<PAGE>
<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 29, 1996
REGISTRATION NO. 33-80731
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PHYSICIAN SUPPORT SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 7374 13-3624081
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
ROUTE 230 AND EBY-CHIQUES ROAD
MT. JOY, PENNSYLVANIA 17552
(717) 653-5340
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
HAMILTON F. POTTER III
EXECUTIVE VICE PRESIDENT AND CHIEF OPERATING AND FINANCIAL OFFICER
P.O. BOX 127
LANDISVILLE, PENNSYLVANIA 17538
(717) 653-5340
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C>
SCOTT F. SMITH, ESQ. JOHN J. SCHUSTER, ESQ.
HOWARD, DARBY & LEVIN CAHILL GORDON & REINDEL
1330 AVENUE OF THE AMERICAS 80 PINE STREET
NEW YORK, NEW YORK 10019 NEW YORK, NEW YORK 10005
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
________________________________________________________________________________
<PAGE>
<PAGE>
PHYSICIAN SUPPORT SYSTEMS, INC.
CROSS-REFERENCE SHEET
<TABLE>
<CAPTION>
ITEM NUMBER AND HEADING IN FORM S-1 CAPTION OR LOCATION IN PROSPECTUS
----------------------------------------------------------------------- --------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and Outside Front Cover Page of
Prospectus........................................................... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of Prospectus................ Inside Front and Outside Back Cover
Pages of Prospectus
3. Summary Information, Risk Factors and Ratio of Earnings to Fixed
Charges.............................................................. Prospectus Summary; The Company; Risk
Factors
4. Use of Proceeds........................................................ Use of Proceeds; Business --
Acquisitions
5. Determination of Offering Price........................................ Underwriting
6. Dilution............................................................... Dilution
7. Selling Security Holders............................................... *
8. Plan of Distribution................................................... Underwriting
9. Description of Securities to be Registered............................. Outside Front Cover Page of
Prospectus; Description of Capital
Stock
10. Interests of Named Experts and Counsel................................. *
11. Information with Respect to the Registrant............................. Outside Front Cover Page; The Company;
Risk Factors; Dividend Policy;
Capitalization; Selected Financial
and Pro Forma Data; Management's
Discussion and Analysis of Financial
Condition and Results of Operations;
Business; Management; Principal
Stockholders; Certain Transactions;
Description of Capital Stock; Shares
Eligible for Future Sale; Financial
Statements
12. Disclosure of Commission Position on Indemnification for Securities Act
Liabilities.......................................................... *
</TABLE>
- ------------
* Item is inapplicable or response thereto is in the negative.
<PAGE>
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION, OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JANUARY 29, 1996
3,000,000 SHARES
PHYSICIAN SUPPORT SYSTEMS, INC.
COMMON STOCK
[LOGO]
------------------------
All of the 3,000,000 shares of Common Stock offered hereby are being
offered by Physician Support Systems, Inc. (together with its wholly owned
subsidiaries 'PSS' or the 'Company'). Prior to this offering (the 'Offering'),
there has been no public market for the Common Stock of the Company.
Approximately $11.5 million and $11.1 million of the net proceeds of the
Offering will be used, respectively, to acquire certain businesses and to repay
certain indebtedness. It is currently anticipated that the initial public
offering price of the Common Stock will be between $9.00 and $11.00 per share.
See 'Underwriting' for a discussion of the factors to be considered in
determining the initial public offering price. The Common Stock has been
approved for quotation, subject to official notice of issuance, on the Nasdaq
National Market under the symbol 'PHSS.'
Upon completion of the Offering, the Company's directors, officers and
principal stockholders, and certain affiliates, will beneficially own
approximately 41.6% of the outstanding shares of Common Stock (without giving
effect to the over-allotment option). See 'Risk Factors -- Control by Existing
Stockholders; Benefits of Offering to Existing Stockholders.'
------------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE 'RISK FACTORS' ON PAGES 6-9.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
<CAPTION>
<S> <C> <C> <C>
Per Share.......................................... $ $ $
Total(3)........................................... $ $ $
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See 'Underwriting.'
(2) Before deducting expenses, payable by the Company, estimated at $800,000.
(3) The Company has granted the Underwriters a 30-day option to purchase an
aggregate of up to 450,000 additional shares of Common Stock on the same
terms and conditions as set forth above solely to cover over-allotments, if
any. If such option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions and Proceeds to Company will be
$ , $ and $ , respectively. See 'Underwriting.'
------------------------
The shares of Common Stock are offered by the several Underwriters named
herein, subject to prior sale, when, as and if accepted by them and subject to
certain conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected
that the certificates for the shares of Common Stock will be available for
delivery at the offices of Volpe, Welty & Company, One Maritime Plaza, San
Francisco, California, on or about , 1996.
VOLPE, WELTY & COMPANY
The date of this Prospectus is , 1996.
<PAGE>
<PAGE>
[Logo]
[Map]
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements and Notes thereto
appearing elsewhere in this Prospectus. Prospective investors should consider
carefully the information discussed under 'Risk Factors.' Except as otherwise
indicated, all information in this Prospectus (i) has been adjusted to give
effect to an increase in the number of authorized shares of common stock from
5,000 to 100,000,000 and a change in the par value of common stock from $.01 to
$.001 per share (the 'Common Stock'), to be effective prior to the completion of
the Offering, (ii) has been adjusted to reflect the 1,400-for-one stock split
with respect to the Common Stock that will occur prior to completion of the
Offering and (iii) assumes no exercise of the Underwriters' over-allotment
option.
THE COMPANY
PSS is a leading provider of business management services to
hospital-affiliated physicians in an array of practice settings, including solo
and group practices, independent practice associations ('IPAs'), specialty
networks and other affiliated-physician groups (such physicians and groups being
referred to in this Prospectus as 'Physicians'). The Company offers its clients
a broad variety of business management services, ranging from accounts
receivable management to financial, administrative and strategic support, data
management and information systems support. In addition, the Company employs its
proprietary technology and extensive financial and patient encounter databases
to provide a comprehensive range of managed care services to its clients,
including contract review and negotiation, implementation and administration,
thereby enhancing their ability to profitably participate in managed care
systems. The Company's services enable Physicians to maintain their independence
and clinical autonomy while maximizing their reimbursement and cashflow. The
Company believes that it is one of the largest providers of business management
services to Physicians.
Physicians continue to experience increasing pressure on fees coupled with
a growing complexity in obtaining reimbursement from third party payors. In
addition, the growth of managed care has fostered the need by Physicians for
reliable health care resource utilization data, which is critical in every phase
of the physician-payor relationship. Given these and other market forces, the
Company believes that there is an increasing need among Physicians for
sophisticated business management services and information systems provided on
an outsourced basis. The Company believes that the business management services
industry is highly fragmented, with services often provided to physicians by
smaller accounts receivable management companies. These organizations are unable
to provide the broad range of services provided by the Company due to their
limited capital and management resources and their less comprehensive patient
encounter databases. The Company believes that, as managed care becomes more
prevalent, and as physicians continue to demand greater sophistication, broader
product lines and higher service levels, these smaller service providers will
find it increasingly difficult to compete.
The Company currently provides service to over 2,000 physicians, including
radiologists, anesthesiologists, pathologists and emergency room physicians, as
well as other specialists, many of whom are affiliated with some form of group
practice, IPA or other specialty network. The Company intends to continue
utilizing its experience in working with Physicians in a number of different
practice settings by acquiring and managing various types of specialty networks.
For example, the Company manages what it believes is the oldest and largest IPA
in the United States, with over 340 physicians. In addition, with its
acquisition of a Cleveland-based company, planned to occur simultaneously with
the Offering, the Company believes that it will become a leader in the
formation, development and management of management service organizations
('MSOs'). For its services, the Company generally is compensated with a
management fee based upon a percentage of its clients' net collections, which
percentage is determined after considering a broad range of factors, including
the medical specialty of the client and the nature of the services to be
provided. In most cases, the Company enters into written contracts with its
clients, which range in duration from month-to-month to five years and renew
automatically unless notice to the contrary is given. The agreements describe in
general the nature of the services to be provided and the management fee to be
charged by the Company. As of November 30, 1995, the Company experienced client
retention (as measured by the continuation of written contracts in existence at
the end of 1994) of approximately 95% of those clients to which it provided
services at the end of 1994.
3
<PAGE>
<PAGE>
The Company's strategy is to build upon its reputation and expertise in
providing a broad range of cost-effective, value-added business management
services to Physicians through internal growth and by acquisition. The specific
elements of the Company's strategy include (i) providing a high level of
customer service on a local level while utilizing cost-effective centralized
processing centers, (ii) offering an increasingly broad array of value-added
services, such as IPA and MSO services, that address the changing health care
environment, (iii) continuing to focus on technological means of increasing
Physician revenue by expanding and developing proprietary software systems,
patient encounter databases, statistical reporting systems and electronic data
interfaces, (iv) expanding geographically through acquisition opportunities in
the consolidating physician business management services industry and (v)
cross-selling its services to other medical specialties.
The Company has entered into agreements to acquire (the 'Acquisitions')
simultaneously with the Offering, three businesses, one of which consists of
three affiliated companies (all of such businesses being referred to
collectively as the 'Acquired Businesses'), currently providing business
management services to Physicians. The Offering is contingent on the
Acquisitions being completed simultaneously with the Offering. After giving
effect to the Acquisitions, the total number of physicians served by the Company
will increase to over 2,500. PSS believes that each of the Acquired Businesses
operates in a manner consistent with the Company's core business strategy and
gives it the opportunity to provide its services to Physicians in other regions
of the United States.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company................ 3,000,000 shares(1)
Common Stock to be outstanding after the
Offering......................................... 5,240,000 shares(1)(2)
Use of proceeds.................................... Pending and future acquisitions; repayment of debt; redemption of
preferred stock; working capital and other general corporate
purposes.
Proposed Nasdaq National Market symbol............. PHSS
</TABLE>
- ------------
(1) Does not include up to an aggregate 450,000 shares of Common Stock that may
be sold by the Company pursuant to the Underwriters' over-allotment option.
See 'Underwriting.'
(2) Excludes 853,500 shares of Common Stock reserved for future issuance under
the Company's proposed stock option plan. It is anticipated that options to
purchase up to 85,350 shares of Common Stock will be granted as of the
completion of the Offering. See 'Management -- Stock Option Plan.'
4
<PAGE>
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND PRO FORMA INFORMATION
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------- -------------------------------
PRO FORMA PRO FORMA
1992 1993(1) 1994 1994(2) 1994 1995 1995(2)
--------- --------- --------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenue..................................... $ 8,123 $ 13,080 $ 18,773 $ 26,897 $ 14,789 $ 14,631 $ 20,841
Operating expenses:
Salaries and wages..................... 3,101 5,898 8,866 12,214 6,552 7,234 10,076
General and administrative............. 2,021 4,291 6,723 9,349 5,121 5,020 6,748
Depreciation and amortization.......... 1,781 2,566 3,349 4,124 2,522 2,549 3,119
--------- --------- --------- ----------- --------- --------- ---------
Total operating expenses.......... 6,903 12,755 18,938 25,687 14,196 14,802 19,943
--------- --------- --------- ----------- --------- --------- ---------
Income (loss) from operations............... 1,221 325 (165) 1,210 593 (171) 898
Net income (loss)........................... $ 16 $ (672) $ (1,067) $ (363) $ (942)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net (loss) per share........................ $ (0.08) $ (0.40) $ (0.58) $ (0.24) $ (0.51)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average shares outstanding(3)...... 2,240,000 2,240,000 2,240,000 2,240,000 2,240,000
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Pro forma net income........................ $ 326 $ 53
----------- ---------
----------- ---------
Pro forma net income per share.............. $ .06 $ .01
Pro forma weighted average shares
outstanding(3)............................ 5,240,000 5,240,000
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995
-----------------------
ACTUAL PRO FORMA(2)
------- ------------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital (deficiency).................................................................. $(1,351) $ 4,384
Total assets.................................................................................. 21,618 38,316
Long-term liabilities, net of current portion................................................. 15,463 6,749
Redeemable preferred stock.................................................................... 2,382 --
Stockholders' equity (deficiency)............................................................. (3,429) 23,671
</TABLE>
- ------------
(1) The results for the year ended December 31, 1993 include the results of
Spring Anesthesia Group, Inc. from the date of acquisition, August 1, 1993,
through December 31, 1993.
(2) The pro forma data gives effect to: (a) the acquisition of the Acquired
Businesses (NCHC Group, MM Support and DPS) and (b) the sale of the shares
of Common Stock offered hereby and the application of the net proceeds
thereof as described in 'Use of Proceeds' as if each had occurred at the
beginning of the periods presented. In addition, the pro forma information
is based on available information and certain assumptions and adjustments.
See Notes 1 and 2 to the Pro Forma Financial Information.
(3) Weighted average shares outstanding includes 2,240,000 shares outstanding
prior to the Offering after adjustment to reflect the 1,400-for-one stock
split which will occur prior to completion of the Offering. In addition, pro
forma weighted average shares outstanding includes 3,000,000 shares being
sold in connection with the Offering. Weighted average shares outstanding
and pro forma weighted average shares outstanding do not include any shares
reserved for future issuance under the Company's proposed stock option plan.
5
<PAGE>
<PAGE>
RISK FACTORS
The following risk factors should be considered carefully in addition to
the other information in this Prospectus before purchasing the shares of Common
Stock offered hereby.
Absence of Combined Operating History and Future Combined Operating
Results. Simultaneously with the completion of the Offering, the Company will
purchase the Acquired Businesses. Although each of the Acquired Businesses and
the Company have been in business for some time, there can be no assurance that
the Company will be able to successfully integrate the businesses, operations or
assets of the Acquired Businesses or of any other businesses it may subsequently
acquire. See 'Business -- Acquired Businesses.' Furthermore, although the
Company does not anticipate incurring significant additional operating costs
associated with the Acquired Businesses, there can be no assurance that such
costs will not be incurred or that the Acquisitions, or any other acquisition,
will not have an adverse effect upon the Company's operating results,
particularly in the fiscal quarters immediately following the consummation of
the acquisitions, while the operations of the acquired businesses are being
integrated into the Company's operations. There can be no assurance that,
following any acquisition, the Company will be able to operate the acquired
business on a profitable basis or that the Company will be able to recover the
excess of the purchase price of the businesses acquired over their tangible book
value.
History of Net Losses and Working Capital Deficit. The Company has
experienced a net loss for each of its fiscal years since 1993 due largely to
the amortization of goodwill and noncompete payments attributable to
acquisitions. As the Company pursues its acquisition strategy (including the
Acquisitions) and continues to amortize expenses associated with acquisitions,
there can be no assurance that it will have net income. As of September 30,
1995, the Company had a working capital deficit of $1.4 million. Although the
Company had working capital of approximately $4.4 million on a pro forma basis,
after giving effect to the Offering and the application of the net proceeds as
set forth in 'Use of Proceeds,' there can be no assurance that the Company will
have sufficient working capital to meet its liquidity needs. See 'Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources.'
Governmental Regulation; Billing Practices. Existing governmental
regulation can adversely affect PSS's business through, among other things, its
potential to reduce the amount of reimbursement received by PSS's clients for
health care services. Substantially all of the Company's revenue is derived from
management fees that are based upon a percentage of net collections of health
care receivables. During the past decade, federal and state governments have
implemented legislation designed to stimulate a reduction in the increase in
health care costs and it is anticipated that such legislative initiatives will
continue. There can be no assurance that current or future government
regulations will not have a material adverse effect upon the Company's business.
PSS may also be subject to applicable federal and state billing and credit
collection agency laws and regulations. In general, these laws provide for
various fines, penalties, damages and other assessments for violations,
including possible exclusion from Medicare, Medicaid and certain other federal
and state health care programs. A majority of the Company's clients are
reimbursed by private insurers as well as federal and state medical insurance
providers. Since the beginning of 1995, governmental agencies have instituted
investigations of, and actions against, at least two industry participants for
improper billing practices. Although the Company believes that its billing
practices, and the billing practices of the Acquired Businesses, are in material
compliance with applicable laws and government regulations, given the highly
technical nature of this area, there can be no assurance that a change in
government regulations, industry practice or an increased focus by governmental
agencies on billing practices would not have a material adverse effect on the
industry and the Company.
Health Care Reform. Health care system reform and concerns over rising
Medicare and Medicaid costs continue to be high priorities for the federal and
certain state governments. Although no comprehensive health care, Medicare or
Medicaid reform legislation has yet been implemented, pressures to contain costs
and the active discussion and issues raised by the Clinton Administration,
Congress and various other groups have impacted the health care delivery system.
In October 1995, both the U.S. House of Representatives and the U.S. Senate
approved bills that would reshape the Medicare and Medicaid programs. These
complex bills as currently passed propose significant reductions in the overall
rate of Medicare and Medicaid spending growth. There is active discussion
concerning these bills, and the form of any final legislation signed into law
could differ significantly from
6
<PAGE>
<PAGE>
the current bills. The impact of currently proposed legislation on the Company
is not readily determinable. However, in their current form, such legislation
and proposals, such as reducing the amount reimbursable under Medicare or
Medicaid or imposing other price controls on physicians, could have a material
adverse effect on the Company, since its revenues are based generally on a
percentage of its Physicians' net collections.
Acquisitions; Need for Capital. The Company's expansion strategy involves
both acquisitions and internal growth. There can be no assurance that suitable
acquisition candidates will be found, that acquisitions will be consummated on
favorable terms or that any such acquisitions will be successfully integrated
into the Company's operations. In addition, although the Company typically
enters into noncompete agreements with the sellers and other principals of
businesses being acquired by the Company, there can be no assurance that such
agreements will be honored by those sellers and principals or be effective in
preventing competition by those sellers and principals. The Company intends to
finance future acquisitions by using cash and debt or equity securities,
including shares of its Common Stock. The Company will need additional debt or
equity financing to implement its acquisition strategy. There can be no
assurance that the Company will be able to obtain financing for such purposes on
terms acceptable to the Company. See 'Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources' and 'Business -- Acquisitions.'
Certain Industry and Market Changes. Certain market changes are occurring
in the health care market that may continue regardless of whether comprehensive
federal or state health care reform legislation is adopted and implemented and
that could adversely affect the accounts receivable management services provided
by PSS. These market reforms include certain employer initiatives, such as
creating purchasing cooperatives and contracting for health care services for
employees through managed care companies (including health maintenance
organizations), certain provider initiatives, such as risk-sharing among health
care providers and managed care companies through capitated contracts and
integration of hospitals and physicians into comprehensive delivery systems, and
certain payor initiatives, such as new alliances between health care providers
and third party payors in which the health care providers are employed by such
third party payors. These changes may result in fixed fee schedules or
capitation payment arrangements lower than standard charges. Some of these
changes may affect the viability of certain billing and collection operations.
Because the Company derives its revenue largely based on the fees charged by its
Physician clients, reductions in payments to Physicians could have an adverse
affect on the Company's operations.
Competition. The physician business management services business is highly
competitive. PSS competes with national, regional and local physician business
management services organizations and Physicians that provide their own practice
management services. At least one of the Company's competitors has substantially
greater resources than PSS.
Clients of Acquired Businesses. In many cases, the Acquired Businesses have
long-established relationships with their clients, which are based largely on
personalized service and the clients' identification with the individual owners
of each Acquired Business. Although the Company intends to retain the management
of the Acquired Businesses, and contracts exist in many cases between the
Acquired Businesses and these clients, there can be no assurance that these
clients will remain customers of the Acquired Businesses after the Acquisitions,
that the clients will renew the contracts upon expiration of their term or that
the Company will be able to continue the relationships formed with these
clients. A significant loss in clients of the Acquired Businesses would reduce
the Company's future revenues and could be materially adverse to the Company.
Dependence on Senior Management. The Company's success depends upon the
continued contributions of its senior management. PSS enters into
confidentiality, noncompete and non-solicitation agreements with its key
employees. In general, these agreements contain certain covenants on the part of
the key employees concerning confidential and proprietary information of PSS and
preclude the key employees from soliciting customers or employees of PSS or
competing with PSS during a period, typically two years, following termination
of employment. The Company maintains 'key man' life insurance policies on the
lives of two of its executive officers. These policies provide benefits of $1.0
million upon the deaths of any insured executive officer and name the Company as
sole beneficiary. Nevertheless, the loss of services of either of these
officers, or other employees of PSS, could have a material adverse effect upon
the Company's business.
7
<PAGE>
<PAGE>
Shares Eligible for Future Sale. The 3,000,000 shares being sold in the
Offering (without giving effect to any exercise of the over-allotment option)
will be freely tradeable unless acquired by affiliates of the Company. The
market price of the Common Stock could be adversely affected by the sale of
substantial amounts of the Common Stock in the public market following this
Offering. Holders of approximately 42.1% of the shares of Common Stock to be
outstanding immediately following completion of this Offering (or 38.8% if the
over-allotment option is exercised in full) have agreed with the Company and the
Underwriters not to sell or otherwise dispose of any such shares of Common Stock
or securities convertible into or exercisable for shares of Common Stock for a
period of 180 days after the date of this Prospectus without the prior written
consent of the Representative of the Underwriters. Upon expiration of this
period, all such shares may be sold subject to the limitations of and in
accordance with Rule 144 under the Securities Act. In addition, holders of
approximately 42.7% of the shares of Common Stock to be outstanding immediately
following completion of the Offering (or 39.4% if the over-allotment option is
exercised in full) have the right to include their shares in certain other
registrations of the Company's capital stock. See 'Description of Capital
Stock -- Registration Rights.' The Company expects that it will issue shares of
Common Stock in connection with future acquisitions. Additional shares of Common
Stock, including shares issuable upon exercise of options, will also become
eligible for sale in the public market from time to time in the future.
Control by Existing Stockholders; Benefits of Offering to Existing
Stockholders. Following this Offering, the Company's directors, officers and
principal stockholders, and certain of their affiliates, will beneficially own
approximately 41.6% of the outstanding shares of Common Stock (or 38.3% if the
over-allotment option is exercised in full), not including shares issuable upon
the exercise of options. As a result of such ownership, these stockholders will
be able to control the election of all directors and other actions submitted to
a vote of the Company's stockholders. The completion of the Offering will
benefit the current stockholders of the Company, including its directors and
executive officers, by, among other things, creating a public market for the
Company's Common Stock and thereby increasing the market value of such
stockholders investment in the Company. See 'Dilution' and 'Principal
Stockholders.' In addition, the current stockholders of the Company will have
their pledges of capital stock in the Company released upon repayment of certain
indebtedness with a portion of the net proceeds of the Offering. See 'Certain
Transactions.'
Effect of Anti-takeover Provisions. Certain provisions of the Company's
Certificate of Incorporation (the 'Certificate of Incorporation') and the Bylaws
could have the effect of making it more difficult for a third party to acquire,
or of discouraging a third party from attempting to acquire, control of the
Company. Such provisions could limit the price that certain investors might be
willing to pay in the future for shares of the Common Stock. Certain of these
provisions allow the Company to issue preferred stock with rights senior to
those of the Common Stock without any further vote or action by the
stockholders. These provisions could also have the effect of delaying or
preventing a change in control of the Company. The issuance of preferred stock
could decrease the amount of earnings and assets available for distribution to
the holders of Common Stock or could adversely affect the rights and powers,
including voting rights, of the holders of the Common Stock. In certain
circumstances, such issuance could have the effect of decreasing the market
price of the Common Stock. The Company has no current plans to issue shares of
preferred stock. In addition, Section 203 of the Delaware General Corporation
Law restricts certain business combinations with any 'interested stockholder' as
defined by such statute. The statute may have the effect of delaying, deferring
or preventing a change in control of the Company. See 'Description of Capital
Stock.'
Pursuant to the Company's proposed 1996 Stock Option Plan, options
outstanding thereunder become immediately exercisable upon a 'change in
control,' including certain mergers or reorganizations, of PSS. These terms of
the Stock Option Plan could adversely affect the likelihood of a change in
control of the Company. See 'Management -- Stock Option Plan.'
No Prior Market; Possible Volatility of Stock Price. Prior to this
Offering, there has been no public market for the Common Stock and there can be
no assurance that an active public market for the Common Stock will develop or
continue after this Offering or that the market price of the Common Stock will
not decline below the initial public offering price. The initial public offering
price of the Common Stock was determined by negotiations between the Company and
the Representative of the Underwriters, and may not be indicative of the market
price for the Common Stock after this Offering.
8
<PAGE>
<PAGE>
See 'Underwriting' for factors to be considered in determining the initial
public offering price. From time to time after this Offering, there may be
significant volatility in the market price of the Common Stock. Quarterly
operating results of the Company, changes in general conditions in the economy
or the health care industry, or other developments affecting the Company or its
competitors, could cause the market price of the Common Stock to fluctuate
substantially. The equity markets have, on occasion, experienced significant
price and volume fluctuations that have affected the market prices for many
companies' securities and that have often been unrelated to the operating
performance of these companies. Concern about the potential effects of health
care reform measures has contributed to the volatility of stock prices of
companies in health care and related industries and may similarly affect the
price of the Common Stock following this Offering. Any such fluctuations that
occur following completion of this Offering may adversely affect the market
price of the Common Stock.
Immediate and Substantial Dilution. The purchasers of the shares of Common
Stock offered by this Prospectus will experience immediate and substantial
dilution in the net tangible book value of their shares of Common Stock. See
'Dilution.' In the event that the Company issues additional Common Stock in the
future, including shares that may be issued in connection with future
acquisitions, purchasers of Common Stock in this Offering may experience further
dilution in the net tangible book value per share of the Common Stock.
Dividend Policy. For the foreseeable future, it is expected that earnings,
if any, which may be generated from PSS's operations will be used to finance the
growth of PSS, and that cash dividends will not be paid to holders of Common
Stock. See 'Dividend Policy.' The Company's existing loan agreement, which will
be terminated upon completion of the Offering, restricts the Company's ability
to pay dividends. In addition, under the terms of the Company's 10% Preferred
Stock, Series A and Series B, which will be redeemed upon completion of the
Offering, the Company is prohibited from declaring or paying any dividend on the
Common Stock as long as any shares of such preferred stock are outstanding. The
Company currently is engaged in negotiations with certain banks, including its
existing bank lender, to provide a line of credit primarily for acquisitions.
Although there can be no assurance that such an agreement will be entered into,
the Company anticipates that any such agreement will restrict its ability to pay
dividends.
THE COMPANY
PSS was formed in 1991 as the successor to a business founded in 1983. The
Company's principal executive offices are located at Route 230 and Eby-Chiques
Road, Mt. Joy, Pennsylvania 17552 and its telephone number is (717) 653-5340.
9
<PAGE>
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered by this Prospectus, after deducting estimated underwriting discounts and
expenses payable by the Company in connection with this Offering, are estimated
to be approximately $27,100,000 ($31,285,000 if the Underwriters' over-allotment
option is exercised in full) assuming an initial public offering price of $10.00
per share.
Simultaneously with, and as a condition to, the Offering, the Company will
purchase the Acquired Businesses for an aggregate consideration of $11,500,000
in cash. Of that amount, $9,500,000 is payable upon the completion of the
Acquisitions. The Company intends to apply $9,500,000 of the net proceeds of the
Offering to pay the initial amount of the purchase price for the Acquired
Businesses and apply an aggregate of $2,000,000 of the net proceeds of the
Offering (which, pending its use, will be held with the Company's general
corporate funds) to payments due in connection with the acquisition of one of
the Acquired Businesses during the first 12 months following consummation of the
Offering. An additional $150,000 may be payable on the second anniversary of the
Acquisitions in connection with the purchase of one of the Acquired Businesses,
subject to the retention of clients. For a further description of the Acquired
Businesses and the consideration being given for them, see 'Business -- Acquired
Businesses.'
Approximately $11,100,000 of the net proceeds will be used to retire short-
and long-term debt outstanding of PSS. Such debt currently bears interest at
rates ranging from 6.64% to 13%, with a weighted average rate of 9.03% per annum
and otherwise would mature between August 31, 1997 and August 31, 1998.
Approximately $2,932,000 of the net proceeds will be used to redeem the
Company's 10% Preferred Stock, Series A and Series B.
The remaining net proceeds of $1,568,000 will be used for working capital
and other general corporate purposes, which are expected to include future
acquisitions. In addition, the Company currently is engaged in negotiations with
certain banks, including its existing bank lender, to provide a line of credit
to be used primarily for acquisitions. The Company has received two proposals to
provide it with a line of credit of up to $12.0 million and $15.0 million,
respectively. The Company intends to evaluate these proposals. However, there
can be no assurance that such a line of credit will be made available to the
Company or made available on favorable terms. Although PSS currently is engaged
in discussions with several acquisition candidates, no acquisition, other than
the Acquisitions, currently is pending and no letter of intent, agreement or
other understanding exists regarding any other acquisition. Other than the
Acquisitions, no portion of the proceeds of this Offering have been allocated
for any acquisition. Pending such uses, the Company intends to invest the net
proceeds of this Offering in short-term, interest bearing, investment grade
securities.
DIVIDEND POLICY
For the foreseeable future, it is expected that earnings, if any, which may
be generated from the Company's operations will be used to finance the growth of
PSS, and that cash dividends will not be paid to holders of Common Stock. The
Company's existing loan agreement (which will be terminated upon completion of
the Offering) also restricts the Company's ability to pay dividends. In
addition, under the terms of the Company's 10% Preferred Stock, Series A and
Series B (which will be redeemed upon completion of the Offering), the Company
is prohibited from declaring or paying any dividend on the Common Stock as long
as any shares of such preferred stock are outstanding. Any future determination
to pay cash dividends on Common Stock will be at the discretion of the Board of
Directors and will be dependent upon the Company's financial condition, results
of operations, capital requirements and such other factors as the Board of
Directors deems relevant. The Company currently is engaged in negotiations with
certain banks, including its existing bank lender, to provide a line of credit
primarily for acquisitions. See 'Business -- Acquisitions.' The Company has
received two proposals to provide it with a line of credit of up to $12.0
million and $15.0 million, respectively. The Company intends to evaluate these
proposals. Although there can be no assurance that such an agreement will be
entered into, the Company anticipates that any such agreement will restrict its
ability to pay dividends.
10
<PAGE>
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at
September 30, 1995, (i) on an actual basis and (ii) on a pro forma basis to
reflect (A) the repayment of approximately $11,100,000 of debt of PSS, (B) the
redemption of approximately $2,382,000 in the Company's 10% Preferred Stock,
Series A and Series B (which excludes the redemption of an additional $550,000
in the Company's Preferred Stock, Series A, that was issued in December 1995),
and (C) the sale by the Company of 3,000,000 shares of Common Stock in the
Offering (at an assumed initial public offering price of $10.00 per share) and
the application of the estimated net proceeds therefrom.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995
-------------------------
ACTUAL PRO FORMA
------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Current portion of long-term debt............................................. $ 1,995 $ --
NCHC Deferred Purchase Payment -- Current(1).................................. -- 1,912
Bank debt..................................................................... 3,894 --
Subordinated notes............................................................ 10,331 5,500
------- ---------
Total long-term debt(2)..................................................... 14,225 5,500
Redeemable Preferred Stock:
10% Preferred Stock, Series A, $.01 par value, 4,700 shares authorized and
2,382.032 shares outstanding prior to Offering(3)........................... 1,191 --
10% Preferred Stock, Series B, $.01 par value, 3,200 shares authorized and
2,382.032 shares outstanding prior to Offering.............................. 1,191 --
Stockholders' Equity:
Preferred Stock, $.01 par value, 10,000,000 shares authorized after Offering
and no shares outstanding................................................... -- --
Common Stock, $.001 par value, 100,000,000 shares authorized, 2,240,000 shares
outstanding, 5,240,000 shares outstanding Pro Forma(4)...................... 2 5
Additional paid-in capital.................................................... 126 27,223
Retained earnings/(Deficit)................................................... (3,557) (3,557)
------- ---------
Total stockholders' equity.................................................... (3,429) 23,671
------- ---------
Total capitalization.......................................................... $15,173 $31,083
------- ---------
------- ---------
</TABLE>
- ------------
(1) Represents the balance of the purchase price for the NCHC Group, payable in
12 monthly installments after consummation of the Offering. See note 2(h) on
Page F-40.
(2) Following completion of the Offering, the Company's long-term debt will
consist of a 7.1% subordinated note due 2003.
(3) Excludes 1,100 shares of 10% Preferred Stock, Series A, issued in December
1995 to Hillside Capital Incorporated, a record holder of more than 5% of
the Common Stock, in consideration for an aggregate of $550,000 in cash.
Such shares will be redeemed for approximately $550,000 with a portion of
the net proceeds of the Offering.
(4) Excludes 853,500 shares of Common Stock reserved for future issuance under
the Company's proposed stock option plan. It is anticipated that options to
purchase up to 85,350 shares of Common Stock will be granted as of
completion of the Offering. See 'Management -- Stock Option Plan.'
11
<PAGE>
<PAGE>
DILUTION
The net tangible book value of the Company at September 30, 1995 was a
deficiency of approximately $(15,917,286), or $(7.11) per share of Common Stock.
Net tangible book value per share represents the amount of the Company's net
tangible assets less total liabilities divided by the number of shares of Common
Stock outstanding at that date. After giving effect to the sale of the 3,000,000
shares of Common Stock offered hereby at an assumed initial public offering
price of $10.00 per share, and after deducting underwriting discounts and
commissions and estimated offering expenses payable by the Company, the
Company's pro forma net tangible book value at September 30, 1995 would have
been $1,306,714 or $0.25 per share. This represents an immediate increase in the
net tangible book value of $7.36 per share to existing stockholders and an
immediate dilution of $9.75 per share to new investors purchasing shares in this
Offering. The following table illustrates this per share dilution:
<TABLE>
<CAPTION>
Assumed initial public offering price per share............ $10.00
<S> <C> <C>
Net tangible book deficiency per share at September 30,
1995..................................................... $(7.11)
------
Increase per share attributable to new investors........... $ 7.36
Pro forma net tangible book value per share after the
Offering................................................. 0.25
------
Net tangible book value dilution per share to new
investors................................................ $ 9.75
------
------
</TABLE>
The following table summarizes, on a pro forma basis as of September 30,
1995, the number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share paid by the existing
stockholders and by the new investors at an assumed initial public offering
price of $10.00 per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
---------------------- ------------------------ AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing
Stockholders... 2,240,000 42.7% $ 128,000 0.4% $ 0.06
New Investors.... 3,000,000 57.3 30,000,000 99.6 10.00
--------- ------- ----------- -------
Total............ 5,240,000 100.0% $30,128,000 100.0%
--------- ------- ----------- -------
--------- ------- ----------- -------
</TABLE>
12
<PAGE>
<PAGE>
SELECTED FINANCIAL AND PRO FORMA DATA
The Company commenced operations in August 1991. Financial statements for
the Company's predecessor are not available for periods or as of dates before
August 1991. The Selected Financial Data for each of the periods and as of each
period end in the three-year period ended December 31, 1994 and nine-month
period ended September 30, 1995 have been derived from the consolidated
financial statements of the Company audited by Deloitte & Touche LLP,
independent auditors, which appear elsewhere in this Prospectus. The Selected
Financial Data for the nine months ended September 30, 1994 have been derived
from unaudited financial statements of the Company included elsewhere in this
Prospectus. The Selected Financial Data for the four months ended and as of
December 31, 1991 have been derived from unaudited financial statements of the
Company not included elsewhere in this Prospectus. These unaudited statements
have been prepared on the same basis as the audited consolidated financial
statements and, in the opinion of management, contain all adjustments,
consisting only of normal recurring accruals, necessary for a fair presentation
of the financial position and results of operations for the periods presented.
Operating results for the nine months ended September 30, 1995 are not
necessarily indicative of the results that may be expected for the entire year.
The selected unaudited pro forma financial data give effect to (i) the
acquisitions by the Company of the Acquired Businesses (North Coast Health Care
Management, Inc., North Coast Account Systems, Inc. and Medical Dental Invoicing
Services, Inc. (collectively, the 'NCHC Group'), Medical Management Support,
Inc. ('MM Support') and Data Processing Systems, Inc. ('DPS')) effective upon
the completion of this Offering and (ii) the sale of 3,000,000 shares of Common
Stock offered by the Company at an assumed initial public offering price of
$10.00 per share and the application of the estimated net proceeds therefrom as
described under 'Use of Proceeds'. The acquisitions of the NCHC Group, MM
Support and DPS will be accounted for as purchases. The unaudited pro forma
financial information is derived from the historical financial statements of the
Company, the NCHC Group, MM Support and DPS and estimates and assumptions set
forth in the unaudited Pro Forma Financial Information and notes thereto
included elsewhere in this Prospectus.
The unaudited pro forma balance sheet data gives effect to the acquisitions
by the Company of the NCHC Group, MM Support and DPS as if such acquisitions had
occurred on September 30, 1995. Such pro forma balance sheet data is derived
from the audited consolidated balance sheet data of the Company as of September
30, 1995, included elsewhere in this Prospectus, as well as the audited balance
sheets of the NCHC Group and MM Support as of September 30, 1995, included
elsewhere in this Prospectus, and the unaudited balance sheet of DPS as of
September 30, 1995.
The unaudited pro forma income statement data present unaudited pro forma
results of operations for the year ended December 31, 1994 and nine months ended
September 30, 1995. For purposes of the unaudited pro forma income statement
data, the acquisitions by the Company of the Acquired Businesses are included as
if such acquisitions had occurred on January 1, 1994. The unaudited pro forma
income statement data for the year ended December 31, 1994 is derived from the
audited consolidated statement of operations of the Company for the year ended
December 31, 1994 and the audited statements of operations of NCHC Group and MM
Support for the year ended December 31, 1994 included elsewhere in this
Prospectus, as well as the unaudited statements of operations of DPS for the
year ended December 31, 1994. The unaudited pro forma income statement data for
the nine months ended September 30, 1995 is derived from the audited
consolidated income statement data of the Company for the nine months ended
September 30, 1995 and the audited statements of operations of NCHC Group and MM
Support for the nine months ended September 30, 1995 included elsewhere in this
Prospectus and the unaudited statement of operations of DPS for the nine months
ended September 30, 1995.
Pro forma adjustments are based upon preliminary estimates, available
information and certain assumptions that management deems appropriate. The
unaudited pro forma financial data presented herein are not necessarily
indicative of the results the Company would have obtained had such events
occurred at the beginning of the period, as assumed, or of the future results of
the Company. The selected unaudited pro forma financial data should be read in
conjunction with the other financial statements and notes thereto included
elsewhere in this Prospectus.
13
<PAGE>
<PAGE>
SELECTED FINANCIAL AND PRO FORMA DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FOUR MONTHS YEAR ENDED DECEMBER 31, SEPTEMBER 30,
ENDED ----------------------------------------------- ---------------------------------
DECEMBER 31, PRO FORMA PRO FORMA
1991 1992 1993(1) 1994 1994(2) 1994 1995 1995(2)
------------ --------- --------- --------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income statement
data:
Revenue............. $2,474 $ 8,123 $ 13,080 $ 18,773 $26,897 $ 14,789 $ 14,631 $20,841
Operating expenses:
Salaries and
wages........ 909 3,101 5,898 8,866 12,214 6,552 7,234 10,076
General and
administrative... 597 2,021 4,291 6,723 9,349 5,121 5,020 6,748
Depreciation
and
amortization... 562 1,781 2,566 3,349 4,124 2,522 2,549 3,119
------------ --------- --------- --------- ----------- --------- --------- ---------
Total
operating
expenses.. 2,068 6,903 12,755 18,938 25,687 14,196 14,802 19,943
------------ --------- --------- --------- ----------- --------- --------- ---------
Income (loss) from
operations........ 406 1,221 325 (165) 1,210 593 (171) 898
Other expenses:
Interest
expense...... 370 1,043 1,262 1,526 590 1,149 1,059 437
Other, net..... -- (10) 38 186 176 189 (3) 34
------------ --------- --------- --------- ----------- --------- --------- ---------
Total
other
expenses... 370 1,033 1,300 1,712 766 1,338 1,056 471
------------ --------- --------- --------- ----------- --------- --------- ---------
Income (loss) before
income taxes
(benefit)......... 36 187 (975) (1,877) 444 (745) (1,227) 427
Income taxes
(benefit)......... 40 171 (303) (810) 118 (382) (286) 374
------------ --------- --------- --------- ----------- --------- --------- ---------
Net income (loss)... $ (4) $ 16 $ (672) $ (1,067) $ (363) $ (942)
------------ --------- --------- --------- --------- ---------
------------ --------- --------- --------- --------- ---------
Net (loss) per
share............. $ (0.08) $ (0.40) $ (0.58) $ (0.24) $ (0.51)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average
shares
outstanding(3).... 2,240,000 2,240,000 2,240,000 2,240,000 2,240,000
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Pro forma net income
(loss)............ $ $326 $ 53
----------- ---------
----------- ---------
Pro forma net income
(loss) per
share............. $ .06 $ .01
----------- ---------
----------- ---------
Pro forma weighted
average shares
outstanding(3).... 5,240,000 5,240,000
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, 1995
-------------------------------------------- ---------------------------
1991 1992 1993 1994 ACTUAL PRO FORMA(2)
----------- ------- ------- ------- ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance sheet data:
Working capital
(deficiency)... $ 484 $ 362 $ 305 $ (218) $(1,351) $ 4,384
Property and
equipment,
net.......... 2,134 1,952 3,512 2,983 2,578 2,965
Total assets... 13,688 13,951 25,768 22,733 21,618 38,316
Long-term
liabilities,
net of
current
portion...... 9,125 9,001 19,394 17,143 15,463 6,749
Redeemable
preferred
stock........ 2,000 2,000 2,000 2,120 2,382 --
Stockholders'
equity
(deficiency)... 124 (60) (932) (2,226) (3,429) 23,671
</TABLE>
- ------------
(1) The results for the year ended December 31, 1993 include the results of
Spring Anesthesia Group from the date of acquisition, August 1, 1993,
through December 31, 1993.
(2) The pro forma data gives effect to: (a) the acquisition of NCHC Group, MM
Support and DPS and (b) the sale of the shares of Common Stock offered
hereby and the application of the net proceeds thereof as described in 'Use
of Proceeds' as if each had occurred at the beginning of the periods
presented. In addition, the pro forma information is based on available
information and certain assumptions and adjustments. See Notes 1 and 2 to
the Pro Forma Financial Statements.
(3) Weighted average shares outstanding includes 2,240,000 shares outstanding
prior to the Offering after adjustment to reflect the 1,400-for-one stock
split which will occur prior to completion of the Offering. In addition, pro
forma weighted average shares outstanding includes 3,000,000 shares being
sold in connection with the Offering. Weighted average shares outstanding
and pro forma weighted average shares outstanding do not include any shares
reserved for future issuance under the Company's proposed stock option plan.
14
<PAGE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion of the results of operations and financial
condition of the Company should be read in conjunction with the Company's
unaudited pro forma financial information and the audited financial statements
and the notes thereto included elsewhere in this Prospectus.
OVERVIEW
The Company is a leading provider of business management services to
hospital-affiliated physicians. The Company was incorporated in April 1991 for
the purpose of acquiring substantially all of the assets of a business founded
in 1983. In August 1993, the Company purchased the stock of Spring Anesthesia
Group, Inc. ('Spring'), a provider of business management services to physicians
primarily in California and Arizona. The Company generally is compensated with a
management fee based upon a percentage of its clients' net collections. The
Company's management fee typically ranges from 3% to 15% and is based upon a
number of factors, including the type of physician specialty involved, the range
of services to be provided by the Company, an analysis of the collectability of
a client's accounts receivable portfolio and an estimate of the costs of such
collection. The Company estimates that its average management fee (on a weighted
average basis) charged in 1994 for business management
services was approximately 7.3% of its clients' net collections. In providing
its clients with accounts receivable management services, the Company manages
the billing process for its clients, including preparation and follow-up on
bills from Physicians for medical services provided by Physicians to their
patients.
The Company has entered into agreements to acquire the Acquired Businesses
simultaneously with the completion of the Offering. The pro forma financial
statements give effect to (i) the Acquisitions by the Company of the Acquired
Businesses, (ii) the sale of shares of Common Stock offered hereby and (iii) the
application of the proceeds therefrom as described under 'Use of Proceeds.' Pro
forma results for the year ended December 31, 1994 and the nine months ended
September 30, 1995 assume the Acquisitions occurred on January 1, 1994. The
Acquired Businesses are engaged in providing physician business management
services to Physicians in a variety of specialities, including anesthesiology
and emergency room medicine. See 'Business -- Acquired Businesses.' The Acquired
Businesses had net income for the year ended December 31, 1994 and for the nine
months ended September 30, 1995 of $973,000 and $626,000, respectively, in the
aggregate. As of September 30, 1995, working capital for the Acquired Businesses
was $1.1 million in the aggregate.
To date, the Company's consolidated financial statements have accounted for
acquisitions on a purchase basis and, accordingly, do not reflect the operating
results of the businesses that were acquired prior to the date of their
acquisition by the Company. The purchase of the Acquired Businesses also will be
accounted for on this basis. This accounting treatment results in goodwill being
recorded by the Company at the time of each transaction reflecting the
difference between the market value of the assets acquired and the price paid,
which is amortized over 20 years. A significant portion of the amortization
unrelated to goodwill, but associated with the purchase accounting in connection
with the Company's acquisition in 1991, will be fully amortized as of August
1996. In connection with the acquisition of the Acquired Businesses, the Company
will record a significant amount of intangible assets, including goodwill, which
will be amortized over future periods.
As a result of the purchase of Spring in 1993, the Company's operating
margins were reduced due primarily to Spring's lower margins as compared to PSS.
Furthermore, with the acquisition of Spring, the Company established a
$2,000,000 reserve for the relocation, consolidation and improvement of the
Spring operations. Such reserve was an estimate of the costs of consolidating
operations of the Spring billing offices into one new location in a lower cost
area and modifying the operating approach to include elements of the PSS
methodology. In addition, the Company's operating income margins in 1994 and
1995 were negatively affected by the reorganization of Spring due to costs
incurred by the Company not included in the operating improvement reserve. As
part of that reorganization, the Company closed 11 offices, maintained three
offices and opened a new centralized office in Stockton, California, which
became Spring's headquarters. Operating income margins in 1994 and 1995 also
reflect certain operational and sales and marketing initiatives launched in 1994
and 1995, which adversely affected
15
<PAGE>
<PAGE>
total Company operating income margins. In addition, the Company believes that
the uncertainty in the marketplace as a result of the Clinton Administration's
1993 health care reform discussions influenced a number of physician groups to
postpone making decisions regarding their business management services in 1993,
which continued into 1994.
The Company intends to expand its business through internal growth and by
acquiring other companies engaged in providing physician business management
services. The Company looks for acquisition candidates that focus on
high-quality service to clients. The Company also evaluates acquisition
opportunities on the basis of the acquisition candidate's management team,
geographic market and medical specialties served, as well as its database
capabilities, if any. The Company does not currently anticipate acquiring other
businesses where significant consolidation or staff reductions would be
required, although acquisition candidates must be evaluated on a case-by-case
basis. Although there can be no assurance that it will not do so, Company is not
aware of significant additional operating costs that it will incur associated
with the Acquired Businesses.
RESULTS OF OPERATIONS
The following table sets forth, for the periods presented, the percentages
of net revenues represented by certain items reflected in the Company's
statement of operations.
<TABLE>
<CAPTION>
PERCENTAGE OF NET REVENUES
---------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER
YEAR ENDED DECEMBER 31, 30,
------------------------------------- ---------------------------
1994 1995
1992 1993 1994 PRO FORMA 1994 1995 PRO FORMA
----- ----- ----- --------- ----- ----- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues............................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Salaries, general and administrative
expenses.............................. 63.0 77.9 83.0 80.2 78.9 83.7 80.7
----- ----- ----- --------- ----- ----- ---------
Income before interest, taxes,
depreciation and amortization......... 37.0 22.1 17.0 19.8 21.1 16.3 19.3
Depreciation and amortization........... 21.9 19.6 17.8 15.3 17.1 17.4 15.0
Interest expense, net................... 12.8 9.6 8.1 2.5 7.8 7.3 2.3
Other, net.............................. -- 0.4 1.1 0.6 1.2 -- 0.3
----- ----- ----- --------- ----- ----- ---------
Income (loss) before income taxes
(benefit)............................. 2.3 (7.5) (10.0) 1.4 (5.0) (8.4) 1.7
Income taxes, (benefit)................. 2.1 (2.3) (4.3) 0.4 (2.6) (2.0) 1.6
----- ----- ----- --------- ----- ----- ---------
Net income (loss)....................... 0.2% (5.1)% (5.7)% 1.0% (2.4)% (6.4)% 0.1%
----- ----- ----- --------- ----- ----- ---------
----- ----- ----- --------- ----- ----- ---------
</TABLE>
REVENUES
YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
The Company's revenues increased 61% from $8,123,000 for the year ended
December 31, 1992 to $13,080,000 for the year ended December 31, 1993. Revenues
in 1994 increased 44% from 1993 to $18,773,000 for the year ended December 31,
1994. The Company generally is compensated with a management fee based upon a
percentage of its clients' net collections, which percentage is determined after
considering a broad range of factors, including the medical specialty of the
client and the nature of the services to be provided. The Company's revenues
increased during 1993 and 1994 due primarily to the Company's acquisition of
Spring in August 1993. The rate of growth in revenues slowed between the years
ended December 31, 1992 to 1993 and the years ended December 31, 1993 to 1994
due in part to a general reduction in the amount of the management fee charged
by the Company and an increased emphasis on the retention of existing client
relationships rather than an allocation of resources to new client development.
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NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1995
For the nine months ended September 30, 1994, revenues were $14,789,000.
Revenues declined 1% from the first nine months in 1994 to $14,631,000 for the
nine months ended September 30, 1995 as a result of a general reduction in the
average management fee percentage charged by the Company. This reduction, which
was made, in part, based on an evaluation by the Company of its overall fee
structure and, in part, to further strengthen client relationships, offset the
positive impact of new clients that began doing business with the Company during
the first nine months of 1995. The Company believes that its management fees are
competitive with other service providers. However, there can be no assurance
that lower fees will not be required to remain competitive.
PRO FORMA
The Company's actual revenues of $18,773,000 for the year ended December
31, 1994 increase 43% on a pro forma basis to $26,897,000 after giving effect to
the Acquisitions. The increase is due to the additional revenues of the Acquired
Business reflected in the pro forma results. Historical revenues of $14,631,000
for the nine months ended September 30, 1995 also increase 42% to $20,841,000 on
a pro forma basis. The increase is due to the additional revenues from an
increase in the volume of business attributable to the Acquired Businesses and
reflected in the pro forma results. In addition to providing accounts receivable
management and other services similar to those provided by the Company, certain
Acquired Businesses provide services not historically offered by the Company,
such as consulting services to MSOs, in the case of the NCHC Group. The
provision of these additional services provides the Company the opportunity to
receive revenue from new sources, although there can be no assurance that such
services will be provided or provided on a cost-effective basis.
SALARIES AND WAGES; GENERAL AND ADMINISTRATIVE
YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
Salaries and wages consist of all wages and other employee compensation.
Salaries and wages increased 90% from $3,101,000 for the year ended December 31,
1992 to $5,898,000 for the year ended December 31, 1993. Salaries and wages
increased 50% from 1993 to $8,866,000 for the year ended December 31, 1994.
Salaries and wages increased during these periods due to the increase in the
Company's total personnel from the Spring acquisition. These increases further
reflect increased salary expense attributable to the addition of staff
throughout the Company and an increase in the sales force and client
representatives at Spring. In addition, the Company's salary expense increased
during these periods as the Company increased its level of service, broadened
the types of medical specialties served and expanded its business beyond its
original base in the Middle Atlantic states.
General and administrative expenses increased 112% from $2,021,000 for the
year ended December 31, 1992 to $4,291,000 for the year ended December 31, 1993.
These expenses increased by 57% from 1993 to $6,723,000 for the year ended
December 31, 1994. These increases are due to the reasons described above for
increases in salaries and wages during the same periods.
NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1995
Salaries and wages increased 10% from $6,552,000 for the nine month period
ended September 30, 1994 to $7,234,000 for the nine months ended September 30,
1995. This increase was caused by greater processing volume due to the addition
of clients and increased service requirements of clients. General and
administrative expenses declined 2% from $5,121,000 for the nine months ended
September 30, 1994 to $5,020,000 for the corresponding 1995 period. This
decrease was due in large part to the consolidation of the Spring operations.
The Company has made significant, and expects to continue to make certain,
operating expenditures, including investments in systems and technology in order
to improve its operating efficiencies and enhance its services offered to
clients.
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PRO FORMA
The Company's salaries and wages of $8,866,000 for the year ended December
31, 1994 increase 39% to $12,214,000 on a pro forma basis. For the nine months
ended September 30, 1995, wages and salaries increase by 39% from $7,234,000 on
a historical basis to $10,076,000 on a pro forma basis. These increases reflect
the personnel gained with the Acquired Businesses. General and administrative
expenses also increase 39% from $6,723,000 for the year ended December 31, 1994
to $9,349,000 on a pro forma basis for the year ended December 31, 1994. These
expenses also increase 34% for the nine months ended September 30, 1995 from
$5,020,000 on a historical basis to $6,748,000 on a pro forma basis. These
increases reflect the additional general and administrative expenses associated
with the Acquired Businesses.
DEPRECIATION AND AMORTIZATION; INTEREST EXPENSE, OTHER (NET) AND INCOME TAXES
YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
The Company's depreciation and amortization increased 44% from $1,781,000
for the year ended December 31, 1992 to $2,566,000 for the year ended December
31, 1993 and 31% from 1993 to $3,349,000 for the year ended December 31, 1994.
These increases were due largely to the higher levels of depreciation and
amortization associated with the acquisition of Spring in August 1993. The
Company's interest expense represents its cost of borrowings, net of earned
interest income. The Company's other expenses consist of losses on dispositions
of equipment and other miscellaneous expense items. The Company's interest and
other expenses increased by 26% from $1,033,000 for the year ended December 31,
1992 to $1,300,000 for the year ended December 31, 1993. These expenses also
increased 32% from 1993 to $1,712,000 for the year ended December 31, 1994.
These increases were due primarily to the additional debt incurred in August
1993 in connection with the Company's acquisition of Spring. Due to the charges
for depreciation and amortization resulting from purchase accounting for the
Company's acquisitions, the Company has paid no federal income taxes and has
generated income tax benefits of $303,000 in the year ended December 31, 1993
and $810,000 in the year ended December 31, 1994.
NINE MONTHS ENDED SEPTEMBER 1994 AND 1995
The Company's depreciation and amortization increased 1% from $2,522,000
for the nine months ended September 30, 1994 to $2,549,000 for the nine months
ended September 31, 1995. This increase was due primarily to the purchase of
additional equipment, furniture and leasehold improvements. The Company's
interest and other expenses declined by 21% from $1,338,000 for the nine months
ended September 30, 1994 to $1,056,000 for the nine months ended September 30,
1995. This decline was due to the decrease in debt of the Company resulting from
certain scheduled repayments of debt. The Company's income tax benefit decreased
from $382,000 for the nine months ended September 30, 1994 to $286,000 for the
corresponding 1995 period. This decrease was primarily due to the inclusion in
the tax benefit in the nine months ended September 1994 of a change in the state
tax law allowing previously disallowed prior year state net operating loss
deductions with no corresponding item in the nine months ended September 1995.
PRO FORMA
On a pro forma basis, the Company's depreciation and amortization for the
year ended December 31, 1994 increases 23% from $3,349,000 on a historical basis
to $4,124,000. The Company's depreciation and amortization for the nine months
ended September 30, 1995 of $2,549,000 also increases by 22% to $3,119,000 on a
pro forma basis. These increases are due largely to higher levels of
depreciation and amortization associated with the acquisition of the Acquired
Businesses.
The Company's interest and other expenses for the year ended December 31,
1994 of $1,712,000 on a historical basis decline by 55% to $766,000 on a pro
forma basis. The Company's interest and other expenses of $1,056,000 for the
nine months ended September 30, 1995 also decline by 50% to $528,000 on a pro
forma basis due to the reduced interest expense resulting from the repayment of
debt upon
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completion of the Offering. After giving effect to the Offering, the Company's
income tax benefit would be reduced from $810,000 for the year ended December
31, 1994 to an income tax expense of $118,000 on a pro forma basis. On a pro
forma basis, the Company's income tax expense changes from an income tax benefit
of $286,000 to an income tax expense of $374,000 for the nine months ended
September 30, 1995. This increase in tax expense is attributable primarily to
the factors described above.
NET INCOME (LOSS)
YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
The Company's net income declined from $16,000 for the year ended December
31, 1992 to a loss of $672,000 for the year ended December 31, 1993 and declined
59% from 1993 to a loss of $1,067,000 for the year ended December 31, 1994. The
changes (losses) in net income resulted principally from the matters discussed
above.
NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1995
The Company's net loss increased 159% from $363,000 for the nine months
ended September 30, 1994 to $942,000 for the nine months ended September 30,
1995. This increase was due to the management fee reductions and operating
expense increases outlined above, which were largely in connection with the
acquisition of Spring while its operations were being consolidated into three
offices and one centralized processing facility. In addition, the increase in
operating expenses for the nine months ended September 30, 1995 reflected
increased salaries and wages of approximately $700,000 from the corresponding
period in 1994. This increase was attributable to an increased volume of
business in the Company's Mt. Joy, Pennsylvania office, the hiring of additional
personnel, particularly in connection with Spring's marketing activities, and an
increase in salary levels generally.
PRO FORMA
The Company's net income for the year ended December 31, 1994 increases by
$1,393,000 from the Company's actual net loss of $1,067,000 to $326,000 of net
income on a pro forma basis (See notes 2(f) through 2(j) of the Notes to Pro
Forma Financial Information). The Company's pro forma net loss for the nine
months ended September 30, 1995 also would be reduced from the Company's
historical nine-month loss of $942,000 to net income of $53,000 on a pro forma
basis (See notes 2(f) through 2(j) of the Notes to Pro Forma Financial
Information). These decreases in the net loss primarily are attributable to the
additional revenues generated by the Acquired Businesses and the reduction in
the Company's interest expense due to the repayment of certain indebtedness with
a portion of the net proceeds of the Offering.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception in 1991, the Company has financed its operations
through the sale of equity securities, borrowings under credit arrangements and
internally generated funds.
The Company's operating activities provided net cash of $1,375,000,
$1,685,000 and $1,946,000 for the years ended December 31, 1992, 1993 and 1994,
respectively. Net cash of $1,194,000 and $52,000 was generated by the Company's
operating activities during the nine months ended September 30, 1994 and 1995,
respectively.
At September 30, 1995, the Company had a working capital deficiency of
$1,351,000. This working capital deficiency was caused primarily by increased
short-term borrowings and related expenditure for items related to operating
improvements at Spring, capital expenditures and principal payments on long-term
debt and capital leases. To address its working capital deficiency, the Company
sold 1,100 shares of 10% Preferred Stock, Series A to Hillside Capital
Incorporated ('Hillside') for an aggregate consideration of $550,000 and
increased its available borrowing capacity under its line of credit from
$400,000 to $600,000. The Company intends to use the proceeds of its preferred
stock sale, which shares will be redeemed with a portion of net proceeds from
the Offering, for general working capital purposes. Although there can be no
assurance that it will not do so, the Company does not anticipate incurring
significant additional operating costs in connection with the Acquired
Businesses, as no significant integration with respect to the Acquired
Businesses is planned.
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The Company's unbilled accounts receivable were 68%, 72% and 73% of total
accounts receivable as of December 31, 1993, December 31, 1994 and September 30,
1995, respectively, and 15%, 17% and 27% of revenues for the years ended
December 31, 1993 (pro forma -- see footnote 3 to the Company's consolidated
financial statements), and December 31, 1994 and the nine months ended September
30, 1995, respectively. The unbilled accounts receivable result from the
Company's recognition of revenue when substantially all services to be performed
by the Company (except the collection of the client's accounts receivable from
patients) have been completed. The significant amount of unbilled receivables in
each period results from the collection period of the client's accounts
receivable from patients, which ranged from approximately 60 to 75 days for the
year ended December 31, 1994.
The Company expects the unbilled accounts receivable of the Acquired
Businesses to have a positive effect on its expected pro forma consolidated cash
inflows. Such cash inflows will commence immediately after the Company purchases
the Acquired Businesses. Such amounts will be offset by the development of new
unbilled accounts receivables generated in the ordinary course of business.
For the years ended December 31, 1992, 1993 and 1994, the Company made
capital expenditures of $140,000, $130,000 and $535,000, respectively. Since
1992, the Company has made significant information technology system upgrades
and improvements. The Company's capital expenditures for the nine months ended
September 30, 1994 and 1995 were $184,000 and $396,000, respectively. These
expenditures reflect the continued investment in technology improvements and
include costs related to certain leasehold improvements and acquisitions of
other office equipment and furnishings. The Company's capital expenditures for
the first nine months in 1995 also reflect start-up costs associated with
servicing new clients from a new office in Florida.
On a pro forma basis at September 30, 1995, after giving effect to the
Offering and the application of the net proceeds as set forth in 'Use of
Proceeds,' the Company had working capital of approximately $4.4 million (See
notes 1(a) through 1(e) of the Notes to the Pro Forma Financial Information).
Based upon the Company's pro forma working capital position and its pro forma
statements of operations for the year ended December 31, 1994 and for the nine
months ended September 30, 1995, the Company believes that additional working
capital is not required to meet its current liquidity needs. In order to pursue
its strategy of making additional acquisitions, the Company will need to obtain
additional financing and is in negotiations for a line of credit from a
financial institution. The Company has received two proposals to provide it with
a line of credit of up to $12.0 million and $15.0 million, respectively. The
Company intends to evaluate these proposals. There can be no assurance that the
Company will obtain any such line of credit, that any such line of credit will
be obtained on favorable terms or that the Company will not be required to seek
additional financing. The Company believes that the net proceeds of the Offering
and its pro forma cash balances, together with cash flow from operating
activities, will be sufficient to finance its operations for the foreseeable
future.
RECENT DEVELOPMENTS
The Company's most recent fiscal year ended on December 31, 1995. Results
of operations are not yet available for the quarter or the year ended December
31, 1995. Based on preliminary financial information for the two months ended
November 30, 1995 the Company estimates the revenue for the two and eleven-month
periods ended November 30, 1995 to be slightly higher than the revenue for the
corresponding two and eleven-month periods in 1994. The Company believes that
this slight increase is due to a greater volume of business in the 1995 periods.
In addition, the Company anticipates that its salaries and wages and
general and administrative expenses for the two and eleven-month periods ended
November 30, 1995 may change in a manner generally consistent with changes
in those expenses for the nine months ended September 1995 from those
expenses for the corresponding 1994 periods. Those changes likely are due to
additional staff, general salary increases and slightly higher operating
expenses in general in the 1995 periods.
These estimates are preliminary, have not been reviewed or audited and may
not be indicative of results of operations for the quarter or the year ended
December 31, 1995. There can be no assurance that the Company's revenue for the
quarter or year ended December 31, 1995 will be equal or greater than the
Company's corresponding 1994 revenue or that operating expenses for the quarter
or year ended December 31, 1995 will not be higher than operating expenses for
the corresponding periods in 1994.
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BUSINESS
GENERAL
The Company is a leading provider of business management services to
hospital-affiliated Physicians. The Company's clients practice medicine in an
array of settings, including solo and group practices, IPAs, specialty networks
and other affiliated-physician groups. The Company's services enable Physicians
to maintain their independence and clinical autonomy while maximizing their
reimbursement and cashflow. The Company believes that it is one of the largest
providers of business management services to Physicians.
The Company offers its clients a broad variety of business management
services, ranging from accounts receivable management to financial,
administrative and strategic support, data management and information systems
support. In addition, the Company employs its proprietary technology and
extensive financial and patient encounter databases to provide a comprehensive
range of managed care services to its clients, including contract review and
negotiation, implementation and administration, thereby enhancing their ability
to profitably participate in managed care systems. For its services, the Company
generally is compensated with a management fee based upon a percentage of its
clients' net collections, which percentage is determined after considering a
broad range of factors, including the medical specialty of the client and the
nature of the services to be provided. The Company currently provides services
to over 2,000 physicians, including specialists in radiology, anesthesiology,
pathology and emergency medicine, as well as other specialists, throughout
Pennsylvania, New Jersey, California, Arizona, Florida, Delaware, Maryland,
Massachusetts and Virginia. Many of the Company's clients are affiliated in some
sort of group practice, IPA or other specialty networks. As of November 30,
1995, the Company experienced client retention (as measured by the continuation
of written contracts in existence at the end of 1994) of approximately 95% of
those clients to which it provided services at the end of 1994. Upon completion
of the Acquisitions, the total number of physicians served by the Company will
increase to over 2,500, and, in addition to the states in which it currently
does business, the Company will offer services to clients in Alabama, Kentucky,
Ohio, Washington and West Virginia.
INDUSTRY BACKGROUND
The Health Care Financing Administration estimates that health care
spending in the United States totaled approximately $1 trillion in 1994, with
approximately $200 billion attributable to physician services. As a large and
rapidly growing component of overall health care costs, physicians have come
under increasing pressure due to the prospect of health care reform legislation,
an increasingly complex reimbursement environment and the continued penetration
of managed care. Due to these and other market forces, physicians have, in
increasing numbers, sought to align themselves with other physician practices
and with business management services companies in an effort to acquire enhanced
management capabilities and information systems. The Company believes that by
providing a broad array of business management services to Physicians, it
enables Physicians to maintain independence and ownership of their practices
while providing them with the expertise necessary to meet the challenges posed
by the changing health care environment. In addition, as more physicians face
pressure to affiliate with other health care providers or managed care
organizations, their need for advisors experienced in analyzing and negotiating
such affiliations increases.
The Company believes that the physician business management services
industry is highly fragmented. Many of the participants in the industry are
smaller firms with limited capital and management resources and limited patient
encounter databases. These firms offer primarily accounts receivable management
services and have a narrow range of additional services. The Company believes
that, as Physicians continue to demand greater sophistication, broader services
and technology-driven products, these smaller service providers will find it
increasingly difficult to compete.
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STRATEGY
The Company's strategy is to build upon its reputation and expertise in
providing a broad range of cost-effective, value-added business management
services to Physicians. PSS's strategy for achieving this objective contains the
following key elements:
Provide High Level of Customer Service at Effective Cost. The Company
customizes its services for each client and provides detailed reports on a
regular basis to its clients regarding their practices. PSS maintains
local offices in regions throughout the United States, where client
representatives are able to visit clients on a regular basis and respond
quickly to the Company's clients' needs. These client representatives
interact directly with existing clients and provide clients with
information derived from the Company's patient encounter database
regarding local, regional and national markets. The Company believes that
this 'multi-local' approach to client relationships effectively
differentiates the Company from its competitors. Further enhancing the
Company's local presence are its centralized processing centers, which
also provide significant economies of operation. The Company believes that
the skill of its employees, its relatively low labor costs and its
technological resources and efficiencies provide it with a cost of service
advantage over many of its competitors.
Provide Broad Array of Services. The Company provides a broad range of
value-added services that meet its clients' needs and that address market
changes. A key part of the Company's service strategy is to capitalize on
changes in the health care market, such as managed care initiatives and
increasingly complex reimbursement procedures, by providing new services
that address the changing needs of Physicians. For example, the Company's
extensive patient encounter database allows the Company to evaluate
managed care and capitation proposals for its clients. PSS believes that
it provides Physicians with an alternative to participation in
commercially owned physician networks by offering Physicians the
experience, expertise and guidance necessary to enable them to form
physician-owned networks, participate in Company-sponsored IPAs and
negotiate favorable contracts with managed care organizations. The Company
believes that its range of business management services (including the MSO
capability it will gain through acquisition of one of the Acquired
Businesses) and its market knowledge give it an advantage over many of its
competitors, which offer a narrower range of services and may not be as
well positioned to respond to market changes and managed care mandates.
Capitalize on Technological Capabilities. PSS's proprietary software
systems perform the complex processing and analytical tasks required to
maximize the income of Physicians and provide database capabilities that
are essential for negotiation and on-going management of managed care
provider relationships. The Company's information systems currently store
transactional data associated with approximately three million patient
encounters per year. As a result, PSS management believes that the Company
possesses one of the largest private patient encounter databases in the
regions in which it operates. This detailed database enables the Company
to provide clients with historical and future trends in utilization data
and physician referral patterns, as well as other encounters and
productivity measurements and benchmark data for strategic practice
planning.
The Company has made significant technology expenditures and believes
that future investments in technology are likely due to the data-intensive
nature of its business. The Company's dedicated programming personnel work
with clients to customize their software and systems functions. In order
to remain competitive in the future, the Company believes that it must be
able to establish full electronic interfaces with all provider and payor
organizations in order to instantly upload registration and procedure
data, verify eligibility, determine specifics of coverages, submit claims,
electronically adjudicate claims, negotiate electronic remittance and
achieve automated posting to line items on the physician's original claim
submission. The Company believes that it is a leader in the industry with
regard to its electronic data interface capabilities.
Pursue Consolidation Opportunities. The increasingly complex nature of the
health care reimbursement process, and the related growing demand for more
advanced technology, have made it more difficult for many of the smaller
medical billing service companies to effectively
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compete due to their limited capital and management resources and their
less comprehensive patient encounter database. As a result, industry
consolidation has accelerated over the past several years. The Company
expects this trend to continue for the foreseeable future. PSS intends to
continue to devote time to identifying and pursuing acquisition candidates
nationwide and to evaluate acquisition opportunities in light of its
acquisition criteria.
The Company seeks to position itself as an attractive acquiror to
prospective sellers. The Company generally looks for acquisition
candidates that share its philosophy of focusing on high-quality service
to clients. In addition, PSS typically encourages the management of its
acquisition candidates to remain involved in the business after the
Company acquires the business in order to ease the transition to the
Company's ownership and utilize the expertise and skills of the acquired
company's managers.
Cross-Market Existing and Acquired Capabilities. PSS believes that it has
established a strong track record for providing highly competent and
cost-efficient services to its clients, thereby enabling a significant
portion of its internal growth to occur through referrals and physician
inquiries. In the past, the Company has utilized the expertise of
personnel in one office to acquire new accounts and offer supplemental
services to Physicians served by other offices. Upon its acquisition of
the Acquired Businesses, and any subsequent acquisitions, the Company
intends to similarly cross-market its services, market knowledge and
physician specialty expertise among its clients and clients of such
acquired businesses. In so doing, the Company believes that it will
expand, on a geographic basis, the services provided and types of
physician specialists served by the Company.
BUSINESS MANAGEMENT SERVICES
In recent years, the physician business management services industry has
changed from one where the service provider was responsible primarily for
accounts receivable management to one where a comprehensive, integrated range of
services is provided. The Company believes that providing its clients with
services beyond accounts receivable management helps create a stronger
relationship with its clients and provides PSS with a competitive advantage. As
the health care market continues to grow in complexity, the Company believes
that those companies with a history of providing a broad array of business
management services will be sought out by physicians and will be better
positioned than others to develop additional services to meet the needs of
the marketplace. The Company's and the Acquired Businesses' business management
services include the following:
Operations Management
Fee Schedule Development and
Management
Capitation Plan Analysis and
Administration
Patient and Resource Scheduling
Coding
Billing and Follow-up
Strategic Support
Feasibility Studies
Support in Establishing Independent
Practice
Contract Negotiation
Practice Marketing
Merger of Practices
Administrative/Financial Support
Valuation Analysis
Budgeting
Cash Management
Bookkeeping and Accounting
Financial Statements
Payroll and Accounts Payable
Expense Management
Insurance Program Administration
Independent Physician Associations
Management Service Organization
Payment Processing
Lockbox Payments
Internal Controls
Payment Validation
Performance Monitoring and Reporting
Data Management
Data Collection, Analysis and Reporting
Encounters Database Design and
Analysis
Financial
Contractual
Practice Profiles
Resource Utilization
Electronic Data Interface
Patient Demographic and Encounter
Information
Billing Claims Submission
Remittance Receipt and Posting
Client Office Connectivity
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The Company does not provide the full range of its business management
services to any one client, although generally all clients receive accounts
receivable management services. The Company generally does not charge separately
for additional business management services, although its managment fee (which
is based on a percentage of its clients' net collections) does take into account
the nature of the services to be provided. The Company's accounts receivable
management services range from data gathering to financial reporting and
analysis. Generally, the Company's practice is to employ personnel dedicated to
the performance of specific tasks in the accounts receivable management process.
In its initial stages, the Company collects data from Physicians, inputs
relevant data for claims processing, monitors data for errors and makes
corrections. The Company submits reimbursement claims on behalf of its Physician
clients, follows-up with third-party payors and patients regarding the
Physicians' accounts receivable and reports to the Physicians regarding their
patient and accounts receivable activity. The Company believes that, through the
use of trained personnel and its proprietary technology, it processes claims
efficiently for its clients, creating cost savings for the Company and rapid and
complete reimbursement for its clients.
CLIENT SUPPORT SERVICES
The Company believes that the level of service provided is the
distinguishing factor among physician business management service companies.
Accordingly, the Company emphasizes a personalized approach in providing
services to its clients. The Company believes that its multi-local,
sophisticated, technology-driven management services help distinguish the
Company from other providers of business management services and provide it with
a competitive advantage.
A key part of the Company's strategy is the proximity and availability of
client representatives to the Company's clients. The Company has 20 client
representatives based in four states, managing the accounts of between one and
15 clients. Upon completion of the Acquisitions, the Company anticipates that
its client representatives will have a presence in five additional states.
Through these client representatives, the Company is able to maintain regular
contact with its clients and respond rapidly, often in person, to questions or
problems. The Company provides detailed monthly and quarterly reports to its
clients. These reports indicate, among other things, the client's accounts
receivables activity for the period, the number of patients seen and procedures
performed for the period and a comparison of the current period's activity with
that of the prior year's. The Company's client representatives typically review
these detailed financial reports with the Physicians on a regular basis. In
addition, the Company's client representatives may share industry or regional
data with the Company's clients to help clients better understand their business
relative to that of other Physicians.
MARKETING AND SALES
The Company's marketing and sales efforts include advertising, attendance
at industry events and maintenance of a marketing and sales force. The Company
believes that most of its marketing efforts coincide with its client support
services, as many new clients are introduced to the Company by existing clients.
The Company believes that, as managed care initiatives become more prominent,
Physicians are more likely to affiliate with one another in groups and
subsequently retain business management services from a provider experienced in
dealing with group structures and issues. The Company believes that its
knowledge gained through operating one of the oldest and largest IPAs in the
United States, its service to a regional physician staffing organization and its
years of working with other affiliated groups of physicians provides it with a
competitive advantage in addressing the changing needs of the health care
market.
The Company employs 10 people in five states for the purpose of marketing
and business development. Typically, these regional representatives identify a
client prospect and then coordinate with senior management of the Company to
develop a suitable service and fee proposal. Before submitting its proposal, the
Company typically reviews financial and practice information of the Physicians
and identifies areas for improvement in the prospective client's current
business management. With knowledge of local markets, the Company's client
representatives also support the marketing efforts of the Company by providing
benchmark information pertaining to other local
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physician practices. The Company believes that its experience and data resources
provide it with a significant advantage over many of its competitors in
acquiring new accounts.
CUSTOMERS
The Company's clients consist of hospital-affiliated Physicians. These
Physicians practice medicine in an array of settings, including solo and group
practices, IPAs and specialty networks and other affiliated-physician groups.
The Company estimates that it provides services (either directly or through its
physician group clients) to over 2,000 physicians, and that it will serve over
2,500 physicians after giving effect to the Acquisitions. Of the Company's 1994
revenues, services for radiologists, emergency room physicians and
anesthesiologists accounted for approximately 24%, 15% and 53%, respectively, of
total revenues. The Company's other clients practice various specialties,
including pathology, cardiology and surgery. As of November 30, 1995, the
Company has retained (as measured by the continuation of written contracts in
existence at the end of 1994) approximately 95% of those clients to which it
provided services at the end of 1994.
In most cases, the Company enters into written agreements with its clients.
The Company's written agreements generally range from month-to-month to five
years in duration and renew automatically at the end of the initial term unless
notice is given by either party 30 to 90 days prior to renewal. However, in
certain regions where the Company conducts business, the industry practice is to
provide business management services without a written contract. In those cases,
typically the Company does not require a written agreement with its clients and
experiences a lower comparative client retention rate.
Substantially all of the Company's contractual arrangements for business
management services provide for management fees payable to the Company based
upon a percentage of the Company's clients' net collections. Management fees,
which typically range from 3% to 15%, are negotiated at the outset of an
engagement based upon a number of factors, including the types of physician
specialists involved, the range of services to be provided by PSS, an analysis
of the collectability of a client's accounts receivable portfolio and an
estimate of the costs of such collection. The Company estimates that its average
management fee (on a weighted average basis) charged in 1994 for business
management services was approximately 7.3% of net collections. No single
customer or organization accounted for 10% or more of the Company's total
revenue in 1994.
ACQUISITIONS
Through their acquisition of the predecessor business of PSS in 1991 and
the Company's acquisition of Spring in 1993, the senior management of the
Company has experience in identifying and acquiring physician business
management service firms. The Company maintains a database of participants in
the physician business management services industry and has taken an active,
highly selective approach to identify acquisition targets that meet its
acquisition criteria. In general, the Company intends to focus on acquisition
candidates that have strong management, demonstrate potential for revenue growth
or continued profitability and are compatible with the Company's business or
provide an opportunity to expand into other high-revenue medical care
specialties.
The Company generally looks for acquisition candidates that share its
philosophy of focusing on high-quality service to clients. In addition, PSS
typically encourages the management of its acquisition candidates to remain
involved in the business on a long-term basis after the Company acquires the
business in order to ease the transition to the Company's ownership and utilize
the expertise and skills of the acquired company's managers. For example, L.
David Covell, a former shareholder of Spring, has continued to be involved in
the day-to-day business of Spring following the Company's acquisition of Spring
in 1993 and has remained the Chairman of the Board of Spring. PSS intends to
evaluate acquisition opportunities in complementary geographic markets and
service areas that present the potential for subsequent growth through
referrals. Although it evaluates each acquisition candidate on a case-by-case
basis, the Company does not currently anticipate acquiring other businesses
where significant consolidation or staff reductions would be required, and PSS
anticipates that any necessary consolidation would be gradual. See 'Risk
Factors -- Acquisitions; Need for Capital.'
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Although PSS currently is engaged in discussions with several acquisition
candidates, no acquisition (other than of the Acquired Businesses) currently is
pending, and no letter of intent, agreement or other understanding exists
regarding any other acquisition. There can be no assurance that any such
acquisition will be completed. The Company currently is in negotiations with
certain banks, including its existing bank lender, to provide it with a line of
credit to be used for acquisitions. The Company has received two proposals to
provide it with a line of credit of up to $12.0 million and $15.0 million,
respectively. The Company intends to evaluate these proposals. There can be no
assurance that such a line of credit will be made available or be made available
on favorable terms.
ACQUIRED BUSINESSES
The Company identified the Acquired Businesses as suitable acquisition
candidates due in part to their strong management, geographic location, range of
services provided and Physician specialists served. Although there can be no
assurance that none will arise, the Company does not anticipate any significant
integration issues in connection with the Acquisitions. The Company intends to
generally keep in place the management and employees of the Acquired Businesses
and believes that each of the Acquired Businesses will be operated in a manner
substantially consistent with its past practice, although certain limited
operational aspects of the Acquired Businesses may be conducted from the
Company's offices or processing centers. The Company believes that the
operations of the Acquired Businesses are similar to the Company's operations
and that they conduct business in a manner consistent with the Company. The
Acquired Businesses provide at least some of the services provided by the
Company to its clients and provide the Company with geographic expansion
opportunities as well as the opportunity, in the case of the acquisition of the
NCHC Group, to begin providing consulting services to MSOs.
The Company has entered into agreements to acquire the Acquired Businesses
simultaneously with the consummation of this Offering. Completion of the
Acquisitions is a condition to the Offering.
Under the terms of each acquisition agreement, consummation of the
Acquisitions is subject to ordinary closing conditions, including the accuracy,
at the time of the Acquisitions, of the representations and warranties of the
Acquired Businesses and their respective stockholders. The aggregate
consideration to be paid by the Company for the Acquired Businesses is
anticipated to consist of $11,500,000 in cash, $9,500,000 of which is payable
upon completion of the Offering and $2,000,000 of which is payable in monthly
installments during the first year after consummation of the Offering. An
additional $150,000 may be payable on the second anniversary of the Acquisitions
in connection with the acquisition of DPS, subject to the retention of clients.
Each of the Acquired Businesses and the principal terms of each Acquisition are
described below.
North Coast Health Care Management, Inc. ('NCHC'). NCHC was founded in 1985
and has its offices in Cleveland, Ohio. NCHC provides business management
services to approximately 400 emergency room and other physicians in Ohio, West
Virginia and Kentucky. NCHC's business management services include accounts
receivable management services, budgeting, payroll administration and financial
planning. NCHC also currently provides consulting services to two MSOs, which
provide assistance in evaluating and negotiating managed care plans and
providing scheduling, staffing, financial analysis and other services to over
130 physicians. North Coast Account Systems, Inc. ('NCAS') and Medical Dental
Invoicing Services, Inc. ('MDIS'), which were established in 1991 and 1978,
respectively, are affiliates of NCHC and also headquartered in Cleveland, Ohio.
NCAS provides collection services to Physicians. MDIS provides accounts
receivable management services to Physicians. NCHC, NCAS and MDIS are sometimes
referred to collectively herein as the 'NCHC Group.' The NCHC Group's revenues
for 1994 represent approximately 22% of the Company's 1994 revenues on a pro
forma basis, after giving effect to the Acquisitions. Approximately 48.3% and
45.4% of the NCHC Group's revenues for the year ended 1994 and the nine months
ended September 30, 1995, respectively, are attributable to several physician
groups in which one of the shareholders of the NCHC Group is a member. Many of
these physician groups are under written contract with NCHC to receive physician
business management services for periods ranging from approximately one year to
two and one-half years after completion of the Acquisitions.
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It is anticipated that, simultaneously with completion of the Offering, the
Company will purchase the capital stock of NCHC for a purchase price of
$5,590,000 in cash, payable at closing, and an aggregate of $1,950,000 in cash,
payable in monthly installments over the succeeding 12 months. In addition, the
Company will acquire the assets of NCAS and MDIS, which consist principally of
customer accounts and receivables and certain office equipment, for cash in the
aggregate of $115,000, payable at closing and an aggregate of $50,000, payable
in monthly installments over the succeeding 12 months. The two stockholders of
the NCHC Group also will receive an aggregate of $295,000 in consideration of
their agreements not to compete with the Acquired Businesses or the Company for
a period of five years after the Acquisition.
The two stockholders of NCHC will enter into employment agreements with
NCHC at the time of the Acquisitions, pursuant to which each of them will be
employed for a term of five years at an annual base salary of $150,000. The
stockholders also will be entitled to receive deferred incentive compensation
based on increases in NCHC's earnings before interest, taxes and certain other
charges.
Medical Management Support, Inc. ('MM Support'). MM Support was founded in
1985 and has its offices in Bellevue, Washington. MM Support provides accounts
receivable management services to approximately 80 anesthesiologists in the
greater Seattle area. MM Support's 1994 revenue would account for approximately
5% of the Company's 1994 revenues on a pro forma basis, after giving effect to
the Acquisitions.
It is anticipated that, simultaneously with completion of the Offering, the
Company will acquire MM Support by purchasing, through a wholly owned subsidiary
of PSS, substantially all of the assets of MM Support, which consist principally
of customer accounts, receivables, leases and certain office equipment. The
purchase price for the assets will be $2,400,000 in cash. In addition, MM
Support and its stockholders will receive $100,000, in the aggregate, for their
agreements not to compete with the Acquired Businesses or PSS for a period of
five years after the Acquisition or, in the case of the stockholders, three
years from the termination of their employment with the Acquired Business, if
longer.
The three shareholders of MM Support will enter into employment agreements
with the ongoing Acquired Business upon completion of the Offering. Under these
agreements, each of the shareholders will agree to provide services of a
substantially similar nature to those currently provided to MM Support for a
period of two years from the Acquisition at a compensation rate of $35 per hour.
In addition, each such shareholder will be entitled to receive certain bonus
compensation based on revenue attributable to new clients introduced to the
Acquired Business by that shareholder before the second anniversary of the
Acquisition.
Data Processing Systems, Inc. ('DPS'). DPS was formed in 1989 and has its
offices in Birmingham, Alabama. DPS provides accounts receivable management
services to Physicians in the Birmingham, Alabama area. DPS's clients consist
principally of radiologists and pathologists, and it currently services
approximately 26 physicians. Revenues of DPS for 1994 represent approximately 3%
of the Company's 1994 revenues on a pro forma basis, after giving effect to the
Acquisitions.
It is anticipated that, simultaneously with completion of the Offering, a
wholly owned subsidiary of the Company will acquire DPS by purchasing
substantially all of DPS's assets, which consist principally of customer
accounts and receivables, for approximately $800,000 in cash (including $100,000
payable because the Acquisition will occur after December 31, 1995) and payment
of $100,000 in consideration of DPS's agreement not to compete with the ongoing
business or the Company for a period of five years after the Acquisition. In
addition, $150,000 may be payable on the second anniversary of the acquisition,
subject to DPS's retention of clients.
In addition to the amounts described above, under the terms of the
acquisition agreement for DPS, McGriff, Seibels & Williams, Inc., the sole
stockholder of DPS ('McGriff'), will receive $100,000 in consideration of its
agreement not to compete for a period of five years after the Acquisition. As a
condition to the acquisition of DPS, McGriff will enter into an agreement with
the Acquired Business, under which McGriff will lease office space to the
Acquired Business for up to two years at a cost of $10,000 per year, which
includes the cost of certain corporate overhead, support and computer software
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and hardware services to be provided by McGriff. In addition, McGriff will agree
to provide the Acquired Business on a cost-only basis certain other services
that it historically provided to DPS.
COMPETITION
The business of providing business management services to Physicians is
highly competitive. The Company estimates that it competes with several
relatively sophisticated local, regional and national physician business
management services organizations, with smaller, less-sophisticated local
accounts receivable management services businesses and with Physicians that
self-manage their practices and accounts receivable. The largest independent
provider of billing and accounts receivable management services to Physicians in
the United States is Medaphis Corporation, which is substantially larger than
the Company and has substantially greater resources.
The Company believes that the principal competitive factors in its industry
are the quality and range of services provided to clients, including the
maximization of revenue to Physicians for each procedure performed. In the
Company's view, the fees charged for services are a less important factor,
although it believes that its fees are competitive with other service providers.
In addressing certain complexities created by managed care initiatives, the
Company believes that one of the principal competitive factors is having a
patient utilization database and other market information to enable an
assessment of managed care proposals. The Company believes that, through use of
its proprietary technology and regional and specialty expertise, it is able to
compete effectively in providing business management services to Physicians in
the managed care market.
REGULATION
Various state and federal laws may regulate the Company's business of
providing business management services to Physicians. The Company also is
subject to laws and regulations relating to business corporations generally. The
Company believes that its operations are in material compliance with applicable
laws. However, many aspects of the Company's business operations have not been
the subject of state or federal regulatory interpretation, and certain areas of
the Company's business are highly technical in nature. In addition, as the
Company's business expands by the addition of services provided or
geographically, it may become subject to additional federal or state regulations
based on the services it provides or the states in which it conducts business.
Regulatory authorities have broad discretion concerning how these laws and
regulations are interpreted and how they are enforced. The Company may,
therefore, be subject to lengthy and expensive investigations of its business
operations. If the Company were found to be in violation of these laws or
regulations, the Company could be subject to criminal or civil penalties or
both, which could limit or prevent the Company from providing its physician
business management services. See 'Risk Factors -- Governmental Regulation;
Billing Practices.'
In accordance with Medicare regulations, physicians and hospitals are
permitted to assign Medicare claims to a billing and collection service only in
certain limited circumstances. The Medicare statutes that restrict assignment of
Medicare claims are supplemented by Medicare regulations and provisions in the
Medicare Carrier's Manual (the 'Manual'). The Medicare regulations and the
Manual provide that a billing service that prepares and sends bills for the
provider or physician and does not receive and negotiate the checks made payable
to the provider or physician does not violate the restrictions on assignment of
Medicare claims. The Company believes that its practices do not violate the
restrictions on assignment of Medicare claims and that it operates in a manner
consistent with these provisions.
The Social Security Act imposes criminal penalties for paying or receiving
remuneration (which is deemed a kickback, bribe or rebate) in connection with
Medicare or Medicaid programs. Violation of this law is a felony, punishable by
fines and imprisonment. These anti-kickback laws and rules have been broadly
interpreted to prohibit the payment, solicitation, offering or receipt of any
form of remuneration in return for the referral of Medicare or Medicaid patients
or any item or service that is covered by Medicare or Medicaid reimbursement.
The Company believes that its business operations do not put it in a position to
make or induce the referral of patients or services reimbursed under government
programs and, therefore, believes that its practices do not violate the federal
anti-kickback
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statute. If, however, the Company were found in violation of these laws, the
Company could be subject to substantial civil monetary fines, criminal sanctions
or both.
The Company also may be subject to criminal, civil and administrative
penalties under federal and state law prohibitions against submitting false
claims for payments. Generally, criminal penalties subjecting participants to
fines and imprisonment require that the entity act knowingly, willfully or with
fraudulent intent. Civil statutes provide for monetary penalties. The Company
also may be subject to criminal laws regarding failure to disclose known
overpayments under Medicare or Medicaid.
Various states prohibit a physician from sharing or 'splitting' fees with
persons not authorized to practice medicine. The Company believes that its
charges to its clients do not violate applicable fee splitting prohibitions. If
this belief is incorrect and the Company is determined to be engaged in fee
splitting arrangements with its clients, those clients would be subject to
charges of professional misconduct and penalties ranging from censure and
reprimand to revocation of their medical licenses. In addition, the Company
could be deprived of access to the courts to collect fees due from those
clients, thereby materially and adversely affecting the Company's revenues and
prospects.
Credit collection practices and activities are regulated by both federal
and state law. The Federal Fair Debt Collection Practices Act (the 'Federal Fair
Debt Act') sets forth various provisions designed to eliminate abusive,
deceptive and unfair debt collection practices by debt collectors. The Federal
Fair Debt Act also provides for, among other things, a civil right of action
against any debt collector who fails to comply with the provisions thereof.
Various states have also promulgated laws and regulations that govern credit
collection practices. In general, these laws and regulations prohibit certain
fraudulent and oppressive credit collection practices and also may impose
license or registration requirements upon collection agencies. In addition,
state credit collection laws and regulations generally provide for criminal
fines, civil penalties, injunctions and jail terms for collection agency
personnel who fail to comply with such laws and regulations and may entitle
states to recover unclaimed refunds from overcollections. The accounts
receivable management services the Company provides to its clients are not
considered debt collection services and the Company is not a 'debt collector'
under the Federal Fair Debt Act. Upon completion of the Acquisitions, certain
activities of one of the Company's subsidiaries will include collection
services, as NCAS specializes in collecting medical service receivables for its
clients.
Various states regulate the provision of administrative and business
services by third parties to physician-sponsored health plans. In addition,
certain federal or state consumer protection laws may apply to the Company's
billing activities insofar as PSS bills patients directly for the cost of
physician services provided.
The Company anticipates that various health care reform proposals may be
introduced at the federal or state level. The Company is unable to predict
whether any such proposals will apply to the operation of the Company's business
or whether, if adopted, any such proposals would materially adversely affect the
Company.
EMPLOYEES
At November 30, 1995, PSS had approximately 364 full-time and 67 part-time
employees, of which approximately 348 were clerical and 83 were administrative
employees. PSS employs 20 client representatives, 10 marketing representatives
and eight software programmers. None of the Company's employees is represented
by a labor union. The Company has experienced no work stoppages and believes
that its relations with its employees are satisfactory.
FACILITIES
The Company's principal executive offices are located at Route 230 and
Eby-Chiques Road, Mt. Joy, Pennsylvania. The Company maintains 11 offices in six
states, five of which include processing centers. The Company leases all of its
facilities, which in the aggregate constitute approximately 75,000 square feet
of office space. Such leases have terms ranging from month-to-month to eight
years, in most cases with options to renew.
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The Company believes that its facilities are adequate for its current
needs. The Company expects to renew its current leases from time to time or to
lease new space as necessary. In addition, the Company expects to lease
additional space as necessary to accommodate the anticipated expansion of the
Company.
LEGAL PROCEEDINGS
As of the date hereof, there are no legal proceedings pending against or
involving the Company that, in the opinion of management, could have a material
adverse effect on the business, financial condition or results of operations of
the Company.
LIABILITY INSURANCE
The Company carries liability insurance providing coverage for
comprehensive property damage, professional liability, employee dishonesty and
workers' compensation. Although the Company believes that its insurance policies
are adequate in amount and coverage for protection of its assets and operations
as currently conducted, there is no assurance that the coverage limits of the
Company's liability policies will be adequate. In addition, there is no
assurance that the Company's insurance coverage will continue to be available in
sufficient amounts and on reasonable terms, or at all.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Company's directors, executive officers and significant employees and
their ages as of January 1, 1996 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------------- --- --------------------------------------------------
<S> <C> <C>
Peter W. Gilson.............................. 55 President, Chief Executive Officer and Director
Hamilton F. Potter III....................... 39 Executive Vice President, Chief Operating and
Financial Officer and Director
Douglas Estock............................... 41 Director of Marketing
Jack R. Kinne................................ 47 President of Spring
Ronald Royer................................. 51 Director of Systems Automation
Bruce B. Schmoyer............................ 52 Director of Operations
Mortimer Berkowitz III....................... 41 Director
</TABLE>
------------------------
Peter W. Gilson has served since September 1991 as a Director and the
President and Chief Executive Officer of PSS. Mr. Gilson also is a Vice
President of Spring. Mr. Gilson was the President of the Goretex Fabrics
Division of W.L. Gore & Associates from 1978 to 1986, and the Chief Operating
Officer of The Timberland Company, a manufacturer of footwear and outdoor
clothing, from 1986 to 1988. From 1988 to 1991, Mr. Gilson served as President,
Chief Executive Officer and Chairman of the Board of Warrington Group, Inc., a
manufacturer of fire safety products, which was previously a division of The
Timberland Company. Mr. Gilson continues to serve as the Chairman of the Board
of Warrington Group, Inc. Mr. Gilson currently is on the Board of Directors of
each of Forschner Company and Sweetwater, Inc.
Hamilton F. Potter III has served, since September 1991, as the Executive
Vice President and Chief Operating and Financial Officer of PSS. Mr. Potter also
is a Vice President and the Treasurer of Spring. Mr. Potter co-founded BPI
Capital Partners, Inc. ('BPI Capital'), a private investment firm, in 1990 and
has been a Managing Director of BPI Capital since that time.
Douglas Estock joined the predecessor company to PSS in January 1989 and
served as its Director of Marketing from 1989 until it was acquired by the
Company in 1991. Mr. Estock has served as Director of Marketing of the Company
since 1991.
Jack R. Kinne joined Spring in 1982 and served as its Vice President until
August 1993. Spring was acquired by PSS in August 1993, at which time Mr. Kinne
was made President of Spring.
Ronald Royer joined the predecessor company to PSS in January 1989 and
served as its Director of Systems Automation from 1989 until it was acquired by
the Company in 1991. Mr. Royer has served as the Director of Systems Automation
of the Company since 1991.
Bruce B. Schmoyer joined PSS in September 1995 as Director of Operations.
From 1990 to August 1995, Mr. Schmoyer was a Senior Manager, Director of Patient
Accounting Practice, Eastern Region at Ernst & Young LLP.
Mortimer Berkowitz III has served as a Director of the Company since
September 1991 and served as a Vice President and the Secretary of the Company
from September 1991 until December 1995. Mr. Berkowitz co-founded BPI Capital in
1990 and has been a Managing Director of BPI Capital since that time. Mr.
Berkowitz also is a director of VZV Research Foundation, Inc.
The Company intends to name up to two people to serve as outside directors
of PSS as soon as practicable. There can be no assurance that such directors
will be named prior to completion of the Offering.
As permitted by the Delaware General Corporation Law, the Company's
Certificate of Incorporation and Bylaws provide that directors of the Company
shall not be personally liable to the Company or its stockholders for monetary
damages for breach of fiduciary duty as a director, except for liability (i) for
any breach of the director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the
Delaware General Corporation Law, relating to prohibited dividends or
distributions, or the repurchase or redemption of stock or (iv) for any
transaction from which the director derives an improper personal benefit.
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Officers of PSS serve at the discretion of the Board of Directors and are
appointed to serve, subject to the discretion of the Board of Directors, until
their successors are appointed. The Company maintains key-man insurance for
Messrs. Gilson and Potter, under which the Company is named as the beneficiary.
Directors of the Company receive reimbursement of their reasonable
out-of-pocket expenses incurred in connection with their board activities.
Spring has entered into an Employment Agreement with Jack R. Kinne, the
President of Spring. Pursuant to the Employment Agreement, Mr. Kinne will be
employed by Spring as its President until August 1998, subject to early
termination by Spring for 'cause,' as defined in the agreement. Under the
Employment Agreement, Mr. Kinne receives an annual salary of $129,012, subject
to upward adjustment, and is entitled to receive bonus compensation as may be
determined by Spring's board of directors.
EXECUTIVE COMPENSATION
The Summary Compensation Table below sets forth the cash compensation
earned by or paid to the Company's executive officers for the years ended
December 31, 1993, 1994 and 1995. The table sets forth such compensation earned
by or paid to the Chief Executive Officer and the Company's other executive
officers (the 'named executive officers').
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION(1)
---------------------------------
ANNUAL COMPENSATION RESTRICTED OPTION & LONG TERM
NAME AND ------------------------------- STOCK WARRANT INCENTIVE ALL OTHER
PRINCIPAL POSITION YEAR SALARY(2) BONUS(3) OTHER(4) AWARDS AWARDS PAYOUTS COMPENSATION
- --------------------------- ---- --------- -------- -------- ---------- -------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Peter W. Gilson 1995 $ 221,888 -- -- -- -- -- --
President, Chief 1994 216,094 -- -- -- -- -- --
Executive Officer 1993 203,658 -- -- -- -- -- --
Hamilton F. Potter III 1995 $ 137,151 -- -- -- -- -- --
Executive Vice President 1994 132,128 -- -- -- -- -- --
and Chief Operating and 1993 123,920 -- -- -- -- -- --
Financial Officer
Jack R. Kinne 1995 $ 131,012 -- $ 32,000(5) -- -- -- --
President of Spring 1994 121,101 $ 25,000 -- -- -- -- --
1993(6) 128,712 -- -- -- -- -- --
</TABLE>
- ------------
(1) The Company has no long-term incentive compensation plans other than its
proposed 1996 Stock Option Plan. No options were granted under that plan in
1995. The Company believes that Mr. Kinne may be granted options under the
1996 Stock Option Plan as of the completion of the Offering. Any such
options would be exercisable at the initial public offering price set forth
on the cover of this Prospectus and subject to the terms of the 1996 Stock
Option Plan.
(2) Amounts shown include compensation deferred pursuant to Section 401(k) of
the Internal Revenue Code of 1986, as amended.
(3) The Company has no formal bonus plan and does not provide for deferred
awards. The Company may pay bonuses based on individual and Company
performance.
(4) The aggregate amount of Other Annual Compensation for each named executive
officer except Mr. Kinne did not equal or exceed the lesser of $50,000 or
10% of such individual's base salary and bonus for the year ended December
31, 1995.
(5) Mr. Kinne received $32,000 in reimbursement for certain costs related to his
relocation in connection with the relocation of Spring's headquarters to
Stockton, California.
(6) PSS acquired Spring in August 1993. Amount shown reflects compensation from
Spring for the entire year.
STOCK OPTION PLAN
It is anticipated that prior to completion of the Offering, the 1996 Stock
Option Plan (the 'Stock Option Plan') will be adopted by the Company's Board of
Directors and approved by its stockholders.
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It is anticipated that a total of 853,500 authorized but unissued shares of
Common Stock will be reserved for issuance under the Stock Option Plan and that
as of completion of the Offering options to purchase up to 85,350 shares of
Common Stock will have been granted to certain employees of the Company. The
purpose of the Stock Option Plan is to attract and retain employees (including
officers), directors and independent consultants of PSS (including its
subsidiaries) and other affiliates (if any) of PSS and provide such people with
additional incentives by increasing their equity ownership in the Company.
Options granted under the Stock Option Plan are intended to qualify as
incentive stock options under Section 422 of the Internal Revenue Code of 1986,
as amended (the 'Code'), or be non-qualified. The Plan is intended to satisfy
the conditions of Section 16 of the Exchange Act pursuant to Rule 16b-3
promulgated thereunder ('Rule 16b-3').
It is anticipated that the Stock Option Plan will be administered by a
committee of the Company's Board of Directors comprised of directors who are
disinterested within the meaning of Rule 16b-3. Subject to the terms of the
Stock Option Plan, the committee administering the plan has the sole authority
and discretion to grant options, construe the terms of the plan and make all
other determinations and take all other action with respect to the Stock Option
Plan.
Options will be exercisable during the period specified by the committee
administering the Stock Option Plan, except that options will become immediately
exercisable in the event of a Change in Control (as defined in the Stock Option
Plan) of the Company. See 'Risk Factors -- Effect of Anti-takeover Provisions.'
It is anticipated that, generally, options will vest over a five-year period. No
option will be exercisable more than 10 years from the date of grant (or such
other period as may be required by the Code) or after the option holder leaves
the Company's employ (other than by reason of death). Options are
nontransferable, except by will or the laws of intestate succession or, if then
permitted under Rule 16b-3, pursuant to a qualified domestic relations order.
Shares underlying options that terminate unexercised are available for
reissuance under the Stock Option Plan.
The per share exercise price of options granted under the Stock Option Plan
will be determined by the committee of the Board of Directors administering the
Stock Option Plan, except that incentive stock options may not be exercised for
less than 100% of the Fair Market Value (as defined in the Stock Option Plan) of
a share of the Company's Common Stock on the date of grant.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Currently, the Board of Directors does not have a compensation committee,
and decisions regarding compensation are made by the entire Board of Directors,
including Mr. Gilson, who currently is the President and Chief Executive Officer
of the Company, and Mr. Potter, who currently is the Executive Vice President,
Chief Operating and Financial Officer of the Company. The Board of Directors
anticipates establishing a compensation committee immediately prior to the
Offering, the initial members of which will be Messrs. Berkowitz and Gilson. The
Board of Directors also intends to establish, following completion of the
Offering and the addition of up to two outside directors to the Board of
Directors, an audit committee on which at least two outside directors would
serve.
33
<PAGE>
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock as of January 1, 1996, giving effect to
the sale of shares of Common Stock by the Company in the Offering (i) by each
person (or group of affiliated persons) who is known by the Company to own
beneficially more than 5% of the Common Stock, (ii) by each of the Company's
directors and executive officers and (iii) by all directors and executive
officers as a group.
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF TOTAL
SHARES --------------------
BENEFICIALLY BEFORE AFTER
BENEFICIAL OWNER(1) OWNED(2) OFFERING OFFERING
- -------------------------------------------------------------------------------- ------------ -------- --------
<S> <C> <C> <C>
Peter W. Gilson................................................................. 840,000 37.5% 16.0%
Hamilton F. Potter III.......................................................... 504,000 22.5 9.6
Jack R. Kinne................................................................... 0 0 0
Mortimer Berkowitz III.......................................................... 336,000 15.0 6.4
John N. Irwin III............................................................... 498,400(3) 22.3 9.5
All executive officers and directors as a group (four persons).................. 1,680,000 75.0 32.1
</TABLE>
- ------------
(1) The address for each beneficial owner except John N. Irwin III is in care of
the Company, Route 230 and Eby-Chiques Road, Mt. Joy, Pennsylvania 17538.
Mr. Irwin's address is care of Hillside Capital Incorporated, 405 Park
Avenue, New York, New York 10022.
(2) Except as indicated in the footnotes to this table, to the knowledge of the
Company, the persons named in the table have sole voting and investment
power with respect to all shares of Common Stock shown as beneficially owned
by them, except to the extent authority is shared by spouses under
applicable law.
(3) Includes 92,400 shares owned of record by Mr. Irwin's wife, 177,800 shares
owned of record for a trust of which Mr. Irwin's children are the
beneficiaries and 226,800 shares owned of record by Hillside, a corporation
in which Mr. Irwin holds a controlling equity interest. Mr. Irwin disclaims
beneficial ownership with respect to all shares not owned by him of record.
CERTAIN TRANSACTIONS
PREFERRED STOCK INVESTMENT
In December 1995, Hillside, the record holder of more than five percent of
the shares of Common Stock and the owner of over $960,000 in shares of the
Company's 10% Preferred Stock, Series A, purchased 1,100 additional shares of
the Company's 10% Preferred Stock, Series A, for aggregate consideration of
$550,000 in cash.
Upon completion of the Offering, the Company will apply approximately
$2,932,000 of the net proceeds of the Offering to redeem all of its 10%
Preferred Stock, Series A and Series B. Mr. John N. Irwin III, a beneficial
owner of more than five percent of the shares of Common Stock, is the beneficial
owner of an aggregate of $2,694,000 in such shares of preferred stock, as to
which he disclaims beneficial ownership of all but $394,000 in such shares. Of
the amount of preferred stock otherwise attributable to Mr. Irwin, Hillside owns
of record over $1,510,000 in such shares of the Company's 10% Preferred Stock,
Series A.
STOCKHOLDER ACTION
In connection with the Company's loans from Meridian Bank, all of the
stockholders of PSS, including Messrs. Berkowitz, Gilson and Potter and other
holders of more than five percent of the outstanding shares of Common Stock,
pledged their shares of capital stock as security for the Company's loan
obligations. Upon repayment of these loan obligations with a portion of the net
proceeds of the Offering, those pledged shares will be released.
Under the terms of the Shareholders' Agreement among the Company and its
existing stockholders (the 'Shareholders' Agreement'), the stockholders were
granted certain registration rights, including the right to be included in the
Offering. Those registration rights have been waived for the Offering. See
'Description of Capital Stock -- Registration Rights.'
34
<PAGE>
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 100,000,000 shares of
Common Stock, par value $.001 per share, and 10,000,000 shares of Preferred
Stock, $.01 par value per share.
COMMON STOCK
As of January 1, 1996, there were 2,240,000 shares of Common Stock
outstanding that were held of record by 15 stockholders. There will be 5,240,000
shares of Common Stock outstanding after giving effect to the sale of the shares
of Common Stock offered hereby.
Holders of shares of Common Stock are entitled to one vote per share on
matters to be voted upon by the stockholders of the Company. Holders of shares
of Common Stock do not have cumulative voting rights; therefore, the holders of
more than 50% of the shares of the Common Stock will have the ability to select
all of the Company's directors. Holders of shares of Common Stock will be
entitled to receive dividends when, as and if declared by the Board of Directors
and to share ratably in the assets of the Company legally available for
distribution to its stockholders in the event of the liquidation, dissolution or
winding up of the Company, in each case subject to the rights of the holders of
Preferred Stock. Holders of Common Stock have no pre-emptive, subscription,
redemption or conversion rights. All outstanding shares of Common Stock are, and
Common Stock being issued and sold hereby will be, when issued, fully paid and
non-assessable.
PREFERRED STOCK
The Board of Directors of the Company is authorized, subject to certain
limitations prescribed by applicable law, from time to time to issue up to an
aggregate of 10,000,000 shares of Preferred Stock in one or more series and to
fix or alter the designations, the rights, preferences, privileges and
restrictions thereof, including dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption, redemption prices, liquidation
preferences and the number of shares constituting any series or the designation
of such series, in each case without further vote or action by the stockholders.
The issuance of Preferred Stock may have the effect of delaying, deferring or
preventing a change in control of the Company without further action by the
stockholders and may adversely affect the voting and other rights of the holders
of Common Stock. The issuance of Preferred Stock with voting and conversion
rights may adversely affect the voting power of the holders of Common Stock,
including the loss of voting control to others. At present, the Company has no
plans to issue any of the Preferred Stock.
REGISTRATION RIGHTS
Under the Shareholders' Agreement, the Company's currently existing
stockholders have certain registration rights. Those stockholders have waived
their right to be included in the Offering. Following completion of the
Offering, the Company's currently existing stockholders (who will hold
approximately 42.7% of the Common Stock outstanding after the Offering) will be
entitled to request that their shares of Common Stock be included in any
registration of the Company's capital stock (except certain registrations in
connection with employee plans and business combinations). The number of shares
of stock to be included in any proposed offering may be reduced pro rata among
all securityholders included in such offering if and to the extent that the
managing underwriter of such offering is of the opinion that such inclusion
could reasonably be expected to adversely affect the marketing of shares to be
sold by the Company. The Company is obligated to pay the registration fee and
certain other fees and expenses in connection with any registration of shares of
Common Stock pursuant to the Shareholders' Agreement. The registration rights of
the Company's currently existing stockholders will continue for 10 years after
completion of the Offering.
ANTITAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BYLAWS
AND DELAWARE LAW
CERTIFICATE OF INCORPORATION AND BYLAWS
Upon completion of this Offering, the Company's Certificate of
Incorporation will provide that all stockholder action must be effected at a
duly called meeting and not by a consent in writing. In addition, upon
completion of the Offering the Company's Bylaws will not permit stockholders of
the
35
<PAGE>
<PAGE>
Company to call a special meeting of stockholders. These provisions of the
Certificate of Incorporation and Bylaws could discourage potential acquisition
proposals and could delay or prevent a change in control of the Company. These
provisions are intended to enhance the likelihood of continuity and stability in
the composition of the Board of Directors and in the policies formulated by the
Board of Directors and to discourage certain types of transactions that may
involve an actual or threatened change of control of the Company. These
provisions are designed to reduce the vulnerability of the Company to an
unsolicited acquisition proposal. The provisions also are intended to discourage
certain tactics that may be used in proxy fights. However, such provisions could
have the effect of discouraging others from making tender offers for the Common
Stock and, as a consequence, they also may inhibit fluctuations in the market
price of the Common Stock that could result from actual or rumored takeover
attempts. Such provisions also may have the effect of preventing changes in the
management of the Company. See 'Risk Factors -- Effect of Anti-takeover
Provisions.'
DELAWARE TAKEOVER STATUTE
The Company is subject to Section 203 of the Delaware General Corporation
Law ('Section 203') which, subject to certain exceptions, prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholder for a period of three years following the date that such stockholder
became an interested stockholder, unless: (i) prior to such date, the board of
directors of the corporation approved either the business combination or the
transaction which resulted in the stockholder becoming an interested
stockholder; (ii) upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested stockholder owned
at least 85% of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding for purposes of determining the number of
shares outstanding those shares owned (x) by persons who are directors and also
officers and (y) by employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer; or (iii) on or subsequent
to such date, the business combination is approved by the board of directors and
authorized at an annual or special meeting of stockholders, and not by written
consent, by the affirmative vote of at least 66 2/3% of the outstanding voting
stock which is not owned by the interested stockholder.
Section 203 defines business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii) any
sale, transfer, pledge or other disposition involving the interested stockholder
of 10% or more of the assets of the corporation; (iii) subject to certain
exceptions, any transaction which results in the issuance or transfer by the
corporation of any stock of the corporation to the interested stockholder; (iv)
any transaction involving the corporation which has the effect of increasing the
proportionate share of the stock of any class or series of the corporation
beneficially owned by the interested stockholder; or (v) the receipt by the
interested stockholder of the benefit of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation. In
general, Section 203 defines an interested stockholder as any entity or person
beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Company's Certificate of Incorporation and Bylaws contain certain
provisions permitted under the Delaware General Corporation Law relating to the
liability of directors. These provisions eliminate a director's personal
liability for monetary damages resulting from a breach of fiduciary duty, except
in certain circumstances involving certain wrongful acts, such as the breach of
a director's duty of loyalty or acts or omissions that involve intentional
misconduct or a knowing violation of law. These provisions do not limit or
eliminate the rights of the Company or any stockholder to seek non-monetary
relief, such as an injunction or rescission, in the event of a breach of a
director's fiduciary duty. These provisions will not alter a director's
liability under federal securities laws. The Company's Bylaws also contain
provisions indemnifying the directors and officers of the Company to the fullest
extent permitted by the Delaware General Corporation Law. The Company believes
that these provisions will assist the Company in attracting and retaining
qualified individuals to serve as directors.
36
<PAGE>
<PAGE>
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Bank of New York.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, 5,240,000 shares of the Common Stock will
be outstanding (5,690,000 shares if the Underwriters' over-allotment option is
exercised in full). The 3,000,000 shares sold in the Offering (3,450,000 if the
Underwriters' over-allotment option is exercised in full) will be freely
tradeable without restrictions or further registration under the Securities Act
unless acquired by an 'affiliate' of the Company (as that term is defined in the
Securities Act) which shares will be subject to the resale limitations of Rule
144 under the Securities Act.
Immediately prior to completion of the Offering, 2,240,000 shares of Common
Stock (the 'Restricted Shares') will be outstanding. Of such shares,
approximately 35,000 shares will be available for immediate sale in the public
market without restriction pursuant to Rule 144(k) under the Securities Act.
Beginning 180 days after the date of this Prospectus, an additional 2,205,000 of
the Restricted Shares will be available for sale in the public market subject to
certain volume and resale restrictions, as described below. Under the
Shareholders' Agreement, holders of the Restricted Shares also will have the
right to include their Restricted Shares in certain other registrations of the
Company's capital stock. See 'Description of Capital Stock -- Registration
Rights.'
In general, under Rule 144 as currently in effect, a shareholder who has
beneficially owned for at least two years shares privately acquired directly or
indirectly from the Company or from an affiliate of the Company, and persons who
are affiliates of the Company, will be entitled to sell within any three-month
period a number of shares that does not exceed the greater of (i) 1.0% of the
outstanding shares of the Common Stock (approximately 52,400 shares immediately
after completion of the Offering, or approximately 56,900 shares if the
Underwriters' over-allotment option is exercised in full) or (ii) the average
weekly trading volume in the Common Stock during the four calendar weeks
preceding such sale. Sales under Rule 144 are also subject to certain
requirements relating to the manner and notice of sale and the availability of
current public information about the Company.
The Company, each of its directors and officers and each shareholder
holding more than 1.0% of the outstanding Common Stock have agreed with the
Underwriters not to offer, sell or otherwise dispose of any shares of Common
Stock or options or any other rights to acquire shares of Common Stock for a
period of 180 days after the date of this Prospectus without the prior written
consent of Volpe, Welty & Company except for shares offered or sold under the
Company's stock-based benefit plans.
The Company has reserved 853,500 shares of Common Stock for issuance under
the Stock Option Plan. At appropriate times subsequent to completion of the
Offering, the Company may file registration statements under the Securities Act
to register the Common Stock to be issued under this plan. After the effective
date of such registration statement, shares issued under this plan will be
freely tradeable without restriction or further registration under the
Securities Act, unless acquired by affiliates of the Company.
Prior to the Offering, there has been no market for the Common Stock. No
predictions can be made with respect to the effect, if any, that public sales of
shares of the Common Stock or the availability of shares for sale will have on
the market price of the Common Stock after the Offering. Sales of substantial
amounts of the Common Stock in the public market following the Offering, or the
perception that such sales may occur, could adversely affect the market price of
the Common Stock or the ability of the Company to raise capital through sales of
its equity securities.
37
<PAGE>
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company has agreed to sell to each of the underwriters named below (the
'Underwriters'), and each of such Underwriters, for whom Volpe, Welty & Company
is acting as representative (the 'Representative'), has agreed severally to
purchase from the Company, the respective number of shares of Common Stock set
forth opposite its name below. The Underwriters are committed to purchase and
pay for all shares if any shares are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ----------------------------------------------------------------------- ---------
<S> <C>
Volpe, Welty & Company.................................................
---------
Total........................................................ 3,000,000
---------
---------
</TABLE>
The Representative has advised the Company that the Underwriters propose to
offer the shares of Common Stock to the public at the initial public offering
price set forth on the cover page of this Prospectus and to certain dealers at
such price less a concession not in excess of $ per share, of which $
may be reallocated to other dealers. After the initial public offering, the
public offering price, concession and reallowance to dealers may be reduced by
the Representative. No such reduction shall change the amount of proceeds to be
received by the Company as set forth on the cover page of this Prospectus.
The Company has granted the Underwriters an option for thirty days after
the date of this Prospectus to purchase, at the initial public offering price,
less the underwriting discounts and commissions as set forth on the cover page
of this Prospectus, up to 450,000 additional shares of Common Stock at the same
price per share as the Company receives for the 3,000,000 shares of Common Stock
offered hereby, solely to cover over-allotments, if any. If the Underwriters
exercise their over-allotment option, the Underwriters have severally agreed,
subject to certain conditions, to purchase approximately the same percentage
thereof that the number of shares of Common Stock to be purchased by each of
them, as shown in the foregoing table, bears to the 3,000,000 shares of Common
Stock offered hereby. The Underwriters may exercise such option only to cover
the over-allotments in connection with the sale of the 3,000,000 shares of
Common Stock offered hereby.
Each of the Company's directors and officers and each shareholder holding
more than 1.0% of the outstanding Common Stock has agreed not to offer, sell,
contract to sell or otherwise dispose of the Common Stock or securities
convertible into or exchangeable for, or any other rights to purchase or
acquire, Common Stock for a period of 180 days following the date of this
Prospectus, without the prior written consent of Volpe, Welty & Company. The
Company also has agreed not to offer, sell, contract to sell or otherwise
dispose of any shares of Common Stock or any securities convertible into or
exchangeable for, or any other rights to purchase or acquire, Common Stock for a
period of 180 days following the date of this Prospectus without the prior
written consent of Volpe, Welty & Company, except for the granting of options or
the sale of stock pursuant to the Company's proposed stock option plan. Volpe,
Welty & Company, in its discretion, may waive the foregoing restrictions in
whole or in part, with or without public announcement of such action.
Prior to the Offering, there has been no public market for the Common
Stock. The initial public offering price of the Common Stock will be determined
by negotiations between the Company and the Representative. Among the factors
that will be considered in determining the initial public offering price of the
Common Stock, in addition to prevailing market conditions, will be the Company's
historical performance, estimates of the business potential and earnings
prospects of the Company, an assessment of the Company's management and the
consideration of the above factors in relation to market valuations of companies
in related businesses.
38
<PAGE>
<PAGE>
The Company has agreed to indemnify the Underwriters against certain
liabilities that may be incurred in connection with the Offering, including
liabilities under the Securities Act, or to contribute payments that the
Underwriters may be required to make in respect thereof.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Howard, Darby & Levin, New York, New York. Certain legal
matters relating to the shares of Common Stock offered hereby will be passed
upon for the Underwriters by Cahill Gordon & Reindel (a partnership including a
professional corporation), New York, New York.
EXPERTS
The financial statements of Physician Support Systems, Inc., North Coast
Health Care Management Group and Medical Management Support, Inc. as of December
31, 1993 and 1994 and September 30, 1995 and for each of the three years in the
period ended December 31, 1994 and for the nine-month period ended September 30,
1995, included in this Prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports appearing herein, and have been
so included in reliance upon the reports of such firm given upon their authority
as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
'Commission') a Registration Statement under the Securities Act, with respect to
the shares of Common Stock offered hereby. This Prospectus, filed as part of the
Registration Statement, omits certain information contained in the Registration
Statement and reference is made to the Registration Statement and the exhibits
and schedules thereto for further information with respect to the Company and
the Common Stock offered hereby. Statements contained herein concerning the
provisions of any documents are not necessarily complete, and in each instance
reference is made to the copy of such document filed as an exhibit to the
Registration Statement. Each such statement is qualified in its entirety by such
reference. The Registration Statement, including exhibits and schedules filed
therewith, may be inspected without charge at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the regional offices of the Commission
located at 7 World Trade Center, 13th Floor, New York, New York 10048 and 500
West Madison Street, Room 1400, Chicago, Illinois 60661. Copies of such
materials may be obtained at prescribed rates from the Public Reference Section
of the Commission, Room 1024, Judiciary Plaza, 450, Fifth Street, N.W.,
Washington, D.C. 20549, and its public reference facilities in New York, New
York and Chicago, Illinois.
The Company intends to furnish its stockholders with annual reports
containing audited financial statements and quarterly reports for the first
three quarters of each fiscal year containing unaudited summary financial
information.
39
<PAGE>
<PAGE>
INDEX TO FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
HISTORICAL FINANCIAL STATEMENTS
<S> <C>
PHYSICIAN SUPPORT SYSTEMS, INC. AND SUBSIDIARY
Report of Deloitte & Touche LLP, Independent Auditors................................................. F-2
Consolidated Balance Sheets as of December 31, 1993 and 1994 and September 30, 1995................... F-3
Consolidated Statements of Operations for the Years ended December 31, 1992, 1993 and 1994 and for the
Nine Months ended September 30, 1994 (Unaudited) and 1995............................................ F-4
Consolidated Statements of Common Stockholders' Equity (Deficiency) for the Years ended December 31,
1992, 1993 and 1994 and for the Nine Months ended September 30, 1995................................. F-5
Consolidated Statements of Cash Flows for the Years ended December 31, 1992, 1993 and 1994 and for the
Nine Months ended September 30, 1994 (Unaudited) and 1995............................................ F-6
Notes to Consolidated Financial Statements............................................................ F-7
NORTH COAST HEALTH CARE MANAGEMENT GROUP
Report of Deloitte & Touche LLP, Independent Auditors................................................. F-17
Combined Balance Sheets as of December 31, 1993 and 1994 and September 30, 1995....................... F-18
Combined Statements of Operations for the Years ended December 31, 1992, 1993 and 1994 and for the
Nine Months ended September 30, 1994 (Unaudited) and 1995............................................ F-19
Combined Statements of Stockholders' Equity for the Years ended December 31, 1992, 1993 and 1994 and
for the Nine Months ended September 30, 1995......................................................... F-20
Combined Statements of Cash Flows for the Years ended December 31, 1992, 1993 and 1994 and for the
Nine Months ended September 30, 1994 (Unaudited) and 1995............................................ F-21
Notes to Combined Financial Statements................................................................ F-22
MEDICAL MANAGEMENT SUPPORT, INC.
Report of Deloitte & Touche LLP, Independent Auditors................................................. F-25
Balance Sheets as of December 31, 1993 and 1994 and September 30, 1995................................ F-26
Statements of Operations for the Years ended December 31, 1992, 1993 and 1994 and for the Nine Months
ended September 30, 1994 (Unaudited) and 1995........................................................ F-27
Statements of Stockholders' Equity for the years ended December 31, 1992, 1993 and 1994 and for the
Nine Months ended September 30, 1995................................................................. F-28
Statements of Cash Flows for the Years ended December 31, 1992, 1993 and 1994 and for the Nine Months
ended September 30, 1994 (Unaudited) and 1995........................................................ F-29
Notes to Financial Statements......................................................................... F-30
PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
PHYSICIAN SUPPORT SYSTEMS, INC. AND SUBSIDIARIES
Introduction to Pro Forma Financial Information (Unaudited)........................................... F-35
Pro Forma Balance Sheet as of September 30, 1995 (Unaudited).......................................... F-36
Pro Forma Statement of Operations for the Year ended December 31, 1994 (Unaudited).................... F-37
Pro Forma Statement of Operations for the Nine Months ended September 30, 1995 (Unaudited)............ F-38
Notes to Pro Forma Financial Information (Unaudited).................................................. F-39
</TABLE>
F-1
<PAGE>
<PAGE>
The accompanying consolidated financial statements give effect to the
completion of the 1,400-for-one split of the Company's outstanding common stock,
which will take place on the effective date of the Offering. The following
report is in the form that will be furnished by Deloitte & Touche LLP upon
completion of the stock split of the Company's common stock described in Note 14
to the consolidated financial statements and assuming that from January 8, 1996
to the date of such completion no other material events have occurred that would
affect the accompanying consolidated financial statements or required disclosure
therein.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
PHYSICIAN SUPPORT SYSTEMS, INC.
Mt. Joy, Pennsylvania
We have audited the accompanying consolidated balance sheets of Physician
Support Systems, Inc. and Subsidiary as of December 31, 1993 and 1994 and
September 30, 1995, and the related consolidated statements of operations,
common stockholders' equity (deficiency) and cash flows for each of the three
years in the period ended December 31, 1994 and the nine months ended September
30, 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Physician Support Systems, Inc.
and Subsidiary as of December 31, 1993 and 1994, and September 30, 1995 and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1994 and the nine months ended September 30, 1995
in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
January 8, 1996 (as to Note 14)
New York, New York'
DELOITTE & TOUCHE LLP
January 29, 1996
New York, New York
F-2
<PAGE>
<PAGE>
PHYSICIAN SUPPORT SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- SEPTEMBER 30,
1993 1994 1995
----------- ----------- -------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 656,505 $ 575,045 $ 18,609
Accounts receivable -- billed (net of allowances of $35,000 at
December 31, 1993 and 1994, and $125,000 at September 30,
1995)........................................................ 1,388,092 1,145,539 1,436,794
Accounts receivable -- unbilled................................ 3,000,060 3,207,364 3,948,738
Prepaid expenses............................................... 297,022 221,194 199,459
Other current assets........................................... 270,208 328,018 246,965
----------- ----------- -------------
Total current assets...................................... 5,611,887 5,477,160 5,850,565
Property and equipment -- net....................................... 3,511,849 2,982,757 2,577,952
Intangible assets -- net............................................ 16,596,892 14,242,663 12,488,051
Deferred income taxes............................................... -- -- 579,322
Other assets........................................................ 47,092 30,521 122,164
----------- ----------- -------------
Total..................................................... $25,767,720 $22,733,101 $21,618,054
----------- ----------- -------------
----------- ----------- -------------
LIABILITIES AND COMMON STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable............................................... $ 221,277 $ 316,683 $ 245,600
Accrued expenses............................................... 1,940,092 2,132,419 2,516,218
Short-term borrowings.......................................... -- -- 400,000
Current portion of long-term debt.............................. 1,266,667 1,466,667 1,995,333
Current portion of other long-term liabilities................. 1,011,834 1,037,115 686,372
Deferred income taxes.......................................... 866,715 742,733 1,358,515
----------- ----------- -------------
Total current liabilities................................. 5,306,585 5,695,617 7,202,038
----------- ----------- -------------
Long-term debt...................................................... 16,664,096 15,197,430 14,225,097
----------- ----------- -------------
Other long-term liabilities......................................... 1,721,223 1,623,391 1,238,122
----------- ----------- -------------
Deferred income taxes............................................... 1,008,214 322,293 --
----------- ----------- -------------
Commitments and contingencies
Redeemable preferred stock:
Par value $.01 per share: authorized 10,000 shares; 10%
Preferred Stock, Series A and B, stated value $500 per share,
outstanding 2,000, 2,120 and 2,382.032 shares of each series
at December 31, 1993 and 1994 and September 30, 1995,
respectively................................................. 2,000,000 2,120,000 2,382,032
----------- ----------- -------------
Common stockholders' deficiency:
Common stock, par value $.001 per share:
authorized 100,000,000 shares; outstanding 2,240,000
shares....................................................... 2,240 2,240 2,240
Additional paid-in capital..................................... 125,760 125,760 125,760
Accumulated deficit............................................ (1,060,398) (2,353,630) (3,557,235)
----------- ----------- -------------
(932,398) (2,225,630) (3,429,235)
----------- ----------- -------------
Total..................................................... $25,767,720 $22,733,101 $21,618,054
----------- ----------- -------------
----------- ----------- -------------
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
<PAGE>
PHYSICIAN SUPPORT SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------- -------------------------
1992 1993 1994 1995
---------- ----------- ----------- 1994 -----------
-----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue.................................. $8,123,359 $13,080,015 $18,772,920 $14,788,827 $14,630,988
---------- ----------- ----------- ----------- -----------
Operating expenses:
Salaries and wages.................. 3,100,517 5,898,379 8,866,498 6,552,343 7,233,522
General and administrative.......... 2,020,847 4,291,026 6,722,621 5,121,350 5,019,914
Depreciation and amortization....... 1,781,289 2,565,868 3,348,752 2,522,393 2,549,054
---------- ----------- ----------- ----------- -----------
Total operating expenses....... 6,902,653 12,755,273 18,937,871 14,196,086 14,802,490
---------- ----------- ----------- ----------- -----------
Income (loss) from operations............ 1,220,706 324,742 (164,951) 592,741 (171,502)
---------- ----------- ----------- ----------- -----------
Other expenses:
Interest expense.................... 1,043,484 1,261,939 1,525,850 1,148,843 1,058,598
Other, net.......................... (10,164) 38,415 186,334 188,940 (2,694)
---------- ----------- ----------- ----------- -----------
Total other expenses........... 1,033,320 1,300,354 1,712,184 1,337,783 1,055,904
---------- ----------- ----------- ----------- -----------
Income (loss) before income taxes
(benefit).............................. 187,386 (975,612) (1,877,135) (745,042) (1,227,406)
Income taxes (benefit)................... 171,353 (303,130) (809,903) (381,580) (285,833)
---------- ----------- ----------- ----------- -----------
Net income (loss)........................ $ 16,033 $ (672,482) $(1,067,232) $ (363,462) $ (941,573)
Preferred stock dividends................ (200,000) (213,333) (230,800) (167,200) (199,704)
---------- ----------- ----------- ----------- -----------
Net (loss) applicable to common stock.... $ (183,967) $ (885,815) $(1,298,032) $ (530,662) $(1,141,277)
---------- ----------- ----------- ----------- -----------
---------- ----------- ----------- ----------- -----------
Net (loss) per share..................... $ (0.08) $ (0.40) $ (0.58) $ (0.24) $ (0.51)
---------- ----------- ----------- ----------- -----------
---------- ----------- ----------- ----------- -----------
Weighted average shares outstanding...... 2,240,000 2,240,000 2,240,000 2,240,000 2,240,000
---------- ----------- ----------- ----------- -----------
---------- ----------- ----------- ----------- -----------
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
<PAGE>
PHYSICIAN SUPPORT SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
TOTAL COMMON
COMMON STOCK ADDITIONAL STOCKHOLDERS'
---------------- PAID-IN ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL DEFICIT (DEFICIENCY)
------ ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1992........................... 1,600 $ 16 $127,984 $ (3,949) $ 124,051
Net income.................................... -- -- -- 16,033 16,033
Redeemable preferred stock distributions...... -- -- -- (200,000) (200,000)
------ ------ ---------- ----------- -------------
Balance, December 31, 1992......................... 1,600 16 127,984 (187,916) (59,916)
Net loss...................................... -- -- -- (672,482) (672,482)
Redeemable preferred stock distributions...... -- -- -- (200,000) (200,000)
------ ------ ---------- ----------- -------------
Balance, December 31, 1993......................... 1,600 16 127,984 (1,060,398) (932,398)
Net loss...................................... -- -- -- (1,067,232) (1,067,232)
Preferred stock issued in lieu of cash
dividends................................... -- -- -- (120,000) (120,000)
Redeemable preferred stock distributions...... -- -- -- (106,000) (106,000)
------ ------ ---------- ----------- -------------
Balance, December 31, 1994......................... 1,600 16 127,984 (2,353,630) (2,225,630)
Net loss...................................... -- -- -- (941,573) (941,573)
Preferred stock issued in lieu of cash
dividends................................... -- -- -- (262,032) (262,032)
------ ------ ---------- ----------- -------------
Balance, September 30, 1995........................ 1,600 $ 16 $127,984 $(3,557,235) $(3,429,235)
------ ------ ---------- ----------- -------------
------ ------ ---------- ----------- -------------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
<PAGE>
PHYSICIAN SUPPORT SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1992 1993 1994
---------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................................................. $ 16,033 $ (672,482) $(1,067,232)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Pension liability provision................................... -- 18,360 6,920
Deferred landlord reimbursement............................... -- -- 667,495
Deferred rent................................................. -- -- 851
Depreciation and amortization................................. 1,781,289 2,565,868 3,348,752
Deferred income taxes......................................... 171,353 (303,130) (809,903)
Loss on disposal of property and equipment.................... 7,744 3,795 202,798
Provision for doubtful accounts receivable.................... -- 35,000 63,203
Changes in operating assets and liabilities:
Accounts receivable -- billed............................ (264,489) 64,776 179,350
Accounts receivable -- unbilled.......................... (267,140) 208,446 (207,304)
Prepaid expenses......................................... (84,411) (59,347) 75,828
Other current assets..................................... (12,638) (156,208) (57,810)
Other assets............................................. (1,642) 1,642 16,571
Accounts payable......................................... 10,999 (117,839) 95,406
Accrued expenses......................................... 17,748 112,101 192,327
Operating improvement reserve............................ -- (15,738) (761,504)
---------- ----------- -----------
Net cash provided by operating activities........... 1,374,846 1,685,244 1,945,748
---------- ----------- -----------
Cash flows from investing activities:
Acquisition of Spring, net of cash acquired........................ -- (2,720,854) --
Capital expenditures............................................... (140,118) (130,369) (534,745)
Proceeds from disposal of property and equipment................... -- 16,735 161,050
---------- ----------- -----------
Net cash used in investing activities............... (140,118) (2,834,488) (373,695)
---------- ----------- -----------
Cash flows from financing activities:
Proceeds from long-term borrowings................................. -- 8,000,000 --
Proceeds from short-term borrowings................................ -- -- --
Principal payments on long-term debt............................... (1,295,269) (6,216,731) (1,266,666)
Principal payments on capital lease obligations.................... (12,286) (141,919) (280,847)
Redeemable preferred stock distributions........................... (200,000) (200,000) (106,000)
---------- ----------- -----------
Net cash (used in) provided by financing
activities........................................ (1,507,555) 1,441,350 (1,653,513)
---------- ----------- -----------
Net increase (decrease) in cash and cash equivalents.................... (272,827) 292,106 (81,460)
Cash and cash equivalents, beginning of period.......................... 637,226 364,399 656,505
---------- ----------- -----------
Cash and cash equivalents, end of period................................ $ 364,399 $ 656,505 $ 575,045
---------- ----------- -----------
---------- ----------- -----------
Supplemental investing activity:
Fair value of Spring assets acquired............................... $ -- $12,657,486 $ --
Cash acquired...................................................... -- (312,146)
Liabilities assumed................................................ -- (2,124,486) --
Subordinated note issued........................................... -- (5,500,000) --
Reserve for Spring office move and consolidation................... -- (2,000,000) --
---------- ----------- -----------
Net cash paid for acquisition....................... $ -- $ 2,720,854 $ --
---------- ----------- -----------
---------- ----------- -----------
Supplemental disclosure of cash flow information:
Cash paid for interest............................................. $1,015,881 $ 1,086,525 $ 1,328,405
---------- ----------- -----------
---------- ----------- -----------
Capital lease obligations incurred in acquisition of equipment..... $ 224,125 $ 84,702 $ 294,534
---------- ----------- -----------
---------- ----------- -----------
<CAPTION>
NINE MONTHS ENDED
-----------------------
1994 1995
----------- ----------
Unaudited
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)..................................................$ (363,462) $ (941,573)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Pension liability provision................................... 622 6,298
Deferred landlord reimbursement............................... -- (60,657)
Deferred rent................................................. -- 248,343
Depreciation and amortization................................. 2,522,393 2,549,054
Deferred income taxes......................................... (381,580) (285,833)
Loss on disposal of property and equipment.................... 202,798 6,695
Provision for doubtful accounts receivable.................... -- 90,000
Changes in operating assets and liabilities:
Accounts receivable -- billed............................ (171,017) (381,255)
Accounts receivable -- unbilled.......................... (402,558) (741,374)
Prepaid expenses......................................... 13,224 21,735
Other current assets..................................... (120,051) 81,053
Other assets............................................. (922) (91,643)
Accounts payable......................................... 202,572 (71,083)
Accrued expenses......................................... 157,270 383,799
Operating improvement reserve............................ (465,620) (761,232)
----------- ----------
Net cash provided by operating activities........... 1,193,669 52,327
----------- ----------
Cash flows from investing activities:
Acquisition of Spring, net of cash acquired........................ -- --
Capital expenditures............................................... (184,137) (396,332)
Proceeds from disposal of property and equipment................... 161,050 --
----------- ----------
Net cash used in investing activities............... (23,087) (396,332)
----------- ----------
Cash flows from financing activities:
Proceeds from long-term borrowings................................. -- --
Proceeds from short-term borrowings................................ -- 400,000
Principal payments on long-term debt............................... (916,666) (443,667)
Principal payments on capital lease obligations.................... (216,536) (168,764)
Redeemable preferred stock distributions........................... (106,000) --
----------- ----------
Net cash (used in) provided by financing
activities........................................ (1,239,202) (212,431)
----------- ----------
Net increase (decrease) in cash and cash equivalents.................... (68,620) (556,436)
Cash and cash equivalents, beginning of period.......................... 656,505 575,045
----------- ----------
Cash and cash equivalents, end of period................................$ 587,885 $ 18,609
----------- ----------
----------- ----------
Supplemental investing activity:
Fair value of Spring assets acquired...............................$ -- $ --
Cash acquired......................................................
Liabilities assumed................................................ -- --
Subordinated note issued........................................... -- --
Reserve for Spring office move and consolidation................... -- --
----------- ----------
Net cash paid for acquisition.......................$ -- $ --
----------- ----------
----------- ----------
Supplemental disclosure of cash flow information:
Cash paid for interest.............................................$ 1,182,893 $ 982,496
----------- ----------
----------- ----------
Capital lease obligations incurred in acquisition of equipment.....$ 294,534 $ --
----------- ----------
----------- ----------
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
<PAGE>
PHYSICIAN SUPPORT SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994 (UNAUDITED) AND 1995
1. DESCRIPTION OF THE BUSINESS
a. Description of the Business -- Physician Support Systems, Inc. (a
Delaware corporation) and Subsidiary (the 'Company') are engaged in the business
of providing business management services to primarily hospital-affiliated
physicians.
b. Business Combination -- On August 12, 1993 (effective August 1, 1993),
the Company acquired 100 percent of the outstanding common stock of Spring
Anesthesia Group, Inc. ('Spring') for approximately $8,533,000, including
approximately $3,033,000 in cash and a $5,500,000 subordinated note. This
acquisition was accounted for under the purchase method of accounting and,
accordingly, the net assets acquired were recorded at their fair values on the
effective date of acquisition. Results of operations for Spring from the
effective date of acquisition through December 31, 1993 are included in the
Company's consolidated statement of operations for the year ended December 31,
1993. The excess purchase price over fair value of net assets acquired of
approximately $5,756,000 is being amortized on the straight-line method over 20
years.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Principles of Consolidation -- The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiary, Spring. All
significant intercompany balances and transactions have been eliminated in
consolidation.
b. Revenue Recognition -- The Company estimates fees that will be invoiced
upon collection of physician accounts receivable and recognizes such revenues
when substantially all services to be performed by the Company have been
completed. Accounts receivable -- unbilled, represents amounts recognized for
services rendered but not yet invoiced and is based on the Company's estimate of
the fees that will be collected from clients when patient accounts are
collected. This estimate is calculated by applying the Company's management fee
percentage to an estimate of the clients' collections that will be achieved on
amounts billed to patients and their insurers. The Company revises its estimate
of its unbilled accounts receivable each month based on its clients' billing and
collection information for that month. The Company provides for additional costs
necessary to complete the collection process.
Accounts receivable -- billed, primarily represents amounts invoiced to
clients. The Company provided $35,000, $63,203 and $90,000 for doubtful accounts
in the years ended December 31, 1993 and 1994 and the nine months ended
September 30, 1995, respectively, and wrote off $-0-, $63,203 and $-0-against
its allowance for doubtful accounts in the years ended December 31, 1993 and
1994 and the nine months ended September 30, 1995, respectively.
c. Cash and Cash Equivalents -- The Company considers its highly liquid
overnight investments to be cash equivalents.
d. Cash in Escrow -- The Company holds cash collected on behalf of its
physician customers in escrow and remits amounts due to physicians weekly.
Approximately $200,400, $2,178,600 and $1,460,700 of cash in escrow was offset
against due to physicians on the Company's balance sheet at December 31, 1993
and 1994 and September 30, 1995, respectively.
e. Property and Equipment -- Depreciation and amortization are computed on
a straight-line basis over the shorter of estimated useful lives of the assets
or lease terms.
f. Intangible Assets -- Amortization is computed on a straight-line basis
over estimated useful lives of the assets. On an annual basis the Company
compares the carrying value of its goodwill to an estimate of the Company's fair
value to evaluate the reasonableness of the carrying value and remaining
amortization period. Fair value is computed using projections of future cash
flows.
g. Income Taxes -- The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards ('SFAS') No. 109, 'Accounting for
Income Taxes,' which requires an
F-7
<PAGE>
<PAGE>
PHYSICIAN SUPPORT SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994 (UNAUDITED) AND 1995
asset and liability approach to accounting for income taxes. Deferred income tax
assets and liabilities are computed annually for differences between the
financial statement and tax bases of assets and liabilities that will result in
taxable or deductible amounts in the future, based on enacted tax laws and rates
applicable to periods in which the differences are expected to affect taxable
income. Income taxes/benefit is the tax payable/receivable for the period plus
or minus the change during the period in deferred income tax assets and
liabilities.
h. Net (Loss) Per Share -- Net (loss) per common share is calculated using
the weighted average number of common shares outstanding during each of the
periods retroactively restated to give effect to the 1,400-for-one stock split
(Note 14).
i. Unaudited Interim Financial Statements -- In the opinion of management,
the Company has made all adjustments, consisting of only normal recurring
accruals, necessary for fair presentation of the results of operations and cash
flows for the nine months ended September 30, 1994 as presented in the
accompanying unaudited financial statements.
3. PRO FORMA FINANCIAL INFORMATION
The unaudited consolidated results of operations on a pro forma basis as
though Spring had been acquired as of January 1, 1992 are as follows:
<TABLE>
<CAPTION>
1992 1993
----------- -----------
<S> <C> <C>
Revenue.................................................................. $21,067,583 $20,535,293
----------- -----------
----------- -----------
Net loss................................................................. $ (631,082) $(1,008,099)
----------- -----------
----------- -----------
Net loss per share....................................................... $ (394.43) $ (630.06)
----------- -----------
----------- -----------
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
ESTIMATED ------------------------ SEPTEMBER 30,
USEFUL LIFE 1993 1994 1995
----------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Furniture and fixtures......................... 7 $ 488,051 $ 528,914 $ 619,060
Equipment...................................... 5 1,652,148 1,535,445 1,664,497
Computer software.............................. 5 2,650,000 2,650,000 2,650,000
Vehicles....................................... 5 16,768 16,768 27,768
Leasehold improvements......................... 10 63,017 310,760 460,126
---------- ---------- -------------
4,869,984 5,041,887 5,421,451
---------- ---------- -------------
Less accumulated depreciation and
amortization................................. 1,358,135 2,059,130 2,843,499
---------- ---------- -------------
$3,511,849 $2,982,757 $ 2,577,952
---------- ---------- -------------
---------- ---------- -------------
</TABLE>
F-8
<PAGE>
<PAGE>
PHYSICIAN SUPPORT SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994 (UNAUDITED) AND 1995
5. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
ESTIMATED -------------------------- SEPTEMBER 30,
USEFUL LIFE 1993 1994 1995
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Physician contracts......................... 6 - 10 $ 9,883,290 $ 9,883,290 $ 9,883,290
Noncompetition agreements................... 5 3,727,042 3,727,042 3,727,042
Excess purchase price over fair value of net
assets acquired........................... 20 6,076,005 6,076,005 6,076,005
Other....................................... 5 441,458 441,458 441,458
----------- ----------- -------------
20,127,795 20,127,795 20,127,795
Less accumulated amortization............... 3,530,903 5,885,132 7,639,744
----------- ----------- -------------
$16,596,892 $14,242,663 $12,488,051
----------- ----------- -------------
----------- ----------- -------------
</TABLE>
6. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ SEPTEMBER 30,
1993 1994 1995
---------- ---------- -------------
<S> <C> <C> <C>
Estimated costs necessary to complete the collection process
for unbilled receivables.................................. $ 758,041 $ 853,411 $ 882,105
Accrued payroll, benefits and related liabilities........... 517,394 483,275 619,380
Accrued interest............................................ 391,349 588,795 664,895
Other....................................................... 273,308 206,938 349,838
---------- ---------- -------------
$1,940,092 $2,132,419 $ 2,516,218
---------- ---------- -------------
---------- ---------- -------------
</TABLE>
F-9
<PAGE>
<PAGE>
PHYSICIAN SUPPORT SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994 (UNAUDITED) AND 1995
7. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- SEPTEMBER 30,
1993 1994 1995
----------- ----------- -------------
<S> <C> <C> <C>
Bank fixed note, 7.6% until August 11, 1996, national
commercial rate plus 1.5% from August 12, 1996 through
August 1, 1998, payable monthly, $133,333 through August
1, 1996, $150,000 through August 1, 1997, $166,667
through August 1, 1998 and $250,000 on August 1, 1998... $ 7,600,000 $ 6,333,334 $ 5,516,667
Bank term note, national commercial rate plus 1%, payable
on February 28, 1996.................................... -- -- 200,000
Bank term note, national commercial rate plus 1 1/4%,
payable monthly $13,500 from August 1, 1995 through
September 1, 1996 and $11,000 on October 1, 1996........ -- -- 173,000
Subordinated notes, 13%, payable $1,500,000 on August 30,
1997 and 1998........................................... 3,000,000 3,000,000 3,000,000
Subordinated notes, 9% on the first $1,350,000 due August
30, 1997, 0% on the remainder, payable on August 30,
1998.................................................... 1,830,763 1,830,763 1,830,763
Spring acquisition subordinated note, 7.1%, payable on
August 12, 2003......................................... 5,500,000 5,500,000 5,500,000
----------- ----------- -------------
17,930,763 16,664,097 16,220,430
Less current portion...................................... 1,266,667 1,466,667 1,995,333
----------- ----------- -------------
$16,664,096 $15,197,430 $14,225,097
----------- ----------- -------------
----------- ----------- -------------
</TABLE>
The loan agreement between the Company and the bank (the 'Bank Agreement')
and certain of the subordinated notes have covenants which restrict the payment
of dividends on common stock and provide that various financial limits and
ratios be maintained. The Company is in compliance with all covenants of the
Bank Agreement as amended on February 25, 1994. In addition, the Bank Agreement
requires an annual prepayment of the fixed rate note equal to 50 percent of the
Company's cash flow as defined.
The bank fixed rate note is secured by all assets of the Company. In
addition, the stockholders have pledged their shares of common stock to the bank
as additional collateral.
The bank's national commercial rate was 8.75% at September 30, 1995.
During the year ended December 31, 1993, the interest rate on the Spring
acquisition subordinated note was negotiated from 8% to 7.6%. During the year
ended December 31, 1994, the interest rate on the Spring acquisition
subordinated note was negotiated from 7.6% to 7.1%.
F-10
<PAGE>
<PAGE>
PHYSICIAN SUPPORT SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994 (UNAUDITED) AND 1995
The aggregate amount of maturities of long-term debt after September 30,
1995 is as follows:
<TABLE>
<CAPTION>
YEAR ENDING
SEPTEMBER 30, AMOUNT
- --------------------------------------------------------------------- -----------
<S> <C>
1996.............................................................. $ 1,995,333
1997.............................................................. 4,677,667
1998.............................................................. 4,047,430
1999.............................................................. --
2000.............................................................. --
Thereafter........................................................ 5,500,000
-----------
$16,220,430
-----------
-----------
</TABLE>
In addition to the above, at September 30, 1995, the Company had borrowed
$400,000 under its line of credit with its bank. See Note 14.
8. INCOME TAXES
The income tax benefit (expense) consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
--------------------------------- -----------------------
1992 1993 1994 1994 1995
--------- -------- -------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Federal:
Current...................................... $ -- $ -- $ -- $ -- $ --
Deferred..................................... (71,893) 272,668 520,339 163,169 317,520
--------- -------- -------- ----------- --------
(71,893) 272,668 520,339 163,169 317,520
--------- -------- -------- ----------- --------
State:
Current...................................... -- -- -- -- --
Deferred..................................... (99,460) 30,462 289,564 218,411 (31,687)
--------- -------- -------- ----------- --------
(99,460) 30,462 289,564 218,411 (31,687)
--------- -------- -------- ----------- --------
$(171,353) $303,130 $809,903 $ 381,580 $285,833
--------- -------- -------- ----------- --------
--------- -------- -------- ----------- --------
</TABLE>
Deferred income tax assets and liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- SEPTEMBER 30,
1993 1994 1995
----------- ----------- -------------
<S> <C> <C> <C>
Deferred income tax assets:
Net operating loss carryforwards............................... $ 935,014 $ 689,212 $ 1,678,588
Valuation reserve for state net operating loss carryforwards... -- (69,374) (153,821)
Spring operating reserve....................................... 748,259 459,791 173,547
Other.......................................................... 51,249 208,979 329,853
----------- ----------- -------------
1,734,522 1,288,608 2,028,167
----------- ----------- -------------
Deferred income tax liabilites:
Physician contracts............................................ (2,095,726) (847,369) (708,709)
Unbilled receivables........................................... (916,448) (947,005) (1,590,281)
Depreciation and amortization.................................. (595,761) (554,877) (503,987)
Other.......................................................... (1,516) (4,383) (4,383)
----------- ----------- -------------
(3,609,451) (2,353,634) (2,807,360)
----------- ----------- -------------
Net deferred income tax liability................................... $(1,874,929) $(1,065,026) $ (779,193)
----------- ----------- -------------
----------- ----------- -------------
</TABLE>
F-11
<PAGE>
<PAGE>
PHYSICIAN SUPPORT SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994 (UNAUDITED) AND 1995
The net deferred income tax liability is classified in the consolidated
balance sheet as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- SEPTEMBER 30,
1993 1994 1995
----------- ----------- -------------
<S> <C> <C> <C>
Net current liability............................................... $ (866,715) $ (742,733) (1,358,515)
Net long-term asset................................................. -- -- 579,322
Net long-term liability............................................. (1,008,214) (322,293) --
----------- ----------- -------------
Net long-term asset................................................. $(1,874,929) $(1,065,026) $ (779,193)
----------- ----------- -------------
----------- ----------- -------------
</TABLE>
A reconciliation of the statutory Federal income tax rate and the effective
rate of the provision for income taxes consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
-------------------------- --------------------
1992 1993 1994 1994 1995
---- ----- ----- ----------- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Statutory Federal income tax rate.............................. 34.0% (34.0)% (34.0)% (34.0)% (34.0)%
State income taxes, net of Federal income tax benefits......... 9.1 (9.0) (4.3) (4.4) (6.2)
Nondeductible items............................................ 4.4 6.1 6.2 11.9 7.5
Disallowed state net operating loss deduction.................. 43.9 13.5 -- -- --
Change in state tax laws allowing previously disallowed prior
years state net operating loss deduction..................... -- -- (8.7) (27.2) --
State net operating loss carryforwards valuation allowance..... -- -- 3.7 10.9 9.4
Effect of changes in state income tax rates on deferred income
tax assets and liabilities................................... -- -- (6.0) (8.4) --
Prior year items............................................... -- (7.7) -- -- --
---- ----- ----- ----------- -----
Effective income tax rate...................................... 91.4% (31.5)% (43.1)% (51.2)% (23.3)%
---- ----- ----- ----------- -----
---- ----- ----- ----------- -----
</TABLE>
As of December 31, 1994, the Company has net operating loss carryforwards
for Federal income tax purposes of approximately $1,724,000 which expire between
2007 and 2009.
In October 1995, the Internal Revenue Service ('IRS') examined the tax
returns of the Company for the years ended August 31, 1992 and 1993. As a result
of the examination, the estimated useful lives for income tax purposes of
certain physician contracts were adjusted to correspond to the estimated useful
lives for financial statement purposes of 10 years. The effect of the IRS
examination was a reduction in the Company's net operating loss carryforwards of
approximately $1,995,000.
F-12
<PAGE>
<PAGE>
PHYSICIAN SUPPORT SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994 (UNAUDITED) AND 1995
9. OTHER LONG-TERM LIABILITIES
Other long-term liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ SEPTEMBER 30,
1993 1994 1995
---------- ---------- -------------
<S> <C> <C> <C>
Reserve for Spring operations move, consolidation and improvement..... $1,984,262 $1,222,758 $ 461,526
Capitalized lease obligations......................................... 730,435 744,122 575,358
Pension liability (Note 10)........................................... 18,360 25,280 31,578
Deferred landlord reimbursement....................................... -- 667,495 606,838
Deferred rent......................................................... -- 851 249,194
---------- ---------- -------------
2,733,057 2,660,506 1,924,494
---------- ---------- -------------
Less current portion:
Reserve for Spring operations consolidation and improvement...... 761,504 806,246 461,526
Capitalized lease obligations.................................... 250,330 230,869 224,846
---------- ---------- -------------
1,011,834 1,037,115 686,372
---------- ---------- -------------
$1,721,223 $1,623,391 $ 1,238,122
---------- ---------- -------------
---------- ---------- -------------
</TABLE>
On August 1, 1993 (the date on which the Company acquired Spring), the
Company established a $2,000,000 reserve for the move, consolidation and
improvement of the Spring operations. Such reserve was an estimate of the costs
of consolidating operations of the Spring billing offices into one new location
in a lower cost area and modifying the operating approach to include elements of
the PSS methodology. The Company classifies the portion of this reserve expected
to be disbursed within the next twelve months as a current liability.
The following is a schedule of future minimum lease payments under capital
leases and the present value of the minimum lease payments as of September 30,
1995:
<TABLE>
<CAPTION>
YEAR ENDING
SEPTEMBER 30, AMOUNT
- ---------------------------------------------------------------------------------- --------
<S> <C>
1996........................................................................... $262,562
1997........................................................................... 221,671
1998........................................................................... 109,923
1999........................................................................... 51,112
2000........................................................................... --
--------
Total minimum lease payments...................................................... 645,268
Less amount representing interest................................................. (69,910)
--------
Present value of minimum lease payments (of which $224,846 is due within one
year)........................................................................ $575,358
--------
--------
</TABLE>
10. EMPLOYEE BENEFIT PLANS
Spring provides pension benefits to eligible employees under a
noncontributory defined benefit pension plan. Benefits are earned on the basis
of credited service and employees' highest five consecutive plan years' average
compensation. The Plan was frozen effective July 1, 1993. Accordingly, no
further benefits accrue to eligible employees after July 1, 1993, the
accumulated benefit obligation becomes equal to the projected benefit obligation
as of that date, and all benefits become vested as of that date. The Company
makes contributions to the plan as necessary to satisfy the minimum funding
requirements of ERISA.
F-13
<PAGE>
<PAGE>
PHYSICIAN SUPPORT SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994 (UNAUDITED) AND 1995
The following table summarizes the significant assumptions used in
determining the pension obligations as of December 31, 1993 and 1994:
<TABLE>
<S> <C>
Discount rate -- pre-retirement............................................... 7.0%
Discount rate -- post-retirement.............................................. 5.0
Expected long-term rate of return on assets................................... 7.0
</TABLE>
Assets of the plan consist primarily of investments in stocks and corporate
and government bonds.
Pension cost includes the following components:
<TABLE>
<CAPTION>
1993 1994
--------- ---------
<S> <C> <C>
Service cost -- benefits earned during the period............................. $ -- $ --
Interest cost on projected benefit obligation................................. (142,407) (142,660)
Return on plan assets -- actual............................................... 46,331 69,574
Net amortization and deferral................................................. 94,834 66,166
--------- ---------
Net pension cost.................................................... $ (1,242) $ (6,920)
--------- ---------
--------- ---------
</TABLE>
The funded status of the pension plan at December 31, 1993 and 1994 was as
follows:
<TABLE>
<CAPTION>
1993 1994
----------- -----------
<S> <C> <C>
Projected benefit obligation (100% vested)................................ $(2,157,713) $(1,911,160)
Plan assets at fair value................................................. 2,132,433 1,740,219
----------- -----------
Projected benefit obligation in excess of plan assets..................... (25,280) (170,941)
Unrecognized net loss..................................................... 6,920 145,661
----------- -----------
Accrued pension cost................................................. $ (18,360) $ (25,280)
----------- -----------
----------- -----------
</TABLE>
The Company established a 401(k) plan that covers substantially all PSS
employees with one year of service age 21 or older effective January 1, 1994.
The Company did not make any contribution to the plan for the year ended
December 31, 1994 or for the nine months ended September 30, 1995.
11. COMMITMENTS
a. Operating Leases -- Future minimum annual rental commitments under
noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
SEPTEMBER 30, TOTAL
- ---------------------------------------------------------------------- ----------
<S> <C>
1996............................................................... $1,102,203
1997............................................................... 585,107
1998............................................................... 454,776
1999............................................................... 459,948
2000............................................................... 535,191
Thereafter......................................................... 1,225,965
----------
$4,363,190
----------
----------
</TABLE>
Rent expense was approximately $351,000, $810,000, $1,143,000, $831,700
(unaudited) and $1,009,000 for the years ended December 31, 1992, 1993, 1994 and
nine months ended September 30, 1994 (unaudited) and 1995, respectively.
b. Letter of Credit -- The Company has a letter of credit from a bank in
the amount of approximately $121,000 at September 30, 1995 in connection with
one of its self-insured employee medical plans.
F-14
<PAGE>
<PAGE>
PHYSICIAN SUPPORT SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994 (UNAUDITED) AND 1995
12. COMMON STOCK
All common stockholders of the Company are parties to a Shareholders'
Agreement (the 'Agreement') dated August 31, 1991. The Agreement requires the
Company to repurchase, at the request of any stockholder, up to 5 percent of the
shares of common stock outstanding on each August 30 from 2006 through 2010 at a
predetermined multiple of earnings per share as defined. In addition, the
Company is required to repurchase, at the request of any stockholder, up to 5
percent of the shares of common stock outstanding on each August 30 from 2016
through 2020 at a price per share to be determined at the time of repurchase.
The Agreement terminates on the earlier of (a) August 30, 2021, (b) the sale of
all or substantially all of the assets of the Company, (c) the sale of more than
20% of the outstanding common stock of the Company pursuant to a public offering
registered under the Securities Act of 1933 or (d) the merger of the Company
into another entity where (i) the Company is not the surviving entity or (ii)
the common stockholders of the Company do not own at least a majority of the
common stock of the surviving entity.
13. REDEEMABLE PREFERRED STOCK
On August 30, 1991, the Company issued 2,000 shares of 10% Preferred Stock,
Series A (the 'Series A Stock') and 2,000 shares of 10% Preferred Stock, Series
B (the 'Series B Stock') (together, the '10% Preferred Stock'). On February 28,
1994, February 28, 1995 and August 31, 1995, the Company issued stock dividends
of 120 shares, 127.2 shares and 134.832 shares, respectively, of 10% Preferred
Stock, Series A and 120 shares, 127.2 shares and 134.832 shares, respectively,
of 10% Preferred Stock, Series B in lieu of cash dividends.
The Series A Stock dividends are cumulative and payable semiannually.
Should the Company merge into or consolidate with an entity such that at least a
majority of the common stock of the surviving entity is not held by the common
stockholders of record as of August 30, 1991, unpaid dividends shall then accrue
at the rate of 12 percent per annum from the latest dividend date. Should the
Company fail to pay dividends when due, the holders of Series A Stock will
receive in lieu of cash dividends additional shares of preferred stock with a
face amount equal to the amount of unpaid cash dividends, at the rate of 12
percent per annum, having identical terms to Series A Stock.
The Series A Stock has no voting rights except that the Company cannot
change the powers, preferences or rights of the 10% Preferred Stock or issue
securities senior to the 10% Preferred Stock without the approval of a majority
of the holders of the 10% Preferred Stock.
The Company must redeem all outstanding shares of Series A Stock on the
earlier of August 31, 1998 or the date on which 60 percent of the Company's
common stock is first held by persons other than the common stockholders of
record as of August 30, 1991. The Series A Stock will be redeemed at its stated
value plus an amount equal to all accrued and unpaid dividends (whether or not
declared) to the date of redemption. The Company may at any time prior to August
31, 1998 redeem all, or any number less than all, of the outstanding shares of
Series A Stock at their stated value plus an amount equal to all accrued and
unpaid dividends (whether or not declared) to the date of redemption.
Upon liquidation, dissolution or winding up of the Company, the holders of
Series A Stock shall be entitled to receive their pro rata share of any payment
or distribution before any such payment or distribution shall be made on any
common stock or on any other preferred stock issued but not approved by a
majority of the holders of 10% Preferred Stock.
The Series B Stock is identical to the Series A Stock except that the
Series B Stock is exchangeable in whole or in part, at the option of the
Company, into 10% Senior Subordinated Notes on any dividend date subsequent to
December 31, 1994, provided the Company has paid all dividends accrued to the
date of such exchange.
F-15
<PAGE>
<PAGE>
PHYSICIAN SUPPORT SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994 (UNAUDITED) AND 1995
14. SUBSEQUENT EVENTS
On December 15, 1995, the Company increased the total availability under
its line of credit to $600,000, and borrowed $100,000, bringing its total
outstanding borrowings under its line of credit to $500,000.
On December 21, 1995, the Company sold 1,100 shares of 10% Redeemable
Preferred Stock, Series A, stated value $500 per share, for $550,000.
At the effective date of the Offering, the Company will increase the number
of authorized shares of common stock from 5,000 to 100,000,000, change the par
value of the stock from $.01 to .001 per share and effect a 1,400-for-one stock
split. The effect of the change in the par value and stock split will be to
transfer $2,224, representing the par value of the additional shares issued,
from additional paid-in capital to common stock. All numbers of common shares
and per share data in the accompanying consolidated financial statements have
been retroactively adjusted to effect the stock split. In addition, at the
effective date of the Offering, the Company will adopt the 1996 Stock Option
Plan (the 'Plan'). It is anticipated that a total of 853,500 authorized but
unissued shares of common stock will be reserved for issuance under the Plan.
The per share exercise price of options granted under the Plan will be not less
than 100% of the fair market value of a share of the Company's common stock on
the date of the grant.
F-16
<PAGE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
NORTH COAST HEALTH CARE MANAGEMENT
Cleveland, Ohio
We have audited the accompanying combined balance sheets of North Coast
Health Care Management, Inc., Medical Dental Invoicing Services, Inc., and North
Coast Account Systems, Inc. (collectively 'North Coast Health Care Management
Group') as of December 31, 1993 and 1994 and September 30, 1995 and the related
combined statements of operations, of stockholders' equity and of cash flows for
the years ended December 31, 1992, 1993 and 1994 and the nine months ended
September 30, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such combined financial statements present fairly, in all
material respects, the combined financial position of North Coast Health Care
Management Group as of December 31, 1993 and 1994 and September 30, 1995 and the
combined results of their operations, their stockholders' equity and their cash
flows for the years ended December 31, 1992, 1993 and 1994 and the nine months
ended September 30, 1995 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
December 29, 1995
Cleveland, Ohio
F-17
<PAGE>
<PAGE>
NORTH COAST HEALTH CARE MANAGEMENT GROUP
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ SEPTEMBER 30,
1993 1994 1995
---------- ---------- -------------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents........................................ $ 54,674 $ 614,977 $ 379,799
Accounts receivable (Note 2):
Billed...................................................... 81,319 16,635 155,651
Unbilled.................................................... 1,407,953 1,217,733 1,250,820
Prepaid expenses and other current assets........................ 14,686 22,119 32,050
---------- ---------- -------------
Total current assets........................................ 1,558,632 1,871,464 1,818,320
Property and Equipment, net (Note 4).................................. 479,037 411,612 318,863
Intangibles and Other Assets.......................................... 97,462 65,989 2,387
---------- ---------- -------------
Total.................................................. $2,135,131 $2,349,065 $ 2,139,570
---------- ---------- -------------
---------- ---------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Note payable to bank under line of credit (Note 5)............... $ 20,000 $ 65,000 $ 75,000
Current portion of note payable to bank (Note 5)................. 40,000 33,333
Accounts payable................................................. 167,280 170,501 95,646
Accrued compensation............................................. 636,946 537,446 931,590
Deferred revenue................................................. 23,440
---------- ---------- -------------
Total current liabilities................................... 864,226 806,280 1,125,676
---------- ---------- -------------
Note Payable to Bank, less current portion (Note 5)................... 33,333
---------- ---------- -------------
Stockholders' Equity:
Common stock, no par value; 750 shares authorized; 100 shares
issued and outstanding at December 31, 1993, 1994, and
September 30, 1995............................................. 2,000 2,000 2,000
Retained earnings..................................................... 1,235,572 1,540,785 1,011,894
---------- ---------- -------------
Total stockholders' equity.................................. 1,237,572 1,542,785 1,013,894
---------- ---------- -------------
Total.................................................. $2,135,131 $2,349,065 $ 2,139,570
---------- ---------- -------------
---------- ---------- -------------
</TABLE>
See notes to combined financial statements.
F-18
<PAGE>
<PAGE>
NORTH COAST HEALTH CARE MANAGEMENT GROUP
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------- -------------------------
1992 1993 1994 1995
---------- ---------- ---------- 1994 ----------
-----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue.................................... $5,828,162 $6,204,952 $5,791,893 $ 4,204,184 $4,376,442
---------- ---------- ---------- ----------- ----------
Operating Expenses:
Salaries and wages.................... 3,580,036 4,201,601 3,241,805 2,537,732 2,802,117
General and administrative............ 1,983,942 2,001,539 2,043,313 1,419,544 1,381,868
Depreciation and amortization......... 152,553 154,605 169,782 127,336 128,826
---------- ---------- ---------- ----------- ----------
Total operating expenses......... 5,716,531 6,357,745 5,454,900 4,084,612 4,312,811
---------- ---------- ---------- ----------- ----------
Income (loss) from Operations.............. 111,631 (152,793) 336,993 119,572 63,631
---------- ---------- ---------- ----------- ----------
Other Income (Expense):
Interest expense...................... (31,183) (13,478) (43,423) (29,753) (19,154)
Interest income....................... 3,164 5,062 11,643 1,170 396
---------- ---------- ---------- ----------- ----------
Other income (expense), net...... (28,019) (8,416) (31,780) (28,583) (18,758)
---------- ---------- ---------- ----------- ----------
Net Income (Loss).......................... $ 83,612 $ (161,209) 305,213 $ 90,989 44,873
---------- ---------- -----------
---------- ---------- -----------
Unaudited pro forma income tax
adjustment............................... 117,500 12,000
---------- ----------
Unaudited pro forma net income............. $ 187,713 $ 32,873
---------- ----------
---------- ----------
</TABLE>
See notes to combined financial statements.
F-19
<PAGE>
<PAGE>
NORTH COAST HEALTH CARE MANAGEMENT GROUP
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
---------------- RETAINED STOCKHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
------ ------ ---------- -------------
<S> <C> <C> <C> <C>
Balance, January 1, 1992.......................................... 100 $2,000 $1,313,169 $ 1,315,169
Net income................................................... 83,612 83,612
------ ------ ---------- -------------
Balance, December 31, 1992........................................ 100 2,000 1,396,781 1,398,781
Net loss..................................................... (161,209) (161,209)
------ ------ ---------- -------------
Balance, December 31, 1993........................................ 100 2,000 1,235,572 1,237,572
Net income................................................... 305,213 305,213
------ ------ ---------- -------------
Balance, December 31, 1994........................................ 100 2,000 1,540,785 1,542,785
Net income................................................... 44,873 44,873
Cash distribution to shareholders............................ (573,764) (573,764)
------ ------ ---------- -------------
Balance, September 30, 1995....................................... 100 $2,000 $1,011,894 $ 1,013,894
------ ------ ---------- -------------
------ ------ ---------- -------------
</TABLE>
See notes to combined financial statements.
F-20
<PAGE>
<PAGE>
NORTH COAST HEALTH CARE MANAGEMENT GROUP
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------- ------------------------
1992 1993 1994 1995
--------- --------- -------- 1994 ---------
-----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).............................................. $ 83,612 $(161,209) $305,213 $ 90,989 $ 44,873
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization............................... 152,553 154,605 169,782 127,336 128,826
Changes in operating assets and liabilities:
Accounts receivable....................................... (219,572) 142,200 254,904 (24,080) (172,103)
Prepaid expenses and other current assets................. 3,508 (14,537) (7,433) (14,602) (9,931)
Other assets.............................................. (51) (40,669) (527) (346) 39,752
Accounts payable.......................................... 46,786 83,601 3,222 (99,686) (74,855)
Accrued compensation...................................... 106,382 101,948 (99,500) 263,128 394,144
Deferred revenue.......................................... 23,440
--------- --------- -------- ----------- ---------
Net cash provided by operating activities.............. 173,218 265,939 625,661 342,739 374,146
--------- --------- -------- ----------- ---------
Cash flows from investing activities -- Capital expenditures..... (53,949) (49,578) (70,358) (70,100) (12,227)
--------- --------- -------- ----------- ---------
Cash flows from financing activities:
Net borrowings (repayments) on line of credit.................. 50,000 (215,000) 45,000 285,000 10,000
Principal payments on note payable to bank..................... (40,000) (40,000) (40,000) (29,999) (33,333)
Borrowing (repayment) of note payable to officer............... (100,000) 100,000
Cash distribution to shareholders.............................. (573,764)
--------- --------- -------- ----------- ---------
Net cash provided (used) by financing activities....... (90,000) (255,000) 5,000 355,001 (597,097)
--------- --------- -------- ----------- ---------
Net increase (decrease) in cash and cash equivalents............. 29,269 (38,639) 560,303 627,640 (235,178)
Cash and cash equivalents, beginning of year..................... 64,044 93,313 54,674 54,674 614,977
--------- --------- -------- ----------- ---------
Cash and cash equivalents, end of year........................... $ 93,313 $ 54,674 $614,977 $ 682,314 $ 379,799
--------- --------- -------- ----------- ---------
--------- --------- -------- ----------- ---------
Supplemental disclosure of cash flow information:
Cash paid during the year for interest......................... $ 31,183 $ 13,478 $ 43,423 $ 29,753 $ 19,154
--------- --------- -------- ----------- ---------
--------- --------- -------- ----------- ---------
</TABLE>
See notes to combined financial statements.
F-21
<PAGE>
<PAGE>
NORTH COAST HEALTH CARE MANAGEMENT GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1994 (UNAUDITED) AND 1995
1. DESCRIPTION OF THE BUSINESS
North Coast Health Care Management, Inc., Medical Dental Invoicing
Services, Inc., and North Coast Account Systems, Inc. (collectively 'North Coast
Health Care Management Group' or, the 'Company') provide various services for
physicians located primarily in northeast Ohio. North Coast Health Care
Management, Inc. (an S corporation) provides practice management services to
both hospital and non-hospital based physicians. Medical Dental Invoicing
Services, Inc. (a C corporation) performs billing services solely for North
Coast Health Care Management, Inc. customers, and North Coast Account Systems,
Inc. (a C corporation) performs accounts receivable collection services for the
same clients. Income taxes are not provided on earnings of the S Corporation.
The C corporations have no taxable income, and no significant temporary
differences or net operating loss carryforwards. The unaudited pro forma income
tax adjustment reflects income taxes as if all the companies that comprise North
Coast Health Care Management Group were C Corporations. There were no
significant differences between taxable income for financial statement purposes
and income tax purposes for the year ended December 31, 1994 and the nine months
ended September 30, 1995.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Combination -- The combined financial statements include the
accounts of the Company due to common ownership and/or management. All
intercompany balances and transactions have been eliminated.
Revenue Recognition -- The Company estimates fees that will be invoiced
upon collection of physician accounts receivable and recognizes such revenues
when all services to be performed by the Company have been completed. Accounts
receivable-billed, primarily represents amounts invoiced to clients. Accounts
receivable-unbilled, represents amounts recognized for services rendered but not
yet invoiced and is based on the Company's estimate of the fees that will be
collected from clients when patient accounts are collected. This estimate is
calculated by applying the Company's management fee percentage to an estimate of
the clients' collections that will be achieved on amounts billed to patients and
their insurers. The Company revises its estimate of its unbilled accounts
receivable based on its clients' billing and collection information for interim
and annual financial statements.
Property and Equipment -- Depreciation and amortization are computed using
the straight-line method over the estimated useful lives of the assets or life
of the lease.
Intangible Assets -- Amortization is computed using the straight-line
method over five years.
Unaudited Interim Financial Statements -- In the opinion of management, the
Company has made all adjustments, consisting of only normal recurring accruals,
necessary for fair presentation of the results of operations and cash flows for
the nine months ended September 30, 1994 as presented in the accompanying
unaudited financial statements.
3. RELATED PARTY TRANSACTIONS
An officer and director of the Company has an ownership interest in
physicians groups that are also clients of the Company. Transactions with these
groups accounted for revenue and accounts receivable as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------- -------------------------
1992 1993 1994 1995
---------- ---------- ---------- 1994 ----------
-----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues......................... $3,205,000 $3,152,000 $2,799,000 $ 2,100,000 $1,988,000
Accounts receivable.............. 931,000 848,000 718,000 781,000
</TABLE>
F-22
<PAGE>
<PAGE>
NORTH COAST HEALTH CARE MANAGEMENT GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)
YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1994 (UNAUDITED) AND 1995
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- SEPTEMBER 30,
DESCRIPTION 1993 1994 1995
- -------------------------------------------------------------- -------- ---------- -------------
<S> <C> <C> <C>
Office equipment.............................................. $633,198 $ 703,556 $ 715,783
Furniture and fixtures........................................ 165,531 165,531 165,531
Leasehold improvements........................................ 137,525 137,525 137,525
-------- ---------- -------------
Total.................................................... 936,254 1,006,612 1,018,839
Less accumulated depreciation and amortization................ 457,217 595,000 699,976
-------- ---------- -------------
Property and equipment, net................................... $479,037 $ 411,612 $ 318,863
-------- ---------- -------------
-------- ---------- -------------
</TABLE>
5. DEBT ARRANGEMENTS
Lines of Credit -- The Company has a total of $400,000 in unsecured lines
of credit available from a bank with interest (9.75% at September 30, 1995) at
the prime lending rate plus one percent.
Note Payable to Bank -- The Company had an unsecured note payable to a bank
in monthly installments of $3,333 plus interest at prime lending rate plus one
percent. This loan was fully paid in September 1995.
6. EMPLOYEE BENEFIT PLANS
The Company provides defined contribution employee benefit plans to the
employees of North Coast Health Care Management, Inc. and Medical Dental
Invoicing Services, Inc. The Company's contributions to the plan are based upon
a percentage of wages (10% for North Coast Health Care Management, Inc. and 5%
for Medical Dental Invoicing Services, Inc.). The total expense recognized by
the Company for the years ended December 31, 1992, 1993 and 1994 and the nine
months ended September 30, 1995 for the defined contribution plans is $152,000,
$158,000, $145,000 and $113,000, respectively.
7. LEASE COMMITMENTS
The Company has various operating leases for automobiles and office space.
Rent expense incurred by the Company is:
<TABLE>
<CAPTION>
PERIOD ENDED AMOUNT
- ---------------------------------------------------------------------------------- --------
<S> <C>
December 31, 1992................................................................. $309,000
December 31, 1993................................................................. 325,000
December 31, 1994................................................................. 331,000
Nine months ended September 30, 1995.............................................. 227,000
</TABLE>
Effective August 1, 1995, the Company entered into a new office lease for
$19,519 a month. This lease expires in November 2002.
F-23
<PAGE>
<PAGE>
NORTH COAST HEALTH CARE MANAGEMENT GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)
YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1994 (UNAUDITED) AND 1995
The remaining future minimum rental commitments under these noncancelable
operating leases, including the new office lease, are:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, AMOUNT
- -------------------------------------------------------------------------------- ----------
<S> <C>
1995......................................................................... $ 72,674
1996......................................................................... 296,495
1997......................................................................... 283,445
1998......................................................................... 252,926
1999......................................................................... 234,228
Thereafter...................................................................... 663,646
----------
Total................................................................. $1,803,414
----------
----------
</TABLE>
F-24
<PAGE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
MEDICAL MANAGEMENT SUPPORT, INC.
We have audited the accompanying balance sheets of Medical Management
Support, Inc. as of December 31, 1993 and 1994, and September 30, 1995, and the
related statements of operations, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1994, and the nine-month
period ended September 30, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Medical Management Support, Inc. as of
December 31, 1993 and 1994, and September 30, 1995, and the results of its
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1994, and the nine-month period ended September
30, 1995, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
January 5, 1996
Seattle, Washington
F-25
<PAGE>
<PAGE>
MEDICAL MANAGEMENT SUPPORT, INC.
BALANCE SHEETS
DECEMBER 31, 1993 AND 1994, AND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1993 1994 1995
-------- -------- -------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................ $135,679 $217,890 $ 86,234
Accounts receivable -- Billed........................................ 14,001 1,974 10,463
Accounts receivable -- Unbilled...................................... 121,715 182,468 189,881
Accounts receivable -- Related parties............................... 312 1,150
Prepaid expenses..................................................... 13,540 12,712 7,472
-------- -------- -------------
Total current assets............................................ 285,247 416,194 294,050
Property and equipment, net............................................... 32,410 8,499 31,012
Other assets.............................................................. 4,501 4,333 4,333
-------- -------- -------------
Total...................................................... $322,158 $429,026 $ 329,395
-------- -------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................... $ 16,259 $ 11,477 $ 18,508
Stockholder dividends payable........................................ 95,000 150,000
Accrued expenses..................................................... 17,651 25,106 33,208
-------- -------- -------------
Total current liabilities....................................... 128,910 186,583 51,716
-------- -------- -------------
Deferred rent............................................................. 26,209 20,525 11,124
Stockholders' equity:
Common stock, $.10 par -- Authorized, 5,000,000 shares; issued, 100
shares............................................................. 10 10 10
Additional paid-in capital........................................... 990 990 990
Retained earnings.................................................... 166,039 220,918 265,555
-------- -------- -------------
Total stockholders' equity...................................... 167,039 221,918 266,555
-------- -------- -------------
Total...................................................... $322,158 $429,026 $ 329,395
-------- -------- -------------
-------- -------- -------------
</TABLE>
See notes to financial statements.
F-26
<PAGE>
<PAGE>
MEDICAL MANAGEMENT SUPPORT, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1992, 1993, 1994,
AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1994 (UNAUDITED) AND 1995
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------------------------- -------------------------
1992 1993 1994 1995
---------- ---------- ---------- 1994 ----------
-----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue.................................... $1,232,117 $1,153,064 $1,437,229 $ 1,062,075 $1,115,514
Operating expenses:
Salaries and wages.................... 567,086 473,064 454,058 343,617 440,838
Salaries and wages -- Related
parties............................. 124,632 72,800 112,441 69,851 39,558
General and administrative............ 294,670 278,186 260,816 191,972 184,748
General and administrative -- Related
parties............................. 18,297 14,539 27,859 21,835 20,590
Depreciation and amortization......... 63,327 54,053 21,387 18,437 3,264
---------- ---------- ---------- ----------- ----------
Total operating expenses......... 1,068,012 892,642 876,561 645,712 688,998
---------- ---------- ---------- ----------- ----------
Income from operations..................... 164,105 260,422 560,668 416,363 426,516
Other Expense:
Interest expense...................... 6,737 2,379 46 38 27
Other, net............................ (4,487) (2,277) 743 2,342 36,852
---------- ---------- ---------- ----------- ----------
Total other expenses............. 2,250 102 789 2,380 36,879
---------- ---------- ---------- ----------- ----------
Net income................................. $ 161,855 $ 260,320 559,879 $ 413,983 389,637
---------- ---------- -----------
---------- ---------- -----------
Unaudited pro forma income tax
adjustment............................... 190,358 132,476
---------- ----------
Unaudited pro forma net income............. $ 369,521 $ 257,161
---------- ----------
---------- ----------
</TABLE>
See notes to financial statements.
F-27
<PAGE>
<PAGE>
MEDICAL MANAGEMENT SUPPORT, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1992, 1993, 1994,
AND NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON STOCK PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ---------- --------- -------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1992............................ 100 $ 10 $990 $ 221,114 $ 222,114
Net income..................................... 161,855 161,855
Dividends...................................... (200,000) (200,000)
------ ------ ---------- --------- -------------
Balance, December 31, 1992.......................... 100 10 990 182,969 183,969
Net income..................................... 260,320 260,320
Dividends...................................... (277,250) (277,250)
------ ------ ---------- --------- -------------
Balance, December 31, 1993.......................... 100 10 990 166,039 167,039
Net income..................................... 559,879 559,879
Dividends...................................... (505,000) (505,000)
------ ------ ---------- --------- -------------
Balance, December 31, 1994.......................... 100 10 990 220,918 221,918
Net income..................................... 389,637 389,637
Dividends...................................... (345,000) (345,000)
------ ------ ---------- --------- -------------
Balance, September 30, 1995......................... 100 $ 10 $990 $ 265,555 $ 266,555
------ ------ ---------- --------- -------------
------ ------ ---------- --------- -------------
</TABLE>
See notes to financial statements.
F-28
<PAGE>
<PAGE>
MEDICAL MANAGEMENT SUPPORT, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1992, 1993, 1994,
AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1994 (UNAUDITED) AND 1995
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
----------------------------------- ------------------------
1992 1993 1994 1995
--------- --------- --------- 1994 ---------
-----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income................................ $ 161,855 $ 260,320 $ 559,879 $ 413,983 $ 389,637
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization........ 63,327 54,053 21,387 18,437 3,264
Loss on disposal of assets........... 8,160 6,836 6,803 10,943 64
Cash provided (used) by changes in
operating assets and liabilities:
Accounts receivable -- Billed... 10,103 (9,900) 12,027 6,535 (8,489)
Accounts receivable --
Unbilled...................... (509) 50,180 (60,753) (63,740) (7,419)
Accounts receivable -- Related
parties....................... (838) (690) 1,150
Prepaid expenses................ 3,792 (8,918) 828 6,877 5,240
Other assets.................... (168) 168 168
Accounts payable................ 5,374 222 (4,782) 3,183 7,031
Accrued expenses................ (8,812) (3,581) 7,455 9,631 8,102
Other long-term liabilities..... (2,638) 4,802 (5,684) (2,752) (9,401)
--------- --------- --------- ----------- ---------
Net cash provided by operating
activities.............................. 240,484 354,014 536,490 402,575 389,179
--------- --------- --------- ----------- ---------
Investing activities:
Capital expenditures...................... (10,659) (10,300) (4,279) (4,279) (25,835)
Proceeds from sale of assets.............. 2,300
--------- --------- --------- ----------- ---------
Net cash used by investing activities..... (8,359) (10,300) (4,279) (4,279) (25,835)
--------- --------- --------- ----------- ---------
Financing activities:
Principal payments on long-term debt...... (18,303) (78,287)
Dividends paid............................ (185,000) (222,250) (450,000) (450,000) (495,000)
--------- --------- --------- ----------- ---------
Net cash used in financing activities..... (203,303) (300,537) (450,000) (450,000) (495,000)
--------- --------- --------- ----------- ---------
Net increase (decrease) in cash and cash
equivalents.................................. 28,822 43,177 82,211 (51,704) (131,656)
Cash and cash equivalents:
Beginning of year......................... 63,680 92,502 135,679 135,679 217,890
--------- --------- --------- ----------- ---------
End of year............................... $ 92,502 $ 135,679 $ 217,890 $ 83,975 $ 86,234
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
Supplemental disclosure of cash flow
information:
Cash paid during the year for interest.... $ 6,737 $ 2,379 $ 46 $ 38 $ 27
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
</TABLE>
See notes to financial statements.
F-29
<PAGE>
<PAGE>
MEDICAL MANAGEMENT SUPPORT, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1992, 1993, 1994,
AND NINE-MONTH PERIODS ENDED
SEPTEMBER 30, 1994 (UNAUDITED) AND 1995
NOTE 1: DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Medical Management Support, Inc. (the Company or MMS), a Washington
S-Corporation, is engaged in the business of providing accounts receivable
management, billing, collection, and related business services for healthcare
providers concentrated in the greater Seattle metropolitan area. The Company was
incorporated in 1981.
REVENUE RECOGNITION
For physician billing activities, the Company recognizes client fee revenue
on the accrual basis. Practice management revenue is based on a percentage fee
of net provider collections of receivables from patient and insurance company
billings. Client fees are calculated at month end and billed to clients the
following month.
A portion of the unbilled receivable is based on an estimate of future
practice management revenue from outstanding provider receivables. The estimated
amount is calculated by multiplying client fee percentages times outstanding
provider accounts receivable balances, less estimated provider write-offs and
less estimated costs to collect. This portion of the unbilled receivable
estimate is calculated and adjusted quarterly.
In addition to normal billing activities, the Company periodically performs
special project or consulting work. This work is billed to clients based on
actual time at standard hourly billing rates.
ACCOUNTS RECEIVABLE
The Company grants credit to its customers for services performed;
resulting accounts receivable are not collateralized. Accounts receivable are
charged directly against earnings when they are determined to be uncollectible.
Management does not expect use of this method to result in a material difference
from the allowance valuation method required by generally accepted accounting
principles.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are cash and short-term, highly liquid
investments with maturities of 90 days or less that are readily convertible to
known amounts of cash and present an insignificant risk of changes in principle
amount due to interest rate fluctuations. Periodically, the Company maintains
deposits in a money market account with a brokerage firm which are not covered
under federally insured programs. The money market account invests primarily in
U.S. Government-backed securities.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization
are provided by using the straight-line method over the estimated useful lives
of three to four years.
F-30
<PAGE>
<PAGE>
MEDICAL MANAGEMENT SUPPORT, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
YEARS ENDED DECEMBER 31, 1992, 1993, 1994,
AND NINE-MONTH PERIODS ENDED
SEPTEMBER 30, 1994 (UNAUDITED) AND 1995
ADVERTISING COSTS
Expenses incurred related to nondirect advertising are expensed as
incurred.
INCOME TAXES
As the Company is classified as an S-Corporation, all taxable income or
loss is included in the stockholders' individual tax returns. These financial
statements do not include a provision for income taxes. In the event the
S-election is terminated the Company will be responsible for income taxes at the
corporate level. The unaudited pro forma income tax adjustment reflects income
taxes as if the Company was a C Corporation. There were no significant
differences between taxable income for financial statement purposes and income
tax purposes for the year ended December 31, 1994 and the nine months ended
September 30, 1995.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INTERIM FINANCIAL INFORMATION
The interim financial information as of and for the nine-month period ended
September 30, 1994, was prepared by the Company in a manner consistent with the
audited financial statements. The unaudited information, in management's
opinion, reflects all adjustments that are of a normal recurring nature and that
are necessary to present fairly the results for the periods presented. The
results of operations for the nine-month period ended September 30, 1995, are
not necessarily indicative of the results to be expected for the entire year.
NOTE 2: RELATED PARTY TRANSACTIONS
ACCOUNTS RECEIVABLE FROM RELATED PARTY
Accounts receivable at December 31, 1993 and 1994, and September 30, 1995,
consist of various accounting services performed by a related party for Medical
Management Support, Inc. Certain partners of the firm own a combined 80%
interest in the Company.
ACCOUNTS PAYABLE TO RELATED PARTY
Included in accounts payable at December 31, 1993 and 1994, and September
30, 1995, are payables to related parties of $11,420, $3,608 and $2,996,
respectively.
SUBLEASE AGREEMENTS
The Company subleases office space to a related party at $120 per month and
subleases office space from them at $150 per month.
F-31
<PAGE>
<PAGE>
MEDICAL MANAGEMENT SUPPORT, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
YEARS ENDED DECEMBER 31, 1992, 1993, 1994,
AND NINE-MONTH PERIODS ENDED
SEPTEMBER 30, 1994 (UNAUDITED) AND 1995
NOTE 3: PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
ESTIMATED -------------------- SEPTEMBER 30,
USEFUL LIFE 1993 1994 1995
----------- -------- -------- -------------
<S> <C> <C> <C> <C>
Furniture, fixtures, and office equipment........... 3-4 $ 56,687 $ 58,016 $ 58,016
Computer equipment.................................. 3 104,823 91,133 72,852
Computer software................................... 3 42,953 36,702 37,320
-------- -------- -------------
204,463 185,851 168,188
Less accumulated depreciation and amortization...... 172,053 177,352 137,176
-------- -------- -------------
$ 32,410 $ 8,499 $ 31,012
-------- -------- -------------
-------- -------- -------------
</TABLE>
Efficiency in medical billing services is dependent on the use of the most
recent technology and systems. Investment in new computer equipment and software
is required on a continuing basis due to technical obsolescence.
NOTE 4: OFFICE LEASE
Medical Management Support, Inc. entered into an operating lease on October
26, 1990, for the use of space in an office building. Terms of the agreement
specified six months of free rent upon signing the lease. Rent expense is
recognized on a straight-line basis over the contractual lease term. Rent
expense recognized during the free rent period has been recorded as other
long-term liabilities and is amortized over the remaining lease life. Rental
expenses incurred for operating leases amounted to $48,140, $53,349, $52,106 for
the years ended December 31, 1992, 1993, and 1994, respectively, and $33,553
(unaudited) and $29,504 for the nine-month periods ended September 30, 1994
(unaudited) and 1995, respectively.
Minimum rental commitments on this lease as of December 31, 1994, are as
follows:
<TABLE>
<S> <C>
1995..................................................................... $52,000
1996..................................................................... 26,000
-------
$78,000
-------
-------
</TABLE>
NOTE 5: MAJOR CUSTOMERS
Customers which represent 10% or more of revenue for each year are as
follows:
<TABLE>
<CAPTION>
PERCENT OF REVENUE
---------------------------------------------
NINE MONTHS ENDED YEAR ENDED DECEMBER 31,
SEPTEMBER 30, ------------------------
CUSTOMER 1995 1994 1993 1992
- --------- ----------------- ---- ---- ----
<C> <S> <C> <C> <C> <C>
1 ................................................... 21.1% 23.5% 21.3% 17.8%
2 ................................................... 18.4 20.0 25.0 25.7
3 ................................................... 19.0 18.7 20.4 21.6
4 ................................................... 24.4 14.3
5 ................................................... 11.3
----- ---- ---- ----
82.9% 76.5% 66.7% 76.4%
----- ---- ---- ----
----- ---- ---- ----
</TABLE>
F-32
<PAGE>
<PAGE>
MEDICAL MANAGEMENT SUPPORT, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
YEARS ENDED DECEMBER 31, 1992, 1993, 1994,
AND NINE-MONTH PERIODS ENDED
SEPTEMBER 30, 1994 (UNAUDITED) AND 1995
NOTE 6: RISKS AND UNCERTAINTIES
Substantially all of the Company's revenue is derived from management fees
which are based upon a percentage of net collection of health care receivables,
generated by providers on a fee-for-service basis.
During the past decade, federal and state governments have implemented
legislation designed to stimulate a reduction in the increase in health care
costs and it is anticipated that such legislative initiatives will continue.
There can be no assurance that current or future government regulations will not
have a material adverse effect on the Company's business.
Health care system reform and concerns over rising Medicare and Medicaid
costs continue to be high priorities for the federal and certain state
governments. Both the U.S. House of Representatives and the U.S. Senate have
approved bills that would reshape the Medicare and Medicaid programs. Although
no comprehensive health care, Medicare, or Medicaid reform legislation has yet
been implemented, pressures to contain costs and other market reforms have
impacted the health care delivery system. These reforms include cost reduction
initiatives by certain employers, health care providers and third party payors.
Such proposed legislation, market pressures, and market reforms could have a
material adverse effect on the Company. In addition, existing governmental
regulations could adversely affect the Company's business through, among other
things, its potential to reduce the amount of reimbursement received by the
Company's clients for health care services.
Certain market changes are occurring in the health care market that may
continue regardless of whether comprehensive federal or state health care reform
legislation is adopted and implemented and that could adversely affect the
accounts receivable management services provided by the Company. These market
reforms include certain employer initiatives, such as creating purchasing
cooperatives and contracting for health care services for employees through
managed care companies (including health maintenance organizations), certain
provider initiatives, such as risk-sharing among health care providers and
managed care companies through capitated contracts and integration of hospitals
and physicians into comprehensive delivery systems, and certain payor
initiatives, such as new alliances between health care providers and third party
payors in which the health care providers are employed by such third party
payors.
The Company is also subject to applicable federal and state billing and
credit collection agency laws and regulations. In general, these laws provide
for various fines, penalties, damages, and other assessments for violations,
including possible exclusion from Medicare, Medicaid, and certain other federal
and state health care programs. Although the Company's management believes that
its billing practices comply with all applicable laws, the increased focus by
governmental agencies on billing practices may have a material adverse effect on
the industry and the Company.
NOTE 7: STOCK PURCHASE AGREEMENT
The shareholders have a stock purchase agreement providing for the transfer
of shares in the event of a stockholder death or other disposition. No shares
may be disposed of without first offering them to the existing shareholders. The
agreement provides for a 90-day cash out of their capital balance at the date of
purchase, and a five-year payout based on an amount equal to the stockholders'
proportionate interest in the earnings of the Company over the five years
subsequent to the purchase.
F-33
<PAGE>
<PAGE>
MEDICAL MANAGEMENT SUPPORT, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
YEARS ENDED DECEMBER 31, 1992, 1993, 1994,
AND NINE-MONTH PERIODS ENDED
SEPTEMBER 30, 1994 (UNAUDITED) AND 1995
NOTE 8: ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1993 1994 1995
------- ------- -------------
<S> <C> <C> <C>
Accrual for compensated absences.................................. $ 9,418 $13,361 $15,266
City, state, and federal taxes.................................... 7,292 11,397 17,942
Other............................................................. 941 348
------- ------- -------------
$17,651 $25,106 $33,208
------- ------- -------------
------- ------- -------------
</TABLE>
NOTE 9: SUBSEQUENT EVENT
Subsequent to September 30, 1995, and continuing as of the date of this
report, the stockholders of the Company have reached an agreement to sell
substantially all of the assets and liabilities of Medical Management Support,
Inc. to another company. It is anticipated an agreement can be reached and that
sale will take place in early 1996.
F-34
<PAGE>
<PAGE>
PRO FORMA FINANCIAL INFORMATION
(UNAUDITED)
The following unaudited pro forma financial information gives effect to
(i)the acquisitions by Physician Support Systems, Inc. ('PSS')of the Acquired
Businesses (North Coast Health Care Management Group ('NCHCM'), Medical
Management Support, Inc. ('MMS') and Data Processing Systems, Inc. ('DPS'))
effective upon the completion of this offering and (ii) the sale of 3,000,000
shares of common stock offered by the Company at an assumed initial public
offering price of $10 per share and the application of the estimated net
proceeds therefrom as described under 'Use of Proceeds.' The acquisitions of
NCHCM, MMS and DPS will be accounted for as purchases. The unaudited pro forma
financial statements are derived from the historical financial statements of
PSS, NCHCM, MMS and DPS and estimates and assumptions set forth below and in the
notes to the unaudited pro forma financial statements.
The unaudited pro forma balance sheet gives effect to the acquisitions by
PSS of NCHCM, MMS and DPS as if such acquisitions had occurred on September 30,
1995. Such pro forma balance sheet is derived from the audited consolidated
balance sheet of PSS and Subsidiary as of September 30, 1995, included elsewhere
in this prospectus, as well as the audited balance sheets of NCHCM and MMS as of
September 30, 1995, included elsewhere in this prospectus, and the unaudited
balance sheet of DPS as of September 30, 1995.
The unaudited pro forma statements of operations present unaudited pro
forma results of operations for the year ended December 31, 1994 and nine months
ended September 30, 1995. For purposes of the unaudited pro forma statements of
operations, the acquisitions by PSS of NCHCM, MMS and DPS are included as if
such acquisitions had occurred on January 1, 1994. The unaudited pro forma
statement of operations for the year ended December 31, 1994 is derived from the
audited consolidated statement of operations of PSS and Subsidiary for the year
ended December 31, 1994 and the audited statements of operations of NCHCM and
MMS for the year ended December 31, 1994 included elsewhere in this prospectus,
as well as the unaudited statement of operations of DPS for the year ended
December 31, 1994. The unaudited pro forma statement of operations for the nine
months ended September 30, 1995 is derived from the audited consolidated
statement of operations of PSS and Subsidiary, and the audited statements of
operations of NCHCM and MMS for the nine months ended September 30, 1995
included elsewhere in this prospectus as well as the unaudited statement of
operations of DPS for the nine months ended September 30, 1995.
Pro forma adjustments are based upon preliminary estimates, available
information and certain assumptions that management deems appropriate. The
unaudited pro forma financial information presented herein are not necessarily
indicative of the results the company would have obtained had such events
occurred at the beginning of the period, as assumed, or of the future results of
the company. The unaudited pro forma financial information should be read in
conjunction with the financial statements and notes thereto included elsewhere
in this prospectus.
F-35
<PAGE>
<PAGE>
PHYSICIAN SUPPORT SYSTEMS, INC.
PRO FORMA BALANCE SHEET
SEPTEMBER 30, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA ACQUISITION ADJUSTMENTS
--------------------------------------------- ------------------------------------------
PHYSICIAN NORTH NORTH
SUPPORT COAST COAST
SYSTEMS HEALTHCARE MEDICAL DATA HEALTHCARE MEDICAL DATA
AND MANAGEMENT MANAGEMENT PROCESSING MANAGEMENT MANAGEMENT PROCESSING
SUBSIDIARY GROUP SUPPORT SYSTEMS GROUP SUPPORT SYSTEMS SUBTOTAL
--------- ---------- ---------- ---------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash.................... 19 380 86 1 (6,000)(a) (2,500)(b) (900)(c) (8,914)
Billed accounts
receivable............ 1,437 155 10 118 1,720
Unbilled accounts
receivable............ 3,949 1,251 190 5,390
Other current assets.... 446 32 8 1 487
--------- ---------- ----- ----- ---------- ---------- ----- --------
Total current
assets........ 5,851 1,818 294 120 (1,317)
--------- ---------- ----- ----- ---------- ---------- ----- --------
Fixed assets, net....... 2,578 319 31 37 2,965
Intangible assets,
net................... 12,488 6,899(a) 2,234(b) 743(c) 22,364
Other assets............ 701 2 4 707
--------- ---------- ----- ----- ---------- ---------- ----- --------
21,618 2,139 329 157 899 (266) (157) 24,719
--------- ---------- ----- ----- ---------- ---------- ----- --------
--------- ---------- ----- ----- ---------- ---------- ----- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion
long-term debt........ 1,995 1,995
Current portion other
long-term
liabilities........... 686 686
Short-term borrowings... 400 400
NCHC purchase note...... 1,912(a) 1,912
Other current
liabilities........... 4,120 1,126 52 5,298
--------- ---------- ----- ----- ---------- ---------- ----- --------
Total current
liabilities... 7,201 1,126 52 10,291
--------- ---------- ----- ----- ---------- ---------- ----- --------
Long-term debt.......... 14,226 14,226
Other long-term
liabilities........... 1,238 11 1,249
Redeemable preferred
stock................. 2,382 2,382
Common stock............ 2 1 1 1 (1)(a) (1)(b) (1)(c) 2
Additional paid-in 1,012(a) 265(b)
capital............... 126 (1,012)(a) (265)(b) 126
Retained earnings....... (3,557) 1,012 265 156 (1,012)(a) (265)(b) (156)(c) (3,557)
--------- ---------- ----- ----- ---------- ---------- ----- --------
(3,429) 1,013 266 157 (1,013) (266) (157) (3,429)
--------- ---------- ----- ----- ---------- ---------- ----- --------
21,618 2,139 329 157 899 (266) (157) 24,719
--------- ---------- ----- ----- ---------- ---------- ----- --------
--------- ---------- ----- ----- ---------- ---------- ----- --------
<CAPTION>
PRO FORMA
OFFERING
ADJUSTMENTS PRO FORMA
----------- ---------
<S> <C> <C>
ASSETS
Cash.................... 550(d) 4,683
13,047(e)
Billed accounts
receivable............ 1,720
Unbilled accounts
receivable............ 5,390
Other current assets.... 487
----------- ---------
Total current
assets........ 12,280
----------- ---------
Fixed assets, net....... 2,965
Intangible assets,
net................... 22,364
Other assets............ 707
----------- ---------
13,597 38,316
----------- ---------
----------- ---------
LIABILITIES AND STOCKHOL
Current portion
long-term debt........ (1,995)(e) --
Current portion other
long-term
liabilities........... 686
Short-term borrowings... (400)(e) --
NCHC purchase note...... 1,912
Other current
liabilities........... 5,298
----------- ---------
Total current
liabilities... 7,896
----------- ---------
Long-term debt.......... (8,726)(e) 5,500
Other long-term
liabilities........... 1,249
Redeemable preferred
stock................. 550(d) --
(2,932)(e)
Common stock............ 3(e) 5
Additional paid-in
capital............... 27,097(e) 27,223
Retained earnings....... (3,557)
----------- ---------
27,100 23,671
----------- ---------
13,597 38,316
----------- ---------
----------- ---------
</TABLE>
See notes to pro forma financial statements.
F-36
<PAGE>
<PAGE>
PHYSICIAN SUPPORT SYSTEMS, INC.
PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1994 (UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA ACQUISITION ADJUSTMENT
------------------------------------------------- ----------------------------------
PHYSICIAN NORTH NORTH
SUPPORT COAST COAST
SYSTEMS HEALTHCARE MEDICAL DATA HEALTHCARE MEDICAL DATA
AND MANAGEMENT MANAGEMENT PROCESSING MANAGEMENT MANAGEMENT PROCESSING
SUBSIDIARY GROUP SUPPORT SYSTEMS GROUP SUPPORT SYSTEMS SUBTOTAL
---------- ---------- ---------- ---------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................. 18,773 5,792 1,437 895 26,897
Operating expenses:
Wages & salaries..... 8,866 3,241 566 391 (850)(f) 12,214
General &
administrative..... 6,724 2,044 289 292 9,349
Depreciation and
amortization....... 3,348 170 21 33 391(g) 121(g) 40(g) 4,124
---------- ---------- ---------- ----- ----- ----- --- --------
18,938 5,455 876 716 25,687
---------- ---------- ---------- ----- ----- ----- --- --------
Income from operations... (165) 337 561 179 1,210
Other income (expense)
Interest............. (1,526) (43) -- -- (88)(h) (1,657)
Other................ (186) 11 (1) -- (176)
---------- ---------- ---------- ----- ----- ----- --- --------
(1,712) (32) (1) -- (1,833)
---------- ---------- ---------- ----- ----- ----- --- --------
Income (loss) before
income taxes
(benefit).............. (1,877) 305 560 179 (623)
Income taxes (benefit)... (810) -- -- 71 270(j) 176(j) (16)(j) (309)
---------- ---------- ---------- ----- ----- ----- --- --------
Net income (loss)........ (1,067) 305 560 108 (314)
---------- ---------- ---------- ----- ----- ----- --- --------
---------- ---------- ---------- ----- ----- ----- --- --------
Weighted average shares
outstanding............
Net income per share.....
<CAPTION>
PRO FORMA
OFFERING
ADJUSTMENTS PRO FORMA
----------- ---------
<S> <C><C> <C>
Revenues................. 26,897
Operating expenses:
Wages & salaries..... 12,214
General &
administrative..... 9,349
Depreciation and
amortization....... 4,124
----------- ---------
25,687
----------- ---------
Income from operations... 1,210
Other income (expense)
Interest............. 1,067(i) (590 )
Other................ (176 )
----------- ---------
(766 )
----------- ---------
Income (loss) before
income taxes
(benefit).............. 444
Income taxes (benefit)... 427(j) 118
----------- ---------
Net income (loss)........ 326
----------- ---------
----------- ---------
Weighted average shares
outstanding............ 5,240,000
---------
Net income per share..... $0.06 (k)
---------
---------
</TABLE>
See notes to pro forma financial statements.
F-37
<PAGE>
<PAGE>
PHYSICIAN SUPPORT SYSTEMS, INC.
PRO FORMA STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA ACQUISITION ADJUSTMENTS
---------------------------------------------- ------------------------------------------
PHYSICIAN NORTH NORTH
SUPPORT COAST COAST
SYSTEMS HEALTHCARE MEDICAL DATA HEALTHCARE MEDICAL DATA
AND MANAGEMENT MANAGEMENT PROCESSING MANAGEMENT MANAGEMENT PROCESSING
SUBSIDIARY GROUP SUPPORT SYSTEMS GROUP SUPPORT SYSTEMS SUBTOTAL
---------- ---------- ---------- ---------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............... 14,631 4,376 1,116 718 20,841
Operating expenses:
Wages & salaries... 7,233 2,802 481 235 (675)(f) 10,076
General &
administrative... 5,020 1,382 205 141 6,748
Depreciation and
amortization..... 2,549 129 3 24 293(g) 90(g) 30(g) 3,119
---------- ---------- ---------- ----- ----- ----- --- --------
14,802 4,313 689 400 19,943
---------- ---------- ---------- ----- ----- ----- --- --------
Income from
operations........... (171) 63 427 318 898
Other income (expense)
Interest........... (1,059) (19) -- -- (80)(h) (1,158)
Other.............. 3 -- (37) -- (34)
---------- ---------- ---------- ----- ----- ----- --- --------
(1,056) (19) (37) -- (1,192)
---------- ---------- ---------- ----- ----- ----- --- --------
Income (loss) before
income taxes
(benefit)............ (1,227) 44 390 318 (294)
Income taxes
(benefit)............ (286) -- -- 126 138(j) 120(j) (12)(j) 86
---------- ---------- ---------- ----- ----- ----- --- --------
Net income (loss)...... (941) 44 390 192 (380)
---------- ---------- ---------- ----- ----- ----- --- --------
---------- ---------- ---------- ----- ----- ----- --- --------
Weighted average shares
outstanding..........
Net income per share...
<CAPTION>
PRO FORMA
OFFERING
ADJUSTMENTS PRO FORMA
----------- ----------
<S> <C> <C>
Revenues............... 20,841
Operating expenses:
Wages & salaries... 10,076
General &
administrative... 6,748
Depreciation and
amortization..... 3,119
----- ----------
19,943
----- ----------
Income from
operations........... 898
Other income (expense)
Interest........... 721(i) (437)
Other.............. (34)
----- ----------
(471)
----- ----------
Income (loss) before
income taxes
(benefit)............ 427
Income taxes
(benefit)............ 288(j) 374
----- ----------
Net income (loss)...... 53
----- ----------
----- ----------
Weighted average shares
outstanding.......... 5,240,000
----------
Net income per share... $0.01(k)
----------
----------
</TABLE>
See notes to pro forma financial statements.
F-38
<PAGE>
<PAGE>
PHYSICIAN SUPPORT SYSTEMS, INC.
NOTES TO PRO FORMA FINANCIAL INFORMATION
(UNAUDITED)
1. UNAUDITED PRO FORMA BALANCE SHEET ADJUSTMENTS
(a) Adjustment to reclassify undistributed S Corporation earnings to
additional paid-in capital and to reflect the acquisition of NCHCM by PSS. The
purchase price of $7,912,000 (after adjustment for $88,000 of imputed
interest -- see note 2(h) on page F-40) is allocated as follows:
<TABLE>
<CAPTION>
($000S)
-----------
(UNAUDITED)
<S> <C>
Current assets............................................................... $ 1,818
Fixed assets................................................................. 319
Other assets................................................................. 2
Intangible assets............................................................ 6,899
Current liabilities.......................................................... (1,126)
-----------
Total purchase price.......................................... $ 7,912
-----------
-----------
</TABLE>
Intangible assets include the following:
<TABLE>
<CAPTION>
($000S)
-----------
<S> <C>
Physician contracts.......................................................... $ 1,691
Non-compete agreement........................................................ 295
Goodwill..................................................................... 4,913
-----------
Total intangible assets....................................... $ 6,899
-----------
-----------
</TABLE>
Useful lives assigned to fixed and intangible assets are as follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE
--------------
<S> <C>
Furniture and fixtures................................................... 7 years
Equipment................................................................ 5 years
Leasehold improvements................................................... Life of lease
Physician contracts...................................................... 10 years
Goodwill................................................................. 20 years
</TABLE>
The NCHC purchase note bears no interest and is payable in equal monthly
installments over the 12 months following the acquisition. See note 2(h) on
page F-40.
(b) Adjustment to reclassify undistributed S Corporation earnings to
additional paid-in capital and to reflect the acquisition of MMS by PSS. The
purchase price of $2,500,000 is allocated as follows:
<TABLE>
<CAPTION>
($000S)
-----------
<S> <C>
Current assets............................................................... $ 278
Fixed assets................................................................. 31
Other assets................................................................. 20
Intangible assets............................................................ 2,234
Current liabilities.......................................................... (52)
Long-term liabilities........................................................ (11)
-----------
Total purchase price.......................................... $ 2,500
-----------
-----------
</TABLE>
Intangible assets include the following:
<TABLE>
<CAPTION>
($000S)
<S> <C>
-----------
Non-compete agreement........................................................ $ 100
Goodwill..................................................................... 2,134
-----------
Total intangible assets....................................... $ 2,234
-----------
-----------
</TABLE>
F-39
<PAGE>
<PAGE>
PHYSICIAN SUPPORT SYSTEMS, INC.
NOTES TO PRO FORMA FINANCIAL INFORMATION -- (continued)
Useful lives assigned to fixed and intangible assets are as follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE
--------------
<S> <C>
Furniture and fixtures................................................... 7 years
Equipment................................................................ 5 years
Leasehold improvements................................................... Life of lease
Goodwill................................................................. 20 years
</TABLE>
(c) Adjustment to reflect the acquisition of DPS by PSS. The purchase price
of $900,000 is allocated as follows:
<TABLE>
<CAPTION>
($000S)
-------
<S> <C>
Current assets................................................................... $ 120
Fixed assets..................................................................... 37
Intangible assets................................................................ 743
-------
Total purchase price.............................................. $ 900
-------
-------
</TABLE>
Intangible assets include the following:
<TABLE>
<CAPTION>
($000S)
-------
<S> <C>
Non-compete agreement............................................................ $ 100
Goodwill......................................................................... 643
-------
Total intangible assets........................................... $ 743
-------
-------
</TABLE>
Useful lives assigned to fixed and intangible assets are as follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE
--------------
<S> <C>
Furniture and fixtures................................................... 7 years
Equipment................................................................ 5 years
Leasehold improvements................................................... Life of lease
Goodwill................................................................. 20 years
</TABLE>
The assumed purchase price does not reflect any adjustments associated
with i) any contingent consideration that may be paid in conjunction with
this acquisition or ii) an additional $100,000 of purchase price as a result
of the closing of the transaction taking place subsequent to December 31,
1995.
(d) Adjustment to reflect the proceeds from the sale of $550,000 of 10%
Preferred Stock, Series A in December 1995.
(e) Adjustment to reflect the proceeds raised from the offering, net of
expenses and underwriting discount and the use of proceeds to purchase the
Acquired Businesses, to repay long-term debt and to redeem outstanding preferred
stock.
2. UNAUDITED PRO FORMA STATEMENT OF OPERATIONS ADJUSTMENTS
(f) Adjustment to reflect the decrease in compensation expense as a result
of employment agreements with NCHCM executive officers entered into as a result
of the acquisition by PSS.
(g) Adjustment to reflect the increase in amortization expense associated
with the intangible assets recorded by PSS in purchase accounting related to the
acquisitions. The goodwill associated with the acquisitions is being amortized
on a straight line basis over an estimated life of 20 years.
(h) Adjustment to reflect interest expense associated with the discount on
the NCHC purchase note. The discount rate used in this calculation is 8%, which
the Company believes is the current borrowing rate associated with seller
financing of this nature.
F-40
<PAGE>
<PAGE>
PHYSICIAN SUPPORT SYSTEMS, INC.
NOTES TO PRO FORMA FINANCIAL INFORMATION -- (continued)
(i) Adjustment to reflect the decrease in interest expense associated with
the repayment of long-term debt as a result of the offering.
(j) Adjustment to reflect the income tax effects of the acquisitions.
(k) The weighted average shares outstanding used to calculate pro forma
earnings per share is 5,240,000 shares, representing the number of shares to be
issued and outstanding as a result of the offering.
F-41
<PAGE>
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
<PAGE>
_____________________________ _____________________________
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES, OR AN OFFER
TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 6
The Company.................................... 9
Use of Proceeds................................ 10
Dividend Policy................................ 10
Capitalization................................. 11
Dilution....................................... 12
Selected Financial and Pro Forma Data.......... 13
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 15
Business....................................... 21
Management..................................... 31
Principal Stockholders......................... 34
Certain Transactions........................... 34
Description of Capital Stock................... 35
Shares Eligible for Future Sale................ 37
Underwriting................................... 38
Legal Matters.................................. 39
Experts........................................ 39
Additional Information......................... 39
Index to Financial Information................. F-1
</TABLE>
------------------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
3,000,000 SHARES
[LOGO]
COMMON STOCK
--------------------
PROSPECTUS
, 1996
--------------------
VOLPE, WELTY & COMPANY
_____________________________ _____________________________
<PAGE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses, other than underwriting
discounts and commissions, payable by the Company in connection with the sale of
the Common Stock being registered. All the amounts shown are estimates, except
for the registration fee with the Securities and Exchange Commission, the NASD
filing fee and the Nasdaq fees.
<TABLE>
<CAPTION>
SEC Registration fee.............................................................. $ 13,086
<S> <C>
NASD filing fee................................................................... 4,296
Nasdaq fees....................................................................... 33,086
Blue Sky fees and expenses*....................................................... 20,000
Printing and engraving expenses*.................................................. 135,000
Legal fees and expenses*.......................................................... 300,000
Accounting fees and expenses*..................................................... 250,000
Transfer agent and registrar fees*................................................ 10,000
Miscellaneous*.................................................................... 34,532
--------
TOTAL*.................................................................. $800,000
--------
--------
</TABLE>
- ------------
* Estimated.
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
The Company's Certificate of Incorporation and Bylaws set forth the extent
to which officers or directors of the Company may be indemnified against any
liabilities which they may incur. The general effect of such provisions is that
any person made a party to an action, suit or proceeding by reason of the fact
that he is or was a director or officer of the Company, or of another
corporation or other enterprise which he served as such at the request of the
Company, shall be indemnified by the Company against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding,
to the full extent permitted under the laws of the State of Delaware.
The general effect of the indemnification provisions contained in Section
145 of the Delaware General Corporation Law is as follows: A director, officer,
employee or agent who, by reason of such position, is involved in any action,
suit or proceeding (other than an action by or in the right of the corporation)
may be indemnified by the corporation against expenses (including attorney's
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe that his conduct was unlawful.
A director, officer, employee or agent who, by reason of such position, is
involved in any action or suit by or in the right of the corporation may be
indemnified by the corporation against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, except that no indemnification may be made in respect of any claim,
issue or matter as to which he shall have been adjudged to be liable to the
corporation unless and only to the extent that a court of appropriate
jurisdiction shall approve such indemnification.
The Company's Certificate of Incorporation provides that, to the maximum
extent permitted under the General Corporation Law of the State of Delaware, a
director of the Company shall not be personally liable to the Company or to any
of its stockholders for monetary damages for breach of fiduciary duty as a
director of the Company. Section 102(b)(7) of the Delaware General Corporation
Law permits a corporation to include in its charter a provision that eliminates
or limits the personal liability of a director to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
provided that such provision shall not eliminate or limit the liability of a
director (i) for any breach of the director's duty of loyalty to the corporation
or its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii)
II-1
<PAGE>
<PAGE>
under Section 174 of the Delaware General Corporation Law or (iv) for any
transaction from which the director derived an improper personal benefit.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since December 1, 1992, the Company has issued the following securities:
As of February 28, 1994, the Company issued 120 shares of the
Company's 10% Preferred Stock, Series A, stated value of $500 per share
(the 'Series A Preferred Stock'), and 120 shares of the Company's 10%
Preferred Stock, Series B, stated value of $500 per share (the 'Series B
Preferred Stock'), to holders of the Series A Preferred Stock and Series B
Preferred Stock, respectively, as of February 15, 1994 as a dividend on
such capital stock. Such issuances were exempt from registration under
Section 4(2) of the Securities Act of 1933.
As of February 28, 1995 and August 31, 1995, the Company issued 127.2
and 134.832 shares, respectively, of Series A Preferred Stock and 127.2 and
134.832 shares, respectively, of Series B Preferred Stock to holders of the
Series A Preferred Stock and Series B Preferred Stock as of February 15,
1995 and August 15, 1995, respectively, as a dividend on such capital
stock. Such issuances were exempt from registration under Section 4(2) of
the Securities Act of 1933.
On December 21, 1995, the Company issued 1,100 shares of Series A
Preferred Stock to Hillside Capital Incorporated for aggregate
consideration of $550,000 in cash. Such issuance was exempt from
registration under Section 4(2) of the Securities Act of 1933.
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------------------
<S> <C>
1.1* -- Proposed Form of Underwriting Agreement
2.1 -- Stock Purchase Agreement dated September 11, 1995 among the Shareholders of NCHC and the Company
2.2 -- Asset Purchase Agreement dated September 25, 1995 among NCAS, MDIS, the Shareholders of NCAS and MDIS
and the Company
2.3 -- Amended and Restated Asset Purchase Agreement dated December 7, 1995 among MM Support, the
Shareholders of MM Support and PSS-Medical Management Support, Inc.
2.4 -- Asset Purchase Agreement dated October 16, 1995 among DPS, McGriff, PSS-Data Processing Systems, Inc.
and the Company
3.1 -- Certificate of Incorporation of the Company, as amended
3.2* -- Form of Amended and Restated Certificate of Incorporation of the Company to be in effect upon
completion of the Offering
3.3 -- By-Laws of the Company
3.4 -- Form of By-Laws of the Company to be in effect upon completion of the Offering
3.5 -- Shareholders' Agreement, dated August 30, 1991, among PSS and the holders of capital stock named
therein
4.1* -- Form of 1996 Stock Option Plan of the Company
5.1* -- Opinion and Consent of Howard, Darby & Levin
10.1 -- Employment Agreement dated August 12, 1993 between Jack R. Kinne and Spring, as amended
10.2 -- Employment Agreement dated August 9, 1995 between Bruce B. Schmoyer and the Company, as supplemented
10.3 -- Agreement of Lease dated August 30, 1991 between the Company and Prospect Realty Company
10.4 -- Office Lease Agreement dated July 20, 1994 between Spring and American Savings Bank, F.A.
</TABLE>
II-2
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------------------
<C> <S>
10.5 -- Amended and Restated Loan Agreement dated August 12, 1993 among Meridian Bank, the Company and Spring,
as amended
10.6 -- Amended and Restated Line of Credit Note issued by the Company to Meridian Bank
10.7 -- Agreement dated as of December 18, 1995 among Medical Management Sciences, Inc., Managed Imaging, Inc.
and PSS
21.1 -- Subsidiaries
23.1* -- Consent of Deloitte & Touche LLP, independent accountants, relating to the financial statements of the
NCHC Group and MM Support
23.2* -- Consent of Howard, Darby & Levin (included in Exhibit 5.1)
23.3 -- Consent of Deloitte & Touche LLP, independent accountants, relating to the financial statements of PSS
(to be filed by amendment) (see opinion at page F-2)
24.1 -- Power of Attorney (see page II-5)
27.1 -- Financial Data Schedule
</TABLE>
- ------------
* Filed herewith.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To provide to the underwriter at the closing specified in the
underwriting agreement, certificates in such denominations and registered
in such names as required by the underwriter to permit prompt delivery to
each purchaser.
(2) That for purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared
effective.
(3) That for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-3
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 2 to the registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of New
York, State of New York, on January 29, 1996.
PHYSICIAN SUPPORT SYSTEMS, INC.
By /s/ HAMILTON F. POTTER III
...................................
NAME: HAMILTON F. POTTER III
TITLE: EXECUTIVE VICE PRESIDENT
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATE INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ -------------------------------------------- -------------------
<C> <S> <C>
* President, Chief Executive Officer and January 29, 1996
......................................... Director (principal executive officer)
PETER W. GILSON
/S/ HAMILTON F. POTTER III Executive Vice President, Chief Operating January 29, 1996
......................................... and Financial Officer and Director
HAMILTON F. POTTER III (principal accounting and financial
officer)
/S/ MORTIMER BERKOWITZ III Director January 29, 1996
.........................................
MORTIMER BERKOWITZ III
*By /s/ Hamilton F. Potter III
.........................................
HAMILTON F. POTTER III
</TABLE>
II-4
GRAPHIC APPENDIX
Graphic and Image Information:
Page 2 of the paper format prospectus contains a map of the continental
United States, illustrating that (i) PSS Centralized Processing
Centers exist in Stockton, CA and Mt. Joy, PA; (ii) Main Offices and/or
Processing Facilities of Acquired Businesses exist in Seattle, WA,
Cleveland, OH and Birmingham, AL; (iii) PSS operates in Pennsylvania,
New Jersey, California, Arizona, Florida, Delaware, Maryland, Massachusetts
and Virginia; and (iv) Acquired Businesses operate in Alabama, Kentucky, Ohio,
Washington and West Virginia.
<PAGE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
LOCATION OF EXHIBIT
EXHIBIT IN SEQUENTIAL
NUMBER DESCRIPTION OF DOCUMENT NUMBERING SYSTEM
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1.1* -- Proposed Form of Underwriting Agreement
2.1 -- Stock Purchase Agreement dated September 11, 1995 among the Shareholders of NCHC and the Company
2.2 -- Asset Purchase Agreement dated September 25, 1995 among NCAS, MDIS, the Shareholders of NCAS and MDIS
and the Company
2.3 -- Amended and Restated Asset Purchase Agreement dated December 7, 1995 among MM Support, the
Shareholders of MM Support and PSS-Medical Management Support, Inc.
2.4 -- Asset Purchase Agreement dated October 16, 1995 among DPS, McGriff, PSS-Data Processing Systems, Inc.
and the Company
3.1 -- Certificate of Incorporation of the Company, as amended
3.2* -- Form of Amended and Restated Certificate of Incorporation of the Company to be in effect upon
completion of the Offering
3.3 -- By-Laws of the Company
3.4 -- Form of By-Laws of the Company to be in effect upon completion of the Offering
3.5 -- Shareholders' Agreement, dated August 30, 1991, among PSS and the holders of capital stock named
therein
4.1* -- Form of 1996 Stock Option Plan of the Company
5.1* -- Opinion and Consent of Howard, Darby & Levin
10.1 -- Employment Agreement dated August 12, 1993 between Jack R. Kinne and Spring, as amended
10.2 -- Employment Agreement dated August 9, 1995 between Bruce B. Schmoyer and the Company, as supplemented
10.3 -- Agreement of Lease dated August 30, 1991 between the Company and Prospect Realty Company
10.4 -- Office Lease Agreement dated July 20, 1994 between Spring and American Savings Bank, F.A.
10.5 -- Amended and Restated Loan Agreement dated August 12, 1993 among Meridian Bank, the Company and Spring,
as amended
10.6 -- Amended and Restated Line of Credit Note issued by the Company to Meridian Bank
10.7 -- Agreement dated as of December 18, 1995 among Medical Management Sciences, Inc., Managed Imaging, Inc.
and PSS
21.1 -- Subsidiaries
23.1* -- Consent of Deloitte & Touche LLP, independent accountants, relating to the financial statements of the
NCHC Group and MM Support
23.2* -- Consent of Howard, Darby & Levin (included in Exhibit 5.1)
23.3 Consent of Deloitte & Touche LLP, independent accountants, relating to the financial statements of PSS
(to be filed by amendment) (see opinion at page F-2)
24.1 -- Power of Attorney (see page II-5)
27.1 -- Financial Data Schedule
</TABLE>
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* Filed herewith.
<PAGE>
<PAGE>
3,000,000 Shares(1)
PHYSICIAN SUPPORT SYSTEMS, INC.
Common Stock
UNDERWRITING AGREEMENT
February __, 1996
Volpe, Welty & Company
One Maritime Plaza, Suite 1100
San Francisco, California 94111
As Representative of the Several Underwriters
Dear Sirs and Madams:
Physician Support Systems, Inc., a Delaware corporation (the "Company"
or "PSS"), proposes, subject to the terms and conditions herein contained, to
issue and sell 3,000,000 shares (the "Firm Shares") of its authorized but
unissued common stock, $.001 par value per share (the "Common Stock"). The
Company proposes to grant to the Underwriters (as defined below) an option to
purchase up to 450,000 additional shares of Common Stock (the "Optional Shares"
and, with the Firm Shares, collectively, the "Shares"). The Common Stock is more
fully described in the Registration Statement and the Prospectus hereinafter
mentioned.
The Company hereby confirms the agreements made with respect to the
purchase of the shares by the several underwriters, named in Schedule I hereto,
for whom you are acting as representative (collectively, the "Underwriters,"
which term shall also include any underwriter purchasing Shares pursuant to
Section 2(c) hereof). You represent and warrant that you have been authorized by
each of the other Underwriters to enter into this Agreement on its behalf and to
act for it in the manner herein provided.
The Shares are being issued and sold concurrently with the
acquisitions (the "Acquisitions") by the Company of (i) North Coast Health Care
Management, Inc. ("NCHC") pursuant to a Stock Purchase Agreement dated September
11, 1995 (the
___________________
(1) Plus an option to purchase from the Company up to 450,000
additional shares to cover over-allotments.
<PAGE>
<PAGE>
-2-
"NCHC Agreement") among the stockholders of NCHC and PSS, (ii) North Coast
Account Systems ("NCAS") and Medical Dental Invoicing Services, Inc. ("MDIS")
pursuant to an Asset Purchase Agreement dated September 25, 1995 (the "NCAS/MDIS
Agreement" and, together with the NCHC Agreement, the "Cleveland Agreements")
among NCAS, MDIS, the stockholders of NCAS and MDIS and PSS, (iii) Medical
Management Support, Inc. ("MM Support") pursuant to an Amended and Restated
Asset Purchase Agreement (the "MM Support Agreement") dated December 7, 1995
among MM Support, the shareholders of MM Support and PSS Medical Management
Support, Inc., a Delaware corporation and a wholly-owned subsidiary of the
Company, and (iv) Data Processing Systems, Inc. ("DPS") pursuant to an Asset
Purchase Agreement dated October 16, 1995 (the "DPS Agreement") among DPS,
McGriff Seibels & Williams Inc. ("McGriff"), PSS-Data Processing Systems, Inc.,
a Delaware corporation and wholly- owned subsidiary of the Company. The
Cleveland Agreements, the MM Support Agreement and the DPS Agreement are herein
collectively referred to as the "Acquisition Agreements." References herein to
the "Company" will refer to (i) PSS, before and after the Acquisitions, and (ii)
each of NCHC, MDIS, MM Support and DPS before and after consummation of the
Acquisitions.
Section 1. Representations and Warranties of the Company. The Company
hereby represents and warrants to the several Underwriters as of the date hereof
and as of each Closing Date (as defined below) that:
(a) The Company has filed with the Securities and Exchange Commission
(the "Commission") a registration statement on Form S-1 (No. 33-80731),
including the related preliminary prospectus, for the registration under
the Securities Act of 1933, as amended (the "Securities Act") of the
Shares; such registration statement, including the form of prospectus,
together with all amendments thereto, has been prepared by the Company in
all material respects in conformity with the requirements of the Act and
the rules and regulations of the Commission thereunder. Copies of such
registration statement and of each amendment thereto, if any, including the
related preliminary prospectus (meeting the requirements of Rule 430A of
the rules and regulations of the Commission) heretofore filed by the
Company with the Commission, have been delivered to you.
The term Registration Statement as used in this agreement shall mean
such registration statement,
<PAGE>
<PAGE>
-3-
including all exhibits and financial statements, all information omitted
therefrom in reliance upon Rule 430A and contained in the Prospectus
referred to below, in the form in which it became effective, and any
registration statement filed pursuant to Rule 462(b) of the rules and
regulations of the Commission with respect to the Shares (a "Rule 462(b)
Registration Statement"), and, in the event of any amendment thereto after
the effective date of such registration statement (the "Effective Date"),
shall also mean (from and after the effectiveness of such amendment) such
registration statement as so amended (including any Rule 462(b)
Registration Statement). The term Prospectus as used in this Agreement
shall mean the prospectus relating to the Shares first filed with the
Commission pursuant to Rule 424(b) and Rule 430A (or if no such filing is
required, as included in the Registration Statement) and, in the event of
any supplement or amendment to such prospectus after the Effective Date,
shall also mean (from and after the filing with the Commission of such
supplement or the effectiveness of such amendment) such prospectus as so
supplemented or amended. The term Preliminary Prospectus as used in this
Agreement shall mean each preliminary prospectus included in such
registration statement prior to the time it becomes effective.
The Registration Statement has been declared effective under the
Securities Act, and no post-effective amendment to the Registration
Statement has been filed as of the date of this Agreement. The Company has
caused to be delivered to you copies of each Preliminary Prospectus and has
consented to the use of such copies for the purposes permitted by the
Securities Act.
(b) Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation, has full corporate
power and authority to own or lease its properties and conduct its business
as described in the Registration Statement and the Prospectus as being
conducted, and is duly qualified as a foreign corporation and in good
standing in all jurisdictions in which the character of the property owned
or leased or the nature of the business transacted by it makes
qualification necessary (except where the failure to be so qualified would
not have a material adverse effect on the business, business prospects,
properties, condition
<PAGE>
<PAGE>
-4-
(financial or otherwise) or results of operations of the Company and its
subsidiaries, taken as a whole).
(c) The Company does not own or control, directly or indirectly, any
corporation, association or other entity other than the subsidiaries listed
in Exhibit 21.1 to the Registration Statement. Except as described in the
Prospectus, the Company owns all of the outstanding capital stock of its
subsidiaries free and clear of all claims, liens, charges and encumbrances,
except that such capital stock of Spring Anesthesia Group, Inc., a
subsidiary of PSS is pledged to Meridian Bank to secure the Company's
obligations due such bank. The Company and each of its subsidiaries are in
possession of and operating in compliance with all material authorizations,
licenses, permits, consents, certificates and orders material to the
conduct of their respective businesses as described in the Prospectus, all
of which are valid and in full force and effect.
(d) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, there has not been any
materially adverse change in the business, business prospects, properties,
condition (financial or otherwise) or results of operations of the Company
and its subsidiaries, taken as a whole, whether or not arising from
transactions in the ordinary course of business, other than as set forth in
the Registration Statement and the Prospectus, and since such dates, except
in the ordinary course of business, neither the Company nor any of its
subsidiaries has entered into any material transaction not referred to in
the Registration Statement and the Prospectus.
(e) The Registration Statement and the Prospectus comply, and on the
Closing Date (as hereinafter defined) and any later date on which Optional
Shares are to be purchased, the Prospectus will comply, in all material
respects, with the provisions of the Securities Act and the rules and
regulations of the Commission thereunder; on the Effective Date, the
Registration Statement did not contain any untrue statement of a material
fact and did not omit to state any material fact required to be stated
therein or necessary in order to make the statements therein not
misleading; and, on the Effective Date the Prospectus did not and, on the
Closing Date and any later date on which Optional Shares are to be
purchased, will
<PAGE>
<PAGE>
-5-
not contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading;
provided, however, that none of the representations and warranties in this
subparagraph (e) shall apply to statements in, or omissions from, the
Registration Statement or the Prospectus made in reliance upon and in
conformity with information herein or otherwise furnished in writing to the
Company by or on behalf of the Underwriters for use in the Registration
Statement or the Prospectus.
(f) The Company has the authorized and outstanding capital stock as
set forth under the heading "Capitalization" in the Prospectus. The issued
and outstanding shares of Common Stock have been duly authorized and
validly issued, are fully paid and nonassessable, have been issued in
compliance with all federal and state securities laws, and were not issued
in violation of or subject to any preemptive rights or other rights to
subscribe for or purchase securities. All issued and outstanding shares of
capital stock of each subsidiary of the Company have been duly authorized
and validly issued and are fully paid and nonassessable. Except as
disclosed in or contemplated by the Prospectus and the financial statements
of the Company and the related notes thereto included in the Prospectus,
neither the Company nor any subsidiary has outstanding any options to
purchase, or any preemptive rights or other rights to subscribe for or to
purchase, any securities or obligations convertible into, or any contracts
or commitments to issue or sell, shares of its capital stock or any such
options, rights, convertible securities or obligations. The description of
the Company's stock option plan (the "Stock Option Plan") and the options
granted and exercised thereunder, set forth in the Prospectus accurately
and fairly presents the information required by the Securities Act and the
Rules and Regulations to be shown with respect to such Stock Option Plan
and options.
(g) The Shares are duly authorized and, when issued and sold to the
Underwriters in accordance with the provisions of this Agreement, will be
validly issued, fully paid and nonassessable and conform to the description
thereof in the Prospectus; the certificates for the Shares that are being
sold by the Company are in due and proper form; and the holders of such
shares will not be subject to personal liability by reason of being such
holders.
<PAGE>
<PAGE>
-6-
(h) The Shares to be issued and sold by the Company will be authorized
for listing on the Nasdaq National Market upon official notice of issuance.
(i) The Shares to be sold by the Company will be sold free and clear
of any pledge, lien, security interest, encumbrance, claim or equitable
interest, and will conform to the description thereof contained in the
Prospectus. No preemptive right, co-sale right, registration right, right
of first refusal or other similar right to subscribe for or purchase
securities of the Company exists with respect to the issuance and sale of
the Shares by the Company pursuant to this Agreement. No stockholder of the
Company has any right which has not been waived, or complied with, to
require the Company to register the sale of any shares owned by such
stockholder under the Securities Act in the public offering contemplated by
this Agreement. No further approval or authority of the shareholders or the
Board of Directors of the Company will be required for the issuance and
sale of the Shares to be sold by the Company as contemplated herein.
(j) The Company and its subsidiaries (to the extent each is a party
thereto) have full corporate power and authority to enter into this
Agreement and the Acquisition Agreements and perform the transactions
contemplated hereby and thereby. This Agreement and the Acquisition
Agreements have been duly authorized, executed and delivered by the Company
and each constitutes a valid and binding obligation of the Company and its
subsidiaries (to the extent each is party thereto) enforceable in
accordance with its terms, except as enforceability may be limited by
general equitable principles, bankruptcy, insolvency, reorganization,
moratorium laws affecting creditors' rights generally and except as to
those provisions relating to indemnity or contribution for liabilities
arising under federal and state securities laws. The making and performance
of this Agreement and the Acquisition Agreements by the Company and its
subsidiaries (to the extent each is a party thereto) and the consummation
of the transactions contemplated hereby and thereby (i) will not violate
any provisions of the Certificate of Incorporation, Bylaws or other
organizational documents of the Company or any of its subsidiaries, and
(ii) will not conflict with, result in a material breach or violation of,
or constitute, either by itself or upon notice or the passage of time or
both, a material default under (A) any
<PAGE>
<PAGE>
-7-
agreement, mortgage, deed of trust, lease, franchise, license, indenture,
permit or other instrument to which the Company or any of its subsidiaries
is a party or by which the Company or any of its subsidiaries or any of
their respective properties may be bound or affected, or (B) any statute or
any authorization, judgment, decree, order, rule or regulation of any court
or any regulatory body, administrative agency or other governmental body
applicable to the Company or any of its subsidiaries or any of their
respective properties. No consent, approval, authorization or other order
of any court, regulatory body, administrative agency or other governmental
body that has not already been obtained is required for the execution and
delivery of this Agreement or the consummation of the transactions
contemplated by this Agreement, except for compliance with the Securities
Act, the Blue Sky laws applicable to the public offering of the Shares by
the several Underwriters and the clearance of such offering with the NASD.
(k) The historical consolidated financial statements and schedules of
the Company and the related notes thereto included in the Registration
Statement and the Prospectus present fairly on a consolidated basis the
financial position of the Company and its subsidiaries as of the respective
dates of such financial statements and schedules, and the results of
operations and cash flows of the Company and its subsidiaries for the
respective periods covered thereby. Such statements, schedules and related
notes have been prepared in accordance with generally accepted accounting
principles applied on a consistent basis throughout the periods specified,
as certified by the independent accountants named in Section 9(f). No other
financial statements or schedules are required to be included in the
Registration Statement. The selected financial data set forth in the
Prospectus under the captions "Capitalization" and ["Selected Financial and
Pro Forma Financial Data"] fairly present the information set forth therein
on the basis stated in the Registration Statement.
(l) (i) The pro forma financial statements and other pro forma
financial information (including the notes thereto) included in the
Registration Statement and the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus) (A) have been prepared
in accordance with applicable requirements of Rule 11-02
<PAGE>
<PAGE>
-8-
of Regulation S-X promulgated under the Act, and (B) have been properly
computed on the bases described therein, (ii) the assumptions used in the
preparation of the pro forma financial statements and other pro forma
financial information included in the Registration Statement and the
Prospectus are, to the knowledge of the Company, reasonable and the
adjustments used therein are appropriate to give effect to the transactions
or circumstances referred to therein.
(m) The Company and its subsidiaries maintain a system of internal
accounting controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or
specific authorizations, (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain accountability for assets,
(iii) access to assets is permitted only in accordance with management's
general or specific authorization, and (iv) the recorded accountability for
assets is compared with existing assets at reasonable intervals and
appropriate action is taken with respect to any differences. The
representations and warranties given by the Company and its officers to its
independent public accountants for the purpose of supporting the letters
referred to in Section 9(f) are true and correct.
(n) Neither the Company nor any of its subsidiaries is (i) in
violation or default of any provision of its Certificate of Incorporation,
Bylaws or other organizational documents, or (ii) in a material breach of
or default with respect to any provision of any agreement, judgment,
decree, order, mortgage, deed of trust, lease, franchise, license,
indenture, permit or other instrument to which it is a party or by which it
or any of its properties are bound; and there does not exist any state of
facts which, with notice or lapse of time or both would constitute such a
breach or default on the part of the Company and its subsidiaries, taken as
a whole.
(o) There are no contracts or other documents required to be described
in the Registration Statement or to be filed as exhibits to the
Registration Statement by the Securities Act or by the Rules and
Regulations which have not been described or filed as required. The
<PAGE>
<PAGE>
-9-
contracts so described in the Prospectus are in full force and effect on
the date hereof.
(p) Except as disclosed in the Prospectus, there are no legal or
governmental actions, suits or proceedings pending or, to the knowledge of
the Company, threatened to which the Company or any of its subsidiaries is
or, to the knowledge of the Company, is threatened to be made a party or of
which property owned or leased by the Company or any of its subsidiaries is
or, to the knowledge of the Company, is threatened to be made the subject,
which actions, suits or proceedings could, individually or in the
aggregate, prevent or adversely affect the transactions contemplated by
this Agreement or the Acquisition Agreements or result in a material
adverse change in the business, business prospects, properties, condition
(financial or otherwise), or results of operations of the Company or its
subsidiaries; and no labor disturbance by the employees of the Company or
any of its subsidiaries exists or, to the knowledge of the Company, is
imminent which could materially adversely affect the business, business
prospects, properties, condition (financial or otherwise), or results of
operations of the Company or its subsidiaries. Neither the Company nor any
of its subsidiaries is a party or subject to the provisions of any material
injunction, judgment, decree or order of any court, regulatory body,
administrative agency or other governmental body. Except as disclosed in
the Prospectus, there are no material legal or governmental actions, suits
or proceedings pending or, to the Company's knowledge, threatened against
any executive officers or directors of the Company.
(q) The Company and its subsidiaries have good and marketable title to
all the properties and assets reflected as owned in the financial
statements hereinabove described (or elsewhere in the Prospectus), subject
to no lien, mortgage, pledge, charge or encumbrance of any kind except (i)
those, if any, reflected in such financial statements (or elsewhere in the
Prospectus), or (ii) those which are not material in amount to the Company
or its subsidiaries, and do not adversely affect the use made and proposed
to be made of such property by the Company or its subsidiaries. The Company
and its subsidiaries hold their leased properties under valid and binding
leases. Except as disclosed in the Prospectus, the Company and its
subsidiaries own or lease all such properties as are
<PAGE>
<PAGE>
-10-
necessary to their operations as now conducted or as proposed to be
conducted.
(r) Since the respective dates as of which information is given in the
Registration Statement and Prospectus, and except as described in or
specifically contemplated by the Prospectus: (i) the Company and its
subsidiaries have not (A) incurred any liabilities or obligations,
indirect, direct or contingent, or (B) entered into any oral or written
agreement or other transaction which in the case of (A) or (B) is not in
the ordinary course of business; (ii) the Company and its subsidiaries have
not sustained any material loss or interference with their respective
businesses or properties from fire, flood, windstorm, accident or other
calamity, whether or not covered by insurance; (iii) the Company has not
paid or declared any dividends or other distributions with respect to its
capital stock and the Company and its subsidiaries are not in default in
the payment of principal or interest on any outstanding debt obligations;
(iv) there has not been any change in the capital stock of the Company
(other than upon the sale of the Shares hereunder or upon the exercise of
any options or warrants disclosed in the Prospectus); (v) there has not
been any material increase in the short- or long-term debt of the Company
and its subsidiaries; and (vi) there has not been any material adverse
change or any development involving or which may reasonably be expected to
involve a prospective material adverse change, in the business, business
prospects, condition (financial or otherwise), properties, or results of
operations of the Company or its subsidiaries.
(s) The Company and its subsidiaries are conducting business in
compliance with all applicable laws, rules and regulations of the
jurisdictions in which they are conducting business, except where the
failure to be so in compliance would not have a material adverse effect on
the business, business prospects, properties, condition
(financial or otherwise) or results of operations of the
Company or its subsidiaries.
(t) The Company and its subsidiaries have filed all necessary federal,
state and foreign income and franchise tax returns, and all such tax
returns are complete and correct in all material respects, and the Company
and its subsidiaries have not failed to pay any taxes which were payable
pursuant to said returns or any assessments with
<PAGE>
<PAGE>
-11-
respect thereto. The Company has no knowledge of any tax deficiency which
has been or is likely to be threatened or asserted against the Company or
its subsidiaries when, if determined adversely to the Company or any of its
subsidiaries, is reasonably likely to have a material adverse effect on
business, business prospects, properties, condition (financial or
otherwise) or results of operations of the Company or its subsidiaries.
(u) The Company has not distributed, and will not distribute prior to
the later to occur of (i) completion of the distribution of the Shares, or
(ii) the expiration of any time period within which a dealer is required
under the Securities Act to deliver a prospectus relating to the Shares,
any offering material in connection with the offering and sale of the
Shares other than the Prospectus, the Registration Statement and any other
materials permitted by the Securities Act and consented to by the
Underwriters.
(v) Each of the Company and its subsidiaries maintains insurance of
the types and in the amounts generally deemed adequate for their business,
including, but not limited to, directors' and officers' insurance,
insurance covering real and personal property owned or leased by the
Company and its subsidiaries against theft, damage, destruction, acts of
vandalism and all other risks customarily insured against, all of which
insurance is in full force and effect. Neither the Company nor any of its
subsidiaries has been refused any insurance coverage sought or applied for,
and the Company and its subsidiaries have no reason to believe that they
will not be able to renew their existing insurance coverage as and when
such coverage expires or to obtain similar coverage from similar insurers
as may be necessary to continue its businesses at a cost that would not
materially adversely affect the business, business prospects, properties,
condition (financial or otherwise) or results of
operations of the Company or its subsidiaries.
(w) Neither the Company nor any of its subsidiaries nor any of their
employees or agents has at any time during the last five years (i) made any
unlawful contribution to any candidate for foreign office, or failed to
disclose fully any contribution in violation of law, or (ii) made any
payment to any foreign, federal or state governmental officer or official
or other person charged with similar
<PAGE>
<PAGE>
-12-
public or quasi-public duties, other than payments required or permitted by
the laws of the United States or any jurisdiction thereof.
(x) The Company has not taken and will not take, directly or
indirectly, any action designed to or that might be reasonably expected to
cause or result in stabilization or manipulation of the price of the Common
Stock to facilitate the sale or resale of the Shares.
(y) The Company has caused (i) each of its executive officers and
directors as set forth in the Prospectus and (ii) each beneficial holder of
more than 1% of the outstanding Common Stock (including shares issuable
upon the exercise or conversion of any option, warrant or other security)
to furnish to the Underwriters an agreement in form and substance
satisfactory to Volpe, Welty & Company (which consent shall not be
unreasonably withheld) pursuant to which each such party has agreed that
during the period of one hundred eighty (180) days after the date the
Registration Statement becomes effective, without the prior written consent
of Volpe, Welty & Company, such party will not (i) offer, sell, contract to
sell, make any short sale, pledge or otherwise dispose of, directly or
indirectly, any shares of the Common Stock, options to acquire Common Stock
or securities convertible into or exchangeable for, or any other rights to
purchase or acquire, the Common Stock (including, without limitation,
Common Stock of the Company which may be deemed to be beneficially owned in
accordance with the rules and regulations of the Commission) other than the
exercise or conversion of outstanding options, warrants or convertible
securities; or (ii) enter into any swap or other agreement that transfers,
in whole or in part, any of the economic consequences or ownership of
Common Stock, whether any such transaction described in (i) or (ii) is to
be settled by delivery of Common Stock or such other securities, in cash or
otherwise; provided, however, that bona fide gift transactions and
transfers which will not result in any change in beneficial ownership may
be permitted if the transferee enters into a lock-up agreement in
substantially the same form covering the remainder of the lock-up period.
(z) Neither the Company nor any of its affiliates does business with
the government of Cuba or with any person or affiliate located in Cuba.
<PAGE>
<PAGE>
-13-
(aa) Except as specifically disclosed in the Pro- spectus, the Company
and its subsidiaries have sufficient trademarks, trade names, patent
rights, copyrights, licenses, approvals and governmental authorizations to
conduct their businesses as now conducted; the expiration of any
trademarks, trade names, patent rights, copyrights, licenses, approvals or
governmental authorizations would not have a material adverse effect on the
business, business prospects, properties, condition (financial or
otherwise) or results of operations of the Company or its subsidiaries; the
Company has no knowledge of any infringement by the Company or its
subsidiaries of trademark, trade name rights, patent rights, copyrights,
licenses, trade secret or other similar rights of others; and no claims
have been made or, to the knowledge of the Company, are threatened against
the Company or its subsidiaries regarding trademark, trade name, patent,
copyright, license, trade secret or other infringement which, if determined
adversely to the Company or its subsidiaries, would be reasonably likely to
have a material adverse effect on the business, business prospects,
properties, condition (financial or otherwise) or results of operations or
prospects of the Company and its subsidiaries.
(ab) Except as disclosed in the Prospectus, (i) the Company and its
subsidiaries are in compliance in all material respects with all rules,
laws and regulations relating to the use, treatment, storage and disposal
of toxic substances and protection of health or the environment
("Environmental Laws") which are applicable to their respective businesses,
(ii) neither the Company nor any of its subsidiaries has received any
notice from any governmental authority or third party of an asserted claim
under Environmental Laws, (iii) no facts currently exist that will require
the Company or any of its subsidiaries to make future material capital
expenditures to comply with Environmental Laws, and (iv) to the knowledge
of the Company, no property which is or has been owned, leased or occupied
by the Company or any of its subsidiaries has been designated as a
Superfund site pursuant to the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended (42 U.S.C. { 9601, et
seq.), or otherwise designated as a contaminated site under applicable
state or local law.
(ac) Neither the company nor any of its subsidiaries is (a) an
"investment company" or a company "controlled"
<PAGE>
<PAGE>
-14-
by an investment company within the meaning of the Investment Company Act
of 1940, as amended, or (b) a "holding company" or a "subsidiary company"
of a holding company or an "affiliate" thereof within the meaning of the
Public Utility Holding Company Act of 1935, as amended.
(ad) Neither the Company nor any agent thereof acting on behalf of the
Company has taken, and none of them will take, any action that might cause
this Agreement or the issuance or sale of the Shares to violate Regulation
G (12 C.F.R. Part 207), Regulation T (12 C.F.R. Part 220), Regulation U (12
C.F.R. Part 221) or Regulation X (12 C.F.R. Part 224) of the Board of
Governors of the Federal Reserve System.
Section 2. Purchase of the Shares by the Under- writers.
(a) On the basis of the representations and warranties and subject to
the terms and conditions herein set forth, the Company agrees to issue and sell
3,000,000 of the Firm Shares to the several Underwriters, and each of the
Underwriters agrees to purchase from the Company the respective number of Firm
Shares set forth opposite its name in Schedule I. The price at which such Firm
Shares shall be sold by the Company and purchased by the several Underwriters
shall be $___ per share. In making this Agreement, each Underwriter is
contracting severally and not jointly; except as provided in paragraphs (b) and
(c) of this Section 2, the agreement of each Underwriter is to purchase only the
respective number of shares of the Firm Shares specified in Schedule I.
(b) On the basis of the representations, warranties and covenants
herein contained, and subject to the terms and conditions herein set forth, the
Company grants an option to the several Underwriters to purchase, severally and
not jointly, up to 450,000 Optional Shares from the Company at the same price
per share as the Underwriters shall pay for the Firm Shares. Said option may be
exercised only to cover over- allotments in the sale of the Firm Shares by the
Underwriters and may be exercised in whole or in part at any time (but not more
than once) on or before the thirtieth day after the date of this Agreement upon
written or telegraphic notice by you to the Company setting forth the aggregate
number of Optional Shares as to which the several Underwriters are exercising
the option. Delivery of certificates for the Optional Shares, and payment
therefor, shall be made as provided in Section 4 hereof. The
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number of Optional Shares to be purchased by each Underwriter shall be the same
percentage of the total number of Optional Shares to be purchased by the several
Underwriters as such Underwriter is purchasing of the Firm Shares, as adjusted
by you in such manner as you deem advisable to avoid fractional shares.
(c) If for any reason one or more of the Underwriters shall fail or
refuse (otherwise than for a reason sufficient to justify the termination of
this Agreement under the provisions of Section 8 or 9 hereof) to purchase and
pay for the number of shares agreed to be purchased by such Under- writer or
Underwriters, on either the First Closing Date or the Subsequent Closing Date
(as defined in Sections 4(a) and (b), respectively) the non-defaulting
Underwriters shall have the right within 24 hours to purchase, or procure one or
more other Underwriters to purchase, in such proportions as may be agreed upon
between you and such purchasing Underwriter or Underwriters and upon the terms
herein set forth, all or any part of the shares which such defaulting
Underwriter or Underwriters agreed to purchase. If the non-defaulting
Underwriters fail so to make such arrangements with respect to all such shares
and portion, the number of shares which each non-defaulting Underwriter is
otherwise obligated to purchase under this Agreement shall be automatically
increased on a pro rata basis to absorb the remaining shares and portion which
the defaulting Underwriter or Underwriters agreed to purchase; provided,
however, that the non-defaulting Underwriters shall not be obligated to purchase
the shares and portion which the defaulting Underwriter or Underwriters agreed
to purchase if the aggregate number of such shares exceeds 10% of the total
number of shares which all Underwriters agreed to purchase hereunder. If the
total number of shares which the defaulting Underwriter or Underwriters agreed
to purchase exceeds the above percentage, the non-defaulting Underwriters and
the Company shall have the right, within 24 hours next succeeding the 24-hour
period above referred to, to make arrangements with other underwriters or
purchasers satisfactory to you for purchase of such shares and portion on the
terms herein set forth. In any such case, either you or the Company shall have
the right to postpone the Closing Date determined as provided in Section 4
hereof for not more than seven business days after the date originally fixed as
the Closing Date pursuant to Section 4 in order that any necessary changes in
the Registration Statement, the Prospectus or any other documents or
arrangements may be made. If neither the non-defaulting Underwriters nor the
Company shall make arrangements within the 24-hour period stated above for the
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purchase of all of the Shares which the defaulting Underwriter or Underwriters
agreed to purchase hereunder, this Agreement shall be terminated without further
act or deed and without any liability on the part of the Company to any
non-defaulting Underwriter and without any liability on the part of any
non-defaulting Underwriter to the Company. Nothing in this paragraph (c), and no
action taken hereunder, shall relieve any defaulting Underwriter from liability
in respect of any default of such Underwriter under this Agreement.
Section 3. Offering by Underwriters.
(a) The terms of the initial public offering by the Underwriters of
the Shares to be purchased by them shall be as set forth in the Prospectus. The
Underwriters may from time to time change the public offering price after the
closing of the initial public offering and increase or decrease the concessions
and discounts to dealers as the Underwriters may determine.
(b) The information (insofar as such information
relates to the Underwriters) set forth in the last paragraph on
the front cover page of the Prospectus relating to the Shares
and the third and sixth paragraphs under "Underwriting" in the
Registration Statement, any Preliminary Prospectus and the
Prospectus relating to the Shares constitutes the only
information furnished by the Underwriters to the Company for
inclusion in the Registration Statement, any Preliminary
Prospectus, and the Prospectus, and you on behalf of the
respective Underwriters represent and warrant to the Company
that the statements made therein are correct.
Section 4. Delivery of and Payment for the Shares.
(a) Delivery of certificates for the Firm Shares and the Optional
Shares (if the option granted by Section 2(b) hereof shall have been exercised
not later than 7:00 A.M., San Francisco time, on the date two business days
preceding the Closing Date), and payment therefor, shall be made at the office
of Howard, Darby & Levin, 1330 Avenue of the Americas, New York, New York 10019,
at 10:00 A.M., New York time, on the [third] full business day after the date of
this Agreement, or at such time on such other day, not later than seven full
business days after such [third] full business day, as shall be agreed upon in
writing by the Company and you. The date and hour of such delivery and payment
of the Firm Shares (which may
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be postponed as provided in Section 2(c) hereof) are herein called the "First
Closing Date."
(b) If the option granted by Section 2(b) hereof shall be exercised
after 7:00 a.m., San Francisco time, on the date two business days preceding the
Closing Date, delivery of certificates for the shares of Optional Shares, and
payment therefor, shall be made at the office of Howard, Darby & Levin, 1330
Avenue of the Americas, New York, New York 10019, at 10:00 A.M., New York time,
on the third full business day after the exercise of such option (the
"Subsequent Closing Date" and, together with the First Closing Date, the
"Closing Date"). The date and hour of such delivery and payment of the Optional
Shares may be postponed as provided in Section 2(c) hereof.
(c) Payment for the shares purchased from the Company shall be made to
the Company by (i) one or more certified or official bank check or checks in
next day funds (and the Company agrees not to deposit any such check in the bank
on which drawn until the day following the date of its delivery to the Company)
or (ii) federal funds wire transfer, provided that on the Closing Date the
Company agrees to reimburse Volpe, Welty & Company for one day of interest on
such amount at the federal funds rate plus any additional bank fees. Such
payment shall be made upon delivery of certificates for the shares to you for
the respective accounts of the several Underwriters against receipt therefor
signed by you. Certificates for the shares to be delivered to you shall be
registered in such name or names and shall be in such denominations as you may
request at least two business days before the First Closing Date or the
Subsequent Closing Date, as the case may be. Such certificates will be made
available to the Underwriters for inspection, checking and packaging at the
offices of Howard, Darby & Levin on the business day prior to the applicable
Closing Date.
It is understood that you, individually and not on behalf of the
Underwriters, may (but shall not be obligated to) make payment to the Company
for shares to be purchased by any Underwriter whose check shall not have been
received by you on the First Closing Date or the Subsequent Closing Date for the
account of such Underwriter. Any such payment by you shall not relieve such
Underwriter from any of its obligations hereunder.
Section 5. Covenants of the Company. The Company covenants and agrees
as follows:
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(a) The Company will (i) prepare and timely file with the Commission
under Rule 424(b) a Prospectus containing information previously omitted at
the time of effectiveness of the Registration Statement in reliance on Rule
430A or, if filed, will file a post-effective amendment thereto with the
Commission pursuant to and in accordance with Rule 462(b) and (ii) not file
any amendment to the Registration Statement or supplement to the Prospectus
of which you shall not previously have been advised and furnished with a
copy or to which you shall have reasonably objected in writing or which is
not in compliance with the Securities Act or the rules and regulations of
the Commission.
(b) The Company will promptly notify you in the event of (i) the
request by the Commission for amendment of the Registration Statement or
for supplement to the Prospectus or for any additional information, (ii)
the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement, (iii) the institution or
notice of intended institution of any action or proceeding for that
purpose, (iv) the receipt by the Company of any notification with respect
to the suspension of the qualification of the shares for sale in any
jurisdiction, or (v) the receipt by it of notice of the initiation or
threatening of any proceeding for such purpose. The Company will make every
reasonable effort to prevent the issuance of such a stop order and, if such
an order shall at any time be issued, to obtain the withdrawal thereof at
the earliest possible moment.
(c) The Company will (i) on or before the First Closing Date, deliver
to you a signed copy of the Registration Statement as originally filed and
of each amendment thereto filed prior to the time the Registration
Statement becomes effective and, promptly upon the filing thereof, a signed
copy of each post-effective amendment, if any, to the Registration
Statement (together with, in each case, all exhibits thereto unless
previously furnished to you) and will also deliver to you, for distribution
to the Underwriters, a sufficient number of additional conformed copies of
each of the foregoing (but without exhibits) so that one copy of each may
be distributed to each Underwriter, (ii) as promptly as possible deliver to
you and send to the several Underwriters, at such office or offices as you
may designate, as many copies of the Prospectus as you may reasonably
request, and
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(iii) thereafter from time to time during the period in which a prospectus
is required by law to be delivered by an Underwriter or dealer, likewise
send to the Underwriters as many additional copies of the Prospectus and as
many copies of any supplement to the Prospectus and of any amended
prospectus, filed by the Company with the Commission, as you may reasonably
request for the purposes contemplated by the Securities Act.
(d) If at any time during the period in which a prospectus is required
by law to be delivered by an Underwriter or dealer any event relating to or
affecting the Company, or of which the Company shall be advised in writing
by you, shall occur as a result of which it is necessary, in the opinion of
counsel for the Company or of counsel for the Underwriters, to supplement
or amend the Prospectus in order to make the Prospectus not misleading in
the light of the circumstances existing at the time it is delivered to a
purchaser of the Shares, the Company will notify you and will forthwith
prepare and file with the Commission a supplement to the Prospectus or an
amended prospectus so that the Prospectus as so supplemented or amended
will not contain any untrue statement of a material fact or omit to state
any material fact necessary in order to make the statements therein, in the
light of the circumstances existing at the time such Prospectus is
delivered to such purchaser, not misleading. If, after the initial public
offering of the Shares by the Underwriters and during such period, the
Underwriters shall propose to vary the terms of offering thereof by reason
of changes in general market conditions or otherwise, you will advise the
Company in writing of the proposed variation, and, if in the opinion either
of counsel for the Company or of counsel for the Underwriters such proposed
variation requires that the Prospectus be supplemented or amended, the
Company will forthwith prepare and file with the Commission a supplement to
the Prospectus or an amended prospectus setting forth such variation. The
Company authorizes the Underwriters and all dealers to whom any of the
shares may be sold by the several Underwriters to use the Prospectus, as
from time to time amended or supplemented, in connection with the sale of
the Shares in accordance with the applicable provisions of the Securities
Act and the applicable rules and regulations thereunder for such period.
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(e) Prior to the filing thereof with the Commission, the Company will
submit to you, for your information, a copy of any post-effective amendment
to the Registration Statement and any supplement to the Prospectus or any
amended prospectus proposed to be filed.
(f) The Company will cooperate, when and as requested by you, in the
qualification of the Shares for offer and sale under the securities or blue
sky laws of such jurisdictions as you may designate and, during the period
in which a prospectus is required by law to be delivered by an Underwriter
or dealer, in keeping such qualifications in good standing under said
securities or blue sky laws; provided, however, that the Company shall not
be obligated to file any general consent to service of process or to
qualify as a foreign corporation in any jurisdiction in which it is not so
qualified. The Company will, from time to time, prepare and file such
statements, reports, and other documents as are or may be required to
continue such qualifications in effect for so long a period as you may
reasonably request for distribution of the shares.
(g) During a period of five years commencing with the date hereof, the
Company will furnish to you, and to each Underwriter who may so request in
writing, copies of all periodic and special reports furnished to
shareholders of the Company and of all information, documents and reports
filed with the Commission (including the Report on Form SR required by Rule
463 of the Commission under the Securities Act).
(h) Not later than the 45th day following the end of the fiscal
quarter first occurring after the first anniversary of the Effective Date,
the Company will make generally available to its security holders an
earnings statement in accordance with Section 11(a) of the Securities Act
and Rule 158 thereunder.
(i) The Company agrees to pay all costs and expenses incident to the
performance of its obligations under this Agreement, including all costs
and expenses incident to (i) the preparation, printing and filing with the
Commission and the National Association of Securities Dealers, Inc.
("NASD") of the Registration Statement, any Preliminary Prospectus and the
Prospectus, (ii) the furnishing to the Underwriters of copies of any
Preliminary Prospectus
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and of the several documents required by paragraph (c) of this Section 5 to
be so furnished, (iii) the printing of this Agreement and related documents
delivered to the Underwriters, (iv) the preparation, printing and filing of
all supplements and amendments to the Prospectus referred to in paragraph
(d) of this Section 5, (v) the furnishing to you and the Underwriters of
the reports and information referred to in paragraph (g) of this Section 5,
(vi) the printing and issuance of stock certificates, including the
transfer agent's fees, and (vii) the fees and disbursements of the counsel,
the accountants and any other experts or advisors retained by the Company
or its subsidiaries.
(j) The Company agrees to reimburse you, for the account of the
several Underwriters, for blue sky fees and related disbursements
(including fees and disbursements of Cahill Gordon & Reindel, counsel for
the Underwriters, relating thereto, and cost of printing memoranda for the
Underwriters) paid by or for the account of the Underwriters or their
counsel in qualifying the shares under state securities or blue sky laws
and in the review of the offering by the NASD.
(k) The provisions of paragraphs (i) and (j) of this Section are
intended to relieve the Underwriters from the payment of the expenses and
costs which the Company hereby agrees to pay.
(l) The Company hereby agrees that, without the prior written consent
of Volpe, Welty & Company, the Company will not, for a period of 180 days
following the Effective Date, (i) offer, sell, contract to sell, make any
short sale, pledge, or otherwise dispose of, directly or indirectly, any
shares of Common Stock or any options to acquire shares of Common Stock or
securities convertible into or exchangeable or exercisable for or any other
rights to purchase or acquire Common Stock (including without limitation,
Common Stock of the Company which may be deemed to be beneficially owned in
accordance with the rules and regulations of the Commission) other than the
exercise or conversion of outstanding options, warrants or convertible
securities or (ii) enter into any swap or other agreement that transfers,
in whole or in part, any of the economic consequences or ownership of
Common Stock, whether any such transaction described in clause (i) or (ii)
above is to be settled by delivery of Common Stock or
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such other securities, in cash or otherwise; provided, however, that bona
fide gift transactions and transfers which will not result in any change in
beneficial ownership may be permitted if the transferee enters into a
lock-up agreement in substantially the same form covering the remainder of
the lock-up period. The foregoing sentence shall not apply to (A) the
shares to be sold to the Underwriters pursuant to this Agreement, (B)
shares of Common Stock issued by the Company upon the exercise of options
granted under the option plans of the Company (the "Option Plans"), as
described in footnote (4) to the table under the caption "Capitalization"
in the Preliminary Prospectus, and (C) options to purchase Common Stock
granted under the Option Plans.
(m) If at any time during the 25-day period after the Registration
Statement becomes effective any rumor, publication or event relating to or
affecting the Company shall occur as a result of which in your opinion the
market price for the shares has been or is likely to be materially affected
(regardless of whether such rumor, publication or event necessitates a
supplement to or amendment of the Prospectus), the Company will, after
written notice from you advising the Company to the effect set forth above,
forthwith prepare, consult with you concerning the substance of, and
disseminate a press release or other public statement, reasonably
satisfactory to you, responding to or commenting on such rumor, publication
or event.
(n) The Company is familiar with the Investment Company Act of 1940,
as amended, and has in the past conducted its affairs, and will in the
future conduct its affairs, in such a manner to ensure that the Company was
not and will not be an "investment company" or a company "controlled" by an
"investment company" within the meaning of the Investment Company Act of
1940, as amended, and the rules and regulations thereunder.
(o) The Company will use its best effort to maintain the inclusion of
the Common Stock on the Nasdaq National Market (or on a national securities
exchange) for a period of three years after the effective date of the
Registration Statement.
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Section 6. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless each Underwriter
and each person (including each partner or officer thereof) who controls any
Underwriter within the meaning of Section 15 of the Securities Act from and
against any and all losses, claims, damages or liabilities, joint or several, to
which such indemnified parties or any of them may become subject under the
Securities Act, the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), or the common law or otherwise, and the Company agrees to reimburse each
such Underwriter and controlling person for any legal or other expenses
(including, except as otherwise hereinafter provided, reasonable fees and
disbursements of counsel) incurred by the respective indemnified parties in
connection with defending against any such losses, claims, damages or
liabilities or in connection with any investigation or inquiry of, or other
proceeding which may be brought against, the respective indemnified parties, in
each case arising out of or based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(including the Prospectus as part thereof and any Rule 462(b) registration
statement) or any post-effective amendment thereto (including any Rule 462(b)
registration statement), or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or (ii) any untrue statement or alleged untrue statement
of a material fact contained in any Preliminary Prospectus or the Prospectus (as
amended or as supplemented if the Company shall have filed with the Commission
any amendment thereof or supplement thereto) or the omission or alleged omission
to state therein a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; provided, however, that (1) the indemnity agreement of the Company
contained in this paragraph (a) shall not apply to any such losses, claims,
damages, liabilities or expenses if such statement or omission was made in
reliance upon and in conformity with information furnished as herein stated or
otherwise furnished in writing to the Company by or on behalf of any Underwriter
for use in any Preliminary Prospectus or the Registration Statement or the
Prospectus or any such amendment thereof or supplement thereto, and (2) the
indemnity agreement contained in this paragraph (a) with respect to any
Preliminary Prospectus shall not inure to the benefit of any Underwriter from
whom the person asserting any such losses, claims, damages, liabilities or
expenses purchased the shares which is the subject thereof (or to the
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benefit of any person controlling such Underwriter) if at or prior to the
written confirmation of the sale of such Shares a copy of the Prospectus (or the
Prospectus as amended or supplemented) was not sent or delivered to such person
and the untrue statement or omission of a material fact contained in such
Preliminary Prospectus was corrected in the Prospectus (or the Prospectus as
amended or supplemented) unless the failure is the result of noncompliance by
the Company with paragraph (c) of Section 5 hereof. The indemnity agreement of
the Company contained in this paragraph (a) and the representations and
warranties of the Company contained in Section 1 hereof shall remain operative
and in full force and effect regardless of any investigation made by or on
behalf of any indemnified party and shall survive the delivery of and payment
for the Shares.
(b) Each Underwriter severally agrees to indemnify and hold harmless
the Company, each of its officers who signs the Registration Statement on his
own behalf or pursuant to a power of attorney, each of its directors, each other
Underwriter and each person (including each partner or officer thereof) who
controls the Company or any such other Underwriter within the meaning of Section
15 of the Securities Act from and against any and all losses, claims, damages or
liabilities, joint or several, to which such indemnified parties or any of them
may become subject under the Securities Act, the Exchange Act, or the common law
or otherwise and to reimburse each of them for any legal or other expenses
(including, except as otherwise hereinafter provided, reasonable fees and
disbursements of counsel) incurred by the respective indemnified parties in
connection with defending against any such losses, claims, damages or
liabilities or in connection with any investigation or inquiry of, or other
proceeding which may be brought against, the respective indemnified parties, in
each case arising out of or based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(including the Prospectus as part thereof and any Rule 462(b) registration
statement) or any post-effective amendment thereto (including any Rule 462(b)
registration statement) or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading or (ii) any untrue statement or alleged untrue statement
of a material fact contained in the Prospectus (as amended or as supplemented if
the Company shall have filed with the Commission any amendment thereof or
supplement thereto) or the omission or alleged omission to state therein a
material fact necessary in order to make the statements therein, in the light of
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the circumstances under which they were made, not misleading, if such statement
or omission was made in reliance upon and in conformity with information
furnished as herein stated or otherwise furnished in writing to the Company by
or on behalf of such indemnifying Underwriter for use in the Registration
Statement or the Prospectus or any such amendment thereof or supplement thereto.
The indemnity agreement of each Underwriter contained in this paragraph (b)
shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any indemnified party and shall survive
the delivery of and payment for the Shares.
(c) Each party indemnified under the provision of paragraphs (a) and
(b) of this Section 6 agrees that, upon the service of a summons or other
initial legal process upon it in any action or suit instituted against it or
upon its receipt of written notification of the commencement of any
investigation or inquiry of, or proceeding against, it in respect of which
indemnity may be sought on account of any indemnity agreement contained in such
paragraphs, it will promptly give written notice (the "Notice") of such service
or notification to the party or parties from whom indemnification may be sought
hereunder. No indemnification provided for in such paragraphs shall be available
to any party who shall fail so to give the Notice if and to the extent the party
to whom such Notice was not given was unaware of the action, suit,
investigation, inquiry or proceeding to which the Notice would have related and
was materially prejudiced by the failure to give the Notice, but the omission so
to notify such indemnifying party or parties of any such service or notification
shall not relieve such indemnifying party or parties from any liability which it
or they may have to the indemnified party for contribution or otherwise than on
account of such indemnity agreement. Any indemnifying party shall be entitled at
its own expense to participate in the defense of any action, suit or proceeding
against, or investigation or inquiry of, an indemnified party. Any indemnifying
party shall be entitled, if it so elects within a reasonable time after receipt
of the Notice by giving written notice (the "Notice of Defense") to the
indemnified party, to assume (alone or in conjunction with any other
indemnifying party or parties) the entire defense of such action, suit,
investigation, inquiry or proceeding, in which event such defense shall be
conducted, at the expense of the indemnifying party or parties, by counsel
chosen by such indemnifying party or parties and reasonably satisfactory to the
indemnified party or parties; provided, however, that (i) if the indemnified
party or parties reasonably determine that
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there may be a conflict between the positions of the indemnifying party or
parties and of the indemnified party or parties in conducting the defense of
such action, suit, investigation, inquiry or proceeding or that there may be
legal defenses available to such indemnified party or parties different from or
in addition to those available to the indemnifying party or parties, then
counsel for the indemnified party or parties (which counsel shall be reasonably
satisfactory to the indemnifying party or parties) shall be entitled to conduct
the defense to the extent reasonably determined by such counsel to be necessary
to protect the interests of the indemnified party or parties and (ii) in any
event, the indemnified party or parties shall be entitled to have counsel chosen
by such indemnified party or parties participate in, but not conduct, the
defense. If, within a reasonable time after receipt of the Notice, an
indemnifying party gives a Notice of Defense and the counsel chosen by the
indemnifying party or parties is reasonably satisfactory to the indemnified
party or parties, the indemnifying party or parties will not be liable under
paragraphs (a) through (c) of this Section 6 for any legal or other expenses
subsequently incurred by the indemnified party or parties in connection with the
defense of the action, suit, investigation, inquiry or proceeding, except that
(A) the indemnifying party or parties shall bear the legal and other expenses
incurred in connection with the conduct of the defense as referred to in clause
(i) of the proviso to the preceding sentence, it being understood, however, that
the indemnifying party shall not, in connection with any one such action or
separate but substantially similar or related actions arising out of the same
general allegations or circumstances, be liable for the reasonable fees and
expenses of more than one separate firm of attorneys (together with appropriate
local counsel) at any time for all such indemnified parties, and (B) the
indemnifying party or parties shall bear such other expenses as it or they have
authorized to be incurred by the indemnified party or parties. If, within a
reasonable time after receipt of the Notice, no Notice of Defense has been
given, the indemnifying party or parties shall be responsible for reasonable
legal or other reasonable expenses incurred by the indemnified party or parties
in connection with the defense of the action, suit, investigation, inquiry or
proceeding. Each indemnified party, as a condition of the indemnity agreements
contained in Sections 6(a) and 6(b), shall cooperate with the indemnifying party
in the defense of any such action or claim. No indemnifying party shall be
liable for any settlement of any such action effected without its prior written
consent (which consent shall not be unreasonably withheld or delayed).
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Notwithstanding the immediately preceding sentence, if in any case where the
fees and expenses of counsel are at the expense of the indemnifying party and an
indemnified party shall have requested the indemnifying party to reimburse the
indemnified party for such fees and expenses of counsel as incurred, such
indemnifying party agrees that it shall be liable for any settlement of any
action effected without its written consent if (i) such settlement is entered
into more than ten business days after the receipt by such indemnifying party of
the aforesaid request and (ii) such indemnifying party shall have failed to
reimburse the indemnified party in accordance with such request for
reimbursement prior to the date of such settlement.
(d) If the indemnification provided for in this Section 6 is
unavailable or insufficient to hold harmless an indemnified party under
paragraph (a) or (b) of this Section 6, then each indemnifying party, in lieu of
indemnifying such indemnified party, shall contribute to the amount paid or
payable by such indemnified party as a result of the losses, claims, damages or
liabilities referred to in paragraph (a) or (b) of this Section 6 (i) in such
proportion as is appropriate to reflect the relative benefits received by each
indemnifying party from the offering of the shares or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of each indemnifying party in
connection with the statements or omissions that resulted in such losses,
claims, damages or liabilities, or actions in respect thereof, as well as any
other relevant equitable considerations. The relative benefits received by the
Company on the one hand and the Underwriters on the other shall be deemed to be
in the same respective proportions as the total net proceeds from the offering
of the shares received by the Company and the total underwriting discount
received by the Underwriters, as set forth in the table on the cover page of the
Prospectus, bear to the aggregate public offering price of the shares. Relative
fault shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by each
indemnifying party and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such untrue statement or
omission.
The parties agree that it would not be just and equitable if
contributions pursuant to this paragraph (d) were to
<PAGE>
<PAGE>
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be determined by pro rata allocation (even if the Underwriters were treated as
one entity for such purpose) or by any other method of allocation which does not
take into account the equitable considerations referred to in the first sentence
of the foregoing paragraph. The amount paid by an indemnified party as a result
of the losses, claims, damages or liabilities, or actions in respect thereof,
referred to in the foregoing paragraph shall be deemed to include any legal or
other expenses reasonably incurred by such indemnified party in connection with
investigation, preparing to defend or defending against any action or claim
which is the subject of this paragraph (d). Notwithstanding the provisions of
this paragraph (d), no Underwriter shall be required to contribute any amount in
excess of the underwriting discount applicable to the Shares purchased by such
Underwriter. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this paragraph (d) to
contribute are several in proportion to their respective underwriting
obligations and not joint.
Each party entitled to contribution agrees that upon the service of a
summons or other initial legal process upon it in any action instituted against
it in respect of which contribution may be sought, it will promptly give written
notice of such service to the party or parties from whom contribution may be
sought, but the omission so to notify such party or parties of any such service
shall not relieve the party from whom contribution may be sought from any
obligation it may have hereunder or otherwise (except as specifically provided
in paragraph (c) of this Section 6).
(e) The Company will not, without the prior written consent of each
Underwriter, settle or compromise or consent to the entry of any judgment in any
pending or threatened claim, action, suit or proceeding in respect of which
indemnification may be sought hereunder (whether or not such Underwriter or any
person who controls such Underwriter within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act is a party to such claim,
action, suit or proceeding) unless such settlement, compromise or consent
includes an unconditional release of such Underwriter and each such controlling
person from all liability arising out of such claim, action, suit or proceeding.
<PAGE>
<PAGE>
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Section 7. Reimbursement of Certain Expenses. In addition to their
other obligations under Section 6 of this Agreement, the Company hereby agrees
to reimburse on a quarterly basis the Underwriters for all reasonable legal and
other expenses incurred in connection with investigating or defending any claim,
action, investigation, inquiry or other proceeding arising out of or based upon
any statement or omission, or any alleged statement or omission, described in
paragraph (a) of Section 6 of this Agreement, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the obligations
under this Section 7 and the possibility that such payments might later be held
to be improper; provided, however, that (i) to the extent any such payment is
ultimately held to be improper, the persons receiving such payments shall
promptly refund them and (ii) such persons shall provide to the Company, upon
request, reasonable assurances of their ability to effect any refund, when and
if due.
Section 8. Termination. This Agreement may be terminated by you at any
time prior to the First Closing Date by giving written notice to the Company in
accordance with Section 9, or if after the date of this Agreement trading in the
Common Stock shall have been suspended, or if there shall have occurred (i) the
engagement in hostilities or an escalation of major hostilities by the United
States or the declaration of war or a national emergency by the United States on
or after the date hereof if the effect of such engagement, escalation or
declaration would, in the Underwriters' reasonable judgment, make the offering
or the delivery of the Shares impracticable, (ii) any outbreak of hostilities or
other national or international calamity or crisis or change in economic or
political conditions if the effect of such outbreak, calamity, crisis or change
in economic or political conditions in the financial markets of the United
States would, in the Underwriters' reasonable judgment, make the offering or
delivery of the shares impracticable, (iii) suspension of trading in securities
generally or a material adverse decline in value of securities generally on the
New York Stock Exchange, the American Stock Exchange, or The Nasdaq Stock
Market, or limitations on prices (other than limitations on hours or numbers of
days of trading) for securities on either such exchange or system, (iv) the
enactment, publication, decree or other promulgation of any federal or state
statute, regulation, rule or order of, or commencement of any proceeding or
investigation by, any court, legislative body, agency or other governmental
authority which in the Underwriters' reasonable judgment materially and
adversely affects or will materially or adversely affect the
<PAGE>
<PAGE>
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business or operations of the Company, (v) declaration of a banking moratorium
by either federal or New York State authorities, (vi) the taking of any action
by any federal, state or local government or agency in respect of its monetary
or fiscal affairs which in the Underwriters' reasonable judgment has a material
adverse effect on the securities markets in the United States or (vii) (A) the
Company or its subsidiaries shall have sustained any loss or interference with
respect to its businesses or properties from fire, flood, hurricane, accident or
other calamity, whether or not covered by insurance, or from any strike, labor
dispute, slow down or work stoppage or any legal or governmental proceeding,
which loss or interference has had or has a material adverse effect, or (B)
there shall have been any event or development that, individually or in the
aggregate, has or could be reasonably likely to have a material adverse effect
(including without limitation a change in control of the Company), except in
each case as described in the Prospectus (exclusive of any amendment or
supplement thereto), which, in either case described in (A) or (B), in the
Underwriters' reasonable judgment, would make the offering or delivery of the
Shares impracticable. If this Agreement shall be terminated pursuant to this
Section 8, there shall be no liability of the Company to the Underwriters and no
liability of the Underwriters to the Company; provided, however, that in the
event of any such termination the Company agrees to indemnify and hold harmless
the Underwriters from all costs or expenses incident to the performance of the
obligations of the Company under this Agreement, including all costs and
expenses referred to in paragraphs (i) and (j) of Section 5 hereof.
Section 9. Conditions of Underwriters' Obligations. The obligations of
the several Underwriters to purchase and pay for the Shares shall be subject to
the performance by the Company of all its obligations to be performed hereunder
at or prior to the First Closing Date or the Subsequent Closing Date, as the
case may be, and to the following further conditions:
(a) The Registration Statement or any amendment thereto shall have
become effective; and no stop order suspending the effectiveness thereof
shall have been issued and no proceedings therefor have been instituted, or
shall be pending or threatened by the Commission; and to the best knowledge
of the respective signers, no proceedings for that purpose are contemplated
under the Securities Act.
<PAGE>
<PAGE>
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(b) The legality and sufficiency of the sale of the shares hereunder
and the validity and form of the certificates representing the shares, all
corporate proceedings and other legal matters incident to the foregoing,
and the form of the Registration Statement and of the Prospectus (except as
to the financial statements contained therein), shall have been approved at
or prior to the Closing Date by Cahill Gordon & Reindel, counsel for the
Underwriters.
(c) You shall have received from Howard, Darby & Levin, counsel for
the Company, and from Powell, Goldstein, Frazer & Murphy, healthcare
counsel for the Company, opinions, addressed to the Underwriters and dated
the First Closing Date and subsequent Closing Date, as the case may be,
covering the matters set forth in Annex A and Annex B hereto, respectively,
and if Optional Shares are purchased at any date after the Closing Date,
additional opinions from each such counsel, addressed to the Underwriters
and dated such later date, confirming that the statements expressed as of
the Closing Date in such opinions remain valid as of such later date.
(d) (i) As of the Effective Date, the statements made in the
Registration Statement and the Prospectus shall be true and correct, and
neither the Registration Statement nor the Prospectus shall omit to state
any material fact required to be stated therein or necessary in order to
make the statements therein, respectively, not misleading, (ii) since the
Effective Date, no event shall have occurred which should have been set
forth in a supplement or amendment to the Prospectus which has not been set
forth in such a supplement or amendment, (iii) since the respective dates
as of which information is given in the Registration Statement in the form
in which it originally became effective and the Prospectus contained
therein, there shall not have been any material adverse change or any
development involving a prospective material adverse change in or affecting
the business, properties, financial condition or results of operations of
the Company and its subsidiaries, taken as a whole, whether or not arising
from transactions in the ordinary course of business, and, since such
dates, except in the ordinary course of business, neither the Company nor
any of its subsidiaries shall have entered into any material transaction
not referred to in the Registration Statement in the form in which it
originally became effective and the Prospectus contained therein, (iv)
neither the Company nor
<PAGE>
<PAGE>
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any of its subsidiaries shall have any material contingent obligations
which shall not be disclosed in the Registration Statement and the
Prospectus, (v) there shall not be any pending or known threatened legal
proceedings to which the Company or any of its subsidiaries is a party or
of which property of the Company or any of its subsidiaries is the subject
which is material and which is not disclosed in the Registration Statement
and the Prospectus, (vi) there shall not be any franchises, contracts,
leases or other documents which are required to be filed as exhibits to the
Registration Statement which have not been filed as required, and (vii) the
representations and warranties of the Company herein shall be true and
correct in all material respects as of the First Closing Date or the
Subsequent Closing Date, as the case may be, and (viii) there has not been
any material change in the market for securities in general or in
political, financial or economic conditions from those reasonably
foreseeable as to render it impracticable in your reasonable judgment to
make a public offering of the shares, or a material adverse change in
market levels for securities in general (or those of companies in
particular) or financial or economic conditions which render it inadvisable
to proceed.
(e) You shall have received on the First Closing Date and the
Subsequent Closing Date a certificate, dated the First Closing Date or the
Subsequent Closing Date, as the case may be, and signed by the Chief
Executive Officer and the Chief Operating and Financial Officer of the
Company, stating that the respective signers of said certificate have
carefully examined the Registration Statement in the form in which it
originally became effective and the Prospectus contained therein and any
supplements or amendments thereto, and that the statements included in
clauses (i) through (viii) of paragraph (d) of this Section 9 are true and
correct.
(f) You shall have received from Deloitte & Touche LLP, a letter or
letters, addressed to the Underwriters and dated the First Closing Date and
the Subsequent Closing Date, confirming that they are independent public
accountants with respect to the Company within the meaning of the
Securities Act and the applicable published rules and regulations
thereunder and based upon the procedures described in their letter
delivered to you concurrently with the execution of this Agreement (the
"Original Letter"), but carried out to a date not more than three
<PAGE>
<PAGE>
-33-
business days prior to the First Closing Date or the Subsequent Closing
Date (i) confirming, to the extent true, that the statements and
conclusions set forth in the Original Letter are accurate as of the First
Closing Date or the Subsequent Closing Date, as the case may be, and (ii)
setting forth any revisions and additions to the statements and conclusions
set forth in the Original Letter which are necessary to reflect any changes
in the facts described in the Original Letter since the date of the
Original Letter or to reflect the availability of more recent financial
statements, data or information. The letters shall not disclose any change,
or any development involving a prospective change, in or affecting the
business or properties of the Company or any of its subsidiaries which, in
your sole judgment, makes it impractical or inadvisable to proceed with the
public offering of the shares or the purchase of the Optional Shares as
contemplated by the Prospectus.
(g) You shall have received from Deloitte & Touche LLP a letter
stating that their review of the Company's and its subsidiaries' systems of
internal accounting controls, to the extent they deemed necessary in
establishing the scope of their examination of the Company's and its
subsidiaries' financial statements as of September 30, 1995, did not
disclose any weakness in internal controls that they considered to be
material weaknesses.
(h) You shall have been furnished evidence in usual written or
telegraphic form from the appropriate authorities of the several
jurisdictions, or other evidence satisfactory to you, of the qualification
referred to in paragraph (f) of Section 5 hereof.
(i) Prior to the Closing Date, the shares to be issued and sold by the
Company shall have been duly authorized for listing by the Nasdaq National
Market upon official notice of issuance.
(j) On or prior to the First Closing Date, you shall have received
from all directors, officers, and beneficial holders of more than 1% of the
outstanding Common Stock agreements, in form reasonably satisfactory to
Volpe, Welty & Company, stating that without the prior written consent of
Volpe, Welty & Company, such person or entity will not, for a period of 180
days following the Effective Date (i) offer, sell, contract to sell, make
any short
<PAGE>
<PAGE>
-34-
sale, pledge, or otherwise dispose of, directly or indirectly, any shares
of Common Stock or any options to acquire shares of Common Stock or
securities convertible into or exchangeable or exercisable for or any other
rights to purchase or acquire Common Stock (including without limitation,
Common Stock of the Company which may be deemed to be beneficially owned in
accordance with the rules and regulations of the Commission) other than the
exercise or conversion of outstanding options, warrants or convertible
securities or (ii) enter into any swap or other agreement that transfers,
in whole or in part, any of the economic consequences or ownership of
Common Stock, whether any such transaction described in clause (i) or (ii)
above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise; provided, however, that bona fide gift
transactions and transfers which will not result in any change in
beneficial ownership may be permitted if the transferee enters into a
lock-up agreement in substantially the same form covering the remainder of
the lock-up period.
(k) The Acquisitions and all other transactions contemplated by the
Acquisition Agreements shall be consummated simultaneously with or prior to
the Closing Date.
(l) On or prior to the First Closing Date, the Underwriter and counsel
for the Underwriter shall have reviewed such further opinions,
certificates, documents or all other information as they may have
reasonably requested from the Company.
All the agreements, opinions, certificates and letters mentioned above
or elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if counsel for the Underwriters shall be satisfied that
they comply in form and scope.
In case any of the conditions specified in this Section 9 shall not be
fulfilled, this Agreement may be terminated by you by giving notice to the
Company. Any such termination shall be without liability of the Company to the
Underwriters and without liability of the Underwriters to the Company; provided,
however, that (i) in the event of such termination, the Company agrees to
indemnify and hold harmless the Underwriters from all costs or expenses incident
to the performance of the obligations of the Company under this Agreement,
including all costs and expenses referred to in paragraphs (i)
<PAGE>
<PAGE>
-35-
and (j) of Section 5 hereof, and (ii) if this Agreement is terminated by you
because of any refusal, inability or failure on the part of the Company to
perform any agreement herein, to fulfill any of the conditions herein, or to
comply with any provision hereof other than by reason of a default by any of the
Underwriters, the Company will promptly reimburse the Underwriters severally
upon demand for all out-of-pocket expenses (including reasonable fees and
disbursements of Cahill Gordon & Reindel, counsel for the Underwriter) that
shall have been incurred by them in connection with the transactions
contemplated hereby.
Section 10. Conditions of the Obligation of the Company. The
obligation of the Company to deliver the shares shall be subject to the
conditions that (a) the Registration Statement shall have become effective and
(b) no stop order suspending the effectiveness thereof shall be in effect and no
proceedings therefor shall be pending or threatened by the Commission.
In case either of the conditions specified in this Section 10 shall
not be fulfilled, this Agreement may be terminated by the Company by giving
notice to you. Any such termination shall be without liability of the Company to
the Underwriters and without liability of the Underwriters to the Company;
provided, however, that in the event of any such termination the Company agrees
to indemnify and hold harmless the Underwriters from all costs or expenses
incident to the performance of the obligations of the Company under this
Agreement, including all costs and expenses referred to in paragraphs (i) and
(j) of Section 5 hereof.
Section 11. Persons Entitled to Benefit of Agreement. This Agreement
shall inure to the benefit of the Company and the several Underwriters and, with
respect to the provisions of Section 6 hereof, the several parties (in addition
to the Company and the several Underwriters) indemnified under the provisions of
said Section 6, and their respective personal representatives, successors and
assigns. Nothing in this Agreement is intended or shall be construed to give to
any other person, firm or corporation any legal or equitable remedy or claim
under or in respect of this Agreement or any provision herein contained. The
term "successors and assigns" as herein used shall not include any purchaser, as
such purchaser, of any of the shares from any of the several Underwriters.
<PAGE>
<PAGE>
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Section 12. Notices. Except as otherwise provided herein, all
communications hereunder shall be in writing or by telegraph and, if to the
Underwriters, shall be mailed, telegraphed or delivered to Volpe, Welty &
Company, One Maritime Plaza, 11th Floor, San Francisco, California 94111; and if
to the Company, shall be mailed, telegraphed or delivered to it at its office,
Route 230 and Eby Chiques Road, Mt. Joy, Pennsylvania 17538, Attention: Hamilton
F. Potter III, with a copy to Howard, Darby & Levin, 1330 Avenue of the
Americas, New York, New York 10019, Attention: Kelly Vance, Esq. All notices
given by telegraph shall be promptly confirmed by letter.
Section 13. Miscellaneous. The reimbursement, indemnification and
contribution agreements contained in this Agreement and the representations,
warranties and covenants in this Agreement shall remain in full force and effect
regardless of (a) any termination of this Agreement, (b) any investigation made
by or on behalf of any Underwriter or controlling person thereof, or by or on
behalf of the Company or its directors or officers, and (c) delivery and payment
for the Shares under this Agreement; provided, however, that if this Agreement
is terminated prior to the First Closing Date, the provisions of Section 5
hereof shall be of no further force or effect, except the provisions of
paragraphs (i), (j) and (k), which shall remain in full force and effect.
Section 14. Applicable Law. THE VALIDITY AND INTERPRETATION OF THIS
AGREEMENT, AND THE TERMS AND CONDITIONS SET FORTH HEREIN SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT
GIVING EFFECT TO ANY PROVISIONS RELATING TO CONFLICTS OF LAW.
Section 15. Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
In this Agreement, the masculine, feminine and neuter genders and the
singular and the plural include one another. The section headings in this
Agreement are for the convenience of the parties only and will not affect the
construction or interpretation of this Agreement. This Agreement may be amended
or modified, and the observance of any term of this Agreement may be waived,
only by a writing signed by the Company and you.
<PAGE>
<PAGE>
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If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to us the enclosed copies hereof, whereupon it
will become a binding agreement among the Company and the several Underwriters,
including you, all in accordance with its terms.
Very truly yours,
Physician Support Systems, Inc.
By:
------------------------------
Name:
Title:
The foregoing Underwriting
Agreement is hereby confirmed
and accepted by us in San
Francisco, California as of
the date first above written.
Volpe, Welty & Company
Acting for ourselves and as
Representative of the several
Underwriters named in the
attached Schedule A
By:
----------------------------
Partner
<PAGE>
<PAGE>
Schedule I
UNDERWRITERS
<TABLE>
<CAPTION>
Number of
Shares
to Be
Underwriters Purchased
- ------------ ---------
<S> <C>
Volpe, Welty & Company
Total: ......................... 3,000,000
</TABLE>
<PAGE>
<PAGE>
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
PHYSICIAN SUPPORT SYSTEMS, INC.
1. The name of the Corporation is Physician Support Systems, Inc.
2. The address of its registered office in the State of Delaware is
Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County
of New Castle. The name of its registered agent at such address is The
Corporation Trust Company.
3. The nature of the business or purposes to be conducted or promoted
is to engage in any lawful act or activity for which corporations may be
organized under the General Corporation Law of Delaware.
4. The total number of shares of stock which the Corporation shall have
the authority to issue is 110,000,000 shares of capital stock, classified as
100,000,000 shares of common stock, par value $.001 per share, and 10,000,000
shares of preferred stock, par value $.01 per share.
(a) Common Stock. Each share of common stock, par value $0.01
per share, of the Corporation issued and outstanding immediately prior
to the date hereof shall hereby be converted into and become 1,400
fully paid and non-assessable shares of the Corporation's common stock,
par value $0.001 per share.
(b) Preferred Stock.
(i) The Preferred Stock may be issued from time to
time in one or more classes or series, the shares of each
class or series to have such designations and powers,
preferences and rights, and qualifications, limitations and
restrictions thereof, as are stated and expressed herein and
in the resolution or resolutions providing for the issue of
such class or series adopted by the board of directors of the
Corporation as hereafter prescribed.
(ii) Authority is hereby expressly granted to and
vested in the board of directors of the Corporation to
authorize the issuance of the Preferred Stock from time to
time in one or more classes or series and, with respect to
each class or series of the Preferred Stock, to fix and state,
by the resolution or resolutions from time to time adopted
providing for the issuance thereof, the following:
(A) whether or not the class or series is
to have voting rights, full, special, or limited, or
is to be without voting rights, and whether or
<PAGE>
<PAGE>
not such class or series is to be entitled to vote as
a separate class either alone or together with the
holders of one or more other classes or series of
stock;
(B) the number of shares to constitute the
class or series and the designations thereof;
(C) the preferences, and relative
participating, optional, or other special rights, if
any, and the qualifications, limitations, or
restrictions thereof, if any, with respect to any
class or series;
(D) whether or not the shares of any class
or series shall be redeemable at the option of the
Corporation or the holders thereof or upon the
happening of any specified event, and, if
redeemable, the redemption price or prices (which
may be payable in the form of cash, notes,
securities, or other property), and the time or
times at which, and the terms and conditions upon
which, such shares shall be redeemable and the
manner of redemption;
(E) whether or not the shares of a class or
series shall be subject to the operation of
retirement or sinking funds to be applied to the
purchase or redemption of such shares for
retirement, and, if such retirement or sinking fund
or funds are to be established, the annual amount
thereof, and the terms and provisions relative to
the operation thereof;
(F) the dividend rate, whether dividends
are payable in cash, stock of the Corporation, or
other property, the conditions upon which and the
times when such dividends are payable, the
preference to or the relation to the payment of
dividends payable on any other class or classes or
series of stock, whether or not such dividends shall
be cumulative or noncumulative, and if cumulative,
the date or dates from which such dividends shall
accumulate;
(G) the preferences, if any, and the
amounts thereof which the holders of any class or
series thereof shall be entitled to receive upon the
voluntary or involuntary liquidation, dissolution,
or winding-up of, or upon any distribution of the
assets of, the Corporation;
(H) whether or not the shares of any class
or series, at the option of the Corporation or the
holder thereof or upon the happening of any
specified event, shall be convertible into or
exchangeable for, the shares of any other class or
classes or of any other series of the same or any
other class or classes of stock, securities, or
other property of the
-2-
<PAGE>
<PAGE>
Corporation and the conversion price or prices or
ratio or ratios or the rate or rates at which such
exchange may be made, with such adjustments, if any,
as shall be stated and expressed or provided for in
such resolution or resolutions; and
(I) such other special rights and protective
provisions with respect to any class or series as may
to the board of directors of the Corporation seem
advisable.
(iii) The shares of each class or series of the
Preferred Stock may vary from the shares of any other class or
series thereof in any or all of the foregoing respects. The
board of directors of the Corporation may increase the number
of shares of the Preferred Stock designated for any existing
class or series by a resolution adding to such class or series
authorized and unissued shares of the Preferred Stock not
designated for any other class or series. The board of
directors of the Corporation may decrease the number of shares
of the Preferred Stock designated for any existing class or
series by a resolution subtracting from such class or series
authorized and unissued shares of the Preferred Stock
designated for such existing class or series, and the shares
so subtracted shall become authorized, unissued, and
undesignated shares of the Preferred Stock.
5. The Board of Directors is authorized to make, alter or repeal the
by-laws of the Corporation. Election of directors need not be by written ballot.
6. Whenever a compromise or arrangement is proposed between the
Corporation and its creditors or any class of them and/or between the
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of the Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for the Corporation under the
provisions of Section 291 of Title 8 of the Delaware Code or on the application
of trustees in dissolution or of any receiver or receivers appointed for the
Corporation under the provisions of Section 279 of Title 8 of the Delaware Code
order a meeting of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of the Corporation, as the case may be, to
be summoned in such manner as the said court directs. If a majority in number
representing three fourths in value of the creditors or class of creditors,
and/or of the stockholders or class of stockholders of the Corporation, as the
case may be, agree to any compromise or arrangement and to any reorganization of
the Corporation as consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders or class of
stockholders, of this Corporation, as the case may be, and also on this
Corporation.
7. No director shall have any personal liability to the Corporation or
its stockholders for monetary damages for breach of fiduciary duty as a
director. However, this provision does
-3-
<PAGE>
<PAGE>
not eliminate or limit the liability of a director (a) for any breach of the
director's duty of loyalty to the Corporation or its stockholders, (b) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (c) under Section 174 of the General Corporation Law
of Delaware or (d) for any transaction from which the director derived an
improper personal benefit. If the General Corporation Law of Delaware is amended
after the effective date of this Certificate of Incorporation to authorize
corporate action further eliminating or limiting the personal liability of
directors, then the liability of a director of this Corporation shall be
eliminated or limited to the fullest extent permitted by the General Corporation
Law of Delaware, as so amended. Any repeal or modification of this Section
either (i) by the stockholders of this Corporation or (ii) by an amendment to
the General Corporation Law of Delaware (unless such statutory amendment
specifically provides to the contrary) shall not adversely affect any right or
protection, existing at the time of such repeal or modification with respect to
any acts or omissions occurring either before or after such repeal or
modification, of a person serving as a director at the time of such repeal or
modification.
8. No action required or permitted to be taken at any meeting of the
holders of the common stock of the Corporation may be taken without such
meeting, the giving of prior notice or the taking of a vote. The power of the
holders of the common stock of the Corporation to consent, in writing or
otherwise, to the taking of any action without such meeting, notice and vote is
specifically denied.
-4-
<PAGE>
<PAGE>
PHYSICIAN SUPPORT SYSTEMS, INC.
1996 STOCK OPTION PLAN
1. Purpose; Types of Awards; Construction.
The purpose of the 1996 Stock Option Plan (the "Plan") of Physician
Support Systems, Inc., a Delaware corporation (the "Company"), is to attract and
retain employees (including officers), directors and independent contractors of
the Company, or any Subsidiary or Affiliate which now exists or hereafter is
organized or acquired, and to furnish additional incentives to such persons by
encouraging them to acquire a proprietary interest in the Company. Pursuant to
Section 6 of the Plan, there may be granted Options, including "incentive stock
options" and "nonqualified stock options". The Plan is intended to satisfy the
requirements of Rule 16b-3 promulgated under Section 16 of the Exchange Act and
shall be interpreted in a manner consistent with the requirements thereof.
2. Definitions.
For purposes of the Plan, the following terms shall be defined as set
forth below:
(a) "Affiliate" means any entity if, at the time of granting
of an Option, (i) the Company, directly, owns at least 20% of the combined
voting power of all classes of stock of such entity or at least 20% of the
ownership interests in such entity or (ii) such entity, directly or indirectly,
owns at least 20% of the combined voting power of all classes of stock of the
Company.
(b) "Beneficiary" means the person, persons, trust or trusts
which have been designated by an Optionee in his or her most recent written
beneficiary designation filed with the Company to receive the benefits specified
under the Plan upon his or her death, or, if there is no designated Beneficiary
or surviving designated Beneficiary, then the person, persons, trust or trusts
entitled by will or the applicable laws of descent and distribution to receive
such benefits.
(c) "Board" means the Board of Directors of the Company.
(d) "Change in Control" means a change in control of the
Company which will be deemed to have occurred if:
(i) any "person," as such term is used in Sections
13(d) and 14(d) of the Exchange Act (other than an Exempt
Person), is or becomes the "beneficial owner" (as defined in
Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company representing 50% or more of the
combined voting power of the Company's then outstanding voting
securities;
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(ii) during any period of two consecutive years,
individuals who at the beginning of such period constitute the
Board, and any new director (other than a director designated
by a person who has entered into an agreement with the Company
to effect a transaction described in clause (i), (iii), or
(iv) of this Section 2(d)) whose election by the Board or
nomination for election by the Company's stockholders was
approved by a vote of at least a majority of the directors
then still in office who either were directors at the
beginning of the period or whose election or nomination for
election was previously so approved, cease for any reason to
constitute at least a majority thereof;
(iii) the stockholders of the Company approve a
merger or consolidation of the Company with any other
corporation, other than (A) a merger or consolidation which
would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into
voting securities of the surviving or parent entity) 50% or
more of the combined voting power of the voting securities of
the Company or such surviving or parent entity outstanding
immediately after such merger or consolidation or (B) a merger
or consolidation effected to implement a recapitalization of
the Company (or similar transaction) in which no "person" (as
hereinbefore defined), other than an Exempt Person, acquired
50% or more of the combined voting power of the Company's then
outstanding securities; or
(iv) the stockholders of the Company approve of a
plan of complete liquidation of the Company or an agreement
for the sale or disposition by the Company of all or
substantially all of the Company's assets (or any transaction
having a similar effect).
(e) "Code" means the Internal Revenue Code of 1986, as amended
from time to time.
(f) "Committee" means the committee, consisting of at least
two members of the Board, established by the Board to administer the Plan, the
composition of which shall at all times satisfy the provisions of Rule 16b-3;
provided, however, that to the extent required for the Plan to comply with the
applicable provisions of Section 162(m) of the Code, "Committee" means either
such committee or a subcommittee of that committee, as the case may be, which
shall be constituted to comply with the applicable requirements of Rule 16b-3
and Section 162(m) of the Code and the regulations promulgated thereunder.
(g) "Company" means Physician Support Systems, Inc., a
corporation organized under the laws of the State of Delaware, or any successor
corporation.
(h) "Exchange Act" means the Securities Exchange Act of 1934,
as amended from time to time, and as now or hereafter construed, interpreted and
applied by regulations, rulings and cases.
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(i) "Exempt Person" means (1) the Company, (2) any trustee or
other fiduciary holding securities under an employee benefit plan of the
Company, (3) any corporation owned, directly or indirectly, by the stockholders
of the Company in substantially the same proportions as their ownership of
Stock, or (4) any person or group of persons who, immediately prior to the
adoption of this Plan, owned more than 50% of the combined voting power of the
Company's then outstanding voting securities.
(j) "Fair Market Value" means, with respect to Stock or other
property, the fair market value of such Stock or other property determined by
such methods or procedures as shall be established from time to time by the
Committee. Notwithstanding the foregoing, the per share Fair Market Value of
Stock as of a particular date shall mean (i) if the shares of Stock are then
listed on a national securities exchange, the closing sales price per share of
Stock on the national securities exchange on which the stock is principally
traded, for the last preceding date on which there was a sale of such Stock on
such exchange, or (ii) if the shares of Stock are then traded on the National
Market System of the National Association of Securities Dealers Automated
Quotation System ("NASDAQ"), the reported per share closing price of the Stock
on the day prior to such date or, if there was no such price reported for such
date, on the next preceding date for which such a price was reported, or (iii)
if the shares of Stock are then traded in an over-the-counter market other than
on the NASDAQ National Market System, the average of the closing bid and asked
prices for the shares of Stock in such over-the-counter market for the last
preceding date on which there was a sale of such Stock in such market, or (iv)
if the shares of Stock are not then listed on a national securities exchange or
traded in an over-the-counter market, such value as the Committee, in its sole
discretion, shall determine in good faith.
(k) "ISO" means any Option intended to be and designated as an
incentive stock option within the meaning of Section 422 of the Code.
(l) "NQSO" means any Option not designated as an ISO.
(m) "Option" means a right, granted to an Optionee under
Section 6(b) of the Plan, to purchase shares of Stock. An Option may be either
an ISO or an NQSO, provided that ISOs may be granted only to employees of the
Company or a Subsidiary.
(n) "Optionee" means a person who, as an employee, director or
independent contractor of the Company, a Subsidiary or an Affiliate, has been
granted an Option.
(o) "Plan" means this Physician Support Systems, Inc. 1996
Stock Option Plan, as amended from time to time.
(p) "Rule 16b-3" means Rule 16b-3, as from time to time in
effect, promulgated by the Securities and Exchange Commission under Section 16
of the Exchange Act, including any successor to such Rule.
(q) "Stock" means the common stock, par value $.001 per share,
of the Company.
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(r) "Stock Option Agreement" means any written agreement,
contract, or other instrument or document evidencing an Option.
(s) "Subsidiary" means any corporation in which the Company,
directly or indirectly, owns stock possessing 50% or more of the total combined
voting power of all classes of stock of such corporation.
3. Administration.
The Plan shall be administered by the Committee. The Committee shall
have the authority in its discretion, subject to and not inconsistent with the
express provisions of the Plan, to administer the Plan and to exercise all the
powers and authorities either specifically granted to it under the Plan or
necessary or advisable in the administration of the Plan, including, without
limitation, the authority to grant Options; to determine the persons to whom and
the time or times at which Options shall be granted; to determine the type and
number of Options to be granted, the number of shares of Stock to which Options
may relate and the terms, conditions, restrictions and performance criteria
relating to any Options; to determine whether, to what extent, and under what
circumstances Options may be settled, canceled, forfeited, exchanged, or
surrendered; to make adjustments in the terms and conditions of, and the
criteria and performance objectives included in, Options in recognition of
unusual or non-recurring events affecting the Company or any Subsidiary or
Affiliate or the financial statements of the Company or any Subsidiary or
Affiliate, or in response to changes in applicable laws, regulations, or
accounting principles; to designate Affiliates; to construe and interpret the
Plan and any Options; to prescribe, amend and rescind rules and regulations
relating to the Plan; to determine the terms and provisions of the Stock Option
Agreements (which need not be identical for each Optionee); and to make all
other determinations deemed necessary or advisable for the administration of the
Plan.
The Committee may appoint a chairperson and a secretary and may make
such rules and regulations for the conduct of its business as it shall deem
advisable, and shall keep minutes of its meetings. All determinations of the
Committee shall be made by a majority of its members either present in person or
participating by conference telephone at a meeting or by written consent. The
Committee may delegate to one or more of its members or to one or more agents
such administrative duties as it may deem advisable, and the Committee or any
person to whom it has delegated duties as aforesaid may employ one or more
persons to render advice with respect to any responsibility the Committee or
such person may have under the Plan. All decisions, determinations and
interpretations of the Committee shall be final and binding on all persons,
including the Company, and any Subsidiary, Affiliate or Optionee (or any person
claiming any rights under the Plan from or through any Optionee) and any
stockholder.
No member of the Board or Committee shall be liable for any action
taken or determination made in good faith with respect to the Plan or any Option
granted hereunder.
4. Eligibility.
Options may be granted to employees (including officers), directors and
independent contractors of the Company and its present or future Subsidiaries
and Affiliates, in the discretion
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of the Committee. In determining the person to whom Options shall be granted and
the type of Options granted (including the number of shares to be covered by
such Options), the Committee shall take into account such factors as the
Committee shall deem relevant in connection with accomplishing the purposes of
the Plan.
5. Stock Subject to the Plan.
The maximum number of shares of Stock reserved for the grant of Options
under the Plan shall be 853,500 shares of Stock, subject to adjustment as
provided herein. Such shares may, in whole or in part, be authorized but
unissued shares or shares that shall have been or may be reacquired by the
Company in the open market, in private transactions or otherwise. The number of
shares of Stock available for issuance under the Plan shall be reduced by the
number of shares of Stock subject to outstanding Options. If any shares subject
to an Option are forfeited, canceled, exchanged or surrendered or if an Option
otherwise terminates or expires without a distribution of shares to the
Optionee, the shares of Stock with respect to such Option shall, to the extent
of any such forfeiture, cancellation, exchange, surrender, termination or
expiration, again be available for Options under the Plan.
In the event that the Committee shall determine that any dividend or
other distribution (whether in the form of cash, Stock, or other property),
recapitalization, stock split, reverse split, reorganization, merger,
consolidation, spin-off, combination, repurchase, or share exchange, or other
similar corporate transaction or event, affects the Stock such that an
adjustment is appropriate in order to prevent dilution or enlargement of the
rights of Optionee under the Plan, then the Committee shall make such equitable
changes or adjustments as it deems necessary or appropriate to any or all of (i)
the number and kind of shares of Stock which may thereafter be issued in
connection with Options, (ii) the number and kind of shares of Stock issued or
issuable in respect of outstanding Options, and (iii) the exercise price, grant
price, or purchase price relating to any Option; provided that, with respect to
ISOs, such adjustment shall be made in accordance with Section 424(h) of the
Code.
6. Specific Terms of Options.
(a) General. The term of each Option shall be for such period
as may be determined by the Committee. The Committee may make rules relating to
Options, and may impose on any Option or the exercise thereof, at the date of
grant or thereafter, such additional terms and conditions, not inconsistent with
the provisions of the Plan, as the Committee shall determine.
(b) Options. The Committee is authorized to grant Options to
Optionees on the following terms and conditions:
(i) Type of Option. The Stock Option Agreement
evidencing the grant of an Option under the Plan shall
designate the Option as an ISO (in the event its terms, and
the individual to whom it is granted, satisfy the requirements
for ISOs under the Code), or an NQSO.
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(ii) Exercise Price. The exercise price per share of
Stock purchasable under an Option shall be determined by the
Committee; provided that, in the case of an ISO, such exercise
price shall be not less than the Fair Market Value of a share
of Stock on the date of grant of such Option or such other
exercise price as may be required by the Code, and in no event
shall the exercise price for the purchase of shares of Stock
be less than par value. The exercise price for Stock subject
to an Option may be paid in cash or by an exchange of Stock
previously owned by the Optionee, or a combination of both, in
an amount having a combined value equal to such exercise
price. Any shares of Stock exchanged upon the exercise of any
Option shall be valued at the Fair Market Value on the date on
which such shares are exchanged. An Optionee also may elect to
pay all or a portion of the aggregate exercise price by having
shares of Stock with a Fair Market Value on the date of
exercise equal to the aggregate exercise price withheld by the
Company or sold by a broker-dealer under circumstances meeting
the requirements of 12 C.F.R. ss. 220 or any successor
thereof.
(iii) Term and Exercisability of Options. The date on
which the Committee adopts a resolution expressly granting an
Option shall be considered the day on which such Option is
granted; provided that, Option grants made prior to approval
of the Plan by requisite vote of the Company's stockholders
shall be deemed to have been granted on the date of such
approval. Options shall be exercisable over the exercise
period (which shall not exceed ten years from the date of
grant), at such times and upon such conditions as the
Committee may determine, as reflected in the Stock Option
Agreement. An Option may be exercised to the extent of any or
all full shares of Stock as to which the Option has become
exercisable, by giving written notice of such exercise to the
Company's Secretary and paying the exercise price as described
in Section 6(b)(ii).
(iv) Termination of Employment, etc. An Option may
not be exercised unless the Optionee is then in the employ of,
is then a director of, or then maintains an independent
contractor relationship with, the Company or any Subsidiary or
Affiliate (or a company or a parent or subsidiary company of
such company issuing or assuming the Option in a transaction
to which Section 424(a) of the Code applies), and unless the
Optionee has continuously maintained any of such
relationships, since the date of grant of the Option; provided
that, the Stock Option Agreement may contain provisions
extending the exercisability of Options, in the event of
specified terminations, to a date not later than the
expiration date of such Option. The Committee may establish a
period during which the Beneficiaries of an Optionee who died
while an employee, director or independent contractor of the
Company or any Subsidiary or Affiliate or during any extended
period referred to in the immediately preceding proviso may
exercise those Options which were exercisable on the date of
the Optionee's death; provided that no Option shall be
exercisable after its expiration date.
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(v) Nontransferability. Options shall not be
transferrable by an Optionee except by will or the laws of
descent and distribution or, if then permitted under Rule
16b-3, pursuant to a qualified domestic relations order as
defined under the Code or Title I of the Employee Retirement
Income Security Act of 1974, as amended, or the rules
thereunder, and shall be exercisable during the lifetime of an
Optionee only by such Optionee or his guardian or legal
representative.
(vi) Other Provisions. Options may be subject to such
other conditions as the Committee may prescribe in its
discretion.
7. Change in Control Provisions.
In the event of a Change in Control, any and all Options then
outstanding shall become fully exercisable and vested, whether or not
theretofore vested and exercisable.
8. General Provisions.
(a) Compliance with Legal and Exchange Requirements. The Plan,
the granting and exercising of Options thereunder, and the other obligations of
the Company under the Plan and any Stock Option Agreement, shall be subject to
all applicable federal and state laws, rules and regulations, and to such
approvals by any regulatory or governmental agency as may be required. The
Company, in its discretion, may postpone the issuance or delivery of Stock under
any Option until completion of such stock exchange listing or registration or
qualification of such Stock or other required action under any state, federal or
foreign law, rule or regulation as the Company may consider appropriate, and may
require any Optionee to make such representations and furnish such information
as it may consider appropriate in connection with the issuance or delivery of
Stock in compliance with applicable laws, rules and regulations.
(b) No Right to Continued Employment, etc. Nothing in the Plan
or in any Option granted or Stock Option Agreement entered into pursuant to the
Plan shall confer upon any Optionee the right to continue in the employ of, or
to continue as a director of or an independent contractor to, the Company, any
Subsidiary or any Affiliate, as the case may be, or to be entitled to any
remuneration or benefits not set forth in the Plan or such Stock Option
Agreement or to interfere with or limit in any way the right of the Company or
any such Subsidiary or Affiliate to terminate such Optionee's employment,
directorship or independent contractor relationship.
(c) Taxes. The Company or any Subsidiary or Affiliate is
authorized to withhold from any Option granted, any payment relating to an
Option under the Plan (including from a distribution of Stock), or any other
payment to an Optionee, amounts of withholding and other taxes due in connection
with any transaction involving an Option, and to take such other action as the
Committee may deem advisable to enable the Company and an Optionee to satisfy
obligations for the payment of withholding taxes and other tax obligations
relating to any Option. This authority shall include authority to withhold or
receive Stock or other property and to make cash payments in respect thereof in
satisfaction of an Optionee's tax obligations.
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(d) Amendment and Termination of the Plan. The Board may at
any time and from time to time alter, amend, suspend, or terminate the Plan in
whole or in part; provided that, no amendment which requires stockholder
approval in order for the Plan to continue to comply with Rule 16b-3 shall be
effective unless the same shall be approved by the requisite vote of the
stockholders of the Company entitled to vote thereon. Notwithstanding the
foregoing, no amendment shall affect adversely any of the rights of any
Optionee, without such Optionee's consent, under any Option theretofore granted
under the Plan.
(e) No Rights to Options; No Stockholder Rights. No Optionee
shall have any claim to be granted any Option under the Plan, and there is no
obligation for uniformity of treatment of Optionees. Except as provided
specifically herein, an Optionee or a transferee of an Option shall have no
rights as a stockholder with respect to any shares covered by the Option until
the date of the issuance of a stock certificate to such Optionee for such
shares.
(f) Unfunded Status of Options. The Plan is intended to
constitute an "unfunded" plan for incentive and deferred compensation. Nothing
contained in the Plan or any Option shall give any such Optionee any rights that
are greater than those of a general creditor of the Company.
(g) No Fractional Shares. No fractional shares of Stock shall
be issued or delivered pursuant to the Plan or any Option. The Committee shall
determine whether cash, other Options, or other property shall be issued or paid
in lieu of such fractional shares or whether such fractional shares or any
rights thereto shall be forfeited or otherwise eliminated.
(h) Governing Law. The Plan and all determinations made and
actions taken pursuant hereto shall be governed by the laws of the State of
Delaware without giving effect to the conflict of laws principles thereof.
(i) Effective Date; Plan Termination. The Plan shall take
effect upon its adoption by the Board (the "Effective Date"), but the Plan (and
any grants of Options made prior to the stockholder approval mentioned herein),
shall be subject to the approval of the holder(s) of a majority of the issued
and outstanding shares of voting securities of the Company entitled to vote,
which approval must occur within twelve months of the date the Plan is adopted
by the Board. In the absence of such approval, such Options shall be null and
void.
The Board may terminate the Plan at any time with respect to
any shares of Stock that are not subject to Options. Unless terminated earlier
by the Board, the Plan shall terminate ten years after the effective date and no
Options shall be granted under the Plan after such date. Termination of the Plan
under this Section 8(i) will not affect the rights and obligations of any
Optionee with respect to Options grated prior to termination.
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January 29, 1996
Physician Support Systems, Inc.
Route 230 and Eby-Chiques Road
Mt. Joy, Pennsylvania 17552
Dear Sirs:
In connection with the registration under the Securities Act of 1933,
as amended (the "Act"), of 3,450,000 shares of common stock, par value $.001 per
share (the "Shares"), of Physician Support Systems, Inc., a Delaware corporation
(the "Company"), pursuant to the Registration Statement (No. 33-80731) on Form
S-1 (the "Registration Statement") filed by you with the Securities and Exchange
Commission, we have reviewed such corporate records, certificates and other
documents, and such questions of law, as we have deemed necessary or appropriate
for the purposes of this opinion.
Based upon the foregoing, we are of the opinion that, when the
Registration Statement has become effective under the Act, the terms of the
issuance and sale of the Shares have been duly established in conformity with
the Company's Certificate of Incorporation and the proceedings that we
contemplate being taken prior to the issuance of the Shares have been completed,
the Shares, when issued and sold as contemplated in the Registration Statement
and assuming compliance with the Act, will be duly and validly issued, fully
paid and nonassessable.
We hereby consent to the filing of our opinion as Exhibit 5.1 to the
Registration Statement and to the
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Physician Support Systems, Inc. -2-
reference to us under the heading "Legal Matters" in the Prospectus. In giving
such consent, we do not thereby admit that we are in the category of persons
whose consent is required under Section 7 of the Act.
Very truly yours,
HOWARD, DARBY & LEVIN
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EXHIBIT 23.1
To the Board of Directors and Stockholders of
Physician Support Systems, Inc.
Landisville, Pennsylvania
We consent to the use in this Amendment No. 2 Registration Statement (relating
to 3,000,000 shares of Common Stock) of Physician Support Systems, Inc. on Form
S-1 of our report dated December 29, 1995 on the financial statements of North
Coast Health Care Management Group, and our report dated January 5, 1996 on the
financial statements of Medical Management Support, Inc., appearing in the
Prospectus, which is a part of this Registration Statement, and to the
references to us under the headings 'Seclected Financial Data' and 'Experts' in
such Prospectus.
DELOITTE & TOUCHE LLP
New York, New York
January 29, 1996
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