U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-SB
(AMENDMENT NO. 6)
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS
Under Section 12(b) or 12(g) of the Securities Exchange Act of 1934
MEDICAL ASSET MANAGEMENT, INC.
(Name of Small Business Issuer in its charter)
Delaware 33-0359976
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
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25241 Paseo de Alicia, Suite 230
Laguna Hills, CA 92653
Telephone: (714) 829-8333
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Securities to be registered under Section 12(b) of the Act:
Title of each class to Name of each exchange on which
be so registered each class to be registered
N/A N/A
Securities to be registered under Section 12(g) of the Act:
Common Stock, par value $.001 per share
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
COMPANY OVERVIEW.
Medical Asset Management, Inc. (the "Company" or "MAM") is a physician
practice management company that develops contractual affiliations with
physician practices. These contractual agreements provide clinical autonomy for
the physicians' practice as well as professional practice management by the
Company. Through its subsidiary, Healthcare Professional Management, Inc.
("HPM"), the Company also offers a full array of management services to
physicians and other independent healthcare entities under long-term service
contracts as a management service organization ("MSO"). The Company has
long-term MSO contracts with five medical group practices having a total of 48
physicians in two states. HPM also provides practice management services on a
consulting basis to over 200 physicians in Pennsylvania, West Virginia and Ohio.
Under the Company's standard equity arrangements, the Company has
developed equity affiliations with 28 physician practices having a total of 54
physicians in eight states as of November 1, 1997. Pursuant to these equity
affiliations, the Company has exchanged cash and Common Stock for the ownership
and management of the business assets and the practices as well, as the rights
to manage such practices. Although the amounts and terms of such arrangements
are separately negotiated with each affiliated practice, the Company typically
purchases the practice's accounts receivables and office equipment and enters
into a 25-year practice management agreement. This agreement provides for the
management and administration of all non-medical personnel and human resource
issues. The agreement also provides for general business administration,
reimbursement management, and an integrated information system, which includes
electronic patient records filing and other daily operating systems. The
Company's revenues under such agreements are derived from the medical service
revenues generated by the physicians. These revenues consist of the
reimbursement of the practice's operating expenses, which include salaries and
benefits for clerical personnel and management fees. The management fees are
based primarily on a percentage of the practice's medical service revenue
collected by the Company. Under its standard equity agreements, the Company has
earned an average of 5% to 10% of the annual collected medical service revenue.
Pursuant to the management agreement, the physicians receive a negotiated
percentage of collected medical service revenue. These budgeted payments are to
be used to cover the professional expenses of the practice, which include
physicians' and other medical providers' salaries and benefits, as well as
malpractice insurance for the physicians and other health care providers. The
total amount retained by physicians, excluding advances, averaged 31% of the sum
of the Company's net revenues in 1996 plus the amounts retained by medical
groups.
In addition, the Company, through HPM, provides services to medical
practices through service contracts and consulting arrangements. Services
provided under current long-term service contracts, which range from four to
eight years in length, include billing and collections, accounting, human
resource management, financial management and marketing. The Company's revenues
under such contracts consist of management fees based on a percentage of the
practice's medical service revenue collected by the Company. The percentage of
medical service revenue received as a
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management fee by the Company under these non-equity arrangements varies with
the services provided to the practice. On average, in 1997 the Company has
received management fees under its non-equity long term service contracts of
between 3% and 11% of the practice's collected medical service revenues.
Services provided under consulting arrangements include practice management,
accounting, tax preparation, employee benefits analysis and retirement and
estate planning. In general, the Company is compensated under these consulting
arrangements on a retainer basis.
The Company's strategy is to develop physician-driven, integrated provider
networks of small to mid-sized physician groups that deliver high quality,
cost-effective health care in selected geographic markets. The Company believes
that the keys to its continued growth will be dependent upon the successful
implementation of the current management plan to improve the Company's financial
position and profitability (the "Management Business Plan"), more fully
described in Note 2 to the Company's financial statements and in "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources;" and its ability (i) to expand its markets by
entering into additional equity and non-equity management service affiliations
with physician practices and by promoting the growth of such practices, (ii) to
enhance the operating efficiency and profits of such practices, and (iii) to
provide an integrated information system to such practices.
As of December 31, 1996, officers and directors of the Company
beneficially owned 6,222,537 shares, or 41.6%, of the Company's outstanding
Common Stock. Physicians whose practices are affiliated with the Company owned
3,099,697 shares, or 20.7%, of the Company's outstanding Common Stock at
December 31, 1996. In addition, during the years 1997 through 2000, the number
of shares beneficially owned by affiliated physicians is expected to increase by
1,988,071 shares, or 11.7%, of the Company's Common Stock, based on the number
of shares outstanding at year end 1996 and the future issuance of nonforfeitable
shares to affiliated physicians pursuant to then existing equity arrangements.
Subsequent to December 31, 1996, the Company has entered into new equity
arrangements under which it has committed to issue an aggregate of an additional
573,311 shares of Common Stock under new equity arrangements with physicians.
HISTORY.
The Company was incorporated in Delaware on January 23, 1986, as Eagle
High Enterprises, Inc., to raise investor capital to fund the Company's
acquisition of an existing business. From 1986 to June 1994, the Company engaged
in a search for technologies, properties or businesses that had long term growth
potential. Although the Company considered a number of acquisition candidates,
it undertook no acquisition during this period. The Company's activities during
this period were funded largely from the proceeds of a limited offering of the
Company's Common Stock.
In June 1994, the Company entered into a stock exchange agreement with the
stockholders of Medical Asset Management, Inc., a closely held Delaware
corporation incorporated on May 12, 1989 ("Old MAM"), pursuant to which control
of the Company was acquired by the shareholders of Old MAM (the "Acquisition").
Old MAM had been engaged in the business of managing three medical practices
having four physicians with which it became affiliated in the period 1991 to
1993 and owned certain franchise rights under the name "Occu-Med," which
franchise activities have since been discontinued by the Company.
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In connection with the Acquisition, the shareholders of Old MAM
transferred their business to the Company in exchange for 6,960,000 newly issued
shares of the Company's Common Stock, which represented 80% of the outstanding
shares of the Company after giving effect to the Acquisition. The transaction
between the Company and Old MAM was treated as a recapitalization of Old MAM,
with Old MAM as the acquirer for accounting purposes, i.e. a reverse
acquisition. As such, no revaluation of net assets was recorded. In connection
with the Acquisition, the Company merged Old MAM into itself with the Company
continuing as the surviving entity. As a result, the stockholders were able to
take advantage of the already existing market for the Company's shares. The
Company changed its name to "Medical Asset Management, Inc." in connection with
the merger.
HEALTH CARE INDUSTRY OVERVIEW.
Concerns over the accelerating cost of health care have resulted in the
increasing prominence of managed care over traditional fee-for-service medicine.
As managed care penetrates a larger number of geographic markets, managed care
organizations ("MCOs") and health care providers confront pressures to provide
high quality health care in a cost-effective manner. Employer groups have begun
to bargain as consumers of health care in an effort to reduce premiums and
achieve greater accountability of MCOs and health care providers with respect to
accessibility, choice of provider, quality of care and other indicators of
consumer satisfaction. In addition, Congress has attempted to contain Medicare
and Medicaid costs, most recently through the Budget Reconciliation Act, by
limiting payments to medical providers, including physicians.
The focus on cost containment has placed small to mid-sized physician
groups and sole practitioners at a disadvantage. Such physician groups typically
have higher operating costs because they often have little purchasing power with
suppliers and lack the capital to purchase either new technologies that can
improve quality and reduce costs or the cost accounting and quality management
systems necessary to enter into sophisticated risk-sharing contracts with
payors.
In order to compete effectively, health care providers have sought to
reorganize themselves into health care delivery systems that are better suited
to the managed care environment. Primary care physicians have increasingly
become the conduit for the delivery of medical care by acting as gatekeepers and
directing referrals to certain specialists, hospitals, alternate-site facilities
and diagnostic facilities. Many physicians are concluding that they must have
control over the delivery and financial impact of a broader range of health care
services through the acceptance of global capitalization. Groups of independent
physicians and medical groups are accordingly taking steps to assume
responsibility and financial risk for integrated health care services. In brief,
physicians are increasingly abandoning traditional private practice in favor of
affiliations with larger organizations that offer skilled and innovative
management, sophisticated information systems and capital resources.
COMPANY STRATEGY.
The Company's strategy is to develop physician-driven, integrated provider
networks of small to mid-sized physician groups that deliver high quality,
cost-effective health care in selected geographic markets. The Company focuses
on the market segment of small (under five providers) to medium-sized (under 50
providers) medical group practices. The Company believes that the keys to its
continued growth will be the successful implementation of the Management
Business Plan (see
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"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" and Note 2 to the Company's
Financial Statements) and its ability to (i) expand its markets by entering into
additional equity and non-equity management service arrangements with affiliated
physicians and by promoting the growth of its affiliated practices, (ii) enhance
the operating efficiency and profits of its affiliated practices and (iii)
provide an integrated information system to its affiliated practices. The key
elements of this strategy are as follows:
EXPANSION OF MARKETS. The Company's strategy is to expand its markets
through the acquisition of the operating assets of additional medical practices,
entry into additional long-term management service contracts and promotion of
the growth of its existing affiliated practices, subject to the Company's
ability to implement the Management Business Plan. The Company seeks to promote
the growth of its existing practices by creating alliances among its affiliated
physician groups, either by forming horizontally structured, single-specialty
networks or integrated, multi-specialty networks built upon a base of primary
care physicians in selected regional markets. The Company also seeks to further
enhance its existing market share by increasing managed care enrollment and
fee-for-service business in its existing affiliated physician groups.
INCREASED OPERATIONAL EFFICIENCIES AND COST REDUCTIONS. The Company seeks
to increase revenues and reduce and control costs at its affiliated practices
through a combination of one or more methods. To increase the revenue of the
affiliated practices, the Company recruits additional physicians, merges other
physicians practicing in the same geographic area into larger affiliated
physician groups, develops new clinic sites, develops ancillary services and/or
negotiates contracts with managed care organizations. To reduce and control
costs at its affiliated practices, the Company plans to negotiate national
purchasing contracts, provide a single, fully-integrated information system that
can assist the physicians in developing more cost-effective practice patterns,
and/or centralize the business management of multiple practices in selected
regions of the country to allow physicians to create economies of scale that
would not otherwise be possible.
INSTALLATION OF INTEGRATED INFORMATION SYSTEM. The Company believes that
information technology is critical to the growth of its integrated health care
provider networks and that the availability of detailed clinical data is
fundamental to quality control and cost containment. The Company currently
provides a sophisticated management information system, including an electronic
patient record, to its affiliated physicians in the Pittsburgh, Pennsylvania
market area. During early 1998, the Company expects that the system will be
operational for affiliated practices in the Pennsylvania and Ohio markets and in
the Denver, Colorado region, and by the end of 1998 the Company plans to provide
the system to the balance of its affiliated practices. The system will collect
and analyze clinical and administrative data in order to allow the Company to
manage more effectively overhead expenses, maximize reimbursement and provide
the information to assist in effective utilization management. The Company
evaluates the administrative and clinical operations of affiliated practices and
intends to re-engineer these functions as appropriate to maximize the benefits
of the information system. In conjunction with the implementation of the
information system, the Company is developing a company-wide intranet and wide
area network that will allow access to online purchasing, daily reporting and
direct online access to healthcare data banks and medical research. The Company,
through its integrated information system and accounting department, expects to
be able to provide the financial and clinical data necessary to quantify actual
costs related to the delivery of medical care within the individual practices,
within the Company's network, within the region and nationally.
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PRACTICE MANAGEMENT ACTIVITIES.
The Company believes that its various management service arrangements are
attractive to physicians seeking to remain independent by offering economies of
scale in the marketplace and access to enhanced risk-sharing arrangements and
other strategic alliances within the Company's network. The Company believes
that the expansion of its network operations is important to the future growth
of the Company. Many of the physicians who contract with the Company have a
significant number of patients who do not currently participate in a prepaid
health plan and thus do not have access to enhanced risk-sharing arrangements.
Such physicians may, therefore, seek to form physician group alliances that may
become affiliated with the Company. See "Company Strategy."
ACQUISITION PROGRAM. The Company's growth strategy has been to enter into
equity and non-equity management services agreements with small and mid-sized
physician practices. The Company entered into equity arrangements with three
medical practices having four physicians in 1993, nine medical practices having
a total of 11 physicians in 1994, five medical practices having a total of five
physicians in 1995 and 12 medical practices having a total of 30 physicians in
1996. As of November 1, 1997, the Company had entered into new equity
arrangements with an additional 13 medical practices having a total of 22
physicians. Since 1993, 14 medical practices having a total of 18 physicians
have terminated.
In its largest acquisition to date, in April 1996 the Company purchased
certain business assets of, and entered into a 25-year management service
agreement with, OB-GYN Associates, P.C. ("OB-GYN") of Denver, Colorado, in
exchange for $1,806,000 in cash and 730,000 shares of the Company's Common
Stock. The Company believes that this medical group, consisting of nine OB/GYN
physicians in four offices, is the largest OB/GYN single-specialty medical group
in the Rocky Mountain region. For financial information concerning OB-GYN, see
"Index to Financial Information -- OB-GYN."
In addition, the Company acquired HPM, a physician practice management
company located in Pittsburgh, Pennsylvania, in exchange for 433,332 shares of
the Company's Common Stock effective December 31, 1995. HPM has provided
management services to physician practices for over 35 years and currently
provides such services on a long-term contractual as well as a consulting basis
to physicians in Pennsylvania, Ohio and West Virginia.
The Company constantly pursues and evaluates potential physician practice
affiliations, and it intends to continue to enter into equity and non-equity
affiliations, subject to limitations imposed by its financing capabilities and
debt facilities. In addition, the Company is in the process of negotiating an
equity joint venture MSO (management services organization) arrangement with an
integrated delivery system. The Company is also negotiating an equity joint
venture arrangement with a clinical research company that contracts for Stage 3
clinical trials. There can be no assurance that any of these potential
contractual affiliations will be consummated. Under the Management Business
Plan, further acquisition activity will be curtailed until the Company's
financial position improves. See Note 2 to the Company's consolidated financial
statements for the years ended December 31, 1996 and 1995 (the "Company's
Financial Statements") and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
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AFFILIATED MEDICAL PRACTICES. As of November 1, 1997, the Company was
managing 33 medical practices and clinics and 102 physicians under equity or
non-equity management service arrangements. In 1996, OB-GYN accounted for
approximately 22% of the Company's net revenues. No other practice accounted for
more than 10% of the Company's net revenues in 1996. Based on preliminary
estimates of the Company's net revenues for the first six months of 1997, OB-GYN
is the only practice to account for more than 10% of the Company's net revenues.
In 1995, prior to the Company's acquisition of OB-GYN, four practices (with a
total of eight physicians located in California) accounted for 60% of the
Company's net revenues.
For operations management purposes, as of July 1, 1997, the Company has
grouped its affiliated practices into two broad geographic zones: the Western
Region and the Eastern Region. Each region is under the supervision of a senior
member of the management who reports to the Company's chief executive officer
and is responsible for operations and growth and expansion of the Company's
management affiliations with physicians. Information concerning the Company's
affiliated practices is set forth below based on the region in which the
practices are located:
Western Region. The Company manages 24 practices in the Western
Region of the United States, five in Washington, six in California, two in
Alaska, six in Colorado, two in Idaho, two in Arizona, and one in
Mississippi, consisting of a total of 49 physicians.
Eastern Region. The Company manages nine medical practices in the
Eastern part of the United States, four in Pennsylvania, one in Ohio, one
in Florida and three in Illinois, consisting of 53 physicians.
Existing affiliated physicians and the hospitals in which current
affiliated physicians practice are the primary sources of referrals of new
acquisitions and management service relationships for the Company.
EQUITY AFFILIATIONS. To meet payor demand for price competitive, quality
services, the Company utilizes a market based approach, the goal of which is to
establish a base of primary care physicians allied with specialty physicians
into a network of providers serving a targeted geographic area. Affiliated
primary care physicians currently include physicians in family practice,
internal medicine, pediatrics and obstetrics/gynecology. Key specialties of
affiliated physicians currently include allergy, cardiology, podiatry,
nephrology, urology, surgery and oncology. The Company markets its physician
affiliations to managed care and third-party payors, referring physicians and
hospitals. Affiliated physicians also treat fee-for-service patients on a
per-occurrence basis. After-hours care is available in several of the Company's
clinics.
Under the Company's standard equity arrangements, physician affiliations
are established through the exchange of cash and Common Stock of the Company in
amounts and on terms that are separately negotiated with each individual
physician or practice group. This consideration is payable in installments over
an agreed period of time, usually four years. The relationship between the
Company and its affiliated physicians is set forth in asset purchase and
management service agreements.
Through the asset purchase agreement, the Company acquires the assets
utilized in the practice and may also assume certain liabilities of the
physician group. The assets to be acquired by the
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Company under the asset purchase agreement will vary, although all have involved
the acquisition of certain selected business assets, such as desks, computers,
typewriters or filing cabinets, and the majority have involved the acquisition
of accounts receivable. The Company may also acquire the lease or fee interest
of the physician-owners in the physical location of the practice. Of the
practices currently under management by the Company, three have involved the
acquisition of real property by the Company.
Under a management service agreement, a physician group or sole
practitioner delegates to the Company administrative, management and support
functions required in connection with its or his medical practice. The
management service agreements typically have terms of 25 years and provide the
physicians with access to capital, management expertise, an integrated
information system and managed care contracts negotiated by the Company, while
enabling affiliated physicians to retain clinical control and autonomy through
their professional corporations or similar entities. The Company also provides
the medical group or physician with the equipment used in its medical practice,
manages practice operations and employs substantially all of the practice's
non-physician personnel, except for certain allied health professionals, such as
nurse practitioners, physician assistants and physical therapists. The agreement
provides that the affiliated professional corporation or entity will not compete
with the Company. The Company does not, however, control the practice of
medicine by physicians or compliance by them with licensure or certification
requirements.
Under the Company's standard equity arrangements, the Company collects the
medical service revenues for its affiliated practices and distributes these
collected revenues as provided for in the contract, generally in a series of
four steps. First, the Company uses this revenue to pay the operating expenses
of the practice, which include salaries and benefits for receptionists and
medical secretaries, billing and collection expenses, office supplies, real
property lease payments and property insurance expenses. Second, the Company
retains its minimum guaranteed management fee as provided for in the management
service agreement with the affiliated practice, which usually ranges from 5% to
10% of collections. When the Company provides the fully integrated information
system to the affiliated practice, the Company plans to increase the minimum
guaranteed management fee by 3% of the practice's collected medical service
revenues. Third, the Company pays the physicians their negotiated, budgeted
percentage of collected revenues to cover the professional expenses of the
practice, which include physicians' and other medical providers' salaries and
benefits and professional malpractice insurance. The payments to affiliated
practices for professional expenses in 1996 averaged 31% of the annual collected
medical service revenues. Finally, to the extent that there is any residual
collected medical service revenue, the Company retains such revenue as a
supplemental management fee, usually up to 30% of collected medical service
revenues.
In general, the significant terms of the management service agreement with
OB-GYN are the same as those provided for in the Company's standard equity
arrangements, i.e., the Company will provide OB-GYN with management services for
a term of 25 years in exchange for a minimum guaranteed fee of 10% of OB-GYN's
collected medical service revenues. The OB-GYN physician-owners received
approximately 46% of the practice's collected medical service revenues in 1996
to cover the professional expenses of the practice.
The Company enhances growth in its practices by expanding managed care
arrangements (to which the affiliated physician groups are typically party),
assisting in the recruitment of new physicians
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and expanding and adding services that have historically been performed outside
of the practices. The Company works closely with affiliated physicians in
targeting and recruiting physicians and in merging sole practitioners or single
specialty groups into affiliated physician groups. The Company assists in the
development of new and expanded ancillary services, such as birthing centers,
surgery centers, and diagnostic labs, by offering management services and needed
capital resources.
The Company, under the terms of its standard equity management service
agreement, employs all non-medical personnel and has the authority to make any
changes required to improve practice efficiency and productivity and, thus, has
the ability to control all non-physician operating costs. The Company does,
however, establish an advisory committee for the practice, consisting of Company
and professional personnel, that recommends guidelines and budgets for the
practice, including staffing, personnel issues (both medical and non-medical),
capital expenditures, practice acquisitions and practice expansion (including
patient source and physician recruitment issues). To reduce or control expenses
the Company, among other things, anticipates negotiating national purchasing
contracts for key items, reviewing staffing levels to make sure they are
appropriate and assisting the physicians in developing more cost-effective
clinical practice patterns through the use of its integrated information system.
The Company offers affiliated physicians who enter into asset purchase and
management service agreements with the Company the option to repurchase tangible
assets and the management service agreement. All existing and prospective equity
management service agreements are subject to early termination. During an agreed
period (generally four years in the case of existing agreements and three years
in the case of pending and future agreements), the repurchase of tangible assets
requires the return of all consideration paid by the Company and the repayment
of all money invested in, or advanced to, the practice by the Company. The
repurchase of the management service agreement requires the return of all
consideration paid by the Company for the acquisition of the management service
agreement. In the event of a repurchase during the agreed period, the medical
practice also forfeits all management fees earned by, and all accounts
receivable that have been assigned to, the Company as of the date of the
repurchase. After the expiration of the agreed period in equity arrangements,
termination of the affiliation requires the practice to pay the Company a
negotiated amount of cash for liquidated damages or obligates the medical
providers to abide by a contract not to compete. Of the physicians who have
placed their business assets under the management of the Company since the
inception of Old MAM, a total of 14 practices with 18 physicians have terminated
their affiliation with the Company as of November 1, 1997. During 1996 two
groups comprising seven practices having eight physicians were repurchased by
the physicians or terminated which resulted in $153,000 of income.
The table below indicates the number of practices and physicians
affiliated with the Company pursuant to such equity arrangements, net of
terminations, at the dates indicated:
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<TABLE>
<CAPTION>
Year Ended December 31, November 1,
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1994 1995 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Number of affiliated practices 12 16 21 28
Number of affiliated physicians 15 19 41 54
</TABLE>
The Company's strategy is to emphasize the expansion of physician
practices under management through equity affiliations.
NON-EQUITY SERVICE ARRANGEMENTS. The Company also provides services to
medical practices pursuant to non-equity long-term service contracts. As of
November 1, 1997, the Company had in place long term service contracts, ranging
from four to 25 years in length, with five medical group practices having a
total of 48 physicians. Services provided under current long-term service
agreements include billing and collections, accounting, human resource
management, financial management and marketing. The Company's revenues under
such arrangements consist of management fees based on a percentage of the
medical service revenue earned by the practice. The percentage of the medical
service revenue received as a management fee by the Company varies with the type
of services provided. On average, in 1997 the Company has received management
fees under its non-equity long-term service contracts of between 3% and 11% of
the practice's collected medical service revenue.
The Company also provides management services to over 200 physicians on a
consulting basis. Such consulting services include practice management,
accounting, tax preparation, employee benefits analysis and retirement and
estate planning. In general, the Company is compensated under its consulting
arrangements on a retainer basis.
INFORMATION SYSTEM. The Company has purchased and is implementing an
integrated information system to support its growth and acquisition plans. The
Company's current plan is to provide this information system to all affiliated
practices by the end of 1998. The Company's overall information system design is
open, modular and flexible and is intended to give affiliated physicians and
staff efficient and rapid access to complex clinical data. The system is driven
by an individual patient electronic medical record ("EMR") to complement
practice management and billing functions. The Company's use of the EMR enhances
operational efficiencies through automation of many routine clinical functions.
The EMR also improves the capacity to link treatment protocols by diagnosis and
physician, thus allowing physicians to check their treatments against such
protocols at the time of service.
As affiliated physicians enter into more capitation contracts, the Company
believes that effective and efficient access to key clinical patient data will
be critical to improving costs and quality outcomes. The Company expects to
utilize its information system to improve productivity, manage complex
reimbursement procedures, measure patient care satisfaction and outcomes of
care, and integrate information from multiple facilities throughout the
Company's network of affiliated physicians. This system will also allow the
Company to analyze clinical and cost data so that it will be able to help its
affiliated physicians effectively achieve thresholds of profitability.
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INSURANCE. The Company maintains insurance, including insurance for any
vicarious liability of the Company that may result from its relationship with
its affiliated physician groups, in an amount that it believes to be sufficient
based on historical claims and the nature and risk of its business. In addition,
the Company requires each affiliated physician to maintain professional
liability insurance coverage in accordance with applicable state regulations.
COMPETITION.
The physician practice management industry is highly competitive. The
Company's operations compete with national, regional and local companies in
providing physician practice management services. In addition, certain
companies, including hospitals and insurers, are expanding their presence in the
physician management market. Some of the Company's competitors are larger and
better capitalized, provide a wider variety of services, and have greater
experience in providing health care management services. The industry is also
subject to continuing changes in the provision of services and the selection and
compensation of providers. The principal methods of competition within the
Company's industry are as follows: price; the range of services provided; the
amount and nature of consideration paid to affiliated physicians; the ability to
facilitate practice group formations; the ability to assist in gathering managed
care contracts; and the degree of autonomy retained by the physicians.
The Company believes that it can effectively compete by employing two
strategies. First, the Company provides a broad range of management and support
services (including an integrated information system) to small and medium, as
well as larger, physician groups, while, at the same time, offering physicians
greater medical autonomy than permitted by most competitor's arrangements.
Second, the Company offers equity in the Company as partial consideration for
the acquisition of practice assets and management service contracts. The Company
expects that the relative ownership position in the Company of the affiliated
physicians will continue to rise as the Company acquires assets of affiliated
practices and enters into management arrangements through the issuance of
additional equity consideration.
GOVERNMENT REGULATIONS.
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 ability of
the Company to operate profitably will depend in part upon the Company and its
affiliated physician groups obtaining and maintaining all necessary licenses,
certificates of need and other approvals and operating in compliance with
applicable health care regulations. The Company believes that its operations are
in material compliance with applicable law and expects to modify its agreements
and operations to conform in all material respects to future regulatory changes.
Nevertheless, while physician affiliations are becoming more common, many
aspects of the Company's business operations have not been the subject of state
or federal regulatory interpretation. The Company is also unable to predict what
additional government regulations, if any, affecting its business may be enacted
in the future or how existing or future laws and regulations might be
interpreted. Accordingly, there can be no assurance that a review of the
Company's or its affiliated physicians' businesses by courts or regulatory
authorities will not result in a determination that could adversely affect the
operations of the Company or the affiliated physicians or that the health care
regulatory
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environment will not change so as to restrict the Company's or the affiliated
physicians' existing operations or their expansion.
In 1996 the affiliated medical groups derived approximately 35% of their
medical service revenue from services provided under Medicare and Medicaid
programs, and approximately 30% from contractual fee-for-service arrangements
with numerous payors and managed care programs, none of which individually
aggregated more than 10% of medical service revenue. The remaining 35% of
medical service revenue was derived from various fee-for-service payors.
As part of its management services, the Company plans to negotiate
contracts with licensed insurance companies, such as health maintenance
organizations ("HMOs"), under which the affiliated physicians might assume
financial risk in connection with providing health care services under various
capitation arrangements. In "capitation arrangements," the involved physicians
agree to provide for all or nearly all of the health care needs of a defined
patient population for a flat fee, which is fixed in advance by the terms of the
contract. In most instances, the fee is paid monthly on a per capita basis,
based on the number of patients within the insurance plan assigned to the
physicians. The physicians are the parties at risk in these arrangements, as
they are paid the flat fee regardless of the amount of their service utilization
by the covered patients. The Company's role in these contracts would be only
that of negotiation; the Company would not enter into any risk-sharing
relationship. To the extent the affiliated physicians are in the business of
insurance as a result of entering into risk-sharing arrangements with HMOs, they
may be subject to a variety of regulatory and licensing requirements applicable
to insurance companies or HMOs. The Company would not be subject to such
requirements because it is not a party to these risk-sharing arrangements.
However, any change in reimbursement statutes, regulations, policies, or
practices could adversely affect the operations of the Company.
Laws exist in many states that prohibit the corporate practice of medicine
other than by physicians. Under these laws, business corporations such as the
Company may not engage in the practice of medicine and may not employ physicians
to practice medicine. However, the Company believes that it is not in violation
of any such applicable state laws because it performs only non-medical
administrative services, does not represent to the public or its clients that it
offers medical services, does not exercise influence or control over the
practice of medicine by the affiliated physicians and does not employ the
affiliated physicians.
A portion of the Social Security Act addresses illegal remuneration (the
"federal anti-kickback statute") by prohibiting the offer, payment,
solicitation, or receipt of any form of remuneration to induce (i) the referral
of an individual for the provision of any item or service reimbursable in whole
or in part by Medicare or certain state health care programs (including
Medicaid) or (ii) the purchase, lease, or order of any item or service
reimbursable in whole or in part by Medicare or certain state health care
programs. The Health Insurance Portability and Accountability Act of 1996
extended the scope of the federal anti-kickback statute to include all federal
health care payment programs, not just Medicare. In addition, some states have
adopted similar legislation that applies to the beneficiaries of Medicaid and
other health care payment programs. Federal and state health care programs do
not reimburse medical practices for management fees paid to the Company, and the
Company does not refer patients to the physician practices. Payments by the
Company to the physician practices are not and should not be viewed as payments
within the scope of the federal anti-kickback statute, nor should
12
<PAGE>
payments by the physician practices to the Company. Thus, the Company does not
believe that its business or any portion of its business constitutes a violation
of the federal anti-kickback statute. Nevertheless, because of the breadth of
the federal anti-kickback statute and the absence of court decisions
interpreting its application to arrangements such as those entered into by the
Company, there can be no assurance that the Company's activities will not be
challenged by regulatory authorities or that such a challenge will result in a
positive outcome for the Company.
The federal anti-kickback statute also prohibits the knowing and willful
making or causing to be made of false claims with respect to Medicare and
certain state health care programs. In addition, the False Claims Act is a broad
federal statute that can be applied to physician groups and corporations such as
the Company. The statute includes prohibitions against knowingly presenting to
the federal government a false or fraudulent claim for payment or approval, as
well as knowingly making or using a false record or statement to get a false or
fraudulent claim paid or approved by the federal government. The statute is
increasingly used to fight the proliferation of false and fraudulent claims for
payment through federal health care programs. Because the Company files claims
for payment by such federal programs and other private insurers, it has taken
and continues to take reasonable measures to detect and prevent errors in its
billing process. The Company believes that it is in compliance with the false
claims provisions of the federal anti-kickback statue and the False Claims Act,
although there can be no assurance that the Company's activities will not be
challenged by regulatory authorities.
Additionally, a federal statute known as "Stark II" prohibits referrals by
a physician, or an immediate family member, of Medicare or Medicaid patients to
an entity providing certain services in which the physician has an ownership or
investment interest or with which the physician has entered into a compensation
arrangement. The services addressed by the statute include clinical laboratory
services, physical therapy services, occupational therapy services, radiology
and ultrasound services, radiation therapy services and supplies, durable
medical equipment and supplies, parenteral and enteral nutrients and supplies,
prosthetics, orthotics, and prosthetic devices, home health services and
supplies, outpatient prescription drugs, and inpatient and outpatient hospital
services. Some states have enacted similar self-referral laws. The Company
believes that it is in compliance with all such legislation, although future
regulatory changes could require the Company to modify the form of its
relationships with physician groups.
The Company and its affiliated physicians are also subject to federal,
state, and local laws dealing with issues such as occupational safety,
employment, medical leave, insurance regulations, civil rights and
discrimination, and medical waste and other environmental issues. At an
increasing rate, federal, state and local governments are expanding the
regulatory requirements on businesses, including medical practices. The
imposition of these regulatory requirements may have the effect of increasing
operating costs and reducing the profitability of the Company's operations.
EMPLOYEES.
As of November 1, 1997, the Company employed 291 persons, including 51
employees at the Company's headquarters and regional offices and 240 employees
at its affiliated physician practices. Of these employees, 137 were full time
and 154 were part time. No employee of the Company or of any affiliated
physician group is a member of a labor union or subject to a collective
bargaining agreement. The Company considers its relations with its employees to
be good.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
SELECTED FINANCIAL DATA
The following table sets forth certain selected financial data for the
three years ended December 31, 1996, during which time the Company has operated
as a physician practice management company. The selected financial data are
derived from the audited financial statements of the Company which, insofar as
periods prior to 1996 are concerned, have been restated as indicated under
"Overview - Restatement." This selected financial data should be read in
conjunction with the financial statements included elsewhere in this Form 10-SB,
including the pro forma financial statements that give effect to the acquisition
of OB-GYN in April 1996. See "Management's Discussion and Analysis of Financial
Condition and Results of Operation" and "Index to Financial Information."
The audited consolidated financial statements of the Company for the year
ended December 31, 1996 and the restatement for the years ended December 31,
1995 and 1994 were available on October 30, 1997. The Form 10-SB and the Form
10-KSB are being filed as soon as practicable thereafter. Unaudited financial
data for quarterly periods in 1997 will be included in the quarterly reports on
Form 10-QSB for the periods ended March 31, 1997, June 30, 1997 and September
30, 1997 to be filed as soon as possible.
14
<PAGE>
<TABLE>
<CAPTION>
MEDICAL ASSET MANAGEMENT, INC.
YEAR ENDED DECEMBER 31,
1994(4) 1995(4) 1996(4)
------- ------- -------
(restated) (restated)
STATEMENT OF OPERATIONS DATA: (in thousands, except for per share data)
<S> <C> <C> <C>
Net Revenue $ 2,573 $ 6,400 $ 10,379
Operating Expenses:
Clinic expenses 1,389 5,378 8,514
Depreciation and amortization 149 374 988
-------- -------- --------
Total operating expenses 1,538 5,752 9,502
--------- -------- --------
Income from operations 1,035 648 877
General and administrative expenses 1,283 1,841 3,880
-------- -------- --------
(248) (1,193) (3,003)
Other income (expense) 147 (289) (2,671)(3)
Income taxes -- 51 --
-------- -------- --------
Net loss $ (101) $(1,533) $(5,674)
Net loss per share $(.01) $ (.15) $ (.43)
Weighted-average number of
Common Stock 9,169 10,376 13,093
BALANCE SHEET DATA:
Cash and cash equivalents $ 50 $ 134 $ 4,664 (1)
Working capital 213 1,447 5,103
Total assets 6,991 11,833 31,920
Long term debt and capital
lease obligations (2) 61 1,446 2,426
Total stockholders equity $ 3,781 $ 7,332 $ 19,248
OTHER DATA:
Cash flows provided by
(used in):
Operating activities $(1,063) $(1,872) $(2,106)
Investing activities (106) (291) (3,917)
Financing activities 1,128 2,247 9,289
(1) Includes restricted cash of $1,264,000 at December 31, 1996 to collateralize
the Company's line of credit.
(2) Excludes current portion of long term debt and capitalize lease obligations.
See Note 10 to the Company;s Financial Statements with respect to the Company's
deferred tax liability.
(3) See Notes 9 and 12 to the Company's Financial Statements for a discussion of
litigation settlements and clinic terminations.
(4) See Note 4 to the Company's Financial Statements for a discussion of the
effects of acquisitions.
</TABLE>
15
<PAGE>
OVERVIEW.
GENERAL. The Company is a physician practice management company that
develops contractual affiliations with physician practices that provide for
management by the Company and clinical autonomy for the physicians. The Company
also offers a full array of management services as an MSO under long term
service contracts, to both affiliated physicians and other independent
healthcare entities, directly and through its subsidiary, HPM. HPM also provides
management services on a consulting basis to over 200 physicians in
Pennsylvania, West Virginia and Ohio. As of November 1, 1997, the Company has
entered into equity and non-equity affiliations with 33 medical practices having
a total of 102 physicians in eleven states.
For the years ended December 31, 1996 and 1995, the medical groups
affiliated with the Company derived approximately 35% and 30% of their medical
service revenue from service provided under Medicare and Medicaid programs,
respectively, and approximately 30% and 30% from contractual fee-for-service
arrangements with numerous payors and managed care programs, respectively, none
of which individually aggregated more than 10% of medical service revenue. The
remaining 35% and 40% of medical service revenue was derived from various
fee-for-service payors. Changes in the medical group's payor mix can affect the
Company's revenue. See Note 8 to the Company's Financial Statements.
During 1996, management determined that the Occu-Med franchises held by
Old MAM at the time of its acquisition by the Company in June 1994 were no
longer valuable to the primary business of the Company and would not be a source
of future revenue. Accordingly, the remaining net realizable value of $902,000,
or $.07 per share, was written off. The "Occu-Med" concept involved the
marketing of programs in the areas in California designed to reduce lost work
time from work-related injuries.
RESTATEMENT. During 1996 management restated the prior years' financial
statements for certain corrections of accounting principles and misapplication
of facts that existed at the time the 1995 and 1994 financial statements were
prepared. The aggregate amount of the restatement resulted in a reduction in
earnings from the previously reported net income for the year ended December 31,
1995 of $578,000 to a net loss of $1,533,000 and a reduction in earnings from
the previously reported net income for the year ended December 31, 1994 of
$65,000 to a net loss of $101,000.
The following schedule summarizes the effect on net income (loss), net
income (loss) per share and stockholders' equity as a result of restating the
Company's 1995 financial statements from that previously reported in November
1996:
16
<PAGE>
<TABLE>
<CAPTION>
Net Income Net Income Stockholders'
(Loss) (Loss) Per Share Equity
------ ---------------- ------
<S> <C> <C> <C>
1995:
As previously reported $ 578,000 $ .05 $6,657,000
Adjustment (2,111,000) (.20) 675,000
----------- ---- ----------
As restated $(1,533,000) $(.15) $7,332,000
</TABLE>
The following schedule summarizes the effect on net income (loss), net
income (loss) per share and stockholders' equity as a result of restating the
Company's 1994 financial statements from that previously reported in November
1996:
<TABLE>
<CAPTION>
Net Income Net Income Stockholders'
(Loss) (Loss) Per Share Equity
------ ---------------- ------
<S> <C> <C> <C>
1994:
As previously reported $ (65,000) $(.00) $1,773,000
Adjustment (36,000) (.00) 2,008,000
--------- ------ -----------
As restated $(101,000) $(.00) $3,781,000
</TABLE>
RESULTS OF OPERATIONS.
The following table sets forth the percentages of revenue represented by
certain items reflected in the Company's Statement of Operations:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Revenue 100.0% 100.0% 100.0%
Operating expenses:
Clinic expenses 54.0% 84.0% 82.0%
Depreciation and
amortization 5.8% 5.9% 9.6%
--- --- ---
Income from operations 40.2% 10.1% 8.4%
General and 49.9% 28.8% 37.4%
administrative
Other income (expense) 5.8% (4.5)% (25.7)%
Income tax expense -- (0.8)% --
---- ---- ----
Net loss (3.9)% (24.0)% (54.7)%
</TABLE>
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995.
At December 31, 1996, the Company managed 26 practices having a total of
89 physicians in eleven states pursuant to its equity and non-equity
arrangements, as compared to 19 practices having a total of 27 affiliated
physicians in four states at December 31, 1995. During 1996, the
17
<PAGE>
Company entered into such arrangements with 14 additional practices and
terminated seven practices as compared to eight additional practices and one
termination in 1995. Changes in the results of operations from 1995 to 1996 were
caused primarily by affiliations with these additional practices (net of
termations), the continued building of a corporate infrastructure, write-off of
franchise fees and the settlement of certain litigation, with their
corresponding professional fees.
NET REVENUE increased $3,979,000, or 62%, to $10,379,000 in 1996, as
compared to $6,400,000 in 1995. The Company's revenue growth in 1996 is
attributable to the addition of new management services agreements, which
contributed about 50% of the total revenue. Revenue from existing management
agreements in 1996 reflects a full year's results for practices acquired in 1995
as well as from the addition of new management agreements. The terminations of
seven physician groups having eight physicians had an adverse effect on net
revenues in 1996.
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1996
---- ----
<S> <C> <C>
Revenue from Existing Management Agreements $2,573,000 $5,239,000
Revenue from New Management Agreements 3,827,000 5,140,000
--------- ---------
Total Revenue $6,400,000 $10,379,000
</TABLE>
The Company's management services agreements with the physician practices
specify the percentage of net collected revenues to be paid to the affiliated
physicians and the percentage to be received by the Company. Medical service
revenue received by affiliated medical groups increased by 82% in 1996 to
approximately $21,775,000 as compared to $11,986,000 in 1995, offset by a 40%
increase in the provisions for doubtful accounts and contractual adjustments
also increased from $2,347,000 in 1995 (20% of medical service revenue) to
$8,160,000 in 1996 (37% of medical service revenue). If the collected revenue is
insufficient to pay the Company its minimum guaranteed management fee, the
Company is authorized to reduce the amount of revenue paid to the affiliated
physicians to the extent necessary to pay the minimum guaranteed management fee.
See Note 3 to the Company's Financial Statements.
Revenues attributable to the operations of HPM, which was acquired by the
Company effective December 31, 1995, were $1,319,000 in 1996 as compared to
$1,090,000 in 1995, reflecting revenues of $225,000 from non-equity long term
service contracts as well as $1,044,000 from consulting fees. Long-term service
contracts range from four to eight years in length and provide management fees
based on a percentage of medical service revenue earned by the practice. At
December 31, 1996, the Company, through HPM, had entered into five long-term MSO
contracts involving 48 physicians in two states, while at December 31, 1995 the
Company had entered into three such contracts involving eight physicians.
OPERATING EXPENSES consist of (i) clinic salaries, wages and benefits,
clinic laboratory and fees, clinic rent, other clinic costs and consulting fees
and (ii) depreciation and amortization expenses. Clinic operating expenses
increased by $3,135,000, or 58%, to $8,514,000 in 1996 from $5,379,000 in 1995.
The 58% increase in clinic operating expenses was slightly less than the 62%
increase in 1996 net revenues over 1995 net revenues. The increase in 1996
operating
18
<PAGE>
expenses also reflects the addition of an oncology practice with significantly
higher drug and medication costs. Depreciation and amortization expenses for
1996 increased by $614,000, or 164%, to $988,000, as compared to $374,000 for
1995. This increase was primarily the result of the amortization and
depreciation of newly acquired management service agreements and fixed assets.
INCOME FROM OPERATIONS increased $229,000, or 35% to $877,000 in 1996 from
$647,000 in 1995. Substantially all of this increase was attributable to the
addition of new affiliated physician practices.
GENERAL AND ADMINISTRATIVE EXPENSES consist of salaries paid to corporate
clinic staffs, corporate administrative costs and development costs. During 1996
the Company added 12 new physician practice affiliations, as compared to five
new affiliations in 1995. General and administrative costs increased by
$2,039,000, or 111%, to $3,880,000 in 1996 from $1,841,000 in 1995. The increase
was primarily the result of a build-up in the Company's financial and
operational staffs, additional professional and administrative costs incurred in
1996 and expenses related to the Company's SEC reporting requirements.
OTHER INCOME (EXPENSE) consists principally of net loss on litigation
settlements, clinic terminations and franchise fee write-off expenses totaling
$2,454,000 in 1996. See Notes 9 and 12 to the Company's Financial Statements.
Losses on settlements of lawsuits of $1,710,000 and the write-off of the
Occu-Med franchise agreement of $902,000 were partially offset by gains on
clinic terminations of $153,000. Interest expense declined in 1996 to $252,000,
as compared to $292,000 in 1995, primarily as a result of varying interest rates
on the Company's outstanding debt and the conversion and retirement of
outstanding debentures. Interest income of $114,000 in 1996 resulted from
investing a portion of funds received from a private placement that was
completed in June 1996.
INCOME TAXES were zero in 1996 as a result of the loss in that year as
compared to $51,000 in 1995. A deferred tax asset of $3,041,000 has been
reserved because of uncertainty about the ability of the Company to produce the
necessary taxable income to utilize the related benefit.
NET LOSS increased $4,141,000, or 270%, to a loss of $5,674,000 in 1996
from a net loss of $1,533,000 in 1995 The increase in the net loss was the
result of a $2,454,000 charge for losses on settlements of lawsuits,
terminations of certain physician practice management agreements, write-off of
the Occu-Med franchise agreement and a $2,039,000 increase in general and
administrative expenses in 1996 compared to general and administrative expenses
of $1,841,000 in 1995.
NET LOSS PER SHARE increased to ($.43) per share in 1996 as compared to
($.15) per share in 1995 as a result of the increase in net loss and an 26%
increase in the weighted average number of shares of Common Stock outstanding.
19
<PAGE>
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994.
At December 31, 1995, the Company managed 19 practices having a total of
27 physicians in four states pursuant to its equity and non-equity arrangements,
as compared to 12 practices having a total of 15 physicians in three states at
December 31, 1994. During 1995, the Company entered into such arrangements with
eight additional practices and terminated one agreement as compared to nine
additional agreements entered into and no terminations in 1994. Changes in the
results of operations from 1994 to 1995 reflect a full year's results of the
practices acquired in 1994 and the affiliations with the additional practices in
1995.
NET REVENUE increased $3,827,000, or 149%, to $6,400,000 in 1995, as
compared to $2,573,000 in 1994. The Company's revenue growth in 1995 is
attributable both to the addition of the new management agreements and increased
revenue from existing management agreements reflecting a full year's results for
the practices the Company acquired in December 1994.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1994 1995
---- ----
<S> <C> <C>
Revenue from Existing Management Agreements $ 435,000 $2,573,000
Revenue from New Management Agreements 2,138,000 3,827,000
---------- ----------
Total Revenue $2,573,000 $6,400,000
</TABLE>
Revenues attributable to the operations of HPM for 1995 and 1994, prior to
the acquisition of HPM by the Company, were derived from consulting services to
over 300 physicians in Pennsylvania, Ohio and West Virginia. Revenues were
$1,090,000 in 1995 as compared to $1,125,000 in 1994.
OPERATING EXPENSES consist of (i) clinic salaries, wages and benefits,
other clinic costs and consulting fees and (ii) depreciation and amortization
expenses. Operating expenses increased by approximately $4,000,000 to $5,400,000
million, or 286%, in 1995 from $1,400,000 million in 1994. The increase was
primarily the result of the Company reflecting a full year's cost of the
practices acquired in December 1994. Depreciation and amortization expenses for
1995 increased by $224,000, or 150%, to $374,000, as compared to $149,000 for
1994. This increase was primarily the result of the amortization and
depreciation of newly acquired management service agreements and fixed assets.
INCOME FROM OPERATIONS decreased $387,000, or 37%, to $647,000 in 1995
from $1,034,000 in 1994. While net revenue increased by 149%, clinic operating
expenses increased by 286%.
GENERAL AND ADMINISTRATIVE EXPENSES consist of salaries paid to corporate
staff, administrative, legal and accounting and development costs. General and
administrative expenses increased by $552,000, or 43%, to $1,841,000 in 1995
from $1,283,000 in 1994. The increase was primarily attributable to additions to
the corporate staff in support of the increase in clinics and increased
professional fees associated with private placements completed in 1995.
20
<PAGE>
OTHER INCOME (EXPENSE) consists of interest income, interest expense and
other income. In 1995 total other expense was $289,000, primarily interest
expense, while in 1994 total other income was $147,000, a difference of
$436,000. In 1995, interest expense increased $266,000, or 1055%, to $292,000 in
1995 as compared to $25,000 in 1994. The increase was primarily the result of
the issuance of $762,000 in 12% Series B Convertible Redeemable Secured
Subordinated Debentures in April 1995 and interest at 10% on notes payable to
physicians related to acquired accounts receivable. In 1994 other income
consisted of $169,000 in miscellaneous income that the Company recognized as the
result of debt forgiveness.
NET LOSS PER SHARE increased to ($.15) per share in 1995 from ($.01) per
share in 1994 as a result of the increase in net loss in 1995 and a 13% increase
in the weighted average number of shares of Common Stock outstanding.
LIQUIDITY AND CAPITAL RESOURCES.
SUMMARY. The Company has experienced losses from operations and negative
cash flows from operating activities for the years ended December 31, 1996 and
1995. Significant contributing factors to the loss in 1996 were lawsuit
settlements (see Notes 9 and 12 to the Company's Financial Statements), related
professional expenses and general and administrative expenses and the rapid
growth of the Company. In addition to these factors, cash used in operations in
1996 was primarily the result of the Company's decision to defer the timely
collection of management fees to support the growth of practices under
management agreements. The Company has funded the loss from operations and cash
flow shortfalls with private placement stock offerings and third party credit
facilities which were secured by $1,264,000 of the Company's certificates of
deposit at December 31, 1996. The Company's decision during 1996, which
continued into 1997, to reinvest funds in medical practices that are already
owned, and fund acquisitions of additional medical practices along with cash
required to meet debt obligations and fund operations has significantly reduced
the amount of cash available to the Company subsequent to December 31, 1996. As
a result, the Company will be required to seek additional financing from banks,
institutional investors and other sources and to reduce or contain costs in
order to fund operations and meet obligations and future commitments.
Because these conditions raise substantial doubt about the Company's
ability to continue as a going concern, the report of independent auditors on
the Company's financial statements as of and for the year ended December 31,
1996 included an explanatory paragraph to that effect. See Note 2 to the
Company's Financial Statements and "Management Business Plan" below.
WORKING CAPITAL. At December 31, 1996, the Company's net working capital
was $5,103,000, as compared to $1,447,000 at December 31, 1995. The principal
component of the Company's working capital are cash and accounts receivable.
Unrestricted cash increased by $3,265,000 from $135,000 in 1995 to $3,400,000 in
1996 primarily as a result of private placements of 2,501,174 shares of the
Company's Common Stock for $8,400,000 cash net of placement costs. Accounts
receivable principally represent receivable from patients and third parties for
medical services provided by physician groups. Such amounts are recorded net of
contractual allowances and estimated bad debts. Accounts receivable are a
function of net physician practice revenue rather than net revenue of the
Company. Accounts receivable
21
<PAGE>
increased $1,325,000, or 41%, to $4,481,000 in 1996 from $3,155,000 in 1995,
reflecting the Company's addition of 12 new practices in 1996 and the
termination of seven practices in 1996. Physician receivables, less $150,000 of
allowance for doubtful accounts in 1996, were $2,660,000, as compared to $27,000
in 1995, reflecting funds advanced to practices to pay operating expenses under
the terms of the management services agreements. At December 31, 1996 and 1995,
advances to and receivables from physician groups exceeded amounts relating to
the liability for the physician's portion of uncollected net billings. See Notes
4 and 8 to the Company's Financial Statements. As part of the Management
Business Plan, the Company plans to reduce advances made to physicians.
CASH FLOWS. Net cash used in investing activities in 1996 was $3,917,000,
a $3,626,000 increase over $291,000 used in investing activities during 1995.
These increases were due to cash payments for the acquisition of non-medical
assets and management contracts, primarily OB-GYN, where $1,806,000 of cash was
invested.
Net cash provided by financing activities during 1996 was $9,289,000, a
$7,042,000 increase over the $2,247,000 net cash provided by financing
activities during 1995. This increase resulted primarily from a private
placement of Common Stock on May 31, 1996, which yielded proceeds, net of
offering expenses, of $7.2 million. Approximately $2.7 million and $2.9 million
of these proceeds were used to fund acquisitions and to reinvest funds in
medical practices already owned, respectively. The Company also entered into a
loan agreement and revolving credit/term facility under which the Company could
borrow up to $2,500,000. On December 31, 1996, the Company had an outstanding
balance of $1,264,000 under this credit facility. Net cash provided by financing
activities during 1996 was partially offset by the repayment of notes payable to
affiliated physicians in connection with equity arrangements. See "Debt
Facilities" for information concerning developments to date in 1997.
Net cash used in operations in 1996 was $2,106,000, a $234,000 increase
over the $1,872,000 used in operations in 1995. While the 1996 net loss adjusted
for non cash expenditures declined to $618,000 from 1995's net loss adjusted for
non cash expenditures of $1,109,000, increases in 1996 assets, primarily
accounts receivables, required $725,000 in additional uses of cash resulting in
a net increase in cash required by operation activities of $234,000 in 1996.
ACQUISITION PROGRAM AND CAPITAL EXPENDITURES. Over the past three years,
the Company entered into contractual affiliations with nine practices with an
aggregate tangible value of $553,000 in assets in 1994, five practices with an
aggregate tangible value of $469,000 in assets in 1995, and 12 practices with an
aggregate tangible value of $4,186,000 in assets in 1996. In addition to
acquiring the tangible values, the Company acquires an intangible asset equal to
the value of the Company's Common Stock issued to acquire the management
agreement. This intangible value is recorded at the time of acquisition based
upon the then value of the stock issued and to be issued. The total intangible
value for the three years ended December 31, 1996 amounted to $14,420,000. The
breakdown of the consideration for these acquisitions was as follows:
22
<PAGE>
<TABLE>
<CAPTION>
December 31,
------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Cash and transaction costs $ 98,000 $ 5,000 $2,653,000
Liability assumed -- -- 16,000
Notes payable 0 446,000 1,512,000
Common Stock issued
and to be issued 697,000 3,764,000 8,752,000
---------- ---------- ----------
Total $ 795,000 $4,215,000 $12,933,000
========== ========== ==========
</TABLE>
The cash portion of the purchase price was funded by a combination of internally
generated funds, the proceeds from the sale of shares of Common Stock and
convertible debt securities in private placement or offshore transactions and
borrowings under the Company's credit facility, which were also used to fund
Company operations, as follows (net of repayment of debt and payments under
capital lease obligations):
<TABLE>
<CAPTION>
December 31,
------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Debt $1,568,000 $ 623,000 $1,587,000
Convertible debt -- 809,000 --
Common Stock 54,000 1,231,000 8,376,000
---------- ---------- ----------
Total $1,622,000 $2,663,000 $9,963,000
========== ========== ==========
</TABLE>
For transactions completed through December 31, 1996, the scheduled issuance of
shares of Common Stock that the Company is committed to deliver in the future
are 693,449 shares in 1997, 592,783 shares in 1998, 544,076 shares in 1999 and
157,763 shares in 2000.
The Company has completed the acquisition of or entered into service
agreements with 13 practices subsequent to December 31, 1996 and prior to
October 30, 1997. As consideration for these acquisitions in 1997, the Company
has agreed to pay approximately $1,250,000 in cash (of which $719,000 has been
paid) and has issued approximately $2,000,000 principal amount in short term and
subordinated notes of which 20% is due on each of the subsequent four
anniversary dates, and issue 576,311 shares of Common Stock over the next four
years valued at approximately $2,400,000.
The Company's installation of new information technology in all of its
affiliated practices is scheduled to be completed by the end of 1998. The
equipment and installation costs of $1,737,000 are being financed principally
through notes payable in the aggregate amount of $1,238,000, of which $786,000
is due in 1998 and the remainder in 1999. The note is
23
<PAGE>
collateralized by software licenses. The Company plans to increase its
management fee charged to affiliated physicians by 3% annually as this software
is installed in each practice.
DEBT FACILITIES. The Company's outstanding debt obligations consist of
a line of credit, notes payable, long-term debt, and convertible subordinated
debt.
At December 31, 1996, the Company has $2,500,000 available under a line of
credit with a bank. The amount outstanding under the line was $1,264,000 at
December 31, 1996 at 4.9%. Upon maturity on May 30, 1997, this note was extended
to May 29, 1998 at 6.72%. Amounts were available under this line only to the
extent the Company had certificates of deposit to secure the balance. At
December 31, 1996, $1,236,000 remained available for use under the line. On
September 3, 1997, all amounts outstanding under the line were repaid. On
October 16, 1997, the Company entered into a $1,250,000 accounts receivable
factoring line of credit under which approximately $572,000 is outstanding. The
Company borrowings are limited to a formula equal to 40% of accounts receivable
outstanding for less than 90 days at the time of the borrowing. A factoring
commission of 1% for each 30 day period in addition to interest at the published
prime rate plus 2% will be charged on outstanding borrowings. A reserve of 5% of
the total outstanding invoices is also required. This facility is guaranteed by
certain officers of the Company.
The Company is currently in discussions with a lender regarding an
accounts receivable credit facility under which 80% of the net collectible value
of the Company's accounts receivable could be advanced up to $2.5 million. The
Company believes that this credit facility could be completed in November, 1997.
Under the proposed terms the Company could initially borrow approximately
$1,900,000, the proceeds of which would be used to repay the outstanding
borrowings under the existing factoring accounts receivable line and to fund
working capital needs. Additional increases up to the maximum of $2.5 million
would correspond to increases in the value of accounts receivable. No assurance
can be given that a mutually acceptable agreement will be completed.
At December 31, 1996, the Company had four notes payable totaling $301,000
due upon demand including interest at 10%. On July 21, 1997, the total amount
due under these notes on that date of $318,000 was forgiven. This forgiveness
will be recognized in the Company's financial statements in the quarter ended
September 30, 1997. The Company also has $ 141,000 of demand notes payable at
interest rates ranging from 8% to 10% due in 1997. Also, at December 31, 1995,
the Company had $937,000 of demand notes at interest rates ranging from 8% to
10%. In August 1996, $263,000 of the 1995 balance plus $12,000 of additional
interest accrued in 1996 was converted into 47,565 shares of Common Stock.
Additionally, $516,000 of the 1995 balance was forgiven in conjunction with the
termination of certain management agreements in 1996.
At December 31, 1996, the Company's long-term debt in the aggregate
principal amount of $3,694,000 (including current portion of $1,393,000)
consisted of:
24
<PAGE>
(i) Notes payable to various individuals in conjunction with asset
acquisitions, interest at 10%, maturing on various dates in 1996 and 1997,
with all unpaid principal and accrued interest due at maturity date in the
amount of $1,511,000;
(ii) Mortgage payable to a bank, collateralized by a building, with a
net book value of $510,000 interest at 10%, with monthly payments of
$3,270 to 2011, in the amount of $301,000;
(iii) Unsecured note payable to a finance company with interest at
7.9%, and monthly payments of $15,550 to 1999, in the amount of $500,000;
(iv) Note payable to a computer software vendor, interest at 10%,
$600,000 due in 1998, remainder in 1999, collateralized by software
licenses with a net book value of $1,238,000, in the amount of $738,000;
(v) Capital lease obligations, varying interest rates not exceeding
26.5%, with various due dates through 2001 and collateralized by
equipment, in the aggregate amount of $535,000; and
(vi) Other debt in the amount of $110,000.
During 1995, the Company issued $762,000 in Series B Convertible
Redeemable Secured Subordinated Debentures which were convertible into Common
Stock at $5 per share. Principal and accrued interest at December 31, 1995 was
$808,000. During 1996, the holders of $718,000 of such convertible debentures
converted the convertible debentures into 143,600 shares of Common Stock. The
remaining $44,000 of such convertible debentures was redeemed in cash.
Also, in 1995, in conjunction with an acquisition, the Company entered
into an agreement to issue to a physician 8% convertible debentures not to
exceed $450,000, which will mature and be due for payment to the physician in
1999. These debentures are convertible into Common Stock upon maturity at a rate
of 80% of the then current market price at the time of maturity but not less
than $5 per share. At December 31, 1996 $125,000 of debentures (including
interest) were outstanding.
OTHER COMMITMENTS AND CONTINGENCIES. Reference is made to Notes 4, 6,
9 and 12 for other commitments and contingencies.
MANAGEMENT BUSINESS PLAN. Management recognizes that the Company must
generate additional financial resources and reduce operating expenses. To
address future cash requirements, management's plans include, among other
things:
* Securing additional financing to cover anticipated cash requirements
(in addition to $1,250,000 accounts receivable factoring secured line
of credit entered into on October 16, 1997).
* Reducing advances made to physicians.
25
<PAGE>
* Reducing compensation expense included in general and administrative
expense by headcount and salary reductions.
* Reducing executive compensation by 30% effective November 1, 1997 and
deferral of 1998 senior management compensation, if necessary.
* Completing refinancings of Company-owned medical buildings and
equipment.
* Curtailing acquisition activity until cash resources are available
and reducing associated travel and entertainment expenditures.
In addition, the Company intends to control discretionary expenditures and
to seek additional bank financing or funds through private placements. The
Company's current financing plans include the completion of the new $2,500,000
secured accounts receivable credit facility with a lender described under "Debt
Facilities" above, the refinancing of Company-owned medical buildings and
equipment, and the possible issuance of up to $5,000,000 in debt and convertible
debt securities. There can be no assurance that the additional financing, other
sources of funds, or other cost reductions as described above will be achieved.
If these financings, other sources of funds or other cost reductions are not
achieved within acceptable ranges, the Company's liquidity would be materially
adversely affected.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 (SFAS No. 128), "Earnings
per Share," which is required to be adopted by the Company for the year ended
December 31, 1997. The provisions of SFAS No. 128 will be adopted in the 1997
consolidated financial statements. At that time, the Company will be required to
change the method currently used to compute earnings per share and to restate
all prior periods. Under the new requirements for calculating earnings per
share, the dilutive effect of convertible preferred stock will be excluded for
"basic earnings per share" and only included in "diluted" earnings per share."
Further, contingently issuable shares will be included in basic earnings per
share only if all the necessary conditions have been satisfied by the end of the
period and it is only a matter of time before they are issued. The impact of
SFAS No. 128 on the calculation of earnings per share for the year ending
December 31, 1997 has not been determined.
* * *
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This registration statement includes "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. All statements
other than statements of historical facts included in this registration
statement, including without limitation, certain statements under "Description
of Business" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" may constitute forward-looking statements. Although
the Company
26
<PAGE>
believes that the expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to have
been correct.
ITEM 3. DESCRIPTION OF PROPERTY.
The Company leases or owns offices in six different locations. The
Company's executive offices are in leased facilities in Mesa, Arizona. The
Company maintains administrative offices in leased facilities in Orange County,
California and Pittsburgh, Pennsylvania. The Company owns three office buildings
in Colorado, Mississippi and Florida in which its affiliated physicians practice
medicine. The Company's owned real estate in Colorado is subject to a mortgage
in the principal amount of $301,000. See Note 6 to the Company's Financial
Statements. The Company believes that all of its real property is adequately
covered by insurance.
The Company's leased office space is governed by lease agreements that
expire at various dates through 2005. The cost of leased facilities for the
Company's offices was $972,000 in 1995, as compared to $1,418,000 in 1996. See
Note 13 of the Company's audited financial statements for future minimum lease
payments due under noncancellable operating leases. Although the Company
believes that, at the present time, these leased facilities are adequate for its
needs, the Company is currently considering whether the addition or relocation
of administrative offices would materially aid in the growth and development of
the Company. The Company does not believe that it will have any material
difficulty in securing the type and scope of facilities that it may need now or
in the future.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth as of December 31, 1996, the names,
addresses, and stock ownership in the Company for the current directors and
named executive officers of the Company and every person known to the Company to
own 5% or more of the issued and outstanding shares of the Company's Common
Stock:
27
<PAGE>
<TABLE>
<CAPTION>
Shares Percentage
Title of Name and Address of Beneficially of
Class Beneficial Owner Owned Class(1)
----- ---------------- ----- --------
<S> <C> <C>
Common John W. Regan 4,792,740 32.1
Medical Asset Management, Inc.
4447 E. Broadway, Suite 102
Mesa, AZ 85206
Common Dennis Calvert 1,108,457 7.4
Medical Asset Management, Inc.
25241 Paseo de Alicia, Suite
230
Laguna Hills, CA 92653
Common Clarke Underwood 164,035 1.1
Medical Asset Management, Inc.
25241 Paseo de Alicia, Suite
230
Laguna Hills, CA 92653
Common Michael A. Zaic --- ---
Medical Asset Management, Inc.
25241 Paseo de Alicia, Suite
230
Laguna Hills, CA 92653
Common Anthony F. Aulicino 137,333 (2)
Health Care Professional
Management, Inc.
Four Station Square, Suite 250
Pittsburgh, PA 15219
Common J. Joshua Kopelman, M.D. 19,872 (2)
The OB-GYN Associates, PC
1350 S. Potomac, Suite 330
Aurora, CO 80012
Common All Officers and Directors 6,222,537 41.6
as a Group (eight)
(1) Based on the number of shares outstanding at December 31, 1996, without
giving effect to any further conversion of Series A Convertible Preferred Stock,
the future issuance of nonforfeitable shares to affiliated physicians pursuant
to existing equity arrangements or the exercise of an outstanding warrant.
(2) Less than 1%.
</TABLE>
In addition, the Company has issued, or has committed to issue, to affiliated
physicians 1,988,071 shares, or 11.7%, of the Company's Common Stock issued or
committed to be issued during the period 1997 to 2000.
The Company also has 2,250,000 shares of Series A Convertible Preferred
Stock currently outstanding, all of which are held by Dr. Edward Dickstein, one
of the founders of Old MAM. Such shares may be converted into Common Stock on
the basis of one share of Series A Convertible Preferred Stock for each share of
Common Stock, subject to the limitation that no more than 25% may be converted
into Common Stock in any one calendar year, and at no time may the holders of
the Class A Preferred Stock hold directly or indirectly more than 4.9% of the
shares of Common Stock outstanding. See "Description of Securities."
28
<PAGE>
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.
Information concerning the current executive officers and directors of the
Company is set forth in the following table:
<TABLE>
<CAPTION>
Name Age Position with the Company
---- --- -------------------------
<S> <C> <C>
John W. Regan 48 President and Chairman of the
Board of Directors
Dennis Calvert 33 Senior Vice President
and Director
Anthony F. Aulicino 55 Senior Vice President
and Director
Clarke Underwood 51 Vice President and Chief
Financial Officer and
Director
Michael A. Zaic 40 Vice President and
Director
Kent Norton 45 Vice President
Gary L. Steib 46 Treasurer
J. Joshua Kopelman, M.D. 52 Director
</TABLE>
Mr. Regan has been President and a director of the Company since June 1994
and prior thereto served as President and a director of Old MAM from 1986 until
June 1994.
Mr. Calvert has been Senior Vice President and a director of the Company
since June 1994 and prior thereto served as Vice President and a director of Old
MAM from 1991 until June 1994.
Mr. Aulicino has been Senior Vice President and a director of the Company
since December and prior thereto served as the Chief Executive Officer and a
director of HPM since 1992.
Mr. Underwood has been Vice President and Chief Financial Officer of the
Company since September 1996 and prior thereto served as a director of Old MAM
from 1989 to 1994. Following the Company's acquisition of Old MAM in 1994, Mr.
Underwood provided consulting services to the Company.
29
<PAGE>
Mr. Zaic has been a Vice President and a director of the Company since
June 1994 and prior thereto served as Vice President and a director of Old MAM
from 1992 1994.
Mr. Norton has been a Vice President of the Company since 1995 and prior
thereto was engaged in several private businesses and property development. He
has approximately twenty years experience as a commentator with KSL Television
in Salt Lake City.
Mr. Steib has served as Treasurer of the Company since June 1997. From
September 1995 to June 1997 Mr. Steib was Chief Financial Officer of The Italian
Oven, Inc., Vice President of Finance since September 1993 and Treasurer since
February 1992. On October 21, 1996, a voluntary petition for bankruptcy under
Chapter 11 of the United States Bankruptcy Code was filed with respect to The
Italian Oven, Inc. and a sale of substantially all of the assets was approved on
January 17, 1997. From 1976 until 1991, Mr. Steib was Treasurer of The Lyden
Company in Youngstown, Ohio. Mr. Steib is a certified public accountant.
Dr. Kopelman, a director of the Company, is a physician and member of the
OB-GYN Associates, P.C. in Denver, Colorado, the largest medical group
affiliated with the Company.
The officers and directors of the Company are elected to one year terms.
No director or officer of the Company is an affiliate of any other reporting
company. There are no family relationships between any officers and directors.
ITEM 6. EXECUTIVE COMPENSATION.
The following table provides information about the compensation paid by
the Company to its Chief Executive Officer and all other current executive
officers who were serving as executive officers at the end of 1996 and who
received in excess of $100,000:
30
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
NAME AND
PRINCIPAL POSITION YEAR SALARY
------------------ ---- ------
<S> <C> <C>
JOHN W. REGAN, Chairman 1996 $200,000
and President of the 1995 96,000
Company(1)(2) 1994 72,000
DENNIS CALVERT, Senior 1996 $107,000
Vice President (1)(3) 1995 72,000
1994 54,000
ANTHONY F. AULICINO, 1996 $ 83,598
Senior Vice President (4)
CLARKE UNDERWOOD, Chief 1996 $ 28,500
Financial Officer (5)
(1) FOR THE THREE YEARS BEGINNING JANUARY 1, 1995, MESSRS. REGAN AND CALVERT
WERE PAID LESS THAN WHAT WAS PROVIDED FOR IN THEIR EMPLOYMENT AGREEMENTS
DISCUSSED BELOW. THESE EMPLOYEES HAVE AGREED TO WAIVE THEIR RIGHT TO THIS
ADDITIONAL COMPENSATION, EXCEPT FOR PURPOSE OF CALCULATING ANY SEVERANCE
BENEFITS, AS DISCUSSED BELOW.
(2) MR. REGAN'S ANNUAL BASE SALARY FOR 1997 WAS $250,000; EFFECTIVE NOVEMBER 1,
1997, MR. REGAN AGREED TO A 30% REDUCTION IN HIS BASE SALARY.
(3) MR. CALVERT'S ANNUAL BASE SALARY FOR 1997 WAS $187,500; EFFECTIVE NOVEMBER
1, 1997, MR. CALVERT AGREED TO A 30% REDUCTION IN HIS BASE SALARY.
(4) MR. AULICINO WAS FIRST EMPLOYED BY THE COMPANY AT THE TIME HPM, OF WHICH HE
WAS PRESIDENT, WAS ACQUIRED BY THE COMPANY EFFECTIVE DECEMBER 31, 1995. MR.
AULICINO'S ANNUAL BASE SALARY FOR 1997 WAS $187,500; EFFECTIVE NOVEMBER 1, 1997,
MR. AULICINO AGREED TO A 30% REDUCTION IN HIS BASE SALARY.
(5) MR. UNDERWOOD WAS EMPLOYED BY THE COMPANY AS ITS CHIEF FINANCIAL OFFICER IN
AUGUST 1996; HIS ANNUAL BASE SALARY FOR 1997 WAS $140,625; EFFECTIVE NOVEMBER 1,
1997, MR. UNDERWOOD AGREED TO A 30% REDUCTION IN HIS BASE SALARY.
</TABLE>
Messrs. Regan and Calvert entered into employment agreements with the
Company for three years beginning January 1, 1995. These agreements require that
the employee devote 100% of his time to the business of the Company. In addition
to salary, the Company has agreed to reimburse each employee for all authorized
actual travel, promotion and entertainment expenses incurred in connection with
performance of his duties. The employee is also entitled to any employer-paid
benefits otherwise made available to employees of the Company. At the present
time, the Company is not offering any employer-paid benefits other than medical
insurance. Employees are entitled to sick leave and paid holidays pursuant to
the Company policy. The employment agreements with these two senior executive
officers provide that if any of them is terminated through no cause or fault of
his own, the terminated officer will receive the balance of the then-applicable
base salaries for purposes of their severance benefits through the termination
date of the employment agreement. The base salaries for Messrs. Regan and
Calvert for purpose of their severance benefits under their employment contracts
for the 12 months ended December 31, 1997, are $250,000 and $187,500,
respectively. Additional terms of employment are set forth in the respective
employment agreements, which are included as exhibits to this Form 10-SB.
31
<PAGE>
The Company in 1996 adopted a non-qualified stock option plan providing
for the issuance of up to 2,000,000 shares of Common Stock to key employees and
directors. To date the plan has not been submitted to the stockholders and no
options have been granted.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
During 1996, an outstanding loan in the amount of $177,449 from Mr. Regan,
Chairman and President of the Company, was repaid with the exception of $9,830;
this loan represented deferral of compensation or expense reimbursement accrued
in prior periods. See Note 6 to the Company's Financial Statements. In
connection with the settlement of a lawsuit against the Company, referred to in
Note 9 to the Company's Financial Statements, Mr. Regan agreed to transfer
40,000 shares of Common Stock owned by him in partial settlement of such
lawsuit.
The Company is a party to a management services agreement with OB-GYN, a
medical group affiliated with the Company with which Dr. Kopelman, a director of
the Company, is an affiliated physician. See generally Note 13 to the Company's
Financial Statements for information concerning the Company's relationship with
affiliated physicians.
In addition, in connection with the Company's $1,250,000 factoring
agreement dated October 16, 1997, Messrs. Regan, Norton and Underwood have
guaranteed the Company's obligations thereunder. See Note 15 to the Company's
Financial Statements.
ITEM 8. DESCRIPTION OF SECURITIES.
The Company is authorized to issue 50,000,000 shares of Common Stock, par
value $.001 per share. The holders of Common Stock are entitled to: (i) equal,
ratable dividends from funds legally available, when, as and if declared by the
Board of Directors of the Company and (ii) share ratably in all the assets of
the Company available for distribution to holders of Common Stock upon
liquidation, dissolution or winding up of the affairs of the Company. The
holders of Common Stock do not have preemptive or redemption rights. The holders
of shares of Common Stock of the Company do not have cumulative voting rights,
which means that the holders of more than 50% of such outstanding shares, voting
for the election of directors, can elect all of the directors of the Company if
they so choose and, in such event, the holders of the remaining shares will not
be able to elect any of the Company's directors. All shares of Common Stock are
fully paid and non-assessable, with no personal liability associated with their
ownership. As of December 31, 1996, 14,944,603 shares of common stock were
outstanding, of which officers and directors of the Company owned 6,222,537
shares, without giving effect to the conversion of outstanding Series A
Convertible Preferred Stock, to the future issuance of nonforfeitable Common
Stock to affiliated physicians pursuant to then existing equity arrangements or
the exercise of an outstanding warrant.
32
<PAGE>
The Company is authorized to issue 10,000,000 shares of preferred stock,
with such rights as the Board of Directors may designate. In 1994, the Company
agreed to issue 3,000,000 shares of Series A Convertible Preferred Stock to Dr.
Edward Dickstein pursuant to a certain share exchange agreement. In July 1996,
750,000 shares of Common Stock were issued to the original holder of the Series
A Convertible Preferred Stock in a one for one exchange pursuant to the agreed
conversion terms, leaving a balance of 2,250,000 shares of Series A Convertible
Preferred Stock. In order to conform the Company's Certificate of Incorporation
to reflect the 1994 agreement to issue shares of Series A Convertible Preferred
Stock, on September 19, 1997 the Company filed a designation of terms with
respect to 2,250,000 shares of Series A Convertible Preferred Stock. The terms
of the Series A Convertible Preferred Stock are as follows: (1) the Series A
Convertible Preferred Stock has no voting rights; (2) the Series A Convertible
Preferred Stock may be converted into Common Stock on the basis of one share of
Series A Convertible Preferred Stock for each share of Common Stock, subject to
the limitation that no more than 25% may be converted into Common Stock in any
one calendar year, and at no time may the holders of the Series A Convertible
Preferred Stock hold directly or indirectly more than 4.9% of the shares of
Common Stock outstanding; (3) the Series A Convertible Preferred Stock carries
no dividend rights, except in an amount equal to, on a per share basis, amounts
declared, paid or set aside for Common Stock; and (4) the Series A Convertible
Preferred Stock has no redemption rights.
33
<PAGE>
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON
EQUITY AND OTHER SHAREHOLDER MATTERS.
Neither the Company's Common Stock nor its Series A Convertible Preferred
Stock is listed on any exchange or major reporting system. The Company's Common
Stock is traded over the counter by means of the NASDAQ Bulletin Board system.
The range of the high bid and low bid prices of the Company's Common Stock
for each quarter within the last two complete fiscal years, the first three
quarters of fiscal 1997 and the fourth quarter through November 7, 1997 is as
follows:
<TABLE>
<CAPTION>
===========================================================
Quarter Ending High Bid Low Bid
===========================================================
<S> <C> <C> <C>
1997 December 31 (through
November 7, 1997) $1.312 $1.187
September 30 1.937 1.750
June 30 3.937 3.625
March 31 3.875 3.375
===========================================================
1996 December 31 4.94 4.88
September 30 6.13 5.12
June 30 8.50 3.37
March 31 5.50 1.92
============================================================
1995 December 31 4.75 1.75
September 30 5.375 4.75
June 30 6.25 5.00
March 31 6.43 5.37
============================================================
</TABLE>
The above prices (based on IDD Information Services/Tradeline) reflect
inter-dealer prices, without retail mark-up, mark-down or commissions and may
not represent actual transactions.
As of December 31, 1996, there were approximately 230 holders of record of
the Company's Common Stock and one holder of record of the Series A Convertible
Preferred Stock. There is no market for the Series A Convertible Preferred
Stock.
The Company has paid no dividends in the past on any class of stock and
does not anticipate paying dividends in the near future. There are no
restrictions that limit the payment of future dividends on any class of stock.
34
<PAGE>
ITEM 2. LEGAL PROCEEDINGS.
The Company is presently engaged in various proceedings occurring in the
course of its business of entering its affiliations with physician practices and
medical related entities. However, except as described below and in Notes 9 and
12 to the Company's Financial Statements, management believes that the ultimate
outcome of these proceedings is not expected to be material to operations or the
Company's financial position.
The Company is a defendant in an arbitration proceeding captioned Century
City Plaza Radiology Medical Group; Neil L. Horn, M.D.; Neil L. Horn, M.D.,
Inc., Ralph Borrows, M.D.; Brona H. Burrows (collectively "Century City") v.
Medical Asset Management, Inc. filed on June 26, 1997 with the American
Arbitration Association in Los Angeles, California. In its arbitration demand
against the Company, Century City alleged breach of contract, breach of
fiduciary duty, request for indemnification, and constructive fraud with respect
to an asset purchase and clinic management agreement entered into by Old MAM in
1993. Century City has requested compensatory damages in the amount of $517,000,
loss of profits in the amount of $400,000, unspecified attorneys fees, and
punitive damages. On August 1, 1997 the Company filed a response denying
liability and counterclaim asserting claims for material misrepresentation and
other causes of action. The Company has requested damages to indemnify it for
physician compensation, operating expenses, and management fees as well as
punitive damages, interest, attorneys fees and costs. The proceeding is in a
discovery phase with hearings expected to be scheduled by year end 1997.
In addition, the Company has filed a civil action against One Capital
Corporation in Maricopa County, Arizona Superior Court and, by way of
counterclaim, in Colorado for, among other things, breach of fiduciary duty,
breach of oral agreement, and misappropriation of trade secrets. The Company had
entered into a corporate advisory agreement in 1995 under which the advisory
firm agreed to perform certain services for the Company in return for fees and
stock options of the Company. In an action filed against the Company in Denver
County, Colorado Superior Court, an individual plaintiff alleged breach of
contract. The Company believes that plaintiff's allegations are without merit.
In response to the Company's complaint, One Capital Corporation filed a
counterclaim against the Company, seeking specific performance of the advisory
agreement and, in the alternative, damages. The Company believes One Capital
Corporation's counterclaims are without merit. The litigation is in preliminary
stages and, therefore, the outcome cannot be determined. However, the Company's
maximum exposure should the advisory firm prevail would be the grant of a stock
option with respect to 375,000 shares of the Company's common stock at an
exercise price equivalent to a 40 to 50 percent discount from fair market value,
plus attorneys' fees.
Information with respect to litigation settlements accrued on the
Company's financial statements for the year ended December 31, 1996 is set forth
in Note 9 to the Company's Financial Statements. See also "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Results of Operations."
35
<PAGE>
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
As reported in a Form 8-K filed by the Company on November 22, 1996, the
Company appointed Ernst & Young, LLP, on November 15, 1996, as the Company's
independent public accountants to audit the Company's financial statements for
the year ended December 31, 1996. Harlan & Boettger audited the Company's
financial statements for the years ended December 31, 1995 and 1994.
The decision to change independent accountants was recommended by the
Company's management and approved by the Board of Directors. The change from
Harlan & Boettger to Ernst & Young, LLP resulted from the rapid expansion of the
Company's operations on a national basis and the Company's belief that a
nationally recognized accounting firm with an expertise in health care would
provide valuable assistance to the Company. The report of Harlan & Boettger on
the financial statements of the Company for the years ended December 31, 1995
and 1994, did not contain an adverse opinion or a disclaimer of opinion, nor was
it qualified or modified as to uncertainty, audit scope, or accounting
principles. During the years ended December 31, 1995 and 1994, there were no
disagreements with Harlan & Boettger on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of Harlan & Boettger, would
have caused it to make a reference to the subject matter of the disagreements in
connection with its reports.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES.
1994 SALES. In June 1994, the Company issued 6,960,000 shares of its
Common Stock to the shareholders of Old MAM in return for all of the issued and
outstanding shares of common stock of Old MAM. The effect of this transaction
was for Old MAM to acquire control of the Company, and thereafter to merge Old
MAM with and into the Company, with the Company being the surviving entity. This
stock was exchanged pursuant to an agreement between the 15 shareholders of Old
MAM and the Company. These shareholders exchanged their shares of Old MAM
initially for 62% of the shares of the Common Stock of the Company. In total,
the shareholders of Old MAM (principally Messrs. Regan and Calvert, now officers
and directors of the Company) acquired 80% of the shares of the Company as of
the date of the closing of the transaction. The Company shares were issued in
reliance on the exemption under Section 4(2) of the Securities Act of 1933 (the
"Act").
In 1994, the Company issued 3,000,000 shares of Series A Convertible
Preferred Stock to Edward Dickstein in exchange for outstanding shares of
preferred stock of Old MAM pursuant to a share exchange agreement with the
Company. Such issuance was exempt pursuant to Section 4(2) of the Act. In July
1996, 750,000 shares of Common Stock were issued to the original holder of the
Series A Convertible Preferred Stock pursuant to the agreed conversion terms;
such issuance upon conversion of a like number of shares of such preferred stock
was exempt from registration pursuant to Section 3(a)(9) of the Act.
36
<PAGE>
In 1994, the Company sold 21,400 shares of restricted Common Stock for
cash at $2.50 per share to accredited investors. That same year, the Company
also exchanged 366,478 shares of restricted Common Stock with approximately 12
physicians for assets with a net book value of $370,000, or the equivalent of
$1.01 per share, in reliance on the exemption under Section 4(2) of the Act. The
Company also issued 354,286 shares of Common Stock pursuant to Regulation S to
overseas investors during 1994 in consideration for the cancellation of
promissory notes in a principal amount of $550,000. Certain other DE MINIMIS
sales of shares of Common Stock to investors also occurred in 1994 pursuant to
Section 4(2) of the Securities Act of 1933. No underwriter was used in
connection with any of these transactions.
1995 SALES. During 1995, the Company sold $762,000 principal amount of 12%
Series B Convertible Redeemable Secured Subordinated Debentures due April 28,
2000 through Global Securities Corporation of Vancouver, British Columbia. The
sale of these debentures was limited to non-residents of the United States. In
connection with the original sale, the Company relied on Regulation S for an
exemption from registration. These debentures in the principal amount of
$718,000 were converted by the holders into 150,305 shares of Common Stock in
1996; the issuance of shares of Common Stock upon conversion was exempt pursuant
to Section 3(a)(9) of the Act. The remaining $44,000 of convertible debentures
were redeemed in cash.
During the period from August through December 1995, the Company sold
575,000 shares of Common Stock to eight accredited investors in eight individual
transactions for a total consideration of $775,000 pursuant to an exemption
under Section 4(2) of the Act.
1996 SALES. On May 31, 1996 the Company sold 2,000,000 shares of Common
Stock to 30 accredited investors for $8,000,000, or $4.00 per share. Cruttenden
Roth Incorporated of Irvine, California, was the selling agent. The Company
issued these shares in reliance upon the exemption provided under Section 4(2)
of the Act. On May 31, 1996, the Company also issued to Cruttenden Roth a
warrant to purchase 140,000 shares of the Company's Common Stock at an exercise
price of $7.05 per share, which expires on May 31, 2001. No warrants have been
exercised to date. On August 1, 1996 the Company filed a Registration Statement
on Form SB-2 under the Securities Act of 1933 to permit the resale of these
2,000,000 shares as agreed in connection with that private placement; this
registration statement has not been declared effective.
In January 1996, the Company issued for cash 200,000 shares of Common
Stock to certain individuals at $1 per share. In December 1996, 18,000 shares of
common stock were issued for cash at $3.50 per share. The Company issued an
additional 283,174 shares at prices ranging from $2.50 to $3.50 per share for a
total of $948,000 in private placement transactions during 1996. The Company
issued these shares in separate transactions each in reliance upon the exemption
provided under Section 4(2) of the Act.
In 1996, 77,918 shares were issued as compensation to physicians in
accordance with the terms of their respective asset purchase agreements and
certain individuals in accordance with commission agreements valued at $375,000.
In addition, $145,000 of legal fees were paid through the issuance of 43,398
shares of Common Stock. The Company also entered into an agreement with a
physician in 1996 whereby the physician has the right, but not the obligations,
to purchase Common Stock at $3 per share limited by percentages ranging form 1%
to 5% of his
37
<PAGE>
clinic's revenue in return for the Company being given the opportunity to take
over the physician's practice on retirement. No shares have been purchased under
this agreement. The Company issued these shares in separate transactions each in
reliance upon the exemption provided under Section 4(2) of the Act.
At December 31, 1996 the Company had agreed to issue, pursuant to equity
affiliation agreements with physicians, a total of 1,988,071 shares during the
period 1997 to 2000.
1997 SALES. To date in 1997 the Company has committed to issue an
aggregate of 573,811 shares of Common Stock at prices ranging from $2.68 to
$4.79 per share pursuant to 10 asset purchase agreements with physicians. The
Company issued these shares in separate transactions each in reliance upon the
exemption provided under Section 4(2) of the Act.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under its certificate of incorporation, the directors and officers of the
Company are indemnified from expenses, amounts paid on judgments, counsel fees
and amounts paid in settlement for any claim asserted against them by reason of
their having been an officer or director of the Company, except in matters in
which the director or officer is adjudged liable for his own negligence or
misconduct in the performance of his duty. Under Delaware law, the officers and
directors are entitled to be indemnified by the Company for any claim arising
out of the performance of their duties, except for matters in which the officers
and directors may be found to have been guilty of gross negligence.
38
<PAGE>
INDEX TO FINANCIAL INFORMATION
Page
MEDICAL ASSET MANAGEMENT, INC.
AUDITED FINANCIAL STATEMENTS
Report of Independent Auditors ......................................... F-1
Consolidated Balance Sheets as of December 31, 1996 and 1995 ........... F-2
Consolidated Statements of Operations for the Years Ended December
31, 1996 and 1995 .................................................... F-4
Consolidated Statement of Changes in Stockholders' Equity for the
Years Ended December 31, 1996 and 1995 ............................... F-5
Consolidated Statements of Cash Flows for the Years Ended December
31, 1996 and 1995 .................................................... F-6
Notes to Consolidated Financial Statements ............................. F-7
AUDITED FINANCIAL STATEMENTS
Report of Independent Auditors ......................................... F-31
Consolidated Balance Sheets as of December 31, 1995 and 1994 ........... F-32
Consolidated Statements of Operations for the Years Ended December
31, 1995 and 1994 .................................................... F-34
Consolidated Statement of Changes in Stockholders' Equity for the
Years Ended December 31, 1995 and 1994 .............................. F-35
Consolidated Statements of Cash Flows for the Years Ended December
31, 1995 and 1994 .................................................... F-36
Notes to Consolidated Financial Statements ............................. F-37
OB-GYN
Report of Independent Auditors ......................................... F-54
Balance Sheet as of December 31, 1995 (audited) ........................ F-55
Statement of Operations for the Year Ended December 31, 1995
(audited) ............................................................ F-56
Statement of Stockholders' Equity for the Year Ended December
31, 1995 ............................................................ F-57
Statement of Cash Flows for the Year Ended December 31, 1995 (audited) . F-58
Notes to Financial Statements .......................................... F-59
UNAUDITED INTERIM FINANCIAL STATEMENTS
Balance Sheets as of December 31, 1995 and March 31, 1996 (unaudited) F-63
Statements of Operations for the Three Months Ended March 31, 1996
and 1995 (unaudited) ................................................ F-64
Statements of Cash Flows for the Three Months Ended March 31, 1996
and 1995 (unaudited) ................................................ F-65
Notes to Unaudited Financial Statements ................................ F-66
PRO FORMA FINANCIAL STATEMENTS
Pro forma Statement of Operations for the Three Months Ended March
31, 1996 (unaudited) ............................................... F-68
Pro forma Statement of Operations for the Year Ended December 31, 1995
(unaudited) ........................................................ F-69
Notes to Unaudited Pro Forma Financial Statements ...................... F-70
<PAGE>
Consolidated Financial Statements
Medical Asset Management, Inc. and Subsidiary
YEARS ENDED DECEMBER 31, 1996 AND 1995
WITH REPORTS OF INDEPENDENT AUDITORS
<PAGE>
Report of Independent Auditors
The Board of Directors and Shareholders
Medical Asset Management, Inc.
We have audited the accompanying consolidated balance sheet of Medical Asset
Management, Inc. and subsidiary as of December 31, 1996, and the related
consolidated statements of operations, changes in stockholders' equity, and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1996 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Medical Asset
Management, Inc. and its subsidiary at December 31, 1996, and the consolidated
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements for 1996 have been prepared
assuming that Medical Asset Management, Inc. will continue as a going concern.
As more fully described in Note 2, the Company has experienced recurring
operating losses and negative cash flows from operating activities.
Additionally, the Company has continued to reinvest funds in medical practices
and make additional acquisitions reducing the amount of funds available to the
Company to meet its requirements for operations, obligations and commitments.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. Management's plans in regard to these matters are also
described in Note 2. The 1996 financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of these uncertainties.
/s/ Ernst & Young LLP
--------------------
Pittsburgh, Pennsylvania Ernst & Young LLP
September 19, 1997,
except for Note 15 as
to which the date is
October 15, 1997
F-1
<PAGE>
<TABLE>
<CAPTION>
Medical Asset Management, Inc. and Subsidiary
Consolidated Balance Sheets
DECEMBER 31
1996 1995
---------------------------
<S> <C> <C>
(RESTATED)
ASSETS
Current assets:
Cash and cash equivalents $ 3,399,513 $ 34,378
Restricted cash 1,264,351 -
Accounts receivable, less $3,585,742 and
$1,580,820 of allowances for doubtful
accounts and contractual adjustments in 4,480,562 3,155,482
1996 and 1995, respectively
Physician receivables, less $150,000 of
allowance for doubtful accounts in 1996 2,659,995 26,552
Other current assets 268,728 93,841
Total current assets 12,073,149 3,410,253
---------- ---------
Property and equipment:
Buildings 680,000 -
Furniture and equipment 1,667,857 671,752
---------- ---------
2,347,857 671,752
Less accumulated depreciation 507,241 173,462
---------- ---------
Total property and equipment, net 1,840,616 498,290
Intangible assets and other:
Acquired management contracts 12,202,074 3,779,486
Excess of cost of acquired assets over fair 5,431,397 3,569,199
value
Computer software licenses 1,237,604 -
Franchise fees - 1,210,000
Other assets 19,635 12,264
---------- ---------
18,890,710 8,570,949
Less accumulated amortization 884,971 646,930
---------- ---------
Total intangible assets and other, net 18,005,739 7,924,019
============================
Total assets $31,919,504 $11,832,562
============================
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
---------------------------
(RESTATED)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit and notes payable $ 1,706,771 $ 936,766
Current portion of long-term liabilities 1,393,399 21,898
Accrued litigation settlements 1,573,000 -
Accounts payable 704,547 297,488
Accrued payroll and payroll taxes 268,413 244,377
Accrued professional fees 945,415 -
Related party debt 9,830 213,361
Accrued expenses 369,036 249,116
Total current liabilities 6,970,411 1,963,006
Notes payable, capital lease obligations and term
debt 2,300,888 582,847
Convertible subordinated debt 125,438 862,905
Deferred tax liability 3,274,294 1,091,473
Commitments and contingencies - -
------- -------
Total liabilities 12,671,031 4,500,231
Stockholders' equity:
Convertible preferred stock--$.001 par
value--10,000,000 shares authorized; Class
A--2,250,000 shares issued and outstanding at
December 31, 1996 and 3,000,000 shares issued
and outstanding at December 31, 1995 2,250 3,000
Common stock--$.001 par value--50,000,000 shares
authorized, 14,944,603 shares
issued and outstanding at December 31, 1996 and
10,912,772 shares issued and outstanding at
December 31, 1995 (restated) 14,945 10,913
Additional paid-in capital 18,381,846 6,210,962
Common stock to be issued, 1,988,071 shares at
December 31, 1996 and 1,131,113 shares at
December 31, 1995 9,574,145 5,979,026
Unearned remuneration (1,493,817) (3,314,800)
Deficit (7,230,896) (1,556,770)
--------- ---------
Total stockholders' equity 19,248,473 7,332,331
---------- ---------
Total liabilities and stockholders' equity $31,919,504 $11,832,562
========== ==========
SEE ACCOMPANYING NOTES.
</TABLE>
F-3
<PAGE>
Medical Asset Management, Inc. and Subsidiary
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995
---------------------------
(RESTATED)
<S> <C> <C>
Net revenue $10,378,508 $ 6,400,235
Operating expenses:
Clinic salaries, wages, and benefits 3,904,562 3,041,648
Clinic laboratory and fees 1,724,035 932,111
Clinic rent 1,422,955 885,724
Other clinic costs 1,392,433 318,910
Consulting fees 70,393 200,864
Depreciation and amortization 987,567 373,797
------- -------
Total operating expenses 9,501,945 5,753,054
--------- ---------
876,563 647,181
General and administrative expenses 3,880,013 1,840,991
--------- ---------
(3,003,450) (1,193,810)
Other income (expense):
Net loss on litigation settlements and clinic (2,454,093) -
terminations
Interest income 114,202 -
Interest expense (251,561) (291,657)
Other (net) (79,224) 2,880
------- -----
Total other income (expense) (2,670,676) (288,777)
---------- --------
Loss before income taxes (5,674,126) (1,482,587)
Income tax expense - 50,655
---------- --------
Net loss $ (5,674,126 $(1,533,242)
------------ -----------
Net loss per share $(.43) $(.15)
Weighted average number of common
shares outstanding 13,092,669 10,376,247
SEE ACCOMPANYING NOTES.
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
Medical Asset Management, Inc. and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
COMMON STOCK PREFERRED STOCK
------------------------------------------------------ PAID-IN
SHARES AMOUNTS SHARES AMOUNTS CAPITAL
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994, as
previously reported 9,451,486 $ 9,451 3,000,000 $ 3,000 $ 1,747,003
Correction of error (NOTE 1) 293,516 294 -- -- 2,045,118
-------------------------------------------------------------------
Balance, December 31, 1994, as
restated 9,745,002 9,745 3,000,000 3,000 3,792,121
Issuance of common stock 189,000 189 -- -- 386,661
Medical practice transactions:
Stock issued 418,861 419 -- -- 1,082,467
Value of 728,468 shares to be
issued -- -- -- -- --
Issued shares of common stock
for fixed assets 142,675 143 -- -- 105,546
Debt and payables exchanged for
common stock 417,234 417 -- -- 828,167
Capital contributed -- -- -- -- 16,000
Net loss -- -- -- -- --
--------------------------------------------------------------------
Balance, December 31, 1995 10,912,772 10,913 3,000,000 3,000 6,210,962
Issuance of shares of common stock
for cash 2,501,174 2,501 -- -- 8,373,101
Medical practice transactions:
Stock issued and 1,347,212 shares
to be issued in acquisitions 541,616 542 -- -- 2,669,601
Stock issued for prior years'
acquisitions 197,303 197 -- -- 665,951
Shares canceled in termination
including 292,951 to be issued (270,744) (271) -- -- (1,170,277)
Debt and payables exchanged for
common stock 234,564 235 -- -- 1,138,082
Issued shares for compensation 77,918 78 -- -- 374,426
Preferred converted to common 750,000 750 (750,000) (750) --
Shares contributed for legal costs -- -- -- -- 120,000
Net loss -- -- -- -- --
--------------------------------------------------------------------
Balance, December 31, 1996 14,944,603 $ 14,945 2,250,000 $ 2,250 $ 18,381,846
====================================================================
0
===============
TABLE CONTINUED
===============
COMMON RETAINED
STOCK UNEARNED EARNINGS
TO BE ISSUED REMUNERATION (DEFICIT) TOTAL
------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1994, as
previously reported $ 367,925 $ (367,925) $ 13,245 $ 1,772,699
Correction of error (NOTE 1) 2,657,690 (2,657,690) (36,773) 2,008,639
-------------------------------------------------------------
Balance, December 31, 1994, as 3,025,615 (3,025,615) (23,528) 3,781,338
restated
Issuance of common stock -- -- -- 386,850
Medical practice transactions:
Stock issued -- -- -- 1,082,886
Value of 728,468 shares to be 2,953,411 (289,185) -- 2,664,226
issued
Issued shares of common stock
for fixed assets -- -- -- 105,689
Debt and payables exchanged for
common stock -- -- -- 828,584
Capital contributed -- -- -- 16,000
Net loss -- -- (1,533,242) (1,533,242)
-------------------------------------------------------------
Balance, December 31, 1995 5,979,026 (3,314,800) (1,556,770) 7,332,331
Issuance of shares of common stock
for cash -- -- -- 8,375,602
Medical practice transactions:
Stock issued and 1,347,212 shares
to be issued in acquisitions 6,082,250 -- -- 8,752,393
Stock issued for prior years' (666,148) -- -- --
acquisitions
Shares canceled in termination
including 292,951 to be issued (1,762,368) 1,762,368 -- (1,170,548)
Debt and payables exchanged for
common stock -- -- -- 1,138,317
Issued shares for compensation (58,615) 58,615 -- 374,504
Preferred converted to common -- -- -- --
Shares contributed for legal costs -- -- -- 120,000
Net loss -- -- (5,674,126) (5,674,126)
---------- ---------- ---------- ----------
Balance, December 31, 1996 $9,574,145 $(1,493,817) $(7,230,896) $19,248,473
========== =========== =========== ===========
SEE ACCOMPANYING NOTES.
</TABLE>
F-5
<PAGE>
Medical Asset Management, Inc. and Subsidiary
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995
---------------------------
(RESTATED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(5,674,126) $(1,533,242)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 987,567 373,797
Bad debt and contractual allowances 1,933,486 -
Write-off of franchise fees 902,000 -
Litigation settlements and clinic terminations 588,178 -
Deferred taxes - 50,655
Common stock issued for interest expense 36,738 -
Common stock and debentures issued for services 607,951 -
Changes in operating assets and liabilities,
net of effects of acquisitions and
terminations:
Accounts receivable (632,341) (996,301)
Physician receivables (2,931,788) (62,289)
Other assets (173,875) 124,208
Accounts payable 407,059 171,217
Accrued litigation settlements 952,257 -
Accrued professional fees 945,415 -
Other accrued expenses (54,728) -
--------- ---------
Net cash used in operating activities (2,106,207) (1,871,955)
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in restricted cash (1,264,351) -
Net cash used to fund acquisitions (2,652,934) (91,716)
Acquisition of property and equipment - (199,392)
--------- ---------
Net cash used in investing activities (3,917,285) (291,108)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from debt issuances 1,587,415 623,027
Repayment of debt (287,702) (415,701)
Repayment of related party debt (203,531) -
Issuance of convertible debt - 808,905
Payments under capital lease obligations (183,157) -
Net proceeds from issuances of common stock 8,375,602 1,230,828
--------- ---------
Net cash provided by financing activities 9,288,627 2,247,059
--------- ---------
Net increase in cash 3,265,135 83,996
Cash and cash equivalents, beginning of year 134,378 50,382
--------- ---------
Cash and cash equivalents, end of year $ 3,399,513 $ 134,378
=========== =========
SEE ACCOMPANYING NOTES.
</TABLE>
F-6
<PAGE>
Medical Asset Management, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 1996
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Medical Asset Management, Inc. (the Company or MAM), a Delaware corporation, is
a physician practice management company (PPM) that develops contractual
affiliations with physician practices and provides for management by the Company
and clinical autonomy for the physicians. Through its subsidiary, Healthcare
Professional Management, Inc. (HPM), the Company offers a full array of
management services to affiliated physicians and other independent health care
entities under long-term service contracts as a management service organization
(MSO). At December 31, 1996 and 1995, the Company has management service
contracts with 26 physician practices and 19 physician practices, respectively.
2. OPERATIONS AND LIQUIDITY
The Company's financial statements for the year ended December 31, 1996 have
been prepared on a going concern basis which contemplates the realization of
assets and the settlement of liabilities and commitments in the normal course of
business. MAM has experienced losses from operations and negative cash flows
from operating activities for the years ended December 31, 1996 and 1995.
Significant contributing factors to the loss in 1996 were lawsuit settlements,
related professional expenses and general and administrative expenses and the
rapid growth of the Company. In addition to the preceding factors, cash used in
operations in 1996 was primarily the result of the Company's decision to defer
the timely collection of management fees to support the growth of practices
under management agreements. MAM has funded the loss from operations and cash
flow shortfalls with private placement stock offerings and third party credit
facilities which are secured by $1,264,351 of the Company's certificates of
deposit at December 31, 1996. The Company's decision during 1996, which
continued into 1997 to reinvest funds in medical practices that are already
owned, and fund acquisitions of additional medical practices along with cash
required to meet debt obligations and fund operations has significantly reduced
the amount of cash available to the Company subsequent to December 31, 1996. As
a result, the Company will be required to seek additional financing from banks,
institutional investors and other sources and to reduce or contain costs in
order to fund operations and meet obligations and future commitments.
Management recognizes that the Company must generate additional resources and
reduce operating expenses. To address these future cash requirements,
management's plans include, among other things:
F-7
<PAGE>
2. OPERATIONS AND LIQUIDITY (CONTINUED)
* Securing additional financing to cover anticipated cash requirements. As
discussed in Note 15, the Company has obtained a $1,250,000 accounts
receivable factoring line of credit.
* Reducing advances made to physicians.
* Reducing compensation expense included in general and administrative expenses
as a result of headcount and salary reductions.
* Reducing executive compensation in 1997 and deferral of 1998 senior
management compensation, if necessary.
* Completing refinancings of Company-owned medical buildings and equipment.
* Curtailing acquisition activity until cash resources are available and
reducing associated travel and entertainment expenditures.
In addition, the Company intends to control discretionary expenditures and to
seek additional bank financing or funds through private placements.
There can be no assurance that additional financing, other sources of funds or
the cost reductions as described in the preceding paragraphs will be achieved.
If these financings, other sources of funds or cost reductions are not achieved,
the Company's liquidity would be materially adversely affected.
These matters raise substantial doubt about the Company's ability to continue as
a going concern. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
outcome of these uncertainties.
3. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Medical Asset
Management, Inc. and its wholly owned subsidiary, Healthcare Professional
Management, Inc. All significant intercompany balances and transactions are
eliminated in consolidation.
F-8
<PAGE>
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reporting in the financial statements and accompanying notes. Actual
results could differ from those estimates.
RESTATEMENT
During 1996, management restated the 1995 consolidated financial statements for
certain corrections of accounting principles and misapplications of facts that
existed at the time the 1995 financial statements were prepared. The aggregate
amount of this restatement resulted in a reduction in earnings from the
previously reported net income for the year ended December 31, 1995 of $577,913,
to a net loss of $1,533,242. The following schedule summarizes the effect on net
income (loss), net income (loss) per share and stockholders' equity as a result
of restating the companies' 1995 financial statements from that previously
reported as restated in November 1996.
<TABLE>
<CAPTION>
NET INCOME
NET INCOME (LOSS) PER STOCKHOLDERS'
(LOSS) SHARE EQUITY
-----------------------------------------
<S> <C> <C> <C>
1995:
As previously reported $ 577,913 $ .05 $6,657,582
Adjustment (2,111,155) (.20) 674,749
---------- ---- -------
As restated $(1,533,242) $(.15) $7,332,331
========== ===== ==========
</TABLE>
F-9
<PAGE>
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESTATEMENT (CONTINUED)
The corrections also required restatement of and adjustments to the previously
reported 1996 quarterly financial information as follows (unaudited):
<TABLE>
<CAPTION>
NET INCOME
NET INCOME (LOSS) PER STOCKHOLDERS'
(LOSS) SHARE EQUITY
-----------------------------------------
<S> <C> <C> <C>
1996:
Three months ended March 31
As previously reported $ 372,564 $ .03 $ 9,096,695
Adjustment (1,571,482) (.14) 2,293,646
---------- ---- ---------
As restated $(1,198,918) $(.11) $11,390,341
=========== ===== ===========
Three months ended June 30
As previously reported $ 385,663 $ .03 $19,101,595
Adjustment (1,092,677) (.09) 1,653,115
---------- ---- ---------
As restated $ (707,014) $(.06) $20,754,710
=========== ===== ===========
Three months ended September 30
As previously reported $ 717,400 $ .06 $26,226,200
Adjustment (1,552,962) (.12) (5,007,153)
---------- ---- ----------
As restated $ (835,562) $(.06) $21,219,047
=========== ===== ===========
</TABLE>
CASH EQUIVALENTS AND RESTRICTED CASH
At December 31, 1996, the Company had restricted cash of $1,264,253 (certificate
of deposits at 4.5%) as a compensating balance for a $1,264,253 line of credit
at a bank (at 4.9%) (see Note 6). Cash equivalents consist of certificate of
deposits with maturities of six months or less.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and depreciated using the straight-line
method over the estimated useful lives of the assets, or the underlying leases.
Estimated useful lives range from 3 to 5 years for equipment, 3 to 7 years for
leasehold improvements and 15 to 25 years for buildings and improvements based
upon the type and condition of assets. Maintenance, repairs
F-10
<PAGE>
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT (CONTINUED)
and minor renewals are charged to operations as incurred. Major replacements or
betterments are capitalized. When properties are retired or otherwise disposed,
the related cost and accumulated depreciation are eliminated from the respective
accounts and any gain or loss on disposition is reflected in operations.
Depreciation expense which includes amortization of assets under capital lease
was $382,621 for the year ended December 31, 1996 and $148,000 for the year
ended December 31, 1995.
INTANGIBLE AND OTHER ASSETS
ACQUIRED MANAGEMENT CONTRACTS
Acquired management contracts consist of the Company's exclusive right to manage
the business side of a physician or physician group's practice generally over a
25-year period. These costs are established based upon historic revenues of the
acquired clinics and are amortized on a straight-line basis over the initial
terms of the contracts. In the event of termination of a management contract,
the related physician or physician group is required to repurchase all clinic
assets, including intangible assets, generally at the current book value, which
includes the return of both Company stock issued and rights for to-be-issued
stock.
EXCESS OF COST OF ACQUIRED ASSETS OVER FAIR VALUE
The excess of the cost of acquired assets over fair value (goodwill) is
amortized using the straight-line method over twenty-five years.
OTHER ASSETS
Other assets include Occu-med franchise fees and computer software licenses. The
Occu-med franchise fees were written off during 1996 (see discussion below). The
computer software licenses, which were acquired for installation of physician
practice software in clinics owned or managed by the Company, will be amortized
over five years beginning when the underlying systems to utilize each license
are installed and operational. The term of the license agreement is fifteen
years. As of December 31, 1996, there were no systems installed or operational.
F-11
<PAGE>
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLE AND OTHER ASSETS (CONTINUED)
AMORTIZATION AND RECOVERABILITY
The Company periodically reviews its intangible and other assets to assess
recoverability, and impairments are recognized in operations if a permanent
impairment was determined to have occurred. An impairment is recognized when
undiscounted cash flows are insufficient to cover the unamortized cost of these
intangibles. The amount of the impairment, if any, is measured based on
discounted future operating cash flows using a discount rate reflecting the
Company's average cost of funds. The recoverability of intangible assets will be
adversely affected if future operating cash flows are not sufficient to cover
the related costs. During 1996, management determined that the Occu-med
franchises were not recoverable. Accordingly, the remaining recorded value of
$902,000 or $.07 per share was written off. This amount is included in net loss
on settlements and terminations in the consolidated statement of operations.
Amortization of intangibles amounted to $604,946 and $86,000 for the years ended
December 31, 1996 and 1995, respectively.
COMMON STOCK TO BE ISSUED
As part of entering into long-term management contracts with medical practices
as described above, the Company has made nonforfeitable commitments to issue
shares of common stock at specified future dates for no further consideration.
Common stock to be issued is shown as a separate component of stockholders'
equity and the amounts, upon issuance of the shares, will be reclassified to par
value and additional paid-in capital.
Additionally, contingent shares to be issued as remuneration related to services
provided by physicians for acquisitions in 1994 are included in common stock to
be issued. Unearned remuneration related to the contingent stock has been
recorded as a separate component of equity equal to the estimated fair market
value of the stock on the effective date of the acquisition.
Remuneration expense is recorded at the estimated fair value of the stock on the
date the performance criteria are met. Upon issuance of the contingent shares,
their fair value is reclassified to par value and additional paid-in capital.
F-12
<PAGE>
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
The Company's net revenues are the estimated realizable amounts earned from
billings to patients, third party payors and others for services rendered at the
Company's affiliated clinics and practices, reduced by contractual adjustments
and the contractual allocation of revenues to the medical provider-owner(s) of
the clinics and practices. Contractual adjustments arise due to the terms of
certain reimbursement and managed care contracts. These adjustments represent
the difference between charges at established rates and estimated recoverable
amounts and are recognized in the period the services are rendered. Any
differences between estimated contractual adjustments and actual final
settlements under reimbursement contracts are reported as contractual
adjustments in the year final settlements are determined.
INCOME TAXES
Income taxes are provided for using the liability method of accounting in
accordance with Statement of Financial Accounting Standards No. 109 (SFAS No.
109), "Accounting for Income Taxes." Deferred tax assets and liabilities are
recognized for future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax basis.
NET LOSS PER SHARE
The computation of fully diluted net loss per share was antidilutive in each of
the periods presented. Net loss per share is computed based upon the weighted
average number of shares of common stock outstanding during the periods. Common
stock equivalents consisting of convertible preferred stock, all commitments to
issue common stock at specified future dates based upon the mere passage of time
and contingent shares for which conditions for their issuance are currently
being met are not included in the primary earnings per share calculation because
the effect would be antidilutive.
F-13
<PAGE>
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 (SFAS No. 128), "Earnings Per Share,"
which is required to be adopted by the Company for the year ended December 31,
1997. The provisions of SFAS No. 128 will be adopted in the 1997 consolidated
financial statements. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating earnings per share, the
dilutive effect of convertible preferred stock will be excluded for "basic
earnings per share" and only included in "diluted earnings per share." Further,
contingently issuable shares will be included in basic earnings per share only
if all the necessary conditions have been satisfied by the end of the period and
it is only a matter of time before they are issued. The impact of SFAS No. 128
on the calculation of earnings per share for the year ended December 31, 1997
has not been determined.
4. ACQUISITIONS
On December 29, 1995, the Company exchanged 433,332 shares of its common stock
valued at $1,168,288 for 100% of the outstanding common stock of Healthcare
Professional Management, Inc. This transaction was accounted for as a pooling of
interests.
The following represents the results of operations of Healthcare Professional
Management, Inc. for the years ended December 31, 1996 and 1995 that are
included in the combined net income of the Company.
1996 1995
-------------------------
Revenues $1,319,000 $1,090,000
Net loss (50,000) (17,000)
On December 31, 1995, the Company entered into a Clinic Management Agreement
with OB-GYN Associates. On April 1, 1996 (the effective date of the acquisition
for accounting purposes), the Company entered into an Asset Purchase Agreement
with OB-GYN Associates. In May 1996, the Asset Purchase Agreement was finalized
with the Company providing for the issuance of 730,000 shares of its common
stock and the payment of $1,806,000 in cash (including acquisition costs) for a
total acquisition price of $4,831,000. As of December 31,
F-14
<PAGE>
4. ACQUISITIONS (CONTINUED)
1996, the Company has issued 292,000 shares of its common stock as part of this
acquisition. The remaining 438,000 shares are to be issued at 146,000 shares
each December through 1999. The 25-year management agreement provides for a
contractual allocation to OB-GYN Associates of 54% of net collected revenues. If
after business costs are covered, the collected revenue is insufficient to pay
the Company its minimum guaranteed management fee of 10%, the Company is
authorized to reduce the amount of revenue paid to affiliated physicians to the
extent necessary to pay the minimum guaranteed fee.
This acquisition has been accounted for as a purchase. The accounts receivable
acquired were valued at net collectible value based upon an analysis by the
Company. The estimated fair value of assets is summarized as follows:
<TABLE>
<CAPTION>
<S> <C>
Accounts receivable, net $1,011,000
Property and equipment 305,000
Management service contract 3,036,000
Excess of cost of acquired assets over fair value 429,000
Other 50,000
------------
4,831,000
Less value of stock issued and to be issued 3,025,000
============
Cash purchase price $1,806,000
============
</TABLE>
For the year ended December 31, 1995, the financial statements of the Company do
not include any financial results of OB-GYN Associates.
Unaudited pro forma results of operations for 1996 and 1995, assuming the
acquisition of OB-GYN Associates was consummated January 1, 1995, are as
follows:
<TABLE>
<CAPTION>
1996 1995
------------------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net revenue $11,143,508 $9,462,235
Net loss (5,601,135) (1,241,277)
Net loss per share (.43) (.12)
</TABLE>
In addition to the Healthcare Professional Management, Inc. and OB-GYN
Associates transactions, the Company entered into acquisition and long-term
management service agreements with 13 medical groups in 1996.
F-15
<PAGE>
4. ACQUISITIONS (CONTINUED)
Total acquisition consideration was comprised of the following:
<TABLE>
<CAPTION>
<S> <C>
Cash and transaction costs $ 846,934
Notes payable 1,511,888
Common stock issued and to be issued 5,727,393
Liabilities assumed 16,142
============
Total costs $8,102,357
============
</TABLE>
These agreements provided for the Company to acquire all the nonmedical assets
and properties which the physicians own in connection with the conduct of the
physicians' medical practice. The assets included (i) all of the physicians'
accounts receivable as reflected on the physicians' books and records, on the
effective date of the agreement and at all times during the terms of the
agreement, all accounts receivable acquired are reflected on the Company's
balance sheet with a corresponding allowance account for those accounts
considered possibly uncollectible, (ii) all administrative (i.e., nonmedical)
aspects of every kind and character pertaining to the running of the clinic, and
(iii) all other assets as described in the agreement. Total consideration paid
for the medical groups to enter into long-term management service agreements and
for the nonmedical assets described above may include cash, the issuance of
common stock, the estimated value of nonforfeitable commitments by the Company
to issue common stock at future dates for no additional consideration and
short-term and subordinated notes. The Company has accounted for these business
acquisitions as purchases. The purchase prices were allocated to assets acquired
based upon their fair market value at the date of the agreement.
The Company has the legal right to collect patient accounts receivable and,
therefore, recognizes these amounts in the financial statements. The Company is
liable for certain operating expenses of the practices and, therefore, records
them as operating expenses. Under the majority of these agreements, the Company
is to receive a minimum management fee of ten percent (10%) up to a maximum of
thirty percent (30%) of net billings of the practice as a management fee. The
Company records the management fees earned as net revenues. Additionally, the
Company records a receivable for funds advanced to practices to pay practice
operating expenses under the terms of the management services agreements.
Management of the Company evaluates collectibility of the management fee
receivable on an ongoing basis and records collectibility reserves if deemed
necessary. The Company is also obligated to pay a percentage, if available after
collection of minimum management fees, of net billings to the physicians, and
records such amounts as a reduction of revenues on its consolidated statements
of operations with corresponding liability due to physician groups for amounts
not yet collected. At December 31, 1996 and 1995, advances to and receivables
from physician groups exceeded amounts relating to the liability for the
physicians' portion of the uncollected net billings.
F-16
<PAGE>
4. ACQUISITIONS (CONTINUED)
In addition to the acquisitions described above, the Company entered into two
management service agreements with a total of 40 physicians in 1996.
The Company offers affiliated physicians who enter into asset purchase and
management agreements with the Company, the option to repurchase the tangible
assets and the management agreement acquired by the Company during the first
four years of each agreement. The repurchase price is the return of all
consideration paid by the Company and repayment to the Company of all money
invested or advanced to the practice. In the event of a repurchase, the medical
practice forfeits all management fees earned by the Company as of the date of
the repurchase and not paid. The accounts receivable of the medical practice are
owned or assigned to the Company as of the date of the repurchase. In the event
of a repurchase, the practice is not bound by any covenant not to compete.
After the first four years of each agreement, a termination provision is
offered. The termination provision requires the practice to pay the Company a
negotiated amount of cash for liquidated damages, or obligates the medical
providers to abide by a covenant not to compete. During 1996, certain practices
were repurchased or terminated which resulted in $152,565 of income which is
included in net loss on litigation settlements and clinic terminations within
the consolidated statement of operations.
For transactions completed through December 31, 1996, shares of common stock
that the Company is committed to issue are 693,449 in 1997, 592,783 in 1998,
544,076 in 1999, and 157,763 in 2000. The accompanying financial statements
include the results of operations derived from the asset purchase and management
services agreements from their respective effective dates. The following
unaudited pro forma information presents the results of operations of the
Company as of December 31, 1996 as if the 1996 transactions had been consummated
on January 1, 1996 and for the year ended December 31, 1995 as if the 1996 and
1995 transactions were consummated on January 1, 1995. Such information is based
on the historical financial information of the medical groups and does not
include operational or other changes which might have been effected pursuant to
the Company's management of the nonmedical aspects of such groups.
F-17
<PAGE>
4. ACQUISITIONS (CONTINUED)
The unaudited pro forma information presented below is for illustrative
information only and is not necessarily indicative of results which would have
been achieved or results which may be achieved in the future:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Revenue $12,608,758 $14,833,235
Net loss (5,516,496) (1,030,025)
Net loss per share (.42) (.10)
</TABLE>
5. PROFIT SHARING PLAN
During 1996, the Company implemented a 401(k) profit sharing plan (the Plan).
Substantially all employees are eligible to participate in the Plan once they
have reached the age of 21 and completed one year of service with the Company,
as defined. Participants may contribute a percentage of their compensation to
the Plan, but not in excess of the maximum allowed by law. The Plan also
provides for matching and other additional contributions by the Company at its
discretion. No discretionary contributions were made by the Company in 1996.
6. DEBT
RELATED PARTY DEBT
Related party debt in the amount of $9,830 and $213,361 at December 31, 1996 and
1995, respectively, consists of demand notes payable including interest at 8% to
certain officers of the Company.
LINE OF CREDIT AND NOTES PAYABLE
At December 31, 1996, the Company has $2.5 million available under a line of
credit with a bank. The amount outstanding under the line was $1,264,351 at
December 31, 1996 at 4.9%. Upon maturity on May 30, 1997, this note was extended
to May 29, 1998 at 6.72%. Amounts are available under this line only to the
extent the Company has certificates of deposit to secure the balance (see Note
2). At December 31, 1996, $1,235,649 remained available for use under the line.
On September 3, 1997, all amounts outstanding under the line were repaid.
F-18
<PAGE>
6. DEBT (CONTINUED)
LINE OF CREDIT AND NOTES PAYABLE (CONTINUED)
At December 31, 1996, the Company had four notes payable totaling $301,498 due
upon demand including interest at 10%. On July 21, 1997, the total amount due
under these notes on that date of $317,636 was forgiven. This forgiveness will
be recognized in the Company's financial statements in the quarter ended
September 30, 1997. The Company also has $141,020 of demand notes payable at
interest rates ranging from 8% to 10% due in 1997.
At December 31, 1995, the Company had $936,766 of demand notes at interest rates
ranging from 8% to 10%. In August 1996, $263,193 of the 1995 balance plus
$12,260 of additional interest accrued in 1996 was converted into 47,565 shares
of common stock. Additionally, $515,875 of the 1995 balance was forgiven in
conjunction with the termination of certain management agreements in 1996 (see
Note 3).
LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
-----------------------
<S> <C> <C>
Notes payable to various individuals in conjunction
with asset acquisitions, interest at 10%, maturing
on various dates in 1996 and 1997, with all unpaid
principal and accrued interest due at maturity date $1,511,190 $391,606
Mortgage payable to a bank, collateralized by a
building, with a net book value of $510,000 interest 300,513 -
at 10%, with monthly payments of $3,270 to 2011
Unsecured note payable to a finance company with
interest at 7.9%, and monthly payments of $15,550 to 500,000 -
1999
Note payable to a computer software vendor, interest
at 10%, $600,000 due in 1998, remainder in 1999,
collateralized by software licenses with a net book 737,500 -
value of $1,237,604
Capital lease obligations, varying interest rates not
exceeding 26.5%, with various due dates through 2001 534,734 175,241
and collateralized by equipment
Other 110,350 37,898
- ----- ------- ------
3,694,287 604,745
Less current portion 1,393,399 21,898
--------- ------
$2,300,888 $582,847
========== ========
</TABLE>
F-19
<PAGE>
6. DEBT (CONTINUED)
LONG-TERM DEBT (CONTINUED)
Maturities of long-term debt, including capital lease obligations, as of
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $1,393,399
1998 1,526,000
1999 426,500
2000 96,000
2001 41,000
Thereafter 211,388
---------
$3,694,287
==========
</TABLE>
CONVERTIBLE SUBORDINATED DEBT
During 1995, the Company issued $762,000 in Series B Convertible Redeemable
Secured Subordinated Debentures (convertible debentures) which are convertible
into common stock at $5 per share. Principal and accrued interest at December
31, 1995 was $808,095. During 1996, the holders of $718,000 of the convertible
debentures converted the convertible debentures into 143,600 shares of common
stock. The remaining $44,000 of convertible debentures were redeemed in cash.
In 1995, in conjunction with an acquisition, the Company entered into an
agreement to issue to a physician 8% convertible debentures not to exceed
$450,000, which will mature and be due for payment to the physician in 1999.
These debentures are convertible into common stock upon maturity at a rate of
80% of the then current market price at the time of maturity but not less than
$5 per share. At December 31, 1996 and 1995, $125,438 and $54,810, respectively
of debentures (including interest) were outstanding.
7. EQUITY
PREFERRED STOCK
In 1994, the Company issued 3,000,000 shares of Class A preferred stock which
are convertible into shares of common stock. In July 1996, 750,000 shares of
common stock were issued to the original holder of the Class A preferred stock
pursuant to the agreed conversion terms, leaving a balance of 2,250,000 shares
of Class A preferred stock. In order to conform the Company's
F-20
<PAGE>
7. EQUITY (CONTINUED)
PREFERRED STOCK (CONTINUED)
Certificate of Incorporation to reflect the 1994 agreement to issue shares of
Class A preferred stock, on September 19, 1997 the Company filed a designation
of terms with respect to 2,250,000 shares of Class A preferred stock.
The Company's preferred shares (1) carry no voting rights; (2) may be converted
into common shares on a one-to-one basis subject to the limitation that no more
than 25% may be converted into common shares in any one year and at no time may
the holders of the Class A preferred hold directly or indirectly 4.9% of the
common shares outstanding; (3) the shares carry no dividend right, except in an
amount equal to, on a per share basis, amounts declared paid or set aside for
common stock; and (4) the shares have no redemption rights.
COMMON STOCK
In June 1996, the Company completed a private placement for 2,000,000 shares of
common stock at $4 per share. The proceeds from the private placement were
reduced by $835,000 in underwriter fees and expenses. In conjunction with the
private placement, warrants to purchase 140,000 shares of the Company's common
stock were issued to the underwriters for a five-year period ending May 31, 2001
at an exercise price of $7.05 per share. No warrants were exercised during 1996.
In January 1996, the Company issued for cash 200,000 shares of common stock to
certain individuals at $1 per share. In December 1996, 18,000 shares of common
stock were issued for cash at $3.50 per share. The Company issued an additional
283,174 shares ranging in price from $2.50 to $3.50 per share for a total of
$947,602 in private placement transactions during 1996.
In 1996, 77,918 shares were issued as compensation to physicians per the terms
of their respective asset purchase agreements and certain individuals per
commission agreements valued at $343,423. In addition, $144,864 of legal fees
were paid through the issuance of 43,399 shares of common stock. The Company
also entered into an agreement with a physician in 1996 whereby the physician
has the right, but not the obligation, to purchase MAM stock at $3 per share
limited by percentages ranging from 1% to 5% of his clinic's revenue in return
for MAM being given the opportunity to take over the physician's practice on
retirement. No shares were purchased during 1996 under this agreement.
F-21
<PAGE>
7. EQUITY (CONTINUED)
COMMON STOCK (CONTINUED)
In years prior to 1995, the Company entered into arrangements whereby the
issuance of common stock at future dates was contingent upon meeting certain
revenue targets. These amounts are included in unearned remuneration and are
charged to compensation expense at the fair value of the stock on the date the
revenue targets are met.
During 1996, it was determined that certain historical stock records of the
Company were inaccurate or incomplete. Management believes that any inaccuracy
will not have a material impact on shares outstanding at December 31, 1996.
8. REVENUE
The following amounts were included in the determination of the Company's
revenues:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995
-------------------------
<S> <C> <C>
Medical service revenue $21,774,648 $11,985,696
Healthcare Professional Management, Inc. 1,319,185 1,090,304
--------- ---------
23,093,833 13,076,000
Less: Provisions for doubtful accounts and
contractual adjustments 8,160,341 2,346,765
Amounts retained by medical groups 4,554,984 4,329,000
--------- ---------
$10,378,508 $6,400,235
=========== ==========
</TABLE>
The Company's management services agreements with the physician practices
specify the percentage of the net collected revenues to be paid to the
affiliated physicians and the percentage to be received by the Company. The net
revenue distributed to the physician pays for professional expenses, such as
physicians' and nurse practitioners' salaries and benefits and professional
malpractice insurance. The net revenue amounts received by the Company are
applied to pay the Company's management fee and the practice's business
expenses, such as salaries and benefits for receptionists and medical
secretaries, billing and collection expense, office supplies, real property
lease payments, property insurance expense and an integrated information system.
If, after business costs are covered, the collected revenue is insufficient to
pay the Company its minimum guaranteed management fee, the Company is authorized
to reduce the amount of revenue paid to the affiliated physicians to the extent
necessary to pay the
F-22
<PAGE>
8. REVENUE (CONTINUED)
minimum guaranteed management fee. On average, since 1994 the Company is
entitled to management fees between 5% and 10% of annual medical service
revenues per the terms of the various management agreements.
For the years ended December 31, 1996 and 1995, the medical groups derived
approximately 35% and 30% of their medical service revenue from services
provided under Medicare and Medicaid programs, respectively, and approximately
30% and 30% from contractual fee-for-service arrangements with numerous payors
and managed care programs, respectively, none of which individually aggregated
more than 10% of medical service revenue. The remaining 35% and 40% of medical
service revenue was derived from various fee-for-service payors. Changes in the
medical group's payor mix can affect the Company's revenue.
Accounts receivable principally represent receivables from patients and third
parties for medical services provided by physician groups. Such amounts are
recorded net of contractual allowances and estimated bad debts. Accounts
receivable are a function of net physician practice revenue rather than net
revenue of the Company. Receivables from the Medicare and State Medicaid
programs are considered to have minimal credit risk and no other payor comprised
more than 10% of accounts receivable at December 31, 1996 and 1995.
9. NET LOSS ON LITIGATION SETTLEMENTS AND CLINIC TERMINATIONS
Net loss on settlements, terminations and disposals for the year ended December
31, 1996 is comprised of the following:
<TABLE>
<CAPTION>
INCOME
(EXPENSE)
-------------
<S> <C>
Lawsuit settlements $(1,709,990)
Clinic terminations (NOTE 4) 152,565
Franchise fee write-off (NOTE 3) (902,000)
Other 5,332
==========
$(2,454,093)
===========
</TABLE>
At December 31, 1996, the Company has accrued within litigation settlements
$431,250 relating to two lawsuits with physicians anticipated to settle in 1997.
Approximately $180,000 of the total will be paid through the issuance of at
least 29,000 shares of the Company's common stock.
F-23
<PAGE>
9. NET LOSS ON LITIGATION SETTLEMENTS AND CLINIC TERMINATIONS (CONTINUED)
Additionally, in January 1997, the Company settled a lawsuit regarding the value
of an acquisition of a health facility. The lawsuit was settled in two parts.
The first part requires the issuance of 49,999 shares of the Company's common
stock in three quarterly installments of 12,500 and one installment of 12,499
shares beginning March 25, 1997 and for each quarter thereafter. At December 31,
1996, $312,493 has been accrued related to this portion of the lawsuit as the
Company has guaranteed the ultimate receipt of $6.25 per share. The second
portion of the lawsuit settlement requires the payment of $187,500 in cash,
$127,000 in common stock and the assumption of $274,361 in debt and payroll
taxes. The total value of the second portion of the settlement of $588,861 has
been included in accrued litigation settlements at December 31, 1996. In
conjunction with these settlements, the Company has fully reserved a related
advance of $93,841.
In addition to the above settlements, two lawsuits involving workers'
compensation and one real estate lawsuit were settled for a total of $377,386. A
portion of this amount ($257,386) has been included as accrued litigation
settlements. The remaining $120,000 has been included in paid-in capital as a
result of the agreed upon transfer of 40,000 shares owned by an officer of the
Company in partial settlement of one of the lawsuits.
10. INCOME TAXES
A reconciliation of U.S. income tax computed at the statutory rate and actual
expense is as follows for the two years ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
---------------------------
<S> <C> <C>
Statutory rate 34% 34%
Nondeductible items - (2)
State tax assets of federal benefit 6 6
Increase in valuation allowance (40) (38)
===========================
--% --%
===========================
</TABLE>
F-24
<PAGE>
10. INCOME TAXES (CONTINUED)
The components of the net deferred tax assets and liabilities at December 31 are
as follows:
<TABLE>
<CAPTION>
1996 1995
---------------------------
<S> <C> <C>
Deferred tax assets:
Receivables $ 454,000 $ 631,000
Accrued expenses 529,000 -
Federal net operating losses 2,554,000 1,150,000
State net operating losses 470,000 202,000
------- -------
4,007,000 1,983,000
Valuation allowance (3,041,000) (977,000)
---------- --------
Total deferred tax assets 966,000 1,006,000
Deferred tax liabilities:
Method of accounting 923,000 968,000
Property, plant, and equipment 43,000 38,000
Intangibles 3,274,000 1,092,000
--------- ---------
Total deferred tax liabilities 4,240,000 2,098,000
--------- ---------
Net deferred tax liabilities $3,274,000 $1,092,000
========== ==========
</TABLE>
The Company had net operating losses for federal and state income tax purposes
at December 31, 1996 and 1995 of approximately $7,500,000 and $3,400,000,
respectively. The net operating losses can be carried forward and used to offset
the Company's future taxable income. The federal net operating loss
carryforwards will expire beginning in the year 2009.
Recognition of a deferred tax asset is allowed if future realization is
more-likely-than-not. A valuation allowance has been provided for the net
operating losses and certain temporary differences that based on management's
belief are not more-likely-than-not to be realized. The valuation allowance
increased by $2,064,000, due in significant part to reserving the tax benefit
attributable to the net operating loss generated in the current period.
11. FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of cash, certificates of deposit and accounts
receivable. The Company places its cash and certificates of deposit with
high-credit quality financial institutions. At times, such investments may be in
excess of the FDIC insurance limits.
F-25
<PAGE>
11. FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
The Company has a concentration of credit risk with certain governmental
agencies and insurance companies for the payment of patient charges. The net
amount due from the governmental agencies approximates 24% of the net
receivables outstanding. In addition, the Company is due certain amounts from
various physician-owned professional corporations. The net amount due from these
sources amounted to approximately $2,660,000 at December 31, 1996. The Company
may be able to offset certain amounts due from the physician-owned professional
corporations with amounts due to the physician groups.
An allowance for doubtful accounts is maintained at a level considered adequate
to provide for possible future losses.
The carrying amounts of cash, restricted cash, accounts receivable, line of
credit and notes payable, accounts payable and accrued expenses approximate fair
value because of the short maturity of these items.
It is not practicable to estimate the fair value of the Series B Convertible
Redeemable Secured Subordinated Debentures or the 8% convertible debentures,
because each of these securities contains unique terms, conditions and
restrictions.
12. COMMITMENTS AND CONTINGENCIES
The Company leases office facilities under operating leases which expire at
various dates through the year 2005. In addition, the Company pays, on behalf of
the clinics it manages, operating leases for office facilities. It has not
assumed and does not intend to assume these obligations, but rather pays the
leases under the terms of its management agreement with the medical practice.
The accompanying consolidated statements of operations include expenses from
operating leases of $1,418,173 and $971,890 for the years ended December 31,
1996 and 1995, respectively. Future minimum lease payments due under
noncancelable operating leases as of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
MANAGED
COMPANY CLINIC
LEASES LEASES TOTAL
------------------------------------
<S> <C> <C> <C>
1997 $ 415,000 $ 747,000 $ 1,162,000
1998 447,000 683,000 1,130,000
1999 420,000 495,000 915,000
2000 419,000 323,000 742,000
2001 352,000 261,000 613,000
Thereafter 182,000 1,098,000 1,280,000
------- --------- ---------
$2,235,000 $3,607,000 $5,842,000
========== ========== ==========
</TABLE>
F-26
<PAGE>
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company entered into a corporate advisory agreement in 1995 under which the
advisory firm agreed to perform certain services for MAM in return for fees and
stock options of MAM. In response to a lawsuit filed by the Company against the
advisory firm alleging breach of fiduciary duty, breach of oral agreement and
misappropriation of trade secrets, the defendant filed a counterclaim seeking
specific performance of the advisory agreement or, in the alternative, damages.
The litigation is still in preliminary stages and, therefore, the outcome cannot
be determined. However, the Company's maximum exposure should the advisory firm
prevail would be the grant of a stock option with respect to 375,000 shares of
MAM common stock at an exercise price equivalent to a 40 to 50 percent discount
from fair value plus attorney fees.
The Company is presently involved in various other lawsuits occurring in the
course of its business of acquiring physician practices and medical related
entities. The above referenced claims are either in discovery or the early
phases of arbitration; however, management believes the amounts accrued (Note 9)
are adequate and the ultimate outcome of these claims is not expected to be
material to operations or the Company's financial position.
13. RELATED PARTIES
The management services agreement activity between the Company and the
affiliated physician groups is reflected in accounts receivable affiliated
physicians on the consolidated balance sheet.
The Company leases a portion of its medical office space at rates which the
Company believes approximate fair market value, from entities affiliated with
certain of the stockholders of physician groups affiliated with the Company.
Payments under these leases were approximately $187,000 and $146,000 in 1996 and
1995, respectively.
F-27
<PAGE>
14. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosures of cash flow information for the years ended December
31, 1996 and 1995 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
-------------------------
<S> <C> <C>
Cash paid for interest and income taxes:
Interest $ 109,214 $ 292,000
Noncash investing and financing activities:
Assets acquired by capital lease 519,993 86,000
Assets acquired with stock issuance, assumption
of debt and other liabilities 10,702,815 4,348,000
Stock issued for debt - 828,000
Debt converted to stock 993,453 -
</TABLE>
15. SUBSEQUENT EVENTS
The Company has completed the acquisition of or entered into service agreements
with ten clinics subsequent to December 31, 1996. As consideration for these
acquisitions, the Company will pay approximately $1,250,000 in cash, issue
approximately $2,000,000 in notes payable and 576,311 shares of common stock
over the next five years valued at approximately $2,400,000.
On October 15, 1997, the Company entered into a $1,250,000 accounts receivable
factoring line of credit under which the Company can receive advances equal to
40% of accounts receivable outstanding less than 90 days. A factoring commission
of 1% for each 30-day period in addition to interest at the prime rate (as
published in the WALL STREET JOURNAL) plus 2% will be charged on outstanding
dollars. A reserve of 5% of the total outstanding invoices is also required.
This indefinite facility is guaranteed by certain officers of the corporation.
In September 1997, the Company signed a nonbinding letter of intent with
VenturCor, Inc., a wholly owned subsidiary of ServantCor, an Illinois
not-for-profit integrated health care delivery system, to form an Illinois
statewide physician practice management company. The joint venture company would
be owned 51% by VenturCor and 49% by the Company and would offer administrative
and managed care contracting services, purchase fixed assets from physician
practices and enter into 25 to 40 year management contracts with Illinois-based
physicians. It is contemplated that the Company would fund its capital
contribution through a combination of cash and shares of the Company's common
stock while VenturCor would fund its capital contribution with cash. In
addition, the Company and VenturCor are discussing a possible
F-28
<PAGE>
15. SUBSEQUENT EVENTS (CONTINUED)
issuance of convertible debentures by the Company to VenturCor. No assurance can
be given that a mutually acceptable joint venture will be formed or that
VenturCor will make a direct investment in the Company.
F-29
<PAGE>
Medical Asset Management, Inc.
Consolidated Financial Statements
YEARS ENDED DECEMBER 31, 1995 AND 1994
WITH REPORT OF INDEPENDENT AUDITORS
<PAGE>
Report of Independent Auditors
To the Board of Directors
and Stockholders of
Medical Asset Management, Inc.
Mesa, Arizona
We have audited the consolidated balance sheet of Medical Asset Management, Inc.
as of December 31, 1995 and the related consolidated statement of operations,
stockholders equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Medical Asset Management, Inc.
as of December 31,1995 and the results of its operations and cash flows for the
year then ended in conformity with generally accepted accounting principles.
As discussed in Note 1, the accompanying consolidated financial statements have
been restated for the correction of an error.
HARLAN AND BOETTGER
San Diego, California
May 1, 1996, except
for Notes 1 and 12 as to which
the date is September 19, 1997.
F-31
<PAGE>
<TABLE>
<CAPTION>
Medical Asset Management, Inc. and Subsidiaries
Consolidated Balance Sheets
DECEMBER 31
1995 1994
-----------------------------
(RESTATED)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 134,378 $ 50,382
Accounts receivable, less $1,580,820 and
$633,705 of allowance for doubtful 3,155,482 2,857,809
accounts
Affiliated physicians receivables 26,552 231,570
Other current assets 93,841 222,180
------ -------
Total current assets 3,410,253 3,361,941
Property and equipment, net 498,290 435,418
Intangible assets, net 7,911,755 3,185,765
Other assets 12,264 8,133
----------------------------
Total assets $11,832,562 $6,991,257
============================
</TABLE>
F-32
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31
1995 1994
-----------------------------
(RESTATED)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit and notes payable $ 936,766 $
Accounts payable 297,488 318,172
Accrued payroll 244,377 -
Accrued expenses 249,116 146,509
Related party debt 213,361 166,049
Due to Physician groups 1,535,298
Current portion of long-term liabilities 21,898 982,759
------ -------
Total current liabilities 1,963,006 3,148,787
Long-term debt:
Notes payable and
Capital lease obligations 582,847 7,132
Convertible subordinated debt 862,905 54,000
Deferred tax liability 1,091,473 -
Commitments and contingencies - -
------ -------
Total liabilities 4,500,231 3,209,919
--------- ---------
STOCKHOLDERS' EQUITY
Preferred stock (convertible) --$.001 par
value--10,000,000 shares authorized; Class
A--3,000,000 shares issued and outstanding
at December 31, 1995 and 1994 3,000 3,000
Common Stock--$.001 par value--50,000,000 shares
authorized, 10,912,772 and 9,451,486 issued and
outstanding at December 31, 1995 and 1994,
respectively 10,913 9,745
Additional paid-in capital 6,210,962 3,792,121
Common stock to be issued, 1,131,113 and 504,178
shares at December 31, 1995 and 1994,
respectively 5,979,026 3,025,615
Unearned remuneration (3,314,800) (3,025,615)
Retained earnings (1,556,770) (23,528)
---------- -------
Total stockholders' equity 7,332,331 3,781,338
---------- -------
Total liabilities and stockholders' equity $11,832,562 $6,991,257
=========== ==========
SEE ACCOMPANYING NOTES.
</TABLE>
F-33
<PAGE>
<TABLE>
<CAPTION>
Medical Asset Management, Inc. and Subsidiaries
Consolidated Statements of Operations
YEAR ENDED DECEMBER 31
1995 1994
-----------------------------
(RESTATED)
<S> <C> <C>
Net revenue $6,400,235 $2,573,319
---------- ----------
Operating expenses:
Clinic salaries, and benefits 3,041,648 860,847
Other clinic costs 2,136,745 528,922
Consulting fees 200,864 -
Depreciation and amortization 373,797 149,303
------- -------
Total operating expenses 5,753,054 1,539,072
--------- ---------
647,181 1,034,247
General and administrative expenses 1,840,991 1,283,068
--------- ---------
(1,193,810) (248,821)
Other income (expense):
Interest income - 3,000
Interest expense (291,657) (25,240)
Other (net) 2,880 169,630
--------- ---------
Total other income (expense) (288,777) 147,390
--------- ---------
(Loss) before income taxes (1,482,587) (101,431)
--------- ---------
Income tax 50,655 -
--------- ---------
Net income (loss) $(1,533,242) $ (101,431)
========== ==========
Net (loss) per common share $(.15) $ (.001)
========== ==========
Weighted average number of shares of common
outstanding 10,376,247 9,168,762
========== =========
SEE ACCOMPANYING NOTES.
</TABLE>
F-34
<PAGE>
<TABLE>
<CAPTION>
Medical Asset Management, Inc. and Subsidiaries
Consolidated Statement of Changes in Stockholders' Equity
COMMON STOCK PREFERRED STOCK
--------------------------------------------------- PAID-IN
SHARES AMOUNTS SHARES AMOUNTS CAPITAL
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993 9,133,332 $ 9,133 3,000,000 $ 3,000 $ 1,397,067
Issuance of common 21,400 21 -- -- 53,479
stock
Medical practice
transactions:
Stock issued 590,270 591 -- -- 2,341,575
Value of 504,178 shares
to be issued -- -- -- -- --
Net income (loss) -- -- -- -- --
-----------------------------------------------------------------------
Balance, December 31, 1994
as restated 9,745,002 $ 9,745 3,000,000 $ 3,000 $ 3,792,121
Issuance of common stock 189,000 189 -- -- 386,661
Medical practice
transactions:
Stock issued 418,861 419 -- -- 1,082,467
Value of 728,468
shares to be issued -- -- -- -- --
Issued shares of
common stock for
fixed assets 142,675 143 -- -- 105,546
Debt and payables
exchanged for
common stock 417,234 417 -- -- 828,167
Capital contributed -- -- -- 16,000 --
Net income (loss) -- -- -- -- --
-------------------------------------------------------------------------
Balance, December 31, 1995 10,912,772 $ 10,913 3,000,000 $ 3,000 $ 6,210,962
=========================================================================
================
TABLE CONTINUED
================
COMMON RETAINED
STOCK UNEARNED EARNINGS
TO BE ISSUED REMUNERATION (DEFICIT) TOTAL
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1993 $ -- $ -- $ 77,903 $ 1,487,103
Issuance of common stock -- -- -- 53,500
Medical practice
transactions:
Stock issued -- -- -- 2,342,166
Value of 504,178 shares
to be issued 3,025,615 (3,025,615) -- --
Net income (loss) -- -- (101,431) (101,431)
- -----------------------------------------------------------------------------------------------------------
Balance, December 31, 1994
as restated $ 3,025,615 $(3,025,615) $ (23,528) $ 3,781,338
Issuance of common stock -- -- -- 386,850
Medical practice
transactions:
Stock issued -- -- -- 1,082,886
Value of 728,468
shares to be issued 2,953,411 (289,157) -- 2,664,226
Issued shares of
common stock for
fixed assets -- -- -- 105,689
Debt and payables
exchanged for
common stock -- -- -- 828,584
Capital contributed -- -- 16,000
Net income (loss) -- -- (1,533,242) (1,553,242)
- ----------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 $ 5,979,026 $(3,314,800) $(1,556,770) $ 7,332,331
==========================================================================================================
SEE ACCOMPANYING NOTES.
</TABLE>
F-35
<PAGE>
Medical Asset Management, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1995 1994
-----------------------------
(RESTATED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(1,533,242) $ (101,431)
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 373,797 149,303
Deferred taxes 50,655 -
Changes in operating assets and
liabilities, net of effects of
acquisitions:
Accounts receivable (996,301) (1,781,777)
Affiliated physician fee receivable (62,289) (48,599)
Other current assets 128,339 40,500
Accounts payable and accruals 171,217 679,216
Other assets (4,131) -
------ --------
Net cash provided by (used in) operating
activities (1,871,955) (1,062,788)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of intangibles (86,400) -
Net cash used to fund acquisitions (5,316) (98,477)
Acquisition of property and equipment (199,392) (7,969)
-------- ------
Net cash used in investing activities (291,108) (106,446)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from debt issuances 623,027 1,567,980
Repayment of long-term debt (415,701) (493,061)
Issuance of convertible debt 808,905 -
Proceeds from issuances of common stock 1,230,828 53,500
--------- ------
Net cash (used in) provided by financing
activities 2,247,059 1,128,419
--------- ---------
Net increase (decrease) in cash 83,996 (40,815)
Cash, beginning of year 50,382 91,197
------ ------
Cash, end of year $134,378 $ 50,382
======== ===========
SEE ACCOMPANYING NOTES.
</TABLE>
F-36
<PAGE>
Medical Asset Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
DECEMBER 31, 1995
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Medical Asset Management, Inc. (Company), a Delaware corporation, is engaged in
the business of meeting the several urgent needs of practicing physicians and
exploiting emerging opportunities in the practice of medicine through business
management services. Its management services involve the acquisition of assets
of medical practices, which it enhances by increasing patient collections and
lowering costs through its management and marketing expertise and volume
purchasing power. At December 31, 1995, Medical Asset Management, Inc. has
management service agreements with 20 physician practices in four states.
In August 1994, the Company acquired 100% of the outstanding common stock of
Medical Asset Management, Inc. (MAM) in exchange for 6,960,000 shares of common
stock of the Company along with the right to issue 3,000,000 shares of the
Company's Class A Preferred Stock in exchange for the 1,176,581 shares of MAM's
Class A Preferred Stock and the 133,000 shares of MAM's Class B Preferred Stock.
This transaction was recorded as a recapitalization of MAM with MAM as the
acquirer for accounting purposes (reverse acquisition). As such, no revaluation
of net assets acquired was recorded.
Subsequent to this acquisition and pursuant to the approval of a majority of the
Company's common stockholders, the Company changed its name from Eagle High
Enterprises, Inc. to Medical Asset Management, Inc.
The following is a summary of the Company's significant accounting policies:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Medical Asset
Management, Inc., its wholly owned subsidiaries, Medical Asset Corporation,
Inc., and Healthcare Professional Management, Inc. (together "the Company"). All
significant intercompany balances and transactions are eliminated in
consolidation.
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 in the financial statements and accompanying notes. Actual
results could differ from those estimates.
F-37
<PAGE>
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESTATEMENT
During 1996, management restated the prior years financial statements for
certain corrections of accounting principles and misapplications of facts that
existed at the time the 1995 financial statements were prepared. The aggregate
amount of the restatement resulted in a reduction in earnings from the
previously reported net income for the year ended December 31, 1995 of $577,913
to a net loss of $1,533,242. The following schedule summarizes the effect on net
income (loss), net income (loss) per share and stockholders' equity as a result
of restating the companies 1995 financial statements from that previously
reported in November 1996.
<TABLE>
<CAPTION>
NET INCOME
NET INCOME (LOSS) PER STOCKHOLDERS'
(LOSS) SHARE EQUITY
---------------------------------------
<S> <C> <C> <C>
1995:
As previously reported $ 577,913 $.05 $6,657,582
Adjustment (2,111,155) $(.20) 674,749
As restated (1,533,242) $(.15) 7,332,331
</TABLE>
F-38
<PAGE>
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, and depreciated using the
straight-line method over the estimated useful lives of the assets, or the
underlying leases. Estimated useful lives range from 3 to 5 years for equipment,
3 to 7 years for leasehold improvement and 15 to 25 years for buildings and
improvements based upon the type and condition of assets. Maintenance, repairs
and minor renewals are charged to operations as incurred. Major replacements or
betterments are capitalized. When properties are retired or otherwise disposed,
the related cost and accumulated depreciation are eliminated from the respective
accounts and any gain or loss on disposition is reflected as income or expense.
INTANGIBLE ASSETS
MANAGEMENT SERVICE AGREEMENTS
Management Service Agreements consist of the Company's exclusive right to manage
the business side of a physician or physician group's practice over a 25-year
period. These costs are amortized on a straight-line basis over the initial
25-year (or less) terms of the related management service agreements. In the
event of termination of a service agreement, the related physician or physician
group is required to purchase all clinic assets, including intangible assets,
generally at then current book value.
FRANCHISE FEES
Franchise fees are agreements with certain related parties. Franchise fees are
amortized using the straight-line method over 25 years.
AMORTIZATION AND RECOVERY
The Company periodically reviews its intangible assets to assess recoverability
and impairments would be recognized in the statement of operations if a
permanent impairment were determined to have occurred. Recoverability of
intangibles is determined based on undiscounted future operating cash flows from
the related business unit or activity. The amount of the impairment, if any, is
measured based on discounted future operating cash flows using a discount rate
reflecting the Company's average cost of funds. The assessment of the
recoverability of intangible assets will be impacted if estimated future
operating cash flows are not achieved.
F-39
<PAGE>
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMMON STOCK TO BE ISSUED
As part of entering into long-term management services agreements with medical
practices as described in Note 2, the Company has made nonforfeitable
commitments to issue shares of common stock at specified future dates for no
further consideration. Common stock to be issued is shown as a separate
component of shareholders' equity and the amounts, upon issuance of the shares,
will be reclassified to par value and additional paid-in capital. Additionally,
contingent shares to be issued as remuneration related to services provded by
physicians for acquisitions in 1994 (Note 14) are included in common stock to be
issued. Unearned renumeration related to the contingent stock has been recorded
as a separate component of equity equal to the estimated fair market value of
the stock on the effective date of the acquisition. Renumeration expense is
recorded at the estimated fair value of the stock on the date the performance
criteria are met. Upon issuance of the contingent shares, their value is
reclassified to par value and additional paid-in-capital.
REVENUE RECOGNITION
The Company's revenues are the estimated realizable amounts earned from billings
to patients, third-party payors and others for services rendered at the
company's affiliated clinics and practices, reduced by contractual adjustments
and the contractual allocation of revenues to the medical provider-owner(s) of
the clinics and practices. Contractual adjustments arise due to the terms of
certain reimbursement and managed care contracts. These adjustments represent
the difference between charges at established rates and estimated recoverable
amounts and are recognized in the period the services are rendered. Any
differences between estimated contractual adjustments and actual final
settlements under reimbursement contracts are reported as contractual
adjustments in the year final settlements are determined.
INCOME TAXES
Income taxes are provided for using the liability method of accounting in
accordance with Statement of Financial Accounting Standards No. 109 (SFAS 109),
"Accounting for Income Taxes." Deferred tax assets and liabilities are
recognized for future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax basis.
NET LOSS PER SHARE
The computation of fully diluted net loss per share was antidilutive in each of
the periods presented. Net income (loss) per share is computed based upon the
weighted average number of shares of common stock outstanding during the
periods. Common share equivalents consisting
F-40
<PAGE>
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET INCOME PER SHARE (CONTINUED)
of convertible preferred stock, all commitments to issue common stock at
specified future dates based upon the mere passage of time and contingent shares
for which conditions for their issuance are currently being met are not included
in the primary per share calculation because the effect would be antidilutive.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
The Company will adopt the Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," during the first quarter of 1996. The adoption of this
Statement is not expected to have a material effect on the Company's financial
position or results of operations.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123). SFAS No. 123 establishes financial accounting and
reporting standards for stock-based compensation plans and for transactions in
which an entity issues its equity instruments to acquire goods and services from
nonemployees. The new accounting standards prescribed by SFAS No. 123 are
optional, and the Company is permitted to account for its stock incentive and
stock purchase plans under previously issued accounting standards. The Company
does not expect to adopt the new accounting standard; consequently, SFAS No. 123
will not have an impact on the Company's results of operations.
2. ACQUISITIONS
On December 29, 1995, the Company exchanged 433,332 shares of its common stock
valued at $1,168,288 for 100% of the outstanding common stock of Healthcare
Professional Management, Inc. The Company has recorded the transaction under the
Pooling of Interest Method for Business Combinations.
F-41
<PAGE>
2. ACQUISITIONS (CONTINUED)
The following represents the results of operations of Healthcare Professional
Management, Inc. for the years ended December 31, 1995 and 1994 that are
included in the combined net income of the Company.
<TABLE>
<CAPTION>
1995 1994
---------------------------
<S> <C> <C>
Revenues $1,090,304 $1,124,978
Net (loss) income (17,270) 40,809
</TABLE>
In addition to the Healthcare Professional Management, Inc. transaction, from
January 1, 1994 through December 31, 1995, the Company entered into long-term
management service agreements with 18 medical groups.
These agreements provided for the Company to acquire all the non medical assets
and properties which the physician's own in connection with the conduct of the
physicians medical practice. The assets included (i) all of the physicians
accounts receivable as reflected on the physicians books and records, on the
effective date of the agreement and at all times during the terms of the
agreement, all accounts receivable acquired are reflected on the Company's
balance sheet with a corresponding allowance account for those accounts
considered possibly uncollectible, (ii) all administrative (i.e., nonmedical)
aspects of every kind and character pertaining to the running of the Clinic, and
(iii) all other assets as described in the agreement. Total consideration paid
for the medical groups to enter into long-term management service agreements and
for the nonmedical assets described above includes cash, the issuance of common
stock, the estimated value of nonforfeitable commitments by the Company to issue
common stock at future dates for no additional consideration and short-term and
subordinated notes. The Company has recorded the business acquisition at the
fair market value of the assets acquired (purchase). The purchase price was
allocated based upon their fair market value at the date of the agreement.
The Company has legal title to patient accounts receivable, and therefore
recognizes these amounts in the financial statements. The Company is liable for
certain operating expenses of the practices, and therefore records them as
operating expenses. Under these agreements the Company is to receive a minimum
management fee of 10% up to a maximum of thirty percent (30%) of net billings of
the practice as a management fee. The Company records the management fees earned
as net revenues and the related management fee receivable. Additionally, the
Company records a receivable for funds advanced to practices to pay practice
operating expenses under the terms of the Management Services Agreements.
Management of the Company evaluates collectibility of the management fee
receivable on an ongoing basis and records collectibility reserves if deemed
necessary. The Company is also obligated to pay a stipulated percentage, if
available after collection of minimum management fees, of
F-42
<PAGE>
2. ACQUISITIONS (CONTINUED)
net billings to the physicians, and records such amounts as a reduction of
revenues on its statements of operations with corresponding liability in due to
physician groups. At December 31, 1995, advances to and receivables from
physician groups exceeded amounts related to the liability for the physicians
portion of the uncollected net billings.
The Company offers affiliated physicians who enter into an Asset Purchase and
Management Agreement with the Company the option to repurchase tangible assets
and an option to repurchase the Management Agreement with the medical practice,
acquired by the Company. During the first four years of each agreement, the
repurchase of tangible assets requires the return of all consideration paid by
the Company, a mandatory repurchase of the Management Agreement, and repayment
to the Company of all money invested or advanced to the practice. The repurchase
of the Management Agreement requires the return of all consideration paid by the
Company for the acquisition of the Management Agreement. In the event of a
repurchase, the medical practice forfeits all management fees earned by the
Company as of the date of the repurchase. The accounts receivable of the medical
practice are owned or assigned to the company as of the date of the repurchase.
In the event of a repurchase, the practice is not bound by any covenant not to
compete.
After the first four years of each agreement, a termination provision is
offered. The termination provision requires the Practice to pay the Company a
negotiated amount of cash for liquidated damages, or obligates the medical
providers to abide by a covenant not to compete.
During 1995, the Company acquired the nonmedical assets and entered into
long-term management service agreements with seven medical clinics.
F-43
<PAGE>
2. ACQUISITIONS (CONTINUED)
During 1994, the Company acquired the nonmedical assets and entered into
long-term management service agreements with 8 medical clinics.
Total acquisition transaction consideration is comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1995 1994
---------------------------
<S> <C> <C>
Cash and transaction costs $ 5,316 $ 98,477
Short-term and subordinated notes 446,311 -0-
Common stock issued and to be
issued (at fair value) 3,763,690 696,538
Liabilities assumed
---------------------------
Total costs $4,215,317 $795,015
===========================
</TABLE>
The shares of common stock to be issued at specified future dates were valued at
the average market value during the preceeding 90 day period. The common stock
in all of the transactions is delivered 20% at closing and 20% each on the
first, second, third, and fourth anniversaries.
For transactions completed through December 31, 1995, the scheduled issuance of
shares of common stock that the Company is committed to deliver after the
passage of time are 307,942 in 1996, 307,942 in 1997, 307,942 in 1998, and
207,287 in 1999. The accompanying financial statements include the results of
operations derived from the management services agreements from their respective
effective dates. The following unaudited pro forma information presents the
results of operations of the Company for the year ended December 31, 1994 as if
the 1995 and 1994 transactions had been consummated on January 1, 1994 and for
the year ended
F-44
<PAGE>
2. ACQUISITIONS (CONTINUED)
December 31, 1995 as if the 1995 transactions were consummated on January 1,
1995. Such information is based on the historical financial information of the
medical groups and does not include operational or other changes which might
have been affected pursuant to the Company's management of the nonmedical
aspects of such groups.
The pro forma information presented below is for illustrative information only
and is not necessarily indicative of results which would have been achieved or
results which may be achieved in the future (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
PRO FORMA (UNAUDITED)
YEAR ENDED DECEMBER 31
1995 1994
---- ----
<S> <C> <C>
Revenue 8,880 7,993
Net income (354) 430
Net income per share (.03) .05
</TABLE>
3. ACCOUNTS RECEIVABLE
The Company has established an allowance for doubtful accounts based upon
anticipated actual collections as determined by management in an amount between
10% and 20% of the gross accounts receivable balance.
Management feels that this amount is reasonable.
4. PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
<TABLE>
<CAPTION>
1995 1994
--------------------------
<S> <C> <C>
Furniture and equipment $671,752 $ 761,298
Less accumulated depreciation (173,462) (325,880)
-------- --------
Property and equipment, net $498,290 $ 435,418
======== =========
</TABLE>
Depreciation expense for the years ended December 31, 1995 and 1994 was $148,050
and $65,814, respectively.
F-45
<PAGE>
5. DEBT
RELATED PARTY DEBT
Related party debt at December 31, 1995 and 1994 consists of demand notes
payable, including interest, at 8% to certain officers of the Company.
LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1995 1994
--------------------------
<S> <C> <C>
Notes payable to various individuals in
conjunction with asset acquisition,
collateralized with accounts receivable,
interest payable at 10%, matures at various
dates in 1996 and 1997, all unpaid principal
and accrued interest are due at due date $391,606 $ 163,806
Note payable to an individual, collateralized
by accounts receivable, interest payable
at 10%, principal and interest payable
at $45,000 monthly through December 1996.
During 1995 the note was eliminated as a result
of a re-valuation of accounts receivable
purchased with the note. - 1,540,236
Notes payable, interest payable at 12%, principal
and any accrued interest due on demand. Notes may
be converted into 338,494 shares of the Company's - 550,000
common stock in 1995.
37,898 -
Other
Capital lease obligations 175,241 29,245
------- ------
604,745 989,891
Less current portion 21,898 982,759
------ -------
$ 582,847 $7,132
========= ======
</TABLE>
F-46
<PAGE>
5. DEBT (CONTINUED)
LONG-TERM DEBT (CONTINUED)
Future principal maturities, including capital lease obligations, as of December
31, 1995 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31
<S> <C>
1996 $ 21,898
1997 526,963
1998 16,602
1999 18,788
2000 20,494
---------
$ 604,745
=========
</TABLE>
6. CONVERTIBLE SUBORDINATED DEBT
During 1995, the Company issued $762,000 of 12% Series B Convertible Redeemable
Secured Subordinated Debentures. Interest payable semiannually, principal and
any unpaid interest due April 28, 2000. Upon maturity the holder shall have the
right of option, but not the obligation, to convert all or part of the debt into
fully paid shares of the Company's common stock at the conversion price of $5.00
per share. Principal and accrued interest at December 31, 1995 was $808,095.
7. REVENUE
The following presents the amounts included in the determination of the
Company's revenues (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1995 1994
-------------------------
<S> <C> <C>
Medical service revenue, net $10,729 $3,784
Amounts retained by medical groups 4,329 1,133
----- -----
$ 6,400 $2,651
======= ======
Medical service agreements at year-end 18 12
</TABLE>
The Company's management services agreements with the practices specify the
percentage of the net collected revenues to be paid to the affiliated physicians
and the percentage to be received by the Company. The net revenue distributed to
the physician pays for professional expenses,
F-47
<PAGE>
7. REVENUE (CONTINUED)
such as physicians' and nurse practitioners' salaries and benefits and
professional malpractice insurance. The net revenue amounts received by the
Company are applied to pay the Company's management fee and the practice's
business expenses, such as salaries and benefits for receptionists and medical
secretaries, billing and collection expenses, office supplies, real property
lease payments, property insurance expenses and an integrated information
system. If, after business costs are covered, the collected revenues is
insufficient to pay the Company its minimum guaranteed management fee, the
Company is authorized to reduce the amount of revenue paid to the affiliated
physicians to the extent necessary to pay the minimum guaranteed management fee.
On average, since 1994 the Company has earned management fees of between 5% and
10% of annual medical service revenues.
The range of net billing percentage that the Company is obligated to pay to
physicians pursuant to their consulting arrangements is 33%-38%.
For the years ended December 31, 1995 and 1994, the medical groups derived
approximately 35% and 30% of their medical service revenue from services
provided under Medicare and Medicaid programs and 30% and 30% from contractual
fee-for-service arrangements with numerous payors and managed care programs,
none of which individually aggregated more than 10% of medical service revenue.
The remaining 40% was derived from various fee-for-service payors. Capitation
revenues were less than 20% of total revenue in 1995. Changes in the medical
group's payor mix can affect the Company's revenue.
Accounts receivable principally represent receivables from patients and
third-parties for medical services provided by a physician groups. Such amounts
are recorded net of contractual allowances and estimated bad debts. Accounts
receivable are a function of net physician practice revenue rather than net
revenue of the company. Receivables from the Medicare and State Medicaid
programs are considered to have minimal credit risk and no other payor comprised
more than 10% of accounts receivable at December 31, 1995.
F-48
<PAGE>
8. INCOME TAXES
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
1995 1994
--------------------------
<S> <C> <C>
Current:
Federal $ - $ -
State - -
-
-------- --------
Total current - $ -
======== ========
</TABLE>
The components of the net deferred tax asset and liability at December 31 are
as follows:
<TABLE>
<CAPTION>
1995 1994
-----------------------
<S> <C> <C>
Deferred tax assets:
Receivables $ 631,000 -
Federal net operating losses 1,150,000 -
State net operating losses 202,000 -
--------- -------
1,983,000 -
Valuation allowance (977,000) -
--------- -------
Total deferred tax assets 1,006,000 -
Deferred tax liabilities:
Method of accounting 968,000 -
Property , plant, and equipment 38,000 -
Intangibles 1,092,000 -
---------- --------
Total deferred tax liabilities 2,098,000 -
========= ========
</TABLE>
F-49
<PAGE>
9. COMMITMENTS AND CONTINGENCIES
The Company leases office facilities under operating leases which expire at
various dates through the year 2005. The accompanying statement of operations
includes expenses from operating leases of $971,890 and $239,089 for 1995 and
1994, respectively. Future minimum lease payments, due under noncancelable
operating leases as of December 31, 1995 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1996 $ 931,600
1997 601,056
1998 601,056
1999 414,566
2000 383,352
2001 148,632
2002 148,632
2003 56,460
2004 56,460
2005 56,460
------
$3,398,274
==========
</TABLE>
The Company is subject to legal proceedings and claims arising in the ordinary
course of its business. In the opinion of management, the amount of ultimate
liability with respect to these actions will not materially affect the financial
position or results of operations of the Company.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of accounts receivable, management
fee receivable, accounts payable, related party debt and long-term debt, and
convertible subordinated debt. At December 31, 1995 and 1994, fair values of
these instruments approximates carrying value.
F-50
<PAGE>
11. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosures of cash flow information for the years ended December
31, 1995 and 1994 are summarized as follows:
<TABLE>
<CAPTION>
1995 1994
-------------------------
<S> <C> <C>
Cash paid for interest and income taxes:
Interest $ 291,657 $ 25,240
Noncash investing and financing activities:
Assets acquired by capital lease 86,000 --
Assets acquired with stock issuance,
assumption of debt and other liabilities 4,348,751 296,754
Stock issued for debt 828,584 --
</TABLE>
12. EQUITY
In June 1994, the Company's shareholders approved proposals to cancel 2,000,000
shares of common stock and effect a 1-for-3.5 reverse stock split of the
Company's common stock. The effect of the reverse split was to convert three and
one half (3.5) shares of common stock into one (1) share of common stock.
The Company's preferred shares (1) carry no voting rights; (2) may be converted
into common shares on a one-to-one basis subject to the limitation that no more
than 25% may be converted into common shares in any one year and at no time may
the holders of the Class A preferred hold directly or indirectly 4.9% of the
common shares outstanding; (3) the shares carry no dividend right, except an
amount equal to, on a per share basis, amounts declared paid or set aside for
common stock, and (4) the shares have no redemption rights. In order to conform
the Company's Certificate of Incorporation to reflect the 1994 agreement to
issue the shares of class A preferred stock, on September 19, 1997, the Company
filed a description of terms with respect to 2,250,000 shares of class A
preferred stock which was outstanding on that date.
During 1996, it was determined that certain historical stock records of the
Company were inaccurate or incomplete. Management believes that any inaccuracy
will not have a material impact on shares outstanding at December 31, 1995.
F-51
<PAGE>
13. SUBSEQUENT EVENTS
On December 31, 1995 the Company entered into an Clinic Management Agreement
with OB-GYN Associates. On April 1, 1996 (the effective date of the acquisition
for accounting purposes) the Company entered into an Asset Purchase Agreement
with OB-GYN Associates. In May 1996 Management Agreement and the Asset Purchase
Agreement was finalized with the Company agreeing to issue 730,000 shares of its
common stock, valued at $2,920,000 and paying $1,606,202 in cash for a total
acquisition price of $4,526,202. As of May 31, 1996 the Company has issued
146,000 shares of its common stock as part of this acquisition. The remaining
584,000 shares are to be issued at 146,000 shares each December through 1999.
The 25 year management agreement provides for a contractual allocation to OB-GYN
Associates of 54% of net collected revenues. If, after business costs are
covered the collected revenue is insufficient to pay the Company its minimum
guaranteed management fees, the Company is authorized to reduce the amount of
revenue payed to affiliated physicians to the extent necessary to pay the
minimum guaranteed fee.
This acquisition has been accounted for as a purchase. The accounts receivable
were valued at net collectible value based upon an analysis by the Company. The
estimated fair value of assets is summarized as follows:
<TABLE>
<CAPTION>
<S> <C>
Accounts receivable, net $1,011,000
Property and equipment 305,000
Management service agreement 3,036,000
Excess of cost of acquired assets over fair value 429,000
Other 50,000
----------
4,831,000
Less value of stock issued and to be issued 3,025,000
----------
Cash purchase price $1,806,000
==========
</TABLE>
For the year ended December 31, 1995 the financial statements of the Company do
not include any financial results of OB-GYN Associates.
Audited pro forma results of operations for 1995 and unaudited pro forma results
of operations for 1994, assuming the acquisition of OB-GYN Associates was
consummated January 1, 1994, are as follows:
<TABLE>
<CAPTION>
1995 1994
------------------------------
<S> <C> <C>
Net revenue $ 9,462,235 $7,356,377
Net earnings (1,241,277) 254,411
Earnings per share (.12) .03
</TABLE>
F-52
<PAGE>
Medical Asset Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. SUBSEQUENT EVENTS (CONTINUED)
Audited pro forma results of operations for 1995 and unaudited pro forma results
of operations for 1994, assuming the acquisition of OB-GYN Associates was
consummated January 1, 1994, are as follows:
<TABLE>
<CAPTION>
1995 1994
------------------------
<S> <C> <C>
Net revenue $9462,235 $7,356,377
Net earnings (1,241,277) 254,411
Earnings per share (.12) .03
</TABLE>
F-53
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS OF
MEDICAL ASSET MANAGEMENT, INC.:
We have audited the accompanying balance sheet of OB-GYN Associates, P.C. (a
Colorado corporation) as of December 31, 1995, and the related statement of
operations and retained earnings and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of OB-GYN Associates, P.C. as of
December 31, 1995, and the results of their operations and their cash flows for
the year then ended in conformity with generally accepted accounting principles.
Harlan & Boettger, CPAs
San Diego, California
September 23, 1996
F-54
<PAGE>
<TABLE>
<CAPTION>
OB-GYN ASSOCIATES, P.C.
BALANCE SHEET
DECEMBER 31, 1995
<S> <C>
ASSETS
CURRENT ASSETS
Cash 8,518
Investment (Note C) $ 378,654
Accounts receivable, trade, net of allowance for
doubtful accounts of $683,670 (Note A) 1,366,065
Accounts receivable, other 216,072
Accounts receivable, shareholder 21,003
Prepaid expenses and other current assets
105,668
TOTAL CURRENT ASSETS 2,095,980
PROPERTY AND EQUIPMENT, net (Note B) 318,749
-----------
TOTAL ASSETS $ 2,414,729
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 258,422
Bank overdraft 162,888
Line of credit - current (Note G) 35,000
Capital lease obligations 76,669
Accrued pension contribution payable (Note D) 5,340
Note payable - current (Note F) 180,073
Income taxes payable (Note E) 95,443
Deferred income taxes (Notes A and E) 86,500
------
TOTAL CURRENT LIABILITIES 900,335
COMMITMENTS (Note H) -
NOTE PAYABLE LESS CURRENT PORTION (Note F) 1,407,494
---------
TOTAL LIABILITIES 2,307,829
STOCKHOLDERS' EQUITY
Common stock, $1 par value; 50,000 shares
authorized; 12,500 shares issued and outstanding 12,500
Additional paid-in-capital 524,768
Stock subscription receivable (Note I) (160,098)
Retained deficit (270,270)
TOTAL STOCKHOLDERS' EQUITY 106,900
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,414,729
===========
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-55
<PAGE>
OB-GYN ASSOCIATES, P.C.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
<S> <C>
INCOME
Professional fees $5,212,881
Interest income 33,207
Other income 319,374
-----------
TOTAL INCOME 5,565,462
OPERATING EXPENSES
Payroll and payroll taxes 2,878,709
Liability insurance 235,293
Officer's insurance 57,077
General and administrative 799,642
Office expense 167,943
Management fees 72,278
Miscellaneous 17,093
Depreciation 126,626
Pension plan contributions (Note D) 25,652
Property tax, dues & subscriptions 71,987
Contract labor 140,194
Medical supplies 194,465
Lab fees 48,999
Consulting 18,450
Interest expense 190,154
Loss on sale of equipment 80,922
Legal and accounting 42,310
--------
TOTAL OPERATING EXPENSES 5,167,794
INCOME BEFORE PROVISION FOR TAXES 397,668
INCOME TAXES (Notes A and E) 95,433
--------
NET INCOME $302,235
========
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-56
<PAGE>
OB-GYN ASSOCIATES, P.C.
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
Additional
Common Paid-in Retained
Shares Amount Capital Deficit Total
------ ------ ------- ------- -----
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995 12,500 $ 12,500 $524,768 $(572,505) $ (35,237)
Stock subscription
receivable - - - - (160,098)
------- ------- ------- ------ -------
Net income 12,500 $ 12,500 $524,768 302,235 302,235
======= ======== ======== ======= =======
DECEMBER 31, 1995 (270,270) $ 106,900
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-57
<PAGE>
OB-GYN ASSOCIATES, P.C.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $302,235
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization (274,898)
Change in assets and liabilities:
Increase in accounts receivable - trade (337,314)
Increase in receivable - other (128,747)
Decrease in shareholder receivable 71,480
Increase in prepaid expenses and other (56,544)
Decrease in accounts payable and accrued (176,528)
expenses
Increase in bank overdraft 162,888
Decrease in deferred compensation (140,721)
Increase in income taxes payable 17,533
Decrease in deferred loss on sale of equipment (16,140)
NET CASH USED IN OPERATING ACTIVITIES (576,756)
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of fixed assets 569,315
Increase in investments (66,996)
NET CASH USED IN INVESTING ACTIVITIES 502,319
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds on line of credit 35,000
Principal payments on capital leases (84,747)
Decrease in notes payable (45,871)
Principal payments in notes payable - long-term (17,715)
Proceeds from common stock receivable 179,813
-------
NET CASH PROVIDED BY FINANCING ACTIVITIES 66,480
------
NET (DECREASE) IN CASH (7,957)
CASH, BEGINNING OF YEAR 16,475
CASH, END OF YEAR $ 8,518
==========
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-58
<PAGE>
OB-GYN ASSOCIATES, P.C.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1995
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION
OB-GYN Associates, P.C. (the Company) was incorporated as Stuart O.
Silverberg, M.D. and Herbert L. Jacobs, M.D., P.C. under the laws of the
State of Colorado on July 1, 1969. The corporate name was changed to
OB-GYN Associates, P.C. on January 21, 1971. The Company provides neonatal
medical services through its three outpatient facilities located in the
Denver area.
BASIS OF ACCOUNTING
The Company's policy is to prepare its financial statements on an accrual
basis of accounting. Accordingly, the accompanying financial statements
are intended to present the financial position, results of operations and
cash flows in conformity with generally accepted accounting principles.
CASH
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months
or less and money market funds to be cash equivalents.
ACCOUNTS RECEIVABLE
Accounts receivable are stated at net realizable value. An allowance for
doubtful accounts has been reflected in the financial statements to reduce
accounts receivable for managed care contracts and Medi-Cal charges which
the Company has agreed to accept at a discounted fee. The total mandatory
adjustments at 1995 are $683,670.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided by the
straight-line method over their estimated useful lives as follows:
Leasehold improvements 5 years (term of lease)
Furniture and fixtures 7 years
Equipment 5 - 7 years
Software 3 years
Upon retirement or disposal of depreciated assets, the cost and related
depreciation are removed and the resulting gain or loss is reflected in
income. Major renewals and betterments are capitalized while maintenance
costs and repairs are expensed in the year incurred.
F-59
<PAGE>
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
INCOME TAXES
Deferred tax liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax liabilities are measured using enacted tax rates
in effect for the year in which those temporary differences are expected
to be settled. The effect on deferred tax liabilities of a change in tax
rates is recognized in income in the period in which the change is
enacted. Temporary differences related principally to differences between
the accrual method of accounting used for financial statement purposes and
the cash method of accounting used for tax purposes.
CONCENTRATION OF CREDIT RISK
Substantially all of the Company's accounts receivables are concentrated
within the medical industry, primarily health insurance companies and
government insurance providers.
B. PROPERTY AND EQUIPMENT:
Property and equipment as of December 31, 1995 are summarized as follows:
<TABLE>
<CAPTION>
<S> <C>
Furniture and fixtures $ 27,106
Equipment 924,170
Leasehold improvements 200,147
1,151,423
Less: accumulated depreciation 832,674
-------
$ 318,749
===========
</TABLE>
C. INVESTMENT:
The Company maintains an investment in the form of an annuity with General
Services Life Insurance Company. This investment is carried at its cash
surrender value, net of any fees applicable in accordance with the annuity
contract. At December 31, 1995 the annuity had a cash surrender value of
$378,654.
D. ACCRUED PENSION AND PROFIT SHARING EXPENSE:
The Company maintains a defined contribution profit sharing plan covering
substantially all employees subject to minimum age and service
requirements. Contributions to the profit sharing plan are at the
discretion of the Board of Directors. Total pension and profit sharing
expense was $25,652 for the year ended December 31, 1995.
It is the policy of the Company to fund accrued pension and profit sharing
contributions prior to the filing of the corporate income tax returns.
F-60
<PAGE>
E. INCOME TAXES:
As discussed in Note A, the Company adopted SFAS 109, "Accounting for
Income Taxes" in 1993 and applied the provisions of this statement
retroactively to January 1, 1992. SFAS 109 requires the use of the balance
sheet method of accounting for income taxes. Under this method, a deferred
tax asset or liability represents the tax effect of temporary differences
between financial statement and tax bases of assets and liabilities and is
measured using the latest enacted tax rates.
The provision for income taxes for the year ended December 31, 1995 is
$95,443:
<TABLE>
<CAPTION>
<S> <C>
Current provision $ 95,443
Deferred liability 86,500
--------
Net liability $181,943
========
</TABLE>
F. NOTES PAYABLE:
<TABLE>
<CAPTION>
<S> <C>
Note payable to bank bearing interest
at the bank's variable reference rate
plus 2% (8% at December 31, 1995)
payable in monthly installments of
$6,000 plus interest, secured by
substantially all the assets of the
Company, matures March 1999 $1,165,850
Note payable to bank bearing interest
at 6% payable in monthly installments
of $5,370 including interest, secured
by substantially all the assets of the
Company, matures January 1996 7,629
Note payable to bank bearing interest
at the bank's adjustable reference
rate (10.25% at December 31, 1995)
payable in monthly installments of
$2,500 plus interest, secured by
substantially all the assets of the
Company, matures February 1999 95,000
Note payable to bank bearing interest
at 8% payable in monthly installments
of $4,000 plus interest through
December 1, 1995 and $6,000 monthly
plus interest thereafter through the
maturity date of June 1998, secured by
substantially all the assets of the
Company 145,898
Note payable to bank bearing interest
at 8% payable in interest only monthly
installments of $1,000 to be
negotiated in 1996. 104,833
Note payable to bank bearing interest
at the bank's reference rate plus 1%
(8% at December 31, 1995) payable in
monthly installments of $935 plus
interest, unsecured, matures September
1998 68,357
-------
1,587,567
Less current portion 180,073
---------
$1,407,494
==========
</TABLE>
F-61
<PAGE>
G. LINE OF CREDIT:
The Company maintains a line of credit facility with a bank which bears
interest at 8.75% payable in monthly interest only installments and
secured by substantially all the assets of the Company. The final
outstanding balance is due and payable at the maturity date of September
1996.
The following is a schedule of future maturities of the line of credit as
of December 31, 1995:
<TABLE>
<CAPTION>
Year Ending
December 31,
<S> <C> <C> <C> <C> <C> <C>
1996 $35,000
Thereafter -
$35,000
=======
</TABLE>
H. COMMITMENTS:
The Company has entered into noncancelable building leases for its
operating facilities. The agreements call for annual base rents adjusted
annually for changes in the consumer price index as well as common area
expenses.
Net future minimum rental payments required under this lease as of
December 31, 1995 are as follows:
<TABLE>
<CAPTION>
Years ended
December 31,
<S> <C>
1996 $ 266,879
1997 173,884
1998 154,810
1999 154,810
2001 161,002
Thereafter 341,581
-------
$1,252,966
==========
</TABLE>
Total rent expense charged to operations for the year ended December 31,
1995 was $387,097.
I. SUBSCRIPTION RECEIVABLE:
During the years ended 1994 and 1995, the Company issued stock to certain
physicians to join the Company. In exchange for their membership the
physicians each individually issued subscriptions receivable at varying
interest rates and due dates. The balance of these subscriptions at
December 31, 1995 is $160,098. Accordingly, the subscribed amount is
reflected in the accompanying financial statements as a separate
component of stockholders' equity.
J. SUBSEQUENT EVENT:
On December 30, 1995 the OB-GYN Associates, P.C. signed a contract with
Medical Asset Management, Inc. Under the terms of the agreement the
Company exchanged the fixed assets and accounts receivables for cash. The
cash was obligated to be used to pay accounts payable and the St.
Anthony's note and the Colorado National Lease.
The cash was received and all related obligations settled by May 31,
1996.
F-62
<PAGE>
OB-GYN Associates, P.C.
Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
---------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 118,514 $ 8,518
Investment 378,654 378,654
Accounts receivable, net of allowance for doubtful
accounts of $617,516 and $683,670, respectively 1,571,733 1,603,140
Other assets 110,683 105,668
------- -------
2,179,584 2,095,980
Property, plant, and equipment, net 278,742 318,749
------- -------
Total assets $2,458,326 $2,414,729
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 260,433 $ 426,650
Current portion of long-term debt and capital leases 257,848 256,742
Income taxes payable 121,622 95,443
Deferred income taxes 86,500 86,500
Line of credit 91,000 35,000
------ ------
817,403 900,335
Long-term debt 1,346,495 1,407,494
--------- ---------
Total liabilities 2,163,898 2,307,829
Stockholders' equity:
Common stock, $1 par value; 50,000 shares
authorized; 12,500 and 12,500 issued and
outstanding, respectively 12,500 12,500
Additional paid-in capital 505,018 524,768
Stock subscription receivable (140,348) (160,098)
Retained earnings (deficit) (82,742) (270,270)
------- --------
Total stockholders' equity 294,428 106,900
------- -------
Total liabilities and stockholders' equity $2,458,326 $2,414,729
========== ==========
SEE ACCOMPANYING NOTES.
</TABLE>
F-63
<PAGE>
<TABLE>
<CAPTION>
OB-GYN Associates, P.C.
Statements of Operations
(Unaudited)
THREE MONTHS ENDED MARCH 31,
1996 1995
---------------------------
<S> <C> <C>
Net revenue $1,286,002 $1,343,140
Expenses:
Practice salaries and benefits 529,186 521,056
Other practice costs 245,945 255,625
General and administrative 349,374 506,974
Depreciation and amortization 40,005 37,080
Other (net) (125,252) (72,435)
--------- --------
1,039,258 1,248,300
Net income before income taxes 246,744 94,840
Provision for income taxes 59,216 22,762
------ ------
Net income $ 187,528 $ 72,078
=========== ============
SEE ACCOMPANYING NOTES.
</TABLE>
F-64
<PAGE>
<TABLE>
<CAPTION>
OB-GYN Associates, P.C.
Statements of Cash Flows
(Unaudited)
THREE MONTHS ENDED MARCH 31,
--------------------------
1996 1995
--------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 187,528 $ 72,078
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 40,007 37,080
Change in assets and liabilities:
Decrease in accounts receivable--trade 31,407 27,069
Increase in other current assets (5,015) (19,394)
(Decrease) increase in accounts
payable and accrued expenses (166,217) 151,052
Increase in income taxes payable 26,179 (174,422)
--------- ---------
Net cash provided by operating activities 113,889 93,463
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment -- (11,369)
Increase in investment -- (25,480)
--------- ---------
Net cash used in investing activities -- (36,849)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds on line of credit 56,000 --
Principal payments on capital leases (16,041) (25,678)
Decrease in term-debt (43,852) (45,339)
Proceeds from common stock receivable -- 625
--------- ---------
Net cash used in financing activities (3,893) (70,392)
--------- ---------
Net increase (decrease) in cash 109,996 (13,778)
Cash, beginning of the period 8,518 16,475
--------- ---------
Cash, end of the period $ 118,514 $ 2,697
--------- ---------
</TABLE>
SEE ACCOMPANYING NOTES.
F-65
<PAGE>
OB-GYN Associates, P.C.
Notes to Unaudited Financial Statements
1. INTERIM STATEMENT PRESENTATION
The unaudited financial statements have been prepared by OB-GYN Associates, P.C.
(the Company) pursuant to the rules and regulations of the Securities and
Exchange Commission and in accordance with generally accepted accounting
principles for the preparation of interim financial statements. Accordingly,
certain information and footnote disclosures normally included in annual
financial statements have been omitted or condensed. It is suggested that these
financial statements be read in conjunction with the audited financial
statements and notes thereto included in this Form 8-K/A.
In the opinion of management, all necessary adjustments have been made to
present fairly OB-GYN Associates, P.C.'s financial position, results of
operations and cash flows. Such adjustments are of a normal, recurring nature.
The results of this interim period are not necessarily indicative of results for
the entire year or any other interim period.
2. SUBSCRIPTION RECEIVABLE
During the year ended December 31, 1995, the Company issued stock to certain
physicians to join the Company. In exchange for their membership, the physicians
each individually issued subscriptions receivable at varying interest rates and
due dates. The balance of these subscriptions at March 31, 1996 and December 31,
1995 is $140,348 and $160,098, respectively. Accordingly, the subscribed amount
is reflected in the accompanying financial statements as a separate component of
stockholders' equity.
3. SUBSEQUENT EVENTS
On December 30, 1995, the OB-GYN Associates, P.C. signed a contract with Medical
Asset Management, Inc. (MAM). Under the terms of the agreement MAM managed the
Company under a short-term management agreement from December 31, 1995 to April
1, 1996. On April 1, 1996, MAM purchased the accounts receivable and nonmedical
assets of the Company in addition to entering into a twenty-five year management
agreement for $4,526,206 consisting of cash of $1,606,202 and 730,000 shares of
MAM stock.
F-66
<PAGE>
Medical Asset Management, Inc.
Unaudited Pro forma Financial Statements
The unaudited pro forma financial information presented in the unaudited pro
forma financial statements is included in order to illustrate the effect on the
Medical Asset Management, Inc.'s (the "Company" or MAM) financial statements of
the acquisition of OB-GYN Associates, P.C. on April 1, 1996 (the "Acquisition").
The unaudited pro forma statements of operations for the three months ended
March 31, 1996 and for the year ended December 31, 1995 present adjustments for
the Acquisition as if the Acquisition had occurred on January 1, 1995.
In the opinion of management, all adjustments have been made that are necessary
to present fairly the pro forma data.
The unaudited pro forma financial statements should be read in conjunction with
the Company's historic consolidated financial statements and notes thereto, and
the historic financial statements and the notes thereto of OB-GYN Associates,
P.C. The unaudited pro forma statements of operations are not necessarily
indicative of the results that would have been reported had such events actually
occurred on the date specified, nor are they indicative of the Company's future
results.
F-67
<PAGE>
<TABLE>
<CAPTION>
Medical Asset Management, Inc.
Unaudited Pro forma Statement of Operations
Three Months ended March 31, 1996
PRO FORMA
ADJUSTMENTS
OB-GYN FOR OB-GYN
COMPANY ASSOCIATES, ASSOCIATES, P.C. COMPANY
AS RESTATED P.C. TRANSACTION PRO FORMA
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenue $ 1,453,060 $ 1,286,002 $ (560,259)(a) $ 2,178,803
Expenses:
Practice salaries and
benefits 1,192,021 529,186 (321,961)(b) 1,399,246
Other practice costs -- 245,945 (45,691)(b) 200,254
General and
administrative 543,200 349,374 (28,875)(b) 863,699
Depreciation and
amortization 138,259 40,005 24,319 (c) 202,583
Net loss on
litigation
settlements and
clinic terminations 749,000 -- -- 749,000
Other expense
(income), net 29,498 (125,252) (45,588)(b) (141,342)
----------- ----------- ----------- -----------
2,651,978 1,039,258 (417,796) 3,273,440
----------- ----------- ----------- -----------
Net income (loss) before
income taxes (1,198,918) 246,744 (142,463) (1,094,637)
Provision for income taxes 59,216 (59,216)(d) --
----------- ----------- -----------
Net income (loss) $(1,198,918) $ 187,528 $ (83,247) $(1,094,637)
=========== =========== =========== ===========
Weighted average number of
common stock and
common stock equivalents
outstanding:
Primary 11,065,988 11,211,988
Loss per common share:
Primary $0.11 $0.10
============================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS STATEMENT.
</TABLE>
F-68
<PAGE>
<TABLE>
<CAPTION>
Medical Asset Management, Inc.
Unaudited Pro forma Statement of Operations
Year ended December 31, 1995
PRO FORMA
ADJUSTMENTS
OB-GYN FOR OB-GYN
COMPANY ASSOCIATES, ASSOCIATES, P.C. COMPANY
AS RESTATED P.C. TRANSACTION PRO FORMA
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenue $ 6,400,235 $ 5,212,881 $(2,293,668) (a) $ 9,319,448
Expenses:
Practice salaries and
benefits 3,041,648 2,961,438 (2,016,454)(b) 3,986,632
Other practice costs 2,136,745 690,938 (39,752)(b) 2,787,931
Consulting fees 200,864 18,450 -- 219,314
General and
administrative 1,840,991 1,099,266 (204,135)(b) 2,736,122
Depreciation and 373,797 126,626 97,277 (b) 597,700
amortization
Other expense
(income), net 288,777 (81,505) (156,947)(b) 50,325
7,882,822 4,815,213 (2,320,011) 10,378,024
------------ ------------ ------------ ------------
Net income (loss) before
income taxes (1,482,587) 397,668 (26,343) (1,058,576)
Provision for income taxes 50,655 95,433 (95,433)(d) 50,655
------------ ------------ ------------ ------------
Net income (loss) $ (1,533,242) $ 302,235 $ (121,776) $ (1,109,231)
============ ============ ============ ============
Weighted average number of
common stock and
common stock
equivalents
outstanding:
Primary 10,376,247 10,412,747
(Loss) per common share:
Primary $(.43) $(.11)
===== =====
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS STATEMENT.
</TABLE>
F-69
<PAGE>
Medical Asset Management, Inc.
Notes to Unaudited Pro forma Financial Statements
(a) to record contractual allocation of 54% of net revenues to medical
owners of OB-GYN Associates, P.C. managed by the Company. This
contractual allocation has been reduced by the amount necessary
($521,288) to pay the Company its minimum guaranteed management fee
after business costs are covered. The pro forma calculation retained
by the Company for the year ended December 31, 1996 is as follows:
OB-GYN Patient Revenue $5,212,881
Management Fee Percentage 10%
-----------
Management Fee 521,288
Amount to cover business
side expenses 2,397,925
Total amount retained by MAM $2,919,213
(b) to remove medical side expenses to be paid by medical owners of
OB-GYN Associates, P.C.
(c) to record amortization of acquired management contract over 25 years
straight-line
(d) to reverse tax provision related to the operations of the assets
acquired
F-70
<PAGE>
SIGNATURE
In accordance with Section 12 of the Securities Exchange Act of 1934, this
registrant has caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized.
MEDICAL ASSET MANAGEMENT, INC.
Dated: November 14, 1997
By: /s/ John Regan
---------------------
John W. Regan, President
PART III
ITEM 1 AND 2. INDEX TO EXHIBITS AND DESCRIPTION.
EXHIBIT SEQUENTIAL
NO. DESCRIPTION LOCATION NO.
--- ----------- ------------
3.1 Certificate of Incorporation of Eagle High Previously Filed
Enterprises, Inc., filed January 23, 1986.
3.2 Certificate of Amendment of Certificate of Previously Filed
Incorporation of Eagle High Enterprises, Inc.,
filed June 21, 1994.
3.3 Certificate of Designations filed September 19,
1997.
3.4 Bylaws of Eagle High Enterprises, Inc. Previously Filed
4.1 Placement Agreement between Cruttenden Roth Previously Filed
Incorporated and Medical Asset Management,
Incorporated, dated April 30, 1996.
4.2 Medical Asset Management, Inc. Declaration of Previously Filed
Registration Rights.
4.3 Medical Asset Management, Inc. Common Stock Previously Filed
Warrant.
4.4 Agreement to Exchange Stock between Medical Asset
Management, Inc. and Edward Dickstein and Diana
Steiner Dickstein, as Trustees of the Dickstein
Trust, dated March 28, 1995.
4.5 Equity-Based Incentive Plan.
4.6 Stock Exchange Agreement with Shareholders of Previously Filed
Medical Asset Management, Inc. and Eagle High
Enterprises, Inc., dated June 24, 1994.
<PAGE>
10.1 Employment Agreement between Medical Asset Previously Filed
Management, Inc. and John Regan, dated
January 1, 1995.
10.2 Employment Agreement between Medical Asset Previously Filed
Management, Inc. and Dennis Calvert, dated
January 1, 1995.
10.3 Employment Agreement between Medical Asset Previously Filed
Management, Inc. and Michael Zaic, dated
January 1, 1995.
10.4 Factoring Agreement between ALTRES Financial
L.P., a Hawaii limited partnership, and Medical
Asset Management, Inc., a Delaware corporation,
dated October 16, 1997.
10.5 Addendum to Factoring Agreement between ALTRES
Financial L.P., a Hawaii limited partnership, and
Medical Asset Management, Inc., a Delaware
corporation, dated October 22, 1997.
10.6 Software License Agreement between the
Company and Visteon Corporation, dated
September 18, 1996.
10.7 Addendum A to the Software License Agreement
between the Company and Visteon Corporation,
dated September 18, 1996.
10.8 Agreement with Healthcare Professional Previously Filed
Management, Inc. dated December 29, 1995.
10.9 Asset Purchase and Medical Practice Management Previously Filed
Agreement between the Company and OB-GYN
Associates, P.C., dated December 31, 1995.
10.10 Promissory Note between the Company and
Northern Trust Bank of Arizona, N.A.,
dated May 30, 1997.
23.1 Consent of Ernst & Young LLP, independent
accountants for Medical Asset Management, Inc.,
dated November 14, 1997.
23.2 Consent of Harlan & Boettger, LLP, dated
November 14, 1997.
EXHIBIT 3.3
MEDICAL ASSET MANAGEMENT, INC.
----------
CERTIFICATE OF DESIGNATIONS
PURSUANT TO SECTION 151 OF THE GENERAL CORPORATION LAW
OF THE STATE OF DELAWARE
----------
SERIES A CONVERTIBLE PREFERRED STOCK
----------
MEDICAL ASSET MANAGEMENT, INC., a Delaware corporation (the
"Corporation"), certifies that, pursuant to the authority contained in Article
IV of its Certificate of Incorporation, as amended, and in accordance with the
provisions of Section 151 of the General Corporation Law of the State of
Delaware, its Board of Directors has adopted the following resolution creating a
series of its Preferred Stock, par value $.001 per share, designated as Series A
Convertible Preferred Stock:
RESOLVED, that a series of Preferred Stock, par value $.001 per
share, of the Corporation is hereby created, and that the designation and amount
thereof and the voting powers, preferences and relative, participating, optional
and other special rights of the shares of such series, and the qualifications,
limitations or restrictions thereof, are as follows:
Section 1. DESIGNATION OF AMOUNT. The shares of such series shall be
designated as "Series A Convertible Preferred Stock," and the number of shares
constituting such series shall be 2,250,000.
Section 2. DIVIDENDS AND DISTRIBUTIONS. The holders of shares of
this Series shall be entitled to receive, when, as and if declared by the Board
of Directors of the Corporation, cash dividends, out of funds legally available
for that purpose, in an amount per share equal to the product of (i) the per
share amount, if any, of the cash dividend declared, paid or set aside for the
Common Stock, multiplied by (ii) the number whole shares of Common Stock into
which each such share of Series A Preferred Stock is then convertible. Such
dividends upon shares of this Series shall not be cumulative.
Section 3. LIQUIDATION RIGHTS. Upon the dissolution, liquidation or
winding up of the Corporation (whether voluntary or involuntary), shares of this
Series shall rank on a parity with the Common Stock in all respects.
Section 4. CONVERSION.
(A) Each share of this Series shall be convertible at the option of
the respective holder thereof, subject to the limitations set forth below, at
any time into the number of fully paid
<PAGE>
and non-assessable shares of Common Stock obtained by dividing one by the Series
A Conversion Price, determined as hereinafter provided, in effect at the time of
conversion. No payment or adjustment shall be made on account of dividends
accrued or in arrears on shares of this Series surrendered for conversion or on
account of any dividends on Common Stock issued upon such conversion.
Before any holder of shares of this Series shall be entitled to
convert the same into Common Stock, such holder shall surrender the certificate
or certificates for such shares of this Series at the office or agency
maintained by the Corporation for that purpose, which certificate or
certificates, if the Corporation shall so request, shall be duly endorsed to the
Corporation or in blank, or accompanied by proper instruments of transfer to the
Corporation or in blank, and accompanied by funds in the amount of any amounts
which may be payable to the Corporation pursuant to this Section 4, and shall
give written notice to the Corporation at said office or agency that such holder
elects so to convert such shares of this Series, and shall state in writing
therein the name or names in which such holder wishes the certificate or
certificates for shares of Common Stock to be issued.
As soon as practicable after such surrender of a certificate or
certificates for shares of this Series and all instruments and notices above
prescribed, the Corporation shall issue and deliver at said office or agency a
certificate or certificates for the number of full shares of Common Stock
issuable upon conversion to the person or persons entitled thereto. Shares of
this Series shall be deemed to have been converted as of the date of such
surrender of a certificate or certificates for shares of this Series,
accompanied by all instruments, amounts and notices above prescribed, and the
person or persons entitled to receive the Common Stock issuable upon such
conversion shall be treated as the record holder or holders of such Common Stock
at such time for all purposes; PROVIDED, HOWEVER, that any such surrender on any
date when the stock transfer books of the Corporation are closed for any purpose
shall not be effective to constitute the person or persons entitled to receive
the shares of Common Stock upon such conversion as the record holder or holders
of such shares of Common Stock on such date, but such surrender shall be
effective to constitute the person or persons in whose name or names the
certificates for such shares of Common Stock are to be issued as the record
holder or holders thereof for all purposes immediately prior to the close of
business on the next succeeding day on which such stock transfer books are open,
and such conversion shall be at the Series A Conversion Price in effect at such
time on such succeeding day.
(B) The Series A Conversion Price shall be initially $1.00. The
Series A Conversion Price shall be adjusted from time to time as follows:
(1) If the Corporation:
(a) makes a distribution or pays a dividend on its
Common Stock in shares of its Common Stock; or
(b) subdivides outstanding shares of Common Stock into a
greater number of shares; or
<PAGE>
(c) combines its outstanding shares of Common Stock into
a smaller number of shares; or
(d) makes a distribution on its Common Stock in shares
of its capital stock other than Common Stock; or
(e) issues by reclassification of its Common Stock any
shares of its capital stock;
then the conversion privilege and the Series A Conversion Price in effect
immediately before such action shall be adjusted so that the holder of shares of
this Series thereafter converted shall receive the number of shares of Common
Stock or capital stock of the Corporation, as the case may be, which such holder
would have owned immediately following such action if such holder had converted
the shares of this Series immediately before the record date (or, if no record
date, the effective date) for such action.
The adjustment shall become effective immediately after the record
date in the case of a dividend or distribution and immediately after the
effective date in the case of a subdivision, combination or reclassification.
If after an adjustment a holder of shares of this Series upon
conversion thereof may receive shares of two or more classes of capital stock of
the Corporation, the Board of Directors of the Corporation shall determine the
allocation of the adjusted Series A Conversion Price between the classes of
capital stock. After such allocation, the conversion privilege and conversion
price of each class of capital stock shall thereafter be subject to adjustment
on terms comparable to those in this Paragraph (B).
(2) No adjustment of the Conversion Price need be made unless
the adjustment would require an increase or decrease of at least 1% in the
Conversion Price. Any adjustments that are not made shall be carried forward and
taken into account in any subsequent adjustment.
(3) No adjustment need be made for a transaction referred to
in Paragraph (B)(1) of this Section 4 if holders of shares of this Series may
participate in the transaction on a basis that the Board of Directors determines
to be fair and appropriate in light of the basis on which holders of Common
Stock participate in the transaction.
(C) Whenever the Series A Conversion Price shall be adjusted as
herein provided, the Corporation shall forthwith file, at the office or agency
maintained for the conversion of shares of this Series as hereinabove provided,
a statement showing in detail the facts requiring such adjustment and the actual
Series A Conversion Price that shall be in effect after such adjustment. In the
absence of manifest error, each such statement shall be conclusive evidence of
the correctness of the amount of the adjustment specified therein. The
Corporation shall also cause a notice setting forth any such adjustments to be
sent by first-class mail, postage prepaid, to each holder of shares of this
Series at such holder's address as it appears on the stock register of the
Corporation.
<PAGE>
(D) The Corporation shall not be required to issue a fractional
interest in a share of Common Stock or scrip upon conversion of shares of this
Series. As to any fractional interest in a share of Common Stock which otherwise
would be issuable in respect of the aggregate number of shares of this Series
surrendered for conversion at any one time by the same holder, the Corporation
shall pay a cash adjustment in respect of such fractional interest.
(E) The Corporation shall at all times reserve and keep available,
free from preemptive rights, out of its treasury stock or authorized and
unissued Common Stock, or both, solely for the purpose of effecting the
conversion of shares of this Series, such full number of shares of Common Stock
as shall then be sufficient to effect the conversion of all shares of this
Series then outstanding.
(F) Notwithstanding any other provision of this Certificate of
Designations, (i) no shares of this Series may be converted if, after giving
effect to such conversion, the number of shares of Common Stock held of record
or beneficially by the original holder of this series exceeds 4.90% (as
calculated pursuant to Rule 13d-3 under the Securities Exchange Act of 1934, as
amended) of the total number of shares of Common Stock issued and outstanding
after giving effect to such conversion and (ii) no more than 25% of the shares
of this Series issued and outstanding as of January 1 of any year may be
converted in that calendar year. If the Corporation effects a transaction that
reduces the outstanding number of shares of Common Stock to a number such that
the number of shares of Common Stock held of record or benefically by the
original holder of this series exceeds 4.90% (as calculated pursuant to Rule
13d-3 under the Securities Exchange Act of 1934, as amended) of the total number
of shares of Common Stock issued and outstanding after giving effect to such
transaction, the original holder and his affiliates shall sell the number of
shares of Common Stock required to reduce the number of shares of Common Stock
held of record or beneficially by the original holder to 4.90% (as calculated
pursuant to Rule 13d-3 under the Securities Exchange Act of 1934, as amended) of
the total number of shares of Common Stock outstanding after consummation of
such transaction.
Section 5. VOTING. The holders of shares of this Series shall have
no voting rights.
<PAGE>
IN WITNESS WHEREOF, Medical Asset Management, Inc. has caused this
Certificate of Designations of Series A Convertible Preferred Stock to be signed
and attested this 19th day of September, 1997.
ATTEST: MEDICAL ASSET MANAGEMENT, INC.
By:/s/ Dennis Calvert By: /s/Clarke Underwood
--------------------------- --------------------------------
Clarke Underwood,
Chief Financial Officer
EXHIBIT 4.4
AGREEMENT TO EXCHANGE STOCK
This agreement to exchange stock is entered into between Medical Asset
Management, Inc., a Delaware Corporation, hereafter "MAM", and Edward Dickstein
and Diana Steiner Dickstein as trustees of the Dickstein Family Trust dated
12/15/1988, as amended, hereafter, "DICKSTEIN".
1. PURPOSE. This agreement is made with respect to the ownership of
1,176,581 shares of Class A and 133,000 shares of Class B Preferred Stock of
Medical Asset Corporation (formerly known as Medical Asset Management, Inc.),
hereafter "MAC". Control of MAC passed to MAM on or about June 24, 1994. This
agreement provides for the exchange of the above referenced Preferred shares of
MAC for Preferred shares of MAM.
2. REPRESENTATIONS OF MAM.
MAM represents:
A. MAM is duly organized and in good standing in the State of
Delaware and has qualified to do business in all jurisdictions in which it
conducts business.
B. MAM has furnished to DICKSTEIN its unaudited financial
statements for the year ended December 31, 1994.
C. MAM has furnished to DICKSTEIN a copy of the draft offering
memorandum prepared for the offering of $ 3,000,000 of convertible subordinated
debentures by Global Securities of Vancouver, B.C., Canada.
D. MAM has made available to DICKSTEIN all material contracts in
effect on the date of this agreement.
E. The officers and directors of MAM have been available to
DICKSTEIN to answer any question concerning the current state of affairs of MAM
and its subsidiary.
F. MAM by action of its Board of Directors has established a Class
of Preferred Stock consisting of 5,000,000 shares designated as Series A with
the following rights, preferences and privileges:
(1) the Series shall be referred to as "Series A", (2) all
shares of this series shall be non-voting, (3) the shares
shall be convertible into common shares of the corporation on
the basis of one (1) share of Series A preferred stock for one
(1) share of common stock, (4) none of the shares of this
series shall have any dividend rights, (5) none of the shares
of this series may be redeemed prior to liquidation
<PAGE>
for any amount, and (6) upon liquidation the shares of this
series shall participate ratably in any liquidation amounts
equally with the common shares and shall have no preference
with respect thereto.
G. MAM and its predecessor MAC have previously entered into the
following agreements:
1. Management and Rental Agreement dated 5/1/91;
2. Asset Purchase Agreement dated 5/1/91;
3. Convertible Subordinated Note for $ 950,000 dated
5/1/91;
4. Exchange Agreement and Release dated 6/19/91;
5. Collateral Agreement dated 6/19/91;
6. Continuous Security Agreement dated 7/29/91;
7. Loan Purchase Agreement dated 9/1/91;
8. Second Amendment to Exchange Agreement and Release
dated 6/22/92;
9. First Amendment to Exchange Agreement and to 10%
Convertible Adjustable Subordinated Secured Note dated 9/18/92;
10. Promissory Note dated 10/1/92 for $ 1,400,000, and;
11. Third Amendment to Exchange Agreement, Convertible
Adjustable Note and First Amendment to Certain Promissory Notes date 12/1/93.
3. REPRESENTATIONS OF DICKSTEIN.
DICKSTEIN represents:
A. The material set forth above in subparagraphs B, C, D and G
above has been made available to DICKSTEIN and receipt thereof is hereby
acknowledged.
B. DICKSTEIN acknowledges having had an opportunity to review the
material provided and ask any questions of the officers and directors of MAM as
he may have wanted. DICKSTEIN acknowledges receiving satisfactory answers to
said questions and that as
2
<PAGE>
of the date of this agreement there are no questions unanswered or requests for
further information still pending.
C. DICKSTEIN represents and warrants as of the date of this
agreement it is the owner of 1,176,581 shares of Class A and 133,000 shares of
Class B Preferred Stock of MAC, that it has full and complete title thereto, and
has not previously converted into common stock or tendered for conversion any of
said Preferred Stock. DICKSTEIN further warrants and represents that no other
person or entity has any interest in or to said shares of Preferred Stock.
D. DICKSTEIN represents and warrants that as of the date of this
Agreement only the following documents remain in effect:
1. Management and Rental Agreement dated 5/1/91;
2. Asset Purchase Agreement dated 5/1/91, but only to the
extent that rights and obligations continue to exist under Sections 4.7,6 and 7;
3. Continuous Security Agreement dated 7/29/91, but only to
the extent that it purports to secure obligations under the $ 2,250,000 Note;
and
4. The Third Amendment to Exchange Agreement and Release and
to the 10% Convertible Adjustable Secured Subordinated Note Due 1995 and First
Amendment to Certain Other Promissory Notes, hereafter Third Amendment, but only
to the extent that it documents the only outstanding obligation of MAM to
Dickstein, which is the $ 2,250,000 Note and only to the extent that rights and
obligations continue to exist under Sections 2, 4 and 5 of the Third Amendment.
References to other documents in each of the agreements and specific sections
referred to above are specifically excluded and are not made a part of this
Agreement.
E. Dickstein represents and warrants that it has received all sums
and other consideration due it as provided in the agreements and amendments
thereto set forth in Subparagraph G of Paragraph 2 above. With respect to the
payments of principal and interest due under Section 4 of the Third Amendment,
DICKSTEIN acknowledges that it has received a portion of the $ 540,000 due and
owing to it during 1994. DICKSTEIN agrees to forgive any and all unpaid interest
that accrued but was unpaid from January 1, 1994 through the date of this
Agreement, and hereby acknowledges that as of the date of this Exchange
Agreement, the $ 2,250,000 Note is current and MAM is not in default on such
note.
F. DICKSTEIN represents and warrants that it is, and the
beneficiaries of the trust are "accredited investors," as that term is defined
in Rule 501(a) of Regulation D promulgated by the Securities and Exchange
Commission pursuant to the Securities Act of 1933, as amended, and that the
trustees and the beneficiaries of the Dickstein Family Trust dated 12/15/1988,
as amended, have sufficient knowledge and experience in financial and business
matters to be capable of evaluating the merits and risks of the transactions
contemplated herein.
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<PAGE>
4. CONSENT. DICKSTEIN, as holder of all shares of Preferred Stock of MAC
hereby consents and agrees to the change of control of MAC that occurred on or
about June 24, 1994 with respect to the exchange of Class A common shares of MAC
for common shares of MAM. DICKSTEIN, as holder of all shares of Preferred Stock
of MAC hereby consents and agrees to the issuance of shares of Preferred Stock
of MAM as set forth below for all issued and outstanding Preferred Stock of MAC
as set forth in this Exchange Agreement. DICKSTEIN as holder of all shares of
Preferred Stock of MAC hereby consents and agrees to the rights, preferences and
privileges of the Class A Preferred Stock of MAM as now constituted.
5. EXCHANGE. DICKSTEIN hereby agrees to exchange 1,176,581 shares of Class
A Preferred stock and 133,000 shares of Class B Preferred Stock of MAC for
3,000,000 shares of Class A Preferred Stock of MAM. Upon receipt, said shares
shall constitute the total consideration to be received under the agreements set
forth in paragraph 2(g) above, except for the Management and Rental Agreement
dated 5/1/91 and the $ 2,250,000 Note.
6. CONVERSION. DICKSTEIN agrees that the rights of conversion of the shares
of Class A Preferred Stock of MAM into common shares of MAM shall be continued
to be governed by the contractual limitations that existed with respect to the
shares of Preferred Stock of MAC. These limitations are that the right to
convert shall be limited to the extent that at no time may Edward Dickstein or
any member of his family hold, directly, indirectly or beneficially, more than
4.9% of the common stock of MAM. The parties agree that no more than 25% of the
Class A Preferred Stock may be converted into common shares of MAM in any one
calendar year.
7. MODIFICATION OF OPERATING AGREEMENT. The parties agree that the
Management and Rental Agreement dated 5/1/91 shall be amended by inserting the
following language in paragraph 5.3(B)(ii) in lieu of the language following the
words "provided, however," as follows:
"provided however, that in lieu of complying with the provisions of
Section 2.6 hereof, Doctor may, in his sole discretion, pay to
Manager the reasonable fair value of such covenant not to compete
which the Parties agree is equal to all sums paid to Doctor under
this Agreement except for those related to the compensation for
Professional Services rendered plus the assignment of Doctor's
interest in any collections from receivables created after the
Effective Date of this agreement, outstanding as of the Effective
Date of the termination of this agreement ("Residual Collections")."
8. ANTI-DILUTION AND CONSIDERATION. DICKSTEIN consents to the number
of shares of Preferred Stock of MAM to be issued hereunder and waives any claim
to any different number of shares based on any prior agreement. DICKSTEIN
acknowledges receiving good and valuable consideration with respect to the
issuance of Preferred Stock under this Exchange Agreement. The parties agree
that in the event of any change in the issued and outstanding
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shares of common stock of MAM by way of a stock dividend, merger, stock split or
reverse stock split an appropriate adjustment shall be made in the conversion
ratio between the Series A Preferred Stock and common shares of MAM so that the
same relative conversion ratio will be maintained that is in existence at the
date this Exchange Agreement is executed.
9. LEGAL ADVICE. The parties hereto acknowledge that this agreement may
have substantial legal implications to the respective parties. The parties have
had an opportunity to consult with legal counsel of their choice and have not
relied on the other party as to the legal interpretation or meaning of any part
of this agreement or any representation or warranty made in connection with the
preparation and execution of this Exchange Agreement.
10. GOVERNING LAW AND ATTORNEY'S FEES. The parties agree that this Exchange
Agreement is made in the state of California and California law shall govern as
to any interpretation thereof. In the event of litigation with respect to this
Exchange Agreement the prevailing party shall be entitled to attorney's fees and
costs.
11. COMPLETE AGREEMENT. The parties agree that this Agreement to Exchange
Stock is complete in and to itself and that there are no other agreements,
understandings, or contracts dealing with any matters contained in this
Agreement. This Agreement may only be changed, amended or modified by a writing
signed by the parties hereto.
In witness whereof the parties have executed this Agreement To Exchange Stock
this 28th day of March, 1995 at Los Angeles, California.
Medical Asset Management, Inc.
By /s/ John Regan
-----------------------------------
John Regan, President
Dickstein Family Trust dated
12/15/1988, as amended
/s/ Edward Dickstein
- -----------------------------------
Edward Dickstein, Trustee
/s/ Diana Steiner Dickstein
- -----------------------------------
Diana Steiner Dickstein, Trustee
5
EXHIBIT 4.5
MEDICAL ASSET MANAGEMENT, INC.
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EQUITY-BASED INCENTIVE PLAN
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SECTION CONTENTS PAGE
1. Purpose; Definitions 1
2. Administration 4
3. Stock Subject to Plan 5
4. Eligibility 6
5. Stock Options 6
6. Stock Appreciation Rights 12
7. Restricted Stock 14
8. Long-Term Performance Awards 16
9. Change-in-Control Provisions 18
10. Amendments and Termination 21
11. Unfunded Status of Plan 21
12. General Provisions 22
13. Effective Date of Plan 22
14. Term of Plan 24
15. Indemnification of Committee 24
16. Financing 25
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Adopted by the Directors On October 1, 1996, and approved by
the Shareholders on , 199
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<PAGE>
SECTION 1. PURPOSE; DEFINITIONS.
The name of this plan is the Medical Asset Management, Inc.
Equity-Based Incentive Plan (the "Plan").
The purposes of the Plan are to promote the best interests of the
Corporation and its Shareholders by strengthening the Corporation's ability to
attract and retain skilled and competent managerial and technical employees, and
expert contractors, and to provide a means to encourage stock ownership and
proprietary interest in the Corporation and its future success by executive and
other officers, key consultants and contractors, and key employees upon all of
whose judgment, initiative and efforts the financial success and growth of the
Corporation largely depend, and to align the interests of such persons directly
with the interests of the Shareholders of the Corporation. Specifically the Plan
will enable key employees and Eligible Independent Contractors (as hereinafter
defined) of Medical Asset Management, Inc. ("the Company") to (i) own shares of
stock in the Company, (ii) participate in the shareholders and (iv) enable the
Company to attract, retain and motivate key employees, non-employee directors,
and independent contractors of particular merit.
It is intended that eligibility under this Plan be restricted to a
select group of management or highly compensated employees as defined by the
Employee Retirement Income Security Act of 1974. All provisions of this Plan
shall be construed to effectuate such purposed.
For the purposes of the Plan, the following terms shall be defined
as set forth below:
(i) "BOARD" means the Board of Directors of the Company.
(ii) "CAUSE" means a felony conviction of a Participant or the
failure of a Participant to contest prosecution for a felony,
or a Participant's willful misconduct or dishonesty, any of
which is directly and materially harmful to the business or
reputation of the Company.
(iii) "CODE" means the Internal Revenue Code of 1986, as amended
from time to time, and any successor thereto.
(iv) "COMMITTEE" means a duly elected or appointed Administrative
Committee having control over the Plan and meeting the
requirements of all applicable regulatory agencies requiring
such a committee. If at any time no Committee shall be duly
elected and serving as a result of Board action or
resignations of the Committee or otherwise, then the functions
of the Committee specified in the Plan shall be exercised by
the Board.
(v) "COMPANY" means Medical Asset Management, Inc., a corporation
organized under the laws of the State of Delaware and its
subsidiaries or any successor organization.
<PAGE>
(vi) "DISABILITY" shall have the same meaning as under the
Company's Retirement Plan, as it may exist or be amended from
time to time.
(vii) "EARLY RETIREMENT" means retirement, with consent of the
Committee at the time of retirement, from active employment
with the Company prior to normal retirement age under
provisions of the Company's pension plan, if such a plan is in
effect at the time; or pursuant to the Company's
profit-sharing plan if such a plan is in place and no pension
plan is then in effect; or retirement prior to age 65 if
neither a pension plan nor a profit sharing plan are then in
place.
(viii) "ELIGIBLE INDEPENDENT CONTRACTOR" means an independent
contractor hired by the Company to provide expert advisory,
technical or consulting services for the Company at or after
the time the Plan is initially approved by the shareholders.
(ix) "FAIR MARKET VALUE" means, as of any given date, the average
of the closing bid price and the closing asked price of the
Stock as furnished by the National Association of Securities
Dealers Inc. ("NASDAQ") on the effective date of the Award,
or, if either no such sale is reported by NASDAQ on such date
or the Stock is not publicly traded on or as of such date, the
fair market value of the Stock as determined by the Committee
in good faith based on the best available facts and
circumstances at the time. If the Stock subject to the Plan is
not registered under the Securities Act of 1933 or its then
existing corollary statutes, then and in that event the Board
or the Committee shall reduce the fair market value as
otherwise determined in accordance with this paragraph by a
factor of 20% to give effect to the restricted nature of such
securities.
(x) "INCENTIVE STOCK OPTION" means any Stock Option intended to be
and designated as an "Incentive Stock Option" within the
meaning of Section 422A of the Code.
(xi) "INSIDER" means a Participant who is subject to the
requirements of the Rules (as defined below).
(xii) "LONG-TERM PERFORMANCE AWARD" or "LONG-TERM AWARD" means an
award made pursuant to Section 8 below that is payable in cash
and/or Stock (including Restricted Stock) in accordance with
the terms of the grant, based on Company, business unit and/or
individual performance over a period of at least two years.
(xiii) "NON-QUALIFIED STOCK OPTION" means any Stock Option that is
not an Incentive Stock Option.
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<PAGE>
(xiv) "NORMAL RETIREMENT" means retirement from active employment
with the Company or with any Affiliate (as defined in Section
9) pursuant to the normal retirement provisions of the
Company's pension plan, if such a plan is in effect at the
time; or pursuant to the Company's profit-sharing plan if no
pension plan is then in effect; or retirement at or after age
65 if neither a pension nor a profit sharing plan are then in
place.
(xv) "PARTICIPANT" means an employee, or Eligible Independent
Contractor to whom an Award is granted pursuant to the Plan.
(xvi) "RESTRICTED STOCK" means an award of shares of Stock that is
subject to restrictions pursuant to Section 7 below.
(xvii) "RETIREMENT" shall have the same meaning prescribed in
Section herein. The term shall contemplate either normal or
early retirement.
(xviii) "RULES" means the regulations promulgated by the Securities
and Exchange Commission under Section 16 of the Exchange Act.
(xix) "SECURITIES BROKER" means the registered securities broker
acceptable to the Company who agrees to effect the cashless
exercise of an Option pursuant to the Section 5(m) hereof.
(xx) "STOCK" means the Common Stock, $0.001 par value per share, of
the Company.
(xxi) "STOCK APPRECIATION RIGHT" means the right, pursuant to an
award granted under Section 6 below, to surrender to the
Company all (or a portion) of a Stock Option in exchange for
an amount equal to the difference between (i) the Fair Market
Value, as of the date such Stock Option (or such portion
thereof), and (ii) the aggregate exercise price of such Stock
Option (or such portion thereof).
(xxii) "STOCK OPTION" or "OPTION" means any option to purchase
shares of Stock (including Restricted Stock, if the Committee
so determines) granted pursuant to Section 5 below.
In addition, the terms "CHANGE-IN-CONTROL," "POTENTIAL
CHANGE-IN-CONTROL" and "CHANGE-IN-CONTROL PRICE" shall have meanings set forth,
respectively, in Sections 9(b), (c) and (d) below.
SECTION 2. ADMINISTRATION OF PLAN; DUTY OF INSIDERS.
The Plan shall be administered by the Committee, as defined, who
shall serve at the pleasure of the Board.
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<PAGE>
The Committee shall have the authority to grant pursuant to the
terms of the Plan: (i) Stock Options, (ii) Stock Appreciation Rights, (iii)
Restricted Stock and/or (iv) Long-Term Performance Awards to key employees and
officers of the Company; and (i) Stock Options and/or (ii) Stock Appreciation
Rights to Eligible Independent Contractors.
In particular, the Committee shall have the authority:
(i) to select the officers and other key employees of the Company
to whom Stock Options, Stock Appreciation Rights, Restricted
Stock and Long-Term Performance Awards may from time to time
be granted hereunder and Eligible Independent Contractors to
whom Stock Options and Stock Appreciation Rights may from time
to time be granted hereunder;
(ii) to determine whether and to what extent Incentive Stock
Options, Non-Qualified Stock Options, Stock Appreciation
Rights, Restricted Stock and Long-Term Performance Awards, or
any combination thereof, are to be granted hereunder;
(iii) to determine the number of shares of Stock to be covered by
each such award granted hereunder,
(iv) to determine the terms and conditions, not inconsistent with
the terms of the Plan, of any award granted hereunder:
including, but not limited to, the share price and any
restriction or limitation, or any vesting acceleration or
forfeiture waiver regarding any Stock Option or other award
and/or the shares of Stock relating thereto, based on such
factors as the Committee shall determine, in its sole
discretion;
(v) to determine whether and under what circumstances a Stock
Option may be settled in cash or stock, including Restricted
Stock under Section 5(1);
(vi) to determine whether and under what circumstances a Stock
Option may be exercised without a payment of cash under
Section 5(m); and
(vii) to determine whether, to what extent and under what
circumstances Stock or cash distributable or payable with
respect to an award under this Plan shall be deferred either
automatically or at the election of the Participant.
The Committee shall have the authority to adopt, alter and repeal
such administrative rules, guidelines and practices governing the Plan as it
shall, from time to time,, deem advisable; to interpret the terms and provisions
of the Plan and any award issued under the Plan (and any agreements relating
thereto); and to otherwise supervise the administration of the Plan.
All decisions made by the Committee pursuant to the provisions of
the Plan shall be final and binding on all persons, including the Company and
Plan Participants.
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<PAGE>
It shall be a condition of participation in this Plan by an Insider
that such Participant individually assume full responsibility to comply with all
federal, state or other applicable securities laws in connection with their
Awards and award exercise decisions under the Plan, and that such Insider retain
competent counsel or other advisors to ensure compliance with all such
applicable laws.
SECTION 3. STOCK SUBJECT TO THE PLAN.
(i) STOCK SUBJECT TO PLAN. Awards of Stock under the Plan shall be
made from stock which is either authorized and unissued or
held in the treasury of the Company. The maximum number of
shares of Stock authorized for issuance under the Plan with
respect to the grant of awards while the Plan is in effect,
subject to adjustment in accordance with paragraph 3(d) below,
shall be up to 2,000,000 shares in the aggregate, or such
other number of shares as are subsequently approved by the
board, or as may be approved by the Company's Shareholders, if
such approval is required to meet regulatory or stock exchange
requirements.
(ii) COMPUTATION OF STOCK AVAILABLE FOR THE PLAN. For the purpose
of computing the total number of shares of Stock available for
distribution at any time in each calendar year during which
the Plan is in effect in connection with the exercise of
options awarded under the Plan, there shall be debited against
the total number of shares determined to be available pursuant
to paragraphs (i), and (iii) of this Section 3 the maximum
number of shares of Stock subject to issuance upon exercise of
options or other stock based awards made under the Plan.
(iii) UNUSED, FORFEITED AND REACQUIRED SHARES. Any unused portion
of the shares annually available for award shall be carried
forward and shall be made available for Plan awards in
succeeding calendar years. The shares related to the
unexercised or undistributed portion of any terminated,
expired or forfeited award for which no material benefit was
received by a Participant (i.e. dividends) also shall be made
available for distribution in connection with future awards
under the Plan to the extent permitted to receive exemptive
relief pursuant to the Rules.
(iv) OTHER ADJUSTMENTS. In the event of any merger, reorganization,
consolidation, recapitalization, stock dividend, or other
change in corporate structure affecting the Stock, such
substitution or adjustment shall be made in the aggregate
number of shares reserved for issuance under the Plan, and in
the number and option price of shares subject to outstanding
Options granted under the Plan, as may be determined to be
appropriate by the Committee in its sole discretion, provided
that the number of shares subject to any award shall always be
a whole number. Such adjusted option price shall also be used
to determine the amount
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<PAGE>
payable by the Company upon the exercise of any Stock
Appreciation Right associated with any Stock Option.
SECTION 4. ELIGIBILITY; LIMIT ON AWARDS TO CERTAIN PERSONS.
Officers of the Company, other key employees of the Company, and
Eligible Independent Contractors, who are responsible for or contribute to the
management, growth and/or profitability of the business of the Company are
eligible to be granted awards under the Plan as determined in the sole
discretion of the Committee.
Section 162(m) of the Internal Revenue Code places a limit of $1
million on the tax-deductibility of compensation paid to individuals listed in
the proxy statements of publicly held corporations. Compensation for the
individual executives listed in company proxy statements which exceeds $1
million on an individual basis may not be tax-deductible unless it meets certain
requirements with respect to being performance-based. To ensure that its
executive compensation program is in full compliance with the provisions
regarding performance-based compensation, the number of Awards (calculated as a
number of Shares granted to an individual under the Plan may not exceed, in
total over the life of that individual, 20% of the shares authorized and
approved for grants under the Plan.
SECTION 5. STOCK OPTIONS.
Stock Options may be granted alone, in addition to or in tandem with
other awards granted under the Plan, consistent with the requirement of Section
12(vi), below. Any stock Option granted under the Plan shall be in such form as
the Committee may from time to time approve.
Stock Options granted under the Plan may be of two types: (i)
Incentive Stock Options and (ii) Non-Qualified Stock Options.
The Committee shall have the authority to grant Incentive Stock
Options, Non-Qualified Stock Options, or both types of Stock Options (in each
case with or without Stock Appreciation Rights). To the extent that any Stock
Options does not qualify as an Incentive Stock Option, it shall constitute a
separate Non-Qualified Stock Option.
Anything in the Plan to the contrary notwithstanding, no term of
this Plan relating to Incentive Stock Options shall be interpreted, amended or
altered, nor shall any discretion or authority granted under the Plan be so
exercised, so as to disqualify the Plan under Section 422A of the Code, or,
without the consent of the optionee(s) affected, to disqualify any Incentive
Stock Option under such Section 422A.
In the discretion of the Committee, Non-Qualified Stock Options or
shares of Restricted Stock may be issued to any employee in consideration of the
waiver of a portion of such Employee's salary, compensation or fees, with the
spread between the exercise price of such Stock Options and the then Fair Market
Value of the Stock being equal to the salary,
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<PAGE>
compensation or fees waived or such other terms and provisions as the Committee
may in its discretion provide.
Stock Options granted under the Plan shall be subject to the
following terms and conditions and shall contain such additional terms and
conditions, not inconsistent with the terms of the Plan, as the Committee shall
deem appropriate:
(i) OPTION PRICE. The option price per share of Stock purchasable
under a Stock Option shall be determined by the Committee at
the time of grant but shall be not less than 100% of the Fair
Market Value of the Stock at the time of grant for Incentive
Stock Options and 85% of the Fair Market Value of the Stock at
the time of grant for Non-Qualified Options; PROVIDED, however
that Non-Qualified Options issued in exchange for options held
by employees of an acquired company or a division or
subsidiary thereof may, at the Committee's discretion, be
issued at not less that 50% of the Fair Market Value of the
Stock at the time of grant.
Any Incentive Stock Option granted to any optionee who, at
the time the option is granted, owns more than 10% of the
voting power of all classes of stock of the Company or of a
Parent or Subsidiary corporation, shall have an exercise price
no less than 110% of Fair Market Value per share on date of
the grant.
(ii) OPTION TERM. The term of each Stock Option shall be fixed by
the Committee, but no Incentive Stock Option shall be
exercisable more than ten years after the date the Option is
granted and no Non-Qualified Stock Option shall be exercisable
more than ten years and one day after the date the Option is
granted. However, any option granted to any optionee who, at
the time the option is granted owns more than 10% of the
voting power of all classes of Stock of the Company or of a
Parent or Subsidiary corporation may no have a term of more
than five years. No option may be exercised by any person
after expiration of the term of the option.
(iii) EXERCISABILITY. Stock Options shall be exercisable at such
time or times and subject to such terms and conditions as
shall be determined by the Committee at or after grant,
provided, however, that, except as provided in Section 5(vii)
and Section 9, unless otherwise determined by the Committee at
or after grant, no Stock Option shall be exercisable during
the six months following the date of the granting of the
Option. If the Committee provides, in its discretion, that any
Stock Option is exercisable only in installments, the
Committee may waive such installment exercise only in
installments, the Committee may waive such installment
exercise provision sat any time at or after grant in whole or
in part, based on such factors as the Committee shall
determine, in its sole discretion. No shares of Stock shall be
issued until full payment therefor has been made. An otionee
shall generally have the rights to dividends or other rights
or a
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<PAGE>
shareholder with respect to shares subject to the Option when
the optionee has given written notice of exercise, has paid in
full for such shares, and, if requested, has given the
representation described in Section 12(i).
(iv) METHODS OF EXERCISE.
(a) Stock Options may be exercised in whole or in part by
giving written notice of exercise to the Company
specifying the number of shares of Stock to be
purchased. Such notice shall be accompanied by payment
in full of the purchase price, either by certified or
bank check, or such other instrument as the Committee
may accept.
(b) As determined by the Committee, in its sole discretion,
at or after grant, payment in full or in part may also
be made in the form of unrestricted shares of Stock
already owned by the optionee based on the Fair Market
Value of the Stock on the date the option is exercised,
as determined by the Committee), PROVIDED, however,
that, in the case of an Incentive -------- Stock Option,
the right to make a payment in the form of already owned
shares may be authorized only at the time the option is
granted.
If payment of the option exercise price of a
Non-Qualified Stock Option is made in whole or in part
in the form of Restricted Stock, such Restricted Stock
(and any replacement shares relating thereto) shall
remain (or be) restricted in accordance with the
original terms of the Restricted Stock award in
question, and any additional Stock received upon the
exercise shall be subject to the same forfeiture
restrictions, unless otherwise determined by the
Committee, in its sole discretion, at or after grant.
If payment of the Option exercise price of a
Non-Qualified Option is made in whole or in part in the
form of unrestricted stock already owned by the
Participant, the Company may require that the stock has
been owned by the Participant for a period of time so
that such payment would not result in a charge to the
Company's earnings as a result of the exercise. Such
provision may be used by the Company to prevent a
pyramid exercise.
(c) On receipt of written notice to exercise, the Committee
may, in its sole discretion, elect to cash out all or
part of the portion of the option(s) to be exercised by
paying the optionee an amount, in cash or Stock, equal
to the excess of the Fair Market Value of the Stock over
the option price (the "Spread Value") on the effective
date of such cash-out.
8
<PAGE>
In addition, if the option agreement so provides at
grant or is amended after grant and prior to exercise to
so provide (with the optionee's consent), the Committee
may require that all or part of the shares to be issued
with respect to the Spread Value of any exercise option
take the form of Restricted Stock, which shall be valued
on the date of exercise on the basis of the Fair Market
Value of such Restricted Stock determined without regard
to the forfeiture restrictions involved.
(d) To the extent permitted under the applicable laws
and regulations, at the request of the Participant, and
with the consent of the Committee, the Company agrees to
cooperate in a "cashless exercise" of an Option. The
cashless exercise shall be effected by the Participant
delivering to a Securities Broker instructions to sell a
sufficient number of shares of Common Stock to cover the
costs and expenses associated therewith.
(v) WITHHOLDING TAXES. The recipient of an Award under the Plan is
responsible at the time of any taxable event in connection
with such Award to make satisfactory arrangements with the
Company for the payment of the required federal and state
withholding taxes due.
(vi) REPLACEMENT OPTIONS. If an Option granted pursuant to the Plan
may be exercised by an optionee by means of a stock-for-stock
swap method of exercise as provided above, then the Committee
may, in its sole discretion and at the time of the original
option grant, authorize the Participant to automatically
receive a replacement Option pursuant to this part of the
Plan. This replacement option shall cover a number of shares
determined by the Committee, but in no event more than the
number of shares equal to the difference between the number of
shares of the original option exercised and the net shares
received by the Participant from such exercise. The exercise
price of the replacement option shall equal the then current
Fair Market Value, and with a term extending to the expiration
date of the original Option.
The Committee shall have the right, in its sole discretion and
at any time, to discontinue the automatic grant of replacement
options if it determines the continuance of such grants to no
longer be in the best interest of the Company.
(vii) TRANSFERABILITY OF OPTION. Stock Options shall be
transferable according to then terms of the Stock Option
Agreement.
(viii) TERMINATION OF PARTICIPANT'S EMPLOYMENT BY REASON OF DEATH.
Subject to Section 5(xi), if an optionee's employment by the
Company
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<PAGE>
terminates by reason of Disability, any Stock Option held by
such optionee may thereafter be exercised by the optionee, to
the extent it was exercisable at the time of termination, or
on such accelerated basis as the Committee may determine at or
after grant, for a period of five years (or such shorter
period as the Committee may specify at grant) from the date of
such termination of employment or until the expiration of the
stated term of such Stock Option, whichever period is the
shorter; provided, however, that, if the optionee dies within
such five-year period (or such shorter period as the Committee
shall specify at grant), any unexercised Stock Option held by
such optionee shall thereafter be exercisable to the extent to
which it was exercisable at the time of death for a period of
twelve months from the date of such death or until the
expiration of the stated term of such Stock Option, whichever
period is the shorter. In the event of termination of
employment by reason of Disability, if an Incentive Stock
Option is exercised after the expiration of the exercise
periods that apply for purposes of Section 422A of the Code,
such Stock Option will thereafter be treated as a
Non-Qualified Stock Option.
(ix) TERMINATION OF PARTICIPANT'S EMPLOYMENT BY REASON OF
RETIREMENT. Subject to Section 5(xi), if an optionee's
employment by the Company terminates by reason of Normal or
Early Retirement, any Stock Option held by such optionee may
thereafter be exercised by the optionee, to the extent it was
exercisable at the time of such Retirement or on such
accelerated basis as the Committee may determine at or after
grant, for a period of five years (or such shorter period as
Committee may specify at grant) from the date of such
termination of employment or the expiration of the stated term
of such Stock Option, whichever period is the shorter;
provided, however, that, if the optionee dies within such
three-year period, any unexercised Stock Option held by such
optionee shall thereafter be exercisable, to the extent to
which it was exercisable at the time of death, for a period of
twelve months from the date of such death or until the
expiration of the stated term of such Stock Option, whichever
period is the shorter. In the event of termination of
employment by reason of Retirement, if an Incentive Stock
Option is exercised after the expiration of the exercise
periods that apply for purposes of Section 422A of the Code,
the option will thereafter be treated as a Non-Qualified Stock
Option.
(x) OTHER TERMINATIONS OF EMPLOYMENT OF A PARTICIPANT. Unless
otherwise determined by the Committee at or after grant, if an
optionee's employment by the Company terminates for any reason
other than death, Disability or Normal or Early Retirement,
the Stock Option shall thereupon terminate, except that such
Stock Option may be exercised for the lesser of three months
or the balance of such Stock Option's term if the optionee is
involuntarily terminated by the Company without Cause to the
10
<PAGE>
extent it was exercisable at the time of such termination or
on such accelerated basis as the Committee may determine at or
after grant.
(xi) SPECIAL INCENTIVE STOCK OPTION LIMITATIONS. To the extent
required for "incentive stock option" status under Section
422A of the Code, the aggregate Fair Market Value (determined
as of the time of grant) of the Stock with respect to which
Incentive Stock Options granted after 1986 are exercisable for
the first item by the optionee during any calendar year under
the Plan and/or any other stock option plan of the Company
(within the meaning of Section 425 of the Code) after 1986
shall not exceed $100,000.
To the extent (if any) permitted under Section 422A of the
Code, if (i) a Participant's employment with the Company is
terminated by reason of death, Disability or Retirement and
(ii) the portion of any Incentive Stock Option that is
otherwise exercisable during the post-termination period
specified under Section 5(g), (h) or (i), applied without
regard to this Section 5(k), is greater than the portion of
such option that is exercisable as an "incentive stock option"
during such post-termination period under Section 422A, such
post-termination period shall automatically be extended (but
not beyond the original option term) to the extent necessary
to permit the optionee to exercise such Incentive Stock
Option. The Committee is also authorized to provide at grant
for a similar extension of the post-termination exercise
period in the event of a Change-in Control.
SECTION 6. STOCK APPRECIATION RIGHTS.
(i) GRANT AND EXERCISE. Stock Appreciation Rights may be granted
in conjunction with all or part of any Stock Option granted
under the Plan, complying at all times with the requirements
of Section 12(vi), below. In the case of a Non-Qualified Stock
Option, such rights may be granted either at or after the time
of the grant of such Stock Option. In the case of an Incentive
Stock Option, such rights may be granted only at the time of
the grant of such Stock Option.
A Stock Appreciation Right or applicable portion thereof
granted with respect to a given Stock Option shall terminate
and no longer be exercisable upon the termination or exercise
of the related Stock Option, except that, unless otherwise
determined by the Committee, in its sole discretion, at the
time of grant, a Stock Appreciation Right granted with respect
to less than the full number of shares covered by a related
Stock Option shall not be reduced until the number of shares
covered by an exercise or termination of the related Stock
Option exceeds the number of shares not covered by the Stock
Appreciation Right.
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A Stock Appreciation Right may be exercised by an optionee, in
accordance with Section 6(ii), by surrendering the applicable
portion of the related Stock Option. Upon such exercise and
surrender, the optionee shall be entitled to receive an amount
determined in the manner prescribed in Section 6(b). Stock
Options which have been so surrendered, in whole or in part,
shall no longer be exercisable to the extent the related Stock
Appreciation Rights have been exercised.
(ii) TERMS AND CONDITIONS. Stock Appreciation Rights shall be
subject to such terms and conditions, not inconsistent with
the provisions of the Plan, as shall be determined from time
to time by the Committee, including the following:
(a) Stock Appreciation Rights shall be exercisable only at
such time or times and to the extent that the Stock
Options to which they relate, if any, shall be
exercisable in accordance with the provisions of Section
5 and this Section 6 of the Plan; provided, however,
that any Stock Appreciation Right granted subsequent to
the grant of the related Stock Option shall not be
exercisable during the first six months of its term,
except that this special limitation shall not apply in
the event of death or Disability of the optionee prior
to the expiration of the six-month period.
(b) Upon the exercise of a Stock Appreciation Right, an
optionee shall be entitled to receive up to, but not
more than, an amount in cash and/or shares of Stock
equal in value to the excess of the Fair Market Value of
one share of Stock over the option price per share
specified in the related Stock Option, multiplied by the
number of shares in respect of which the Stock
Appreciation Right shall have been exercised, with the
Committee having the right to determine the form of
payment.
(c) Sock Appreciation Rights shall be transferable only when
and to the extent that the underlying Stock Option would
be transferable under Section S(f) of the Plan.
(d) Upon the exercise of a Stock Appreciation Right, the
Stock Option or part thereof to which such Stock
Appreciation Right is related shall be deemed to have
been exercised for the purpose of the limitation set
forth in Section 3 of the Plan on the number of shares
of Stock to be issued under the Plan, but only to the
extent of the number of shares issued under the Stock
Appreciation Right at the time of exercise based on the
value of the Stock Appreciation Right at such time.
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<PAGE>
(e) A Stock Appreciation Right granted in connection with an
Incentive Stock Option may be exercised only if and when
the market price of the Stock subject to the Incentive
Stock Option exceeds the exercise price of such Stock
Option.
(f) In its sole discretion, the Committee may provide, at
the time of grant of a Stock Appreciation Right under
this Section 6, that such Stock Appreciation Right can
be exercised only in the event of a Change-in-Control
and/or a Potential Change-in-Control, subject to such
terms and conditions as the Committee may specify at
grant.
(g) The Committee, in its sole discretion, may also provide
that, in the event of a Change-in-Control and/or a
Potential Change-in-Control, the amount to be paid upon
the exercise of a Stock Appreciation Right shall be
based on the Change-in-Control Price, subject to such
terms and conditions at the Committee may specify at
grant.
SECTION 7. RESTRICTED STOCK.
(i) ADMINISTRATION. Shares of Restricted Stock may be issued
either alone or in addition to other awards granted under the
Plan, complying at all times with the requirements of Section
12(vi), below. The Committee shall determine the number of
shares to be awarded, the price (if any) to be paid by the
recipient of Restricted Stock (subject to Section 7(ii)), the
time or times within which such awards may be subject to
vesting and/or forfeiture, and all other conditions of the
awards.
The Committee may condition the grant of Restricted Stock upon
the attainment of specified performance goals or such other
factors as the Committee may determine, in its sole
discretion.
The provisions of Restricted Stock awards need not be the same
with respect to each recipient.
(ii) AWARDS AND CERTIFICATES. The grantee of a Restricted Stock
award shall not have any rights with respect to such award,
unless and until such recipient has executed an agreement
evidencing the award and had delivered a fully executed copy
thereof to the Company, and has otherwise complied with the
applicable terms and conditions of such award.
(a) The purchase price for shares of Restricted Stock shall
be may be any price determined by the Administrative
Committee, and may be zero.
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(b) Awards of Restricted Stock must be accepted within a
period of 60 days (or such shorter period as the
Committee may specify at grant) after the award date, by
executing a Restricted Stock Award Agreement and paying
whatever price (if any) is required under Section
7(ii)(a).
(c) Each Participant receiving a Restricted Stock award
shall be issued a stock certificate in respect of such
shares of Restricted Stock. Such certificate shall be
registered in the name of such Participant, and shall
bear an appropriate legend referring to the terms,
conditions, and restrictions applicable to such award,
substantially in the following form:
"The transferability of this certificate and the
shares of stock represented hereby are subject to
the terms and conditions (including forfeiture) of
the Medical Asset Management, Inc. Comprehensive
Management Incentive Plan and an Agreement entered
into between the registered owner and Medical
Asset Management, Inc. Copies of such Plan and
Agreement are on file at the offices of Medical
Asset Management, Inc., 200 Desert Building, 79
South Main Street, Salt Lake City, Utah 84111".
(d) The Committee shall require that the stock certificates
evidencing such shares be held in custody by the Company
until the restrictions thereon shall have lapsed, and
that, as a condition of any Restricted Stock award, the
Participant shall have delivered a stock power, endorsed
in blank, relating to the Stock covered by such award.
(iii) RESTRICTIONS AND CONDITIONS. The shares of Restricted Stock
awarded pursuant to this Section 7 shall be subject to the
following restrictions and conditions:
(a) Subject to the provisions of this Plan and the award
Agreement, during a period set by the Committee
commencing with the date of such award (the "Restriction
Period"), the Participant shall not be permitted to
sell, transfer, pledge, assign or otherwise encumber
shares of Restricted Stock awarded under the Plan.
Within these limits, the Committee, in its sole
discretion, may provide for the lapse of such
restrictions in installments and may accelerate or waive
such restrictions in whole or in part, based on service,
performance and/or such other factors or criteria as the
Committee may determine, in its sole discretion.
14
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(b) Except as provided in this paragraph (b) and Section
7(iii)(a), the Participant shall have, with respect to
the shares of Restricted Stock, all of the rights of a
Shareholder of the Company, including the right to vote
the shares, and the right to receive any cash dividends.
The Committee, in its sole discretion, as determined at
the time of award, may permit or require the payment of
cash dividends to be deferred and, it the Committee so
determines, reinvested in additional Restricted Stock to
the extent shares are available under Section 3.
(c) Subject to the applicable provisions of the award
Agreement and this Section 7, upon termination of a
Participant's employment with the Company for any reason
during the Restriction Period, all shares still subject
to restriction shall be forfeited by the Participant.
(d) In the even of hardship or other special circumstances
of a Participant whose employment with the Company is
involuntarily terminated (other than for Cause), the
Committee may, in it sole discretion, waive in whole or
in part any or all remaining restrictions with respect
to such Participant's shares of Restricted Stock, based
on such factors as the Committee may deem appropriate.
(e) If and when the Restriction Period expires without a
prior forfeiture of the Restricted Stock subject to such
Restriction Period, the certificates for such shares
shall be delivered to the Participant promptly.
SECTION 8. LONG TERM PERFORMANCE AWARDS.
(i) AWARDS AND ADMINISTRATION. Long Term Performance Awards may be
awarded either alone or in addition to other awards granted
under the Plan, complying at all times with the requirement of
Section 129(vi), below. The Committee shall determine the
nature, length and starting date of the performance period
(the 'Performance Period") for each Long Term Performance
Award, which shall be at least two years (subject to Section 9
below), and shall determine the performance objectives to be
used in valuing Long Term Performance Awards and determining
the extent to which such Long Term Performance Awards have
been earned. Performance objectives may vary from Participant
to Participant and between groups of Participants and shall be
based upon such Company, business unit and/or individual
performance factors and criteria as the Committee may deem
appropriate, including, but not limited to, earnings per share
or return on equity. Performance Periods may overlap and
15
<PAGE>
Participants may participate simultaneously with respect to
Long Term Performance Awards that are subject to different
Performance Periods and/or different performance factors and
criteria.
At the beginning of each Performance Period, the Committee
shall determine for each Long Term Performance Award subject
to such Performance period the range of dollar values or
number of shares of Stock to be awarded to the Participant at
the end of the performance Period if and to the extent that
the relevant measure(s) of performance for such Long Term
Performance Award is (are) met. Such dollar values or number
of shares of Stock may be fixed or may vary in accordance with
such performance and/or other criteria as may be specified by
the Committee, in its sole discretion.
(ii) ADJUSTMENT OF AWARDS. In the event of special or unusual event
or circumstances affecting the application of one or more
performance objectives to a Long Term Performance Award, the
Committee may revise the performance objectives and/or
underlying factors and criteria applicable to the Long Term
Performance Awards affected, to the extent deemed appropriate
by the Committee, in its sole discretion, to avoid unintended
windfalls or hardship.
(iii) TERMINATION OF EMPLOYMENT. Subject to Section 9 below and
unless otherwise provided in the applicable award
agreement(s), if a Participant terminates employment with the
Company during a Performance Period because of death,
Disability or Retirement, such Participant shall be entitled
to a payment with respect to each outstanding Long Term
Performance Award at the end of the
(a) based, to the extent relevant under the terms of the
award, upon the Participant's performance for the
portion of such Performance Period ending on the date of
termination and the performance of the applicable
business unit(s) for the entire Performance Period, and
(b) prorated, where deemed appropriate by the Committee, for
the portion of the Performance Period during which the
Participant was employed by the Company, all as
determined by the Committee, in its sole discretion.
However, the Committee may provide for any earlier payment in
settlement of such award in such amount and under such terms
and conditions as the Committee deems appropriate.
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<PAGE>
Subject to Section 9 below, if a Participant terminates
employment with the Company during a Performance Period for
any other reason, then such Participant shall not be entitled
to any payment with respect to the Long Term Performance
Awards subject to such Performance Period, unless the
Committee shall otherwise determine, in its sole discretion.
(iv) FORM OF PAYMENT. The earned portion of a Long Term Performance
Award may be paid currently or on a deferred basis with such
interest or earnings equivalent as may be determined by the
Committee, in its sole discretion. Payment shall be made in
the form of cash or whole shares of Stock, including
Restricted Stock, either in a lump sum payment or in annual
installments commencing as soon as practicable after the end
of the relevant Performance Period, all as the Committee shall
determine at or after grant. If and to the extent a Long Term
Performance Award is payable in Stock and the full amount of
such value is not paid in Stock, then the shares of Stock
representing the portion of the value of the Long Term
Performance Award not paid in Stock shall again become
available for award under the Plan.
SECTION 9. CHANGE IN CONTROL PROVISIONS.
(i) IMPACT OF EVENT. In the event of:
(a) a "Change in Control" as defined in Section 9(ii),
unless otherwise determined by the Committee or the
Board at or after grant, but prior to the occurrence of
such Change in Control, or
(b) a "Potential Change in Control" as defined in Section
9(iii), but only if and to the extent so determined by
the Committee or the Board at or after grant (subject to
any right of approval expressly reserved by the
committee or the Board at the time of such
determination), the following acceleration and valuation
provisions shall apply:
(c) Any Stock Appreciation Rights outstanding for at least
six months and any Stock Options awarded under the Plan
not previously exercisable and vested shall become fully
vested and exercisable.
(d) The restrictions applicable to any Restricted Stock
awards under the Plan shall lapse and such shares and
awards shall be deemed fully vested.
(e) The value of all outstanding Stock Options, Stock
Appreciation Rights and restricted Stock awards shall,
unless otherwise determined by the Committee at or after
grant, be cashed out on the basis of the "Change in
Control Price" as defined in Section 9(iv)
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<PAGE>
as of the date such Change in Control or such Potential
Change in Control is determined to have occurred or such
other date as the Committee may determine prior to the
Change in Control.
(f) Any outstanding Long Term Performance Awards shall be
vested and paid out based on the prorated target results
for the Performance Periods in question, unless the
Committee provides at or after grant and prior to the
Change in Control event, for a different payment.
(ii) DEFINITION OF "CHANGE IN CONTROL". For purposes of section
9(i), a "Change in Control" means the happening of any of the
following:
(a) When any "person," as such term is used in Sections
13(d) and 14(d) of the Exchange Act, other than the
Company or an Affiliate of the Company (as defined in
Rule 12b-2 under the Securities Exchange Act) or any
Company employee benefit plan (including any trustee of
such plan acting as trustee) is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly of securities of
the Company representing 20 percent or more of the
combined voting power of the Company's then outstanding
securities without the consent of a majority of the
Board;
(b) The occurrence of any transactions or event relating to
the Company required to be described pursuant to the
requirements of Item 5(f) of Schedule 13A of the
Exchange Act;
(c) When, during any period of two consecutive years during
the existence of the Plan, the individuals who, at the
beginning of such period, constitute the Board of
Directors of the Company cease for any reason other than
death to constitute at least a two-thirds majority
thereof, provided, however, that a director who was not
a director at the beginning of such period shall be
deemed to have satisfied the two-year requirement if
such director was elected by, or on the recommendation
of, at least two-thirds of the directors who were
directors at the beginning of such period (either
actually or by prior operation of this Section
9(b)(iii); or
(d) The occurrence of a transaction requiring stockholder
approval for the acquisition of the Company by an entity
other than the Company through purchase of assets, or by
merger, or otherwise.
(iii) DEFINITION OF POTENTIAL CHANGE IN CONTROL. For purposes of
Section 9(i), a "Potential Change in Control" means the
happening of any one of the following:
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(a) The entering into an agreement by the Company, the
consummation of which would result in a Change in
Control of the Company as defined in Section 9(ii); or
(b) The acquisition of beneficial ownership, directly or
indirectly, by any entity, person or group other than
the Company or any Company employee benefit plan
(including any trustee of such plan acting as such
trustee) of securities of the Company representing five
percent or more of the combined voting power of the
Company's outstanding securities and the adoption by the
Board of Directors of a resolution to the effect that a
Potential Change in Control of the Company has occurred
for the purposes of this Plan.
(iv) CHANGE IN CONTROL PRICE. For purposes of this Section 9,
"Change in Control Price" means the highest bid price per
share paid in any transaction as furnished by NASDAQ-NMS or
the highest price paid or offered in any bona fide transaction
related to a potential or actual change in control of the
Company at any time during the preceding sixty day period as
determined by the Committee except that, in the case of
Incentive Stock Options and Stock Appreciation Rights relating
to Incentive Stock Options, such price shall be based only on
(i) The Committee may require each person purchasing shares
pursuant to a Stock Option under the Plan to represent to and
agree with the Company in writing that the optionee or
Participant is acquiring the shares without a view to
distribution thereof. The certificates for such shares may
include any legend which the Committee deems appropriate to
reflect any restrictions on transfer.
(vi) Any grant made under this Plan shall be represented by a
WRITTEN AGREEMENT between the Company and the Participant
receiving the grant setting forth the material terms of the
grant, and incorporating the terms of this Plan (specifically
as well as generally by reference) into each such Agreement.
19
<PAGE>
(vii) The Committee shall establish such procedures as it deems
appropriate for a Participant to designate a beneficiary to
whom any amounts payable in the event of the Participant's
death are to be paid.
(viii) In the event any Section or paragraph in this Plan or any
Agreement or writing relating to the Plan is found to be
illegal or invalid for any reason, such illegality or
invalidity shall not affect the remaining provisions of the
Plan and the Plan shall be construed and enforced as if such
illegal and invalid provision had never been set forth in the
Plan; PROVIDED, that the Committee may conclude that the
purposes of the Plan have been materially frustrated by such a
finding, and may thereupon terminate the Plan.
(ix) Where applicable, the masculine includes feminine and neuter
and vice versa. Where applicable, the singular includes the
plural and vice versa. Where a word or phrase is defined in
one place in the Plan and appears in capitalized form in
another paragraph of the Plan, such word or phrase shall have
the meaning first set forth unless the context clearly
requires otherwise. A word or phrase in noncapitalized form
shall retain its plain meaning taken in the context in which
it appears, regardless of whether said word or phrase is
defined in the Plan.
(x) The headings are for reference only. In the event of a
conflict between a heading and the content of an Article or
paragraph, the content of the Article or paragraph shall
control.
(xi) The Plan and all awards made and actions taken thereunder
shall be governed by and construed in accordance with the laws
of the State of Delaware.
SECTION 13. EFFECTIVE DATE OF PLAN.
The Plan, as amended and restated, shall be effective on the date it
is approved by the Company's Executive Committee or Board of Directors, subject
to a condition subsequent that the Shareholders of the Company also approve the
Plan, as amended and restated, at a meeting duly noticed and called for that
purpose by the vote of holders of a majority of the total outstanding Stock
within 12 months of such date.
SECTION 14. TERM OF PLAN.
No Stock Option, Stock Appreciation Right, Restricted Stock or Long
Term Performance Award shall be granted pursuant to the Plan on or after the
tenth anniversary of the date of stockholder approval, but awards granted prior
to such tenth anniversary may extend beyond that date.
20
<PAGE>
SECTION 15. INDEMNIFICATION OF COMMITTEE
In addition to such other rights of indemnification as they may have
as Directors of the Company, the members of the Committee shall be indemnified
by the Corporation against the reasonable expenses, including attorneys' fees
actually and necessarily incurred in connection with the defense of any action,
suit or proceeding, or in connection with any appeal therein, to which they or
any of them may be a party by reason of any action taken or failure to act under
or in connection with the Plan or any Incentive Award granted thereunder, and
against all amounts paid by them in settlement thereof (provided such settlement
is approved by independent legal counsel selected by the Company) or paid by
them in satisfaction of a judgment in any such action, suit or proceeding,
except in relation to matters as to which it shall be adjudged in such action,
suit or proceeding that such Committee member is liable for gross negligence or
willful misconduct in the performance of his duties; such indemnification shall
result provided that within sixty (60) days after institution of any above
action, suit or proceeding, a member of such Committee shall in writing offer
the Company the opportunity, at its own expense, to handle and defend the same.
Notwithstanding anything herein to the contrary, a condition of such
indemnification shall be the cooperation of the Committee member with the
Company in the defense of any such action, suit or proceeding.
SECTION 16. FINANCING
The Committee may arrange for and offer loans to a Participant under
the Plan to pay for the exercise of any Stock Option or other Award if
applicable, provided that no Participant shall have a right or entitlement to
such a loan, and loans may be determined on a basis of individual selection in
the sole and absolute discretion of the Committee governed at all times by
Regulation G or successor provisions of the Federal Reserve Board.
IN WITNESS WHEREOF, verifying that the required approvals of the
shareholders and the Directors have been obtained for the foregoing Plans as of
the day of , 199 .
---- --------- ---
-------------------------------------
Chairman and Chief Executive Officer
21
EXHIBIT 10.4
FACTORING AGREEMENT
ALTRES Financial L. P. ("ALTRES"), a Hawaii limited partnership, and
Medical Asset Management, Inc., a Delaware corporation ("Client"), agree as
follows:
1. DEFINITIONS.
a. "Acceptable account" shall mean an account of Client conforming to
the representations, warranties, and requirements of this Agreement.
b. "Account" shall mean any and all accounts as defined in the Uniform
Commercial Code, accounts receivable, amounts owing to Client under
any rental agreement or lease, payments on construction contracts,
promissory notes or on any other indebtedness, any rights to payment
customarily or for accounting purposes classified as accounts
receivable, and all rights to payment, proceeds or distributions
under any contract, of Client, presently existing or hereafter
created, and all proceeds thereof.
c. "Account debtor" shall mean any account debtor obligated for payment
of any account.
d. "Account debtor dispute" shall refer to any delay or failure of an
account debtor to timely pay an account or any portion of an account
for any reason which is not solely a credit problem, including,
without limitation, any dispute or claim against Client (whether or
not relating to the goods or services sold giving rise to the
account), whether or not valid, setoff, deduction, or any other
alleged defense or counterclaim. An account subject to both a credit
problem and an account debtor dispute shall be treated as subject
only to an account debtor dispute.
e. "Advance" or "Advances" shall mean an advance described in Paragraph
3, PURCHASE PRICE OF ACCOUNTS, below.
f. "Chargeback" refers to the procedure whereby a Client purchases an
account back from ALTRES pursuant to the recourse or limited
recourse obligations of Client under this Agreement or pursuant to
any other provision of this Agreement.
g. "Collateral" refers collectively to the following, and to any other
collateral or security or the obligations of Client under this
Agreement:
(1) All inventory as defined in the Uniform Commercial Code,
wherever located, all goods, merchandise or other personal
property held for sale or lease, names or marks affixed
thereto for purposes of selling or identifying the same or the
seller or manufacturer thereof and all related rights, title
and interest all raw materials, work or goods in process or
materials or supplies of every nature used, consumed or to be
used in Client's business, all packaging and shipping
materials, and all other goods customarily or for accounting
purposes classified as inventory, of Client's now owned or
hereafter acquired or created, all proceeds and products of
the foregoing
<PAGE>
and all additions and accessions to, replacements of,
insurance or condemnation proceeds of, and documents covering
any of the foregoing, all property received wholly or
partially in trade or exchange for any of the foregoing, all
leases of any of the foregoing, and all rents, revenues,
issues, profits and proceeds arising from the sale, lease,
license, encumbrance, collection, or any other temporary or
permanent disposition of any of the foregoing or any interest
therein.
(2) All accounts (as defined in Subparagraph "b", above).
(3) Any and all general intangibles of Client, presently existing
or hereafter arising, including general intangibles as defined
in the Uniform Commercial Code, chooses in action, proceeds,
contracts, distributions, dividends, refunds, security
deposits, judgments, insurance claims, any right to payment of
any nature, intellectual property rights or licenses, any
other rights or assets of Client customarily or for accounting
purposes classified as general intangibles, and all
documentation and supporting information related to any of the
foregoing, and all proceeds thereof.
(4) All balances, reserves, deposits, debts or any other amounts
or obligations of ALTRES owing to Client, including, without
limitation, any rebates, the Reserve, and any other amounts
owing pursuant to this Agreement, whether or not due, now
existing or hereafter arising or created, and all proceeds
thereof.
(5) All equipment and goods as defined in the Uniform Commercial
Code, all motor vehicles, including all tires, accessories,
spare and repair parts, and tools, wherever located, and all
related right, title and interest, of Client, now owned or,
hereafter acquired or created, all additions and accessions
to, replacements of, insurance or condemnation proceeds of,
and documents covering any of the any of the foregoing, all
leases of any of the foregoing, and all rents, revenues,
issues, profits and proceeds arising from the sale, lease,
license, encumbrance, collection, or any other temporary or
permanent disposition of any of the foregoing or any interest
therein (collectively, the "Equipment").
h. "Credit problem" shall refer to any delay or failure of an account
debtor to timely pay an account or any portion of an account due
solely to financial, cash flow or credit problems of the account
debtor.
i. "Discount" shall mean the discount described in Paragraph 3,
PURCHASE PRICE OF ACCOUNTS, below.
j. "Event of Default" shall mean an event of default as defined in
Paragraph 25, DEFAULT AND REMEDIES, below.
k. "Person" shall mean an individual, corporation, partnership, trust,
or any other legal entity.
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l. "Rebate" shall mean the rebate described in Paragraph 3, PURCHASE
PRICE OF ACCOUNTS, below.
m. "Reserve" shall mean the Reserve described in Paragraph 5, RESERVE
FOR SECURITY, below.
2. FACTORING OF ACCOUNTS.
ALTRES may purchase from Client such acceptable accounts as Client may
submit to ALTRES, subject to the terms and conditions of this agreement.
The obligation of ALTRES to purchase accounts from Client is discretionary
and ALTRES shall have no obligation to purchase any account from Client,
notwithstanding anything to the contrary in this Agreement. ALTRES may
decline to purchase any account submitted by Client for any reason or for
no reason, without notice, regardless of any course of conduct or past
purchases of accounts by ALTRES.
ALTRES shall be the sole and exclusive factor for Clients accounts. Client
will not factor or otherwise finance its accounts receivable except with
ALTRES.
Notwithstanding anything to the contrary in this Agreement, the purchase
of accounts by ALTRES shall be deemed to be a true purchase with transfer
of title and shall not be deemed to be a loan arrangement or secured
transaction, except to the extent that a true purchase of accounts is
subject to laws relating to secured transactions.
3. PURCHASE PRICE OF ACCOUNTS.
An advance shall be the amount paid to Client by ALTRES upon the initial
purchase of an acceptable account. The amount of the advance shall be the
face amount of each account less the discount. The discount shall be FORTY
PERCENT (40%) of the face amount of each account. The amount of the
discount may be adjusted by ALTRES at any time. The discount will be
indicated on the factoring bill of sale.
Client shall be entitled to a rebate on the discount determined as
follows:
Discount
-Base Commission
-Total Daily Funds Charges
--------------------------
Rebate
The base commission shall be calculated at a rate of ONE PERCENT (1.0%) of
the face amount of each account for each THIRTY (30) day period, or part
thereof, until payment of the account is received by ALTRES.
The total daily funds charges will be determined as follows:
Daily Funds Rate
X Advance Amount
------------------
Daily Funds Charge
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Daily Funds Charge
X Days Outstanding
------------------
Total Daily Funds Charges
The daily funds rate shall be the prime rate as announced in the Wall
Street Journal plus TWO PERCENT (2.0%) divided by 360. The prime rate
shall be adjusted and initially determined in accordance with the
following provision:
At the option of ALTRES, the prime rate may be adjusted from time to
time as of the date of any change in the prime rate. The initial
prime rate shall be the prime rate in effect under this formula on
the date of this Factoring Agreement.
The days outstanding shall be the number of days from purchase of the
account by ALTRES until payment in full is received by ALTRES.
The amount of the discount and rebate are based upon a minimum volume of
ONE MILLION TWO HUNDRED FIFTY THOUSAND DOLLARS ($1,250,000.00) of accounts
of Client sold to ALTRES each month. If this minimum volume is not met in
any month, ALTRES will charge additional fees to be deducted from the
Client's Reserve account. The additional fees will be calculated by
subtracting the minimum volume from the total of the face value of
accounts sold to ALTRES for the monthly period and multiplying the result
by TWO PERCENT (2.0%). Client and ALTRES further agree that the minimum
term of this agreement is for NINETY (90) days. Notwithstanding a
cancellation of this agreement by Client, ALTRES will be entitled to
collect a cancellation fee from the Client based upon the minimum volume
requirement set forth above. At no time will the total purchased
outstanding balance exceed ONE MILLION TWO HUNDRED FIFTY THOUSAND DOLLARS
($1,250,000.00). An application fee of Two Thousand Five Hundred Dollars
($2,500.00) shall be payable upon signing the proposal to factor. An
origination fee of Seven Thousand Five Hundred Dollars ($7,500.00) shall
be payable upon signing the proposal to factor.
4. PAYMENT OF PURCHASE PRICE AND REBATE.
Payment to Client for accounts factored to ALTRES will be available within
three (3) business days of the date the account and all other required
documentation is received by ALTRES. Any rebate owing to Client by ALTRES
will be paid after the weekly collection cycle or at such other intervals
as may be determined by ALTRES.
Payment shall be made in accordance with any written instructions of
Client which are agreed to by ALTRES. Absent other instructions, payment
shall be made by the mailing of a check to Client.
5. RESERVE FOR SECURITY.
As security for the payment of recourse obligations and performance of all
obligations of Client hereunder, ALTRES may withhold a reserve (the
"Reserve") from amounts owing to Client by ALTRES. The amount of the
Reserve shall be determined in accordance with the following provision:
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FIVE PERCENT (5.0%) of the outstanding balance owing on accounts
factored to ALTRES, calculated at such intervals as are determined
by ALTRES, but in no event less than ONE THOUSAND DOLLARS
($1,000.00).
The Reserve may be funded by ALTRES withholding amounts owing to Client
for advances or for rebates or, upon request of ALTRES, Client will from
time to time pay ALTRES an amount sufficient to fund the Reserve.
In the sole discretion of ALTRES, the amount of the Reserve may be
adjusted at any time.
ALTRES may, at any time and from time to time, regardless of whether the
obligation is delinquent, setoff end apply all or any part of the Reserve
to any obligation of Client owing to ALTRES. Upon doing so, ALTRES may
fund the resulting deficiency in the Reserve by again withholding payments
owing to Client as provided in this paragraph.
Upon termination of the right of Client to submit accounts to ALTRES as
provided in Paragraph 16 TERMINATION OF FACTORING, any balance of the
Reserve shall be due and owing and paid to Client upon completion of the
following conditions: (i) all amounts owing to ALTRES by Client pursuant
to this Agreement or otherwise have been paid in full; and (2) Ninety-one
(91) days have elapsed since such termination.
ALTRES shall be free to use the Reserve as working capital or as ALTRES
otherwise determines. ALTRES shall have no obligation to segregate, not
commingle or otherwise account for the use of the Reserve. Client shall
not be entitled to any interest on the Reserve. The Reserve shall be a
debt owed to Client by ALTRES, payable in accordance with the terms and
conditions of this Agreement.
6. RECOURSE AND LIMITED RECOURSE PURCHASES.
At the time of purchase of each account, ALTRES shall designate whether
the purchase is recourse or limited recourse to Client. Determination of
whether the account is recourse or limited recourse shall be made solely
by ALTRES in its discretion.
Except as otherwise provided in this Agreement, an account purchased with
limited recourse will be subject to chargeback only in the event the
limited recourse account is determined by ALTRES to not have been an
acceptable account at the time of purchase by ALTRES, or in the event
ALTRES is unable to collect any limited recourse account or portion
thereof due to an account debtor dispute.
A recourse account shall be subject to chargeback if not paid in full
within ninety (90) days of the date on the face of the invoice.
Client agrees to purchase any and all chargeback accounts, or the
uncollected portion thereof, from ALTRES upon demand. The purchase pace to
be paid by the Client for a chargeback shall be the face amount of the
account, less any collections received on the account by ALTRES. Any
waiver or extension by ALTRES of the right to demand that Client purchase
any chargeback accounts shall not constitute a waiver or extension to any
other accounts and such waiver or extension may be revoked at any time
without notice.
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7. CREDIT INSURANCE.
ALTRES may, but is not obligated to, obtain an umbrella credit insurance
policy for factored accounts receivable. The umbrella policy will provide
coverage for certain losses due to insolvency (as defined in the policy).
ALTRES may elect to place coverage under the policy on any accounts
factored pursuant to this Factoring Agreement and or require the Client to
purchase coverage under the policy when any account represents Twenty Five
percent (25%) of the total outstanding factored accounts. Client may also
elect, by written notice to ALTRES, to place coverage under the policy on
any accounts factored pursuant to this Factoring Agreement. Placement of
coverage shall be subject to the policy being in effect, coverage being
available under the terms and conditions and dollar limitations of the
policy, and any required approval of the insurer.
Client shall pay ALTRES a fee in an amount equal to five-tenths percent
(.5%) of the face amount of each invoice for which coverage under the
policy is placed. This fee is payable upon demand and may be deducted from
amounts owing to Client by ALTRES.
Credit insurance coverage shall be subject to all terms and conditions of
the policy. No obligations of Client under this Factoring Agreement shall
be excused or deferred based upon insurance coverage or any pending claim
under the policy. Upon payment of any claim under the policy to ALTRES,
ALTRES shall, in its discretion, pay the payment to Client as
reimbursement for corresponding chargeback obligations creating the claim
that Client has paid to ALTRES, apply the payment to other obligations of
Client to ALTRES, or add the payment to the Reserve.
8. Chargeback Procedure.
Upon an account becoming eligible for chargeback, chargeback shall be
deemed to have automatically taken place at that time. ALTRES may then (i)
setoff such chargeback against any amount then or thereafter owing by
ALTRES to Client, including, without limitation, payments for the purchase
of accounts; (ii) notify Client that chargeback has been made, identifying
the subject accounts, whereupon Client shall promptly purchase such
accounts and pay the amount owing to ALTRES, (iii) ALTRES may debit the
Reserve, or (iv) ALTRES may exercise any combination of the alternatives
set forth in this paragraph as to any account or group of accounts.
9. COLLECTION PROCEDURES.
a. ALTRES shall have the exclusive right to collect accounts and
receive payments thereon. Client shall not bill for, submit any
invoice, or otherwise attempt to collect any factored account except
as authorized in writing by ALTRES.
b. Client agrees to pay all reasonable handling and out of pocket costs
incurred by ALTRES in collection of the accounts of Client,
including, without limitation, postage, photocopy charges, and long
distance phone expenses. Payment of such costs shall be due upon
request. ALTRES may deduct such costs from amounts owing to Client
and may debit the Reserve for such costs.
c. Client shall promptly and completely respond to all requests from
ALTRES for any information or records requested to assist in
collection of factored accounts.
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If Client fails to respond to any request within five (5) days,
ALTRES may treat the account as a chargeback.
d. Client may authorize ALTRES to revise the amount of or otherwise
modify an outstanding account. ALTRES shall have no obligation to
advise the account debtor of such revision except to send the
account debtor any revised invoice which may be provided to ALTRES
by Client. In the event such revision results in a reduction in the
amount owing on such account, such reduced amount may be treated as
a chargeback.
e. In the event an account debtor makes payment to Client on an account
which has been purchased by ALTRES, Client shall immediately deliver
the payment to ALTRES. If payment is made in cash, such payment
shall be immediately delivered to ALTRES. If payment is made by
check or similar instrument, such instrument shall be immediately
delivered to ALTRES in the form received without negotiation. Upon
inquiry from the account debtor or upon request of ALTRES, Client
shall notify the account debtor to make payment directly to ALTRES.
Any payments received by Client on accounts purchased by ALTRES
shall be held in trust by Client for ALTRES.
If any payment received by Client on an account which has been
purchased by ALTRES is deposited or negotiated by Client, or if
Client fails to tender the payment to ALTRES within five (5)
business days of receipt by Client, Client shall promptly pay ALTRES
an amount equal to ten percent ( 10%) of the payment, not as a
penalty but as liquidated damages, to compensate ALTRES for
additional administrative and collection expenses, interest costs
and other damages resulting from such action. Client acknowledges
and agrees that it would be very difficult or impossible to
calculate such damages and that ten percent (10%) of the payment is
a fair estimation of those damages.
Upon failure by Client to immediately deliver any such payment or
ten percent ( 10%) fee to ALTRES, ALTRES may treat the amount of
such payment and fee as a chargeback. The duty of Client to
immediately deliver any such payment and to pay any such fee to
ALTRES shall terminate only when such chargeback is paid.
Client acknowledges and agrees that it has no right, title or
interest whatsoever in the funds constituting payment of an account
purchased by ALTRES, that said funds are the sole and exclusive
property of ALTRES, and that any use of or interference with said
funds by Client will result in civil and criminal liability.
f. Client shall immediately notify ALTRES of any account debtor dispute
concerning an account purchased by ALTRES and of any bankruptcy
filing, lien, garnishment or other legal action concerning such
accounts.
g. ALTRES shall make a good faith, commercially reasonable effort to
collect the factored accounts. It is agreed that collection of
accounts in a commercially reasonable manner does not require, and
ALTRES shall have no obligation to,
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<PAGE>
commence any legal action, including the sending of an attorney's
demand letter, to collect any account. Client hereby waives and
releases any and all claims relating to or arising out of any act or
omission by ALTRES in the collection of the factored accounts, gross
negligence and intentional misconduct excepted.
h. Upon request of ALTRES, Client will cause all payments on all
accounts of Client, whether or not factored to ALTRES, to be sent
directly to such address as may be designated by ALTRES. ALTRES is
authorized to receive and open all such payments and retain such
payments which are owing to ALTRES.
i. Upon request of ALTRES, Client will tender to ALTRES all payments
received by Client from an account debtor on accounts created after
Client begins factoring any accounts of that account debtor to
ALTRES, whether or not those accounts are factored to ALTRES. Upon
such request being made, all such payments received by Client shall
be the sole and exclusive property of ALTRES and shall be held in
trust by Client for ALTRES. All such payments shall be applied on
obligations of that account debtor to ALTRES.
j. In the event ALTRES receives any payment from an account debtor on
an account which has not been factored to ALTRES, ALTRES may,
subject to any rights of the account debtor, apply such payment to
any other obligation of Client owing to ALTRES, including, without
limitation, funding of any deficiency in the Reserve.
10. ACCEPTABLE ACCOUNTS.
ALTRES will purchase only acceptable accounts. An acceptable account must
meet all of the following requirements and conditions:
a. The account shall be evidenced by an invoice submitted to ALTRES in
duplicate meeting the following conditions:
(1) Contain the Client name, invoice number, and date;
(2) Contain the full and complete name and address of the account
debtor;
(3) Clearly set forth the amount owing and to be collected by
ALTRES;
(4) State the due date and any other terms for payment of the
account;
(5) Be completely legible;
(6) Be stamped with a notice, in a form acceptable to ALTRES,
stating that the account has been purchased by ALTRES and is
payable to ALTRES; and
(7) Be accompanied by such other documents as are required by
ALTRES.
b. The account shall be submitted to ALTRES within seven (7) business
days of the date the goods are sold or services performed giving
rise to the account are completed, except as otherwise approved in
writing by ALTRES.
c. The invoice shall be accompanied by proof of delivery of goods or
performance of services acceptable to ALTRES.
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<PAGE>
d. The account shall meet and comply with the following conditions:
(1) Client has sole and unconditional good title to the account,
the account and any goods sold to create the account being
free from any other security interest, assignment, lien or
other encumbrance of any type;
(2) The account is a bona fide obligation of the account debtor
for the amount identified on the account and there have been
no payments, deductions, credits, payment terms, or other
modifications or reductions in the amount owing on such
account except as set forth on the face of the invoice;
(3) To the best knowledge of Client, there are no defenses or
setoffs to payment of the account which can be asserted by way
of defense or counterclaim against Client or ALTRES;
(4) To the best knowledge of Client, the account will be timely
paid in full by the account debtor;
(5) Any services performed or goods sold which give rise to the
account have been rendered or sold in compliance with all
applicable laws, ordinances, rules and regulations and were
performed or sold in the ordinary course of Client's business;
(6) There have been no extensions, modifications, or other
agreements relating to payment of such account except as shown
upon the face of the invoice;
(7) The account debtor is located or authorized to do business
within the United States; and
(8) No proceeding has been commenced or petition filed under any
bankruptcy or insolvency law by or against the account debtor;
no receiver, trustee or custodian has been appointed for any
part of the property of the account debtor; and no property of
the account debtor has been assigned for the benefit of
creditors.
11. GRANT OF SECURITY INTEREST.
Client hereby grants ALTRES a security interest in the Collateral. The
Collateral shall secure all obligations of Client to ALTRES arising under
or relating to this Agreement and all other obligations of Client to
ALTRES which recite that they are secured by the Collateral.
Clients obligations under this Agreement may also be secured by other
collateral as may be evidenced by other documentation apart from this
Agreement.
Client and ALTRES acknowledge that all security interests and liens
contemplated herein are given as a contemporaneous exchange for new value
to Client, regardless of when advances under this Agreement are actually
made.
12. REPRESENTATIONS, WARRANTIES AND COVENANTS OF CLIENT.
Client represents, warrants and covenants that:
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a. All accounts sold to ALTRES are acceptable accounts;
b. Client has been duly organized or incorporated, as the case may be,
and is in good standing, under the laws of the state of its
organization or incorporation;
c. The place of business of Client, or, if Client has more than one
place of business, the location of its chief executive office, is in
the CITY OF MESA, COUNTY OF MARICOPA, STATE OF ARIZONA, and will not
be moved therefrom without at least thirty (30) days prior written
notice to ALTRES;
d. All records of Client pertaining to accounts sold to ALTRES shall be
kept and stored in the CITY OF MESA, COUNTY OF MARICOPA, STATE OF
ARIZONA, and will not be moved therefrom without at least thirty
(30) days prior written notice to ALTRES;
e. The Equipment will be located in the STATE OF ARIZONA, other than
temporary (not to exceed three months) uses outside that state in
the ordinary course of Client's business, will not be removed from
that state without the prior written consent of ALTRES;
f. Client shall keep the Equipment in good repair and be responsible
for any loss or damage to the Equipment. Client shall pay when due
all taxes, license fees and other charges on the Equipment. Client
shall not sell, misuse, conceal, or in any way dispose of the
Equipment or permit it to be used unlawfully or for hire or contrary
to the provisions of any insurance coverage. Risk of loss of the
Equipment shall be on Client at all times unless ALTRES takes
possession of the Equipment. Loss of or damage to the Equipment or
any part thereof shall not release Client from any of the
obligations secured by the Equipment. ALTRES or its representatives
may, at any time and from time to time, enter any premises where the
Equipment is located and inspect, audit and check the Equipment;
g. Client agrees to insure the Equipment, at Client's expense, against
loss, damage, theft, and such other risks as ALTRES may request to
the full insurable value thereof with insurance companies and
polices satisfactory to ALTRES. Proceeds from such insurance shall
be payable to ALTRES as its interest may appear and such policies
shall provide for a minimum ten days written cancellation notice to
ALTRES. Upon request, policies or certificates attesting to such
coverage shall be delivered to ALTRES. Insurance proceeds may be
applied by ALTRES toward payment of any obligation secured by this
agreement, whether or not due, in such order of application as
ALTRES may elect;
h. Client is duly qualified to do business in each jurisdiction where
the conduct of its business requires such qualification;
i. Client has all necessary licenses and other certificates or permits
required for the conduct of its business and all such necessary
licenses and other certificates or permits are current and will be
maintained at all times;
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j. Client has and shall maintain the full power and authority to
conduct the business in which it engages and to enter into and
perform its obligations under this Agreement;
k. The execution, delivery and performance by Client of this Agreement
have been duly authorized by all necessary action on the part of
Client, and are not inconsistent with any Articles of Incorporation,
By-Laws, Articles of Partnership, or other organizational document
of Client, do not and will not contravene any provision of, or
constitute a default under, any indenture, mortgage, contract or
other instrument to which Client is a party or by which it is bound,
and upon execution and delivery hereof, this Agreement will
constitute a legal, valid and binding agreement and obligation of
Client, enforceable in accordance with its terms;
l. All financial statements of Client, and of any guarantor of Client's
obligations under this Agreement, have been prepared in accordance
with generally accepted accounting principles and fairly present the
financial condition of Client and any such guarantor as of the date
thereof and the results of operations for the period or periods
covered thereby. Since the date of such financial statements there
has been no material, adverse change in the financial condition of
Client or any such guarantor. Client agrees to submit financial
statements for Client to ALTRES and Client shall cause any such
guarantor to submit financial statements for such guarantor to
ALTRES as may be requested by ALTRES, all such financial statements
to be prepared in accordance with generally accepted accounting
principles and to be in a form and from a firm acceptable to ALTRES;
m. Client shall conduct its business in a lawful manner and in
compliance with all applicable federal state, and local laws,
ordinances, rules, regulations, and orders and shall pay when due
all lawfully imposed taxes upon its property, business and income;
n. Client will at all times keep accurate and complete records relating
to its accounts. Client shall not show factored accounts as an asset
on its financial statements. ALTRES and its representatives shall
have the right at any reasonable time to enter any premises where
any such records are located to inspect, audit, check, copy and make
extracts from any records or other data relating to said accounts or
to any other transactions between ALTRES and Client;
o. This Agreement, the financial statements referred to herein, and all
other statements furnished by Client to ALTRES in connection
herewith contain no untrue statement of a material fact and omit no
material fact necessary to make the statements contained therein or
herein not misleading. Client represents and warrants that it has
not failed to disclose in writing to ALTRES any fact that materially
and adversely affects, or is reasonably likely to materially and
adversely affect, Client's business, operations, properties,
prospects, profits, condition (financial or otherwise), or ability
to perform this Agreement; and
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p. Client agrees to execute any financing statements, notices of
assignment, and other documents reasonably requested by ALOES for
perfection or enforcement of the rights and interests of ALTRES, and
to give good faith, diligent cooperation to ALTRES, and to perform
such other acts reasonably requested by ALTRES for perfection and
enforcement of the rights and interests of ALTRES. ALTRES is
authorized to file, record, or otherwise utilize such documents as
it sees fit.
13. REPRESENTATIONS, WARRANTIES AND COVENANTS CONCERNING COLLATERAL.
Client represents, warrants, and covenants concerning the Collateral as
follows:
a. Client has sole and unconditional good title to the Collateral, the
Collateral being free from any other security interest, assignment,
lien or other encumbrance of any type, except as has been previously
disclosed to ALTRES; and
b. The Collateral will be kept free from any other security interest,
assignment, lien or other encumbrance of any type, except as
consented to in writing by ALTRES.
c. Client agrees to insure the Collateral, at Client's expense, against
loss, damage, theft, and such other risks as ALTRES may request to
the full insurable value thereof with insurance companies and
policies satisfactory to ALTRES. Proceeds from such insurance shall
be payable to ALTRES as its interests may appear and such policies
shall provide for a minimum ten days written cancellation notice to
ALTRES. Upon request, policies or certificates attesting to such
coverage shall be delivered to ALTRES. Insurance proceeds may be
applied by ALTRES toward payment of any obligation secured by the
Collateral, whether or not due, in such order of application as
ALTRES may elect.
14. ASSIGNMENT OF RIGHTS CONCERNING COLLATERAL.
Client hereby assigns to ALTRES all of its interest in and rights to any
inventory or other goods giving rise to the accounts factored to ALTRES
which may be returned by account debtors, all rights as an unpaid vendor
or lienor, all rights of stoppage in transit, replevin and reclamation
relating thereto, all rights in and to all security therefor and
guarantees thereof, all rights against third parties with respect thereto,
and all rights under the Uniform Commercial Code and any other law,
statute, regulation or agreement. Any goods so recovered or returned shall
be set aside, marked with the name of ALTRES, and held for the account of
ALTRES. Client will promptly notify ALTRES of all such returned or
recovered inventory or other goods.
Upon request, Client shall deliver such inventory or other goods to
ALTRES. ALTRES may take possession of such inventory or other goods and
resell such inventory or other goods. Client shall pay all reasonable
costs and expenses incurred in taking possession and selling such
inventory and other goods, including, without limitation, reasonable
attorneys fees and legal expenses, transportation expenses, storage
expenses, insurance, and sales commissions. Such reasonable costs and
expenses may be treated as a chargeback. All proceeds from such resale
shall be retained by ALTRES and the net proceeds credited against the
obligations of Client.
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15. ADJUSTMENTS UPON REFUND OF COLLECTIONS.
In the event ALTRES is required to refund or pay back any collection
received on any factored account for any reason other than a credit
problem concerning a limited recourse account, Client shall promptly
reimburse ALTRES for such amount. Such reimbursement may be treated as a
chargeback.
16. TERMINATION OF FACTORING.
The right of Client to submit accounts to ALTRES for factoring shall
remain in force and effect until terminated by either party hereto by
giving Three (3) days written notice of such termination. Upon the
effective date of such notice, Client and ALTRES shall be excused from the
covenants of the second paragraph of Paragraph 2 FACTORING OF ACCOUNTS
providing that ALTRES shall be the sole and exclusive factor for Client's
accounts.
Upon such termination or in the event an Event of Default terminates the
right of Client to submit accounts to ALTRES, at the election of ALTRES
all outstanding, recourse accounts factored to ALTRES may be immediately
subject to chargeback.
In the event Client elects to terminate its right to submit accounts to
ALTRES or an Event of Default terminates the right of Client to submit
accounts to ALTRES within ninety (90) days of the date of this Agreement,
Client shall forfeit to ALTRES twenty-five percent (25%) of the Reserve,
not as a penalty but as liquidated damages to compensate ALTRES for loss
of profits, recovery of expenses, and other damages resulting from such
premature termination. Client acknowledges and agrees that it would be
very difficult or impossible to calculate such amounts and that
twenty-five percent (25%) of the Reserve is a fair estimation of those
amounts.
17. RIGHT TO PERFORM FOR CLIENT.
ALTRES may, in its sole discretion, elect to discharge any security
interest, lien or other encumbrance upon any account purchased by ALTRES
from Client, elect to pay any insurance charges payable by Client or
provide insurance as required herein if Client fails to do so. Any such
payments and all expenses incurred in connection therewith shall be
treated as a chargeback. ALTRES shall have no obligation to discharge any
such security interest, lien or other encumbrance or pay such insurance
charges or provide such insurance. In the event Client is indebted to
ALTRES as the account debtor on any account which has been purchased by
ALTRES, ALTRES may treat such debt as a chargeback.
18. POWER OF ATTORNEY TO ENDORSE CHECKS.
Client does hereby make, constitute and appoint ALTRES, and its designees,
as its true and lawful attorneys-in-fact, with full power of substitution,
with full power to endorse the name of Client upon any checks or other
forms of payment on accounts purchased by ALTRES and to effect the deposit
and collection thereof. Such power may be exercised at any time. Client
does hereby make, constitute, and appoint ALTRES, and its designees, as
Client's true and lawful attorneys in fact, with full power of
substitution, such power to be exercised only upon the occurrence of an
Event of Default, to: (a)
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receive, open, and dispose of all mail addressed to Client; (b) cause mail
relating to accounts of Client sold to ALTRES to be delivered to a
designated address of ALTRES where ALTRES may open all such mail and
remove therefrom any payment of such accounts; (c) ALTRES may settle or
adjust account debtor disputes in respect to said accounts for amounts and
upon such terms as ALTRES, in good faith, deems to be advisable, in such
case crediting Client with only the proceeds received and collected by
ALTRES after deduction of ALTRES' costs, including reasonable attorneys
fees and legal expenses; and (d) ALTRES may do any and all other things
necessary or proper to carry out the intent of this Agreement and to
perfect and protect the rights of ALTRES created under this Agreement.
Exercise of any of the foregoing powers shall be in the sole discretion of
ALTRES without any duty to do so.
19. DISCLOSURE OF INFORMATION.
Client hereby consents to ALTRES disclosing to any financial institution
or investor providing financing for ALTRES, any and all information,
knowledge, reports and records, including, without limitation, financial
statements, concerning Client or any guarantor.
20. INTEREST ON UNPAID CHARGEBACKS.
In the event Client fails to pay any chargeback, Client agrees to pay
interest on the chargeback amount from the date of chargeback until paid,
both before and after judgment, at the rate of eighteen percent (18%) per
annum, unless such rate is in violation of law in which case such interest
rate shall be at the maximum rate allowable by law.
21. SALE OF ALL ACCEPTABLE ACCOUNTS.
Unless otherwise agreed in writing by ALTRES, Client may not sell only a
portion of the accounts for any particular account debtor to ALTRES but
shall offer to sell to ALTRES all acceptable accounts of an account debtor
unless Client elects not to sell any accounts of that account debtor to
ALTRES.
22. COLLECTION OF CHARGEBACK ACCOUNTS.
Until a chargeback has been paid in full, ALTRES shall retain the right to
collect the account(s) giving rise to such chargeback. All out of pocket
expenses, including reasonable attorneys fees and legal expenses, incurred
by ALTRES in seeking collection of such chargeback account(s) shall be
added to the amount due for payment of said chargeback. Client hereby
authorizes ALTRES to initiate any legal action to collect a chargeback
account which is not paid by Client within fifteen (15) days of
chargeback. Client further authorizes ALTRES to settle or compromise any
such chargeback account, in the sole discretion of ALTRES subject only to
acting in good faith, which has not been paid within fifteen (15) days of
chargeback. Any deficiency remaining after such settlement or compromise
shall remain as a chargeback.
14
<PAGE>
23. NO THIRD PARTY BENEFICIARY.
This Agreement is made for the sole and exclusive benefit of ALTRES and
Client and is not intended to benefit any third party. No such third party
may claim any right or benefit or seek to enforce any term or provision of
this Agreement.
24. INDEMNIFICATION.
Client agrees to indemnify ALTRES for any and all claims, liabilities, and
damages which may be awarded against ALTRES, and for all reasonable
attorneys fees, legal expenses and other expenses incurred in defending
such claims, arising from or relating in any manner to the purchase of
accounts pursuant to the terms of this Agreement, excluding claims based
on the negligence or misconduct of ALTRES. ALTRES shall have sole and
complete control of the defense of any such claims, and is hereby given
authority to settle or otherwise compromise any such claims as ALTRES, in
good faith, determines shall be in its best interests.
25. DEFAULT AND REMEDIES.
Time is of the essence of this agreement. The occurrence of any of the
following events shall constitute a default under this Agreement and be
termed an "Event of Default":
a. Failure by Client to promptly repurchase any account or pay any
chargeback in accordance with the terms of this Agreement;
b. Client fails in the payment or performance of any obligation,
covenant, agreement, or liability created by this Agreement;
c. Any representation, warranty, or financial statement made by or on
behalf of Client in this Agreement, or on behalf of any guarantor of
this Agreement, proves to have been false or materially misleading
when made or furnished;
d. Any default or event which, with the giving of notice or the passage
of time or both, occurs on any indebtedness of Client or any such
guarantor to others;
e. Client or any such guarantor becomes dissolved or terminated, or
experiences a business failure;
f. A receiver, trustee, or custodian is appointed for any part of
Client's or any such guarantor's property, or any part of Client's
or any such guarantor's property is assigned for the benefit of
creditors;
g. Any proceeding is commenced or petition filed under any bankruptcy
or insolvency law by or against Client or any such guarantor;
h. Any judgment is entered against Client or any such guarantor which
may materially affect Client's or any such guarantor's financial
condition;
i. Client or any such guarantor becomes insolvent or unable to pay its
debts as they mature; or
j. The accounts purchased by ALTRES from Client become, for any reason
whatsoever, substantially delinquent or uncollectible.
15
<PAGE>
Waiver of any Event of Default shall not constitute a waiver of any
subsequent Event of Default. Upon the occurrence of any event of Default
and at any time thereafter, at the election of Altres and without notice
of such election, Altres may terminate the right of Client or factor
accounts to Altres and all obligations of Client to Altres shall become
immediately due and payable. At the election of Altres, all outstanding
recourse accounts purchased from Client may be immediately subject to
chargeback. Altres shall have the right to enter upon any premises where
the Collateral or records pertaining thereto may be take possession of the
Collateral and records relating thereto or, Client shall, if requested by
Altres, assemble such Collateral and records at a place designated by
Altres. Altres shall have all rights and remedies under the Uniform
Commercial Code. Without notice to Client, Altres may obtain the
appointment of a receiver of the business, property and assets of Client
and Client consents to the appointment of Altres or such person as Altres
may designate as such receiver. Altres may continue to hold the Reserve
for payment of any obligations of Client to Altres then existing or which
may thereafter arise. At any time after the occurrence of an Event of
Default, Altres may, in its desecration, apply the reserve against
obligations of Client owing to Altres. In the event the Reserve is applied
against chargeback shall remain the property of Altres and Altres may
continue to pursue and collect such accounts until all obligations of
Client to Altres then owing or which may thereafter arise have been paid
in full or are otherwise satisfied.
Altres may sell, lease or otherwise dispose of any or all of the
Collateral and, after deducting the reasonable costs and out-pocket
expenses incurred by Altres, including, without limitation, (1) reasonable
attorney fees and legal expenses, (2) transportation and storage costs,
(3) advertising of sale of the Collateral, (4) sale commissions, (5) sales
tax, (6) costs for improving or repairing the Collateral, and (7) costs
for preservation and protection of the Collateral, apply the remainder to
pay, or to hold as a reserve against, the obligations secured by the
Collateral.
26. COSTS OF ESTABLISHING AGREEMENT.
Client agrees to pay to ALTRES, upon demand and submission of a statement
therefor, reasonable legal expenses, attorneys fees, and other out of
pocket expenses of ALTRES relating to the cost of negotiating, preparing
and entering into this Agreement.
27. ATTORNEYS FEES.
In the event of breach or default under the terms of this Agreement, the
breaching or defaulting party agrees to pay all reasonable attorneys fees
and legal expenses incurred by the non-breaching or non-defaulting party
in enforcement of this Agreement, in collecting any damages arising from
such breach or default, or otherwise related to such breach or default.
Client agrees to pay all expenses, including reasonable attorney's fees
and legal expenses, incurred by ALTRES in any bankruptcy proceedings of
any type involving Client or this Agreement, including, without
limitation, expenses incurred in modifying or lifting the automatic stay,
determining adequate protection, use of cash collateral, or relating to
any plan of reorganization.
16
<PAGE>
28. BANKRUPTCY CONSIDERATIONS.
In addition to any other covenants made herein by Client, Client covenants
that it will notify ALTRES of any voluntary or involuntary bankruptcy
petition filed by or against Client or any guarantor of this Agreement
under the United States Bankruptcy Code, within twenty-four (24) hours of
any such filing. Failure to notify ALTRES of any such bankruptcy filing
within twenty-four (24) hours shall constitute an Event of Default.
Client acknowledges that this Agreement is a contract to extend debt
financing or financial accommodations to or for the benefit of Client
within the meaning of 11 U.S.C. ss.365(c)(2) and, as such, may not be
assumed or assigned. ALTRES shall be under no obligation to purchase
accounts under this Agreement from and after the filing of any voluntary
or involuntary petition against Client. However, ALTRES may, at its sole
option, agree to provide post-petition financing to the debtor and/or
debtor-in-possession after the filing of a voluntary or involuntary
bankruptcy petition by or against Client. Any such agreement to provide
post-petition financing shall not obligate ALTRES to purchase accounts
until such time as the Bankruptcy Court approves the post-petition
financing agreement.
29. ARBITRATION. N/A.
30. SEVERABILITY OF INVALID PROVISIONS, HEADINGS, INTERPRETATIONS OF
AGREEMENT.
Any provision of this Agreement which is prohibited or unenforceable in
any jurisdiction shall as to such jurisdiction, be ineffective to the
extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or unenforceability
in any jurisdiction shall not invalidate or render unenforceable such
provision in any other jurisdiction.
All headings in this Agreement are inserted for convenience and shall not
be considered part of the Agreement or be used in its interpretation.
All references in this Agreement to the singular shall be deemed to
include the plural when the context so requires, and visa versa.
References in He collective or conjunctive shall also include the
disjunctive unless the context otherwise clearly requires a different
interpretation.
31. NOTICES.
All notices hereunder shall be in writing and may be mailed, postage
prepaid, addressed as follows:
To ALTRES:
ALTRES Financial, L. P.
2323 South Foothill Drive
Salt Lake City, Utah 84109
Attention: Compliance Officer
17
<PAGE>
To Client:
Medical Asset Management, Inc.
25241 Paseo de Alicia, Suite 230
Laguna Hills, California 92653
Attention: John W. Regan
Any notice so mailed shall be deemed given three (3) days after mailing.
Any notice otherwise delivered shall be deemed given when received by the
addressee.
32. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS.
All agreements, representations, warranties and covenants made herein by
Client shall survive the execution and delivery of this Agreement and any
bankruptcy proceedings involving Client and shall continue in effect so
long as any obligation to ALTRES contemplated by this Agreement is
outstanding and unpaid, notwithstanding any termination of this Agreement.
33. ASSIGNABILITY.
This Agreement is not assignable or transferable by Client and any such
purported assignment or transfer is void. This Agreement shall be binding
upon the successors of Client. Client acknowledges and agrees that ALTRES
may assign all or any portion of this Agreement, including, without
limitation, assignment of the rights, benefits and remedies of ALTRES
hereunder without any assignment of the duties, obligations or liabilities
of ALTRES hereunder.
34. INTEGRATED AGREEMENT, AMENDMENT HEADINGS, GOVERNING LAW.
This Agreement shall replace and supersede any prior agreement between
Client and ALTRES.
This Agreement and the documents identified or contemplated herein
constitute the entire agreement between ALTRES and Client as to the
subject matter hereof and may not be altered or amended except by written
agreement signed by ALTRES and Client. No provision hereof may be waived
by ALTRES except upon written waiver executed by ALTRES. This Agreement
shall be governed by and construed in accordance with the laws of the
State of Utah and this Agreement shall be deemed to have been executed by
the parties in the State of Utah.
Dated: October 16, 1997
18
<PAGE>
MEDICAL ASSET MANAGEMENT, INC.
By: /s/ John W. Regan
---------------------------------
JOHN W. REGAN
Title (Its): President
ALTRES Financial, L.P.
By: Jim Guss Associates, a Hawaii
limited partnership, Its General
Partner
By: FOIGP Corp., a Hawaii corporation,
Its General Partner
By: Jim Guss
----------------------------------
Title (its): General Partner
----------------------------
FOR CORPORATE CLIENT:
STATE OF UTAH )
) : ss.
COUNTY OF SALT LAKE )
On the 16th day of October 1997, personally appeared before me JOHN W. REGAN who
being by me duly sworn did depose and say that he is the PRESIDENT OF MEDICAL
ASSET MANAGEMENT, INC. the Client in the foregoing Agreement and that by and
through its By-laws or by resolution of its Board of Directors, said JOHN W.
REGAN acknowledged that he/she executed the foregoing Agreement for and on
behalf of MEDICAL ASSET MANAGEMENT, INC.
Kenneth O. Allen
- ----------------------------------
NOTARY PUBLIC
My Commission Expires: June 26, 1999 Residing At: Salt Lakes
19
<PAGE>
Exhibit "A"
ATTACHMENT TO UCC FINANCING STATEMENT
Debtor: MEDICAL ASSET MANAGEMENT, INC.
Secured Party: ALTRES FINANCIAL L. P.
Description of Collateral:
(1) All inventory as defined in the Uniform Commercial Code, wherever
located, all goods, merchandise or other personal property held for sale or
lease, names or marks adduced thereto for purposes of selling or identifying the
same or the seller or manufacturer thereof and all related rights, title and
interest, all raw materials, work or goods in process or materials or supplies
of every nature used, consumed or to be used in Debtor's business, all packaging
and shipping materials, and all other goods customarily or for accounting
purposes classified as inventory, of Debtor, now owned or hereafter acquired or
created, all proceeds and products of the foregoing and all additions and
accessions to replacements of, insurance or condemnation proceeds of, and
documents covering any of the foregoing, all property received wholly or
partially in trade or exchange for any of the foregoing, all leases of any of
the foregoing, and all rents, revenues, issues, profits and proceeds arising
from the sale, lease, license, encumbrance, collection, or any other temporary
or permanent disposition of any of the foregoing or any interest therein.
(2) All accounts as defined in the Uniform Commercial Code, accounts
receivable, amounts owing to Debtor under any rental agreement or lease,
payments on construction contracts, promissory notes or on any other
indebtedness, any rights to payment customarily or for accounting purposes
classified as accounts receivable, and all rights to payment, proceeds or
distributions under any contract, of Debtor, presently existing or hereafter
created, and all proceeds thereof.
(3) Any and all general intangibles of Debtor, presently existing or
hereafter arising, including general intangibles as defined in the Uniform
Commercial Code, chooses in action, proceeds, contracts, distributions,
dividends, refunds, security deposits, judgments, insurance claims, any right to
payment of any nature, intellectual property rights or licenses, any other
rights or assets of Debtor customarily or for accounting purposes classified as
general intangibles, and all documentation and supporting information related to
any for the foregoing, and all proceeds thereof
(4) All balances, reserves, deposits, debts or any other amounts or
obligations of Secured Party owing to Debtor, including, without limitation, any
rebates, the Reserve (as defined in the Factoring Agreement between Debtor and
Secured Party), and any other amounts owing pursuant to this Agreement, whether
or not due, now existing or hereafter arising or created, and all proceeds
thereof.
<PAGE>
All equipment and goods as defined in the Uniform Commercial Code,
all motor vehicles, including all tires, accessories, spare and repair parts,
and tools, wherever located, and all related right, title and interest, of
debtor, now owned or hereafter acquired or created, all proceeds and products of
the foregoing and all additions and accessions to, replacements of, insurance or
condemnation proceeds of, and documents covering any of the foregoing, all
leases of any of the foregoing, and all rents, revenues, issues, profits and
proceeds arising from the sale, lease, license, encumbrances, collections, or
any other temporary or permanent disposition of any of the foregoing or any
interest therein
(5) Pursuant to any agreement between Debtor and secured party, Debtor has
agreed not to further encumber the collateral described herein.
- 2 -
EXHIBIT 10.5
ADDENDUM TO FACTORING AGREEMENT
Altres Financial, L.P. ("Altres"), a Hawaii limited partnership, and
Medical Asset Management, Inc. ("Client") have entered into a Factoring
Agreement dated October 16, 1997 (the "Factoring Agreement"). Altres and Client
desire to modify the Factoring Agreement as set forth herein and agree as
follows:
1. DEPOSITORY ACCOUNTS.
a. Client represents and warrants that the depository accounts
identified on Exhibit A hereto constitute all of the depositary accounts for
which Client is a signatory or beneficiary or has any other interest, excluding
the Clinic Depositary Accounts (as defined below).
b. Client shall not open, maintain, or become a signatory on or
beneficiary of any other depositary account, including Clinic Depositary
Accounts, without providing prior written notice to Altres. The notice shall
include the name, address and phone number of the bank or other financial
institution where the account is opened, the account number, the name on the
account, and identify all signatories on the account. (All depositary accounts
identified on Exhibit A and all other depositary accounts opened or maintained
by Client or of which Client is a beneficiary or has any other interest,
excluding Clinic Depositary Accounts, are referred to collectively herein as the
"MAM Depositary Accounts".)
c. Client represents and warrants that the depositary accounts
identified on Exhibit B hereto constitute all of the depositary accounts which
are maintained for the purpose of depositing collections of accounts of any
doctor's office or clinic which has been acquired by Client and/or is operated
by Client (a "MAM Clinic"). (All depositary accounts identified on Exhibit B and
all other depositary accounts which are maintained for the purposes of
depositing collections of accounts of any MAM Clinic are referred to
collectively herein as the "Clinic Depositary Accounts".) MAM represents,
warrants and covenants that at all times an officer or employee of MAM shall be
a signatory on each Clinic Depositary Account.
d. All collections and other proceeds from accounts of any MAM
Clinic and/or Client (whether or not Altres has advanced funds based on the
account) shall be deposited daily into the Clinic Depositary Accounts. Such
proceeds and collections shall not be commingled with any other funds and shall
be promptly and directly deposited into the Clinic Depositary Accounts in the
form in which received by Client. Such proceeds and collections shall not be
deposited in any other account.
e. Client shall cause all amounts in all of the Clinic Depositary
Accounts to be transferred to the MAM Depositary Accounts on a daily basis.
f. Client shall cause all amounts in all of the MAM Depositary
Accounts which constitute collections and other proceeds from accounts of any
MAM Clinic and/or Client
<PAGE>
(whether or not Altres has advanced funds based on the account) to be
transferred to Altres on a daily basis as instructed by Altres.
g. Client shall provide Altres with any account numbers, passwords,
and other information necessary or helpful for Altres to electronically or
telephonically access the MAM Depositary Accounts and the Clinic Depositary
Accounts for all purposes, including, without limitation, determining balances
and transferring funds. Upon request of Altres, Client will immediately cause
any person designated by Altres to become a signatory on such of the MAM
Depositary Accounts and Clinic Depositary Accounts as are requested by Altres.
Altres is authorized to determine balances in the MAM Depositary Accounts and
Clinic Depositary Accounts at any time and upon failure of Client to transfer
any funds as provided herein or upon the occurrence of any Event of Default, to
cause such transfer to be made.
h. Upon execution and delivery of this Addendum, Client shall
execute and deliver to Altres an Authorization and Power of Attorney in
substantially the form attached hereto as Exhibit C concerning each MAM
Depositary Account and each Clinic Depositary Account. Upon establishing any new
MAM Depositary Account or any new Clinic Depository Account, Client shall
promptly execute and deliver an Authorization and Power of Attorney in
substantially the form attached hereto as Exhibit C concerning each such new
account.
2. UCC FINANCING STATEMENTS.
a. Within seven (7) days of the first advance to Client pursuant to
the Factoring Agreement, Client shall (1) prepare and deliver to Altres fully
executed UCC-1 Financing Statements showing Client as secured party and as
debtor each MAM Clinic, together with an assignment thereof by Client to Altres,
or (2) proof of prior filing of a UCC-1 Financing Statement complying with
sub-section (1), together with an executed assignment thereof by Client to
Altres.
b. All such UCC-1 Financing Statements shall be in a form and
substance acceptable to Altres and filed or to be filed with each jurisdiction
or governmental entity requested by Altres.
3. INTEGRATED AGREEMENTS. This Addendum to Factoring Agreement, together
with the Factoring Agreement, and the documents identified or contemplated
therein, constitute the entire agreement between Altres and Client and may to be
altered or amended except by written agreement signed by Altres and Client. No
provision hereof or thereof may be waived by Altres except upon written waiver
executed by Altres. The Factoring Agreement and this Addendum to Factoring
Agreement shall be read and construed together as one agreement. This Addendum
to Factoring Agreement shall be governed by and construed in accordance with the
laws of the State of Utah and shall be deemed to have been executed by the
parties in the State of Utah.
4. FACTORING AGREEMENT REMAINS IN FULL FORCE AND EFFECT. Except as
expressly modified by this Addendum to Factoring Agreement, the Factoring
Agreement remains in full force and effect.
2
<PAGE>
Dated: October 22, 1997
Medical Asset Management, Inc.
By: /s/ John W. Regan
-----------------------------------
Title: President
-----------------------------------
Altres Financial, L.P.
By: Jim Guss Associates, a Hawaii
limited partnership,
Its General Partner
By: FOIGP Corp., a Hawaii limited
partnership,
Its General Partner
By: /s/ Jim Guss
-----------------------------------
Jim Guss
President
Consented to:
/s/ D. Kent Norton
- --------------------------------
D. Kent Norton
3
EXHIBIT 10.6
VISTEON CORPORATION
SOFTWARE LICENSE AGREEMENT
This Software License Agreement includes the Software Schedule set forth below,
the attached Terms and Conditions and the attached Addendum. The parties have
caused their duly authorized representatives to execute this Software License
Agreement as of 9/18/96 (the "Effective Date").
VISTEON CORPORATION ("Visteon") MEDICAL ASSET MANAGEMENT, INC.
("Licensee")
By: /s/ David S. Greenberg By: /s/ John W.Regan
---------------------------- --------------------------
Printed Name: David S. Greenberg Printed Name: John W. Regan
------------------ -----------------
Title: CEO Title: President
------------------------- ------------------------
Address: 2250 Lucien Way Address: 4447 E. Broadway
Suite 250 #102
Maitland, FL 32751 Mesa, AZ 85206
- ------------------------------------------------------------------------------
Software Schedule
Licensed Products # of Providers: Total License Fee:
- ----------------- --------------- ------------------
275 $1,237,500
BIGVision Patient Manager, BIGVision
Clinical Manager, and BIGVision Billing
Manager
- ------------------------------------------------------------------------------
TOTAL 275 $1,237,500.00
(1)
<PAGE>
VISTEON CORPORATION
SOFTWARE LICENSE AGREEMENT
TERMS AND CONDITIONS
1. DEFINITIONS
1.1. "Licensee" means the legal entity whose name appears on the face
page of the Agreement.
1.2. "Licensed Products" means the software products listed on the face
page of this agreement, in machine readable, object code format, and any
modifications, corrections, or updates thereto, as well as any related
manuals or other documentation, in each case as furnished by Visteon to
Licensee under this Agreement.
1.3. "Effective Date" shall mean the date on which Visteon signs this
Agreement and notes such on the face page of this Agreement.
1.4. "Provider" means a billable clinical practitioner (i.e., a
physician, nurse practitioner, physician assistant, nutritionist, physical
therapist, chiropractor, mental health counselor, or licensed professional
performing substantially similar functions to any of the foregoing).
1.5. "Live Date" means that date which licensed products are delivered,
installed, tested and operational.
2. LICENSE GRANT
2.1. Subject to the terms and conditions of this Agreement, and to the
continued payment of all license fees set forth herein, Visteon grants
Licensee non-exclusive, non-transferable license, without right of
sublicense, for the number of Providers identified on the face page of
this Agreement, to use the Licensed Products solely for Licensee's own
business purposes. In no event shall the total term of the license however
modified exceed fifteen (15) years from the "Effective Date" of this
agreement and the "Effective Date" of any addendum(s) executed for
additional providers.
2.2. Licensee may not copy, modify, rent, lease, loan, sell, distribute
or create derivative works based upon the Licensed Products in whole or in
part. If for good business reason any provider(s) decide not to continue
with Licensee within the first four years of their agreement with
Licensee, Licensee must request in writing from Visteon the ability to
transfer the licensed products in use at the time to the individual
provider(s) (such approval by Visteon would not be unreasonably withheld).
In such instance the Provider(s) will be required to sign a no charge
Software License Agreement with Visteon. All maintenance charges must be
current and said provider(s) must elect to subscribe to Visteon's ongoing
charges for maintenance. Thus said provider(s) would become direct
customers of Visteon.
(2)
<PAGE>
2.3. Licensee may operate the Licensed Products on computer networks
throughout its facilities in the quantities specified on the face page of
this Agreement. Licensee may increase the number of Providers authorized
to use the Licensed Products provided that Licensee notifies Visteon in
writing of such an increase and pays Visteon the applicable License Fee
for each additional Provider as specified in Addendum A. Licensee grants
to Visteon the right to access the Licensed Products to monitor the level
of use, provided that Visteon complies with the Licensee's reasonable
security policies with respect to such access.
2.4. Each Licensed Product is delivered with one (1) complete set of
documentation for each authorized care center. Additional sets of
documentation are available from Visteon at Visteon's then current list
prices for such documentation.
2.5. Licensee shall have no rights with respect to the Licensed Products
other than the rights expressly set forth herein.
3. DELIVERY, PAYMENT AND TAX PROVISIONS
3.1. Visteon shall delive the Licensed Products to Licensee promptly
after the Effective Date.
3.2. Upon the execution of this Agreement, Visteon will invoice Licensee
for all applicable fees shown in Addendum A of this Agreement and
thereafter as scheduled on Addendum A. In addition, Visteon shall invoice
Licensee for any additional license fees related to additional Provider
licenses not authorized under the Agreement and for any other amounts due
to Visteon hereunder as such amounts are incurred. Licensee agrees to pay
all such invoices in full as detailed in Addendum A.
3.3. In addition to all applicable fees, Licensee shall be responsible
for the payment of all reasonable travel and living expenses incurred by
Visteon in performing its obligations under this Agreement. Such expenses
will be estimated for prior approval by Licensee.
3.4. Licensee shall be responsible for all taxes and charges of any kind
imposed by any federal, state or local governmental entity for products or
services provided under this Agreement, excluding only taxes based solely
upon Visteon's net income.
4. CUSTOM SERVICES
4.1. Training, installation assistance and other services are available
from Visteon at Visteon's then current rates for such services. In the
event Licensee wishes to obtain such services, the parties will execute an
Agreement defining the services to be performed and the fees and billing
terms associated therewith.
(3)
<PAGE>
5. SOFTWARE SUPPORT
5.1. "Software Support" shall include: (a) new releases of the Licensed
Products when made generally available to Visteon's customers; (b)
provision of other enhancements and modifications when generally available
to Visteon's customers; (c) updates to the documentation when made
generally available to Visteon's customers; (d) "hotline" support during
normal business hours (8:30am to 5:00pm, Monday through Friday, Eastern
Standard Time, excluding holidays); Support after that time is available
on a beeper service basis, and (e) reasonable efforts to correct a failure
of the Licensed Products to perform substantially in accordance with the
documentation ("Nonconformity").
5.2. Visteon shall provide Software Support beginning on the Effective
Date for its then current charge, payable in advance unless otherwise
stated in writing; and for as long as Visteon is offering Software Support
for the Licensed Products, provided that Licensee pays the fees in
accordance with the terms of this Agreement.
5.3. Visteon shall provide Software Support from its business premises
except that Visteon, at Visteon's expense, will perform Software Support
at Licensee's facility for all Nonconformities that, in Visteon's
reasonable judgment, significantly impair the operation of the Licensed
Products and that Visteon is unable to correct from Visteon's premises.
5.4. Visteon is not required to perform Software Support pursuant to this
Agreement in the following situations: (a) corrective maintenance with
respect to Nonconformities caused by Licensee's modifications to the
Licensed Products; (b) Licensee's failure to use enhancements or
Nonconformity corections; (c) misuse of the Licensed Products; (d) third
party product malfunctions; unless Visteon is authorized to provide such
support. If not support will be provided by the applicable third party;
(e) hardware or communication equipment malfunctions; (f) Licensee's
failure, after a reasonable notice period, to use the most current release
of the Licensed Products offered by Visteon, or the operating system for
the Licensed Products at the release levels specified by Visteon, or the
version than approved by Visteon of any third party software that operates
with the Licensed Products. If Licensee requests Visteon to correct
Nonconformities cause by any of the foregoing, all corrective services so
performed shall entitle Visteon to additional compensation at its then
current rates.
5.5. Licensee shall provide Visteon with all information and assistance
reasonably requested by Visteon to detect, simulate and correct any
Nonconformities.
5.6. Licensee shall designate certain Support Representatives who shall
be the exclusive representatives with whom Visteon will communicate on
Software Support matters.
5.7. Visteon has developed its licensed products to utilize a variety of
quality clients and servers. Although final client and server selection is
the responsibility of the
(4)
<PAGE>
licensee, Visteon will offer licensee specific vendor choices. From time
to time this list will be modified by Visteon. Selection of another vendor
not on this list by Licensee will void the Warranty provisions of Section
7 of this agreement, unless otherwise indicated in writing by Visteon.
6. PROPRIETARY RIGHTS AND PROTECTION
6.1. Licensee acknowledges and agrees that, as between Licensee and
Visteon, all right, title and interest in the Licensed Products and any
part thereof, including, without limitation, all rights to patent,
copyright, trademark and trade secret rights and all other intellectual
property rights therein and thereto, and all copies thereof, in whatever
form, including any written documentation and all other material
describing such Licensed Products, shall at all times remain solely with
Visteon. Visteon specifically retains title to any improvement,
enhancement of or modification made to the Licensed Products by or at the
request of Licensee. Licensee shall not be an owner of any copies of the
Licensed Products, but, rather, is licensed pursuant to this Agreement to
use such copies. Copies of the products are held in escrow.
6.2. Confidentiality. Licensee agrees to secure and protect the Licensed
Products, and to take all reasonable actions necessary, including
instruction, written agreement and all other actions, to ensure that all
employees of Licensee and any consultant or independent contractor engaged
by Licensee treats confidentially all information relating to the Licensed
Products, and ensure that there is no breach, compromise or violation of
Visteon's rights in and title to the Licensed Products. Licensee agrees to
protect any such confidential information of Visteon, exercising all
reasonable care, which shall include taking those measures, electronic,
mechanical or otherwise, to prevent unauthorized access to, or copying of,
the Licensed Products. Licensee will not, directly or through any person
or entity, in any form or manner, decompile, reverse engineer, disassemble
or otherwise attempt to derive source code from the Licensed Products. The
obligations of Licensee to maintain confidentiality shall survive any
expiration or termination of this Agreement.
7. WARRANTY
7.1. Visteon warrants that the Licensed Products will perform according
to its specifications contained in the applicable Reference Manual
unmodified by anyone without the occurrence of a Nonconformity for a
period of ninety (90) days following the initial delivery of the Licensed
Products to Licensee. Visteon does not warrant that the Licensed Products
will meet all of Licensee's requirements nor that the use of the Licensed
Products will be uninterrupted or error free. Visteon's sole liability,
and Licensee's sole remedy with respect to such warranty, shall be
Visteon's obligation to correct any Nonconformity as defined in Section
5.1 above. As new feature/function releases are made generally available,
Visteon will make reasonable efforts to correct any nonconformity.
(5)
<PAGE>
7.2. Visteon's warranty shall not extend to problems in the Licensed
Products that result from: (a) Licensee's modifications to the Licensed
Products; (b) Licensee's failure to use enhancements or Nonconformity
corrections; (c) misuse of the Licensed Products (d) third party product
malfunctions; unless Third Party authorizes Visteon in writing to warrant
its products; (e) hardware or communication equipment malfunctions; (f)
Licensee's failure, after a reasonable notice period, to use the most
current release of the Licensed Products offered by Visteon, or the
operating system for the Licensed Products at the release levels specified
by Visteon, or the version then approved by Visteon of any third party
software that operates with the Licensed Products; (g) any modifications,
alterations of or additions to the Licensed Products performed by parties
other than Visteon; (h) Licensee's use of such Licensed Products outside
the scope of this License or in a manner for which they were not designed;
or (i) Licensee's negligence.
7.3. LICENSEE'S SOLE REMEDY, AND VISTEON'S SOLE LIABILITY ARISING IN
CONNECTION WITH THE FOREGOING WARRANTY SHALL BE FOR VISTEON, AT ITS SOLE
OPTION, TO REPAIR THE LICENSED PRODUCT THAT DOES NOT PERFORM ACCORDING TO
SPECIFICATIONS AS PROVIDED UNDER SECTION 7.1 ABOVE, REPLACE THE LICENSED
PRODUCTS OR TERMINATE THIS AGREEMENT AND REFUND THE INITIAL PAYMENT OF THE
LICENSE FEE FOR THE LICENSED PRODUCTS SET FORTH IN ADDENDUM A HERETO.
EXCEPT FOR THIS EXPRESS LIMITED WARRANTY, VISTEON MAKES NO WARRANTIES,
EXPRESS, IMPLIED, STATUTORY OR IN ANY COMMUNICATION WITH LICENSEE, AND
SPECIFICALLY DISCLAIMS ANY IMPLIED WARRANTIES OF MERCHANTABILITY AND
FITNESS FOR A PARTICULAR PURPOSE.
8. INDEMNIFICATION
8.1. Visteon agrees, at its own expense, to defend or at its option to
settle, any claim brought against Licensee on the issue of infringement of
any United States patent, copyright, trade secret or trademark of any
third party ("Indemnified Right") by the Licensed Products as used within
the scope of this Agreement, provided that Licensee provides Visteon with
(a) prompt written notice of such claim, (b) authority to proceed as
contemplated herein and (c) proper and full information and assistance to
settle and/or defend any such claim. If a final injunction is, or Visteon
believes, in its sole discretion, is likely to be entered prohibiting
Licensee from exercising its right to use the Licensed Products granted
hereunder, Visteon may, at its sole option and expense, either: (a)
procure for Licensee the right to use the Licensed Products as provided
herein; (b) replace the Licensed Products with other non-infringing
products; (c) suitably modify the Licensed Products so that they are not
infringing; or (d) accept return of the Licensed Products and refund to
Licensee the initial license fee. Visteon will not be liable for any costs
or expenses incurred without its prior written authorization.
8.2. Notwithstanding the provision of Section 8.1 above, Visteon assumes
no liability for infringement claims arising from (a) third party
products, (b) the modification of the
(6)
<PAGE>
Licensed Products unless such modification was made by Visteon, or (c)
Licensee's failure to use the Licensed Products as set forth herein.
8.3. THE FOREGOING PROVISIONS OF THIS SECTION 8 STATE THE ENTIRE
LIABILITY AND OBLIGATIONS OF VISTEON, AND THE EXCLUSIVE REMEDY OF
LICENSEE, WITH RESPECT TO ANY ACTUAL OR ALLEGED INFRINGEMENT OF ANY
PATENT, COPYRIGHT, TRADE SECRET, TRADEMARK OR OTHER INTELLECTUAL PROPERTY
RIGHT BY THE LICENSED PRODUCTS.
9. LIMITATION OF LIABILITY
9.1. In no event shall Visteon be liable in any way to Licensee or others
for any lost profits, loss of data unless Visteon determines this was done
due to a nonconformity in the product(s). If so, Visteon will use best
efforts to work with Licensee to recreate the lost data or cost of
procurement of substitute goods or services, or for any indirect, special
or consequential damages of any nature, whether foreseeable or not,
regardless of whether Visteon has been advised of the possibility of such
damages. In no event will Visteon's liability in connection with the
Licensed Products or this Agreement, whether caused by failure to deliver,
non-performance, defects, Nonconformities, breach of warranty or
otherwise, exceed the total License Fee paid to Visteon by Licensee
hereunder as set forth in Addendum A. These limitations apply to all
causes of action in the aggregate, whether based in contract, tort or
otherwise, but do not apply to claims arising out of damage to tangible
personal property or personal injury caused by Visteon's employees while
on Licensee's premises.
9.2. Without limiting the foregoing, Licensee agrees that the use of the
Licensed Products for any purpose related to patient care cannot be
controlled by Visteon and must not be substituted for Licensee's
professional skill and judgment. Licensee acknowledges that Visteon is in
no way responsible for any medical, pharmacological, laboratory,
radiology, legal or similar information contained in, entered into, or
used in connection with the System and Licensee independently will verify
the accuracy and completeness of such information.
9.3. No action, regardless of form, arising out of any of the
transactions pursuant to this Agreement, may be brought by Licensee more
than three years after the cause of the action accrued.
10. TERMINATION
10.1. This Agreement shall terminate upon expiration. This Agreement also
may be terminated by either party in the event that the other party
materially breaches any of the terms or conditions of the Agreement and,
if such breach is capable of cure, such breach has not been cured within
thirty (30) days after notice of breach from the party asserting breach.
Upon termination, Licensee will immediately discontinue all use of the
Licensed Products and return to Visteon all copies of the Licensed
Products including all programs,
(7)
<PAGE>
documentation and enhancements and Licensee thereafter shall continue to
maintain in confidence all knowledge of the Licensed Products. Licensee
shall deliver to Visteon within fifteen (15) days after termination a
written certification of compliance with the foregoing executed by an
officer of Licensee.
11. GENERAL
11.1. This Agreement constitutes the entire and exclusive Agreement
between the parties hereto with respect to the subject matter hereof and
supersedes and cancels all previous representations, agreements,
commitments, and writing in respect thereof.
11.2. This Agreement shall be governed by the laws of the State of
Florida. All actions and proceedings arising in any way out of the
Agreement shall be litigated in state or federal courts located in the
State of Florida.
11.3. No modification to this Agreement, nor any waiver of any rights,
shall be effective unless assented to in writing by the party to be
charged and the waiver of any breach or default shall not constitute a
waiver of any other right hereunder or any subsequent breach or default.
11.4. This Agreement and the use of the Licensed Products provided
hereunder are not assignable without prior written consent of Visteon
which consent will not be unreasonably withheld. Any attempt at assignment
without such consent shall be null and void and of no force and effect.
11.5. If any provision of the Agreement is held to be invalid by a court
of competent jurisdiction, then the remaining provisions will nevertheless
remain in full force and effect. The parties agree to renegotiate in good
faith any term held invalid and to be found by the mutually agreed
substitute provision.
11.6. The failure of Visteon to enforce any term or condition of this
Agreement shall not constitute a waiver of Visteon's rights to enforce
subsequent breaches of any term or condition under this Agreement.
11.7. Any notices required to be given under this Agreement shall be in
writing and addressed to the respective party at the address shown on the
face page of this Agreement or such other address as may be provided by
each party from time to time. Notices shall be effective when received and
shall be sent by certified or registered mail, return receipt requested,
or by overnight courier.
Medical Asset Management Inc.
By: /s/ John W. Regan
-----------------------------
Name: John W. Regan
-----------------------------
Title: President
-----------------------------
Date: 9/18/96
-----------------------------
(8)
<PAGE>
Visteon Corporation
By: /s/ David S. Greenberg
-----------------------------
Name: David S. Greenberg
-----------------------------
Title: CEO & CTO
-----------------------------
Date: 9/18/96
-----------------------------
(9)
EXHIBIT 10.7
Business Terms
Addendum A
This Addendum sets forth terms and conditions which are in addition to and/or
modify those terms and conditions set forth in the Visteon Corporate Software
License Agreement between Visteon Corporation ("Visteon") and Medical Asset
Management, Inc. ("Licensee"), dated 9/18/96 (the "Agreement").
THIS ADDENDUM, INCLUDING THE SOFTWARE LICENSE AGREEMENT OF WHICH IT IS PART, IS
A COMPLETE AND EXCLUSIVE STATEMENT OF THE ENTIRE AGREEMENT BETWEEN THE PARTIES,
WHICH SUPERSEDES ALL PRIOR OR CONCURRENT PROPOSALS AND UNDERSTANDINGS, WHETHER
ORAL OR WRITTEN, AND ALL OTHER COMMUNICATIONS BETWEEN THE PARTIES RELATING TO
THE SUBJECT MATTER OF THIS ADDENDUM AND THE AGREEMENT.
Notwithstanding anything to the contrary in the Agreement, in the event of a
conflict between this Addendum and the Agreement, this Addendum shall prevail.
All other terms and conditions remain unchanged and are in effect.
THIS ADDENDUM SHALL NOT BE EFFECTIVE UNTIL EXECUTED BY MEDICAL ASSET MANAGEMENT,
INC. AND ACCEPTED BY AN AUTHORIZED REPRESENTATIVE OF VISTEON AT ITS PRINCIPAL
PLACE OF BUSINESS.
In consideration of both parties mutual promise, the following terms and
conditions are in effect as stated herein, provided the Agreement and this
Addendum are executed by the Licensee on or before September 18, 1996. The
parties therefore agree:
1) The terms and conditions of this Addendum A will exist for a period
of three (3) years from the "effective date" of this agreement.
2) Licensee agrees to be a "showcase" reference account for Visteon and
will host reference site visits on its own time and cost provided
Visteon gives Licensee reasonable notice. Visteon and Licensee agree
that such visits will occur on a reasonable basis and in a
reasonable volume, so as to not materially impact the Licensee in
the performance of its normal business. Licensee will in no way be
responsible for any costs incurred by the prospect or Visteon for
said visit.
3) Subject to Licensee's commitment of 275 full time providers (as
defined in Section 1 paragraph 1.4 of the Agreement), Licensee will
pay to Visteon a one time non-refundable (except as provided in
Section 7 Warranty of the Agreement) license fee of $1,237,500 for
the License to Visteon's suite of products known as BigVision
("Licensed Products").
1
<PAGE>
4) Licensee commits to pay a License Fee for the Licensed Products as
follows:
* Initial payment of $500,000 due once Licensee has secured
financing but no later than September 18, 1996
* A second payment of $250,000 no later than June 30, 1997
* A third payment of $350,000 no later than December 30, 1997
* A final payment of $137,500 no later than March 27, 1998.
5) Further pricing consideration will be given for the addition of full
time providers in excess of 275 as follows: for full time providers
between 276-500, a one-time fee of NOT MORE THAN $3,500 per full
time provider will apply and from 501 full time providers and over
the price per full time provider will be NOT MORE THAN $3,200.
6) Visteon recognizes that Licensee also will employ part time
providers in its operation that will require access to the Licensed
Products. In addition to the pricing detailed herein, use of the
Licensed Products will be priced at $2,500 per part time provider.
The definition of a provider is defined in Section 1, paragraph 1.4
of the Agreement. LICENSEE PLANS TO HAVE 20 PART-TIME PROVIDERS
WHICH WILL EQUATE TO (2) PART-TIME PROVIDERS = (1) FULL-TIME
PROVIDER AND EACH FULL-TIME PROVIDER ATTRIBUTED TO THIS EQUATION
WILL APPLY AGAINST THE 275 OR OVER FULL-TIME PROVIDERS.
7) Annual Software Support charges for the first 18 months of this
agreement from the "LIVE DATE" of the Agreement will be priced at
15% or $675 per full time providers up to 275 full time providers;
15% or $525 per full time provider from 276-500; and 15% or $480 per
full time provider for 501 and over. Part time providers will be
charged a support fee of 15% or $375 per part time provider. After
this 18 month period, Visteon may raise prices annually by an amount
not to exceed the change in the Consumer Price Index in effect at
the time as quoted in the "Wall Street Journal". Support Fees will
be based on the number of full time and part time providers who are
using the Licensed Products at each of Licensee's facilities where
implementation of the Licensed Products has been completed.
8) Upon mutual agreement of the parties during the term of this
Addendum A, Visteon will be willing to discuss Central Site Support
services (as defined by Visteon) with Licensee, if and when such
services are offered and available. Currently it is Visteon's plan
to offer such services.
9) Implementation and training services as performed by Visteon or its
certified business partners will be priced at $600 per day plus
reasonable travel and living expenses for the first 18 months from
the "effective date" of this agreement. Thereafter, these same
services will be priced at $800 per day plus reasonable travel and
living expenses.
2
<PAGE>
10) If and when Visteon acquires the rights to a risk management
software product, such product will be licensed to Licensee for a
discount of 60% from Visteon's then current list price, and will be
subject to the terms and conditions of the Agreement. Support
charges will be 15% of the net licensee fee per provider. Annual
support price increases may occur after the initial year based on
the Consumer Price Index consistent with paragraph 7, above.
11) If Visteon should acquire marketing and support services rights to
third-party products, Licensee may license such products from
Visteon on such terms and conditions as may be required by such
third party provider at a fifty percent (50%) discount from
Visteon's published list price after any royalty payments have been
deducted which are payable by Licensee, for such third party
products. Support Services fees for such third party products will
be charged to Licensee at Visteon's then current prices for such
Support services.
12) The third-party owned Datagate interface product which Visteon is
authorized to market will be offered to Licensee at Visteon's
current list price. Support will also be charged at the then current
list price.
13) Visteon will offer Licensee a resource to interface with the
hardware and network vendor Licensee selects to run the Licensed
Products for no charge other than reasonable travel and living
expenses. The scope of the work to be completed will be defined by
Visteon with Licensee input as we jointly develop Licensee's
implementation and training plan.
14) Visteon and Licensee agree that the parties will engage in a
non-exclusive joint marketing program INCLUDING THE PERFORMANCE OF
DEMO'S ON A SELECTIVE BASIS for the expansion of Licensee's business
predicated on using Visteon's products. Licensee will designate an
individual through which Visteon will take direction for its part of
the joint marketing activity. A total formal plan for this effort
will be designed with Licensee once Licensee has designated an
individual(s) for Visteon to work with. Each party will bear its own
costs in this venture and Visteon, upon written approval, will allow
Licensee to use the BigVision product name in these or any of its
marketing efforts for no additional cost. Such approval will not be
unreasonably withheld.
3
<PAGE>
15) Due to the special nature of the pricing and various concessions
within this Addendum, the parties agree that the terms and
conditions of this Addendum are strictly confidential to the parties
and should be revealed only to those select few employees who have
an absolute need to know for the performance of each parties
business.
VISTEON CORPORATION MEDICAL ASSET MANAGEMENT, INC.
By: /s/ David S. Greenberg By: /s/ John W. Regan
------------------------ ------------------------
Name: David S. Greenberg Name: John W. Regan
------------------------ ------------------------
Title: CEO & CTO Title: President
------------------------ ------------------------
Date: 9/18/96 Date: 9/18/97
------------------------ ------------------------
4
EXHIBIT 10.10
NORTHERN TRUST BANK OF ARIZONA, N.A.
PROMISSORY NOTE
================================================================================
Borrower: MEDICAL ASSET MANAGEMENT, INC.,
a Delaware corporation
4447 East Broadway Road, Suite 102
Mesa, AZ 85206
Lender: NORTHERN TRUST BANK OF ARIZONA, N.A.
CAMELBACK OFFICE
2398 EAST CAMELBACK ROAD
PHOENIX, AZ 85016
================================================================================
Principal Amount: $2,500,000.00
Interest Rate: 6.720%
Date of Note: May 30, 1997
PROMISE TO PAY, MEDICAL ASSET MANAGEMENT, INC., a Delaware corporation
("Borrower") promises to pay to NORTHERN TRUST BANK OF ARIZONA, N.A. ("Lender"),
or order, in lawful money of the United States of America, the principal amount
of Two Million Five Hundred Thousand & 00/100 Dollars ($2,500,000.00) or so much
as may be outstanding, together with interest at the rate of 6.720% per annum on
the unpaid outstanding principal balance of each advance. Interest shall be
calculated from the date of each advance until repayment of each advance.
PAYMENT. Borrower will pay this loan in one payment of all outstanding principal
plus all accrued unpaid interest on May 28, 1998. In addition, Borrower will pay
regular monthly payments of accrued unpaid interest beginning June 29, 1997, and
all subsequent interest payments are due on the same day of each month after
that. Interest on this Note is computed on a 365/360 simple interest basis; that
is, by applying the ratio of the annual interest rate over a year of 360 days,
multiplied by the outstanding principal balance, multiplied by the actual number
of days the principal balance is outstanding. Borrower will pay Lender at
Lender's address shown above or at such other place as Lender may designate in
writing. Unless otherwise agreed or required by applicable law, payments will be
applied first to any unpaid collection costs and any late charges, then to any
unpaid interest, and any remaining amount to principal.
PREPAYMENT. Borrower may pay without penalty all or a portion of the amount owed
earlier than it is due. Early payments will not, unless agreed to by Lender in
writing, relieve Borrower of Borrower's obligation to continue to make payments
of accrued unpaid interest. Rather, they will reduce the principal balance due.
LATE CHARGE. If a payment is 10 days or more late, Borrower will be charged
5.000% of the regularly scheduled payment or $10.00, whichever is greater.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to comply with or to perform when
due any other term, obligation, covenant, or condition contained in this Note or
any agreement related to this Note, or in any other agreement or loan Borrower
has with Lender. (c) Any representation or statement made or furnished to Lender
by Borrower or on Borrower's behalf is false or misleading in any material
respect either now or at the time made or furnished. (d) Borrower becomes
insolvent, a receiver is appointed for any part of Borrower's property, Borrower
makes an assignment for the benefit of creditors, or any proceeding is commenced
either by Borrower or against Borrower under any bankruptcy or insolvency laws.
(e) Any creditor tries to take any of Borrower's property on or in which Lender
has a lien or security interest. This includes a garnishment of any of
<PAGE>
PROMISSORY NOTE
(Continued)
================================================================================
Borrower's accounts with Lender. (f) Any guarantor dies or any of the other
events described in this default section occurs with respect to any guarantor of
this Note. (g) A material adverse change occurs in Borrower's financial
condition, or Lender believes the prospect of payment or performance of the
Indebtedness is impaired. (h) Lender in good faith deems itself insecure.
If any default, other than a default in payment, is curable and if Borrower has
not been given a notice of a breach of the same provision of this Note within
the preceding twelve (12) months, it may be cured (and no event of default will
have occurred) if Borrower, after receiving written notice from Lender demanding
cure of such default: (a) cures the default within fifteen (15) days; or (b) if
the cure requires more than fifteen (15) days, immediately initiate steps which
Lender deems in Lender's sole discretion to be sufficient to cure the default
and thereafter continues and completes all reasonable and necessary steps
sufficient to produce compliance as soon as reasonably practical.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid interest immediately due, without
notice, and then Borrower will pay that amount. Upon default, including failure
to pay upon final maturity, Lender, at its option, may also, if permitted under
applicable law, increase the interest rate on this Note 3.000 percentage points.
The interest rate will not exceed the maximum ratio permitted by applicable law.
Lender may hire or pay someone else to help collect this Note if Borrower does
not pay. Borrower also will pay Lender that amount. This includes, subject to
any limits under applicable law, Lender's attorneys' fees and Lender's legal
expenses whether or not there is a lawsuit, including attorneys' fees and legal
expenses for bankruptcy proceedings (including efforts to modify or vacate any
automatic stay or injunction), appeals, and any anticipated post-judgment
collection services. If not prohibited by applicable law, Borrower also will pay
any court costs, in addition to all other sums provided by law. This Note has
been delivered to Lender and accepted by Lender in the State of Arizona. If
there is a lawsuit, Borrower agrees upon Lender's request to submit to the
jurisdiction or the courts of MARICOPA County, the State of Arizona. This Note
shall be governed by and construed in accordance with the laws of the State of
Arizona.
DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $16.00 if Borrower
makes a payment on Borrower's loan and the check or preauthorized charge with
which Borrower pays is later dishonored.
RIGHT OF SETOFF. Borrower grants to Lender a contractual promissory security
interest in, and hereby assigns, conveys, delivers, pledges, and transfers to
Lender all Borrower's right, title and interest in and to, Borrower's accounts
with Lender (whether checking, savings, or some other account), including
without limitation all accounts held jointly with someone else and all accounts
Borrower may open in the future, excluding however all IRA and Keogh accounts,
and all trust accounts for which the grant of a security interest would be
prohibited by law. Borrower authorizes Lender, to the extent permitted by
applicable law, to charge or setoff all sums owing on this Note against any and
all such accounts.
COLLATERAL. This Note is secured by an Assignment of Deposit Account to Lender
dated March 3, 1997, all the terms and conditions of which are hereby
incorporated and made a part of this Note.
LINE OF CREDIT. This Note evidences a revolving line of credit. Advances
under this Note may be requested either orally or in writing by Borrower or
by an authorized person. Lender may, but need not,
2
<PAGE>
PROMISSORY NOTE
(Continued)
================================================================================
require that all oral requests be confirmed in writing. All communications,
instructions, or directions by telephone or otherwise to Lender are to be
directed to Lender's office shown above. The following party or parties are
authorized to request advances under the line of credit until Lender receives
from Borrower at Lender's address shown above written notice of revocation of
their authority: John Regan, President. Borrower agrees to be liable for all
sums either: (a) advanced in accordance with the instructions of an authorized
person or (b) credited to any of Borrower's accounts with Lender. The unpaid
principal balances owing on this Note at any time may be evidenced by
endorsements on this Note or by Lender's internal records, including daily
computer print-outs. Lender will have no obligation to advance funds under this
Note if: (a) Borrower or any guarantor is in default under the terms of this
Note or any agreement that Borrower or any guarantor has with Lender, including
any agreement made in connection with the signing of this Note; (b) Borrower or
any guarantor ceases doing business or is insolvent; (c) any guarantor seeks,
claims or otherwise attempts to limit, modify or revoke such guarantor's
guarantee of this Note or any other loan with Lender; (d) Borrower has applied
funds provided pursuant to this Note for purposes other than those authorized by
Lender; or (e) Lender in good faith deems itself insecure under this Note or any
other agreement between Lender and Borrower.
PRIOR NOTE. This Promissory Note from Medical Asset Management, Inc., a
Delaware corporation to Lender, modifies and supersedes Promissory Note dated
March 3, 1997.
GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or
remedies under this Note without losing them. Borrower and any other person who
signs, guarantees or endorses this Note, to the extent allowed by law, waive
presentment, demand for payment, protest and notice of dishonor. Upon any change
in the terms of this Note, and unless otherwise expressly stated in writing, no
party who signs this Note, whether as maker, guarantor, accommodation maker or
endorser, shall be released from liability. All such parties agree that Lender
may renew or extend (repeatedly and for any length of time) this loan, or
release any party or guarantor of collateral; or impair, fail to realize upon or
perfect Lender's security interest in the collateral; and take any other action
deemed necessary by Lender without the consent of or notice to anyone. All such
parties also agree that Lender may modify this loan without the consent of or
notice to anyone other than the party with whom the modification is made.
EFFECTIVE RATE. Borrower agrees to an effective rate of interest that is the
rate specified in this Note plus any additional rate resulting from any other
charges in the nature of interest paid or to be paid in connection with this
Note.
3
<PAGE>
PROMISSORY NOTE
(Continued)
================================================================================
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS
OF THIS NOTE. BORROWER AGREES TO THE TERMS OF THE NOTE AND ACKNOWLEDGES
RECEIPT OF A COMPLETED COPY OF THE NOTE.
BORROWER:
MEDICAL ASSET MANAGEMENT, INC.,
a Delaware corporation
By: /s/ John Regan
----------------------------
John Regan, President
4
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the use of our report dated Seprember 19, 1997, (except for Note
15 as to which the date is October 15, 1997), in Amendment No. 6 to the
Registration Statement (Form 10-SB) of Medical Asset Management, Inc. dated
November 14, 1997.
/s/ Ernst & Young
------------------------------
ERNST & YOUNG LLP
Pittsburgh, Pennsylvania
November 14, 1997
EXHIBIT 23.2
HARLAN & BOETTGER, LLF
Certified Public Accountants
James C. Harlan III
William C. Boettger
P. Robert Wilkinson
Marshall J. Varano
Consent of Independent Auditors
We consent to the use of our report dated May 1, 1996 (except for Notes 1 and 12
as to which the date is September 19, 1997) with respect to the consolidated
financial statements of Medical Asset Management, Inc. and our report dated
September 23, 1996 with repsect to the financial statments of OB-GYN Associates,
P.C. in amendment No. 6 to the Registration Statement (Form 10) of Medical Asset
Management, Inc. dated November 14, 1997.
/s/ Harlan & Boettger
- -----------------------------
Harlan & Boettger, LLP
November 14, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-END> DEC-31-1996 DEC-31-1995
<CASH> 4,663,864 134,378
<SECURITIES> 0 0
<RECEIVABLES> 10,726,299 4,762,854
<ALLOWANCES> 3,735,742 1,580,820
<INVENTORY> 0 0
<CURRENT-ASSETS> 12,073,149 3,410,253
<PP&E> 2,347,857 671,752
<DEPRECIATION> 507,241 173,462
<TOTAL-ASSETS> 31,919,504 11,832,562
<CURRENT-LIABILITIES> 6,970,411 1,963,006
<BONDS> 2,300,888 582,847
0 0
2,250 3,000
<COMMON> 9,589,090 5,989,939
<OTHER-SE> 9,657,133 1,339,392
<TOTAL-LIABILITY-AND-EQUITY> 31,919,504 11,832,562
<SALES> 0 0
<TOTAL-REVENUES> 10,378,508 6,400,236
<CGS> 0 0
<TOTAL-COSTS> 9,501,945 5,753,054
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 8,160,341 2,346,765
<INTEREST-EXPENSE> 251,561 291,657
<INCOME-PRETAX> (5,674,126) (1,482,587)
<INCOME-TAX> 0 50,655
<INCOME-CONTINUING> (5,674,126) (1,533,242)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (5,674,126) (1,533,242)
<EPS-PRIMARY> (0.43) (0.15)
<EPS-DILUTED> 0 0
</TABLE>
