U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ___________
COMMISSION FILE NO. 0-27236
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)
25241 Paseo de Alicia, Suite 230
Laguna Hills, CA 92653
Telephone: (714) 829-8333
Securities to be registered under Section 12(b) of the Exchange 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 Exchange Act:
Common Stock, par value $.001 per share
<PAGE>
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [ ] No [X]
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB [X]
State issuer's revenues for its most recent fiscal year: $10,378,508.
The aggregate market value of the voting stock held by non-affiliates as
of September 25, 1997 computed by reference to the bid price of such stock as of
November 24, 1997 was $8,379,518.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
The number of shares of the issuer's common stock outstanding as of
September 25, 1997, was 15,799,129.
DOCUMENTS INCORPORATED BY REFERENCE.
The issuer incorporates by reference (i) the documents included as
exhibits to the Form 10-SB (Amendment No. 6) filed November 21, 1997, (ii) the
Form 8-K filed November 22, 1996, and (iii) the Form 8-K filed December 3, 1996.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
<PAGE>
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 management fee by the Company under these
non-equity arrangements varies with the services
1
<PAGE>
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.
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
2
<PAGE>
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 "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
3
<PAGE>
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.
4
<PAGE>
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
Item 7.
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."
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
5
<PAGE>
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 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
6
<PAGE>
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 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
7
<PAGE>
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:
<TABLE>
<CAPTION>
Year Ended December 31, November 1,
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.
8
<PAGE>
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.
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
9
<PAGE>
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 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
10
<PAGE>
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 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
11
<PAGE>
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.
ITEM 2. 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 $1,418,000 in 1996as compared to $972,000 in 1995, See
Note 13 of the Company's audited financial statements for future minimum lease
payments due under noncancellable operating leases. Although the
12
<PAGE>
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 3. 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
13
<PAGE>
Financial Statements. See also "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Results of Operations."
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the last
quarter of fiscal year 1996.
14
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED 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:
============================================================
Quarter Ending High Bid Low Bid
============================================================
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
============================================================
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.
15
<PAGE>
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.
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
16
<PAGE>
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 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.
17
<PAGE>
ITEM 6. 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-KSB, 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 was filed on
November 21, 1997. This Form 10-KSB is being filed as soon as practicable.
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.
18
<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>
19
<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 loss 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:
20
<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 Company entered
into such arrangements with 14 additional practices and terminated seven
21
<PAGE>
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 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
22
<PAGE>
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
staff, administrative, legal and accounting 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.
23
<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.
24
<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 increased $1,325,000, or 41%, to $4,481,000 in 1996
from $3,155,000 in 1995, reflecting the
25
<PAGE>
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:
26
<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 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.
27
<PAGE>
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 had $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 was outstanding and
repaid on November 24, 1997. The Company borrowings were 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% could be charged on
outstanding borrowings. A reserve of 5% of the total outstanding invoices was
also required. This facility was guaranteed by certain officers of the Company.
The Company entered into a new accounts receivable credit facility dated
as of November 12, 1997 under which 80% of the net collectible value of the
Company's accounts receivable could be advanced up to $2.5 million. The Company
initially borrowed approximately $1,600,000 on November 24, 1997, the proceeds
of which were used to repay the outstanding borrowings under the existing
factoring accounts receivable line described above and to fund working capital
needs.
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:
(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;
28
<PAGE>
(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.
* 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.
29
<PAGE>
* 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 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 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.
30
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
INDEX TO FINANCIAL INFORMATION
Page
MEDICAL ASSET MANAGEMENT, INC.
AUDITED FINANCIAL STATEMENTS
Reports of Independent Auditors.......................................32
Consolidated Balance Sheets as of December 31, 1996 and 1995..........34
Consolidated Statements of Operations for the Years Ended December
31, 1996 and 1995.....................................................36
Consolidated Statement of Changes in Stockholders' Equity for
the Years Ended December 31, 1996 and 1995 ...........................37
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996 and 1995 ...........................................38
Notes to Consolidated Financial Statements............................39
AUDITED FINANCIAL STATEMENTS
Report of Independent Auditors........................................62
Consolidated Balance Sheets as of December 31, 1995 and 1994 .........63
Consolidated Statements of Operations for the Years
Ended December 31, 1995 and 1994 .....................................65
Consolidated Statement of Changes in Stockholders' Equity
for the Years Ended December 31, 1995 and 1994 .......................66
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995 and 1994 ...........................................67
Notes to Consolidated Financial Statements............................68
OB-GYN
Report of Independent Auditors........................................85
Balance Sheet as of December 31, 1995 (audited).......................86
Statement of Operations for the Year Ended December 31,
1995 (audited)........................................................87
Statement of Stockholders' Equity for the Year Ended
December 31, 1995.....................................................88
Statement of Cash Flows for the Year Ended December 31,
1995 (audited)........................................................89
Notes to Financial Statements.........................................90
UNAUDITED INTERIM FINANCIAL STATEMENTS
Balance Sheets as of December 31, 1995 and March 31, 1996
(unaudited)...........................................................94
Statements of Operations for the Three Months Ended
March 31, 1996 and 1995 (unaudited)...................................95
Statements of Cash Flows for the Three Months Ended
March 31, 1996 and 1995 (unaudited)...................................96
Notes to Unaudited Financial Statements...............................97
PRO FORMA FINANCIAL STATEMENTS
Pro forma Statement of Operations for the Three Months
Ended March 31, 1996 (unaudited)......................................99
Pro forma Statement of Operations for the Year Ended
December 31, 1995 (unaudited)........................................100
Notes to Unaudited Pro Forma Financial Statements....................101
31
<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.
Pittsburgh, Pennsylvania Ernst & Young LLP
September 19, 1997,
except for Note 15 as
to which the date is
October 15, 1997
32
<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.
33
<PAGE>
Medical Asset Management, Inc. and Subsidiary
Consolidated Balance Sheets
<TABLE>
<CAPTION>
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>
34
<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>
35
<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>
36
<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
====================================================================
===============
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>
37
<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>
38
<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:
39
<PAGE>
2. OPERATIONS AND LIQUIDITY (CONTINUED)
o 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.
o Reducing advances made to physicians.
o Reducing compensation expense included in general and administrative expenses
as a result of headcount and salary reductions.
o Reducing executive compensation in 1997 and deferral of 1998 senior
management compensation, if necessary.
o Completing refinancings of Company-owned medical buildings and equipment.
o 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.
40
<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>
41
<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
42
<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.
43
<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.
44
<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.
45
<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.
<TABLE>
<CAPTION>
1996 1995
------------- ------------
<S> <C> <C>
Revenues $1,319,000 $1,090,000
Net loss (50,000) (17,000)
</TABLE>
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,
46
<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.
47
<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.
48
<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.
49
<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.
50
<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>
51
<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
52
<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.
53
<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
54
<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.
55
<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>
56
<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.
57
<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>
58
<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.
59
<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
60
<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.
61
<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 sheets of Medical Asset Management,
Inc. as of December 31, 1995 and 1994, and the related consolidated statements
of operations, stockholders equity, and cash flows for the years then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits 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 1994, and the results of its operations and cash
flows for the years 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.
<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>
63
<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>
64
<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>
65
<PAGE>
<TABLE>
<CAPTION>
Medical Asset Management, Inc. and Subsidiaries
Consolidated Statement of Changes in Stockholders' Equity
COMMON STOCK PREFERRED STOCK
--------------------------------------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT 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
STOCK UNEARNED RETAINED
TO BE ISSUED REMUNERATION EARNINGS 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>
66
<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>
67
<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.
68
<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>
69
<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.
70
<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
71
<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.
72
<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
73
<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.
74
<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
75
<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.
76
<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>
77
<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,
78
<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.
79
<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>
80
<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.
81
<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.
82
<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>
83
<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>
84
<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
85
<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>
86
<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>
87
<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.
88
<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>
89
<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.
90
<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.
91
<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>
92
<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>
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.
93
<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>
94
<PAGE>
OB-GYN Associates, P.C.
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
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>
95
<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.
96
<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.
97
<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.
98
<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>
99
<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>
100
<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:
<TABLE>
<CAPTION>
<S> <C>
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
</TABLE>
(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
101
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
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.
102
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
Information concerning the current executive officers and directors of the
Company is set forth in the following table:
Name Age Position with the Company
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
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.
103
<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.
104
<PAGE>
ITEM 10. 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:
<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
105
<PAGE>
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-KSB.
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 11. 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:
106
<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.
107
<PAGE>
ITEM 12. 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 had
guaranteed the Company's obligations thereunder. See Note 15 to the Company's
Financial Statements.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
PAGE
(a) EXHIBITS
3.1 Certificate of Incorporation of Eagle High Enterprises,
Inc., filed January 23, 1986. (Incorporated by
reference to Exhibit 3.1 to Form 10-SB (Amendment No.
6) filed November 21, 1997).
3.2 Certificate of Amendment of Certificate of
Incorporation of Eagle High Enterprises, Inc., filed
June 21, 1994. (Incorporated by reference to Exhibit
3.2 to Form 10-SB (Amendment No. 6) filed November 21,
1997).
3.3 Certificate of Designations filed September 19, 1997.
(Incorporated by reference to Exhibit 3.3 to Form 10-SB
(Amendment No. 6) filed November 21, 1997).
3.4 Bylaws of Eagle High Enterprises, Inc. (Incorporated
by reference to Exhibit 3.4 to Form 10-SB (Amendment
No. 6) filed November 21, 1997).
4.1 Placement Agreement between Cruttenden Roth
Incorporated and Medical Asset Management,
Incorporated, dated April 30, 1996. (Incorporated by
reference to Exhibit 4.1 to Form 10-SB (Amendment No.
6) filed November 21, 1997).
4.2 Medical Asset Management, Inc. Declaration of
Registration Rights. (Incorporated by reference to
Exhibit 4.2 to Form 10-SB (Amendment No. 6) filed
November 21, 1997).
4.3 Medical Asset Management, Inc. Common Stock Warrant.
108
<PAGE>
(Incorporated by reference to Exhibit 4.3 to Form 10-SB
(Amendment No. 6) filed November 21, 1997).
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. (Incorporated by reference to Exhibit
4.4 to Form 10-SB (Amendment No. 6) filed November 21,
1997).
4.5 Equity-Based Incentive Plan. (Incorporated by
reference to Exhibit 4.5 to Form 10-SB (Amendment No.
6) filed November 21, 1997).
4.6 Stock Exchange Agreement with Shareholders of Medical
Asset Management, Inc. and Eagle High Enterprises,
Inc., dated June 24, 1994. (Incorporated by reference
to Exhibit 4.6 to Form 10-SB (Amendment No. 6) filed
November 21, 1997).
10.1 Employment Agreement between Medical Asset Management,
Inc. and John Regan, dated January 1, 1995.
(Incorporated by reference to Exhibit 10.1 to Form
10-SB (Amendment No. 6) filed November 21, 1997).
10.2 Employment Agreement between Medical Asset Management,
Inc. And Dennis Calvert, dated January 1, 1995.
(Incorporated by reference to Exhibit 10.2 to Form
10-SB (Amendment No. 6) filed November 21, 1997).
10.3 Employment Agreement between Medical Asset Management,
Inc. and Michael Zaic, dated January 1, 1995.
(Incorporated by reference to Exhibit 10.3 to Form
10-SB (Amendment No. 6) filed November 21, 1997).
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. (Incorporated by
reference to Exhibit 10.4 to Form 10-SB (Amendment No.
6) filed November 21, 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. (Incorporated by reference to Exhibit 10.5 to
Form 10-SB (Amendment No. 6) filed November 21, 1997).
10.6 Software License Agreement between the Company and
Visteon corporation, dated September 18, 1996.
(Incorporated by reference to Exhibit 10.6 to Form 10-SB
(Amendment No. 6) filed November 21, 1997).
10.7 Addendum A to Software License Agreement between the
Company
109
<PAGE>
and Visteon corporation, dated September 18,
1996. (Incorporated by reference to Exhibit 10.7 to
Form 10-SB (Amendment No. 6) filed November 21, 1997).
10.8 Agreement with Healthcare Professional Management, Inc.
Dated December 29, 1995. (Incorporated by reference to
Exhibit 10.8 to Form 10-SB (Amendment No. 6) filed
November 21, 1997).
10.9 Asset Purchase and Medical Practice Management Agreement
between the Company and OB-GYN Associates, P.C., dated
December 31, 1995. (Incorporated by reference to Exhibit
10.9 to Form 10-SB (Amendment No. 6) filed November 21, 1997).
10.10 Promissory Note between the Company and Northern
Trust Bank of Arizona, N.A., dated May 30, 1997.
(Incorporated by reference to Exhibit 10.10 to Form 10-SB
(Amendment No. 6) filed November 21, 1997).
10.11 Loan and Security Agreement between the Company, Healthcare
Professional Management, Inc. and HCFP Funding, Inc.
dated November 12, 1997.
10.12 Revolving Credit Note between the Company, Healthcare
Professional Management, Inc. and HCFP Funding, Inc.
dated November 12, 1997.
16 Letter on change in certifying accountant. (Incorporated by
reference to Exhibit to Form 8-K filed November 22, 1996).
21 Subsidiaries of the Registrant.
27 Financial Data Schedule.
110
<PAGE>
(b) REPORTS ON FORM 8-K
During the last quarter of fiscal year 1996, the Company filed the
following reports on Form 8-K: Current Report on Form 8-K filed on
November 22, 1996 which reported the Company's solicitation of
Ernst & Young, LLP as the Company's independent auditors. Current
Report Form 8-K filed on December 3, 1996 which reported the
Company's solicitation of Ernst & Young, LLP as the Company's
independent auditors.
111
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MEDICAL ASSET MANAGEMENT, INC.
By: /s/ John W. Regan
----------------------------
John W. Regan
President and Chairman of
the Board of Directors
Date: November 26, 1997
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Signature Title Date
--------- ----- ----
/s/ John W. Regan President and Chairman of November 26, 1997
- -------------------------- the Board of Directors
John W. Regan
/s/ Dennis Calvert Senior Vice President and November 26, 1997
- ---------------------------- Director
Dennis Calvert
/s/ Anthony F. Aulicino Senior Vice President and November 26, 1997
- ---------------------------- Director
Anthony F. Aulicino
/s/ Clarke Underwood Vice President and Chief November 26, 1997
- -------------------------- Financial Officer
Clarke Underwood and Director
/s/ Anthony F. Aulicino Vice President and Director November 26, 1997
- --------------------------
Michael A. Zaic
/s/ J. Joshua Kopelman, M.D. Director November 26, 1997
- --------------------------
J. Joshua Kopelman, M.D.
EXHIBIT 10.11
$2,500,000.00
LOAN AND SECURITY AGREEMENT
by and among
MEDICAL ASSET MANAGEMENT, INC.
HEALTHCARE PROFESSIONAL MANAGEMENT, INC.
("Borrower")
and
HCFP FUNDING, INC.
("Lender")
November 12, 1997
<PAGE>
LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT (the "Agreement") is made as of this 12th
day of November, 1997, by and among MEDICAL ASSET MANAGEMENT, INC., a Delaware
corporation, and HEALTHCARE PROFESSIONAL MANAGEMENT, INC., a Pennsylvania
corporation (collectively, "Borrower"), and HCFP FUNDING, INC., a Delaware
corporation ("Lender").
RECITALS
A. Borrower desires to establish certain financing arrangements with and
borrow funds from Lender, and Lender is willing to establish such arrangements
for and make loans and extensions of credit to Borrower, on the terms and
conditions set forth below.
B. The parties desire to define the terms and conditions of their
relationship and to reduce their agreements to writing.
NOW, THEREFORE, in consideration of the promises and covenants contained
in this Agreement, and for other consideration, the receipt and sufficiency of
which are acknowledged, the parties agree as follows:
ARTICLE I
DEFINITIONS
As used in this Agreement, the following terms shall have the following
meanings:
SECTION 1.1. ACCOUNT. "Account" means any right to payment for goods sold
or leased or services rendered, whether or not evidenced by an instrument or
chattel paper, and whether or not earned by performance.
SECTION 1.2. ACCOUNT DEBTOR. "Account Debtor" means any Person obligated on
any Account of Borrower, including without limitation, any Insurer and any
Medicaid/Medicare Account Debtor.
SECTION 1.3. AFFILIATE. "Affiliate" means, with respect to a specified
Person, any Person directly or indirectly controlling, controlled by, or under
common control with the specified Person, including without limitation their
stockholders and any Affiliates thereof. A Person shall be deemed to control a
corporation or other entity if the Person possesses, directly or indirectly, the
power to direct or cause the direction of the management and business of the
corporation or other entity, whether through the ownership of voting securities,
by contract, or otherwise.
<PAGE>
SECTION 1.4. AGREEMENT. "Agreement" means this Loan and Security Agreement,
as it may be amended or supplemented from time to time.
SECTION 1.5. BASE RATE. "Base Rate" means a rate of interest equal to two
percent (2%) above the "Prime Rate of Interest".
SECTION 1.6. BORROWED MONEY. "Borrowed Money" means any obligation to repay
money, any indebtedness evidenced by notes, bonds, debentures or similar
obligations, any obligation under a conditional sale or other title retention
agreement and the net aggregate rentals under any lease which under GAAP would
be capitalized on the books of Borrower or which is the substantial equivalent
of the financing of the property so leased.
SECTION 1.7. BORROWER. "Borrower" has the meaning set forth in the
Preamble.
SECTION 1.8. BORROWING BASE. "Borrowing Base" has the meaning set forth in
Section 2.1(d).
SECTION 1.9. BUSINESS DAY. "Business Day" means any day on which financial
institutions are open for business in the State of Maryland, excluding Saturdays
and Sundays.
SECTION 1.10. CLOSING; CLOSING DATE. "Closing" and "Closing Date" have the
meanings set forth in Section 5.3.
SECTION 1.11. COLLATERAL. "Collateral" has the meaning set forth in Section
3.1.
SECTION 1.12. COMMITMENT FEE. "Commitment Fee" has the meaning set forth in
Section 2.4(a).
SECTION 1.13. CONCENTRATION ACCOUNT. "Concentration Account" has the
meaning set forth in Section 2.3.
SECTION 1.14. CONTROLLED GROUP. "Controlled Group" means a "controlled
group" within the meaning of Section 4001(b) of ERISA.
SECTION 1.15. COST REPORT SETTLEMENT ACCOUNT. "Cost Report Settlement
Account" means an "Account" owed to Borrower by a Medicaid/Medicare Account
Debtor pursuant to any cost report, either interim, filed or audited, as the
context may require.
SECTION 1.16. DEFAULT RATE. "Default Rate" means a rate per annum equal to
five percent (5%) above the then applicable Base Rate.
SECTION 1.17. ERISA. "ERISA" has the meaning set forth in Section 4.12.
2
<PAGE>
SECTION 1.18. EVENT OF DEFAULT. "Event of Default" and "Events of Default"
have the meanings set forth in Section 8.1.
SECTION 1.19. GAAP. "GAAP" means generally accepted accounting principles
applied in a matter consistent with the financial statements referred to in
Section 4.7.
SECTION 1.20. GOVERNMENTAL AUTHORITY. "Governmental Authority" means and
includes any federal, state, District of Columbia, county, municipal, or other
government and any department, commission, board, bureau, agency or
instrumentality thereof, whether domestic or foreign.
SECTION 1.21. HAZARDOUS MATERIAL. "Hazardous Material" means any substances
defined or designated as hazardous or toxic waste, hazardous or toxic material,
hazardous or toxic substance, or similar term, by any environmental statute,
rule or regulation or any Governmental Authority.
SECTION 1.22. HIGHEST LAWFUL RATE. "Highest Lawful Rate" means the maximum
lawful rate of interest referred to in Section 2.7 that may accrue pursuant to
this Agreement.
SECTION 1.23. INSURER. "Insurer" means a Person that insures a Patient
against certain of the costs incurred in the receipt by such Patient of Medical
Services, or that has an agreement with Borrower to compensate Borrower for
providing services to a Patient.
SECTION 1.24. LENDER. "Lender" has the meaning set forth in the Preamble.
SECTION 1.25. LOAN. "Loan" has the meaning set forth in Section 2.1(a).
SECTION 1.26. LOAN DOCUMENTS. "Loan Documents" means and includes this
Agreement, the Note, and each and every other document now or hereafter
delivered in connection therewith, as any of them may be amended, modified, or
supplemented from time to time.
SECTION 1.27. LOAN MANAGEMENT FEE. "Loan Management Fee" has the meaning
set forth in Section 2.4(c).
SECTION 1.28. LOCKBOX. "Lockbox" has the meaning set forth in Section 2.3.
SECTION 1.28 A. LOCKBOX ACCOUNT. "Lockbox Account" means an account
maintained by Borrower at the Lockbox Bank into which all collections of
Accounts are paid directly.
SECTION 1.29. LOCKBOX BANK. "Lockbox Bank" has the meaning set forth in
Section 2.3.
3
<PAGE>
SECTION 1.30. MAXIMUM LOAN AMOUNT. "Maximum Loan Amount" has the meaning
set forth in Section 2.1(a).
SECTION 1.31. MEDICAID/MEDICARE ACCOUNT DEBTOR. "Medicaid/ Medicare Account
Debtor" means any Account Debtor which is (i) the United States of America
acting under the Medicaid/Medicare program established pursuant to the Social
Security Act, (ii) any state or the District of Columbia acting pursuant to a
health plan adopted pursuant to Title XIX of the Social Security Act or (iii)
any agent, carrier, administrator or intermediary for any of the foregoing.
SECTION 1.32. MEDICAL SERVICES. Medical and health care services provided
to a Patient, including, but not limited to, medical and health care services
provided to a Patient and performed by Borrower which are covered by a policy of
insurance issued by an Insurer, and includes physician services, nurse and
therapist services, dental services, hospital services, skilled nursing facility
services, comprehensive outpatient rehabilitation services, home health care
services, residential and out-patient behavioral healthcare services, and
medicine or health care equipment provided by Borrower to a Patient for a
necessary or specifically requested valid and proper medical or health purpose.
SECTION 1.33. NOTE. "Note" has the meaning set forth in Section 2.1(c).
SECTION 1.34. OBLIGATIONS. "Obligations" has the meaning set forth in
Section 3.1.
SECTION 1.35. PATIENT. "Patient" means any Person receiving Medical
Services from Borrower and all Persons legally liable to pay Borrower for such
Medical Services other than Insurers.
SECTION 1.36. PERMITTED LIENS. "Permitted Liens" means: (a) liens for taxes
not delinquent, or which are being contested in good faith and by appropriate
proceedings which suspend the collection thereof and in respect of which
adequate reserves have been made (provided that such proceedings do not, in
Lender's sole discretion, involve any substantial danger of the sale, loss or
forfeiture of such property or assets or any interest therein); (b) deposits or
pledges to secure obligations under workmen's compensation, social security or
similar laws, or under unemployment insurance; (c) deposits or pledges to secure
bids, tenders, contracts (other than contracts for the payment of money),
leases, statutory obligations, surety and appeal bonds and other obligations of
like nature arising in the ordinary course of business; (d) mechanic's,
workmen's, materialmen's or other like liens arising in the ordinary course of
business with respect to obligations which are not due, or which are being
contested in good faith by appropriate proceedings which suspend the collection
thereof and in respect of which adequate reserves have been made (provided that
such proceedings do not, in Lender's sole discretion, involve any substantial
danger of the sale, loss or forfeiture of such property or assets or any
interest therein); (e) liens and encumbrances in favor of Lender; (f) liens
granted in connection with the lease or purchase of property or assets financed
by borrowings permitted by
4
<PAGE>
Section 7.1 (provided, however, that no such borrowings permitted by Section 7.1
may be secured by liens on any of the Collateral); and (g) liens set forth on
Schedule 1.36.
SECTION 1.37. PERSON. "Person" means an individual, partnership,
corporation, trust, joint venture, joint stock company, limited liability
company, association, unincorporated organization, Governmental Authority, or
any other entity.
SECTION 1.38. PLAN. "Plan" has the meaning set forth in Section 4.12.
SECTION 1.39. PREMISES. "Premises" has the meaning set forth in Section
4.15.
SECTION 1.40. PRIME RATE OF INTEREST. "Prime Rate of Interest" means that
rate of interest designated as such by Fleet National Bank of Connecticut, N.A.,
or any successor thereto, as the same may from time to time fluctuate.
SECTION 1.41. PROHIBITED TRANSACTION. "Prohibited Transaction" means a
"prohibited transaction" within the meaning of Section 406 of ERISA or Section
4975(c)(1) of the Internal Revenue Code.
SECTION 1.42. QUALIFIED ACCOUNT. "Qualified Account" means an Account of
Borrower generated in the ordinary course of Borrower's business from the sale
of goods or rendition of medical services which Lender, in its sole credit
judgment, deems to be a Qualified Account. Without limiting the generality of
the foregoing, no Account shall be a Qualified Account if: (a) the Account or
any portion thereof is payable by an individual beneficiary, recipient or
subscriber individually and not directly to Borrower by a Medicaid/Medicare
Account Debtor or commercial medical insurance carrier acceptable to Lender in
its sole discretion; (b) the Account remains unpaid more than one hundred twenty
(120) days past the claim or invoice date; (c) the Account is subject to any
defense, set-off, counterclaim, deduction, discount, credit, chargeback, freight
claim, allowance, or adjustment of any kind; (d) any part of any goods the sale
of which has given rise to the Account has been returned, rejected, lost, or
damaged; (e) if the Account arises from the sale of goods by Borrower, such sale
was not an absolute sale or on consignment or on approval or on a sale-or-return
basis or subject to any other repurchase or return agreement, or such goods have
not been shipped to the Account Debtor or its designee; (f) if the Account
arises from the performance of services, such services have not been actually
been performed or were undertaken in violation of any law; (g) the Account is
subject to a lien other than a Permitted Lien; (h) Borrower knows or should have
known of the bankruptcy, receivership, reorganization, or insolvency of the
Account Debtor; (i) the Account is evidenced by chattel paper or an instrument
of any kind, or has been reduced to judgment; (j) the Account is an Account of
an Account Debtor having its principal place of business or executive office
outside the United States; (k) the Account Debtor is an Affiliate or Subsidiary
of Borrower; (l) more than ten percent (10%) of the aggregate balance of all
Accounts owing from the Account Debtor obligated on the Account are outstanding
more than one hundred fifty (150) days past their invoice date; (m) fifty
percent (50%) or more of the aggregate unpaid Accounts from any
5
<PAGE>
individual Account Debtor are not deemed Qualified Accounts hereunder; (n) the
total unpaid Accounts of the Account Debtor, except for a Medicaid/Medicare
Account Debtor, exceed twenty percent (20%) of the net amount of all Qualified
Accounts (including Medicaid/Medicare Account Debtors); (o) any covenant,
representation or warranty contained in the Loan Documents with respect to such
Account has been breached; or (p) the Account fails to meet such other
specifications and requirements which may from time to time be established by
Lender.
SECTION 1.43. REPORTABLE EVENT. "Reportable Event" means a "reportable
event" as defined in Section 4043(b) of ERISA.
SECTION 1.44. REVOLVING CREDIT LOAN. "Revolving Credit Loan" has the
meaning set forth in Section 2.1(b).
SECTION 1.45. TERM. "Term" has the meaning set forth in Section 2.8.
ARTICLE II
LOAN
SECTION 2.1. TERMS.
(a) The maximum aggregate principal amount of credit extended by
Lender to Borrower hereunder (the "Loan") that will be outstanding at any time
is Two Million Five Hundred Thousand and No/100 Dollars ($2,500,000.00) (the
"Maximum Loan Amount").
(b) The Loan shall be in the nature of a revolving line of credit,
and shall include sums advanced and other credit extended by Lender to or for
the benefit of Borrower from time to time under this Article II (each a
"Revolving Credit Loan") up to the Maximum Loan Amount depending upon the
availability in the Borrowing Base, the requests of Borrower pursuant to the
terms and conditions of Section 2.2 below, and on such other basis as Lender may
reasonably determine. The outstanding principal balance of the Loan may
fluctuate from time to time, to be reduced by repayments made by Borrower (which
may be made without penalty or premium), and to be increased by future Revolving
Credit Loans, advances and other extensions of credit to or for the benefit of
Borrower, and shall be due and payable in full upon the expiration of the Term.
For purposes of this Agreement, any determination as to whether there is ability
within the Borrowing Base for advances or extensions of credit shall be made by
Lender in its sole discretion and is final and binding upon Borrower.
(c) At Closing, Borrower shall execute and deliver to Lender a
promissory note evidencing Borrower's unconditional obligation to repay Lender
for Revolving Credit Loans, advances, and other extensions of credit made under
the Loan, in the form of Exhibit A to
6
<PAGE>
this Agreement (the "Note"), dated the date hereof, payable to the order of
Lender in accordance with the terms thereof. The Note shall bear interest from
the date thereof until repaid, with interest payable monthly in arrears on the
first Business Day of each month, at a rate per annum (on the basis of the
actual number of days elapsed over a year of 360 days) equal to the Base Rate,
provided that after an Event of Default such rate shall be equal to the Default
Rate. Each Revolving Credit Loan, advance and other extension of credit shall be
deemed evidenced by the Note, which is deemed incorporated by reference herein
and made a part hereof.
(d) Subject to the terms and conditions of this Agreement, advances
under the Loan shall be made against a borrowing base equal to eighty percent
(80%) of Qualified Accounts due and owing from any Medicaid/Medicare, Insurer or
other Account Debtor (the "Borrowing Base").
SECTION 2.2. LOAN ADMINISTRATION. Borrowings under the Loan shall be as
follows:
(a) A request for a Revolving Credit Loan shall be made, or shall be
deemed to be made, in the following manner: (i) Borrower may give Lender notice
of its intention to borrow, in which notice Borrower shall specify the amount of
the proposed borrowing and the proposed borrowing date, not later than 2:00 p.m.
Eastern time two (2) Business Day prior to the proposed borrowing date;
provided, however, that no such request may be made at a time when there exists
an Event of Default; and (ii) the becoming due of any amount required to be paid
under this Agreement, whether as interest or for any other Obligation, shall be
deemed irrevocably to be a request for a Revolving Credit Loan on the due date
in the amount required to pay such interest or other Obligation.
(b) Borrower hereby irrevocably authorizes Lender to disburse the
proceeds of each Revolving Credit Loan requested, or deemed to be requested, as
follows: (i) the proceeds of each Revolving Credit Loan requested under
subsection 2.2(a)(i) shall be disbursed by Lender by wire transfer to such bank
account as may be agreed upon by Borrower or Lender from time to time or
elsewhere if pursuant to written direction from Borrower; and (ii) the proceeds
of each Revolving Credit Loan requested under subsection 2.2(a)(ii) shall be
disbursed by Lender by way of direct payment of the relevant interest or other
Obligation.
(c) All Revolving Credit Loans, advances and other extensions of
credit to or for the benefit of Borrower shall constitute one general Obligation
of Borrower, and shall be secured by Lender's lien upon all of the Collateral.
(d) Lender shall enter all Revolving Credit Loans as debits to a
loan account in the name of Borrower and shall also record in said loan account
all payments made by Borrower on any Obligations and all proceeds of Collateral
which are indefeasibly paid to Lender, and may record therein, in accordance
with customary accounting practice, other debits and credits, including interest
and all charges and expenses properly chargeable to Borrower. All collections
into the Concentration Account pursuant to Section 2.3 shall be applied first to
fees,
7
<PAGE>
costs and expenses due and owing under the Loan Documents, then to interest due
and owing under the Loan Documents, and then to principal outstanding with
respect to Revolving Credit Loans.
(e) Lender will account to Borrower monthly with a statement of
Revolving Credit Loans, charges and payments made pursuant to this Agreement,
and such account rendered by Lender shall be deemed final, binding and
conclusive upon Borrower unless Lender is notified by Borrower in writing to the
contrary within thirty (30) days of the date each accounting is mailed to
Borrower. Such notice shall be deemed an objection to those items specifically
objected to therein.
SECTION 2.3. COLLECTIONS, DISBURSEMENTS, BORROWING AVAILABILITY, AND
LOCKBOX ACCOUNT. Borrower shall maintain a lockbox account (the "Lockbox") with
Bank One Arizona, N.A.(the "Lockbox Bank"), subject to the provisions of this
Agreement, and shall execute with the Lockbox Bank a Lockbox Agreement in the
form attached as Exhibit B, and such other agreements related thereto as Lender
may require. Borrower shall ensure that after it receives payment, it deposits
all collections of Accounts into the Lockbox, and that all funds paid into the
Lockbox are immediately transferred into a depository account maintained by
Lender at Bank One Arizona, N.A. or U.S. Bank N.A., as determined by Lender in
its sole discretion and communicated to Borrower (the "Concentration Account").
Lender shall apply, on a daily basis, all funds transferred into the
Concentration Account pursuant to this Section 2.3 to reduce the outstanding
indebtedness under the Loan (in accordance with Section 2.2(d)) with future
Revolving Credit Loans, advances and other extensions of credit to be made by
Lender under the conditions set forth in this Article II. Borrower acknowledges
and agrees that its compliance with the terms of this Section 2.3 is essential,
and that upon its failure to comply with any such terms Lender shall be entitled
to assess a non-compliance fee which shall operate to increase the Base Rate by
two percent (2%) per annum during any period of non-compliance. Lender shall be
entitled to assess such fee whether or not an Event of Default is declared or
otherwise occurs. All funds transferred from the Concentration Account for
application to Borrower's indebtedness to Lender shall be applied to reduce the
Loan balance, but for purposes of calculating interest shall be subject to a
nine (9) Business Day clearance period. If as the result of collections of
Accounts pursuant to the terms and conditions of this Section 2.3 a credit
balance exists with respect to the Concentration Account, such credit balance
shall not accrue interest in favor of Borrower, but shall be available to
Borrower at any time or times for so long as no Event of Default exists.
8
<PAGE>
SECTION 2.4. FEES.
(a) At Closing, Borrower shall unconditionally pay to Lender a
commitment fee equal to one percent (1%) of the Maximum Loan Amount (the
"Commitment Fee").
(b) For so long as the Loan is available to Borrower, Borrower
unconditionally shall pay to Lender a monthly usage fee (the "Usage Fee") equal
to one twelfth (1/12th) of one percent (1.0%) of the average amount by which the
Maximum Loan Amount exceeds the average amount of the outstanding principal
balance of the Revolving Credit Loans during the preceding month. The Usage Fee
shall be payable monthly in arrears on the first Business Day of each successive
calendar month.
(c) For so long as the Loan is available to Borrower, Borrower
unconditionally shall pay to Lender a monthly loan management fee (the "Loan
Management Fee") equal to fifteen one hundredths of one percent (0.15%) of the
average amount of the outstanding principal balance of the Revolving Credit
Loans during the preceding month. The Loan Management Fee shall be payable
monthly in arrears on the first day of each successive calendar month.
(d) Borrower shall pay to Lender all out-of-pocket audit and
appraisal fees in connection with audits and appraisals of Borrower's books and
records and such other matters as Lender shall deem appropriate, which shall be
due and payable on the first Business Day of the month following the date of
issuance by Lender of a request for payment thereof to Borrower.
(e) Borrower shall pay to Lender, on demand, any and all fees, costs
or expenses which Lender or any participant pays to a bank or other similar
institution (including, without limitation, any fees paid by Lender to any
participant) arising out of or in connection with (i) the forwarding to Borrower
or any other Person on behalf of Borrower, by Lender, of proceeds of Revolving
Credit Loans made by Lender to Borrower pursuant to this Agreement, and (ii) the
depositing for collection, by Lender or any participant, of any check or item of
payment received or delivered to Lender or any participant on account of
Obligations.
SECTION 2.5. PAYMENTS. Principal payable on account of Revolving Credit
Loans shall be payable by Borrower to Lender immediately upon the earliest of
(i) the receipt by Borrower of any proceeds of any of the Collateral, to the
extent of such proceeds, (ii) the occurrence of an Event of Default in
consequence of which the Loan and the maturity of the payment of the Obligations
are accelerated, or (iii) the termination of this Agreement pursuant to Section
2.8 hereof; provided, however, that if any advance made by Lender in excess of
the Borrowing Base shall exist at any time, Borrower shall, immediately upon
demand, repay such overadvance. Interest accrued on the Revolving Credit Loans
shall be due on the earliest of (i) the first Business Day of each month (for
the immediately preceding month), computed on the last calendar day of the
preceding month, (ii) the occurrence of an Event of Default in consequence of
which the Loan and the maturity of the payment of the Obligations are
accelerated, or (iii) the
9
<PAGE>
termination of this Agreement pursuant to Section 2.8 hereof. Except to the
extent otherwise set forth in this Agreement, all payments of principal and of
interest on the Loan, all other charges and any other obligations of Borrower
hereunder, shall be made to Lender to the Concentration Account, in immediately
available funds.
SECTION 2.6. USE OF PROCEEDS. The proceeds of Lender's advances under the
Loan shall be used solely for working capital and for other costs of Borrower
arising in the ordinary course of Borrower's business.
SECTION 2.7. INTEREST RATE LIMITATION. The parties intend to conform
strictly to the applicable usury laws in effect from time to time during the
term of the Loan. Accordingly, if any transaction contemplated hereby would be
usurious under such laws, then notwithstanding any other provision hereof: (i)
the aggregate of all interest that is contracted for, charged, or received under
this Agreement or under any other Loan Document shall not exceed the maximum
amount of interest allowed by applicable law (the "Highest Lawful Rate"), and
any excess shall be promptly credited to Borrower by Lender (or, to the extent
that such consideration shall have been paid, such excess shall be promptly
refunded to Borrower by Lender); (ii) neither Borrower nor any other Person now
or hereafter liable hereunder shall be obligated to pay the amount of such
interest to the extent that it is in excess of the Highest Lawful Rate; and
(iii) the effective rate of interest shall be reduced to the Highest Lawful
Rate. All sums paid, or agreed to be paid, to Lender for the use, forbearance,
and detention of the debt of Borrower to Lender shall, to the extent permitted
by applicable law, be allocated throughout the full term of the Note until
payment is made in full so that the actual rate of interest does not exceed the
Highest Lawful Rate in effect at any particular time during the full term
thereof. If at any time the rate of interest under the Note exceeds the Highest
Lawful Rate, the rate of interest to accrue pursuant to this Agreement shall be
limited, notwithstanding anything to the contrary herein, to the Highest Lawful
Rate, but any subsequent reductions in the Base Rate shall not reduce the
interest to accrue pursuant to this Agreement below the Highest Lawful Rate
until the total amount of interest accrued equals the amount of interest that
would have accrued if a varying rate per annum equal to the interest rate under
the Note had at all times been in effect. If the total amount of interest paid
or accrued pursuant to this Agreement under the foregoing provisions is less
than the total amount of interest that would have accrued if a varying rate per
annum equal to the interest rate under the Note had been in effect, then
Borrower agrees to pay to Lender an amount equal to the difference between (i)
the lesser of (x) the amount of interest that would have accrued if the Highest
Lawful Rate had at all times been in effect, or (y) the amount of interest that
would have accrued if a varying rate per annum equal to the interest rate under
the Note had at all times been in effect, and (ii) the amount of interest
accrued in accordance with the other provisions of this Agreement.
SECTION 2.8. TERM.
(a) Subject to Lender's right to cease making Revolving Credit Loans
to Borrower upon or after any Event of Default, this Agreement shall be in
effect for a period of
10
<PAGE>
two (2) years from the Closing Date, unless terminated as provided in this
Section 2.8 (the "Term"), and this Agreement shall be renewed for one-year
periods thereafter upon the mutual written agreement of the parties.
(b) Notwithstanding anything herein to the contrary, Lender may
terminate this Agreement without notice upon or after the occurrence of an Event
of Default.
(c) Upon at least thirty (30) days prior written notice to Lender,
Borrower may terminate this Agreement prior to the second annual anniversary of
the Closing Date, provided that, at the effective date of such termination,
Borrower shall pay to Lender (in addition to the then outstanding principal,
accrued interest and other Obligations owing under the terms of this Agreement
and any other Loan Documents) as liquidated damages for the loss of bargain and
not as a penalty, an amount equal to (i) three percent (3%) of the Maximum Loan
Amount if the effective date of such termination by Borrower is on or prior to
the first annual anniversary of the Closing Date, and (ii) two percent (2%) of
the Maximum Loan Amount if the effective date of such termination by Borrower is
after the first annual anniversary of the Closing Date and prior to the second
annual anniversary of the Closing Date.
(d) All of the Obligations shall be immediately due and payable upon
the termination date stated in any notice of termination of this Agreement. All
undertakings, agreements, covenants, warranties, and representations of Borrower
contained in the Loan Documents shall survive any such termination and Lender
shall retain its liens in the Collateral and all of its rights and remedies
under the Loan Documents notwithstanding such termination until Borrower has
paid the Obligations to Lender, in full, in immediately available funds.
(e) Notwithstanding any provision of this Agreement which makes
reference to the continuance of an Event of Default, nothing in this Agreement
shall be construed to permit Borrower to cure an Event of Default following the
lapse of the applicable cure period, and Borrower shall have no such right in
any instance unless specifically granted in writing by Lender.
SECTION 2.9. JOINT AND SEVERAL LIABILITY; BINDING OBLIGATIONS. Each entity
comprising Borrower and executing this Agreement on behalf of Borrower shall be
jointly and severally liable for all of the Obligations. In addition, each
entity comprising Borrower hereby acknowledges and agrees that all of the
representations, warranties, covenants, obligations, conditions, agreements and
other terms contained in this Agreement shall be applicable to and shall be
binding upon each individual entity comprising Borrower, and shall be binding
upon all such entities taken together.
ARTICLE III
COLLATERAL
11
<PAGE>
SECTION 3.1. GENERALLY. As security for the payment of all liabilities of
Borrower to Lender, including without limitation: (i) indebtedness evidenced
under the Note, repayment of Revolving Credit Loans, advances and other
extensions of credit, all fees and charges owing by Borrower, and all other
liabilities and obligations of every kind or nature whatsoever of Borrower to
Lender, whether now existing or hereafter incurred, joint or several, matured or
unmatured, direct or indirect, primary or secondary, related or unrelated, due
or to become due, including but not limited to any extensions, modifications,
substitutions, increases and renewals thereof, (ii) the payment of all amounts
advanced by Lender to preserve, protect, defend, and enforce its rights
hereunder and in the following property in accordance with the terms of this
Agreement, and (iii) the payment of all expenses incurred by Lender in
connection therewith (collectively, the "Obligations"). Borrower hereby assigns
and grants to Lender a continuing first priority lien on and security interest
in, upon, and to the following property (the "Collateral"):
(a) All of Borrower's now-owned and hereafter acquired or arising
Accounts, accounts receivable and rights to payment of every kind and
description, and any contract rights, chattel paper, documents and instruments
with respect thereto;
(b) All of Borrower's now owned and hereafter acquired or arising
general intangibles of every kind and description pertaining to its Accounts,
accounts receivable and other rights to payment, including, but not limited to,
all existing and future customer lists, choses in action, claims, books,
records, contracts, licenses, formulae, tax and other types of refunds, returned
and unearned insurance premiums, rights and claims under insurance policies, and
computer information, software, records, and data;
(c) All of Borrower's now or hereafter acquired deposit accounts
into which Accounts are deposited, including the Lockbox Account;
(d) All of Borrower's monies and other property of every kind and
nature now or at any time or times hereafter in the possession of or under the
control of Lender or a bailee or Affiliate of Lender; and
(e) The proceeds (including, without limitation, insurance proceeds)
of all of the foregoing.
SECTION 3.2. LIEN DOCUMENTS. At Closing and thereafter as Lender deems
necessary in its sole discretion, Borrower shall execute and deliver to Lender,
or have executed and delivered (all in form and substance satisfactory to Lender
in its sole discretion):
(a) UCC-1 Financing statements pursuant to the Uniform Commercial
Code in effect in the jurisdiction(s) in which Borrower operates, which Lender
may file in any jurisdiction where any Collateral is or may be located and in
any other jurisdiction that Lender deems appropriate; provided that a carbon,
photographic, or other reproduction or other copy of
12
<PAGE>
this Agreement or of a financing statement is sufficient as and may be filed in
lieu of a financing statement; and
(b) Any other agreements, documents, instruments, and writings
deemed necessary by Lender or as Lender may otherwise request from time to time
in its sole discretion to evidence, perfect, or protect Lender's lien and
security interest in the Collateral required hereunder.
SECTION 3.3. COLLATERAL ADMINISTRATION.
(a) All Collateral (except deposit accounts) will at all times be
kept by Borrower at its principal office(s) as set forth on Schedule 4.15 hereto
and shall not, without the prior written approval of Lender, be moved therefrom.
(b) Borrower shall keep accurate and complete records of its
Accounts and all payments and collections thereon and shall submit to Lender on
such periodic basis as Lender shall request a sales and collections report for
the preceding period, in form satisfactory to Lender. In addition, if Accounts
in an aggregate face amount in excess of $50,000.00 become ineligible because
they fall within one of the specified categories of ineligibility set forth in
the definition of Qualified Accounts or otherwise, Borrower shall notify Lender
of such occurrence on the first Business Day following such occurrence and the
Borrowing Base shall thereupon be adjusted to reflect such occurrence. If
requested by Lender, Borrower shall execute and deliver to Lender formal written
assignments of all of its Accounts weekly or daily, which shall include all
Accounts that have been created since the date of the last assignment, together
with copies of claims, invoices or other information related thereto.
(c) Whether or not an Event of Default has occurred, any of Lender's
officers, employees or agents shall have the right, at any time or times
hereafter, in the name of Lender, any designee of Lender or Borrower, to verify
the validity, amount or any other matter relating to any Accounts by mail,
telephone, telegraph or otherwise. Borrower shall cooperate fully with Lender in
an effort to facilitate and promptly conclude such verification process.
(d) To expedite collection, Borrower shall endeavor in the first
instance to make collection of its Accounts for Lender. Lender retains the right
at all times after the occurrence of an Event of Default, subject to applicable
law regarding Medicaid/Medicare Account Debtors, to notify Account Debtors that
Accounts have been assigned to Lender and to collect Accounts directly in its
own name and to charge the collection costs and expenses, including attorneys'
fees, to Borrower.
SECTION 3.4. OTHER ACTIONS. In addition to the foregoing, Borrower (i)
shall provide prompt written notice to each private indemnity, managed care or
other Insurer who either is currently an Account Debtor or becomes an Account
Debtor at any time following the date hereof that Lender has been granted a
first priority lien and security interest in, upon and to all
13
<PAGE>
Accounts applicable to such Insurer, and hereby authorizes Lender to send any
and all similar notices to such Insurers by Lender, and (ii) shall do anything
further that may be lawfully required by Lender to secure Lender and effectuate
the intentions and objects of this Agreement, including but not limited to the
execution and delivery of lockbox agreements, continuation statements,
amendments to financing statements, and any other documents required hereunder.
At Lender's request, Borrower shall also immediately deliver to Lender all items
for which Lender must receive possession to obtain a perfected security
interest. Borrower shall, on Lender's demand, deliver to Lender all notes,
certificates, and documents of title, chattel paper, warehouse receipts,
instruments, and any other similar instruments constituting Collateral.
SECTION 3.5. SEARCHES. Prior to Closing, and thereafter (as and when
requested by Lender in its sole discretion), Borrower shall obtain and deliver
to Lender the following searches against Borrower (the results of which are to
be consistent with Borrower's representations and warranties under this
Agreement), all at its own expense:
(a) Uniform Commercial Code searches with the Secretary of State and
local filing offices of each jurisdiction where Borrower maintains its executive
offices, a place of business, or assets;
(b) Judgment, federal tax lien and corporate and partnership tax
lien searches, in each jurisdiction searched under clause (a) above; and
(c) Good standing certificates showing Borrower to be in good
standing in its state of formation and in each other state in which it is doing
and presently intends to do business for which qualification is required.
SECTION 3.6. POWER OF ATTORNEY. Each of the officers of Lender is hereby
irrevocably made, constituted and appointed the true and lawful attorney for
Borrower (without requiring any of them to act as such) with full power of
substitution to do the following: (i) endorse the name of Borrower upon any and
all checks, drafts, money orders, and other instruments for the payment of money
that are payable to Borrower and constitute collections on Borrower's Accounts;
(ii) execute in the name of Borrower any financing statements, schedules,
assignments, instruments, documents, and statements that Borrower is obligated
to give Lender hereunder; and (iii) do such other and further acts and deeds in
the name of Borrower that Lender may deem necessary or desirable to enforce any
Account or other Collateral or perfect Lender's security interest or lien in any
Collateral.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
14
<PAGE>
Borrower represents and warrants to Lender, and shall be deemed to
represent and warrant on each day on which any Obligations shall be outstanding
hereunder, that:
SECTION 4.1. SUBSIDIARIES. Except as set forth in Schedule 4.1, Borrower
has no subsidiaries.
SECTION 4.2. ORGANIZATION AND GOOD STANDING. Borrower is a corporation duly
organized, validly existing, and in good standing under the laws of its state of
formation, is in good standing as a foreign corporation in each jurisdiction in
which the character of the properties owned or leased by it therein or the
nature of its business makes such qualification necessary, has the corporate
power and authority to own its assets and transact the business in which it is
engaged, and has obtained all certificates, licenses and qualifications required
under all laws, regulations, ordinances, or orders of public authorities
necessary for the ownership and operation of all of its properties and
transaction of all of its business.
SECTION 4.3. AUTHORITY. Borrower has full corporate power and authority to
enter into, execute, and deliver this Agreement and to perform its obligations
hereunder, to borrow the Loan, to execute and deliver the Note, and to incur and
perform the obligations provided for in the Loan Documents, all of which have
been duly authorized by all necessary corporate action. No consent or approval
of shareholders of, or lenders to, Borrower and no consent, approval, filing or
registration with any Governmental Authority is required as a condition to the
validity of the Loan Documents or the performance by Borrower of its obligations
thereunder.
SECTION 4.4. BINDING AGREEMENT. This Agreement and all other Loan Documents
constitute, and the Note, when issued and delivered pursuant hereto for value
received, will constitute, the valid and legally binding obligations of
Borrower, enforceable against Borrower in accordance with their respective
terms.
SECTION 4.5. LITIGATION. Except as disclosed in Schedule 4.5, there are no
actions, suits, proceedings or investigations pending or threatened against
Borrower before any court or arbitrator or before or by any Governmental
Authority which, in any one case or in the aggregate, if determined adversely to
the interests of Borrower, could have a material adverse effect on the business,
properties, condition (financial or otherwise) or operations, present or
prospective, of Borrower, or upon its ability to perform its obligations under
the Loan Documents. Borrower is not in default with respect to any order of any
court, arbitrator, or Governmental Authority applicable to Borrower or its
properties.
SECTION 4.6. NO CONFLICTS. The execution and delivery by Borrower of this
Agreement and the other Loan Documents do not, and the performance of its
obligations thereunder will not, violate, conflict with, constitute a default
under, or result in the creation of a lien or encumbrance upon the property of
Borrower under: (i) any provision of Borrower's articles of incorporation or
bylaws, (ii) any provision of any law, rule, or regulation applicable to
Borrower, or (iii) any of the following: (A) any indenture or other agreement or
instrument to which Borrower is a party
15
<PAGE>
or by which Borrower or its property is bound; or (B) any judgment, order or
decree of any court, arbitration tribunal, or Governmental Authority having
jurisdiction over Borrower which is applicable to Borrower.
SECTION 4.7. FINANCIAL CONDITION. The annual financial statements of
Borrower as of December 31, 1996 audited by Ernst & Young, LLP and the unaudited
financial statements of Borrower as of June 30, 1997, certified by the chief
financial officer of Borrower, which have been delivered to Lender, fairly
present the financial condition of Borrower and the results of its operations
and changes in financial condition as of the dates and for the periods referred
to, and have been prepared in accordance with GAAP. There are no material
unrealized or anticipated liabilities, direct or indirect, fixed or contingent,
of Borrower as of the dates of such financial statements which are not reflected
therein or in the notes thereto. There has been no adverse change in the
business, properties, condition (financial or otherwise) or operations (present
or prospective) of Borrower since June 30, 1997. Borrower's fiscal year ends on
December 31. The federal tax identification number of each entity comprising
Borrower is as described on Schedule 4.7.
SECTION 4.8. NO DEFAULT. Borrower is not in default under or with respect
to any obligation in any respect which could be adverse to its business,
operations, property or financial condition, or which could adversely affect the
ability of Borrower to perform its obligations under the Loan Documents. No
Event of Default or event which, with the giving of notice or lapse of time, or
both, could become an Event of Default, has occurred and is continuing.
SECTION 4.9. TITLE TO PROPERTIES. Borrower has good and marketable title to
its properties and assets, including the Collateral and the properties and
assets reflected in the financial statements described in Section 4.7, subject
to no lien, mortgage, pledge, encumbrance or charge of any kind, other than
Permitted Liens. Borrower has not agreed or consented to cause any of its
properties or assets whether owned now or hereafter acquired to be subject in
the future (upon the happening of a contingency or otherwise) to any lien,
mortgage, pledge, encumbrance or charge of any kind other than Permitted Liens.
Consistent with the foregoing and pursuant to the terms of all management
services agreements and asset purchase agreements with medical practices
applicable to the Accounts being financed pursuant to this Agreement, Borrower
has all right, title and interest to all such presently owned and hereafter
arising Accounts.
SECTION 4.10. TAXES. Borrower has filed, or has obtained extensions for the
filing of, all federal, state and other tax returns which are required to be
filed, and has paid all taxes shown as due on those returns and all assessments,
fees and other amounts due as of the date hereof. All tax liabilities of
Borrower were, as of December 31, 1996 and are now, adequately provided for on
Borrower's books. No tax liability has been asserted by the Internal Revenue
Service or other taxing authority against Borrower for taxes in excess of those
already paid.
16
<PAGE>
SECTION 4.11. SECURITIES AND BANKING LAWS AND REGULATIONS.
(a) The use of the proceeds of the Loan and Borrower's issuance of
the Note will not directly or indirectly violate or result in a violation of the
Securities Act of 1933 or the Securities Exchange Act of 1934, as amended, or
any regulations issued pursuant thereto, including without limitation
Regulations U, T, G, or X of the Board of Governors of the Federal Reserve
System. Borrower is not engaged in the business of extending credit for the
purpose of the purchasing or carrying "margin stock" within the meaning of those
regulations. No part of the proceeds of the Loan hereunder will be used to
purchase or carry any margin stock or to extend credit to others for such
purpose.
(b) Borrower is not an investment company within the meaning of the
Investment Company Act of 1940, as amended, nor is it, directly or indirectly,
controlled by or acting on behalf of any Person which is an investment company
within the meaning of that Act.
SECTION 4.12. ERISA. No employee benefit plan (a "Plan") subject to the
Employee Retirement Income Security Act of 1974 ("ERISA") and regulations issued
pursuant thereto that is maintained by Borrower or under which Borrower could
have any liability under ERISA (a) has failed to meet minimum funding standards
established in Section 302 of ERISA, (b) has failed to comply with all
applicable requirements of ERISA and of the Internal Revenue Code, including all
applicable rulings and regulations thereunder, (c) has engaged in or been
involved in a prohibited transaction (as defined in ERISA) under ERISA or under
the Internal Revenue Code, or (d) has been terminated. Borrower has not assumed,
or received notice of a claim asserted against Borrower for, withdrawal
liability (as defined in the Multi-Employer Pension Plan Amendments Act of 1980,
as amended) with respect to any multi-employer pension plan and is not a member
of any Controlled Group (as defined in ERISA). Borrower has timely made when due
all contributions with respect to any multi-employer pension plan in which it
participates and no event has occurred triggering a claim against Borrower for
withdrawal liability with respect to any multi-employer pension plan in which
Borrower participates.
SECTION 4.13. COMPLIANCE WITH LAW. Except as described in Schedule 4.13,
Borrower is not in violation of any statute, rule or regulation of any
Governmental Authority (including, without limitation, any statute, rule or
regulation relating to employment practices or to environmental, occupational
and health standards and controls). Borrower has obtained all licenses, permits,
franchises, and other governmental authorizations necessary for the ownership of
its properties and the conduct of its business. Borrower is current with all
reports and documents required to be filed with any state or federal securities
commission or similar Governmental Authority and is in full compliance with all
applicable rules and regulations of such commissions.
SECTION 4.14. ENVIRONMENTAL MATTERS. No use, exposure, release, generation,
manufacture, storage, treatment, transportation or disposal of Hazardous
Material has occurred or is occurring on or from any real property on which the
Collateral is located or which is owned,
17
<PAGE>
leased or otherwise occupied by Borrower (the "Premises"), or off the Premises
as a result of any action of Borrower, except as described in Schedule 4.14. All
Hazardous Material used, treated, stored, transported to or from, generated or
handled on the Premises, or off the Premises by Borrower, has been disposed of
on or off the Premises by or on behalf of Borrower in a lawful manner. There are
no underground storage tanks present on or under the Premises owned or leased by
Borrower. No other environmental, public health or safety hazards exist with
respect to the Premises.
SECTION 4.15. PLACES OF BUSINESS. The only places of business of Borrower,
and the places where it keeps and intends to keep the Collateral and records
concerning the Collateral, are at the addresses set forth in Schedule 4.15.
Schedule 4.15 also lists the owner of record of each such property.
SECTION 4.16. INTELLECTUAL PROPERTY. Borrower exclusively owns or possesses
all the patents, patent applications, trademarks, trademark applications,
service marks, trade names, copyrights, franchises, licenses, and rights with
respect to the foregoing necessary for the present and planned future conduct of
its business, without any conflict with the rights of others. A list of all such
intellectual property (indicating the nature of Borrower's interest), as well as
all outstanding franchises and licenses given by or held by Borrower, is
attached as Schedule 4.16. Borrower is not in default of any obligation or
undertaking with respect to such intellectual property or rights.
SECTION 4.17. STOCK OWNERSHIP. The identity of the known significant
stockholders of record of all classes of the outstanding stock of Borrower,
together with the respective ownership percentages held by such stockholders,
are as set forth on Schedule 4.17.
SECTION 4.18. MATERIAL FACTS. Neither this Agreement nor any other Loan
Document nor any other agreement, document, certificate, or statement furnished
to Lender by or on behalf of Borrower in connection with the transactions
contemplated hereby contains any untrue statement of material fact or omits to
state a material fact necessary in order to make the statements contained herein
or therein not misleading. There is no fact known to Borrower that adversely
affects or in the future may adversely affect the business, operations, affairs
or financial condition of Borrower, or any of its properties or assets.
SECTION 4.19. INVESTMENTS, GUARANTEES, AND CERTAIN CONTRACTS. Borrower does
not own or hold any equity or long-term debt investments in, have any
outstanding advances to, have any outstanding guarantees for the obligations of,
or have any outstanding borrowings from, any Person, except as described on
Schedule 4.19. Borrower is not a party to any contract or agreement, or subject
to any corporate restriction, which adversely affects its business.
SECTION 4.20. BUSINESS INTERRUPTIONS. Within five years prior to the date
hereof, neither the business, property or assets, or operations of Borrower has
been adversely affected in any way by any casualty, strike, lockout, combination
of workers, or order of the United States OF
18
<PAGE>
America or other Governmental Authority, directed against Borrower. There are no
pending or threatened labor disputes, strikes, lockouts, or similar occurrences
or grievances against Borrower or its business.
SECTION 4.21. NAMES. Within five years prior to the date hereof, Borrower
has not conducted business under or used any other name (whether corporate,
partnership or assumed) other than as shown on Schedule 4.21. Borrower is the
sole owner of all names listed on that Schedule and any and all business done
and invoices issued in such names are Borrower's sales, business, and invoices.
Each trade name of Borrower represents a division or trading style of Borrower
and not a separate Person or independent Affiliate.
SECTION 4.22 JOINT VENTURES. Borrower is not engaged in any joint venture
or partnership with any other Person, except as set forth on Schedule 4.22.
SECTION 4.23 ACCOUNTS. Lender may rely, in determining which Accounts are
Qualified Accounts, on all statements and representations made by Borrower with
respect to any Account or Accounts. Unless otherwise indicated in writing to
Lender, with respect to each Account:
(a) It is genuine and in all respects what it purports to be, and is
not evidenced by a judgment;
(b) It arises out of a completed, bona fide sale and delivery of
goods or rendition of services by Borrower in the ordinary course of its
business and in accordance with the terms and conditions of all purchase orders,
contracts, certification, participation, certificate of need, or other documents
relating thereto and forming a part of the contract between Borrower and the
Account Debtor;
(c) It is for a liquidated amount maturing as stated in a duplicate
claim or invoice covering such sale or rendition of services, a copy of which
has been furnished or is available to Lender;
(d) Such Account, and Lender's security interest therein, is not,
and will not (by voluntary act or omission by Borrower), be in the future,
subject to any offset, lien, deduction, defense, dispute, counterclaim or any
other adverse condition, and each such Account is absolutely owing to Borrower
and is not contingent in any respect or for any reason;
(e) There are no facts, events or occurrences which in any way
impair the validity or enforceability of any Accounts or tend to reduce the
amount payable thereunder from the face amount of the claim or invoice and
statements delivered to Lender with respect thereto;
(f) To the best of Borrower's knowledge, (i) the Account Debtor
thereunder had the capacity to contract at the time any contract or other
document giving rise to the Account was executed and (ii) such Account Debtor is
solvent;
19
<PAGE>
(g) To the best of Borrower's knowledge, there are no proceedings or
actions which are threatened or pending against any Account Debtor thereunder
which might result in any material adverse change in such Account Debtor's
financial condition or the collectibility of such Account;
(h) It has been billed and forwarded to the Account Debtor for
payment in accordance with applicable laws and compliance and conformance with
any and requisite procedures, requirements and regulations governing payment by
such Account Debtor with respect to such Account, and such Account if due from a
Medicaid/Medicare Account Debtor is properly payable directly to Borrower; and
(i) Borrower has obtained and currently has all certificates of
need, Medicaid and Medicare provider numbers, licenses, permits and
authorizations as necessary in the generation of such Accounts.
ARTICLE V
CLOSING AND CONDITIONS OF LENDING
SECTION 5.1. CONDITIONS PRECEDENT TO AGREEMENT. The obligation of Lender
to enter into and perform this Agreement and to make Revolving Credit Loans is
subject to the following conditions precedent:
(a) Lender shall have received two (2) originals of this Agreement
and all other Loan Documents required to be executed and delivered at or prior
to Closing (other than the Note, as to which Lender shall receive only one
original), executed by Borrower and any other required Persons, as applicable.
(b) Lender shall have received all searches and good standing
certificates required by Section 3.5.
(c) Borrower shall have complied and shall then be in compliance
with all the terms, covenants and conditions of the Loan Documents.
(d) There shall have occurred no Event of Default and no event
which, with the giving of notice or the lapse of time, or both, could constitute
such an Event of Default.
(e) The representations and warranties contained in Article IV shall
be true and correct.
(f) Lender shall have received copies of all board of directors
resolutions of Borrower, and other corporate action taken by Borrower to
authorize the execution, delivery and performance of the Loan Documents and the
borrowing of the Loan thereunder, as well as the
20
<PAGE>
names and signatures of the officers of Borrower authorized to execute documents
on its behalf in connection herewith, all as also certified as of the date
hereof by Borrower's chief financial officer, and such other papers as Lender
may require.
(g) Lender shall have received copies, certified as true, correct
and complete by a corporate officer of each Borrower, of the articles of
incorporation of each Borrower, with any amendments to any of the foregoing, and
all other documents necessary for performance of the obligations of Borrower
under this Agreement and the other Loan Documents.
(h) Lender shall have received a written opinion of counsel for
Borrower, dated the date hereof, in the form of Exhibit C.
(i) Lender shall have received such financial statements, reports,
certifications, and other operational information required to be delivered
hereunder, including without limitation an initial borrowing base certificate
calculating the Borrowing Base.
(j) Lender shall have received the Commitment Fee.
(k) The Lockbox and the Concentration Account shall have been
established.
(l) Lender shall have received a certificate of Borrower's chief
financial officer, dated the Closing Date, certifying that all of the conditions
specified in this Section have been fulfilled.
SECTION 5.2. CONDITIONS PRECEDENT TO ADVANCES. Notwithstanding any other
provision of this Agreement, no Loan proceeds, Revolving Credit Loans, advances
or other extensions of credit under the Loan shall be disbursed hereunder unless
the following conditions have been satisfied or waived immediately prior to such
disbursement:
(a) The representations and warranties on the part of Borrower
contained in Article IV of this Agreement shall be true and correct in all
respects at and as of the date of disbursement or advance, as though made on and
as of such date (except to the extent that such representations and warranties
expressly relate solely to an earlier date and except that the references in
Section 4.7 to financial statements shall be deemed to be a reference to the
then most recent annual and interim financial statements of Borrower furnished
to Lender pursuant to Section 6.1 hereof).
(b) No Event of Default or event which, with the giving of notice of
the lapse of time, or both, could become an Event of Default shall have occurred
and be continuing or would result from the making of the disbursement or
advance.
21
<PAGE>
(c) No adverse change in the condition (financial or otherwise),
properties, business, or operations of Borrower shall have occurred and be
continuing with respect to Borrower since the date hereof.
SECTION 5.3. CLOSING. Subject to the conditions of this Article V, the Loan
shall be made available on the date as is mutually agreed by the parties (the
"Closing Date") at such time as may be mutually agreeable to the parties upon
the execution hereof (the "Closing") at such place as may be requested by
Lender.
SECTION 5.4. WAIVER OF RIGHTS. By completing the Closing hereunder, or by
making advances under the Loan, Lender does not waive a breach of any
representation or warranty of Borrower hereunder or under any other Loan
Document, and all of Lender's claims and rights resulting from any breach or
misrepresentation by Borrower are specifically reserved by Lender.
ARTICLE VI
AFFIRMATIVE COVENANTS
Borrower covenants and agrees that for so long as Borrower may borrow
hereunder and until payment in full of the Note and performance of all other
obligations of Borrower under the Loan Documents:
SECTION 6.1. FINANCIAL STATEMENTS AND COLLATERAL REPORTS. Borrower will
furnish to Lender (i) a sales and collections report and accounts receivable
aging schedule on a form acceptable to Lender within fifteen (15) days after the
end of each calendar month, which shall include, but not be limited to, a report
of sales, credits issued, and collections received; (ii) payable aging schedules
within fifteen (15) days after the end of each calendar month; (iii) internally
prepared monthly financial statements for Borrower, certified by the chief
financial officer of Borrower, within forty-five (45) days of the end of each
calendar month, accompanied by management analysis and actual vs. budget
variance reports; (iv) to the extent prepared by Borrower, annual projections,
profit and loss statements, balance sheets, and cash flow reports (prepared on a
monthly basis) for the succeeding fiscal year within thirty (30) days before the
end of each of Borrower's fiscal years; (v) internally prepared annual financial
statements for Borrower within sixty (60) days after the end of each of
Borrower's fiscal years; (vi) annual audited financial statements for Borrower
prepared by Ernst & Young, LLP, or a firm of independent public accountants
satisfactory to Lender, within one hundred thirty-five (135) days after the end
of each of Borrower's fiscal years; (vii) promptly upon receipt thereof, copies
of any reports submitted to Borrower by the independent accountants in
connection with any interim audit of the books of Borrower and copies of each
management control letter provided to Borrower by independent accountants;
(viii) as soon as available, copies of all financial statements and notices
provided by Borrower to all of its stockholders; and (ix) such additional
information, reports or statements as Lender may from time to time request.
Annual financial
22
<PAGE>
statements shall set forth in comparative form figures for the corresponding
periods in the prior fiscal year. All financial statements shall include a
balance sheet and statement of earnings and shall be prepared in accordance with
GAAP.
SECTION 6.2. PAYMENTS HEREUNDER. Borrower will make all payments of
principal, interest, fees, and all other payments required hereunder, under the
Loan, and under any other agreements with Lender to which Borrower is a party,
as and when due.
SECTION 6.3. EXISTENCE, GOOD STANDING, AND COMPLIANCE WITH LAWS. Borrower
will do or cause to be done all things necessary (a) to obtain and keep in full
force and effect all corporate existence, rights, licenses, privileges, and
franchises of Borrower necessary to the ownership of its property or the conduct
of its business, and comply with all applicable present and future laws,
ordinances, rules, regulations, orders and decrees of any Governmental Authority
having or claiming jurisdiction over Borrower; and (b) to maintain and protect
the properties used or useful in the conduct of the operations of Borrower, in a
prudent manner, including without limitation the maintenance at all times of
such insurance upon its insurable property and operations as required by law or
by Section 6.7 hereof.
SECTION 6.4. LEGALITY. The making of the Loan and each disbursement or
advance under the Loan shall not be subject to any penalty or special tax, shall
not be prohibited by any governmental order or regulation applicable to
Borrower, and shall not violate any rule or regulation of any Governmental
Authority, and necessary consents, approvals and authorizations of any
Governmental Authority to or of any such disbursement or advance shall have been
obtained.
SECTION 6.5. LENDER'S SATISFACTION. All instruments and legal documents
and proceedings in connection with the transactions contemplated by this
Agreement shall be satisfactory in form and substance to Lender and its counsel,
and Lender shall have received all documents, including records of corporate
proceedings and opinions of counsel, which Lender may have requested in
connection therewith.
SECTION 6.6. TAXES AND CHARGES. Borrower will timely file all tax reports
and pay and discharge all taxes, assessments and governmental charges or levies
imposed upon Borrower, or its income or profits or upon its properties or any
part thereof, before the same shall be in default and prior to the date on which
penalties attach thereto, as well as all lawful claims for labor, material,
supplies or otherwise which, if unpaid, might become a lien or charge upon the
properties or any part thereof of Borrower; provided, however, that Borrower
shall not be required to pay and discharge or cause to be paid and discharged
any such tax, assessment, charge, levy or claim so long as the validity or
amount thereof shall be contested in good faith and by appropriate proceedings
by Borrower, and Borrower shall have set aside on their books adequate reserve
therefor; and provided further, that such deferment of payment is permissible
only so long as Borrower's title to, and its right to use, the Collateral is not
adversely affected
23
<PAGE>
thereby and Lender's lien and priority on the Collateral are not adversely
affected, altered or impaired thereby.
SECTION 6.7. INSURANCE. Borrower will carry adequate public liability and
professional liability insurance with responsible companies satisfactory to
Lender in such amounts and against such risks as is customarily maintained by
similar businesses and by owners of similar property in the same general area.
SECTION 6.8. GENERAL INFORMATION. Borrower will furnish to Lender such
information as Lender may, from time to time, request with respect to the
business or financial affairs of Borrower, and permit any officer, employee or
agent of Lender to visit and inspect any of the properties, to examine the
minute books, books of account and other records, including management letters
prepared by Borrower's auditors, of Borrower, and make copies thereof or
extracts therefrom, and to discuss its and their business affairs, finances and
accounts with, and be advised as to the same by, the accountants and officers of
Borrower, all at such times and as often as Lender may require.
SECTION 6.9. MAINTENANCE OF PROPERTY. Borrower will maintain, keep and
preserve all of its properties in good repair, working order and condition and
from time to time make all needful and proper repairs, renewals, replacements,
betterments and improvements thereto, so that the business carried on in
connection therewith may be properly and advantageously conducted at all times.
SECTION 6.10. NOTIFICATION OF EVENTS OF DEFAULT AND ADVERSE DEVELOPMENTS.
Borrower promptly will notify Lender upon the occurrence of: (i) any Event of
Default; (ii) any event which, with the giving of notice or lapse of time, or
both, could constitute an Event of Default; (iii) any event, development or
circumstance whereby the financial statements previously furnished to Lender
fail in any material respect to present fairly, in accordance with GAAP, the
financial condition and operational results of Borrower; (iv) any judicial,
administrative or arbitration proceeding pending against Borrower, and any
judicial or administrative proceeding known by Borrower to be threatened against
it which, if adversely decided, could adversely affect its condition (financial
or otherwise) or operations (present or prospective) or which may expose
Borrower to uninsured liability of $25,000.00 or more; (v) any default claimed
by any other creditor for Borrowed Money of Borrower other than Lender; and (vi)
any other development in the business or affairs of Borrower which may be
adverse; in each case describing the nature thereof and (in the case of
notification under clauses (i) and (ii)) the action Borrower proposes to take
with respect thereto.
SECTION 6.11. EMPLOYEE BENEFIT PLANS. Borrower will (i) comply with the
funding requirements of ERISA with respect to the Plans for its employees, or
will promptly satisfy any accumulated funding deficiency that arises under
Section 302 of ERISA; (ii) furnish Lender, promptly after filing the same, with
copies of all reports or other statements filed with the United States
Department of Labor, the Pension Benefit Guaranty Corporation, or the Internal
Revenue
24
<PAGE>
Service with respect to all Plans, or which Borrower, or any member of a
Controlled Group, may receive from such Governmental Authority with respect to
any such Plans, and (iii) promptly advise Lender of the occurrence of any
Reportable Event or Prohibited Transaction with respect to any such Plan and the
action which Borrower proposes to take with respect thereto. Borrower will make
all contributions when due with respect to any multi-employer pension plan in
which it participates and will promptly advise Lender: (i) upon its receipt of
notice of the assertion against Borrower of a claim for withdrawal liability;
(ii) upon the occurrence of any event which could trigger the assertion of a
claim for withdrawal liability against Borrower; and (iii) upon the occurrence
of any event which would place Borrower in a Controlled Group as a result of
which any member (including Borrower) thereof may be subject to a claim for
withdrawal liability, whether liquidated or contingent.
SECTION 6.12. FINANCING STATEMENTS. Borrower shall provide to Lender
evidence satisfactory to Lender as to the due recording of termination
statements, releases of collateral, and Forms UCC-3, and shall cause to be
recorded financing statements on Form UCC-1, duly executed by Borrower and
Lender, in all places necessary to release all existing security interests and
other liens in the Collateral (other than as permitted hereby) and to perfect
and protect Lender's first priority lien and security interest in the
Collateral, as Lender may request.
SECTION 6.13. FINANCIAL RECORDS. Borrower shall keep current and accurate
books of records and accounts in which full and correct entries will be made of
all of its business transactions, and will reflect in its financial statements
adequate accruals and appropriations to reserves, all in accordance with GAAP.
SECTION 6.14. COLLECTION OF ACCOUNTS. Borrower shall continue to collect
its Accounts in the ordinary course of business.
SECTION 6.15. PLACES OF BUSINESS. Borrower shall give thirty (30) days'
prior written notice to Lender of any change in the location of any of its
places of business, of the places where its records concerning its Accounts are
kept, of the places where the Collateral is kept, or of the establishment of any
new, or the discontinuance of any existing, places of business.
SECTION 6.16. BUSINESS CONDUCTED. Borrower shall continue in the business
presently conducted by it using its best efforts to maintain its customers and
goodwill. Borrower shall not engage, directly or indirectly, in any line of
business substantially different from the business conducted by it immediately
prior to the Closing Date, or engage in business or lines of business which are
not reasonably related thereto.
SECTION 6.17. LITIGATION AND OTHER PROCEEDINGS. Borrower shall give prompt
notice to Lender of any litigation, arbitration, or other proceeding before any
Governmental Authority against or affecting Borrower if the amount claimed is
more than $25,000.00.
25
<PAGE>
SECTION 6.18. BANK ACCOUNTS. Borrower shall assign all of its depository
and disbursement accounts to Lender.
SECTION 6.19. SUBMISSION OF COLLATERAL DOCUMENTS. Borrower will, on demand
of Lender, make available to Lender copies of shipping and delivery receipts
evidencing the shipment of goods that gave rise to an Account, medical records,
insurance verification forms, assignment of benefits, in-take forms or other
proof of the satisfactory performance of services that gave rise to an Account,
a copy of the claim or invoice for each Account and copies of any written
contract or order from which the Account arose. Borrower shall promptly notify
Lender if an Account becomes evidenced or secured by an instrument or chattel
paper and upon request of Lender, will promptly deliver any such instrument or
chattel paper to Lender.
SECTION 6.20. LICENSURE; MEDICAID/MEDICARE COST REPORTS. Borrower will
maintain all certificates of need, provider numbers and licenses necessary to
conduct its business as presently conducted, and take any steps required to
comply with any such new or additional requirements that may be imposed on
providers of medical products and services. If required, all Medicaid/Medicare
cost reports will be properly filed.
SECTION 6.21. OFFICER'S CERTIFICATES. Together with the monthly financial
statements delivered pursuant to clause (iii) of Section 6.1, and together with
the audited annual financial statements delivered pursuant to clause (vi) of
that Section, Borrower shall deliver to Lender a certificate of its chief
financial officer, in form and substance satisfactory to Lender:
(a) Setting forth the information (including detailed calculations)
required to establish whether Borrower is in compliance with the requirements of
Articles VI and VII as of the end of the period covered by the financial
statements then being furnished; and
(b) Stating that the signer has reviewed the relevant terms of this
Agreement, and has made (or caused to be made under his supervision) a review of
the transactions and conditions of Borrower from the beginning of the accounting
period covered by the income statements being delivered to the date of the
certificate, and that such review has not disclosed the existence during such
period of any condition or event which constitutes an Event of Default or which
is then, or with the passage of time or giving of notice or both, could become
an Event of Default, and if any such condition or event existed during such
period or now exists, specifying the nature and period of existence thereof and
what action Borrower has taken or proposes to take with respect thereto.
SECTION 6.22. VISITS AND INSPECTIONS. Borrower agrees to permit
representatives of Lender, from time to time, as often as may be reasonably
requested, but only during normal business hours, to visit and inspect the
properties of Borrower, and to inspect, audit and make extracts from its books
and records, and discuss with its officers, its employees and its independent
accountants, Borrower's business, assets, liabilities, financial condition,
business prospects and results of operations.
26
<PAGE>
SECTION 6.23. NET WORTH. Borrower will not at any time allow its net worth,
as computed in accordance with GAAP, to fall below $ . -----------------
ARTICLE VII
NEGATIVE COVENANTS
Borrower covenants and agrees that so long as Borrower may borrow hereunder
and until payment in full of the Note and performance of all other obligations
of Borrower under the Loan Documents:
SECTION 7.1. BORROWING. Borrower will not create, incur, assume or suffer
to exist any liability for Borrowed Money except: (i) indebtedness to Lender;
(ii) indebtedness of Borrower secured by mortgages, encumbrances or liens
expressly permitted by Section 7.3 hereof; (iii) accounts payable to trade
creditors and current operating expenses (other than for borrowed money) which
are not aged more than one hundred twenty (120) days from the billing date or
more than thirty (30) days from the due date, in each case incurred in the
ordinary course of business and paid within such time period, unless the same
are being contested in good faith and by appropriate and lawful proceedings, and
Borrower shall have set aside such reserves, if any, with respect thereto as are
required by GAAP and deemed adequate by Borrower and its independent
accountants; and (iv) borrowings incurred in the ordinary course of its business
and not exceeding $10,000.00 in the aggregate outstanding at any one time.
Borrower will not make prepayments on any existing or future indebtedness for
Borrowed Money to any Person (other than Lender, to the extent permitted by this
Agreement or any subsequent agreement between Borrower and Lender).
SECTION 7.2. JOINT VENTURES. Borrower will not invest directly or
indirectly in any joint venture for any purpose without the prior written notice
to, and the express written consent of, Lender, which consent may be withheld in
Lender's sole discretion.
SECTION 7.3. LIENS AND ENCUMBRANCES. Borrower will not create, incur,
assume or suffer to exist any mortgage, pledge, lien or other encumbrance of any
kind (including the charge upon property purchased under a conditional sale or
other title retention agreement) upon, or any security interest in, any of its
Collateral, whether now owned or hereafter acquired, except for Permitted Liens.
SECTION 7.4. MERGER, ACQUISITION, OR SALE OF ASSETS. Borrower will not
enter into any merger or consolidation with or acquire all or substantially all
of the assets of any Person, and will not sell, lease, or otherwise dispose of
any of its assets except in the ordinary course of its business.
27
<PAGE>
SECTION 7.5. SALE AND LEASEBACK. Borrower will not, directly or indirectly,
enter into any arrangement whereby Borrower sells or transfers all or any part
of its assets and thereupon and within one year thereafter rents or leases the
assets so sold or transferred without the prior written notice to, and the
express written consent of, Lender, which consent may be withheld in Lender's
sole discretion.
SECTION 7.6. DIVIDENDS, DISTRIBUTIONS AND MANAGEMENT FEES. Upon notice from
Lender to Borrower of the existence of an Event of Default hereunder, Borrower
will not declare or pay any dividends or other distributions with respect to,
purchase, redeem or otherwise acquire for value any of its outstanding stock now
or hereafter outstanding, or return any capital of its stockholders, nor shall
Borrower pay management fees or fees of a similar nature to any Person.
SECTION 7.7. LOANS. Borrower will not make loans or advances to any Person,
other than (i) trade credit extended in the ordinary course of its business, and
(ii) advances for business travel and similar temporary advances in the ordinary
course of business to officers, stockholders, directors, and employees.
SECTION 7.8. CONTINGENT LIABILITIES. Borrower will not assume, guarantee,
endorse, contingently agree to purchase or otherwise become liable upon the
obligation of any Person, except by the endorsement of negotiable instruments
for deposit or collection or similar transactions in the ordinary course of
business.
SECTION 7.9. SUBSIDIARIES. Borrower will not form any subsidiary, or make
any investment in or any loan in the nature of an investment to, any other
Person.
SECTION 7.10. COMPLIANCE WITH ERISA. Borrower will not permit with respect
to any Plan covered by Title IV of ERISA any Prohibited Transaction or any
Reportable Event.
SECTION 7.11. CERTIFICATES OF NEED. Borrower will not amend, alter or
suspend or terminate or make provisional in any material way, any certificate of
need or provider number without the prior written consent of Lender.
SECTION 7.12. TRANSACTIONS WITH AFFILIATES. Borrower will not enter into
any transaction, including without limitation the purchase, sale, or exchange of
property, or the loaning or giving of funds to any Affiliate or subsidiary,
except in the ordinary course of business and pursuant to the reasonable
requirements of Borrower's business and upon terms substantially the same and no
less favorable to Borrower as it would obtain in a comparable arm's length
transaction with any Person not an Affiliate or subsidiary, and so long as the
transaction is not otherwise prohibited hereunder. For purposes of the
foregoing, Lender consents to the transactions described on Schedule 7.12.
SECTION 7.13. USE OF LENDER'S NAME. Borrower will not use Lender's name (or
the name of any of Lender's affiliates) in connection with any of its business
operations. Borrower
28
<PAGE>
may disclose to third parties that Borrower has a borrowing relationship with
Lender. Nothing herein contained is intended to permit or authorize Borrower to
make any contract on behalf of Lender.
SECTION 7.14. CHANGE IN CAPITAL STRUCTURE. There shall occur no
change in Borrower's capital structure as set forth in Schedule 4.17.
SECTION 7.15. CONTRACTS AND AGREEMENTS. Borrower will not become or be a
party to any contract or agreement which would breach this Agreement, or breach
any other instrument, agreement, or document to which Borrower is a party or by
which it is or may be bound.
SECTION 7.16. MARGIN STOCK. Borrower will not carry or purchase any
"margin security" within the meaning of Regulations U, G, T or X of the Board of
Governors of the Federal Reserve System.
SECTION 7.17. TRUTH OF STATEMENTS AND CERTIFICATES. Borrower will not
furnish to Lender any certificate or other document that contains any untrue
statement of a material fact or that omits to state a material fact necessary to
make it not misleading in light of the circumstances under which it was
furnished.
ARTICLE VIII
EVENTS OF DEFAULT
SECTION 8.1. EVENTS OF DEFAULT. Each of the following (individually,
an "Event of Default" and collectively, the "Events of Default") shall
constitute an event of default hereunder:
(a) A default in the payment of any installment of principal of, or
interest upon, the Note when due and payable, whether at maturity or otherwise,
or any breach of Section 2.3 of this Agreement, which default or breach, as
applicable, shall have continued unremedied for a period of five (5) days after
written notice thereof from Lender to Borrower;
(b) A default in the payment of any other charges, fees, or other
monetary obligations owing to Lender arising out of or incurred in connection
with this Agreement when such payment is due and payable, which default shall
have continued unremedied for a period of five (5) days after written notice
from Lender;
(c) A default in the due observance or performance by Borrower of
any other term, covenant or agreement contained in any of the Loan Documents,
which default shall have continued unremedied for a period of ten (10) days
after written notice from Lender;
29
<PAGE>
(d) If any representation or warranty made by Borrower herein or in
any of the other Loan Documents, any financial statement, or any statement or
representation made in any other certificate, report or opinion delivered in
connection herewith or therewith proves to have been incorrect or misleading in
any material respect when made, which default shall have continued unremedied
for a period of ten (10) days after written notice from Lender;
(e) If any obligation of Borrower (other than its Obligations
hereunder) for the payment of Borrowed Money is not paid when due or within any
applicable grace period, or such obligation becomes or is declared to be due and
payable prior to the expressed maturity thereof, or there shall have occurred an
event which, with the giving of notice or lapse of time, or both, would cause
any such obligation to become, or allow any such obligation to be declared to
be, due and payable;
(f) If Borrower makes an assignment for the benefit of creditors,
offers a composition or extension to creditors, or makes or sends notice of an
intended bulk sale of any business or assets now or hereafter conducted by
Borrower;
(g) If Borrower files a petition in bankruptcy, is adjudicated
insolvent or bankrupt, petitions or applies to any tribunal for any receiver of
or any trustee for itself or any substantial part of its property, commences any
proceeding relating to itself under any reorganization, arrangement,
readjustment or debt, dissolution or liquidation law or statute of any
jurisdiction, whether now or hereafter in effect, or there is commenced against
Borrower any such proceeding which remains undismissed for a period of sixty
(60) days, or any Borrower by any act indicates its consent to, approval of, or
acquiescence in, any such proceeding or the appointment of any receiver of or
any trustee for a Borrower or any substantial part of its property, or suffers
any such receivership or trusteeship to continue undischarged for a period of
sixty (60) days;
(h) If one or more final judgments against Borrower or attachments
against its property not fully and unconditionally covered by insurance shall be
rendered by a court of record and shall remain unpaid, unstayed on appeal,
undischarged, unbonded and undismissed for a period of ten (10) days;
(i) A Reportable Event which might constitute grounds for
termination of any Plan covered by Title IV of ERISA or for the appointment by
the appropriate United States District Court of a trustee to administer any such
Plan or for the entry of a lien or encumbrance to secure any deficiency, has
occurred and is continuing thirty (30) days after its occurrence, or any such
Plan is terminated, or a trustee is appointed by an appropriate United States
District Court to administer any such Plan, or the Pension Benefit Guaranty
Corporation institutes proceedings to terminate any such Plan or to appoint a
trustee to administer any such Plan, or a lien or encumbrance is entered to
secure any deficiency or claim;
30
<PAGE>
(j) If a majority of the outstanding stock of Borrower is sold or
otherwise transferred by the Person owning such stock on the date hereof;
(k) If there shall occur any uninsured damage to or loss, theft or
destruction of any portion of the Collateral;
(l) If Borrower breaches or violates the terms of, or if a default
or an event which could, whether with notice or the passage of time, or both,
constitute a default, occurs under any other existing or future agreement
(related or unrelated) between Borrower and Lender;
(m) Upon the issuance of any execution or distraint process against
Borrower or any of its property or assets;
(n) If Borrower ceases any material portion of its business
operations as presently conducted;
(o) If any indication or evidence is received by Lender that
Borrower may have directly or indirectly been engaged in any type of activity
which, in Lender's discretion, might result in the forfeiture of any property of
Borrower to any Governmental Authority, which default shall have continued
unremedied for a period of ten (10) days after written notice from Lender;
(p) Borrower or any Affiliate of Borrower, shall challenge or
contest, in any action, suit or proceeding, the validity or enforceability of
this Agreement, or any of the other Loan Documents, the legality or the
enforceability of any of the Obligations or the perfection or priority of any
Lien granted to Lender;
(q) Borrower shall be criminally indicted or convicted under any law
that could lead to a forfeiture of any Collateral.
(r) There shall occur a material adverse change in the financial
condition or business prospects of Borrower, or if Lender in good faith deems
itself insecure as a result of acts or events bearing upon the financial
condition of Borrower or the repayment of the Note, which default shall have
continued unremedied for a period of ten (10) days after written notice from
Lender.
SECTION 8.2. ACCELERATION. Upon the occurrence of any of the foregoing
Events of Default, the Note shall become and be immediately due and payable upon
declaration to that effect delivered by Lender to Borrower; provided that, upon
the happening of any event specified in Section 8.1(g) hereof, the Note shall be
immediately due and payable without declaration or other notice to Borrower.
31
<PAGE>
SECTION 8.3. REMEDIES.
(a) In addition to all other rights, options, and remedies granted
to Lender under this Agreement, upon the occurrence of an Event of Default
Lender may (i) terminate the Loan, whereupon all outstanding Obligations shall
be immediately due and payable, (ii) exercise all other rights granted to it
hereunder and all rights under the Uniform Commercial Code in effect in the
applicable jurisdiction(s) and under any other applicable law, and (iii)
exercise all rights and remedies under all Loan Documents now or hereafter in
effect, including the following rights and remedies (which list is given by way
of example and is not intended to be an exhaustive list of all such rights and
remedies):
(i) The right to take possession of, send notices regarding,
and collect directly the Collateral, with or without judicial process, and to
exercise all rights and remedies available to Lender with respect to the
Collateral under the Uniform Commercial Code in effect in the jurisdiction(s) in
which such Collateral is located;
(ii) The right to (by its own means or with judicial
assistance) enter any of Borrower's premises and take possession of the
Collateral, or render it unusable, or dispose of the Collateral on such premises
in compliance with subsection (b), without any liability for rent, storage,
utilities, or other sums, and Borrower shall not resist or interfere with such
action;
(iii) The right to require Borrower at Borrower's expense to
assemble all or any part of the Collateral and make it available to Lender at
any place designated by Lender;
(iv) The right to reduce the Maximum Loan Amount or to use the
Collateral and/or funds in the Concentration Account in amounts up to the
Maximum Loan Amount for any reason; and
(v) The right to relinquish or abandon any Collateral or any
security interest therein.
(b) Borrower agrees that a notice received by it at least five (5)
days before the time of any intended public sale, or the time after which any
private sale or other disposition of the Collateral is to be made, shall be
deemed to be reasonable notice of such sale or other disposition. If permitted
by applicable law, any perishable Collateral which threatens to speedily decline
in value or which is sold on a recognized marked may be sold immediately by
Lender without prior notice to Borrower. At any sale or disposition of
Collateral, Lender may (to the extent permitted by applicable law) purchase all
or any part of the Collateral, free from any right of redemption by Borrower,
which right is hereby waived and released. Borrower covenants and agrees not to
interfere with or impose any obstacle to Lender's exercise of its rights and
remedies with respect to the Collateral.
41
<PAGE>
SECTION 8.4. NATURE OF REMEDIES. Lender shall have the right to proceed
against all or any portion of the Collateral to satisfy the liabilities and
Obligations of Borrower to Lender in any order. All rights and remedies granted
Lender hereunder and under any agreement referred to herein, or otherwise
available at law or in equity, shall be deemed concurrent and cumulative, and
not alternative remedies, and Lender may proceed with any number of remedies at
the same time until the Loans, and all other existing and future liabilities and
obligations of Borrower to Lender, are satisfied in full. The exercise of any
one right or remedy shall not be deemed a waiver or release of any other right
or remedy, and Lender, upon the occurrence of an Event of Default, may proceed
against Borrower, and/or the Collateral, at any time, under any agreement, with
any available remedy and in any order.
ARTICLE IX
MISCELLANEOUS
SECTION 9.1. EXPENSES AND TAXES.
(a) Borrower agrees to pay, whether or not the Closing occurs, a
reasonable documentation preparation fee, together with actual audit and
appraisal fees and all other out-of-pocket charges and expenses incurred by
Lender in connection with the negotiation, preparation and execution of each of
the Loan Documents, any amendments to the Loan Documents following Closing, and
preparation for Closing. Borrower also agrees to pay all out-of-pocket charges
and expenses incurred by Lender (including the fees and expenses of Lender's
counsel) in connection with the enforcement, protection or preservation of any
right or claim of Lender and the collection of any amounts due under the Loan
Documents.
(b) Borrower shall pay all taxes (other than taxes based upon or
measured by Lender's income or revenues or any personal property tax), if any,
in connection with the issuance of the Note and the recording of the security
documents therefor. The obligations of Borrower under this clause (b) shall
survive the payment of Borrower's indebtedness hereunder and the termination of
this Agreement.
SECTION 9.2. ENTIRE AGREEMENT; AMENDMENTS. This Agreement and the other
Loan Documents constitute the full and entire understanding and agreement among
the parties with regard to their subject matter and supersede all prior written
or oral agreements, understandings, representations and warranties made with
respect thereto. No amendment, supplement or modification of this Agreement nor
any waiver of any provision thereof shall be made except in writing executed by
the party against whom enforcement is sought.
SECTION 9.3. NO WAIVER; CUMULATIVE RIGHTS. No waiver by any party hereto of
any one or more defaults by the other party in the performance of any of the
provisions of this Agreement shall operate or be construed as a waiver of any
future default or defaults, whether of a like or different nature. No failure or
delay on the part of any party in exercising any right, power or
33
<PAGE>
remedy hereunder shall operate as a waiver thereof, nor shall any single or
partial exercise of any such right, power or remedy preclude any other or
further exercise thereof or the exercise of any other right, power or remedy.
The remedies provided for herein are cumulative and are not exclusive of any
remedies that may be available to any party hereto at law, in equity or
otherwise.
SECTION 9.4. NOTICES. Any notice or other communication required or
permitted hereunder shall be in writing and personally delivered, mailed by
registered or certified mail (return receipt requested and postage prepaid),
sent by telecopier (with a confirming copy sent by regular mail), or sent by
prepaid overnight courier service, and addressed to the relevant party at its
address set forth below, or at such other address as such party may, by written
notice, designate as its address for purposes of notice hereunder:
(a) If to Lender, at:
HCFP Funding, Inc.
2 Wisconsin Circle, Suite 320
Chevy Chase, Maryland 20815
Attention: Ethan D. Leder, President
Telephone: (301) 961-1640
Telecopier: (301) 664-9860
(b) If to Borrower, at:
Medical Asset Management, Inc.
25241 Paseo De Alicia, Suite 230
Laguna Hills, California 92653
Attention: Mr. Clarke Underwood, Chief Financial Officer
Telephone: (714) 829-8333
Telecopier: (714) 829-8330
If mailed, notice shall be deemed to be given five (5) days after being
sent, if sent by personal delivery or telecopier, notice shall be deemed to be
given when delivered, and if sent by prepaid courier, notice shall be deemed to
be given on the next Business Day following deposit with the courier.
SECTION 9.5. SEVERABILITY. If any term, covenant or condition of this
Agreement, or the application of such term, covenant or condition to any party
or circumstance shall be found by a court of competent jurisdiction to be, to
any extent, invalid or unenforceable, the remainder of this Agreement and the
application of such term, covenant, or condition to parties or circumstances
other than those as to which it is held invalid or unenforceable, shall not be
affected thereby, and each term, covenant or condition shall be valid and
enforced to the fullest extent permitted by law. Upon determination that any
such term is invalid, illegal or
34
<PAGE>
unenforceable, the parties hereto shall amend this Agreement so as to effect the
original intent of the parties as closely as possible in an acceptable manner.
SECTION 9.6. SUCCESSORS AND ASSIGNS. This Agreement, the Note, and the
other Loan Documents shall be binding upon and inure to the benefit of Borrower
and Lender and their respective successors and assigns. Notwithstanding the
foregoing, Borrower may not assign any of its rights or delegate any of its
obligations hereunder without the prior written consent of Lender, which may be
withheld in its sole discretion. Lender may sell, assign, transfer, or
participate any or all of its rights or obligations hereunder without notice to
or consent of Borrower.
SECTION 9.7. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which
together shall constitute but one instrument.
SECTION 9.8. INTERPRETATION. No provision of this Agreement or any other
Loan Document shall be interpreted or construed against any party because that
party or its legal representative drafted that provision. The titles of the
paragraphs of this Agreement are for convenience of reference only and are not
to be considered in construing this Agreement. Any pronoun used in this
Agreement shall be deemed to include singular and plural and masculine, feminine
and neuter gender as the case may be. The words "herein," "hereof," and
"hereunder" shall be deemed to refer to this entire Agreement, except as the
context otherwise requires.
SECTION 9.9. SURVIVAL OF TERMS. All covenants, agreements, representations
and warranties made in this Agreement, any other Loan Document, and in any
certificates and other instruments delivered in connection therewith shall be
considered to have been relied upon by Lender and shall survive the making by
Lender of the Loans herein contemplated and the execution and delivery to Lender
of the Note, and shall continue in full force and effect until all liabilities
and obligations of Borrower to Lender are satisfied in full.
SECTION 9.10. RELEASE OF LENDER. Borrower releases Lender, its officers,
employees, and agents, of and from any claims for loss or damage resulting from
acts or conduct of any or all of them, unless caused by Lender's recklessness,
gross negligence, or willful misconduct.
SECTION 9.11. TIME. Whenever Borrower is required to make any payment or
perform any act on a Saturday, Sunday, or a legal holiday under the laws of the
State of Maryland (or other jurisdiction where Borrower is required to make the
payment or perform the act), the payment may be made or the act performed on the
next Business Day. Time is of the essence in Borrower's performance under this
Agreement and all other Loan Documents.
SECTION 9.12. COMMISSIONS. The transaction contemplated by this Agreement
was brought about by Lender and Borrower acting as principals and without any
brokers, agents, or finders being the effective procuring cause. Borrower
represents that it has not committed
35
<PAGE>
Lender to the payment of any brokerage fee, commission, or charge in connection
with this transaction. If any such claim is made on Lender by any broker,
finder, or agent or other person, Borrower will indemnify, defend, and hold
Lender harmless from and against the claim and will defend any action to recover
on that claim, at Borrower's cost and expense, including Lender's counsel fees.
Borrower further agrees that until any such claim or demand is adjudicated in
Lender's favor, the amount demanded will be deemed a liability of Borrower under
this Agreement, secured by the Collateral.
SECTION 9.13. THIRD PARTIES. No rights are intended to be created hereunder
or under any other Loan Document for the benefit of any third party donee,
creditor, or incidental beneficiary of Borrower. Nothing contained in this
Agreement shall be construed as a delegation to Lender of Borrower's duty of
performance, including without limitation Borrower's duties under any account or
contract in which Lender has a security interest.
SECTION 9.14. DISCHARGE OF BORROWER'S OBLIGATIONS. Lender, in its sole
discretion, shall have the right at any time, and from time to time, without
prior notice to Borrower if Borrower fails to do so, to: (i) obtain insurance
covering any of the Collateral as required hereunder; (ii) pay for the
performance of any of Borrower's obligations hereunder; (iii) discharge taxes,
liens, security interests, or other encumbrances at any time levied or placed on
any of the Collateral in violation of this Agreement unless Borrower is in good
faith with due diligence by appropriate proceedings contesting those items; and
(iv) pay for the maintenance and preservation of any of the Collateral. Expenses
and advances shall be added to the Loan, until reimbursed to Lender and shall be
secured by the Collateral. Any such payments and advances by Lender shall not be
construed as a waiver by Lender of an Event of Default.
SECTION 9.15. INFORMATION TO PARTICIPANTS. Lender may divulge to any
participant it may obtain in the Loan, or any portion thereof, all information,
and furnish to such participant copies of reports, financial statements,
certificates, and documents obtained under any provision of this Agreement or
any other Loan Document.
SECTION 9.16. INDEMNITY. Borrower hereby agrees to indemnify and hold
harmless Lender, its partners, officers, agents and employees (collectively,
"Indemnitee") from and against any liability, loss, cost, expense, claim,
damage, suit, action or proceeding ever suffered or incurred by Lender
(including reasonable attorneys' fees and expenses) arising from Borrower's
failure to observe, perform or discharge any of its covenants, obligations,
agreements or duties hereunder, or from the breach of any of the representations
or warranties contained in Article IV hereof. In addition, Borrower shall defend
Indemnitee against and save it harmless from all claims of any Person with
respect to the Collateral. Notwithstanding any contrary provision in this
Agreement, the obligation of Borrower under this Section 9.16 shall survive the
payment in full of the Obligations and the termination of this Agreement.
SECTION 9.17. CHOICE OF LAW; CONSENT TO JURISDICTION. THIS AGREEMENT AND
THE NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE
36
<PAGE>
WITH, THE LAWS OF THE STATE OF MARYLAND, WITHOUT REGARD TO ANY OTHERWISE
APPLICABLE PRINCIPLES OF CONFLICTS OF LAWS. IF ANY ACTION ARISING OUT OF THIS
AGREEMENT OR THE NOTE IS COMMENCED BY LENDER IN THE STATE COURTS OF THE STATE OF
MARYLAND OR IN THE U.S. DISTRICT COURT FOR THE DISTRICT OF MARYLAND, BORROWER
HEREBY CONSENTS TO THE JURISDICTION OF ANY SUCH COURT IN ANY SUCH ACTION AND TO
THE LAYING OF VENUE IN THE STATE OF MARYLAND. ANY PROCESS IN ANY SUCH ACTION
SHALL BE DULY SERVED IF MAILED BY REGISTERED MAIL, POSTAGE PREPAID, TO BORROWER
AT ITS ADDRESS DESCRIBED IN SECTION 9.4 HEREOF.
SECTION 9.18. WAIVER OF TRIAL BY JURY. BORROWER HEREBY (A) COVENANTS AND
AGREES NOT TO ELECT A TRIAL BY JURY OF ANY ISSUE TRIABLE OF RIGHT BY A JURY, AND
(B) WAIVES ANY RIGHT TO TRIAL BY JURY FULLY TO THE EXTENT THAT ANY SUCH RIGHT
SHALL NOW OR HEREAFTER EXIST. THIS WAIVER OF RIGHT TO TRIAL BY JURY IS
SEPARATELY GIVEN, KNOWINGLY AND VOLUNTARILY, BY BORROWER, AND THIS WAIVER IS
INTENDED TO ENCOMPASS INDIVIDUALLY EACH INSTANCE AND EACH ISSUE AS TO WHICH THE
RIGHT TO A JURY TRIAL WOULD OTHERWISE ACCRUE. LENDER IS HEREBY AUTHORIZED AND
REQUESTED TO SUBMIT THIS AGREEMENT TO ANY COURT HAVING JURISDICTION OVER THE
SUBJECT MATTER AND THE PARTIES HERETO, SO AS TO SERVE AS CONCLUSIVE EVIDENCE OF
BORROWER'S WAIVER OF THE RIGHT TO JURY TRIAL. FURTHER, BORROWER HEREBY CERTIFIES
THAT NO REPRESENTATIVE OR AGENT OF LENDER (INCLUDING LENDER'S COUNSEL) HAS
REPRESENTED, EXPRESSLY OR OTHERWISE, TO BORROWER THAT LENDER WILL NOT SEEK TO
ENFORCE THIS WAIVER OF RIGHT TO JURY TRIAL PROVISION.
SECTION 9.19. CONFESSION OF JUDGMENT. BORROWER AUTHORIZES ANY ATTORNEY
ADMITTED TO PRACTICE BEFORE ANY COURT OF RECORD IN THE UNITED STATES OR THE
CLERK OF SUCH COURT TO APPEAR ON BEHALF OF BORROWER IN ANY COURT IN ONE OR MORE
PROCEEDINGS, OR BEFORE ANY CLERK THEREOF OF PROTHONOTARY OR OTHER COURT
OFFICIAL, AND TO CONFESS JUDGMENT AGAINST BORROWER IN FAVOR OF LENDER IN THE
FULL AMOUNT DUE ON THIS AGREEMENT (INCLUDING PRINCIPAL, ACCRUED INTEREST AND ANY
AND ALL CHARGES, FEES AND COSTS) PLUS ATTORNEYS' FEES EQUAL TO FIFTEEN PERCENT
(15%) OF THE AMOUNT DUE, PLUS COURT COSTS, ALL WITHOUT PRIOR NOTICE OR
OPPORTUNITY OF BORROWER FOR PRIOR HEARING. BORROWER AGREES AND CONSENTS THAT
VENUE AND JURISDICTION SHALL BE PROPER IN THE CIRCUIT COURT OF ANY COUNTY OF THE
STATE OF MARYLAND OR OF BALTIMORE CITY, MARYLAND, OR IN THE UNITED STATES
DISTRICT COURT FOR THE DISTRICT OF MARYLAND. BORROWER WAIVES THE BENEFIT OF ANY
AND EVERY STATUTE,
37
<PAGE>
ORDINANCE, OR RULE OF COURT WHICH MAY BE LAWFULLY WAIVED CONFERRING UPON
BORROWER ANY RIGHT OR PRIVILEGE OF EXEMPTION, HOMESTEAD RIGHTS, STAY OF
EXECUTION, OR SUPPLEMENTARY PROCEEDINGS, OR OTHER RELIEF FROM THE ENFORCEMENT OR
IMMEDIATE ENFORCEMENT OF A JUDGMENT OR RELATED PROCEEDINGS ON A JUDGMENT. THE
AUTHORITY AND POWER TO APPEAR FOR AND ENTER JUDGMENT AGAINST BORROWER SHALL NOT
BE EXHAUSTED BY ONE OR MORE EXERCISES THEREOF, OR BY ANY IMPERFECT EXERCISE
THEREOF, AND SHALL NOT BE EXTINGUISHED BY ANY JUDGMENT ENTERED PURSUANT THERETO;
SUCH AUTHORITY AND POWER MAY BE EXERCISED ON ONE OR MORE OCCASIONS FROM TIME TO
TIME, IN THE SAME OR DIFFERENT JURISDICTIONS, AS OFTEN AS LENDER SHALL DEEM
NECESSARY, CONVENIENT, OR PROPER.
38
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
as of the date first written above.
LENDER:
ATTEST: HCFP FUNDING, INC.
a Delaware corporation
By: By: /s/ Jeffrey P. Hoffman [SEAL]
---------------------------- ---------------------------
Name: Name: Jeffrey P. Hoffman
Title: Title: Vice President
BORROWER:
ATTEST: MEDICAL ASSET MANAGEMENT, INC.
a Delaware corporation
By: /s/ D. Kent Norton By: /s/ Charlie Underwood [SEAL]
---------------------------- ---------------------------
Name: D. Kent Norton Name: Charlie Underwood
Title: V.P. Title: Chief Financial Officer
ATTEST: HEALTHCARE PROFESSIONAL
MANAGEMENT, INC.
a Pennsylvania corporation
By: /s/ Arnold M. Neuman, M.D. By: /s/ Anthony F. Aulicino [SEAL]
---------------------------- ---------------------------
Name: Arnold M. Neuman Name: Anthony F. Aulicino
Title: Title: CEO
39
<PAGE>
LIST OF EXHIBITS
Exhibit A - Form of Revolving Credit Note
Exhibit B - Form of Lockbox Agreement
Exhibit C - Form of Legal Opinion
40
<PAGE>
LIST OF SCHEDULES
Schedule 1.36 - Permitted Liens
Schedule 4.1 - Subsidiaries
Schedule 4.5 - Litigation
Schedule 4.7 - Tax Identification Numbers
Schedule 4.13 - Non-Compliance with Law
Schedule 4.14 - Environmental Matters
Schedule 4.15 - Places of Business
Schedule 4.16 - Licenses
Schedule 4.17 - Stock Ownership
Schedule 4.19 - Borrowings and Guarantees
Schedule 4.21 - Trade Names
Schedule 4.22 - Joint Ventures
Schedule 7.12 - Transactions with Affiliates
41
<PAGE>
SCHEDULE 1.36
Permitted Liens
C. Jeffery Kessler, M.D., P.C. (Colorado)
Gynecology Ltd., P.C. (Colorado)
M. H. Melmed, M.D., P.C. (Colorado)
<PAGE>
SCHEDULE 4.1
Subsidiaries
None
<PAGE>
SCHEDULE 4.5
Litigation
CYNTHIA LATSKO KLUTZ ("KLUTZ") V. HEALTH PROFESSIONAL MANAGEMENT CORP.("HPM")
On or about August 30, 1995, Cynthia Latsko Klutz filed a civil action
against HPM, Inc. in Allegheny County, Pennsylvania, Court of Common Pleas.
Klutz alleges breach of contract and negligence arising in connection with HPM's
alleged obligation to seek out prospective buyer for the sale of plaintiff's
medical practice. Klutz seeks damages in excess of $25,000.
BRADLEY HALL, M.D., P.C. AND BRADLEY HALL, M.D. ("BRADLEY") V. MEDICAL ASSET
MANAGEMENT, INC. ("MAM"); HEALTHCARE PROFESSIONAL MANAGEMENT ("HPM"); AND GREGG
S. SOERGEL
On or about September 20, 1996, Bradley Hall, M.D., filed a civil action
against HPM, Inc., MAM, Inc., and Gregg Soergel filed in Allegheny County,
Pennsylvania, Court of Common Pleas. Bradley alleges breach of contract,
negligence, and misrepresentation arising in connection with HPM and MAM's
alleged obligation to perform their duty under the contract to detect and/or
report embezzlement of the plaintiffs' funds. Bradley seeks damages in excess of
$25,000, together with interest, costs and attorney fees.
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. ("MAM")
On or about June 26, 1997, Century City filed this demand for an
arbitration proceeding with the Los Angeles, California office of the American
Arbitration Association based upon an Asset Purchase and Clinic Management
Agreement dated February 1, 1993, between Century City and MAM. In its
arbitration demand against MAM, Century City alleged breach of contract, breach
of fiduciary duty, request for indemnification, and constructive fraud. Century
City has requested compensatory damages in the amount of $516,545, loss of
profits in the amount of $400,000, unspecified attorneys fees, and punitive
damages. One August 1, 1997 MAM filed a response and counterclaim against
Century City denying liability and asserting claims for material
misrepresentation and other causes of action. MAM has requested damages to
indemnify it for physician compensation, operating expenses, and management
fees. In addition, MAM has requested punitive damages, interest, attorneys fees
and costs. The parties are currently engaged in discovery, and based upon
matters discovered therein as well as managements knowledge and understanding of
the relevant facts and circumstances, MAM believes that Century City's claims
are without merit and has made no reserves for such.
<PAGE>
MEDICAL ASSET MANAGEMENT, INC. ("MAM") V. ARBOR FAMILY MEDICINE, P.C.; MEDICAL
ACQUISITION CORPORATION; SUZANNE NASH-TRUJILLO, M.D.; AND ALEXANDER G.
CIANFLONE, M.D., (COLLECTIVELY "ARBOR")
On or about August 15, 1977, MAM filed a demand for arbitration with the
Denver, Colorado office of the American Arbitration Association against Arbor
based upon the March 31, 1996, Asset Purchase Agreement and Management Services
Agreement between MAM and Arbor, in its demand, MAM requests the return of its
monies represented by accounts receivable in the approximate amount of $250,000;
that Arbor repurchase its furniture, fixtures, equipment and supplies in the
approximate amount of $130,000; that Arbor return 90,000 shares of MAM common
stock, that Arbor assume certain liabilities which it is obligated to assume,
and that Arbor repurchase real property in the amount of $360,000, plus interest
and costs. On or about September 1, 1997, Arbor filed an answer and counterclaim
alleging breach of contract and requesting approximately $140,000 in
reimbursement and the return of $80,000 in management fees paid MAM, as well as
interest and costs. MAM believes that Arbor's counterclaims are without merit
and has made no reserves for such.
RENTON FAMILY PRACTICE CENTER ("RENTON") V. MEDICAL ASSET MANAGEMENT, INC.
("MAM")
On or about August 1, 1997, Renton filed an unlawful detainer action in
King County, Washington Superior Court against MAM seeking approximately $13,000
in rent, attorneys fees, interest and costs. MAM, subsequently, consolidated
this action with numerous counterclaims against Renton, and claims against
entities owned or controlled by Renton's general partner, Manfred Laband, M.D.
The matter has been consolidated and calendared for trial in December 1998. MAM
believes it will prevail in its claim and has made no reserves for any
counterclaims of Renton.
MEDICAL ASSET MANAGEMENT, INC. ("MAM") V. ONE CAPITAL CORPORATION; MARCUS V. MAM
In these related matters, MAM 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. (Plaintiff,
Marcus, has filed the action against MAM in Denver County, Colorado Superior
Court, alleging breach of contract. MAM believes Plaintiff's allegations are
without merit. MAM's maximum exposure in the Colorado action is under $40,000
plus plaintiff's attorneys' fees.) In or about 1995, MAM and One Capital
Corporation entered into corporate advisory agreements wherein One Capital
Corporation represented that it would perform certain services for MAM in return
for certain fees, including stock options of MAM. One Capital Corporation has
brought various counterclaims against MAM in response to MAM's complaint. MAM
believes One Capital Corporation's counterclaims are without merit. MAM has
established no contingent reserve for these counterclaims. One Capital
Corporation has asked for specific performance and, in the alternative, damages.
In the event One Capital Corporation prevails in its counterclaims, the
agreement between MAM and One Capital Corporation provides for the sale of a
maximum of 375,000 shares of MAM common
<PAGE>
stock to One Capital Corporation at a 40 to 50 percent discount from fair market
value. Counterclaimants have also requested attorneys' fees.
NORMAN COHEN, M.D. ("COHEN") V. MEDICAL ASSET MANAGEMENT, INC. ("MAM")
Cohen and MAM entered into a settlement agreement, based upon certain
claims by Cohen, on July 17, 1997. Thereafter, on October 1, 1997, Cohen entered
a judgment against MAM in the amount of $181,250. MAM has reserved $182,000 for
the judgment.
WILLIAM SCHEYER ("SCHEYER") V. MEDICAL ASSET MANAGEMENT, INC. ("MAM")
In June 1997, Scheyer filed a claim for 10,000 shares of stock, and $80,575
for unpaid compensation with a King County, Washington arbitration association.
Scheyer also alleged unspecified damages for breach of alleged oral agreement,
together with a claim for interest and attorneys' fees. MAM plans to vigorously
defend these claims. MAM has asserted a counterclaim for payment of its
management fee and damages for breach of contract and violation of the
Washington Securities Act. The claims are expected to be submitted to
arbitration. MAM believes Scheyer's claims are without merit and has made no
reserves for such.
ROY MUSGROVE ("MUSGROVE") V. MEDICAL ASSET MANAGEMENT, INC. ("MAM")
The Musgrove action was settled on May 23, 1997, based on an action filed
in King County, Washington Superior Court. The material features of the
settlement include payment by MAM of $112,500 upon execution of the agreement
and $75,000 over 24 months, the issuance of 40,461 shares of MAM stock to
various shareholders of Lifestyle Academy, and the assumption of certain
obligations of Lifestyle Academy. The parties executed mutual releases. MAM may
assert a malpractice cause of action against its former counsel to recover some
of its losses in this case.
PICO COMMERCIAL CENTER PROPERTIES, A CALIFORNIA GENERAL PARTNERSHIP ("PICO")
V. MEDICAL ASSET MANAGEMENT, INC. ("MAM")
In this action filed in Los Angeles County, California Superior Court,
Pico alleges breach of contract and damages arising in connection with MAM's
alleged obligation to deliver 112,000 shares of its common stock in exchange for
Pico's conveyance to MAM of its interest in a certain long term hospital lease.
MAM, by way of defense, asserts that Pico did not fulfill certain conditions
precedent to MAM's obligations. Subsequently, the parties agreed upon the basic
terms of a settlement, under which MAM officers, Johns Regan and/or Kent Norton
individually, and not MAM, would convey to Pico 40,000 shares of MAM common
stock, restricted in accordance with SEC Rule 144. MAM would use its best
efforts to obtain "piggyback registration rights" for said shares and would pay,
by way of cash or additional stock, any shortfall between the ultimate
liquidated proceeds of the stock and the amount of $6.25 per share. The parties
are
<PAGE>
currently engaged in the process of negotiating details of the settlement. MAM
has not established a reserve for this matter.
CARL CANTRELL ("CANTRELL") V. MEDICAL ASSET MANAGEMENT, INC. ("MAM")
In or about July 1997, the California State Worker's Compensation Appeals
Board issued an Amended Findings and Award in favor of former MAM employee
Cantrell in the approximate amount of $45,000 for indemnity awards and
penalties.
<PAGE>
SCHEDULE 4.7
Tax Identification Numbers
Medical Asset Management, Inc. (33-03599760)
Healthcare Professional Management (25-1635922)
<PAGE>
SCHEDULE 4.13
Non-Compliance with Law
Other than filing with the SEC which MAM is currently in the process of
updating, MAM believes it is not in violation of any statute, rules or
regulation.
<PAGE>
SCHEDULE 4.14
Environmental Matters
None
<PAGE>
SCHEDULE 4.15
Places of Business
<PAGE>
MEDICAL ASSET MANAGEMENT, INC.
Steve Ward, Controller
Rocky Mountain Region
CORPORATE OFFICE 3773 Cherry Creek North Drive,
- ---------------- Suite 735
Denver, CO 80209
3651 Baseline, Suite 222
Gilbert, AZ 85234
Office: (602) 503-3131
FAX: (602) 503-3222
CALIFORNIA REGIONAL OFFICE
M&A and CFO
25241 Paseo de Alicia, Suite 230
Laguna Hills, CA 92653
OPERATIONS HEADQUARTERS Office: (714) 829-8333
(888) MAM-T555
Healthcare Professional Management
Four Station Square, Suite 250
Pittsburgh, PA 15219
<PAGE>
MERGERS & ACQUISITIONS
Jim Causey
Vice President of Mergers & Acquisitions
Pines Office Center
One Pines Court
St. Louis, MO 63141
<PAGE>
ALASKA CLINICS
FAMILY MEDICAL CLINIC OF SOLDOTNA
206 Rockwell Avenue
Soldotna, AK 99669
BRENT DAVIDSON, MD (IM)
FAMILY MEDICAL CLINIC OF SEWARD 60 North 13th Street
P.O. Box 2563 San Jose, CA 85112
302 Railway Avenue
Seward, AK 99669
AND
285 South Drive, Suite 3
Mountain View, CA 94040
Manager: Debi Salazar
ARIZONA CLINICS Business: (415) 968-4977
Back Office: (415) 968-4968
(415)968-4981 FAX: (415) 968-4981
BIRTH & WOMEN'S HEALTH CENTER
2529 North Wyatt SOUTH VALLEY CARDIOVASCULAR GROUP
Tucson, AZ 85712 173 North Morrison, Suite D
San Jose, CA 95126
RONALD H. YANAGIHARA, MD (HEM/ONC)
JERRY NEUMAN, MD 9360 No Name Uno, Suite 130
1500 N. Wilmot, Suite B-240 Gilroy, CA 95020
Tucson, AZ 85712
<PAGE>
PEDIATRIC UROLOGY & MALE INFERTILITY
18370 Burbank Boulevard, Suite 412
Tarzana, CA 91356
THE OB/GYN ASSOCIATES, PC
25 North 14th Street, Suite 540 BUSINESS OFFICE
San Jose, CA 95112 3773 Cherry Creek North Drive,
Suite 735
Denver, CO 80209
1610 N. El Dorado, Suite 10 AND
Stockton, CA 95204
POTOMAC OFFICE
1550 S. Potomac, Suite 330
Aurora, CO 80012
COLORADO CLINICS
7950 Kipling Street, Suite 200
Arvada, CO 80005 AND
ALCOTT OFFICE
8300 N. Alcott, Suite 300
Westminister, CO 80030
AND
3655 Lutheran Parkway, Suite 207
Wheat Ridge, CO 80033
<PAGE>
ROCKY MOUNTAIN WOMEN'S HEALTHCARE FLORIDA CLINICS
701 E. Hampden, Suite 110
Englewood, CO 80110 LAUREL OAK MEDICAL ASSOCIATES
418 SW 47th Terrace
Cape Coral, FL 33914
7180 E. Orchard Road, Suite 200
Englewood, CO 80111 IDAHO CLINICS
Fairview Medical Clinic, PA
4809 Fairview Avenue
Boise, ID 83706
9141 Grant Street, Suite 235
Thornton, CO 80229
MISSISSIPPI CLINICS
DESOTO FAMILY PRACTICE
WOODRIDGE WOMEN'S CLINIC, PC (RETIRED) 7163 Goodman Road
C/O 3773 Cherry Creek North Drive, Olive Branch, MS 38652
Suite 735
Denver, CO 80209
GYN, LTD.
320 East Fontanero Street
Colorado Springs, CO 80907
<PAGE>
OHIO CLINICS
PEDIATRIC ALLIANCE
PRIMARY CARE ASSOCIATES, PC
7355 California Avenue, Suite 4 BUTLER PEDIATRICS
Boardman, OH 44512 100 Evans Road, Suite A
Butler, PA 16001
PENNSYLVANIA CLINICS
MANOR OAK
MOUNTAIN SPRINGS MEDICAL ASSOCIATES 1910 Cochran Rd.
20 Nickman's Plaza Pittsburgh, PA 15220
Lemont Furnace, PA 15456
MT. LEBANON PEDIATRICS
603 Washington Road
COMMUNITY CARE PLUS Mt. Lebanon, PA 15228
2010 Kinvara Drive
Pittsburgh, PA 15237
NORTH HILLS PEDIATRICS
9104 Babcock Blvd., Suite 2111
Pittsburgh, PA 15237
AND
601 Monroe Ave.
Pittsburgh, PA 15202
<PAGE>
NORTHLAND PEDIATRICS CONTEMPORARY WOMEN'S HEALTH CARE
4721 McKnight Rd., Suite 209 N 435 Williams Avenue South
Pittsburgh, PA 15237 Renton, WA 98040
PEDIATRICS SOUTH
240 Mt. Lebanon Blvd.
Pittsburgh, PA 15234
AURORA FOOT & ANKLE
SOUTHWESTERN PEDIATRICS 7315 212th Street SW, Suite 103
51 Professional Plaza Edmonds, WA 98026
850 Clariton Plaza
Pittsburgh, PA 15236
ST. CLAIR PEDIATRICS WOODENVILLE DERMATOLOGY CLINIC
1580 McLaughlin Run Rd. 1700 140th Avenue, Suite 206
Pittsburgh, PA 15241 Woodenville, WA 98072
WASHINGTON CLINICS
Northwest Foot & Ankle
9730 3rd Avenue, NE Suite 208
Seattle, WA 98115
<PAGE>
SCHEDULE 4.16
Licenses
Medical Asset Management, Inc.
Business permits and qualified to do business in the following states:
Alaska, Arizona, California, Colorado, Mississippi, Tennessee, and Washington
Healthcare Professional Management Business permits and
qualified to do business in the following state:
Pennsylvania
<PAGE>
SCHEDULE 4.17
Stock Ownership
<PAGE>
<TABLE>
<CAPTION>
MEDICAL ASSET MANAGEMENT INC SHAREHOLDER LIST PAGE 8
AS OF 06/30/96 FORM: 10A
DATE: 07/10/97
TIME: 12:40:05
REGISTRATION ACCOUNT NO. TAXPAYER ID SERIES SHARES
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
STANLEY & TOBY HERZOFF MA 1042 ###-##-#### C 2,000
4240 FULTON AVE APT 307 -------
STUDIO CITY CA 91604 TOTAL 2,000
EDWARD P HESTIN MA 1035 R 108,333
108 SOUTHRIDGE DR -------
MONROEVILLE PA 15146 TOTAL 108,333
DAVID A & LINDA M HILL JT TEN MA0937 R 2,000
-------
TOTAL 2,000
LINDA HINERMAN 0753 C 1,429
1250 EMERY ST -------
SALT LAKE CITY UT 84104 TOTAL 1,429
MICHAEL J & PATRICIA A MA1004 ###-##-#### C 100
HOCHGESANG JTTEN -------
1339 MILLER LN TOTAL 100
JASPER IN 47546
CAROL RAE HOPF MA1076 ###-##-#### C 200
3229 N 500 W -------
JASPER IN 47546 TOTAL 200
RALPH S HOPF MA1077 ###-##-#### C 300
3229 N 500 W -------
JASPER IN 47546 TOTAL 300
JOHN P HOSINSKI MA1030 ###-##-#### C 100
1015 NEVILLE -------
JONEDBORO AR 72401 TOTAL 100
HARRY J JAFFE MA1040 ###-##-#### C 200
1827 ALLENBY GREEN -------
GERMANTOWN TN 38139 TOTAL 200
JDN PARTNERS LP MA1048 R 50,000
-------
TOTAL 50,000
PATRICIA D JENSEN 0754 C 1,429
3954 HIGHLAND DR -------
SALT LAKE CITY UT 84124 TOTAL 1,429
ROY & GENEVIEVE P JEPSEN JTTEN MA0955 ###-##-#### C 3,000
277 PASEO CHUREA -------
GREEN VALLEY AZ 85614 TOTAL 3,000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEDICAL ASSET MANAGEMENT INC SHAREHOLDER LIST PAGE 11
AS OF 06/30/96 FORM: 10A
DATE: 07/10/97
TIME: 12:44:52
REGISTRATION ACCOUNT NO. TAXPAYER ID SERIES SHARES
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DAVID F LIDDELL MA0961 R 25,000
DAVID F LIDDELL, MA, RPT, --------
INC, PS TOTAL 25,000
JUDY LOTAS MA1085 R 14,286
---------
TOTAL 14,286
IRENE S LUND 0761 C 1,429
529 A FIRST AVE ---------
SALT LAKE CITY UT 84103 TOTAL 1,429
DENNIS S & LAURIE J MANN JTTEN MA0965 R 11,300
---------
TOTAL 11,300
ERNEST & JAINE MCVOY MA0951 26-2455173 C 200
106 OLD WATERMILL RD ---------
RAINBOW CITY AL 35906 TOTAL 200
KEVIN C MEHRINGER MA0977 C 2,000
453 E STATE RD 164 ---------
JASPER IN 47546 TOTAL 2,000
SALLY MINARD MA1084 R 14,286
---------
TOTAL 14,286
WILLIAM MORETH MA0954 ###-##-#### C 200
1747 S CARRIAGE LN ---------
NEW BERLIN WI 53151 TOTAL 200
STEVEN MORTON 0764 C 1,429
3866 S 825 WEST ---------
BOUNTIFUL UT 84010 TOTAL 1,429
MARVIN NEIUWENDORP 0810 ###-##-#### C 100
230 N 7TH AVE ---------
SHELDON IA 51201 TOTAL 100
STANLEY G NEWELL DPM MA0966 R 64,200
---------
TOTAL 64,200
OB-GYN ASSOCIATES PC MA1015 84-0591950 R 146,000
11175 E MISSISSIPPI AVE STE 100 ---------
AURORA CO 80012 TOTAL 146,000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEDICAL ASSET MANAGEMENT INC SHAREHOLDER LIST PAGE 12
AS OF 06/30/96 FORM: 10A
DATE: 07/10/97
TIME: 12:44:53
REGISTRATION ACCOUNT NO. TAXPAYER ID SERIES SHARES
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ODESSA MANAGEMENT 0767 C 215,026
2ND FLOOR CITY BANK BUILD ---------
FREEPORT BAHAMAS TOTAL 215,026
PACIFIC INTER SECURITIES INC 0769 C 38,606
1500-700 W GEORGIA ST ---------
PO BOX 10015 TOTAL 38,606
VANCOUVER BC V7Y1J1
GEORGIA PACIFIC SEC. 0814 C 2,858
STE 1600 TWO BENTALL CENTRE ---------
555 BURRARD ST TOTAL 2,858
VANCOUVER BC V7XIS6
MR & MRS WILBUR PERRY MA0941 R 2,000
---------
TOTAL 2,000
WILBUR A & PATRICIA C PERRY JTTEN MA0970 R 2,000
---------
TOTAL 2,000
DANIEL S PERKINS TRUSTEE MA1062 R 5,000
UA DTD 5-12-88 FBO DANIEL S ---------
PERKINS
TOTAL 5,000
RICHARD W PERKINS TRUSTEE MA1070 R 15,000
UA DTD 6-14-78 FBO RICHARD W ---------
PERKINS
TOTAL 15,000
STEVE PERRY 0803 R 5,000
---------
TOTAL 5,000
PHILADELPHIA DEP 0771 C 396,754
1900 MARKET ST ---------
PHILADELPHIA PA 19103 TOTAL 396,754
SHARON PODOBNIK & SUSAN D MA1088 ###-##-#### C 155
PODOBNIK JTTEN
616 MILLER LN ---------
PITTSBURGH PA 15239 TOTAL 155
DANIEL & SUSAN D PODOBNIK JTTEN MA1089 ###-##-#### C 130
616 MILLER LN ---------
PITTSBURGH PA 15239 TOTAL 130
OZZIE POLIT 0792 R 2,000
---------
2,000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEDICAL ASSET MANAGEMENT INC SHAREHOLDER LIST PAGE 13
AS OF 06/30/96 FORM: 10A
DATE: 07/10/97
TIME: 12:44:54
REGISTRATION ACCOUNT NO. TAXPAYER ID SERIES SHARES
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PONTE VEDRE PARTNERS LTD MA1058 R 150,000
---------
TOTAL 150,000
CLYDE E PRECHTER MA0956 39-3052671 C 200
11137 WILLOW VALLEY RD ---------
NEVADA CA 95959 TOTAL 200
PRISM PARTNERS I MA1045 R 50,000
---------
TOTAL 50,000
PYRAMID PARTNERS LP MA1069 R 75,000
---------
TOTAL 75,000
WILLIAM F RAWLS MA0912 ###-##-#### C 150
BOX 593 ---------
INDIANOLA MS 38751 TOTAL 150
JOHN W REGAN & SANDRA K REGAN MA1028 R 5,146,094
JTTEN
---------
TOTAL 5,146,094
WILLARD D & NORENE V REGESTER MA0968 R 15,800
COM PROP
---------
15,800
REGENT CAPITAL PARTNERS MA1053 R 200,000
---------
TOTAL 200,000
MARIO S RODRIGUEZ 0773 C 2,002
1445 W ARAPAHOE AVE ---------
SALT LAKE CITY UT 84104 TOTAL 2,002
RONALD ROSENQUIST 0774 C 11,559
---------
TOTAL 11,559
THEODORE D ROTH MA1067 R 6,250
---------
TOTAL 6,250
DUANE J ROTH MA1068 R 6,250
---------
TOTAL 6,250
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEDICAL ASSET MANAGEMENT INC SHAREHOLDER LIST PAGE 14
AS OF 06/30/96 FORM: 10A
DATE: 07/10/97
TIME: 12:44:55
REGISTRATION ACCOUNT NO. TAXPAYER ID SERIES SHARES
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
WILLIAM M & KATHLEEN M ROWEKAMP MA0900 ###-##-#### C 4,000
JTTEN
BOX 828 ---------
JASPER IN 47546 TOTAL 4,000
MARILYN C RUSHTON 0775 C 2,858
1582 E 12700 S ---------
DRAPER UT 84020 TOTAL 2,858
STEPHAN C & CHRISTA M SCHULER MA0959 ###-##-#### C 200
858 BLESSINGER LN ---------
JASPER IN 47546 TOTAL 200
WILLIAM J & ZELDZ M SCHEYER MA0967 R 5,000
CO TRUST UTA 5/24/93 ---------
TOTAL 5,000
JOSEPH W & JEAN M SCHERER JTTEN MA1014 C 1,000
160 LEISIE RD ---------
RENFREW PA 16053 TOTAL 1,000
KENNETH W SCHMITT TR WILLIAM F MA0968 C 1,000
SCHMITT
3584 BITTERSWEET DR ---------
JASPER IN 47546 TOTAL 1,000
JAMES SEAY 0777 R 2,312
---------
TOTAL 2,312
THERON & HELEN SEEMANN JTTEN MA0930 ###-##-#### C 700
3106 HOWARD DR ---------
JASPER IN 47546 TOTAL 700
BRADLEY T & DEBRA K SEGER MA0933 ###-##-#### C 16,500
1986 EMILY ST ---------
JASPER IN 47546 TOTAL 16,500
ALBERT & ROSE SHAW MA1001 C 3,000
26 GORMLEY AVE ---------
MERRICK NY 11566 TOTAL 3,000
JAVAID SHEIKH MA0940 R 8,000
---------
TOTAL 8,000
SHELL PENSIONS TRUST LTD MA1054 R 150,000
---------
TOTAL 150,000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEDICAL ASSET MANAGEMENT INC SHAREHOLDER LIST PAGE 15
AS OF 06/30/96 FORM: 10A
DATE: 07/10/97
TIME: 12:44:56
REGISTRATION ACCOUNT NO. TAXPAYER ID SERIES SHARES
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
JAMES H SKILMAN CUST ANDREW J MA0949 ###-##-#### C 475
SKILMAN
1795 W 5TH AVE --------
JASPER IN 47546 TOTAL 475
JAMES H & CAROL J SKILLMAN JTTEN 0817 ###-##-#### C 100
1795 W FIFTH ST ---------
JASPER IN 47546 TOTAL 100
DENIS E & CAROLYN H SKOG JT TEN MA0922 ###-##-#### R 558
1609 2ND ST ---------
MARYSVILLE WA 98270 TOTAL 558
BLUE SKY DEVELOPMENT CO MA0911 C 1,000
10 MORRIS LN ---------
TEXARKANA TX 75503 TOTAL 1,000
GREGG S SOERGEL MA1034 R 108,333
140 PROSPECT ST ---------
PITTSBURGH PA 15211 TOTAL 108,333
SAMUEL & JULIA SPIGELMAN MA0980 R 48,800
5800 RAINBOW HILL RD ---------
LOS ANGELES CA TOTAL 48,800
SAMUEL SPIGELMAN MD MA1083 R 14,304
---------
TOTAL 14,304
SPRING POINT PARTNERS LP MA1046 R 50,000
---------
TOTAL 50,000
JOSEPH F STEURER MA0957 ###-##-#### C 500
404 REYLING DR ---------
JASPER IN 47546 TOTAL 500
ARNOLD M STEINMAN MA0964 ###-##-#### C 3,000
BOX 8006 ---------
PITTSBURGH PA 15216 TOTAL 3,000
FRANCIS R & ROYAL STERLING JT TEN MA0907 C 1,400
43 PLANTATION DR #A-104 ---------
VERO BEACH FL 32966 TOTAL 1,400
STORIE PARTNERS LP MA1059 R 250,000
---------
TOTAL 250,000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEDICAL ASSET MANAGEMENT INC SHAREHOLDER LIST PAGE 16
AS OF 06/30/96 FORM: 10A
DATE: 07/10/97
TIME: 12:44:58
REGISTRATION ACCOUNT NO. TAXPAYER ID SERIES SHARES
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
LOREN B & SHARON B STONE JTTEN MA1081 R 10,625
---------
TOTAL 10,625
LORELEI H TAMAYO MA0924 ###-##-#### R 558
12627 SE 307TH ST ---------
AUBURN WA 98092 TOTAL 558
RAYMOND L & MARGARET F TANNER MA1027 ###-##-#### C 300
JTTEN
450 N AVON RD ---------
MEMPHIS TN 38117 TOTAL 300
GERALD & ELLEN TARLOW MA1023 R 7,500
---------
TOTAL 7,500
JAY TEITELBAUM MA1056 R 5,600
---------
TOTAL 5,600
BROOKS TERRY MA0993 R 1,000
---------
TOTAL 1,000
RODGER S TERRY 0779 R 2,312
---------
TOTAL 2,312
MCKINLEY W THIGPEN MA0985 R 4,000
---------
TOTAL 4,000
PHILIP L THOMAS TR PL THOMAS MA0982 C 150,000
INC PROFIT SHARING TR ---------
TOTAL 150,000
THE TRAVELERS INDEMNITY COMPANY MA1057 R 650,000
---------
TOTAL 650,000
SUZANNE NASH - TRUJILLO, MD MA1091 R 22,500
---------
TOTAL 22,500
RAE S TSUKAMOTO MA0923 ###-##-#### R 558
12627 SE 307TH ST ---------
AUBURN WA 98092 TOTAL 558
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEDICAL ASSET MANAGEMENT INC SHAREHOLDER LIST PAGE 17
AS OF 06/30/96 FORM: 10A
DATE: 07/10/97
TIME: 12:44:59
REGISTRATION ACCOUNT NO. TAXPAYER ID SERIES SHARES
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TURNER-VISION INC MA1052 R 15,625
--------
TOTAL 15,625
CLARKE UNDERWOOD 0800 R 224,035
--------
TOTAL 224,035
MICHAEL C VALERIO MA1011 ###-##-#### C 700
6730 GLENN FAIRY --------
SAN ANTONIO TX 78239 TOTAL 700
BETTY VANDERSCHUUR 0783 C 1,429
4124 W 4835 S --------
SALT LAKE CITY UT 84118 TOTAL 1,429
PAUL VOYTIK MA0972 11-1111118 C 1,000
3760 MT HICKORY BLVD --------
HERMITAGE PA 16148 TOTAL 1,000
ROBERT E & ANNE E WADDELL 0815 ###-##-#### C 100
BOX 631 --------
JASPER IN 47546 TOTAL 100
PHILIP WADE 0801 R 11,659
--------
TOTAL 11,659
CORINNE K WALTER 0784 C 1,429
3130 S 4TH EAST --------
SALT LAKE CITY UT 84115 TOTAL 1,429
DAVID WANK 0796 R 2,000
--------
TOTAL 2,000
DARREN WARDLE MA1016 ###-##-#### R 15,125
7315 212TH ST SW#103 --------
EDMAIDS WA 98026 TOTAL 15,125
STEVEN J WARD CUST TIMOTHY S WARD MA1005 ###-##-#### C 1,050
14614 W 62ND PL --------
ARVADA CO 80004 TOTAL 1,050
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEDICAL ASSET MANAGEMENT INC SHAREHOLDER LIST PAGE 18
AS OF 06/30/96 FORM: 10A
DATE: 07/10/97
TIME: 12:48:10
REGISTRATION ACCOUNT NO. TAXPAYER ID SERIES SHARES
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
STEVEN WARD CUST SHELBY R WARD MA1006 ###-##-#### C 1,050
14614 W 62ND PL -------
ARVADA CO 80004 TOTAL 1,050
JOHN L WEAVER MA1074 ###-##-#### C 25
3358 STEIN RD -------
SHELBY OH 44875 TOTAL 25
JAMES H & PATRICIA A WEISHEIT MA0989 C 4,000
JTTEN
1804 N 350 W -------
JASPER IN 47546 TOTAL 4,000
DAVID R WEIR MA1071 R 6,250
-------
TOTAL 6,250
DAVE M WESTRUM MA1072 R 6,250
-------
TOTAL 6,250
MICHAEL WILKINSON MA1002 C 1,000
PO BOX 282 -------
CENTRAL CITY CO 80427 TOTAL 1,000
RICHARD S WINER & LYNN M WINER MA0925 R 2,000
TRUSTEES LIVING TRUST DATED -------
2/8/95
26834 W HOTSPRINGS PLACE TOTAL 2,000
CALABASAS HILLS CA 91301
ANTHONY WINER MA0944 R 2,000
-------
TOTAL 2,000
RAINER WUNDERLICH MA1051 R 3,500
-------
TOTAL 3,500
ROBERT E & MARGARET ZAIC 0798 R 2,000
-------
TOTAL 2,000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEDICAL ASSET MANAGEMENT INC SHAREHOLDER LIST PAGE 19
AS OF 06/30/96 FORM: 10A
DATE: 07/10/97
TIME: 12:48:10
REPORT SELECTION CRITERIA
- --------------------------
<S> <C>
CLASS : Both
SERIES : All
MIN. SHARES : 1
STATE : All
ENTITY : All
COMMON SERIES C SHARES SHAREHOLDERS
- --------------- ---------------------------------------
<S> <C> <C>
This Criteria 3,132,670 113
All Other 0 0
---------------------------------------
3,132,670 113
COMMON SERIES R SHARES SHAREHOLDERS
- --------------- ---------------------------------------
This Criteria 9,941,932 101
All Other 0 0
---------------------------------------
TOTALS 9,941,932 101
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEDICAL ASSET MANAGEMENT INC SHAREHOLDER LIST PAGE 1
AS OF 06/30/96 FORM: 10A
DATE: 07/10/97
TIME: 12:39:58
REGISTRATION ACCOUNT NO. TAXPAYER ID SERIES SHARES
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MICHELLE L ANDERS MA0997 C 100
1105 KINGS LN ------
MOON TWP PA 15108 TOTAL 100
MARION ANDERSON 0789 R 2,000
440 HARMONY DR ------
SEDONA AZ 86336 TOTAL 2,000
DAVID J ANDERSON 0727 C 2,858
343 UNIVERSITY VILLAGE ------
SALT LAKE CITY UT 84108 TOTAL 2,858
PATRICIA J APGOOD 0728 C 2,858
544 SOUTH SUNSET DR. ------
KAYVILLE UT 84037 TOTAL 2,858
ROY ASCANI 0729 C 2,858
324 11TH AVENUE ------
SALT LAKE CIY UT 84103 TOTAL 2,858
ASSOCIATED CAPITAL LP MA1047 R 237,500
------
237,500
ANTHONY F AULICINO MA1033 R 108,333
-------
108,333
MR & MRS PHILIP BACHELIS MA0945 R 2,000
-------
2,000
JAMIE L BACHELIS 0790 R 2,000
-------
TOTAL 2,000
PAUL BAKER MA0979 R 2,100
-------
TOTAL 2,100
MICHELLE BARELA 0730 C 1,429
303 N 12TH WEST -------
SALT LAKE CITY UT 84116 TOTAL 1,429
BBR CAPITAL LIMITED MA0973 C 175,000
-------
TOTAL 175,000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEDICAL ASSET MANAGEMENT INC SHAREHOLDER LIST PAGE 3
AS OF 06/30/96 FORM: 10A
DATE: 07/10/97
TIME: 12:40:00
REGISTRATION ACCOUNT NO. TAXPAYER ID SERIES SHARES
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CALVERT IRREVOCABLE TRUST MA0991 R 50,000
---------
TOTAL 50,000
J CALVERT BROTHERS MA0992 R 1,000
---------
TOTAL 1,000
PATTY A CALVERT MA1029 R 55,483
1021 MOSBY RD ---------
MEMPHIS TN 38116 TOTAL 55,483
MARY CALLICCHIO 0734 C 500
25 S GLENVIEW DR ---------
LOMARD IL 60148 TOTAL 500
DENNIS P CALVERT 0736 R 1,131,096
24772 MENDOCINO CT ---------
LAGUNA HILLS CA 92653 TOTAL 1,131,096
GENE CALVERT 0805 R 2,000
---------
TOTAL 2,000
PATRICIA CALVERT 0737 R 2,312
---------
TOTAL 2,312
ALEX E & JUDY CASTRACANE JTTEN MA1009 ###-##-#### C 500
139 PHILOMENA DR ---------
CORAOPOLIS PA 15108 TOTAL 500
CEDE & CO 0780 C 1,996,034
PO BOX 222 -----------
NY TOTAL 1,996,034
NY NY 10274
PEGGY CHASE 0740 C 2,858
935 W 1600 NORTH -----------
WEST BOUNTIFUL UT 84087 TOTAL 2,858
SHARON CHILES 0741 C 2,858
14594 S ROSE CANYON RD -----------
RIVERTON UT 84065 TOTAL 2,858
STEPHEN H CHILES 0742 C 2,858
14594 S ROSE CANYON RD -----------
RIVERTON UT 84065 TOTAL 2,858
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEDICAL ASSET MANAGEMENT INC SHAREHOLDER LIST PAGE 4
AS OF 06/30/96 FORM: 10A
DATE: 07/10/97
TIME: 12:40:01
REGISTRATION ACCOUNT NO. TAXPAYER ID SERIES SHARES
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHERRY CHRISTENSEN 0743 C 2,858
5654 S 625 E -------
MURRAY UT 84107 TOTAL 2,858
ALEXANDER G CIANFLONE, MD MA1090 R 22,500
-------
TOTAL 22,500
TIMOTHY J CLEARY TRUST UTA MA1038 R 4,000
12/25/94
-------
TOTAL 4,000
WILLIAM B CLUFF 0744 C 1,429
3839 HIGHLAND COVE #211 -------
SALT LAKE CITY UT 84106 TOTAL 1,429
CHARLES M COHN TTEE CHARLES COHN MA1017 36-2669784 C 500
& ASS
PROFIR SHARING TRUST -------
3230 TEMPLE LN TOTAL 500
WILMETTE IL 60091
HOLLY L COOMANS 0745 C 1,429
6043 TROWBRIDGE WAY -------
SALT LAKE CITY UT 84118 TOTAL 1,429
ERNEST & MARYANNE CUMBERLEDGE MA1003 C 200
JTTEN
437 BLUE BUFF RD -------
KING OF PRUSSIA PA 19406 TOTAL 200
MARY EILEEN & LEO G DANZER JTTEN MA1018 ###-##-#### C 10
5469 E JACKSON -------
DUBOIS IN 47527 TOTAL 10
LAVERN DAVIDHIZAR MA0946 R 41,000
206 ROCKWELL AVE -------
SOLDOTNA AK 99669 TOTAL 41,000
BRENT W DAVIDSON MD PC MA0969 R 3,000
-------
TOTAL 3,000
DAVID CAPITAL LP MA0983 R 65,000
-------
TOTAL 65,000
PHILIP J DEER JR 0791 R 4,000
-------
TOTAL 4,000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEDICAL ASSET MANAGEMENT INC SHAREHOLDER LIST PAGE 5
AS OF 06/30/96 FORM: 10A
DATE: 07/10/97
TIME: 12:40:02
REGISTRATION ACCOUNT NO. TAXPAYER ID SERIES SHARES
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
QUINTON DOBBINS MA0958 ###-##-#### C 1,000
5685 US 40 -------
GREENFIELD IN 46140 TOTAL 1,000
DENNIE R DXLEY II MA0996 C 200
GENERAL DELIVERY -------
MILLTOWN IN 47145 TOTAL 200
ELLIS LIMITED PARTNERSHIP MA1066 R 15,000
-------
TOTAL 15,000
H STEPHEN & BARBARA EPSTEIN MA0981 R 29,000
-------
TOTAL 29,000
JOHN M ERNST JR 0746 R 800
PO BOX 223 -------
FERDINAND IN 47532 TOTAL 800
JOSEPH D & PATRICA W FERRRONE MA1086 R 10,015
JTTEN
-------
TOTAL 10,015
RONALD FLEISHMAN 0825 R 2,000
-------
TOTAL 2,000
JERE T & JACQUELINE R FRONZA JT MA0927 ###-##-#### C 200
TEN -------
1500 MOUNT HOPE AVE TOTAL 200
POTTSVILLE PA 17901
DAVID A & JULIE M FUHS JTTEN MA0978 C 8,000
804 TURNBRIDGE CIR -------
NAPERVILLE IL 60540 TOTAL 8,000
STEVEN & JULIE FULD UTA FEB 21 0794 R 2,000
1994 -------
TOTAL 2,000
COSTANTINO & DONNA GALLO MA1026 R 100,000
TRUSTEES
UTA DATED 3/4/96 -------
TOTAL 100,000
ROBIN K GALLAGHER 0747 C 1,429
925 E CARNATION DR -------
SANDY UT 84070 TOTAL 1,429
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEDICAL ASSET MANAGEMENT INC SHAREHOLDER LIST PAGE 6
AS OF 06/30/96 FORM: 10A
DATE: 07/10/97
TIME: 12:40:03
REGISTRATION ACCOUNT NO. TAXPAYER ID SERIES SHARES
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
LESLIE J GARFIELD MA1044 ###-##-#### C 2,000
654 MADISON AVE STE 1507 -------
NY NY 10021 TOTAL 2,000
ELENOR GARDNER MA1087 R 20,000
-------
TOTAL 20,000
HENRY GELLIS MA1094 R 10,000
-------
TOTAL 10,000
DENA GENDUSA MA1063 R 6,250
-------
TOTAL 6,250
PAUL E GETTINGS JR & TS GETTINGS MA1039 R 2,000
JTTEN
-------
TOTAL 2,000
EDWARD L &HELEN M GIESLER JTTEN MA1043 ###-##-#### C 150
PO BOX 94 -------
IRELAND IN 47545 TOTAL 150
POLLY GILBERT 0806 C 4,624
-------
TOTAL 4,624
JULIA ANNE GILLIN 0795 R 2,000
-------
TOTAL 2,000
GLOBAL SECURITIES CORP 0748 C 8,000
PO BOX 11190 ROYAL TOWER -------
2900 - 1055 WEST GEORGIA ST TOTAL 8,000
VAN COUVER BC V6E 3R5
MURIEL & BARNEY GOLDSTEIN JTTEN MA1036 ###-##-#### C 200
-------
5215 BALBOA BLVD TOTAL 200
APT 304
ENCINO CA 91316
BARNEY & JUDITH GOLDSTEIN JTTEN MA1073 ###-##-#### C 1,000
2290 PACIFIC AVE -------
LONG BEACH CA 90806 TOTAL 1,000
LEE T GRIFO MA1082 ###-##-#### C 200
625 PAXINOSA AVE -------
EASTON PA 18042 TOTAL 200
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEDICAL ASSET MANAGEMENT INC SHAREHOLDER LIST PAGE 7
AS OF 06/30/96 FORM: 10A
DATE: 07/10/97
TIME: 12:40:04
REGISTRATION ACCOUNT NO. TAXPAYER ID SERIES SHARES
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ROSEMARY B HAGER MA1032 R 108,333
-------
TOTAL 108,333
WILLIAM J HALKO MA0932 ###-##-#### C 200
604 WALNUT ST -------
ASHLAND PA 17921 TOTAL 200
SAMUEL E & BETTY S HALL 0749 C 1,000
RFD 1 BOX 247 -------
JEFFERSON PA 15344 TOTAL 1,000
LORRAINE HALL 0750 C 1,429
2636 DUBLIN DR -------
SALT LAKE CITY UT 84119 TOTAL 1,429
ROGER HAMILTON MA1092 R 5,779
-------
TOTAL 5,779
STEVE HARRISON 0804 R 16,000
-------
TOTAL 16,000
SHARON L HARRIS 0812 C 1,500
525 E 86TH ST -------
NY NY 10028 TOTAL 1,500
PAUL L HASSFURTHER MA1024 ###-##-#### C 300
BOX 421 -------
JASPER IN 47546 TOTAL 300
THE HEART LAB OF SANTA CLARA MA1013 R 23,559
VALLEY INC -------
PROFIT SHARING PLAN FBO
COSTANINO TINO TOTAL 23,559
RICHARD N HEFFNER MA0935 ###-##-#### C 100
227 DAUPHIN ST -------
ENOLA PA 17025 TOTAL 100
TRACY HENSON 0751 C 1,429
3628 DESERT FOX CIR -------
KEARNS UT 84118 TOTAL 1,429
JAMES HERZOFF MA0943 R 7,400
CROWEL WEEDON & CO -------
TOTAL 7,400
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEDICAL ASSET MANAGEMENT INC SHAREHOLDER LIST PAGE 9
AS OF 06/30/96 FORM: 10A
DATE: 07/10/97
TIME: 12:40:07
REGISTRATION ACCOUNT NO. TAXPAYER ID SERIES SHARES
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BANK OF NEWPORT AS CUST MA0936 R 4,000
FBO: JEFFERY JOHNSON -------
TOTAL 4,000
ORANGE NAT BK CUST FBO: MA0971 R 2,000
JEFF JOHNSON IRA BPS:55931888a11 -------
TOTAL 2,000
JOSHUA CAPITAL PARTNERS LP MA1060 R 2,525
-------
TOTAL 2,525
HERMAN KAPLAN & SHIRLEY KAPLAN MA1050 R 1,750
-------
TOTAL 1,750
DAVID KIZOR 0757 R 2,312
-------
TOTAL 2,312
PAUL & DELORES KLAUS 0758 C 500
2055 SAWGRASS DR -------
APOPKA FL 32712 TOTAL 500
ALFRED H KLEISER MA1078 314932-3925 C 400
1323 GREEN ST -------
JASPER IN 47546 TOTAL 400
NORBERT KLUESNER MA0987 C 300
BOX 193 -------
DUBOIS IN 47527 TOTAL 300
GLENN j & KAREN K KNIES JTTEN MA1079 ###-##-#### C 500
4261 S170 E -------
HUNTINGBURG IN 47542 TOTAL 500
TIMOTHY R & YVONNE A KNIES JTTEN MA0903 C 1,000
1644 E WALNUT DR -------
HUNTINGBURG IN 47542 TOTAL 1,000
HOPE & CHAD KOBER MA0999 C 190
206 DELEWARE AVE -------
N VERSAILLES PA 15137 TOTAL 190
FRANK M KOERBER MA1055 R 10,000
-------
TOTAL 10,000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEDICAL ASSET MANAGEMENT INC SHAREHOLDER LIST PAGE 10
AS OF 06/30/96 FORM: 10A
DATE: 07/10/97
TIME: 12:44:51
REGISTRATION ACCOUNT NO. TAXPAYER ID SERIES SHARES
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
JEROME KOSSOFF AND
MAXINE KOSSOFF MA1061 R 6,250
-------
TOTAL 6,250
AMY KOSSOFF MA1064 R 6,250
-------
TOTAL 6,250
DAVID KOSSOFF MA1065 R 6,250
-------
TOTAL 6,250
MARK F KRESS MA1008 ###-##-#### C 200
1321 BRIARCLIFF -------
JASPER IN 47546 TOTAL 200
MARK F KRESS CUST MA1020 ###-##-#### C 1,130
KEASHA M KRESS -------
1321 BRIARCLIFF TOTAL 1,130
JASPER IN 47546
RICHARD F KUNKEL 0821 ###-##-#### C 4,000
725 UNIVERSITY DR -------
JASPER IN 47546 TOTAL 4,000
GREGORY W KUPER & DEBORAH A MA0906 ###-##-#### C 600
HUPER JTTEN
1393 EMILY -------
JASPER IN 47546 TOTAL 600
SCOTT D LEAVITT 0760 C 1,429
1582 E 12700 S -------
DRAPER UT 84020 TOTAL 1,429
RODGER LEE & JOAN H LEE MA1049 R 3,500
-------
TOTAL 3,500
KENNETH W & CAROL J LEINENBACH MA1075 ###-##-#### C 200
JTTEN
BOX 121 -------
IRELAND IN 47545 TOTAL 200
RAY & SALLEY LEIVA 0813 ###-##-#### C 500
1206 FULLERTON AVE -------
CORONA CA 91719 TOTAL 500
</TABLE>
<PAGE>
SCHEDULE 4.19
Borrowings & Guarantees
<PAGE>
Medical Asset Management, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
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:
1996 1995
(Unaudited) (Uaudited)
----------- ---------
Revenue $12,608,758 $14,833,235
Net loss (5,516,496) (1,030,025)
Net loss per share (.42) (.10)
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.
18
<PAGE>
Medical Asset Management, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
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 $1,511,190 $391,606
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.
Mortgage payable to a bank, 300,513 -
collateralized by a building, with a net
book value of $510,000 interest at 10%
with monthly payments of $3,270 to 2011
Unsecured note payable to a finance 500,000 -
company with interest at 7.9%, and
monthly payments of $15,550 to 1999
Note payable to a computer software 737,500 -
vendor, interest at 10%, $600,000 due in
1998, remainder in 1999, collateralized
by software licenses with a net book
value of $1,237,604
Capital lease obligations, varying 534,734 175,241
interest rates not exceeding 26.5%, with
various due dates through 2001 and
collateraliized by equipment
Other 110,350 37,898
------- ------
3,694,287 604,745
1,393,399 21,898
Less current portion --------- ------
$2,300,888 $582,847
========== ========
</TABLE>
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
<PAGE>
SCHEDULE 4.21
Trade Names
None
<PAGE>
SCHEDULE 4.22
Joint Ventures
None
<PAGE>
SCHEDULE 7.12
Transactions with Affiliates
None
EXHIBIT 10.12
REVOLVING CREDIT NOTE
$2,500,000.00 November 12, 1997
For value received, the undersigned, MEDICAL ASSET MANAGEMENT, INC., a
Delaware corporation and HEALTHCARE PROFESSIONAL MANAGEMENT, INC., a
Pennsylvania corporation (collectively, "Borrower"), jointly and severally
promise to pay, in lawful money of the United States, to the order of HCFP
FUNDING, INC., a Delaware corporation ("Lender"), the principal sum of Two
Million Five Hundred Thousand and No/100 Dollars ($2,500,000.00), or so much
thereof as shall be advanced or readvanced and shall remain unpaid under the
Loan established pursuant to that certain Loan and Security Agreement of even
date with this Note by and among the undersigned and Lender (the "Loan
Agreement"), plus interest on the unpaid balance thereof, computed on a 360-day
basis, at the rate per annum that is set forth in the Loan Agreement. All
capitalized terms used, and not otherwise specifically defined, in this
Revolving Credit Note ("Note") shall have the meanings ascribed to them in the
Loan Agreement.
This Note shall evidence the undersigned's obligation to repay all sums
advanced by Lender from time to time under and as part of the Loan. The actual
amount due and owing from time to time under this Note shall be evidenced by
Lender's records of receipts and disbursements with respect to the Loan, which
shall be conclusive evidence of that amount, absent manifest error.
Interest hereon shall be payable monthly, in arrears, on the first
Business Day of each month hereafter (for the previous month). For purposes of
this Note, a "Business Day" shall mean any day on which banks are open for
business in Maryland, excluding Saturdays and Sundays.
This Note shall become due and payable upon the earlier to occur of (i)
the expiration of the Term, or (ii) any Event of Default under the Loan
Agreement, or any other event under any other Loan Documents which would result
in this Note becoming due and payable. At such time, the entire principal
balance of this Note and all other fees, costs and expenses, if any, shall be
due and payable in full. Lender shall then have the option at any time and from
time to time to exercise all of the rights and remedies set forth in this Note
and in the other Loan Documents, as well as all rights and remedies otherwise
available to Lender at law or in equity, to collect the unpaid indebtedness
under this Note and the other Loan Documents. This Note is secured by the
Collateral, as defined in and described in the Loan Agreement.
Whenever any principal and/or interest and/or fee under this Note shall
not be paid when due, whether at the stated maturity or by acceleration,
interest on such unpaid amounts shall thereafter be payable at a rate per annum
equal to five percentage points above the stated rate of interest on this Note
until such amounts shall be paid.
<PAGE>
The undersigned and Lender intend to conform strictly to the applicable
usury laws in effect from time to time during the term of the Loan. Accordingly,
if any transaction contemplated hereby would be usurious under such laws, then
notwithstanding any other provision hereof: (a) the aggregate of all interest
that is contracted for, charged, or received under this Note or under any other
Loan Document shall not exceed the maximum amount of interest allowed by
applicable law, and any excess shall be promptly credited to the undersigned by
Lender (or, to the extent that such consideration shall have been paid, such
excess shall be promptly refunded to the undersigned by Lender); (b) neither the
undersigned nor any other Person (as defined in the Loan Agreement) now or
hereafter liable hereunder shall be obligated to pay the amount of such interest
to the extent that it is in excess of the maximum interest permitted by
applicable law; and (c) the effective rate of interest shall be reduced to the
Highest Lawful Rate (as defined in the Loan Agreement). All sums paid, or agreed
to be paid, to Lender for the use, forbearance, and detention of the debt of
Borrower to Lender shall, to the extent permitted by applicable law, be
allocated throughout the full term of this Note until payment is made in full so
that the actual rate of interest does not exceed the Highest Lawful Rate in
effect at any particular time during the full term thereof If at any time the
rate of interest under the Note exceeds the Highest Lawful Rate, the rate of
interest to accrue pursuant to this Note shall be limited, notwithstanding
anything to the contrary herein, to the Highest Lawful Rate, but any subsequent
reductions in the Base Rate shall not reduce the interest to accrue pursuant to
this Note below the Highest Lawful Rate until the total amount of interest
accrued equals the amount of interest that would have accrued if a varying rate
per annum equal to the interest rate under the Note had at all times been in
effect. If the total amount of interest paid or accrued pursuant to this Note
under the foregoing provisions is less than the total amount of interest that
would have accrued if a varying rate per annum equal to the interest rate under
this Note had been in effect, then the undersigned agrees to pay to Lender an
amount equal to the difference between (a) the lesser of (i) the amount of
interest that would have accrued if the Highest Lawful Rate had at all times
been in effect, or (ii) the amount of interest that would have accrued if a
varying rate per annum equal to the interest rate under the Note had at all
times been in effect, and (b) the amount of interest accrued in accordance with
the other provisions of this Note and the Loan Agreement.
This Note is the "Note" referred to in the Loan Agreement, and is issued
pursuant thereto. Reference is made to the Loan Agreement for a statement of the
additional rights and obligations of the undersigned and Lender. In the event of
any conflict between the terms hereof and the terms of the Loan Agreement, the
terms of the Loan Agreement shall prevail. All of the terms, covenants,
provisions, conditions, stipulations, promises and agreements contained in the
Loan Documents to be kept, observed and/or performed by the undersigned are made
a part of this Note and are incorporated herein by this reference to the same
extent and with the same force and effect as if they were fully set forth
herein, and the undersigned promises and agrees to keep, observe and perform
them or cause them to be kept, observed and performed, strictly in accordance
with the terms and provisions thereof.
Each party liable hereon in any capacity, whether as maker, endorser,
surety, guarantor or otherwise, (i) waives presentment for payment, demand,
protest and notice of presentment, notice
2
<PAGE>
of protest, notice of non-payment and notice of dishonor of this debt and each
and every other notice of any kind respecting this Note and all lack of
diligence or delays in collection or enforcement hereof, (ii) agrees that Lender
and any subsequent holder of this Note, at any time or times, without notice to
the undersigned or its consent, may grant extensions of time, without limit as
to the number of the aggregate period of such extensions, for the payment of any
principal, interest or other sums due hereunder, (iii) to the extent permitted
by law, waives all exemptions under the laws of the State of Maryland and/or any
state or territory of the United States, (iv) to the extent permitted by law,
waives the benefit of any law or rule of law intended for its advantage or
protection as an obliger hereunder or providing for its release or discharge
from liability hereon, in whole or in part, on account of any facts or
circumstances other than full and complete payment of all amounts due hereunder,
and (v) agrees to pay, in addition to all other sums of money due, all cost of
collection and attorney's fees, whether suit be brought or not, if this Note is
not paid in full when due, whether at the stated maturity or by acceleration.
No waiver by Lender or any subsequent holder of this Note of any one or
more defaults by the undersigned in the performance of any of its obligations
hereunder shall operate or be construed as a waiver of any future default or
defaults, whether of a like or different nature. No failure or delay on the part
of Lender in exercising any right, power or remedy under this Note (including,
without limitation, the right to declare this Note due and payable) shall
operate as a waiver thereof, nor shall any single or partial exercise of any
such right, power or remedy preclude any other or further exercise thereof or
the exercise of any other right, power or remedy.
If any term, covenant or condition of this Note, or the application of
such term, covenant or condition to any party or circumstance shall be found by
a court of competent jurisdiction to be, to any extent, invalid or
unenforceable, the remainder of this Note and the application of such term,
covenant, or condition to parties or circumstances other than those as to which
it is held invalid or unenforceable, shall not be affected thereby, and each
term, covenant or condition shall be valid and enforced to the fullest extent
permitted by law. Upon determination that any such term is invalid, illegal or
unenforceable, the undersigned shall cooperate with Lender to amend this Note so
as to effect the original intent of the parties as closely as possible in an
acceptable manner.
No amendment, supplement or modification of this Note nor any waiver of
any provision hereof shall be made except in writing executed by the party
against whom enforcement is sought.
This Note shall be binding upon the undersigned and its successors and
assigns. Notwithstanding the foregoing, the undersigned may not assign any of
its rights or delegate any of its obligations hereunder without the prior
written consent of Lender, which may be withheld in its sole discretion.
THIS NOTE IS TO BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS
OF THE STATE OF MARYLAND WITHOUT RESPECT TO ANY
3
<PAGE>
OTHERWISE APPLICABLE CONFLICTS-OF-LAWS PRINCIPLES, BOTH AS TO INTERPRETATION AND
PERFORMANCE, AND THE PARTIES EXPRESSLY CONSENT AND AGREE TO THE NON-EXCLUSIVE
JURISDICTION OF THE COURTS OF THE STATE OF MARYLAND AND THE UNITED STATES
DISTRICT COURT FOR THE DISTRICT OF MARYLAND AND TO THE LAYING OF VENUE IN THE
STATE OF MARYLAND, WAIVING ALL CLAIMS OR DEFENSES BASED ON LACK OF PERSONAL
JURISDICTION, IMPROPER VENUE, INCONVENIENT FORUM OR THE LIKE. BORROWER HEREBY
CONSENTS TO SERVICE OF PROCESS BY MAILING A COPY OF THE SUMMONS TO BORROWER, BY
CERTIFIED OR REGISTERED MAIL, POSTAGE PREPAID, TO BORROWER'S ADDRESS SET FORTH
IN SECTION 9.4 OF THE LOAN AGREEMENT. BORROWER FURTHER WAIVES ANY CLAIM FOR
CONSEQUENTIAL DAMAGES IN RESPECT OF ANY ACTION TAKEN OR OMITTED TO BE TAKEN BY
LENDER IN GOOD FAITH.
THE UNDERSIGNED HEREBY (A) COVENANTS AND AGREES NOT TO ELECT A TRIAL BY
JURY OF ANY ISSUE TRIABLE OF RIGHT BY A JURY, AND (B) WAIVES ANY RIGHT TO TRIAL
BY JURY FULLY TO THE EXTENT THAT ANY SUCH RIGHT SHALL NOW OR HEREAFTER EXIST.
THIS WAIVER OF RIGHT TO TRIAL BY JURY IS GIVEN KNOWINGLY AND VOLUNTARILY BY THE
UNDERSIGNED, AND THIS WAIVER IS INTENDED TO ENCOMPASS INDIVIDUALLY EACH INSTANCE
AND EACH ISSUE AS TO WHICH THE RIGHT TO A JURY TRIAL WOULD OTHERWISE ACCRUE.
LENDER IS HEREBY AUTHORIZED AND REQUESTED TO SUBMIT THIS NOTE TO ANY COURT
HAVING JURISDICTION OVER THE SUBJECT MATTER AND THE PARTIES HERETO, SO AS TO
SERVE AS CONCLUSIVE EVIDENCE OF THE UNDERSIGNED'S WAIVER OF THE RIGHT TO JURY
TRIAL. FURTHER, THE UNDERSIGNED HEREBY CERTIFIES THAT NO REPRESENTATIVE OR AGENT
OF LENDER (INCLUDING LENDER'S COUNSEL) HAS REPRESENTED, EXPRESSLY OR OTHERWISE,
TO ANY BORROWER THAT LENDER WILL NOT SEEK TO ENFORCE THIS WAIVER OF RIGHT TO
JURY TRIAL PROVISION.
THE UNDERSIGNED HEREBY AUTHORIZES ANY ATTORNEY ADMITTED TO PRACTICE BEFORE
ANY COURT OF RECORD IN THE UNITED STATES OR THE CLERK OF SUCH COURT TO APPEAR ON
BEHALF OF THE UNDERSIGNED IN ANY COURT IN ONE OR MORE PROCEEDINGS, OR BEFORE ANY
CLERK THEREOF OF PROTHONOTARY OR OTHER COURT OFFICIAL, AND TO CONFESS JUDGMENT
AGAINST THE UNDERSIGNED IN FAVOR OF LENDER IN THE FULL AMOUNT DUE ON THIS NOTE
INCLUDING PRINCIPAL, ACCRUED INTEREST AND ANY AND ALL CHARGES, FEES AND COSTS)
PLUS ATTORNEYS' FEES EQUAL TO FIFTEEN PERCENT (15%) OF THE AMOUNT DUE, PLUS
COURT COSTS, ALL WITHOUT PRIOR NOTICE OR OPPORTUNITY OF BORROWER FOR PRIOR
HEARING. THE UNDERSIGNED AGREES AND CONSENTS THAT VENUE AND JURISDICTION SHALL
BE PROPER IN THE CIRCUIT COURT OF ANY COUNTY OF THE STATE OF MARYLAND OR OF
BALTIMORE CITY, MARYLAND,
4
<PAGE>
OR IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MARYLAND. THE
UNDERSIGNED WAIVES THE BENEFIT OF ANY AND EVERY STATUTE, ORDINANCE, OR RULE OF
COURT WHICH MAY BE LAWFULLY WAIVED CONFERRING UPON BORROWER ANY RIGHT OR
PRIVILEGE OF EXEMPTION, HOMESTEAD RIGHTS, STAY OF EXECUTION, OR SUPPLEMENTARY
PROCEEDINGS, OR OTHER RELIEF FROM THE ENFORCEMENT OR IMMEDIATE ENFORCEMENT OF A
JUDGMENT OR RELATED PROCEEDINGS ON A JUDGMENT. THE AUTHORITY AND POWER TO APPEAR
FOR AND ENTER JUDGMENT AGAINST THE UNDERSIGNED SHALL NOT BE EXHAUSTED BY ONE OR
MORE EXERCISES THEREOF, OR BY ANY IMPERFECT EXERCISE THEREOF, AND SHALL NOT BE
EXTINGUISHED BY ANY JUDGMENT ENTERED PURSUANT THERETO; SUCH AUTHORITY AND POWER
MAY BE EXERCISED ON ONE OR MORE OCCASIONS FROM TIME TO TIME, IN THE SAME OR
DIFFERENT JURISDICTIONS, AS OFTEN AS LENDER SHALL DEEM NECESSARY, CONVENIENT, OR
PROPER.
5
<PAGE>
IN WITNESS WHEREOF, the undersigned have caused their authorized officers
to execute this Note as of the date first above written.
BORROWER:
ATTEST: MEDICAL ASSET MANAGEMENT, INC.
a Delaware corporation
By: /s/ D. Kent Norton By: /s/ C. Underwood [SEAL]
---------------------- -------------------------
Name: D. Kent Norton Name: Clarke Underwood
Title: V.P. Title: Chief Financial Officer
ATTEST: HEALTHCARE PROFESSIONAL
MANAGEMENT, INC.
a Pennsylvania corporation
By: /s Arnold M. Neuuman By: [SEAL]
---------------------- ------------------------
Name: Name: Anthony F. Aulicino
Title: Title Sr. Vice President
6
EXHIBIT 21
EXHIBIT 21
SUBSIDIARIES OF MEDICAL ASSET MANAGEMENT, INC.
Healthcare Professional Management, Inc., a Pennsylvania corporation
<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>
