UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the fiscal year ended December 31, 1996
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from ____________
to________________
Commission File Number 0-21209
ADVANCED HEALTH CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-3893841
(State or other jurisdiction (IRS employer
of incorporation or organization) identification number)
560 White Plains Road 10591
Tarrytown, New York (Zip code)
(Address of principal executive offices)
Registrants' telephone number, including area code: (914) 524-4200
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01
par value
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K: [ ]
The aggregate market value of the shares of Common Stock held by
non-affiliates of the registrant is $90,233,257, based on the closing price of
the Common Stock on March 25, 1997.
As of March 25, 1997, there were 7,166,941 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the 1997
Annual Meeting of Stockholders to be filed with the Securities and Exchange
Commission within 120 days after December 31, 1996, are incorporated by
reference in Part III hereof.
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ADVANCED HEALTH CORPORATION
FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
Table of Contents
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Page
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PART I
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Item 1. Business 3
Item 2. Properties 14
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 15
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 16
Item 6. Selected Financial Data 16
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations 17
Item 8. Financial Statements and Supplementary Data 19
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure 20
PART III
Item 10. Directors and Executive Officers of the Registrant 21
Item 11. Executive Compensation 21
Item 12. Security Ownership of Certain Beneficial Owners and Management 21
Item 13. Certain Relationships and Related Transactions 21
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 22
Signatures 23
Financial Statements F-1
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PART I
ITEM 1. BUSINESS
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Overview
Advanced Health Corporation (the "Company") 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 four multi-specialty
physician group practices and four single-specialty physician group practices
comprised of more than 170 physicians in the New York metropolitan area and 11
physician networks with approximately 1,500 physicians in the greater New York,
Philadelphia 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.
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. On October 2, 1996, the Company
consummated the initial public offering (the "IPO") of its Common Stock
(including the exercise of the underwriters' over-allotment option). In the IPO,
the Company sold 2,645,000 shares of Common Stock at an initial public offering
price of $13.00 per share.
Industry
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 growth in enrollment
in these new reimbursement models is shifting the financial risk of delivering
health care from payors to providers.
As a result of this changing health care environment, health care cost
containment pressures have increased physician management responsibilities while
lowering reimbursement rates to physicians. Consequently, physician compensation
has declined. Because the majority of all physicians currently practice
individually or in 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 specialties), limited capital to invest in new clinical equipment
and
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Med-E-Practice(TM), Smart Scripts(TM), Internet Script Writer(TM),
Med-E-Visit(TM), Practice Management Integrator(TM), Med-E-Network(TM),
Med-E-Net Central(TM), Med-E-Net Office(TM), Med-E-Net Integrator(TM) and
Med-E-Net Cardiology(TM) are trademarks of the Company.
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technologies and limited purchasing power with vendors of medical supplies. In
addition, individual physicians and small group practices typically lack the
information systems necessary to enter into and manage risk-sharing contracts
with payors and to implement disease management programs efficiently.
In response to the foregoing factors, individual physicians and small
group practices are increasingly affiliating with larger group practices and
physician practice management companies ("PPMs"). By 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, 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'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.
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 information systems provide physicians with the information
needed to improve the quality and reduce the cost of health care.
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
networks. The
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Company anticipates that the physicians within these practices and networks will
be linked together by the Company's clinical information systems.
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.
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.
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.
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. 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. 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.
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The Company offers a broad range of clinical information systems for
physician users, presently 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
and of the Med-E-Network suite of applications in February 1997.
The following table summarizes the two suites of applications presently
offered and being developed by the Company:
Product Name Product Description
Med-E-Practice
Smart Scripts Pharmaceutical prescription writing applications
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 Allows Med-E-Practice applications to integrate
Integrator 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.
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.
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.
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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 current
activities are directed toward this type of product development. 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 30
professionals dedicated to systems development.
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 year ended December 31, 1996, Madison and the
Advanced Heart Physicians & Surgeons Network, P.C. ("AHP&S") accounted for
approximately 47% and 19% 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 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.
Contractual Relationships with Affiliated Physicians
The Company typically establishes a majority-owned management service
organization ("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 a transaction in which interests of the physician groups and
networks in such MSO would be exchanged for Common Stock (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 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. The Company has reserved 548,224
shares of Common Stock for issuance upon the merger of such MSOs into the
Company.
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Physician Practices. The management services agreements between the MSO
and a physician practice group generally have an initial term of five to 20
years and are automatically renewable for additional terms. Such agreements
typically are subject to early termination for cause. The management services
agreements generally obligate an MSO to provide certain non-medical practice
management services to the physician practice group for a monthly fee. The fee
paid to the MSO is generally a combination of fixed fees for certain services
and percentage fees for certain services. For risk-based contracts that the
physician practice group enters into, the management services agreement will
generally provide for additional management fees based upon savings recognized
by the physician practice group because of any cost efficiencies resulting from
the MSO's performance. The fees are set to be competitive within the geographic
area in which the physician practice group is located. A provision restricting
the physician practice group from competing against the MSO or employing the
MSO's employees is generally included in the agreement.
Physician Networks. The management services agreements between the MSO
and a physician network generally have an initial term of at least five years
and are automatically renewable for additional terms. Such agreements typically
are subject to early termination for cause. The management services agreements
generally obligate an MSO to provide certain non-medical practice management
services to the physician network for a fee. The fee paid to the MSO for
risk-based or capitated contracts is generally a service fee equal to the actual
cost, not to exceed a specified percentage of capitated revenues, for providing
the non-medical management services plus an incentive based on savings generated
by the network. The fee paid to the MSO for fee-for-service contracts is
generally equal to the administrative fees included in the managed care contract
plus a management processing fee agreed upon by the MSO and the physician
network. The fees are set to be competitive within the geographic area in which
the physician network is located. In the agreement, the physician network agrees
that the MSO will be the exclusive provider of non-medical management services
to the physician network.
Capitated and Other Fixed-Fee Arrangements. In the future, the Company
anticipates entering into managed care or capitated arrangements, either
indirectly through the assignment of managed care contracts entered into between
its affiliated physicians and third-party payors or directly through the
formation of an independent physician association ("IPA"). The Company does not
now have capitated contracts (although the Company does provide management
services to physician groups and networks that have entered into such capitated
contracts). The Company has little experience in managing capitated-risk
arrangements and has no experience in forming or managing an IPA. With respect
to the assignment of capitated revenues to the Company, the Company will be
dependent on the physician group practices and networks entering into such
agreements, the terms and conditions of which are determined by the physicians
in their sole discretion, and providing medical services thereunder. In
addition, the Company is dependent upon the continued alliance of the physicians
with the group practice and network clients of the Company. The Company had
previously reported, at the insistence of the accounting staff of the Securities
and Exchange Commission (the "SEC"), that it would recognize in its financial
statements only those assigned revenues associated with the provision of its
management services (typically expected to be approximately 10% of the capitated
payments made), with the balance of such payments being paid over to the
physicians providing the services pursuant to such agreements. Subsequently, but
prior to the Company either earning, recording or reporting any such revenues,
SEC accounting releases have indicated that because of the increased
risk-sharing relationships, revenues for the full amount of the capitated fee
should be reflected in full in the Company's statement of operations when
earned. The Company has not earned, recognized or recorded any such revenue
through December 31, 1996. Revenues under any managed care or capitated
arrangements entered into directly by the Company will generally be a fixed
amount per enrollee. Under such an arrangement, the Company would contract with
affiliated physicians for the provision of health care services and the Company
would be responsible for the provision of all or a portion of the health care
requirements of such enrollees. To the extent that enrollees require more care
than is anticipated by the Company upon entering into such a contract, the
Company's revenues under such contracts may be insufficient to cover its costs,
in which event the Company would suffer a loss. The Company expects to enter
into reinsurance agreements with third-party insurers in respect of a portion of
such risk.
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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 having subject
matter common with both U.S. applications, but no issued patents. The patent
applications are directed to the Company's Smart Scripts prescription management
system and related technologies. No assurance can be provided that a patent or
patents will be issued or will provide the Company with adequate protection. Nor
can any assurance be given that patent, trade secrets, copyright or other
intellectual property rights can be successfully asserted in any court action.
The Company also has copyrights in its software, user documentation and
databases. The copyright protection accorded to databases, however, is fairly
limited. While the arrangement and selection of data are protectable, the actual
data are not, and others are free to create databases that perform the same
function. The Company distributes its clinical information systems products
under agreements that grant customers non-exclusive licenses and generally
contain terms and conditions restricting the disclosure and use of the Company's
systems. In addition, the Company attempts to protect the secrecy of its
proprietary databases and other trade secrets and proprietary information
through confidentiality agreements with employees, consultants and third
parties.
The Company believes that, aside from the various legal protections of
its proprietary information and technologies, factors such as the technological
and creative skills of its personnel and product maintenance and support are
integral to establishing and maintaining its position within the health care
industry. Although the Company believes that its products do not infringe upon
the proprietary rights of third parties, there can be no assurance that third
parties will not assert infringement claims against the Company in the future.
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. Inasmuch as a portion of the revenues of the Company's
affiliated physician group practices is derived from payments made by
government-sponsored health care programs (principally, Medicare, Medicaid and
state reimbursed programs), 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, a resource-based relative value scale ("RBRVS") payment
methodology, which took effect in 1992 and was 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.
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 decision making, and that the MSO may neither interfere with the
professional judgment of medical personnel nor control, direct or supervise the
provision of medical services. Furthermore, the MSAs make it clear that the MSO
may not perform any services or activities which constitute the practice of
medicine. For instance, the MSO has no responsibility in decisions regarding
level of patient care, credentialing or quality monitoring. Administrative
policies, budgets and fee schedules affecting the delivery of medical services
are developed by a Joint Management Advisory Board, which is at all times
controlled by medical group physicians. In contrast, each MSO controlled by the
Company is a management organization whose role is to assist with and coordinate
administrative functions and to advise the physician group as to the
relationship between its performance
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<PAGE>
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 "Antikickback 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 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
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<PAGE>
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 health maintenance organizations ("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 National
Association of Insurance Commissioners (the "NAIC") issued a report opining that
certain risk-transferring arrangements may entail the business of insurance, to
which state licensure laws apply, but that licensure laws would not apply where
an unlicensed entity contracts to assume "downstream risk" from a duly licensed
health insurer or HMO for health care provided to that carrier's enrollees. The
NAIC's conclusions are not binding on the states. The Company does not now have
capitated contracts and will enter into such contracts only with licensed
insurance companies and HMOs, and only if allowed by state law. The Company
believes that it is in compliance with these laws in the states in which it does
business, but there can be no assurance that future interpretations of insurance
laws and health care network laws by the regulatory authorities in these states
or in the states into which the Company may expand will not require licensure or
a restructuring of some or all of the Company's operations.
Health Care Reform. As a result of the continued escalation of health
care costs and the inability of many individuals to obtain health insurance,
numerous proposals have been or may be introduced in the U.S. Congress and state
legislatures relating to health care reform. There can be no assurance as to the
ultimate content, timing or effect of any health care reform legislation, nor is
it possible at this time to estimate the impact of potential legislation, which
may be material, on the Company.
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<PAGE>
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 United States Food and Drug Administration (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 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. 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 be required to comply with those controls.
Since issuing the 1989 Draft Policy Statement, the FDA has not issued a
final policy on this issue and has not formally exempted any products as
discussed in the 1989 Draft Policy Statement. The FDA has referred to the 1989
Draft Policy Statement in official presentations regarding software regulation
and in decisions and opinions regarding the regulatory status of various
products. Over the last few years, however, the FDA has stated that it intends
to issue a new policy concerning computer products and has been increasing its
efforts to develop this policy in recent months. Under this new policy,
exemptions from regulatory controls, if any, would be based upon a product
specific "risk factor" analysis. For purposes of this analysis, the FDA has
considered, among other things, the following: (i) seriousness of the disease to
be diagnosed or treated; (ii) time frame for use of the information; (iii)
whether the data output is provided or manipulated in a novel or non-traditional
manner; (iv) whether the software provides individualized patient care
recommendations; (v) whether the mechanism by which the software arrives at a
decision is hidden or transparent; and (vi) whether the product provides new
capabilities for the user. Given the FDA's intent to issue a new policy
concerning the regulation of computer software, there can be no assurance as to
the effect of such a policy, if any, upon the regulatory status of the Company's
products.
The Company's clinical information systems are intended to assist
health care providers in analyzing economic and quality data related to patient
care and expected outcomes in order to maximize the cost-effectiveness of
general treatment plans and practice protocols. These products are not intended
to provide specific diagnostic data or results or affect the use of specific
therapeutic interventions for individual patients. As such, the Company
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<PAGE>
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.
Employees
As of December 31, 1996, the Company had a total of approximately 110
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.
ITEM 2. PROPERTIES
- ------
The Company currently occupies 26,302 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 for the Tarrytown office has an annual
rental of approximately $500,000 and expires in March 2002. 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 October 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 $184,000 for the
current year. The Company believes that these facilities are adequate for the
foreseeable future.
ITEM 3. 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.
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Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None.
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PART II
Item 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Common Stock began trading over-the-counter on the Nasdaq National
Market under the symbol "ADVH" on October 3, 1996. The high and low closing
prices for the period from such date through December 31, 1996 were $16.87 and
$12.50, respectively. As of March 25, 1997, there were approximately 170
registered holders of the Common Stock.
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.
Item 6. SELECTED FINANCIAL DATA
The selected consolidated statement of operations data for the years
ended December 31, 1994, 1995 and 1996, and the balance sheet data as of
December 31, 1995 and 1996, are derived from the Consolidated Financial
Statements of the Company included elsewhere in this Annual Report on Form 10-K,
which have been audited by Arthur Andersen LLP, independent public accountants.
The selected consolidated statement of operations data for the period from
inception (August 27, 1993) to December 31, 1993 and the selected consolidated
balance sheet data as of December 31, 1993 and 1994 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 Annual Report on Form 10-K. 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 Annual Report on Form 10-K.
<TABLE>
<CAPTION>
Year Ended
Period from Inception December 31,
(August 27, 1993) to ------------------------------------------
December 31, 1993 1994 1995 1996
---------------------- ------ ------ ------
(In thousands, except per share data)
Statement of Operations Data:
<S> <C> <C> <C> <C>
Revenues $ -- $ 379 $ 1,054 $19,136
Cost of revenues -- 12 340 9,707
------- -------- -------- -------
Gross profit -- 367 714 9,429
Operating expenses 521 2,900 6,412 11,886
------- -------- -------- -------
Operating loss (521) (2,533) (5,698) (2,442)
Other income (expense) -- (15) (8) 15
------- -------- -------- -------
Net loss before income taxes (521) (2,548) (5,706) (2,445)
Income tax benefit -- -- -- 977
------- -------- -------- -------
Net loss $ (521) $(2,548) $(5,706) $(1,465)
======= ======== ======== =======
Net loss per share $(0.23) $ (1.03) $ (1.47) $ (0.26)
======= ======== ======== =======
Weighted average number of common
shares and common share equivalents
outstanding 2,229 2,482 3,893 5,635
======= ======== ======== =======
</TABLE>
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<TABLE>
<CAPTION>
December 31,
---------------------------------------------------
<S> <C> <C> <C> <C>
1993 1994 1995 1996
------ ------ ------ ------
(In thousands)
Balance Sheet Data:
Cash and cash equivalents $ 7 $ 7 $1,464 $12,086
Investments in marketable securities -- -- -- 7,390
Working capital (deficit) (435) (1,032) (741) 26,683
Total assets 27 913 6,462 35,400
Total debt -- 416 567 235
Total stockholders' equity (deficit) (416) (325) 2,675 31,884
</TABLE>
ITEM 7. 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 Annual
Report on Form 10-K.
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.
To date, the Company has been dependent on a small number of contracts
to generate the majority of its revenues. See "Business -- Concentration of
Revenues." 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.
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
December 31, 1996, none of such notes payable remained outstanding. The purchase
price also included an additional 56,611 shares of
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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 and accounted for based
on the then fair market value.
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.
Results of Operations
Year Ended December 31, 1996 and 1995
Total revenues for the year ended December 31, 1996 increased to $19.1
million from $1.1 million in the year ended December 31, 1995, primarily as a
result of the increased activity in the Company's group practice and network
management services. The provision of physician group practice management and
related services and network management services accounted for approximately
$15.1 million of the Company's net revenue for the year ended December 31, 1996
as compared to $.3 million in 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 and software, systems and training
revenues, of approximately $4.0 million for the year ended December 31, 1996, as
compared to $.7 million in the year ended December 31, 1995.
Cost of revenues for the year ended December 31, 1996 increased to $9.7
million from approximately $.3 million for the year ended December 31, 1995. The
increase in cost of revenues related primarily to the non-medical and system
expenses outsourced to the Company from physician group practices under
management.
Operating expenses for the year ended December 31, 1996 increased to
$11.9 million from $6.4 million for the year ended December 31, 1995. The
increase in operating expenses reflected expenses related to the provision of
physician group practice management services for the full year ended December
31, 1996, the Company did not begin to provide such services until December
1995.
An income tax benefit of approximately $1.0 million was recorded in
1996 as a result of the Company's determination, based on profitable fourth
quarter operations, that the related deferred income tax asset would be realized
through the generation of taxable income in the future. No such benefit was
recorded in 1995.
The net loss for the year ended December 31, 1996 was $1.5 million
compared to a loss of $5.7 million for the year ended December 31, 1995.
Year Ended December 31, 1995 and 1994
Total revenues 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
$6.4 million from $2.9 million for the year ended December 31, 1994. The
increase in operating expenses was due to the increases in staffing and general
corporate expenses required to fund the Company's transition from a development
stage company involved in the development of clinical information systems to a
full service physician practice and network management company.
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.
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<PAGE>
Liquidity and Capital Resources
At December 31, 1996, the Company had cash and cash equivalents of
$12.1 million and marketable securities of $7.4 million, compared to $1.5
million of cash at December 31, 1995.
The Company's operations used net cash of $11.0 million and $4.3
million in 1996 and 1995, respectively. The increased use of cash in 1996
resulted primarily from the purchase of accounts receivable from a physician
practice under Company management for an aggregate amount of $4.5 million and
$1.1 million from the recognition of revenue deferred at December 31, 1995. Cash
flows from investing activities increased, as a result of the investment of
proceeds from the Company's IPO in marketable securities, to $8.6 million for
the year ended December 31, 1996 compared with $1.0 million for the year ended
December 31, 1995. Net cash provided by financing activities was $30.2 million
for the year ended December 31, 1996 and related to the completion of the
Company's IPO. Net cash provided by financing activities for the year ended
December 31, 1995 was $6.8 million primarily attributable to the private
placement of equity securities. See "-- Acquisitions" above.
The Company's operating plan for 1997 includes continued development of
the Company's integrated management services and clinical information systems.
The principal categories of expenditures include further development of the
Company's clinical information systems, as well as ongoing business development
and marketing. The Company believes that the net proceeds of the IPO, cash and
investments 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
During January and February 1997, the Company loaned $2 million to
Madison, a physician practice it currently manages, secured by the physicians'
49% ownership interest in its MSO. The loan bears interest at prime plus 2
percent and is to be repaid in 12 equal monthly installments beginning January
1998. Furthermore, the Company provided a letter of credit on behalf of Madison
that expires January 8, 1998, in the amount of $1.8 million by depositing
restricted cash with the lending institution that issued the letter of credit.
The Company has no other planned material capital expenditures or other capital
commitments.
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 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
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. 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements
<TABLE>
<CAPTION>
<S> <C>
Page
----
Report of Independent Public Accountants F-1
Consolidated Balance Sheets as of December 31, 1995 and 1996 F-2
Consolidated Statements of Operations for the years ended December 31,
1994, 1995 and 1996 F-3
Consolidated Statements of Stockholders' Equity (Deficit) for the years
ended December 31, 1994, 1995 and 1996 F-4
Consolidated Statements of Cash Flows for the years ended December 31, 1994,
1995 and 1996 F-5
Notes to Consolidated Financial Statements F-6
</TABLE>
Financial Statement Schedules
All schedules have been omitted because they are not applicable or not
required or because the required information is included in the Consolidated
Financial Statements or notes thereto.
-19-
<PAGE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-20-
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by this item is incorporated herein by
reference to the sections of the definitive Proxy Statement to be filed with the
Securities and Exchange Commission not later than 120 days after December 31,
1996, and delivered to stockholders in connection with the 1997 Annual Meeting
of Stockholders, captioned "Election of Directors," "Executive Officers" and
"Disclosure Pursuant to Section 16 of the Exchange Act."
ITEM 11. EXECUTIVE COMPENSATION
The information called for by this item is incorporated herein by
reference to the sections of the definitive Proxy Statement to be filed with the
Securities and Exchange Commission not later than 120 days after December 31,
1996, and delivered to stockholders in connection with the 1997 Annual Meeting
of Stockholders, captioned "Meetings of the Board of Directors and Committees of
the Board of Directors; Compensation of Directors" and "Executive Compensation
and Related Information."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by this item is incorporated herein by
reference to the section of the definitive Proxy Statement to be filed with the
Securities and Exchange Commission not later than 120 days after December 31,
1996, and delivered to stockholders in connection with the 1997 Annual Meeting
of Stockholders, captioned "Security Ownership of Certain Beneficial Owners,
Directors and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by this item is incorporated herein by
reference to the section of the definitive Proxy Statement to be filed with the
Securities and Exchange Commission not later than 120 days after December 31,
1996, and delivered to stockholders in connection with the 1997 Annual Meeting
of Stockholders, captioned "Certain Transactions."
-21-
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents Filed as Part of the Report
1. Financial Statements
The financial statements listed under Item 8 are
filed as part of this report.
2. Financial Statement Schedules
Schedules have been omitted because they are either
not applicable or the required information has been
disclosed in the financial statements or notes
thereto.
3. Exhibits
The exhibits listed on the accompanying Exhibit
Index are filed as part of this report or
incorporated by reference herein.
(b) Reports on Form 8-K
No Current Reports on Form 8-K were filed by the registrant
during the fourth quarter of the year ended December 31, 1996.
-22-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 30th day of
March, 1997.
ADVANCED HEALTH CORPORATION
By /s/ Jonathan Edelson
------------------------
Jonathan Edelson, M.D.
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
<S> <C> <C>
Signature Title Date
- ------------ ------- ------
/s/ Jonathan Edelson Chairman of the Board, Chief Executive March 30, 1997
- ----------------------- Officer and Director (Principal Executive
Jonathan Edelson, M.D. Officer)
/s/ Steven Hochberg President and Director March 30, 1997
- -----------------------
Steven Hochberg
/s/ Alan B. Masarek Chief Operating Officer and Chief Financial March 30, 1997
- ----------------------- Officer (Principal Financial and
Alan B. Masarek Accounting Officer)
/s/ James T. Carney
- ---------------------- Director March 30, 1997
James T. Carney
/s/ Barry Kurokawa
- ---------------------- Director March 30, 1997
Barry Kurokawa
/s/ Jonathan Lieber
- ---------------------- Director March 30, 1997
Jonathan Lieber
</TABLE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Advanced Health Corporation:
We have audited the accompanying consolidated balance sheets of Advanced Health
Corporation (a Delaware corporation) and subsidiaries as of December 31, 1995
and 1996, and the related consolidated statements of operations, shareholders'
equity (deficit) and cash flows for the three years ended December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Advanced Health Corporation and
subsidiaries as of December 31, 1995 and 1996, and the results of their
operations and their cash flows for the three years ended December 31, 1996 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
New York, New York
March 28, 1997
F-1
<PAGE>
ADVANCED HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
ASSETS 1995 1996
------ -------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,464,427 $ 12,085,990
Investments in marketable securities (Note 5) - 7,389,971
Accounts receivable, net 1,020,558 8,636,696
Note receivable 125,000 -
Prepaid expenses 278,305 182,027
Advances to affiliates (Note 4) - 646,738
Deferred income taxes, net (Note 11) - 976,792
--------------- ---------------
Total current assets 2,888,290 29,918,214
PROPERTY AND EQUIPMENT, net (Note 6) 1,538,898 2,053,049
INTANGIBLE ASSETS, net (Note 7) 1,875,611 1,857,763
OTHER ASSETS (Notes 2 and 4) 159,112 1,570,536
--------------- ---------------
Total assets $ 6,461,911 $ 35,399,562
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 1,312,571 $ 1,968,203
Accrued expenses (Note 8) 407,241 912,764
Deferred revenue 1,500,000 200,000
Loan payable related to acquisition (Note 3) 150,000 22,500
Current portion of capital lease obligations (Note 12) 259,805 131,441
--------------- ---------------
Total current liabilities 3,629,617 3,234,908
DEFERRED REVENUE - 200,000
CAPITAL LEASE OBLIGATIONS (Note 12) 157,254 80,775
--------------- ---------------
Total liabilities 3,786,871 3,515,683
--------------- ---------------
COMMITMENTS (Note 13)
SHAREHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.01 par value; 5,000,000 shares authorized; 0 shares issued and
outstanding - -
Common stock, $.01 par value; 15,000,000 shares authorized; 4,491,270 and 7,166,941
shares issued and outstanding, respectively 44,913 71,669
Additional paid-in capital 11,481,478 42,068,864
Accumulated deficit (8,776,351) (10,241,539)
Unrealized gain on marketable securities, net of deferred income taxes - 59,885
Less: Treasury stock, at cost; 8,937 shares, respectively (75,000) (75,000)
--------------- ---------------
Total shareholders' equity (deficit) 2,675,040 31,883,879
--------------- ---------------
Total liabilities and shareholders' equity (deficit) $ 6,461,911 $ 35,399,562
=============== ===============
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
F-2
<PAGE>
ADVANCED HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
REVENUE FROM MSOs $ -- $ 341,657 $ 15,124,806
REVENUE 203,878 712,292 4,011,420
REVENUE FROM RELATED PARTY 175,000 -- --
------------ ------------ ------------
Total revenues 378,878 1,053,949 19,136,226
COST OF REVENUES 12,297 340,326 9,706,667
------------ ------------ ------------
Gross profit 366,581 713,623 9,429,559
OPERATING EXPENSES 2,900,477 6,412,367 11,886,216
------------ ------------ ------------
Operating loss (2,533,896) (5,698,744) (2,456,657)
INTEREST EXPENSE (15,034) (7,863) (164,656)
INTEREST INCOME -- -- 179,333
------------ ------------ ------------
Net loss before income taxes (2,548,930) (5,706,607) (2,441,980)
INCOME TAX BENEFIT (Note 11) -- -- 976,792
------------ ------------ ------------
Net loss $ (2,548,930) $ (5,706,607) $ (1,465,188)
============ ============ ============
PER SHARE INFORMATION (Note 2):
Net loss per share $ (1.03) $ (1.47) $ (0.26)
============ ============ ============
Weighted average common shares and common share equivalents
outstanding 2,482,213 3,893,244 5,634,898
============ ============ ============
The accompanying notes are an integral part of these
consolidated statements.
F-3
<PAGE>
ADVANCED HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
Common Stock
Subscriptions
Common Stock Additional Receivable
---------------------------- Paid-in -------------------------- Accumulated
Shares Par Value Capital Shares Amount Deficit
------------ ------------ ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1994 1,773,389 $ 17,734 $ 90,611 185,893 $ (3,120) $ (520,814)
Sale and issuance of common stock
(Note 10a) 25,319 253 639,402 -- -- --
Issuance of Series B Convertible
Preferred Stock (Note 10) 252,831 2,529 1,997,574 -- -- --
Net loss -- -- -- -- -- (2,548,930)
------------ ------------ ------------ ---------- ------------ ------------
BALANCE, December 31, 1994 2,051,539 20,516 2,727,587 185,893 (3,120) (3,069,744)
Issuance of Common Stock (Note 10a) 50,641 506 (506) -- -- --
Issuance of Series C convertible
Preferred Stock (Note 10) 178,743 1,787 1,498,213 -- -- --
Issuance of common stock in private
placement (Note 10c) 79,780 798 624,261 -- -- --
Redemption of common stock
subscriptions -- -- -- (185,893) 3,120 --
Exercise of stock options 885,279 8,853 10,864 -- -- --
Common stock issued for acquisitions 649,753 6,498 1,629,314 -- -- --
Issuance of Series D Convertible
Preferred Stock (Note 10) 595,535 5,955 4,991,745 -- -- --
Repurchase of treasury stock -- -- -- -- -- --
Net loss -- -- -- -- -- (5,706,607)
------------ ------------ ------------ ---------- ------------ ------------
BALANCE, December 31, 1995 4,491,270 44,913 11,481,478 -- -- (8,776,351)
Common stock issued for acquisition 8,937 89 44,911 -- -- --
Exercise of stock options (Note 10) 21,734 217 85,757 -- -- --
Issuance of common stock in public
offering, net of expenses of
$3,921,742 (Note 10c) 2,645,000 26,450 30,456,718 -- -- --
Unrealized gain on marketable
securities, net of deferred income
taxes of $39,924 -- -- -- -- -- --
Net loss -- -- -- -- -- (1,465,188)
------------ ------------ ------------ ---------- ------------ ------------
BALANCE, December 31, 1996 7,166,941 $ 71,669 $ 42,068,864 -- $ -- $(10,241,539)
============ ============ ============ ========== ============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Unrealized
Gain On Treasury Stock
Marketable ---------------------------
Securities Shares Amount Total
------------ ------------ ------------ ------------
<S> <C> <C> <C>
BALANCE, January 1, 1994 $ -- -- $ -- $ (415,589)
Sale and issuance of common stock
(Note 10a) -- -- -- 639,655
Issuance of Series B Convertible
Preferred Stock (Note 10) -- -- -- 2,000,103
Net loss -- -- -- (2,548,930)
------------ ------------ ------------ ------------
BALANCE, December 31, 1994 -- -- -- (324,761)
Issuance of Common Stock (Note 10a) -- -- -- --
Issuance of Series C convertible
Preferred Stock (Note 10) -- -- -- 1,500,000
Issuance of common stock in private
placement (Note 10c) -- -- -- 625,059
Redemption of common stock
subscriptions -- -- -- 3,120
Exercise of stock options -- -- -- 19,717
Common stock issued for acquisitions -- -- -- 1,635,812
Issuance of Series D Convertible
Preferred Stock (Note 10) -- -- -- 4,997,700
Repurchase of treasury stock -- 8,937 (75,000) (75,000)
Net loss -- -- -- (5,706,607)
------------ ------------ ------------ ------------
BALANCE, December 31, 1995 -- 8,937 (75,000) 2,675,040
Common stock issued for acquisition -- -- -- 45,000
Exercise of stock options (Note 10) -- -- -- 85,974
Issuance of common stock in public
offering, net of expenses of
$3,921,742 (Note 10c) -- -- -- 30,483,168
Unrealized gain on marketable
securities, net of deferred income
taxes of $39,924 59,885 -- -- 59,885
Net loss -- -- -- (1,465,188)
------------ ------------ ------------ ------------
BALANCE, December 31, 1996 $ 59,885 8,937 $ (75,000) $ 31,883,879
============ ============ ============ ============
</TABLE>
The accompanying notes are
an integral part of these consolidated statements.
F-4
<PAGE>
ADVANCED HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------------------
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,548,930) $ (5,706,607) $ (1,465,188)
Adjustments to reconcile net loss to net cash used in operating activities-
Depreciation and amortization 146,681 456,819 890,346
Deferred income taxes -- -- (976,792)
Allowance for doubtful accounts -- -- 210,000
Changes in operating assets and liabilities-
Accounts receivable -- (1,020,558) (7,826,138)
Note receivable -- (125,000) 125,000
Prepaid expenses (7,134) (271,171) 96,278
Advances to affiliates -- -- (646,738)
Other assets (125,711) (33,401) (1,439,934)
Accounts payable 200,713 993,445 655,632
Accrued expenses 82,973 280,396 505,523
Due to affiliate 270,709 (375,825) --
Deferred revenue (175,000) 1,500,000 (1,100,000)
------------ ------------ ------------
Net cash used in operating activities (2,155,699) (4,301,902) (10,972,011)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Issuance of note receivable from affiliate -- (500,000) --
Proceeds from repayment of note receivable from affiliate -- 500,000 --
Investments in marketable securities -- -- (7,290,162)
Cash paid for acquisitions -- (150,000) --
Purchases of property and equipment, net (505,997) (881,531) (1,296,131)
------------ ------------ ------------
Net cash used in investing activities (505,997) (1,031,531) (8,586,293)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repayment of) proceeds from loan payable related to acquisition 50,000 (50,000) (94,500)
Net proceeds from sale and issuance of common stock 639,655 628,179 30,483,168
Net proceeds from exercise of stock options -- 19,717 85,974
Net proceeds from promissory notes -- -- 5,000,000
Repayment of promissory notes -- -- (5,000,000)
Purchase of treasury stock -- (75,000) --
Net proceeds from issuance of Series B Convertible Preferred Stock (Note 10) 2,000,103 -- --
Net proceeds from issuance of Series C Convertible Preferred Stock (Note 10) -- 1,500,000 --
Net proceeds from issuance of Series D Convertible Preferred Stock (Note 10) -- 4,997,700 --
Repayment of capital lease obligations (28,435) (229,639) (294,775)
------------ ------------ ------------
Net cash provided by financing activities 2,661,323 6,790,957 30,179,867
------------ ------------ ------------
Net change in cash and cash equivalents (373) 1,457,524 10,621,563
CASH AND CASH EQUIVALENTS, beginning of year 7,276 6,903 1,464,427
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of year $ 6,903 $ 1,464,427 $ 12,085,990
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 3,267 $ 21,497 $ 160,477
============ ============ ============
Income taxes $ 3,189 $ 14,854 $ 35,633
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES:
Capital lease obligations incurred $ 394,481 $ 280,652 $ 58,017
============ ============ ============
Fair market value of common stock issued for acquisitions $ -- $ 1,635,812 $ 45,000
============ ============ ============
Unrealized gain on marketable securities $ -- $ -- $ 99,809
============ ============ ============
Loan payable issued for acquisition $ -- $ 150,000 $ 22,500
============ ============ ============
</TABLE>
The accompanying notes are an
integral part of these consolidated statements.
F-5
<PAGE>
ADVANCED HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
1. ORGANIZATION AND BUSINESS:
The Company
Advanced Health Corporation ("AHC") and subsidiaries (collectively, the
"Company") provides physician groups and networks with professional 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, 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.
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.
Formation of Management Service Organizations
The Company has established Management Service Organizations ("MSOs") to
facilitate the provision of management services to physician practice and
network clients.
In November 1995, the Company obtained a 51% interest in Uptown Physician
Management , Inc. ("Uptown") a newly formed MSO. The Company acquired this
interest as part of the formation of Uptown and concurrent with the signing of a
long-term management services agreement between Uptown and Madison Medical - The
Private Practice Group of New York, L.L.P.("Madison"), which is a
multi-specialist group practice based in the State of New York.
In June 1996, the Company obtained a 51% interest in Specialist Physicians
Management, Inc. ("Specialist"), a newly formed MSO. The Company acquired this
interest as part of the formation of Specialist and concurrent with the signing
of a long-term management services agreement between Specialist and Cardiology
First of New Jersey, P.A., which is a network of cardiologists based in the
State of New Jersey.
In June 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.
F-6
<PAGE>
In August 1996, the Company obtained a 51% interest in Millenium Physician
Management, Inc. ("Millenium"), a newly formed MSO. The Company acquired this
interest as part of the formation of Millenium and concurrent with the signing
of a long-term management services agreement between Millenium and Millenium
Medical Associates, P.C., which is a multi-specialist group practice based in
the State of New Jersey.
In November 1996, the Company obtained a 51% interest in Prime Health Physician
Management, Inc. ("Prime"), a newly formed MSO. The Company acquired this
interest as part of the formation of Prime and concurrent with the signing of a
long-term management services agreement between Prime and Primary Care
Associates, which is a multi-specialist group practice based in the State of
Pennsylvania.
In November 1996, the Company obtained a 51% interest in Mid-Atlantic Physicians
Management, Inc. ("Mid-Atlantic"), a newly formed MSO. The Company acquired this
interest as part of the formation of Mid-Atlantic and concurrent with the
signing of a long-term management services agreement between Mid-Atlantic and
Mid-Atlantic Cardiology, P.A., which is a cardiologist group practice based in
the State of New Jersey.
In forming these MSOs, the Company conveyed 49% interests (Note 3) to the
physician practice or network in exchange for the execution of the long-term
management services agreements described above. The Company records the fair
value of these arrangements, which is, in the opinion of management, more
readily determinable than the 49% MSO interest conveyed. These intangible
assets, which are not material, will be amortized over the life of the related
contracts.
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) and Med-E-Systems
Corporation ("MES"), and the MSOs discussed in Note 1. The consolidated
financial statements for 1994 and 1995 include the results of operations of the
Company, including other entities formed or acquired from their formation or
acquisition during those years, 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.
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.
F-7
<PAGE>
Revenue Recognition
Operating revenues are generated form 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 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 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 has not earned, recognized or recorded any such capitated
revenues through December 31, 1996.
In the event that contracts between MSOs and physician practices and network 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. In order to generate operating
funds and demonstrate the uses of its systems and development capabilities, the
Company has licensed and may continue licensing certain components of its
software to third parties.
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 the
SOP.
F-8
<PAGE>
Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments with
original maturities of three months or less when purchased.
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
rendered.
Investments in Marketable Securities
The Company accounts for investments in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." In accordance with this pronouncement, the debt
securities held by the Company and included in the accompanying consolidated
balance sheets that may be sold in response to changes in interest rates,
prepayments, and other factors have been classified as available-for-sale. Such
securities are reported at fair value, with unrealized gains and losses excluded
from earnings and reported in a separate component of shareholders' equity (on
an after-tax basis). Gains and losses on the disposition of securities are
recognized on the specific identification method in the period in which they
occur.
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
Goodwill, which represents the excess of the purchase price over the fair value
of the net assets acquired, covenants not-to-compete and management contracts
are included in intangible assets and are presently being amortized over periods
of 4 to 20 years on a straight-line basis. These amortization periods are
evaluated by management on a continuing basis, and will be adjusted if the lives
of the related intangible assets are impaired.
Accounting for Long-Lived Assets
During March 1995, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 121, "Accounting for the Impairment of 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 intangibles to be disposed of. This statement is effective
for financial statements for fiscal years beginning after December 15, 1995, and
was adopted by the Company in 1996. The effect of the adoption was not material.
F-9
<PAGE>
Computer Software Costs
The Company develops computer software which is marketed to third parties. The
Company capitalizes such costs in accordance with SFAS 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 $100,569 and $1,130,143 of unamortized capitalized computer
software costs included in other assets in the accompanying consolidated balance
sheets as of December 31, 1995 and 1996, respectively. Such costs capitalized in
1996 were incurred primarily in the latter part of that year.
Computer software amortization expense aggregated $0, $25,142 and $28,542,
respectively, for the three years ended December 31, 1996.
Research and Development
Research and development costs are expensed as incurred by the Company. Research
and development expense aggregated $1,582,332, $3,157,389 and $2,843,355,
respectively, for the three years ended December 31, 1996.
Income Taxes
The Company accounts for income taxes under SFAS 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) net
operating loss 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 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
10, which occurred 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 initial public offering, 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, 9 and 10) would be antidilutive.
F-10
<PAGE>
Stock-Based Compensation
During October 1995, the FASB 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
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 earnings (loss) per share in the notes to the
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 adopted this standard in 1996, and has elected to continue the accounting
set forth in Accounting Principles Board No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25") and to provide the necessary pro-forma disclosures
(Note 10).
Recently Issued Accounting Standards
Subsequent to December 31, 1996, the FASB issued SFAS No. 128, "Earnings Per
Share." This statement establishes standards for computing and presenting
earnings per share ("EPS"), replacing the presentation of currently required
primary EPS with a presentation of Basic EPS. For entities with complex capital
structures, the statement requires the dual presentation of both Basic EPS and
Diluted EPS on the face of the statement of operations. Under this new standard,
Basic EPS is computed based on weighted average shares outstanding and excludes
any potential dilution. Diluted EPS reflects potential dilution from the
exercise or conversion of securities into common stock or from other contracts
to issue common stock and is similar to the currently-required fully diluted
EPS. SFAS 128 is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods, and earlier application is
not permitted. When adopted, the Company will be required to restate its EPS
data for all prior periods presented. The Company does not expect the impact of
the adoption of this statement to be material to previously reported EPS
amounts.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year's presentation.
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 sheets,
as will any contingent consideration which arises due to the option described
above, based on a twenty-year contract with an 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.
F-11
<PAGE>
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 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 common shares, as contingent consideration,
based on the achievement of targeted operating performance by this entity.
The Company will record the effect of the contingent consideration, if any,
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
Management contracts 1,368,471 - -
Goodwill - 173,551 355,239
Covenant not-to-compete - 10,000 10,000
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 the Company.
Adjustments have been made for pro forma income taxes and amortization of
intangible assets related to these transactions.
F-12
<PAGE>
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.
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 on the first anniversary thereof, for an aggregate purchase
price of approximately $90,000, all of which is included in goodwill in the
accompanying consolidated balance sheets. 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.
The stockholders agreements for these MSOs and those MSOs which were formed as
described in Note 1, 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.
4. RELATED PARTY TRANSACTIONS:
Shared Services
The Company previously shared office space and administrative services with
Physicians' Online, Inc. ("POL"), a privately held healthcare information
services company which is partly owned by several of the Company's shareholders,
including certain officers and directors.
During the three years ended December 31, 1996, POL also incurred expenses
totaling $135,825, $180,631 and $94,605, respectively, on behalf of the Company
for which the Company has reimbursed POL. The Company also repaid a loan from
POL in the amount of $300,000 during the year ended December 31, 1995. In
addition, during 1995, POL borrowed $500,000 from the Company. POL repaid this
amount in full prior to December 31, 1995.
Transactions with MSOs
Revenues from MSOs, which are also related parties, are separately set forth in
the accompanying consolidated financial statements.
F-13
<PAGE>
In December 1996, one of the MSOs purchased accounts receivable from a physician
practice, under the terms of its management services agreement, for an aggregate
amount of $4,501,352, which is included in accounts receivable in the
accompanying consolidated balance sheet as of December 31, 1996. In accordance
with the agreement, all purchased accounts receivable outstanding after ninety
days from the purchase date are to be sold back to the physician practice at
face value. In the event that the physician practice is unable to repurchase the
receivables, the aggregate outstanding amount is converted to a loan which is
collateralized by outstanding shares of the Company held by the shareholders of
the physician practice.
During 1996, a separate MSO made advances aggregating $600,000, in the ordinary
course of business, to a physician practice with which the MSO has a long-term
management services agreement. These advances were satisfied subsequent to
December 31, 1996, as the physician practice simultaneously assigned certain
accounts receivable to the MSO to satisfy the advances and sold additional
accounts receivable to the MSO. This amount is included in advances to
affiliates in the accompanying consolidated balance sheet.
Transactions with Officers
In accordance with the Company's Senior Executive Loan Policy, which is
administered by the Compensation Committee of the Board of Directors, the
Company has made loans to certain senior executives of the Company aggregating
$430,000, which are included in other assets in the accompanying consolidated
balance sheet as of December 31, 1996. These loans are due three years from the
loan date with interest payable monthly at a rate of 6% per annum. There were
such no loans outstanding at December 31, 1995.
Management of the Company believes that these related party transactions were
effected on terms which approximate fair market value.
5. INVESTMENTS IN MARKETABLE SECURITIES:
The amortized cost, gross unrealized gains and losses and fair value of the
available-for-sale securities as of December 31, 1996, are as follows:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Commercial paper $ 7,290,162 $ 99,809 $ - $ 7,389,971
============= ============= ============= =============
</TABLE>
All available-for-sale securities are due within one year. There were no sales
of available-for-sale securities for the year ended December 31, 1996. The
Company had no marketable securities prior to 1996.
F-14
<PAGE>
6. PROPERTY AND EQUIPMENT:
Property and equipment is comprised of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------------
1995 1996
---- ----
<S> <C> <C>
Computer equipment and software $ 1,152,077 $ 2,276,484
Equipment under capital leases 681,988 470,856
Furniture and fixtures 189,448 271,578
Leasehold improvements 60,236 43,061
-------------- ---------------
2,083,749 3,061,979
Less: Accumulated depreciation and amortization 544,851 1,008,930
-------------- ---------------
Property and equipment, net $ 1,538,898 $ 2,053,049
============== ==============
</TABLE>
Depreciation and amortization aggregated $146,681, $396,618 and $781,980,
respectively, for the three years ended December 31, 1996.
7. INTANGIBLE ASSETS:
Intangible assets arising from acquisitions (Note 3) consist of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1995 1996
---- ----
<S> <C> <C>
Management contracts $ 1,368,471 $ 1,368,471
Goodwill 528,790 618,790
Covenant not-to-compete 20,000 20,000
----------------- ---------------
1,917,261 2,007,261
Less: Accumulated amortization 41,650 149,498
----------------- ---------------
Intangible assets, net $ 1,875,611 $ 1,857,763
=============== =============
</TABLE>
Amortization aggregated $41,650 and $107,848, respectively, for the years ended
December 31, 1995 and 1996. There were no intangible assets prior to 1995.
8. ACCRUED EXPENSES:
Accrued expenses consist of the following as of December 31, 1996:
Reimbursable physician practice expense $ 326,225
Public stock offering expenses 244,656
Other 341,883
---------------
Total accrued expenses $ 912,764
=============
The Company had no individual accrued expenses in excess of 5% of current
liabilities as of December 31, 1995.
F-15
<PAGE>
9. BRIDGE FINANCING:
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 received the
remaining $750,000 on the third closing date, June 28, 1996. Each note was due
on the earlier of the initial public offering of the Company's securities or one
year from the respective closing dates. Interest was 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 were to be exercisable
during the period from January 1, 1997 through June 28, 2001 if payment had not
been made on the notes by the agreed-upon payment dates described above or if an
initial public offering was not consummated prior to January 1, 1997; however,
when payments on the notes were made by the specified dates, these contingent
warrants were canceled.
The Company also entered into an agreement with the owners of the Company's
Series D Convertible Preferred Stock and related warrants (Note 10) for
additional bridge financing in the amount of approximately $2,000,000. This
financing was unsecured, bore interest at 9% and expired 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.
The Company used a portion of the proceeds of the initial public offering to
repay this bridge financing. The supplementary net loss per share for the year
ended December 31, 1996, which follows, gives supplementary effect to the
issuance of 384,615 shares of common stock for the entire period during which
the related bridge financing was outstanding, which is the number of shares
issued in the initial public offering, the proceeds of which were used to repay
the bridge financing, as well as to the effect of the reduction of related
interest expense, net of tax, in the period during which that debt was
outstanding. These shares are presumed outstanding for supplementary purposes
only, and were neither issued nor outstanding for any purpose during the year
ended December 31, 1996.
For the year ended
December 31, 1996
Supplementary net loss per share $ (.24)
=============
Supplementary weighted average
common shares outstanding 5,931,241
=============
F-16
<PAGE>
10. SHAREHOLDERS' EQUITY:
Common Stock
(a) In November 1994, the Company sold 75,960 common shares 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.
(b) In 1995, the Company sold 79,780 common shares 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.
(c) In October 1996, the Company completed an initial public offering of
its securities. The offering included the sale of 2,300,000 shares of
common stock (on a basis which reflected the reverse split described
below) at $13 per share plus an underwriters' overallotment of 345,000
shares. Total net proceeds from this offering were $30,483,168.
Preferred Stock
Prior to the initial public offering, the Company had 2,000,000 shares of
authorized Preferred Stock with a par value of $.01 per share, of which 971,800
shares had been designated Series A Convertible Preferred Stock. On August 31,
1993, the Company sold 971,800 shares of Series A Convertible Preferred Stock
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 at the holder's option, subject to adjustment
for antidilution. The holders of Series A, B, C and D Convertible Preferred
Stock are 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 are
entitled to receive all accrued dividends, if applicable, plus the liquidation
price per share of $.07, $4.71, $5.00 and $5.00, respectively.
Subject to certain provisions, registration rights, as defined in the agreement,
may be exercised 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 Class D Convertible Preferred Stock at
$8.39 per share.
F-17
<PAGE>
Stock Splits and Conversion of Preferred Stock
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. In April 1996, the Company authorized a 1.5 for 1 stock split on its
common stock in the form of a stock dividend.
Pursuant to the terms of the Series A, B, C and D Convertible Preferred Stock,
these securities were converted, on a 1.5 to 1 share basis, to common stock
immediately prior to the effective date of the initial public offering.
In connection with the initial public offering, the Company effected a
recapitalization whereby the presently outstanding common stock (including
converted Series A, B, C and D Convertible Preferred Stock) was converted to
shares of common stock on a .59581 to 1 share basis.
All information in the accompanying consolidated financial statements and
footnotes has been retroactively restated to give effect to these transactions.
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 adopted the 1995 Stock Option Plan (the "1995 Plan")
for the purpose of granting incentive stock options to employees, officers or
directors of, or consultants or advisors to, the Company, provided that
incentive stock options may only granted to individuals who are employees of the
Company. Options granted under the 1995 Plan typically vest annually over a
three-year period and expire ten years from the date of grant. The Company
reserved 1,500,000 shares of common stock for issuance under the 1995 Plan.
The Company also adopted the Advanced Health Corporation Employee Stock Purchase
Plan (the "Employee Plan") during 1996 in order to allow the employees of the
Company to acquire a proprietary interest in the Company through the purchase of
the Company's common stock. Under the Employee Plan, eligible employees will be
granted options to purchase shares of common stock through regular payroll
deductions. The total number of shares of common stock that are authorized for
issuance under the Employee Plan is 1,200,000. No shares have been issued under
the Employee Plan.
The Company accounts for these plans under APB Opinion No. 25, under which no
compensation cost has been recognized.
Had compensation cost for these plans been determined consistent with SFAS No.
123, the Company's net loss and net loss per share would have been changed to
the following pro forma amounts:
<TABLE>
<CAPTION>
1995 1996
<S> <C> <C> <C>
Net loss: As Reported $ (5,706,607) $ (1,465,188)
Pro Forma (5,898,054) (1,850,482)
Net loss per share: As Reported $ (1.47) $ (0.26)
Pro Forma (1.51) (0.33)
</TABLE>
Because the SFAS No. 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
F-18
<PAGE>
A summary of the status of the 1995 Plan at December 31, 1995 and 1996, and
changes during the years then ended, is presented in the table and narrative
below:
<TABLE>
<CAPTION>
1995 1996
Wtd Avg Wtd Avg
Shares Ex Price Shares Ex Price
---------------- --------------------- --------------- -------------------
<S> <C> <C> <C> <C>
Outstanding at beg. of year 841,264 $ 0.27 888,916 $ 0.17
Grant 980,968 2.73 154,733 6.77
Exercised (885,279) 0.01 (21,734) 3.71
Forfeited (48,037) 2.52 (217,471) 4.17
------------- ---------------
Outstanding at end of year 888,916 0.17 804,444 1.31
============= ===============
Exercisable at end of year 22,479 n/a 306,511 n/a
============= ===============
Weighted average fair value of
options granted $ 1.43 n/a $ 3.54 n/a
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1995 and 1996, respectively: risk-free interest
rates of 6.2%; expected dividend yields of 0%; expected lives of 3 years;
expected stock price volatility of 74%.
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.
F-19
<PAGE>
11. INCOME TAXES:
Income tax benefit consists of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------- ------------------ --------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Federal:
Current $ - $ - $ -
Deferred - - 757,014
State and Local:
Current - - -
Deferred - - 219,778
-------- --------- ------------
Total income tax benefit $ - $ - $ 976,792
======== ========= ============
</TABLE>
A reconciliation of difference between the statutory U.S. Federal Income Tax
Rate and the Company's effective tax rate for the years ended December 31, 1994,
1995 and 1996 follows:
1994 1995 1996
--- --- ---
U.S. Federal statutory income tax
rate 34% 34% 34%
State income taxes, net of federal tax
tax benefit 6% 6% 6%
Net operating loss without tax
benefit (40%) (40%) --
------ ----- -----
-- -- 40%
====== ===== =====
The tax effects of temporary differences, that give rise to a significant
portion of the deferred income tax asset, net, are as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1995 1996
---- ----
<S> <C> <C>
Current deferred income tax assets:
Net operating loss carryforward $ - $ 976,792
--------------- --------------
Current deferred tax asset - 976,792
--------------- --------------
Noncurrent deferred income tax asset, net:
Net operating loss carryforwards 2,564,800 3,510,540
Amortization 522,969 380,346
Deferred revenue 240,000 160,000
Allowance for doubtful accounts - 84,000
Other 178,771 (10,924)
--------------- --------------
3,506,540 4,123,962
--------------- --------------
Less: Valuation allowance (3,506,540) (4,123,962)
--------------- --------------
Total deferred income taxes, net $ - $ 976,792
=============== ==============
</TABLE>
F-20
<PAGE>
As of December 31, 1996, the Company had net operating loss carryforwards
("NOLs") available to offset future book and taxable income of approximately
$10.2 million and $8.7 million, respectively, which expire in varying amounts
through 2011. Certain of these carryforwards are limited as to their utilization
due to cumulative changes in ownership of the Company through 1996 (Note 10).
Future changes in ownership, as defined by Section 382 of the Internal Revenue
Code, as amended could limit the amount of net operating loss carryforwards in
any one year. In 1996, management of the Company determined that it has become
more likely than not that the current year deferred income tax assets will be
realized and has, accordingly, recorded the current year deferred income tax
asset of $976,792, which is included in the income tax benefit in the
accompanying consolidated statement of operations for 1996. The determination
that the net deferred income tax asset of $976,792, which includes the deferred
income tax benefit for the current year, is realizable is based on the Company's
profitability in the latter part of 1996.
12. CAPITAL LEASE OBLIGATIONS INCOME TAX:
The Company is the lessee of certain equipment under capital leases expiring
through 2001. 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%.
Future minimum payments under these lease agreements are as follows:
Year ending December 31,
1997 $ 145,048
1998 77,818
1999 8,458
2000 10,648
2001 3,550
-------------
Total minimum lease payments 245,522
Less: Amount representing interest 33,306
-------------
Present value of net minimum lease payments 212,216
Less: Current portion 131,441
-------------
$ 80,775
=============
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, 1996 are as
follows:
Year ending December 31,
1997 $ 631,012
1998 719,016
1999 784,040
2000 813,764
2001 and thereafter 792,289
Rent expense was $69,774, $125,881 and $629,847, respectively, for the three
years ended December 31, 1996.
14. SUBSEQUENT EVENT:
Subsequent to December 31, 1996, the Company loaned $2,000,000 to Madison at the
prime rate plus 2%, not to exceed 10%, with interest payable monthly and the
outstanding principal payable in twelve monthly installments beginning in
January 1998. In conjunction with this loan, the Company has guaranteed a letter
of credit of Madison, in the amount $1,727,000, by depositing and restricting
cash in the same amount with the same financial institution providing that
letter of credit. These obligations are secured by the 49% ownership interest in
Uptown held by Madison.
F-21
<PAGE>
EXHIBIT INDEX
Exhibit No. Description of Exhibit Page
- ----------- ---------------------- ----
**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
**3.2 By-laws of the Registrant
+**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
Communications Partners, L.P., 21st Century
Communications T-E Partners, L.P. and 21st Century
Communications Foreign Partners, L.P
**10.8 Registrant 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.
<PAGE>
Exhibit No. Description of Exhibit Page
- ----------- ---------------------- ----
**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 First Amendment to Lease Agreement between Reckson
Operating Partnership, LP, as Owner, and the
Registrant, as Tenant
**10.20 Chicago Office Lease Agreement dated December 8,
1995, between Adams Family, L.L.C. and the
Registrant
**10.21 Form of Director Indemnification Agreement
**10.22 Employment Agreement between the Registrant and
Jonathan Edelson, M.D.
**10.23 Employment Agreement between the Registrant and
Steven Hochberg
**10.24 Employment Agreement between the Registrant and
Alan B. Masarek
**10.25 Amended and Restated Advanced Health Corporation
1995 Stock Option Plan
**10.26 Employee Stock Purchase Plan
*11.1 Supplemental Net Loss Per Common Share Computation
**21 List of Subsidiaries
*23.2 Consent of Arthur Andersen LLP
*27 Financial Data Schedule
- --------
* Filed herewith.
** Filed as an exhibit to the Registrant's Registration Statement on Form S-1,
as amended (Registration No. 333-06283), and incorporated herein by
reference.
+ 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 granted therefor.
FIRST AMENDMENT TO LEASE AGREEMENT BETWEEN
RECKSON OPERATING PARTNERSHIP, LP,
AS OWNER,
AND
ADVANCED HEALTH CORPORATION,
AS TENANT,
Premises:
555 White Plains Road
Tarrytown, New York 10591
Prepared By:
The Law Office of
STEVEN C. HIRSCH, ESQ.
595 Stewart Avenue
Suite 800
Garden City, New York 11530
(516) 227-1117
<PAGE>
THIS FIRST AMENDMENT TO LEASE, made as of the 20th day of September,
1996, between RECKSON OPERATING PARTNERSHIP, LP, having an office at 660 White
Plains Road, Tarrytown, New York 10591, hereinafter called the "Owner" and
ADVANCED HEALTH CORPORATION, having an office at 660 White Plains Road,
Tarrytown, New York 10591 hereinafter referred to as the "Tenant."
W I T N E S S E T H:
WHEREAS, Owner, is the fee simple owner of the building commonly known
as and located at 560 White Plains Road, Tarrytown, New York 10591 (the "560
Building");
WHEREAS, Owner's predecessor-in-interest entered into that certain
lease dated January 14, 1992, with Integrated Systems Solutions Corporation
("ISSC"), as Tenant (the "Prime Lease") for the Second, Third, and Fourth floors
of the 560 Building for a term which exprires on March 31, 1997, which Prime
Lease was thereafter assigned to and assumed by International Business Machines
Corporation ("IBM") pursuant to a certain Assignment, Assumption and Release
Agreement dated January 1, 1994;
WHEREAS, IBM entered into that certain sublease dated June 2, 1994,
with American Software, USA, Inc. ("American") as subleasee, for a portion of
the Second (2nd) Floor of the 560 Building consisting of Six Thousand, Five
Hundred and Nine (6,509) rentable square feet more particularly described
therein (the "American Premises") for a period commencing on July 1, 1994 and
ending on March 30, 1997 (the "American Sublease");
WHEREAS, American entered into that certain sublease dated October 31,
1995 with Tenant for the American Premises for a period commencing on November
1, 1995 and ending on March 29, 1997 (the "American/Advanced Sublease");
WHEREAS, IBM entered into that certain sublease dated January 14, 1994,
with Industri-Matematik North American Operations, Inc. ("IMI"), for a portion
of the Second (2nd) Floor of the 560 Building consisting of Five Thousand, Five
Hundred and Seventy-One (5,571) rentable square feet (the "IMI Premises") for a
period commencing on April 1, 1994 and ending on March 30, 1997 (the "IMI
Sublease");
WHEREAS, IMI entered into that certain sublease dated July 1, 1996 with
Tenant for the IMI Premises for a period ending on March 30, 1997 (the
"IMI/Advanced Sublease");
WHEREAS, IBM entered into that certain sublease dated August 1, 1993,
with Physicians OnLine, Inc., ("POL") as sublessee, for a portion of the Second
(2nd) Floor of the 560 Building consisting of Four Thousand, Eight Hundred
(4,800) rentable square feet more particularly described therein (the "POL
Premises") for a period commencing on August 8, 1993 and ending on March 30,
1997 (the "POL Sublease");
WHEREAS, Tenant, presently occupies the POL Premises pursuant to a
written sublease with POL;
WHEREAS, Tenant, by reason of the American/Advanced Sublease,
IMI/Advanced Sublease and the POL Sublease, presently occupies Sixteen Thousand,
Eight Hundred and Eighty (16,880) rentable
Page 1 of 14
<PAGE>
square feet in the 560 Building (the "560 Premises") until March 30, 1997;
WHEREAS, Owner's predecessor-in-interest entered into that certain
Lease dated November 30, 1995 with Tenant for the entire Second (2nd) Floor of
the 560 Building consisting of Twenty-Six Thousand, Three Hundred and Two
(26,302) rentable square feet for the period commencing on April 1, 1997 and
ending March 31, 2002 (the "Lease");
WHEREAS, Owner, is also the fee simple owner of the building commonly
known as and located at 555 White Plains Road, Tarrytown, New York 10591 (the
"555 Building");
WHEREAS Tenant is desirous of relocating its business to the 555
Building and Owner has agreed to lease to Tenant a portion of the Fifth (5th)
Floor of the 555 Building consisting of Twenty-Six Thousand, Three Hundred and
Two (26,302) rentable square feet (the "555 Premises") within which to operate
its business on substantially the same terms and conditions as contained in the
Lease;
NOW, THEREFORE, for and in consideration of the foregoing and for other
good and valuable consideration and of the mutual agreements hereinafter set
forth, Owner and Tenant stipulate, covenant and agree as follows:
ARTICLE-1 LEASE AMENDMENTS
SECTION 1.01. Effective as of the Commencement Date (as hereinafter
defined), the Lease, is hereby modified as follows:
A. The term "Demised Premises" is hereby amended as follows:
"Demised Premises" shall mean that portion of the Fifth (5th)
Floor in the building commonly known as and located at 555 White Plains
Road, Tarrytown, New York 10591 (the "Building") comprising
approximately Twenty-Six Thousand, Three Hundred and Two (26,302)
rentable square feet as delineated on the floor plan(s) attached to
this First Amendment of Lease as Exhibit "A-1".
B. The third paragraph in Section 2 entitled "Taxes" on page 4 of
the Lease is hereby deleted and a new third paragraph is hereby substituted in
its place as follows:
"Tenant agrees to pay Owner, throughout the term of this
Lease, as additional rental, a sum equal to 21.72% percent ("Tenant's
Proportionate Share") of the amount by which the Impositions levied
against the Property in each fiscal tax year (or, in the event this
Lease shall expire on other than December 31, the applicable portion
thereof) exceeds the Base Impositions."
C. Section 5 entitled "Commencement Date, Rent Commencement Date;
Rent" of the Lease is hereby deleted and a new Section 5 is hereby substituted
in its place as follows:
"The Lease shall commence on the Commencement Date (as
hereinafter defined) and shall end on the last day of the Sixty-Fifth
(65th) month from the Commencement Date (the "Expiration Date").
Page 2 of 14
<PAGE>
(a) Tenant shall pay to Owner, or to such other person as Owner may
from time to time designate, at Owner's address specified above, fixed rent,
over and above the other and additional payments to be made by Tenant as herein
provided, as follows:
(i) during and in respect of the period from the Commencement
Date to the end of the Fourth (4th) month from the Commencement Date
(both dates inclusive) the sum of Eighty-Two Thousand, Nine Hundred and
Ninety-Two and 00/100 ($82,992.00) Dollars payable in equal monthly
installments of Twenty Thousand, Seven Hundred and Forty Eight and
00/100 ($20,748.00) Dollars;
(ii) during and in respect of the Fifth (5th) month from the
Commencement Date the Sum of Twenty-One Thousand, Four Hundred and
Fifty-Two and 00/100 ($21,452.00) Dollars payable in one monthly
installment;
(iii) during and in respect of the period from the Sixth (6th)
month from the Commencement Date to the end of the Seventeenth (17th)
month from the Commencement Date (both dates inclusive) the sum of Four
Hundred and One Thousand, One Hundred and Six and 00/100 ($401,106)
Dollars payable in equal monthly installments of Thirty-Three Thousand,
Four Hundred and Twenty-Five and 00/100 ($33,425.00) Dollars;
(iv) during and in respect of the period from the Eighteenth
(18th) month from the Commencement Date to the end of the Twenty-Ninth
(29th) month from the Commencement Date (both dates inclusive) the sum
of Four Hundred and Eighty Thousand, and Twelve and 00/100
($480,012.00) Dollars payable in equal monthly installments of Forty
Thousand and One and 00/100 ($40,001.00) Dollars;
(v) during and in respect of the period from the Thirtieth
(30th) month from the Commencement Date to the end of the Forty-First
(41st) month from the Commencement Date (both dates inclusive) the sum
of Five Hundred and Forty-Five Thousand, Seven Hundred and Seventy-Two
and 00/100 ($545,772.00) Dollars payable in equal monthly installments
of Forty-Five Thousand, Four Hundred and Eighty-One and 00/100
($45,481.00) Dollars;
(vi) during and in respect of the period from the Forty-Second
(42nd) month from the Commencement Date to the end of the Fifty-Third
(53rd) month from the Commencement Date (both dates inclusive) the sum
of Six Hundred and Twenty-Four Thousand, Six Hundred and Seventy-Two
and 00/100 ($624,672.00) Dollars payable in equal monthly installments
of Fifty-Two Thousand and Fifty-Six and 00/100 ($52,056.00) Dollars;
and
(vii) during and in respect of the period from the Fifty
Fourth (54th) month from the Commencement Date to the Expiration Date
(both dates inclusive) the sum of Six Hundred and Thirty-Seven
Thousand, Eight Hundred and Twenty-Four and 00/100 ($637,824.00)
Dollars payable in equal monthly installments of Fifty-Three Thousand,
One Hundred and Fifty-Two and 00/100 ($53,152.00) Dollars.
Page 3 of 14
<PAGE>
(b) Notwithstanding the foregoing, Owner represents that on or
before December 1, 1996, there will be a food service/cafeteria located
and operating in the 555 Building. In the event that the food
service/cafeteria is not operating by December 1, 1996, then in such
event, Owner represents that it will provide an interim food service in
the 555 Building until the food service/cafeteria is operating in the
555 Building. Lessor further represents that the landscaping around the
555 Building will be substantially complete on or before March 1, 1997.
(c) (i) If Owner is unable to give possession of the 555
Premises on the date of the commencement of the term, because of the
holding-over or retention of possession of any tenant, undertenant or
occupants or if the 555 Premises are being constructed or built-out by
Owner in accordance with the provisions of this First Amendment to
Lease, because such construction or build-out has not been sufficiently
completed to make the 555 Premises ready for occupancy or because of
the fact that a certificate of occupancy has not been procured or for
any other reason, Owner shall not be subject to any liability for
failure to give possession on said date and the validity of the Lease
shall not be impaired under such circumstances, nor shall the same be
construed in any wise to extend the duration of Term, but the term
hereof shall not be deemed to have commenced (provided Tenant is not
responsible for Owner's inability to obtain or deliver possession)
until after Owner shall have given Tenant at least Twenty (20) days
prior written notice that the 555 Premises are substantially ready for
Tenant's occupancy and the term of this Lease shall commence on a date
which shall be the earlier of: (a) the date that the 555 Premises are
substantially complete and a certificate of occupancy or temporary
certificate or occupancy shall have been issued (but not necessarily
actually received by Owner) respecting the 555 Premises, or (b) the day
Tenant shall occupy or take possession of any portion of the 555
Premises (the "Commencement Date").
(ii) If permission is given to Tenant to enter into the
possession of the 555 Premises or to occupy premises other than the 555
Premises prior to the date specified as the commencement of this Lease,
Tenant covenants and agrees that such occupancy shall be deemed to be
under all the terms, covenants, conditions and provisions of this
Lease, except as to the covenant to pay fixed rent.
(d) The provisions of Section 5(b) of this Rider to Lease are
intended to constitute "an express provision to the contrary" within
the meaning of Section 223-a of the New York Real Property Law."
D. Section 19 entitled "Owner's Allowance for Work, Owner's Work" of
the Lease is hereby deleted and a new Section 19 is hereby substituted in its
place as follows:
"A. Owner and Tenant agree that Tenant will take the 555
Premises on the Commencement Date of the term in "AS IS" condition.
Notwithstanding the foregoing, prior to the commencement of the initial
term of this Lease, Owner shall retain Reckson Construction Group,
Inc., at its sole cost and expense, to act as general contractor with
respect to the design and build-out of the 555 Premises (the "Work")
and, in such capacity, shall perform the Work in accordance with the
plans and specifications annexed hereto as EXHIBIT "B" (the "Plans"),
which Plans Owner and Tenant have both approved.
B. Owner shall use diligence to complete the Work so as to
have the 555 Premises
Page 4 of 14
<PAGE>
ready for occupancy on or before November 1, 1996. However, Owner's
agreement to complete this Work shall not require it to incur overtime
costs and expenses and shall be subject to any delays due to acts of
God, governmental restrictions or guidelines, strikes, labor
disturbances, shortages of materials and supplies and for any other
causes or events whatsoever beyond Owner's reasonable control. Owner
has not made, and makes, no representations as to the date when the 555
Premises will be ready for Tenant's occupancy, and notwithstanding any
date specified elsewhere in this First Amendment to Lease as the
commencement date it is understood that the same is merely an estimate.
C. Tenant shall submit to Owner, on or before the thirtieth
(30th) day following notice of substantial completion of the Work, a
punch list setting forth such details provided for in the Plans as
remain to be completed and, except as noted therein, Tenant shall be
deemed to have accepted the Work as of the date of substantial
completion, except for those items which are considered to be seasonal
in nature. Owner agrees to complete all punch list items within Thirty
(30) days, subject however to Unavoidable Delays and items which are
considered to be seasonal in nature.
D. Owner shall act as general contractor, or retain a general
contractor, with respect to the build-out of the 555 Premises and, in
such capacity, shall perform the Work at its sole cost and expense.
Owner and Tenant have agreed upon the Plans for all Work to be
completed which shall encompass the scope and time-frame with respect
to such Work and which shall indicate the estimated Cost thereof (the
"Cost Estimate"). Any material increase in the scope of Work to be
performed by Owner beyond that contained in the Plans ("Extra Work")
shall be approved as follows: (i) a written request for any such Extra
Work (including any and all change orders) defining the scope of such
Extra Work plus any possible time delay and containing an "Extra Work
Cost Estimate" shall be prepared by Owner for review and acceptance by
Tenant; and (ii) upon execution by Tenant of such written request of
Owner, Owner shall pursue completion of the Extra Work stipulated
therein at Tenant's sole cost and Expense. Tenant shall pay to Owner
the cost of the Extra Work upon the commencement of such Extra Work. As
used in this section, the term "material" shall mean any increase in
the scope of the Work, which cost, in the aggregate, in excess of the
Three Thousand and 00/100 ($3,000.00) Dollars, inclusive of the
installation of telephone, data, and computer lines and cabling in that
portion of the 555 Premises in excess of Sixteen Thousand, Eight
Hundred and Eighty (16,880) rentable square feet.
E. To the extent (i) Owner (which term as used herein may be
deemed to mean Owner and/or Owner's affiliated or non-affiliated
general contractor) may be or is required to or actually does perform
Extra Work as provided for herein above, and/or (ii) Owner performs
other build-out or similar work or alterations to the 555 Premises of
any kind or any other demolition, renovation or construction on
Tenant's behalf during the term of this Lease, pursuant to Section 4 of
this Lease and otherwise, the "Cost", as such term is used in
connection herewith, shall mean that Owner will perform all such
services on a "cost plus" basis, whereby Cost shall include, but not be
limited to, the cost of sub-contractors, material, equipment rental,
transportation and delivery items, permits, fees, taxes, insurance's,
debris removal, demolition, safety protection, labor, purchasing,
expediting and material handling, and shall also include a contingency,
based on the complexity of the work to be performed, of up to five
percent (5%) of the total of all such items otherwise included within
such definition. In addition, Cost shall include Owner's fee for acting
as general contractor which shall be equal to Fifteen percent (15%) of
the total Cost otherwise
Page 5 of 14
<PAGE>
determined; provided however, that with respect to decorating only,
such fee shall be applicable to labor and service items such as
decorator fees and costs of installation and other labor but shall not
be applicable to the cost of furniture, and similar items otherwise
included therein.
F. In addition to the Work provided for on EXHIBIT B attached
hereto, Owner agrees, at its sole cost and expense, to: (i) relocate
Tenant, including, but not limited to all its existing furniture, files
and equipment, from the 560 Premises to the 555 Premises; (ii)
dismantling and set-up of all Tenant's existing work cubes located at
the 560 Premises to the 555 Premises; (iii) to remove from the 560
Premises and install in the 555 Premises all of tenant's existing
telephone, data and computer lines and cabling; (iv) prepare and
install all of Tenant's signs, including internal building directory,
floor directional and entrance door signs; and (v) reimburse Tenant for
the cost of printing new stationary, business cards, announcements and
the postage for such announcements to reflect its relocation to the 555
Premises."
E. Section 28 entitled "Additional Premises," Section 29 entitled
"Tenant's Right to Give Back Space," and Exhibit "C" of the Lease are all hereby
deleted in there entirety and shall be of no further force and effect.
F. Subparagraph (f) of Section 30 entitled "Miscellaneous" of the Lease
is hereby deleted and a new subparagraph (f) is hereby substituted in its place
as follows:
"(f) Tenant's Proportionate Share for the 555 Premises is
Twenty-One and Seventy-Two Hundreths (21.72%) Percent, which is the
ratio that the Twenty-Six Thousand, Three Hundred and Two (26,302)
square feet of rentable area comprising the 555 Premises bears to the
One Hundred and Twenty-One Thousand, (121,000) square feet of rentable
area in the Building."
Section 1.02. Effective as of the Commencement Date, Owner agrees that
Tenant shall have no obligation to repay the Thirteen Thousand, Five Hundred and
Seventy and 00/100 ($13,570.00) Dollars of the Interim Allowance used by Tenant
in connection with American Premises. In consideration of the foregoing, Tenant
hereby waives, as of the date hereof, its right to draw down the Sixteen
Thousand, Four Hundred and Thirty and 00/100 ($16,430.00) Dollars remaining on
the Interim Allowance in connection with the IMI Premises as provided in the
IMI/Advanced Sublease.
Section 1.03. In the event that Owner is unable to deliver the 555
Premises, on or before March 1, 1997, subject however to Unavoidable Delays,
then in such event, Owner agrees that it will be obligated to perform the Work
(as that term is defined in Section 19 of the Lease) in the 560 Premises in
accordance with and pursuant to the provisions of the Section 19 of the Lease.
Notwithstanding, the foregoing, Tenant agrees to vacate and surrender the 560
Premises in accordance with the provisions hereof and to occupy the 555 Premises
upon substantial completion of same. Owner's obligation to perform the Work in
the 560 Premises shall in no way be construed as a release of Owner's obligation
to perform the Work (as that term is defined in this First Amendment to Lease)
in the 555 Premises, except as otherwise specifically provided for in Section
1.04. Of this First Amendment to Lease.
Section 1.04. Tenant acknowledges that Owner has entered into a lease
with Ciba-Geigy ("Ciba") to occupy the 560 Premises as of the Commencement Date
hereof. Notwithstanding the foregoing, Tenant further acknowledges that Ciba has
the right to cancel its lease with Owner for the 560 Premises in the event that
Owner can not deliver possession thereof by December 31, 1996. In the event
Page 6 of 14
<PAGE>
that Ciba exercises its right to cancel its lease with Owner for the 560
premises prior to substantial completion of the 555 Premises, then in such
event, Owner shall have the right, upon five (5) days written notice to Tenant,
to cancel this First Amendment to Lease, provided that Owner shall have notified
Tenant of same within ten (10) days after Owner's receipt of the notice of
cancellation from Ciba. In the event that Owner shall exercise its right to
cancel this First Amendment to Lease, then in such event this First Amendment to
Lease shall become null and void and of no further force and effect upon the
expiration of said five (5) day period and the Lease will continue in full force
and effect, without amendment, on its then executory terms with respect to the
560 Premises.
ARTICLE -2 GUARANTEED ADDITIONAL TSS SPACE, RIGHT OF FIRST OFFER
SECTION 2.01.A. Lessee acknowledges that the Eight Thousand, Eight
Hundred and Twenty-Eight (8,828) rentable square feet on the Fifth (5th) floor
of the 555 Building immediately adjacent to the 555 Premises (the "Guaranteed
Additional TSS Space") will be occupied by Technology Service Solutions ("TSS")
for period of two (2) years pursuant to a written lease with Owner (the "TSS
Lease"). Lessee further acknowledges that from and after the first (1st)
anniversary of the commencement of the TSS Lease, TSS has the right, on sixty
(60) days notice to Owner, to cancel the TSS Lease and surrender the Guaranteed
Additional TSS Space prior to the expiration of the two (2) year term (the "TSS
Cancellation Notice"). Owner, agrees that within thirty (30) days after receipt
of TSS Cancellation Notice, or six (6) months prior to the expiration of the TSS
Lease, in the event TSS does not exercise its right to early termination, it
shall give Tenant notice of (the "Guaranteed Additional TSS Space Notice"), and
a one time right to, at Tenant's option, expand the 555 Premises herein to
include all of the Guaranteed Additional TSS Space with occupancy to commence on
the Guaranteed Additional TSS Space Commencement Date (as hereinafter defined)
and to end on the Expiration Date originally provided for herein (the
"Guaranteed Additional TSS Space Term").
B. Tenant shall, within Thirty (30) days after receipt of Guaranteed
Additional TSS Space Notice, notify Owner of its intention to lease the
Guaranteed Additional TSS Space (time being of the essence with respect
thereto). Tenant's failure to notify Owner within the Thirty (30) day period
shall be deemed a waiver of the right to hire the Guaranteed Additional TSS
Space. In the event that Tenant shall elect to hire the Guaranteed Additional
TSS Space, same shall be deemed added to and a part of the 555 Premises, with
the same force and effect as if originally so demised under the Lease as of the
Guaranteed Additional TSS Space Commencement Date.
C. As used herein the "Guaranteed Additional TSS Space Commencement
Date" shall be the date which is the sooner of: (1) six (6) months from the date
that TSS vacates and surrenders the Guaranteed Additional TSS Space, or (2) the
date on which the Guaranteed Additional TSS Work Space (as hereinafter defined)
is substantially complete.
D. Tenant shall have the right to inspect the Guaranteed Additional TSS
Space prior to exercising its rights herein, Tenant agrees to accept the
Guaranteed Additional TSS Space in its "AS IS" state and condition on the
Guaranteed Additional TSS Space Commencement Date, except that Owner shall
provide Tenant with a Guaranteed Additional TSS Space Alteration Allowance (as
hereinafter defined) and perform the work and build-out of the Guaranteed
Additional TSS Space (the "Guaranteed Additional TSS Space Work"). As used
herein the Guaranteed Additional TSS Space Alteration Allowance shall be
determined by multiplying the product of (i) Eight Thousand, Eight Hundred and
Twenty-Eight (8,828) and the amount, on a square footage basis, of the cost to
perform the Work in the 555 Premises (inclusive of all
Page 7 of 14
<PAGE>
architectural, and engineering fees) plus One and 50/100 ($1.50) Dollars per
square foot by (ii) a fraction, the numerator of which is the number of months
remaining on the Term originally provided for herein and the denominator of
which is the total number of months of Term originally provided for herein.
E. Any notice of election to exercise the right to expand the 555
Premises to include the Guaranteed Additional TSS Space as herein provided must
be in writing and sent to Owner as provided for in the Lease. Neither the right
granted to Tenant in this section to expand the 555 Premises to include the
Guaranteed Additional TSS Space, nor the exercise of such right by Tenant, shall
prevent Owner from exercising any option or right granted or reserved to Owner
in this Lease to terminate this Lease, and the effective exercise of any such
right of termination by Owner shall terminate any such expansion of Tenant to
the Guaranteed Additional TSS Space, whether or not Tenant shall have exercised
any such right to expand the 555 Premises to include the Guaranteed Additional
TSS Space. Any such option or right on the part of Owner to terminate this Lease
pursuant to the provisions hereof shall apply to the Guaranteed Additional TSS
Space.
F. All of the terms, covenants and conditions of this Lease applicable
to the 555 Premises as originally constituted shall be applicable to the 555
Premises including the Guaranteed Additional TSS Space, except that: (1) the
annual fixed rent provided for in Section 5 of the Rider to Lease shall be
increased by the product of (i) ninety-five (95%) percent of the fair market
value of the Guaranteed Additional TSS Space as determined in accordance with
this Article 2 and (ii) the rentable square footage of the Guaranteed Additional
TSS Space; and (2) Tenant's Proportionate share shall be increased by the amount
of the Guaranteed Additional TSS Space.
G. If Tenant shall effectively exercise its right to hire the
Guaranteed Additional TSS Space, Owner and Tenant, upon demand of either, shall
execute and deliver to each other duplicate originals of an instrument, duly
acknowledged, setting forth (i) that the 555 Premises have been expanded to
include the Guaranteed Additional TSS Space, (ii) the amount of such Guaranteed
Additional TSS Space, (iii) the annual fixed rent payable during the Term and
(iv) that such Guaranteed Additional TSS Space is upon and subject to all of the
terms, covenants, conditions and limitations contained herein.
H. The right of Tenant to hire the Guaranteed Additional TSS Space as
provided for herein is conditioned in all respects upon Tenant's not being in
default in the observance or performance of any material term, covenant,
condition or agreement of Tenant's part to be observed or performed under this
Lease both at the time the notice of exercise is given and immediately prior to
Guaranteed Additional Space TSS Commencement Date. Any termination, cancellation
or surrender of this Lease shall terminate Tenant's right to hire the Guaranteed
Additional TSS Space.
SECTION 2.02.A. In the event that Tenant shall fail to exercise its
right to the Guaranteed Additional TSS Space, Owner, agrees that thereafter, and
prior to offering for lease the balance of the Eight Thousand, Eight Hundred and
Twenty-Eight (8,828) rentable square feet on the Fifth (5th) floor of the 555
Building (the "Optional Additional Space"), it shall give Tenant notice of and
the right to , at its option, expand the 555 Premises to include the Optional
Additional Space with occupancy to commence on the Optional Additional Space
Commencement Date (as hereinafter defined) and to end on the Expiration Date
originally provided for herein (the "Optional Additional Space Term").
B. Tenant shall, within Thirty (30) days after receipt of the notice
from Owner that the Optional Additional Space will become available for hire,
notify Owner of its intention to lease the Optional
Page 8 of 14
<PAGE>
Additional Space (time being of the essence with respect thereto). Tenant's
failure to notify Owner within the Thirty (30) day period shall be deemed a
waiver of the right to hire the Optional Additional Space. In the event that
Tenant shall elect to hire the Optional Additional Space, same shall be deemed
added to and a part of the 555 Premises, with the same force and effect as if
originally so demised under the Lease as of the Optional Additional Space
Commencement Date.
C. Tenant shall have the right to inspect the Additional Space prior to
exercising its rights herein. Tenant agrees to accept the Optional Additional
Space in its "AS IS" state and condition on the Option Additional Space
Commencement Date, except that Owner shall provide Tenant with an Optional
Additional Space Alteration Allowance equal to the allowance that Owner is
giving to renewing, non-equity tenants for comparable space in the Building on
the date of the commencement of the Optional Additional Space Term with a term
equal to the Optional Additional Space Term and otherwise containing the same
quality of construction and appearance to that of the 555 Premises, as
determined by agreement between Owner and Tenant.
D. As used herein the "Optional Additional Space Commencement Date"
shall be sooner of: (i) the date specified in Owner's notice; (ii) or the date
on which Tenant occupies all or part of the Optional Additional Space.
SECTION 2.03. Any notice of election to exercise the right to expand
the 555 Premises as hereinbefore provided must be in writing and sent to Owner
as provided in the Lease. In addition, if prior to the exercise of the right to
expand the 555 Premises, Tenants herein named shall have assigned this Lease, no
notice by the then Tenant of election to exercise an option to expand shall be
valid unless joined in or consented to in writing by Tenant herein named (which
consent, in order for the exercise of such right to be effective, shall be
delivered to Owner at or prior to the time of the exercise of the right as to
which consent of Tenant herein named had been given). Neither the right granted
to Tenant in this Article to expand the 555 Premises, nor the exercise of such
right by Tenant, shall prevent Owner from exercising any option or right granted
or reserved to Owner in this Lease to terminate this Lease, and the effective
exercise of any such right of termination by Owner shall terminate any such
right of Tenant to the Optional Additional Space, whether or not Tenant shall
have exercised any such right to expand the 555 Premises to the include the
Optional Additional Space. Any such option or right on the part of Owner to
terminate this Lease pursuant to the provisions hereof shall apply to the
Optional Additional Space.
SECTION 2.04.A All of the terms, covenants and conditions of this Lease
applicable to the 555 Premises as originally constituted shall be applicable to
the 555 Premises including the Additional Space, except that the annual Fixed
Rent provided for in Article 5 of the Rider to Lease shall be increased by the
product of the fair market rent as determined in Section 2.05. hereof and the
gross square footage of the Optional Additional Space, and Tenant agrees to pay
such amount from and after the Optional Additional Space Commencement Date.
B. During and in respect of the Term hereof, Tenant's Proportionate
Share shall be increased by the gross square footage of all Additional Space
that Tenant occupies in the Building.
SECTION 2.05.A. During the Optional Additional Space Term, Tenant shall
pay to Owner annual Fixed Rent, at the same times and in the same manner as in
the Term originally provided for, at the annual rate equal to ninety-five (95%)
percent of the annual fair rental value of the Optional Additional Space
(without deduction for the cash value of free rent and leasehold improvements),
which renewing,
Page 9 of 14
<PAGE>
non-equity tenants are then receiving in connection with a lease for comparable
space in a building of the same age, quality, size, location, services,
amenities, quality of construction and appearance to that of the Building on the
date of the commencement of the Optional Additional Space Term with a term equal
to the Optional Additional Space Term and otherwise containing the same
provisions as this Lease contains, as determined by agreement between Owner and
Tenant. If, prior to the commencement of the Optional Additional Space Term,
Owner and Tenant are unable to agree on the amount of the annual Fixed Rent
during the Optional Additional Space Term, then in such event, the determination
of such annual fair rental value shall be made by arbitration pursuant to the
provisions of Section 2.05.B. hereof. If the Optional Additional Space Term,
shall commence prior to determination of the amount of annual Fixed Rent payable
during the Optional Additional Space Term, either by agreement or by decision of
the arbitrators, Tenant, in the meantime, shall pay the monthly installments of
Fixed Rent at the annual rate payable under this Lease for the year ending on
the Optional Additional Space Commencement Date. If monthly installments of the
amount agreed upon by Owner and Tenant, or found by the arbitrators, shall be
greater than such amount, then Tenant, forthwith after such agreement or
arbitrators' decision, shall pay to Owner, for the period from the Optional
Additional Space Commencement Date to the last day of the calendar month in
which the agreement or the arbitrators' decision takes effect, the difference
between the monthly installments actually paid and the monthly installments
which should have been paid in accordance with such agreement or arbitrator's
decision; and, thereafter, Tenant shall pay the monthly installments at the new
rate. In no event shall the annual Fixed Rent during the Optional Additional
Space Term be less than the annual Fixed Rent payable immediately prior to the
Optional Additional Space Term.
B.(1) In the event that Owner and Tenant are unable to agree on the
amount of the annual Fixed Rent during the Optional Additional Space Term, then
either Owner or Tenant (hereinafter referred to as the "Initiating Party") may
give the other party (hereinafter called the "Responding Party") a notice
designating the name and address of the arbitrator designated by the Initiating
Party to act on its behalf in the arbitration process hereinafter described (the
"Review Notice").
(2) If the Initiating Party gives a Review Notice, then within twenty
(20) days after giving such Review Notice, the Responding Party shall give
notice to Initiating Party specifying in such notice the name and address of the
arbitrator designated by the Responding Party to act on its behalf. In the event
the Responding Party shall fail to give such notice within such twenty (20) day
period, then the appointment of such arbitrator shall be made in the same manner
as hereinafter provided for the appointment of a third arbitrator in a case
where two arbitrators are appointed hereunder and the parties are unable to
agree to such appointment. The two arbitrators so chosen shall meet within
thirty (30) days after the second arbitrator is appointed and shall exchange
sealed envelopes each containing such arbitrators written determination of the
fair market rent of the Optional Additional Space based on the criteria set
forth in Section 2.05.A. The fair market rent specified by Owner's arbitrator
shall be called the "Owner's Submitted Value" and the fair market rent specified
by Tenant's arbitrator shall be called the "Tenant's Submitted Value". Copies of
such written determinations shall promptly be sent to both Owner and Tenant. Any
failure of either such arbitrator to meet and exchange such determinations shall
be acceptance of the other party's arbitrator's determination as to fair market
rent, if, and only if, such failure persists for five (5) days after notice to
whom such arbitrator is acting, and, provided that such five (5) day period
shall be extended by reason of any Unavoidable Delay. If the higher
determination of the fair market rent for the Additional Space is not more than
one hundred and five (105%) percent of the lower determination of the fair
market rent, then the fair market rent for such space shall be deemed to be the
average of the two determinations. If however, the higher determination is more
than one hundred and
Page 10 of 14
<PAGE>
five (105%) percent of the lower determination, then within ten (10) days of the
date the arbitrators submitted their respective fair market rent determinations,
the two arbitrators shall appoint a third arbitrator. In the event of their
being unable to agree upon such appointment within ten (10) days after the
exchange of the sealed envelopes, the third arbitrator shall be selected by the
parties themselves if they can agree thereon within a further period of ten (10)
days. If the parties do not so agree, then either party, on behalf of both and
on notice to the other, may request such an appointment by the American
Arbitration Association (or any successor organization) in accordance with its
rules then prevailing or if the American Arbitration Association (or any
successor organization) shall fail to appoint said third arbitrator within
fifteen (15) days after such request is made, then either party may apply for
such appointment, on notice to the other, to the President of the Westchester
County Bar Association (who may consult with the Chairman of the Real Property
Law Committee of the Westchester County Bar Association). Within ten (10) days
after the appointment of such third arbitrator, the Owner's arbitrator shall
submit Owner's Submitted Value to such third arbitrator and the Tenant's
arbitrator shall submit Tenant's Submitted Value to such third arbitrator. Such
third arbitrator shall within thirty (30) days after the end of such fifteen
(15) day period, make his own determination of the fair market rent of the
Additional Space using the criteria set forth in Section 2.04.A, hereof, and
send copies of his determination promptly to both Owner and Tenant specifying
whether Owner's Submitted Value or Tenant's Submitted Value was closer to the
determination by such third arbitrator of the fair market rent of the Optional
Additional Space. Whichever of Owner's Submitted Value or Tenant's Submitted
Value shall be closer to the determination by such third arbitrator shall
conclusively be deemed to be the fair market rent of the Optional Additional
Space.
(3) In no event shall the arbitrator enlarge upon, or alter or amend,
this Lease or Owner's or Tenant's rights as provided in this Lease, it being
understood that the sole issue for determination by the arbitrators shall be the
single issue of fact of the annual fair rental value of the Optional Additional
Space as provided in paragraph A of this Section 2.05
(4) Except as otherwise provided in the following sentence, the fees
and expenses of an arbitration proceeding shall by borne by the parties equally.
The fees of respective counsel engaged by the parties the fees and expenses of
expert witnesses and other witnesses called and the cost of transcripts shall be
borne by the parties engaging such counsel or calling such witness or ordering
such transcripts.
SECTION 2.06. If Tenant shall effectively exercise its rights to hire
the Optional Additional Space, Owner and Tenant, upon demand of either, shall
execute and deliver to each other duplicate originals of an instrument, duly
acknowledged, setting forth (i) that the 555 Premises have been expanded to
include the Optional Additional Space (ii) the amount of such Optional
Additional Space,(iii) the annual Fixed Rent payable during the Term, (iv) that
such Optional Additional Space is upon and subject to all of the terms,
covenants, conditions and limitations contained herein, and (v) Tenant's
Proportionate Share as increased by the Optional Additional Space.
SECTION 2.07. The right of Tenant to hire the Optional Additional Space
as provided herein is conditioned in all respects upon there being no event of
default in the observance or performance of any material term, covenant,
condition or agreement on Tenant's part to be observed or performed under this
Lease both at the time the notice of exercise is given and immediately prior to
Optional Additional Space Commencement Date. Any termination, cancellation or
surrender of this Lease shall terminate Tenant's right to hire the Optional
Additional Space.
Page 11 of 14
<PAGE>
ARTICLE -3 RENEWAL TERM
SECTION 3.01. A. Tenant shall have the right, at its option, to extend
this lease for one (1) five (5) year term ("Renewal Term") commencing on the
Expiration Date originally provided for herein and to end at noon on the fifth
anniversary of such Expiration Date originally provided for herein, by giving
Owner notice of such election at anytime but not less than nine (9) months prior
to the Expiration Date originally provided for herein (time being of the essence
with respect thereto), and upon the giving of such notice this Lease thereupon
shall be automatically extended for each such Renewal Term with the same force
and effect as if such Renewal Term had been originally included in the Term,
without the execution of any further instrument.
B. Any notice of election to exercise the option to extend as
hereinbefore provided must be in writing and set to Owner as provided for in the
Lease. In addition, if prior to the exercise of the option to extend Tenant
herein named shall have assigned this Lease, no notice by the then Tenant of
election to exercise an option to extend shall be valid unless joined in or
consented to in writing by Tenant herein named (which consent, in order for the
exercise of such option to be effective, shall be delivered to Owner at or prior
to the time of the exercise of the option as to which consent of Tenant herein
named had been given). Neither the option granted to Tenant in this Section to
extend the Term, nor the exercise of such option by Tenant, shall prevent Owner
from exercising any option or right granted or reserved to Owner in this Lease
to terminate this Lease, and the effective exercise of any such right of
termination by Owner shall terminate any such renewal or extension and any right
of Tenant to any such renewal or extension, whether or not Tenant shall have
exercised any such option to extend the Term. Any such option or right on the
part of Owner to terminate this Lease pursuant to the provisions of this Lease
shall continue during the Renewal Term.
C. All of the terms, covenants and conditions of this Lease shall
continue in full force and effect during the Renewal Term except that (i) the
fixed rent for the Renewal Term shall be equal to ninety-five (95%) percent of
the fair market value of the 555 Premises (including the Guaranteed Additional
TSS Space or the Optional Additional Space, as the case may be) determined in
accordance with the provisions of Section 2.05 hereof (all other rent and
charges payable by Tenant remaining unaffected), and (b) there shall be no
further privilege of extension of this Lease beyond the Renewal Term.
SECTION 3.02. The right of Tenant to extend the term of this Lease as
provided herein is conditioned in all respects upon there being no material
event of default in the observance or performance of any material term,
covenant, condition or agreement on Tenant's part to be observed or performed
under this Lease both at the time the notice of exercise is given and
immediately prior to the Renewal Term. Any termination, cancellation or
surrender of this Lease shall terminate Tenant's right to extend the term of
this Lease.
ARTICLE-4 SURRENDER OF POSSESSORY RIGHTS IN THE 560 BUILDING
SECTION 4.01 Commencing five (5) business days after the Commencement
Date, Tenant agrees to and hereby surrenders all of its right, title and
interest in and to the IMI Premises, American Premises, POL Premises and the
balance of the Second (2nd) Floor of the 560 Building (hereinafter collectively
referred to as the "560 Premises") and agrees that Owner shall have the right to
and physical possession of the 560 Premises, from and after said date.
Page 12 of 14
<PAGE>
SECTION 4.02. Within five (5) business days after the Commencement
Date, Tenant shall peaceably and quietly leave, surrender and deliver the IMI
Premises, American Premises and POL Premises to Owner, together with (a) all
alterations, changes, additions and improvements, which may have been made upon
therein, and (b) except for Tenant's personal property, all fixtures and
articles of personal property of any kind or nature which Tenant, or its
predecessors-in-interest, may have installed or affixed on, in, or to the IMI
Premises, American Premises and POL Premises for use in connection with the
operation and maintenance of Tenant's business therein (whether or not said
property be deemed to be fixtures), all of the foregoing to be surrendered broom
clean and in good, substantial and sufficient repair, order and condition,
reasonable use, wear and tear, and damage by fire or other casualty excepted.
SECTION 4.03. In the event that Tenant retains possession of the IMI
Premises, American Premises or POL Premises, or any part thereof, after five (5)
business days from the Commencement Date, for any reason whatsoever, without the
prior written approval of Owner, Tenant shall: (i) pay to Owner use and
occupancy charges, at two times the then fixed rent for IMI Premises, American
Premises, and/or POL Premises, as contained the IMI/Advanced Sublease,
American/Advanced Sublease or the POL Sublease, respectively, as the case may
be, for the time that Tenant remains in possession of thereof, (ii) pay to Owner
all damages, consequential as well as direct (including fees of counsel incurred
in connection therewith) sustained by reason of Tenant's retention of possession
of same; and (iii) be in default under the Lease and Owner shall be entitled to
all rights and remedies provided therein.
ARTICLE-5. NO OTHER CHANGES
SECTION 5.01. Except as otherwise specifically provided for in this
First Amendment to Lease, all other terms, covenants and conditions of the
Lease, as amended, and all exhibits and schedules thereto shall remain in full
force and effect, are hereby ratified, confirmed and incorporated herein by
reference as though set forth fully herein at length.
IN WITNESS WHEREOF, duly authorized representatives of the parties
hereto have executed this First Amendment to Lease as of the day and year first
above written.
ADVANCED HEALTH CORPORATION, Tenant
By: /s/ Jeffrey M. Sauerhoff
---------------------------------------
Name: Jeffrey M. Sauerhoff
Title: Vice President
RECKSON OPERATING PARTNERSHIP, L.P., Owner
By: Reckson Realty Associates Corp.,
Its General Partner
By: /s/ Jon L. Halpern
---------------------------------------
Name: Jon L. Halpern
Title: Executive Vice President
Page 13 of 14
<PAGE>
STATE OF NEW YORK )
) SS.:
COUNTY OF WESTCHESTER )
On the day of September, 1996, before me personally
came______________________ , to me known, who being by me duly sworn, did depose
and say that he maintains an office at 660 White Plains Road, Tarrytown, New
York 10591; that he is the of Reckson Realty Associates Corp., the General
Partner of RECKSON OPERATING PARTNERSHIP, L.P., the limited partnership
described in and which executed the foregoing instrument; That he signed his
name thereto on behalf of the limited partnership described therein by order of
its board of directors of its corporate general partner.
------------------------------
Notary Public
STATE OF NEW YORK )
) SS.:
COUNTY OF WESTCHESTER )
On the day of September, 1996, before me personally
came____________________________ , to me known, who being by me duly sworn, did
depose and say that he maintains an office at 560 White Plains Road, Tarrytown,
New York 10591; that he is the of ADVANCED HEALTH CORPORATION, the corporation
described in and which executed the foregoing instrument; That he signed his
name thereto on behalf of the Corporation described therein by order of its
board of directors.
------------------------------
Notary Public
Page 14 of 14
<PAGE>
WORK SCHEDULE OF LANDLORD'S RESPONSIBILITY
FOR
ADVANCED HEALTH
555 WHITE PLAINS ROAD
TARRYTOWN, NEW YORK
I. PARTITIONS:
Landlord shall furnish and install ceiling-high partitions constructed
from metal studs with 5/8" sheetrock on both sides and 4" tile base, as per
attached plan. The corridor and between Tenant partitions shall be sound
attenuating construction, extending to under side of floor above.
II. CLOSETS:
Landlord shall furnish closets as per attached plan. Closets will
contain one (1) wood hat shelf and one (1) metal coat rod.
III. DOORS:
Landlord shall furnish and install necessary doors as per attached
plan.
IV. HARDWARE:
Landlord shall furnish and install necessary building standard hardware
such as latch sets, hinges, door stops and bucks where required. Landlord shall
supply and install a combination lock on one of the entrance doors to the
demised premises. Landlord shall relocate coat hooks in existing offices to the
555 premises.
V. CEILINGS:
Existing 2'0" X 4'0" textured acoustical tile ceiling to remain.
Landlord shall replace any damaged or stained ceiling tile in such a matter as
to maintain the appearance of the ceiling.
VI. ELECTRICAL:
A. Lighting
Landlord shall supply and install in perimeter and interior working
areas, recessed parabolic building standard 2' X 4" fluorescent light fixtures
(except where conditions necessitate a surface mounted fixtures). Initial bulbs
supplied by Landlord; all subsequent replacements by Tenant.
B. Outlets
Supply and install duplex wall convenience outlets as per
attached plan.
C. Telephone
Landlord shall, at Landlord's expense, provide all telephone wiring and
relocate Tenant's telephone switch.
D. Computer Wiring
Landlord shall at Landlord's expense, provide wire the premises to
accommodate Tenant's computer system.
With reference to the telephone and computer wiring, Landlord's
obligation shall be limited to approximately 16,800 sq. ft. of installation and
not the entire 26,302 sq. ft. which Tenant is leasing as of April 1, 1997.
E. Circuits and Service
The building will contain sufficient electrical facilities to provide
for all normal installations. The design capacity is based on a combined
lighting and receptacle load of four (4) watts per square foot of office area at
208/120 volts. Three-phase 208 volt electrical service will be provided by the
owner in the electrical service panel on each floor.
VII. VENETIAN BLINDS:
Landlord shall supply and install ceiling-high venetian blinds on all
exterior windows. These blinds shall be maintained by Tenant.
VIII. CARPETING:
Landlord shall supply and install throughout the demised premises
Landlord's building standard carpeting, colors to be selected from samples
submitted by Landlord. Landlord shall provide and install upgraded carpeting in
the areas indicated on attached plan.
<PAGE>
IX. WALL FINISHES
PAINTING:
Landlord shall paint the entire premises (excluding the acoustical
ceiling) in a good workman-like manner with primer and two (2) coats of paint in
colors to be selected by Tenant from building color chart consisting of fifteen
(15) colors. Tenant will be permitted five (5) of the standard colors per floor
and one (1) color per room.
WALL COVERING
Landlord shall provide and install wall covering in areas indicated on
attached plan.
X. HEATING AND AIR CONDITIONING:
1. This work shall comprise essentially the design and installation of
duct system on each floor together with a reasonable amount of air diffusers and
associated fixtures, all supplied from a central system designed to conform to
the standards per performance of the best new office buildings in Suburban New
York. Normal operating hours shall be 8:30 a.m. to 6:00 p.m., Monday through
Friday. The type and design ceiling diffusers and return grilles shall be
building standard, locations to be approved by Tenant's architects. Landlord
shall give quiet enjoyment to Tenant regarding noise or vibration from any of
the building's installation of mechanical equipment or systems.
The system shall be capable of delivering 100% outside fresh air and
shall never deliver less than 25% outside fresh air, but at no time will there
will be less than 0.35 C.F.M. of fresh air per square foot, during periods
specified and is based upon the normal design of air conditioning, where four
(4) watts of light and power/square foot is available for Tenant's use and an
average occupancy of one (1) person per 100 square feet.
The system shall capable of maintaining and shall be operated by the
Landlord so as to maintain inside conditions of not more than 78 degrees
Fahrenheit and 50% relative humidity when outside conditions are not more than
95 degrees Fahrenheit dry bulb and 75 degrees Fahrenheit wet bulb except that as
the outside temperature conditions shall be maintained approximately as follows:
<TABLE>
<CAPTION>
OUTSIDE CONDITIONS MAXIMUM INSIDE CONDITIONS
---------------------- ------------------------------
<S> <C>
66 - 72 db 72 (PLUS OR MINUS) 2db, 25 - 50 (plus or minus) 5RH
72 - 80 db 74 (plus or minus) 2db, 35 - 50 (plus or minus) 5RH
85 - 90 db 76 (plus or minus) 2db, 35 - 50 (plus or minus) 5RH
91 - 95 db 78 (plus or minus) 2db, 35 - 50 (plus or minus) 5RH
</TABLE>
* With normal humidity tolerance
The performance requirements noted above shall be maintained all year round,
either by the use of varying amounts of outside air or by mechanical
refrigeration.
A. The above noted performance requirements shall be based upon the following
conditions of internal heat and moisture gain.
1. One person per 100 square feet.
2. Four watts per square foot for Tenant light and power use.
B. The system shall also be capable of maintaining a minimum temperature
throughout the demised premises of 69 F when the outside temperature is 0 F.
System shall be automatically controlled, free of noticeable noise,
vibration, or drafts and require minimum cost expenditure in fuel.
XI. PLUMBING:
The Landlord shall provide and install two (2) wet columns, designed to
carry a cold water line, a hot water line, a sewer line and a vent line. These
wet columns shall be located in the corners of the building approximately
halfway between the exterior wall and the core. Wet connections and extensions
of said system shall be performed by the Landlord at the Tenant's expense.
XII. PARKING:
The Landlord shall provide Tenant with 75 parking spaces on a
non-reserved, non-exclusive basis and 13 reserved parking spaces in the
under-building parking area.
ADVANCED HEALTH CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL NET LOSS
PER COMMON SHARE COMPUTATION
<TABLE>
<CAPTION>
For the
year ended
December 31, 1996
(unaudited)
-------------------
<S> <C>
Calculation of Supplemental Shares Outstanding:
Debt repaid by offering proceeds $ 5,000,000
Proceeds per share 13 .00
----------------
Additional shares assumed outstanding 384,615
----------------
Additional weighted average common shares assumed outstanding 296,343
Weighted average common shares outstanding 5,634,898
----------------
Supplemental weighted average common shares outstanding 5,931,241
================
Supplemental Net Loss Per Share:
Net loss $ (1,465,188)
Pro forma impact of use of proceeds on interest expense, net of tax 55,464
----------------
Supplemental net loss (1,409,724)
Supplemental weighted average common shares outstanding 5,931,241
----------------
Supplemental net loss per common share $ (0.24)
================
</TABLE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K, into the Company's previously filed
Registration Statement, Files No. 333-16919 and 333-16921.
ARTHUR ANDERSEN LLP
New York, New York
March 30, 1997
<PAGE>
March 31, 1997
VIA EDGAR
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
ADVANCED HEALTH CORPORATION
FILE NUMBER 0-21209
Dear Sirs:
On behalf of the above-named registrant (the "Registrant"), transmitted
herewith for filing pursuant to the Securities Exchange Act of 1934 is a Form
10-K, Annual Report, including exhibits thereto.
Pursuant to the instructions to the Form 10-K, we supplementally inform you,
on behalf of the Registrant, that the financial statements included in the Form
10-K do not reflect any change from the preceding year in accounting principles
or practices, or in the method of applying any such principles or practices.
Sincerely,
/s/ Alan B. Masarek
----------------------------------------
Alan B. Masarek
Attachments
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