AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 26, 1996
REGISTRATION NO. 333-06283
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
AMENDMENT NO. 3
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 SEPTEMBER 26, 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.
- --------------------------------------------------------------------------------
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<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------
Per Share................................ $ $ $
Total (3)................................ $ $ $
</TABLE>
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- --------------------------------------------------------------------------------
(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
offering...................................... 6,500,267 shares(1)
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
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"). 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. The Company does not now have capitated contracts 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. 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. Revenues under
managed care or capitated arrangements entered into 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
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 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
8
<PAGE>
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 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
9
<PAGE>
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 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
10
<PAGE>
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 has stated that it intends to revise its 1989 Draft
Policy Statement and that it may eliminate some or all of the exemptions that it
currently allows. 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 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 commensurate 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
11
<PAGE>
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 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
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<PAGE>
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 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
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<PAGE>
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."
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,
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<PAGE>
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.
15
<PAGE>
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:
Assumed initial public offering price per share........... $12.00
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
------
------
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
----- ------- ------ --------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
<CAPTION>
<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, pursuant to which the aggregate capitated payments to be
made by a third-party payor to such network are assigned to the MSO. 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 from fee-for-service or capitated contracts. 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.
20
<PAGE>
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 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 earns 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.
With respect to the assignment of capitation revenues to the Company, the
Company is 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 revenues
associated with the provision of its management services.
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 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
21
<PAGE>
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 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.
22
<PAGE>
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.
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
23
<PAGE>
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 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
24
<PAGE>
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. 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 has little
experience in managing capitated-risk arrangements and has no experience in
forming or managing an IPA. Revenues under any managed care or capitated
arrangements entered into by the Company, whether through the assignment of a
capitated contract entered into by its affiliated physicians or directly through
an IPA, 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. The Company expects to enter
into reinsurance agreements with third-party insurers in respect of a portion of
such risk.
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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 commensurate 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 has also filed
applications for registration of 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.
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.
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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 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
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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 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
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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 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
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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 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
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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.
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) concordance with accepted medical practice; (iv)
format of data and its presentation; (v) individualized versus aggregate patient
care recommendations; and (vi) clarity of algorithms used in the software. 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 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 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.
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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
persons)(7).................................................. 925,403 20.4 14.2
</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
-------------------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
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.
FOR THE YEARS ENDED DECEMBER
31,
-----------------------------
1994 1995
----------- -----------
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)
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:
YEAR ENDING
DECEMBER 31,
- ----------------------------------------------------------------
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
--------
--------
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:
YEAR ENDING
DECEMBER 31,
- ---------------------------------------------------------------
1996........................................................... $ 247,447
1997........................................................... 673,317
1998........................................................... 784,772
1999........................................................... 781,844
2000 and thereafter............................................ 1,539,750
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:
DECEMBER 31, AUGUST 31,
1994 1995
------------ ----------
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
------------ ----------
------------ ----------
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 UNDERWRITERS OR BY ANY OTHER
PERSON. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY A 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 THE SECURITIES OFFERED HEREBY, TO ANY PERSON IN ANY JURISDICTION IN
WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR 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
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
Description of Capital Stock........... 53
Shares Eligible for Future 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 PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
2,000,000 SHARES
[LOGO]
ADVANCED HEALTH
CORPORATION
COMMON STOCK
----------------------
PROSPECTUS
----------------------
COWEN & COMPANY
VOLPE, WELTY & COMPANY
, 1996
================================================================================
- --------------------------------------------------------------------------------
<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.
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
--------
--------
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. 3 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 26th day of September, 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. 3 to Registration Statement has been signed on the 26th day of September,
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 1.1
2,000,000 Shares
ADVANCED HEALTH CORPORATION
Common Stock
UNDERWRITING AGREEMENT
----------------------
October [__], 1996
COWEN & COMPANY
VOLPE, WELTY & COMPANY
As Representatives of the several Underwriters
c/o Cowen & Company
Financial Square
New York, New York 10005
Ladies and Gentlemen:
1. Introductory. Advanced Health Corporation, a Delaware
------------
corporation (the "Company"), proposes to sell, pursuant to the terms of this
Agreement, to the several underwriters named in Schedule A hereto (the
"Underwriters," or, each, an "Underwriter"), an aggregate of 2,000,000 shares
of Common Stock, par value $.01 per share (the "Common Stock") of the
Company. The aggregate of 2,000,000 shares so proposed to be sold is
hereinafter referred to as the "Firm Stock". The Company also proposes to
sell to the Underwriters, upon the terms and conditions set forth in Section
3 hereof, up to an additional 300,000 shares of Common Stock (the "Optional
Stock"). The Firm Stock and the Optional Stock are hereinafter collectively
referred to as the "Stock". Cowen & Company ("Cowen") and Volpe, Welty &
Company are acting as representatives of the several Underwriters and in such
capacity are hereinafter referred to as the "Representatives".
2. Representations and Warranties of the Company. The Company
---------------------------------------------
represents and warrants to, and agrees with, the several Underwriters that:
(a) A registration statement on Form S-1 (File No. 333-
06283), as amended in the form in which it became or becomes effective
and also in such form as it may be when any post-effective amendment
thereto shall become effective with respect to the Stock, including
preeffective prospectuses included as part of the
<PAGE>
2
registration statement as originally filed or as part of any amendment
or supplement thereto, or filed pursuant to Rule 424 under the
Securities Act of 1933, as amended (the "Securities Act"), and the rules
and regulations (the "Rules and Regulations") of the Securities and
Exchange Commission (the "Commission") thereunder, copies of which have
heretofore been delivered to you, has been carefully prepared by the
Company in conformity with the requirements of the Securities Act and
has been filed with the Commission under the Securities Act; and one or
more amendments to such registration statement, including in each case
an amended preeffective prospectus, copies of which amendments have
heretofore been delivered to you, have been so prepared and filed (as so
amended, the "Registration Statement"). If it is contemplated, at the
time this Agreement is executed, that a post-effective amendment to the
Registration Statement will be filed and must be declared effective
before the offering of the Stock may commence, the term "Registration
Statement" as used in this Agreement means the Registration Statement as
amended by said post-effective amendment. The term "Registration
Statement" as used in this Agreement shall also include any registration
statement relating to the Stock that is filed and declared effective
pursuant to Rule 462(b) under the Securities Act. The term "Prospectus"
as used in this Agreement means the prospectus in the form included in
the Registration Statement, or, (A) if the prospectus included in the
Registration Statement omits information in reliance on Rule 430A under
the Securities Act and such information is included in a prospectus
filed with the Commission pursuant to Rule 424(b) under the Securities
Act, the term "Prospectus" as used in this Agreement means the
prospectus in the form included in the Registration Statement as
supplemented by the addition of the Rule 430A information contained in
the prospectus filed with the Commission pursuant to Rule 424(b) and (B)
if prospectuses that meet the requirements of Section 10(a) of the
Securities Act are delivered pursuant to Rule 434 under the Securities
Act, then (i) the term "Prospectus" as used in this Agreement means the
"prospectus subject to completion" (as such term is defined in Rule
434(g) under the Securities Act) as supplemented by (a) the addition of
Rule 430A information or other information contained in the form of
prospectus delivered pursuant to Rule 434(b)(2) under the Securities Act
or (b) the information contained in the term sheets described in Rule
434(b)(3) under the Securities Act, and (ii) the date of such
prospectuses shall be deemed to be the date of the term sheets. The
term "Preeffective Prospectus" as used in this Agreement means the
prospectus subject to completion in the form included in the
Registration Statement at the time of the initial filing of the
Registration Statement with the Commission, and as such prospectus shall
have been amended from time to time prior to the date of the Prospectus.
(b) The Commission has not issued or threatened to issue any
order preventing or suspending the use of any Preeffective Prospectus,
and, at its date of issue, each Preeffective Prospectus conformed in all
material respects with the requirements of the Securities Act and did
not include any untrue statement of a
<PAGE>
3
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; and, when the
Registration Statement becomes effective and at all times subsequent
thereto up to and including the Closing Date, the Registration Statement
and the Prospectus and any amendments or supplements thereto contained
and will contain all material statements and information required to be
included therein by the Securities Act and conformed and will conform in
all material respects to the requirements of the Securities Act and
neither the Registration Statement nor the Prospectus, nor any amendment
or supplement thereto, included or will include any untrue statement of
a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided,
however, that the foregoing representations, warranties and agreements
shall not apply to information contained in or omitted from any
Preeffective Prospectus or the Registration Statement or the Prospectus
or any such amendment or supplement thereto in reliance upon, and in
conformity with, written information regarding any Underwriter furnished
to the Company by or on behalf of any Underwriter, directly or through
you, specifically for use in the preparation thereof; there is no lease,
contract, agreement or document required to be described in the
Registration Statement or Prospectus or to be filed as an exhibit to the
Registration Statement which is not described or filed therein as
required; and all descriptions of any such leases, contracts, agreements
or documents contained in the Registration Statement are accurate and
complete descriptions of such documents in all material respects.
(c) Subsequent to the respective dates as of which
information is given in the Registration Statement and Prospectus, and
except as set forth or contemplated in the Prospectus, neither the
Company nor any of its subsidiaries has incurred any material
liabilities or obligations, direct or contingent, nor entered into any
transactions not in the ordinary course of business, and there has not
been any material adverse change in the condition (financial or
otherwise), properties, business, management, prospects, net worth or
results of operations of the Company and its subsidiaries considered as
a whole, or any change in the capital stock, short-term or long-term
debt of the Company and its subsidiaries considered as a whole.
(d) The financial statements, together with the related notes
and schedules, set forth in the Prospectus and elsewhere in the
Registration Statement fairly present, on the basis stated in the
Registration Statement, the financial position and the results of
operations and changes in financial position of the entities purported
to be shown thereby at the respective dates or for the respective
periods therein specified and have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis
except as may be set forth in the Prospectus. The pro forma financial
statements set forth in the Registration Statement fairly presents, on
the basis
<PAGE>
4
stated in the Registration Statement, the information set forth therein,
has been prepared in accordance with the Rules and Regulations and the
guidelines of the Commission with respect to pro forma financial
statements, has been properly compiled on the pro forma bases set forth
therein and the assumptions used in the preparation thereof are
reasonable and the adjustments used therein are appropriate to give
effect to the transactions or circumstances referred to therein. The
selected financial data set forth in the Prospectus under the caption
"Selected Consolidated Financial Data" fairly present, on the basis
stated in the Registration Statement, the information set forth therein.
(e) Arthur Andersen, LLP, who have expressed their opinions
on the audited financial statements and related schedules included in
the Registration Statement and the Prospectus, are independent public
accountants as required by the Securities Act and the Rules and
Regulations.
(f) The Company has and each of its subsidiaries have been
duly organized and are validly existing and in good standing as
corporations under the laws of their respective jurisdictions of
organization, with power and authority (corporate and other) to own or
lease their properties and to conduct their businesses as described in
the Prospectus; the Company is and each of its subsidiaries are in
possession of and operating in compliance with all grants,
authorizations, licenses, permits, consents, certificates and orders
required for the conduct of their respective businesses, all of which
are valid and in full force and effect; and the Company is and each of
such subsidiaries are duly qualified to do business and in good standing
as foreign corporations in all other jurisdictions where their ownership
or leasing of properties or the conduct of their businesses requires
such qualification, except where the failure to be so qualified would
not have a material adverse effect on the condition (financial or
otherwise), properties, business, management, prospects, net worth or
results of operations of the Company and its subsidiaries considered as
a whole. The Company has and each of its subsidiaries have all
requisite power and authority, and all necessary grants, authorizations,
licenses, permits, consents, certificates, orders, approvals,
registrations and qualifications of and from all public regulatory or
governmental agencies and bodies to own, lease and operate their
properties and conduct their respective businesses as now being
conducted and as described in the Registration Statement and the
Prospectus, and no such consent, approval, authorization, order,
registration, qualification, license or permit contains a materially
burdensome restriction not adequately disclosed in the Registration
Statement and the Prospectus. The Company's only significant
subsidiaries (as defined in Rule 1-02(w) of Regulation S-X under the
Securities Act) are those set forth in Exhibit 21 to the Registration
Statement.
<PAGE>
5
(g) The Company's authorized and outstanding capital stock is
on the date hereof, and will be on the Closing Date (as hereinafter
defined), as set forth under the heading "Capitalization" in the
Prospectus; the outstanding shares of Common Stock of the Company
conform to the description thereof in the Prospectus and have been duly
authorized and validly issued and are fully paid and nonassessable; and
have been issued in compliance with all federal and state securities
laws and were not issued in violation of or subject to any preemptive
rights or similar rights to subscribe for or purchase securities.
Except as disclosed in and or contemplated by the Prospectus and the
financial statements of the Company and related notes thereto included
in the Prospectus, the Company does not have outstanding any options or
warrants to purchase, or any preemptive rights or other rights to
subscribe for or to purchase any securities or obligations convertible
into, or any contracts or commitments to issue or sell, shares of its
capital stock or any such options, rights, convertible securities or
obligations, except for options granted subsequent to the date of
information provided in the Prospectus pursuant to the Company's stock
option plans disclosed in the Prospectus. The description of the
Company's stock option and other stock plans or arrangements, and the
options or other rights granted or exercised thereunder, as set forth in
the Prospectus, accurately and fairly presents the information required
to be shown with respect to such plans, arrangements, options and
rights. Except as set forth in the Prospectus, all outstanding shares
of capital stock of each subsidiary have been duly authorized and
validly issued, and are fully paid and nonassessable and (except for
directors' qualifying shares) are owned directly by the Company or by
another wholly owned subsidiary of the Company free and clear of any
liens, encumbrances, equities or claims.
(h) The Stock to be issued and sold by the Company to the
Underwriters hereunder has been duly and validly authorized and, when
issued and delivered against payment therefor as provided herein, will
be duly and validly issued, fully paid and nonassessable and free of any
preemptive or similar rights and will conform to the description thereof
in the Prospectus. The Common Stock has been approved for quotation on
the Nasdaq National Market, subject to official notice of issuance.
(i) Except as set forth in the Prospectus, there are no legal
or governmental proceedings pending to which the Company or any of its
subsidiaries or affiliates is a party or of which any property of the
Company or any subsidiary or affiliate is subject, which, if determined
adversely to the Company or any such subsidiary or affiliate, might
individually or in the aggregate (i) prevent or adversely affect the
transactions contemplated by this Agreement, (ii) suspend the
effectiveness of the Registration Statement, (iii) prevent or suspend
the use of the Prospectus in any jurisdiction or (iv) result in a
material adverse change in the condition (financial or otherwise),
properties, business, management, prospects, net worth or results of
operations of the Company and its subsidiaries considered as a whole;
and to the best
<PAGE>
6
of the Company's knowledge no such proceedings are threatened or
contemplated against the Company or any subsidiary or affiliate by
governmental authorities or others. The Company is not a party to nor
subject to the provisions of any material injunction, judgment, decree
or order of any court, regulatory body or other governmental agency or
body. The description of the Company's litigation under the heading
"Legal Proceedings" in the Prospectus is true and correct and complies
with the Rules and Regulations.
(j) The execution, delivery and performance of this Agreement
and the consummation of the transactions herein contemplated will not
result in a breach or violation of any of the terms or provisions of or
constitute a default under any indenture, mortgage, deed of trust, note
agreement or other agreement or instrument to which the Company or any
of its subsidiaries is a party or by which it or any of its properties
is or may be bound, the Certificate of Incorporation, By-laws or other
organizational documents of the Company or any of its subsidiaries, or
any law, order, rule or regulation of any court or governmental agency
or body having jurisdiction over the Company or any of its subsidiaries
or any of their properties or result in the creation of a lien.
(k) No consent, approval, authorization or order of any court
or governmental agency or body is required for the consummation by the
Company of the transactions contemplated by this Agreement, except such
as may be required by the National Association of Securities Dealers,
Inc. (the "NASD") or under the Securities Act or the securities or "Blue
Sky" laws of any jurisdiction in connection with the purchase and
distribution of the Stock by the Underwriters.
(l) The statements set forth under the captions "Risk Factors
- Government Regulation," "Risk Factors - FDA Regulation" and "Business -
Government Regulation" in the Prospectus are accurate and fairly
represent the information disclosed therein.
(m) The Company has the full corporate power and authority to
enter into this Agreement and to perform its obligations hereunder
(including to issue, sell and deliver the Stock), and this Agreement has
been duly and validly authorized, executed and delivered by the Company
and is a valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms, except to the extent
that rights to indemnity and contribution hereunder may be limited by
federal or state securities laws or the public policy underlying such
laws.
(n) The Company and its subsidiaries are in all material
respects in compliance with, and conduct their businesses in conformity
with, all applicable federal, state, local and foreign laws, rules and
regulations of any court or
<PAGE>
7
governmental agency or body; to the knowledge of the Company, otherwise
than as set forth in the Registration Statement and the Prospectus, no
prospective change in any of such federal or state laws, rules or
regulations has been adopted which, when made effective, would have a
material adverse effect on the operations of the Company and its
subsidiaries.
(o) The Company's conduct of its business complies in all material
respects with the statutes relating to the corporate practice of
medicine in each jurisdiction in which the Company does business,
including New York, New Jersey, Connecticut, Pennsylvania, Delaware and
Georgia.
(p) To the extent that the Company enters into risk-sharing or
capitation arrangements in the manner described in the Prospectus, the
Company is or will be exempt from regulation under any and all local,
state and federal laws, rules and regulations pertaining to the
regulation of insurance companies.
(q) The Company and its subsidiaries have filed all necessary
federal, state, local and foreign income, payroll, franchise and other
tax returns and have paid all taxes shown as due thereon or with respect
to any of their properties, and there is no tax deficiency that has
been, or to the knowledge of the Company is likely to be, asserted
against the Company or any of its subsidiaries or any of their
respective properties or assets that would adversely affect the
financial position, business or operations of the Company and its
subsidiaries.
(r) No person or entity has the right to require registration of
shares of Common Stock or other securities of the Company because of the
filing or effectiveness of the Registration Statement, except for
persons and entities who have expressly waived such right in connection
with this Registration Statement or who have been given proper notice
and have failed to exercise such right within the time or times required
under the terms and conditions of such right.
(s) Neither the Company nor any of its officers, directors or
affiliates has taken or will take, directly or indirectly, any action
designed or intended to stabilize or manipulate the price of any
security of the Company, or which caused or resulted in, or which might
in the future reasonably be expected to cause or result in,
stabilization or manipulation of the price of any security of the
Company.
(t) The Company has provided you with all financial statements
since August 27, 1993 to the date hereof that are available to the
officers of the Company, including financial statements for the months
of July and August of 1996.
<PAGE>
8
(u) The Company and its subsidiaries own or possess all
trademarks, trademark registrations, service marks, service mark
registrations, tradenames, copyrights, licenses, inventions, trade
secrets and rights described in the Prospectus as being owned by them or
any of them or necessary for the conduct of their respective businesses,
and the Company is not aware of any claim to the contrary or any
challenge by any other person to the rights of the Company and its
subsidiaries with respect to the foregoing. The Company's business as
now conducted and as proposed to be conducted does not and will not
infringe or conflict with in any material respect patents, trademarks,
service marks, trade names, copyrights, trade secrets, licenses or other
intellectual property or franchise right of any person. No claim has
been made against the Company alleging the infringement by the Company
of any patent, trademark, service mark, tradename, copyright, trade
secret, license in or other intellectual property right or franchise
right of any person.
(v) The Company and its subsidiaries have performed all material
obligations required to be performed by them under all contracts
required by Item 601(b)(10) of Regulation S-K under the Securities Act
to be filed as exhibits to the Registration Statement, and neither the
Company nor any of its subsidiaries nor any other party to such contract
is in default under or in breach of any such obligations. Neither the
Company nor any of its subsidiaries has received any notice of such
default or breach.
(w) The Company is not aware that (A) any executive, key employee
or significant group of employees of the Company or any subsidiary plans
to terminate employment with the Company or any such subsidiary or (B)
any such executive or key employee is subject to any noncompete,
nondisclosure, confidentiality, employment, consulting or similar
agreement that would be violated by the present or proposed business
activities of the Company and its subsidiaries. Neither the Company nor
any subsidiary has or expects to have any liability for any prohibited
transaction or funding deficiency or any complete or partial withdrawal
liability with respect to any pension, profit sharing or other plan
which is subject to the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), to which the Company or any subsidiary makes or
ever has made a contribution and in which any employee of the Company or
any subsidiary is or has ever been a participant. With respect to such
plans, the Company and each subsidiary are in compliance in all material
respects with all applicable provisions of ERISA.
(x) The Company has obtained the written agreement described in
Section 8(l) of this Agreement from each of its officers, directors and
holders of Common Stock listed on Schedule B hereto.
<PAGE>
9
(y) The Company and its subsidiaries have, and the Company and its
subsidiaries as of the Closing Date will have, good and marketable title
to all personal property owned or proposed to be owned by them which is
material to the business of the Company or of its subsidiaries, in each
case free and clear of all liens, encumbrances and defects except such
as are described in the Prospectus or such as would not have a material
adverse effect on the Company and its subsidiaries considered as a
whole; and any real property and buildings held under lease by the
Company and its subsidiaries are held by them under valid, subsisting
and enforceable leases (assuming the lessors under such leases have full
right, power and authority to perform their obligations under such
leases) with such exceptions as would not have a material adverse effect
on the Company and its subsidiaries considered as a whole, in each case
except as described in the Prospectus.
(z) The Company and its subsidiaries are insured by insurers of
recognized financial responsibility against such losses and risks and in
such amounts as are customary in the businesses in which they are
engaged; and neither the Company nor any subsidiary of the Company has
any reason to believe that it will not be able to renew its existing
insurance coverage as and when such coverage expires, to obtain similar
coverage from similar insurers as may be necessary to continue their
business or to obtain any reinsurance in connection with risk-sharing or
capitation arrangements which the Company may enter into as described in
the Prospectus at a cost that would not materially and adversely affect
the condition (financial or otherwise), properties, business,
management, prospects, net worth or results of operations of the Company
and its subsidiaries considered as a whole, except as described in the
Prospectus.
(aa) Other than as contemplated by this Agreement, there is no
broker, finder or other party that is entitled to receive from the
Company any brokerage or finder's fee or other fee or commission as a
result of any of the transactions contemplated by this Agreement.
(bb) The Company has complied with all applicable provisions of
Section 517.075 Florida Statutes (Chapter 92-198; Laws of Florida).
(cc) The Company and each of its subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurances
that (i) transactions are executed in accordance with management's
general or specific authorization; (ii) transactions are recorded as
necessary to permit preparation of financial statements in conformity
with generally accepted accounting principles and to maintain
accountability
<PAGE>
10
for assets; (iii) access to assets is permitted only in accordance with
management's general or specific authorization; and (iv) the recorded
accountability for assets is compared with existing assets at reasonable
intervals and appropriate action is taken with respect to any
differences.
(dd) To the Company's knowledge, neither the Company nor any of its
subsidiaries nor any employee or agent of the Company or any of its
subsidiaries has made any payment of funds of the Company or any of its
subsidiaries or received or retained any funds in violation of any law,
rule or regulation, which payment, receipt or retention of funds is of a
character required to be disclosed in the Prospectus.
(ee) Neither the Company nor any of its subsidiaries is an
"investment company" or an entity "controlled" by an "investment
company" as such terms are defined in the Investment Company Act of
1940, as amended (the "1940 Act"), and the rules and regulations
thereunder, and the Company and its subsidiaries intend in the future to
conduct their affairs in such a manner as to ensure that they will not
become an "investment company" or a company "controlled" by an
"investment company" within the meaning of the 1940 Act and such rules
and regulations.
(ff) There has been no storage, disposal, generation, manufacture,
refinement, transportation, handling or treatment of medical wastes or
hazardous substances by the Company or any of its subsidiaries (or, to
the knowledge of the Company, any of its predecessors in interest) at,
upon or from any of the property now or previously owned or leased by
the Company or any of its subsidiaries in violation of any applicable
law, ordinance, rule, regulation, order, judgment, decree or permit or
which would require remedial action under any applicable law, ordinance,
rule, regulation, order, judgment, decree or permit, except for any
violation or remedial action which would not have, or could not be
reasonably likely to have, singularly or in the aggregate with all such
violations and remedial actions, a material adverse effect on the
condition (financial or otherwise), properties, business, management,
prospects, net worth or results of operations of the Company and its
subsidiaries considered as a whole; there has been no material spill,
discharge, leak, emission, injection, escape, dumping or release of any
kind onto such property or of any medical wastes or hazardous substances
due to or caused by the Company or any of its subsidiaries or with
respect to which the Company or any of its subsidiaries had knowledge,
except for any such spill, discharge, leak, emission, injection, escapes,
dumpings and releases which would not have or would not be reasonably
likely to have, singularly or in the aggregate with all such spills,
discharges, leaks, emissions, injections, escapes, dumpings and
releases, such a material adverse effect; and the terms "hazardous
substances" and "medical wastes" shall have the meanings specified in
any applicable local, state, federal and foreign laws or regulations
with respect to environmental protection.
<PAGE>
11
(gg) Each certificate signed by any officer of the Company and
delivered to the Underwriters or counsel for the Underwriters shall be
deemed to be a representation and warranty by the Company as to the
matters covered thereby.
3. Purchase by, and Sale and Delivery to, Underwriters--Closing
------------------------------------------------------------
Date. The Company agrees to sell to the Underwriters the Firm Stock; and on
----
the basis of the representations, warranties, covenants and agreements herein
contained, but subject to the terms and conditions herein set forth, the
Underwriters agree, severally and not jointly, to purchase the Firm Stock
from the Company, the number of shares of Firm Stock to be purchased by each
Underwriter being set opposite its name in Schedule A, subject to adjustment
in accordance with Section 11 hereof.
The purchase price per share, net of commissions, to be paid by the
Underwriters to the Company will be $[____] per share (the "Purchase Price").
The Company will deliver the Firm Stock to the Representatives for
the respective accounts of the several Underwriters in the form of definitive
certificates, issued in such names and in such denominations as the
Representatives may direct by notice in writing to the Company given at or
prior to 12:00 Noon, New York Time, on the second full business day preceding
the Firm Closing Date (as defined below) or, if no such direction is
received, in the names of the respective Underwriters or in such other names
as Cowen may designate (solely for the purpose of administrative convenience)
and in such denominations as Cowen may determine, against payment of the
aggregate Purchase Price therefor by certified or official bank check or
checks in same day funds, payable to the order of the Company, all at the
offices of Shearman & Sterling, 599 Lexington Avenue, New York, New York
-
10022. The time and date of the delivery and closing shall be at 10:00 A.M.,
New York Time, on October [__], 1996, in accordance with Rule 15c6-1 of the
Exchange Act. The time and date of such payment and delivery are herein
referred to as the "Firm Closing Date". The Firm Closing Date and the
location of delivery of, and the form of payment for, the Firm Stock may be
varied by agreement between the Company and Cowen. The Firm Closing Date may
be postponed pursuant to the provisions of Section 12.
The Company shall make the certificates for the Stock available to
the Representatives for examination on behalf of the Underwriters not later
than 10:00 A.M., New York Time, on the business day preceding the Firm
Closing Date at the offices of Cowen & Company, Financial Square, New York,
New York 10005.
It is understood that either Representative, individually and not
as Representative of the several Underwriters, may (but shall not be
obligated to) make payment to the Company on behalf of any Underwriter or
Underwriters, for the Stock to be purchased by such Underwriter or
Underwriters. Any such payment by either Representative shall not
<PAGE>
12
relieve such Underwriter or Underwriters from any of its or their other
obligations hereunder.
The several Underwriters agree to make an initial public offering
of the Firm Stock at the initial public offering price as soon after the
effectiveness of the Registration Statement as in their judgment is
advisable. The Representatives shall promptly advise the Company of the
making of the initial public offering.
For the purpose of covering any over-allotments in connection with
the distribution and sale of the Firm Stock as contemplated by the
Prospectus, the Company hereby grants to the Underwriters an option to
purchase, severally and not jointly, up to the aggregate number of shares of
Optional Stock set forth opposite each Underwriter's name on Schedule A
hereto, for an aggregate of up to 300,000 shares. The price per share to be
paid for the Optional Stock shall be the Purchase Price. The option granted
hereby may be exercised as to all or any part of the Optional Stock at any
time, and from time to time, not more than thirty (30) days subsequent to the
effective date of this Agreement. No Optional Stock shall be sold and
delivered unless the Firm Stock previously has been, or simultaneously is,
sold and delivered. The right to purchase the Optional Stock or any portion
thereof may be surrendered and terminated at any time upon notice by the
Underwriters to the Company.
The option granted hereby may be exercised by the Underwriters by
giving written notice from Cowen to the Company setting forth the number of
shares of the Optional Stock to be purchased by them and the date and time
for delivery of and payment for the Optional Stock. Each date and time for
delivery of and payment for the Optional Stock (which may be the Firm Closing
Date, but not earlier) is herein called the "Option Closing Date" and shall
in no event be earlier than two (2) business days nor later than ten (10)
business days after written notice is given. (The Option Closing Date and
the Firm Closing Date are herein called the "Closing Dates".) All purchases
of Optional Stock from the Company shall be made on a pro rata basis.
Optional Stock shall be purchased for the account of each Underwriter in the
same proportion as the number of shares of Firm Stock set forth opposite such
Underwriter's name in Schedule A hereto bears to the total number of shares
of Firm Stock (subject to adjustment by the Underwriters to eliminate odd
lots). Upon exercise of the option by the Underwriters, the Company agrees
to sell to the Underwriters the number of shares of Optional Stock set forth
in the written notice of exercise and the Underwriters agree, severally and
not jointly and subject to the terms and conditions herein set forth, to
purchase the number of such shares determined as aforesaid.
The Company will deliver the Optional Stock to the Underwriters (in
the form of definitive certificates, issued in such names and in such
denominations as the Representatives may direct by notice in writing to the
Company given at or prior to 12:00 Noon, New York Time, on the second full
business day preceding the Option Closing Date
<PAGE>
13
or, if no such direction is received, in the names of the respective
Underwriters or in such other names as Cowen may designate (solely for the
purpose of administrative convenience) and in such denominations as Cowen may
determine), against payment of the aggregate Purchase Price therefor by
certified or official bank check or checks in Clearing House funds (next day
funds), payable to the order of the Company all at the offices of Shearman &
Sterling, 599 Lexington Avenue, New York, New York 10022. The Company shall
make the certificates for the Optional Stock available to the Underwriters
for examination not later than 10:00 A.M., New York Time, on the business day
preceding the Option Closing Date at the offices of Cowen & Company,
Financial Square, New York, New York 10005. The Option Closing Date and the
location of delivery of, and the form of payment for, the Option Stock may be
varied by agreement between the Company and Cowen. The Option Closing Date
may be postponed pursuant to the provisions of Section 12.
4. Covenants and Agreements of the Company. The Company
---------------------------------------
covenants and agrees with the several Underwriters that:
(a) The Company will (i) if the Company and the Representatives
have determined not to proceed pursuant to Rule 430A, use its best
efforts to cause the Registration Statement to become effective, (ii) if
the Company and the Representatives have determined to proceed pursuant
to Rule 430A, use its best efforts to comply with the provisions of and
make all requisite filings with the Commission pursuant to Rule 430A and
Rule 424 of the Rules and Regulations and (iii) if the Company and the
Representatives have determined to deliver Prospectuses pursuant to Rule
434 of the Rules and Regulations, to use its best efforts to comply with
all the applicable provisions thereof. The Company will advise the
Representatives promptly as to the time at which the Registration
Statement becomes effective, will advise the Representatives promptly of
the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or of the institution of any
proceedings for that purpose, and will use its best efforts to prevent
the issuance of any such stop order and to obtain as soon as possible
the lifting thereof, if issued. The Company will advise the
Representatives promptly of the receipt of any comments of the
Commission or any request by the Commission for any amendment of or
supplement to the Registration Statement or the Prospectus or for
additional information and will not at any time file any amendment to
the Registration Statement or supplement to the Prospectus which shall
not previously have been submitted to the Representatives a reasonable
time prior to the proposed filing thereof or to which the
Representatives shall reasonably object in writing or which is not in
compliance with the Securities Act and the Rules and Regulations.
(b) The Company will prepare and file with the Commission,
promptly upon the request of the Representatives, any amendments or
supplements to the Registration Statement or the Prospectus which in the
reasonable opinion of the
<PAGE>
14
Representatives may be necessary to enable the several Underwriters to
continue the distribution of the Stock and will use its best efforts to
cause the same to become effective as promptly as possible.
(c) If at any time after the effective date of the Registration
Statement when a prospectus relating to the Stock is required to be
delivered under the Securities Act any event relating to or affecting
the Company or any of its subsidiaries occurs as a result of which the
Prospectus or any other prospectus as then in effect would include an
untrue statement of a material fact, or omit to state any material fact
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or if it is
necessary at any time to amend the Prospectus to comply with the
Securities Act, the Company will promptly notify the Representatives
thereof and will prepare an amended or supplemented prospectus which
will correct such statement or omission; and in case any Underwriter is
required to deliver a prospectus relating to the Stock nine (9) months
or more after the effective date of the Registration Statement, the
Company upon the request of the Representatives and at the expense of
such Underwriter will prepare promptly such prospectus or prospectuses
as may be necessary to permit compliance with the requirements of
Section 10(a)(3) of the Securities Act.
(d) The Company will deliver to the Representatives, at or before
the Closing Date, signed copies of the Registration Statement, as
originally filed with the Commission, and all amendments thereto
including all financial statements and exhibits thereto, and will
deliver to the Representatives such number of copies of the Registration
Statement, including such financial statements but without exhibits, and
all amendments thereto, as the Representatives may reasonably request.
The Company will deliver or mail to or upon the order of the
Representatives, from time to time until the effective date of the
Registration Statement, as many copies of the Preeffective Prospectus as
the Representatives may reasonably request. The Company will deliver or
mail to or upon the order of the Representatives on the date of the
initial public offering, and thereafter from time to time during the
period when delivery of a prospectus relating to the Stock is required
under the Securities Act, as many copies of the Prospectus, in final
form or as thereafter amended or supplemented as the Representatives may
reasonably request; provided, however, that the expense of the
preparation and delivery of any prospectus required for use nine (9)
months or more after the effective date of the Registration Statement
shall be borne by the Underwriters required to deliver such prospectus.
(e) The Company will make generally available to its stockholders
as soon as practicable, but not later than fifteen (15) months after the
effective date of the Registration Statement, an earnings statement
which will be in reasonable detail (but which need not be audited) and
which will comply with Section 11(a) of the Securities
<PAGE>
15
Act, covering a period of at least twelve (12) months beginning after
the "effective date" (as defined in Rule 158 under the Securities Act)
of the Registration Statement.
(f) The Company will cooperate with the Representatives to enable
the Stock to be registered or qualified for offering and sale by the
Underwriters and by dealers under the securities laws of such
jurisdictions as the Representatives may designate and at the request of
the Representatives will make such applications and furnish such
consents to service of process or other documents as may be required of
it as the issuer of the Stock for that purpose; provided, however, that
the Company shall not be required to qualify to do business or to file a
general consent (other than that arising out of the offering or sale of
the Stock) to service of process in any such jurisdiction where it is
not now so subject. The Company will, from time to time, prepare and
file such statements and reports as are or may be required of it as the
issuer of the Stock to continue such qualifications in effect for so
long a period as the Representatives may reasonably request for the
distribution of the Stock. The Company will advise the Representatives
promptly after the Company becomes aware of the suspension of the
qualifications or registration of (or any such exception relating to)
the Common Stock of the Company for offering, sale or trading in any
jurisdiction or of any initiation or threat of any proceeding for any
such purpose, and in the event of the issuance of any orders suspending
such qualifications, registration or exception, the Company will, with
the cooperation of the Representatives, use its best efforts to obtain
the withdrawal thereof.
(g) The Company will furnish to its stockholders annual reports
containing financial statements certified by independent public
accountants and with quarterly summary financial information in
reasonable detail which may be unaudited. During the period of five (5)
years from the date hereof, the Company will deliver to the
Representatives and, upon request, to each of the other Underwriters,
(i) as soon as is practicable after the end of each fiscal year, copies
of each Annual Report of the Company filed on Form 10-K containing the
balance sheet of the Company as of the close of such fiscal year and
statements of income, stockholders' equity and cash flows for the year
then ended and the opinion thereon of the Company's independent public
accountants, (ii) as soon as they are available, copies of any other
reports or communications of the Company (financial or other) which the
Company shall publish or otherwise make available to any of its
stockholders as such, (iii) as soon as practicable after the filing
thereof, copies of each proxy statement, Quarterly Report on Form 10-Q,
Report on Form 8-K or any report filed by the Company with the
Commission, the NASD or any national securities exchange and (iv) from
time to time such other information concerning the Company as the
Representatives may reasonably request. So long as the Company has
active subsidiaries, such financial statements will be on a consolidated
basis to the extent the accounts of the Company and its subsidiaries are
consolidated in reports furnished to its stockholders generally.
<PAGE>
16
Separate financial statements shall be furnished for all subsidiaries
whose accounts are not consolidated but which at the time are
significant subsidiaries as defined in the Rules and Regulations.
(h) The Company will have quoted, subject to official notice of
issuance, on the Nasdaq National Market, the Stock to be issued and sold
by the Company.
(i) The Company will maintain a transfer agent and registrar for
its Common Stock.
(j) Prior to filing its quarterly statements on Form 10-Q, the
Company will have its independent auditors perform a limited quarterly
review of its quarterly numbers.
(k) Without the prior written consent of Cowen, the Company will
not offer, sell, assign, transfer, encumber, 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 the 180 days commencing on the date hereof, other than the
Company's sale of Common Stock hereunder and the Company's issuance of
Common Stock upon the exercise of warrants and stock options which are
presently outstanding and described in the Prospectus, the Company's
issuance of options under the Company's presently authorized stock
option and purchase plans described in the Prospectus and the Company's
issuance of Common Stock upon the exercise of any such options.
(l) The Company will apply the net proceeds from the sale of the
Stock as set forth in the description under "Use of Proceeds" in the
Prospectus, which description complies in all respects with the
requirements of Item 504 of Regulation S-K.
(m) The Company will supply the Representatives with copies of all
correspondence to and from, and all documents issued to and by, the
Commission in connection with the registration of the offer and sale of
the Stock under the Securities Act.
(n) Prior to the Closing Date, the Company will furnish to the
Representatives, as soon as they have been prepared, copies of any
unaudited interim consolidated financial statements of the Company and
its subsidiaries for any periods subsequent to the periods covered by
the financial statements appearing in the Registration Statement and the
Prospectus.
<PAGE>
17
(o) Prior to the Closing Date, the Company will issue no press
release or other communications directly or indirectly and hold no press
conference with respect to the Company or any of its subsidiaries, the
financial condition, results of operation, business, prospects, assets
or liabilities of any of them, or the offering of the Stock, without the
prior written consent of the Representatives. For a period of twelve
(12) months following the Closing Date, the Company will use its best
efforts to provide to the Representatives copies of each press release
or other public communications with respect to the financial condition,
results of operations, business, prospects, assets or liabilities of the
Company contemporaneously with the public issuance thereof.
5. Payment of Expenses. (a) The Company will pay (directly or
-------------------
by reimbursement) all costs, fees and expenses incurred in connection with
expenses incident to the performance of its obligations under this Agreement
and in connection with the transactions contemplated hereby, including but
not limited to (i) all expenses and taxes incident to the issuance and
delivery of the Stock to the Representatives; (ii) all expenses incident to
the registration of the Stock under the Securities Act; (iii) the costs of
preparing stock certificates (including printing and engraving costs) ;
(iv) all fees and expenses of the registrar and transfer agent of the Stock;
(v) all necessary issue, transfer and other stamp taxes in connection with
the issuance and sale of the Stock to the Underwriters; (vi) fees and
expenses of the Company's counsel and the Company's independent accountants;
(vii) all costs and expenses incurred in connection with the preparation,
printing, filing, shipping and distribution of the Registration Statement,
each Preeffective Prospectus and the Prospectus (including all exhibits and
financial statements) and all amendments and supplements provided for herein,
the Agreement Among Underwriters between the Representatives and the
Underwriters, the Master Selected Dealers' Agreement, the Underwriters'
Questionnaire and the Blue Sky memoranda and this Agreement; (viii) all
filing fees, attorneys' fees and expenses incurred by the Company or the
Underwriters in connection with exemptions from the qualifying or registering
(or obtaining qualification or registration of) all or any part of the Stock
for offer and sale and determination of its eligibility for investment under
the Blue Sky or other securities laws of such jurisdictions as the
Representatives may designate; (ix) all fees and expenses paid or incurred in
connection with filings made with the NASD; and (x) all other costs and
expenses incident to the performance of its obligations hereunder which are
not otherwise specifically provided for in this Section.
(b) In addition to its other obligations under Section 5(a)
hereof, the Company agrees that, as an interim measure during the pendency of
any claim, action, investigation, inquiry or other proceeding arising out of
or based upon (i) any statement or omission or any alleged statement or
omission or (ii) any breach or inaccuracy in its representations and
warranties, it will reimburse each Underwriter on a quarterly basis for all
reasonable legal or other expenses incurred in connection with investigating
or defending any such claim, action, investigation, inquiry or other
proceeding, notwithstanding the absence of
<PAGE>
18
a judicial determination as to the propriety and enforceability of the
Company's obligation to reimburse each Underwriter for such expenses and the
possibility that such payments might later be held to have been improper by a
court of competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, each Underwriter
shall promptly return it to the Company together with interest, compounded
daily, determined on the basis of the prime rate (or other commercial lending
rate for borrowers of the highest credit standing) announced from time to
time by [________], New York, New York (the "Prime Rate"). Any such interim
reimbursement payments which are not made to an Underwriter in a timely
manner as provided below shall bear interest at the Prime Rate from the due
date for such reimbursement. This expense reimbursement agreement will be in
addition to any other liability which the Company may otherwise have. The
request for reimbursement will be sent to the Company.
(c) In addition to its other obligations under Section 5(b)
hereof, each Underwriter severally agrees that, as an interim measure during
the pendency of any claim, action, investigation, inquiry or other proceeding
arising out of or based upon any statement or omission, or any alleged
statement or omission, described in Section 5(b) hereof which relates to
written information regarding any Underwriter furnished to the Company by or
on behalf of any Underwriter, directly or through you, specifically for use
in the Registration Statement, it will reimburse the Company (and, to the
extent applicable, each officer, director, or controlling person on a
quarterly basis for all reasonable legal or other expenses incurred in
connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the
Underwriters' obligation to reimburse the Company (and, to the extent
applicable, each officer, director, or controlling person for such expenses
and the possibility that such payments might later be held to have been
improper by a court of competent jurisdiction. To the extent that any such
interim reimbursement payment is so held to have been improper, the Company
(and, to the extent applicable, each officer, director, or controlling
person) shall promptly return it to the Underwriters together with interest,
compounded daily, determined on the basis of the Prime Rate. Any such
interim reimbursement payments which are not made to the Company within
thirty (30) days of a request for reimbursement shall bear interest at the
Prime Rate from the date of such request. This indemnity agreement will be
in addition to any liability which such Underwriter may otherwise have.
(d) It is agreed that any controversy arising out of the operation
of the interim reimbursement arrangements set forth in paragraphs (b) and/or
(c) of this Section 5, including the amounts of any requested reimbursement
payments and the method of determining such amounts, shall be settled by
arbitration conducted pursuant to the Code of Arbitration Procedure of the
NASD. Any such arbitration must be commenced by service of a written demand
for arbitration or written notice of intention to arbitrate, therein electing
the arbitration tribunal. In the event the party demanding arbitration does
not make such
<PAGE>
19
designation of an arbitration tribunal in such demand or notice, then the
party responding to said demand or notice is authorized to do so. Such an
arbitration would be limited to the operation of the interim reimbursement
provisions contained in paragraphs (b) and/or (c) of this Section 5 and would
not resolve the ultimate propriety or enforceability of the obligation to
reimburse expenses which is created by the provisions of this Section 5.
6. Indemnification and Contribution. (a) The Company agrees to
--------------------------------
indemnify and hold harmless each Underwriter and each person, if any, who
controls such Underwriter within the meaning of the Securities Act and the
respective officers, directors, partners, employees, representatives and
agents of each of such Underwriter (collectively, the "Underwriter
Indemnified Parties" and, each, an "Underwriter Indemnified Party"), against
any losses, claims, damages, liabilities or expenses (including the
reasonable cost of investigating and defending against any claims therefor
and counsel fees incurred in connection therewith), joint or several, which
may be based upon the Securities Act, or any other statute or at common law,
on the ground or alleged ground that any Preeffective Prospectus, the
Registration Statement or the Prospectus (or any Preeffective Prospectus, the
Registration Statement or the Prospectus as from time to time amended or
supplemented) includes or allegedly includes an untrue statement of a
material fact or omits to state a material fact required to be stated therein
or necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading, unless such
statement or omission was made in reliance upon, and in conformity with,
written information regarding any Underwriter furnished to the Company by any
Underwriter, directly or through the Representatives, specifically for use in
the preparation thereof. The Company will be entitled to participate at its
own expense in the defense or, if it so elects, to assume the defense of any
suit brought to enforce any such liability, but if the Company elects to
assume the defense, such defense shall be conducted by counsel chosen by it.
In the event the Company elects to assume the defense of any such suit and
retain such counsel, any Underwriter Indemnified Parties, defendant or
defendants in the suit, may retain additional counsel but shall bear the fees
and expenses of such counsel unless (i) the Company shall have specifically
authorized the retaining of such counsel or (ii) the parties to such suit
include any such Underwriter Indemnified Parties, and the Company and such
Underwriter Indemnified Parties have been advised by counsel to the
Underwriters that one or more legal defenses may be available to it or them
which may not be available to the Company, in which case the Company shall
not be entitled to assume the defense of such suit notwithstanding its
obligation to bear the fees and expenses of such counsel. This indemnity
agreement is not exclusive and will be in addition to any liability which the
Company might otherwise have and shall not limit any rights or remedies which
may otherwise be available at law or in equity to each Underwriter
Indemnified Party.
(b) Each Underwriter severally agrees to indemnify and hold
harmless the Company, each of its directors, each of its officers who have
signed the Registration Statement and each person, if any, who controls the
Company within the meaning of the
<PAGE>
20
Securities Act (collectively, the "Company Indemnified Parties") against any
losses, claims, damages, liabilities or expenses (including, unless the
Underwriter or Underwriters elect to assume the defense, the reasonable cost
of investigating and defending against any claims therefor and counsel fees
incurred in connection therewith), joint or several, which arise out of or
are based in whole or in part upon the Securities Act, the Exchange Act or
any other federal, state, local or foreign statute or regulation, or at
common law, on the ground or alleged ground that any Preeffective Prospectus,
the Registration Statement or the Prospectus (or any Preeffective Prospectus,
the Registration Statement or the Prospectus, as from time to time amended
and supplemented) includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary in order to
make the statements therein, in the light of the circumstances under which
they were made, not misleading, but only insofar as any such statement or
omission was made in reliance upon, and in conformity with, written
information regarding any Underwriter furnished to the Company by such
Underwriter, directly or through the Representatives, specifically for use in
the preparation thereof; provided, however, that in no case is such
Underwriter to be liable with respect to any claims made against any Company
Indemnified Party against whom the action is brought unless such Company
Indemnified Party shall have notified such Underwriter in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon the
Company Indemnified Party, but failure to notify such Underwriter of such
claim shall not relieve it from any liability which it may have to any
Company Indemnified Party otherwise than on account of its indemnity
agreement contained in this paragraph. Such Underwriter shall be entitled to
participate at its own expense in the defense, or, if it so elects, to assume
the defense of any suit brought to enforce any such liability, but, if such
Underwriter elects to assume the defense, such defense shall be conducted by
counsel chosen by it. In the event that any Underwriter elects to assume the
defense of any such suit and retain such counsel, the Company Indemnified
Parties and any other Underwriter or Underwriters or controlling person or
persons, defendant or defendants in the suit, shall bear the fees and
expenses of any additional counsel retained by them, respectively. The
Underwriter against whom indemnity may be sought shall not be liable to
indemnify any person for any settlement of any such claim effected without
such Underwriter's consent. This indemnity agreement is not exclusive and
will be in addition to any liability which such Underwriter might otherwise
have and shall not limit any rights or remedies which may otherwise be
available at law or in equity to any Company Indemnified Party.
(c) If the indemnification provided for in this Section 6 is
unavailable or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above in respect of any losses, claims, damages,
liabilities or expenses (or actions in respect thereof) referred to herein,
then each indemnifying party shall contribute to the amount paid or payable
by such indemnified party as a result of such losses, claims, damages,
liabilities or expenses (or actions in respect thereof) in such proportion as
is appropriate to reflect the relative benefits received by the Company on
the one hand and the Underwriters on the other
<PAGE>
21
from the offering of the Stock. If, however, the allocation provided by the
immediately preceding sentence is not permitted by applicable law, then each
indemnifying party shall contribute to such amount paid or payable by such
indemnified party in such proportion as is appropriate to reflect not only
such relative benefits but also the relative fault of the Company on the one
hand and the Underwriters on the other in connection with the statements or
omissions which resulted in such losses, claims, damages, liabilities or
expenses (or actions in respect thereof), as well as any other relevant
equitable considerations. The relative benefits received by the Company on
the one hand and the Underwriters on the other shall be deemed to be in the
same proportion as the total net proceeds from the offering (before deducting
expenses) received by the Company bear to the total underwriting discounts
and commissions received by the Underwriters, in each case as set forth in
the table on the cover page of the Prospectus. The relative fault shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to
state a material fact relates to information supplied by the Company or the
Underwriters and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company and the Underwriters agree that it would not be just and
equitable if contribution were determined by pro rata allocation (even if the
Underwriters were treated as one entity for such purpose) or by any other
method of allocation which does not take account of the equitable
considerations referred to above. The amount paid or payable by an
indemnified party as a result of the losses, claims, damages, liabilities or
expenses (or actions in respect thereof) referred to above shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating, defending, settling or compromising
any such claim. Notwithstanding the provisions of this subsection (c), no
Underwriter shall be required to contribute any amount in excess of the
amount by which the total price at which the shares of the Stock underwritten
by it and distributed to the public were offered to the public exceeds the
amount of any damages which such Underwriter has otherwise been required to
pay by reason of such untrue or alleged untrue statement or omission or
alleged omission. The Underwriters' obligations to contribute are several in
proportion to their respective underwriting obligations and not joint. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation.
7. Survival of Indemnities, Representations, Warranties, etc.
---------------------------------------------------------
The respective indemnities, covenants, agreements, representations,
warranties and other statements of the Company and the several Underwriters,
as set forth in this Agreement or made by them respectively, pursuant to this
Agreement, shall remain in full force and effect, regardless of any
investigation made by or on behalf of any Underwriter, the Company or any of
its officers or directors or any controlling person, and shall survive
delivery of and payment for the Stock.
<PAGE>
22
8. Conditions of Underwriters' Obligations. The respective
---------------------------------------
obligations of the several Underwriters hereunder shall be subject to the
accuracy, at and (except as otherwise stated herein) as of the date hereof
and at and as each Closing Date, of the representations and warranties made
herein by the Company, to compliance at and as of such Closing Date by the
Company with its covenants and agreements herein contained and other
provisions hereof to be satisfied at or prior to such Closing Date, and to
the following additional conditions:
(a) The Registration Statement shall have become effective and no
stop order suspending the effectiveness thereof shall have been issued
and no proceedings for that purpose shall have been initiated or, to the
knowledge of the Company or the Representatives, shall be threatened by
the Commission, and any request for additional information on the part
of the Commission (to be included in the Registration Statement or the
Prospectus or otherwise) shall have been complied with to the reasonable
satisfaction of the Representatives. Any filings of the Prospectus, or
any supplement thereto, required pursuant to Rule 424(b) or Rule 434 of
the Rules and Regulations, shall have been made in the manner and within
the time period required by Rule 424(b) and Rule 434 of the Rules and
Regulations, as the case may be.
(b) The Representatives shall have been satisfied that there shall
not have occurred any change, on a consolidated basis, prior to such
Closing Date in the condition (financial or otherwise), properties,
business, management, prospects, net worth or results of operations of
the Company and its subsidiaries considered as a whole, or any change in
the capital stock, short-term or long-term debt of the Company and its
subsidiaries considered as a whole, such that (i) the Registration
Statement or the Prospectus, or any amendment or supplement thereto,
contains an untrue statement of fact which, in the opinion of the
Representatives, is material, or omits to state a fact which, in the
opinion of the Representatives, is required to be stated therein or is
necessary to make the statements therein not misleading, or (ii) it is
unpracticable in the reasonable judgment of the Representatives to
proceed with the public offering or purchase the Stock as contemplated
hereby.
(c) The Representatives shall be satisfied that no legal or
governmental action, suit or proceeding affecting the Company which is
material and adverse to the Company or which affects or may affect the
Company's ability to perform its obligations under this Agreement shall
have been instituted or threatened and there shall have occurred no
material adverse development in any existing such action, suit or
proceeding.
<PAGE>
23
(d) At the time of execution of this Agreement, the
Representatives shall have received from Arthur Andersen LLP,
independent certified public accountants, a letter, dated the date
hereof, in form and substance satisfactory to the Underwriters.
(e) The Representatives shall have received from Arthur Andersen,
LLP, independent certified public accountants, a letter, dated the
Closing Date, to the effect that such accountants reaffirm, as of such
Closing Date, and as though made on the Closing Date, the statements
made in the letter furnished by such accountants pursuant to paragraph
(d) of this Section 8.
(f) The Representatives shall have received from O'Sullivan Graev
& Karabell, LLP, counsel for the Company, an opinion, dated the Closing
Date, to the effect set forth in Exhibit I hereto.
(g) The Representatives shall have received from Proskauer Rose
Goetz & Mendelsohn LLP, special regulatory counsel for the Company, an
opinion, dated the Closing Date, to the effect set forth in Exhibit II
hereto.
(h) The Representatives shall have received from King &
Spalding, special regulatory counsel for the Company, an opinion, dated
the Closing Date, to the effect set forth in Exhibit III hereto.
(i) The Representatives shall have received from Handal &
Morofsky, patent counsel for the Company, an opinion, dated the Closing
Date, to the effect set forth in Exhibit IV hereto.
(j) The Representatives shall have received from Shearman &
Sterling, counsel for the Underwriters, their opinion or opinions dated
the Closing Date with respect to the incorporation of the Company, the
validity of the Stock, the Registration Statement and the Prospectus and
such other related matters as it may reasonably request, and the Company
shall have furnished to such counsel such documents as they may request
for the purpose of enabling them to pass upon such matters.
(k) The Representatives shall have received a certificate, dated
the Closing Date, of the chief executive officer and the chief financial
or accounting officer of the Company to the effect that:
(i) No stop order suspending the effectiveness of the Registration
Statement has been issued, and, to the best of the knowledge of the
signers, no proceedings for that purpose have been instituted or are
pending or contemplated under the Securities Act.
<PAGE>
24
(ii) Neither any Preeffective Prospectus, as of its date, nor
the Registration Statement nor the Prospectus, nor any amendment or
supplement thereto, as of the time when the Registration Statement
became effective and at all times subsequent thereto up to the
delivery of such certificate, included any untrue statement of a
material fact or omitted to state any material fact required to be
stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not
misleading.
(iii) The representations and warranties of the Company in
this Agreement are true and correct at and as of the Closing Date,
and the Company has complied with all the agreements and performed
or satisfied all the conditions on its part to be performed or
satisfied at or prior to the Closing Date.
(iv) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, and except
as disclosed in or contemplated by the Prospectus, (i) there has
not been any material adverse change or a development involving a
material adverse change in the condition (financial or otherwise),
properties, business, management, prospects, net worth or results
of operations of the Company and its subsidiaries considered as a
whole; (ii) the business and operations conducted by the Company
and its subsidiaries have not sustained a loss by strike, fire,
flood, accident or other calamity (whether or not insured) of such
a character as to interfere materially with the conduct of the
business and operations of the Company and its subsidiaries
considered as a whole; (iii) no legal or governmental action, suit
or proceeding is pending or threatened against the Company or its
subsidiaries which is material to the Company or its subsidiaries,
whether or not arising from transactions in the ordinary course of
business, or which may materially and adversely affect the
transactions contemplated by this Agreement; (iv) since such dates
and except as so disclosed, the Company and its subsidiaries have
not incurred any material liability or obligation, direct,
contingent or indirect, made any change in their capital stock
(except pursuant to their stock plans), made any material change in
their short-term or funded debt or repurchased or otherwise
acquired any of the Company's or its subsidiaries capital stock;
and (v) the Company and its subsidiaries have not declared or paid
any dividend, or made any other distribution, upon their
outstanding capital stock payable to stockholders of record on a
date prior to the Closing Date.
(l) Cowen shall have received the written agreements of the
officers, directors and holders of Common Stock or holders of options or
warrants in respect of Common Stock listed in Schedule B that each will
not offer, sell, assign, transfer,
<PAGE>
25
encumber, 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 (including, without
limitation, Common Stock of the Company which may be deemed to be
beneficially owned by the Company in accordance with the Rules and
Regulations) during the 180 days commencing on the Effective Date (as
defined in the Registration Statement).
All opinions, certificates, letters and other documents will be in
compliance with the provisions hereunder only if they are satisfactory in
form and substance to the Representatives. The Company will furnish to the
Representatives conformed copies of such opinions, certificates, letters and
other documents as the Representatives shall reasonably request. If any of
the conditions hereinabove provided for in this Section shall not have been
satisfied when and as required by this Agreement, this Agreement may be
terminated by the Representatives by notifying the Company of such
termination in writing or by telegram at or prior to the Closing Date, but
Cowen shall be entitled to waive any of such conditions.
9. Effective Date. This Agreement shall become effective
--------------
immediately as to Sections 5, 6, 7, 9, 10, 11, 13, 14, 15, 16 and 17 and, as
to all other provisions, at 11:00 a.m. New York City time on the first full
business day following the effectiveness of the Registration Statement or at
such earlier time after the Registration Statement becomes effective as the
Representatives may determine on and by notice to the Company or by release
of any of the Stock for sale to the public. For the purposes of this Section
9, the Stock shall be deemed to have been so released upon the release for
publication of any newspaper advertisement relating to the Stock or upon the
release by you of telegrams (i) advising Underwriters that the shares of
Stock are released for public offering or (ii) offering the Stock for sale to
securities dealers, whichever may occur first.
10. Termination. This Agreement (except for the provisions of
-----------
Section 6) may be terminated by the Company at any time before it becomes
effective in accordance with Section 9 by notice to the Representatives and
may be terminated by the Representatives at any time before it becomes
effective in accordance with Section 9 by notice to the Company. In the
event of any termination of this Agreement under this or any other provision
of this Agreement, there shall be no liability of any party to this Agreement
to any other party, other than as provided in Sections 5, 6 and 11 and other
than as provided in Section 12 as to the liability of defaulting
Underwriters.
This Agreement may be terminated after it becomes effective by the
Representatives by notice to the Company (i) if at or prior to the Firm
Closing Date or the Option Closing Date trading in securities on any of the
New York Stock Exchange, American Stock Exchange or Nasdaq National Market
System shall have been suspended or minimum or maximum prices shall have been
established on any such exchange or market,
<PAGE>
26
or a banking moratorium shall have been declared by New York or United States
authorities; (ii) trading of any securities of the Company shall have been
suspended on any exchange or in any over-the-counter market; (iii) if at or
prior to the Firm Closing Date or the Option Closing Date there shall have
been (A) an outbreak or escalation of hostilities between the United States
and any foreign power or of any other insurrection or armed conflict
involving the United States or (B) any change in financial markets or any
calamity or crisis which, in the reasonable judgment of the Representatives,
makes it impractical or inadvisable to offer or sell the Firm Stock or
Optional Stock, as applicable, on the terms contemplated by the Prospectus;
(iv) if there shall have been any development or prospective development
involving particularly the business or properties or securities of the
Company or any of its subsidiaries or the transactions contemplated by this
Agreement, which, in the reasonable judgment of the Representatives, makes it
impracticable or inadvisable to offer or deliver the Firm Stock or the
Optional Stock, as applicable, on the terms contemplated by the Prospectus;
(v) if there shall be any litigation or proceeding, pending or threatened,
which, in the reasonable judgment of the Representatives, makes it
impracticable or inadvisable to offer or deliver the Firm Stock or Optional
Stock, as applicable, on the terms contemplated by the Prospectus; or (vi) if
there shall have occurred any of the events specified in the immediately
preceding clauses (i) - (v) together with any other such event that makes it,
in the reasonable judgment of the Representatives, impractical or inadvisable
to offer or deliver the Firm Stock or Optional Stock, as applicable, on the
terms contemplated by the Prospectus.
11. Reimbursement of Underwriters. Notwithstanding any other
-----------------------------
provisions hereof, if this Agreement shall not become effective by reason of
any election of the Company pursuant to the first paragraph of Section 10 or
shall be terminated by the Representatives under Section 8 or Section 10, the
Company will bear and pay the expenses specified in Section 5 hereof and, in
addition to its obligations pursuant to Section 6 hereof, the Company will
reimburse the reasonable out-of-pocket expenses of the several Underwriters
(including reasonable fees and disbursements of counsel for the Underwriters)
incurred in connection with this Agreement and the proposed purchase of the
Stock, and promptly upon demand the Company will pay such amounts to the
Representatives.
12. Substitution of Underwriters. If any Underwriter or
----------------------------
Underwriters shall default in its or their obligations to purchase shares of
Stock hereunder and the aggregate number of shares which such defaulting
Underwriter or Underwriters agreed but failed to purchase does not exceed ten
percent (10%) of the total number of shares underwritten, the other
Underwriters shall be obligated severally, in proportion to their respective
commitments hereunder, to purchase the shares which such defaulting
Underwriter or Underwriters agreed but failed to purchase. If any
Underwriter or Underwriters shall so default and the aggregate number of
shares with respect to which such default or defaults occur is more than ten
percent (10%) of the total number of shares underwritten and arrangements
satisfactory to the Representatives and the Company for the purchase of such
<PAGE>
27
shares by other persons are not made within forty-eight (48) hours after such
default, this Agreement shall terminate.
If the remaining Underwriters or substituted Underwriters are
required hereby or agree to take up all or part of the shares of Stock of a
defaulting Underwriter or Underwriters as provided in this Section 12,
(i) the Company shall have the right to postpone the Closing Date for a
period of not more than five (5) full business days in order that the Company
may effect whatever changes may thereby be made necessary in the Registration
Statement or the Prospectus, or in any other documents or arrangements, and
the Company agrees promptly to file any amendments to the Registration
Statement or supplements to the Prospectus which may thereby be made
necessary, and (ii) the respective numbers of shares to be purchased by the
remaining Underwriters or substituted Underwriters shall be taken as the
basis of their underwriting obligation for all purposes of this Agreement.
Nothing herein contained shall relieve any defaulting Underwriter of its
liability to the Company or the other Underwriters for damages occasioned by
its default hereunder. Any termination of this Agreement pursuant to this
Section 12 shall be without liability on the part of any non-defaulting
Underwriter or the Company, except for expenses to be paid or reimbursed
pursuant to Section 5 and except for the provisions of Section 6.
13. Notices. All communications hereunder shall be in writing
-------
and, if sent to the Underwriters shall be mailed, delivered or telegraphed
and confirmed to you, as their Representatives, c/o Cowen & Company at
Financial Square, New York, New York 10005 except that notices given to an
Underwriter pursuant to Section 6 hereof shall be sent to such Underwriter at
the address furnished by the Representatives or, if sent to the Company,
shall be mailed, delivered or telegraphed and confirmed to Advanced Health
Corporation, 560 White Plains Road, Tarrytown, New York 10591.
14. Successors. This Agreement shall inure to the benefit of and
----------
be binding upon the several Underwriters, the Company and their respective
successors and legal representatives. Nothing expressed or mentioned in
this Agreement is intended or shall be construed to give any person other
than the persons mentioned in the preceding sentence any legal or equitable
right, remedy or claim under or in respect of this Agreement, or any
provisions herein contained, this Agreement and all conditions and provisions
hereof being intended to be and being for the sole and exclusive benefit of
such persons and for the benefit of no other person; except that the
representations, warranties, covenants, agreements and indemnities of the
Company contained in this Agreement shall also be for the benefit of the
person or persons, if any, who control any Underwriter or Underwriters within
the meaning of Section 15 of the Securities Act or Section 20 of the Exchange
Act, and the indemnities of the several Underwriters shall also be for the
benefit of each director of the Company, each of its officers who has signed
the Registration Statement and the person or persons, if any, who control the
Company within the meaning of Section 15 of the Securities Act or Section 20
of the Exchange Act.
<PAGE>
28
15. Applicable Law. This Agreement shall be governed by and
--------------
construed in accordance with the laws of the state of New York.
16. Authority of the Representatives. In connection with this
--------------------------------
Agreement, Cowen will act for and on behalf of the several Underwriters, and
any action taken under this Agreement by Cowen, as Representative will be
binding on all the Underwriters.
17. Partial Unenforceability. The invalidity or unenforceability
------------------------
of any Section, paragraph or provision of this Agreement shall not affect the
validity or enforceability of any other Section, paragraph or provision
hereof. If any Section, paragraph or provision of this Agreement is for any
reason determined to be invalid or unenforceable, there shall be deemed to be
made such minor changes (and only such minor changes) as are necessary to
make it valid and enforceable.
18. General. This Agreement constitutes the entire agreement of
-------
the parties to this Agreement and supersedes all prior written or oral and
all contemporaneous oral agreements, understandings and negotiations with
respect to the subject matter hereof.
In this Agreement, the masculine, feminine and neuter genders and
the singular and the plural include one another. The section headings in
this Agreement are for the convenience of the parties only and will not
affect the construction or interpretation of this Agreement. This Agreement
may be amended or modified, and the observance of any term of this Agreement
may be waived, only by a writing signed by the Company and the
Representatives.
19. Counterparts. This Agreement may be signed in two (2) or more
------------
counterparts, each of which shall be an original, with the same effect as if
the signatures thereto and hereto were upon the same instrument.
<PAGE>
29
If the foregoing correctly sets forth our understanding, please
indicate your acceptance thereof in the space provided below for that
purpose, whereupon this letter and your acceptance shall constitute a binding
agreement between us.
Very truly yours,
ADVANCED HEALTH CORPORATION
By:
---------------------------------------------
Title:
Accepted and delivered in
New York, New York as of
the date first above written.
COWEN & COMPANY
VOLPE, WELTY & COMPANY
Acting on their own behalf
and as Representatives of the several
Underwriters referred to in the
foregoing Agreement.
By: Cowen & Company
By:
--------------------------
Title:
<PAGE>
SCHEDULE A
Number Number of
of Firm Optional
Shares Shares
to be to be
Purchased Purchased
-------- ---------
Name
----
Cowen & Company . . . . . . . . .
Volpe, Welty & Company . . . . .
--------- ---------
Total . . . . . . . . . . . . . .
========= =========
<PAGE>
SCHEDULE B
Number of
Shares Subject to
Stockholders "Lock-Up" Letters
------------ -----------------
<PAGE>
EXHIBIT I
[Letterhead of O'Sullivan Graev & Karabell, L.L.P.]
Cowen & Company
Volpe, Welty & Company
As Representatives of the several
Underwriters
c/o Cowen & Company
Financial Square
New York, New York 10005
Advanced Health Corporation
---------------------------
Ladies and Gentlemen:
We have acted as counsel to Advanced Health Corporation, a Delaware
corporation (the "Company"), in connection with the issuance and sale by the
Company of an aggregate of _____________ shares of the Company's Common
Stock, par value $.01 per share (the "Shares"), to the Underwriters named in
Schedule I of the Underwriting Agreement dated October [__], 1996 (the
"Underwriting Agreement") among the Company and Cowen & Company and Volpe,
Welty & Company, as representatives of the several Underwriters. This
opinion is being delivered to you pursuant to Section 8(f) of the
Underwriting Agreement. Capitalized terms used but not defined herein shall
have the meanings ascribed thereto in the Underwriting Agreement.
In this capacity, we have examined signed copies of the
registration statement on Form S-1 (Registration No. 333-06283) (the
"Registration Statement") filed by the Company under the Securities Act of
1933, as amended, (the "Securities Act") with the Securities and Exchange
Commission (the "Commission") on June 19, 1996, Amendment No. 1 to the
Registration Statement filed with the Commission on August 15, 1996 and
Amendment No. 2 to the Registration Statement filed with the Commission on
September 9, 1996. The Registration Statement, as amended at the time it
became effective, including the information deemed to be a part thereof at
the time of effectiveness pursuant to Rule 430A under the Securities Act, the
exhibits and the schedules thereto, is hereinafter referred to as the
"Registration Statement," and the final prospectus dated October [__], 1996,
in the form filed by the Company pursuant to Rule 424(b)(4) under the
Securities Act, is hereinafter referred to as the "Prospectus."
We have also examined the Underwriting Agreement and the originals,
or copies identified to our satisfaction, of such corporate records of the
Company, certificates of public officials, officers of the Company and other
persons, and such other documents,
<PAGE>
2
agreements and instruments as we have deemed necessary as a basis for the
opinions hereinafter expressed. In such examination, we have assumed the
genuineness of all signatures, the authenticity of all documents submitted to
us as originals and the conformity with the originals of all documents
submitted to us as copies. In rendering the opinions expressed below, we
have relied as to certain factual matters, to the extent we deem proper, upon
the representations and warranties contained in or made pursuant to the
Underwriting Agreement and upon certificates of officers of the Company and
certificates of public officials.
With respect to our opinion set forth in Paragraph (ii) below, we
have relied upon and assumed the accuracy of telephonic confirmation from the
Staff of the Division of Corporation Finance of the Commission that the
Registration Statement has become and remains effective under the Securities
Act.
Our opinions expressed below are limited to the law of the State of
New York, the General Corporation Law of the State of Delaware and the
Federal Law of the United States, and we do not express any opinion herein
concerning any other law.
Based upon and subject to the foregoing, we are of the opinion
that:
(i) Each of the Company has and its subsidiaries has been duly
organized and is validly existing and in good standing as a corporation under
the law of its respective jurisdictions of organization, with full corporate
power and authority to own or lease its properties and to conduct its
business as described in the Prospectus;
(ii) The Registration Statement has been declared effective under
the Securities Act and no stop order suspending the effectiveness of the
Registration Statement has been issued, and to the best of our knowledge, no
proceedings for that purpose have been instituted or are pending or
contemplated under the Securities Act;
(iii) The description of all contracts and other documents
referred to in the Registration Statement and the Prospectus, and the
summaries of, and other disclosures regarding, such contracts and other
documents included in the Registration Statement and the Prospectus fairly
present the information required to be disclosed with respect thereto; and,
to our knowledge, there are no other contracts or other documents of a
character required to be filed as an exhibit to the Registration Statement
or required to be described in the Registration Statement or the Prospectus
which are not filed or described as required;
(iv) The Underwriting Agreement has been duly authorized, executed
and delivered by the Company;
<PAGE>
3
(v) The authorized capital stock of the Company conforms in
all material respects as to legal matters to the description thereof
contained in the Prospectus;
(vi) The Shares have been duly authorized, and when delivered
to and paid for by the Underwriters in accordance with the terms of the
Underwriting Agreement, will be validly issued, fully paid and non-
assessable and the issuance of the Shares is not subject to any preemptive
or similar rights;
(vii) All registration rights attached to any of the
Company's shares have been duly waived with respect to the offering
contemplated by the Prospectus;
(viii) The issue and sale of the Shares and the performance
by the Company of its obligations under the Underwriting Agreement will not
result in any violation of the certificate of incorporation or by-laws of
the Company or the provisions of the General Corporation Law of the State
of Delaware or any applicable New York or Federal law or statute or any
order, rule or regulation of any New York or Federal court or governmental
agency or body having jurisdiction over the Company or any of its
properties (except that we render no opinion herein with respect to the
compliance of the indemnification or contribution provisions of the
Underwriting Agreement with the Federal Securities law;
(ix) To the best of our knowledge, the execution, delivery
and performance of the Underwriting Agreement and the consummation of the
transactions therein contemplated will not result in a breach or violation
of any of the terms or provisions of any material agreement or instrument
to which the Company or any of its subsidiaries is a party or by which it
or any of its properties is bound or result in the creation of a lien under
any of such agreement;
(x) No consent, approval, authorization, order, registration
or qualification of or with any New York or Federal court or governmental
agency or body is required for the sale and issuance of the Shares or the
performance of the Company of its obligations under the Underwriting
Agreement, except such consents, approvals, authorizations, registrations
or qualifications as have been obtained under the Securities Act, as may be
required under state securities or Blue Sky laws or under the rules of the
National Association of Securities Dealers, Inc. in connection with the
purchase and distribution of the Shares by the Underwriters.
(xi) The Company and its subsidiaries are in all material
respects in compliance with, and conduct their businesses in conformity
with, all applicable federal, state, local and foreign laws, rules and
regulations of any court or governmental agency or body; otherwise than as
set forth in the Registration Statement and the Prospectus, no prospective
change in any of such federal or state laws, rules or regulations has been
<PAGE>
4
adopted which, when made effective, would have a material adverse effect on
the operations of the Company and its subsidiaries;
(xii) To the best of our knowledge, the Company and its
subsidiaries have performed all material obligations required to be
performed by them under all contracts required by Item 601(b)(10) of
Regulation S-K under the Securities Act to be filed as exhibits to the
Registration Statement, and, to the best of our knowledge, neither the
Company nor any of its subsidiaries nor any other party to such contract is
in default under or in breach of any such obligations.
(xiii) To the best of our knowledge, except as set forth in
the Prospectus, there are no legal or governmental proceedings pending to
which the Company or any of its subsidiaries or affiliates is a party or of
which any property of the Company or any subsidiary or affiliate is
subject, which, if determined adversely to the Company or any such
subsidiary or affiliate, might individually or in the aggregate (i) prevent
or adversely affect the transactions contemplated by the Underwriting
Agreement, (ii) suspend the effectiveness of the Registration Statement,
(iii) prevent or suspend the use of the Prospectus in any jurisdiction or
(iv) result in a material adverse change in the condition (financial or
otherwise), properties, business, management, prospects, net worth or
results of operations of the Company and its subsidiaries considered as a
whole; and to the best of our knowledge, no such proceedings are threatened
or contemplated against the Company or any subsidiary or affiliate by
governmental authorities or others.
(xiv) Neither the Company nor its subsidiaries is an
"investment company" or an entity "controlled" by an "investment company"
as such terms are defined in the Investment Company Act of 1940, as
amended;
(xv) The statements in the Prospectus under the caption
"Description of Capital Stock" and "Shares Eligible for Future Sale",
insofar as such statements constitute a summary of documents referred to
therein or matters of law, are accurate summaries and fairly and correctly
present, in all material respects, the information called for with respect
to such documents and matters; and
(xvi) The Registration Statement and the Prospectus (except
for the financial statements, notes thereto and other financial information
and schedules included therein or omitted therefrom as to which we have not
been requested to express any opinion) appear on their face to have been
appropriately responsive in all material respects to the requirements of the
Securities Act.
We have not verified, and are not passing upon and do not assume
any responsibility for, the accuracy, completeness or fairness of the
statements contained in the Registration Statement or Prospectus, other than
those mentioned in subparagraph (xv)
<PAGE>
5
above. We have, however, generally reviewed and discussed such statements
with certain officers of the Company, its auditors and with your
representatives and their counsel. In the course of this review and
discussion, no facts have come to our attention that lead us to believe that
(i) the Registration Statement (except for the financial statements, notes
thereto and other financial information and schedules included therein or
omitted therefrom as to which we have not been requested to express any
opinion or statement of belief), at the time the Registration Statement
became effective, contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary
to make the statements therein not misleading, or (ii) the Prospectus (except
for the financial statements, notes thereto and other financial information
and schedules included therein or omitted therefrom as to which we have not
been requested to express any opinion or statement of belief), at the time
the Prospectus was issued or on the date hereof, contained any untrue
statement of a material fact or omitted to state a material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading.
<PAGE>
EXHIBIT II
[Letterhead of Proskauer Rose Goetz & Mendelsohn LLP]
Cowen & Company
Volpe, Welty & Company
As Representatives of the several
Underwriters
c/o Cowen & Company
Financial Square
New York, New York 10005
Advanced Health Corporation
---------------------------
Ladies and Gentlemen:
We have acted as special regulatory counsel to Advanced Health
Corporation, a Delaware corporation (the "Company"), in connection with the
issuance and sale by the Company of an aggregate of 2,300,000 shares
(including 300,000 shares pursuant to an over-allotment option granted to the
Underwriters) of the Company's Common Stock par value $.01 per share (the
"Shares"), to the Underwriters named in Schedule I of the Underwriting
Agreement dated August [__], 1996 (the "Underwriting Agreement") among the
Company and Cowen & Company and Volpe, Welty & Company, as representatives of
the several Underwriters. Capitalized terms used but not defined herein
shall have the meanings ascribed thereto in the Underwriting Agreement.
Our opinions expressed below are limited to the law of the State of
New York, the General Corporation Law of the State of Delaware and the
Federal Law of the United States, and we do not express any opinion herein
concerning any other law.
Based upon and subject to the foregoing, we are of the opinion
that:
(i) The statements set forth under the captions "Risk Factors -
Government Regulation" and "Business - Government Regulation" (other than
the statements in the last five paragraphs of such section, as to which we
have not been requested to express an opinion) in the Prospectus insofar as
such statements constitute a summary of documents referred to therein or
matters of law, are accurate summaries and fairly and correctly present, in
all material respects, the information called for with respect to such
documents and matters;
<PAGE>
2
(ii) To the best of our knowledge, the Company conducts its
business in conformity with all applicable local, New York State and federal
regulatory laws, rules and regulations, including, but not limited to, the
corporate practice of medicine laws in New York; and
(iii) To the extent that the Company enters into risk-sharing
or capitation arrangements in the manner described in the Prospectus, the
Company is or will be exempt from regulation under any and all local, state
and federal laws, rules and regulations pertaining to the regulation of
insurance companies.
<PAGE>
EXHIBIT III
[Letterhead of King & Spalding]
Cowen & Company
Volpe, Welty & Company
As Representatives of the several
Underwriters
c/o Cowen & Company
Financial Square
New York, New York 10005
Advanced Health Corporation
---------------------------
Ladies and Gentlemen:
We have acted as special regulatory counsel to Advanced Health
Corporation, a Delaware corporation (the "Company"), in connection with the
issuance and sale by the Company of an aggregate of 2,300,000 shares
(including 300,000 shares pursuant to an over-allotment option granted to the
Underwriters) of the Company's Common Stock par value $.01 per share (the
"Shares"), to the Underwriters named in Schedule I of the Underwriting
Agreement dated August [__], 1996 (the "Underwriting Agreement") among the
Company and Cowen & Company and Volpe, Welty & Company, as representatives of
the several Underwriters. Capitalized terms used but not defined herein
shall have the meanings ascribed thereto in the Underwriting Agreement.
Our opinion expressed below is limited to the Federal Law of the
United States, and we do not express any opinion herein concerning any other
law.
Based upon and subject to the foregoing, we are of the opinion
that:
(i) The statements set forth under the caption "Risk Factors - FDA
Regulation" and in the last five paragraphs under the caption "Business -
Government Regulation" in the Prospectus insofar as such statements
constitute a summary of documents referred to therein or matters of law,
are accurate summaries and fairly and correctly present, in all material
respects, the information called for with respect to such documents and
matters.
<PAGE>
EXHIBIT IV
[Letterhead of Handal & Morofsky ]
Cowen & Company
Volpe, Welty & Company
As Representatives of the several
Underwriters
c/o Cowen & Company
Financial Square
New York, New York 10005
Advanced Health Corporation
---------------------------
Ladies and Gentlemen:
We have acted as special patent counsel to Advanced Health
Corporation, a Delaware corporation (the "Company"), in connection with the
issuance and sale by the Company of an aggregate of 2,300,000 shares
(including 300,000 shares pursuant to an over-allotment option granted to the
Underwriters) of the Company's Common Stock par value $.01 per share (the
"Shares"), to the Underwriters named in Schedule I of the Underwriting
Agreement dated August [__], 1996 (the "Underwriting Agreement") among the
Company and Cowen & Company and Volpe, Welty & Company, as representatives of
the several Underwriters. Capitalized terms used but not defined herein
shall have the meanings ascribed thereto in the Underwriting Agreement.
Our opinions expressed below are limited to the law of the State of
New York, and the Federal Law of the United States, and we do not express any
opinion herein concerning any other law.
Based upon and subject to the foregoing, we are of the opinion
that:
(i) We have no knowledge of any fact which would preclude the
Company from having clear title to any patent applications referenced in
the Prospectus;
(ii) To the best of our knowledge, the Company does not lack and
will not be unable to obtain any rights or licenses to use any patent or
know-how necessary to conduct the business now conducted by the Company as
described in the Prospectus.
<PAGE>
2
(iii) To the best of our knowledge, the Company has not
received any notice of infringement or of conflict with rights or claims of
others with respect to any patents, trademarks, service marks, trade names,
copyrights or know-how which could result in any material adverse effect
upon the Company;
(iv) We are not aware of any patents of others which are
infringed by specific products or processes referred to in the Prospectus in
such manner as to materially and adversely affect the Company;
(v) To the best of our knowledge, there are no legal or
governmental proceedings pending relating to patent rights, trade secrets,
trademarks, service marks or other proprietary information or materials of
the Company, and to the best of our knowledge, no such proceedings are
threatened or contemplated by governmental authorities or others;
(vi) To the best of our knowledge, there are no material
contracts or other material documents relating to the Company's patents or
proprietary information other than those filed as an exhibit to the
Registration Statement, if any; and
(vii) The statements under the captions "Risk Factors -
Dependence on Proprietary Assets" and "Business - Proprietary Rights" in the
Prospectus, insofar as such statements constitute a summary of documents
referred to therein or matters of law, are accurate summaries and fairly and
correctly present, in all material respects, the information called for with
respect to such documents and matters.
EXHIBIT 2.1
AGREEMENT AND PLAN OF MERGER
----------------------------
AGREEMENT AND PLAN OF MERGER dated as of August 2, 1995 by and between MED-
E-SYSTEMS CORPORATION, a Delaware corporation (the "Company"), MES ACQUISITION
CORP., a Delaware corporation ("Merger Sub") and ADVANCED HEALTH CORPORATION
("AHC").
The Company was incorporated in the State of Delaware on August 27, 1993.
Its authorized capital stock consists of 5,000,000 shares of Common Stock,
$.0001 par value, and 2,000,000 shares of Preferred Stock, $.0001 par value.
As of the date hereof, the Company has issued and outstanding 2,024,066 shares
of Common Stock and 1,454,700 shares of Preferred Stock, 971,800 of which have
been designated Series A Preferred Stock, 282,900 of which have been designated
Series B Preferred Stock and 200,000 of which have been designated Series C
Preferred Stock, each of which shares was entitled to vote on the merger.
Merger Sub was incorporated in the State of Delaware on July 24, 1995. Its
authorized capital stock consists of 50,000 shares of Common Stock, $.01 par
value. As of the date hereof, Merger Sub has issued and outstanding 35,428
shares of Common Stock, each of which was entitled to vote on the merger.
The respective Boards of Directors of the Company and Merger Sub deem it
advisable and in the best interests of their corporations and the respective
shareholders of their corporations that Merger Sub be merged into the Company
pursuant to Section 251 of the General Corporation Law of the State of Delaware,
as provided herein. It is intended that this Agreement constitute a Plan of
Reorganization for purposes of Section 368 of the Internal Revenue Code.
It is, therefore, agreed as follows:
1. As soon as practicable after this Agreement and Plan of Merger (the
"Agreement") has been approved by the stockholders of each of the Company and
Merger Sub, a Certificate of Merger (the "Certificate") shall be certified,
signed and acknowledged in accordance with the laws of the State of Delaware.
The Certificate shall then be filed in the office of the Secretary of State of
Delaware. The term "Effective Date" as used herein shall mean the date on which
the Certificate is filed with the Secretary of State of Delaware.
2. On the Effective Date, Merger Sub shall be merged into the Company.
The Company shall be the surviving corporation, under its present name, and
shall continue to be governed by the laws of the State of Delaware. The separate
corporate existence of Merger Sub shall cease.
<PAGE>
3. The merger shall have the effects set forth in the General Corporation
Law of Delaware. Without limiting the generality of the foregoing, and subject
thereto, at the Effective Date, all the rights, privileges, immunities and
franchises of each of the Company and Merger Sub shall vest in the Company; and
all property, real, personal and mixed, and all debts, liability and duties, and
all other choses in action, and all and every other interest, of or belonging to
or due to Merger Sub shall be taken and deemed to be vested in the Company
without further act or deed.
4. The Certificate of Incorporation of the Company shall continue as the
Certificate of Incorporation of the surviving corporation but it shall be
amended and restated as set forth on Exhibit A hereto. The By-laws of the
Company in effect on the Effective Date shall continue as the By-laws of the
surviving corporation. The officers and directors of the Company in office on
the Effective Date shall continue to hold their respective positions.
5. Each share of Common Stock, Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock of the Company that is issued and
outstanding on the Effective Date shall (subject to the rights of dissenting
stockholders under Section 262 of the Delaware General Corporation Law), by
virtue of the merger and without any action on the part of the holder thereof,
be converted into and represent the right to receive 1.0 share of Common Stock,
Series A Preferred Stock, Series B Preferred Stock or Series C Preferred Stock,
as the case may be, of Advanced Health Corporation ("AHC"), a Delaware
corporation and the holder of all of the outstanding capital stock of Merger
Sub. Each option or warrant to purchase Common Stock of the Company shall, by
virtue of the merger and without any action on the part of the holder thereof,
be converted into and represent an option or warrant to purchase 0.01 shares of
Common Stock of the Company.
6. Each share of Merger Sub Common Stock that is issued and outstanding
on the Effective Date shall, by virtue of the merger and without any action on
the part of the holder thereof, be converted into and represent the right to
receive 1.0 share of Common Stock of the Company.
7. The shares of stock of AHC issued and outstanding immediately prior
to the Effective Date, all of which are held by the Company, will be cancelled
and retired on the Effective Date.
8. As soon as practicable after the Effective Date, each holder of a
certificate or certificates which prior thereto represented issued and
outstanding shares of Company Common Stock, Series A Preferred Stock, Series B
Preferred Stock or Series C Preferred Stock shall surrender such certificate or
certificates to the Secretary of the Company at the principal office of the
Company, and shall receive in exchange therefor a certificate representing the
number of shares of AHC Common Stock, Series A Preferred Stock, Series B
Preferred Stock or Series C Preferred Stock, as the case may be, into which such
shares shall have been converted by virtue of the merger. From and after the
Effective Date, the holder of a certificate which prior thereto represented
issued and outstanding shares of the Company Common Stock of Preferred
-2-
<PAGE>
Stock shall have no rights with respect to such shares except to surrender such
certificates in exchange for a certificate representing the number of shares of
AHC Common Stock or Preferred Stock into which such shares of the Company shall
have been converted by virtue of the merger or to perfect any rights of
appraisal which such holder may have under the law of the State of Delaware.
9. As soon as practicable after the Effective Date, each holder of a
certificate or certificates which prior thereto represented issued and
outstanding shares of Merger Sub Common Stock shall surrender such certificate
or certificates to the Secretary of the Company at the principal office of the
Company, and shall receive in exchange therefor a certificate representing the
number of shares of Company Common Stock into which such shares shall have been
converted by virtue of the merger. From and after the Effective Date, the holder
of a certificate which prior thereto represented issued and outstanding shares
of Merger Sub Common Stock shall have no rights with respect to such shares
except to surrender such certificates in exchange for a certificate representing
the number of shares of Company Common Stock into which such shares of Merger
Sub shall have been converted by virtue of the merger.
10. Each of the Company and Merger Sub agree to take all such action as
may be necessary or appropriate in order to effectuate the merger as promptly as
practicable, subject to the terms of this Agreement. If, at any time after the
Effective Date, any further action is necessary or desirable to carry out the
purposes of this Agreement and to vest the surviving corporation with full
right, title and possession to all assets, properties, rights, privileges,
powers and franchises of Merger Sub, the officers and directors of the surviving
corporation are fully authorized in the name of their corporation or otherwise
to take, and shall take, all such action.
11. This Agreement of Merger may be abandoned or terminated prior to the
filing thereof with the Secretary of State of Delaware by resolution duly
adopted by the respective Boards of Directors of the constituent corporations,
notwithstanding the approval thereof by the respective stockholders of the
constituent corporations.
-3-
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Agreement of Merger
as of the date first written above.
ATTEST: MED-E-SYSTEMS CORPORATION
/s/ Brian Benz By: /s/ Jonathan Edelson
- -------------- ---------------------
Brian Benz Jonathan Edelson, M.D.
Secretary Chief Executive Officer
ATTEST: MES ACQUISITION CORP.
/s/ Brian Benz By: /s/ Steven Hochberg
- -------------- --------------------
Brian Benz Steven Hochberg
Secretary President
ATTEST: ADVANCED HEALTH CORPORATION
/s/ Richard Kaplan By: /s/ Steven Hochberg
- ------------------- -----------------------
Richard Kaplan Steven Hochberg
Secretary President
-4-
EXHIBIT 2.2
_________________________________________________________________
AGREEMENT AND PLAN OF MERGER
DATED AS OF AUGUST 7, 1995
by and between
ADVANCED HEALTH CORPORATION
and
MAJEAN INC.
_________________________________________________________________
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE 1 THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 The Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Effective Time of the Merger . . . . . . . . . . . . . . . . . . . 1
1.3 Effect of Merger . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.4 Supplementary Action . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE 2 THE SURVIVING CORPORATION . . . . . . . . . . . . . . . . . . 2
2.1 Name . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.2 Certificate of Incorporation . . . . . . . . . . . . . . . . . . . 2
2.3 By-laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.4 Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.5 Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
ARTICLE 3 CONVERSION OF SHARES . . . . . . . . . . . . . . . . . . . . . 2
3.1 Conversion of Shares and Options . . . . . . . . . . . . . . . . . 2
3.2 No Further Transfers . . . . . . . . . . . . . . . . . . . . . . . 4
ARTICLE 4 CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
4.1 Time and Place . . . . . . . . . . . . . . . . . . . . . . . . . . 4
4.2 Deliveries at Closing . . . . . . . . . . . . . . . . . . . . . . . 4
ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF MAJEAN . . . . . . . . . . . 4
5.1 Capitalization. . . . . . . . . . . . . . . . . . . . . . . . . . . 4
5.2 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
5.3 Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
5.4 Absence of Undisclosed Liabilities. . . . . . . . . . . . . . . . . 5
5.5 Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
5.6 Management Services Agreement . . . . . . . . . . . . . . . . . . . 6
5.7 Corporate Power and Authority; No Violations . . . . . . . . . . . 6
ARTICLE 6 REPRESENTATIONS AND WARRANTIES OF THE COMPANY . . . . . . . . 6
6.1 Organization, Good Standing, Qualification and Corporate Power . . 6
6.2 Capitalization and Voting Rights . . . . . . . . . . . . . . . . . 7
6.3 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
6.4 Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
6.5 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . 7
6.6 Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
6.7 Governmental Consents . . . . . . . . . . . . . . . . . . . . . . . 8
6.8 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
6.9 Patents and Trademarks . . . . . . . . . . . . . . . . . . . . . . 8
6.10 Compliance with Other Instruments . . . . . . . . . . . . . . . . . 8
6.11 Title to Property and Assets . . . . . . . . . . . . . . . . . . . 9
6.12 Labor Agreements and Actions; Employee Benefits . . . . . . . . . . 9
6.13 Tax Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
ARTICLE 7 COVENANTS OF THE PARTIES . . . . . . . . . . . . . . . . . . 10
7.1 Best Efforts . . . . . . . . . . . . . . . . . . . . . . . . . . 10
7.2 Conduct of Business . . . . . . . . . . . . . . . . . . . . . . . 10
<PAGE>
ARTICLE 8 CONDITIONS TO COMPANY'S OBLIGATIONS . . . . . . . . . . . . 10
8.1 Representations, Warranties and Covenants of Majean . . . . . . . 10
8.2 No Prohibition . . . . . . . . . . . . . . . . . . . . . . . . . 11
8.3 Third Party Consents . . . . . . . . . . . . . . . . . . . . . . 11
8.4 Governmental Consents . . . . . . . . . . . . . . . . . . . . . . 11
8.5 Stockholders' Consent, Etc. . . . . . . . . . . . . . . . . . . . 11
ARTICLE 9 CONDITIONS TO MAJEAN'S OBLIGATIONS . . . . . . . . . . . . . 11
9.1 Representations, Warranties and Covenants of the Company . . . . 11
9.2 No Prohibition . . . . . . . . . . . . . . . . . . . . . . . . . 12
9.3 Governmental Consents . . . . . . . . . . . . . . . . . . . . . . 12
ARTICLE 10 TERMINATION PRIOR TO CLOSING . . . . . . . . . . . . . . . . 12
10.1 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
10.2 Effect of Termination . . . . . . . . . . . . . . . . . . . . . . 12
ARTICLE 11 MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . 13
11.1 Non-Survival of Representations and Warranties . . . . . . . . . 13
11.2 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . 13
11.3 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . 13
11.4 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
11.5 Modification and Waiver . . . . . . . . . . . . . . . . . . . . . 13
11.6 Broker's Fees . . . . . . . . . . . . . . . . . . . . . . . . . . 13
11.7 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
11.8 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
11.9 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . 15
11.10 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . 15
- ii -
<PAGE>
Attachments
-----------
EXHIBIT 1.2 - Form of Certificate of Merger
EXHIBIT 2.2 - Form of Amended and Restated Certificate of Incorporation
for Majean, Inc.
SCHEDULE 5.1 - Majean Stockholders
SCHEDULE 5.2 - Subsidiaries
SCHEDULE 5.5 - Contracts
SCHEDULE 6.12 - Employee Benefit Plans
- iii -
<PAGE>
LIST OF DEFINED TERMS
Term Place of Definition
- ---- -------------------
"Certificate of Merger" . . . . . . . . Section 1.2
"Closing Date" . . . . . . . . . . . . Section 4.1
"Closing" . . . . . . . . . . . . . . . Section 4.1
"Company" . . . . . . . . . . . . . . . Preamble
"Company's Certificate" . . . . . . . . Section 9.1
"Constituent Corporations" . . . . . . Preamble
"Corporation Law" . . . . . . . . . . . Preamble
"Effective Time" . . . . . . . . . . . Section 1.2
"Encumbrances" . . . . . . . . . . . . Section 5.2
"Government Entity" . . . . . . . . . . Section 5.7
"Indemnified Party" . . . . . . . . . . Section 7.5
"Litigation" . . . . . . . . . . . . . Section 5.7
"Material Adverse Effect" . . . . . . . Section 5.4
"Merger" . . . . . . . . . . . . . . . Preamble
"Permitted Encumbrances" . . . . . . . Section 5.5
"Permits" . . . . . . . . . . . . . . . Section 5.8
"Returns" . . . . . . . . . . . . . . . Section 5.11
"Subsidiaries" . . . . . . . . . . . . Section 5.2
"Subsidiary" . . . . . . . . . . . . . Section 5.2
"Surviving Corporation" . . . . . . . . Preamble
"Taxes" . . . . . . . . . . . . . . . . Section 5.11
- iv -
<PAGE>
AGREEMENT AND PLAN OF MERGER, dated as of August
7, 1995, between ADVANCED HEALTH CORPORATION, a
Delaware corporation (the "Company") and MAJEAN,
INC., a Delaware corporation ("Majean").
The Boards of Directors and stockholders of the Company and Majean
deem it advisable and in the best interests of each such corporation and their
respective stockholders to cause the merger of the Company with and into Majean
(the "Merger") upon the terms and conditions set forth herein and in accordance
with the General Corporation Law of the State of Delaware (the "Corporation
Law"). Majean and the Company being hereinafter sometimes referred to as the
"Constituent Corporations" and Majean, following the effectiveness of the
Merger, as the "Surviving Corporation".
THEREFORE, in consideration of the mutual representations, warranties,
covenants and conditions contained herein, and in order to set forth the terms
and conditions of the Merger and the mode of carrying the same into effect, the
parties hereby agree as follows:
ARTICLE 1
THE MERGER
----------
1.1 The Merger. Upon the terms and subject to the conditions hereof
----------
as promptly as practicable following the satisfaction or waiver of the
conditions set forth in Articles 8 and 9 hereof, the Company shall be merged
with and into Majean and the separate existence of the Company shall thereupon
cease, and Majean, as the Surviving Corporation, shall continue to exist under
and be governed by the Corporation Law.
1.2 Effective Time of the Merger. The Merger shall become effective
----------------------------
when a properly executed Certificate of Merger in substantially the form of
Exhibit 1.2 attached hereto (the "Certificate of Merger") is filed with the
- -----------
Secretary of State of Delaware as provided in the Corporation Law. When used in
this Agreement, the term "Effective Time" shall mean the date and time at which
the Certificate of Merger is so filed.
1.3 Effect of Merger. The Merger shall have the effects set forth
----------------
in the Corporation Law.
1.4 Supplementary Action. If, at any time after the Effective Time,
--------------------
the Surviving Corporation shall consider or be advised that any further
assignments or assurances are necessary
<PAGE>
or desirable to vest or to perfect or confirm of record in the Surviving
Corporation the title to any property or rights of either of the Constituent
Corporations, or otherwise to carry out the provisions of this Agreement, the
officers and directors of the Surviving Corporation are hereby authorized and
empowered on behalf of the respective Constituent Corporations, in the name of
and on behalf of the appropriate Constituent Corporation, to execute and deliver
any and all things necessary or proper to vest or to perfect or confirm title to
such property or rights in the Surviving Corporation, and otherwise to carry out
the purposes and provisions of this Agreement.
ARTICLE 2
THE SURVIVING CORPORATION
-------------------------
2.1 Name. The name of the Surviving Corporation will be Majean,
----
Inc.
2.2 Certificate of Incorporation. The Certificate of Incorporation
----------------------------
of the Surviving Corporation shall be the Certificate of Incorporation of
Majean, as amended and restated in the form of Exhibit 2.2.
-----------
2.3 By-laws. The By-laws of the Company immediately prior to the
-------
Effective Time shall be the By-laws of the Surviving Corporation.
2.4 Directors. The directors of the Company immediately prior to
---------
the Effective Time shall be the directors of the Surviving Corporation until
their respective successors are duly elected and qualified in the manner
provided in the Certificate of Incorporation and By-laws of the Surviving
Corporation, or until their earlier resignation or removal, or as otherwise
provided by law.
2.5 Officers. The officers of the Company immediately prior to the
--------
Effective Time shall be the officers of the Surviving Corporation until their
successors are duly elected and qualified in the manner provided in the
Certificate of Incorporation and By-laws of the Surviving Corporation, or until
their earlier resignation or removal, or as otherwise provided by law.
ARTICLE 3
CONVERSION OF SHARES AND OPTIONS
--------------------------------
3.1 Conversion of Shares and Options. As of the Effective Time, by
--------------------------------
virtue of the Merger and without any action on the part of any holder:
- 2 -
<PAGE>
(a) Each issued and outstanding share of the Company's Common
Stock, par value $.001 per share (the "Company Common Stock"), excluding any
such shares held in the Company's treasury, shall be converted into one fully
paid and nonassessable share of the Surviving Corporation's Common Stock, par
value $.001 per share. Each share of Company Common Stock held in the treasury
of the Company shall be cancelled and no payment shall be made in respect
thereof.
(b) Each issued and outstanding share of the Company's Series A
Preferred Stock, par value $.001 per share (the "Company Series A Preferred
Stock"), excluding any such shares held in the Company's treasury, shall be
converted into one fully paid and nonassessable share of the Surviving
Corporation's Series A Preferred Stock, par value $.001 per share. Each share
of Company Series A Preferred Stock held in the treasury of the Company shall be
cancelled and no payment shall be made in respect thereof.
(c) Each issued and outstanding share of the Company's Series B
Preferred Stock, par value $.001 per share (the "Company Series B Preferred
Stock"), excluding any such shares held in the Company's treasury, shall be
converted into one fully paid and nonassessable share of the Surviving
Corporation's Series B Preferred Stock, par value $.001 per share. Each share
of Company Series B Preferred Stock held in the treasury of the Company shall be
cancelled and no payment shall be made in respect thereof.
(d) Each issued and outstanding share of the Company's Series C
Preferred Stock, par value $.001 per share (the "Company Series C Preferred
Stock" and, collectively with the Company Common Stock, the Company Series A
Preferred Stock and the Company Series B Preferred Stock, the "Company
Securities"), excluding any such shares held in the Company's treasury, shall be
converted into one fully paid and nonassessable share of the Surviving
Corporation's Series C Preferred Stock, par value $.001 per share. Each share
of Company Series C Preferred Stock held in the treasury of the Company shall be
cancelled and no payment shall be made in respect thereof.
(e) Each issued and outstanding share of the Company's Series D
Preferred Stock, par value $.001 per share (the "Company Series D Preferred
Stock" and, collectively with the Company Common Stock, the Company Series A
Preferred Stock, the Company Series B Preferred Stock and the Company Series C
Preferred Stock, the "Company Securities"), excluding any such shares held in
the Company's treasury, shall be converted into one fully paid and nonassessable
share of the Surviving Corporation's Series D Preferred Stock, par value
$.001 per share. Each share of Company Series D Preferred Stock held in
- 3 -
<PAGE>
the treasury of the Company shall be cancelled and no payment shall be made in
respect thereof.
(f) Each outstanding option to acquire a share of common stock
of Majean shall be converted into an option to acquire one share of the
Surviving Corporation's common stock.
3.2 No Further Transfers. At the Effective Time, the stock transfer
--------------------
books of the Company shall be closed and no transfer of Company Securities shall
thereafter be made.
ARTICLE 4
CLOSING
-------
4.1 Time and Place. The closing of the transactions contemplated
--------------
hereby (the "Closing") shall take place at a place to be agreed upon by the
parties on August 7, 1995 or on such other date which is as soon thereafter as
reasonably practicable (the "Closing Date") at 10:00 a.m., which time shall also
be the Effective Time.
4.2 Deliveries at Closing. At the Closing:
---------------------
(a) There shall be delivered to Majean, the Company and their
respective stockholders, the certificates, opinions and other documents and
instruments provided to be delivered under Articles 8 and 9 hereof.
(b) Majean and the Company shall cause the Certificate of
Merger to be filed in accordance with the Corporation Law, and shall take any
and all other lawful actions, and do any other lawful things necessary to effect
the Merger and to enable the Merger to become effective.
(c) The stockholders of the Company shall deliver to the Majean
for cancellation all the certificates representing Company Common Stock (other
than shares held in the treasury of the Company).
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF MAJEAN
----------------------------------------
Majean represents and warrants to the Company as follows:
5.1 Capitalization. The authorized capital stock of Majean consists
--------------
of 912,315 shares of Common Stock ("Majean Common Stock"), par value $.001 per
share, of which 608,209 shares are outstanding; all of such shares of Majean
Common Stock are owned
- 4 -
<PAGE>
of record by the stockholders of Majean as set forth on Schedule 5.1. All of
------------
such shares are validly issued, fully paid and non-assessable. There are no
securities presently outstanding, and at the Effective Time there will not be
any outstanding securities which are, convertible into, exchangeable for, or
carrying the right to acquire, equity securities of Majean, or subscriptions,
warrants, options, calls, convertible securities, registration or other rights
or other arrangements or commitments obligating Majean to issue, transfer or
dispose of any of its equity securities or any ownership interest therein.
There are no voting trusts or other agreements or understandings to which Majean
is bound with respect to the voting of Majean Common Stock.
5.2 Subsidiaries. Except as set forth on Schedule 5.2, Majean does
------------ ------------
not own, directly or indirectly, any capital stock or any other equity interest
in any person. The entities so set forth on Schedule 5.2 are referred to herein
------------
individually as a "Subsidiary" and collectively as the "Subsidiaries." The
name, jurisdiction of incorporation, capitalization and ownership of each
Subsidiary is set forth on Schedule 5.2. Majean owns all of the issued and
------------
outstanding shares of capital stock of the Subsidiaries which they own, free and
clear of any imperfections to title, liens, claims, security interests, pledges,
charges or other encumbrances ("Encumbrances"), and all of such shares are
validly issued, fully paid and non-assessable. There are not now, and at the
Effective Time there will be no, outstanding securities convertible into,
exchangeable for, or carrying the right to acquire, equity securities of any of
the Subsidiaries, or subscriptions, warrants, options, calls, convertible
securities, registration or other rights or other arrangements or commitments
obligating any Subsidiary to issue, transfer or dispose of any of its equity
securities or any ownership interest therein or voting trusts or other
agreements or understandings to which Majean or any of the Subsidiaries is bound
with respect to the voting of the capital stock of any of the Subsidiaries.
5.3 Organization. Majean and each of the Subsidiaries is a
------------
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware with all requisite corporate power and authority to
own, lease and operate its properties and assets and to carry on its business as
it is now being conducted. True and complete copies of the certificate of
incorporation and by-laws of Majean and each of the Subsidiaries have been
delivered to the Company.
5.4 Absence of Undisclosed Liabilities. As of the date hereof,
-----------------------------------
neither Majean nor any Subsidiary has any material liability of any nature
(matured or unmatured, fixed or contingent, known or unknown) which has not been
previously disclosed in writing to the Company.
- 5 -
<PAGE>
5.5 Contracts. Except as set forth on Schedule 5.5, Majean and its
--------- ------------
Subsidiaries are not parties to or bound by the terms of any commitment,
arrangement, agreement or other instrument other than this Agreement and as
contemplated hereby.
5.6 Management Services Agreement. The Management Services
-----------------------------
Agreement dated 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.
is in full force and effect and has not been amended since the date of its
execution.
5.7 Corporate Power and Authority; No Violations. Majean has full
--------------------------------------------
corporate power and authority to execute, deliver and perform this Agreement and
to consummate the transactions contemplated hereby. The execution, delivery and
performance by Majean of this Agreement and the consummation by Majean of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of Majean, including due and valid authorization by
the Board of Directors and the stockholders of Majean and no other corporate
proceedings on the part of Majean are necessary to authorize this Agreement or
to consummate the transactions contemplated hereby.
ARTICLE 6
REPRESENTATIONS AND WARRANTIES OF
---------------------------------
THE COMPANY AND THE SUBSIDIARY
------------------------------
The Company and Med-E-Systems, Inc., a wholly-owned subsidiary of the
Company incorporated under the laws of the State of Delaware (the "Subsidiary),
hereby represent and warrant to Majean as follows:
6.1 Organization, Good Standing, Qualification and Corporate Power.
--------------------------------------------------------------
(a) The Company and the Subsidiary are corporations duly organized,
validly existing and in good standing under the laws of the State of Delaware
and have all requisite corporate power and authority to carry on their business
as now conducted and as proposed to be conducted. The Company and the
Subsidiary are duly qualified to transact business, and are in good standing in
each jurisdiction in which the failure so to qualify would have a material
adverse effect on their business or properties. True and correct copies of the
Certificate of Incorporation and Bylaws of the Company and the Subsidiary have
been provided to Majean.
(b) The Company has all requisite legal and corporate power to
execute and deliver this Agreement and to carry out and perform its obligations
under the terms of this Agreement.
- 6 -
<PAGE>
6.2 Capitalization and Voting Rights. The authorized capital of the
--------------------------------
Company consists, or will consist prior to the Closing, of:
(i) Preferred Stock. 3,000,000 shares of Preferred Stock, par
---------------
value $.01 per share (the "Preferred Stock"), of which (w) 971,800 shares have
been designated Series A Preferred Stock (the "Series A Preferred Stock") and
are issued and outstanding as of the date hereof, (x) 282,900 shares have been
designated Series B Preferred Stock (the "Series B Preferred Stock") and are
issued and outstanding as of the date hereof, (y) 200,000 shares have been
designated Series C Preferred Stock (the "Series C Preferred Stock") and are
issued and outstanding as of the date hereof and (z) 666,360 shares have been
designated Series D Preferred Stock (the "Series D Preferred Stock") and are
issued and outstanding as of the date hereof. The rights, privileges and
preferences of the Series A Preferred Stock, the Series B Preferred Stock,
Series C Preferred Stock and the Series D Preferred Stock are as stated in the
Company's Certificate of Incorporation.
(ii) Common Stock. 10,000,000 shares of Common Stock, par
------------
value $.01 per share (the "Common Stock"), of which 2,171,401 shares are issued
and outstanding as of the date hereof.
6.3 Subsidiaries. The Company does not presently own or control,
------------
directly or indirectly, any interest in any other corporation, association, or
other business entity, except for the Subsidiary.
6.4 Authorization. This Agreement has been duly authorized,
-------------
executed and delivered by the Company and constitutes the legal, valid and
binding obligation of the Company, enforceable in accordance with its terms.
6.5 Financial Statements. The Company has delivered to Majean (i)
--------------------
its consolidated audited balance sheet and an audited income statement as of
December 31, 1994 (the "Audited Financial Statements") and (ii) its consolidated
unaudited balance sheet and an unaudited income statement at May 31, 1995 (the
"Unaudited Financial Statements" and, together with the Audited Financial
Statements, the "Financial Statements"). The Financial Statements are complete
and correct in all material respects and have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis
throughout the periods indicated, except that the Unaudited Financial Statements
do not contain footnotes. The Financial Statements fairly present the financial
condition and results of operations of the Company as of the dates and during
the periods indicated therein, subject to normal year-end audit adjustments
which are neither individually nor in the aggregate expected to be material.
- 7 -
<PAGE>
6.6 Changes. Since December 31, 1994, there has
-------
been no material adverse change in the business, operations, property, assets or
condition (financial or otherwise) of the Company.
6.7 Governmental Consents. No consent, approval, order, or
---------------------
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state, local or provincial governmental authority on
the part of the Company is required in connection with the consummation of the
transactions contemplated by this Agreement.
6.8 Litigation. There is no action, suit, proceeding, or
----------
investigation pending or to the Company's knowledge currently threatened against
the Company. The Company is not a party or subject to the provisions of any
order, writ, injunction, judgment, or decree of any court or government agency
or instrumentality. There is no action, suit, proceeding or investigation by
the Company currently pending or which the Company intends to initiate.
6.9 Patents and Trademarks. The Company has sufficient title and
----------------------
ownership of all patents, trademarks, service marks, trade names, copyrights,
trade secrets, information, proprietary rights, and processes necessary for its
business as now conducted without any conflict with or infringement of the
rights of others. The Company has not received any communications or claims
alleging that the Company has violated or, by conducting its business as
proposed, would violate, any of the patents, trademarks, service marks, trade
names, copyrights, or trade secrets or other proprietary rights of any other
person or entity.
6.10 Compliance with Other Instruments. The Company is not in
---------------------------------
violation or default of any provisions of its Certificate or Bylaws or of any
instrument, judgment, order, writ, decree, or contract to which it is a party or
by which it is bound or, to its knowledge, of any provision of federal or state
statute, rule or regulation, license, or permit applicable to the Company, the
violation or default of which would have a material adverse effect on the
Company. The execution, delivery, and performance of this Agreement and the
consummation of the transactions contemplated hereby will not result in any such
violation or be in conflict with or constitute, with or without the passage of
time and giving of notice, either a default under any such provision,
instrument, judgment, order, writ, decree, or contract or an event which results
in the creation of any lien, charge, or encumbrance upon any assets of the
Company. The Company does not have any knowledge of any termination or material
breach or anticipated termination or material breach by the other parties to any
material contract or commitment to which it is a party or to which any of its
assets is subject.
- 8 -
<PAGE>
6.11 Title to Property and Assets. The Company has good and marketable
----------------------------
title to its property and assets free and clear of all mortgages, liens, loans,
and encumbrances, except such encumbrances and liens which arise in the ordinary
course of business and do not materially impair the Company's ownership or use
of such property or assets. With respect to the property and assets it leases,
the Company is in compliance with such leases and, to its knowledge, holds a
valid leasehold interest free of any liens, claims, or encumbrances. All of the
Company's properties and assets are, in all material respects, in good operating
and usable condition, subject to normal wear and tear.
6.12 Labor Agreements and Actions; Employee Benefits. The Company is not
-----------------------------------------------
bound by or subject to (and none of its assets or properties is bound by or
subject to) any written or oral, express or implied, contract, commitment, or
arrangement with any labor union, and no labor union has requested or, to the
knowledge of the Company, has sought to represent any of the employees,
representatives, or agents of the Company. There is no strike or other labor
dispute involving the Company pending, or, to the knowledge of the Company,
threatened, which could have a material adverse effect on the assets,
properties, financial condition, operating results, or business of the Company
(as such business is presently conducted and as it is proposed to be conducted),
nor is the Company aware of any labor organization activity involving its
employees. Except as listed on Schedule 6.12, the Company does not have any
-------------
employee benefit plans presently in force with respect to profit-sharing,
pensions, stock options or other stock benefits.
6.13 Tax Matters. The Company (i) has timely filed all tax returns that
-----------
are required to have been filed by it with all appropriate governmental agencies
(and all such returns are true and correct and fairly reflect its operations for
tax purposes); and (ii) has timely paid all taxes owed or assessments by it
(other than taxes the validity of which are being contested in good faith by
appropriate proceedings). The assessment of any additional taxes for periods
for which returns have been filed is not expected to exceed the recorded
liability therefor and, to the Company's knowledge, there are no material
unresolved questions or claims concerning the Company's tax liability. The
Company's tax returns have not been reviewed or audited by any taxing authority.
There is no pending dispute with any taxing authority relating to any of said
returns which, if determined adversely to the Company, would result in the
assertion by any taxing authority of any valid deficiency in a material amount
for taxes.
- 9 -
<PAGE>
ARTICLE 7
COVENANTS OF THE PARTIES
------------------------
7.1 Best Efforts. Subject to the terms and conditions herein
------------
provided, each of the parties hereto agrees to use its commercially reasonable
efforts to take, or cause to be taken, all action, and to do, or cause to be
done, all things necessary, proper or advisable under applicable laws and
regulations or otherwise to consummate and effect the transactions contemplated
by this Agreement on or before December 31, 1995.
7.2 Conduct of Business. Except as required by law or as the
-------------------
Company may otherwise consent to in writing, from the date hereof and prior to
the Effective Time, Majean will, and will cause each of the Subsidiaries to:
(i) operate its business only in the ordinary course
consistent with past practice;
(ii) use commercially reasonable efforts to preserve intact
its business organization;
(iii) use commercially reasonable efforts to maintain its
properties, machinery and equipment in sufficient operating condition and repair
to enable the Company to operate its business in all material respects in the
manner in which such business is currently operated; and
(iv) use commercially reasonable efforts to keep available
the services of their present officers, employees and agents (as a group).
ARTICLE 8
CONDITIONS TO COMPANY'S OBLIGATIONS
-----------------------------------
The obligations of the Company to consummate the Merger shall be
subject to the satisfaction (or waiver) on or prior to the Closing Date of all
of the following conditions:
8.1 Representations, Warranties and Covenants of Majean.
---------------------------------------------------
(a) Majean shall have performed and complied in all material
respects with its agreements and covenants contained herein to be performed on
or prior to the Closing Date.
(b) The representations and warranties of Majean contained
herein shall be true and correct in all material respects as of the Closing
Date.
- 10 -
<PAGE>
8.2 No Prohibition. No order, decree or injunction of any court or
--------------
government authority shall be in effect which prohibits the consummation of the
transactions contemplated hereby.
8.3 Third Party Consents. Majean shall have received all consents,
--------------------
authorizations and approvals from non-governmental third parties, in form
reasonably acceptable to the Company, which are necessary in order to enable
(i) Majean to consummate the transactions contemplated hereby and (ii) enable
Majean and the Subsidiaries to conduct their businesses after the Effective Time
on the same basis as conducted prior to the date hereof.
8.4 Governmental Consents. All consents, approvals, authorizations,
---------------------
exemptions and waivers from Government Entities that shall be required in order
to enable (i) Majean to consummate the transactions contemplated hereby (except
for such consents, approvals, authorizations, exemptions and waivers, the
absence of which would not prohibit consummation of such transactions or render
such consummation illegal) and (ii) Majean and the Subsidiaries to conduct their
businesses after the Effective Time on the same basis as conducted prior to the
date hereof shall have been obtained.
8.5 Stockholders' Consent, Etc. All of the stockholders of Majean
---------------------------
shall have consented in writing to the Merger and shall have surrendered the
certificates representing all of their shares.
ARTICLE 9
CONDITIONS TO MAJEAN'S OBLIGATIONS
----------------------------------
The obligations of Majean to consummate the Merger shall be subject to the
satisfaction (or waiver) on or prior to the Closing Date of all of the following
conditions:
9.1 Representations, Warranties and Covenants of the Company.
--------------------------------------------------------
(a) The Company shall have performed and complied in all
material respects with its agreements and covenants contained herein to be
performed on or prior to the Closing Date.
(b) The representations and warranties of the Company contained
herein shall be true and correct in all material respects as of the date of this
Agreement.
(c) Majean and the stockholders of Majean shall have received
certificates of the Company, dated as of the Closing Date and signed by two
officers of the Company,
- 11 -
<PAGE>
certifying as to the fulfillment of the conditions set forth in this Section 9.1
(the "Company's Certificate").
9.2 No Prohibition. No order, decree or injunction of any court or
--------------
government authority shall be in effect which prohibits the consummation of the
transactions contemplated hereby.
9.3 Governmental Consents. All consents, approvals, authorizations,
---------------------
exemptions and waivers from Government Entities that shall be required in order
to enable the Company to consummate the transactions contemplated hereby shall
have been obtained (except for such consents, approvals, authorizations,
exemptions and waivers, the absence of which would not prohibit consummation of
such transactions or render such consummation illegal).
ARTICLE 10
TERMINATION PRIOR TO CLOSING
----------------------------
10.1 Termination. This Agreement may be terminated at any time prior
-----------
to the Closing:
(a) By the mutual written consent of the Company and Majean; or
(b) By either the Company or Majean in writing, without
liability to the terminating party on account of such termination, if the
Closing shall not have occurred on or before December 31, 1995; or
(c) By either the Company or Majean if (i) the conditions to
such party's obligations shall have become impossible to satisfy on or before
December 31, 1995 (after giving effect to any potential actions the non-
terminating party may propose to take to cure such failure of condition after
reasonable notice from the party proposing to terminate this Agreement),
provided that no party shall be entitled to terminate this Agreement pursuant to
this clause (c) if the reason for such impossibility is due to a breach by the
party proposing to terminate this Agreement or (ii) any permanent injunction or
other order of a Government Entity preventing the consummation of the Merger
shall have become final and non-appealable.
10.2 Effect of Termination. Termination of this Agreement pursuant
---------------------
to this Article 10 shall terminate all obligations of the parties hereunder,
except for the obligations under Sections 11.6, 11.7 and 11.9, provided,
however, that nothing in this Section 10.2 shall relieve or limit the liability
or obligations hereunder of any party (the "Defaulting Party") to the other
party or parties on account of a willful and
- 12 -
<PAGE>
intentional breach of a covenant or agreement contained herein, or any
fraudulent representation or warranty contained herein by the Defaulting Party.
In the case of such a willful and intentional breach or fraud, in addition to
any damages for which the Defaulting Party may be liable, the Defaulting Party
shall reimburse the other party or parties for any expenses incurred by such
party or parties in order to enforce its or their rights under this Agreement
(including reasonable attorney's fees and expenses).
ARTICLE 11
MISCELLANEOUS
-------------
11.1 Non-Survival of Representations and Warranties. None of the
----------------------------------------------
representations and warranties in this Agreement or any certificate delivered
pursuant to this Agreement shall survive the Effective Time.
11.2 Entire Agreement. This Agreement (including the Schedules and
----------------
Exhibits hereto) constitutes the sole understanding of the parties with respect
to the subject matter hereof. Matters disclosed in the Schedules pursuant to
any Section of this Agreement shall be deemed to be disclosed with respect to
all Sections of this Agreement.
11.3 Successors and Assigns. The terms and conditions of this
----------------------
Agreement shall inure to the benefit of and be binding upon the respective
successors and assigns of the parties hereto; provided, however, that this
-------- -------
Agreement may not be assigned by any party without the prior written consent of
the other parties, except that the Company may assign this Agreement to any of
its affiliates.
11.4 Headings. The headings of the Articles, Sections and paragraphs
--------
of this Agreement are inserted for convenience only and shall not be deemed to
constitute part of this Agreement or to affect the construction hereof.
11.5 Modification and Waiver. No amendment, modification or
-----------------------
alteration of the terms or provisions of this Agreement shall be binding unless
the same shall be in writing and duly executed by the parties hereto, except
that any of the terms or provisions of this Agreement may be waived in writing
at any time by the party which is entitled to the benefits of such waived terms
or provisions. No waiver of any of the provisions of this Agreement shall be
deemed to or shall constitute a waiver of any other provision hereof (whether or
not similar). No delay on the part of any party in exercising any right, power
or privilege hereunder shall operate as a waiver thereof.
11.6 Broker's Fees. Each of the parties hereto (i) represents and
-------------
warrants that it has not taken and will not
- 13 -
<PAGE>
take any action that would cause the other party hereto to have any obligation
or liability to any person for a finder's or broker's fee, and (ii) agrees to
indemnify the other party hereto for breach of the foregoing representation and
warranty, whether or not the Closing occurs.
11.7 Expenses. Except as otherwise provided herein, the Company on
--------
the one hand and Majean on the other hand shall each pay all costs and expenses
incurred by it or on its behalf in connection with this Agreement and the
transactions contemplated hereby including, without limiting the generality of
the foregoing, fees and expenses of its own financial consultants, accountants
and counsel.
11.8 Notices. Any notice, request, instruction or other document to
-------
be given hereunder by any party hereto to any other party shall be in writing
and shall be given (and will be deemed to have been duly given upon receipt) by
delivery in person, by electronic facsimile transmission, cable, telegram, telex
or other standard forms of written telecommunications, by overnight courier or
by registered or certified mail, postage prepaid,
if to the Company to:
Advanced Health Corporation
560 White Plains Road, Second Floor
Tarrytown, New York 10501
Attention: Steven Hochberg
Telecopy: (914) 332-1186
with a copy to:
O'Sullivan Graev & Karabell
30 Rockefeller Plaza
New York, New York 10112
Attention: John J Suydam, Esq.
Telecopy: (212) 408-2462
if to Majean to:
Majean, Inc.
Sexter & Warmflash
61 Broadway
New York, New York 10006
Attention: David Warmflash, Esq.
Telecopy: (212) 383-5310
with a copy to:
Sexter & Warmflash
61 Broadway
New York, New York 10006
Attention: David Warmflash, Esq.
Telecopy: (212) 383-5310
- 14 -
<PAGE>
11.9 Governing Law. This Agreement shall be construed in accordance
-------------
with and governed by the laws of the State of New York.
11.10 Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall for all purposes be deemed to be an original
and all of which shall constitute the same instrument.
* * *
- 15 -
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed on its behalf as of the date first above written.
ADVANCED HEALTH CORPORATION
BY:
---------------------------
Steven Hochberg
President
MAJEAN, INC.
BY:
---------------------------
Name:
Title:
- 16 -
<PAGE>
EXHIBIT 1.2
-----------
CERTIFICATE OF MERGER
OF
ADVANCED HEALTH CORPORATION
INTO
MAJEAN, INC.
- -----------------------------------------------------------------
The undersigned corporation does hereby certify:
FIRST: The name and state of incorporation of each of the constituent
-----
corporations of the merger are as follows:
NAME STATE OF INCORPORATION
- ---- ----------------------
Advanced Health Corporation Delaware
Majean, Inc. Delaware
SECOND: The Agreement and Plan of Merger between the parties to the merger
------
has been approved, adopted, certified, executed and acknowledged by each of the
constituent corporations in accordance with the requirements of Section 251 of
the General Corporation Law of the State of Delaware.
THIRD: The name of the surviving corporation of the merger is Majean,
-----
Inc., a Delaware corporation.
FOURTH: The Certificate of Incorporation of Majean, Inc., a Delaware
------
corporation which is surviving the merger, as amended herein, shall be the
Certificate of Incorporation, as amended and restated of the surviving corpo-
ration.
FIFTH: The executed Agreement and Plan of Merger is on file at the
------
principal place of business of the surviving corporation.
- 17 -
<PAGE>
The address of said principal place of business is 560 White Plains Road,
Tarrytown, New York 10501.
SIXTH: A copy of the Agreement and Plan of Merger will be furnished on
-----
request and without cost to any stockholder of any constituent corporation.
SEVENTH: That the holders of all of the outstanding shares of the
-------
Corporation have adopted a resolution authorizing the amendment to the
Certificate of Incorporation herein above set forth.
MAJEAN, INC.
By:______________________________
Name:
Its:
ATTEST:
By:______________________________
Name:
Its: Secretary
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<PAGE>
SCHEDULE 5.1
to Agreement and Plan of Merger
-------------------------------
Majean Capitalization
---------------------
Stockholder Shares Options
- ----------- ------ -------
Valavanur A. Subramanian, M.D. 304,105
Jeffrey Moses, M.D. 304,105
Angelo Acquista, M.D. 304,105
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<PAGE>
SCHEDULE 5.2
to Agreement and Plan of Merger
-------------------------------
Subsidiaries
------------
Majean Management, Inc.
Majean Sub 2, Inc.
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<PAGE>
SCHEDULE 5.5
to Agreement and Plan of Merger
-------------------------------
Contracts
---------
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.
Letter Agreement dated August 7, 1995 between Majean, Inc. and Angelo
Acquista, M.D. re Majean, Inc. Grant of Stock Option
- 21 -
<PAGE>
SCHEDULE 6.12
to Agreement and Plan of Merger
-------------------------------
Benefit Plans
-------------
1995 Stock Option Plan
- 22 -
================================================================================
EXHIBIT 10.1
DEVELOPMENT AND MARKETING AGREEMENT
between
MED-E-SYSTEMS CORPORATION
and
INTEGRATED DISEASE MANAGEMENT, INC.
August 1, 1995
================================================================================
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I Certain Definitions................................................. 2
ARTICLE II Scope and Services................................................. 7
2.1 Scope of Agreement............................................... 7
2.2 MES Services..................................................... 7
(a) Pilot Services............................................... 7
(b) Programming Services......................................... 7
(c) Application Programming Interface............................ 8
2.3 Separate Work Order.............................................. 8
2.4 Service Interface................................................ 8
ARTICLE III Payment for MES Services......................................... 10
3.1 Payment ..................................................... 10
3.2 Procedures for Payment.......................................... 10
ARTICLE IV Managing the Pilots............................................... 12
4.1 Coordinating Committee.......................................... 12
4.2 Product Information............................................. 12
4.3 Product Performance............................................. 13
ARTICLE V Custom Programming for IDM Applications............................ 14
5.1 Development of DMA.............................................. 14
5.2 Development of Other IDM Applications........................... 14
5.3 Maintenance of IDM Applications................................. 15
ARTICLE VI Ownership......................................................... 15
6.1 Med-E-Practice System, MES Information and
Service Interface.................................... 15
6.2 IDM Applications and IDM Information............................ 16
6.3 Pilot Results................................................... 17
ARTICLE VII Marketing Efforts................................................ 17
7.1 Customer Introductions.......................................... 17
7.2 Prime Contracts and Subcontracts................................ 17
7.3 IDM's Right of First Offer...................................... 20
7.4 IDM Right to Offer Its Customer the Med-E-
Practice System...................................... 21
7.5 Pilot Results................................................... 22
7.6 Future Beta Releases of MES Products............................ 22
7.7 Export Controls................................................. 22
7.8 Use of Trademarks............................................... 23
ARTICLE VIII Purchase of MES Products and Services........................... 24
ARTICLE IX Patient and Clinical Data Collected............................... 24
9.1 Privacy of Patient and Clinical Data............................ 24
9.2 Exclusive Access and Use of IDM Information..................... 24
9.3 Releases ..................................................... 25
(i)
<PAGE>
9.4 Access and Use of MES Information............................... 25
ARTICLE X Indemnification.................................................... 26
10.1 Indemnification................................................. 26
10.2 Survival ..................................................... 27
ARTICLE XI Acquisition of MES Shares......................................... 27
11.1 Right to Acquire MES Shares..................................... 27
11.2 Remedies ..................................................... 27
ARTICLE XII Confidentiality Obligations...................................... 27
ARTICLE XIII Representations, Warranties and Covenants....................... 29
13.1 Representations, Warranties and Covenants...................... 29
13.2 Limitation of Warranties and Liability......................... 31
ARTICLE XIV Termination...................................................... 32
14.1 Term of Agreement............................................... 32
14.2 Termination of Agreement........................................ 32
14.3 Survival of Obligations......................................... 33
ARTICLE XV Miscellaneous Provisions.......................................... 33
15.1 Assignability................................................... 33
15.2 Notices ..................................................... 33
15.3 Merger and Amendment............................................ 34
15.4 Binding Effect.................................................. 34
15.5 Severability.................................................... 35
15.6 Waiver ..................................................... 35
15.7 Governing Law; Arbitration...................................... 35
15.8 Force Majeure................................................... 36
15.9 Brokers' or Finders' Fees....................................... 36
15.10 Relationship of Parties......................................... 36
15.11 Counterparts.................................................... 37
15.12 Headings ..................................................... 37
(ii)
<PAGE>
DEVELOPMENT AND MARKETING AGREEMENT
This Development and Marketing Agreement, dated as of August 1, 1995 (the
"Agreement"), between MED-E-SYSTEMS CORPORATION, a Delaware corporation, with
its principal place of business at 560 White Plains Road, 2nd Floor, Tarrytown,
New York 10591 ("MES"), and INTEGRATED DISEASE MANAGEMENT, INC., an Indiana
corporation, with its principal place of business at P.O. Box 618, Indianapolis,
Indiana 46206-0618 ("IDM").
W I T N E S S E T H:
WHEREAS, MES has developed a proprietary integrated information management
system for use in the physician practice environment, which system consists of
computer hardware, software, database/communications products and technical
support and is presently designated as the "Med-E-Practice" System;
WHEREAS, IDM is developing specialized disease management systems and
protocols to be used to manage specific diseases on behalf of health care
providers and payors, including systems and protocols to manage depression;
WHEREAS, pursuant to that certain Letter of Agreement Between IDM and MES,
dated May 9, 1995 (the "Letter Agreement"), (i) MES has agreed to develop for
IDM certain specialized disease management modules which will enable IDM to use
the Med-E- Practice System in the delivery of its specialized disease management
services and (ii) MES and IDM have agreed to undertake two pilot programs with
IDM managed care customers, to provide to
<PAGE>
such customers the Med-E-Practice System combined with specialized disease
management services for the management of depression; and
WHEREAS, MES and IDM desire to more fully set forth their respective rights
and duties in connection with their development and marketing arrangements in
this Agreement.
NOW THEREFORE, in consideration of the foregoing premises and the mutual
covenants and conditions contained herein, the parties hereto agree as follows:
ARTICLE I
Certain Definitions
Capitalized terms used in this Agreement shall have the following
respective meanings:
"Affiliate" shall mean an individual, a corporation, a partnership, an
association, a trust or any other type of entity or organization which, directly
or indirectly, controls, is controlled by or is under common control with any
other individual, a corporation, a partnership, an association, a trust or any
other type of entity or organization.
"Agreement" shall mean this Development and Marketing Agreement, dated
August 1, 1995, between MES and IDM.
"Commencement Date" shall mean, for any Pilot, the date on which the
customer jointly selected by MES and IDM for participation in such Pilot has
signed a binding commitment to participate in such Pilot.
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<PAGE>
"Confidential Information" shall have the meaning given to such term in
Article 11 hereof.
"Connection Date" shall mean, for any Pilot, the date on which the
Med-E-Practice System for such Pilot is connected, as set forth in the Pilot
scope of services attached as Exhibit A, to the pharmacy benefit manager of the
customers engaged in such Pilot or to the pharmacy information system of the
customer directly as is relevant and necessary to conduct the Pilot.
"Coordinating Committee" shall mean the committee appointed by MES and IDM
as provided in Section 4.1 hereof for coordination of the development and
marketing obligations of the parties hereunder.
"DMA Specifications" shall mean the Specifications to be mutually agreed
upon by the parties, for the completion of the DMA.
"DMA" shall mean the module created for the management of depression which
is operationalized on the Med-E-Practice System and any and all updates,
modifications and new versions thereof, the initial description of which is set
forth on Exhibit B.
"Documentation" shall mean the user materials for the Med-E-Practice System
and IDM Applications, as the case may be, and such other documents relating
thereto.
"High Level Aggregate Information" shall mean aggregate diagnosis,
procedure and prescription information which has been compiled across patient
populations based on geographic regions
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<PAGE>
and does not contain any information relating to the identity of any patient or
any physician.
"IDM Applications" shall mean the DMA and Other IDM Applications, which are
modules created to operationalize IDM's disease management programs on the
Med-E-Practice System, including information provided by IDM to MES to
facilitate development of IDM Applications.
"IDM Information" shall have the meaning given to such term in Section 9.2
hereof.
"IDM Trademarks" shall mean the IDM tradenames, trademarks and servicemarks
specified by IDM to MES as provided in Article 7 hereof for use in connection
with any marketing hereunder.
"Joint Ownership Interest" shall have the meaning set forth in Section 6.3
hereof.
"Letter Agreement" shall have the meaning given to such term in the third
WHEREAS clause.
"Med-E-Practice System" shall mean the integrated information management
system developed by MES for use in the physician practice environment, which
combines computer hardware and other equipment, computer software,
database/communication services, programming services and physician training and
support services and any and all updates, modifications and new versions
thereof.
"MES Information" shall have the meaning given to such term in Section 9.4
hereof.
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<PAGE>
"MES Trademarks" shall mean the MES tradenames, trademarks and servicemarks
specified by MES to IDM as provided in Article 7 hereof for use in connection
with any marketing hereunder.
"Other IDM Applications" shall have the meaning given to such term in
Section 5.2 hereof.
"Pilot" shall mean MES's provision of the services set forth in Exhibit A
to an IDM managed care customer.
"Pilot Intellectual Property" shall mean the Pilot Results and any and all
trade secrets and other intellectual property rights related to the Pilot
Results.
"Pilot Period" shall mean with respect to any Pilot the period commencing
on the Commencement Date and ending on the first anniversary of the Connection
Date for such Pilot.
"Pilot Results" shall mean the written or oral information developed by
MES, IDM or an IDM customer in connection with a Pilot relating to the cost
savings and benefits realized by all parties resulting from the use of the
Med-E- Practice System and the DMA. The Pilot Results shall not be deemed to
include any part of the code, algorithms, structure or architecture of the
Med-E-Practice System or any intellectual property related thereto.
"Pilot Survey" shall mean the initial survey, and any subsequent surveys,
for a Pilot developed by the parties as provided in Section 4.3 hereof.
"Shares" shall have the meaning given to such term in Article 10.
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<PAGE>
"Service Interface" shall mean the collection of application program
interfaces, remote procedure calls and messages which permit clients using the
Med-E-Practice System to fully utilize the functions of the Med-E-Practice
System and to facilitate communications between clients and the servers used in
the Med-E-Practice System.
"Skilled Programmer" shall mean a person fully skilled and competent in
systems architecture and programming for client server systems of comparable
complexity to the Med-E-Practice System.
"Specifications" shall mean the functional and techni- cal specifications
for any IDM Applications jointly developed by the parties.
"Term" shall mean the period commencing on the date hereof and ending on
the first anniversary of the Connection Date for the second Pilot, unless
extended with the mutual consent of the parties.
Any of the terms defined in this Article 1 may, unless the context
otherwise requires, be used in the singular or plural depending on the
reference. References to the Agreement or Exhibits or to any other agreement or
contract are to such agreements and exhibits as amended, modified or
supplemented from time to time in accordance with the terms hereof or thereof.
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<PAGE>
ARTICLE II
Scope and Services
2.1 Scope of Agreement. (a) Subject to the terms and conditions in this
Agreement, MES and IDM agree to cooperate and to use reasonable commercial
efforts to (i) identify and engage two of IDM's managed care customers in the
piloting of the Med-E-Practice System, such customers to be mutually agreed upon
by the parties, (ii) develop specialized disease management modules for the
delivery of the DMA and Other IDM Applications on the Med-E-Practice System and
(iii) have the ability to market their respective products using the Pilot
Results.
(b) MES and IDM shall use reasonable commercial efforts to develop and
agree upon the DMA Specifications on or prior to September 15, 1995.
2.2 MES Services. In consideration of the payments to be made by IDM to MES
in accordance with Section 3.1 hereof, MES agrees to render the following
services:
(a) Pilot Services. MES agrees to perform the services set forth in Exhibit
A in connection with each Pilot. The parties acknowledge and agree that MES is
not obligated hereunder to render any services not specifically set forth on
Exhibit A unless otherwise agreed in writing by the parties pursuant to a
separate work order;
(b) Programming Services. In accordance with Article 5 hereof, MES agrees
to provide up to 100 hours of custom programming and system analysis services to
develop a module for the delivery of DMA on the Med-E-Practice System; and
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<PAGE>
(c) Application Programming Interface. In accordance with Article 5 hereof,
prior to the end of the Term, MES shall provide to IDM the Service Interface
documented to commercial standards.
2.3 Separate Work Order. In connection with a Pilot, IDM may request in
writing for MES to perform additional services not within the scope of services
specifically set forth on Exhibit A. MES shall use reasonable commercial efforts
to comply with IDM's request. Within thirty (30) days of receiving such request,
MES shall notify IDM in writing whether or not it can perform such additional
services. If MES agrees to perform such additional services, MES shall provide
IDM with a written estimate for completing the additional services, such
additional services to be billed on a time and materials basis at rates at least
as favorable to IDM as rates charged by MES to other customers for comparable
services (both as to volume and commitment). If IDM and MES agree on the scope
and rates for MES's performance of the additional services a separate written
work order shall be entered into by the parties. IDM acknowledges and agrees
that any payments to MES for MES's performance of additional services hereunder
shall be in addition to, and are not included in, the payments to be made to MES
under Article 3 hereof. All payments to MES pursuant to this Section 2.3 shall
be made in the manner set forth in Section 3.2 hereof.
2.4 Service Interface.
(a) As soon as practicable after the date hereof, MES shall document to
commercial standards the Service
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<PAGE>
Interface for the Med-E-Practice System and shall provide IDM with a copy of
such documentation (the "Service Interface Documentation"). MES shall use
commercially reasonable efforts to ensure that the Service Interface
Documentation shall document the Service Interface in a manner which is
sufficient to permit a Skilled Programmer to construct and operate (i) client
programs ("Client Programs") that can be fully functional in the Med-e- Practice
System environment and that can access and be accessed by the Med-E-Practice
System server or by another server with substantially the same functional
capabilities as the Med-E- Practice System server, and/or (ii) server programs
("Server Programs") that can be fully functional in the Med-E-Practice System
environment and that can access and be accessed by a client of the
Med-E-Practice System server or by another client with substantially the same
functional capabilities as a client of the Med-E-Practice System.
(b) Prior to implementing any modification to the Service Interface which
would cause any system or application designed to employ the Service Interface
to no longer be functional, MES will (i) consult with the Coordinating Committee
at least 30 days prior to the implementation of such modification, (ii) document
such modification, in accordance with Section 2.4(a), prior to the
implementation of such modification, such documentation to be considered part of
the Service Interface Documentation, and (iii) implement such modification in a
reasonable manner and with reasonable notice to IDM. IDM has the
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<PAGE>
responsibility for providing reasonable notice of such modification to IDM users
of the Service Interface.
(c) Med-E-Systems hereby grants to IDM a non- exclusive, worldwide,
irrevocable, perpetual, royalty-free right and license, with the right and
license to grant sublicenses, (i) to make and distribute complete copies of the
Service Interface Documentation, as such Service Interface Documentation may be
modified from time to time during the term of this Agreement pursuant Section
2.3(b), (ii) to construct, modify, operation, maintain, license and market
Client Programs and Server Programs that implement and execute features and
functions described in the Service Interface Documentation for use on the
Med-E-Practice System, (iii) to construct, modify, operate, maintain, license
and market Client Programs and Server Programs based on or using the Service
Interface Documentation (and systems implementing such programs) for use on the
Med-E-Practice System, and (iv) to take any action reasonably required to
exercise the license and right granted pursuant to the foregoing subparagraphs
(i), (ii) and (iii).
ARTICLE III
Payment for MES Services
3.1 Payment. In consideration of MES rendering the services set forth in
Sections 2.2 hereof, IDM agrees to pay to MES an amount equa to [ ]* in
installments as follows:
(a) $100,000 was paid upon the execution of the Letter Agreement,
receipt of which is acknowledged by MES;
(b) $150,000 shall be paid upon the exeuction and delivery of this
Agreement;
(c) [ ]* shall be paid upon the Commencement Date for the first
Pilot;
(d) [ ]* shall be paid upon the Connection date for the first
Pilot;
(e) [ ]* shall be paid upon the Commencement Date for the second
Pilot;
(f) [ ]* shall be paid upon the Connection date for the second
Pilot;
(g) [ ]* shall be paid upon the conclusion of the Pilot Survey
for the first pilot in which ten percent or more of the physicians actually
using the Med-E-Practice system find it "helpful" as measured by the results of
such Pilot Survey (criteria for measuring "helpful" in a Pilot Survey shall
include whether a physician is able to use the Med-E-Practice System to
(i) order a prescription for a patient, (ii) access formulary lists,
(iii) access a patient's medical history as documented by the Med-E-Practice
System, (iv) make a referral to another physician, (v) access patient
demographic information, (vi) access drug information, (vii) complete patient
encounter forms and (viii) print referral encounter and prescription forms);
(h) [ ]* shall be paid upon the completion of development of
the DMA module in accordance with the DMA Specifications; and
(i) [ ]* shall be paid upon the commencement of development of
Other IDM Applications provided, however, if IDM and MES have not aggreed
-------- -------
upon the Specifications for such Other IDM Applications within six months
of the date hereof, IDM shall pay to MES the installment in this
Section 3.1(i) within five days after the expiration of such six month period.
3.2 Procedures for Payment. (a) Upon the occurrence of each of the events
set forth in subsections (c) through (i) of
- --------
* Omitted pursuant to Rule 406 promulgated under the Securities Act of 1933,
as amended.
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<PAGE>
Section 3.1 hereof, MES shall send a written notice (a "Payment Notice") to IDM
confirming the occurrence of such event and requesting the payment provided for
with respect to such event. IDM may, within ten (10) days of IDM's receipt of a
Payment Notice, dispute the occurrence of the event specified by MES in any
Payment Notice by delivering a written notice (a "Dispute Notice") to MES to
such effect, which notice shall specify in reasonable detail the basis of such
dispute. IDM and MES shall, for a period of five (5) days following the delivery
of a Dispute Notice, attempt to resolve such dispute. If the parties are unable
to resolve such dispute within such five (5) day period, the dispute shall be
submitted to arbitration in accordance with Section 15.7 hereof, with the
decision of the arbitrator being final and binding on all parties. Unless IDM
has delivered a Dispute Notice within the period provided above, within fifteen
(15) days of IDM's receipt of a Payment Notice, IDM shall send a check for the
amount owed to MES at 560 White Plains Road, 2nd Floor, Tarrytown, New York
10591 or wire transfer such amount to a U.S. bank account designated in writing
by MES.
(b) Without prejudicing MES's right to terminate this Agreement for IDM's
failure to make timely payments to MES hereunder, past due amounts shall accrue
interest at the annual rate of ten percent or, if lower, the maximum rate
permitted by applicable law, until all amounts owed to MES hereunder have been
paid in full. All payments to MES hereunder shall be made without withholding or
deduction for or on account
-11-
<PAGE>
of any and all taxes or other charges and MES shall assume all responsibilities
for such obligations.
ARTICLE IV
Managing the Pilots
4.1 Coordinating Committee. Each party shall appoint two representatives to
a Coordinating Committee. The Coordinating Committee shall be responsible for
(i) coordination of information with respect to each Pilot undertaken and with
respect to the development of custom programming to create IDM Applications
compatible with the Med-E-Practice System, (ii) supervision and approval of
development of written specifications for such custom programming and IDM
Applications, (iii) supervision and approval of development of the Pilot Survey
for each Pilot, custom programming and IDM Applications, (iv) coordination of
the administration of the Pilot Survey, (v) creating the controls, formats and
methodologies for capturing the Pilot Results and procedures for distributing
the Pilot Results to the parties; and (vi) such other matters mutually agreed by
the parties. The Coordinating Committee shall meet from time to time, but no
less frequently than quarterly, at the request of either party and shall make
decisions only by consensus of all of the members of the Coordinating Committee
at meetings in person or by video conference, or as otherwise agreed upon be the
Coordinating Committee.
4.2 Product Information. (a) Commencing upon the date hereof and from time
to time thereafter, IDM shall provide
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<PAGE>
MES such information reasonably requested by MES in connection with its
obligation to provide custom programming to create IDM Applications and the
Documentation relating thereto and the performance of its other obligations
hereunder.
(b) Commencing upon the date hereof and from time to time thereafter, MES
shall provide IDM such information with respect to the Med-E-Practice System and
the Documentation as is reasonably requested by IDM in connection with the
performance by IDM of its responsibilities hereunder.
4.3 Product Performance. (a) IDM and MES shall cooperate in designing one
or more surveys designed to solicit information on the performance and
acceptance of (i) the Med-E- Practice System and (ii) the IDM Applications
operationalized on the Med-E-Practice System in connection with each Pilot,
which surveys shall be approved by the Coordinating Committee. A Pilot Survey
may be amended from time to time as mutually agreed to by MES and IDM to include
any additional information which the parties believe to be helpful.
(b) Within two weeks after completion of a Pilot Survey, the Coordinating
Committee shall summarize the results of such Pilot Survey in a writing which
shall be sent to each party. Within four weeks after the completion of a Pilot
Survey, the written results of such Pilot Survey shall be sent to each party.
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<PAGE>
ARTICLE V
Custom Programming for IDM Applications
5.1 Development of DMA. MES agrees to provide up to one hundred hours of
programming and systems analysis under this Agreement to develop a module for
the delivery of DMA on the Med- E-Practice System. MES shall use its best
efforts to develop DMA so as to be integrated and compatible with the
Med-E-Practice System platform. Within sixty days after the date hereof, MES and
IDM shall agree upon the Specifications for the DMA module and a schedule for
MES performing up to one hundred hours of programming and systems analysis. If
the programming and systems analysis required to complete the DMA module exceed
100 hours, MES shall provide IDM with a written estimate for completing the
development of the DMA module, such services to be billed on a time and
materials basis at rates at least as favorable to IDM as rates charged by MES to
other customers for comparable services (both as to volume and commitment).
5.2 Development of Other IDM Applications. In addition to DMA, within six
months of the date hereof IDM may request MES to create as many applications as
IDM chooses in which case MES shall provide custom programming services to IDM
to create modules for the delivery of other IDM specialized disease management
applications operating on the Med-E-Practice System, the purpose of each such
application being to address a different disease (the "Other IDM Applications").
MES will provide IDM with a written estimate for completing the development of
the Other IDM Applications, such services to be
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<PAGE>
billed on a time and materials basis at rates at least as favorable to IDM as
rates charged by MES to other customers for comparable services (both as to
volume and commitment).
5.3 Maintenance of IDM Applications. Unless the parties otherwise agree,
MES shall, in addition to its obligations elsewhere specified in the Agreement
with respect to the DMA and any other IDM application to be developed by MES
hereunder, maintain the DMA and any Other IDM Applications so that such DMA and
Other IDM Applications continue to function properly with new versions, updates
or modifications of the Med- E-Practice System platform subsequently released by
MES.
ARTICLE VI
Ownership
6.1 Med-E-Practice System, MES Information and Service Interface. IDM
acknowledges and agrees that MES is the owner of all right, title and interest
in and to the Med-E- Practice System (for the purposes of this Section 6.1,
Med-E- Practice System shall not include the hardware consisting of the
physician computer tablets and the office administrative/print stations), the
MES Information, the Service Interface and Confidential Information relating
thereto, except with respect to certain hardware or software incorporated in the
Med-E-Practice System which is licensed to MES in which case the licensor is the
owner of all right, title and interest to such hardware or software. At no time
shall IDM or IDM's customers acquire, impair or retain under or pursuant to this
Agreement any right,
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<PAGE>
title or interest in and to, or appropriate for its own use, any of the
foregoing right, title and interest of MES or any licensor of MES in and to the
Med-E-Practice System, the MES Information, the Service Interface and
Confidential Information relating thereto. Without MES's prior written consent,
IDM shall not, and IDM shall cause its customers not to, modify the
Med-E-Practice System, the Service Interface or any hardware, software or other
component thereof. Any and all modifications to the Med-E- Practice System, the
Service Interface or any hardware, software or other component of the
Med-E-Practice System, whether or not performed by MES, shall remain the
exclusive property of MES.
6.2 IDM Applications and IDM Information. MES acknowledges and agrees that
IDM is the owner of all right, title and interest in and to the IDM
Applications, IDM Information and Confidential Information relating thereto. At
no time shall MES impair or retain any right, title or interest in and to, or
appropriate for its own use, any of the foregoing right, title and interest of
IDM or any licensor of IDM in and to the IDM Applications, IDM Information and
Confidential Information relating thereto. Except as provided in Section 5.3
hereof, without IDM's prior written consent, MES shall not modify the IDM
Applications or IDM Information. Unless otherwise agreed in writing, any and all
modifications to the IDM Applications performed by IDM or MES shall remain the
exclusive property of IDM. MES hereby assigns to IDM all right, title and
interest in and to all work completed by MES under the Agreement on the IDM
Applications.
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<PAGE>
6.3 Pilot Results. MES and IDM shall have a joint, equal and undivided
ownership interest (the "Joint Ownership Interest") in the entire right, title
and interest in and to the Pilot Results. MES and IDM shall cooperate in good
faith with one another to protect their respective interests in and to the Pilot
Results and each party shall have a Joint Ownership Interest in any intellectual
property rights arising from the Pilot Results (the "Pilot Intellectual
Property"). In addition, IDM shall have the exclusive right, title and interest
in and to any information developed by IDM or IDM's customers in connection with
a Pilot relating to the cost savings resulting from the use of an IDM
Application on the Med-E-Practice System, provided, that MES shall have the
right to receive such information from IDM upon request for its own internal
use. The parties acknowledge and agree that, unless otherwise agreed in writing,
neither party shall have a right to share in any revenues or gain realized by a
party arising from its use of the Pilot Results.
ARTICLE VII
Marketing Efforts
7.1 Customer Introductions. MES shall introduce IDM to two of MES's managed
care customer candidates that have expressed strong interest in installing the
Med-E-Practice System in their physician practice environment.
7.2 Prime Contracts and Subcontracts. (a) If IDM holds a relationship with
a managed care organization or other possible customer that (i) was initially
introduced to MES,
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<PAGE>
directly or indirectly, through IDM and (ii) requests the joint services of IDM
and MES, then MES and IDM agree that IDM has the option of entering into any
prime contract that results with such customer and MES shall, enter into a
subcontract with IDM in connection with the provision of joint services to such
customer. If IDM was introduced to a customer, directly or indirectly, through
MES, then MES has the option of entering into any prime contract that results
with such customer and IDM shall, enter into a subcontract with MES in
connection with the provision of joint services to such customer. If either IDM
or MES, as the case may be, fails to exercise its option to enter into a prime
contract with a customer within a reasonable time after the option has arisen,
the party without the option shall have the right to enter into a prime contract
with such customer and the party failing to exercise its option hereunder shall
be a subcontractor in connection with the provision of the joint services of IDM
and MES to such customer. IDM and MES agree that prior to entering into any
prime contract with a potential customer, in connection with which IDM or MES
will enter into a subcontract with the other, it will give the subcontracting
party reasonable notice of the provisions of the prime contract and negotiate in
good faith any changes to the provisions of the prime contract reasonably
requested by the other subcontracting party. The parties acknowledge and agree
that the foregoing notice of the provisions of the prime contract and the final
outcome of such prime contract negotiations shall not in any way constitute a
waiver of a subcontracting party's rights to fully
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negotiate in good faith any and all provisions of any subcontract to be entered
into as contemplated by this Agreement. Notwithstanding anything to the contrary
in this Section 7.2(a), IDM may elect to be the prime contractor with the
customers for the first two Pilots hereunder regardless of how such Pilot
customers were introduced to IDM.
(b) If IDM enters into a prime contract with a customer, it may price the
products and services it acquires from MES, pursuant to a subcontract with MES
in connection with the prime contract, in any manner it finds appropriate,
including, directly sharing in the savings, in whole or in part, generated by
the system of products and services offered to such customer under the prime
contract and requesting surcharges from a customer if such customer installs
other applications on the Med- E-Practice Systems platform. The parties
acknowledge and agree that all such pricing under a prime contract shall be
represented to a customer as IDM's pricing.
(c) MES and IDM acknowledge that the prices set forth in Article 3 hereof
for MES's products and services in connection with each Pilot shall serve as the
basis for negotiations between IDM and MES in connection with any acquisition of
MES products and services by IDM in connection with any future subcontracts
between IDM and MES, provided, however, that the foregoing acknowledgement is
not intended to limit in any manner the rights of IDM and MES to jointly agree
upon other prices or models for structuring IDM's acquisition of MES's products
and services under such subcontracts.
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7.3 IDM's Right of First Offer. In the event that at any time during the
Term, MES proposes to offer for sale to a non-Affiliate third party the
marketing rights (the "Marketing Rights") to be the exclusive preferred disease
management application provider for the Med-E-Practice System, (i.e., such third
party's disease management applications will be the standard or default set of
disease management application modules directly marketed by MES as part of the
standard applications package for the Med-E-Practice System), then IDM shall
have the right of first offer to acquire such Marketing Rights (the "Right of
First Offer"). In such case, MES shall submit to IDM a written notice setting
forth in reasonable detail the terms upon which it will sell the Marketing
Rights. IDM shall have fifteen (15) days from receipt of such notice to inform
MES as to whether it wishes to exercise its Right of First Offer and enter into
formal negotiations with MES with respect to acquiring the Marketing Rights. If
IDM so notifies MES in writing within the applicable fifteen (15) day period,
MES and IDM shall negotiate in good faith for thirty (30) days in order to
conclude a mutually acceptable cash purchase price and a definitive agreement
with respect to the acquisition of the Marketing Rights by IDM. If MES and IDM
fail to enter into a definitive agreement with respect to the Marketing Rights
within thirty (30) days after the date IDM notifies MES of its intention to
exercise its Right of First Offer, each party shall deliver to the other a
written instrument setting forth in the case of IDM, the highest price offered
to MES during the prior negotiation period and, in
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the case of MES, the lowest offer price MES indicated to IDM that MES would
accept during the prior negotiation period for the Marketing Rights. Once such
written instruments have been delivered an acquisition price shall be calculated
by the Coordinating Committee taking the average of the prices set forth by IDM
and MES in such written instruments (the "Strike Price"). If MES offers the
Marketing Rights to any other non-Affiliate third party at a price lower than
the Strike Price, IDM shall have a right to acquire the exclusive marketing
rights from MES at such lower price within a fifteen (15) day period following
MES's written notice to IDM of such offer. If MES negotiates a price with
another party for the Marketing Rights at or above the Strike Price, MES may
freely license, assign or transfer the Marketing Rights to such party. The
parties agree that the foregoing rights of IDM set forth in this Section 7.3
shall not preclude an MES customer from installing its own or any third party's
disease management applications on the Med-E-Practice System platform it is
using. If IDM fails to notify MES within fifteen (15) days of its desire to
exercise its Right of First Offer, MES shall be free to assign or transfer the
Marketing Rights to any third party.
7.4 IDM Right to Offer Its Customer the Med-E- Practice System. During the
Term, if IDM identifies a customer (other than the two customers involved in the
Pilots) interested in an IDM disease management application program utilizing
the Med-E-Practice System platform, IDM may offer MES's products and services
relating thereto with the prior written consent of MES,
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such consent not to be unreasonably withheld. IDM shall notify MES in writing of
such customer's desire to acquire the joint products and services of IDM and MES
and within ten (10) days of receipt of such notice, MES shall respond to IDM in
writing. If MES does not respond within such ten (10) day period, MES shall be
deemed to have agreed to provide the requested services at its standard rates.
7.5 Pilot Results. Notwithstanding their Joint Ownership Interest in and to
the Pilot Results, IDM and MES shall each have the right to access and use the
Pilot Results in connection with the marketing of their respective products,
subject to any restrictions placed upon such access and use by IDM's customers
participating in such Pilots.
7.6 Future Beta Releases of MES Products. MES agrees that it will offer to
IDM and IDM's customers which have the Med-E-Practice System, the opportunity to
participate in any future beta releases of MES products, including both hardware
and software products, on terms to be mutually agreed by the parties (which
terms will be comparable to those offered to other third parties), provided,
however, that IDM and such customers first enter into non-disclosure and
confidentiality agreements relating thereto in form and substance satisfactory
to MES.
7.7 Export Controls. In connection with any marketing activities undertaken
by the parties hereunder, the parties acknowledge that the Med-E-Practice
System, the Service Interface and Pilot Results and the Confidential Information
relating thereto (the "Technical Data") may be subject to United
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States export controls pursuant to the Export Administration Regulations, 15
C.F.R. Parts 768-799. The parties agree to comply strictly with any and all
requirements of the Export Administration Regulations with respect to all such
Technical Data and to cause their customers to comply with the same. MES shall
use reasonable commercial efforts to respond to any questions IDM may receive
from its managed care customers.
7.8 Use of Trademarks. (a) MES hereby grants to IDM a non-exclusive,
worldwide, fully paid-up license during the term of this Agreement to display
the MES Trademarks specified by MES to IDM as reasonably determined by MES for
use on materials ap- proved by MES in connection with any marketing of the
Med-E- Practice System hereunder. The use of any MES Trademark by IDM shall be
subject to prior approval by MES in writing and to compliance with such
specifications concerning the graphics, color and other distinctive features of
such MES Trademarks as may reasonably be determined by MES.
(b) IDM hereby grants to MES a non-exclusive, worldwide, fully paid-up
license during the term of this Agreement to display the IDM Trademarks
specified by IDM to MES as reasonably determined by IDM for use on materials
approved by IDM in connection with any marketing hereunder. The use of any IDM
Trademarks by MES shall be subject to prior approval by IDM in writing and to
compliance with such specifications concerning the graphics, color and other
distinctive features of such IDM Trademarks as may reasonably be determined by
IDM.
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ARTICLE VIII
Purchase of MES Products and Services
Except as provided herein, during the Term, MES agrees to offer for
sale or license its products and services to IDM on terms and conditions no less
favorable than the terms and conditions MES offers its products and services for
sale or license to non-Affiliate third parties (both as to volume and
commitment).
ARTICLE IX
Patient and Clinical Data Collected
9.1 Privacy of Patient and Clinical Data. IDM and MES shall maintain the
privacy of all patient and clinical data collected in connection with use of the
Med-E-Practice System and/or IDM Applications in accordance with the
restrictions in this Agreement and applicable law.
9.2 Exclusive Access and Use of IDM Information. Subject to MES's rights
relating to the Pilot Results, IDM shall have the exclusive rights to access and
use the data collected by MES, on behalf of IDM, in connection with the use of
all IDM Applications on the Med-E-Practice System (the "IDM Information"). IDM's
exclusive rights are subject to (i) agreements it has entered into with third
parties regarding access and use of the IDM Information, (ii) MES agreements or
obligations to provide access and use of the IDM Information to physicians for
patient care purposes, (iii) restrictions on IDM's access and use of the IDM
Information under applicable law, (iv) any authorization or requirement under
applicable law to access, use or disclose the IDM Information and (v) MES's need
to maintain a record of its work for legal purposes. To the extent
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technically feasible, IDM shall have the right to instruct MES to which computer
network the IDM Information collected by MES should be sent for storage and
retrieval. IDM shall pay MES the fee charged for modifications of the
Med-E-Practice System and any other reasonable costs and expenses incurred by
MES in connection with IDM's designation of such computer network for storage
and retrieval of the IDM Information.
9.3 Releases. IDM shall use reasonable commercial efforts to obtain and
maintain all necessary releases, approvals and permissions from patients,
physicians, clinical organizations, managed care entities and other interested
persons that may have an interest in the IDM Information. Such releases,
approvals and permissions shall authorize IDM to access, use and store with a
third party the IDM Information, MES shall use reasonable commercial efforts to
obtain and maintain any releases, approvals and permissions that are necessary
pursuant to Sections 9.2(ii) and 9.2(v) hereof.
9.4 Access and Use of MES Information. With the prior written approval of
MES, any such approval to be provided or rejected within ten (10) days of the
request, and to the extent permitted by applicable law and MES's agreements with
its customers, during the Term, IDM shall have the non-exclusive rights to
access and use "High Level Aggregate Information" derived from the MES databases
without regard to the customers for which the data was created (the "MES
Information"). IDM agrees that its access and use of such High Level Aggregate
Information shall be limited to identifying potential clients or
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markets for IDM products and services solely for marketing purposes.
ARTICLE X
Indemnification
10.1 Indemnification. (a) IDM shall indemnify, defend and hold harmless MES
from and against any and all claims, costs, damages, demands, expenses,
liabilities, losses and charges of whatsoever nature (including reasonable
attorneys' fees and expenses) incurred or suffered by MES arising from or
relating to (i) IDM's breach of its representations, warranties and covenants
set forth in this Agreement, (ii) claims by third parties against MES arising
from the use of the IDM Applications (except for infringement claims
attributable to MES's development of the IDM Applications to the extent such
claims are not based on information provided by IDM to MES to facilitate the
development of the IDM Applications), (iii) claims by third parties against MES
arising from the access, use and storage by IDM, and any third party designated
by IDM, of the IDM Information and (iv) claims against MES arising from IDM's
non-compliance with any rules, laws, ordinances, regulations and requirements of
any governmental agency having jurisdiction over the products and services of
IDM.
(b) MES agrees to indemnify, defend and hold harmless IDM from and against
any and all claims, costs, damages, demands, expenses, liabilities, losses and
charges of whatsoever nature (including reasonable attorneys' fees and expenses)
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incurred or suffered by IDM arising from or relating to (i) MES's breach of its
representations, warranties and covenants set forth in this Agreement, (ii)
claims against IDM arising from the use of non-IDM Applications in connection
with the Med-E-Practice System and (iii) claims against IDM arising from MES's
non- compliance with any rules, laws, ordinances, regulations and requirements
of any governmental agency having jurisdiction over the products and services of
MES.
10.2 Survival. The indemnities given in Section 10.1 hereof shall survive
the expiration or termination of this Agreement.
ARTICLE XI
Acquisition of MES Shares
--------------------------
11.1 Right to Acquire MES Shares. During the Term, if MES undertakes
---------------------------
an initial public offering of its common stock, IDM or any Affiliate thereof
shall have the right to purchase up to five percent of any MES common stock,
issued in such initial public offering (the "Shares") by giving written notice
to MES within ten days of receiving reasonable written notice from MES of its
intention to undertake such public offering. Any notice given by IDM shall be
irrevocable except with the written consent of MES. IDM shall purchase the
Shares at the time and price the Shares are offered for sale to the public,
provided, that if IDM fails to give the foregoing notice in a timely manner or
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otherwise, IDM's right hereunder to purchase the Shares shall automatically
terminate and MES shall have no further obligation to sell the Shares to IDM.
11.2 Remedies. The foregoing acquisition of the Shares shall not in any
manner limit the ability or the right of the parties hereto to seek legal and
equitable remedies related to any material breach or failure of performance
under this Agreement.
ARTICLE XII
Confidentiality Obligations
Confidentiality Obligations. From and after the date of this Agreement,
termination or expiration notwithstanding, each party shall retain in
confidence, shall use only for the
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purposes set forth in this Agreement and shall not disclose to any third party
(except a third party prospective financier of either IDM or MES under a duty to
keep any information disclosed to it confidential and the identity of which is
disclosed to the other party hereto) any information obtained from the other
party including, but not limited to, the terms of this Agreement and any
information disclosed in writing under the terms of this Agreement, source code
and source listings for the Med-E-Practice System and IDM Applications and
specifications for IDM Applications provided by IDM to MES and modifications
thereto disclosed in writing and expressly identified as confidential
(collectively, "Confidential Information"), without advance written approval of
the other party, except as may be required by law or government regulation or
unless the information sought to be disclosed (i) is publicly known at the time
of its disclosure to such party or becomes known through no fault of such party,
(ii) is lawfully received by such party from a third party not bound in a
confidential relationship to the other party, (iii) is published or otherwise
made known to the public by the other party, or (iv) was already lawfully known
by such party at the time of its disclosure to such party by the other party as
demonstrated by the files of the disclosed to party in existence at the time of
the disclosure. Information orally disclosed that is considered to be
Confidential Information by a disclosing party must be reduced to writing and
marked Confidential within fifteen (15) days of disclosure. Each party shall
restrict access to information provided by the other party under this
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Agreement to those employees with a need to know such information. In the event
that (i) MES or IDM is required to disclose Confidential Information by law or
government regulation or order or (ii) a party becomes aware of any breach of
its confidentiality obligations hereunder which it would appear that
Confidential Information was prejudiced or exposed to loss, the party from whom
such disclosure is sought or who becomes aware of a breach of its
confidentiality obligations hereunder shall immediately provide notice of such
requested disclosure to the other party. Each party's confidentiality
obligations under this Article 12 shall survive for five (5) years following the
expiration or termination of this Agreement.
ARTICLE XIII
Representations, Warranties and Covenants
13.1 Representations, Warranties and Covenants. (a) MES hereby represents
and warrants that it is the owner of the Med-E-Practice System and MES
Trademarks and that the Med-E- Practice System, and all hardware and software
components thereof, do not infringe any patent, trademark, copyright or trade
secret rights of any third party.
(b) IDM hereby represents and warrants that (i) it is the owner of the DMA
and IDM Trademarks and will be the owner of the IDM Applications and (ii) the
DMA, IDM Trademarks and the IDM Applications will not infringe any patent,
trademark, copyright or trade secret rights of any third party.
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(c) Each party hereby represents and warrants that (i) it has the
unrestricted right to enter into and perform this Agreement, (ii) it is a
corporation duly organized, validly existing and in good standing under the laws
of its state of incorporation and has the corporate power to own its assets and
properties and to carry on its business as now being conducted, and (iii) this
Agreement (A) has been duly authorized, executed and delivered, (B) constitutes
the valid and binding obligation of such party enforceable in accordance with
its terms, (C) will not violate, to such party's best knowledge, any law,
statute, rule or regulation, court or administrative agency judgment or decree,
and (D) will not conflict with or result in any breach or default of any of the
terms and conditions of any corporate document or any agreement to which such
party is a party.
(d) MES hereby represents and warrants that the Med-E-Practice System
complies with any and all rules, laws, ordinances, regulations, and other
requirements of any governmental agency having jurisdiction over the
Med-E-Practice System and its use pursuant to this Agreement.
(e) IDM hereby covenants that the IDM Applications developed my MES
pursuant to the scope of services provided by IDM shall comply with any and all
rules, laws, ordinances, regulations and other requirements of any governmental
agency having jurisdiction over the IDM Applications.
(f) MES hereby represents and warrants that the computer software and
hardware components of the Med-E-
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Practice System (other than the IDM Applications) shall meet commercial
standards for the production of computer software and hardware.
13.2 Limitation of Warranties and Liability. (a) Except as expressly set
forth in Section 13.1 hereof, neither party MAKES ANY WARRANTIES, GUARANTEES OR
REPRESENTATIONS OF ANY KIND CONCERNING THE PRODUCT OR ANY OTHER PRODUCT OF SUCH
PARTY, EITHER EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION, ANY WARRANTY OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR ANY IMPLIED WARRANTY
ARISING FROM COURSE OF PERFORMANCE, COURSE OF DEALING OR USAGE OF TRADE. No
representation or warranty made herein is made for the benefit of, nor shall any
claim be made with respect thereto by, any user of the Med-E- Practice System,
IDM Application, any MES product or service or any IDM product or service.
(b) UNDER NO CIRCUMSTANCES SHALL EITHER PARTY'S LIABILITY TO THE OTHER FOR
THE FAILURE OR ASSERTED FAILURE OF SUCH PARTY TO PERFORM ITS OBLIGATIONS
HEREUNDER (OTHER THAN OBLIGATIONS UNDER ARTICLES 10 AND 12) INCLUDE, NOR SHALL
SUCH PARTY BE LIABLE FOR, SPECIAL, INCIDENTAL, CONSEQUENTIAL OR TORT DAMAGES,
INCLUDING, WITHOUT LIMITATION, DAMAGES RESULTING FROM DELAY OR FROM LOSS OF
PROFITS, BUSINESS OR GOODWILL, WHETHER OR NOT SUCH PARTY HAS BEEN ADVISED OR IS
AWARE OF THE POSSIBILITY OF SUCH DAMAGES.
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ARTICLE XIV
Termination
14.1 Term of Agreement. Unless earlier terminated in accordance with
Section 14.2 hereof, this Agreement shall remain in full force and effect until
the end of the Term.
14.2 Termination of Agreement. Notwithstanding Section 14.1 hereof, this
Agreement may be terminated:
(a) by MES, upon written notice to IDM, in the event that IDM fails to make
any payment to MES when due under Section 3.1 hereof, which failure shall not
have been cured within ten (10) days after written notice thereof;
(b) by either party, upon thirty days written notice to the other party, in
the event that the other party shall have breached a material provision of this
Agreement, which breach shall not have been cured within said thirty days after
written notice thereof;
(c) by either party, effective immediately upon written notice thereof to
the other party, if the other shall cease conducting business in the normal
course, become insolvent, make a general assignment for the benefit of
creditors, suffer or permit the appointment of a receiver for its business or
assets, or shall avail itself of or become subject to any proceeding under the
Federal Bankruptcy Code or any other statute of any state relating to insolvency
or the protection of rights of creditors; or
(d) by the mutual agreement in writing of the parties hereto.
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14.3 Survival of Obligations. In the event of the termination or expiration
of this Agreement the provisions of Articles and Sections 3, 5, 6, 9.1, 9.2,
9.3, 10, 12, 13, 14 and 15 shall remain in full force and effect.
ARTICLE XV
Miscellaneous Provisions
15.1 Assignability. Neither this Agreement nor any interest herein, except
for the Joint Ownership Interest of either party in the Pilot Results and Pilot
Intellectual Property set forth in Section 6.3 hereof and except for access and
use of IDM Information as set forth in Section 9.2 hereof, may be assigned or
delegated, in whole or in part, by either party hereto without the prior written
consent of the other party hereto, except that either party may assign or
delegate all or part of its rights or obligations under this Agreement to any
Affiliate, provided that the assignee or delegatee agrees in writing to be bound
by the terms hereof. Any assignment or delegation in contravention of this
Section 14.1 shall be null and void.
15.2 Notices. All notices provided for in this Agree- ment shall be given
in writing and shall be effective when either is served by personal delivery or
five (5) days after mailing, return receipt requested, postage prepaid, at the
addresses listed below:
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If to MES:
Med-E-Systems Corporation
560 White Plains Road, 2nd Floor
Tarrytown, New York 10591
Telephone: (914) 332-6688
Facsimile: (914) 332-1186
Attn: Chief Executive Officer
with a copy to:
O'Sullivan Graev & Karabell, LLP
30 Rockefeller Plaza, 41st Floor
New York, New York 10112
Telephone: (212) 408-2400
Facsimile: (212) 408-2420
Attn: John J. Suydam, Esq.
If to IDM:
Integrated Disease Management, Inc.
P.O. Box 618
Indianapolis, Indiana 46206
Telephone: (317) 276-2846
Facsimile: (317) 277-3245
Attn: Kevin J. Hanna
15.3 Merger and Amendment. This Agreement and the Exhibits attached hereto
constitutes the entire understanding of the parties with respect to the subject
matter of this Agreement and merges and supersedes all prior and contemporaneous
communications, understandings, and agreements between the parties, whether oral
or written, concerning the subject matter hereof. This Agreement shall not be
modified except by a subsequently dated written amendment hereto, signed on
behalf of each party by a duly authorized representative.
15.4 Binding Effect. Subject to the limitations herein expressed, this
Agreement will mutually benefit and be binding upon the parties, their
successors and permitted assigns.
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15.5 Severability. If any provision of this Agreement shall be held by a
court of competent jurisdiction to be contrary to law or public policy, the
remaining provisions shall remain in full force and effect.
15.6 Waiver. No term or provision hereof shall be deemed waived and no
breach consented to or excused, unless such waiver, consent or excuse shall be
in writing and signed by the party claimed to have waived or consented. Should
either party consent, waive or excuse a breach by the other party, such shall
not constitute a consent to, waiver of, or excuse of any other different or
subsequent breach whether or not of the same kind as the original breach.
15.7 Governing Law; Arbitration. This Agreement shall be governed by and
construed in accordance with the laws of the State of Indiana without regard to
the laws and principles thereof which would direct the application of the laws
of another jurisdiction. All disputes, controversies, differences, or claims
arising out of this Agreement, or the breach thereof, shall be finally settled
by binding arbitration in Indianapolis, Indiana pursuant to the arbitration
rules of the American Arbitration Association. Arbitration shall take place
before one arbitrator appointed in accordance with such rules. Any award
rendered by the arbitrator shall clearly set forth the factual and legal basis
for such award. Judgement on the award rendered by the arbitrator shall be
non-appealable and enforceable in any court having jurisdiction thereof. The
arbitrator shall apply the law as set forth in this Section 15.7. The costs of
the arbitration,
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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 who is the losing party under the award.
15.8 Force Majeure. Neither party shall be liable for failure to perform or
damages for any delay or failure of performance arising out of causes beyond its
reasonable control and without its fault or negligence, including but not
limited to, acts of civil or military authority, fires, riots, wars, embargoes
or communications failures or late performance or default of any subcontractor,
where the choice by such party of such subcontractor was reasonable and where
such party has used its best efforts to expedite the performance or avoid the
default of such subcontractor or to obtain reasonable substitute performance
therefore.
15.9 Brokers' or Finders' Fees. MES will indemnify and hold IDM harmless
from any claim for brokerage or finders' fees arising out of the transactions
contemplated hereunder by any person claiming to have been engaged by MES. IDM
will indemnify and hold MES harmless from any claim for brokerage or finders'
fees arising out of the transactions contemplated hereunder by any person
claiming to have been engaged by IDM.
15.10 Relationship of Parties. The parties hereto are independent
contractors and neither party is an employee, agent, partner or joint venturer
of the other. Neither party shall have the right to bind the other to any
agreement with a third party or to incur any obligation or liability on behalf
of the other party.
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Neither party shall by any act or omission jeopardize the other party's property
rights or title in its intellectual or industrial property. Each party shall
report promptly to the other party its awareness of any abuse or breach by any
third parties of the intellectual or industrial property rights of the other
party.
15.11 Counterparts. This Agreement may be signed in any number of
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
15.12 Headings. Article headings and captions used in this Agreement and
the Exhibits attached hereto are included herein and therein for convenience of
reference only and shall not constitute a part of this Agreement or the Exhibits
for any other purpose or be given any substantive effect.
IN WITNESS WHEREOF, the parties have executed this Agreement by their duly
authorized representatives on the date first above written.
MED-E-SYSTEMS CORPORATION
By:_____________________________
Name:
Title:
INTEGRATED DISEASE MANAGEMENT, INC.
By:______________________________
Name:
Title:
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EXHIBIT A
MES Scope of Services for the Pilots
MES will provide the MEP system for 2 Pilot sites at a cost of
[ ]* per Pilot site.
For each Pilot Site, MES will provide the minimum necessary
resources, services, hardware and software to:
- Support up to 50 physicians (one computer tablet per physician)
practicing in up to a total of 4 physically separate locations,
including a total of 7 administrative/print stations to serve the
50 physicians. Hardware and software configuration includes:
- Physician hardware - a Fujitsu Stylistic 500 with 8 mg of
RAM, 170 mg hard drive, and a Proxim radio frequency modem,
or compatible hardware configuration.
- Adminsitrative/print station hardware - a 486 Personal
Computer, an Inkjet Printer, a radio frequency base station
(e.g. Proxim's Access Point) and other equipment required
for communications with the Med-E-Net server.
- Med-E-Practice Applications: SmartScripts, Med-E-Visit,
Med-E-Referral, and Med-E-Mail (facilitates connectivity
between physicians)
- Obtain from the Pilot site's practice management system (PMS) an
initial patient roster load to MEP. Provide the administrative
workstation functionality to add and maintain patients. The
initial patient roster will be loaded onto MEP under the above
cost provided that, as expected, the patient information can be
obtained from the physician's practice management system in an
electronic format. Acceptable electronic formats include
ANSI X.12 eligibility and patient roster records, and HL7 patient
roster records.
- Connect to a Pharmacy Benefit Manager or to the pharmacy
information system of the customer ("PBM") with full prescription
history download capability. MES will create the physical
interface between its host server and the PBM's host. IDM and
the customer managed care organization bear the responsibility of
gaining the permission and cooperation from the PBM to allow for
this connection to be made. IDM must notify MES that it has
received consent from the PBM for the connection.
- Load a formulary database and referral network database for the
customer managed care organization. MES will offer a mechanism
to the managed care organization to alter the database as needed
after the initial load or
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* Omitted pursuant to Rule 406 promulgated under the Securities Act of 1933,
as amended.
<PAGE>
provide monthly maintenance of the database for the managed
care organization.
- Conduct standard training on the Med-E-Practice System for the
physician and office support staff at either a customer managed
care organization training facility or remote location. Standard
training is provided in a classroom environment. Classroom
training requires a minimum of six (6) people, but no more than
twelve (12) people per class. MES will provide two (2)
classroom training sessions per physician and one (1) training
session per office administrator. Each session is conducted by
MES staff and runs between two (2) and four (4) hours. MES staff
is responsible for coordinating and conducting training with
physicians and their office administrators. IDM and the customer
managed care organization are responsible for physician education
relating to their applications which are incorporated into Med-E-
Practice System.
- One year of unlimited clinical transactions and messaging for the
Med-E-Practice applications starting after the completion of the
first physician training session including charges for lines,
communications equipment, hardware maintenance and replacement-
support of computer tablets.
- Maintain a toll-free telephone line available to Med-E-Practice
System users staffed by MES service representatives to receive
reports of malfunctions and assist with operational inquiries.
Calls on the toll-free line will be answered during the hours of
7:30 a.m. to 7 p.m. Central Time, Monday through Friday (except
for federal holidays). A beeper service will answer the toll-
free line from 6:00 a.m. to 7:30 a.m. and 7 p.m. to 9:00 p.m.
(Central Time) which will notify MES service representatives of
calls. The toll free telephone line will be operational prior to
the Connection Date for the first pilot.
At IDM's request, MES will provide additional computer tablets for patient use
at an approximate additional cost of [ ]* per unit, which includes the cost
of maintenance and service during the pilot year. Additional services beyond
Exhibit A will be billed according to Section 2.3.
- --------
* Omitted pursuant to Rule 406 promulgated under the Securities Act of 1933,
as amended.
EXHIBIT 10.2
SOFTWARE LICENSE
AGREEMENT DATED SEPTEMBER 27, 1995,
BETWEEN MED-E-SYSTEMS CORPORATION,
a Delaware corporation (the
"Licensor"), and MEDCO CONTAINMENT
SERVICES, INC., a Delaware
corporation ("Medco").
The parties agree as follows:
ARTICLE I
CERTAIN DEFINITIONS
The following terms shall have the following meanings:
"Competitive Business" means any business in the Territory that markets or
distributes computerized systems for the delivery of digital clinical
information in hospitals or physician offices, other than as part of an
Integrated Product; provided, however, that Competitive Business shall not
include the preparation and dissemination of the clinical information delivered
through or utilized by such systems or activity related to achieving
connectivity to such systems.
"Customer" means any customer of the Licensee.
"Documentation" means the user manual and other written materials relating
to each Product generally provided by the Licensee to users of Products.
"Enhancement" means any upgrade or improvement to the Program that adds a
feature or function.
"Integrated Product" means the object code or source code of any
applications software program that (i) contains material features and functions
in addition to those offered by the Program, (ii) is offered and distributed in
connection with other managed care services or products, and (iii) is offered
and distributed without separate or itemized fee.
"Intellectual Property Rights" means all program data files; utilities;
subroutines; libraries; schematics; flow charts; logic diagrams; development
tools; programmer's comments; supporting data and annotations; designs,
developments, improvements, enhancements and upgrades; source and object codes;
display screens; inventions; patents and patent applications; trademarks and
trademark applications; trade names; copyrights
<PAGE>
and copyright applications; trade secrets; and other confidential and
proprietary information.
"Licensee" means Medco, its subsidiaries, and all other entities controlled
by Medco.
"Modification" means any correction or modification to the Program that
does not add a new feature or function.
"Permitted Sublicensee" means (i) any Customer, and (ii) any other person
or entity that is in a direct or indirect contractual or provider relationship
with any Customer relating to the delivery or implementation of services offered
by the Licensee.
"Product" means the object code or source code of any software program that
performs the functions performed by the Program and that contains all or a
portion of the Program, including any Modification or Enhancement.
"Program" means the object code, source code, and related documentation
constituting or relating to the Licensor's software program known as
"SmartScripts" and described on Annex I.
"Territory" means the United States of America and Canada.
"Trademarks" means the registered trademarks "Med-E-Systems" and
"SmartScripts".
"Upgrade Period" means the period during which the Licensee may obtain
Modifications and Enhancements under Section 2.1(a)(i) or 2.3.
ARTICLE II
LICENSES
2.1. Licenses.
(a) On the terms and subject to the conditions set forth in this Agreement,
the Licensor hereby grants to the Licensee the following licenses:
(i) a non-exclusive, non-transferable license to use the Program, and
all Modifications and Enhancements developed by or on behalf of the
Licensor after the date hereof and prior to its third anniversary, for the
purpose of making and manufacturing Products, developing Modifications and
Enhancements, and marketing, distributing, and sublicensing Products solely
to Permitted Sublicensees
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within the Territory as part of services offered by the Licensee; and
(ii) a non-exclusive, non-transferable license to use the Trademarks
in connection with the marketing, distribution, and sublicensing of
Products solely to Permitted Sublicensees within the Territory as part of
services offered by the Licensee.
(b) Schedule 2.1(b) sets forth a list of all operating system, database
management system, and associated utilities software programs required for the
operation of the Program. The Licensee acknowledges that such software programs
are owned by third parties and are not the subject of the licenses granted under
this Agreement, and that the Licensee is solely responsible for obtaining
appropriate licenses to such software programs in order to take commercial
advantage of the licenses granted under this Agreement.
(c) The Licensor retains all right and title to the Intellectual Property
Rights relating to the Program, including all Modifications or Enhancements
developed by or on behalf of the Licensor.
2.2. License Fee.
In consideration of the grant by the Licensor to the Licensee of the
licenses under Section 2.1, the Licensee shall pay to the Licensor:
(i) simultaneously with the execution and delivery of this Agreement,
the amount of [ * ] and
(ii) on the first anniversary of the date hereof, the amount of [ * ]
in each case by wire transfer to an account designated by the Licensor.
2.3. Extension of Maintenance License.
On the terms and subject to the conditions set forth in this Agreement, the
Licensor hereby grants to the Licensee the right to extend the license under
Section 2.1(a)(i) with respect to Modifications and Enhancements developed by or
on behalf of the Licensor to successive one-year periods for a license fee for
each such one-year period equal to the lesser of (i) $200,000 and (ii) the
lowest fee payable to the Licensor by any third party under any license to such
Modifications and Enhancements upon terms otherwise substantially similar to
those set forth in this Agreement. The Licensor shall notify the Licensee of any
such license with a third party at least 40 days before the third anniversary
and each subsequent anniversary of the date hereof. The Licensee may exercise
its rights under this Section by delivering to the Licensee at least 30 days
before the third anniversary and each subsequent anniversary of the date hereof
(i) a notice stating that the Licensee exercises its right under this Section
and (ii) the applicable license fee, payable by wire transfer to an account
designated by the Licensor. Upon delivery of such notice and such license fee,
the Licensee shall be deemed granted a non-exclusive, non-transferable license
to use all Modifications and Enhancements developed by the Licensor during
- --------
* Omitted pursuant to Rule 406 promulgated under the Securities Act of 1933,
as amended.
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<PAGE>
the one-year period commencing with such anniversary for the purpose of making
and manufacturing Products, developing Modifications and Enhancements, and
marketing, distributing, and sublicensing Products solely to Permitted
Sublicensees within the Territory as part of services offered by the Licensee.
2.4. Deliveries by Licensor.
(a) On a mutually agreed upon delivery schedule, the Licensor shall deliver
to the Licensee (i) copies of the source code and object code of the Program,
and (ii) copies of all written materials owned by the Licensor and relating to
the development and use of the Program as may be reasonably required by the
Licensee in order to use, modify, and enhance the Program.
(b) Within 30 days after the general public release of any Modification or
Enhancement developed by or on behalf of the Licensor prior to the third
anniversary of the date hereof, the Licensor shall deliver to the Licensee
copies of (i) the source code and object code of such Modification or
Enhancement, and (ii) all written materials owned by the Licensor and relating
to the development and use of such Modification or Enhancement as may be
reasonably required by the Licensee in order to use, modify, and enhance such
Modification or Enhancement.
(c) Upon the exercise by the Licensee of its rights under Section 2.3 with
respect to any one-year period, the Licensor shall, within 30 days after the
general public release of any Modification or Enhancement developed by or on
behalf of the Licensor during such one-year period, deliver to the Licensee
copies of (i) the source code and object code of such Modification or
Enhancement, and (ii) all written materials owned by the Licensor and relating
to the development and operation of such Modification or Enhancement as may be
reasonably required by the Licensee in order to use, modify, and enhance such
Modification or Enhancement.
2.5. Transition Services.
(a) The Licensor shall upon request by the Licensee furnish to the Licensee
professional transition services to assist the Licensee with respect to the
preparation of the Program for adoption and customization by the Licensee, the
installation of a reference copy of the Program on a host computer, the
installation of a reference copy of the Program on a client computer, and such
other matters as the Licensee may reasonably request. The Licensee shall request
at least 160 hours of such services. The Licensor shall not be required to
devote more than two persons and 200 hours per month to the rendering of such
services.
(b) Such services shall be furnished from the date of this Agreement until
the end of the 180-day period commencing with such date.
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<PAGE>
(c) The consideration payable by the Licensee for any services furnished
under this Section shall be determined in accordance with the hourly rate
schedule set forth on Schedule 2.5(c). In addition, the Licensee shall reimburse
the Licensor for all reasonable travel and other out-of-pocket expenses incurred
in connection with the furnishing of such services.
2.6. Modifications and Enhancements.
The Intellectual Property Rights relating to all Modifications and
Enhancements developed by or on behalf of the Licensee shall be the property of
the Licensee.
2.7. References to Licensee.
Upon the terms set forth in this Section, the Licensee hereby grants to the
Licensor the right to announce publicly and state in its promotional materials
that the Licensee has been granted a license to the Program and that the
Licensee will be or is using the Program as its platform for directly
interfacing with physicians in order to conduct prescription management. Before
the release or distribution of any such announcement or material, the Licensor
shall deliver to the Licensee a copy of such announcement or material. Within 10
days after such delivery, the Licensee may object to any reference to the
Licensee in such announcement or material on the ground that such reference is
not correct or accurate. If the Licensee does not object in such manner within
such 10-day period, the Licensor may release or distribute such announcement or
material. If the Licensee objects in such manner within such 10-day period, the
Licensor may not release or distribute such announcement or material unless and
until the reference to the Licensee has been deleted or the Licensee has
consented to a modification in accordance with this Section. Such consent shall
not be unreasonably withheld.
ARTICLE III
REPRESENTATIONS AND
OBLIGATIONS OF LICENSOR
3.1. Representations.
The Licensor hereby represents and warrants to the Licensee as follows:
(a) The Licensor is a corporation duly organized, validly existing and in
good standing under the laws of the jurisdiction of its incorporation and has
all requisite corporate power and authority to own, lease and operate the assets
used in its business, to carry on its business as presently conducted, to enter
into this Agreement, to perform its obligations hereunder, and to consummate the
transactions contemplated hereby.
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<PAGE>
(b) The Licensor has taken all corporate action necessary to authorize its
execution and delivery of this Agreement, its performance of its obligations
hereunder, and its consummation of the transactions contemplated hereby. This
Agreement has been executed and delivered by an officer of the Licensor in
accordance with such authorization. This Agreement constitutes a valid and
binding obligation of the Licensor, enforceable in accordance with its terms,
subject to bankruptcy, reorganization, insolvency, moratorium, and similar laws
affecting creditors' rights generally and to general principles of equity.
(c) The execution and delivery by the Licensor of this Agreement, its
consummation of the transactions contemplated hereby, and its compliance with
the provisions hereof, will not (i) violate or conflict with its Certificate of
Incorporation or By-laws, (ii) violate, conflict with, or give rise to any right
of termination, cancellation, or acceleration under any agreement, lease,
security, license, permit, or instrument to which the Licensor or any of its
subsidiaries is a party, (iii) violate or conflict with any laws, rules, or
regulations, or (iv) require any consent, approval or other action of, notice
to, or filing with any entity or person (governmental or private).
(d) To the best knowledge of the Licensor, the Program and the Trademarks
do not infringe the Intellectual Property Rights of any person or entity. The
Licensee has not received any notice that the Program or any Trademark infringes
the Intellectual Property Rights of any person or entity and will promptly
notify the Licensee if it receives any such notice.
3.2. Disclaimer.
THE LICENSOR IS LICENSING THE PROGRAM, ANY MODIFICATIONS AND ENHANCEMENTS,
AND THE TRADEMARKS ON AN "AS IS" BASIS. EXCEPT AS SPECIFICALLY SET FORTH IN THIS
AGREEMENT, THE LICENSOR DOES NOT MAKE AND SHALL NOT BE DEEMED TO HAVE MADE ANY
REPRESENTATIONS OR WARRANTIES OF ANY KIND, EITHER EXPRESS OR IMPLIED, STATUTORY
OR OTHERWISE, WITH RESPECT TO OR IN ANY WAY RELATING TO THE PROGRAM, ANY
MODIFICATION OR ENHANCEMENT, OR ANY TRADEMARK, INCLUDING, WITHOUT LIMITATION,
(I) ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR USE OR FOR A
PARTICULAR PURPOSE, OR ARISING FROM COURSE OF PERFORMANCE, COURSE OF DEALING, OR
USAGE OF TRADE, AND (II) AS TO WHETHER THE FUNCTIONS CONTAINED IN THE PROGRAM OR
ANY MODIFICATION OR ENHANCEMENT WILL MEET THE LICENSEE'S REQUIREMENTS.
ARTICLE IV
REPRESENTATIONS AND
OBLIGATIONS OF LICENSEE
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<PAGE>
4.1. Representations.
The Licensee hereby represents and warrants to the Licensor as follows:
(a) The Licensee is a corporation duly organized, validly existing and in
good standing under the laws of the jurisdiction of its incorporation and has
all requisite corporate power and authority to own, lease and operate the assets
used in its business, to carry on its business as presently conducted, to enter
into this Agreement, to perform its obligations hereunder, and to consummate the
transactions contemplated hereby.
(b) The Licensee has taken all corporate action necessary to authorize its
execution and delivery of this Agreement, its performance of its obligations
hereunder, and its consummation of the transactions contemplated hereby. This
Agreement has been executed and delivered by an officer of the Licensee in
accordance with such authorization. This Agreement constitutes a valid and
binding obligation of the Licensee, enforceable in accordance with its terms,
subject to bankruptcy, reorganization, insolvency, moratorium, and similar laws
affecting creditors' rights generally and to general principles of equity.
(c) The execution and delivery by the Licensee of this Agreement, its
consummation of the transactions contemplated hereby, and its compliance with
the provisions hereof, will not (i) violate or conflict with its Certificate of
Incorporation or By-laws, (ii) violate, conflict with, or give rise to any right
of termination, cancellation, or acceleration under any agreement, lease,
security, license, permit, or instrument to which the Licensee or any of its
subsidiaries is a party, (iii) violate or conflict with an laws, rules, or
regulations, or (iv) require any consent, approval or other action of, notice
to, or filing with any entity or person (governmental or private).
4.2. General Obligation.
The Licensee agrees that any manufacture, marketing, distribution, and
sublicensing of the Products and the Documentation shall be done with commercial
diligence and care, consistent with sound business practices.
4.3. Compliance with Laws.
The Licensee shall manufacture, market, distribute, and sublicense the
Products and the Documentation in all material respects in compliance with all
applicable laws, rules, and regulations. Without limiting the generality of the
foregoing, the Licensee shall, if it exports any Products or Documentation,
comply in all material respects with all laws, rules, and regulations applicable
to the export of Products from the United States.
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<PAGE>
4.4. Identification.
(a) The Licensee shall display a copyright notice in the name of the
Licensor on each Product and its packaging and the Documentation relating to
such Product. Such copyright notice shall appear on the initial or title screen
of such Product, on the label of any media containing such Product, on the
outside of such packaging, on the title page of such Documentation, and in such
other locations as the Licensor may from time to time reasonably specify to the
Licensee.
(b) The Licensor shall display a trademark notice in the name of the
Licensor on each written material containing any Trademark. Such trademark
notice shall appear next to the first use of such Trademark in such material and
in such other locations as the Licensor may from time to time reasonably specify
to the Licensee.
(c) The Licensee shall, subject to any limitations in the technical
capacity of the display device, display the Trademarks substantially in the form
and manner displayed by the Licensor in connection with the marketing and
distribution of its products and services at the time the Licensee commences the
use of the Trademarks.
(d) The Licensee may display copyright notices, trademarks, or tradenames
other than those of the Licensor referred to in paragraphs (a) through (c)
above, except to the extent any such display could lead a third party to believe
that any such copyright notice applies to the Program, including any
Modification or Enhancement, or the product or service designated by any such
trademark or tradename was created or endorsed by the Licensor.
4.5. Sublicense Agreement.
(a) Each sublicense of any Product to any Permitted Sublicensee shall be
governed by a sublicense agreement that complies with the following conditions:
(a) such sublicense, and any further sublicense permitted by this Section,
must clearly state that the Licensee is acting under license from the Licensor;
(b) such sublicense, and any further sublicense permitted by this Section,
(A) shall terminate no later than 180 days after the sublicensee thereunder
ceases to be a Permitted Sublicensee, (B) must contain provisions to ensure that
all communications functions of such Product, other than the electronic
prescription transmission function and any non-clinical messages responsive to
the electronic prescription transmission, are used solely for direct or indirect
communications to or from the Licensee regarding patients covered by a program
or service provided by the Licensee, and (C) must provide that the sublicensee
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<PAGE>
thereunder may not further sublicense such Product to any person or entity,
other than any Permitted Sublicensee;
(c) any permitted further sublicense (A) must be made in accordance with,
and contain provisions to ensure compliance with, Sections 4.2, 4.3, 4.4, 4.5,
4.6, and 6.2 of this Agreement and (B) must contain an obligation, to the extent
permitted by any other bona fide contractual obligation, to notify the Licensee
of any further sublicense and the name of the parties thereto; and
(d) if such Product is provided as source code, such source code (A) may
not be used by such Permitted Sublicensee or any further Permitted Sublicensee
for any purpose other than the integration of such Product into any Integrated
Product and (B) may not be disclosed to any person or entity other than those
employees of such Permitted Sublicensee or further Permitted Sublicensee that
have a predetermined need to know such source code.
(b) To the extent permitted by any bona fide contractual obligation to
third parties, the Licensee shall promptly (i) notify the Licensor of any
sublicense of any Product and the parties thereto, and (ii) deliver to the
Licensor a copy of any notification of any further sublicense received by the
Licensee, as contemplated by clause (iii)(B) of paragraph (a) above.
(c) Upon (i) the termination of any sublicense of any Product to any
practicing physician in accordance with clause (ii)(A) of paragraph (a) above
and (ii) the notification by the Licensee to the Licensor of such termination
and the name and address of such physician, the Licensor shall offer to such
physician a license to continue the use of the Program, including Modifications
and Enhancements, on terms equivalent to those at the time generally offered by
the Licensor to physicians for the Licensor's Products.
4.6. Enforcement.
In connection with the distribution and sublicensing of Products, the
Licensee shall take all reasonable steps and use all reasonable efforts
necessary in order to protect the Licensor's Intellectual Property Rights
relating to the Program. The Licensee shall notify the Licensor of any
threatened or actual infringement of any Intellectual Property Right of the
Licensor promptly after the Licensee obtains knowledge thereof. Nothing
contained herein shall be construed to limit in any way the right of the
Licensor to take at any time all actions and use all efforts as the Licensor, in
its sole discretion, may deem necessary to detect any infringement of any
Intellectual Property Right of the Licensor, to enjoin such infringement and
recover damages therefor, and otherwise protect all Intellectual Property Rights
of the Licensor.
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4.7. Beta Version.
Upon completion of the beta version of any Product made or manufactured by
the Licensee, the Licensee shall, to the extent permitted by any contractual
obligation to third parties, provide a copy of such beta version to the Licensor
upon the same terms and conditions as such beta version is generally made
available for beta testing. The provision by the Licensee of any such beta
version shall not constitute a license to the Licensor with respect to such
Product. If any contractual obligation to third parties prohibits the Licensee
from providing a copy of such beta version to the Licensor, the Licensee shall
represent and warrant that the Licensee has taken reasonable steps to assure the
proper functioning of the Product.
4.8. Outsourcing of Development.
Subject to the terms and conditions of this Section and Section 6.1, the
Licensee may at any time engage any independent contractor for the development
of any Modification or Enhancement. Any such independent contractor may not be
engaged in any Competitive Business. If the Licensee proposes to engage any
independent contractor for the development of any Modification or Enhancement,
other than any individual who performs his or her services in connection with
and as part of internal development by the Licensee or any entity that furnishes
such individuals on a temporary basis, the Licensee shall, before such
engagement, deliver to the Licensor an offer to perform such development. Such
offer shall describe in reasonable detail the development to be performed and
state the terms of (including fees for) the proposed engagement. The Licensor
may accept such offer within 15 days of such delivery. If the Licensor does not
accept such offer within such 15-day period, the Licensee may engage any third
party on the terms of such offer within 12 months after expiration of such
15-day period. If such engagement is not made within such 12-month period, the
restrictions provided for in this Section shall again become effective.
4.9. Termination.
The obligations of the Licensee under Sections 4.7 and 4.8 shall terminate
upon the earliest to occur of (i) the bankruptcy of the Licensor, (ii) the
acquisition by any person or entity principally engaged in the provision of
services competitive to services from which the Licensee derives substantial
revenues of (A) all or substantially all assets of the Licensor or (B) a
majority of the capital stock of the Licensor entitled to vote for the election
of directors, and (iii)(x) with respect to Section 4.7, the second anniversary
of the termination of the Upgrade Period, and (y) with respect to Section 4.8,
the termination of the Upgrade Period.
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ARTICLE V
INDEMNIFICATION
5.1. Indemnification by Licensor.
The Licensor shall indemnify and save the Licensee and its affiliates,
directors, officers, employees, successors, and permitted assigns (the "Licensee
Group") from, against, for and in respect of:
(a) all damages, losses, obligations, liabilities, claims, actions or
causes of action sustained or suffered by the Licensee Group, or any member
thereof, as a result of any breach of any representation, warranty or agreement
of the Licensor contained or made in this Agreement; and
(b) all costs and expenses (including, without limitation, reasonable
attorneys', accountants' and other professional fees and expenses) incurred by
the Licensee Group, or any member thereof, in connection with any action, suit,
proceeding, demand, or judgment relating to any matters indemnified against
under paragraph (a) above.
5.2. Indemnification by Licensee.
The Licensee shall indemnify and save the Licensor and its affiliates,
directors, officers, employees, successors, and permitted assigns (the "Licensor
Group") from, against, for and in respect of:
(a) all damages, losses, obligations, liabilities, claims, actions or
causes of action sustained or suffered by the Licensor Group, or any member
thereof, as a result of (i) any breach of any representation, warranty or
agreement of the Licensee contained or made in this Agreement, (ii) any claim by
any third party based on, arising out of, or in any way relating to the
manufacture, marketing, distribution, or sublicensing of Products by or on
behalf of the Licensee (other than any such claim arising from any facts on
circumstances constituting any breach of any representation, warranty, or
agreement of the Licensor contained or made in this Agreement), or (iii) any
claim by any third party based on, arising out of, or in any way relating to the
use of any Product, including, without limitation, any claim that any reliance
on any information provided by any Product resulted in any mental or physical
harm (other than any such claim arising from any facts or circumstances
constituting any breach of any representation, warranty, or agreement of the
Licensor contained or made in this Agreement); and
(b) all costs and expenses (including, without limitation, reasonable
attorneys', accountants' and other professional fees and expenses) incurred by
the Licensor Group,
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or any member thereof, in connection with any action, suit, proceeding, demand,
or judgment relating to any matters indemnified against under paragraph (a)
above.
5.3. Remedies Cumulative.
The remedies provided for in this Article shall be cumulative and shall not
preclude assertion of any other rights or the seeking of any other remedies.
5.4. Limitation of Liability.
IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER PARTY OR ANY THIRD
PARTY FOR ANY INDIRECT, PUNITIVE, SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES,
INCLUDING, WITHOUT LIMITATION, DAMAGES RESULTING FROM LOSS OF OR INABILITY TO
USE DATA, LOSS OF ANTICIPATED PROFITS, OR OTHER ECONOMIC LOSS, IRRESPECTIVE OF
THE POSSIBILITY OR LIKELIHOOD OF SUCH DAMAGES. IN NO EVENT SHALL THE LICENSOR BE
LIABLE TO THE LICENSEE OR ANY THIRD PARTY FOR ANY DAMAGES IN EXCESS OF THE TOTAL
LICENSE FEES RECEIVED BY THE LICENSEE UNDER THIS AGREEMENT.
ARTICLE VI
CONFIDENTIALITY AND NONCOMPETITION
6.1. Confidentiality
(a) "Confidential Information" means all materials and information in
whatever form disclosed by either party to the other party in connection with
the performance of this Agreement that was identified to be confidential or
proprietary in nature or, from the nature thereof or the circumstances under
which disclosed, should reasonably be regarded as confidential or proprietary
information; provided, however, that "Confidential Information" shall not
include information that is:
(i) available to the general public or to the software development
industry generally;
(ii) lawfully received by either party from a third person who, to the
knowledge of such receiving party, is or was not bound in a confidential
relationship to the disclosing party;
(iii) already in the possession of the receiving party without
obligation to the other party to keep such information confidential;
(iv) necessary for the purpose of enforcement of this Agreement; or
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(v) required by law to be disclosed.
(b) Either party receiving Confidential Information (i) shall limit the
disclosure, publication or dissemination of such Confidential Information to
those employees or independent contractors of such party that have a
predetermined need to know (or could reasonably be expected to need to know it
for the purposes of this Agreement), (ii) shall advise such employees and
independent contractors of the confidential nature of such Confidential
Information, (iii) shall require any such independent contractors to acknowledge
the restrictions set forth in this Section in writing, and (iv) shall use the
same care and discretion to avoid disclosure, publication or dissemination of
such Confidential Information outside of such employees and independent
contractors as such party employs with similar information of its own which it
does not desire to publish, disclose or disseminate.
(c) Subject to the licenses granted under this Agreement, all tangible
forms of Confidential Information shall remain the property of the disclosing
party and the receiving party shall promptly return to the disclosing party or
destroy such Confidential Information upon the written request of the disclosing
party.
(d) Nothing contained herein shall prevent either party from disclosing any
Confidential Information in compliance with a valid order of a court or other
governmental entity of the United States; provided, however, that the party
making the disclosure in compliance with such order shall first have given
notice to the other party and made a reasonable effort to obtain a protective
order requiring that any disclosed Confidential Information be used only for the
purposes for which such order was issued.
6.2. Noncompetition.
The Licensee acknowledges that the licenses granted under this Agreement
will allow the Licensee to acquire particular familiarity with the Program and
the Licensor's business of developing and selling computerized patient records
systems. Accordingly, the Licensee shall not (i) use the Program, including any
Modification or Enhancement, in connection with the engagement in any
Competitive Business, (ii) during the Upgrade Period and for two years
thereafter, induce any person employed by the Licensor to terminate his or her
employment with the Licensor, or (iii) during the Upgrade Period (and, if the
Upgrade Period has been terminated upon delivery of a notice under Section 7.3,
for two years thereafter, unless given in connection with a notice under Section
7.2(a) that the Licensee is engaged in a Competitive Business, in which case
such additional period shall be 60 days) specifically solicit any customer or
supplier of the Licensor to replace its relationship with the Licensor with a
substantially similar relationship with the Licensee.
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<PAGE>
Nothing contained in this Section shall prohibit the Licensee from (A) engaging
in any Competitive Business, (B) investing in or entering into a business
relationship with any person or entity engaged in a Competitive Business, and
(C) manufacturing, marketing, distributing, and sublicensing Products in
accordance with this Agreement; provided, however, that (x) the Licensee may not
use the Program in connection with the engagement in any Competitive Business,
and (y) if the Licensee engages in any Competitive Business, other than in the
form of an investment in or business relationship with any person or entity so
long as the Licensee does not control the management of such person or entity,
Section 7.2(a) shall apply.
6.3. Limited Exclusivity.
Until the first anniversary of the date hereof, the Licensor shall not
grant any license substantially similar to the licenses granted under this
Agreement to PCS Health Systems, Inc.; Diversified Pharmaceutical Services,
Inc.; Value Health, Inc.; Caremark International Inc.; or any affiliate of any
of the foregoing.
6.4. Remedies.
In the event of a breach or threatened breach by either party of any
provision of this Article, the other party shall be entitled to an injunction to
restrain such actual or threatened breach. Such party may also pursue any other
remedies (including, without limitation, an action for damages) available for
such actual or threatened breach.
ARTICLE VII
TERMINATION
7.1. Term of Licenses.
Except as set forth in this Article VII, the licenses granted to the
Licensee under this Agreement shall be perpetual and non-terminable. Termination
of the licenses granted hereunder shall not be available to the Licensor as a
remedy for the breach of this Agreement by the Licensee. The Licensor's
bankruptcy or insolvency shall not terminate or permit the Licensor or its
trustee in bankruptcy to terminate the licenses granted hereunder.
7.2. Termination After Competition.
(a) Promptly upon engaging in any Competitive Business, the Licensee shall
deliver a notice to the Licensor describing such engagement, including the date
of its commencement, in reasonable detail. Within 60 days after the delivery of
such
-14-
<PAGE>
notice, the Licensor may terminate this Agreement to the extent set forth in
paragraph (b) below by notice delivered to the Licensee, which notice shall
become effective immediately. The foregoing right of termination shall not apply
if such engagement consists solely of an investment in or business relationship
with a person or entity engaged in a Competitive Business, so long as the
Licensee does not control the management of such person or entity.
(b) Upon any termination of this Agreement in accordance with paragraph (a)
above, the licenses to use Modifications and Enhancements developed by or on
behalf of the Licensor after the date of such termination, and to use the
Trademarks, shall terminate. Any such termination shall not affect (i) the
license to use the Program, and all Modifications and Enhancements developed by
or on behalf of the Licensor prior to the date of such termination, in
accordance with this Agreement, (ii) all sublicenses of Products granted prior
to such termination, (iii) the obligation of the Licensee with respect to such
sublicenses under Article IV, and (iv) the provisions of Articles V and VI, all
of which shall survive such termination.
7.3. Termination for Modifications and Enhancements.
By notice to the Licensor, the Licensee may terminate its right to receive
and use Modifications and Enhancements developed by or on behalf of the Licensor
after the date of such termination, but any such termination shall not affect
the license to use the Program, and all Modifications and Enhancements developed
by or on behalf of the Licensor prior to the date of such termination, in
accordance with this Agreement.
ARTICLE VIII
MISCELLANEOUS
8.1. Assignment.
The rights of each party hereunder may not be assigned to any person or
entity, except to the transferee in connection with a sale or other transfer to
such transferee of all or substantially all assets of such party.
8.2. Parties in Interest.
This Agreement shall be binding upon, inure to the benefit of, and be
enforceable by the successors and permitted assigns of the parties. None of the
agreements, representations or warranties contained herein shall be for the
benefit of any person or entity not a party to this Agreement.
-15-
<PAGE>
8.3. Amendment, Modification and Waiver.
This Agreement may only be altered or otherwise amended or terminated
pursuant to an instrument in writing signed by both parties, except that either
party may waive any obligation owed to it by the other party. The waiver by
either party of a breach of any provisions of this Agreement shall not operate
or be construed as a waiver of any other breach.
8.4. Entire Agreement.
This Agreement contains the entire understanding of the parties with
respect to its subject matter. This Agreement supersedes all prior agreements
and understandings between the parties with respect to its subject matter.
8.5. Headings.
The section and paragraph headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning of
interpretation of this Agreement.
8.6. Notices.
All notices, claims, certificates, requests, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given if (i) delivered personally, (ii) sent by facsimile transmission
(with confirmation received), (iii) sent by a nationally-recognized air courier
assuring overnight delivery, or (iv) mailed (by registered or certified mail,
return receipt requested and postage prepaid) as follows:
If to the Licensor, to:
Med-E-Systems Corporation
560 White Plains Road
2nd Floor
Tarrytown, New York 10591
Attention: Jon Edelson, MD
Fax No.: 914-332-1186; and
if to the Licensee, to:
Medco Containment Services, Inc.
100 Summit Avenue
Montvale, New Jersey 07645
Attention: Co-General Counsel
Fax No.: (201) 358-5773;
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 with this Section. Any
such communication shall be deemed to have been given, (i) in the case of
personal delivery, on the date of delivery, (ii) in the case of facsimile
-16-
<PAGE>
transmission, on the date of transmission, (iii) in the case of delivery by air
courier, on the first business day following the day on which such communication
was posted, and (iv) in the case of mailing, on the fifth business day following
the day on which such communication was posted.
8.7. Counterparts.
This Agreement may be executed in any number of counterparts, and each such
counterpart shall be deemed to be an original instrument, but all such
counterparts together shall constitute but one agreement.
8.8. Governing Law.
This Agreement shall be governed by and construed in accordance with the
laws of the State of New York, without giving effect to principles governing
conflicts of laws.
8.9. Severability
The provisions of this Agreement are severable and in the event that any
court of competent jurisdiction shall determine that any one or more of the
provisions contained in this Agreement shall, for any reason, be held to be
invalid, illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision of this Agreement; but
this Agreement shall be reformed and construed as if such invalid or illegal or
unenforceable provision, had been modified in the jurisdictions necessary so
that it would be valid, legal and enforceable to the maximum extent possible.
8.10. Relationship of Parties.
The parties are independent contractors and neither party is an employee,
agent, partner or joint venture of the other party. Neither party shall have the
right to bind the other party to any agreement with a third party or to incur
any obligation or liability on behalf of such other party.
-17-
<PAGE>
IN WITNESS WHEREOF, the parties have executed and delivered in this
Software License Agreement as of the date first above written.
MED-E-SYSTEMS CORPORATION
By: /s/ Jonathan Edelson
--------------------------------
Name: Jonathan Edelson
Title: Chairman/CEO
MEDCO CONTAINMENT SERVICES, INC.
By:
--------------------------------
Name:
Title:
-19-
<PAGE>
IN WITNESS WHEREOF, the parties have executed and delivered in this
Software License Agreement as of the date first above written.
MED-E-SYSTEMS CORPORATION
By:
--------------------------------
Name:
Title:
MEDCO CONTAINMENT SERVICES, INC.
By: /s/ Joseph V. Valesio
--------------------------------
Name: Joseph V. Valesio
Title: Executive Vice President
<PAGE>
Annex I
-------
SmartScripts Deliverables
The SmartScripts prescription drug script writer. Consisting of:
Client Software for a Windows 3.11 platform including optional pen extensions)
- A patient roster application
- A prescription application with presentation for:
- Drug
- Dosage
- Form
- Strength
- Supply
- Original/Bridge/Renewal prescription generation
- History of patient prescriptions
- Formulary presentation capability
- Clinical messaging capability
- Allergy manager
- Middleware and communications software allowing host connectivity over
TCP/IP networks
- Client database structures
UNIX host software
- Middleware and communications
- Host data structures consisting of:
- Schema
- Stored procedures
- Clinical resolution engine
- Message management
<PAGE>
Schedule 2.1(b)
Required Third Party Software
-----------------------------
PDA
- ---
Microsoft DOS 6.2
Microsoft Windows for Pen
Netmanage Chameleon 4.5
Microsoft Visual Basic (embedded controls)
Microsoft Visual C++ (embedded controls)
Far Point Spreadsheet VBX Controls
Far Point Spreadsheet C++ Controls
Microhelp VBTools
Host
- ----
HP-UX 9.04
Sybase System 10
Sybase CT Lib
Objectspace
Medispan Data
American Medical Association Clinical Data: ICD-9, CPT-4
<PAGE>
Schedule 2.5(c)
Hourly Development Rates
------------------------
Application Development/Client
- ------------------------------
Software Engineer (Visual Basic) $100
Senior Software Engineer (Visual C++) $125
Development Manager $180
Data Base Engineering
- ---------------------
Senior Database Developer $125
Senior Data Modeler $150
Client/Server Architect $200
Unix
- ----
Senior Host Administrator $125
Host Services Architect/Designer $150
Communications and Middleware
- ------------------------------
Senior Communications Engineer $125
Senior Communications Architect $175
Network Security Architect $200
Exhibit 10.3
IDX[LOGO](R)
Systems Division - 1400 Shelbourne Road
Burlington, Vermont 05402
(802) 658-2664
SYSTEM IMPLEMENTATION AGREEMENT
IDX SYSTEMS CORPORATION ("IDX"), by its acceptance of this agreement (the
"Agreement"), agrees to sell to the customer identified below (the "Customer"),
and to deliver the hardware described on the Hardware Schedule or Hardware
obtained by Customer (the "Hardware"), if attached. In addition, IDX agrees to
deliver and install the proprietary software described on the Software Schedule
(the "Software"), if attached, and to grant to Customer a license to use the
Software pursuant to the terms and conditions of this Agreement. Customer agrees
to purchase the Hardware, to accept the license for the Software, and to pay the
requisite price and fees therefor, all in accordance with the Terms and
Conditions attached to this cover sheet. Special undertakings, with respect to
installation, training, conversions, interfaces and other matters, if any, will
be as specified on the appropriate schedules and attachments. Customer and IDX
expressly incorporate into this Agreement only the schedules and supplements
indicated as included in the box below, and no other documents or writings shall
be considered a part of this Agreement. Software support and maintenance
services, if to be provided, are governed by the IDX Standard Support Services
Agreement, which is a separate undertaking.
THIS AGREEMENT INCLUDING ALL THE TERMS AND CONDITIONS SET FORTH ON THE ATTACHED
IDX TERMS AND CONDITIONS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
CUSTOMER INFORMATION: SCHEDULES, SUPPLEMENTS AND OTHER
ATTACHMENTS: (mark only if included)
<S> <C> <C>
Advanced Health Corporation
- -------------------------------------- Terms and Conditions X
(Customer name) Software Schedule X
Payment Schedule X
560 White Plains Road Future Pricing Schedule X
- -------------------------------------- Addendum to The System Implementation Agreement X
(Address) Addendum to The Standard Support Services Agreement X
Escrow Agreement X
Tarrytown, NY 10591 Addendum to Escrow Agreement X
- -------------------------------------- Computer Service Supplement X
Addendum to The Computer Service Supplement X
- ------------------------------------- Accession Agreement X
Implementation Schedule X
- -------------------------------------
(914) 332-6688 Ex.204
- -------------------------------------
(phone)
35 MAXIMUM NUMBER OF PROVIDERS LICENSED
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
FOR SYSTEM IMPLEMENTATION AGREEMENT, AND THE ATTACHMENTS INDICATED IN THE BOX
ABOVE, IS THE PARTIES' ENTIRE AGREEMENT AND CANNOT BE MODIFIED EXCEPT BY WRITING
SIGNED BY DULY AUTHORIZED REPRESENTATIVES OF THE PARTIES. CUSTOMER UNDERSTANDS
THAT THE FEES CHARGED BY IDX IN THIS AGREEMENT REFLECT THE ALLOCATION OF RISKS
EXPRESSED BY THE LIMITED WARRANTY, THE EXCLUSIVE REMEDY FOR BREACH OF THAT
LIMITED WARRANTY, AND THE LIMITATIONS OF LIABILITY AND DAMAGES WHICH ARE SET
FORTH IN THE ATTACHED TERMS AND CONDITIONS. BY SIGNING WHERE INDICATED BELOW,
CUSTOMER ACCEPTS THESE TERMS AND AFFIRMS IT UNDERSTANDS THAT TO CHANGE THEM
WOULD AFFECT THE ECONOMIC BARGAIN EXPRESSED IN THIS AGREEMENT.
EXECUTED on the date(s) indicated below;
- -----------------------------------
Advanced Health Corporation IDX SYSTEMS CORPORATION
[Legal Name of Customer]
By: /s/ Jeffrey M. Sauerhoff By: /s/ James H. Crook, Jr.
------------------------------- ----------------------------------
Jeffrey M. Sauerhoff - Controller
- ----------------------------------- --------------------------------------
[Name and Title] James H. Crook, Jr., Vice President
[Name and Title]
Date: 9/12/95 Date: 9/14/95
------------------------------ ---------------------------------
<PAGE>
IDX[LOGO](R)
[PRINTED MATERIAL SEQUENTIALLY NUMBERED (LINES)]
TERMS AND CONDITIONS - SYSTEM IMPLEMENTATION AGREEMENT
1. DELIVERY IDX shall arrange for shipment of Hardware by common carrier at
mutually agreeable time(s). Customer shall pay or reimburse IDX for all costs of
Hardware shipping, and transportation. Good and merchantable title and risk of
loss in and to the Hardware shall pass to Customer upon delivery of each
respective item to the common carrier. At Customer's expense, IDX shall procure
transit and casualty insurance for the replacement value of the Hardware,
covering the transportation of the Hardware by the common carriers to Customer's
loading dock. Upon delivery, IDX shall install all those items designated on the
Hardware Schedule as to be installed by Customer. Upon successful installation
of the items of Hardware necessary to install the Software, IDX shall install
the object code version of the Software and notify Customer that the Software
has been installed.
2. OTHER TERMS Terms, conditions and warranties applicable to the Hardware and
operating system software and to all other products not manufactured by IDX are
provided by the applicable manufacturers, as set forth on the Manufacturer's
Supplement attached hereto. IDX makes no warranty as to the Hardware and no
warranty as to any other products not manufactured by IDX.
3. CHARGES AND PAYMENT Customer agrees to pay the charges specified in the
schedules and supplements hereto as and when due and shall pay a finance charge
equal to one and one-half percent (1 1/2%) per month on all amounts not paid
within thirty (30) days from the date of invoice. Customer shall pay or
reimburse IDX for all reasonable out-of-pocket expenses in connection with
delivery and installation of the Hardware and Software, including travel,
lodging and meals. All travel will be coach or tourist class. Prices and fees
are exclusive of all federal, state, municipal, or other government excise,
sales, use, occupational, or like taxes now in force or enacted in the future,
and Customer agrees to pay any tax (excluding taxes on IDX's net income) which
IDX may be required to collect or pay now or at any time in the future and which
are imposed upon the sale or delivery of items and services purchased or
licensed hereunder. Customer's obligation to pay taxes shall include interest
imposed by taxing authorities on uncollected taxes at a rate not greater than
the Citibank prime rate plus three percent (3%) and penalties imposed by any
taxing authorities to the extent such penalties are applicable to taxes not paid
at the request of Customer, or as a result of reliance by IDX on representations
of Customer. If a certificate of exemption or similar document or proceeding is
necessary in order to exempt the sale from sales or use tax liability, the
Customer will obtain and pursue such certificate, document or proceeding.
Customer will be charged and agrees to pay, at IDX's then current rate, for all
goods and services not specified herein or on the included supplements,
schedules and attachments and which are requested by Customer.
[PARAGRAPH 4 DELETED AND INITIALED: is JC]
5. GRANT OF LICENSE Subject to all the terms and conditions of this Agreement,
IDX hereby grants to Customer, and Customer hereby accepts, a personal,
non-exclusive, non-transferable, term license to use, only as herein provided,
one (1) executable copy of the object code version of the Software and two (2)
copies of the database to be created with the Software, one (1) of which shall
be dedicated only to testing and training purposes, and one (1) of which may be
used for Customer's data processing purposes. IDX also grants to Customer such a
license to use, as a reference and training aid for Customer in its licensed use
of the Software, one (1) copy of the applicable IDX standard published
instruction and operating manuals furnished to Customer by IDX from time to time
("Documentation"). IDX reserves all rights, title, privileges and interests not
expressly granted to Customer, who shall acquire no right, title, interest or
privilege with respect to the Software or the Documentation by implication. The
term of the license herein granted is ten (10) years commencing with the
effective date of this Agreement unless terminated earlier as provided herein.
6. SCOPE OF LICENSE The one (1) executable copy of the object code version of
the Software and two (2) executable copies of the data base licensed herein may
be used by Customer for processing of data on the Hardware or any temporary
substitution located in the United States, but not so as to serve more than the
number of terminals indicated in the box on the first page of this Agreement.
For the purpose of the preceding sentence, the term "terminals" refers to any
kind of local or remote data entry or inquiry device. Terminals may be counted
by the Software, and it may operate to deny Software access to an end user or
deny operation of a process initiated at any terminal, to the extent that such
access or use would result in more
<PAGE>
than the number of terminals specified on the front page of this Agreement. The
data processed by Customer shall be strictly limited to data created or used in
Customer's business as a licensed provider of medical care, and no other data of
any other person or entity. Neither the Software nor the Documentation may be
used in any manner directly or indirectly related to or in connection with the
operation or management of any other business, including without limitation a
timeshare, facilities management, practice management billing or data processing
service. Customer may not modify or sublicense the Software. Customer may make
and keep up to two (2) back-up copies of the Software, provided Customer employs
secure back-up procedures and a secure location in the United States, and
provided further that Customer shall place on such copy any proprietary notice,
including, copyright notice, requested by IDX.
7. TITLE AND OWNERSHIP IDX is the exclusive owner, or sublicensor, of the
Software, the Documentation and all associated materials provided to Customer,
all modifications, additions, derivatives and enhancements thereof, all copies
thereof and all rights therein. All modifications, additions, derivatives and
enhancements to the Software and Documentation shall be deemed a part of the
Software. Physical copies of Software and Documentation are not sold to
Customer, but are the property of IDX and are provided to Customer on loan
during the term of this Agreement. Customer shall keep each and every copy of
the Software, and all rights and interests therein, licensed hereunder free and
clear of all claims, liens and encumbrances, and any act of Customer purporting
to create such a claim, lien or encumbrance shall be void. Customer acknowledges
IDX's representation that the Software, Documentation and related materials,
techniques and procedures contained herein embody valuable trade secrets.
Customer shall not create or attempt to create, by decompilation, disassembly,
reverse engineering or otherwise, the source programs for the Software from the
object programs or other information made available by IDX, nor shall Customer
demonstrate, disclose, divulge, communicate or allow access to the Software, the
Documentation or any portion thereof to any person (including contractors and
consultants), except to Customer's employees, but then only to the extent
necessary to operate the Software as licensed hereunder.
8. CUSTOMER RESPONSIBILITIES Customer shall be responsible for timely site
preparation, including without limitation power, environment and cabling not
specifically to be provided by IDX, and shall prepare for and assist IDX in
timely installation of the Hardware and the Software. Customer shall use its
best efforts to implement the Software which shall include making available a
sufficient number of qualified personnel to be trained by IDX in the use,
operation, and management of the Hardware and Software, and providing and
adequately managing the resources necessary to test, implement and operate the
Hardware and Software, completing IDX start-up questionnaires, selecting among
options and parameters, and constructing data dictionaries. IDX shall not be
responsible for use of Hardware and Software if not operated in a manner
recommended in the Documentation, nor shall IDX be responsible for any
non-compliance by Customer with laws, or failure to use audit controls, back-up
and security procedures. IDX is not responsible for any failure by Customer to
use professional care in the use and validation of the results produced by the
Hardware and Software. Customer shall indemnify and hold harmless IDX, its
officers, directors, employees, successors and assigns from and against any and
all claims, liabilities, costs and damages arising out of or in any manner
connected with Customer's medical malpractice.
9. ACCEPTANCE The Software shall be deemed accepted when Customer has used the
Software to produce output not in a test mode for a period of thirty (30) days.
10. LIMITED WARRANTY IDX warrants only that, when operated as recommended, each
module or unit of the Software will perform substantially as described in the
current editions of the Documentation for a warranty period commencing on the
date IDX gives notice that the Software has been installed and is ready for
productive use and continuing for ninety (90) days thereafter (the "Warranty
Period"). IDX will perform technical services at no cost to Customer, to design,
code, check out and deliver promptly amendments or alterations to Software, or
other solutions, necessary to remedy or avoid any condition which causes the
Software to fail to perform as warranted above. Customer shall allow Software
access to IDX through dedicated remote communications for this purpose. The
foregoing is Customer's sole and exclusive warranty of performance regarding the
Software, and Customer's sole and exclusive remedy for breach of such limited
warranty. This limited warranty is contingent upon Customer's written report,
received not later than five (5) days after the last day of the Warranty Period,
detailing the nature and circumstances of any alleged breach of warranty.
11. CUSTOMER ACKNOWLEDGES THAT NO EXPRESS WARRANTIES HAVE BEEN MADE BY IDX
EXCEPT FOR THE LIMITED WARRANTY MADE IN THE FOREGOING ENTITLED "LIMITED
WARRANTY." THIS LIMITED WARRANTY AND THE ASSOCIATED LIMITED REMEDY ARE PROVIDED
BY IDX IN LIEU OF ALL OTHER WARRANTIES AND REMEDIES RELATED TO PERFORMANCE OF
THE SOFTWARE AND HARDWARE. IDX DISCLAIMS ALL IMPLIED WARRANTIES, INCLUDING
IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
12. BANKRUPTCY All rights and licenses granted under or pursuant to this
Agreement by IDX to Customer are, and shall otherwise be deemed to be, for
purposes of Section 365(n) of the United States Bankruptcy Code (the "Code"),
licenses to rights to "intellectual property" as defined under Section 101(52)
of the Code. Customer, as licensee of such rights under this Agreement, shall
retain and may fully exercise all of its rights and elections under the Code. In
the event of the commencement
<PAGE>
of a bankruptcy proceeding by or against IDX under the Code, Customer shall be
entitled to retain all of its rights under this License.
13. ASSIGNMENT This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors and permitted
assigns. Neither this Agreement nor any of the rights hereunder may be assigned,
sold or otherwise transferred by a party without the prior express written
consent of the other, except that after the expiration of the Warranty Period,
there shall be no restriction upon assignment of this Agreement by IDX. The
obligations of IDX under Section 14 below shall not be terminated by such
assignment.
14. INDEMNITY IDX is the owner of the Software, or has adequate rights to
license to Customer the use of the Software as herein provided. IDX will, at its
expense, defend against and pay any final judgment against Customer arising out
of any claim that the Software infringes a U.S. copyright, a U.S. patent issued
as of the effective date of this Agreement, or a trade secret provided that (a)
Customer promptly notifies IDX in writing of such claim or action and (b) IDX
has sole control of the defense and settlement of such claim or action. In
defending against such claim or action, IDX may at its option (i) consent, (ii)
settle, (iii) procure for Customer the right to continue using the Software, or
(iv) modify or replace the Software so that it no longer infringes, to the
extent that the exercise of any such option does not result in a material
adverse change in the operational characteristics of the Software, and
equivalent functions and performance provided by the Software remain following
implementation of such option. If IDX concludes in its judgment that none of the
foregoing options is reasonable, then IDX will refund or credit to Customer the
license fee paid by Customer under this Agreement, less a pro rata credit for
each full or partial month of the first one hundred and twenty (120) months
following the effective date of this Agreement, Customer will return the
original and all whole or partial copies of the Software to IDX, and the license
granted hereunder will terminate. IDX has no liability with respect to patent
infringement or trade secret misappropriation arising out of modifications of
the Software made to Customer's order or specification or use of the Software in
combination with other software or equipment not specified on a schedule or
attachment hereto. This paragraph states the entire obligation of IDX regarding
infringement of intellectual property rights, and will survive the termination
of this Agreement.
15. IDX SHALL NOT BE LIABLE TO CUSTOMER UNDER ANY CIRCUMSTANCES FOR ANY
CONSEQUENTIAL, SPECIAL, INCIDENTAL, PUNITIVE OR INDIRECT DAMAGES (INCLUDING
WITHOUT LIMITATION LOSS OF PROFIT, REVENUE, BUSINESS OPPORTUNITY OR BUSINESS
ADVANTAGE), WHETHER BASED UPON A CLAIM OR ACTION OF TORT CONTRACT, WARRANTY,
NEGLIGENCE, STRICT LIABILITY, BREACH OF STATUTORY DUTY, CONTRIBUTION, INDEMNITY
OR ANY OTHER LEGAL THEORY OR CAUSE OF ACTION, EVEN IF ADVISED OF THE POSSIBILITY
OF SUCH DAMAGES.
16. TERMINATION This Agreement shall terminate at the option of either party
upon the failure of the other party to perform or observe any material covenant
or obligation set forth in this Agreement, provided the non-performing party has
been given written notice and ninety (90) days opportunity to cure such failure.
Upon any termination of this Agreement, Customer shall cease using the Software
and shall return to IDX, or at IDX's option destroy, the original and all copies
of the Software, the Documentation and any other materials provided by IDX. The
obligations of Customer set forth in the paragraphs entitled "Scope" and "Title
and Ownership" shall continue in full force and effect upon any termination of
this Agreement.
17. DISPUTES At the option of either party, any dispute as to the performance of
a party's obligations under this Agreement or any related matter shall be
referred to non-binding mediation by a neutral third party, the costs of whom
shall be paid jointly by IDX and the Customer. Each party shall cooperate in
such mediation but may terminate mediation at any time after the expiration of
sixty (60) days from commencement thereof. Nothing herein shall preclude either
party from exercising any and all legal rights available to it in a court of
competent jurisdiction, and nothing contained in this paragraph shall prevent or
preclude resort to mediation or other dispute resolution while litigation is
pending. No offer, finding, action, inaction or recommendation made or taken in
or as a result of mediation shall be considered for any purpose an admission of
a party, nor shall it be offered or entered into evidence in any legal
proceeding.
18. NOTWITHSTANDING ANYTHING TO THE CONTRARY, IDX'S AGGREGATE MONETARY LIABILITY
FOR ANY CAUSE OR CAUSES (REGARDLESS OF THE FORM OF ACTION) UNDER OR RELATING TO
THIS AGREEMENT, THE HARDWARE OR THE SOFTWARE, SHALL IN NO EVENT EXCEED THE TOTAL
OF ALL AMOUNTS PAID TO IDX BY CUSTOMER FOR SOFTWARE LICENSE FEES PURSUANT TO
THIS AGREEMENT, LESS A PRO RATA ABATEMENT OF SUCH FEES FOR EACH FULL OR PARTIAL
MONTH OF THE FIRST ONE HUNDRED TWENTY (120) MONTHS FOLLOWING THE EFFECTIVE DATE
OF THIS AGREEMENT UNTIL THE INSTITUTION OF LITIGATION.
19. INTERPRETATION This Agreement is not intended nor shall it be interpreted,
to confer any benefit, right or privilege in any person or entity not a party
hereto. Unless specified to the contrary in any schedule, supplement or other
attachment, in the event of any conflict or inconsistency between such items and
the provisions of this Agreement, the provisions of this Agreement shall prevail
and govern the interpretation thereof. In the event any provision hereof shall
be deemed invalid or
<PAGE>
unenforceable by any court or governmental agency, such provision shall be
deemed severed from this Agreement and replaced by a valid provision which
approximates as closely as possible the intent of the parties. All remaining
provisions shall be given full force and effect. This Agreement has been
mutually negotiated, and therefore shall be deemed to have been negotiated and
prepared at the joint request, direction and construction of the parties, at
arms length, and shall be interpreted in accordance with its terms without favor
to either party. This Agreement shall become effective and shall be binding only
upon acceptance by IDX at its offices in Burlington, Vermont. This Agreement
shall be governed by, subject to, and interpreted in accordance with, the laws
of the State of Vermont. Any cause or action against IDX arising out of or in
connection with this Agreement or any schedule or other agreement executed in
connection herewith shall be instituted and served upon IDX not later than two
(2) years following the effective date of this Agreement.
20. MISCELLANEOUS Any notice or communication provided or permitted hereunder
shall expressly describe its purpose and scope, and shall be in writing and
shall be deemed duly given or made if delivered in person or if sent by U.S.
registered mail, return receipt requested, postage prepaid, addressed to the
attention of the chief executive officer of the party for which it is intended
at the address set forth in this Agreement or at any other address specified by
a party in writing. Except as expressly provided to the contrary in this
Agreement, the dates and times by which Customer or IDX is required to render
delivery or performance under this Agreement shall be automatically postponed to
the extent, and for the period of time, that Customer or IDX, as the case may
be, is prevented from meeting such dates and times by reason of causes beyond
its reasonable control. The foregoing shall not excuse any failure to make
payment of any amount due hereunder that has continued for more than ninety (90)
days.
21. THIS AGREEMENT AND THE SCHEDULES AND OTHER AGREEMENTS INDICATED AS INCLUDED
ON THE FIRST PAGE HEREOF CONTAIN THE ENTIRE AGREEMENT AND UNDERSTANDING BETWEEN
IDX AND CUSTOMER WITH RESPECT TO THE SELECTION, PROCUREMENT AND IMPLEMENTATION
OF THE HARDWARE AND THE SOFTWARE AND THEIR PERFORMANCE IN EVERY NATURE AND
RESPECT, AND AS SUCH THIS AGREEMENT SUPERSEDES ALL PRIOR AND CONTEMPORANEOUS
AGREEMENTS, NEGOTIATIONS, REPRESENTATIONS, AND PROPOSALS, WRITTEN AND ORAL,
RELATING TO THE HARDWARE AND SOFTWARE. NO CONTRARY TERMS AND CONDITIONS OF ANY
SUBSEQUENT CUSTOMER PURCHASE ORDER, NO COURSE OF DEALING, TRADE CUSTOM OR USAGE
OF TRADE, AND NO WARRANTY OR PROMISE MADE DURING THE COURSE OF PERFORMANCE, WILL
VARY OR CONTRADICT THE TERMS OF THIS AGREEMENT, UNLESS EXPRESSLY AGREED TO IN
WRITING. CUSTOMER EXPRESSLY ACKNOWLEDGES, AGREES AND REPRESENTS TO IDX THAT
THERE ARE NO UNDERSTANDINGS OR AGREEMENTS WITH RESPECT TO THE HARDWARE OR
SOFTWARE OTHER THAN AS EXPRESSLY SET FORTH IN THIS AGREEMENT.
<PAGE>
IDX SYSTEMS CORPORATION
SYSTEMS DIVISION
P.O. Box 1070
1400 Shelburne Road
Burlington, VT 05402-1070
(802) 862-1022
IDX SOFTWARE SCHEDULE
For
ADVANCED HEALTH CORPORATION
August 22, 1995
This schedule is part of the System Implementation Agreement between IDX systems
Corporation and the Customer named above. The items below are sold pursuant to
the System Implementation Agreement, at the prices specified, and subject to
further terms, if any, contained on this IDX Software Schedule.
Group Practice Management System (GPMS) [ ]*
Unattended Backup
Open-Item Posting
Automatic Transfer by Payor and User-Defined Aging Criteria
Automatic Small Balance Write-Offs
Automatic Rebilling by Payor and User-Defined Aging Criteria
Custom Formatting of Patient Statements
Custom Formatting of Claim Forms
Custom Report Writer
GPMS Collections Plus [ ]*
Automated Collections:
Automatic Assignment to work Queues of:
Collection Accounts by User-Defined Account and Aging Criteria
Unlimited Number of Work Queues for Automated Tickler Activity
Up to 180 Collection and Follow-up Letters.
IDX CONFIDENTIAL
* Omitted pursuant to Rule 406 promulgated under the Securities Act of 1933, as
amended.
<PAGE>
IDX SOFTWARE SCHEDULE
August 22, 1995
Page 2
- - GPMS Automated Appointment Scheduling [ ]*
Automated Tracking:
NoShows
Cancellations
Bumps
Encounter Utilization Reporting
Actual Duration of Encounters, Timed by GPMS
For Resource Utilization Reporting By:
Provider
Place of Service
Encounter Type
User Defined Criteria
Automatic Follow-Up for Recalls:
Automated Wait List
Automatic Letters
- - Initial Training (20 Days) [ ]*
- - Clinical Document Manager [ ]*
- - Electronic Claims Remittance (ECR)(Any Four Carriers) [ ]*
- - Electronic Claims Submission (ECS)(Six Carriers) [ ]*
- - 4 Demographic Conversions [ ]*
- - Med-E-Practice Interface [ ]*
IDX SOFTWARE TOTAL: [ ]*
IDX CONFIDENTIAL
- --------------------
* Omitted pursuant to Rule 406 promulgated under the Securities Act of
1933, as amended.
<PAGE>
IDX SYSTEMS CORPORATION
SYSTEMS DIVISION
P.O. Box 1070
1400 Shelburne Road
Burlington, VT 05402-1070
(802) 862-1022
PAYMENT SCHEDULE
For
ADVANCED HEALTH CORPORATION
August 22, 1995
This Schedule is part of the System Implementation Agreement between IDX Systems
Corporation and the Customer named above. Its terms supplement and modify the
System Implementation Agreement, and in the event of any conflict or
inconsistency between the System Implementation Agreement and this Schedule, the
terms of this Schedule will govern and control; otherwise, all provisions of the
System Implementation Agreement remain in full force and effect. The capitalized
terms used in this Schedule have the definition given in the System
Implementation Agreement.
Schedule of Payments
Customer agrees to make the payments specified below, on or before the
applicable dates.
Date or Event % of Price per Schedules Amount
- ------------- ------------------------ ------
(If Applicable)
Contract Signing 25% of S/W (Appt. Scheduling) *
25% of S/W (Clinical Doc. Mgr.)
25% of S/W (Collections Plus)
25% of S/W (Electronic Claims)
25% of S/W (Electronic Remittance)
25% of S/W (GPMS)
25% of S/W (Interface)
25% of S/W (Conversion)
Contract Signing Total:
IDX CONFIDENTIAL
* Omitted pursuant to Rule 406 promulgated under the Securities Act of 1933, as
amended.
<PAGE>
PAYMENT SCHEDULE
August 22, 1995
Page 2
Delivery 50% of S/W (Appt. Scheduling) *
50% of S/W (Clinical Doc. Mgr.)
50% of S/W (Collections Plus)
50% of S/W (GPMS)
Delivery Total:
Live 15% of S/W (Appt. Scheduling)
15% of S/W (Clinical Doc. Mgr.)
15% of S/W (Collections Plus)
15% of S/W (GPMS)
Live Total:
Live +30 10% of S/W (Appt. Scheduling)
10% of S/W (Clinical Doc. Mgr.)
10% of S/W (Collections Plus)
10% of S/W (GPMS)
Live Total:
Delivery of Format 75% of S/W (Electronic Claims)
75% of S/W (Electronic Remittance)
Delivery Total:
Training Days Used 100% of S/W (Install/Consult)
Conversion Completed 75% of Conversion
Interface 75% of Interface
Subtotal:
Estimated Sales Tax:
Shipping & Insurance
TOTAL:
PAYMENTS ARE DUE UPON THE DATE OR EVENTS SPECIFIED ABOVE AND PAYABLE THIRTY (30)
DAYS AFTER NOTICE. IN THE ABSENCE OF AN AMOUNT FOR SALES TAX, IDX WILL INVOICE
CUSTOMER AT A LATER DATE.
IDX CONFIDENTIAL
- --------------------
* Omitted pursuant to Rule 406 promulgated under the Securities Act of
1933, as amended.
<PAGE>
IDX SYSTEMS CORPORATION
SYSTEMS DIVISION
P.O. Box 1070
1400 Shelburne Road
Burlington, VT 05402-1070
(802) 862-1022
FUTURE PRICING SCHEDULE
For
ADVANCED HEALTH CORPORATION
August 22, 1995
Aggregate Providers/FTE Price Software Maintenance
- ----------------------- ----- --------------------
*
36 - 100 provider * perannum/provider
101 - 150 provider perannum/provider
151 - 200 provider perannum/provider
201 + provider perannum/provider
NOTE: Any single practice with over 100 providers/FTE's will be negotiated
separately.
* Omitted pursuant to Rule 406 promulgated under the Securities Act of 1933, as
amended.
<PAGE>
FUTURE PRICING SCHEDULE
August 22, 1995
Page 2
Other IDX Services: (All below prices are good for one (1) year from date of
- -------------------
signing.)
- - BALANCE FORWARD CONVERSIONS *
- - OPEN-ITEM CONVERSION
- - IDX Conversion Training - includes (3) days of training,
XASCII to GPMS Program and IDX Conversion tools.
- - IDX Electronic Claims Submission Training Class
- - ISX GPMS Training:
- Trainer (Account Manager)
- Senior Account Manager
- Advisory Account Manager
- IDX Hardware Installation Consulting
NOTE: Travel Expenses or not included for IDX training classes or consulting
services.
IDX PROGRAMING/FORMATTING SERVICES:
- -----------------------------------
ELECTRONIC CLAIM FORMATS NEW CARRIERS *
ELECTRONIC REMITTANCE FORMATS NEW CARRIERS
PAPER STATEMENTS AND CLAIMS FORMATTING CHANGES
ELECTRONIC CLAIMS/REMISSION FORMATTING CHANGES
HOSPITAL AND LAB SYSTEMS INTERFACE PRICING (ESTIMATES):
- -------------------------------------------------------
Inquiry Only
One Way Demographic Interface
Two Way Demographic Interface
UNSPECIFIED INTERFACES AND PROGRAMMING TIME
OTHER INTERFACE PRICING:
- ------------------------
Open Systems General Ledger Interface (ASCII File
via GPMS Custom Report)
- --------------------
* Omitted pursuant to Rule 406 promulgated under the Securities Act of
1933, as amended.
<PAGE>
IDX SYSTEMS CORPORATION
SYSTEMS DIVISION
P.O. Box 1070
1400 Shelburne Road
Burlington, VT 05402-1070
(802) 862-1022
ADDENDUM TO THE SYSTEM IMPLEMENTATION
AGREEMENT
For
ADVANCED HEALTH CORPORATION
August 22, 1995
This Addendum is part of the System Implementation Agreement between IDX Systems
Corporation and the Customer named above. Its terms supplement and modify the
System Implementation Agreement, and in the event of any conflict or
inconsistency between the System Implementation Agreement and this Addendum, the
terms of this Addendum will govern and control; otherwise, all provisions of the
System Implementation Agreement remain in full force and effect. The capitalized
terms used in this Addendum have the definition given in the System
Implementation Agreement.
If IDX and Customer establish a joint venture to market the Med-E-Practice
Software, then IDX will refund the thirty thousand dollar interface cost to the
Customer.
DELIVERY:
- ---------
- - Remove this paragraph in its entirety and replace with the following:
"Customer will notify IDX that the appropriate hardware necessary to
install the Software has been successfully installed by Customer and that
IDX shall install the object code version of the Software and notify
Customer that the Software has been installed."
CHARGES AND PAYMENTS:
- ---------------------
- - In line 16, replace "date of invoice" with "receipt of correct invoice".
- - In line 18, insert the following before "prices":
"IDX shall communicate travel arrangements, attendees, number of staff and
other details to Customer in advance of every trip. IDX will also provide
appropriate supporting documents for travel expenses."
IDX CONFIDENTIAL
<PAGE>
ADDENDUM TO THE SYSTEM IMPLEMENTATION AGREEMENT
August 22, 1995
Page 2
- - In line 20, insert the following after "net income":
"and income, franchise or similar taxes imposed on or measured by the net
income or gross receipts of IDX."
GRANT OF LICENSE:
- -----------------
- - In line 36, replace "two (2)" with "multiple".
- - In line 37, strike the following:
"One (1) of which .........., processing purposes."
TITLE AND OWNERSHIP
- -------------------
- - Add the following to the end of this paragraph:
"The Customer may demonstrate the Software to prospective customers to gain
potential business."
SCOPE:
- ------
- - In line 44, page 2 of 5, replace "The one (1) executable copy" with "Multiple
executable copies" and "two (2)" with "the multiple".
- - In line 45, page 2 of 5, remove the following:
"or any temporary substitution located in the United States".
- - In line 46, page 2 of 5, replace "terminals" with "providers".
- - In line 2, page 3 of 5, remove "as a licensed provider of medical care .....
person or entity."
- - In line 3, page 3 of 5, remove the following sentence:
"Neither the Software ..... or data processing service."
- - In line 6, page 3 of 5, remove "up to two (2)".
CUSTOMER RESPONSIBILITIES:
- --------------------------
- - Delete the last sentence of this section in its entirety and replace with the
following:
"Customer acknowledges that the hardware and Software provided hereunder
are tools to be used by Customer with due care and that their successful
use and operation is dependent upon the skill of the operator. Customer
further acknowledges that the use of such
IDX CONFIDENTIAL
<PAGE>
ADDENDUM TO THE SYSTEM IMPLEMENTATION AGREEMENT
August 22, 1995
Page 3
hardware and Software is not a substitute for the professional skill and
judgement of a qualified and trained professional."
- - Add the following to the end of this section.
"IDX acknowledges that it has responsibilities with regards to successful
implementation of the Software. The attached installation timeline outlines
some of these responsibilities."
ACCEPTANCE:
- -----------
- - In line 34, insert the following after "produce":
"Substantially accurate and complete"
- - In line 35, replace "thirty (30) days." with "one (1) calendar month."
LIMITED WARRANTY:
- -----------------
- - In line 38, replace "IDX gives notice that the Software has been installed and
is ready for productive use with "Customer accepts Software".
BANKRUPTCY:
- -----------
- - In line 2, page 4 of 5, add the following after "license":
"and may execute the attached Escrow Agreement".
ASSIGNMENT:
- -----------
- - In line 6, add the following sentence after "by IDX.":
"Such request for assignment shall not be unreasonably withheld by IDX."
TERMINATION:
- ------------
- - Add the following to the end of this paragraph:
"If Customer elects to terminate the Agreement, based on the conditions
outlined above, within one year from Acceptance, IDX will refund all
Software License fees paid to IDX. After such time IDX is not liable to
reimburse Customer for any fees paid to IDX."
PARAGRAPH 18:
- -------------
- - In line 47, remove the following:
"less a pro rata ...... of litigation."
IDX CONFIDENTIAL
<PAGE>
ADDENDUM TO THE SYSTEM IMPLEMENTATION AGREEMENT
August 22, 1995
Page 4
INTERPRETATION:
- ---------------
- - In line 7, page 5 of 5, replace "Vermont" with "New York".
- - In line 9, page 5 of 5, replace "effective date of this Agreement." with the
following: "date of occurrence.".
Initial: [INITIALED]
-------------------- IDX
[INITIALED]
-------------------- AHC
IDX CONFIDENTIAL
EXHIBIT 10.9
EXECUTION COPY
================================================================================
MANAGEMENT SERVICES AGREEMENT
BETWEEN
MADISON MEDICAL-THE PRIVATE PRACTICE GROUP OF NEW YORK, L.L.P.,
AND
UPTOWN PHYSICIAN MANAGEMENT, INC.
Dated as of December 11, 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............................... 3
SECTION 5. Obligations of the Medical Group.............................. 4
SECTION 6. Fees ....................................................... 5
SECTION 7. Certain Covenants............................................. 5
SECTION 8. Insurance and Indemnity....................................... 6
SECTION 9. Default....................................................... 7
SECTION 10. Termination................................................... 8
SECTION 11. Non-Disclosure of Confidential Information.................... 8
SECTION 12. Restrictive Covenants......................................... 9
SECTION 13. Activities of the Management Company.......................... 10
SECTION 14. Assignment.................................................... 11
SECTION 15. Notices....................................................... 11
SECTION 16. Benefits of Agreement; No Third Party
Beneficiaries.......................................... 12
SECTION 17. Governing Law and Arbitration................................. 12
SECTION 18. Headings...................................................... 12
SECTION 19. Entire Agreement; Amendments.................................. 12
SECTION 20. Severability.................................................. 12
SECTION 21. Counterparts.................................................. 13
SECTION 22. Waivers....................................................... 13
SECTION 23. Survival of Termination....................................... 13
SECTION 24. Contract Modification for Prospective Legal
Events................................................. 13
-i-
<PAGE>
ATTACHMENTS
SCHEDULE I -- Management Services
SCHEDULE II -- Actual Costs
SCHEDULE III -- Full-Time Employees
SCHEDULE IV -- Medical Group Expenses
SCHEDULE V -- Billing Fee
SCHEDULE VI -- Management Fee
SCHEDULE VII -- Hardware, Software and Maintenance Fee
SCHEDULE VIII -- Information Management Fee
EXHIBIT A -- Guarantee
-ii-
<PAGE>
INDEX OF DEFINED TERMS
Term Section
- ---- -------
ACN....................................................................... 3(d)
Actual Costs...............................................................3(b)
Actual Revenues................................................Schedule V(3)(i)
Additional Term............................................................2(a)
Administrative Personnel..........................................Schedule I(5)
Aggregate Collections..........................................Schedule V(2)(a)
AHC........................................................................3(d)
Agreements............................................................Exhibit A
Annualized Revenues...........................................Schedule V(3)(ii)
Applicable Law.............................................................3(c)
Authorized Officer.........................................................1(d)
Base Term..................................................................2(a)
Base Burden Percentage...........................................Schedule VI(3)
Billing Fee.............................................................6(a)(i)
Burden Agreement.................................................Schedule VI(3)
Competitive Business......................................................12(b)
confidential or proprietary information...................................11(b)
Data.............................................................Schedule I(11)
Documents..................................................................1(d)
Effective Date.............................................................2(a)
Facility...................................................................5(b)
First Renegotiated Percentage..........................................6(a)(ii)
Guarantee..................................................................7(c)
Hardware, Software and Maintenance Fee.....................................6(b)
IDX.......................................................................10(c)
Information Management Fee.................................................6(d)
JMAB.......................................................................4(a)
Letter Agreement...........................................................3(d)
Loss.............................................................Schedule VI(3)
Managed Care Contracts...........................................Schedule I(13)
Management Company.....................................................Preamble
Management Company Default.................................................9(a)
Management Company Disclosees.............................................11(a)
Management Company Representatives.........................................4(a)
Management Fee.............................................................6(b)
Management Services........................................................1(a)
Medical Group..........................................................Preamble
Medical Group Default......................................................9(b)
Medical Group Disclosees..................................................11(a)
Medical Group Representatives..............................................4(a)
Medical Personnel.................................................Schedule I(6)
Medical Practice...........................................................7(a)
Medical Services.......................................................Preamble
Monthly Actual Costs.............................................Schedule VI(1)
Monthly Collections............................................Schedule V(2)(a)
Network..........................................................Schedule I(15)
New Offer.................................................................24(b)
Offer.....................................................................24(b)
Offeror...................................................................24(b)
On-line Date ..................................................... Schedule VII
Operating Account.........................................Schedule I (3)(a)(vi)
-iii-
<PAGE>
Period............................................................Schedule VI(3)
Physician Employees................................................Schedule I(6)
Physician Partners.................................................Schedule I(6)
Potential Transaction.......................................................7(a)
Renegotiated Information Management Fee............................Schedule VIII
Renegotiated Percentage.................................................6(a)(ii)
Reimbursement Obligation...................................................10(c)
Saving Schedule...................................................Schedule VI(3)
Second Installment..............................................Schedule VIII(a)
Section 17 coverage.........................................................8(a)
Stub Period........................................................Schedule V(3)
Sublicense Agreement...................................................Exhibit A
Term........................................................................2(a)
Termination Date...........................................................10(b)
Third Party................................................................24(b)
Transfer...................................................................24(b)
-iv-
<PAGE>
MANAGEMENT SERVICES AGREEMENT
dated as of December 11, 1995,
between MADISON MEDICAL-THE PRIVATE
PRACTICE GROUP OF NEW YORK, L.L.P.,
a New York limited liability
partnership (the "Medical Group"),
and UPTOWN PHYSICIAN MANAGEMENT,
INC., a Delaware corporation (the
"Management Company").
The Medical Group is a limited liability partnership involved in providing
a range of medical services including primary care and specialty 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 Management Company and the Medical Group desire to
enter into this Agreement, pursuant to which, among other things, the Management
Company will render 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 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 (as defined below) 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 management services.
<PAGE>
(d) 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: (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 and deposit such amounts in the
Operating Account (as defined in Schedule I); (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 and deposit such amounts in the
Operating Account; (iv) to take possession of and endorse in the name of the
Medical Group (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, cash, cash equivalents and other instruments
received in payment of accounts receivable and deposit such amounts in the
Operating Account; 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(d), shall not have any duties or responsibilities except those
expressly set forth in Sections 1(d)(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 perform its duties as agent under this Section 1(d) 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.
SECTION 2. Term. (a) This Agreement shall commence on the date hereof (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") or
extended for one or more additional terms (each an "Additional Term" and
together with the Base Term, the "Term") upon the mutual agreement in writing of
the Medical Group and the Management Company.
SECTION 3. Management Services. (a) The Management Company shall be the
manager and administrator of the Management
-2-
<PAGE>
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 monthly basis the costs and expenses (the
"Actual Costs") described on Schedule II relating to the Management Services;
-----------
provided, however, that the costs and expenses relating to the full-time
- -------- -------
employees listed on Schedule III employed by the Medical Group after December
------------
11, 1995, shall, from the date hereof until December 31, 1996, be (i) excluded
from the definition of Actual Costs and (ii) borne equally by the Medical Group
and the Management Company.
(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") or other events over which the
Management Company has no control for so long as such events continue and for a
reasonable time thereafter; provided, however, that the Management Company shall
use its best efforts to provide the Management Services notwithstanding the
occurrence of an event set forth in this Section 3(c).
(d) EXCEPT AS SET FORTH IN THE LETTER AGREEMENT (THE "LETTER AGREEMENT"),
DATED THE DATE HEREOF, AMONG ADVANCED HEALTH CORPORATION ("AHC"), ADVANCED
CLINICAL NETWORKS CORPORATION ("ACN"), UPTOWN PHYSICIAN MANAGEMENT, INC. AND THE
MEDICAL GROUP, 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, THIRD-PARTY COMPUTER
SOFTWARE, FURNISHINGS, INVENTORY OR SUPPLIES PROVIDED PURSUANT TO THIS AGREEMENT
FOR THE CONDUCT OF A MEDICAL PRACTICE OR FOR ANY OTHER PARTICULAR PURPOSE.
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.
SECTION 4. Joint Management Advisory Board. (a) 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 and the delivery of Medical Services. The JMAB shall initially
consist of five members. The Management Company shall designate, in its sole
discretion, two members (the "Management Company Representatives") of the JMAB.
The Medical Group shall designate, in its sole discretion, three members (the
"Medical Group Representatives") of the JMAB which Medical Group
-3-
<PAGE>
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.
SECTION 5. Obligations of the Medical Group. (a) The Medical Group shall
provide professional services to patients in compliance at all times with
ethical standards, laws and regulations applying to the medical profession. 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. The Medical Group shall monitor the quality of medical care
provided by Medical Personnel associated with the Medical Group.
(b) The Medical Group shall use and occupy any Facility (as defined below)
principally for the practice of medicine and shall comply with all applicable
federal, state and local rules, laws, regulations, ordinances and standards of
medical care. The medical practice or practices conducted at any Facility shall
be conducted solely by Medical Personnel associated with the Medical Group, and
no other physician or medical practitioner shall be permitted to use or occupy
any such Facility without prior written notice to the Management Company and the
prior written consent of the Medical Group. The term "Facility" shall mean any
medical facility or laboratory controlled, managed or operated by the Management
Company.
(c) 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.
(d) The Medical Group and its Medical Personnel shall be solely responsible
for the cost of membership in professional associations and continuing
professional education.
(e) The Medical Group shall obtain and maintain professional liability
insurance for the Medical Group and its Medical Personnel and shall cooperate
with the Management Company in ensuring that its Medical Personnel are
insurable.
(f) The Medical Group 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 God, changes in Applicable Law or other events
over which the Medical Group has no control for so long as such events continue
and for a reasonable time thereafter; provided, however,
-4-
<PAGE>
that the Medical Group shall use its best efforts to continue to provide the
Medical Services notwithstanding the occurrence of an event set forth in this
Section 5(f).
(g) The Medical Group shall be solely responsible for all costs, fees and
expenses related to the items and services listed on Schedule IV.
SECTION 6. Fees. (a) (i) In consideration of the billing and collection
services rendered by the Management Company, the Medical Group shall pay to the
Management Company on the first business day of each month the billing fee set
forth on Schedule V (the "Billing Fee") for such services rendered during the
----------
prior calendar month.
(ii) Commencing on March 31, 1997, the Medical Group and the Management
Company shall review the Billing Fee then in effect and negotiate in good faith
based on such review the renegotiated percentage (the "Renegotiated
Percentage"). If the parties fail to reach a mutually acceptable agreement on or
before April 30, 1997, the parties will enter into baseball-style arbitration in
which the Renegotiated Percentage shall be determined by an independent
arbitrator mutually agreed to by the parties, such arbitration to take place
during the 60 day period ending on June 30, 1997. Each party shall submit its
proposal for the Renegotiated Percentage to the arbitrator. The arbitrator shall
review such proposals and the fees charged by third parties for billing and
collection services in comparable geographic regions for a comparable mix of
primary and specialty physician practices. After such review, the arbitrator
shall select either the Medical Group's or the Management Company's proposal for
the Renegotiated Percentage and shall issue a written determination setting
forth the Renegotiated Percentage and the basis for such determination. The
arbitrator's decision shall be final and binding on the parties.
(b) In consideration of the Management Services rendered by the Management
Company during the Term, the Medical Group shall pay to the Management Company
the monthly management fee set forth on Schedule VI (the "Management Fee"). The
-----------
equal estimated installments on the first business day of each week during the
Term (with any adjustments to be made at the end of each month).
-5-
<PAGE>
(c) In consideration of the hardware, software, maintenance, installation
and training services provided by the Management Company to the Medical Group on
a turnkey basis, the Medical Group shall pay the fees listed on Schedule VII
------------
(the "Hardware, Software and Maintenance Fee"). The Management Company shall use
every reasonable effort to provide the hardware for the Med-E-Practice system at
ACN's cost to purchase such hardware paid to an unrelated third party or to an
affiliate. In connection therewith, the Management Company shall present three
competitive bids for the supply of hardware for the Med-E-Practice system (or
such lesser number of bids, if less than three bids are received by the
Management Company) to the JMAB. The JMAB shall approve one of the bids and the
Management Company shall procedure such hardware from such approved bidder.
(d) In consideration of the financial reporting and clinical data
management services rendered by the Management Company during the Term, the
Medical Group shall pay to the Management Company the information management
fees (the "Information Management Fee") set forth on Schedule VIII.
-------------
(e) The fees charged by the Management Company hereunder shall be no less
favorable to the Medical Group than the fees charged by ACN or an affiliate
thereof for management services rendered to other practice management clients
with a reasonably comparable mix of specialists in the boroughs of Manhattan,
Brooklyn, Queens, Staten Island and/or the Bronx. Such fees charged to the
Medical Group shall be adjusted, if necessary, to reflect the most favored
customer rates of ACN and its affiliates.
(f) The Medical Group shall pay its obligations to the Management Company
in a prompt and timely manner.
SECTION 7. Certain Covenants. (a) Except for the physician practices and
groups of physicians (each, a "Medical Practice") that the Management Company
has entered into an agreement or is engaged in confidential negotiations with
prior to the date hereof with respect to the provision of management services,
(i) neither AHC, any affiliate thereof nor the Management Company shall during
the Term provide the Management Services to any other multi-specialty or primary
care Medical Practice maintaining an office or practicing within the geographic
area bounded by East 42nd Street, Fifth Avenue, East 110th Street and the East
River in the borough of Manhattan in the State of New York without the written
consent of the Medical Group and (ii) prior to entering into an agreement to
provide Management Services to any Medical Practice maintaining an office or
practicing within the geographic areas bounded by 34th Street, the East River,
110th Street and the Hudson River in the borough of Manhattan in the State of
New York, the Management Company and AHC or any affiliate thereof shall use
every reasonable effort to introduce such Medical Practice to the Medical Group
for the purpose of the Medical Group exploring a possible merger or combination
with or acquisition of the capital stock or assets of such Medical Practice (a
"Potential Transaction"). If either the Medical Practice or the Medical Group
orally opposes a Potential Transaction after such introduction, then the
Management Company may enter into an agreement to provide management services to
such Medical Practice without any restriction other than the restrictions set
forth in Section 6(e).
(b) The Management Company shall use every reasonable effort to assist the
Medical Group to comply with the National Committee for Quality Assurance
standards prior to the Management Company having any obligation under this
Agreement to provide Management Services to the Medical Group with respect to
Managed Care Contracts.
(c) AHC shall unconditionally guarantee the due and punctual performance
when due of all obligations, financial or otherwise, of the Management Company
under this Agreement pursuant to the guarantee substantially in the form of
Exhibit A (the "Guarantee").
-6-
<PAGE>
(d) In performing their respective obligations under this Agreement, each
of the Management Company and the Medical Group shall comply with all Applicable
Law.
(e) All costs and expenses relating to the incorporation, formation and
maintenance of the Management Company shall be borne by ACN.
SECTION 8. 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 such
physician 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, directors, shareholders, employees, agents and
medical professional 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 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.
(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, (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) or (iv) any erroneous or fraudulent Medical Group
billing caused solely by the Management Company's negligence. In addition, the
Management Company shall reimburse the Medical Group for any legal expenses
-7-
<PAGE>
incurred by reason of the Medical Group or any affiliate thereof being named as
a party to any suit or claim based upon Management Services provided by the
Management Company, its members or employees.
SECTION 9. Default. (a) The occurrence of any one or more of the following
events shall constitute a default by the Management Company (a "Management
Company Default") under this Agreement:
(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 30 days after written notice
thereof has been given to the Management Company by the Medical Group;
(ii) 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:
(iii) in the event that AHC or any affiliate thereof breaches any of
the representations and warranties and covenants in the Letter Agreement in
any material respect and such breach shall continue for a period of 30 days
after written notice thereof has been given to the Management Company by
the Medical Group;
(iv) in the event the Management Company materially defaults in the
performance of the Management Services set forth in on Schedule I in any
material respect 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;
(v) in the event the Management Company, AHC or any affiliate thereof
enters into a management agreement with a third party medical practice and
the performance by the Management Company, AHC or any affiliate thereof of
its obligations under such management agreement will have a material and
adverse effect on the financial condition and results of operations of the
Medical Group and such management agreement shall remain in effect for a
period of 30 days after written notice thereof has been given to the
Management Company by the Medical Group; or
(vi) in the event the Management Company shall fail to use its best
efforts to introduce the Medical Group
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<PAGE>
to managed care payors in accordance with paragraph (13) of Schedule I.
(b) The occurrence of any one or more of the following events shall
constitute a default by the Medical Group (a "Medical Group Default") under this
Agreement:
(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 30 days after written notice
thereof has been given to the Medical Group by the Management Company; or
(ii) 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.
SECTION 10. Termination. (a) The Medical Group may terminate this Agreement
effective immediately by giving written notice to the Management Company of a
Management Company Default.
(b) The Medical Group may terminate this Agreement without cause with
effect on any anniversary date of the Effective Date during the Term
(the"Termination Date") by giving the Management Company 180 days prior written
notice of such Termination Date subject to the following:
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<PAGE>
(i) from the Effective Date until the first anniversary of the
Effective Date, the Medical Group shall not terminate this Agreement
without cause; and
(ii) from the first anniversary of the Effective Date until the tenth
anniversary of the Effective Date, the Medical Group may terminate this
Agreement without cause by paying to the Management Company on the
Termination Date a termination fee equal to [ ]* After the tenth
anniversary of the Effective Date, the Medical Group may terminate this
Agreement without cause and, in such event, the Medical Group shall have no
obligation to pay to the Management Company a termination fee.
(c) The Management Company may terminate this Agreement effective
immediately by giving written notice to the Medical Group of a Medical Group
Default; provided, however, that for a period not to exceed 90 days after any
such termination the Management Company shall continue to render the Management
Services, if, and only if, the Medical Group continues paying to the Management
Company the fees set forth in Section 6 (subject the amount of any shortfall in
the Management Company's Group terminates this Agreement as a result of a
Management Company Default, the Management Company shall use its best efforts to
ensure continuity for the Medical Group with respect software; provided,
--------
however, that the Management Company shall reimburse the Medical Group up to
- -------
[ ]* per physician user (the :Reimbursement Obligation") in the event the
Medical Group is required to pay IDX for the right to continue to use the IDX
practice management software after any such termination.
(d) If the Medical Group terminates this Agreement without cause or the
Management Company terminates this Agreement as a result of a Medical Group
Default, 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.
(e) Either the Management Company or the Medical Group may terminate this
Agreement pursuant to Section 24.
(f) Following any termination of this Agreement, the Management Company
shall continue to collect the Medical Group's accounts receivable accrued as of
the Termination Date and the Medical Group shall pay to the Management Company
the Billing Fee set forth in Section 6 for such collection services.
SECTION 11. Non-Disclosure of Confidential Information. (a) Neither the
Medical Group, its Medical
- ----------
* Omitted pursuant to Rule 406 promulgated under the Securities Act of 1933,
as amended.
-10-
<PAGE>
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 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 or (ii)
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 of
competent jurisdiction.
SECTION 12. Restrictive Covenants. The parties recognize that the
Management Services shall be deliverable only if the Medical Group operates an
active medical practice to which the Medical Personnel associated with the
Medical Group devote substantial time and attention. To that end:
(a) During the Term, neither the Medical Group, nor the Physician Partners
or Physician Employees, so long as they continue to be Physician Partners and
Physician Employees, shall provide Medical Services at any medical office,
clinic or other health care facility other than a Facility, without the prior
written approval of the JMAB; provided, however, that a Physician Partner or
Physician Employee may provide Medical Services at a health care facility other
than a Facility, if, and only if, the physician revenues relating to such
Medical Services are included in the Medical Group's revenues for the purpose of
calculating the Management Company's fees pursuant to Section 6. The Medical
Group shall cause the Physicians to comply with their obligation pursuant to
this Section 12(a).
(b) The Medical Group acknowledges and recognizes the highly competitive
nature of the business of the Management
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<PAGE>
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 which are substantially equivalent to the Management
Services provided by the Management Company.
(c) 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
this Section 12 shall be inadequate the non-breaching 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 12 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 12. The invalidity or non-enforceability of this Section 12 in any
respect shall not affect the validity or enforceability of the remainder of this
Section 12 or of any other provisions of this Agreement.
SECTION 13. Activities of the Management Company. (a) 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, except
in compliance therewith.
(b) The Management Company shall not interfere with the exercise of
professional judgment by any Medical Personnel 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
-12-
<PAGE>
and monitoring compliance with policies and procedures that have been instituted
in accordance with this Agreement.
SECTION 14. Assignment. Except with respect to the Services Agreement dated
the date hereof between ACN and the Management Company, neither the Management
Company nor the Medical Group shall assign or delegate its rights or duties
hereunder without the prior written consent of the other party.
SECTION 15. 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:
Uptown Physician Management, Inc.
c/o Advanced Health Corporation
560 White Plains Road, 2nd Floor
Tarrytown, New York 10591
Attention: Alan Masarek
with a copy to:
O'Sullivan Graev & Karabell, LLP
30 Rockefeller Plaza
New York, New York 10112
Attention: John J. Suydam, Esq.
if to the Medical Group, to:
Madison Medical - The Private Practice Group
of New York, L.L.P.
535 Park Avenue
New York, New York 10021
Attention: Gerald Bahr, M.D.
with a copy to:
Jankoff, Sakofsky, Yegelwel & Gabe, P.C.
575 Lexington Avenue
New York, New York 10022
Attention: John H. Jankoff, 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
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<PAGE>
mailing, on the third business day following that on which the piece of mail
containing such communication is posted.
SECTION 16. 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 17. 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, 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 17(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 18. Headings. Section headings are used for convenience only and
shall in no way affect the construction of this Agreement.
SECTION 19. Entire Agreement; Amendments. This Agreement, the Letter
Agreement, the Stockholders' Agreement, the Sublicense Agreement, the Schedules
and the Exhibits 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 20. 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
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<PAGE>
remainder of this Agreement shall be effective and binding upon the parties and
the parties shall amend this Agreement in any reasonable manner requested by
either party to restore the intended benefits of the provision so severed.
SECTION 21. 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 22. 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 23. Survival of Termination. Notwithstanding anything contained
herein to the contrary, Sections 6, 7(d), 8, 9, 10, 11, 15, 16, 17, 18, 19, 20,
21 and 22 and this Section 23 shall survive any termination or expiration of
this Agreement.
SECTION 24. Contract Modification for Prospective Legal Events. (a) In the
event any Applicable Law, now existing or 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 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.
(b) In the event any Applicable Law, now existing or 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 allow a business
corporation to purchase, operate or own equity interests in medical practices or
professional corporations, and if the Medical Group or any holder or a
partnership interest in the Medical Group (the "Offeror") proposes to sell,
transfer, assign, pledge, distribute, encumber or otherwise dispose of, either
voluntarily or involuntarily, with or without consideration, any partnership
interest of the Medical Group or all or substantially all of the assets of the
Medical Group (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 during which time the
Management Company shall
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<PAGE>
have the right to accept such Offer. If the Management Company fails to accept
such Offer within the 45 day period and the Offeror proposes to enter into such
Transfer with a Third Party upon terms more favorable than the Offer (the "New
Offer"), the Management Company shall have the right to accept any New Offer
within a 30 day period following the Offeror's delivery to the Management
Company of a written notice containing the terms of such New Offer.
* * *
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<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Management Services
Agreement as of the date first above written.
MADISON MEDICAL - THE PRIVATE
PRACTICE GROUP OF NEW YORK, L.L.P.
By Its Executive Committee on
behalf of Madison Medical - The
Private Practice Group of New
York, L.L.P.
By: [signature unreadable]
--------------------------------
By: [signature unreadable]
--------------------------------
By: [signature unreadable]
--------------------------------
By: [signature unreadable]
--------------------------------
UPTOWN PHYSICIAN MANAGEMENT, INC.
By: [signature unreadable]
--------------------------------
Name:
Title: President
ACCEPTED AND AGREED AS TO
SECTION 7 (a) AND 7(c):
ADVANCED HEALTH CORPORATION
By: /s/ Alan B. Masarek
--------------------------------
Name: Alan B. Masarek
Title: Chief Oper. Officer/Chief Fin. Operator
ACCEPTED AND AGREED AS TO
SCHEDULE VII AND SECTION 7(e):
ADVANCED CLINICAL NETWORKS CORPORATION
By: /s/ Alan B. Masarek
--------------------------------
Name: Alan B. Masarek
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 which will be provided in
consideration of the payment of the Management Fee:
(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;
(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 and shall provide financial and accounting
reporting on a calendar quarter basis within 20 business days after the end
of each calendar quarter;
(3) Billing and Collection. (a) Except with respect to the billing and
collection relating to radiology services provided to the Medical Group by
a third party, the Management Company shall provide the following billing
and collection services and reports to the Medical Group:
(i) The preparation of and inputting of patient initial bills
(super-bills) and the 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.
<PAGE>
(v) Billing statements will be completed containing all detail
on open items as well as payments, adjustments and
information requests.
(vi) Payments received will be deposited daily into the Medical
Group's operating account (the "Operating Account").
(vii) Posted payments will be verified against the Operating
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) Management Company will provide 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) Management Company employees will be cross-trained for each
billing function, including data entry, billing, follow up,
<PAGE>
correspondence, filing, collections, cash receipts,
supervision, litigation, and insurance.
(xi) 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.
(xii) Management Company shall provide management services for
office operations including a full-time on-site person at
the 110 East 59th Street Medical Group office at the time
the Medical Group occupies such office to assist in:
(A) Personnel training,
promotion of the Medical
Group's medical practice and
management.
(B) Equipment evaluation,
selection, installation,
quality control and
operation.
(C) Bookkeeping of expenses, payables,
payroll.
(D) Advisement of insurance and other
controls.
(E) Operations, services, hours,
techniques, pricing, and policies
(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 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.
<PAGE>
The Management Company shall protect the confidentiality of patient medical
records to the extent required by Applicable Law; provided, however, that in no
event shall a breach of such confidentiality be deemed a default under this
Agreement unless such breach is part of a continuing course of conduct by the
Management Company;
(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, subject to the
reasonable and timely approval of the JMAB. The Management Company shall provide
administrative services such as scheduling, personnel policies and payroll
administration for Administrative Personnel;
(6) Medical Personnel Recruiting and Payroll. As a material inducement to
the Medical Group entering into this Agreement, subject to Section 5(c) of the
Agreement, the Management Company shall in consultation with the Medical Group
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 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
unless such breach is part of a continuing course of conduct by the Management
Company 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. The Management Company shall negotiate on behalf of the
Medical Personnel the insurance coverage as described in Section 8(a);
<PAGE>
(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
cause its subcontractor to generate an annual W-2 statement for each Physician
Partner and Physician Employee of the Medical Group. 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;
(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. The Management Company on a weekly basis shall deliver
back-up copies of the practice management data stored on the IBM RS/6000
computer in the Med-E-System Corporation's Chicago data center (the "Data") to
an off-site storage facility designated by the Medical Group. Back-up copies of
the Data shall be stored at the off-site facility for the statute of limitations
period under Applicable Law applicable to the management of files and records of
this kind. The Management Company acknowledges the right of the Medical Group to
install its own computer system at the Medical Group's 110 East 59th Street
location, or such other location designated by the Medical Group, to run the
Data. Business records of the Medical Group 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
Medical Group and shall be located at a location that is readily accessible for
patient care. The chief financial officer of the Medical Group shall have
unrestricted access to all business and patient medical records and files during
reasonable business hours. 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 a breach of such
confidentiality be deemed a default under this Agreement unless such breach is
part of a continuing course of conduct by the Management Company;
<PAGE>
(12) Payors. As a material inducement to the Medical Group entering into
this Agreement, the Management Company shall assist the Medical Group in the
solicitation of, and negotiations with, prospective payors, including, without
limitation, preparation of cost forecasts and proposals;
(13) Managed Care. The Management Company shall use its best efforts to (i)
solicit and present to the Medical Group prospective managed care payors and
opportunities to engage in managed care contracts ("Managed Care Contracts") and
(ii) 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 JMAB;
(14) 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;
(15) Introductions. The Management Company shall use every reasonable
effort to introduce to the Medical Group any single specialty physician network
or multi-specialty physician network (each, a "Network") located in Manhattan,
Brooklyn, Queens, Staten Island and/or the Bronx now or hereafter managed by the
Management Company or any affiliate thereof for the purpose of the Network
considering the use of the Medical Group's Medical Services; and
(16) Non-medical Management Support. The Management Company shall provide
all other 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); provided, however, that from the date hereof any
full-time equivalents employees involved in billing and collection functions as
reasonably determined by the JMAB shall be excluded from Actual Costs; provided,
further, that from the date hereof reception and scheduling personnel shall be
included in Actual Costs.
Rents
Telephone-Communications (except as provided on Schedule VII)
Insurance - Incl. Malpractice
Office Expense (expenses normally incurred in the conduct of its business)
Payroll Service
Repairs & Maintenance
Equipment Lease
Logistics/Courier
Legal/Accounting/Prof. Fees (other than legal, accounting and professional fees
of the Medical Group not related to the Management Services)
Outside Office Service
Bank Charges (late payments and other ordinary fees incurred in the conduct
of its business)
Medical Supplies
Commercial Rent Tax
<PAGE>
SCHEDULE III
to Management Services Agreement
Full-Time Employees
Two full-time employees hired by a temporary employment agency.
<PAGE>
SCHEDULE IV
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
Hospital Fees
Workers Comp/DBL Insurance/Life
Conference Cost/Travel & Entertainment
Dues, Licenses and Subscriptions
Legal/Accounting/Professional Fees Not Related to the Management Services
Contributions
Unincorporated Business Tax
Auto Lease/Garage
<PAGE>
SCHEDULE V
to Management Services Agreement
--------------------------------
The Medical Group shall pay to the Management Company the following Billing
Fee:
(1) For the billing and collection services to be rendered from
December 11, 1995, until April 30, 1996, the Management Company hereby
acknowledges receipt of $407,058.54 from the Medical Group in partial
payment for such services. The Management Company further acknowledges that
such amount paid by the Medical Group shall be credited against any amounts
owed by the Medical Group for the period January 1, 1996, through April 30,
1996, pursuant to paragraph (2) below.
(2) From January 1, 1996, until December 31, 1996, a monthly fee equal
to:
(a) If the Medical Group's aggregate revenues collected by the
Management Company in a given calendar year (the "Aggregate
Collections") are less than or equal to $30,000,000, an amount equal
to Medical Group's immediate preceding month's revenues collected by
the Management Company (the "Monthly Collections") multiplied by [*];
(b) If Aggregate Collections are greater than $30,000,000 but
less than $45,000,000, an amount equal to the Monthly Collections
multiplied by [*]; or
(c) If Aggregate Collections are greater than $45,000,000, an
amount equal to the Monthly Collections multiplied by [*].
----------
(d) For new medical practices acquired by, consolidated with or
merged into the Medical Group:
(i) For each primary care physician, their historical cost;
provided, that such rate shall not be less than [*] of such
--------
physician's billings collected by the Management Company; and
(ii) For each specialist physician, a market-based estimate
of the rate charged for billing and collection services rendered
to specialist physicians of that type.
(3) From January 1, 1997, until June 30, 1997 (the "Stub
Period"), a fee to be determined at the end of
- -----------------------
* Omitted pursuant to Rule 406 promulgated under the Securities Act of 1933,
as amended.
<PAGE>
the Stub Period in accordance with the formulas set forth in this
paragraph (3) (a) through (c). As used below (i) "Actual Revenues"
shall mean the Medical Group's aggregate revenues collected by the
Management Company during the Stub Period and (ii) "Annualized
Revenues" shall mean Actual Revenues multiplied by two.
----------
(a) If Annualized Revenues are less than or equal to
$30,000,000, an amount equal to Actual Revenues multiplied by
[*].
(b) If Annualized Revenues are greater than $30,000,000, an
amount equal to:
Actual Revenues x $30,000,000 x [ * ]
-----------
Annualized
Revenues
plus
----
Actual Revenues x Annualized x [ ]*
Revenues in
excess of
$30,000,000
and less than
or equal
to $45,000,000
--------------
Annualized Revenues
plus
Actual Revenues x Annualized x [ * ]
Revenues in excess
of $45,000,000
--------------
Annualized Revenues
(c) For new medical practices acquired by, consolidated with or
merged into the Medical Group:
(i) for each primary care physician, their historical cost;
provided, that such rate shall not be less than [*] of such
physician's billings collected by the Management Company;
(ii) for each specialist physician, a market-based estimate
of the rate charged for billing and collection services rendered
to specialist physicians of that type.
(4) From June 30, 1997, until the end of the Term, an amount
equal to the Renegotiated Percentage multiplied by the Monthly
Collections.
- ---------
* Omitted pursuant to Rule 406 promulgated under the Securities Act of 1933,
as amended.
<PAGE>
(5) The Medical Group shall receive a [ ]* discount off the blended Billing
Fee for all Medical Group revenues arising under Managed Care Contracts that are
collected by the Management Company.
(6) If the E-Z Cap system is operational, the Medical Group agrees to pay
to the Management Company [ ]* per member per month for all capitated lives
covered under Managed Care Contracts.
(7) All Collections shall be deposited in the Operating Account by the
Management Company in the same calendar year such collections were collected.
(8) In calculating the Billing Fee, the Medical Group's revenues used to
determine Aggregate Collections, Monthly Collections and Actual Revenues shall
exclude the Medical Group's revenues relating to radiology services provided to
the Medical Group by a third party.
- ----------
* Omitted pursuant to Rule 406 promulgated under the Securities Act of 1933,
as amended.
<PAGE>
SCHEDULE VI
to Management Services Agreement
Management Fee
--------------
The Medical Group shall pay to the Management Company the following
Management Fee:
(1) From December 11, 1995, until June 30, 1996:
Actual Costs for the immediately preceding month ("Monthly Actual
Costs") plus [ ] *of Monthly Actual Costs;
----
(2) From July 1, 1996, until the end of the Term:
(a) If Aggregate Collections (as defined in Schedule V are
----------
less than or equal to $30,000,000, Monthly Actual Costs plus [ ] *of
----
Monthly Actual Costs;
(b) If Aggregate Collections are greater than $30,000,000
but less than or equal to $45,000,000, Monthly Actual Costs plus [ ] *of
----
Monthly Actual Costs;
(c) If Aggregate Collections are greater than $45,000,000
but less than or equal to $60,000,000, Monthly Actual Costs plus [ ] *of
----
Monthly Actual Costs; or
(d) If Aggregate Collections are greater than $60,000,000,
Monthly Actual Costs plus [ ] *of Monthly Actual Costs;
----
plus the Management Company's share of any Saving (as defined in paragraph 3
- ----
below) or minus the Management Company's share of any Loss (as defined in
-----
paragraph 3 below).
(3) Commencing on July 1, 1997, and on each January 1 and July 1
thereafter, the Management Fee payable shall be adjusted by any Saving or Loss
realized during the six-month period immediately preceding such date (each, a
"Period") then ended. The Medical Group and the Management Company shall
calculate and agree upon a base burden percentage for the Medical Group during
the Period ending on December 31, 1996 (the "Base Burden Percentage"). The Base
Burden Percentage shall be calculated by dividing (a) the aggregate Actual Costs
--------
for the Medical Group paid by the Management Company during the Period ending on
December 31, 1996 normalized to reflect (i) the 18-months of free rent on the
110 East 59th Street location and (ii) redundant costs in excess of $500, if
any, created by the consolidation of the Medical Group by (b) the aggregate
revenues of the Medical Group collected by the Management company during the
Period ending on December 31, 1996; provided, however, that the Base Burden
-------- -------
Percentage shall be recalculated on January 1, 1998, and every 12 months
thereafter during the Term by dividing (i) the aggregate Actual Costs for the
--------
Medical Group paid by the Management Company
- -----------
* Omitted pursuant to Rule 406 promulgated under the Securities Act of 1933,
as amended.
<PAGE>
during the preceding three Periods by (ii) the aggregate revenues of the Medical
Group collected by the Management Company during the preceding three Periods. On
July 1, 1997, and on each January 1 and July 1 thereafter during the Term, the
Saving or Loss shall be calculated by subtracting (a) the aggregate Actual Costs
-----------
for the Medical Group paid by the Management Company during the preceding Period
from (b) an amount equal to (i) the Base Burden Percentage multiplied by (ii)
----------
the aggregate revenue of the Medical Group collected by the Management Company
during the preceding Period (the "Burden Amount"). If the Burden Amount exceeds
the Period Actual Costs (the "Saving") or the Period Actual Costs exceed the
Burden Amount (the "Loss"), the Medical Group and the Management Company shall
share such Saving or Loss [ ] *for the account of the Medical Group and [ ] *
for the account of the Management Company.
(4) In calculating the Management Fee, the Medical Group's revenues
used to determine the aggregate revenues of the Medical Group and Aggregate
Collections shall exclude the Medical Group's revenues relating to radiology
services provided to the Medical Group by a third party.
VI-2
- ----------
* Omitted pursuant to Rule 406 promulgated under the Securities Act of 1933,
as amended.
<PAGE>
SCHEDULE VII
to Management Services Agreement
Hardware, Software and Maintenance Fee
--------------------------------------
The Medical Group shall pay to the Management Company the following
Hardware, Software and Maintenance Fee:
(a) Upon the signing of this Agreement, the Medical Group shall pay to
the Management Company the sum of [ ]*
(b) On the On-line Date, the Medical Group shall pay to the Management
Company the sum of [*] (the "Second Installment"). The "On-line Date" shall
mean the date on which (i) the personal digital assistants are installed in
the Medical Group's offices, as applicable, and on-line in conformance with
the specifications set forth on Exhibit A to the Sublicense Agreement, (ii)
---------
billing and specifications set forth on Exhibit A to the Sublicense
---------
Agreement and available and (iii) personnel involved in the collection,
analysis and preparation of billing and financial information and reports
are on-line in conformance with the specification set forth on Exhibit A to
---------
the Sublicense Agreement.
(c) Except to the extent paid by the Medical Group pursuant to
paragraph (a) of this Schedule VII, after the date hereof, in addition to
------------
the Second Installment, the Medical Group shall pay to the Management
Company the following fees (such fees to include payment for the
Med-E-Practice System hardware and software to be used by each new
physician):
Hardware and Software:
- ----------------------
1st 16 2nd 16
Physicians Physicians >32 Physicians
---------- ---------- --------------
Per Physician [ ]*
Maintenance:
- -----------
[ ]* per physician per month for practice management software (provided
at the Management Company's cost)
[ ]* per physician per month for Med-E-Practice software
Telecommunications:
- ------------------
ACN shall pay the telecommunication line charges for the dedicated
high-speed leased lines at the Medical Group's 110 East 59th Street office.
- ----------
* Omitted pursuant to Rule 406 promulgated under the Securities Act of 1933,
as amended.
<PAGE>
The Medical Group shall pay the telecommunications line charges for each
other Medical Group office.
<PAGE>
SCHEDULE VIII
to Management Services Agreement
Information Management Fees
---------------------------
The Medical Group shall pay to the Management Company on the first business
day of each month the following Information management Fee:
(i) If the On-line Date has not occurred, [ ]*; provided, that if the
--------
On-line Date occurs on a date other than the first day of a month, the pro
---
rata portion thereof based on the number of days elapsed before the
----
occurrence of the On-line Date during such month;
(ii) If the On-line Date has occurred,
(A) from August 1, 1996 until December 31, 1996, [ ]*
(B) from the period from January 1, 1997 until December 31, 1997,
[ ]*
(C) from the period from January 1, 1998 until December 31, 1998,
[ ]*
(D) from the period from January 1, 1999 until December 31, 1991,
[ ]*
provided, that if the On-line Date occurs on a date other than the
--------
first day of a month, the pro rata portion thereof based on the number
--- ----
of days elapsed after the occurrence of the On-line Date during such
month.
Commencing on December 1, 1999, and on each December 1st every four
years thereafter during the Term, the Medical Group and the Management
Company shall review the Information Management Fee then in effect and
shall negotiate in good faith, based on value criteria to be mutually
agreed upon by the parties, a new Information Management Fee (the
"Renegotiated Information Management Fee").
- ----------
* Omitted pursuant to Rule 406 promulgated under the Securities Act of 1933,
as amended.
<PAGE>
EXHIBIT A
to Management Services Agreement
GUARANTEE
In order to induce Madison Medical --- The Private Practice Group of New
York, a New York limited liability partnership (the "Medical Group"), to enter
into (i) the Management Services Agreement, dated December 11, 1995 (the
"Management Services Agreement"), between Uptown Physician Management, Inc., a
Delaware corporation (the "Management Company"), and the Medical Group and (ii)
the Sublicense Agreement, dated December 11, 1995 (the "Sublicense Agreement";
and together with the Management Services Agreement collectively, the
"Agreements"), between the Management Company and the Medical Group, the
undersigned hereby irrevocably guarantees to the Medical Group, its successors
and assigns upon the terms and conditions set forth herein, the punctual
performance when due of the payment and performance obligations of the
Management Company under the Agreements and agrees to indemnify and hold
harmless the Medical Group, it successors and assigns from and against any
damages arising from the non-performance by the Management Company under the
Agreements.
This Guarantee is an absolute, continuing and unconditional guarantee of
payment and performance and is not in any way conditioned or contingent upon an
attempt to collect from the Management Company or any other action, occurrence
or circumstance whatsoever or upon the validity or enforceability of the
Agreements or any provision thereof. The Medical Group, its successors and
assigns may proceed against the undersigned immediately upon delivery by the
Medical Group to such party of a demand for payment of any obligation under the
Agreements when due. The liability of the undersigned hereunder shall continue
in full force and effect until all of the payments and other obligations of the
Management Company under the Agreements are fully satisfied and discharged and
shall not be reduced, affected, discharged or impaired in whole or in part until
such payments and obligations are paid or satisfied in full.
The obligations of the undersigned under this Guarantee shall not be
subject to any related defenses and counter-claims or any right of set-off,
suspension or postponement, recoupment, reduction, limitation or impairment,
whether arising hereunder or otherwise.
The undersigned hereby unconditionally and irrevocably waives notice of
acceptance of this Guarantee, diligence, presentment, notice of dishonor and
protest, notice of default by the Management Company and all other notices,
demands and defenses (other than payment and/or performance, as the case may be)
of any kind to which he may be entitled.
<PAGE>
The undersigned hereby agrees that no failure to exercise and no delay in
exercising on the part of the Medical Group any right, power or privilege under
the Agreements shall operate as a waiver thereof, nor shall any single or
partial exercise of any right, power or privilege hereunder preclude any other
or further exercise thereof or the exercise of any other right, power or
privilege. The undersigned further agrees that any rights and remedies of the
Medical Group under the Agreements shall be cumulative, may be exercised singly
or concurrently and are not exclusive of any rights or remedies provided by law.
No waiver shall be deemed to have been made by the Medical Group of any of its
rights under the Agreements, including without limitation, any course of dealing
between the Management Company and the Medical Group with respect to acceptance
of late or partial payments, unless any such waiver shall be in writing, signed
by the Medical Group, and communicated in the manner prescribed in the
Agreements. The Medical Group may deal directly with the Management Company
without in any way affecting the liability of the undersigned under this
Guarantee.
The undersigned hereby agrees to indemnify and to hold the Medical Group
harmless from and against all costs and expenses incurred in connection with or
incidental to the enforcement or protection of the rights of the Medical Group
hereunder, including reasonable attorneys' fees and expenses.
This Guarantee shall be governed by and construed in accordance with the
laws of the State of New York.
IN WITNESS WHEREOF, this Guarantee has been executed as of the 11th day of
December, 1995.
ADVANCED HEALTH CORPORATION
By: _______________________________
Name:
Title:
AGREED TO AND ACCEPTED AS OF
THE DATE FIRST ABOVE WRITTEN:
MADISON MEDICAL --- THE PRIVATE PRACTICE
GROUP OF NEW YORK, L.L.P.
By Its Executive Committee on behalf of
Madison Medical --- The Private
Practice Group of New York, L.L.P.
- ------------------------- -------------------------
- ------------------------- -------------------------
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
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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
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<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
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<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
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<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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<PAGE>
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
[*] provided further, however, that such Working Capital Advance shall not
-------- ------- -------
exceed [ ] *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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- -----------
* Omitted pursuant to Rule 406 promulgated under the Securities Act of 1933,
as amended.
<PAGE>
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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<PAGE>
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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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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<PAGE>
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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<PAGE>
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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<PAGE>
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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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
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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
2
<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
3
<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
6
<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:
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:
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 10.12
MANAGEMENT SERVICES AGREEMENT (this
"Agreement") is entered into as of July 1, 1996
by and between SPECIALIST PHYSICIANS MANAGEMENT,
INC., a Delaware corporation (the "Management
Company"), and CARDIOLOGY FIRST OF NEW JERSEY,
P.A., an independent physicians association (the
"Network").
WITNESSETH:
A. The Network is an independent physician association that contracts with
various health maintenance organizations, insurance carriers, self-funded
employers, union trust funds, and other third party payors (collectively,
"payors"), and that provides or otherwise makes available medical services in
New Jersey to persons enrolled in payor health care plans. The Management
Company has, or has the ability to procure, management and administrative
resources and services essential to the Network's operations.
B. The Network and the Management Company desire to contract for the
provision of such resources and services in accordance with the terms and
conditions contained in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants, premises and
agreements herein contained and the mutual benefits to be derived therefrom, the
Management Company and the Network agree as follows:
SECTION 1. Engagement of the Management Company; Term and Termination.
1.1. Engagement.
The Network hereby engages the Management Company, and the Management
Company hereby agrees and confirms its engagement by the Network, to provide the
administrative and management services necessary for the operations of the
Network (the "Services"), including, but not limited to, the services described
on Schedule I; provided, however, that if the Network requests a service that is
not identified on Schedule I, then the Management Company may either (a) notify
the Network of its inability to provide the requested service and, in such
event, have no obligation or liability to the Network with respect thereto, or
(b) take such action as the Management Company may deem necessary or appropriate
to adequately perform such service within a reasonable period of time after
request therefor was
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made; provided that in such case the Network shall pay such
additional fees to the Management Company as then agreed by the parties.
1.2. Term.
The term of this Agreement shall commence effective as of the date hereof
(the "Effective Date") and shall continue until the fifth anniversary of the
Effective Date (the "Initial Term"), unless sooner terminated or extended
pursuant to the terms hereof. After the Initial Term, the Network shall have the
right to extend this Agreement for an additional three year term (the "Option
Term") by providing written notice to the Management Company of the Network's
election to so extend not later than 120 days prior to the end of the Initial
Term. After the Option Term, this Agreement shall automatically renew for
successive three year terms, unless the Management Company or the Network gives
written notice of its intent to terminate not less than 90 days prior to the end
of the then expiring term.
1.3. Termination.
(a) The Network may terminate this Agreement, upon a 45-day written notice
to the Management Company, on either (i) the first anniversary of the Effective
Date, provided that on such date (A) the Network has failed to obtain at least
50,000 capitated lives under new managed care contracts or through the extension
or expansion of existing managed care contracts or (B) Advanced Health
Management Corporation, a Delaware corporation ("AHM"), is unwilling to fund its
pro rata share, based on the equity ownership of the Management Company, of the
reasonable working capital needs of the Management Company in excess of Original
Working Capital (as defined below); or (ii) the 36-month anniversary of the
Effective Date, provided that on such date the Network has failed to obtain at
least 100,000 capitated lives under new managed care contracts or the extension
or expansion of existing managed care contracts. For the purposes of this
Agreement, a "managed care contract" shall be any contract, agreement or
understanding pursuant to which the Network is to provide medical services
consistent with its then existing practice to patients covered by a particular
managed care company, health maintenance organization or other medical insurance
provider. "Original Working Capital" shall mean working capital funding that AHM
alone is responsible for providing to the Management Company in cash up to an
aggregate amount not to exceed $150,000 as necessary to fund any operating
deficit of the Management Company.
(b) The Management Company may terminate this Agreement, upon a 45-day
written notice to the Network, on either (i) the first anniversary of the
Effective Date, provided that (A) AHM is then unwilling to fund its pro rata
share, based on the equity ownership of the Management Company, of the
reasonable working capital needs of the Network in excess of the Original
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Working Capital of the Management Company or (B) the Network has failed to
obtain at least 50,000 capitated lives under new managed care contracts or the
extension or expansion of existing managed care contracts; or (ii) the 36-month
anniversary of the Effective Date, provided that on such date the Network has
failed to obtain at least 100,000 capitated lives under new managed care
contracts or the extension or expansion of existing managed care contracts.
(c) This Agreement may be terminated for "cause" by either party upon
written notice of termination to the defaulting party specifying with
particularity the event that justifies such termination. No delay or failure to
transmit such notice shall constitute a waiver of any such event or of any other
or further event. If the defaulting party shall fail within 45 days after the
receipt of such notice to cure or correct the default alleged in the notice, the
non-defaulting party shall have the right to terminate this Agreement, such
termination to be effective as of the date specified in such notice of
termination, or, alternatively, immediately upon the defaulting party's failure
to cure by the end of the 45 day period; provided, however, that if such default
is not capable of correction within such 45 day period, and if the defaulting
party shall commence corrective action within that 45 day period and pursue the
corrective measures promptly and with due diligence, then the effective date of
termination will be deferred for a period not in excess of 45 days beyond the
initial 45 day period so long as the defaulting party continues to pursue
corrective measures. In the event any such default is in fact cured during any
such period the notice of termination shall be null and void. As used herein,
the term "cause" shall mean (a) the failure by either party to reasonably
perform or observe any of its obligations under this Agreement, (b) the loss of
the ability of either party lawfully to perform any of its obligations hereunder
or (c) the dissolution of the Network.
SECTION 2. Payment for Services; Budget Process.
2.1. Payment.
In consideration for the provision of the Services, the Network shall pay
to the Management Company the Service Fee and the Incentive Fee as set forth on
Schedule II.
2.2. Allocation of Certain Expenses.
It is expressly acknowledged that certain of the Services shall be
performed by personnel employed by the Management Company (or the Management
Company's affiliates) who are not dedicated exclusively to the provision of
Services under this Agreement. The Network and the Management Company agree to
allocate the actual costs and expenses of such personnel (including, but not
limited to, salaries, benefits programs, and FICA and FUTA contributions) to the
Service Fee in proportion to
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the percentage of time the personnel are dedicated to the provision of Services
under this Agreement. Similarly, the Network and the Management Company agree
to allocate the actual costs and expenses of office facilities, equipment and
other resources to the Service Fee proportionate to the dedication of such
resources to the Services provided under this Agreement. All such allocations
shall be made by mutual agreement in accordance with the budget process set
forth in Section 2.4 and subject to Section 3.4. The Management Company
acknowledges that it is not the intent of the Management Company to allocate to
the Service Fee expenses relating to the Management Company's senior management
who participate in the provision of Services on only an incidental basis. The
parties shall allocate a stipend for local medical management of the Network,
including, without limitation, a Network medical director (the "Medical
Director") whose role will expand with the development of the Network.
2.3. Process and Method of Payment.
(a) The Service Fee shall be billed to the Network on a monthly basis, and
shall be paid by the Network within five days following receipt of such bill.
The bill shall identify and include all actual costs and expenses incurred by
the Management Company in the provision of the Services plus the allocated costs
agreed to during the budget process set forth in Section 2.4 and reflected in
the budget then in effect. At the reasonable request of the Network, the
Management Company shall provide the Network with any supporting documentation
relating to the Service Fee.
(b) The Incentive Fee shall be paid at the time of the distribution of any
risk pools, incentive pools, incentive payments or any other risk-sharing
arrangement referenced in the definition of Incentive Fee as set forth on
Schedule II.
(c) Payment of the Service Fee and the Incentive Fee shall be by federal
funds wire transfer to the account of the Management Company or such other means
as the Management Company may, by notice in writing, direct.
2.4. Budget Process.
The initial budget for the Services is attached to this Agreement as
Schedule III and incorporated by this reference (the "Initial Budget"). The
- ------------
Network and the Management Company shall meet periodically (but not less than
every six months) to evaluate the level of and need for Services and negotiate a
revised budget of costs and expenses, including, if necessary, a reallocation of
the personnel, facilities and other resources dedicated to the Services and the
related allocation of expenses. Any revised budget shall set forth, among other
relevant information, (a) the initial Services provided under this Agreement,
(b) the employees of the Management Company (or the Management Company's
affiliates) that will be dedicated to the performance of the Services (and, with
respect to each such employee, an agreed upon allocation of time and costs
attributed to the Services and related Service Fee), (c) the estimated cost of
providing the Services for a six-month period (each, a "Period") and (d) the
office facilities, equipment (including computer and hardware)and other
resources necessary provision of the Services (and an allocation of costs
attributed to the Service Fee). Following the conclusion of a Period, there
will be an adjustment in the Service Fee (an "Adjustment") to reflect any
difference between the actual costs and expense incurred by the Management
Company in the provision of the Services and the Service Fee paid during that
Period; provided, however, that in no event shall such Adjustment cause the
-------- -------
Service Fee payable for risk-based contracts for which professional services
and hospital services have been capitated to exceed [ ]* percent of the
Network's capitated service revenues collected during such Period.
SECTION 3. Additional Agreements Regarding the Services.
3.1. Standard.
The Management Company shall perform the Services in a manner that
reasonably supports the competent, cost-efficient
- -------------------
* Omitted pursuant to Rule 406 promulgated under Securities Act of 1933, as
amended.
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operation, administration and management of the nonmedical aspects of the
Network's operations. The Services shall meet the standards of services utilized
or provided by the Management Company in its own operations. The Management
Company will supervise and manage, or cause to be supervised and managed, the
individuals providing the Services in a manner consistent with the supervision
and management of individuals (including its employees) performing services in
its own operations.
3.2. The Network's Designated Representative.
The Network shall identify the person(s) designated by the Network in
writing to act on its behalf under this Agreement (whether one or more, the "the
Network Representative"). Until the Management Company receives notice in
writing of any change in the Network Representative, the Management Company
shall be entitled to rely upon directions and approvals from the most recently
designated Network Representative. In any situation in which, pursuant to the
terms hereof, the Network shall be required or permitted to take any action, or
to give any approval, the Management Company shall be entitled to rely upon the
statement of the Network Representative to the effect that any such action or
approval has been taken or given. In the event the Network Representative does
not respond to a request by the Management Company for any approval or consent
under this Agreement within 10 days after receipt of such request, the request
shall be deemed to be approved.
3.3. Parties Performing the Services.
It is agreed that, in performing the Services, the Management Company may
provide the Services directly, may retain, on behalf of the Network, qualified
outside parties to provide the Services, or may delegate the provision of the
Services to the Management Company's affiliates.
3.4. Record Retention; Auditing Rights.
The Management Company shall maintain during the term of this Agreement and
for a period of at least 12 months thereafter (unless otherwise agreed) all
material business records, documents, and reports relating to its provision of
the Services and the related Service Fee. Upon request, and during normal
business hours at the facility or facilities identified by the Management
Company, the Network shall be entitled to audit all such records, documents and
reports, to determine if the revenues generated by the Network, the actual costs
and expenses incurred by the Management Company in performing the Services
hereunder and/or the allocation of costs made pursuant to Section 2.4 are
accurate and comply with generally accepted accounting principles or are
otherwise being allocated as required by this Agreement. If this audit discloses
errors or other discrepancies between (a) the amount of revenues of the Network
as entered in the books and records of the Network and/or the costs and
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expenses of the Management Company as entered in the books and records of the
Management Company, as the case may be, and such amount of revenues and/or costs
and expenses are used by the Management Company in determining the Service Fee
or any other figure or for any report or document that may be required to be
disclosed to the Network pursuant to this Agreement and (b) the actual amount of
revenues of the Network and/or the costs and expenses of the Management Company
as determined by the audit, which errors or discrepancies are in the aggregate
(after netting any and all such errors and discrepancies relating to revenues
against any and all such errors and discrepancies relating to costs and
expenses) in excess of five percent for the Period being audited, and which, if
corrected, would favor the Network, then the Management Company shall (x)
reimburse the Network's reasonable out-of-pocket costs incurred in conducting
the audit and (y) pay the Network a dollar amount that is equal to the net
amount of any and all such errors and discrepancies.
3.5. Best Pricing.
The rates charged by the Management Company to the Network shall be
equivalent to or better than the rates ACN or any Affiliate (as defined below)
thereof charges during the term of this Agreement to any other Network of
cardiovascular physicians located in the States of New Jersey and New York
and/or the Commonwealth of Pennsylvania; provided that such network (x) has at
--------
least a comparable number of physicians to the Network and (y) is being
provided at least comparable levels of services as those being provided
pursuant to the terms of this Agreement by the Management Company, As used in
this Agreement, "Affiliate" shall have the meaning set forth in Rule 12b-2
promulgated under the Securities Exchange Act of 1934, as amended.
SECTION 4. Relationship of the Parties.
4.1. Conflict of Interests.
The Management Company and the Network expressly acknowledge that the
provision of Services may involve the sharing of office space, equipment and
other resources. Notwithstanding the foregoing, because the relationship created
by this Agreement represents an efficient and cost-effective mechanism by which
the Network may ensure the receipt of quality administrative services,
facilities and other resources, in the absence of bad faith on the part of
either party hereto, the Network and the Management Company hereby waive any and
all claims of conflict of interest relating to this Agreement and the provision
of the Services. The Network further acknowledges and agrees that, subject to
the Network's prior written consent, the Management Company and its Affiliates,
directly or indirectly, may at any time and from time to time own, manage,
operate, market, join, control, or participate in the ownership, management,
marketing, operation, or control of a physician network, independent physician
association, management services organization or other managed care organization
that primarily provides cardiovascular medical services of comparable scope to
the Network that compete directly with the Network in, or in counties adjacent
to, the counties in which the Network's providers maintain a medical office. The
obligations of the Management Company and its Affiliates pursuant to this
Section 4.1 shall automatically terminate upon the expiration or termination of
this Agreement for any reason whatsoever.
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4.2. Exclusivity of the Network.
During the term of this Agreement, the Management Company shall be the
exclusive provider of the Services or of other services similar to the Services
on behalf of the Network.
4.3. Independent Contractor.
In the provision of the Services hereunder, the Management Company shall be
an independent contractor with respect to the Network and no relationship of
employer and employee, principal and agent, master and servant or of partner or
of joint venturer shall arise or exist between the Management Company and the
Network. Notwithstanding the foregoing, the Management Company shall exercise
good faith and due care in handling the Network's business and financial
affairs.
4.4. Control over Medical Practice.
The Network shall, throughout the term of this Agreement, retain complete
control over the manner in which medicine is practiced by physicians under
contract with the Network.
4.5. Third Party Beneficiaries.
No party, other than the Management Company and the Network, shall be
entitled to any rights whatsoever by virtue of the relationships created by or
arising under this Agreement, including, without limitation, rights as a third
party beneficiary. The duties of the Management Company hereunder shall accrue
only to the benefit of the Network, and no other party may base a claim on a
breach of the Management Company's duties contained herein.
4.6. Limitations of Liability; Indemnification.
The parties acknowledge and agree that they shall act hereunder in a
reasonably prudent manner, but neither the Management Company nor the Network
nor any of their officers, directors, employees or agents shall be liable to the
other party for any act done or omitted to be done in good faith or for any
error of judgment, mistake of law or for any loss incurred by the other party in
connection with this Agreement, except such loss as may result from willful
misconduct or bad faith. Each party hereto and its agents, employees, officers,
directors and stockholders (each, an "Indemnified Party"), shall be indemnified,
defended and held harmless by the other party hereto (the "Indemnifying Party"),
from and against any and all losses, liabilities, claims, causes of action,
demands, damages, costs and expenses incurred or suffered by an Indemnified
Party as a result of any and all third party claims arising from, relating to or
in connection with a party hereto (a) entering into this Agreement or (b)
performing its obligations pursuant to this
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Agreement, excluding those claims that result from the willful misconduct or bad
faith of such Indemnified Party; provided, however, that neither party hereto
shall be liable to an Indemnified Party under this Section 4.6 for any claim
covered by such Indemnified Party's insurance, except to the extent that the
liability incurred by the Indemnified Party exceeds the amount of the
Indemnified Party's insurance coverage. Notwithstanding the foregoing, this
Section 4.6 shall be null and void to the extent that it is interpreted by
either party's insurance provider to reduce insurance coverage to which either
party is otherwise entitled, by way of any exclusion for contractually assumed
liability or otherwise.
4.7. Direct Responsibilities of the Network.
The Network and the Management Company acknowledge that certain management
and administrative functions relating to the operations of the Network may be
conducted directly by the Network while certain other functions will be
conducted by the Management Company pursuant to this Agreement. The Network and
the Management Company agree to cooperate with each other with respect to any
joint responsibilities, in order to ensure the efficient management and
administration of the Network. Other than with respect to the functions
performed directly by the Network, the Network shall rely exclusively upon the
Management Company for the provision of management and administrative services
and functions relating to the operations of the Network.
4.8. Responsibilities Regarding Providers.
The Network and the Management Company agree to use their respective best
recruiting efforts to optimize the number of providers participating in the
Network.
4.9. Computer Equipment.
The Med-E-Net(TM) system will require that each Network physician's office
be equipped with (i) one IBM-compatible 486 - or better computer, (ii) one modem
and (iii) one laser printer. In the event a Network physician's office does not
have sufficient computer hardware to support the Med-E-Net(TM) system, the
Network shall require such Network physician to acquire, at his or her own
expense, the necessary computer hardware. All computer hardware and software
licensed or otherwise provided by the Management Company to the Network shall be
and remain the property of the Management Company; provided, however, that the
Network shall have access to and be allowed to obtain copies of any and all
records pertaining to the operations of the Network.
4.10. Insurance.
The Network will provide and maintain fully paid and appropriate stop-loss,
directors and officers and
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errors and omissions insurance policies at all times during the term of this
Agreement. The Management Company will, upon the written request of the Network,
aid the Network in acquiring such insurance policies; provided that any such
assistance shall not include the incurrence of any premium or other insurance
related cost or expense by the Management Company.
SECTION 5. Representations of the Network.
The Network covenants, represents and warrants as follows: (a) the Network
is a company duly incorporated and existing under the laws of the state in which
it was organized; (b) the execution and delivery of this Agreement and the
performance of its covenants, promises and agreements herein contained have been
duly authorized by appropriate action of its governing body; (c) this Agreement
constitutes the valid and binding obligation of the Network, enforceable against
it in accordance with its terms, subject to applicable bankruptcy, insolvency,
reorganization or similar laws from time to time in effect which affect
creditor's rights generally, and to principles of equity regarding the
availability of remedies; and (d) the execution and delivery of this Agreement
and the due performance of its covenants, promises and agreements herein
contained will not be in violation of its charter, bylaws or any agreement to
which it is subject.
SECTION 6. Representations of the Management Company.
The Management Company covenants, represents and warrants as follows: (a)
the Management Company is a corporation duly incorporated and existing under the
laws of the State of Delaware; (b) the execution and delivery of this Agreement
and the performance of its covenants, promises and agreements herein contained
have been duly authorized by appropriate action of its Board of Directors; (c)
this Agreement constitutes the valid and binding obligation of the Management
Company, enforceable against it in accordance with its terms, subject to
applicable bankruptcy, insolvency, reorganization or similar laws from time to
time in effect which affect creditor's rights generally, and to principles of
equity regarding the availability of remedies; and (d) the execution and
delivery of this Agreement and the due performance of its covenants, promises
and agreements herein contained will not be in violation of its charter, bylaws
or any agreement to which it is subject.
SECTION 7. Confidentiality.
Neither the Management Company nor the Network nor any of their respective
officers, employees agents or representatives shall reveal or disclose to any
person or entity, directly or indirectly, for its or their benefit or for the
benefit of others, whether during or after the termination of this Agreement,
the terms and conditions of this Agreement or any
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information or trade secret, including any and all financial information with
respect to the Network or the Management Company obtained by or made available
to the Management Company or the Network or their respective officers,
employees, agents or representatives in the course of the performance of the
obligations hereunder, unless and until such information is in the public
domain, except to the extent that disclosure is required by law or by any
regulatory body. Upon the expiration or termination of this Agreement, each
party's confidential information promptly shall be returned to it, and the
Network and the Management Company shall only retain copies of the other party's
confidential information as may be required by law. This obligation to maintain
the confidentiality of all information obtained from the other party pursuant to
this Agreement shall survive the expiration or termination of this Agreement.
SECTION 8. Publicity.
Except as required by law, neither of the parties hereto will issue any
report, statement or release pertaining to the matters contemplated by this
Agreement without the prior written consent of the other party hereto.
SECTION 9. Notice.
Any notice to the Management Company or the Network given, made or served
for any purpose under this Agreement shall be given, made or served by sending
the same by first class pre-paid post, or by telegram, cable, telecopier or
telex confirmed (in each such case) by copy forthwith sent by first class
prepaid post, or by delivering the same by hand to the Management Company or the
Network, as the case may be, at the respective address set forth on the
signature page to this Agreement or at such other address as each party may from
time to time notify the other of in writing. Any notice sent by post as provided
in this Section 9 shall be deemed to have been given, made or served three days
after dispatch and any notice sent by telegram, cable, telecopier or telex as
provided in this Section shall be deemed to have been given, made or served 24
hours after dispatch.
SECTION 10. Governing Law.
This Agreement shall be governed by and construed in accordance with the
laws of the State of New Jersey.
SECTION 11. Limitations of Assignment.
Except as may otherwise occur by operation of law, no party to this
Agreement may assign this Agreement or any of the rights or obligations set
forth herein without the specific prior written consent of the other party to
this Agreement. Subject to the foregoing, this Agreement shall inure to the
benefit of and
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be binding upon the successors and assigns of the Management Company and the
Network. Nothing in this Agreement shall entitle any person or entity other than
the parties hereto to any claim, cause of action, remedy or right of any kind.
SECTION 12. Waiver.
The waiver by any party of the breach or violation of any provision of this
Agreement shall not operate as, or be construed to be, a waiver or any
subsequent breach of the same or other provision hereof.
SECTION 13. Attorney's Fees.
If any party shall resort to legal action to enforce the terms and
provisions of this Agreement, the prevailing party may recover from the other
party the cost of such action, including without limitation, reasonable
attorneys' fees.
SECTION 14. Severability.
If any provision of this Agreement is held to be unenforceable for any
reason, the unenforceability thereof shall not affect the remainder of this
Agreement, which shall remain in full force and effect and be enforceable in
accordance with its terms.
SECTION 15. 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.
SECTION 16. Duplicate Copies.
This Agreement and amendments thereto shall be in writing and executed in
duplicate copies by duly authorized agents of the parties. Each such duplicate
copy shall be deemed an original, but each duplicate copy shall constitute one
and the same instrument.
SECTION 17. Entire Agreement; Amendment; Counterparts.
This Agreement and the agreements entered into pursuant to the terms hereof
supersede all previous contracts oral or written between the parties concerning
the subject matter hereof and constitute the entire agreement between the
parties concerning the subject matter hereof. No oral statements or prior
written material not specifically incorporated herein shall be of any force and
effect. No changes in or additions to this Agreement (including exhibits and
schedules hereto) shall be recognized unless incorporated herein by written
amendment, such amendment to become effective on the date stipulated, or unless
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otherwise permitted herein. This Agreement may be executed in any number of
counterparts, and each counterpart shall be deemed to be an original instrument,
but all such counterparts together shall constitute one and the same instrument.
SECTION 18. Force Majeure.
No party to this Agreement shall be liable or deemed to be in default for
any delay or failure of performance under this Agreement or other interruption
resulting directly or indirectly from acts of God, civil or military authority,
acts of public enemy, war, accidents, fires, explosions, earthquakes, floods,
failure of transportation, strikes or other work interruptions by either party's
employees or agents or any similar or dissimilar cause beyond the reasonable
control of either party.
SECTION 19. Arbitration.
All disputes, controversies, differences or claims arising out of, relating
to or in connection with this Agreement, or the breach thereof, shall be finally
settled by binding arbitration in Tarrytown, 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 10. 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 nonappealable 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 20. Legislative and Regulatory Matters; Fraud and Abuse.
20.1. Legislative/Regulatory Modification.
In the event that any Medicare and/or Medicaid law, rule, regulation or
payment policy, or any rule or policy of any payor, or any law, or any
interpretation thereof at any time during the term of this Agreement is
modified, implemented, threatened to be implemented, or determined to prohibit,
restrict or in any way materially change the terms of this Agreement or the
transactions contemplated hereby, or by virtue of the existence of this
Agreement has or will have a material adverse affect on the ability of either
party to this Agreement to engage in any commercial activity on terms at least
as favorable to that party as those reasonably attributable as of the date
hereof (each of the foregoing being referred to herein as a "Change"), then the
parties to this Agreement shall negotiate promptly and
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in good faith to amend this Agreement in a manner consistent with such Change
and the intent of the parties as provided herein, such amendment to be
documented and made effective within a period of no longer than 60 days from the
date of such Change or such longer period as the parties may agree to.
20.2. Fraud and Abuse.
Nothing in this Agreement shall be construed as an offer or payment by one
party to the other party or any affiliate of the other party of any, cash or
other remuneration, whether directly or indirectly, overtly or covertly,
specifically for patient referrals or for recommending or arranging the
purchase, lease or order of any item or service. No amount paid or to be paid
hereunder is intended to be, nor shall it be construed to be, an inducement or
payment for the referral of patients by the Network to the Management Company or
any affiliate of the Management Company or by the Management Company or any
affiliate of the Management Company to the Network. In addition, no amount paid
or advanced hereunder includes any discount, rebate, kickback or other reduction
in charge.
* * *
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IN WITNESS WHEREOF, this Agreement was entered into as of the day and year
first above written.
SPECIALIST PHYSICIANS MANAGEMENT, INC.
By:
----------------------------------
Name:
Title:
ADDRESS: 560 White Plains Road
Second Floor
Tarrytown, NY 10591
CARDIOLOGY FIRST OF NEW JERSEY,
P.A.
By: /s/ Vance J. Waler M.D.
----------------------------------
Name:
Title: President
ADDRESS: 673 Morris Avenue
Springfield, NJ 07081
<PAGE>
Schedule I
DESCRIPTION OF THE SERVICES
I. GENERAL ADMINISTRATIVE SERVICES.
The Management Company shall perform or arrange for the performance of the
general administrative and management services described below on behalf of
and for the Network:
A. perform financial, accounting, tax, budgeting, data processing and
other related services for the Network;
B. assist and advise with respect to contracts and agreements (including
conducting negotiations);
C. obtain and maintain on behalf of the Network insurance to the extent
reasonably available, including, without limitation, professional
liability/malpractice insurance coverage, coverage for utilization
review decisions, and stop-loss coverage, which premiums for any and
all such insurance shall be approved and paid by the Network;
D. assist and advise with respect to human resource matters and benefits
administration, including recruiting and hiring employees on behalf
of, and upon the approval of the Network;
E. provide secretarial, clerical and mailing services to the Network; and
F. provide telephone, wire, telex and other telecommunications services
to the Network.
II. REPORTING DUTIES.
A. Books and Records.
(1) The Management Company shall establish and maintain a
comprehensive system of books, records and accounts in compliance
with all state and federal statutes and regulations and all payor
requirements, and in accordance with customary medical practice
and clinical standards.
(2) The Management Company shall establish all accounting journals,
including cash receipts journals, cash disbursements journals,
general journals, general ledgers, account receipts ledger, and
payroll ledgers, all backup records
<PAGE>
for accounting and managerial control such as purchase records,
equipment records, and personnel and employment records and all
tax records, if needed, such as worker's compensation,
unemployment compensation, social security, federal income tax
and withholding, state and local income tax and withholding,
federal excise tax, and state and local sales taxes.
B. Management and Financial Reports.
(1) The Management Company shall provide to the Network such
financial, accounting and operational reports as may be
reasonably required by the Network, including, but not limited
to, monthly operating and management reports, and financial
statements (unaudited) for the preceding quarterly period. The
financial statements shall contain:
(a) a balance sheet and a statement of income and expenses in
reasonable detail (including an estimate of claims incurred
but not reported);
(b) a comparison of actual income and expenses for the preceding
quarter and the fiscal year to date, and a statement of
changes in cash position;
(c) an account of reserves and withholds or other risk-sharing
accounts, if any, established by Management Company on
behalf of the Network; and
(d) preliminary financial statements for the fiscal year after
the end of each Network fiscal year, by no later than one
hundred twenty (120) days after the close of each Network
fiscal year, and final statements within one hundred eighty
(180) days after the close of each Network fiscal year. The
financial statements for the Network's fiscal year may, at
the Network's sole option, be audited by an independent
certified public accounting firm designated by the Network.
(2) The Management Company shall prepare and provide to the Network
annual capital and operating budgets and financial projections of
the Network. The budget shall set forth major
2
<PAGE>
operating objectives, anticipated revenues and expenses, cash
flow, enrollment and staffing projections, projected capital
expenditures, and an explanation of anticipated changes, if any,
in utilization, and other factors which may significantly affect
the operating budget. The Management Company shall consult with
the Network representatives in the preparation of such budgets.
This budgeting process shall be completed and presented to the
Network's Board of Directors ("Network Board") for acceptance or
rejection at least sixty (60) days prior to the commencement of
each Network fiscal year. Upon its adoption, the budget shall
serve as a guide for the operations of the Network during the
year to which it relates.
(3) The Management Company shall prepare and, upon approval by the
Network, timely file any and all financial reports as may be
required by federal, state or other statute, ordinance or
regulation affecting the Network's operations, including tax
returns.
(4) The Management Company shall prepare and provide the Network with
data and reports for the Network's use in evaluating the
performance of physicians and other health care providers who
have contracted with the Network to provide medical services to
members ("Network Providers"), maintaining patient care quality
and improving the efficiency of the Network. The Management
Company shall meet periodically with the Network to review the
data and reports provided by the Management Company, to consult
with each other with regard to the interpretation of such data
and reports, and to evaluate the application of such data and
reports to the operation of the Network's business. The Network
shall have sole and exclusive authority to make all decisions
that affect or relate to the Network's operations.
(5) The Management Company shall also prepare and present to the
Network written monthly reports as are customary for entities
such as the Network that contract with payors, including, but not
limited to, utilization reports, capitation reports, hospital
pool balances, analysis of encounter data and specialty referral
pools, reports of incurred but not reported expenses, other
periodic financial and
3
<PAGE>
management reports and other reports as may be reasonably
requested by the Network.
III. NETWORK RELATED SERVICES.
A. The Management Company shall perform and arrange for the performance
of the following claims processing, referral, authorization and
eligibility questions and data services:
(1) The Management Company shall provide the necessary resources,
including but not limited to software and other related ancillary
items, to facilitate and implement a proprietary insurance claims
processing system ("ICPS"). The ICPS will include the following
functionalities:
(a) verification of membership, both current and past, including
benefits and types of coverage;
(b) verification of Network Provider eligibility;
(c) referral tracking including lag analysis reports,
administrative overview functions, and management of IBNR
funds. (See Schedule III for overview of administrative
functions and menu of management reports available on a
periodic basis included in contract); and
(d) support available by phone between the hours of 9 a.m. and 6
p.m. Monday through Friday and between the hours of 8 a.m.
and 8 p.m. Saturday and Sunday and by pager between the
hours of 9 a.m. and 8 p.m. Monday through Friday, to answer
questions of members and Network Providers related to
benefits, billing programs, appropriate referrals and
referral authorization for members of contracted health
plans.
(2) The Management Company shall modify all software, to reflect any
changes required by the Federal government, State government,
regulatory agencies or payors.
(3) The Management Company shall develop, maintain and continuously
update Network's files to permit eligibility verification,
claims,
4
<PAGE>
administration and efficient and timely response to inquiries
from members and Network Providers. Such files shall include all
records of member enrollment and withdrawal, as provided by
payors. Management Company shall distribute updated Network
Provider lists, as needed.
(4) The Management Company shall supply Network Providers with
encounter and referrals forms.
(5) The Management Company shall design operational forms, records
and documents as reasonably necessary for the administration and
operation of Network's programs.
(6) The Management Company shall record encounter data in format
required by payors.
(7) The Management Company shall assist in the preauthorization of
services, including (i) authorize and track services requiring
preauthorization, (ii) coordinate with the Network in tracking of
specialist referral, (iii) coordinate outside ancillary services
when required, (iv) coordinate planned patient discharge, (v)
coordinate hospice, subacute and home health care services, and
(vi) assist enrollees in obtaining required second opinions from
Network Providers.
(8) The Management Company shall process referrals to specialists,
including (i) referral limitation, (ii) control of patient visits
to and care by specialist physicians, (iii) basis for billing by
specialists and data required, (iv) prior approval mechanism for
utilization beyond the specified consultation, (v) payment to
Network Providers, (vi) inpatient concurrent review, (vii) all
required reporting to payors, regulatory agencies and the Network
Board.
(9) The Management Company shall analyze and interpret the results of
operations, including comparison of fee schedules and CPT codes,
UR/QA, case management and other analytical procedures.
(10) The Management Company shall serve as the Network's liaison with
payors regarding all issues related to: (i) payments to the
Network; (ii) eligibility, (iii) member grievances; (iv)
expansion of panel or service area; (v) contract
5
<PAGE>
provisions; (vi) shares risk programs, and (vii) all reports
required to be provided by the Network to payors.
B. Billing and Collection of Accounts. The Management Company shall
implement and be responsible for all billing and collection procedures
appropriate to Network's business, including all coordination of
benefit procedures; provided that the Network provides in advance the
information relating thereto to the Management Company.
C. Financial Policies, Bank Accounts and Working Capital. The Management
Company, in consultation with the Network Board, shall adopt policies
and procedures for all matters relating to the Network's financial
policies, money management, short term investments, bank accounts and
working capital.
D. Deposit and Disbursement of Funds. The Management Company shall
maintain all Network funds in accounts established in the Network's
name with banks or other appropriate depository institutions (the
"Network Accounts"). Except as otherwise provided in this Agreement,
signatories and approvals as to the Network Accounts on all checks
shall be in accordance with the reasonable, duly adopted policies of
the Network. The Management Company shall have the authority to make
disbursements from the Network Accounts on behalf of the Network
according to the Network's contractual obligations. In addition, the
Network's President or Treasurer shall have the authority to authorize
payments of up to Five Thousand Dollars ($5,000) in Network funds for
non-contractual obligations. Other payments of the Network funds,
including any bonuses to the Management Company personnel assigned to
the Network, must be approved by the Network with the consent of the
Network's President or Treasurer, which consent shall not be withheld
unreasonably. The Management Company shall, if requested by Network,
establish and maintain on behalf of the Network, as a Network Account,
a Network Risk Pool. In the event a Network Risk Pool is established,
the Management Company shall deduct such amounts as determined by the
Network from the payments made to the Network or Network Providers by
payors and place such amounts into the Network Risk Pool.
E. Legal Actions and Counsel. The Network shall have the sole authority
to initiate, defend, and pursue any and all legal actions or
proceedings reasonably necessary to operate the Network and protect
its assets. The Network shall notify the Management Company's
President of any and all legal actions brought against the Network.
6
<PAGE>
F. Organization; Payor and Provider Services.
(1) The Management Company shall provide the following payor
services:
(a) Develop and implement marketing strategies for obtaining a
larger number and payor base, including marketing to various
insurance companies, health maintenance organizations,
employer groups and hospitals.
(b) Review and negotiate proposed contracts with payors for the
provision of medical services, and analyze and advise the
Network regarding financial and medical feasibility and
other pertinent issues related to the contracts.
(2) The Management Company shall provide the following services to
the Network Providers:
(a) Assist and advise with respect to relationships with Network
Providers and hospitals, which services include, without
limitation:
(i) developing and maintaining the Network's provider
network, recruiting and contracting with Network
Providers and Hospitals, enhancing the Network's out of
area provider network;
(ii) tracking Network Providers' contract renewal dates, and
obtaining all necessary and relevant member and Network
Provider information from payors;
(iii) assisting in Network Provider disputes between the
Network, payors and enrollees;
(iv) assisting and advising in establishing a compensation
schedule for Network Providers. The Management Company
shall use its reasonable efforts to obtain actuarial
data needed to establish and revise the compensation
structure for Network Providers, as
7
<PAGE>
may be necessary from time to time. Such data and
recommendations, if any, shall be submitted to the
Network Board as reasonably necessary or as requested
by the Network Board;
(v) providing strategies and assist in negotiating
capitated and reduced fee-for-service contracts with
potential providers;
(vi) assisting and advising regarding a strategy of hospital
relationships, and negotiating contracts with selected
hospitals;
(vii) orientating new and existing Network Providers and
their staffs regarding the Network's, the Management
Company's and the applicable payor's procedures;
(viii) credentialing Network Providers in accordance with
all applicable state and federal laws and regulations,
reviewing applications of prospective Network
Providers, reviewing and verifying references of
prospective Network Providers, reviewing and verifying
licensing status of Network Providers;
(ix) assisting the Network in establishing and maintaining a
peer review body and hearing panel as necessary to
comply with any applicable federal and state law. The
Management Company shall, at the request of the
Network, process all notices required under federal or
state law to be sent to a provider subject to any
medical disciplinary review action;
(x) assisting and advising in areas of specialty and
ancillary services;
(xi) supervising and assisting in the development and
implementation of policies, practice guidelines,
education of participating
8
<PAGE>
physicians, the training of Network Providers and
Network Providers in the Network's policies and
procedures; assist Network in developing and updating
provider instructional manuals; review of management
reporting, and other areas deemed necessary (including,
but not limited to, policies of UR/QA and Case
Management). The Network shall require all Network
Providers to participate in and abide by such quality
assessment and utilization review program. The
Management Company shall also provide administrative
support for managed care quality management activities
as they relate to non-medical policy and procedure
development, data collection, meeting administration,
documentation of findings, and monitoring of Network's
developed requirements for medical record
documentation. The Management Company shall attend
Network Board meetings, utilization management and
quality management committee meetings and other Network
meetings, as necessary, and shall prepare agendas and
minutes for each of these meetings;
(xii) assisting in the processing of Network Provider
payments, including the following: claims processing
for all non-medical tasks, reconcile and disburse
Network Provider capitation payments each calendar
month; and disburse Network Provider payment fees for
covered services, as required under the Network's
provider agreements, after receipt of "clean" claim and
by the fifteenth (15th) day of the month following the
month to which the capitation applies, or as otherwise
directed by the Network;
(xiii) assisting and advising the Network regarding all
non-medical issues with Network Providers, including
physician payment issues; and
9
<PAGE>
(xiv) negotiating and preparing documents related to the
Network's relationship with Network Providers and
related entities.
10
<PAGE>
Schedule II
FEES
The following fees will be payable to the Management Company on the last
day of each Period throughout the term of this Agreement (each a "Reference
Date"); terms used in this Schedule II, but not defined herein shall have the
-----------
meaning given such terms in the body of this Agreement:
1. Service Fee Prior to execution of Network Contracts. The Service Fee in
---------------------------------------------------
connection with any services provided by the Management Company to the
Network prior to the Network entering into any medical service contracts
shall be an amount equal to [ ]* during such period.
2. Service Fee for Fee-for-Service Contracts. The Service Fee in connection
-----------------------------------------
with any fee-for-service contracts shall be 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
Management Company prior to the execution by the Network of any such
fee-for-service contract.
3. Service Fee for Risk-based Contracts for which Only Professional services
-------------------------------------------------------------------------
have been capitated. The Service Fee in connection with any risk-based or
-------------------
capitated managed care contracts for which only professional services have
been capitated shall be an amount equal to [ ]*. During each Period, the
total Service Fee paid (including any Adjustments pursuant to Section 2.4)
shall not exceed [ ]* of capitated service revenues collected during
such Period.
4. Service Fee for Risk-base Contracts for which Both Professional Services
------------------------------------------------------------------------
and Hospital Services have been Capitated. The Service Fee in
-----------------------------------------
connection with any risk-based or capitated managed care contracts for
which both professional services and hospital services have bee
capitated shall be an amount equal to [ ]*. During each Period, the
total Service Fee paid (including any Adjustments pursuant to Section
2.4) shall not exceed [ ]* of capitated service revenues collected
during such Period.
5. Incentive Fee for Risk-based Contracts for which Only Professional
------------------------------------------------------------------
Services have been Capitated. The Incentive Fee in connection with any
----------------------------
risk-based or capitated managed care contracts for which only
professional services have been capitated shall be an amount equal to
[ ]* of the Retained Amounts (as defined below) within the Withhold
Pool (as defined below). "Retained Amounts" shall mean any amounts
deposited in the Withhold Pool equal to 10% of the capitated revenues
paid to the Network during such Period for professional services as
adjusted by any amounts withdrawn by the Network from such Withhold
Pool to cover any professional services costs that exceed 90% of
capitated revenues earned during such Period.
"Withhold Pool" shall mean the Network's separate professional services
withhold reserve account.
6. Incentive Fee for Risk-based Contracts for which Both Professional
------------------------------------------------------------------
Services and Hospital Services have been Capitated. The Incentive Fee
--------------------------------------------------
in connection with any risk-based or capitated managed care contracts for
which both professional services and hospital services have been capitated
shall be in an amount equal to:
(a) [ ]* of the first 50% of the Net Hospital Savings (as defined
below); plus
----
(b) [ ]* of the next 25% of the Net Hospital Savings; plus
----
(c) [ ]* of the remaining 25% of the Net Hospital Savings.
"Net Hospital Savings" shall mean (i) any amounts paid to the Network relating
to hospital-based medical services (excluding amounts paid for professional
services rendered) during a Period pursuant to a risk-based or capitated managed
care contract minus (ii) the amount of hospital-based medical service costs
-----
incurred by the Network during such Period.
- ----------
* Omitted pursuant to Rule 406 promulgated under the Securities Act of 1933,
as amended.
<PAGE>
<TABLE>
INITIAL BUDGET Schedule III
"Professional Component Only" Capitalized Resources Model
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
Assumtpions -1 -2 -3 -4 -5 1 2 3
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
Revenues
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
Members 50,000 150,000 150,000
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
PNPM(commercial) $1.00 $1.00 $1.00
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
TOTAL REVENUES $0 $0 $0 $0 $0 $50,000 $150,000 $150,000
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
Salaries & Wages:
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
PT Medical $2,600 $2,500 $2,500 $2,500 $2,500 $2,500 $2,500 $2,500
Director
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
MSO Director 1/4-1/3 time $1,875 $1,875 $1,875 $1,875 $1,875 $1,875 $2,475 $2,475
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
UM nurses sal: $60k each $0 $0 $0 $0 $0 $1,875 $7,500 $7,500
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
1/100,000
Aveg
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
Admin Assistant Sal; $26 each $1,041 $1,041 $1,041 $1,041 $1,041 $1,041 $2,083 $2,083
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
Claims examiners Sal; $35 each $0 $0 $0 $0 $0 $1,083 $4,373 $4,373
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
1/100,000 Aveg
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
Sub-total $5,416 $5,416 $5,416 $5,416 $5,416 $$$$$ $18,932 $18,932
salaries
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
Fringe Benefits 18 percent of $975 $975 $975 $975 $975 $1,509 $3,408 $3,408
gross salary
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
TOTAL STAFFING $6,391 $6,391 $6,391 $6,391 $6,391 $9,893 $22,939 $22,939
COSTS
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
Rent
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
Telephone 2-3 toll free $200 $200 $200 $450 $450 $450
lines
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
Capital ???? $388 $388 $388 $388 $388 $388 $388 $388
expenditure
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
???? $1,000
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
Med E
Netsoftware 1
per office
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
18% annual $1,500 $1,500 $1,500 $1,500 $1,500 $1,500 $1,500 $1,500
license fee
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
???? $1,041 $1,041 $1,041 $1,041
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
EZ Cap PMPM $0 $0 $750 $2,250 $2,250
fee
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
Advertising eds for staff $600 $300 $300
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
Travel office $167 $167 $167 $167 $167 $167 $167 $167
coordinating/meetings
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
Postage $100 $100 $250 $250 $300 $500 $750 $750
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
Education committee $500 $1,000 $500 $500
form
actions/meeetings
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
Dues & NCOA $7,500 $250 $250 $200
Subscriptions certification/journals
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
Insurance E&O; $1,500
property
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
Outside $11,000
contracted
agencies
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
Taxes & Licenses business $1,000
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
Printing & $1,000 $200 $200 $200 $200 $200 $350 $350
Supplies
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
Marketing sales
expenses
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
Commissions outside
sales at
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
10% comm
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
Advertising $1,500 $600
& Promotions
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
Travel & $1,000 $750 $500 $1,000 $500 $500 $500 $500
Entertainment
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
TOTAL $18,156 $3,705 $11,705 $5,455 $5,096 $5,748 $9,696 $7,596
NON-STAFFING EXP.
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
TOTAL OPERATING $24,546 ????? ?????? $11,946 $11,487 $15,639 $32,035 $29,935
& STAFFING
EXPENSE
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
Monthly Cash Flow ($24,548) ($10,096) ($18,096) ($11,646) ($11,487) $34,361 $147,965 $120,065
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
Accumulated Cash ($24,548) ($34,641) ($52,737) $76,069 $41,706 $76,257 $196,322
Flow $64,582
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
Cardiology First $0 $0 $0 $0 $0 $0 $0 $0
Capital
Contribution
- ------------------ --------------- ----------- --------- ---------- --------- ---------- ---------- ------------ -------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
- ------------- ------------- ------------- -------------- ------------ ---------------------- ----------
New contract year
- ------------- ------------- ------------- -------------- ------------ ---------------------- ----------
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
4 5 6 7 Year-end 8 9 10
total
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
150,000 200,000 200,000 200,000 1,100,000 275,000 275,000 275,000
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
$1.00 $1.00 $1.00 $1.00 $1.00 $1.25 $1.25 $1.25
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
$150,000 $200,000 $200,000 $200,000 $1,100,000 $343,750 $343,750 $343,750
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
$2,500 $2,500 $2,500 $2,500 $30,000 $2,500 $2,500 $2,500
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
$2,475 $2,475 $2,475 $2,475 $26,100 $2,475 $2,475 $2,475
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
$0
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
$7,500 $10,000 $10,000 $10,000 $54,376 $13,750 $13,750 $13,750
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
$0
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
$0
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
$2,083 $2,083 $2,083 $2,083 $18,746 $2,187 $2,187 $2,187
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
$0
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
$4,373 $5,831 $5,831 $5,831 $31,706 $8,017 $8,017 $8,017
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
$0
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
$0
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
$18,932 $22,889 $22,889 $22,889 $160,927 $28,929 $28,929 $28,929
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
$0
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
$3,408 $4,120 $4,120 $4,120 $28,967 $5,207 $5,207 $5,207
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
$0
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
$22,339 $27,009 $27,009 $27,009 $189,893 $34,137 $34,137 $34,137
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
$0
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
$650 $650 $650 $650 $4,550 $850 $850 $850
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
$0
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
$0
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
$388 $388 $388 $388 $4,656 $388 $388 $388
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
$1,000 $2,000 $2,000
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
$0
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
$1,500 $1,500 $1,500 $1,500 $10,000 $1,500 $1,500 $1,500
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
$1,041 $1,041 $1,041 $1,041 $8,328 $1,041 $1,041 $1,041
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
$2,400 $3,000 $3,000 $3,000 $16,850 $4,125 $4,125 $4,125
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
$500 $1,700
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
$167 $167 $167 $167 $2,000 $167 $167 $167
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
$750 $1,000 $1,000 $1,000 $6,780 $1,200 $1,200 $1,200
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
$1,500 $500 4,600 !,000
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
$8,200 $1,500
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
$1,500 $1,500
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
$11,000 $2,000
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
$1,000 $1,000
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
$350 $600 $600 $600 $4,690 $750 $750 $750
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
$0
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
$0
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
$0 $11,000 $11,000 $11,000
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
$1,000 $3,000 $1,000
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
$500 $500 $1,000 $500 $7,760 $1,000 $500 $500
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
$0
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
$9,246 $9,746 $11,246 $6,746 $106,134 $30,521 $21,521 $22,021
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
$31,585 $38,765 $38,255 $35,755 $296,027 $64,037 $55,857 $68,167
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
$118,416 $163,245 $161,745 $154,245 $403,375 $279,093 $288,093 $287,593
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
$314,730 $477,983 $639,728 ?????? $279,093 $587,186 $654,776
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
$0 $0 $0 $0 $0 $0 $0 $0
- ------------- ------------- ------------- -------------- ------------ ------------ --------- ----------
</TABLE>
<PAGE>
Schedule IV
DESCRIPTION OF ADMINISTRATIVE FUNCTIONS
PROVIDED BY AUTOMATED CLAIMS MANAGEMENT SYSTEM
The Management Company will implement an automated claims management
system. With the automated claims management system, on-line verification of
both current and past membership can be obtained including benefits and types of
coverage. Tracking of all referrals (both in and out of system) and the
associated IBNR's payable is available. The automated claims management system
can track the date a claim was received, as well as the date it was paid, and
generate a lag analysis report. It will also track redirected claims, denials,
and services provided by capitated providers. Reports, such as per member per
month, costs by specialty, and number of visits, are generated on a monthly
basis. Additional reports and customized data are available upon request.
Utilization review is enhanced by requiring all non-compliant referrals to be
authorized by the Network's Medical Director in addition to being reviewed by
the Management Company. The referral screen will also indicate whether or not
the referral was either a normal referral, inpatient, outpatient, COB or denied.
List of Report Menu Items
I. Beneficiary
A. Beneficiary Listing
B. Beneficiary Listing By Specialty
II. Specialty
A. Specialty Listing
III. Contract
A. Contract Report
IV. Referral
A. Daily Referral Report
B. Referral Utilization Report
C. Detail Referral by "Type"
<PAGE>
V. Checks
A. Check Preview
B. Check Register
C. Amount Paid By Site
VI. IBNR
A. IBNR Report by Member
B. IBNR Detail Report
C. Stop Loss Summary By Member
VIII. Lag Analysis
A. Date of Entry to Date Paid
B. Date of Referral to Date Entered
C. Date of Service to Date Paid
IX. Management Reporting
A. Service Profile
1) Sort Options
a) Procedure, Site
b) Procedure, Beneficiary, Site
c) Beneficiary, Site
2) Data
a) Units
b) Total Paid
B. Referral Analysis By Physician
1) Units Referred
EXHIBIT 10.13
EXECUTION COPY
================================================================================
STOCKHOLDERS' AGREEMENT
AMONG
SPECIALIST PHYSICIANS MANAGEMENT, INC.
and
THE STOCKHOLDERS LISTED
ON SCHEDULE I
----------
Dated as of July 1, 1996
================================================================================
<PAGE>
TABLE OF CONTENTS
-----------------
Page No.
--------
SECTION 1. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . 1
SECTION 2. Board of Directors . . . . . . . . . . . . . . . . . . . . . . 3
SECTION 3. Rollup of SPM's Stock . . . . . . . . . . . . . . . . . . . . 4
SECTION 4. Mandatory Repurchase of SPM Stock . . . . . . . . . . . . . . 5
SECTION 5. Restrictions on Sales of Stock . . . . . . . . . . . . . . . . 5
5.1. General Restrictions . . . . . . . . . . . . . . . . . . . . . 5
5.2. Right of First Refusal . . . . . . . . . . . . . . . . . . . . 6
SECTION 6. Certain Repurchase Rights of AHM and/or the Corporation . . . 8
6.1. Repurchase from SPM . . . . . . . . . . . . . . . . . . . . . 8
SECTION 7. Legend . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
SECTION 8. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . 9
SECTION 9. Benefits of Agreement . . . . . . . . . . . . . . . . . . . . 9
SECTION 10. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
SECTION 11. Entire Agreement . . . . . . . . . . . . . . . . . . . . . . 10
SECTION 12. Modification . . . . . . . . . . . . . . . . . . . . . . . . 10
SECTION 13. Headings . . . . . . . . . . . . . . . . . . . . . . . . . . 10
SECTION 14. Nouns and Pronouns . . . . . . . . . . . . . . . . . . . . . 10
SECTION 15. Counterparts . . . . . . . . . . . . . . . . . . . . . . . . 11
<PAGE>
STOCKHOLDERS' AGREEMENT
dated as of July 1, 1996 (the
"Agreement"), among SPECIALIST
PHYSICIANS MANAGEMENT, INC., a
Delaware corporation (the
"Corporation"), and the parties
listed on Schedule I (collectively,
----------
the "Stockholders").
The Stockholders have caused the Corporation to be formed for the
purpose of providing certain non-medical management, administrative and
information management services to one or more physician networks, some of whose
stockholders or members are members of Specialist Physicians MSO, L.L.C., in
accordance with the terms of one or more management services agreements (each, a
"Management Services Agreement" and collectively, the "Management Services
Agreements") entered into between the Corporation and each such physician
network (each, a "Network" and collectively, the "Networks"). Each Stockholder
is acquiring that number of shares of common stock (the "Common Stock"), $.001
par value, of the Corporation set forth opposite such Stockholder's name on
Schedule I. The Stockholders and the Corporation deem it to be advisable and in
- ----------
their respective best interests to enter into certain agreements with respect to
the management, continuity and stability of the business and policies of the
Corporation and certain other matters as set forth in this Agreement.
NOW, THEREFORE, in consideration of the foregoing premises and the
mutual agreements and obligations contained herein, the parties hereto agree as
follows:
SECTION 1. DEFINITIONS. As used herein, the following terms shall
-----------
have the following respective meanings:
(a) "Affiliate", with respect to any Stockholder, shall mean any
Person that directly or indirectly Controls, is Controlled by or is under common
Control with such Stockholder.
(b) "AHC" shall mean the Advanced Health Corporation, a Delaware
corporation, and any successors thereto.
(c) "AHC Stock" shall have the meaning given to such term in Section
3(a) hereof.
(d) "AHM" shall mean the Advanced Health Management Corporation, a
Delaware corporation, and any successors thereto.
(e) "Control" shall mean, with respect to any Person, the power to
direct or cause the direction of the management and policies of such Person,
whether directly or indirectly, through ownership of voting securities, by
contract or otherwise.
<PAGE>
(f) "Non-selling Stockholder" shall mean any Stockholder except a
Selling Stockholder.
(g) "Network Management Services" shall mean (i) network development-
services, including feasibility studies, structuring, financing and physician
recruiting and (ii) network operation services, including marketing, managed
care contracting, utilization management, claims processing, billing, finance,
accounting and information systems management.
(h) "Person" shall mean any individual, partnership, corporation,
group, trust or other legal entity.
(i) "Practice Management Services" shall mean assisting physician
group practices in (i) developing and expanding their practices by physician
recruitment, physician specialty mix analysis, acquisition evaluation and
integration, ancillary services evaluation, financial consulting and strategic
planning, (ii) marketing their medical services to HMO's, insurance companies,
self-insured companies and the patient community, (iii) negotiating and
structuring managed care contracts with payors for the provision of medical
services, (iv) financial management and reporting, (v) accessing and using
proprietary clinical information management systems, (vi) managing all non-
medical personnel that perform administrative, clerical and secretarial support,
billing and collection and records management for the physician practice and
(vii) establishing a joint management advisory board to develop management and
administrative policies for the overall operation of the physician group
practice.
(j) "Sell" (or "Sale"), as to any Stock, shall mean to sell, or in
any other way directly or indirectly transfer, assign, pledge, hypothecate,
distribute, exchange, encumber or otherwise dispose of, either voluntarily or
involuntarily and with or without consideration.
(k) "Selling Stockholder" shall mean AHM, if AHM is proposing to Sell
Stock, or SPM, if SPM is proposing to Sell Stock.
(l) "SPM" shall mean Specialist Physicians MSO, L.L.C., a New Jersey
limited liability company, and any successors thereto.
(m) "Stock" shall mean (i) common stock outstanding on the date
hereof, (ii) any additional shares of common stock or other capital stock (or
options or warrants to acquire capital stock) of the Corporation hereafter
issued and outstanding or (iii) any shares of capital stock of the Corporation
into which such shares may be converted or for which they may be exchanged or
exercised.
- 2 -
<PAGE>
(n) "Trigger Event" shall have the meaning set forth in Section 3(b)
hereof.
SECTION 2. BOARD OF DIRECTORS. (a) The business and affairs of the
------------------
Corporation shall be managed by or under the direction of a Board of Directors
(the "Board of Directors") consisting of seven directors, four of whom shall be
designated by AHM and three of whom shall be designated by SPM. At each annual
meeting of the stockholders of the Corporation, and at each special meeting of
the stockholders of the Corporation called for the purpose of electing directors
of the Corporation, and at any time at which the Stockholders shall have the
right to, or shall, vote or give their written consent to elect directors of the
Corporation, then, and in each event, the Stockholders shall vote all shares of
Stock owned by them (or shall consent in writing in lieu of a meeting of
stockholders of the Corporation, as the case may be) for the election of the
directors designated in accordance with the preceding sentence. In the event of
the removal, resignation or death of a director, the Stockholders shall vote, or
give their written consent, to fill the resulting vacancy with a nominee
selected by the Stockholder originally entitled to designate such director.
Notwithstanding anything contained herein to the contrary, SPM's right to
designate three directors to serve on the Board of Directors shall be
nonassignable and shall terminate as of the date SPM owns in the aggregate less
than five percent of the Corporation's Stock.
(b) Except for the actions of the Board of Directors relating to
authorizing the Corporation to (i) participate in the Rollup (as defined below)
transactions contemplated pursuant to Section 3 hereof and (ii) repurchase from
SPM shares of Stock pursuant to Section 6.1 hereof, for which such actions a
quorum shall exist if a majority of the directors of the Corporation then in
office are present at any meeting of the Board of Directors, a quorum at any
meeting of the Board of Directors shall exist if a majority of the directors
then in office are present and at least one director designated by AHM and one
director designated by SPM are present at such meeting.
(c) Except for the actions of the Board of Directors relating to
authorizing the Corporation to (i) participate in the Rollup (as defined below)
transactions contemplated pursuant to Section 3 hereof and (ii) repurchase from
SPM shares of Stock pursuant to Section 6.1 hereof, which such actions shall
require the approval of a majority of the directors then in office, any and all
other actions to be taken by the Board of Directors shall require the approval
of a majority of the directors then in office, including the approval of one
director designated by AHM and one director designated by SPM. AHM shall at all
times have the right to elect the Chairman of the Board of Directors.
- 3 -
<PAGE>
SECTION 3. ROLLUP OF SPM'S STOCK.
---------------------
(a) If AHM's Board of Directors determines that the Trigger Event (as
defined below) has occurred, then AHM may elect to merge the Corporation with
and into AHM in a transaction in which SPM shall receive voting common stock of
AHC (the "AHC Stock") in exchange for its Stock of the Corporation (the
"Rollup"). Each share of Stock owned by SPM shall be convertible into that
number of shares of AHC Stock to be determined at the time of the Rollup in
accordance with Exhibit A.
---------
(b) A "Trigger Event" shall be deemed to have occurred if each of the
following conditions is satisfied in full: (i) AHM is providing Practice
Management Services to at least 300 physicians, (ii) AHM is providing Network
Management Services to at least 2,000 physicians, (iii) AHC has at least
$75,000,000 in stockholders' equity according to AHC's most recent financial
statements, (iv) AHC maintains stock outstanding which is publicly traded on a
national stock exchange and (v) AHC's Board of Directors has authorized the
Rollup.
(c) The right of SPM to participate in the Rollup and to receive
shares of AHC Stock pursuant to Section 3(a) hereof shall automatically
terminate if, prior to the completion of the Rollup, (i) the Corporation has
terminated all of the Management Services Agreements entered into between the
Corporation and the Networks with cause pursuant to Section 1.3(c) thereof or
(ii) any Management Services Agreement between the Corporation and a Network (a
"Terminated Network") in which a Member [as such terms are defined in the
Operating Agreement dated as of March 15, 1996 (the "Operating Agreement"),
between SPM and the Members thereto] holds an ownership interest is terminated
by the Corporation with cause pursuant to Section 1.3(c) thereof, unless, within
60 business days after the effective date of such termination (x) a Member or
Members, other than a Member who or which holds an ownership interest in a
Terminated Network, holding Units (as such term is defined in the Operating
Agreement) in SPM exchanges or exchange such Units for all of SPM's Stock in the
Corporation pursuant to the provisions of the Operating Agreement, or (y) all
Members who or which hold an ownership interest in a Terminated Network Sell to
SPM, pursuant to the terms of the Operating Agreement, all of the Units in SPM
held by such Member. In the event a Member acquires all or part of SPM's Stock
in the Corporation pursuant to clause (x) above, SPM shall cause each such
Member to enter into a written agreement to be bound by the terms of this
Agreement. AHC shall not be obligated to issue AHC Stock in the Rollup to any
Member that fails to enter into a written agreement at the time such Member
acquires all or part of SPM's Stock in the Corporation pursuant to clause (x)
above. In the event of the occurrence of either of the events set forth in this
Section 3(c)(i) or (ii), SPM shall promptly surrender and deliver to the
Corporation any and all stock certificates evidencing SPM's ownership of the
Stock in a form sufficient to convey to the Corporation good
- 4 -
<PAGE>
title to the Stock and free and clear of any and all encumbrances, liens
pledges, security interests, mortgages, charges, easements, reservations,
options, rights of first refusal and other restrictions of any kind.
SECTION 4. MANDATORY REPURCHASE OF SPM STOCK.
---------------------------------
(a) If AHM has failed to commence the Rollup by the first
anniversary of the occurrence of the conditions set forth in Section 3(b)(i)
through (iv) hereof, SPM shall be entitled to require AHM, and AHM shall be
obligated (subject to the following sentence), to repurchase all of the
outstanding Stock owned by SPM (the "Put Option") at a purchase price equal to
110 percent of the fair market value of such Stock had the Rollup been
consummated pursuant to Section 3. The fair market value of the Stock subject
to the Put Option shall be the average publicly traded price per share of AHC's
Stock quoted on a national stock exchange for the 30 consecutive trading days
immediately prior to SPM's exercise of the Put Option multiplied by the number
----------
of shares of such Stock then owned by SPM. In the event that a quote of the
price of AHC's Stock is unavailable on a national stock exchange, the
determination of fair market value shall be made by a nationally recognized
independent public accounting firm or an investment banking firm mutually agreed
to by AHM and SPM which is independent of and not affiliated with AHM, SPM or
any of their Affiliates. Any determination of fair market value shall be
conclusive and binding on AHM and SPM. AHM and SPM shall equally bear the cost
of any such appraisal.
(b) SPM may exercise the Put Option by delivering a written
notice (the "Put Notice") to AHM which notice shall specify the number and
percentage of shares of Stock owned by SPM to be repurchased.
(c) The closing of such repurchase by AHM shall occur on a date
determined by AHM (the "Put Closing Date") which date shall be no more than 30
days after the determination by the independent appraiser of fair market value
of the Stock subject to the Put Option. On the Put Closing Date, SPM shall
surrender to AHM the Stock owned by SPM being repurchased without any
representation or warranty (other than that the holder has good and valid title
thereto free and clear of liens, claims, encumbrances and restrictions of any
kind), against payment therefor by AHM to SPM by (at the option of SPM), (i)
wire transfer to an account in a bank located in the United States designated by
SPM for such purpose or (ii) a certified or official bank check drawn on a
member of the New York Clearing House payable to the order of SPM.
SECTION 5. RESTRICTIONS ON SALES OF STOCK.
------------------------------
5.1. GENERAL RESTRICTIONS. No Stockholder shall, at any time during
--------------------
the term of this Agreement, Sell any Stock, except:
- 5 -
<PAGE>
(i) by pledge which creates a mere security interest in the
Stock, provided that (a) all Stockholders consent to such pledge and (b)
the pledgee thereof shall agree in writing in advance with the parties
hereto to be bound by and comply with all applicable provisions of this
Agreement to the same event as if it were the Stockholder making such
pledge;
(ii) SPM shall Sell its Stock to the Corporation in accordance
with Section 3 hereof;
(iii) SPM may Sell its Stock to the Members (as defined in the
Operating Agreement) pursuant to the terms of the Operating Agreement;
(iv) by Sale in accordance with Section 4 or 5.2;
(v) AHM shall have the right to Sell all or any part of its Stock
to any Affiliate, or any employee of AHM or any Affiliate, who or which
agrees in writing to be bound by and to comply with the applicable
provisions of this Agreement as if such purchaser were AHM for the purposes
hereof;
(vi) SPM shall be permitted to sell its Stock to AHM or the
Corporation;
(vii) pursuant to a liquidation or winding-up of the
Corporation.
5.2. RIGHT OF FIRST REFUSAL. Except as otherwise provided in Section
----------------------
5.1, SPM and AHM shall not Sell any shares of Stock unless (i) the prior written
consent of the Corporation is obtained or (ii) the following procedure is
followed:
(a) The Selling Stockholder shall first deliver to the Corporation
and the Non-selling Stockholders a written notice (the "Offer Notice"), which
shall be irrevocable for a period of 90 days after delivery thereof, offering
(the "Offer") all of the Stock proposed to be Sold by the Selling Stockholder at
the purchase price and on the terms specified in the Offer Notice. The
Corporation (or its designee) shall then have the right and option, for a period
of 30 days after delivery of the Offer Notice, to accept all or any part of the
Stock so offered at the purchase price and on the terms stated in the Offer
Notice. Such acceptance shall be made by delivering a written notice to the
Selling Stockholder and the Non-selling Stockholders within said 30-day period.
(b) If the Corporation (or its designee) shall fail to accept all of
the Stock offered for sale pursuant to, or shall reject in writing, the Offer
(the Corporation being required to notify in writing the Selling Stockholder and
the Non-selling Stockholders of its rejection or failure to accept all of the
- 6 -
<PAGE>
Stock in the event of the same), then, upon the earlier of the expiration of
such 30-day period or the receipt of such written notice of rejection or failure
to accept such Offer by the Corporation, the Non-selling Stockholders shall have
the right and option, for a period of 30 days thereafter, to accept all or any
part of the Stock so offered and not accepted by the Corporation (the "Refused
Stock") at the purchase price and on the terms stated in the Offer Notice. Such
acceptance shall be made by delivering a written notice to the Corporation and
the Selling Stockholder within said 30-day period.
(c) Sales of Stock under the terms of Sections 5.2(a) and 5.2(b)
shall be made at the offices of the Corporation on a mutually satisfactory
business day within 30 days after the expiration of the last applicable period
described in Section 5.2(b). Delivery of certificates or other instruments
evidencing such Stock duly endorsed for transfer shall be made on such date
against payment of the purchase price therefor.
(d) If effective acceptance shall not be received pursuant to
Sections 5.2(a) and 5.2(b) with respect to all Stock offered for Sale pursuant
to the Offer Notice, then the Selling Stockholder may Sell all or any part of
the Stock so offered and not so accepted to a party or parties reasonably
acceptable to the Non-selling Stockholders (determined in accordance with
Section 5.2(e) hereof) at a price not less than the price, and on terms not more
favorable to the purchaser thereof than the terms stated in the Offer Notice at
any time within 60 days after the expiration of the Offer required by Sections
5.2(a) and 5.2(b). In the event that the Stock is not Sold by the Selling
Stockholder during such 60-day period to such party or parties, the right of the
Selling Stockholder to Sell such Stock shall expire and the obligations of this
Section 5.2 shall be reinstated.
(e) The Selling Stockholder shall, at least 20 days prior to the
proposed date of Sale of Stock by the Selling Stockholder to any party other
than the Non-selling Stockholders, provide in writing to the Non-selling
Stockholders the identity of such proposed purchaser and such other information
concerning such purchaser as shall be reasonably requested by the Non-selling
Stockholders to enable the Non-selling Stockholders to determine the
acceptability of the proposed purchaser as a Stockholder. Within such 20 day
period, the Non-selling Stockholders shall provide to the Selling Stockholder in
writing either such Stockholder's consent or disapproval of such proposed
purchaser. The Selling Stockholder shall be entitled to consummate such Sale of
Stock to such proposed purchaser if the Non-selling Stockholders shall consent
to such proposed purchaser.
(f) Anything contained herein to the contrary notwithstanding, any
purchaser of Stock pursuant to this Section 5.2 who or which is not a
Stockholder shall agree in writing in advance
- 7 -
<PAGE>
with the parties hereto to be bound by and comply with all applicable provisions
of this Agreement and shall be deemed to be a Stockholder for all purposes of
this Agreement.
(g) The Selling Stockholder shall comply in all respects with Rule
144 under the Securities Act in connection with any Sale of Stock pursuant to
this Section 5.
SECTION 6. CERTAIN REPURCHASE RIGHTS OF AHM AND/OR THE CORPORATION.
-------------------------------------------------------
6.1. REPURCHASE FROM SPM. (a) In the event of:
-------------------
(i) the breach by SPM of the terms of this Agreement; or
(ii) the commencement of a voluntary or involuntary
bankruptcy proceeding (provided, with respect to an involuntary
proceeding, that such proceeding has not been stayed or dismissed
within 60 days of such commencement) by or against SPM;
then, AHM (or the Corporation or any other designee of AHM) shall have the
- ----
right, but not the obligation, to purchase from SPM and SPM shall be obligated
to sell to AHM (or the Corporation or such other designee), upon the exercise of
such right, at a purchase price per share (as constituted on the date hereof)
equal to the original cost paid by SPM for the Stock at the time of such event
as determined by the accountants of the Corporation, up to that number of shares
of Stock then owned by SPM.
(b) AHM (or the Corporation or any other designee of AHM) may
exercise its right to purchase Stock owned by SPM pursuant to Section 6.1(a) by
delivering a written notice to such effect to SPM within 30 days following the
event giving rise to such right, which notice shall specify the number of shares
of Stock which the Corporation so elects to purchase. Any purchase of Stock
pursuant to Section 6.1(a) shall be made for a purchase price per share equal to
the original cost paid by SPM for the Stock and on a business day designated by
AHM (or the Corporation or other designee) which shall be within 10 days of the
delivery of such notice, by delivery of the purchase price against receipt of
one or more certificates, properly endorsed, evidencing the Stock to be so
purchased.
SECTION 7. LEGEND. Each certificate evidencing Stock shall be
------
stamped or otherwise imprinted with a legend in substantially the following
form:
"THE REGISTERED HOLDER HEREOF HAS REPRESENTED TO THE ISSUER OF THE
SHARES REPRESENTED HEREBY THAT IT HAS ACQUIRED SUCH SHARES FOR
INVESTMENT PURPOSES AND NOT FOR DISTRIBUTION. ACCORDINGLY, SUCH
SHARES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
- 8 -
<PAGE>
AMENDED, OR ANY STATE SECURITIES OR BLUE SKY LAWS, AND MAY NOT BE SOLD,
TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS SUBSEQUENTLY REGISTERED
THEREUNDER OR AN EXEMPTION FROM REGISTRATION THEREUNDER IS AVAILABLE."
"CERTAIN OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT
TO REPURCHASE UNDER THE TERMS AND CONDITIONS OF A STOCKHOLDERS'
AGREEMENT DATED AS OF JULY 1, 1996, AMONG SPECIALIST PHYSICIANS
MANAGEMENT, INC. AND THE OTHER STOCKHOLDERS LISTED ON SCHEDULE I
----------
THERETO. COPIES OF SUCH AGREEMENT MAY BE OBTAINED AT NO COST BY
WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF THIS CERTIFICATE TO
THE SECRETARY OF SPECIALIST PHYSICIANS MANAGEMENT, INC."
SECTION 8. GOVERNING LAW. This Agreement shall be governed by, and
-------------
construed in accordance with, the laws of the State of New York without regard
to the laws and principles thereof or of any other jurisdiction that would
direct the application of the laws of another jurisdiction. The parties to this
Agreement agree that jurisdiction and venue in any action brought by any party
hereto pursuant to this Agreement shall exclusively lie in any federal or state
court located in the State of New York. By execution and delivery of this
Agreement, the parties hereto irrevocably submit to the jurisdiction of such
courts for themselves and in respect of their property with respect to such
action. The parties hereto irrevocably agree that venue would be proper in such
court and hereby waive any objection that such court is an improper or
inconvenient forum for the resolution of such action.
SECTION 9. BENEFITS OF AGREEMENT. Except as otherwise provided
---------------------
herein, this Agreement shall be binding upon and inure to the benefit of the
parties and their respective successors and assigns, legal representatives and
heirs.
SECTION 10. NOTICES. All notices, claims, certificates, requests,
-------
demands and other communications hereunder shall be in writing and shall be
deemed to have been duly given if personally delivered or if sent by telecopy,
nationally-recognized overnight courier or by registered or certified mail,
return receipt requested and postage prepaid, addressed as follows:
(i) if to the Corporation, to:
Specialist Physicians Management, Inc.
560 White Plains Road, 2nd Floor
Tarrytown, New York 10591
Attention: Alan Masarek
Telephone: (914) 332-6688
Telecopy: (914) 332-1186
- 9 -
<PAGE>
with a copy to:
O'Sullivan Graev & Karabell, LLP
30 Rockefeller Plaza
New York, New York 10112
Attention: John J. Suydam, Esq.
Telephone: (212) 408-2400
Telecopy: (212) 408-2420; and
(ii) if to the Stockholders, to their respective
addresses set forth on Schedule I attached hereto;
----------
with a copy to:
McDermott, Will & Emery
1211 Avenue of the Americas
43rd Floor
New York, New York 10036-8701
Attention: J. Peter Rich, Esq.
Telephone: (212) 768-5400
Telecopy: (212) 768-5444
or to such other address as the party to whom notice is to be given may have
furnished to the other parties hereto in writing in accordance herewith. Any
such notice or communication shall be deemed to have been received (a) in the
case of delivery by telecopy or 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 communi-
cation is posted.
SECTION 11. ENTIRE AGREEMENT. This Agreement and the other
----------------
writings and agreements referred to herein or delivered pursuant hereto contain
the entire understanding of the parties with respect to their subject matter.
This Agreement and such other writings and agreements referred to herein
supersede all prior agreements and understandings among the parties with respect
to their subject matter.
SECTION 12. MODIFICATION. The terms and provisions of this
------------
Agreement may not be modified or amended, or any of the provisions hereof
waived, temporarily or permanently, except pursuant to the written consent of
the Corporation, AHM and SPM.
SECTION 13. HEADINGS. The section and paragraph headings
--------
contained in this Agreement are for reference purposes only and shall not affect
in any way the meaning or interpretation of this Agreement.
SECTION 14. NOUNS AND PRONOUNS. Whenever the context may
------------------
require, any pronouns used herein shall include the corresponding masculine,
feminine or neuter forms, and the singular
- 10 -
<PAGE>
form of names and pronouns shall include the plural and vice-versa.
SECTION 15. COUNTERPARTS. This Agreement may be executed
------------
in one or more counterparts, each of which shall be deemed to be an original,
but all of which taken together shall constitute one and the same instrument.
* * *
- 11 -
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first above written.
SPECIALIST PHYSICIANS MANAGEMENT, INC.
By:
-------------------------------------
Name:
Title:
ADVANCED HEALTH MANAGEMENT CORPORATION
By:
-------------------------------------
Name:
Title:
SPECIALIST PHYSICIANS MSO, L.L.C.
By:
-------------------------------------
Name:
Title:
<PAGE>
SCHEDULE I
----------
STOCKHOLDERS
------------
STOCKHOLDER COMMON SHARES %
----------- ------------- -------------
ADVANCED HEALTH MANAGEMENT 51 51
CORPORATION
560 White Plains Road, 2nd Fl.
Tarrytown, New York 10591
Attention: Richard Kaplan
SPECIALIST PHYSICIANS MSO, 49 49
L.L.C.
P.O. Box 615
Short Hills, New Jersey 07078
Attention: Vance J. Weber, M.D.
<PAGE>
EXHIBIT A
---------
The Rollup
----------
AHC has established and reserved 548,224 shares of its common stock as
adjusted by a stock split, reverse stock split, stock dividend or
recapitalization of AHC's shares of common stock (the "MSO Pool") for issuance
to all medical personnel which own, from time to time, any equity interest in
any Affiliate of AHC which provides management services to physicians or
physician groups (each an "MSO"). AHC has organized, and from time to time
after the date hereof shall organize, MSO's to provide physician management and
network services and grant equity interests in such entities, which equity
interests will participate in the MSO Pool or any Rollup.
The MSO Pool will only be issued if AHC determines, in its discretion,
to consummate the Rollup. The Rollup of all MSO equity interests must be done
at one time and in one transaction. The shares in the MSO Pool have been
divided into four tranches, of 17.5%, 22.5% 27.5% and 32.5%, respectively. AHC
will allocate the first tranche of the MSO Pool ("Tranche I") to be divided
among the physician networks and physician practices (each a "PPN") which own
equity in the MSO's which are established on or prior to December 31, 1996 (the
"Tranche I Period"). AHC will allocate the second tranche of the MSO Pool
("Tranche II") to be divided among the PPNs which own equity in all MSO's which
operate (including MSO's formed during the Tranche I Period) during calendar
year 1997 (the "Tranche II Period"). AHC will allocate the third tranche of the
MSO Pool ("Tranche III") to be divided among the PPN's which own equity in all
MSO's which operate during calendar year 1998 (the "Tranche III Period"). AHC
will allocate the fourth tranche of the MSO Pool ("Tranche IV") to be divided
among the PPNs which own equity in MSO's which operate during calendar year 1999
(the "Tranche IV Period").
At the time AHC shall determine to effect the Rollup, the MSO Pool
shall be allocated as follows:
1. All PPNs which qualify for Tranche I shares shall receive an
allocation of Tranche I shares based upon their proportionate percentage of
Qualifying Revenues for the Tranche I Period. To determine the proportionate
percentage for each PPN, a numerator for each PPN will be established by taking
the Qualifying Revenues of such MSO for the Tranche I Period. The denominator
shall be equal to the sum of the numerators for the PPNs. As used herein,
Qualifying Revenues for each MSO shall mean all revenues other than revenues
derived from referrals for "designated health services" (as such term is defined
by applicable law and regulations or similarly referral regulated services) by
physicians if consideration for such referrals is prohibited by state or federal
law, including federal "STARK" law and regulations.
<PAGE>
2. All PPNs which qualify for Tranche II shares shall receive an
allocation of Tranche II shares based upon their proportionate percentage of
Qualifying Revenue for the Tranche II Period. The proportionate percentage
shall be calculated as provided in 1 above.
3. All PPNs which qualify for Tranche III shares shall receive an
allocation of Tranche III shares based upon their proportionate percentage of
Qualifying Revenue for the Tranche III Period. The proportionate percentage
shall be calculated as provided in 1 above
4. All PPNs which qualify for Tranche IV shares shall receive an
allocation of Tranche IV shares based upon their proportionate percentage of
Qualifying Revenue for the Tranche IV Period. The proportionate percentage
shall be calculated as provided in 1 above.
5. If the Rollup shall occur prior to the end of the Tranche IV
Period but after the end of the Tranche III Period, the Tranche IV shares shall
be allocated as if the Tranche IV Period ended on the date of the Rollup. If
the Rollup shall occur prior to the end of the Tranche III Period but after the
end of the Tranche II Period, the Tranche III shares shall be allocated as if
the Tranche II Period had ended on the date of the Rollup and the Tranche IV
shares shall be allocated pro rata to all PPNs receiving Tranche I, Tranche II
--- ----
and Tranche III shares based upon the number of shares received. If the Rollup
shall occur prior to the end of the Tranche II Period, the Tranche II shares
shall be allocated as if the Trance II Period had ended on the date of the
Rollup and the Tranche III and IV shares shall be allocated pro rata to all PPNs
--- ----
receiving Tranche I and II shares based upon the number of shares received.
================================================================================
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
-i-
<PAGE>
ATTACHMENTS
SCHEDULE I -- Management Services
SCHEDULE II -- Actual Costs
SCHEDULE III -- Medical Group Expenses
SCHEDULE IV -- Fees
-ii-
<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)
-iii-
<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
-2-
<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.
-----------
-3-
<PAGE>
(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.
-4-
<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,
-5-
<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
-6-
<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
-7-
<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
-8-
<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
-9-
<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
-10-
<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
-11-
<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,
-12-
<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
-13-
<PAGE>
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.
* * *
-14-
<PAGE>
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 [ ]* for
the account of the Medical Group and [ ]* 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 10.16
ADMINISTRATIVE SERVICES BASE AGREEMENT
THIS AGREEMENT, entered into as of this 30 day of June, 1994, by and
between U.S. HEALTH CONNECTIONS, INC., a Georgia corporation ("USHC"), and THE
EMORY CLINIC, INC., a Georgia corporation ("Emory").
W I T N E S S E T H
WHEREAS, Emory intends to develop specialty practitioner networks ("Emory
Networks") that will engage in delivery of medical services pursuant to managed
care agreements;
WHEREAS, USHC has substantial expertise in the organization,
administration, and operation of provider and practitioner networks
("Administrative Services") and is the owner of all rights, including
copyrights, in written materials and other documentation used in connection with
managed care contracting, including, without limitation, utilization review and
quality assurance plan, as identified on Exhibit "A" attached hereto and made a
part hereof (collectively referred to as the "Works");
WHEREAS, USHC is the owner of all rights in the service mark "U.S. Health
Connections" and designs that identify the source of USHC's services (the
"Marks"); and,
WHEREAS, Emory desires to obtain the services of USHC in the organization,
administration, and operation of the Emory Networks and the right to use the
Works and the Marks for purposes of improving the operations and marketing of
the Emory Networks;
NOW, THEREFORE, for and in consideration of the premises and the mutual
promises set forth herein, and for other good and valuable consideration, the
receipt and adequacy of which is hereby acknowledged, the parties hereto agree
as follows:
1. Administrative Services. Emory may at any time offer to obtain
Administrative Services and the right to use the Works from USHC in connection
with an Emory Network. The terms and conditions applicable to any specific Emory
Network shall be described on an Addendum to this Agreement signed by both
parties in accordance with the terms and conditions of this Agreement.
2. Copyright License. USHC hereby grants to Emory the following:
2.1 Grant of License. Subject to the terms and conditions of this
Agreement, USHC hereby grants to Emory the non-exclusive, non-transferable
license and right to use the Works for purposes of administration of each Emory
Network described in a fully executed Addendum to this Agreement (the "Copyright
License"). The term of the Copyright License for each Emory Network shall run
concurrently with the term for provision of Administrative Services as described
in each Addendum. Consistently with the terms and conditions of this Agreement,
Emory may (a) reproduce
<PAGE>
all or any part of Works and (b) distribute copies of the Works to participants
in each Emory Network described in a fully executed Addendum. Each participation
agreement between Emory and each participating provider or practitioner in an
Emory Network described in a fully executed Addendum shall, without limitation,
(a) acknowledge USHC's rights in the Works as generally expressed in this
Agreement, (b) sublicense the use of the Works subject to the same limitations
placed on Emory in subparagraph 2.2 below, and (c) require each participant to
return the Works to USHC upon termination of USHC's Administrative Services for
the Emory Network unless USHC agrees in writing to permit Emory to continue to
use the Works after termination of USHC's Administrative Services. If necessary,
Emory agrees to cooperate with and assist USHC in obtaining appropriate
amendments to such participation agreements.
2.2 Limitations on Use. The grant of rights hereunder shall be limited
to Networks whose operations are administered by USHC as evidenced by a fully
executed Addendum. Emory shall have no right to use the Works for any other
purpose. Except as expressly provided in this Agreement, Emory shall not copy,
reproduce, give away, or otherwise use any copies of Works or permit third
parties to use any copies of Works.
2.3 Underlying Works. Ownership and title to the Works, including all
copyrights and other intellectual property rights in the Works, shall vest and
remain in USHC. All copies of the Works shall display a copyright notice in the
following form or such other form agreed to by USHC:
Copyright (C) [year of first publication] U.S. Health Connections, Inc. All
Rights Reserved.
2.4 Jointly Created Works. During the term of provision of
Administrative Services to an Emory Network, Emory, or participants in Emory
Networks administered by USHC, and USHC may jointly create expressions that are
applicable only to the administration of the Emory Network ("Joint Works").
Joint Works shall be owned jointly by Emory and USHC subject to the following
limitations: (a) such ownership does not grant Emory the right to use all or any
part of the Works upon termination of USHC's Administrative Services for an
Emory Network unless USHC expressly agrees otherwise in writing; and, (b) upon
termination of this Agreement, either party may use the Joint Works without
further accounting to the other party.
3. Trademark and Service Mark License. USHC hereby grants to Emory the
following:
3.1 Grant of Rights. Subject to the terms and conditions of this
Agreement, USHC hereby grants to Emory the non-exclusive, non-transferable
license right to use the name and service mark "U.S. HEALTH CONNECTIONS" and all
-2-
<PAGE>
designs developed by USHC that identify the source of its services to the public
(the "Marks") for purposes of administration of each Emory Network described in
a fully executed Addendum (the "Service Mark License"). The term of the Service
Mark License for each Emory Network shall run concurrently with the term for
provision of Administrative Services as described in each Addendum.
3.2 Limitations on Use. The grant of rights hereunder shall be limited
to Networks whose operations are administered by USHC as evidenced by a fully
executed Addendum. Emory shall have no right to use Marks for any other purpose.
Expressly, without limitation, Emory shall have no right to sublicense rights in
the Marks.
3.3 Ownership of Marks. USHC represents and warrants that USHC is the
owner of the Marks and that USHC has the right to enter into this Agreement to
license use of the Marks to Emory. All documents and promotional material
displaying any Mark shall bear a notice that the Mark is owned by US Health
Connections, Inc. USHC may pursue registration of Marks with the United States
Trademark Office. Upon issuance of registration of any Mark with the United
States Trademark Office and written notice from USHC, Emory agrees to put the
symbol "(R)" next to the registered Mark; provided, however, it shall be USHC's
obligation to identify all documents requiring the addition of the symbol. Emory
agrees that nothing herein shall be construed to give Emory any right, title, or
interest in and to Marks other than the rights granted herein. Emory agrees that
the Marks are, and shall remain, the sole property of USHC, that Emory shall not
contest USHC's ownership of Marks, and that any and all use of Marks shall inure
to the benefit of USHC.
3.4 Samples. Emory agrees to submit representative samples and obtain
approval from USHC before using Marks on any documentation or promotional
material distributed to the public, which approval shall not be unreasonably
withheld.
4. Consideration and Compensation.
4.1 Administrative Services. USHC's compensation for Administrative
-----------------------
Services shall be negotiated independently for each Emory Network and described
in the Addendum for each Emory Network. Payment terms shall also be described
in the Addendum.
4.2 Intellectual Property Licensing. Emory shall not be obligated to
-------------------------------
pay any fee for use of the Works or the Marks during the term of any Addendum
for provision of Administrative Services for any Emory Network. Upon
termination of USHC's Administrative Services for any Emory Network, or for any
Emory Network for which USHC does not provide Administrative Services, USHC may
grant to Emory the right to use the Works or the Marks in consideration for a
licensing fee to be negotiated by the parties.
4.3 Equity Distributions. Distributions related to the parties'
--------------------
equity interests in any Emory Network shall be described in the Addendum for
that Network.
-3-
<PAGE>
5. Term. The term for provision of Administrative Services shall be
independently negotiated for each Emory Network and described in the Addendum
for such Emory Network.
6. Termination.
6.1 Termination for Cause. Administrative Services under any Addendum
may be terminated by either party for cause. "Cause" shall be defined as a
breach by either party of any material term or condition of this Agreement,
provided that the allegedly breaching party has failed to cure the alleged
breach within thirty (30) days following written notice reasonably describing
such alleged breach.
6.2 Rights Upon Termination. Upon termination of the Administrative
Services for any Emory Network for any reason, (a) all copies of the Works shall
be promptly returned to USHC, (b) Emory shall immediately cease all use and
distribution of the Works and shall demand the return of all copies of the Works
from all participants in the Emory Network for which USHC's services have been
terminated, and (c) Emory shall immediately discontinue and refrain from any
further use of Marks or any service marks confusingly similar to the Marks,
unless USHC expressly agrees otherwise in writing. Any copies of the Works which
Emory fails to return to USHC upon termination of this Agreement shall be
destroyed by Emory, and Emory shall provide USHC with reasonable evidence of
such destruction.
7. Covenant Not To Solicit Employees. Emory covenants and agrees that,
during the term of this Agreement and for a period of two (2) years immediately
following the date of termination of USHC's services hereunder, Emory shall not,
on Emory's own behalf or on behalf of any person, firm, partnership,
association, corporation, or business organization, entity, or enterprise,
either directly or indirectly, solicit, recruit, entice, persuade or induce, or
attempt to solicit, recruit, entice, persuade or induce, any employee,
consultant, or independent contractor employed or otherwise engaged by USHC at
the time of termination of this Agreement or within the two (2) year period
immediately preceding such date of termination, to sever his or her relationship
with USHC or to be employed or otherwise engaged in any capacity by any person,
firm, partnership, association, corporation, or business organization, entity,
or enterprise engaged in a Competitive Business. For purposes of this Agreement,
"Competitive Business" shall mean a network alliance, partnership, or
combination of two (2) or more unrelated providers and practitioners that
develops, enters into, and administers contracts directly with employers,
insurers, third-party administrators, preferred provider organizations, health
maintenance organizations, physician-hospital organizations, health care
alliances, and other payors for the delivery of medical services to individuals
eligible for such coverage under health benefit plans managed or
-4-
<PAGE>
administered by such payors.
8. Covenant Not To Disclose. Independently from the covenants set forth in
Paragraph 7, above, Emory and USHC covenant as follows:
8.1 Trade Secrets. Each party covenants and agrees that from the date
hereof and for all time each party shall treat as confidential and shall not
use, disclose, or divulge (except in connection with performance of duties
hereunder and any Addendum hereto), any and all trade secret information
concerning the other party or its business obtained during the performance of
this Agreement. For purposes hereof, "trade secret information" includes, but is
not limited to, utilization review and quality assurance information and
procedures, compilations of medical outcomes data, lists of actual or potential
customers and referral sources, lists of actual or potential suppliers, pricing
structures, rates, fees, contract rates, technical and nontechnical data,
formulae, patterns, compilations, programs, devices, methods, techniques,
drawings, processes, financial data, financial plans, and product plans.
8.2 Other Confidential Information. Each party covenants and agrees
that during the terms of this Agreement and for a period of two (2) years
immediately following the date of termination of this Agreement, each party
shall treat as confidential and shall not use, disclose, or divulge (except in
connection with performance of duties hereunder and any Addendum hereto), any
confidential business information regarding the other party that does not fall
within the definition of "trade secret information" as defined above.
8.3 This Agreement. The terms and conditions of this Agreement shall
be regarded by Emory as confidential information and shall not be disclosed to
any persons except employees of Emory or representatives or employees of The
Emory University System of Health Care without the express written consent of
USHC.
9. Severability. The covenants set forth in Paragraphs 7 and 8, above,
shall be construed to be separate and distinct from each other and every other
provision set forth in this Agreement. In the event that any court of competent
jurisdiction shall declare any covenant invalid, prohibited, or unenforceable,
the remaining covenants and obligations shall be remain independent, divisible,
and enforceable. Any such unenforceable or prohibited provision or provisions
may be modified in a court of law to the fullest extent allowed by the law of
such jurisdiction so as to allow such provision or provisions to be written in
such a manner and to such an extent as to be enforceable in such jurisdiction
under the circumstances.
10. Independent Contractors. USHC and Emory are and shall continue to be
independent contractors under this Agreement. USHC shall be responsible for
payment or withholding of all taxes for USHC employees, and preparation of all
reports regarding amounts paid to USHC's contractors, who serve Emory under this
Agreement. Neither
-5-
<PAGE>
party shall be liable for acts or omissions of the other.
11. Assignment; Parties Benefitted. This Agreement contemplates the
specific services of each party hereto and may not be assigned without the prior
written permission of the other party except as follows: (a) Emory may assign
its rights and delegate its responsibilities under this Agreement to any parent,
subsidiary, or affiliate (including, without limitation, The Emory University
System of Health Care) upon at least ninety (90) days written notice to the
other party; and (b) USHC may assign this Agreement to a purchaser of all or
substantially all of USHC's assets, with the consent of Emory, provided that the
purchaser provides Emory with written acknowledgement of assumption of USHC's
obligations hereunder. Neither party hereto anticipates nor intends to confer
any benefits to any third party by virtue of entering into this Agreement.
12. Access to Books, Documents and Records. USHC covenants and agrees that,
upon request made in accordance with applicable law and regulations, the
Comptroller General of the United States, the United States Department of Health
and Human Services and the duly authorized representatives of the foregoing
shall be given access by USHC to the books, documents, and records related to
the furnishing of services under this Agreement by USHC or any organization
related to USHC from the date of this Agreement until the expiration of four (4)
years after the furnishing of services under this agreement pursuant to 42
C.F.R. ss. 420.302(b) and Section 1861 (v)(1)(i) of the Social Security Act or
the proposed or final regulations thereunder. Requests for access to records
shall be granted in accordance with 42 C.F.R. ss. 420,304. USHC shall promptly
notify Emory of any request for access to books, records, and documents in
accordance with this Paragraph and shall identify each such book, record, or
document and give Emory access thereto for review and copying. Any subcontract
entered into by USHC for the provision of services hereunder shall include a
clause substantially in the form of this Paragraph.
13. Binding Effect. All of the terms, covenants, agreements and conditions
herein contained shall be binding upon and inure to the benefit of each of the
parties hereto and their respective successors and permitted assigns.
14. Waiver of Breach. The wavier by either party of a breach of any portion
of this Agreement by the other party shall not operate or be construed as a
waiver of any subsequent breach.
15. Entire Agreement. This instrument contains the entire agreement of the
parties, and all prior representations of the parties, whether written or oral,
are merged herein. This Agreement may be changed or modified only by an
agreement in writing signed by both parties.
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<PAGE>
16. Paragraph Headings. The paragraph headings contained in this Agreement
are for reference purposes only and shall under no circumstances affect the
meaning or interpretation of this Agreement.
17. Applicable Law. This Agreement shall be governed and controlled by the
local laws of the State of Georgia.
18. Severability. The invalidity or unenforceability of any particular
provision of this Agreement shall not affect its other provisions, and this
Agreement shall be construed in all respects as if such invalid or
unenforceable provision were omitted.
19. Notices. All notices and other communications under or in connection
with this Agreement shall be in writing and shall be deemed to have been duly
given when hand delivered or when mailed, postage prepaid, by certified mail,
return receipt requested and addressed as follows:
If to USHC: Deborah Ann Smith, President
US Health Connections, Inc.
371 Battle Woods Trail
Marietta, Georgia 30064
With a copy to: Thomas William Baker
Kilpatrick & Cody
1100 Peachtree Street, Suite 2800
Atlanta, Georgia 30309-4530
If to Emory: Michael E. Bernardino, M.D.
Associate Clinic Director for Managed Care
The Emory Clinic, Inc.
1365 Clifton Road
Atlanta, Georgia 30322
With a copy to: General Counsel
The Emory Clinic, Inc.
1365 Clifton Road
Atlanta, Georgia 30322
The above addresses may be changed by either party upon notice to the other
party in the manner prescribed herein.
-7-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
"USHC" "Emory"
U.S. HEALTH CONNECTIONS, INC. THE EMORY CLINIC, INC.
By: /s/ Deborah Ann Smith By: /s/ ILLEGIBLE
----------------------------- -----------------------------------
Title: President Title:
-------------------------- ---------------------------------
<PAGE>
ONCOLOGY NETWORK ADDENDUM
THIS ADDENDUM dated as of 6/30, 1994, to the Administrative Services
Base Agreement between The Emory Clinic, Inc. ("Emory") and U.S. Health
Connections, Inc. ("USHC") dated as of 6/30, 1994, sets forth the terms and
conditions of engagement of USHC's Administrative Services for the Emory
Oncology Network:
1. Administrative Services. USHC shall name its President to serve as
USHC's liaison to the Emory Oncology Network. The President or designee shall
attend Emory Oncology Network meetings upon request by the Emory Oncology
Network. In addition, USHC shall provide the following Administrative Services
to the Emory Oncology Network:
1.1 Designate a person who shall act as the point of contact for
Emory Oncology Network participating physicians ("Network
Participants") for claim entry and resolution of claims
processing problems.
1.2 Prepare and maintain a directory of Network Participants.
1.3 Generate standard provider reports for the Emory Oncology Network
and Network Participants as available within USHC's programming
capabilities including patient service reports by Network
Participant, by procedure and diagnosis code, or by patient.
1.4 Create and maintain Emory Oncology Network credentialing files,
generate notices to Network Participants informing them of
upcoming re-credentialing dates, and support the Emory Oncology
Network's quality management function by organizing claims
generated under managed care contracts, organizing subscriber
utilization data, and generating reports for use by the Emory
Oncology Network.
1.5 Provide the Emory Oncology Network with documentation it may
require to review or modify managed care contracts.
1.6 Coordinate pre-certification approvals between and among the
Emory Oncology Network, Network Providers, and managed care
payors.
1.7 Coordinate inquiries from Network Participants regarding other
Network Participants and facilities approved by managed care
payors.
1.8 Coordinate resolution of claims procedure issues between and
<PAGE>
among the Emory Oncology Network, Network Participants, and
managed care payors.
1.9 Review accounting of payments due from managed care payors for
distribution to the Emory Oncology Network and Network
Participants.
1.10 Disburse funds from the Emory Oncology Network bank account to
Network Participants according to Emory Oncology Network
procedures or, alternatively, report financial information to the
Emory Oncology Network for fund disbursement to Network
Participants by the Emory Oncology Network.
2. Agreements and Responsibilities of the Emory Oncology Network. In
addition to Emory's further obligations hereunder, Emory agrees as follows:
2.1 The Emory Oncology Network shall cause each Network Participant
to submit claims to USHC or its designee according to the
procedures established in the Emory Oncology Network's
administrative manual. The Emory Oncology Network shall designate
a person to serve as a liaison from the Emory Oncology Network to
USHC for resolution of claims processing issues and shall cause
each Network Participant to designate a liaison for similar
purposes from his or her practice to USHC.
2.2 The Emory Oncology Network shall comply and shall cause each of
its Network Participants and their respective practices to comply
with all legal and regulatory requirements relating to the
furnishing of medical services to the public, including, but not
limited to, obtaining payment of or reimbursement for such
medical services including compliance with any requirements
applicable to networks. The Emory Oncology Network shall obtain
and maintain, and shall cause each of its Network Participants
and their respective practices to obtain and maintain, in effect,
all permits, licenses, and governmental or board approvals or
notices which may be necessary for those purposes. The Emory
Oncology Network shall obtain and maintain general and
professional liability insurance in amounts acceptable to managed
care payors and shall provide evidence to USHC of such coverage
upon request. The Emory Oncology Network represents and warrants
that, on or before the effective date of this Agreement, it will
have received all consents and approvals required and given all
notices necessary to enter into this Agreement.
-2-
<PAGE>
2.3 The Emory Oncology Network shall give written notice within ten
(10) days to USHC of any legal, governmental, or other action
initiated or consummated against the Emory Oncology Network or a
Network Participant, which could impair the ability of the Emory
Oncology Network or such Network Participant to perform the
medical service required under managed care contracts or to
obtain payment of or reimbursement for such services.
2.4 USHC shall have no control over the practice of medical services
provided by or arranged for by the Emory Oncology Network or any
Network Participant or their personnel. The Emory Oncology
Network shall retain sole control of the credentialing and
utilization and quality management of the Emory Oncology Network
and Network Participants. Nothing contained herein shall grant
USHC or any party performing credentialing, utilization, or
quality management support services the right to govern the level
of care of a subscriber or beneficiary or to participate in any
quality decisions affecting a Network Participant. While USHC may
assist in assembling credentialing, utilization, and quality data
in connection with managed care contracts or for the Emory
Oncology Network, USHC shall have no responsibility for any
credentialing, quality, or utilization management decisions. USHC
shall have no responsibility for any costs or expenses associated
with the operations of the Emory Oncology Network or those of any
Network Participant. The Medical Director of the Emory Oncology
Network shall serve as the Emory Oncology Network's liaison to
USHC and shall attend USHC meetings upon request. The Emory
Oncology Network shall use its best efforts to work with USHC in
resolving administrative disputes.
2.5 USHC may provide data and information regarding the Emory
Oncology Network to independent contractors under agreement with
USHC to fulfill USHC's obligations hereunder, provided that USHC
shall insure that such independent contractors shall be obligated
to maintain confidentiality of such data and information in
accordance with the confidentially obligations imposed on USHC in
Paragraph 8 of the Administrative Services Base Agreement.
2.6 The Emory Oncology Network shall maintain and shall cause each of
its Network Participants and their respective personnel to
maintain records and procedures as may be required to account
accurately for all services provided which are the subject of
this Agreement and the managed care contracts. Such records shall
be kept in accordance with generally accepted accounting
principles
-3-
<PAGE>
and recognized standards of professional medical practice and
immediately available to USHC. The Emory Oncology Network shall
provide and shall cause each of its Network Participants to
provide to USHC all information necessary for it to fulfill its
obligations under Paragraph 1 in a timely, accurate, and orderly
manner. The Emory Oncology Network acknowledges that certain of
USHC's obligations are conditioned upon its receipt of
information from the Emory Oncology Network and, therefore, any
failure of USHC to perform its obligations hereunder attributable
to the failure of the Emory Oncology Network to provide such
information shall not be considered a breach by USHC of this
Agreement.
2.7 USHC shall have the right of first refusal for administrative
services for any Oncology Network which Emory proposes.
3. Exclusivity. During the term of this Addendum, and in a territory
described as Metropolitan Atlanta, Georgia, USHC shall not provide services
substantially similar to the Administrative Services to any other oncology
network, including both medical oncology and radiation oncology. However, such
exclusivity shall cease upon notice of termination.
4. Compensation.
For Administrative Services, USHC shall be compensated in an amount
equal to [ ]* of the total revenue received by the Emory Oncology Network.
Payment shall be made by the tenth day of each month for revenue received in the
prior month. Payments past due shall accumulate interest in an amount equal to
one percent (1%) per month commencing as of the date the payment becomes due.
5. Term.
5.1 The term of this Addendum shall run concurrently with the term of
the Initial Payor Agreement, all Additional Payor Agreements, and
any renewals thereof. The term of this Addendum shall terminate
upon termination of the last payor agreement for which USHC
provides Administrative Services to the Network under this
Addendum.
5.2 Notwithstanding Section 5.1, Emory has the right to terminate
this Addendum for cause due to inadequate performance by USHC if
USHC's performance is unacceptable to Emory and such inadequate
performance is not remedied within thirty (30) days after notice
is given by Emory to USHC of the inadequate performance.
* Omitted pursuant to Rule 406 promulgated under the Securities Act of 1933, as
amended.
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<PAGE>
5.3 Notwithstanding Section 5.1, or anything to the contrary
elsewhere, this Addendum may be terminated by either party for
any reason, without cause, on one hundred eighty (180) days
notice. However, any Payor Agreement that is listed on Exhibit
"B" may only be terminated for cause pursuant to Section 5.2.
6. Limitation of Liability. USHC's obligations to Emory are limited to the
agreements expressly set forth in this Addendum and the Administrative Services
Base Agreement described in Paragraph 8, below. The parties agree and
acknowledge that, without limitation, USHC shall have no responsibility for the
following as related to the Emory Oncology Network; utilization review; quality
assurance; credentialing of Network Participants; implementation of standards of
care; and, all other management decisions related to operations of the Emory
Oncology Network. The Emory Oncology Network shall provide or cause others to
provide to USHC accurate and complete patient and procedure charge and other
information in a timely and orderly manner. USHC is not obligated to verify
independently any information provided to it by the Emory Oncology Network or a
Network Participant in connection with performance of USHC's duties hereunder.
THEREFORE, USHC DOES NOT MAKE AND HAS NOT MADE, AND HEREBY DISCLAIMS, ANY AND
ALL WARRANTIES INCLUDING, WITHOUT LIMITATION, ANY EXPRESS, IMPLIED, OR STATUTORY
WARRANTIES, WITH RESPECT TO THE ACCURACY OR COMPLETENESS OF ANY CLAIMS, REPORTS,
OR OTHER INFORMATION OR DOCUMENTATION BASED UPON BILLING OR OTHER INFORMATION
PROVIDED TO USHC BY THE EMORY NETWORK OR A NETWORK PARTICIPANT. EMORY
ACKNOWLEDGES THAT USHC IS NOT A GUARANTOR OF PAYMENTS.
7. Indemnification. Emory agrees to indemnify USHC for, and hold USHC
harmless for all time from and against, any and all claims, damages,
liabilities, charges, and expenses of any nature, including, without limitation,
attorneys' fees, regardless of whether such attorneys' fees are incurred in
connection with litigation, that USHC may incur in the defense of any claims,
demands, actions, lawsuits, or proceedings of any kind brought against USHC
arising from the following as related to the Emory Oncology Network: provision
of medical services by Network Participants; credentialing of physician
participants; utilization of medical services by physician participants;
development and implementation of standards of care; and payments from managed
care payors and patients.
8. Entire Agreement. This Addendum and the Administrative Services Base
Agreement constitute the entire agreement of the parties for provision of
Administrative Services to the Emory Oncology Network, and all prior
representations, whether written or oral, are merged herein. This Addendum may
be modified or altered only by written instrument signed by both parties. If
there are any ambiguities or conflicts between the terms and conditions of this
Addendum and the terms and conditions of the Administrative Services Base
Agreements the terms and conditions of this Addendum
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<PAGE>
shall govern.
IN WITNESS WHEREOF, the parties hereto have executed this Addendum as of
the day and date first set forth above.
"Emory" "USHC"
THE EMORY CLINIC, INC. U.S. HEALTH CONNECTIONS, INC.
By: /S/ [ILLEGIBLE] By: /S/ Deborah Ann Smith
--------------------------- ---------------------------
Title: Title: President
--------------------------- ---------------------------
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<PAGE>
EXHIBIT "A"
The Works, copies of which have been provided to Emory, are described
as follows:
U.S. HEALTH CONNECTIONS QUALITY IMPROVEMENT PLAN
U.S. HEALTH CONNECTIONS UTILIZATION MANAGEMENT PLAN
U.S. HEALTH CONNECTIONS CREDENTIALING PLAN
U.S. HEALTH CONNECTIONS ADMINISTRATIVE MANUAL
U.S. HEALTH CONNECTIONS APPLICATION
U.S. HEALTH CONNECTIONS NEWSLETTER FORMAT
Exhibit 21
SUBSIDIARIES
- ------------
Advanced Health Management Corporation, a Delaware corporation
Advanced Health Heart Practices, Inc., a Delaware corporation
Advanced Health Med-E-Systems Corporation, a Delaware corporation
Uptown Physician Management, Inc., a Delaware corporation
Physicians Capital Corporation, a Delaware corporation
Diamond Physician Management, Inc., a Delaware corporation
Specialist Physicians Management, Inc., a Delaware corporation
Millenium Physician Management, Inc., a Delaware corporation
PCC Leasing, Inc., a Delaware corporation
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
September 26, 1996
