agreement not to compete with the Company, and
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each physician within the group enters into an agreement not to compete with the
Affiliated Practice during the period of his or her employment and for a period
of time thereafter, typically two years.
COMPETITION
The physician practice management industry is highly competitive. The
Company is subject to significant competition both in affiliating with physician
practices and in seeking managed care contracts on behalf of the Affiliated
Practices. Its competitors include hospitals, managed care organizations, and
other PPMOs. In comparison with the Company, many of its competitors are larger
and have substantially greater resources, provide a wider variety of services,
and have longer established relationships with purchasers of such services. The
Company intends to compete in such market by focusing on the quality of service
of its Affiliated Practices and believes its affiliation selection process, the
skills and experience of its management and personnel, and its medical
information system will all be important competitive factors. There can be no
assurance, however, that the Company will be able to compete effectively, that
additional competitors will not enter the market, or that such competition will
not make it more difficult to enter into affiliations with physician practices
on terms beneficial to the Company.
The Company also experiences competition in the recruitment and retention of
qualified physicians and other health care professionals on behalf of the
Affiliated Practices. There can be no assurance that the Company will be able to
recruit or retain a sufficient number of qualified physicians and other health
care professionals to expand its operations.
THIRD PARTY REIMBURSEMENT
The Company's ability to collect fees in a timely manner, or at all, is
affected by whether the Affiliated Practices are reimbursed for their medical
services and the amount of reimbursement. Substantially all of the revenue of
the Affiliated Practices, on which the Company's revenue will be dependent, will
derive from commercial health insurance, state workers' compensation programs,
and other third party payors. All of these providers and programs are regulated
at the state or federal level. There are increasing and significant public and
private sector pressures to contain health care costs and to restrict
reimbursement rates for medical services. For example, it has been reported that
the Medicare program is expected to experience a deficiency of funds early in
the next century. Accordingly, Congress, in its fiscal year 1997 budget
legislation, called for, and considered, severe reductions in both the Medicare
and Medicaid programs. Several states have taken measures to reduce the
reimbursement rates paid to health care providers in their states. The Company
believes that additional states will implement reductions from time to time.
Reductions in Medicare and Medicaid rates often lead to reductions in the
reimbursement rates of other third party payors as well. Thus, changes in the
level of support by federal and state governments of health care services, the
methods by which health care services may be delivered, and the prices of such
services may all have a material impact on the revenue of the Company, which in
turn could have a material adverse effect on the Company.
Third party payors may disagree with the description or coding of a bill for
medical services, or may contest a description or code under a lesser fee
schedule depending on the medical services rendered. Such disagreements on the
description of professional services or bill coding, particularly where the
third-party payor is a federal or state funded health care program, could result
in lesser reimbursement, which could have a material adverse effect on the
Company. Persistent disagreements or alleged "upcoding" could result in
allegations of fraud or false billing, both of which constitute felonies. Such
an allegation, if proven, could result in forfeitures of payment, civil money
penalties, civil fines, suspensions, or exclusion from participation in federal
or state funded health care programs, and could have a material adverse effect
on the Company. Investigation and prosecution for fraudulent or false billing
could have a material adverse effect on the Company, even if such allegations
were disproven.
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The Company's income may be materially adversely affected by the
uncollectibility of medical fees from third party payors or by delay in the
submission of claims. Additionally, there may be long collection cycles for such
receivables. Many third party payors, particularly insurance carriers covering
automobile no-fault and workers' compensation claims refuse, as a matter of
business practice, to pay claims unless submitted to arbitration. Further, third
party payors may reject medical claims if, in their judgment, the procedures
performed were not medically necessary or if the charges exceed such payor's
allowable fee standards. In addition, some receivables may not be collected
because of omissions or errors in timely completion of the required claim forms.
This does not mean that such claims will not ultimately be paid. The Affiliated
Practices normally would resubmit the claim with such revisions as requested
and/or forms and documentation. Outstanding claims that continue to be disputed
after one year or more could then be submitted to an arbitration process. Often,
when final arbitration decisions are about to be rendered, the third party payor
will settle. Although the Company will take all legally available steps to
collect receivables on behalf of the Affiliated Practices, there is a
significant risk that the Affiliated Practice receivables may not be collected,
which could materially adversely affect the Company.
GOVERNMENT REGULATION
As a participant in the health care industry, the Company's operations and
relationships are subject to extensive and increasing regulation by a number of
governmental entities at the federal, state, and local levels. The Company is
also subject to laws and regulations relating to business corporations in
general. The Company believes its operations and the operations of the Initial
Affiliated Practices and NBS are currently, and will continue to be, in material
compliance with all applicable laws. Nevertheless, because of the structure of
the intended relationship with the Affiliated Practices, many aspects of the
Company's business operations have not been the subject of state or federal
regulatory interpretation and there can be no assurance that a review of the
Company's or the Affiliated Practices by courts or regulatory authorities will
not result in a determination that could adversely affect the operations of the
Company or the Affiliated Practices.
A significant portion of the revenues of the Affiliated Practices will be
derived from payments made by government sponsored health care programs
principally Medicare and Medicaid. As a result, any change in reimbursement
regulations, policies, practices, interpretations, or statutes could adversely
affect the future operations of the Company. The federal Medicare program has
adopted a system of reimbursement for physician services, known as the resource
based relative value scale schedule ("RBRVS"). The Company expects that the
RBRVS fee schedule and other future changes in Medicare reimbursement will
result in a reduction in the Medicare revenue received by certain Affiliated
Practices. However, the Company does not believe such reductions will adversely
affect the Company's projected operating results.
Certain provisions of the Social Security Act, commonly referred to as the
"Anti-kickback Statute," prohibit the offer, payment, solicitation, or receipt
of any form of remuneration in return for the recommendation, arrangement,
purchase, lease, or order of items or services that are covered by Medicare or
state health programs. The Anti-kickback Statute is broad in scope and has been
broadly interpreted by courts in many jurisdictions. Read literally, the statute
places at risk many legitimate business arrangements, potentially subjecting
such arrangements to lengthy, expensive investigations and prosecutions
initiated by federal and state governmental officials. Many states have adopted
similar prohibitions against payments intended to induce referrals of Medicaid
and other third party payor patients. The Company believes that although it will
receive remuneration under the PMSAs for management services, it is not in a
position to make or influence the referral of patients or services reimbursed
under government programs to the physician groups and, therefore, believes that
it will not violate the Anti-kickback Statute. The Company will also not be a
separate provider of Medicare or state health program reimbursed services. To
the extent the Company is deemed to be either a referral source or a separate
provider under the PMSAs the financial provisions of these agreements could be
subject to scrutiny and prosecution under the Anti-kickback Statute. Violation
of the Anti-kickback Statute is a felony punishable by fines up to $25,000 per
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violation and imprisonment for up to five years. In addition, the Department of
Health and Human Services may impose civil penalties and may exclude violators
from participation in Medicare or state health programs.
In July 1991, in part to address concerns regarding the Anti-kickback
Statute, the federal government published regulations that provide exceptions,
or "safe harbors," for transactions that will be deemed not to violate the Anti-
kickback Statute. Among the safe harbors included in the regulations were
provisions relating to the sale of practitioner practices, management and
personal service agreements, and employee relationships. Additional safe harbors
were published in September 1993 offering new protections under the
Anti-kickback Statute to eight activities, including referrals within group
practices. Proposed amendments to clarify these safe harbors were published in
July 1994 which, if adopted, would cause substantive retroactive changes to the
1991 regulations. Although the Company believes that it will not be in violation
of the Anti-kickback Statute, its operations may not fit within any of the
existing or proposed safe harbors.
Significant prohibitions against physician referrals were enacted by
Congress in the Omnibus Budget Reconciliation Act of 1993. These prohibitions,
commonly known as "Stark II," amended prior physician self-referral legislation
known as "Stark I" by dramatically enlarging the field of physician-owned or
physician interested entities to which the referral prohibitions apply.
Effective January 1, 1995, Stark II prohibits, subject to certain exemptions, a
physician or a member of his immediate family from referring Medicare or
Medicaid patients to an entity providing "designated health services" in which
the physician has an ownership or investment interest, or with which the
physician has entered into a compensation arrangement, including the physician's
own group practice. The designated health services include radiology and other
diagnostic services, radiation therapy services, physical and occupational
therapy services, durable medical equipment, parenteral and enteral nutrients,
equipment, and supplies, orthotic and prosthetic devices and supplies,
outpatient prescription drugs, home health services, and inpatient and
outpatient hospital services. The penalties for violating Stark II include a
prohibition on payment by these government programs and civil penalties of as
much as $15,000 for each violative referral and $100,000 for participation in a
"circumvention scheme." The Company believes that its activities, as structured,
will not be in violation of Stark I or Stark II. While the Company believes it
will be in compliance with the Stark legislation, future regulations could
require the Company to modify the form of its relationships with physician
groups. Moreover, the violation of Stark I or II by the Affiliated Practices
could result in significant fines and loss of reimbursement which would
adversely affect the Company.
Because the Affiliated Practices will remain separate legal entities, they
may be deemed competitors subject to a range of antitrust laws which prohibit
anti-competitive conduct, including price fixing, concerted refusals to deal and
division of market. The Company intends to comply with such state and federal
laws as may affect its development of an integrated health care delivery
network, but there is no assurance that a review of the Company's business by
courts or regulatory authorities will not result in a determination that could
adversely affect the operation of the Company and the Affiliated Practices.
There are also state and federal civil and criminal statutes imposing
substantial penalties, including civil and criminal fines and imprisonment, on
health care providers which fraudulently or wrongfully bill governmental or
other third party payors for health care services. The federal law prohibiting
false billings allows a private person to bring a civil action in the name of
the United States government for violations of the law's provisions. Recent
actions of Congress, including the Health Insurance Portability and
Accountability Act of 1996 and the Balanced Budget Act of 1997, have expanded
the coverage of fraud and abuse provisions, enhanced the enforcement efforts of
the federal government in pursuing fraud and abuse, and have increased the
penalties related to violations of the various fraud and abuse provisions. The
Company believes that it will be in material compliance with such laws, but
there is no assurance that the Company's activities will not be challenged or
scrutinized by governmental authorities. Moreover, technical Medicare and other
reimbursement rules affect the structure of physician billing arrangements. The
Company believes that it will be in material compliance with such regulations,
but regulatory authorities may differ.
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In such event the Company may have to modify its relationship with the
Affiliated Practices. Noncompliance with such regulations may adversely affect
the operations of the Company and subject it and certain Affiliated Practices to
penalties and additional costs.
Every state imposes licensing requirements on individual physicians and on
certain other health care providers and facilities. Many states require
regulatory approval, including licensing to render care or certificates of need
before establishing certain types of health care services which entail the
acquisition of expensive medical equipment or facilities. While the performance
of management services on behalf of a medical practice does not currently
require any regulatory approval, there can be no assurance that such activities
will not be subject to licensure in the future.
The laws of many states, including New York, New Jersey, and Pennsylvania,
prohibit business corporations such as the Company from practicing medicine and
employing physicians to practice medicine. The Company will perform only
non-medical administrative service, will not represent to the public or its
clients that it offers medical services, and will not exercise influence or
control over the practice of medicine by the physicians with whom it affiliates.
Accordingly, the Company believes that it will not be in violation of any state
laws relating to the practice of medicine. The laws in most states regarding the
corporate practice of medicine have been subjected to limited judicial and
regulatory interpretation and, therefore, no assurances can be given that the
Company's activities will be found to be in compliance, if challenged. In
addition to prohibiting the practice of medicine, numerous states prohibit
entities like the Company from engaging in certain health care related
activities such as fee-splitting with physicians. The Company believes it is
likely that more states will adapt similar legislation. Accordingly, expansion
of the operations of the Company to certain jurisdictions may lead to structural
and organizational modifications in the Company's form of contractural
relationships with physician practices. Such changes, if any, could have an
adverse effect on the Company. Further, there can be no assurance that the
Company's arrangements with the Affiliated Practices will not be successfully
challenged as constituting the unauthorized practice of medicine.
Following is a brief summary of the laws of the states in which the Company
intends to initially focus its operations:
NEW YORK
New York's prohibition against the corporate practice of medicine prohibits,
with several exceptions, any corporation from engaging in the practice of
medicine. Among the recognized exceptions, physicians may practice medicine
through partnerships, professional corporations, professional service limited
liability companies, and registered limited liability partnerships. Violations
of the corporate practice of medicine in New York often involve "fee splitting"
issues as well. Under New York State law, physicians are prohibited from sharing
revenues received in connection with the furnishing of medical care, other than
with a partner, employee, associate in a professional corporation, subcontractor
or physician consultant. Unlike the practice in other states, management service
organizations in New York State may not manage a physician's practice in return
for a percentage of patient revenues as a result of New York's fee-splitting
rules. Accordingly,, management service contracts are generally based on an
alternative compensation arrangement including "cost plus" arrangements or
fair-market compensation agreed to in advance by the parties. The Company
currently has no New York practices under agreement for acquisition. If the
Company commences operations in New York, any PMSA entered into will be based on
one of the alternative compensation arrangements permissible in New York.
NEW JERSEY
The rule against the corporate practice of medicine is not expressly stated
in the Medical Practice Act. The Medical Practice Act, however, grants the State
Board of Medical Examiners rule making powers. The Board of Medical Examiners
has adopted regulations which specifically prescribe "acceptable professional
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practice forms" for those professionals licensed by the Board. The physicians
are to be employed by "Professional Associations" which qualify as an acceptable
practice form. Unlike New York there is no "fee-splitting" prohibition and the
Company believes that its PMSA fee structure is acceptable in New Jersey.
PENNSYLVANIA
The rule is generally recognized that a licensed practitioner of a
profession may not lawfully practice his profession among the public as the
servant of an unlicensed person or a corporation; and that, if he does so, the
unlicensed person or corporation employing him is guilty of practicing that
profession without a license. Practice in a professional corporation is an
exception to this rule. The Company believes that the structure utilized in New
Jersey is acceptable in Pennsylvania.
Laws in all states regulate the business of insurance and the operation of
HMOs. Many states also regulate the establishment and operation of networks of
health care providers. Many state insurance commissioners have interpreted their
states' insurance statutes to prohibit entities from entering into risk-based
managed care contracts unless there is an entity licensed to engage in the
business of insurance, such as an HMO, in the chain of contracts. An entity not
licensed to engage in the business of insurance that contracts directly with a
self-insured employer in such a state may be deemed to be engaged in the
unlicensed business of insurance. While these laws do not generally apply to the
hiring and contracting of physicians by other health care providers, there can
be no assurance that regulatory authorities of the states in which the Company
operates would not apply these laws to require licensure of the Company's
operations as an insurer, as an HMO or as a provider network. The Company
believes that it will be in compliance with these laws in the states in which it
does business, but there can be no assurance that future interpretations of
insurance laws and health care network laws by the regulatory authorities in
these states or in the states into which the Company may expand will not require
licensure or a restructuring of some or all of the Company's operations.
In addition to current regulation, the Clinton Administration and several
members of Congress have proposed legislation for comprehensive reforms
affecting the payment for, and availability of, health care services. Aspects of
certain of these health care proposals, such as reductions in Medicare and
Medicaid payments, if adopted, could adversely affect the Company. Other aspects
of such proposals, such as universal health insurance coverage and coverage of
certain previously uncovered services, could have a positive impact on the
Company's business. It is not possible at this time to predict what, if any,
reforms will be adopted by Congress or state legislatures, or when such reforms
will be adopted and implemented.
As health care reform progresses, and the regulatory environment
accommodates reform, it is likely that changes in state and federal regulations
will necessitate modifications to the Company's agreements and/or operations.
While the Company believes that it will be able to restructure in accordance
with applicable laws and regulations, the Company cannot be certain that such
restructuring will be possible or profitable in all circumstances.
EMPLOYEES
At June 30, 1997, the Company had seven employees consisting of four
executive officers, the general counsel to the Company, and two employees of
PMI.
PROFESSIONAL LIABILITY INSURANCE
In recent years, physicians, hospitals, and other participants in the health
care industry have become subject to an increasing number of lawsuits alleging
medical malpractice and related legal theories. Many of these lawsuits involve
large claims and substantial defense costs. The Company does not engage in the
practice of medicine or provide medical services, nor does it control the
practice of medicine by the Affiliated Practices or the compliance with
regulatory and other requirements directly applicable to the
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<PAGE>
Affiliated Physicians and Affiliated Practices. Although the Company has not
been a party to any litigation relating to the practice of medicine, there can
be no assurance that the Company will not become involved in such litigation in
the future.
The PMSAs will require the Affiliated Practices to maintain, at their
expense, professional liability insurance for themselves and each physician
employed by or otherwise providing medical services for the Affiliated Practices
in the minimum amount of $1,000,000 per occurrence and $3,000,000 in the
aggregate. In addition, each Affiliated Practice will undertake to comply with
all applicable regulations and requirements, and the Company will be indemnified
under the PMSA for claims against the Company arising in connection with actions
by the Affiliated Practices. The Company has applied for general liability
insurance for itself and intends to require that it be named as an additional
insured party on the professional liability insurance policies of the Affiliated
Practices pursuant to the PMSA. In addition, the Company will maintain liability
insurance on its non-physician professional employees, such as nurses and
midwives.
There can be no assurance that the Company, its employees, the Affiliated
Practices, or the Affiliated Physicians will not be subject to claims in amounts
that exceed the coverage limits or that such coverage will be available when
needed. Further, there can be no assurance that professional liability or other
insurance will continue to be available to the Affiliated Practices in the
future at adequate levels, at an acceptable cost, or at all. A successful claim
against the Company or an Affiliated Practice in excess of the relevant
insurance coverage could have a material adverse effect upon the Company. Claims
against the Company or an Affiliated Practice, regardless of the merits or
eventual outcomes, may also have a material adverse effect on the Company.
PROPERTIES
The Company has assumed the lease of PMI, which covers approximately 2,400
square feet, at $29,792 per annum, at 615 Hope Road, Eatontown, New Jersey.
Prior to the consummation of this Offering, the Company has been conducting its
administration and marketing operations at the offices of Wellness Concepts,
Inc., at 2644 Bristol Road, Warrington, Pennsylvania 18976. After this Offering,
the Company intends to use both the Hope Road and Bristol Road facilities as its
principal places of business. Upon consummation of the Acquisitions, the Company
will lease approximately 17 medical practice facilities of the Affiliated
Practices in the form of either a sublease of facilities being leased by the PCs
or entering into a lease agreement with the sole practitioners who own their
facilities. The annual rent payments of such medical facilities are estimated to
aggregate approximately $725,000 . In addition, upon the consummation of the
Acquisitions, the Company will acquire, as part of the Acquisitions, a medical
practice facility currently owned by Reliance, at 3407 Atlantic Avenue, Atlantic
City, New Jersey.
LEGAL PROCEEDINGS
There are no material lawsuits pending, or to the Company's knowledge,
threatened against the Company.
42
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the members of
the Board of Directors and executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE TITLE
- ----------------------------------- --- -----------------------------------------------------------------------
<S> <C> <C>
Scott G. Pollock(1)................ 36 President, Chief Executive Officer, Chief Financial Officer and a
Director
Dennis B. Liotta, M.D.............. 43 Executive Vice President, Chief Operating Officer and a Director
Peter Heisen, M.D.(1).............. 54 Vice President, Chief Medical Officer and a Director
David I. Rosen, M.D................ 59 Vice President for Business Development and a Director
Joseph F. Murray................... 41 Secretary and a Director
Walter B. Dunsmore................. 50 Corporate General Counsel and a Director
James M. Foulke.................... 41 Director
Randall K. Sprau(2)................ 50 Consultant
</TABLE>
- ------------------------
(1) Effective upon the consummation of this Offering, Mr. Pollock will resign
his position as President of the Company. At such time the office of
President will be assumed by Dr. Heisen.
(2) Effective upon the consummation of this Offering, Mr. Sprau will become a
Vice President and the Chief Information Officer of the Company.
Each director is elected for a period of one year at the Company's annual
meeting of stockholders and serves until the next annual meeting and until his
successor is duly elected and qualified. Officers of the Company are elected by,
and serve at the discretion of, the Board of Directors.
Set forth below is a brief summary of the background of each director,
executive officer, and key employee of the Company.
SCOTT G. POLLOCK is a co-founder of the Company, has served as the President
and Chief Executive Officer of the Company since August 1, 1996 and has served
as a Director and Chief Financial Officer of the Company since April 1995. Since
January 1, 1994, Mr. Pollock has served as Chief Financial Officer of Wellness
Concepts, Inc. ("Wellness"), an owner and manager of long-term care facilities
and other health care related ventures. Effective upon the consummation of this
Offering, Mr. Pollock will resign from his position with Wellness. From 1986
through December, 1993, Mr. Pollock was a Director and Senior Manager at
Zelenofske, Axelrod & Co., Ltd., a regional health care consulting and certified
public accounting firm. Mr. Pollock received a Bachelor of Science degree in
accounting from Indiana University of Pennsylvania and is a member of the
American Institute of Certified Public Accountants.
DENNIS B. LIOTTA, M.D., is a co-founder of the Company and has served as the
Executive Vice President, Chief Operating Officer and a Director of the Company
since April 1995. Since 1990, Dr. Liotta has served as President of PMI, a
health care marketing and management firm. In 1986, Dr. Liotta founded, and from
1986 through 1990, served as President of ProHEALTH, a care organization in New
Jersey that specifically addressed work-related injuries and illnesses. From
1985 through 1990, Dr. Liotta maintained a private internal medicine practice.
Dr. Liotta received his medical training at Northeastern University, completed
his residency in internal medicine at Monmouth Medical Center in New Jersey, and
received an MBA from Rutgers University.
43
<PAGE>
PETER R. HEISEN, M.D. will, upon the consummation of this Offering, become
President and Chief Medical Officer of the Company. Since 1993, Dr. Heisen has
been a principal with William M. Mercer, Inc., a national health care consulting
firm, and has worked on a number of projects helping clients design, operate,
and build health care delivery systems. From May 1991 through September 1992,
Dr. Heisen was Medical Director of PruCare of New Jersey ("PruCare"), a
state-wide managed care insurance plan serving more than 250,000 subscribers
through affiliations with 3,000 physicians and 42 hospitals. From 1986 through
1991, Dr. Heisen served as the Associate Medical Director at PruCare. From 1971
through 1991, Dr. Heisen engaged in the private practice of medicine,
specializing in internal medicine and infectious disease. Dr. Heisen received
his medical degree from the University of Pennsylvania and has an undergraduate
degree in mathematics from Swarthmore College. Dr. Heisen is a Diplomate of the
American Board of Internal Medicine and the National Board of Medical Examiners.
DAVID I. ROSEN, M.D. has served as Vice President for Business Development
and a Director of the Company since April 1995. Dr. Rosen is also a co-founder
of the Company. From 1978 to June 1996, Dr. Rosen was the managing partner of
Hunterdon Urological Associates, a New Jersey urological practice. Since 1989,
Dr. Rosen has also been a general partner of a licensed 68-bed long-term and
subacute care facility in Hunterdon County. Dr. Rosen is a board certified
urologist who graduated cum laude with a Bachelor of Arts degree from Brooklyn
College. He received his medical degree, with honors, from State University of
New York at Syracuse School of Medicine. Following three years in the U.S. Navy
(Lt. M.C.), he completed his post graduate medical education in urology at
Stanford University.
JOSEPH F. MURRAY has served as Secretary, and a Director of the Company
since April 1995. Since 1986, Mr. Murray has served, and currently serves, as
Vice President and General Counsel of Wellness. Following the consummation of
this Offering, Mr. Murray will maintain a part-time position with Wellness. From
1991 to 1994 he was also Vice President, General Counsel and a Board Member of
GraceCare Health Systems, Inc., a long-term care management company. From 1980
until 1986, Mr. Murray was engaged in the private practice of law primarily
representing health care clients. Mr. Murray received a Bachelor of Arts degree
in Political Science and an L.L.M. in Taxation from Villanova University, and a
Juris Doctor from Widener University School of Law. He is a member of the
National Health Lawyers Association.
JAMES M. FOULKE is a co-founder of the Company and has served as a Director
of the Company since October 1997. Mr. Foulke is the Chairman of the Board of
Directors, President, and Chief Executive Officer, of Wellness. He has been the
Chief Executive Officer, and a Director of Wellness and its predecessor and
affiliated companies since 1979. From 1991 to 1994 he was President, Chief
Executive Officer, and Chairman of the Board of Directors of GraceCare Health
Systems, Inc. He has served two terms on the board of directors of the
Pennsylvania Healthcare Association (1988-1991 and 1992-1993).
WALTER B. DUNSMORE, ESQ. is an attorney who has been associated with the
Company since April 1996. From April 1991 to September 1995, Mr. Dunsmore was
General Counsel and Chief Financial Officer of Nutrition Management Services
Company, a national health care food service provider. From 1976 through 1991,
Mr. Dunsmore was engaged in the private practice of law with an emphasis on
business and health care clients. Mr. Dunsmore received his Bachelor of Business
Administration from Temple University and his Juris Doctor degree from Seton
Hall University.
RANDALL K. SPRAU currently serves as a consultant to the Company and will,
effective upon the consummation of this Offering, become a Senior Vice President
and the Chief Information Officer of the Company. Prior to becoming associated
with the Company, Mr. Sprau had been employed, since 1969, by Shared Medical
Systems, Inc. ("SMS"). SMS is a provider of information systems and computer
products to the health care industry. Mr. Sprau has held a variety of positions
with SMS, most recently as Vice President of Information Systems. In addition,
from 1981 through 1994, Mr. Sprau managed the development, marketing, and
installation of SMS' premier clinical information system for physicians. Mr.
Sprau received a degree in mathematics from Mankato State University.
44
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth compensation awarded to, earned by, or paid
to Scott G. Pollock, the Company's President and Chief Executive Officer, for
the year ended December 31, 1996. No executive officer of the Company received
compensation in excess of $100,000 during the Company's last fiscal year.
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY
- ------------------------------------------------------------------------- ------------- ---------
<S> <C> <C>
Scott G. Pollock; President, Chief Executive Officer,
Chief Financial Officer and a Director................................. 1996 $ 0(1)
</TABLE>
- ------------------------------
(1) During 1996 and until December 1, 1997, Mr. Pollock has not and will not
receive a salary, but has been and will be reimbursed for all out-of-pocket
expenses. At December 1, 1997, Mr. Pollock's employment agreement commences,
pursuant to which he is entitled to an annual base salary of $200,000. See
"Management--Employment Agreements."
DIRECTOR COMPENSATION
Members of the Board of Directors will receive compensation at the rate of
$200 per meeting attended. All Directors will be reimbursed for out-of-pocket
expenses incurred in attending meetings of the Board of Directors or committees
thereof and for other expenses incurred in their capacity as Directors.
COMMITTEES OF THE BOARD OF DIRECTORS
On May 1, 1997, the Board of Directors formalized the creation of a
Compensation Committee, which is comprised of Messrs. Pollock, Murray, and
Dunsmore. The Compensation Committee has (i) full power and authority to
interpret the provisions of, and supervise the administration of, the Plan and
(ii) the authority to review all compensation matters relating to the Company.
On May 1, 1997, the Board formalized the creation of an Audit Committee,
which is comprised of Messrs. Heisen, Murray, and Dunsmore. The Audit Committee
is responsible for reviewing the plans and results of the audit engagement with
the independent auditors; reviewing the adequacy, scope, and results of the
internal accounting controls and procedures; reviewing the degree of
independence of the auditors; reviewing the auditors' fees; and recommending the
engagement of auditors to the full Board of Directors.
DIRECTORS' LIMITATION OF LIABILITY
The Company's Certificate of Incorporation and By-Laws include provisions to
(a) eliminate the personal liability of directors for monetary damages resulting
from breaches of their fiduciary duty (except for liability for breaches of the
duty of loyalty, acts, or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, violations under Section
174 of the Delaware General Corporation Law, or for any transaction from which
the director derived an improper personal benefit) and (b) indemnify the
directors and officers to the fullest extent permitted by the Delaware General
Corporation Law, including circumstances under which indemnification is
otherwise discretionary. The Company believes that these provisions are
necessary to attract and retain qualified persons as directors and officers.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Messr. Pollock, and
Drs. Heisen and Liotta to serve in their respective positions with the Company.
Each of the agreements has a term of three years, commencing on December 1, 1997
and terminating on July 31, 2000. Each of the agreements contains a covenant not
to compete with the Company for a period of two years following termination of
45
<PAGE>
employment with the Company, although there can be no assurance that such
covenants will be enforceable. Such employees are entitled to an annual salary
of $200,000, $200,000, and $150,000, respectively, and Company-paid health,
life, and disability benefits, as well as a monthly automobile allowance of
$600. Each of the employment agreements additionally provides that the employee
may receive bonus compensation, to be determined by the Board of Directors of
the Company, based upon the achievement of certain financial and operational
goals. Each of the agreements provides that in the event that the agreement is
terminated for any reason other than a change in control of the Company the
employee shall be entitled to receive all accrued compensation and a severance
payment equal to two months salary. In the event that such employment is
terminated as a result of a change in control of the Company, each of the above-
named employees shall be entitled to receive all accrued compensation and a
payment equal to two times such employee's (i) base salary and (ii) the maximum
potential bonus under the agreement.
The Company has entered into a memorandum of understanding to enter an
employment agreement with Randall K. Sprau upon consummation of this Offering to
serve as the Senior Vice President and Chief Information Officer of the Company.
The agreement will have a term of three years. Pursuant to the terms of such
employment agreement, Mr. Sprau will initially receive an annual salary of
$175,000 and Company-paid health, life, and disability benefits. Mr. Sprau
additionally may receive bonus compensation of between 10% and 30% of his annual
salary, based upon the achievement of certain financial and operational goals.
Concurrently with the execution of the emplyment agreement, Mr. Sprau agreed to
enter into an agreement not to compete with the Company. Until such employment
agreement is executed, Mr. Sprau has agreed to provide consulting services to
the Company in consideration of the reimbursement of all of his expenses in
connection with his engagement as a consultant.
STOCK OPTION PLAN
On April 24, 1996, the Board of Directors and the stockholders of the
Company adopted the Plan. The Plan provides for the grant of options to purchase
up to 300,000 shares of Common Stock to employees, officers, directors, and
consultants of the Company. Options may be either "incentive stock options"
within the meaning of Section 422 of the United States Internal Revenue Code of
1986, as amended (the "Code"), or non-qualified options. Incentive stock options
may be granted only to employees of the Company, while non-qualified options may
be issued to non-employee directors, consultants, and others, as well as to
employees of the Company.
The Plan will be administered by "disinterested members" of the Board of
Directors (as defined by Rule 16b-3 of the Exchange Act) or the Compensation
Committee thereof, who will determine, among other things, the individuals who
shall receive options, the time period during which the options may be partially
or fully exercised, the number of shares of Common Stock issuable upon the
exercise of each option, and the option exercise price.
The exercise price per share of Common Stock subject to an incentive option
may not be less than the fair market value per share of Common Stock on the date
the option is granted. The per share exercise price of the Common Stock subject
to a non-qualified option may be established by the Board of Directors.
The aggregate fair market value (determined as of the date the option is
granted) of Common Stock for which any person may be granted incentive stock
options which first become exercisable in any calendar year may not exceed
$100,000. No person who owns, directly or indirectly, at the time of the
granting of an incentive stock option to such person, 10% or more of the total
combined voting power of all classes of stock of the Company (a "10%
Stockholder") shall be eligible to receive any incentive stock options under the
Plan unless the exercise price is at least 110% of the fair market value of the
shares of Common Stock subject to the option, determined on the date of grant.
Non-qualified options are not subject to such limitation.
No stock option may be transferred by an optionee other than by will or the
laws of descent and distribution, and, during the lifetime of an optionee, the
option will be exercisable only by the optionee. In
46
<PAGE>
the event of termination of employment other than by death or disability, the
optionee will have no more than three months after such termination during which
the optionee shall be entitled to exercise the option, unless otherwise
determined by the Board of Directors. Upon termination of employment of an
optionee by reason of death or permanent and total disability, such optionee's
options will remain exercisable for one year thereafter to the extent such
options were exercisable on the date of such termination. No similar limitation
applies to non-qualified options.
Options under the Plan must be issued within ten years from the effective
date of the Plan. The effective date of the Plan is April 24, 1996. Incentive
stock options granted under the Plan cannot be exercised more than ten years
from the date of grant. Incentive stock options issued to a 10% Stockholder are
limited to five year terms. Options granted under the Plan generally provide for
the payment of the exercise price in cash and may provide for the payment of the
exercise price by delivery to the Company of shares of Common Stock already
owned by the optionee having a fair market value equal to the exercise price of
the options being exercised, or by a combination of such methods. Therefore, if
so provided in an optionee's options, such optionee may be able to tender shares
of Common Stock to purchase additional shares of Common Stock and may
theoretically exercise all of his stock options with no additional investment
other than the purchase of his original shares.
Any unexercised options that expire or that terminate upon an employee's
cessation of employment with the Company become available again for issuance
under the Plan.
To date, no options have been granted under the Plan.
47
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of the date of this Prospectus, the
ownership of the Common Stock by (i) each person who is known by the Company to
own of record or beneficially more than 5% of the outstanding Common Stock, (ii)
each of the Company's directors and executive officers, and (iii) all directors
and executive officers of the Company as a group. Except as otherwise indicated,
the stockholders listed in the table have sole voting and investment powers with
respect to the shares indicated.
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF CLASS
SHARES ------------------------
BENEFICIALLY BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER(2) OWNED(1) OFFERING OFFERING
- --------------------------------------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Scott G. Pollock................................................................. 225,000 10.3% 5.3%
Dennis B. Liotta, M.D............................................................ 180,000 8.2% 4.3%
Peter R. Heisen, M.D............................................................. 60,000 2.7% 1.4%
David I. Rosen, M.D.............................................................. 213,750 9.8% 5.1%
Joseph F. Murray................................................................. 20,000 0.9% 0.5%
Walter B. Dunsmore, Esq.......................................................... 20,000 0.9% 0.5%
James M. and Ellen Foulke........................................................ 420,250 19.2% 10.0%
All directors and executive officers of the
Company as a group (7 persons)................................................. 1,139,000 52.1% 27.2%
</TABLE>
- ------------------------
(1) As used herein, the term beneficial ownership with respect to a security is
defined by Rule 13d-3 under the Securities Exchange Act of 1934, as amended,
as consisting of sole or shared voting power (including the power to vote or
direct the vote) and/or sole or shared investment power (including the power
to dispose or direct the disposition) with respect to the security through
any contract, arrangement, understanding, relationship or otherwise,
including a right to acquire such power(s) during the next 60 days. Unless
otherwise noted, beneficial ownership consists of sole ownership, voting,
and investment power with respect to all shares shown as beneficially owned
by them.
(2) The address of each of the referenced individuals is c/o Integrated
Physician Systems, Inc., 2644 Bristol Road, Warrington, Pennsylvania 18976.
48
<PAGE>
CERTAIN TRANSACTIONS
Since the Company's inception, Wellness, the founding stockholder of the
Company, has advanced to the Company an aggregate of $245,468 to assist in
funding the fees and expenses accrued in connection with this Offering. Such
advance bears no interest and is required to be repaid upon the closing of this
Offering. As of the date of this Prospectus, the balance owed by the Company on
such advance is $199,078, all of which will be paid with a portion of the net
proceeds from this Offering. James M. Foulke, Scott G. Pollock, and Joseph F.
Murray are currently the President, the Chief Financial Officer, and the Vice
President and General Counsel, respectively, of Wellness. See "Use of Proceeds"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Affiliated PCs, which, upon the consummation of this Offering, will
employ the affiliated physicians and enter into the PMSAs with the Company, will
be 100% owned by David I. Rosen, M.D., the Vice President for Business
Development of the Company. The Company has entered into an agency agreement and
other agreements with Dr. Rosen which provide that the Company has control over
all significant decisions of the Affiliated PCs, except decisions relating to
the practice of medicine, and that the Company may direct Dr. Rosen with respect
to the election of officers and directors of the Affiliated PCs, and may effect
a change in the identity of the sole stockholder of the Affiliated PC in the
event of death, disability, retirement, or termination of employment of Dr.
Rosen. Dr. Rosen will receive no payment, whether in the form of dividends or
otherwise, by virtue of his being stockholder of the Affiliated PCs. See
"Business--Development and Operations."
In April 1997, pursuant to a stock purchase agreement, the Company purchased
all of the outstanding capital stock of PMI from Dr. Dennis B. Liotta, the sole
shareholder of PMI, for $2,000. As a result of such transaction, PMI became a
wholly-owned subsidiary of the Company. In addition, the Company entered into an
employment agreement pursuant to which Dr. Liotta agreed to serve as the
Executive Vice President and Chief Operating Officer of the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
On October 21, 1997 certain stockholders of the Company, including a former
Director, contributed 1,356,000 shares of Common Stock owned by such
stockholders, including 422,000 shares owned by the former Director, to the
Company. The shares were simultaneously retired by the Company.
All future transactions between the Company and its officers, directors, and
5% stockholders will be on terms no less favorable to the Company than can be
obtained from unaffiliated third parties and will be approved by a majority of
the independent and disinterested directors of the Company.
49
<PAGE>
DESCRIPTION OF DEBENTURES
GENERALLY
The Debentures will be issued under an Indenture, to be dated as of
, 1997, (the "Indenture"), between the Company, as issuer, and IBJ
Schroder Bank & Trust Company, as trustee (the "Trustee"), a copy of which has
been filed as an exhibit to the Registration Statement. The descriptions of the
Debentures and the Indenture in this Prospectus are summaries, do not purport to
be complete, and are subject to, and are qualified in their entirety by
reference to, all provisions of the Indenture. Wherever terms defined in the
Indenture are used in this Prospectus, such defined terms are incorporated
herein by reference. Article and Section references appearing below refer to the
corresponding Articles and Sections of the Indenture.
The Debentures will be unsecured subordinated obligations of the Company,
will be limited to an aggregate principal amount of $28,750,000 (including
$3,750,000 subject to the Underwriters' over-allotment option and excluding
$2,500,000, subject to the Representative's Warrants) and will mature on
, 2004. The Debentures will bear interest at the rate per annum
stated in their title from the date of the issuance thereof or from the most
recent Interest Payment Date to which interest has been paid or provided for,
payable semi-annually on 15 and 15 of each year, commencing
15, 1998, to each holder in whose name a Debenture (or any predecessor
Debenture) is registered at the close of business on the Regular Record Date for
such interest payment, which shall be 1 or 1 (whether or
not a Business Day), as the case may be, next preceding such Interest Payment
Date (unless, with certain exceptions, such Debentures are converted or redeemed
prior to such Interest Payment Date). Interest on the Debentures will be paid on
the basis of a 360-day year consisting of twelve 30-day months (Section 311).
Principal of, and interest on, the Debentures will be payable at the office or
agency of the Company maintained for that purpose in the Borough of Manhattan,
City of New York, and such other office or agency of the Company as may be
maintained for such purpose (initially the corporate trust office of the Trustee
in New York, New York). Debentures may be surrendered for transfer, exchange,
repurchase, redemption, or conversion at that agency or office. Payment of
interest may, at the option of the Company, be made by check mailed to the
address of the holder entitled thereto as it appears in the Debenture Register
(See Sections 301, 305, 1002 and 1202). The Debentures will be issued only in
fully registered form, without coupons, in denominations of $1,000 and any
integral multiple thereof (Section 302). No service charge will be made for any
transfer or exchange of Debentures, but the Company may require payment of a sum
sufficient to cover any tax or other governmental charge payable in connection
therewith (Section 305). The Company is not required to transfer or exchange any
Debenture (i) during a period beginning at the opening of business 15 days
before the date of the mailing of a notice of redemption and ending at the close
of business on the date of such mailing or (ii) selected for redemption, in
whole or in part, except the unredeemed portion of Debentures being redeemed in
part. All moneys paid by the Company to the Trustee or any Paying Agent for the
payment of, principal of, and premium, if any, and interest on any Debenture
which remain unclaimed for two years after such principal, premium, or interest
became due and payable may be repaid to the Company. Thereafter, the holder of
such Debenture may, as an unsecured general creditor, look only to the Company
for payment thereof.
The Indenture does not contain any provisions that would provide protection
to holders of the Debentures against a sudden and dramatic decline in credit
quality of the Company resulting from any takeover, recapitalization, or similar
restructuring, except as described under "--Certain Rights to Require Repurchase
of Debentures."
The Indenture contains no financial covenants or covenants restricting the
incurrence of indebtedness by the Company or any Subsidiary (as defined
therein). Although certain agreements under which Senior Indebtedness (as
defined therein) in the future may be outstanding may contain limitations on the
incurrence of indebtedness by the Company or its Subsidiaries, such agreements
may be amended or modified as provided therein, may provide only incidental
protection to holders of Debentures in the event
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<PAGE>
of a Repurchase Event (as described below), and are not intended for the benefit
of the holders of the Debentures. In addition, future agreements under which
future Senior Indebtedness may be outstanding may contain provisions which may
require repayment of such Senior Indebtedness prior to repayment of the
Debentures upon, among other things, a Repurchase Event.
CONVERSION RIGHTS
The Debentures (or any portion thereof that is an integral multiple of
$1,000) will be convertible into Common Stock at the option of the holders
thereof at any time and from time to time prior to, and including, the maturity
date unless a Debenture or a portion thereof shall have been called for
redemption, through optional redemption, a sinking fund or otherwise, in which
case it will be convertible if duly surrendered on or before the close of
business on the fifth day preceding the Redemption Date at the conversion price
stated on the cover hereof (subject to adjustment as described below). The
conversion price shall be subject to adjustment upon certain events, including
in the event that:
(a) The Company shall declare a dividend or make a distribution on its
outstanding Common Stock payable in Common Stock or shall declare or make a
dividend or other distribution on any other class of capital stock of the
Company or any subsidiary not wholly owned by the Company which dividend or
distribution includes Common Stock.
(b) The Company shall subdivide the outstanding Common Stock into a
greater number of shares, or combine the outstanding Common Stock into a
smaller number of shares.
(c) The Company shall fix a record date for the issuance of rights or
warrants to all holders of its Common Stock entitling them (for a period
expiring within 45 days after the record date therefor) to subscribe for or
purchase Common Stock (or securities convertible into Common Stock) at a
price per share (or having an initial conversion price per share) less than
the Current Market Price (as defined in Section 1204(h) of the Indenture) of
Common Stock on such record date.
(d) The Company shall fix a record date for making a distribution to
holders of its Common Stock or holders (other than the Company or its
wholly-owned subsidiaries) of capital stock of any Subsidiary (as defined in
the Indenture) (i) of evidences of indebtedness of the Company or any
Subsidiary, (ii) of assets (including shares of any class of capital stock,
cash or other securities, but excluding any rights or warrants referred to
in subsection (c), above, or securities referred to in subsection (e),
below, excluding any dividend or distribution referred to in subsection (a),
above, and excluding any dividend or distribution paid exclusively in cash
out of retained or current earnings) or (iii) of rights or warrants
entitling the holders thereof to receive upon payment of the consideration
set forth therein shares of capital stock of the Company (excluding those
referred to in subsection (c) above).
(e) The Company shall issue or distribute Common Stock, (excluding
shares issued (i) in any of the transactions described in subsection (a)
above, (ii) upon conversion or exchange of securities convertible into or
exchangeable for Common Stock described in subsection (f) below, (iii) to
employees or consultants under the Plan, as now in effect or hereafter
amended, if such shares would otherwise be included in this section (e),
(iv) to the Company's employees or consultants under bona fide benefit
plans, employment agreements, or consulting agreements adopted by the
Company's Board of Directors and approved by its stockholders or granted at
an exercise price of at least 100% of the fair market value of the shares on
the date of grant whether or not approved by stockholders, if such shares
would otherwise be included in this Section (e) (but only to the extent that
the aggregate number of shares excluded by this subdivision (iv) and issued
after the date of the Indenture shall not exceed 10% of the Common Stock
outstanding at the time of any such issuance), (v) upon exercise of rights
or warrants issued to the holders of Common Stock, (vi) to acquire, or in
connection with the acquisition of, all or any portion of a business as a
going concern, whether such acquisition shall be effected by purchase of
assets, exchange of securities, merger, consolidation or otherwise, (vii) in
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connection with the entry into a medical practice or other professional
practice management agreement by the Company for a term of at least five
years, (viii) upon exercise of rights or warrants issued in a bona fide
public offering pursuant to a firm commitment underwriting, but only if no
adjustment is required pursuant to these conversion price adjustments
(without regard to Section 1204(j) of the Indenture) with respect to the
transaction giving rise to such rights or (ix) pursuant to an offering
effected at a discount of less than 5% from the Current Market Price per
share determined as provided in Section 1204(h) of the Indenture) for a
consideration per share less than the Current Market Price per share on the
date the Company fixes the offering price of such additional shares.
(f) The Company shall issue any securities convertible into, or
exchangeable for, its Common Stock (excluding securities issued in
transactions described in sections (c) and (d) above, or the Securities (as
defined in the Indenture)) for a consideration per share of Common Stock
initially deliverable upon conversion or exchange of such securities less
than the Current Market Price per share in effect immediately prior to the
issuance of such securities.
Upon the termination of the right to convert or exchange such securities,
the conversion price shall forthwith be readjusted to such conversion price as
would have obtained had the adjustments made upon the issuance of such
convertible or exchangeable securities been made upon the basis of the delivery
of only the number of shares of Common Stock actually delivered upon conversion
or exchange of such securities and upon the basis of the consideration actually
received by the Company for such securities. No adjustment in the conversion
price need be made unless such adjustment would require an increase or decrease
of at least 1% in such price; provided, however, that any such adjustment which
is not required to be made shall be carried forward and taken into account in
any subsequent adjustment. All calculations shall be made to the nearest cent or
to the nearest one-hundredth of a share, as the case may be. Fractional shares
will not be issued upon conversion, but in lieu thereof, the Company will pay
cash equal to the market value of such fractional share computed with reference
to the Closing Price of the Common Stock on the last business day prior to
conversion (Section 1203). Debentures surrendered for conversion during the
period from the close of business on any Regular Record Date to the opening of
business on the next succeeding Interest Payment Date (except Debentures whose
maturity is prior to such Interest Payment Date and Debentures called for
redemption on a Redemption Date within such period) must be accompanied by
payment of an amount equal to the interest thereon to be paid on such Interest
Payment Date (provided, however, that if the Company shall default in payment of
such interest, such payment shall be returned to the payor thereof.) Except for
Debentures surrendered for conversion which must be accompanied by payment as
described above, no interest on converted Debentures will be payable by the
Company on any Interest Payment Date subsequent to the date of conversion
(Sections 307 and 1202).
Except as stated above, the conversion price will not be adjusted for the
issuance of Common Stock or any securities convertible into, or exchangeable
for, Common Stock or for payment of dividends on the Common Stock or any
preferred shares of the Company.
The Company has covenanted under the Indenture to reserve and keep available
at all times out of its authorized but unissued shares of Common Stock, for the
purpose of effecting conversions of Debentures, the full number of shares of
Common Stock deliverable upon the conversion of all outstanding Debentures.
CERTAIN RIGHTS TO REQUIRE REPURCHASE OF THE DEBENTURES
In the event of any Fundamental Change (as described below) affecting the
Company which constitutes a Repurchase Event occurring after the date of
issuance of the Debentures and on or prior to maturity, each holder of
Debentures will have the right, at the holder's option, to require the Company
to repurchase all or any part of the holder's Debentures on the date (the
"Repurchase Date") that is 30 days after the date the Company gives notice of
the Repurchase Event as described below at a price (the "Repurchase Price")
equal to 100% of the principal amount thereof, together with accrued and unpaid
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interest to the Repurchase Date. On or prior to the Repurchase Date, the Company
shall deposit with the Trustee or a Paying Agent an amount of money sufficient
to pay the Repurchase Price of the Debentures which are to be repurchased on or
promptly following the Repurchase Date (Section 1403). In the event the Company
becomes obligated to repurchase some or all of the Debentures, the Company
expects that it would seek to finance the Repurchase Price with its available
cash and short-term investments, through available bank credit facilities (if
any), or through a public or private issuance of debt or equity securities.
Failure by the Company to repurchase the Debentures when required as
described in the second preceding paragraph will result in an Event of Default
under the Indenture whether or not such repurchase is permitted by the
subordination provisions of the Indenture (Section 501). On or before the 15th
day after the occurrence of a Repurchase Event, the Company shall mail (or at
its option cause the Trustee to mail) to all holders of record of Debentures
notice of the occurrence of such Repurchase Event, setting forth, among other
things, the date by which the repurchase right must be exercised, the Repurchase
Price and the procedures which the holder must follow to exercise this right. No
failure of the Company to give such notice shall limit any holder's right to
exercise a repurchase right (Section 1402). Failure to give notice of the
Repurchase Event in accordance with the terms of the Indenture will result in an
Event of Default. To exercise the repurchase right, the holder of a Debenture
must deliver, on or before the fifth day prior to the Repurchase Date, written
notice to the Company (or an agent designated by the Company for such purpose)
of the holder's exercise of such right, together with the certificates
evidencing the Debentures with respect to which the right is being exercised,
duly endorsed for transfer (Section 1402). Such notice of exercise may be
withdrawn by the holder by a written notice of withdrawal delivered to the
Trustee at any time prior to the close of business on the fifth day prior to the
Repurchase Date and thereafter only with the consent of the Company (Section
1402).
The term "Fundamental Change" means when (i) any "person" or "group" (as
such terms are used in Sections 13(d) and 14(d) of the Exchange Act) is or
becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act) of shares representing more than 50% of the combined voting power
of the then outstanding securities entitled to vote generally in elections of
directors of the Company ("Voting Stock"); (ii) the stockholders of the Company
approve any plan or proposal for the liquidation, dissolution, or winding up of
the Company; or (iii) the Company (A) consolidates with, or merges into, any
other corporation or any other corporation merges into the Company, and in the
case of any such transaction, the outstanding Common Stock of the Company is
changed or exchanged into or for other assets or securities as a result, unless
the stockholders of the Company immediately before such transaction own,
directly or indirectly immediately following such transaction, at least 51% of
the combined voting power of the outstanding voting securities of the
corporation resulting from such transaction in substantially the same proportion
as their ownership of the Voting Stock immediately before such transaction or
(B) conveys, transfers, or leases all or substantially all of its assets to any
person.
The phrase "all or substantially all" of the assets of the Company, as
included in the definition of Fundamental Change, is likely to be interpreted by
reference to applicable state law at the relevant time, and will be dependent on
the facts and circumstances existing at such time. As a result, there may be a
degree of uncertainty in ascertaining whether a sale or transfer of "all or
substantially all" of the assets of the Company has occurred.
A Repurchase Event is a right to require the Company to repurchase the
Debentures and a Repurchase Event shall have occurred if a Fundamental Change
shall have occurred unless (i) the Current Market Price of the Common Stock is
at least equal to the conversion price of the Debentures in effect immediately
preceding the time of such Fundamental Change or (ii) the consideration in the
transaction or event giving rise to such Fundamental Change to the holders of
Common Stock consists of cash, securities that are, or immediately upon issuance
will be, listed on a national securities exchange or quoted in the Nasdaq
National Market (or in the case of securities which are common stock in any
Nasdaq system or any similar system of automated dissemination of quotations of
securities prices), or a combination of cash and such securities, and the
aggregate fair market value of such consideration (which, in the case of such
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securities, shall be equal to the average of the daily Closing Prices of such
securities during the 10 consecutive trading days commencing with the sixth
trading day following consummation of such transaction or event) is at least
105% of the conversion price of the Debentures in effect on the date immediately
preceding the closing date of such transaction or event. The right to require
the Company to repurchase the Debentures as a result of the occurrence of a
Repurchase Event could create an Event of Default under Senior Indebtedness, as
a result of which any repurchase could, absent a waiver, be prevented by the
subordination provisions of the Debentures. Failure by the Company to repurchase
the Debentures when required will result in an Event of Default with respect to
the Debentures whether or not such repurchase is permitted by the subordination
provisions. The Company's ability to pay cash to the holders of the Debentures
upon a repurchase may be limited by certain financial covenants contained in any
future Senior Indebtedness. In the event a Repurchase Event occurs and the
holders exercise their rights to require the Company to repurchase Debentures,
the Company intends to comply with applicable tender offer rules under the
Exchange Act, including Rules 13e-4 and 14e-1, as then in effect, with respect
to any such purchase. This right to require repurchase would not necessarily
afford holders of the Debentures protection in the event of highly leveraged or
other transactions involving the Company that may impair the rights of holders
of Debentures.
The effect of these provisions granting the holders the right to require the
Company to repurchase the Debentures upon the occurrence of a Repurchase Event
may make it more difficult for any person or group to acquire control of the
Company or to effect a business combination with the Company and may discourage
open market purchases of the Common Stock or a non-negotiated tender or exchange
offer for the Common Stock. Accordingly, such provisions may limit a
stockholder's ability to realize a premium over the market price of the Common
Stock in connection with any such transaction.
The foregoing provisions would not necessarily afford holders of the
Debentures protection in the event of a highly leveraged transaction, a change
in control of the Company or other transactions involving the Company that may
adversely affect holders. The Company could, in the future, enter into certain
transactions, including certain recapitalizations of the Company that would not
constitute a Fundamental Change, but that would increase the amount of Senior
Indebtedness (or other indebtedness) outstanding at such time. There are no
restrictions in the Indenture or the Debentures on the creation of additional
Senior Indebtedness (or any other indebtedness of the Company or any of its
subsidiaries) and the incurrence of significant amounts of additional
indebtedness could have an adverse impact on the Company's ability to service
its debt, including the Debentures. The Debentures are subordinate in right to
payment to all existing and future Senior Indebtedness as described under
"--Subordination" below.
SUBORDINATION
The payment of the principal of, and interest on, the Debentures will, to
the extent set forth in the Indenture, be subordinated in right of payment to
the prior payment in full of all Senior Indebtedness whether currently
outstanding or hereafter incurred. Upon any payment or distribution of assets to
creditors upon any liquidation, dissolution, winding up, reorganization,
assignment for the benefit of creditors, or marshaling of assets, whether
voluntary, involuntary or in receivership, bankruptcy, insolvency, or similar
proceedings, the holders of all Senior Indebtedness will be first entitled to
receive payment in full of cash amounts due or to become due thereon before any
payment is made on account of the principal of, and premium, if any, or interest
on, the indebtedness evidenced by the Debentures or on account of any other
monetary claims, including such monetary claims as may result from rights of
repurchase or rescission, under or in respect of the Debentures, before any
payment is made to acquire any of the Debentures for cash, property, or
securities or before any distribution is made with respect to the Debentures of
any cash, property, or securities. Moreover, in the event of any acceleration of
the Debentures because of an Event of Default, the holders of any Senior
Indebtedness then outstanding would be entitled to payment in full of all
obligations in respect of such Senior Indebtedness before the holders of the
Debentures are entitled to receive any payment or distribution in respect
thereof. No
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payments on account of principal of, sinking fund requirements, if any, or
premium, if any, or interest on the Debentures shall be made, and no Debentures
shall be redeemed or repurchased, if at the time thereof: (i) there is a default
in the payment of all or any portion of the obligations under any Senior
Indebtedness; or (ii) there shall exist a default in any covenant with respect
to the Senior Indebtedness (other than as specified in clause (i) of this
sentence), and, in such event, such default shall not have been cured or waived
or shall not have ceased to exist, the Trustee and the Company shall have
received written notice from any holder of such Senior Indebtedness stating that
no payment shall be made with respect to the Debentures, and such default would
permit the maturity of such Senior Indebtedness to be accelerated provided that
no such default will prevent any payment on, or in respect of, the Debentures
for more than 120 days unless the maturity of such Senior Indebtedness has been
accelerated (Section 1303).
The holders of the Debentures will be subrogated to the rights of the
holders of the Senior Indebtedness to the extent of payments made on Senior
Indebtedness upon any distribution of assets in any such proceedings out of the
distributive share of the Debentures (Section 1302).
By reason of such subordination, in the event of insolvency, creditors of
the Company, who are not holders of Senior Indebtedness or of the Debentures,
may recover less, ratably, than holders of Senior Indebtedness but may recover
more, ratably, than the holders of the Debentures.
"Senior Indebtedness" is defined in the Indenture as the principal of,
premium, if any, interest on (including any interest accruing after the filing
of a petition by or against the Company under any bankruptcy law, whether or not
allowed as a claim after such filing in any proceeding under such bankruptcy
law), and any other payment due pursuant to, any of the following, whether
outstanding on the date of the Indenture or thereafter incurred or created: (a)
all indebtedness of the Company for money borrowed or evidenced by notes,
debentures, bonds, or other securities (including, but not limited to, those
which are convertible or exchangeable for securities of the Company) and all
other obligations of the Company constituting the deferred purchase price of
property or assets; (b) all indebtedness of the Company due and owing with
respect to letters of credit (including, but not limited to, reimbursement
obligations with respect thereto); (c) all indebtedness or other obligations of
the Company due and owing with respect to interest rate and currency swap
agreements, cap, floor and collar agreements, currency spot and forward
contracts, and other similar agreements and arrangements; (d) all indebtedness
consisting of commitment or standby fees due and payable to lending institutions
with respect to credit facilities or letters of credit available to the Company;
(e) all obligations of the Company under leases required or permitted to be
capitalized under generally accepted accounting principles or under any lease or
related document (including a purchase agreement) that provides that the Company
is contractually obligated to purchase or cause a third party to purchase and
thereby guarantee a minimum residual value of the lease property to the lessor
and the obligations of the Company under such lease or related document to
purchase or to cause a third party to purchase such leased property; (f) all
indebtedness or obligations of others of the kinds described in any of the
preceding clauses (a), (b), (c), (d) or (e) assumed by, or guaranteed in any
manner by, the Company or in effect guaranteed (directly or indirectly) by the
Company through an agreement to purchase, contingent or otherwise, and all
obligations of the Company under any such guarantee or other arrangements; and
(g) all renewals, extensions, refundings, deferrals, amendments, or
modifications of indebtedness or obligations of the kinds described in any of
the preceding clauses (a), (b), (c), (d), (e) or (f); unless in the case of any
particular indebtedness, obligation, renewal, extension, refunding, amendment,
modification, or supplement, the instrument or other document creating or
evidencing the same or the assumption or guarantee of the same expressly
provides that such indebtedness, obligation, renewal, extension, refunding,
amendment, modification, or supplement is subordinate to, or is not superior to,
or is pari passau with, the Debentures; provided that Senior Indebtedness shall
not include (i) any indebtedness of any kind of the Company to any subsidiary of
the Company, a majority of the voting stock of which is owned, directly or
indirectly, by the Company, (ii) indebtedness for trade payables or constituting
the deferred purchase price of assets or services incurred in the ordinary
course of business; or (iii) the Debentures.
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Notwithstanding the foregoing, in the event that the Trustee or any holder
of Debentures receives any payment or distribution of assets of the Company of
any kind in contravention of any of the terms of the Indenture, whether in cash,
property, or securities, including, without limitation, by way of set-off or
otherwise, in respect of the Debentures before all Senior Indebtedness is paid
in full, then such payment or distribution will be held by the recipient in
trust for the benefit of the holders of Senior Indebtedness of the Company, and
will be immediately paid over, or delivered to, the holders of Senior
Indebtedness of the Company or their respective representative or
representatives, or to the trustee or trustees under any indenture pursuant to
which any instruments evidencing any Senior Indebtedness may have been issued,
as their respective interests may appear, as calculated by the Company, for
application to the payment of all Senior Indebtedness remaining unpaid to the
extent necessary to make payment in full of all Senior Indebtedness of the
Company remaining unpaid, after giving effect to any concurrent payment or
distribution, or provision therefor, to or for the holders of the Senior
Indebtedness of the Company.
No provision contained in the Indenture or the Debentures will affect the
obligation of the Company, which is absolute and unconditional, to pay, when
due, principal of, premium, if any, and interest on, the Debentures. The
subordination provisions of the Indenture and the Debentures will not prevent
the occurrence of any default or Event of Default or limit the rights of any
holder of Debentures to pursue any other rights or remedies with respect to the
Debentures.
The Debentures are obligations exclusively of the Company. Certain
operations of the Company will be conducted through its subsidiaries,
principally PMI and, upon completion of this Offering, NBS (the "Subsidiaries").
The Subsidiaries are separate distinct entities that have no obligation,
contingent or otherwise, to pay any amounts due pursuant to the Debentures. In
addition, the payment of dividends, interest, and the repayment of certain loans
and advances to the Company by the Subsidiaries may be subject to certain
statutory or contractual restrictions and are contingent upon the earnings of
such Subsidiaries. The Debentures will be effectively subordinated to all
indebtedness and other liabilities and commitments (including trade payables and
lease obligations) of the Subsidiaries. In addition, the right of the Company
and, therefore, the right of creditors of the Company (including holders of
Debentures) to receive assets of any such Subsidiary upon the liquidation or
reorganization of any such Subsidiary or otherwise will be effectively
subordinated to the claims of the Subsidiary's creditors, except to the extent
that the Company is itself recognized as a creditor of such Subsidiary, in which
case the claims of the Company would still be subordinate to any secured claim
on the assets of such Subsidiary and any indebtedness of such Subsidiary senior
to that held by the Company.
At June 30, 1997, Senior Indebtedness and indebtedness of the Subsidiaries
and the Initial Affiliated Practices aggregated approximately $572,000 on a pro
forma basis, giving effect to the Acquisitions. The Company expects that it and
its Subsidiaries will from time to time incur additional indebtedness, including
Senior Indebtedness. The Indenture does not prohibit or limit the incurrence,
assumption, or guarantee by the Company or its Subsidiaries of additional
indebtedness, including Senior Indebtedness.
EVENTS OF DEFAULT
Events of Default under the Indenture are: (i) failure to pay principal of
any Debenture when due, whether at maturity, upon redemption or acceleration, or
otherwise, whether or not such payment is prohibited by the subordination
provisions of the Indenture; (ii) failure to pay any interest on any Debenture
when due or within 30 days thereafter, whether or not such payment is prohibited
by the subordination provisions of the Indenture; (iii) failure to deposit when
due or within 30 days thereafter any sinking fund payment for the Debentures,
whether or not such deposits are prohibited by the subordination provisions of
the Indenture; (iv) failure to pay any Repurchase Price when due or within 10
days thereafter on any Debenture, whether or not such payments are prohibited by
the subordination provisions of the Indenture; (v) failure to perform any other
covenant of the Company in the Indenture, which default continues for 60 days
after written notice to the Company by the Trustee or to the Company and the
Trustee by the holders of not less than 25% in aggregate principal amount of the
outstanding Debentures;
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(vi) default on any indebtedness of the Company or the Subsidiaries in excess of
$1,000,000 for borrowed money or on any Senior Indebtedness resulting in such
indebtedness being declared due and payable after the expiration of any
applicable grace period or becoming due and payable and the holders thereof
taking any action to collect such indebtedness; and (vii) certain events in
bankruptcy, insolvency, or reorganization of the Company or significant
Subsidiaries (Section 501). Subject to the provisions of the Indenture relating
to the duties of the Trustee in case an Event of Default shall occur and be
continuing, the Trustee will be under no obligation to exercise any of its
rights or powers under the Indenture at the request or direction of any of the
holders, unless such holders shall have offered to the Trustee reasonable
indemnity (Section 514). Subject to such provisions for the indemnification of
the Trustee, the holders of a majority in principal amount of the outstanding
Debentures will have the right to determine the time, method, and place of
conducting any proceeding for any remedy available to the Trustee or exercising
any trust or power conferred on the Trustee (Section 512). If an Event of
Default (other than those relating to certain events of bankruptcy, insolvency,
and reorganization) shall occur and be continuing, either the Trustee or the
holders of at least 25% in aggregate principal amount of the outstanding
Debentures may by written notice to the Company and, if applicable, to the
Trustee, accelerate the maturity of all Debentures; provided, however, that
after such acceleration, but before a judgment or decree based on acceleration,
the holders of a majority in aggregate principal amount of outstanding
Debentures may, under certain circumstances, rescind and annul such acceleration
if all Events of Default, other than the non-payment of accelerated principal,
have been cured or waived as provided in the Indenture (Section 502). If an
Event of Default occurs by reason of certain events in bankruptcy, insolvency,
and reorganization, all principal and accrued and unpaid interest due under the
Debentures then outstanding shall automatically become immediately due and
payable. No holder of any Debenture will have any right to institute any
proceeding with respect to the Indenture or for any remedy thereunder, unless
such holder shall have previously given to the Trustee written notice of a
continuing Event of Default, the holders of at least 25% in aggregate principal
amount of the outstanding Debentures shall have made written request and offered
reasonable indemnity to the Trustee to institute such proceeding as trustee, the
Trustee shall not have received from the holders of a majority in principal
amount of the outstanding Debentures a direction inconsistent with such request
and the Trustee shall have failed to institute such proceeding within 60 days
after such notice (Section 507). However, such limitations do not apply to a
suit instituted by a holder of a Debenture for the enforcement of payment of the
principal or Repurchase Price of, sinking fund payment for, if any, or interest
on such Debenture on or after the respective due dates expressed in such
Debenture or of the right to convert such Debenture in accordance with the
Indenture (Section 508).
The Indenture provides that the Trustee shall, within 90 days after a
Responsible Officer of the Trustee has actual knowledge of the occurrence of a
default (not including any grace period allowed), mail to the holders of the
Debentures, as their names and addresses appear on the Debenture Register,
notice of all uncured defaults known to it; provided, however, that except in
the case of default in the payment of principal or Repurchase Price of, sinking
fund payment for, if any, or interest on any of the Debentures, the Trustee
shall be protected in withholding such notice if it in good faith determines
that the withholding of such notice is in the interests of the holders of the
Debentures (Section 602).
The Company will be required to furnish to the Trustee annually a
certificate with respect to its compliance with the terms, provisions, and
conditions of the Indenture and as to any default with respect thereto (Section
1004).
OPTIONAL REDEMPTION
The Debentures are not redeemable prior to , 2000. Thereafter,
the Debentures will be redeemable until maturity, at the Company's option, in
whole or from time to time in part, upon not less than 45 nor more than 60 days'
notice mailed to each holder of the Debentures at such holder's address
appearing in the Debenture Register at a redemption price equal to 100% of the
principal amount thereof plus accrued but unpaid interest thereon to the date
fixed for redemption (subject to the right of holders of
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record on a relevant record date to receive interest due on an Interest Payment
Date that is on or prior to the date fixed for redemption), except that the
Debentures may not be redeemed prior to maturity unless, for the 20 consecutive
trading days immediately preceding the date of the notice of redemption, the
Closing Price has equaled or exceeded $ [150% of the Closing Price of
the Common Stock on the effective date of this offering], subject to adjustment
in the case of the same events which result in an adjustment of the conversion
price. For purposes of optional redemption, the "Closing Price" on any trading
day shall mean the last reported sales price of the Common Stock, or, in case no
such reported sale takes place on such day, the closing bid price of the Common
Stock, on the principal national securities exchange on which the Common Stock
is listed or admitted to trading or, if not listed or admitted to trading on any
national securities exchange, on the Nasdaq National Market or Nasdaq, as the
case may be, or, if the Common Stock is not listed or admitted to trading on any
national securities exchange or quoted on the Nasdaq National Market or Nasdaq,
the closing bid price in the over-the-counter market as furnished by any New
York Stock Exchange member firm that is selected from time to time by the
Company for that purpose and is reasonably acceptable to the Trustee. If less
than all of the Debentures are to be redeemed, the Trustee, in its discretion,
will select those to be redeemed as a whole or in part by such method as the
Trustee shall deem fair and appropriate (as long as such method is not
prohibited by the rules of any United States national securities exchange or an
established automated over-the-counter trading market in the United States on
which the Debentures are listed). Notice of redemption will be given to holders
of the Debentures to be redeemed by first class mail at their last address
appearing on the Debenture Register. If any Debenture is to be redeemed in part
only, a new Debenture or Debentures in principal amount equal to the unredeemed
principal portion thereof will be issued. If a portion of a holder's Debenture
is selected for partial redemption, and such holder converts a portion of such
Debenture, such converted portion shall be deemed to have been redeemed as the
portion selected for redemption.
SINKING FUND
If the Company provides for one or more sinking funds for securities
representing indebtedness for money borrowed ranking equal or junior to the
Debentures, and such indebtedness has a maturity or weighted average time to
maturity which is on or prior to , 2004, the Company will provide a
sinking fund for the Debentures calculated to retire that amount of Debentures
equal to the lesser of (i) the same percentage of outstanding Debentures prior
to maturity as the percentage of the principal amount of such other indebtedness
to be retired prior to maturity on the same payment schedule as such other
indebtedness or (ii) such amount of Debentures necessary to result in the
Debentures having the same weighted average time to maturity as other
indebtedness. Except as set forth herein with respect to the credit against
mandatory sinking fund payments, the redemption price and other terms of the
sinking fund applicable to the Debentures shall be the same as those applicable
to the relevant indebtedness, except that the redemption price of the Debentures
in connection with the sinking fund shall be 100% of the principal amount
thereof plus accrued and unpaid interest to the date fixed for redemption. The
Company may, at its option, receive credit against mandatory sinking fund
payments for the principal amount of (i) Debentures acquired by the Company and
surrendered for cancellation, (ii) Debentures previously converted into Common
Stock, and (iii) Debentures redeemed or called for redemption otherwise than
through the operation of the sinking fund.
LIMITATIONS ON DIVIDENDS AND REDEMPTIONS
The Indenture provides that the Company will not (i) declare or pay any
dividend or make any other distribution on any Junior Securities (as described
below), except dividends or distributions payable in Junior Securities, or (ii)
purchase, redeem or otherwise acquire or retire for value any Junior Securities,
except Junior Securities acquired upon conversion thereof into other Junior
Securities, or (iii) permit a Subsidiary to purchase, redeem or otherwise
acquire or retire for value any Junior Securities, if, upon giving effect to
such dividend, distribution, purchase, redemption, retirement or other
acquisition, a default
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in the payment of any principal or Repurchase Price of, sinking fund payment
for, if any, premium, if any, or interest on any Debenture shall have occurred
and be continuing.
The term "Junior Securities" means (i) the Common Stock, (ii) shares of any
other class or classes of capital stock of the Company, (iii) any other non-debt
securities of the Company (whether or not such other securities are convertible
into Junior Securities), and (iv) debt securities of the Company (other than
Senior Indebtedness and the Debentures) as to which, in the instrument creating
or evidencing Senior Indebtedness and the same or pursuant to which the same is
outstanding, it is expressly provided that such debt securities are not Senior
Indebtedness with respect to, or do not rank PARI PASSU with, the Debentures.
CONSOLIDATION, MERGER, AND SALE OF ASSETS
The Company, without the consent of the holders of any of the Debentures,
may consolidate with or merge into any other Person or convey, transfer, sell,
or lease its assets substantially as an entirety to any Person, provided that:
(i) either (a) the Company is the continuing corporation or (b) the corporation
or other entity formed by such consolidation or into which the Company is merged
or the Person to which such assets are conveyed, transferred, sold or leased is
organized under the laws of the United States or any state thereof or the
District of Columbia and expressly assumes all obligations of the Company under
the Debentures and the Indenture; (ii) immediately after and giving effect to
such merger, consolidation, conveyance, transfer, sale, or lease no Event of
Default, and no event which, after notice or lapse of time, would become an
Event of Default, under the Indenture shall have occurred and be continuing;
(iii) upon consummation of such consolidation, merger, conveyance, transfer,
sale, or lease, the Debentures and the Indenture will be valid and enforceable
obligations of the Company or such successor Person, corporation, or other
entity and (iv) the Company has delivered to the Trustee an Officer's
Certificate and an Opinion of Counsel, each stating that such consolidation,
merger, conveyance, transfer, sale, or lease complies with the provisions of the
Indenture (Sections 801 and 802).
MODIFICATION AND WAIVER
Modifications and amendments of the Indenture may be made by the Company and
the Trustee with the consent of the holders of not less than a majority in
aggregate principal amount of the outstanding Debentures; provided, however,
that no such modification or amendment may, without the consent of the holder of
each outstanding Debenture affected thereby, (i) change the Stated Maturity of
the principal of, or any installment of interest on, any Debenture, (ii) reduce
the principal amount of any Debenture or reduce the rate or extend the time of
payment of interest thereon, (iii) change the place or currency of payment of
principal of, or Repurchase Price or interest on, any Debenture, (iv) impair the
right to institute suit for the enforcement of any payment on or with respect to
any Debenture, (v) adversely affect the right to convert Debentures, (vi) reduce
the percentage of the aggregate principal amount of outstanding Debentures, the
consent of the holders of which is necessary to modify or amend the Indenture,
(vii) reduce the percentage of the aggregate principal amount of outstanding
Debentures, the consent of the holders of which is necessary for waiver of
compliance with certain provisions of the Indenture or for waiver of certain
defaults, (viii) modify the provisions of the Indenture with respect to the
subordination of the Debentures in a manner adverse to the holders of the
Debentures, or (ix) modify the provisions of the Indenture with respect to the
right to require the Company to repurchase Debentures in a manner adverse to the
holders of the Debentures (Section 902). The holders of not less than a majority
in principal amount of the Outstanding Debentures may on behalf of the holders
of all Debentures waive any past defaults, except (i) a default in payment of
the principal of, or premium, if any, or interest on, any Debenture when due,
(ii) a failure by the Company to convert any Debentures into Common Stock or
(iii) a default in respect of certain provisions of the Indenture which cannot
be modified or amended without the consent of the holder of each outstanding
Debenture affected thereby.
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SATISFACTION AND DISCHARGE
The Indenture provides that the Company may discharge its obligations under
the Indenture while Debentures remaining outstanding if (i) all outstanding
Debentures will become due and payable at their scheduled maturity within one
year or (ii) all outstanding Debentures are scheduled for redemption within one
year, and in either case the Company has deposited with the Trustee an amount
sufficient to pay and discharge all outstanding Debentures on the date of their
scheduled maturity or scheduled redemption (Section 401).
GOVERNING LAW
The Indenture and the Debentures will be governed and construed in
accordance with the laws of the State of New York without giving effect to such
state's conflicts of laws principles.
INFORMATION CONCERNING THE TRUSTEE
The Company and its Subsidiaries may maintain deposit accounts and conduct
other banking transactions with the Trustee or its affiliates in the ordinary
course of business, and the Trustee and its affiliates may from time to time in
the future provide the Company and its Subsidiaries with banking and financial
services in the ordinary course of their businesses.
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DESCRIPTION OF SECURITIES
GENERAL
The Company is authorized by its Certificate of Incorporation to issue an
aggregate of 50,000,000 shares of Common Stock, par value $.01 per share, and
1,000,000 shares of preferred stock, par value $.01 per share. As of October 22,
1997, 1,702,000 shares of Common Stock were outstanding and held of record by 46
stockholders, and no shares of preferred stock were outstanding. Following the
completion of this Offering, an aggregate of 4,183,067 shares of Common Stock
outstanding (4,483,067 shares if the Underwriters' over-allotment option is
exercised in full) and no shares of preferred stock will be outstanding.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held of
record on each matter submitted to a vote of stockholders. There is no
cumulative voting for the election of directors. Subject to the prior rights of
any series of preferred stock which may from time to time be outstanding, if
any, holders of Common Stock are entitled to receive ratably, dividends when,
as, and if declared by the Board of Directors out of funds legally available
therefor and, upon the liquidation, dissolution, or winding up of the Company,
are entitled to share ratably in all assets remaining after payment of
liabilities and payment of accrued dividends and liquidation preferences on the
preferred stock, if any. Holders of Common Stock have no preemptive rights and
have no rights to convert their Common Stock into any other securities. The
outstanding Common Stock is validly authorized and issued, fully-paid, and
nonassessable. In the event the Company were to elect to sell additional shares
of Common Stock following this Offering, investors in this Offering would have
no prior right to purchase such additional shares. As a result, their percentage
equity interest in the Company would be diluted. The shares of Common Stock
offered hereby will be, when issued and paid for, fully paid and not liable for
further call or assessment. Holders of the Common Stock do not have cumulative
voting rights, which means that the holders of more than one half of the
outstanding shares of Common Stock (subject to the rights of the holders of the
preferred stock) can elect all of the Company's directors, if they choose to do
so. In such event, the holders of the remaining shares of Common Stock would not
be able to elect any directors. The Board of Directors is empowered to fill any
vacancies thereon. Except as otherwise required by Delaware law, and subject to
the rights of the holders of preferred stock, all stockholder action is taken by
the vote of a majority of the outstanding shares of Common Stock voting as a
single class present at a meeting of stockholders at which a quorum (consisting
of a majority of the outstanding shares of Common Stock) is present in person or
proxy, or by written consent in lieu of such meeting.
PREFERRED STOCK
Preferred stock may be issued in one or more series and having such rights,
privileges, and limitations, including voting rights, conversion privileges,
and/or redemption rights, as may, from time to time, be determined by the Board
of Directors of the Company. Preferred stock may be issued in the future in
connection with acquisitions, financings, or such other matters as the Board of
Directors deems appropriate. In the event that any such shares of preferred
stock are to be issued, a Certificate of Designation, setting forth the series
of such preferred stock and the rights, privileges, and limitations with respect
thereto, shall be filed with the Secretary of State of the State of Delaware.
The effect of such preferred stock is that the Company's Board of Directors
alone, subject to, federal securities laws and Delaware law, may be able to
authorize the issuance of preferred stock which could have the effect of
delaying, deferring, or preventing a change in control of the Company without
further action by the stockholders, and may adversely affect the voting and
other rights of the holders of the Common Stock. The issuance of preferred stock
with voting and conversion rights may also adversely affect the voting power of
the holders of Common Stock, including the loss of voting control to others.
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WARRANTS
The following is a brief summary of certain provisions of the Warrants, but
such summary does not purport to be complete and is qualified in all respects by
reference to the actual text of the Warrant Agreement between the Company and
Continental Stock Transfer & Trust Company (the "Warrant Agent"), a copy of
which has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part. See "Additional Information."
EXERCISE PRICE AND TERMS. Each Warrant entitles the registered holder
thereof to purchase, at any time commencing , 1997 [the date of this
Prospectus] until , 2002 [five years after the date of this Prospectus],
one share of Common Stock at a price of $ per share [140% of the initial
public offering price per share of Common Stock], subject to adjustment in
accordance with the anti-dilution and other provisions referred to below. The
holder of any Warrant may exercise such Warrant by surrendering the certificate
representing the Warrant to the Warrant Agent, with the subscription form
thereon properly completed and executed, together with payment of the exercise
price. No fractional shares will be issued upon the exercise of the Warrants.
The exercise price of the Warrants bears no relationship to any objective
criteria of value and should in no event be regarded as an indication of any
future market price of the Securities offered hereby.
ADJUSTMENTS. The exercise price and the number of shares of Common Stock
purchasable upon the exercise of the Warrants are subject to adjustment upon the
occurrence of certain events, including stock dividends, stock splits,
combinations, reclassifications of the Common Stock or, for a period of two
years after the date of this Prospectus, except under certain circumstances, the
sale by the Company of its Common Stock or other securities convertible into
Common Stock at a price below the exercise price of the Warrants. Additionally,
an adjustment would be made in the case of a reclassification or exchange of
Common Stock, consolidation, or merger of the Company with or into another
corporation (other than a consolidation or merger in which the Company is the
surviving corporation) or sale of all or substantially all of the assets of the
Company, in order to enable warrantholders to acquire the kind and number of
shares of stock or other securities or property receivable in such event by a
holder of the number of shares of Common Stock that might otherwise have been
purchased upon the exercise of the Warrant.
REDEMPTION PROVISIONS. Commencing , 1999 [18 months after the date of
this Prospectus], the Warrants are subject to redemption by the Company, in
whole but not in part, at $.10 per Warrant on 30 days prior written notice to
the warrantholders, if the average closing sale price of the Common Stock as
reported on AMEX equals or exceeds $ per share [210% of the initial
public offering price per share of Common Stock] for any 20 trading days within
a period of 30 consecutive trading days ending on the fifth trading day prior to
the date of the notice of redemption. In the event the Company exercises the
right to redeem the Warrants, such Warrants will be exercisable until the close
of business on the business day immediately preceding the date for redemption
fixed in such notice. If any Warrant called for redemption is not exercised by
such time, it will cease to be exercisable and the holder will be entitled only
to the redemption price.
TRANSFER, EXCHANGE AND EXERCISE. The Warrants are in registered form and
may be presented to the Warrant Agent for transfer, exchange, or exercise at any
time on or prior to their expiration date five years from the date of this
Prospectus, at which time the Warrants will become wholly void and of no value.
If a market for the Warrants develops, the holder may sell the Warrants in lieu
of exercising them. There can be no assurance, however, that a market for the
Warrants will develop or continue.
WARRANTHOLDER NOT A STOCKHOLDER. The Warrants do not confer upon holders
thereof any voting, dividend, or other rights as stockholders of the Company.
MODIFICATION OF WARRANTS. The Company and the Warrant Agent may make such
modifications to the Warrants as they deem necessary and desirable that do not
adversely affect the interests of the warrantholders. The Company may, in its
sole discretion, lower the exercise price of the Warrants for a period of not
less than 30 days on not less than thirty 30 days' prior written notice to the
warrantholders and the
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<PAGE>
Representative. Modification of the number of securities purchasable upon the
exercise of any Warrant, the exercise price (other than as provided in the
preceding sentence), and the expiration date with respect to any Warrant
requires the consent of two-thirds of the warrantholders.
The Warrants are not exercisable unless, at the time of the exercise, the
Company has a current prospectus covering the shares of Common Stock issuable
upon exercise of the Warrants, and such shares have been registered, qualified,
or deemed to be exempt under the securities or "blue sky" laws of the state of
residence of the exercising holder of the Warrants. Although the Company has
undertaken to use its best efforts to have all of the shares of Common Stock
issuable upon exercise of the Warrants registered or qualified on or before the
exercise date and to maintain a current prospectus relating thereto until the
expiration of the Warrants, there can be no assurance that it will be able to do
so.
Although the Securities will not be knowingly be sold to purchasers in
jurisdictions in which the Securities are not registered or otherwise qualified
for sale, investors in such jurisdictions may purchase Warrants in the secondary
market or investors may move to jurisdictions in which the shares underlying the
Warrants are not so registered or qualified during the period that the Warrants
are exercisable. In such event, the Company would be unable to issue shares to
those persons desiring to exercise their Warrants, and holders of Warrants would
have no choice but to attempt to sell the Warrants in a jurisdiction where such
sale is permissible or allow them to expire unexercised.
REGISTRATION RIGHTS
The holders of the 58,000 shares of Common Stock issued in connection with
the Bridge Financing are entitled to certain rights with respect to the
registration of such shares under the Securities Act. In the event that the
Company proposes to register any of its securities in a secondary public
offering under the Securities Act, except in connection with this Offering or
pursuant to a registration statement on Forms S-4 or S-8, or similar or
successor forms, such holders are entitled to include such shares of Common
Stock in such registration, subject to the right of the underwriters of any such
offering to limit the number of shares included in such registration. The
Company is required to use its best efforts to effect the registration described
above and is generally required to bear the expenses of all such registrations.
TRANSFER AND WARRANT AGENT
The Company has appointed Continental Stock Transfer & Trust Company, 2
Broadway, New York, New York 10004, as transfer agent for the Common Stock and
as Warrant Agent for the Warrants.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following summary sets forth the principal federal income tax
consequences of holding and disposing of Debentures. This summary is based upon
laws, regulations, rulings and judicial decisions now in effect, all of which
are subject to change, possibly on a retroactive basis. This summary is
presented for informational purposes only and relates only to Debentures or
Common Stock received in exchange therefor that are held as "capital assets"
(generally, property held for investment within the meaning of Section 1221 of
the Internal Revenue Code of 1986, as amended (the "Code"). The summary
discusses certain federal income tax consequences to holders of Debentures
("holders") that are citizens or residents of the United States. It does not
discuss state, local or foreign tax consequences, nor does it discuss tax
consequences to categories of holders that may be subject to special rules, such
as tax exempt organizations, insurance companies, financial institutions and
dealers in stocks and securities. Tax consequences may vary depending on the
particular status of an investor.
This summary does not purport to deal with all aspects of federal income
taxation that may be relevant to an investor's decision to purchase the
Debentures. Each investor should consult his or her own tax advisor as to the
particular tax consequences to such person of purchasing, holding and disposing
of the Debentures, including the applicability and effect of any state, local or
foreign tax laws and any recent proposed changes in applicable income tax laws.
STATED INTEREST
A holder using the accrual method of accounting for tax purposes generally
will be required to include interest in income as such interest accrues, while a
cash basis holder generally will be required to include interest in income when
cash payments are received (or made available for receipt) by such holder.
CONVERSION OF DEBENTURES
Except as otherwise indicated below, no gain or loss will be recognized for
federal income tax purposes upon the conversion of the Debentures into Common
Stock. Cash paid in lieu of fractional Common Stock will be taxed as if the
fractional Common Stock was issued and then redeemed for cash, resulting in
either sale or exchange treatment or dividend treatment. The tax basis of the
Common Stock received upon conversion will be equal to the tax basis of the
Debentures converted reduced by the portion of such basis, if any, allocable to
any fractional share interest exchanged for cash. The holding period of the
Common Stock received upon conversion will include the holding period of the
Debentures converted.
If at any time the Company makes a distribution of property to its
shareholders that would be taxable to such shareholders as a dividend for
federal income tax purposes (e.g. distributions of cash, evidences of
indebtedness or assets of the Company, but generally not stock dividends or
rights to subscribe for Common Stock) and, pursuant to the anti-dilution
provisions of the Indenture, the conversion price of the Debentures is reduced,
such reduction will be deemed to be the payment of a stock distribution to
holders which may be taxable as a dividend. If the Company voluntarily reduces
the conversion price for a period of time, holders may, in certain
circumstances, have to include in gross income an amount equal to the value of
the reduction in the conversion price. Holders could, therefore, have taxable
income as a result of an event pursuant to which they received no cash or
property that could be used to pay the related income tax.
POSSIBLE ORIGINAL ISSUE DISCOUNT
Because the Debentures have an initial interest accrual period that is
longer than each subsequent interest accrual period, it is possible that upon
retirement of the Debentures, the holders thereof would be required to recognize
income equal to the "de minimis OID" amount, within the meaning of Section
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1.1273-1 (d)(6) of the regulations under the Code. Assuming a holder holds the
Debenture as a capital asset, any such income required to be recognized
thereunder will be characterized as capital gain.
DISPOSITION OF DEBENTURES OR SHARES OF COMMON STOCK
In general, the holder of a Debenture or the Common Stock into which it is
converted will recognize gain or loss upon the sale, redemption, retirement or
other disposition of the Debenture or Common Stock in an amount equal to the
difference between the amount of cash and the fair market value of property
received (except to the extent attributable to the payment of accrued interest)
and the holder's adjusted tax basis in the Debenture or Common Stock. The
holder's tax basis in a Debenture generally will be such holder's cost,
increased by the amount of accrued market discount a holder elects to include in
income with respect to the Debenture (discussed below), and reduced by (i) any
principal payments received by such holder and (ii) the amount of any
amortizable bond premium the holder elects to amortize with respect to the
Debenture. If a holder holds a Debenture as a capital asset, such gain or loss
will be a capital gain or loss except to the extent of any accrued market
discount (see "Market Discount on Resale") if the Debenture has been held for
the then requisite holding period at the time of the sale, exchange, redemption
or retirement.
MARKET DISCOUNT ON RESALE
The tax consequences of the sale of a Debenture by a holder may be affected
by the market discount provisions of the Code. Market discount is defined as the
excess of a debt instrument's stated redemption price (or its revised issue
price in the case of a debt instrument issued with original issue discount) at
maturity over the holder's tax basis in such debt instrument immediately after
its acquisition. If the market discount is less than 25% of the stated
redemption price (or the revised issue price, as the case may be) at maturity
multiplied by the number of complete years to maturity (after the holder
acquired the debt instrument), then the market discount will be considered to be
zero.
If a holder purchases a Debenture at a market discount and thereafter
recognizes gain on its disposition (or the disposition of the Common Stock into
which such Debenture is converted) such gain is treated as ordinary interest
income to the extent it does not exceed the accrued market discount on such
Debenture. In addition, recognition of gain to the extent of accrued market
discount may be required in the case of some dispositions which would otherwise
be nonrecognition transactions. Unless a holder elects to use a constant rate
method, accrued market discount equals a Debenture market discount multiplied by
a fraction, the numerator of which equals the number of days the holder holds
such Debenture and the denominator of which equals the total number of days
following the date the holder acquires such Debenture up to and including the
date of its maturity. If a holder of a Debenture acquired at a market discount
receives a partial principal payment prior to maturity, that payment is treated
as ordinary income to the extent of the accrued market discount on the Debenture
at the time payment is received. However, when the holder disposes of the
Debenture, the accrued market discount is reduced by the amount of the partial
principal payment previously included in income.
A holder that acquires a Debenture at a market discount may be required to
defer a portion of any interest expense that may otherwise be deductible on any
indebtedness incurred to purchase such Debenture until the holder disposes of
such Debenture in a taxable transaction. A holder of Debentures acquired at a
market discount may elect to include the market discount in income as the
discount accrues, either on a ratable basis, or, if elected, on a constant
interest rate basis. Once made, the current inclusion election applies to all
market discount obligations acquired on or after the first day of the first
taxable year to which the election applies and may not be revoked without the
consent of the Internal Revenue Service (the "IRS"). If a holder of a Debenture
elects to include the market discount in income as it accrues, the foregoing
rules with respect to the recognition of ordinary income on sales and certain
other dispositions and with respect to the deferral of interest deductions on
related indebtedness, would not apply.
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BOND PREMIUM
If, as a result of a purchase at a premium, a holder's adjusted tax basis in
a Debenture exceeds the Debenture's stated redemption price at maturity, such
excess may constitute amortizable bond premium. If the Debenture is a capital
asset in the hands of the holder, Section 171 of the Code allows the holder to
elect to amortize any such bond premium under the constant interest rate method
as an offset against interest income earned on the Debenture. The amount of
amortizable bond premium equals the excess of the holder's basis (for
determining loss on sale or exchange) in the Debenture over the amount payable
at maturity or, if it results in a smaller amortizable bond premium, an earlier
call date. If a holder is required to amortize bond premium by reference to such
a call date and the Debenture is not in fact called on such date, the remaining
unamortized premium must be amortized to a succeeding call date or to maturity.
A holder's tax basis in a Debenture must be reduced by the amount of
amortized bond premium. An election to amortize bond premium applies to all
bonds (other than tax-exempt bonds) held by the holder at the beginning of the
first taxable year to which the election applies or thereafter acquired by the
holder and is irrevocable without the consent of the IRS.
BACKUP WITHHOLDING
Under the "backup withholding" provisions of federal income tax law, the
Company, its agent, a broker or any paying agent, as the case may be, will be
required to withhold a tax equal to 31% of any payment of (i) principal,
premium, if any, and interest on the Debentures, (ii) proceeds from the sale or
redemption of the Debentures, (iii) dividends on the Common Stock and (iv)
proceeds from the sale or redemption of the Common Stock, unless the holder (a)
is exempt from backup withholding and, when required, demonstrates this fact to
the payor or (b) provides a taxpayer identification number to the payor,
certifies as to no loss of exemption from backup withholding and otherwise
complies with applicable requirements of the backup withholding rules. Certain
holders (including corporations, tax-exempt organizations, individual retirement
accounts and, to a limited extent, nonresident aliens) are not subject to the
backup withholding importing requirements. A nonresident alien must submit a
statement, signed under penalties of perjury, attesting to that individual's
exemption from backup withholding. A holder of Debentures or Common Stock that
is otherwise required to but does not provide the Company with a correct
taxpayer identification number may be subject to penalties imposed by the Code.
Any amounts paid as backup withholding with respect to the Debentures or Common
Stock will be credited to the income tax liability of the person receiving the
payment from which such amount was withheld. Holders of Debentures and Common
Stock should consult their tax advisors as to their qualification for exemption
from backup withholding and the procedure for obtaining such an exemption.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of this Offering, and giving effect to the Acquisitions,
the Company will have 4,183,067 shares of Common Stock outstanding (4,483,067
shares of Common Stock outstanding if the Underwriters' over-allotment option is
exercised in full). Of these shares, the 2,000,000 shares of Common Stock
offered hereby (2,300,000 shares if the Underwriters' over-allotment option is
exercised in full), will be freely tradeable without restriction under the
Securities Act unless purchased by affiliates as that term is defined in Rule
144 under the Securities Act.
The remaining 2,183,067 shares of Common Stock are "restricted securities"
within the meaning of Rule 144 of the Securities Act and, if held for at least
one year, would be eligible for sale in the public market in reliance upon, and
in accordance with, the provisions of Rule 144 following the expiration of such
one-year period. In general, under Rule 144 as currently in effect, a person or
persons whose shares are aggregated, including a person who may be deemed to be
an "affiliate" of the Company as that term is defined under the Securities Act,
would be entitled to sell within any three-month period a number of shares
beneficially owned for at least one year that does not exceed the greater of (i)
1% of the then outstanding shares of Common Stock, or (ii) the average weekly
trading volume in the Common Stock during the four calendar weeks preceding such
sale. Sales under Rule 144 are also subject to certain requirements as to the
manner of sale, notice, and the availability of current public information about
the Company. However, a person who is not deemed to have been an affiliate of
the Company during the 90 days preceding a sale by such person and who has
beneficially owned such shares of Common Stock for at least two years may sell
such shares without regard to the volume, manner of sale, or notice requirements
of Rule 144. All officers and directors of the Company, current stockholders,
and option holders under the Plan have agreed not, directly or indirectly, to
offer, agree to offer to sell, transfer, pledge, assign, encumber, grant an
option for the purchase or sale of, hypothecate, or otherwise dispose of any
securities of the Company for a period of 18 months from the date of this
Prospectus without the Representative's prior written consent. After such
18-month period, all 2,183,067 shares may be sold in accordance with Rule 144.
Prior to this offering, there has been no public market for the Company's
securities. Following this offering, the Company cannot predict the effect, if
any, that sales of shares of Common Stock and Warrants pursuant to Rule 144 or
otherwise, or the availability of such shares for sale, will have on the market
price prevailing from time to time. Nevertheless, sales by the current
stockholders of a substantial number of shares of Common Stock and Warrants in
the public market could materially adversely affect prevailing market prices for
the Common Stock and Warrants. In addition, the availability for sale of a
substantial number of shares of Common Stock Warrants acquired through the
exercise of the Representative's Warrants or the outstanding options under the
Plan could materially adversely affect prevailing market prices for such
securities.
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UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom Nolan Securities
Corp., SouthWall Capital Corp., and Dirks & Company, Inc. are acting as
representatives (in such capacity, the "Representatives"), have severally
agreed, subject to the terms and conditions of the Underwriting Agreement (the
"Underwriting Agreement") to purchase from the Company, and the Company has
agreed to sell to the Underwriters on a firm commitment basis, the respective
amount of Debentures, and number of shares of Common Stock, and the number of
Warrants set forth opposite their names:
<TABLE>
<CAPTION>
AMOUNT OF NUMBER OF NUMBER OF
UNDERWRITERS DEBENTURES SHARES WARRANTS
- ----------------------------------------------------- ------------- ---------- ----------
<S> <C> <C> <C>
Nolan Securities Corp................................
SouthWall Capital Corp...............................
Dirks & Company, Inc.................................
------------- ---------- ----------
Total.......................................... $ 25,000,000 2,000,000 2,000,000
------------- ---------- ----------
------------- ---------- ----------
</TABLE>
The Underwriters are committed to purchase all the Securities offered
hereby, if any of such Securities are purchased. The Underwriting Agreement
provides that the obligations of the several Underwriters are subject to
conditions precedent specified therein.
The Company has been advised by the Representatives that the Underwriters
propose initially to offer the Securities to the public at the initial public
offering prices set forth on the cover page of this Prospectus and to such
dealers at such prices less concessions not in excess of % of the principal
amount of Debentures, $ per share of Common Stock, and $ per
Warrant. Such dealers may reallow a concession not in excess of % of the
Debentures, $ per share of Common Stock, and $ per Warrant to
certain other dealers. After the commencement of the Offering, the public
offering prices, concession, and reallowance may be changed by the
Representatives.
The Representatives have informed the Company that they do not expect sales
to discretionary accounts by the Underwriters to exceed five percent of the
Securities offered hereby.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments that the Underwriters may be required to make. The Company has also
agreed to pay to the Representatives a non-accountable expense allowance equal
to 2% of the gross proceeds derived from the sale of the Securities
underwritten, of which $25,000 has been paid to date.
The Company has granted to the Underwriters an over-allotment option,
exercisable during the 45 day period from the date of this Prospectus, to
purchase up to an aggregate of $3,750,000 principal amount of Debentures, an
additional 300,000 shares of Common Stock, and/or 300,000 Warrants at the
initial offering price per Debenture, share of Common Stock, and Warrant,
respectively, offered hereby, less underwriting discounts and the
non-accountable expense allowance. Such option may be exercised only for the
purpose of covering over-allotments, if any, incurred in the sale of the
Securities offered hereby. To the extent such option is exercised in whole or in
part, each Underwriter will have a firm commitment, subject to certain
conditions, to purchase the amount of additional Securities proportionate to its
initial commitment.
The Company has agreed, at the request of the Representatives, that for five
years after the date of this Prospectus, it will use its best efforts to cause
one individual designated by the Representatives to be elected to the Company's
Board of Directors.
68
<PAGE>
In connection with this Offering, the Company has agreed to sell to the
Representatives, for nominal consideration, warrants to purchase from the
Company up to an aggregate of $2,500,000 principal amount of Debentures, up to
200,000 shares of Common Stock, and/or up to 200,000 Warrants (the
"Representatives' Warrants"). The Representatives' Warrants are initially
exercisable at a price of 100% of the principal amount of Debentures, $
per share of Common Stock [140% of the initial public offering price per share
of Common Stock], and $ per Warrant [140% of the initial public offering
price per Warrant] for a period of four years, commencing at the beginning of
the second year after their issuance and sale and are restricted from sale,
transfer, assignment, or hypothecation for a period of 12 months from the date
hereof, except to officers of the Representatives. The Warrants obtained upon
exercise of the Representatives' Warrants will be exercisable for a period of
four years commencing at the beginning of the second year after the effective
date of this Offering, at an exercise price of $____ per share [140% of the
exercise price of the Warrants]. The Representatives' Warrants provide for
adjustment in the number of shares of Common Stock and Warrants issuable upon
the exercise thereof and in the exercise price of the Representatives' Warrants
as a result of certain events, including subdivisions and combinations of the
Common Stock. The Representatives' Warrants grant to the holders thereof certain
rights of registration for the securities issuable upon exercise thereof.
All officers and directors of the Company, all holders of the issued and
outstanding Common Stock, and all holders of options, warrants, or other
securities convertible exercisable, or exchangeable for the issued or
outstanding Common Stock have agreed not to, directly or indirectly, issue,
offer, agree or offer to sell, sell, transfer, assign, encumber, grant an option
for the purchase or sale of, pledge, hypothecate, or otherwise dispose of any
beneficial interest in such securities for a period of 18 months following the
effective date of the Registration Statement without the prior written consent
of the Company and the Representatives (the "Lock-up Agreements"). An
appropriate legend shall be marked on the face of the certificates representing
all such certificates.
In connection with this Offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain, or otherwise affect the market prices of the Securities.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M, pursuant to which such persons may bid for
purchase of the Securities for the purpose of stabilizing their respective
market prices. The Underwriters also may create a short position for the account
of the Underwriters by selling more Securities in connection with the Offering
than they are committed to purchase from the Company, and in such case, may
purchase Securities in the open market following completion of the Offering, to
cover all or a portion of such short position. The Underwriters may also cover
all or a portion of such short position, up to an aggregate of $3,750,000
principal amount of Debentures, 300,000 shares of Common Stock, and/or 300,000
Warrants, by exercising the Underwriters' over-allotment option referred to
above. In addition, the Representatives may impose "penalty bids" under
contractual arrangements with the Underwriters whereby it may reclaim from an
Underwriter (or dealer participating in the Offering) for the account of other
Underwriters, the selling concession with respect to the Securities which are
distributed in the Offering but subsequently purchased for the account of the
Underwriters in the open market. None of the transactions described in this
paragraph is required , and, if they are undertaken, they may be discontinued at
any time.
Nolan Securities Corp. has been in business since February 1991 and has
participated in two public offerings as a co-manager and two public offerings as
a member of the underwriting syndicate. Dirks & Company, Inc. commenced
operations in July 1997 and has not co-managed or participated as an underwriter
in any public offering of securities. SouthWall Capital Corp. commenced
operations as an underwriter in May 1996 and has co-managed one public offering
and participated as an underwriter in nine public offerings to date.
Accordingly, none of the Representatives have extensive experience as a co-
manager or underwriter of public offerings of securities. In addition, each of
the Representatives are relatively small firms and no assurance can be given
that any of the Representatives will be able to
69
<PAGE>
participate as a market maker in any of the Securities. No assuance can be given
that any broker-dealer will make a market in any of the Securities.
Prior to this Offering, there has been no public market for any of the
Securities. Consequently, the initial public offering prices of the Securities
has been determined by negotiation between the Company and the Representatives
and does not necessarily bear any relationship to the Company's asset value, net
worth, or other established criteria of value. The factors considered in these
negotiations, in addition to prevailing market conditions, included the history
of, and prospects for, the industry in which the Company competes, an assessment
of the Company's management, the prospects for the Company, its capital
structure, the market for initial public offerings, and certain other factors as
were deemed relevant.
The foregoing is a summary of the principal terms of the agreements
described above and does not purport to be complete. Reference is made to a copy
of each such agreement, which are filed as exhibits to the Registration
Statement. See "Additional Information."
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Brock
Fensterstock Silverstein McAuliffe & Wade LLC, New York, New York. Orrick,
Herrington & Sutcliffe, LLP, New York, New York, has acted as counsel to the
Underwriters in connection with this Offering.
EXPERTS
The financial statements of the Company, the Initial Affiliated Practices,
and PMI as at December 31, 1996, and for the period then ended have been audited
by Feldman Radin & Co., P.C., independent certified public accountants, as
indicated in their reports with respect thereto, and are included herein in
reliance upon such reports upon the authority of said firm as experts in
accounting and auditing. Certain health care-related legal matters will be
passed upon for the Company by Kalogredis, Tsoules and Sweeney Ltd., Wayne,
Pennsylvania.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), 450 Fifth Street, N.W., Washington D.C. 20549, a registration
statement on Form S-1 (the "Registration Statement"), including amendments
thereto, under the Securities Act with respect to the securities offered hereby.
This Prospectus does not contain all the information set forth in the
Registration Statement and the exhibits and schedules filed therewith, as
permitted by the rules and regulations of the Commission. For further
information with respect to the Company and the Offering, reference is hereby
made to the Registration Statement and to the exhibits and schedules filed
therewith. Statements contained in this Prospectus as to the contents of any
contract or other document which has been filed as an exhibit to the
Registration Statement are qualified in their entirety by reference to such
exhibits for a complete statement of their terms and conditions. The
Registration Statement and the exhibits and schedules thereto may be inspected
without charge at the offices of the Commission and copies of all or any part
thereof may be obtained from the Commission's principal office at 450 Fifth
Street, N.W., Washington D.C. 20549 or at certain of the regional offices of the
Commission located at Seven World Trade Center, 13th Floor, New York, New York
10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, upon
payment of the fees prescribed by the Commission. Electronic registration
statements filed through the Electronic Data Gathering, Analysis, and Retrieval
system are publicly available through the Commission's Web site
(http://www.sec.gov). Following the consummation of this Offering and the
listing of the Debentures and the Common Stock on the AMEX, reports and other
information concerning the Company may be inspected at the offices of the AMEX,
86 Trinity Place, New York, New York 10006.
70
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Unaudited Pro Forma Financial Statements of
INTEGRATED PHYSICIAN SYSTEMS, INC.
Basis of Presentation.................................................................................. F-4
Unaudited Pro Forma Balance Sheet...................................................................... F-6
Unaudited Pro Forma Statement of Operations............................................................ F-7
Notes to Unaudited Pro Forma Financial Statements...................................................... F-10
INTEGRATED PHYSICIAN SYSTEMS, INC.
Report of Independent Public Accountants............................................................... F-12
Balance Sheets......................................................................................... F-13
Statements of Operations............................................................................... F-14
Statements of Changes in Stockholders' Equity (Deficit)................................................ F-15
Statements of Cash Flows............................................................................... F-16
Notes to Financial Statements.......................................................................... F-17
RELIANCE HEALTHCARE GROUP
Report of Independent Public Accountants............................................................... F-20
Combined Balance Sheets................................................................................ F-21
Combined Statements of Operations...................................................................... F-22
Combined Statements of Changes in Stockholders' Equity (Deficit)....................................... F-23
Combined Statements of Cash Flows...................................................................... F-24
Notes to Financial Statements.......................................................................... F-25
MEDICAL BILLING AND MANAGEMENT SERVICES, INC. AND SUBSIDIARY
Report of Independent Public Accountants............................................................... F-31
Balance Sheets......................................................................................... F-32
Statements of Operations............................................................................... F-33
Statements of Changes in Stockholder's Equity (Deficit)................................................ F-34
Statements of Cash Flows............................................................................... F-35
Notes to Financial Statements.......................................................................... F-36
BRANCHBURG EYE PHYSICIANS, P.A.
Report of Independent Public Accountants............................................................... F-40
Balance Sheets......................................................................................... F-41
Statements of Operations............................................................................... F-42
Statements of Changes in Stockholder's Equity (Deficit)................................................ F-43
Statements of Cash Flows............................................................................... F-44
Notes to Financial Statements.......................................................................... F-45
FELIX SALERNO, M.D. AND RICHARD WEEDER, M.D.
Report of Independent Public Accountants............................................................... F-49
Balance Sheets......................................................................................... F-50
Statements of Operations............................................................................... F-51
Combined Statements of Proprietors' Capital............................................................ F-52
Statements of Cash Flows............................................................................... F-53
Notes to Financial Statements.......................................................................... F-54
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
FLEMINGTON MEDICAL GROUP, P.A.
Report of Independent Public Accountants............................................................... F-56
Balance Sheets......................................................................................... F-57
Statements of Operations............................................................................... F-58
Statements of Changes in Stockholder's Equity.......................................................... F-59
Statements of Cash Flows............................................................................... F-60
Notes to Financial Statements.......................................................................... F-61
HUNTERDON OPTHALMOLOGISTS, P.A.
Report of Independent Public Accountants............................................................... F-64
Balance Sheets......................................................................................... F-65
Statements of Operations............................................................................... F-66
Statements of Changes in Stockholders' Equity.......................................................... F-67
Statements of Cash Flows............................................................................... F-68
Notes to Financial Statements.......................................................................... F-69
JOEL FUHRMAN M.D., P.C. D/B/A AMWELL HEALTH CENTER
Report of Independent Public Accountants............................................................... F-72
Balance Sheets......................................................................................... F-73
Statements of Operations............................................................................... F-74
Statements of Changes in Stockholder's Equity.......................................................... F-75
Statements of Cash Flows............................................................................... F-76
Notes to Financial Statements.......................................................................... F-77
KENNETH G. STERN, M.D., P.A.
Report of Independent Public Accountants............................................................... F-80
Balance Sheets......................................................................................... F-81
Statements of Operations............................................................................... F-82
Statements of Changes in Stockholder's Equity.......................................................... F-83
Statements of Cash Flows............................................................................... F-84
Notes to Financial Statements.......................................................................... F-85
ALEXANDER KUDRYK, M.D.
Report of Independent Public Accountants............................................................... F-88
Balance Sheets......................................................................................... F-89
Statements of Operations............................................................................... F-90
Statements of Proprietor's Capital..................................................................... F-91
Statements of Cash Flows............................................................................... F-92
Notes to Financial Statements.......................................................................... F-93
BOUND BROOK PEDIATRIC ASSOCIATION, P.A.
Report of Independent Public Accountants............................................................... F-96
Balance Sheets......................................................................................... F-97
Statements of Operations............................................................................... F-98
Statements of Changes in Stockholder's Equity.......................................................... F-99
Statements of Cash Flows............................................................................... F-100
Notes to Financial Statements.......................................................................... F-101
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
AUDREY HINDS-MCDONALD, M.D.
Report of Independent Public Accountants............................................................... F-104
Balance Sheets......................................................................................... F-105
Statements of Operations............................................................................... F-106
Statements of Proprietor's Capital..................................................................... F-107
Statements of Cash Flows............................................................................... F-108
Notes to Financial Statements.......................................................................... F-109
JOHN E. DURST, M.D.
Report of Independent Public Accountants............................................................... F-112
Balance Sheets......................................................................................... F-113
Statements of Operations............................................................................... F-114
Statements of Proprietor's Capital..................................................................... F-115
Statements of Cash Flows............................................................................... F-116
Notes to Financial Statements.......................................................................... F-117
PROFESSIONAL MEDICAL IMAGES, LTD.
Report of Independent Public Accountants............................................................... F-119
Balance Sheets......................................................................................... F-120
Statements of Operations............................................................................... F-121
Statements of Changes in Stockholders' Equity (Deficit)................................................ F-122
Statements of Cash Flows............................................................................... F-123
Notes to Financial Statements.......................................................................... F-124
</TABLE>
F-3
<PAGE>
INTEGRATED PHYSICIAN SYSTEMS, INC.
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The following pro forma financial statements include the unaudited consolidated
balance sheet of Integrated Physician Systems, Inc. ("IPS" or the "Company"), as
of June 30, 1997, the audited statements of operations for the year ended
December 31, 1996, and the unaudited statements of operations for the six months
ended June 30, 1996 and 1997.
The following unaudited pro forma financial statements (i) give effect to
the acquisitions of the individual Initial Affiliated Practices, pursuant to
which the Company will acquire certain assets and assume certain liabilities in
exchange for 481,067 shares of the Company's Common Stock, cash and notes
payable (ii) reflect the effects of the provisions of the Practice Management
Service Agreements between the Company and each of the Initial Affiliated
Practices (except for the medical billing company) and (iii) give effect to the
consummation of the IPO. For purposes of developing the unaudited pro forma
balance sheet the value of the Company's Common Stock is based upon the assumed
initial public offering price of $7.50 per share. The estimated aggregate
amounts to be allocated to the assets acquired and liabilities assumed consist
of:
<TABLE>
<S> <C>
Common stock................................................... $3,608,000
Cash........................................................... 7,937,000
Notes payable.................................................. 114,000
----------
$11,659,000
----------
----------
</TABLE>
The allocation is based upon preliminary estimates in accordance with
generally accepted accounting principles. The actual allocation will be based on
the estimated fair market value of the tangible and intangible assets and
liabilities of such Initial Affiliated Practices as of the date of the
Acquisition. For purposes of the pro forma financial statements, such allocation
has been estimated as follows:
<TABLE>
<S> <C>
Current assets................................................. $ 146,000
Intangible assets.............................................. 9,980,000
Property, equipment and improvements........................... 2,000,000
Liabilities assumed............................................ (467,000)
----------
$11,659,000
----------
----------
</TABLE>
The unaudited pro forma financial statements have been prepared by the
Company based upon the historical financial statements of Integrated Physician
Systems, Inc. and the individual Initial Affiliated Practices included in this
Prospectus and certain preliminary estimates and assumptions deemed appropriate
by management of the Company. The pro forma balance sheet as of June 30, 1997
gives effect to the Acquisitions and the consummation of the IPO as if such
transactions had occurred on June 30, 1997 and reflects certain transactions
occurring subsequent to June 30, 1997. The pro forma statements of operations
for the year ended December 31, 1996 and six months ended June 30, 1996 and 1997
assumes the Acquisitions and the IPO were completed on January 1, 1996. These
pro forma financial statements may not be indicative of actual results as if the
transactions had occurred on the dates indicated or which may be realized in the
future. Neither expected benefits nor cost efficiencies anticipated by the
Company following consummation of the Acquisitions have been reflected in such
pro forma financial statements: however, cost reductions as contractually agreed
per the Practice Management Service Agreements have been reflected in the pro
forma financial statements. The pro forma general and administrative expenses do
not include the anticipated incremental costs of managing such additional
Affiliated Practices as the
F-4
<PAGE>
INTEGRATED PHYSICIAN SYSTEMS, INC.
UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
BASIS OF PRESENTATION
related management fees are not included in the pro forma revenues. Such costs
may also be substantial and may vary according to the operations of each new
Initial Affiliated Practice.
The pro forma financial statements should be read in conjunction with the
historical financial statements of Integrated Physicians Systems, Inc. and the
individual Initial Affiliated Practices, including the related notes thereto,
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" that appear elsewhere in this Prospectus.
F-5
<PAGE>
INTEGRATED PHYSICIAN SYSTEMS, INC.
UNAUDITED PRO FORMA BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30, 1997
-----------------------------------------
<S> <C> <C> <C>
HISTORICAL ADJUSTMENTS PRO FORMA
----------- ------------- -------------
<CAPTION>
ASSETS
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents......................................... $ 35,000 $ 12,850,000(B) $ 27,378,000
22,625,000(B)
181,000(B)
63,000(C)
(7,937,000 (C)
(435,000 (D)
125,000(C)
(129,000 (A)
Accounts receivable, net.......................................... 67,000 83,000(C) 150,000
----------- ------------- -------------
Total current assets.......................................... 102,000 27,426,000 27,528,000
----------- ------------- -------------
PROPERTY AND EQUIPMENT, net......................................... 6,000 2,000,000 2,006,000
----------- ------------- -------------
OTHER NONCURRENT ASSETS
Organization costs, net........................................... 6,000 -- 6,000
Discount on notes................................................. 113,000 (113,000 (E) --
Deferred registration costs....................................... 393,000 570,000(B) --
(963,000 (B)
Goodwill.......................................................... 38,000 9,130,000(C) 9,168,000
Deferred financing costs.......................................... -- 2,375,000(B) 2,375,000
Other intangibles................................................. -- 850,000(C) 850,000
----------- ------------- -------------
550,000 11,849,000 12,399,000
----------- ------------- -------------
$ 658,000 $ 41,275,000 $ 41,933,000
----------- ------------- -------------
----------- ------------- -------------
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued liabilities.......................... $ 105,000 $ 9,000(C) $ 114,000
Due to related party.............................................. 129,000 (129,000 (A) --
Notes payables and current portion of long-term debt.............. -- 128,000(C) 128,000
Current portion of obligations under capital lease................ -- 37,000(C) 37,000
Senior notes...................................................... 310,000 125,000(D) --
(435,000 (D)
----------- ------------- -------------
Total current liabilities....................................... 544,000 (265,000) 279,000
----------- ------------- -------------
LONG-TERM DEBT:
Notes payable, net of current portion............................. -- 273,000(C) 387,000
114,000(C)
Obligations under capital lease, net of current portion........... -- 20,000(C) 20,000
% Convertible subordinated debentures............................ -- 25,000,000(B) 25,000,000
----------- ------------- -------------
Total long-term debt.......................................... -- 25,407,000 25,407,000
----------- ------------- -------------
Total liabilities........................................... 544,000 25,142,000 25,686,000
----------- ------------- -------------
STOCKHOLDERS' EQUITY
Common stock...................................................... 30,000 20,000(B) 42,000
5,000(C)
(13,000 (F)
Additional paid-in capital........................................ 245,000 12,618,000(B) 16,479,000
3,603,000(C)
13,000(F)
Accumulated deficit............................................... (161,000) (113,000 (E) (274,000)
----------- ------------- -------------
Total stockholders' equity.................................... 114,000 16,133,000 16,247,000
----------- ------------- -------------
$ 658,000 $ 41,275,000 $ 41,933,000
----------- ------------- -------------
----------- ------------- -------------
</TABLE>
See notes to pro forma financial statements.
F-6
<PAGE>
INTEGRATED PHYSICIAN SYSTEMS, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1997
------------------------------------------
<S> <C> <C> <C>
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ------------ -----------
REVENUE:
Medical service revenue.......................................................... $ -- $ 7,962,000(AA) $ 7,962,000
Management fees.................................................................. 111,000 -- 111,000
Medical billing and service fees................................................. -- 1,101,000(AA) 1,101,000
Other revenue.................................................................... -- 63,000(AA) 63,000
---------- ------------ -----------
Total revenue................................................................ 111,000 9,126,000 9,237,000
---------- ------------ -----------
COSTS AND EXPENSES:
Salaries and wages............................................................... 51,000 5,133,000(BB) 5,184,000
Medical supplies and expenses.................................................... -- 239,000(CC) 239,000
General and administrative expenses.............................................. 78,000 3,312,000(DD) 3,390,000
Depreciation and amortization.................................................... 1,000 619,000(EE) 620,000
Interest expense................................................................. 135,000 875,000(FF) 1,010,000
---------- ------------ -----------
Total costs and expenses....................................................... 265,000 10,178,000 10,443,000
---------- ------------ -----------
LOSS BEFORE INCOME TAXES........................................................... (154,000) (1,052,000) (1,206,000)
PROVISION FOR INCOME TAXES......................................................... -- -- (GG) --
---------- ------------ -----------
NET LOSS........................................................................... $ (154,000) $ (1,052,000) $(1,206,000)
---------- ------------ -----------
---------- ------------ -----------
LOSS PER SHARE..................................................................... (HH) $ (0.29)
-----------
-----------
</TABLE>
See notes to pro forma financial statements.
F-7
<PAGE>
INTEGRATED PHYSICIAN SYSTEMS, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-----------------------------------------
<S> <C> <C> <C>
HISTORICAL ADJUSTMENTS PRO FORMA
-------- ------------ ------------
REVENUE:
Medical service revenue................................................ $ -- $ 17,130,000(AA) $ 17,130,000
Medical billing and service fees....................................... -- 1,398,000(AA) 1,398,000
Other revenue.......................................................... -- 38,000(AA) 38,000
-------- ------------ ------------
Total revenue...................................................... -- 18,566,000 18,566,000
-------- ------------ ------------
COSTS AND EXPENSES:
Salaries and wages..................................................... -- 13,294,000(BB) 13,294,000
Medical supplies and expenses.......................................... -- 426,000(CC) 426,000
General and administrative expenses.................................... 4,000 4,170,000(DD) 4,174,000
Depreciation and amortization.......................................... 2,000 1,237,000(EE) 1,239,000
Interest expense....................................................... -- 2,020,000(FF) 2,020,000
-------- ------------ ------------
Total costs and expenses............................................. 6,000 21,147,000 21,153,000
-------- ------------ ------------
LOSS BEFORE INCOME TAXES................................................. (6,000) (2,581,000) (2,587,000)
PROVISION FOR INCOME TAXES............................................... -- -- (GG) --
-------- ------------ ------------
NET LOSS................................................................. $ (6,000) $ (2,581,000) $ (2,587,000)
-------- ------------ ------------
-------- ------------ ------------
LOSS PER SHARE........................................................... (HH) $ (0.62)
------------
------------
</TABLE>
See notes to pro forma financial statements.
F-8
<PAGE>
INTEGRATED PHYSICIAN SYSTEMS INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1996
-------------------------------------------
<S> <C> <C> <C>
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ------------ ------------
REVENUE:
Medical service revenue.......................................................... $ -- $ 8,754,000(AA) $ 8,754,000
Medical billing and service fees................................................. -- 576,000(AA) 576,000
Other revenue.................................................................... -- 48,000(AA) 48,000
---------- ------------ ------------
Total revenue.................................................................. -- 9,378,000 9,378,000
---------- ------------ ------------
COSTS AND EXPENSES:
Salaries and wages............................................................... -- 6,624,000(BB) 6,624,000
Medical supplies and expenses.................................................... -- 205,000(CC) 205,000
General and administrative expenses.............................................. 2,000 2,606,000(DD) 2,608,000
Depreciation and amortization.................................................... 1,000 619,000(EE) 620,000
Interest expense................................................................. -- 1,010,000(FF) 1,010,000
---------- ------------ ------------
Total costs and expenses....................................................... 3,000 11,064,000 11,067,000
---------- ------------ ------------
LOSS BEFORE INCOME TAXES........................................................... (3,000) (1,686,000) (1,689,000)
PROVISION FOR INCOME TAXES......................................................... -- -- (GG) --
---------- ------------ ------------
---------- ------------ ------------
NET LOSS........................................................................... $ (3,000) $ (1,686,000) $ (1,689,000)
---------- ------------ ------------
---------- ------------
LOSS PER SHARE..................................................................... (HH) $ (0.41)
------------
------------
</TABLE>
See notes to pro forma financial statements.
F-9
<PAGE>
INTEGRATED PHYSICIANS SYSTEMS, INC.
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
UNAUDITED PRO FORMA BALANCE SHEET ADJUSTMENTS
(A) Reflects the repayment of monies borrowed for the purposes of funding the
initial operations of the Company from Wellness Concepts, Inc., a related
party, in the amount of $129,000 from the net proceeds of the IPO.
(B) Reflects the issuance of 2,000,000 shares of common stock by the Company
at an assumed initial public offering price of $7.50 per share, and the
issuance of 2,000,000 warrants to purchase a share of common stock, at
an assumed initial public offering price of $0.10 per warrant and the
issuance of the aggregate principal amount of $25,000,000 of the %
convertible subordinated debentures, less underwriters' discount,
offering expenses, and non-accountable expense allowance and other
expenses of the IPO.
(C) Reflects the purchase of the Initial Affiliated Practices which includes
(a) the issuance of 481,067 shares of common stock of the Company at a
price of $7.50 per share (b) the issuance of a $114,000 note by the
Company and (c) the assumption of certain liabilities of the Initial
Affiliated Practices.
<TABLE>
<S> <C>
Cash............................................................. $ 63,000
Accounts receivable.............................................. 83,000
Property and equipment........................................... 2,000,000
Other intangibles................................................ 850,000
Goodwill......................................................... 9,130,000
Accounts payable................................................. (9,000)
Issued long-term notes payable................................... (114,000)
Short term notes payable and current portion of long-term debt... (128,000)
Current portion of obligations under capital lease............... (37,000)
Long-term debt, net of current portion........................... (273,000)
Long-term obligations under capital lease, net of current
portion........................................................ (20,000)
Common stock issued.............................................. (5,000)
Additional paid-in-capital....................................... (3,603,000)
---------
Net cash payment made to Initial Affiliated Practices............ $7,937,000
---------
---------
</TABLE>
(D) Reflects the issuance after June 30, 1997 of an aggregate principal
amount of $125,000 Senior Notes as part of the Bridge Financing and the
repayment of the Senior Notes in the aggregate principal amount of
$435,000 from the net proceeds of the IPO.
(E) Represents the write off of the remaining unamortized portion of the
discount on the Senior notes.
(F) Represents the contribution on October 21, 1997 to the Company by
certain stockholders of 1,356,000 shares of Common Stock.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS ADJUSTMENTS
(AA) To record the accounts receivables of the Initial Affiliates Practices
assigned to the Company pursuant to the terms of the practice management
service agreements.
F-10
<PAGE>
INTEGRATED PHYSICIANS SYSTEMS, INC.
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
(BB) To record the physician and management/owner compensation to agree with
the contracted physician salaries, management salaries and incentive
compensation as contained in each of the physician and management
contracts with the Company and the Affiliated PCs. These adjustments
include compensation to three officers of the Company pursuant to their
employment agreements in the amount of $275,000 for the six month periods
ending June 30, 1996 and June 30, 1997, and $550,000 for the year ended
December 31, 1996.
(CC) To record the medical supplies expenses paid by the Company pursuant to
the terms of the practice management service agreements.
(DD) To record the general and administrative expenses paid by the Company
pursuant to the terms of the practice management service agreements.
(EE) To record the depreciation and amortization expenses associated with the
assets acquired from the Initial Affiliated Practices. Goodwill is being
amortized over 20 years. Other intangibles are being amortized over
periods ranging from 3 to 7 years. Deferred financing costs associated
with the convertible subordinated debentures are being amortized over 7
years.
(FF) Represents recording of interest expense on the convertible subordinated
debentures to be offered in the IPO. No estimated interest income on idle
funds associated with the proceeds from the issuance of the convertible
subordinated debentures has been assumed.
(GG) The Company has generated pro forma pre-tax losses for financial
reporting purposes. Recognition of deferred tax assets will require the
generation of future taxable income. Because there can be no assurance
that the Company will generate any earnings in future years, a valuation
allowance has been established equal to the deferred tax assets created
by the pro forma losses.
(HH) The number of shares used in the pro forma loss per share calculations
are determined as follows:
<TABLE>
<CAPTION>
NUMBER OF
SHARES
----------
<S> <C>
Outstanding shares after the Initial Public Offering............................. 3,644,000
Shares issued in connection with Bridge Financing................................ 58,000
Shares issued to acquire the Initial Affiliated Practices........................ 481,067
----------
Shares used to compute primary loss per share.................................... 4,183,067
Share issued in connection with conversion of subordinated convertible
debentures..................................................................... 2,381,000
----------
Shares used to compute fully diluted earnings per share(1)....................... 6,564,067
----------
----------
</TABLE>
- ------------------------
(1) Fully diluted loss per share has not been computed as it would be
anti-dilutive.
F-11
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Integrated Physician Systems, Inc.
We have audited the accompanying balance sheets of Integrated Physician
Systems, Inc., a Delaware corporation, as of December 31, 1995 and 1996, and the
related statements of operations, changes in stockholders' equity, and cash
flows for the period from inception, April 25, 1995, through December 31, 1995,
and for the year ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Integrated Physician
Systems, Inc., as of December 31, 1995 and 1996, and the results of its
operations and its cash flows for the period from inception, April 25, 1995
through December 31, 1995, and for the year ended December 31, 1996, in
conformity with generally accepted accounting principles.
Feldman Radin & Co., P. C.
Certified Public Accountants
New York, New York
May 9, 1997 and October 23, 1997
as to Notes 7A and 7E
F-12
<PAGE>
INTEGRATED PHYSICIAN SYSTEMS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JUNE 30,
1995 1996 1997
---------- ---------- -----------
<S> <C> <C> <C>
(UNAUDITED)
<CAPTION>
ASSETS
<S> <C> <C> <C>
CURRENT ASSETS:
Cash...................................................................... $ -- $ 30,000 $ 35,000
Accounts receivable....................................................... -- -- 67,000
---------- ---------- -----------
Total current assets.................................................. -- 30,000 102,000
---------- ---------- -----------
PROPERTY AND EQUIPMENT, net of
accumulated depreciation of $25,000....................................... -- -- 6,000
OTHER ASSETS:
Deferred registration costs............................................... 64,000 259,000 393,000
Goodwill.................................................................. -- -- 38,000
Organization costs, net of accumulated amortization
of $1,000, $3,000 and $4,000 respectively................................. 9,000 7,000 6,000
---------- ---------- -----------
Total other assets.................................................... 73,000 266,000 437,000
---------- ---------- -----------
$ 73,000 $ 296,000 $ 545,000
---------- ---------- -----------
---------- ---------- -----------
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<S> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued liabilities.................................. $ -- $ 30,000 $ 105,000
Due to related party...................................................... 74,000 118,000 129,000
Senior notes, net of discount of $0, $94,000 and $113,000, respectively... -- 31,000 197,000
---------- ---------- -----------
Total current liabilities............................................. 74,000 179,000 431,000
---------- ---------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred Stock, $.01 par value, authorized 1,000,000,
shares; none issued and outstanding..................................... -- -- --
Common Stock, $.01 par value, authorized 50,000,000 shares,
issued and outstanding 1,000, 3,012,500,
and 3,031,000, respectively............................................. -- 30,000 30,000
Additional paid-in capital................................................ -- 94,000 245,000
Accumulated deficit....................................................... (1,000) (7,000) (161,000)
---------- ---------- -----------
Total stockholders' equity (deficit).................................. (1,000) 117,000 114,000
---------- ---------- -----------
$ 73,000 $ 296,000 $ 545,000
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
See notes to financial statements
F-13
<PAGE>
INTEGRATED PHYSICIAN SYSTEMS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM APRIL 25,
1995
(INCEPTION) SIX MONTHS
THROUGH YEAR ENDED ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, ----------------------
1995 1996 1996 1997
--------------- ------------ --------- -----------
<S> <C> <C> <C> <C>
(UNAUDITED)
REVENUES
Management fees......................................... $ -- $ -- $ -- $ 111,000
------- ------------ --------- -----------
COSTS AND EXPENSES:
Salaries and wages...................................... 51,000
General and administrative expenses..................... -- 4,000 2,000 78,000
Interest expense........................................ -- -- -- 135,000
Amortization of organization costs...................... 1,000 2,000 1,000 1,000
------- ------------ --------- -----------
Total costs and expenses............................ 1,000 6,000 3,000 265,000
------- ------------ --------- -----------
LOSS BEFORE PROVISION FOR INCOME TAXES.................... (1,000) (6,000) (3,000) (154,000)
PROVISION FOR INCOME TAXES................................ -- -- -- --
------- ------------ --------- -----------
NET LOSS.................................................. $ (1,000) $ (6,000) $ (3,000) $ (154,000)
------- ------------ --------- -----------
------- ------------ --------- -----------
NET LOSS PER SHARE........................................ $ (1.00) $ (0.00) $ (0.00) $ (0.05)
------- ------------ --------- -----------
------- ------------ --------- -----------
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING............. 1,000 2,251,292 1,000,667 3,027,000
------- ------------ --------- -----------
------- ------------ --------- -----------
</TABLE>
See notes to financial statements
F-14
<PAGE>
INTEGRATED PHYSICIAN SYSTEMS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL STOCKHOLDERS'
--------------------- PAID-IN ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL DEFICIT (DEFICIT)
---------- --------- ---------- ------------ --------------
<S> <C> <C> <C> <C> <C>
BALANCE, April 25, 1995........................ -- $ -- $ -- $ -- $ --
Issuance of common stock..................... 1,000 -- -- -- --
Net loss..................................... -- -- -- (1,000) (1,000)
---------- --------- ---------- ------------ --------------
BALANCE, December 31, 1995..................... 1,000 -- -- (1,000) (1,000)
Issuance of common stock..................... 3,011,500 30,000 -- -- 30,000
Net loss..................................... -- -- (6,000) (6,000)
Additional paid-in capital................... -- -- 94,000 -- 94,000
---------- --------- ---------- ------------ --------------
BALANCE, December 31, 1996..................... 3,012,500 30,000 94,000 (7,000) 117,000
Issuance of common stock (unaudited)......... 18,500 -- -- -- --
Net loss (unaudited)......................... -- -- -- (154,000) (154,000)
Additional paid-in capital................... -- -- 151,000 -- 151,000
---------- --------- ---------- ------------ --------------
BALANCE, June 30, 1997 (unaudited)............. 3,031,000 $ 30,000 $ 245,000 $ (161,000) $ 114,000
---------- --------- ---------- ------------ --------------
---------- --------- ---------- ------------ --------------
</TABLE>
See notes to financial statements
F-15
<PAGE>
INTEGRATED PHYSICIAN SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM APRIL 25,
1995
(INCEPTION) SIX MONTHS
THROUGH YEAR ENDED ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, ----------------------
1995 1996 1996 1997
--------------- ------------ --------- -----------
<S> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOWS USED IN OPERATING ACTIVITIES:
Cash received for revenues................................... 111,000
Cash paid for general and administrative expenses............ $ -- $ (4,000) $ (2,000) $ (122,000)
--------------- ------------ --------- -----------
Net cash used in operating activities.................... -- (4,000) (2,000) (11,000)
--------------- ------------ --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in deferred registration costs...................... (74,000) (195,000) -- (134,000)
Increase in accounts receivable.............................. -- -- -- (67,000)
--------------- ------------ --------- -----------
Net cash used in investing activities.................... (74,000) (195,000) -- (201,000)
--------------- ------------ --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in accounts payable and accrued expenses............ -- 30,000 -- 21,000
Proceeds from senior notes................................... -- 125,000 -- 185,000
Advances from related party.................................. 74,000 74,000 2,000 11,000
Advances to related party.................................... -- (30,000) -- --
Issuance of common stock..................................... -- 30,000 -- --
--------------- ------------ --------- -----------
Net cash provided by financing activities................ 74,000 229,000 2,000 217,000
--------------- ------------ --------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS...................... -- 30,000 -- 5,000
CASH AND CASH EQUIVALENTS, beginning of period................. -- -- -- 30,000
--------------- ------------ --------- -----------
CASH AND CASH EQUIVALENTS, end of period....................... $ -- $ 30,000 $ -- $ 35,000
--------------- ------------ --------- -----------
--------------- ------------ --------- -----------
RECONCILIATION OF NET LOSS TO NET CASH USED IN OPERATING
ACTIVITIES:
Net loss................................................... $ (1,000) $ (6,000) $ (3,000) $ (154,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization of organization cost........................ 1,000 2,000 1,000 1,000
Amortization of discount................................. -- -- -- 132,000
--------------- ------------ --------- -----------
1,000 2,000 1,000 133,000
--------------- ------------ --------- -----------
Net cash used in operating activities.................... $ -- $ (4,000) $ (2,000) $ (21,000)
--------------- ------------ --------- -----------
--------------- ------------ --------- -----------
SUPPLEMENTAL INFORMATION ON NON CASH FINANCING ACTIVITIES:
Stock issued in connection with senior notes................. $ -- $ 94,000 $ -- $ 151,000
--------------- ------------ --------- -----------
--------------- ------------ --------- -----------
</TABLE>
See notes to financial statements
F-16
<PAGE>
INTEGRATED PHYSICIAN SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
Integrated Physician Systems, Inc. ("IPS" or the "Company"), was established
as a Delaware corporation on April 25, 1995, for the purpose of creating a
physician practice management company which will (i) own the assets of and
manage physician groups, (ii) own or manage Independent Practice Associations,
(iii) provide management services to independent physicians including
hospital-based physicians and (iv) own or manage medically related ancillary
services. The Company's operations to date have consisted primarily of seeking
affiliations with physicians, negotiating acquisitions of the assets of such
physician practices and negotiating agreements to provide management services to
such practices. The Company plans to make an initial public offering of its
common stock, warrants and convertible subordinated debentures (the "IPO") and
simultaneously exchange cash, notes and shares of its common stock for selected
assets and liabilities associated with 12 physician practices and a medical
billing company (referred to collectively as the "Initial Affiliated
Practices").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. ORGANIZATION COSTS
Organization costs incurred in the formation of the Company are amortized on
a straight-line basis over a five-year period.
B. DEFERRED REGISTRATION COSTS
Substantially all costs incurred to date have been in conjunction with the
anticipated initial public offering of the Company's common stock, warrants and
convertible subordinated debentures. All costs incurred in connection with such
efforts have been capitalized and will be charged against the proceeds of the
IPO upon its successful completion.
C. INCOME TAXES
As reflected in the accompanying statements of operations, the Company
incurred losses from operations during the period from inception, April 25,
1995, through December 31, 1995, the year ended December 31, 1996, and the six
months ended June 30, 1997. Due to the limited operations of the Company since
its inception and pending the IPO of its common stock, warrants and convertible
subordinated debentures, a valuation allowance has been recorded to fully
reserve for the deferred tax benefits generated by net operating losses. There
is no significant difference in the tax and book basis of the Company's assets
or liabilities that would give rise to deferred tax balances.
D. 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 as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
E. LONG-LIVED ASSETS
Under the requirements of SFAS No. 121 "Accounting for Long-Lived Assets and
for Long-Lived Assets to be Disposed of," the Company is obligated to recognize
an impairment loss on its long-lived
F-17
<PAGE>
INTEGRATED PHYSICIAN SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
assets whenever the sum of the expected future cash flows resulting from their
use is less than their carrying amount. As of December 31, 1996, no impairment
exists with respect to the Company's long-lived assets.
F. PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are amortized over the respective lease terms or the
service lives of the improvements, whichever is shorter.
3. RELATED PARTY
The founding stockholder of the Company, Wellness Concepts, Inc., has
advanced funds on behalf of the Company in connection with the IPO. Such
payments have been reflected as amounts due to a related party in the
accompanying balance sheets and will be repaid at the closing of the IPO. The
Company has no resources to repay such amounts should the IPO not be
successfully completed.
4. SENIOR NOTES
As of June 30, 1997, the Company is obligated to pay an aggregate amount of
$310,000 pursuant to the terms of the series A 10% Senior Notes (the "Senior
Notes") in varying amounts issued by the Company in connection with its Bridge
Financing in contemplation of its IPO. The Senior Notes bear interest at the
rate of 10% per annum until the Senior Notes maturity which is the earlier of 12
months from the date of issuance or the closing of the IPO. Interest on the
Senior Notes is payable in arrears on the maturity date. In connection with the
issuance of the Senior Notes, the Company issued, as additional consideration,
41,333 shares of common stock, par value $.01 per share. Such 41,333 shares have
been recorded at 79% of the expected IPO price and the cost of same is reflected
as a discount against the Senior Notes. The amount assigned to the discount in
connection with the Senior Notes has been netted against the outstanding balance
at June 30, 1997 and is being amortized to interest expense over the life of the
notes.
5. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards (SFAS) No. 107 "Disclosures
About Fair Value of Financial Instruments" requires disclosure about the fair
value of all financial instruments. Carrying amounts of all financial
instruments approximate fair value as of December 31, 1996 and June 30, 1997.
6. INTERIM FINANCIAL STATEMENTS
The balance sheet at June 30, 1997, and the statements of operations and
cash flows for the six months ended June 30, 1997 are unaudited, but, in the
opinion of management, include all adjustments (consisting of normal recurring
adjustments) necessary for a fair presentation of results for the interim
period. The results of operations for the six months ended June 30, 1997 are not
necessarily indicative of results to be expected for the entire year.
F-18
<PAGE>
INTEGRATED PHYSICIAN SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. SUBSEQUENT EVENTS
A. ISSUANCE OF ADDITIONAL SENIOR NOTES
During July 1997, the Company issued an additional aggregate principal
amount of $125,000 of Senior Notes in connection with its Bridge Financing in
contemplation of its IPO. The Senior Notes are more fully described in Note 4 to
the financial statements. In connection with the issuance of the additional
Senior Notes, the Company issued, as additional consideration, 16,667 shares of
common stock, par value $.01 per share.
B. ACQUISITION OF PROFESSIONAL MEDICAL IMAGES, INC. (PMI)
On April 1, 1997, the Company acquired 100% of the outstanding common stock
of PMI. PMI is a New Jersey corporation engaged in the business of managing and
developing IPAs and providing a full range of consulting services to physicians,
hospitals and managed care organizations. Goodwill of $38,000 resulting from the
acquisition is being amortized over 20 years.
C. CONSULTING AGREEMENT
Effective April 1, 1997, the Company entered into a Consulting Agreement
with several physician practices and a management service organization
collectively known as the Reliance Medical Group ("Reliance"). Under the terms
of a one year consulting agreement, the Company provides physician practice
management services to Reliance in return for fixed monthly compensation in the
amount of $25,000. It is anticipated that the Reliance medical practices and
management service organization will be acquired as part of the Initial
Affiliated Practices as described in Note 1.
D. COMMITMENTS AND CONTINGENCIES
The Company intends to consummate an initial public offering of its common
stock, warrants and convertible subordinated debentures and contemporaneously
exchange approximately $7,937,000 in cash, $114,000 in notes and 481,067 shares
of its common stock for selected assets of, and certain liabilities associated
with the Initial Affiliated Practices. The Company has entered into purchase and
sale and other related acquisition agreements with the Initial Affiliated
Practices the closing of which will occur upon consummation of the IPO.
E. RECAPITALIZATION
On October 21, 1997 certain stockholders of the Company contributed
1,356,000 shares of common stock owned by such stockholders to the Company. The
shares were simultaneously retired by the Company.
8. STOCK OPTION PLAN
In 1996, the Company adopted the 1996 Stock Option Plan ( the "Plan"). The
purpose of the Plan is to provide directors, officers, key employees and certain
advisors with additional incentives by increasing their proprietary interest in
the Company. The Company has authorized 300,000 shares of Common Stock to be
issued pursuant to the Plan. As of December 31, 1995, 1996, and June 30, 1997
there were no options outstanding under the Plan.
F-19
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Reliance Healthcare Group
We have audited the accompanying combined balance sheets of the Reliance
Healthcare Group as of December 31, 1995 and 1996, and the related combined
statements of operations, changes in stockholders' deficit and cash flows for
each of three years in the period ended December 31, 1996. These combined
financial statements are the responsibility of Reliance Healthcare Group's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Reliance Healthcare
Group as of December 31, 1995 and 1996, and the results of its operations,
changes in stockholders' deficit and cash flows for each of the three years in
the period ended December 31, 1996 in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 6 to the
financial statements, the Company is currently in default under two of its debt
agreements and its current liabilities exceed its current assets by $4,996,000
as of December 31, 1996. These matters raise substantial doubt about the
Company's ability to continue as a going concern. The accompanying financial
statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts or the amounts and classification of
liabilities that might be necessary should the Company be unable to continue as
a going concern.
Feldman Radin & Co., P. C.
Certified Public Accountants
New York, New York
May 9, 1997
F-20
<PAGE>
RELIANCE HEALTHCARE GROUP
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- JUNE 30,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................... $ -- $ -- $ 181,828
Accounts receivable, less allowance for contractual adjustments of
$5,661,976 in 1995, $5,720,689 in 1996 and $5,730,529 in 1997 and
an allowance for doubtful accounts of $250,000 in 1995, $280,000
in 1996 and $310,000 in 1997...................................... 961,899 1,558,202 1,669,445
Prepaid expenses and other current assets........................... 259,917 503,416 637,333
------------ ------------ ------------
Total current assets............................................ 1,221,816 2,061,618 2,488,606
------------ ------------ ------------
PROPERTY AND EQUIPMENT, net............................................. 837,190 718,976 650,813
------------ ------------ ------------
OTHER NONCURRENT ASSETS, net............................................ 62,344 36,094 76,623
------------ ------------ ------------
$ 2,121,350 $ 2,816,688 $ 3,216,042
------------ ------------ ------------
------------ ------------ ------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Bank overdrafts..................................................... $ 168,651 $ -- $ --
Short-term notes payable............................................ 1,611,530 1,931,196 2,397,633
Current portion of long-term debt................................... 217,175 130,364 --
Current portion of obligations under capital lease.................. 53,390 39,099 34,500
Accounts payable and accrued expenses............................... 1,049,736 1,440,390 1,227,913
Accrued payroll..................................................... 617,806 315,781 373,826
Accrued payroll taxes............................................... 1,362,682 2,875,479 3,280,075
------------ ------------ ------------
Total current liabilities....................................... 5,080,970 6,732,309 7,313,947
------------ ------------ ------------
LONG-TERM DEBT, net of current portion.................................. 384,698 273,137 255,817
------------ ------------ ------------
LONG-TERM OBLIGATIONS UNDER CAPITAL LEASE,
net of current portion............................................ 49,919 26,724 31,124
------------ ------------ ------------
Total liabilities............................................... 5,515,587 7,032,170 7,600,888
------------ ------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT
Common Stock........................................................ 3,700 3,700 3,700
Additional paid in capital.......................................... 19,900 19,900 19,900
Accumulated deficit................................................. (3,417,837) (4,239,082) (4,408,446)
------------ ------------ ------------
TOTAL STOCKHOLDERS' DEFICIT............................................. (3,394,237) (4,215,482) (4,384,846)
------------ ------------ ------------
$ 2,121,350 $ 2,816,688 $ 3,216,042
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See notes to financial statements.
F-21
<PAGE>
RELIANCE HEALTHCARE GROUP
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------------- --------------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1996 1997
------------- ------------- ------------- ------------ ------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE:
Medical services revenue............. $ 11,253,425 $ 11,118,296 $ 11,074,770 $ 5,774,775 $ 5,143,518
Other revenue........................ 123,260 38,671 -- -- 18,617
------------- ------------- ------------- ------------ ------------
Total revenue.................... 11,376,685 11,156,967 11,074,770 5,774,775 5,162,135
------------- ------------- ------------- ------------ ------------
COSTS AND EXPENSES:
Salaries and wages................... 9,399,315 9,149,904 9,023,455 4,568,103 3,083,171
Medical supplies and expenses........ 63,225 109,179 39,929 41,782 88,267
General and administrative
expenses........................... 3,230,726 1,762,334 1,054,537 1,204,533 793,082
Bad debt expense..................... 20,000 30,000 30,000 15,000 30,000
Payroll tax interest and penalties... 194,000 199,205 490,131 225,000 167,787
Management fees...................... -- -- 910,000 -- 952,698
Depreciation and amortization........ 140,991 205,810 179,499 93,072 107,982
Interest expense..................... 217,778 223,319 168,464 90,379 108,512
------------- ------------- ------------- ------------ ------------
Total costs and expenses......... 13,266,035 11,679,751 11,896,015 6,237,869 5,331,499
------------- ------------- ------------- ------------ ------------
Net loss......................... $ (1,889,350) $ (522,784) $ (821,245) $ (463,094) $ (169,364)
------------- ------------- ------------- ------------ ------------
------------- ------------- ------------- ------------ ------------
</TABLE>
See notes to financial statements.
F-22
<PAGE>
RELIANCE HEALTHCARE GROUP
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL ACCUMULATED
---------------------- PAID-IN STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT TOTAL
----------- --------- -------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993........................ 3,700 $ 3,700 $ 19,900 $ (1,005,703) $ (982,103)
Net loss.......................................... (1,889,350) (1,889,350)
----- --------- ------- ------------- -----------
Balance, December 31, 1994........................ 3,700 3,700 19,900 (2,895,053) (2,871,453)
Net loss.......................................... (522,784) (522,784)
----- --------- ------- ------------- -----------
Balance, December 31, 1995........................ 3,700 3,700 19,900 (3,417,837) (3,394,237)
Net loss.......................................... (821,245) (821,245)
----- --------- ------- ------------- -----------
Balance, December 31, 1996........................ 3,700 3,700 19,900 (4,239,082) (4,215,482)
Net loss.......................................... (169,364) (169,364)
----- --------- ------- ------------- -----------
Balance, June 30, 1997(unaudited)................. 3,700 3,700 19,900 (4,408,446) (4,384,846)
----- --------- ------- ------------- -----------
----- --------- ------- ------------- -----------
</TABLE>
See notes to financial statements.
F-23
<PAGE>
RELIANCE HEALTHCARE GROUP
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1996 1997
---------- --------- --------- --------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................ $(1,889,350) $(522,784) $(821,245) $(463,094) $(169,364)
---------- --------- --------- --------- ---------
Adjustments to reconcile net loss
to net cash provided by (used) in operating activities
-
Depreciation and amortization................. 140,991 205,810 179,499 93,072 107,982
Changes in assets and liabilities -
(Increase) decrease in -
Accounts receivable, net........................ 66,755 (43,567) (596,303) (402,887) (111,243)
Prepaid expenses and other current assets....... 147,640 (228,762) (243,499) 95,029 (133,917)
Increase (decrease) in -
Accounts payable and accrued expenses........... 634,693 415,043 390,654 (108,192) (212,477)
Accrued payroll and payroll taxes............... 11,543 137,193 1,210,772 296,755 462,641
---------- --------- --------- --------- ---------
1,001,622 485,717 941,123 (26,223) 112,986
---------- --------- --------- --------- ---------
Net cash provided by (used) in operating activities... (887,728) (37,067) 119,878 (489,317) (56,378)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment...................... (501,474) (83,567) (61,285) (56,615) (39,819)
(Increase) decrease in of other noncurrent assets....... (74,029) 148,950 26,250 (17,725) (40,529)
---------- --------- --------- --------- ---------
Net cash used in investing activities........... (575,503) 65,383 (35,035) (74,340) (80,348)
---------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayments of) bank overdraft............ 634,721 (466,070) (168,651) 310,894 --
Proceeds from (repayments of) short-term notes
payable............................................... 314,286 339,143 319,666 410,528 466,437
Proceeds from (repayments of) long-term debts........... 491,170 110,703 (198,372) (601,873) (147,684)
Proceeds from (repayments of) obligations under capital
leases................................................ 20,956 (12,092) (37,486) 44,108 (199)
---------- --------- --------- --------- ---------
Net cash provided by (used in) financing activities... 1,461,133 (28,316) (84,843) 163,657 318,554
---------- --------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH............................. (2,098) -- -- (400,000) 181,828
CASH, beginning of period................................... 2,098 -- -- -- --
---------- --------- --------- --------- ---------
CASH, end of period......................................... $ -- $ -- $ -- $(400,000) $ 181,828
---------- --------- --------- --------- ---------
---------- --------- --------- --------- ---------
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid......................................... $ 217,778 $ 223,319 $ 168,464 $ 76,000 $ 52,000
---------- --------- --------- --------- ---------
---------- --------- --------- --------- ---------
</TABLE>
See notes to financial statements.
F-24
<PAGE>
RELIANCE HEALTHCARE GROUP
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS ORGANIZATION AND BASIS OF PRESENTATION
Reliance Healthcare Group (the "Company") is comprised of four entities
under common control, Reliance Healthcare Group, Inc., Reliance Medical Group,
P.C., West Jersey Medical Group, P.C., and Island Medical Group, P.C..
The combined financial statements of the Company have been presented as
supplemental information concerning the entities that Integrated Physician
Systems, Inc. ("IPS") intends to acquire following its planned IPO. Their
historical financial positions, results of operations, and cash flows have been
combined in the accompanying financial statements and do not reflect any
adjustments relating to the proposed transaction nor adjustments to reflect
changes that may have occurred if the actual operations of the Company,
previously operated as separate entities, had been combined. Within the Company
all significant intercompany accounts and transactions have been eliminated.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. METHOD OF ACCOUNTING
The combined financial statements of the Company are presented on the
accrual basis of accounting. Accordingly, revenues are recorded when earned,
rather than when received and expenses are recorded when incurred, rather than
when paid.
B. CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all cash accounts which are not subject to
withdrawal restrictions or penalties, and all highly liquid instruments, with
original maturities of three months or less.
C. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standard ("SFAS") No. 107 "Disclosures
About Fair Value of Financial Instruments" requires disclosure about the fair
value of all financial instruments. Carrying amounts of all financial
instruments approximate fair value as of December 31, 1996.
D. PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are amortized over the respective lease terms or the
service lives of the improvements, whichever is shorter.
E. LONG LIVED ASSETS
Under the requirements of SFAS No. 121 "Accounting for Long-Lived Assets and
for Long-Lived Assets to be Disposed of", the Company is obligated to recognize
an impairment loss on its long lived assets whenever the sum of the expected
future cash flows resulting from their use is less than their carrying amount.
As of December 31, 1996, no impairment exists with respect to the Company's
long-lived assets.
F. REVENUE
Medical service revenues are accounted for in the period the services are
provided. Revenues are reported at the estimated net realizable amounts from
patients, third-party payors and others for services
F-25
<PAGE>
RELIANCE HEALTHCARE GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
rendered. Provisions for estimated third-party payor adjustments are recorded in
the period the related services are provided as a reduction of revenue. Any
adjustment to those amounts are recorded in the period in which the revised
amount is determined. A portion of the Company's medical services revenue is
derived from Medicare, Medicaid and other governmental programs. Medicare,
Medicaid, and other governmental programs reimburse physicians based on fee
schedules which are determined by the specific governmental agency.
Additionally, the Company participates in agreements with managed care
organizations to provide services at negotiated fee-for-service or capitated
payment rates.
G. CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk consist principally of trade accounts receivable.
The Company establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific payors, historical trends and other
information.
H. 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 as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
I. INCOME TAXES
All of the Company's entities have elected to be taxed under the provisions
of Subchapter S of the Internal Revenue Code. Under those provisions, the
Company does not pay Federal or State corporate income taxes on its taxable
income. Instead, the individual stockholders' are liable for Federal and State
income taxes on the Company's taxable income.
3. OTHER NONCURRENT ASSETS
Other noncurrent assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1995 1996
--------- ---------
Customer lists.......................................................... $ 70,000 $ 70,000
Less: Accumulated amortization.......................................... (7,656) (33,906)
--------- ---------
Total............................................................... $ 62,344 $ 36,094
--------- ---------
--------- ---------
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
The Company is insured with respect to medical malpractice risks. In the
normal course of business the Company has been named in lawsuits. In the opinion
of the Company's management , the ultimate liability, if any, of the Company
with respect to any such lawsuit will not exceed the insurance coverages carried
by the Company and will not materially impact the operating results or results
of its financial condition.
F-26
<PAGE>
RELIANCE HEALTHCARE GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company has entered into a binding agreement with Integrated Physician
Systems, Inc. (IPS), the terms of which provide that IPS will acquire
substantially all of the assets, goodwill, and intangibles of the Company. The
acquisition by IPS will coincide with the consummation of its IPO.
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIVES --------------------------
(YEARS) 1995 1996
--------------- ------------ ------------
<S> <C> <C> <C>
Land and building................................... 30 $ 375,000 $ 375,000
Leasehold improvements.............................. 5-10 414,711 416,578
Medical and computer equipment...................... 5-7 683,158 686,205
Automobiles......................................... 3-5 64,464 94,583
------------ ------------
Total............................................. 1,537,333 1,572,366
Less: Accumulated depreciation...................... (700,143) (853,390)
------------ ------------
Net............................................... $ 837,190 $ 718,976
------------ ------------
------------ ------------
</TABLE>
6. SHORT-TERM AND LONG-TERM OBLIGATIONS AND COMMITMENTS
A. SHORT-TERM NOTES PAYABLE
Short-term notes payable consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
<S> <C> <C>
1995 1996
------------ ------------
Notes payable to a bank bearing interests at 5%
to prime +3% collateralized by various assets
of the Company.................................................. $ 1,611,530 $ 1,481,196
Secured, non-interest bearing demand note, payable to an
individual secured by accounts receivable....................... -- 450,000
------------ ------------
$ 1,611,530 $ 1,931,196
------------ ------------
------------ ------------
</TABLE>
F-27
<PAGE>
RELIANCE HEALTHCARE GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. SHORT-TERM AND LONG-TERM OBLIGATIONS AND COMMITMENTS (CONTINUED)
B. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
<S> <C> <C>
1995 1996
----------- -----------
Mortgage notes payable to the New Jersey Economic Development
Authority, and the South Jersey
Transit Authority, bearing interest at rates
ranging from 3% to 6%............................................. $ 270,141 $ 226,495
Term loan payable to a bank, due July 1999, bearing interest at
8.75%, secured by automobile...................................... 22,232 15,880
Notes payable to a physician relating to the acquisition of practice
assets and accounts receivable, bearing interest ranging from 0%
to 10%............................................................ 105,662 51,915
Unsecured, note payable to a hospital, bearing interest at 7%....... 131,250 93,750
Loan payable to a credit company, due March 2000, bearing interest
at 11%, secured by automobile..................................... 16,727 13,461
Other debt.......................................................... 55,861 2,000
----------- -----------
Total long-term debt.......................................... 601,873 403,501
Less: current portion............................................... (217,175) (130,364)
----------- -----------
Long-term debt, excluding current portion..................... $ 384,698 $ 273,137
----------- -----------
----------- -----------
</TABLE>
As of December 31, 1996, the Company has not complied with the payment
provisions of its mortgage note and its long-term bank debt. Because of
arrearage in payments with respect to the long-term bank debt, only long term
bank debt has been reclassified as short term obligations.
As of December 31, 1996, the aggregate amounts of annual principal
maturities of long-term debt (excluding capital lease obligations) are as
follows:
<TABLE>
<S> <C>
1997.............................................................. $ 130,683
1998.............................................................. 243,613
1999.............................................................. 27,990
2000.............................................................. 1,215
---------
Total........................................................... $ 403,501
---------
---------
</TABLE>
F-28
<PAGE>
RELIANCE HEALTHCARE GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. SHORT-TERM AND LONG-TERM OBLIGATIONS AND COMMITMENTS (CONTINUED)
C. LEASES
The Company leases certain equipment under capital lease agreements, which
expire at various dates. As of December 31, 1996, minimum annual lease
commitments under capital leases with terms in excess of one year are as
follows:
<TABLE>
<CAPTION>
CAPITAL
LEASES
----------
<S> <C>
1997.............................................................................. $ 46,000
1998.............................................................................. 23,000
1999.............................................................................. 7,000
2000.............................................................................. --
2001.............................................................................. --
----------
Total future minimum lease payments............................................. 76,000
Less: Amounts representing interest............................................... (10,000)
----------
Present value of minimum capital lease payments................................. 66,000
Less: Current portion of obligations under capital lease.......................... (39,000)
----------
Long-term obligations under capital lease, net of current portion................. $ 27,000
----------
----------
</TABLE>
7. ACCRUED PAYROLL TAXES
As of December 31, 1995 and 1996, accrued payroll taxes are approximately
$1,362,682 and $2,875,479 representing accrued current and delinquent Federal
and State of New Jersey payroll taxes including withholding taxes interest amd
penalties.
8. COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL
The common stock components of each company as of December 31, 1996 is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------
<S> <C> <C>
ADDITIONAL
COMMON PAID-IN
STOCK CAPITAL
----------- -----------
Reliance Healthcare Group, Inc.,
$1.00 par, 1,000 shares authorized,
100 shares issued and outstanding..................................... $ 100 $ 19,900
Reliance Medical Group, P.C., $1.00 par,
1,000 shares authorized, 100 shares
issued and outstanding................................................ 100 --
West Jersey Medical Group, P.C., No par,
2,500 shares authorized, 1,000 shares
issued and outstanding................................................ 1,000 --
Island Medical Group, P.C., No par,
2,500 shares issued and outstanding................................... 2,500 --
----------- -----------
Total................................................................. $ 3,700 $ 19,900
----------- -----------
----------- -----------
</TABLE>
F-29
<PAGE>
RELIANCE HEALTHCARE GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. MANAGEMENT AGREEMENT
Reliance Healthcare Group, on October 1, 1996, entered into a management
agreement with US Alliance Medical, Inc. (USMA), a publicly traded NASDAQ
company. According to the agreement, USMA managed the administration and site
operations of Reliance Healthcare Group in return for a fee based upon a
percentage of collections. Management fees charged to operations for the period
October 1, 1996 through December 31, 1996 was $910,000. Effective March 31,
1997, the Company terminated its agreement with USMA.
10. SUBSEQUENT EVENT
Effective April 1, 1997, the Company entered into a Consulting Agreement
with Integrated Physician Systems, Inc. ("IPS"). Under the terms of the one-year
consulting agreement, the Company will receive physician practive management
services for a fixed monthly payment in the amount of $25,000.
F-30
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholder of
Medical Billing and Management Services, Inc. and Subsidiary
We have audited the accompanying balance sheets of Medical Billing and
Management Services, Inc. and Subsidiary as of December 31, 1995 and 1996, and
the related statements of operations, changes in stockholder's deficit and cash
flows for each of the three years in the period ended December 31, 1996. These
combined financial statements are the responsibility of Medical Billing and
Management Services, Inc.'s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Medical Billing and
Management Services, Inc. and Subsidiary as of December 31, 1995 and 1996, and
the results of its operations, changes in stockholder's deficit and cash flows
for each of the three years in the period ended December 31, 1996 in conformity
with generally accepted accounting principles.
Feldman Radin & Co., P. C.
Certified Public Accountants
New York, New York
May 9, 1997
F-31
<PAGE>
MEDICAL BILLING AND MANAGEMENT SERVICES, INC.
AND SUBSIDIARY
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JUNE 30,
1995 1996 1997
---------- ---------- -----------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash...................................................................... $ 29,999 $ 59,814 $ 39,440
Accounts receivable, less allowance for bad debts of of $0 in 1995, $6,497
in 1996 and $6,497 in 1997.............................................. 42,091 82,704 219,791
---------- ---------- -----------
Total current assets.................................................. 72,090 142,518 259,231
---------- ---------- -----------
PROPERTY AND EQUIPMENT, net................................................. 57,054 61,477 73,542
---------- ---------- -----------
OTHER NONCURRENT ASSETS, net................................................ 52,500 42,500 40,166
---------- ---------- -----------
$ 181,644 $ 246,495 $ 372,939
---------- ---------- -----------
---------- ---------- -----------
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
CURRENT LIABILITIES:
Short-term notes--stockholder............................................. $ 98,390 $ -- $ --
Current portion of long-term note--stockholder............................ 100,292 11,854 6,066
Accounts payable and accrued expenses..................................... 48,363 18,759 13,507
---------- ---------- -----------
Total current liabilities............................................. 247,045 30,613 19,573
LONG-TERM NOTE--STOCKHOLDER, net of current portion......................... -- 254,878 238,585
---------- ---------- -----------
Total liabilities..................................................... 247,045 285,491 258,158
---------- ---------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY (DEFICIT):
Common Stock, no par value; 1,000 shares authorized and 100 shares issued
and outstanding, respectively........................................... 1,000 1,000 1,000
Additional paid-in capital................................................ 9,000 9,000 9,000
Retained earnings (deficit)............................................... (75,401) (48,996) 104,781
---------- ---------- -----------
TOTAL STOCKHOLDER'S EQUITY (DEFICIT)........................................ (65,401) (38,996) 114,781
---------- ---------- -----------
$ 181,644 $ 246,495 $ 372,939
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
See notes to financial statements.
F-32
<PAGE>
MEDICAL BILLING AND MANAGEMENT SERVICES, INC.
AND SUBSIDIARY
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------------------- ------------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1996 1997
---------- ------------ ------------ ---------- ------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE:
Medical billing and service fees............ $ 990,937 $ 1,241,294 $ 1,398,593 $ 675,741 $ 1,100,855
---------- ------------ ------------ ---------- ------------
COSTS AND EXPENSES:
Salaries and wages.......................... 571,183 603,344 653,897 331,531 482,812
General and administrative expenses......... 462,297 563,022 662,981 269,171 445,416
Bad debt expense............................ -- -- 6,497 3,249 --
Depreciation and amortization............... 17,466 43,063 39,960 18,850 18,850
Interest expense............................ 6,024 10,716 8,853 4,426 --
---------- ------------ ------------ ---------- ------------
Total costs and expenses................ 1,056,970 1,220,145 1,372,188 627,227 947,078
---------- ------------ ------------ ---------- ------------
Net (loss) income....................... $ (66,033) $ 21,149 $ 26,405 $ 48,514 $ 153,777
---------- ------------ ------------ ---------- ------------
---------- ------------ ------------ ---------- ------------
</TABLE>
See notes to financial statements.
F-33
<PAGE>
MEDICAL BILLING AND MANAGEMENT SERVICES, INC.
AND SUBSIDIARY
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK
---------------------- ADDITIONAL RETAINED
SHARES AMOUNT PAID-IN CAPITAL EARNINGS(DEFICIT) TOTAL
----------- --------- --------------- ---------------- ----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993.............................. 100 $ 1,000 $ 9,000 $ (30,517) $ (20,517)
Net loss.............................................. -- -- -- (66,033) (66,033)
Balance, December 31, 1994.............................. 100 1,000 9,000 (96,550) (86,550)
Net income............................................ -- -- -- 21,149 21,149
--- --------- ------ -------- ----------
Balance, December 31, 1995.............................. 100 1,000 9,000 (75,401) (65,401)
Net income............................................ -- -- -- 26,405 26,405
--- --------- ------ -------- ----------
Balance, December 31, 1996.............................. 100 1,000 9,000 (48,996) (38,996)
Net income............................................ -- -- -- 153,777 153,777
--- --------- ------ -------- ----------
Balance, June 30, 1997 (unaudited)...................... 100 $ 1,000 $ 9,000 $ 104,781 $ 114,781
--- --------- ------ -------- ----------
--- --------- ------ -------- ----------
</TABLE>
See notes to financial statements.
F-34
<PAGE>
MEDICAL BILLING AND MANAGEMENT SERVICES, INC.
AND SUBSIDIARY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------------- ----------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1996 1997
---------- ---------- --------- --------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................... $ (66,033) $ 21,149 $ 26,405 $ 48,514 $ 153,777
---------- ---------- --------- --------- -----------
Adjustments to reconcile net income (loss) to net
cash provided by operating activities -
Depreciation and amortization...................... 17,466 43,063 39,960 18,850 18,850
Changes in assets and liabilities -
(Increase) decrease in -
Accounts receivable, net....................... (14,949) (27,142) (40,613) (37,349) (137,087)
Prepaid expenses and other current assets...... (300) 300 -- -- --
Increase (decrease) in -
Accounts payable and accrued expenses.......... 53,793 (6,985) (29,604) (29,604) (5,252)
---------- ---------- --------- --------- -----------
56,010 9,236 (30,257) (48,103) (123,489)
---------- ---------- --------- --------- -----------
Net cash provided by (used in) operating
activities......................................... (10,023) 30,385 (3,852) (4,589) 30,288
---------- ---------- --------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment................... (51,621) (31,333) (34,383) (13,183) (28,581)
(Increase) decrease in other noncurrent assets....... (62,500) -- -- -- --
---------- ---------- --------- --------- -----------
Net cash used in investing activities............ (114,121) (31,333) (34,383) (13,183) (28,581)
---------- ---------- --------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayments of) short-term
note-stockholder................................... 100,000 (1,610) (98,390) (98,390) --
Proceeds from (repayments of) long-term
note-stockholder................................... 66,827 (10,126) 166,440 140,977 (22,081)
---------- ---------- --------- --------- -----------
Net cash provided by (used in) financing
activities....................................... 166,827 (11,736) 68,050 42,587 (22,081)
---------- ---------- --------- --------- -----------
NET INCREASE (DECREASE) IN CASH........................ 42,683 (12,684) 29,815 29,815 (20,374)
CASH, beginning of period.............................. -- 42,683 29,999 29,999 59,814
---------- ---------- --------- --------- -----------
CASH, end of period.................................... $ 42,683 $ 29,999 $ 59,814 $ 59,814 $ 39,440
---------- ---------- --------- --------- -----------
---------- ---------- --------- --------- -----------
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid........................................ $ 6,396 $ 11,169 $ 8,516 $ 4,426 $ --
---------- ---------- --------- --------- -----------
---------- ---------- --------- --------- -----------
</TABLE>
See notes to financial statements.
F-35
<PAGE>
MEDICAL BILLING AND MANAGEMENT SERVICE, INC.
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS ORGANIZATION AND BASIS OF PRESENTATION
Medical Billing and Management Services, Inc. (the "Company") was
incorporated under the laws of the Commonwealth of Pennsylvania. The Company was
organized to provide billing and collection services to its clients as well as
maintaining applicable billing records on patient accounts.
The Company's wholly owned subsidiary Radiology Billing and Management
Services, Inc. ("RBMS") provides similar services to clients specializing in the
practice of radiology.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. METHOD OF ACCOUNTING
The financial statements of Medical Billing and Management Services, Inc.
and Subsidiary are presented on the accrual basis of accounting. Accordingly,
revenues are recorded when earned, rather than when received, and expenses are
recorded when incurred, rather than when paid.
B. REVENUES
Revenues are accounted for in the period the services are provided and are
derived from billings to clients. Fees are earned based on a percentage of gross
billings to the individual clients. Fee percentages range from 6% to 12% of
gross billings.
C. CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk consist principally of trade account receivables.
The Company establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific clients, historical trends and other
information.
D. PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are amortized over the respective lease terms or the
service lives of the improvements, whichever is shorter.
E. 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 as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F. INCOME TAXES
The Company, with the consent of its stockholder, has elected under the
Internal Revenue Code to be an S corporation for federal and state tax purposes.
In lieu of corporate income taxes, the stockholders of an S corporation are
taxed on their proportionate share of the Company's taxable income. Therefore,
no provision or liability for federal or state income taxes has been included in
these financial statements.
F-36
<PAGE>
MEDICAL BILLING AND MANAGEMENT SERVICE, INC.
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
G. CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all cash accounts which are not subject to
withdrawal restrictions or penalties, and all highly liquid instruments, with
original maturities of three months or less.
H. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards ("SFAS") No. 107 "Disclosures
About Fair Value of Financial Instruments" requires disclosure about the fair
value of all financial instruments. Carrying amounts of all financial
instruments approximate fair value as of December 31, 1996.
I. LONG LIVED ASSETS
Under the requirements of SFAS No. 121 "Accounting for Long-Lived Assets and
for Long-Lived-Assets to be Disposed of", the Company is obligated to recognize
an impairment loss on its long lived assets whenever the sum of the expected
future cash flows resulting from their use is less than their carrying amount.
As of December 31, 1996, no impairment exists with respect to the Company's
long-lived assets.
3. OTHER NONCURRENT ASSETS
Other noncurrent assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
<S> <C> <C>
1995 1996
---------- ----------
Excess of cost over fair value of assets acquired..................... $ 3,141 $ --
Customer lists........................................................ 70,000 70,000
---------- ----------
73,141 70,000
Less: Accumulated amortization........................................ (20,641) (27,500)
---------- ----------
$ 52,500 $ 42,500
---------- ----------
---------- ----------
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
The Company has entered into binding agreements with Integrated Physicians
Systems, Inc. ("IPS"), the terms of which provide that IPS will acquire
substantially all of the assets, goodwill, and intangibles of the Company. The
acquisition by IPS will coincide with the consummation of its IPO.
F-37
<PAGE>
MEDICAL BILLING AND MANAGEMENT SERVICE, INC.
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIVES ----------------------
(YEARS) 1995 1996
--------------- ---------- ----------
<S> <C> <C> <C>
Leasehold improvements.................................. 5-10 $ 4,434 $ 14,337
Office and computer equipment........................... 5-7 94,023 101,703
Furniture and fixtures.................................. 7-10 34,652 27,797
---------- ----------
Total................................................... 133,109 143,837
Less: Accumulated depreciation.......................... (76,055) (82,360)
---------- ----------
Net..................................................... $ 57,054 $ 61,477
---------- ----------
---------- ----------
</TABLE>
6. SHORT-TERM AND LONG-TERM OBLIGATIONS AND COMMITMENTS
A. SHORT-TERM NOTES PAYABLE--STOCKHOLDER
Short-term notes payable to stockholder consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1995 1996
--------- ---------
Unsecured demand notes payable to stockholder bearing interest at 9%....... $ 98,390 $ --
--------- ---------
--------- ---------
</TABLE>
B. LONG-TERM NOTE--STOCKHOLDER
Long-term note payable to stockholder consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
<S> <C> <C>
1995 1996
----------- ----------
Unsecured note payable to stockholder, due through 2009, bearing
interest at 9.5%, payable in monthly installments with fixed
principal payments................................................. $ 100,292 $ 266,732
Less: current portion................................................ (100,292) (11,854)
----------- ----------
Long-term note, excluding current portion...................... $ -- $ 254,878
----------- ----------
----------- ----------
</TABLE>
F-38
<PAGE>
MEDICAL BILLING AND MANAGEMENT SERVICE, INC.
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. SHORT-TERM AND LONG-TERM OBLIGATIONS AND COMMITMENTS (CONTINUED)
As of December 31, 1996, the aggregate amounts of annual principal
maturities of long-term debt is as follows:
<TABLE>
<S> <C>
1997.............................................................. $ 12,000
1998.............................................................. 13,000
1999.............................................................. 14,000
2000.............................................................. 16,000
2001.............................................................. 17,000
Thereafter 182,878
---------
Total $ 254,878
---------
---------
</TABLE>
Interest of $8,000 was paid to the shareholder during year ending December
31, 1996.
C. LEASE OBLIGATIONS
The Company leases office space under noncancellable operating lease
agreements which expire at various dates. At December 31, 1996, minimum annual
rental commitments under noncancelable operating leases with terms in excess of
one year are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
----------
<S> <C>
1997.............................................................................. $ 137,432
1998.............................................................................. 141,720
1999.............................................................................. 143,046
2000.............................................................................. 127,932
----------
Total future minimum lease payments............................................. $ 550,130
----------
----------
</TABLE>
Rent expense related to operating leases amounted to $71,000, $90,000,
$74,000 for the years ended December 31, 1994, 1995, and 1996, respectively.
7. EMPLOYEE BENEFIT PLANS
The Company has a qualified defined contribution pension plan (the "Plan").
The Company pays all general and administrative expenses of the Plan. The
Company made contributions related to the Plan totaling $80,000, $44,000 and $0
in 1994, 1995 and 1996, respectively.
The Company does not typically provide employees any post retirement
benefits other than the Plan described above and, accordingly, the impact of
SFAS No. 106 "Employer's Accounting for Postretirement Benefits Other than
Pensions" had no material effect on the Company.
F-39
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholder of
Branchburg Eye Physicians, P.A.
We have audited the accompanying balance sheets of Branchburg Eye
Physicians, P.A. as of December 31, 1995 and 1996, and the related statements of
operations, stockholder's equity (deficit) and cash flows for each of the three
years in the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Branchburg Eye Physicians,
P.A. as of December 31, 1995 and 1996, and the results of its operations,
stockholder's equity (deficit) and cash flows for each of the three years in the
period ended December 31, 1996 in conformity with generally accepted accounting
principles.
Feldman Radin & Co., P. C.
Certified Public Accountants
New York, New York
May 9, 1997
F-40
<PAGE>
BRANCHBERG EYE PHYSICIANS, P.A.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JUNE 30,
1995 1996 1997
---------- ---------- -----------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash...................................................................... $ -- $ 24,368 $ 23,595
Accounts receivable, less allowance for bad debts of $52,416 in 1995,
$63,561 in 1996 and $63,561 in 1997..................................... 50,361 56,365 108,378
---------- ---------- -----------
Total current assets.................................................. 50,361 80,733 131,973
---------- ---------- -----------
PROPERTY AND EQUIPMENT, net................................................. 143,886 136,949 136,949
---------- ---------- -----------
$ 194,247 $ 217,682 $ 268,922
---------- ---------- -----------
---------- ---------- -----------
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
CURRENT LIABILITIES:
Short-term notes payable--stockholder..................................... $ 27,239 $ 171,320 $ 66,922
Accounts payable and accrued expenses..................................... 14,486 85,267 91,739
---------- ---------- -----------
Total current liabilities............................................. 41,725 256,587 158,661
---------- ---------- -----------
LONG-TERM DEBT, net of current portion...................................... -- -- 144,875
---------- ---------- -----------
Total liabilities..................................................... 41,725 256,587 303,536
STOCKHOLDER'S EQUITY (DEFICIT):
Common stock, no par value; 1,000 shares authorized, 1,000 shares issued
and outstanding, respectively........................................... 1,000 1,000 1,000
Additional paid in capital................................................ 64,000 64,000 64,000
Retained earnings (deficit)............................................... 87,522 (103,905) (99,614)
---------- ---------- -----------
TOTAL STOCKHOLDER'S EQUITY (DEFICIT)........................................ 152,522 (38,905) (34,614)
---------- ---------- -----------
$ 194,247 $ 217,682 $ 268,922
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
See notes to financial statements.
F-41
<PAGE>
BRANCHBERG EYE PHYSICIANS, P.A.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------------------- ----------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1996 1997
------------ ---------- ------------ ---------- ----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE:
Medical services revenue.............................. $ 1,035,987 1,091,733 $ 1,093,179 $ 513,795 $ 551,215
Other revenue......................................... 226 233 2,604 82 --
------------ ---------- ------------ ---------- ----------
Total revenue..................................... 1,036,213 1,091,966 1,095,783 513,877 551,215
------------ ---------- ------------ ---------- ----------
COSTS AND EXPENSES:
Salaries and wages.................................... 672,980 572,002 815,298 168,845 183,127
Medical supplies and expenses......................... 80,574 77,735 89,199 39,053 41,659
General and administrative expenses................... 343,139 383,162 325,771 281,242 319,288
Bad debt expense...................................... 10,000 -- 11,145 5,573 --
Depreciation and amortization......................... 3,404 44,674 41,477 500 2,850
Interest expense...................................... -- 2,909 4,320 -- --
------------ ---------- ------------ ---------- ----------
Total costs and expenses.......................... 1,110,097 1,080,482 1,287,210 495,213 546,924
------------ ---------- ------------ ---------- ----------
Net income (loss)................................. $ (73,884) 11,484 $ (191,427) $ 18,664 $ 4,291
------------ ---------- ------------ ---------- ----------
------------ ---------- ------------ ---------- ----------
</TABLE>
See notes to financial statements.
F-42
<PAGE>
BRANCHBURG EYE PHYSICIANS, P.A.
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED
---------------------- PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (DEFECIT) TOTAL
----------- --------- -------------- ----------------- -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993..................... 1,000 $ 1,000 $ 64,000 $ 149,922 $ 214,922
Net loss..................................... -- -- -- (73,884) (73,884)
----- --------- ------- ----------------- -----------
Balance, December 31, 1994..................... 1,000 1,000 64,000 76,038 141,038
Net income................................... -- -- -- 11,484 11,484
----- --------- ------- ----------------- -----------
Balance, December 31, 1995..................... 1,000 1,000 64,000 87,522 152,522
Net loss..................................... -- -- -- (191,427) (191,427)
----- --------- ------- ----------------- -----------
Balance, December 31, 1996..................... 1,000 1,000 64,000 (103,905) (38,905)
Net income................................... -- -- -- 4,291 4,291
----- --------- ------- ----------------- -----------
Balance, June 30, 1997(unaudited).............. 1,000 $ 1,000 $ 64,000 $ (99,614) $ (34,614)
----- --------- ------- ----------------- -----------
----- --------- ------- ----------------- -----------
</TABLE>
See notes to financial statements
F-43
<PAGE>
BRANCHBERG EYE PHYSICIANS, P.A.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------ ----------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1996 1997
---------- ----------- ----------- --------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).......................................... $ (73,884) $ 11,484 $ (191,427) $ 18,664 $ 4,291
---------- ----------- ----------- --------- -----------
Adjustments to reconcile net income (loss) to net cash used
in operating activities -
Depreciation and amortization.......................... 3,404 44,674 41,477 500 2,850
Changes in assets and liabilities -
(Increase) decrease in -Accounts receivable, net..... 157,475 15 (6,004) (77,551) (52,013)
Increase (decrease) in -Accounts payable and accrued
expenses........................................... (48,704) 2,428 70,781 4,514 6,472
---------- ----------- ----------- --------- -----------
112,175 47,117 106,254 (72,537) (42,691)
---------- ----------- ----------- --------- -----------
Net cash used in operating activities.................. 38,291 58,601 (85,173) (53,873) (38,400)
---------- ----------- ----------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment....................... (15,309) (39,425) (34,540) (500) (2,850)
---------- ----------- ----------- --------- -----------
Net cash provided by (used in) investing activities.... (15,309) (39,425) (34,540) (500) (2,850)
---------- ----------- ----------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayment of) short-term notes payable.... (12,585) (15,068) 144,081 30,937 (104,398)
Proceeds from (repayment of) long-term debt.............. (8,819) (5,781) -- 27,707 144,875
---------- ----------- ----------- --------- -----------
Net cash provided by (used in) financing activities.... (21,404) (20,849) 144,081 58,644 40,477
---------- ----------- ----------- --------- -----------
NET INCREASE (DECREASE) IN CASH............................ 1,578 (1,673) 24,368 4,271 (773)
CASH-, beginning of period................................. 95 1,673 -- -- 24,368
---------- ----------- ----------- --------- -----------
CASH-, end of period....................................... 1,673 $ -- $ 24,368 $ 4,271 $ 23,595
---------- ----------- ----------- --------- -----------
---------- ----------- ----------- --------- -----------
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid.............................................. $ 3,404 $ 2,909 $ 4,320 $ 500 $ 2,850
---------- ----------- ----------- --------- -----------
---------- ----------- ----------- --------- -----------
</TABLE>
See notes to financial statements.
F-44
<PAGE>
BRANCHBURG EYE PHYSICIANS, P.A.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS ORGANIZATION AND BASIS OF PRESENTATION
Branchburg Eye Physicians, P.A. (the "Company") is a New Jersey professional
corporation providing medical services in the state of New Jersey. The Company
was incorporated on July 18, 1990.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. METHOD OF ACCOUNTING
The financial statements of the Company are presented on the accrual basis
of accounting. Accordingly, revenues are recorded when earned, rather than when
received and expenses are recorded when incurred, rather than when paid.
B. REVENUES
Medical service revenues are accounted for in the period the services are
provided. The revenues are reported at the estimated realizable amounts from
patients, third-party payors and others. Provisions for estimated third-party
payor adjustments are recorded in the period the related services are provided
as a reduction of revenue. Any adjustments to those amounts are recorded in the
period in which the revised amount is determined. A portion of the Company's
medical service revenue is derived from Medicare, Medicaid and other
governmental programs. Medicare, Medicaid, and other governmental programs
reimburse physicians based on fee schedules which are determined by the specific
governmental agency. Additionally, the Company participates in agreements with
managed care organizations to provide services at negotiated fee-for-service or
capitated payment rates.
C. CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk consist principally of trade accounts receivable.
The Company establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific payors, historical trends and other
information.
D. PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are amortized over the respective lease terms or the
service lives of the improvements, whichever is shorter.
E. 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 as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F. INCOME TAXES
The Company has historically not incurred significant tax liabilities for
federal or state income taxes. Compensation to physician owners has
traditionally reduced taxable income to nominal levels. Provisions
F-45
<PAGE>
BRANCHBURG EYE PHYSICIANS, P.A.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
for income taxes and deferred tax assets and liabilities are not material and
have not been reflected in the financial statements.
G. CASH AND CASH EQUIVALENTS
The Company includes as cash and cash equivalents all cash accounts which
are not subject to withdrawal restrictions or penalties, and all highly liquid
instruments, with original maturities of three months or less.
H. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards ("SFAS") No. 107 "Disclosures
About Fair Value of Financial Instruments" requires disclosure about the fair
value of all financial instruments. Carrying amounts of all financial
instruments approximate fair value as of December 31, 1996.
I. ACCOUNTING FOR LONG-LIVED ASSETS
Under the requirements of SFAS No. 121 "Accounting for Long-Lived Assets and
for Long-Lived Assets to be disposed of", the Company is obligated to recognize
an impairment loss on their long-lived assets whenever the sum of the expected
future cash flows from their use is less than their carrying amount. Based on
the Company's review as of December 31, 1996, no impairment of long-lived assets
was evident.
3. COMMITMENTS AND CONTINGENCIES
The Company is insured with respect to medical malpractice risks. In the
normal course of business the Company has been named in lawsuits. In the opinion
of the management of the Company the ultimate liability, if any, of the Company
with respect to any such lawsuit will not exceed the insurance coverages carried
by the Company and will not materially impact the operating results or results
of financial condition of the Company.
The Company has entered into a binding agreement with Integrated Physicians
Systems, Inc. ("IPS"), the terms of which provide that IPS will acquire
substantially all of the assets, goodwill, and intangibles of the Company. The
acquisition by IPS will coincide with the consummation of its IPO.
F-46
<PAGE>
BRANCHBURG EYE PHYSICIANS, P.A.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIVES ----------------------
(YEARS) 1995 1996
--------------- ---------- ----------
<S> <C> <C> <C>
Leasehold improvements.................................. 5-7 $ 11,705 $ 19,556
Medical and computer equipment.......................... 5-7 240,685 217,848
Furniture and fixtures.................................. 5-7 62,908 82,467
Automobiles............................................. 5 34,357 34,357
---------- ----------
Total................................................. 349,655 354,228
Less: Accumulated depreciation.......................... 205,769 217,279
---------- ----------
Net................................................... $ 143,886 $ 136,949
---------- ----------
---------- ----------
</TABLE>
5. SHORT-TERM OBLIGATIONS AND COMMITMENTS
A. SHORT-TERM NOTES PAYABLE - STOCKHOLDER
Short-term notes payable- stockholder, consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
<S> <C> <C>
1995 1996
--------- ----------
Secured and unsecured demand notes payable to the stockholders, bearing
interest at 9%....................................................... $ 27,239 $ 171,230
--------- ----------
--------- ----------
</TABLE>
B. LEASE OBLIGATIONS
The Company leases office space under noncancelable operating lease
agreements, which expire at various dates. At December 31, 1996 minimum annual
rental commitments under noncancelable operating leases with terms in excess of
one year are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
----------
<S> <C>
1997.............................................................................. $ 83,000
1998.............................................................................. 83,000
1999.............................................................................. 83,000
----------
Total future minimum lease payments............................................. $ 249,000
----------
----------
</TABLE>
Rent expense relating to operating leases amounted to $88,312, $88,898 and
$81,023 for the years ended December 31, 1994, 1995 and 1996, respectively.
6. EMPLOYEE BENEFIT PLANS
The Company has an unqualified defined contribution pension plan. The
Company pays all general and administrative expenses of this plan. The Company
accrued contributions related to this plan totaling $54,378 in 1996.
F-47
<PAGE>
BRANCHBURG EYE PHYSICIANS, P.A.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. EMPLOYEE BENEFIT PLANS (CONTINUED)
The Company does not typically provide employees any post retirement
benefits other than retirement benefits other than the plan described above,
accordingly, the impact of SFAS No. 106 "Employer's Accounting for
Postretirement Benefits Other than Pensions" had no material effect on the
Company.
7. RELATED PARTY TRANSACTIONS
A stockholder made a loan to the Company. Obligations payable to the
stockholder were $30,000 and $171,000 as of December 31, 1995 and 1996,
respectively. Interest paid associated with these obligations was $3,000 for the
year ended December 31, 1995.
F-48
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Felix Salerno, M.D. and Richard Weeder, M.D.
We have audited the accompanying combined balance sheets of Felix Salerno,
M.D. and Richard Weeder, M.D. as of December 31, 1995 and 1996, and the related
combined statements of operations, proprietors' capital and statement of changes
in cash flows for each of the three years in the period ended December 31, 1996.
These combined financial statements are the responsibility of Felix Salerno,
M.D. and Richard Weeder, M.D.'s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Felix Salerno, M.D.
and Richard Weeder, M.D. as of December 31, 1995 and 1996, and the results of
its operations, proprietors' capital and statement of changes in cash flows for
each of the three years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.
Feldman Radin & Co., P. C.
Certified Public Accountants
New York, New York
May 9, 1997
F-49
<PAGE>
FELIX SALERNO, M.D. AND RICHARD WEEDER, M.D.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JUNE 30,
1995 1996 1997
---------- ---------- -----------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash...................................................................... $ -- $ -- $ 49,488
Accounts receivable, less allowance for bad debts of $155,774 in 1995,
$168,553 in 1996 and $168,553 in 1997................................... 126,013 155,357 129,675
---------- ---------- -----------
Total current assets.................................................. 126,013 155,357 179,163
---------- ---------- -----------
$ 126,013 $ 155,357 $ 179,163
---------- ---------- -----------
---------- ---------- -----------
LIABILITIES AND PROPRIETORS' CAPITAL
CURRENT LIABILITIES:
Accounts payable and accrued expenses..................................... $ 21,226 $ 10,454 $ 23,803
Accrued payroll and payroll taxes......................................... 30,255 37,718 --
---------- ---------- -----------
Total current liabilities............................................. 51,481 48,172 23,803
---------- ---------- -----------
COMMITMENTS AND CONTINGENCIES
PROPRIETORS' CAPITAL........................................................ 74,532 107,185 155,360
---------- ---------- -----------
$ 126,013 $ 155,357 $ 179,163
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
See notes to financial statements.
F-50
<PAGE>
FELIX SALERNO, M.D. AND RICHARD WEEDER, M.D.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------------------- ----------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1996 1997
------------ ------------ ---------- ---------- ----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE:
Medical services revenue.............................. $ 1,049,500 $ 1,016,588 $ 853,472 $ 416,153 $ 384,305
Other revenue......................................... 10,154 13,499 20,467 5,364 7,273
------------ ------------ ---------- ---------- ----------
Total revenue....................................... 1,059,654 1,030,087 873,939 421,517 391,578
------------ ------------ ---------- ---------- ----------
COSTS AND EXPENSES:
Salaries and wages.................................... 846,880 650,202 568,817 239,668 188,076
Medical supplies and expenses......................... 7,619 5,068 4,633 2,720 2,128
General and administrative expenses................... 196,155 277,618 251,525 156,874 146,077
Bad debt expense...................................... 131,774 25,000 12,779 6,390 7,122
Interest expense...................................... 94 1,112 3,532 -- --
------------ ------------ ---------- ---------- ----------
Total costs and expenses............................ 1,181,522 959,000 841,286 405,652 343,403
------------ ------------ ---------- ---------- ----------
Net (loss) income................................... $ (121,868) $ 71,087 $ 32,653 $ 15,865 $ 48,175
------------ ------------ ---------- ---------- ----------
------------ ------------ ---------- ---------- ----------
</TABLE>
See notes to financial statements.
F-51
<PAGE>
FELIX SALERNO, M.D. AND RICHARD WEEDER, M.D.
COMBINED STATEMENTS OF PROPRIETORS' CAPITAL
<TABLE>
<S> <C>
BALANCE, December 31, 1993....................................................... $ 125,313
Net loss......................................................................... (121,868)
---------
BALANCE, December 31, 1994....................................................... 3,445
Net income....................................................................... 71,087
---------
BALANCE, December 31, 1995....................................................... 74,532
Net income....................................................................... 32,653
---------
BALANCE, December 31, 1996....................................................... 107,185
Net income....................................................................... 48,175
---------
BALANCE, June 30, 1997 (unaudited)............................................... $ 155,360
---------
---------
</TABLE>
See notes to financial statements.
F-52
<PAGE>
FELIX SALERNO, M.D. AND RICHARD WEEDER, M.D.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------------- ----------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1996 1997
----------- ---------- ---------- ---------- ----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income........................................ $ (121,868) $ 71,087 $ 32,653 $ 15,865 $ 48,175
----------- ---------- ---------- ---------- ----------
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities -
Changes in assets and liabilities -
(Increase) decrease in -
Accounts receivable, net........................... 79,371 (62,357) (29,344) 59,481 25,682
Increase (decrease) in -
Accounts payable and accrued expenses.............. (96,801) 17,474 (10,772) (11,226) 13,349
Accrued payroll and payroll taxes.................. 56,459 (26,204) 7,463 (30,255) (37,718)
----------- ---------- ---------- ---------- ----------
39,029 (71,087) (32,653) 18,000 1,313
----------- ---------- ---------- ---------- ----------
Net cash provided by (used in) operating activities.... (82,839) -- -- 33,865 49,488
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of property and equipment............ 9,740 -- -- -- --
Decrease in other noncurrent assets...................... 8,408 -- -- -- --
----------- ---------- ---------- ---------- ----------
Net cash provided by investing activities............ 18,148 -- -- -- --
----------- ---------- ---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH............................ (64,691) -- -- 33,865 49,488
CASH, beginning of period.................................. 64,691 -- -- -- --
----------- ---------- ---------- ---------- ----------
CASH, end of period........................................ $ -- $ -- $ -- $ 33,865 $ 49,488
----------- ---------- ---------- ---------- ----------
----------- ---------- ---------- ---------- ----------
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid............................................ $ 94 $ 1,112 $ 3,532 $ 106 $ 159
----------- ---------- ---------- ---------- ----------
----------- ---------- ---------- ---------- ----------
</TABLE>
See notes to financial statements.
F-53
<PAGE>
FELIX SALERNO, M.D. AND RICHARD WEEDER, M.D,
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS ORGANIZATION AND BASIS OF PRESENTATION
Felix Salerno, M.D. and Richard Weeder, M.D. (the "Proprietors") are medical
practitioners organized to do business as sole proprietors in the state of New
Jersey.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. METHOD OF ACCOUNTING
The combined financial statements of the Proprietors are presented on the
accrual basis of accounting. Accordingly, revenues are recorded when earned,
rather than when received and expenses are recorded when incurred, rather than
when paid.
B. REVENUES
Medical service revenues are accounted for in the period the services are
provided. The revenues are reported at the estimated realizable amounts from
patients, third-party payors and others. Provisions for estimated third-party
payor adjustments are recorded in the period the related services are provided
as a reduction of revenue. Any adjustment to those amounts are recorded in the
period in which the revised amount is determined. A portion of the Proprietors'
medical services revenue is derived from Medicare, Medicaid and other
governmental programs. Medicare, Medicaid, and other governmental programs
reimburse physicians based on fee schedules which are determined by the specific
governmental agency. Additionally, the Proprietors participate in agreements
with managed care organizations to provide services at negotiated
fee-for-service or capitated payments rates.
C. CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Proprietors to
concentrations of credit risk consist principally of trade account receivables.
The Proprietors establish an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific payors, historical trends and other
information.
D. 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 as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
E. INCOME TAXES
Income from the proprietorships are combined with the income and expenses of
the Proprietors from other sources and reported in the Proprietors' individual
federal and state tax returns. The proprietorships are not tax paying entities
for purposes of federal and state income taxes, and thus no income taxes have
been recorded in the statements.
F. CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all cash accounts which are not subject to
withdrawal restrictions or penalties, and all highly liquid instruments, with
original maturities of three months or less.
F-54
<PAGE>
FELIX SALERNO, M.D. AND RICHARD WEEDER, M.D,
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
G. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards ("SFAS") No. 107 "Disclosures
About Fair Value of Financial Instruments" requires disclosure about the fair
value of all financial instruments. Carrying amounts of all financial
instruments approximate fair value as of December 31, 1996.
H. LONG-LIVED ASSETS
Under the requirements of SFAS No. 121 "Accounting for Long-Lived Assets and
for Long-Lived-Assets to be Disposed of", the Proprietors are obligated to
recognize an impairment loss on their long lived assets whenever the sum of the
expected future cash flows resulting from their use is less than their carrying
amount. As of December 31, 1996, no impairment exists with respect to the
shareholders' long-lived assets.
3. COMMITMENTS AND CONTINGENCIES
The Proprietors are insured with respect to medical malpractice risks. In
the normal course of business the Proprietors have been named in lawsuits. In
the opinion of the Proprietors the ultimate liability, if any, of the
Proprietors with respect to any such lawsuit will not exceed the insurance
coverages carried by the Proprietors and will not materially impact the
operating results or results of financial condition of the Proprietors.
The Proprietors have entered into binding agreements with Integrated
Physician Systems, Inc. ("IPS"), the terms of which provide that IPS will
acquire substantially all of the assets, goodwill, and intangibles of the
Proprietors. The acquisition by IPS will coincide with the consummation of its
IPO.
4. LEASE OBLIGATIONS
The Proprietors lease office space under noncancellable operating lease
agreements. At December 31, 1996, minimum annual rental commitments under
noncancelable operating leases with terms in excess of one year are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
-----------
<S> <C>
1997............................................................................... $ 22,200
1998............................................................................... 22,200
1999............................................................................... 22,200
-----------
Total future minimum lease payments.............................................. $ 66,600
-----------
-----------
</TABLE>
Rent expense related to operating leases amounted to $22,200 for each of the
years ended December 31, 1994, 1995 and 1996, respectively.
5. EMPLOYEE BENEFIT PLANS
The Proprietors have qualified defined contribution pension plans (the
"Plan"). The Proprietors pay all general and administrative expenses of the
Plans. The Proprietors made contributions related to the Plan totaling $51,000,
$60,000 and $60,000 in 1994, 1995 and 1996, respectively.
The Proprietors do not typically provide employees any post retirement
benefits other than the Plan described above and, accordingly, the impact of
SFAS No. 106 "Employer's Accounting for Postretirement Benefits other than
Pensions" had no material effect on the Proprietors.
F-55
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Shareholder of
Flemington Medical Group, PA.
We have audited the accompanying balance sheets of Flemington Medical Group,
PA. as of December 31, 1995 and 1996, and the related statements of operations,
changes in shareholder's equity and cash flows for each of the three years in
the period ended December 31, 1996. These combined financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Flemington Medical Group,
PA., as of December 31, 1995 and 1996, and the results of its operations,
changes in shareholder's equity and cash flows for each of the three years in
the period ended December 31, 1996 in conformity with generally accepted
accounting principles.
Feldman Radin & Co., P. C.
Certified Public Accountants
New York, New York
May 9, 1997
F-56
<PAGE>
FLEMINGTON MEDICAL GROUP, P.A.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JUNE 30,
1995 1996 1997
---------- ---------- -----------
<S> <C> <C> <C>
(UNAUDITED)
<CAPTION>
ASSETS
<S> <C> <C> <C>
CURRENT ASSETS:
Cash...................................................................... $ 779 $ 6,800 $ 37,040
Accounts receivable, less allowance for bad debts of $4,500 in 1995,
$4,051 in 1996 and $4,051 in 1997....................................... 70,491 69,535 70,336
---------- ---------- -----------
Total current assets.................................................. 71,270 76,335 107,376
---------- ---------- -----------
PROPERTY AND EQUIPMENT, net................................................. 54,633 50,986 50,563
---------- ---------- -----------
$ 125,903 $ 127,321 $ 157,939
---------- ---------- -----------
---------- ---------- -----------
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY
<S> <C> <C> <C>
CURRENT LIABILITIES:
Short-term notes payable.................................................. $ 9,611 $ 3,410 $ --
Accounts payable and accrued expenses..................................... 24,943 35,567 940
---------- ---------- -----------
Total current liabilities............................................. 34,554 38,977 940
---------- ---------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common stock, no par value; 1,000 shares authorized, 100 shares issued and
outstanding, respectively............................................... 1,000 1,000 1,000
Additional paid-in capital................................................ 16,402 16,402 16,402
Retained earnings......................................................... 73,947 70,942 139,597
---------- ---------- -----------
Total stockholder's equity............................................ 91,349 88,344 156,999
---------- ---------- -----------
$ 125,903 $ 127,321 $ 157,939
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
See notes to financial statements.
F-57
<PAGE>
FLEMINGTON MEDICAL GROUP, P.A.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------- ----------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE:
Medical services revenue........................... $ 759,200 $ 748,211 $ 697,837 $ 375,530 $ 361,513
---------- ---------- ---------- ---------- ----------
Total revenue.................................. 759,200 748,211 697,837 375,530 361,513
---------- ---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Salaries and wages................................. 422,094 416,553 410,658 243,246 195,743
Medical supplies and expenses...................... 50,369 51,680 40,660 20,293 13,040
General and administrative expenses................ 269,107 253,320 241,267 78,654 78,983
Bad debt expense................................... 4,500 -- -- -- 750
Depreciation and amortization...................... 11,517 22,654 6,851 3,500 3,878
Interest expense................................... 2,800 2,453 1,406 891 464
---------- ---------- ---------- ---------- ----------
Total costs and expenses....................... 760,387 746,660 700,842 346,584 292,858
---------- ---------- ---------- ---------- ----------
Net income (loss).............................. $ (1,187) $ 1,551 $ (3,005) $ 28,946 $ 68,655
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
See notes to financial statements.
F-58
<PAGE>
FLEMINGTON MEDICAL GROUP, P.A.
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
----------- --------- -------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993............................ 1,000 $ 1,000 $ 16,402 $ 73,583 $ 90,985
Net loss............................................ -- -- -- (1,187) (1,187)
----- --------- ------- ---------- ----------
Balance, December 31, 1994............................ 1,000 1,000 16,402 72,396 89,798
Net income.......................................... -- -- -- 1,551 1,551
----- --------- ------- ---------- ----------
Balance, December 31, 1995............................ 1,000 1,000 16,402 73,947 91,349
Net loss............................................ -- -- -- (3,005) (3,005)
----- --------- ------- ---------- ----------
Balance, December 31, 1996............................ 1,000 1,000 16,402 70,942 88,344
Net income.......................................... -- -- -- 68,655 68,655
----- --------- ------- ---------- ----------
Balance, June 30, 1997 (unaudited).................... 1,000 $ 1,000 $ 16,402 $ 139,597 $ 156,999
----- --------- ------- ---------- ----------
----- --------- ------- ---------- ----------
</TABLE>
See notes to financial statements
F-59
<PAGE>
FLEMINGTON MEDICAL GROUP, P.A.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------------- ----------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1996 1997
---------- ---------- --------- ---------- ----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................................ $ (1,187) $ 1,551 $ (3,005) $ 28,946 $ 68,655
---------- ---------- --------- ---------- ----------
Adjustments to reconcile net income (loss) to net cash
provided by operating activities -
Depreciation and amortization.............................. 11,517 22,654 6,851 3,500 3,878
Changes in assets and liabilities -
(Increase) decrease in -
Accounts receivable, net............................... (4,829) (4,175) 956 18,281 (801)
Prepaid expenses and other current assets.............. 807 -- -- -- --
Increase (decrease) in -
Accounts payable and accrued expenses.................. 19,363 2,061 10,624 (22,081) (34,627)
---------- ---------- --------- ---------- ----------
26,858 20,540 18,431 (300) (31,550)
---------- ---------- --------- ---------- ----------
Net cash provided by operating activities................ 25,671 22,091 15,426 28,646 37,105
---------- ---------- --------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................... (9,379) (15,784) (3,204) -- (3,455)
Proceeds from sales of property and equpment................. -- -- -- 8,800 --
---------- ---------- --------- ---------- ----------
Net cash provided by (used in) investing activities...... (9,379) (15,784) (3,204) 8,800 (3,455)
---------- ---------- --------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayments of) short-term notes payable....... (16,854) (5,528) (6,201) (9,611) (3,410)
---------- ---------- --------- ---------- ----------
Net cash used in financing activities.................... (16,854) (5,528) (6,201) (9,611) (3,410)
---------- ---------- --------- ---------- ----------
NET INCREASE (DECREASE) IN CASH................................ (562) 779 6,021 27,835 30,240
CASH, beginning of period...................................... 562 -- 779 779 6,800
---------- ---------- --------- ---------- ----------
CASH, end of period............................................ $ -- $ 779 $ 6,800 $ 28,614 $ 37,040
---------- ---------- --------- ---------- ----------
---------- ---------- --------- ---------- ----------
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid............................................ $ 2,800 $ 2,453 $ 1,406 $ 891 $ 464
---------- ---------- --------- ---------- ----------
---------- ---------- --------- ---------- ----------
</TABLE>
See notes to financial statements.
F-60
<PAGE>
FLEMINGTON MEDICAL GROUP, P.A.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS ORGANIZATION AND BASIS OF PRESENTATION
Flemington Medical Group, PA. (the "Company") is a New Jersy professional
corporation providing medical services in the state of New Jersey. The Company
was incorporated on July 19, 1989.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. METHOD OF ACCOUNTING
The combined financial statements of the Company are presented on the
accrual basis of accounting. Accordingly, revenues are recorded when earned,
rather than when received and expenses are recorded when incurred, rather than
when paid.
B. REVENUES
Medical service revenues are accounted for in the period the services are
provided. The revenues are reported at the estimated realizable amounts from
patients, third-party payors and others. Provisions for estimated third-party
payor adjustments are recorded in the period the related services are provided.
Any adjustment to those amounts are recorded in the period in which the revised
amount is determined. A portion of the Company's medical services revenue is
derived from Medicare, Medicaid and other governmental programs. Medicare,
Medicaid, and other governmental programs reimburse physicians based on fee
schedules which are determined by the specific governmental agency.
Additionally, the Company participates in agreements with managed care
organizations to provide services at negotiated fee-for-service or capitated
payments rates.
C. CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to concentration
of credit risk consists principally of trade accounts receivable. The Company
establishes an allowance for doubtful accounts based upon factors surrounding
the credit risk of specific payors, historical trends and other information.
D. 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 as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
E. INCOME TAXES
The Company, with the consent of its shareholder, has elected under the
Internal Revenue Code to be taxed as an S corporation. In lieu of corporate
income taxes, the shareholders of an S corporation are taxed on their
proportionate share of the Company's taxable income. Therefore, no provision or
liability for federal income taxes has been included in these financial
statements.
F-61
<PAGE>
FLEMINGTON MEDICAL GROUP, P.A.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
F. CASH AND CASH EQUIVALENTS
The Company includes as cash and cash equivalents all cash accounts which
are not subject to withdrawal restrictions or penalties, and all highly liquid
instruments, with original maturities of three months or less.
G. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards ("SFAS") No. 107 "Disclosures
About Fair Value of Financial Instruments" requires disclosure about the fair
value of all financial instruments. Carrying amounts of all financial
instruments approximate fair value as of December 31, 1996.
H. PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are amortized over the respective lease terms or the
service lives of the improvements, whichever is shorter.
I. LONG-LIVED ASSETS
Under the requirements of SFAS No. 121 "Accounting for Long-Lived Assets and
for Long-Lived Assets to be Disposed of", the Company is obligated to recognize
an impairment loss on its long-lived assets whenever the sum of the expected
future cash flows resulting from their use is less than their carrying amount.
As of December 31, 1996, no impairment exists with respect to the Company's
long-lived assets.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIVES ------------------------
(YEARS) 1995 1996
------------- ----------- -----------
<S> <C> <C> <C>
Leasehold improvements................................ 5-10 $ 60,513 $ 62,103
Medical and computer equipment........................ 5-7 33,486 33,486
Furniture and fixtures................................ 7-10 63,779 65,393
----------- -----------
Total............................................... 157,779 160,983
Less: Accumulated depreciation........................ (103,145) (109,996)
----------- -----------
Net................................................. $ 54,633 $ 50,986
----------- -----------
----------- -----------
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
The Company has entered into binding agreements with Integrated Physicians
Systems, Inc. (IPS), the terms of which provide that IPS will acquire
substantially all of the assets, goodwill, and intangibles of the Company. The
acquisition by IPS will coincide with the consummation of its IPO.
F-62
<PAGE>
FLEMINGTON MEDICAL GROUP, P.A.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. SHORT-TERM OBLIGATIONS AND COMMITMENTS
A. SHORT-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1995 1996
--------- ---------
Short-term debt consist of a line of credit with a bank. The line of credit
bears interest at prime + 3%............................................. $ 9,611 $ 3,410
--------- ---------
--------- ---------
</TABLE>
B. LEASE OBLIGATIONS
The Company leases office space under noncancellable lease agreements. At
December 31, 1996, minimum annual rental commitments under noncancellable
operating leases with terms in excess of one year are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
----------
<S> <C>
1997.............................................................................. $ 55,000
1998.............................................................................. 55,000
1999.............................................................................. 35,000
----------
Total future minimum lease payments........................................... $ 145,000
----------
----------
</TABLE>
Rent expense amounted to $53,685, $55,786 and $56,883 for the years ended
December 31, 1994, 1995 and 1996, respectively.
6. EMPLOYEE BENEFIT PLANS
The Company maintains a qualified defined contribution profit sharing plan
(the "Plan") and pays all general and administrative expenses of the Plan. The
contributions related to the Plan totaled $40,000, $22,500 and $35,417 in 1994,
1995 and 1996, respectively.
The Company does not typically provide employees any post retirement
benefits other than the Plan described above and, accordingly, the impact of
SFAS No. 106 "Employer's Accounting for Postretirement Benefits other than
Pensions" had no material effect on the Company.
F-63
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Hunterdon Ophthalmologists, P.A.
We have audited the accompanying balance sheets of Hunterdon
Ophthalmologists, P.A. as of December 31, 1995 and 1996, and the related
statements of operations, changes in stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of Hunterdon Ophthalmologists' management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Hunterdon Ophthalmologists,
P.A. as of December 31, 1995 and 1996, and the results of its operations,
changes in stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1996 in conformity with generally accepted
accounting principles.
Feldman Radin & Co., P. C.
Certified Public Accountants
New York, New York
May 9, 1997
F-64
<PAGE>
HUNTERDON OPHTHALMOLOGISTS, P.A.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1995 1996 1997
--------- --------- -----------
<S> <C> <C> <C>
(UNAUDITED)
<CAPTION>
ASSETS
<S> <C> <C> <C>
CURRENT ASSETS:
Cash......................................................................... $ 23,399 $ 20,076 $ 20,750
Accounts receivable, less allowance for bad debts of $12,000 in 1995, $17,088
in 1996 and $18,366 in 1997................................................ 48,000 68,352 71,417
Prepaid expenses and other current assets.................................... 3,927 3,927 4,077
--------- --------- -----------
Total current assets..................................................... 75,326 92,355 96,244
--------- --------- -----------
PROPERTY AND EQUIPMENT, net.................................................... 5,598 4,354 3,732
--------- --------- -----------
$ 80,924 $ 96,709 $ 99,976
--------- --------- -----------
--------- --------- -----------
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued expenses........................................ $ 14,783 $ 11,784 $ 10,350
--------- --------- -----------
Total current liabilities................................................ 14,783 11,784 10,350
--------- --------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, no par value; 1,000 shares authorized and 1,000 shares issued
and outstanding, respectively.............................................. 1,000 1,000 1,000
Retained earnings............................................................ 65,141 83,925 88,626
--------- --------- -----------
TOTAL STOCKHOLDERS' EQUITY..................................................... 66,141 84,925 89,626
--------- --------- -----------
$ 80,924 $ 96,709 $ 99,976
--------- --------- -----------
--------- --------- -----------
</TABLE>
See notes to financial statements.
F-65
<PAGE>
HUNTERDON OPHTHALMOLOGISTS, P.A.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------- ----------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE:
Medical services revenue........................... $ 744,038 $ 804,638 $ 684,391 $ 342,196 $ 308,358
Other revenue...................................... 133 104 31 16 49
---------- ---------- ---------- ---------- ----------
Total revenue.................................. 744,171 804,742 684,422 342,212 308,407
---------- ---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Salaries and wages................................. 329,778 350,456 325,117 162,558 128,956
Medical supplies and expenses...................... 131,153 134,953 91,347 45,674 38,121
General and administrative expenses................ 284,719 299,560 242,842 110,174 133,402
Bad debt expense................................... 8,295 3,705 5,088 2,544 2,605
Depreciation and amortization...................... 1,244 1,244 1,244 622 622
Interest expense................................... 417 100 -- -- --
---------- ---------- ---------- ---------- ----------
Total costs and expenses....................... 755,606 790,018 665,638 321,572 303,706
---------- ---------- ---------- ---------- ----------
Net (loss) income.............................. $ (11,435) $ 14,724 $ 18,784 $ 20,640 $ 4,701
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
See notes to financial statements.
F-66
<PAGE>
HUNTERDON OPHTHALMOLOGISTS, P.A.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
-------------------- ADDITIONAL RETAINED
SHARES AMOUNT PAID-IN CAPITAL EARNINGS TOTAL
--------- --------- --------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993............................ -- $ 1,000 $ -- $ 61,852 $ 62,852
Net loss............................................ -- -- -- (11,435) (11,435)
--------- --------- ------ ---------- ----------
Balance, December 31, 1994............................ -- 1,000 -- 50,417 51,417
Net income.......................................... -- -- -- 14,724 14,724
--------- --------- ------ ---------- ----------
Balance, December 31, 1995............................ -- 1,000 -- 65,141 66,141
Net income.......................................... -- -- -- 18,784 18,784
--------- --------- ------ ---------- ----------
Balance, December 31, 1996............................ -- 1,000 -- 83,925 84,925
Net income.......................................... -- -- -- 4,701 4,701
--------- --------- ------ ---------- ----------
Balance, June 30, 1997 (unaudited).................... -- $ 1,000 $ -- $ 88,626 $ 89,626
--------- --------- ------ ---------- ----------
--------- --------- ------ ---------- ----------
</TABLE>
See notes to financial statements.
F-67
<PAGE>
HUNTERDON OPHTHALMOLOGISTS, P.A.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------- ---------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income.................................... $ (11,435) $ 14,724 $ 18,784 $ 20,640 $ 4,701
---------- ---------- ---------- ---------- ---------
Adjustments to reconcile net (loss) income to net
cash provided by (used in) operating activities:
Depreciation and amortization...................... 1,244 1,244 1,244 622 622
Changes in assets and liabilities -
(Increase) decrease in -
Accounts receivable, net....................... 789 (14,822) (20,352) (20,921) (3,065)
Prepaid expenses and other current assets...... (3,927) -- -- 70 (150)
Increase (decrease) in -
Accounts payable and accrued expenses.......... 2,184 (913) (2,999) (3,953) (1,434)
---------- ---------- ---------- ---------- ---------
290 (14,491) (22,107) (24,182) (4,027)
---------- ---------- ---------- ---------- ---------
Net cash provided by (used in) operating
activities......................................... (11,145) 233 (3,323) (3,542) 674
---------- ---------- ---------- ---------- ---------
NET INCREASE (DECREASE) IN CASH........................ (11,145) 233 (3,323) (3,542) 674
CASH, beginning of period.............................. 34,311 23,166 23,399 23,399 20,076
CASH, end of period.................................... $ 23,166 $ 23,399 $ 20,076 $ 19,857 $ 20,750
---------- ---------- ---------- ---------- ---------
---------- ---------- ---------- ---------- ---------
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid........................................ $ 417 $ 100 $ -- $ -- $ --
---------- ---------- ---------- ---------- ---------
---------- ---------- ---------- ---------- ---------
</TABLE>
See notes to financial statements.
F-68
<PAGE>
HUNTERDON OPHTHALMOLOGISTS, P.A.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS ORGANIZATION AND BASIS OF PRESENTATION
Hunterdon Ophthalmologists, P.A. (the "Company") is a New Jersey
professional corporation which provides ophthalmological services. The Company
was incorporated on February 21, 1985.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. METHOD OF ACCOUNTING
The financial statements of the Company are presented on the accrual basis
of accounting. Accordingly, revenues are recorded when earned, rather than when
received and expenses are recorded when incurred, rather than when paid.
B. REVENUES
Medical service revenues are accounted for in the period the services are
provided. The revenues are reported at the estimated realizable amounts from
patients, third-party payors and others. Provisions for estimated third-party
payor adjustments are recorded in the period the related services are provided
as a reduction of revenue. Any adjustment to those amounts are recorded in the
period in which the revised amount is determined. A portion of the Company's
medical services revenue is derived from Medicare, Medicaid and other
governmental programs. Medicare, Medicaid, and other governmental programs
reimburse physicians based on fee schedules which are determined by the specific
governmental agency. Additionally, the Company participates in agreements with
managed care organizations to provide services at negotiated fee-for-service or
capitated payments rates.
C. CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk consist principally of trade account receivables.
The Company establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific payors, historical trends and other
information.
D. PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are amortized over the respective lease terms or the
service lives of the improvements, whichever is shorter.
E. 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 as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F. INCOME TAXES
The Company has historically not incurred significant tax liabilities for
federal or state income taxes. Compensation to physician owners has
traditionally reduced taxable income to nominal levels. Provisions
F-69
<PAGE>
HUNTERDON OPHTHALMOLOGISTS, P.A.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
for income taxes and deferred tax assets and liabilities are not material and
have not been reflected in the financial statements.
G. CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all cash accounts which are not subject to
withdrawal restrictions or penalties, and all highly liquid instruments, with
original maturities of three months or less.
H. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting standards ("SFAS") No. 107 "Disclosures
About Fair Value of Financial Instruments" requires disclosure about the fair
value of all financial instruments. Carrying amounts of all financial
instruments approximate fair value as of December 31, 1996.
I. LONG-LIVED ASSETS
Under the requirements of SFAS No. 121 "Accounting for Long-Lived Assets and
for Long-Lived-Assets to be Disposed of", the Company is obligated to recognize
an impairment loss on their long lived assets whenever the sum of the expected
future cash flows resulting from their use is less than their carrying amount.
As of December 31, 1996, no impairment exists with respect to the Company's
long-lived assets.
3. COMMITMENTS AND CONTINGENCIES
The Company is insured with respect to medical malpractice risks. In the
normal course of business the Company has been named in lawsuits. In the opinion
of the management of the Company the ultimate liability, if any, of the Company
with respect to any such lawsuit will not exceed the insurance coverages carried
by the Company and will not materially impact the operating results or results
of financial condition of the Company.
The Company has entered into binding agreements with Integrated Physicians
Systems, Inc. ("IPS"), the terms of which provide that IPS will acquire
substantially all of the assets, goodwill, and intangibles of the Company. The
acquisition by IPS will coincide with the consummation of its IPO.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIFE ----------------------
(YEARS) 1995 1996
--------------- ---------- ----------
<S> <C> <C> <C>
Equipment................................................. 5-7 26,208 26,208
Less: Accumulated depreciation............................ (20,610) (21,854)
---------- ----------
Net..................................................... $ 5,598 $ 4,354
---------- ----------
---------- ----------
</TABLE>
F-70
<PAGE>
HUNTERDON OPHTHALMOLOGISTS, P.A.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. LEASE OBLIGATIONS
The Company leases office space under noncancelable operating lease
agreements, which expire at various dates. At December 31, 1996, minimum annual
rental commitments under noncancelable operating leases with terms in excess of
one year are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
----------
<S> <C>
1997.............................................................................. $ 79,000
1998.............................................................................. 86,000
1999.............................................................................. 86,000
----------
Total future minimum lease payments............................................. $ 251,000
----------
----------
</TABLE>
Rent expense related to operating leases amounted to $88,000, $88,000 and
$79,000 for the years ended December 31, 1994, 1995 and 1996, respectively.
6. EMPLOYEE BENEFIT PLANS
The Company has a qualified defined contribution profit sharing plan (the
"Plan"). The Company pays all general and administrative expenses of the Plan.
The Company made contributions related to the Plan totaling $10,000, $13,650 and
$7,500 in 1994, 1995 and 1996, respectively.
The Company does not typically provide employees any post retirement
benefits other than the Plan described above and, accordingly, the impact of
SFAS No. 106 "Employer's Accounting for Postretirement Benefits other than
Pensions" had no material effect on the Company.
F-71
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholder of
Joel Fuhrman M.D., P.C.
D/B/A Amwell Health Center
We have audited the accompanying balance sheets of the Amwell Health Center
as of December 31, 1995 and 1996, and the related statements of operations,
changes in stockholder's equity and cash flows for each of three years in the
period ended December 31, 1996. These financial statements are the
responsibility of Amwell Health Center's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Amwell Health Center as of
December 31, 1995 and 1996, and the results of its operations, changes in
stockholder's equity and cash flows for each of the three years in the period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
Feldman Radin & Co., P. C.
Certified Public Accountants
New York, New York
May 9, 1997
F-72
<PAGE>
AMWELL HEALTH CENTER
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
<S> <C> <C> <C>
JUNE 30,
1995 1996 1997
---------- ---------- -----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
- -----------------------------------------------------------------------------------------------------------------
CURRENT ASSETS:
Cash...................................................................... $ 52,405 $ 87,336 $ 71,376
Accounts receivable, less allowance for bad debts
of $11,139 in 1995, $6,723 in 1996...................................... 16,709 15,688 7,415
Prepaid expenses and other current assets................................. -- 19,644 40,731
---------- ---------- -----------
Total current assets................................................ 69,114 122,668 119,522
---------- ---------- -----------
PROPERTY AND EQUIPMENT, net................................................. 186,031 179,241 186,031
---------- ---------- -----------
OTHER NONCURRENT ASSETS, net................................................ 44,457 44,457 46,139
---------- ---------- -----------
$ 299,602 $ 346,366 $ 351,692
---------- ---------- -----------
---------- ---------- -----------
LIABILITIES AND STOCKHOLDER'S EQUITY
- -----------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES:
Current portion of long-term debt......................................... $ 197,315 $ 23,714 $ 169,737
Accounts payable and accrued expenses..................................... 17,346 -- 10,819
---------- ---------- -----------
Total current liabilities........................................... 214,661 23,714 180,556
---------- ---------- -----------
LONG-TERM DEBT, net of current portion...................................... -- 157,800 --
---------- ---------- -----------
Total liabilities................................................... 214,661 181,514 180,556
---------- ---------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common Stock, $1.00 par value; 100 shares authorized,
100 shares issued and outstanding respectively 100 100 100
Retained earnings......................................................... 84,841 164,752 171,036
---------- ---------- -----------
Total stockholder's equity.......................................... 84,941 164,852 171,136
---------- ---------- -----------
$ 299,602 $ 346,366 $ 351,692
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
See notes to financial statements.
F-73
<PAGE>
AMWELL HEALTH CENTER
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------- ----------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE:
Medical services revenue.................................. $ 670,842 $ 752,129 $ 651,987 $ 328,525 $ 337,125
Other revenue............................................. 10,085 11,219 377 -- 30
---------- ---------- ---------- ---------- ----------
Total revenue......................................... 680,927 763,348 652,364 328,525 337,155
---------- ---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Salaries and wages........................................ 308,345 419,219 332,142 188,747 193,542
Medical supplies and expenses............................. 49,687 131,101 72,581 15,518 15,021
General and administrative expenses....................... 244,468 189,946 146,341 104,692 104,815
Bad debt expense.......................................... 6,336 4,803 -- -- --
Depreciation and amortization............................. 10,393 7,844 7,843 3,462 8,465
Interest expense.......................................... 7,625 4,994 13,546 10,314 9,028
---------- ---------- ---------- ---------- ----------
Total costs and expenses.............................. 626,854 757,907 572,453 322,733 330,871
---------- ---------- ---------- ---------- ----------
Net income............................................ $ 54,073 $ 5,441 $ 79,911 $ 5,792 $ 6,284
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
See notes to financial statements.
F-74
<PAGE>
AMWELL HEALTH CENTER
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
------------------------ RETAINED
SHARES AMOUNT EARNINGS TOTAL
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Balance, December 31, 1993............................................. 100 $ 100 $ 25,327 $ 25,427
Net income........................................................... -- -- 54,073 54,073
--- ----- ---------- ----------
Balance, December 31, 1994............................................. 100 100 79,400 79,500
Net income........................................................... -- -- 5,441 5,441
--- ----- ---------- ----------
Balance, December 31, 1995............................................. 100 100 84,841 84,941
Net income........................................................... -- -- 79,911 79,911
--- ----- ---------- ----------
Balance, December 31, 1996............................................. 100 100 164,752 164,852
Net income (unaudited)............................................... -- -- 6,284 6,284
--- ----- ---------- ----------
Balance, June 30, 1997 (unaudited)..................................... 100 $ 100 $ 171,036 $ 171,136
--- ----- ---------- ----------
--- ----- ---------- ----------
</TABLE>
See notes to financial statements.
F-75
<PAGE>
AMWELL HEALTH CENTER
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------------- ----------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1996 1997
---------- ----------- ---------- ---------- ----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................... $ 54,073 $ 5,441 $ 79,911 $ 5,792 $ 6,284
---------- ----------- ---------- ---------- ----------
Adjustments to reconcile net income to net cash
provided by operating activities -
Depreciation and amortization.................. 10,393 7,844 7,843 3,462 8,465
Changes in assets and liabilities -
(Increase) decrease in -
Accounts receivable, net................... (2,111) (1,924) 1,021 16,709 8,273
Prepaid expenses and other current
assets................................... -- 35,800 (19,644) -- (21,087)
Increase (decrease) in -
Accounts payable and accrued expenses...... (19,223) 13,522 (17,346) 10,922 10,819
---------- ----------- ---------- ---------- ----------
(10,941) 55,242 (28,126) 31,093 6,470
---------- ----------- ---------- ---------- ----------
Net cash provided by operating activities.......... 43,132 60,683 51,785 36,885 12,754
---------- ----------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment................. (13,319) (190,949) (1,053) (13,824) (15,255)
Increase in other noncurrent assets................ (20,000) (24,457) -- (7,186) (1,682)
---------- ----------- ---------- ---------- ----------
Net cash (used in) provided by investing
activities................................... (33,319) (215,406) (1,053) (21,010) (16,937)
---------- ----------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayment of) long-term debt........ -- 197,315 (15,801) (5,253) (11,777)
---------- ----------- ---------- ---------- ----------
Net cash provided by (used in) financing
activities................................... -- 197,315 (15,801) (5,253) (11,777)
---------- ----------- ---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH...................... 9,813 42,592 34,931 10,622 (15,960)
CASH, beginning of period............................ -- 9,813 52,405 52,405 87,336
---------- ----------- ---------- ---------- ----------
CASH, end of period.................................. $ 9,813 $ 52,405 $ 87,336 $ 63,027 $ 71,376
---------- ----------- ---------- ---------- ----------
---------- ----------- ---------- ---------- ----------
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid...................................... $ 7,625 $ 4,994 $ 13,546 $ 6,773 $ 9,028
---------- ----------- ---------- ---------- ----------
---------- ----------- ---------- ---------- ----------
</TABLE>
See notes to financial statements.
F-76
<PAGE>
AMWELL HEALTH CENTER
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS ORGANIZATION AND BASIS OF PRESENTATION
Amwell Health Center (the "Company") is a New Jersey professional
corporation providing general medical services in the state of New Jersey and
was incorporated on January 24, 1994.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. METHOD OF ACCOUNTING
The financial statements of the Company are presented on the accrual basis
of accounting. Accordingly, revenues are recorded when earned, rather than when
received and expenses are recorded when incurred, rather than when paid.
B. REVENUES
Medical service revenues are accounted for in the period the services are
provided. The revenues are reported at the estimated realizable amounts from
patients, third-party payors and others. Provisions for estimated third-party
payor adjustments are recorded in the period the related services are provided
as a reduction of revenue. Any adjustment to those amounts are recorded in the
period in which the revised amount is determined. A portion of the Company's
medical services revenue is derived from Medicare, Medicaid and other
governmental programs. Medicare, Medicaid, and other governmental programs
reimburse physicians based on fee schedules which are determined by the specific
governmental agency. Additionally, the Company participates in agreements with
managed care organizations to provide services at negotiated fee-for-service or
capitated payments rates.
C. CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk consist principally of trade account receivables.
The Company establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific payors, historical trends and other
information.
D. PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are amortized over the respective lease terms or the
service lives of the improvements, whichever is shorter.
E. 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 as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F. INCOME TAXES
The Company has historically not incurred significant tax liabilities for
federal or state income taxes. Compensation to physician owners has
traditionally reduced taxable income to nominal levels. Provisions for income
taxes and deferred tax assets and liabilities are not material and have not been
reflected in the financial statements.
F-77
<PAGE>
AMWELL HEALTH CENTER
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
G. CASH AND CASH EQUIVALENTS
The Company includes as cash and cash equivalents all cash accounts which
are not subject to withdrawal restrictions or penalties, and all highly liquid
instruments, with original maturities of three months or less.
H. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statements of Financial Accounting Standards ("SFAS") No. 107 "Disclosures
About Fair Value of Financial Instruments" requires disclosure about the fair
value of all financial instruments. Carrying amounts of all financial
instruments approximate fair value as of December 31, 1996.
I. LONG-LIVED ASSETS
Under the requirements of SFAS No. 121 "Accounting for Long-Lived Assets and
for Long-Lived Assets to be Disposed of", the Company is obligated to recognize
an impairment loss on its long-lived assets whenever the sum of the expected
future cash flows resulting from their use is less than their carrying amount.
As of December 31, 1996, no impairment exists with respect to the Company's
long-lived assets.
3. COMMITMENTS AND CONTINGENCIES
The Company is insured with respect to medical malpractice risks. In the
normal course of business the Company has been named in lawsuits. In the opinion
of the management of the Company the ultimate liability, if any, of the Company
with respect to any such lawsuit will not exceed the insurance coverages carried
by the Company and will not materially impact the operating results or results
of financial condition of the Company.
The Company has entered into a binding agreement with Integrated Physician
Systems, Inc. (IPS), the terms of which provide that IPS will acquire
substantially all of the assets, goodwill, and intangibles of the Company. The
acquisition by IPS will coincide with the consummation of its IPO.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIVES ----------------------
(YEARS) 1995 1996
------------- ---------- ----------
<S> <C> <C> <C>
Leasehold improvements.................................. 5-10 $ 41,109 $ 41,109
Medical and computer equipment.......................... 5-7 125,723 126,777
Furniture and fixtures.................................. 7-10 25,310 25,310
Automobiles............................................. 3-5 46,666 46,666
------ ---------- ----------
Total................................................. 238,808 239,862
Less: Accumulated depreciation.......................... (52,777) (60,621)
---------- ----------
Net................................................... $ 186,031 $ 179,241
---------- ----------
---------- ----------
</TABLE>
F-78
<PAGE>
AMWELL HEALTH CENTER
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
<S> <C> <C>
1995 1996
----------- ----------
Term loans payable to banks, due through 2001, bearing interest at
9.25%, payable monthly............................................. $ -- $ 170,372
Unsecured non-interest bearing line of credit with a hospital........ 177,690 --
Other debt........................................................... 19,625 11,142
----------- ----------
Total long-term debt............................................... 197,315 181,514
Less: current portion................................................ (197,315) (23,714)
----------- ----------
Long-term debt, excluding current portion.......................... $ -- $ 157,800
----------- ----------
----------- ----------
</TABLE>
As of December 31, 1996, the aggregate amounts of annual principal
maturities of long-term debt (excluding capital lease obligations) are as
follows:
<TABLE>
<S> <C>
1997.............................................................. $ 23,714
1998.............................................................. 13,786
1999.............................................................. 15,118
2000.............................................................. 16,576
2001.............................................................. 112,320
---------
Total............................................................. $ 181,514
---------
---------
</TABLE>
6. EMPLOYEE BENEFIT PLANS
The Company has a qualified defined contribution profit sharing plan (the
"Plan") and pays all general and administrative expenses of the Plan. The
Company made contributions related to the Plan totaling $0, $40,146 and $0 in
1994, 1995 and 1996, respectively.
The Company does not typically provide employees any post retirement
benefits other than the Plan described above and, accordingly, the impact of
SFAS No. 106 "Employer's Accounting for Postretirement Benefits other than
Pensions" had no material effect on the Company.
F-79
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholder of
Kenneth G. Stern, M.D., PA
We have audited the accompanying balance sheets of Kenneth G. Stern, M.D.,
PA as of December 31, 1995 and 1996, and the related statements of operations,
changes in stockholder's equity and cash flows for each of the three years in
the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Kenneth G. Stern,
M.D.., PA as of December 31, 1995 and 1996, and the results of its operations,
changes in stockholder's equity and cash flows for each of the three years in
the period ended December 31, 1996 in conformity with generally accepted
accounting principles.
Feldman Radin & Co., P. C.
Certified Public Accountants
New York, New York
May 9, 1997
F-80
<PAGE>
KENNETH G. STERN, M.D., PA
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1995 1996 1997
--------- --------- -----------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash......................................................................... $ -- $ -- $ 46,926
Accounts receivable, less allowance for bad debts of $8,119 in 1995, $8,436
in 1996 and $8,450 in 1997................................................. 46,009 47,802 45,345
Prepaid expenses and other current assets.................................... 2,401 7,600 --
--------- --------- -----------
Total current assets..................................................... 48,410 55,402 92,271
PROPERTY AND EQUIPMENT, net.................................................... 47,498 39,568 34,736
--------- --------- -----------
$ 95,908 $ 94,970 $ 127,007
--------- --------- -----------
--------- --------- -----------
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses........................................ $ 28,823 $ 47,953 $ 42,702
--------- --------- -----------
Total current liabilities................................................ 28,823 47,953 42,702
--------- --------- -----------
STOCKHOLDER'S EQUITY:
Common stock, no par value; 100 shares authorized, 100 shares
issued and outstanding, respectively....................................... 5,000 5,000 5,000
Additional paid in capital................................................... -- 13,173 13,173
Retained earnings............................................................ 62,085 28,844 66,132
--------- --------- -----------
TOTAL STOCKHOLDER'S EQUITY..................................................... 67,085 47,017 84,305
--------- --------- -----------
$ 95,908 $ 94,970 $ 127,007
--------- --------- -----------
--------- --------- -----------
</TABLE>
See notes to financial statements.
F-81
<PAGE>
KENNETH G. STERN, M.D., PA
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------- ----------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE:
Medical services revenue........................... $ 524,148 $ 606,186 $ 608,627 $ 273,986 $ 258,490
Other revenue...................................... 10,561 13,487 11,869 5,650 6,048
---------- ---------- ---------- ---------- ----------
Total revenue.................................. 534,709 619,673 620,496 279,636 264,538
---------- ---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Salaries and wages................................. 274,678 361,061 474,190 119,295 125,855
Medical supplies and expenses...................... 44,552 39,343 24,299 11,337 11,462
General and administrative expenses................ 110,070 134,236 142,844 94,584 81,921
Bad debt expense................................... 7,769 350 317 -- 250
Depreciation and amortization...................... 20,945 12,413 12,087 3,408 2,362
---------- ---------- ---------- ---------- ----------
Total costs and expenses....................... 458,014 547,403 653,737 228,624 221,849
---------- ---------- ---------- ---------- ----------
Net income (loss).............................. $ 76,695 $ 72,270 $ (33,241) $ 51,012 $ 42,689
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
See notes to financial statements.
F-82
<PAGE>
KENNETH G. STERN, M.D., PA
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
-------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
--------- --------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993......................... -- $ 5,000 $ -- $ 239,948 $ 244,948
Net income....................................... -- -- -- 76,695 76,695
Dividends........................................ -- -- -- (236,380) (236,380)
--------- --------- ------- ----------- -----------
Balance, December 31, 1994......................... -- 5,000 -- 80,263 85,263
Net income....................................... -- -- -- 72,270 72,270
Dividends........................................ -- -- -- (90,448) (90,448)
--------- --------- ------- ----------- -----------
Balance, December 31, 1995......................... -- 5,000 -- 62,085 67,085
Net income....................................... -- -- -- (33,241) (33,241)
Capital contributions............................ -- -- 13,173 -- 13,173
--------- --------- ------- ----------- -----------
Balance, December 31, 1996......................... -- 5,000 13,173 28,844 47,017
Net income....................................... -- -- -- 42,689 42,689
Dividends........................................ -- -- -- (5,401) (5,401)
--------- --------- ------- ----------- -----------
Balance, June 30, 1997(unaudited).................. -- $ 5,000 $ 13,173 $ 66,132 $ 84,305
--------- --------- ------- ----------- -----------
--------- --------- ------- ----------- -----------
</TABLE>
See notes to financial statements.
F-83
<PAGE>
KENNETH G. STERN, M.D., PA
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1996 1997
---------- ---------- ---------- --------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 76,695 $ 72,270 $ (33,241) $ 51,012 $ 42,689
---------- ---------- ---------- --------- ---------
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization......................... 20,945 12,413 12,087 3,408 2,362
Changes in assets and liabilities -
(Increase) decrease in -
Accounts receivable, net.......................... (5,843) (1,985) (1,793) (2,306) 2,457
Prepaid expenses and other current assets......... 3,093 (2,401) (5,199) 2,401 7,600
Increase (decrease) in -
Accounts payable and accrued expenses............. (39,804) 22,791 19,130 (4,668) (5,251)
---------- ---------- ---------- --------- ---------
(21,609) 30,818 24,225 (1,165) 7,168
---------- ---------- ---------- --------- ---------
Net cash provided by (used in) operating activities....... 55,086 103,088 (9,016) 49,847 49,857
---------- ---------- ---------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................ (37,542) (18,279) (4,157) -- 2,470
---------- ---------- ---------- --------- ---------
Net cash provided by (used in) investing activities... (37,542) (18,279) (4,157) -- 2,470
---------- ---------- ---------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid............................................ (236,380) (90,448) -- (38,387) (5,401)
Increase in additional paid in capital.................... -- -- 13,173 -- --
---------- ---------- ---------- --------- ---------
Net cash provided by (used in) financing activities... (236,380) (90,448) 13,173 (38,387) (5,401)
---------- ---------- ---------- --------- ---------
NET INCREASE (DECREASE) IN CASH............................. (218,836) (5,639) -- 11,460 46,926
CASH, beginning of period................................... 224,475 5,639 -- -- --
---------- ---------- ---------- --------- ---------
CASH, end of period......................................... 5,639 $ -- $ -- $ 11,460 $ 46,926
---------- ---------- ---------- --------- ---------
---------- ---------- ---------- --------- ---------
</TABLE>
See notes to financial statements.
F-84
<PAGE>
KENNETH G. STERN, M.D., PA
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS ORGANIZATION AND BASIS OF PRESENTATION
Kenneth G. Stern, M.D., PA (the "Company") is a New Jersey professional
corporation which provides medical services in the state of New Jersey. The
Company was incorporated on March 22, 1974.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. METHOD OF ACCOUNTING
The financial statements of the Company are presented on the accrual basis
of accounting. Accordingly, revenues are recorded when earned, rather than when
received and expenses are recorded when incurred, rather than when paid.
B. REVENUES
Medical service revenues are accounted for in the period the services are
provided. The revenues are reported at the estimated realizable amounts from
patients, third-party payors and others. Provisions for estimated third-party
payor adjustments are recorded in the period the related services are provided
as a reduction of revenue. Any adjustment to those amounts are recorded in the
period in which the revised amount is determined. A portion of the Company's
medical services revenue is derived from Medicare, Medicaid and other
governmental programs. Medicare, Medicaid, and other governmental programs
reimburse physicians based on fee schedules which are determined by the specific
governmental agency. Additionally, the Company participates in agreements with
managed care organizations to provide services at negotiated fee-for-service or
capitated payments rates.
C. CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk consist principally of trade accounts receivable.
The Company establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific payors, historical trends and other
information.
D. PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are amortized over the respective lease terms or the
service lives of the improvements, whichever is shorter.
E. 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 as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
E. INCOME TAXES
The Company has historically not incurred significant tax liabilities for
federal or state income taxes. Compensation to physician owners has
traditionally reduced taxable income to nominal levels. Provisions
F-85
<PAGE>
KENNETH G. STERN, M.D., PA
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
for income taxes and deferred tax assets and liabilities are not material and
have not been reflected in the financial statements.
F. CASH AND CASH EQUIVALENTS
The Company includes as cash and cash equivalents all cash accounts which
are not subject to withdrawal restrictions or penalties, and all highly liquid
instruments, with original maturities of three months or less.
G. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards ("SFAS") No. 107 "Disclosures
About Fair Value of Financial Instruments" requires disclosure about the fair
value of all financial instruments. Carrying amounts of all financial
instruments approximate fair value as of December 31, 1996.
H. ACCOUNTING FOR LONG-LIVED ASSETS
Under the requirements of SFAS No. 121 "Accounting for Long-Lived Assets and
for Long-Lived Assets to be disposed of", the Company is obligated to recognize
an impairment loss on long-lived assets whenever the sum of the expected future
cash flows from their use is less than their carrying amount. Based on the
Company's review as of December 31, 1996, no impairment of long-lived assets was
evident.
3. COMMITMENTS AND CONTINGENCIES
The Company is insured with respect to medical malpractice risks. In the
normal course of business the Company has been named in lawsuits. In the opinion
of management the ultimate liability, if any, of the with respect to any such
lawsuit will not exceed insurance coverage and will not materially impact the
operating results or results of financial condition of the Company.
The Company. has entered into a binding agreement with Integrated Physicians
Systems, Inc. (IPS), the terms of which provide that IPS will acquire
substantially all of the assets, goodwill, and intangibles of the Company. The
acquisition by IPS will coincide with the consummation of its IPO.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIVES ----------------------
(YEARS) 1995 1996
--------------- ---------- ----------
<S> <C> <C> <C>
Leasehold improvements.................................. 5-39 $ 25,892 $ 28,892
Medical and computer equipment.......................... 5-7 43,288 44,445
Furniture and fixtures.................................. 5-7 9,830 9,830
Automobiles............................................. 5 34,523 34,523
---------- ----------
Total................................................. 113,533 117,690
Less: Accumulated depreciation.......................... (66,035) (78,122)
---------- ----------
Net................................................... $ 47,498 $ 39,568
---------- ----------
---------- ----------
</TABLE>
F-86
<PAGE>
KENNETH G. STERN, M.D., PA
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. LEASE OBLIGATIONS
The Company leases office space under noncancelable lease agreements, which
expire at various dates. At December 31, 1996 minimum annual rental commitments
under noncancelable leases with terms in excess of one year are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
-----------
<S> <C>
1997............................................................................... $ 19,250
1998............................................................................... 16,215
1999............................................................................... 16,215
-----------
Total future minimum lease payments................................................ $ 51,680
-----------
-----------
</TABLE>
Rent expense relating to operating leases amounted to $13,200, $16,200 and
$19,250 for the years ended December 31, 1994, 1995 and 1996, respectively.
6. EMPLOYEE BENEFIT PLANS
The Company has a qualified defined contribution pension plan (the "Plan").
The Company pays all general and administrative expenses of the Plan and made
contributions related to the Plan totaling $44,221, $38,334 and $42,169 in 1994,
1995 and 1996, respectively.
The Company does not typically provide employees any post retirement
benefits other than the Plan described above and, accordingly, the impact of
SFAS No. 106 " Employer's Accounting for Postretirement Benefits other than
Pensions" had no material effect.
F-87
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Alexander Kudryk, M.D.
We have audited the accompanying balance sheets of Alexander Kudryk, M.D. as
of December 31, 1995 and 1996, and the related statements of operations,
proprietor's capital and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Alexander Kudryk, M.D. as of
December 31, 1995 and 1996, and the results of its operations, proprietor's
capital and cash flows for each of the three years in the period ended December
31, 1996 in conformity with generally accepted accounting principles.
Feldman Radin & Co., P. C.
Certified Public Accountants
New York, New York
May 9, 1997
F-88
<PAGE>
ALEXANDER KUDRYK, M.D.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1995 1996 1997
--------- --------- -----------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash......................................................................... $ -- $ -- $ 12,440
Accounts receivable, less allowance for bad debts of $19,409 in 1995, $16,359
in 1996 and $16,359, in 1997............................................... 56,295 48,333 5,000
Prepaid expenses and other current assets.................................... 5,000 5,000 5,000
--------- --------- -----------
Total current assets..................................................... 61,295 53,333 22,440
--------- --------- -----------
PROPERTY AND EQUIPMENT, net.................................................... 8,766 6,215 10,895
--------- --------- -----------
$ 70,061 $ 59,548 $ 33,335
--------- --------- -----------
--------- --------- -----------
LIABILITIES AND PROPRIETOR'S CAPITAL
CURRENT LIABILITIES:
Accounts payable............................................................. $ 1,163 $ 2,117 $ --
Current portion of capital lease............................................. -- 1,352 1,352
Current portion of long-term debt............................................ 29,783 -- 2,400
--------- --------- -----------
Total current liabilities................................................ 30,946 3,469 3,752
LONG-TERM DEBT, net of current portion......................................... 6,582 5,231 9,600
--------- --------- -----------
LONG-TERM OBLIGATION UNDER CAPITAL LEASE,
net of current portion....................................................... -- -- 4,499
--------- --------- -----------
Total liabilities........................................................ 37,528 8,700 17,851
COMMITMENTS AND CONTINGENCIES
PROPRIETOR'S CAPITAL........................................................... 32,533 50,848 15,484
--------- --------- -----------
$ 70,061 $ 59,548 $ 33,335
--------- --------- -----------
--------- --------- -----------
</TABLE>
See notes to financial statements.
F-89
<PAGE>
ALEXANDER KUDRYK, M.D.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------- ----------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE:
Medical services revenue........................... $ 353,031 $ 484,095 $ 485,271 $ 222,993 $ 229,598
Other revenue...................................... 121 138 125 36,000 30,000
---------- ---------- ---------- ---------- ----------
Total revenue.................................. 353,152 484,233 485,396 258,993 259,598
---------- ---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Salaries and wages................................. 78,583 83,758 91,364 46,465 64,810
Medical supplies and expenses...................... 30,464 26,415 21,258 11,880 12,147
General and administrative expenses................ 135,274 201,570 172,639 72,356 68,468
Bad debt expense................................... 15,297 4,112 -- -- 2,235
Payroll tax interest and penalties................. -- -- -- 3,837 4,482
Depreciation and amortization...................... 11,240 15,891 2,551 277 1,212
Interest expense................................... 9,421 6,658 1,749 1,315 380
---------- ---------- ---------- ---------- ----------
Total costs and expenses....................... 280,279 338,404 289,561 136,130 149,252
---------- ---------- ---------- ---------- ----------
Net income..................................... $ 72,873 $ 145,829 $ 195,835 $ 122,863 $ 110,346
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
See notes to financial statements.
F-90
<PAGE>
ALEXANDER KUDRYK, M.D.
STATEMENTS OF PROPRIETOR'S CAPITAL
<TABLE>
<S> <C>
BALANCE, December 31, 1993....................................................... $ (32,566)
Net income....................................................................... 72,873
Drawings......................................................................... (56,456)
---------
BALANCE, December 31, 1994....................................................... (16,149)
Net income....................................................................... 145,829
Drawings......................................................................... (97,147)
---------
BALANCE, December 31, 1995....................................................... 32,533
Net income....................................................................... 195,835
Drawings......................................................................... (177,520)
---------
BALANCE, December 31, 1996....................................................... 50,848
Net income....................................................................... 110,346
Drawings (Unaudited)............................................................. (145,710)
---------
BALANCE, June 30, 1997 (unaudited)............................................... $ 15,484
---------
---------
</TABLE>
See notes to financial statements.
F-91
<PAGE>
ALEXANDER KUDRYK, M.D.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------------- ------------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1996 1997
---------- ---------- ----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................... $ 72,873 $ 145,829 $ 195,835 $ 122,863 $ 110,346
---------- ---------- ----------- ----------- -----------
Adjustments to reconcile net income to net cash
provided by operating activities -
Depreciation and amortization............... 11,240 15,891 2,551 277 1,212
Changes in assets and liabilities -
(Increase) decrease in -
Accounts receivable, net................ 817 (5,406) 7,962 51,295 43,333
Accounts payable........................ -- 1,163 954 6,827 (2,117)
---------- ---------- ----------- ----------- -----------
12,057 11,648 11,467 58,399 42,428
---------- ---------- ----------- ----------- -----------
Net cash provided by operating activities....... 84,930 157,477 207,302 181,262 152,774
---------- ---------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.............. -- (17,976) -- -- (5,892)
---------- ---------- ----------- ----------- -----------
Net cash provided by (used in) investing
activities................................ -- (17,976) -- -- (5,892)
---------- ---------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayment of) short-term notes
payable....................................... 5,971 (5,971) 1,352 1,352 --
Drawings by owner............................... (56,456) (97,147) (177,520) (146,690) (145,710)
Proceeds from (repayment of) obligations under
capital leases................................ -- -- -- 5,926 4,499
Proceeds from (repayment of) debt............... (35,061) (38,287) (31,134) (36,365) 6,769
---------- ---------- ----------- ----------- -----------
Net cash used in financing activities....... (85,546) (141,405) (207,302) (175,777) (134,442)
---------- ---------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH................... (616) (1,904) -- 5,485 12,440
CASH, beginning of period......................... 2,520 1,904 -- -- --
---------- ---------- ----------- ----------- -----------
CASH, end of period............................... $ 1,904 $ -- $ -- $ 5,485 $ 12,440
---------- ---------- ----------- ----------- -----------
---------- ---------- ----------- ----------- -----------
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid............................... $ 9,421 $ 6,658 $ 1,749 $ 1,315 $ 380
---------- ---------- ----------- ----------- -----------
---------- ---------- ----------- ----------- -----------
</TABLE>
See notes to financial statements.
F-92
<PAGE>
ALEXANDER KUDRYK, M.D.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS ORGANIZATION AND BASIS OF PRESENTATION
Alexander Kudryk, M.D. (the "Proprietorship" or "Practice") was organized as
a sole propietorship, and provides medical services in the state of New Jersey.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. METHOD OF ACCOUNTING
The financial statements of Alexander Kudryk, M.D., are presented on the
accrual basis of accounting. Accordingly, revenues are recorded when earned,
rather than when received and expenses are recorded when incurred, rather than
when paid.
B. REVENUES
Medical service revenues are accounted for in the period the services are
provided. Revenues are reported at the estimated realizable amounts from
patients, third-party payors and others. Provisions for estimated third-party
payor adjustments are recorded in the period the related services are provided
as a reduction of revenue. Any adjustment to those amounts are recorded in the
period in which the revised amount is determined. A portion of the
Proprietorship's medical service revenue is derived from Medicare, Medicaid and
other governmental programs. Medicare, Medicaid, and other governmental programs
reimburse physicians based on fee schedules which are determined by the specific
governmental agency. Additionally, the Proprietorship participates in agreements
with managed care organizations to provide services at negotiated
fee-for-service or capitated payment rates.
C. CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Proprietorship to
concentrations of credit risk consist principally of trade accounts receivable.
The Proprietorship establishes an allowance for doubtful accounts based upon
factors surrounding the credit risk of specific payors, historical trends and
other information.
D. PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are amortized over the respective lease terms or the
service lives of the improvements, whichever is shorter.
E. 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 as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F. INCOME TAXES
Income from the Practice is combined with the income and expenses of the
proprietor from other sources and reported in the proprietor's individual
federal and state tax returns. The Proprietorship is not
F-93
<PAGE>
ALEXANDER KUDRYK, M.D.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
a tax paying entity for purposes of federal and state income taxes, and thus no
taxes have been recorded in the statements.
G. CASH AND CASH EQUIVALENTS
The Practice includes as cash and cash equivalents all cash accounts which
are not subject to withdrawal restrictions or penalties, and all highly liquid
instruments, with original maturities of three months or less.
H. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards ("SFAS") No. 107 "Disclosures
About Fair Value of Financial Instruments" requires disclosure about the fair
value of all financial instruments. Carrying amounts of all financial
instruments approximate fair value as of December 31, 1996.
I. LONG-LIVED ASSETS
Under the requirements of SFAS No. 121 "Accounting for Long-Lived Assets and
for Long-Lived Assets to be Disposed of" the Practice is obligated to recognize
an impairment loss on their long lived assets whenever the sum of the expected
future cash flows resulting from their use is less than their carrying amount.
Based on the Practice's review as of December 31, 1996, no impairment of
long-lived assets was evident.
3. COMMITMENTS AND CONTINGENCIES
The Practice, is insured with respect to medical malpractice risks. In the
normal course of business the Practice has been named in lawsuits. In the
opinion of management the ultimate liability, if any, with respect to any such
lawsuit will not exceed the insurance coverages carried, and will not materially
impact the operating results or results of financial condition of the Practice.
The Practice, has entered into binding agreements with Integrated Physicians
Systems, Inc. (IPS), the terms of which provide that IPS will acquire
substantially all of the assets, goodwill, and intangibles of the Practice. The
acquisition by IPS will coincide with the consummation of its IPO.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIVES ------------------------
(YEARS) 1995 1996
--------------- ----------- -----------
<S> <C> <C> <C>
Medical and office equipment.......................... 5-7 $ 107,181 $ 107,181
Equipment under capital leases........................ 5-7 5,477 5,477
Furniture and fixtures................................ 7-10 9,125 9,125
----------- -----------
Total............................................... 121,783 121,783
Less: Accumulated depreciation........................ (113,017) (115,568)
----------- -----------
Net................................................. $ 8,766 $ 6,215
----------- -----------
----------- -----------
</TABLE>
F-94
<PAGE>
ALEXANDER KUDRYK, M.D.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. LONG-TERM OBLIGATIONS AND COMMITMENTS
A. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
<S> <C> <C>
1995 1996
---------- ---------
Interest bearing term loan secured by accounts receivable payable to
bank, and due in 1996................................................. $ 29,783 $ --
Term loan payable to bank, due through 2000, bearing interest at 11.9%,
payable monthly....................................................... 6,582 6,582
---------- ---------
Total long term debt.............................................. 36,365 6,582
Less: current portion................................................... (29,783) (1,352)
---------- ---------
Long-term debt, excluding current portion......................... $ 6,582 $ 5,230
---------- ---------
---------- ---------
</TABLE>
As of December 31, 1996, the aggregate amounts of annual principal
maturities of long-term debts (excluding capital lease obligations) are as
follows:
<TABLE>
<S> <C>
1997................................................................ $ 1,352
1998................................................................ 1,522
1999................................................................ 1,713
2000................................................................ 1,995
---------
Total............................................................. $ 6,582
---------
---------
</TABLE>
B. LEASE OBLIGATIONS
The Practice leases office space under a noncancelable lease agreement. At
December 31, 1996, minimum annual rental commitments under noncancelable
operating leases with terms in excess of one year are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
-----------
<S> <C>
1997............................................................................... $ 25,400
1998............................................................................... 25,400
1999............................................................................... 25,400
-----------
Total future minimum lease payments.............................................. $ 76,200
-----------
-----------
</TABLE>
Rent expense related to operating leases amounted to $26,085, $27,829 and
$22,272 for the years ended December 31, 1994, 1995, 1996, respectively.
F-95
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Board of Directors and the Stockholder of
Bound Brook Pediatric Association, PA.
We have audited the accompanying balance sheets of Bound Brook Pediatric
Association, PA., as of December 31, 1995 and 1996, and the related statements
of operations, changes in shareholder's equity and cash flows for each of the
three years in the period ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Bound Brook Pediatric
Association, PA., as of December 31, 1995 and 1996, and the results of its
operations, changes in shareholder's equity and cash flows for each of the three
years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
Feldman Radin & Co., P. C.
Certified Public Accountants
New York, New York
May 9, 1997
F-96
<PAGE>
BOUND BROOK PEDIATRIC ASSOCIATION, P.A.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JUNE 30,
1995 1996 1997
---------- ---------- -----------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
- -----------------------------------------------------------------------------------------------------------------
CURRENT ASSETS:
Cash and cash equivalents................................................. $ 55,810 $ 51,216 $ 39,491
Accounts receivable, less allowance for bad debts of $5,200 in 1995,
$4,800 in 1996, and $0 in 1997.......................................... 20,800 19,200 11,341
Prepaid expenses and other current assets................................. 2,850 2,850 2,850
---------- ---------- -----------
Total current assets.................................................. 79,460 73,266 53,682
---------- ---------- -----------
PROPERTY AND EQUIPMENT, net................................................. 32,841 31,004 41,740
---------- ---------- -----------
$ 112,301 $ 104,270 $ 95,422
---------- ---------- -----------
---------- ---------- -----------
LIABILITIES AND STOCKHOLDER'S EQUITY
- -----------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses..................................... $ 28,571 $ 34,704 $ 38,646
---------- ---------- -----------
STOCKHOLDER'S EQUITY:
Common stock, no par value; 100 shares authorized, 100 shares issued and
outstanding, respectively............................................... 10,000 10,000 10,000
Retained earnings......................................................... 73,730 59,566 46,776
---------- ---------- -----------
STOCKHOLDER'S EQUITY........................................................ 83,730 69,566 56,776
---------- ---------- -----------
$ 112,301 $ 104,270 $ 95,422
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
See notes to financial statements.
F-97
<PAGE>
BOUND BROOK PEDIATRIC ASSOCIATION, P.A.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------- ----------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE:
Medical services revenue........................... $ 329,994 $ 305,384 $ 311,742 $ 159,924 $ 156,020
Other revenue...................................... 1,752 1,925 1,340 666 515
---------- ---------- ---------- ---------- ----------
Total revenue.................................. 331,746 307,309 313,082 160,590 156,535
---------- ---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Salaries and wages................................. 207,202 213,251 217,530 140,160 123,698
Medical supplies and expenses...................... 29,384 28,597 24,421 7,908 8,017
General and administrative expenses................ 82,278 87,160 83,458 35,664 37,050
Bad debt expense................................... 5,700 -- -- -- --
Depreciation and amortization...................... 532 1,321 1,837 1,100 560
---------- ---------- ---------- ---------- ----------
Total costs and expenses....................... 325,096 330,329 327,246 184,832 169,325
---------- ---------- ---------- ---------- ----------
Net income (loss).............................. $ 6,650 $ (23,020) $ (14,164) $ (24,242) $ (12,790)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
See notes to financial statements.
F-98
<PAGE>
BOUND BROOK PEDIATRIC ASSOCIATION, P.A.
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
-------------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Balance, December 31, 1993........................................... -- $ 10,000 $ 90,100 $ 100,100
Net income......................................................... -- -- 6,650 6,650
--------- --------- ---------- ----------
Balance, December 31, 1994........................................... -- 10,000 96,750 106,750
Net loss........................................................... -- -- (23,020) (23,020)
--------- --------- ---------- ----------
Balance, December 31, 1995........................................... -- 10,000 73,730 83,730
Net loss........................................................... -- -- (14,164) (14,164)
--------- --------- ---------- ----------
Balance, December 31, 1996........................................... -- 10,000 59,566 69,566
Net loss........................................................... -- -- (12,790) (12,790)
--------- --------- ---------- ----------
Balance, June 30, 1997(unaudited).................................... -- $ 10,000 $ 46,776 $ 56,776
--------- --------- ---------- ----------
--------- --------- ---------- ----------
</TABLE>
See notes to financial statements.
F-99
<PAGE>
BOUND BROOK PEDIATRIC ASSOCIATION, P.A.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------- ----------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $ 6,650 $ (23,020) $ (14,164) $ (24,242) $ (12,790)
---------- ---------- ---------- ---------- ----------
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization........................... 532 1,321 1,837 1,100 560
Changes in assets and liabilities -
(Increase) decrease in -
Accounts receivable, net............................ 1,984 2,000 1,600 20,800 19,200
Prepaid expenses and other current assets........... 1,259 -- -- 500 --
Increase (decrease) in -
Accounts payable and accrued expenses............... 2,180 (940) 6,133 959 3,942
---------- ---------- ---------- ---------- ----------
5,955 2,381 9,570 23,359 23,702
---------- ---------- ---------- ---------- ----------
Net cash provided by (used in) operating activities....... 12,605 (20,639) (4,594) (883) 10,912
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.......................... -- (6,396) -- (1,100) (11,296)
---------- ---------- ---------- ---------- ----------
Net cash used in investing activities..................... -- (6,396) -- (1,100) (11,296)
---------- ---------- ---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.......... 12,605 (27,035) (4,594) (1,983) (384)
CASH AND CASH EQUIVALENTS, beginning of period................ 70,240 82,845 55,810 55,810 51,216
---------- ---------- ---------- ---------- ----------
CASH AND CASH EQUIVALENTS, end of period...................... $ 82,845 $ 55,810 $ 51,216 $ 53,827 $ 50,832
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
See notes to financial statements.
F-100
<PAGE>
BOUND BROOK PEDIATRIC ASSOCIATION, P.A.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS ORGANIZATION AND BASIS OF PRESENTATION
Bound Brook Pediatric Association, P.A. (The "Company") is a New Jersey
professional corporation providing medical services in New Jersey. The Company
was incorporated on September 1, 1970.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. METHOD OF ACCOUNTING
The combined financial statements of the Company are presented on the
accrual basis of accounting. Accordingly, revenues are recorded when earned,
rather than when received and expenses are recorded when incurred, rather than
when paid.
B. CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all cash accounts which are not subject to
withdrawal restrictions or penalties, and all highly liquid instruments, with
original maturities of three months or less.
C. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards ("SFAS") No. 107 "Disclosures
About Fair Value of Financial Instruments" requires disclosure about the fair
value of all financial instruments. Carrying amounts of all financial
instruments approximate fair value as of December 31, 1996.
D. PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are amortized over the respective lease terms or the
service lives of the improvements, whichever is shorter.
E. LONG-LIVED ASSETS
Under the requirements of SFAS No. 121 "Accounting for Long-Lived Assets and
for Long-Lived Assets to be Disposed of", the Company is obligated to recognize
an impairment loss on their long lived assets whenever the sum of the expected
future cash flows resulting from their use is less than their carrying amount.
As of December 31, 1996, no impairment exists with respect to any of the
Company's long-lived assets.
F. REVENUE RECOGNITION
Medical service revenues are accounted for in the period the services are
provided. The revenues are reported at the estimated realizable amounts from
patients, third-party payors and others. Provisions for estimated third-party
payor adjustments are recorded in the period the related services are provided
as a reduction of revenue. Any adjustment to those amounts are recorded in the
period in which the revised amount is determined. A portion of the Company's
medical services revenue is derived from Medicare, Medicaid and other
governmental programs. Medicare,
Medicaid, and other governmental programs reimburse physicians based on fee
schedules which are determined by the specific governmental agency.
Additionally, the Company participates in agreements with managed care
organizations to provide services at negotiated fee-for-service or capitated
payments rates.
F-101
<PAGE>
BOUND BROOK PEDIATRIC ASSOCIATION, P.A.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
G. CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk consist principally of trade accounts receivable.
The Company establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific payors, historical trends and other
information.
H. 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 as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
I. INCOME TAXES
The Company has historically not incurred significant tax liabilities for
federal or state income taxes. Compensation to physician owners has
traditionally reduced taxable income to nominal levels. Provision for income
taxes and deferred tax assets and liabilities are not material and have not been
reflected in the financial statements.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIVES ----------------------
(YEARS) 1995 1996
--------------- ---------- ----------
<S> <C> <C> <C>
Leasehold improvements................................... 5-10 $ 27,583 $ 27,583
Medical and computer equipment........................... 5-7 3,007 3,007
Furniture and fixtures................................... 7-10 27,107 27,107
Automobiles.............................................. 3-5 39,252 39,252
---------- ----------
Total.................................................. 96,949 96,949
Less: Accumulated depreciation........................... (64,107) (65,945)
---------- ----------
Net.................................................... $ 32,841 $ 31,004
---------- ----------
---------- ----------
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
The Company is insured with respect to medical malpractice risks. In the
normal course of business the Company has been named in lawsuits. In the opinion
of the management of the Company the ultimate liability, if any, of the Company
with respect to any such lawsuit will not exceed the insurance coverages carried
by the Company and will not materially impact the operating results or results
of financial condition of the Company.
The Company has entered into a binding agreement with Integrated Physician
Systems (IPS), the terms of which provide that IPS will acquire substantially
all of the assets, goodwill, and intangibles of the Company. The acquisition by
IPS will coincide with the consummation of its IPO.
F-102
<PAGE>
BOUND BROOK PEDIATRIC ASSOCIATION, P.A.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. EMPLOYEE BENEFIT PLANS
The Company maintains a non-contributory money purchase pension plan
(the"Plan") and pays all general and administrative expenses of the Plan. The
Company made contributions related to the Plan totaling $36,546, $33,918 and
$33,758 in 1994, 1995 and 1996, respectively.
The Company does not typically provide employees any post retirement
benefits other than the Plan described above and, accordingly, the impact of
SFAS No. 106 "Employer's Accounting for Postretirement Benefits other than
Pensions" had no material effect on the Company.
6. RELATED PARTY TRANSACTION
Rent expense of $2,000 monthly is paid to the sole stockholder by the
corporation for the use of the office. The annual rent paid to him for each of
the years ended December 31, 1994, 1995 and 1996 was $24,000.
F-103
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Audrey Hinds-McDonald, M.D.
We have audited the accompanying balance sheets of Audrey Hinds-McDonald,
M.D. as of December 31, 1995 and 1996, and the related statements of operations,
proprietor's capital and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Audrey Hinds-McDonald, M.D.
as of December 31, 1995 and 1996, and the results of its operations,
proprietor's capital and cash flows for each of the three years in the period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
Feldman Radin & Co., P. C.
Certified Public Accountants
New York, New York
May 9, 1997
F-104
<PAGE>
AUDRY HINDS--MCDONALD, M.D.
(A SOLE PROPRIETERSHIP)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1995 1996 1997
--------- --------- -----------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................................... $ 5,000 $ 3,500 $ 3,250
Accounts receivable, less allowance for bad debts of $10,750 in 1995, $13,200
in 1996 and $13,200 in 1997................................................ 14,250 17,550 18,345
--------- --------- -----------
Total current assets..................................................... 19,250 21,050 21,595
--------- --------- -----------
$ 19,250 $ 21,050 $ 21,595
--------- --------- -----------
--------- --------- -----------
LIABILITIES AND PROPRIETOR'S CAPITAL
CURRENT LIABILITIES:
Short-term notes payable..................................................... $ 5,000 $ 5,540 $ 6,350
COMMITMENTS AND CONTINGENCIES
PROPRIETOR'S CAPITAL........................................................... 14,250 15,510 15,245
--------- --------- -----------
$ 19,250 $ 21,050 $ 21,595
--------- --------- -----------
--------- --------- -----------
</TABLE>
See notes to financial statements.
F-105
<PAGE>
AUDRY HINDS--MCDONALD, M.D.
(A SOLE PROPRIETERSHIP)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------- ----------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE:
Medical services revenue........................... $ 191,666 $ 182,668 $ 273,573 $ 132,300 $ 127,000
---------- ---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Salaries and wages................................. 24,200 25,399 47,081 24,052 27,000
Medical supplies and expenses...................... 10,954 10,954 9,968 5,105 6,302
General and administrative expenses................ 74,443 82,430 91,911 46,523 48,489
Bad debt expense................................... 8,600 2,150 2,450 1,225 1,345
---------- ---------- ---------- ---------- ----------
Total costs and expenses....................... 118,197 120,933 151,410 76,905 83,136
---------- ---------- ---------- ---------- ----------
Net income..................................... $ 73,469 $ 61,735 $ 122,163 $ 55,395 $ 43,864
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
See notes to financial statements.
F-106
<PAGE>
AUDREY HINDS--MCDONALD, M.D.
STATEMENTS OF PROPRIETOR'S CAPITAL
<TABLE>
<S> <C>
BALANCE, December 31, 1993........................................................ $ --
Net income........................................................................ 73,469
Drawings.......................................................................... (62,069)
---------
BALANCE, December 31, 1994........................................................ 11,400
Net income........................................................................ 61,735
Drawings.......................................................................... (58,885)
---------
BALANCE, December 31, 1995........................................................ 14,250
Net income........................................................................ 122,163
Drawings.......................................................................... (120,903)
---------
BALANCE, December 31, 1996........................................................ 15,510
Net income........................................................................ 43,864
Drawings.......................................................................... (44,129)
---------
BALANCE, June 30, 1997 (unaudited)................................................ $ 15,245
---------
---------
</TABLE>
See notes to financial statements.
F-107
<PAGE>
AUDRY HINDS--MCDONALD
(A SOLE PROPRIETERSHIP)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------------- ----------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1996 1997
---------- ---------- ----------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................... $ 73,469 $ 61,735 $ 122,163 $ 55,395 $ 43,864
---------- ---------- ----------- ---------- ----------
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization........................ -- -- -- -- --
Changes in assets and liabilities -
(Increase) decrease in -
Accounts receivable, net......................... (11,400) (2,850) (3,300) (5,090) (795)
---------- ---------- ----------- ---------- ----------
(11,400) (2,850) (3,300) (5,090) (795)
---------- ---------- ----------- ---------- ----------
Net cash provided by operating activities................ 62,069 58,885 118,863 50,305 43,069
Net cash provided by (used in) operating activities...... -- -- (2,040) (4,450) (1,060)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proprietor's Drawings.................................... (62,008) (59,885) (120,903) (54,755) (44,129)
Proceeds from (repayments of) short-term notes payable... 5,000 -- 540 950 810
---------- ---------- ----------- ---------- ----------
Net cash provided by (used in) financing
activities......................................... (57,068) (58,885) (120,363) (53,805) (43,319)
---------- ---------- ----------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....... 5,000 -- (1,500) (3,500) (250)
CASH, beginning of period.................................. -- 5,000 5,000 5,000 3,500
---------- ---------- ----------- ---------- ----------
CASH, end of period........................................ $ 5,000 $ 5,000 $ 3,500 $ 1,500 $ 3,250
---------- ---------- ----------- ---------- ----------
---------- ---------- ----------- ---------- ----------
</TABLE>
See notes to financial statements.
F-108
<PAGE>
AUDREY HINDS-MCDONALD, M.D.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS ORGANIZATION AND BASIS OF PRESENTATION
Audrey Hinds-McDonald, M.D., (the "Proprietorship" or "Practice") is
organized as a sole proprietorship operating in the state of New Jersey.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. METHOD OF ACCOUNTING
The financial statements of the Practice are presented on the accrual basis
of accounting. Accordingly, revenues are recorded when earned, rather than when
received and expenses are recorded when incurred, rather than when paid.
B. REVENUES
Medical service revenues are accounted for in the period the services are
provided. Revenues are reported at the estimated realizable amounts from
patients, third-party payors and others. Provisions for estimated third-party
payor adjustments are recorded in the period the related services are provided
as a reduction of revenue. Any adjustment to those amounts are recorded in the
period in which the revised amount is determined. A portion of the Company's
medical service revenue is derived from Medicare, Medicaid and other
governmental programs. Medicare, Medicaid, and other governmental programs
reimburse physicians based on fees schedules which are determined by the
specific governmental agency. Additionally, the Company participates in
agreements with managed care organizations to provide services at negotiated
fee-for-service or capitated payment rates.
C. CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Proprietorship to
concentrations of credit risk consist principally of trade accounts receivable.
The Proprietorship establishes an allowance for doubtful accounts based upon
factors surrounding the credit risk of specific payors, historical trends and
other information.
D. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the owner 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 as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
E. CASH AND CASH EQUIVALENTS
The Practice includes as cash and cash equivalents all cash accounts which
are not subject to withdrawal restrictions or penalties, and all highly liquid
instruments, with original maturities of three months or less.
F. LONG-LIVED ASSETS
Under the requirements of Statement of Financial Accounting Standard
("SFAS") No. 121 "Accounting for Long-Lived Assets and for Long-Lived Assets to
be Disposed of", the Practice is obligated to
F-109
<PAGE>
AUDREY HINDS-MCDONALD, M.D.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
recognize an impairment loss on their long lived assets whenever the sum of the
expected future cash flows resulting from their use is less than their carrying
amount. As of December 31, 1996, no impairment exists with respect to any of the
Practice's long-lived assets.
G. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107 "Disclosures About Fair Value of Financial Instruments"
requires disclosure about the fair value of all financial instruments. Carrying
amounts of all financial instruments approximate fair value as of December 31,
1996.
H. INCOME TAXES
Income from the Practice is combined with the income and expenses of the
proprietor from other sources and reported in the proprietor's individual
federal and state tax returns. The proprietorship is not a tax paying entity for
purposes of federal and state income taxes, and thus no income taxes have been
recorded in the statements.
3. COMMITMENTS AND CONTINGENCIES
Dr. Audrey Hinds-McDonald has entered into binding agreements with
Integrated Physicians Systems, Inc. (IPS), the terms of which provide that IPS
will acquire substantially all of the assets, goodwill, and intangibles of the
Practice. The acquisition by IPS will coincide with the consummation of its IPO.
4. SHORT-TERM AND LONG-TERM OBLIGATIONS
A. SHORT-TERM NOTES PAYABLE
Short-term notes payable consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1995 1996
--------- ---------
Unsecured line of credit with a bank bearing interest at prime +1%......... $ 5,000 $ 5,540
--------- ---------
--------- ---------
</TABLE>
F-110
<PAGE>
AUDREY HINDS-MCDONALD, M.D.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. SHORT-TERM AND LONG-TERM OBLIGATIONS (CONTINUED)
B. LEASE OBLIGATIONS
Dr. Audrey Hinds-McDonald leases office space under noncancellable lease
agreements. At December 31, 1996, minimum annual rental commitments under
noncancellable operating leases with terms in excess of one year are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
----------
<S> <C>
1997.............................................................................. $ 20,046
1998.............................................................................. 20,046
1999.............................................................................. 20,046
2000.............................................................................. 20,046
2001.............................................................................. 20,046
----------
Total future minimum lease payments............................................. $ 100,230
----------
----------
</TABLE>
Rent expense related to operating leases amounted to $28,938 $27,238 and
$24,108 for the years ended December 31, 1994, 1995 and 1996, respectively.
5. EMPLOYEE BENEFIT PLANS
The Practice maintains a defined contribution Keough profit sharing plan
covering all employees that meet age and length of service requirements.
Contributions on behalf of employees was $7,000, $7,000 and $8,208 for the years
ended December 31, 1994, 1995 and 1996. Contributions on behalf of the
proprietor, Audrey Hinds-McDonald have not been charged to operations for years
ended December 31, 1994, 1995 and 1996.
The Practice does not typically provide employees any post retirement
benefits other than the plan described above and, accordingly, the impact of
SFAS No. 106 "Employer's Accounting for Postretirement Benefits Other than
Pensions" had no material effect on the Practice.
F-111
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
John E. Durst, M.D.
We have audited the accompanying balance sheets of John E. Durst, M.D. as of
December 31, 1995 and 1996, and the related statements of operations,
proprietor's capital and cash flows for each of the three years in the period
ended December 31, 1996. These combined financial statements are the
responsibility of Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of John E Durst, M.D. as of
December 31, 1995 and 1996, and the results of its operations, proprietor's
capital and cash flows for each of the three years in the period ended December
31, 1996 in conformity with generally accepted accounting principles.
Feldman Radin & Co., P. C.
Certified Public Accountants
New York, New York
May 9, 1997
F-112
<PAGE>
JOHN E. DURST, M.D.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1995 1996 1997
--------- --------- -----------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash......................................................................... $ 15,782 $ 684 $ 52,356
Accounts receivable, less allowance for bad debts of $2,725 in 1995, $1,708
in 1996 and $0 in 1997..................................................... 17,775 11,880 12,500
--------- --------- -----------
Total current assets..................................................... 33,557 12,564 64,856
--------- --------- -----------
PROPERTY AND EQUIPMENT, net.................................................... 8,180 5,889 7,213
--------- --------- -----------
$ 41,737 $ 18,453 $ 72,069
--------- --------- -----------
--------- --------- -----------
LIABILITIES AND PROPRIETOR'S CAPITAL
COMMITMENTS AND CONTINGENCIES
PROPRIETOR'S CAPITAL........................................................... $ 41,737 $ 18,453 $ 72,069
--------- --------- -----------
$ 41,737 $ 18,453 $ 72,069
--------- --------- -----------
--------- --------- -----------
</TABLE>
See notes to financial statements.
F-113
<PAGE>
JOHN E. DURST, M.D.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------- ----------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE:
Medical services revenue........................... $ 266,245 $ 277,484 $ 208,078 $ 106,986 $ 104,712
---------- ---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Salaries and wages................................. 58,002 56,928 47,067 23,534 23,958
Medical supplies and expenses...................... 5,815 6,222 7,250 3,626 3,138
General and administrative expenses................ 97,441 108,779 92,744 23,543 43,534
Bad debt expense................................... 2,217 508 -- -- --
Depreciation and amortization...................... 7,410 3,554 2,040 1,020 924
Interest expense................................... 1,941 1,716 1,403 702 542
---------- ---------- ---------- ---------- ----------
Total costs and expenses....................... 172,826 177,707 150,504 52,425 72,096
---------- ---------- ---------- ---------- ----------
Net income..................................... $ 93,419 $ 99,777 $ 57,574 $ 54,561 $ 32,616
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
See notes to financial statements.
F-114
<PAGE>
JOHN E. DURST, M.D.
STATEMENTS OF PROPRIETOR'S CAPITAL
<TABLE>
<S> <C>
BALANCE, December 31, 1993....................................................... $ 46,678
Net income..................................................................... 93,419
Drawings....................................................................... (109,362)
---------
BALANCE, December 31, 1994....................................................... 30,735
Net income..................................................................... 99,777
Drawings....................................................................... (88,775)
---------
BALANCE, December 31, 1995....................................................... 41,737
Net income..................................................................... 57,574
Drawings....................................................................... (80,858)
---------
BALANCE, December 31, 1996....................................................... 18,453
Net income (unaudited)......................................................... 32,616
Capital contributions.......................................................... 21,000
---------
BALANCE, June 30, 1997 (unaudited)............................................... $ 72,069
---------
---------
</TABLE>
See notes to financial statements.
F-115
<PAGE>
JOHN E. DURST, M.D.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------------- ---------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1996 1997
----------- ---------- ---------- ---------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................... $ 93,419 $ 99,777 $ 57,574 $ 54,561 $ 32,616
----------- ---------- ---------- ---------- ---------
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................ 7,410 3,554 2,040 1,020 924
Changes in assets and liabilities -
(Increase) decrease in -
Accounts receivable, net......................... 906 (2,948) 5,895 7,055 (620)
Increase (decrease) in -
Accounts payable and accrued expenses............ 32,748 (1,803) -- -- --
----------- ---------- ---------- ---------- ---------
41,064 (1,197) 7,935 8,075 304
----------- ---------- ---------- ---------- ---------
Net cash provided by operating activities................ 134,483 98,580 65,509 62,636 32,920
----------- ---------- ---------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment....................... (23,277) 4,133 251 (977) (2,248)
----------- ---------- ---------- ---------- ---------
Net cash (used in) provided by investing
activities......................................... (23,277) 4,133 251 (977) (2,248)
----------- ---------- ---------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions.................................... -- -- -- -- 21,000
Drawings................................................. (109,362) (88,775) (80,858) (30,767) --
----------- ---------- ---------- ---------- ---------
Net cash (used in) provided by financing
activities......................................... (109,362) (88,775) (80,858) (30,767) 21,000
----------- ---------- ---------- ---------- ---------
NET INCREASE (DECREASE) IN CASH............................ 1,844 13,938 (15,098) 30,892 51,672
CASH, beginning of period.................................. -- 1,844 15,782 15,782 684
----------- ---------- ---------- ---------- ---------
CASH, end of period........................................ 1,844 $ 15,782 $ 684 $ 46,674 $ 52,356
----------- ---------- ---------- ---------- ---------
----------- ---------- ---------- ---------- ---------
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid.............................................. $ 1,941 $ 1,716 $ 1,403 $ 351 $ 271
----------- ---------- ---------- ---------- ---------
----------- ---------- ---------- ---------- ---------
</TABLE>
See notes to financial statements.
F-116
<PAGE>
JOHN E. DURST, M.D.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS ORGANIZATION AND BASIS OF PRESENTATION
John E. Durst M.D. is a physician with a medical practice (the "Proprietors
or "Practice") operating in the state of New Jersey. The Practice is organized
as a sole proprietorship.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. METHOD OF ACCOUNTING
The financial statements of the Practice. are presented on the accrual basis
of accounting. Accordingly, revenues are recorded when earned, rather than when
received and expenses are recorded when incurred, rather than when paid.
B. REVENUES
Medical service revenues are accounted for in the period the services are
provided. The revenues are reported at the estimated realizable amounts from
patients, third-party payors and others. Provisions for estimated third-party
payor adjustments are recorded in the period the related services are provided
as a reduction of revenue. Any adjustment to those amounts are recorded in the
period in which the revised amount is determined. A portion of the Company's
medical services revenue is derived from Medicare, Medicaid and other
governmental programs. Medicare, Medicaid, and other governmental programs
reimburse physicians based on fee schedules which are determined by the specific
governmental agency. Additionally, the Company participates in agreements with
managed care organizations to provide services at negotiated fee-for-service or
capitated payments rates.
C. CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Practice to
concentrations of credit risk consist principally of trade accounts receivable.
The Practice establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific payors, historical trends and other
information.
D. PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are amortized over the respective lease terms or the
service lives of the improvements, whichever is shorter.
E. 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 as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F. INCOME TAXES
Income from the Practice is combined with the income and expenses of the
proprietor from other sources and reported in the proprietor's individual
federal and state tax returns. The proprietorship is not a tax paying entity for
purposes of federal and state income taxes, and thus no income taxes have been
F-117
<PAGE>
JOHN E. DURST, M.D.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
recorded in the statements. The proprietor customarily makes estimated tax
payments toward his income tax liability from the Practice's bank account.
G. CASH AND CASH EQUIVALENTS
The Practice includes as cash and cash equivalents all cash accounts which
are not subject to withdrawal restrictions or penalties, and all highly liquid
instruments, with original maturities of three months or less.
H. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards ("SFAS") No. 107 "Disclosures
About Fair Value of Financial Instruments" requires disclosure about the fair
value of all financial instruments. Carrying amounts of all financial
instruments approximate fair value as of December 31, 1996.
I. ACCOUNTING FOR LONG-LIVED ASSETS
Under the requirements of SFAS No. 121 "Accounting for Long-Lived Assets and
for Long-Lived Assets to be disposed of", the Practice is obligated to recognize
an impairment loss on their long-lived assets whenever the sum of the expected
future cash flows from their use is less than their carrying amount. Based on
the Company's review as of December 31, 1996, no impairment of long-lived assets
was evident.
3. COMMITMENTS AND CONTINGENCIES
The Practice is insured with respect to medical malpractice risks. In the
normal course of business the Practice has been named in lawsuits. In the
opinion of the management of the Practice the ultimate liability, if any, of The
Practice with respect to any such lawsuit will not exceed the insurance
coverages carried by the Practice and will not materially impact the operating
results or results of financial condition of the Practice.
The Proprietor has entered into a binding agreement with Integrated
Physicians Systems (IPS), the terms of which provide that IPS will acquire
substantially all of the assets, goodwill, and intangibles of the Practice. The
acquisition by IPS will coincide with the consummation of its IPO.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIVES ----------------------
(YEARS) 1995 1996
------------- ---------- ----------
<S> <C> <C> <C>
Leasehold improvements................................... 5-39 $ 9,159 $ 9,159
Medical and computer equipment........................... 5-7 11,420 11,420
Automobiles.............................................. 5 17,680 17,680
---------- ----------
Total.................................................. 38,259 38,259
Less: Accumulated depreciation........................... (30,079) (32,370)
---------- ----------
Net.................................................... $ 8,180 $ 5,889
---------- ----------
---------- ----------
</TABLE>
F-118
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholder of
Professional Medical Images, Ltd.
We have audited the accompanying balance sheets of Professional Medical
Images, Ltd. as of February 29, 1996 and February 28, 1997, and the related
statements of operations, changes in stockholder's deficit and cash flows for
each of the three years in the period ended February 28, 1997. These financial
statements are the responsibility of Professional Medical Images' management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Professional Medical Images,
Ltd. as of February 29, 1996 and February 28, 1997, and the results of its
operations, stockholder's deficit and cash flows for each of the three years in
the period ended February 28, 1997 in conformity with generally accepted
accounting principles.
Feldman Radin & Co., P. C.
Certified Public Accountants
New York, New York
May 9, 1997
F-119
<PAGE>
PROFESSIONAL MEDICAL IMAGES, LTD.
BALANCE SHEETS
<TABLE>
<CAPTION>
FEBRUARY 29, FEBRUARY 28,
1996 1997
------------ ------------
<S> <C> <C>
<CAPTION>
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash................................................................................ $ 12,192 $ 2,873
Prepaid expenses and other current assets........................................... 18,482 450
------------ ------------
Total current assets............................................................ 30,674 3,323
PROPERTY AND EQUIPMENT, net........................................................... 9,678 6,190
------------ ------------
$ 40,352 $ 9,513
------------ ------------
------------ ------------
<CAPTION>
LIABILITIES AND STOCKHOLDER'S DEFICIT
<S> <C> <C>
CURRENT LIABILITIES:
Bank Credit Line.................................................................... $ 23,500 $ 23,622
Accounts payable and accrued expenses............................................... 22,709 22,772
------------ ------------
Total current liabilities....................................................... 46,209 46,394
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S DEFICIT:
Common Stock, no par value; 200 shares authorized
and 200 shares issued and outstanding, respectively............................... 200 200
Accumulated deficit................................................................. (6,057) (37,081)
------------ ------------
TOTAL STOCKHOLDER'S DEFICIT........................................................... (5,857) (36,881)
------------ ------------
$ 40,352 $ 9,513
------------ ------------
------------ ------------
</TABLE>
See notes to financial statements.
F-120
<PAGE>
PROFESSIONAL MEDICAL IMAGES, LTD.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED
----------------------------------------
<S> <C> <C> <C>
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1995 1996 1997
------------ ------------ ------------
REVENUE:
Management fees....................................................... $ 236,165 $ 197,020 $ 186,684
Other revenue......................................................... -- 2,420 1,013
------------ ------------ ------------
Total revenue..................................................... 236,165 199,440 187,697
------------ ------------ ------------
COSTS AND EXPENSES:
Salaries and wages.................................................... 97,520 131,515 132,878
General and administrative expenses................................... 142,126 72,472 81,322
Depreciation and amortization......................................... 5,976 4,865 3,488
Interest expense...................................................... -- 1,288 1,033
------------ ------------ ------------
Total costs and expenses.......................................... 245,622 210,140 218,721
------------ ------------ ------------
Net loss.......................................................... $ (9,457) $ (10,700) $ (31,024)
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See notes to financial statements.
F-121
<PAGE>
PROFESSIONAL MEDICAL IMAGES, LTD.
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK RETAINED
------------------------ EARNINGS
SHARES AMOUNT (DEFICIT) TOTAL
----------- ----------- ---------------- ----------
<S> <C> <C> <C> <C>
Balance, February 28, 1994....................................... -- $ 200 $ 14,100 $ 14,300
Net loss....................................................... -- -- (9,457) (9,457)
--- ----- -------- ----------
Balance, February 28, 1995....................................... -- 200 4,643 4,843
Net loss....................................................... -- -- (10,700) (10,700)
--- ----- -------- ----------
Balance, February 29, 1996....................................... -- 200 (6,057) (5,857)
Net loss....................................................... -- -- (31,024) (31,024)
--- ----- -------- ----------
Balance, February 28, 1997....................................... -- 200 (37,081) (36,881)
--- ----- -------- ----------
--- ----- -------- ----------
</TABLE>
See notes to financial statements.
F-122
<PAGE>
PROFESSIONAL MEDICAL IMAGES, LTD.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
----------------------------------------
<S> <C> <C> <C>
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1995 1996 1997
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.............................................................. $ (9,457) $ (10,700) $ (31,024)
------------ ------------ ------------
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities -
Depreciation and amortization..................................... 5,976 4,865 3,488
Changes in assets and liabilities -
(Increase) decrease in -
Prepaid expenses and other current assets..................... 5,049 (16,978) 18,032
Increase (decrease) in -
Accounts payable and accrued expenses......................... 3,313 14,801 63
------------ ------------ ------------
14,338 2,688 21,583
------------ ------------ ------------
Net cash provided by (used in) operating activities............... 4,881 (8,012) (9,441)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.................................... -- (600) --
------------ ------------ ------------
Net cash used in investing activities............................... -- (600) --
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayment of) bank credit line......................... 3,179 9,879 122
------------ ------------ ------------
Net cash provided by (used in) financing activities............... 3,179 9,879 122
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH......................................... 8,060 1,267 (9,319)
CASH, beginning of period............................................... 2,865 10,925 12,192
------------ ------------ ------------
CASH, end of period..................................................... $ 10,925 $ 12,192 $ 2,873
------------ ------------ ------------
------------ ------------ ------------
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid......................................................... $ -- $ 1,288 $ 1,033
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See notes to financial statements.
F-123
<PAGE>
PROFESSIONAL MEDICAL IMAGES, LTD.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS ORGANIZATION AND BASIS OF PRESENTATION
Professional Medical Images, Ltd. (the "Company") is a New Jersey
professional corporation which is engaged in the development and management of
independent practice associations ("IPA's") and is currently providing IPA
management to 225 physicians in the State of New Jersey. The Company was
incorporated on March 26, 1990.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. METHOD OF ACCOUNTING
The financial statements of the Company are presented on the accrual basis
of accounting. Accordingly, revenues are recorded when earned, rather than when
received and expenses are recorded when incurred, rather than when paid.
B. REVENUES
Management fee revenues are accounted for in the period the services are
provided. The revenues are reported at the estimated net realizable amounts from
clients for services rendered. Fees are predoninantly determined under
negotiated fixed fee arrangements.
C. CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk consist principally of trade account receivables.
The Company establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific payors, historical trends and other
information.
D. PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are amortized over the respective lease terms or the
service lives of the improvements, whichever is shorter.
E. 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 as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F. INCOME TAXES
The Company has historically not incurred significant tax liabilities for
federal or state income taxes. Because of this, provisions for income taxes and
deferred tax assets and liabilities are not material and have not been reflected
in the financial statements.
F-124
<PAGE>
PROFESSIONAL MEDICAL IMAGES, LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
G. CASH AND CASH EQUIVALENTS
The Company includes as cash and cash equivalents all cash accounts which
are not subject to withdrawal restrictions or penalties, and all highly liquid
instruments, with original maturities of three months or less.
H. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards ("SFAS") No. 107 "Disclosures
About Fair Value of Financial Instruments" requires disclosure about the fair
value of all financial instruments. Carrying amounts of all financial
instruments approximate fair value as of February 28, 1997.
I. ACCOUNTING FOR LONG-LIVED ASSETS
Under the requirements of SFAS No. 121 "Accounting for Long-Lived Assets and
for Long-Lived-Assets to be Disposed of", the Company is obligated to recognize
an impairment loss on their long lived assets whenever the sum of the expected
future cash flows resulting from their use is less than their carrying amount.
As of February 28, 1997, no impairment exists with respect to any of the
Company's long-lived assets.
3. SUBSEQUENT EVENT
On April 1, 1997 the Company was acquired by Integrated Physicians Services,
Inc. ("IPS") in a transaction accounted for as a purchase. The purchase price
paid by IPS included $2,000 and the assumption of net liabilities of the Company
in the amount of $37,000.
5. SHORT TERM OBLIGATIONS
<TABLE>
<CAPTION>
FEBRUARY 29, FEBRUARY 28,
1996 1997
------------ ------------
<S> <C> <C>
The Company maintains a credit line with a bank at 5% per annum
secured by stockholder.......................................... $ 23,500 $ 23,622
------------ ------------
------------ ------------
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFES FEBRUARY 29, FEBRUARY 28,
(YEARS) 1996 1997
------------- ------------ ------------
<S> <C> <C> <C>
Medical and computer equipment....................... 5-7 $ 19,690 $ 19,690
Furniture and fixtures............................... 7-10 10,791 10,791
------------ ------------
Total.............................................. 30,481 30,481
Less: Accumulated depreciation....................... (20,803) (24,291)
------------ ------------
Net................................................ $ 9,678 $ 6,190
------------ ------------
------------ ------------
</TABLE>
F-125
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO UNDERWRITER, DEALER, SALESMAN, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION, OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY OF THE
SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANYONE TO WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATES AS OF WHICH SUCH INFORMATION IS FURNISHED.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................... 3
Risk Factors..................................... 9
Use of Proceeds.................................. 19
Dilution......................................... 20
Capitalization................................... 21
Dividend Policy.................................. 22
Selected Financial Data.......................... 23
Management's Discussion and Analysis of
Financial Condition and Results of
Operations..................................... 25
Business......................................... 28
Management....................................... 43
Principal Stockholders........................... 48
Certain Transactions............................. 49
Description of Debentures........................ 50
Description of Securities........................ 61
Certain United States Federal
Income Tax Considerations...................... 64
Shares Eligible for Future Sale.................. 67
Underwriting..................................... 68
Legal Matters.................................... 70
Experts.......................................... 70
Additional Information........................... 70
Financial Statements............................. F-1
</TABLE>
------------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
[LOGO]
INTEGRATED
PHYSICIAN SYSTEMS,
INC.
$25,000,000 [6 1/2% TO 8%]
CONVERTIBLE SUBORDINATED
DEBENTURES DUE 2004
2,000,000 SHARES OF COMMON STOCK
2,000,000 CLASS A REDEEMABLE
COMMON STOCK PURCHASE WARRANTS
---------------------
PROSPECTUS
---------------------
NOLAN SECURITIES CORP.
SOUTHWALL CAPITAL CORP.
DIRKS & COMPANY, INC.
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is an itemization of all expenses (subject to future
contingencies) incurred or expected to be incurred by the Company in connection
with the issuance and distribution of the securities being offered hereby (items
marked with an asterisk (*) represent estimated expenses);
<TABLE>
<S> <C>
SEC Registration Fee........................................... $23,273.93
NASD Filing Fees............................................... 8,657.00
AMEX Filing Fees............................................... 25,000.00
Legal Fees and Expenses........................................ 175,000.00*
Blue Sky Fees (including counsel fees)......................... 35,000.00*
Accounting Fees and Expenses................................... 350,000.00*
Transfer Agent and Registrar Fees.............................. 5,000.00*
Printing and Engraving Expenses................................ 80,000.00*
Miscellaneous.................................................. 23,069.07*
----------
Total.................................................... $725,000.00
----------
----------
</TABLE>
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Delaware General Corporation Law, Section 102(b)(7), enables a corporation
in its original certificate of incorporation, or an amendment thereto validly
approved by stockholders, to eliminate or limit personal liability of members of
its Board of Directors for violations of a director's fiduciary duty of care.
However, the elimination or limitation shall not apply where there has been a
breach of the duty of loyalty, failure to act in good faith, intentional
misconduct or a knowing violation of a law, the payment of a dividend or
approval of a stock repurchase which is deemed illegal or an improper personal
benefit is obtained. The Company's Certificate of Incorporation includes the
following language:
"The personal liability of the Directors of the Corporation is hereby
eliminated to the fullest extent permitted by paragraph (7) of Subsection
(b) of Section 102 of the General Corporation Law of the State of Delaware
as the same may be amended and supplemented."
Delaware General Corporation Law, Section 145, permits a corporation
organized under Delaware law to indemnify directors and officers with respect to
any matter in which the director or officer acted in good faith and in a manner
he reasonably believed to be not opposed to the best interests of the Company,
and, with respect to any criminal action, had reasonable cause to believe his
conduct was lawful. Article VII, Section 7 of the By-laws of the Company
provides as follows:
"The corporation shall indemnify its officers, directors, employees, and
agents to the extent permitted by the General Corporation Law of Delaware."
Article 11 of the Certificate of Incorporation of the Company, as amended,
permits indemnification of, and advancement of expenses to, among others,
officers and directors of the Corporation. Such Article provides as follows:
"(a) Each person who was or is made a party or is threatened to be made
a party to or is otherwise involved in any action, suit, or proceeding,
whether civil, criminal, administrative, or investigative (hereinafter a
"proceeding"), by reason of the fact that he or she is or was a director,
officer, employee, or agent of the Corporation or any of its direct or
indirect subsidiaries or is or was serving at the request of the Corporation
as a director, officer, employee, or agent of any other corporation or of a
partnership, joint venture, trust, or other enterprise, including service
with respect
II-1
<PAGE>
to an employee benefit plan (hereinafter an "indemnitee"), whether the basis
of such proceeding is alleged action in an official capacity as a director,
officer, employee, or agent or in any other capacity while serving as a
director, officer, employee, or agent, shall be indemnified and held
harmless by the Corporation to the fullest extent authorized by the Delaware
General Corporation Law, as the same exists or may hereafter be amended
(but, in the case of any such amendment, only to the extent that such
amendment permits the Corporation to provide broader indemnification rights
than permitted prior thereto), against all expense, liability, and loss
(including attorneys' fees, judgments, fines, ERISA excise taxes or
penalties, and amounts paid in settlement) reasonably incurred or suffered
by such indemnitee in connection therewith, and such indemnification shall
continue as to an indemnitee who has ceased to be a director, officer,
employee, or agent and shall inure to the benefit of the indemnitee's heirs,
executors, and administrators; provided, however, that, except as provided
in paragraph (c) of this Article 11 with respect to proceedings to enforce
rights to indemnification, the Corporation shall indemnify any such
indemnitee in connection with a proceeding (or part thereof) initiated by
such indemnitee only if such proceeding (or part thereof) was authorized by
the Board of Directors of the Corporation.
"(b) The right to indemnification conferred in paragraph (a) of this
Article 11 shall include the right to be paid by the Corporation the
expenses incurred in defending any proceeding for which such right to
indemnification is applicable in advance of its final disposition
(hereinafter an "advancement of expenses"); provided, however, that, if the
Delaware General Corporation Law requires, an advancement of expenses
incurred by an indemnitee in his or her capacity as a director or officer
(and not in any other capacity in which service was or is rendered by such
indemnitee, including, without limitation, service to an employee benefit
plan) shall be made only upon delivery to the Corporation of an undertaking
(hereinafter an "undertaking"), by or on behalf of such indemnitee, to repay
all amounts so advanced if it shall ultimately be determined by final
judicial decision from which there is no further right to appeal
(hereinafter a "final adjudication") that such indemnitee is not entitled to
be indemnified for such expenses under this Article 11 or otherwise.
"(c) The rights to indemnification and to the advancement of expenses
conferred in paragraphs (a) and (b) of this Article 11 shall be contract
rights. If a claim under paragraph (a) or (b) of this Article 11 is not paid
in full by the Corporation within sixty days after a written claim has been
received by the Corporation, except in the case of a claim for an
advancement of expenses, in which case the applicable period shall be twenty
days, the indemnitee may at any time thereafter bring suit against the
Corporation to recover the unpaid amount of the claim. If successful in
whole or in part in any such suit, or in a suit brought by the Corporation
to recover an advancement of expenses pursuant to the terms of an
undertaking, the indemnitee shall be entitled to be paid also the expense of
prosecuting or defending such suit. In (i) any suit brought by the
indemnitee to enforce a right to indemnification hereunder (but not in a
suit brought by an indemnitee to enforce a right to an advancement of
expenses) it shall be a defense that, and (ii) any suit by the Corporation
to recover an advancement of expenses pursuant to the terms of an
undertaking, the Corporation shall be entitled to recover such expenses upon
a final adjudication that, the indemnitee has not met any applicable
standard for indemnification set forth in the Delaware General Corporation
Law. Neither the failure of the Corporation (including its Board of
Directors, independent legal counsel, or its stockholders) to have made a
determination prior to the commencement of such suit that indemnification of
the indemnitee is proper in the circumstances because the indemnitee has met
the applicable standard of conduct set forth in the Delaware General
Corporation Law, nor an actual determination by the Corporation (including
its Board of Directors, independent legal counsel, or its stockholders) that
the indemnitee has not met such applicable standard of conduct, shall create
a presumption that the indemnitee has not met the applicable standard of
conduct or, in the case of such a suit brought by the indemnitee, be a
defense to such suit. In any suit brought by the indemnitee to enforce a
right to indemnification or to an advancement of expenses hereunder, or by
the Corporation to recover an advancement of expenses pursuant to the terms
of an undertaking, the burden of proving that the
II-2
<PAGE>
indemnitee is not entitled to be indemnified, or to such advancement of
expenses, under this Article 11 or otherwise, shall be on the Corporation.
"(d) The rights to indemnification and to the advancement of expenses
conferred in this Article 11 shall not be exclusive of any other right which
any person may have or hereafter acquire under any statute, this certificate
of incorporation, by-law, agreement, vote of stockholders or disinterested
directors, or otherwise.
"(e) The Corporation may maintain insurance, at its expense, to protect
itself and any director, officer, employee, or agent of the Corporation or
another corporation, partnership, joint venture, trust, or other enterprise
against any expense, liability, or loss, whether or not the Corporation
would have the power to indemnify such person against such expense,
liability, or loss under the Delaware General Corporation Law.
"(f) The Corporation's obligation, if any, to indemnify any person who
was or is serving as a director, officer, employee, or agent of any direct
or indirect subsidiary of the Corporation or, at the request of the
Corporation, of any other corporation or of a partnership, joint venture,
trust, or other enterprise shall be reduced by any amount such person may
collect as indemnification from such other corporation, partnership, joint
venture, trust, or other enterprise.
"(g) Any repeal or modification of the foregoing provisions of this
Article 11 shall not adversely affect any right or protection hereunder of
any person in respect of any act or omission occurring prior to the time of
such repeal or modification."
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Set forth below in chronological order is information regarding the numbers
of shares of Common Stock sold by the Company and the principal amount of debt
instruments issued by the Company since April 25, 1995, the consideration
received by the Company for such shares, options and debt instruments and
information relating to the section of the Securities Act of 1933, as amended
(the "Securities Act"), or rule of the Securities and Exchange Commission under
which exemption from registration was claimed. None of these securities was
registered under the Securities Act. Except as otherwise indicated, no sales of
securities involved the use of an underwriter and no commissions were paid in
connection with the sale of any securities.
On April 27, 1995, the Company issued 1,000 shares of Common Stock to
Wellness Concepts, Inc. ("Wellness"), the founding stockholder of the Company at
a price of $.01 per share.
On April 24, 1996, the Company completed a 3,000-for-one stock split and
Wellness surrendered all of its Common Stock to the Company. On April 25, 1996,
the Company issued to certain stockholders, including certain directors and
officers of the Company, a total of 3,000,000 shares of Common Stock at a price
of $.01 per share.
Between December 1996 and July 1997, the Company consummated the private
placement of 8.7 Units, each Unit consisting of $50,000 principal amount of
Series A 10% Senior Notes and 6,667 shares of Common Stock. Pursuant thereto,
the Company issued an aggregate principal amount of $435,000 of Senior Notes and
58,000 shares of Common Stock. The Units were offered to, and purchased by,
accredited investors pursuant to section 4(2) of the Securities Act and the
rules promulgated thereunder.
Each purchaser of the securities described above has represented that
he/she/it understands that the securities acquired may not be sold or otherwise
transferred absent registration under the Securities Act or the availability of
an exemption from the registration requirements of the Securities Act, and each
certificate evidencing the securities owned by each purchaser bears or will bear
upon issuance a legend to that effect.
II-3
<PAGE>
ITEM 16. EXHIBITS
(a) The following exhibits are filed herewith:
<TABLE>
<CAPTION>
EXHIBIT NO.
- -----------------
<C> <S>
1.1 Form of Underwriting Agreement
3.1 Certificate of Incorporation, as amended
3.2 Bylaws, as amended+
4.1 Form of Representatives' Warrant Agreement
4.2 Specimen Common Stock Certificate*
4.3 Form of Indenture+
4.4 Form of Warrant Agreement by and between the Company and Continental Stock
Transfer & Trust Company, including form of Warrant
5.1 Opinion of Brock Fensterstock Silverstein McAuliffe & Wade LLC*
10.1 Employment Agreements with Scott Pollock, Dennis B. Liotta, M.D., and Peter R.
Heisen, M.D., as amended
10.2 1996 Stock Option Plan+
10.3 Form of Asset Purchase Agreement with Affiliated Practices+
10.4 Form of Employment Agreement with affiliated physicians+
10.5 Form of Practice Management Services Agreement
10.6 Form of Goodwill Purchase Agreements*
23.1 Consent of Feldman Radin & Co., P.C.
23.2 Consent of Brock Fensterstock Silverstein McAuliffe & Wade LLC (contained in the
Opinion filed as Exhibit 5.1).*
23.3 Consent of Kalogredis Tsoules and Sweeney Ltd.
24.1 Power of Attorney+
25.1 Form T-1 Statement of Eligibility under the Trust Indenture Act of 1939
27.1 Financial Data Schedule
</TABLE>
(b) Financial statement schedules:
Report of Independent Certified Public Accountants
Schedule II - Valuation and Qualifying Accounts
- ------------------------
* To be filed by amendment.
+ Previously filed.
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
(1) to file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the registration statement;
(iii) To include any additional or changed material information on
the plan of distribution;
(2) that, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be treated as a new
registration statement relating to the securities offered
II-4
<PAGE>
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(3) to remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) Insofar as indemnification for liabilities arising under the Securities
Act 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 the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer, or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(c) The Registrant hereby undertakes that it will:
(1) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act as part of this registration statement as of
the time the Commission declared it effective.
(2) For the purpose of determining any liability under the Securities
Act, treat each post-effective amendment that contains a form of prospectus
as a new registration statement relating to the securities offered therein,
and the offering of such securities at that time as the initial bona fide
offering thereof.
(d) The Registrant hereby undertakes that it will provide to the underwriter
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
II-5
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Boards of Directors and Stockholders and proprietors of:
INTEGRATED PHYSICIAN SYSTEMS, INC.
RELIANCE HEALTHCARE GROUP
MEDICAL BILLING AND MANAGEMENT SERVICES, INC. AND SUBSIDIARY
BRANCHBURG EYE PHYSICIANS, P.A.
FELIX SALERNO, M.D. AND RICHARD WEEDER, M.D.
FLEMINGTON MEDICAL GROUP, P.A.
HUNTERDON OPTHAMOLOGY, P.A.
AMWELL HEALTH CENTER
KENNETH G. STERN, M.D., PA
ALEXANDER KUDRYK, M.D.
BOUND BROOK PEDIATRIC ASSOCIATION
AUDREY HINDS-MCDONALD
JOHN E. DURST, M.D.
PROFESSIONAL MEDICAL IMAGES
We have audited in accordance with generally accepted auditing standards the
financial statements of the above companies included in this Registration
Statement and have issued our reports thereon, all dated May 9, 1997. Our audits
were made for the purpose of forming opinions on the basic financial statements
taken as a whole. The schedules listed in the Exhibit index are the
responsibility of the Companies' management and are presented for purposes of
complying with the Securities and Exchange Commission's rules and are not part
of the basic financial statements. Our responsibility is to express an opinion
based on our audit. These Schedules have been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly state, in all material respects, the financial data required to
be set forth therein in relation to the basic financial statements taken as
whole.
/s/ Feldman Radin & Co., P.C.
Certified Public Accountants
New York, NY
May 9, 1997
II-6
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT
JANUARY 1, AMOUNTS CHARGED BALANCE AT
1996 TO EXPENSES DEDUCTIONS DECEMBER 31, 1996
-------------- ---------------- ----------- -----------------
<S> <C> <C> <C> <C>
INTEGRATED PHYSICIAN SYSTEMS, INC.
Accumulated depreciation and amortization.... $ 1,000 $ 2,000 $ -- $ 3,000
RELIANCE HEALTHCARE GROUP
Allowance for doubtful accounts.............. 250,000 30,000 -- 280,000
Allowance for contractual adjustments........ 5,661,976 58,713 -- 5,720,689
Accumulated depreciation and amortization.... 707,797 179,499 -- 887,296
MEDICAL BILLING AND MANAGEMENT SERVICES, INC.
AND SUBSIDIARY
Allowance for doubtful accounts.............. -- 6,497 -- 6,497
Accumulated depreciation and amortization.... 96,696 39,960 26,796 109,860
BRANCHBURG EYE PHYSICIANS, P.A.
Allowance for doubtful accounts.............. 52,416 11,145 -- 63,561
Accumulated depreciation and amortization.... 205,769 41,477 29,967 217,279
FELIX SALERNO, M.D. AND RICHARD WEEDER, M.D.
Allowance for doubtful accounts.............. 155,774 12,779 -- 168,553
FLEMINGTON MEDICAL GROUP, P.A.
Allowance for doubtful accounts.............. 4,500 -- 449 4,051
Accumulated depreciation and amortization.... 103,145 6,851 -- 109,996
HUNTERDON OPTHALMOLOGISTS, P.A.
Allowance for doubtful accounts.............. 12,000 5,088 -- 17,088
Accumulated depreciation and amortization.... 20,610 1,244 -- 21,854
JOEL FUHRMAN M.D., P.C. D/B/A
AMWELL HEALTH CENTER
Allowance for doubtful accounts.............. 11,139 -- 4,416 6,723
Accumulated depreciation and amortization.... 52,777 7,843 -- 60,620
KENNETH G. STERN, M.D., P.A.
Allowance for doubtful accounts.............. 8,119 317 -- 8,436
Accumulated depreciation and amortization.... 66,035 12,087 -- 78,122
ALEXANDER KUDRYK, M.D.
Allowance for doubtful accounts.............. 19,409 -- 3,050 16,359
Accumulated depreciation and amortization.... 113,017 2,551 -- 115,568
BOUND BROOK PEDIATRIC ASSOCIATION, P.A.
Allowance for doubtful accounts.............. 5,200 -- 400 4,800
Accumulated depreciation and amortization.... 64,108 1,837 -- 65,945
AUDREY HINDS-MCDONALD, M.D.
Allowance for doubtful accounts.............. 10,750 2,450 -- 13,200
JOHN E. DURST, M.D.
Allowance for doubtful accounts.............. 2,725 -- 1,017 1,708
Accumulated depreciation and amortization.... 30,079 2,291 -- 32,370
PROFESSIONAL MEDICAL IMAGES, LTD.
Accumulated depreciation and amortization.... 20,803 3,488 -- 24,291
</TABLE>
II-7
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT
JANUARY 1, AMOUNTS CHARGED BALANCE AT
1995 TO EXPENSES DEDUCTIONS DECEMBER 31, 1995
-------------- ---------------- ------------- -----------------
<S> <C> <C> <C> <C>
INTEGRATED PHYSICIAN SYSTEMS, INC.
Accumulated depreciation and amortization.... $ -- $ 1,000 $ -- $ 1,000
RELIANCE HEALTHCARE GROUP
Allowance for doubtful accounts.............. 220,000 30,000 -- 250,000
Allowance for contractual adjustments........ 4,492,024 1,169,952 -- 5,661,976
Accumulated depreciation and amortization.... 501,987 205,810 -- 707,797
MEDICAL BILLING AND MANAGEMENT
SERVICES, INC. AND SUBSIDIARY
Allowance for doubtful accounts.............. -- -- -- --
Accumulated depreciation and amortization.... 53,633 43,063 -- 96,696
BRANCHBURG EYE PHYSICIANS, P.A.
Allowance for doubtful accounts.............. 61,571 9,155 52,416
Accumulated depreciation and amortization.... 161,095 44,674 -- 205,769
FELIX SALERNO, M.D. AND
RICHARD WEEDER, M.D.
Allowance for doubtful accounts.............. 130,774 25,000 -- 155,774
FLEMINGTON MEDICAL GROUP, P.A.
Allowance for doubtful accounts.............. 4,500 -- -- 4,500
Accumulated depreciation and amortization.... 80,491 22,654 -- 103,145
HUNTERDON OPTHALMOLOGISTS, P.A.
Allowance for doubtful accounts.............. 8,295 3,705 -- 12,000
Accumulated depreciation and amortization.... 19,366 1,244 -- 20,610
JOEL FUHRMAN M.D., P.C. D/B/A
AMWELL HEALTH CENTER
Allowance for doubtful accounts.............. 6,336 4,803 -- 11,139
Accumulated depreciation and amortization.... 44,933 7,844 -- 52,777
KENNETH G. STERN, M.D., P.A.
Allowance for doubtful accounts.............. 7,769 350 -- 8,119
Accumulated depreciation and amortization.... 53,622 12,413 -- 66,035
ALEXANDER KUDRYK, M.D.
Allowance for doubtful accounts.............. 15,297 4,112 -- 19,409
Accumulated depreciation and amortization.... 97,126 15,891 -- 113,017
BOUND BROOK PEDIATRIC ASSOCIATION, P.A.
Allowance for doubtful accounts.............. 5,700 -- 500 5,200
Accumulated depreciation and amortization.... 62,787 1,321 -- 64,108
AUDREY HINDS-MCDONALD, M.D.
Allowance for doubtful accounts.............. 8,600 2,150 -- 10,750
JOHN E. DURST, M.D.
Allowance for doubtful accounts.............. 2,217 508 -- 2,725
Accumulated depreciation and amortization.... 26,525 3,554 -- 30,079
PROFESSIONAL MEDICAL IMAGES, LTD.
Accumulated depreciation and amortization.... 15,938 4,865 -- 20,803
</TABLE>
II-8
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT
JANUARY 1, AMOUNTS CHARGED BALANCE AT
1994 TO EXPENSES DEDUCTIONS DECEMBER 31, 1994
-------------- ---------------- ----------- -----------------
<S> <C> <C> <C> <C>
RELIANCE HEALTHCARE GROUP
Allowance for doubtful accounts.............. $ 200,000 $ 20,000 $ -- $ 220,000
Allowance for contractual adjustments........ 3,355,322 1,136,702 -- 4,492,024
Accumulated depreciation and amortization.... 360,996 140,991 -- 501,987
MEDICAL BILLING AND MANAGEMENT SERVICES, INC.
AND SUBSIDIARY
Allowance for doubtful accounts.............. -- -- -- --
Accumulated depreciation and amortization.... 36,167 17,466 -- 53,633
BRANCHBURG EYE PHYSICIANS, P.A.
Allowance for doubtful accounts.............. -- 61,571 -- 61,571
Accumulated depreciation and amortization.... 157,691 3,404 -- 161,095
FELIX SALERNO, M.D. AND RICHARD WEEDER, M.D.
Allowance for doubtful accounts.............. -- 130,774 -- 130,774
FLEMINGTON MEDICAL GROUP, P.A.
Allowance for doubtful accounts.............. -- 4,500 -- 4,500
Accumulated depreciation and amortization.... 68,974 11,517 -- 80,491
HUNTERDON OPTHAMOLOGY, P.A.
Allowance for doubtful accounts.............. -- 8,295 -- 8,295
Accumulated depreciation and amortization.... 18,122 1,244 -- 19,366
AMWELL HEALTH CENTER
Allowance for doubtful accounts.............. -- 6,336 -- 6,336
Accumulated depreciation and amortization.... 34,540 10,393 -- 44,933
KENNETH G. STERN, M.D., P.A.
Allowance for doubtful accounts.............. -- 7,769 -- 7,769
Accumulated depreciation and amortization.... 32,677 20,945 -- 53,622
ALEXANDER KUDRYK, M.D.
Allowance for doubtful accounts.............. -- 15,297 -- 15,297
Accumulated depreciation and amortization.... 85,886 11,240 -- 97,126
BOUND BROOK PEDIATRIC ASSOCIATION
Allowance for doubtful accounts.............. -- 5,700 -- 5,700
Accumulated depreciation and amortization.... 62,255 532 -- 62,787
AUDREY HINDS-MCDONALD
Allowance for doubtful accounts.............. -- 8,600 -- 8,600
JOHN E. DURST, M.D.
Allowance for doubtful accounts.............. -- 2,217 -- 2,217
Accumulated depreciation and amortization.... 19,115 7,410 -- 26,525
PROFESSIONAL MEDICAL IMAGES
Accumulated depreciation and amortization.... 9,962 5,976 -- 15,938
</TABLE>
II-9
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant has duly caused this Amendment No. 1 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in The
City of New York on October 24, 1997.
INTEGRATED PHYSICIAN SYSTEMS, INC.
By: /s/ SCOTT G. POLLOCK
-----------------------------------------
Scott G. Pollock
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
/s/ SCOTT G. POLLOCK President, Chief Executive
- ------------------------------ Officer, Chief Financial October 24, 1997
Scott G. Pollock Officer and a Director
* Executive Vice President,
- ------------------------------ Chief Operating Officer October 24, 1997
Dennis B. Liotta, M.D. and a Director
* Vice President, Chief
- ------------------------------ Medical Officer and a October 24, 1997
Peter Heisen, M.D. Director
* Vice President for
- ------------------------------ Business Development and October 24, 1997
David I. Rosen, M.D. a Director
*
- ------------------------------ Secretary and a Director October 24, 1997
Joseph F. Murray
*
- ------------------------------ Corporate General Counsel October 24, 1997
Walter B. Dunsmore and a Director
/s/ JAMES M. FOULKE
- ------------------------------ Director October 24, 1997
James M. Foulke
*By: /s/ SCOTT G. POLLOCK
-------------------------
Scott G. Pollock
ATTORNEY-IN-FACT
II-10
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. PAGE
- --------------- ---------
<C> <S> <C>
1.1 Form of Underwriting Agreement
3.1 Certificate of Incorporation, as amended
3.2 Bylaws, as amended+
4.1 Form of Representatives' Warrant Agreement
4.2 Specimen Common Stock Certificate*
4.3 Form of Indenture+
4.4 Form of Warrant Agreement by and between the Company and Continental Stock Transfer &
Trust Company, including form of Warrant
5.1 Opinion of Brock Fensterstock Silverstein McAuliffe & Wade LLC *
10.1 Employment Agreements with Scott Pollock, Dennis B. Liotta, M.D., and Peter R. Heisen,
M.D., as amended
10.2 1996 Stock Option Plan+
10.3 Form of Asset Purchase Agreement with Affiliated Practices+
10.4 Form of Employment Agreement with affiliated physicians+
10.5 Form of Practice Management Services Agreement
10.6 Form of Goodwill Purchase Agreements*
23.1 Consent of Feldman Radin & Co., P.C.
23.2 Consent of Brock Fensterstock Silverstein McAuliffe & Wade LLC (contained in the Opinion
filed as Exhibit 5.1).*
23.3 Consent of Kalogredis Tsoules and Sweeney Ltd.
24.1 Power of Attorney+
25.1 Form T-1 Statement of Eligibility under the Trust Indenture Act of 1939
27.1 Financial Data Schedule
</TABLE>
- ------------------------
* To be filed by amendment.
+ Previously filed.
<PAGE>
Exhibit 1.1
[Form of Underwriting Agreement - Subject to Additional Review]
$25,000,000
SUBORDINATED CONVERTIBLE DEBENTURES DUE 2004
2,000,000 SHARES OF COMMON STOCK AND
2,000,000 CLASS A REDEEMABLE COMMON STOCK PURCHASE WARRANTS
INTEGRATED PHYSICIAN SYSTEMS, INC.
UNDERWRITING AGREEMENT
----------------------
New York, New York
, 1997
NOLAN SECURITIES CORP.
SOUTHWALL CAPITAL CORP.
DIRKS & COMPANY, INC.
As Representatives of the
Several Underwriters listed on Schedule A hereto
c/o Nolan Securities Corp.
405 Lexington Avenue, 45th Floor
New York, New York, 10174
Ladies and Gentlemen:
Integrated Physician Systems, Inc., a Delaware corporation (the
"Company"), confirms its agreement with each of Nolan Securities Corp.
("Nolan"), SouthWall Capital Corp. ("SouthWall") and Dirks & Company, Inc.
("Dirks") and each of the underwriters named in Schedule A hereto
(collectively, the "Underwriters," which term shall also include any
underwriter substituted as hereinafter provided in SECTION 11), for whom
Nolan, SouthWall and Dirks are acting as representatives (in such capacity,
Nolan, SouthWall and Dirks shall hereinafter be referred to as "you" or the
"Representatives"), with respect to the sale by the Company and the purchase
by the Underwriters, acting severally and not jointly, of the respective
numbers
<PAGE>
of shares ("Shares") of the Company's common stock, $.01 par value per share
("Common Stock"), class A redeemable common stock purchase warrants (the
"Redeemable Warrants"), and an aggregate principal amount of $25,000,000
Convertible Subordinated Debentures due 2004 (the "Convertible Debentures").
The Shares, Redeemable Warrants and the Convertible Debentures are hereinafter
referred to as the "Firm Securities." Each Redeemable Warrant is exercisable
commencing on ___________, 1997 [date of the Prospectus] until ___________, 2002
[5 years after date of Prospectus], unless previously redeemed by the Company,
at an initial exercise price of $______ per share of Common Stock [140% of
initial public offering price per share of Common Stock]. The Redeemable
Warrants may be redeemed by the Company at a redemption price of $.10 per
Redeemable Warrant at any time after ___________, 1999 [18 months after date of
Prospectus] on thirty (30) days' prior written notice, provided that the average
closing sale price of the Common Stock equals or exceeds $_____ per share [210%
of initial public offering price of the Common Stock] (subject to adjustment
under certain circumstances) for any twenty (20) trading days within a period of
thirty (30) consecutive trading days ending on the fifth trading day prior to
the date of notice of redemption, all in accordance with the terms and
conditions of the Warrant Agreement (herein defined). Each Convertible
Debenture shall mature seven (7) years after issuance and shall be initially
convertible, unless previously redeemed, into shares of Common Stock at a price
equivalent to [120% to 130%] of the initial public offering price of the Shares.
The Convertible Debentures may be redeemed by the Company at face amount at any
time after __________, 2000 [36 months from the date of this Agreement] on
forty-five (45) days' prior written notice, provided that the average closing
sale price of the Common Stock equals or exceeds $________________ [150% of the
initial public offering price of the Common Stock] per share of Common Stock,
for the twenty (20) consecutive trading days prior to the date of notice of
redemption.
Upon your request, as provided in Section 2(b) of this Agreement, the
Company shall also issue and sell to the Underwriters, acting severally and not
jointly, up to an additional 300,000 shares of Common Stock, 300,000 Redeemable
Warrants and/or $3,750,000 aggregate principal amount of Convertible Debentures
for the purpose of covering over-allotments, if any. Such 300,000 shares of
Common Stock, 300,000 Redeemable Warrants and $3,750,000 aggregate principal
amount of Convertible Debentures are hereinafter collectively referred to as the
"Option Securities." The Company also proposes to issue and sell to you
warrants (the "Representatives' Warrants") pursuant to the Representatives'
Warrant Agreement (the "Representatives' Warrant Agreement") for the purchase of
an additional 200,000 shares of Common Stock, 200,000 Redeemable Warrants and/or
$2,500,000 aggregate principal amount of Convertible Debentures (excluding the
over-allotment option) being underwritten for the account of the Company. The
shares of Common Stock, Redeemable Warrants and Convertible Debentures issuable
upon exercise of the Representatives' Warrants are hereinafter referred to as
the "Representatives' Securities." The Firm Securities, the Option Securities,
the Representatives' Warrants and the Representatives' Securities (collectively,
hereinafter referred to as the "Securities") are more fully described in the
Registration Statement and the Prospectus referred to below.
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents
and warrants to, and agrees with, each of the Underwriters as of the date
hereof, and as of the
2
<PAGE>
Closing Date (as hereinafter defined) and each Option Closing Date (as
hereinafter defined), if any, as follows:
(a) The Company has prepared and filed with the Securities and
Exchange Commission (the "Commission") a registration statement, and an
amendment or amendments thereto, on Form S-1 (No. 333-33247), including any
related preliminary prospectus ("Preliminary Prospectus"), for the registration
of the Firm Securities, the Option Securities and the Representatives'
Securities under the Securities Act of 1933, as amended (the "Act"), which
registration statement and amendment or amendments have been prepared by the
Company in conformity with the requirements of the Act, and the rules and
regulations (the "Rules and Regulations") of the Commission under the Act. The
Company will promptly file a further amendment to said registration statement in
the form heretofore delivered to the Underwriters and will not file any other
amendment thereto to which the Underwriters shall have objected in writing after
having been furnished with a copy thereof. Except as the context may otherwise
require, such registration statement, as amended, on file with the Commission at
the time the registration statement becomes effective (including the prospectus,
financial statements, schedules, exhibits and all other documents filed as a
part thereof or incorporated therein (including, but not limited to those
documents or information incorporated by reference therein) and all information
deemed to be a part thereof as of such time pursuant to paragraph (b) of Rule
430(A) of the Rules and Regulations), is hereinafter called the "Registration
Statement," and the form of prospectus in the form first filed with the
Commission pursuant to Rule 424(b) of the Regulations, is hereinafter called the
"Prospectus." For purposes hereof, "Rules and Regulations" mean the rules and
regulations adopted by the Commission under either the Act or the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), as applicable.
(b) Neither the Commission nor any state regulatory authority has
issued any order preventing or suspending the use of any Preliminary Prospectus,
the Registration Statement or Prospectus or any part of any thereof and no
proceedings for a stop order suspending the effectiveness of the Registration
Statement or any of the Company's securities have been instituted or are pending
or threatened. Each of the Preliminary Prospectus, the Registration Statement
and Prospectus at the time of filing thereof conformed with the requirements of
the Act and the Rules and Regulations, and none of the Preliminary Prospectus,
the Registration Statement or Prospectus at the time of filing thereof contained
an untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading, except
that this representation and warranty does not apply to statements made in
reliance upon and in conformity with written information furnished to the
Company with respect to the Underwriters by or on behalf of the Underwriters
expressly for use in such Preliminary Prospectus, Registration Statement or
Prospectus or any amendment thereof or supplement thereto.
(c) When the Registration Statement becomes effective and at all
times subsequent thereto up to the Closing Date (as defined herein) and each
Option Closing Date (as defined herein), if any, and during such longer period
as the Prospectus may be required to be delivered in connection with sales by
the Underwriters or a dealer, the Registration Statement and the
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Prospectus will contain all statements which are required to be stated therein
in accordance with the Act and the Rules and Regulations, and will conform to
the requirements of the Act and the Rules and Regulations; neither the
Registration Statement nor the Prospectus, nor any amendment or supplement
thereto, will 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, in light of the circumstances under which they were made,
not misleading, PROVIDED, HOWEVER, that this representation and warranty does
not apply to statements made or statements omitted in reliance upon and in
strict conformity with information furnished to the Company in writing by or on
behalf of any Underwriter expressly for use in the Preliminary Prospectus,
Registration Statement or Prospectus or any amendment thereof or supplement
thereto.
(d) Simultaneously with the closing of the offering of the Firm
Securities, the Company will acquire (the "Acquisitions") substantially all of
the assets and assume certain liabilities of Joel Fuhrman, M.D., P.C. D/B/A
Amwell Health Center ("Fuhrman"); Bound Brook Pediatric Association, P.A.
("Bound Brook"); Branchburg Eye Physicians, P.A. ("Branchburg"); Alexander
Kudryk, M.D. ("Kudryk"); Audrey Hinds-McDonald, M.D., P.A. ("Hinds-McDonald");
Hunterdon Opthamologists, P.A. ("Hunterdon"); Richard M. Weeder, M.D.
("Weeder"); Felix Salerno, M.D. ("Salerno"); Kenneth Stern, M.D., P.A.
("Stern"); Flemington Medical Group, P.A. ("Flemington"); John E. Durst, M.D.
("Durst"); Reliance Medical Group, P.C. and its affiliate Reliance Health Care
Group, Inc. (collectively, "Reliance"); and Medical Billing and Management
Services, Inc. and its subsidiary Radiology Billing and Management Services,
Inc. (collectively, "MBMS"). Fuhrman, Bound Brook, Branchburg, Hines-McDonald,
Hunterdon, Stern, Flemington, Reliance and MBMS are hereinafter referred to
collectively as the "Corporate Initial Affiliated Practices". Kudryk, Weeden,
Salerno and Durst are hereinafter referred to collectively as the "Initial
Affiliated Practices." Prior to the consummation of the Acquisitions, each of
Fuhrman, Bound Brook, Branchburg, Kudryk, Hinds-McDonald, Hunterdon, Weeder,
Salerno, Stern, Flemington, Durst, Reliance and MBMS will have formed a new
professional corporation (the "New PCs"). Immediately prior to the consummation
of the Acquisitions, each of the Company, the Corporate Initial Affiliated
Practices and the New PCs (hereinafter collectively referred to with the
Corporate Initial Affiliated Practices as the "Corporate Entities") are duly
organized and validly existing as a corporation in good standing under the laws
of the state of its incorporation. Except as set forth in the Prospectus, none
of the Company nor the Corporate Entities owns an interest in any corporation,
partnership, trust, joint venture or other business entity. Each of the Company
and the Corporate Entities is duly qualified and licensed and in good standing
as a foreign corporation in each jurisdiction in which its ownership or leasing
of any properties or the character of its operations requires such qualification
or licensing. Each of the Company, the Corporate Entities and the Initial
Affiliated Practices has all requisite power and authority (corporate and
other), and has obtained any and all necessary authorizations, approvals,
orders, licenses, certificates, franchises and permits of and from all
governmental or regulatory officials and bodies (including, without limitation,
those having jurisdiction over environmental or similar matters), to own or
lease its properties and conduct its business as described in the Prospectus;
each of the Company, the Corporate Entities and the Initial Affiliated Practices
is and has been doing business in compliance with all such authorizations,
approvals, orders, licenses, certificates, franchises and permits and all
applicable federal, state, local and foreign laws, rules
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and regulations; and none of the Company, the Corporate Entities or the Initial
Affiliated Practices has received any notice of proceedings relating to the
revocation or modification of any such authorization, approval, order, license,
certificate, franchise, or permit which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would materially and
adversely affect the condition, financial or otherwise, or the earnings,
position, prospects, value, operation, properties, business or results of
operations of the Company, the Corporate Entities or the Initial Affiliated
Practices. The disclosures in the Registration Statement concerning the effects
of federal, state, local, and foreign laws, rules and regulations on the
Company's, the Corporate Entities and the Initial Affiliated Practices'
businesses as currently conducted and as contemplated are correct in all
material respects and do not omit to state a material fact required to be stated
therein or necessary to make the statements contained therein not misleading in
light of the circumstances under which then were made.
(e) The Company has a duly authorized, issued and outstanding
capitalization as set forth in the Prospectus under "Capitalization" and
"Description of Securities" and will have the adjusted capitalization set forth
therein on the Closing Date and each Option Closing Date, if any, based upon the
assumptions set forth therein, and the Company is not a party to or bound by any
instrument, agreement or other arrangement providing for it to issue any capital
stock, rights, warrants, options or other securities, except for this Agreement,
the Representatives' Warrant Agreement, the Acquisition Agreements (as defined
herein), and as described in the Prospectus. The Securities and all other
securities issued or issuable by the Company conform or, when issued and paid
for, will conform, in all respects to all statements with respect thereto
contained in the Registration Statement and the Prospectus. All issued and
outstanding securities of the Company have been duly authorized and validly
issued and are fully paid and non-assessable and the holders thereof have no
rights of rescission with respect thereto, and are not subject to personal
liability by reason of being such holders; and none of such securities were
issued in violation of the preemptive rights of any holders of any security of
the Company or similar contractual rights granted by the Company. The
Securities are not and will not be subject to any preemptive or other similar
rights of any stockholder, have been duly authorized and, when issued, paid for
and delivered in accordance with the terms hereof, will be validly issued, fully
paid and non-assessable and will conform to the description thereof contained in
the Prospectus; the holders thereof will not be subject to any liability solely
as such holders; all corporate action required to be taken for the
authorization, issue and sale of the Securities has been duly and validly taken;
and the certificates representing the Securities will be in due and proper form.
Upon the issuance and delivery pursuant to the terms hereof of the Securities to
be sold by the Company hereunder, the Underwriters or the Representatives, as
the case may be, will acquire good and marketable title to such Securities free
and clear of any lien, charge, claim, encumbrance, pledge, security interest,
defect or other restriction or equity of any kind whatsoever.
(f) The financial statements of the Company, the Corporate Initial
Affiliated Practices and the Initial Affiliated Practices, together with the
related notes and schedules thereto, included in the Registration Statement,
each Preliminary Prospectus and the Prospectus fairly present the financial
position, income, changes in cash flow, changes in stockholders' equity and the
results of operations of the Company, the Corporate Initial Affiliated Practices
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<PAGE>
and the Initial Affiliated Practices at the respective dates and for the
respective periods to which they apply and such financial statements have been
prepared in conformity with generally accepted accounting principles and the
Rules and Regulations, consistently applied throughout the periods involved and
such financial statements as are audited have been examined by Feldman Radin &
Co., P.C., who are independent certified public accountants within the meaning
of the Act and the Rules and Regulations, as indicated in their reports filed
therewith. There has been no adverse change or development involving a
prospective adverse change in the condition, financial or otherwise, or in the
earnings, position, prospects, value, operation, properties, business, or
results of operations of the Company and each of the Corporate Initial
Affiliated Practices and the Initial Affiliated Practices, whether or not
arising in the ordinary course of business, since the date of the financial
statements included in the Registration Statement and the Prospectus and the
outstanding debt, the property, both tangible and intangible, and the business
of the Company, the Corporate Initial Affiliated Practices and the Initial
Affiliated Practices, conform in all material respects to the descriptions
thereof contained in the Registration Statement and the Prospectus. Financial
information set forth in the Prospectus under the headings "Summary Financial
Data," "Selected Financial Data," "Capitalization," and "Management's
Discussion and Analysis of Financial Conditions and Results of Operations,"
fairly present, on the basis stated in the Prospectus, the information set forth
therein, and have been derived from or compiled on a basis consistent with that
of the audited financial statements included in the Prospectus.
The pro forma financial statements of the Company, the Corporate
Initial Affiliated Practices and the Initial Affiliated Practices, and the
related notes thereto, set forth in the Registration Statement and the
Prospectus, have been prepared in conformity with the requirements of the Act
and the Rules and Regulations and present fairly the information shown therein;
and the pro forma adjustments on such pro forma financial statements have been
properly applied on the basis described in the related notes thereto. The pro
forma financial data set forth in the Prospectus have been prepared on a basis
consistent with the pro forma financial statements of the Company, the Corporate
Initial Affiliated Practices and the Initial Affiliated Practices. The amounts
shown as accrued for current and deferred income and other taxes in such
financial statements are sufficient for the payment of all accrued and unpaid
federal, state, local and foreign income taxes, interest, penalties, assessments
or deficiencies applicable to the Company, the Corporate Initial Affiliated
Practices and the Initial Affiliated Practices, whether disputed or not, for the
applicable period then ended and periods prior thereto; adequate allowance for
doubtful accounts has been provided for unindemnified losses due to the
operations of the Company, the Corporate Initial Affiliated Practices and the
Initial Affiliated Practices; and the statements of income do not contain any
items of special or nonrecurring income not earned in the ordinary course of
business, except as specified in the notes thereto.
(g) Each of the Company, the Corporate Initial Affiliated Practices
and the Initial Affiliated Practices (i) has paid all federal, state, local, and
foreign taxes for which it is liable, including, but not limited to, withholding
taxes and amounts payable under Chapters 21 through 24 of the Internal Revenue
Code of 1986, as amended (the "Code"), and has furnished all information returns
it is required to furnish pursuant to the Code, (ii) has established adequate
6
<PAGE>
reserves for such taxes which are not due and payable, and (iii) does not have
any tax deficiency or claims outstanding, proposed or assessed against it.
(h) No transfer tax, stamp duty or other similar tax is payable by or
on behalf of the Underwriters in connection with (i) the issuance by the Company
of the Securities, (ii) the purchase by the Underwriters of the Firm Securities
and the Option Securities from the Company and the purchase by the
Representatives of the Representatives' Warrants from the Company, (iii) the
consummation by the Company of any of its obligations under this Agreement, or
(iv) resales of the Firm Securities and the Option Securities in connection with
the distribution contemplated hereby.
(i) Each of the Company, the Corporate Initial Affiliated Practices
and the Initial Affiliated Practices maintains insurance policies, including,
but not limited to, general liability, malpractice (except with respect to the
Company) and property insurance, which insures each of the Company, the
Corporate Initial Affiliated Practices and the Initial Affiliated Practices and
their respective employees, against such losses and risks generally insured
against by comparable businesses. None of the Company, the Corporate Initial
Affiliated Practices nor the Initial Affiliated Practices (A) has failed to give
notice or present any insurance claim with respect to any matter, including but
not limited to the Company's business, property or employees, under any
insurance policy or surety bond in a due and timely manner, (B) has any disputes
or claims against any underwriter of such insurance policies or surety bonds or
has failed to pay any premiums due and payable thereunder, or (C) has failed to
comply with all conditions contained in such insurance policies and surety
bonds. There are no facts or circumstances under any such insurance policy or
surety bond which would relieve any insurer of its obligation to satisfy in full
any valid claim of any of the Company, the Corporate Initial Affiliated
Practices and the Initial Affiliated Practices.
(j) There is no action, suit, proceeding, inquiry, arbitration,
investigation, litigation or governmental proceeding (including, without
limitation, those having jurisdiction over environmental or similar matters),
domestic or foreign, pending or threatened against (or circumstances that man
give rise to the same), or involving the properties or business of, the Company,
the Corporate Initial Affiliated Practices or the Initial Affiliated Practices
which (i) questions the validity of the capital stock of the Company, this
Agreement, the Acquisition Agreements, the Warrant Agreement, the PMSA (as
defined herein) or the Representatives' Warrant Agreement, or of any action
taken or to be taken by the Company pursuant to or in connection with this
Agreement, the Acquisition Agreements, the Warrant Agreement, the PMSA or the
Representatives' Warrant Agreement, (ii) is required to be disclosed in the
Registration Statement which is not so disclosed (and such proceedings as are
summarized in the Registration Statement are accurately summarized in all
material respects), or (iii) might materially and adversely affect the
condition, financial or otherwise, or the earnings, position, prospects,
stockholders' equity, value, operation, properties, business or results of
operations of the Company and each of the Corporate Initial Affiliated Practices
and the Initial Affiliated Practices.
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<PAGE>
(k) The Company has full legal right, power and authority to
authorize, issue, deliver and sell the Securities, enter into this Agreement,
the Acquisition Agreements, the Warrant Agreement, the PMSA and the
Representatives' Warrant Agreement and to consummate the transactions provided
for in this Agreement, the Acquisition Agreements, the Warrant Agreement, the
PMSA and the Representatives' Warrant Agreement; and this Agreement, the
Acquisition Agreements, the Warrant Agreement, the PMSA and the Representatives'
Warrant Agreement have each been duly and properly authorized, executed and
delivered by the Company. Each of this Agreement, the Acquisition Agreements,
the Warrant Agreement, the PMSA and the Representatives' Warrant Agreement
constitutes a legal, valid and binding agreement of the Company enforceable
against the Company in accordance with its terms, and none of the Company's
issue and sale of the Securities, execution or delivery of this Agreement, the
Acquisition Agreements, the Warrant Agreement, the PMSA or the Representatives'
Warrant Agreement, its performance hereunder and thereunder, its consummation of
the transactions contemplated herein and therein, or the conduct of its business
as described in the Registration Statement, the Prospectus, and any amendments
or supplements thereto, conflicts with or will conflict with or results or will
result in any breach or violation of any of the terms or provisions of, or
constitutes or will constitute a default under, or result in the creation or
imposition of any lien, charge, claim, encumbrance, pledge, security interest,
defect or other restriction or equity of any kind whatsoever upon, any property
or assets (tangible or intangible) of any of the Company, the Corporate Entities
or the Initial Affiliated Practices pursuant to the terms of (i) the certificate
of incorporation or by-laws of any of the Company, (ii) any license, contract,
collective bargaining agreement, indenture, mortgage, deed of trust, lease,
voting trust agreement, stockholders agreement, note, loan or credit agreement
or any other agreement or instrument to which any of the Company, the Corporate
Entities or the Initial Affiliated Practices is a party or by which any of the
Company, the Corporate Entities or the Initial Affiliated Practices is or may be
bound or to which either of its or their respective properties or assets
(tangible or intangible) is or may be subject, or any indebtedness, or (iii) any
statute, judgment, decree, order, rule or regulation applicable to any of the
Company, the Corporate Entities or the Initial Affiliated Practices of any
arbitrator, court, regulatory body or administrative agency or other
governmental agency or body (including, without limitation, those having
jurisdiction over environmental or similar matters), domestic or foreign, having
jurisdiction over any of the Company, the Corporate Entities or the Initial
Affiliated Practices or any of its or their respective activities or properties.
(l) No consent, approval, authorization or order of, and no filing
with, any court, regulatory body, government agency or other body, domestic or
foreign, is required for the issuance of the Securities pursuant to the
Prospectus and the Registration Statement, the performance of this Agreement,
the Acquisition Agreements, the Warrant Agreement, the PMSA and the
Representatives' Warrant Agreement and the transactions contemplated hereby and
thereby, including without limitation, any waiver of any preemptive, first
refusal or other rights that any entity or person man have for the issue and/or
sale of any of the Securities, except such as have been or may be obtained under
the Act or may be required under state securities or Blue Sky laws in connection
with the Underwriters' purchase and distribution of the Firm Securities and the
Option Securities, and the Representatives' Warrants to be sold by the Company
hereunder.
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(m) All executed agreements, contracts or other documents or copies
of executed agreements, contracts or other documents filed as exhibits to the
Registration Statement to which any of the Company, the Corporate Initial
Affiliated Practices or the Initial Affiliated Practices is a party or by which
it or they may be bound or to which its or their respective assets, properties
or business may be subject have been duly and validly authorized, executed and
delivered by the Company, the Corporate Initial Affiliated Practices and the
Initial Affiliated Practices as the case may be, and constitute the legal, valid
and binding agreements of the Company, the Corporate Initial Affiliated
Practices or the Initial Affiliated Practices, as the case may be, enforceable
against each of them in accordance with their respective terms. The
descriptions in the Registration Statement of agreements, contracts and other
documents are accurate and fairly present the information required to be shown
with respect thereto by Form S-1, and there are no contracts or other documents
which are required by the Act to be described in the Registration Statement or
filed as exhibits to the Registration Statement which are not described or filed
as required, and the exhibits which have been filed are complete and correct
copies of the documents of which they purport to be copies.
(n) Subsequent to the respective dates as of which information is set
forth in the Registration Statement and Prospectus, and except as may otherwise
be indicated or contemplated herein or therein, none of the Company, the
Corporate Entities nor the Initial Affiliated Practices has (i) issued any
securities or incurred any liability or obligation, direct or contingent, for
borrowed money, (ii) entered into any transaction other than in the ordinary
course of business, or (iii) declared or paid any dividend or made any other
distribution on or in respect of its capital stock of any class, and there has
not been any change in the capital stock, or any change in the debt (long or
short term) or liabilities or material adverse change in or affecting the
general affairs, management, financial operations, stockholders' equity or
results of operations of any of the Company, the Corporate Entities or the
Initial Affiliated Practices.
(o) No default exists in the due performance and observance of any
term, covenant or condition of any license, contract, collective bargaining
agreement, indenture, mortgage, installment sale agreement, lease, deed of
trust, voting trust agreement, stockholders agreement, partnership agreement,
note, loan or credit agreement, purchase order, or any other agreement or
instrument evidencing an obligation for borrowed money, or any other material
agreement or instrument to which any of the Company, the Corporate Initial
Affiliated Practices or the Initial Affiliated Practices is a party or by which
any of the Company, the Corporate Initial Affiliated Practices or the Initial
Affiliated Practices may be bound or to which the property or assets (tangible
or intangible) of any of the Company, the Corporate Initial Affiliated Practices
or the Initial Affiliated Practices is subject or affected, except such as have
been cured or as to which written waivers have been obtained and remain in full
force and effect.
(p) Each of the Company, the Corporate Initial Affiliated Practices
and the Initial Affiliated Practices has generally enjoyed a satisfactory
employer-employee relationship with its employees and is in compliance with all
federal, state, local, and foreign laws and regulations respecting employment
and employment practices, terms and conditions of employment and wages and
hours. There are no pending investigations involving any of the Company, the
Corporate Initial Affiliated Practices and the Initial Affiliated Practices by
the U.S. Department
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of Labor, or any other governmental agency responsible for the enforcement of
such federal, state, local, or foreign laws and regulations. There is no unfair
labor practice charge or complaint against any of the Company, the Corporate
Initial Affiliated Practices and the Initial Affiliated Practices pending before
the National Labor Relations Board or any lockout, strike, picketing, boycott,
dispute, slowdown or stoppage pending or threatened against or involving any of
the Company, the Corporate Initial Affiliated Practices or the Initial
Affiliated Practices, or any predecessor entity, and none has ever occurred. No
representation question exists respecting the employees of any of the Company,
the Corporate Initial Affiliated Practices and the Initial Affiliated Practices
and no collective bargaining agreement or modification thereof is currently
being negotiated by any of the Company, the Corporate Initial Affiliated
Practices and the Initial Affiliated Practices. No grievance or arbitration
proceeding is pending under any expired or existing collective bargaining
agreements of any of the Company, the Corporate Initial Affiliated Practices and
the Initial Affiliated Practices. No labor dispute with the employees of any of
the Company, the Corporate Initial Affiliated Practices and the Initial
Affiliated Practices exists, or, is imminent.
(q) None of the Company, the Corporate Initial Affiliated Practices
nor the Initial Affiliated Practices maintains, sponsors or contributes to any
program or arrangement that is an "employee pension benefit plan," an "employee
welfare benefit plan," or a "multiemployer plan" as such terms are defined in
Sections 3(2), 3(1) and 3(37), respectively, of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA") ("ERISA Plans"). None of the
Company, the Corporate Initial Affiliated Practices nor the Initial Affiliated
Practices maintains or contributes, now or at any time previously, to a defined
benefit plan, as defined in Section 3(35) of ERISA. No ERISA Plan (or any trust
created thereunder) has engaged in a "prohibited transaction" within the meaning
of Section 406 of ERISA or Section 4975 of the Code, which could subject the
Company, the Corporate Initial Affiliated Practices and the Initial Affiliated
Practices to any tax penalty on prohibited transactions and which has not
adequately been corrected. Each ERISA Plan is in compliance with all reporting,
disclosure and other requirements of the Code and ERISA as then relate to any
such ERISA Plan. Determination letters have been received from the Internal
Revenue Service with respect to each ERISA Plan which is intended to comply with
Code Section 401(a), stating that such ERISA Plan and the attendant trust are
qualified thereunder. None of the Company, the Corporate Initial Affiliated
Practices nor the Initial Affiliated Practices has ever completely or partially
withdrawn from a "multiemployer plan."
(r) None of the Company, the Corporate Entities nor the Initial
Affiliated Practices, nor any of its or their respective employees, directors,
stockholders, partners, or affiliates (within the meaning of the Rules and
Regulations) of any of the foregoing has taken or will take, directly or
indirectly, any action designed to or which has constituted or which might be
expected to cause or result in, under the Exchange Act, or otherwise,
stabilization or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Securities or otherwise.
(s) Each of the Company, the Corporate Initial Affiliated Practices
and the Initial Affiliated Practices has good and marketable title to, or valid
and enforceable leasehold estates
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in, all items of real and personal property stated in the Prospectus to be owned
or leased by it, free and clear of all liens, charges, claims, encumbrances,
pledges, security interests, defects, or other restrictions or equities of any
kind whatsoever, except such as do not materially and adversely affect the value
of such property taken as a whole and do not interfere with the use made or
proposed to be made of such property by the Company, the Corporate Initial
Affiliated Practices and the Initial Affiliated Practices other than those
referred to in the Prospectus and liens for taxes not net due and payable.
(t) Feldman Radin & Co., P.C., whose report is filed with the
Commission as a part of the Registration Statement, are independent certified
public accountants as required by the Act and the Rules and Regulations.
(u) The Company has caused to be duly executed legally binding and
enforceable agreements pursuant to which each of the Company's officers,
directors, stockholders and holders of securities exchangeable or exercisable
for or convertible into shares of Common Stock has agreed (i) not to, directly
or indirectly, issue, offer, offer to sell, sell, grant any option for the sale
or purchase of, assign, transfer, pledge, hypothecate or otherwise encumber or
dispose of any shares of Common Stock or securities convertible into,
exercisable or exchangeable for or evidencing any right to purchase or subscribe
for any shares of Common Stock (either pursuant to Rule 144 of the Rules and
Regulations or otherwise) or dispose of any beneficial interest therein for a
period of not less than twenty-four (24) months following the effective date of
the Registration Statement without the prior written consent of the
Representatives and the Company and (ii) to waive all rights to request or
demand the registration pursuant to the Act of any securities of the Company
which are registered in the name of or beneficially owned by any such holder.
During the 24 month period commencing on the effective date of the Registration
Statement, the Company shall not, without the prior written consent of the
Representatives, sell, contract or offer to sell, issue, transfer, assign,
pledge, distribute, or otherwise dispose of, directly or indirectly, any shares
of Common Stock or any options, rights or warrants with respect to any shares of
Common Stock except (i) pursuant to the Acquisition Agreements entered into by
the Company prior to the date of, and described in, the Prospectus, (ii)
pursuant to awards that may be made from time to time following the date of the
Prospectus under the 1996 Stock Option Plan, as such plan may be amended from
time to time by the stockholders of the Company and (iii) pursuant to
Acquisition Agreements to be entered into by the Company from time to time which
have been approved by the Board of Directors of the Company and are on a basis
consistent with the Acquisition Agreements entered into by the Company prior to
the date hereof and described in the Prospectus. The Company will cause the
Transfer Agent (as hereinafter defined) to mark an appropriate legend on the
face of stock certificates representing all of such securities and to place
"stop transfer" orders on the Company's stock ledgers.
(v) There are no claims, payments, issuances, arrangements or
understandings, whether oral or written, for services in the nature of a
finder's or origination fee with respect to the sale of the Securities hereunder
or any other arrangements, agreements, understandings, payments or issuance with
respect to the Company, the Corporate Entities or the Initial Affiliated
Practices, or any of its or their respective officers, directors, stockholders,
partners, employees
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or affiliates, that may affect the Underwriters' compensation, as determined by
the National Association of Securities Dealers, Inc. ("NASD"), except as
disclosed in the Prospectus.
(w) The Common Stock, Redeemable Warrants and the Convertible
Debentures have been approved for quotation on the American Stock Exchange
("Amex").
(x) None of the Company, the Corporate Initial Affiliated Practices
or the Initial Affiliated Practices, nor any of its or their respective
officers, employees, agents or any other person acting on behalf of any of the
Company, the Corporate Initial Affiliated Practices or the Initial Affiliated
Practices has, directly or indirectly, given or agreed to give any money, gift
or similar benefit (other than legal price concessions to customers in the
ordinary course of business) to any customer, supplier, employee or agent of a
customer or supplier, or official or employee of any governmental agency
(domestic or foreign) or instrumentality of any government (domestic or foreign)
or any political party or candidate for office (domestic or foreign) or other
person who was, is, or may be in a position to help or hinder the business of
any of the Company, the Corporate Initial Affiliated Practices or the Initial
Affiliated Practices (or assist any of the Company, the Corporate Initial
Affiliated Practices or the Initial Affiliated Practices in connection with any
actual or proposed transaction) which (a) might subject any of the Company, the
Corporate Initial Affiliated Practices or the Initial Affiliated Practices or
any other such person to any damage or penalty in any civil, criminal or
governmental litigation or proceeding (domestic or foreign), (b) if not given in
the past, might have had a material adverse effect on the assets, business or
operations of any of the Company, the Corporate Initial Affiliated Practices or
the Initial Affiliated Practices, or (c) if not continued in the future, might
adversely affect the assets, business, condition, financial or otherwise,
earnings, position, properties, value, operations or prospects of any of the
Company, the Corporate Initial Affiliated Practices or the Initial Affiliated
Practices. The Company's and each of the Corporate Initial Affiliated
Practices' and the Initial Affiliated Practices' internal accounting controls
are sufficient to cause each of the Company, the Corporate Initial Affiliated
Practices or the Initial Affiliated Practices to comply with the Foreign Corrupt
Practices Act of 1977, as amended.
(y) Except as set forth in the Prospectus, no officer, director,
stockholder or partner of the Company, the Corporate Initial Affiliated
Practices or the Initial Affiliated Practices, or any "affiliate" or "associate"
(as these terms are defined in Rule 405 promulgated under the Rules and
Regulations) of any of the foregoing persons or entities has or has had, either
directly or indirectly, (i) an interest in any person or entity which
(A) furnishes or sells services or products which are furnished or sold or are
proposed to be furnished or sold by any of the Company, the Corporate Initial
Affiliated Practices or the Initial Affiliated Practices, or (B) purchases from
or sells or furnishes to any of the Company, the Corporate Initial Affiliated
Practices or the Initial Affiliated Practices any goods or services, or (ii) a
beneficiary interest in any contract or agreement to which the Company, the
Corporate Initial Affiliated Practices or the Initial Affiliated Practices is a
party or by which it may be bound or affected. Except as set forth in the
Prospectus under "Management" and "Certain Transactions," there are no existing
agreements, arrangements, understandings or transactions, or proposed
agreements, arrangements, understandings or transactions, between or among the
Company, the Corporate Entities or the Initial Affiliated Practices, and any
officer, director, or 5% or greater
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securityholder of any of the Company, the Corporate Entities or the Initial
Affiliated Practices, or any partner, affiliate or associate of any of the
foregoing persons or entities.
(z) Any certificate signed by any officer of the Company or any of
the Corporate Entities and the Initial Affiliated Practices, and delivered to
the Underwriters or to Underwriters' Counsel (as defined herein) shall be deemed
a representation and warranty by the Company to the Underwriters as to the
matters covered thereby.
(aa) The minute books of each of the Company and the Corporate
Entities have been made available to the Underwriters and contain a complete
summary of all meetings and actions of the directors (including committees
thereof) and stockholders of each of the Company and the Corporate Entities,
since the time of its incorporation, and reflect all transactions referred to in
such minutes accurately in all material respects.
(ab) Except and to the extent described in the Prospectus, no holders
of any securities of the Company or of any options, warrants or other
convertible or exchangeable securities of the Company have the right to include
any securities issued by the Company in the Registration Statement or any
registration statement to be filed by the Company or to require the Company to
file a registration statement under the Act and no person or entity holds any
anti-dilution rights with respect to any securities of the Company.
(ac) The Company has as of the effective date of the Registration
Statement (i) entered into an employment agreement with each of Scott G.
Pollock, Dennis B. Liotta, M.D., Peter Heisen, M.D. and Randall K. Sprau in the
form filed as Exhibit 10.__, Exhibit 10.__, 10.__ and Exhibit 10.__,
respectively, to the Registration Statement and (ii) purchased term key person
insurance on the life of each of Mr. Pollock, Mr. Heisen and Mr. Liotta in the
amount of $1 million which policy names the Company as the sole beneficiary
thereof.
(ad) The Company is not, and upon the issuance and sale of the
Securities as herein contemplated and the application of the net proceeds
therefrom as described in the Prospectus under the caption "Use of Proceeds"
will not be, an "investment company" or an entity "controlled" by an "investment
company" as such terms are defined in the Investment Company Act of 1940, as
amended (the "1940 Act").
(ae) Each of the Company, the Corporate Initial Affiliated Practices
or the Initial Affiliated Practices maintain a system of internal accounting
controls sufficient to provide reasonable assurance that (i) transactions are
executed in accordance with management's general or specific authorizations;
(ii) transactions are recorded as necessary to permit preparations 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 authorizations; and (iv) the
recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
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(af) Prior to the date hereof, the Company has entered into (i)
Acquisition Agreements with each of the Corporate Initial Affiliated Practices
and the Initial Affiliated Practices in the form filed as Exhibits [2.__]
through [2.__], inclusive, to the Registration Statement (the "Acquisition
Agreements") and (ii) the Practice Management Services Agreements ("PMSA") with
____________ in the form filed as Exhibits [2.__] to the Registration Statement.
Each of the Acquisition Agreements and the PMSA has been duly and validly
authorized, executed and delivered by the Company and to the best of the
Company's knowledge, by each of the Corporate Entities and the Initial
Affiliated Practices, and constitutes valid and binding obligations of the
Company and to the knowledge of the Company, the Corporate Entities and the
Initial Affiliated Practices in accordance with the respective terms of the
Acquisition Agreements and the PMSA. In accordance with the Certificate of
Incorporation and By-Laws of the Company and applicable law, rules and
regulations, all consents, approvals, authorizations, permissions, waivers,
orders and permits required to authorize, approve and consummate the Acquisition
Agreements, the PMSA and the transactions contemplated thereby, on behalf of the
Company and to the Company's best knowledge, by each of the Corporate Entities
and the Initial Affiliated Practices, have been duly and validly obtained or
will be obtained prior to the consummation of such transaction and remain in
full force and effect.
(ag) The Company has entered into a warrant agreement, substantially
in the form filed as Exhibit ___ to the Registration Statement (the "Warrant
Agreement"), with Continental Stock Transfer & Trust Company, in form and
substance satisfactory to the Representatives, with respect to the Redeemable
Warrants which provides, among other things, for the payment of commissions
contemplated by SECTION 4(w) hereof. The Warrant Agreement has been duly and
validly authorized by the Company and, assuming due execution by the parties
thereto other than the Company, constitutes a valid and legally binding
agreement of the Company in accordance with its terms (except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, or other laws of general application relating to or
affecting the enforcement of creditors' rights and the application of equitable
principles in any action, legal or equitable, and except as obligations to
indemnify or contribute to losses may be limited by applicable law).
2. PURCHASE, SALE AND DELIVERY OF THE SECURITIES.
(a) On the basis of the representations, warranties, covenants and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company agrees to sell to each Underwriter, and each Underwriter,
severally and not jointly, agrees to purchase from the Company at a price of
$_______ [92.5% of the public offering price] per Share, $_______ [92.5% of the
public offering price] per Redeemable Warrant and $_______ [92.5% of the public
offering price] per Convertible Debenture, that number of Firm Securities set
forth in Schedule A opposite the name of such Underwriter, subject to such
adjustment as the Representatives in its sole discretion shall make to eliminate
any sales or purchases of fractional shares, plus any additional number of Firm
Securities which such Underwriter may become obligated to purchase pursuant to
the provisions of SECTION 11 hereof.
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(b) In addition, on the basis of the representations, warranties,
covenants and agreements herein contained, but subject to the terms and
conditions herein set forth, the Company hereby grants an option to the
Underwriters, severally and not jointly, to purchase all or any part of an
additional 300,000 shares of Common Stock at a price of $______ [92.5% of the
public offering price] per share of Common Stock, 300,000 Redeemable Warrants at
a price of $______ [92.5% of the public offering price] per Redeemable Warrant
and/or $3,750,000 aggregate principal amount of Convertible Debentures at a
price of $______ [92.5% of the public offering price] per Convertible Debenture.
The option granted hereby will expire forty-five (45) days after (i) the date
the Registration Statement becomes effective, if the Company has elected not to
rely on Rule 430A under the Rules and Regulations, or (ii) the date of this
Agreement if the Company has elected to rely upon Rule 430A under the Rules and
Regulations, and may be exercised in whole or in part from time to time only for
the purpose of covering over-allotments which may be made in connection with the
offering and distribution of the Firm Securities upon notice by the
Representatives to the Company setting forth the number of Option Securities as
to which the several Underwriters are then exercising the option and the time
and date of payment and delivery for any such Option Securities. Any such time
and date of delivery (an "Option Closing Date") shall be determined by the
Representatives, but shall not be later than three (3) full business days after
the exercise of said option, nor in any event prior to the Closing Date, as
hereinafter defined, unless otherwise agreed upon by the Representatives and the
Company. Nothing herein contained shall obligate the Underwriters to make any
over-allotments. No Option Securities shall be delivered unless the Firm
Securities shall be simultaneously delivered or shall theretofore have been
delivered as herein provided.
(c) Payment of the purchase price for, and delivery of certificates
for, the Firm Securities shall be made at the offices of Nolan at 405 Lexington
Avenue, 45th Floor, New York, New York, 10174, or at such other place as shall
be agreed upon by the Representatives and the Company. Such delivery and
payment shall be made at 10:00 a.m. (New York City time) on ,
1997 or at such other time and date as shall be agreed upon by the
Representatives and the Company, but not less than three (3) nor more than five
(5) full business days after the effective date of the Registration Statement
(such time and date of payment and delivery being herein called the "Closing
Date"). In addition, in the event that any or all of the Option Securities are
purchased by the Underwriters, payment of the purchase price for, and delivery
of certificates for, such Option Securities shall be made at the above-mentioned
office of the Representatives or at such other place as shall be agreed upon by
the Representatives and the Company on each Option Closing Date as specified in
the notice from the Representatives to the Company. Delivery of the
certificates for the Firm Securities and the Option Securities, if any, shall be
made to the Underwriters against payment by the Underwriters, severally and not
jointly, of the purchase price for the Firm Securities and the Option
Securities, if any, to the order of the Company for the Firm Securities and the
Option Securities, if any, by New York Clearing House funds. In the event such
option is exercised, each of the Underwriters, acting severally and not jointly,
shall purchase that proportion of the total number of Option Securities then
being purchased which the number of Firm Securities set forth in Schedule A
hereto opposite the name of such Underwriter bears to the total number of Firm
Securities, subject in each case to such adjustments as the Representatives in
its discretion shall make to eliminate any sales or purchases of fractional
shares. Certificates for the Firm Securities and the Option
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Securities, if any, shall be in definitive, fully registered form, shall bear no
restrictive legends and shall be in such denominations and registered in such
names as the Underwriters may request in writing at least two (2) business days
prior to the Closing Date or the relevant Option Closing Date, as the case may
be. The certificates for the Firm Securities and the Option Securities, if any,
shall be made available to the Representatives at such office or such other
place as the Representatives may designate for inspection, checking and
packaging no later than 9:30 a.m. on the last business dan prior to the Closing
Date or the relevant Option Closing Date, as the case may be.
(d) On the Closing Date, the Company shall issue and sell to the
Representative Representatives' Warrants at a purchase price of $.0001 per
warrant, which Representatives' Warrants shall entitle the holders thereof to
purchase an aggregate of 200,000 shares of Common Stock, 200,000 Redeemable
Warrants and/or $2,500,000 aggregate principal amount of Convertible Debentures
(excluding the Option Securities) being underwritten for the account of the
Company. The Representatives' Warrants shall be exercisable for a period of
four (4) years commencing one (1) year from the effective date of the
Registration Statement at a price equaling one hundred twenty percent (120%) of
the respective initial public offering price of the Shares, Redeemable Warrants
and the Convertible Debentures. The Representatives' Warrant Agreement and form
of Warrant Certificate shall be substantially in the form filed as Exhibit [4.5]
to the Registration Statement. Payment for the Representatives' Warrants shall
be made on the Closing Date.
3. PUBLIC OFFERING OF THE SHARES AND CONVERTIBLE DEBENTURES. As soon
after the Registration Statement becomes effective as the Representatives deems
advisable, the Underwriters shall make a public offering of the Shares,
Redeemable Warrants and Convertible Debentures (other than to residents of or in
any jurisdiction in which qualification of the Shares, Redeemable Warrants and
Convertible Debentures is required and has not become effective) at the price
and upon the other terms set forth in the Prospectus. The Representatives may
from time to time increase or decrease the respective public offering price
after distribution of the Shares, Redeemable Warrants and Convertible Debentures
has been completed to such extent as the Representatives, in its sole discretion
deems advisable. The Underwriters may enter into one of more agreements as the
Underwriters, in each of their sole discretion, deem advisable with one or more
broker-dealers who shall act as dealers in connection with such public offering.
4. COVENANTS AND AGREEMENTS OF THE COMPANY. The Company covenants and
agrees with each of the Underwriters as follows:
(a) The Company shall use its best efforts to cause the Registration
Statement and any amendments thereto to become effective as promptly as
practicable and will not at any time, whether before or after the effective date
of the Registration Statement, file any amendment to the Registration Statement
or supplement to the Prospectus or file any document under the Act or Exchange
Act before termination of the offering of the Shares, Redeemable Warrants and
Convertible Debentures by the Underwriters of which the Representatives shall
not previously have been advised and furnished with a copy, or to which the
Representatives shall have objected or which is not in compliance with the Act,
the Exchange Act or the Rules and Regulations.
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(b) As soon as the Company is advised or obtains knowledge thereof,
the Company will advise the Representatives and confirm the notice in writing
(i) when the Registration Statement, as amended, becomes effective, if the
provisions of Rule 430A promulgated under the Act will be relied upon, when the
Prospectus has been filed in accordance with said Rule 430A and when any
post-effective amendment to the Registration Statement becomes effective;
(ii) of the issuance by the Commission of any stop order or of the initiation,
or the threatening, of any proceeding suspending the effectiveness of the
Registration Statement or any order preventing or suspending the use of the
Preliminary Prospectus or the Prospectus, or any amendment or supplement
thereto, or the institution of proceedings for that purpose; (iii) of the
issuance by the Commission or by any state securities commission of any
proceedings for the suspension of the qualification of any of the Securities for
offering or sale in any jurisdiction or of the initiation, or the threatening,
of any proceeding for that purpose; (iv) of the receipt of any comments from the
Commission; and (v) of any request by the Commission for any amendment to the
Registration Statement or any amendment or supplement to the Prospectus or for
additional information. If the Commission or any state securities commission
shall enter a stop order or suspend such qualification at any time, the Company
will make every effort to obtain promptly the lifting of such order.
(c) The Company shall file the Prospectus (in form and substance
satisfactory to the Representatives) or transmit the Prospectus by a means
reasonably calculated to result in filing with the Commission pursuant to Rule
424(b)(1) (or, if applicable and if consented to by the Representatives,
pursuant to Rule 424(b)(4)) not later than the Commission's close of business on
the earlier of (i) the second business day following the execution and delivery
of this Agreement and (ii) the fifth business day after the effective date of
the Registration Statement.
(d) The Company will give the Representatives notice of its intention
to file or prepare any amendment to the Registration Statement (including any
post-effective amendment) or any amendment or supplement to the Prospectus
(including any revised prospectus which the Company proposes for use by the
Underwriters in connection with the offering of the Securities which differs
from the corresponding prospectus on file at the Commission at the time the
Registration Statement becomes effective, whether or not such revised prospectus
is required to be filed pursuant to Rule 424(b) of the Rules and Regulations),
and will furnish the Representatives with copies of any such amendment or
supplement a reasonable amount of time prior to such proposed filing or use, as
the case may be, and, except as may reasonably be required by law, will not file
any such prospectus to which the Representatives or Orrick, Herrington &
Sutcliffe LLP ("Underwriters' Counsel") shall object.
(e) The Company shall endeavor in good faith, in cooperation with the
Representatives, at or prior to the time the Registration Statement becomes
effective, to qualify the Securities for offering and sale under the securities
laws of such jurisdictions as the Representatives may designate to permit the
continuance of sales and dealings therein for as long as may be necessary to
complete the distribution, and shall make such applications, file such documents
and furnish such information as may be required for such purpose; PROVIDED,
HOWEVER, the Company shall not be required to qualify as a foreign corporation
or file a general or limited consent to service of process in any such
jurisdiction. In each jurisdiction where such
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qualification shall be effected, the Company will, unless the Representatives
agrees that such action is not at the time necessary or advisable, use all
reasonable efforts to file and make such statements or reports at such times as
are or may reasonably be required by the laws of such jurisdiction to continue
such qualification.
(f) During the time when a prospectus is required to be delivered
under the Act, the Company shall use all reasonable efforts to comply with all
requirements imposed upon it by the Act and the Exchange Act, as now and
hereafter amended and by the Rules and Regulations, as from time to time in
force, so far as necessary to permit the continuance of sales of or dealings in
the Securities in accordance with the provisions hereof and the Prospectus, or
any amendments or supplements thereto. If at any time when a prospectus
relating to the Securities is required to be delivered under the Act, any event
shall have occurred as a result of which, in the opinion of counsel for the
Company or Underwriters' Counsel, the Prospectus, as then amended or
supplemented, includes an untrue statement of a material fact or omits 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, or if it is necessary at any time to amend the Prospectus to
comply with the Act, the Company will notify the Representatives promptly and
prepare and file with the Commission an appropriate amendment or supplement in
accordance with Section 10 of the Act, each such amendment or supplement to be
satisfactory to Underwriters' Counsel, and the Company will furnish to the
Underwriters copies of such amendment or supplement as soon as available and in
such quantities as the Underwriters may request.
(g) As soon as practicable, but in any event not later than
forty-five (45) days after the end of the 12-month period beginning on the day
after the end of the fiscal quarter of the Company during which the effective
date of the Registration Statement occurs (ninety (90) days in the event that
the end of such fiscal quarter is the end of the Company's fiscal year), the
Company shall make generally available to its security holders, in the manner
specified in Rule 158(b) of the Rules and Regulations, and to the
Representatives, an earnings statement which will be in the detail required by,
and will otherwise comply with, the provisions of Section 11(a) of the Act and
Rule 158(a) of the Rules and Regulations, which statement need not be audited
unless required by the Act, covering a period of at least twelve (12)
consecutive months after the effective date of the Registration Statement.
(h) During a period of seven (7) years after the date hereof, the
Company will furnish to its stockholders, as soon as practicable, annual reports
(including financial statements audited by independent public accountants) and
unaudited quarterly reports of earnings, and will deliver to the
Representatives:
i.concurrently with furnishing such quarterly reports to its
stockholders, statements of income of the Company for each quarter in the
form furnished to the Company's stockholders and certified by the Company's
principal financial or accounting officer;
ii.concurrently with furnishing such annual reports to its
stockholders, a balance sheet of the Company as at the end of the preceding
fiscal year, together with statements
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of operations, stockholders' equity, and cash flows of the Company for such
fiscal year, accompanied by a copy of the certificate thereon of
independent certified public accountants;
iii.as soon as they are available, copies of all reports (financial or
other) mailed to stockholders;
iv.as soon as they are available, copies of all reports and financial
statements furnished to or filed with the Commission, the NASD or any
securities exchange;
v.every press release and every material news item or article of
interest to the financial community in respect of the Company, or its
affairs, which was released or prepared by or on behalf of the Company; and
vi.any additional information of a public nature concerning the
Company (and any future subsidiary) or its businesses which the
Representatives may request.
During such seven-year period, if the Company has an active subsidiary, the
foregoing financial statements will be on a consolidated basis to the extent
that the accounts of the Company and its subsidiary(ies) are consolidated, and
will be accompanied by similar financial statements for any significant
subsidiary which is not so consolidated.
(i) The Company will maintain a transfer agent ("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 and a trustee ("Trustee") for the Convertible Debentures.
(j) The Company will furnish to the Representatives or on the
Representatives' order, without charge, at such place as the Representatives may
designate, copies of each Preliminary Prospectus, the Registration Statement and
any pre-effective or post-effective amendments thereto (two of which copies will
be signed and will include all financial statements and exhibits), the
Prospectus, and all amendments and supplements thereto, including any prospectus
prepared after the effective date of the Registration Statement, in each case as
soon as available and in such quantities as the Representatives may request.
(k) On or before the effective date of the Registration Statement,
the Company shall provide the Representatives with true original copies of duly
executed, legally binding and enforceable agreements pursuant to which, for a
period of eighteen (18) months from the effective date of the Registration
Statement, each of the Company's stockholders and holders of securities
exchangeable or exercisable for or convertible into shares of Common Stock
agrees that it or he or she (i) will not, directly or indirectly, issue, offer
to sell, sell, grant an option for the sale or purchase of, assign, transfer,
pledge, hypothecate or otherwise encumber or dispose of any shares of Common
Stock or securities convertible into, exercisable or exchangeable for or
evidencing any right to purchase or subscribe for any shares of Common Stock
(either pursuant to Rule 144 of the Rules and Regulations or otherwise) or
dispose of any
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beneficial interest therein without the prior consent of the Representatives
(collectively, the "Lock-up Agreements") and (ii) waives, during such 18 month
period, any and all rights to request or demand the registration pursuant to the
Act, of any securities of the Company which are registered in the name of or
beneficially owned by it or he or she, respectively. Except (i) pursuant to the
Acquisition Agreements entered into by the Company prior to the date of, and
described in, the Prospectus, (ii) pursuant to awards that may be made from time
to time following the date of the Prospectus under the 1996 Stock Option Plan,
as such plan may be amended from time to time by the stockholders of the Company
and (iii) pursuant to Acquisition Agreements to be entered into by the Company
from time to time which have been approved by the Board of Directors of the
Company and are on a basis consistent with the Acquisition Agreements entered
into by the Company prior to the date hereof and described in the Prospectus,
during the 18 month period commencing on the effective date of the Registration
Statement, the Company shall not, without the prior written consent of the
Representatives, sell, contract or offer to sell, issue, transfer, assign,
pledge, distribute, or otherwise dispose of, directly or indirectly, any shares
of Common Stock or any options, rights or warrants with respect to any shares of
Common Stock. On or before the Closing Date, the Company shall deliver
instructions to the Transfer Agent authorizing it to place appropriate legends
on the certificates representing the securities subject to the Lock-up
Agreements and to place appropriate stop transfer orders on the Company's
ledgers.
(l) None of the Company, the Corporate Entities or the Initial
Affiliated Practices, nor any of its or their respective officers, directors,
stockholders, nor any of its or their respective affiliates (within the meaning
of the Rules and Regulations) will take, directly or indirectly, any action
designed to, or which might in the future reasonably be expected to cause or
result in, stabilization or manipulation of the price of any securities of the
Company.
(m) The Company shall apply the net proceeds from the sale of the
Securities in the manner, and subject to the conditions, set forth under "Use of
Proceeds" in the Prospectus. No portion of the net proceeds will be used,
directly or indirectly, to acquire any securities issued by the Company.
(n) The Company shall timely file all such reports, forms or other
documents as may be required (including, but not limited to, a Form SR as may be
required pursuant to Rule 463 under the Act) from time to time, under the Act,
the Exchange Act, and the Rules and Regulations, and all such reports, forms and
documents filed will comply as to form and substance with the applicable
requirements under the Act, the Exchange Act, and the Rules and Regulations.
(o) The Company shall furnish to the Representatives as early as
practicable prior to each of the date hereof, the Closing Date and each Option
Closing Date, if any, but no later than two (2) full business days prior
thereto, a copy of the latest available unaudited interim financial statements
of the Company (which in no event shall be as of a date more than thirty (30)
days prior to the date of the Registration Statement) which have been read by
the Company's independent public accountants, as stated in their letters to be
furnished pursuant to SECTIONS 6(k) and 6(l) hereof.
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(p) The Company shall cause the Common Stock and Convertible
Debentures to be quoted on Amex and, for a period of seven (7) years from the
date hereof, use its best efforts to maintain the Amex quotation of the Common
Stock and the Convertible Debentures to the extent outstanding.
(q) For a period of five (5) years from the Closing Date, the Company
shall furnish to the Representatives at the Company's sole expense, (i) daily
consolidated transfer sheets relating to the Common Stock and Convertible
Debentures (ii) the list of holders of all of the Company's securities and (iii)
a Blue Sky "Trading Survey" for secondary sales of the Company's securities
prepared by counsel to the Company.
(r) As soon as practicable, (i) but in no event more than five (5)
business days before the effective date of the Registration Statement, file a
Form 8-A with the Commission providing for the registration under the Exchange
Act of the Securities and (ii) but in no event more than thirty (30) days after
the effective date of the Registration Statement, take all necessary and
appropriate actions to be included in Standard and Poor's Corporation
Descriptions and Moody's OTC Manual and to continue such inclusion for a period
of not less than seven (7) years.
(s) The Company hereby agrees that it will not, for a period of
twelve (12) months from the effective date of the Registration Statement, adopt,
propose to adopt or otherwise permit to exist any employee, officer, director,
consultant or compensation plan or similar arrangement permitting (i) the grant,
issue, sale or entry into any agreement to grant, issue or sell any option,
warrant or other contract right (x) at an exercise price that is less than the
greater of the public offering price of the Shares set forth herein and the fair
market value on the date of grant or sale or (y) to any of its executive
officers or directors or to any holder of 5% or more of the Common Stock, except
as provided in subsection (ii) of this subparagraph; (ii) the maximum number of
shares of Common Stock or other securities of the Company purchasable at any
time pursuant to options or warrants issued by the Company to exceed the
aggregate 300,000 shares reserved for future issuance under the Company's Stock
Option Plan; (iii) the payment for such securities with any form of
consideration other than cash; or (iv) the existence of stock appreciation
rights, phantom options or similar arrangements.
(t) Until the completion of the distribution of the Securities, the
Company shall not, without the prior written consent of the Representatives and
Underwriters' Counsel or as required under the Exchange Act, issue, directly or
indirectly, any press release or other communication or hold any press
conference with respect to the Company or its activities or the offering
contemplated hereby, other than trade releases issued in the ordinary course of
the Company's business consistent with past practices with respect to the
Company's operations.
(u) For a period equal to the lesser of (i) seven (7) years from the
date hereof, and (ii) the sale to the public of the Representatives' Securities,
the Company will not take any action or actions which may prevent or disqualify
the Company's use of Form S-1 (or other appropriate form) for the registration
under the Act of the Representatives' Securities. The Company further agrees to
use its best efforts to file such post-effective amendments to the Registration
Statement,
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as may be necessary, in order to maintain its effectiveness and to keep such
Registration Statement effective while any of the Convertible Debentures or
Representatives' Warrants remain outstanding.
(v) For a period of five (5) years after the effective date of the
Registration Statement, the Company shall cause one (1) individual selected by
the Representatives to be elected to the board of directors of the Company, if
requested by the Representatives. In the event that the Representatives shall
not have designated such individual at the time of any meeting of the Company's
board of directors or in the event that such individual has not been elected or
is unavailable to serve, the Company shall notify the Representatives of each
meeting of its board of directors and, in such event, an individual selected by
the Representatives shall be permitted to attend all meetings of the Company's
board of directors as a non-voting advisor and to receive all notices and other
correspondence and communications sent by the Company to the members of its
board of directors. Such board member or non-voting advisor shall receive no
more or less director compensation than is paid to other non-officer directors
of the Company for attendance at meetings of the Company's board of directors
and such board member or non-voting advisor shall be entitled to receive
reimbursement for all reasonable costs incurred in attending such meetings,
including, but not limited to, food, lodging and transportation. The Company
hereby agrees to indemnify and hold such director or non-voting advisor
harmless, to the maximum extent permitted by law, against any and all actions,
suits, proceedings, inquiries, arbitrations, investigations, litigation,
governmental or other proceedings, domestic or foreign, and awards and judgments
arising out of such individual's service as a director or non-voting advisor
and, in the event that the Company maintains a liability insurance policy
affording coverage for the acts of its officers and directors, and/or in the
event that the Company has entered into an indemnification agreement with any of
its officers or directors, the Company agrees to include such director or
non-voting advisor as an insured under such insurance policy and/or to enter
into an indemnification agreement with such director or non-voting advisor which
is at least as favorable to such individual as any indemnification agreement
that the Company has entered into with any of its officers or directors. The
rights and benefits of such indemnification and the benefits of such insurance
shall, to the maximum extent possible, extend to the Representatives insofar as
it may be or may be alleged to be responsible for such director or non-voting
advisor. The Company agrees to provide its outside directors with compensation
as deemed appropriate and customary for similar companies.
(w) Commencing one year from the date hereof, the Company shall pay the
Representatives a commission equal to five percent (5%) of the exercise price of
the Redeemable Warrants, payable upon exercise thereof on the terms set forth in
the Warrant Agreement. The Company will not solicit the exercise of the
Redeemable Warrants other than through the Representatives.
5. PAYMENT OF EXPENSES.
(a) The Company hereby agrees to pay on each of the Closing Date and
the Option Closing Date (to the extent not paid at the Closing Date) all
expenses and fees (other than fees of Underwriters' Counsel, except as provided
in (iv) below) incident to the performance of the
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obligations of the Company under this Agreement, the Warrant Agreement and the
Representatives' Warrant Agreement, including, without limitation, (i) the fees
and expenses of accountants and counsel for the Company, (ii) all costs and
expenses incurred in connection with the preparation, duplication, printing
(including mailing and handling charges), filing, delivery and mailing
(including the payment of postage with respect thereto) of the Registration
Statement and the Prospectus and any amendments and supplements thereto and the
printing, mailing (including the payment of postage with respect thereto) and
delivery of this Agreement, the Warrant Agreement, the Representatives' Warrant
Agreement, the Agreement Among Underwriters, the Selected Dealer Agreements, and
related documents, including the cost of all copies thereof and of the
Preliminary Prospectuses and of the Prospectus and any amendments thereof or
supplements thereto supplied to the Underwriters and such dealers as the
Underwriters may request, in quantities as hereinabove stated, (iii) the
printing, engraving, issuance and delivery of the Securities including, but not
limited to, (x) the purchase by the Underwriters of the Firm Securities and the
Option Securities and the purchase by the Representatives of the
Representatives' Warrants from the Company, (y) the consummation by the Company
of any of its obligations under this Agreement and the Representatives' Warrant
Agreement, and (z) resale of the Firm Securities and the Option Securities by
the Underwriters in connection with the distribution contemplated hereby,
(iv) the qualification of the Securities under state or foreign securities or
"Blue Sky" laws and determination of the status of such securities under legal
investment laws, including the costs of printing and mailing the "Preliminary
Blue Sky Memorandum", the "Supplemental Blue Sky Memorandum" and "Legal
Investments Survey," if any, and disbursements and fees of counsel in connection
therewith, (v) advertising costs and expenses, including but not limited to
costs and expenses in connection with the "road show", information meetings and
presentations, bound volumes and prospectus memorabilia and "tomb-stone"
advertisement expenses, (vi) costs and expenses in connection with due diligence
investigations, including but not limited to the fees of any independent
counsel, expert or consultant retained, (vii) fees and expenses of the Transfer
Agent, Trustee and registrar and all issue and transfer taxes, if any,
(viii) applications for assignment of a rating of the Securities by qualified
rating agencies, (ix) the fees payable to the Commission and the NASD, and (x)
the fees and expenses incurred in connection with the quotation of the
Securities on Amex and any other exchange.
(b) If this Agreement is terminated by the Underwriters in accordance
with the provisions of SECTION 6 or SECTION 12, the Company shall reimburse and
indemnify the Underwriters for all of their actual out-of-pocket expenses,
including the fees and disbursements of Underwriters' Counsel, less any amounts
already paid pursuant to SECTION 5(c) hereof.
(c) The Company further agrees that, in addition to the expenses
payable pursuant to subsection (a) of this SECTION 5, it will pay to the
Representatives on the Closing Date by certified or bank cashier's check or, at
the election of the Representatives, by deduction from the proceeds of the
offering contemplated herein a non-accountable expense allowance equal to two
percent (2%) of the gross proceeds received by the Company from sale of the Firm
Securities, $25,000 of which has been paid to date. In the event the
Representatives elect to exercise the over-allotment option described in Section
2(b) hereof, the Company agrees to pay to the Representatives on the Option
Closing Date (by certified or bank cashier's check or, at
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the Representatives' election, by deduction from the proceeds of the offering) a
non-accountable expense allowance equal to two percent (2%) of the gross
proceeds received by the Company from the sale of the Option Securities.
6. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS. The obligations of the
Underwriters hereunder shall be subject to the continuing accuracy of the
representations and warranties of the Company herein as of the date hereof and
as of the Closing Date and each Option Closing Date, if any, as if they had been
made on and as of the Closing Date or each Option Closing Date, as the case may
be; the accuracy on and as of the Closing Date or Option Closing Date, if any,
of the statements of the officers of the Company made pursuant to the provisions
hereof; and the performance by the Company on and as of the Closing Date and
each Option Closing Date, if any, of its covenants and obligations hereunder and
to the following further conditions:
(a) The Registration Statement shall have become effective not later
than 12:00 P.M., New York time, on the date of this Agreement or such later date
and time as shall be consented to in writing by the Representatives, and, at the
Closing Date and each Option Closing Date, if any, no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been instituted or shall be pending or
contemplated by the Commission and any request on the part of the Commission for
additional information shall have been complied with to the reasonable
satisfaction of Underwriters' Counsel. If the Company has elected to rely upon
Rule 430A of the Rules and Regulations, the price of the Shares, Redeemable
Warrants and Convertible Debentures and any price-related information previously
omitted from the effective Registration Statement pursuant to such Rule 430A
shall have been transmitted to the Commission for filing pursuant to Rule 424(b)
of the Rules and Regulations within the prescribed time period and, prior to the
Closing Date, the Company shall have provided evidence satisfactory to the
Representatives of such timely filing, or a post-effective amendment providing
such information shall have been promptly filed and declared effective in
accordance with the requirements of Rule 430A of the Rules and Regulations.
(b) The Representatives shall not have advised the Company that the
Registration Statement, or any amendment thereto, contains an untrue statement
of fact which, in the Representatives' opinion, is material, or omits to state a
fact which, in the Representatives' opinion, is material and is required to be
stated therein or is necessary to make the statements therein not misleading, or
that the Prospectus, or any supplement thereto, contains an untrue statement of
fact which, in the Representatives' opinion, is material, or omits to state a
fact which, in the Representatives' opinion, is material and is required to be
stated therein or is necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(c) On or prior to each of the Closing Date and each Option Closing
Date, if any, the Representatives shall have received from Underwriters'
Counsel, such opinion or opinions with respect to the organization of the
Company, the validity of the Securities, the Registration Statement, the
Prospectus and other related matters as the Representatives may request and
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Underwriters' Counsel shall have received such papers and information as they
request to enable them to pass upon such matters.
(d) At the Closing Date, the Underwriters shall have received the
favorable opinion of Brock Fensterstock Silver Stein McAuliffe & Wade LLC,
counsel to the Company, dated the Closing Date, addressed to the Underwriters
and in form and substance satisfactory to Underwriters' Counsel, and in
substantially the form of Schedule C hereto.
(e) At the Closing Date, the Underwriters shall have received the
favorable opinion of Kalogredis, Tsoules and Sweeney Ltd., regulatory counsel to
the Company, dated the Closing Date, addressed to the Underwriters, in form and
substance satisfactory to Underwriters' Counsel and in substantially the form of
Schedule B hereto.
(f) At each Option Closing Date, if any, the Underwriters shall have
received the favorable opinions of each of Brock Fensterstock Silver Stein
McAuliffe & Wade LLC, counsel to the Company, and Kalogredis, Tsoules and
Sweeney Ltd., regulatory counsel to the Company, dated such Option Closing Date,
addressed to the Underwriters and in form and substance satisfactory to
Underwriters' Counsel confirming as of such Option Closing Date the statements
made by each of Brock Fensterstock Silver Stein McAuliffe & Wade LLC, and
Kalogredis, Tsoules and Sweeney Ltd., in their respective opinions delivered on
the Closing Date.
(g) On or prior to each of the Closing Date and each Option Closing
Date, if any, Underwriters' Counsel shall have been furnished such documents,
certificates and opinions as they may reasonably require for the purpose of
enabling them to review or pass upon the matters referred to in subsection (c)
of this SECTION 6, or in order to evidence the accuracy, completeness or
satisfaction of any of the representations, warranties or conditions of the
Company, or herein contained.
(h) Prior to each of the Closing Date and each Option Closing Date,
if any, (i) there shall have been no material adverse change nor development
involving a prospective change in the condition, financial or otherwise,
earnings, position, value, properties, results of operations, prospects,
stockholders' equity or the business activities of any of the Company, the
Corporate Entities or the Initial Affiliated Practices, whether or not in the
ordinary course of business, from the latest dates as of which such condition is
set forth in the Registration Statement and Prospectus; (ii) there shall have
been no transaction, not in the ordinary course of business, entered into by any
of the Company, the Corporate Entities or the Initial Affiliated Practices, from
the latest date as of which the financial condition of the Company, the
Corporate Initial Affiliated Practices or the Initial Affiliated Practices is
set forth in the Registration Statement and Prospectus which is adverse to the
Company, the Corporate Entities or the Initial Affiliated Practices, (iii) none
of the Company, the Corporate Entities or the Initial Affiliated Practices shall
be in default under any provision of any instrument relating to any outstanding
indebtedness; (iv) none of the Company or the Corporate Entities shall have
issued any securities (other than the Securities) or declared or paid any
dividend or made any distribution in respect of its capital stock of any class
and there has not been any change in the capital stock or any
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material change in the debt (long or short term) or liabilities or obligations
of any of the Company, the Corporate Entities or the Initial Affiliated
Practices (contingent or otherwise), except as described in the Prospectus; (v)
no material amount of the assets of any of the Company, the Corporate Entities
or the Initial Affiliated Practices shall have been pledged or mortgaged, except
as set forth in the Registration Statement and Prospectus; (vi) no action, suit
or proceeding, at law or in equity, shall have been pending or threatened (or
circumstances giving rise to same) against any of the Company, the Corporate
Entities or the Initial Affiliated Practices, or affecting any of its or their
respective properties or businesses before or by any court or federal, state or
foreign commission, board or other administrative agency wherein an unfavorable
decision, ruling or finding man adversely affect the business, operations,
earnings, position, value, properties, results of operations, prospects or
financial condition or income of the Company, the Corporate Entities or the
Initial Affiliated Practices; and (vii) no stop order shall have been issued
under the Act and no proceedings therefor shall have been initiated, threatened
or contemplated by the Commission.
(i) At each of the Closing Date and each Option Closing Date, if any,
the Underwriters shall have received a certificate of the Company signed by the
principal executive officer and by the chief financial or chief accounting
officer of the Company, dated the Closing Date or Option Closing Date, as the
case may be, to the effect that each of such persons has carefully examined the
Registration Statement, the Prospectus and this Agreement, and that:
i.The representations and warranties of the Company in this Agreement
are true and correct, as if made on and as of the Closing Date or the
Option Closing Date, as the case may be, and the Company has complied with
all agreements and covenants and satisfied all conditions contained in this
Agreement on its part to be performed or satisfied at or prior to such
Closing Date or Option Closing Date, as the case may be;
ii.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, to the best of each of
such person's knowledge, are contemplated or threatened under the Act;
iii.The Registration Statement and the Prospectus and, if any, each
amendment and each supplement thereto, contain all statements and
information required to be included therein, and none of the Registration
Statement, the Prospectus nor any amendment or supplement thereto includes
any untrue statement of a material fact or omits to state any material fact
required to be stated therein or necessary to make the statements therein
not misleading and neither the Preliminary Prospectus or any supplement
thereto included 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; and
iv.Subsequent to the respective dates as of which information is given
in the Registration Statement and the Prospectus, (a) none of the Company,
the Corporate Entities or the Initial Affiliated Practices has incurred up
to and including the Closing Date
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or the Option Closing Date, as the case may be, other than in the ordinary
course of its business, any material liabilities or obligations, direct or
contingent; (b) none of the Company or the Corporate Entities has paid or
declared any dividends or other distributions on its capital stock; (c)
none of the Company, the Corporate Entities or the Initial Affiliated
Practices has entered into any transactions not in the ordinary course of
business; (d) there has not been any change in the capital stock or
long-term debt or any increase in the short-term borrowings (other than any
increase in the short-term borrowings in the ordinary course of business)
of any of the Company, the Corporate Entities or the Initial Affiliated
Practices (e) none of the Company, the Corporate Entities or the Initial
Affiliated Practices has sustained any loss or damage to its or their
respective properties or assets, whether or not insured; (f) there is no
litigation which is pending or threatened (or circumstances giving rise to
same) against any of the Company, the Corporate Entities or the Initial
Affiliated Practices or any affiliated party of any of the foregoing which
is required to be set forth in an amended or supplemented Prospectus which
has not been set forth; and (g) there has occurred no event required to be
set forth in an amended or supplemented Prospectus which has not been set
forth.
References to the Registration Statement and the Prospectus in this subsection
(i) are to such documents as amended and supplemented at the date of such
certificate.
(j) By the Closing Date, the Underwriters will have received
clearance from the NASD as to the amount of compensation allowable or payable to
the Underwriters, as described in the Registration Statement.
(k) At the time this Agreement is executed, the Underwriters shall
have received a letter, dated such date, addressed to the Underwriters in form
and substance satisfactory (including the non-material nature of the changes or
decreases, if any, referred to in clause (iii) below) in all respects to the
Underwriters and Underwriters' Counsel, from Feldman Radin & Co., P.C.:
i.confirming that they are independent certified public accountants
with respect to the Company, the Corporate Initial Affiliated Practices and
the Initial Affiliated Practices within the meaning of the Act and the
applicable Rules and Regulations;
ii.stating that it is their opinion that the financial statements and
supporting schedules of the Company, the Corporate Initial Affiliated
Practices and the Initial Affiliated Practices included in the Registration
Statement comply as to form in all material respects with the applicable
accounting requirements of the Act and the Rules and Regulations thereunder
and that the Representatives may rely upon the opinion of Feldman Radin &
Co., P.C. with respect to the consolidated financial statements and
supporting schedules included in the Registration Statement;
iii.stating that, on the basis of a limited review which included a
reading of the latest available unaudited interim financial statements of
each of the Company, the Corporate Initial Affiliated Practices and the
Initial Affiliated Practices, a reading of the latest
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available minutes of the stockholders and board of directors and the
various committees of the boards of directors of each of the Company, the
Corporate Initial Affiliated Practices and the Initial Affiliated
Practices, consultations with officers and other employees of each of the
Company, the Corporate Initial Affiliated Practices and the Initial
Affiliated Practices, responsible for financial and accounting matters and
other specified procedures and inquiries, nothing has come to their
attention which would lead them to believe that (A) the pro forma financial
information contained in the Registration Statement and Prospectus does not
comply as to form in all material respects with the applicable accounting
requirements of the Act and the Rules and Regulations or is not fairly
presented in conformity with generally accepted accounting principles
applied on a basis consistent with that of the audited financial statements
of the Company, the Corporate Initial Affiliated Practices and the Initial
Affiliated Practices, or the unaudited pro forma financial information
included in the Registration Statement, (B) the unaudited financial
statements and supporting schedules of the Company, the Corporate Initial
Affiliated Practices and the Initial Affiliated Practices included in the
Registration Statement do not comply as to form in all material respects
with the applicable accounting requirements of the Act and the Rules and
Regulations or are not fairly presented in conformity with generally
accepted accounting principles applied on a basis substantially consistent
with that of the audited financial statements of the Company, the Corporate
Initial Affiliated Practices and the Initial Affiliated Practices included
in the Registration Statement, or (C) at a specified date not more than
five (5) days prior to the effective date of the Registration Statement,
there has been any change in the capital stock or long-term debt of any of
the Company, the Corporate Initial Affiliated Practices and the Initial
Affiliated Practices, or any decrease in the stockholders' equity or net
current assets or net assets of any of the Company, the Corporate Initial
Affiliated Practices and the Initial Affiliated Practices as compared with
amounts shown in the June 30, 1997 balance sheet included in the
Registration Statement, other than as set forth in or contemplated by the
Registration Statement, or, if there was any change or decrease, setting
forth the amount of such change or decrease, and (D) during the period from
June 30, 1997 to a specified date not more than five (5) days prior to the
effective date of the Registration Statement, there was any decrease in net
revenues, net earnings or increase in net earnings per common share of any
of the Company, the Corporate Initial Affiliated Practices and the Initial
Affiliated Practices, in each case as compared with the corresponding
period beginning June 30, 1996, other than as set forth in or contemplated
by the Registration Statement, or, if there was any such decrease, setting
forth the amount of such decrease;
iv.setting forth, at a date not later than five (5) days prior to the
date of the Registration Statement, the amount of liabilities of the
Company, the Corporate Initial Affiliated Practices and the Initial
Affiliated Practices taken as a whole (including a break-down of commercial
paper and notes payable to banks);
v.stating that they have compared specific dollar amounts, numbers of
shares, percentages of revenues and earnings, statements and other
financial information pertaining to the Company, the Corporate Initial
Affiliated Practices and the Initial Affiliated Practices set forth in the
Prospectus in each case to the extent that such amounts, numbers,
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percentages, statements and information may be derived from the general
accounting records, including work sheets, of the Company, the Corporate
Initial Affiliated Practices and the Initial Affiliated Practices and
excluding any questions requiring an interpretation by legal counsel, with
the results obtained from the application of specified readings, inquiries
and other appropriate procedures (which procedures do not constitute an
examination in accordance with generally accepted auditing standards) set
forth in the letter and found them to be in agreement;
vi.statements as to such other matters incident to the transaction
contemplated hereby as the Representatives may request.
(l) At the Closing Date and each Option Closing Date, if any, the
Underwriters shall have received from Feldman Radin & Co., P.C. a letter, dated
as of the Closing Date or the Option Closing Date, as the case may be, to the
effect that they reaffirm that statements made in the letter furnished pursuant
to SUBSECTION (k) of this SECTION, except that the specified date referred to
shall be a date not more than five (5) days prior to the Closing Date or the
Option Closing Date, as the case may be, and, if the Company has elected to rely
on Rule 430A of the Rules and Regulations, to the further effect that they have
carried out procedures as specified in clause (v) of SUBSECTION (k) of this
Section with respect to certain amounts, percentages and financial information
as specified by the Representatives and deemed to be a part of the Registration
Statement pursuant to Rule 430A(b) and have found such amounts, percentages and
financial information to be in agreement with the records specified in such
clause (v).
(m) On each of the Closing Date and each Option Closing Date, if any,
there shall have been duly tendered to the Representatives for the several
Underwriters' accounts the appropriate number of Securities.
(n) No order suspending the sale of the Securities in any
jurisdiction designated by the Representatives pursuant to SUBSECTION (e) of
SECTION 4 hereof shall have been issued on either the Closing Date or the Option
Closing Date, if any, and no proceedings for that purpose shall have been
instituted or shall be contemplated.
(o) On or before the Closing Date, the Company shall have executed
and delivered to the Representatives, (i) the Representatives' Warrant Agreement
substantially in the form filed as Exhibit ___ to the Registration Statement, in
final form and substance satisfactory to the Representatives, and (ii) the
Representatives' Warrants in such denominations and to such designees as shall
have been provided to the Company.
(p) On or before the Closing Date, the Firm Securities and Option
Securities shall have been duly approved for quotation on Amex, subject to
official notice of issuance.
(q) On or before the Closing Date, there shall have been delivered to
the Representatives all of the Lock-up Agreements, in form and substance
satisfactory to Underwriters' Counsel.
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(r) On or before the Closing Date, the Company and Continental Stock
Transfer & Trust Company shall have executed and delivered to the
Representatives the Warrant Agreement, substantially in the form filed as
Exhibit ___ to the Registration Statement.
If any condition to the Underwriters' obligations hereunder to be fulfilled
prior to or at the Closing Date or the relevant Option Closing Date, as the case
may be, is not so fulfilled, the Representatives may terminate this Agreement
or, if the Representatives so elects, it may waive any such conditions which
have not been fulfilled or extend the time for their fulfillment.
7. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless each of the
Underwriters (for purposes of this SECTION 7 "Underwriter" shall include the
officers, directors, partners, employees, agents and counsel of the Underwriter,
including specifically each person who may be substituted for an Underwriter as
provided in SECTION 11 hereof), and each person, if any, who controls the
Underwriter ("controlling person") within the meaning of Section 15 of the
Act or Section 20(a) of the Exchange Act, from and against any and all losses,
claims, damages, expenses or liabilities, joint or several (and actions,
proceedings, investigations, inquiries, suits and litigation in respect
thereof), whatsoever (including but not limited to any and all expenses
whatsoever reasonably incurred in investigating, preparing or defending against
any such claim, action, proceeding, investigation, inquiry, suit or litigation,
commenced or threatened, or any claim whatsoever), as such are incurred, to
which the Underwriter or such controlling person may become subject under the
Act, the Exchange Act or any other statute or at common law or otherwise or
under the laws of foreign countries, arising out of or based upon (A) any untrue
statement or alleged untrue statement of a material fact contained (i) in any
Preliminary Prospectus, the Registration Statement or the Prospectus (as from
time to time amended and supplemented); (ii) in any post-effective amendment or
amendments or any new registration statement and prospectus in which is included
securities of the Company issued or issuable upon exercise of the Securities; or
(iii) in any application or other document or written communication (in this
SECTION 7 collectively called "application") executed by the Company or based
upon written information furnished by the Company in any jurisdiction in order
to qualify the Securities under the securities laws thereof or filed with the
Commission, any state securities commission or agency, Nasdaq or any other
securities exchange; (B) the omission or alleged omission therefrom of a
material fact required to be stated therein or necessary to make the statements
therein not misleading (in the case of the Prospectus, in the light of the
circumstances under which they were made), or (C) any breach of any
representation, warranty, covenant or agreement of the Company contained herein
or in any certificate by or on behalf of the Company or any of its officers
delivered pursuant hereto, unless, in the case of clause (A) or (B) above, such
statement or omission was made in reliance upon and in strict conformity with
written information furnished to the Company with respect to any Underwriter by
or on behalf of such Underwriter expressly for use in any Preliminary
Prospectus, the Registration Statement or Prospectus, or any amendment thereof
or supplement thereto, or in any application, as the case may be.
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The indemnity agreement in this SUBSECTION (a) shall be in addition to any
liability which the Company may have at common law or otherwise.
(b) Each of the Underwriters agrees severally, but not jointly, to
indemnify and hold harmless the Company, each of its directors, each of its
officers who has signed the Registration Statement, and each other person, if
any, who controls the Company within the meaning of the Act, to the same extent
as the foregoing indemnity from the Company to the Underwriters but only with
respect to statements or omissions, if any, made in any Preliminary Prospectus,
the Registration Statement or Prospectus or any amendment thereof or supplement
thereto or in any application made in reliance upon, and in strict conformity
with, written information furnished to the Company with respect to any
Underwriter by such Underwriter expressly for use in such Preliminary
Prospectus, the Registration Statement or Prospectus or any amendment thereof or
supplement thereto or in any such application, provided that such written
information or omissions only pertain to disclosures in the Preliminary
Prospectus, the Registration Statement or Prospectus directly relating to the
transactions effected by the Underwriters in connection with this Offering. The
Company acknowledges that the statements with respect to the public offering of
the Firm Securities and the Option Securities set forth under the heading
"Underwriting" and the stabilization legend in the Prospectus have been
furnished by the Underwriters expressly for use therein and constitute the only
information furnished in writing by or on behalf of the Underwriters for
inclusion in the Prospectus.
(c) Promptly after receipt by an indemnified party under this SECTION
7 of notice of the commencement of any claim, action, suit, investigation,
inquiry, proceeding or litigation, such indemnified party shall, if a claim in
respect thereof is to be made against one or more indemnifying parties under
this SECTION 7, notify each party against whom indemnification is to be sought
in writing of the commencement thereof (but the failure to so notify an
indemnifying party shall not relieve it from any liability which it may have
under this SECTION 7 except to the extent that it has been prejudiced in any
material respect by such failure or from any liability which it may have
otherwise). In case any such claim, action, suit, investigation, inquiry,
proceeding or litigation is brought against any indemnified party, and it
notifies an indemnifying party or parties of the commencement thereof, the
indemnifying party or parties will be entitled to participate therein, and to
the extent it may elect by written notice delivered to the indemnified party
promptly after receiving the aforesaid notice from such indemnified party, to
assume the defense thereof with counsel reasonably satisfactory to such
indemnified party. Notwithstanding the foregoing, the indemnified party or
parties shall have the right to employ its or their own counsel in any such case
but the fees and expenses of such counsel shall be at the expense of such
indemnified party or parties unless (i) the employment of such counsel shall
have been authorized in writing by the indemnifying parties in connection with
the defense of thereof at the expense of the indemnifying party, (ii) the
indemnifying parties shall not have employed counsel reasonably satisfactory to
such indemnified party to have charge of the defense thereof within a reasonable
time after notice of commencement thereof, or (iii) such indemnified party or
parties shall have reasonably concluded that there may be defenses available to
it or them which are different from or additional to those available to one or
all of the indemnifying parties (in which case the indemnifying parties shall
not have the right to direct the defense thereof on behalf of the indemnified
party or parties), in any of which events such fees and
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expenses of one additional counsel shall be borne by the indemnifying parties.
In no event shall the indemnifying parties be liable for fees and expenses of
more than one counsel (in addition to any local counsel) separate from their own
counsel for all indemnified parties in connection with any one claim, action,
suit, investigation, inquiry, proceeding or litigation or separate but similar
or related claims, actions, suits, investigations, inquiries, proceedings or
litigation in the same jurisdiction arising out of the same general allegations
or circumstances. Anything in this SECTION 7 to the contrary notwithstanding,
an indemnifying party shall not be liable for any settlement of any claim,
action, suit, investigation, inquiry, proceeding or litigation effected without
its written consent; PROVIDED, HOWEVER, that such consent was not unreasonably
withheld. An indemnifying party will not, without the prior written consent of
the indemnified parties, settle, compromise or consent to the entry of any
judgment with respect to any pending or threatened claim, action, suit,
investigation, inquiry, proceeding or litigation in respect of which
indemnification or contribution may be sought hereunder (whether or not the
indemnified parties are actual or potential parties to such claim, action, suit,
investigation, inquiry, proceeding or litigation), unless such settlement,
compromise or consent (i) includes an unconditional release of each indemnified
party from all liability arising out of such claim, action, suit, investigation,
inquiry, proceeding or litigation and (ii) does not include a statement as to or
an admission of fault, culpability or a failure to act by or on behalf of any
indemnified party.
(d) In order to provide for just and equitable contribution in any
case in which (i) an indemnified party makes claim for indemnification pursuant
to this SECTION 7, but it is judicially determined (by the entry of a final
judgment or decree by a court of competent jurisdiction and the expiration of
time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding the fact that
the express provisions of this SECTION 7 provide for indemnification in such
case, or (ii) contribution under the Act may be required on the part of any
indemnified party, then each indemnifying party shall contribute to the amount
paid as a result of such losses, claims, damages, expenses or liabilities (or
actions in respect thereof) (A) in such proportion as is appropriate to reflect
the relative benefits received by each of the contributing parties, on the one
hand, and the party to be indemnified on the other hand, from the offering of
the Firm Securities and the Option Securities or (B) if the allocation provided
by clause (A) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of each of the contributing parties, on the
one hand, and the party to be indemnified on the other hand in connection with
the statements or omissions that resulted in such losses, claims, damages,
expenses or liabilities, as well as any other relevant equitable considerations.
In any case where the Company is the contributing party and the Underwriters are
the indemnified party, the relative benefits received by the Company on the one
hand, and the Underwriters, on the other, shall be deemed to be in the same
proportion as the total net proceeds from the offering of the Firm Securities
and the Option Securities (before deducting expenses) bear to the total
underwriting discounts received by the Underwriters hereunder, in each case as
set forth in the table on the Cover Page of the Prospectus. Relative fault
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Company, or by
the Underwriters, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such untrue statement
32
<PAGE>
or omission. The amount paid or payable by an indemnified party as a result of
the losses, claims, damages, expenses or liabilities (or actions in respect
thereof) referred to above in this SUBSECTION (d) shall be deemed to include 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 SUBSECTION (d), the Underwriters shall
not be required to contribute any amount in excess of the underwriting discount
applicable to the Firm Securities and the Option Securities purchased by the
Underwriters hereunder. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this SECTION 7, each person, if any, who
controls the Company or the Underwriter within the meaning of the Act, each
officer of the Company who has signed the Registration Statement, and each
director of the Company shall have the same rights to contribution as the
Company or the Underwriter, as the case may be, subject in each case to this
SUBSECTION (d). Any party entitled to contribution will, promptly after receipt
of notice of commencement of any action, suit or proceeding against such party
in respect to which a claim for contribution may be made against another party
or parties under this SUBSECTION (d), notify such party or parties from whom
contribution may be sought, but the omission so to notify such party or parties
shall not relieve the party or parties from whom contribution may be sought from
any obligation it or they may have hereunder or otherwise than under this
SUBSECTION (d), or to the extent that such party or parties were not adversely
affected by such omission. The contribution agreement set forth above shall be
in addition to any liabilities which any indemnifying party may have at common
law or otherwise.
8. REPRESENTATIONS AND AGREEMENTS TO SURVIVE DELIVERY. All
representations, warranties and agreements contained in this Agreement or
contained in certificates of officers of the Company submitted pursuant hereto,
shall be deemed to be representations, warranties and agreements at the Closing
Date and the Option Closing Date, as the case may be, and such representations,
warranties and agreements of the Company and the respective indemnity agreements
contained in SECTION 7 hereof, shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of any Underwriter,
the Company, any controlling person of any Underwriter or the Company, and shall
survive termination of this Agreement or the issuance and delivery of the
Securities to the Underwriters and the Representatives, as the case may be.
9. EFFECTIVE DATE. This Agreement shall become effective at 10:00 a.m.,
New York City time, on the next full business day following the date hereof, or
at such earlier time after the Registration Statement becomes effective as the
Representatives, in its discretion, shall release the Securities for sale to the
public; PROVIDED, HOWEVER, that the provisions of SECTIONS 5, 7 and 10 of this
Agreement shall at all times be effective. For purposes of this SECTION 9, the
Securities to be purchased hereunder shall be deemed to have been so released
upon the earlier of dispatch by the Representatives of telegrams to securities
dealers releasing such securities for offering or the release by the
Representatives for publication of the first newspaper advertisement which is
subsequently published relating to the Securities.
33
<PAGE>
10. TERMINATION.
(a) Subject to SUBSECTION (b) of this SECTION 10, the Representatives
shall have the right to terminate this Agreement, (i) if any domestic or
international event or act or occurrence has materially adversely disrupted, or
in the Representatives' opinion will in the immediate future materially
adversely disrupt, the financial markets; or (ii) if any material adverse change
in the financial markets shall have occurred; or (iii) if trading generally
shall have been suspended or materially limited on or by, as the case may be,
any of the New York Stock Exchange, the American Stock Exchange, Nasdaq, the
NASD, the Boston Stock Exchange, the Commission or any governmental authority
having jurisdiction over such matters; or (iv) if trading of any of the
securities of the Company shall have been suspended, or any of the securities of
the Company shall have been delisted, on any exchange or in any over-the-counter
market; (v) if the United States shall have become involved in a war or major
hostilities, or if there shall have been an escalation in an existing war or
major hostilities or a national emergency shall have been declared in the United
States; or (vi) if a banking moratorium has been declared by a state or federal
authority; or (vii) if a moratorium in foreign exchange trading has been
declared; or (viii) if the Company or any of the Corporate Initial Affiliated
Practices or the Initial Affiliated Practices shall have sustained a loss
material or substantial to the Company or any of the Corporate Initial
Affiliated Practices or the Initial Affiliated Practices by fire, flood,
accident, hurricane, earthquake, theft, sabotage or other calamity or malicious
act which, whether or not such loss shall have been insured, will, in the
Representatives' opinion, make it inadvisable to proceed with the offering, sale
and/or delivery of the Securities; or (ix) if there shall have been such a
material adverse change in the conditions or prospects of the Company or any of
the Corporate Initial Affiliated Practices or the Initial Affiliated Practices,
or such material adverse change in the general market, political or economic
conditions, in the United States or elsewhere, that, in each case, in the
Representatives' judgment, would make it inadvisable to proceed with the
offering, sale and/or delivery of the Securities or (x) if Scott G. Pollock
shall no longer serve the Company in his present capacity.
(b) If this Agreement is terminated by the Representatives in
accordance with the provisions of SECTION 10(a) the Company shall promptly
reimburse and indemnify the Representatives for all of its actual out-of-pocket
expenses, including the fees and disbursements of counsel for the Underwriters
(less amounts previously paid pursuant to SECTION 5(c) above). Notwithstanding
any contrary provision contained in this Agreement, if this Agreement shall not
be carried out within the time specified herein, or any extension thereof
granted to the Representatives, by reason of any failure on the part of the
Company to perform any undertaking or satisfy any condition of this Agreement by
it to be performed or satisfied (including, without limitation, pursuant to
SECTION 6 or SECTION 12) then, the Company shall promptly reimburse and
indemnify the Representatives for all of its actual out-of-pocket expenses,
including the fees and disbursements of counsel for the Underwriters (less
amounts previously paid pursuant to SECTION 5(c) above). In addition, the
Company shall remain liable for all Blue Sky counsel fees and disbursements,
expenses and filing fees. Notwithstanding any contrary provision contained in
this Agreement, any election hereunder or any termination of this Agreement
(including, without limitation, pursuant to SECTIONS 6, 10, 11 and 12 hereof),
and whether or not this Agreement is otherwise carried out, the provisions of
SECTION 5 and SECTION 7 shall not be in any way affected
34
<PAGE>
by such election or termination or failure to carry out the terms of this
Agreement or any part hereof.
11. SUBSTITUTION OF THE UNDERWRITERS. If one or more of the Underwriters
shall fail (otherwise than for a reason sufficient to justify the termination of
this Agreement under the provisions of SECTION 6, SECTION 10 or SECTION 12
hereof) to purchase the Securities which it or they are obligated to purchase on
such date under this Agreement (the "Defaulted Securities"), the Representatives
shall have the right, within 24 hours thereafter, to make arrangement for one or
more of the non-defaulting Underwriters, or any other underwriters, to purchase
all, but not less than all, of the Defaulted Securities in such amounts as may
be agreed upon and upon the terms herein set forth; if, however, the
Representatives shall not have completed such arrangements within such 24-hour
period, then:
(a) if the number of Defaulted Securities does not exceed 10% of the
total number of Firm Securities to be purchased on such date, the
non-defaulting Underwriters shall be obligated to purchase the full amount
thereof in the proportions that their respective underwriting obligations
hereunder bear to the underwriting obligations of all non-defaulting
Underwriters, or
(b) if the number of Defaulted Securities exceeds 10% of the total
number of Firm Securities, this Agreement shall terminate without liability
on the part of any non-defaulting Underwriters (or, if such default shall
occur with respect to any Option Securities to be purchased on an Option
Closing Date, the Underwriters may at the Representatives' option, by
notice from the Representatives to the Company, terminate the Underwriters'
obligation to purchase Option Securities from the Company on such date).
No action taken pursuant to this SECTION 11 shall relieve any defaulting
Underwriter from liability in respect of any default by such Underwriter under
this Agreement.
In the event of any such default which does not result in a termination of
this Agreement, the Representatives shall have the right to postpone the Closing
Date for a period not exceeding seven (7) days in order to effect any required
changes in the Registration Statement or Prospectus or in any other documents or
arrangements.
12. DEFAULT BY THE COMPANY. If the Company shall fail at the Closing Date
or at any Option Closing Date, as applicable, to sell and deliver the number of
Securities which it is obligated to sell hereunder on such date, then this
Agreement shall terminate (or, if such default shall occur with respect to any
Option Securities to be purchased on an Option Closing Date, the Underwriters
may at the Representatives' option, by notice from the Representatives to the
Company, terminate the Underwriters' obligation to purchase Option Securities
from the Company on such date) without any liability on the part of any
non-defaulting party other than pursuant to SECTION 5, SECTION 7 and SECTION 10
hereof. No action taken pursuant to this SECTION 12 shall relieve the Company
from liability, if any, in respect of such default.
35
<PAGE>
13. NOTICES. All notices and communications hereunder, except as herein
otherwise specifically provided, shall be in writing and shall be deemed to have
been duly given if mailed or transmitted by any standard form of
telecommunication. Notices to the Underwriters shall be directed to the
Representatives c/o Nolan Securities Corp., 405 Lexington Avenue, 45th Floor,
New York, New York 10174, Attention: Terry Nolan, with a copy to Orrick,
Herrington & Sutcliffe LLP, 666 Fifth Avenue, New York, New York 10103,
Attention: Lawrence B. Fisher, Esq. Notices to the Company shall be directed
to the Company at 2644 Bristol Road, Warrington, Pennsylvania 18976, Attention:
Scott Pollack, Chief Executive Officer, with a copy to: Brock Fensterstock
Silver Stein McAuliffe & Wade LLC, 153 East 53rd Street, New York, New York
10022, Attention: Robert Brown, Esq.
14. PARTIES. This Agreement shall inure solely to the benefit of and
shall be binding upon, the Underwriters, the Company and the controlling
persons, directors and officers referred to in SECTION 7 hereof, and their
respective successors, legal representatives and assigns, and no other person
shall have or be construed to have any legal or equitable right, remedy or claim
under or in respect of or by virtue of this Agreement or any provisions herein
contained. No purchaser of Securities from any Underwriter shall be deemed to
be a successor by reason merely of such purchase.
15. CONSTRUCTION. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of New York without giving
effect to the choice of law or conflict of laws principles.
16. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, and all of which
taken together shall be deemed to be one and the same instrument.
17. ENTIRE AGREEMENT; AMENDMENTS. This Agreement and the Representatives'
Warrant Agreement constitute the entire agreement of the parties hereto and
supersede all prior written or oral agreements, understandings and negotiations
with respect to the subject matter hereof. This Agreement may not be amended
except in a writing, signed by the Representatives and the Company.
36
<PAGE>
If the foregoing correctly sets forth the understanding between the
Underwriters and the Company, please so indicate in the space provided below for
that purpose, whereupon this letter shall constitute a binding agreement among
us.
Very truly yours,
INTEGRATED PHYSICIAN SYSTEMS, INC.
By:
-------------------------------
Scott G. Pollock
Chief Executive Officer
Confirmed and accepted as of
the date first above written.
NOLAN SECURITIES CORP.
SOUTHWALL CAPITAL CORP.
DIRKS & COMPANY, INC.
For themselves and as Representatives
of the several Underwriters named
in Schedule A hereto.
By: NOLAN SECURITIES CORP.
By:
-------------------------------
Name:
Title:
As Attorney-in-Fact for
each of the Representatives
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
Number of Amount of
Number of Redeemable Convertible
Shares to Warrants to Debentures to
Name of Underwriters be Purchased be Purchased be Purchased
- -------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Nolan Securities Corp
SouthWall Capital Corp.
Dirks & Company, Inc.
Total......................... 2,000,000 2,000,000 $25,000,000
========= ========= ===========
</TABLE>
<PAGE>
SCHEDULE B
----------
At the Closing Date, the Underwriters shall have received the favorable
opinion of Kalogredis, Tsoules and Sweeney, Ltd., special health care regulatory
counsel to the Company and the Subsidiaries, dated the Closing Date, addressed
to the Underwriters, in form and substance satisfactory to Underwriters' Counsel
to the effect that:
i. to the best of such counsel's knowledge, the statements in the
Prospectus under "RISK FACTORS--State Laws Prohibiting the Corporate
Practice of Medicine,""RISK FACTORS--Government Regulation," "RISK
FACTORS--Dependence on Third Party Reimbursement," "BUSINESS--Government
Regulation" and "BUSINESS--Third Party Reimbursement" are accurate in all
material respects, fairly represent the information disclosed therein, do
not contain any untrue statement of a material fact and do not omit to
state a fact required to be stated therein or necessary to make the
statements contained therein not misleading;
ii. to the best of such counsel's knowledge, the Company, the
Corporate Initial Affiliated Practices and the Initial Affiliated Practices
are in compliance in all material respects with all federal, state, local
and foreign rules, orders, regulations with respect to the Company's
business as currently conducted and as contemplated;
iii.each of the Company, the Corporate Initial Affiliated Practices
and the Initial Affiliated Practices has obtained all necessary and
required approvals, authorizations, licenses, orders, permits, certificates
and franchises of and from all governmental or regulatory officials and
bodies, domestic and foreign, to conduct its respective business as
described in the Prospectus; and none of such approvals, authorizations,
licenses, orders, permits, certificates and franchises have been revoked,
restricted or limited in any matter and all of such approvals,
authorizations, licenses, orders, permits, certificates and franchises are
in full force and effect;
iv. to the best of such counsel's knowledge, there is no action, suit,
proceeding, inquiry, investigation, litigation or governmental proceeding,
domestic or foreign, pending or threatened (or circumstances that may give
rise to the same) against or affecting any of the Company, the Corporate
Initial Affiliated Practices and the Initial Affiliated Practices before
any court or arbitrator or governmental body, agency or official in which
there is a reasonable possibility of a decision which may result in a
material adverse change in the condition, financial or otherwise, or the
earnings, position, prospects, stockholders' equity, value, operation,
properties, business or results of operations of any of the Company, the
Corporate Initial Affiliated Practices and the Initial Affiliated
Practices.
v. to the best of such counsel's knowledge, the statements in the
Registration Statement and Prospectus do not contain any untrue statement
of material fact with respect to government regulation of the Company's
proposed business, or omit to state
<PAGE>
any material fact relating to government regulation of the Company's
proposed business which is necessary to make the statements therein not
misleading.
2
<PAGE>
EXHIBIT 3.1
CERTIFICATE OF AMENDMENT OF THE CERTIFICATE OF INCORPORATION
OF
INTEGRATED PHYSICIAN SYSTEMS, INC.
Adopted in accordance with the provisions of Section 242
of the General Corporation Law of the State of Delaware
It is hereby certified that:
1. The name of the corporation (hereinafter called the
"Corporation") is Integrated Physician Systems, Inc.
2. The Corporation was incorporated on April 25, 1995.
3. The Certificate of Incorporation is hereby amended by deleting
Article THIRD thereof and by substituting in lieu of said Article THIRD the
following:
"THIRD: The purpose of the corporation is to engage in any
lawful act or activity for which corporations may be organized
under the General Corporation Law of the State of Delaware."
4. This amendment was authorized by written consent of the
Directors and by written consents of the holders of a majority of the
outstanding shares of Common Stock which consents were executed as of April
24, 1996. A written notice of action was provided to each stockholder who did
not consent to this Certificate of Amendment pursuant to Section 228 of the
General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, I have subscribed this document on the date set
forth below and do hereby affirm, under the penalties of perjury, that the
statements contained herein have been examined by me and are true and correct.
Dated as of April 25, 1996.
INTEGRATED PHYSICIAN SYSTEMS, INC.
/s/ Joseph F. Murray
----------------------------------
Joseph F. Murray
Secretary
<PAGE>
CERTIFICATE OF INCORPORATION
OF
INTEGRATED PHYSICIAN SYSTEMS, INC.
The undersigned, a natural person, for the purpose of organizing a
corporation for conducting the business and promoting the purposes
hereinafter stated, under the provisions and subject to the requirements of
the laws of the State of Delaware (particularly Chapter 1, Title 8 of the
Delaware Code and the acts amendatory thereof and supplemental thereto, and
known, identified, and referred to as the "General Corporation Law of the
State of Delaware"), hereby certifies that:
FIRST: The name of the corporation (hereinafter called "corporation") is
INTEGRATED PHYSICIAN SYSTEMS, INC.
SECOND: The address, including street, number, city, and county of the
registered office of the corporation in the State of Delaware is Corporation
Trust Center, 1209 Orange Street, Wilmington, Delaware 19801 and the name of
the registered agent of the corporation in the State of Delaware at such
address is The Corporation Trust Company.
THIRD: The purpose of the corporation is to enter into a loan transaction
with Forrest Financial Corporation and a Securities Pledge Agreement; to
issue and repay a note with Forrest Financial Corporation; to acquire and
pledge the collateral and acquire an investment agreement to secure and repay
the note; to engage in any acts and transactions incidental or otherwise
related to the entry into the Securities Pledge Agreement, the issuance and
repayment of the note or the acquisition of the collateral and investment
agreement, and to do all other acts required by law or required or permitted
by the note or the Securities Pledge Agreement; and to engage in any act,
have any power, enter into any contract, and own any property allowed by law
as necessary or incidental to any of the foregoing.
FOURTH: The total number of shares of stock which the corporation shall
have authority to issue One Thousand (1000). The par value of each such share
is One Cent ($.01). All such shares are of one class and are shares of Common
Stock.
<PAGE>
FIFTH: The name and the mailing address of the incorporator are as
follows:
NAME MAILING ADDRESS
---- ---------------
Michael Zelinsky Clark, Ladner, Fortenbaugh
& Young
One Commerce Square
22nd Floor
2005 Market Street
Philadelphia, PA 19103
SIXTH: The corporation is to have perpetual existence.
SEVENTH: Whenever a compromise or arrangement is proposed between this
corporation and its creditors or any class of them and/or between this
corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a
summary way of this corporation or of any creditor or stockholder thereof or
on the application of any receiver or receivers appointed for this
corporation under the provisions of Section 291 of Title 8 of the Delaware
Code or on the application of trustees in dissolution or of any receiver or
receivers appointed for this corporation under the provisions of Section 279
of Title 8 of the Delaware Code order a meeting of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
corporation, as the case may be, to be summoned in such manner as the said
court directs. If a majority in number representing three fourths in value
of the creditors or class of creditors, and/or of the stockholders or class
of stockholders of this corporation, as the case may be, agree to any
compromise or arrangement and to any reorganization of this corporation as
consequence of such compromise or arrangement, the said compromise or
arrangement and the said reorganization shall, if sanctioned by the court to
which the said application has been made, be binding on all the creditors or
class of creditors,and/or on all the stockholders or class of stockholders, of
this corporation, as the case may be, and also on this corporation.
EIGHTH: For the management of the business and for the conduct of the
affairs of the corporation, and in further definition, limitation, and
regulation of the powers of the corporation and of its directors and of its
stockholders or any class thereof, as the case may be, it is further provided:
1. The management of the business and the conduct of the affairs of the
corporation shall be vested in its Board of Directors. The number of
directors which shall constitute the whole Board of Directors
<PAGE>
shall be fixed by, or in the manner provided in, the Bylaws. The
phrase "whole Board" and the phrase "total number of directors" shall
be deemed to have the same meaning, to wit, the total number of
directors which the corporation would have if there were not
vacancies. No election of directors need be by written ballot.
2. After the original or other Bylaws of the corporation have been
adopted, amended, or repealed, as the case may be, in accordance with
the provisions of Section 109 of the General Corporation Law of the
State of Delaware, and, after the corporation has received any payment
for any of its stock, the power to adopt, amend, or repeal the Bylaws
of the corporation may be exercised by the Board of Directors of the
corporation, provided, however, that any provision for the
classification of directors of the corporation for staggered terms
pursuant to the provisions of subsection (d) of Section 141 of the
General Corporation Law of the State of Delaware shall be set forth in
an initial Bylaw or in a Bylaw adopted by the stockholders entitled to
vote for the corporation unless provisions for such classification
shall be set forth in this certificate of incorporation.
3. When ever the corporation shall be authorized to issue only one class of
stock, each outstanding shall entitle the holder thereof to notice of,
and the right to vote at, any meeting of stockholders. Whenever the
corporation shall be authorized to issue more than one class of stock,
no outstanding share of any class of stock which is denied voting
power under the provisions of the certificate of incorporation shall
entitle the holder thereof to the right to vote at any meeting of
stockholders except as the provisions of paragraph (2) of subsection
(b) of Section 242 of the General Corporation Law of the State of
Delaware shall otherwise require; provided, that no share of any such
class which is otherwise denied voting power shall entitle the holder
thereof to vote upon the increase or decrease in the number of
authorized shares of said class.
NINTH: The personal liability of the directors of the corporation is
hereby eliminated to the fullest extent permitted by the provisions of
paragraph (7) of subsection (b) of Section 102 of the General Corporation Law
of the State of Delaware, as the same
<PAGE>
may be amended and supplemented.
TENTH: The corporation shall, to the fullest extent permitted by the
provisions of Section 145 of the General Corporation Law of the State of
Delaware, as the same may be amended and supplemented, indemnify any and all
persons whom it shall have power to indemnify under said section from and
against any and all of the expenses, liabilities, or other matters referred
to in or covered by said section, and the indemnification provided for herein
shall not be deemed exclusive or any other rights to which those indemnified
may be entitled under any Bylaw, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in his official
capacity and as to action in another capacity while holding such office, and
shall continue as to a person who has ceased to be a director, officer,
employee, or agent and shall inure to the benefit of the heirs, executors,
and administrators of such a person.
ELEVENTH: From time to time any of the provisions of this certificate of
incorporation may be amended, altered, or repealed, and other provisions
authorized by the laws of the State of Delaware at the time in force may be
added or inserted in the manner and at the time prescribed by said laws, and
all rights at any time conferred upon the stockholders of the corporation by
this certificate of incorporation are granted subject to the provisions of
this Article ELEVENTH.
Signed on April 25, 1995
/s/ Michael A. Zelinsky
------------------------
Incorporator
<PAGE>
CERTIFICATE OF AMENDMENT
OF THE CERTIFICATE OF INCORPORATION
OF INTEGRATED PHYSICIAN SYSTEMS, INC.
Adopted in accordance with the provisions of Section 242
of the General Corporation law of the State of Delaware
It is hereby certified that:
1. The name of the corporation (hereinafter called the "Corporation") is
Integrated Physician Systems, Inc.
2. The Corporation was incorporated on April 25, 1995.
3. The Certificate of Incorporation is hereby amended by deleting Article
FOURTH thereof and by substituting in lieu of said Article FOURTH, the
following:
"FOURTH:
A. The aggregate number of shares which the Corporation shall have
authority to issue is fifty-one million (51,000,000) shares, of
which one million (1,000,000) shares shall be designated
'Preferred Shares' and of which fifty million (50,000,000)
shares shall be designated 'Common Shares.' All shares of the
Corporation shall be of the par value of $.01 per share.
B. Authority is hereby expressly granted to the Board of
Directors of the Corporation (or a committee thereof designated
by the Board of Directors pursuant to the by-laws of the
Corporation, as from time to time amended (the "By-laws")) to
issue Preferred Shares from time to time as Preferred Shares of
any series and to declare and pay dividends thereon in accordance
with the terms thereof and, in connection with the creation of
each such series, to fix by the resolution or resolutions
providing for the issue of shares thereof, the number of shares
of such series, and the designations, powers, preferences, and
rights (including voting rights), and the qualifications,
limitations, and restrictions of such series, to the full extent
now or hereafter permitted by the laws of the State of Delaware."
4. The Certificate of Incorporation is hereby amended by adding as a new
Article TWELVE:
"TWELVE: At 5:00 P.M., Eastern Standard Time, on April 24, 1996, (i)
each of the one thousand (1,000) outstanding shares of the Common
Stock of the Corporation held by each holder of record on such date
shall be automatically changed from one (1) shares of Common Stock to
three thousand (3,000) shares of
<PAGE>
Common Stock. No fractional shares will be issued - a fractional
share, based on all the shares of Common Stock held by the record
holder of such shares, of four-tenths of one share or more shall be
increased to the next higher whole number share, and a fractional
share of less than four-tenths of one share shall be disregarded."
5. These amendments were authorized by written consent of the Directors
and by written consent of the holders of a majority of the outstanding shares
of Common Stock which consents were executed on April 24, 1996. A written
notice of action was provided to each stockholder who did not consent to this
Certificate of Amendment in pursuance of Section 228 of the General
Corporation law of the State of Delaware.
IN WITNESS WHEREOF, I have subscribed this document on the date set
forth below and do hereby affirm, under the penalties of perjury, that the
statements contained herein have been examined by me and are true and correct.
Dated as of April 25, 1996.
/s/ Joseph F. Murray
-----------------------------
Joseph F. Murray
Secretary
<PAGE>
Exhibit 4.1
[FORM OF REPRESENTATIVES' WARRANT AGREEMENT]
[SUBJECT TO ADDITIONAL REVIEW]
- --------------------------------------------------------------------------------
INTEGRATED PHYSICIAN SYSTEMS, INC.
AND
NOLAN SECURITIES CORP.
AND SOUTHWALL CAPITAL CORP.
REPRESENTATIVES'
WARRANT AGREEMENT
DATED AS OF ________, 1997
- --------------------------------------------------------------------------------
<PAGE>
REPRESENTATIVES' WARRANT AGREEMENT dated as of _______, 1997 between
INTEGRATED PHYSICIAN SYSTEMS, INC., a Delaware corporation (the "Company"),
and NOLAN SECURITIES CORP. and SOUTHWALL CAPITAL CORP. (hereinafter referred
to variously as the "Holder" or "Holders" or the "Representatives").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Company proposes to issue to the Representatives warrants
("Warrants") to purchase up to an aggregate principal amount of $2,500,000
[61/2%-8%] Convertible Subordinated Debentures due 2004 ("Debentures") and/or
200,000 shares of Common Stock, $.01 par value, of the Company and/or 200,000
redeemable class A common stock purchase warrants of the Company ("Redeemable
Warrants"), each Redeemable Warrant to purchase one additional share of Common
Stock; and
WHEREAS, the Representatives have agreed pursuant to the underwriting
agreement (the "Underwriting Agreement") dated as of the date hereof between the
Company and the several Underwriters listed therein to act as the
Representatives in connection with the Company's proposed public offering of an
aggregate principal amount of $25,000,000 Debentures at a public offering price
of 100%, up to 2,000,000 shares of Common Stock at a public offering price of
$____ per share, and up to 2,000,000 Redeemable Warrants (the "Public Warrants")
at a public offering price of $____ per share (the "Public Offering"); and
WHEREAS, the Warrants to be issued pursuant to this Agreement will be
issued on the Closing Date (as such term is defined in the Underwriting
Agreement) by the Company
<PAGE>
to the Representatives in consideration for, and as part of the Representatives'
compensation in connection with, the Representatives acting as the
Representatives pursuant to the Underwriting Agreement;
NOW, THEREFORE, in consideration of the premises, the payment by the
Representatives to the Company of an aggregate twenty-five dollars ($25.00), the
agreements herein set forth and other good and valuable consideration, hereby
acknowledged, the parties hereto agree as follows:
1. GRANT. The Representatives (or their designees) are hereby granted the
right to purchase, at any time from _______, 1998 [one year from the effective
date of the Registration Statement], until 5:30 P.M., New York time, on _______,
2002 [five years from the effective date of the Registration Statement], up to
an aggregate principal amount of $2,500,000 Debentures and/or 200,000 shares of
Common Stock and/or 200,000 Redeemable Warrants at an initial exercise price
(subject to adjustment as provided in SECTION 8 hereof) of 100% of the principal
amount of the Debentures, $____ per share of Common Stock [120% of the initial
public offering price per share of the Common Stock] and $____ per Warrant [120%
of the initial public offering price per Warrant], respectively, subject to the
terms and conditions of this Agreement. One Redeemable Warrant is exercisable
to purchase one additional share of Common Stock at an initial exercise price of
$____ [140% of the initial public offering price share of Common Stock] per
share from ____, 1998 [one year after date of this Agreement] until 5:30 p.m.
New York time on ____, 2002 [5 years after date of this Agreement], at which
time the Redeemable Warrants shall expire. Except as set forth herein, the
Debentures, the shares of Common Stock and the Redeemable Warrants issuable upon
exercise of the Warrants are in all respects identical to the Debentures, the
shares of Common Stock and Redeemable Warrants
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being purchased by the Underwriters for resale to the public pursuant to the
terms and provisions of the Underwriting Agreement. The Debentures, the shares
of Common Stock and the Redeemable Warrants issuable upon exercise of the
Warrants are sometimes hereinafter referred to collectively as the "Warrant
Securities."
2. WARRANT CERTIFICATES. The warrant certificates (the "Warrant
Certificates") delivered and to be delivered pursuant to this Agreement shall be
in the form set forth in Exhibit A, attached hereto and made a part hereof, with
such appropriate insertions, omissions, substitutions, and other variations as
required or permitted by this Agreement.
3. EXERCISE OF WARRANT.
Section 3.1 METHOD OF EXERCISE. The Warrants initially are exercisable
at an aggregate initial exercise price (subject to adjustment as provided in
SECTION 8 hereof) of the Debentures, per share of Common Stock and per
Redeemable Warrant set forth in SECTION 6 hereof payable by certified or
official bank check in New York Clearing House funds, subject to adjustment as
provided in SECTION 8 hereof. Upon surrender of a Warrant Certificate with the
annexed Form of Election to Purchase duly executed, together with payment of the
Exercise Price (as hereinafter defined) for the Debentures, the shares of Common
Stock and Redeemable Warrants purchased at the Company's principal executive
offices in Pennsylvania (presently located at 2644 Bristol Road, Warrington,
Pennsylvania 18976) the registered holder of a Warrant Certificate ("Holder" or
"Holders") shall be entitled to receive a certificate or certificates for the
Debentures, the shares of Common Stock or Redeemable Warrants so purchased. The
purchase rights represented by each Warrant Certificate are exercisable at the
option of the Holder thereof, in whole or in part (but not as to fractional
Debentures, fractional shares of the Common Stock or fractional Redeemable
Warrants). Warrants may be exercised to purchase
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all or part of the Debentures, the shares of Common Stock or Redeemable
Warrants. In the case of the purchase of less than all the Debentures, the
shares of Common Stock or Redeemable Warrants purchasable under any Warrant
Certificate, the Company shall cancel said Warrant Certificate upon the
surrender thereof and shall execute and deliver a new Warrant Certificate of
like tenor for the balance of the Debentures, the shares of Common Stock and
Redeemable Warrants.
Section 3.2 EXERCISE BY SURRENDER OF WARRANT. In addition to the method
of payment set forth in SECTION 3.1 and in lieu of any cash payment required
thereunder, the Holder(s) of the Warrants shall have the right at any time and
from time to time to exercise the Warrants in full or in part by surrendering
the Warrant Certificate in the manner specified in SECTION 3.1 hereof. The
number of shares of Common Stock to be issued to holders of the Common Stock
pursuant to this SECTION 3.2 shall be equal to the difference between (a) the
number of shares of Common Stock in respect of which the Warrants are exercised
and (b) a fraction, the numerator of which shall be the number of shares of
Common Stock in respect of which the Warrants are exercised multiplied by the
Exercise Price and the denominator of which shall be the Market Price (as
defined in Section 3.3 hereof) of the Common Stock. The number of Debentures to
be issued to holders of the Debentures pursuant to this SECTION 3.2 shall be
equal to the difference between (a) the amount of Debentures in respect of which
the Warrants are exercised and (b) a fraction, the numerator of which shall be
the amount of Debentures in respect of which the Warrants are exercised
multiplied by the Exercise Price and the denominator of which shall be the
Market Price (as defined in SECTION 3.3 hereof) of the Debentures. The number
of Redeemable Warrants to be issued to holders of the Redeemable Warrants
pursuant to this SECTION 3.2 shall be equal to the difference between (a) the
number of Redeemable Warrants in
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respect of which the Warrants are exercised and (b) a fraction, the numerator of
which shall be the number of shares of Common Stock in respect of which the
Warrants are exercised multiplied by the Exercise Price and the denominator of
which shall be the Market Price (as defined in SECTION 3.3 hereof) of the
Redeemable Warrants. Solely for the purposes of this paragraph, Market Price
shall be calculated either (i) on the date on which the form of election
attached hereto is deemed to have been sent to the Company pursuant to Section
14 hereof ("Notice Date") or (ii) as the average of the Market Prices for each
of the five trading days preceding the Notice Date, whichever of (i) or (ii) is
greater.
Section 3.3 DEFINITION OF MARKET PRICE. As used herein, the phrase "Market
Price" at any date shall be deemed to be (i) when referring to the Common Stock,
the last reported sale price, or, in case no such reported sale takes place on
such day, the average of the last reported sale prices for the last three (3)
trading days, in either case as officially reported by the principal securities
exchange on which the Common Stock is listed or admitted to trading or by the
National Association of Securities Dealers Automated Quotation System
("Nasdaq"), or, if the Common Stock is not listed or admitted to trading on any
national securities exchange or quoted by Nasdaq, the average closing bid price
as furnished by the National Association of Securities Dealers, Inc. ("NASD")
through Nasdaq or similar organization if Nasdaq is no longer reporting such
information, or if the Common Stock is not quoted on Nasdaq, as determined in
good faith (using customary valuation methods) by resolution of the members of
the Board of Directors of the Company, based on the best information available
to it or (ii) when referring to a Debenture, the last reported sales price, or,
in the case no such reported sale takes place on such day, the average of the
last reported sale prices for the last three (3) trading days, in either case as
officially reported by the principal securities exchange on which the Debentures
are listed or
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admitted to trading or by Nasdaq, or, if the Debentures are not listed or
admitted to trading on any national securities exchange or quoted by Nasdaq, the
average closing bid price as furnished by the NASD through Nasdaq or similar
organization if Nasdaq is no longer reporting such information, or if the
Debentures are not quoted on Nasdaq or are no longer outstanding, the Market
Price of a Debenture shall equal the difference between the Market Price of the
Common Stock and the Exercise Price of the Debenture or (iii) when referring to
a Redeemable Warrant, the last reported sale price, or, in the case no such
reported sale takes place on such day, the average of the last reported sale
prices for the last three (3) trading days, in either case as officially
reported by the principal securities exchange on which the Redeemable Warrants
are listed or admitted to trading or by Nasdaq, or, if the Redeemable Warrants
are not listed or admitted to trading on any national securities exchange or
quoted by Nasdaq, the average closing bid price as furnished by the NASD through
Nasdaq or similar organization if Nasdaq is no longer reporting such
information, or if the Redeemable Warrants are not quoted on Nasdaq or are no
longer outstanding, the Market Price of the Redeemable Warrant and the Exercise
Price of the Redeemable Warrant.
4. ISSUANCE OF CERTIFICATES. Upon the exercise of the Warrants, the
issuance of certificates for shares of Common Stock, Debentures, Redeemable
Warrants and/or other securities, properties or rights underlying such Warrants
and, upon the exercise of the Redeemable Warrants or conversion of the
Debentures the issuance of certificates for shares of Common Stock, and/or other
securities, properties or rights underlying such Redeemable Warrants or
Debentures shall be made forthwith (and in any event within five (5) business
days thereafter) without charge to the Holders thereof including, without
limitation, any tax which may be payable in respect of the issuance thereof, and
such certificates shall (subject to the
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provisions of SECTIONS 5 and 7 hereof) be issued in the name of, or in such
names as may be directed by, the Holder thereof; provided, however, that the
Company shall not be required to pay any tax which may be payable in respect of
any transfer involved in the issuance and delivery of any such certificates in a
name other than that of the Holder, and the Company shall not be required to
issue or deliver such certificates unless or until the person or persons
requesting the issuance thereof shall have paid to the Company the amount of
such tax or shall have established to the satisfaction of the Company that such
tax has been paid.
The Warrant Certificates and the certificates representing the Debentures,
the Redeemable Warrants and the shares of Common Stock underlying the Warrants
(and/or other securities, property or rights issuable upon the exercise of the
Warrants, the Debentures or the Redeemable Warrants) shall be executed on behalf
of the Company by the manual or facsimile signature of the then Chairman or Vice
Chairman of the Board of Directors or President or any Vice President of the
Company. Warrant Certificates shall be dated the date of execution by the
Company upon initial issuance, division, exchange, substitution or transfer.
Certificates representing the shares of Common Stock, Redeemable Warrants or
Debentures (and/or other securities, property or rights issuable upon exercise
of the Debentures, the Redeemable Warrants or the Warrants) shall be dated as of
the Notice Date (regardless of when executed or delivered) and dividend bearing
securities so issued shall accrue dividends from the Notice Date.
5. RESTRICTION ON TRANSFER OF WARRANTS. The Holder of a Warrant
Certificate, by its acceptance thereof, covenants and agrees that the Warrants
are being acquired as an investment and not with a view to the distribution
thereof; that the Warrants may not be sold, transferred, assigned, hypothecated
or otherwise disposed of, in whole or in part, for a period of one (1) year from
the date hereof, except to officers of the Representatives.
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6. EXERCISE PRICE.
Section 6.1 INITIAL AND ADJUSTED EXERCISE PRICE. Except as otherwise
provided in SECTION 8 hereof, the initial exercise price of each Warrant shall
be 100% of the principal amount of the Debentures, $____ [120% of the initial
public offering price] per share of Common Stock and $____ [120% of the initial
public offering price] per Redeemable Warrant. The adjusted exercise price
shall be the price which shall result from time to time from any and all
adjustments of the initial exercise price in accordance with the provisions of
SECTION 8 hereof. Any transfer of a Warrant shall constitute an automatic
transfer and assignment of the registration rights set forth in SECTION 7 hereof
with respect to the Warrant Securities (as defined herein) or other securities,
properties or rights underlying the Warrants.
Section 6.2 EXERCISE PRICE. The term "Exercise Price" herein shall mean
the initial exercise price or the adjusted exercise price, depending upon the
context or unless otherwise specified.
7. REGISTRATION RIGHTS.
Section 7.1 REGISTRATION UNDER THE SECURITIES ACT OF 1933. The Warrants,
the shares of Common Stock, the Redeemable Warrants, the Debentures, the Common
Stock underlying the Debentures and the Redeemable Warrants or other securities
exercisable upon exercise of the Warrants (the "Warrant Securities") have been
registered under the Securities Act of 1933, as amended (the "Act") pursuant to
the Company's Registration Statement on Form S-1 (Registration No. 333-33247)
(the "Registration Statement"). All of the representations and warranties of
the Company contained in the Underwriting Agreement relating to the Registration
Statement, the Preliminary Prospectus and Prospectus (as such terms are defined
in the Underwriting Agreement) and made as of the dates provided therein, are
incorporated by
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reference herein. The Company agrees and covenants promptly to file
post-effective amendments to such Registration Statement as may be necessary in
order to maintain its effectiveness and otherwise to take such action as may be
necessary to maintain the effectiveness of the Registration Statement as long as
any Warrants are outstanding. In the event that, for any reason, whatsoever,
the Company shall fail to maintain the effectiveness of the Registration
Statement, the certificates representing the Warrant Securities shall bear the
following legend:
The securities represented by this certificate have not been registered
under the Securities Act of 1933, as amended ("Act"), and may not be
offered or sold except pursuant to (i) an effective registration statement
under the Act, (ii) to the extent applicable, Rule 144 under the Act (or
any similar rule under such Act relating to the disposition of securities),
or (iii) an opinion of counsel, if such opinion shall be reasonably
satisfactory to counsel to the issuer, that an exemption from registration
under such Act is available.
Section 7.2 PIGGYBACK REGISTRATION. If, at any time commencing after the
date hereof and expiring seven (7) years thereafter, the Company proposes to
register any of its securities under the Act (other than pursuant to Form S-4,
Form S-8 or a comparable registration statement) it will give written notice by
registered mail, at least thirty (30) days prior to the filing of each such
registration statement, to the Representatives and to all other Holders of the
Warrants and/or the Warrant Securities of its intention to do so. If the
Representatives or other Holders of the Warrants and/or Warrant Securities
notify the Company within twenty (20) business days after receipt of any such
notice of its or their desire to include any such securities in such proposed
registration statement, the Company shall afford the Representatives and such
Holders of the Warrants and/or Warrant Securities the opportunity to have any
such Warrant Securities registered under such registration statement.
Notwithstanding the provisions of this SECTION 7.2, the Company shall have
the right at any time after it shall have given written notice pursuant to this
SECTION 7.2 (irrespective of whether a written request for inclusion of any such
securities shall have been made) to elect not to file any such proposed
registration statement, or to withdraw the same after the filing but prior to
the effective date thereof.
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Section 7.3 DEMAND REGISTRATION.
(a) At any time commencing after the date hereof and expiring five (5)
years thereafter, the Holders of the Warrants and/or Warrant Securities
representing a "Majority" (as hereinafter defined) of such securities (assuming
the exercise of all of the Warrants) shall have the right (which right is in
addition to the registration rights under SECTION 7.2 hereof), exercisable by
written notice to the Company, to have the Company prepare and file with the
Securities and Exchange Commission (the "Commission"), on one occasion, a
registration statement and such other documents, including a prospectus, as may
be necessary in the opinion of both counsel for the Company and counsel for the
Representatives and Holders, in order to comply with the provisions of the Act,
so as to permit a public offering and sale of their respective Warrant
Securities for nine (9) consecutive months by such Holders and any other Holders
of the Warrants and/or Warrant Securities who notify the Company within ten (10)
days after receiving notice from the Company of such request.
(b) The Company covenants and agrees to give written notice of any
registration request under this SECTION 7.3 by any Holder or Holders to all
other registered Holders of the Warrants and the Warrant Securities within ten
(10) days from the date of the receipt of any such registration request.
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(c) In addition to the registration rights under SECTION 7.2 and
subsection (a) of this SECTION 7.3, at any time commencing after the date hereof
and expiring five (5) years thereafter, any Holder of Warrants and/or Warrant
Securities shall have the right, exercisable by written request to the Company,
to have the Company prepare and file, on one occasion, with the Commission a
registration statement so as to permit a public offering and sale for nine (9)
consecutive months by any such Holder of its Warrant Securities provided,
however, that the provisions of SECTION 7.4(b) hereof shall not apply to any
such registration request and registration and all costs incident thereto shall
be at the expense of the Holder or Holders making such request.
(d) Notwithstanding anything to the contrary contained herein, if the
Company shall not have filed a registration statement for the Warrant Securities
within the time period specified in SECTION 7.4(a) hereof pursuant to the
written notice specified in SECTION 7.3(a) of a Majority of the Holders of the
Warrants and/or Warrant Securities, the Company may, at its option, upon the
written notice of election of a Majority of the Holders of the Warrants and/or
Warrant Securities requesting such registration, repurchase (i) any and all
Warrant Securities of such Holders at the higher of the Market Price per share
of Common Stock and per Debenture and per Redeemable Warrant on (x) the date of
the notice sent pursuant to SECTION 7.3(a) or (y) the expiration of the period
specified in SECTION 7.4(a) and (ii) any and all Warrants of such Holders at
such Market Price less the Exercise Price of such Warrant. Such repurchase
shall be in immediately available funds and shall close within two (2) days
after the later of (i) the expiration of the period specified in SECTION 7.4(a)
or (ii) the delivery of the written notice of election specified in this SECTION
7.3(d).
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Section 7.4 COVENANTS OF THE COMPANY WITH RESPECT TO REGISTRATION. In
connection with any registration under SECTION 7.2 or 7.3 hereof, the Company
covenants and agrees as follows:
(a) The Company shall use its best efforts to file a registration
statement within thirty (30) days of receipt of any demand therefor, shall use
its best efforts to have any registration statements declared effective at the
earliest possible time, and shall furnish each Holder desiring to sell Warrant
Securities such number of prospectuses as shall reasonably be requested.
(b) The Company shall pay all costs (excluding fees and expenses of
Holder(s)' counsel and any underwriting or selling commissions), fees and
expenses in connection with all registration statements filed pursuant to
SECTIONS 7.2 and 7.3(a) hereof including, without limitation, the Company's
legal and accounting fees, printing expenses, blue sky fees and expenses. The
Holder(s) whose Warrant Securities are the subject of such registration
statement will pay all costs, fees and expenses in connection with any
registration statement filed pursuant to SECTION 7.3(c).
(c) The Company will take all necessary action which may be required in
qualifying or registering the Warrant Securities included in a registration
statement for offering and sale under the securities or blue sky laws of such
states as reasonably are requested by the Holder(s), provided that the Company
shall not be obligated to execute or file any general consent to service of
process or to qualify as a foreign corporation to do business under the laws of
any such jurisdiction.
(d) The Company shall indemnify the Holder(s) of the Warrant Securities to
be sold pursuant to any registration statement and each person, if any, who
controls such Holders
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within the meaning of SECTION 15 of the Act or SECTION 20(a) of the Securities
Exchange Act of 1934, as amended ("Exchange Act"), against all loss, claim,
damage, expense or liability (including all expenses reasonably incurred in
investigating, preparing or defending against any claim whatsoever) to which any
of them may become subject under the Act, the Exchange Act or otherwise, arising
from such registration statement but only to the same extent and with the same
effect as the provisions pursuant to which the Company has agreed to indemnify
each of the Underwriters contained in SECTION 7 of the Underwriting Agreement.
(e) The Holder(s) of the Warrant Securities to be sold pursuant to a
registration statement, and their successors and assigns, shall severally, and
not jointly, indemnify the Company, its officers and directors and each person,
if any, who controls the Company within the meaning of SECTION 15 of the Act or
SECTION 20(a) of the Exchange Act, against all loss, claim, damage, expense or
liability (including all expenses reasonably incurred in investigating,
preparing or defending against any claim whatsoever) to which they may become
subject under the Act, the Exchange Act or otherwise, arising from information
furnished by or on behalf of such Holders, or their successors or assigns, for
specific inclusion in such registration statement to the same extent and with
the same effect as the provisions contained in SECTION 7 of the Underwriting
Agreement pursuant to which the Underwriters have agreed to indemnify the
Company.
(f) Nothing contained in this Agreement shall be construed as requiring
the Holder(s) to exercise their Warrants prior to the initial filing of any
registration statement or the effectiveness thereof.
(g) The Company shall not permit the inclusion of any securities other
than the Warrant Securities to be included in any registration statement filed
pursuant to SECTION 7.3
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hereof, or permit any other registration statement to be or remain effective
during the effectiveness of a registration statement filed pursuant to SECTION
7.3 hereof, without the prior written consent of the Holders of the Warrants and
Warrant Securities representing a Majority of such securities.
(h) The Company shall furnish to each Holder participating in the offering
and to each underwriter, if any, a signed counterpart, addressed to such Holder
or underwriter, of (i) an opinion of counsel to the Company, dated the effective
date of such registration statement (and, if such registration includes an
underwritten public offering, an opinion dated the date of the closing under the
underwriting agreement), and (ii) a "cold comfort" letter dated the effective
date of such registration statement (and, if such registration includes an
underwritten public offering, a letter dated the date of the closing under the
underwriting agreement) signed by the independent public accountants who have
issued a report on the Company's financial statements included in such
registration statement, in each case covering substantially the same matters
with respect to such registration statement (and the prospectus included
therein) and, in the case of such accountants' letter, with respect to events
subsequent to the date of such financial statements, as are customarily covered
in opinions of issuer's counsel and in accountants' letters delivered to
underwriters in underwritten public offerings of securities.
(i) The Company shall as soon as practicable after the effective date of
the registration statement, and in any event within 15 months thereafter, make
"generally available to its security holders" (within the meaning of Rule 158
under the Act) an earnings statement (which need not be audited) complying with
SECTION 11(a) of the Act and covering a period of at least 12 consecutive months
beginning after the effective date of the registration statement.
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(j) The Company shall deliver promptly to each Holder participating in the
offering requesting the correspondence and memoranda described below and to the
managing underwriters, copies of all correspondence between the Commission and
the Company, its counsel or auditors and all memoranda relating to discussions
with the Commission or its staff with respect to the registration statement and
permit each Holder and underwriter to do such investigation, upon reasonable
advance notice, with respect to information contained in or omitted from the
registration statement as it deems reasonably necessary to comply with
applicable securities laws or rules of the NASD. Such investigation shall
include access to books, records and properties and opportunities to discuss the
business of the Company with its officers and independent auditors, all to such
reasonable extent and at such reasonable times and as often as any such Holder
or underwriter shall reasonably request.
(k) The Company shall enter into an underwriting agreement with the
managing underwriters selected for such underwriting by Holders holding a
Majority of the Warrant Securities requested to be included in such
underwriting, which may be any of the Representatives. Such agreement shall be
satisfactory in form and substance to the Company, each Holder and such managing
underwriter(s), and shall contain such representations, warranties and covenants
by the Company and such other terms as are customarily contained in agreements
of that type used by the managing underwriter(s). The Holders shall be parties
to any underwriting agreement relating to an underwritten sale of their Warrant
Securities and may, at their option, require that any or all of the
representations, warranties and covenants of the Company to or for the benefit
of such underwriter(s) shall also be made to and for the benefit of such
Holders. Such Holders shall not be required to make any representations or
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warranties to or agreements with the Company or the underwriter(s) except as
they may relate to such Holders, title to their Warrant Securities and their
intended methods of distribution.
(l) In addition to the Warrant Securities, upon the written request
therefor by any Holder(s), the Company shall include in the registration
statement any other securities of the Company held by such Holder(s) as of the
date of filing of such registration statement, including without limitation
restricted shares of Common Stock, options, warrants or any other securities
convertible into shares of Common Stock.
(m) For purposes of this Agreement, the term "Majority" in reference to
the Holders of Warrants or Warrant Securities, shall mean in excess of fifty
percent (50%) of the then outstanding Warrants or Warrant Securities that (i)
are not held by the Company, an affiliate, officer, creditor, employee or agent
thereof or any of their respective affiliates, members of their family, persons
acting as nominees or in conjunction therewith and (ii) have not been resold to
the public pursuant to a registration statement filed with the Commission under
the Act.
8. ADJUSTMENTS TO EXERCISE PRICE AND NUMBER OF SECURITIES.
Section 8.1 SUBDIVISION AND COMBINATION. In case the Company shall at any
time subdivide or combine the outstanding shares of Common Stock, the Redeemable
Warrants or Debentures, the Exercise Price shall forthwith be proportionately
decreased in the case of subdivision or increased in the case of combination.
Section 8.2 STOCK DIVIDENDS AND DISTRIBUTIONS. In case the Company shall
pay a dividend in, or make a distribution of, shares of Common Stock or of the
Company's capital stock convertible into Common Stock, the Exercise Price shall
forthwith be proportionately
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decreased. An adjustment made pursuant to this SECTION 8.2 shall be made as of
the record date for the subject stock dividend or distribution.
Section 8.3 ADJUSTMENT IN NUMBER OF SECURITIES. Upon each adjustment of
the Exercise Price pursuant to the provisions of this SECTION 8, the number of
Warrant Securities issuable upon the exercise at the adjusted exercise price of
each Warrant shall be adjusted to the nearest full amount by multiplying a
number equal to the Exercise Price in effect immediately prior to such
adjustment by the number of Warrant Securities issuable upon exercise of the
Warrants immediately prior to such adjustment and dividing the product so
obtained by the adjusted Exercise Price.
Section 8.4 DEFINITION OF COMMON STOCK. For the purpose of this
Agreement, the term "Common Stock" shall mean (i) the class of stock designated
as Common Stock in the Certificate of Incorporation of the Company as may be
amended as of the date hereof, or (ii) any other class of stock resulting from
successive changes or reclassifications of such Common Stock consisting solely
of changes in par value, or from par value to no par value, or from no par value
to par value. In the event that the Company shall after the date hereof issue
securities with greater or superior voting rights than the shares of Common
Stock outstanding as of the date hereof, the Holder, at its option, may receive
upon exercise of any Warrant either the Warrant Securities or a like number of
such securities with greater or superior voting rights.
Section 8.5 MERGER OR CONSOLIDATION. In case of any consolidation of the
Company with, or merger of the Company with, or merger of the Company into,
another corporation (other than a consolidation or merger which does not result
in any reclassification or change of the outstanding Common Stock), the
corporation formed by such consolidation or merger
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shall execute and deliver to the Holder a supplemental warrant agreement
providing that the holder of each Warrant then outstanding or to be outstanding
shall have the right thereafter (until the expiration of such Warrant) to
receive, upon exercise of such Warrant, the kind and amount of shares of stock
and other securities and property receivable upon such consolidation or merger,
by a holder of the number of securities of the Company for which such Warrant
might have been exercised immediately prior to such consolidation, merger, sale
or transfer. Such supplemental warrant agreement shall provide for adjustments
which shall be identical to the adjustments provided in SECTION 8. The above
provision of this subsection shall similarly apply to successive consolidations
or mergers.
Section 8.6 NO ADJUSTMENT OF EXERCISE PRICE IN CERTAIN CASES. No
adjustment of the Exercise Price shall be made:
(a) Upon the issuance or sale of the Warrants or the Warrant
Securities issuable upon the exercise of the Warrants;
(b) If the amount of said adjustment shall be less than two cents
(2CENTS) per Warrant Security, provided, however, that in such case any
adjustment that would otherwise be required then to be made shall be
carried forward and shall be made at the time of and together with the next
subsequent adjustment which, together with any adjustment so carried
forward, shall amount to at least two cents (2CENTS) per Warrant Security.
9. EXCHANGE AND REPLACEMENT OF WARRANT CERTIFICATES. Each Warrant
Certificate is exchangeable without expense, upon the surrender thereof by the
registered Holder at the principal executive office of the Company, for a new
Warrant Certificate of like tenor and date representing in the aggregate the
right to purchase the same number of Warrant
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Securities in such denominations as shall be designated by the Holder thereof at
the time of such surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it of
the loss, theft, destruction or mutilation of any Warrant Certificate, and, in
case of loss, theft or destruction, of indemnity or security reasonably
satisfactory to it, and reimbursement to the Company of all reasonable expenses
incidental thereto, and upon surrender and cancellation of the Warrants, if
mutilated, the Company will make and deliver a new Warrant Certificate of like
tenor, in lieu thereof.
10. ELIMINATION OF FRACTIONAL INTERESTS. The Company shall not be
required to issue certificates representing fractions of shares of Common Stock,
Redeemable Warrants or Debentures upon the exercise of the Warrants, nor shall
it be required to issue scrip or pay cash in lieu of fractional interests, it
being the intent of the parties that all fractional interests shall be
eliminated by rounding any fraction up to the nearest whole number of shares of
Common Stock or Redeemable Warrants or principal amount of Debentures or other
securities, properties or rights.
11. RESERVATION AND LISTING OF SECURITIES. The Company shall at all times
reserve and keep available out of its authorized shares of Common Stock, solely
for the purpose of issuance upon the exercise of the Warrants, such number of
shares of Common Stock, or other securities, properties or rights as shall be
issuable upon the exercise thereof and conversion of the Debentures into Common
Stock and exercise of the Redeemable Warrants for Common Stock. The Company
covenants and agrees that, upon exercise of the Warrants and payment of the
Exercise Price therefor, all shares of Common Stock, Redeemable Warrants,
Debentures and other securities issuable upon such exercise shall be duly and
validly
-19-
<PAGE>
issued, fully paid, non-assessable and not subject to the preemptive rights of
any stockholder. In addition, the Company covenants and agrees that, upon
exercise of the Redeemable Warrants and conversion of the Debentures underlying
the Warrants into Common Stock and payment of the respective Redeemable Warrant
exercise price or conversion price of the Debentures, all shares of Common Stock
and other securities issuable upon such exercise or conversion shall be duly and
validly issued, fully paid, non-assessable and not subject to the preemptive
rights of any stockholder. As long as the Warrants shall be outstanding, the
Company shall use its best efforts to cause all shares of Common Stock,
Redeemable Warrants and Debentures issuable upon the exercise of the Warrants to
be listed (subject to official notice of issuance) on all securities exchanges
on which the Common Stock, Redeemable Warrants and Debentures issued to the
public in connection herewith may then be listed and/or quoted on the American
Stock Exchange or Nasdaq.
12. NOTICES TO WARRANT HOLDERS. Nothing contained in this Agreement shall
be construed as conferring upon the Holders the right to vote or to consent or
to receive notice as a stockholder in respect of any meetings of stockholders
for the election of directors or any other matter, or as having any rights
whatsoever as a stockholder of the Company. If, however, at any time prior to
the expiration of the Warrants and their exercise, any of the following events
shall occur:
(a) the Company shall take a record of the holders of its shares of
Common Stock for the purpose of entitling them to receive a dividend or
distribution payable otherwise than in cash, or a cash dividend or
distribution payable otherwise than out of current or retained earnings or
capital surplus (in
-20-
<PAGE>
accordance with applicable law), as indicated by the accounting treatment
of such dividend or distribution on the books of the Company; or
(b) the Company shall offer to all the holders of its Common Stock any
additional shares of capital stock of the Company or securities convertible
into or exchangeable for shares of capital stock of the Company, or any
option, right or warrant to subscribe therefor; or
(c) a dissolution, liquidation or winding up of the Company (other
than in connection with a consolidation or merger) or a sale of all or
substantially all of its property, assets and business as an entirety shall
be proposed;
then, in any one or more of said events, the Company shall give written notice
of such event at least thirty (30) days prior to the date fixed as a record date
or the date of closing the transfer books for the determination of the
stockholders entitled to such dividend, distribution, convertible or
exchangeable securities or subscription rights, or entitled to vote on such
proposed dissolution, liquidation, winding up or sale. Such notice shall
specify such record date or the date of closing the transfer books, as the case
may be. Failure to give such notice or any defect therein shall not affect the
validity of any action taken in connection with the declaration or payment of
any such dividend, or the issuance of any convertible or exchangeable
securities, or subscription rights, options or warrants, or any proposed
dissolution, liquidation, winding up or sale.
13. NOTICES.
All notices, requests, consents and other communications hereunder shall be
in writing and shall be deemed to have been duly made and sent when delivered,
or mailed by registered or certified mail, return receipt requested:
-21-
<PAGE>
(a) If to the registered Holder of the Warrants, to the address of
such Holder as shown on the books of the Company; or
(b) If to the Company, to the address set forth in SECTION 3 hereof or
to such other address as the Company may designate by notice to the
Holders.
14. SUPPLEMENTS AND AMENDMENTS. The Company and the Representatives may
from time to time supplement or amend this Agreement without the approval of any
Holders of Warrant Certificates (other than the Representatives) in order to
cure any ambiguity, to correct or supplement any provision contained herein
which may be defective or inconsistent with any provisions herein, or to make
any other provisions in regard to matters or questions arising hereunder which
the Company and the Representatives may deem necessary or desirable and which
the Company and the Representatives deem shall not adversely affect the
interests of the Holders of Warrant Certificates.
15. SUCCESSORS. All the covenants and provisions of this Agreement shall
be binding upon and inure to the benefit of the Company, the Holders and their
respective successors and assigns hereunder.
16. TERMINATION. This Agreement shall terminate at the close of business
on _______, 2004. Notwithstanding the foregoing, the indemnification provisions
of SECTION 7 shall survive such termination until the close of business on
_______, 2010.
17. GOVERNING LAW; SUBMISSION TO JURISDICTION. This Agreement and each
Warrant Certificate issued hereunder shall be deemed to be a contract made under
the laws of the State of New York and for all purposes shall be construed in
accordance with the laws of said State without giving effect to the rules of
said State governing the conflicts of laws.
-22-
<PAGE>
The Company, the Representatives and the Holders hereby agree that any
action, proceeding or claim against it arising out of, or relating in any way
to, this Agreement shall be brought and enforced in the courts of the State of
New York or of the United States of America for the Southern District of New
York, and irrevocably submits to such jurisdiction, which jurisdiction shall be
exclusive. The Company, the Representatives and the Holders hereby irrevocably
waive any objection to such exclusive jurisdiction or inconvenient forum. Any
such process or summons to be served upon any of the Company, the
Representatives and the Holders (at the option of the party bringing such
action, proceeding or claim) may be served by transmitting a copy thereof, by
registered or certified mail, return receipt requested, postage prepaid,
addressed to it at the address set forth in SECTION 13 hereof. Such mailing
shall be deemed personal service and shall be legal and binding upon the party
so served in any action, proceeding or claim. The Company, the Representatives
and the Holders agree that the prevailing party(ies) in any such action or
proceeding shall be entitled to recover from the other party(ies) all of
its/their reasonable legal costs and expenses relating to such action or
proceeding and/or incurred in connection with the preparation therefor.
18. ENTIRE AGREEMENT; MODIFICATION. This Agreement (including the
Underwriting Agreement to the extent portions thereof are referred to herein)
contains the entire understanding between the parties hereto with respect to the
subject matter hereof and may not be modified or amended except by a writing
duly signed by the party against whom enforcement of the modification or
amendment is sought.
19. SEVERABILITY. If any provision of this Agreement shall be held to be
invalid or unenforceable, such invalidity or unenforceability shall not affect
any other provision of this Agreement.
-23-
<PAGE>
20. CAPTIONS. The caption headings of the Sections of this Agreement are
for convenience of reference only and are not intended, nor should they be
construed as, a part of this Agreement and shall be given no substantive effect.
21. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement shall be
construed to give to any person or corporation other than the Company and the
Representatives and any other registered Holder(s) of the Warrant Certificates
or Warrant Securities any legal or equitable right, remedy or claim under this
Agreement; and this Agreement shall be for the sole benefit of the Company and
the Representatives and any other registered Holders of Warrant Certificates or
Warrant Securities.
22. COUNTERPARTS. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and such counterparts shall together constitute but one and the
same instrument.
-24-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, as of the day and year first above written.
INTEGRATED PHYSICIAN SYSTEMS, INC.
By:
------------------------------
Name:
Title:
Attest:
- --------------------------
Secretary
NOLAN SECURITIES CORP.
SOUTHWALL CAPITAL CORP.
By: Nolan Securities Corp.
By:
------------------------------
Name:
Title:
<PAGE>
EXHIBIT A
[FORM OF WARRANT CERTIFICATE]
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, (ii) TO THE
EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT
RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) AN OPINION OF COUNSEL, IF
SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL FOR THE ISSUER, THAT AN
EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN.
EXERCISABLE ON OR BEFORE
5:30 P.M., NEW YORK TIME, __________, 2002
No. W- Warrants to Purchase
____ Shares of Common Stock and/or
____ Debentures and/or
____ Redeemable Warrants
WARRANT CERTIFICATE
This Warrant Certificate certifies that , or registered assigns,
is the registered holder of Warrants to purchase initially, at any
time from __________, 1998 [one year from the effective date of the Registration
Statement] until 5:30 p.m. New York time on ___________, 2002 [five years from
the effective date of the Registration Statement] ("Expiration Date"), up to
__________ fully-paid and non-assessable shares of common stock, $.01 par value
("Common Stock"), of INTEGRATED PHYSICIAN SYSTEMS, INC., a Delaware corporation
(the "Company"), and/or _____ Debentures of the Company, and/or Redeemable
Warrants of the Company at the initial exercise price, subject to adjustment in
certain events (the "Exercise Price"), of $______ [120% of the initial public
offering price] per share of Common Stock, 100% of the principal amount of the
Debentures and $____ [120% of the initial public offering price] per Redeemable
Warrant upon surrender of this Warrant Certificate and payment of the Exercise
Price at an office or agency of the Company, but subject to the conditions set
forth herein and in the warrant agreement dated as of _______,
A-1
<PAGE>
1997 between the Company and NOLAN SECURITIES CORP. and SOUTHWALL CAPITAL
CORP. (the "Warrant Agreement"). Payment of the Exercise Price shall be
made by certified or official bank check in New York Clearing House funds
payable to the order of the Company or by surrender of this Warrant
Certificate.
No Warrant may be exercised after 5:30 p.m., New York time, on the
Expiration Date, at which time all Warrants evidenced hereby, unless exercised
prior thereto, hereby shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants issued pursuant to the Warrant Agreement, which
Warrant Agreement is hereby incorporated by reference in and made a part of this
instrument and is hereby referred to for a description of the rights, limitation
of rights, obligations, duties and immunities thereunder of the Company and the
holders (the words "holders" or "holder" meaning the registered holders or
registered holder) of the Warrants.
The Warrant Agreement provides that upon the occurrence of certain events
the Exercise Price and the type and/or number of the Company's securities
issuable thereupon may, subject to certain conditions, be adjusted. In such
event, the Company will, at the request of the holder, issue a new Warrant
Certificate evidencing the adjustment in the Exercise Price and the number
and/or type of securities issuable upon the exercise of the Warrants; provided,
however, that the failure of the Company to issue such new Warrant Certificates
shall not in any way change, alter, or otherwise impair, the rights of the
holder as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this Warrant
Certificate at an office or agency of the Company, a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like number
of Warrants shall be issued to the transferee(s) in exchange for this Warrant
Certificate, subject to the limitations provided herein and in the Warrant
Agreement, without any charge except for any tax or other governmental charge
imposed in connection with such transfer.
Upon the exercise of less than all of the Warrants evidenced by this
Certificate, the Company shall forthwith issue to the holder hereof a new
Warrant Certificate representing such number of unexercised Warrants.
The Company may deem and treat the registered holder(s) hereof as the
absolute owner(s) of this Warrant Certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, and of any distribution to the holder(s) hereof, and for all
other purposes, and the Company shall not be affected by any notice to the
contrary.
All terms used in this Warrant Certificate which are defined in the Warrant
Agreement shall have the meanings assigned to them in the Warrant Agreement.
A-2
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed under its corporate seal.
Dated as of ___________, 1997
INTEGRATED PHYSICIAN SYSTEMS, INC.
By:
-----------------------------
Name:
Title:
A-3
<PAGE>
[FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 3.1]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase:
/ / _______________________ shares of Common Stock;
/ / _______________________ Redeemable Warrants;
/ / _______________________ Debentures;
/ / _______________________ shares of Common Stock together with
_______________________ Debentures and
_______________________ Redeemable Warrants.
and herewith tenders in payment for such securities a certified or official
bank check payable in New York Clearing House Funds to the order of
Integrated Physician Systems, Inc. in the amount of $_______________________,
all in accordance with the terms of Section 3.1 of the Representatives'
Warrant Agreement dated as of ______________________, 1997 between Integrated
Physician Systems, Inc. and Nolan Securities Corp. and SouthWall Capital Corp.
The undersigned requests that a certificate for
such securities be registered in the name of whose
address is and that such Certificate be
delivered to whose address is
.
Dated:
Signature ________________________________________
(Signature must conform in all respects to name of
holder as specified on the face of the Warrant
Certificate.)
____________________________________________
(Insert Social Security or Other Identifying
Number of Holder)
A-4
<PAGE>
[FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 3.2]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase:
/ / _______________________ shares of Common Stock;
/ / _______________________ Redeemable Warrants;
/ / _______________________ Debentures;
/ / _______________________ shares of Common Stock together with
_______________________ Debentures and
_______________________ Redeemable Warrants.
and herewith tenders in payment for such securities ________ Warrants all in
accordance with the terms of Section 3.2 of the Representatives' Warrant
Agreement dated as of __________________, 1997 between Integrated Physician
Systems, Inc. and Nolan Securities Corp. and SouthWall Capital Corp. The
undersigned requests that a certificate for such securities be registered in
the name of___________________________________ whose address
is___________________________________________________________ that such
Certificate be delivered to _____________________________________ whose
address is___________________________________________________________.
Dated:
Signature ________________________________________
(Signature must conform in all respects to name of
holder as specified on the face of the Warrant
Certificate.)
____________________________________________
(Insert Social Security or Other Identifying
Number of Holder)
A-5
<PAGE>
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED ____________________________hereby sells, assigns
and transfers unto
______________________________________________________________________________
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint Attorney, to
transfer the within Warrant Certificate on the books of the within-named
Company, with full power of substitution.
Dated:
Signature ________________________________________
(Signature must conform in all respects to name of
holder as specified on the face of the Warrant
Certificate.)
____________________________________________
(Insert Social Security or Other Identifying
Number of Holder)
A-6
<PAGE>
EXHIBIT 4.4
________________________________________________________________________________
________________________________________________________________________________
INTEGRATED PHYSICIAN SYSTEMS, INC.
AND
CONTINENTAL STOCK TRANSFER AND TRUST COMPANY
____________
WARRANT AGREEMENT
Dated as of _________, 1997
________________________________________________________________________________
________________________________________________________________________________
<PAGE>
AGREEMENT, dated this ___ day of _________, 1997, by and among
INTEGRATED PHYSICIAN SYSTEMS, INC., a Delaware corporation (the "Company"),
and CONTINENTAL STOCK TRANSFER AND TRUST COMPANY, as Warrant Agent (the
"Warrant Agent").
W I T N E S S E T H:
WHEREAS, in connection with (i) the offering to the public of
up to $25,000,000 aggregate principal amount of ____% Convertible
Subordinated Debentures due 2004 (the "Debentures"), 2,000,000 shares of
Common Stock (as defined in Section 1) and 2,000,000 Class A Redeemable
Common Stock Purchase Warrants (the "Warrants"), each warrant entitling the
holder thereof to purchase one additional share of Common Stock, (ii) the
over-allotment option to purchase up to an additional $3,750,000 principal
amount of Debentures and/or up to an additional 300,000 shares of Common
Stock and/or up to an additional 300,000 Warrants (the "Over-allotment
Option"), and (iii) the sale to Nolan Securities Corp. ("Nolan"), Madison
Capital Markets Corp. and Dirks & Company, Inc. (collectively, the
"Representatives") of warrants (the "Representatives' Warrants") to purchase
up to $2,500,000 principal amount of Debentures and/or 200,000 shares of
Common Stock and/or 200,000 Warrants, the Company will issue up to 2,500,000
Warrants (subject to increase as provided in the Representatives' Warrant
Agreement); and
WHEREAS, the Company desires to provide for the issuance of
certificates representing the Warrants; and
WHEREAS, the Company desires the Warrant Agent to act on
behalf of the Company, and the Warrant Agent is willing to so act, in
connection with the issuance, registration, transfer, exchange and redemption
of the Warrants, the issuance of certificates representing the Warrants, the
exercise of the Warrants and the rights of the holders thereof.
<PAGE>
NOW, THEREFORE, in consideration of the premises and the
mutual agreements hereinafter set forth and for the purpose of defining the
terms and provisions of the Warrants and the certificates representing the
Warrants and the respective rights and obligations thereunder of the Company,
the Representatives, the holders of certificates representing the Warrants
and the Warrant Agent, the parties hereto agree as follows:
SECTION 1. DEFINITIONS. As used herein, the following terms
shall have the following meanings, unless the context shall otherwise require:
(a) "Act" shall mean the Securities Act of 1933, as amended.
(b) "Common Stock" shall mean the authorized stock of the
Company of any class, whether now or hereafter authorized, which has the
right to participate in the voting and in the distribution of earnings and
assets of the Company without limit as to amount or percentage.
(c) "Commission" shall mean the Securities and Exchange
Commission.
(d) "Corporate Office shall mean the office of the Warrant
Agent (or its successor) at which at any particular time its business in New
York, New York, shall be administered, which office is located on the date
hereof at 2 Broadway.
(e) "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
(f) "Exercise Date" shall mean, subject to the provisions of
Section 5(b) hereof, as to any Warrant, the date on which the Warrant Agent
shall have received both (i) the Warrant Certificate representing such
Warrant, with the exercise form thereon duly executed by the Registered
Holder thereof or his attorney duly authorized in writing, and (ii) payment
in cash or by official bank or certified check made payable to the Warrant
Agent for the account of the Company, of the amount in lawful money of the
United States of America equal to the applicable Purchase Price (as
hereinafter defined) in good funds.
2
<PAGE>
(g) "Initial Public Offering Price" shall mean $______ per
share of Common Stock.
(h) "Initial Warrant Exercise Date" shall mean _________,
1997 [date of Prospectus].
(i) "Initial Warrant Redemption Date" shall mean ________,
1999 [18 months after date of Prospectus].
(j) "NASD" shall mean the National Association of Securities
Dealers, Inc.
(k) "Nasdaq" shall mean the Nasdaq Stock Market.
(l) "Purchase Price" shall mean, subject to modification and
adjustment as provided in Section 8, $______
[140% of initial public offering price per share of Common Stock] and further
subject to the Company's right, in its sole discretion, to decrease the
Purchase Price for a period of not less than 30 days on not less than 30
days' prior written notice to the Registered Holders and Nolan.
(m) "Redemption Date" shall mean the date (which may not
occur before the Initial Warrant Redemption Date) fixed for the redemption of
the Warrants in accordance with the terms hereof.
(n) "Redemption Price" shall mean the price at which the
Company may, at its option, redeem the Warrants, in accordance with the terms
hereof, which price shall be $0.10 per Warrant, subject to adjustment from
time to time pursuant to the provisions of Section 9 hereof.
(o) "Registered Holder" shall mean the person in whose name
any certificate representing the Warrants shall be registered on the books
maintained by the Warrant Agent pursuant to Section 6.
(p) "Transfer Agent" shall mean Continental Stock Transfer
and Trust Company, or its authorized successor.
3
<PAGE>
(q) "Underwriting Agreement" shall mean the underwriting
agreement dated __________, 1997 [date of Prospectus] between the Company and
the several underwriters listed therein relating to the purchase for resale
to the public of the $25,000,000 aggregate principal amount of Debentures,
2,000,000 shares of Common Stock and 2,000,000 Warrants.
(r) "Representatives' Warrant Agreement" shall mean the
agreement dated as of _________, 1997 [date of Prospectus] between the
Company and the Representatives relating to and governing the terms and
provisions of the Representatives' Warrants.
(s) "Warrant Certificate" shall mean a certificate
representing each of the Warrants substantially in the form annexed hereto as
Exhibit A.
(t) "Warrant Expiration Date" shall mean, unless the Warrants
are redeemed as provided in Section 9 hereof prior to such date, 5:30 p.m.
(New York time), on ________, 2002 [five years after date of Prospectus], or
the Redemption Date as defined herein, whichever date is earlier; PROVIDED
that if such date shall in the State of New York be a holiday or a day on
which banks are authorized to close, then 5:30 p.m. (New York time) on the
next following day which, in the State of New York, is not a holiday or a day
on which banks are authorized to close. Upon five business days' prior
written notice to the Registered Holders, the Company shall have the right to
extend the Warrant Expiration Date.
SECTION 2. WARRANTS AND ISSUANCE OF WARRANT CERTIFICATES.
(a) Each Warrant shall initially entitle the Registered
Holder of the Warrant Certificate representing such Warrant to purchase at
the Purchase Price therefor from the Initial Warrant Exercise Date until the
Warrant Expiration Date one share of Common Stock upon the exercise thereof
in accordance with the terms hereof, subject to modification and adjustment
as provided in Section 8.
4
<PAGE>
(b) Upon execution of this Agreement, Warrant Certificates
representing the number of Warrants sold pursuant to the Underwriting
Agreement (subject to modification and adjustment as provided in Section 8)
shall be executed by the Company and delivered to the Warrant Agent.
(c) Upon exercise of the Representatives' Warrants as
provided therein, Warrant Certificates representing all or a portion of
Warrants to purchase up to $2,500,000 principal amount of Debentures and/or
200,000 shares of Common Stock and/or 200,000 Warrants (subject to
modification and adjustment as provided in Section 8 hereof and in the
Representatives' Warrant Agreement), shall be countersigned, issued and
delivered by the Warrant Agent upon written order of the Company signed by
its Chairman of the Board, Chief Executive Officer, President or a Vice
President and by its Treasurer or an Assistant Treasurer or its Secretary or
an Assistant Secretary.
(d) From time to time, up to the Warrant Expiration Date or
the Redemption Date, whichever date is earlier, the Warrant Agent shall
countersign and deliver Warrant Certificates in required denominations of one
or whole number multiples thereof to the person entitled thereto in
connection with any transfer or exchange permitted under this Agreement.
Except as provided herein, no Warrant Certificates shall be issued except (i)
Warrant Certificates initially issued hereunder and those issued on or after
the Initial Warrant Exercise Date, upon the exercise of fewer than all
Warrants held by the exercising Registered Holder, (ii) Warrant Certificates
issued upon any transfer or exchange of Warrants, (iii) Warrant Certificates
issued in replacement of lost, stolen, destroyed or mutilated Warrant
Certificates pursuant to Section 7, (iv) Warrant Certificates issued pursuant
to the Representatives' Warrant Agreement, and (v) at the option of the
Company, Warrant Certificates in such form as may be approved by its Board of
Directors, to reflect any adjustment or change in the Purchase Price, the
number of shares of
5
<PAGE>
Common Stock purchasable upon exercise of the Warrants or the Redemption
Price therefor made pursuant to Section 8 hereof.
SECTION 3. FORM AND EXECUTION OF WARRANT CERTIFICATES.
(a) The Warrant Certificates shall be substantially in the
form annexed hereto as Exhibit A (the provisions of which are hereby
incorporated herein) and may have such letters, numbers or other marks of
identification or designation and such legends, summaries or endorsements
printed, lithographed or engraved thereon as the Company may deem appropriate
and as are not inconsistent with the provisions of this Agreement, or as may
be required to comply with any law or with any rule or regulation made
pursuant thereto or with any rule or regulation of any stock exchange on
which the Warrants may be listed, or to conform to usage. The Warrant
Certificates shall be dated the date of issuance thereof (whether upon
initial issuance, transfer, exchange or in lieu of mutilated, lost, stolen or
destroyed Warrant Certificates) and issued in registered form. Warrants
shall be numbered serially with the letter W on the Warrants.
(b)Warrant Certificates shall be executed on behalf of the
Company by its Chairman of the Board, Chief Executive Officer, President or
any Vice President and by its Treasurer or an Assistant Treasurer or its
Secretary or an Assistant Secretary, by manual signatures or by facsimile
signatures printed thereon, and shall have imprinted thereon a facsimile of
the Company's seal. Warrant Certificates shall be manually countersigned by
the Warrant Agent and shall not be valid for any purpose unless so
countersigned. In case any officer of the Company who shall have signed any
of the Warrant Certificates shall cease to be such officer of the Company
before the date of issuance of the Warrant Certificates or before
countersignature by the Warrant Agent and issue and delivery thereof, such
Warrant Certificates, nevertheless, may be countersigned by the Warrant
Agent, issued and delivered with the same force and effect as though the
person who signed such Warrant Certificates had not ceased to be such officer
of the Company. After
6
<PAGE>
countersignature by the Warrant Agent, Warrant Certificates shall be
delivered by the Warrant Agent to the Registered Holder promptly and without
further action by the Company, except as otherwise provided by Section 4(a)
hereof.
SECTION 4. EXERCISE.
(a)Warrants in denominations of one or whole number multiples
thereof may be exercised by the Registered Holder thereof commencing at any
time on or after the Initial Warrant Exercise Date, but not after the Warrant
Expiration Date, upon the terms and subject to the conditions set forth
herein and in the applicable Warrant Certificate. A Warrant shall be deemed
to have been exercised immediately prior to the close of business on the
Exercise Date and the person entitled to receive the securities deliverable
upon such exercise shall be treated for all purposes as the holder, upon
exercise thereof, as of the close of business on the Exercise Date. If
Warrants in denominations other than whole number multiples thereof shall be
exercised at one time by the same Registered Holder, the number of full
shares of Common Stock which shall be issuable upon exercise thereof shall be
computed on the basis of the aggregate number of full shares of Common Stock
issuable upon such exercise. As soon as practicable on or after the Exercise
Date and in any event within five business days after such date, if one or
more Warrants have been exercised, the Warrant Agent on behalf of the Company
shall cause to be issued to the person or persons entitled to receive the
same a Common Stock certificate or certificates for the shares of Common
Stock deliverable upon such exercise, and the Warrant Agent shall deliver the
same to the person or persons entitled thereto. Upon the exercise of any one
or more Warrants, the Warrant Agent shall promptly notify the Company in
writing of such fact and of the number of securities delivered upon such
exercise and, subject to subsection (b) below, shall cause all payments of an
amount in cash or by check made payable to the order of the Company, equal to
the Purchase Price, to be deposited promptly in the Company's bank account.
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(b)At any time upon the exercise of any Warrants after one
year and one day from the date hereof, the Warrant Agent shall, on a daily
basis, within two business days after such exercise, notify Nolan of the
exercise of any such Warrants and shall, on a weekly basis (subject to
collection of funds constituting the tendered Purchase Price, but in no event
later than five business days after the last day of the calendar week in
which such funds were tendered), remit to Nolan on behalf of the
Representatives an amount equal to five percent (5%) of the Purchase Price of
such Warrants then being exercised unless Nolan shall have notified the
Warrant Agent that the payment of such amount with respect to such Warrant is
violative of the General Rules and Regulations promulgated under the Exchange
Act, or the rules and regulations of the NASD or applicable state securities
or "blue sky" laws, or the Warrants are those underlying the Representatives'
Warrants in which event, the Warrant Agent shall remit the full Purchase
Price to the Company; provided, that the Warrant Agent shall not be obligated
to pay any amounts pursuant to this Section 4(b) during any week that such
amounts payable are less than $1,000 and the Warrant Agent's obligation to
make such payments shall be suspended until the amount payable aggregates
$1,000, and provided further, that, in any event, any such payment
(regardless of amount) shall be made not less frequently than monthly.
Notwithstanding the foregoing, Nolan shall be entitled to receive the
commission contemplated by this Section 4(b) as Warrant solicitation agent
only if: (i) any of the Representatives have provided actual services in
connection with the solicitation of the exercise of a Warrant by a Registered
Holder and (ii) the Registered Holder exercising a Warrant affirmatively
designates in writing on the exercise form on the reverse side of the Warrant
Certificate that the exercise of such Registered Holder's Warrant was
solicited by any of the Representatives.
(c)The Company shall not be required to issue fractional
shares on the exercise of Warrants. Warrants may only be exercised in such
multiples as are required to permit
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the issuance by the Company of one or more whole shares. If one or more
Warrants shall be presented for exercise in full at the same time by the same
Registered Holder, the number of whole shares which shall be issuable upon
such exercise thereof shall be computed on the basis of the aggregate number
of shares purchasable on exercise of the Warrants so presented. If any
fraction of a share would, except for the provisions provided herein, be
issuable on the exercise of any Warrant (or specified portion thereof), the
Company shall pay an amount in cash equal to such fraction multiplied by the
then current market value of a share of Common Stock, determined as follows:
(1)If the Common Stock is listed, or admitted to unlisted
trading privileges on a national securities exchange, or is traded on Nasdaq,
the current market value of a share of Common Stock shall be the closing sale
price of the Common Stock at the end of the regular trading session on the
last business day prior to the date of exercise of the Warrants on whichever
of such exchanges or Nasdaq had the highest average daily trading volume for
the Common Stock on such day; or
(2)If the Common Stock is not listed or admitted to unlisted
trading privileges on any national securities exchange, or listed, quoted or
reported for trading on Nasdaq, but is traded in the over-the-counter market,
the current market value of a share of Common Stock shall be the average of
the last reported bid and asked prices of the Common Stock reported by the
National Quotation Bureau, Inc. on the last business day prior to the date of
exercise of the Warrants; or
(3)If the Common Stock is not listed, admitted to unlisted
trading privileges on any national securities exchange, or listed, quoted or
reported for trading on Nasdaq, and bid and asked prices of the Common Stock
are not reported by the National Quotation Bureau, Inc., the current market
value of a share of Common Stock shall be an amount, not less than the book
value thereof as of the end of the most recently completed fiscal quarter of
the Company ending prior to
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the date of exercise, determined by the members of the Board of Directors of the
Company exercising good faith and using customary valuation methods.
SECTION 5. RESERVATION OF SHARES; LISTING; PAYMENT OF TAXES; ETC.
(a)The Company covenants that it will at all times reserve and
keep available out of its authorized Common Stock, solely for the purpose of
issue upon exercise of Warrants, such number of shares of Common Stock as
shall then be issuable upon the exercise of all outstanding Warrants. The
Company covenants that all shares of Common Stock which shall be issuable
upon exercise of the Warrants shall, at the time of delivery thereof, be duly
and validly issued and fully paid and nonassessable and free from all
preemptive or similar rights, taxes, liens and charges with respect to the
issue thereof, and that upon issuance such shares shall be listed on each
securities exchange, if any, on which the other shares of outstanding Common
Stock of the Company are then listed.
(b)The Company covenants that if any securities to be
reserved for the purpose of exercise of Warrants hereunder require
registration with, or approval of, any governmental authority under any
federal securities law before such securities may be validly issued or
delivered upon such exercise, then the Company will file a registration
statement under the federal securities laws or a post-effective amendment,
use its best efforts to cause the same to become effective and to keep such
registration statement current while any of the Warrants are outstanding and
deliver a prospectus which complies with Section 10(a)(3) of the Act, to the
Registered Holder exercising the Warrant (except, if in the opinion of
counsel to the Company, such registration is not required under the federal
securities law or if the Company receives a letter from the staff of the
Commission stating that it would not take any enforcement action if such
registration is not effected). The Company will use its best efforts to
obtain appropriate approvals or registrations under state "blue sky"
securities laws with respect to any such securities. However,
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Warrants may not be exercised by, or shares of Common Stock issued to, any
Registered Holder in any state in which such exercise would be unlawful.
(c)The Company shall pay all documentary, stamp or similar
taxes and other governmental charges that may be imposed with respect to the
issuance of Warrants, or the issuance or delivery of any shares of Common
Stock upon exercise of the Warrants; provided, however, that if shares of
Common Stock are to be delivered in a name other than the name of the
Registered Holder of the Warrant Certificate representing any Warrant being
exercised, then no such delivery shall be made unless the person requesting
the same has paid to the Warrant Agent the amount of transfer taxes or
charges incident thereto, if any.
(d)The Warrant Agent is hereby irrevocably authorized as
the Transfer Agent to requisition from time to time certificates representing
shares of Common Stock or other securities required upon exercise of the
Warrants, and the Company will comply with all such requisitions.
SECTION 6. EXCHANGE AND REGISTRATION OF TRANSFER.
(a)Warrant Certificates may be exchanged for other Warrant
Certificates representing an equal aggregate number of Warrants of the same
class or may be transferred in whole or in part. Warrant Certificates to be
exchanged shall be surrendered to the Warrant Agent at its Corporate Office,
and, upon satisfaction of the terms and provisions hereof, the Company shall
execute and the Warrant Agent shall countersign, issue and deliver in
exchange therefor the Warrant Certificate or Certificates which the
Registered Holder making the exchange shall be entitled to receive.
(b)The Warrant Agent shall keep, at its office, books in
which, subject to such reasonable regulations as it may prescribe, it shall
register Warrant Certificates and the transfer thereof in accordance with
customary practice. Upon due presentment for registration of transfer of
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<PAGE>
any Warrant Certificate at such office, the Company shall execute and the
Warrant Agent shall issue and deliver to the transferee or transferees a new
Warrant Certificate or Certificates representing an equal aggregate number of
Warrants of the same class.
(c)With respect to all Warrant Certificates presented for
registration of transfer, or for exchange or exercise, the subscription or
exercise form, as the case may be, on the reverse thereof shall be duly
endorsed or be accompanied by a written instrument or instruments of transfer
and subscription, in form satisfactory to the Company and the Warrant Agent,
duly executed by the Registered Holder thereof or his attorney-in-fact duly
authorized in writing.
(d)A service charge may be imposed by the Warrant Agent
for any exchange or registration of transfer of Warrant Certificates. In
addition, the Company may require payment by such Holder of a sum sufficient
to cover any tax or other governmental charge that may be imposed in
connection therewith.
(e)All Warrant Certificates surrendered for exercise or
for exchange in case of mutilated Warrant Certificates shall be promptly
canceled by the Warrant Agent and thereafter retained by the Warrant Agent
until termination of this Agreement.
(f)Prior to due presentment for registration of transfer
thereof, the Company and the Warrant Agent may deem and treat the Registered
Holder of any Warrant Certificate as the absolute owner thereof and of each
Warrant represented thereby (notwithstanding any notations of ownership or
writing thereon made by anyone other than a duly authorized officer of the
Company or the Warrant Agent) for all purposes and shall not be affected by
any notice to the contrary.
SECTION 7. LOSS OR MUTILATION. Upon receipt by the
Company and the Warrant Agent of evidence satisfactory to them of the
ownership of and the loss, theft, destruction or mutilation of any Warrant
Certificate and (in the case of loss, theft or destruction) of indemnity
satisfactory to them, and (in case of mutilation) upon surrender and
cancellation thereof, the
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<PAGE>
Company shall execute and the Warrant Agent shall (in the absence of notice
to the Company and/or the Warrant Agent that a new Warrant Certificate has
been acquired by a bona fide purchaser) countersign and deliver to the
Registered Holder in lieu thereof a new Warrant Certificate of like tenor
representing an equal aggregate number of Warrants. Applicants for a
substitute Warrant Certificate shall also comply with such other reasonable
regulations and pay such other reasonable charges as the Warrant Agent may
prescribe.
SECTION 8. ADJUSTMENT OF PURCHASE PRICE AND NUMBER OF SHARES OF
COMMON STOCK DELIVERABLE.
(a)Except as hereinafter provided, in the event the Company shall
issue or sell any shares of Common Stock for a consideration per share less
than the Initial Public Offering Price of the shares of Common Stock or issue
any shares of Common Stock as a stock dividend to the holders of Common
Stock, or subdivide or combine the outstanding shares of Common Stock into a
greater or lesser number of shares (any such issuance, subdivision or
combination being herein called a "Change of Shares"), then, and thereafter
upon each further Change of Shares, the Purchase Price for the Warrants
(whether or not the same shall be issued and outstanding) in effect
immediately prior to such Change of Shares shall be changed to a price
(including any applicable fraction of a cent to the nearest cent) determined
by dividing (i) the sum of (a) the total number of shares of Common Stock
outstanding immediately prior to such Change of Shares, multiplied by the
Purchase Price in effect immediately prior to such Change of Shares and (b)
the consideration, if any, received by the Company upon such sale, issuance,
subdivision or combination, by (ii) the total number of shares of Common
Stock outstanding immediately after such Change of Shares; PROVIDED, HOWEVER,
that in no event shall the Purchase Price be adjusted pursuant to this
computation to an amount in excess of the Purchase Price in effect
immediately prior to such computation, except in the case of a combination of
outstanding shares of Common Stock.
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For the purposes of any adjustment to be made in accordance with
this Section 8(a), the following provisions shall be applicable:
(A) In case of the issuance or sale of shares of Common Stock
(or of other securities deemed hereunder to involve the issuance or sale of
shares of Common Stock) for a consideration part or all of which shall be
cash, the amount of the cash portion of the consideration therefor deemed to
have been received by the Company shall be (i) the subscription price, if
shares of Common Stock are offered by the Company for subscription, or (ii)
the public offering price (before deducting therefrom any compensation paid
or discount allowed in the sale, underwriting or purchase thereof by
underwriters or dealers or others performing similar services, or any
expenses incurred in connection therewith), if such securities are sold to
underwriters or dealers for public offering without a subscription offering,
or (iii) the gross amount of cash actually received by the Company for such
securities, in any other case.
(B) In case of the issuance or sale (otherwise than as a
dividend or other distribution on any stock of the Company, and otherwise
than on the exercise of options, rights or warrants or the conversion or
exchange of convertible or exchangeable securities) of shares of Common Stock
(or of other securities deemed hereunder to involve the issuance or sale of
shares of Common Stock) for a consideration part or all of which shall be
other than cash, the amount of the consideration therefor other than cash
deemed to have been received by the Company shall be the value of such
consideration as determined in good faith by the Board of Directors of the
Company, using customary valuation methods and on the basis of prevailing
market values for similar property or services.
(C) Shares of Common Stock issuable by way of dividend or
other distribution on any stock of the Company shall be deemed to have been
issued immediately after the opening of business on the day following the
record date for the determination of shareholders
14
<PAGE>
entitled to receive such dividend or other distribution and shall be deemed
to have been issued without consideration.
(D) The reclassification of securities of the Company other
than shares of Common Stock into securities including shares of Common Stock
shall be deemed to involve the issuance of such shares of Common Stock for a
consideration other than cash immediately prior to the close of business on
the date fixed for the determination of security holders entitled to receive
such shares, and the value of the consideration allocable to such shares of
Common Stock shall be determined as provided in subsection (B) of this
Section 8(a).
(E) The number of shares of Common Stock at any one time
outstanding shall be deemed to include the aggregate maximum number of shares
issuable (subject to readjustment upon the actual issuance thereof) upon the
exercise of options, rights or warrants and upon the conversion or exchange
of convertible or exchangeable securities.
(b) Upon each adjustment of the Purchase Price pursuant to
this Section 8, the number of shares of Common Stock purchasable upon the
exercise of each Warrant shall be the number derived by multiplying the
number of shares of Common Stock purchasable immediately prior to such
adjustment by the Purchase Price in effect prior to such adjustment and
dividing the product so obtained by the applicable adjusted Purchase Price.
(c) In case the Company shall at any time after the date
hereof issue options, rights or warrants to subscribe for shares of Common
Stock, or issue any securities convertible into or exchangeable for shares of
Common Stock, for a consideration per share (determined as provided in
Sections 8(a) and 8(b) and as provided below) less than the Initial Public
Offering Price of the shares of Common Stock, or without consideration
(including the issuance of any such securities by way of dividend or other
distribution), the Purchase Price for the Warrants (whether or not the same
shall be issued and outstanding) in effect immediately prior to the issuance
15
<PAGE>
of such options, rights or warrants, or such convertible or exchangeable
securities, as the case may be, shall be reduced to a price determined by
making the computation in accordance with the provisions of Sections 8(a) and
8(b) hereof, PROVIDED that:
(A) The aggregate maximum number of shares of Common Stock,
as the case may be, issuable or that may become issuable under such options,
rights or warrants (assuming exercise in full even if not then currently
exercisable or currently exercisable in full) shall be deemed to be issued
and outstanding at the time such options, rights or warrants were issued, for
a consideration equal to the minimum purchase price per share provided for in
such options, rights or warrants at the time of issuance, plus the
consideration, if any, received by the Company for such options, rights or
warrants; PROVIDED, HOWEVER, that upon the expiration or other termination of
such options, rights or warrants, if any thereof shall not have been
exercised, the number of shares of Common Stock deemed to be issued and
outstanding pursuant to this subsection (A) (and for the purposes of
subsection (E) of Section 8(a) hereof) shall be reduced by the number of
shares as to which options, warrants and/or rights shall have expired, and
such number of shares shall no longer be deemed to be issued and outstanding,
and the Purchase Price then in effect shall forthwith be readjusted and
thereafter be the price that it would have been had adjustment been made on
the basis of the issuance only of the shares actually issued plus the shares
remaining issuable upon the exercise of those options, rights or warrants as
to which the exercise rights shall not have expired or terminated unexercised.
(B) The aggregate maximum number of shares of Common Stock
issuable or that may become issuable upon conversion or exchange of any
convertible or exchangeable securities (assuming conversion or exchange in
full even if not then currently convertible or exchangeable in full) shall be
deemed to be issued and outstanding at the time of issuance of such
securities, for a consideration equal to the consideration received by the
Company for such
16
<PAGE>
securities, plus the minimum consideration, if any, receivable by the Company
upon the conversion or exchange thereof; PROVIDED, HOWEVER, that upon the
termination of the right to convert or exchange such convertible or
exchangeable securities (whether by reason of redemption or otherwise), the
number of shares of Common Stock deemed to be issued and outstanding pursuant
to this subsection (B) (and for the purposes of subsection (E) of Section
8(a) hereof) shall be reduced by the number of shares as to which the
conversion or exchange rights shall have expired or terminated unexercised,
and such number of shares shall no longer be deemed to be issued and
outstanding, and the Purchase Price then in effect shall forthwith be
readjusted and thereafter be the price that it would have been had adjustment
been made on the basis of the issuance only of the shares actually issued
plus the shares remaining issuable upon conversion or exchange of those
convertible or exchangeable securities as to which the conversion or exchange
rights shall not have expired or terminated unexercised.
(C) If any change shall occur in the price per share provided
for in any of the options, rights or warrants referred to in subsection (A)
of this Section 8(c), or in the price per share or ratio at which the
securities referred to in subsection (B) of this Section 8(c) are convertible
or exchangeable, such options, rights or warrants or conversion or exchange
rights, as the case may be, to the extent not theretofore exercised, shall be
deemed to have expired or terminated on the date when such price change
became effective in respect of shares not theretofore issued pursuant to the
exercise or conversion or exchange thereof, and the Company shall be deemed
to have issued upon such date new options, rights or warrants or convertible
or exchangeable securities.
(d) In case of any reclassification or change of outstanding
shares of Common Stock issuable upon exercise of the Warrants (other than a
change in par value, or from par value to no par value, or from no par value
to par value or as a result of a subdivision or combination), or in case of
any consolidation or merger of the Company with or into another
17
<PAGE>
corporation (other than (1) a merger with a subsidiary of the Company in
which merger the Company is the continuing corporation or (2) any
consolidation or merger of the Company with or into another corporation
which, in either instance, does not result in any reclassification or change
of the then outstanding shares of Common Stock or other capital stock
issuable upon exercise of the Warrants (other than a change in par value, or
from par value to no par value, or from no par value to par value or as a
result of subdivision or combination)) 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, then, as a condition of such reclassification,
change, consolidation, merger, sale or conveyance, the Company, or such
successor or purchasing corporation, as the case may be, shall make lawful
and adequate provision whereby the Registered Holder of each Warrant then
outstanding shall have the right thereafter to receive on exercise of such
Warrant the kind and amount of securities and property receivable upon such
reclassification, change, consolidation, merger, sale or conveyance by a
holder of the number of securities issuable upon exercise of such Warrant
immediately prior to such reclassification, change, consolidation, merger,
sale or conveyance and shall forthwith file at the Corporate Office of the
Warrant Agent a statement signed by its Chief Executive Officer, President or
a Vice President and by its Treasurer or an Assistant Treasurer or its
Secretary or an Assistant Secretary evidencing such provision. Such
provisions shall include provision for adjustments which shall be as nearly
equivalent as may be practicable to the adjustments provided for in Sections
8(a), (b) and (c). The above provisions of this Section 8(d) shall similarly
apply to successive reclassifications and changes of shares of Common Stock
and to successive consolidations, mergers, sales or conveyances.
(e) Irrespective of any adjustments or changes in the
Purchase Price or the number of shares of Common Stock purchasable upon
exercise of the Warrants, the Warrant Certificates theretofore and thereafter
issued shall, unless the Company shall exercise its option to
18
<PAGE>
issue new Warrant Certificates pursuant to Section 2(e) hereof, continue to
express the Purchase Price per share and the number of shares purchasable
thereunder as the Purchase Price per share and the number of shares
purchasable thereunder were expressed in the Warrant Certificates when the
same were originally issued.
(f) After each adjustment of the Purchase Price pursuant to
this Section 8, the Company will promptly prepare a certificate signed by the
Chairman, Chief Executive Officer or President, and by the Treasurer or an
Assistant Treasurer or the Secretary or an Assistant Secretary, of the
Company setting forth: (i) the Purchase Price as so adjusted, (ii) the number
of shares of Common Stock purchasable upon exercise of each Warrant, after
such adjustment, and (iii) a brief statement of the facts accounting for such
adjustment. The Company will promptly file such certificate with the Warrant
Agent and cause a brief summary thereof to be sent by ordinary first class
mail to each Registered Holder at his last address as it shall appear on the
registry books of the Warrant Agent. No failure to mail such notice nor any
defect therein or in the mailing thereof shall affect the validity thereof
except as to the holder to whom the Company failed to mail such notice, or
except as to the holder whose notice was defective. The affidavit of an
officer of the Warrant Agent or the Secretary or an Assistant Secretary of
the Company that such notice has been mailed shall, in the absence of fraud,
be prima facie evidence of the facts stated therein.
(g) No adjustment of the Purchase Price shall be made as a
result of or in connection with (A) the issuance or sale of shares of Common
Stock pursuant to options, warrants, stock purchase agreements and
convertible or exchangeable securities outstanding or in effect on the date
hereof and on the terms described in the final prospectus relating to the
public offering contemplated by the Underwriting Agreement; (B) stock options
to be granted under the Company's Stock Option Plan to employees, consultants
and directors; (C) shares of Common Stock, options or warrants issued to
outside parties in connection with strategic alliances, joint ventures or
other
19
<PAGE>
corporate partnerships with the Company, or (D) the issuance or sale of
shares of Common Stock if the amount of said adjustment shall be less than
$.10, PROVIDED, HOWEVER, that in such case, any adjustment that would
otherwise be required then to be made shall be carried forward and shall be
made at the time of and together with the next subsequent adjustment that
shall amount, together with any adjustment so carried forward, to at least
$.10. In addition, Registered Holders shall not be entitled to cash dividends
paid by the Company prior to the exercise of any Warrant or Warrants held by
them.
SECTION 9. REDEMPTION.
(a) Commencing on the Initial Warrant Redemption Date, the
Company may, on 30 days' prior written notice, redeem all the Warrants at ten
cents ($.10) per Warrant, PROVIDED, HOWEVER, that before any such call for
redemption of Warrants can take place, the average closing sale price for the
Common Stock as reported by the American Stock Exchange, if the Common Stock
is then traded on the American Stock Exchange, (or the average closing bid
price, if the Common Stock is then traded on Nasdaq) shall have equalled or
exceeded 210% of the initial public offering price of the Common Stock, for
any twenty (20) trading days within a period of thirty (30) consecutive
trading days ending on the fifth trading day prior to the date on which the
notice contemplated by (b) and (c) below is given (subject to adjustment in
the event of any stock splits or other similar events as provided in Section
8 hereof).
(b) In case the Company shall exercise its right to redeem
all of the Warrants, it shall give or cause to be given notice to the
Registered Holders of the Warrants, by mailing to such Registered Holders a
notice of redemption, first class, postage prepaid, at their last address as
shall appear on the records of the Warrant Agent. Any notice mailed in the
manner provided herein shall be conclusively presumed to have been duly given
whether or not the Registered Holder receives such notice. Not less than
four (4) trading days prior to the mailing to
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<PAGE>
the Registered Holders of the Warrants of the notice of redemption, the
Company shall deliver or cause to be delivered to Nolan a similar notice
telephonically and confirmed in writing together with a list of the
Registered Holders (including their respective addresses and number of
Warrants beneficially owned) to whom such notice of redemption has been or
will be given.
(c) The notice of redemption shall specify (i) the redemption
price, (ii) the Redemption Date, which shall in no event be less than thirty
(30) days after the date of mailing of such notice, (iii) the place where the
Warrant Certificate shall be delivered and the redemption price shall be
paid, (iv) if any of the Representatives are engaged as a Warrant
solicitation agent, that such Representative shall receive the commission
contemplated by Section 4(b) hereof, and (v) that the right to exercise the
Warrant shall terminate at 5:30 p.m. (New York time) on the business day
immediately preceding the date fixed for redemption. No failure to mail such
notice nor any defect therein or in the mailing thereof shall affect the
validity of the proceedings for such redemption except as to a holder (a) to
whom notice was not mailed or (b) whose notice was defective. An affidavit
of the Warrant Agent or the Secretary or Assistant Secretary of the Company
that notice of redemption has been mailed shall, in the absence of fraud, be
prima facie evidence of the facts stated therein.
(d) Any right to exercise a Warrant shall terminate at 5:30
p.m. (New York time) on the business day immediately preceding the Redemption
Date. The redemption price payable to the Registered Holders shall be mailed
to such persons at their addresses of record.
(e) The Company shall indemnify each of the Representatives
and each person, if any, who controls any of the Representatives within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act against
all loss, claim, damage, expense or liability (including all expenses
reasonably incurred in investigating, preparing or defending against any
claim whatsoever) to which any of them may become subject under the Act, the
Exchange Act or
21
<PAGE>
otherwise, arising from the registration statement or prospectus referred to
in Section 5(b) hereof to the same extent and with the same effect (including
the provisions regarding contribution) as the provisions pursuant to which
the Company has agreed to indemnify the Underwriters contained in Section 7
of the Underwriting Agreement.
(f) Five business days prior to the Redemption Date, the
Company shall furnish to such Representative (i) an opinion of counsel to the
Company, dated such date and addressed to such Representative, and (ii) a
"cold comfort" letter dated such date addressed to such Representative,
signed by the independent public accountants who have issued a report on the
Company's financial statements included in such registration statement, in
each case covering substantially the same matters with respect to such
registration statement (and the prospectus included therein) and, in the case
of such accountants' letter, with respect to events subsequent to the date of
such financial statements, as are customarily covered in opinions of issuer's
counsel and in accountants' letters delivered to underwriters in underwritten
public offerings of securities.
SECTION 10. CONCERNING THE WARRANT AGENT.
(a) The Warrant Agent acts hereunder as agent and in a
ministerial capacity for the Company and the Representatives, and its duties
shall be determined solely by the provisions hereof. The Warrant Agent shall
not, by issuing and delivering Warrant Certificates or by any other act
hereunder, be deemed to make any representations as to the validity or value
or authorization of the Warrant Certificates or the Warrants represented
thereby or of any securities or other property delivered upon exercise of any
Warrant or whether any stock issued upon exercise of any Warrant is fully
paid and nonassessable.
(b) The Warrant Agent shall not at any time be under any duty
or responsibility to any holder of Warrant Certificates to make or cause to
be made any adjustment of the Purchase Price or the Redemption Price provided
in this Agreement, or to determine whether
22
<PAGE>
any fact exists which may require any such adjustments, or with respect to
the nature or extent of any such adjustments, when made, or with respect to
the method employed in making the same. It shall not (i) be liable for any
recital or statement of fact contained herein or for any action taken,
suffered or omitted by it in reliance on any Warrant Certificate or other
document or instrument believed by it in good faith to be genuine and to have
been signed or presented by the proper party or parties, (ii) be responsible
for any failure on the part of the Company to comply with any of its
covenants and obligations contained in this Agreement or in any Warrant
Certificate, or (iii) be liable for any act or omission in connection with
this Agreement except for its own negligence, bad faith or willful misconduct.
(c) The Warrant Agent may at any time consult with counsel
satisfactory to it (who may be counsel for the Company or for the
Representatives) and shall incur no liability or responsibility for any
action taken, suffered or omitted by it in good faith in accordance with the
opinion or advice of such counsel.
(d) Any notice, statement, instruction, request, direction,
order or demand of the Company shall be sufficiently evidenced by an
instrument signed by the Chairman of the Board of Directors, Chief Executive
Officer, President or any Vice President (unless other evidence in respect
thereof is herein specifically prescribed). The Warrant Agent shall not be
liable for any action taken, suffered or omitted by it in accordance with
such notice, statement, instruction, request, direction, order or demand
reasonably believed by it to be genuine.
(e) The Company agrees to pay the Warrant Agent reasonable
compensation for its services hereunder and to reimburse it for its
reasonable expenses hereunder; the Company further agrees to indemnify the
Warrant Agent and save it harmless from and against any and all losses,
expenses and liabilities, including judgments, costs and counsel fees, for
anything done or omitted by the Warrant Agent in the execution of its duties
and powers hereunder EXCEPT
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losses, expenses and liabilities arising as a result of the Warrant Agent's
negligence, bad faith or willful misconduct.
(f) The Warrant Agent may resign its duties and be discharged
from all further duties and liabilities hereunder (except liabilities arising
as a result of the Warrant Agent's own gross negligence or willful
misconduct), after giving 30 days' prior written notice to the Company. At
least 15 days prior to the date such resignation is to become effective, the
Warrant Agent shall cause a copy of such notice of resignation to be mailed
to the Registered Holder of each Warrant Certificate at the Company's
expense. Upon such resignation, or any inability of the Warrant Agent to act
as such hereunder, the Company shall appoint in writing a new warrant agent.
If the Company shall fail to make such appointment within a period of 15 days
after it has been notified in writing of such resignation by the resigning
Warrant Agent, then the Registered Holder of any Warrant Certificate may
apply to any court of competent jurisdiction for the appointment of a new
warrant agent. Any new warrant agent, whether appointed by the Company or by
such a court, shall be a bank or trust company having a capital and surplus,
as shown by its last published report to its stockholders, of not less than
$10,000,000 or a stock transfer company. After acceptance in writing of such
appointment by the new warrant agent is received by the Company, such new
warrant agent shall be vested with the same powers, rights, duties and
responsibilities as if it had been originally named herein as the Warrant
Agent, without any further assurance, conveyance, act or deed; but if for any
reason it shall be necessary or expedient to execute and deliver any further
assurance, conveyance, act or deed, the same shall be done at the expense of
the Company and shall be legally and validly executed and delivered by the
resigning Warrant Agent. Not later than the effective date of any such
appointment the Company shall file notice thereof with the resigning Warrant
Agent and shall forthwith cause a copy of such notice to be mailed to the
Registered Holder of each Warrant Certificate.
24
<PAGE>
(g) Any corporation into which the Warrant Agent or any new
warrant agent may be converted or merged, any corporation resulting from any
consolidation to which the Warrant Agent or any new warrant agent shall be a
party, or any corporation succeeding to the corporate trust business of the
Warrant Agent or any new warrant agent shall be a successor warrant agent
under this Agreement without any further act, provided that such corporation
is eligible for appointment as successor to the Warrant Agent under the
provisions of the preceding paragraph. Any such successor warrant agent shall
promptly cause notice of its succession as warrant agent to be mailed to the
Company and to the Registered Holders of each Warrant Certificate.
(h) The Warrant Agent, its subsidiaries and affiliates, and
any of its or their officers or directors, may buy and hold or sell Warrants
or other securities of the Company and otherwise deal with the Company in the
same manner and to the same extent and with like effect as though it were not
Warrant Agent. Nothing herein shall preclude the Warrant Agent from acting in
any other capacity for the Company or for any other legal entity.
(i) The Warrant Agent shall retain for a period of two years
from the date of exercise any Warrant Certificate received by it upon such
exercise.
SECTION 11. MODIFICATION OF AGREEMENT.
The Warrant Agent and the Company may by supplemental agreement
make any changes or corrections in this Agreement (i) that they shall deem
appropriate to cure any ambiguity or to correct any defective or inconsistent
provision or manifest mistake or error herein contained; or (ii) that they
may deem necessary or desirable and which shall not adversely affect the
interests of the holders of Warrant Certificates; PROVIDED, HOWEVER, that no
change in the number or nature of the securities purchasable upon the
exercise of any Warrant, or to increase the Purchase Price therefor or to
accelerate the Warrant Expiration Date, shall be made without the consent in
writing of the Registered Holders representing not less than 66% of the
Warrants then outstanding, other
25
<PAGE>
than such changes as are presently specifically prescribed by this Agreement
as originally executed. In addition, this Agreement may not be modified,
amended or supplemented without the prior written consent of the
Representatives, other than to cure any ambiguity or to correct any provision
which is inconsistent with any other provision of this Agreement or to make
any such change that is necessary or desirable and which shall not adversely
affect the interests of the Representatives and except as may be required by
law.
SECTION 12. NOTICES.
All notices, requests, consents and other communications
hereunder shall be in writing and shall be deemed to have been made when
delivered or mailed first-class registered or certified mail, postage
prepaid, as follows: if to the Registered Holder of a Warrant Certificate, at
the address of such holder as shown on the registry books maintained by the
Warrant Agent; if to the Company at 2644 Bristol Road, Warrington,
Pennsylvania 18976, Attention: Scott G. Pollock, President and Chief
Executive Officer, or at such other address as may have been furnished to the
Warrant Agent in writing by the Company; and if to the Warrant Agent, at its
Corporate Office. Copies of any notice delivered pursuant to this Agreement
shall also be delivered to the Representatives, c/o Nolan Securities Corp.,
405 Lexington Avenue, 45th Floor, New York, New York 10174, Attention:
General Counsel, or at such other address as may have been furnished to the
Company and the Warrant Agent in writing.
SECTION 13. GOVERNING LAW.
This Agreement shall be governed by and construed in accordance
with the laws of the State of New York without giving effect to conflicts of
laws.
SECTION 14. BINDING EFFECT.
This Agreement shall be binding upon and inure to the benefit
of the Company, the Representatives, the Warrant Agent and their respective
successors and assigns and the holders from
26
<PAGE>
time to time of Warrant Certificates or any of them. Nothing in this
Agreement is intended or shall be construed to confer upon any other person
any right, remedy or claim, in equity or at law, or to impose upon any other
person any duty, liability or obligation.
SECTION 15. TERMINATION.
This Agreement shall terminate at the close of business on
the Expiration Date of all of the Warrants or such earlier date upon which
all Warrants have been exercised or redeemed, except that the Warrant Agent
shall account to the Company for cash held by it and the provisions of
Section 10 hereof shall survive such termination.
SECTION 16. COUNTERPARTS.
This Agreement may be executed in several counterparts, which
taken together shall constitute a single document.
27
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed as of the date first above written.
[SEAL]
INTEGRATED PHYSICIAN SYSTEMS, INC.
By: ______________________________
Name:
Title
Attest:
By: ___________________________
Name:
Title:
CONTINENTAL STOCK TRANSFER &
TRUST COMPANY,
As Warrant Agent
By: _____________________________
Name:
Title:
28
<PAGE>
EXHIBIT A
No. W______ VOID AFTER ________, 2002
CLASS A WARRANTS
CLASS A REDEEMABLE COMMON STOCK PURCHASE WARRANT CERTIFICATE
TO PURCHASE ONE SHARE OF COMMON STOCK
INTEGRATED PHYSICIAN SYSTEMS, INC.
CUSIP_____
THIS CERTIFIES THAT, FOR VALUE RECEIVED
or registered assigns (the "Registered Holder") is the
owner of the number of Class A Redeemable Common Stock Warrants (the
"Warrants") specified above. Each Warrant initially entitles the Registered
Holder to purchase, subject to the terms and conditions set forth in this
Certificate and the Warrant Agreement (as hereinafter defined), one fully
paid and nonassessable share of Common Stock, $.01 par value, of Integrated
Physician Systems, Inc., a Delaware corporation (the "Company"), at any time
between _______, 1997 (the "Initial Warrant Exercise Date"), and the
Expiration Date (as hereinafter defined) upon the presentation and surrender
of this Warrant Certificate with the Subscription Form on the reverse hereof
duly executed, at the corporate office of Continental Stock Transfer & Trust
Company, as Warrant Agent, or its successor (the "Warrant Agent"),
accompanied by payment of $_____ subject to adjustment (the "Purchase
Price"), in lawful money of the United States of America in cash or by check
made payable to the Warrant Agent for the account of the Company.
This Warrant Certificate and each Warrant represented hereby are
issued pursuant to and are subject in all respects to the terms and
conditions set forth in the Warrant Agreement (the "Warrant Agreement"),
dated _________, 1997, between the Company and the Warrant Agent.
In the event of certain contingencies provided for in the Warrant
Agreement, the Purchase Price and the number of shares of Common Stock
subject to purchase upon the exercise of each Warrant represented hereby are
subject to modification or adjustment.
Each Warrant represented hereby is exercisable at the option of the
Registered Holder, but no fractional interests will be issued. In the case
of the exercise of less than all the Warrants represented hereby, the Company
shall cancel this Warrant Certificate upon the surrender hereof and shall
execute and deliver a new Warrant Certificate or Warrant Certificates of like
tenor, which the Warrant Agent shall countersign, for the balance of such
Warrants.
The term "Expiration Date" shall mean 5:30 p.m. (New York time) on
the date which is forty-eight (48) months after the Initial Warrant Exercise
Date. If each such date shall in the State of New York be a holiday or a day
on which the banks are authorized to close, then the
1
<PAGE>
Expiration Date shall mean 5:30 p.m. (New York time) on the next following
day which in the State of New York is not a holiday or a day on which banks
are authorized to close.
The Company shall not be obligated to deliver any
securities pursuant to the exercise of this Warrant unless a registration
statement under the Securities Act of 1933, as amended (the "Act"), with
respect to such securities is effective or an exemption thereunder is
available. The Company has covenanted and agreed that it will file a
registration statement under the Federal securities laws, use its best
efforts to cause the same to become effective, use its best efforts to keep
such registration statement current, if required under the Act, while any of
the Warrants are outstanding, and deliver a prospectus which complies with
Section 10(a)(3) of the Act to the Registered Holder exercising this Warrant.
This Warrant shall not be exercisable by a Registered Holder in any state
where such exercise would be unlawful.
This Warrant Certificate is exchangeable, upon the
surrender hereof by the Registered Holder at the corporate office of the
Warrant Agent, for a new Warrant Certificate or Warrant Certificates of like
tenor representing an equal aggregate number of Warrants, each of such new
Warrant Certificates to represent such number of Warrants as shall be
designated by such Registered Holder at the time of such surrender. Upon due
presentment and payment of any tax or other charge imposed in connection
therewith or incident thereto, for registration of transfer of this Warrant
Certificate at such office, a new Warrant Certificate or Warrant Certificates
representing an equal aggregate number of Warrants will be issued to the
transferee in exchange therefor, subject to the limitations provided in the
Warrant Agreement.
Prior to the exercise of any Warrant represented
hereby, the Registered Holder shall not be entitled to any rights of a
stockholder of the Company, including, without limitation, the right to vote
or to receive dividends or other distributions, and shall not be entitled to
receive any notice of any proceedings of the Company, except as provided in
the Warrant Agreement.
Subject to the provisions of the Warrant Agreement,
this Warrant may be redeemed at the option of the Company, at a redemption
price of $0.10 per Warrant, at any time commencing after ________, 1999,
provided that the average closing sale price for the Common Stock as reported
by the American Stock Exchange (or the closing bid price, if the Common Stock
is then traded on Nasdaq), shall have equaled or exceeded 210% of the initial
public offering price of the Common Stock for any twenty (20) trading days
within a period of thirty (30) consecutive trading days ending on the fifth
trading day prior to the Notice of Redemption, as defined below (subject to
adjustment in the event of any stock splits or other similar events). Notice
of redemption (the "Notice of Redemption") shall be given not later than the
thirtieth day before the date fixed for redemption, all as provided in the
Warrant Agreement. On and after the date fixed for redemption, the
Registered Holder shall have no rights with respect to the Warrants except to
receive the $.10 per Warrant upon surrender of this Warrant Certificate.
Under certain circumstances, the Representatives of the
several Underwriters may be entitled to receive an aggregate of five percent
(5%) of the Purchase Price of the Warrants represented hereby.
Prior to due presentment for registration of transfer
hereof, the Company and the Warrant Agent may deem and treat the Registered
Holder as the absolute owner hereof and of each Warrant represented hereby
(notwithstanding any notations of ownership or writing hereon made by
2
<PAGE>
anyone other than a duly authorized officer of the Company or the Warrant
Agent) for all purposes and shall not be affected by any notice to the
contrary, except as provided in the Warrant Agreement.
This Warrant Certificate shall be governed by and
construed in accordance with the laws of the State of New York without giving
effect to conflicts of laws.
This Warrant Certificate is not valid unless
countersigned by the Warrant Agent.
IN WITNESS WHEREOF, the Company has caused this Warrant
Certificate to be duly executed, manually or in facsimile by two of its
officers thereunto duly authorized and a facsimile of its corporate seal to
be imprinted hereon.
Dated:
INTEGRATED PHYSICIAN SYSTEMS, INC.
[SEAL]
By: ______________________________
Name:
Title:
COUNTERSIGNED:
CONTINENTAL STOCK TRANSFER & TRUST COMPANY,
as Warrant Agent
By: ______________________________
Authorized Officer
3
<PAGE>
SUBSCRIPTION FORM
To Be Executed by the Registered Holder
in Order to Exercise Warrants
The undersigned Registered Holder hereby irrevocably elects to exercise
Warrants represented by this Warrant Certificate, and to purchase the
securities issuable upon the exercise of such Warrants, and requests that
certificates for such securities shall be issued in the name of
PLEASE INSERT SOCIAL SECURITY
OR OTHER IDENTIFYING NUMBER
______________________________
______________________________
______________________________
(please print or type name and
address) and be delivered to
______________________________
______________________________
______________________________
(please print or type name and
address)
and if such number of Warrants shall not be all the Warrants evidenced by
this Warrant Certificate, that a new Warrant Certificate for the balance of
such Warrants be registered in the name of, and delivered to, the Registered
Holder at the address stated below.
4
<PAGE>
IMPORTANT: PLEASE COMPLETE THE FOLLOWING:
1. The exercise of this Warrant was solicited by
Nolan Securities Corp.,
SouthWall Capital Corp. or
Dirks & Company, Inc
/ /
2. The exercise of this Warrant was solicited by
________________________.
/ /
3. The exercise of this Warrant was not
solicited.
/ /
Dated: _________________________ X___________________________
____________________________
____________________________
Address
____________________________
Social Security or Taxpayer
Identification Number
____________________________
Signature Guaranteed
5
<PAGE>
ASSIGNMENT
To Be Executed by the Registered Holder
in Order to Assign Warrants
FOR VALUE RECEIVED,_______________________, hereby sells, assigns
and transfers unto
PLEASE INSERT SOCIAL SECURITY
OR OTHER IDENTIFYING NUMBER
____________________________
____________________________
____________________________
(please print or type name and
address)
___________________ of the Warrants represented by this Warrant
Certificate, and hereby irrevocably constitutes and appoints
_____________________ Attorney to transfer this Warrant Certificate on the
books of the Company, with full power of substitution in the premises.
Dated: _________________________ X___________________________
Signature Guaranteed
THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM 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 AND
MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS,
SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE
17Ad-15.
6
<PAGE>
Exhibit 10.1
The Board of Directors
Integrated Physician Systems, Inc.
2644 Bristol Road
Warrington, PA 18976
RE: Employment Agreements
Gentlemen:
This letter shall serve to confirm our agreement that, not
withstanding the express language of our employment agreements, the term of
such agreement shall not commence until December 1, 1997.
This letter agreement constitutes a formal Amendment to Exhibit "A" of
our employment agreements as it relates to paragraph 3 of such agreements.
Intending do be legally bound hereby, we have hereunto set our hands and
seals the day and year first above written.
/s/ Peter R. Heisen, M.D.
-------------------------
Peter R. Heisen, M.D.
/s/ Scott G. Pollock
--------------------------
Scott G. Pollock
/s/ Dennis B. Liotta, M.D.
--------------------------
Dennis B. Liotta, M.D.
<PAGE>
EMPLOYMENT AGREEMENT
AGREEMENT made this 16th day of June, 1997, by and between INTEGRATED
PHYSICIAN SYSTEMS, INC. a Delaware business Corporation, with a principal
place of business at 615 Hope Road, Eatontown, New Jersey, (hereinafter
referred to as "Company") and SCOTT G. POLLOCK, an adult individual residing
at 1627 Fairfield Road, Yardley, PA 19067, (hereinafter referred to as
"Employee".)
WHEREAS, Company wishes to hire and employ Employee on the terms and
conditions hereinafter set forth; and
WHEREAS, Employee wishes to accept such employment in return for the
compensation set forth herein.
NOW, THEREFORE, in return for the mutual covenants and conditions set
forth herein, and for other good and valuable consideration, receipt of which
is hereby acknowledged, the parties hereto do agree as follows:
1. Employment
Company hereby employs Employee and Employee hereby accepts
employment by Company for the period and upon the terms and conditions
contained in this Agreement.
2. Duties
(a) Employee shall serve Company generally in the capacity
described on Exhibit A, attached hereto and incorporated herein by this
reference, and shall have such authority and responsibilities as Company may
reasonably determine from time to time. Employee shall perform any other
duties reasonably required by Company.
(b) Throughout the term of this Agreement, Employee shall devote
his entire business working time, energy, skill and best efforts to the
performance of his duties hereunder in a manner which will faithfully and
diligently further the business and interests of Company.
3. Term
Unless sooner terminated as herein provided, this Agreement shall
be for the term set forth on Exhibit A attached hereto and incorporated
herein by this reference.
4. Compensation
(a) For all of the services rendered by Employee to Company,
Employee shall receive the compensation set forth on Exhibit A attached
hereto, payable in reasonable periodic installments in accordance with
Company's regular payroll practices in effect from time to time.
<PAGE>
(b) Throughout the term of this Agreement and provided that
Employee shall be deemed to be a full-time employee, Employee shall be
provided the health, dental, life and disability insurance benefits set forth
in paragraph 4 of Exhibit "A" attached hereto, and shall be entitled to
participate in the Company's 401K plan as described in paragraph 5 of Exhibit
"A".
(c) Employee shall be entitled to the paid vacation set forth on
Exhibit A attached hereto.
(d) During Employee's employment hereunder, Company shall reimburse
Employee for all ordinary and necessary business expenses incurred by him in
connection with the business of Company. Such payments shall be made by
Company upon submission by Employee of vouchers itemizing such expenses in a
form reasonably satisfactory to Company.
5. Disability
If Employee becomes unable to perform his/her duties hereunder due
to partial or total disability or incapacity resulting from a mental or
physical illness or any similar cause, and such disability continues for a
period in excess of sixty (60) consecutive days in any one hundred and eighty
(180) day period, Company shall have the right to terminate this Agreement upon
thirty (30) days written notice to Employee. In the event of such
disability, Company shall pay Employee his then current compensation,
including any and all accrued salary, bonus compensation and vacation pay,
through the date of the commencement of Employee's entitlements under
Company's long-term disability insurance policy. Thereafter, Company shall
have no further obligations or liabilities to Employee hereunder.
6. Death
If Employee dies, this Agreement shall automatically terminate and
all payments hereunder shall cease at the end of the month in which
Employee's death shall occur and Company shall have no further obligations or
liabilities hereunder to Employee's estate or legal representative or
otherwise, other than the payment of any and all accrued bonus compensation
and accrued vacation pay.
7. Discharge for Cause
(a) Notwithstanding the state term of employment, this Agreement
and the Employee's employment may be sooner terminated by the Company for any
of the following reasons:
(i) The willful failure or refusal of Employee to perform
his duties as may, from time to time, be delegated to him by the Company,
through the Board of Directors.
(ii) Employee's gross negligence which materially and
adversely affects the business or affairs of the Company.
<PAGE>
(iii) Any act by Employee of fraud, dishonesty or criminal
wrongdoing, which materially adversely effects the Company.
(iv) Any intentional or willful breach by Employee of any
material covenant of this Agreement including but not limited to the
provisions regarding noncompetition and confidentiality.
All of the foregoing shall be, separately and collectively,
known as "cause" for termination.
(b) The Company shall effect termination pursuant to this Section 7
by written notice to Employee specifying in reasonable detail the
circumstances alleged by Company to constitute "cause" and the specific
provisions of this Section 7 relied upon in effecting such termination. The
date of such termination shall be the date ten (10) days after Company gives
such notice of termination to Employee. If the grounds for termination are
solely the grounds set forth in Section 7(a)(ii) or (iv) above, then during
such ten (10) day period, Employee shall be afforded an opportunity to
discuss the basis for such termination with the full Board of Directors of
the Company, and Employee shall, at his election exercised in writing prior
to the expiration of such ten (10) day period, be entitled to a period of not
less than thirty (30) days after the date of such discussion to attempt to
remedy or cure the conduct alleged to constitute such grounds and the harm
caused thereby if in the good faith judgment of the Board of Directors such
conduct and harm is capable of being remedied or cured within such thirty
(30) day period. If, after the expiration of such cure period, the Employee
has not in the good faith judgment of the Board of Directors remedied or
cured the conduct alleged to constitute such grounds and the harm caused
thereby, the termination shall be effective upon notice to Employee of such
adverse Board judgment.
(c) In the event of early termination of Employee's employment
hereunder, for any reason, Employee shall, simultaneously with such
termination, be conclusively deemed to have resigned any other position he
might hold with the Company. Employee agrees to execute any and all
documents reasonably requested of him by Company's Board of Directors to
evidence such resignation(s).
8. Compensation Upon Termination
In the event that the Employee's employment and this Agreement is
terminated by Company prior to the end of its term, for cause as is set forth
in paragraph 7 hereof, Company shall pay to Employee, as severance
compensation, in circumstances other than by Employee's death or disability,
or other than as a result of change in control of the Company, an amount equal
to two months' salary. This amount shall be in addition to all compensation
earned or accrued by Employee through the last day of actual employment. In
the event that Employee's employment is terminated by the Company as a result
of change in control of the Company, the Company shall pay to Employee, as
severance compensation, an amount equal to two times (i) Employee's base
annual salary and (ii) Employee's maximum potential annual bonus
compensation. After the payment of such severance compensation, Company
shall have no further obligation or liability to Employee hereunder.
<PAGE>
9. Key Man Insurance. Company shall have the right to obtain, at its sole
discretion, what is commonly known as Key Man Insurance on the life of the
Employee in such amount as the Company deems appropriate. Executive agrees to
cooperate in all respects in the obtaining of such a policy. All expenses
involved in connection with the obtaining and maintaining of such a policy
shall be paid by the Company.
10. Company Property; Noncompetition
(a) All research, experiments, discoveries, inventions, improvements,
materials or information, including without limitation, reports, analysis,
handbooks, manuals, invoices, price lists or information, customer lists,
information about costs, profits, markets, sales, pricing, methods and other
business affairs including future expansion plans, or any other materials or
data of any kind furnished to Employee by Company or developed by Employee on
behalf of Company or at Company's direction or for Company's use or otherwise
in connection with Employee's employment hereunder, are and shall remain the
sole and confidential property of Company, and Employee shall immediately
deliver the same to Company at the termination of Employee's employment or at
any other time if so requested by Company.
(b) During the term of this Agreement and at all times thereafter,
Employee shall not use for his/her personal benefit, or disclose, communicate
or divulge to, or use for the direct or indirect benefit of any person, firm
association, or company other than the Company, any material referred to in
subparagraph (a) above or any information regarding the business methods,
business policies, procedures, techniques, research or development projects
or results, trade secrets, or any other confidential information relating to
or dealing with the business operations or activities of the Company.
(c) During the term of this Agreement and for a period of two (2)
years after termination of his/her employment with Company for any reason
whatsoever, Employee shall not directly or indirectly induce or attempt to
influence any employee of Company to terminate his employment with Company.
(d) During the period of time which Employee is employed by Company
pursuant to the terms of this Agreement and for a period of two (2) years
thereafter, without the prior written consent of Company, Employee shall not,
directly or indirectly, within a State wherein Company then does business,
own, manage, operate, join, control, finance, or participate in the
ownership, management, operation, control, or financing of, or be connected
as an officer, director, employee, partner, principal, agent, representative,
or otherwise, with any enterprise, business, firm or corporation which is in
competition with the Company. If Employee violates the provisions of this
Paragraph 10 (d), the restrictive period set forth herein shall be extended
by a period of time equal to the number of days, if any, during which the
Employee is in violation of the provisions hereof.
(e) Employee hereby acknowledges and agrees that the covenants and
restrictions contained in this Paragraph 10 relate to matters which are of a
special, unique, and extraordinary importance to Company. Employee
acknowledges that the restrictions contained in the foregoing subparagraphs
are reasonable and necessary in order to protect the legitimate interests
<PAGE>
of Company and that without such restrictions, Company would be unwilling to
enter into this Agreement. Employee acknowledges that any violation of any of
the terms hereof will result in irreparable injury to Company for which money
damages alone will be insufficient. Accordingly, Employee agrees that Company
shall be entitled to obtain from any Court of competent jurisdiction,
preliminary and permanent injunctive relief for a violation or threatened
violation of any such restrictions without having to prove actual damages or
to post a bond. Company shall also be entitled to an equitable accounting of
all earnings, profits, and other benefits arising from such violation, which
rights shall be cumulative and in addition to any other rights or remedies to
which Company may be entitled in law or equity. Employee hereby waives any
objections on the grounds of improper jurisdiction or venue to the
commencement of an action in the state of New Jersey and agrees that
effective service of process may be made upon him/her by mail under the
notice provisions contained in this Agreement. EMPLOYEE ACKNOWLEDGES THAT THE
TERMS OF THIS AGREEMENT HAVE BEEN NEGOTIATED AT ARM'S LENGTH. EMPLOYEE
REPRESENTS THAT HE HAS READ THE RESTRICTIONS CONTAINED HEREIN, HAS HAD THE
OPPORTUNITY TO REVIEW THEM WITH LEGAL COUNSEL, AND DOES UNDERSTAND THE FULL
EXTENT AND IMPLICATION OF THE TERMS OF THIS AGREEMENT AND HEREBY KNOWINGLY
AND VOLUNTARILY AGREES TO BE BOUND HEREBY.
(f) It is the intent of the parties that the provisions of this
Paragraph 10 be enforceable to the fullest extent permitted by law. If,
however, any portion of any section of this Agreement including the
restrictive covenant as set forth herein is held by a court of law to be
unreasonable in any proceeding, then the period of time, the geographic area,
or such other restrictions shall be reduced by the elimination or reduction
of such portion thereof, so that such restrictions may be enforced in a
manner that is adjudged to be reasonable.
11) Miscellaneous
(a) Controlling Law. This Agreement and all questions relating to its
validity, interpretation, performance and enforcement, shall be governed by
and construed in a accordance with the laws of the State of New Jersey.
(b) Indulgences, etc. Neither the failure nor any delay on the part
of either party to exercise any right, remedy, power or privilege under this
Agreement shall operate as a waiver thereof, nor shall any single or partial
exercise of any right, remedy, power or privilege preclude any other or
further exercise of the same or any other right, remedy, power or privilege,
nor shall any waiver of any right, remedy, power or privilege, for a
particular occurrence, constitute a waiver with respect to any other
occurrence.
(c) Binding Nature. This Agreement shall be binding upon and inure to
the benefit of Company and its successors and assigns and shall be binding
upon Employee, his heirs and legal representatives.
(d) Entire Agreement. This Agreement contains the entire
understanding among the parties hereto with respect to the subject matter
hereof, and supersedes all prior and contemporaneous agreements and
understandings, inducements or conditions, express or implied,
<PAGE>
oral or written, except as herein contained. This Agreement may not be
modified or amended other than by an agreement in writing, signed by the
parties.
(e) Assignment. This Agreement may be assigned by Company upon thirty
(30) days written notice to Employee. Employee may not assign his duties,
obligations or entitlements hereunder.
(f) Right To Independent Counsel. The parties hereto recognize that
this Agreement is a legal document which may affect them adversely.
Consequently, the parties acknowledge that prior to executing this Agreement
they were given the opportunity to seek the advice of independent legal
counsel regarding the provisions of this Agreement and their legal
involvement herein. By executing this Agreement, the parties acknowledge that
they have reviewed this Agreement with independent counsel or have waived
their opportunity to do so.
(g) Expenses of Agreement. Each of the parties hereto shall bear its
own expenses incurred in connection with the negotiation, preparation and
execution of this Agreement and the consummation of the transactions
contemplated hereby.
(h) Notices. Any notice required to be given pursuant to the terms of
this Agreement shall be in writing and sent by registered mail or nationally
recognized carrier, to the parties at the following addresses:
To Company at:
Integrated Physician Systems, Inc.
615 Hope Road
Eatontown, NJ
To Employee at:
1627 Fairfield Road
Yardley, PA 19067
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered as of the date first above written.
INTEGRATED PHYSICIAN SYSTEMS, INC.
Attest: By: /s/ Joseph F. Murray
----------------------------- --------------------------------
EMPLOYEE:
Witness: /s/ Walter B. Dunsmore /S/ Scott G. Pollock
---------------------------- ------------------------------------
SCOTT G. POLLOCK
<PAGE>
EXHIBIT "A"
EMPLOYMENT AGREEMENT BETWEEN
INTEGRATED PHYSICIAN SYSTEMS, INC. AND SCOTT G. POLLOCK
-------------------------------------------------------
DUTIES - (Pursuant to Paragraph 2) - Employee shall occupy the office of
Chief Executive Officer of the Company and shall have all duties and
responsibilities attendant to such position including such duties as are set
forth in the by-laws of the Company and as may be imposed by the Board of
Directors of the Company from time to time. Employee shall also serve as
Chief Financial Officer of the Company, and, as such, shall be responsible
for all financial affairs of the Company including financial reporting.
Employee shall report to and follow the directions of the Board of Directors
of the Company. Employee shall serve as one of management's representatives
on the Board of Directors of the Company. Employee shall be indemnified and
held harmless by the Company for all acts of Employee as an officer or
director of the Company in accordance with (i) the provisions set forth in
the amended articles of incorporation of the Company, (ii) the provisions set
forth in the by-laws of the Company, and (iii) the provisions of the
directors and officers liability insurance policy to be maintained by the
Company. Company shall provide Employee with copies of the articles of
incorporation, the by-laws, and the insurance policy.
TERM - (Pursuant to Paragraph 3) - This Agreement shall be for a term of
three years, commencing on August 1, 1997. This Agreement shall not be
terminated except in accordance with its terms.
COMPENSATION - (Pursuant to Paragraph 4) -
1) Salary - For all of his services to be rendered hereunder,
including his service on the Board of Directors and any committees thereof,
Employee shall be paid an annual salary of Two Hundred Thousand ($200,000)
Dollars during his first year of employment hereunder. Employee's
compensation for the second year of employment shall be the initial annual
compensation, increased by a factor equal to the prior year's inflation.
Employee's compensation for the third year of employment hereunder shall be
as mutually agreed upon by the parties after good faith negotiations at the
end of the second employment year, provided, however, that in no event shall
such third year compensation be less than the compensation paid in the second
year of employment increased by factor equal to the prior year's inflation.
2) Bonus - Employee shall be entitled to an annual bonus in an
amount equal to either 10%, 20%, or 30% of base compensation, depending upon
the achievement, by the Company, of certain financial and operational goals,
the definition of which shall be provided to Employee by the Board of
Directors of the Company prior to the commencement of employment hereunder.
Employee shall receive the most favorable bonus as shall have been paid to
any other executive officer of the Company. Bonus compensation hereunder
shall be paid to Employee within ninety (90) days of the end of the period of
measurement thereof.
<PAGE>
3) Automobile Allowance - Employee shall be paid a monthly
automobile allowance in the amount of Six Hundred ($600) Dollars which is
intended to represent reimbursement to Employee of all costs incurred in the
operation of his automobile on Company business. The amount set forth herein
shall be the maximum amount allowed to Employee for any automobile expenses.
4) Health, Dental, Disability and Life Insurance - Employee shall
receive, at no cost to Employee, full coverage for Employee and his
dependents, in such health, dental, accident and long-term disability
insurance as shall be in force in the Company from time to time. Employee
shall receive from the Company, at no cost to Employee, life insurance on the
life of Employee in an amount equal to the Employee's annual salary
hereunder. Employee may, subject to the provisions of the group life
insurance contract, purchase additional life insurance at Employee's sole
cost and expense.
5) 401 (K) Plan/Stock Option Plan - Employee shall be entitled to
participate in any 401(K) or employee stock option plan adopted by the
Company. The amount of contribution thereto by Company, if any, shall be at
Company's sole discretion.
6) Vacation - Employee shall be entitled to four (4) weeks paid
vacation during each year of employment hereunder which may be accumulated up
to a maximum of eight (8) weeks during any one calendar year.
<PAGE>
AMENDMENT TO EMPLOYMENT AGREEMENT
---------------------------------
This amendment to that certain Employment Agreement (the "Agreement")
dated the 1st day of April, 1997, by and between INTEGRATED PHYSICIAN
SYSTEMS, INC. ("IPS") as Company and DENNIS B. LIOTTA, M.D., as Employee.
WITNESSETH:
WHEREAS, Company and Employee have heretofore agreed upon the terms and
conditions of the employment of Employee by Company, and
WHEREAS, Company and Employee have agreed to amend said Agreement and
desire that this writing reflect said amendment,
NOW, THEREFORE, intending to be legally bound hereby, the parties hereto
do agree as follows:
1. AMENDMENT TO EXHIBIT "A" OF THE AGREEMENT. The parties do hereby agree
that effective with the date hereof, Exhibit "A" of the Agreement is changed
to read as set forth in the attached Amended Exhibit "A".
2. AFFIRMATION OF AGREEMENT. The parties do hereby agree that in all
other respects, the Agreement is, and shall remain, in full force and effect.
IN WITNESS WHEREOF, intending to be legally bound, the parties have set
their hands and seals this ___ day October 1997.
INTEGRATED PHYSICIAN SYSTEMS, INC.
By: /s/ Scott G. Pollock
-------------------------------
Chief Executive Officer
/s/ Dennis B. Liotta, M.D.
-------------------------------
Dennis B. Liotta, M.D.
<PAGE>
EMPLOYMENT AGREEMENT
--------------------
AGREEMENT made this 1st day of April, 1997, by and between INTEGRATED
PHYSICIAN SYSTEMS, INC. a Delaware business Corporation, with its principle
place of business at 615 Hope Road, Eatontown, New Jersey, (hereinafter
referred to as "Company") and Dennis B. Liotta, M.D., an adult individual
residing at 33 High Ridge Road, Wayside, NJ 07712, (hereinafter referred to
as "Employee".)
WHEREAS, Company wishes to hire and employ Employee on the terms and
conditions hereinafter set forth; and
WHEREAS, Employee wishes to accept such employment in return for the
compensation set forth herein.
NOW, THEREFORE, in return for the mutual covenants and conditions set
forth herein, and for other good and valuable consideration, receipt of which
is hereby acknowledged, the parties hereto do agree as follows:
1. Employment
Company hereby employs Employee and Employee hereby accepts
employment by Company for the period and upon the terms and conditions
contained in this Agreement.
2. Duties
(a) Employee shall serve Company generally in the capacity
described on Exhibit A, attached hereto and incorporated herein by this
reference, shall be an authorized agent of the Company, and shall have such
authority and responsibilities commensurate with the position held, as
Company may reasonably determine from time to time. Employee shall perform
any other duties reasonably required or requested by Company.
(b) Throughout the term of this Agreement, Employee shall
devote his entire business working time, energy, skill and best efforts to
the performance of his duties hereunder in a manner which will faithfully and
diligently further the business and interests of Company.
3. Term
Unless sooner terminated as herein provided, this Agreement
shall be for the term set forth on Exhibit A attached hereto and incorporated
herein by this reference.
<PAGE>
4. Compensation
(a) For all of the services rendered by Employee to Company,
Employee shall receive the compensation set forth on Exhibit A attached hereto,
payable in reasonable periodic installments in accordance with Company's
regular payroll practices in effect from time to time.
(b) Throughout the term of this Agreement and provided that
Employee shall be deemed to be a full-time employee, Employee shall be
entitled to participate in and receive the benefits of any pension, profit
sharing plan, or 401K plan. Company will provide Employee and his
designated dependents with Company paid health, life, accident and disability
insurance in addition to any other plans or programs that are paid for other
similarly situated employees of Company.
(c) Employee shall be entitled to the paid vacation set forth on
Exhibit A attached hereto.
(d) During Employee's employment hereunder, and in accordance with
Exhibit "A" attached hereto, Company shall reimburse Employee for all
ordinary and necessary business expenses incurred by him in connection with
the business of Company, including, but not limited to reimbursement for use
of home telephone, home fax, and personal cellular phone. Such payments shall
be made by Company upon submission by Employee of vouchers itemizing such
expenses in a form reasonably satisfactory to Company.
5. Disability
If Employee becomes unable to perform his/her duties hereunder due
to partial or total disability or incapacity resulting from a mental or
physical illness or any similar cause, and such disability continues for a
period in excess of sixty (60) consecutive days in any one hundred and eighty
(180) day period, Company shall have the right to terminate this Agreement
upon thirty (30) days written notice to Employee. In the event of such
disability, Company shall pay Employee his then current compensation,
including any and all accrued salary, bonus compensation and vacation pay,
through the date of the commencement of Employee's entitlements under
Company's long-term disability insurance policy. Thereafter, Company shall
have no further obligations or liabilities to Employee hereunder.
6. Death
If Employee dies, this Agreement shall automatically terminate and
all payments hereunder shall cease at the end of the month in which
Employee's death shall occur and Company shall have no further obligations or
liabilities hereunder to Employee's estate or legal representative or
otherwise.
<PAGE>
7. Discharge for Cause
(a) Notwithstanding the stated term of employment, this Agreement
and the Employee's employment may be sooner terminated by the Company for any
of the following reasons:
(i) The willful failure, or refusal of Employee to perform his
duties as may, from time to time, be delegated to him by the Company, through
the President, the Chief Executive Officer, or the Board of Directors.
(ii) Employee's gross negligence or intentional failure to act
which materially and adversely affects the business or affairs of the Company.
(iii) Any act by Employee of fraud, dishonesty or criminal
wrongdoing.
(iv) Any intentional or willful breach by Employee of any
material covenant of this Agreement including but not limited to the
provisions regarding noncompetition and confidentiality.
All of the foregoing shall be, separately and collectively, known
as "cause" for termination.
(b) The Company shall effect termination pursuant to this Section 7
by written notice to Employee specifying in reasonable detail the
circumstances alleged by Company to constitute "cause" and the specific
provisions of this Section 7 relied upon in effecting such termination. The
date of such termination shall be the date ten (10) days after Company gives
such notice of termination to Employee. If the grounds for termination are
solely the grounds set forth in Section 7(a)(ii) or (iv) above, then during
such ten (10) day period, Employee shall be afforded an opportunity to
discuss the basis for such termination with the full Board of Directors of
the Company, and Employee shall, at his election exercised in writing prior
to the expiration of such ten (10) day period, be entitled to a period of not
less than thirty (30) days after the date of such discussion to attempt to
remedy or cure the conduct alleged to constitute such grounds and the harm
caused thereby if in the good faith judgment of the Board of Directors such
conduct and harm is capable of being remedied or cured within such thirty
(30) day period. If, after the expiration of such cure period, the Employee
has not in the good faith judgement of the Board of Directors remedied or cured
the conduct alleged to constitute such grounds and the harm caused thereby,
the termination shall be effective upon notice to Employee of such adverse
Board judgment.
(c) In the event of early termination of Employee's employment
hereunder, for any reason, Employee shall, simultaneously with such
termination, be conclusively deemed to have resigned any other position he
might hold with the Company. Employee agrees to execute any and all documents
reasonably requested of him by Company's Board of Directors to evidence such
resignation(s).
<PAGE>
8. Compensation Upon Termination.
In the event that the Employee's employment and this Agreement is
terminated by Company prior to the end of its term,
Company shall pay to Employee, as severance compensation, in circumstances
other than by Employee's death or disability, or other than as a result of
change in control of the Company, an amount equal to two months' salary. This
amount shall be in addition to all compensation earned or accrued by
Employee through the last day of actual employment. In the event that
Employee's employment is terminated by the Company as a result of change in
control of the Company, the Company shall pay to Employee, as severance
compensation, an amount equal to two times (i) Employee's base annual salary
and (ii) Employee's maximum potential annual bonus compensation. After the
payment of such severance compensation, Company shall have no further
obligation or liability to Employee hereunder.
9. Key Man Insurance. Company shall the right to obtain, at its sole
discretion, what is commonly known as Key Man Insurance on the life of the
Employee in such amount as the Company deems appropriate. Executive agrees to
cooperate in all respects in the obtaining of such a policy. All expenses
involved in connection with the obtaining and maintaining of such a policy
shall be paid by the Company.
10. Company Property; Noncompetition
(a) All research, experiments, discoveries, inventions,
improvements, materials or information, including without limitation, reports,
analysis, handbooks, manuals, invoices, price lists or information, customer
lists, information about costs, profits, markets, sales, pricing, methods and
other business affairs including future expansion plans, or any other
materials or data of any kind furnished to Employee by Company or developed
by Employee on behalf of Company or at Company's direction or for Company's
use or otherwise in connection with Employee's employment hereunder, are and
shall remain the sole and confidential property of Company, and Employee
shall immediately deliver the same to Company at the termination of
Employee's employment or at any other time if so requested by Company.
(b) During the term of this Agreement and at all times thereafter,
Employee shall not use for his/her personal benefit, or disclose, communicate
or divulge to, or use for the direct or indirect benefit of any person, firm
association, or company other than the Company, any material referred to in
subparagraph (a) above or any information regarding the business methods,
business policies, procedures, techniques, research or development projects
or results, trade secrets, or any other confidential information relating to
or dealing with the business operations or activities of the Company.
(c) During the term of this Agreement and for a period of two (2)
years after termination of his/her employment with Company for any reason
whatsoever, Employee shall not directly or indirectly induce or attempt to
influence any employee of Company to terminate his employment with Company.
<PAGE>
(d) During the period of time which Employee is employed by Company
pursuant to the terms of this Agreement and for a period of two (2) years
thereafter, without the prior written consent of Company, Employee shall not,
directly or indirectly, within a State wherein Company then does business,
own, manage, operate, join, control, finance, or participate in the
ownership, management, operation, control, or financing of, or be connected
as an officer, director, employee, partner, principal, agent, representative,
consultant, or otherwise, with any enterprise, business, firm or corporation
which is in direct competition with the Company. If Employee violates the
provisions of this Paragraph 10(d), the restrictive period set forth herein
shall be extended by a period of time equal to the number of days, if any,
during which the Employee is in violation of the provisions hereof.
(e) Employee hereby acknowledges and agrees that the covenants and
restrictions contained in this Paragraph 10 relate to matters which are of a
special, unique, and extraordinary importance to Company. Employee
acknowledges that the restrictions contained in the foregoing subparagraphs
are reasonable and necessary in order to protect the legitimate interests of
Company and that without such restrictions, Company would be unwilling to
enter into this Agreement. Employee acknowledges that any violation of any
of the terms hereof will result in irreparable injury to Company for which
money damages alone will be insufficient. Accordingly, Employee agrees that
Company shall be entitled to obtain from any Court of competent jurisdiction,
preliminary and permanent injunctive relief for a violation or threatened
violation of any such restrictions without having to prove actual damages or
to post a bond. Company shall also be entitled to an equitable accounting of
all earnings, profits, and other benefits arising from such violation, which
rights shall be cumulative and in addition to any other rights or remedies to
which Company may be entitled in law or equity. Employee hereby waives any
objections on the grounds of improper jurisdiction or venue to the
commencement of an action in the state of New Jersey and agrees that
effective service of process may be made upon him/her by mail under the
notice provisions contained in this Agreement. EMPLOYEE ACKNOWLEDGES THAT
THE TERMS OF THIS AGREEMENT HAVE BEEN NEGOTIATED AT ARM'S LENGTH. EMPLOYEE
REPRESENTS THAT HE HAS READ THE RESTRICTIONS CONTAINED HEREIN, HAS HAD THE
OPPORTUNITY TO REVIEW THEM WITH LEGAL COUNSEL, AND DOES UNDERSTAND THE FULL
EXTENT AND IMPLICATION OF THE TERMS OF THIS AGREEMENT AND HEREBY KNOWINGLY
AND VOLUNTARILY AGREES TO BE BOUND HEREBY.
(f) It is the intent of the parties that the provisions of this
Paragraph 10 be enforceable to the fullest extent permitted by law. If,
however, any portion of any section of this Agreement including the
restrictive covenant as set forth herein is held by a court of law to be
unreasonable in any proceeding, then the period of time, the geographic area,
or such other restrictions shall be reduced by the elimination or reduction
of such portion thereof, so that such restrictions may be enforced in a
manner that is adjudged to be reasonable.
11) Miscellaneous
(a) Controlling Law. This Agreement and all questions relating to
its validity, interpretation, performance and enforcement, shall be governed
by and construed in accordance with the laws of the State of New Jersey.
<PAGE>
(b) Indulgences, etc. Neither the failure nor any delay on the
part of either party to exercise any right, remedy, power or privilege under
this Agreement shall operate as a waiver thereof, nor shall any single or
partial exercise of any right, remedy, power or privilege preclude any waiver
of any right, remedy, power or privilege, for a particular occurrence,
constitute a waiver with respect to any other occurrence.
(c) Binding Nature. This Agreement shall be binding upon and
inure to the benefit of Company and its successors and assigns and shall be
binding upon Employee, his heirs and legal representatives.
(d) Entire Agreement. This Agreement contains the entire
understanding among the parties hereto with respect to the subject matter
hereof, and supersedes all prior and contemporaneous agreements and
understandings, inducements or conditions, express or implied, oral or
written, except as herein contained. This Agreement may not be modified or
amended other than by an agreement in writing, signed by the parties.
(e) Assignment. This Agreement may be assigned by Company upon
thirty (30) days written notice to Employee. Employee may not assign his
duties, obligations or entitlements hereunder.
(f) Right To Independent Counsel. The parties hereto recognize
that this Agreement is a legal document which may affect them adversely.
Consequently, the parties acknowledge that prior to executing this Agreement
they were given the opportunity to seek the advice of independent legal
counsel regarding the provisions of this Agreement and their legal
involvement herein. By executing this Agreement, the parties acknowledge
that they have reviewed this Agreement with independent counsel or have
waived their opportunity to do so.
(g) Expenses of Agreement. Each of the parties hereto shall bear
its own expenses incurred in connection with the negotiation, preparation and
execution of this Agreement and the consummation of the transactions
contemplated hereby.
(h) Notices. Any notice required to be given pursuant to the terms
of this Agreement shall be in writing and sent by registered mail or
nationally recognized carrier, to the parties at the following addresses:
To the Employer at:
Integrated Physician Systems, Inc.
2644 Bristol Road
Warrington, PA 18976
To the Employee at:
<PAGE>
Dennis B. Liotta, M.D.
33 High Ridge Road
Wayside, NJ 07712
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed
and delivered as of the date first above written.
INTEGRATED PHYSICIAN SYSTEMS, INC.
Attest:/S/ Joseph F. Murray By: /S/ Scott G. Pollock
______________________ __________________________
EMPLOYEE:
Witness:/S/ Manuela E. Jackson /S/ Dennis B. Liotta, M.D.
______________________ ______________________________
Dennis B. Liotta, M.D.
<PAGE>
EMPLOYMENT AGREEMENT BETWEEN INTEGRATED PHYSICIAN SYSTEMS,
INC. AND DENNIS B. LIOTTA, M.D.
AMENDED EXHIBIT "A"
-------------------
DUTIES - (Pursuant to Paragraph 2) - Employee shall occupy the office of
Executive Vice President. Employee shall serve as the Chief Operating Officer
of the Company, and, as such, shall be responsible for the day to day
operations of the Company. Employee shall also serve as President of
Professional Medical Images, LTD., a subsidiary of the Company involved in
IPA development and management services. Employee shall report to and follow
the directions of the President of the Company. Employee shall serve as one
of management's representatives on the Board of Directors of the Company.
Employee shall be indemnified and held harmless by the Company for all acts
of Employee as an officer or director of the Company in accordance with (i)
the provisions set forth in the amended articles of incorporation of the
Company, (ii) the provisions set forth in the by-laws of the Company, and
(iii) the provisions of the directors and officers liability insurance policy
to be maintained by the Company. Company shall provide Employee with copies
of the articles of incorporation, the by-laws, and the insurance policy.
TERM - (Pursuant to Paragraph 3) - This Agreement shall be for a term of
three (3) years from August 1, 1997.
COMPENSATION - (Pursuant to Paragraph 4) -
SALARY - For all of his services to be rendered hereunder, including
his service on the Board of Directors and any committees thereof, Executive
Employee shall be paid an annual salary of One Hundred Fifty Thousand Dollars
($150,000) Dollars during the first year of employment. Employee's
compensation for the second and third years of employment shall be the
initial annual compensation, increased by a factor equal to the prior year's
inflation.
B0NUS - Employee shall be eligible for an annual bonus at the
discretion of the Board of Directors. Bonus compensation hereunder shall be
paid to Employee within ninety (90) days of the end of the period of
measurement thereof.
AUTOMOBILE ALLOWANCE - Employee shall be paid a monthly automobile
allowance in the amount of Six Hundred ($600) Dollars which is intended to
represent reimbursement to Employee of all costs incurred in the operations
of his automobile on Company business. The amount set forth herein shall be
the maximum amount allowed to Employee for any automobile expenses.
HEALTH, DENTAL, DISABILITY AND LIFE INSURANCE - Employee shall
receive, at no cost to Employee, full coverage for Employee and his
dependents, in such health, dental, accident and long-term disability
insurance programs as shall be in force in the Company from time to time, and
shall receive any such other benefits as shall be received by other employees
of the Company similarly situate. Employee shall receive from the Company, at
no cost to Employee, life insurance on the life of the Employee in an amount
equal to Employee's annual salary hereunder. Employee may, subject to the
provisions of the group life insurance contract, purchase additional life
insurance at Employee's sole cost and expense.
401(K) PLAN - Employee shall be entitled to participate in any
401(K) plan adopted by the company. The amount of contribution thereto by
Company, if any, shall be at Company's sole discretion.
VACATION - Employee shall be entitled to four (4) weeks paid vacation
during each year of employment hereunder which may be accumulated up to a
maximum of eight (8) weeks during any one calendar year.
<PAGE>
EMPLOYMENT AGREEMENT BETWEEN INTEGRATED PHYSICIAN SYSTEMS
INC. AND DENNIS B. LIOTTA, M.D.
EXHIBIT "A"
DUTIES-(Pursuant to Paragraph 2)-Employee shall occupy the office of
Executive Vice President. Employee shall serve as the Chief Operating Officer
of the Company, and, as such, shall be responsible for the day to day
operations of the Company. Employee shall also serve as President of
Professional Medical Images, LTD., a subsidiary of the Company involved in
IPA development and management services. Employee shall report to and follow
the directions of the President of the Company. Employee shall serve as one
of management's representatives on the Board of Directors of the Company.
Employee shall be indemnified and held harmless by the Company for all acts
of Employee as an officer or director of the Company in accordance with (i)
the provisions set forth in the amended articles of incorporation of the
Company, (ii) the provisions set forth in the by-laws of the Company, and
(iii) the provisions of the directors and officers liability insurance policy
to be maintained by the Company. Company shall provide Employee with copies
of the articles of incorporation, the by-laws, and the insurance policy.
TERM-(Pursuant to Paragraph 3)-This Agreement shall be for a term of
three (3) years from August 1, 1997.
COMPENSATION-(Pursuant to Paragraph 4)-
Salary-For all of his services to be rendered hereunder,
including his service on the Board of Directors and any committees thereof,
Executive Employee shall be paid an annual salary of Two Hundred Thousand
Dollars ($200,000) commencing with the closing of the Company's
initial public offering. From April 1, 1997 until the closing of the
Company's initial public offering, Employee's annual compensation will be
One Hundred Fifty Thousand Dollars ($150,000). Employee's compensation for
the second and third years of employment shall be the initial
annual compensation, increased by a factor equal to the prior year's inflation.
Bonus-Employee shall be entitled to an annual bonus in an amount
equal to either 10%, 20% or 30% of base compensation depending upon the
achievement, by the Company, of certain financial and operational goals, the
definition of which shall be provided to Employee by the Chief Executive
Officer prior to the commencement of employment hereunder. Employee shall
receive the most favorable bonus as shall have been paid to any other
executive officer of the Company. Bonus compensation hereunder shall be paid
to Employee within ninety (90) days of the end of the period of measurement
thereof.
<PAGE>
Automobile Allowance-Employee shall be paid a monthly automobile
allowance in the amount of Six Hundred ($600) Dollars which is intended to
represent reimbursement to Employee of all costs incurred in the operation of
his automobile on Company business. The amount set forth herein shall be the
maximum amount allowed to Employee for any automobile expenses.
Health, Dental, Disability and Life Insurance-Employee shall
receive, at no cost to Employee, full coverage for Employee and his
dependents, in such health, dental, accident and long-term disability
insurance programs as shall be in force in the Company from time to time, and
shall receive any such other benefits as shall be received by other employees
of the Company similarly situate. Employee shall receive from the Company, at
no cost to Employee, life insurance on the life of the Employee in an amount
equal to Employee's annual salary hereunder. Employee may, subject to the
provisions of the group life insurance contract, purchase additional life
insurance at Employee's sole cost and expense.
401(K)Plan-Employee shall be entitled to participate in any 401(K)
plan adopted by the company. The amount of contribution thereto by Company,
if any, shall be at Company's sole discretion.
Vacation-Employee shall be entitled to four (4) weeks paid vacation
during each year of employment hereunder which may be accumulated up to a
maximum of eight (8) weeks during any one calendar year.
<PAGE>
EMPLOYMENT AGREEMENT
AGREEMENT made this 8th day of June, 1997, by and between INTEGRATED
PHYSICIAN SYSTEMS, INC. a Delaware business Corporation, with a principal
place of business at 615 Hope Road, Eatontown, New Jersey, (hereinafter
referred to as "Company") and PETER R. HEISEN, M.D., an adult individual
residing at 38 Timber Knoll Drive, Washington Crossing, PA 18977,
(hereinafter referred to as "Employee".)
WHEREAS, Company wishes to hire and employ Employee on the terms and
conditions hereinafter set forth; and
WHEREAS, Employee wishes to accept such employment in return for the
compensation set forth herein.
NOW, THEREFORE, in return for the mutual covenants and conditions set
forth herein, and for other good and valuable consideration, receipt of which
is hereby acknowledged, the parties hereto do agree as follows:
1. Employment
Company hereby employs Employee and Employee hereby accepts
employment by Company for the period and upon the terms and conditions
contained in this Agreement.
2. Duties
(a) Employee shall serve Company generally in the capacity
described on Exhibit A, attached hereto and incorporated herein by this
reference, and shall have such authority and responsibilities as Company may
reasonably determine from time to time. Employee shall perform any other
duties reasonably required by Company.
(b) Throughout the term of this Agreement, Employee shall
devote his entire business working time, energy, skill and best efforts to
the performance of his duties hereunder in a manner which will faithfully and
diligently further the business and interests of Company.
3. Term
Unless sooner terminated as herein provided, this Agreement
shall be for the term set forth on Exhibit A attached hereto and incorporated
herein by this reference.
4. Compensation
(a) For all of the services rendered by Employee to Company,
Employee shall receive the compensation set forth on Exhibit A attached
hereto, payable in reasonable periodic installments in accordance with
Company's regular payroll practices in effect from time to time.
<PAGE>
(b) Throughout the term of this Agreement and provided that
Employee shall be deemed to be a full-time employee, Employee shall be
provided the health, dental, life and disability insurance benefits set forth
in paragraph 4 of Exhibit "A" attached hereto, and shall be entitled to
participate in the Company's 401K plan as described in paragraph 5 of Exhibit
"A."
(c) Employee shall be entitled to the paid vacation set forth
on Exhibit A attached hereto.
(d) During Employee's employment hereunder, Company shall
reimburse Employee for all ordinary and necessary business expenses incurred
by him in connection with the business of Company. Such payments shall be
made by Company upon submission by Employee of vouchers itemizing such
expenses in a form reasonably satisfactory to Company.
5. Disability
If Employee becomes unable to perform his/her duties hereunder
due to partial or total disability or incapacity resulting from a mental or
physical illness or any similar cause, and such disability continues for a
period in excess of sixty (60) consecutive days in any one hundred and eighty
(180) day period, Company shall have the right to terminate this Agreement
upon thirty (30) days written notice to Employee. In the event of such
disability, Company shall pay Employee his then current compensation,
including any and all accrued salary, bonus compensation and vacation pay,
through the date of the commencement of Employee's entitlements under
Company's long-term disability insurance policy. Thereafter, Company
shall have no further obligations or liabilities to Employee hereunder.
6. Death
If Employee dies, this Agreement shall automatically terminate
and all payments hereunder shall cease at the end of the month in which
Employee's death shall occur and Company shall have no further obligations or
liabilities hereunder to Employee's estate or legal representative or
otherwise, other than the payment of any and all accrued bonus compensation
and accrued vacation pay.
7. Discharge for Cause
(a) Notwithstanding the stated term of employment, this
Agreement and the Employee's employment may be sooner terminated by the
Company for any of the following reasons:
(i) The willful failure or refusal of Employee to
perform his duties as may, from time to time, be delegated to him by the
Company, through the Chief Executive Officer, or the Board of Directors.
(ii) Employee's gross negligence which materially and
adversely affects the business or affairs of the Company.
<PAGE>
(iii) Any act by Employee of fraud, dishonesty or criminal wrongdoing,
which materially adversely effects the Company.
(iv) Any intentional or willful breach by Employee of any material
covenant of this Agreement including but not limited to the provisions
regarding noncompetition and confidentiality.
All of the foregoing shall be, separately and collectively, known as
"cause" for termination.
(b) The Company shall effect termination pursuant to this Section 7 by
written notice to Employee specifying in reasonable detail the circumstances
alleged by Company to constitute "cause" and the specific provisions of this
Section 7 relied upon in effecting such termination. The date of such
termination shall be the date ten (10) days after Company gives such notice of
termination to Employee. If the grounds for termination are solely the
grounds set forth in Section 7(a)(ii) or (iv) above, then during such ten
(10) day period, Employee shall be afforded an opportunity to discuss the
basis for such termination with the full Board of Directors of the Company,
and Employee shall, at his election exercised in writing prior to the
expiration of such ten (10) day period, be entitled to a period of not less
than thirty (30) days after the date of such discussion to attempt to remedy
or cure the conduct alleged to constitute such grounds and the harm caused
thereby if in the good faith judgment of the Board of Directors such conduct
and harm is capable of being remedied or cured within such thirty (30) day
period. If, after the expiration of such cure period, the Employee has not in
the good faith judgment of the Board of Directors remedied or cured the
conduct alleged to constitute such grounds and the harm caused thereby, the
termination shall be effective upon notice to Employee of such adverse Board
judgment.
(c) In the event of early termination of Employee's employment hereunder,
for any reason, Employee shall, simultaneously with such termination, be
conclusively deemed to have resigned any other position he might hold with
the Company. Employee agrees to execute any and all documents reasonably
requested of him by Company's Board of Directors to evidence such
resignations(s).
8. Termination of Agreement by Employee for Cause.
(a) Employee may terminate this Agreement by written notice to Company on
or before the thirtieth (30th) day after the earlier of notice of or the
occurrence of the following events: (i) the giving of a title to Employee
below the level of Chief Medical Officer of the Company; (ii) the assignment
to Employee of any duties or a change in Employee status materially
inconsistent with those set forth herein, including the removal of Employee
from the Board of Directors of the Company; (iii) the Company's willful
breach of any material covenant of this Agreement which breach continues ten
(10) days after written notice to Company from Employee specifying the nature
of the breach and the remedy expected; or (iv) the relocation of the offices
at which Employee is based to a location outside of the Philadelphia or New
York metropolitan area.
<PAGE>
(b) If Employee terminates his employment with Company for any reason
specified in paragraph (a) above, in addition to any other remedies to which
Employee may be lawfully entitled, Employee shall be entitled to receive
severance pay as follows: (i) his then base salary paid monthly for the
remainder of the Term, but in no event less than one hundred and twenty-five
(125%) of such base salary for six (6) months, and (ii) the maximum possible
bonus compensation in accordance with the terms of Exhibit "A" attached
hereto. Furthermore, within ten (10) business days after such termination,
Company shall pay to Employee a per diem amount based upon such base salary for
any accrued vacation days not previously taken by Employee.
9. Compensation Upon Termination.
In the event that the Employee's employment and this Agreement is terminated
by Company prior to the end of its term, for cause as is set forth in
paragraph 7 hereof, Company shall pay to Employee, as severance compensation,
in circumstances other than by Employee's death or disability, or other than
as a result of change in control of the Company, an amount equal to two
months' salary. This amount shall be in addition to all compensation earned
or accrued by Employee through the last day of actual employment. In the
event that Employee's employment is terminated by the Company as a result of
change in control of the Company, the Company shall pay to Employee, as
severance compensation, an amount equal to two times (i) Employee's base
annual salary and (ii) Employee's maximum potential annual bonus
compensation. After the payment of such severance compensation, Company shall
have no further obligation or liability to Employee hereunder.
10. Key Man Insurance. Company shall have the right to obtain, at its
sole discretion, what is commonly known as Key Man Insurance on the life of
the Employee in such amount as the Company deems appropriate. Executive
agrees to cooperate in all respects in the obtaining of such a policy. All
expenses involved in connection with the obtaining and maintaining of such a
policy shall be paid by the Company.
11. Company Property; Noncompetition.
(a) All research, experiments, discoveries, inventions, improvements,
materials or information, including without limitation, reports, analysis,
handbooks, manuals, invoices, price lists or information, customer lists,
information about costs, profits, markets, sales, pricing, methods and other
business affairs including future expansion plans, or any other materials or
data of any kind furnished to Employee by Company or developed by Employee on
behalf of Company or at Company's direction or for Company's use or otherwise
in connection with Employee's employment hereunder, are and shall remain the
sole and confidential property of Company, and Employee shall immediately
deliver the same to Company at the termination of Employee's employment or at
any other time if so requested by Company.
(b) During the term of this Agreement and at all times thereafter, Employee
shall not use for his/her personal benefit, or disclose, communicate or
divulge to, or use for the direct or indirect benefit of any person, firm
association, or company other than the Company, any
<PAGE>
material referred to in subparagraph (a) above or any information regarding
the business methods, business policies, procedures, techniques, research or
development projects or results, trade secrets, or any other confidential
information relating to or dealing with the business operations or activities
of the Company.
(c) During the term of this Agreement and for a period of two (2) years
after termination of his/her employment with Company for any reason
whatsoever, Employee shall not directly or indirectly induce or attempt to
influence any employee of Company to terminate his employment with Company.
(d) During the period of time which Employee is employed by Company
pursuant to the terms of this Agreement and for a period of two (2) years
thereafter, without the prior written consent of Company, Employee shall not,
directly or indirectly, within a State wherein Company then does business,
own, manage, operate, join, control, finance, or participate in the
ownership, management, operation, control, or financing of, or be connected
as an officer, director, employee, partner, principal, agent, representative,
or otherwise, with any enterprise, business, firm or corporation which is in
competition with the Company, other than providing consulting services to
William M. Mercer, Inc. or a similar consulting firm. If Employee violates the
provisions of this Paragraph 11(d), the restrictive period set forth herein
shall be extended by a period of time equal to the number of days, if any,
during which the Employee is in violation of the provisions hereof.
(e) Employee hereby acknowledges and agrees that the covenants and
restrictions contained in this Paragraph 11 relate to matters which are of a
special, unique, and extraordinary importance to Company. Employee
acknowledges that the restrictions contained in the foregoing subparagraphs
are reasonable and necessary in order to protect the legitimate interests of
Company and that without such restrictions, Company would be unwilling to
enter into this Agreement. Employee acknowledges that any violation of any of
the terms hereof will result in irreparable injury to Company for which
money damages alone will be insufficient. Accordingly, Employee agrees that
Company shall be entitled to obtain from any Court of competent jurisdiction,
preliminary and permanent injunctive relief for a violation or threatened
violation of any such restrictions without having to prove actual damages or
to post a bond. Company shall also be entitled to an equitable accounting of
all earnings, profits, and other benefits arising from such violation, which
rights shall be cumulative and in addition to any other rights or remedies to
which Company may be entitled in law or equity. Employee hereby waives any
objections on the grounds of improper jurisdiction or venue to the
commencement of an action in the state of New Jersey and agrees that
effective service of process may be made upon him/her by mail under the
notice provisions contained in this Agreement. EMPLOYEE ACKNOWLEDGES THAT THE
TERMS OF THIS AGREEMENT HAVE BEEN NEGOTIATED AT ARM'S LENGTH. EMPLOYEE
REPRESENTS THAT HE HAS READ THE RESTRICTIONS CONTAINED HEREIN, HAS HAD THE
OPPORTUNITY TO REVIEW THEM WITH LEGAL COUNSEL, AND DOES UNDERSTAND THE FULL
EXTENT AND IMPLICATION OF THE TERMS OF THIS AGREEMENT AND HEREBY KNOWINGLY
AND VOLUNTARILY AGREES TO BE BOUND HEREBY.
<PAGE>
(f) It is the intent of the parties that the provisions of this
Paragraph 11 be enforceable to the fullest extent permitted by law. If,
however, any portion of any section of this Agreement including the
restrictive covenant as set forth herein is held by a court of law to be
unreasonable in any proceeding, then the period of time, the geographic area,
or such other restrictions shall be reduced by the elimination or reduction
of such portion thereof, so that such restrictions may be enforced in a
manner that is adjudged to be reasonable.
12) Miscellaneous
(a) Controlling Law. This Agreement and all questions relating to its
validity, interpretation, performance and enforcement, shall be governed by
and construed in accordance with the laws of the State of New Jersey.
(b) Indulgences, etc. Neither the failure nor any delay on the part
of either party to exercise any right, remedy, power or privilege under this
Agreement shall operate as a waiver thereof, nor shall any single or partial
exercise of any right, remedy, power or privilege preclude any other or
further exercise of the same or any other right, remedy, power or privilege,
nor shall any waiver of any right, remedy, power or privilege, for a
particular occurrence, constitute a waiver with respect to any other
occurrence.
(c) Binding Nature. This Agreement shall be binding upon and inure to
the benefit of Company and its successors and assigns and shall be binding
upon Employee, his heirs and legal representatives.
(d) Entire Agreement. This Agreement contains the entire
understanding among the parties hereto with respect to the subject matter
hereof, and supersedes all prior and contemporaneous agreements and
understandings, inducements or conditions, express or implied, oral or
written, except as herein contained. This Agreement may not be modified or
amended other than by an agreement in writing, signed by the parties.
(e) Assignment. This Agreement may be assigned by Company upon
thirty (30) days written notice to Employee. Employee may not assign his
duties, obligations or entitlements hereunder.
(f) Right to Independent Counsel. The parties hereto recognize that
this Agreement is a legal document which may affect them adversely.
Consequently, the parties acknowledge that prior to executing this Agreement
they were given the opportunity to seek the advice of independent legal
counsel regarding the provisions of this Agreement and their legal
involvement herein. By executing this Agreement, the parties acknowledge that
they have reviewed this Agreement with independent counsel or have waived
their opportunity to do so.
(g) Expenses of Agreement. Each of the parties hereto shall bear its
own expenses incurred in connection with the negotiation, preparation and
execution of this Agreement and the consummation of the transactions
contemplated hereby.
<PAGE>
(h) Notices. Any notice required to be given pursuant to the terms of
this Agreement shall be in writing and sent by registered mail or nationally
recognized carrier, to the parties at the following addresses:
To Company at:
Integrated Physician Systems, Inc.
615 Hope Road
Eatontown, NJ
To Employee at:
38 Timber Knoll Drive,
Washington Crossing, PA 18977
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered as of the date first above written.
INTEGRATED PHYSICIAN SYSTEMS, INC.
Attest: /s/ Walter B. Dunsmore By: /s/ Scott G. Pollock
---------------------- -------------------------
Chief Executive Officer
EMPLOYEE:
Witness:/s/ Walter B. Dunsmore By: /s/ PETER R. HEISEN, M.D.
---------------------- -------------------------
PETER R. HEISEN, M.D.
<PAGE>
3) AUTOMOBILE ALLOWANCE - Employee shall be paid a monthly automobile
allowance in the amount of Six Hundred ($600) Dollars which is intended to
represent reimbursement to Employee of all costs incurred in the operation of
his automobile on Company business. The amount set forth herein shall be the
maximum amount allowed to Employee for any automobile expenses.
4) HEALTH, DENTAL, DISABILITY AND LIFE INSURANCE - Employee shall
receive, at no cost to Employee, full coverage for Employee and his
dependents, in such health, dental, accident and long-term disability
insurance as shall be in force in the Company from time to time. Employee
shall receive from the Company, at no cost to Employee, life insurance on the
life of Employee in an amount equal to twice the Employee's annual salary
hereunder. Employee may, subject to the provisions of the group life
insurance contract, purchase additional life insurance at Employee's sole
cost and expense.
5) 401(K) PLAN/STOCK OPTION PLAN - Employee shall be entitled to
participate in any 401(K) or employee stock option plan adopted by the
Company. The amount of contribution thereto by Company, if any, shall be at
Company's sole discretion.
6) VACATION - Employee shall be entitled to four (4) weeks paid vacation
during each year of employment hereunder which may be accumulated up to a
maximum of eight (8) weeks during any one calendar year.
<PAGE>
Exhibit 10.5
INTEGRATED PHYSICIAN SYSTEMS INC.
PRACTICE MANAGEMENT
SERVICES AGREEMENT
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE 1 DEFINITIONS............................................... 2
ARTICLE 2 RELATIONSHIP OF THE PARTIES............................... 6
2.1 Independent Relationship
2.2 Responsibilities of the Parties
2.3 Provider Matters
2.4 Patient Referrals
ARTICLE 3 DUTIES OF THE POLICY BOARD................................ 7
3.1 Formation of the Policy Board
3.2 Duties and Responsibilities of the Policy Board
ARTICLE 4 FACILITIES AND SERVICES TO BE PROVIDED BY IPS............. 8
4.1 Facilities
4.2 Additional Facilities
4.3 Performance of Management Functions
4.4 Financial Planning and Goals
4.5 Audits and Statements
4.6 Inventory and Supplies
4.7 Management Services and Administration
4.8 Executive Director
4.9 Personnel
4.10 Practice Expenses
4.11 Events Excusing Performance
4.12 Compliance with Applicable Laws
4.13 Quality Assurance
4.14 Ancillary Services
ARTICLE 5 OBLIGATIONS OF PROVIDER.................................. 12
5.1 Professional Services
5.2 Medical Practice
5.3 Employment of Physician Employees
5.4 Professional Dues and Education Expenses
5.5 Fees for Professional Services
5.6 Provider Compensation
5.7 Professional Insurance Eligibility
5.8 Events Excusing Performance
ARTICLE 6 RESTRICTIVE COVENANTS.................................... 13
6.1 Restrictive Covenants by Provider
<PAGE>
6.2 Restrictive Covenants by Current Physician Stockholders and
Physician Employees
6.3 Restrictive Covenants by Future Physician Employees
6.4 Enforcement
ARTICLE 7 FINANCIAL ARRANGEMENTS................................... 14
7.1 Provider Compensation
7.2 Draws
7.3 Determination and Payment of Provider Compensation
7.4 Assignment of Fees for Medical Service
7.5 Collection of Governmental Receivables
7.6 Collection of Non-Governmental Receivables
7.7 Procedures Without Lockbox
7.8 Misdirected Payments
7.9 Representations and Warranties with respect to Accounts
Receivable
ARTICLE 8 RECORDS................................................. 21
8.1 Patient Records
8.2 Records Owned by IPS
8.3 Access to Records
8.4 Maintenance of Records/Subcontracts
ARTICLE 9 INSURANCE AND INDEMNITY................................. 22
9.1 Insurance to be Maintained by Provider
9.2 Insurance to be Maintained by IPS
9.3 Additional Insureds
9.4 Indemnification
ARTICLE 10 TERM AND TERMINATION................................... 23
10.1 Term of Agreement
10.2 Extended Term
10.3 Termination by Provider
10.4 Termination by IPS
ARTICLE 11 GENERAL PROVISIONS..................................... 24
11.1 Assignment
11.2 Whole Agreement; Modification
11.3 Notices
11.4 Binding on Successors
11.5 Waiver of Provisions
11.6 Governing Law
11.7 Severability
11.8 Additional Documents
11.9 Time is of the Essence
11.10 Confidentiality
<PAGE>
11.11 Contract Modifications for Prospective Legal Events
11.12 Remedies Cumulative
11.13 No Obligation to Third Parties
1
<PAGE>
INTEGRATED PHYSICIAN SYSTEMS INC.
PRACTICE MANAGEMENT SERVICES AGREEMENT
THIS PRACTICE MANAGEMENT SERVICES AGREEMENT dated as of May, 1997,
by and between INTEGRATED PHYSICIAN SYSTEMS, INC., a Delaware Corporation with
its principal place of business at 2644 Bristol Road, Warrington, Pennsylvania
18976 (hereinafter "IPS") and IPS/PHYSICIANS _____________, P.C., a New Jersey
professional corporation with its principal place of business at
___________________________ (hereinafter "Provider"), _______________, an adult
individual with a business address at ____________ (hereinafter "Physician
Stockholder"), and _______________, duly licensed physician(s), with a business
address at _________________ (hereinafter "Physician Employee(s)").
RECITALS:
WHEREAS, Provider is a professional corporation which conducts a
muti-specialty group medical practice (the "Practice") which provides
comprehensive professional medical care to the public at several locations
("Practice Sites") in the_____________ county area; and
WHEREAS, Physician Stockholder is a duly licensed physician who owns
all of the issued and outstanding common stock of Provider; and
WHEREAS, Physician Employee(s) is/are employees of Provider and render
medical services at the practice Sites; and
WHEREAS, IPS is in the business of owning certain assets of and
managing and operating physician practices and furnishing such medical practices
with necessary facilities. equipment, personnel, supplies, and support staff;
and
WHEREAS, Provider desires to engage IPS to perform such management
functions and render such services which will enable Provider to devote its
efforts on a concentrated and continuous basis to the rendering of medical
services to its patients;
NOW THEREFORE, in consideration of the mutual covenants and agreements
herein contained, Provider hereby agrees to purchase from IPS the management and
support services herein described and IPS agrees to provide to Provider such
management and support services on the terms and conditions set forth in this
Agreement.
2
<PAGE>
ARTICLE 1
DEFINITIONS
Definitions. For purposes of this Agreement, the following
definitions shall apply:
(a) "Account Debtor" means an account debtor or any other person or
entity obligated in respect of an Account Receivable.
(b) "Accounts Receivable" means, with respect to the Provider, all
accounts and any and all rights to payment of money or other forms of
consideration of any kind now owned or hereafter acquired (whether classified
under the Uniform Commercial Code ("UCC") as accounts, chattel paper, general
intangibles or otherwise) for goods sold or leased or for services rendered by
the Provider, including, but not limited to, accounts receivable, proceeds of
any letters of credit naming the Provider as beneficiary, chattel paper
insurance proceeds, contract rights, notes, drafts, instruments, documents,
acceptances and all other debts, obligations and liabilities in whatever form,
from any other person or entity; provided, however, that cash, checks and credit
card purchases are not included in the definition of Accounts Receivable.
(c) "Assigned A/R" shall mean, with respect to the Provider, the
Accounts Receivable assigned pursuant to Article 7 of this Agreement.
(d) "CHAMPUS" means the Civilian Health and Medical Program of the
Uniformed Services.
(e) "Collecting Bank" means the main office of ____________________
located at___________________ or such other financial institution agreed to by
IPS.
(f) "Finance Charge Rate" means a rate of interest equal to the lessor
of (i) eighteen percent (18%) per annum or (ii) the maximum rate of interest
allowed by applicable law from time to time in effect.
(g) "GAAP" shall mean generally accepted accounting principles as set
forth in the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such entity or other practices and procedures as may be approved
by a significant segment of the accounting profession. For purposes of this
Agreement, GAAP shall be applied in a manner consistent with the historic
practices used by IPS or Provider as applicable.
(h) "Governmental Receivables" means an Account Receivable of Provider
which (i) arises in the ordinary course of business of Provider, (ii) has as its
third party payor the United
3
<PAGE>
States of America or any state or any agency or instrumentality of the United
States of America or any state which makes any payments with respect to
Medicare or Medicaid or with respect to any other program (including CHAMPUS)
established by federal or state law, and (iii) is required by federal or
state law to be paid or to be made to Provider as a health care provider.
Governmental Receivables shall not, however, refer to amounts payable by
private insurers under contract to provide benefits under the Federal
Employee Health Benefit Program.
(i) "Governmental Lockbox Account" means an account established at
the Collecting Bank by Provider into which all proceeds of Providers
Governmental Receivables are remitted.
(j) "IPS' Expenses" shall be the sole obligation of IPS and shall
mean, pursuant to GAAP applied on a consistent basis: (i) any general and
administrative expenses of IPS and other items or expenses incurred by IPS
that are not incurred specifically for the purpose of providing services to
Provider or are not directly attributable to Provider (or cannot be
reasonably allocated to Provider), as determined by IPS , including, without
limitation, salaries and benefits of executive officers of IPS, except as
otherwise provided for in the definition of Provider Compensation; and (ii)
all taxes of IPS, including but not limited to, state and federal income
taxes and franchise taxes, but excluding state and federal employee taxes
related to employees who provide services to Provider, property taxes on
assets used by Provider and other taxes specifically included in Provider
Compensation.
(k) "Lender" shall mean any lender to IPS that has a security
interest in the Accounts Receivable from time to time.
(l) "Lockbox Agreements" means those certain agreements to be entered
into between the Collecting Bank and Provider as to Governmental Receivables
and the Non-Governmental Receivables, respectively, in form and substance
acceptable to IPS and its legal counsel.
(m) "Main Account" means IPS operating account established at the
Collecting Bank.
(n) "Medicaid" means any state program pursuant to which health care
providers are paid or reimbursed for care given or goods afforded to indigent
persons and administered pursuant to a plan approved by the Health Care
Financing Administration under Title XIX of the Social Security Act.
(o) "Medicare" means any medical program established under Title XVIII
of the Social Security Act and administered by the Health Care Financing
Administration.
(p) "Non-Governmental Lockbox Account" means the account established
by IPS with the Collecting Bank into which all proceeds from Providers Accounts
Receivable from third party payors or patients ( other than Governmental
Receivables ) are remitted.
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<PAGE>
(q) "Non-Governmental Receivables" means any Accounts Receivable
which are not Governmental Receivables.
(r) "Notification Letter" means a written notification from Provider
to third party payors that all proceeds due under Providers Accounts Receivable
are to be remitted to the Non-Governmental Lockbox Account or the Governmental
Lockbox Account, as the case may be, with such Notification Letter to be in
form acceptable to IPS and its legal counsel.
(s) "Physician Employees" shall mean only those who are doctors of
medicine (including Physician Stockholders) and who are employed by Provider or
are otherwise under contract with Provider to provide professional services to
patients at the Practice Sites and are duly licensed to provide medical services
in the State of New Jersey.
(t) "Physician Extender Employees" shall mean physician assistants,
midwives, nurse practitioners and other such persons who are employees of IPS,
excluding, however, all Technical Employees.
(u) "Physician Stockholders" shall mean those Physician Employees who
own an interest, directly or indirectly, in the equity of Provider.
(v) "Practice Expenses" shall be the sole obligation of IPS and shall
mean, pursuant to GAAP applied on a consistent basis, all operating and
nonoperating expenses of Provider arising hereunder in connection with the
operation of the Practice Sites, unless expressly provided otherwise herein
(e.g., Provider Compensation), including but not limited to:
(i) Salaries, benefits and other direct costs of all
non-physician employees working at the Practice Sites or elsewhere on behalf of
Provider, excluding Technical Employees.
(ii) Obligations of Provider under leases of space and equipment
for the proper and efficient operation of the Practice Sites. If IPS is the
lessor of such space or equipment under Practice Site Lease Agreements and/or
Practice Equipment Lease Agreements, the rental values therefor shall be clearly
delineated in the lease agreement(s), for such items and shall be set at a rate
equal to their fair market value regardless of the relationship between IPS and
Provider;
(iii) All expenses and charges associated with the operation of
the Practice Sites, including, without limitation, utilities, telephone,
janitorial/maintenance, etc.;
(iv) Personal property taxes assessed against IPSs assets
utilized by Provider in the Practice Sites from and after the date of this
Agreement;
(v) Malpractice insurance premiums, and fire, workers
compensation and general liability insurance premiums;
5
<PAGE>
(vi) The cost of any goods purchased for resale;
(vii) Direct costs of all employees or consultants of IPS engaged
to provide services at or in connection with Provider or who actually provide
services at or in connection with the Practice (whether or not at a Practice
Site) for improved performance, such as quality assurance, materials management,
purchasing programs, coding analysis and physician recruitment; provided,
however, that only the portion of expenses related to such employee or
consultant, that is allocable to work performed at or for the benefit of
Provider shall be included in Practice Expenses, without mark up;
(viii) Reasonable expenses related to professional meetings,
seminars, dues and professional licensing fees for Physician Employees (
including Physician Stockholder(s)) and Physician Extender Employees; and
(ix) Any and all other ordinary and necessary expenses incurred
by Provider or IPS for the direct benefit of the Provider in carrying out their
respective obligations under this Agreement.
(w) "Practice Site" shall mean any office, clinic, laboratory, or
other location from which Provider renders professional medical services.
(x) "Professional Services Revenue" shall mean all fees actually
recorded each month (net of any amounts reimbursed to any patient or third party
payors during the applicable month and net of any adjustments for contractual
allowances and reserves for uncollectible amounts based on the historical
experience of Provider, as determined by IPS in its sole discretion) by or on
behalf of Provider as a result of professional medical services personally
furnished to patients (including but not limited to fee for service revenues,
managed care payments and capitation revenues from risk contracts) and other
fees or income generated by Physician Stockholder(s), Physician Employees,
Physician Extender Employees and other non-physician employees, plus any
revenues from the sale or provision of any goods, supplies, diagnostic tests,
therapies or other ancillary services or items by Provider. References to
"actually recorded" shall mean all amounts recorded in accordance with GAAP.
(y) "Provider Equipment Lease Agreement(s)" shall mean any lease for
equipment utilized at a Practice Site which is entered into by and between IPS
as lessor and Provider as lessee.
(z) "Provider Compensation" shall be the sole obligation of
Provider and shall mean, pursuant to GAAP (as defined herein) applied on a
consistent basis: (i) federal, state or local income taxes payable by
Provider and the costs of preparing federal, state or local tax returns for
Provider; (ii) all compensation and other benefits payable with respect to
Physician Stockholders, Physician Employees and Technical Employees (as
defined herein) and all employment taxes and costs associated therewith;
(iii) physician licensure fees, board certification fees and costs of
membership in professional associations for Physician Stockholders, Physician
Employees and Technical Employees; (iv) costs associated with legal,
accounting and professional services
6
<PAGE>
incurred by or on behalf of Provider; (v) final and non-appealable judgments in
excess of professional liability insurance policy limits rendered against
Provider, Physician Stockholders, Physician Employees and Technical Employees,
or any of them, in the performance of medical services as employees or
contractors of Provider; (vi) direct personal expenses of Physician
Stockholders, Physician Employees or Technical Employees of a kind which
Provider has historically charged to its Physician Stockholders, Physician
Employees or Technical Employees as the case may be; and (vii) costs of
continuing professional education for Physician Stockholders, Physician
Employees and Technical Employees.
(aa) "Provider Practice Site Lease Agreement(s)" shall mean any lease
for Provider office space which is entered into by and between IPS as lessor and
Provider as lessee.
(bb) "Provider Operating Account" shall mean the main bank account
maintained by Provider.
(cc) "Technical Employees" shall mean those individuals who provide
billable services on behalf of Provider and are employees of Provider, but are
neither Physician Employees nor Physician Extender Employees.
ARTICLE 2
RELATIONSHIP OF THE PARTIES
2.1 Independent Relationship. Provider and IPS intend to act and
perform as independent contractors. Notwithstanding the authority granted to IPS
herein, IPS and Provider agree that Provider will retain the sole authority to
direct the medical, professional and ethical aspects of its medical practice.
Each party shall be responsible for and shall comply with all state and federal
laws with respect to employment taxes, income tax withholding, unemployment
compensation contributions and such other employment related statutes as may be
applicable to that party.
2.2 Responsibilities of the Parties. As more specifically set forth
herein, IPS shall provide Provider with offices, facilities, equipment,
supplies, support personnel and practice management and financial advisory
services. As more specifically set forth herein, Provider shall be responsible
for the recruitment and hiring of physicians and all issues related to medical
practice patterns and documentation thereof. Notwithstanding anything herein to
the contrary, any clinical laboratory service shall be operated in full
compliance with Section 6204 of the Omnibus Budget Reconciliation Act of 1989.
2.3 Provider Matters. Matters involving the internal agreements and
finances of Provider, including the distribution of professional fee income
among the individual Physician Stockholders (as hereinafter defined), tax
planning, pension and investment planning (and expenses relating solely to
these internal business matters) shall remain the sole responsibility of
Provider and the individual Physician Stockholders.
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2.4 Patient Referrals. The parties agree that the benefits to
Provider hereunder do not require, are not payment for, and are not contingent
upon the admission, referral or any other arrangement for the provision of any
item or service offered by IPS to any of Providers patients in any facility or
laboratory controlled, managed or operated by IPS.
ARTICLE 3
THE POLICY BOARD
3.1 Formation of the Policy Board. The Parties hereto shall
establish a Policy Board which shall be responsible for developing management
and administrative policies for the overall operation of the Practice. The
Policy Board shall consist of six (6) members. IPS shall designate, in its sole
discretion, three (3) members of the Policy Board. Provider shall elect from
among its shareholders and employed physicians, the other three (3) members of
the Policy Board.
3.2 Duties and Responsibilities of the Policy Board. The Policy
Board shall have the following duties and obligations:
3.2.1 Capital Improvements and Expansion. Any renovation or
expansion plan and any capital equipment expenditure with respect to the
Practice shall be first reviewed and approved by the Policy Board and shall be
based upon economic feasibility, physician support. productivity and the then
current market conditions.
3.2.2 Annual Budgets. All annual capital and operating
budgets prepared by IPS, as set forth in Section 4.2 hereof, shall be subject
to the review and approval of the Policy Board.
3.2.3 Advertising. All advertising and other marketing of the
services performed by the Practice shall be subject to the prior review and
approval of the Policy Board.
3.2.4 Patient Fees. As a part of the annual operating budget,
in consultation with IPS, the Policy Board shall review and adopt a fee
schedule for all physician and ancillary services rendered by the Practice.
3.2.5 Ancillary Services. The Policy Board shall approve any
ancillary services provided by the Practice based upon the pricing and quality
of such services.
3.2.6 Provider and Payor Relationships. Decisions regarding
the establishment or maintenance of relationships with institutional health care
providers and payors shall be made by the Policy Board in consultation with IPS.
3.2.7 Strategic Planning. The Policy Board shall develop long
term strategic objectives.
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3.2.8 Capital Expenditures. The Policy Board shall determine
the priority of major capital expenditures.
3.2.9 Physician Hiring. The Policy Board shall determine the
number and type of physicians required for the efficient operation of the
Practice. The approval of the Policy Board shall be required prior to any
variation in the restrictive covenants contained in any employment agreement
between a physician and Provider.
3.2.10 Executive Director. The selection and retention of the
Executive Director pursuant to Section 4.8 by IPS shall be subject to the
approval of the Policy Board. If Provider is dissatisfied with the services
provided by the Executive Director, Provider shall so inform the Policy Board.
IPS and the Policy Board shall in good faith determine whether the Executive
Director should be terminated, counseled or assisted.
3.2.11 Grievance Referrals. The Policy Board shall consider
and make final decisions on all grievances pertaining to matters not
specifically addressed in this Agreement.
ARTICLE 4
FACILITIES AND ADMINISTRATIVE SERVICES TO BE PROVIDED BY IPS
4.1 Facilities. IPS hereby agrees to furnish to Provider and be
responsible for the offices and facilities more fully described in Exhibit 4.1,
including, but not limited to, all costs of repairs, maintenance, improvements,
utilities (telephone, electric, gas, water), normal janitorial service, refuse
disposal, real or personal property lease or sublease expenses, taxes, insurance
and all other costs and expenses reasonably incurred in conducting the
Practices during the term of this Agreement. IPS shall consult with Provider
regarding the condition, use and needs for the offices, facilities and
improvements.
4.2 Additional Facilities. In the event that additional physicians
shall be employed by Provider, and provided that the circumstances so require,
IPS shall expand the offices, facilities and improvements provided hereunder to
accommodate any additional needs of the Practice. IPS shall consult with
Provider regarding the need for additional offices, facilities and improvements.
4.3 Performance of Management Functions. IPS shall provide or arrange
for the services set forth in this Article 4, the cost of which shall be
included in Practice Expenses (hereinafter defined). IPS is hereby expressly
authorized to perform its services hereunder in whatever manner it deems
reasonably appropriate to meet the day to day requirements of practice
operations in accordance with the general standards approved by the Policy
Board, including, without limitation, performance of some of the business office
functions at locations
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other than the Practice locations. Provider will not act in a manner which
prevents IPS from efficiently managing the day to day operations of the Practice
in a business like manner.
4.4 Financial Planning and Goals. IPS shall prepare annual capital
and operating budgets reflecting, in reasonable detail, anticipated revenues and
expenses, sources and uses of capital for growth in the Practice, and medical
services to be rendered at the Practice. The budgets shall be presented to the
Policy Board at least thirty (30) days prior to the end of the preceding fiscal
year. IPS shall determine the amount and form of capital to be invested annually
in the Practice and shall specify the targeted profit margin for the Practice
which shall be reflected in the budget.
4.5 Audits and Statements. IPS shall prepare, after consultation with
the Policy Board, annual financial statements for the operations of Provider and
shall cause the annual financial statements to be audited by an independent
certified public accountant selected by IPS.
4.6 Inventory and Supplies. IPS shall order and purchase for the
Practice all inventory supplies and other ordinary, necessary and appropriate
materials.
4.7 Management Services and Administration.
(a) Provider hereby appoints IPS as its sole and exclusive
manager and administrator for all day to day business functions of the Practice.
Provider agrees that the purpose and intent of this Practice Management
Services Agreement is to relieve the Physician Stockholders and Physician
Employees, to the maximum extent possible, of the administrative, accounting,
personnel and business functions of the Practice and to have IPS assume
responsibility for and be given all necessary authority to perform these
functions. IPS agrees that Provider, and only Provider, will perform all medical
functions of its practice. IPS will have no authority, directly or indirectly,
to perform, and will not perform, any medical function. IPS may, however, advise
Provider regarding the relationship between its performance of medical functions
and the overall administrative and business functioning of the Practice. To the
extent that they assist Provider in performing medical functions, all clinical
support personnel provided by IPS shall be subject solely to the direction and
supervision of Provider and in the performance of such medical functions, shall
not be subject to any direction or control by, or liability to, IPS, except as
may be specifically authorized by Provider.
(b) IPS shall, on behalf of Provider, bill patients and collect the
accounts receivable for medical services rendered by Provider at the Practice
Sites, for services performed outside the Practice Sites; for hospitalized
patients; and for all other professional services. Provider hereby appoints IPS
for the term hereof to be its true and lawful attorney-in-fact, for the
following purposes: (i) to bill patients in Providers name and on its behalf;
(ii) to collect accounts receivable resulting from such billing in Providers
name and on its behalf; (iii) to receive payments from Blue Shield, health and
other insurance companies, prepayments from health care plans, Medicare,
Medicaid and all other third party payors; (iv) to take possession of and to
endorse in the name of Provider (and/or in the name of an individual physician)
any notes,
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checks, money orders, insurance payments and other instruments received in
payment of accounts receivable; and (v) to initiate the institution of legal
proceedings in the name of Provider to collect any accounts and moneys owed to
Provider; (vi) to enforce the rights of Provider as creditors under any contract
or in connection with the rendering of any service; and (vii) to contest
adjustments and denials by governmental agencies (or their fiscal
intermediaries) as third party payors. All adjustments made for uncollectible
accounts, professional courtesies and other activities that do not generate a
collectible fee shall be done in a reasonable and consistent manner approved by
IPS independent certified public accountants.
(c) IPS shall design, supervise and maintain custody of all files and
records relating to the operation of Provider, including but not limited to
accounting, billing, patient medical records, and collection records. Patient
medical records shall at all times be and remain the property of Provider and
shall be located at the Practice Sites so that they are readily accessible for
patient care. The management of all files and records shall comply with
applicable state and federal statutes. IPS shall use its best efforts to
preserve the confidentiality of patient medical records and use information
contained in such records only for the limited purposes necessary to perform the
services set forth herein; provided however, that in no event shall a breach of
said confidentiality be deemed a default under this Agreement.
(d) IPS shall supply to Provider all clerical, accounting,
bookkeeping, transcription and computer services, printing, postage and
duplication services, medical transcription services and all other ordinary,
necessary or appropriate services for the operation of the Practice.
(e) Subject to the provisions of Section 3.2.3, IPS shall design and
implement an adequate and appropriate public relations program on behalf of
Provider, with appropriate emphasis on public awareness of the availability of
services at the Practice Sites. The public relations program shall be conducted
in compliance with applicable laws and regulations governing advertising by the
medical profession.
(f) IPS shall provide the data necessary for Provider to prepare its
annual income tax returns and financial statements. IPS shall have no
responsibility for the preparation of Provider federal or state income tax
returns other than as provided in Section 4.5(i) nor shall IPS have any
responsibility for the payment of any such income taxes.
(g) IPS shall assist Provider in recruiting additional physicians,
performing such administrative functions as may be appropriate such as
advertising for and identifying potential candidates, checking credentials,
and arranging interviews; provided however, that Provider shall interview and
make the decision as to the suitability of any physician to become associated
with the Provider. All physicians recruited by IPS and accepted by Provider
shall be the employees of Provider and not of IPS. Subject to Section 5.3,
any expenses incurred in the recruitment of physicians, including, but not
limited to, employment agency fees, relocation costs and interviewing
expenses shall be budgeted Practice Expenses. Such expenses shall be approved
by IPS.
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(h) Subject to the direction and approval of the Policy Board, IPS
shall negotiate and administer all managed care contracts on behalf of Provider.
(i) IPS shall arrange for all legal and accounting services related to
Practice operations incurred traditionally in the ordinary course of business,
including enforcing any physician contract containing any restrictive covenants,
provided that such service shall first be approved in advance by the Executive
Director.
(j) IPS will provide for the proper cleanliness of the premises, and
maintenance and cleaning of the equipment, furniture and furnishings located
upon such premises.
(k) IPS shall negotiate for and cause premiums to be paid with respect
to the Insurance provided in Section 9.1. All premiums and deductibles with
respect to such policies shall be Practice expenses.
4.8 Executive Director. Subject to the provisions of Section 3.2.11,
IPS, if in its sole discretion it deems it to be prudent and necessary, shall
hire and appoint an Executive Director to manage and administer all of the day
to day business functions of the Practice. IPS shall determine the salary and
fringe benefits of the Executive Director. At the direction of, and under the
supervision and control of IPS, the Executive Director, subject to the terms of
this Agreement, shall implement the policies established by the Policy Board and
shall generally perform the duties and have the responsibilities of an
administrator. The Executive Director shall be responsible for organizing the
agenda for the meetings of the Policy Board referred to in Article 3.
4.9 Personnel. IPS shall provide physician extender employees,
nursing and other non-physician professional support (other than Technical
Employees) and administrative personnel, clerical, secretarial, and bookkeeping
and collection personnel reasonably necessary for the conduct of the Practice.
IPS shall determine and cause to be paid the salaries and fringe benefits of all
such personnel. Such personnel shall be under the direction, supervision and
control of IPS, with those personnel performing patient care services subject to
the professional supervision of Provider. If Provider is dissatisfied with the
services of any person, Provider shall consult with IPS. IPS shall in good faith
determine whether the performance of that employee could be brought to
acceptable levels through counsel and assistance, or whether such employee
should be terminated. IPS obligations regarding staff shall be governed by the
overriding principle and goal of providing the highest quality of medical care.
Employee assignments shall be made in a manner which assures consistent and
continued rendering of high quality medical support services and prompt
availability and accessibility of individual medical support personnel to
physicians, in order to develop constant, familiar and routine working
relationships between individual physicians and individual members of the
medical support staff. IPS shall maintain established working relationships
wherever possible and IPS shall make every effort consistent with sound business
practices to honor the specific requests of Provider with regard to the
assignment of its employees.
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4.10 Practice Expenses. During the term of this Agreement, IPS shall
be solely responsible for, and shall pay on a timely basis, when due, all
Practice Expenses.
4.11 Events Excusing Performance. IPS shall not be liable to Provider
for failure to perform any of the services required herein in the event of
strikes, lockouts, calamities, acts of God, unavailability of supplies, or other
events over which IPS has no control for so long as such events continue, and
for a reasonable time thereafter.
4.12 Compliance with Applicable Laws. IPS shall comply with all
applicable federal, state and local laws, regulations and restrictions in the
conduct of its obligations under this Agreement.
4.13 Quality Assurance. IPS shall assist Provider in fulfilling its
obligation to its patients to maintain a high quality of medical and
professional services. The Physician Stockholders hereby acknowledge their
obligations to each other and to the public to maintain appropriate standards of
medical care.
4.14 Ancillary Services. IPS shall operate such ancillary services as
are approved by the Policy Board.
ARTICLE 5
OBLIGATIONS OF PROVIDER
5.1 Professional Services. Provider shall provide professional
services to patients in compliance at all times with all ethical standards, laws
and regulations applying to the medical profession. Provider shall ensure that
each physician associated with Provider that provides medical care to patients
of Provider is licensed to do so by the State of New Jersey. In the event that
any disciplinary action or medical malpractice action is initiated against any
such physician, Provider shall immediately inform the Executive Director of the
existence of such action and the facts and circumstances underlying the action.
Provider shall establish a program which monitors the medical care delivered at
the Practice Sites.
5.2 Medical Practice. Provider shall use and occupy the Practice
Sites exclusively for the practice of medicine and shall comply with all
applicable local rules, ordinances and standards of medical care. It is
expressly acknowledged by the parties that the medical practice or practices
conducted at the Practice Sites shall be conducted solely by physicians
associated with Provider and no other physician or other medical practitioner
shall be permitted to use or occupy the Practice Sites without the prior written
consent of IPS.
5.3 Employment of Physician Employees and Technical Employees.
Provider shall have complete control of and responsibility for the hiring,
compensation, evaluation and termination of its Physician Employees and
Technical Employees, although at the request of Provider, IPS shall consult with
Provider respecting such matters. Provider shall be responsible
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for the payment of all Physician Employees and Technical Employees salaries
and wages, payroll taxes, benefits and all other charges now or hereafter
applicable to them. Provider shall only employ and contract with licensed
physicians meeting applicable credentialing guidelines established by the
Policy Board.
5.4 Professional Dues and Educational Expenses. Provider and its
Physician Employees shall be solely responsible for the cost of membership in
professional associations, and continuing professional education. Provider shall
ensure that each of its Physician Employees participates in such continuing
medical education as may be required in order for such physician to remain in
compliance with all appropriate standards.
5.5 Fees for Professional Services. Provider shall be solely
responsible for all legal, accounting and other professional service fees
incurred by Provider.
5.6 Provider Compensation. During the term of this Agreement,
Provider shall be solely responsible for, and shall pay on a timely basis,
when due, all Provider Compensation.
5.7 Professional Insurance Eligibility. Provider shall cooperate with
IPS in obtaining and retaining professional liability insurance; shall make
certain that its Physician Employees are properly insurable; and shall
participate in an ongoing risk management program.
5.8 Events Excusing Performance. Provider shall not be liable to IPS
for failure to perform any of the services required herein in the event of
strikes, lockouts, calamities, acts of God, unavailability of supplies, or other
events over which Provider has no control, for so long as such events continue
and for a reasonable period of time thereafter.
ARTICLE 6
RESTRICTIVE COVENANTS
The parties recognize that the services to be provided by IPS
hereunder shall be effective only if Provider operates an active medical
practice to which the physicians associated with Provider devote their full time
and attention. To that end:
6.1 Restrictive Covenants by Provider. During the term of this
Agreement, Provider shall not establish, operate or provide physician services
at any medical office, clinic or other health care facility providing services
substantially similar to those provided by Provider pursuant to this Agreement,
located within 35 miles of the Practice Sites (wherever located at such time).
6.2 Restrictive Covenants by Current Physician Stockholders and
Physician Employees. Provider shall obtain and enforce (subject to IPS
obligations under Section 4.5(i) of this Agreement) formal agreements from its
current Physician Stockholders, pursuant to which the Physician Stockholders
agree not to establish, operate or provide physician services at any
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medical office, clinic or outpatient and/or ambulatory treatment or diagnostic
facility providing services substantially similar to those provided by Provider
within 10 miles of the Practice Sites (wherever located at such time) during
the term of such agreements and for a period of two (2) years after any
termination of employment with Provider. Provider shall not waive any of the
provisions of such agreements.
6.3 Restrictive Covenants by Future Physician Employees. Provider
shall obtain and enforce formal agreements from each of its future Physician
Employees (and future Physician Stockholders) hired or contracted, pursuant to
which such physicians agree not to establish, operate or provide physician
services at any medical office, clinic or outpatient and/or ambulatory treatment
or diagnostic facility providing services substantially similar to those
provided by Provider within 10 miles of the Practice Sites (wherever located at
such time) during the term of said Physician Employees employment agreement with
Provider and for a period of two (2) years thereafter.
6.4 Enforcement. IPS and Provider acknowledge and agree that since a
remedy at law for any breach or attempted breach of the provisions of this
Article 6 shall be inadequate, either party shall be entitled to specific
performance and injunctive or other equitable relief in the event of any such
breach or attempted breach, in addition to all other remedies which may exist
at law or equity. The parties hereto also waive any requirement for the securing
or posting of any bond in connection with the obtaining of any injunctive or
other equitable relief. If any provision of Article 6 relating to the
restrictive period, scope of activity restricted and/or the geographic
limitation described therein shall be declared by a court of competent
jurisdiction to exceed the maximum time period, scope of activity restricted, or
geographic area, such court deems reasonable and enforceable under applicable
law, the time period, scope of activity restricted, and/or area of restriction
held reasonable and enforceable by the court shall thereafter be the restrictive
period, scope of activity restricted and/or the territory applicable to the
restrictive covenant provisions in this Article 6. The invalidity or
non-enforceability of this Article 6 in any respect shall not affect the
validity or enforceability of the remainder of this Article 6 or any other
provisions of this Agreement.
ARTICLE 7
FINANCIAL ARRANGEMENTS
7.1. Provider Compensation. As compensation for the services rendered at
the Practice Sites, Provider shall receive compensation as set forth on Appendix
"A", attached hereto and made a part hereof ("Provider Compensation"). With
respect to any partial calendar years during which this Agreement is in effect,
Provider Compensation shall be prorated according to the number of calendar days
actually elapsed during such partial calendar year.
7.2 Draws. At the beginning of each month, IPS shall make a reasonable
estimate of the amount of Provider Compensation which shall be due and payable
to Provider for such months operations. IPS shall pay such estimated amount
("Estimated Provider Compensation")
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as a Draw to Provider, on or before the tenth (10th) day of each calendar month.
The Estimated Provider Compensation may vary from month to month depending upon
historical factors and other adjustments.
7.3 Determination and Payment of Provider Compensation.
(a) Between July 1 and July 15 of the calendar year immediately
following each calendar year during the term of this Agreement, IPS shall make a
determination as to the amount of the total Provider Compensation earned by
Provider during the immediately preceding year. No later than each such July 15,
IPS shall cause a payment to be made to Provider in an amount equal to the
aggregate Provider Compensation payable with respect to such calendar year, less
the aggregate sum of all Draws received by Provider pursuant to Section 7.2
during such calendar year. All Net Practice Revenues with respect to any
calendar year, in excess of Provider Compensation for such calendar year, shall
be the sole property of IPS, pursuant to the terms of Section 7.4(a) hereof.
(b) In the event that, after making the determination provided for in
Section 7.3(a), it is determined that the aggregate Draws by Provider under
Section 7.2 for the applicable calendar year exceed the actual amount of
Provider Compensation which Provider is ultimately entitled to receive with
respect to such calendar year (an "overdraft"), Provider shall pay the amount of
the overdraft to IPS within thirty (30) days after receipt by Provider of
written notice from IPS specifying the amount of such overdraft or, at the
option of IPS, Provider shall have the amounts payable to it pursuant to Section
7.1 with respect to the next succeeding calendar year reduced by the amount of
such overdraft.
In the event that Provider shall ever disagree with any determination by
IPS of the total Provider Compensation for any calendar year, Provider shall
have the right to review, upon reasonable notice to IPS, the documents used by
IPS in determining such amounts.
7.4 Assignment of Accounts Receivable for Medical Services.
(a) As compensation to IPS for all of the facilities, equipment and
services rendered by it to Provider pursuant to the terms of this Agreement,
and as full and complete payment therefor, Provider, Physician Stockholders,
and Physician Employees hereby irrevocably assign and set over to IPS all of
their rights and interests in and to all of their accounts receivable arising
from the provision of medical services to patients of the Practice, including
all charges which Provider or the Physician Stockholders or Physician
Employees would otherwise bill and retain for their own account, and all of
their rights and interests in and to all of their accounts receivable arising
from other income or revenue generated by the operations of the Practice..
The parties acknowledge and agree that the compensation and benefits payable
to Provider pursuant to the provisions of Section 7.1 are intended to be in
lieu of charges which Provider or its Physician Stockholders or Physician
Employees would otherwise earn for the provision of medical services to
patients of their medical practice. Provider shall obtain, or cause to be
obtained, from each Physician Stockholder and Physician Employee, an
assignment of all of his right, title and interest in and to all accounts
receivable arising from medical services rendered to patients of the practice
and all of his rights to any other accounts receivable from income or revenue
generated by the operations of the Practice.
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Provider, Physician Stockholders and Physician Employees shall endorse any
payments received on account of such services to the order of IPS and shall take
such other actions as may be necessary to confirm to IPS the rights set forth in
this Section 7.4(a).
(b) Without limiting the generality of the foregoing, it is the
intent of the parties that the assignment to IPS of the rights described in
Section 7.4(a) above shall be inclusive of the rights of Provider and the
Physician Stockholders and Physician Employees to receive payment with respect
to any services rendered prior to the effective date of any expiration or
termination of this Agreement. Provider agrees, and shall cause each Physician
Stockholder and Physician Employee to agree, that IPS shall retain the right to
collect and retain for its own account any accounts receivable relating to any
such services rendered prior to the effective date of any such expiration or
termination ("Pre-Termination Accounts Receivable").
(c) Provider acknowledges that it is the intent of IPS to grant a
security interest in the Pre-Termination Accounts Receivable to the lender(s)
under its working capital line of credit facility (whether one or more,
"Lender"), as in effect from time to time. Provider agrees that such security
interest of the Lender is intended to be a first priority security interest and
is superior to any right, title or interest which may be asserted by Provider or
any Physician Stockholder or Physician Employee with respect to Pre-Termination
Accounts Receivable or the proceeds thereof. Provider further agrees, and shall
cause each Physician Stockholder and Physician Employee to agree, that, upon the
occurrence of an event which, under the terms of such working capital credit
facility, would allow the Lender to exercise its right to collect
Pre-Termination Accounts Receivable and apply the proceeds thereof toward
amounts due under such working capital credit facility, the Lender will succeed
to all rights and powers of IPS under the powers of attorney provided for in
Section 4.7(b) above as if such Lender had been named as the attorney-in-fact
therein.
(d) If, contrary to the mutual intent of IPS and Provider, the
assignment of rights described in this Section 7.4 shall be deemed, for any
reason, to be ineffective as an outright assignment, then Provider and each
Physician Stockholder and each Physician Employee shall, effective as of the
date of this Agreement, be deemed to have granted (and Provider does hereby
grant, and shall cause each Physician Stockholder and Physician Employee to
grant) to IPS, a first priority lien on and security interest in and to any and
all interests of Provider and such Physician Stockholders and Physician
Employees in any accounts receivable generated by the medical practice of
Provider and its Physician Stockholders and Physician Employees or otherwise
generated through the operations of the Practice, and all proceeds with respect
thereto, to secure the payment to IPS of all Net Practice Revenues in excess of
Provider Compensation, and this Agreement shall be deemed to be a security
agreement to the extent necessary to give effect to the foregoing. Provider
shall execute and deliver and cause each Physician Stockholder and Physician
Employee to execute and deliver, all such financing statements as IPS may
request in order to perfect such security interest, Provider shall not grant
(and shall not suffer any Physician Stockholder or Physician Employee to grant)
any other lien on or security interest in or to such accounts receivable or any
proceeds thereof.
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7.5. Collection of Governmental Receivables. With respect to payments on
Governmental Receivables, at the request and option of IPS, Provider agrees that
the following procedures shall apply:
(a) Provider shall enter into a lockbox agreement applicable to
Governmental Receivables and establish a Governmental Lockbox Account. The
Governmental Lockbox Account shall be an account in the name of Provider. All
payments in respect of Providers Governmental Receivables are to be made
directly to such account. In the event IPS exercises this option, Provider shall
instruct each Account Debtor in respect of Providers Governmental Receivables to
remit all such payments directly to such Governmental Lockbox Account pursuant
to a Notification Letter. In addition, Provider shall attach written
instructions to each invoice directing that said invoice be paid to the
Governmental Lockbox Account. Provider agrees that it shall not deposit any
funds other than payments of Governmental Receivables into, nor make any
withdrawals from, the Governmental Lockbox Account without the prior written
consent of IPS. Provider further agrees that it shall not during the term of
this Agreement, terminate, modify or amend in any manner the Lockbox Agreement
applicable to the Governmental Lockbox Account.
(b) In accordance with the Lockbox Agreement pertaining to
Governmental Receivables, Provider shall instruct the Collecting Bank to
transfer all amounts deposited in the Governmental Lockbox Account constituting
collected funds to IPSs Main Account. Provider shall have no right or interest
in the Main Account. Provider shall not, so long as any Assigned A/R remains
unpaid, change or cancel such automatic transfer at any time, or, without the
prior written consent of IPS, change either the identity of the Governmental
Lockbox Account or the instructions to each Account Debtor of the related
Governmental Receivable to make its payments to such Account. Any such action
shall be considered a breach of this Agreement for which IPS shall be entitled
to all remedies at law and in equity, including the obtaining of an injunction.
(c) Provider will cooperate with IPS and its agents in the
identification of sums deposited into the Governmental Lockbox Account, which
cooperation shall continue until all Assigned A/R have been collected.
(d) Provider agrees to pay, on demand, a finance charge equal to the
Finance Charge Rate, on any payment of a Governmental Receivable received by
Provider that is not deposited in the Governmental Lockbox Account within
forty-eight (48) hours after receipt by Provider.
7.6. Collection of Non-Governmental Receivables. With respect to payments
on Non-Governmental Receivables, if requested by IPS at IPSs option, Provider
agrees that the following procedures shall apply:
(a) Prior to the assignment of any Non-Governmental Receivable
hereunder, IPS, the Collecting Bank and Lender (if requested by Lender) shall
enter into a Lockbox Agreement applicable to Non-Governmental Receivables, and
IPS shall establish a Non-Governmental
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Lockbox Account. The Non-Governmental Lockbox Account shall be an account in the
name of IPS. All payments in respect of Providers Non-Governmental Receivables
are to be made directly to such account. In the event IPS exercises this option,
Provider shall instruct each Account Debtor in respect of Providers
Non-Governmental Receivables to remit all such payments directly to such
Non-Governmental Lockbox Account pursuant to a Notification Letter. In addition,
Provider shall attach written instructions to each invoice representing such
Non-Governmental Receivables generated subsequent to the date of this Agreement
instructing such third party payor or Account Debtor that payment of such
invoice is to be paid to the Non- Governmental Lockbox Account. Provider agrees
that it shall not deposit any funds other than payments of Non-Governmental
Receivables into, nor make any withdrawals from, the Non-Governmental Lockbox
Account without the prior written consent of IPS. Provider further agrees that
it shall not during the term of this Agreement terminate, modify or amend in any
manner the Lockbox Agreement applicable to the Non-Governmental Lockbox Account.
(b) In accordance with the Lockbox Agreement pertaining to
Non-Governmental Receivables, Provider and IPS shall instruct the Collecting
Bank to transfer all amounts deposited in the Governmental Lockbox Account
constituting good funds to IPSs Main Account. Provider shall have no right or
interest in the Non-Governmental Lockbox Account nor to the Main Account and
such accounts shall be in the name of and under the control of IPS. Provider
shall not, so long as any Assigned A/R remains uncollected, and in any event,
during the term of this Agreement, at any time, or, without the prior written
consent of IPS, change the instructions to each Account Debtor of the related
Non-Governmental Receivable to make its payments to such Account. Any such
action shall be considered a breach of this Agreement for which IPS shall be
entitled to all remedies at law and in equity, including the obtaining of an
injunction.
(c) Provider will cooperate with IPS and its agents in the
identification of sums deposited into the Non-Governmental Lockbox Account,
which cooperation shall continue until all Assigned A/R have been collected.
(d) Provider agrees to pay, on demand, a finance charge equal to the
Finance Charge Rate, on any payment on a Non-Governmental Receivable received by
Provider that is not deposited into the Non-Governmental Lockbox Account within
forty-eight (48) hours after receipt by Provider.
7.7. Procedures Without Lockbox. In the event that IPS elects to forego the
procedures established in Sections 7.5 and 7.6, Provider shall instruct the
Collecting Bank to transfer automatically all amounts constituting collected
funds in the account or accounts of Provider established for the collection of
Governmental and Non-Governmental Receivables to IPSs Main Account pursuant to a
standing order in form and substance acceptable to IPS and its legal counsel.
Provider shall have no right or interest in IPSs Main Account and such account
shall be in the name of and under the control of IPS. Provider shall not, so
long as any Assigned Accounts Receivable remain unpaid, change or cancel such
standing order at any time, or, without the prior written consent of IPS, change
the instructions to any Account Debtor of each Governmental Receivable and
Non-Governmental Receivable to make its payments to such
19
<PAGE>
account. Any such action shall be considered a breach of this Agreement for
which IPS shall be entitled to all remedies at law and in equity, including the
obtaining of an injunction.
7.8. Misdirected Payments. If, after the date of this Agreement, an Account
Debtor shall make payment of any Assigned A/R to a location other than is
provided in the Notification Letter, or Provider otherwise receives payments on
Accounts Receivable that are assigned to IPS under the terms of this Agreement
("Misdirected Payments"), Provider (at its own cost and expense) shall promptly
take all necessary steps to effect collection of such Misdirected Payments from
any other party claiming an interest therein or having possession thereof and
(i) hold such payment in trust for IPS, (ii) segregate such payment, (iii) use
its best efforts not to commingle such payment with Providers own funds or other
assets, and (iv) deliver such payment no later than forty-eight (48) hours from
the day of receipt to the Governmental Lockbox Account or the Non-Governmental
Lockbox Account, as applicable. Provider agrees to pay, on demand, the Finance
Charge Rate on any Misdirected Payment received by Provider that is not
deposited in IPSs Main Account within forty-eight (48) hours after receipt by
Provider.
7.9. Representations and Warranties with respect to Accounts Receivable.
Provider hereby represents and warrants that with respect to the Assigned A/R,
as of the date of assignment:
(a)(i) All documents and agreements relating to Assigned A/R that have
been delivered to IPS are true and correct; (ii) Provider has delivered or
caused to be delivered to IPS all requested supporting claim documents with
respect to IPSs billing and collection of such Accounts Receivable on its
behalf; and (iii) all information provided by Provider to IPS and to be set
forth on the bill and supporting claims documents is true and correct, and, if
any error has been made, Provider will promptly correct the same and cooperate
with IPS to rebill such Accounts Receivable.
(b) The Assigned A/R are exclusively owned by Provider and there is no
security interest or lien in favor of any third party, nor has there been any
UCC recording or filing against Provider, as debtor, covering or purporting to
cover any interest of any kind in any Accounts Receivable, except as may have
been released by each party holding such adverse interest in the Accounts
Receivable. With respect to the Assigned A/R and with respect to Governmental
Receivables, to the extent permissible by law, all right, title and interest of
Provider with respect thereto shall be vested in IPS, free and clear of any
lien, security interest or encumbrance of any kind, Provider agrees to defend
the same (or pay the costs and expenses incurred in undertaking such a defense
on behalf of Provider) against the claims of all persons to the Assigned A/R.
(c) The Assigned A/R (i) are payable in an amount not less than their
face amount, (ii) are based on an actual and bona fide rendition of services or
sale of goods to the patient by Provider in the ordinary course of Provider's
business, (iii) are denominated and payable only in lawful currency of the
United States; and (iv) are accounts of general intangibles within the meaning
of the UCC of the state in which Provider has its principal place of business,
or are rights to payment under a policy of insurance or proceeds thereof, and
are not evidenced by any
20
<PAGE>
instrument or chattel paper. There are no payors other than the Account Debtor
identified by Provider as the payor primarily liable on any Assigned A/R.
(d) The Assigned A/R are not: (i) subject to any action, suit,
proceeding or dispute (pending or threatened), set-off. counterclaim, defense,
abatement, suspension, deferment, deductible, reduction or termination by the
Account Debtors other than routine adjustments and disallowances made in the
ordinary course of business, to the extent of such adjustments and
disallowances; (ii) past or within sixty (60) days of the statutory limit for
collection applicable to the Account Debtor; (iii) subject to an invoice which
provides for payment more than forty-five days from the date of such invoice;
(iv) an account which arises out of a sale or other transaction by or between
Provider and an Affiliate of Provider; (v) from an Account Debtor who is also a
creditor of Provider; (vi) Accounts Receivable in which the Account Debtor has
commenced a voluntary case, or an involuntary proceeding has been instituted,
under the federal bankruptcy laws , as now constituted or hereafter amended, or
made an assignment for the benefit of creditors, or if a decree or order for
relief has been entered by a court having jurisdiction in the premises in
respect to the Account Debtor; (vii) an account of which the services giving
rise to such Accounts Receivable have not been performed by Provider and
accepted by the Account Debtor or the Accounts Receivable otherwise do not
represent a final sale; (viii) is evidenced by an instrument or chattel paper
unless such instrument or chattel paper is delivered to IPS with all appropriate
endorsements in favor of IPS, or (ix) other than a complete bona fide
transaction which requires no further act under any circumstances on the part of
Provider to make the Accounts Receivable payable by the Account Debtor.
(e) Provider does not have any guaranty of, letter of credit providing
support for, or collateral support for, the Assigned A/R, other than any such
guaranty, letter of credit or collateral security as has been assigned to IPS,
and any such guaranty, letter of cedit or collateral security is not subject to
any lien in favor of any other person.
(f) The goods or services provided and reflected by the Assigned A/R
have been or will be medically necessary for the patient in the opinion of
Provider and the patient received such goods or services.
(g) The face amount of the Accounts Receivable for the services
constituting the basis for the Assigned A/R are consistent with the usual,
customary and reasonable fees charged by other similar medical service providers
in Providers community for the same or similar services.
(h) Each Account Debtor with respect to the Assigned A/R (i) is not
the subject of any bankruptcy, insolvency or receivership proceeding, nor is it
generally unable to make payments on its obligations when due, (ii) is located
in the United States, and (iii) is one of the following: (x) a party which in
the ordinary course of its business or activities agrees to pay for health care
services received by individuals, including without limitation, Medicare,
Medicaid, governmental bodies, commercial insurance companies and nonprofit
insurance companies (such as Blue Cross and Blue Shield entities) issuing
health, personal injury, workers compensation or other types of insurance; (y)
employers or unions which self-insure for employee or member
21
<PAGE>
health insurance, prepaid health care organizations, managed care entities,
preferred provider organizations or any other similar organization or entity, or
(z) a third party payor of the types described in the definition of Governmental
Receivables.
(i) Except with respect to Governmental Receivables, the insurance
policy, contract or other instrument obligating an Account Debtor to make
payment with respect to the Assigned A/R (i) does not contain any provision
prohibiting the transfer of such payment obligation from the patient to the
Provider, or from Provider to IPS, and if any such does contain such a
provision, the consent of the third party to the transfer has been obtained in
writing; (ii) has been duly authorized and, together with the Assigned A/R,
constitutes the legal, valid and binding obligations of the Account Debtor in
accordance with its terms; (iii) together with the applicable Assigned A/R, does
not contravene in any material respect any requirement of law applicable
thereto; and (iv) was in full force and effect and applicable to the patient at
the time the services constituting the basis for the Assigned A/R were
performed.
None of the foregoing representations and warranties shall be deemed to
constitute a guaranty by Provider that the Assigned A/R will be collected by
IPS.
ARTICLE 8
RECORDS
8.1. Patient Records. Upon termination of this Agreement, Provider
shall retain all patient medical records maintained by Provider or by IPS on
behalf of Provider. Provider shall, at its option, be entitled to retain copies
of financial and accounting records relating to all services performed by
Provider.
8.2. Records Owned by IPS. All records relating in any way to the operation
of the Practice which are not the property of Provider under the provisions of
Section 8.1 above, shall at all times be the property of IPS.
8.3. Access to Records. During the term of this Agreement, and thereafter,
Provider or its designee shall have reasonable access during normal business
hours to the financial records of the Practice, including but not limited to,
revenues, records of collections, expenses and disbursements maintained by IPS
pursuant to this Agreement, and Provider may copy any or all such records.
8.4 Maintenance of Records/Subcontracts Pursuant to Title 42 of the
United States Code and applicable rules and regulations thereunder, until the
expiration of four (4) years after termination of this Agreement, IPS shall make
available, upon appropriate written request by the Secretary of the United
States Department of Health and Human Services or the Comptroller General of the
United States General Accounting Office, or any of their duly authorized
representatives, a copy of this Agreement and such books, documents and records
as are necessary to certify the nature and extent of the costs of the services
provided by IPS under this
22
<PAGE>
Agreement. IPS further agrees that if it carries out any of its duties under
this Agreement through a subcontract with a value or cost of Ten Thousand
($10,000) Dollars or more over a twelve (12) month period with a related
organization, such subcontract shall contain a clause to the effect that until
the expiration of four (4) years after the furnishing of such services pursuant
to such subcontract, the related organization shall make available, upon
appropriate written request by the Secretary of the United States Department of
Health and Human Services or the Comptroller General of the United States
General Accounting Office, or any of their duly authorized representatives, a
copy of such subcontract and such books, documents and records of such
organization as are necessary to verify the nature and extent of the such costs.
Disclosure pursuant to this Section shall not be construed as a waiver of any
other legal right to which IPS may be entitled under law or regulation.
ARTICLE 9
INSURANCE AND INDEMNITY
9.1. Insurance to be Maintained by Provider. Throughout the term of this
Agreement, subject to the provisions of Section 5.5, Provider shall maintain
comprehensive professional liability insurance with limits of not less than
$2,000,000 per claim and with aggregate policy limits of not less than
$4,000,000 per physician, and a separate limit for Provider. Provider shall be
responsible for all liabilities in excess of the limits of such policies. IPS
shall have the option, subject to Policy Board approval, of providing such
professional liability insurance through an alternative program, provided that
such program meets the requirements of the Insurance Commissioner of the State
of New Jersey.
9.2. Insurance to be Maintained by IPS Throughout the term of this
Agreement, IPS, as a Practice Expense, shall provide and maintain comprehensive
professional liability insurance for all professional employees of IPS with
limits as determined reasonable by IPS in its national program, comprehensive
general liability and property insurance covering the premises and operations at
all Practice Sites.
9.3. Additional Insureds Provider and IPS agree to use their best efforts
to have each other named as an additional insured on the others respective
professional liability insurance program, at IPS's expense.
9.4. Indemnification PROVIDER SHALL INDEMNIFY, HOLD HARMLESS AND DEFEND
IPS, ITS OFFICERS, DIRECTORS AND EMPLOYEES, FROM AND AGAINST ANY AND ALL
LIABILITY, LOSS, DAMAGE, CLAIM, CAUSES OF ACTION, AND EXPENSES (INCLUDING
REASONABLE ATTORNEYS' FEES), WHETHER OR NOT COVERED BY INSURANCE, CAUSED OR
ASSERTED TO HAVE BEEN CAUSED, DIRECTLY OR INDIRECTLY, BY OR AS A RESULT OF THE
PROVISION OF MEDICAL
23
<PAGE>
SERVICES OR ANY OTHER ACTS OR OMISSIONS BY PROVIDER AND/OR ITS SHAREHOLDERS,
AGENTS, EMPLOYEES AND/OR SUBCONTRACTORS (OTHER THAN IPS) DURING THE TERM HEREOF.
IPS SHALL INDEMNIFY, HOLD HARMLESS AND DEFEND PROVIDER, ITS OFFICERS, DIRECTORS
AND EMPLOYEES, FROM AND AGAINST ANY AND ALL LIABILITY, LOSS, DAMAGE, CLAIM,
CAUSES OF ACTION AND EXPENSES (INCLUDING REASONABLE ATTORNEYS' FEES), CAUSED OR
ASSERTED TO HAVE BEEN CAUSED, DIRECTLY OR INDIRECTLY, BY OR AS A RESULT OF THE
PERFORMANCE OF ANY INTENTIONAL ACTS, NEGLIGENT ACTS OR OMISSIONS BY IPS AND/OR
ITS SHAREHOLDERS, AGENTS, EMPLOYEES AND/OR SUBCONTRACTORS (OTHER THAN PROVIDER)
DURING THE TERM OF THIS AGREEMENT.
ARTICLE 10
TERM AND TERMINATION
10.1. Term of Agreement. This Agreement shall commence on the date
hereof and shall expire on the 40th anniversary hereof unless earlier terminated
pursuant to the terms hereof.
10.2. Extended Term. Unless earlier terminated as provided for in this
Agreement, the term of this Agreement shall be automatically extended for
additional terms of five (5) years each, unless either party delivers to the
other party, not less than twelve (12) months nor earlier than fifteen (15)
months prior to the expiration of the proceeding term, written notice of such
partys intention not to extend the term of this Agreement.
10.3. Termination by Provider. Provider may terminate this Agreement in
the following circumstances:
(a) In the event of a filing of a petition in voluntary bankruptcy or an
assignment for the benefit of creditors by IPS, or upon other action taken or
suffered, voluntarily or involuntarily, under any federal or state law for the
benefit of debtors by IPS, except for the filing of a petition in involuntary
bankruptcy against IPS which is dismissed within sixty (60) days thereafter,
Provider may give written notice of the immediate termination of this Agreement,
and such termination shall be effective upon receipt of such notice by IPS.
(b) In the event IPS shall materially default in the performance of any
duty or obligation imposed upon it by this Agreement, and such default shall
continue for a period of ninety (90) days after written notice thereof has been
given to IPS by Provider; or IPS shall fail to remit the payments as provided
for in this Agreement and such failure to remit shall continue for a period of
sixty (60) days after written notice thereof, Provider may terminate this
24
<PAGE>
Agreement. Termination of this Agreement pursuant to this subsection (b) by
Provider shall require the affirmative vote of seventy-five percent (75%) of
Physician Stockholders.
10.4. Termination by IPS. IPS may terminate this Agreement in the
following circumstances:
(a) In the event of the filing of a voluntary petition in bankruptcy or an
assignment for the benefit of creditors by Provider, or upon other action taken
or suffered, voluntarily or involuntarily, under any federal or state law for
the benefit of debtors by Provider, except for the filing of a petition in
involuntary bankruptcy against Provider which is dismissed within sixty (60)
days thereafter, IPS may give notice of the immediate termination of this
Agreement, and such termination shall be effective upon receipt of such notice
by Provider
(b) In the event Provider shall materially default in the performance of
any duty or obligation imposed upon it by this Agreement, and such default shall
continue for a period of ninety (90) days after written notice thereof has been
given to Provider by IPS, IPS may thereafter terminate this Agreement.
ARTICLE 11
GENERAL PROVISIONS
11.1 Assignment. IPS shall have the right to assign its rights hereunder
to any person, firm or corporation for any reason without need for Provider's
consent. Provider may not assign this agreement or any of its rights or
duties hereunder without the express written consent of IPS.
11.2 Whole Agreement; Modification. There are no other agreements or
understandings, written or oral, between the parties regarding this Agreement,
the Exhibits and the Schedules, other than as set forth herein. This Agreement
shall not be modified or amended except by a written document executed by both
parties to this Agreement, and such written modification(s) shall be attached
hereto.
11.3 Notices All notices required or permitted by this Agreement shall be
in writing and shall be addressed as :
To IPS: Integrated Physician Systems, Inc.
2644 Bristol Road
Warrington, PA 18976
With copies to: Joseph F. Murray, Esq.
2644 Bristol Road
Warrington, PA 18976
25
<PAGE>
To Provider IPS Physicians / ________, P.C.
_____________________
_____________________
With copies to: _____________________
_____________________
_____________________
or to such other address as either party shall notify the other.
11.4 Binding on Successors. Subject to Section 11.1, this Agreement shall
be binding upon the parties hereto, and their successors, assigns and
beneficiaries.
11.5 Waiver of Provisions. Any waiver of any terms and conditions hereof
must be in writing, and signed by the parties hereto. The waiver of any of the
terms and conditions of this Agreement shall not be construed as a waiver of any
of the other terms and conditions hereof.
11.6 Governing Law. The validity, interpretation and performance of this
Agreement shall be governed by and construed in accordance with the laws of the
State of New Jersey. The parties acknowledge that IPS is not authorized or
qualified to engage in any activity which may be construed or deemed to
constitute the practice of medicine. To the extent any act or service required
of IPS in this Agreement should be construed or deemed, by any governmental
authority, agency or court to constitute the practice of medicine, the
performance of said act or service by IPS shall be deemed waived and forever
unenforceable.
11.7 Severability. The provisions of this Agreement shall be deemed
severable and if any portion shall be held invalid, illegal or unenforceable for
any reason, the remainder of this Agreement shall be effective and binding upon
the parties.
11.8 Additional Documents. Each of the parties hereto agrees to execute any
document or documents that may be requested from time to time by the other party
to implement or complete such partys obligations pursuant to this Agreement.
11.9 Time is of the Essence. Time is hereby expressly declared to be of the
essence in this Agreement.
11.10 Confidentiality. Except for disclosure to its bankers,
underwriters or lenders or as necessary or desirable for conduct of business,
neither party hereto shall disseminate or release to any third party any
information regarding any provision of this Agreement, or any financial
information regarding the other (past, present or future) that was obtained by
the other in the course of the negotiations of this Agreement, without the other
partys written approval.
26
<PAGE>
11.11 Contract Modifications for Prospective Legal Events. In the event
any state or federal laws or regulations, now existing or enacted or promulgated
after the effective date of this Agreement, are interpreted by judicial
decision, a regulatory agency or legal counsel in such a manner as to indicate
that the structure of this Agreement may be in violation of such laws or
regulations, Provider and IPS shall amend this Agreement as necessary. To the
maximum extent possible, any such amendment shall preserve the underlying
economic and financial arrangements between Provider and IPS.
11.12 Remedies Cumulative. No remedy set forth in this Agreement or
otherwise conferred upon or reserved to any party shall be considered exclusive
of any other remedy available to any other party, but the same shall be
distinct, separate and cumulative and may be exercised from time to time as
often as occasion may arise or as may be expedient.
11.13 No Obligations to Third Parties. None of the obligations and
duties of IPS or Provider under this Agreement shall in any way or in any manner
be deemed to create any obligation of IPS or of Provider to, or any rights, in
any person or entity not a party to this Agreement.
27
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
IPS Physicians/__________P.C.
Attest:__________________ By:_______________________
Title:______________________
Integrated Physician Systems, Inc.
Attest:__________________ By:________________________
Title:_______________________
28
<PAGE>
EXHIBIT 4.1
LIST OF PRACTICE SITES AND FACILITIES
29
<PAGE>
EXHIBIT A
PROVIDER COMPENSATION
30
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement on Form S-1 of our reports dated May 9, 1997 and October
23, 1997 as to note 7A and 7E relating to the financial statements of Integrated
Physician Systems, Inc. and the Initial Affiliated Practices, which are
contained in that Prospectus. We also consent to the reference to our Firm under
the captions "Selected Financial Data" and "Experts" in the Prospectus.
/s/ FELDMAN RADIN & CO., P.C.
-----------------------------------------
Feldman Radin & Co., P.C.
CERTIFIED PUBLIC ACCOUNTANTS
New York, New York
October 23, 1997
<PAGE>
EXHIBIT 23.3
CONSENT OF KALOGREDIS TSOULES AND SWEENEY LTD.
We hereby consent to the use of our name under the caption 'Experts' in the
Prospectus constituting part of the Registration Statement on Form S-1 of
Integrated Physician Systems, Inc.
/s/ KALOGREDIS, TSOULES AND SWEENEY, LTD.
Kalogredis, Tsoules and Sweeney, Ltd.
Wayne, Pennsylvania
October 23, 1997
<PAGE>
------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
--------------------
FORM T-1
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE
ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(B)(2)
--
--------------------
IBJ SCHRODER BANK & TRUST COMPANY
(Exact name of trustee as specified in its charter)
New York 13-5375195
(Jurisdiction of incorporation (I.R.S. employer
or organization if not a U.S. national bank) identification No.)
One State Street, New York, New York 10004
(Address of principal executive offices) (Zip code)
STEPHEN J. GIURLANDO
IBJ SCHRODER BANK & TRUST COMPANY
One State Street
New York, New York 10004
(212) 858-2000
(Name, address and telephone number of agent for service)
INTEGRATED PHYSICIAN SYSTEMS, INC.
(Exact name of obligor as specified in its charter)
Delaware 22-2820597
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
2644 Bristol Road
Warrington, Pennsylvania 18976
(Address of principal executive offices) (Zip code)
Convertible Subordinated Debentures due 2004
--------------------
(Title of indenture securities)
<PAGE>
Item 1. General information
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervising
authority to which it is subject.
New York State Banking Department, Two Rector Street,
New York, New York
Federal Deposit Insurance Corporation, Washington, D.C.
Federal Reserve Bank of New York Second District,
33 Liberty Street, New York, New York
(b) Whether it is authorized to exercise corporate
trust powers.
Yes
Item 2. Affiliations with the Obligor.
If the obligor is an affiliate of the trustee, describe each
such affiliation.
The obligor is not an affiliate of the trustee.
Item 13. Defaults by the Obligor.
(a) State whether there is or has been a default with respect to
the securities under this indenture. Explain the nature of
any such default.
None
2
<PAGE>
(b) If the trustee is a trustee under another indenture under
which any other securities, or certificates of interest or
participation in any other securities, of the obligors are
outstanding, or is trustee for more than one outstanding
series of securities under the indenture, state whether
there has been a default under any such indenture or series,
identify the indenture or series affected, and explain the
nature of any such default.
None
Item 16. List of exhibits.
List below all exhibits filed as part of this statement of
eligibility.
*1. A copy of the Charter of IBJ Schroder Bank & Trust Company as
amended to date. (See Exhibit 1A to Form T-1, Securities and
Exchange Commission File No. 22-18460).
*2. A copy of the Certificate of Authority of the trustee to
Commence Business (Included in Exhibit 1 above).
*3. A copy of the Authorization of the trustee to exercise corporate
trust powers, as amended to date (See Exhibit 4 to Form T-1,
Securities and Exchange Commission File No. 22-19146).
*4. A copy of the existing By-Laws of the trustee, as amended to date
(See Exhibit 4 to Form T-1, Securities and Exchange Commission
File No. 22-19146).
5. Not Applicable
6. The consent of United States institutional trustee required by
Section 321(b) of the Act.
7. A copy of the latest report of condition of the trustee published
pursuant to law or the requirements of its supervising or
examining authority.
* The Exhibits thus designated are incorporated herein by reference as
exhibits hereto. Following the description of such Exhibits is a reference
to the copy of the Exhibit heretofore filed with the Securities and
Exchange Commission, to which there have been no amendments or changes.
3
<PAGE>
NOTE
In answering any item in this Statement of Eligibility which relates to
matters peculiarly within the knowledge of the obligor and its directors or
officers, the trustee has relied upon information furnished to it by the
obligor.
Inasmuch as this Form T-1 is filed prior to the ascertainment by the
trustee of all facts on which to base responsive answers to Item 2, the
answer to said Item is based on incomplete information.
Item 2, may, however, be considered as correct unless amended by an
amendment to this Form T-1.
Pursuant to General Instruction B, the trustee has responded to Items 1, 2
and 16 of this form since to the best knowledge of the trustee as indicated
in Item 13, the obligor is not in default under any indenture under which
the applicant is trustee.
4
<PAGE>
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, the
trustee, IBJ Schroder Bank & Trust Company, a corporation organized and existing
under the laws of the State of New York, has duly caused this statement of
eligibility & qualification to be signed on its behalf by the undersigned,
thereunto duly authorized, all in the City of New York, and State of New York,
on the 23rd day of October, 1997.
IBJ SCHRODER BANK & TRUST COMPANY
By: /s/ Stephen J. Giurlando
-------------------------------------
Stephen J. Giurlando
Assistant Vice President
<PAGE>
EXHIBIT 6
CONSENT OF TRUSTEE
Pursuant to the requirements of Section 321(b) of the Trust Indenture
Act of 1939, as amended, in connection with the issuance by INTEGRATED PHYSICIAN
SYSTEMS, INC. of its Convertible Subordinated Debentures due 2004, we hereby
consent that reports of examinations by Federal, State, Territorial, or District
authorities may be furnished by such authorities to the Securities and Exchange
Commission upon request therefor.
IBJ SCHRODER BANK & TRUST COMPANY
By: /s/ Stephen J. Giurlando
------------------------------------
Stephen J. Giurlando
Assistant Vice President
Dated: October 23, 1997
<PAGE>
EXHIBIT 7
CONSOLIDATED REPORT OF CONDITION OF
IBJ SCHRODER BANK & TRUST COMPANY
OF NEW YORK, NEW YORK
AND FOREIGN AND DOMESTIC SUBSIDIARIES
REPORT AS OF JUNE 30, 1997
<TABLE>
<CAPTION>
DOLLAR AMOUNTS
IN THOUSANDS
ASSETS
<S> <C>
Cash and balance due from depository institutions:
Noninterest-bearing balances and currency and coin .....................................$ 41,319
Interest-bearing balances.................................................................$ 314,579
Securities: Held-to-maturity securities....................................................$ 180,111
Available-for-sale securities..................................................$ 47,600
Federal funds sold and securities purchased under agreements to resell in
domestic offices of the bank and of its Edge and Agreement subsidiaries and in
IBFs:
Federal Funds sold and Securities purchased under agreements to resell....................$ 694,859
Loans and lease financing receivables:
Loans and leases, net of unearned income....................................$ 1,955,686
LESS: Allowance for loan and lease losses...................................$ 62,876
LESS: Allocated transfer risk reserve.......................................$ -0-
Loans and leases, net of unearned income, allowance, and reserve..........................$ 1,892,810
Trading assets held in trading accounts.......................................................$ 603
Premises and fixed assets (including capitalized leases)......................................$ 3,709
Other real estate owned.......................................................................$ 202
Investments in unconsolidated subsidiaries and associated companies...........................$ -0-
Customers' liability to this bank on acceptances outstanding..................................$ 81
Intangible assets.............................................................................$ -0-
Other assets..................................................................................$ 67,092
TOTAL ASSETS..................................................................................$ 3,242,965
</TABLE>
<PAGE>
LIABILITIES
<TABLE>
<CAPTION>
Deposits:
<S> <C>
In domestic offices.......................................................................$ 1,694,675
Noninterest-bearing ....................................................$ 263,641
Interest-bearing .......................................................$ 1,431,034
In foreign offices, Edge and Agreement subsidiaries, and IBFs.............................$ 1,121,075
Noninterest-bearing ....................................................$ 17,535
Interest-bearing .......................................................$ 1,103,540
Federal funds purchased and securities sold under agreements to repurchase in
domestic offices of the bank and of its Edge and Agreement subsidiaries, and in
IBFs:
Federal Funds purchased and Securities sold under agreements to repurchase................$ 25,000
Demand notes issued to the U.S. Treasury......................................................$ 60,000
Trading Liabilities...........................................................................$ 140
Other borrowed money:
a) With a remaining maturity of one year or less..........................................$ 38,369
b) With a remaining maturity of more than one year........................................$ 1,763
c) With a remaining maturity of more than three years.....................................$ 2,242
Bank's liability on acceptances executed and outstanding......................................$ 81
Subordinated notes and
debentures....................................................................................$ -0-
Other liabilities.............................................................................$ 69,908
TOTAL LIABILITIES.............................................................................$ 3,013,253
Limited-life preferred stock and related surplus..............................................$ -0-
EQUITY CAPITAL
Perpetual preferred stock and related surplus.................................................$ -0-
Common stock..................................................................................$ 29,649
Surplus (exclude all surplus related to preferred stock)......................................$ 217,008
Undivided profits and capital reserves........................................................$ (17,000)
Net unrealized gains (losses) on available-for-sale securities................................$ 55
Cumulative foreign currency translation adjustments...........................................$ -0-
TOTAL EQUITY CAPITAL..........................................................................$ 229,712
TOTAL LIABILITIES AND EQUITY CAPITAL..........................................................$ 3,242,965
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 30,000
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 30,000
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 296,000
<CURRENT-LIABILITIES> 179,000
<BONDS> 0
0
0
<COMMON> 17,000
<OTHER-SE> 100,000
<TOTAL-LIABILITY-AND-EQUITY> 296,000
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 6,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,000)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
