Initial Public Offering (IPO): Registration Statement (General Form) — Form S-1
Filing Table of Contents
Document/Exhibit Description Pages Size
1: S-1 Registration Statement (General Form) 78 433K
2: EX-3 Exhibit 3.1 17 56K
3: EX-3 Exhibit 3.2 8 36K
4: EX-10 Exhibit 10.1 9 32K
13: EX-10 Exhibit 10.10 12 39K
14: EX-10 Exhibit 10.11 5 18K
15: EX-10 Exhibit 10.12 10 33K
16: EX-10 Exhibit 10.13 5 20K
17: EX-10 Exhibit 10.14 9 40K
18: EX-10 Exhibit 10.15 6 27K
19: EX-10 Exhibit 10.16 5 26K
20: EX-10 Exhibit 10.18 4 16K
21: EX-10 Exhibit 10.19 4 16K
5: EX-10 Exhibit 10.2 10 52K
22: EX-10 Exhibit 10.20 5 25K
6: EX-10 Exhibit 10.3 10 52K
7: EX-10 Exhibit 10.4 34 61K
8: EX-10 Exhibit 10.5 34 61K
9: EX-10 Exhibit 10.6 12 26K
10: EX-10 Exhibit 10.7 10 24K
11: EX-10 Exhibit 10.8 5 19K
12: EX-10 Exhibit 10.9 5 19K
23: EX-24 Exhibit 24.2 1 8K
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON_______________, 1998
REGISTRATION STATEMENT 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
MEDI-CEN MANAGEMENT, INC.
(Exact name of registrant as specified in its charter)
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MARYLAND 8721 52-1892451
STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
5301 WISCONSIN AVENUE, SUITE 620
WASHINGTON, D.C. 20015
(301) 961-2799
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
MR. MICHAEL MACEDO
CHIEF EXECUTIVE OFFICER
5301 WISCONSIN AVENUE, SUITE 620
WASHINGTON, D.C. 20015
(301) 961-2799
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
Copies of Communications to:
Jeffrey A. Baumel, Esq. Elizabeth Hughes, Esq.
Gibbons, Del Deo, Dolan, Venable, Baetjer & Howard, LLP
Griffinger & Vecchione 1800 Mercantile Bank & Trust
One Riverfront Plaza Two Hopkins Place
Newark, New Jersey 07102 Baltimore, Maryland
(973) 596-4500 (410) 244-7400
APPROXIMATE DATE OF COMMENCEMENT PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering.
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering.
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
CALCULATION OF REGISTRATION FEE
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PROPOSED
MAXIMUM
TITLE OF EACH CLASS AMOUNT PROPOSED AGGREGATE AMOUNT
OF SECURITIES TO BE MAXIMUM PRICE OFFERING OF
TO BE REGISTERED REGISTERED PER SECURITY(1) PRICE(1) REGISTRATION FEE
---------------- ---------- --------------- -------- ----------------
Common Stock, par value $.0024 per share ....... 2,300,000(2) $10.00 $23,000,000 $6,969.70
Total Registration Fee ............................................................................... $6,969.70
(1) Estimated solely for purposes of calculating registration fee.
(2) Includes 300,000 shares of Common Stock subject to an over-allotment option
granted to the Underwriter.
SUBJECT TO COMPLETION DATED MARCH 16, 1998
PROSPECTUS [LOGO]
2,000,000 SHARES
MEDI-CEN MANAGEMENT, INC.
COMMON STOCK
[RED HERRING LANGUAGE: Information contained herein is subject to completion or
amendment. A registration statement relating to these securities has been filed
with the Securities and Exchange Commission. These securities may not be sold
nor may offers to buy be accepted prior to the time this registration statement
becomes effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.]
All of the shares of Common Stock, par value $0.0024 per share (the Common
Stock) offered hereby are being sold by Medi-Cen Management, Inc. (MMI or the
Company). Prior to this offering (the Offering), there has been no significant
public market for the Common Stock of the Company. For a discussion of the
factors considered in determining the initial public offering price, see
Underwriting.
It is currently estimated that the initial public offering price will be
between $8.00 and $10.00 per share. The Company has applied for listing of the
shares of Common Stock for quotation on the Nasdaq National Market under the
symbol MCEN.
SEE RISK FACTORS BEGINNING ON PAGE 6 OF THIS PROSPECTUS FOR A DISCUSSION OF
CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
SHARES OF COMMON STOCK OFFERED HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
UNDERWRITING
PRICE TO DISCOUNTS PROCEEDS TO
PUBLIC AND COMMISSIONS(1) COMPANY(2)
Per Share ................. $ $ $
Total (3) ................. $ $ $
(1) Does not include additional consideration to be received by Ferris, Baker
Watts, Incorporated (the Representative) in the form of a one percent
non-accountable expense allowance and the value of warrants to be issued to
the Representative to purchase 200,000 shares of Common Stock at an
exercise price of 110% of the Price to Public (the Representative's
Warrants). The Company has agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of
1933, as amended (the Securities Act). See Underwriting.
(2) Before deducting expenses of the Offering payable by the Company estimated
at $905,000, including the Underwriter's non-accountable expense allowance.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
an additional 300,000 shares of Common Stock on the same terms and
conditions as set forth herein, solely to cover over-allotments, if any. If
the Underwriters exercise such option in full, the total Price to Public,
Underwriting Discounts and Commissions and Proceeds to Company will be $ ,
$ and $ , respectively. See Underwriting.
The shares of Common Stock are offered by the Underwriters named herein,
subject to prior sale, when, as and if delivered to and accepted by the
Underwriters and subject to their right to reject any order in whole or in part.
It is expected that delivery of certificates representing the shares of Common
Stock will be made against payment therefor at the offices of Ferris, Baker
Watts, Incorporated, 1720 Eye Street, N.W., Washington, D.C., or through the
Depository Trust Company on or about , 1998.
FERRIS, BAKER WATTS
Incorporated
The date of this Prospectus is ________, 1998
AVAILABLE INFORMATION
As of the date of this Prospectus, the Company will become subject to the
reporting requirements of the Securities Exchange Act of 1934, as amended (the
Exchange Act), and in accordance therewith, will file reports, proxy statements
and other information with the Securities and Exchange Commission (the
Commission). The Company intends to furnish its stockholders with annual reports
containing audited financial statements and such other periodic reports as the
Company deems appropriate or as may be required by law.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS,
ON NASDAQ, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE, WHICH STABILIZE,
MAINTAIN OR OTHERWISE AFFECT THE PRICES OF THE COMMON STOCK. SPECIFICALLY, THE
UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING AND MAY BID FOR AND
PURCHASE SHARES OF COMMON STOCK IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE UNDERWRITING.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information, including risk factors and
financial statements, including the notes thereto, appearing elsewhere in this
Prospectus. Each prospective investor is urged to read this Prospectus in its
entirety. Unless otherwise indicated, the information contained in this
Prospectus, including per share data and information relating to the number of
shares outstanding gives effect to (i) a 4.132 for one stock split of the Common
Stock effected on the date of this Prospectus, (ii) the merger (Merger) of
Medi-Cen Corporation of America (MCA) into a wholly owned subsidiary of the
Company effective on the date of this Prospectus, (iii) and assumes no exercise
of the Underwriters' over-allotment option. All references herein to the Company
shall include the Company and MCA together. See Description of Securities and
Underwriting. This Prospectus contains forward looking statements that involve
risks and uncertainties. The Company's actual results may differ materially from
the results discussed in the forward looking statements. Factors that might
cause such a difference include, but are not limited to, those discussed in Risk
Factors.
THE COMPANY
Medi-Cen Management, Inc. (MMI or the Company) provides or arranges for the
provision of management services to medical practices and develops low-cost
physician driven provider networks and medical mall facilities. The Company has
developed three medical mall facilities in the Washington, D.C. metropolitan
area, each providing medical services ranging from general family practice to
selected specialties. Through the medical mall facilities, the Company enables
health care providers and payors to offer patients high-quality medical services
on a cost-effective basis. Additional physician management services provided by
the Company include marketing, health care payor contracting and financial and
administrative management. The Company currently manages a network of
approximately 57 licensed health care providers that treat over 100,000 active
patients. The Company intends to rapidly expand the medical mall concept
throughout the Washington-Baltimore metropolitan area and throughout the
mid-Atlantic region to take advantage of market opportunities.
The Company believes that there are several advantages to its medical mall
strategy. The one-stop facility permits patients to see both primary care
providers and specialists under one roof, which is both convenient and
time-saving. In addition, the Company provides patients with a single
comprehensive monthly statement for all medical services provided at the medical
malls, thereby reducing paperwork and confusion. The Company also believes that
the medical malls reduce overhead expenses, ultimately resulting in lower health
care delivery costs. Finally, the Company believes the medical malls will help
attract high-quality health care providers by: (i) increasing provider
compensation by lowering overhead costs; (ii) allowing health care providers to
locally control the practice of medicine; (iii) offering providers the ability
to consult with other specialists in the facilities; and (iv) providing the
financial incentive and automony of controlling the physical assets and
non-professional costs of the medical practices through its franchise structure.
The Company affiliates with licensed health care providers who are seeking
the resources necessary to function effectively in health care markets that are
evolving from fee-for-service to managed care payor systems. The Company
enhances the operations of medical practices by centralizing administrative
functions and introducing management tools, such as clinical guidelines,
utilization review and outcomes measurement. The Company also provides medical
practices with access to capital and sophisticated management information
systems. In addition, the Company receives payments from over 1,400 health
maintenance organizations and other third-party payors. These relationships
provide licensed health care providers with the opportunity to operate under a
variety of payor arrangements and to increase their patient flow.
The Company has developed a corporate structure that provides licensed
health care providers control over the delivery of medical services while the
Company provides, or arranges for the provision of, administrative services. The
Company has entered into long-term management service agreements with two
networks of health care providers, Yater Medical Group, P.C. (Yater) and
Medi-Cen Physician Services, L.L.P. (MPS, and together with Yater, the PCs),
which directly employ the health care providers that treat the patients in
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the medical malls. The management services agreements require the Company to
provide, or arrange for the provision of, substantially all non-professional
services on behalf of the PCs, including, but not limited to, billing,
recruitment and establishment of medical malls. The Company has arranged for a
franchisee, Medi-Cen, Corp. of Maryland, Inc. (MOM) to provide operational
services at the medical malls, including the payment of rent for the facilities,
the purchase of supplies and equipment and salaries for non-professional staff.
A majority of the health care providers employed by the PCs are also equity
owners in MOM and, accordingly, have direct input into local governance and
certain operations of the medical practices as well as a direct incentive to
efficiently utilize the facilities.
Fee-for-service reimbursement is rapidly being replaced by alternative
reimbursement models, including capitated and other discounted-fee arrangements.
In response, individual physicians and small group practices are increasingly
affiliating with larger group practices and physician practice management
companies. The Washington, D.C. area in which the Company operates has been
particularly affected by the changing health care environment. The Company
believes that fewer than 6% of physicians in the Washington - Baltimore
metropolitan area have entered into practice management agreements, providing
significant opportunities for the Company to assist physicians in developing
medical mall facilities and managing the administrative aspects of group
practices and networks.
The Company believes that it is well positioned to attract, organize and
manage medical group practices by offering, through the unique medical mall and
franchise concept, a full range of integrated management services and access to
managed care patients. The Company's strategy includes (i) developing additional
medical mall facilities, (ii) providing low cost medical services by increasing
operational efficiencies and cost reductions, (iii) attracting high quality
health care providers, (iv) diversifying its payor base, and (v) utilizing
sophisticated management information systems.
The Company was incorporated on March 25, 1994 under the laws of the State
of Maryland and commenced operations on January 1, 1995. The Company's principal
executive offices are located at 5301 Wisconsin Avenue, Suite 620, Washington,
DC 20015, and its telephone number is (301) 961-2799.
THE OFFERING
Common Stock Offered by the Company.. 2,000,000 shares
Common Stock to be Outstanding after
the Offering ..................... 5,378,046 shares (1)
Use of Proceeds .................... The Company intends to use the net
proceeds of the Offering for the
development of medical mall facilities,
the repayment of certain debt to finance
acquisitions and expansion of the PCs,
working capital, and general corporate
purposes. See "Use of Proceeds."
Proposed Nasdaq National Market
Symbol ........................... MCEN
(1) Excludes (i) 2,000,000 shares of Common Stock issuable upon the exercise of
options under the Company's Stock Option Plan, 1,800,000 of which have been
granted at an exercise price equal to the initial public offering price;
(ii) 945,826 shares of Common Stock issuable pursuant to the exercise of
certain other options and warrants at a weighted average exercise price of
$4.36; (iii) approximately 36,111 shares of Common Stock issuable upon
consummation of this Offering in lieu of compensation valued at the initial
public offering price; and (iv) up to 116,109 shares of Common Stock
issuable upon consummation of the Merger. See "Management-Stock Option
Plan," "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Overview" and "Underwriting."
4
SUMMARY CONSOLIDATED FINANCIAL DATA
Due to control by the Company, the summary consolidated financial data
presented below reflects the consolidation of the operations of MPS with those
of the Company for all periods presented and the operations of Yater with those
of the Company for the period ending December 31, 1997.
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YEARS ENDED DECEMBER 31,
-----------------------------------------
1995 1996 1997
---- ---- ----
STATEMENT OF OPERATIONS DATA:
Total revenue........................................................... $ 1,151,144 $ 1,304,130 $ 6,603,791
Operating income........................................................ 268,669 278,149 1,044,558
Net income.............................................................. 284,107 267,008 1,046,563
Net income per share.................................................... $ 0.31
Weighted average number of shares outstanding........................... 3,363,084
CERTAIN OPERATING DATA:
Staff health care providers............................................. 8 11 53
Independent network health care providers............................... 120 123 114
Patients treated........................................................ 4,498 13,952 104,481
Payors.................................................................. 553 987 1,406
DECEMBER 31, 1997
------------------------------
ACTUAL AS ADJUSTED(1)
------ --------------
BALANCE SHEET DATA:
Working capital (deficit)........................................................... $ 1,930,487 $ 17,632,791
Total assets........................................................................ 7,204,222 22,533,353
Total long term debt, net of current maturities..................................... 3,805,138 3,672,442
Stockholders' equity................................................................ 1,517,597 17,352,597
(1) Adjusted to give effect to the sale of the 2,000,000 shares of Common Stock
offered hereby (at an assumed initial public offering price of $9.00 per
share) and the application of the estimated net proceeds therefrom. See
"Use of Proceeds."
5
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following risk factors should be considered carefully by prospective investors
prior to making an investment in the Common Stock offered hereby. Information
contained in this Prospectus contains forward-looking statements which can be
identified by the use of forward-looking terminology such as believes, expects,
may, will, should, or anticipates or the negative thereof or other variations
thereon or comparable terminology or as discussions of strategy. No assurance
can be given that the future results covered by the forward-looking statements
will be achieved or that the events contemplated thereby will occur or have the
effects anticipated. The following matters constitute cautionary statements
identifying important factors with respect to such forward-looking statements,
including certain risks and uncertainties that could cause actual results to
vary materially from the anticipated results covered in such forward-looking
statements. Other factors could also cause actual results to vary materially
from the anticipated results covered in such forward-looking statements. Factors
that could cause or contribute to such differences include, but are not limited
to, those discussed in this section and in the sections entitled Management's
Discussion and Analysis of Financial Condition and Results of Operations and
Business, as well as those discussed elsewhere in this Prospectus.
Dependence on Growth. The Company's future growth and profitability is
substantially dependent upon the expansion of Yater Medical Group, P.C. (Yater)
and Medi-Cen Physician Services, L.L.P. (MPS, and together with Yater, the PCs)
through the employment of new licensed health care providers or the acquisition
of new medical practices for whom the Company will provide management services.
Competition for such personnel is intense, and there can be no assurance that
the Company will be successful in attracting or retaining such personnel. In
addition, there can be no assurance that the employment of such providers or the
acquisition of such practices can be made on satisfactory terms, or at all. The
future growth and profitability of the Company is also dependent on the
Company's ability to effectively integrate the practices of the PCs with any new
medical practices, to manage and control costs and to realize economies of
scale. The integration of new medical practices, as well as the maintenance of
existing contracts, is made more difficult by reduced reimbursement rates of
health care payors at a time when the cost of providing medical services
continues to increase. The Company intends to use a substantial portion of the
proceeds of this Offering to assist the PCs in expanding their business through
the acquisition of additional medical practices. See Use of Proceeds. There can
be no assurance that the PCs or the Company will successfully identify, complete
or integrate additional acquisitions or that any acquisition will perform as
expected or will contribute significant revenues or profits to the Company.
Limited Operating History; Uncertainty Of Future Profitability. The Company
was incorporated in March 25, 1994, began providing physician practice
management services on January 1, 1995 and began developing medical malls on
March 1, 1996. Accordingly, the Company has only a limited operating history
upon which an evaluation of the Company and its prospects can be based. There
can be no assurance that the Company will continue to be profitable in the
future. The Company's prospects must be considered in light of the risks,
expenses and difficulties frequently encountered by companies in their early
stages of development, particularly companies in rapidly evolving markets. To
address these risks, the Company must, among other things, increase the number
of licensed health care providers in the medical malls, open new medical mall
facilities in expanded geographical areas, expand sales of its physician
practice and network management services, continue to enhance its clinical
information systems, respond to competitive developments and continue to attract
and retain qualified personnel. Accordingly, there can be no assurance that the
Company will be able to generate sufficient revenue to maintain profitability on
a quarterly or annual basis or to sustain or increase its revenue growth in
future periods. See Management's Discussion and Analysis of Financial Condition
and Results of Operations and Business.
Dependence on Franchisee. Pursuant to the management service agreements
between the Company and each of the PCs, the Company is obligated to provide
management services for the medical practices of the PCs. The Company has
arranged with its franchisee, Medi-Cen, Corp. of Maryland, Inc., (MOM) pursuant
to a franchise agreement between the Company and MOM, for the provision of
certain of those services. Accordingly, the Company will be substantially
dependent upon the efforts of others, over whom it may not have direct control,
for its success. To the extent MOM is unable or unwilling to fulfill its
obligations under the franchise agreement with the Company to provide
6
such services, the Company will be required either to locate a new provider of
these services or perform the services itself. There can be no assurance that
the Company will be able to locate a new provider on satisfactory terms, or at
all. In addition, there can be no assurance that the Company's operating results
and financial condition will not be materially adversely affected in the event
the Company is required to provide these services itself. In 1997, the
management fee payable to MOM was less than its expenses and the Company was
required to loan to MOM an amount sufficient to permit MOM to pay its
operational expenses. At December 31, 1997, the Company's balance sheet
reflected an outstanding receivable of $1.2 million for such advances. The PCs
typically do not acquire a new health care provider's receivables when such
health care provider becomes employed by a PC or his or her practice is acquired
by a PC. Therefore, during the period between the commencement of billing for
such health care provider and the receipt of collections in respect of such
billings, no cash is collected. Furthermore, when medical malls open, a further
delay in collections occurs during the start-up phase as the health care
provider goes through the credentialing process with payors. As a result of
these delays, the payments to MOM in respect of its management fees are
significantly reduced as the MOM fee is based on collected net patient service
revenue. The Company believes that once a medical mall has a full complement of
health care providers who have reestablished a billing receivables base, the
management fees payable to MOM out of collections will likely be sufficient to
cover its expenses and the Company will not be required to advance management
fee payments to MOM. There can be no assurance that management fees payable to
MOM will be sufficient to cover its operating costs.
Conflicts of Interest. Certain of the Company's executive officers and
directors hold management positions and/or ownership interests in the PCs and
MOM. These entities have entered into contractual relationships with one
another, the terms of which were not negotiated on an arms length basis. In the
future, the Company expects to enter into additional related party transactions
which will involve potential conflicts of interest. All ongoing and future
transactions with affiliates of the Company, if any, will be on terms believed
by the Company to be no less favorable than are available from unaffiliated
third parties and will be approved by a majority of disinterested directors of
the Company. See "Certain Transactions."
Dependence on Third-Party Payors; Delay in Payments. Physician groups that
render services on a fee-for-service basis typically bill various third-party
payors, such as governmental programs (e.g., Medicare and Medicaid), private
insurance plans and managed care plans, for the health care services provided to
their patients. A majority of the Company's total revenue is derived from fee
for-service payments by these third-party payors. Recently, many health care
providers have experienced significant delays in receiving payments from payors.
There can be no assurance that payments under governmental programs or from
other third-party payors will remain at present levels or that there will not be
significant delays in receipt of such payments by the Company. Substantial
delays in payments by various payors have resulted in cash flow shortfalls for
the Company, Yater and MOM in the past and may continue to do so in the future.
In addition, third-party payors can deny reimbursement for a variety of reasons,
including technical compliance matters such as timely accreditation with the
payor or for other reasons. A majority of the contracts between the Company and
the health care payors may be terminated by the payor upon 30 days notice. Any
material decrease or delay in payments received from such third-party payors or
the termination of contracts with such payors could have a material adverse
effect on the operating results and financial condition of the Company.
Dependence On Executive Officers. The Company's ability to market and
deliver its services and systems and to achieve and maintain a competitive
position is dependent in large part upon the efforts of its senior management,
particularly P. Steven Macedo, M.D., the Company's Chairman of the Board, and
Michael Macedo, the Company's Chief Executive Officer. Although the Company is
the beneficiary of a $1,000,000 key man life insurance policy on the life of Dr.
Macedo and has applied for such a policy on the life of Mr. Macedo, the Company
does not believe such amount would be adequate to compensate for the loss of the
services of any such executive. In addition, although the Company has entered
into employment agreements with most of its senior executives, including Dr.
Macedo and Mr. Macedo, such agreements will not assure the services of such
employees. The loss of the services of one or more members of its senior
management could have a material adverse effect on the Company. The Company's
future success also will depend upon its ability to attract and retain qualified
management, technical and marketing employees to support its future growth.
Competition for such personnel is intense, and there can be no assurance that
the Company will be successful in attracting or retaining such personnel. The
failure to attract and retain such persons could materially adversely affect the
Company. See Management.
Control by Certain Shareholders. As of the date of this Prospectus, the two
largest stockholders of the Company, Dr. Steven Macedo and Michael Macedo, owned
an aggregate of 88.8% of the outstanding shares of Common Stock, excluding any
outstanding options owned by such individuals. After giving effect to this
Offering, Dr. Steven Macedo and Michael Macedo will own an aggregate of 55.8% of
the outstanding shares of Common Stock, excluding any outstanding options owned
by such individuals. Accordingly, if Dr. Macedo and Mr. Macedo were to vote in
the same manner on the election of members of the Board of Directors or on any
other matter requiring approval of a majority of the outstanding shares of
Common Stock, such matter would likely be approved or defeated, as the case may
be, depending on the vote of such stockholders. See "Principal Shareholders."
Management Of Growth. The Company recently has experienced, and expects to
continue to experience, substantial growth and has significantly expanded and
expects to continue to expand, its operations. This growth and expansion has
placed, and will continue to place, significant demands on the Company's
management, technical, financial and other resources. To manage growth
effectively, the Company must maintain a high level of operational quality and
efficiency, and must continue to enhance its operational, financial and
management
7
systems and to expand, train and manage its employee base. To date, the Company
has only limited experience in providing physician practice management services
and in developing medical malls. To execute its growth strategy, the Company
plans to significantly increase the number of medical practices under
management, open new medical malls and expand its sales and marketing
organization. The ability of the Company to manage growth through acquisitions
depends on its ability to maintain the high quality of services that it provides
to customers, to successfully integrate the different services that it provides
and to recruit, motivate and retain qualified personnel. There can be no
assurance that the Company will be able to manage growth effectively, and any
failure to do so could have a material adverse effect on the Company's business,
financial condition and results of operations and the price of the Common Stock.
See Use of Proceeds and Business - Strategy.
Risks Relating to Control of Health Care Costs. Recently, many providers
have experienced pricing pressures with respect to negotiations with health care
payors. In addition, employer groups are becoming increasingly successful in
negotiating reductions in the growth of premiums paid for their employees'
health insurance, which tends to depress the reimbursement for health care
services. At the same time, employer groups are demanding higher accountability
from payors and providers of health care services with respect to measurable
accessibility, quality and service. If these trends continue, the cost of
providing medical services could increase while the level of reimbursement could
grow at a lower rate or could decrease. There can be no assurance that these
pricing pressures will not have a material adverse effect on the operating
results and financial condition of the Company. In addition, changes in health
care practices, inflation, new technologies, major epidemics, natural disasters
and numerous other factors affecting the delivery and cost of health care could
have a material adverse effect on the operating results and financial condition
of the Company.
Cost Containment and Reimbursement Trends. The health care industry is
experiencing a trend toward cost containment as government and private
third-party payors seek to impose lower reimbursement and utilization rates and
negotiate reduced payment schedules with service providers. The federal
government has implemented, through the Medicare program, a resource-based
relative value scale (RBRVS) payment methodology for medical services. This
methodology went into effect in 1992 and continued to be implemented in annual
increments through December 31, 1996. RBRVS is a fee schedule that, except for
certain geographical and other adjustments, pays similarly situated physicians
the same amount for the same services. The RBRVS is adjusted each year, and is
subject to increases or decreases at the discretion of Congress. To date, the
implementation of RBRVS has reduced payment rates for certain of the procedures
provided by the PCs. Management estimates that approximately 14% of the revenues
of the PCs are derived from government sponsored health care programs
(principally Medicare and Medicaid). RBRVS-type payment systems have also been
adopted by certain private third-party payors and may become a predominant
payment methodology. More wide-spread implementation of such programs would
reduce payments by private third-party payors. Rates currently paid by many
private third-party payors are based on established physician and hospital
charges and are generally higher than Medicare payment rates. A change in the
patient mix of the PCs that results in a decrease in patients covered by private
insurance could adversely affect the Company's results of operations if the
Company is unable to assist health care providers in containing the cost of the
provision of medical services. To the extent that the PCs receive lower revenue
for medical services, there can be no assurance that the Company will be able to
derive sufficient revenues from its relationship with the PCs to achieve or
maintain profitability. The Company believes that cost containment trends will
continue to result in a reduction from historical levels in per-patient revenue
for medical practices. Further reductions in payments to health care providers
or other changes in reimbursement for health care services could have an adverse
effect on the Company's operations, unless the Company is otherwise able to
offset such payment reductions. There can be no assurance that the effect of any
or all of these changes in third-party reimbursement could be offset by the
Company through costs reductions, increased volume, introduction of new services
and systems or otherwise. See Risk Factors - Government Regulation - Uncertainty
Related to Health Care Reform and Business - Government Regulation.
Highly Competitive Industry. The physician practice management industry is
highly competitive. The industry is also subject to continuing changes in how
services and products are provided and how providers are selected and paid. As
prepaid medical care continues to grow, the Company may encounter increased
competition. Certain companies are expanding their presence in the physician
management market through the use of several approaches. A number of companies
provide broad management services to primary care, multi-specialty and
single-specialty physician groups, while other companies provide claims
processing, utilization
8
review and other more focused management services. In addition, certain of the
Company's competitors are dedicated to the management of single-specialty
practices focused on specific diseases. Certain of the Company's competitors are
significantly larger, have access to greater resources, provide a wider variety
of services and products, have greater experience in providing health care
management services and products and/or have longer established relationships
with customers for these services and products than the Company. The Company
believes that competition for services is based on cost and quality of services.
There can be no assurance that the Company's strategy will allow it to compete
favorably in negotiating agreements with health care payors or expanding or
maintaining its medical group practices or in existing or new markets. In
addition, many health care providers are consolidating to create larger health
care delivery enterprises with greater regional market power. Such consolidation
could erode the Company's customer base and reduce the size of the Company's
target market. In addition, the resulting enterprises could have greater
bargaining power, which could lead to price erosion affecting the Company's
services. The reduction in the size of the Company's target market or the
failure of the Company to maintain adequate price levels could have a material
adverse effect on the Company's business, financial condition and results of
operations and on the price of the Common Stock. See Business - Competition.
Government Regulation. As a participant in the health care industry, the
Company's operations and relationships are subject to extensive and increasing
regulation under numerous laws administered by governmental entities at the
federal, state and local levels. See Business - Government Regulation.
Fraud and Abuse Statutes. Federal anti-kickback provisions prohibit the
solicitation, payment, receipt or offer of any direct or indirect remuneration
for the referral of federal health care program patients (including Medicare and
Medicaid patients) or for the order or provision of covered services, items or
equipment. Other fraud and abuse laws also impose restrictions on physicians'
referrals for designated health services to entities with which they have
financial relationships (known as the Stark laws). In addition, federal law
imposes significant penalties for false or improper billings. Violations of any
of these laws may result in substantial civil or criminal penalties for
individuals or entities, including large civil monetary penalties and exclusion
from participation in the Medicare and Medicaid programs. Several states,
including states in which the Company operates, have adopted similar laws that
cover patients in private and workers' compensation programs as well as
government programs. Violations of any of the fraud and abuse laws by any of the
Company, Yater or MPS could have a material adverse effect on the Company's
business and financial condition and on the price of the Common Stock.
Corporate Practice of Medicine and Fee Splitting. The laws of many states
prohibit non-physician entities from practicing medicine and employing
physicians to practice medicine. The Company provides only non-medical
administrative services and clinical information systems to the PCs, does not
represent to the public or its clients that it offers medical services and does
not exercise control over the practice of medicine by the PCs. These limitations
on the Company's activities are incorporated into each management service
agreement, which is the contract governing the relationship between the Company
and the PCs. The PCs are responsible for providing medical care and are
independent from the Company, which provides, or arranges for the provision of,
administrative services. The Company believes its operations are in material
compliance with applicable laws in all jurisdictions in which it operates.
Nevertheless, because of the structure of its relationship with the PCs, many
aspects of the Company's business operations have not been the subject of formal
state or federal regulatory interpretation and there can be no assurance that a
review of the Company's structure by courts or regulatory authorities would not
result in a determination that could adversely affect the operations of the
Company or the PCs (for example, by rendering the Company's management services
agreement with the PCs unenforceable) or that the health care regulatory
environment will not change so as to restrict the existing operations or
expansion plans of the Company or the PCs. In addition, recently released
regulations dealing with the use of physician incentives may restrict the extent
to which payors or the Company may impose financial risk upon physicians (or
other health care providers). Violation of such regulations could result in
substantial penalties. Such regulations may also reduce the Company's ability to
control its expenses.
Confidentiality of Patient Records. The confidentiality of patient records
and the circumstances under which such records may be released are subject to
substantial regulation by state and federal laws and regulations, which govern
both the disclosure and use of confidential patient medical record information.
The Company believes that it complies with the laws and regulations regarding
the collection and distribution of patient data in all
9
jurisdictions in which it operates, but regulations governing patient
confidentiality rights are evolving rapidly and are often unclear and difficult
to apply in the restructuring health care market. Additional legislation
governing the dissemination of medical record information is continually being
proposed at both the state and federal level. For example, the Health Insurance
Portability and Accountability Act of 1996 requires the Secretary of Health and
Human Services to recommend legislation or promulgate regulations governing
privacy standards for individually identified health information and creates a
federal criminal offense for knowing disclosure and misuse of such information.
Additional proposed legislation could require patient consent before even coded
or anonymous patient information may be shared with third parties and further
require that holders or users of such information implement security measures.
In addition, the American Medical Association (the AMA) has issued a Current
Opinion to the effect that a physician who does not obtain a patient's consent
to disclosure of patient information for commercial purposes, including
anonymous disclosure, violates the AMA's ethical standards with respect to
patient confidentiality. While the AMA's Current Opinions are not law, they may
influence physicians' willingness to obtain patient consents or agree to permit
the Company to access clinical data in their systems without such consents. Any
such restrictions could have a material adverse effect on the Company's ability
to market its services and systems. Although the Company intends to safeguard
patient privacy when clinical data is accessed and transmitted over private and
public networks, including the Internet, and to enter patient medical
information into or receive such information from its database only with the
consent of the patient, if a patient's privacy is violated, the Company could be
liable for damages incurred by such patient. There can be no assurance that
changes to state or federal laws will not materially restrict the ability of the
Company to obtain or disseminate patient information.
Uncertainty Related To Health Care Reform. The Company anticipates that
Congress and state legislatures will continue to review and assess alternative
health care delivery and payment systems. Potential approaches that have been
considered include mandated basic health care benefits, controls on health care
spending through limitations on the growth of private health insurance premiums
and Medicare and Medicaid spending, the creation of large insurance purchasing
groups and other fundamental changes to the health care delivery system.
Proposals have also been discussed which would provide incentives for the
provision of cost-effective, quality health care through formation of regional
delivery systems. Private sector providers and payors have embraced certain
elements of reform, resulting in increased consolidation of medical groups and
competition among managers of medical practice groups as these providers and
payors seek to form alliances in order to provide quality, cost-effective care.
Due to uncertainties regarding the ultimate features of reform initiatives and
their enactment and implementation, the Company cannot predict which, if any, of
such reform proposals will be adopted, when they may be adopted or what impact
they may have on the Company, and there can be no assurance that the adoption of
reform proposals will not have a material adverse effect on the Company's
business, operating results or financial condition. In addition, the
announcement of reform proposals and the investment community's reaction to such
proposals, as well as announcements by competitors and third-party payors of
their strategies to respond to such initiatives, could produce volatility in the
trading and market price of the Common Stock.
Technological Change. The health care information industry is relatively
new and is experiencing rapid technology change, changing customer needs,
frequent new product instructions and evolving industry standards. There can be
no assurance that the Company will not experience difficulties, including lack
of necessary capital or expertise, that could delay or prevent the successful
development and introduction of system enhancements or new systems in response
to technological changes. The Company's inability to respond to technological
changes in a timely and cost-effective manner could have a material adverse
effect on the Company's business, financial condition and results of operations
and on the price of the Common Stock. See Business.
Franchise Regulation. Except for Maryland and Virginia, the Company is not
yet licensed to sell franchises in other states in which a license is required.
The business of franchising is subject to regulation by Federal and state
authorities, including the Federal Trade Commission. There can be no assurance
that the Company will be licensed to sell franchises in any other states in
which it wishes to sell franchises. Compliance with rules and regulations that
apply to franchising can be expensive and time consuming. The application of
existing or future Federal and state laws and regulations could prevent the
Company from selling franchises in certain states and could substantially impair
and delay the marketing and operation of the Company's franchise program. State
laws or regulations as they now or may in the future exist, could have a
material adverse effect upon the Company's results of operations and financial
condition.
10
Risk Of Liability Claims. Customer reliance on the Company's services and
systems could result in exposure of the Company to liability claims if the
Company's services and systems fail to perform as intended or if patient care
decisions based in part on guidance from the Company's services and systems are
challenged. Even unsuccessful claims would result in the expenditure of funds in
litigation, diversion of management time and resources or damage to the
Company's reputation and the marketability of the Company's services and
systems. While no such claims have been made against the Company to date, and
although the Company takes contractual steps to obtain indemnification for
certain liabilities and maintains general commercial liability insurance, there
can be no assurance that a successful claim could not be made against the
Company, that the amount of indemnification payments or insurance would be
adequate to cover the costs of defending against or paying such a claim or that
the costs of defending against such a claim or the payment of damages by the
Company would not have a material adverse effect on the Company's business,
financial condition and results of operations and on the price of the Common
Stock.
Dilution. The purchasers of the shares of Common Stock offered hereby will
experience immediate and substantial dilution in the net tangible book value of
their shares of Common Stock in the amount of $5.84 per share (assuming a public
offering price of $9.00 per share and after deducting underwriting discounts and
commissions and estimated offering expenses). Such investors will experience
additional dilution upon the exercise of certain outstanding options and
warrants. In addition, in the event the Company issues additional Common Stock
in the future, including shares that may be issued in connection with the Merger
or future acquisitions, investors may experience further dilution. See Dilution,
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Business - Contractual Relationships with Yater and MPS.
Shares Eligible For Future Sale. Sales of shares of Common Stock (including
shares issued upon the exercise of outstanding options) in the public market
after this Offering could adversely affect the market price of the Common Stock.
Such sales also might make it more difficult for the Company to sell equity
securities or equity-related securities in the future at the time and price that
the Company deems appropriate. Upon completion of this Offering, the Company
will have approximately 5,378,046 shares of Common Stock outstanding. The
2,000,000 shares of Common Stock offered hereby will be freely tradeable without
restriction unless they are held by affiliates of the Company as the term is
used under the Securities Act of 1933, as amended (the Securities Act), and the
regulations promulgated thereunder. The remaining approximately 3,378,046 shares
are restricted securities that may be sold only if registered under the
Securities Act or sold in accordance with an applicable exemption from
registration, such as Rule 144 or Rule 144(k) promulgated under the Securities
Act. As a result of the provisions of Rule 144, such shares will generally be
available for sale in the public market 90 days after the date of this
Prospectus, subject in certain cases, to the volume, manner of sale and
reporting requirements of Rule 144. The Company, and its officers, directors and
principal stockholders have agreed for a period of 180 days from the
consummation of this Offering not to offer, sell or otherwise dispose of any
shares of Common Stock (or any securities convertible into or exercisable for
Common Stock) or grant any options or warrants to purchase shares of Common
Stock without the prior written consent of Ferris, Baker Watts, Incorporated
(the Representative). See Shares Eligible for Future Sale and Description of
Capital Stock
No Assurance of Public Market; Determination of Offering Price; Possible
Volatility of Market Price of Common Stock. Prior to this Offering, there has
been no established public trading market for the Common Stock. Consequently,
the initial public offering price of the Common Stock has been determined by
negotiations between the Company and the Underwriters and do not necessarily
reflect the Company's book value or other established criteria of value. There
can be no assurance that a regular trading market of the Common Stock will
develop after this Offering or that, if developed, it will be sustained. The
market prices of the Company's securities following this offering may be highly
volatile as has been the case with the securities of other emerging companies.
Factors such as the Company's operating results, announcements by the Company or
its competitors of new physician practice and network management service
contracts, and various factors affecting the health care industry generally, may
have a significant impact on the market price of the Company's securities. In
general, in recent years, the stock market has experienced a high level of price
and volume volatility and market prices for the stock of many companies,
particularly of small and emerging growth companies, the
11
common stock of which trade in the Over-the-Counter market, have experienced
wide price fluctuations which have not necessarily been related to the operating
performance of such companies. See Underwriting.
THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 WITH RESPECT TO THE FINANCIAL
CONDITION, RESULTS OF OPERATIONS AND BUSINESS OF THE COMPANY, INCLUDING
STATEMENTS UNDER THE CAPTIONS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS AND BUSINESS. THESE FORWARD LOOKING
STATEMENTS INVOLVE CERTAIN RISKS AND UNCERTAINTIES. NO ASSURANCE CAN BE GIVEN
THAT ANY SUCH MATTERS WILL BE REALIZED.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered by the Company hereby are estimated to be approximately $15.8 million
($18.3 million if the Underwriters' over-allotment option is exercised in full),
assuming an initial public offering price of $9.00 per share and after deducting
underwriting discounts, commissions and estimated offering expenses. The Company
intends to use the net proceeds: (i) for the development of up to five
additional medical mall facilities; (ii) for the repayment of certain debt;
(iii) to finance acquisitions and expansion of the PCs; (iv) for working
capital; and (v) for general corporate purposes, including to secure debt that
may be incurred by MOM or any future franchisee. Such debt may be incurred in
connection with the employment of new health care providers, the acquisition of
additional physician practices and the opening of new medical mall facilities.
Development costs associated with new medical mall facilities include the
identification of a site, negotiation of a lease, construction and finishing
expenses, acquisition of supplies and equipment, recruitment of health care
providers and operating staff and other start-up costs. The Company may also use
a portion of the net proceeds to make improvements to existing medical mall
facilities. The Company intends to repay an aggregate of approximately $935,000
of debt, including $270,000 owed to Dr. Steven Macedo and Michael Macedo. These
obligations bear interest at rates ranging from 9.5% to prime plus 1.5% per
annum and mature between May 28, 1998 and May 28, 2002. See Certain
Transactions.
From time to time in the ordinary course of its business, the Company
evaluates possible acquisitions of businesses, products and technologies that
are complementary to those of the Company. The Company currently has no
agreements or understandings, and is not engaged in active negotiations, with
respect to any material acquisition.
Pending the application of the net proceeds of this Offering, the Company
intends to invest such proceeds in short-term, investment-grade,
interest-bearing U.S. government securities or money market funds.
12
DILUTION
The difference between the initial public offering price per share of
Common Stock and net tangible book value per share of Common Stock after this
Offering constitutes the dilution to investors in this Offering. Net tangible
book value per share is determined on any given date by dividing the net
tangible book value of the Company (total tangible assets less total
liabilities) on such date by the number of then outstanding shares of Common
Stock.
At December 31, 1997, the net tangible book value of the Company was
$1,127,657, or $0.33 per share of Common Stock. After giving effect to the sale
of the 2,000,000 shares of Common Stock offered hereby (at an assumed initial
public offering price of $9.00 per share) and the receipt and application of the
estimated net proceeds therefrom (less underwriting discounts and commissions
and estimated offering expenses), the as adjusted net tangible book value of the
Company as of December 31, 1997 would have been $16,962,657 or $3.16 per share,
representing an immediate increase in net tangible book value of $2.83 per share
to existing stockholders and an immediate dilution of $5.84 per share to new
investors.
The following table illustrates the foregoing information with respect to
dilution to new investors on a per share basis:
Initial public offering price..................................... $9.00
Net tangible book value per share at December 31, 1997....... $0.33
Increase attributable to investors in this Offering.......... $2.83
As adjusted net tangible book value after this Offering........... $3.16
Dilution to new investors in this Offering........................ $5.84
The following table sets forth a comparison between the Company's existing
stockholders and new investors in this Offering, with respect to the number of
shares of Common Stock acquired from the Company, the percentage ownership of
such shares, the total consideration paid, the percentage of total consideration
paid and the average price per share:
AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------ ------- ------ ------- ------------
Existing stockholders.... 3,378,046 63% $ 604,464 3% $0.18
New investors............ 2,000,000 37% 18,000,000 97% 9.00
--------- --- ---------- ---
Total............... 5,378,046 100% $18,604,464 100% $3.47
The above tables assume no exercise of the Underwriters' over-allotment
option. If such option is exercised in full, the new investors will have paid
$20,700,000 for 2,300,000 shares of Common Stock offered by the Company,
representing approximately 97% of the total consideration, for 40% of the total
number of shares of Common Stock outstanding. In addition, the above table
excludes (i) 2,000,000 shares of Common Stock issuable upon the exercise of
options under the Company's Stock Option Plan, 1,800,000 of which have been
granted at an exercise price equal to the initial public offering price; (ii)
945,826 shares of Common Stock issuable pursuant to the exercise of certain
other options and warrants at a weighted average exercise price of $4.36; (ii)
approximately 36,111 shares of Common Stock issuable upon consummation of this
Offering in lieu of compensation valued at the initial public offering price;
(iii) up to 116,109 shares of Common Stock issuable upon consummation of the
Merger. To the extent that such options and warrants are exercised, and such
shares issued, there will be further dilution to new investors. See Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources, Management - Stock Option Plan, and
Underwriting.
13
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
There is no significant trading market in the Company's Common Stock. No
closing price, bid or ask information is reported for the Common Stock and the
Company is not aware that any brokers currently make a market in the Common
Stock of the Company. In addition, to the extent that any shares have been
traded, the volume has been very low and sporadic.
The Company has declared and paid cash dividends on its capital stock at
the following times in the indicated amounts:
DATE DIVIDEND
---- --------
March 29, 1996...................................... $.0012 per share
January 1, 1997 through March 1, 1997............... $.0024 per share per month
April 1, 1997 through December 31, 1997............. $.0048 per share per month
The Company expects to pay quarterly dividends in the future to the extent
that the Board of Directors determines it to be in the best interests of the
Company and its shareholders and to the extent allowable under Maryland law. The
payment of any cash dividends in the future will depend on the Company's
earnings, financial condition, results of operations, capital needs and other
factors deemed pertinent by the Company's Board of Directors, subject to laws
and regulations then in effect.
CAPITALIZATION
The following table sets forth the capitalization of the Company at
December 31, 1997 on a historical basis and as adjusted to give effect to the
sale by the Company of the shares of Common Stock offered hereby.
ACTUAL AS ADJUSTED
------ -----------
Due to related parties(1).............................. $ 135,000 --
Current maturities of long-term debt................... 460,146 $ 221,973
Long term debt, net of current maturities.............. 3,805,138 3,672,442
Stockholders' equity:
Common stock, $.0024 par value, 10,000,000 shares
authorized, 3,366,841 shares issued and outstanding
actual and 5,366,841 shares issued and outstanding
as adjusted(2)....................................... 8,080 12,880
Additional paid in capital............................. 570,002 16,426,581
Retained earnings...................................... 939,515 939,515
---------- -----------
Total stockholders' equity........................ $1,517,597 $17,378,976
---------- -----------
Total capitalization.............................. $5,782,881 $21,273,391
========== ===========
(1) The Company owes Dr. and Mr. Macedo $135,000 at December 31, 1997 for
short-term cash advances.
(2) Excludes 11,205 shares of Common Stock issued on March 11, 1998 to an
executive officer.
14
SELECTED FINANCIAL DATA
The consolidated selected financial data presented below for the Company's
consolidated statements of operations data for the years ended December 31,
1995, 1996 and 1997 and the balance sheet data at December 31, 1996 and 1997 are
derived from the Company's consolidated financial statements which have been
audited by KPMG Peat Marwick LLP, independent public accountants, and as
indicated in their report included elsewhere in this Prospectus. The selected
consolidated balance sheet data at December 31, 1995 is derived from the
consolidated financial statements of the Company which have been audited by KPMG
Peat Marwick LLP, independent public accountants, but which are not included in
this Prospectus. The Company commenced operations on January 1, 1995. Due to
control by the Company, the operations of MPS have been consolidated with those
of the Company for all periods presented and the operations of Yater have been
consolidated for the period ending December 31, 1997 and should be read in
conjunction with the Company's consolidated financial statements and the notes
thereto, and the information in Management's Discussion and Analysis of
Financial Condition and Results of Operations included elsewhere in this
Prospectus.
YEARS ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
---------- ---------- ----------
STATEMENT OF OPERATIONS DATA:
Net patient service revenue................. $1,117,962 $1,078,343 $6,028,181
Fee revenue--related parties................ 33,182 225,787 575,610
Total revenue............................... 1,151,144 1,304,130 6,603,791
Operating expenses:
Medical malls salaries, benefits and
other costs.......................... 567,535 596,520 2,133,064
Medical malls management fee expenses.. -- -- 1,140,744
Medical malls bad debt expense......... 133,094 86,786 912,799
Fee-related expenses................... 124,028 200,870 413,503
General and administrative expenses.... 37,735 111,246 841,532
Depreciation and amortization.......... 20,083 30,559 117,591
Total operating expenses.................... 882,475 1,025,981 5,559,233
Income from operations...................... 268,669 278,149 1,044,558
Net interest expense........................ (14,886) (24,765) (193,154)
Gain on sale of equipment................... -- -- 424,499
Income before income taxes.................. 253,783 253,384 1,275,903
Provision (benefit) for income taxes........ (30,324) (13,624) 229,340
Net income.................................. $ 284,107 $ 267,008 $1,046,563
Net income per share........................ $ .31
Weighted average number of shares out
standing.................................. 3,363,084
DECEMBER 31,
----------------------------------
1995 1996 1997
---------- ---------- ----------
BALANCE SHEET DATA:
Working capital............................. $ 423,123 $ 549,198 $1,930,487
Total assets................................ 678,173 881,659 7,204,222
Long-term debt, net of current maturities... 164,230 232,463 3,805,138
Total stockholders' equity.................. 271,391 388,477 1,517,597
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Company's consolidated financial statements (and the related notes thereto)
included elsewhere in this Prospectus. This discussion contains forward-looking
statements that involve risks and uncertainties, the Company's actual results
may differ materially from the results discussed in the forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed in Risk Factors.
OVERVIEW
The Company provides or arranges for the provision of management services
to medical practices and develops low-cost physician driven provider networks
and medical mall facilities. The Company has developed three medical mall
facilities in the Washington, D.C. metropolitan area, each providing medical
services ranging from general family practice to selected specialties. Through
the medical mall facilities, the Company enables health care providers and
payors to offer patients high-quality medical services on a cost-effective
basis. Additional physician management services provided by the Company include
marketing, health care payor contracting and financial and administrative
management. The Company currently manages a network of approximately 57 licensed
health care providers that treat over 100,000 active patients. The Company
intends to rapidly expand the medical mall concept throughout the
Washington-Baltimore metropolitan area and throughout the mid-Atlantic region to
take advantage of market opportunities.
The Company's consolidated financial statements reflect the combined
operations of the PCs for the year ended December 31, 1997. MPS is wholly owned
by Dr. Steven Macedo, the Chairman of the Board of the Company, and his wife,
Dr. Ilene Macedo. Yater was purchased by Drs. Steven and Ilene Macedo on January
17, 1997. Prior to this Offering, Dr. Macedo and his brother, Michael Macedo,
the Chief Executive Officer of the Company, beneficially owned approximately
88.8% of the outstanding shares of Common Stock of the Company. Accordingly,
notwithstanding the lack of technical majority ownership of the PCs, through Dr.
Macedo's ownership interest in the PCs, the Company may be deemed to have
sufficient control over the operations of such entities so that consolidation of
the operations of the PCs into those of the Company is necessary to present
fairly the financial position and results of operations of the Company. The
Company is also a party to transfer restriction agreements with the shareholders
of Yater and partners of MPS. These agreements restrict the sale of the
ownership interests by Drs. Steven and Ilene Macedo in Yater and automatically
transfer the ownership interests to a Company-designated transferee upon the
death, disability, or disqualification of the owners or dissolution of Yater.
Nominal consideration is required upon such involuntary transfer of the Yater
shares. The MPS partnership interest transfer restriction agreement provides for
a payment from the Company to the estate of the partners upon the partners
death, disability or disqualification or the dissolution of MPS at a mutually
agreed-upon fair value at time of transfer. Due to the presence of this common
control by the Macedos in conjunction with the ownership transfer restriction
agreements effective December 31, 1997, the PCs have been consolidated with the
operations of the Company for the year ended December 31, 1997. Yater was not
consolidated with the Company until 1997 since common control was not
established until that time.
The Company's total revenue consists primarily of patient revenue generated
by the PCs. The Company has numerous contracts with third-party payors and
managed care companies to provide physician services based on contracted or
negotiated fee schedules. Services under these agreements are recorded as
revenue when provided. No contracts with third-party payors or individual
managed care agreements are material to the Company.
Operating expenses consisted primarily of costs to operate the medical
malls and include salaries, benefits and other costs, management fee expenses
and bad debt expenses. Under the management service agreements between the
Company and the PCs, the Company is responsible for providing or arranging for
the provision of management and administrative services for the medical
practices of the PCs. In connection with its services, the Company has retained
for the benefit of the PCs, a separate company to provide certain management
services. This company, Medi-Cen, of Maryland, Inc. (MOM), has entered into a
franchise agreement with the Company providing MOM with the right to use the
Medi-Cen name
16
and model in connection with the development of medical mall facilities and the
obligation to provide operational services at the medical malls, including
payment of rent for the facilities, purchase of supplies and equipment and
salaries for non-professional staff.
In consideration of 34.25% of collections of net patient service revenue,
MOM has agreed to assume responsibility for all expenses related to rent,
non-medical personnel, equipment and supplies in the operation of the PCs and
the medical malls. During 1997, 34.25% of collections of net patient service
revenue equaled 17.3% of total revenue or 18.9% of net patient service revenue,
giving effect to the delay in timing of the receipt of net patient service
revenue. MOM is primarily owned by the health care providers employed by the PCs
and as equity owners, the providers make decisions regarding the operation of
the facilities and also bear the economic risk that amounts paid to MOM under
the franchise agreement will be sufficient to pay the expenses of such
operation.
The Company has responsibility for all other costs and services relating to
the management of the medical malls and the PCs, including, but not limited to,
management information systems, insurance and quality control. More importantly,
the Company also works with the PCs to develop additional medical malls,
including locating mall sites, recruiting additional health care providers,
merging other health care practices into the PCs, negotiating contracts with
managed care organizations and providing additional ancillary services. To
reduce or control expenses, among other things, the Company reviews staffing
levels at the medical malls to make sure they are appropriate, assists the
health care providers in developing more cost-effective clinical practice
patterns, and intends to establish centralized purchasing for medical supplies.
After the payment of all costs relating to the management of the medical
mall facilities, including the fees paid to MOM, the Company is entitled to
receive, as its management fee, 60% of the remaining collections. This amount is
a minimum of $500,000 per year and may not exceed $1,000,000 annually for
existing medical mall facilities and $500,000 annually for new medical mall
facilities. The remaining collections are retained by the PCs to satisfy all
professional costs, including health care provider salaries, taxes and certain
other professional costs. During 1997, medical malls salaries, benefits and
other costs were in fact equal to 29.7% of total revenue, giving effect to the
Company's accrual based accounting method.
In 1997, the management fee payable to MOM was less than its expenses and
the Company was required to loan to MOM an amount sufficient to permit MOM to
pay its operational expenses. At December 31, 1997, the Company's balance sheet
reflected an outstanding receivable of $1.2 million for such advances. The PCs
typically do not acquire a new health care provider's receivables when such
health care provider becomes employed by a PC or his or her practice is acquired
by a PC. Therefore, during the period between the commencement of billing for
such health care provider and the receipt of collections in respect of such
billings, no cash is collected. Furthermore, when medical malls open, a further
delay in collections occurs during the start-up phase as the health care
provider goes through the credentialing process with payors. As a result of
these delays, the payments to MOM in respect of its management fees are
significantly reduced as the MOM fee is based on collected net patient service
revenue. The Company believes that once a medical mall has a full complement of
health care providers who have reestablished a billing receivables base, the
management fees payable to MOM out of collections will likely be sufficient to
cover its expenses and the Company will not be required to advance management
fee payments to MOM. In addition, during start-up phases for particular health
care providers, the Company or Yater may advance some amount of funds to such
providers while collections may lag behind billings.
Simultaneously with the closing of this Offering, the Company will acquire
Medi-Cen Corporation of America (MCA) through a merger of MCA into a wholly
owned subsidiary of the Company (the Merger). In connection with the Merger, the
Company will issue up to 116,109 shares of its Common Stock to the shareholders
of MCA. Prior to the Merger, MCA developed the medical mall franchise concept
and received franchise fees from MOM in connection with this operation. MCA also
provided services to the PCs in connection with negotiations for insurance and
managed care contracts. The effects of this Merger will be insignificant to the
consolidated financial position and operations of the Company.
17
RESULTS OF OPERATIONS
The Company believes that its historical results of operations from period
to period are not comparable and that such results are not necessarily
indicative of results for any future periods. The following table sets forth
certain items from the Company's Statements of Operations as a percentage of
total revenue for the periods indicated:
YEARS ENDED DECEMBER 31,
------------------------
1995 1996 1997
---- ---- ----
Total revenue.......................................... 100.0% 100.0% 100.0%
Medical malls salaries benefits and other costs... 49.3 45.7 32.3
Medical malls management fee expenses............. -- -- 17.3
Medical malls bad debt expense.................... 11.6 6.7 13.8
Fee related expenses.............................. 10.8 15.4 6.3
General and administrative expenses............... 3.3 8.5 12.7
Depreciation and amortization..................... 1.7 2.3 1.8
----- ----- -----
Income from operations................................. 23.3 21.4 15.8
Net interest expense.............................. 1.3 1.9 2.9
Gain on sale of equipment......................... -- -- 6.4
Provision (benefit) for income taxes.............. (2.6) (1.0) 3.5
----- ----- -----
Net income............................................. 24.6% 20.4% 15.8%
===== ===== =====
Year Ended December 31, 1997 compared to year ended December 31, 1996
Total revenue. Total revenue was approximately $6.6 million for the year
ended December 31, 1997 (Fiscal Year 1997) as compared to approximately $1.3
million for the year ended December 31, 1996 (Fiscal Year 1996), an increase of
$5.3 million or 408%. This increase was primarily attributable to an increase in
the number of licensed health care providers and the associated patient volume
related to the addition of Yater and growth in MPS. In Fiscal Year 1997, total
revenues was comprised of 91.3% net patient service revenue and 8.7% fee revenue
from related parties. In Fiscal Year 1996, the Company's total revenues was
comprised of 82.7% net patient service revenue and 17.3% fee revenue from
related parties. Fee revenue from related parties reflects payments made by MOM
to the Company on behalf of the PCs for management information services. This
amount will now be collected by the Company directly from the PCs pursuant to
the management services agreement.
Medical malls salaries, benefits and other costs. Medical malls salaries,
benefits and other costs were approximately $2.1 million for Fiscal Year 1997 as
compared to $596,520 for Fiscal Year 1996, an increase of approximately $1.5
million or 251%. This increase was attributable to the execution of a management
services agreement with Yater, which significantly expanded the professional
staff from 11 providers to 53. As a percentage of total revenue, these expenses
decreased from 45.7% Fiscal Year 1996 to 32.3% Fiscal Year 1997 due to the
ability of the PCs to negotiate lower prices for the acquisition of medical
practices.
Medical malls management fee expenses. In Fiscal Year 1997, the Company
incurred medical malls management fee expenses of approximately $1.1 million.
These expenses are attributable to the fees paid to MOM for the provision of
certain administrative services on behalf of the PCs.
Medical malls bad debt expense. Medical malls bad debt expense was $912,799
for Fiscal Year 1997 as compared to $86,786 for Fiscal Year 1996, an increase of
$826,013 or 952%. This expense is attributable to the default by patients
responsible for the payment of any co-payments or other unreimbursed costs of
medical services. The increase in Fiscal Year 1997 was primarily attributable to
the inclusion of Yater in this calculation. As a percentage of total revenues,
this expense increased from 6.7% in Fiscal Year 1996 to 13.8% in Fiscal Year
1997 due to the costs associated with integrating new medical practices into the
medical malls. Because there can be a delay between the time a newly acquired
health care provider begins to treat patients and the time such provider becomes
credentialed by health care payors, payments for such services are frequently
delayed and as a result medical malls bad debt expense increases.
18
Fee related expenses. Fee related expenses were $413,503 for Fiscal Year
1997 as compared to $200,870 for Fiscal Year 1996, an increase of $212,633 or
106%. These expenses relate to the direct costs of the Company to provide
management information systems to the PCs pursuant to the management services
agreements. The increase of these expenses in Fiscal Year 1997 was primarily
attributable to the addition of management information systems provided to Yater
in 1997. As a percentage of total revenue, these expenses decreased from 15.4%
in Fiscal Year 1996 to 6.3% in Fiscal Year 1997 due to efficiencies gained by
costs being distributed among a larger number of health care providers.
General and administrative expenses. General and administrative expenses
were $841,532 for Fiscal Year 1997 as compared to $111,246 for Fiscal Year 1996,
an increase of $730,286 or 656%. This increase was primarily attributable to the
costs of expansion and professional fees. These expenses increased as a
percentage of total revenue from 8.5% in Fiscal Year 1996 to 12.7% in Fiscal
Year 1997 due to the increase in medical practices acquired.
Depreciation and amortization. Depreciation and amortization was $117,591
for Fiscal Year 1997 as compared to $30,559 for Fiscal Year 1996, an increase of
$87,032 or 285%. This increase was primarily attributable to the amortization of
the goodwill resulting from the acquisition of Yater.
Income from operations. As a result of the foregoing, income from
operations was approximately $1.0 million for Fiscal Year 1997 as compared to
$278,149 for Fiscal Year 1996, an increase of $766,409 or 276%. However, income
from operations decreased as a percentage of total revenue from 21.4% in Fiscal
Year 1996 to 15.8 % in Fiscal Year 1997 due to the additional expenses related
to the acquisition of Yater.
Net interest expense. Net interest expense was $193,154 for Fiscal Year
1997 as compared to $24,765 for Fiscal Year 1996, an increase of $168,389 or
680%. This increase is attributable to the increased borrowings of the PCs to
finance the acquisition of medical practices.
Gain on sale of equipment. In Fiscal Year 1997, the Company realized
$424,499 from the sale of equipment by the PCs to MOM.
Provision (benefit) for income taxes. Provision for income taxes was
$229,340 for Fiscal Year 1997 as compared to a benefit of $13,624 for Fiscal
Year 1996, an increase of $242,964. This increase is attributable to higher
income generated during the period.
Net income. As a result of the foregoing, net income was $1,046,563 for
Fiscal Year 1997 as compared to $267,008 for Fiscal Year 1996, an increase of
$779,555 or 292%.
Year Ended December 31, 1996 compared to year ended December 31, 1995
Total revenue. Total revenue was approximately $1.3 million for Fiscal Year
1996 as compared to approximately $1.2 million for the year ended December 31,
1995 (Fiscal Year 1995), an increase of $152,986 or 13.3%. This increase was
attributable to an increase in patient volume. In Fiscal Year 1996, the
Company's total revenues was comprised of 82.7% net patient service revenue and
17.3% fee revenue from related parties. In Fiscal Year 1995, total revenues was
comprised of 97.1% net patient service revenue and 2.9% fee revenue from related
parties.
Medical malls salaries, benefits and other costs. Medical malls salaries,
benefits and other costs was $596,520 for Fiscal Year 1996 as compared to
$567,535 for Fiscal Year 1995, an increase of $28,985 or 5.1%. This increase was
attributable to the employment of additional health care providers by MPS and
was partly offset by the termination of employment of certain other providers.
Medical malls bad debt expense. Medical malls bad debt expense was $86,786
for Fiscal Year 1996 as compared to $133,094 for Fiscal Year 1995, a decrease of
$46,308 or 34.8%. This decrease was attributable to a decrease in defaults by
patients responsible for the payment of any co-payments or other unreimbursed
costs of medical services.
Fee related expenses. Fee related expenses were $200,870 for Fiscal Year
1996 as compared to $124,028 for Fiscal Year 1995, an increase of $76,842 or
62%. This increase was attributable to management information systems provided
to one new medical mall facility.
19
General and administrative expenses. General and administrative expenses
were $111,246 for Fiscal Year 1996 as compared to $37,735 for Fiscal Year 1995,
an increase of $73,511 or 195%. This increase was attributable to the costs of
expansion and professional fees.
Depreciation and amortization. Depreciation and amortization was $30,559
for Fiscal Year 1996 as compared to $20,083 for Fiscal Year 1995, an increase of
$10,476 or 52.2%.
Income from operations. As a result of the foregoing, income from
operations was $278,149 for Fiscal Year 1996 as compared to $268,669 for Fiscal
Year 1995, an increase of $9,480 or 3.5%. However, income from operations
decreased as a percentage of total revenue from 23.3% in Fiscal Year 1995 to
21.3% in Fiscal Year 1996 due to additional expenses related to the expansion of
MPS.
Net interest expense. Net interest expense was $24,765 for Fiscal Year 1996
as compared to $14,886 for Fiscal Year 1995, an increase of $9,879 or 66%. This
increase is attributable to increased borrowings by MPS to finance the
acquisition of medical practices.
Provision (benefit) for income taxes. Provision (benefit) for income taxes
was $(13,624) for Fiscal Year 1996 as compared to $(30,324) for Fiscal Year
1995, an increase of $16,700.
Net income. As a result of the foregoing, net income was $267,008 for
Fiscal Year 1996 as compared to $284,107 for Fiscal Year 1995, a decrease of
$17,099 or 6.0%.
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company has financed its operations, including working
capital, using bank borrowings and loans from corporate officers, as well as
from cash flow generated from operating activities. As of December 31, 1997, the
Company had net working capital of $1,930,487, as compared to a net working
capital at December 31, 1996 of $549,198.
At December 31, 1997, the Company's current liabilities included $383,534
in accrued salaries and benefits, payable in the ordinary course of its
business. It also included $135,000 payable to Dr. Steven Macedo and Michael
Macedo, officers of the Company. As of the date of this Prospectus, the Company
owes approximately $270,000, together with interest at the rate of prime rate
plus 0.5%, to Dr. Macedo and Michael Macedo and these amounts are expected to be
repaid from a portion of the net proceeds of the Offering. See Use of Proceeds.
In October 1996, the Company obtained a bank loan in the amount of
$105,000, which bears interest at the rate of prime rate plus 1% per annum and
must be repaid by October 1, 2001. The assets of the Company, excluding
certificates of deposit, secure this loan. Furthermore, Dr. Steven Macedo and
Michael Macedo, officers of the Company, have each personally guaranteed
repayment of this loan. The Company intends to use a portion of the net proceeds
from this Offering to repay this debt. See Use of Proceeds.
In May 1997, the Company obtained two bank loans in the aggregate amount of
$300,000. $200,000 of this loan bears interest at the rate of prime rate plus
1.5% per annum and must be repaid by May 28, 1998. $100,000 of this loan bears
interest at the rate of 9.5% per annum and must be repaid by May 28, 2002. The
assets of the Company, excluding certificates of deposit, secure these loans.
Furthermore, Dr. Steven Macedo and Michael Macedo, officers of the Company, have
each personally guaranteed repayment of these loans. The Company intends to use
a portion of the net proceeds from this Offering to repay these amounts. See Use
of Proceeds.
In December 1997, the Company obtained a bank loan and a line of credit to
fund the acquisition of new medical practices. The loan is in the principal
amount of $3,000,000, which bears interest at the rate of prime rate plus 0.5%
per annum and must be repaid by January 1, 2004. Interest is due monthly on this
loan until February 1, 1999 when principal payments of $50,000 also become due
monthly. The line of credit is available in the amount of $1,500,000, which
bears interest at the rate of prime rate plus 0.5% per annum and must be repaid
by January 1, 2004. As of the date of this Prospectus, the outstanding balance
on this line of credit is approximately $708,000. Interest is due monthly on
outstanding balances under this line of credit until February 1, 1999 when
principal payments become payable over 60 months. The PCs are co-borrowers on
these obligations, which are secured by all assets of the PCs as well as certain
other collateral more particularly defined in
20
the financing documents. These obligations are guaranteed by Dr. Macedo and
his wife. Dr. Macedo's parents have also guaranteed up to $1,500,000 of this
debt.
In February 1998, the Company obtained a revolving bank line of credit in
the amount of $260,000, which bears interest at the rate of prime rate plus 0.5%
per annum. As of the date of this Prospectus, the outstanding balance on this
line of credit is $260,000. The Company intends to use a portion of the net
proceeds from this Offering to repay such outstanding balance. See Use of
Proceeds.
From inception, the Company's operations have been funded by bank
borrowings and borrowings from individuals. The Company's operating activities
provided (used) cash of $(1,164,639), $163,639, $274,504 for the Fiscal Years
1997, 1996 and 1995, respectively. In Fiscal Year 1997 cash was primarily used
by an increase in accounts receivable from the increased patient volume related
to the acquisition of Yater and advances made to related parties. In Fiscal Year
1996, cash was primarily provided by operating activities. In Fiscal Year 1995,
cash was primarily provided by the receipt of fees from MOM.
The Company's investing activities provided (used) cash of $(1,175,575),
$(639) and $33,244 in Fiscal Year 1997, 1996 and 1995, respectively. In Fiscal
Year 1997 cash was primarily used in the purchases of certificates of deposit,
all of which were utilized to guarantee debt of the PCs, as well as to make
advances to related parties. In Fiscal Year 1996, cash was used in the purchase
of furniture and equipment. In Fiscal Year 1995, cash was provided by the return
of deposits.
The Company's financing activities provided (used) cash of $2,969,636,
$(222,771) and $(232,933), in Fiscal Year 1997, 1996 and 1995, respectively. In
Fiscal Year 1997, cash was primarily provided by borrowings of long-term debt by
the PCs. In Fiscal Year 1996, cash was primarily used by distributions to the
partners of MPS, who are Dr. Steven Macedo and Dr. Ilene Macedo, which was
partly offset by cash provided by long-term borrowings. In Fiscal Year 1995,
cash was primarily used by distributions to the partners of MPS, Drs. Steven and
Ilene Macedo.
The Company's cash position was $648,069 and $18,647 at December 31, 1997
and 1996, respectively.
The Company intends to seek to expand its operations through the
acquisition of additional medical practices and the establishment of new medical
mall facilities. The Company believes that the combination of the net proceeds
raised from this Offering, together with internally generated funds, will
provide sufficient cash to meet the Company's capital and other cash
requirements for at least the next twelve months.
Management believes that there has been no significant impact on the
Company's operations as a result of inflation.
SEASONALITY
The health care practice industry is somewhat seasonal in nature, and it
has been the Company's experience that patients visit health care providers less
frequently during the winter months particularly in the mid-Atlantic region and
Northeast United States. Accordingly, patient revenue may be lower from December
through February. In addition, as many health care payors require that patients
pay a deductible amount at the beginning of each calendar year, the Company has
experienced lower collection rates during the first three months of each year.
21
BUSINESS
OVERVIEW
Medi-Cen Management, Inc. (MMI or the Company) provides or arranges for the
provision of management services to medical practices and develops low-cost
physician driven provider networks and medical mall facilities. The Company has
developed three medical mall facilities in the Washington, D.C. metropolitan
area, each providing medical services ranging from general family practice to
selected specialties. Through the medical mall facilities, the Company enables
health care providers and payors to offer patients high-quality medical services
on a cost-effective basis. Additional physician management services provided by
the Company include marketing, health care payor contracting and financial and
administrative management. The Company currently manages a network of
approximately 57 licensed health care providers that treat over 100,000 active
patients (treated in the last 36 months). The Company intends to rapidly expand
the medical mall concept throughout the Washington-Baltimore metropolitan area
and throughout the mid-Atlantic region to take advantage of market
opportunities.
The Company believes that there are several advantages to its medical mall
strategy. The one-stop facility permits patients to see both primary care
providers and specialists under one roof, which is both convenient and
time-saving. In addition, the Company provides patients with a single
comprehensive monthly statement for all medical services provided at the medical
malls, thereby reducing paperwork and confusion. The Company also believes that
the medical malls reduce overhead expenses, ultimately resulting in lower health
care delivery costs. Finally, the Company believes the medical malls will help
attract high-quality health care providers by: (i) increasing provider
compensation by lowering overhead costs; (ii) allowing health care providers to
locally control the practice of medicine; (iii) offering providers the ability
to consult with other specialists in the facilities; and (iv) providing the
financial incentive and autonomy of owning and operating the physical assets and
non-professional costs of the medical practices through its franchise structure.
INDUSTRY
The Health Care Financing Administration estimates that national health
care spending in 1997 was in excess of $1 trillion, with physicians controlling
more than 80 percent of the overall expenditures. The American Medical
Association reports that approximately 613,000 physicians are actively involved
in patient care in the United States, with a growing number participating in
multi-specialty or single-specialty groups. Expenditures directly attributable
to physicians are estimated at $246 billion. Under such programs, managed care
payors typically govern the provision of health care with the objective of
ensuring delivery of quality care in a cost-effective manner. The traditional
fee-for-service method of compensating health care providers offers few
incentives for the efficient utilization of resources and is generally believed
to contribute to health care cost increases at rates significantly higher than
inflation. Consequently, fee-for-service reimbursement is rapidly being replaced
by alternative reimbursement models, including capitated and other
discounted-fee arrangements. The growth in enrollment in these new reimbursement
models is shifting the financial risk of delivering health care from payors to
providers.
As a result of this changing health care environment, health care cost
containment pressures have increased physician management responsibilities while
lowering reimbursement rates to physicians. Consequently, physician compensation
has declined. Because the majority of all physicians currently practice
individually or in small groups, their ability to lower costs and to negotiate
with payors is limited. Individual physicians and small group practices also
tend to have limited administrative capacity, limited ties to other health care
providers (restricting their ability to coordinate care across a variety of
specialties), limited capital to invest in new clinical equipment and
technologies and limited purchasing power with vendors of medical supplies. In
addition, individual physicians and small group practices typically lack the
information systems necessary to enter into and manage risk-sharing contracts
with payors and to implement disease management programs efficiently.
In response to the foregoing factors, individual physicians and small group
practices are increasingly affiliating with larger group practices and physician
practice management companies (PPMs). By affiliating with physician practices,
PPMs are providing physicians with lower administrative costs, leverage with
vendors and payors and economies of scale necessary to attract capital
resources. In addition, management companies and consultants are organizing
independent physician practices, independent physician associations, physician
22
hospital organizations and other physician organizations for the purpose of
enabling physicians to enter into agreements with managed care payors. In 1995,
only 6% of physicians nationally were affiliated with a publicly traded practice
management company. It is estimated that by the year 2000, in excess of 20% of
physicians will be affiliated with such companies.
Physicians have historically sought to maintain their independence. With
the prevalence of managed care, physician revenue has declined and physicians
who have not sought to develop cost efficient operations have suffered
financially. In traditional physician hospital organizations and other
practices managed by third parties, physician input has often been low,
therefore such arrangements have not been favored by health care providers.
Accordingly, such providers have sought to affiliate with physician-driven
organizations.
The Washington, D.C. area in which the Company operates has been
particularly affected by the changing health care environment described above.
As the number of health care providers has risen in the Company's market and
managed care has become more prevalent, the competition among providers for
health care payor credentials has increased and many health care plans have
closed their plans to new physicians. Accordingly, health care providers who
have been closed out of plans have encountered more difficulty in attracting
patients, who may be required to consult only with providers participating in
such plans. The Company believes that by negotiating contracts with the majority
of the payors within its markets, it can provide health care providers with a
steady stream of patients.
As the practice management industry matures, the Company believes that
established companies such as the Company will have a competitive advantage over
new entrants since they already have a critical mass of health care providers
and a stable operating history. In addition, entities such as the Company which
have developed relationships with diversified payors offer providers decreased
dependence on any one payor source and leverage in negotiating discounts and
capitation rates.
The Company believes that fewer than 6% of physicians in the Washington
D.C. metropolitan area have entered into practice management agreements.
Therefore, there are significant opportunities for the Company to assist
physicians in developing medical mall facilities and managing the administrative
aspects of group practices and networks.
STRATEGY
The Company's strategy is to develop and sustain an alliance among high
quality regional primary care and specialized licensed health care providers in
order to create a comprehensive, integrated health care delivery system that
reduces medical costs for patients and health care payors. The Company intends
to:
o Develop Additional Medical Mall Facilities. The Company intends to
develop additional medical mall facilities, initially in the Washington -
Baltimore metropolitan area and then throughout the mid-Atlantic region. MMI
will identify sites, negotiate leases, develop facilities, establish operational
structure and recruit physicians. The Company intends to develop up to five
additional medical mall facilities during the next 12 months.
o Provide Low Cost Medical Services by Increasing Operational Efficiencies
and Cost Reductions. By consolidating primary-care based multi-specialty
practices within medical mall facilities, the Company may reduce overhead,
increase efficiency and improve the operations for the provision of medical
services. Specialists employed by the PCs may rotate among medical mall
facilities, spreading a larger patient base over a smaller number of specialists
and making an increased range of specialty services available to patients. The
Company is also seeking to increase its operating efficiency through expansion
of its market area and number of patients, development of additional in-house
services and increase emphasis on outpatient care. The Company also intends to
improve the economies of scale of medical practices through centralized billing,
information management and other services.
o Attract High Quality Health Care Providers. The Company will seek to
attract high-quality health care providers to the medical malls by offering an
environment conducive to providing superior medical care. The Company believes
the medical mall concept will attract additional high-quality providers because
it: (i) reduces overhead costs; (ii) increases patient volume by offering the
opportunity to consult with other specialists in the
23
facilities; (iii) increases revenue enhancement potential by diversifying the
payor base; and (iv) provides more control over local practice governance than
other PPMs.
o Diversify Payor Base. The Company's mix of patients is reflective of the
payor system in its markets. This broad customer base affords leverage in
negotiating discounts and capitation rates and lowers dependence on any one
payor source. As of December 31, 1997, the Company received payments from over
1,400 health care payors.
o Utilize Sophisticated Management Information Systems. The Company
believes that information technology is critical to the growth of integrated
health care delivery systems, quality control and cost containment. The Company
develops and maintains sophisticated management information systems that collect
and analyze administrative data. These systems allow the Company to control
overhead expenses, maximize reimbursement and provide utilization management.
The Company evaluates the administrative functions of the medical practices in
the medical malls and modifies these functions as appropriate in conjunction
with the implementation of the Company's management information systems.
CORPORATE STRUCTURE
Physician practice management companies typically employ three methods for
providing management services to medical groups: (i) physician service
arrangements under which a management company administers a contract or supplies
labor for a hospital-based specialty group, such as an emergency room; (ii)
equity arrangements, where the management company is responsible for the
operations of acquired practices and physicians are responsible for providing
medical services and where both the management company and the physician are
compensated by a percentage of revenues and a percentage of profits; and (iii)
network management agreements, which allows independent physicians to form a
group to leverage negotiations with managed care companies while remaining
independent.
The following chart depicts the corporate structure of the Company.
[CHART TO COME WILL SHOW RELATIONSHIP BETWEEN THE
FOLLOWING ENTITIES: THE COMPANY, MOM, THE PCs,
INDEPENDENT PHYSICIAN NETWORK AND MEDICAL MALLS]
The Company has developed a model by which licensed health care providers
in its medical mall facilities are both employees of the PCs that control all
aspects of medical delivery and, in many instances, are also equity owners in
MOM, the franchisee that controls non-professional medical services and
operation of the medical mall facilities.
The PCs are owned by P. Steven Macedo, M.D. and Ilene S. Macedo, M.D. and
controlled by the Company. Pursuant to management services agreements with the
PCs, the Company develops the medical malls, recruits physicians and either
provides or arranges through its franchisee for the provision of, general
management services. Management services provided by the Company include but are
not limited to, financial management, human resources management, management
information systems and managed care contracting.
The Company has arranged for a portion of the management services provided
to the medical mall practices to be provided by its franchisee, MOM. This
physician-owned and operated company provides for local governance and has
financial responsibility for the payment of rent for the facilities, salaries
for non-professional staff and the purchase of supplies and equipment. See
Business-Franchise Arrangements. The Company has also entered into a franchise
agreement with Medi-Cen, Corp. of Virginia, whose operations are currently
immaterial.
24
Through MOM, the Company also has a relationship with a network of
independent licensed health care providers who retain their own offices and
treat their own patients. This network plays an important role in recruiting new
providers to the medical mall facilities.
MEDICAL MALL FACILITIES
The Company has developed the medical mall model as a market-based approach
to meet health care payor demand for price competitive, quality services that
incorporate primary care and specialty health care providers into a network
dedicated to serving a targeted geographic area. Primary care includes family
practice, internal medicine, pediatrics and obstetrics/gynecology. Key
specialties include cardiology, radiology, neurosciences, surgery, ophthalmology
and ear, nose and throat. At certain facilities, heath care providers and
support personnel operate centers for diagnostic imaging, urgent care, cancer
management, mental health treatment and health education.
The Company currently operates the following three medical malls:
[Enlarge/Download Table]
DATE PROVIDERS BASED PROVIDERS ROTATING
LOCATION ESTABLISHED AT LOCATIONS AMONG LOCATIONS PRACTICE AREAS
-------- ----------- ------------ --------------- --------------
Chevy Chase, MD March 1996 16 2 Neurology, Family Medicine,
Neuropsychology, Psychology, Clinical Social
Work, Podiatry, Physical Therapy, Pediatrics,
Optometry
Washington, D.C. January 1997 39 8 Internal Medicine, Cardiology, General Surgery,
Ear, Nose and Throat, Oncology, Neurology,
Nephrology, Opthamology, OB-GYN, Orthopedics,
Pediatrics, Clinical Social Work, Physical Therapy,
Podiatry, Dermatology, Neuroscience,
Radiology
Oxon Hill, MD March 1997 2 17 Family Medicine, Internal Medicine, Cardiology,
OB-GYN, Neurology, Physical Therapy, Pediatrics,
Radiology, Psychology, Clinical Social Work,
Podiatry
---------
(1) Certain specialists rotate among the medical mall facilities.
To attract high-quality health care providers to the medical mall
facilities, the Company offers a comprehensive set of physician practice
management services, including practice formation, site location, financial
consulting, marketing, and payor contracting and management.
Practice Formation. The Company assists medical group practices that join
the medical malls in developing and expanding their practices through a
combination of professional recruitment, professional specialty mix analysis,
acquisition evaluation and integration, ancillary services evaluation,
operations development and strategic planning.
Site Location. The Company identifies and assists in the negotiations for
new medical mall locations and arranges for and supervises any necessary
facility buildout.
Financial Consulting. The Company arranges financing for the expansion and
acquisition of medical practices and in the future intends to provide credit
support for such acquisitions and expansions.
Marketing. The Company assists health care providers in marketing their
medical services to health care payors, insurance companies, self-insured
companies, referring physicians, hospitals and the patient community.
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The Company, in close cooperation with the providers, develops public relations
and community outreach programs designed to educate managed care entities and
the patient community about the medical services provided at the medical malls.
Payor Contracting and Management. The Company assists health care providers
in negotiating and structuring managed care contracts with payors for the
provision of medical services. The Company also works with medical group
practices to meet credentialling standards and to manage the provider/payor
relationship.
FRANCHISE ARRANGEMENTS
As discussed above, the Company has arranged for MOM, its franchisee, to
provide certain management services to the PCs. MOM is primarily owned by the
licensed health care providers that provide medical services at the medical
malls. MOM provides local governance and has the financial responsibility for
the payment of rent for the facilities, salaries for non-professional staff and
the purchase of supplies and equipment. As payment for its services, MOM has
been entitled to receive 43.25% of collections of net patient service revenue.
Of this amount, MOM paid to the Company 8% in respect of fees for management
information systems and 1% for a franchise fee.
The Company and MOM have entered into a franchise agreement which grants
MOM the exclusive right to use the Medi-Cen name in the State of Maryland. In
exchange, MOM transferred certain assets to the Company as payment for a
one-time fee of $50,000 for use of the Company franchise and a one time fee of
$150,000 for franchise services. In addition, MOM makes periodic payments of 1%
of the gross billings of MOM each month. The initial term of the franchise
agreement is 20 years with an option to renew for five additional years.
The Company has entered into an identical franchise agreement with
Medi-Cen, Corp. of Virginia for the State of Virginia, whose operations are
currently immaterial.
MEDICAL PRACTICE SERVICES
General. The Company provides a full range of integrated services to form
and develop provider networks within the medical malls and to manage medical
risk. These integrated services include billing services, information systems
and administrative support. The services provided by the Company to the medical
malls are also available to a network of independent licensed health care
providers on a fee for service basis. MMI provides management information
systems and practice management services for approximately 57 health care
providers employed by the PCs. These providers have, with the Company's
assistance, aggregated their practices into group practices in the medical
malls.
Medical Information. MMI maintains the hardware and software necessary to
ensure compliance with all relevant information capture and reporting needs and
requirements for the operation of the PCs. The Company also develops and
maintains customized forms for the purpose of automated communication with
payors and patients and monitors the status of statements and billing cycles to
maximize effectiveness. MMI works with and provides operations support to each
medical mall facility for the purpose of developing accurate, complete and
timely capture of charge and demographic information. Additionally, the Company
develops and maintains relevant monthly health care provider reports and payor
reports, which provide information needed for practice management, business
planning, marketing and accounting. MMI additionally establishes and maintains
automated mechanisms for the receipt and exchange of relevant information
between medical malls, to and from payors and to and from authorized outside
agents.
MMI provides practice profile reports which sort and list patient
utilization data by managed care plan, diagnosis, type of service, amount of
payment and time of payment for the PCs. The Company's management information
systems permit health care providers to comply with all reporting requirements
of third-party payors from which the PCs receive reimbursement, and to validate
and verify the accuracy of reports or profiles of patient services utilization
data generated by managed care plans and other payors.
Management Information Systems. MMI develops and maintains the systems used
to capture charges for professional services at the medical malls and reconciles
account information to minimize lost charges and non-billable services. MMI also
develops and maintains mechanisms for the capture of demographic information
required for utilization data and reviews clinical procedure coding to ensure
accurate, complete and ethical description of professional services performed.
26
MMI creates accounts as utilization data is received from the health care
providers upon the completion of a patient's visit and prepares documents
necessary to provide bills for medical services including any customized
documents requested by the PCs. The Company's systems daily produce primary and
secondary claims and filings for relevant payors. The Company also performs
annual revisions of clinical procedure coding and facilitates the maintenance of
a professional charge description paradigm to reflect a complete and accurate
menu of procedures for the PCs. MMI additionally maintains systems for
production or capture of medical reports needed to substantiate each medical
practice's charges and manages a mechanism to provide authorized legal access to
medical records as required to comply with court subpoenas, legal agents and
health care payor needs for documentation of services performed.
Collection and Account Management. MMI's services related to collection and
account management include: (i) processing or arranging for the processing of
claims for medical services; (ii) arranging for the PCs to submit information to
support claims; (iii) submitting standard forms for the payment of claims
received from the PCs; and (iv) conducting coordination of benefits consistent
with the terms of applicable health insurance or plans. MMI also establishes and
maintains escrow or client trust accounts in federally insured banking
institutions to facilitate the expeditious receipt of payments from third party
payors and patients and the deposit of funds to appropriate accounts for the
PCs. In addition, MMI coordinates any appropriate collection efforts with the
PCs, reviews credit balance accounts and maintains medical practice accounts in
such a manner as to allow the production of patient account information which is
required by authorized outside legal and auditing agents.
Patient Services. Patients may contact MMI directly to resolve any problems
that may arise from the billing and collection of patients' accounts
receivables. Patient services include maintaining a dedicated phone line to
allow patients direct access to a patient service representative; processing
patient and insurance company correspondence related to resolution of patient
accounts; and processing patient refunds when appropriate.
Deposit of Funds. MMI is responsible for depositing or directing the
deposit of collected amounts into the accounts of the PCs. The Company also
initiates transfers from the escrow or trust accounts maintained for payment of
fees to MMI in accordance with the management services agreements.
Financial and Administrative Management. The Company offers a variety of
financial and administrative management services to the PCs. The Company's
financial management services include accounting, payroll, finance, payables
management, financial reporting, financial controls, insurance negotiation and
management information systems.
MANAGEMENT INFORMATION SYSTEMS
The Company develops and maintains sophisticated management information
systems to support its growth and acquisition plans. The Company's overall
information systems design is open, modular and flexible.
The software currently used on the system is a customized version of the
program Medical Manager. The software has been modified to allow multiple
practices to bill using the same copy of the software under separate E.I.N.
numbers; to allow for electronic filing and remission; to allow patient
statements to be electronically transmitted to a remote billing house which
mails out the statements to the patients; and to print deposit slips. The
software is also currently being modified to automatically handle referrals for
managed care. The Company intends to further modify its software to
automatically calculate single capitation payments to separate health care
providers in multi-specialty practices.
COMPETITION
The provision of physician practice management services is a highly
competitive business in which the Company competes with several national and
many regional and local companies. Certain of the Company's competitors are
dedicated to or specialize in the management of single-specialty practices
focused on specialties such as neurology, cardiology, podiatry and radiology and
may compete with the Company for providers of these specialties. The Company's
competitors in the development of medical mall facilities include physician
hospital organizations, health maintenance organizations and physician practices
in general. The Company believes that it is able to compete
27
in this industry by: (i) increasing provider compensation by lowering overhead
costs; (ii) allowing health care providers to locally control the practice of
medicine; (iii) offering providers the ability to consult with other specialists
in the facilities; and (iv) providing the financial incentive and autonomy of
controlling the physical assets and non-professional costs of the medical
practices through its franchise structure.
Many of the Company's competitors and potential competitors have
substantially greater financial, product development, technical, marketing and
other resources than the Company, and currently have, or may develop or acquire
substantially more health care providers under employment or management than the
Company. Although the Company believes that the barriers to entry into physician
practice management industry are relatively high, additional competitors may
enter the market and competition may intensify. There can be no assurance that
future competition will not have a material adverse effect on the Company. See
Risk Factors - Highly Competitive Industry.
GOVERNMENT REGULATION
As a participant in the health care industry, the Company's operations and
relationships are subject to extensive and increasing regulation by a number of
governmental entities at the federal, state and local levels. The Company
believes its operations are in material compliance with applicable laws.
Nevertheless, because of the nature of the Company's relationship with physician
organizations, many aspects of the Company's business operations have not been
the subject of formal state or federal regulatory interpretations and there can
be no assurance that a review by courts or regulatory authorities of the
Company's business or that of the PCs will not result in a determination that
could adversely affect the operations of the Company or that the health care
regulatory environment will not change so as to restrict the existing operations
or expansion plans of the Company or the PCs.
Reimbursement. Management estimates that approximately 14% of the revenues
of the PCs are derived from payments made by government sponsored health care
programs (principally Medicare and Medicaid). Consequently, any change in
reimbursement regulations, policies, practices, interpretations or statutes
could adversely affect the operations of the Company. The federal Medicare
program has implemented a system of resource-based relative value scale (RBRVS)
payment methodology for medical services. The Company expects that future
changes in the RBRVS fee schedule, as required by law, and in Medicare
reimbursement generally, will result, in some cases, in a reduction and, in some
cases, in an increase from historical levels in the per-patient Medicare revenue
received by the PCs. Although the Company does not believe any such reductions
would have a material adverse effect on the Company, the RBRVS fee schedule may
be adopted by other private payors, which could have a material adverse effect
on the Company. See Risk Factors - Cost Containment and Reimbursement Trends.
Billing. There are state and federal civil and criminal statutes which
impose substantial penalties, including civil and criminal fines and
imprisonment, on health care providers who fraudulently or wrongfully bill
governmental or other third-party payors for health care services. The federal
law prohibiting false billings allows a private person to bring a civil action
and there can be no assurance that the Company's activities will not be
challenged or scrutinized by governmental authorities. Moreover, technical
Medicare and other reimbursement rules affect the structure of physician billing
arrangements. The Company believes it is in material compliance with such
regulations, but regulatory authorities may differ in their interpretations of
such regulations, and in such event, the Company may have to modify its
relationship with the PCs. Noncompliance with such regulations could have a
material adverse effect on the business, financial condition and results of
operations of the Company and subject it or the PCs to penalties and additional
costs.
Corporate Practice of Medicine and Fee Splitting. The laws of many states
prohibit business corporations such as the Company from practicing medicine and
employing physicians to practice medicine. These laws forbid both direct control
over medical decisions and indirect interference, such as splitting medical fees
with physicians or controlling budgetary allotments for patient care. Laws
regarding the corporate practice of medicine vary from state to state and are
enforced by the courts and by regulatory authorities. The management service
agreements between the Company and the PCs address this issue by providing that
the PCs retain complete control over medical decision making, and that the
Company may neither interfere with the professional judgment of medical
personnel nor control, direct or supervise the provision of medical services.
Furthermore, the management services agreements provide that the Company may not
perform any services or activities which constitute the practice of medicine,
patient care or quality monitoring. Administrative policies, budgets and
28
fee schedules affecting the delivery of medical services are developed by a
Joint Management Advisory Board, which is at all times controlled by licensed
health care providers. MOM, the Company's franchisee, performs administrative
and business functions on behalf of the PCs. Although the Company believes it is
in material compliance with regulations regarding the corporate practice of
medicine, no assurance can be given that its operations will not be challenged
by regulatory authorities.
Fraud and Abuse Statutes. Certain provisions of the Social Security Act,
commonly referred to as the Anti-kickback Statute, prohibit the offer, payment,
solicitation or receipt of any form of remuneration which is intended to induce
business for which payment may be made under a federal health care program. A
federal health care program is any plan or program that provides health
benefits, whether directly, through insurance or otherwise, which is funded
directly, in whole or in part, by the United States government (e.g., Medicare,
Medicaid and CHAMPUS). Excluded from the definition of federal health care
program is the Federal Employee Health Benefits Program. The type of
remuneration covered by the Anti-kickback Statute is very broad. It includes not
only kickbacks, bribes and rebates, but also proscribes any such remuneration,
whether made directly or indirectly, overtly or covertly, in cash or in kind.
Moreover, prohibited conduct includes not only remuneration intended to induce
referrals, but also remuneration intended to induce the purchasing, leasing,
arranging or ordering of any goods, facilities, services or items paid for by a
federal health care program. The Anti-kickback Statute has been broadly
interpreted by courts in many jurisdictions. Read literally, the statute places
at risk many business arrangements, potentially subjecting such arrangements to
lengthy and expensive investigations and prosecutions initiated by federal and
state government officials. Many states, including some of those in which the
Company does business, have adopted similar statutory provisions which cover
other third-party payor patients. The Company believes that, although it is
receiving remuneration under the management service agreements from the PCs for
management services, it is not in a position to make or influence the referral
of patients or services reimbursed under government programs to these medical
practices and, therefore, believes it has not violated the Anti-kickback
Statute. Moreover, the Company is not a separate provider of Medicare or state
health program reimbursed services. To the extent the Company is deemed to be
either a referral source or a separate provider under its management service
agreements with the PCs and to receive referrals from physicians, the financial
arrangements under such agreements could be subject to scrutiny and prosecution
under the Anti-kickback Statute. Violation of the Anti-kickback Statute is a
felony, punishable by criminal fines up to $25,000 per violation and
imprisonment for up to five years; a civil monetary penalty of $50,000; and/or
civil damages of not more than three times the amount of remuneration offered,
paid, solicited or received without regard to whether any portion of such
remuneration was for a lawful purpose. In addition, the U.S. Department of
Health and Human Services (HHS) may impose civil penalties excluding violators
from participation in Medicare or state health programs.
In July 1991, in part to address concerns regarding the Anti-kickback
Statute, the federal government published regulations that provided exceptions,
or safe harbors, for transactions that will be deemed not to violate the
Anti-kickback Statute. The federal government has adopted "Safe Harbors" which
exclude remuneration received in transactions described in the regulations from
the definition of remuneration under the Anti kickback rules. Safe Harbors have
been adopted for: return on an investment interest, such as a dividend or
interest income, made to an investor in large publicly traded companies and in
companies which meet standards limiting the percentage of total equity which can
be held by investors in a position to refer to the entity; the lease of space or
equipment; bona fide employment; the one time purchase of a practice by a
physician; certain price reductions offered to certain health maintenance
organizations; certain warranties or discounts; certain referral services; and
payments made by a principal to an agent under personal service or management
contracts. Some of these safe harbors are applicable to the activities of the
Group practices, their employee physicians, and the Company, including
provisions related to space and equipment leases, personal service and
management contracts, the sale of practices to physicians, bona fide employment
relationships, group practices, physician incentive plans and certain managed
care contracting activities. Basically, all agreements must be in writing,
describe all services to be provided, be on commercially reasonable terms, and
require payment consistent with fair market value in arms length transactions
which is not determined by taking into account the volume or value of referrals
of Medicare and Medicaid business. The Company believes that its lease and
management activities generally fall within the safe harbors. However, no
independent appraisal or fairness opinion concerning the fair market value of
such leases or services agreements or the reasonableness of the consideration
received by the Company therefor has been secured, and there can be no assurance
that federal or state regulators might not challenge some of the transactions or
practices of the Company. Failure to comply with a safe harbor exception or the
lack of a safe harbor with respect to a transaction does not itself result in,
or constitute a violation of, the fraud and abuse rules. Although the Company
believes that it is not in violation of the Anti-kickback Statute, its
operations may not fit within any of the existing or proposed safe harbors.
As a component of the recently enacted Health Insurance Portability and
Accountability Act of 1996, Congress directed the Secretary of HHS to issue
advisory opinions regarding compliance with the Anti-kickback Statute. Advisory
opinions are available concerning what constitutes prohibited remuneration
within the meaning of the Anti-kickback Statute, whether an arrangement
satisfies the statutory exceptions to the Anti-kickback Statute, whether an
arrangement meets a safe harbor, what constitutes an illegal inducement to
reduce or limit services to individuals entitled to benefits covered by the
Anti-kickback Statute and whether an activity
constitutes grounds for the imposition of civil or criminal penalties under the
applicable exclusion. Advisory opinions, however, will not assess fair market
value for any goods, services or property or determine whether an individual is
a bona fide employee within the meaning of the Internal Revenue Code. The
statutory language makes clear that advisory opinions are available for both
proposed and existing arrangements. The failure of a party to seek an advisory
opinion, however, may not be introduced into evidence to prove that the party
intended
29
to violate the Anti-kickback Statute. The Company has not sought, and has no
present intention of seeking, an advisory opinion regarding any aspect of its
current operations or arrangements with physicians.
Significant prohibitions against physician referrals were enacted by
Congress in the Omnibus Budget Reconciliation Act of 1993. These prohibitions,
commonly known as Stark II, amended prior physician self-referral legislation
known as Stark I by dramatically enlarging the field of physician-owned or
physician-interested entities to which the referral prohibitions apply.
Effective January 1, 1995, Stark II prohibits, subject to certain exemptions, a
physician or a member of his or her immediate family from referring Medicare
patients to an entity providing designated health services in which the
physician has an ownership or investment interest, or with which the physician
has entered into a compensation arrangement, including the physician's group
practice. The designated health services include radiology and other diagnostic
services, radiation therapy services, physical and occupational therapy services
and the provision of durable medical equipment, parenteral and enteral
nutrients, equipment and supplies, prosthetics, orthotics, outpatient
prescription drugs, home health services and inpatient and outpatient hospital
services. The penalties for violating Stark II include a prohibition on payment
by these government programs and civil penalties of as much as $15,000 for each
violative referral and $100,000 for participation in a "circumvention scheme."
The Company believes that its activities are not in violation of Stark I or
Stark II. The federal government issued interim final regulations which
addressed Stark I and portions of Stark II in August 1995. Proposed regulations
interpreting Stark II were published on January 9, 1998. The comment period on
the proposed Stark II regulations has not yet run. The proposed regulations
define the designated health services, refine the definition of a group
practice, and impose additional requirements on the exception for referrals
within a group practice for in office ancillary services. Therefore, there can
be no assurance that the Company's operations will not be challenged by
regulatory authorities.
Stark II also governs a physician's ability to refer patients for
designated health services within the practices and networks that the Company
manages in light of the physician's ongoing compensation arrangements with such
practices and networks. An exception for in-office ancillary services requires
that the practices and networks meet certain structural and operational
requirements on an ongoing basis in order to bill for in-office ancillary
designated health services rendered by employed or contracted physicians. A key
feature of the in-office ancillary services exception is the Stark law's
definition of "group practice." The proposed regulations impose new requirements
on the structure and operation of a group practice, and impose new limitations
on the ability of physicians in a group practice to refer radiology, physical
therapy and other designated health services within the group. The affiliated
group practices currently offer several of the designated health services within
the groups, and will have to comply with the Stark II regulations when they
become effective. The Company believes that the affiliated group practices will
be able to meet the requirements imposed by the proposed regulations, or can be
successfully restructured to meet the requirements. Regulations are subject to
change, and there can be no certainty that the affiliated group practices will
be able to meet the definition of group practice under regulations ultimately
adopted. Any adverse changes to the group practice definition may have a
material adverse effect on the Company by severely limiting the ability of the
medical practices that the Company manages to bill the Medicare and Medicaid
Programs for certain ancillary services furnished by those practices.
In the recently enacted Balanced Budget Act of 1997, Congress directed the
Secretary of HHS to issue advisory opinions as to whether a referral relating to
designated health services (other than clinical laboratory services) is
prohibited under the Stark law. The advisory opinion mechanism began in November
1997. An advisory opinion issued by the Secretary will be binding as to the
Secretary and the party or parties requesting the opinion. The Company has no
present intention to seek an advisory opinion regarding its current operations,
arrangements with health care providers or the referral activities of health
care providers in the practices it manages.
A number of states have enacted self-referral laws that are similar in
purpose to Stark II but which impose different restrictions on referrals from
Stark II. These various state self-referral laws have different requirements.
Some states, for example, only prohibit referrals when the physician's financial
relationship with a health care provider is based upon an investment interest.
Other state laws apply only to a limited number of designated health services
or, alternatively, to all health care services furnished by a provider. Some
states do not prohibit referrals at all, but require only that a patient be
informed of the financial relationship before the referral is made. Most of the
states in which the Company conducts business have adopted some form of
self-referral law. Many states, including Pennsylvania, have self-referral laws
that are particularly applicable to workers' compensation patients. The Company
believes that it current operations and the structure of the medical practices
it manages are in material compliance with the self-referral laws of the states
in which such practices are located.
Under numerous federal laws, including the Federal False Claims Act (the
False Claims Act), the federal government is authorized to impose criminal,
civil and administrative penalties on any health care provider that files a
false claim for reimbursement from a federally funded health program (such as
Medicare or Medicaid). Recently enacted federal legislation also imposes federal
criminal penalties on persons who file false or fraudulent claims with private
insurers. While the criminal statutes are generally reserved for instances of
fraud,
30
the civil and administrative penalty statutes are being applied by the
government in an increasingly broad range of circumstances. Civil sanctions may
be imposed if the claimant knew or should have known that billing was improper.
The government also has taken the position that claiming reimbursement for
services that are substandard is a violation of these false claims statutes if
the claimant knew or should have known that the care was substandard or rendered
under improper circumstances. Private persons may bring civil actions to enforce
the False Claims Act. Under certain lower court decisions, claims derived from
the Anti-kickback Statute or the Stark law have been deemed to be, or may under
certain circumstances be construed to be, false claims.
State physician self referral laws and Stark II have not been extensively
judicially interpreted and there is considerable uncertainty concerning how such
laws will be interpreted, including specifically how broadly the exemptions and
exceptions to their application will be applied. Physicians participating in the
Company's network or employed by an affiliated group practice will have several
financial relationships with the Company, including the lease of space and
equipment, the purchase of practices, loans or advances of money, and the
provision of billing and management services. Certain physicians may refer
patients among themselves within their group practices and as part of the
network, and refer designated health services under the In Office Ancillary
Service exception available to certain referrals within a group practice. The
Company can not be sure that all of its relationships with the physicians and
affiliated group practices will fall within one of the exemptions under Stark
II, as interpreted under final regulations. However, the Company believes that
it is not an entity to which referrals can be made, and that the referrals of
patients by physicians within the group practices should fall within one or more
of the exceptions permitted by Stark II and the state self-referral laws. Final
regulations or future regulations or statutes might require the Company to
restructure its relationships with its group practices. Violations of Stark II
by the Company or its Group practices could result in significant fines and
financial losses which could adversely affect the Company.
While the Company believes that it is in compliance with the foregoing
federal and state laws, future regulations could require the Company to modify
the form of its relationships with physician organizations. Moreover, the
violation of any such state or federal law by the Company or the PCs, could have
a material adverse effect on the Company.
Anti-Trust. Although the PCs are managed by the Company, they remain
separate legal entities and they may be deemed competitors subject to a range of
antitrust laws which prohibit anti-competitive conduct, including price fixing,
concerted refusals to deal and divisions of markets. In particular, the
antitrust laws have been interpreted by the Federal Trade Commission and the
United States Department of Justice to prohibit joint negotiations by
competitors of price terms in the absence of financial risk that is shared among
the competitors, other financial integration or substantial clinical integration
among the competitors. The Company intends to comply with such state and federal
laws as may affect its development of, and contracting for, the medical mall
facilities, but there can be no assurance that review of the Company's business
by courts or regulatory authorities will not result in a determination that
could adversely affect the operations of the Company or the PCs.
Insurance Regulations. Laws in all states regulate the business of
insurance and the operation of health maintenance organizations. On August 10,
1995, the NAIC issued a report opining that certain risk-transferring
arrangements may entail the business of insurance, to which state licensure laws
apply, but that licensure laws would not apply where an unlicensed entity
contracts to assume downstream risk from a duly licensed health insurer or
health care payor for health care provided to that carrier's enrollees. In
addition, in December 1996, the NAIC issued a report entitled Regulation of
Health Risk Bearing Entities, which sets forth issues to be considered by state
insurance regulators when considering new regulations and encourages that a
uniform body of regulation be adopted by the states. Certain states have enacted
statutes or adopted regulations affecting risk assumption in the health care
industry. In some states, including some of those in which the Company does
business, these statutes and regulations subject any physician or physician
network engaged in risk-based contracting, even if through health care payors
and insurance companies, to applicable insurance laws and regulations, or other
laws and regulations, which may include, among other things, providing for
minimum capital requirements and other safety and soundness requirements.
Although the NAIC's conclusions are not binding on the states, the Company
believes that additional regulation at the state level will be forthcoming in
response to the NAIC initiatives. The Company will enter into capitated
contracts only with licensed insurance companies and health maintenance
organizations, and only if allowed by state law. The Company believes that it is
in compliance with these laws in the states in which it does business, but there
can be no assurance that future interpretations of insurance laws and health
care network laws by the regulatory authorities in these states or in the states
into which the Company may expand will not require licensure or a restructuring
of some or all of the Company's operations.
Health Care Reform. As a result of the continued escalation of health care
costs and the inability of many individuals to obtain health insurance, numerous
proposals have been and may continue to be introduced in the U.S. Congress and
state legislatures relating to health care reform. There can be no assurance as
to the ultimate content, timing or effect of any health care reform legislation,
nor is it possible at this time to estimate the impact of potential legislation,
which may be material to the Company.
Confidentiality of Patient Records. The confidentiality of patient records
and the circumstances under which such records may be released is subject to
substantial regulation under state and federal laws and regulations. Although
the Company does not currently collect aggregate clinical data for utilization
review and quality assurance purposes, it plans to develop such databases. Data
entries to these databases would delete any patient identifiers, including name,
address, hospital and physician. The Company believes that its procedures comply
with the laws and regulations regarding the collection of patient data in
substantially all jurisdictions, but regulations governing patient
confidentiality rights are evolving rapidly and are often difficult to apply.
31
Additional legislation governing the dissemination of medical record information
has been proposed at both the state and federal level. Furthermore, the Health
Insurance Portability and Accountability Act of 1996 requires the Secretary of
HHS to recommend legislation or promulgate regulations governing privacy
standards for individually identifiable health information and creates a federal
criminal offense for knowing disclosure or misuse of such information. These
statutes and regulations may require holders of such information to implement
security measures that may be of substantial cost to the Company. There can be
no assurance that changes to state or federal laws would not materially restrict
the ability of the Company to obtain patient information originating from
records.
Licensure, Certificate of Need and Prescription Laws. Certain of the
ancillary services that the Company anticipates providing on behalf of the PCs
are now, or may in the future be, subject to licensure or certificate of need
laws in various states. There can be no assurance that the Company or the PCs
will be able to obtain such licenses or certificate of need approval to the
extent required for the particular ancillary service. Finally, each state
establishes rules related to the practice of medicine, including the method of
prescribing drugs.
CONTRACTUAL RELATIONSHIPS WITH YATER AND MPS
The relationship between the Company and the PCs is set forth in the
management service agreements. Through the management service agreements, the
Company agrees to provide, or arrange for the provision of, management and
administration services for the medical practices. The services the Company
provides includes but are not limited to, business planning, financial
management, bookkeeping, accounting and data processing, maintenance of medical
records, human resource management, billing and collecting, facility utilization
and cost and quality management. As discussed above, the Company has arranged
for its franchisee, MOM, to provide operational services at the medical malls,
including the payment of rent for the facilities, the purchase of supplies and
equipment and salaries for non-professional staff.
The PCs are consolidated medical practices that have either directly
entered into contracts with health care payors or that have the right to receive
payment directly from health care payors for the provision of medical services
in the medical malls. MMI obtains a controlling financial interest in the PCs by
virtue of the long-term management service agreement with each entity, the
transfer restriction agreements discussed below and the fact that the PCs are
each owned by Dr. Steven Macedo, the Chairman of the Board of the Company, and
his wife, Dr. Ilene Macedo.
Under the management service agreements, the Company is responsible for the
billing and collection of all revenue for services provided at the medical malls
but is not responsible for the payment of professional salaries and certain
benefits. Accordingly, the PCs are responsible and at risk for all such
expenses, and the Company, since it is not the owner of these medical practices,
does not have a substantive capital investment that is at risk. The PCs are each
entitled to receive 40% of collections of net patient service revenue from their
respective medical malls as fees for services rendered, which is used to pay the
salaries of the licensed health care providers employed by the PCs.
The Company's management service agreements with the PCs are long-term and
provide the Company with unilateral control over the administrative aspects of
physician practices. The management agreements include the following provisions:
(i) the initial term is 30 years; (ii) renewal provisions call for automatic and
successive five year renewal periods; and (iii) neither of the PCs can
unilaterally terminate their agreements with the Company unless the Company
fails to cure a breach of its contractual responsibilities thereunder within one
year after notification of such breach.
The Company has also entered into transfer restriction agreements with the
shareholders of Yater and the partners of MPS. These agreements restrict the
resale of the ownership interest of Drs. Steven and Ilene Macedo in Yater and
their partnership interests in MPS. See Management's Discussion and Analysis of
Financial Condition and Results of Operations.
CORPORATE LIABILITY AND INSURANCE
The Company's business entails an inherent risk of claims of medical
professional liability. In recent years participants in the health care industry
have become increasingly subject to large claims based on theories of medical
malpractice that entail substantial defense costs. The Company maintains general
liability insurance of $1.0 million per occurrence and other customary insurance
on an occurrence basis, in amounts deemed appropriate by management based upon
historical claims and the nature and risks of the business. There can be
32
no assurance that a future claim will not exceed the limits of available
insurance coverage or that such coverage will continue to be available.
Moreover, the Company requires the PCs to obtain and maintain professional
liability of $4 million per occurrence and $6 million in the aggregate, and
workers' compensation insurance coverage. Such insurance will likely not provide
additional coverage, subject to policy limits, in the event the Company were
held liable as a co-defendant in a lawsuit for professional malpractice against
a licensed health care provider. In addition, generally, the Company is
indemnified under the management service agreements by the PCs for liabilities
resulting from the performance of medical services. However, there can be no
assurance that any future claim or claims will not exceed the limits of these
available insurance coverages or that indemnification will be available for all
such claims.
EMPLOYEES
As of the date of this Prospectus, the Company had 16 employees, all of
whom were employed on a full-time basis. Approximately six of such employees are
management and 10 provide administrative support. As of the date of this
Prospectus, MOM had 63 employees that provide non-professional services at the
medical malls and the PCs collectively employed 57 licensed health care
providers. None of the Company's employees are represented by labor unions and
the Company believes its relationship with its employees is good.
PROPERTIES
MMI currently leases 1,113 square feet of office space in Bethesda,
Maryland pursuant to a lease agreement dated January 3, 1995 (the Lease). The
annual minimum rent for the year commencing February 1998 is $18,243 payable in
monthly installments of $1,520.
The Lease terminates upon the commencement of the Lease Agreement dated
July 16, 1997 (the Lease Agreement) covering 3,570 square feet at the same
premises in Bethesda, Maryland. The term of the Lease Agreement is five years
from the date of occupancy with three options to renew for additional five year
terms each. The initial annual minimum rent under the Lease Agreement is
$40,000, payable in equal monthly installments. Annual rent will increase to
approximately $64,000 in the fifth year of occupancy. The Company expects to
occupy this property on or about May 1, 1998.
33
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are:
NAME AGE POSITION
--------- --- --------
P. Steven Macedo, M.D. 37 Chairman of the Board
Michael Macedo 34 Chief Executive Officer and Director
Frank Cronin 58 President
Harrison G. Jett 45 Chief Financial Officer and Director
Bruce A. Kehr 47 Vice President of Provider Relations
James Cornelson 44 Director
William Lester 73 Director
P. STEVEN MACEDO, M.D. has served as Chairman of the Board of the Company
since its inception in March 1994. Dr. Macedo is also Chairman of the Board and
Chief Executive Officer of each of MOM, the Company's franchisee, and Medi-Cen,
Corp. of Virginia, Inc., a franchisee whose current operations are immaterial.
Dr. Macedo is a neurologist who has been in private practice as a partner of MPS
since 1991, with special expertise in Behavioral and Forensic Neurology. Since
January 1997 Dr. Macedo also has been an owner of Yater, a multi-specialty
medical practice. Dr. Macedo is also currently a Clinical Associate Professor at
the George Washington University Department of Neurology and a Director of
Taxsoft, Inc., an Internet tax software company. Dr. Macedo was President of
Forensic Medicine Institute, Inc., a continuing legal education provider, from
1994 to 1997, and Chief Executive Officer and Chairman of the Board of Directors
of NeuroData, Inc., a neurological medical equipment company, from 1993 to 1996.
He served as Chief Resident of Neurology between 1990 and 1991 at Georgetown
University, Washington Veterans Administration Medical Center, and Children's
Hospital National Medical Center.
MICHAEL MACEDO has served as Chief Executive Officer and a Director of the
Company since its inception in March 1994. He is also Vice President and
Secretary of Taxsoft, Inc., an Internet tax software company. From 1994 to 1997,
he was Vice President of Forensic Medicine Institute, Inc. a continuing legal
education provider. Mr. Macedo has been in the private practice of law since
1988 with offices in Washington, D.C. and New York, N.Y.
FRANK CRONIN has served the Company in several capacities since January
1996 and has been President of the Company since February 1998. He was Vice
President of MIIX Healthcare Group, a health care consulting firm from August
1997 to February 1998. From August 1995 to August 1997 he was President of MCR
Healthcare, Inc., a health care consulting firm. Mr. Cronin was President and
Chief Executive Officer of Central New England Health Alliance, an integrated
health care delivery system, from 1992 to August 1995. Since 1995, he has been
on the Board of Directors of the American Academy of Medical Administrators,
which named him Healthcare Executive of the Year in 1994. He is also on the
Boards of the National Council of Community Hospitals and the New England
Healthcare Assembly and is a Paul Harris Fellow of Rotary International.
HARRISON G. JETT has served as Chief Financial Officer and a Director of
the Company since August 1996. He is also the Treasurer of MOM, the Company's
franchisee. From 1988 to January 1996, Mr. Jett was the owner and principal
broker of RE/MAX Realty Associates, a franchisee of RE/MAX International, Inc.,
a commercial and residential real estate company.
BRUCE A. KEHR has been Vice President of Provider Relations of the Company
since April 1996. He is also the Vice President and Director of MOM, the
Company's franchisee, and Secretary and Director of Medi-Cen, Corp. of Virginia.
Dr. Kehr is a board certified psychiatrist who has been in private practice
since 1976. Dr. Kehr has been President of Contemporary Psychiatric Services
since 1982 and President of Medication Management Technologies, Inc. since 1994.
Since 1988, he has been President and Chief Operating Officer of American
Neuroscience Centers, Inc., where he was Vice President and Director from 1987
to 1988.
JAMES W. CORNELSON has agreed to become a Director of the Company upon the
consummation of this Offering. He is currently President of Old Line National
Bank. He had been Senior Vice President of Sequoia
34
Bank from 1992 to 1994, where he served as Chief Lending Officer in charge of
all credit aspects of the institution. Previously, Mr. Cornelson worked for
fourteen years as Vice-President of Citizen Bank of Maryland.
WILLIAM LESTER has agreed to become a Director of the Company upon the
consummation of this Offering. He has been President of William Lester
Associates, Inc. since 1989 and President of International Facilitators, Inc.
since 1992, where he provides management and business development consulting in
the United States and international markets including exclusive services to CEOs
and entrepreneurs.
P. Steven Macedo, M.D. and Michael Macedo are brothers.
BOARD OF DIRECTORS' COMMITTEES AND COMPENSATION
The Board of Directors of the Company has appointed two committees: the
Audit Committee and the Compensation Committee. The members of the Audit
Committee are Dr. Steven Macedo, William Lester and James W. Cornelson. The
Audit Committee periodically reviews the Company's auditing practices and
procedures, makes recommendations to management or to the Board of Directors as
to any changes to such practices and procedures deemed necessary from time to
time to comply with applicable auditing rules, regulations and practices, and
recommends independent auditors for the Company to be elected by the
stockholders. The members of the Compensation Committee are Michael Macedo,
William Lester and James W. Cornelson. The Compensation Committee meets
periodically to make recommendations to the Board of Directors concerning the
compensation and benefits payable to the Company's executive officers and other
senior executives. The Company currently reimburses directors for their
out-of-pocket expenses incurred in attending Board and Committee meetings and
intends to pay outside Directors $1,600 for each Board of Directors meeting
attended upon consummation of this Offering.
EXECUTIVE COMPENSATION
The following table sets forth the cash compensation for services in all
capacities to the Company of that person who was, as of December 31, 1997, the
Company's Chief Executive Officer and for the other most highly compensated
Executive Officer of the Company (collectively, the Named Executive Officers)
for the year ended December 31, 1997.
[Enlarge/Download Table]
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
--------------------------------- -----------------------------
OTHER RESTRICTED SECURITIES
ANNUAL STOCK UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION AWARDS OPTIONS
--------------------------- ---- ------ ----- ------------ ------ -------
P. Steven Macedo, M.D., Chairman.................. 1997 $ 0(1) $ 0 $ 273,618(2) 0 0
Michael Macedo, Chief Executive Officer........... 1997 $ 0(3) $ 0 $ 328,987(4) 0 0
(1) Does not include loan amounts owed by the Company to Dr. Macedo of $125,000
as of December 31, 1997 and $163,000 as of February 12, 1998.
(2) Represents amounts received by Dr. Macedo of: $73,000 plus loan interest
payments of $2,200 and car payments of $4,785 from Yater; and $185,500
plus $3,665 of car payments from MPS; and $4,468 from MCA.
(3) Does not include (a) legal fees from the Company to the law firm of Michael
Carlos Buarque de Macedo of $17,106, (b) legal fees from MOM to the law
firm of Michael Carlos Buarque de Macedo of $17,465, (c) legal fees from
Yater to the law firm of Michael Carlos Buarque de Macedo of $15,489 and
(d) loan amounts owed by the Company to Mr. Macedo of $10,000 as of
December 31, 1997 and $107,933 as of February 12, 1998.
(4) Represents amounts received by Mr. Macedo of: consulting fees of $225,000,
bonus of $65,000, car payments of $8,920, and loan interest of $600 from
Yater; consulting fees of $25,000 from MPS; and $4,467 from MCA.
35
EMPLOYMENT AGREEMENTS
The Company has entered into two year employment agreements effective March
11, 1998 with each of Dr. Steven Macedo and Michael Macedo. Pursuant to each
employment agreement, Dr. Macedo will act as Chairman of the Board of Directors
and Secretary and Mr. Macedo will act as Chief Executive Officer. Each of Dr.
Macedo and Mr. Macedo will be entitled to receive base compensation in an amount
determined by the Board of Directors and options to purchase up to 900,000
shares of Common Stock at a price equal to the initial public offering price.
The Company has entered into a one year employment agreement effective
February 1, 1998 with Frank Cronin, President of the Company. The agreement
provides for an annual salary of $250,000, $500 per month for payment of
disability, life, dental and health insurance and a car allowance. The agreement
also prevents Mr. Cronin from competing with the Company for a period of two
years subsequent to the termination of his employment.
Michael Macedo has entered into a five year consulting agreement with Yater
effective January 20, 1997, which provides that Mr. Macedo shall receive annual
compensation of $300,000 and $60,000 per year in other benefits.
Dr. Steven Macedo has entered into a five year employment contract
effective January 1, 1998, which provides that Dr. Macedo shall receive annual
compensation of $300,000 and $60,000 per year in fringe benefits.
STOCK OPTION PLAN
The Company adopted the Medi-Cen Management, Inc. Stock Option Plan (the
Plan) in 1998 to encourage stock ownership by key management employees of the
Company and to provide an incentive for such employees to expand and improve the
profits of the Company. The purpose of the Plan is to support the Company's
ongoing efforts to develop and retain qualified directors, employees and
consultants and to provide the Company with the ability to more directly link
incentives to the profitability of the Company's business and increases in
stockholder value.
The Plan provides for the award to eligible employees of the Company and
others of stock options, stock appreciation rights, restricted stock, and other
stock-based awards, as well as cash-based annual and long-term incentive awards.
The Plan reserves 2,000,000 shares of Common Stock for issuance. As of the date
of this Prospectus, 1,800,000 options have been granted under the Plan, at an
exercise price equal to the initial public offering price. The Plan will be
administered by the Compensation Committee of the Board of Directors. This
committee will select the persons to whom awards will be granted and will
determine the terms and conditions of such awards. The shares of Common Stock
comprising any award that terminates, expires or is cashed out without payment
being made in the form of Common Stock will again be available for distribution
under the Plan, as will shares that are used by an employee to pay withholding
taxes or as payment for the exercise price of an award.
Awards under the Plan are not transferable except in the event of the
person's death or unless otherwise required by law. Other terms and conditions
of each award will be set forth in award agreements.
INDEMNIFICATION AND LIMITATION OF LIABILITY
The Company's Certificate of Incorporation provides that the Company shall
indemnify any and all persons whom it shall have power to indemnify under
Maryland law, as from time to time amended, from and against any and all of the
expense, liabilities or other matters referred to in or covered by the Maryland
General Corporation Law. The Company maintains insurance on behalf of any person
who is or was a director, officer, employee, or agent of the Company, or is or
was serving at the request of the Company as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise against any expense, liability, or loss incurred by such person in
any such capacity or arising out of his status as such, whether or not the
Company would have the power to indemnify him against such liability under
Maryland law.
Under Maryland law, the Company is permitted to indemnify directors,
officers, employees and agents made a party to any proceeding by reason of
service in that capacity unless it is established that: (1) the act or omission
of the party was material to the matter giving rise to the proceeding and (i)
was committed in bad faith, or (ii) was
36
the result of active and deliberate dishonesty; or (2) the party actually
received an improper personal benefit in money, property or services; or (3) in
the case of any criminal proceeding, the party had reasonable cause to believe
that the act or omission was unlawful. Maryland law further provides that a
party may not be indemnified in respect of any proceeding charging improper
personal benefit, whether or not involving action in such party's official
capacity, in which the party was adjudged to be liable on the basis that
personal benefit was improperly received. In Paragraph 4 of Clause 7 of its
amended Certificate of Incorporation, the Company has included a provision which
limits the liability of its directors and officers for money damages in
accordance with the Maryland law. Paragraph 4 of Clause 7 does not eliminate or
otherwise limit the fiduciary duties or obligations of the Company's directors
and officers, does not limit non-monetary forms or recourse against such
directors and officers, and, in the opinion of the Securities and Exchange
Commission, does not eliminate the liability of a director or officer under the
federal securities laws.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's shares of Common Stock as of March 13,
1998, and as adjusted to reflect the sale of the shares of Common Stock offered
hereby, by (i) each person who is known to the Company to own beneficially more
than 5% of the Company's shares of Common Stock and (ii) all directors and
executive officers as a group. Unless otherwise indicated, the persons named in
this table have sole voting and investment power with respect to the shares of
Common Stock shown as beneficially owned by them.
[Enlarge/Download Table]
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO OFFERING AFTER OFFERING
------------------------ ---------------------
NAME AND ADDRESS OF
BENEFICIAL OWNER(1) NUMBER PERCENT NUMBER PERCENT
P. Steven Macedo, M.D................................................ 1,957,349(2) 40.7% 1,957,349(2) 28.7
Michael Macedo....................................................... 1,942,007(2) 40.4 1,942,007(2) 28.5
Frank Cronin......................................................... 53,716(3) 1.1 53,716(3) --
Harrison Jett........................................................ 54,117(4) 1.1 54,117(4) --
Bruce Kehr........................................................... 413,200(3) 8.6 413,200(3) 6.1
James Cornelson...................................................... 8,330(3) -- 8,330(3) --
William Lester....................................................... 25,825(5) -- 25,825(5) --
All directors and executive officers as a group (7 persons)(6)....... 4,454,544 92.6 4,454,544 65.4
(1) The address for all persons is 5301 Wisconsin Avenue, Suite 620,
Washington, D.C. 20015.
(2) Includes options to purchase 450,000 shares of Common Stock. Does not
include 450,000 additional shares issuable upon the exercise of options
that are not exercisable within 60 days. Each of Dr. Macedo and Michael
Macedo have entered into an agreement with Yater, under which Yater has
agreed to purchase from each of them, commencing January 22, 1998, 620
shares of Common Stock per week for $7.26 per share through the date of
this Prospectus. Yater intends to use the shares of Common Stock purchased
from the Macedos as consideration for the purchase by Yater of medical
practices from health care providers.
(3) Represents options to purchase Common Stock.
(4) Includes options to purchase 33,056 shares of Common Stock.
(5) Includes options to purchase 24,792 shares of Common Stock.
(6) Includes options to purchase 1,433,094 shares of Common Stock.
CERTAIN TRANSACTIONS
P. Steven Macedo, Secretary and Chairman of the Board of Directors of the
Company is also a Director and Chief Executive Officer of MOM and Medi-Cen,
Corp. of Virginia, Inc., and is an owner of the PCs, medical practices managed
by the Company. For his services, excluding income received for physician
services and as an owner of medical practices, Dr. Macedo has received, in 1996,
$4,807 from MOM and in 1997, $4,468 from MCA.
Michael Macedo, Director and Chief Executive Officer of the Company, is
also: Management Consultant to MOM; Consultant to the PCs, medical practices
owned by his brother, Dr. Macedo and managed by the
37
Company; and sole proprietor of the law firm of Michael Carlos Buarque de
Macedo. In 1996, Michael Macedo received $13,060 from MOM as compensation for
consultant services. During 1997, Michael Macedo received as compensation for
services: $290,000 plus $8,920 of automobile lease payments from Yater; $25,000
from MPS; and $4,467 from MCA. In 1996, the law firm of Michael Carlos Buarque
de Macedo was paid $75,000 by the selling shareholders of the Company for legal
services in connection with the preparation of the securities offering effective
November 15, 1995 and $30,000 was paid by the firm as salary to Tatiana Daniels
Macedo, Esq., an attorney employed by the firm, and a sister-in-law of Michael
Macedo, Esq. and Dr. Macedo. For 1997, the law firm of Michael Carlos Buarque de
Macedo received, for general counsel services, reimbursements of $17,106 from
the Company, $17,465 from MOM and $15,489 from Yater, and $37,216 was paid by
the firm as salary to Tatiana Daniels Macedo, Esq., an attorney employed by the
firm, and a sister-in-law of Michael Macedo and Dr. Macedo.
As of the date of this Prospectus, the Company owes Dr. Steven Macedo and
Michael Macedo $163,000 and $107,933, respectively. These amounts bear interest
at the rate of prime rate plus 0.5% per annum and are payable upon demand. The
Company intends to use a portion of the net proceeds of this Offering to pay all
amounts outstanding to Dr. Macedo and Mr. Macedo. See Use of Proceeds.
Bruce A. Kehr, M.D., Vice President of Provider Relations of the Company,
is also a Director, Vice President and Secretary of MOM; Director and Secretary
of Medi-Cen, Corp. of Virginia, Inc.; and owner of Contemporary Psychiatric
Services, one of the independent physician practices associated with the
Company. Dr. Kehr and the Company have entered into a contract pursuant to which
the Company provides billing and collection services to Dr. Kehr's medical
practice. In 1997, the Company received approximately $60,000 from such
contracts. In 1997, excluding income received for physician services or as an
owner of medical practices, Bruce A. Kehr, M.D. received $4,468 from MCA for
services therefor. He also received interest payments from MOM of $350 in 1996.
Pursuant to Dr. Kehr's Vice President and Provider Relations Center with the
Company, dated April 30, 1996, Dr. Kehr has also received stock options to
purchase 413,200 shares of Common Stock of the Company at a price of $2.42.
In 1997, Dr. Steven Macedo and his wife, Dr. Ilene Macedo received an
aggregate of $73,000 in dividends from Yater. In 1996 and 1997, Drs. Steven and
Ilene Macedo received $228,000 and $185,500, respectively, from MPS as
partnership distributions.
MOM has paid the Company a fee of $150,000 for billing and collection
services, and has entered into a 20 year contract to pay the Company an ongoing
eight percent (8%) of gross collections of billing attributable to providers
using Company negotiated contracts. Medi-Cen, Corp. of Virginia, Inc. has also
entered into a 20 year contract with the Company upon the same terms and
conditions, but has not yet paid its fees to MMI and is currently inactive.
Yater has entered into a five year contract with MMI for billing and related
services for a fee of 8% of moneys actually collected. MPS has entered into an
identical five year contract. See Business.
In 1997, Michael Macedo loaned $20,000 to Yater which bore interest at the
rate of 1% per month. This loan was fully repaid in 1997.
Steven Macedo owes Yater $400,000 in connection with the purchase of Yater.
The loan will be repaid beginning in 1999. Interest is earned on the outstanding
balance at prime plus 0.5%.
Upon consummation of this offering, the law firm of Michael Carlos Buarque
de Macedo will receive approximately 11,111 shares of Common Stock valued at the
initial public offering price.
Each of Dr. Macedo and Michael Macedo have entered into an agreement with
Yater, under which Yater has agreed to purchase from each of them, 620 shares of
Common Stock per week for $7.26 per share until the date of this Prospectus. As
of the date of this Prospectus, Yater has purchased an aggregate of 9,917
38
shares of Common Stock from Dr. Macedo and Mr. Macedo. Yater intends to use the
shares of Common Stock purchased from the Company as consideration for the
purchase by Yater of medical practices from health care providers.
All ongoing and any future transaction with affiliates of the Company, if
any, will be on terms believed by the Company to be no less favorable than are
available from unaffiliated third parties and will be approved by a majority of
disinterested directors.
DESCRIPTION OF SECURITIES
GENERAL
Upon consummation of this Offering, the Company will be authorized to issue
up to 10,000,000 shares of Common Stock, par value $.0024 per share. As of the
date of this Prospectus, there are 3,378,046 shares of Common Stock outstanding
held by approximately 45 stockholders. Upon the consummation of this Offering,
there will be 5,378,046 shares of Common Stock outstanding.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders. If dividends are
declared, whether payable in cash, property or securities of the Company,
holders of the Common Stock are entitled to share equally in such dividends. In
the event of any voluntary or involuntary liquidation, dissolution or winding up
of the Company, each holder of Common Stock will be entitled to share equally in
the assets available for distribution.
Holders of shares of Common Stock have no preemptive rights to acquire any
additional shares of the Common Stock and have no cumulative voting rights. All
currently outstanding shares of Common Stock are duly authorized, validly
issued, fully paid and non-assessable.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is Gemisys
Corporation.
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of this offering, the Company will have outstanding
5,378,046 shares of Common Stock, of which the 2,000,000 shares offered hereby
will be freely tradeable without restriction or further registration under the
Securities Act, except for shares purchased by an affiliate of the Company (in
general, a person who has a controlling position with regard to the Company),
which will be subject to the resale limitations of Rule 144 promulgated under
the Securities Act.
The remaining 3,378,046 shares of Common Stock outstanding are deemed to be
restricted securities, as that term is defined under Rule 144 promulgated under
the Securities Act, and may only be sold pursuant to an effective registration
under the Securities Act, in compliance with the exemption provisions of Rule
144 or pursuant to another exemption under the Securities Act. Such restricted
shares of Common Stock will become eligible for sale, under Rule 144, subject to
certain volume limitations prescribed by Rule 144.
In general, under Rule 144, subject to the satisfaction of certain other
conditions, a person, including an affiliate of the Company (or persons whose
shares are aggregated with an affiliate) who has owned restricted shares of
Common Stock beneficially for at least one year is entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of 1% of
the then outstanding shares of the issuer's Common Stock or the average weekly
trading volume during the four calendar weeks preceding such sale, provided that
certain public information about the issuer as required by Rule 144 is then
available and the seller complies with certain other requirements. A person who
is not an affiliate, has not been an affiliate within three months prior to
sale, and has beneficially owned the restricted shares for at least two years is
entitled to sell such shares under Rule 144 without regard to any of the
limitations described above.
39
The Company and its executive officers, directors and principal
stockholders have agreed that for a period of 180 days following the Offering,
without the prior written consent of the Representatives, they will not,
directly or indirectly, offer or agree to sell, hypothecate, pledge or otherwise
dispose of any shares of Common Stock (or securities convertible into,
exchangeable or exercisable for or evidencing the right to purchase shares of
Common Stock). As a result of these contractual restrictions, shares subject to
lock-up agreements will not be saleable until such agreements expire.
Future sales of Common Stock in the public market following this Offering
by the current stockholders of the Company, or the perception that such sales
could occur, could adversely affect the market price for the Common Stock. The
Company's principal stockholders hold a significant portion of the outstanding
shares of Common Stock and a decision by one or more of these stockholders to
sell shares pursuant to Rule 144 under the Securities Act or otherwise could
materially adversely affect the market price of the Common Stock. See Risk
Factors - Shares Eligible for Future Sale.
Prior to this Offering, there has been no market for the Common Stock and
no prediction can be made as to the effect, if any, that market sales of Common
Stock or the availability of such shares for sale will have on the market price
prevailing from time to time. Nevertheless, the possibility that substantial
amounts of Common Stock may be sold in the public market may adversely affect
prevailing market prices for the Common Stock and could impair the Company's
ability to raise capital through the sale of its equity securities.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Company has agreed to sell to each of the underwriters named
below (the Underwriters), for whom Ferris, Baker Watts, Incorporated are acting
as representative (the Representative), and each of the Underwriters has
severally agreed to purchase from the Company the respective number of shares of
Common Stock set forth opposite its name below:
UNDERWRITER NUMBER OF SHARES
----------- ----------------
Ferris, Baker Watts, Incorporated..........................
Total................................................. 2,000,000
The nature of the respective obligations of the Underwriters is such that
all of the shares of Common Stock must be purchased if any are purchased. The
Underwriting Agreement provides that the obligations of the Underwriters to pay
for and accept delivery of the shares of Common Stock are subject to certain
conditions, including the approval of certain legal matters by counsel.
The Company has been advised by the Representative that the Underwriters
propose to offer the share of Common Stock initially at the public offering
price set forth on the cover page of this Prospectus and to certain selected
dealers at such price less a concession not to exceed $ per share; that the
Underwriters may allow, and such selected dealers may reallow, a concession to
certain other dealers not to exceed $ per share; and that after the
commencement of the Offering, the public offering price and the concessions may
be changed.
The Company has granted the Underwriters an option to purchase in the
aggregate up to 300,000 additional shares of Common Stock solely to cover
over-allotments, if any. The option may be exercised in whole or in part at any
time within 30 days after the date of this Prospectus. To the extent the option
is exercised, the Underwriters will be severally committed, subject to certain
conditions, to purchase the additional shares of Common Stock in proportion to
their respective purchase commitments as indicated in the preceding table.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and, where such
indemnification is unavailable, to contribute to payments that the Underwriters
may be required to make in respect of such liabilities.
The executive officers, directors and stockholders of the Company have
agreed that they will not offer, sell, contract to sell or grant an option to
purchase or otherwise dispose of any shares of the Company's Common Stock,
options to acquire shares of Common Stock or any securities exercisable for, or
convertible into Common Stock owned by them, for a period of 180 days from the
date of this Prospectus, without the prior written consent of the
Representative. The Company also has agreed not to offer, sell or issue any
shares of Common Stock, options to acquire Common Stock or any securities
exercisable for, or convertible into Common Stock, for
40
a period of 180 days from the date of this Prospectus, without the prior written
consent of the Representative, except that the Company may issue securities
pursuant to the Company's stock option and incentive plans and upon the exercise
of any outstanding options and warrants.
Prior to the Offering, there has been no public market for the Common
Stock. The initial public offering price for the shares of Common Stock included
in this Offering has been determined by negotiation among the Company and the
Representative. Among the factors considered in determining such price were the
history of and prospects for the Company's business and the industry in which it
operates, an assessment of the Company's management, past and present revenues
and earnings of the Company, the prospects for growth of the Company's revenues
and earnings and currently prevailing conditions in the securities markets,
including current market valuations of publicly traded companies which are
comparable to the Company. There can be no assurance, however, that the prices
at which the shares of Common Stock will sell in the public market after this
Offering will not be lower than the price at which it is sold by the
Underwriters.
The Representative has advised the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.
Certain persons participating in the Offering may over allot or engage in
transactions that stabilize, maintain or otherwise affect the market price of
the Common Stock, including entering stabilizing bids, effecting syndicate
covering transactions or imposing penalty bids. A stabilizing bid means the
placing of any bid or effecting any purchase for the purpose of pegging, fixing
or maintaining the price of the Common Stock. A syndicate covering transaction
means the placing of any bid on behalf of the underwriting syndicate or the
effecting of any purchase to reduce a short position created in connection with
the Offering. A penalty bid means an arrangement that permits the Underwriters
to reclaim a selling concession from a syndicate member in connection with the
Offering when the Common Stock sold by the syndicate member is purchased in
syndicate covering transactions. Any of the transactions described above may
result in the maintenance of the price of the Common Stock at a level above that
which might otherwise prevail in the open market. Such stabilizing activities,
if commenced, may be discontinued at any time.
At the request of the Company, the Underwriters have reserved up to 5% of
the shares of Common Stock offered hereby for sale to certain directors,
officers, employees and certain other persons having business relationships with
the Company, who have expressed an interest in purchasing shares of Common Stock
in this Offering. The price for such reserved shares will be the initial public
offering price. The number of shares available to the general public will be
reduced to the extent such persons purchase the reserved shares. Any reserved
shares that are not so purchased by such persons at the initial closing of this
Offering will be sold by the Underwriters to the general public on the same
terms and conditions as the other shares of Common Stock offered hereby.
The Company has agreed to issue to the Representative, for consideration of
$.001 per warrant, warrants (the Representative's Warrants) to purchase up to
200,000 shares of Common Stock at an exercise price per share equal to 110% of
the initial public offering price. The Representative's Warrants are exercisable
for a period of five years beginning one year from the effective date of the
Company's registration statement, of which this Prospectus is a part. The
holders of the Representative's Warrants will have no voting or other
stockholder rights unless and until the Representative's Warrants are exercised.
The Representative's Warrants may not be sold, transferred, assigned, pledged or
hypothecated by any person, other than among the Underwriters and bona fide
officers or partners of the Underwriters, for a period of one year following the
effective date of the Company's registration statement, of which this Prospectus
is a part. In addition, the Company has granted the holders of the
Representative's Warrants certain rights to register the shares of Common Stock
underlying the Representative's Warrants under the Securities Act.
The Company has also agreed to pay the Representative a non-accountable
expense allowance equal to 1% of the gross proceeds of the Offering for expenses
incurred in connection therewith.
LEGAL MATTERS
Certain legal matters with respect to the validity of the Common Stock
offered hereby will be passed upon for the Company by Gibbons, Del Deo, Dolan,
Griffinger & Vecchione, a Professional Corporation, Newark,
41
New Jersey. Certain legal matters will be passed upon for the Underwriters by
Venable, Baetjer and Howard, LLP, Baltimore, Maryland.
EXPERTS
The consolidated financial statements of the Company as of December 31,
1996 and 1997 and for each of the years in the three year period ended December
31, 1997, have been included herein and in the Registration Statement in
reliance upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
Commission) a Registration Statement on Form S-1 under the Securities Act with
respect to the Common Stock offered hereby. This Prospectus does not contain all
of the information set forth in the Registration Statement and the exhibits and
schedules to the Registration Statement. For further information with respect to
the Company and such Common Stock offered hereby, reference is made to the
Registration Statement and the exhibits and schedules filed as part of the
Registration Statement. Statements contained in this Prospectus concerning the
contents of any contract or any other document referred to are not necessarily
complete and in each instance reference is made to the copy of such contract or
document filed as an exhibit to the Registration Statement. Each such statement
is qualified in all respects by such reference to such exhibit. The Registration
Statement, including exhibits and schedules thereto, as well as the reports and
other information filed by the Company with the Commission, may be inspected
without charge at the Public Reference Room of the Commission's principal office
at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's regional offices at Seven World Trade Center, 13th Floor, New York,
New York 10048, and 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. Copies of such material can also be obtained at prescribed rates from the
Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549. Electronic filings made through the Electronic
Data Gathering Analysis and Retrieval System are also publicly available through
the Commission's Web Site (http://www.sec.gov).
The Company is not currently subject to the periodic reporting and
informational requirements of the Securities Exchange Act of 1934, as amended
(the Exchange Act). As a result of this Offering, the Company will be required
to file reports and other information with the Commission pursuant to the
requirements of the Exchange Act. Such reports and other information may be
obtained from the Commission's Public Reference Section and copied at the public
reference facilities and regional offices of the Commission referred to above.
The Company intends to furnish holders of the Common Stock with annual reports
containing financial statements audited by an independent public accounting
firm.
42
Medi-Cen Management, Inc. and Affiliates
Index to Consolidated Financial Statements
Page
Medi-Cen Management, Inc. and Affiliates
Report of Independent Public Accountants ........................F-2
Consolidated Balance Sheets:
As of December 31, 1996 and 1997 ..............................F-3
Consolidated Statements of Operations:
For the years ended December 31, 1995, 1996 and 1997 ..........F-4
Consolidated Statements of Stockholders' Equity:
For the years ended December 31, 1995, 1996 and 1997 ..........F-5
Consolidated Statements of Cash Flow:
For the years ended December 31, 1995, 1996 and 1997 ..........F-6
Notes to Consolidated Financial Statements ......................F-7
Yater Medical Group, P.C.
Report of Independent Public Accountants ........................F-20
Balance Sheet:
As of December 31, 1996 .......................................F-21
Statements of Operations:
For the years ended December 31, 1995, 1996 ...................F-22
Statement of Stockholders' Equity:
For the years ended December 31, 1995, 1996 ...................F-23
Statement of Cash Flows:
For the years ended December 31, 1995, 1996 ...................F-24
Notes to Financial Statements ...................................F-25
F-1
When the events referred to in Note 13 of the Notes to the Consolidated
Financial Statements have been consummated, we will be in a position to render
the following report.
[signed] KPMG Peat Marwick LLP
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Medi-Cen Management, Inc. and Affiliates:
We have audited the accompanying consolidated balance sheets of Medi-Cen
Management, Inc. and Affiliates (the Company) as of December 31, 1996 and 1997,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the years in the three year period ended December 31,
1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Medi-Cen Management,
Inc. and Affiliates as of December 31, 1996 and 1997, and the results of their
operations and their cash flows for each of the years in the three year period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
McLean, Virginia
February 13, 1998, except as to Note 13
which is as of __________, 1998
F-2
MEDI-CEN MANAGEMENT, INC. AND AFFILIATES
Consolidated Balance Sheets
December 31, 1996 and 1997
1996 1997
---- ----
ASSETS
Current assets:
Cash.................................................. $ 18,647 $ 648,069
Patient accounts receivable, net of allowance for
doubtful accounts of $129,313 and $715,468 in 1996
and 1997, respectively.............................. 493,076 2,729,205
Accounts receivable--related parties (note 4)......... 149,492 115,111
Other current assets.................................. 11,353 47,364
-------- ----------
Total current assets....................................... 672,568 3,539,749
-------- ----------
Furniture and equipment, net (note 5)...................... 148,742 221,193
-------- ----------
Other assets
Certificates of deposit (note 8)...................... -- 1,125,000
Due from related parties (note 4)..................... -- 1,721,088
Intangible assets, net (note 6)....................... -- 389,940
Deferred income taxes (note 9)........................ 56,130 130,588
Other................................................. 4,219 76,664
-------- ----------
Total other assets......................................... 60,349 3,443,280
-------- ----------
$881,659 $7,204,222
======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................... $ 24,709 $ 42,558
Accrued salaries and benefits......................... 13,091 383,534
Other accrued expenses................................ 5,744 76,203
Income taxes payable.................................. 10,595 304,673
Deferred income taxes (note 9)........................ -- 207,148
Due to related parties (note 4)....................... -- 135,000
Current portion of long-term debt (note 7):
Banks............................................ 21,000 238,173
Other............................................ 48,231 221,973
-------- ----------
Total current liabilities.................................. 123,370 1,609,262
-------- ----------
Long-term liabilities:
Long-term debt (note 7):
Banks............................................ 80,500 3,307,086
Other............................................ 151,963 498,052
Deferred revenue...................................... 137,349 272,225
-------- ----------
Total long-term liabilities................................ 369,812 4,077,363
-------- ----------
Total liabilities.......................................... 493,182 5,686,625
-------- ----------
Stockholders' equity (note 10):
Common stock, par value $0.0024, 10,000,000 shares
authorized, 3,347,239 and 3,366,841 shares issued
and outstanding in 1996 and 1997, respectively...... 8,033 8,080
Additional paid-in capital............................ 82,577 570,002
Retained earnings/partners' capital................... 297,867 939,515
-------- ----------
Total stockholders' equity................................. 388,477 1,517,597
-------- ----------
Commitments (note 8)....................................... $881,659 $7,204,222
======== ==========
See accompanying notes to consolidated financial statements.
F-3
MEDI-CEN MANAGEMENT, INC. AND AFFILIATES
Consolidated Statements of Operations
Years ended December 31, 1995, 1996, and 1997
[Enlarge/Download Table]
1995 1996 1997
---- ---- ----
Net patient service revenue............................ $1,117,962 $1,078,343 $6,028,181
Fee revenue--related parties (note 4).................. 33,182 225,787 575,610
---------- ---------- ----------
Total revenue.......................................... 1,151,144 1,304,130 6,603,791
---------- ---------- ----------
Operating expenses:
Medical malls salaries, benefits and other costs.. 567,535 596,520 2,133,064
Medical malls management fee expenses (note 4).... -- -- 1,140,744
Medical malls bad debt expense.................... 133,094 86,786 912,799
Fee related expenses.............................. 124,028 200,870 413,503
General and administrative expenses (note 4)...... 37,735 111,246 841,532
Depreciation and amortization..................... 20,083 30,559 117,591
---------- ---------- ----------
Total expenses......................................... 882,475 1,025,981 5,559,233
---------- ---------- ----------
Income from operations................................. 268,669 278,149 1,044,558
Other income (expense):
Net interest expense.............................. (14,886) (24,765) (193,154)
Gain on sale of equipment (note 4)................ -- -- 424,499
---------- ---------- ----------
Total other income (expense)........................... (14,886) (24,765) 231,345
---------- ---------- ----------
Income before income taxes............................. 253,783 253,384 1,275,903
Provision (benefit) for income taxes (note 9).......... (30,324) (13,624) 229,340
---------- ---------- ----------
Net income............................................. $ 284,107 $ 267,008 $1,046,563
========== ========== ==========
Earnings per common share.............................. $ .31
==========
Weighted average number of common shares outstanding... 3,363,084
==========
See accompanying notes to consolidated financial statements.
F-4
MEDI-CEN MANAGEMENT, INC. AND AFFILIATES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1995, 1996, and 1997
[Enlarge/Download Table]
RETAINED
COMMON STOCK ADDITIONAL EARNINGS/
------------------ PAID-IN PARTNERS'
SHARES AMOUNT CAPITAL CAPITAL TOTAL
------ ------ ---------- --------- -----
Balance, December 31, 1994................ 3,430,880 $8,234 $ -- $ 217,749 $ 225,983
Issuance of common stock.................. 40,000 96 -- (95) 1
Distributions to partners................. -- -- -- (238,700) (238,700)
Net income................................ -- -- -- 284,107 284,107
--------- ------ -------- ---------- ----------
Balance, December 31, 1995................ 3,470,880 8,330 -- 263,061 271,391
Options issued in exchange for services... -- -- 48,054 -- 48,054
Purchase of common shares................. (137,785) (331) 327 -- (4)
Stock issued in exchange for services..... 14,144 34 34,196 -- 34,230
Dividends paid............................ -- -- -- (4,202) (4,202)
Distributions to partners................. -- -- -- (228,000) (228,000)
Net income................................ -- -- -- 267,008 267,008
--------- ------ -------- ---------- ----------
Balance, December 31, 1996................ 3,347,239 8,033 82,577 297,867 388,477
Assumption of control of Yater............ -- -- 400,000 -- 400,000
Options issued in exchange for services... -- -- 40,032 -- 40,032
Stock issued in exchange for services..... 19,602 47 47,393 -- 47,440
Dividends paid............................ -- -- -- (259,415) (259,415)
Contributions from partners............... -- -- -- 40,000 40,000
Distributions to partners................. -- -- -- (185,500) (185,500)
Net income................................ -- -- -- 1,046,563 1,046,563
--------- ------ -------- ---------- ----------
Balance, December 31, 1997................ 3,366,841 $8,080 $570,002 $ 939,515 $1,517,597
========= ====== ======== ========== ==========
See accompanying notes to consolidated financial statements.
F-5
MEDI-CEN MANAGEMENT, INC. AND AFFILIATES
Consolidated Statements of Cash Flows
Years ended December 31, 1995, 1996, and 1997
[Enlarge/Download Table]
1995 1996 1997
---- ---- ----
Cash flows from operating activities:
Net income.......................................................... $ 284,107 $ 267,008 $ 1,046,563
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization................................... 20,083 30,559 117,591
Provision (benefit) for deferred income taxes................... (49,486) (5,057) (74,458)
Provision for bad debt expense.................................. 133,094 86,786 912,799
Gain on sale of equipment....................................... -- -- (424,499)
Stock and options issued in exchange for services............... -- 82,284 87,472
Payment of services with stock investment....................... -- -- 20,000
Changes in operating assets and liabilities:
Accounts receivable........................................... (276,732) (294,485) (1,972,548)
Other assets.................................................. (2,053) (6,198) (28,847)
Income taxes payable.......................................... 19,162 (8,567) 294,078
Accounts payable.............................................. 18,278 4,037 (178,306)
Accrued salaries and benefits................................. (164) 12,858 257,238
Other accrued expenses........................................ 3,637 1,643 (139,083)
Deferred revenue.............................................. 124,578 (7,229) 134,876
Due from related parties...................................... -- -- (1,217,515)
--------- --------- -----------
Cash provided by (used in) operating activities....................... 274,504 163,639 (1,164,639)
--------- --------- -----------
Cash flows from investing activities:
Purchase of furniture and equipment................................. (11,056) (639) (812)
Deposits returned................................................... 44,300 -- --
Sale of equipment................................................... -- -- 483,810
Loans to related parties............................................ -- -- (540,909)
Repayments on loans to related parties.............................. -- -- 37,336
Purchase of certificates of deposit................................. -- -- (1,125,000)
Purchase of physician practice...................................... -- -- (30,000)
--------- --------- -----------
Cash provided by (used in) investing activities....................... 33,244 (639) (1,175,575)
--------- --------- -----------
Cash flows from financing activities:
Purchase of treasury stock.......................................... -- (4) --
Loan fees paid...................................................... -- -- (42,500)
Borrowings on long-term debt........................................ 40,000 145,000 5,781,825
Dividends paid...................................................... -- (4,202) (259,415)
Payments on long-term debt.......................................... (34,234) (135,565) (2,459,774)
Proceeds from issuance of common stock.............................. 1 -- --
Distributions to partners........................................... (238,700) (228,000) (185,500)
Due to related parties.............................................. -- -- 135,000
--------- --------- -----------
Cash provided by (used in) financing activities....................... (232,933) (222,771) 2,969,636
--------- --------- -----------
Net increase (decrease) in cash....................................... 74,815 (59,771) 629,422
Cash, beginning of year............................................... 3,603 78,418 18,647
--------- --------- -----------
Cash, end of year..................................................... $ 78,418 $ 18,647 $ 648,069
========= ========= ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest.......................................................... $ 16,534 $ 25,803 $ 216,063
Income taxes...................................................... 1,415 12,950 9,720
========= ========= ===========
Supplemental schedule of noncash investing and financing activities:
Assets acquired under capital lease................................. $ 72,937 $ 74,223 $ 90,783
Payment of note with stock investment............................... -- -- 20,000
Capital contributed through stock investment........................ -- -- 40,000
Assumption of control of Yater:
Assets acquired................................................... -- -- 1,679,156
Liabilities assumed............................................... -- -- 1,279,156
Net assets acquired............................................... -- -- 400,000
========= ========= ===========
See accompanying notes to consolidated financial statements.
F-6
MEDI-CEN MANAGEMENT, INC. AND AFFILIATES
Notes to Consolidated Financial Statements
December 31, 1995, 1996, and 1997
--------------------------------------------------------------------------------
(1) DESCRIPTION OF BUSINESS
Medi-Cen Management, Inc. and Affiliates (the Company), incorporated in
1994 in Maryland, provides or arranges for the provision of management
services to medical practices and develops low-cost physician driven
provider networks and medical mall facilities. The Company has developed
three medical mall facilities in the Washington metropolitan area, each
providing medical services ranging from general family practice to selected
specialties. Through the medical mall facilities, the Company enables
health care providers and payors to offer patients high-quality medical
services on a cost-effective basis. Additional physician management
services provided by the Company include marketing, health care payor
contracting and financial and administrative management. The Company
currently manages a network of 57 licensed health care providers that treat
over 100,000 active patients. The Company's current customers are primarily
affiliates (see note 4). The Company intends to rapidly expand the medical
mall concept throughout the Washington-Baltimore metropolitan area and
throughout the mid-Atlantic region to take advantage of market
opportunities. The Company operates in a highly competitive market and is
subject to the risk that it will be unable to identify and recruit suitable
physicians on satisfactory terms to support continued growth.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements have been prepared on the accrual
basis of accounting and include the accounts of the Company and two
entities under common control, Yater Medical Group, P.C. (Yater) and
Medi-Cen Physician Services, LLP (MPS).
The Company, notwithstanding the lack of majority ownership of the stock of
Yater and MPS, has sufficient control over the operations of such entities
so that consolidation of Yater and MPS is required to present fairly the
financial position and results of operations of the Company because of
control by means other than ownership of stock. Control by the Company is
other than temporary because on December 31, 1997, the Company entered into
ownership transfer restriction agreements with the shareholders of Yater
and partners of MPS. These agreements restrict the sale of the ownership
interests and provide for the transfer of the ownership interests to a
Company-designated transferee. No consideration is required upon such
involuntary transfer of the Yater shares. The MPS partnership interest
transfer restriction agreement provides for a payment from the Company to
the estate of the partners upon the partners death at a mutually
agreed-upon fair value at time of death. These transfer restriction
agreements provide the Company sole authority over ownership of the
practices, subject to permissible shareholders restrictions under
applicable state law.
Steven Macedo and his wife are the sole partners of MPS. Yater was
purchased by Steven Macedo and his wife on January 17, 1997. The Company is
owned 90% by Steven Macedo and his brother, Michael Macedo. Due to the
presence of this common control by the Macedos, in conjunction with the
ownership transfer restriction agreements effective December 31, 1997, and
the management services agreements effective January 1, 1997, MPS has been
consolidated with the accounts of the Company for all periods presented.
Yater has been consolidated with these two entities for the period ending
December 31, 1997, the period when common control was established. The
consolidation of these entities has been accounted for on a historical cost
basis (see note 3). All intercompany accounts and transactions have been
eliminated in the consolidation.
(Continued)
F-7
MEDI-CEN MANAGEMENT, INC. AND AFFILIATES
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
(2) CONTINUED
Net Patient Service Revenue
Net patient service revenue is reported at the estimated net realizable
amounts from patients, third-party payors, and others for services
rendered. The Company has numerous agreements under managed care
arrangements to provide physician services based on negotiated fee
schedules. Services under these agreements are recorded as revenue when
provided. No contracts with third party payors or individual managed care
agreements are material to the Company.
Fee Revenue--Related Parties
The Company enters into contracts with all of its customers to provide
medical information services. The Company earns an ongoing fee based on a
fixed percentage of total charges billed by the Company on behalf of the
medical practice. These contracts have 20-year terms and can only be
terminated for cause as outlined in the agreement. Certain of these
contracts provide for a one-time initial management fee of $150,000 for the
start-up and initial establishment of the administrative services related
to the medical information services to be provided. This fee is included in
deferred revenue and is being amortized into income over the term of the
contract.
Furniture and Equipment
Furniture and equipment is stated at cost. Capitalized leased assets are
stated at the lower of the present value of the future minimum lease
payments or fair market value at the inception of the lease. Expenditures
for maintenance and repairs which do not materially extend the useful lives
of the equipment are expensed as incurred.
Provisions for depreciation and amortization are provided on the
straight-line basis over estimated useful lives, or the term of the lease,
if shorter, generally ranging from three to ten years.
Income Taxes
Income taxes are accounted for in accordance with Financial Accounting
Standards Board Statement No. 109 (Statement 109). Under the asset and
liability method of Statement 109, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases
of assets and liabilities and are measured using the enacted tax rates and
laws that are expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled.
A provision for income taxes has not been provided for MPS, since any tax
benefit or liability is the responsibility of the individual partners. A
provision has also not been provided for Yater. Yater, with the consent of
its stockholders, elected to have its income taxed as an S corporation
under Section 1362 of the Internal Revenue Code effective January 1, 1997.
This section provides that, in lieu of corporation income taxes, the
shareholders report their proportionate share of the taxable income or loss
on their individual income tax returns. However, a deferred tax liability
for Yater has been presented in accordance with Statement 109 for an
unrealized built-in gain as a result of Yater converting from a C
corporation to an S corporation on January 1, 1997.
Earnings Per Share
The Company adopted Statement 128, Earnings Per Share, in 1997. Earnings
per share are computed by dividing net income by the weighted average
number of common shares outstanding. Common stock options do not have a
dilutive effect under the treasury stock method and are not included in
this calculation.
(Continued)
F-8
MEDI-CEN MANAGEMENT, INC. AND AFFILIATES
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
(2) CONTINUED
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements. Estimates also effect the reported amounts of revenue
and expenses during the reporting period. Actual results could differ from
those estimates.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments, as reflected
in the accompanying consolidated balance sheets, approximate fair value.
Financial instruments consist of cash, accounts receivable, certificates of
deposit, due from/to related parties, accounts payable, accrued expenses,
and long term debt.
Stock Option Plan
The Company accounts for its stock option plan in accordance with Statement
123, Accounting for Stock-Based Compensation, which permits entities to
recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, Statement 123
allows entities to continue to apply the provisions of Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees, and provide pro forma net income and pro forma earnings per
share disclosures for employee stock option grants as if the
fair-value-based method defined in Statement 123 had been applied. Under
APB Opinion No. 25, compensation expense would be recorded on the date of
grant only if the current market price of the underlying stock exceeded the
exercise price. The Company has elected to continue to apply the provisions
of APB Opinion No. 25 and provide the pro forma disclosure provisions of
Statement 123 for employee stock option grants. Non-employee stock option
grants are recorded in accordance with the provisions of Statement 123.
Intangible Assets
Intangible assets consist primarily of patient lists which were acquired in
the acquisition of Yater and are being amortized on a straight-line basis
over the estimated useful life of 20 years.
On January 1, 1996, the Company adopted Statement 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of. Under Statement 121, intangibles are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of the
asset may not be recoverable. If this review indicates that the carrying
amount of the asset may not be recoverable, as determined based on the
undiscounted cash flows of the operations acquired over the remaining
amortization period, the carrying value of the asset is reduced to fair
value. Management has determined that long-lived assets are fairly stated
in the accompanying consolidated balance sheets, and that no indicators of
impairment are present.
(3) BUSINESS COMBINATIONS
The Company entered into ownership transfer restriction agreements with the
shareholders of Yater and partners of MPS effective December 31, 1997. As
more fully described in note 2, these agreements give the Company a
controlling financial interest over the operations of Yater and MPS. The
Company and MPS were under common control for all periods presented. Yater
was under common control for 1997 only. Because of the presence of this
common control, the consolidation of these entities in the accompanying
financial statements is accounted for in a manner similar to a pooling of
interests.
(Continued)
F-9
MEDI-CEN MANAGEMENT, INC. AND AFFILIATES
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
(3) CONTINUED
The results of operations previously reported by the separate entities and
the combined amounts presented in the accompanying consolidated financial
statements are as follows:
1995 1996 1997
---- ---- ----
Total revenue:
MPS............................ $1,117,962 $1,078,343 $1,819,626
Yater.......................... -- -- 4,208,555
MMI............................ 97,946 311,829 1,467,360
---------- ---------- ----------
1,215,908 1,390,172 7,495,541
Intercompany eliminations........... 64,764 86,042 891,750
---------- ---------- ----------
Combined after eliminations......... 1,151,144 1,304,130 6,603,791
---------- ---------- ----------
Net income (loss):
MPS............................ 329,206 291,518 33,841
Yater.......................... -- -- 632,531
MMI............................ (45,099) (24,510) 380,191
---------- ---------- ----------
Combined............................ $ 284,107 $ 267,008 $1,046,563
========== ========== ==========
Transactions eliminated upon consolidation included management and billing
fees between MMI, MPS and Yater.
(4) RELATED-PARTY TRANSACTIONS
Fee Revenue
The Company earns substantially all its fee revenue from a related company,
Medi-Cen, Corp. of Maryland (MOM). The chief executive officer and board
chairman of MOM is Steven Macedo. Steven Macedo is also the chief executive
officer and board chairman of Medi-Cen Corporation of America (MCA), which
is the franchiser of the Medi-Cen name and philosophy of medical
management. The franchise agreement requires MOM to contract with the
Company for its medical information services. Steven and Michael Macedo own
approximately 20% of the stock of MOM, and 22% of the stock of MCA.
The Company's remaining fee revenue, totaling $62,888 and $81,332 for the
years ended December 31, 1996 and 1997, respectively, was earned from a
physician practice owned by an officer of the Company. In addition, during
1996 the Company earned $141,038 from Yater, prior to the date it was
acquired by Steven Macedo.
Accounts receivable related to these fees was $149,492 and $115,111 at
December 31, 1996 and 1997, respectively.
Medical Malls Management Fee Expense
During 1997, both Yater and MPS entered into management agreements with
MOM. Under these agreements, MOM provides operational services, including
facilities, equipment, nonprofessional staff, and billing and collecting
services, for a fee equal to 43.25% of cash collections of the physician
practices. Expenses are accrued as cash is collected. These agreements may
be terminated by either party with 90 days notice with MOM having no claim
to uncollected revenue.
(Continued)
F-10
MEDI-CEN MANAGEMENT, INC. AND AFFILIATES
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
(4) CONTINUED
Due From Related Parties
Both Yater and MPS prepaid management fees to MOM during 1997. Amounts
outstanding of $1,217,515 are included in due from related parties in the
accompanying consolidated balance sheets at December 31, 1997. These fees
are to be repaid out of certain cash collections as agreed to by the
parties. Interest is earned on the outstanding balance at prime plus .5%.
MPS has a loan receivable from an employee with an outstanding balance of
$103,573 at December 31, 1997. This loan is being repaid out of certain
cash collections from billings of this employee physician. This loan is
fully collateralized by certain accounts receivable of the employee as well
as the employee's personal residence.
Steven Macedo owes Yater $400,000 in connection with the purchase of Yater.
This unsecured loan will be repaid beginning in 1999. Interest is earned on
the outstanding balance at prime plus .5%.
Due to Related Parties
The Company owes Steven and Michael Macedo a total of $135,000 at December
31, 1997 for short term cash advances. These advances are expected to be
repaid in 1998 with interest at prime plus .5% out of the proceeds of the
anticipated initial public offering.
Gain on Sale of Equipment
Both Yater and MPS sold certain equipment with a net book value of $59,311
to MOM during 1997. Cash proceeds from these sales totaled $483,810, which
approximated the fair value of the equipment.
Consulting Expenses
Both Yater and MPS have entered into agreements with Michael Macedo in 1997
to provide business development consulting services. These contracts are
for 5 years and have fixed payments due totaling $1,455,000 over the
remaining term of the agreements. Total consulting expenses incurred under
these agreements were $317,500 in 1997 and are included in general and
administrative expenses in the accompanying consolidated statements of
operations.
(5) FURNITURE AND EQUIPMENT
Furniture and equipment at December 31, 1996 and 1997, consisted of the
following:
1996 1997
---- ----
Computer equipment and software.................... $ 186,369 $ 277,151
Furniture and office equipment..................... 64,245 119,205
--------- ---------
250,614 396,356
Less accumulated depreciation and amortization..... (101,872) (175,163)
--------- ---------
Furniture and equipment, net....................... $ 148,742 $ 221,193
========= =========
(Continued)
F-11
MEDI-CEN MANAGEMENT, INC. AND AFFILIATES
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
(6) INTANGIBLE ASSETS
Intangible assets are summarized as follows:
1996 1997
---- ----
Patient lists........................................ $ -- $419,411
Less accumulated amortization........................ -- (29,471)
------ --------
Intangible assets, net............................... $ -- $389,940
====== ========
Substantially all of the intangible assets of the Company were intangible
assets of Yater which were acquired through the business combination with
Yater (see note 3).
(Continued)
F-12
MEDI-CEN MANAGEMENT, INC. AND AFFILIATES
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
(7) LONG-TERM DEBT
Long-term debt consists of the following at December 31:
1996 1997
---- ----
Note and line of credit payable to a bank, interest
only due monthly on the term loan of $3,000,000
until February 1, 1999 when monthly principal
payments of $50,000 are also due; line of credit
is available in the maximum amount of $1,500,000
to fund the acquisition of new medical practices,
$174,644 has been drawn as of December 31, 1997,
interest only due monthly until February 1, 1999
when principal payments become payable over
60 months. Yater and MPS are co-borrowers on
these obligations which bear interest at prime
plus .5% (9% at December 31, 1997), are due on
January 1, 2004, are secured by all assets of Yater
and MPS as well as certain other collateral defined
in the agreement, and are guaranteed by Steven
Macedo and his wife. Steven Macedo's parents have
also guaranteed up to $1,500,000 of this debt.
Yater and MPS are subject to certain financial
and other covenants as outlined in the agreements
dated December 31, 1997 .......................... $ -- $3,174,644
Three notes payable to two banks, monthly principal
payments of $1,750 plus interest at prime plus 1%
on one of the notes, due October 1, 2001, and
monthly principal and interest payments of $2,017
with interest at 9.5% on the second note, due
May 28, 2002. The third note requires monthly
interest payments at prime plus 1.5% with the
principal of $199,750 due on May 28, 1998. The
assets of MMI, excluding the certificates
of deposit, secure these notes. The notes are
guaranteed by Steven and Michael Macedo........... 101,500 370,615
Various notes payable to former owners of Yater;
total monthly principal and interest payments
of $10,000 with interest at 8%; due July 1, 2002;
secured by the assets of Yater, subordinated to the
note and line of credit above..................... -- 529,808
Various capital lease obligations, primarily for
computer equipment; monthly payments totaling
$6,626 at December 31, 1997 with interest ranging
from 11.9% to 18%; due at varying dates from
November 26, 1999 to August 2002; guaranteed by
Michael Macedo. Cost recorded for the equipment
is $144,585 and $232,907 with accumulated
amortization of $19,854 and $58,338 at December 31,
1996 and 1997, respectively....................... 130,861 180,217
Other long-term debt................................. 69,333 10,000
-------- ----------
301,694 4,265,284
Less current portion................................. (69,231) (460,146)
-------- ----------
$232,463 $3,805,138
======== ==========
Maturities of long-term debt are as follows:
1998............................................... $ 460,146
1999............................................... 819,057
2000............................................... 804,591
2001............................................... 800,712
2002............................................... 702,997
Thereafter......................................... 677,781
----------
$4,265,284
==========
F-13
MEDI-CEN MANAGEMENT, INC. AND AFFILIATES
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
(8) COMMITMENTS
Operating Leases
The Company has entered into a lease for new office space expected to be
occupied by April 1998. The lease is for five years with annual rent
increases as specified in the lease. The lease may be extended for three
additional terms of five years each. This lease will replace the current
office lease with the same landlord which will automatically terminate when
the Company moves into its new space.
Yater and MPS have entered into various operating lease agreements for
clinic space and office equipment. All lease payments for MPS and Yater are
being paid by MOM as part of the management services agreement described in
note 4. The leases have not been assigned to or assumed by MOM, and are
included below under physician practices lease commitments. If the
management services agreement were to terminate, the Company would resume
payments on these leases.
Future minimum lease payments under these noncancelable operating leases,
including equipment leases, are as follows:
PHYSICIAN
COMPANY PRACTICES
------- ---------
1998.................................... $ 58,475 $ 606,559
1999.................................... 69,643 362,092
2000.................................... 74,634 277,405
2001.................................... 62,664 277,528
2002.................................... 63,642 97,925
Thereafter.............................. 21,420 --
-------- ----------
$350,478 $1,621,509
======== ==========
Total rent expense under all operating leases, including various equipment
leases, was $76,005, $74,344, and $89,452 for the years ended December 31,
1995, 1996, and 1997, respectively.
Affiliate Debt
The Company has collateralized debt of MOM with certificates of deposit
totaling $1,125,000 as of December 31, 1997. The Company has also
guaranteed up to $90,000 of this debt.
(Continued)
F-14
MEDI-CEN MANAGEMENT, INC. AND AFFILIATES
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
(9) INCOME TAX EXPENSE
Income tax expense (benefit) for the years ended December 31, 1995, 1996,
and 1997 consists of the following:
1995 1996 1997
---- ---- ----
Current:
Federal.............................. $ 15,689 $ (7,098) $248,734
State................................ 3,473 (1,469) 55,064
-------- -------- --------
19,162 (8,567) 303,798
-------- -------- --------
Deferred:
Federal.............................. (40,319) (4,457) (65,638)
State................................ (9,167) (600) (8,820)
-------- -------- --------
(49,486) (5,057) (74,458)
-------- -------- --------
Total.................................. $(30,324) $(13,624) $229,340
======== ======== ========
Total income tax expense differed from the amount computed by applying the
U.S. federal income tax rate of 34% for the years ended December 31, 1995,
1996, and 1997 to income before income taxes as a result of the following:
[Enlarge/Download Table]
1995 1996 1997
---- ---- ----
Computed "expected" tax expense............................ $ 86,286 $ 86,150 $ 433,807
Increase (decrease) in income taxes resulting from:
State income taxes, net of federal income tax benefit.... 11,725 11,705 58,945
Income (loss) not taxed at corporate level............... (128,335) (112,403) (265,816)
Other.................................................... -- 924 2,404
--------- --------- ---------
Total income tax expense................................... $ (30,324) $ (13,624) $ 229,340
========= ========= =========
The significant components of the deferred tax benefit for the years ended
December 31, 1995, 1996, and 1997 are as follows:
[Enlarge/Download Table]
1995 1996 1997
---- ---- ----
Deferred revenue........................................... $ (56,385) $ 2,819 $ (52,602)
Book depreciation in excess of tax depreciation............ 5,312 10,865 4,333
Net operating loss......................................... 1,587 -- --
Stock compensation......................................... -- (18,741) (26,189)
--------- --------- ---------
Total deferred tax benefit................................. $ (49,486) $ (5,057) $ (74,458)
========= ========= =========
(Continued)
F-15
MEDI-CEN MANAGEMENT, INC. AND AFFILIATES
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
(9) CONTINUED
The tax effects of temporary differences that give rise to significant
portions of the deferred tax asset (liability) are presented below:
1996 1997
---- ----
Deferred tax assets:
Stock compensation................................. $18,741 $ 44,930
Deferred revenue................................... 53,566 106,168
------- --------
Total deferred tax assets............................ 72,307 151,098
------- --------
Deferred tax liabilities:
Unrealized built-in gain........................... -- 207,148
Property and equipment, principally
differences in depreciation...................... 16,177 20,510
------- --------
Total deferred tax liabilities....................... 16,177 227,658
------- --------
Net noncurrent deferred tax assets................... 56,130 130,588
------- --------
Net current deferred tax liability................... $ -- $207,148
======= ========
(10) STOCKHOLDERS' EQUITY
Common Stock
The Company was originally capitalized through the issuance of 83 shares of
common stock for $1 each, at a par value of $.01. After 1 additional share
was issued in 1995, the Board of Directors approved a 10,000 for 1 stock
split in July 1995. All share and per share amounts in the accompanying
consolidated financial statements have been retroactively adjusted to
reflect the stock split (see also note 13).
Dividends
During 1996 and 1997, dividends of $0.0012 per share and $0.05 per share,
respectively, were paid to shareholders of the Company. In addition, during
1997, dividends totaling $73,000 were paid to the shareholders of Yater.
Stock Issued for Services Rendered
Common stock issued to employees and consultants in recognition of services
rendered totaled 14,144 and 19,602 shares during the years ended December
31, 1996 and 1997, respectively, at a fair value of $34,230 and $47,440,
respectively.
Stock Option Plan
Options to purchase common stock under the Company's stock option plan are
granted to employees at prices which are at or exceed fair market value as
determined by the Board of Directors. The options vest either immediately
or when certain objectives are met. The expiration dates of options are
determined by the Company's Board of Directors and are generally 5 years
after issuance.
(Continued)
F-16
MEDI-CEN MANAGEMENT, INC. AND AFFILIATES
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
(10) CONTINUED
The Company applies APB Opinion No. 25 in accounting for its stock option
plan for options granted to employees and accordingly, no compensation
expense has been recognized in the financial statements. Had the Company
determined compensation expense based on the fair value at the grant date
for its stock options under Statement 123, the Company's net income would
have been reduced to the pro forma amounts indicated below (no options
granted prior to 1996):
1996 1997
Net income:
As reported............................... $267,008 $1,046,563
Pro forma................................. 172,659 1,011,990
Earnings per common share:
As reported............................... $ .31
Pro forma................................. .30
======== ==========
The fair value of each option is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions generally used for grants in 1996 and 1997, respectively:
dividend yield of .1 and 2.4%, expected volatility of 28.8 and 62.0%, risk
free interest rate of 6.2 and 6.25%, and expected lives of 5 and 3 years.
A summary of the status of the Company's stock options as of December 31,
1996 and 1997, and changes during the years ended on those dates is
presented below:
1996 1997
---------------- ----------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
------ ----- ------ -----
Outstanding at beginning of year........ -- $ -- 491,708 $2.42
Granted............................. 491,708 2.42 84,706 6.43
------- ----- ------- -----
Outstanding at end of year.............. 491,708 2.42 576,414 3.00
------- ----- ------- -----
Options exercisable at year-end......... 179,329 2.42 256,712 3.17
------- ----- ------- -----
Weighted-average fair value of options
granted during the year:
Exercise price equals market value.. $3.54 $4.48
Exercise price exceeds market value. $ -- $2.76
======= ===== ======= =====
At December 31, 1997, after giving effect to the planned change in the
Company's capital structure as described in note 13, 524,764 outstanding
options under the Company's stock option plan have an exercise price of
$2.42 and 45,824 have an exercise price of $10.00. Of the exercisable
options, 227,623 have an exercise price of $2.42 and 29,089 have an
exercise price of $10.00. The weighted-average remaining contractual life
of the outstanding and exercisable options is approximately 7 years for the
$10.00 options and 5 years for the $10.00 options.
Options outstanding and exercisable at December 31, 1996 and 1997, issued
to non-employees, totaled 73,000 and 114,353, respectively, with an
exercise price of $2.42. Compensation expense recognized in 1996 and 1997
for compensation awards to consultants was $48,054
(Continued)
F-17
MEDI-CEN MANAGEMENT, INC. AND AFFILIATES
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
(10) CONTINUED
and $40,032, respectively, based on 73,000 and 41,353 options issued, with
a weighted average value per option of $2.72 and $4.00, respectively.
(11) CONCENTRATION OF CREDIT RISK
The Company grants credit to its customers, primarily affiliates, without
collateral. These receivables are generally considered collectible by the
Company.
MPS and Yater grant credit without collateral to all its patients, most of
whom are local residents and are insured under third-party payor
agreements. Appropriate allowances have been made on those receivables that
are considered uncollectible. A breakdown of the percentage of gross
patient accounts receivable as of December 31 by type of payor follows:
1996 1997
---- ----
Medicare................................................. 20% 11%
Blue Cross Blue Shield (all plans)....................... 17 17
Self-pay................................................. 18 33
Other (none more than 10%)............................... 45 39
--- ---
100% 100%
=== ===
(12) PROFESSIONAL AND GENERAL LIABILITY INSURANCE
MPS and Yater maintain professional and general liability insurance to
cover medical malpractice claims. Management is not aware of any claims
against the Company.
(13) SUBSEQUENT EVENTS
Modifications to Capital Structure
On March 11, 1998 the Company's Board of Directors authorized the filing of
a Registration Statement on Form S-1 in connection with a planned initial
public offering of the Company's stock. The Company intends to effect a
stock split of the Company's common stock and options issued and
outstanding in the amount of 4.132 shares for every one share outstanding
as of the effective date of the transaction. The Company's Board of
Directors also approved an increase in the number of authorized shares to
10,000,000 with a par value of $0.0024. All share, option and per share
information in the accompanying consolidated financial statements have been
retroactively adjusted to give effect to the planned modification to the
Company's capital structure.
The Board of Directors granted 900,000 stock options to each of Steven and
Michael Macedo under the employee stock option plan.
(14) NEW FINANCIAL ACCOUNTING STANDARDS
Physician Practice Management Companies
In November 1997, the Emerging Issues Task Force of the Financial
Accounting Standards Board reached a consensus on issue 97-2. All changes
that would be required under this consensus have been reflected in the
accompanying consolidated financial statements.
Statement 130
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income.
Statement 130 establishes standards for the required reporting and display
of comprehensive income and its components in equal prominence with other
(Continued)
F-18
MEDI-CEN MANAGEMENT, INC. AND AFFILIATES
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
(14) CONTINUED
financial statements. Statement 130 was issued to address concerns over the
practice of reporting elements of comprehensive income directly in equity.
Statement 130 is effective for both interim and annual periods beginning
after December 15, 1997. Comparative financial statements provided for
earlier periods are required to be reclassified to reflect the provisions
of this Statement. It is not anticipated that Statement 130 will have any
material effect on current or prior period financial statement displays
presented by the Company.
Statement 131
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information. Statement 131 establishes standards for
the way public business enterprises are to report information about
operating segments in annual financial statements and requires those
enterprises to report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes
standards for related disclosures about products and services, geographic
areas and major customers.
Statement 131 is effective for financial statements for periods beginning
after December 15, 1997. In the initial year of application, comparative
information for earlier years is to be restated, unless it is impracticable
to do so. Statement 131 need not be applied to interim financial statements
in the initial year of its application, but comparative information for
interim periods in the initial year of application shall be reported in
financial statements for interim periods in the second year of application.
It is not anticipated that Statement 131 will have any material effect on
current or prior period disclosures presented by the Company.
F-19
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Yater Medical Group, P.C.:
We have audited the accompanying balance sheet of Yater Medical Group, P.C. (the
Company) as of December 31, 1996, and the related statements of operations,
stockholders' equity, and cash flows for the years ended December 31, 1995 and
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Yater Medical Group, P.C. as of
December 31, 1996, and the results of its operations and its cash flows for the
years ended December 31, 1995 and 1996 in conformity with generally accepted
accounting principles.
McLean, Virginia
February 6, 1998
F-20
YATER MEDICAL GROUP, P.C.
Balance Sheet
December 31, 1996
--------------------------------------------------------------------------------
ASSETS
Current assets:
Cash............................................................. $ 2,348
Accounts receivable, net of allowance for doubtful
accounts of $330,757........................................... 1,142,001
Prepaid expenses and other assets................................ 14,509
----------
Total current assets............................................... 1,158,858
----------
Furniture and equipment............................................ 1,267,672
Less accumulated depreciation...................................... (1,139,385)
----------
Furniture and equipment, net....................................... 128,287
Deposits........................................................... 2,600
----------
$1,289,745
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................. $ 196,155
Accrued expenses (note 3)........................................ 305,096
Deferred income taxes (note 5)................................... 204,267
Due to former partners (note 6).................................. 77,572
----------
Total liabilities.................................................. 783,090
----------
Stockholders equity (note 6):
Preferred stock, no par value, 10,000 shares authorized,
4,000 shares issued and outstanding............................ 73,303
Common stock, par value $1.00, 40,000 shares authorized,
4,000 shares issued and outstanding............................ 4,000
Additional paid-in capital....................................... 848,513
Accumulated deficit.............................................. (419,161)
----------
Total stockholders' equity......................................... 506,655
----------
Commitments (note 4)............................................... $1,289,745
==========
See accompanying notes to financial statements.
F-21
YATER MEDICAL GROUP, P.C.
Statements of Operations
Years ended December 31, 1995 and 1996
--------------------------------------------------------------------------------
1995 1996
---- ----
Net patient service revenues.......................... $5,778,452 4,765,699
Expenses:
Clinic salaries and benefits........................ 3,186,932 2,718,350
Clinic rent and lease expenses...................... 392,935 392,400
Clinic pharmaceuticals and supplies................. 657,671 552,921
Other clinic costs.................................. 811,327 799,658
Bad debt expense.................................... 409,141 501,474
Depreciation........................................ 67,067 40,518
---------- ---------
Total expenses........................................ 5,525,073 5,005,321
---------- ---------
Net income (loss) before income taxes................. 253,379 (239,622)
Income tax expense (benefit) (note 5)................. 296,892 (92,625)
---------- ---------
Net loss.............................................. $ (43,513) (146,997)
========== ========
See accompanying notes to financial statements.
F-22
YATER MEDICAL GROUP, P.C.
Statements of Stockholders' Equity
Years ended December 31, 1995 and 1996
--------------------------------------------------------------------------------
[Enlarge/Download Table]
PREFERRED STOCK COMMON STOCK ADDITIONAL
PARTNERS' ---------------- --------------- PAID-IN ACCUMULATED
CAPITAL SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
------- ------ ------ ------ ------ ------- ------- -----
Balance, December 31, 1994......... $1,583,629 -- $ -- -- $ -- -- -- 1,583,629
Distributions to partners.......... (886,464) -- -- -- -- -- -- (886,464)
Net income (loss).................. 228,651 -- -- -- -- -- (272,164) (43,513)
Transfer of remaining partners'
capital to the corporation....... (925,816) 4,000 73,303 4,000 4,000 848,513 -- --
---------- ----- ------- ----- ------ ------- -------- ---------
Balance, December 31, 1995......... -- 4,000 73,303 4,000 4,000 848,513 (272,164) 653,652
Net loss........................... -- -- -- -- -- -- (146,997) (146,997)
---------- ----- ------- ----- ------ ------- -------- ---------
Balance, December 31, 1996......... $ -- 4,000 $73,303 4,000 $4,000 848,513 (419,161) 506,655
========== ===== ======= ===== ====== ======= ======== =========
See accompanying notes to financial statements.
F-23
YATER MEDICAL GROUP, P.C.
Statements of Cash Flows
Years ended December 31, 1995 and 1996
--------------------------------------------------------------------------------
[Enlarge/Download Table]
1995 1996
---- ----
Cash flows from operating activities:
Net loss............................................................. $ (43,513) (146,997)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation..................................................... 67,067 40,518
Provision (benefit) for deferred income taxes.................... 296,892 (92,625)
Provision for bad debt expense................................... 409,141 501,474
Changes in operating assets and liabilities:
Accounts receivable............................................ (290,628) (690,599)
Prepaid expenses and other assets.............................. 15,534 5,500
Accounts payable............................................... 4,909 125,953
Accrued expenses............................................... 2,846 220,167
--------- --------
Cash provided by (used in) operating activities........................ 462,248 (36,609)
--------- --------
Cash flows used in investing activities--purchase of
fixed assets......................................................... -- (2,589)
--------- --------
Cash flows used in financing activities--distributions
to partners.......................................................... (808,892) --
--------- --------
Net decrease in cash................................................... (346,644) (39,198)
Cash, beginning of year................................................ 388,190 41,546
--------- --------
Cash, end of year...................................................... $ 41,546 2,348
========= ========
Supplemental disclosure of noncash investing and financing activities:
Conversion of the partnership into a corporation:
Issuance of common stock for partnership interests................. $ 4,000 --
Issuance of preferred stock for partnership interests.............. 73,303 --
Conversion of remaining partnership interests into additional
paid-in capital.................................................. 848,513 --
Issuance of notes payable for withdrawing partner interests........ 77,572 --
========= ========
See accompanying notes to financial statements.
F-24
YATER MEDICAL GROUP, P.C.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
--------------------------------------------------------------------------------
(1) DESCRIPTION OF BUSINESS
YaterMedical Group, P.C., (the Company) was originally organized as a
general partnership in the District of Columbia. The Company was
reorganized into a professional corporation effective October 1, 1995. The
Company provides specialty physician services to its patients.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Net Patient Service Revenue
Net patient service revenue is reported at the estimated net realizable
amounts from patients, third-party payors, and others for services
rendered. The Company has numerous agreements under managed care
arrangements to provide physician services based on negotiated fee
schedules. Services under these agreements are recorded as revenue when
provided. No contracts with third-party payors or individual managed care
agreements are material to the Company.
Furniture and Equipment
Furniture and equipment is stated at cost. Expenditures for maintenance and
repairs which do not materially extend the useful lives of the equipment
are expensed as incurred.
Depreciation is provided on the straight-line basis over estimated useful
lives generally ranging from three to ten years.
Income Taxes
Income taxes are accounted for in accordance with Financial Accounting
Standards Board Statement No. 109 (Statement 109). Under the asset and
liability method of Statement 109, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases
of assets and liabilities and are measured using the enacted tax rates and
laws that are expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements. Estimates also effect the reported amounts of revenue
and expenses during the reporting period. Actual results could differ from
those estimates.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments, as reflected
in the accompanying balance sheet, approximate fair value. Financial
instruments consist of cash, accounts receivable, accounts payable, accrued
expenses and due to former partners.
(3) ACCRUED EXPENSES
Accrued expenses consists of the following:
Salaries and benefits............................................ $113,205
Billing fees..................................................... 99,872
Professional fees................................................ 67,388
Property taxes................................................... 24,631
---------
$305,096
========
F-25
(4) COMMITMENTS
The Company leases office space in three locations under leases expiring
through January 1999. Two of the leases have original terms of five years
with annual rent increases as specified in the leases. The other lease is a
renewable one-year lease with rent negotiated annually.
Future minimum lease payments under these noncancelable operating leases,
including equipment leases, are as follows:
1997................................................... $452,764
1998................................................... 352,607
1999................................................... 97,499
2000................................................... 1,722
--------
$904,592
========
Total rent expense under all operating leases, including various equipment
leases, was $392,935 and $392,400 for the years ended December 31, 1995 and
1996, respectively.
(5) INCOME TAX EXPENSE
Income tax expense (benefit) for the years ended December 31, 1995 and 1996
consists of the following:
1995 1996
---- ----
Deferred:
Federal........................................... $243,604 (80,348)
State............................................. 53,288 (12,277)
-------- -------
Total income tax expense (benefit).................. $296,892 (92,625)
======== =======
Total income tax expense (benefit) differed from the amount computed by
applying the U.S. federal income tax rate of 34 percent for the years ended
December 31, 1995 and 1996 to earnings before income taxes as a result of
the following:
1995 1996
---- ----
Computed "expected" tax expense......................... $ 8,407 (81,471)
Increase (decrease) in income taxes resulting from:
State income taxes, net of federal income tax benefit. (924) (11,784)
Converting partnership to taxable corporation......... 288,683 --
Other................................................... 726 630
-------- -------
Total income tax expense (benefit)...................... $296,892 (92,625)
======== =======
The significant components of the deferred tax expense (benefit) for the
years ended December 31, 1995 and 1996 are as follows:
1995 1996
---- ----
Cash basis reporting for tax purposes................... $ 32,534 (68,402)
Converting partnership to taxable corporation........... 288,683 --
Net operating loss...................................... (24,325) (24,223)
-------- -------
Total deferred income tax expense (benefit)............. $296,892 (92,625)
======== =======
The Company converted from a partnership to a taxable corporation during
1995. Under Statement 109, a deferred tax asset or liability is to be
recognized for temporary differences at the date that a nontaxable
enterprise becomes a taxable enterprise. The effect of recognizing the
deferred tax asset or liability is to be included in income from continuing
operations. The tax effects of temporary differences that give rise to the
deferred tax liability are primarily related to this conversion.
F-26
At December 31, 1996, the Company has net operating loss carryforwards of
approximately $125,000 for federal income tax purposes which expire in 2010
and 2011.
(6) STOCKHOLDERS' EQUITY
The Company was reorganized from a general partnership to a professional
corporation effective October 1, 1995. Partners' capital at September 30,
1995, including net income of the partnership for the nine months ended
September 30, 1995, was converted into 4,000 shares of common stock (par
value $1) and 4,000 shares of preferred stock (no par value). Two partners'
withdrew from the partnership at the conversion date and are owed $77,572
for the balance in their partners' capital accounts. The balance of
partners' capital was credited to additional paid-in capital.
(7) CONCENTRATION OF CREDIT RISK
The Company grants credit without collateral to all its patients, most of
whom are local residents and are insured under third-party payor
agreements. A breakdown of the percentage of gross patient accounts
receivable by type of payor follows:
Medicare....................................................... 20%
Blue Cross Blue Shield (all plans)............................. 17
Self-pay....................................................... 18
Other (none more than 10%)..................................... 45
---
100%
===
(8) PROFESSIONAL AND GENERAL LIABILITY INSURANCE
The Company maintains professional and general liability insurance to cover
medical malpractice claims. Management is not aware of any claims against
the Company which might have a material impact on the Company's financial
position.
(9) SUBSEQUENT EVENTS
On January 17, 1997, the Company was sold under a stock purchase agreement
to an unrelated party for $400,000. Immediately prior to the sale, the
Company redeemed its preferred stock for approximately $493,000. On
December 31, 1997, the new owner entered into a stock transfer restriction
agreement which gives control of the Company to Medi-Cen Management, Inc.,
an affiliate of the new owner.
F-27
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION AND REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY TO ANY
SECURITIES BY ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
TABLE OF CONTENTS
PAGE
Prospectus Summary ............................
Risk Factors ..................................
Use of Proceeds ...............................
Dilution ......................................
Divided Policy ................................
Capitalization ................................
Selected Financial Data .......................
Management's Discussion and Analysis of
Financial Condition and Results of Operations
.............................................
Business ......................................
Management ....................................
Principal Stockholders ........................
Certain Transactions ..........................
Description of Securities .....................
Shares Eligible for Future Sale ...............
Underwriting ..................................
Legal Matters .................................
Experts .......................................
Additional Information ........................
Index to Financial Statements ................. F-1
UNTIL _________, 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE SHARES OF COMMON STOCK OFFERED HEREBY, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
2,000,000 SHARES
MEDI-CEN
MANAGEMENT, INC.
COMMON STOCK
PROSPECTUS
FERRIS, BAKER WATTS
INCORPORATED
, 1998
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Maryland law, the Company is permitted to indemnify directors,
officers, employees and agents made a party to any proceeding by reason of
service in that capacity unless it is established that: (1) the act or omission
of the party was material to the matter giving rise to the proceeding and (i)
was committed in bad faith, or (ii) was the result of active and deliberate
dishonesty; or (2) the party actually received an improper personal benefit in
money, property or services; or (3) in the case of any criminal proceeding, the
party had reasonable cause to believe that the act or omission was unlawful.
This provision offers persons who serve on the Board of Directors of the
Registrant protection against awards of monetary damages resulting from breaches
of their duty of care (except as indicated above). As a result of this
provision, the ability of the Registrant or a stockholder thereof to
successfully prosecute an action against a director for breach of his duty of
care is limited. However, the provision does not affect the availability of
equitable remedies such as an injunction or rescission based upon a director's
breach of his duty of care. The Securities and Exchange Commission has taken the
position that this provision will have no effect on claims arising under the
Federal securities laws.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Set forth below is an estimate of the fees and expenses to be incurred in
connection with the issuance and distribution of the shares of Common Stock
offered hereby.
Securities and Exchange Commission Registration Fee........ $ 6,970
NASD Filing Fee............................................ $ 2,800
NASDAQ Listing Fee......................................... $ *
Blue Sky Fees and Expenses................................. $ *
Legal Fees and Expenses.................................... $ *
Accounting Fees............................................ $ *
Printing and Engraving Costs............................... $ *
Transfer Agent Fees........................................ $ *
Miscellaneous Expenses..................................... $ *
Total $ *
* To be included by amendment
II-1
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
The following table sets forth all sales of unregistered securities by the
Registrant within the past three years.
[Enlarge/Download Table]
NATURE OF AGGREGATE
TRANSACTION AND CLASS OF OFFERING PRICE PER
DATE PURCHASERS SECURITIES SOLD PRICE SHARE
9/27/94 Michael Carlos 1,652,800 shares $40.00 --
Initial Buarque de Macedo
Capitalization
9/27/94 P. Steven & Illene 1,652,800 shares $40.00 --
Initial S. Macedo TBE
Capitalization
9/27/94 Blaine T. Kuser 123,960 shares $3.00 --
Initial
Capitalization
6/08/95 Diane Mejia 20,660 shares $.50 --
7/10/95 Tracy L. Ziadeh 20,660 shares $.50 --
8/5/96 Harrison Jett Option for 33,056 shares Services N/A
10/24/96 William Lester Option for 24,792 shares Services N/A
12/01/96 Kass Consulting, Option for 123,960 Services N/A
LLC shares
12/20/96 Harrison G. Jett 8,979 shares Services N/A
Treasury Stock
12/20/96 Alan J. 4,132 shares Services N/A
Treasury Stock Silverstone
& Kylanne G.
Silverston, JTWROS
12/20/96 William Lester 1,033 shares Services N/A
12/20/96 Bruce A. Kehr, Option for 413,200 Services N/A
M.D. shares
12/20/96 Gregory A. Winston Option for 20,660 shares Services N/A
12/20/96 Rosen & Hoover, Option for 20,660 shares Services N/A
LLC
12/20/96 Jerry W. Clever Option for 24,792 shares Services N/A
4/09/97 Harrison G. Jett 5,603 shares Services N/A
Treasury Stock
4/09/97 Francis Cronin Option for 33,056 shares Services N/A
4/09/97 Francis Cronin Option for 14,834 shares Services N/A
8/14/97 Lansing Holman Option for 1,653 shares Services N/A
8/13/97 Harrison G. Jett 5,603 shares Services N/A
Treasury Stock
8/13/97 Rosen, Sapperstein 7,157 shares Services N/A
Treasury Stock & Friedlander,
Chartered
12/30/97 Scott E. Sheridan 8,677 shares Services N/A
Treasury Stock
12/31/97 Joshua Korsower Option for 5,785 shares Services N/A
The Company relied on Section 4(2) of the Securities Act and Rule 701
promulgated thereunder for each issuance. No underwriters were involved nor any
commissions paid in connection with any of the above transactions.
II-2
ITEM 27. EXHIBITS
EXHIBIT
NO. DESCRIPTION
1.1* Form of Underwriting Agreement
3.1 Articles of Incorporation, as amended
3.2 Amended and Restated By-Laws
4.1* Specimen Common Stock Certificate
5* Opinion of Gibbons, Del Deo, Dolan, Griffinger & Vecchione
10.1 Form of 1998 Stock Option Plan
10.2 CMO Franchise Agreement dated June 3, 1995 between Medi-Cen, Corp. of
America, Inc. and Medi-Cen, Corp. of Maryland, Inc.
10.3 CMO Franchise Agreement dated June 3, 1995 between Medi-Cen, Corp. of
America, Inc. and Medi-Cen, Corp. of Virginia, Inc.
10.4 Management Agreement dated January 1, 1998 between the Company and
Washington Neurology Associates, L.L.P.
10.5 Management Agreement dated January 1, 1998 between the Company and Yater
Medical Group, P.C.
10.6 Stock Transfer Restriction Agreement dated December 31, 1997 among Yater
Medical Group, P.C., P. Steven Macedo, M.D., Ilene S. Macedo, M.D. and
the Company, as amended
10.7 Partnership Interest Transfer Restriction Agreement dated December 31,
1997 among Washington Neurology Associates, L.L.P., P. Steven Macedo,
M.D., Ilene S. Macedo, M.D. and the Company
10.8 Employment Agreement dated March 11, 1998 between the Company and Steven
Macedo, M.D.
10.9 Employment Agreement dated March 11, 1998 between the Company and
Michael Macedo
10.10 Employment Agreement dated January 1, 1998 between Yater Medical Group,
P.C. and Steven Macedo, M.D.
10.11 Consulting Agreement dated January 20, 1997 between Yater Medical Group,
P.C. and Michael Macedo
10.12 Employment Agreement dated March 11, 1998 between the Company and
Francis J. Cronin
10.13 Letter Agreements among Medi-Cen, Corp. of Maryland, Medi-Cen
Management, Inc. and Yater Medical Group, P.C.
10.14 Executive Officer Agreement dated August 5, 1996 between Medi-Cen
Management, Inc. and Harrison Jett, as amended
10.15 Consultant Contract dated April 19, 1997 between Medi-Cen Management,
Inc. and Frank Cronin, as amended
10.16 Billing Agent Agreement (Medicare/Medicaid) between Medi-Cen Management,
Inc. and Washington Neurology Associates, L.L.P.
10.17 Vice-President of Provider Relations Contract, dated April 30, 1996
between the Company and Bruce Kehr
10.18 Stock Purchase Agreement dated March 11, 1998 between Yater Medical
Group, P.C. and Michael Macedo
10.19 Stock Purchase Agreement dated March 11, 1998 between Yater Medical
Group, P.C. and P. Steven Macedo
10.20 Billing Agent Agreement (Medicare/Medicaid) between Medi-Cen Management,
Inc. and Yater Medical Group, P.C.
24.1* Consent of Gibbons, Del Deo, Dolan, Griffinger & Vecchione (included in
Exhibit 5)
24.2 Consent of KPMG Peat Marwick LLP
24.3* Consent of James Cornelson
24.4* Consent of William Lester
* To be filed by amendment
II-3
ITEM 28. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to Item 24 hereof, or otherwise, the Registrant has been
advised that in the opinion of the Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
The undersigned Registrant further undertakes that: (i) For purposes of
determining any liability under the Securities Act, the information omitted from
the form of Prospectus filed as part of this Registration Statement in reliance
upon Rule 430A and contained in a form of Prospectus filed by the Registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this Registration Statement as of the time it was declared
effective; (ii) For the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of Prospectus
shall be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at the time shall be deemed
to be the initial bona fide offering thereof.
II-4
SIGNATURES AND POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Washington, D.C., on
, 1998.
MEDI-CEN MANAGEMENT, INC.
By:_________________________
Michael Macedo
Chief Executive Officer
Pursuant to the requirements of the Securities Act, this Registration Statement
has been signed by the following persons in the capacities and on the dates
indicated. Each person whose signature appears below hereby constitutes and
appoints P. Steven Macedo and Michael Macedo, or either of them, as such
person's true and lawful attorney-in-fact and agent with full power of
substitution for such person and in such person's name, place and stead, in any
and all capacities, to sign and to file with the Commission, any and all
amendments and post-effective amendments to this Registration Statement, with
exhibits thereto and other documents in connection therewith, granting unto said
attorney-in-fact and agent full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as such person might or could do
in person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or any substitute therefor, may lawfully do or cause to be done by virtue
thereof.
NAME TITLE DATE
_____________________________ Chairman of the Board , 1998
P. Steven Macedo
_____________________________ Chief Executive Officer , 1998
Michael Macedo and Director (Principal
Executive Officer)
_____________________________ Principal Financial and , 1998
Harrison G. Jett Accounting Officer and
Director
_____________________________ Director , 1998
James Cornelson
_____________________________ Director , 1998
William Lester
II-5
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Medi-Cen Management Inc. and Affiliates:
Under date of February 13, 1998, except as to note 13, which is as of _______,
1998, we reported on the consolidated balance sheets of Medi-Cen Management,
Inc. and Affiliates as of December 31, 1996 and 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1997, which are
included in the Prospectus. In connection with our audits of the aforementioned
consolidated financial statements, we also audited the related consolidated
financial statement schedules in the registration statement. These consolidated
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statement schedules based on our audits.
In our opinion, such consolidated financial statement schedules, when considered
in relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
Mclean, Virginia
February 13, 1998 except as to note 13,
which is as of __________, 1998
II-6
MEDI-CEN MANAGEMENT, INC. AND AFFILIATES
Valuation and Qualifying Accounts
Years ended December 31, 1995, 1996, and 1997
ADD BALANCE
BALANCE AT FOR YATER ADDITIONS BALANCE AT
BEGINNING AT DATE OF CHARGED TO END OF
OF PERIOD ACQUISITION EXPENSE WRITE-OFFS PERIOD
--------- ----------- ------- ---------- ------
December 31, 1995
Accounts receivable
allowances..... $ 49,509 -- 133,094 (78,766) 103,837
December 31, 1996
Accounts receivable
allowances..... $ 103,837 -- 86,786 (61,310) 129,313
December 31, 1997
Accounts receivable
allowances..... $ 129,313 330,757 912,799 (657,401) 715,468
II-7
Dates Referenced Herein
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