<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 0R 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
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Commission File Number 0-19803
ALLEGIANT PHYSICIAN SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 58-1774324
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 Northridge Road, Suite 500
Atlanta, Georgia 30350
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: 770-643-5555
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes No X
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K, or any
amendment to this Form 10-K. Yes X No
--- ---
Aggregate market value of the voting stock held by non-affiliates of the
registrant, computed using the closing price as reported by OTC Bulletin Board
for the Company's common stock on May 31, 1996: $11,892,554
Indicate the number of shares outstanding of the registrant's common stock,
$.001 par value, as of the latest practicable date:
Class Outstanding at May 31, 1996
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Common Stock, $.001 par value 24,270,519
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<PAGE>
PART I
ITEM 1: BUSINESS
History and Overview
Allegiant Physician Services, Inc. (the "Company") was incorporated in
Delaware in February 1988 under the name Physicians Staffing, Inc. and was a
successor by merger in November 1988 to Physician Sourcing & Research, Inc., a
Delaware corporation incorporated in September 1987. In August 1989, the Company
changed its name to Premier Anesthesia, Inc. On November 15, 1994, the Company
changed its name to Allegiant Physician Services, Inc. The Company's executive
office is located at 500 Northridge Road, Suite 500, Atlanta, Georgia 30350,
(770) 643-5555.
The Company has experienced significant net losses in 1995 and prior years,
has a working capital deficiency of $17.9 million and a deficit in stockholders'
equity of $14.8 million as of December 31, 1995. The Company has sold its pain
treatment operations and intends to sell, subject to shareholder approval, its
anesthesia contract business. The Company is focusing its efforts on physician
recruiting, software development and physician management services. See Item 7
(Management's Discussion and Analysis of Results of Operations and Financial
Condition) for a discussion of these matters as well as other risk factors that
the Company faces.
The Company provides contract anesthesiology services to hospitals, managed
care services to physicians, hospitals and a preferred provider organization
("PPO"), hospital information systems, locum tenens services and recruiting and
staffing services in a variety of specialties for hospitals, clinics and
physician practice groups. Historically, the Company concentrated on providing
contract anesthesiology services to hospitals and the operations of outpatient
medical/surgical centers specializing in the multi-disciplinary treatment of
chronic pain. In early 1995, the Company made the decision to discontinue its
pain treatment operations entirely. The Company sold the pain treatment
operations in December 1995 to Pain Net, Inc. ("Pain Net") a company organized
and wholly owned by former members of senior management of the Company's
discontinued pain division. Terms of the sale were $2.3 million cash, paid at
closing, and $12.5 million in promissory notes. Pain Net will repay these notes
through future operations. The Company expects to fully collect these notes,
however, the repayments will be reflected as income when received due to the
highly leveraged structure of Pain Net.
Simultaneous with the discontinuation of the pain treatment operations, and
in response to slower than anticipated growth in its contract anesthesia
business, the Company streamlined its core business and shifted its focus from
the hospital anesthesia contract services to expanding and developing its
hospital information systems, physician recruiting and staffing services, locum
tenens services and its physician practice management services.
Recent Developments
Effective June 1, 1996, and subject to the rescission rights described below,
Allegiant Physician Services, Inc. (the "Company") transferred substantially all
of its assets (the "Transaction") to Anesthesia Solutions, Inc. ("ASI"), a new
company. The Transaction will be rescinded if the requisite shareholder approval
of the Transaction is not received by October 1, 1996. The assets to be sold in
the Transaction include all of the Company's anesthesia contracts, physician and
nurse contracts, office furniture and computer equipment used in the contract
anesthesia business.
The consideration received in the Transaction was a Promissory Note, dated June
1, 1996, (the "Note") by ASI in favor of the Company, in original principal
amount of $16.0 million, with interest equal to 9% per year. The Note will be
reduced by certain liabilities assumed by ASI totaling approximately $12
million. The Agreement requires interest only payments on the Note to be made
for the first six months commencing July 1, 1996, and monthly principal payments
of $500,000 starting January 1, 1997, increasing to $1,500,000 per month
beginning July 1, 1997, and to be made thereafter until the Note is paid in
full. The Note is secured by 2,750,000 shares of EquiMed, Inc., $.0001 par
value, common stock. An additional sale premium up to $9 million will be paid by
ASI if the provisions of an earn-out agreement are realized by ASI within twelve
months. It cannot be assured that the provisions of the earn-out will be
realized.
<PAGE>
In accordance with the Agreement, the Transaction must be approved by the
Company's shareholders by October 1, 1996. In the event that the Transaction is
not approved by the shareholders the Transaction will be rescinded and the
Company will pay ASI, or ASI will pay the Company, as the case may be, an amount
necessary to place the respective parties in the financial positions at May 31,
1996, as if the Agreement had not been consummated on June 1, 1996.
Growth Strategy
The Company's strategy is to achieve growth by (i) expanding its hospital
information systems business by marketing its specialized software system to
acute care hospitals, outpatient surgery facilities and ambulatory surgical
centers; (ii) expanding its physician recruiting and staffing business by
marketing the Company's ability to determine prospective hiring needs and its
ability to provide an array of recruiting and placement services to large
physician groups, hospitals and healthcare providers; (iii) developing its locum
tenens services by taking advantage of a significant market need for temporary
physicians; and (iv) developing its physician practice management services by
offering a broad range of management and organizational services to physicians,
hospitals, managed care organizations and networks and other healthcare
providers, assisting in efforts to build networks providing quality services to
patients, providers and payors. As reflected in "Recent Developments," the
Company intends to sell its contract anesthesia division to ASI effective June
1, 1996. The Asset Purchase Agreement provides that the Transaction will be
rescinded if the requisite shareholder approval of the Transaction is not
received by October 1, 1996. No assurances can be made that the Company's
shareholders will approve the Transaction. In accordance with the Asset Purchase
Agreement approximately $7.5 million of short-term debt and $4.5 million in
other current liabilities of the Company has been assumed by ASI and the Company
plans to re-deploy the remaining assets of the Company in marketing and
developing its hospital information systems, expanding its physician recruiting
and staffing business, developing its locum tenens services and developing its
newly organized physician practice management division.
Acquisition Activities
In May 1995, the Company moved forward with its strategy of developing its
physician management group by joining with Primary Care Concepts of Fort Worth,
Texas ("PCC") to develop a physician-owned and controlled community healthcare
delivery system in the Dallas-Fort Worth metropolitan area. Pursuant to a Stock
Purchase Agreement dated May 24, 1995 (the "Stock Purchase Agreement") by and
between Daughters of Charity Health Services of Fort Worth, Texas and AHP
Acquisition Company, L.L.C. (a corporation 80% owned by PCC and 20% owned by the
Company) ("AHP"), AHP purchased an established preferred provider organization
for $341,000. The Company executed a promissory note with AHP agreeing to fund
AHP up to $1.0 million of which $823,000 had been advanced in 1995. The Company
will serve as the management services organization for the new healthcare
delivery system by providing services such as marketing, staffing, management,
billing and collections and information systems. PCC will provide the management
of clinical care, and AHP will manage and expand the healthcare provider
network.
The Company is limited in its method of identifying and developing certain
practices because of its financial constraints in developing an acquisition
strategy. The settlement agreement relating to the class action lawsuit filed
against the Company requires the Acquisition Committee of the Company's Board of
Directors, a majority of the members of which must be non-management directors,
to conduct a thorough evaluation of a target company's compliance with all
applicable government regulations for the sale or manufacture of such company's
products or services if the target company provides services outside the
Company's core competencies and the purchase price exceeds $1.0 million.
Industry Background
National concern over the rapidly rising cost of healthcare and recent
initiatives to control both public and private healthcare expenditures through
legislation are pressuring healthcare providers to deliver more cost effective
healthcare services. To limit utilization and to control the cost of healthcare,
payors are increasingly relying on managed care arrangements. Additionally, as
payors such as large employers and insurance companies use the power inherent in
their large patient bases to negotiate discounts and capitated fee arrangements,
<PAGE>
healthcare providers are forced to find ways to understand their cost
structures, improve their negotiating powers, maintain their patient and
referral bases and perform the treatment and administrative functions of their
businesses more effectively and efficiently.
In response to cost and competitive pressures, physicians are increasingly
consolidating their practices with other physicians, selling their practices,
becoming employees of hospitals or payors or establishing affiliations with
insurance companies, hospitals and physician practice management companies in
order to be able to effectively negotiate group contracts and to secure larger
patient bases and referral pools. Similarly, hospitals and clinics are
consolidating their operations, forming affiliations with other healthcare
providers and turning to outside sources to recruit, staff, schedule and
administer different departments in order to shift these managerial and
administrative responsibilities to organizations that can deliver these services
on a more cost effective basis. The Company believes that it is well positioned
to take advantage of these changes through the services offered by its hospital
information systems, recruiting and staffing services, locum tenens services and
physician practice management services.
Services Provided
The principal services provided by the Company and its subsidiaries are (i)
hospital anesthesia contract services, (ii) hospital information services,
(iii) physician recruiting and staffing services, (iv) locum tenens services and
(v) physician practice management services. Each of these services is discussed
below.
Hospital Anesthesia Contract Services
As reflected in "Recent Developments" the Company has entered into a definitive
agreement to sell its contract anesthesia division. The sale is subject to
shareholder approval and will be voted upon by the shareholders at the Company's
1996 annual meeting. Consequently, at this time, there is no assurance that the
sale will be approved by the Company's shareholders.
The Company contracts with physicians and Certified Registered Nurse
Anesthetists ("CRNA's") to provide full anesthesiology department staffing for
hospitals with which the Company has exclusive anesthesia services contracts.
The Company either contracts with anesthesiologists who are existing members of
the hospital's medical staff, provided such physicians satisfy credentialing
requirements, or actively recruits qualified anesthesiologists to fulfill its
contractual obligations to the hospital. Anesthesiologists who desire to
practice at the hospital must contract with the Company. Generally, one of the
Company's contract anesthesiologists is appointed as medical director of the
hospital's anesthesiology department, having responsibility for department
administration. The Company commits to carry, or cause each anesthesiologist and
CRNA to carry, professional liability insurance covering the individual's
activities at the client hospital. This business group of the Company accounted
for 95% of the Company's net revenues in 1995 and 94% of net revenues in each of
fiscal 1994 and 1993.
The Company contracts with a sufficient number of anesthesiologists and CRNAs to
provide anesthesia services for its hospital clients on a 24-hour, 365-day
basis. The Company believes that the availability of full-time anesthesiologists
and CRNA coverage is a principal factor in allowing the surgical procedures to
be scheduled when necessary and as desired by the hospital or surgeon and in
accordance with the needs of the patients. The Company also believes that the
availability of such coverage will often influence both a patient's and
physician's decision to choose a particular hospital for medical services.
Predictable and dependable coverage increases the opportunity to schedule
elective surgical procedures, which are frequently associated with more
favorable reimbursement levels.
In order to determine a potential hospital client's appropriate staffing levels,
the Company analyzes the hospital's existing anesthesiology services and
requirements as well as the level of services the hospital desires to provide to
the community. Based on this assessment, the Company submits a proposal for an
advisable level of anesthesia coverage. The Company then develops and implements
a staffing plan for coverage of the anesthesiology department, including on-call
coverage for times when the operating rooms are not scheduled to be in use. If
the hospital desires a staffing level greater than that justified by the
existing surgical caseload or existing reimbursement levels, the Company will
generally require the hospital to guarantee either to pay the Company's expenses
or a stated level of reimbursement during the term of the contract.
<PAGE>
During the recruiting period for permanent anesthesia staff, the Company
contracts with and schedules locum tenens (temporary) anesthesiologists and
CRNAs to provide anesthesiology services to hospitals on an interim basis.
Management believes that the Company maintains the appropriate internal
resources and expertise to provide an adequate supply of locum tenens coverage
to fulfill contractual obligations. This staff utilizes strict standards to
ensure compliance with Company quality standards.
The Company currently provides contract anesthesiology services to 28 hospital
anesthesiology departments. None of the Company's existing service contracts
accounted for more than 10% of the Company's net revenue for fiscal 1995. As of
December 31, 1995, this business group had 58 full-time employees.
As of December 31, 1995, the Company provided recruiting, staffing and related
services under 28 contracts to 28 hospital anesthesiology departments. The
Company's contracts with hospitals which grant the Company exclusive right and
responsibility to contract with physicians and CRNAs to provide required medical
services. Under these arrangements, the Company accepts responsibility for
billing and collection and, subject to contractual guarantees as described
below, assumes the risks for non-payment, fluctuations in patient volumes or
payor mix associated with reimbursement through government programs and other
third-party payors. All of these factors are taken into consideration by the
Company in deciding on appropriate contract terms with hospitals and healthcare
professionals.
The Company recruits all the physicians and CRNAs used to fulfill the staffing
requirements of hospitals and clinics in which the Company provides contract
anesthesiology services. Methods used by the Company to identify
anesthesiologists and CRNAs include mail solicitations, professional journal
advertising, telemarketing and the use of management's personal contacts. The
Company maintains a proprietary computerized database which holds information on
approximately 4,000 anesthesiologists who have indicated an interest in
affiliating with the Company on a full-time or locum tenens basis. The Company
prescreens responses of anesthesiologists from its search to ensure the
candidates meet the qualifications established by the client and the Company.
The Company then conducts a verification of licensing, training and professional
references of each healthcare professional prior to setting up interviews for
the candidate with the hospital personnel and visits to the community. The
Company is responsible for supervising all arrangements relating to the
commencement of the healthcare professional's services, including relocation if
necessary.
The Company's hospital contracts generally provide that as compensation for
its services, the Company is entitled to collect and retain all charges for
medical services furnished by the Company's independent contractor healthcare
professionals to patients. Such contracts are referred to as "fee-for-service"
contracts. Under such an arrangement, the Company bears the expenses of
providing these services (principally consisting of physician and CRNA
compensation, insurance costs and billing and collection expenses). In general,
the Company's contracts with physicians performing services at hospitals require
the Company to pay the physicians a percentage of the Company's profits from its
contracts with that hospital, in addition to the physician's annual
compensation.
Many of the Company's contracts provide for certain financial guarantees or
stipends by hospital clients to the Company. Under "expense guaranty" contracts,
the client reimburses the Company to the extent that the Company's expenses in
performing the contract plus a fixed management fee exceed the Company's
collections from the medical services provided by the Company's physicians and
CRNAs. Under "collection guaranty" contracts, the client reimburses the Company
to the extent that collections do not reach a predetermined amount, regardless
of the Company's expenses. Finally, under "fixed stipend" contracts, the client
pays the Company a fixed supplemental amount, regardless of the Company's
collections or expenses. Expense guaranty, collection guaranty and fixed stipend
payments are made to the Company monthly. If the Company's collections exceed
the guaranteed amount, the Company must reimburse the excess to the client up to
the amount of guaranty payments received by the Company during the same period.
The Company principally obtains guaranties on contracts to compensate either
for its historical inability to fund the start-up phase of a contract and
finance the receivables until collection, or for the cost of implementing
staffing for the hospital's department, the cost of which may or may not be
justified by existing surgical case loads or patient volumes at the hospital. To
the extent the Company enters into a non-guaranteed contract, the Company may
experience losses if it has overestimated collections or underestimated expenses
required to perform such
<PAGE>
contracts, particularly during the start-up phase. As of December 31, 1995, 10
hospital contracts contained expense guaranties, 4 hospital contracts contained
collection guaranties, 2 hospital contracts provided for fixed stipends and 12
hospital contracts provided for no guaranty or stipend.
Under most contracts, the hospital agrees not to contract with any independent
contractor physicians provided to them by the Company for a period of one year
after the termination of the contract with the hospital. The enforceability of
such a non-solicitation restriction varies from state to state depending on
public policy constraints as they relate to the perceived reasonableness of the
scope of such non-solicitations.
Hospital Information Systems
A subsidiary of the Company, CINet, incorporated in February, 1993
develops and markets a surgical information system for use in hospitals and
surgery centers to monitor, record and help improve operating room procedures
while capturing all cost components of the pre-operative process.
The product developed and marketed by CINet is a fully integrated on-
line software application. In the operating room context, it is used by
anesthesia providers and surgical nurses to record each event (e.g., drugs
administrated, surgical procedures performed, supplies and equipment used)
throughout the pre-, intra- and post-operative and anesthesia phases. In
addition, the system is linked to all patient monitoring equipment in order to
record vital signs and significant OR events, time stamping all data points, and
preparing both the anesthesia and nursing records for signature. In the patient
record-keeping context, it is used by physicians, nurses and clerks to record
patients' medical histories, physiological and other relevant data, pre- and
post-operative treatments and recovery progress.
Development of the next release of the product, version 2.0, is
scheduled for beta release by the third quarter of 1996. Unlike the version 1.0
product currently in use, Version 2.0 is based entirely on open architecture
standards using Microsoft Windows NT workstations and Microsoft Windows NT or
UNIX servers running one of many off-the-shelf Relational Database Management
Systems (RDBMS). The system is uniquely designed to allow customization of user
screens on-site without writing any additional system code. This business group
of the Company accounted for 0.0%, 0.3% and 0.5% of the Company's net revenues
in fiscal 1995, 1994 and 1993, respectively. As of December 31, 1995, this
business group had 9 full-time employees.
Physician Recruiting and Staffing Services
The Company recruits physicians practicing in a variety of specialties
for hospitals and clinics for which the Company does not provide contract
staffing services. During 1995 and 1994, the main areas of specialty for which
the Company provided such recruiting services included family practices,
internal medicine, orthopedics, general surgery, pediatrics and psychiatry. This
business group of the Company accounted for 3.5%, 4.0% and 3.6% of the Company's
net revenue in fiscal 1995, 1994 and 1993, respectively. As of December 31,
1995, this business group had 17 full-time employees.
Locum Tenens
In January 1995, the Company formed a new business subsidiary, Quest
Staffing Solutions, that provides locum tenens, or temporary physician services,
to its already mature physician recruiting base. Quest offers physicians the
opportunity to practice medicine on a long-term or short-term basis throughout
the United States. This also affords the clientele the flexibility of not
bearing the long-term committed costs of full time physicians and paying on an
as needed basis. Quest is owned 80% by the Company and accounted for 2.1% of the
Company's revenue in 1995. As of December 31, 1995, this business group had 8
full-time employees.
Physician Practice Management Services
The Company has recently made a strategic decision to market its contract
management discipline in a market place that recent publications put at
approximately $200 billion. The Company's physician practice management group is
focusing its efforts in the area of hospital owned practices. The Company feels
that its core
<PAGE>
competencies of physician recruiting and contract management services place it
uniquely in this emerging market. The group had no contribution to revenue in
1995 and had 4 full-time employees as of December 31, 1995.
Pain Treatment Operations
Historically, the Company operated outpatient medical/surgical centers
that specialized in pain management and the multi-disciplinary treatment of
chronic pain. The Company offered comprehensive medical services at the pain
treatment centers for the treatment of pain with specialists practicing in
anesthesiology, orthopedics, neurology, physical medicine and rehabilitation and
psychology. The Company discontinued the operations of these centers in the
first quarter of 1995. In December 1995, the Company sold the discontinued pain
treatment centers to the senior management of the pain treatment operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
Competition
There are a number of other companies which provide contract staffing services
to hospital departments on a local or regional basis and the Company has several
major competitors. The Company is affected by significant competition in the
market for medical billing and collection services, which are an integral part
of the Company's hospital and clinic-based contract anesthesiology business and
are provided by many firms both regionally, nationally and locally. The Company
must also compete with the traditional structure of hospital specialty
departments for satisfying staffing, scheduling and administrative needs of
hospital-based physicians and with professional search firms who provide
physician recruiting services. While management believes the Company is the only
provider of an integrated hospital operating room system, the Company must
compete with a large number of software vendors who provide systems with
billing, charting, scheduling and other capabilities to the hospital. Management
believes that the competition will continue to be based primarily upon the
quality and reliability of services provided, the cost of providing the services
and the reduction in administrative expenses experienced by the purchaser.
Government Regulation
Physicians and other healthcare provider's practices are highly regulated at
both state and federal levels and are subject to healthcare reform measures
being considered by Congress and State legislatures. Several of the alternatives
being considered contain provisions intended to control public and private
spending on healthcare and are funded in part by reductions in payments by
federal healthcare programs (primarily Medicare and Medicaid) to providers such
as hospitals and physicians. Given the uncertainty about the final content and
timing of the implementation of such reforms, it is difficult to predict the
impact adoption may have on the operations of the Company or the relationship it
has with its independent contractors. One measure which is already in use is a
new system of Medicare reimbursement for medical services (including anesthesia
services) which is based on relative value fee schedules. The purpose of this
system of reimbursement, known as "Resource Based Relative Value Scale"
("RBRVS") reimbursements, is to reallocate medical reimbursement among medical
specialties. Under the final regulations relating to the RBRVS fee structure,
the aggregate payments from Medicare to anesthesiologists may be reduced
slightly in each year through 1996, subject to regional variation.
Professional Liability Insurance
The Company maintains professional liability insurance in amounts deemed
appropriate by management based upon historical claims and the nature and risks
of the business. The Company's policy provides insurance coverage for all
claims reported during the policy period ("claims-made basis"). In the past,
the Company's independent contractor physicians were not required to be covered
under the Company's policy, although approximately two-thirds of the Company's
independent contractor physicians at December 31, 1995 have elected to have such
coverage. If a physician chooses to obtain individual coverage, the Company
reimburses the physician for the cost of such policy. The Company's
professional liability insurance provides coverage, subject to policy limits, in
the event the Company is held liable as a defendant in a lawsuit against an
independent contractor physician or hospital, as well as for legal fees incurred
in defending any such lawsuit. The most significant source of potential
liability in this regard would be claims of negligence on the part of healthcare
professionals contracting with the Company. If such healthcare professionals
were deemed to be employees or agents of the Company in the
<PAGE>
practice of medicine, the Company could be held liable for any medical
negligence of such healthcare professionals. Furthermore, the Company could be
held liable for negligence regardless of the nature of the relationship between
the Company and its contracted healthcare professionals if the Company were
deemed negligent in selecting or retaining such healthcare professionals. Most
of the Company's hospital contracts contain Company undertakings to ensure that
services provided by its physicians and CRNAs conform to certain generally
accepted standards of the anesthesiology profession.
Employees and Independent Contractors
As of December 31, 1995, the Company and its subsidiaries had 112 full-time
employees. None of the Company's employees is represented by a labor union and
the Company believes its relations with its employees are good. In addition to
its employees, at such date the Company had contractual relationships with 107
physicians and 53 CRNAs.
ITEM 2: PROPERTIES
The Company leases all of its facilities pursuant to leases with unaffiliated
lessors. During November 1994, the Company relocated its corporate headquarters
in Atlanta, Georgia, occupying approximately 22,000 square feet of space,
providing for current annualized rent of approximately $328,000. This space is
leased under an agreement that expires at the end of 1999. Prior to this, the
Company occupied 40,000 square feet of space pursuant to a lease with an
unaffiliated lessor with annualized rent of approximately $560,000.
ITEM 3: LEGAL PROCEEDINGS
In April and May 1995, the Company issued an aggregate of 500,000 shares of its
common stock to two corporations affiliated with a California physician in
return for promissory notes from these corporations aggregating $1 million. The
notes were due on April 30 and June 30, 1995 and were guaranteed by the
physician. In June 1995, the Company received information that the physician
had pledged the 500,000 shares to a broker/dealer to secure financing and that
the broker/dealer asserted title to the shares pursuant to the pledge. The
Company instructed its transfer agent not to permit a transfer of the shares.
The $1 million in promissory notes guaranteed by the physician have not been
paid and on August 28, 1995 the Company filed a civil action against the
physician and his related corporations for default under the note agreements and
related guaranties. The physician, on December 22, 1995, filed a cross-
complaint against the Company for, among other things, fraud and breach of
contract. On April 9, 1996, the broker/dealer filed legal action against the
physician and his related corporations for fraud and securities fraud,
respectively, and against the Company for certain violations of the related
state's Uniform Commercial Code. There is no assurance, however, that the
Company will be able to collect the notes in whole or in part. Certain facts
and events, in the near term, could change the Company's current valuation that
the stock subscription receivable is collectible.
In April 1995, Texas NPI, P.A. ("Texas NPI"), an affiliate of the Company, filed
a civil action against a physician of the practice seeking damages for breach of
contract, breach of fiduciary duty and fraud. The action was filed in State
Court in Dallas, Texas. In May 1995, the physician filed a counterclaim against
Texas NPI, the Company, another affiliate of the Company and two executive
officers of the Company. The counter claim seeks damages in excess of $650,000.
Any liability resulting from this litigation was assumed by Pain Net as part of
the sale of the pain treatment operations. In the first quarter of 1996, the
Company and Pain Net settled the lawsuit for $300,000. In exchange for a
promissory note the Company advanced $300,000 to Pain Net to fund the
settlement. The settlement has been reflected in the Company's discontinued
operations in 1995. Repayment of the note from Pain Net will be reflected as
income when received.
During the fourth quarter of 1994, the Company filed in the Superior Court of
the State of California, County of Los Angeles, an action against certain
workers' compensation insurers and administrators seeking $123.0 million in
compensatory damages claiming abuse of process, intentional interference with
contractual and prospective economic relations, negligent interference with
contractual and prospective economic relations and unfair business practices,
which led to NPI's termination of pain management services to new patients
covered by the slow-paying
<PAGE>
California litigated workers' compensation system insurance carriers. Certain
of the defendants in the lawsuit have filed cross complaints seeking
restitution from the Company, its healthcare subsidiaries and their associated
medical groups for funds previously paid to the medical groups and other
damages. Although there can be no assurances, based upon the facts and
circumstances known to date, in the opinion of management, final resolution of
this matter will not have a material adverse effect on the Company's financial
condition or results of operations.
In December 1994, Hermes Systems S.A. commenced an arbitration proceeding
against the Company in the Belgian Centre for the Study and Practice of National
and International Arbitration. Hermes sought to recover $1,802,380, plus
interest, for computer software and related hardware allegedly purchased or
allegedly required to be purchased by the Company pursuant to a distribution
agreement between the Company and Hermes. The Company interposed defenses to
the claims asserted by Hermes and, in turn, alleged that Hermes has breached the
agreement. In the first quarter of 1996, Hermes was awarded damages against the
Company and as a result the Company recorded a $490,000 reserve in the fourth
quarter of 1995. The Company filed an appeal of the award in Georgia but there
is no assurance that the Company will obtain any relief from the appeal.
The Company contracts with physicians and other healthcare professionals to
fulfill certain of its contractual obligations to clients. Consistent with the
long-standing recognized practice of a significant segment of the healthcare
industry, the Company considers these professionals to be independent
contractors for income tax purposes. In the event of a proposed change in this
classification through regulatory challenge, management, based on the advice of
counsel, believes that certain "safe harbor" relief is available. In the event
of a determination that the healthcare professionals under contract to the
Company are employees, the Company may be subject to retroactive taxes and
penalties.
The Company is subject to claims and legal actions by patients and others in the
ordinary course of business. The Company maintains professional liability
insurance which is limited to patient claims reported during the policy period.
A liability is recorded for estimated losses related to unreported patient
claims, which is included in other current liabilities in the accompanying
consolidated balance sheets. In the opinion of management, such liability is
sufficient to cover any such unreported patient claims, and the amount of
potential liability with respect to other legal actions will not affect the
financial position or results of operations of the Company.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the quarter ended December 31, 1995, there were no matters submitted to a
vote of security holders.
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
From March 4, 1992 through April 9, 1996 the Company's common stock traded on
the National Market System ("Nasdaq") under the symbol ALPS, however, on April
9, 1996, the Company was notified by the Nasdaq Review Committee that since the
Company did not meet the Nasdaq minimum net worth and minimum closing bid price
requirements, the Company's common stock would no longer be traded on the Nasdaq
National Market System. Effective April 10, 1996, the Company's common stock
began trading on the OTC Bulletin Board utilizing the same symbol, ALPS. At
March 14, 1996, there were approximately 3,200 shareholders of record of the
Company's common stock. The following table sets forth, for the periods
indicated, the high and low sale prices for the Common Stock as reported by the
Nasdaq National Market.
<TABLE>
<CAPTION>
Fiscal 1994 High Low
- ----------- ------ ------
<S> <C> <C>
First Quarter (ended March 31, 1994) $4.63 $2.38
Second Quarter (ended June 30, 1994) 2.75 1.13
Third Quarter (ended September 30, 1994) 4.00 1.25
Fourth Quarter (ended December 31, 1994) 3.25 1.75
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Fiscal 1995
- -----------
<S> <C> <C>
First Quarter (ended March 31, 1995) $2.63 $1.00
Second Quarter (ended June 30, 1995) 2.44 0.94
Third Quarter (ended September 30, 1995) 1.94 1.13
Fourth Quarter (ended December 31, 1995) 1.63 0.66
</TABLE>
The Company has never declared or paid cash dividends on its common stock and
does not anticipate paying cash dividends in the foreseeable future. The
Company currently intends to retain all earnings, if any, for use in the
expansion of the Company's business. The payment of dividends, if any, in the
future with respect to the Company's common stock is within the discretion of
the Board of Directors and will depend on the Company's earnings, capital
requirements, financial condition and other relevant factors.
<PAGE>
ITEM 6: SELECTED FINANCIAL DATA
The selected financial data is presented below for the five years ended
December 31, 1991 through 1995. The data should be read in conjunction with
the financial statements, related notes and other financial information
contained herein.
(000s omitted except for per share data, %'s and ratios)
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Summary of Operations
Net revenue $57,607 $64,775 $68,168 $58,813 $40,546
Operating income (loss) (a) (4,187) 1,881 (10,172) 2,609 1,318
Income (loss) before income taxes (a) (7,676) 629 (9,711) 4,276 1,502
Income (loss) from continuing operations (a) (8,518) 1,124 (7,128) 2,566 902
Income (loss) from discontinued operations (b) 1,790 (11,571) (24,117) -- --
Loss from sale of discontinued operations (c) (12,401) -- -- -- --
-------- -------- -------- ------- -------
Net income (loss) ($19,129) ($10,447) ($31,245) $ 2,566 $ 902
======== ======== ======== ======= =======
Net income (loss) per common share:
Continuing operations ($0.62) $0.11 ($0.81) $0.30 $0.14
Discontinued operations (b) (0.77) (1.10) (2.76) -- --
-------- -------- -------- ------- -------
Total net income (loss) ($1.39) ($0.99) ($3.57) $0.30 $0.14
======== ======== ======== ======= =======
Weighted average common shares outstanding 13,727 10,572 8,759 8,564 6,114
As a Percent of Net Revenue - Continuing Operations
Operating income (loss) (7.3) % 2.9 % (14.9) % 4.4 % 3.3 %
Income (loss) before income taxes (13.3) % 1.0 % (14.2) % 7.3 % 3.7 %
Net income (loss) (14.8) % 1.7 % (10.5) % 4.4 % 2.2 %
Percent Change From Prior Year - Continuing Operations
Net revenue (11.1) % (5.0)% 15.9 % 45.1 % 91.0 %
Operating income (loss) (322.6) % 118.5 % (489.9) % 98.0 % 125.7 %
Income (loss) before income taxes (1,320.3) % 106.5 % (327.1) % 184.7 % 273.6 %
Net income (loss) (857.8) % 115.8 % (377.8) % 184.5 % 143.8 %
Balance Sheet Data
Working capital ($17,905) ($7,607) ($6,937) $23,643 $2,435
Total assets $9,388 $21,537 $35,282 $47,878 $13,898
Long-term obligations $1,637 $1,904 $661 $102 $1,098
Stockholders' investment ($14,828) $1,889 $7,139 $37,523 $3,043
Operating Ratios
Current ratio 0.2:1 0.6:1 0.7:1 3.5:1 1.3:1
Total borrowings to stockholders' investment (d) -- 4.1:1 1.6:1 0.0:1 1.1:1
</TABLE>
(a) Includes nonrecurring items totaling $6.0 million (pretax) in 1993.
(b) Includes (1) an extraordinary gain on the early extinguishment of debt of
$390,000, a loss provision of $3.6 million to adjust to the estimated value
of the Pain Treatment operations and a writedown of accounts receivable of
$8.4 million in 1994, and (2) a $20.0 million charge for the termination of
services to a significant payer category in 1993. See Note C.
(c) In 1995, the Company sold its pain treatment operations for $2.3 million
cash and $12.5 million in promissory notes. The Company fully reserved the
notes in 1995 due to the highly leveraged structure of the acquiring
company and recorded a $12.4 million loss on the sale. The notes will be
paid by the future operations of the acquiring company and will be recorded
as revenue when received.
(d) In 1995, the Company's Stockholders' Equity was a retained deficit.
<PAGE>
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Overview
Historically, the Company's principal business activity has been it's contract
anesthesia division, which accounted for approximately 95% of the Company's net
revenues in 1995. As discussed in detail below in "Recent Developments" the
Company intends to sell this division. This will mark the consummation of the
shift of the Company's core business from contract anesthesia services to
providing other hospital related services including hospital information
services, physician recruiting and staffing services, locum tenens services and
physician practice management services. The Company began operations in 1988. In
late 1993 and prior years, the Company concentrated on providing contract
management services to hospital anesthesiology departments and offered physician
recruiting services to hospitals for all physician specialties. In late 1993,
while continuing to offer and expand the services previously mentioned, the
Company decided to shift its marketing focus from contract anesthesia services
to the development and management of integrated healthcare delivery networks
primarily in small urban areas. Given this broader definition of the market to
which the Company offered its hospital information services, recruiting and
staffing services, locum tenens and physician practice management services, the
Company changed its name in 1994 to Allegiant Physician Services, Inc. from
Premier Anesthesia, Inc.
Effective June 1, 1996, and subject to the rescission rights described below,
Allegiant Physician Services, Inc. (the "Company") transferred substantially all
of its assets (the "Transaction") to Anesthesia Solutions, Inc. ("ASI"),a new
company. The Transaction will be rescinded if the requisite shareholder approval
of the Transaction is not received by October 1, 1996. The assets to be sold in
the Transaction include all of the Company's anesthesia contracts, physician and
nurse contracts, office furniture and computer equipment used in the contract
anesthesia business.
The consideration received in the Transaction was a Promissory Note, dated June
1, 1996, (the "Note") by ASI in favor of the Company, in original principal
amount of $16.0 million, with interest equal to 9% per year. The Note will be
reduced by certain liabilities assumed by ASI totaling approximately $12
million. The Agreement requires interest only payments on the Note to be made
for the first six months commencing July 1, 1996, and monthly principal payments
of $500,000 starting January 1, 1997, increasing to $1,500,000 per month
beginning July 1, 1997, and to be made thereafter until the Note is paid in
full. The Note is secured by 2,750,000 shares of EquiMed, Inc., $.0001 par
value, common stock. An additional sale premium up to $9 million will be paid by
ASI if the provisions of an earn-out agreement are realized by ASI within twelve
months.
In accordance with the Agreement, the Transaction must be approved by the
Company's shareholders by October 1, 1996. In the event that the Transaction is
not approved by the shareholders the Transaction will be rescinded and the
Company will pay ASI, or ASI will pay the Company, as the case may be, an amount
necessary to place the respective parties in the financial positions at May 31,
1996, as if the transfer had not been made on June 1, 1996.
Historically, the Company also operated medical/surgical centers specializing in
the multi-disciplinary treatment of chronic pain. The Company discontinued all
pain treatment operations in 1994. The Company evaluated the historical trend of
payments from the insurance carriers, the length of time in the payment cycle
and the cost of collection related to receiving these payments. Under these
circumstances, the Company determined that it was in the best interests of the
stockholders to discontinue all operations related to its pain treatment
operations. As a result, the Company recorded a $12.0 million charge to 1994
earnings, of which $8.4 million provided for a write down of accounts receivable
and a provision of $3.6 million to adjust the estimated net realizable value of
the assets of the pain treatment operations. In December 1995, the Company sold
its pain treatment operations to Pain Net, Inc. (Pain Net), a company formed and
owned by former members of the senior management of the Company's discontinued
pain treatment operations, for $2.3 million cash paid at closing and $12.5
million in two promissory notes. The notes earn interest at 12% a year and are
collateralized by the patient receivables of Pain Net. Pain Net will repay the
notes from future operations. The Company expects to fully collect these notes,
however, the repayments will be reflected as income when received due to the
highly leveraged structure of Pain Net.
<PAGE>
RESULTS OF CONTINUING OPERATIONS
Unless otherwise noted, the following discussion of consolidated results of
operations relates only to continuing operations: (1) hospital anesthesia
contract services, which will be discussed more generally as "Contract Services"
in order to reflect the inclusion of those services provided to departments
other than anesthesiology, and (2) "Other Operations", which includes hospital
information systems; physician recruiting and staffing services; locum tenens
services; and physician practice management services.
1995 Compared to 1994
Net revenue decreased $7.2 million or 11% to $57.6 million in 1995 compared to
$64.8 million in 1994. This decrease was due to the termination of nine
anesthesia contracts in 1995. The provision for bad debt expense increased to
17% of net revenue in 1995 compared to 13% in 1994. Contract labor and other
direct expenses remained proportionate to net revenue at 71% due to
restructuring contracts with hospitals and physicians to make the physician cost
component more of a variable expense rather than a fixed expense in relation to
net revenue. Gross margin as a percent of revenue decreased to 12.1% in 1995
compared to 16.6% in 1994, due to an increase in the provision for bad debts of
$1.7 million from 1995 compared to 1994, resulting from a deterioration in the
Company's patient receivables.
Operating expenses increased $2.3 million or 25.8% to $11.1 million in 1995
compared to $8.9 million in 1994. Salaries and benefits increased $645,000 or
12.5% in 1995 compared to 1994. Other expenses increased $1.6 million or 44.1%
in 1995 compared to 1994. These increases were a result of the Company
expanding its marketing and development efforts for its hospital information
systems, its locum tenens services, and its newly organized physician practice
management division. In addition, the Company received an unfavorable ruling
in an arbitration dispute with a vendor relating to one of its hospital
information system products for $597,000, including legal fees.
Interest expense increased 163% or $2.2 million to $3.5 million compared to $1.3
million in 1994. This resulted from additional borrowings including
approximately $5.2 million required to fund the working capital needs of the
discontinued pain treatment operations. Also, the Company incurred interest
expense as a result of additional borrowings needed to expand the efforts of
marketing and developing its hospital information systems, its locum tenens
services, and its newly organized physician practice management division.
The Company's deferred tax asset increased from approximately $18.6 million in
1994 to $25.0 million in 1995 primarily as a result of the Company's provision
to fully reserve the Pain Net notes received from the sale of the Company's
discontinued pain treatment operations. Based on uncertainties associated with
the future realization of the deferred tax asset in 1995 the Company increased
the deferred tax valuation allowance to $25.0 million in 1995 from $16.9
million in 1994, reducing its net deferred tax asset balance to $0, representing
the uncertainty that future tax obligations would be generated from planned
earnings after 1995. In 1995, the Company recognized a tax benefit of $78,000
for the state income tax refunds related to prior years, for which a valuation
allowance had been established. At December 31, 1995, the Company had an
estimated consolidated net operating loss carryforward of $25.5 million which
expires in years beginning in 2006 through 2009.
In the fourth quarter of 1995, the Company sold its pain treatment operations
Pain Net. Terms of the sale were $2.3 million in cash and $12.5 million in
promissory notes. Due to the highly leveraged structure of the pain treatment
operations the Company fully reserved the promissory notes and recorded a $12.4
million loss, or $.90 per share, from the sale of discontinued operations.
Payments on these notes will be provided from future operations of the acquiring
company and will be reflected as revenue when received. Losses from discontinued
operations were ($10.6) million or ($.77) per share in 1995 compared to ($11.6)
million or ($1.10) per share in 1994, which included a provision of $3.6 million
to adjust to the estimated net realizable value of the pain treatment operations
and a writeoff of approximately $8.4 million of pain treatment patient accounts
receivable.
The Company's earnings per share ("EPS") from continuing operations decreased to
a loss of $.62 per share in 1995 from earnings of $.11 per share in 1994.
Weighted average shares outstanding used to compute earnings per share were
higher in 1995 than in 1994 due primarily to private placements of approximately
1.8 million shares of registered and unregistered common stock. In addition, the
Company issued 500,000 shares of its common stock to two affiliated corporations
in California for promissory notes aggregating $1.0 million.
<PAGE>
1994 Compared to 1993
Net revenues decreased $3.4 million or 4.9% in 1994 compared to 1993 due to a
shift in revenue mix in the Company's contract anesthesia division from higher
reimbursement payors toward lower reimbursement payors such as Medicare,
Medicaid, Health Maintenance Organizations ("HMOs") and Preferred Provider
Organizations ("PPOs"), and further compression of their already low
reimbursement rates despite a 12.1% increase in the number of anesthesia cases
performed, a 9.2% increase in the number of physicians managed, and a 2.7%
increase in the number of cases per physician.
Gross margin increased $1.5 million or 16.6% in 1994 compared to 1993 due to a
$4.8 million or 9.4% reduction in contract labor and other direct expenses in
1994 compared to 1993. The provision for bad debt expense as a percent of net
revenue was 12.5% compared to 11.7% in 1994 and 1993, respectfully. The 1994
operating income was achieved through an improved gross margin as a percent of
net revenue and a $4.5 million reduction in operating expenses (excluding the
effect of the 1993 non-recurring charges discussed above). The primary reason
for the improved gross margin as a percent of revenue was an ongoing emphasis on
enhancing Contract Services' profitability by restructuring contracts with
hospitals and physicians to make the physician cost component of those contracts
more of a variable rather than fixed expenses in relation to net revenue. Losses
in 1993 relating to Contract Services were attributable to higher overhead costs
incurred to handle a higher level of new contract activity that never
materialized, and to certain unprofitable contracts that have subsequently been
restructured or terminated. The significant reduction in Company-wide operating
expenses in 1994 was directly attributable to the fourth quarter of 1993
restructuring activities which included a substantial work force reduction and a
related reduction in facilities expense.
The significant improvement in operating income in 1994 compared to 1993 was
reduced by the $1.7 million increase in net interest expense. The majority of
this increase was a result of the Company's financing of the pain treatment
operations by taking on an additional $11.1 million in debt. In addition, in
1993, the Company generated about $591,000 of interest income from short-term
investments. Such short-term investments were exhausted in financing the buildup
of slow-paying pain treatment accounts receivable in California during 1993.
Based on uncertainties associated with the realization of the deferred tax
asset, the Company provided a deferred tax valuation allowance of $16.9 million
at December 31, 1994. However, the Company recognized a $495,000 income tax
benefit related to larger than anticipated refund claims for prior years' income
taxes paid and the realization of previously reserved net deferred tax assets
based on a higher than originally estimated income tax obligation generated from
future earnings.
Company's earnings per share ("EPS") increased to $.11 per share in 1994 from a
loss of $.81 per share in 1993, which included significant non recurring
charges. The 1994 EPS was achieved through improved operation income and reduced
income tax expenses, despite a 5.0% decrease in net revenue, a $1.7 million or
372% increase in net interest expense and a 20.7% increase in the weighted
average number of shares outstanding.
EPS in 1993 included non recurring items totaling $6.0 million (pretax) relating
to the settlement of litigation ($2.0 million) and a restructuring charge ($4.0
million). The 1993 EPS effect of each of these items, net of an income tax
effect of 38%, was ($.14) for the settlement of litigation and ($.28) for the
restructuring charge.
Weighted average shares outstanding used to compute earnings per share was
higher in 1994 than in 1993 due to private placements of approximately 2.1
million shares of unregistered common stock in the fourth quarter of 1993 and at
various times in 1994 and the conversion of $1.0 million of promissory notes
payable to the Company's Chairman, Chief Executive officer and President into
400,000 shares of unregistered common stock at $2.50 per share during May 1994.
Such conversion was approved by the Company's stockholders at their annual
meeting in May 1994.
<PAGE>
Impact of Recently Issued Accounting Standards
In March 1995, the FASB issued Statement No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which
requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The Company will adopt Statement
121 in the first quarter of 1996 and, based on current circumstances, does not
believe the effect of adoption will be material.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation," establishes accounting and reporting standards for stock based
employee compensation plans. As permitted by the standard, the Company expects
to continue to account for such arrangements under APB Opinion No. 25.
Accordingly, adoption of the standard will not affect the Company's results of
operations or financial position.
Liquidity and Capital Resources
The Company's cash balance at December 31, 1995 was approximately $1.8 million
compared to $267,000 at December 31, 1994. The increase was due primarily to a
Federal Income Tax refund received in 1995 of approximately $706,000 and the
proceeds received from the private placements of the unregistered common stock
of $3.2 million. Cash flows from continuing operations decreased $6.7 million
between years due to the significant reduction in hospital anesthesia contracts
and an increase in operating expenses as a result of increased efforts to
develop and market its hospital information systems, locum tenens services, and
its newly organized physician practice management division.
The Company entered into an accounts receivable funding program with a private
healthcare accounts receivable finance company during the first quarter of 1994
and has continued that arrangement to date. The Company has found it necessary,
from time to time, to call on its principal financing company to provide
additional cash resources beyond its contractual commitment.
During 1995, the Company was able to meet its current working capital
obligations, despite the continued funding needs of the discontinued pain
treatment operations. However, with the sale of the pain treatment operations in
December 1995, the Company no longer must meet that commitment. Total funding
provided by the Company to the pain treatment operations amounted to over $6.7
million in 1995.
As described above, the Company executed an Asset Purchase Agreement with ASI
providing for the sale of the Company's contract anesthesia operations effective
June 1, 1996. The sale is subject to shareholder approval and will be voted upon
by the shareholders at the Company's 1996 annual meeting. The contract
anesthesia division accounted for approximately 95% of the Company's operations
in 1995, and consequently the future cash flows and capital resources of the
Company should be dramatically impacted by the sale. The contract anesthesia
division provided $3.8 million in net cash flows during 1995. Although cash
contributions from the contract anesthesia division have decreased in recent
years, the sale of this division will have immediate liquidity benefits to the
Company. The agreement with ASI provides that upon consummation of the sale, ASI
will assume $7.5 million in short term debt from the Company's principal lender.
ASI will assume approximately $4.5 million of other current obligations. The
Company believes that this reduction of approximately $12.0 million in working
capital requirements will give the Company a more favorable working capital
position. The reduction in short-term debt translates into a monthly savings of
approximately $75,000 in interest costs plus a cash inflow of $30,000 from
interest income on the promissory note from ASI. In addition, the Company will
also be paying down additional debt as collections on its accounts receivables
occur.
The principal services of the Company upon consummation of the sale of the
contract anesthesia division will be (i) hospital information services (ii)
physician recruiting and staffing services, (iii) locum tenens and (iv)
physician practice management services. Hospital information services and
physician practice management services, though mature as business concepts, are
essentially new business divisions and did not provide a contribution to revenue
in 1995. Locum tenens services is a relatively new business group, formed in
January 1995. Physician recruiting and staffing services is the business group
that formed the genesis of Premier Anesthesia, the contract anesthesia
management services division. Though all the remaining subsidiaries and business
groups of the Company are
<PAGE>
promising, only physician recruiting and staffing services and locum tenens
services have made significant revenue contributions. There can be no
assurances that these two divisions will be able to sustain the working capital
needs of the whole Company. Because of the nature of the sales transaction of
the contract anesthesia business, in accordance with the terms of the Asset
Purchase Agreement with ASI, the Company expects, upon consummation of the
sale, to receive a "primary note" from ASI estimated to be approximately $4.0
million. However, the Company will not benefit from the reduction in principal
of the balance of the primary note until seven months after the closing of the
sale. At that time, the Company will receive principal payments of $500,000 per
month for five months beginning on January 1, 1997, increasing to $1.5 million
per month on July 1, 1997, and continuing until the principal is paid off. In
addition, the Company may also be entitled to an additional "earn-out" on a
"variable note" based upon the profitability of the contracts sold. However,
this is an indeterminable dollar amount that will not be calculable until twelve
months after the closing. It cannot be assured that the benefits of the
earn-out will be realized.
The Company is dependent upon the continuation of the accounts receivable
financing arrangement it has with its primary financing company. Although the
Company expects the finance company to continue to provide additional funding to
the Company while the Company seeks to become cash flow positive, there is no
assurance that the amount of such funding will meet the Company's requirements
or that the Company will become cash flow positive. The company has identified
approximately $20 million of previously billed and uncollected accounts
receivable. Upon the Company re-billing and submitting these accounts
receivable, the finance company is committed to purchase these receivables, upon
acceptance, for approximately $10 million. Although the Company expects the
finance company to accept a majority of the re-billed accounts receivable, there
is no assurance of the ultimate accepted amount, if any.
The report of the Company's independent certified public accountants contains an
explanatory paragraph as to the Company's ability to continue as a going
concern. According to the report, the Company has experienced recurring losses,
a capital deficit, cash flow deficiencies and overfunding related to short-term
financing received by the Company that raise substantial doubt about the
Company's ability to continue as a going concern. In addition, the Company has
not complied with certain covenants of existing loan agreements. Certain of the
Company's assets might be worth substantially less than the amounts shown on the
Company's balance sheet if the Company is unable to continue as a going concern
and the financial statements have not been adjusted to reflect the outcome of
this uncertainty. There can be no assurance that future revenues will exceed
operating expenses to enable the Company to continue as a going concern.
To reduce the operating loss and improve operating cash flows, the Company
implemented or is in the process of implementing the following plan: (i) expand
its hospital information systems business by completing the enhanced version of
its specialized software system and market it to hospitals, outpatient and
ambulatory surgical centers; (ii) expand its physician recruiting and staffing
business by marketing the Company's ability to determine prospective hiring
needs and its ability to provide an array of recruiting and placement services
to large physician groups, hospitals and other healthcare providers; (iii)
continue to develop its locum tenens services by taking advantage of a
significant market need for temporary physicians; and (iv) develop its physician
practice management services by offering a broad range of management and
organizational services to physicians, hospitals, managed care organizations and
networks, and other healthcare providers, assisting in efforts to provide
services to patients, providers and payors.
The Company plans to reduce its current working capital needs and secure
additional financing until the Company is cash flow positive by selling the
Company's anesthesia contract business, which will reduce the Company's current
liabilities by approximately $12 million and by obtaining additional financing
from its primary financing company through the sale of accounts receivable
(described in detail above).
<PAGE>
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
Reports of Independent Auditors 18
Consolidated Statements of Operations
For the Years Ended December 31, 1995, 1994 and 1993 20
Consolidated Balance Sheets,
December 31, 1995 and 1994 21
Consolidated Statement of Stockholders' Investment (Deficit)
For the Years Ended December 31, 1995, 1994 and 1993 22
Consolidated Statements of Cash Flows,
For the Years Ended December 31, 1995, 1994 and 1993 23
Notes to Consolidated Financial Statements 24
</TABLE>
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
Allegiant Physician Services, Inc.
We have audited the accompanying consolidated balance sheet of Allegiant
Physician Services, Inc. (a Delaware corporation) and subsidiaries as of
December 31, 1995 and the related consolidated statements of operations,
stockholders' investment, and cash flows for the year ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Allegiant
Physician Services, Inc. and subsidiaries as of December 31, 1995, and the
consolidated results of their operations and their cash flows for the year ended
in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that Allegiant
Physician Services, Inc. will continue as a going concern. As more fully
described in Note B, the Company has incurred recurring operating losses and has
a working capital deficiency. In addition, the Company has not complied with
certain covenants of loan agreements. These conditions raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note B. The financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
Ernst & Young LLP
Atlanta, Georgia
April 19, 1996
except for Note O, as to which the date is
June 1, 1996
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Allegiant Physician Services, Inc.
We have audited the accompanying consolidated balance sheet of Allegiant
Physician Services, Inc. (a Delaware corporation) and subsidiaries as of
December 31, 1994 and the related consolidated statements of operations,
stockholders' investment, and cash flows for each of the two years in the
period ended December 31, 1994. 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 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.
Refer to Note B for significant events subsequent to the date of our original
report of April 24, 1995.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Allegiant Physician Services,
Inc. and subsidiaries as of December 31, 1994 and the results of their
operations and their cash flows for each of the two years in the period
December 31, 1994, in conformity with generally accepted accounting principles.
Atlanta, Georgia
April 24, 1995
(except with resprect to the matter in Note B,
as to which the date is April 19, 1996) Arthur Andersen, LLP
<PAGE>
ALLEGIANT PHYSICIAN SERVICES, INC. & SUBSIDIARIES
Consolidated Statements of Operations
- --------------------------------------------------------------------------------
(000s omitted except for per share data)
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Net revenue $ 57,607 $ 64,775 $ 68,168
-------- -------- --------
Direct costs:
Contract labor and other direct expenses 40,776 45,909 50,962
Provision for bad debts 9,869 8,121 7,991
-------- -------- --------
50,645 54,030 58,953
-------- -------- --------
Gross margin 6,962 10,745 9,215
Operating expenses:
Salaries and benefits 5,798 5,153 6,923
Other 5,351 3,711 6,464
Restructuring charge -- -- 4,000
Settlement of litigation -- -- 2,000
-------- -------- --------
Total expenses 11,149 8,864 19,387
-------- -------- --------
Operating income (loss) (4,187) 1,881 (10,172)
Interest (expense) income:
Interest expense (3,522) (1,339) (130)
Interest income 33 87 591
-------- -------- --------
Net interest (expense) income (3,489) (1,252) 461
-------- -------- --------
Income (loss) before income taxes (7,676) 629 (9,711)
Income tax (expense) benefit (842) 495 2,583
-------- -------- --------
Income (loss) from continuing operations (8,518) 1,124 (7,128)
Income (loss) from discontinued operations,
net of taxes 1,790 (11,571) (24,117)
Loss from sale of discontinued operations,
net of taxes (12,401) -- --
-------- -------- --------
Net loss ($19,129) ($10,447) ($31,245)
======== ======== ========
Earnings (loss) per share:
Continuing Operations ($0.62) $0.11 ($0.81)
Discontinued Operations (0.77) (1.10) (2.76)
-------- -------- --------
Net (loss) ($1.39) ($0.99) ($3.57)
======== ======== ========
Weighted average shares outstanding: 13,727 10,572 8,759
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
ALLEGIANT PHYSICIAN SERVICES, INC. & SUBSIDIARIES
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
(000s omitted)
<TABLE>
<CAPTION>
December 31,
---------------------
1995 1994
-------- --------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 1,784 $ 267
Accounts receivable, net of allowance for doubtful accounts
of $5,570 and $4,117 in 1995 and 1994, respectively 1,468 6,536
Deferred income taxes -- 1,626
Other receivables 251 787
Prepaid expenses 519 411
Other current assets 259 360
-------- --------
Total current assets 4,281 9,987
-------- --------
Net Assets of Discontinued Operations -- 7,092
Capitalized Software 1,894 1,248
Property and Equipment, net of accumulated depreciation of $1,641 and
$1,401 in 1995 and 1994, respectively 1,746 2,092
Long-term Notes Receivable 823 --
Other Assets 644 1,118
-------- --------
$ 9,388 $ 21,537
======== ========
LIABILITIES AND STOCKHOLDERS' INVESTMENT (DEFICIT)
Current Liabilities:
Short-term borrowings and current portion of long-term obligations $ 10,403 $ 4,221
Account payable 4,757 3,511
Accrued salaries and contract costs 2,589 3,416
Billings in excess of contract costs 1,548 2,999
Accrued expenses 2,890 1,891
Indebtedness to related party -- 1,556
-------- --------
Total current liabilities 22,187 17,594
-------- --------
Long-term Obligations:
Long-term indebtedness to related party 1,500 --
Long-term debt -- 899
Capital lease obligations 137 161
Deposits and other noncurrent liabilities -- 844
-------- --------
1,637 1,904
-------- --------
Commitments and Contingencies
Redeemable Common Stock 393 150
Stockholders' Investment (Deficit):
Common stock, $.001 par value, 50,000 shares authorized,
22,846 and 12,640 shares issued and outstanding in 1995 and 1994, respectively 23 12
Additional paid-in capital 43,801 40,401
Accumulated deficit (57,653) (38,524)
-------- --------
(13,829) 1,889
Less: Subscriptions receivable (1,000) --
-------- --------
(14,829) 1,889
-------- --------
$ 9,388 $ 21,537
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
ALLEGIANT PHYSICIAN SERVICES, INC. & SUBSIDIARIES
Consolidated Statement of Stockholders' Investment (Deficit)
- --------------------------------------------------------------------------------
(000s omitted)
<TABLE>
<CAPTION>
Common Stock Total
--------------------- Additional Stockholders'
Number Paid-In Accumulated Investment
of Shares Amount Capital (Deficit) (Deficit)
----------- -------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1993 8,693 $ 9 $34,346 $ 3,168 $ 37,523
Exercise of stock options 112 -- 142 -- 142
Private offerings of common stock 254 -- 719 -- 719
Net loss -- -- -- (31,245) (31,245)
----------- -------- ---------- ----------- -------------
BALANCE AT DECEMBER 31, 1993 9,059 9 35,207 (28,077) 7,139
Exercise of stock options 165 -- 122 -- 122
Private offerings of common stock 1,887 2 3,517 -- 3,519
Related party debt conversion 400 1 999 -- 1,000
Shares held as collateral for outstanding
indebtedness 851 -- -- -- --
Other 278 -- 556 -- 556
Net loss -- -- -- (10,447) (10,447)
----------- -------- ---------- ----------- -------------
BALANCE AT DECEMBER 31, 1994 12,640 12 40,401 (38,524) 1,889
Exercise of stock options 1 -- 2 -- 2
Private offerings of common stock 1,775 2 2,893 -- 2,895
Shares held as collateral for outstanding
indebtedness 7,818 8 (8) -- --
Common shares issued in conversion of debt 543 1 418 -- 419
Stock subscription receivable -- -- -- -- (1,000)
Other 69 -- 95 -- 95
Net loss -- -- -- (19,129) (19,129)
----------- -------- ---------- ----------- -------------
BALANCE AT DECEMBER 31, 1995 22,846 $23 $43,801 ($57,653) ($14,829)
=========== ======== ========== =========== =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
ALLEGIANT PHYSICIAN SERVICES, INC. & SUBSIDIARIES
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
(000s omitted)
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($19,129) ($10,447) ($31,245)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Restructuring charge -- -- 3,725
Settlement of litigation -- -- 2,000
Depreciation and amortization 1,115 631 778
Deferred income tax expense (benefit) 920 209 (3,630)
(Income) loss from discontinued operations (1,790) 11,571 24,117
Loss from sale of discontinued operations 12,401 -- --
Other -- 41 --
Changes in assets and liabilities, net of acquisitions:
Accounts receivable, net 7,702 9,954 (4,081)
Prepaid expenses and other 1,447 539 396
Other assets 574 26 (934)
Accounts payable (1,502) 278 2,427
Accrued expenses 103 (6,063) (1,193)
Deposits and other current liabilities (1,824) 1,474 1,610
-------- -------- --------
Net cash provided by (used in) continuing operations 17 8,213 (6,030)
-------- -------- --------
Net cash used in discontinued operations (5,222) (7,621) (18,880)
-------- -------- --------
Net cash provided by (used in) operating activities (5,205) 592 (24,910)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions, net (376) (658) (1,143)
Capitalized software (816) (492) (384)
Acquisitions -- -- (2,458)
Cash received from (paid for) short-term investments -- -- 15,910
Cash received from sale of Pain Treatment operations 2,226 -- --
Long-term note receivable to affiliate (823) -- --
-------- -------- --------
Net cash provided by (used in) investing activities 211 (1,150) 11,925
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit agreements 430 3,111 9,999
Repayments under line of credit agreements (2,666) (10,575) (300)
Related party borrowing -- 1,450 1,070
Net proceeds from issuances of common stock 1,857 3,641 861
Net borrowings (repayments) of debt and capital lease obligations 6,890 2,981 (81)
-------- -------- --------
Net cash provided by financing activities 6,511 608 11,549
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 1,517 50 (1,436)
Cash and cash equivalents at beginning of year 267 217 1,653
-------- -------- --------
Cash and cash equivalents at end of year $ 1,784 $ 267 $ 217
======== ======== ========
Cash paid during the year for:
Interest $ 3,046 $ 1,384 $ 155
======== ======== ========
Income taxes $ -- $ 75 $ 732
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
Note A - Business and Summary of Significant Accounting Policies
General and Basis of Presentation
Allegiant Physician Services, Inc., (the "Company") is a national provider of
management services to physicians, hospitals and other healthcare providers. The
Company provides anesthesiology services to hospitals through contracted
healthcare professionals; provides marketing, staffing, management information
systems and other services to physician groups; provides physician placement and
recruiting services to nonaffiliated healthcare institutions; and sells an
operating room information system. As further discussed in Note B, the
accompanying financial statements have been prepared assuming the company will
continue as a going concern which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business.
The consolidated financial statements include the accounts of the Company and
its subsidiaries. The Company's 20% owned investee, AHP Acquisition Company,
LLC ("AHP"), is accounted for under the equity method. The Company's 80% owned
investee, Quest Staffing Solutions, is consolidated with the accompanying
financial statements. All other subsidiaries are wholly owned. Significant
intercompany accounts and transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Revenue and Cost Recognition
Anesthesia service contract terms range from one to five years. Many contracts
provide for termination without cause by either party on 90 to 180 day notice
after specified noncancellable periods. Anesthesia contract revenue and direct
costs are recognized on the long-term contract basis of accounting over the
period in which the contracts are noncancellable by either party. Such revenue
and costs are recognized ratably over the noncancellable contract term as
measured by staffing level requirements to perform under the contract during
this period. Subsequent to the noncancellable period, revenue is recognized as
services are performed, and costs are expensed as incurred. Provisions for
estimated contract losses are made in the period such losses become apparent.
Revenue from anesthesia services is recorded net of contractual allowances.
Such allowances represent the difference between established rates for
services and the amounts allowed for such services by government sponsored
healthcare programs and other third- party payors. Government sponsored
healthcare programs such as Medicare and Medicaid comprise approximately 20% of
the Company's net revenue for 1995, 1994 and 1993.
Revenue from the recruiting and staffing of physicians is recognized when
services are performed. Revenue from placement fees is recognized when the
physician is accepted by the client.
Revenue from software and related hardware sales is recognized when the
software and related hardware are accepted by the customer and all significant
obligations have been fulfilled.
Direct costs include contract labor costs related to anesthesiologists,
certified registered nurse anesthetists, and other healthcare professionals;
bad debts; and other costs, including all costs associated with providing
patient care, direct recruiting and placement costs as well as software and
hardware costs.
The Company has insignificant amounts of services that are identified as
charity care.
Per Share Data
Earnings (loss) per share is based upon the weighted average number of shares
and the dilutive effect of common equivalent shares, such as stock options,
warrants and convertible preferred stock outstanding. The convertible
promissory notes held by Richard L. Jackson, Chairman, Chief Executive Officer
and President, and the related interest (see Note J) had an antidilutive effect
on earnings per share in 1995 and 1994 and are, therefore, excluded from the
<PAGE>
computation. In 1995 and 1994, the Company issued an aggregate of 8.7 million
shares of unregistered common stock as collateral to secure certain debt
obligations (see Note F). When these debt obligations are paid in full, the
applicable collateral shares will be returned to the Company. These shares are
included in the Company's outstanding common stock balance but are antidilutive
and are not included in the calculation of weighted average shares. The loss
per share is based upon the weighted average number of shares outstanding,
since the effect of stock options is anti-dilutive.
Impact of Recently Issued Accounting Standards
In March 1995, the FASB issued Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The Company will adopt Statement
121 in the first quarter of 1996 and, based on current circumstances, does not
believe the effect of adoption will be material.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock
Based Compensation," establishes accounting and reporting standards for stock
based employee compensation plans. As permitted by the standard, the Company
expects to continue to account for such arrangements under APB Opinion No. 25.
Accordingly, adoption of the standard will not affect the Company's results of
operations or financial position.
Cash Equivalents
The Company considers all highly liquid investments with original maturities of
less than three months from date of purchase to be cash equivalents.
Accounts Receivable
Estimated bad debts are charged to direct costs based on an evaluation of
potential uncollectible accounts. The provision considered necessary is based
on an analysis of current and past due accounts, collection experience in
relation to amounts billed and other relevant information. The allowance for
doubtful accounts represents the estimated uncollectible portion of accounts
receivable.
Capitalized Software
The Company, through its CINet subsidiary, capitalizes the costs of both
purchased and internally developed software to be subsequently marketed as
finished products. Such capitalized software will be amortized over the
estimated useful lives of the applicable finished products as the products are
made available for sale, with annual amortization equal to the greater of (1)
the amount that current gross revenues bear to the total of current and
anticipated future gross revenues for the product or (2) the straight-line
method over the remaining estimated economic life of the product, which
generally will be three years. At December 31, 1995, capitalized software
totaled $2.2 million, of which $1.8 million was purchased from or developed by
third parties, and $346,000 was internally developed. At December 31, 1994,
capitalized software totaled $1.2 million, of which $1.0 million was purchased
from or developed by third parties, and $193,000 was internally developed.
Amortization expense is included in other direct expenses in the accompanying
statements of operations and totaled $220,000 for 1995.
Property and equipment
Property and equipment are recorded at cost. Depreciation is computed using the
straight-line method over their expected useful lives from two to seven years
for furniture and equipment. The costs of assets held under capital leases are
amortized using the straight-line method over the shorter of the lease term or
the estimated life of the assets. Amortization of capital leases is included in
depreciation expense.
Cost in Excess of Net Assets Acquired
The cost in excess of net assets acquired ("goodwill") is being amortized over
periods ranging from 5 to 40 years. The carrying value of goodwill will be
reviewed if the facts and circumstances suggest that it may be impaired. If
this review indicates that goodwill will not be recoverable, as determined
based on the undiscounted cash flows of the entity acquired over the remaining
amortization period, the Company's carrying value of the goodwill will be
reduced by the estimated shortfall of cash flows. Goodwill as of December 31,
1995 and 1994 totaled $241,000 and $8.0 million, respectively, net of
accumulated amortization of $366,000 and $852,000, respectively. Substantially
all goodwill recorded during 1994 was related to Discontinued Operations (see
Notes C and D).
Reclassifications
<PAGE>
Certain reclassifications have been made to prior years' amounts to conform to
the 1995 presentation.
Note B - Going Concern and Management's Plan
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern; they do not include
adjustments relating to the recoverability of recorded asset amounts and
classification of recorded assets and liabilities.
The Company reported a net loss of $19.1 million for the year ended December
31, 1995 and has reported net losses in each of the two preceding fiscal years
aggregating an additional $41.7 million. As a result, the Company has an
accumulated deficit of $57.7 million and a total stockholders' deficiency of
$14.8 million as of December 31, 1995. Additionally, the Company's current
assets at December 31, 1995 amounted to approximately $4.3 million and current
liabilities were approximately $22.2 million, resulting in a working capital
deficiency of approximately $17.9 million and a current ratio of approximately
1:5. The Company had a cash flow deficiency of approximately $5.2 million from
its operating activities for the year ended December 31, 1995.
Included in current liabilities are debentures and promissory notes aggregating
$2.4 million with respect to which the Company has not complied with certain
covenants of the underlying loan agreements. Noncompliance with these covenants
permits the lender to accelerate the maturity of the debt upon given proper
notice. The lenders, however, have not notified the Company of their intention
to accelerate the maturity of the debt, but if they did the Company would
prepay the notes. If required to prepay the notes, the Company intends to seek
financing from the Company's purchaser of accounts receivable. There can be no
assurances that the financing company will provide funds for the Company to
prepay the note. Also included in current liabilities at December 31, 1995 is
approximately $6.5 million owed to the Company's purchaser of accounts
receivable. This amount is in excess of amounts permitted under the related
agreement and places the Company in default. However, the financing company has
continued to extend additional funding to the Company.
These conditions raise substantial doubt about the Company's ability to
continue as a going concern.
The Company plans to reduce its current working capital needs and secure
additional financing until the Company is cash flow positive through the sale
of the Company's anesthesia contract business which, if completed, will reduce
the Company's current liabilities by approximately $12 million and increase its
current assets by approximately $4.0 million (described in more detail in the
following paragraph) and by obtaining additional financing from its primary
financing company, which purchases the Company's healthcare accounts
receivable.
In the second quarter of 1996, the Company entered into a transaction to sell,
subject to shareholder approval, its anesthesia contract business (the
"Agreement") for $16 million in the form of a Promissory Note (the "Note"). The
Note will be reduced by certain current liabilities assumed by the purchaser
Anesthesia Solutions, Inc. ("ASI") totaling approximately $12 million. The
Agreement requires interest (9.0%) only payments for each of the first
six months commencing July 1, 1996, and monthly principal payments of $500,000
starting January 1, 1997, increasing to $1,500,000 per month beginning July 1,
1997, and to be made thereafter until the Note is paid in full. The Note is
guaranteed by ASI's principal stockholder, which guarantee is secured by
2,750,000 shares of EquiMed, Inc., $.0001 par value, common stock. An additional
sale premium up to $9 million will be paid by ASI if the provisions of an earn-
out agreement are realized by ASI within twelve months. However, it cannot be
assured that the benefits of the earn-out will be realized. In accordance with
the Agreement, the Transaction must be approved by the Company's shareholders by
October 1, 1996 or be subject to unwinding. There can be no assurances that the
sale will be approved by the shareholders and be consummated.
The Company plans to obtain growth and strategically position the Company to
take advantage of the growing healthcare industry by: (i) expanding its
hospital information systems business by marketing its specialized software
system to acute care hospitals, outpatient and ambulatory surgical centers;
(ii) expanding its physician recruiting and staffing business by marketing the
Company's ability to determine prospective hiring needs and its ability to
provide an array of recruiting and placement services to large physician
groups, hospitals and healthcare providers; (iii) developing its locum tenens
services by taking advantage of a significant market need for temporary
physicians; and (iv) developing its physician practice management services by
offering a broad range of management and organizational services to physicians,
hospitals, managed care organizations and networks, and other healthcare
providers, assisting in efforts to provide quality services to patients,
providers and payors.
<PAGE>
Although the results of these actions cannot be predicted, the Company believes
that the steps are appropriate and will help improve the operating results and
cash flows.
Note C - Discontinued Operations
In November 1993, the Company determined that its majority owned subsidiary,
National Pain Institute ("NPI"), could no longer continue to provide medical
services to patients seeking treatment as a result of disputed work related
injuries. The California Workers' Compensation system dramatically delayed the
payment for these services to such a significant extent that NPI could not
expect timely payment in part or in full within any reasonably calculable time
period. The delay in reimbursements created a significant ongoing monthly cash
requirement for the Company to finance the related accounts receivable. This
delay, as well as the failure of a financing arrangement for the initial sale
of and a multi-year facility to sell said receivables, forced the Company to
winddown the NPI operations and terminate the services to patients whose
reimbursements were subject to the California Litigated Workers' Compensation
system insurance carriers, which represented approximately 80% of NPI's patient
visits. As a result, the Company restructured its activities and recorded a
$20.0 million pretax charge in the fourth quarter of 1993. The major components
of the charge were accounts receivable contractual allowance and collection
costs, $13.2 million; abandoned facilities, leases and leaseholds, $2.5
million; severance payments, $1.8 million; and other expenses, $2.5 million.
Pain Relief Network ("PRN"), the Company's wholly owned subsidiary, was formed
to provide services, through its practice management relationship with its
medical providers, to patients from the private insurance sector, including
Medicare, and to injured workers who were not subject to the litigated workers'
compensation system. Even though PRN was not accepting patients with disputed
worker related injuries, PRN decided that to insure good quality medical care
and continuity to patients treated by NPI, they must continue to care for those
patients with disputed work injuries until such patients were determined by its
medical providers to be permanent and stationary ("straddle" patients). These
"straddle" patients were seen and discharged by PRN's medical advisors
primarily during the first half of 1994. The percentage of patients being
treated for work related injuries during 1994 decreased from 65% of all
patients treated in the first quarter to 25% in the fourth quarter.
The California Workers' Compensation system continued to undergo changes that
caused further delays in payment to medical providers. For example, during 1994
the Workers' Compensation Administrative Director issued a new and lower fee
schedule to be used by medical providers treating both litigated and non
litigated workers' compensation system patients. Due to confusion regarding
whether this fee schedule related to patients treated before its adoption,
insurance carriers either reduced the amount of their overall settlement
offers, delayed making settlement offers or refused to make offers entirely.
This left the medical provider with two options: (1) accept the reduced payment
offered by the insurance carrier without objection or (2) reject the payment
and wait for the injured worker's case to be settled or decided by the severely
overloaded administrative system. Both of these options created additional
costs to the medical providers by requiring the use of a staff of collectors to
make attempts at negotiating with insurance carriers under the first option, or
making appearances before the Administrative Court to represent the interests
of the medical providers under the second option. Additionally, the collection
percentages were adversely affected, resulting in the need for additional
reserves to record the receivables at their net realizable value.
During 1994, the lender under NPI's revolving credit facility, which funds
NPI's accounts receivable direct collection costs, completed an evaluation of
the underlying NPI accounts receivable collateral portfolio and agreed to
continue to fund the costs of the accounts receivable collection efforts from
monthly collections. However, during the third quarter of 1994, the lender did
not agree to advance additional moneys from these receivable collections to
cover any portion of the non-operating cash flow requirements, which
substantially reduced cash flow to the Company. In April 1995, the Company and
the lender signed a letter of intent for the sale of the portfolio of
receivables for $16.0 million in settlement of the underlying debt. Based on
conditions that existed at December 31, 1994, which included below expected
collections and collection percentages in the fourth quarter, the lawsuit filed
against insurance carriers in the fourth quarter (See Note H), the evaluation
of receivables by the lender, and the anticipated sale of receivables, the
Company established an $8.4 million reserve previously described to record the
portfolio at its estimated net realizable value. Effective June 30, 1995, the
Company sold the accounts receivable to the lender in satisfaction of the
outstanding debt. Under the terms of the agreement, the Company is entitled to
any amounts collected by the lender in excess of the outstanding balance,
accrued interest and applicable fees. In addition, if collections do not cover
the outstanding balance, accrued interest and applicable fees, the Company is
obligated to pay the finance company the lesser of the outstanding balance or
85% of any recovery received, net of legal expenses, by the Company pursuant to
the pending suit against the workers compensation insurers as discussed in Note
H - Commitments and Contingencies.
<PAGE>
The Company evaluated this information and the historical trend of payments
from the insurance carriers, the length of time in the payment cycle and the
cost of collection related to receiving these payments. The Company determined
that it was in the best interests of its stockholders to discontinue all
operations related to its pain treatment centers. As a result, the Company
recorded an $8.4 million write down of the NPI accounts receivable portfolio to
its estimated net realizable value, and a provision of $3.6 million to adjust
to the estimated net realizable value of the pain treatment operations in 1994.
On December 1, 1995, the Company finalized the sale of the pain treatment
operations to Pain Net, Inc., ("Pain Net") a company owned by former members of
senior management of the Company's discontinued pain treatment operations. The
Company received consideration of $14.8 million which consisted of $2.3 million
in cash and $12.5 million in notes receivable.
The assets sold totaled approximately $17.5 million consisting of $8.4 million
of accounts receivable and $7.3 million of goodwill. Certain liabilities
associated with the pain treatment operations were assumed by Pain Net and
totaled approximately $3.6 million. The remaining net assets of the
discontinued operations consists of $500,000 of accounts receivable and $1.2
million of liabilities and are included as part of the Company's continuing
operations' in 1995.
The Company fully reserved the notes receivable and recorded a loss on the sale
of discontinued operations of $12.4 million. Pain Net will repay these notes
from future operations. The Company fully expects to collect these notes,
however the repayments will be recorded as income when received due to the
highly leveraged structure Pain Net.
The notes received as consideration in the divestiture are comprised of a $6.5
million senior note, a $5.9 million senior subordinated note, and an $89,000
short-term note. Interest accrues at 12% per annum for each of the three notes.
Interest accrues and is payable monthly beginning April 1, 1996 on the senior
note ($6.5 million). All unpaid principal and interest is payable in full on
the earlier of December 1, 2000 or the effective date of an initial public
offering of Pain Net.
Interest on the senior subordinated note ($5.9 million) is payable in monthly
installments beginning on December 1, 1996. The principal and any accrued but
unpaid interest is payable in full on the earlier of December 1, 2000 or the
effective date of an initial public offering of Pain Net.
The following results of operations and financial position are attributable to
discontinued operations (000's omitted):
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- ------
<S> <C> <C> <C>
Results of operations:
Net revenue $ 12,251 $ 13,049 $ 23,822
Income (loss) from discontinued operations, net of taxes 1,790 (11,571) (24,117)
Loss from the sale of discontinued operations (12,401) -- --
Financial position:
Accounts receivable, net $ -- $ 20,836 $ 29,951
Costs in excess of net assets acquired, net -- 7,611 7,968
Property and other assets -- 2,410 10,459
Total liabilities -- (23,765) (37,336)
-------- -------- --------
Net assets of discontinued operations $ -- $ 7,092 $ 11,042
-------- -------- --------
</TABLE>
The income tax provision allocated to the loss from discontinued operations was
$0, $0 and $3.8 million at December 31, 1995, 1994 and 1993, respectively.
In 1995, 1994 and 1993, interest expense of $0, $783,000 and $89,000,
respectively, was allocated to discontinued operations to approximate the amount
of interest expense that would be reduced as a result of the sale of the pain
treatment operations.
<PAGE>
During the third quarter of 1994, the Company recognized an extraordinary gain
of $390,000, net of transaction costs, as a result of the early extinguishment
of $2.1 million of installment notes payable to one lender at a discount. This
gain is included in the loss from discontinued operations.
In the third quarter of 1994, the Company settled a lawsuit related to the
operations of NPI, requiring the issuance of 90,000 shares of the Company's
unregistered common stock, with put options valued at $150,000 exercisable by
the holder. On November 1, 1995, the Company issued an additional 25,000 shares
of the Company's unregistered common stock, with put options valued at $41,750,
to compensate for the Company's failure to register the shares by the date
specified in the agreement. The costs of this settlement were charged to the
Company's 1993 reserve for the termination of services to a significant payor
category. The shares have been classified as redeemable common stock and are not
included in the Stockholders' Investment (Deficit) but are included in the
weighted average shares outstanding calculation.
Note D - Acquisitions
In May 1995, the Company entered into a joint venture with Primary Concepts of
Fort Worth ("PCC") to form AHP Acquisition Company, L.L.C. ("AHP"), a
corporation 80% owned by PCC and 20% owned by the Company. Pursuant to a Stock
Purchase Agreement dated May 24, 1995, AHP purchased an established preferred
provider organization for $341,000, the net book value of the organization, from
funds advanced to AHP by the Company pursuant to a promissory note receivable
agreement. Under the terms of the note agreement, the Company may be required to
advance up to $1.0 million to AHP, with the aggregate of all loans outstanding
to be repaid by April 1998. Interest accrues monthly on the unpaid balance at a
rate of prime plus 1%. As of December 31, 1995, the Company had advanced AHP
$823,000 for working capital needs under the loan agreement. The Company will
serve as the management services organization for the new healthcare delivery
system by providing services such as marketing, staffing, management, billing
and collections and information systems. PCC will provide the management of
clinical care, and AHP will manage and expand the care provider network.
The Company acquired during February 1994, substantially all of the assets of an
outpatient surgery and pain treatment center located in Las Vegas, Nevada. The
acquisition, valued at $500,000 plus acquisition costs, was accounted for as a
purchase; there were no costs in excess of net assets acquired at the date of
acquisition. During October 1994, the Company terminated its agreement related
to this acquisition. There was no gain or loss associated with this disposition.
On July 31, 1993, the Company acquired the business and certain assets of both
Texas Pain Institute ("TPI"), a Dallas medical center that provides outpatient
pain management and anesthesia services, and Daniel Shalev, M.D., P.A., a pain
management professional association that services TPI, for approximately $3.5
million (of which $1.0 million was a note payable), including guaranteed earn-
out payments and acquisition costs. The acquisition was accounted for as a
purchase. The costs in excess of the net assets acquired of $3.3 million is
being amortized on the straight-line basis over 40 years. Effective December 1,
1995, the Company sold its pain treatment operations (see Note C - Discontinued
Operations).
Note E - Property and Equipment
The major classes of property and equipment are as follows (000 omitted):
1995 1994
----- ------
Furniture, fixtures and leasehold improvements $ 825 $1,194
Computer equipment 2,561 2,299
------ ------
3,386 3,493
Less accumulated depreciation 1,640 1,401
------ ------
Net property and equipment $1,746 $2,092
====== ======
Depreciation expense totaled $621,000, $508,000 and $499,000 in 1995, 1994 and
1993, respectively.
Note F - Short-Term Borrowings and Long-Term Debt
Continuing Operations
In February and March 1994, the Company entered accounts receivable funding
agreements with a private healthcare accounts receivable finance company. Under
these agreements, the finance company purchases with recourse and the
<PAGE>
Company sells, on a weekly basis, the Company's eligible healthcare accounts
receivable, net of contractual adjustments, collection reserves and subsequent
collections. In June 1995, the Company entered into a separate agreement with
this finance company with the same terms as previously noted. No gain or loss is
recognized on these transactions. The Company paid a 1.5% commitment fee and
pays interest at 9.5% per annum on the net outstanding purchased accounts
receivable balance until such accounts receivable are collected. The outstanding
balances of uncollected purchased accounts receivable under both agreements
totaled approximately $21.4 million and $12.6 million, net of amounts the
finance company withheld from the Company as reserves of approximately $5.1
million and $2.5 million, at December 31, 1995 and 1994, respectively. As of
December 31, 1995, the finance company has advanced to the Company an additional
$6.5 million. This additional funding represents funding in excess of the
contractual requirements of the accounts receivable funding agreements and is
secured by approximately 2.8 million of the Company's unregistered stock. This
additional funding places the Company in default of the contractual requirements
of the accounts receivable funding agreements. This amount has been classified
as short-term debt at December 31, 1995. In 1995 and 1994, the financing company
funded the Company $52.1 million and $52.0 million, respectively.
In March 1994, the Company entered into a line of credit agreement with a bank
which provides up to the lesser of $2.0 million or a specified percentage of
certain eligible receivables. In September 1994, the Company renewed this
agreement, and in October 1994, the Company's software subsidiary, CINet,
entered into a separate line of credit facility with the same bank which
provides up to the lesser of $1.0 million and a specified percentage of eligible
software sale receivables. Total outstanding borrowings under both facilities
cannot exceed $2.5 million and matured in August 1995. Interest on outstanding
borrowings accrues at the bank's prime rate plus 3%. The agreements require
compliance with certain financial and nonfinancial covenants. Outstanding
borrowings totaled approximately $0 and $2.2 million at December 31, 1995 and
1994, respectively. In March 1994, and in conjunction with establishing the
original $2.0 million line of credit, the Company issued to the bank warrants to
purchase 25,000 shares of the Company's unregistered common stock at $2.00 per
share. The warrants expire in April 1999. The Company has reserved 25,000 shares
of common stock for future issuance pursuant to these warrants.
Long-term debt at December 31, 1995 and 1994 consisted of the following (000
omitted):
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Secured promissory notes, secured by shares of the Company's
unregistered common stock, interest at prime plus 2%, 10.5%
at December 31, 1995, net of fees of $246,000, maturing in
1997 and 1998 $ 1,537 $ 867
Secured promissory note, secured by shares of the Company's
unregistered common stock, interest at 7%, maturing in 1996 500 500
Convertible debentures, interest at 8%, payable on demand 600 --
Convertible debentures, interest at 8%, maturing in 1997 300 --
Secured installment note matured in 1995 -- 1,141
Related party indebtedness (see note J) 1,500 --
Other 876 150
------- ------
5,313 2,658
Less current portion (3,813) (1,759)
------- ------
Total long-term debt from continuing operations $ 1,500 $ 899
======= ======
</TABLE>
Future maturities of long-term debt at December 31, 1995 are summarized as
follows (000 omitted):
<TABLE>
<S> <C>
1996 3,813
1997 1,500
1998 --
1999 and thereafter --
------
$5,313
======
</TABLE>
In the third and fourth quarter of 1995, the Company borrowed $750,000, less
discount fees of $60,000, in various convertible debentures from foreign
corporations. The loans accrue interest at 8% per annum and are convertible into
shares of the Company's common stock. The conversion price is based upon 75% of
the last five days average closing bid price. The debentures have been
classified as short-term as of December 31, 1995. At December 31, 1995, $150,000
<PAGE>
of the debentures had converted into 197,903 shares of common stock. In January
1996, the remaining $600,000 convertible debentures converted into 1,103,548
shares of common stock. As of December 31, 1995, the Company was in default of
certain covenants relating to these debentures.
Also during 1995, the Company borrowed $600,000, less discount fees of $83,000,
in various convertible debentures from foreign corporations. The loans accrue
interest at 8% per annum and are convertible into shares of the Company's common
stock. The conversion price was based on the lesser of (a) the closing market
price on the date of closing, or (b) 80% of the market price of the Company's
common stock on the date of conversion. At December 31, 1995, $300,000 of
debentures had converted into 345,029 shares of common stock. The remaining
$300,000 convertible debentures matures in December of 1997. As of December 31,
1995, the Company was in default of a certain loan covenant relating to these
debentures. These debentures have been classified as short-term by the Company
as of December 31, 1995. The Company prepaid the $300,000 convertible debenture
in the first quarter of 1996.
In September 1994, the Company signed a three-year promissory note agreement
with a financial broker to provide up to $2.0 million for working capital
purposes, as lenders' funds are available. No principal payments are required
for three years, but the Company may prepay the notes at any time at a premium
up to 15%. As of December 31, 1995, outstanding borrowings totaled $1.5 million,
net of additional fees of $246,000. Interest is payable monthly at the prime
rate plus 2%. The promissory notes are secured by 5.9 million shares of the
Company's unregistered common stock, of which 851,000 shares were issued in
1994, 3.8 million shares were issued in 1995, and 1.2 million shares issued in
the first quarter of 1996. The Company is required to provide the lender with
300% market value to loan balance coverage as determined at each month-end.
Events of default, which require cure by prepayment or otherwise within two
business days after notice of default, include, among other things, the untimely
payment of monthly interest and a drop in the Company's stock price below $0.62
per share. At December 31, 1995, the Company was in default because the
Company's common stock has been trading below $0.62 per share. The Company has
not been officially notified of this default which is required by the note
agreements. The Company has classified the notes as short-term borrowings.
In September 1994, the Company entered into a separate $1.2 million, 18% per
annum loan agreement, secured by certain accounts receivable due in January
1995, with the private healthcare receivables finance company mentioned above.
The proceeds from this loan and other funds were used to prepay at a $390,000
discount, net of transaction costs, installment notes payable of $2.1 million to
one lender (see Note C). In March 1995, the amount due under this agreement was
consolidated with the balance outstanding under the original accounts receivable
funding agreement as described above.
In April 1994, the Company borrowed $500,000 from one of its insurance carriers
to fund a portion of the legal settlement discussed in Note H. The loan, plus
interest at 6%, was payable in April 1995 and is collateralized by 350,000
shares of the Company's unregistered common stock. The Company and lender
restructured the agreement in April 1995, which as revised provides for a
maturity of April 1996 and interest of 7%.
The weighted average interest rate on the Company's short-term borrowings,
including long term debt reclassified to shout term, for the year ended December
31, 1995, was 12.75%.
See Note J for related party indebtedness.
Note G - Fair Value of Financial Instruments
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amount reported in the balance sheet for
cash and cash equivalents approximates its fair value.
Accounts receivable and accounts payable: The carrying amounts reported in the
balance sheet for accounts receivable and accounts payable approximates their
fair value.
Long-term notes receivable: The fair value of the Company's long-term notes
receivable is estimated using discounted cash flow analysis, based on estimated
interest rates for similar types of instruments.
<PAGE>
Long- and short-term debt: The carrying amounts of the Company's borrowings
under its short-term revolving credit arrangements approximated their fair
value. The fair value of the Company's long-term debt are estimated using
discounted cash flow analyses, based on the Company's current incremental
borrowing rates for similar types of borrowing arrangements.
The carrying amounts and fair values of the Company's financial instruments at
December 31 are as follows:
<TABLE>
<CAPTION>
1995 1994
------------------------------ -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 1,784 $ 1,784 $ 267 $ 267
Accounts receivable 1,468 1,468 6,536 6,536
Long-term notes receivable 823 823 -- --
Accounts payable (4,757) (4,757) (3,511) (3,511)
Short-term debt (10,403) (10,403) (5,777) (5,777)
Long-term debt (1,500) (1,500) (899) (899)
</TABLE>
Note H - Commitments and Contingencies
The Company leases office and clinic space, furniture, and medical equipment
under capital and operating leases. Rental payments on operating leases are
being expensed on a straight-line basis over the lives of the leases. Rental
expense under all operating leases (excluding non recurring and discontinued
items, and net of subleased amounts), was $697,000, $537,000, and $717,000
during 1995, 1994 and 1993, respectively.
Property and equipment include the following amounts for items under capital
leases (000 omitted):
<TABLE>
<CAPTION>
December 31,
-------------
1995 1994
----- -----
<S> <C> <C>
Property and equipment $ 367 $ 407
Less accumulated depreciation (113) (154)
----- -----
$ 254 $ 253
===== =====
</TABLE>
Future minimum lease payments under the capital leases and noncancellable
operating leases consisted of the following at December 31, 1995 (000 omitted):
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------- --------
<S> <C> <C>
1996 $ 215 $ 480
1997 111 429
1998 30 462
1999 20 436
2000 0 55
----- ------
Total minimum lease payments 376 $1,862
======
Less amount representing interest (72)
-----
Present value of minimum
lease payments, (including $167 classified as current) $ 304
=====
</TABLE>
In April and May 1995, the Company issued an aggregate of 500,000 shares of
common stock to two corporations affiliated with a California physician in
return for promissory notes from these corporations aggregating $1 million. The
notes were due on April 30 and June 30, 1995 and were guaranteed by the
physician. In June 1995, the Company received information that the physician had
pledged the 500,000 shares to a broker/dealer to secure financing and that the
broker/dealer asserted title to the shares pursuant to the pledge. The Company
instructed its transfer agent not to
<PAGE>
permit a transfer of the shares. The $1 million in promissory notes guaranteed
by the physician have not been paid and on August 28, 1995 the Company filed a
civil action against the physician and his related corporations for default
under the note agreements and related guaranties. The physician, on December 22,
1995, filed a cross-complaint against the Company for, among other things, fraud
and breach of contract. On April 9, 1996, the broker/dealer filed legal action
against the physician and his related corporations for fraud and securities
fraud, and against the Company for certain violations of the related state's
Uniform Commercial Code. There is no assurance, however, that the Company will
be able to collect the notes in whole or in part. Certain facts and events, in
the near term, could change the Company's current valuation that the stock
subscription receivable is collectible.
In April 1995, Texas NPI, P.A. ("Texas NPI"), an affiliate of the Company, filed
a civil action against a physician of the practice seeking damages for breach of
contract, breach of fiduciary duty and fraud. The action was filed in State
Court in Dallas, Texas. In May 1995, the physician filed a counterclaim against
Texas NPI, the Company, another affiliate of the Company and two executive
officers of the Company. The counter claim seeks damages in excess of $650,000.
Any liability resulting from this litigation was assumed by Pain Net, Inc. as
part of the sale of the pain treatment operations. In the first quarter of 1996,
the Company and Pain Net, Inc. settled the lawsuit for $300,000. In order to
fund the settlement, Pain Net, Inc. issued a promissory note to the Company for
$300,000 and the Company funded the settlement.
During the fourth quarter of 1994, the Company filed in the Superior Court of
the State of California, County of Los Angeles, an action against certain
workers' compensation insurers and administrators seeking $123.0 million in
compensatory damages claiming abuse of process, intentional interference with
contractual and prospective economic relations, negligent interference with
contractual and prospective economic relations and unfair business practices,
which led to NPI's termination of pain management services to new patients
covered by the slow-paying California litigated workers' compensation system
insurance carriers. Certain of the defendants in the Lawsuit have filed cross
complaints seeking restitution from Allegiant, its healthcare subsidiaries and
their associated medical groups for funds previously paid to the medical groups
and other damages. Although there can be no assurances, based upon the facts and
circumstances known to date, in the opinion of management, final resolution of
this matter will not have a material adverse effect on the Company's financial
condition or results of operations.
The Company contracts with physicians and other healthcare professionals to
fulfill certain of its contractual obligations to clients. Consistent with the
long-standing recognized practice of a significant segment of the healthcare
industry, the Company considers these professionals to be independent
contractors for income tax purposes. In the event of a proposed change in this
classification through regulatory challenge, management, based on the advice of
counsel, believes that certain "safe harbor" relief is available. In the event
of a determination that the healthcare professionals under contract to the
Company are employees, the Company may be subject to retroactive taxes and
penalties.
The Company is subject to claims and legal actions by patients and others in the
ordinary course of business. The Company maintains professional liability
insurance which is limited to patient claims reported during the policy period.
A liability is recorded for estimated losses related to unreported patient
claims, which is included in other current liabilities in the accompanying
consolidated balance sheets. In the opinion of management, such liability is
sufficient to cover any such unreported patient claims, and the amount of
potential liability with respect to other legal actions will not affect the
financial position or results of operations of the Company.
In December 1994, Hermes Systems S.A. commenced an arbitration proceeding
against the Company in the Belgian Centre for the Study and Practice of National
and International Arbitration. Hermes sought to recover $1,802,380, plus
interest, for computer software and related hardware allegedly purchased or
allegedly required to be purchased by the Company pursuant to a distribution
agreement between the Company and Hermes. The Company interposed defenses to the
claims asserted by Hermes and, in turn, alleged that Hermes has breached the
agreement. In the first quarter of 1996, Hermes was awarded damages against the
Company and as a result the Company recorded a $490,000 charge in the fourth
quarter of 1995. The Company plans to appeal the award in Georgia, but there is
no assurance that the Company will obtain any relief from the appeal.
Due to the failure to secure accounts receivable financing (See Note C), in the
fourth quarter of 1993, the Company restructured its anesthesia and other
business activities. The restructuring activities focused on shifting marketing
focus toward physician services, away from, but not abandoning, contract
management and becoming the low cost producer serving the redefined market by
eliminating or reducing certain corporate overhead functions and the planned use
of more effective information technology. Certain other nonproductive start-up
business activities were ceased. These
<PAGE>
restructuring activities resulted in a $4.0 million non recurring pretax charge
to the Company's fourth quarter 1993 operating results. The major components of
the charge were: leases and leaseholds, $1.3 million; severance payments, $1.0
million; terminated contracts, $1.0 million; and other, $665,000. At the end of
1995 the above accruals had been fully depleted.
In August 1993, a purported class action suit was filed in the US District Court
for the Central District of California against the Company, certain directors,
officers and others. The plaintiff alleged various violations of Federal
Securities Laws and sought unspecified damages. The Company and plaintiff
submitted to mediation in November 1993. For 1993, as a result of mediation, the
Company recorded an expense of $2 million, net of insurance proceeds. In 1994
the Company funded its portion of the preliminary settlement into escrow, as
required by the preliminary settlement agreement. The Company borrowed $500,000
of the funds put in escrow for the settlement of the case from one of the
Company's insurance carriers (see Note F). During September 1994 the Company
finalized the settlement.
Note I - Income Taxes
Deferred income taxes represent the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax reporting purposes. Significant
components of the Company's net deferred tax assets and liabilities as of
December 31, 1995 and 1994, are a result of temporary differences related to the
items described as follows (000 omitted):
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Deferred tax liabilities:
Termination of cash basis accounting $ - $ (3,194)
Property and equipment (644) (573)
Sale of receivables -- (1,170)
-------- --------
(644) (4,937)
-------- --------
Deferred tax assets:
Net operating loss carryforwards 9,150 9,955
Collection reserves for NPI's accounts receivable 6,144 6,144
Reserve for discontinued operations 4,128 5,070
Allowance for doubtful accounts 896 1,293
Deposits and contract accounting (200) 152
Liability accruals 634 871
Reserve for Pain Net, Inc. notes 4,836 --
Other 73 28
-------- --------
25,661 23,513
-------- --------
Net deferred tax asset before valuation allowance 25,017 18,576
Valuation allowance (25,017) (16,950)
-------- --------
Net deferred tax asset $ -- $ 1,626
======== ========
</TABLE>
Based on uncertainties associated with the future realization of the deferred
tax asset, in 1995 and 1994, the Company established a valuation allowance of
$25.0 million and $16.9 million, respectively, reducing its net deferred tax
asset balance to $0 million and $1.6 million, respectively. In 1995, a valuation
allowance was established for the entire balance of the deferred tax asset
because of the uncertainty that future tax obligations will be generated from
planned earnings after 1995. The $1.6 million net deferred tax asset as of
December 31, 1994, represented the availability of income tax carrybacks to
prior years and expected future tax obligations. In 1995, the Company recognized
a tax benefit from state income tax refunds related to prior years, for which a
valuation allowance had been established.
The components of income tax expense (benefit) from continuing operations are as
follows (000 omitted):
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Current income tax expense (benefit) $ (78) $ 50 $ (127)
Deferred income tax expense (benefit) (2,796) 209 (3,630)
------- ----- -------
Income tax expense (benefit) before
valuation allowance (2,874) 259 (3,757)
Valuation allowance increase (decrease) 3,716 (754) 1,174
------- ----- ------
Total income tax expense (benefit) $ 842 $(495) $(2,583)
======= ===== =======
</TABLE>
<PAGE>
A reconciliation of the components of income tax expense (benefit) for
continuing operations computed at the statutory federal income tax rate with the
Company's effective income tax rate is as follows (000 omitted):
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate $(2,610) $ 214 $(3,302)
State income taxes, net of federal benefit (313) 80 (486)
Increase (decrease) in valuation allowance 3,716 (754) 1,174
Other (49) (35) 31
------- ----- -------
Total income tax expense (benefit) $ 842 $(495) $(2,583)
======= ===== =======
</TABLE>
At December 31, 1995, the Company had estimated consolidated net operating loss
carryforwards of $25.5 million (including NPI's pre-acquisition net operating
loss carryforwards of $23.5 million), which expire in years beginning in 2006
through 2009. Due to income tax limitations on the utilization of
pre-acquisition net operating loss carryforwards, these carryforwards can be
utilized only by NPI to offset NPI's future taxable income. Upon becoming a
member of the Company's controlled group on December 31, 1992, NPI was required
to change from the cash to accrual method of accounting for tax reporting
purposes. Beginning January 1, 1993, NPI's aggregate cash to accrual difference
of approximately $27.9 million was recognized over a three-year period.
Note J - Related Party Transactions
In December 1993, the Company borrowed $1.1 million from Richard L. Jackson,
Chairman, Chief Executive Officer, President and a significant stockholder,
under a thirty-day promissory note bearing interest at prime plus 0.5% (6.5% at
December 31, 1993), the same interest rate as the Company's line of credit from
a bank. During the first quarter of 1994, the Company borrowed an additional
$1.5 million from Mr. Jackson under the same terms and conditions. In May 1994,
with shareholders' approval, these short-term loans were converted to $1.5
million convertible promissory notes maturing in 1995 with interest at 10% and
400,000 shares of the Company's unregistered common stock valued at $2.50 per
share. The convertible promissory notes of $500,000 and $1.0 million were
convertible to common stock at per share prices of $3.00 and $3.25,
respectively, at Mr. Jackson's option during March and September 1995,
respectively.
In August 1995, the Company's Board of Directors approved the restructure of the
two convertible promissory note agreements to Richard L. Jackson, Chairman,
Chief Executive Officer, President and a significant shareholder. Under the
terms of the new agreement, the two notes were combined into one note for $1.5
million, with an interest rate of prime plus 3%, 11.5% at December 31, 1995. The
loan will be paid in six equal monthly installments of $250,000 beginning on
September 1, 1997.
In 1991, the Company guaranteed a sublease for office space of Premier
HealthCare, Inc., a company in which Richard L. Jackson had an ownership
interest at the time of the guarantee. The Company paid rent totaling
approximately $20,000 and $56,000 in 1995 and 1994, respectively, related to its
guarantee. Also, effective February 1993, the Company entered into an
arms-length one year corporate finance consulting agreement with an entity
controlled by a former Company Director and stockholder in Premier HealthCare,
Inc. Under the terms of the agreement, the Company paid transaction and
financing fees totaling $248,000 in 1993 until the agreement was canceled in
late 1993 in exchange for the Company agreeing to make the guaranteed sublease
payments referred to above.
The following related party transactions occurred (000 omitted):
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Interest expense on promissory notes payable
to Richard L. Jackson $ 166 $ 162 $ 4
Guaranteed sublease costs paid for an affiliated entity 20 56 --
Transaction and financing fees to affiliated entity -- -- 248
</TABLE>
<PAGE>
Note K - Stock Options and Warrants
In prior years, the Company established various incentive, non- qualified and
individualized stock option plans to help attract and retain key employees,
officers, directors, anesthesiologists and certified registered nurse
anesthetists. During 1994, the stockholders approved the Omnibus Stock Incentive
Plan for key employees, officers and others and The Non-Employee Director Stock
Option Plan, which provide for the granting of options to purchase up to
1,000,000 and 100,000 shares of the Company's common stock, respectively. The
exercise price of the options under all option plans is generally the fair
market value of the Company's common stock on the date of grant. The options
granted under all plans may be exercised during periods ranging up to ten years
from the date of grant.
During 1995, options that were granted to certain employees were repriced to the
current market price of the Company's common stock. Options are intended to
serve as reward for joining and continuing with the Company and to encourage the
holder to make significant contributions to the success of the Company. During
1995, the Company canceled 578,000 options exercisable at prices ranging from
$1.61 to $3.37 and issued 578,000 new options exercisable at $1.31 per share.
The number of options exercisable at December 31, 1995, was 416,000 at prices
ranging from $3.75 to $0.88 per share. Transactions involving the Company's
stock options during 1993, 1994 and 1995 were as follows (000 omitted except for
price per share):
<TABLE>
<CAPTION>
Option Option Price
Shares Per Share
------- ------------
<S> <C> <C>
Outstanding at January 1, 1993 662 .66-13.75
Granted 443 3.75-14.00
Exercised (112) .66- 1.61
Forfeited (306) 1.61-14.00
------
Outstanding at December 31, 1993 687 .66-12.25
Granted 998 1.88- 3.63
Exercised (165) .66- 2.75
Forfeited (574) 1.61-12.25
------
Outstanding at December 31, 1994 946 1.61- 3.75
Granted 1,311 .88- 2.06
Exercised (1) 1.61
Forfeited (1,095) 1.31- 3.75
------
Outstanding at December 31, 1995 1,161 .88- 2.85
------
</TABLE>
As of December 31, 1995, an aggregate of 294,000 shares of common stock are
reserved for exercise of future option grants under all plans, 1,161,262
reserved for exercise of current option grants outstanding and 25,000 for
exercise of warrants.
Note L - Employee Benefit Plan
The Company has a 401(k) retirement savings plan (the "Plan") covering
substantially all of its employees who meet the eligibility requirements of six
months of service and at least 21 years of age. Employees may contribute up to
the lesser of 20% of their annual salary or the annual statutory limit ($9,240
in 1995) to the Plan. The Company currently matches 25% of the employees'
contribution up to 4% of an employees' annual salary. The Company made
contributions to the Plan of approximately $19,000, $22,000, and $32,000 in
1995, 1994 and 1993, respectively.
Note M - Common Stock
At various times during 1994 and 1995, the Company issued 8.7 million shares of
common stock as collateral for certain debt obligations. When these debt
obligations are paid in full the shares will be returned to the Company. These
shares are not included in the weighted average shares outstanding
but are included in the Consolidated Statement of Stockholders' Investment
(Deficit).
During 1994 and 1995 the Company issued a total of 315,000 shares of redeemable
common stock, $.001 par value. Of these 90,000 shares were issued in 1994,
45,000 shares were redeemed for $75,000 in 1995 and an additional 45,000 shares
were redeemed in the 1st quarter of 1996. In 1995, 225,000 shares were issued
and are redeemable for $317,750. These shares are not included in the
Consolidated Statements of Stockholders' Investment (Deficit) but are included
in the weighted average shares outstanding calculation.
<PAGE>
Note N - Significant Fourth Quarter Adjustments
The Company recorded approximately $15.6 million in significant adjustments
during the fourth quarter of 1995 primarily relating to its discontinued
operations and patient and hospital accounts receivable. The Company recorded a
charge of approximately $12.4 to fully reserve the notes received in conjunction
with the sale of the its discontinued pain treatment operations during the
fourth quarter due to the highly leveraged nature of the acquiring company (see
Note F). In addition the Company increased its reserves related to patient and
hospital receivables by $2.7 million.
The Company reclassified approximately $1.5 million of interest expense from
discontinued operations to continuing operations in the fourth quarter of 1995.
The interest was previously allocated to the Company's discontinued operations
based upon the amount of debt estimated by the Company to be assumed by Pain Net
in the sale of the pain treatment operations.
In the fourth quarter of 1994 the Company recorded $1.0 million additional
provision for bad debts. A less than anticipated percentage of collections was
realized during the fourth quarter of 1994 causing the need for an additional
provision which was determined through the analysis of doubtful accounts. Also
during the fourth quarter of 1994, discontinued operations includes a $3.6
million loss to adjust to the estimated net realizable value of the pain
treatment operations and a $8.4 million writedown of accounts receivable.
In the fourth quarter of 1993 the Company recorded non recurring items of $6.0
million, a $665,000 provision for bad debts related to accounts receivable from
hospitals, a $310,000 accrual for anticipated future losses on certain contracts
and a $266,000 write-off for abandoned acquisitions and new businesses. Also
during the fourth quarter of 1993, discontinued operations included a $20.0
million charge for the termination of services to a significant payor category.
Note O - Subsequent Event
Effective June 1, 1996, and subject to the rescission rights described below,
Allegiant Physician Services, Inc. (the "Company") transferred substantially all
of its assets relating to its anesthesia operations (the "Transaction") to
Anesthesia Solutions, Inc. ("ASI"). The Transaction will be rescinded if the
requisite shareholder approval of the Transaction is not received by October 1,
1996. The assets to be sold in the Transaction include all of the Company's
anesthesia contracts, physician and nurse contracts, office furniture and
computer equipment used in the contract anesthesia business. The anesthesia
contract business accounted for approximately 95% of the Company's revenue in
1995, 1994 and 1993. The assets to be sold primarily consists of contracts and
are recorded in the Company's financial statements at nominal amounts as of
December 31, 1995.
The consideration received in the Transaction was a Promissory Note, dated June
1, 1996, (the "Note") by ASI in favor of the Company, in original principal
amount of $16.0 million, with interest equal to 9% per year. The Note will be
reduced by certain liabilities assumed by ASI totaling approximately $12
million. The Agreement requires interest only payments on the Note to be made
for the first six months commencing July 1, 1996, and monthly principal payments
of $500,000 starting January 1, 1997, increasing to $1,500,000 on July 1, 1997,
until the Note is paid in full. The Note is secured by 2,750,000 shares of
EquiMed, Inc., $.0001 par value, common stock. An additional sale premium up to
$9 million will be paid by ASI if the provisions of an earn-out agreement are
realized by ASI within twelve months. It cannot be assured that the benefits of
the earn-out agreement will be met.
In accordance with the Agreement, the Transaction must be approved by the
Company's shareholders by October 1, 1996. In the event that the Transaction is
not approved by the shareholders the Transaction will be rescinded and the
Company will pay ASI, or ASI will pay the Company, as the case may be, an amount
necessary to place the respective parties in their financial positions at May
31, 1996, as if the Agreement had not been consummated on June 1, 1996.
<PAGE>
ITEM 9: DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
On January 17, 1996 Allegiant Physician Services, Inc. (the "Company"),
dismissed Arthur Andersen LLP as its independent accountants.
The reports of Arthur Andersen LLP on the consolidated financial statements of
the Company for the two fiscal years ended December 31, 1994 and 1993,
contained no adverse opinion or disclaimer of opinion and were not qualified or
modified as to uncertainty, audit scope or accounting principles.
The decision to change accountants was approved by the Board of Directors of
the Company by unanimous written consent dated January 17, 1996.
In connection with its audits for the fiscal years ended December 31, 1994 and
1993, and through January 17, 1996, there have been no disagreements with
Arthur Andersen LLP on any matter of accounting principles or practices,
financial statement disclosures, or auditing scope or procedure, which
disagreements if not resolved to the satisfaction of Arthur Andersen LLP would
have caused them to make reference thereto in their report on the financial
statements for such years.
During the two fiscal years ended December 31, 1994 and 1993, through present,
there have been no reportable events (as defined in Item 304(a)(1)(v) of
Regulation S-K) with Arthur Andersen LLP.
The Company engaged Ernst & Young LLP as its new independent accountants as of
January 17, 1996. During the two fiscal years ended December 31, 1994 and 1993,
and through January 17, 1996, the Company has not consulted with Ernst & Young
LLP on items which (1) concerned the application of accounting principles to a
specified transaction or the type of audit opinion which might be rendered on
the Registrant's financial statements or (2) concerned the subject matter of
a disagreement or reportable event with former independent accountants, (as
described in Regulation S-K Item 304(a)(1)(v)).
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names, ages and positions of the executive
officers and directors of the Company:
<TABLE>
<CAPTION>
Name Age Position With the Company
- ---------------------- --- -------------------------------------
<S> <C> <C>
Richard L. Jackson (1) 41 Chairman of the Board, Chief Executive Officer
Terrence L. Bauer 40 President, Chief Operating Officer
Timothy L. Powers 45 Executive Vice President, Chief Financial Officer and
Treasurer
Bruce A. Jacobs 52 Executive Vice President, Managed Care
Terrence P. Schuck 50 Executive Vice President, Chief Information Officer
W. Daniel Barker (2) 69 Director
Paul S. Ellison (3) 63 Director
William H. Franklin, Jr., Ph.D. (1) (2) 58 Director
Kenneth J. O'Donnell 52 Director
Harrison L. Rogers, Jr. MD 71 Director
</TABLE>
- ---------
(1) Member of the Executive Committee
(2) Member of the Audit Committee
(3) Member of the Compensation and Stock Option Administration Committee
<PAGE>
Richard L. Jackson founded the Company in September 1987 and served as President
of the Company until September 1991 when he became Chairman of the Board. Mr.
Jackson became Chief Executive Officer in November 1993 and resumed his position
as President in January 1994 as part of the Company's restructuring effort. In
December 1995, Mr. Jackson relinquished his position as President to Terrence L.
Bauer. Prior to forming the Company, Mr. Jackson was a founder, President and
Chief Executive officer of Jackson & Coker, one of the largest physician
recruiting firms in the United States. Mr. Jackson is also a director of I.Q.
Software, Inc. and the founder of several other healthcare service companies,
including Millennium HealthCare, Inc. of which he is a director and minority
shareholder.
Terrence L. Bauer joined the Company in December 1995 as President and Chief
Operating Officer. He has over 16 years of experience in operations, marketing,
and sales. Prior to joining the Company, Mr. Bauer served as Chief Executive
Officer at ATC HealthCare Services, a provider of temporary and contractual
healthcare staffing services. Also, he has served in senior management positions
at Critical Care America, IVAC Corporation, and McGaw Laboratories.
Timothy L. Powers joined the Company in February 1995 as Controller and was
appointed to the position of Vice President-Controller, Chief Accounting
Officer and Assistant Treasurer by the Company's Board of Directors. He was
promoted to the position of Vice President, Chief Financial Officer and
Treasurer in March 1995. Prior to joining the Company, Mr. Powers served as
controller and in other financial management positions at Freshens Premium
Yogurt, Burger King Corporation, HBO & Company and Wheelabrator-Frye
Corporation.
Bruce Jacobs joined the Company as Executive Vice President responsible for its
newly-formed Allegiant Managed Care Division effective January 1, 1995. Prior to
joining the Company, Mr. Jacobs was a principal of The Jacobs Group within
SunHealth Alliance in Atlanta, Georgia. From May 1989 to May 1993, Mr. Jacobs
was the Vice President of Plan Management of Mercy Alternative in Detroit,
Michigan where he developed physician-hospital organizations as well as a
state-wide managed care organization consisting of 22 hospitals and 650
physicians. From June 1987 to April 1989, he served as a Regional Vice President
of Travelers Health Network in Atlanta, Georgia where he managed a five-city
network of health maintenance organizations and preferred provider organizations
with more than 90,000 members and $100 million in revenue. Prior to joining
Travelers Health Network, Mr. Jacobs spent approximately 15 years working in the
healthcare industry for Cigna Health Plans, Comed Management Inc., HealthOne and
Blue Cross and Blue Shield Association.
Terrence P. Schuck joined the Company in March 1994 as Executive Vice President
and Chief Information Officer. Prior to joining the Company Mr. Schuck served as
Executive Director, Information Systems at HBO & Co. He has over 29 years
experience in management information systems and computer support and has served
in managerial and executive positions for Computer Service Management Group and
Harris Corporation.
W. Daniel Barker, MHA, LFACHE, became a director of the Company in March 1994.
Since 1991, Mr. Barker has served as Professor Emeritus, Department of Community
Health at the Emory University School of Medicine, where he had been named an
Associate Professor in 1978 and Professor in 1988. From 1984 to 1990, he was the
Director of Hospitals for Woodruff Health Sciences Center of Emory University,
and now holds the title of Retired, Director of Hospitals. In 1990, Mr. Barker
became a Life Fellow with the American College of Healthcare Executives
(LFACHE). Throughout the years, he has received numerous honors, which include
Distinguished Service Awards from the American Hospital Association, the
Emory University School of Medicine, the Medical Association of Atlanta, and
the Georgia State University, Institute of Health Administration Alumni Club.
Mr. Barker has served on numerous healthcare finance, advisory and strategic
planning committees, including President of the Georgia Hospital Association and
Chairman of the Board of Trustees of the American Hospital Association.
Paul S. Ellison has served as a director of the Company since May 1993. He has
served as the Executive Vice President of The SunHealth Alliance since 1986.
From 1969 to 1986, Mr. Ellison served as the President of Cleveland Memorial
Hospital in Shelby, North Carolina. He has been a member of the North Carolina
Hospital Association since 1967, serving in various capacities, and receiving
the Distinguished Service Award and the Meritorious Service Award from the
Association in 1986 and 1992, respectively. He has also served as Chairman
of the American College of Healthcare Executive from 1990 to 1993 and on the
Board of Directors of the Southeastern Hospital Conference from 1989 to 1992,
serving as Chairman from 1979 to 1980. Mr. Ellison is a
<PAGE>
member of the American Hospital Association and has served on the Board of the
North Carolina Health Insurance Advisory Board and on the Board of North
Carolina Blue Cross/Blue Shield. Mr. Ellison is a graduate of Wofford College
and of the post graduate program in hospital administration at Charlotte
Memorial Hospital (Carolinas Medical Center).
William H. Franklin, Ph.D., has served as director of the Company since March
1992. He is President of Angel Ventures, Inc., a firm specializing in
capitalizing and developing start-up and early stage ventures. He is also
President of Environmental Science Technologies, a company which produces health
physics and radiological safety and regulatory compliance software and
automation for the nuclear power industry and hazardous process manufacturers.
Prior to forming Angel Ventures in 1993, Dr. Franklin was Vice Chairman of
Premier HealthCare, Inc., a venture development firm specializing in healthcare
service businesses. Between 1979 and 1992, he worked with a number of
entrepreneurs developing various business ventures including Jackson & Coker on
whose Board he served from 1983 to 1987. Dr. Franklin holds two engineering
degrees, an MBA and Ph.D.
Kenneth J. O'Donnell became a director of the Company in November 1994. Since
January 1994, Mr. O'Donnell has been the President, Chief Executive Officer and
a member of the Board of Directors of CTI EDIsolv, Inc., a provider of
electronic data interchange services for the healthcare industry. Prior to
joining CTI EDIsolv, Inc., Mr. O'Donnell was President and Chief executive
Officer of National Electronic Information Corporation ("NEIC") where he created
and directed the design and implementation of the NEIC Healthcare Information
Network. Mr. O'Donnell started his career with McDonnell Douglas Information
Systems, one of the pioneers in computerized hospital information systems, where
he held a variety of technical, marketing and management positions during his 22
years of service.
Harrison L. Rogers, Jr. MD, became a director of the Company in November 1994.
Dr. Rogers, who previously served as the President of the American Medical
Association, is a retired general surgeon who formerly practiced on the staffs
of Crawford Long Hospital and Piedmont Hospital in Atlanta, Georgia. Prior to
his retirement from clinical practice in 1992, Dr. Rogers was a clinical
assistant professor in the department of surgery at Emory University School of
Medicine and a member of the medical and teaching staffs at both Crawford Long
and Piedmont Hospitals. From 1986 until 1993, Dr. Rogers served as a member of
the board of Trustees of SunHealth Corporation, a hospital alliance of 240
southeastern hospitals. Dr. Rogers has also served as a regional delegate to the
American Hospital Association House of Delegates, a member of the American Red
Cross Board of Directors, President of the Atlanta Clinical Society and as a
member of the Board of Directors and Treasurer of Blue Cross/Blue Shield of
Georgia/Atlanta.
Legal Proceedings Involving Certain Officers and Directors
During September 1994, the Company settled for $2.8 million a purported class
action suit filed in August 1993 in the US District Court for the Central
District of California against the Company, certain directors, officers and
others. Mr. Jackson and Dr. Franklin are current directors who were named in the
litigation. The plaintiff alleged various violations of federal securities laws.
The Company's portion of the settlement of $2.0 million, net of insurance
proceeds, is recorded for financial purposes during the fourth quarter of 1993.
The Company borrowed $500,000 of the funds put in escrow for the settlement of
the case from one of the Company's insurance carriers.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than 10% of a
registered class of the Company's equity securities, to file with the Securities
and Exchange Commission initial reports of ownership and reports of changes in
ownership of common stock and other equity securities of the Company. These
insiders are required by Securities and Exchange Commission regulations to
furnish the Company with copies of Section 16(a) forms they file, including
Forms 3, 4 and 5.
To the Company's knowledge, based solely on review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, insiders complied with all applicable monthly
transaction reporting requirements during the year ended December 31, 1995.
<PAGE>
ITEM 11: EXECUTIVE COMPENSATION
The following table sets forth the aggregate compensation awarded to, earned by,
or paid by any person, to the Chief Executive Officer and to the executive
officers named below (the "Executive Officer Group") at December 31, 1995.
SUMMARY COMPENSATION TABLE
--------------------------
<TABLE>
<CAPTION>
Annual Long-term
Compensation Compensation
----------------- ------------
Securities All
Underlying Other
Name and Salary Bonus Options Compensation
Principal Position Year $ $ (#) $
- ----------------------------------- ---- ------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Richard L. Jackson 1995 316,757 -- -- 7,200 (2)
Chairman of the Board and Chief 1994 281,250 -- -- 1,110 (2)
Executive Officer 1993 280,679 61,895 (1) -- 1,479
Bruce Jacobs (3) 1995 151,350 7,474 46,773 --
Executive Vice President, Managed 1994 -- -- -- --
Care 1993 -- -- -- --
Terrence P. Schuck (4) 1995 105,000 10,121 71,301 (5) --
Executive Vice President and Chief 1994 80,002 -- 50,000
Information Officer 1993 -- -- -- --
</TABLE>
(1) Bonus paid in 1993 was based upon the Company's 1992 performance and was
included in the Company's 1992 results of operations.
(2) Represents amount paid for premiums on certain term and whole life
insurance policies.
(3) Mr. Jacobs joined the Company on January 1, 1995.
(4) Mr. Schuck joined the Company on March 1, 1994.
(5) Includes 42,657 options at an exercise price of $1.31 that were issued in
August 1995 as a replacement for the 50,000 originally granted in 1994 at
an exercise price of $2.88.
<PAGE>
The following table sets forth information regarding grants of stock options to
purchase shares of Common Stock made during 1995 to each member of the Executive
Officer Group.
1995 OPTION GRANTS
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation
Individual Grants for Option Term (1)
- ---------------------------------------------------------------------------- -------------------------
Number of
Securities % of Total
Underlying Options
Options Granted to Exercise
Granted Employees Price Expiration
Name (#) in 1994 ($/Share) Date 5% 10%
- -------------------- ---------- ---------- --------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Bruce A. Jacobs 46,773 4% $1.31 December 2004 $38,534 $97,653
Terrence P. Schuck 28,644 2% $1.31 January 2005 $23,598 $59,803
49,657(2) 3% $1.31 February 2004 $35,143 $89,059
</TABLE>
(1) The dollar gains under these columns are the result of calculations
assuming a 5% and a 10% annual appreciation for the term of the stock
option, i.e., 10 years. These calculations are required to be included in
accordance with rules promulgated by the Securities and Exchange Commission
and are not intended to forecast possible future appreciation of the stock
prices of the Company's Common Stock.
(2) During 1995, 50,000 options originally granted in 1994 at an exercise price
of $2.88 per share were surrendered and subsequently replaced with 42,657
options at an exercise price of $1.31.
<PAGE>
The following table sets forth information regarding the value of unexercised
stock options held at December 31, 1995 by each member of the Executive Officers
Group. No options were exercised during 1995 by any member of the Executive
Officer Group:
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUE TABLE
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options at Options
Fiscal Year- at Fiscal Year-
End (#) End ($)
Exercisable/ Exercisable/
Name Unexercisable Unexercisable
----------------- ------------- -------------
<S> <C> <C>
Bruce A. Jacobs 19,168/27,605 --
Terrence P. Schuck (2) 36,593/34,708 --
</TABLE>
<PAGE>
The following table sets forth information regarding the repricing during 1995
of the Company's stock options held by each member of the Executive Officer
Group.
TEN-YEAR OPTION REPRICING
-------------------------
<TABLE>
<CAPTION>
Number of Length of
Securities Market Exercise Original
Underlying Price of Price New Option Term
Options Stock at Time at Time Exercise Remaining at
Repriced of Repricing of Repricing Price Date of
Name Date (#) ($) ($) ($) Repricing
- ---------------------- ------------ ---------- ------------- ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Terrance P. Schuck(1) August, 1995 42,657 $1.31 $2.88 $1.31 9 years
</TABLE>
(1) During 1995, 50,000 options originally granted in 1994 at an exercise
price of $2.88 per share were surrendered and subsequently replaced with
42,657 options at an exercise price of $1.31.
Report on Repricing Options
During 1995 options that were previously granted to Mr. Schuck, an executive
officer, were repriced to the current market price of the Company's common
stock. These options were intended to serve as a reward for joining and
continuing with the Company and to encourage the holder to make significant
contributions to the success of the Company. Due to the decrease in the market
price of the Company's common stock, the Company repriced certain options to the
current market value to reward the holders for remaining with the Company and
encourage them to continue to contribute to the success of the Company.
Paul S. Ellison
Compensation and Stock Option
Administration Committee
<PAGE>
The following graph compares the cumulative total return on the Company's Common
Stock from March 4, 1992 (the effective date of the Company's initial public
offering) through December 31, 1995 with the Nasdaq Market Index and the Nasdaq
Health Services Stocks Index, assuming that $100 was invested as of March 4,
1992.
PERFORMANCE GRAPH
-----------------
[CHART GOES HERE]
<TABLE>
<CAPTION>
3/4/92 6/92 12/92 6/93 12/93 6/94 12/94 6/95 12/95
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Allegiant Physician Services, Inc. $100 $51 $117 $50 $29 $14 $17 $11 $7
Nasdaq Stock Market $100 $89 $108 $112 $123 $113 $121 $150 $170
Nasdaq Health Services Stocks $100 $83 $101 $95 $117 $108 $125 $118 $160
</TABLE>
<PAGE>
Employment Agreements
In May 1991, Richard L. Jackson entered into an employment agreement with the
Company, which was amended in October 1991 and expires in March 1997. The
amended agreement requires Mr. Jackson to serve as Chairman, Chief Executive
Officer and President of the Company. The agreement is automatically renewed
for additional one year terms unless either party gives the other 60 days
notice. The base compensation under the amended agreement is $275,000 per annum
effective January 1, 1994, subject to annual increases equal to a cost-of-living
index increase. Compensation will continue to be paid to Mr. Jackson for two
months in case of permanent disability and to Mr. Jackson's designated
beneficiary for six months in the case of death. All obligations of the Company
under the agreement cease if Mr. Jackson's employment is terminated for cause,
as defined in the agreement. The Company is obligated to maintain certain term
and whole life insurance policies providing $350,000 and $1,000,000,
respectively, in coverage, of which Mr. Jackson's designees are the
beneficiaries. The agreement also includes certain confidentiality and non-
competition provisions.
Bruce A. Jacobs entered into an employment agreement with the Company starting
on January 1, 1995 serving as Executive Vice President, Managed Care. Mr.
Jacobs base salary is $150,000. The Company will provide 90 days income
protection if terminated for no cause. The agreement also includes certain
confidentiality and non-competition provisions.
Terrence P. Schuck entered into an employment agreement with the Company
beginning March 1, 1994. Mr. Schuck serves as Executive Vice President, and
Chief Information Officer. The base compensation under this agreement is
$100,000. Mr. Schuck has since received an increase in his base salary to
$105,000. The Company will provide 6 months income protection if Mr. Schuck is
terminated for no cause and 30 days if terminated for cause. The agreement also
includes certain confidentiality and non-competition provisions.
Compensation of Directors
Each Director of the Company who is not an officer or an affiliate of the
Company is paid a fee of $1,500 for attendance at any meeting (other than for
telephonic meetings) of the Board of Directors. Additionally, each non-
affiliated Director receives an annual retainer of $6,000 for services as a
Director and at the time of becoming a Director received options to purchase
20,000 shares of Common Stock at an exercise price equal to the then current
fair market value of the Common Stock on the date of grant.
Report of the Compensation and Stock Option Administration Committee
The Compensation and Stock Option Administration Committee (the "Committee")
believes that the Company must pay competitively to attract and retain qualified
executives. The Committee reviews the Company's executive incentive plans,
programs and policies; monitors the performance and compensation of the Chief
Executive Officer and the Chief Financial Officer; and makes recommendations and
reports to the Board of Directors concerning matters of executive compensation.
In performing these duties, the Committee considers management's evaluations and
recommendations along with other factors. The Committee seeks to achieve the
following:
1. A competitive base compensation package that enables the Company to
attract and retain key executives by evaluating comparable historical and
industry information.
2. A bonus program that is based on both the Company's business performance
and the individual performance of each officer.
3. The provision of stock compensation opportunities that are linked with
performance.
The Company's executive compensation program currently has three main
components, which are discussed below:
Base Salary
The Company's objective for paying base salaries is to be competitive in the
marketplace based on individual responsibilities and experience, together with
the particular needs, requirements and financial results of the Company.
The base salaries for the Chief Executive Officer and Chief Financial Officer
were determined by employment agreements entered into with such officers. Any
incentive compensation granted to executive officers other than what is
specifically provided for in their employment agreements is totally at the
discretion of the Board of Directors and would be based on the Company meeting
or exceeding its operating plans for the year.
<PAGE>
Bonuses
Upon recommendation to its Board of Directors, the Company may pay an annual
cash bonus to its executive officers based on both the executive officer's
performance and the Company's overall performance.
During 1995, due to the Company's performance, the Company paid no bonuses to
the Chief Executive Officer and Chief Financial Officer.
Stock Options
The Company has in place stock option plans (collectively, the "Plans"). During
each year, the Stock Option Administration Committee considers the desirability
of granting key employees, including the executive officers, awards under its
Plans. The Plans are designed to provide long-term, stock based incentives for
executives in order to encourage superior performance over an extended period of
time and to align executives' interests with those of shareholders.
In 1995, stock options were issued to a broad group of key employees, including
executive officers, Messrs. Jacobs and Schuck. Also during 1995, stock options
that were previously granted to Mr. Schuck, an executive officer, were
subsequently repriced to the current market price of the Company's common stock.
These options were intended to serve as a reward for joining and continuing with
the Company and to encourage the holders to make significant contributions to
the success of the Company. All options granted during 1995 were granted at the
fair market value on the date of grant.
Paul S. Ellison
Compensation and Stock Option
Administration Committee
Compensation Committee Interlocks and Insider Participation
The Compensation Committee consists of Mr. Ellison, who is not nor was an
officer or other employee of the Company and has no other relationship with the
Company required to be disclosed as a Compensation Committee interlock.
<PAGE>
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of March 31, 1996 information regarding the
beneficial ownership of Common Stock of (i) each person known by the Company to
be the beneficial owner of more than five percent of the outstanding Common
Stock of the Company, (ii) each of the directors of the Company, (iii) the
Executive Officer Group and (iv) all executive officers and directors of the
Company as a group.
<TABLE>
<CAPTION>
Amount and Nature of Percentage of Class
Name and Address of Beneficial Owner (1) Beneficial Ownership (2) Beneficially Owned (12)
- ---------------------------------------- ------------------------ -----------------------
<S> <C> <C>
Richard L. Jackson 6,417,199 (3) 25.3%
National Century Financial Enterprises, Inc. 2,773,333 (4) 11.0%
6125 Memorial Drive
Dublin, OH 43017
HealthCare Ventures II, L.P. 1,862,673 7.4%
Twin Towers at Metro Park
379 Thornall Street
Edison, NJ 08837
Daniel Barker 24,237 (5) *
Paul Ellison 13,518 (6) *
William Franklin 30,543 (7) *
Kenneth J. O'Donnell 19,774 (8) *
Harrison Rogers 19,774 (9) *
Bruce A. Jacobs 19,193 (10) *
Terrence P. Schuck 43,675 (11) *
All executive officers and directors of the
Company as a group 6,775,821 (3)(12) 26.8%
</TABLE>
- ----------
* Denotes beneficial ownership of less than 1%.
(1) Except as otherwise indicated, the address of the beneficial owners of more
than five percent of the outstanding common stock is c/o the Company, 500
Northridge Road, Suite 500, Atlanta, Georgia 30350.
(2) Except as otherwise indicated, each of the parties listed above has sole
voting and investment power over the shares owned.
(3) Includes an aggregate of 3,212,213 shares with respect to which Mr. Jackson
holds a proxy to vote.
(4) Represents shares issued as collateral for the Company's debt obligations
which are subject to a proxy to vote held by Richard L. Jackson.
(5) Includes 12,425 shares issuable upon exercise of options within 60 days but
does not include 8,532 shares issuable upon exercise of options not
exercisable within 60 days.
(6) Includes 13,518 shares issuable upon exercise of options within 60 days
but does not include 3,208 shares issuable upon exercise of options not
exercisable within 60 days.
(7) Includes 13,543 shares issuable upon exercise of options within 60 days.
(8) Represents shares issuable upon exercise of options which are exercisable
within 60 days.
(9) Represents shares issuable upon exercise of options which are exercisable
within 60 days.
(10) Includes 19,193 shares issuable upon exercise of options within 60 days but
does not include 27,580 shares issuable upon exercise of options not
exercisable within 60 days.
(11) Includes 37,675 shares issuable upon exercise of options within 60 days but
does not include 33,626 shares issuable upon exercise of options not
exercisable within 60 days.
(12) Calculation of percentages of beneficial ownership includes 8,765,251
shares issued as collateral for certain of the Company's debt obligations.
When these debt obligations are paid in full and the shares held as
collateral are returned to the Company, the percentages of beneficial
ownership (assuming no other changes in the number of shares beneficially
owned) would be as follows: Richard L. Jackson, 22.0%; National Century
Financial Enterprises, Inc., 0.0%; HealthCare Ventures II, L.P., 11.3%;
and officers and directors of the Company as a group, 24.2%.
<PAGE>
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In December 1993, the Company borrowed $1.1 million from Richard L. Jackson,
Chairman, Chief Executive Officer, President and a significant stockholder,
under a thirty-day promissory note bearing interest at prime plus 0.5% (6.5% at
December 31, 1993), the same interest rate as the Company's line of credit from
a bank. During the first quarter of 1994, the Company borrowed an additional
$1.5 million from Mr. Jackson under the same terms and conditions. In May
1994, with shareholders' approval, these short-term loans were converted to $1.5
million convertible promissory notes maturing in 1995 with interest at 10% and
400,000 shares of the Company's unregistered common stock valued at $2.50 per
share. The convertible promissory notes of $500,000 and $1.0 million were
convertible to common stock at per share prices of $3.00 and $3.25,
respectively, at Mr. Jackson's option during March and September 1995,
respectively.
In August 1995, the Company's Board of Directors approved the restructure of the
two convertible promissory note agreements to Mr. Jackson, Chairman, Chief
Executive Officer, President and a significant shareholder. Under the terms of
the new agreement, the two notes will be combined into one note for $1.5
million, with the same interest rate as the Company's line of credit from a
bank. The loan will be paid in six equal monthly installments of $250,000
beginning on September 1, 1997.
In 1991, the Company guaranteed a sublease for office space of Premier
HealthCare, Inc., a company in which Mr. Jackson had an ownership interest at
the time of the guarantee. The Company paid rent totaling approximately $56,000
and $20,000 in fiscal 1994 and 1995, respectively. The lease terminated in
April 1995. Also, effective in February 1993, the Company entered into an arms-
length one year corporate finance consulting agreement with an entity controlled
by Gerald R. Benjamin, a former director of the Company and stockholder of
Premier HealthCare, Inc. Due to a restructuring of the Company's obligations
with respect to Premier HealthCare, Inc., the Company has no further obligations
under the terminated consulting agreement.
<PAGE>
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Index to Consolidated financial Statements, Financial Statement Schedules
and Exhibits
(1) Financial Statements: See Item 8 herein.
(2) Financial Statement Schedules:
. Report of Independent Auditors as to Schedule Supporting
Financial Statements
. Schedule II - Valuation and Qualifying Accounts for the Three Years
Ended December 31, 1995, 1994 and 1993.
. All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission
are not required under the related instructions or, are inapplicable
and, therefore, have been omitted.
(3) Exhibits
Exhibit
Number Description
- ------- -----------
Incorporated by reference from its Form S-1 (Regulation Number 33-45105) filed
on March 4, 1992:
3.2 _ Amended and Restated by-laws of Registrant
10.3 _ Amended and Restated 1991 Stock Option Plan
10.3(a) _ Form of Stock Option Agreement
10.7 _ Employment Agreement dated May 24, 1991 between Registrant and
Richard L. Jackson ("Employment Agreement")
10.7(a) _ Amendment No. 1 to Employment Agreement dated October 31, 1991
10.10 _ Form of Confidentiality and Non-Competition Agreement, as amended
10.11 _ Form of Indemnification Agreement
Incorporated by reference from its Form 10-K for the year ended December
31, 1994:
10(a) _ Purchase Assignment dated February 28, 1994 between Texas NPI,
P.A., NPF-PW, Inc. and National Premier Services, Inc.
10(b) _ Purchase Assignment dated February 28, 1994 between Noback Medical
Group, LTD, NPF-PW and National Premier Financial Services,
Inc.
10(c) _ Sale and Subservicing Agreement dated February 28, 1994 between
the Company and National Premier Financial Services, Inc.
10(d) _ Sale and Subservicing Agreement dated February 28, 1994 by and
among Pain Relief Network, Texas NPI, P.A., Noback Medical Group,
Ltd., NPF-PW Inc. and National Premier Financial Services, Inc.
10(e) _ Acquisition Agreement dated as of February 1, 1994 by and among
Nevada NPI Management Company, Inc. and Carl R. Noback, MD Ltd.,
P.C. and Carl R. Noback, MD
10(f) _ Acquisition Agreement dated August 6, 1993 by and among Texas NPI,
P.A., Texas Pain Institute, P.A. and Shareholders of Texas
Pain Institute P.A.
10(g) _ Stock Purchase Agreement dated October 4, 1993 by and among Texas
NPI, P.A., Daniel Shalev, MD and Shalev, MD, Inc.
10(h) _ Promissory Note dated March 17, 1994 between the Company and
Richard L. Jackson
10(k) _ Separation Agreement and General Release dated February 14, 1994,
between the Company and Terry S. Vitez, MD
10(m) _ Loan and Security Agreement dated March 1, 1994 between the
Company and Silicon Valley Bank
<PAGE>
Incorporated by reference from its Form 10-Q for the quarter ended
June 30, 1995:
10.1 _ Sale and Subservicing Agreement dated as of June 21, 1995 by and
among the Company, NPF-WI, Inc., and National Premier Financial
Services, Inc.
10.2 _ Form of Promissory Note Agreement and Security Agreement between
the Company and Eagle Management Services Limited
10.3 _ Medical Claims Purchase Agreement as of June 1995 by and between
the Company, Heller Financial, Inc., National Pain Institute, Inc.
and Terry Vitez, MD, Inc.
Incorporated by reference from its Form 10-Q for the quarter ended
September 30, 1995:
10.1 _ Form of Convertible Debenture and Subscription Agreement with
Hull Overseas, Ltd.
10.2 _ Form of Convertible Debenture and Escrow Agreement with Zeron
Capital Partners LP
10.3 _ Form of Convertible Debenture and Subscription Agreement with
Argossy Ltd.
10.4 _ Form of Convertible Debenture and Subscription Agreement with
Vortex Capital Corporation
10.5 _ Form of Convertible Debenture and Subscription Agreement with
Odyssey Venture Partners
Incorporated by reference from Form 8-K dated January 17, 1996:
16 _ Letter from Arthur Andersen LLP dated January 22, 1996 addressed
to Securities and Exchange Commission regarding the change
in certifying accountants.
Incorporated by reference from Form 8-K dated January 17, 1996:
2 _ Asset Purchase Agreement, dated as of June 1, 1996, between
Allegiant Physician Services, Inc. and Anesthesia Solutions, Inc.
The following exhibits are included in this annual report on Form 10-K:
3.1 _ Second Restated Certificate of Incorporation and all amendments
thereto.
10.1 _ Form of Convertible Debenture and Subscription Agreement with Hull
Overseas, Ltd.
10.2 _ Employment Agreement dated January 19, 1994 between Registrant and
Terrence P. Schuck
10.3 _ Employment Agreement dated November 11, 1994 between Registrant and
Bruce A. Jacobs
10.4 _ Employment Agreement dated December, 1995 between Registrant and
Terrence L Bauer
11 _ Computation of Earnings Per Share of Common Stock for the years
ended December 31, 1995, 1994 and 1993.
21 _ Subsidiaries of the Registrant
(b) Reports on Form 8-K during the quarter ended December 31, 1995, or
subsequent to that date but prior to the filing date of this Form 10-K:
Form 8-K dated January 3, 1996:
Reporting under Item 2 that on December 18, 1995, the Company finalized the
sale of its pain treatment operations
Form 8-K dated January 17, 1996:
Reporting under Item 4 that on January 17, 1996, the Company dismissed
Arthur Andersen LLP as its independent accountants. On the same day the
Company engaged Ernst & Young LLP as its new independent accountants.
Form 8-K dated March 29, 1996:
Reporting under Item 5 that the Company is currently in negotiations for the
sale of its contract anesthesia business. A pro forma consolidated condensed
balance sheet as if sale was consummated on February 29, 1996 was included
in this Form 8-K.
Form 8-K dated June 17, 1996:
Reporting under Item 5 that the Company entered into an Asset Purchase
Agreement with Anesthesia Solutions, Inc. to sale the Company's anesthesia
contract business.
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
Allegiant Physician Services, Inc.
We have audited the consolidated financial statements of Allegiant Physician
Services, Inc. (a Delaware corporation) and subsidiaries as of December 31,
1995, and for the year then ended and have issued our report thereon dated April
19, 1996, except for Note O, as to which the date is June 1, 1996, included
elsewhere in this Form 10-K. Our audit also included the financial statement
schedule listed in Item 14(a)2 of this Form 10-K. This schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audit.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
The financial statement schedule does not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the outcome
of the uncertainty regarding the Company's ability to continue as a going
concern.
Atlanta, Georgia Ernst & Young LLP
June 1, 1996
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Allegiant Physician Services, Inc.
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements included in Allegiant Physician Services'
annual report to stockholders included in this Form 10-K, and have issued our
report thereon dated April 24, 1995 (except with respect to the matter discussed
in Note B, as to which the date is April 19, 1996). Our audits were made for the
purpose of forming an opinion on those statements taken as a whole. The schedule
listed in item 14(a)2 is the responsibility of management and is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not part of the basic financial statements and, in our opinion, fairly states,
in all material respects, the financial date required to be set forth therein in
relation to the basic financial statements taken as a whole.
Atlanta, Georgia Arthur Andersen LLP
April 24, 1995
<PAGE>
Schedule II
ALLEGIANT PHYSICIAN SERVICES, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
For the Years Ended December 31, 1995, 1994 and 1993
- --------------------------------------------------------------------------------
(000s omitted)
<TABLE>
<CAPTION>
Additions
-----------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
of Year Expenses Accounts Deductions Year
---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
December 31, 1993:
Allowance for doubtful accounts 1,351 7,991 -- (6,293) (1) 3,049
Deferred tax valuation allowance 0 11,419 -- -- 11,419
December 31, 1994:
Allowance for doubtful accounts 3,049 8,121 -- (7,053) (1) 4,117
Deferred tax valuation allowance 11,419 5,903 -- (372) (2) 16,950
December 31, 1995
Allowance for doubtful accounts 4,117 9,869 786 (9,202) (1) 5,570
Deferred tax valuation allowance 16,950 7,475 706 (114) (2) 25,017
Allowance for Pain Net, Inc. notes receivable 0 12,404 -- 0 12,404
</TABLE>
- --------------------------------------------------------------------------------
(1) Includes the amounts considered uncollectible and charged off during the
year and other deductions.
(2) Includes adjustments for future planned earnings/losses.
<PAGE>
P R E L I M I N A R Y
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Atlanta, State of
Georgia on the 3rd day of July, 1996.
ALLEGIANT PHYSICIAN SERVICES, INC.
BY: /s/ Richard L. Jackson
-----------------------------
Richard L. Jackson
Chairman of the Board Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Richard L. Jackson Chairman of the Board and
- ---------------------------------- Chief Executive Officer July 3, 1996
Richard L. Jackson
/s/ Timothy L. Powers Executive Vice President, Treasurer
- ---------------------------------- and Chief Financial Officer July 3, 1996
Timothy L. Powers
/s/ James R. Begnaud Vice President-Controller and
- --------------------------------- Chief Accounting Officer July 3, 1996
James R. Begnaud
/s/ W. Daniel Barker Director July 3, 1996
- ----------------------------------
W. Daniel Barker
/s/ William H. Franklin, Jr. Ph.D. Director July 3, 1996
- ----------------------------------
William H. Franklin, Jr. Ph.D.
/s/ Kenneth J. O'Donnell Director July 3, 1996
- ----------------------------------
Kenneth J. O'Donnell
/s/Harrison L. Rogers, Jr., MD Director July 3, 1996
- ----------------------------------
Harrison L. Rogers, Jr. MD
</TABLE>
<PAGE>
EXHIBIT 3.1
State of Delaware
[LOGO OF STATE OF DELAWARE]
Office of Secretary of State
I, JEFFREY D. LEWIS, ACTING SECRETARY OF STATE OF THE STATE OF DELAWARE DO
HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
RESTATED CERTIFICATE OF INCORPORATION OF "PREMIER ANESTHESIA, INC." FILED IN
THIS OFFICE ON THE FIFTEENTH DAY OF JANUARY, A.D. 1992, AT 4:30 O'CLOCK P.M.
* * * * * * * * * *
/s/ Jeffrey D. Lewis
----------------------------------
ACTING SECRETARY OF STATE
AUTHENTICATION: *3312777
DATE: 01/16/1992
[SEAL OF DELAWARE
DEPARTMENT OF STATE]
<PAGE>
SECOND
RESTATED CERTIFICATE OF INCORPORATION
OF
PREMIER ANESTHESIA, INC.
Premier Anesthesia, Inc. (the "Corporation"), a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware (the "General Corporation Law"), hereby certifies as follows:
FIRST: The name of the Corporation is Premier Anesthesia, Inc. The
Certificate of Incorporation of the Corporation was originally filed under the
name Physician Staffing, Inc. with the Secretary of State of Delaware on
February 9, 1988. The Corporation filed a Restated Certificate of Incorporation
under the name Premier Anesthesia, Inc. with the Secretary of State of Delaware
on May 17, 1991. The Corporation filed a Certificate of Amendment to its
Restated Certificate of Incorporation with the Secretary of State of Delaware on
January 9, 1992.
SECOND: This Second Restated Certificate of Incorporation restates and
integrates and further amends the Restated Certificate of Incorporation of the
Corporation, as heretofore amended and restated. It was duly adopted in
accordance with the provisions of Sections 242 and 245 of the General
Corporation Law, and was approved by written consent of the stockholders of the
Corporation given in accordance with the provisions of Section 228 of the
General Corporation Law (prompt notice of such action having being given to
those stockholders who did not consent in writing).
THIRD: The text of the Second Restated Certificate of Incorporation
of the Corporation, as heretofore amended and restated, is hereby restated and
further amended to read in its entirety as follows:
ARTICLE I
---------
Name
----
The name of the corporation is Premier Anesthesia, Inc.
ARTICLE II
----------
Purpose
-------
The Corporation is organized to engage in any lawful act or activity for
which a corporation may be organized under the General Corporation Law of the
State of Delaware.
<PAGE>
ARTICLE III
-----------
Capital Stock
-------------
1. Authorization. (a) The total number of shares of all classes of
-------------
stock which the Corporation shall have authority to issue is 32,480,255,
consisting of (i) 7,480,255 shares of Preferred Stock, par value $.001 per share
(the "Preferred Stock"), provided that, prior to the effective date (the
"Effective Date") of a registration statement under the Securities Act of 1933,
as amended, or any successor statute (the "Securities Act") for the
Corporation's initial public offering, as hereinafter defined in Section A.7(a),
the Corporation shall not issue more than 1,640,381 shares of Preferred Stock,
pursuant to the terms set forth in Section A.2 and pursuant to the terms set
forth in Section B.1, and (ii) 25,000,000 shares of Common Stock, par value
$.001 per share (the "Common Stock").
(b) The preferred stock may be issued in any number of series, including,
without limitation, Series A Preferred Stock (as such terms are defined in
Section A.1), and any other series designated by the Board of Directors pursuant
to Section B.1.
PART A. REDEEMABLE CONVERTIBLE PREFERRED STOCK
A.1 Designation of the Series A Preferred Stock. The Corporation shall
-------------------------------------------
have authority to issue out of the authorized but unissued shares of Preferred
Stock a series of Preferred Stock to be designated the Series A Redeemable
Convertible Preferred Stock (the "Series A Preferred Stock"). The number of
shares, powers, relative, participating, optional and other special rights, and
the qualifications, limitations and restrictions, if any, of the Series A
Preferred Stock shall be as set forth in this Part A.
A.2 Number. The number of the shares of Series A Preferred Stock
------
("Series A Shares") shall be 2,480,255 provided that, prior to the Effective
Date of the Corporation's Public Offering, as hereinafter defined in Section
A.7(a), the Corporation shall not issue more than 1,640,381 Series A Shares.
A.3 Restrictions on Dividends.
--------------------------
A.3 (a) So long as any Series A Preferred Stock is outstanding the
Corporation shall not:
A.3 (a) (i) declare or pay any dividend or make any distribution
(whether in cash, shares of capital stock of the
-2-
<PAGE>
Corporation other than shares of Common Stock, or other property) on shares of
its capital stock unless (A) all dividends and distributions previously declared
on the Series A Preferred Stock shall have been paid or the Corporation shall
have irrevocably deposited or set aside cash or obligations the payment of which
is backed by the full faith and credit of the United States ("United States
Obligations") sufficient for the payment thereof, and (B) all purchases of
Series A Preferred Stock herein required for all past Redemption Dates (as
hereinafter defined) shall have been made, and the Corporation shall have
irrevocably deposited or set aside the full Redemption Payment (as hereinafter
defined) required for all future Redemption Dates in United States Obligations,
the principal and interest payable on which shall be sufficient for the
Redemption Payment, for all shares of Series A Preferred Stock held by all
Requesting Preferred Stockholders (as hereinafter defined); or
A.3 (a) (ii) directly or indirectly, redeem, purchase or otherwise
acquire for value, or set apart money or other property for any mandatory
purchase of other analogous fund for the redemption, purchase or acquisition of,
any shares of Common Stock except that up to 50,000 shares of Common Stock
issued pursuant to the Corporation's stock option plans for employees and others
who render services to the Corporation ("Stock Option Plans") may be repurchased
by the Corporation in any calendar year at prices not in excess of Current
Market Prices (as hereinafter defined in Section A.7(d)(vii).
A.3 (b) If the Board of Directors declares dividends and distributions
on the Common Stock, in cash, property or securities of the Corporation (or
subscription or other rights to purchase or acquire securities of the
Corporation) as permitted by Section A.3(a)(i), the Board of Directors shall
simultaneously declare a dividend or distribution at the same rate and in like
kind on the Series A Preferred Stock, so that the Series A Preferred Stock
participates equally with the Common Stock in such dividend or distribution,
provided, however, that any dividends or distributions on the Common Stock
payable in shares of Common Stock on or after the Effective Date shall be
payable on the Series A Preferred Stock in shares of Series A Preferred Stock.
For purposes of determining its proportional share of the dividend, each share
of the Series A Preferred Stock shall be deemed to be that number of shares of
Common Stock into which such share of Series A Preferred Stock is then
convertible, rounded to the nearest one-tenth of a share. All dividends declared
upon the Series A Preferred Stock shall be declared pro rata per share.
--------
A.4 Rights on Liquidation, Dissolution, Winding-up.
-----------------------------------------------
A.4 (a) In the event of any liquidation, dissolution or winding-up of
the affairs of the Corporation (collectively, a "Liquidation"), whether
voluntary or involuntary, before any
-3-
<PAGE>
payment of cash or distribution of other property shall be made to the holders
of Common Stock, the holders of Series A Preferred Stock ("Series A Preferred
Stockholders") shall be entitled to receive out of the assets of the Corporation
legally available for distribution to its stockholders, $3.44 per share, whether
from capital, surplus or earnings, plus an amount equal to any declared but
unpaid dividends thereon.
A.4 (b) If, upon any Liquidation, the assets of the Corporation
available for distribution to its stockholders shall be insufficient to pay the
Series A Preferred Stockholders the full amounts to which they shall be
entitled, the Series A Preferred Stockholders shall share ratably in any
distribution of assets according to the number of such shares held by them.
A.4 (c) For purposes of this Certificate and subject to Section
A.6(b)(v), the sale, lease or other disposition of all or substantially all of
the assets of the Corporation or the merger or consolidation of another
corporation into or with the Corporation (a "Merger") where the Series A
Preferred Stockholders of the Corporation receive distributions of cash in an
amount less than $3.44 per share in complete exchange for their shares, shall be
deemed to be a Liquidation. The amount of any cash received by the Series A
Preferred Stockholders in complete exchange for their shares shall be credited
against the amount otherwise payable to the Series A Preferred Stockholders
pursuant to Section A.4(a)-(b). A Merger where the Series A Preferred
Stockholders receive securities in complete or partial exchange for their shares
shall not be deemed to be a Liquidation.
A.4 (d) Notwithstanding the provisions of Sections A.4(a)
and A.4(c), on and after the Effective Date of a Public Offering, as hereinafter
defined in Section A.7(a), in the event of a Liquidation, the Series A Preferred
Stockholders shall be entitled to receive out of the assets of the Corporation
legally available for distribution to its stockholders, $2.28 per share, whether
from capital, surplus or earnings, plus an amount equal to any declared but
unpaid dividends thereon.
A.5 Redemption.
-----------
A.5 (a) The Corporation shall at the request of any Series A
Preferred Stockholder ("Requesting Preferred Stockholder") redeem all (but not
less than all) of the Series A Shares owned by such Requesting Preferred
Stockholder at a redemption price per share equal to (i) $3.44 prior to the
Effective Date and $2.28 on or after the Effective Date, plus (ii) an amount
equal to any declared but unpaid dividends thereon to the applicable Redemption
Date (as hereinafter defined) for the shares, plus interest at the rate of 10%
per annum on the sum of (i) and (ii) from the Redemption Date until the
Corporation has paid the Requesting Preferred Stockholder
-4-
<PAGE>
in full, or has irrevocably deposited or set aside cash or United States
Obligations sufficient for such payment (such redemption price and dividends and
interest, if any, are hereinafter referred to as the "Redemption Payment"). The
redemption of the Series A Shares owned by a Requesting Preferred Stockholder
shall take place in four equal installments that shall close on the first
business day in 1996, 1997, 1998 and 1999, respectively (each a "Redemption
Date").
A.5 (b) (i) On and after each Redemption Date all rights of any
requesting Preferred Stockholder with respect to the Series A Shares redeemed on
that Redemption Date, except the right to receive the Redemption Payment as
provided herein, shall cease, and such shares shall no longer be deemed to be
outstanding, whether or not the Corporation has received the certificates
representing such shares, on condition that the Corporation pays the Redemption
Payment, or irrevocably deposits or sets aside cash or United States
Obligations, the principal and interest payable on which shall be sufficient to
pay the Redemption Payment; provided, however, that, if the Corporation defaults
-----------------
in paying the Redemption Payment or irrevocably depositing or setting aside
United States Obligations sufficient to pay the Redemption Payment, all rights
of the Requesting Preferred Stockholder with respect to the Series A Shares that
were to have been redeemed shall continue until the Corporation cures such
default.
A.5 (b) (ii) Each share of Series A Preferred Stock owned by a
Requesting Preferred Stockholder shall be deemed to be outstanding and entitled
to all the rights provided herein until the Redemption Date with respect to the
share in question. In the event shares of Common Stock are issued to a
Requesting Preferred Stockholder upon conversion of shares of Series A Preferred
Stock prior to the Redemption Date for such shares of Series A Preferred Stock,
the shares of Common Stock shall not be redeemable.
A.5 (c) Any Requesting Preferred Stockholder shall send notice of its
redemption request pursuant to this Section A.5 by first-class certified mail,
return receipt requested, postage prepaid to the Corporation at its principal
place of business on or before October 1, 1995. The Requesting Preferred
Stockholder shall be entitled to receive the Redemption Payment at any time on
or after the Redemption Date, upon actual delivery to the Corporation, or its
transfer agent, if any, of the certificate(s) representing the shares of Series
A Preferred Stock to be redeemed on that Redemption Date.
A.5 (d) Notwithstanding anything to the contrary contained in Section
A.5(a), the Corporation shall not be obligated to acquire any shares on any
Redemption Date to the extent that the acquisition thereof would violate any
law, statute, rule, regulation, policy or guideline promulgated by any federal,
state, local or foreign governmental authority
-5-
<PAGE>
applicable to the Corporation, provided that the Corporation shall use all
legally permissible methods in the reduction of capital and revaluation of
assets, including appraisal, in order to obtain a legal source of funds with
which to pay the Redemption Payment and shall acquire such shares as soon as
permitted by applicable laws, statutes, rules, regulations, policies and
guidelines.
A.5 (e) Shares of Series A Preferred Stock are not subject to or
entitled to the benefit of a sinking fund.
A.5 (f) Redeemed shares of Series A Preferred Stock shall not be
reissued but shall be retired. Upon the retirement of redeemed shares the
capital of the Corporation shall be reduced.
A.6 Voting.
------
A.6 (a) In addition to the rights otherwise provided for herein or by
law, the Series A Preferred Stockholders shall be entitled to vote, together
with the Common Stockholders, as one class on all matters submitted to a vote of
Stockholders, as in the same manner and with the same effect as the Common
Stockholders. In any such vote, each share of Series A Preferred Stock shall
entitle the holder thereof to the number of votes per share that equals the
number of shares of Common Stock (including fractional shares) into which each
share of Series A Preferred Stock is then convertible, rounded to the nearest
decimal place.
A.6 (b) So long as any Series A Preferred Stock is outstanding, the
Corporation shall not, without the written consent in lieu of a meeting, or the
affirmative vote at a meeting called for such purpose, of Series A Preferred
Stockholders of record that hold at least two-thirds (2/3) of the outstanding
Series A Preferred Stock, voting as a separate class:
A.6 (b) (i) sell, abandon, transfer, lease or otherwise dispose
of all or substantially all of the properties or assets of the Corporation or
any of its subsidiaries,
A.6 (b) (ii) purchase fifty percent (50%) or more of the voting
stock of any corporation or of the voting interest in any partnership, joint
venture, trust, or other entity or purchase, lease or otherwise acquire all or
substantially all of the assets of another entity, if (A) any stockholder,
director, officer, manager, partner, trustee, beneficiary or other official of
the other entity is a stockholder, director, officer or manager of the
Corporation of any of its subsidiaries or is related by blood or marriage to a
stockholder, director, officer or manager of the Corporation or any of its
subsidiaries, (B) the lines of business, if any, of the other entity outside the
medical and health services fields constituted more than 10% of the other
entity's annual revenues
-6-
<PAGE>
during its most recent year, or (C) the pro forma ratio of the aggregate
---------
principal amount of the interest bearing indebtedness of the Corporation and its
subsidiaries to their consolidated net worth at the end of the fiscal quarter of
the Corporation immediately preceding the proposed purchase, lease or other
acquisition, after giving effect to the proposed purchase, lease or other
acquisition, would be more than two and one-half to one (21/2:1),
A.6 (b) (iii) declare or pay any dividend or make any distribution
(whether in cash, shares of capital stock of the Corporation other than shares
of Common Stock, or other property) on shares of its capital stock,
A.6 (b) (iv) directly or indirectly, redeem, purchase or otherwise
acquire for value, or set apart money or other property for any mandatory
purchase or other analogous fund for the redemption, purchase or acquisition of,
any shares of Common Stock or Series A Preferred Stock except:
(A) for redemptions pursuant to Section A.5(a),
(B) pursuant to an offer to purchase not less than
two-thirds (2/3) of the outstanding Series A Preferred Stock made on the same
basis to the holders of all the outstanding shares of Series A Preferred Stock
with such purchase to be made pro rata as nearly as practicable, according to
--------
the number of shares held by the respective holders accepting such offer,
provided such offer is made in accordance with the applicable provisions of all
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stockholders' agreements between the Corporation and one or more of its
stockholders, and
(C) that up to 50,000 shares of Common Stock
issued pursuant to the Corporation's Stock Option Plans may be repurchased by
the Corporation in any calendar year at prices not in excess of Current Market
Prices.
A.6 (b) (v) merge or consolidate with or into, or permit any
subsidiary of the Corporation to merge or consolidate with or into, any other
corporation, corporations or other entity or entities,
A.6 (b) (vi) voluntarily dissolve, liquidate or wind-up or carry
out any partial liquidation or distribution or transaction in the nature of a
partial liquidation or distribution,
A.6 (b) (vii) amend, alter or repeal the designations, powers,
preferences, rights, qualifications, limitations or restrictions of the Series A
Preferred Stock, so as to adversely affect the rights of the Series A Preferred
Stock,
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A.6 (b) (viii) amend, alter, or repeal any provision of the
Certificate of Incorporation or By-Laws of the Corporation or add any provision
thereto, so as to affect adversely the rights of the Series A Preferred Stock,
A.6 (b) (ix) authorize, issue or agree to issue (A) any shares of the
Corporation's capital stock, or any equity security, or right or option to
receive any equity security, ranking senior to or on parity with the Series A
Preferred Stock with respect to rights on Liquidation or redemption or ranking
senior to the Series A Preferred Stock with respect to the payment of any
dividend or distribution other than in Liquidation, (B) any security convertible
into, or warrant exercisable or exchangeable for, capital stock or other
securities of the Corporation described in the preceding clause (A), or (C) any
debt security or capitalized lease with an equity feature,
A.6 (b) (x) increase the number of shares of Series A Preferred
Stock authorized to be issued,
A.6 (b) (xi) reclassify any shares of the Corporation's capital
stock as shares ranking senior to or on parity with the Series A Preferred Stock
with respect to rights on Liquidation, redemption or for the payment of any
dividend or distribution other than in Liquidation, or
A.6 (b) (xii) enter into any line of business outside the medical
and health services field except as permitted in the preceding clause (ii)(B).
A.7 Conversion.
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A.7 (a) (i) Any Series A Preferred Stockholder shall have the
right, at any time or from time to time, prior to the closing date (the "Closing
Date") of the Company's initial Public Offering (as hereinafter defined), to
convert any or all of its shares of Series A Preferred Stock into that number of
fully paid and nonassessable shares (including fractional shares) of Common
Stock for each share of Series A Preferred Stock equal to the quotient of $3.44
divided by the Preferred Conversion Price, as hereinafter defined in Section
A.7(d), for that share (as last adjusted and then in effect) rounded to the
nearest decimal place. Any Series A Preferred Shares that remain unconverted on
the Closing Date shall be automatically converted without notice and without any
action on the part of the holder thereof into shares of Common Stock on the
Closing Date in accordance with the preceding sentence. After the Closing Date
all rights of holders of shares of Series A Preferred Stock with respect to
Series A Stock Preferred Stock, except the right to receive shares of Common
Stock in accordance with the penultimate sentence, shall cease and the shares of
Series A Preferred Stock shall no longer be deemed to be outstanding, whether or
not the Corporation has
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<PAGE>
received the certificates representing such shares. Any Series A Shares
converted pursuant to this Section A.7 shall not be reissued but shall be
retired. Upon the retirement of redeemed Series A Shares, the capital of the
Corporation shall be reduce.
A.7 (a) (ii) A Public Offering is defined as an Underwritten Offering (as
hereinafter defined) by the Corporation of authorized but unissued shares of
Common Stock at an initial offering price of at least ten dollars ($10) per
share (adjusted for any stock split or combination or recapitalization of the
Corporation). An Underwritten Offering is defined as a firm commitment offering
by one or more underwriters that have executed and delivered to the Corporation
an underwriting agreement containing only such conditions to closing as are
customary in the industry and consistent with the underwriters' usual practice,
provided that the Corporation shall use its best efforts to cause the
- --------
underwriters to close their purchase of shares of Common Stock as provided in
the underwriting agreement.
A.7 (a) (iii) The Corporation shall promptly send by first-class
mail, postage prepaid, to each Series A Preferred Stockholder at such holder's
address appearing on the Corporation's records a copy of (i) each registration
statement filed by the Corporation under the Securities Act and each amendment
thereof and each exhibit and schedule thereto and (ii) each order of the
Securities and Exchange Commission declaring any such registration statement to
be effective.
A.7 (a) (iv) Holders of Series A Preferred Stock converted into
shares of Common Stock pursuant to this Section A.7 shall be entitled to payment
of any declared but unpaid dividends payable with respect to such shares of
Series A Preferred Stock, up to and including the Conversion Date (as defined in
Section A.7(b) below) or the Closing Date, as the case may be.
A.7 (b) (i) Any Series A Preferred Stockholder that exercises its
right to convert its shares of Series A Preferred Stock into Common Stock shall
deliver the certificate(s) for the shares to be converted ("Preferred
Certificate"), duly endorsed or assigned in blank to the Corporation, during
regular business hours, at the office of the transfer agent of the Corporation,
if any, at the principal place of business of the Corporation or at such other
place as may be designated by the Corporation.
A.7 (b) (ii) Each Preferred Certificate shall be accompanied by
written notice stating that such holder elects to convert such shares and
stating the name or names (with address) in which the certificate(s) for the
shares of Common Stock ("Common Certificate") are to be issued. Such conversion
shall be deemed to have been effected on the date when the aforesaid delivery is
made ("Conversion Date").
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<PAGE>
A.7 (b) (iii) As promptly as practicable thereafter, the
Corporation shall issue and deliver to or upon the written order of such holder,
at the place designated by such holder, a Common Certificate(s) for the number
of full shares of Common Stock to which such holder is entitled and a check or
cash for any fractional interest in a share of Common Stock, as provided in
Section A.7(c) below, and for any declared but unpaid dividends, payable with
respect to the converted shares of Series A Preferred Stock, up to and including
the Conversion Date or the Effective Date, as the case may be.
A.7 (b) (iv) The person in whose name each Common Certificate is to be
issued shall be deemed to have become a stockholder of record of Common Stock on
the applicable Conversion Date or the Closing Date, as the case may be, unless
the transfer books of the Corporation are closed on that date, in which event
such holder shall be deemed to have become a stockholder of record on the next
succeeding date on which the transfer books are open; provided, that the
--------
Preferred Conversion Price shall be that in effect on the Conversion Date or the
Closing Date, as the case may be.
A.7 (b) (v) Upon conversion of only a portion of the shares
covered by a Preferred Certificate, the Corporation, at its own expense, shall
issue and deliver to or upon the written order of the holder of such Preferred
Certificate, a new Preferred Certificate representing the number of unconverted
shares of Series A Preferred Stock from the Preferred Certificate so
surrendered. The new Preferred Certificate shall entitle the holder thereof to
dividends on the shares of Series A Preferred Stock represented thereby to the
same extent as if the old Preferred Certificate had not been surrendered for
conversion.
A.7 (c) (i) If a Series A Preferred Stockholder shall surrender
more than one Preferred Certificate for conversion at any one time, the number
of such shares of Common Stock issuable upon conversion thereof shall be
computed on the basis of the aggregate number of shares of Series A Preferred
Stock so surrendered.
A.7 (c) (ii) No fractional shares of Common Stock shall be issued
upon conversion of shares of Series A Preferred Stock. The Corporation shall pay
a cash adjustment for such fractional interest in an amount equal to the then
Current Market Price (as hereinafter defined) of a share of Common Stock
multiplied by such fractional interest. Fractional interests shall not be
entitled to dividends, and the holders of fractional interests shall not be
entitled to any rights as stockholders of the Corporation for such fractional
interest.
A.7 (d) The Preferred Conversion Price shall initially be $3.44 and
shall be subject to adjustment from time
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to time as follows:
A.7 (d) (i) If the Corporation shall at any time or from time to
time after the date of original issuance of the first share of the Series A
Preferred Stock (the "Original Series A Issuance Date") issue any shares of
Common Stock other than the Excluded Stock (as hereinafter defined) for a
consideration per share, or issue any shares of Series A Preferred Stock or
other securities convertible into, exchangeable for or exercisable for shares of
Common Stock, other than Excluded Stock, for a consideration per share of
underlying Common Stock less than the Preferred Conversion Price in effect
immediately prior to such issue, the Preferred Conversion Price in effect
immediately prior to each such issue shall be lowered to a price equal to the
consideration per share of Common Stock or underlying Common Stock received by
the Corporation upon such issue. For the purposes of any adjustment of the
Preferred Conversion Price pursuant to this Section A.7(d)(i), the following
provisions shall be applicable:
(A) In the case of the issuance of Common Stock in
whole or in part for cash, the consideration shall be deemed to be the amount of
cash paid therefor, plus the value of any property other than cash received by
the Corporation as provided in paragraph (B) of this clause (i), less any
discounts, commissions or other expenses allowed, paid or incurred by the
Corporation for any underwriting or otherwise in connection with the issuance
and sale thereof.
(B) In the case of the issuance of Common Stock for
consideration in whole or in part in property or consideration other than cash,
the value of such property or consideration other than cash shall be deemed to
be the fair market value thereof as determined in good faith by the Board of
Directors of the Corporation, irrespective of any accounting treatment;
provided, however, that such fair market value shall not exceed the aggregate
- -------- -------
Current Market Price of the shares of Common Stock being issued, less any cash
consideration paid for such shares.
(C) In the case of the issuance of (I) options to
purchase or rights to subscribe for Common Stock, (II) securities convertible
into or exchangeable for Common Stock or (III) options to purchase or rights to
subscribe for such convertible or exchangeable securities:
(1) the aggregate maximum number of shares of
Common Stock deliverable upon exercise of such options to purchase, or rights to
subscribe for Common Stock shall be deemed to have been issued at the time such
options or rights were issued and for a consideration equal to the consideration
(determined in the manner provided in paragraphs (A) and (B) above), if any,
received by the Corporation upon the issuance of such options or rights plus the
minimum
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<PAGE>
purchase price provided in such options or rights for the Common Stock covered
thereby;
(2) the aggregate maximum number of shares of
Common Stock deliverable upon conversion of, or in exchange for, any such
convertible or exchangeable securities or upon the exercise of options to
purchase, or rights to subscribe for, such convertible or exchangeable
securities and subsequent conversion or exchange thereof shall be deemed to have
been issued at the time such securities were issued or such options or rights
were issued and for a consideration equal to the consideration received by the
Corporation for any such securities and related options or rights (excluding any
cash received on account of accrued interest or accrued dividends), plus the
additional consideration, if any, to be received by the Corporation upon the
conversion or exchange of such securities or the exercise of any related options
or rights (determined in the manner provided in paragraphs (A) and (B) above);
and
(3) if there is any decrease in the conversion or
exercise price of, or any increase in the number of shares to be received upon
exercise, conversion or exchange of any such options, rights or convertible or
exchangeable securities (other than a change resulting from the antidilution
provisions thereof), the Preferred Conversion Price shall be automatically
lowered to reflect such change.
A.7 (d) (ii) "Excluded Stock" shall mean:
(A) Common Stock issued upon conversion of any
shares of Series A Preferred Stock;
(B) Securities issued pursuant to the acquisition
of another corporation, partnership, joint venture, trust or other entity by the
Corporation by merger, consolidation, stock acquisition, reorganization, or
otherwise whereby the Corporation, or its shareholders of record immediately
prior to the effectiveness of such transaction, directly or indirectly own at
least the majority of the voting power of such other entity or the resulting or
surviving corporation immediately after such transaction; and
(C) Common Stock issued to officers or employees
of or consultants to the Corporation, pursuant to any options to purchase or
rights to subscribe for such Common Stock granted pursuant to an option or
rights plan with vesting features approved by the Corporation's Board of
Directors but not to exceed 106,350 shares of Common Stock, giving effect to
appropriate adjustment to prevent dilution thereof; and
(D) Common Stock issued to physician
anesthesiologists, radiologists and consultants, and certified registered nurse
anesthetists, under contract with the
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<PAGE>
Corporation pursuant to any options to purchase or rights to subscribe for such
Common Stock granted by the Board of Directors but not to exceed 90,250 shares
of Common Stock, giving effect to appropriate adjustment to prevent dilution
thereof; and
(E) Common Stock issued to Robert D. Garces in
connection with the acquisition by the Corporation of the assets of Premier
Management, Inc., a corporation wholly-owned by Robert D. Garces, but not to
exceed 30,000 shares of Common Stock, giving effect to appropriate adjustment to
prevent dilution thereof.
A.7 (d) (iii) If the number of shares of Common Stock outstanding
at any time after the Original Series A Issuance Date is increased by a stock
dividend payable in shares of Common Stock or by a subdivision or split-up of
shares of Common Stock, then, a stock dividend payable in shares of Series A
Preferred Stock or a subdivision or spilt-up of shares of Series A Preferred
Stock in the same proportion or ratio shall be simultaneously payable or
effected on the Series A Preferred Stock so that no adjustment in the Preferred
Conversion Price shall be required as a result of such stock dividend,
subdivision or split-up, provided, however, that no fractional shares shall be
issued as a result of such stock dividend, distribution or split-up and any
fractions resulting therefrom shall be calculated to the nearest whole share.
A.7 (d) (iv) If, at any time after the Original Series A Issuance
Date, the number of shares of Common Stock outstanding is decreased by a
combination of the outstanding shares of Common Stock, then, following the
record date for such combination, the Preferred Conversion Price shall be
appropriately increased so that the number of shares of Common Stock issuable on
conversion of each share of Series A Preferred Stock shall be decreased in
proportion to such decrease in outstanding shares.
A.7 (d) (v) In case, at any time after the Original Series A
Issuance Date, of any capital reorganization, or any reclassification of the
capital stock of the Corporation (other than a change in par value or from par
value to no par value or from no par value to par value or as a result of a
stock dividend or subdivision, split-up or combination of shares), or the
consolidation or merger of the Corporation with or into another corporation
(other than a consolidation or merger in which the Corporation is the continuing
corporation and which does not result in any change in the powers, designations,
preferences and rights (or the qualifications, limitations or restrictions, if
any) of the Series A Preferred Stock (an "Extraordinary Transaction"), the
Preferred Conversion Price with respect to the Series A Preferred Stock
outstanding after the Extraordinary Transaction shall be adjusted to provide
that the shares of Series A Preferred Stock outstanding immediately
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<PAGE>
prior to the effectiveness of the Extraordinary Transaction shall be convertible
into the kind and number of shares of stock or other securities or property of
the Corporation or of the corporation resulting from or surviving such
Extraordinary Transaction which the holder of the number of shares of Common
Stock deliverable (immediately prior to the effectiveness of the Extraordinary
Transaction) upon conversion of such Series A Preferred Stock would have been
entitled to receive upon such Extraordinary Transaction. The provisions of this
Section A.7. shall similarly apply to successive Extraordinary Transactions.
A.7 (d) (vi) All calculations under this Section A.7(d) shall be
made to the nearest one-tenth of a cent ($.001) or to the nearest one-tenth of a
share, as the case may be.
A.7 (d) (viii) For the purpose of any computation pursuant to
Section A.3(a)(ii), A.6(b)(iv)(C) or A.7(d), the Current Market Price at any
date of one share of Common Stock shall be deemed to be the average of the daily
closing prices for the thirty (30) consecutive business days ending on the fifth
(5th) business day before the day in question (as adjusted for any stock
dividend, split-up, combination or reclassification that took effect during such
thirty (30) business day period) as follows:
(A) If the Common Stock is listed or admitted for
trading on a national securities exchange, the closing price for each day shall
be the last reported sales price regular way or, in case no such reported sales
took place on such day, the average of the last reported bid and asked prices
regular way, in either case, on the principal national securities exchange on
which the Common Stock is listed or admitted to trading.
(B) If the Common Stock is not at the time listed
or admitted for trading on any such exchange, then such price as shall be equal
to the last reported sale price, or, if there is no such sale price, the average
of the last reported bid and asked prices, as reported by the National
Association of Securities Dealers Automated Quotations System ("NASDAQ") on such
day.
(C) If, on any day in question, the security shall
not be listed or admitted to trading on a national securities exchange or quoted
on the NASDAQ, then such price shall be equal to the last reported bid and asked
prices on such day as reported by the National Quotation Bureau, Inc. or any
similar reputable quotation and reporting service, if such quotation is not
reported by the National Quotation Bureau, Inc.
(D) If the Common Stock is not traded in such
manner that the quotations referred to in this clause (vii) are available for
the period required hereunder, the
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<PAGE>
Current Market Price shall be determined by unanimous vote or written consent of
the entire Board of Directors of the Corporation.
(E) If the Common Stock is not traded in such
manner that the quotations referred to in this clause (vii) are available for
the period required hereunder and the Directors of the Corporation are unable to
agree on a determination of Current Market Price, then Current Market Price
shall be determined by an investment banking firm of nationally recognized
standing selected by the President of the Corporation and approved by vote of a
majority of the Series A Preferred Stockholders or by their unanimous written
consent.
A.7 (d) (viii) In any case in which the provisions of this Section
A.7(d) shall require that an adjustment shall become effective immediately after
a record date for an event, the Corporation may defer until the occurrence of
that event (A) issuing to the holder of any share of Series A Preferred Stock
converted after such record date and before the occurrence of such event the
additional shares of capital stock issuable upon such conversion by reason of
the adjustment required by such event over and above the shares of capital stock
issuable upon such conversion before giving effect to such adjustment and (B)
paying to such holder any amount in cash in lieu of a fractional share of
capital stock pursuant to Section A.7(c) above; provided, however, that the
-------- -------
Corporation shall deliver to such holder a due bill or other appropriate
instrument evidencing such holder's right to receive such additional shares, in
such case, upon the occurrence of the event requiring such adjustment.
A.7 (e) Whenever the Preferred Conversion Price shall be adjusted as
provided in Section A.7(d) above, the Corporation shall file, at its principal
office, at the office of the transfer agent for the Series A Preferred Stock, if
any, or at such other place as may be designated by the Corporation, a
statement, signed by its President and by its Chief Financial Officer, showing
in detail the facts requiring such adjustment and the Preferred Conversion Price
that shall be in effect after such adjustment. The Corporation shall also cause
a copy of such statement to be sent by first-class, certified mail, return
receipt requested, postage prepaid, to each Series A Preferred Stockholder at
such holder's address appearing on the Corporation's records. Where appropriate,
such copy may be given in advance and may be included as part of a notice
required to be mailed under the provisions of Section A.7(f) below.
A.7 (f) In the event the Corporation shall propose to file a
registration statement under the Securities Act for a Public Offering or to take
any action of the types described in clauses (I), (iii), (iv), or (v) of Section
A.7(d) above, the
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Corporation shall give notice to each Series A Preferred Stockholder, in the
manner set forth in Section A.7(e) above, which shall specify the record date,
if any, with respect to any such action and the date on which such action is to
take place. The notice shall also set forth such facts as are reasonably
necessary to indicate the effect of such action (to the extent such effect may
be known at the date of such notice) on the Preferred Conversion Price and the
number, kind or class of shares or other securities or property which shall be
deliverable or purchasable upon the occurrence of such action or deliverable
upon conversion of shares of Series A Preferred Stock. In the case of any action
which would require the fixing of a record date, such notice shall be given at
least ten (10) days prior to the date so fixed, and in case of all other action,
such notice shall be given at least fifteen (15) days prior to the taking of
such proposed action. Failure to give such notice, or any defect therein, shall
not affect the legality or validity of any such action.
A.7 (g) The Corporation shall pay all documentary, stamp or other
transactional taxes (excluding income taxes) attributable to the issuance or
delivery of shares of capital stock of the Corporation upon conversion of any
shares of Series A Preferred Stock; provided, however, that the Corporation
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shall not be required to pay any taxes which may be payable in respect of any
transfer involved in the issuance or delivery of any certificate for such shares
in a name other than that of the holder of the shares of Series A Preferred
Stock in respect of which such shares are being issued.
A.7 (h) The Corporation shall at all times reserve, free from
preemptive rights, out of its authorized but unissued shares of Common Stock,
solely for the purpose of effecting the conversion of the shares of Series A
Preferred Stock, sufficient shares of Common Stock to provide for the conversion
of all outstanding shares of Series A Preferred Stock.
A.7 (i) All shares of Common Stock which may be issued in connection
with the conversion provisions set forth herein will, upon issuance by the
Corporation, be validly issued, fully paid and nonassessable, free from
preemptive rights and free from all taxes, liens or charges with respect thereto
created or imposed by the Corporation.
A.7 (j) If at any time the outstanding number of Series A Shares is
less than 20% of the number of Series A Shares outstanding on the Series A
Issuance Date, then the Corporation may at its option, on thirty (30) days'
written notice to the then remaining holders of Series A Preferred Shares,
require such holders to exercise their conversion rights under this Section A.7.
In the event that such holders fail to exercise their conversion rights as
provided in such written notice of the Corporation, then such Series A Shares
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shall be automatically converted without any further action on the part of the
holder thereof into shares of Common Stock on the date provided in the
Corporation's notice in accordance with the provisions of this Section A.7.
After such date, all rights of the holders of such Series A Shares with respect
to Series A Preferred Stock, except the right to receive shares of Common Stock
in accordance with the penultimate sentence, shall cease and such Series A
Shares shall no longer be deemed to be outstanding, whether or not the
Corporation has received the certificates representing such shares.
A.8 Preemptive Rights.
------------------
A.8 (a) Except for Excluded Stock, the Series A Preferred
Stockholders shall have the preemptive right to subscribe to any and all
issuances of (i) Common Stock of the Corporation, (ii) options to purchase or
rights to subscribe for Common Stock, (iii) securities convertible into or
exchangeable for Common Stock and (iv) options to purchase or rights to
subscribe for such convertible or exchangeable securities. For purposes of
determining the proportional share of the securities to be issued to which each
share of Series A Preferred Stock is entitled to subscribe, the number of shares
of Common Stock into which a share of Series A Preferred Stock is then
convertible (without giving effect to the proposed issuance of securities) shall
be divided by the total number of shares of Common Stock outstanding prior to
the offering on a fully diluted basis, i.e., assuming that all the outstanding
Series A Preferred Stock and any other security of the Corporation convertible
into or exercisable or exchangeable for shares of Common Stock without the
payment of consideration shall have been converted into or exercised or
exchanged for shares of Common Stock
A.8 (b) In the event the Corporation shall purpose to issue
securities of the type described in Section A.8(a), the Corporation shall give
notice to each Series A Preferred Stockholder, in the manner set forth in
Section A.7(e), which shall set forth the number and kind or class of shares or
other securities proposed to be issued, the price therefor and the procedure by
which Series A Preferred Stockholders may exercise their preemptive right to
subscribe therefor. Such notice shall be given at least twenty (20) days prior
to the issuance of such securities.
A.8 (c) The preemptive right of the Series A Preferred Stockholders
shall terminate at the close of business on the day prior to the Effective Date.
The notice referred to in Section A.8(b) shall not be required in connection
with issuances of securities of the type described in Section A.8(a) on or after
the Effective Date.
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A.9 Equal Rights.
-------------
Each share of Series A Preferred Stock issued and outstanding shall be
identical in all respects one with the other, and no dividends shall be paid on
any shares of Series A Preferred Stock unless the same dividend is paid on all
shares of Series A Preferred Stock outstanding at the time of such payment.
PART B. ADDITIONAL SERIES OF PREFERRED STOCK
---------------------------------------------
B.1 Designation of Additional Series of Preferred Stock. The Board of
---------------------------------------------------
Directors is hereby expressly authorized, at any time after the Effective Date
of the Corporation's initial Public Offering as defined in Section A.7(a)
above, by resolution or resolutions thereof, to provide for, designate and
issue, out of the 5,000,000 authorized but unissued and undesignated shares of
Preferred Stock, one or more series of Preferred Stock, subject to the terms and
conditions set forth herein. Before any shares of any such series are issued,
the Board of Directors shall fix, and hereby is expressly empowered to fix, by
resolution or resolutions, the following provisions of the shares of any such
series:
B.1 (a) the designation of such series, the number of shares to
constitute such series and the stated value thereof, if different from the par
value thereof;
B.1 (b) whether the shares of such series shall have voting rights or
powers, in addition to any voting rights required by law, and, if so, the terms
of such voting rights or powers, which may be full or limited;
B.1 (c) the dividends, if any, payable on such series, whether any
such dividends shall be cumulative and, if so, from what dates, the conditions
and dates upon which such dividends shall be payable, and the preference or
relation which such dividends shall bear to the dividends payable on any shares
of stock or any other class or any other series of this class;
B.1 (d) whether the shares of such series shall be subject to
redemption by the Corporation and, if so, the times, prices and other conditions
of such redemption;
B.1 (e) the amount or amounts payable upon shares of such series upon,
and the rights of the holders of such series in, the voluntary or involuntary
liquidation, dissolution or winding up, or upon any distribution of the assets,
of the Corporation;
B.1 (f) whether the shares of such series shall be subject to the
operation of a retirement or sinking fund and,
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if so, the extent to and manner in which any such retirement or sinking fund
shall be applied to the purchase or redemption of the shares of such series for
retirement or other corporate purposes and the terms and provisions relative to
the operation thereof;
B.1 (g) whether the shares of such series shall be convertible into,
or exchangeable for, shares of stock of any other class or any other series of
this class or any other securities and, if so, the price or prices or the rate
or rates of conversion or exchange and the method, if any, of adjusting the
same, and any other terms and condition or exchange;
B.1 (h) the limitations and restrictions, if any, to be effective
while any shares of such series are outstanding upon the payment of dividends or
the making of other distributions on, and upon the purchase, redemption or other
acquisition by the Corporation of, the Common Stock or shares of stock of any
other class or any other series of this class;
B.1 (i) the conditions or restrictions, if any, to be effective while
any shares of such series are outstanding upon the creation of indebtedness of
the Corporation upon the issue of any additional stock, including additional
shares of such series or of any other series of this class or of any other
class; and
B.1 (j) any other powers, designations, preferences and relative,
participating, optional or other special rights, and any qualifications,
limitations or restrictions thereof.
The powers, designations, preferences and relative, participating,
optional or other special rights of each series of Preferred Stock, and the
qualifications, limitations or restrictions thereof, if any, may differ from
those of any and all other series at any time outstanding. The Board of
Directors is hereby expressly authorized from time to time to increase (but not
above the total number of authorized shares of Preferred Stock) or decrease (but
not below the number of shares thereof then outstanding) the number of shares of
stock of any series of Preferred Stock designated as any one or more series of
Preferred Stock pursuant to this Section B.1.
PART C. COMMON STOCK
----------------------
C.1 Voting. Each Common Stockholder shall be entitled to one vote for
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each share of Common Stock held of record on all matters as to which Common
Stockholders shall be entitled to vote. In any election of directors, no Common
Stockholder shall be entitled to cumulate his or her other votes by giving one
candidate more than one vote per share.
-19-
<PAGE>
C.2 Other Rights. Each share of Common Stock issued and outstanding
------------
shall be identical in all respects one with each other such share, and no
dividends shall be paid on any shares of Common Stock unless the same dividend
is paid on all shares of Common Stock outstanding at the time of such payment.
Except for and subject to those rights expressly granted to Preferred
Stockholders or, except as may be provided by the laws of the State of Delaware,
the Common Stockholders shall have exclusively all other rights of stockholders,
including, without limitation, (i) the right to receive dividends, when and as
declared by the Board of Directors of the Corporation, out of assets lawfully
available therefor, and (ii) in the event of any distribution of assets upon a
Liquidation or otherwise, the right to receive ratably and equally, together
with the holders of the Preferred Stock, all the assets and funds of the
Corporation remaining after the payment to the holders of the Preferred Stock of
the specific amounts which they are entitled to receive upon such Liquidation,
as provided herein. The Common Stockholders shall have no preemptive right to
subscribe to any issuance of securities of the Corporation.
ARTICLE IV
----------
Registered Agent
----------------
The address of the registered office of the Corporation in the State of
Delaware is 32 Loockerman Square, Suite L-100, City of Dover, County of Kent,
State of Delaware. The name of the registered agent of the Corporation at such
address is The Prentice-Hall Corporation System, Inc.
ARTICLE V
---------
Board of Directors
------------------
The election of Directors of the Corporation need not be by written
ballot, unless the By-Laws of the Corporation shall so provide. The number of
directors of the Corporation shall be fixed by, or in the manner provided in,
the By-Laws of the Corporation.
ARTICLE VI
----------
By-Laws
-------
The power to adopt, amend or repeal By-Laws shall be in the stockholders
entitled to vote, provided, however, that By-Laws also may be amended or
repealed, and new By-Laws also may be adopted, by resolution adopted by majority
vote or unanimous written consent of the Board of Directors, and provided,
further, that any By-Law or amendment to the By-Laws adopted by the Board may be
amended or repealed, and any By-Law
-20-
<PAGE>
repealed by the Board may be reinstated, by the stockholders entitled to vote,
and such stockholder vote may provide that the Board shall not thereafter take
action with respect to the By-Laws which is inconsistent with the action so
taken by the stockholders.
ARTICLE VII
-----------
Perpetual Existence
-------------------
The Corporation is to have perpetual existence.
ARTICLE VIII
------------
Amendments and Repeal
---------------------
The Corporation reserves the right to amend, alter, change, or repeal any
provision contained in this Certificate, in the manner now or hereafter
prescribed by the laws of the State of Delaware and this Certificate, and all
rights herein conferred are granted subject to this reservation.
ARTICLE IX
----------
Limitation of Liability
-----------------------
No director of the Corporation shall be liable to the Corporation or its
stockholders for monetary damages for breach of his or her fiduciary duty as
director. Nothing contained in this Article, however, shall 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 the law;
(c) under Section 174 of the General Corporation Law of the State
of Delaware; or
(d) for any transaction from which the director derived improper
personal benefit.
No amendment to or repeal of this Article X shall apply to or have any
effect on the liability or alleged liability of any director of the Corporation
for or with respect to any acts or missions of such director occurring prior to
the effective date of such amendment or repeal.
-21-
<PAGE>
ARTICLE X
---------
Indemnification
---------------
The Corporation shall indemnify, to the full extent permitted by Section
145 of the General Corporation Law of the State of Delaware, or as otherwise
permitted by law, all persons whom it may indemnify pursuant thereto.
IN WITNESS WHEREOF, said Board of Directors of Premier Anesthesia, Inc.
has caused this Certificate to be signed by its President and attested by its
Secretary, the 19th day of January, 1992.
----
PREMIER ANESTHESIA, INC.
By: /s/ Richard D. Ballard
-----------------------------
Richard D. Ballard, President
By: /s/ Pamela Wagner
-----------------------------
Pamela Wagner, Secretary
-22-
<PAGE>
State of Delaware PAGE 1
Office of the Secretary of State
--------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
OWNERSHIP, WHICH MERGES:
"ALLEGIANT PHYSICIAN SERVICES, INC.", A DELAWARE CORPORATION,
WITH AND INTO "PREMIER ANESTHESIA, INC", UNDER THE NAME OF "ALLEGIANT
PHYSICIAN SERVICES, INC.", A CORPORATION ORGANIZED AND EXISTING UNDER THE LAWS
OF THE STATE OF DELAWARE, AS RECEIVED AND FILED IN THIS OFFICE THE FOURTEENTH
DAY OF NOVEMBER, A.D. 1994, AT 9 O'CLOCK A.M.
A CERTIFIED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE KENT
COUNTY RECORDER OF DEEDS FOR RECORDING.
[SEAL OF STATE]
/s/ Edward J. Freel
------------------------------
Edward J. Freel, Secretary of State
2151572 8100M [SEAL OF SECRETARY AUTHENTICATION: 7300485
944218448 OF STATE OF DATE: 11-13-94
DELAWARE]
<PAGE>
CERTIFICATE OF OWNERSHIP AND MERGER
MERGING ALLEGIANT PHYSICIAN SERVICES, INC.
WITH AND INTO
PREMIER ANESTHESIA, INC.
Pursuant to Section 253 of the Delaware General Corporation Law (the
"Code"), the undersigned, Premier Anesthesia, Inc., a Delaware corporation (the
"Corporation"), does hereby certify:
FIRST: That the Corporation was incorporated and duly organized
pursuant to the General Corporation Law of the State of Delaware.
SECOND: That the Corporation owns all of the outstanding shares of
stock of Allegiant Physician Services, Inc., a Delaware corporation (the
"Subsidiary").
THIRD: That the Corporation shall merge with and into itself the
Subsidiary and, pursuant to Section 253 (b) of the Code, shall change its name
to "Allegiant Physician Services, Inc."
FOURTH: This certificate of Ownership and Merger shall be
effective on November 15, 1994.
FIFTH: That the Corporation, by resolutions duly adopted by its
Board of Directors on the 3rd day of November, 1994, determined, pursuant to
Section 253 of the Code, to (i) merge with and into itself the Subsidiary and
(ii) change its name to Allegiant Physician Services, Inc., and that a copy of
said resolutions and the conditions set forth in such resolutions are in the
form hereinafter set forth:
WHEREAS, the Board desires to effectuate the name change of the
Company pursuant to Section 253 of the General Corporation Law of the
State of Delaware by the creation of a wholly-owned subsidiary using
the name of ALLEGIANT PHYSICIAN SERVICES, INC. that will be merged
into the Company, with the Company surviving the merger but taking the
name of ALLEGIANT PHYSICIAN SERVICES, INC.;
NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors hereby
authorizes the creation of the wholly-owned Delaware subsidiary called
ALLEGIANT PHYSICIAN SERVICES, INC. and directs the Company and the
appropriate officers thereof to take all actions they deem necessary
or appropriate to accomplish such merger under the laws of the State
of Delaware; and
BE IT FURTHER RESOLVED, that any and all prior actions taken by the
officers of the Company or an agent or employee of the Company under
the direction of such offer in connection with the actions authorized
in the above resolutions hereby are ratified, confirmed, authorized
and approved in all respects.
<PAGE>
IN WITNESS WHEREOF, the undersigned authorized officer of Premier
Anesthesia, Inc. has executed this certificate on behalf of the
surviving corporation, this 11 day of November, 1994.
--
PREMIER ANESTHESIA, INC.
By: /s/ Richard L. Jackson
------------------------
Richard L. Jackson
Chairman
[CORPORATE SEAL]
ATTEST:
/s/ Pamela Wagner
- ------------------------
Pamela Wagner, Secretary
<PAGE>
NAME CHANGE OF PARENT COMPANY
WHEREAS, the Board of Directors of the Company desires to change the name of the
Company to ALLEGIANT PHYSICIAN SERVICES in order to reflect more accurately that
the services provided by the Company now extend to a wide variety of services in
the health care industry;
WHEREAS, the Board desires to effectuate the name change pursuant to Section 253
of the General Corporation Law of ALLEGIANT PHYSICIAN SERVICES the State of
Delaware by the creation of a wholly-owned subsidiary using the name of that
will be merged into the Company, with the Company surviving the merger but
taking the name of ALLEGIANT PHYSICIAN SERVICES;
NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors hereby authorizes
the creation of the wholly-owned Delaware subsidiary called ALLEGIANT PHYSICIAN
SERVICES and directs the Company and the appropriate officers thereof to take
all actions they deem necessary or appropriate to accomplish such merger under
the laws of the State of Delaware; and
BE IT FURTHER RESOLVED, that any and all prior actions taken by the officers of
the Company or an agent or employee of the Company under the direction of such
officer in connection with the actions authorized in the above resolutions
hereby are ratified, confirmed, authorized and approved in all respects.
The above resolution was duly adopted by the Board of Directors of Premier
Anesthesia, Inc. on November 3, 1994.
/s/ Pamela Wagner
- ------------------
Pamela Wagner
Corporate Secretary
<PAGE>
STATE OF DELAWARE
OFFICE OF THE SECRETARY OF STATE
--------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY
CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF AMENDMENT
OF "ALLEGIANT PHYSICIAN SERVICES, INC.", FILED IN THIS OFFICE ON THE TWENTY-
SIXTH DAY OF MARCH, A.D. 1996, AT 10:30 O'CLOCK A.M.
A CERTIFIED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE
COUNTY RECORDER OF DEEDS FOR RECORDING.
[SEAL OF STATE]
/s/ Edward J. Freel
----------------------------------
Edward J. Freel, Secretary of State
2151572 8100 [SEAL OF SECRETARY AUTHENTICATION: 7882287
OF STATE OF
960086820 DELAWARE] DATE: 03-26-96
<PAGE>
CERTIFICATE OF AMENDMENT
OF
SECOND RESTATED CERTIFICATE INCORPORATION
OF
ALLEGIANT PHYSICIAN SERVICES INC.
Pursuant to Section 242 of the Delaware General Corporation Law (the
"Code"), the undersigned, Allegiant Physician Services, Inc., a Delaware
corporation )the "Corporation") does hereby certify:
FIRST: ARTICLE III, 1 (a)(ii) of the Second Restated Certificate of
Incorporation of the Corporation is hereby amended in its entirety to read as
follows:
"(ii) 50,000,000 shares of the Common Stock, par value $.001 per
share (the Common Stock").
SECOND: The amendment to the Corporation's Second Restated Certificate of
Incorporation set forth above (the "Amendment") was duly adopted by the Board of
Directors of the Corporation at a meeting duly called and held, declaring said
Amendment to be advisable and directing that the Amendment be submitted to the
stockholders of the Corporation for consideration.
THIRD: The Amendment was duly adopted and approved by the stockholders of
the Corporation at a meeting duly called and held pursuant to Section 222 of the
Code, at which meeting the necessary number of shares as required by statute
were voted in favor of said Amendment.
FOURTH: The Amendment was duly adopted in accordance with the provision of
Section 242 of the Code.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Amendment to be executed by its duly authorized officer, this 22nd day of
March, 1996.
ALLEGIANT PHYSICIAN SERVICES, INC.
/s/ Richard L. Jackson
----------------------------------
RICHARD L. JACKSON
Chairman of the Board
ATTEST:
/s/ Pamela L. Wagner
- ---------------------------
Pamela L. Wagner, Secretary
<PAGE>
EXHIBIT 10.1
THIS SUBSCRIPTION AGREEMENT AND THE DEBENTURES SOLD HEREBY HAVE NOT BEEN
REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED, BUT AS AN
EXEMPTION FROM THE REQUIREMENTS OF SAID ACT. NEITHER SUCH DEBENTURES NOR
ANY INTEREST OR PARTICIPATION HEREIN OR THEREIN MAY BE SOLD, ASSIGNED, PLEDGED,
HYPOTHECATED, ENCUMBERED OR IN ANY OTHER MANNER TRANSFERRED OR DISPOSED
OF IN THE UNITED STATES OR TO A "U.S. PERSON" AS DEFINED IN REGULATION S
PROMULGATED UNDER SUCH ACT ("REGULATION S") EXCEPT IN COMPLIANCE WITH
REGULATION S.
SUBSCRIPTION AGREEMENT
----------------------
Mr. Richard L. Jackson
Chairman, CEO & President
Allegiant Physician Services
500 Northridge Road, Suite 500
Atlanta, Georgia 30350
Gentlemen:
THIS OFFSHORE SECURITIES SUBSCRIPTION AGREEMENT (this "Agreement") is executed
in reliance upon the transactional exemption afforded by Regulation S
("Regulation S") as promulgated by the Securities and Exchange Commission
("SEC") under the Securities Act of 1933, as amended ("1933 Act").
THIS AGREEMENT has been executed by the undersigned in connection with the
private placement of Subordinated Convertible Debentures (hereinafter referred
to as the "Debentures") of Allegiant Physician Services, Inc., a corporation
under the laws of the state of Delaware, U.S.A., NASDAQ symbol "ALPS"
(hereinafter referred to as the "Seller" or the "Company"). The Debentures
being sold pursuant to this Agreement have not been registered under the
1933 act and may not be offered or sold in the United States or to U.S.
persons, other than distributors, (as such terms are defined in Regulation
S), unless the Debentures are registered under the 1933 act, or an exemption
from the registration requirement of the 1933 Act is available. The terms
on which the Debentures may be converted into Common Stock (such Common
stock underlying the Debentures being referred to herein as "Shares") and
the other terms of the Debenture are set forth therein. This Subscription
and, if accepted by the Company, the offer and sale of Debentures and the
Shares (collectively the "Securities"), are being made in reliance upon
the provision of Regulation S ("Regulation S") under the United States
Securities Act of 1933, as amended (the "Act").
The undersigned, Hull Overseas, Ltd. (hereinafter referred to as Buyer or
"Purchaser") in order to induce the Company to enter into the transaction
contemplated hereby and acknowledging that the Company will rely thereon
represents, warrants and agrees as follows:
1. Subject to the terms and conditions set forth in this Agreement,
the undersigned hereby subscribes for $300,000 in principal amount of 8%
Subordinated Convertible Debentures and pays herewith funds in the amount
of 300,000 Dollars ($300,000 U.S.) (Sales of Debentures are made only in
$100,000 increments)
1
<PAGE>
Upon execution of this Subscription Agreement by the Company, Purchaser
will wire transfer available funds in U.S. dollars payable to the Company
Via escrow account as follows:
The Debentures shall be delivered to the Purchaser c/o Christian M. Van Pelt,
P.C., as escrow agent, on a delivery versus payment basis and funds shall be
wired by Purchaser as follows:
The Bank of New York
National Community Division
Parsippany, New Jersey 07054
ABA No. 021-000-18
For the Benefit of:
Christian M. Van Pelt, P.C.
Attorney Trust Account
Account No. 610-1824886
2. Representation and Warranties: The purchaser hereby acknowledges,
-----------------------------
represents and warrants to and agrees with the Company as follows:
(a) The Purchaser has been furnished with the Company's press
releases, current Annual Report on Form 10-K for year ended December 31,
1994 and Quarterly Reports on Form 10-Q March 31, 1995, respectively (the
"Disclosure Document"). The purchaser acknowledges that the Company will,
upon written request made by the Purchaser, provide without charge, copies
of all documents identified in the Disclosure Document.
(b) The purchaser represents and warrants that it is not a U.S.
person (as defined in Rule 902(o) of Regulation S.
(c) The purchaser acknowledges that the offer and sale of the
Debentures is not taking place within the United States, but rather in an
offshore transaction. "United States" means the United States of America, its
territories and possessions, and any state of the United States, and the
District of Columbia. No "direct selling efforts" (as defined in Regulation S)
may be made in the United States by the Company, and distributor of the
Debentures, any of their affiliates or any person acting on behalf of any
of the foregoing.
(d) The Purchaser acknowledges its understanding that the offer
and sale of the Debentures is intended to be exempt from registration under
the 1933 Act by virtue of Regulation S.
(e) The Purchaser acknowledges that the Securities have not been
registered under the 1933 Act and, therefore, cannot be offered or sold
in the United States or to U.S. persons for a period of a minimum of 40 days
from the sale of Debentures, unless the Debentures are registered under
the 1933 Act, or an exemption from the registration requirements of the
Act is available.
(f) The Purchaser acknowledges that this Agreement and any
certificate representing the Debentures or Debenture issued under this
Agreement shall
2
<PAGE>
bear the restrictive legend set forth in Paragraph 3(c) of this Agreement.
The Purchaser further acknowledges that the Company will effect a conveyance
only in accordance with Regulation S.
(g) All offers and sales of these Securities prior to the expiration
of 40 days from the later of the date when these Debentures were first offered
to persons other than distributors or the date of closing of this offering
shall be made only in accordance with Rule 903 or Rule 904 of Regulation
S or pursuant to an available exemption from the registration requirements
of the 1993 Act.
(h) purchaser is purchasing the Debentures for its own account and
not on behalf of any U.S. person, and no sale has been prearranged with
a purchaser in the United States.
(i) Purchaser acknowledges that Purchaser in making the decision
to purchase the Debentures subscribed for, has relied upon independent
investigations made by it and its Purchaser representatives, if any and
Purchaser and such representatives, if any, have, prior to any sale to it,
been given access and the opportunity to examine all material books and
records of the Company, all materials contracts and documents relating to
this offering and an opportunity to ask questions of, and to receive answers
from Company or any person acting on its behalf concerning the terms and
conditions of this offering. Purchaser and its representatives, if any,
have been furnished with access to all publicly available materials relating
to the business, finances and operations of the Company and materials relating
to the offer and sale of the Debentures which have been requested. Purchaser
and its representatives, if any, have received complete and satisfactory
answers to any such inquiries.
3. Representations and Warranties: The Company hereby acknowledges,
------------------------------
represents and warrants to and agrees with the Purchaser as follows:
(a) The Company is a "Reporting Issuer." The Company has filed
all reports required to be filed by Section 13 or 15 (d) of the Securities
and Exchange Act of 1934 during the preceding 12 months and has been subject
to such filing requirements for the past 90 days.
(b) The Offering is being made pursuant to SEC Regulation 230.903
(e)(2).
(c) The Company will issue Debentures in the form of Exhibit "A"
attached hereto.
(d) The Company has the requisite corporate power and authority
to enter into this Agreement and to sell and deliver the Securities; this
Agreement and the issuance of the Securities have been duly and validly
authorized by all necessary corporate action by the Company; this Agreement
and the Debentures have been duly and validly executed and delivered by
and on behalf of the Company, and are valid and binding agreements of the
Company, enforceable in accordance with their respective terms, except as
enforceability may be limited by general equitable principles, bankruptcy,
insolvency, fraudulent conveyance, reorganization, moratorium or other laws
affecting creditors rights generally.
(e) The Shares issued upon conversion of the Debentures will contain
no restrictive legend and will not be the subject of any stop transfer
direction or order.
3
<PAGE>
5. Miscellaneous:
--------------
(a) All notices or other communications given or made hereunder
shall be in writing and shall be delivered or mailed by registered or certified
mail, return receipt requested, postage prepaid, to the undersigned at the
Purchaser's address set forth on the signature page below.
(b) This Agreement constitutes the entire agreement between the
parties hereto with respect to the subject matter hereof and may be amended
only by a writing executed by all parties.
(c) All pronouns contained herein and any variations thereof
shall be deemed to refer to the masculine, feminine, or neuter, singular
or plural, as the identity of the parties hereto require.
(d) This Agreement may be executed in several counterparts, each
of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
(e) Upon execution of this Agreement by the Company, Purchaser
shall wire funds to the Escrow Agent to be distributed in accordance with
the Private Placement and Distribution Agreement.
IN WITNESS WHEREOF, the purchaser has executed this Subscription Agreement
on this 27th day of December, 1995.
---- --------
PURCHASER:
/s/ J. Mitchell Hull
-----------------------------------------
Signature and Title
J. Mitchell Hull
Director
ACCEPTED BY:
Allegiant Physician Services
By: Tufsin
-------------------------------
Executive Vice President
Title: & Chief Financial Officer
-------------------------------
Dated: 12/27/95
-------------------------------
4
<PAGE>
"EXHIBIT A"
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED
STATES SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD TRANSFERRED,
ASSIGNED, PLEDGED OR HYPOTHECATED ABSENT AN EFFECTIVE REGISTRATION THEREOF UNDER
SUCH ACT, OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL, SATISFACTORY
TO THE COMPANY AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED.
Allegiant Physician Services (ALPS)
8% SUBORDINATED CONVERTIBLE DEBENTURE DUE December 27,1997
----------------
Initial Issuance Date: December 27,1995
No. U.S. $300,000
------ --------
THIS DEBENTURE is one of a duly authorized issue of Debentures of Allegiant
Physician Services (the "Company" or "ALPS"), a corporation duly organized and
existing under the laws of the state of Delaware designated as its 8%
Convertible Debenture Due December 27,1997, in an aggregate principal amount not
exceeding $300,000.
FOR VALUE RECEIVED, the Company promises to pay to purchaser or the registered
holder hereof (the "Holder"), or its registered assigns, for value received, the
principal sum of Three Hundred Thousand Dollars ($300,000) on December 27, 1997,
----------------------------------------
(the "Maturity Date"), and to pay interest on the principal sum outstanding from
time to time in arrears on the Maturity Date at the rate of 8% per annum
accruing from the date of initial issuance. Interest o the Debentures shall be
computed on the basis of a year of twelve 30-day months. Accrual of interest
shall commence on the first business day to occur after the date hereof until
payment in full of the principal sum has been made or duly provided for. All
accrued and unpaid interest shall bear interest at the same rate as the date of
the interest payment until paid. The interest so payable will be paid on
Maturity Date to the person in whose name this Debenture (or one or more
predecessor Debentures) is registered on the records of the Company regarding
registration and transfer of the Debentures (the "Debenture register") on the
tenth day prior to the Maturity Date; provided, however, that the Company's
obligation to a transferee of this Debenture arises only if such transfer, sale
or other disposition is made in accordance with the terms and conditions of the
Offshore Securities Subscription agreement executed by the original Holder. The
principal of, and interest on, this Debenture are payable in such coin or
currency of the United States of America as at the time of payment is legal
tender for payment of public and private debts, at the address last appearing on
the Debenture Register of the Company as designated in writing by the Holder
from time to time. The Company will pay the principal of and interest upon this
Debenture on the Maturity Date, less any amounts required by law to be deducted,
to the registered Holder of this Debenture as of the tenth day prior to the
Maturity Date ad addressed to such Holder as the last address appearing on the
Debenture Register. The forwarding of such check shall constitute a payment
5
<PAGE>
of principal and interest hereunder and shall satisfy and discharge the
liability for principal and interest on this Debenture to the extent of the sum
represented by such check less any amounts so deducted.
This Debenture is subject to the following additional provisions:
1. The Debentures are issuable in denominations of $100,000 and integral
multiples thereof. The Debentures are exchangeable for an equal aggregate
principal amount of Debentures of different authorized denominations, as
requested by the Holder surrendering the same. No service charge will be made
for such registration or transfer or exchange.
2. The Company shall be entitled to withhold from all payments of principal of,
and interest on, this Debenture any amounts required to be withheld under the
provisions of the United States income tax laws or other applicable laws at the
time of such payments.
3. This Debenture has been issued subject to investment representations of the
original purchaser hereof and may be transferred or exchanged only in compliance
with the U.S. Securities Act of 1933, as amended (the "Act"). Prior to due
presentment for or transfer of this Debenture, the Company and any agent of the
Company may treat the person in whose name this Debenture is duly registered on
the Company's Debenture Register as the owner hereof for the purpose of
receiving payment as herein provided and for all other purposes, whether or not
this Debenture be overdue, and neither the Company nor any such agent shall be
affected by notice to the contrary.
4. The Holder of these Debentures is entitled, as its option, at any time
commencing forty-one (41) days after the Closing Date (as hereinafter defined)
until maturity hereof to convert the principal amount of these Debentures or any
portion of the principal amount hereof which is at least Twenty-Five Thousand
Dollars ($25,000) into shares of Common Stock of the Company ("Shares") at a
conversion price equal to the lesser of (a) the Closing Market Price on the date
-------------
of Closing, or (b) 80% of the Market Price of the Company's Common Stock (such
---
fixed price to be subject to appropriate adjustment in the event of any stock,
split, dividend combination or similar event). For purposes of this section, the
Market Price shall e the closing Market Price of the Common Stock on the date of
conversion date, as reported by the Nation Association of Securities Automated
Quotation System ("NASDAQ"). Such conversion shall be effectuated by
surrendering the Debenture to be converted to the Company, with the form of
conversion notice attached the debenture as Exhibit A, executed by the Holder of
the Debenture evidencing such Holder's intention to convert this Debenture, and
accompanied, if required by the Company, by proper assignment hereof in blank.
No amount of accrued but unpaid interest shall be subject to conversion, but
interest accrued or accruing from the date of issuance to the date of conversion
shall be waived by the Holder. No fraction of Shares scrip representing
fractions of Shares will be issued on conversion, but the number of Shares
issued shall be rounded to the nearest whole Share. The date on which notice of
conversion is given shall be deemed to be the date on which the Holder has
delivered this Debenture, with the conversion notice duly executed, to the
Company, or if earlier, the ate set forth in such notice of conversion if the
Debenture is received by the Company within five business days thereafter. If
the Debenture is converted all accrued and unpaid interest earned to that point
will be forfeited.
5. No provision of this Debenture shall alter or impair the obligation of the
Company, which is absolute and unconditional, to pay the principal of, and
interest on, this Debenture at the time, place and rate, and in the coin or
currency herein prescribed. This Debenture and all other
6
<PAGE>
Debentures now or hereafter issued on similar terms are direct obligations of
the Company. This Debenture ranks equally with all other Debentures now or
hereafter issued under the terms set forth herein.
6. The Company hereby expressly waives demand and presentment for payment,
notice of nonpayment, protest, notice of protest, notice of dishonor, notice of
acceleration or intent to accelerate, bringing of suit and diligence in taking
action to collect amounts called for hereunder and shall be directly and
primarily liable for the payment of all sums owing and to be owing hereon,
regardless of and without any notice, diligence, act or omission as or with
respect to the collection of any amount called for hereunder.
7. The Company agrees to pay all costs and expenses, including reasonable
attorney's fees which may be incurred by Holder in collecting any amount under
this Debenture.
8. If one or more of the following described "Events of Default" shall occur.
(a) The Company shall default in the payment of principal or interest on this
Debenture; or
(b) Any of the representations or warranties made by the Company herein, in the
Offshore Securities Subscription Agreement dated December 27, 1995 between the
-----------
Company and the Holder (the "Subscription Agreement"), or in any certificate or
financial or other statements heretofore or hereafter furnished by or on behalf
of the Company in connection with the execution and delivery of this Debenture
or the Subscription Agreement shall be false or misleading in any material
respect at the time made; or
(c) The Company shall fail to perform or observe any other covenant, term,
provision, condition, agreement or obligation of the Company under this
Debenture and such failure shall continue uncured for a period of seven (7) days
after notice from the Holder of such failure, or
(d) The Company shall (1) become insolvent; (2) admit in writing its inability
to pay its debts as they mature; (3) make an assignment for the benefit of
creditors or commence proceedings for its dissolution; or (4) apply for or
consent to the appointment of a trustee, liquidator or receiver for it or for a
substantial part of its property or business; or
(e) A trustee, liquidator or receiver shall be appointed for the Company or for
a substantial part of its property or business without is consent and shall not
be discharged within thirty (30) days after such appointment; or
(f) Any governmental agency or any court of competent jurisdiction at the
instance of any governmental agency shall assume custody or control of the whole
or any substantial portion of the properties or assets of the Company and shall
not be dismissed within thirty (30) days thereafter; or
(g) Any money judgment, writ or warrant of attachment, or similar process in
excess of Two Hundred Thousand Dollars ($200,000) in the aggregate shall be
entered or filed against the Company or any of its properties or other assets
and shall remain unvacated, unbonded or unstayed for a period of fifteen (15)
days or in any event later than five (5) days prior to the date of any proposed
sale thereunder, or
7
<PAGE>
(h) Bankruptcy, reorganization, insolvency or liquidation proceedings or other
proceedings for relief under any bankruptcy law or any law for the relief of
debtors shall be instituted by or the relief of debtors shall be instituted by
or against the Company and, if instituted against the Company, the Company shall
by any action or answer approve of, consent to, or acquiesce in any such
proceedings or admit the material allegations of, or default in answering a
petition filed in any such proceeding; or
(i) cThe Company shall have its Common Stock delisted from an exchange or over-
the-counter market.
Then, or at any time thereafter, and in each and every such case, unless such
Event of Default shall have been waived in writing by the Holder (which waiver
shall not be deemed to be a waiver of any subsequent default) at the option of
the Holder and in the Holder's sole discretion, the Holder may consider this
Debenture immediately due and payable, without presentment, demand, protest or
notice of any kind, all of which are hereby expressly waived, anything herein or
in any Debenture or other instruments contained to the contrary notwithstanding,
and the Holder may immediately, and without expiration of any period of grace,
enforce any and all of the Holder's rights and remedies provided herein or any
other rights or remedies afforded by law.
9. For so long as any amount payable under this Debenture remains unpaid, the
Company shall furnish to the Holder two copies of its annual and quarterly
reports filed with the Securities and Exchange Commission ("SEC") pursuant to
the Act, promptly upon filing with the SEC.
10. The Company covenants and agrees that all amounts due under this Debenture
shall be paid in full, by conversion or otherwise, unless the Holder waives
compliance in writing. The Company shall:
(a) Give prompt written notice to the Holder of any Event of Default as
defined in this Debenture or of any other matter which has resulted in, or
could reasonably be expected to result in, a materially adverse change in its
financial condition of the Company.
(b) Give prompt notice to Holder of any claim, action or proceeding which, in
the event of any unfavorable outcome, would or could reasonably be expected to
have a material adverse effect on the financial condition of the Company.
(c) At all times reserve and keep available of its authorized but unissued
stock for the purpose of effecting the conversion of this Debenture such number
of its duly authorized shares of Common Stock as shall from time to time be
sufficient to effect the conversion of the outstanding principal balance of
this Debenture into Shares of Common Stock.
(d) Upon receipt by the Company of evidence reasonably satisfactory to it of
the loss, theft, destruction or mutilation of this Debenture and
(i) in the case of loss, theft or destruction, of indemnity reasonably
satisfactory to it, or
(ii) in the case of mutilation, upon surrender and cancellation of this
Debenture, the Company at its expense will execute and deliver a new Debenture,
dated the date of the lost, stolen, destroyed or mutilated Debenture.
8
<PAGE>
(e) The Company will file any notices required to be filed with the NASD or the
SEC.
11. The Holder of this Debenture, by acceptance hereof, agrees that this
Debenture is being acquired for investment and that such Holder will not offer,
sell or otherwise dispose of this Debenture or the Shares of Common Stock
issuable upon exercise thereof except under circumstances which will not result
in a violation of the Act or any applicable state Blue Sky laws or similar laws
relating to the sale of securities.
12. In case any provision of this Debenture is held by a court of competent
jurisdiction to be excessive in scope or otherwise invalid or unenforceable,
such provision shall be adjusted rather voided, if possible, so that it is
enforceable to the maximum extent possible, and validity and enforceability of
the remaining provisions of this Debenture will not in any way be affected or
impaired thereby.
13. This Debenture constitutes the full and entire understanding and agreement
between the Company and the Holder with respect to the subject hereof. Neither
this Debenture nor any term hereof may be amended, waived discharged or
terminated other than by a written instrument signed by the Company and the
Holder.
14. This Debenture shall be governed by and construed in accordance with the
laws of the State of Georgia.
15. The initial Holder of this Debenture is Hull Overseas, Ltd. Charlotte House,
Charlotte Street, Box N 9204 Nassau, Bahamas.
16. As used herein the term "Closing Date" shall mean December 27,1995.
IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed
by an officer thereunto duly authorized.
ALLEGIANT PHYSICIAN SERVICES
Dated: December 27, 1995 By: \s\Tim Powers
Executive Vice President &
Chief Financial Officer
9
<PAGE>
EXHIBIT 10.2
[LOGO OF PREMIER ANESTHESIA]
January 19, 1994
Mr. Terrence P. Schuck
8795 Willowbrae Lane
Roswell, GA 30076
Dear Terry:
This letter will serve as an offer of employment with Premier Anesthesia.
Below are the terms and conditions which will outline our agreement.
Position: Executive Vice President
Chief Information Officer
Reports to: CEO
Salary: $100,000.00
Bonus: 10-25% based upon mutually acceptable performance
criteria. (to be mutually developed by 4-1-94)
Options: *50,000 shares 10,000 vested immediately
vested over 40,000 5 years (accelerated if guidelines
met).
Additional options will be given in future at
discretion of CEO
Benefits: Executive level (Exhibit A attached)
- ---------------
* Contingent upon Option Committee approval.
1100 Ashwood Parkway Suite 200 Atlanta, Georgia 30338
(404) 668-9330 FAX: (404) 390-3801
<PAGE>
Mr. Terrence P. Schuck
Page -2-
02/04/94
Expenses: Company will pay all out-of-pocket expenses related
to travel, phones, etc. expended by T.S. on behalf
of his duties at Company.
Responsibilities: To develop and implement a strategic company-wide
information system plan that provides the Company
with a strategic tactical and operational competitive
advantage.
Start Date: On or before March 1, 1994.
Non-solicitation: T.S. agrees to sign confidentiality and non-
solicitation of employees and clients agreement.
Indemnity: Company will indemnify T.S. from all liability
arising from duties as an officer of the Company.
Termination:
For Cause: 30 days, if gross misconduct, convicted or breach
of agreement or insubordination.
Income Protection: Company will provide 90 days of income protection
if terminated within the first year.
Company will provide 6 months of income protection
after the first year, if T.S. is terminated for
no cause. (Income Protection defined as salary
continuation, minus income derived from other
sources of employment or consulting.) T.S. agrees
to use best effort to interview for other employment.
If the above is agreeable, then please initial below. I look forward to
a long and mutually-rewarding relationship.
Sincerely, Agreed to:
/s/ Richard L. Jackson Terrence P. Schuck
Richard L. Jackson ----------------------- 2/5/94
Chairman and CEO
<PAGE>
EXHIBIT 10.3
+++++++++++++++++++++++++++++++++++
+ALLEGIANT PHYSICIAN SERVICES INC.+
+++++++++++++++++++++++++++++++++++
November 11, 1994
Mr. Bruce Jacobs
350 River Valley Road
Atlanta, Georgia 30328
Dear Bruce:
This letter will serve as an offer of employment with Allegiant Physician
Services. Below are the terms and conditions which will outline our agreement:
Position: Executive Vice President
Managed Care
Reports to: CEO
Salary: $150,000.00
Bonus: $60,000 1st year based on meeting mutually
acceptable 1994 Plan. (attached)
2nd Year, 25% of profits up to $250,000 profit
10% above $250,000 with cap on bonus of $200,000.
Options: *50,000 shares. 10,000 vested on start date with
40,000 vested over 4 years -- 10,000 shares each
January 1st (accelerated if guidelines are met).
Additional options will be given in future at
discretion of CEO
Benefits: Executive Level (Exhibit A attached)
500 Northridge Road, Suite 500, Atlanta, Georgia 30350
(404) 643-5500 Fax: (404) 643-5777
<PAGE>
Expenses: Company will pay all out-of-pocket expenses related
to travel, phones, etc. expended by BJ on behalf
of his duties at Company.
Responsibilities: See attached. /s/ BAJ
Start Date: On or before January 1, 1995.
Non-solicitation: BJ agrees to sign confidentiality and non-
solicitation of employees and clients agreement.
Indemnity: Company will indemnify BJ from all liability arising
from duties as an officer of the Company.
Consulting: All previous consulting arrangements can be
completed after start date with 75% of income
to Company and 25% to BJ. After 90 days all income
earned on consulting arrangements will come to
Company.
Termination: Company will provide 9 months of income if BJ
is terminated for no cause. (Income Protection
is defined as salary continuation, minus income
derived from other sources of employment or
consulting). BJ agrees to use best effort to
interview for other employment. Company will provide
payment for executive level outplacement services
during salary compensation period.
If the above is agreeable, then please initial below. I look forward to
a long and mutually-rewarding relationship.
Sincerely Agreed to:
/s/ Richard L. Jackson /s/ Bruce Jacobs
---------------------------------
Richard L. Jackson Bruce Jacobs
Chairman, President & CEO
500 Northridge Road, Suite 500, Atlanta, Georgia 30350
(404) 643-5500 Fax: (404) 643-5777
<PAGE>
EXHIBIT 10.4
[LOGO OF ALLEGIANT PHYSICIAN SERVICES]
December 7, 1995
Mr. Terrence L. Bauer
1206 Lexham Drive
Marietta, Georgia 30068
Dear Terry:
This letter will serve as an offer of employment with Allegiant Physician
Services, Inc. Below are the terms and conditions which outline our agreement:
POSITION PHASE I: President and CEO of Allegiant Physician
Services.
PHASE II: Upon the spin-off of CINet, and if RL
Jackson becomes it's CEO, then it is anticipated
that the Board would appoint you CEO of Allegiant
Physician Services.
RESPONSIBILITIES Total P&L responsibility for the business unit
of PA, PS&S, Quest and future contract services
division.
REPORTS TO Phase I, CEO; Phase II, Chairman of the Board
SALARY $185,000.00 per year
BONUS Ten percent (10%) of profit above Plan; to be
mutually agreed upon before 2-1-96.
STOCK Stock Options - 100,000 shares vested upon start
date and 400,000 vested pro rata monthly over
4 years. An additional 100,000 option shares at
each of the following stock price thresholds
$3.00/share, $4.00/share, $5.00/share and
$6.00/share.
BENEFITS Executive Level
EXPENSES Company will pay all out-of-pocket expenses related
to travel, phones, etc. expended by TB on behalf
of his duties with the Company.
START DATE December 11, 1995
<PAGE>
[LOGO OF ALLEGIANT PHYSICIAN SERVICES]
INDEMNITY Company will indemnify TB from all liability arising
from duties as an officer of the Company.
NON SOLICITATION TB agrees to sign confidentiality and non-
solicitation of employees and clients agreement.
TERMINATION
No Cause Company will provide 12 months of income protection
if TB is terminated for no cause (income protection
is defined as salary continuation minus income
derived from other sources of employment or
consulting.
Termination for no cause shall include but not
be limited to any alteration or revision in the
corporate position of Employee such that Employee's
responsibilities or compensation are materially
reduced or decreased for any reason with the
Employee's consent.
For Cause Termination with Cause shall be defined as continued
gross negligence, gross misconduct, conviction
of a felony or fraud, material acts of dishonesty,
or theft or embezzlement with regard to material
property of the Company. In addition, termination
with cause can occur, if by unanimous agreement
of the Board of Directors, the employee fails to
meet specified annual financial objectives by a
significant margin.
Change of Control If Company sells more than 50% of its stock in one
related transaction, then Options are vested 100%.
And if employee is terminated at Change of Control
or within 120 days before such "change" the
termination for no cause provision will be triggered.
If the above is agreeable to you, then please initial below. I look forward
to a long and a mutually-rewarding relationship.
Sincerely, Agreed to:
/s/ Richard L. Jackson /s/ T. L. Bauer
Richard L. Jackson ---------------------
Chairman, President & CEO Terrence L. Bauer
<PAGE>
Exhibit 11
ALLEGIANT PHYSICIAN SERVICES, INC. AND SUBSIDIARIES
Computation of Earnings Per Share of Common Stock
For The Years Ended December 31, 1995, 1994 and 1993
- --------------------------------------------------------------------------------
(000s omitted except for per share data)
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------
1995 1994 1993
---------- ----------- ----------
<S> <C> <C> <C>
Weighted average number of common
shares outstanding 13,727 10,572 8,759
========== ========== ==========
Number of common and common equivalent
shares outstanding 13,727 10,572 8,759
========== ========== ==========
Net earnings (loss) for primary and fully
diluted earnings per share:
Continuing Operations ($8,518) $1,124 ($7,128)
Discontinued Operations (10,611) (11,571) (24,117)
---------- ---------- ----------
Net income (loss) ($19,129) ($10,447) ($31,245)
========== ========== ==========
Earnings (loss) per share:
Continuing Operations ($0.62) $0.11 ($0.81)
Discontinued Operations (0.77) (1.10) (2.76)
---------- ---------- ----------
Net income (loss) ($1.39) ($0.99) ($3.57)
========== ========== ==========
</TABLE>
<PAGE>
Exhibit 21
ALLEGIANT PHYSICIAN SERVICES, INC. AND SUBSIDIARIES
Subsidiaries of the Registrant
December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
State of %
Subsidiary Incorporation Owned
- ------------------------------------------ ---------------- ---------
<S> <C> <C>
Allegiant Physician Services, Inc. (1) Delaware 100%
Clinical Information Networks, Inc. (2) Delaware 100%
Premier Locun Tenens, Inc. Delaware 100%
National Pain Institute, Inc. Delaware 96.5%
Texas NPI Management Company, Inc. Texas 100%
Pain Relief Network of Arizona, Inc. Arizona 100%
Pain Relief Network of Nevada, Inc. Nevada 100%
Pain Relief Network, Inc. Delaware 100%
Quest Staffing Solutions, Inc. Delaware 80%
AHP Acquisition Company, LLC Texas 20%
</TABLE>
(1) Formerly Premier Anesthesia, Inc.
(2) Formerly Premier Anesthesia Systems, Inc.
