AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 2, 1996
REGISTRATION NO. 333-06283
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------
ADVANCED HEALTH CORPORATION
(Exact name of registrant as specified in charter)
<TABLE>
<S> <C> <C>
DELAWARE 8099 13-3893841
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
-------------------
560 WHITE PLAINS ROAD
TARRYTOWN, NEW YORK 10591
(914) 524-4200
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
-------------------
JONATHAN EDELSON, M.D.
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
ADVANCED HEALTH CORPORATION
560 WHITE PLAINS ROAD
TARRYTOWN, NEW YORK 10591
(914) 524-4200
(Name, address, including zip code, and telephone number, including area code,
of agent for service of process)
-------------------
WITH COPIES TO:
<TABLE>
<S> <C>
JOHN J. SUYDAM, ESQ. MARK KESSEL, ESQ.
O'SULLIVAN GRAEV & KARABELL, LLP SHEARMAN & STERLING
30 ROCKEFELLER PLAZA 599 LEXINGTON AVENUE
NEW YORK, NEW YORK 10112 NEW YORK, NEW YORK 10022
(212) 408-2400 (212) 848-4000
</TABLE>
-------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
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
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 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 THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
PROSPECTUS (SUBJECT TO COMPLETION)
DATED OCTOBER 2, 1996
2,000,000 SHARES
[LOGO]
ADVANCED HEALTH CORPORATION
COMMON STOCK
------------
All of the 2,000,000 shares of Common Stock offered hereby are being sold by
Advanced Health Corporation ("Advanced Health" or the "Company"). Prior to this
offering, there has been no public market for the Common Stock of the Company.
It is estimated that the initial public offering price will be between $11.00
and $13.00 per share. See "Underwriting" for a discussion of the factors to be
considered in determining the initial public offering price. The Common Stock
has been approved for quotation on the Nasdaq National Market under the symbol
"ADVH", subject to official notice of issuance.
----------------------
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 5 OF THIS PROSPECTUS.
----------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------
Per Share................................ $ $ $
Total (3)................................ $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company, estimated to be $850,000.
(3) The Company has granted the Underwriters an option, exercisable within 30
days of the date hereof, to purchase an aggregate of up to 300,000
additional shares at the Price to Public less Underwriting Discounts and
Commissions to cover over-allotments, if any. If all such additional shares
are purchased, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."
----------------------
The Common Stock is offered by the several Underwriters named herein when,
as and if received and accepted by them, subject to their right to reject orders
in whole or in part and subject to certain other conditions. It is expected that
delivery of certificates for the shares will be made at the offices of Cowen &
Company, New York, New York, on or about , 1996.
----------------------
COWEN & COMPANY VOLPE, WELTY & COMPANY
, 1996
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
A diagram captioned "Advanced Health Corporation/Integrating Physician
Management Services with Information Technology", which includes a center circle
with the caption "Advanced Health Integrated Solutions for Physicians" with
boxes above it captioned "Physician Practice Management Services", "Physician
Network Management Services" and "Clinical Information Systems" and boxes below
it captioned "Preserving Practice Ownership by Physicians", "Empowering
Physicians to Succeed in Managed Care", "Providing Point-of-Care Clinical
Decision Support", "Enhancing Physician Communication and Information Access",
"Providing Operations Support and Administrative Efficiencies", "Providing
Disease Management Program Services for High-Cost, High-Volume Specialties".
Med-E-PracticeTM, Smart ScriptsTM, Internet Script WriterTM, Med-E-VisitTM,
Practice Management IntegratorTM, Med-E-NetworkTM, Med-E-Net CentralTM,
Med-E-Net OfficeTM, Med-E-Net IntegratorTM and Med-E-Net CardiologyTM are
trademarks of the Company. Trade names and trademarks of other companies
appearing in this Prospectus are the property of their respective holders.
-------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements and notes thereto appearing
elsewhere in this Prospectus. Unless otherwise indicated, all information in
this Prospectus (i) assumes no exercise of the Underwriters' over-allotment
option, (ii) reflects a 1.5-for-1 split of the Common Stock effected in the form
of a stock dividend in April 1996 and a .59581-for-1 reverse split of the Common
Stock to be effected prior to the date of this Prospectus (the "Stock Splits")
and (iii) reflects the conversion of all outstanding Convertible Preferred Stock
of the Company into Common Stock upon the consummation of this offering (the
"Preferred Stock Conversion"). Unless the context otherwise requires, all
references in this Prospectus to the Company refer collectively to Advanced
Health Corporation, its predecessor and its subsidiaries.
THE COMPANY
Advanced Health Corporation provides a full range of integrated management
services and clinical information systems to physician group practices, single
legal entities comprised of multiple physicians, and to physician networks,
aggregations of individual physicians and physician groups formed for the
purpose of entering into contracts with third-party payors. The management
services provided by the Company include physician practice and network
development, marketing, payor contracting, financial and administrative
management, clinical information management, human resource management and
practice and network governance. The Company developed its clinical information
systems to provide physicians, at the point of care and on a real-time basis,
with patient-specific clinical and payor information and the ability to generate
patient medical orders and facilitate the implementation of disease management
programs. Through the management of multi-specialty and single-specialty
physician group practices and networks, the Company focuses its management
efforts on high-cost, high-volume disease specialties, such as cardiology,
oncology and orthopedics. The Company currently manages two multi-specialty
physician group practices and two single-specialty physician group practices
comprised of more than 75 physicians in the New York metropolitan area and eight
physician networks with approximately 800 physicians in the greater New York and
Atlanta metropolitan areas, and provides physician group consulting services to
more than 100 physicians.
Health care expenditures in the U.S. totalled approximately $1 trillion in
1994, with approximately 85% of such expenditures controlled by physician
decisions. Increasing concern over the rising cost of health care has led to the
development of managed care programs, which have shifted traditional fee-
for-service reimbursement for physicians to capitated and other fixed-fee
arrangements. As the financial risk of delivering health care shifts from payors
to providers, physicians are faced with increasing management responsibilities
and declining compensation. Because the majority of physicians practice
individually or in two-person groups, they tend to have limited financial and
administrative capacity. Consequently, physician practice management companies
have emerged in recent years to manage the financial and administrative
requirements of physician organizations. More importantly, the Company believes
there exists an even greater need among physicians for clinical management
services and information systems. The Company believes that assisting physicians
in managing the clinical aspects of their practices represents the greatest
opportunity to enhance the quality and reduce the cost of health care.
The Company believes that it is well positioned to attract, organize and
manage physician group practices and networks by offering a full range of
integrated management services and clinical information systems. The Company
believes that its clinical information systems will allow physicians, at the
point of care and on a real-time basis, (i) to access patient-specific clinical
and payor information, (ii) to generate patient instructions, prescriptions and
orders for tests, specialty referrals and specialty procedures and (iii) to
access databases containing managed care and disease management protocols,
diagnostic/treatment preferences and guidelines affecting medical orders. By
combining its group practice and network management services with its clinical
information systems, the Company believes it can provide physicians with
integrated solutions for managing the increased financial opportunities and
risks associated with managed care contracts while allowing physicians to
improve the quality of care.
3
<PAGE>
The Company's strategy includes (i) establishing long-term contractual
alliances with physician organizations, (ii) managing high-cost, high-volume
disease specialties such as cardiology, oncology and orthopedics, (iii)
providing physicians with clinical information at the point of care, (iv)
focusing on selected geographic markets that offer concentrations of physicians
seeking the Company's services and (v) continuing to develop relationships with
key industry participants. The Company has entered into a software license and
integration agreement with Merck Medco Managed Care, Inc. for the Company's
prescription writing software. In addition, the Company has entered into a
contract with an affiliate of PCS Health Systems, Inc., the managed care unit of
Eli Lilly & Company, to provide disease management information services and
software for the treatment of certain diseases.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered hereby.................... 2,000,000 shares
Common Stock to be outstanding after the 6,500,267 shares(1)
offering.......................................
Use of proceeds................................ To repay certain indebtedness and for
working capital and general corporate
purposes, which may include acquisitions.
See "Use of Proceeds."
Proposed Nasdaq National Market symbol......... ADVH
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(In thousands, except per share data)
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED SIX MONTHS ENDED
INCEPTION DECEMBER 31, JUNE 30,
(AUGUST 27, 1993) TO ----------------- ---------------------------------
DECEMBER 31, 1993 1994 1995 1995 1996
-------------------- ------- ------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue.......................... --$ $ 379 $ 1,054 $ 100 $ 7,617
Cost of sales.................... -- 12 340 22 3,512
------ ------- ------- ------- -------
Gross profit..................... -- 367 714 78 4,105
Operating expenses............... 66 1,318 3,255 617 4,034
Research and development
expenses........................... 455 1,582 3,157 1,512 1,875
------ ------- ------- ------- -------
Operating loss................... (521) (2,533) (5,698) (2,051) (1,804)
Other income (expense)........... -- (15) (8) 1 (54)
------ ------- ------- ------- -------
Net loss......................... $ (521) $(2,548) $(5,706) $(2,050) $(1,858)
------ ------- ------- ------- -------
------ ------- ------- ------- -------
Net loss per share............... $(0.23) $ (1.03) $ (1.47) $ (0.65) $ (0.37)
------ ------- ------- ------- -------
------ ------- ------- ------- -------
Weighted average number of common
shares and common share
equivalents outstanding(2)......... 2,229 2,482 3,893 3,136 4,991
<CAPTION>
JUNE 30, 1996
---------------------------------
ACTUAL AS ADJUSTED (3)
--------------- ---------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash....................................................................... $ 837 $18,307
Working capital (deficit).................................................. (2,713) 18,757
Total assets............................................................... 8,191 25,661
Total debt................................................................. 4,504 504
Total stockholders' equity................................................. 863 22,333
</TABLE>
- ------------
(1) Excludes 783,032 shares issuable upon the exercise of outstanding stock
options at a weighted average exercise price of $3.44 per share and 481,489
shares issuable upon the exercise of outstanding warrants to purchase Common
Stock at a weighted average exercise price of $8.50 per share. Also excluded
are 306,769 shares and 113,995 shares issuable upon the exercise of options
and warrants, respectively, which, in each case, are contingent upon the
Company's achieving certain capitalization levels related to regulatory
requirements or upon the Company's achieving certain performance targets.
See "Management -- Stock Plans" and Notes 3 and 10 of Notes to Consolidated
Financial Statements.
(2) See Notes 2 and 14 of Notes to Consolidated Financial Statements.
(3) Adjusted to give effect to (i) the sale by the Company of 2,000,000 shares
of Common Stock offered hereby at an assumed initial public offering price
of $12.00 per share and after deducting underwriting discounts and
commissions and estimated offering expenses and (ii) the receipt and initial
application of the net proceeds therefrom. See "Use of Proceeds."
4
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. The following factors should be carefully considered in
evaluating the Company and its business before purchasing the shares of Common
Stock offered hereby. The discussion in this Prospectus contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
could differ materially from those discussed herein. 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.
LIMITED OPERATING HISTORY; HISTORY OF LOSSES; UNCERTAINTY OF FUTURE
PROFITABILITY; DIRECT CAPITATION
The Company was incorporated in August 1993, began providing physician
practice and network management services in December 1995 and has only recently
commercially installed its clinical information systems on a limited basis.
Accordingly, the Company has only a limited operating history upon which an
evaluation of the Company and its prospects can be based. As of June 30, 1996,
the Company had an accumulated deficit of approximately $10.6 million. The
Company has never achieved profitability and expects to continue to incur
operating losses through at least the end of 1996. Due to anticipated increases
in operating expenses, the Company's operating results will be adversely
affected if sales of its management services and clinical information systems do
not increase. In addition, 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, expand
sales of its physician practice and network management services, commercialize
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
achieve profitability, to maintain such profitability, if achieved, on a
quarterly or annual basis or to sustain or increase its revenue growth in future
periods. In addition, the Company may in the future enter into direct or
indirect managed care or capitation arrangements pursuant to which the Company
would be subject to significant risk if its revenues were insufficient to cover
increased variable costs resulting from requirements of greater than expected
levels of medical care. See "-- Risks Associated with Direct Capitation,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business."
DEPENDENCE ON MANAGEMENT CONTRACTS WITH AFFILIATED PHYSICIAN GROUPS AND NETWORKS
The Company's revenue to date has been derived from a limited number of
management agreements between the Company and certain physician groups and
networks. Such management agreements generally have an initial term of five to
20 years and are automatically renewable for additional terms. See "Risk Factors
- -- Concentration of Revenues" and "Business--Contractual Relationships with
Affiliated Physicians." The termination of any one or more of such management
agreements would have a material adverse effect on the Company's revenues and
results of operations. The Company's future growth and profitability is
substantially dependent upon obtaining new contracts for the provision of
services to physician groups and physician networks on satisfactory terms and
conditions. The Company must accurately assess the costs it will incur in
providing services in order to negotiate contracts on terms under which the
Company can expect to realize adequate profit margins or otherwise meet its
objectives. In addition, the Company must perform services in sufficient volume
to generate revenues to support its infrastructure. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Overview." The
future growth and profitability of the Company is also dependent on the
Company's ability to effectively integrate the practices of its affiliated
physicians, to manage and control costs and to realize economies of scale. The
integration of new physician practice and network management contracts, 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. There can be no assurance that the
Company will
5
<PAGE>
obtain new physician practice and network management contracts on satisfactory
terms, or at all. Any failure of the Company to obtain new contracts and price
its services appropriately would have a material adverse effect on the Company's
business, financial condition and results of operations and the price of the
Common Stock. See "Business -- Physician Practice and Network Services."
UNCERTAINTY OF SUCCESSFUL COMMERCIALIZATION OF CLINICAL INFORMATION SYSTEMS
Since its inception in August 1993, the Company has focused on developing
its clinical information systems. However, to date, the Company has commercially
installed its clinical information systems only on a limited basis. The
Company's future growth and profitability is substantially dependent upon the
success of its clinical information systems. The Company believes that market
acceptance of such systems will depend upon the continued growth of managed care
in the Company's markets, the continued increase in the administrative and
clinical complexity of ambulatory medicine, the clinical efficacy of the disease
management programs developed by its affiliated physicians and third parties,
the continued downward trend in the cost of computer hardware, particularly
handheld computing devices and wireless network infrastructures, and the
continued consolidation of physician group practices. No assurance can be given
that the Company's clinical information systems will be accepted or competitive
or that the Company will be successful in taking systems from their current
state of limited commercial introduction to commercial acceptance. If the
Company's clinical information systems do not achieve market acceptance or if
the Company does not develop and maintain sales, marketing and service
expertise, the Company's growth, revenues and results of operations will be
materially adversely affected. See "Business -- Clinical Information Systems."
CONCENTRATION OF REVENUES
In the year ended December 31, 1995, Madison Medical -- The Private Practice
Group of New York, L.L.P. ("Madison") accounted for approximately 36% of the
Company's revenues. In the six months ended June 30, 1996, Madison and the
Advanced Heart Physicians & Surgeons Network, P.C. ("AHP&S") accounted for
approximately 49% and 23% of revenues, respectively. The Company's management
services agreements generally have an initial term of five to 20 years and may
be terminated only for cause. The management services agreement with Madison,
however, gives Madison the right to terminate without cause following the first
year of the term and prior to the end of the tenth year of the term upon payment
of a penalty and thereafter without penalty. The management services agreement
with AHP&S restricts the Company's ability to provide management services to
certain cardiology physician groups in the New York metropolitan area. In
addition, in the year ended December 31, 1995, the Company's disease management
software license and integration agreement with an affiliate of PCS Health
Systems, Inc., the managed care unit of Eli Lilly & Company, accounted for
approximately 32% of the Company's revenues. Although such affiliate of PCS
Health Systems has agreed to sponsor two pilot programs involving the software
applications developed by the Company, it has no obligation thereafter to use or
distribute the Company's software. Although the Company seeks to build long-term
customer relationships, no assurance can be given that such relationships will
continue. Any termination or significant deterioration of the Company's
relationships with its principal customers could have a material adverse effect
on the Company's business, financial condition and results of operations. In
addition, a deterioration in the financial condition of any of its principal
customers would materially adversely affect the Company's financial condition
and results of operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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 systems and to expand, train and
manage its employee base. To date, the Company
6
<PAGE>
has only limited experience in providing physician practice and network
management services and clinical information systems. To execute its growth
strategy, the Company plans to significantly increase the number of physician
practices and networks under management, expand its clinical information systems
customer base, develop disease management services and develop a sales and
marketing organization. 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.
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
physician services. This methodology went into effect in 1992 and is continuing
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 historically provided by the physician
groups and networks managed by the Company. Management estimates that 35% of the
revenues of physician groups managed by the Company are derived from government
sponsored health care programs (principally, Medicare, Medicaid and state
reimbursed programs). RBRVS-type of 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 paid by many private third-party
payors, including those that provide Medicare supplemental insurance, are based
on established physician and hospital charges and are generally higher than
Medicare payment rates. A change in the patient mix of the practices under
Company management 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 physicians in containing the cost of the provision
of medical services. To the extent that affiliated physicians 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 any such
affiliated physicians 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 physicians 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 cost
reductions, increased volume, introduction of new services and systems or
otherwise. See "Risk Factors -- Uncertainty Related to Health Care Reform" and
"Business -- Government Regulation."
RISKS ASSOCIATED WITH CAPITATED FEE ARRANGEMENTS
As an increasing percentage of patients are coming under the control of
managed care entities, the Company believes that its success will, in part, be
dependent upon the Company's ability to negotiate and manage, on behalf of
physician practice groups and networks, agreements with health maintenance
organizations ("HMOs"), employer groups and other private third-party payors
pursuant to which professional services will be provided on a risk-sharing or
capitated basis by some or all of the physicians affiliated with the Company.
Under some of such agreements, the health care provider accepts a pre-determined
amount per patient per month in exchange for providing all necessary covered
services to the patients covered by the agreement. Such agreements pass the
economic risk of providing care from the payor to the provider. In the Company's
target markets, capitated fee arrangements are relatively new and the Company
has limited experience in negotiating or managing capitated fee agreements. The
proliferation of such agreements in markets served by the Company could result
in greater predictability of revenues, but not necessarily of profits, for
physicians affiliated with the Company. There can be
7
<PAGE>
no assurance that the Company will be able to negotiate, on behalf of the
physicians, satisfactory arrangements on a risk-sharing or capitated basis or
that the physician organizations managed by the Company will be able to provide
medical services at a profit under such arrangements. To the extent affiliated
physicians incur medical costs that limit such affiliated physicians'
profitability, there can be no assurance that the Company will be able to derive
sufficient revenues from its relationship with any such affiliated physicians to
achieve or maintain profitability.
RISKS ASSOCIATED WITH DIRECT CAPITATION
In the future, the Company anticipates entering into managed care or
capitated arrangements, either indirectly, through the assignment of managed
care contracts entered into between its affiliated physicians and third-party
payors, or directly, through the formation of an independent physician
association ("IPA"). The Company does not now have capitated contracts (although
the Company does provide management services to physician groups and networks
that have entered into such capitated contracts (see "--Risks Associated with
Capitated Fee Arrangements")), and would enter into such contracts only with
licensed insurance companies and HMOs, and only if allowed by state law. To the
extent such contracts are prohibited by the law of any particular state, the
Company would not enter into such contracts in that state. On August 10, 1995,
the National Association of Insurance Commissioners (the "NAIC") issued a report
opining that such risk-transferring arrangements may entail the business of
insurance, to which state licensure laws apply, but that licensure laws would
not apply where the unlicensed entity contracts to assume "downstream risk" from
a duly licensed health insurer or HMO for health care provided to that carrier's
enrollees. The NAIC's conclusions are not binding on the states. To the extent
that the Company accepts capitation and is regulated as an insurer, regulatory
provisions that might mitigate losses by insurers will not apply to reduce the
Company's risk. In addition, the Company has little experience in managing
capitated-risk arrangements. With respect to the assignment of capitated
revenues to the Company, the Company will be dependent on the physician group
practices and networks entering into such agreements, the terms and conditions
of which are determined by the physicians in their sole discretion, and
providing medical services thereunder. In addition, the Company is dependent
upon the continued alliance of the physicians with the group practice and
network clients of the Company. The Company will recognize in its financial
statements, however, only those assigned revenues associated with the provision
of its management services (typically expected to be approximately 10% of the
capitated payments made), with the balance of such payments being paid over to
the physicians providing the medical services pursuant to such agreements.
Revenues under managed care or capitated arrangements entered into by the
Company directly will generally be a fixed amount per enrollee. Under such an
arrangement, the Company would contract with affiliated physicians for the
provision of health care services and the Company would be responsible for the
provision of all or a portion of the health care requirements of such enrollees.
To the extent that such enrollees require more care than is anticipated by the
Company upon entering into such a contract, the Company's revenues under such
contracts may be insufficient to cover its costs, in which event the Company
would suffer a loss. Although the Company expects to enter into reinsurance
agreements with third-party insurers in respect of such risk, no assurances can
be given that the Company will be able to obtain such reinsurance on favorable
terms, if at all. In addition, the Company has no experience in forming or
managing an IPA. There can be no assurance that the Company will enter into such
managed care or capitation arrangements or, if it does so, that it will realize
a profit from such arrangements. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business -- Contractual
Relationships with Affiliated Physicians -- Capitated and Other Fixed-Fee
Arrangements."
HIGHLY COMPETITIVE INDUSTRY
The physician practice and network 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
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<PAGE>
primary, multi-specialty and specialty physician groups, while other companies
provide claims processing, utilization 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 diseases such as cardiology,
oncology and orthopedics. 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. 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 contracting
with payors or expanding or maintaining its physician group practices or
networks 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.
The market for health care information systems is highly competitive and
rapidly changing. The Company believes that the principal competitive factors
for clinical information systems are the usefulness of the data and reports
generated by the software, customer service and support, compatibility with the
customer's existing information systems, potential for product enhancement,
vendor reputation, price and the effectiveness of sales and marketing efforts.
Many of the Company's competitors and potential competitors have greater
financial, product development, technical and marketing resources than the
Company, and currently have, or may develop or acquire, substantial installed
customer bases in the health care industry. In addition, as the market for
clinical information systems develops, additional competitors may enter the
market and competition may intensify. While the Company believes that it has
successfully differentiated itself from competitors, for example, by offering
clinical information systems that provide patient-specific, point-of-care
information, there can be no assurance that, in the future, competition will 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. 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.
Anti-kickback Statutes. The fraud and abuse provisions of the Medicare and
Medicaid statutes, which prohibit the solicitation, payment, receipt or offer of
any direct or indirect remuneration for the referral of Medicare or Medicaid
patients or for the order or provision of Medicare or Medicaid covered services,
items or equipment. These laws also impose restrictions on physicians' referrals
for designated health services to entities with which they have financial
relationships. Violations 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. Such exclusion, if applied to the physician groups or networks managed
by the Company, could result in significant loss of reimbursement. Several
states, including states in which the Company operates, have adopted similar
laws that cover patients in private programs as well as government programs.
Corporate Practice of Medicine. The laws of many states prohibit
non-physician entities from practicing medicine and employing physicians to
practice medicine. The Company, through its majority-owned management service
organizations ("MSOs"), provides only non-medical administrative services and
clinical information systems to physician organizations, 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
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<PAGE>
the physician organizations with which it contracts. These limitations on MSO
activities are incorporated into each management service agreement--the contract
governing the relationship between an MSO and the physician group practice or
network it serves. Physician group practices or networks, which deliver medical
care, are independent entities from MSOs, which perform administrative functions
and are controlled by the Company. 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 its
affiliated physician groups and networks, many aspects of the Company's business
operations have not been the subject of state or federal regulatory
interpretation and there can be no assurance that a review of the Company's or
its affiliated physicians' businesses by courts or regulatory authorities will
not result in a determination that could adversely affect the operations of the
Company or its affiliated physicians (for example, by rendering the Company's
management services agreements with a physician organization unenforceable) or
that the health care regulatory environment will not change so as to restrict
the Company's or its affiliated physicians' existing operations or expansion. 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 providers). Violation of such
regulations could result in substantial penalties. Such regulations may 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 jurisdictions in which it
operates, but regulations governing patient confidentiality rights are evolving
rapidly and are often unclear and difficult to apply in the rapidly
restructuring health care market. Additional legislation governing the
dissemination of medical record information is continually being proposed at
both the state and federal level. Such proposed legislation could require
patient consent before even coded or anonymous patient information may be shared
with third parties and 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 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 patients. 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. See
"Business -- Government Regulation."
FDA REGULATION
Products, including software applications, intended for use in the diagnosis
of disease or other conditions, or in the cure, treatment, mitigation or
prevention of disease, are subject to regulation by the United States Food and
Drug Administration (the "FDA") as medical devices. The laws administered by the
FDA impose substantial regulatory controls over the manufacturing, labeling,
testing, distribution, sale, marketing and promotion of medical devices and
other related activities. These regulatory controls can include compliance with
the following requirements: manufacturer establishment registration and device
listing; current good manufacturing practices; FDA clearance of a premarket
notification submission or FDA approval of a premarket approval application;
medical device adverse event reporting; and general prohibitions on misbranding
and adulteration. Violations of the laws concerning medical devices can result
in, among other things, severe criminal and civil penalties, product seizure,
recall, repair or refund orders, withdrawal or denial of premarket notifications
or premarket approval
10
<PAGE>
applications, denial or suspension of government contracts and injunctions
against unlawful product manufacture, labeling, promotion and distribution or
other activities. In its 1989 Draft Policy for the Regulation of Computer
Products (the "1989 Draft Policy Statement"), the FDA stated that it intended to
exempt certain clinical decision support software products from a number of
regulatory controls, and that until those regulations were issued it would not
require manufacturers of such products to comply with requirements other than
the prohibitions on misbranding and adulteration. The Company believes that its
clinical information systems are not medical devices and, thus, are not subject
to the controls imposed on manufacturers of such products and do not fall within
the scope of the 1989 Draft Policy Statement. The Company further believes that
to the extent that its systems were determined to be medical devices, the
systems would fall within the exemptions for decision support systems provided
by the 1989 Draft Policy Statement. The Company has not sought or obtained a
formal opinion of counsel with respect to the issue of FDA exemption nor has the
Company taken action to comply with the controls that would otherwise apply if
the Company's systems were determined to be non-exempt medical devices. The FDA
is currently in the process of developing a new policy concerning FDA regulation
of computer products that would replace the 1989 Draft Policy. The FDA's new
policy may eliminate some or all of the exemptions provided under the 1989 Draft
Policy. Accordingly, there can be no assurance that the FDA will not now or in
the future make a determination that the Company's current or future clinical
information systems are medical devices subject to FDA regulations and are
ineligible for the exemptions from those regulations. Furthermore, there can be
no assurance that the Company would be able to comply in a timely manner, if at
all, with FDA regulations if the agency made such determinations. Thus, such
determinations by the FDA could significantly delay, or even prevent, the
Company's ability to offer its systems and could otherwise 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 -- Government
Regulation."
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. See "Business -- Government Regulation."
TECHNOLOGICAL CHANGE
The health care information industry is relatively new and is experiencing
rapid technological change, changing customer needs, frequent new product
introductions and evolving industry standards. In addition, as the computer and
software industries continue to experience rapid technological change, the
Company must be able to quickly and successfully adapt its clinical information
systems so that they continue to integrate well with the computer platforms and
other software employed by its customers. There can be no assurance that the
Company will not experience difficulties, including lack
11
<PAGE>
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 -- Clinical Information
Systems."
DEPENDENCE ON PROPRIETARY ASSETS
The Company has made significant investments in its clinical information
systems and relies on a combination of patent, trade secret and copyright laws,
nondisclosure and other contractual provisions and technological measures to
protect its proprietary rights. The Company has two U.S. patent applications and
a foreign patent application having subject matter common with both U.S.
applications but no issued patents. There can be no assurance that any patent
will be issued or, if issued, that such patent or any other protections will be
adequate or that the Company's competitors will not independently develop
technologies that are substantially equivalent or superior to those of the
Company. In addition, there can be no assurance that the legal protections and
precautions taken by the Company will be adequate to prevent infringement or
misappropriation of the Company's proprietary assets.
Although the Company believes that its clinical information systems do not
infringe upon the proprietary rights of third parties, there can be no assurance
that third parties will not assert infringement claims against the Company in
the future or that a license or similar agreement will be available on
reasonable terms in the event of an unfavorable outcome on any such claim. In
addition, any such claim may require the Company to incur substantial litigation
expenses or subject the Company to significant liabilities and could have a
material adverse effect on the Company's business, financial condition and
results of operations and the price of the Common Stock.
The Company is aware that a third party has filed a notice of opposition and
extensions of time to file notices of opposition with respect to certain of the
Company's pending trademark registration applications containing the suffix
"e-systems". Although the Company believes that it will be able to obtain the
registrations applied for, no assurance can be given that it will be able to do
so. In the event of any successful opposition, the Company might be required to
change the trademark used for certain of its clinical information systems. The
Company does not believe that such a result would have a material adverse effect
on its business. See "Business -- Proprietary Rights."
MANAGEMENT SERVICES ORGANIZATIONS NOT WHOLLY-OWNED; PHYSICIAN PUT RIGHTS;
DILUTION
The Company typically establishes an MSO for each physician practice group
or network to which it provides services, which MSO is majority-owned by the
Company. The physician group or network served typically has a minority interest
in the MSO. The MSO's assets consist primarily of its management service
contracts with the physician group or network served and its liabilities consist
primarily of its obligations under its agreements with the Company and its
obligations to its employees. Although the Company has sufficient interests in
the MSOs to exercise control over them, the Company may owe a fiduciary duty to
the holders of various minority interests in such MSOs. Accordingly, the
Company, in exercising control over such MSOs, may be required to deal with them
on terms no less favorable to such MSOs than could be obtained from unaffiliated
third parties.
Under certain specified circumstances, the Company has the option to cause
certain MSOs to be merged with and into a wholly-owned subsidiary of the Company
in a transaction in which the interests of the physician groups and networks in
such MSOs would be exchanged for Common Stock of the Company (the "Roll Up
Transaction"). The Company has reserved 548,224 shares of Common Stock for
issuance upon consummation of the Roll Up Transaction, all of which shares are
required to be issued if the Company effects the Roll Up Transaction.
Accordingly, the Roll Up Transaction, if effected, will be dilutive to
investors. In addition, certain of the physician groups and networks managed by
the Company have rights to require the Company to purchase all or part of such
physicians' interest in their respective MSOs in the event that the Company does
not consummate the Roll Up Transaction within one year after the satisfaction of
specified conditions. There can be no assurance that the Company will have the
financial resources to purchase such interests in accordance with its
obligations
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<PAGE>
at the time any such rights are exercised, or that the Company would be able to
obtain financing on satisfactory terms or conditions, if at all, to purchase
such interests. To the extent that any future financing requirements with
respect to such put rights are satisfied through the issuance of equity
securities, investors may experience dilution. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business --
Contractual Relationships with Affiliated Physicians."
DEPENDENCE ON KEY PERSONNEL
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 Jonathan Edelson, M.D., the
Company's Chairman of the Board and Chief Executive Officer, and Steven
Hochberg, the Company's President. Although the Company is the beneficiary of
$250,000 "key man" life insurance policies on the lives of each of Dr. Edelson
and Mr. Hochberg, the Company does not believe such amount would be adequate to
compensate for the loss of the services of either executive. In addition,
although the Company has entered into employment agreements with most of its
senior executives, including Dr. Edelson and Mr. Hochberg, 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."
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 could 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.
NO PRIOR PUBLIC MARKET; OFFERING PRICE DETERMINED BY AGREEMENT; VOLATILITY OF
STOCK PRICE
Prior to this offering, there has been no public market for the Common
Stock. Although the Common Stock has been approved for quotation on the Nasdaq
National Market, subject to official notice of issuance, there can be no
assurance that an active trading market for the Common Stock will develop or
continue after this offering. The initial public offering price of the Common
Stock will be determined by negotiation between the Company and the
Representatives of the Underwriters, and may not be indicative of the market
price for the Common Stock after this offering. See "Underwriting." From time to
time after this offering, there may be significant volatility in the market
price for the Common Stock. Results of the Company's operations may fluctuate
significantly from quarter to quarter and will depend on numerous factors,
primarily the timing of the addition of new physician practice groups and
networks under management and the sale of clinical information systems and
associated services. Such fluctuations in quarterly operating results of the
Company, changes in general conditions in the economy, the financial markets or
the health care industry or other developments affecting the Company or its
competitors could cause the market price of the Common Stock to fluctuate
substantially. In addition, in recent years the stock market has experienced
extreme price and
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<PAGE>
volume fluctuations. This volatility has had a significant effect on the market
prices of securities issued by many companies for reasons unrelated to their
operating performance.
DILUTION
The purchasers of the shares of Common Stock offered hereby will experience
immediate and substantial dilution in the pro forma net tangible book value of
their shares of Common Stock in the amount of $8.86 per share, at an assumed
initial public offering price of $12.00 per share (after deducting underwriting
discounts and commissions and estimated offering expenses). Such investors will
experience additional dilution upon the exercise of 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 Roll
Up Transaction 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 Affiliated Physicians."
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 a time and price that the Company deems appropriate. Upon
completion of this offering, the Company will have approximately 6,500,267
shares of Common Stock outstanding. The 2,000,000 shares 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 (the "Securities
Act") and the regulations promulgated thereunder. The remaining approximately
4,500,267 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 promulgated under the Securities Act. As a result
of the contractual restrictions described below and the provisions of Rules 144,
144(k) and 701 under the Securities Act, additional shares will be available for
sale in the public market as follows: (i) no shares of Common Stock (other than
those shares sold hereby and not held by affiliates) will be available for
immediate sale in the public market on the date of this Prospectus, (ii) 19,272
shares of Common Stock subject to options exercisable within 90 days of the date
of this Prospectus will be freely tradeable by non-affiliates upon the
effectiveness of a registration statement relating to such stock options, (iii)
224,566 shares of Common Stock and 18,432 shares of Common Stock subject to
options exercisable within 90 days of the date of this Prospectus will be
eligible for sale 90 days after the date of this Prospectus, subject to the
volume, manner of sale and reporting requirements of Rule 144, and (iv)
approximately 4,266,800 shares of Common Stock and approximately 9,500 shares of
Common Stock subject to options exercisable within 180 days of the date of this
Prospectus will be eligible for sale upon expiration of the lock-up agreements
180 days after the date of this Prospectus, subject to the volume, manner of
sale and reporting requirements of Rule 144. The holders of 2,941,985 shares of
Common Stock have the right in certain circumstances to require the Company to
register their shares under the Securities Act for resale to the public. If such
holders, by exercising their demand registration rights, cause a large number of
shares to be registered and sold in the public market, such sales could have an
adverse effect on the market price for the Company's Common Stock. If the
Company were required to include in a Company-initiated registration shares held
by such holders pursuant to the exercise of their "piggyback" registration
rights, such sales may have an adverse effect on the Company's ability to raise
needed capital. See "Shares Eligible for Future Sale," "Description of Capital
Stock" and "Underwriting."
UNSPECIFIED USE OF PROCEEDS
Following this offering, the Company will have approximately $16.4 million
($19.7 million if the Underwriters' over-allotment option is exercised in full)
of the net proceeds of this offering available for working capital and general
corporate purposes, which may include acquisitions. The Company's management,
subject to approval by the Board of Directors in certain circumstances, will
have broad discretion with respect to the application of such proceeds. See "Use
of Proceeds."
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POTENTIAL ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF THE COMPANY'S
CERTIFICATE OF INCORPORATION AND BY-LAWS AND THE DGCL
The Company's Restated Certificate of Incorporation (the "Certificate of
Incorporation") and By-laws (the "By-laws") and the Delaware General Corporation
Law (the "DGCL") contain provisions which may have the effect of delaying,
deterring or preventing a future takeover or change in control of the Company
unless such takeover or change in control is approved by the Company's Board of
Directors. Such provisions may also render the removal of directors and
management more difficult. The Certificate of Incorporation and By-laws provide
for, among other things, a classified Board of Directors serving staggered terms
of three years, certain advance notice requirements for stockholder nominations
of candidates for election to the Board of Directors and certain other
stockholder proposals, restrictions on who may call a special meeting of
stockholders and a prohibition on stockholder action by written consent. In
addition, the Company's Board of Directors has the ability to authorize the
issuance of up to 5,000,000 shares of preferred stock in one or more series and
to fix the voting powers, designations, preferences and relative, participating,
optional and other special rights and qualifications, limitations or
restrictions thereof without stockholder approval. The DGCL also contains
provisions preventing certain stockholders from engaging in business
combinations with the Company, subject to certain exceptions. See "Description
of Capital Stock."
INVESTMENT COMPANY ACT CONSIDERATIONS
The Investment Company Act of 1940, as amended (the "1940 Act"), requires
the registration of, and imposes various substantive restrictions on, certain
companies that engage primarily, or propose to engage primarily, in the business
of investing, reinvesting or trading in securities, or that fail certain
statistical tests regarding the composition of assets and sources of income, and
are not primarily engaged in business other than investing, holding, owning or
trading securities. The Company believes that it is, and it intends to remain,
primarily engaged in business other than investing, holding, owning or trading
securities. The Company will seek to invest temporarily the proceeds of this
offering, pending their use as described under the caption "Use of Proceeds,"
and to utilize the proceeds of this offering in the manner described under "Use
of Proceeds," so as to avoid becoming subject to the registration requirements
of the 1940 Act. Such investment is likely to result in the Company obtaining
lower yields on the funds invested than might be available in the securities
markets generally. There can be no assurance, however, that such investments and
utilization can be made. If the Company were required to register as an
investment company under the 1940 Act, it would become subject to substantial
regulation with respect to its capital structure, management, operations,
transactions with affiliates, and other matters.
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THE COMPANY
The Company's predecessor, Med-E-Systems Corporation ("MES"), was
incorporated on August 27, 1993 as a clinical information systems development
company. Effective August 23, 1995, MES became a subsidiary of the Company
through a tax-free reorganization. The Company was subsequently merged with and
into Majean, Inc., a Delaware corporation, and the surviving corporation changed
its name to Advanced Health Corporation. The Company's executive offices are
located at 560 White Plains Road, Tarrytown, New York 10591, and its telephone
number at that address is (914) 524-4200.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered hereby are estimated to be approximately $21.5 million ($24.8 million if
the Underwriters' over-allotment option is exercised in full), at an assumed
initial public offering price of $12.00 per share and after deducting
underwriting discounts and commissions and estimated offering expenses.
The Company will use approximately $5.1 million of the net proceeds of this
offering to repay an aggregate of $5.0 million principal amount of indebtedness,
plus interest, including the repayment of an aggregate of $2.0 million principal
amount of indebtedness, plus interest, to certain 21st Century Partnerships.
21st Century Partnerships is a principal stockholder of the Company. See
"Principal Stockholders." The Company issued three 8% promissory notes in the
principal amounts of $1.5 million, $750,000 and $750,000 on February 28, April
26 and June 28, 1996, respectively. The Company issued six 9% promissory notes
in an aggregate principal amount of $2.0 million on June 19 and August 13, 1996
to certain 21st Century Partnerships. All of such notes will mature on the
earlier of the consummation of this offering and the one-year anniversary of
their issuance, in the case of the 8% notes, or July 31, 1997, in the case of
the 9% notes. The proceeds of such notes are being used to finance working
capital. See "Certain Transactions."
The Company intends to use the balance of the net proceeds, approximately
$16.4 million, for working capital and general corporate purposes, which may
include acquisitions. 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 such 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 instruments or money market funds.
DIVIDEND POLICY
The Company has not declared or paid any cash dividends on its capital stock
since inception and does not expect to pay dividends in the foreseeable future.
The Company presently intends to retain future earnings, if any, to finance the
expansion of its business. 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.
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CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1996 (i) on a pro forma basis giving effect to the Stock Splits and the
Preferred Stock Conversion and (ii) as adjusted to reflect the receipt and
initial application of the estimated net proceeds from the sale by the Company
of 2,000,000 shares of Common Stock offered hereby, at an assumed initial public
offering price of $12.00 per share (after deducting underwriting discounts and
commissions and estimated offering expenses):
<TABLE>
<CAPTION>
JUNE 30, 1996
--------------------------
PRO FORMA
PRO FORMA AS ADJUSTED
----------- -----------
<S> <C> <C>
Current portion of long-term debt................................ $ 4,378,910 $ 378,910
----------- -----------
----------- -----------
Long-term debt, less current portion............................. $ 125,096 $ 125,096
----------- -----------
Stockholders' equity:
Preferred Stock, $.01 par value, 5,000,000 shares authorized
and no shares issued and outstanding......................... -- --
Common Stock, $.01 par value, 15,000,000 shares authorized,
4,500,267 shares issued and outstanding pro forma; and
6,500,267 shares issued and outstanding as adjusted(1)........... 45,003 65,003
Additional paid-in capital....................................... 11,526,538 32,976,538
Accumulated deficit.............................................. (10,633,192) (10,633,192)
Treasury stock, at cost (8,937 shares pro forma and as
adjusted)........................................................ (75,000) (75,000)
----------- -----------
Total stockholders' equity..................................... 863,349 22,333,349
----------- -----------
Total capitalization......................................... $ 988,445 $22,458,445
----------- -----------
----------- -----------
</TABLE>
- ------------
(1) Excludes 783,032 shares issuable upon the exercise of outstanding stock
options at a weighted average exercise price of $3.44 per share and 481,489
shares issuable upon the exercise of outstanding warrants to purchase Common
Stock at a weighted average exercise price of $8.50 per share. Also excluded
are 306,769 shares and 113,995 shares issuable upon the exercise of options
and warrants, respectively, which, in each case, are contingent upon the
Company's achieving certain capitalization levels related to regulatory
requirements or upon the Company's achieving certain performance targets.
See "Management -- Stock Plans" and Notes 3 and 10 of Notes to Consolidated
Financial Statements.
17
<PAGE>
DILUTION
The net tangible book value of the Company as of June 30, 1996 was
$(1,048,338), or $(0.23) per share of Common Stock on a pro forma basis, after
giving effect to the Stock Splits and the Preferred Stock Conversion. "Net
tangible book value per share" represents the amount of the Company's total
tangible assets less the Company's total liabilities, divided by the number of
shares of Common Stock outstanding. After giving effect to the sale of 2,000,000
shares of Common Stock offered hereby at an assumed initial public offering
price of $12.00 per share (after deducting underwriting discounts and
commissions and estimated offering expenses), and the initial application of the
net proceeds therefrom, the pro forma net tangible book value of the Company at
June 30, 1996 would have been $20,421,662, or $3.14 per share of Common Stock.
This represents an immediate increase in pro forma net tangible book value of
$3.37 per share to existing stockholders and an immediate, substantial dilution
in pro forma net tangible book value per share of $8.86 per share to purchasers
of shares of Common Stock offered hereby, as illustrated in the following table:
<TABLE>
<CAPTION>
Assumed initial public offering price per share........... $12.00
<S> <C> <C>
Pro forma net tangible book value per share at June 30,
1996...................................................... $(0.23)
Increase per share attributable to new investors........ 3.37
------
Pro forma net tangible book value per share after this
offering.................................................. 3.14
------
Dilution per share to new investors....................... $ 8.86
------
------
</TABLE>
The following table sets forth, on a pro forma basis, after giving effect to
the Stock Splits and the Preferred Stock Conversion, as of June 30, 1996, the
number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company and the average price per share paid by
existing stockholders and to be paid by purchasers of shares of Common Stock
offered hereby based upon assumed initial public offering price of $12.00 per
share (before deducting underwriting discounts and commissions and estimated
offering expenses).
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.................. 4,500,267 69.2% $11,571,541 32.5% $ 2.57
New investors.......................... 2,000,000 30.8 24,000,000 67.5 12.00
--------- ------- ----------- -------
Total............................ 6,500,267 100.0% $35,571,541 100.0%
--------- ------- ----------- -------
--------- ------- ----------- -------
</TABLE>
The foregoing tables assume no exercise of stock options to purchase 783,032
shares of Common Stock outstanding at a weighted average exercise price of $3.44
per share and 481,489 shares issuable upon the exercise of outstanding warrants
to purchase Common Stock at a weighted average exercise price of $8.50 per
share. The foregoing tables also assume no exercise of 306,769 shares and
113,995 shares issuable upon the exercise of options and warrants, respectively,
which, in each case, are contingent upon the Company's achieving certain
capitalization levels related to regulatory requirements or upon the Company's
achieving certain performance targets. To the extent that any of such options or
warrants are exercised, there will be further dilution to new investors in this
offering. See "Management -- Stock Plans" and Notes 3 and 10 of Notes to
Consolidated Financial Statements.
18
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated statement of operations data for the period from
inception (August 27, 1993) to December 31, 1993 and for the years ended
December 31, 1994 and 1995, and the balance sheet data as of December 31, 1994
and 1995, are derived from the Consolidated Financial Statements of the Company
included elsewhere in this Prospectus, which have been audited by Arthur
Andersen LLP, independent public accountants. The selected consolidated balance
sheet data as of December 31, 1993 are derived from the consolidated financial
statements of the Company which have been audited by Arthur Andersen LLP,
independent public accountants, but which are not included in this Prospectus.
The selected consolidated statement of operations data for the six months ended
June 30, 1995 and 1996 and the selected consolidated balance sheet data as of
June 30, 1996 are derived from the Company's unaudited consolidated financial
statements, which include all adjustments, consisting of normal recurring
adjustments, which the Company considers necessary for a fair presentation of
the financial position and results of operations as of and for the periods then
ended. The results of operations for the six months ended June 30, 1996 are not
necessarily indicative of the results that may be expected for the entire year
ending December 31, 1996 or any future period. The selected consolidated
financial data set forth below is qualified by reference to, and should be read
in conjunction with, the Company's Consolidated Financial Statements and the
Notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" contained elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
PERIOD FROM INCEPTION DECEMBER 31, JUNE 30,
(AUGUST 27, 1993) TO ----------------- -----------------
DECEMBER 31, 1993 1994 1995 1995 1996
--------------------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue................................ -$- $ 379 $ 1,054 $ 100 $ 7,617
Cost of sales.......................... -- 12 340 22 3,512
------- ------- ------- ------- -------
Gross profit........................... -- 367 714 78 4,105
Operating expenses..................... 66 1,318 3,255 617 4,034
Research and development expenses...... 455 1,582 3,157 1,512 1,875
------- ------- ------- ------- -------
Operating loss......................... (521) (2,533) (5,698) (2,051) (1,804)
Other income (expense)................. -- (15) (8) 1 (54)
------- ------- ------- ------- -------
Net loss............................... $ (521) $(2,548) $(5,706) $(2,050) $(1,858)
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Net loss per share..................... $ (0.23) $ (1.03) $ (1.47) $ (0.65) $ (0.37)
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Weighted average number of common
shares and common share equivalents
outstanding(1)........................... 2,229 2,482 3,893 3,136 4,991
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- JUNE 30,
1993 1994 1995 1996
----- ------- ------ --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash................................................... $ 7 $ 7 $1,464 $ 837
Working capital (deficit).............................. (435) (1,032) (741) (2,713)
Total assets........................................... 27 913 6,462 8,191
Total debt............................................. -- 416 567 4,504
Total stockholders' equity (deficit)................... (416) (325) 2,675 863
</TABLE>
- ------------
(1) See Notes 2 and 14 of Notes to Consolidated Financial Statements.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion of the results of operations and financial
condition of the Company should be read in conjunction with the Consolidated
Financial Statements and the notes thereto included elsewhere in this
Prospectus.
OVERVIEW
The Company provides a full range of integrated management services and
clinical information systems to physician group practices and physician
networks. The Company generates revenues from (i) fees for managing and
providing consulting services to physician group practices, (ii) fees for
managing physician networks and (iii) fees for use and support of its clinical
information systems, including recurring license, software installation,
software integration, training and data conversion fees. The Company contracts
with its physician practice and network management clients pursuant to long-term
agreements with its MSOs, the results of which MSOs are consolidated in the
Consolidated Financial Statements.
Through its MSOs, the Company enters into long-term management services
agreements with physician group practices, whereby such physician group
practices outsource their non-medical and administrative functions to an MSO.
The Company generates revenues from its physician practice clients in return for
the provision of various management services, including general administrative
services, billing and collection services and capitated contract management
services. Revenue resulting from general administrative services provided by the
Company varies depending on the level of monthly services performed. At the end
of every six-month period, if the Company has caused the group practice's
administrative overhead to be reduced as a result of its delivery of management
services, then the Company receives an additional fee typically equal to 50% of
the savings created. Monthly revenue resulting from the Company's provision of
billing and collection services is based on a percentage of revenue collected by
the Company during the previous month on behalf of the group practice. This
percentage fee is either fixed or based on the size of the collections made
during a given month. With respect to management services provided to physician
groups relating to capitated contracts, the Company typically receives a fee
equal to a percentage of the savings recognized by the group practice as a
result of the Company's management of a given capitated contract. This fee is
mutually agreed upon by the group practice and the Company on a
contract-by-contract basis. The Company manages four medical practices
consisting of more than 75 physicians in the greater New York metropolitan area.
The Company also provides physician group consulting services to more than 100
physicians. The Company's strategy to achieve profitability involves the
rendering of management services to physician practices and networks to an
extent large enough to support the Company's infrastructure for the purpose of
providing such services. See "Business -- Physician Practice and Network
Services -- Physician Practice Services."
Through its MSOs, the Company enters into management service agreements with
physician networks. The Company generates revenue from its physician network
clients in return for the provision of various management services. For certain
of the Company's current physician network clients, revenue is based on a
percentage of total revenue generated by the network. These revenues are earned
by the Company for the provision of management services regardless of the amount
of medical services provided by the network. With respect to management services
provided for fee-for-service contracts entered into by a network, the Company
typically earns monthly revenue in an amount equal to (i) all administrative
fees included in such fee-for-service contract and (ii) a management processing
fee mutually agreed to by the network and the Company prior to the execution by
the network of any such fee-for-service contract.
With respect to risk-based contracts for which only professional medical
fees have been capitated, the Company typically earns monthly revenues for
providing management services relating to such
20
<PAGE>
contract, not to exceed an agreed upon fixed percentage of monthly capitated
revenue generated by that contract. In addition, the Company typically receives
an incentive fee related to such contracts in an amount equal to 50% of any
amounts deposited at the beginning of a month in a professional services
withhold reserve account and not paid out of that account during that period.
The amount typically deposited in the withhold account is equal to 10% of the
capitated payments made to the network pursuant to such contract. Funds remain
in this account at the end of the month so long as the physician network
delivers professional services during such month at the rate predicted by
standard actuarial analysis. To the extent that funds in excess of amounts
deposited in such account are required to reimburse the network physicians, the
Company will bear its proportional risk of such loss.
With respect to risk-based contracts for which both professional medical
fees and hospital fees have been capitated, the Company typically will earn
revenue equal to a percentage of (i) any amounts paid to the network relating to
hospital-based medical services during a given period pursuant to such contract
minus (ii) the amount of hospital-based medical service costs incurred by the
network during such period. To the extent that amounts in excess of such funds
are required to reimburse the network physicians, the Company will bear its
proportional risk of such loss.
The Company anticipates that, in the future, it may enter into capitated
contracts indirectly through the assignment of managed care contracts entered
into between its affiliated physicians and third-party payors. With respect to
the assignment of capitation revenues to the Company, the Company will be
dependent on the physician group practices and networks entering into such
agreements, the terms and conditions of which are determined by the physicians
in their sole discretion, and providing medical services thereunder. In
addition, the Company is dependent upon the continued alliance of the physicians
with the group practice and network clients of the Company. The Company will
recognize in its financial statements, however, only those assigned revenues
associated with the provision of its management services (typically expected to
be approximately 10% of the capitated payments made), with the balance of such
payments being paid over to the physicians providing the medical services
pursuant to such agreements.
The Company anticipates that in the future it may form for-profit IPAs, in
states that permit such entities, that will enter into capitated contracts with
healthcare payors. In such event, the for-profit IPA will be directly
responsible for subcontracting with physician networks to provide medical
services under such capitated contracts. The for-profit IPA will assume all the
risk related to providing necessary medical services in a cost-effective manner.
The Company manages eight physician networks, and is developing additional
networks, primarily in the fields of cardiology, oncology and orthopedics. See
"Business -- Physician Practice and Network Services -- Physician Network
Services."
As described above, the payor contracts contain risk-sharing provisions
whereby incentive revenue can be earned or losses incurred, by the physician
networks, based on the utilization of physician and hospital services by
assigned enrollees. There can be no assurance that the Company will be able to
negotiate, on behalf of the physicians, satisfactory arrangements on a
risk-sharing or capitated basis or that the physician organizations managed by
the Company will be able to provide medical services at a profit under such
arrangements. To the extent affiliated physicians incur medical costs that limit
their profitability, there can be no assurance that the Company will be able to
derive profits from any such affiliated relationship.
As described above, the Company anticipates entering into managed care or
capitated arrangements, either indirectly, through the assignment of managed
care contracts entered into between its affiliated physicians and third-party
payors, or directly, through the formation of an IPA. On August 10, 1995, the
NAIC issued a report opining that such risk-transferring arrangements may entail
the business of insurance, to which state licensure laws apply, but that
licensure laws would not apply where the unlicensed entity contracts to assume
"downstream risk" from a duly licensed health insurer or HMO for health care
provided to that carrier's enrollees. The NAIC's conclusions are not binding on
the states. The Company does not now have capitated contracts and would enter
into such contracts
21
<PAGE>
only with licensed insurance companies and HMOs, and only if allowed by state
law. To the extent such contracts are prohibited by the law of any particular
state, the Company would not enter into such a contract in that state. Also, to
the extent that the Company accepts capitation and is regulated as an insurer,
regulatory provisions that might mitigate losses by insurers will not apply to
reduce the Company's risk. In addition, the Company has little experience in
managing capitated-risk arrangements and has no experience in forming or
managing an IPA. Revenues under any such arrangements entered into by the
Company would generally be a fixed amount per enrollee. Under such an
arrangement, the Company would contract with affiliated physicians for the
provision of health care services and the Company would be responsible for the
provision of all or a portion of the health care requirements of such enrollees.
To the extent that enrollees require more care than is anticipated by the
Company upon entering into such a contract, the Company's revenues under such
contracts may be insufficient to cover its costs. The Company expects to enter
into reinsurance agreements with third-party insurers in respect of a portion of
its risk under such arrangements. See "Business -- Contractual Relationships
with Affiliated Physicians -- Capitated and Other Fixed-Fee Arrangements."
The Company recognizes revenue from the sale and license of its clinical
information systems upon installation and acceptance, and from software
development and integration as services are provided. The Company has only
recently begun to generate revenues from the commercial sale and installation of
its clinical information systems. The Company has made substantial investment in
the development of its clinical information systems and expects to continue such
investment in the future.
To date, the Company has been dependent on a small number of contracts to
generate the majority of its revenues. In the year ended December 31, 1995,
approximately 68% of the Company's revenues were derived from its contracts with
Madison and an affiliate of PCS Health Systems, Inc., the managed care unit of
Eli Lilly & Company, while in the six months ended June 30, 1996, approximately
72% of the Company's revenues were derived from its contracts with Madison and
AHP&S. The Company expects that the concentration of its revenues will be
reduced as the Company enters into additional contracts to provide management
services and clinical information systems to physician organizations.
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 because the Company was a
development stage company investing in technology development and did not
provide physician practice and network management services prior to December 11,
1995.
ACQUISITIONS
On August 28, 1995, the Company acquired certain assets and assumed certain
liabilities of Peltz Ventimiglia, Inc. ("Peltz"), a physician practice
management consulting company with physician clients located throughout the East
Coast of the United States, for 75,996 shares of Common Stock and contingent
warrants to purchase 113,995 shares of Common Stock at $4.38 per share. The
warrants are only exercisable, as contingent consideration, based on the
achievement of targeted operating performance criteria. The audited financial
statements of Peltz are included elsewhere in this Prospectus.
On September 1, 1995, the Company acquired U.S. Health Connections, Inc.
("Health Connections"), a network management company servicing the Southeastern
United States and headquartered in Atlanta, Georgia, for $150,000 in cash,
30,193 shares of the Common Stock and $150,000 in notes payable. As of June 30,
1996, $75,000 of notes payable remained outstanding. The purchase price also
included an additional 56,611 shares of Common Stock issued into escrow at
closing. These escrowed shares represent contingent consideration that will be
released from escrow based on the achievement of targeted operating performance
criteria. The audited financial statements of Health Connections are included
elsewhere in this Prospectus.
On April 1, 1996, the Company acquired certain assets of Benenson &
Associates, Inc. ("Benenson"), a physician network development company with
approximately 10 network clients located
22
<PAGE>
throughout the East Coast of the United States, for 8,937 shares of Common Stock
and $45,000 in cash, payable in two installments of $22,500 each on the closing
date and the first anniversary thereof.
RESULTS OF OPERATIONS
Six Months Ended June 30, 1996 and 1995
Net revenue for the six months ended June 30, 1996 increased to $7.6 million
from $100,000 in the comparable period ended June 30, 1995, primarily as a
result of the initiation of the Company's physician group practice and network
management services. The Company began providing physician group practice
management and related services to Madison in December 1995 and to AHP&S in
January 1996. The provision of physician group practice management and related
services accounted for approximately $5.8 million of the Company's net revenue
for the six months ended June 30, 1996. The provision of physician network
management services accounted for approximately $273,000 of the Company's net
revenue for the six months ended June 30, 1996. The Company earned fees for the
use and support of its clinical information systems, including the recognition
of license revenues under its contract with Merck Medco Managed Care, Inc., and
software installation and training revenues, of approximately $1.5 million for
the six months ended June 30, 1996, as compared to approximately $100,000 of
such revenues for the comparable period ended June 30, 1995.
Cost of sales for the six months ended June 30, 1996 increased to $3.5
million from $21,822 for the comparable period ended June 30, 1995. The increase
in cost of sales related primarily to the non-medical and system expenses
outsourced to the Company from Madison and AHP&S.
Operating expenses for the six months ended June 30, 1996 increased to $4.0
million from $616,503 for the comparable period ended June 30, 1995. The
increase in operating expenses reflected expenses related to the provision of
management services for the six months ended June 30, 1996, whereas the Company
was a development stage company for the comparable period ended June 30, 1995.
Research and development expenses for the six months ended June 30, 1996
increased to $1.9 million from $1.5 million for the comparable period ended June
30, 1995, due to an increase in the Company's development activities for its
clinical information systems.
Other expense for the six months ended June 30, 1996 was $53,628 and related
to interest on capital lease obligations and interest on $3.0 million and $1.0
million of indebtedness issued as of June 20, 1996, bearing interest at 8% and
9%, respectively. The Company incurred no interest expense for the comparable
period ended June 30, 1995.
The net loss for the six months ended June 30, 1996 was $1.9 million
compared to a loss of $2.0 million for the six months ended June 30, 1995.
Year Ended December 31, 1995 and 1994
Net revenue for the year ended December 31, 1995 increased to $1.1 million
from $378,878 in the year ended December 31, 1994, primarily as a result of the
initiation of the Company's physician group practice services to Madison in
December 1995, which generated approximately $505,000 of the Company's net
revenue for the year ended December 31, 1995. The Company began to provide
physician network management services in September 1995, which accounted for
approximately $163,000 of the Company's net revenue for the year ended December
31, 1995. The Company earned fees for the use and support of its clinical
information systems, including the recognition of license revenues under its
contract with an affiliate of PCS Health Systems, Inc., the managed care unit of
Eli Lilly & Company, and software installation and training revenues, of
approximately $386,000 for the year ended December 31, 1995, as compared to
$378,878 of such revenues for the year ended December 31, 1994.
23
<PAGE>
Operating expenses for the year ended December 31, 1995 increased to $3.3
million from $1.3 million for the year ended December 31, 1994. The increase in
operating expenses was due to the increases in staffing and general corporate
expenses required to fund the Company's transition from a development stage
company involved in the development of clinical information systems to a full
service physician practice and network management company.
Research and development expenses for the year ended December 31, 1995
increased to $3.2 million from $1.6 million, due to an increase in the Company's
development activities for its clinical information systems.
The net loss for the year ended December 31, 1995 was $5.7 million compared
to a loss of $2.5 million for the year ended December 31, 1994.
As of December 31, 1995, the Company had net operating loss carryforwards
("NOLs") available to offset future book and taxable income of approximately
$8.7 million and $6.2 million, respectively, which expire through 2010. The
difference between the book and tax NOLs relates principally to the differences
between book and tax accounting with respect to start-up costs, depreciation of
fixed assets, amortization of intangible assets and recognition of deferred
revenue. The book income tax benefits of $3.5 million and $1.3 million as of
December 31, 1995 and December 31, 1994, respectively, have been fully reserved
due to the uncertainty of their future realization.
Year Ended December 31, 1994 and Period from Inception (August 27, 1993) through
December 31, 1993
Net revenue for the year ended December 31, 1994 was $378,878, including
license revenues from a third party and development revenues from Physicians'
Online, Inc. See "Certain Transactions." The Company realized no revenue during
the period from inception through December 31, 1993. During both of such
periods, the Company was a development stage company primarily engaged in the
development of clinical information systems.
Operating expenses for the year ended December 31, 1994 increased to $1.3
million, from $66,192 in the period from inception to December 31, 1993. The
increase in operating expenses was due, in part, to the inclusion of 12 months
of operating results in 1994 compared with approximately four months in 1993
and, in part, to the increase in staffing expenses and general corporate
expenses required to further develop the Company's clinical information systems.
Research and development expenses for the year ended December 31, 1994
increased to $1.6 million from $454,622 for the period from inception to
December 31, 1993. These expenses related to the Company's development
activities for its clinical information systems.
The net loss for the year ended December 31, 1994 was $2.5 million compared
to a loss of $520,814 for the period from inception through December 31, 1993.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its capital requirements through the
sale of equity and debt securities. The Company issued three 8% promissory notes
in the principal amounts of $1.5 million, $750,000 and $750,000 on February 28,
April 26 and June 28, 1996, respectively. The Company issued six 9% promissory
notes in the aggregate principal amount of $2.0 million on June 19 and August
13, 1996. All of such notes will mature on the earlier of the consummation of
this offering and the one-year anniversary of their issuance, in the case of the
8% notes, or July 31, 1997, in the case of the 9% notes. The proceeds of such
notes are being used to finance working capital. At June 30, 1996, the Company
had cash and cash equivalents of $836,863.
For the year ended December 31, 1995, the Company had a negative cash flow
from its operating activities of $4.3 million, compared with $4.1 million for
the six months ended June 30, 1996. Net cash
24
<PAGE>
used in investing activities was $1.0 million for the year ended December 31,
1995 and principally related to purchases of property, plant and equipment. Net
cash provided by financing activities was $6.8 million for the year ended
December 31, 1995 and related to the private placement of equity securities. See
"Certain Transactions." Net cash provided by financing activities for the six
months ended June 30, 1996 was $3.7 million, principally attributable to the
above-described debt issuances.
The Company's operating plan for the remainder of 1996 and for the first two
quarters of 1997 includes continued development of the Company's integrated
management services and clinical information systems. The principal categories
of expenditures include research and development of the Company's clinical
information systems as well as ongoing business development and marketing. The
Company believes that the net proceeds of this offering, cash on hand, interest
income and revenues from operations will be sufficient to fund planned
operations of the Company through at least the end of 1998. The Company has no
planned material capital expenditures or capital commitments. See "Risk Factors
- -- Limited Operating History; History of Losses; Uncertainty of Future
Profitability."
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 such acquisition.
Under certain specified circumstances, the Company has the option to cause
the Roll Up Transaction to occur. The Company has reserved 548,224 shares of
Common Stock for issuance upon consummation of the Roll Up Transaction, all of
which will be issued if the Company effects the Roll Up Transaction.
Accordingly, the Roll Up Transaction, if effected, will be dilutive to
investors. In addition, certain of the physician groups and networks managed by
the Company have rights to require the Company to purchase all or part of such
physicians' interest in their respective MSO in the event that the Company does
not consummate the Roll Up Transaction within one year after the satisfaction of
specified conditions. There can be no assurance that the Company will have the
financial resources to purchase such interests in accordance with its
obligations at the time any such rights are exercised, or that the Company would
be able to obtain financing on satisfactory terms or conditions, if at all, to
purchase such interests. In addition, pursuant to its agreement with one of its
physician group practice clients, the Company has agreed, under certain
circumstances, to advance funds to such group practice to finance working
capital. To date, the Company has not made any advances to such group practice
under the agreement and it does not expect to do so in the future. See
"Business--Contractual Relationships with Affiliated Physicians."
25
<PAGE>
BUSINESS
OVERVIEW
Advanced Health Corporation provides a full range of integrated management
services and clinical information systems to physician group practices, single
legal entities comprised of multiple physicians, and physician networks,
aggregations of individual physicians and physician groups formed for the
purpose of entering into contracts with third-party payors. The management
services provided by the Company include physician practice and network
development, marketing, payor contracting, financial and administrative
management, clinical information management, human resource management and
practice and network governance. The Company developed its clinical information
systems to provide physicians, at the point of care and on a real-time basis,
with patient-specific clinical and payor information and the ability to generate
patient medical orders and facilitate the implementation of disease management
programs. Through the management of multi-specialty and single-specialty
physician group practices and networks, the Company focuses its management
efforts on high-cost, high-volume disease specialties, such as cardiology,
oncology and orthopedics. The Company currently manages two multi-specialty
physician group practices and two single-specialty physician group practices
comprised of more than 75 physicians in the New York metropolitan area and eight
physician networks with approximately 800 physicians in the greater New York and
Atlanta metropolitan areas, and provides physician group consulting services to
more than 100 physicians. The Company believes its management services and
clinical information systems will enable physicians to enhance the quality and
reduce the cost of health care.
INDUSTRY
Health care expenditures in the United States have risen rapidly over the
past two decades and totalled approximately $1 trillion in 1994. One significant
factor affecting health care expenditures in the United States is the aging of
the population. Older Americans utilize more health care services. In 1992, the
number of Americans 65 years old or over represented 12% of the U.S. population,
but were responsible for approximately 23% of all health care expenditures. In
particular, older Americans spend more on certain medical specialties, such as
cardiology, oncology and orthopedics. In 1992, spending on cardiology, oncology
and orthopedics totalled approximately $200 billion and represented
approximately 17%, 5% and 5%, respectively, of total direct health care costs in
the United States.
Increasing concern over the rising cost of health care in the United States
has led to the development of managed care organizations and programs. 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 fixed-fee arrangements. The number of private insurance
beneficiaries who are enrolled in HMOs increased by approximately 45% from 1991
to 1995, with approximately 40 million beneficiaries enrolled in HMOs in 1991
and approximately 58 million beneficiaries enrolled in HMOs in 1995. In
addition, the number of Medicare beneficiaries enrolled in managed care programs
increased by approximately 52% from December 1994 to April 1996. 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; the average net income for physicians decreased by approximately
4% from 1993 to 1994. Because approximately 67% of all physicians currently
practice individually or in two-person 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
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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"). From 1991 to 1995, the number of
physicians practicing in group practices increased by approximately 14% to a
total of 185,000 physicians, with approximately 5% of such physicians managed by
PPMs. By acquiring physician practices, PPMs are successfully 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 hospital organizations
and other physician organizations for the purpose of enabling physicians to
contract with managed care payors.
The Company believes that significant opportunities exist, in the
consolidating health care industry, to assist physicians in managing the
administrative aspects of group practices and networks. More importantly, since
clinical decisions made by physicians impact 85% of overall health care
expenditures, the Company believes that even greater opportunities exist to
assist physicians in managing the clinical aspects of group practices and
networks. The Company believes its integrated physician practice and network
management services and clinical information systems will enable physicians to
more effectively control both the quality and cost of health care.
STRATEGY
The objective of the Company is to become a leading provider of integrated
management services and clinical information systems to physician organizations.
By enabling physicians to develop and efficiently manage group practices and
networks, the Company seeks to assist physicians in facilitating risk-based
managed care contracts, developing and implementing disease management programs
and monitoring and controlling health care outcomes and costs. The Company
intends to achieve its objective through the implementation of the following
strategy:
.Establishing Long-Term Alliances with Physician Organizations. The Company is
seeking to partner with physician group practices and networks through
long-term management contracts under which the Company provides a full range of
integrated management and information services. The Company believes that
contracting with physician organizations, rather than acquiring them, permits
physicians to remain independent while providing them with the proper
incentives and resources to improve their organizations. The Company typically
develops an alliance with each physician organization through the establishment
of an MSO. See "Business -- Contractual Relationships with Affiliated
Physicians."
. Managing High-Cost, High-Volume Disease Specialties. The Company believes that
the greatest opportunity for achieving clinical efficiencies is in high-cost,
high-volume disease specialties such as cardiology, oncology and orthopedics.
Total health care expenditures for these medical specialties are expected to
increase with the aging of the U.S. population. The Company seeks to integrate
physicians into multi-specialty and single-specialty practices and networks to
provide them with greater access to managed care contracts and to implement
disease management programs. The Company believes that the evolution of
disease specialty treatment organizations will play a major role in managed
care contracting as payors recognize that the quality of care is improved and
the cost of care reduced when reimbursement and health care services target a
specific disease through coordinated networks of health care providers.
. Providing Physicians with Clinical Information at the Point of Care. The
Company has designed and developed point-of-care clinical information systems
that link physician users and their offices on a real-time basis to other
physicians, health care providers and third-party databases. By facilitating
the
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integration of clinical guidelines and efficient access to information, the
Company believes it can assist physicians in improving the quality and
lowering the cost of patient care.
. Focusing on Selected Geographic Markets. The Company seeks to provide its
services to physician group practices and networks located principally in
geographic markets where fee-for-service reimbursement is shifting to
capitated and other risk-based reimbursement and where there are significant
concentrations of physicians specializing in high-cost, high-volume disease
specialties. The Company's initial target markets include the greater New
York, Philadelphia and Atlanta metropolitan areas.
. Developing Strategic Industry Relationships. The Company believes that
developing strategic industry relationships will enhance its ability to
penetrate existing markets, gain access to new markets and develop new
products and services. The Company has entered into a software license and
integration agreement with Merck Medco Managed Care, Inc. for the Company's
prescription writing software. In addition, the Company has entered into a
contract with an affiliate of PCS Health Systems, Inc., the managed care unit
of Eli Lilly & Company, to provide disease management information services and
software for the treatment of certain diseases. The Company is continuing to
seek relationships for the development and distribution to third parties of
its clinical information systems.
The Company intends to use the balance of the net proceeds of this offering
remaining after the repayment of certain indebtedness (see "Use of Proceeds") to
pursue its strategy. The Company's operating plan for the remainder of 1996 and
the first two quarters of 1997 includes continued development of the Company's
integrated management services and clinical information systems. The principal
categories of expenditures include research and development of the Company's
clinical information systems as well as ongoing business development and
marketing. The Company believes that the net proceeds of this offering, cash on
hand, interest income and revenues from operations will be sufficient to fund
planned operations of the Company through at least the end of 1998. The Company
has no planned material capital expenditures or capital commitments. See "Risk
Factors--Limited Operating History; History of Losses; Uncertainty of Future
Profitability."
PHYSICIAN PRACTICE AND NETWORK SERVICES
The Company provides physicians with a full range of integrated services to
form and develop group practices and networks, to manage group practice and
network operations, to develop disease management programs and to manage medical
risk. These integrated services include clinical support and administrative and
marketing services as well as point-of-care information systems and support. The
Company often initially provides physician practice and network services
pursuant to a consulting arrangement. The Company believes that its
point-of-care clinical information systems provide physicians with the
information needed to improve the quality and reduce the cost of health care.
The Company manages two multi-specialty group practices and two
single-specialty group practices located in the New York metropolitan area. The
two multi-specialty group practices are made up of more than 50 physicians who
have, with the Company's assistance, aggregated their practices into group
practices. The medical specialties represented by these two groups include adult
primary care, cardiology, oncology and orthopedics. The two single-specialty
group practices are collectively comprised of more than 25 clinical
cardiologists, interventional cardiologists and cardiothoracic surgeons,
including leading physicians in the areas of minimally invasive coronary artery
bypass grafts and angioplasties employing coronary stents. The Company is
currently negotiating the terms of management agreements with additional
physician group practices in the greater New York, Philadelphia and Atlanta
metropolitan areas.
The Company currently provides physician group consulting services to more
than 100 physicians. Such services have traditionally included group formation
services. More recently, the Company has begun to provide operations development
and strategic planning services to established groups. The Company believes that
the provision of consulting services, particularly operations development and
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strategic planning services, may lead to the establishment of long-term practice
management agreements.
The Company manages eight physician networks covering approximately 738,000
lives, with a total of seven payor contracts among such networks. The Company
manages three networks consisting of approximately 225 cardiologists in New
Jersey, Pennsylvania and Delaware, and is developing additional cardiology
networks in New York and Connecticut. The Company anticipates that these
cardiovascular networks will provide comprehensive cardiac care, including
ancillary services. The Company manages a community and medical center-based
oncology network in Atlanta serving approximately 150,000 lives that includes
both medical and radiation oncology. The Company is currently developing an
oncology network in New Jersey. The Company manages an orthopedic network in
Atlanta, covering approximately 205,000 lives and is developing orthopedic
networks in New York, New Jersey, Pennsylvania and Connecticut. In addition, the
Company manages three additional networks in the greater Atlanta area covering
approximately 383,000 lives, including a multi-specialty network, an obstetrics
and gynecology network and a plastic surgery network.
In addition to providing administrative management services to physician
organizations, the Company seeks to differentiate itself by assisting physicians
in managing the clinical aspects of their practices. The Company believes that
its integrated management services and clinical information systems will enhance
the ability of physician group practices and networks to implement disease
management programs and to manage practices under risk-based contracts. The
Company is working to assist physicians in developing disease-specific clinical
practice guidelines and in practicing in accordance with applicable standards of
care. The Company has initially focused the implementation of its
single-specialty disease management strategy on the creation of an integrated
comprehensive cardiovascular care program, which includes physician group
practices, networks and medical support services. It is anticipated that this
disease management program will be delivered through linked practices and
networks of cardiovascular specialists under management and/or development by
the Company who will provide integrated, high-quality care for patients based on
clinical care guidelines developed by the physician network. The Company
anticipates that the physicians within these practices and networks will be
linked together by the Company's clinical information systems.
The Company has expanded its physician practice and network management
expertise through acquisitions. In August 1995, the Company acquired the assets
of Peltz, which provides consulting services to physicians seeking to form group
practices on the East Coast, including assistance in the legal, administrative,
technical, and logistical aspects of group formation and the subsequent
recruiting of new physicians. In September 1995, the Company acquired Health
Connections, an Atlanta-based physician network management company with over two
years of network management experience in disease-specific areas, including
oncology and orthopedics. In April 1996, the Company acquired certain assets of
Benenson, a physician network development company specializing in the formation
of state-wide and regional cardiology and orthopedic networks capable of
marketing and servicing risk-based contracts.
The Company markets its physician practice management and network management
services through (i) direct sales methods, (ii) consultative sales that include
providing advice on the development, consolidation and financing of group
practices and networks and (iii) cross-selling to customers of its clinical
information systems.
PHYSICIAN PRACTICE SERVICES
The Company offers a comprehensive set of physician practice management
services, including practice formation, operations development and strategic
planning, marketing, payor contracting and management, financial and
administrative management, clinical information management, human resource
management and practice governance.
Practice Formation, Operations Development and Strategic Planning. The
Company assists physician group practices in developing and expanding their
practices through a combination of
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physician recruitment, physician specialty mix analysis, acquisition evaluation
and integration, ancillary services evaluation, financial consulting and
operations development and strategic planning.
Marketing. The Company assists physician group practices in marketing their
medical services to HMOs, insurance companies, self-insured companies and the
patient community. Working closely with the physician group practice, the
Company develops public relations and community outreach programs designed to
educate managed care entities and the patient community about the medical
services provided by the physician group practice.
Payor Contracting and Management. The Company assists physician group
practices in negotiating and structuring managed care contracts with payors for
the provision of physician services. The Company works with physician group
practices to meet credentialling standards and specialty mix requirements of
payors. The Company administers payments to physician providers under payor
contracts.
Financial and Administrative Management. The Company offers a variety of
financial and administrative management services to physician group practices.
The Company's financial management services include accounting, payroll,
finance, payables management, financial reporting, financial controls, insurance
negotiation and billing and collection. The Company's administrative management
services include lease negotiations, facilities contracting and inventory
management.
Clinical Information Management. The Company offers physician group
practices its proprietary clinical information management systems. The
Med-E-Practice suite of applications is delivered as an integrated system of
computer hardware, software and clinical information intended to provide a
physician, at the point of care and on a real-time basis, with access to
databases containing clinical, diagnostic, disease management, patient medical
record and other medical information. The Company's clinical information system
provides a seamless interface with third-party administrative software. See
"Business -- Clinical Information Systems."
Human Resource Management. The Company, through its MSOs, employs and
manages all non-medical personnel that perform administrative, clerical and
secretarial support, billing and collection and records management for a
physician practice. The Company evaluates such employees, establishes personnel
policies and procedures and manages employee benefit programs. The Company also
provides payroll administration on behalf of the physician practice for the
medical personnel.
Practice Governance. The management services agreement that the Company
enters into with a physician practice provides for the establishment of a
management advisory board. Such board is responsible for developing management
and administrative policies for the overall operation of the physician group
practice and guidelines for the delivery of medical services. The management
advisory board is controlled by licensed physicians within the physician group
practice.
PHYSICIAN NETWORK SERVICES
The Company's physician network management services include network
development and strategic planning, disease management program development,
payor marketing and contracting, financial and administrative management,
clinical information management and network governance.
Network Development and Strategic Planning. The Company provides network
development services including feasibility studies, organizational services,
financial services, payor identification services, physician recruiting,
credentialling services and operations development and strategic planning
services.
Disease Management Program Development. The Company provides physician
networks with disease management program development services, including
clinical guidelines development, implementation and management services, data
collection, outcomes measurement and clinical trials development.
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Payor Marketing and Contracting. The Company assists physician networks in
marketing their medical services to health care payors, including HMOs,
insurance companies, self-insured companies and other managed care entities. The
Company works with each physician network to educate payors about the medical
services provided by such network. The Company structures and negotiates risk-
based contracts on behalf of its affiliated physician networks. The Company
works with physician networks to meet credentialling standards and specialty mix
requirements of payors.
Financial and Administrative Management. The Company offers a variety of
financial and administrative services to physician networks. The financial
services provided by the Company include risk management, capitation allocation
and distribution, claims processing and accounting services. The administrative
services provided by the Company include records maintenance, utilization
management and communications.
Clinical Information Management. The Company offers clinical information
management services to physician networks. The Med-E-Network suite of
applications allows network physicians to process electronic referrals and
electronic claims. Med-E-Network also provides access to electronic payor and
patient eligibility information, third-party databases and patient-specific
diagnostic and clinical information.
Network Governance. The Company assists network medical directors and
governance committees with a variety of governance issues.
CLINICAL INFORMATION SYSTEMS
The Company has developed clinical information systems that link physician
users at the point of care and on a real-time basis with patient data and
clinical guidelines maintained by the Company and third parties. The Company's
clinical information systems consist of proprietary software, third-party
hardware, proprietary and third-party databases and related support services.
The Company's clinical information systems are designed to allow physicians (i)
to access patient-specific clinical and payor information, (ii) to generate
patient instructions, prescriptions and orders for tests, specialty referrals
and specialty procedures and (iii) to access databases containing managed care
and disease management guidelines, diagnostic/treatment preferences and
guidelines affecting medical orders.
The Company's clinical information systems are designed to complement
existing health care information systems and to function with third-party
applications. The clinical information system connects to physician users either
through the use of a hand-held computer equipped with a wireless modem or a
desktop computer using a standard wireline modem. It is anticipated that access
to the Company's clinical information systems will be delivered to physician
users and other health care professionals via both private and public networks,
including the Internet. The Company's product suites operate within a
client/server-based open architecture. The Company's products support HL-7
interfaces, incorporate TCP/IP protocols for real-time data transmission and run
on the Microsoft Windows operating system and standard hardware platforms. The
Company employs proprietary processes and standard commercial security measures
to ensure the privacy of the data communication paths within its products.
The Company has made only limited commercial sales of its clinical
information systems to date. Since October 1994, the Company has provided its
clinical information systems, including user support, data center operations and
network operations, to two pilot sites in Michigan, consisting of approximately
10 physicians and, since December 1995, to a multi-specialty group, consisting
of approximately 35 physicians, that the Company manages in New York. The
Company has developed training and installation templates for its products and
has experience using these templates in its two pilot sites and in a New
York-based physician group practice. The Company has a contract with a
third-party to provide training to its clients. In addition to providing its
clinical information systems to its affiliated physicians, the Company intends
to continue licensing its clinical information systems to third-party health
care organizations. The Company has one employee dedicated to developing
distribution
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channels for its clinical information systems. In addition, the Company markets
its clinical information systems to physician group practices and networks
together with its management services.
On September 27, 1995, the Company entered into a software license and
integration agreement with Merck Medco Managed Care, Inc. for the Company's
prescription writing software, which provides formulary management, drug
utilization and review ("DUR") edits and linkage to drug therapy protocols. On
August 1, 1995, the Company signed an agreement to provide disease management
information systems and software to an affiliate of PCS Health Systems, Inc.,
the managed care unit of Eli Lilly & Company. The Eli Lilly & Company affiliate
has agreed to sponsor two pilot programs involving the software applications
developed by the Company.
The Company continues to pursue strategic relationships with health care
providers as well as hospital information systems companies, physician practice
management systems companies and on-line services companies for the purpose of
further developing and marketing its information systems.
SYSTEMS
The Company offers a broad range of clinical information systems for
physician users through two suites of applications, Med-E-Practice and
Med-E-Network. Med-E-Practice is designed to be used directly by physician group
practices in support of clinical decision making, clinical ordering and
administrative management. Med-E-Network is designed to support administrative
and clinical decision making for physician networks engaged in capitated and
other fixed-fee arrangements under managed care contracts. These systems have
only been developed by the Company recently, and the initial limited commercial
installations of the Med-E-Practice suite of applications occurred in June 1996.
The Med-E-Network suite of applications is expected to be initially installed
during the fourth quarter of 1996. See "Risk Factors -- Uncertainty of
Successful Commercialization of Clinical Information Systems."
The following table summarizes the two suites of applications offered and
being developed by the Company:
<TABLE>
<CAPTION>
PRODUCT NAME PRODUCT DESCRIPTION
- ------------ -------------------
<S> <C>
MED-E-PRACTICE
Smart Scripts.................. Pharmaceutical prescription writing application providing
formulary management, DUR edits and diagnostic coding
linkage to drug therapy protocols.
Med-E-Visit.................... Patient encounter application generating a Superbill with
fully-qualified diagnostic coding linked to appropriate
billing codes required to support outcomes analysis.
Referral....................... Supports multiple referral networks by recording referral
information and providing both network-specific referral
rules and appropriate network specialists.
Conditions Editor.............. Tracks and maintains an active conditions list by patient.
Allergies Editor............... Maintains active and inactive allergy conditions by
patient, supporting charting and DUR editing.
Practice Management
Integrator................... Allows Med-E-Practice applications to integrate with
third-party physician practice management systems using
industry-standard HL-7 records.
Clinical Note.................. Allows physicians to complete clinical notes at the point
of care. Currently in development.
MED-E-NETWORK
Med-E-Net Central.............. Provides centralized administrative functions necessary to
manage risk-taking specialty networks.
Med-E-Net Office............... Integrates physicians in geographically dispersed
networks.
Med-E-Net Integrator........... Provides integration and connectivity between the
applications in the Med-E-Network suite and third-party
databases.
Med-E-Net Cardiology........... Provides cardiology-specific extensions to Med-E-Network
for managing risk-taking cardiology networks.
</TABLE>
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Med-E-Practice provides administrative and clinical support for physician
group practices. The Med-E-Practice suite is designed for use by physicians at
the point of care and on a real-time basis and is intended to allow better care
decisions by providing better information. All of the applications in the
Med-E-Practice suite are designed to be run on a pen-based, portable, wireless
computer for use in a busy ambulatory practice. The Med-E-Practice suite
consists of the following applications:
Smart Scripts. Smart Scripts is a prescription writing application that
provides the clinician: (i) patient-specific prescription history, (ii)
real-time formulary management, specific to each patient's insurance coverage,
(iii) clinical intervention screening, using third-party DUR modules, (iv)
default dosing, (v) generic substitution, (vi) condition/drug relationship
maintenance and (vii) support for individual customer lists. The Company also
markets Smart Scripts as a stand-alone product. The Company is also developing
an Internet/intranet version of Smart Scripts, "Internet Script Writer."
Internet Script Writer is designed to allow any physician with access to the
Internet to gain the advantages of on-line prescription management. The Internet
Script Writer will provide (i) patient-specific prescription history, (ii)
real-time formulary management, specific to each patient's insurance coverage,
(iii) clinical intervention screening, using third-party DUR modules and (iv)
legible, printed prescriptions. The Company expects that the Internet Script
Writer will be commercially available in the fourth quarter of 1996.
Med-E-Visit. Med-E-Visit is a patient encounter management application that
records procedures and conditions. Med-E-Visit allows for the selection of
laboratory, x-ray, immunization, visit and procedure codes, using standard
diagnostic and billing coding. Med-E-Visit links all procedures with conditions
for outcomes analysis and facilitates correct insurance billing. Med-E-Visit
records follow-up visit requirements and, in conjunction with the Practice
Management Integrator, submits a Superbill to a third-party practice management
system.
Referral. The Referral application simplifies patient referrals through
real-time access to each individual patient's appropriate physician network. The
Referral application records referral information, provides network-specific
referral rules and helps to select the appropriate referral physician by
specialty and location and allows a complete referral form to be created and
printed.
Conditions Editor. The Conditions Editor automatically tracks a patient's
medical condition information generated by the other applications in the
Med-E-Practice suite. It uses disease-specific algorithms to monitor and permit
a physician to record a patient encounter. The Conditions Editor also allows the
clinical user to directly edit and manage the current conditions list.
Allergies Editor. The Allergies Editor allows the clinical user to easily
maintain allergy information for use in the Med-E-Practice suite. Allergy
information is provided by the Conditions Editor to the Smart Scripts
application and other Med-E-Practice applications.
Practice Management Integrator. The Practice Management Integrator
integrates the Med-E-Practice suite with third-party practice management systems
through a Company-designed interface using the industry standard HL-7 interface.
Clinical Note. The Clinical Note is designed to be an "at a glance" utility
bringing the most appropriate information to the physician at the point of care.
The Clinical Note application is intended to enable the physician to review the
most current information regarding the patient's medical history, including
current medications, active and inactive conditions, office visits, past
referrals and pertinent test results. The Clinical Note also permits the
physician to update patient information during the patient encounter with new
clinical findings, new prescriptions, new referrals and new procedure orders.
The automated Clinical Note application structures the input of information and
orders in a focused and customizable format to allow rapid physician-driven data
entry and retrieval. The Clinical Note is expected to be commercially available
in 1997.
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Med-E-Network is a suite of network management applications supporting
physician networks engaged in risk-based contracts with payors. Med-E-Network
automates network configuration, maintenance of network rules, referral
management, utilization review management, claims and encounter submissions and
financial and clinical reporting. Med-E-Network utilizes a relational database
engine which integrates various sources of information and provides a flexible
repository for developing administrative, financial and clinical reports. The
Med-E-Network suite consists of the following applications:
Med-E-Net Central. Med-E-Net Central is designed to centralize and support
the administrative functions of a risk-taking physician network by (i) providing
pre-certification, (ii) processing claims and encounters, (iii) generating,
managing and matching referrals, (iv) providing financial and clinical
utilization review reporting, (v) providing automated utilization review
approvals and denials and (vi) providing eligibility assistance.
Med-E-Net Office. Med-E-Net Office links physician offices to Med-E-Net
Central. Med-E-Net Office is a forms-based, scaleable, client/server application
supporting referral creation and receipt, claims and encounter submission and
the creation and submission of treatment plans.
Med-E-Net Integrator. The Med-E-Net Integrator provides connectivity between
the applications in the Med-E-Network suite and third-party databases.
Med-E-Net Cardiology. Med-E-Net Cardiology is designed to deliver
procedure-specific guidelines for the management of cardiac disease coupled with
an automated procedure approval and referral engine. Med-E-Net Cardiology is
expected to be commercially available in the third quarter of 1996.
CLINICAL INFORMATION SYSTEMS DEVELOPMENT
The Company believes that the timely development of new clinical information
applications and the enhancement of existing clinical information systems are
important to its competitive position. The Company's product development
strategy is directed toward creating new applications that (i) increase the
functionality of current products by providing enhanced interfaces to
third-party systems and data repositories, (ii) expand coverage along the
continuum of clinical care, (iii) increase coverage to additional disease and
procedure groups and (iv) provide customers with a range of decision support
systems at various price points. The Company has approximately 20 professionals
dedicated to systems development. See "Risk Factors -- Technological Change."
CONTRACTUAL RELATIONSHIPS WITH AFFILIATED PHYSICIANS
The Company typically establishes an MSO for each physician organization it
manages. The MSO is a joint venture between the physician organization and the
Company, with the Company owning at least 51% of the equity in the MSO. The MSO
enters into a long-term management services agreement with the physician
organization pursuant to which the MSO provides group practice management or
network management services that provide both administrative and clinical
support to members of the physician organization. The MSO concurrently enters
into a services agreement with the Company pursuant to which it gains access to
management services and clinical information systems from the Company. The MSO's
assets consist primarily of its management service contracts with the physician
group or network served and its liabilities consist primarily of its obligations
under its agreement with the Company and its obligations to its employees. For
certain MSOs, a stockholders agreement is entered into among the MSO, the
physician organization and the Company. The stockholders agreement, among other
things, (i) restricts the transfer of MSO equity, (ii) provides the terms upon
which, after the occurrence of the Trigger Event (as hereinafter defined), the
MSO can, at the Company's option, be merged with and into a wholly-owned
subsidiary of the Company in the Roll Up Transaction and (iii) grants to the
physician organization the right to put its equity in the MSO to the Company at
a price equal to 110% of the then-current fair market value of the shares of
Common Stock that would have otherwise been issued in the Roll Up Transaction if
the Company does not exercise its option to
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cause the Roll Up Transaction to occur within one year after the occurrence of
the Trigger Event. In the case of each such MSO, a Trigger Event will occur at
such time as (i) the Company is providing physician practice management services
to at least 300 physicians, (ii) the Company is providing physician network
management services to at least 2,000 physicians, (iii) the Company has at least
$75,000,000 in stockholders' equity and (iv) the Company's Common Stock is
publicly traded. As of August 31, 1996, the Company was providing (i) physician
practice management services to 77 physicians and (ii) physician network
management services to 798 physicians and as of June 30, 1996, the Company had
$863,349 in stockholders' equity. The Company has reserved 548,224 shares of
Common Stock for issuance upon the merger of such MSOs into the Company. See
"Risk Factors -- Management Service Organizations Not Wholly-Owned; Physician
Put Rights; Dilution."
Physician Practices. The management services agreements between the MSO and
a physician practice group generally have an initial term of five to 20 years
and are automatically renewable for additional terms. Such agreements typically
are subject to early termination for cause. The management services agreements
generally obligate an MSO to provide certain non-medical practice management
services to the physician practice group for a monthly fee. The fee paid to the
MSO is generally a combination of fixed fees for certain services and percentage
fees for certain services. For risk-based contracts that the physician practice
group enters into, the management services agreement will generally provide for
additional management fees based upon savings recognized by the physician
practice group because of any cost efficiencies resulting from the MSO's
performance. The fees are set to be competitive within the geographic area in
which the physician practice group is located. A provision restricting the
physician practice group from competing against the MSO or employing the MSO's
employees is generally included in the agreement.
Physician Networks. The management services agreements between the MSO and a
physician network generally have an initial term of at least five years and are
automatically renewable for additional terms. Such agreements typically are
subject to early termination for cause. The management services agreements
generally obligate an MSO to provide certain non-medical practice management
services to the physician network for a fee. The fee paid to the MSO for
risk-based or capitated contracts is generally a service fee equal to the actual
cost, not to exceed a specified percentage of capitated revenues, for providing
the non-medical management services plus an incentive based on savings generated
by the network. The fee paid to the MSO for fee-for-service contracts is
generally equal to the administrative fees included in the managed care contract
plus a management processing fee agreed upon by the MSO and the physician
network. The fees are set to be competitive within the geographic area in which
the physician network is located. In the agreement, the physician network agrees
that the MSO will be the exclusive provider of non-medical management services
to the physician network.
Capitated and Other Fixed-Fee Arrangements. In the future, the Company
anticipates entering into managed care or capitated arrangements, either
indirectly through the assignment of managed care contracts entered into between
its affiliated physicians and third-party payors or directly through the
formation of an IPA. See "Government Regulation -- Insurance Regulations." The
Company does not now have capitated contracts (although the Company does provide
management services to physician groups and networks that have entered into such
capitated contracts). The Company has little experience in managing
capitated-risk arrangements and has no experience in forming or managing an IPA.
With respect to the assignment of capitated revenues to the Company, the Company
will be dependent on the physician group practices and networks entering into
such agreements, the terms and conditions of which are determined by the
physicians in their sole discretion, and providing medical services thereunder.
In addition, the Company is dependent upon the continued alliance of the
physicians with the group practice and network clients of the Company. The
Company will recognize in its financial statements, however, only those assigned
revenues associated with the provision of its management services (typically
expected to be approximately 10% of the capitated payments made), with the
balance of such payments being paid over to the physicians providing the medical
services
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pursuant to such agreements. Revenues under any managed care or capitated
arrangements entered into directly by the Company will generally be a fixed
amount per enrollee. Under such an arrangement, the Company would contract with
affiliated physicians for the provision of health care services and the Company
would be responsible for the provision of all or a portion of the health care
requirements of such enrollees. To the extent that enrollees require more care
than is anticipated by the Company upon entering into such a contract, the
Company's revenues under such contracts may be insufficient to cover its costs,
in which event the Company would suffer a loss. The Company expects to enter
into reinsurance agreements with third-party insurers in respect of a portion of
such risk.
PROPRIETARY RIGHTS
The Company is relying upon the effectiveness of protection provided by a
combination of patent, trade secret and copyright laws, nondisclosure and other
contractual provisions and technological measures to protect its proprietary
position in its methodologies, databases and software. The Company has two U.S.
patent applications and a foreign patent application having subject matter
common with both U.S. applications, but no issued patents. The patent
applications are directed to the Company's Smart Scripts prescription management
system and related technologies. No assurance can be provided that a patent or
patents will be issued or will provide the Company with adequate protection. Nor
can any assurance be given that patent, trade secret, copyright or other
intellectual property rights can be successfully asserted in any court action.
The Company also has copyrights in its software, user documentation and
databases. The copyright protection accorded to databases, however, is fairly
limited. While the arrangement and selection of data are protectable, the actual
data are not, and others are free to create databases that perform the same
function. The Company distributes its clinical information systems products
under agreements that grant customers non-exclusive licenses and generally
contain terms and conditions restricting the disclosure and use of the Company's
systems. In addition, the Company attempts to protect the secrecy of its
proprietary databases and other trade secrets and proprietary information
through confidentiality agreements with employees, consultants and third
parties.
The Company believes that, aside from the various legal protections of its
proprietary information and technologies, factors such as the technological and
creative skills of its personnel and product maintenance and support are
integral to establishing and maintaining its position within the health care
industry. Although the Company believes that its products do not infringe upon
the proprietary rights of third parties, there can be no assurance that third
parties will not assert infringement claims against the Company in the future.
See "Risk Factors -- Dependence on Proprietary Assets."
COMPETITION
The provision of physician practice and network management services is a
highly competitive business in which the Company competes for contracts with
several national and many regional and local companies. The Company also
competes with traditional managers of health care services that directly recruit
and manage physicians. In addition, certain of the Company's competitors are
dedicated to or specialize in the management of single-specialty practices
focused on diseases such as cardiology, oncology and orthopedics, specialties on
which the Company intends to focus. Certain of the Company's competitors have
access to substantially greater financial resources than the Company. The
Company believes that competition in this industry is generally based on cost
and quality of services.
The market for health care information systems and services is highly
competitive and rapidly changing. The Company believes that the principal
competitive factors for clinical information systems are the proprietary nature
of methodologies, databases and technical resources, the usefulness of the data
and reports generated by the software, customer service and support,
compatibility with the customer's existing information systems, potential for
product enhancement, vendor reputation, price and the effectiveness of marketing
and sales efforts.
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The Company's competitors include other providers of clinical information
systems and practice management systems. Many of the Company's competitors and
potential competitors have greater financial, product development, technical and
marketing resources than the Company, and currently have, or may develop or
acquire, substantial installed customer bases in the health care industry. In
addition, as the market for clinical information systems and practice management
systems develops, additional competitors may enter the market and competition
may intensify. While the Company believes that it will successfully
differentiate its clinical information systems from those of its competitors,
there can be no assurance that future competition will not have a material
adverse effect on the Company.
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 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 its affiliated physician organizations 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
Company's or the affiliated physicians' existing operations or their expansion.
Reimbursement. During the first six months of 1996, approximately 35% of the
revenues of the Company's affiliated physician group practices was derived from
payments made by government-sponsored health care programs (principally,
Medicare, Medicaid and state reimbursed programs). As a result, any change in
reimbursement regulations, policies, practices, interpretations or statutes
could adversely affect the operations of the Company. The federal Medicare
program adopted a system of reimbursement of physician services, RBRVS, which
took effect in 1992 and is expected to be fully implemented by December 31,
1996. The Company expects that the RBRVS fee schedule and other future changes
in Medicare reimbursement 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 certain of the physician organizations with which the Company
contracts. Although the Company does not believe such reductions will have a
material adverse effect on the Company's operating results, the RBRVS fee
schedule may be adopted by other payors, which could have a material adverse
effect on the Company. See "Risk Factors -- Cost Containment and Reimbursement
Trends."
Billing. There are also state and federal civil and criminal statutes
imposing substantial penalties, including civil and criminal fines and
imprisonment, on health care providers that 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
in the name of the U.S. government for violations of its provisions. The Company
believes it is in material compliance with such laws, but there is 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 and in such event the Company may have to modify its
relationship with physician organizations. Noncompliance with such regulations
may adversely affect the business, financial condition and results of operations
of the Company and subject it and affiliated physician groups to penalties and
additional costs.
Corporate Practice of Medicine. 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
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practice of medicine vary from state to state and are enforced by the courts and
by regulatory authorities. New York State, for example, prohibits percentage
payments from physicians or physician groups to management entities for services
other than billing and collecting and prohibits management entities from
engaging in the delivery of medical services. All of the management service
agreements ("MSAs") between the Company's majority-owned MSOs and the physician
groups and networks they serve specifically address this issue. First, each
explicitly provides that the physician organization retains complete control
over medical decisionmaking, and that the MSO may neither interfere with the
professional judgment of medical personnel nor control, direct or supervise the
provision of medical services. Furthermore, the MSAs make it clear that the MSO
may not perform any services or activities which constitute the practice of
medicine. For instance, the MSO has no responsibility in decisions regarding
level of patient care, credentialing or quality monitoring. Administrative
policies, budgets and fee schedules affecting the delivery of medical services
are developed by a Joint Management Advisory Board, which is at all times
controlled by medical group physicians. In contrast, each MSO controlled by the
Company is a management organization whose role is to assist with and coordinate
administrative functions and to advise the physician group as to the
relationship between its performance of medical activities and the
administrative and business functioning of its practice. The Company believes it
is in material compliance with regulations regarding the corporate practice of
medicine, but regulatory authority may differ and in such event expansion of the
operations of the Company to certain jurisdictions may require it to comply with
such jurisdictions' regulations which could lead to structural and
organizational modifications of the Company's form of relationships with
physician organizations. Such changes, if any, could have a material adverse
effect on the Company.
Anti-Kickback 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 in return for the
referral of Medicare or state health program patients or patient care
opportunities, or in return for the recommendation, arrangement, purchase, lease
or order of items or services that are covered by Medicare or state health
programs. The Anti-kickback Statute is broad in scope and has been broadly
interpreted by courts in many jurisdictions. Read literally, the statute places
at risk many legitimate business arrangements, potentially subjecting such
arrangements to lengthy, expensive investigations and prosecutions initiated by
federal and state governmental officials. Many states, including those in which
the Company does business, have adopted similar prohibitions against payments
intended to induce referrals of Medicaid and other third-party payor patients.
The Company believes that, although it is receiving remuneration under the
management services agreements for management services, it is not in a position
to make or influence the referral of patients or services reimbursed under
government programs to the physician groups and, therefore, believes it has not
violated the Anti-kickback Statute. The Company also 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 services agreements 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 fines up to $25,000 per violation and
imprisonment for up to five years. In addition, the Department of Health and
Human Services 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 provide exceptions,
or "safe harbors," for transactions that will be deemed not to violate the
Anti-kickback Statute. Among the safe harbors included in the regulations were
provisions relating to the sale of practitioner practices, management and
personal services agreements and employee relationships. Additional safe harbors
were published in September 1993 offering new protections under the
Anti-kickback Statute to eight activities, including referrals within group
practices consisting of active investors. Proposed amendments to clarify these
safe harbors were published in July 1994 which, if adopted, would cause
substantive retroactive changes to the 1991
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regulations. 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.
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 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 own group practice.
The designated health services include radiology and other diagnostic services,
radiation therapy services, physical and occupational therapy services, 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. However, the Stark
legislation is broad and ambiguous. Interpretative regulations clarifying the
provisions of Stark II have not been issued. While the Company believes it is in
compliance with the Stark legislation, future regulations could require the
Company to modify the form of its relationships with physician organizations.
Moreover, the violation of Stark I or II by the Company's affiliated physician
organizations could result in significant fines and loss or reimbursement which
could materially adversely affect the Company. Many states in which the Company
conducts business have enacted similar laws applicable to all services.
PIP Regulations. The Health Care Finance Administration ("HCFA") has issued
final regulations (the "PIP regulations") covering the use of physician
incentive plans ("PIPs") by HMOs and other managed care contractors and
subcontractors ("Organizations"), potentially including the Company. Any
Organization that contracts with a physician group that places the individual
physician members of the group at substantial financial risk for the provision
of services (e.g., if a primary care group takes risk but subcontracts with a
specialty group to provide certain services) must satisfy certain disclosure,
survey and stop-loss requirements. Under the PIP regulations, payments of any
kind, direct or indirect, to induce providers to reduce or limit covered or
medically necessary services ("Prohibited Payments") are prohibited. Further,
where there are no Prohibited Payments but there is risk sharing among
participating providers related to utilization of services by their patients,
the regulations contain three groups of requirements: (i) requirements for
physician incentive plans that place physicians at "substantial financial risk;"
(ii) disclosure requirements for all Organizations with PIPs; and (iii)
requirements related to subcontracting arrangements. In the case of substantial
financial risk (defined in the regulations according to several methods, but
essentially risk in excess of 25% of the maximum payments anticipated under a
plan with less than 25,000 covered lives), Organizations must: (1) conduct
enrollee surveys; and (2) ensure that all providers have specified stop-loss
protection. The violation of the requirements of the PIP regulations may result
in a variety of sanctions, including suspension of enrollment of new Medicaid or
Medicare members, or a civil monetary penalty of $25,000 for each determination
of noncompliance. In addition, because of the increasing public concerns
regarding PIPs, the PIP regulations may become the model for the industry as a
whole. The new regulations could have an affect on the ability of the Company to
effectively reduce the costs of providing services, by limiting the amount of
risk that may be imposed upon physicians.
Anti-Trust. Because the affiliated physician organizations remain separate
legal entities, 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 division of market. The Company intends to comply with such
state and federal laws as may affect its development of integrated health care
delivery networks, but there can be no assurance that a review of the Company's
business by courts or regulatory
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authorities will not result in a determination that could adversely affect the
operation of the Company and its affiliated physician groups.
Insurance Regulations. Laws in all states regulate the business of insurance
and the operation of HMOs. Many states also regulate the establishment and
operation of networks of health care providers. There can be no assurance that
regulatory authorities of the states in which the Company operates would not
apply these laws to require licensure of the Company's operations as an insurer,
as an HMO or as a provider network. 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 HMO for health care provided to that carrier's
enrollees. The NAIC's conclusions are not binding on the states. The Company
does not now have capitated contracts and will enter into such contracts only
with licensed insurance companies and HMOs, 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 or may 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, on 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. To protect
patient confidentiality, data entries to the Company's databases 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. Additional legislation governing the dissemination
of medical record information has been proposed at both the state and federal
level. This legislation 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.
FDA Regulation. Certain products, including software applications, intended
for use in the diagnosis of disease or other conditions, or in the cure,
treatment, mitigation or prevention of disease, are subject to regulation by the
FDA under the Federal Food, Drug and Cosmetic Act of 1938, as amended (the
"FDCA"). The FDCA imposes substantial regulatory controls over the
manufacturing, testing, labeling, sale, distribution, marketing and promotion of
medical devices and other related activities. These regulatory controls can
include, for example, compliance with the following: manufacturer establishment
registration and device listing; current good manufacturing practices; FDA
clearance of a premarket notification submission or FDA approval of a premarket
approval application; medical device adverse event reporting; and general
prohibitions on misbranding and adulteration. Violations of the FDCA can result
in severe criminal and civil penalties, and other sanctions, including, but not
limited to, product seizure, recall, repair or refund orders, withdrawal or
denial of premarket notifications or premarket approval applications, denial or
suspension of government contracts, and injunctions against unlawful product
manufacture, labeling, promotion, and distribution or other activities.
In its 1989 Draft Policy Statement, the FDA stated that it intended to
exempt certain clinical decision support software products from a number of
regulatory controls. Under the 1989 Draft Policy
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Statement, the FDA stated that it intended to exempt decision support software
products that involve "competent human intervention before any impact on human
health occurs (e.g., where clinical judgment and experience can be used to check
and interpret a system output)" from the following controls: manufacturer
establishment registration and device listing, premarket notification, and
compliance with the medical device reporting and current good manufacturing
practice regulations. In the 1989 Draft Policy Statement, the FDA stated that
until it formally exempted decision support software products from these
requirements, manufacturers of eligible decision support software products would
to be required to comply with those controls.
Since issuing the 1989 Draft Policy Statement, the FDA has not issued a
final policy on this issue and has not formally exempted any products as
discussed in the 1989 Draft Policy Statement. The FDA has referred to the 1989
Draft Policy Statement in official presentations regarding software regulation
and in decisions and opinions regarding the regulatory status of various
products. Over the last few years, however, the FDA has stated that it intends
to issue a new policy concerning computer products and has been increasing its
efforts to develop this policy in recent months. Under this new policy,
exemptions from regulatory controls, if any, would be based upon a product
specific "risk factor" analysis. For purposes of this analysis, the FDA has
considered, among other things, the following: (i) seriousness of the disease to
be diagnosed or treated; (ii) time frame for use of the information; (iii)
whether the data output is provided or manipulated in a novel or non-traditional
manner; (iv) whether the software provides individualized patient care
recommendations; (v) whether the mechanism by which the software arrives at a
decision is hidden or transparent; and (vi) whether the product provides new
capabilities for the user. Given the FDA's intent to issue a new policy
concerning the regulation of computer software, there can be no assurance as to
the effect of such a policy, if any, upon the regulatory status of the Company's
products.
The Company's clinical information systems are intended to assist health
care providers in analyzing economic and quality data related to patient care
and expected outcomes in order to maximize the cost-effectiveness of general
treatment plans and practice protocols. These products are not intended to
provide specific diagnostic data or results or affect the use of specific
therapeutic interventions for individual patients. As such, the Company believes
that its clinical information systems are not medical devices under the FDCA
and, thus, are not subject to the controls imposed on manufacturers of medical
devices and do not fall within the scope of the 1989 Draft Policy Statement. The
Company further believes that to the extent that its products are determined to
be medical devices, they fall within the exemptions for decision support systems
provided by the 1989 Draft Policy Statement. The Company has not taken action to
comply with the requirements that would otherwise apply if the Company's
products were determined to be non-exempt medical devices.
There can be no assurance that the FDA will not make a request or take other
action to require the Company to comply with any or all current or future
controls applicable to medical devices under the FDCA. There can be no assurance
that, if such a request were made or other action were taken, the Company could
comply in a timely manner, if at all, or that any failure to comply would not
have a material adverse effect on the Company's business, financial condition or
results of operations, or that the Company would not be subjected to significant
penalties or other sanctions. There can be no assurance that the FDA will
continue to permit any or all of the exemptions provided in the 1989 Draft
Policy Statement, or in a new policy statement, if any, or that the FDA will
promulgate regulations formally implementing such exemptions. There can be no
assurance that the Company's current or future clinical information systems will
qualify for future exemptions, if any, nor can there be any assurance that any
future requirements will not have a material adverse effect on the Company's
business, financial condition or results of operations.
The health care industry is subject to changing political, economic and
regulatory influences that may affect the procurement practices and operations
of health care industry participants. During the past several years, government
regulation of reimbursement rates in the United States health care industry has
increased. Lawmakers continue to propose programs to reform the United States
health
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care system, which may contain proposals to increase governmental involvement in
health care, lower reimbursement rates and otherwise change the operating
environment for the Company's customers. Health care industry participants may
react to these proposals by curtailing or deferring investments, including
investments in the Company's products. The Company cannot predict what impact,
if any, such factors may have on its business, financial condition and results
of operations or on the price of the Common Stock.
LEGAL PROCEEDINGS
The Company is not a party to any litigation that would have a material
adverse effect on its business, results of operations or financial condition.
EMPLOYEES
As of August 31, 1996, the Company had a total of approximately 160
employees, approximately 30 of whom were employed in the Company's information
systems subsidiary. None of the Company's employees is subject to a collective
bargaining agreement. The Company has never experienced a work stoppage and
believes that its employee relations are satisfactory.
PROPERTIES
The Company currently occupies 16,580 square feet of leased office space in
Tarrytown, New York, 4,065 square feet of leased office space in Marietta,
Georgia, 1,180 square feet of leased office space in Wayne, Pennsylvania and
10,742 square feet of leased office and data center space in Chicago, Illinois.
The current lease (including 4,500 square feet of space subleased from
Physicians' Online, Inc. as more fully described under "Certain Transactions")
for the Tarrytown office expires in March 1997 and has an annual rental of
approximately $290,790. The Company has entered into a lease, effective April 1,
1997, for 25,000 square feet at the Tarrytown office. Such lease will have an
annual rental of approximately $500,000 and will expire March 2002. See "Certain
Transactions". The lease for the Marietta office expires in January 2001 and has
an annual rental of approximately $50,000. The lease for the Wayne office
expires in April 1997 and has an annual rental of approximately $20,000. The
lease for the Chicago office expires in March 2001 and has an annual rental of
$180,000 for the current year. The Company believes that these facilities are
adequate for the foreseeable future.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Jonathan Edelson, M.D................... 36 Chairman of the Board and Chief
Executive Officer
Steven Hochberg......................... 34 President and Director
Alan B. Masarek......................... 35 Chief Operating Officer and Chief
Financial Officer
Robert Alger............................ 41 Vice President and Chief Information
Officer
Andrew C. Garling, M.D.................. 50 Vice President and Chief Medical Officer
James T. Carney(2)...................... 52 Director
Barry Kurokawa(1)(2).................... 40 Director
Jonathan Lieber(1)...................... 30 Director
</TABLE>
- ------------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
JONATHAN EDELSON, M.D. has been the Chairman of the Board and Chief
Executive Officer of the Company since its inception. Dr. Edelson is a
board-certified internist. Prior to co-founding the Company, Dr. Edelson served
as the Chief Executive Officer of Physicians' Online, Inc. from August 1993 to
December 1994 and as a director from August 1993 to the present. Dr. Edelson was
a senior vice president with ValueRx, Inc., the prescription drug benefits
management unit of Value Health, Inc., from October 1990 to June 1993. As a
practicing physician prior to joining ValueRx, Inc., Dr. Edelson founded Medical
Decision Resources, Inc., a physician profiling and education business, in March
1989, and served as its President through September 1990. Dr. Edelson attended
Yale University, University of Chicago School of Medicine and the Harvard School
of Public Health.
STEVEN HOCHBERG has been President and a director of the Company since its
inception. He is a co-founder of the Company and a co-founder of Physicians'
Online, Inc. Mr. Hochberg served as the President of Physicians' Online, Inc.
from January 1993 to June 1994. Mr. Hochberg served as the President of Ascent
Group, Inc., a financial consulting business that he founded, from February 1992
to January 1993, and as a Vice President of Sigoloff & Associates, management
consultants, from September 1989 to February 1992. In addition, he worked with
Alex. Brown & Sons as a Corporate Finance Associate in 1985 and with Bain &
Company as a Strategy Consultant from 1986 to 1987. Mr. Hochberg, a CPA, holds
an MBA from Harvard Business School.
ALAN B. MASAREK has been Chief Operating Officer and Chief Financial Officer
of the Company since November 1995. Prior to joining the Company, from April
1995 to November 1995, Mr. Masarek was acting as an independent consultant. Mr.
Masarek was President and Chief Executive Officer of the Scovill Group, an
international manufacturer of fasteners and other component items with annual
revenues of approximately $125 million, from February 1994 to April 1995. Prior
to Scovill, Mr. Masarek was President of two divisions of the Bibb Company, a
diversified textile manufacturer, from December 1991 to February 1994. Prior to
that, Mr. Masarek worked for three years as a buyout specialist with the NTC
Group and for five years in the audit division of Arthur Andersen & Co. Mr.
Masarek, a CPA, holds an MBA from Harvard Business School.
ROBERT ALGER has been Vice President and Chief Information Officer of the
Company since February 1995. Prior to joining the Company, Mr. Alger was Chief
Information Officer and Vice President of Information Systems at Blue Shield of
California, from December 1991 to February 1995, and a partner at Scribner,
Jackson & Associates, a technology consulting group, from January 1986 to
December 1991. Mr. Alger received his B.S. from California State
University--Northridge.
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ANDREW C. GARLING, M.D. has been Vice President and Chief Medical Officer of
the Company since November 1995. Dr. Garling's experience in medical information
systems includes serving as Vice President of Medical Affairs for TDS, Inc. from
August 1988 to December 1992 and as Chief Information Officer and Vice President
for the Prudential Health Care System's Southern Group Operations from December
1992 to November 1995. Dr. Garling completed his medical degree at Harvard
Medical School with initial specialty training in surgery. He later became board
certified in Emergency Medicine and practiced clinical medicine with the Kaiser
Permanente Medical Group of Northern California from July 1977 to August 1988.
At Kaiser, he also had administrative responsibilities, including serving as
staff president for the hospital system.
JAMES T. CARNEY has been a director of the Company since September 1996. Mr.
Carney has served as General Manager of Benefits Administration for USX
Corporation and Vice President of Administration for United States Steel and
Carnegie Pension Fund since 1989. Mr. Carney was named General Attorney-Employee
Benefits of USX Corporation in 1978, Senior General Attorney-Employee Benefits
and Workers' Compensation in 1985 and Senior General Attorney-Commercial and
Employee Relations for the U.S. Diversified Group in 1986.
BARRY KUROKAWA has been a director of the Company since March 1996. Since
February 1996, Mr. Kurokawa has served as a Managing Director of ProMed Asset
Management, L.L.C. ("ProMed"), a private health care investment management and
services company, and as the President of Blackriver Capital Management, Ltd.,
the general partner of ProMed Partners, L.P. and a consultant to INVESCO Trust
Company, a mutual fund company. From May 1992 to January 1996, he was employed
by INVESCO Trust Company as Senior Vice President and portfolio manager of four
health care funds managed by the firm. From July 1992 to January 1996, Mr.
Kurokawa was also the Vice President of Global Health Services, a closed-end
mutual fund. Before he joined INVESCO, Mr. Kurokawa served as Vice President
Equity Research and health care analyst at Trust Company of the West, an
investment management company, from July 1987 to April 1992.
JONATHAN LIEBER has been a director of the Company since September 1995. Mr.
Lieber has served as an investment analyst focusing on special situation
investments, including the areas of healthcare, banking and other consumer
services, of GeoCapital Corp., since July 1992. Mr. Lieber has served since June
1992 as Vice President of Applewood Capital, where he specializes in consumer
services including healthcare, banking and finance. Additionally, Mr. Lieber has
served as a Vice President of Infomedia Management Co., Inc., the management
company for the general partner of the 21st Century investment partnerships
since February 1995. Prior to joining GeoCapital, Mr. Lieber was employed as a
research analyst at Gabelli & Co., an investment management and brokerage firm,
from 1990 to 1991.
Each of Barry Kurokawa and Jonathan Lieber were elected to the Board of
Directors pursuant to voting agreements which give the holders of the Series B
and C Preferred Stock of the Company the right to elect one director and the
holders of the Series D Preferred Stock of the Company the right to elect one
director. Such agreements will terminate upon the consummation of this offering.
The Board of Directors is divided into three classes, as nearly equal in
number as possible, having terms expiring at the annual meeting of the Company's
stockholders in 1997 (comprised of Mr. Lieber), 1998 (comprised of Messrs.
Carney and Kurokawa) and 1999 (comprised of Dr. Edelson and Mr. Hochberg). At
each annual meeting of stockholders, successors to the class of directors whose
term expires at such meeting will be elected to serve for three-year terms and
until their successors are elected and qualified.
BOARD COMMITTEES
The Board of Directors has established two committees, the Audit Committee
and the Compensation Committee. The Audit Committee is comprised of Messrs.
Kurokawa and Lieber and oversees the
44
<PAGE>
activities of the Company's independent auditors and the Company's internal
controls. The Compensation Committee, which is comprised of Messrs. Carney and
Kurokawa, makes recommendations to the Board of Directors with respect to
general compensation and benefit levels, determines the compensation and
benefits for the Company's executive officers and administers the Company's
stock option plans and employee stock purchase plan.
DIRECTOR COMPENSATION
Directors do not currently receive any cash compensation from the Company
for their service as members of the Board of Directors, although they are
reimbursed for certain expenses in connection with attendance at Board and
Committee meetings. Non-employee directors of the Company are eligible to
receive options under the Company's 1995 Stock Option Plan. See "Management --
Stock Plans."
LIMITATIONS ON DIRECTORS' AND OFFICERS' LIABILITY
The Company's Certificate of Incorporation provides that directors of the
Company shall not be personally liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director except for liability
(i) for any breach of the director's duty of loyalty to the Company or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) in respect of
certain unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the DGCL or (iv) for any transaction
from which the director derived an improper personal benefit. The effect of
these provisions will be to eliminate the rights of the Company and its
stockholders (through stockholders' derivative suits on behalf of the Company)
to recover monetary damages against a director for breach of fiduciary duty as a
director (including breaches resulting from grossly negligent behavior), except
in the situations described above. These provisions will not limit the liability
of directors under federal securities laws.
The Company's Certificate of Incorporation provides that the Company shall
indemnify its directors, officers, employees and agents to the fullest extent
permitted by law. The Company's Certificate of Incorporation also permits it to
secure insurance on behalf of any director, officer, employee or agent against
any expense, liability or loss arising out of his or her actions in such
capacity.
The Company intends to obtain directors' and officers' liability insurance
("D&O Insurance") prior to the date of this Prospectus, and expects to continue
to carry D&O Insurance following this offering. In addition, the Company has
entered into an indemnification agreement with each of its directors and
officers under which the Company has indemnified each of them against expenses
and losses incurred for claims brought against them by reason of a director or
officer of the Company.
The Company believes that the limitation of liability and indemnification
provisions in its Certificate of Incorporation, the D&O Insurance and the
indemnification agreements will enhance the Company's ability to continue to
attract and retain qualified individuals to serve as directors and officers.
There is no pending litigation or proceeding involving a director, officer or
employee of the Company to which the indemnification provisions would apply.
EXECUTIVE COMPENSATION
The following table sets forth a summary of the compensation earned by the
Company's Chief Executive Officer and the other executive officers of the
Company whose combined salary and bonus for the year ended December 31, 1995 was
in excess of $100,000 (collectively, the "Named Executive Officers") for
services rendered in all capacities to the Company during the Company's fiscal
year ended December 31, 1995.
45
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
AWARDS
------------
ANNUAL SECURITIES
COMPENSATION UNDERLYING
------------ OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) (#) COMPENSATION
- ------------------------------------------------ ---- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Jonathan Edelson, M.D........................... 1995 $187,115(1) 101,286 $ 0
Chief Executive Officer
Steven Hochberg................................. 1995 187,115(1) 101,286 0
President
Richard W. Kaplan(2)............................ 1995 142,000(3) 193,637 14,800(4)
Executive Vice President
Robert Alger.................................... 1995 123,937(5) 41,706 0
Vice President and Chief Information Officer
</TABLE>
- ------------
(1) Current annual salary is $220,000.
(2) Mr. Kaplan ceased to be an executive officer of the Company in August 1996.
(3) Mr. Kaplan joined the Company in April 1995. Includes a $17,000 signing
bonus.
(4) Includes living expenses as part of a relocation package for Mr. Kaplan.
(5) Mr. Alger joined the Company in February 1995. Mr. Alger's current annual
salary is $154,000.
The compensation of each of Alan B. Masarek, the Company's Chief Operating
Officer and Chief Financial Officer, and Andrew C. Garling, M.D., the Company's
Vice President and Chief Medical Officer, each of whom joined the Company in
November 1995, is currently in excess of $100,000 on an annual basis.
The following tables set forth, with respect to the Named Executive
Officers, the option grants made during the Company's fiscal year ended December
31, 1995 and the option values at the end of such fiscal year.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
INDIVIDUAL GRANTS REALIZABLE
--------------------------------------------------------- VALUE AT ASSUMED
PERCENT OF ANNUAL RATES OF
NUMBER OF TOTAL STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM (1)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ------------------
NAME GRANTED (#)(3) FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
- -------------------------------- -------------- ------------ -------- -------------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Jonathan Edelson, M.D........... 53,622 4.25% $ 2.52 Mar. 31, 2005 $84,723 $215,560
47,664 3.78% 3.52 Dec. 31, 2005 105,337 267,395
Steven Hochberg................. 53,622 4.25% 2.52 Mar. 31, 2005 84,723 215,560
47,664 3.78% 3.52 Dec. 31, 2005 105,357 267,395
Richard W. Kaplan(2)............ 178,742 14.17% 2.52 -- -- --
14,895 1.18% 3.52 -- -- --
Robert Alger.................... 35,748 2.83% 2.52 Feb. 28, 2005 56,482 143,707
5,958 0.47% 3.52 Dec. 31, 2005 13,167 33,424
</TABLE>
- ------------
(1) Gains are reported net of the option exercise price, but before taxes
associated with exercise. These amounts represent assumed rates of
appreciation only. Actual gains, if any, on stock option exercises are
dependent on the future performance of the Common Stock. The amounts
reflected in this table may not necessarily be achieved.
(2) All options granted to Mr. Kaplan terminated upon the termination of his
employment with the Company.
(3) All options were granted under the Company's 1995 Stock Option Plan. All
options granted had an exercise price equal to the fair market value on the
date of grant. All options were granted on dates that
46
<PAGE>
were 10 years prior to such options' expiration dates. All options may
become fully exercisable on the occurrence of a change in control as
described in the Company's 1995 Stock Option Plan. Options vest at the rate
of one-third per year over a three-year period from the date of grant.
The following table sets forth information with respect to options exercised
during the fiscal year ended December 31, 1995 by each of the Named Executive
Officers and certain information regarding options held at December 31, 1995 by
each of the Named Executive Officers.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
ACQUIRED ON VALUE OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END
EXERCISE REALIZED --------------------------- ----------------------------
NAME (#) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE(2)
- --------------------------- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Jonathan Edelson, M.D...... 239,515 $840,413 0 101,286 $ 0 $ 356,527
Steven Hochberg............ 268,114 $940,761 0 101,286 $ 0 $ 356,527
Richard W. Kaplan(3)....... -- -- -- -- -- --
Robert Alger............... -- -- 0 41,706 $ 0 $ 146,805
</TABLE>
- ------------
(1) Value realized is based on a value of $3.52 per share of the Company's
Common Stock, the fair market value of the Company's Common Stock on
December 31, 1995, net of the exercise price paid.
Value realized based upon the $12 proposed offering price per share of the
Company's Common Stock, net of the exercise price paid, would be $2,871,497
for Dr. Edelson's options and $3,214,365 for Mr. Hochberg's options.
(2) Value of unexercised in-the-money options is based on a value of $3.52 per
share of the Company's Common Stock, the fair market value of the Company's
Common Stock on December 31, 1995. Amounts reflected are based on the
assumed value minus the exercise price and multiplying the result by the
number of shares subject to the option.
(3) All options granted to Mr. Kaplan terminated upon the termination of his
employment with the Company.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements (the "Employment
Agreements") with Jonathan Edelson, M.D., its Chairman and Chief Executive
Officer, Steven Hochberg, its President, Alan B. Masarek, its Chief Operating
Officer and Chief Financial Officer, Robert Alger, its Vice President and Chief
Information Officer, and Andrew C. Garling, M.D., its Vice President and Chief
Medical Officer (each, an "Employee"). The Employment Agreements provide that
the annual base salary of each of the Employees is: Dr. Edelson, $220,000; Mr.
Hochberg, $220,000; Mr. Masarek, $200,000; Mr. Alger, $154,000; and Dr. Garling,
$200,000. The Employees are also entitled to receive discretionary bonuses.
The Employment Agreements generally provide for a three-year term that is
automatically renewable for successive one-year terms unless either party gives
prior written notice of its intent not to renew. The Employment Agreements set
forth the compensation arrangements and the employee fringe benefits provided by
the Company to each Employee. In addition, the Employment Agreements set forth
the compensation payable to an Employee in the event of a termination of the
Employee's employment by the Company. Generally, upon the termination of an
Employee's employment by the Company for cause, the Employee is entitled to
receive earned but unpaid salary and reimbursement for business expenses
incurred during the performance of the Employee's duties. If an Employee's
employment with the Company is terminated without cause, due to the death or
incapacity of the Employee or within a specified period after a change of
control (as defined in the Employment Agreements), the Employee is entitled to
receive the amounts payable in the event of a termination for cause plus a cash
severance payment not to exceed the cash compensation received by the Employee
in the prior 12-month period and the vesting of certain shares of Common Stock
and options to purchase
47
<PAGE>
Common Stock of the Company then held by such Employee. Each Employment
Agreement provides a non-compete provision that restricts an Employee from
competing against the Company for a period of one-year following such Employee's
termination of employment with the Company.
STOCK PLANS
1995 Stock Option Plan. The Company has adopted the 1995 Stock Option Plan
(the "1995 Plan"). The 1995 Plan permits the grant of (i) options to purchase
shares of Common Stock intended to qualify as incentive stock options under
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code")
("Incentive Stock Options"), and (ii) options that do not so qualify
("Non-Qualified Options"). No award may be granted under the 1995 Plan after the
tenth anniversary of the Plan's adoption. The 1995 Plan is administered by the
Compensation Committee.
1,500,000 shares of Common Stock have been reserved for issuance under the
1995 Plan, subject to adjustment for stock splits, stock dividends,
recapitalizations, reclassifications and similar events. If an option granted
under the 1995 Plan expires unexercised or is terminated or cancelled for any
reason, the shares of Common Stock previously reserved for issuance thereunder
will be available for future option grants under the 1995 Plan.
Options may be granted to persons who are, at the time of grant, employees,
officers or directors of, or consultants or advisors to, the Company, provided
that Incentive Stock Options may only be granted to individuals who are
employees of the Company (within the meaning of Section 3401(c) of the Code).
Options granted under the 1995 Plan must be exercised within no more than
ten years of the grant date, except that an Incentive Stock Option granted to a
person owning more than 10% of the total combined voting power of all classes of
stock of the Company (a "Ten Percent Stockholder") must be exercised within no
more than five years of the grant date. No options may be assigned or
transferred by the optionee other than by will or the laws of descent or
distribution or pursuant to a qualified domestic relations order (as defined in
the Code or Title I of the Employee Retirement Income Security Act, or the rules
thereunder). Each option may be exercised only by the optionee during his or her
lifetime.
The exercise price for each option granted will be determined by the
Compensation Committee at the time of grant. For Incentive Stock Options granted
to a Ten Percent Stockholder, the exercise price shall not be less than 110% of
the fair market value per share of Common Stock.
Options may be made exercisable in installments, and the exercisability of
Options may be accelerated by the Compensation Committee. Options granted under
the 1995 Plan typically vest over a three-year period.
In the event of a consolidation or merger in which the Company is not the
surviving corporation, or sale of all or substantially all of the assets of the
Company in which outstanding shares of Common Stock are exchanged for
securities, cash or other property of any other corporation or business entity
or a liquidation of the Company (a "Corporate Transaction"), the Compensation
Committee, or the board of directors of any corporation assuming the obligations
of the Company, may, in its discretion, take any one or more of the following
actions, as to outstanding options: (i) provide that such options shall be
assumed, or equivalent options shall be substituted, by the acquiring or
succeeding corporation (or an affiliate thereof), provided that any such option
substituted for incentive stock options shall meet the requirements of Section
424(a) of the Code; (ii) upon written notice to the optionee, provide that all
unexercised options will terminate immediately prior to the consummation of such
transaction unless exercised by the optionee within a specified period following
the date of such notice; (iii) in the event of a Corporate Transaction under the
terms of which holders of the Common Stock of the Company will receive upon
consummation thereof a cash payment for each share surrendered in the Corporate
Transaction (the "Transaction Price"), make or provide for a cash payment to the
optionees equal to the difference between (A) the Transaction Price times the
number of shares of Common Stock subject to such outstanding options (to the
extent then exercisable at prices not in excess of the Transaction Price)
48
<PAGE>
and (B) the aggregate exercise price of all such outstanding options in exchange
for the termination of such options, and (iv) provide that all or any
outstanding options shall become exercisable in full immediately prior to any
such event.
As of the date of this Prospectus, an aggregate of 843,846 outstanding
options had been granted to approximately 80 directors, officers, employees and
consultants at a weighted average exercise price of $3.13 per share and an
aggregate of 156,154 shares were available for future option grants. Of such
outstanding options, 101,286 were granted to Dr. Edelson, 101,286 to Mr.
Hochberg, 86,037 to Mr. Masarek, 43,196 to Mr. Alger, 39,472 to Dr. Garling,
7,507 to Mr. Kurokawa and 7,507 to Mr. Lieber.
Employee Stock Purchase Plan. The Company has adopted, effective upon the
date of this Prospectus, an employee stock purchase plan (the "Stock Purchase
Plan"). The purpose of the Stock Purchase Plan is to allow the employees of the
Company to acquire a proprietary interest in the Company through the purchase of
shares of Common Stock. Under the Stock Purchase Plan, eligible employees will
be granted options (exercisable by electing to participate in the Plan) to
purchase shares of Common Stock through regular payroll deductions. The Stock
Purchase Plan is intended to qualify as an "employee stock purchase plan" under
Section 423 of the Code. The total number of shares of Common Stock that are
authorized for issuance under the Stock Purchase Plan is 1,200,000. All full-
time employees of the Company who have completed at least one year of employment
will be eligible to participate in the Stock Purchase Plan, subject to certain
limited exceptions. Options will be granted every six months to eligible
employees and, if not exercised, will expire on the last day of the six-month
period in which granted. Employees electing to participate for any plan year
will authorize payroll deductions at a stated whole percentage ranging from 2%
to 10% of compensation, as determined by the participant. Employees may also
elect to make payments by check payable to the Company to purchase shares of
Common Stock. Options will be nontransferable other than by will or by operation
of the laws of descent and distribution. The purchase price for shares offered
under the Stock Purchase Plan each year will be equal to a percentage designated
by the Board of Directors (not less than 85%) of the lower of the fair market
value of the Common Stock at the date of grant or the semi-annual date of
exercise as evidenced by the high and low sales prices of the Common Stock on
such date as reported on the Nasdaq National Market. The Stock Purchase Plan
will expire on the tenth anniversary of the date of this Prospectus, unless
sooner terminated by the Board of Directors. The Board of Directors of the
Company may amend, suspend or terminate the Stock Purchase Plan at any time and
from time to time, subject to certain limitations. The Stock Purchase Plan will
be administered by the Compensation Committee.
49
<PAGE>
CERTAIN TRANSACTIONS
In connection with the formation of the Company, Jonathan Edelson, M.D., the
Chairman of the Board and Chief Executive Officer of the Company, was issued
157,293 shares of Common Stock for an aggregate purchase price of $1,760. In
February 1994, the Company issued Dr. Edelson 893 shares of Common Stock in lieu
of interest on advances made to the Company. In May 1995, Dr. Edelson exercised
options to purchase 239,515 shares, for which he paid the Company $2,680. In
August 1995, Dr. Edelson purchased 48,260 shares for $576. In 1994, Dr. Edelson
loaned the Company an aggregate of $50,000 to fund working capital. Such loans
have been repaid in full.
In connection with the formation of the Company, Steven Hochberg, President
and a director of the Company, was issued 128,694 shares of Common Stock for an
aggregate purchase price of $1,440. In March 1995, Mr. Hochberg exercised
options to purchase 268,114 shares, for which he paid the Company $3,000. In
August 1995, Mr. Hochberg purchased 48,260 shares for $576. In 1995, Mr.
Hochberg loaned the Company an aggregate of $32,000 to fund working capital.
Such loans have been repaid in full.
In August 1995, the Company issued 2,978 shares of Common Stock to Richard
W. Kaplan, a former officer and director of the Company, for $25,000. On March
15, 1996, the Company loaned Mr. Kaplan $15,000 at a 5% interest rate, to be
repaid over a twelve-month period beginning July 1, 1996. As of August 15, 1996,
Mr. Kaplan had repaid $1,875 of the principal of such loan. The balance of such
loan was forgiven upon termination of Mr. Kaplan's employment with the Company.
In August 1993, the Company issued 971,800 shares of Series A Convertible
Preferred Stock to affiliates of INVESCO Trust Company, a principal stockholder
of the Company, for $97,180. In March 1994, the Company issued 282,900 shares of
Series B Convertible Preferred Stock to affiliates of INVESCO Trust Company for
$2,000,103. In January 1995, the Company issued 200,000 shares of Series C
Convertible Preferred Stock to affiliates of INVESCO Trust Company for
$1,500,000. In August 1995, the Company issued 666,360 shares of Series D
Convertible Preferred Stock to certain 21st Century partnerships, a principal
stockholder of the Company, for $4,997,700. Each share of Series A, B, C and D
Convertible Preferred Stock (collectively, the "Preferred Stock") is convertible
into 1.1189249 shares of Common Stock upon the consummation of this offering.
In June 1996, the Company issued three 9% Series B Promissory Notes in the
aggregate principal amount of $1 million to certain 21st Century Partnerships.
In August 1996, the Company issued three additional 9% Series B Promissory Notes
in the aggregate principal amount of $1 million to certain 21st Century
Partnerships. 21st Century Partnerships is a principal stockholder of the
Company.
In connection with the formation of the Company in 1993, Christian Mayaud,
M.D., a principal stockholder of the Company, was issued 300,288 shares of
Common Stock for an aggregate purchase price of $3,360. In August 1994, Dr.
Mayaud was granted options to purchase 96,521 shares of Common Stock at an
exercise price of $.0112 per share. In March 1995, Dr. Mayaud was granted
options to purchase 11,171 shares of Common Stock at exercise prices of $2.52
per share. In March 1995, Dr. Mayaud exercised the 1994 options to purchase
96,521 shares of Common Stock for which he paid the Company $1,080. In August
1995, Dr. Mayaud purchased 32,174 shares of Common Stock for $360. In 1995, Dr.
Mayaud loaned the Company $25,000 to fund working capital. Such loan has been
repaid in full.
The Company currently subleases approximately 4,500 square feet of office
space in Tarrytown, New York from Physicians' Online, Inc. ("Physicians'
Online"), a Delaware corporation of which Dr. Edelson, Mr. Hochberg and Dr.
Mayaud own approximately 16% of the currently outstanding capital stock.
Physicians' Online was founded in January 1992 by Mr. Hochberg and Dr. Mayaud.
The
50
<PAGE>
yearly base rental on the Physicians' Online sublease equals $77,707, plus
escalations. During the period ended December 31, 1993, the years ended December
31, 1994 and 1995 and the three months ended March 31, 1996, Physicians' Online
incurred administrative expenses totalling $105,116, $135,825, $180,631 and
$25,500, respectively, on behalf of the Company for which the Company reimbursed
Physicians' Online. During 1993, Physicians' Online paid the Company a $175,000
fee for the development and implementation of a wireless application. The
Company does not expect to continue to receive administrative services from
Physicians' Online in the future. During 1994, Physicians' Online loaned the
Company $300,000, which loan bore interest at the prime rate. At December 31,
1994, $304,262 was outstanding, which included accrued interest of $4,262. Such
loan was repaid in full in 1995, and the accrued interest was forgiven. During
1995, Physicians' Online borrowed $500,000 from the Company. Such amount bore
interest at the prime rate plus 1% and was repaid in full prior to December 31,
1995. See Note 4 of Notes to Consolidated Financial Statements.
The Company has granted options to purchase shares of Common Stock to its
directors and executive officers. See "Management -- Stock Plans" and Note 10 of
Notes to Consolidated Financial Statements.
The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. All future transactions, including loans, between
the Company and its officers, directors and principal stockholders and their
affiliates will be approved by a majority of the Board of Directors, including a
majority of the independent and disinterested outside directors of the Board of
Directors.
51
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to the Company
regarding the beneficial ownership of the Common Stock of the Company as of the
date of this Prospectus and as adjusted to reflect the sale of the shares of
Common Stock offered hereby with respect to (i) each person known by the Company
to own beneficially more than 5% of the outstanding shares of Common Stock, (ii)
each of the Company's directors, (iii) each of the Named Executive Officers and
(iv) all directors and officers as a group. Unless otherwise indicated, the
address for each stockholder is c/o the Company, 560 White Plains Road,
Tarrytown, New York 10591.
<TABLE>
<CAPTION>
NUMBER PERCENTAGE
OF BENEFICIALLY OWNED(1)
SHARES -----------------------
BENEFICIALLY BEFORE THE AFTER THE
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(1) OFFERING OFFERING
- -------------------------------------------------------------- ------------ ---------- ---------
<S> <C> <C> <C>
INVESCO Trust Company(2)...................................... 1,300,086 28.9% 20.0%
7800 E. Union Avenue
Denver, CO 80237
21st Century Partnerships(3).................................. 595,535 13.2 9.2
767 Fifth Avenue
New York, NY 10153
Christian Mayaud, M.D.(4)..................................... 432,707 9.6 6.7
1235 Oenoke Ridge
New Canaan, CT 06840
Jonathan Edelson, M.D.(5)..................................... 446,261 9.9 6.9
Steven Hochberg(5)............................................ 457,153 10.2 7.0
Robert Alger(6)............................................... 11,916 * *
Richard W. Kaplan............................................. 2,979 * *
James T. Carney............................................... -- -- --
Barry Kurokawa................................................ -- -- --
Jonathan Lieber............................................... -- -- --
All directors and executive officers as a group (9 925,403 20.4 14.2
persons)(7)...................................................
</TABLE>
- ------------
<TABLE>
<C> <S>
* Represents less than 1% of the outstanding shares of Common Stock.
(1) Beneficial ownership is determined in accordance with the rules of the Securities and
Exchange Commission (the "Commission") and generally includes voting or investment
power with respect to securities and includes options exercisable within 60 days of the
date of this Prospectus. Except as indicated by footnote, and subject to community
property laws where applicable, the persons named in the table above have sole voting
and investment power with respect to all shares of Common Stock shown as beneficially
owned by them. Percentage of beneficial ownership is based on 4,500,267 shares of
Common Stock outstanding as of June 30, 1996 and 6,500,267 shares of Common Stock
outstanding upon the consummation of this offering.
(2) Includes 687,087 shares of Common Stock owned of record by INVESCO Strategic
Portfolios, Inc.--Health Sciences Portfolio ("ISP--HSP") and 612,999 shares of Common
Stock owned of record by The Global Health Sciences Fund ("GHS"). ISP--HSP and GHS are
mutual fund companies advised by INVESCO Funds Group, Inc., which is a subsidiary of
INVESCO PLC. INVESCO Trust Company is a subsidiary of INVESCO Funds Group, Inc.
(3) Includes shares owned by 21st Century Communications Partners, L.P., 21st Century
Communications T-E Partners, L.P. and 21st Century Foreign Partners, L.P.
(4) Includes options to purchase 3,723 shares of Common Stock that are exercisable within
60 days of the date of this Prospectus.
(5) Includes options to purchase 17,874 shares of Common Stock that are exercisable within
60 days of the date of this Prospectus.
(6) Includes options to purchase 11,916 shares of Common Stock that are exercisable within
60 days of the date of this Prospectus.
(7) See notes (5) and (6). Also includes options to purchase 7,092 shares of Common Stock
held by Alan B. Masarek that are exercisable within 60 days of the date of this
Prospectus.
</TABLE>
52
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
Following the closing of the sale of the shares offered hereby, the
Company's authorized capital stock will consist of 15,000,000 shares of Common
Stock, par value $.01 per share, and 5,000,000 shares of Preferred Stock, par
value $.01 per share. The following summaries of certain provisions of the
Common Stock and Preferred Stock do not purport to be complete and are subject
to, and qualified by, the provisions of the Company's Restated Certificate of
Incorporation and By-laws, which are included as exhibits to the Registration
Statement of which this Prospectus is a part, and by applicable law.
COMMON STOCK
As of July 12, 1996, there were 4,500,267 shares of Common Stock outstanding
that were held of record by approximately 80 stockholders, after giving effect
to the Stock Splits and the Preferred Stock Conversion. The holders of Common
Stock are entitled to one vote for each share on all matters voted upon by
stockholders, including the election of directors. Subject to the rights of any
then out Preferred Shares, the holders of the Common Stock are entitled to such
dividends as may be declared in the discretion of the Board of Directors out of
funds legally available therefor. Holders of the Common Stock are entitled to
share ratably in the net assets of the Company upon liquidation after payment or
provision for all liabilities and any preferential liquidation rights of any
Preferred Shares then outstanding. The holders of Common Stock have no
preemptive rights to purchase shares of stock of the Company. Shares of Common
Stock are not subject to any redemption provisions and are not convertible into
any other securities of the Company. All outstanding shares of Common Stock are,
and the shares of Common Stock to be issued pursuant to this offering will be,
upon payment of consideration therefor, fully paid and nonassessable.
PREFERRED STOCK
Preferred Stock may be issued from time to time by the Board of Directors as
shares of one or more classes or series. Subject to the provisions of the
Company's Restated Certificate of Incorporation and limitations prescribed by
law, the Board of Directors is expressly authorized to adopt resolutions to
issue the shares, to fix the number of shares and to change the number of shares
constituting any series, and to provide for a change in the voting power,
designations, preferences and relative, participating, optional or other special
rights, qualifications, limitations or restrictions thereof, including dividend
rights (including whether dividends are cumulative), dividend rates conversion
rights and liquidation preferences of the shares constituting any class or
series of the Preferred Stock, in each case without any further action or vote
by the stockholders. Although the Company has no present plans to issue any
shares of Preferred Stock following the consummation of this offering, the
issuance of shares of Preferred Stock, or the issuance of rights to purchase
such shares, may have the effect of delaying, deferring or preventing a change
in control of the Company or an unsolicited acquisition proposal.
REGISTRATION RIGHTS
The holders of 2,941,985 shares of the Company's Common Stock are entitled
to certain rights with respect to the registration of shares of Common Stock
under the Securities Act. Under the terms of the agreements between the Company
and the holders of such registrable securities, if the Company proposes to
register any of its securities under the Securities Act, either for its own
account or for the account of other security holders exercising registration
rights, such holders are entitled to notice of such registration and are
entitled to include shares of such Common Stock therein. These registration
rights have been waived in connection with this Offering. The stockholders
benefiting from these rights may also require the Company to file a registration
statement under the Securities Act at its expense
53
<PAGE>
with respect to their shares of Common Stock, and the Company is required to use
its best efforts to effect such registration. These registration rights will
expire within three years from the consummation of this Offering and have been
waived by such holders in connection with this Offering. In addition, these
stockholders have the right to require the Company to file up to two additional
registration statements on Form S-3. This right becomes available upon the
eligibility of the Company to use such Form S-3 and will expire within three
years from the consummation of this Offering. All of these rights are subject to
certain conditions and limitations, including the right of the underwriters of
an offering to limit the number of shares included in such registration.
In connection with the outstanding warrants, the holders of the Common Stock
issuable upon exercise of the warrants have certain rights to request the
Company to use its best efforts to effect the registration of the Common Stock
issuable upon the exercise of the warrants in connection with a registered
offering of Common Stock by the Company; provided that the Company will be
required to use its best efforts to include any such Common Stock issuable upon
the exercise of the warrants only after the registration of the Company's own
securities to the extent the underwriter for any such offering would not deem
any inclusion of such Common Stock issuable upon exercise of the warrants to
interfere with such offering. The warrant holders have waived these rights in
connection with this Offering. The rights to notice and inclusion in any
registration terminates with respect to each such share of Common Stock when
such shares issuable upon exercise of the warrants have been registered or sold.
CERTAIN PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND BY-LAWS
As described below, the Company's Restated Certificate of Incorporation and
By-laws contain certain provisions that are intended to enhance the likelihood
of continuity and stability in the composition of the Company's Board of
Directors and which may have the effect of delaying, deterring or preventing a
future takeover or change in control of the Company unless such takeover or
change in control is approved by the Company's Board of Directors. Such
provisions may also render the removal of the directors and management more
difficult.
Pursuant to the Restated Certificate of Incorporation, the Board of
Directors of the Company is divided into three classes serving staggered
three-year terms. The By-laws establish an advance notice procedure with regard
to the nomination, other than by or at the direction of the Board of Directors,
of candidates for election as directors and with regard to certain matters to be
brought before an annual meeting of stockholders of the Company. In general,
notice must be received by the Company not less than 130 days prior to the
meeting and must contain certain specified information concerning the person to
be nominated or the matter to be brought before the meeting and concerning the
stockholder submitting the proposal. Special meetings of stockholders may be
called only by the Chairman of the Board, the President of the Company or the
Board of Directors. In addition, the Certificate of Incorporation provides that
stockholders may act only at an annual or special meeting and stockholders may
not act by written consent.
SECTION 203 OF THE DGCL
Section 203 of the DGCL ("Section 203") prevents an "interested stockholder"
(defined in Section 203, generally, as a person owning 15% or more of a
corporation's outstanding voting stock) from engaging in a "business
combination" (as defined in Section 203) with a publicly-held Delaware
corporation for three years following the date such person became an interested
stockholder unless (i) before such person became an interested stockholder, the
board of directors of the corporation approved either the business combination
or the transaction that resulted in the interested stockholder's becoming an
interested stockholder, the interested stockholder owns at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced (excluding stock held by directors who
54
<PAGE>
are also officers of the corporation and by employee stock plans that do not
provide employees with the right to determine confidentially whether shares held
subject to the plan will be tendered in a tender or exchange offer); or (iii)
following the transaction in which such person became an interested stockholder,
the business combination is approved by the board of directors of the
corporation and authorized at a meeting of stockholders by the affirmative vote
of the holders of two-thirds of the outstanding voting stock of the corporation
not owned by the interested stockholder.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the shares of Common Stock of the
Company is The Bank of New York.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for the Common Stock of the
Company. Future sales of substantial amounts of Common Stock in the public
market could adversely affect the prevailing market price from time to time.
Furthermore, because only a limited number of shares will be available for sale
shortly after this offering because of certain contractual and legal
restrictions on resale (as described below), sales of substantial amounts of
Common Stock in the public market after the restrictions lapse could adversely
affect the prevailing market price and the ability of the Company to raise
equity capital in the future. See "Risk Factors -- Shares Eligible for Future
Sale."
Upon completion of this offering, the Company will have outstanding
6,500,267 shares of Common Stock (assuming no exercise of the Underwriters'
over-allotment option or outstanding options). Of these shares, the 2,000,000
shares sold in this offering will be freely transferable without restriction or
further registration under the Securities Act unless purchased by "affiliates"
of the Company as that term is defined in Rule 144 of the Securities Act (an
"Affiliate"), which shares will be subject to the resale limitations of Rule 144
adopted under the Securities Act. The remaining 4,500,267 shares outstanding
upon completion of this offering and held by existing shareholders will be
"restricted securities" as that term is defined under Rule 144 (the "Restricted
Shares"). Restricted Shares generally may be sold in the public market only if
registered or if they qualify for an exemption from registration under Rules
144, 144(k) or 701 promulgated under the Securities Act, which rules are
summarized below. As a result of the contractual restrictions described below
and the provisions of Rules 144, 144(k) and 701, additional shares will be
available for sale in the public market as follows: (i) no shares of Common
Stock (other than those shares sold hereby and not held by Affiliates) will be
available for immediate sale in the public market on the date of this
Prospectus, (ii) 19,272 shares of Common Stock subject to options exercisable
within 90 days of the date of this Prospectus will be freely tradeable by
non-Affiliates upon the effectiveness of a registration statement relating to
such stock options, (iii) 224,566 shares of Common Stock and 18,432 shares of
Common Stock subject to options exercisable within 90 days of the Effective Date
will be eligible for sale 90 days after the Effective Date, subject to the
volume, manner of sale and reporting requirements of Rule 144 and (iv)
approximately 4,266,800 shares of Common Stock and approximately 9,500 shares of
Common Stock subject to options exercisable within 180 days of the Effective
Date will be eligible for sale upon expiration of the lock-up agreements 180
days after the Effective Date, subject to the volume, manner of sale and
reporting requirements of Rule 144.
The Company plans to file registration statements to register Common Shares
reserved for issuance under its stock option plans and employee stock purchase
plan. See "Management -- Stock Plans." Once registered, persons acquiring such
shares, whether or not they are Affiliates, will be permitted to resell their
shares in the public market without regard to the Rule 144 holding period.
55
<PAGE>
Upon completion of this offering, the holders of 2,941,985 shares of Common
Stock, or their transferees, will be entitled to certain rights with respect to
the registration of such shares under the Securities Act. See "Description of
Capital Stock -- Registration Rights." Registration of such shares under the
Securities Act would result in such shares (except for shares purchased by
Affiliates) becoming eligible for sale immediately upon the effectiveness of
such registration.
The Company has agreed not to sell or otherwise dispose of any shares of
Common Stock or any securities convertible into or exercisable or exchangeable
for Common Stock, or enter into any swap or similar agreement that transfers, in
whole or in part, the economic risk of ownership of the Common Stock, for a
period of 180 days after the Effective Date, without the prior written consent
of Cowen & Company, subject to certain limited exceptions. Additionally, all
directors and executive officers and certain other shareholders of the Company,
holding in the aggregate approximately 4,266,800 shares of Common Stock
outstanding prior to this offering, have agreed with the Underwriters not to
sell or otherwise dispose of any shares of Common Stock for a period of 180 days
after the Effective Date (the "Lockup Period") without the prior written consent
of Cowen & Company. See "Underwriting." The number of shares of Common Stock
available for sale in the public market is further limited by restrictions under
the Securities Act.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned Restricted Shares for at least two years, including
persons who may be deemed "affiliates" of the Company, would be entitled to sell
within any three-month period a number of shares that does not exceed the
greater of one percent of the number of shares of Common Stock then outstanding
or the average weekly trading volume of the Common Stock as reported through the
Nasdaq National Market during the four calendar weeks preceding the filing of a
Form 144 with respect to such sale. Sales under Rule 144 are also subject to
certain manner of sale provisions and notice requirements and to the
availability of current public information about the Company. In addition, a
person who is not deemed to have been an affiliate of the Company at any time
during the 90 days preceding a sale, and who has beneficially owned for at least
three years the Restricted Shares proposed to be sold, would be entitled to sell
such shares under Rule 144(k) without regard to the volume limitation, manner of
sale provisions, public information requirements or notice requirements. The
Commission has proposed certain amendments to Rule 144 and Rule 144(k) that
reduce the applicable requisite holding periods to one year and two years,
respectively.
Subject to certain limitations on the aggregate offering price of a
transaction and certain other conditions, Rule 701 permits resales of shares
issued prior to the date the issuer becomes subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), pursuant to certain compensatory benefit plans and contracts commencing
90 days after the issuer becomes subject to the reporting requirements of the
Exchange Act, in reliance upon Rule 144 but without compliance with certain
restrictions, including the holding period requirements, contained in Rule 144.
In addition, the Commission has indicated that Rule 701 will apply to typical
stock options granted by an issuer before it becomes subject to the reporting
requirements of the Exchange Act, along with the shares acquired upon exercise
of such options (including exercises after the date of this Prospectus).
Securities issued in reliance on Rule 701 are restricted securities and, subject
to the contractual restrictions described above, beginning 90 days after the
date of this Prospectus, may be sold by persons other than Affiliates subject
only to the manner of sale provisions of Rule 144 and by Affiliates under Rule
144 without compliance with its two-year minimum holding period requirements.
56
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their Representatives,
Cowen & Company and Volpe, Welty & Company, have severally agreed to purchase
from the Company the following respective number of shares at the initial public
offering price less the underwriting discounts and commissions set forth on the
cover page of this Prospectus:
<TABLE>
<CAPTION>
NUMBER
OF
UNDERWRITER SHARES
- ----------- ------------
<S> <C>
Cowen & Company...............................................................
Volpe, Welty & Company........................................................
------------
Total................................................................... 2,000,000
------------
------------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in the Company's business and the receipt of certain
certificates, opinions and letters from the Company and its counsel and
independent auditors. The nature of the Underwriters' obligation is such that
they are committed to purchase all shares of Common Stock offered hereby if any
of such shares are purchased.
The Underwriters propose to offer the shares of Common Stock directly to the
public at the initial public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in excess
of $ per share. The Underwriters may allow and such dealers may re-allow a
concession not in excess of $ per share to certain other dealers. The
Underwriters have informed the Company that they do not intend to confirm sales
to any accounts over which they exercise discretionary authority. After the
initial public offering of the shares, the offering price and other selling
terms may from time to time be varied by the Underwriters.
The Company has granted to the Underwriters an option, exercisable no later
than 30 days after the date of this Prospectus, to purchase up to 300,000
additional shares of Common Stock at the initial public offering price, less the
underwriting discounts and commissions, set forth on the cover page of this
Prospectus, to cover over-allotments, if any. If the Underwriters exercise such
over-allotment option, the Underwriters have severally agreed, subject to
certain conditions, to purchase approximately the same percentage thereof that
the number of shares of Common Stock to be purchased by each of them shown in
the foregoing table bears to the total number of shares of Common Stock offered
hereby. The Underwriters may exercise such option only to cover over-allotments
made in connection with the sale of shares of Common Stock offered hereby.
The Company's officers and directors and certain other shareholders of the
Company holding in the aggregate approximately 4,266,800 shares of Common Stock
and approximately 9,500 shares of Common Stock subject to options exercisable
within 180 days of the effective date have agreed that they
57
<PAGE>
will not, without the prior written consent of Cowen & Company, offer, sell,
contract or grant any option to purchase or otherwise dispose of any shares of
Common Stock, options, rights or warrants to acquire shares of Common Stock, or
securities exchangeable for or convertible into shares of Common Stock owned by
them during the 180-day period commencing on the Effective Date. In addition,
the Company has agreed that it will not, without the prior written consent of
Cowen & Company, offer, sell, contract or grant any option to purchase or
otherwise dispose of any shares of Common Stock, options, rights or warrants to
acquire shares of Common Stock or securities exchangeable for or convertible
into shares of Common Stock during such 180-day period except in certain limited
circumstances.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments the Underwriters may be required to make in respect thereof.
Prior to this offering, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock will be determined
by negotiation among the Company and the Representatives. Among the factors
considered in determining the initial public offering price will be prevailing
market and economic conditions, market valuations of other companies engaged in
activities similar to the Company, estimates of the business potential and
prospects of the Company, the present state of the Company's business
operations, the Company's management and other factors, if any, deemed relevant.
The estimated initial public offering price range set forth on the cover of this
Prospectus is subject to change as a result of market conditions and other
factors.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by O'Sullivan Graev & Karabell, LLP, New York, New York and
for the Underwriters by Shearman & Sterling, New York, New York.
EXPERTS
The financial statements included in this Prospectus have been audited by
Arthur Andersen LLP, independent public accountants, and are included herein in
reliance upon the authority of said firm as experts in giving said reports.
ADDITIONAL INFORMATION
A Registration Statement on Form S-1 under the Securities Act, including
amendments thereto, relating to Common Stock offered hereby has been filed by
the Company with the Commission. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. Statements contained in this Prospectus concerning the
provisions or contents of any contract or other document referred to herein are
not necessarily complete. With respect to each such contract or document filed
as an exhibit to the Registration Statement, reference is made to such exhibit
for a more complete description, and each such statement is deemed to be
qualified in all respects by such reference. The Registration Statement and the
exhibits and schedules thereto filed with the Commission may be inspected,
without charge, at the public reference facilities maintained by the Commission
at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the Commission's Regional Offices located at Seven World Trade Center,
Suite 1300, New York, New York 10048, and 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such material may also be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. In addition, the Company is
required to file electronic versions of these documents with the Commission
through the Commission's Electronic Data Gathering, Analysis and Retrieval
(EDGAR) system. The Commission maintains a World Wide Web site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission.
58
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
ADVANCED HEALTH CORPORATION
(FORMERLY MED-E-SYSTEMS CORPORATION)
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS....................................... F-2
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets:
As of December 31, 1994 and December 31, 1995 and June 30, 1996 (unaudited).. F-3
Consolidated Statements of Operations:
For the period from inception to December 31, 1993 and for the years ended
December 31, 1994 and 1995
For the six months ended June 30, 1995 and 1996 (unaudited).................. F-4
Consolidated Statement of Shareholders' Equity (Deficit):
From inception to December 31, 1995
For the six months ended June 30, 1996 (unaudited)........................... F-5
Consolidated Statements of Cash Flows:
For the period from inception to December 31, 1993 and for the years ended
December 31, 1994 and 1995
For the six months ended June 30, 1995 and 1996 (unaudited).................. F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS..................................... F-7-F-20
PELTZ VENTIMIGLIA, INC.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS....................................... F-21
FINANCIAL STATEMENTS:
Balance Sheets as of December 31, 1994 and August 31, 1995................... F-22
Statements of Operations for the years ended December 31, 1993 and 1994 and
for the eight months ended August 31, 1995..................................... F-23
Statement of Shareholders' Equity for the years ended December 31, 1993 and
1994 and for the eight months ended August 31, 1995............................ F-24
Statements of Cash Flows for the years ended December 31, 1993 and 1994 and
for the eight months ended August 31, 1995..................................... F-25
NOTES TO FINANCIAL STATEMENTS.................................................. F-26
U.S. HEALTH CONNECTIONS, INC.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS....................................... F-27
FINANCIAL STATEMENTS:
Balance Sheets as of December 31, 1994 and August 31, 1995................... F-28
Statements of Operations for the year ended December 31, 1994 and
for the eight months ended August 31, 1995................................. F-29
Statement of Shareholders' Equity for the year ended December 31, 1994 and
for the eight months ended August 31, 1995................................. F-30
Statements of Cash Flows for the year ended December 31, 1994 and
for the eight months ended August 31, 1995................................. F-31
NOTES TO FINANCIAL STATEMENTS.................................................. F-32-F-33
PRO FORMA FINANCIAL INFORMATION
Pro Forma Statement of Operations of Advanced Health Corporation and
Subsidiaries for the year ended December 31, 1995.............................. F-34
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Advanced Health Corporation:
We have audited the accompanying consolidated balance sheets of Advanced
Health Corporation (formerly Med-E-Systems Corporation) (a Delaware corporation)
and subsidiaries as of December 31, 1994 and 1995, and the related consolidated
statements of operations, shareholders' equity (deficit) and cash flows for the
period from inception (August 27, 1993) to December 31, 1993 and for the years
ended December 31, 1994 and 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Advanced Health Corporation
(formerly Med-E-Systems Corporation) and subsidiaries as of December 31, 1994
and 1995, and the results of their operations and their cash flows for the
period from inception to December 31, 1993 and for the years ended December 31,
1994 and 1995 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
New York, New York
June 19, 1996 (except for the matters
discussed in Note 14, as to which the
date is August 14, 1996)
F-2
<PAGE>
ADVANCED HEALTH CORPORATION AND SUBSIDIARIES
(FORMERLY MED-E-SYSTEMS CORPORATION)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- JUNE 30,
1994 1995 1996
---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash................................................... $ 6,903 $ 1,464,427 $ 836,863
Accounts receivable.................................... -- 1,020,558 3,302,583
Note receivable........................................ -- 125,000 15,000
Prepaid expenses and deferred registration costs....... 7,134 278,305 335,958
---------- ----------- -----------
Total current assets............................... 14,037 2,888,290 4,490,404
PROPERTY AND EQUIPMENT, net............................. 773,333 1,538,898 1,614,947
DEFERRED INCOME TAXES, net of valuation allowance of
$1,290,849, $3,506,540 and $4,253,278, respectively..... -- -- --
INTANGIBLE ASSETS, net.................................. -- 1,875,611 1,911,687
OTHER ASSETS............................................ 125,711 159,112 173,943
---------- ----------- -----------
Total assets....................................... $ 913,081 $ 6,461,911 $ 8,190,981
---------- ----------- -----------
---------- ----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable....................................... $ 319,126 $ 1,312,571 $ 971,331
Accrued expenses....................................... 126,845 407,241 851,795
Due to affiliate....................................... 375,825 -- 50,500
Deferred revenue....................................... -- 1,500,000 950,000
Promissory notes....................................... -- -- 4,000,000
Loan payable related to acquisitions................... 50,000 150,000 100,500
Current portion of capital lease obligations........... 174,247 259,805 278,410
---------- ----------- -----------
Total current liabilities.......................... 1,046,043 3,629,617 7,202,536
---------- ----------- -----------
CAPITAL LEASE OBLIGATIONS............................... 191,799 157,254 125,096
---------- ----------- -----------
Total liabilities.................................. 1,237,842 3,786,871 7,327,632
---------- ----------- -----------
COMMITMENTS (Note 13)
SHAREHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.01 par value, 5,000,000 shares
authorized:.............................................
Series A Convertible Preferred Stock, $.01 par value;
971,800 shares authorized; 971,800, 971,800 and 0
shares issued and outstanding, respectively.......... 9,718 9,718 --
Series B Convertible Preferred Stock, $.01 par value;
282,900 shares authorized; 282,900, 282,900 and 0
shares issued and outstanding, respectively.......... 2,829 2,829 --
Series C Convertible Preferred Stock, $.01 par value;
0, 200,000 and 200,000 shares authorized; 0, 200,000
and 0 shares issued and outstanding, respectively.... -- 2,000 --
Series D Convertible Preferred Stock, $.01 par value;
0, 666,360 and 666,360 shares authorized; 0, 666,360
and 0 shares issued and outstanding, respectively.... -- 6,664 --
Common stock, $.01 par value; 15,000,000 shares
authorized; 930,196, 2,595,649 and 4,500,267 shares
issued and outstanding, respectively................. 9,302 25,957 45,003
Additional paid-in capital............................. 2,726,254 11,479,223 11,526,538
Common stock subscriptions receivable.................. (3,120) -- --
Accumulated deficit.................................... (3,069,744) (8,776,351) (10,633,192)
Less: Treasury stock, at cost (0, 8,937 and 8,937
shares, respectively)................................ -- (75,000) (75,000)
---------- ----------- -----------
Total shareholders' equity (deficit)............... (324,761) 2,675,040 863,349
---------- ----------- -----------
Total liabilities and shareholders' equity
(deficit)............................................... $ 913,081 $ 6,461,911 $ 8,190,981
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE>
ADVANCED HEALTH CORPORATION AND SUBSIDIARIES
(FORMERLY MED-E-SYSTEMS CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE YEARS FOR THE SIX
FROM INCEPTION ENDED DECEMBER 31, MONTHS ENDED JUNE 30,
(AUGUST 27, 1993) TO ------------------------- -------------------------
DECEMBER 31, 1993 1994 1995 1995 1996
-------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
REVENUE..................... $-- $ 203,878 $ 712,292 $ 100,000 $ 1,530,245
REVENUE FROM MSOs (Note
2).......................... -- -- 341,657 -- 6,086,819
REVENUE FROM RELATED PARTY
(Note 4).................. -- 175,000 -- -- --
----------- ----------- ----------- ----------- -----------
Total Revenues........ -- 378,878 1,053,949 100,000 7,617,064
COST OF SALES............... -- 12,297 340,326 21,822 3,511,787
----------- ----------- ----------- ----------- -----------
Gross profit.......... -- 366,581 713,623 78,178 4,105,277
OPERATING EXPENSES.......... 66,192 1,318,145 3,254,978 616,503 4,033,502
RESEARCH AND DEVELOPMENT
EXPENSES.................... 454,622 1,582,332 3,157,389 1,511,681 1,874,988
----------- ----------- ----------- ----------- -----------
Operating loss........ (520,814) (2,533,896) (5,698,744) (2,050,006) (1,803,213)
OTHER INCOME (EXPENSE)...... -- (15,034) (7,863) 1,341 (53,628)
----------- ----------- ----------- ----------- -----------
Net loss.............. $ (520,814) $(2,548,930) $(5,706,607) $(2,048,665) $(1,856,841)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
PER SHARE INFORMATION:
Net loss per share (Note
2).......................... $ (0.23) $ (1.03) $ (1.47) $ (0.65) $ (0.37)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Weighted average common
shares outstanding
(Note 2).................. 2,229,136 2,482,213 3,893,244 3,135,780 4,991,135
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
ADVANCED HEALTH CORPORATION AND SUBSIDIARIES
(FORMERLY MED-E-SYSTEMS CORPORATION)
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C SERIES D
CONVERTIBLE CONVERTIBLE CONVERTIBLE CONVERTIBLE COMMON
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK STOCK
-------------------- -------------------- -------------------- -------------------- ---------
SHARES PAR VALUE SHARES PAR VALUE SHARES PAR VALUE SHARES PAR VALUE SHARES
-------- --------- -------- --------- -------- --------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT INCEPTION
(August 27, 1993)... -- $ -- -- $ -- -- $ -- -- $ -- --
Common stock
subscriptions....... -- -- -- -- -- -- -- -- 185,893
Issuance of common
stock............... -- -- -- -- -- -- -- -- 718,984
Issuance of Series A
Convertible
Preferred Stock
(Notes 8 and 14)... 971,800 9,718 -- -- -- -- -- -- --
Net loss............ -- -- -- -- -- -- -- -- --
-------- --------- -------- --------- -------- --------- -------- --------- ---------
BALANCE, December
31, 1993............ 971,800 9,718 -- -- -- -- -- -- 904,877
Sale and issuance of
common stock (Note
7c)................. -- -- -- -- -- -- -- -- 25,319
Issuance of Series B
Convertible
Preferred Stock
(Notes 8 and 14)... -- -- 282,900 2,829 -- -- -- -- --
Net loss............ -- -- -- -- -- -- -- -- --
-------- --------- -------- --------- -------- --------- -------- --------- ---------
BALANCE, December
31, 1994............ 971,800 9,718 282,900 2,829 -- -- -- -- 930,196
Issuance of Common
Stock (Note 7c).... -- -- -- -- -- -- -- -- 50,641
Issuance of Series C
Convertible
Preferred Stock
(Notes 8 and 14)... -- -- -- -- 200,000 2,000 -- -- --
Issuance of common
stock in private
placement........... -- -- -- -- -- -- -- -- 79,780
Redemption of common
stock
subscriptions....... -- -- -- -- -- -- -- -- --
Exercise of stock
options............. -- -- -- -- -- -- -- -- 885,279
Common stock issued
for acquisitions... -- -- -- -- -- -- -- -- 649,753
Issuance of Series D
Convertible
Preferred Stock
(Notes 8 and 14)... -- -- -- -- -- -- 666,360 6,664 --
Purchase of treasury
stock............... -- -- -- -- -- -- -- -- --
Net loss............ -- -- -- -- -- -- -- -- --
-------- --------- -------- --------- -------- --------- -------- --------- ---------
BALANCE, December
31, 1995............ 971,800 9,718 282,900 2,829 200,000 2,000 666,360 6,664 2,595,649
Net loss
(unaudited)......... -- -- -- -- -- -- -- -- --
Common stock issued
for acquisition.... -- -- -- -- -- -- -- -- 8,937
Exercise of stock
options............. -- -- -- -- -- -- -- -- 60
Conversion of Series
A, B, C and D
Convertible
Preferred Stock to
Common Stock (Notes
8 and 14).......... (971,800) (9,718) (282,900) (2,829) (200,000) (2,000) (666,360) (6,664) 1,895,621
-------- --------- -------- --------- -------- --------- -------- --------- ---------
BALANCE, June 30,
1996 (unaudited)... -- $ -- -- $ -- -- $ -- -- $ -- 4,500,267
-------- --------- -------- --------- -------- --------- -------- --------- ---------
-------- --------- -------- --------- -------- --------- -------- --------- ---------
<CAPTION>
COMMON STOCK
SUBSCRIPTIONS
ADDITIONAL RECEIVABLE TREASURY STOCK
PAID-IN ----------------- ACCUMULATED -------------------
PAR VALUE CAPITAL SHARES AMOUNT DEFICIT SHARES AMOUNT TOTAL
--------- ----------- -------- ------ ------------ ------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT INCEPTION
(August 27, 1993)... $ -- $ -- -- $-- $ -- -- $ -- $ --
Common stock
subscriptions....... 1,859 1,261 185,893 (3,120) -- -- -- --
Issuance of common
stock............... 7,190 855 -- -- -- -- -- 8,045
Issuance of Series A
Convertible
Preferred Stock
(Notes 8 and 14)... -- 87,462 -- -- -- -- -- 97,180
Net loss............ -- -- -- -- (520,814) -- -- (520,814)
--------- ----------- -------- ------ ------------ ------ ---------- ----------
BALANCE, December
31, 1993............ 9,049 89,578 185,893 (3,120) (520,814) -- -- (415,589)
Sale and issuance of
common stock (Note
7c)................. 253 639,402 -- -- -- -- -- 639,655
Issuance of Series B
Convertible
Preferred Stock
(Notes 8 and 14)... -- 1,997,274 -- -- -- -- -- 2,000,103
Net loss............ -- -- -- -- (2,548,930) -- -- (2,548,930)
--------- ----------- -------- ------ ------------ ------ ---------- ----------
BALANCE, December
31, 1994............ 9,302 2,726,254 185,893 (3,120) (3,069,744) -- -- (324,761)
Issuance of Common
Stock (Note 7c).... 506 (506) -- -- -- -- -- --
Issuance of Series C
Convertible
Preferred Stock
(Notes 8 and 14)... -- 1,498,000 -- -- -- -- -- 1,500,000
Issuance of common
stock in private
placement........... 798 624,261 -- -- -- -- -- 625,059
Redemption of common
stock
subscriptions....... -- -- (185,893) 3,120 -- -- -- 3,120
Exercise of stock
options............. 8,853 10,864 -- -- -- -- -- 19,717
Common stock issued
for acquisitions... 6,498 1,629,314 -- -- -- -- -- 1,635,812
Issuance of Series D
Convertible
Preferred Stock
(Notes 8 and 14)... -- 4,991,036 -- -- -- -- -- 4,997,700
Purchase of treasury
stock............... -- -- -- -- -- 8,937 (75,000) (75,000)
Net loss............ -- -- -- -- (5,706,607) -- -- (5,706,607)
--------- ----------- -------- ------ ------------ ------ ---------- ----------
BALANCE, December
31, 1995............ 25,957 11,479,223 -- -- (8,776,351) 8,937 (75,000) 2,675,040
Net loss
(unaudited)......... -- -- -- -- (1,856,841) -- -- (1,856,841)
Common stock issued
for acquisition.... 89 44,911 -- -- -- -- -- 45,000
Exercise of stock
options............. 1 149 -- -- -- -- -- 150
Conversion of Series
A, B, C and D
Convertible
Preferred Stock to
Common Stock (Notes
8 and 14).......... 18,956 2,255 -- -- -- -- -- --
--------- ----------- -------- ------ ------------ ------ ---------- ----------
BALANCE, June 30,
1996 (unaudited)... $45,003 $11,526,538 -- $-- $(10,633,192) 8,937 $ (75,000) $ 863,349
--------- ----------- -------- ------ ------------ ------ ---------- ----------
--------- ----------- -------- ------ ------------ ------ ---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
ADVANCED HEALTH CORPORATION AND SUBSIDIARIES
(FORMERLY MED-E-SYSTEMS CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE YEARS FOR THE SIX MONTHS
FROM INCEPTION ENDED DECEMBER 31, ENDED JUNE 30,
(AUGUST 27, 1993) TO -------------------------- --------------------------
DECEMBER 31, 1993 1994 1995 1995 1996
-------------------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss......................... $ (520,814) $(2,548,930) $(5,706,607) $(2,048,665) $(1,856,841)
Adjustments to reconcile net loss
to net cash used in operating
activities-
Depreciation and amortization... 1,552 146,681 456,819 167,940 422,746
Changes in operating assets and
liabilities-
Accounts receivable........... -- -- (1,020,558) -- (2,282,025)
Note receivable............... -- -- (125,000) -- 110,000
Prepaids and deferred
registration costs............... -- (7,134) (271,171) (49,176) (57,653)
Other assets.................. -- (125,711) (33,401) -- (14,831)
Accounts payable.............. 118,413 200,713 993,445 305,288 (341,240)
Accrued expenses.............. 43,872 82,973 280,396 9,904 444,554
Due to affiliate.............. 105,116 270,709 (375,825) -- 50,500
Deferred revenue.............. 175,000 (175,000) 1,500,000 -- (550,000)
------- ----------- ----------- ----------- -----------
Net cash used in operating
activities....................... (76,861) (2,155,699) (4,301,902) (1,614,709) (4,074,790)
------- ----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Issuance of note receivable from
affiliate........................ -- -- (500,000) -- --
Proceeds from repayment of note
receivable from affiliate....... -- -- 500,000 -- --
Net purchase price of
acquisitions..................... -- -- (150,000) -- --
Purchases of property and
equipment, net................... (21,088) (505,997) (881,531) (75,799) (249,056)
------- ----------- ----------- ----------- -----------
Net cash used in investing
activities....................... (21,088) (505,997) (1,031,531) (75,799) (249,056)
------- ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
(Repayment of) proceeds from
loans payable related to
acquisitions..................... -- 50,000 (50,000) -- (94,500)
Net proceeds from sale and
issuance of common stock........ 8,045 639,655 628,179 -- --
Net proceeds from exercise of
stock options.................... -- -- 19,717 -- 150
Net proceeds from promissory
notes............................ -- -- -- -- 4,000,000
Purchase of treasury stock....... -- -- (75,000) -- --
Net proceeds from issuance of
Series A Convertible Preferred
Stock............................ 97,180 -- -- -- --
Net proceeds from issuance of
Series B Convertible Preferred
Stock............................ -- 2,000,103 -- -- --
Net proceeds from issuance of
Series C Convertible Preferred
Stock............................ -- -- 1,500,000 1,815,362 --
Net proceeds from issuance of
Series D Convertible Preferred
Stock............................ -- -- 4,997,700 -- --
Repayment of capital lease
obligations...................... -- (28,435) (229,639) (100,552) (209,368)
------- ----------- ----------- ----------- -----------
Net cash provided by
financing activities....... 105,225 2,661,323 6,790,957 1,714,810 3,696,282
------- ----------- ----------- ----------- -----------
Net change in cash........... 7,276 (373) 1,457,524 24,302 (627,564)
CASH, beginning of period........ -- 7,276 6,903 6,903 1,464,427
------- ----------- ----------- ----------- -----------
CASH, end of period.............. $ 7,276 $ 6,903 $ 1,464,427 $ 31,205 $ 836,863
------- ----------- ----------- ----------- -----------
------- ----------- ----------- ----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the period for:
Interest......................... $-- $ 3,267 $ 21,497 $ 4,557 $ 46,440
------- ----------- ----------- ----------- -----------
------- ----------- ----------- ----------- -----------
Income taxes..................... $-- $ 3,189 $ 14,854 $ -- $ 573
------- ----------- ----------- ----------- -----------
------- ----------- ----------- ----------- -----------
SUPPLEMENTAL DISCLOSURE OF
NONCASH INVESTING ACTIVITIES:
Capital lease obligations
incurred......................... $-- $ 394,481 $ 280,652 $ 152,177 $ 195,815
------- ----------- ----------- ----------- -----------
------- ----------- ----------- ----------- -----------
Fair market value of common stock
issued for acquisitions......... $-- $ -- $ 1,635,812 $ -- $ 45,000
------- ----------- ----------- ----------- -----------
------- ----------- ----------- ----------- -----------
Loan payable issued for
acquisition...................... $-- $ -- $ 150,000 $ -- $ --
------- ----------- ----------- ----------- -----------
------- ----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
ADVANCED HEALTH CORPORATION AND SUBSIDIARIES
(FORMERLY MED-E-SYSTEMS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995
1. ORGANIZATION AND BUSINESS
Advanced Health Corporation and subsidiaries (collectively, the "Company" or
"AHC"), provides physician groups and networks with practice and network
management services and clinical information systems and services. The Company's
wholly-owned subsidiary was incorporated on August 27, 1993 as Med-E-Systems
Corporation (formerly Med-E-Mail Corporation), and was engaged at inception to
design and develop clinical information systems for physician users. Effective
August 1995, Med-E-Systems Corporation became a wholly-owned subsidiary of AHC,
an entity incorporated in March 1995, through a stock-for-stock transfer in
which preferred and common shareholders of Med-E-Systems Corporation exchanged
their interests for the same amounts and classes of preferred and common stock
in AHC as those then outstanding in Med-E-Systems Corporation. The Company was
subsequently merged with and into Majean, Inc. (Note 3), a Delaware corporation,
and the surviving corporation changed its name to Advanced Health Corporation.
Concurrent with this transaction, the Company raised approximately $5 million in
a private placement of its securities for the principal purposes of funding the
ongoing development of the Company's clinical information systems and services
and the Company's forward integration into physician practice and network
management services. Management of the Company believes that this financing, as
well as the bridge financing described in Note 14, will be adequate to fund the
Company's operations at least through January 1997.
The Company operates in a highly-regulated environment in which its sources
of revenues are dependent on the Company's ability to successfully negotiate
with third parties for its various services. Currently, the Company depends on
revenue generated by a limited number of customers, including physician groups
and networks which are under long-term contracts.
For a discussion of risks associated with the Company and its business, see
"Risk Factors" in the accompanying initial public offering (Note 14)
registration statement of which these consolidated financial statements and
notes to consolidated financial statements are a part.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
AHC and its wholly-owned subsidiaries: Advanced Health Management Corporation
("AHM", formerly Advanced Clinical Networks Corporation), Med-E-Systems
Corporation ("MES") and Management Service Organization subsidiaries ("MSOs")
established to facilitate the provision of management services to physician
practice and network clients. These consolidated financial statements include
the results of operations of the Company from the inception of MES in August
1993, including other entities formed or acquired from their formation or
acquisition, through December 31, 1995. The structure of the Company's wholly or
majority-owned MSOs presently provides for the Company to receive activity-based
fee income from the MSOs for management services provided, and reimbursement
from the MSOs for certain expenses incurred, with the result being that there
are no profits in the MSO entity for which a minority interest is required to be
calculated. Accordingly, the consolidated financial statements do not reflect
any minority interest in the operations of the MSOs. In the event that profits
remain in MSO entities in the future, minority interests will be reflected in
the Company's consolidated financial statements. Intercompany accounts and
transactions have been eliminated in consolidation.
F-7
<PAGE>
ADVANCED HEALTH CORPORATION AND SUBSIDIARIES
(FORMERLY MED-E-SYSTEMS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994 AND 1995
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
REVENUE RECOGNITION
Operating revenues are generated from three principal sources:
(a) Physician Practice Revenues: A physician group practice is a single
legal entity comprised of multiple physicians. Through its majority or
wholly-owned consolidated MSOs, the Company enters into management services
agreements with physician group practices, whereby such physician practices
outsource their non-medical and administrative functions to the MSO.
Activity-based fees are generated by the MSO through the provision of these
outsourced services as well as certain additional management, marketing and
information services. Fees for such services are either fixed or based on
the level of services provided, as negotiated in the Company's various
agreements for the provision of services, and are recognized monthly or as
these services are rendered, respectively, based on the terms of the related
agreements. The Company's contracts with its physician group practices also
include pre-determined incentives which are earned and recognized as revenue
in the event that the Company is successful in reducing a physician group
practice's administrative expenses.
(b) Physician Network Revenues: A physician network is an aggregation of
individual physicians and physician groups formed for the purpose of
entering into contracts with third-party payors. A physician network enters
into a contract with a third-party payor pursuant to which the physicians
comprising the network agree to provide medical services to network
enrollees in return for a fixed per enrollee fee. Such contracts are known
as "capitated contracts." The physician network then enters into a
management services agreement with the Company's majority-owned,
consolidated MSO, pursuant to which the aggregate capitated payments are
assigned to the MSO. From these capitated payments, the MSO pays a fixed
percentage of the capitated premium to fund all administrative and
management services required under the contract. After payment of such
administrative and management services expenses, the MSO pays the network
physicians in return for the physicians' provision of medical services to
medical enrollees. Such payments are based on a pre-determined fee schedule
established based on actuarial predictions of required medical utilization
by the networks' enrollees. In the event that total capitated premiums
exceed the sum of the costs of (i) administrative and management services
provided and (ii) the physicians' provision of medical services to the
network enrollees, such savings are shared between the MSO and the network
physicians in differing pre-determined amounts. In the event that total
capitated premiums are less than the sum of the abovementioned costs, such
costs are accrued and are borne proportionally by the MSO. The Company will
recognize in its financial statements only those revenues earned in
connection with the provision of management services related to these
capitated arrangements.
In the event that contracts between MSOs and physician practices and
networks are terminated, the terms of the related contracts do not require
the Company, through the MSOs, to return any previously-earned revenues.
(c) Information Systems and Services Revenue: The Company's current
business strategy for providing integrated physician practice and network
management services includes selling its information systems and services as
a means of ultimately providing a full range of services. The Company has,
in order to generate funds and demonstrate the uses of its systems, licensed
certain components of its software to third parties.
F-8
<PAGE>
ADVANCED HEALTH CORPORATION AND SUBSIDIARIES
(FORMERLY MED-E-SYSTEMS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994 AND 1995
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
The Company recognizes revenue from the sale of its information systems
and services (upon installation and acceptance), and from the licensing of
its software to third parties (upon delivery). Certain of these third
parties provide payment in advance for the development and installation of
software, databases and systems. The Company accounts for these advance
payments as deferred revenue when received, and recognizes revenue ratably
over the period of time during which the software is delivered and services
are performed. In December 1991, the American Institute of Certified Public
Accountants issued Statement of Position ("SOP") 91-1, "Software Revenue
Recognition". The Company's revenue recognition policy is in compliance with
the provisions of this SOP.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of trade receivables from physician practice
revenues, physician network revenues and information systems and services
revenues.
PROPERTY AND EQUIPMENT
Property and equipment, consisting primarily of electronic data processing
equipment, are stated at cost and depreciated on a straight-line basis over the
useful lives of the assets (3 to 5 years). Equipment held under capital leases
is amortized utilizing the straight-line method over the lesser of the term of
the lease or the estimated useful life of the asset.
INTANGIBLE ASSETS
The Company is in the process of allocating the excess of purchase price
over tangible net assets acquired in the acquisitions described in Note 3 to
specific categories of intangible assets. The total of such excess purchase
price is included in intangible assets and is presently being amortized over
periods of 15 to 20 years.
These amortization periods are evaluated by management on a continuing
basis, and will be adjusted if the lives of the related intangible assets
(expected to be principally goodwill and management contracts) are impaired.
COMPUTER SOFTWARE COSTS
The Company develops computer software which is marketed to third parties.
The Company capitalizes such costs in accordance with Statement of Financial
Accounting Standards No. 86, "Accounting for the Costs of Computer Software to
be Sold, Leased, or Otherwise Marketed". Amortization of such costs is provided
using the straight-line method over the estimated economic life of the products,
which is generally five years.
The Company has $125,711, $100,569 and $87,998 of unamortized capitalized
computer software costs included in other assets in the accompanying
consolidated balance sheets as of December 31, 1994, December 31, 1995 and June
30, 1996 (unaudited), respectively.
F-9
<PAGE>
ADVANCED HEALTH CORPORATION AND SUBSIDIARIES
(FORMERLY MED-E-SYSTEMS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994 AND 1995
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Computer software amortization expense aggregated $0, $0 and $25,142,
respectively, for the period ended December 31, 1993 and for the years ended
December 31, 1994 and 1995, and $12,571 in each of the six month periods ended
June 30, 1995 and 1996 (unaudited).
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred by the Company.
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 and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INCOME TAXES
At inception, the Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes", which requires recognition of
deferred tax liabilities and assets for the estimated future tax effects of
events that have been recognized in the financial statements or income tax
returns. Under this method, deferred tax liabilities and assets are determined
based on (1) differences between the financial accounting and income tax bases
of assets and liabilities, and (2) carry-forwards, using enacted tax rates in
effect for the years in which the differences and carry-forwards are expected to
reverse and be utilized, respectively (Note 11).
NET LOSS PER COMMON SHARE
Net loss per common share was computed by dividing net loss by the weighted
average number of common shares and common share equivalents outstanding during
the respective years, which includes, for all periods, (i) the effect of the
conversion of common stock equivalent Class A, B, C and D Convertible Preferred
Stock to common stock, (ii) the retroactive effect of the reverse stock split,
both described in Note 14, which will occur concurrent with the consummation of
the Company's initial public offering and (iii) the impact of the issuance, in
the year prior to the Company's pending initial public offering (Note 14), of
504,477 warrants and options for all periods presented. Fully diluted net loss
per common share has not been presented since the inclusion of the impact of
stock options and warrants outstanding (Notes 3, 8, 10 and 14) would be
antidilutive.
RECENTLY ISSUED ACCOUNTING STANDARDS
During March 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
This statement establishes financial accounting and reporting standards for the
impairment of long-lived assets, certain identifiable intangibles, and goodwill
related to those assets to be held and used, and for long-lived assets and
certain identifiable
F-10
<PAGE>
ADVANCED HEALTH CORPORATION AND SUBSIDIARIES
(FORMERLY MED-E-SYSTEMS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994 AND 1995
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
intangibles to be disposed of. This statement is effective for financial
statements for fiscal years beginning after December 15, 1995, although earlier
application is encouraged. It is the Company's policy to account for these
assets at the lower of amortized cost or fair value. As part of an ongoing
review of the valuation and amortization of such assets, management assesses the
carrying value of such assets on a continuing basis. If this review indicates
that the assets will not be recoverable as determined by a nondiscounted cash
flow analysis over the remaining amortization period, the carrying value of
these assets would be reduced to their estimated fair market values. The Company
does not expect the impact of the adoption of this pronouncement to be material.
During October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, "Accounting for Stock Based Compensation." This statement establishes
financial accounting and reporting standards for stock-based employee
compensation plans. SFAS No. 123 encourages entities to adopt a fair value based
method of accounting for stock compensation plans. However, SFAS No. 123 also
permits the Company to continue to measure compensation costs under pre-existing
accounting pronouncements. If the fair value based method of accounting is not
adopted, SFAS No. 123 requires pro forma disclosures of net income (loss) and
net income (loss) per common share in the notes to consolidated financial
statements. The accounting requirements of SFAS No. 123 are effective for
transactions entered into in fiscal years that begin after December 15, 1995,
though they may be adopted on issuance. The disclosure requirements of SFAS No.
123 are effective for financial statements for fiscal years beginning after
December 15, 1995, or for an earlier fiscal year for which SFAS No. 123 is
initially adopted for recognizing compensation cost. The Company has not yet
quantified the expected impact of the adoption of this pronouncement.
3. ACQUISITION OF BUSINESSES
ACQUISITIONS
The transaction with Majean, Inc. described in Note 1 was accounted for as a
purchase through the issuance of 543,564 shares of the Company's stock to the
shareholders of Majean, Inc., who were not previously affiliated with the
Company, for an aggregate purchase price of $1,368,471. Additionally, options to
purchase 283,010 shares of common stock at $.0112 per share were issued as part
of this transaction. These options are only exercisable, as contingent
consideration, upon the achievement of certain capitalization levels related to
regulatory requirements. The entire purchase price of this acquisition has been
allocated to intangible assets in the accompanying consolidated balance sheet,
as will any contingent consideration which arises due to the option described
above, based on a twenty-year contract with a MSO, which was contributed to
Majean, Inc. by its shareholders upon its formation immediately prior to the
transaction. Accordingly, this intangible asset is being amortized over a period
of twenty years.
Pursuant to an asset purchase agreement with Peltz Ventimiglia, Inc.
("Peltz") dated August 28, 1995, AHC acquired certain assets and assumed certain
liabilities of Peltz for 75,996 shares of common stock for an aggregate purchase
price of $191,327. Additionally, the former owners of Peltz received warrants to
purchase 113,995 shares of the Company's common stock at $4.38 per share, which
management believes to be in excess of the fair market value of such shares at
the date of grant. These
F-11
<PAGE>
ADVANCED HEALTH CORPORATION AND SUBSIDIARIES
(FORMERLY MED-E-SYSTEMS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994 AND 1995
3. ACQUISITION OF BUSINESSES--(CONTINUED)
warrants are only exercisable, as contingent consideration, based on the
achievement of targeted operating performance.
Pursuant to a purchase agreement with U.S. Health Connections, Inc. ("Health
Connections") dated September 1, 1995, the Company acquired, through its
subsidiary AHM, all of the outstanding stock of Health Connections for $150,000
in cash, a note for $150,000 due in two installments within one year of the
acquisition and 30,193 shares of common stock, for an aggregate purchase price
of $376,014. Furthermore, the Health Connections purchase agreement calls for
the issuance of an additional 56,611 shares of common stock, as contingent
consideration, based on the achievement of targeted operating performance by
this entity.
The Company will record the effect of the contingent consideration related
to these acquisitions based upon the provisions of Emerging Issues Task Force
Issue 95-8, "Accounting for Contingent Consideration Paid to the Shareholders of
an Acquired Company in a Purchase Business Combination", which sets forth the
criteria for determining the allocation of contingent consideration as either
additional purchase price or compensation expense. These criteria provide for
the recognition of contingent consideration, as opposed to compensation expense,
upon the exercisability, if any, of such options and warrants where relevant
facts and circumstances, such as continued employment of the sellers, components
of the selling shareholder group, reasons for contingent payments and other
agreements and issues, indicate that such accounting is warranted. Management of
the Company believes that the terms of the acquisitions described above meet the
criteria for recognition of contingent consideration.
These acquisitions described above were valued based on management's
estimate of the fair value of common stock at the date of acquisition, which was
determined by the Company's management by comparisons to (i) arms-length
transactions with unrelated third-parties for the same or similar securities and
(ii) an independent third-party appraisal. Costs in excess of net assets
acquired were recorded as intangible assets as follows:
<TABLE>
<CAPTION>
PELTZ U.S. HEALTH
MAJEAN, INC. VENTIMIGLIA, INC. CONNECTIONS, INC.
------------ ----------------- -----------------
<S> <C> <C> <C>
Accounts receivable................................ $ -- $ 41,555 $ 40,775
Intangible assets.................................. 1,368,471 183,551 365,239
Current liabilities................................ -- (33,779) (30,000)
------------ ----------------- -----------------
Total purchase price........................... $ 1,368,471 $ 191,327 $ 376,014
------------ ----------------- -----------------
------------ ----------------- -----------------
</TABLE>
PRO FORMA RESULTS OF OPERATIONS
Summarized below are the unaudited pro forma results of operations of the
Company as though these acquisitions had occurred at the beginning of 1994. This
pro forma information does not give effect to any operations of Majean, Inc.,
which had no operations prior to the merger transaction with
F-12
<PAGE>
ADVANCED HEALTH CORPORATION AND SUBSIDIARIES
(FORMERLY MED-E-SYSTEMS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994 AND 1995
3. ACQUISITION OF BUSINESSES--(CONTINUED)
the Company. Adjustments have been made for pro forma income taxes and
amortization of intangible assets related to these transactions.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER
31,
-----------------------------
1994 1995
----------- -----------
<S> <C> <C>
Pro Forma:
Revenues................................... $ 1,228,409 $ 1,619,621
Net loss................................... (2,467,198) (5,742,954)
Net loss per share......................... $ (1.18) $ (1.66)
</TABLE>
These pro forma results of operations are not necessarily indicative of the
actual results of operations that would have occurred had the acquisitions been
made at the beginning of 1994, or of results which may occur in the future.
4. RELATED PARTY TRANSACTIONS
The Company shares office space and administrative services with Physicians'
Online, Inc. ("POL"), a healthcare information services company which is partly
owned by several of the Company's shareholders, including certain officers and
directors.
During the year ended December 31, 1994, the Company earned $175,000 of
revenue from POL for information systems and services. During the period ended
December 31, 1993 and the years ended December 31, 1994 and 1995, POL also
incurred expenses totaling $105,116, $135,825 and $180,631, respectively, and
$117,362 and $50,500, respectively, for the six months ended June 30, 1995 and
1996 (unaudited), on behalf of the Company for which the Company has reimbursed
POL. The amount due POL, as well as a loan from POL in the amount of $300,000,
which has been repaid, is reflected as due to affiliate in the accompanying
consolidated balance sheet at December 31, 1994. In addition, during 1995, POL
borrowed $500,000 from the Company. POL repaid this amount in full prior to
December 31, 1995.
Revenues from MSOs, which are also related parties, are separately set forth
in the accompanying consolidated financial statements.
Management of the Company believes that these related party transactions
were effected on terms which approximate fair market value.
F-13
<PAGE>
ADVANCED HEALTH CORPORATION AND SUBSIDIARIES
(FORMERLY MED-E-SYSTEMS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994 AND 1995
5. PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
---------------------- 1996
1994 1995 (UNAUDITED)
-------- ---------- ------------
<S> <C> <C> <C>
Computer equipment and software.......................... $486,155 $1,152,077 $ 1,378,407
Equipment under capital leases........................... 394,481 681,988 877,803
Leasehold improvements................................... 37,930 60,236 27,049
Furniture and fixtures................................... 3,000 189,448 245,361
-------- ---------- ------------
921,566 2,083,749 2,528,620
Less: Accumulated depreciation and amortization.......... 148,233 544,851 913,673
-------- ---------- ------------
Property and equipment, net.............................. $773,333 $1,538,898 $ 1,614,947
-------- ---------- ------------
-------- ---------- ------------
</TABLE>
Depreciation and amortization aggregated $1,552, $146,681 and $396,618,
respectively, for the period ended December 31, 1993 and for the years ended
December 31, 1994 and 1995, and $167,940 and $368,822, respectively, for the six
months ended June 30, 1995 and 1996 (unaudited).
F-14
<PAGE>
ADVANCED HEALTH CORPORATION AND SUBSIDIARIES
(FORMERLY MED-E-SYSTEMS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994 AND 1995
6. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
DECEMBER 31, 1996
1995 (UNAUDITED)
------------ -----------
<S> <C> <C>
Excess of purchase price over net assets acquired.................. $1,917,261 $ 2,007,261
Less: Accumulated amortization..................................... 41,650 95,574
------------ -----------
Intangible assets, net......................................... $1,875,611 $ 1,911,687
------------ -----------
------------ -----------
</TABLE>
Amortization aggregated $41,650 for the year ended December 31, 1995 and
$53,924 for the six months ended June 30, 1996 (unaudited). There were no
intangible assets or related amortization prior to 1995.
7. COMMON STOCK
In connection with the formation of the Company, the Company entered into
two common stock agreements as follows:
(a) On August 30, 1993, the Company entered into agreements for the
subscription of 185,893 shares of common stock for $3,120.
(b) On December 27, 1993, the Company sold 718,984 shares of common
stock for $8,045 pursuant to a private placement agreement dated November 8,
1993. The shares were offered only to the holders of POL stock on a
one-for-one basis pro rata to their shareholdings in POL as of the close of
business on August 30, 1993. In accordance with this agreement, the holders
of these shares have the right, on two occasions, to participate on a
"piggy-back" basis in a registration by the Company under the Securities Act
of 1933, as amended, subject to certain restrictions, for a period ending on
December 27, 1998, and commencing twelve months from the closing of an
initial public offering of the securities of the Company.
(c) In November 1994, the Company sold 75,960 shares of common stock
pursuant to a private placement agreement dated August 22, 1994 for an
aggregate of $639,655. Of these shares sold, all of which were paid for in
1994, 25,319 were issued prior to December 31, 1994 and 50,641 were issued
in January 1995. In accordance with this agreement, the holders of these
shares have the right, on two occasions, to participate on a "piggy-back"
basis in a registration by the Company under the Securities Act of 1933, as
amended, subject to certain restrictions, for a period ending on October 31,
1999, and commencing twelve months from the closing of an initial public
offering of the securities of the Company.
(d) In 1995, the Company sold 79,780 shares of common stock pursuant to
a private placement agreement dated April 21, 1995 for an aggregate of
$625,059. In accordance with this agreement, the holders of these shares
have the right, on two occasions, to participate on a "piggy-back" basis in
a registration by the Company under the Securities Act of 1933, as amended,
subject to certain restrictions, for a period ending on September 30, 2000,
and commencing twelve months from the closing of an initial public offering
of the securities of the Company.
8. CONVERTIBLE PREFERRED STOCK
During 1993, the Company's shareholders authorized 2,000,000 shares of
Preferred Stock with a par value of $.01 per share, of which 971,800 shares were
designated Series A Convertible Preferred Stock. On August 31, 1993, the Company
sold 971,800 shares of Series A Convertible Preferred Stock
F-15
<PAGE>
ADVANCED HEALTH CORPORATION AND SUBSIDIARIES
(FORMERLY MED-E-SYSTEMS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994 AND 1995
8. CONVERTIBLE PREFERRED STOCK--(CONTINUED)
for $97,180. In March 1994, the Company authorized and sold 282,900 shares of
Series B Convertible Preferred Stock for $2,000,103 pursuant to a Private
Placement Agreement. In January 1995, the Company authorized and sold 200,000
shares of Series C Convertible Preferred Stock for $1,500,000 pursuant to a
Private Placement Agreement. In August 1995, the Company authorized and sold
666,360 shares of Series D Convertible Preferred Stock for $4,997,700 pursuant
to a Private Placement Agreement. All of the above shares are not redeemable.
Each individual share of Series A, B, C and D Convertible Preferred Stock
was convertible into 1.5 common shares (see Note 14) at the holder's option,
subject to adjustment for antidilution. The holders of Series A, B, C and D
Convertible Preferred Stock were entitled to receive dividends as and if
declared by the Board of Directors. In the event of liquidation, dissolution or
winding up of the Company, the holders of Series A, B, C and D Convertible
Preferred Stock were entitled to receive all accrued dividends, if applicable,
plus the liquidation price per share of $.07, $4.71, $5.00 and $5.00,
respectively.
As described in Note 14, all information contained in the accompanying
consolidated financial statements has been retroactively restated to give effect
to the reverse stock split, and the information contained in the accompanying
consolidated balance sheet as of June 30, 1996 (unaudited) has been
retroactively restated to give effect to the conversion of Class A, B, C and D
Convertible Preferred Stock to common stock, both of which transactions will be
effected concurrently with the consummation of the pending initial public
offering. Accordingly, the sale of common stock equivalent Series A, B, C and D
Convertible Preferred Stock is reflected as the sale of 868,512, 252,831,
178,743 and 595,535 shares of common stock, respectively, in the accompanying
consolidated statements of operations for the purpose of computing net loss per
share and in the accompanying consolidated balance sheet as of June 30, 1996
(unaudited).
Subject to certain provisions, prior to the conversion to common stock,
registration rights, as defined in the agreement, were to be exercisable after
the earlier of (1) August 23, 1999, or (2) the effective date of the first
registration statement for a public offering of securities of the Company.
Holders of Series B, C and D Convertible Preferred Stock have voting rights.
Furthermore, holders of Series D Convertible Preferred Stock have the right to
purchase 446,858 shares of common stock at $8.39 per share.
9. STOCK SPLITS
In January 1995, the Company authorized a 100 for 1 stock split on its
Series A and B Preferred Stock and a 100 for 1 stock split on the common stock
sold in 1993 (Note 7 a). In April 1996, the Company effected a 1.5 for 1 stock
split on its common stock in the form of a stock dividend. All information in
the accompanying consolidated financial statements and footnotes has been
retroactively restated to give effect to these stock splits.
10. STOCK OPTIONS AND WARRANTS
STOCK OPTIONS
During 1994, the Company issued options to employees to purchase 970,860
shares of common stock at prices ranging from $.0112 to $2.52 per share. During
1995, the Company issued options to employees to purchase 851,380 shares of
common stock at prices ranging from $2.52 to $3.52 per share. During the six
months ended June 30, 1996, the Company issued options to employees, directors
and
F-16
<PAGE>
ADVANCED HEALTH CORPORATION AND SUBSIDIARIES
(FORMERLY MED-E-SYSTEMS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994 AND 1995
10. STOCK OPTIONS AND WARRANTS--(CONTINUED)
advisors to purchase 105,244 shares of common stock at $5.04 per share. In the
opinion of management, these option prices represented the fair market value of
such shares at the dates of grant.
Transactions involving the Stock Option Plan for the years ended December
31, 1994 and 1995 and for the six months ended June 30, 1996 are summarized as
follows:
<TABLE>
<CAPTION>
SIX MONTHS
FOR THE YEARS ENDED ENDED
DECEMBER 31, JUNE 30,
--------------------------- 1996
1994 1995 (UNAUDITED)
------------ ----------- -----------
<S> <C> <C> <C>
Outstanding at beginning of period.................. -- 970,860 888,924
Granted........................................... 970,860 851,380 105,244
Exercised......................................... -- (885,279) (60)
Canceled.......................................... -- (48,037) (17,427)
------------ ----------- -----------
Outstanding at end of period........................ 970,860 888,924 976,681
------------ ----------- -----------
------------ ----------- -----------
Range of exercise prices............................ $.0112-$2.52 $2.52-$3.52 $2.52-$5.04
------------ ----------- -----------
------------ ----------- -----------
</TABLE>
STOCK WARRANTS
In October 1995, the Company issued warrants to a financial advisor to
purchase 17,874 shares of common stock at $3.52 per share. In the opinion of
management, the exercise price of $3.52 per share represents the fair value of
such shares at the date the warrants were issued. Accordingly, management has
determined that the intrinsic value of these warrants is not material to the
Company's consolidated financial statements.
11. INCOME TAXES
There is no provision for income taxes in the accompanying consolidated
financial statements because the Company has incurred net operating losses from
inception. As of December 31, 1995, the Company had net operating loss carry
forwards ("NOLs") available to offset future book and taxable income of
approximately $8.7 million and $6.2 million, respectively, which expire through
2010. The difference between the book and tax NOLs relates principally to the
differences between book and tax accounting related to start-up costs,
depreciation of fixed assets, amortization of intangible assets and recognition
of deferred revenue. The future book income tax benefits of $1.3 million and
$3.5 million as of December 31, 1994 and December 31, 1995, respectively, have
been fully reserved due to the fact that it is more likely than not that these
tax benefits will not be recognized in the future.
12. CAPITAL LEASE OBLIGATIONS
The Company is the lessee of certain equipment under capital leases expiring
through 1998. The assets and liabilities are recorded at the lower of the
present value of minimum lease payments or the fair market value of the asset.
The interest rates on the capital leases vary from 2.63% to 17.00%.
F-17
<PAGE>
ADVANCED HEALTH CORPORATION AND SUBSIDIARIES
(FORMERLY MED-E-SYSTEMS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994 AND 1995
12. CAPITAL LEASE OBLIGATIONS--(CONTINUED)
Future minimum payments under these lease agreements are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- ------------
<S> <C>
1996............................................................ $277,842
1997............................................................ 126,767
1998 and thereafter............................................. 39,994
--------
Total minimum lease payments.................................... 444,603
Less: Amount representing interest.............................. 27,544
--------
Present value of net minimum lease payments..................... $417,059
--------
--------
</TABLE>
13. COMMITMENTS
The Company leases certain office space for its operations. Leases for this
space expire through 2002 and call for annual rent with immaterial escalations
through the end of the leases.
The Company has also entered into several operating leases for office
equipment.
Future minimum payments for operating leases at December 31, 1995 are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- ------------
<S> <C>
1996........................................................... $ 247,447
1997........................................................... 673,317
1998........................................................... 784,772
1999........................................................... 781,844
2000 and thereafter............................................ 1,539,750
</TABLE>
Rent expense for the period ended December 31, 1993 and for the years ended
December 31, 1994 and 1995 was $20,000, $69,774 and $125,881, respectively, and
$60,750 and $180,973 for the six months ended June 30, 1995 and 1996
(unaudited).
14. SUBSEQUENT EVENTS
ACQUISITION
On April 1, 1996, the Company acquired certain assets and assumed certain
liabilities of a network development company in exchange for 8,937 shares of the
Company's common stock and $45,000, to be paid in two installments of $22,500 on
the closing date and the first anniversary thereof, for an aggregate purchase
price of approximately $90,000, all of which is included in intangible assets
(Note 6) in the accompanying unaudited balance sheet as of June 30, 1996. The
pro forma effects of this transaction have not been presented, as the results
are immaterial to the Company's consolidated financial statements taken as a
whole.
FORMATION OF MSOS
In July 1996, the Company obtained a 51% interest in Cardiology First
Management Company ("CFMC"), a newly formed MSO. The Company acquired this
interest as part of the formation of CFMC and concurrent with the signing of a
long-term management services agreement between CFMC and Cardiology First of New
Jersey, P.A., which is a network of cardiologists based in the State of New
Jersey.
F-18
<PAGE>
ADVANCED HEALTH CORPORATION AND SUBSIDIARIES
(FORMERLY MED-E-SYSTEMS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994 AND 1995
14. SUBSEQUENT EVENTS--(CONTINUED)
In July 1996, the Company obtained a 51% interest in Diamond Physician
Management, Inc. ("Diamond"), a newly formed MSO. The Company acquired this
interest as part of the formation of Diamond and concurrent with the signing of
a long-term management services agreement between Diamond and Long Island
Interventional Cardiology, which is a private cardiovascular physician practice
based in Long Island, New York.
In forming these MSOs, the Company conveyed 49% interests to the physician
practice or network in exchange for the execution of the long-term management
services agreements described above. The Company will record the fair value of
this arrangement, which is, in the opinion of management, more readily
determinable than the 49% MSO interest conveyed. These intangible assets, which
the Company does not expect to be material, will be amortized over the life of
the related contracts.
The stockholders agreements for these MSOs, among other things, (i) restrict
the transfer of MSO equity, (ii) provide the terms upon which the MSO can, at
the Company's option, be merged with and into a wholly-owned subsidiary of the
Company in a transaction in which the physician practice or network will receive
stock of the Company in exchange for shares in the MSO, and (iii) grant to the
physician practice or network the right to put its equity share in the MSO to
the Company within one year of the Company's satisfaction of certain specified
targets if the Company has not called its right to acquire those interests
within that period. The agreements provide that these call transactions will be
paid in the Company's common stock, and put transactions will be paid in cash,
and that either transaction, if effected, would be based on an agreed-upon
amount at the time of the transaction. The Company will, in the event that these
transactions take place, account for such transactions as purchases at the
agreed-upon fair market value of the MSO interest being purchased.
INITIAL PUBLIC OFFERING
The Company is pursuing an initial public offering of its securities. The
proposed offering presently contemplates the sale of 2,000,000 shares of common
stock at $12 per share. The Company plans to use a portion of the proceeds of
the proposed offering to repay the Bridge Financing described below, of which
$4,000,000 was outstanding at June 30, 1996. The supplementary net loss per
share for the six months ended June 30, 1996 (unaudited), which follows, gives
supplemental effect to the issuance of 333,333 shares of common stock for the
entire period during which the related Bridge Financing was outstanding, which
is the number of shares to be issued in the proposed initial public offering,
the proceeds of which would be used to repay the $4,000,000 outstanding at June
30, 1996, as well as to the effect of the reduction of related interest expense
in that period. These shares are presumed outstanding for supplementary purposes
only, and were neither issued nor outstanding for any purpose during the six
months ended June 30, 1996.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30, 1996
(UNAUDITED)
-------------------
<S> <C>
Supplementary net loss per share.......................................... $ (0.35)
----------
----------
Supplementary weighted average common shares outstanding.................. 5,217,654
----------
----------
</TABLE>
CONVERSION OF CONVERTIBLE PREFERRED STOCK
Pursuant to the terms of the Series A, B, C and D Convertible Preferred
Stock (Note 8), these securities will be converted, on a 1.5 to 1 share basis,
to common stock concurrent with the consummation of the pending public offering
described above. The accompanying unaudited consolidated financial
F-19
<PAGE>
ADVANCED HEALTH CORPORATION AND SUBSIDIARIES
(FORMERLY MED-E-SYSTEMS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994 AND 1995
14. SUBSEQUENT EVENTS--(CONTINUED)
statements as of June 30, 1996 and for the period then ended give effect to the
conversion of the Series A, B, C and D Convertible Preferred Stock as if it had
occurred as of that date.
REVERSE STOCK SPLIT AND RECAPITALIZATION
In connection with the pending initial public offering described above, the
Company will effect a recapitalization whereby the presently outstanding common
stock (including converted Series A, B, C and D Convertible Preferred Stock)
will be converted to shares of common stock on a .59581 to 1 share basis. After
this reverse split is effected, the Company will have 5,000,000 shares of
preferred stock authorized and 15,000,000 shares of common stock authorized. All
information contained in the accompanying financial statements and footnotes has
been retroactively restated to give effect to this transaction.
BRIDGE FINANCING
On February 28, 1996, the Company entered into an agreement to issue three
8% promissory notes to an investor for an aggregate amount of $3,000,000. The
Company issued one promissory note and received $1,500,000 upon the closing,
issued a second promissory note and received $750,000 at the second closing
date, April 26, 1996, and issued a third promissory note and recieved the
remaining $750,000 on the third closing date, June 28, 1996. Each note is due on
the earlier of the initial public offering of the Company's securities or one
year from the respective closing dates. Interest is due quarterly on each of the
notes.
In addition, the investor received warrants to purchase 16,757 shares of
common stock of the Company at $16.78 per share which expire on June 28, 2001.
The exercise price of $16.78 per share is, in the opinion of management, greater
than the fair market value of such shares at the date the warrants were issued.
The investor also received 8,937 contingent warrants to purchase the Company's
stock at $8.39 per share. These contingent warrants may be exercised during the
period of January 1, 1997 through June 28, 2001 if payment has not been made on
the notes by the agreed upon payment dates described above or if an initial
public offering is not consummated prior to January 1, 1997; however, if
payments on the notes are made by the specified dates, these contingent warrants
will be canceled.
The Company has entered into an agreement with the owners of the Company's
Series D Convertible Preferred Stock and related warrants (Note 8) for
additional bridge financing in the amount of approximately $2,000,000. This
financing is unsecured, bears interest at 9% and expires on the earlier of the
consummation of an initial public offering or July 31, 1997. On June 19, 1996,
the Company issued three promissory notes in the aggregate principal amount of
$1 million and on August 13, 1996, the Company issued three additional
promissory notes in the aggregate principal amount of $1 million under this
agreement.
15. UNAUDITED INTERIM CONSOLIDATED FINANCIAL INFORMATION
The unaudited consolidated financial information for the six months ended
June 30, 1995 and 1996 has been prepared in accordance with generally accepted
accounting principles for interim financial information. In the opinion of the
Company, these unaudited consolidated financial statements reflect all
adjustments necessary, consisting of normal recurring adjustments, for a fair
presentation of such data on a basis consistent with that of the audited data
presented herein. The consolidated results of operations for interim periods are
not necessarily indicative of the results to be expected for a full year.
F-20
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Advanced Health Corporation:
We have audited the accompanying balance sheets of Peltz Ventimiglia, Inc.
(a New York corporation) as of December 31, 1994 and August 31, 1995, and the
related statements of operations, shareholders' equity and cash flows for the
years ended December 31, 1993 and 1994 and for the eight months ended August 31,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Peltz Ventimiglia, Inc. as
of December 31, 1994 and August 31, 1995, and the results of its operations and
its cash flows for the years ended December 31, 1993 and 1994 and for the eight
months ended August 31, 1995 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
New York, New York
June 4, 1996
F-21
<PAGE>
PELTZ VENTIMIGLIA, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, AUGUST 31,
1994 1995
------------ ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash............................................................... $ 3,179 $ 4,344
Accounts receivable................................................ 45,173 41,552
------------ ----------
Total current assets........................................... 48,352 45,896
OTHER ASSETS......................................................... 7,108 7,817
------------ ----------
Total assets................................................... $ 55,460 $ 53,713
------------ ----------
------------ ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................... $ 17,297 $ 30,394
Accrued expenses................................................... 7,337 3,385
------------ ----------
Total liabilities.............................................. 24,634 33,779
------------ ----------
SHAREHOLDERS' EQUITY:
Common stock, $.001 par value; 1,000 shares authorized; 1,000
shares issued and outstanding, respectively...................... 1 1
Additional paid-in capital......................................... 3,085 3,085
Retained earnings.................................................. 27,740 16,848
------------ ----------
Total shareholders' equity..................................... 30,826 19,934
------------ ----------
Total liabilities and shareholders' equity..................... $ 55,460 $ 53,713
------------ ----------
------------ ----------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-22
<PAGE>
PELTZ VENTIMIGLIA, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE
FOR THE YEARS ENDED EIGHT MONTHS
DECEMBER 31, ENDED
-------------------- AUGUST 31,
1993 1994 1995
-------- -------- ------------
<S> <C> <C> <C>
REVENUE................................................... $377,032 $499,543 $351,066
OPERATING EXPENSES........................................ 182,205 408,925 363,047
-------- -------- ------------
(LOSS) INCOME BEFORE (BENEFIT) PROVISION FOR STATE AND
LOCAL INCOME TAXES........................................ 194,827 90,618 (11,981)
(BENEFIT) PROVISION FOR STATE AND LOCAL INCOME TAXES...... 17,712 8,238 (1,089)
-------- -------- ------------
Net (loss) income................................... $177,115 $ 82,380 $(10,892)
-------- -------- ------------
-------- -------- ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-23
<PAGE>
PELTZ VENTIMIGLIA, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993 AND 1994
AND FOR THE EIGHT MONTHS ENDED AUGUST 31, 1995
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------- PAID-IN RETAINED
SHARES PAR VALUE CAPITAL EARNINGS TOTAL
------ --------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE, January 1, 1993.................... 1,000 $ 1 $3,085 $ 3,960 $ 7,046
Distributions to shareholders............. -- -- -- (164,139) (164,139)
Net income................................ -- -- -- 177,115 177,115
--
------ ---------- -------- --------
BALANCE, December 31, 1993.................. 1,000 1 3,085 16,936 20,022
Distributions to shareholders............. -- -- -- (71,576) (71,576)
Net income................................ -- -- -- 82,380 82,380
--
------ ---------- -------- --------
BALANCE, December 31, 1994.................. 1,000 1 3,085 27,740 30,826
Net (loss)................................ -- -- -- (10,892) (10,892)
--
------ ---------- -------- --------
BALANCE, August 31, 1995.................... 1,000 $ 1 $3,085 $ 16,848 $ 19,934
--
--
------ ---------- -------- --------
------ ---------- -------- --------
</TABLE>
The accompanying notes are an integral part of these statements.
F-24
<PAGE>
PELTZ VENTIMIGLIA, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
FOR THE YEARS ENDED EIGHT MONTHS
DECEMBER 31, ENDED
------------------- AUGUST 31,
1993 1994 1995
-------- ------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income........................................ $177,115 $82,380 $(10,892)
Adjustments to reconcile net (loss) income to net cash
provided by operating activities-
Changes in operating assets and liabilities-
Accounts receivable.................................... (34,369) (10,804) 3,621
Other assets........................................... 5,171 (7,108) (709)
Accounts payable....................................... 24,143 (7,171) 13,097
Accrued expenses....................................... -- 7,337 (3,952)
-------- ------- ------------
Net cash provided by operating activities............ 172,060 64,634 1,165
-------- ------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to shareholders............................ (164,139) (71,576) --
-------- ------- ------------
Net cash used in financing activities................ (164,139) (71,576) --
-------- ------- ------------
Net change in cash................................... 7,921 (6,942) 1,165
CASH, beginning of period.................................. 2,200 10,121 3,179
-------- ------- ------------
CASH, end of period........................................ $ 10,121 $ 3,179 $ 4,344
-------- ------- ------------
-------- ------- ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-25
<PAGE>
PELTZ VENTIMIGLIA, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND AUGUST 31, 1995
1. ORGANIZATION AND BUSINESS
Peltz Ventimiglia, Inc. (the "Company") provides physician practice
management consulting services for physicians in the Eastern United States.
On August 28, 1995, the Company entered into a purchase agreement with
Advanced Health Management Corporation ("AHM", formerly Advanced Clinical
Networks Corporation), a wholly-owned subsidiary of Advanced Health Corporation
("AHC"), whereby the Company sold its net assets to AHM for 75,996 shares of AHC
common stock for an aggregate sale price of $191,327.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Fees for physician practice management consulting services are recognized as
services are rendered.
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 and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes", which requires
recognition of deferred tax liabilities and assets for the estimated future tax
effects of events that have been recognized in the financial statements or
income tax returns. Under this method, deferred tax liabilities and assets are
determined based on (1) differences between the financial accounting and income
tax bases of assets and liabilities, and (2) carry-forwards, using enacted tax
rates in effect for the years in which the differences and carry-forwards are
expected to reverse and be utilized, respectively.
The Company operates under Subchapter S of the Internal Revenue Code and,
consequently, is not subject to Federal and certain state income taxes. The
stockholders include their pro rata share of the Company's income in their
personal income tax returns. It is the Company's policy to reimburse its
stockholders for any tax liability resulting from their inclusion of the
Company's income in their respective tax returns.
F-26
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Advanced Health Corporation:
We have audited the accompanying balance sheets of U.S. Health Connections,
Inc. (a Georgia corporation) as of December 31, 1994 and August 31, 1995, and
the related statements of operations, shareholders' equity and cash flows for
the year ended December 31, 1994 and for the eight months ended August 31, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of U.S. Health Connections,
Inc. as of December 31, 1994 and August 31, 1995, and the results of its
operations and its cash flows for the year ended December 31, 1994 and for the
eight months ended August 31, 1995 in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
New York, New York
June 5, 1996
F-27
<PAGE>
U.S. HEALTH CONNECTIONS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, AUGUST 31,
1994 1995
------------ ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash............................................................... $ 4,708 $ --
Accounts receivable................................................ 72,596 40,775
------------ ----------
Total current assets........................................... 77,304 40,775
PROPERTY AND EQUIPMENT, net.......................................... 20,052 23,736
OTHER ASSETS......................................................... 1,592 1,652
------------ ----------
Total assets................................................... $ 98,948 $ 66,163
------------ ----------
------------ ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................... $ 24,834 $ 10,436
Accrued expenses................................................... 27,414 15,953
Current portion of long-term debt.................................. 2,838 8,309
Loan payable to shareholder........................................ -- 6,000
Deferred revenue................................................... 10,002 --
------------ ----------
Total current liabilities...................................... 65,088 40,698
LONG-TERM DEBT, net of current portion............................... 8,513 --
------------ ----------
Total liabilities.............................................. 73,601 40,698
------------ ----------
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value; 10,000 shares authorized; 100 shares
issued and outstanding............................................... 1 1
Additional paid-in capital......................................... 99 99
Retained earnings.................................................. 25,247 25,365
------------ ----------
Total shareholders' equity..................................... 25,347 25,465
------------ ----------
Total liabilities and shareholders' equity..................... $ 98,948 $ 66,163
------------ ----------
------------ ----------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-28
<PAGE>
U.S. HEALTH CONNECTIONS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE
FOR THE EIGHT MONTHS
YEAR ENDED ENDED
DECEMBER 31, AUGUST 31,
1994 1995
------------ ------------
<S> <C> <C>
REVENUE............................................................ $349,988 $214,606
OPERATING EXPENSES................................................. 318,506 212,002
------------ ------------
Operating income............................................. 31,482 2,604
INTEREST EXPENSE, net.............................................. 948 690
------------ ------------
INCOME BEFORE PROVISION FOR INCOME TAXES........................... 30,534 1,914
PROVISION FOR INCOME TAXES......................................... 5,287 1,796
------------ ------------
Net income................................................... $ 25,247 $ 118
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-29
<PAGE>
U.S. HEALTH CONNECTIONS, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1994
AND FOR THE EIGHT MONTHS ENDED AUGUST 31, 1995
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------ PAID-IN RETAINED
SHARES PAR VALUE CAPITAL EARNINGS TOTAL
------ --------- ---------- -------- -------
<S> <C> <C> <C> <C> <C>
BALANCE, January 1, 1994............................. -- $ -- $ -- $ -- $ --
Issuance of common stock............................. 100 1 99 -- 100
Net income........................................... -- -- -- 25,247 25,247
------ --- --- -------- -------
BALANCE, December 31, 1994........................... 100 1 99 25,247 25,347
Net income........................................... -- -- -- 118 118
------ --- --- -------- -------
BALANCE, August 31, 1995............................. 100 $ 1 $ 99 $ 25,365 $25,465
------ --- --- -------- -------
------ --- --- -------- -------
</TABLE>
The accompanying notes are an integral part of this statement.
F-30
<PAGE>
U.S. HEALTH CONNECTIONS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
FOR THE EIGHT MONTHS
YEAR ENDED ENDED
DECEMBER 31, AUGUST 31,
1994 1995
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................................... $ 25,247 $ 118
Adjustments to reconcile net income to net cash provided by
operating activities-
Depreciation................................................... 5,200 5,200
Changes in operating assets and liabilities-
Accounts receivable.......................................... (72,596) 31,821
Other assets................................................. (1,592) (60)
Accounts payable............................................. 24,834 (14,398)
Accrued expenses............................................. 27,414 (11,461)
Deferred revenue............................................. 10,002 (10,002)
------------ ------------
Net cash provided by operating activities.................. 18,509 1,218
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net......................... (25,252) (8,884)
------------ ------------
Net cash used in investing activities...................... (25,252) (8,884)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from long-term debt................................. 11,351 (3,042)
Proceeds from loan payable from related party.................... -- 6,000
Proceeds from sale and issuance of common stock.................. 100 --
------------ ------------
Net cash provided by financing activities.................. 11,451 2,958
------------ ------------
Net change in cash......................................... 4,708 (4,708)
CASH, beginning of period.......................................... -- 4,708
------------ ------------
CASH, end of period................................................ $ 4,708 $ --
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-31
<PAGE>
U.S. HEALTH CONNECTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND AUGUST 31, 1995
1. ORGANIZATION AND BUSINESS
U.S. Health Connections, Inc. (the "Company") commenced operations on
January 1, 1994. The Company provides physician network management services for
physician groups in the Southeastern United States.
On September 1, 1995, the Company entered into a purchase agreement with
Advanced Health Management Corporation ("AHM", formerly Advanced Clinical
Networks Corporation), a wholly-owned subsidiary of Advanced Health Corporation
("AHC"), whereby the Company's shareholders sold all of their outstanding stock
to AHM for $150,000 in cash, a $150,000 note receivable and 30,193 shares of AHC
common stock, for an aggregate sale price of $376,014.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
The Company enters into management services agreements with its network
clients whereby the Company recognizes administrative fees for managing
capitated contracts between health maintenance organizations ("HMOs") and
physician networks for the delivery of health care.
PROPERTY AND EQUIPMENT
Property and equipment, consisting primarily of electronic data processing
equipment, are stated at cost and depreciated on a straight-line basis over the
useful lives of the assets (5 years).
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 and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes", which requires
recognition of deferred tax liabilities and assets for the estimated future tax
effects of events that have been recognized in the financial statements or
income tax returns. Under this method, deferred tax liabilities and assets are
determined based on (1) differences between the financial accounting and income
tax bases of assets and liabilities, and (2) carry-forwards, using enacted tax
rates in effect for the years in which the differences and carry-forwards are
expected to reverse and be utilized, respectively. The provision for income
taxes for each period includes both federal and state income taxes.
F-32
<PAGE>
U.S. HEALTH CONNECTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994 AND AUGUST 31, 1995
3. PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31, AUGUST 31,
1994 1995
------------ ----------
<S> <C> <C>
Vehicle............................................. $ 14,888 $ 14,888
Computer equipment and software..................... 7,618 12,499
Furniture and fixtures.............................. 2,746 6,749
------------ ----------
25,252 34,136
Less: Accumulated depreciation...................... 5,200 10,400
------------ ----------
Property and equipment, net......................... $ 20,052 $ 23,736
------------ ----------
------------ ----------
</TABLE>
Depreciation aggregated $5,200 for each of the year ended December 31, 1994
and the eight months ended August 31, 1995, respectively.
4. LONG-TERM DEBT
The Company had a loan payable with a bank related to the acquisition of a
vehicle. This loan was payable, with interest at 7.5%, in equal installments
through December 1997 and was repaid in full subsequent to the sale of the
Company to AHC. Accordingly, all long-term debt is reflected as a current
liability in the accompanying balance sheet as of August 31, 1995.
5. RELATED PARTY TRANSACTION
In 1995, the Company borrowed $6,000 from a related party of the majority
shareholder. The loan is due on demand and interest is payable, and is accrued
by the Company at August 31, 1995, at the payment date at a rate equal to the
Company's average borrowing rate.
F-33
<PAGE>
ADVANCED HEALTH CORPORATION AND SUBSIDIARIES
PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
The following pro forma statement of operations for the year ended December
31, 1995 includes the results of operations of Advanced Health Corporation,
Peltz Ventimiglia, Inc. and U.S. Health Connections, Inc. as if the acquisitions
of Peltz Ventimiglia, Inc. and U.S. Health Connections, Inc. by Advanced Health
Corporation were made on January 1, 1995. The Company believes that this pro
forma statement of operations includes all necessary pro forma adjustments to
give pro forma effect to these transactions as if they had occurred on January
1, 1995.
The pro forma financial information presented below does not purport to be
indicative of the operating results which would have been achieved had the
acquisitions taken place on January 1, 1995 and should not be construed as
representative of the Company's results of operations for any future period.
<TABLE>
<CAPTION>
ADVANCED PELTZ U.S. HEALTH
HEALTH VENTIMIGLIA, CONNECTIONS, PRO FORMA PRO FORMA
CORPORATION(1) INC.(2) INC.(2) SUBTOTAL ADJUSTMENTS(3) OPERATIONS
-------------- ------------ ------------ ----------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
REVENUE................... $ 1,053,949 $351,066 $214,606 $ 1,619,621 $-- $ 1,619,621
COST OF SALES............. 340,326 -- -- 340,326 -- 340,326
-------------- ------------ ------------ ----------- -------------- -----------
Gross Profit.......... 713,623 351,066 214,606 1,279,295 -- 1,279,295
OPERATING EXPENSES........ 6,412,367 363,047 212,002 6,987,416 26,280 7,013,696
-------------- ------------ ------------ ----------- -------------- -----------
Operating income
(loss).................... (5,698,744) (11,981) 2,604 (5,708,121) (26,280) (5,734,401)
OTHER INCOME (EXPENSE).... (7,863) -- (690) (8,553) -- (8,553)
-------------- ------------ ------------ ----------- -------------- -----------
Income (loss) before
income taxes............ (5,706,607) (11,981) 1,914 (5,716,674) (26,280) (5,742,954)
PROVISION (BENEFIT) FOR
INCOME TAXES.............. -- (1,089) 1,796 707 (707) --
-------------- ------------ ------------ ----------- -------------- -----------
Net loss.............. $ (5,706,607) $(10,892) $ 118 $(5,717,381) $(25,573) $(5,742,954)
-------------- ------------ ------------ ----------- -------------- -----------
-------------- ------------ ------------ ----------- -------------- -----------
Pro forma net loss per
share..................... $ (1.66)
-----------
-----------
Pro forma weighted average
common shares
outstanding(4)............ 3,458,838
-----------
-----------
</TABLE>
- ------------
(1) Includes the results of operations of Advanced Health Corporation for the
full year, and the results of operations of Peltz Ventimiglia, Inc. and U.S.
Health Connections, Inc. from September 1, 1995 through December 31, 1995.
(2) Includes the results of operations of Peltz Ventimiglia, Inc. and U.S.
Health Connections, Inc. from January 1, 1995 through August 31, 1995.
(3) Pro forma adjustments give effect to amortization of intangible assets
related to the acquisitions of Peltz Ventimiglia, Inc. and U.S. Health
Connections, Inc., as well as to the tax provision (benefit) which would
have resulted from the combined results of operations, had the acquisitions
been made at the beginning of the year.
(4) Includes the pro forma effect of shares of common stock issued in connection
with the acquisitions of Peltz Ventimiglia, Inc. and U.S. Health
Connections, Inc. as if those shares were issued and outstanding for the
period from January 1, 1995 to December 31, 1995.
F-34
<PAGE>
[Inside Back Cover]
Graphic captioned "Integrating Physician Management Services with
Information Technology", which includes (i) a photograph of a physician holding
a pen-based, portable, wireless computer, captioned "Med-E-Practice/All of the
applications in the Med-E-Practice suite are designed to be run on a pen-based,
portable wireless computer for use in a busy ambulatory practice.", (ii) a
photograph of a computer screen from the Med-E-Visit application, captioned
"Med-E-Visit/A patient encounter application generating a Superbill with
fully-qualified diagnostic coding linked to appropriate billing codes required
to support outcomes analysis.", (iii) a photograph of a computer screen from the
Referral application, captioned "Referral/Support multiple referral networks by
recording referral information and providing both network-specific referral
rules and information regarding appropriate network specialists." and (iv) a
photograph of a computer screen from the Smart Scripts application, captioned
"Smart Scripts/A pharmaceutical prescription-writing application providing
formulary management, DUR edits and diagnostic coding linkage to drug therapy
protocols."
<PAGE>
======================================= ======================================
- --------------------------------------- --------------------------------------
NO DEALER, SALESPERSON OR OTHER
PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY OF THE 2,000,000 SHARES
UNDERWRITERS OR BY ANY OTHER
PERSON. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY A [LOGO]
SECURITY OTHER THAN THE SHARES OF
COMMON STOCK OFFERED HEREBY, NOR DOES
IT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF ADVANCED HEALTH
THE SECURITIES OFFERED HEREBY, TO ANY CORPORATION
PERSON IN ANY JURISDICTION IN WHICH IT
IS UNLAWFUL TO MAKE SUCH OFFER OR COMMON STOCK
SOLICITATION TO SUCH PERSON. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES CREATE ANY IMPLICATION
THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO
THE DATE HEREOF.
-------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary............... 3
Risk Factors..................... 5
The Company...................... 16
Use of Proceeds.................. 16 ----------------------
Dividend Policy.................. 16 PROSPECTUS
Capitalization................... 17 ----------------------
Dilution......................... 18
Selected Consolidated
Financial Data................. 19
Management's Discussion
and Analysis of Financial
Condition and Results
of Operations.................. 20
Business......................... 26
Management....................... 43
Certain Transactions............. 50
Principal Stockholders........... 52 COWEN & COMPANY
Description of Capital Stock..... 53
Shares Eligible for Future VOLPE, WELTY & COMPANY
Sale........................... 55
Underwriting..................... 57
Legal Matters.................... 58
Experts.......................... 58
Additional Information........... 58
Index to Financial Statements.... F-1
-------------------
UNTIL , 1996 (25 DAYS AFTER
THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE
COMMON STOCK, WHETHER OR NOT , 1996
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.
- --------------------------------------- --------------------------------------
======================================= ======================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered, other than
underwriting discounts and commissions. All of the amounts shown are estimated
except the Securities and Exchange Commission registration fee, the NASD filing
fee and the Nasdaq National Market listing fee.
<TABLE>
<S> <C>
SEC registration fee............................................ $ 11,104
NASD filing fee................................................. 3,520
Nasdaq National Market listing fee.............................. 32,728
Blue sky fees and expenses...................................... 25,000
Printing and engraving expenses................................. 75,000
Legal fees and expenses......................................... ]425,000
Accounting fees and expenses.................................... 250,000
Transfer agent and registrar fees............................... 5,000
Miscellaneous................................................... 22,648
--------
Total....................................................... $850,000
--------
--------
</TABLE>
The Company will bear all of the foregoing fees and expenses.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the DGCL authorizes a court to award or a corporation's Board
of Directors to grant indemnification to directors and officers in terms
sufficiently broad to permit such indemnification under certain circumstances
for liabilities (including reimbursement for expenses incurred) arising under
the Act. Articles Nine and Ten of the Registrant's Certificate of Incorporation
provide for indemnification of its directors and officers and permissible
indemnification of employees and other agents to the maximum extent permitted by
the DGCL. Reference is made to the form of Director Indemnification Agreement
filed as Exhibit 10.20 hereto, which provides for indemnification of directors.
Reference is also made to the Underwriting Agreement filed as Exhibit 1.1
hereto, which sets forth certain indemnification provisions. In addition, the
Registrant maintains liability insurance for its officers and directors.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The Registrant has sold and issued the following securities during the past
three years:
On August 30, 1993, the Company sold 185,893 shares of Common Stock to the
Chairman and an employee of the Company, for an aggregate of $3,120.
On December 27, 1993, the Company sold 718,984 shares of Common Stock for
$8,045 pursuant to a rights offering. The shares were offered only to the
holders of Physicians' On-Line, Inc. stock on a one-for-one basis pro rata to
their shareholdings in Physicians' On-Line, Inc.
In November 1994, the Company sold 75,965 shares of Common Stock for an
aggregate of $639,655. Of these shares sold, all of which were paid for in 1994,
25,319 were issued prior to December 31, 1994 and 50,641 were issued in January
1995.
In August 1995, the Company issued 2,978 shares of Common Stock to a
director of the Company for $25,000.
II-1
<PAGE>
In August 1995, the Company issued 543,564 shares of Common Stock to
purchase Majean, Inc. and 75,996 shares of common stock to purchase Peltz
Ventimiglia, Inc. and in September 1995, 30,193 shares of common stock to
purchase U.S. Health Connections, Inc., as more fully described in Note 3 to the
accompanying Consolidated Financial Statements.
In 1995, the Company sold 76,802 shares of Common Stock to investors for an
aggregate of $625,059.
In August 1993, the Company issued 971,800 shares of Series A Convertible
Preferred Stock to investors for $97,180. In March 1994, the Company issued
282,900 shares of Series B Convertible Preferred Stock to investors for
$2,000,103. In January 1995, the Company issued 200,000 shares of Series C
Convertible Preferred Stock to investors for $1,500,000. In August 1995, the
Company issued 666,360 shares of Series D Convertible Preferred Stock to
investors for $4,997,700. Each share of the Preferred Stock is convertible into
1.1189249 shares of Common Stock upon the consummation of this offering.
In February, April and June 1996, the Company issued three 8% Promissory
Notes in the aggregate principal amount of $3 million to an investor.
In June 1996, the Company issued three 9% Series B Promissory Notes in the
aggregate principal amount of $1 million to investors. In August 1996, the
Company issued three additional 9% Series B Promissory Notes in the aggregate
principal amount of $1 million to investors.
During 1995, the Chairman, the President, the principal stockholder and
certain employees exercised stock options for 288,681, 316,376, 128,695 and
151,547 shares, respectively, for $19,717.
During 1996, a former employee exercised stock options for 60 shares of
Common Stock for $150.
In April 1996, the Company issued 8,937 shares of Common Stock to purchase
the assets of Benenson & Associates, Inc. The Registrant issued rights to
acquire Common Stock in the Roll Up Transaction to one physician organization in
December 1995 and two physician organizations in July 1996.
The above securities were offered and sold by the Registrant in reliance
upon an exemption from registration under either (i) Section 4(2) of the
Securities Act as transactions not involving any public offering or (ii) Rule
701 under the Securities Act. No underwriters were involved in connection with
the sales of securities referred to in this Item 15.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
<C> <S>
**1.1 Form of Underwriting Agreement
**2.1 Agreement and Plan of Merger dated as of August 2, 1995, among Med-E-Systems
Corporation, MES Acquisition Corp. and the Registrant
**2.2 Agreement and Plan of Merger dated as of August 7, 1995, between the Registrant
and Majean, Inc.
**2.3 Asset Purchase Agreement dated as of August 28, 1995, among Advanced Clinical
Networks Corporation, Peltz Ventimiglia, Inc., Richard Ventimiglia and Steven
Peltz
**2.4 Agreement and Plan of Merger dated as of September 1, 1995, among U.S. Health
Connections, Inc., the Registrant and Advanced Clinical Networks Corporation
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
<C> <S>
**3.1 Restated Certificate of Incorporation of the Registrant, as in effect on the
effective date of the Registration Statement
**3.2 Restated Certificate of Incorporation of the Registrant, as to be in effect upon
the consummation of the Initial Public Offering
**3.3 By-laws of the Registrant
**5 Opinion of O'Sullivan Graev & Karabell, LLP (including the consent of such firm)
+**10.1 Development and Marketing Agreement dated as of August 1, 1995, between Med-E-
Systems Corporation and Integrated Disease Management, Inc.
+**10.2 Software License Agreement dated as of September 27, 1995, between Med-E-Systems
Corporation and Medco Containment Services Inc.
+**10.3 System Implementation Agreement dated September 14, 1995, between IDX Systems
Corporation and the Registrant
**10.4 Investors' Rights Agreement dated as of August 31, 1993, among Med-E-Mail
Corporation, Financial Strategic Portfolios, Inc.--Health Sciences Portfolio and
The Global Health Sciences Fund
**10.5 Amended and Restated Investors' Rights Agreement dated as of March 16, 1994,
among Med-E-Mail Corporation, Financial Strategic Portfolios, Inc.--Health
Sciences Portfolio and The Global Health Sciences Fund
**10.6 Amended and Restated Investors' Rights Agreement dated as of January 27, 1995,
among Med-E-Systems Corporation, Invesco Strategic Portfolios, Inc.--Health
Sciences Portfolio and The Global Health Sciences Fund
**10.7 Investors' Rights Agreement dated as of August 23, 1995, among the Registrant,
21st Century Communucations Partners, L.P., 21st Century Communications T-E
Partners, L.P. and 21st Century Communications Foreign Partners, L.P.
**10.8 Registration Rights Agreement dated February 28, 1996, among the Registrant,
Park Avenue Capital, L.P. and Access Industries, LLC
+**10.9 Management Services Agreement dated as of December 11, 1995, between Madison
Medical--The Private Practice Group of New York, L.L.P. and Uptown Physician
Management, Inc.
**10.10 Stockholders' Agreement dated as of December 11, 1995, among Uptown Physician
Management, Inc. and certain stockholders
+*10.11 Management Services Agreement dated as of August 7, 1995, among Advanced Heart
Institute of New York, P.C., Valavanur A. Subramanian, M.D., Jeffrey Moses, M.D.
and Majean Sub 2, Inc.
+**10.12 Management Services Agreement dated as of July 1, 1996 between Specialist
Physicians Management, Inc. and Cardiology First of New Jersey, P.A.
**10.13 Stockholders' Agreement dated as of July 1, 1996 among Specialist Physicians
Management, Inc., Specialist Physicians MSO, L.L.C. and Advanced Health
Management Corporation
+*10.14 Management Services Agreement dated as of July 1, 1996 between Diamond Physician
Management, Inc. and Long Island Interventional Cardiology
**10.15 Stockholders' Agreement dated as of July 1, 1996 among Diamond Physician
Management, Inc., Long Island Interventional Cardiology and Advanced Health
Management Corporation
+**10.16 Administrative Services Base Agreement dated as of June 30, 1994, between U.S.
Health Connections, Inc. and The Emory Clinic, Inc.
**10.17 Tarrytown, New York Office Lease Agreement dated November 30, 1995, between
Tarrytown Corporate Center IV, L.P. and the Registrant
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
<C> <S>
**10.18 Tarrytown, New York Office Sublease Agreement dated October 31, 1995, between
American Software, USA, Inc. and the Registrant
**10.19 Chicago Office Lease Agreement dated December 8, 1995, between Adams Family,
L.L.C. and the Registrant
**10.20 Form of Director Indemnification Agreement
**10.21 Employment Agreement between the Registrant and Jonathan Edelson, M.D.
**10.22 Employment Agreement between the Registrant and Steven Hochberg
**10.23 Employment Agreement between the Registrant and Alan B. Masarek
**10.24 Amended and Restated Advanced Health Corporation 1995 Stock Option Plan
**10.25 Employee Stock Purchase Plan
**11.1 Supplemental Net Loss Per Common Share Computation
**21 List of Subsidiaries
**23.1 Consent of O'Sullivan Graev & Karabell, LLP (included as part of its opinion
filed as Exhibit 5 hereto)
*23.2 Consent of Arthur Andersen LLP
**24 Powers of Attorney
**27 Financial Data Schedule
</TABLE>
- ------------
* Filed herewith.
** Previously filed.
+ Portions of such exhibit have been deleted therefrom pursuant to Rule 406
promulgated under the Securities Act of 1933, as amended, and confidential
treatment has been requested therefor.
(b) Financial Statement Schedules
All schedules are omitted because they are inapplicable or the requested
information is shown in the consolidated financial statements or related notes.
ITEM 17. UNDERTAKINGS.
The Registrant hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the DGCL, the Certificate of Incorporation and By-laws,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in such Securities Act, and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in such
Securities Act and will be governed by the final adjudication of such issue.
II-4
<PAGE>
The Registrant hereby undertakes that:
1. 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 the 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.
2. 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 that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 4 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Tarrytown, State of New York, on the 2nd day of October, 1996.
ADVANCED HEALTH CORPORATION
By: *
..................................
Jonathan Edelson, M.D.
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 4 to Registration Statement has been signed on the 2nd day of October, 1996,
by the following persons in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
* Chairman of the Board, Chief Executive
............................................. Officer and Director (Principal Executive
Jonathan Edelson, M.D Officer)
* President and Director
.............................................
Steven Hochberg
/s/ ALAN B. MASAREK Chief Operating Officer and Chief Financial
............................................. Officer (Principal Financial and Accounting
Alan B. Masarek Officer)
............................................. Director
James T. Carney
* Director
.............................................
Barry Kurokawa
* Director
.............................................
Jonathan Lieber
</TABLE>
*By: /s/ ALAN B. MASAREK
........................................
Alan B. Masarek
As Attorney-in-Fact
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE
- ----------- ---------------------- ----
<C> <S> <C>
**1.1 Form of Underwriting Agreement
**2.1 Agreement and Plan of Merger dated as of August 2, 1995, among
Med-E-Systems Corporation, MES Acquisition Corp. and the Registrant
**2.2 Agreement and Plan of Merger dated as of August 7, 1995, between the
Registrant and Majean, Inc.
**2.3 Asset Purchase Agreement dated as of August 28, 1995, among Advanced
Clinical Networks Corporation, Peltz Ventimiglia, Inc., Richard
Ventimiglia and Steven Peltz
**2.4 Agreement and Plan of Merger dated as of September 1, 1995, among U.S.
Health Connections, Inc., the Registrant and Advanced Clinical Networks
Corporation
**3.1 Restated Certificate of Incorporation of the Registrant, as in effect on
the effective date of the Registration Statement
**3.2 Restated Certificate of Incorporation of the Registrant, as to be in
effect upon the consummation of the Initial Public Offering
**3.3 By-laws of the Registrant
**5 Opinion of O'Sullivan Graev & Karabell, LLP (including the consent of such
firm)
+**10.1 Development and Marketing Agreement dated as of August 1, 1995, between
Med-E-Systems Corporation and Integrated Disease Management, Inc.
+**10.2 Software License Agreement dated as of September 27, 1995, between Med-E-
Systems Corporation and Medco Containment Services Inc.
+**10.3 System Implementation Agreement dated September 14, 1995, between IDX
Systems Corporation and the Registrant
**10.4 Investors' Rights Agreement dated as of August 31, 1993, among Med-E-Mail
Corporation, Financial Strategic Portfolios, Inc.--Health Sciences
Portfolio and The Global Health Sciences Fund
**10.5 Amended and Restated Investors' Rights Agreement dated as of March 16,
1994, among Med-E-Mail Corporation, Financial Strategic Portfolios,
Inc.--Health Sciences Portfolio and The Global Health Sciences Fund
**10.6 Amended and Restated Investors' Rights Agreement dated as of January 27,
1995, among Med-E-Systems Corporation, Invesco Strategic Portfolios,
Inc.--Health Sciences Portfolio and The Global Health Sciences Fund
**10.7 Investors' Rights Agreement dated as of August 23, 1995, among the
Registrant, 21st Century Communucations Partners, L.P., 21st Century
Communications T-E Partners, L.P. and 21st Century Communications Foreign
Partners, L.P.
**10.8 Registration Rights Agreement dated February 28, 1996, among the
Registrant, Park Avenue Capital, L.P. and Access Industries, LLC
+**10.9 Management Services Agreement dated as of December 11, 1995, between
Madison Medical--The Private Practice Group of New York, L.L.P. and Uptown
Physician Management, Inc.
**10.10 Stockholders' Agreement dated as of December 11, 1995, among Uptown
Physician Management, Inc. and certain stockholders
+*10.11 Management Services Agreement dated as of August 7, 1995, among Advanced
Heart Institute of New York, P.C., Valavanur A. Subramanian, M.D., Jeffrey
Moses, M.D. and Majean Sub 2, Inc.
+**10.12 Management Services Agreement dated as of July 1, 1996 between Specialist
Physicians Management, Inc. and Cardiology First of New Jersey, P.A.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE
- ----------- ---------------------- ----
<C> <S> <C>
**10.13 Stockholders' Agreement dated as of July 1, 1996 among Specialist
Physicians Management, Inc., Specialist Physicians MSO, L.L.C. and
Advanced Health Management Corporation
+*10.14 Management Services Agreement dated as of July 1, 1996 between Diamond
Physician Management, Inc. and Long Island Interventional Cardiology
**10.15 Stockholders' Agreement dated as of July 1, 1996 among Diamond Physician
Management, Inc., Long Island Interventional Cardiology and Advanced
Health Management Corporation
+**10.16 Administrative Services Base Agreement dated as of June 30, 1994, between
U.S. Health Connections, Inc. and The Emory Clinic, Inc.
**10.17 Tarrytown, New York Office Lease Agreement dated November 30, 1995,
between Tarrytown Corporate Center IV, L.P. and the Registrant
**10.18 Tarrytown, New York Office Sublease Agreement dated October 31, 1995,
between American Software, USA, Inc. and the Registrant
**10.19 Chicago Office Lease Agreement dated December 8, 1995, between Adams
Family, L.L.C. and the Registrant
**10.20 Form of Director Indemnification Agreement
**10.21 Employment Agreement between the Registrant and Jonathan Edelson, M.D.
**10.22 Employment Agreement between the Registrant and Steven Hochberg
**10.23 Employment Agreement between the Registrant and Alan B. Masarek
**10.24 Amended and Restated Advanced Health Corporation 1995 Stock Option Plan
**10.25 Employee Stock Purchase Plan
**11.1 Supplemental Net Loss Per Common Share Computation
**21 List of Subsidiaries
**23.1 Consent of O'Sullivan Graev & Karabell, LLP (included as part of its
opinion filed as Exhibit 5 hereto)
*23.2 Consent of Arthur Andersen LLP
**24 Powers of Attorney
**27 Financial Data Schedule
</TABLE>
- ------------
* Filed herewith.
** Previously filed.
+ Portions of such exhibit have been deleted therefrom pursuant to Rule 406
promulgated under the Securities Act of 1933, as amended, and confidential
treatment has been requested therefor.
EXHIBIT 10.11
================================================================================
MANAGEMENT SERVICES AGREEMENT
AMONG
ADVANCED HEART INSTITUTE OF NEW YORK, P.C.,
VALAVANUR A. SUBRAMANIAN, M.D.,
JEFFREY MOSES, M.D.
AND
MAJEAN SUB 2, INC.
Dated as of August 7, 1995
================================================================================
<PAGE>
TABLE OF CONTENTS
Page
----
SECTION 1. Retention of the Management Company........................... 1
SECTION 2. Term.......................................................... 2
SECTION 3. Management Services........................................... 2
SECTION 4. Joint Management Advisory Board............................... 6
SECTION 5. Obligations of the PC......................................... 7
SECTION 6. Cardiothoracic Interventional or Surgical
Relationships.............................................. 9
SECTION 7. Restrictive Covenants and Liquidated Damages.................. 9
SECTION 8. Working Capital Facility...................................... 10
SECTION 9. Compensation; Accounts Receivable............................. 11
SECTION 10. Representation of AHC. ....................................... 12
SECTION 11. Certain Covenants............................................. 13
SECTION 12. Records....................................................... 13
SECTION 13. Insurance and Indemnity....................................... 14
SECTION 14. Termination................................................... 14
SECTION 15. Non-Disclosure of Confidential Information.................... 16
SECTION 16. Non-Competition............................................... 17
SECTION 17. Activities of the Management Company.......................... 18
SECTION 18. Assignment.................................................... 18
SECTION 19. Notices....................................................... 19
SECTION 20. Benefits of Agreement......................................... 20
SECTION 21. Governing Law; Conduct........................................ 20
SECTION 22. Headings...................................................... 20
SECTION 23. Entire Agreement; Amendments.................................. 20
SECTION 24. Severability.................................................. 20
SECTION 25. Counterparts.................................................. 20
<PAGE>
SECTION 26. Waivers...................................................... 20
SECTION 27. Termination.................................................. 21
SECTION 28. Contract Modification for Prospective Legal
Events..................................................... 21
SECTION 29. Hospital Administrative Matters; Succession.................. 21
SECTION 30. Conditions to Effectiveness.................................. 23
<PAGE>
ATTACHMENTS
EXHIBIT A -- Period 1 Budget
EXHIBIT B -- Form of Employment Agreement
EXHIBIT C -- Form of Promissory Note
EXHIBIT D -- Form of Amendment
EXHIBIT E -- Form of Security Agreement (PC's Accounts
Receivable)
EXHIBIT F -- Form of Security Agreement (Management
Company's Accounts Receivable)
ANNEX A -- Management Fee Amendment Formula
ANNEX B -- Use of Proceeds
SCHEDULE 1 -- PC Expenses
<PAGE>
INDEX OF DEFINED TERMS
Term Section
- ---- -------
PC ........................................................................ 1
Dr. Subramanian............................................................ 1
Dr. Moses ................................................................. 1
Physicians ................................................................ 1
Management Company......................................................... 1
Business .................................................................. 1
Base Term ................................................................. 2
Additional Terms........................................................... 2
Term ...................................................................... 2
Management Services........................................................ 2
Administrative Personnel................................................... 3
Physician Employees........................................................ 4
Budget .................................................................... 5
Joint Management Advisory Board............................................ 6
Management Company Representative.......................................... 6
PC Representatives......................................................... 6
Facility .................................................................. 8
Working Capital Advance.................................................... 10
Management Fee............................................................. 11
Signing Fee................................................................ 11
Period .................................................................... 11
Receivable Payment......................................................... 12
Bankruptcy Event........................................................... 15
Triggering Event........................................................... 16
confidential or proprietary information.................................... 17
Competitive Business....................................................... 17
Competitive Business....................................................... 18
Offeror ................................................................... 21
Transfer .................................................................. 21
Third Party................................................................ 21
Offer ..................................................................... 21
Hospital Matters........................................................... 29
Terminating Physician...................................................... 29
Differences Notice......................................................... 29
Put Notice................................................................. 29
Valuation.................................................................. 29
Put Closing................................................................ 29
<PAGE>
MANAGEMENT SERVICES AGREEMENT
dated as of August 7, 1995, among
ADVANCED HEART INSTITUTE OF NEW
YORK, P.C., a New York professional
corporation (the "PC"), VALAVANUR
A. SUBRAMANIAN, M.D. ("Dr.
Subramanian"), JEFFREY MOSES, M.D.
("Dr. Moses" and together with Dr.
Subramanian, the "Physicians"),
and MAJEAN SUB 2, INC., a Delaware
corporation (the "Management
Company").
The PC is a professional medical corporation involved in providing
cardiothoracic surgery and invasive cardiology medical services to the general
public. The Management Company will be engaged in the business of providing
non-medical administrative, financial, marketing, information technology and
operational services to professional medical corporations (the "Business"). The
Management Company, the PC and the Physicians desire to enter into this
Agreement, pursuant to which, among other things, the Management Company will
render certain non-medical management services to the PC.
ACCORDINGLY, the PC, the Physicians and the Management Company agree as
follows:
SECTION 1. Retention of the Management Company. (a) The PC hereby retains
the Management Company to provide the non-medical management services described
in this Agreement, and the Management Company accepts such retention, upon the
terms and subject to the conditions set forth herein.
(b) During the term of this Agreement, the Management Company shall be the
exclusive provider of all non-medical management services utilized by the PC.
Notwithstanding anything contained herein to the contrary, (i) the Management
Company and the PC intend to act and perform as independent contractors, and the
provisions hereof are not intended to create any partnership, joint venture,
agency or employment relationship between the parties and (ii) the Management
Company is hereby engaged solely to provide non-medical management services to
the PC and shall not interfere with, control, direct or supervise the PC or any
medical professional employed thereby in connection with the provision of
professional medical services.
(c) The parties agree that the benefits to the PC hereunder do not require,
are not payment for and are not in any way contingent upon the admission,
referral or any other arrangement for the provision of any item or service
offered by the Management Company to any of the PC's patients in any medical
-1-
<PAGE>
facility or laboratory controlled, managed or operated by the Management
Company.
(d) The PC hereby irrevocably appoints the Management Company as its true
and lawful attorney and agent to sign in the PC's name and on its behalf any and
all agreements, instruments, certificates, proxies or other documents which are
necessary or advisable in connection with the performance by the Management
Company of its Management Services hereunder for a period of one year from the
date hereof; provided, however, that such appointment shall be automatically
extended for additional periods of one year each, unless the PC delivers to the
Management Company, not less than 60 nor more than 90 days prior to the
expiration of any one year period, written notice of the PC's intention to
revoke such appointment. In the event that such appointment is terminated for
any reason, the PC shall execute in a timely manner any and all documents that
the Management Company may reasonably request it to execute.
SECTION 2. Term. (a) Subject to Section 30, this Agreement shall commence
on August 21, 1995 (the "Effective Date") and shall expire on the twentieth
anniversary of the Effective Date unless terminated earlier pursuant to the
terms hereof (the "Base Term").
(b) Unless terminated earlier as provided for herein, the Base Term of this
Agreement shall be automatically extended for additional terms ("Additional
Terms" and together with the Base Term, the "Term") of five years each, unless
either party delivers to the other party, not less than 12 months nor more than
15 months prior to the expiration of the then-current term, written notice of
such party's intention not to extend the Term of this Agreement.
SECTION 3. Management Services. (a) The Management Company shall be the
sole and exclusive manager and administrator of all day-to-day business
functions for the PC. The Management Company shall have no authority, directly
or indirectly, to perform, and shall not perform, any medical function. The
Management Company may, however, advise the PC as to the relationship between
its performance of medical activities and the administrative and business
functioning of its practice.
(b) During the Term, the Management Company or its designee, which designee
shall be reasonably consented to by the PC in a timely manner, shall (i)
provide, on a fee-for-services basis, the Management Services (as defined below)
required by the PC to operate its business and (ii) commencing with the second
month of the Base Term, pay on behalf of the PC all expenses relating to the
Management Services. The non-professional management services (the "Management
Services") to be provided by the Management Company to the PC shall consist of
the following:
i) Facilities Management. The Management Company shall provide or
arrange for the provision of all facilities
-2-
<PAGE>
management services including, without limitation, the negotiation and
entering into in the name of the Management Company of real or personal
property leases, repairs, maintenance and improvements, procurement of
property insurance, utility services (including telephone, electric, gas
and water), janitorial services and refuse disposal;
ii) Finance and Accounting. The Management Company shall provide or
arrange for the provision of all financial and accounting functions
necessary for the operation of the PC including, without limitation,
creation and maintenance of bank accounts and disbursement of payables;
iii) Billing. The Management Company, on behalf of the PC, shall bill
patients and third party payors and collect all fees for professional and
non-professional services rendered to patients by the PC. The PC hereby
appoints the Management Company to be its true and lawful attorney-in-fact
during the Term, for the following purposes: (1) to bill patients and third
party payors in the PC's name and on its behalf; (2) to collect accounts
receivable resulting from such billing; (3) to receive payments and
prepayments from Blue Shield, insurance companies, health care plans,
Medicare, Medicaid, HMO's and all other third party payors; (4) to take
possession of and endorse in the name of the PC (and/or in the name of an
individual physician, if such payment is intended for purposes of payment
of such physician's bill) any notes, checks, money orders, insurance
payments and other instruments received in payment of accounts receivable;
and (5) to initiate, with the reasonable and timely consent of the PC, the
institution of legal proceedings in the name of the PC to collect any
accounts and monies owed to the PC, to enforce the rights of the PC as a
creditor under any contract or in connection with the rendering of any
service, and to contest adjustments and denials by governmental agencies
(or its fiscal intermediaries) as third-party payors;
iv) Information Management. The Management Company shall provide or
arrange for the provision of all information management services including,
without limitation, a practice management and managed care information
system and a Med-E-Practice clinical information system;
v) Personnel. The Management Company shall, in consultation with the
PC, retain and provide or arrange for the retention and provision of all
non-professional administrative, support, clerical, secretarial,
bookkeeping and collection personnel (collectively, "Administrative
Personnel") necessary for the conduct of the PC's business operations. The
Management Company shall, in consultation
-3-
<PAGE>
with the PC, determine and pay the salaries and fringe benefits of
Administrative Personnel. The Management Company shall provide
administrative services such as scheduling, personnel policies and payroll
administration for Administrative Personnel;
vi) Professional Payroll. The Management Company shall provide payroll
administration services for all physicians employed by the PC (the
"Physician Employees");
vii) Personnel Verification. With respect to each Physician Employee,
the Management Company shall verify educational and employment experience,
licensure and insurability and shall review and provide the PC with copies
of any complaints contained in public files of applicable state and federal
sanctioning commissions;
viii) Working Capital Advances. The Management Company shall provide
secured working capital advances to the PC pursuant to Section 8;
ix) Insurance. The Management Company shall negotiate on behalf of the
physicians employed by PC insurance coverage as described in Section 13(a);
x) Taxes. The Management Company shall provide the PC all information
necessary for the PC to prepare its annual income tax returns and its
annual and interim financial statements. The Management Company shall have
no responsibility for (i) the payment of the PC's federal, state or local
income, withholding or other taxes or (ii) the preparation of any tax
returns for the PC;
xi) Inventory and Supplies. The Management Company shall order and
purchase inventory and supplies on behalf of the PC, and such other
ordinary or appropriate materials as the PC deems to be necessary for it to
carry out its professional medical activities;
xii) Files and Records. The Management Company shall supervise and
maintain custody of all files and records relating to the operation of the
business of the PC, including, without limitation, accounting, billing,
collection and patient medical records. The management of all files and
records shall comply with applicable state and federal statutes. Business
records of the PC created and/or maintained by the Management Company shall
be the joint property of the parties and shall at all times be located at a
location that is readily accessible to the parties. Patient medical records
shall at all times be and remain the property of the PC and shall be
located at a location that is readily accessible for patient care. The
Management Company shall preserve the confidentiality of patient medical
records and use information contained in such
-4-
<PAGE>
records only for the limited purposes necessary to perform the management
services set forth herein; provided, however, that in no event shall a
breach of such confidentiality be deemed a default under this Agreement;
xiii) Payors. The Management Company shall assist the PC in the
solicitation of, and negotiations with, prospective payors, including,
without limitation, preparation of cost forecasts and proposals;
xiv) Managed Care. The Management Company shall solicit, negotiate and
administer (including, without limitation, the administration of all
billings, capitation payments and collections) all managed care contracts
on behalf of the PC and shall consult with the PC on all professional or
clinical matters relating thereto;
xv) Education. The Management Company shall develop and implement
community out-reach programs and public relations programs designed to
educate the patient population regarding the PC, the availability of its
medical services and the availability and terms of any managed care
programs in which the PC participates. The programs shall be conducted in
compliance with applicable laws and regulations governing advertising by
the medical profession;
xvi) Budget. The Management Company shall prepare semi-annual capital
and operating budgets (the "Budget") reflecting in reasonable detail the
projected revenues and expenses of the PC and projected expenses to be
incurred by the Management Company on behalf of the PC. The Budget for the
first Period (as defined below) is set forth as Exhibit A. The Budget shall
provide that aggregate compensation for all physicians employed by the PC
shall not increase more than two and one-half percent (the "Increase") from
the previous Budget's aggregate compensation level for physicians;
provided, however, that for the purposes of the Increase such budgeted
aggregate physician compensation shall exclude the compensation of any
physician hired by the PC within 18 months of the date of the Budget (which
amount shall be set forth as a separate line item on the Budget) and the
compensation of any physician leaving the employment of the PC within 6
months of the date of the Budget; provided, further, that for the purposes
of the Increase such budgeted aggregate compensation shall not include
bonuses that may be awarded based on (x) the decision of the PC to
reallocate budgeted compensation amounts among the individual physicians
employed by the PC and/or (y) the decision of the Joint Management Advisory
Board (as defined below) to allocate excess cash flow resulting from actual
net collections of the PC exceeding budgeted net collections of the PC as
adjusted for the additional expenses incurred by the Management Company in
delivering Management Services in support of such collections. The Budget
for the next
-5-
<PAGE>
succeeding six months shall be presented to the Joint Management Advisory
Board for approval at least 30 days prior to the end of the preceding six
month period; and
xvii) Non-medical Professional Support. The Management Company shall
provide all other non-medical management support required by the PC
including, without limitation, postage and duplication services and medical
transcribing services.
(c) The Management Company shall not be liable to the PC for failure to
perform any of the services required herein in the event of strikes, lock-outs,
calamities, acts of God, unavailability of supplies or other events over which
the Management Company has no control for so long as such events continue and
for a reasonable time thereafter.
SECTION 4. Joint Management Advisory Board. (a) The parties shall establish
a joint management advisory board (the "Joint Management Advisory Board") that
shall be responsible for developing management and administration policies for
the overall operation of the PC and the Management Company. The Joint Management
Advisory Board shall initially consist of three members, at least two of whom
shall be physicians. The Management Company shall designate, in its sole
discretion, one member (the "Management Company Representative") of the Joint
Management Advisory Board which member shall be a physician. The PC shall
designate, in its sole discretion, two members (the "PC Representatives") of the
Joint Management Advisory Board. The initial PC Representatives shall be the
Physicians. The Management Company Representative and each Physician shall have
the right to cast two votes with respect to matters before the Joint Management
Advisory Board. If at any time during the Term a Physician (the "Former Chief")
is no longer chief of his respective division at Lenox Hill Hospital ("LHH") due
to a voluntary relinquishment of his duties as chief, then such Former Chief may
remain a member of the Joint Management Advisory Board for as long as such
Former Chief so desires and shall have the right (i) to cast two or fewer votes
during such period and/or (ii) to assign one or two of his votes to the new
chief physician (such new chief physician or any successor thereto, the "New
Chief") of such division at LHH if such New Chief is or has become a member of
the PC. If the New Chief is or becomes a member of the PC, the New Chief shall
become a member of the Joint Management Advisory Board and may cast those votes,
if any, assigned to the New Chief by the Former Chief. Upon the retirement of
the Former Chief from the Joint Management Advisory Board, the New Chief shall
have the right to cast two votes. A quorum of the Joint Management Advisory
Board for voting purposes shall consist of three members and the act of a
majority of the total votes available to all members of the Joint Management
Advisory Board shall be the act of the Joint Management Advisory Board. Any
written action taken by the Joint Management Advisory
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Board in lieu of a meeting shall require the unanimous approval of all members
of the Joint Management Advisory Board.
(b) The Joint Management Advisory Board shall have the following duties and
obligations:
i) Meetings. The Joint Management Advisory Board shall convene
meetings periodically according to a schedule to be determined by the Joint
Management Advisory Board;
ii) Budgets. All Budgets prepared by the Management Company shall be
subject to the review, modification (except for the cap on budgeted
aggregate compensation for physicians employed by the PC as set forth in
Section 3(b)(xvi)) and approval of the Joint Management Advisory Board;
iii) Patient Fees; Collection Policies; Accounts Payable Policies. As
part of the Budget, in consultation with the Management Company and the PC,
the Joint Management Advisory Board shall review and adopt a fee schedule
for all physician services and ancillary services rendered by the PC. The
Joint Management Advisory Board shall also approve the credit collection
policies of the PC. The Joint Management Advisory Board shall also approve
the accounts payable payment policies of the PC and the Management Company;
iv) Leases. As part of the Budget, in consultation with the Management
Company and the PC, the Joint Management Advisory Board shall review and
approve the size and location of any lease entered into pursuant to Section
3(b)(i);
v) Managed Care Contracts. The Joint Management Advisory Board shall
develop, in consultation with the Management Company and the PC, a set of
financial parameters pursuant to which the Management Company shall
negotiate the managed care contracts referenced in Section 3(b)(xiv);
vi) Strategic Planning. The Joint Management Advisory Board shall
develop long-term strategic planning objectives; and
vii) Capital Expenditures. The Joint Management Advisory Board shall
determine the priority of capital expenditures on behalf of the PC.
SECTION 5. Obligations of the PC. (a) The PC shall provide professional
services to patients in compliance at all times with ethical standards, laws and
regulations applying to the medical profession. The PC shall ensure that each
physician associated with the PC for the purpose of providing medical care to
patients of the PC is licensed by the State of New York. The
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<PAGE>
PC shall monitor the quality of medical care practiced by physicians associated
with the PC. In the event that any disciplinary actions or medical malpractice
actions are initiated against any such physician by any payor, patient, state or
federal regulatory agency or any other person or entity, the PC shall
immediately inform the Management Company of such action and its underlying
facts and circumstances.
(b) The PC shall use and occupy any Facility (as defined below) exclusively
for the practice of medicine, and shall comply with all applicable federal,
state and local rules, ordinances and standards of medical care. The medical
practice or practices conducted at any Facility described in clause (i) of the
definition of the term "Facility" shall be conducted solely by physicians
associated with the PC, and no other physician or medical practitioner shall be
permitted to use or occupy any Facility without the prior written consent of the
Management Company, which consent shall not be unreasonably withheld or delayed.
The term "Facility" shall mean (i) any medical facility or laboratory
controlled, managed or operated by the Management Company or (ii) any hospital
at which any Physician Employee practices medicine or maintains admitting
privileges.
(c) The PC shall at its sole discretion, within the parameters established
in the Budget, have control of and responsibility for the hiring, compensation,
supervision, evaluation and termination of its Physician Employees, although, at
the request of the PC, the Management Company shall consult with the PC
regarding such matters. The PC shall be responsible for the payment of such
Physician Employees' salaries and wages, payroll taxes, benefits and all other
taxes and charges now or hereafter applicable to them.
(d) The PC and its Physician Employees shall be solely responsible for the
cost of membership in professional associations and continuing professional
education. The PC shall ensure that its Physician Employees participate in such
continuing professional education as is necessary for such physician to remain
current in his field of medical practice.
(e) The PC shall cooperate with the Management Company in the obtaining and
retaining of professional liability insurance by (i) ensuring that its Physician
Employees are insurable or (ii) instituting proceedings to terminate within 90
days any Physician Employee who is not insurable or who loses his insurance
eligibility. The PC shall notify the Management Company in writing of any change
in the insurance status of any Physician Employee within two days of the PC
receiving notice of such change. The PC shall require all Physician Employees to
participate in an on-going risk management program.
(f) The PC shall not be liable to the Management Company for failure to
perform any of the services required herein in the event of strikes, lock-outs,
calamities, acts of
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God, unavailability of supplies or other events over which the PC has no control
for so long as such events continue and for a reasonable time thereafter.
(g) The PC shall be solely responsible for all costs, fees and expenses
related, directly or indirectly, to the items and services listed on Schedule 1.
SECTION 6. Cardiothoracic Interventional or Surgical Relationships. (a)
Neither the Management Company, Advanced Health Corporation ("AHC") nor any
affiliate of either shall enter into a contract (i) to acquire the
non-professional assets of or (ii) to provide Management Services to, any
cardiothoracic interventional or surgical physician or group of physicians in
the boroughs of Manhattan, Brooklyn, the Bronx, Queens or Staten Island, the
counties of Westchester, Rockland, Nassau or Suffolk in the State of New York,
the counties of Bergen, Hudson, Middlesex, Union or Essex in the State of New
Jersey or the county of Fairfield in the State of Connecticut without the
written consent of Dr. Subramanian and Dr. Moses, which consent shall not be
unreasonably withheld; provided, however, that if Dr. Subramanian or Dr. Moses
are no longer employed by or affiliated with the PC, the obligation of the
Management Company to obtain such Physician's consent shall be automatically
terminated.
(b) The Management Company shall offer the services of the PC to any
network of cardiologists in the boroughs of Manhattan, Brooklyn, the Bronx,
Queens or Staten Island, the counties of Westchester, Rockland, Nassau or
Suffolk in the State of New York, the counties of Bergen, Hudson, Middlesex,
Union or Essex in the State of New Jersey or the county of Fairfield in the
State of Connecticut to whom the Management Company is providing Management
Services.
SECTION 7. Restrictive Covenants and Liquidated Damages. The parties
recognize that the services to be provided by the Management Company shall be
deliverable only if the PC operates an active medical practice to which the
physicians associated with the PC devote substantial time and attention. To that
end:
(a) During the Term, neither the PC, nor the Physicians shall establish,
operate or provide physician services at any medical office, clinic or other
health care facility other than a Facility, without the written approval of the
Management Company which approval shall not be unreasonably withheld.
(b) Each Physician and any Physician Employee now or hereinafter employed
by the PC shall sign an employment agreement in substantially the form set forth
as Exhibit B.
(c) The Management Company and the PC acknowledge and agree that since a
remedy at law for any breach or attempted
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<PAGE>
breach of the provisions of this Section 7 shall be inadequate either party
shall be entitled to specific performance and injunctive or other equitable
relief in case of any such breach or attempted breach, in addition to any
remedies available at law. If any provision of this Section 7 relating to the
restrictive period and/or the scope of activity restricted shall be declared by
a court of competent jurisdiction to exceed the maximum time period or scope of
activity restricted such court deems reasonable and enforceable under applicable
law, the time period and/or scope of activity restricted held to be reasonable
and enforceable by such court shall thereafter be the restrictive period and/or
scope of activity restricted applicable to the restrictive covenant provisions
in this Section 7. The invalidity or non-enforceability of this Section 7 in any
respect shall not affect the validity or enforceability of the remainder of this
Section 7 or of any other provisions of this Agreement.
SECTION 8. WORKING CAPITAL FACILITY. (a) On the final business day
-------------------------
of every month during the first 36 months of the Term, the Management Company
shall make available to the PC an amount (a "Working Capital Advance") equal to
(x) (i) the aggregate cash expenditures for compensation of Physician Employees
for such months plus (ii) the aggregate cash expenses set forth on Schedule 1
---- ----------
paid directly by the PC for such month (collectively, the "Expenses") minus
-----
(y)(i) the amount the Management Company paid the PC for its accounts receivable
during such month minus (ii) the amount the PC paid to the Management Company
-----
for uncollected receivables during such month (collectively, the "Revenues");
provided, however, that the compensation of any physician employed by the PC
- -------- -------
shall be excluded from clause (x)(i) above if such compensation is paid and/or
guaranteed by any third party; provided further, however, that such Working
-------- ------- -------
Capital Advance shall not exceed (i) the amount of aggregate monthly physician
compensation provided for in the Budget for the relevant Period or (ii) the
amount equal to the cumulative Revenues purchased by the Management Company for
the relevant Period through the date of the Working Capital Advance minus the
-----
cumulative Expenses for the relevant Period through the date of the Working
Capital Advance. Any borrowings made by the PC from the Management Company
pursuant to this Section 8(a) shall be evidenced by a promissory note in
substantially the form set forth as Exhibit C.
---------
(b) If an outstanding balance exists on the note securing any Working
Capital Advance on the 36 month anniversary of the Effective Date, then the PC
may repay such note by (i) paying to the Management Company an amount of cash
equal to the outstanding balance, including unpaid interest, on such note or
(ii) surrendering to the Management Company (A) if AHC is not then a public
company, shares of AHC stock with a value equal to the outstanding balance
including unpaid interest on such note, which value shall be determined based
upon an appraisal by an independent investment bank to be mutually agreed upon
by the parties or (B) if AHC is then a public company, shares of AHC
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common stock with a value, based on a 20-day average closing price, equal to the
outstanding balance, including unpaid interest, on such note; provided, however,
-------- -------
that, in the case of clause (A) or clause (B) above, if the value of all the
shares of AHC stock transferred hereunder plus the value received from the prior
----
disposition of shares of AHC stock is insufficient to repay such note, then the
Management Company shall forgive the amount of such note equal to such
insufficiency.
SECTION 9. COMPENSATION; ACCOUNTS RECEIVABLE. (a) In consideration
---------------------------------
of the Management Services, the PC shall pay to the Management Company (i) a
monthly fee (the "Management Fee") of [ ]*payable in advance on the first
business day of each month during the Term, and (ii) a signing fee (the "Signing
Fee") of [ ] *payable in equal installments on the first business day of the
second and third months of the Base Term which payments shall be by the pledge
of accounts receivable of the PC to the Management Company.
(b) Commencing on January 1, 1996 and commencing on every six
month anniversary of such date thereafter during the Term (each a "Period"), the
parties shall review the Management Fee for the following Period and mutually
agree on a revised Management Fee which shall be reflected in an amendment to
this Agreement in the form of Exhibit D; provided, however, that if the parties
--------- -------- -------
are unable to agree on a revised Management Fee after pursuing good faith
negotiations for 20 days, then the Management Fee for such following Period
will be adjusted automatically upward or downward pursuant to the formula set
forth on Annex A. Upon the addition or subtraction of any practicing physician
-------
by the PC, the parties shall review the Management Fee and mutually agree on a
revised Management Fee for the remainder of the Period during which such
physician is added or subtracted that shall be reflected in an amendment to this
Agreement in the form of Exhibit D; provided, however, that if the parties are
--------- -------- -------
unable to agree on a revised Management Fee after pursuing good faith
negotiations for 20 days, then the Management Fee for the remainder of such
Period shall remain unchanged. A practicing physician shall be deemed to be
subtracted by the PC if such physician does not or cannot practice medicine for
any reason for a period of 90 consecutive days. The PC shall provide written
notice to the Management Company of the addition or subtraction of any
practicing physician within five business days of such addition or subtraction
occurring.
(c) The amount of interest due on any Working Capital Advance
made pursuant to Section 8(a) shall be paid monthly with the Management Fee.
(d) Commencing with the second month of the Base Term, on the
first business day of each month, the Management
- -----------
* Omitted pursuant to Rule 406 promulgated under the Securities Act of 1933,
as amended.
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<PAGE>
Company shall purchase the accounts receivable of the PC arising during the
previous month for an aggregate payment equal to the face amount of such
accounts receivable (the "Receivable Payment"); provided, however, that the
-------- -------
Management Company reserves the right to purchase accounts receivable (i) not
being paid by funds from the Medicare or Medicaid programs or (ii) in the event
any state or federal laws or regulations, now existing or enacted or promulgated
after the Effective Date, are interpreted by judicial decision, a regulatory
agency or legal counsel of the Management Company in such a manner as to allow
the discounted purchase of Medicare or Medicaid receivables, all accounts
receivable, at a discounted rate to be mutually agreed upon by the parties based
upon the historical accounts receivable collection rates of the PC, Lenox Hill
Cardiothoracic Surgical, P.C. ("LHCS PC") and Lenox Hill Interventional
Cardiology, P.C. ("LHIC PC") The Receivable Payment shall be paid in cash, or
other readily available funds, in equal, interest-free weekly installments
payable on the first business day of each week that begins during the month in
question. Appropriate adjustments to such payments shall be made with respect to
the thirteenth week in each fiscal quarter. The Management Company shall have
the right to deduct, withhold and set-off from any Receivable Payment owed to
the PC an amount equal to the amount owed to the Management Company by the PC on
the Signing Fee.
(e) Although it is the intention of the parties that the
Management Company purchase and thereby become owner of the accounts receivable
of the PC, in cash such purchase shall be ineffective for any reason, the
Management Company shall make a loan to the PC in an amount equal to the
Receivable Payment which loan shall be secured by a Security Agreement in the
form attached as Exhibit E which the PC is entering into concurrently herewith.
---------
Any such loan shall be due and payable 90 days after it is made and the PC
shall prepay principal of such loan in an amount equal to its collections of
accounts receivable on each day such collections are made prior to the due date
of such loan. In addition, the PC shall cooperate with the Management Company
and execute all necessary documents in connection with the pledge of such
accounts receivable to the Management Company or at the Management Company's
option, its lenders. All collections, including, without limitation, all
collections of Medicare and Medicaid payments, in respect of such accounts
receivable shall be made by the Management Company on behalf of the PC. To the
extent that the PC gains possession of any payments in respect of such accounts
receivable, the PC shall direct such payments to the Management Company for
deposit in a bank account designated by the Management Company. Any accounts
receivable purchased by the Management Company and not collected within
90 days of such purchase shall be repurchased by the PC at the Management
Company's costs thereof.
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SECTION 10. Representation of AHC. AHC represents and warrants to the PC
that to the best of AHC's knowledge as of the date hereof the proceeds of the
next round of financing shall be used as set forth on Annex B.
SECTION 11. Certain Covenants. (a) Except as expressly provided herein,
during the Term of this Agreement, the Physicians shall not directly or
indirectly sell, or in any other way transfer, assign, pledge, distribute,
encumber or otherwise dispose of (including, without limitation, by reason of
the foreclosure or other acquisition by any lender with respect to any shares of
capital stock of the PC pledged by the Physicians) any capital stock of the PC
or any interest therein, or enter into any agreement with respect to any of the
foregoing, in any case either voluntarily or involuntarily and with or without
consideration.
(b) During the Term of this Agreement, the PC shall not issue or sell any
shares of its capital stock, any securities convertible into or exchangeable or
exercisable for shares of its capital stock or any rights to subscribe for or to
purchase shares of its capital stock without the consent of the Management
Company, which consent shall not be unreasonably withheld or delayed so long as
the recipient thereof agrees to be bound by the terms of this Agreement.
(c) During the Term of this Agreement, each certificate representing shares
of capital stock (including the Stock) issued by the PC shall bear the following
legend:
- --------
*Omitted pursuant to Rule 406 promulgated under the Securities Act of 1933, as
amended.
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<PAGE>
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE
SUBJECT TO THE RESTRICTIONS ON TRANSFER CONTAINED IN
THE MANAGEMENT SERVICES AGREEMENT DATED AS OF
AUGUST 7, 1995, AMONG ADVANCED HEART INSTITUTE OF
NEW YORK, P.C., A NEW YORK PROFESSIONAL CORPORATION,
VALAVANUR A. SUBRAMANIAN, M.D., JEFFREY MOSES, M.D.
AND MAJEAN SUB 2, INC., A DELAWARE CORPORATION."
(d) During the Term of this Agreement, the Management Company shall act
materially in accordance with the accounts payable payment policies approved by
the Joint Management Advisory Board.
(e) During the Term of this Agreement, if any employee of the Management
Company who was previously an employee of LHCS PC or LHIC PC has an
irreconcilable difference with the Management Company which the best efforts of
the parties are unable to resolve, then, at the sole discretion of Dr.
Subramanian with respect to former employees of LHCS PC and at the sole
discretion of Dr. Moses with respect to former employees of LHIC PC, such
employee may become an employee of the PC.
SECTION 12. Records. (a) Upon termination of this Agreement, the PC shall
retain all patient medical records maintained by the PC or the Management
Company in the name of the PC. The PC shall, at its written request and at the
cost of the Management Company, be entitled to copies of any financial and
accounting records relating to all management services performed by the
Management Company.
(b) Following the termination of this Agreement, the PC will grant (to the
extent permitted by law) to the Management Company, for the purposes of
preparing for any actual or anticipated legal proceeding, reasonable access
(which shall include making photocopies) to the records described in Section
12(a) and other information regarding the PC or the Business during the Term.
SECTION 13. Insurance and Indemnity. (a) During the Term, the PC shall
maintain comprehensive professional liability insurance providing for (i)
general liability coverage and (ii) medical malpractice coverage with limits of
not less than $1,000,000 per claim and with aggregate policy limits of not less
than $3,000,000 per physician employed by the PC (or such higher amounts as may
be necessary to comply with any regulatory requirement and/or contractual
requirement to which such physician or the PC may be subject) and a separate
limit for the PC. The Management Company shall have no responsibility for the
payment of the premiums for such liability coverage. The PC shall be responsible
for all liabilities in excess of the limits of such policies.
(b) The PC shall indemnify, hold harmless and defend the Management
Company, its officers, directors,
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shareholders, employees, agents and independent contractors from and against any
and all liabilities, losses, damages, claims, causes of action and expenses
(including reasonable attorneys' fees and expenses), whether or not covered by
insurance, caused or asserted to have been caused, directly or indirectly, by or
as a result of the performance of medical services or any other acts or
omissions by the PC and/or its partners, agents, employees and/or subcontractors
(other than the Management Company) during the Term.
(c) The Management Company shall indemnify, hold harmless and defend the
PC, its officers, directors, shareholders, employees, agents and independent
contractors from and against any and all liabilities, losses, damages, claims,
causes of action and expenses (including reasonable attorneys' fees and
expenses), whether or not covered by insurance, caused or asserted to have been
caused, directly or indirectly, by or as a result of the performance of
Management Services or any other acts or omissions by the Management Company
and/or its partners, agents, employees and/or subcontractors (other than the PC)
during the Term.
SECTION 14. Termination. (a) The PC may terminate this Agreement (i) in the
event of the filing of a petition in voluntary bankruptcy or an assignment for
the benefit of creditors by the Management Company or AHC, or upon other action
taken or suffered, voluntarily or involuntarily, under any federal or state law
for the benefit of debtors by the Management Company or AHC, except for the
filing of a petition in involuntary bankruptcy against the Management Company or
AHC which is dismissed within 60 days thereafter, by giving written notice to
the Management Company of the immediate termination of this Agreement (a
"Bankruptcy Event"), (ii) in the event the Management Company defaults in its
obligation under Section 8(a) and such default results in the PC being unable to
meet its payroll obligations to the Physician Employees and such default shall
continue for a period of five business days after written notice thereof has
been given to the Management Company by the PC, by giving written notice to the
Management Company of the immediate termination of this Agreement, (iii) in the
event the Management Company shall materially default in the performance of any
other duty or obligation imposed upon it by this Agreement and such default
shall continue for a period of 45 days after written notice thereof has been
given to the Management Company by the PC, by giving written notice to the
Management Company of the immediate termination of this Agreement or (iv)
pursuant to Section 28.
(b) The Management Company may terminate this Agreement effective
immediately by giving written notice to the PC (i) in the event of a Bankruptcy
Event relating to the PC, (ii) in the event the PC shall materially default in
the performance of any duty or obligation imposed upon it by this Agreement and
such default shall continue for a period of 45 days
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<PAGE>
after written notice thereof has been given to the PC by the Management Company,
(iii) in the event that the Agreement dated as of October 1, 1994 between LHCS
PC and LHH or the Agreement dated as of October 1, 1993 between LHIC PC and LHH
are terminated for any reason, (iv) in the event the PC or either of the
Physicians is excluded from the Medicaid or Medicare program for any reason or
(v) pursuant to Section 28.
(c) Following the occurrence of a Triggering Event (as defined below), at
the option of the Management Company in the case of a Triggering Event defined
in clause (i) of the definition thereof or at the option of the PC or either
Physician in the case of a Triggering Event defined in clause (ii), (iii), (iv)
or (v) of the definition thereof, upon 30 days written notice, this Agreement
may be terminated. In connection with a termination triggered by the Management
Company or the PC pursuant to this Section 14(c), (i) any then-outstanding note
securing a Working Capital Advance shall be cancelled, (ii) the Management
Company shall return the Signing Fee to the PC by returning an amount, in cash
and/or accounts receivable, equal to the amount of the Signing Fee paid at the
time of the Triggering Event, (iii) the Management Company shall sell to the PC
at a price equal to their then-fair market value any assets acquired for the use
of the PC by the Management Company following the Effective Date, and (iv) the
PC shall repurchase at cost any of its outstanding accounts receivable
previously purchased by the Management Company pursuant to Section 9(d). In
connection with a termination triggered by either Physician pursuant to this
Section 14(c) or Section 29(d), (i) one-half of any then-outstanding note
securing a Working Capital Advance shall be cancelled, (ii) the Management
Company shall return the one half of the Signing Fee to such Physician by
returning an amount, in cash and/or accounts receivable, equal to one-half of
the amount of the Signing Fee paid at the time of the Triggering Event, (iii)
the Management Company shall sell to such Physician at a price equal to their
then-fair market value any assets acquired for the use of such Physician by the
Management Company following the Effective Date, and (iv) such Physician shall
repurchase at cost any of its outstanding accounts receivable previously
purchased by the Management Company pursuant to Section 9(d). The term
"Triggering Event" shall mean (i) (x) the failure of AHC to consummate a
registered public offering within 36 months of the Effective Date, (y) the
failure of AHC to generate revenues equal to or greater than $20,000,000 on a
consolidated basis during the second 12 months of the Base Term and (z) on the
36- month anniversary of the Base Term, the outstanding principal balance on the
notes securing any Working Capital Advance exceeds $3,000,000, (ii) the failure
of AHC to (x) consummate a registered public offering within 36 months of the
Effective Date and (y) generate revenues equal to or greater than $20,000,000 on
a consolidated basis during the second 12 months of the Base Term, (iii) the
failure of AHC to have closed on financing in an amount equal to $5,000,000,
within 90 days of the Effective Date, (iv) at any time during the first 36
months of the Base Term, the
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outstanding principal balance on the notes securing any Working Capital Advance
exceeds $2,150,000 or (v) at any time during the first five months of the Base
Term, the occurrence of a Bankruptcy Event relating to the Management Company or
AHC.
(d) The Management Company shall secure its obligations under Section
14(c)(ii) by granting to the PC a security interest in its accounts receivable,
by entering into a Security Agreement in the form attached as Exhibit F which
the Management Company is entering into concurrently herewith.
SECTION 15. Non-Disclosure of Confidential Information. (a) None of the PC,
its owners, employees, consultants or agents or either Physician shall, at any
time after the execution and delivery hereof, directly or indirectly disclose
any confidential or proprietary information relating to the Management Company
to any person, firm, corporation, association or other entity, nor shall the PC,
its owners, employees, consultants or agents or either Physician make use of any
of such confidential or proprietary information for its or their own purposes or
for the benefit of any person, firm, corporation or other entity except the
Management Company or any subsidiary or affiliate thereof. The foregoing
obligation shall not apply to any information which the PC or either Physician
can establish to have (i) become publicly known without breach of this Agreement
by it or them or (ii) to have been given to the PC or either Physician by a
third party who is not obligated to maintain the confidentiality of such
information.
(b) None of the Management Company, its owners, employees, consultants or
agents shall, at any time after the execution and delivery hereof, directly or
indirectly disclose any confidential or proprietary information relating to the
PC to any person, firm, corporation, association or other entity, nor shall the
Management Company, its owners, employees, consultants or agents make use of any
of such confidential or proprietary information for its or their own purposes or
for the benefit of any person, firm, corporation or other entity except the PC
or any affiliate thereof. The foregoing obligation shall not apply to any
information which the Management Company, its owners, employees, consultants or
agents can establish to have (i) become publicly known without breach of this
Agreement by it or them or (ii) to have been given to the Management Company,
its owners, employees, consultants or agents by a third party who is not
obligated to maintain the confidentiality of such information.
(c) The term "confidential or proprietary information" shall mean all
information which is known to the Management Company, the PC, any of their
respective employees, officers, directors or consultants or the Physicians which
relates to matters such as trade secrets, books and records, supplies, pricing
and cost information, marketing plans, strategies and forecasts. Nothing
contained herein shall prevent the Management Company, the PC or the Physicians
from furnishing
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confidential or proprietary information pursuant to a direct order of a court of
competent jurisdiction.
SECTION 16. Non-Competition. (a) The PC acknowledges and recognizes the
highly competitive nature of the business of the Management Company and that
goodwill is an essential asset of the Management Company. Accordingly, during
the Term, the PC shall not (i) directly or indirectly engage in any Competitive
Business (as defined below), whether such engagement shall be as an employer,
owner, consultant, partner or other participant in any Competitive Business,
(ii) assist others in engaging in any Competitive Business in the manner
described in the foregoing clause (i), (iii) employ or otherwise induce
employees of the Management Company to terminate their employment with the
Management Company or engage in any Competitive Business or (iv) induce
customers or vendors of the Management Company to alter or terminate their
business relationship with the Management Company. As used herein, the term
"Competitive Business" shall mean any business which, directly or indirectly,
competes with the Management Company in the boroughs of Manhattan, Brooklyn, the
Bronx, Queens or Staten Island, the counties of Westchester, Rockland, Nassau or
Suffolk in the State of New York, the counties of Bergen, Hudson, Middlesex,
Union or Essex in the State of New Jersey or the county of Fairfield in the
State of Connecticut.
(b) AHC, the Management Company and any affiliate of either acknowledge and
recognize the highly competitive nature of the business of the PC. Accordingly,
during the Term, AHC, the Management Company and/or any affiliate of either
shall not (i) directly or indirectly engage in any Competitive Business (as
defined below), whether such engagement shall be as an employer, owner,
consultant, partner or other participant in any Competitive Business, (ii)
assist others in engaging in any Competitive Business in the manner described in
the foregoing clause (i), (iii) employ or otherwise induce employees of the PC
to terminate their employment with the PC or engage in any Competitive Business
or (iv) induce patients or vendors of the PC to alter or terminate their medical
or business relationship with the PC. As used herein, the term "Competitive
Business" shall mean any business which, directly or indirectly, competes with
the PC in the provision of cardiothoracic surgery or invasive cardiology to the
general public in the boroughs of Manhattan, Brooklyn, the Bronx, Queens or
Staten Island, the counties of Westchester, Rockland, Nassau or Suffolk in the
State of New York, the counties of Bergen, Hudson, Middlesex, Union or Essex in
the State of New Jersey or the county of Fairfield in the State of Connecticut.
SECTION 17. Activities of the Management Company. (a) The PC and the
Management Company acknowledge that certain federal and state statutes severely
restrict or prohibit the Management Company from providing medical services.
Accordingly, during the Term, the Management Company represents and warrants
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that it shall not provide or otherwise engage in services or activities which
constitute the practice of medicine, as defined in applicable state or federal
law, except in compliance therewith.
(b) Without in any way limiting Section 17(a), during the Term, the
Management Company shall not interfere with the exercise of professional
judgment by any health care provider employed by the PC nor shall the Management
Company interfere with, control, direct or supervise any health care provider in
connection with the provision of professional services. The foregoing shall not
preclude the Management Company from assisting in the development of
professional protocols and monitoring compliance with policies and procedures
that have been instituted in accordance with this Agreement.
(c) Subject to Sections 6 and 16, this Agreement shall not prohibit the
Management Company or any partner or employee thereof from engaging in other
activities, whether or not such activities are competitive with any business of
the PC.
SECTION 18. Assignment. The Management Company shall have the right to
assign its right to receive payment hereunder to an affiliate and to any lending
institution from which the Management Company or Advanced Health Corporation
obtains financing for security purposes or as collateral. Except as set forth in
the preceding sentence, neither the Management Company nor the PC shall have the
right to assign their respective rights and obligations hereunder without the
written consent of the other party.
SECTION 19. Notices. All notices, requests, consents and other
communications hereunder shall be in writing and shall be deemed sufficient if
personally delivered, sent by nationally-recognized overnight courier, or by
registered or certified mail, return receipt requested and postage prepaid,
addressed as follows:
if to the Management Company, to:
Majean Sub 2, Inc.
c/o Sexter & Warmflash
61 Broadway
New York, New York 10006
Attention: David Warmflash, Esq.
with a copy to:
Sexter & Warmflash
61 Broadway
New York, New York 10006
Attention: David Warmflash, Esq.
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<PAGE>
if to the PC, to:
Advanced Heart Institute of New York, P.C.
c/o Lenox Hill Hospital
130 East 77th Street
New York, New York 10021
with a copy to:
Sexter & Warmflash
61 Broadway
New York, New York 10006
Attention: David Warmflash, Esq.
if to the Physicians, to:
Valavanur A. Subramanian, M.D.
Personal and Confidential
c/o Lenox Hill Hospital
130 East 77th Street
New York, New York 10021
Jeffrey Moses, M.D.
Personal and Confidential
c/o Lenox Hill Hospital
130 East 77th Street
New York, New York 10021
in each case, with a copy to:
Sexter & Warmflash
61 Broadway
New York, New York 10006
Attention: David Warmflash, Esq.
or to such other address as the party to whom notice is to be given may have
furnished to each other party in writing in accordance herewith. Any such notice
or communication shall be deemed to have been received (a) in the case of
personal delivery, on the date of such delivery, (b) in the case of
nationally-recognized overnight courier, on the next business day after the date
when sent and (c) in the case of mailing, on the third business day following
that on which the piece of mail containing such communication is posted.
SECTION 20. Benefits of Agreement. This Agreement shall bind and inure to
the benefit of any successors to or assigns of the Management Company, the
Physicians and the PC.
SECTION 21. Governing Law; Conduct. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of New York
(without giving effect to principles of conflicts of laws). The parties hereto
shall act
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<PAGE>
in good faith and shall refrain from taking any actions to circumvent or
frustrate the provisions of this Agreement.
SECTION 22. Headings. Section headings are used for convenience only and
shall in no way affect the construction of this Agreement.
SECTION 23. Entire Agreement; Amendments. This Agreement contains the
entire understanding of the parties with respect to its subject matter, and
neither it nor any part of it may in any way be altered, amended, extended,
waived, discharged or terminated except by a written agreement signed by each of
the parties hereto.
SECTION 24. Severability. The provisions of this Agreement shall be deemed
severable and if any portion shall be held invalid, illegal or unenforceable for
any reason, the remainder of this Agreement shall be effective and binding upon
the parties.
SECTION 25. Counterparts. This Agreement may be executed in counterparts,
and each such counterpart shall be deemed to be an original instrument, but all
such counterparts together shall constitute but one agreement.
SECTION 26. Waivers. Any party to this Agreement may, by written notice to
the other party, waive any provision of this Agreement. The waiver by any party
of a breach of any provision of this Agreement shall not operate or be construed
as a waiver of any subsequent breach.
SECTION 27. Termination. Notwithstanding anything contained herein to the
contrary, Sections 10, 13(c), 13(d), 14, 15, 19, 20, 21, 22, 23, 24, 25, 26 and
27 shall survive any termination of this Agreement.
SECTION 28. Contract Modification for Prospective Legal Events. (a) In the
event any state or federal laws or regulations, now existing or enacted or
promulgated after the Effective Date, are interpreted by judicial decision, a
regulatory agency or legal counsel of both parties in such a manner as to
indicate that the structure of this Agreement may be in violation of such laws
or regulations, the PC, the Physicians and the Management Company shall amend
this Agreement as necessary to avoid such violation. To the maximum extent
possible, any such amendment shall preserve the underlying economic and
financial arrangements between the PC and the Management Company. If an
amendment is not possible, either party shall have the right to terminate this
Agreement.
(b) In the event any state or federal laws or regulations, now existing or
enacted or promulgated after the Effective Date, are interpreted by judicial
decision, a regulatory agency or legal counsel of both parties in such a
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<PAGE>
manner as to allow a business corporation to purchase, operate or own equity
interests in medical practices or professional corporations, and if the PC or
any Physician or other stockholder of the PC (the "Offeror") proposes to sell,
transfer, assign, pledge, distribute, encumber or otherwise dispose of, either
voluntarily or involuntarily, with or without consideration, any capital stock
of the PC or all or substantially all of the assets of the PC (a "Transfer") to
any third party (the "Third Party"), then the Offeror shall, before such
Transfer, deliver to the Management Company an offer (the "Offer") to enter into
such Transfer in place of the Third Party upon the terms offered to such Third
Party. The Offer shall remain open and irrevocable for a period of 45 days from
the date of its delivery.
SECTION 29. Hospital Administrative Matters; Succession. (a) For purposes
of addressing administrative matters with LHH relating to the PC's clinical
activities ("Hospital Matters"), (i) Dr. Subramanian shall be responsible for
all Hospital Matters relating to the cardiothoracic surgical section of the PC
and (ii) Dr. Moses shall be responsible for all Hospital Matters relating to the
interventional cardiology section of the PC.
(b) (i) If either Physician has become a Former Chief of his respective
division at LHH due to a voluntary relinquishment of his duties and title, such
Former Chief (x) shall transfer, based on the book value of the PC on the 15th
day of the month immediately preceding such transfer, his ownership interest in
the PC to the New Chief of such division at LHH, at such time as such Former
Chief may determine in his sole discretion, provided that such New Chief has
agreed to join the PC and provided further that such Former Chief shall transfer
his ownership interest in the PC to the New Chief at such time as such Former
Chief ceases to practice medicine as a member of the PC for any reaon, and (y)
may continue his private practice of medicine as either a full-time Physician
Employee of the PC or enter into a part-time employment or a subcontracting
agreement with the PC.
(ii) If any New Chief who is a member of the PC no longer serves as the
chief physician of his respective division at LHH due to a voluntary
relinquishment of such duties and title, such New Chief (x) shall transfer his
ownership interest in the PC to the new chief physician of such division of LHH,
who shall then be the "New Chief", provided such New Chief has agreed to join
the PC and (y) may continue his private practice of medicine as either a
full-time Physician Employee of the PC or enter into a part-time employment or a
subcontracting agreement with the PC.
(iii) Upon death, disability or voluntary retirement from the practice of
medicine at LHH, such Former Chief, New Chief, or heirs or estate thereof shall
receive a severance payment in the form of monthly cash payments as
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<PAGE>
follows: (x) after three years of employment as chief of his respective division
such Former Chief or New Chief shall receive an amount equal to four months of
Severance Pay (as defined below); (y) after four years of employment as chief of
his respective division such Former Chief or New Chief shall receive an amount
equal to five months of Severance Pay; and (z) after five or more years of
employment as chief of his respective division such Former Chief or New Chief
shall receive an amount equal to six months of Severance Pay. The term
"Severance Pay" means an amount equal to the average monthly salary of such
retiring physician for the twelve months preceding the date of retirement of
such physician.
(c) If either Physician or any New Chief is no longer the chief physician
of his respective division at Lenox Hill Hospital due to an involuntary
relinquishment of such duties and title either for cause or due to death or
disability of such Physician or New Chief, such Physician or New Chief or the
heirs or estate of such Physician or New Chief shall transfer his ownership
interest in the PC to the new chief physician of such division at Lenox Hill
Hospital.
(d) If either Physician (the "Terminating Physician") wishes to terminate
his relationship with the PC due to irreconcilable differences with the other
Physician, the Terminating Physician shall notify the Management Company in
writing (the "Differences Notice") of such differences, which notice shall set
forth a full description of such differences. Following the tenth business day
after the delivery of the Differences Notice, but not later than twenty business
days following the delivery of the Differences Notice, the Terminating Physician
may notify the Management Company in writing (the "Put Notice") of his desire to
cause AHC to repurchase all (but not less than all) of the shares of AHC stock
then owned or beneficially owned by the Terminating Physician at a price equal
to (i) if AHC is not then a public company, their fair market value as of the
date of the Put Notice as determined based upon an appraisal by an independent
investment bank to be mutually agreed upon by AHC and the Terminating Physician
or (ii) if AHC is then a public company, their value as of the date of the Put
Notice as determined based on a 20-day average closing price for such shares
(the "Valuation"). Within 10 business days following the Valuation, AHC shall
purchase, and the Terminating Physician shall sell, the number of shares of AHC
stock specified in the Put Notice at a mutually agreeable time and place (the
"Put Closing"). Following the Put Closing, the Terminating Physician shall enter
into a management services agreement with the Management Company substantially
upon the terms contained herein for the delivery of Management Services to the
Terminating Physician.
SECTION 30. Conditions to Effectiveness. (a) This Agreement shall become
effective upon the Effective Date subject
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to the satisfaction of each of the following conditions unless such conditions
are waived by the parties:
(i) The employment agreements referenced in Section 7(b) shall have
been executed by the parties thereto;
(ii) The Agreement dated as of October 1, 1994 between LHCS PC and LHH
and the Agreement dated as of October 1, 1993 between LHIC PC and LHH shall
have been assigned to the PC;
(iii) Any lease existing between LHCS PC and LHH and/or between LHIC
PC and LHH shall have been assigned to the Management Company;
(iv) The Letter Agreement dated August, 1995 between AHC and LHH
relating to the creation of a network of hospitals providing cardiothoracic
surgery and interventional cardiology services shall have been executed by
the parties thereto;
(v) The Consent Agreement dated August, 1995 between LHH, LHCS PC,
LHIC PC, Dr. Subramanian, Dr. Moses, the PC and the Management Company
shall have been executed by the parties thereto;
(vi) A binding agreement regarding management services shall have been
entered into between S.A.M. Medical Associates, P.C., Angelo Acquista, M.D.
and AHC or a subsidiary thereof;
(vii) A final Budget for the first Period of the Base Term shall have
been agreed upon by the parties; and
(viii) The PC and the Management Company shall have used their best
efforts to draft an employee integration plan reasonably satisfactory to
each party.
(b) If the conditions set forth in Section 29(a) are not satisfied by
August 21, 1995, this Agreement shall automatically terminate.
* * *
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<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Management Services
Agreement as of the date first above written.
ADVANCED HEART INSTITUTE OF NEW
YORK, P.C.
By:
--------------------------------
Name:
Title:
MAJEAN SUB 2, INC.
By:
--------------------------------
Name:
Title:
-----------------------------------
VALAVANUR A. SUBRAMANIAN, M.D.
-----------------------------------
JEFFREY MOSES, M.D.
AGREED AND ACCEPTED AS TO
SECTIONS 6(a), 10, 11(f),
14, 16 AND 29:
ADVANCED HEALTH CORPORATION
By:
--------------------------------
Name:
Title:
<PAGE>
EXHIBIT A
to the Management Services Agreement
AHI Surgery and Interventional
Income Statement
Budget
8/1-12/31/95
-------------
Physician Fee Income (Cash) $6,060,933
----------
Physician Salaries and Professional Expenses
Salaries 3,987,567
Physician Payroll Tax and Benefits 110,417
Outside Service Professional fee 150,000
Outside Service Technical 38,000
Hospital Facility Fees 569,453
Additional Hospital Fees (PA subsidies) 175,000
Malpractice Insurance 120,667
Workers Comp/DBL Insurance 32,500
Pension Expense 0
Legal/Accounting/Prof Fees 54,167
Conference Cost/Travel & Entertainment 67,500
Dues & Subscriptions/Licenses 13,750
Contributions 22,000
Depreciation 15,208
Auto Lease/Garage 17,167
Franchise and Other Taxes 27,188
------
Total Physician Expenses 5,400,582
---------
0
Operating Margin Before Management Fees & Expenses 660,350
-------
Management Expenses
Non-Physician Payroll 130,017
Payroll Taxes and Benefits 34,393
Administrative Subsidy 6,000
Pension Expense/Compensation 0
Rent - Hospital 56,258
Rents - Other 5,000
Telephone 16,667
Insurance - WC/DBL/Office 2,500
Officer Expense 32,333
Billing Expense 142,377
Payroll Service 500
Beepers 542
Repairs & Maintenance 417
Equipment Lease 1,875
Miscellaneous 3,208
Outside Office Services 8,750
Bank Charges 1,042
Medical Supplies 16,458
Depreciation 0
Management Fee 181,828
Taxes - Commercial Rent Tax 3,201
-----
Total Management Expenses 643,365
-------
Net Income/(Loss) $16,986
-------
<PAGE>
EXHIBIT B
to Management Services Agreement
[FORM OF EMPLOYMENT AGREEMENT]
EMPLOYMENT AGREEMENT dated as of
__________ __, 1995, between ADVANCED
HEART INSTITUTE OF NEW YORK, P.C.
(the "PC"), and _________________
(the "Employee").
The PC is a professional corporation engaged in the
provision of cardiothoracic surgery and invasive cardiology medical services to
the general public. The PC desires to employ the Employee as a physician to
deliver such medical services and the Employee desires to accept such employment
by the PC, on the terms and subject to the conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual cove- nants and obligations
hereinafter set forth, the parties hereto hereby agree as follows:
1. Employment. The PC hereby employs the Employee and the Employee hereby
accepts employment by the PC, upon the terms and subject to the conditions
hereinafter set forth.
2. Term. The employment of the Employee hereunder shall be for the
_____-year period commencing on the date hereof and ending on __________ __,
____ (the "Term"). For convenience of reference, the Term and any extension
thereof shall be referred to in this Agreement as the "Employment Period."
3. Duties. (a) The Employee shall be employed as a physician. The Employee
shall perform such medical duties and services as may be assigned to him or her
from time to time by the PC.
4. Time to be Devoted to Employment; Place of Employment. (a) Except for
_____ weeks vacation per year (in addition to public holidays) and absences due
to temporary illness, during the Employment Period the Employee shall devote all
of his or her business time, attention and energies to the medical practice and
affairs of the PC.
(b) During the Employment Period, the Employee shall not be engaged in any
other medical or business activity which conflicts with the duties of the
Employee hereunder, whether or not such activity is pursued for gain, profit or
other pecuniary advantage.
5. Compensation; Reimbursement. (a) During the Employment Period, the PC
shall pay to the Employee an annual salary (the "Base Salary") of not less than
$_______, payable in
<PAGE>
such installments as is the policy of the PC with respect to its physicians.
Such Base Salary will be reviewed at least annually and may be increased by the
PC in its sole discretion.
(b) The Employee may also receive, at the sole discretion of the PC, an
annual cash bonus based upon the Employee's individual performance and upon the
performance of the PC as a whole.
(c) During the Employment Period and to the extent available to physicians
employed by the PC, the Employee shall be entitled to participate in all of the
PC's benefit plans, pension and retirement plans, life insurance,
hospitalization and surgical and major medical coverages, sick leave, vacation
and holidays, long-term disability and such other fringe benefits enjoyed by
other physicians employed by the PC.
6. Involuntary Termination. (a) If the Employee is incapacitated or
disabled by accident, sickness or other cause so as to render him or her
mentally or physically incapable of performing the services required to be
performed by him or her under this Agreement for a period of 90 consecutive days
or longer, or for 90 days during any six-month period (such condition being
herein referred to as a "Disability"), any termination by the PC of the
employment of the Employee under this Agreement as a result of such Disability
shall be called an "Involuntary Termination." Until the PC or the Employee shall
have terminated the Employee's employment hereunder, the Employee shall be
entitled to receive his or her compensation notwithstanding any such physical or
mental disability.
(b) If the Employee dies during the Employment Period, his or her
employment hereunder shall be deemed to cease as of the date of his or her
death, and the termination of his or her employment occasioned thereby shall be
deemed an Involuntary Termination.
7. Termination for Cause. If the PC shall terminate Employee's employment
for "Cause," then such termination shall be called a the Employee's employment
for "Cause," then such termination shall be called a "Termination for Cause."
For purposes of this Agreement, "Cause" shall be limited to:
(i) the willful and continued failure by the Employee substantially to
perform the duties described in Section 3 (other than any failure resulting
from an illness or other similar incapacity or disability), for 30 days
after a written demand for performance is delivered to the Employee on
behalf of the Board which specifically identifies the manner in which it is
alleged that the Employee has not substantially performed his duties;
(ii) the engaging by the Employee in misappropriation of funds,
properties or assets of the PC, sexual harassment of employees of the PC,
chronic alcoholism or drug addiction, slander or libel concerning the PC,
or a material
2
<PAGE>
tort relating to his or her office or employment with the PC which has a
material adverse effect on the PC; or
(iii) the Employee's conviction of a crime constituting a felony.
8. Termination Without Cause. If the PC shall terminate the employment of
the Employee hereunder at any time during the Employment Period without "Cause",
other than in the case of an Involuntary Termination, then such termination
shall be called a "Termination Without Cause."
9. Voluntary Termination. Any termination of the employment of the Employee
hereunder otherwise than as a result of an Involuntary Termination, a
Termination For Cause or a Termination Without Cause shall be deemed to be a
"Voluntary Termination." A Voluntary Termination shall be deemed to be effective
immediately upon such termination.
10. Effect of Termination of Employment. (a) Upon the termination of the
Employee's employment hereunder pursuant to a Voluntary Termination or a
Termination For Cause, neither the Employee nor his or her beneficiary or estate
shall have any further rights or claims against the PC under this Agreement
except to receive any unpaid portion of the Base Salary provided for in Section
5(a), computed on a pro rata basis to the date of termination.
(b) Upon the termination of the Employee's employment hereunder pursuant to
an Involuntary Termination, neither the Employee nor his or her beneficiary or
estate shall have any further rights or claims against the PC under this
Agreement except to receive a termination payment equal to that provided for in
Section 10(a) hereof, plus an amount equal to the pro rata share of the
Employee's cash bonus, if any, that would have been earned pursuant to Section
5(b) based upon an annualized calculation of the Employee's performance through
the date of termination.
(c) Upon the termination of the Employee's employment hereunder pursuant to
a Termination Without Cause, neither the Employee nor his or her beneficiary or
estate shall have any further rights or claims against the PC under this
Agreement except to receive a termination payment equal to the amount provided
for in Section 10(a) hereof, plus an amount equal to the pro rata share of the
Employee's cash bonus, if any, that would have been earned pursuant to Section
5(b) based upon an annualized calculation of the Employee's performance through
the date of termination.
11. Non-Competition; Disclosure of Information. (a) The Employee shall not,
for a period of one year following the termination of the Employment Period, (i)
directly or indirectly engage in any Competitive Business (as defined below),
whether such engagement shall be as an employee, employer, owner,
3
<PAGE>
physician, consultant, partner or other participant in any Competitive Business,
(ii) assist others in engaging in any Competitive Business in the manner
described in the foregoing clause (i), (iii) induce employees of the PC to
terminate their employment with the PC or engage in any Competitive Business or
(iv) induce patients of the PC to alter or terminate their business or medical
relationship with the PC. As used herein, the term "Competitive Business" shall
mean any business or medical practice that, directly or indirectly, competes
with the PC in the boroughs of Manhattan, Brooklyn, Queens, the Bronx or Staten
Island, the counties of Westchester, Rockland, Nassau or Suffolk in the State of
New York, the counties of Bergen, Hudson, Middlesex, Union or Essex in the State
of New Jersey or the county of Fairfield in the State of Connecticut.
(b) The Employee understands that the foregoing restrictions may limit his
or her ability to earn a livelihood in a Competitive Business, but the Employee
nevertheless believes that he or she has received and will receive sufficient
consideration and other benefits in connection with his or her employment to
clearly justify such restrictions which, in any event, the Employee does not
believe would prevent him or her from earning a living. Nothing herein contained
shall prohibit the Employee from engaging in a business or medical practice that
is not a Competitive Business.
(c) During and after the Employment Period, the Employee will preserve and
protect the confidentiality of the Confidential Information (as defined below)
and shall not use or disclose to any person, firm, corporation, medical practice
or other business entity, except as required by law or judicial process, any
Confidential Information for any reason or purpose whatsoever, nor shall he or
she make use of any of the Confidential Information for his or her own purposes
or for the benefit of any person, firm, corporation, medical practice or other
business entity except the PC. "Confidential Information" means any information
of a confidential or proprietary nature, including trade secrets, technical
data, know-how and financial, administrative, marketing and other business
information which the Employee produces or otherwise obtains during the course
of his or her employment with respect to any activity in which the PC is or has
been engaged, or which is entrusted to the PC by others. The foregoing
obligation shall not apply to any information which the Employee can establish
to have (i) become publicly known without breach of this Agreement by him or her
or (ii) to have been given to the Employee by a third party who is not obligated
to maintain the confidentiality of such information. At the time of termination
of the Employee's employment with the PC, the Employee will surrender to the PC
all documents, software and other tangible items in whatever form in his or her
possession or under his or her control which contain any Confidential
Information that belong to or have been entrusted to the Employee by the PC.
4
<PAGE>
12. PC Right to Inventions. The Employee shall promptly disclose, grant and
assign to the PC for its sole use and benefit any and all inventions,
improvements, technical information, methods and suggestions relating in any way
to the business or medical practice of the PC, which he or she may develop or
acquire during the Employment Period (whether or not during usual working
hours), together with all patent applications, patents, copyrights and reissues
thereof that may at any time be granted for or upon any such invention,
improvement, technical information or method. In connection therewith:
(a) The Employee shall without charge, but at the expense of the PC,
promptly at all times hereafter execute and deliver such applications,
assignments, descriptions and other instruments as may be reasonably
necessary or proper in the reasonable opinion of the PC to vest title to
any such inventions, improvements, technical information, methods, patent
applications, patents, copyright applications, copyrights or reissues of
any thereof in the PC and to enable it to obtain and maintain the entire
right and title thereto throughout the world; and
(b) The Employee shall render to the PC at its expense (including a
reasonable payment for the time involved in case he or she is not then in
its employ) all such assistance as it may reasonably require in the
prosecution of applications for said patents, copyrights or reissues
thereof, in the prosecution or defense or interferences which may be
declared involving any said applications, patents or copyrights and in any
litigation in which the PC may be involved relating to any such patents,
copyrights, inventions, improvements, technical information or methods.
13. Enforcement. It is the desire and intent of the parties hereto that the
provisions of this Agreement shall be enforced to the fullest extent permissible
under the laws and public policies applied by the jurisdiction whose laws govern
this Agreement. Accordingly, to the extent that a restriction contained in this
Agreement is more restrictive than permitted by the laws of any jurisdiction
where this Agreement may be subject to review and interpretation, the terms of
such restriction, for the purpose only of the operation of such restriction in
such jurisdiction, shall be the maximum restriction allowed by the laws of such
jurisdiction and such restriction shall be deemed to have been revised
accordingly herein.
14. Remedies; Survival. (a) The Employee acknowl- edges and understands
that the provisions of this Agreement are of a special and unique nature, the
loss of which cannot be accurately compensated for in damages by an action at
law, and that the breach of the provisions of this Agreement would cause the PC
irreparable harm. In the event of a breach by the Employee of the provisions of
Section 11 or 12 hereof, the PC shall be entitled to an injunction restraining
him from such
5
<PAGE>
breach. Nothing herein contained shall be construed as prohibiting the PC from
pursuing any other remedies available for any breach of this Agreement.
(b) Notwithstanding anything contained in this Agree- ment to the contrary,
the provisions of Sections 11, 12, 13 and this Section 14, shall survive the
expiration or other termination of this Agreement until, by their terms, such
provisions are no longer operative.
(c) It is understood and agreed that the provisions of this Agreement are
separate and distinct from any other agreement among the parties hereto.
Accordingly, in the event of a breach of the provisions hereof, the breaching
party shall only be held responsible for damages arising under this Agreement
and not for any damages which may be claimed to arise under or with respect to
any other agreement that is not separately breached.
15. Notices. Notices and other communications hereun- der shall be in
writing and shall be delivered personally or sent by air courier or first class
certified or registered mail, return receipt requested and postage prepaid,
addressed as follows:
If to the Employee:
[INSERT ADDRESS]
with a copy to:
[INSERT ADDRESS]
If to the PC:
Advanced Heart Institute of New York, P.C.
c/o Lenox Hill Hospital
130 East 77th Street
New York, New York 10021
with a copy to:
[INSERT ADDRESS]
or to such other address as the party to whom notice is to be given may have
furnished to the other party in writing in accordance herewith. All notices and
other communications hereunder shall be deemed to have been given on the date of
delivery if personally delivered; on the business day after the date when sent
if sent by air courier; and on the third business day after the date when sent
if sent by mail, in each case addressed to such party as provided in this
Section 14.
16. Binding Agreement. This Agreement shall inure to the benefit of and be
enforceable by the Employee's personal or legal representatives, executors,
administrators, successors,
6
<PAGE>
heirs, distributees and devisees. If the Employee should die while any amount
would still be payable to him or her hereunder if he or she had continued to
live, all such amounts, unless otherwise provided herein, shall be paid in
accordance with the terms of this Agreement to the beneficiary designated by the
Employee in a writing delivered to the PC, or if there be no such designated
beneficiary, to his or her estate.
17. Governing Law. This Agreement shall be governed by, and construed and
enforced in accordance with, the laws of the State of New York.
18. Waiver of Breach. The waiver by either party of a breach of any
provision of this Agreement by the other party must be in writing and shall not
operate or be construed as a waiver of any subsequent breach by such other
party.
19. Entire Agreement; Amendments; Execution. This Agreement contains the
entire agreement between the parties with respect to the subject matter hereof
and supersedes all prior agreements or understandings among the parties with
respect thereto. This Agreement may be amended only by an agreement in writing
signed by the parties hereto. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original document but all of
which shall constitute but one agreement.
20. Headings. The section headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
21. Severability. Any provision of this Agreement that is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
22. Assignment. With respect to the Employee, this Agreement is personal in
its nature and the Employee shall not assign or transfer this Agreement or any
rights or obligations hereunder. The PC may in its sole discretion assign or
otherwise transfer this Agreement and the provisions hereof (including, without
limitation, Sections 11, 12 and 13) shall inure to the benefit of, and be
binding upon, each successor of the PC, whether by merger, consolidation,
transfer of all or substantially all assets, or otherwise.
23. Counterparts. This Agreement may be executed in any number of
counterparts, and each such counterpart hereof shall be deemed to be an original
instrument, but all such counterparts together shall constitute but one
agreement.
7
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the
date first above written.
ADVANCED HEART INSTITUTE OF
NEW YORK, P.C.
By:
-------------------------------
Name:
Title:
-----------------------------------
[NAME OF EMPLOYEE]
8
<PAGE>
EXHIBIT C
to Management Services Agreement
[FORM OF PROMISSORY NOTE]
$[ ] New York, New York
____________, 199_
FOR VALUE RECEIVED, the undersigned, ADVANCED HEART INSTITUTE OF NEW YORK,
P.C., a New York professional corporation (the "Borrower"), hereby promises to
pay to the order of Majean Sub 2, Inc., a Delaware corporation (the "Lender"),
on the [insert date that is the 36-month anniversary of the Effective Date] the
principal sum of ________________________ Dollars ($___________)in lawful money
of the United States of America in immediately available funds, and to pay
interest from the date hereof on the principal amount hereof from time to time
outstanding, in like funds, at the prime rate as quoted by Citibank, N.A. on the
date hereof, which interest shall be paid in full on a monthly basis.
The Borrower may at any time, and from time to time, pre-pay this Note, in
whole or in part, without premium or penalty. All prepayments hereunder shall be
applied first to accrued interest, with the balance applied to principal.
In addition to paying this Note as provided herein, the Borrower may pay
this Note as provided in Section 8(b) of the Management Services Agreement dated
as of August 7, 1995, among Advanced Heart Institute of New York, P.C.,
Valavanur A. Subramanian, M.D., Jeffrey Moses, M.D. and Majean Sub 2, Inc.
If any payment of principal of or interest on this Note shall become due on
a Saturday, Sunday or a public holiday under the laws of either the State of New
York or the United States of America, then such payment shall be made on the
next succeeding business day.
The Borrower hereby waives diligence, presentment, demand, protest and
notice of any kind whatsoever. The failure by the Lender to exercise any of its
rights under this Note in any particular instance shall not constitute a waiver
thereof in that or any subsequent instance.
All borrowings evidenced by this Note and all payments and prepayments of
the principal hereof and interest hereon and the respective dates and maturity
dates thereof shall be noted on the grid attached hereto, and each such notation
shall be conclusive absent manifest error; provided, however, that the failure
of the Lender to make such a notation, or any error herein, shall not affect the
obligations of the Borrower to
<PAGE>
repay, in accordance with the terms of this Note and the Letter Agreement, the
principal amount of this Note.
If any of the following shall occur and be continuing (each, an "Event of
Default"):
(a) the Borrower shall fail to pay when due any principal of or
interest on this Note and such default shall continue for a period of five
(5) business days after the Borrower shall have received written notice of
such default from the Lender; or
(b) the Borrower shall be declared a bankrupt or shall become
protected from actions by its creditors;
then the Lender may, at its option, exercise any or all rights, powers and
remedies afforded under law, and shall have the right to declare the unpaid
balance of principal of and accrued interest on this Note immediately due and
payable.
This Note shall be governed by and construed in accordance with the laws of
the State of New York (without giving effect to principles or conflicts of
laws).
ADVANCED HEART INSTITUTE
OF NEW YORK, P.C.
By:
-------------------------------
Name:
Title:
<PAGE>
LOANS
<TABLE>
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Principal Principal
Amount: Interest: Balance: Notation By:
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Date:
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<PAGE>
EXHIBIT D
to Management Services Agreement
[FORM OF AMENDMENT]
[Date]
Advanced Heart Institute
of New York, P.C.
c/o Lenox Hill Hospital
130 East 77th Street
New York, New York 10021
Gentlemen:
Reference is made to the Management Services Agreement dated as of August
7, 1995 (the "Management Services Agreement"), among Majean Sub 2, Inc., a
Delaware corporation (the "Management Company"), Advanced Heart Institute of New
York, P.C., a New York professional corporation (the "PC"), and Valavanur A.
Subramanian, M.D. ("Dr. Subramanian"), Jeffrey Moses, M.D. ("Dr. Moses" and
together with Dr. Subramanian, the "Physicians"). Capitalized terms used and not
defined herein shall have the meanings given to such terms in the Management
Services Agreement.
In consideration of the Management Services to be provided by the
Management Company to the PC in connection with the provision by the PC of
cardiological medical services to the general public, the PC hereby agrees to
pay the Management Company for the Period commencing on ____________ a
Management Fee equal to $[ ], payable in equal monthly installments
in advance on the first business day of each month commencing on such date.
Very truly yours,
MAJEAN SUB 2, INC.
By:
-------------------------------
Name:
Title:
AGREED AND ACCEPTED:
ADVANCED HEART INSTITUTE
OF NEW YORK, P.C.
By:
-------------------------------
Name:
Title:
<PAGE>
EXHIBIT E
to Management Services Agreement
[FORM OF SECURITY AGREEMENT (PC's Accounts Receivable)]
SECURITY AGREEMENT dated as of
_____ __, 1995, between MAJEAN SUB
2, INC., a Delaware corporation
(the "Management Company"), and
ADVANCED HEART INSTITUTE OF NEW
YORK, P.C., a New York professional
corporation (the "PC").
Reference is made to the Management Services Agreement dated as of August
7, 1995 among the PC, Valavanur A. Subramanian, M.D., Jeffrey Moses, M.D., and
the Management Company (the "Management Services Agreement")
In order to secure the PC's obligations to the Management Company, the PC
has agreed to grant to the Management Company a security interest in all of the
PC's accounts receivable, by entering into this Agreement with the Management
Company.
ACCORDINGLY, in consideration of the premises and the mutual covenants and
agreements contained in this Agreement, and for other good and valuable
consideration the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
SECTION 1. Definitions. (c) As used in this Agree- ment, the following
terms shall have the following meanings:
"Collateral" means all of the PC's accounts receivable, irrespective of the
form thereof, whether now owned or existing or hereafter acquired or arising and
regardless of where located.
"Event of Default" means any default by the PC in the payment or
performance of any Obligation and the continuance of such default for a period
of five days after notice thereof from the Management Company.
"Obligations" means any and all obligations and liabilities of the PC to
the Management Company arising out of Section 9(d) of the Management Services
Agreement.
"UCC" means the Uniform Commercial Code as in effect on the date hereof in
the State of New York; provided, however, that if by reason of mandatory
provisions of law, the perfection or the effect of perfection or non-perfection
of the Security Interest in any Collateral is governed by the Uniform
<PAGE>
Commercial Code as in effect in a jurisdiction other than New York, "UCC" means
the Uniform Commercial Code as in effect in such other jurisdiction for purposes
of the provisions hereof relating to such perfection or effect of perfection or
non-perfection.
(d) Unless otherwise defined herein, or unless the context otherwise
requires, all terms used herein which are defined in the UCC shall have the
meanings ascribed to them in the UCC.
(e) Capitalized terms used and not defined in this Agreement have the
meanings ascribed to them in the Management Services Agreement.
(f) The definitions in this Section 1 shall apply to the singular and
plural forms of the terms defined. Whenever the context requires, any pronoun
shall include the corresponding masculine, feminine and neuter forms. The words
"include," "in- cludes" and "including" shall be deemed to be followed by the
phrase "without limitation."
(g) Unless otherwise specified, references in this Agreement to any Section
are references to such Section in this Agreement and references in any Section
or definition to any clause are references to such clause of such Section or
definition.
SECTION 2. Grant of Security Interest. In order to continue to secure to
the Management Company the full and punctual payment (whether at stated
maturity, by acceleration or otherwise) and performance by the PC of all of its
Obligations, the PC hereby pledges, assigns, conveys, hypothecates and transfers
for security to the Management Company a continuing lien on and continuing first
priority security interest (the "Security Interest") in, all of PC's right,
title and interest in, to and under the Collateral. The Security Interest is
granted as security only and shall not subject the Management Company to, or
transfer or in any way affect or modify, any obligation or liability of the PC
with respect to any of the Collateral or any transaction arising in connection
therewith.
SECTION 3. Rights and Remedies Upon Default.
(a) Generally. If an Event of Default shall have occurred and be
continuing, the Management Company may exercise all rights of a secured party
under the UCC, and, in addition, the Management Company shall have (i) all of
the rights and remedies provided for in this Agreement and (ii) all of the
rights and remedies to which a secured party is entitled under the laws in
effect in any jurisdiction where any rights and remedies hereunder may be
asserted, including, to the maximum extent permitted by law, the right to
exercise all voting, consensual and other powers of ownership pertaining to the
Collateral as if the Management Company were the sole
2
<PAGE>
and absolute owner thereof (and the PC agrees to take all such action as may be
appropriate to give effect to such right).
(b) Sale of the Collateral. (i) If an Event of Default shall have occurred
and be continuing, the Management Company may, without being required to give
any notice (except as may otherwise be required by this Agreement or by
Applicable Law), sell the Collateral or any part thereof at public or private
sale, for cash, upon credit or for future delivery, and at such price or prices
as the Management Company may deem satisfactory. The Management Company may be
the purchaser of any or all of the Collateral so sold at any public sale, or, if
the Collateral is of a type customarily sold in a recognized market or is of a
type which is the subject of widely distributed standard price quotations, at
any private sale. The PC will execute and deliver such documents and take such
other action as the Management Company deems necessary or advisable in order
that any such sale may be made in compliance with law. Upon any such sale the
Management Company shall have the right to deliver, assign and transfer the
Collateral so sold to the purchaser thereof. Each purchaser at any such sale
shall hold the Collateral so sold to it absolutely and free from any Lien or
other claim or right of whatever kind, including any equity or right of
redemption of the PC which may be waived, and the PC, to the extent permitted by
law, hereby specifically waives all rights of redemption, stay or appraisal
which it has or may have under any law now existing or hereafter enacted or
adopted (as well as any rights to exoneration, subrogation or reimbursement
arising at law, in equity or otherwise).
(ii) The Management Company shall give the PC not less than ten (10) days'
prior written notice of the time and place of any such sale or other intended
disposition of any of the Collateral, except any Collateral which threatens to
decline speedily in value or is of a type customarily sold on a recognized
market, and the PC agrees that such notice constitutes "reasonable notification"
within the meaning of, and for all purposes of, the applicable provisions of the
UCC. Any notice of such sale required by this Agreement shall, in case of a
public sale, state the time and place fixed for such sale, and in the case of a
private sale, state the day after which such sale may be consummated. Any such
public sale shall be held at such time or times within ordinary business hours
and at such place or places as the Management Company may fix in the notice of
such sale. At any such sale the Collateral may be sold in one lot as an entirety
or in separate parcels, as the Management Company may determine. The Management
Company shall not be obligated to make any such sale pursuant to any such
notice. The Management Company may, without notice or publication, adjourn any
public or private sale or cause the same to be adjourned from time to time by
announcement at the time and place fixed for the sale, and such sale may be made
at any time or place to which the same may be so adjourned. In the case of any
sale of all or any part of the Collateral on credit or for future delivery, the
Collateral so sold may be retained by the Management Company until the
3
<PAGE>
selling price is paid by the purchaser thereof, but the Management Company shall
not incur any liability in case of the failure of such purchaser to take up and
pay for the Collateral so sold and, in case of any such failure, such Collateral
may again be sold as permitted by and in accordance with this Agreement,
including the application of proceeds as set forth herein.
(c) Other Rights. In addition to, and not in limitation of any rights or
remedies of the Management Company contained elsewhere in this Agreement, if an
Event of Default shall have occurred and be continuing, the Management Company
may require the PC to, and the PC agrees that it will, at its expense and upon
the request of the Management Company, forthwith assemble all or any part of the
Collateral as directed by the Management Company and make it available at a
place designated by the Management Company which is, in the Management Company's
opinion, reasonably convenient to the Management Company, whether at the
premises of the PC or otherwise.
(d) General Authority. Effective only upon the occurrence and during the
continuance of an Event of Default, the PC hereby appoints the Management
Company its true and lawful attorney, with full power of substitution, in the
name of the PC or otherwise, for the sole use and benefit of the Management
Company, but at the expense of the PC, to exercise any power permitted by
Applicable Law with respect to any Collateral, which appointment is irrevocable
and coupled with an interest. Without limiting the generality of the foregoing,
the Management Company shall have the right (but not the obligation), upon the
occurrence and during the continuance of an Event of Default to:
1. demand, sue for, collect, receive and give acquittance for any and
all monies or property due or to become due on account or in exchange for
any of the Collateral or by virtue of the Collateral;
2. settle, compromise, compound, prosecute or defend any action or
proceeding with respect to or other- wise affecting the Collateral;
3. sell, transfer, assign or otherwise deal therein or therewith or
the proceeds or avails of the Collateral, as fully and effectually as if
the Management Company were the absolute owner thereof;
4. extend the time of payment of any or all accounts or other
obligations owed to the PC and to make any allowance and other adjustments
with reference thereto;
5. notify or direct the PC to notify any or all account debtors that
the accounts have been assigned to the Management Company, for the ratable
benefit of the Lenders, and that the Management Company has a security
interest therein (the Management Company shall promptly
4
<PAGE>
furnish the PC with a copy of any such notice, and the PC hereby agrees
that any such notice, in the Management Company's sole discretion, may be
sent on the PC's stationery);
6. contact account debtors for any reason, including to direct or
cause the PC to direct account debtors to make all payments due from them
to the PC upon the accounts directly to or as directed by the Management
Company;
7. prior to the disposition of the Col- lateral, use, operate and
control the Collateral to preserve the Collateral or its value, store or
transfer the Collater- al without charge in or by means of any storage or
transpor- tation facility owned or leased by the PC, or process, repair or
recondition the Collateral or otherwise prepare it for disposition in any
manner and to the extent the Management Company deems appropriate;
8. use the information recorded on or contained in any data processing
equipment and computer hardware and software relating to the accounts and
other obligations owed to the PC to which the PC has access (subject to the
proprietary rights applicable to such computer hardware and software) and
do any other act or thing necessary, in the Management Company's sole
discretion, to fulfill the PC's obligations to the Management Company under
this Agreement or otherwise;
9. make any payments and do any other acts which the Management
Company deems desirable to protect the Security Interest in the Collateral,
including paying, purchasing, contesting or compromising any Lien which, in
the judgment of the Management Company, appears to be prior to or superior
to the Security Interest, and to appear in and defend any action or
proceeding purporting to affect the Security Interest and/or the value of
the Collateral, and in exercising any such power or authority, to pay all
reasonable expenses incurred in connection therewith, the PC's obligation
with respect to the repayment thereof being secured under this Agreement;
and
10. receive, endorse and collect all checks made payable to the order
of the PC representing any payment in respect of the Collateral or any part
thereof and to give full discharge for the same.
(e) Deficiency. If the proceeds of the sale, collection or other
realization of or upon all or part of the Collateral pursuant to the provisions
of this Agreement are insufficient to cover the costs and expenses of such
realization and the payment in full of the Obligations, the PC shall remain
liable for any deficiency.
5
<PAGE>
SECTION 4. Duration of Agreement; Release of Security. This Agreement and
the Security Interests shall terminate when all of the Obligations have been
fully and indefeasibly paid and performed or otherwise satisfied. The release of
Collateral or reassignment of rights to the PC upon the termination of this
Agreement shall be without recourse to or warranty by the Management Company and
shall be made by the Management Company at the expense of the PC. Upon the
release of Collateral or reassignment of rights to the PC, the Management
Company will, at the expense of the PC, execute and deliver to the PC such
documents as the PC shall reasonably request to evidence such release or
reassignment.
SECTION 5. PC Remains Liable. Anything contained in this Agreement to the
contrary notwithstanding, (a) the PC shall remain solely liable to perform its
duties and obligations under the contracts and agreements included in the
Collateral to the extent set forth therein to the same extent as if this
Agreement had not been executed, (b) the exercise by the Management Company of
any of its rights and remedies hereunder shall not release the PC from any of
its duties or obligations under the contracts and agreements included in the
Collateral except to the extent the exercise of such rights renders the
performance of such duties or obligations by the PC impracticable under any such
agreement or contract, and (c) the Management Company shall not have any
obligation or liability under any contract or agreement included in the
Collateral by reason of this Agreement, and the Management Company shall not be
obligated in any manner to perform any of the obligations or duties of the PC
thereunder or to take any action to collect or enforce any claim for payment
assigned hereunder, except to the extent that the Management Company has
expressly and affirmatively assumed the rights and the obligations and duties of
the PC under any such contract or agreement.
SECTION 6. Limitation on Duty of the Management Company Regarding the
Collateral. Beyond the exercise of reasonable care in the custody of the
Collateral, the Management Company shall have no duty as to any Collateral in
its possession or control or in the possession or control of any agent or
bailee, or any income thereon, or as to the preservation of rights against prior
parties or any other rights pertaining thereto. The Management Company shall be
deemed to have exercised reasonable care in the custody of the Collateral in the
Management Company's possession if the Collateral is accorded treatment
substantially equal to that which the Management Company accords its own
property or to that which the Management Company accords to the property of
others that the Management Company holds as a secured party. The Management
Company shall not be liable or responsible for any loss or damage to any of the
Collateral, or for any diminution in the value thereof, by reason of the act or
omission of any warehouseman, carrier, forwarding agency, consignee or other
agent or bailee selected by the Management Company in good faith.
6
<PAGE>
SECTION 7. Security Interest Absolute. All rights of the Management Company
hereunder, the grant of the security interest in the Collateral and all
obligations of the PC hereun- der shall be absolute and unconditional
irrespective of (a) ex- cept to the extent not permitted to be waived under
Applicable Law, any lack of validity or enforceability of the Obligations, (b)
any change in the time, manner or place of payment of, or in any other term of,
all or any of the Obligations, or any other amendment or waiver of or any
consent to any departure from the PC Agreement or any other agreement or
instrument relating to any of the foregoing, (c) failure by the Management
Company to take steps to perfect or maintain perfected its security interest in,
or to preserve its rights to, any of the Collateral, (d) any exchange, release
or non-perfection of any other collateral, or any release or amendment or waiver
of or consent to or departure from any guaranty, for all or any of the
Obligations, (e) the disallowance under Section 502 of the Bankruptcy Code of
all or any portion of the claims of the Management Company for repayment of the
Obligations or (f) any other circumstance which might otherwise constitute a
legal or equitable defense available to, or a legal or equitable discharge of,
the PC with respect to the Obligations other than the indefeasible payment in
full of all of the Obligations.
SECTION 8. No Waiver By the Management Company. No failure on the part of
the Management Company to exercise, and no delay in exercising and no course of
dealing with respect to, any right or power under this Agreement shall operate
as a waiver thereof, nor shall any single or partial exercise by the Management
Company of any right or power under this Agreement, or any abandonment or
discontinuance of steps to enforce such right or power, preclude any other or
further exercise thereof or the exercise of any other right or power. The rights
of the Management Company in this Agreement are cumulative and are not exclusive
of any other rights or remedies available to the Management Company at law or in
equity. No notice to or demand on the PC in any case shall entitle the PC to any
other or further notice or demand in similar or other circumstances.
SECTION 9. Notices. All notices, demands and requests of any kind to be
delivered to any party in connection with this Agreement shall be in writing and
shall be (a) delivered personally, (b) sent by nationally-recognized overnight
courier, (c) sent by first class, registered or certified mail, return receipt
requested or (d) sent by facsimile, in each case to such party at its address as
follows:
7
<PAGE>
(i) if to the PC, to:
Advanced Heart Institute of New York, P.C.
c/o Lenox Hill Hospital
130 East 77th Street
Attention:
Telephone:
Telecopier:
with a copy to:
Sexter & Warmflash
61 Broadway
New York, New York 10006
Attention: David Warmflash, Esq.
Telephone: 212/383-5300
Telecopier: 212/383-5310
(ii) if to the Management Company, to:
Majean Sub 2, Inc.
c/o Sexter & Warmflash
61 Broadway
New York, New York 10006
Attention: David Warmflash, Esq.
Telephone: 212/383-5300
Telecopier: 212/383-5310
with a copy to:
Sexter & Warmflash
61 Broadway
New York, New York 10006
Attention: David Warmflash, Esq.
Telephone: 212/383-5300
Telecopier: 212/383-5310
Any notice, demand or request so delivered shall constitute valid notice under
this Agreement and shall be deemed to have been received (a) on the day of
actual delivery in the case of personal delivery, (b) on the next Business Day
after the date when sent in the case of delivery by nationally-recognized
overnight courier, (c) on the fifth Business Day after the date of deposit in
the U.S. mail in the case of mailing or (d) in the case of a facsimile
transmission, on the day sent, if sent on a Business Day, or, if not sent on a
Business Day, on the next Business Day following the day sent. Any party hereto
may from time to time by notice in writing served upon the other as aforesaid
designate a different mailing address or a different person to which all such
notices, demands or requests thereafter are to be addressed.
SECTION 10. Governing Law. This Agreement shall be construed in accordance
with and governed by the laws of the State of New York (without giving effect to
principles of conflicts of laws), except to the extent that remedies provided by
8
<PAGE>
the laws of any other jurisdiction are governed by the laws of such
jurisdiction.
SECTION 11. Successors and Assigns. This Agreement shall be binding upon
and inure to the benefit of the PC, the Management Company and their successors
and permitted assigns.
SECTION 12. Amendments and Waivers. Any provision of this Agreement may be
amended or waived, but only pursuant to a written agreement signed by the PC and
the Management Company.
SECTION 13. Severability. Any provision of this Agreement which is
prohibited or unenforceable in any jurisdiction shall, as to such provision and
such jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions of this Agreement
or affecting the validity or enforceability of such provision in any other
jurisdiction.
SECTION 14. Section Headings. Section headings used in this Agreement are
for convenience only and are not to affect the construction of, or be taken into
consideration in interpreting, this Agreement.
SECTION 15. Counterparts. This Agreement may be executed in any number of
identical counterparts, each of which shall constitute an original but all of
which when taken together shall constitute but one contract.
* * *
9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Security Agreement
to be duly executed by their authorized officers, all as of the date first
written above.
MAJEAN SUB 2, INC.
By:
-------------------------------
Name:
Title:
ADVANCED HEART INSTITUTE
OF NEW YORK, P.C.
By:
-------------------------------
Name:
Title:
<PAGE>
EXHIBIT F
to Management Services Agreement
[FORM OF SECURITY AGREEMENT
(Management Company's Accounts Receivable)]
SECURITY AGREEMENT dated as
of _____ __, 1995, between MAJEAN
SUB 2, INC., a Delaware corporation
(the "Management Company"), and
ADVANCED HEART INSTITUTE OF NEW
YORK, P.C., a New York professional
corporation (the "PC").
Reference is made to the Management Services Agreement dated as of August
7, 1995 among the PC, Valavanur A. Subramanian, M.D., Jeffrey Moses, M.D., and
the Management Company (the "Management Services Agreement")
In order to secure the Management Company's obligations to the PC under
Section 14(c)(ii) of the Management Services Agreement, the Management Company
has agreed to grant to the PC a security interest in all of the Management
Company's accounts receivable, by entering into this Agreement with the PC.
ACCORDINGLY, in consideration of the premises and the mutual covenants and
agreements contained in this Agreement, and for other good and valuable
consideration the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
SECTION 1. Definitions. (a) As used in this Agree- ment, the following
terms shall have the following meanings:
"Collateral" means all of the Management Company's accounts receivable,
irrespective of the form thereof, whether now owned or existing or hereafter
acquired or arising and regardless of where located, including, without
limitation, accounts receivable purchased from the PC pursuant to Section 8(a)
of the Management Services Agreement.
"Event of Default" means any default by the Management Company in the
payment or performance of any Obligation and the continuance of such default for
a period of five days after notice thereof from the PC.
"Obligations" means any and all obligations and liabilities of the
Management Company to the PC arising out of Section 14(c)(ii) of the Management
Services Agreement.
"UCC" means the Uniform Commercial Code as in effect on the date hereof in
the State of New York; provided,
<PAGE>
however, that if by reason of mandatory provisions of law, the perfection or the
effect of perfection or non-perfection of the Security Interest in any
Collateral is governed by the Uniform Commercial Code as in effect in a
jurisdiction other than New York, "UCC" means the Uniform Commercial Code as in
effect in such other jurisdiction for purposes of the provisions hereof relating
to such perfection or effect of perfection or non-perfection.
(b) Unless otherwise defined herein, or unless the context otherwise
requires, all terms used herein which are defined in the UCC shall have the
meanings ascribed to them in the UCC.
(c) Capitalized terms used and not defined in this Agreement have the
meanings ascribed to them in the Management Services Agreement.
(d) The definitions in this Section 1 shall apply to the singular and
plural forms of the terms defined. Whenever the context requires, any pronoun
shall include the corresponding masculine, feminine and neuter forms. The words
"include," "in- cludes" and "including" shall be deemed to be followed by the
phrase "without limitation."
(e) Unless otherwise specified, references in this Agreement to any Section
are references to such Section in this Agreement and references in any Section
or definition to any clause are references to such clause of such Section or
definition.
SECTION 2. Grant of Security Interest. In order to continue to secure to
the PC the full and punctual payment (whether at stated maturity, by
acceleration or otherwise) and performance by the Management Company of all of
its Obligations, the Management Company hereby pledges, assigns, conveys,
hypothecates and transfers for security to the PC a continuing lien on and
continuing first priority security interest (the "Security Interest") in, all of
Management Company's right, title and interest in, to and under the Collateral.
The Security Interest is granted as security only and shall not subject the PC
to, or transfer or in any way affect or modify, any obligation or liability of
the Management Company with respect to any of the Collateral or any transaction
arising in connection therewith.
SECTION 3. Rights and Remedies Upon Default.
1. Generally. If an Event of Default shall have occurred and be continuing,
the PC may exercise all rights of a secured party under the UCC, and, in
addition, the PC shall have (i) all of the rights and remedies provided for in
this Agreement and (ii) all of the rights and remedies to which a secured party
is entitled under the laws in effect in any jurisdiction where any rights and
remedies hereunder may be asserted, including, to the maximum extent permitted
by law, the right to exercise all
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<PAGE>
voting, consensual and other powers of ownership pertaining to the Collateral as
if the PC were the sole and absolute owner thereof (and the Management Company
agrees to take all such action as may be appropriate to give effect to such
right).
2. Sale of the Collateral. (a) If an Event of Default shall have occurred
and be continuing, the PC may, without being required to give any notice (except
as may otherwise be required by this Agreement or by Applicable Law), sell the
Collateral or any part thereof at public or private sale, for cash, upon credit
or for future delivery, and at such price or prices as the PC may deem
satisfactory. The PC may be the purchaser of any or all of the Collateral so
sold at any public sale, or, if the Collateral is of a type customarily sold in
a recognized market or is of a type which is the subject of widely distributed
standard price quotations, at any private sale. The Management Company will
execute and deliver such documents and take such other action as the PC deems
necessary or advisable in order that any such sale may be made in compliance
with law. Upon any such sale the PC shall have the right to deliver, assign and
transfer the Collateral so sold to the purchaser thereof. Each purchaser at any
such sale shall hold the Collateral so sold to it absolutely and free from any
Lien or other claim or right of whatever kind, including any equity or right of
redemption of the Management Company which may be waived, and the Management
Company, to the extent permitted by law, hereby specifically waives all rights
of redemption, stay or appraisal which it has or may have under any law now
existing or hereafter enacted or adopted (as well as any rights to exoneration,
subrogation or reimbursement arising at law, in equity or otherwise).
(b) The PC shall give the Management Company not less than ten (10) days'
prior written notice of the time and place of any such sale or other intended
disposition of any of the Collateral, except any Collateral which threatens to
decline speedily in value or is of a type customarily sold on a recognized
market, and the Management Company agrees that such notice constitutes
"reasonable notification" within the meaning of, and for all purposes of, the
applicable provisions of the UCC. Any notice of such sale required by this
Agreement shall, in case of a public sale, state the time and place fixed for
such sale, and in the case of a private sale, state the day after which such
sale may be consummated. Any such public sale shall be held at such time or
times within ordinary business hours and at such place or places as the PC may
fix in the notice of such sale. At any such sale the Collateral may be sold in
one lot as an entirety or in separate parcels, as the PC may determine. The PC
shall not be obligated to make any such sale pursuant to any such notice. The PC
may, without notice or publication, adjourn any public or private sale or cause
the same to be adjourned from time to time by announcement at the time and place
fixed for the sale, and such sale may be made at any time or place to which the
same may be so adjourned. In the case of any sale of all or any part of the
Collateral on credit or for future delivery, the
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<PAGE>
Collateral so sold may be retained by the PC until the selling price is paid by
the purchaser thereof, but the PC shall not incur any liability in case of the
failure of such purchaser to take up and pay for the Collateral so sold and, in
case of any such failure, such Collateral may again be sold as permitted by and
in accordance with this Agreement, including the application of proceeds as set
forth herein.
3. Other Rights. In addition to, and not in limitation of any rights or
remedies of the PC contained elsewhere in this Agreement, if an Event of Default
shall have occurred and be continuing, the PC may require the Management Company
to, and the Management Company agrees that it will, at its expense and upon the
request of the PC, forthwith assemble all or any part of the Collateral as
directed by the PC and make it available at a place designated by the PC which
is, in the PC's opinion, reasonably convenient to the PC, whether at the
premises of the Management Company or otherwise.
4. General Authority. Effective only upon the occurrence and during the
continuance of an Event of Default, the Management Company hereby appoints the
PC its true and lawful attorney, with full power of substitution, in the name of
the Management Company or otherwise, for the sole use and benefit of the PC, but
at the expense of the Management Company, to exercise any power permitted by
Applicable Law with respect to any Collat- eral, which appointment is
irrevocable and coupled with an inter- est. Without limiting the generality of
the foregoing, the PC shall have the right (but not the obligation), upon the
occurrence and during the continuance of an Event of Default to:
(a) demand, sue for, collect, receive and give acquittance for any and
all monies or property due or to become due on account or in exchange for
any of the Collateral or by virtue of the Collateral;
(b) settle, compromise, compound, prosecute or defend any action or
proceeding with respect to or other- wise affecting the Collateral;
(c) sell, transfer, assign or otherwise deal therein or therewith or
the proceeds or avails of the Collateral, as fully and effectually as if
the PC were the absolute owner thereof;
(d) extend the time of payment of any or all accounts or other
obligations owed to the Management Company and to make any allowance and
other adjustments with reference thereto;
(e) notify or direct the Management Company to notify any or all
account debtors that the accounts have been assigned to the PC, for the
ratable benefit of the Lenders, and that the PC has a security interest
therein (the PC shall promptly furnish the Management Company with a
4
<PAGE>
copy of any such notice, and the Management Company hereby agrees that any
such notice, in the PC's sole discretion, may be sent on the Management
Company's stationery);
(f) contact account debtors for any reason, including to direct or
cause the Management Company to direct account debtors to make all payments
due from them to the Management Company upon the accounts directly to or as
directed by the PC;
(g) prior to the disposition of the Col- lateral, use, operate and
control the Collateral to preserve the Collateral or its value, store or
transfer the Collater- al without charge in or by means of any storage or
transpor- tation facility owned or leased by the Management Company, or
process, repair or recondition the Collateral or otherwise prepare it for
disposition in any manner and to the extent the PC deems appropriate;
(h) use the information recorded on or contained in any data
processing equipment and computer hardware and software relating to the
accounts and other obligations owed to the Management Company to which the
Management Company has access (subject to the proprietary rights applicable
to such computer hardware and software) and do any other act or thing
necessary, in the PC's sole discretion, to fulfill the Management Company's
obligations to the PC under this Agreement or otherwise;
(i) make any payments and do any other acts which the PC deems
desirable to protect the Security Interest in the Collateral, including
paying, purchasing, contesting or compromising any Lien which, in the
judgment of the PC, appears to be prior to or superior to the Security
Interest, and to appear in and defend any action or proceeding purporting
to affect the Security Interest and/or the value of the Collateral, and in
exercising any such power or authority, to pay all reasonable expenses
incurred in connection therewith, the Management Company's obligation with
respect to the repayment thereof being secured under this Agreement; and
(j) receive, endorse and collect all checks made payable to the order
of the Management Company representing any payment in respect of the
Collateral or any part thereof and to give full discharge for the same.
5. Deficiency. If the proceeds of the sale, collection or other realization
of or upon all or part of the Collateral pursuant to the provisions of this
Agreement are insufficient to cover the costs and expenses of such realization
and the payment in full of the Obligations, the Management Company shall remain
liable for any deficiency.
5
<PAGE>
SECTION 4. Duration of Agreement; Release of Security. This Agreement and
the Security Interests shall terminate at midnight on December 31, 1995. The
release of Collateral or reassignment of rights to the Management Company upon
the termination of this Agreement shall be without recourse to or warranty by
the PC and shall be made by the PC at the expense of the Management Company.
Upon the release of Collateral or reassignment of rights to the Management
Company, the PC will, at the expense of the Management Company, execute and
deliver to the Management Company such documents as the Management Company shall
reasonably request to evidence such release or reassignment.
SECTION 5. Management Company Remains Liable. Anything contained in this
Agreement to the contrary notwithstanding, (a) the Management Company shall
remain solely liable to perform its duties and obligations under the contracts
and agreements included in the Collateral to the extent set forth therein to the
same extent as if this Agreement had not been executed, (b) the exercise by the
PC of any of its rights and remedies hereunder shall not release the Management
Company from any of its duties or obligations under the contracts and agreements
included in the Collateral except to the extent the exercise of such rights
renders the performance of such duties or obligations by the Management Company
impracticable under any such agreement or contract, and (c) the PC shall not
have any obligation or liability under any contract or agreement included in the
Collateral by reason of this Agreement, and the PC shall not be obligated in any
manner to perform any of the obligations or duties of the Management Company
thereunder or to take any action to collect or enforce any claim for payment
assigned hereunder, except to the extent that the PC has expressly and
affirmatively assumed the rights and the obligations and duties of the
Management Company under any such contract or agreement.
SECTION 6. Limitation on Duty of the PC Regarding the Collateral. Beyond
the exercise of reasonable care in the custody of the Collateral, the PC shall
have no duty as to any Collateral in its possession or control or in the
possession or control of any agent or bailee, or any income thereon, or as to
the preservation of rights against prior parties or any other rights pertaining
thereto. The PC shall be deemed to have exercised reasonable care in the custody
of the Collateral in the PC's possession if the Collateral is accorded treatment
substantially equal to that which the PC accords its own property or to that
which the PC accords to the property of others that the PC holds as a secured
party. The PC shall not be liable or responsible for any loss or damage to any
of the Collateral, or for any diminution in the value thereof, by reason of the
act or omission of any warehouseman, carrier, forwarding agency, consignee or
other agent or bailee selected by the PC in good faith.
SECTION 7. Security Interest Absolute. All rights of the PC hereunder, the
grant of the security interest in the Collateral and all obligations of the
Management Company hereunder
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<PAGE>
shall be absolute and unconditional irrespective of (a) except to the extent not
permitted to be waived under Applicable Law, any lack of validity or
enforceability of the Obligations, (b) any change in the time, manner or place
of payment of, or in any other term of, all or any of the Obligations, or any
other amendment or waiver of or any consent to any departure from the PC
Agreement or any other agreement or instrument relating to any of the foregoing,
(c) failure by the PC to take steps to perfect or maintain perfected its
security interest in, or to preserve its rights to, any of the Collateral, (d)
any exchange, release or non-perfection of any other collateral, or any release
or amendment or waiver of or consent to or departure from any guaranty, for all
or any of the Obligations, (e) the disallowance under Section 502 of the
Bankruptcy Code of all or any portion of the claims of the PC for repayment of
the Obligations or (f) any other circumstance which might otherwise constitute a
legal or equitable defense available to, or a legal or equitable discharge of,
the Management Company with respect to the Obligations other than the
indefeasible payment in full of all of the Obligations.
SECTION 8. No Waiver By the PC. No failure on the part of the PC to
exercise, and no delay in exercising and no course of dealing with respect to,
any right or power under this Agreement shall operate as a waiver thereof, nor
shall any single or partial exercise by the PC of any right or power under this
Agreement, or any abandonment or discontinuance of steps to enforce such right
or power, preclude any other or further exercise thereof or the exercise of any
other right or power. The rights of the PC in this Agreement are cumulative and
are not exclusive of any other rights or remedies available to the PC at law or
in equity. No notice to or demand on the Management Company in any case shall
entitle the Management Company to any other or further notice or demand in
similar or other circumstances.
SECTION 9. Notices. All notices, demands and requests of any kind to be
delivered to any party in connection with this Agreement shall be in writing and
shall be (a) delivered personally, (b) sent by nationally-recognized overnight
courier, (c) sent by first class, registered or certified mail, return receipt
requested or (d) sent by facsimile, in each case to such party at its address as
follows:
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(i) if to the PC, to:
Advanced Heart Institute of New York, P.C.
c/o Lenox Hill Hospital
130 East 77th Street
Attention:
Telephone:
Telecopier:
with a copy to:
Sexter & Warmflash
61 Broadway
New York, New York 10006
Attention: David Warmflash, Esq.
Telephone: 212/383-5300
Telecopier: 212/383-5310
(ii) if to the Management Company, to:
Majean Sub 2, Inc.
c/o Sexter & Warmflash
61 Broadway
New York, New York 10006
Attention: David Warmflash, Esq.
Telephone: 212/383-5300
Telecopier: 212/383-5310
with a copy to:
Sexter & Warmflash
61 Broadway
New York, New York 10006
Attention: David Warmflash, Esq.
Telephone: 212/383-5300
Telecopier: 212/383-5310
Any notice, demand or request so delivered shall constitute valid notice under
this Agreement and shall be deemed to have been received (a) on the day of
actual delivery in the case of personal delivery, (b) on the next Business Day
after the date when sent in the case of delivery by nationally-recognized
overnight courier, (c) on the fifth Business Day after the date of deposit in
the U.S. mail in the case of mailing or (d) in the case of a facsimile
transmission, on the day sent, if sent on a Business Day, or, if not sent on a
Business Day, on the next Business Day following the day sent. Any party hereto
may from time to time by notice in writing served upon the other as aforesaid
designate a different mailing address or a different person to which all such
notices, demands or requests thereafter are to be addressed.
SECTION 10. Governing Law. This Agreement shall be construed in accordance
with and governed by the laws of the State of New York (without giving effect to
principles of conflicts of laws), except to the extent that remedies provided by
8
<PAGE>
the laws of any other jurisdiction are governed by the laws of such
jurisdiction.
SECTION 11. Successors and Assigns. This Agreement shall be binding upon
and inure to the benefit of the PC, the Management Company and their successors
and permitted assigns.
SECTION 12. Amendments and Waivers. Any provision of this Agreement may be
amended or waived, but only pursuant to a written agreement signed by the PC and
the Management Company.
SECTION 13. Severability. Any provision of this Agreement which is
prohibited or unenforceable in any jurisdiction shall, as to such provision and
such jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions of this Agreement
or affecting the validity or enforceability of such provision in any other
jurisdiction.
SECTION 14. Section Headings. Section headings used in this Agreement are
for convenience only and are not to affect the construction of, or be taken into
consideration in interpreting, this Agreement.
SECTION 15. Counterparts. This Agreement may be executed in any number of
identical counterparts, each of which shall constitute an original but all of
which when taken together shall constitute but one contract.
* * *
9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Security Agreement
to be duly executed by their authorized officers, all as of the date first
written above.
MAJEAN SUB 2, INC.
By:
-------------------------------
Name:
Title:
ADVANCED HEART INSTITUTE
OF NEW YORK, P.C.
By:
-------------------------------
Name:
Title:
10
<PAGE>
ANNEX A
to Management Services Agreement
MANAGEMENT FEE AMENDMENT FORMULA
The Management Fee for the following Period shall be an amount equal to (i)
the expenses of the Management Company projected in the Budget for such Period
plus (ii) three percent of the net accounts receivable projected in the Budget
to be collected by the Management Company for such Period, as adjusted to
reflect over- or under-payment of the Management Fee during the previous Period,
if any.
<PAGE>
ADVANCED HEALTH CORPORATION (Management Services Agreement - ANNEX B)
FINANCING - ESTIMATED USE AND PROCEEDS
AS AT SEPTEMBER 1, 1995
(000's)
Use and
Proceeds
@ 9/1/95
--------
Proceeds of Financing $5,000
----------
Estimated Use of Proceeds (1 - 5)
Med-E-Systems Operations (6) (760)
Advanced heart Institute Capital Expenditures (7) (600)
Advanced Clinical Network Operations (8) (233)
Advanced Clinical Network System Capital Expenditures (9) (300)
Advanced Health Corp Operations (9) (733)
Advanced Clinical Network - Acquisition (10) (150)
Advanced Heart Institute - Joint Venture (11) (590)
Investor Capital (12) (75)
Accounts Payable (350)
Note Payable (300)
-------
Total Estimated Use of Proceeds (4,091)
-------
Estimated Year End Cash $909
=======
Notes:
(1) Estimated figures based on financial included in Advanced
Health's "Business Summary"
(2) Operating results were based on a six month period beginning July
1, 1995. Pro-rated amounts include "operations" only.
(3) Excludes changes in working capital
(4) Excludes potential moving/relocation allowance
(5) Excludes potential changes to certain acquisitions and customer
agreements AHC is currently negotiating
(6) Merck/Medico increased initial payment from $800K to $1M
(7) Includes $250K for Rehab/Regression; $200K IPA Software
development; $100K PHN Development; $50K Misc.
(8) Includes Advanced Heart Institute; $500K marketing expenses for
the "Heartcare network"; Westchester Otolaryngology $250K equity
investment in MSO
(9) $900K payroll; $200K operations including support for Advanced
Heart @ approximately 20%
(10) Acquisition of US Health Connections - $150K consideration upon
closing
(11) Joint venture proposal with Leo Imaging
(12) Return of investment to MES Investors for compliance requirements
<PAGE>
SCHEDULE 1
to Management Services Agreement
PC EXPENSES
(i) Physician Salaries and Professional Expenses
(ii) Physician Payroll Taxes and Benefits
(iii) Outside Services - Professional
(iv) Outside Service - Technical
(v) Hospital Facility Fees
(vi) Additional Hospital Fees
(vii) Malpractice Insurance
(viii) Workers' Compensation and Disability Insurance
(ix) Pension Expenses
(x) Legal, Accounting and Professional Fees
(xi) Conference Expenses
(xii) Travel and Entertainment Expenses
(xiii) Seasonal Expenses
(xiv) Professional and Charitable Contributions
(xv) Auto Leasing and Garaging Expenses
(xvi) Franchise Taxes
(xvii) Dues and Subscriptions/Licenses
================================================================================
EXHIBIT 10.14
MANAGEMENT SERVICES AGREEMENT
BETWEEN
LONG ISLAND INTERVENTIONAL CARDIOLOGY
AND
DIAMOND PHYSICIAN MANAGEMENT, INC.
Dated as of July 1, 1996
================================================================================
<PAGE>
TABLE OF CONTENTS
Page
----
SECTION 1. Retention of the Management Company............................ 1
SECTION 2. Term........................................................... 3
SECTION 3. Management Services............................................ 3
SECTION 4. Joint Management Advisory Board................................ 4
SECTION 5. Obligations of the Medical Group............................... 4
SECTION 6. Fees........................................................... 5
SECTION 7. Insurance and Indemnity........................................ 5
SECTION 8. Termination.................................................... 7
SECTION 9. Non-Disclosure of Confidential Information..................... 9
SECTION 10. Restrictive Covenants.......................................... 10
SECTION 11. Inadequate Remedy at Law....................................... 11
SECTION 12. Assignment..................................................... 11
SECTION 13. Notices........................................................ 11
SECTION 14. Benefits of Agreement; No Third Party
Beneficiaries........................................... 12
SECTION 15. Governing Law and Arbitration.................................. 12
SECTION 16. Headings....................................................... 13
SECTION 17. Entire Agreement; Amendments................................... 13
SECTION 18. Severability................................................... 13
SECTION 19. Counterparts................................................... 13
SECTION 20. Waivers........................................................ 13
SECTION 21. Survival of Termination........................................ 13
SECTION 22. Contract Modification for Prospective Legal
Events.................................................. 13
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<PAGE>
ATTACHMENTS
SCHEDULE I -- Management Services
SCHEDULE II -- Actual Costs
SCHEDULE III -- Medical Group Expenses
SCHEDULE IV -- Fees
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<PAGE>
INDEX OF DEFINED TERMS
Term Section
- ---- -------
Actual Costs............................................................3(b)
Additional Term.........................................................2(a)
Administrative Personnel.......................................Schedule I(5)
Applicable Law..........................................................3(c)
Authorized Officer......................................................1(d)
Average Quarterly Actual Costs..........................................8(c)
Base Burden Percentage.....................................Schedule IV(3)(c)
Base Term..................................................................2
Billing Fee................................................Schedule IV(3)(c)
Burden Amount..............................................Schedule IV(3)(b)
Business............................................................Preamble
Competitive Business...................................................11(b)
confidential or proprietary information................................10(b)
Documents...............................................................1(d)
Effective Date.............................................................2
Force Majeure Event.....................................................3(c)
Indemnified Party.......................................................7(d)
Indemnified Person......................................................7(d)
Indemnifying Party......................................................7(d)
JMAB....................................................................4(a)
Managed Care Payment..........................................Schedule IV(4)
Management Company..................................................Preamble
Management Company Disclosees..........................................10(a)
Management Fee................................................Schedule IV(2)
Management Services.....................................................1(a)
Management Company Bank.................................................1(g)
Medical Group.......................................................Preamble
Medical Group Account...................................................1(g)
Medical Group Bank......................................................1(g)
Medical Group Disclosees...............................................10(a)
Medical Group Representatives...........................................4(a)
Medical Personnel..............................................Schedule I(6)
Medical Services....................................................Preamble
Operating Account.......................................................1(g)
Period.....................................................Schedule IV(3)(a)
Physician Employees............................................Schedule I(6)
Physician Partners.............................................Schedule I(6)
Potential Transaction...................................................7(a)
Reimbursement Fee.............................................Schedule IV(1)
Renewal Term...............................................................2
Savings....................................................Schedule IV(3)(b)
Section 17 coverage.....................................................8(a)
Sublicense Agreement....................................................8(b)
Term.......................................................................2
Third Party............................................................21(b)
Transfer...............................................................21(b)
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<PAGE>
MANAGEMENT SERVICES AGREEMENT
dated as of July 1, 1996, between
LONG ISLAND INTERVENTIONAL
CARDIOLOGY, a New York partnership
(the "Medical Group"), and
DIAMOND PHYSICIAN MANAGEMENT, INC.,
a Delaware corporation (the
"Management Company").
The Medical Group is a New York partnership involved in providing
interventional cardiology medical services (the "Medical Services") to the
general public. The Management Company is a corporation engaged in the business
of providing administrative, financial, marketing, information technology and
operational services to professional medical organizations (the "Business"). The
Management Company and the Medical Group desire to enter into this Agreement,
pursuant to which, among other things, the Management Company will render
management services to the Medical Group.
ACCORDINGLY, the Medical Group and the Management Company agree as follows:
SECTION 1. Retention of the Management Company. (a) The Medical Group
hereby retains the Management Company to provide the management, financial,
marketing, information technology, operational and administrative services (the
"Management Services") described on Schedule I, and the Management Company
accepts such retention, upon the terms and subject to the conditions set forth
herein.
(b) During the term of this Agreement, the Management Company shall be the
exclusive provider of the Management Services utilized by the Medical Group.
Notwithstanding anything contained herein to the contrary, (i) the Management
Company and the Medical Group intend to act and perform with respect to each
other as independent contractors, and the provisions hereof are not intended to
create any partnership, joint venture, agency or employment relationship between
the parties and (ii) the Management Company is hereby engaged solely to provide
the Management Services to the Medical Group and shall not interfere with,
control, direct or supervise the Medical Group or any licensed medical
professional employed thereby in connection with the provision of the Medical
Services.
(c) The parties agree that the benefits to the Medical Group hereunder do
not require, are not payment for and are not in any way contingent upon the
admission, referral or any other arrangement for the provision of any item or
service offered by the Management Company to any of the Medical Group's patients
in any medical facility or laboratory controlled, managed or operated by the
Management Company or to any other medical practice to which the Management
Company or its affiliates provides non-medical management services.
<PAGE>
(d) The Medical Group and the Management Company acknowledge that certain
federal and state statutes severely restrict or prohibit the Management Company
from providing medical services. Accordingly, during the Term, the Management
Company represents and warrants that it shall not provide or otherwise engage in
services or activities which constitute the practice of medicine, as defined in
Applicable Law (as defined below), except in compliance therewith.
(e) The Management Company shall not interfere with the exercise of
professional judgment by any Medical Personnel (as defined below) nor shall the
Management Company interfere with, control, direct or supervise any health care
provider in connection with the provision of Medical Services. The foregoing
sentence shall not preclude the Management Company from assisting the Medical
Group in the development of professional protocols and monitoring compliance
with policies and procedures that have been instituted in accordance with this
Agreement.
(f) The Medical Group hereby designates and appoints the Management Company
to be the agent of the Medical Group during the Term to perform the following
duties and for those purposes incidental thereto, all of which shall be
performed in a manner reasonably acceptable to the Medical Group: (i) to bill
patients and third party payors in the Medical Group's name and on its behalf;
(ii) to collect accounts receivable resulting from such billing; (iii) to
receive payments and prepayments from the Medical Group's patients, Blue Cross
and Blue Shield organizations, insurance companies, health care plans, Medicare,
Medicaid, HMO's and any and all other third party payors; (iv) to take
possession of and deposit in the name of the Medical Group in accordance with
Section 1(g) (and/or in the name of any partner of the Medical Group or an
individual physician, if such payment is intended for purposes of payment of
such partner's or physician's bill) any notes, checks, money orders, insurance
payments, cash, cash equivalents and other instruments received in payment of
accounts receivable; and (v) to initiate, with the reasonable and timely consent
of the Medical Group, the institution of legal proceedings in the name of the
Medical Group to collect any accounts and monies owed to the Medical Group, to
enforce the rights of the Medical Group as a creditor under any contract or in
connection with the rendering of any service, and to contest adjustments and
denials by governmental agencies (or its fiscal intermediaries) as third-party
payors. The Management Company, in its capacity as agent pursuant to this
Section 1(f), shall not have any duties or responsibilities except those
expressly set forth in Sections 1(f)(i) through (v) above. From time to time at
the Management Company's request, the Medical Group shall make available to the
Management Company an authorized officer (the "Authorized Officer") of the
Medical Group to sign any letters, checks, instruments or other documents (the
"Documents") on behalf of the Medical Group that are necessary for the
Management Group to
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<PAGE>
perform its duties as agent under this Section 1(f) and the Management Services.
If the Management Company notifies the Medical Group that the Authorized Officer
is not signing the Documents in a timely manner, the Management Company shall
not be liable for any failure to perform its duties as agent hereunder or
failure to perform the Management Services arising from the failure of the
Authorized Officer to sign the Documents in a timely manner.
(g) The Management Company shall deposit in such bank (the "Medical Group
Bank") as the Medical Group designates, in an account in the Medical Group's
name (the "Medical Group's Account"), all monies collected by the Management
Company for or on behalf of the Medical Group in connection with the Medical
Group's provision of Medical Services. The Medical Group, on a weekly basis,
shall instruct the Medical Group Bank to transfer funds in the Medical Group's
Account necessary to pay the Management Fee (as defined in Schedule IV) (less
the amount necessary to avoid the payment of bank charges or fees relating to
the failure to maintain a minimum balance in the Medical Group's Account) to a
bank (the "Management Company Bank") designated by the Management Company, to an
account in the Management Company's name (the "Operating Account"). The
Management Company will disburse such monies from the Operating Account as
required pursuant to this Agreement. All interest earned on the Reimbursement
Fee on deposit in the Operating Account shall be for the account of the Medical
Group and all interest earned on the Billing Fee on deposit in the Operating
Account shall be for the account of the Management Company.
SECTION 2. Term. The base term (the "Base Term") of this Agreement will be
for five years commencing on the date hereof (the "Effective Date") and will be
automatically extended for successive two-year renewal terms (each a "Renewal
Term" and together with the Base Term, the "Term") unless either party provides
written notice of termination at least 90 days but no more than 180 days prior
to the end of any such Renewal Term.
SECTION 3. Management Services. (a) The Management Company shall be the
manager and administrator of the Management Services for the Medical Group. The
Management Company shall have no authority, directly or indirectly, to perform,
and shall not perform, any medical function. The Management Company may,
however, advise the Medical Group as to the relationship between its performance
of medical activities and the administrative and business functioning of its
practice.
(b) The Management Company shall provide the Management Services and pay on
behalf of the Medical Group on a timely basis the costs and expenses (the
"Actual Costs") described on Schedule II relating to the Management Services.
-----------
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(c) The Management Company shall not be liable to the Medical Group for
failure to perform any of the services required herein in the event of strikes,
lock-outs, calamities, acts of God, changes in any provision of laws, statutes,
ordinances, rules, regulations, permits, certificates, writs, decrees or orders
of any governmental authority ("Applicable Law"), changes in the reimbursement
rates payable for medical services by third party payors or other events over
which the Management Company has no control (each, a "Force Majeure Event") for
so long as such events continue; provided, that the Management Company continues
to perform such services during the continuance of a Force Majeure Event to the
full extent it is reasonably capable of doing so under the circumstances.
(d) Nothing in this Agreement shall be construed to affect or limit in any
way the professional discretion of the Medical Group to select and use
facilities, equipment, computer hardware or software, furnishings, inventory and
supplies purchased by the Management Company in accordance with the terms of
this Agreement insofar as such selection or use constitutes or might constitute
the practice of medicine. THE MEDICAL GROUP ACKNOWLEDGES THAT THE MANAGEMENT
COMPANY MAKES NO WARRANTIES OR REPRESENTATIONS, EXPRESS OR IMPLIED, AS TO THE
SUITABILITY OR ADEQUACY OF ANY FACILITIES, EQUIPMENT, COMPUTER HARDWARE,
COMPUTER SOFTWARE, FURNISHINGS, INVENTORY OR SUPPLIES PROVIDED PURSUANT TO THIS
AGREEMENT FOR THE CONDUCT OF A MEDICAL PRACTICE OR FOR ANY OTHER PARTICULAR
PURPOSE, EXCEPT THAT THE MANAGEMENT COMPANY DOES REPRESENT AND WARRANT TO THE
MEDICAL GROUP THAT THE EQUIPMENT, COMPUTER HARDWARE AND COMPUTER SOFTWARE THAT
THE MANAGEMENT COMPANY SELECTS FOR USE BY THE MEDICAL GROUP SHALL BE SUITABLE
AND ADEQUATE FOR USE BY THE MEDICAL GROUP FOR SUCH INTENDED USES.
SECTION 4. Joint Management Advisory Board. The parties shall establish a
joint management advisory board (the "JMAB") which shall be responsible for
developing management and administration policies for the overall operation of
the Medical Group. The JMAB shall initially consist of five members. The
Management Company shall designate two members of the JMAB reasonably acceptable
to the Medical Group. The Medical Group shall designate, in its sole discretion,
three members (the "Medical Group Representatives") of the JMAB which Medical
Group Representatives shall each be duly licensed and registered Physician
Partners (as defined below). The Medical Group shall at any and all times
maintain a simple majority of the members of the JMAB. All actions taken by, or
decisions of, the JMAB shall require the vote of a majority of the members of
the JMAB, including at least two of the Medical Group Representatives.
SECTION 5. Obligations of the Medical Group. (a) The Medical Group shall
ensure that each Medical Personnel providing medical care to patients of the
Medical Group is duly licensed by and registered with the State of New York and
any other state in which such Medical Personnel may provide medical care.
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<PAGE>
(b) The Medical Group shall have control of and responsibility for the
compensation of its Medical Personnel, although, at the request of the Medical
Group, the Management Company shall consult with the Medical Group regarding
such matters. The Medical Group shall be responsible for the payment of salaries
and wages, payroll taxes, benefits and all other taxes and charges now or
hereafter applicable to such Medical Personnel.
(c) The Medical Group and its Medical Personnel shall be solely responsible
for the cost of membership in professional associations and continuing
professional education.
(d) The Medical Group shall obtain and maintain professional liability
insurance for the Medical Group and its Medical Personnel and shall notify the
JMAB in writing of any change or proposed change in the insurance status of any
Medical Personnel within five business days of the Medical Group receiving
notice of such change.
(e) The Medical Group shall be solely responsible for all costs, fees and
expenses related to the items and services listed on Schedule III.
(f) The Medical Group shall not be liable to the Management Company for
failure to perform any of the obligations contained herein except for the
Medical Group's obligations pursuant to Sections 1(g), 6, 7(b), 7(d), 9, 10, 12,
13, 15 and 22.
SECTION 6. Fees. (a) In consideration of the Management Services rendered
by the Management Company, the Medical Group shall pay to the Management Company
in arrears on the tenth business day of each month the fees set forth on
Schedule IV.
(b) The Medical Group shall pay its obligations to the Management Company
in a prompt and timely manner.
SECTION 7. Insurance and Indemnity. (a) The Medical Group shall maintain
comprehensive professional liability insurance at least sufficient to comply
with any regulatory requirement and/or contractual requirement to which each
Medical Personnel or the Medical Group may be subject and a separate limit for
the Medical Group. If excess coverage is available to the Physician Partners or
Physician Employees through their affiliate hospitals at no charge (referred to
as "Section 17 coverage"), they shall obtain and maintain such excess coverage
at all times during the Term. The Medical Group shall be responsible for all
liabilities in excess of the limits of such policies.
(b) The Medical Group shall indemnify, hold harmless and defend the
Management Company, its officers,
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<PAGE>
directors, shareholders, employees, agents and independent contractors from and
against any and all liabilities, losses, damages, claims, causes of action and
expenses (including reasonable attorneys' fees and expenses), whether or not
covered by insurance, caused or asserted to have been caused, directly or
indirectly, by or as a result of (i) any acts or omissions of the Medical Group,
its members or employees or (ii) any breach of or failure to perform any
obligation under Sections 1(g), 6, 7(b), 7(d), 9, 10, 12, 13, 15 and/or 22 of
this Agreement by the Medical Group and/or its partners, agents, employees
and/or subcontractors (other than the Management Company) during the Term. In
addition, the Medical Group shall reimburse the Management Company for any legal
expenses incurred by reason of the Management Company or any affiliate thereof
being named as a party to any suit or claim based upon Medical Services provided
by the Medical Group, its members or employees, including, without limitation,
any suit or claim arising from, relating to or in connection with the Medical
Group's failure to perform its obligations set forth in Section 7(a).
(c) The Management Company shall indemnify, hold harmless and defend the
Medical Group, its officers, directors, partners, employees, agents and
independent contractors from and against any and all liabilities, losses,
damages, claims, causes of action and expenses (including reasonable attorneys'
fees and expenses), whether or not covered by insurance, caused or asserted to
have been caused, directly or indirectly, by or as a result of (i) the
performance of Management Services, (ii) any other acts or omissions or (iii)
any breach of or failure to perform any obligation under this Agreement by the
Management Company and/or its partners, agents, employees and/or subcontractors
(other than the Medical Group). In addition, the Management Company shall
reimburse the Medical Group for any legal expenses incurred by reason of the
Medical Group or any affiliate thereof being named as a party to any suit or
claim based upon the Management Services provided by the Management Company, its
members or employees.
(d) (i) In the event any action, suit or proceeding is brought by a third
party against the Medical Group or the Management Company (an "Indemnified
Person"), with respect to which the Medical Group or the Management Company (an
"Indemnifying Person") may have liability under this Section 7, the action, suit
or proceeding shall, upon the written agreement of the Indemnifying Person that
it is obligated with respect to such action, suit or proceeding, be defended
(including all proceedings on appeal or for review which counsel for the
defendant shall deem appropriate) and, unless otherwise provided below,
controlled by such Indemnifying Person. The Indemnified Person shall have the
right to employ its or their own counsel in any such case, but the fees and
expenses of such counsel shall be at the expense of such Indemnified Person,
unless (A) the employment of such counsel shall have been authorized in writing
by the Indemnifying Person in connection with the defense of such
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<PAGE>
action, suit or proceeding, (B) the Indemnifying Person shall fail actively and
diligently to defend such action, suit or proceeding, (C) the Indemnified Person
shall have reasonably concluded that such action, suit or proceeding involves to
a significant extent matters beyond the scope of the indemnity agreement
contained in this Section 7 or (D) the Indemnified Person shall have reasonably
concluded that there may be one or more legal or equitable defenses available to
the Indemnified Person which are different from or addition to those available
to the Indemnifying Person, in any of which events the Indemnifying Person shall
not have the right to direct the defense of such action, suit or proceeding on
behalf of the Indemnified Person; provided, however, that: (I) the portion of
any fees and expenses of such counsel involving matters beyond the scope of the
indemnity agreement contained in this Section 7 shall be borne by the
Indemnified Person and (II) the Indemnified Person shall not make any settlement
of any action, suit or proceeding without the written consent of the
Indemnifying Person, which consent shall not be unreasonably withheld. The
Indemnified Person shall be kept reasonably informed of such action, suit or
proceeding at all stages thereof whether or not they are so represented. The
Indemnifying Person shall make available to the Indemnified Person and their
attorneys and accountants al books and records of the Indemnifying Person
relating to such action, suit or proceeding and the parties hereto agree to
render to each other such assistance as they may reasonably require of each
other in order to ensure the proper and adequate defense of such action suit or
proceeding.
(ii) The Indemnifying Person shall not make any settlement of any action,
suit or proceeding without the written consent of the Indemnified Person, which
consent shall not be unreasonably withheld; provided, however, that in the event
the Indemnified Person refuses to consent to a settlement acceptable to the
Indemnifying Person which is capable of settlement by the payment of money only
and the Indemnifying Person shall demonstrate to the reasonable satisfaction of
the Indemnified Person their ability to pay such amount, the Indemnifying Person
may pay the amount of the proposed settlement to the Indemnified Person and
shall thereupon be released from any further liability with respect to such
action, suit or proceeding.
SECTION 8. Termination. (a) This agreement may be terminated by mutual
written consent of the parties.
(b) The Medical Group may terminate this Agreement effective immediately by
giving written notice to the Management Company (i) in the event the Management
Company materially defaults in the performance of any duty or obligation imposed
on it by this Agreement and such default shall continue for a period of 20 days
after written notice thereof has been given to the Management Company by the
Medical Group, (ii) in the event the Management Company materially defaults in
the performance of any
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<PAGE>
duty or obligation imposed on it by the Sublicense Agreement, dated the date
hereof (the "Sublicense Agreement"), between the Management Company and the
Medical Group, and such default shall continue for a period of 30 days after
written notice thereof has been given to the Management Company by the Medical
Group, (iii) in the event the Management Company files a petition in bankruptcy
or makes an assignment for the benefit of creditors or otherwise seeks relief
from creditors under a federal or state bankruptcy, insolvency, reorganization
or moratorium statute, or the Management Company is the subject of an
involuntary petition in bankruptcy which is not set aside within 90 days after
its filing or (iv) pursuant to Section 22.
(c) The Medical Group may terminate this Agreement upon 90 days' prior
written notice to the Management Company if (i) in any calendar year during the
Term commencing with calendar year 1998, the Medical Group's net collected
revenues per physician (determined by dividing the Medical Group's net collected
revenues during such calendar year by the weighted average number of physicians
in the Medical Group during the calendar year under consideration) is less than
80% of the Medical Group's net collected revenues per physician (determined on
the same basis) in calendar year 1996, unless such reduction results from a
Force Majeure Event or an action or series of actions within the reasonable
control of the Medical Group or (ii) at any time commencing with the first
calendar quarter in calendar year 1998, the Medical Group's Actual Costs per
physician during any calendar quarter (determined by dividing the Medical
Group's Actual Cost by the weighted average number of physicians in the Medical
Group during the calendar quarter under consideration) exceed by more than 10%
the Medical Group's average quarterly Actual Costs per physician during calendar
year 1997 (adjusted for any increase in the Consumer Price Index for Medical
Services for the Standard Metropolitan Statistical Area including New York City
from and after June 30, 1998) (the "Average Quarterly Actual Costs") unless such
excess results from a Force Majeure Event or additional or increased expenses
approved in advance by the Medical Group; provided, however that in the event
that the Medical Group expands to include more noninterventional cardiologist
physicians or other generalist or specialist physicians, the Medical Group and
the Management Company shall meet within 60 days thereafter and mutually agree
upon a different percentage in clause (i) above and a higher percentage in
clause (ii) above. Notwithstanding the foregoing, the Medical Group shall not
have the right to terminate this Agreement pursuant to clause (ii) of the
immediately preceding sentence if the Management Company agrees to a reduction
in the Management Fee in respect of such calendar quarter in an amount necessary
to reduce such excess over the Average Quarterly Actual Costs to 10%, or such
higher percentage as mutually agreed upon by the parties, or less.
(d) The Management Company may terminate this Agreement effective
immediately by giving written notice to the
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<PAGE>
Medical Group (i) in the event the Medical Group shall materially default in the
performance of any duty or obligation imposed upon it by this Agreement and such
default shall continue for a period of 20 days after written notice thereof has
been given to the Medical Group by the Management Company, (ii) in the event the
Medical Group shall materially default in the performance of any duty or
obligation imposed upon it by the Sublicense Agreement and such default shall
continue for a period of 30 days after written notice thereof has been given to
the Medical Group by the Management Company, (iii) in the event the Medical
Group files a petition in bankruptcy or makes an assignment for the benefit of
creditors or otherwise seeks relief from creditors under a federal or state
bankruptcy, insolvency, reorganization or moratorium statute, or the Medical
Group is the subject of an involuntary petition in bankruptcy which is not set
aside within 90 days after its filing or (iv) pursuant to Section 22.
(e) The Management Company may terminate this Agreement upon 90 days' prior
written notice to the Medical Group if in any calendar year during the Term
commencing with calendar year 1998, the Medical Group's net collected revenues
per physician (determined by dividing the Medical Group's net collected revenues
during such calendar year by the weighted average number of physicians in the
Medical Group during the calendar year under consideration) is less than 80% of
the Medical Group's net collected revenues per physician (determined on the same
basis) in calendar year 1996 unless such reduction results from a Force Majeure
Event or an action or series of actions within the reasonable control of the
Management Company; provided, however that in the event that the Medical Group
expands to include more non-interventional cardiologist physicians or other
generalist or specialist physicians, the Medical Group and the Management
Company shall meet within 60 days thereafter and mutually agree upon a different
percentage in this Section 8(e).
(f) If the Management Company terminates this Agreement pursuant to Section
8(d), the Medical Group's right to participate in the Rollup (as defined in
Section 3 of the Stockholders' Agreement, dated the date hereof, among the
Management Company and the Stockholders listed on Schedule I thereto) shall
immediately terminate.
SECTION 9. Non-Disclosure of Confidential Information. (a) Neither the
Medical Group, its Medical Personnel, other employees, consultants,
representatives or agents (the "Medical Group Disclosees") nor the Management
Company, its employees, consultants, representatives or agents (the "Management
Company Disclosees") shall, at any time after the execution and delivery hereof,
directly or indirectly disclose any confidential or proprietary information
relating to the other party hereto to any person, firm, corporation, association
or other entity, nor shall the Medical Group Disclosees or the Management Group
Disclosees make use of any of such confidential or proprietary information
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<PAGE>
for its or their own purposes or for the benefit of any person, firm,
corporation or other entity except the other party hereto or any subsidiary or
affiliate thereof. The foregoing obligation shall not apply to any information
which the Medical Group Disclosees or the Management Company Disclosees, as the
case may be, can establish to have (i) become publicly known without breach of
this Agreement by it or them, (ii) been known to the Medical Group Disclosees,
or any of them, prior to disclosure by the Management Company or (iii) to have
been given to the Medical Group by a third party who is not obligated to
maintain the confidentiality of such information.
(b) The term "confidential or proprietary information" shall mean all
information which is known to the Medical Group Disclosees or the Management
Company Disclosees, as the case may be, which relates to this Agreement or
matters such as patient medical records and charts, trade secrets, books and
records, supplies, pricing and cost information, marketing plans, strategies and
forecasts. Nothing contained herein shall prevent the Medical Group Disclosees
or the Management Company Disclosees, as the case may be, from furnishing
confidential or proprietary information pursuant to a direct order of a court or
governmental authority of competent jurisdiction. In the event that the Medical
Group Disclosees or the Management Company Disclosees are requested or become
legally compelled (by oral questions, interrogatories, request for information
or documents, subpoena, civil investigative demand or similar process) to
disclose any confidential or proprietary information, the Medical Group
Disclosees or the Management Company Disclosees, as the case may be, shall
provide the other party hereto with prompt written notice thereof so that the
other party hereto may seek a protective order, confidential treatment of such
confidential or proprietary information or other appropriate remedy.
SECTION 10. Restrictive Covenants. The Medical Group acknowledges and
recognizes the highly competitive nature of the business of the Management
Company and that goodwill is an essential asset of the Management Company.
Accordingly, during the Term, the Medical Group shall not (i) directly or
indirectly engage in any Competitive Business (as defined below), whether such
engagement shall be as an employer, owner, consultant, partner or other
participant in any Competitive Business, (ii) assist others in engaging in any
Competitive Business in the manner described in the foregoing clause (i), (iii)
employ or otherwise induce employees of the Management Company to terminate
their employment with the Management Company or engage in any Competitive
Business or (iv) induce customers or vendors of the Management Company to alter
or terminate their business relationship with the Management Company. As used
herein, the term "Competitive Business" shall mean any business which, directly
or indirectly, competes with the Management Company in the provision of
management services to professional medical organizations; provided, however,
that the provisions of this Section 10 will not be deemed breached merely
because the Medical
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<PAGE>
Group owns not more than 2% of the outstanding equity securities of an entity
if, at the time of the acquisition of such equity securities, such securities
are listed on a national securities exchange, the NASDAQ National Market System,
the NASDAQ SmallCap System or are regularly traded in the over-the-counter
market.
SECTION 11. Inadequate Remedy at Law. The Management Company and the
Medical Group acknowledge and agree that since a remedy at law for any breach or
attempted breach of the provisions of Sections 9 or 10 shall be inadequate
either party shall be entitled to specific performance and injunctive or other
equitable relief in case of any such breach or attempted breach, in addition to
any remedies available at law. If any provision of Section 10 relating to the
restrictive period and/or the scope of activity restricted shall be declared by
a court of competent jurisdiction to exceed the maximum time period or scope of
activity restricted such court deems reasonable and enforceable under Applicable
Law, the time period and/or scope of activity restricted held to be reasonable
and enforceable by such court shall thereafter be the restrictive period and/or
scope of activity restricted applicable to the restrictive covenant provisions
in Section 10. The invalidity or non-enforceability of Sections 9 or 10 in any
respect shall not affect the validity or enforceability of the remainder of
Sections 9 or 10 or of any other provisions of this Agreement.
SECTION 12. Assignment. The Management Company shall have the right to
assign its rights and delegate its duties hereunder to any affiliated entity of
the Management Company (provided that the Management Company shall continue to
remain responsible for the performance of its obligations under this Agreement)
and the Medical Group shall have the right to assign its rights and delegate its
duties hereunder to a successor entity. Except as set forth in the preceding
sentence, neither the Management Company nor the Medical Group shall assign its
rights hereunder without the prior written consent of the other party.
SECTION 13. Notices. All notices, requests, consents and other
communications hereunder shall be in writing and shall be deemed sufficient if
personally delivered, sent by nationally-recognized overnight courier, sent by
facsimile or by registered or certified mail, return receipt requested and
postage prepaid, addressed as follows:
if to the Management Company, to:
Diamond Physician Management, Inc.
c/o Advanced Health Corporation
560 White Plains Road, 2nd Floor
Tarrytown, New York 10591
Facsimile: (914) 332-1186
Attention: Chief Operating Officer
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<PAGE>
with a copy to:
O'Sullivan Graev & Karabell, LLP
30 Rockefeller Plaza
New York, New York 10112
Facsimile: (212) 408-2420
Attention: John J. Suydam, Esq.
if to the Medical Group, to:
Long Island Interventional Cardiology
100 Port Washington Boulevard
Roslyn, New York 11576
Facsimile: (516) 627-1198
Attention: Ronnie Hershman, M.D.
with a copy to:
Squadron, Ellenoff, Plesent & Sheinfeld, LLP.
551 Fifth Avenue
New York, New York 10176
Facsimile: (212) 697-6686
Attention: Stephen J. Gulotta, Jr., Esq.
or to such other address as the party to whom notice is to be given may have
furnished to each other party in writing in accordance herewith. Any such notice
or communication shall be deemed to have been received (a) in the case of
personal delivery, on the date of such delivery, (b) in the case of
nationally-recognized overnight courier, on the next business day after the date
when sent, (c) in the case of facsimile, on the next business day after the date
when sent and (d) in the case of mailing, on the third business day following
that on which the piece of mail containing such communication is posted.
SECTION 14. Benefits of Agreement; No Third Party Beneficiaries. This
Agreement shall bind and inure to the benefit of any successors to or permitted
assigns of the Management Company and the Medical Group. None of the agreements,
representations or other provisions contained herein shall be for the benefit of
any person or entity not a party to this Agreement.
SECTION 15. Governing Law and Arbitration. (a) This Agreement shall be
governed by and construed and enforced in accordance with the laws of the State
of New York without giving effect to the laws and principles thereof, or of any
other jurisdiction, which would direct the application of the laws of another
jurisdiction. The parties hereto shall act in good faith and shall refrain from
taking any actions to circumvent or frustrate the provisions of this Agreement.
(b) All disputes, controversies, differences or claims arising out of,
relating to or in connection with this Agreement,
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<PAGE>
or the breach thereof, shall be finally settled by binding arbitration in New
York, New York pursuant to the arbitration rules of the American Arbitration
Association. Arbitration shall take place before one arbitrator appointed in
accordance with such rules. The governing law of the arbitration shall be the
law set forth in Section 15(a). Any award or decision rendered by the arbitrator
shall clearly set forth the factual and legal basis for such award or decision.
Judgment on the award or decision rendered by the arbitrator shall be
non-appealable and enforceable in any court having jurisdiction thereof. The
costs of the arbitration, including administrative, legal and arbitrator fees,
shall be borne by the losing party, or according to the discretion of the
arbitrator if the parties disagree as to which party is the losing party under
the award or decision.
SECTION 16. Headings. Section headings are used for convenience only and
shall in no way affect the construction of this Agreement.
SECTION 17. Entire Agreement; Amendments. This Agreement, the Stockholders
Agreement dated the date hereof, between the Management Company and the
stockholders listed on Schedule I thereto, and the Sublicense Agreement contain
the entire understanding of the parties with respect to its subject matter, and
neither it nor any part of it may in any way be altered, amended, extended,
waived, discharged or terminated except by a written agreement signed by each of
the parties hereto.
SECTION 18. Severability. The provisions of this Agreement shall be deemed
severable and if any portion shall be held invalid, illegal or unenforceable for
any reason, the remainder of this Agreement shall be effective and binding upon
the parties.
SECTION 19. Counterparts. This Agreement may be executed in counterparts,
and each such counterpart shall be deemed to be an original instrument, but all
such counterparts together shall constitute but one agreement.
SECTION 20. Waivers. Any party to this Agreement may, by written notice to
the other party, waive any provision of this Agreement. The waiver by any party
of a breach of any provision of this Agreement shall not operate or be construed
as a waiver of any subsequent breach.
SECTION 21. Survival of Termination. Notwithstanding anything contained
herein to the contrary, Sections 7(b), 7(c), 7(d), 8(e), 9, 11, 12, 13, 14, 15,
16, 17, 18, 19, 20 and this Section 21 shall survive any termination or
expiration of this Agreement.
SECTION 22. Contract Modification for Prospective Legal Events. In the
event any Applicable Law, now existing or
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enacted or promulgated after the Effective Date, is interpreted by judicial
decision, a regulatory agency or legal counsel of both parties in such a manner
as to indicate that the structure of this Agreement may be in violation of such
Applicable Law, the Medical Group and the Management Company shall amend this
Agreement as necessary to avoid such violation. To the maximum extent possible,
any such amendment shall preserve the underlying allocation of responsibilities,
economic and financial arrangements between the Medical Group and the Management
Company. If such an amendment is not possible, either party shall have the right
to terminate this Agreement without penalty and in good faith so as not to cause
unnecessary harm to the other party.
* * *
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IN WITNESS WHEREOF, the parties have duly executed this Management Services
Agreement as of the date first above written.
LONG ISLAND INTERVENTIONAL
CARDIOLOGY
By: Ronnie Hershman, M.D., P.C.,
Its General Partner
By: /s/ [signature unreadable]
-------------------------------
Name:
Title: President
DIAMOND PHYSICIAN MANAGEMENT, INC.
By:_______________________________
Name:
Title:
<PAGE>
SCHEDULE I
to Management Services Agreement
Management Services
The Management Services to be provided by the Management Company to the
Medical Group shall consist of the following services:
(1) Facilities Management. The Management Company shall provide or
arrange for the provision of all facilities management services, including,
without limitation, the negotiation of real or personal property leases,
repairs, maintenance and improvements, procurement of property insurance,
utility services (including telephone, electric, gas and water), janitorial
services and refuse disposal. The forms, terms and provisions of all
material contracts, agreements, instruments and other documentation related
thereto shall be subject to the prior written approval of the Medical
Group;
(2) Finance and Accounting. The Management Company shall provide for
the provision of all financial and accounting functions necessary for the
operation of the Medical Group, including, without limitation, creation and
maintenance of bank accounts and disbursement of payables and shall provide
financial and accounting reporting on a monthly basis within 15 days after
the end of each month;
(3) Billing and Collection. (a) The Management Company shall provide
the following billing and collection services and reports to the Medical
Group:
(i) Weekly initiation of billing cycles, generation of
statements, third-party carrier and governmental program
claim forms, collection notices and payment inquiries.
(ii) Prior to mailing, all bills will be verified against source
documents in order to eliminate delay in payments as much as
possible.
(iii) Billing actions will be prioritized by patient financial
class and not by physician provider or location of service.
(iv) All statements will be mailed within seven days of receipt
of the charge and other necessary information.
(v) Billing statements will be completed containing all detail
on open items as well as payments, adjustments and
information requests.
<PAGE>
(vi) Payments received will be deposited daily into the Medical
Group's trust account (the "Trust Account").
(vii) Posted payments will be verified against Trust Account
deposit tickets on a weekly basis.
(viii) Follow up on billings which shall include:
(A) Automatic insurance inquiries on all third-party
carrier accounts if payment is not received within 45
days or such shorter period required under the
applicable third-party carrier contractual arrangement
from initial billing.
(B) Telephone calls will be placed to insurance carriers on
all accounts over $75 (long distance included) 45 days
from initial billing if no payment has been received.
(C) Governmental program charges which are denied by the
intermediary will be appealed.
(D) Daily skiptracing will be performed to ascertain
correct mailing addresses on all mail returned due to
incorrect addresses.
(ix) The Management Company will provide, monthly and otherwise
as reasonably requested, in a usable format all the
following reports which can be sorted and produced by
provider or payor class:
(A) Accounts Receivable Summary
(B) Practice Revenue Analysis
(C) Accounts Receivable Status Reports
(D) Account Aging Summary
(E) Collection Ratio Report
(F) Provider Activity Report
(G) Insurance Utilization (as needed)
(H) Payor Contract Evaluation (as needed)
(x) The Management Company employees will be cross-trained for
each billing function, including data entry, billing, follow
up, correspondence, filing, collections, cash receipts,
supervision, litigation, and insurance.
<PAGE>
(xi) The Management Company will supervise collection agency
follow up after the Medical Group has approved write offs,
at the Medical Group's option as set forth below.
(b) The Medical Group and Management Company shall jointly formulate
and agree upon guidelines to be used for the following
billing/collection activities contemplated under this Agreement:
(i) The terms and conditions upon which periodic payments to the
Medical Group will be allowed.
(ii) The timing and content of all demand letters to accounts of
the Medical Group.
(iii) Terms and conditions under which accounts can be turned
over to collection agencies for further action by Management
Company.
(iv) Terms and conditions upon which the Management Company may
write off appropriate accounts of the Medical Group and
other terms and conditions upon which discounts or other
reductions of the Medical Group accounts can be made by
Management Company;
(4) Information Management. The Management Company shall provide or arrange
for the provision of all of the Medical Group's information management services.
The Management Company shall protect the confidentiality of patient medical
records to the extent required by Applicable Law, but in no event shall such
protection be less than the protection given thereto pursuant to the Medical
Group's own internal practices and procedures which shall have been documented
in writing and delivered to the Management Company from time to time; provided,
however, that in no event shall an inadvertent and immaterial breach of such
confidentiality be deemed a default under this Agreement;
(5) Personnel. The Management Company shall retain and provide or arrange
for the retention and provision of all non-professional administrative, support,
clerical, laboratory, secretarial, bookkeeping and collection personnel
(collectively, "Administrative Personnel") necessary for the conduct of the
Medical Group's business operations. The Management Company shall determine and
pay the salaries and fringe benefits of Administrative Personnel. The Management
Company shall provide administrative services such as scheduling, personnel
<PAGE>
policies and payroll administration for Administrative Personnel;
(6) Medical Personnel Recruiting and Payroll. Subject to Section 5(b) of
the Agreement, the Management Company shall, with the Medical Group's prior
express approval, recruit (i) physician partners of the Medical Group (the
"Physician Partners"), (ii) physician employees (the "Physician Employees") and
(iii) other professional personnel (the Physician Partners and Physician
Employees together with any other professional personnel collectively referred
to herein as, the "Medical Personnel") to work for the Medical Group as may be
necessary for the Medical Group to provide the Medical Services. The decision to
hire any Medical Personnel shall be made by the Medical Group in its sole and
absolute discretion. The Management Company shall provide payroll administration
services for all Medical Personnel engaged by the Medical Group;
(7) Personnel Verification. With respect to each Physician Partner and
Physician Employee, the Management Company shall verify educational and
employment experience, licensure and insurability and shall review and provide
the Medical Group with copies of any complaints contained in public files of
applicable state and federal sanctioning commissions. The Management Company
shall use due diligence in providing personnel verification services but in no
event shall a breach of such obligation be deemed a default under this Agreement
and the Management Company shall have no liability to the Medical Group or
others in the event any information is inaccurate or incomplete;
(8) Insurance. Subject to the Medical Group's prior express approval, the
Management Company shall negotiate on behalf of the Medical Personnel the
insurance coverage as described in Section 7(a);
(9) Taxes. The Management Company shall provide the Medical Group and each
Physician Partner with access to all information necessary for the Medical Group
and each Physician Partner to prepare its or his annual income tax returns and
its or his annual and interim financial statements. The Management Company shall
have no responsibility for (i) the payment of the Medical Group's or any
Physician Partner's federal, state or local income or other taxes or (ii) the
preparation of any tax returns for the Medical Group or any Physician Partner;
(10) Inventory and Supplies. The Management Company shall order and
purchase inventory, supplies and other ordinary or appropriate materials as the
Medical Group deems to be necessary for it to carry out its professional medical
activities on behalf of the Medical Group;
<PAGE>
(11) Files and Records. The Management Company shall supervise custody of
all files and records relating to the operation of the business of the Medical
Group, including, without limitation, accounting, billing, collection and
patient medical records. Business records of the Medical Group created and/or
maintained by the Management Company shall be the property of the Medical Group
and shall at all times be located at a location that is readily accessible to
the parties, and at the end of the Term shall be returned to the Medical Group
and the Management Company shall not retain any copies thereof without the
express written consent of the Medical Group. Patient medical records shall at
all times be and remain the property of the Medical Group and shall be located
at a location that is readily accessible for patient care. The Management
Company shall preserve the confidentiality of patient medical records and use
information contained in such records only for the limited purposes necessary to
perform the Management Services; provided, however, that in no event shall an
inadvertent and immaterial breach of such confidentiality be deemed a default
under this Agreement;
(12) Managed Care. The Management Company shall solicit; negotiate and
administer (including, without limitation, the administration of all billings,
capitation payments and collections) managed care contracts on behalf of the
Medical Group and shall consult with the Medical Group on all professional and
clinical matters relating thereto; including, without limitation, fee schedules,
charges and capitation amounts; provided, however, that each managed care
contract entered into by the Medical Group shall be approved in writing by the
Medical Group;
(13) Education. The Management Company shall develop and implement
community out-reach programs and public relations programs designed to educate
the patient population regarding the Medical Group, the availability of its
medical services and the availability and terms of any managed care programs in
which the Medical Group participates. The programs shall be conducted in
compliance with the Applicable Law governing advertising by the medical
profession; and
(14) Non-medical Management Support. The Management Company shall provide
all other non-medical management support for the Medical Group, including,
without limitation, assisting with the development and implementation of a
strategic growth and business development plan for the Medical Group and the
preparation of accounts receivables, accounts payables, aging, collections and
quality/utilization review reports.
<PAGE>
SCHEDULE II
to Management Services Agreement
Actual Costs of the Medical Group
Non-Medical Personnel Payroll and Administration (including
Payroll Taxes and Benefits Administration)
Rents
Telephone-Communications
Telecommunications (i.e., dedicated high speed leased lines for data
transmission)
Practice and Clinical Management Software Maintenance
Insurance - Inc. Malpractice
Office Expense
Payroll Service
Repairs & Maintenance
Equipment Lease
Advertising
Legal/Accounting/Prof. Fees (other than legal, accounting and professional fees
of the Medical Group not related to the Management Services)
Auto Lease/Garage
Outside Office Service
Bank Charges
Medical Supplies
Commercial Rent Tax
Hospital Fees
Billing and Collection Services
<PAGE>
SCHEDULE III
to Management Services Agreement
Medical Group Expenses
Medical Personnel Salaries and Professional Expenses
Medical Personnel Payroll Tax and Benefits
Outside Service Professional/Medical/Technical Fees
Medical Personnel Pension Expense
Workers Comp/DBL Insurance/Life for Medical Personnel
Conference Cost/Travel & Entertainment
Dues, Licenses and Subscriptions
Legal/Accounting/Professional Fees Not Related to the Management
Services
Contributions
Franchise Taxes
<PAGE>
SCHEDULE IV
to Management Services Agreement
Fees
1. Reimbursement Fee. In consideration of Management Services
-----------------
rendered by the Management Company, the Medical Group shall pay to the
Management Company on the fourth business day of each week during the Term a
reimbursement fee (the "Reimbursement Fee") equal to the costs and expenses set
forth on Schedule II actually incurred by the Medical Group during the preceding
-----------
week.
2. Billing Fee; Management Fee. In consideration of the billing and
---------------------------
collection services rendered by the Management Company, the Medical Group shall
pay to the management Company in arrears on the tenth business day of each month
during the Term a billing fee (the "Billing Fee" and together with the
Reimbursement Fee collectively, the "Management Fee") equal to [ ]* of the
Medical Group's net collected revenues for the previous month.
3. Adjustments. (a) The Management Fee payable on July 1, 1997 and
-----------
each January 1 and July 1 thereafter during the Term shall be adjusted by andy
Savings (as defined below) realized during the six-month period immediately
preceding such date (each, a "Period").
(b) The Savings shall be an amount equal (i) an amount equal to
(A) the Base Burden Percentage (as defined below) multiplied by (B) the
----------
aggregate collected revenue of the Medical Group for the preceding Period (the
"Burden Amount") minus (ii) the aggregate Management Fees paid by the Medical
-----
Group to the Management Company during the preceding period (the "Base Cost").
If the burden Amount exceeds such Period's Base Cost (the "Savings"), the
Medical group and the Management Company shall share such Savings 50 percent or
the account of the Medical Group and 50 percent for the account of the
Management Company.
(c) The Medical Group and the Management Company shall calculate
and agree upon a base burden percentage for the Medica Group as of January 1,
1997 (the "Base Burden Percentage"). The Base Burden Percentage shall be
calculated by dividing (i) the aggregate Reimbursement Fees paid by the Medical
--------
Group to the Management Company from the date hereof through December 31, 1996
by (ii) the aggregate collected revenues of the Medical Group from the date
hereof through December 31, 1966.
4. Risk-Based Contracts. For each risk-based contract that the
--------------------
Medical Group enters into directly with a payor, the Medical Group shall pay to
the Management Company an amount (the "Managed Care Payment") equal to the
amount received by the Medical Group from the payor pursuant to such contract.
The Management Company shall reimburse the Medical Group the Managed
Care Payment less a percentage of the savings recognized by the Medical Group
from the administration of such contract which percentage will be mutually
agreed upon by the parties on a contract-by-contract basis. Upon the request of
the Medical Group, the parties shall meet and mutually agree upon additional
security to be provided by the Management Company to the Medical Group to secure
the Management Company's reimbursement obligations to the Medical Group in
connection with a risk-based contract entered into by the Medical Group.
- ------------
* Omitted pursuant to Rule 406 promulgated under the Securities Act of 1933,
as amended.
<PAGE>
5. Information Systems. In consideration of the hardware, software
-------------------
and other services listed below provided by the Management Company to the
Medical Group on a turnkey basis for the Medical Group's practice management
information systems, the Medical Group shall pay to the Management Company a
monthly fee of [ ]* per physician user for 60 months.
Hardware:
--------
- 1-Router and Communication Pack
- Personal Computers and Monitors
- - 5-Billing and Collection Functions
- - 3-Registration and Scheduling Functions
- - 2-Word-processing and Transcription
- - 9-Individual Physician's Office
- 2-Laser Printer, Dot Matrix and Stand Package for IDX
- 2-Laser printer for all other functions
- 3-Personal Digital Assistant (PDA) Fugitsu
- 1- (PDA) Base Station (Wireless Access Point)
- Cabling of entire office suite
Software
--------
- IDX software and license covering all current
physicians in practice
- Med-E-Practice software and license
- Microsoft Office Package for all P.C.s (Microsoft Word, Excel,
Powerpoint and Access)
- E-Mail
Services
--------
- Installation
- MFS Service
- IDX Maintenance
- Med-E-Practice Maintenance
- Data Conversion
- Physician Training and Support on Med-E-Practice
- Physician and Staff Training and Support on all
products provided
- Access to Advanced Health Server to provide Med-E-Practice
and E-Mail communications
- --------
* Omitted pursuant to Rule 406 promulgated under the Securities Act of 1933,
as amended.
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
dated June 19, 1996 (except for the matters discussed in Note 14, as to which
the date is August 14, 1996), June 4, 1996 and June 5, 1996 and to all
references to our Firm included in or made a part of this registration
statement.
ARTHUR ANDERSEN LLP
New York, New York
October 1, 1996
